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Ir   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Collection: Paul A. Volcker Papers Call Number: MC279  •  Box 10  Preferred Citation: Congressional Correspondence, November 1979-January 1980; Paul A. Volcker Papers, Box 10; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/M1 https://fraser.stlouisfed.org/archival/5297  I  The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections  of the Seeley G. Mudd Manuscript Lilmary, Princeton, NJ  These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. 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Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) muddaprinceton.edu   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  S  JAN  The Honorable William Proxmire ha trran lattee on Banking, liousing and Urban Affairs United States Senate Washington, D. C. 2C51Deer chairman Proxmire h. Dowd has adoted the final provisions of Regulation I to implement the Electronic Fund Transfer Act. Iv addition, the Board has issued for lubli comment propelled amendments to delay the offe .tive date of certain portions of the documentation requirements beyond May 10, 1960, the effective date of the I as pleased to send you the sdo2ted previsions and, as required by 904(a)(4) of the Electronic Fund Transfer t. the prorNmed amemdments and the occompanying e onomic tact analysis. Sincerely,  _  Jpicript-  Enclosure Identical letters also sent to: Chairmen Reuss, Isongas, Annunzio; Senators Garn and %rmstrong; .:;ongressmen Stanton and Evans I.BB:WW:CO:vcd bcc: Mrs. Mallardi (2; Lynn Barr   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  JAN 3 1  1980  The Honorable Themes P. O'Neill, Jr. 3oeaker of the House of Representatives Washington, D. C. 20515 Dear Mr. Speaker: The Beerd has adopted the final ,revisions of Regulation I to implement the Rlectromic Fund Transfer Act. IQ addition, the Booard has issued for public coment proposed amendments to delay the effective date of certain portions of the documentation requirements beyond Say 1960, the effective data of the Act. I en ptessed to send you the adopted provisions and, as required by f 00400(4) of the Rlectronic Fund Transfer Act, the propeedid anemdments and the accompanying economic *pact analysis. Sin, erely, StPaul A. Volcker  Enclosure Speaker of the House of Representatives received (date) Speaker of the House of Representatives by LBB:DJW:CO:vcd bcc: Mrs. Mallardi (2)(/' Lynn Barr   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  JAN 3 1 1980  as ihaeribbe waits's- P. Meedele nastiest of Lima %hived States Smote Weshiostes, a. c, 2c31e  Door Mr. nee Presideat The 20004 hme adopted the flood ,1Yeevisions of lesuLatbee OS iMplesSot the Stecteenik rued Transfer Act. La oddities. the Board hos isesed felt pOblic tomment proposed aramdresee to delay thseffs- ttos *mai sectsie ;options of the deenemetstian requirements bopped Mg WI 1.060, she affectiVe due ill the Att•  L et plowed ve seed yeu the ~al Provisteme 4.44, aa roquirod by S$040)(6) of the Iloutveras rued Toenejor Nct, the !reposed ameedmento and the sessepeiries omeomnda Impact sesipeis. Siworsty,  A. uoictiq  acts're Presidest of the U.S. Senate ref-eived (date)  •  President of the U.S. Senate by  •  L115:WW,c0:ved bee; Mrs. Mallardi (2) c/ Lynn Barr  1   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 30,  The Honorable Henry S. Reuss Chairman Committee on Banking, Finance and Urban Affairs House of Representatives ashington, 1;. C. 20515 Dear Chairman Reuss: Thank you for your letter of January 23 concerning Jay Delay's qualifications to serve as a member of the Board of Governors. I, too, am impressed with Mr. Delay's background and abilities and he will be among those carefully considered for recommendation to the Prpsident. Your personal interest in our search for a highly qualified Board member is greatly appreciated. Sincerely,  TEAllison:red # V-26   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  HEAT S. REUSS. WIS., CHAIRMAN THOMAS L. ASHLEY, OHIO WILLIAM S. MOORHEAD. PA. FERNAND J. ST GERMAIN, R.I. HENRY B. GONZALEZ. TEX. JOSEPH G. MINISH, N.J. FRANK ANNUNZIO, ILL. JAMES M. HANLEY, N.Y. PARREN J. MITCHELL. MD. WALTER E. FAUNTROY, D.C. STEPHEN L. NEAL, N.C. JERRY M. PATTERSON. CALIF. JAMES J. BLArICHARD, MICH.  •  •  U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS  CARROLL HUBBARD. JR., KY. JOHN J. LAFALCE. N.Y. GLADYS NOON SPELLMAN, MD.  NINETY-SIXTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING  WASHINGTON, D.C. 20515  JIM MATTOX. TEX. BRUCE F. VENTO, MINN. DOUG BARNARD, GA. WES WATKINS. OKLA. ROBERT GARCIA. N.Y. MIKE LOWRY. WASH.  S. WILLIAM GREEN, N.Y. RON PAUL, TEX. ED BETHUNE. ARK. NORMAN D. SHUMWAY, CALIF. CARROLL A. CAMPBELL, JR, S.C. DON RITTER. PA. JON I-IINSON, MISS.  41  LES AuCOIN. OREG. DAVID W. EVANS, IND. NORMAN E. D'AMOURS. N.H. STANLEY N. LUNDINE. N.Y. JOHN J. CAVANAUGH, NEBR. MARY ROSE OAKAR, OHIO  J. WILLIAM STANTON, OHIO CHALMERS P. WYLIE. OHIO STEWART B. McKINNEY. CONN. GEORGE HANSEN, IDAHO HENRY J. HYDE. ILL. RICHARD KELLY, FLA. JIM LEACH, IOWA THOMAS B. EVANS. JR.. EEL.  225-4247  January 23, 1980  The Honorable Paul A. Volcker Chairman, Board of Governors Federal Reserve System Washington, D. C. Dear Chairman Volcker: I understand that Mr. Jay DeLay, President of the Huron Valley National Bank of Ann Arbor, Mich. is among those being considered for appointment to the Federal Reserve Board of Governors. It seems to me the Board would be well served by having a member of Mr. DeLay's stature and background. As the head of a medium size bank and as a former director of the Federal Reserve Bank of Chicago, he would make a useful contribution to the problems the Fed must deal. with in the next few years.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely,  Henry S. Reuss Chairman   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  lagesary 29, 19110  limmorablis is root liallessestatIves S.C. 20515 Dear Ur. Ilairars: I vas pleased to Testi of the first recipient of the Cowessloes' ilteslihor Mord, Ni. Freak J. lois. I share your belief that this sword wilt mho the peblic more mere of the fine contributions federal employees oohs, se well as euesernge IfsierAl workers to contin ua to strive for outstanding ewtomplishmemtse The Beard of Governors of the fellers/ Reserve System is Weed hemmed to participate in the propos, bet at the present time we de art hogs 4110, aeminations for yew eiressid. Jimmy thanks for prowidims the oppeetwaity for Us to participate La yeer excellent program. Staserely.  TD:BAIACO:pjt (#V-157) bcc: Tony pistol.* Barbara eills Wrs. Nallardi (2)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 29, 1980  rosax* alractrablie waii Cheibmusa earmsteller on laalkius, ilassiag mit %don Main Vatted States Saaste ftehissent, DX. 2010 ligar elbsisam  POMMANO,  Mimic yes  hit TOW  Uttar  Jammary 73 twit'', gm to math'  Wen yam Camalittes as Oho Coadlat ad! Misastagy Policy in 1980 pursoAst to Oa 9111 MiplayawatamelkdasandlaiswOh At 3f 1978. I as lookims farsard Isspiparis, ea Mauro 2.5 at 10:00 same  Sincerely.  -28) CO:pjt tice: Hr. Axilrod Mrs. MallArdi (2)  Action assig el to Mr. Axilrod  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •••  •  WILLIAM PROXMIRE. WIS., CHAIRMAN HARI:11150N A. WILLIAMS. JR.. N.J. ALAN CRANSTON. CAUF. ADLAI E. STEVENSON. ILL.. ROBERT MORGAN, N.C. DONALD W. RIEGLE, JR., MICH. PAUL S. SARSANES, MD. DC/NALD W. STEWART. ALA. PAUL E. TSONGAS. MASS.  JAXE GARN. UTAH JOHN TOWER, TEX. JOHN HEINZ, PA. WIU_JAM L. ARMSTRONG, COLO. NANCY LANDON KASSESAUM. KANS. RICHARD G. LUGA.R.  'Zertifeb Ziatez Zerrafe  KENNETH A. MC LEAK STAFF DIRECTOR M. DANNY WALL. MINORITY STAFF DIRECTOR MART FRANCES DE LA PAVA, CHIEF CLARK  COMMITTEE ON BANKING. HOUSING. AND URBAN AFFAIRS WASHINGTON. D.C. 20510  January 23, 1980  '7:3  The Honorable Paul A. Volcker Chairman, Board of Governors of the Federal Reserve System Washington, D.C. 20551 Dear Mr. Chairman:  •  The Committee on Banking, Housing and Urban Affairs will conduct two days of hearings, February 25 and 26, 1980, on the Conduct of Mbnetary Policy in 1980 by the Federal Reserve System. These hearings will be held pursuant to Public Law 95-523, the Full Employment and Balanced Growth Act of 1978. The Committee expects to receive the Federal Reserve's written report on the Conduct of Monetary Policy for 1980 on or before February 20, 1980 as required by law. In addition, we would like you to testify before the Committee on Mbnday, February 25th on the Federal Reserve report and the proposed monetary policy outlook. 1 The hearing will be held in Room 5302 of the Dirksen Senate Office Building and is scheduled to begin at 10:00 A.M. Enclosed is a copy of the Committee's Guidelines for Witnesses. As I indicated above, however, we would expect to receive the Monetary Policy Report by February 20th. If you should have any questions concerning the hearings, you may contact Steven M. Roberts of the Committee Staff at 224-7391.  II   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Enclosure  WP:srl  •  40  WILLIAM PROXMIRE, WIS., CHAIRMAN HARRISON A. WILLIAMS. JR., NJ. ALAN CRANSTON. CALJF. ADLAI E. STEVENSON. ILL. ROBERT MORGAN. N.C. DONALD W. RIEGLE. JR.. MICH. PAUL S. SARSANES, MO. DONALD W. STE WART. ALA. PAUL E. TSONGAS. MASS.  JAKE GARN. UTA JOHN TOWER, TEX. JOHN HEINZ, PA. WILLIAM L. ARMSTRONG. COLO. NANCY LANDON KASSESAUM. KANS. RICHARD G. LLJGAA, IND.  'AlCI-Lila),Stafez Zonate COMMITTEE ON BANKING. HOUSING, AND URBAN AFFAIRS  KENNETH A. MC LEAN. STAFF DIRECTOR IRECTOR M. DANNY WALL, MINORITY MARY FRANCES DE LA PAVA. CHIEF CLERK  WASHINGTON. D.C. 20510  GUIDKL1NFS FOR WIlNESSLti  1.  These guidelines apply to all hearings of the Senate Committee on Banking, Housing and Urban Affairs, unless otherwise indicated.  2  All hearings will hegin at 10:00 A.M. in Room 5302, Dirksen Office Building, unless otherwise indicated.  3.  Committee rules require that all witnesses submit at least 100 copies of their written statements 48 hours prior to their appearance. Sundays and holidays are not to he included in determining this 48 -hour period. Statements should he delivered to Room 5300, nirkson Office Building, Washington, D. C. 20510. Strict adherence to this rule is essential in order that Committee memhers may review the statements before the hearing, thus enahling the participants to more thoroughly discuss the issues involved. Statements will not he released to the news media prior to the day of your testimony.  4.  Oral presentations must he limited to a brief summary Your complete statement will not to exceed 10 in he printed in the hearing record.  5  Please complete the attached card and hring it to Room 5300 prior to the hearing. You will he given copies of statements of those testifying with you at that time. tion is appreciated.  s transcript I Please supply the address to which you prefer the reporter' delivered for your correction. to Kindly turn this card in at Room 5300 Dirksen Office Building prior giN in your testimony.  (Name)  (Organization)  (Phone)  (Business address)  (City and State) SENATE BANKING. lloUSINC. AND   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  CRIIAN  (ZIP Code) AFFAIRS COMMITTEE 10-545-h  GPO   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 18, 1980  The Honorable Henry S. Reuss Chairman, Committee on Banking, Finance and Urban Affairs 2129 Rayburn Building Washington, D. C. 20515 Dear Chairman Reuss: Thank you for your recent letter to Washington of the Independent Business om March 17 and 18. I would be pleased to March 17 as you suggested in your letter. a member of the Association should contact Assistant to the Board, at 202-452-3204. With best regards. Sincerely,  cc:  Mrs. Mallardi #155  JRC:tjf  concerning the visit Association of Wisconsin meet with the group on To work out details, Mr. Joseph R. Coyne,  HEARY S. REUSS, WIS., CHAIRMAN THOMAS L. ASHLEY, OHIO WILLIAM S. MOORHEAD, PA. FERNAND J. ST GERMAIN, R.I. HENRY B. GONZALEZ, TEX. . MINISH, N.J. JOSEPH Go FRANK ANNUNZIO, ILL. "AMES M. HANLEY, N.Y. PARREN J. MITCHELL, MD. WALTER E. FAUNTROY, D.C. STEPHEN L. NEAL, N.C. JERRY M. PATTERSON, CALIF. JAMES J. BLANCHARD, MICH. CARROLL HUBBARD, JR., KY. JOHN J. LAFALCE, N.Y. GLADYS NOON SPELLMAN, MD. LES AuCOIN, OREG. DAVID W. EVANS, IND. NORMAN E. D'AMOURS, N.H. STANLEY N. LUNDINE, N.Y. JOHN J. CAVANAUGH, NEBR. MARY ROSE OAKAR, OHIO JIM MATTOX, TEX. BRUCE F. VENTO, MINN. DOUG BARNARD, GA. WES WATKINS, OKLA. ROBERT GARCIA, N.Y. MIKE LOWRY.  •  •  U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS N I N ET'-tP; T H CONGRESS 2129 RAYBURN  HOUSE  OFFICE  BUILDING  WASHINGTON, D.C. 20515  December 27, 1979  J. WILLIAM STANTON, OHIO CHALMERS P. WYLIE, OHIO STEWART B. McKINNEY. CONN. GEORGE HANSEN, IDAHO HENRY J. HYDE, ILL. RIcvlARD KELLY, FLA. JIM LEACH, IOWA THoMAS B. EVANS. JR.. DEL. S. WILLIAM GREEN, N.Y. RON PAUL, TEX. ED BETHUNE, ARK. NORMAN D. SHUMWAY, CALIF. CARROLL A. CAMPBELL, JR., S.C. DON RITTER, PA. JON HINSON, MISS. 225-4247  I.  Honorable Paul Volcker Chairman, Board of Governors of the Federal Reserve System Federal Reserve Building Washington, D.C. 20551 Dear Chairman Volcker: A group of about sixty to seventy-five members of the Inde endent Business Association of Wisconsin will be in ; as ing on arc 17 arid IB7-1980 to attend an annual Washington Presentation of the national organization. The Wisconsin group would greatly appreciate a meeting withg‘ or with another of the Governors if your schedule does not permit, for a brieTing on the whole range of policy issues. The group requests a one to two-hour session on Monday afternoon, March 17. Your accommodation will•be greatly appreciated. The Association would also appreciate your response as early as possible in order to plan their schedule.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely, S: Henry S. Reuss Chairman  EDMUND S. MUSKIE, MAINE, CHAIRMAN WARREN G. MAGNUSON, WASH. ERNEST F. HOLLINGS, S.C. LAWTON CHILES, FLA.  HENRY BELLMON, OKLA. PETE V. DOMENIC% N. MEX. BOB PACK WOOD, OREG.  JOSEPH R. BIDEN, JR., DEL. J. BENNETT JOHNSTON, LA. JIM SASSER, TENN. GARY HART, COLO. HOWARD M. METZENBAUM, OHIO  WILLIAM L. ARMSTRONG, COLO. NANCY L. KASSEBAUM, KANS. RUDY BOSCHWITZ, MINN.  ?..1Cnifeb ,Sfate  ORRIN G. HATCH, UTAH LARRY PRESSLER, S. DAK.  DONALD W. RIEGLE, JR., MICH. DANIEL PATRICK MOYNIHAN, N.Y. J. JAMES EXON, NEBR.  enate  COMMITTEE ON THE BUDGET WASHINGTON, D.C. 20510  JOHN T. MC EVOY, STAFF DIRECTOR ROBERT S. BOYD, MINORITY STAFF DIRECTOR  January 18, 1980 Mr. Joseph R. Coyne Assistant to the Board for Public Affairs Board of Governors of the Federal Reserve Room B-2117 Federal Reserve System Washington, D.C. 20551 Dear Mr. Coyne: This letter will confirm our arrangements with you to have Chairman Volcker join us as our guest speaker at the Chairmen's Representatives breakfast to be held on Friday, February 1,_1980, at 8:30 a.m. to 9:45 a.m. in Room -S-2.4 or:Me—Capitol. Please ask the Chairman to feel free to invite a guest from the Federal Reserve to attend as well. The Chairmen's Representatives group is comprised of Democratic Administrative Assistants, Committee Staff Directors and lay majority staff in the Senate. It is an informal group which meets twice a month for breakfast from 8:30 a.m. to 9:00 a.m. followed by the guest speaker's remarks at 9:00 a.m. and a question and answer period ending no later than 9:45 a.m. If you have any questions, please do not hesitate to get in touch with me. A map is enclosed for your convenience. We look forward to seeing Chairman Volcker on February 1. Sincerely,  0ohn T. McEvoy Co-Chairman of the Ad Hoc Chairmen's Representatives Group Enclosure cc:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  William B. Cherkasky  0   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •••.-  ••••-:--.•••••  ••••••••••• AL....• • -I.  vv.131  -4  11.118  II I  77  iiv* HAW'  .0/  1 .01  040  .0/ .011  FIRST (GROUND) FLOOR PLAN  UNITED  STATES CAPITOL  S(010  0  ,0  11  4  14  7,4_1114;__ II ._•,,_ VA. 100 110C•110 Cl •I Tv9( 14.(01.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 28, 1980  The Honorable John Tower United States Senate Washington, D.C. 20510 Dear Senator Tower: Thank you for your letter of January 16 forwarding copies of three amendments to S. 353, the Federal Reserve Modernizetion Act. AM  looking forw2rd to testifying at the Matisse ea  FebruAry 4. Sincerely,  CO:pjt (#V-15) bcc:  Messrs. Axilrod, Brundy, Quick, Schwnrtz & Petersen Mrs. mallardi (2)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 28, 1980  The Honorable William Proseire Chairman Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. 20510 Dear Chairman Promirtikt Thank you for your letter of January 15 inviting me to testify at your hearings on the federal Reserve membership legislation. I em looking forward to appearing on February 4 at 10:00 a.m. Sincerely,  CO:pjt (tV-13) bcc: Messrs. Axilrod, Brundy, Quick, Schwartz & Petersen (w/copies of incoming) Mrs. Mallardi (2)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Jemmy 24. 1940  The Memorable Jibe J. Commmusb *name et hermseasavatiiree Meakiaves, 14 C. MO saw int. ceemete• diesli Yee ear Year loometatam 11611111110011 querioats ass Meer as re ovoid item Imme ameetituse0. mr. V. I. alowiter, mt. isesiter Wakes that dew cenamem meameatic yeehisme smelt fame the dec,iso Le the loresertime at netimeel ta-Neue meteteed hp the fermis,* ee Der. as segos. that Seemere releevoe Ahem at teem), ileum aheuid be rapeseed le the avers paroarttat tt respeesseeed is 061-52. mio, ha ladieeeess vool4 regetre 4 see faum leases le Mb at $136 Ultimo rather ehen $2,bit as. At the imitial imosemee Ia form asmandity 'rites enquired to aditurve this tam Isom towel s he helleffee that talatiss meald *haw Vera laud ?riAls imemi4 4salos, mud tiquidity of the beektms spume aPod immeve. 10010,11r. It 4*** eft serieer art changer in the Where at image neeetved by femme ate either the cause of, as the 1st Las 611. *or Inior ******#* $01614040. he She eget mar settee bee experteased both ,treesewity amd depreasksa desk* partade whim demon tecedved 4reeiles alms at eettemat lenses Use they de today. At poonolts ot4oir timittirtoo 1st Witch aselinet4.114 Illarvide. a 1**** ,etasilortles et r*etinelli imam how not boOs limasee to inflottoo aid ether weasel* oosbioNO. Over tine. lienhled bee benefited filen the slivolliters ate imeoreeoively smelter AIM at total labor sed other reemosems ma She napdtiatiesef teed amd alstikie.• the emetisallties at this biota treed te the limited Steles &rime the pallet as evades omtribelted usa t impretneeets to the Metiomal OtMedMild it t twlas. 40r mite, Use shave at eeefeeel team recoLied by feenere bee decressed ee the Leber requinemette it tam pempilu4esen hove devitued serbedly. rewist study by a ember if eon 'toff indiratoe riot as fame 'abet requiremests uswe redwed, the eec geckos eermed by One &mum wt4ally rose very vaoidly, Weeemeed is Leastatt deiLars. A   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ilseasable Jae J. Oscraeavet no lie  elko taceeise ammo* 'bout 4 pergiart per Mir met the mot 23 year. Ireatasn7 saversI cermet peibleas ef the eseslas aocter :* btra_ada La tow an to this sapid simith f die otaTemli actora to face aliMINNO* eitida maulca ta taco lead befog primed at a Usk aelelp:o of evaveat *ill *me gatie up inlewese aa vett as Le cciaectatiaaa that Its r z110y ot Cleallet, A , I alteesetiv* am/ye to ai sitaitiON sit the tamales mots*La aiict*. I helm One taimats vifl peeve itiesitti tie yea. Stesecoly„  BatWawa - 'CopLW eclat is Corsa* Imam to the L 1i•levet 1, 1979 bee:  Ma1lardi lir. Whites Se, raise' W. McKelvey  )  —  ninsing 3eutor  Action assignei to Mr. Kichline  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  .14  1208 LONGWORTH HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515  COMMITTEES  Elt  - JOHN J. CAVANAUGH coNGRussmAN 2o CONGRESSIONAL DISTRICT NEBRASKA  41. dANKING. FINANCE AND URBAN AFFAIRS  SUBCOMMITTEES:  Congre55 of tbe Ziniteb btate5  (202) 225-4155  Disrn!GT or-Fict: 8424 FEDERAL BUILDING  INTERNATIONAL TRADE. INVESTMENT AND MONETARY POLICY  ii?ottcSe of ReproSentatibefS  INTERNATIONAL DEVELOPMENT INSTITUTIONS AND FINANCE  Zilagbington, 13.e. 20515  DOMESTIC MONETARY POLICY  215 NORTH I7TH STREET OMAHA, NFBRASKA  II  68102  (402) 221-4117  FINANCIAL INSTITUTIONS SUPERVISION. REGULATION AND INSURANCE  January 7, 1980  SERVICE POST OFFICE ANOCIVIL , SusCOMMITTEEt  INVESTIGATIONS  Paul Volker Chairman Federal Reserve Board 20th Street and Constitution Ave., Washington, D.C. 20551  MEI&  .W.  Dear Mr. Chairman: I have recently received a letter from one of my constituents, Vince E. Rossiter, which describes in detail one view of the potential disaster which he foresees as a result of a continuation of existing public policy toward parity of farm prices. I would be most interested in receiving your thoughts on the issues and conclusions highlighted in the paper. It is most appropriate that all economic forecasts and viewpoints are considered as we consider those decisions which are necessary to ensure our successful through the decade of the 80's. I look forward to hearing from you soon. Sincerely, /  •  JOHN J. CAVANAUGH Member of Congress  ; 5'%•• rAtt fteti  JJC;dbl Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  L  • •  t.  r  :•  - 4t; a•• Ur(  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Ba.nk..  liartington . Hartington.Nebraska ,68739 October 13th, 1979  Hon. John J. Cavanaugh, M.C., 1208 Lonqworth House Office Bldg., Washington, D.C. 20515  Dear John: Thanks for your letter of the 2nd. I'm afraid your confidence in the judgement of the Federal Reserve Board in handling a newly created potential expansion of bank credit, is misplaced. The cover paae on the enclosed paper which I've prepared for the members of NORM, the National Oraanization of Raw Materials, Inc., indicates how well the Pod has administered its responsibilities to date. The paper developes the unique ability for raw material income to perform a special service to the U.S. economy. If this is passed along to some one for further analysis, I'd like to have a copy of their response to you. Do me this favor if you will. For the life of me I can't understand why the power structure, both private and government, haven't reacted to this situation long before now. Regards,  Sincerely,  ii ) Cei")( V. E. Rossiter, Sr.  WE- UE3 . 1P FEDERAL MrSENWE SYSTEN,  boFurFP  rurAPAL orPosiT tNstiPANct APE' A CODE. 4C..2  COPPOPATION  7*.4 , 3995  I   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  January 7, 1930  V. L. Rossiter, Sr. Chairan Itan;. of Hartincjton hartinnton, NE 63739 Dear Vince: Thank you for your recent letter and for enclosing a copy of a most interesting paper which you prepared for tne National Organization of Raw ;laterials, Inc. I am today forwardino a copy of your paper to tne Chaiman of the Federal Reserve board and the Chairman of the Presioent's Council of Economic Advisors. When I receive a response from then. I will surely pass it on to you. I always appreciate reviewinc the material which you send me and I hope that you will continue to keep me abreast of your economic thouqhts. Sincerely,  JOHN J. CAVANAUGH Member of Congress JJC;dbl Enclosure  S.  ALL COMMEtiCIAL BANKS U.S.A. An Historic comparison of principal assets and liabilities TOTAL LOANS INVESTNENTS  LOANS  In Ratio to Total Deposits. U.S.TREASOTHER URY BONDS BONDS CASH  DEPOSITS (Billions)  BORROWINGS CAPITAL (cents) (to total Dep.)  1L/31/4-1 71.2>0 30.5;; 30.6c/0 10. 37.2/J 71.2 Me beginning of World War II -- The inception of 900, of pari1,0 ty farm price supports. 12/31/46 82.0% 22.42'0 53.8% 5.8% 24.670 139.0 w0410 War II declared officially ended Full Employment Act passed by Congress 12/31/52 81.9c/-0 i'rcsident Lisenhour elected 12/31/38 92.5% The 2irst 'money-crunch'  .C  37.1% :36.t)70 8.;2 i; 25.8%0 4 172.9 .015/ signal for the end of 9Q% of parity support pric es on farm commodities.  7  t7 61.1/0 14.9% 16.5% 19.3,01 0 434.0 .240% 8.570 The beginning of deliberate Federal Budget Deficits to stimulate the Private Economy. (U.S. Closed the Gold Window Aupist 15 1971)  12/31/73 100.3`: 72.6% 19.2/0 17.4/0 % The Bt ginning of the wurst recession since the 8.6 depression of the 1930s.  681.8 ,31.015  12/31/18 104.5'10 77.6% 9.3% 17. 17.1% : 993.1 : .- )1.524 8.8 A 4101e :marker as the bahking system and the general economy appr2% oaches new record low level of financial liquidity% . //25/19 111.01% 83.6% 9.2% C 2% 15.5% 1,002.2 .:1.679 !,e_w, unprecedented historically low level of liquidity (hig18. h loana-tinvestments in ratio to deposits) from 1914-1978. 105.4% 80.7% 11.0% LaTistor Jcally low level of liq uidi ty from 1914 to Mg:7% r"  4  24.2 $ .740%  101.7% 6/30/29 72. 9.4% 18.32'0 15.8% 4 58.3 ,>1.750 'Le level of liq uidity in the Comnercial0% Banking _ SysteE, 4 months before Blac kTuesday, October 29, 1929 .   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ^n 1 c' ‘w.. i. ia  10.7%  will result in an e mic collapse, or suL,jet our nomv to unreasonable inflation, and bring about complete corruption of our monetary system, and then result in economic collapse. Parity is absolutely necessary in the United States if we wish to maintain a solvent and prosperous economy; it is equally essential to the rest of the world and particularly to the Third World. Developing countries as a group have increased their medium term and long term debt to an estimated $370.0 billion compared to $58 billion just 10 years ago. And, the World Bank predicts that the debt load will increase to $1.2 trillion in the next 10 years. "Many poor nations have already mortgaged future income," according to a Los Angeles Times Service newspaper story published in the September 30th issue of the Omaha World Herald, "to pay for oil and food that was consumed years ago." The United States is treating American agriculture, within its own boundaries, 'like third world nations' are being treated by the industrialized nations. U.S. farm policy has stiffled parity farm prices in the U.S. for a quarter of a century and adverse effects are evident in the Third World countries. U.S. farm policy has destroyed parity farm prices world wide, except for the European common market. As a consequence any resulting disaster will be world-wide, but the impact will also be felt early in the Money banks of the United States on the East and West coasts. The aforementioned newspaper article also states, ". . . The Federal Reserve has stepped up its surveilance of the $58 billion owed to U.S. banks by companies and governments in developing countries. To a certain extent, noted one Federal official, the loans to date may just beget more loans. "The banks don't want to pull down the house of cards,"he said. • lo this we say, amen, but the house of cards will surely tumble down without U.S. and world-wide parity. Ask any well informed leader from a third world country and he will tell you the same thing. He will also tell you that the Third World countries are helpless in the face of the influence of multinational corporations that control world trade (and prices); just as they control them in the United States. Monopoly is another subject and a lot more complicated than the domestic farm problem, even though it may have some important collateral effects on it. The U.S. farm problem stems from a policy which was firmly established with the inception of the "sliding scale" provisions of the Farm Act of 1952, in the administration of President Eisenhauer and Secretary of Agriculture Ezra Taft Benson. With this act farm prices were effectively unhinged from the average price of other goods and services. Realized Net Farm Income (Farm Income) declined in both absolute and relative terms, for the next quarter of a century. From 1954 to 1970 Farm Income ranged between $10.3 billion and $13.9 billion. It had averaged more than $13.0 billion during the 'parity' years of 1942 to 1952.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .•••••"`"  #2  --An historic ar.sis of the principal assets "Inabilities of 211 Commercial lf,anks in the in ratio to bank deposits - and other related information.  The economic concepts which support the need for 100ri, of paritv prices for farm products, as advocated by NORM, are simpl e, direct and easy for the average person to understand. It is never the less difficult to prove these concepts to a skeptic with orthodox economic training. One life long advocate of 100% of parity, after being completely f•rustrated by what seemed to culminate in a life time of failure, was III to say, "We are the boobs of the world". Strangely, in spite of apparent failure to prove the value of parity conclusively down through the years, thu idea won't die, and the enemies of parity have failed to kill it. Happily the concept is hail and hearty and finds new, and renewed, champions with each passing year. Perhaps, as many friends of parity seem to perceive, it is something more than just a 'man-made' promise. To many it is much more indeed. It is a promise from which almost miraculous benefits will flow to all man-kind, if realized. It is a promise from an infinite Creat or, a Creator who, when he designed the bountiful earth, surely designed a metho d for all to share generously in its fruits. Or, failing to implement His design, suffer incredible periodic social and economic disasters which leave no one without some grevious hurt. Sounds a little fantastic? Perhaps, but let us briefly descriSI be NORM's aims, its asperations and 4ts perceptions for the U.S. and current proof of its on-going research. NORM believes and teaches that raw materials (70';, Agricultural) produced annually are the principal source of 'new wealth', which is added to the already previously accumulated 'old wIll ealth' each year. It follows, then, if all raw material production is adequate to meet the needs of society (or preferably more than adequ ate) and the price is maintained at par with the average cost of other goods and services (parity) then there will be enough 'new wealth' created, which when reacted as a catalyst with 'old wealth' will in turn generate enough incom e to consume all of the goods and services without resorting to excessive credit (debt in excess of annual savings). On the otherhand, if raw material production (God given) is deficient, or the price is below parity (man given) then excessive debt is necessary to sustain the other sectors of the economy. One of the consequenses of a debt fueled economy is inflation. Another is the ultim ate illinuidity of the credit system. Illiquidity and inflation are the twins of disaster in a democratic society. Without timely correction the twins of disaster will have a twofold effect of depleting the credit reservoir in the U.S., which when empty   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  :•,3  411  110  will r..:sult in an no71c (Alapic, or sl.t..ie:: ou•conomy to unreasonable inflation, and briny, abc,ut completL corruption of our monetary system, and then result in economic collapse. Parity is absolutely necessary in the United Stat es if we wish to maintain a solvent and prosperous economy; it is equa lly essential to the rest of the world and particularly to the Third World. Developing countries as a group have increase d their medium term and long term debt to an estimated $370.0 billion compared to $58 billion just 10 years ago. And, the World Bank predicts that the debt load will increase to $1.2 trillion in the next 10 years. "Many poor nations have already mortgaged future income,"according to a Los Angeles Time s Service newspaper story published in the September 30th issue of the Omaha World Herald, "to pay for oil and food that was consumed years ago." The United States is treating American agricult ure, within its own boundaries, 'like third world nations' are being treated by the industrialized nations. U.S. farm policy has stiffled parity farm pric es in the U.S. for a quarter of a century and adverse effects are evid ent in the Third World countries. U.S. farm policy has destroyed parity farm prices world wide, except for the European common market. As a consequence any resulting disaster will be world-wide, but the impact will also be felt early in the Money banks of the United States on the East and West coasts. The aforementioned newspaper article also states, ". . . The Federal Reserve has step ped up its surveilance of the $58 billion owed to U.S. banks by companies and gove rnments in developing countries. To a certain extent, noted one Federal official, the loans to date may just beget more loans. "The banks don't want to pull down the house of cards,"he said. To this we say, amen, but the house of cards will surely tumble down without U.S. and world-wide parity. Ask any well informed leader from a third world country and he will tell you the same thin g. He will also tell you that the Third World countries are helpless in the face of the influence of multinational corporations that control world trade (and prices); just as they control them in the United States. Monopoly is another subject and a lot more comp licated than the domestic farm problem, even though it may have some important collateral effects on it. The U.S. farm problem stems from a policy whic h was firmly established with the inception of the "sliding scale" prov isions of the Farm Act of 1952, in the administration of President Eisenhauer and Secretary of Agriculture Ezra Taft Benson. With this act farm prices were effectiv ely unhinged from the average price of other goods and services. Realized Net Farm Income (Farm Income) declined in both absolute and relative terms, for the next quarter of a century. From 1954 to 1970 Farm Income ranged between $10.3 billion and $13.9 billion. It had averaged more than $13.0 billion during the 'parity' years of 1942 to 1952.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ttic 2t vears that intervened between 1952 and 19M, Realized Net iarr. IncPme (Farm income amounted to less than $12. billinr annually for 12 years. In only 11 of these years did it increase above the $13.0 billion dollar it averaged from 1942-52. It is the 12 years that it averaged less than $13.0 billion that we refer to as an 'absolute' decline. Ironically, the income level of every other sector of the economy rose every year, except from 1952 to 1953. As a matter of contrast, in no year after 1952, including 1953, did total National Income amount to less than it averaged from 1942-52. From 1952 to 1978, a quarter of a century, Farm Income as a componentof National Income, rose from $14.9 billion to $25.1 billion, an average of 2.6% per annum, for a total of only 68.5"4. lotal National Income in the same period increased from $285.8 billion to S1,703.6 billion, or an annual average of 19.17, more than 7 times thu increase in Farm income, for a total increase of 496.17. This is what we mean by a 'relative'decline in Farm Income. National Income moved up 7 times faster than Farm Income, so in effect Farm Income declined, relative to National Income. This is a consequence of established Government Farm Policy, which hasn't changed one whit in spite of all the new farm legislation passed during the past 25 years. Every successful presidential candidate for 25 years, except President Carter, has promised the farmer 100% of parity and every one of them has failed to deliver on that promise. Earlier we stated, "If all raw material production is adequate to meet the needs of society and the price is maintained at par with the average costs of other goods and services, then there will be enough 'new wealth' created which, when reacted as a catalyst with 'old wealth', will in turn generate enough income to consume all the goods and services without resorting to excessive credit." These aren't recent findings. This conclusion was drawn by students of the economy very early in the 20th century, even before World War I. Their proof was carefully gathered and fully documented by statistical data derived from various sources, mostly U.S. Government records. It was largely ignored until President Roosevelt embraced it in 1932,early in his administration. It received a very severe test as a result of the Steagall Act which was passed in the early 1940's. Congressman Steagall was the Chairman of the Banking and Currency CormAittee, and the legislation was designed to maintain the 'stability of the dollar' and to provide ample farm raw materials with which to fight World War II. It provided a 907 of parity support price on most storable farm raw materials, and some perishables. The Steagall Act was to expire 'two years after the close of World War II.' Many knowledgeable people predicted another depression, similar to that experienced in 1920 two years after World War I. President Truman extended the act, which would have expired on December 31st, 1948, two years, to 1950. Subsequently he extended it a second time until 1952, when President Eisenhauer was elected. We didn't have a depression in 1948, nor in 1952, but we set the stage for a depression in 1954, with the inception of "Sliding Scale farm Prices" and the gutting of the 90% of parity legislation.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  isiirwg•  Now we have a new and hi011y visible body of statistical informa tfl'n  from ti,e years 1941-52. IA:ring this period as a result of the farm prices were supported at 90% of parity, but they actually of parity, which is what the 90% of parity law was expected to with a high degree of precision, and fulfilled the predictions admirably.  Steagall Act, averaged 10(L, do. It perforTed of its advocates  Being trained in banking and having a familiarity with bank statistics, and recognizing the sensitivity of the banking industry in rural areas, to the ebb and flow of Farm Income, almost forces one to make a determination which comes first, Farm Income then deposit growth and business expansion, or vise versa. We noted in one widely used text book on economics where the author observed, "The farm depression of the 1930's wouldn't have been so bad, if the banks had not failed." Very logical from the viewpoint of the academician, perhaps, but having been there when it happened, we can testify that just the opposite occured. It was a precipitous decline in farm prices in 1920, as a consequence of restricted bank credit when the Loan and Investments, in ratio to deposits, rose to 105.4% in the Commercial Banking System. The decline in farm prices caused a rash of bank failures the following year, and for several years to come until 1933 when 4000 banks failed in one year. The decline in farm prices, and the resulting loss of Farm Income, from 1920 on, brought abwit a cumulative reaction in 1929. On June 30th, 1929, even though the Loans and investments/deposits ratio had declined to 101.77 from 105.4% in 1920, the banking system was severlv overextended, and the economy collapsed on October 29th, 1929, just a short 4 months thereafter. A recent issue of the Wall Street Journal contained an article wherein several of the leading economists of the nation predicted that it will be impossible to 11;:ve another depression, for various reasons, as serious as that of 1929-33. It may be of interest to note in passing, that the record indicates that 2,293 banks failed in 1931, with a total loss to depositors of $1,690,232,000.00. And in 1974, the worst recession since the 1930's, 4, yes just four, banks failed involving $1,575,832,000.00. Needless to say losses to depositors in these 4 banks was minimal because of FDIC insurance protection. We are dealing in bank totals today exceeding $1.0 trillion, compared to $50.0 billion in 1929. Only former Chairman of the Federal Reserve System Wm. McChesn ey Martin, differed. He wasn't positive it couldn't happen again as bad as the 1930's. Following the depression, and just ahead of the beginning of World War II, the liquidity of the Commercial Banks improved to the best ratios since 1914 at a ratio of 71.2% of total deposits, loaned and invested. Out of this 30.5% of deposits were in loans, 30.67€ in U.S. Treasury Bonds, 10.T, in other bonds, and an additional 37.27. was in cash. The lesson of the depression of the 1930's to the American banking system was, to be absolutely safe, the banking system should maintain approximately a third of its deposits in loans, a third in investments and a third in cash.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  You will recall our earlier reference to a Wall Street Journal Article in which the economists interviewed were essentially all in agreement that "another depression can not be as bad as the depression of the 1930's 1 . Again they were in virtually unanimous agreement that one of the reasons that we can't have another depression as bad as the depression of the 1930's, is "because we have such fine records in the United States today which will permit us to check the operation of the economy very closely." It mentioned specifically that it is now easy to check on the rise or fall of manufacturers inventories, which is an important indicator. We submit that what we have just recited to you in the foregoing paragraphs is an example of those excellent records that the economists have reference to. They are excellent. The Commercial banking system is a very sensitive indicator of how the economy is functioning, and verified figures are reported by every bank at 90 day intervals. Thus the months in between can be projected with an unusual degree of accuracy, and they become available quite often within two months, which is much sooner than other sensitive statistics. Today these statistics say that the Commercial Banking System is reflecting the worst set of economic circumstances ever presented in bank statistics, since 1914. They say that the nation is borrowing more money and paying higher interest rates than ever before, as new historically high records of interest and debt are exceeding previous records almost monthly. They are saying the illiquidity of the banking system has in 1979 accelerated at a rate more than 11 times the historic rate of the past 33 years. The evidence of what has happened has been apparent for at least 17 years and has been brought to the attention of High officials in Banking circles and various members of Congress, and to the members of NORM, more than half of those 33 years. If ostensibly intelligent people fail to see what we see in this information, then they are either blind, or not really intelligent. Sorry, there can be no compromise in this latter statement. By the end of the war the bankinF, system had expanded its deposit volumn from $71.2 Billion to $139.0 Billion, almost exactly double the 1941 figures. The ratio of loans and investments/deposits had increased almost 11 percentage points to 82.0%. But the loan/deposit ratio had declined from 30.5% to 22.4%, illustrating the effect of a balanced economy which was producing an optimum level of profit and saving. 'True, more dollars are involved in 1946, but the people who borrowed money were borrowing less money because adequate profits were providing a larger share of capital requirements in 1946. Even with a doubling of the deposits, and the strain of fighting a terribly expensive war, the dollar remained stable, the economy solvent, with every sector enjoying relative prosperity. From 1946 to 1952 the nation reconverted from war time to a peace time economy. Money was obviously very readily available in the nation's banking system. The Fedcral Budget was essentially in balance for the first time since 1934, and the last time to this date. The nation was enjoying approximate full employment, and social and political unrest were at a minimum. We contributed billions of dollars to our former allies and to enemy nations alike, for the purpose of reconstructing their war torn countries. Thu dollar remained stable, the economy solvent and every   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  sector was enjoying relative prosperity. The re was no run up of iarm realestat e to thousands of dollars an acre. One could buy a farm this year, or be safe to wait until next year without great danger of rising prices. Housing was the same, very stable. There was no run on gold, no int ernational speculation in the American dollar. Some would say that this is caused by the war. They would observe that there is always prosperity during a war. Haven't we for all practicle purposes been at war most of the interval since 1952? Haven't the cost of these wars, the economic cost, been as great or greater than any previous war ? If so, why hasn't the prosperity that pre vailed from 1q41 to 1952, prevailed to this day. So, its not just war per se, it is the economic balance in the economy during a war that preserves solven cy, overall prosperity, and a stablf, dollar. From 1952 to 1968 it became evident tha t the trend in the liquidity of the Commercial banking system was ero ding away. Total loans and investmen ts/ deposits rose about 11 percentage points once again. Now, however, it was evident that individuals, partnerships and corporations, the principal bank borrowers, were becoming more dependent on borrowed funds as bank loans increased 24 percentage points, more than twice the increase in the total loans and investments. Banks reduced their holdings of U.S. Treasury bonds from 36.67. in 1952 to 14.9% in 1968, to accomodate the added loan volumn. Aha, you say, but the "money crunch" exp erienced by the financial system in 1968 didn't bother small country bankers. Fact is it did. Our experience was similar to many larger ban ks. We discovered that we were shor t of liquid funds with which to meet loan committments by $300,000.00, in the fall of 1968. We could sell more bonds to meet this, but everyone else was selling bonds and one had to take a loss if he did this. We did just that, though, and felt the flexing of the econom ic system which was now demanding performance by bankers, at any cost. A saving factor in the 1968 "money cru nch" was a new experiment that was undertaken by President Johnson to enhance his political possibili ties in the fall of 1968. Re in league wit h an agreeable Congress, many of whom were also running for re-election, cre ated a substantial Federal deficit (at least substantial for that period) to sti mulate the economy. It did just that, because 'excessive debt' has the same multiplier effect on the economy as earned income from the sale of raw materials. The difference is that when the dollar of debt has performed its function of increasing the market for goods and services this year, it becomes a claim on incone that will be earned in some future year. With the incremental cost of interest, this claim on future income will double eve ry 9 or 10 years. This is exactly where over $800.0 billion of Federal Debt has come from, which is now costing the U.S. taxpayer an estimated $64.0 bill ion per annum in interest. In contrast to the debilitating effect of excessive debt and interest costs on future market for good s and services, (purchases which the consumer must forego because of debt and interest obligations incurred in by-gone years) a dollar of raw material income (earned income) is quite different.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  When a dollar of raw material income (earned income) multiplies its way through the economy in a chain reilction of sales transactions from the farmer, to the retailer, to the wholesal er, to the manufacturer, to labor wages, taxes, interest and the purchase of more raw materials, the original dollar has been divided into small profits all alon g the chain. It comes to rest in the economy as a dollar of savings, availabl e to be re-spent for consumer goods, producers goods, or invested in business or industry. It is never destroyed, except by depression, nor diminished in value, except by inflation. But more important, it does not mortgage future inco me. It does not have to be repaid. The equation has been described as 'nature credits, man debits'. It is a perfect offset in which society has no futu re obligation, except to adequately (and selfishly) protect and conserve the land from which it emerges,AND, to protect its value as it relates to the valu e of other EQUALLY important products and services of the economic trade chain. By preserving its value we gurantee equity of exchange in the U.S. market place, full consumption, full production and approximate full employme nt. Excessive Debt, on the other hand, destroys a large portion of all of these things ultimately. By 1973 the Loans and investments/depo sits amounted to 100.3%. Loans in ratio to deposits increased to 72.6% and investment in government bonds declined to 8.6%, the lowest leve l since 1916. By this time farm prices have been at or below 507 of parity since 1956, with only a brief interlude in 1972 and 1973 when they improved substantially because of foreign sales. The cum ulative effect of an economy which has been systematically starved for 'ear ned income' from the ever productive renewable resources of the agricultural econ omy, to say nothing of under-priced metals, petroleum, and etc. Now the rising cost of maintaining an increasing public and private debt structure, whic h has to be serviced out of the same profits which people had planned to spen d on food, shoes, clothing, automobiles, fuel, taxes, and support for the chur ch, reduces the cash purchases and requires increased dependence on even more debt . How are we different from the Third World Countires, in our desperation to survive, even if we have to destroy our economic system to do it? On December 31st, 1978 the loans and investme nts/deposits ratio reached a new high of 104.5%, reflecting a continuation of archaic economic policy which has been wrong for nearly a quar ter of a century. Still, nothing changes, except that the Federal Governme nt had availed itself of more than $150.0 billion of spending money by creating repeated deficits in the Federal budget from 1973 to 1978. What for? To stimulate the economy, obviously, because everyone seems to believe that a simple solution is no match for a complicated problem and stimulation and inflatio n is all that Congress seems to know. Chairman Burns said essentially that in testimony before Congress in 1977. He also said in effect, "We economis ts corrupt the congress and the Congress has corrupted the monetary system, and that is where we are now." So true. Every move in the Commercirl Banking System for the past 17 years has confirmed what was predictable in 1962 . The loans and investments in the Commercial Ban!Ang system have risen 1 perc entage point per annum faster than the growth in bank deposits. A straight line projection of the growth from 1945 to 1962, indicated we would reach the June 30th, 1929 levels in 1973.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  We did just that,  it said that we would run out of money in 19. It was that clear and that accurate on other anniversary dates, as it was in 1973. Lord help us if it holds true in 1980. Since December 31st, 1978, the ratio of Loans and investments to deposits in commercial banks has risen to an unprecidented, all time high of 111.01%. The increase has accelerated from a long term 1 percentage point per annum, to very nearly 1 percentage point per month, in 7 months. A leading analyst estimates that it took 17c in bank credit to create a dollar of Gross National Product in the 1950's. it takes $1.88 of bank credit to create a dollar of Gross National Product today. The potenti al of expanded debt, in the present circumstance, is enormous and out of hand. Conclusion. Anyone who is inclined to believe that the foregoing information means less today, than it meant a half century ago, will regret his lack of perception. By now it has become difficult for bankers, or anyone else to 'remember the lessons of past'. But let us be a little more explicit about what we have learned from the very recent past. One of the tested and most acceptable ways to measure the performance of the economy of the U.S. is to take a base period of from 2 to 10 years of economic function, and measure it against a single year, or a combination of years in another period of time. Each series of years has known characteristics as a matter of history. If one wanted to prove, for example, that the Farm Income sector of the economy had apparently lagged qt!ite seriously, and for no good reason, the years 1947-49 co'ld be grouped as a base, or 1946-50 has been used by more conservative analysts. To be ultra-conservative one could use the entire 'parity period' of years from 1941 to 1952. These are years when Farm Income kept up with other sectors of income in the U.S. economy, and banks were solvent. If then you would want to prove that the decline in Farm Income was instrumental in drying up the credit reservoir, you would compare the 1941-52 period with a comparable 10 year period during which the credit reservoir is obviously dryingup, such as 1967 to 1976. These are years in which Farm Income did well for 2 or 3 of the 10 years, but lagged very seriously from its relative position during 1941-52, and these are years when the credit reservoir dried up very noticeably, approaching all time low levels of liquidity. The analysis shows that during the 10 year period in which farm prices averaged 1007. of parity, the average National Income totaled $198.04 billion. Of this total amount each sector received a certain average percent age, which represent the number of pennies out of each dollar of National Income it earned during each of these ten years. . . . Likewise during the 10 years of 1967-76, when farm prices were at a sub-parity level most of the time, National Income averaged $952.82 billion. Remember too that 25 years has passed between these two periods, during which farm prices often fell as low as 507, of parity. We will place the percentage figures side by side for you, and note the discrepancy in the number of pennies earned out of each dollar, in each period.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Compensation of employees Farm Income Income of unincorporated businesses & professionals Rental income of persons Total corporate profits before taxes Net interest income of individuals Total National Income  1941-52  1967-7u  65.90%  75.40%  +14.42%  6.81%  1.90%  -72.10%  10.62%  6.00%  -43.50%  2.77%  2.20%  -20.58%  12.72%  5.20%  -59.06%  1.817.  9.40%  +696.61%  100.00%  100.00%  Discrepancy  From this example it is sel f evident that Farm Income in 194 1-52 received 6.81% of $198.04 billion of national income or $13 .5 bil lion. In 1967-76 it received 1.90% of $952.82 billion of national inc ome or $18.1 billion. The point is tha t had agriculture received 6.8 1% of the 1967-76 national income of $952.8 2 billion, Farm income would hav e ave raged $64.89 billion during this latter ten yeat period . . . . Therefore it is reasonable to conclude that agricu lture was underpaid the differenc e between $64.89 it should have received, and the $18.1 it did receive, or $46 .79 billion each year for 10 years, a total of $467.90 billion during the period. Our contention is that societ y had the spending money to pay the agricultural economy this $467.90 but for some reason it was div erted away from agriculture and into compen sation of employees and intere st, per haps. We say perhaps, because this would seem obvious from the foregoing exa mple . . . . A more realistic reason is that we failed to 'create it' whe n the farm commodities were sold at the market pla ce because of sub-parity pri ces , and not just the farm economy lost it, but the total economy lost this nea rly one/half billion of earned income, market for goods and services, and a pot ential tax base on which Federal Income and Excise taxes could have been lev ied sufficent to balance the Federal Budget . The foregoing is a clsssic exa mple of where NORM comes from. We are classified by many as a farm oriented group with tunnel vision; that the only thing we understand is Agriculture, and the only thi ng we care about is agriculture. This is not so. Clearly we understand agricultu re, and we talk a lot of agriculture and agr iculture is the focal point of our entire effort, but not because agricultu re is more important than any oth er sector. We talk about agriculture because it is the most abused, the easies t from which to draw startling comparisons, and because it has a secondary cat alytic effect on our economy of providing 'new wealth' annually which,if ade quate, will sustain the entire economy without resorting to excessive debt. This is a little heard   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Pll  of, but very self-evident truth, in e.:r judgement. Every sector is interdependent on every other sector and consequently equally i::Tortant, in the sense that we provide mutual support. Every sector must carry its snare of responsibility to the economy, but it must also receive a fair share of the income in order to sustain the other sectors of the economy. providing an adequate market for its share of total production. Look again at the foregoing example. Every sector is doing relatively less well than they did in 1941-52, except Compensation of employees which has received a modest increase of 14.42% of National Income (though admitedly large in a dollar comparison) and Interest income of persons which has increased by the incredible amount of 696.61% of 1941-52. Let's dwell on the interest sector for a minute. It is clearly out of line with the other sectors of the economy. It is grossly out of line, in fact, and would be the least disturbed sector of the economy if it adjusted downward to a more realistic and less disgraceful level. Still, what is receiving the most emphasis at this moment? Interest, of course. Interest rates have increased more than 3 percentage points across the board this year. Congress is worried about the 'little saver' ostensibly, and provide double digit interest rates to those 'little savers' who have $10,000.00 or more to invest. Needless to say, perhaps, but the catagory of "Net interest of Persons" is just what it says it is. It is the little saver, the medium size saver, and the big saver, and they have received very special treatment up to now for the past 25 years, and they are still receiving completely unrestricted (to a large degree) and very favorable treatment right now. Contrast this with the treatment afforded the Agricultural economy. It has long since been the rational of the Government, the Department of Agriculture, and the Land Grant Colleges, that 100% of parity farm prices are gobbled up by the very large farmers who already control 60 or 70 percent of the production, who in turn bid up the price of land to the disadvantage of the small farmer who would like to expand and the large farmers use support prices to 'bid-up' the cost of other farm resources, all of this to the disadvantage of the Small Farmer, whom the Government 'says' it wants to help. How does government help the small farmer then? Why, of course, by holding farm prices down in general, by importing competing farm products from foreign countries whose costs are less than 10% of those in the U.S., by permitting him to buy Japanese automobiles and Russian Tractors, at less than the U.S. production costs of these items, and by making him 100% of value loans, if necessary, to purchase farm resources at record high interest rates. Now contrast this with the treatment afforded the 'small saver' who is enjoying record high returns on his savings, right along with every other saver, without descrimination, without distinction except for dollar amounts, and in a climate of ever rising interest rates. The more sympathetic proponents of ' savings' and 'investment capital' formation through higher interest rates,' are right, of course. They are attempting to find a way that a saver, or an investor, can receive a return on his savings or investment which is at least somewhere near the inflation factor in our economy. From this point of view these actions can be applauded. The question is, why isn't the same consideration being given to 'small farmers', or to all farmers in fact. What is wrong with helping the large farmer, like the large saver and investor.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  P12  The truth is the large farmer is being ignored anc. force,! to live on the fat of the 'unearned increment' (the inflation) on his land because of a public policy to systematically reduce the number of farming opera tion.. You don't believe this? Ask Don Paarlberg. He was on Ezra Taft Benso n's staif when the policy was created. In a Seminar at the University of Missouri in the fall of 1978, Mr. Paarlberg suggested that the solution to the famil y, or small farm problem is "to continue to pursue policies that speed up the incre ase in the size of farms. This is ongoing public policy." He said, "t4e will du this while we continue to dpplore it" . . . Our first thought when we heard this was tc be angry with Mr. Paarlberg. Our more thoughtful appraisal is to be grateful to him for his candor. Now we know. It's difficult to wrestle with supposition: much easier when we have facts. Of course there is no secret about the decline in the number of farms in the U.S. as there is really no secret about the farm policy which encourages, yes forces/ the kind of farm population adjustments that we have seen. It is this farm policy which must be redirected before anything can happe n in agriculture that will truly benefit the U.S. farmer. It is a policy which has deprived the agricultural economy of an incredible $879.9 billion of net incom e from 1952 to 1978, and the total economy many times more than $1.0 trill ion of potential economic activity based on this potential 'earned income' which was lost because of low farm prices. For many years it has been the wisdom of conventional econo mists that savings need only the enhancement of increased interest rates to provide investment funds in greater quantities. The object was to build new plant capacity and thus enhance the possibility of full employment. The logic is that a worker must have a place to work in before he can be employed. During the Administration of John F. Kennedy it became a matte r of public policy to stimulate savings by increasing the inter est rates that could be paid by banks, S. & L.s and other regulated lenders. This policy has been in effect now for more than a decade With the approval of subsequent administrations. Now, in 1979, the futility of this policy is becoming abund antly clear. As interest rates to,savers have been increased, interest rates to borrowers have been increased. The result is no net gain to the economy as a whole. Quite the contrary there has been a massive transfer of wealth to the savers, while the borrowers factored the cost into the price of goods and services passed along to consumers. What is misunderstood is that Interest Income also has a "parity" which must be honored by the other sectors of the econo my in order to maintain relative balance. If the interest rates to savers ( and borrowers) are above parity, then the effect in the remaining sectors is infla tionary. If below parity, it will have a depressing effect. The realistic presumption be enhanced at all by just providing is a market for whatever his factory tant factor in providing employment, is to expand the market.  would seem to be that employment will not a worker a place to work in, unless there may produce. So, in fact, the most imporor enhancing existing jobs for that Edtter,  Nothing expands markets like "raw material" income, if it is price d at parity with the average cost of other goods and services.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • p 13  Indeed, the very special ..'ale that 'raw material income' (new wealth) has, after it has served the needs of the agricultural economy, is it! ability to purchase new homes, new schools, new churches, new highways, and to provide the investment capital to build new plants for the new labor force that comes into the economy annually, without drawing against previously accumulated wealth 'old wealth'. Without this addition of new wealth annually there would be no resources for expansion in the economy, without taking something away from someone who has entered the labor force earlier, and accumulated wealth out of prior years raw material income. Needless to say, perhaps, but if farm prices, like interest rates, are too high, they are inflationary, if too low, deflationary. What we need in the economy today is the relative balance that prevailed in the base period of 1941-52, which provided each sector with enough income to purchase the goods of every other sector, without tilt.: injection of excessive credit. We are describing a 25 year period of U.S. History which has gone awry, and which may be culminating right now. During all of this period the one outstanding performer has been the economic sector known as the Net Interest Ineome of Individuals which has increased 696.61% from 1941-52 to 1967-76, as compared with only 14.4% for the next largest increase, and a decline in every other sector ranging from 20.6% in Rental Income to 72.0% in Realized Net Farm Income. It is true that Net Interest Income of Individuals is not the same as the interest income of Banks and other regulated lenders, but it does reflect the rate structure that has been imposed on investment companies and banks, in order to be able to compete for savings and to pay savers 696.617, more in 1967-76 than in 1941-52. A correlation to the foregoing example of the incredible rise in the cost of interest, is the equally incredible decline in the Net return to agriculture. It is true that the Realized Net Income of agriculture does not directly reflect the price of farm raw materials, but who can deny that it will take a substantial increase in farm prices, perhaps a 1007. increase, to bring Realized Net Farm Income up to parity in 1967-76, as compared with its position in the National Income in 1941-52. The inflationary influence of increasing interest rates, exemplifying excessive debt, has more than offset the depressing effects of drastically reduced Farm Income. However, the situation may be reversed as the credit reservoir dries up and there is no more credit available, at any price. The cumulative effects of this wide disequilibrium in the distribution of National Income, as illustrated in these two examples, without a 1800 turn in the public policy toward the pricing of farm products and other raw materials, leaves open only the question of when potential national bankruptcy will Occur. These policies have been so distructive of our economy that it has required a doubling of the Public and Private debt every decade since 1950. The total of this debt in 1978 exceeded $4.0 trillion, and the estimated interest cost at 87. per annum would equal $360.0 billion, all of which is a 'mortgage' on the future income of the nation.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  it 1.:  This incredible total dcbt and int erest must be extracted National inco::le and Market for goo from future ds and services at a rate which totally frustrates normal economic function. Can you visualize deducting jus t the interest cost, $360.0 billion from the ann ual National Income, then div iding up the rest between the various sectors sho rt $360.0 billion of being eno ugh to consume all of the annual production, at par ity prices. It means that the economy must grow at least $360.0 billion annually, to take care of this interest charge, if the National income is going to be sufficient to produce and dis tribute the nation's goods. Needless to say, there is a nec essity also to pay the princi this public and private debt. pal of This is essential so that the mon ey can re-cycled by reloaning it so be that it can again act as an eco nom ic mul tiplier in producing and consuming the ann ual production. Raw materi al inc ome (new wealth) added annually in a parity yea r (optimum of production x par ity price) will only consume about 14% of the annual production, so re-cycling, and res pending of 'old wealth' is essential to ful l production, full consumption and approximate full employment. A very large part of the public and private debt has a maturi from 1 to 7 years. Say an ave ty of rage of one/fourth is due ann ual ly. This means that $1.0 trillion will have to be collected on debts, and rel oan ed annually for the fullest economic imp act. However, it is well kno wn in financial circles that much debt is being rol led-over. That is, it is being ren ewed from year to year, and not repaid and rel oaned. In this case these dol lars are not re-cycled through the economy and do not perform their economic functi on. They are sterile. The result of this is the nec essity of expanding 'new debt' out of annual earnings,and if the earnings are n't available, out of 'thin ai r, inflation. Inflation can come from the expans ion of cash, or paper dollar s, or from the expansion of credit through the man ipulation of the fractional reserve system. Without a gold base, or silver, the capability of the Treasu ry Department and the Federal Reserve system, in con junction with the Commercial Banking system, is unlimited, and restrained onl y in the judgement of the peo ple in power. If the economy fails to increa se National Income, from earned to pay the cost of interest, and income, to replace the 'sterile' dollar s which are lost to the economy because of insolv ency, then we must substitut e inflation dollars, or go broke. We have continued to make this same horrible error every year since 1952, deliberately. We contin ue to corrupt our money sys tem bec ause no-one has presented a better idea. Not so. A better idea has in fac t been presented and rejected by every administr ation since President Frankl in Roo sevelt. Why? "Because the economists corrup t Congress, and Congress cor rup ts the money . . (Chrm Burns). The fact is, orthodox economics dare not acc ept an 'unorthodox solution' even though comple tely safe, for fear of los ing credibility. Our objective in the next series of illustrations is to demonstrate the potential benefits to the total economy if we can man age a market re-distribution of National Income in a previously proven, more equ itable manner.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (.iite often our conservative friends part company witn us right here. They seem to believe that the re-distrihution of Nati ona! Income, and the redistribution of accumulated wealth are synonymous. If it were, we wouldn't blame them, but it isn't. It is not our intention, nor do our proposals in anv way interfere with accumulated wealth (old wealth), except perhaps to enhance it quite incidently, in a very positive fashion. It is true, however, that a different distribu tion of National IncoTre will also bring about a different distribution of newly created wealth (raw material income), but it will in no way adversly effect the pool of 'old wealth'. If another serious depression would occur, desp ite assurances to the contrary, it will be because existing trends are not corrected, or perhaps because the correction is too late in the game to be effective, then quite clearly 'old wealth' would be in jeopardy. In another depression there is a very real possibility that a 'popuLir call' by the public will be heeded by a desperat e government to confiscate, if not re-distribute, accumulated wealth to provide the needs of a destitute society. It would require only the nationalization of the financial system as a starter and build from there. Needless to say this would mediate to everyone 's disadvantage ultimately, because 'old wealth' is finite, and the needs of Society are infinite. In fact, if this were NORMs objective, we would advocate leaving things just as they are.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  What we propose to demonstrate to you now will be viewe d pure fantasy. But, fantasy suggests 'pure imagination' and this is There has always been a pursuasive body of fact supporting the need of parity from early -on, and very convincingly so since the turn of  by some as not true. for 1007, the century.  On occasion even we refer to these examples as hypothetical, but even this is not true. Hypotnetic denotes assumption without proof, and we have proof, abundant proof. What we have is an easily disected 10 year period of econo mic performance from 1941-52 from which we can extract precise examples of what we wish to prove. We can make very exacting measurements of 'what could have been' in circumstances similar to 1941-52. What we prove totally negates apparent need for confiscati on of, or redistribution of previously accumulated wealth, because it will clearly eliminate the primary cause of serious depressions. Ten years average economic periods are used to offer restr ained comparisons, opinions that are moderate and believable . However, this doesn't mean that such observations are the very best way to illustrate a point. If we presume by now that we have established the period of 1941-52 as a reasonable base from which to measure the disequilibrium that has developed in our economy since that time, then there is really nothi ng wrong with comparing that base period with the year 1978, for example. We can even take the restored 1978 dollar total (column 2) and project them into dollar totals which represent the best of all worlds, 1978 totals which have been not only resto red, but also corrected to reflect a fully operating economy (column 3). And if we aren't sure that a restored 1978 is achievable, we can use the figur es to estimate the amount of debt that will be needed to sustain the economy, temporarily at least, without restoration. 1978  1978 restored to 1941-52  1978 restored & corrected to 100 of parity  $1,301.2 bil.  $1,122.67 bil.  $1,301.2 bil.  Farm Income  25.1 bil.  116.02 bil.  134.5 bil.  Small business & professionals  87.8 bil.  180.92 bil.  209.8 bil  Rental income  23.4 bil.  47.02 bil.  54.7 bil.  Corporate Inc.  160.0 bil.  216.70 bil.  251.2 bil.  Net Interest Inc.  106.1 bil.  20.10 bil.  23.3 bil.  $1,703.6 bil.  $1,703.40 bil.  S1,974.7 bil.  Compensation of employees  Total National Inc.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  it 7  What you see here mnv be 'the greatest story ever told' because it tells an awful lot that is critical to the decision makers, if a correctior. It also tells us something about what, we can expect, or is to be achieved. need to prepare for, if correction is not achieved. The differences between column 1 and 2 indicates the distortions in our 1978 National Income and comparable totals restored to the 1941-52 share earned by each sector. It is evident that Compensation of employees would decline $178.53 billion from column 1 to column 2, and that Net Interest Income of Persons would decline $86.0 billion, with 100% of parity applied to 1978. On the other hand, every other sector would increase substantially without exception. Column 3 merely illustrates what would be necessary in the ramaining sectors of the economy, if the $178.53 billion loss in Compensation of Employees is added back, thus maintaining Compensation of Employees at it's 1978 level. The experience in the distribution of National Income in the 1941-52 period would decree that this would require upward adjustments in all other sectors in exactly the same ratio, in order to maintain balance. The collateral benefit of having $178.53 billion of Wages and Salaries would provide a reciprocal increase in the other sectors totaling $92.77 billion, for a total expansion potential, had 1978 been in 1941-52 balance, of $271.1 billion. The difference between column #1 and P3. This is what could have been in 1978. Something similar to this also 'could have been' in every year from 1952 to and including 1978. The annual figures and the currrulative loss to the various sectors (restored to 1941-52), but still not (corrected) as we did in column #3, are shown elsewhere in publication. Assuming that column P3 to be a realistic figure in the context of this illustration, then the U.S. economy failed to earn a $271.1 billion increase in National Income in 1978. What are some of the consequences? It would have provided a market for $271.1 billion more of goods and services for cash. It could have repaid $271.1 billion of debt, or interest on debt. It would have provided a tax base for an estimated $81.4 billion of additional U.S. income and excise taxes (307 x $271.1), and would have balanced the budget. Had the Federal Budget been in balance it would have reduced the demand for credit enough to prevent a two percentage points rise in the cost of interest on the $4.0 Trillion of public and private debt. Less dependence on borrowed funds, because of more profits earned, would have reduced, or at least stabilized, all interest rates in 1978. Savings would have increased, because an increased Net Farm Income would be the result of higher farm prices, more gross farm income.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  vli  Cost of livinv would have increased i or with a doubling in farm raw material prices, but would then stnbilize, as the value of the dollar stabilizes, interest rates decline, prices stabilize and in some cases decline somewhat on consumers hard goods. Inflation would abate, farm land prices and dwelling prices would drop back substantially, and stabilize at realistic levels. Gold and silver would decline in price and very likely be included in a 'basket' of commodities as the oasis for a stable collar; and not be tne 'barbaric metal' it was once catagorized to be, not for a generation or two a: least. Prices and values would generally find a new level, a water mark, so to speak, where efforts will once again begin to increase the value of one commodity relatively higher than all others, in a new cycle. But we perceive a danger even in this Idealized re-balancing of the economy by restoring 1941-52 norms. Some will perceive any downward adjustment of the economy, or downward readjustment of prices, as a sure sign of depression. Panic can ensue and the best efforts of a purposeful public and government effort to restore the economy and to stabilize it safely for posterity, could come to naught. Now let's assume that no-one is going to react favorably to any kind of a plan for restoration of our raw material income level, and that we continue to trend into either depression, or inflation and then depression, because of a depletion of our liquid financial resources. Going back to the raticis developed in the late 1920s and earl, 1930s by Mr. Adkerson and nr. Wilken and their associates. At that time, without the excessive credit distortions that prevail today, a fairly accurate ratio, between 'raw material' income and National Income, was developed. It became known as the 1 to 5 ratio. Simply stated, $1.00 of raw material income will create $5.00 of National Income. There is little doubt but what this ratio prevails with reasonable accuracy today. The conclusion drawn at that time was, unless this ratio was maintained by whatever means, it would result in ultimate credit illiquidity, and . depression. What we have done up to now is to ignore this earlier ratio, and substitute in its place evidence of a declining farm income and rising illiquidity in the financial system as demonstrated in the Commercial hankinv system, for whatever reason. It has happened. According to the Adkerson-Wilken ratio in order to maintain a solvent 1978 National Income ( as restored and corrected column v3) we need a basic gross income from the production and sale of 'all' raw materials of 1/5th of $1,974.7 billion or $1,974.7 4 5 ,= ;394.94 billion. Of this agricultural raw materials should constitute roughly 707. or $282.1 billion, which would have resulted in $134.5 billion of Realized Net Farm Income in 1978, instead of S25.1 billion. Hard to belicve, bYt it true.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4  •  •  Now let's assume that we aren't goi ng to do anything at all and let it all go dowr., or at least not change it for 1979. What we nee d the n is $271.1 billion of additional cre dit in 1979, to provide a market for goods and services comparable to 197 8. however, you will recall our saying that it now takes $1.88 of bank credit to create $1.00 of Gross National Product, compared to only .17c in the 195 0s. $271.1 x 1.88 = $509.7 bil lion of additional credit required for 1979. Incredible, you say. We agree, it is difficult to believe these figures, but this is the way the y come out, and we have every rea son to believe that they are reasonably acc urate. More incredible perhaps in the fact that these are the figures for 1978, which have already been added to the public and private debt, and not for 1979 which will have to be even higher. You ask now, how this can be accomp lished? If the loans and invest ments of the Commercial Bankin g System are already at 111.01% of deposits, then what? The answer would seem to be apparent. There arc other rea sons why we may have escaped collapse so far. Let us recount just a few of them, and express the hope that there is still time for internal correc tions in the U.S. economy. Fortunately, there are evidently extenuating circumstances which having the effect of keeping are the economy afloat, for the tim e bei ng. We say fortunately . because anything that prevents a depressio n is a for tui tuo us situation, even though failure to make the necessary domestic correc tio ns to restore the economy are not by any means a certainty, it does provide pre cio us time. These are some of the things that are happening now. We have made generous use of sta tistical material up to now. The same fine records that the econom ists agreed would prevent anothe r depression, according to a Wall Street Journa l article. Which makes one wonder if economists ever look at Commercial Bank Sta tistics. We will now relate some of the inf ormation which seems to preclude immediate collapse, but without promise for the more distant fut ure. For example, One reliable source reported ear lier this year that domestic ban had brought back into the U.S. eco ks nomy some $35.0 billion of mon ey which was previously loaned to foreign cus tomers. Not a big 'reflux' com pared to apparent needs, but something anyway. Richard Russel, the author of the Dow Theory Letter, Inc., (P.O.Box 1759, LaJolla, California 92038) in his Sept(mber 12th letter, exp anded this subject considerably and helps exp lain why our economy can contin ue to 'bob-along' in spite of our domestic liquidity problem.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Mr. Russel's letter says, "What we are seeinp. now is a great invasion in the U.S. by the major banks in the world. Here are some startling facts. There are now about 100 foreivn banks doing business in the U.S. These banks have combined assets of $116.0 billion (compared with only $24 billion in 1972). These same banks control 6% of the Commercial banking in the U.S. (against in 1972). Tnese banks account for 20% of all corporate lending in the U.S. 35% in California and an incredible 437 of all corporate loans in New York . . . . "This entrance of foreign banks means a major new source of liquidity in the U.S. Eurocurrency is what bankers call the huge pool of paper money that lies outside the U.S. it is estimated to be around $802.0 billion in size. Furthermore (please sit down for this one) The Eurocurrency marke t has growl at a compound rate of 25'4 since 1970. Thus it dwarfs the U.S. money supply and is about equal to the Federal debt. The Eurocurrency market is now an unbelievable ocean of liquidity, and I don't think most investors fully compr ehend its meaning or implications "The essence of this whole discussion is tHis: I believe the flood of Eurocurrency into the U.S. is moving almost out of control. It is causing the Fed Figures and statistics to be almost meaningles s. The "out of the Fed" financing in the U.S. today is of absolutely massi ve proportions . . . . . But what I do see is the U.S. and international money lake growing into an ocean. It is an ocean that is subject to few controls, and an ocean that is growing out of control." Perhaps this reflux of U.S. investments overseas, and the mounting influence of foreign banking in the United States with acces s to $802.0 billion of Eurocurrency explains why the U.S. economy is 'bobbing-a long' in spite of evidence in the domestic bank statistics to the contr ary. It is a well known fact that the very large U.S. money banks are the most competitive in the world. The second largest of these, City National Bank of New York, has hundreds of bran,ches in New York, and maybe a hundred branches in foreign countries, to say nothing of additional hundreds of 'business development' offices in almost every large city in the U.S. It is also a matter of record that Chase Manhatten, the Third largest bank in the U.S. earned 73% of its profits on loans to foreign borrowers, and City National Bank more than 50%, an indication of their foreign involvement. The large money banks of the U.S. are known for their agressiveness and yes, have even been accused of being predatory. A September 26th, 1979 issue of the American Banker, a daily bank newspaper told in bold headlines, "Citycorp (First City National Holding Compa ny) studies New Effort to Raise Funds Outside of State". The First line of the article goes on to say "Citycorp has under serious study another effort to raise funds from nonNew York State Consumers." This is what we call predatory. One has to ask why the large money banks in the U.S. permi t very agressive lending in the U.S. by foreign banks, which have grown fourfold in 8 years, on the one hand, and why it is driven at this point to seek consumer savings from outside the state of New York, on the other hand; unless they are running out of lendable funds from their usual sources, depos its of their own customers in New York, and the WORLD. And, on the same date, September 26th the Wall Street Journ al carried an editorial entitled "Gold and Money". It referred to Chairman Volker's performance since replacing Chairman Miller on the Federal Reser ve Board. It says in part, "Evidence of easy money surrounds us. In the forei gn exchange markets the dollar has needed extensive support, and still is at the lowes t point since   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  near-collapse turned around American economic policy last November. The netarv aggrigates are gallopine. Over the last four weeks M1 has expanded a: a rate oi 1e.1% while M2 expanded at a rate of 11.6%. The monetary base has ballooned at a rate of 15.1% which means that despite the hullabaloo about Interest rates the Federal Reserve has still been injecting reserves into the banki:Ig system. Far from fighting inflation, monetary policy remains expansive The best proxy for short-term credit demands is the total of commercial and industrial loans by large weekly reporting banks, plus outstanding commercial paper of non-financial corporations. In the June 15 - September 15 perio.,, this number grew by $9.2 billion, in the same period of 1978 it grew only $0.6 billion, while in the 1977 period it actually shrank $0.7 billion. This extraordinary Credit demand naturally pushed up interest rates, the Fed has merely been following and finding itself injecting reserves and expanding money to meet the demand." it  This bit of information seems to reinforce what we are already beginning to percieve. The ref lux of foreign deposits from foreign branches of American banks plus the influx of Eurocurrency from a rapidly expanding Foreign banking system, seems to be necessary in a liquidity starved American Lanking system. Plus the Federal Reserve bank is making substantial, and ih recent history, unprecedented contributions to the liquidity of the American Banking system. What the information tells us is that the Federal Reserve has no statistics on foreign bank lending, and as a consequence the Fed's records do not accurately reflect the total supply of money that is available, or that is in use in the United States. It does not say that the statistics publish ed in the Federal Reserve Bulletin every month are not an accurate appraisal of the condition of the U.S. banking system. In this case, the July 25th, 1979 bank statistics, though preliminary, speak loud and clear. The startling acceleration in the rise of the Loans and Investments totals in the U.S. banking system on this date show 111.01%. This an abrupt increase from the long term history of this ratio wherein Loans and investments have exceeded the growth of deposits by 1 percentage point per annum. A commonly expressed reason for not wanting to increase Farm Income by S2.0 billion or $3.0 billion in recent years, is because the consumer can't afford it, or won't stand for it. What the total economy needs is not $2.0 or $3.0 billion of increased Net Farm Income, what it needs is the gross farm income that will result in an addition to Net Farm Income of at least $100.0 billion annually. The way things are stacking up now, the consumer can't afford not to pay the additional bill, if he wants economic stability restored to the U.S. Please note this. This past year the interest rates have increased in excess of 3 percentage points. It is reasonable to assume that the rate on the more than $4.0 trillion public and private debt has moved up at least 2 percentage points, from approximately 6% to 87. per annum. $4.0 trillion x 2.0% equals $80.0 billion more interest to be paid this year. This interest cost will be absorbed by the General Public, either directly, or in the increase in the costs of goods and services and taxes . . . .Add to this the fact that an increase of 15c per gallon for gasoline and heating oil will increase the total   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A1-1  fuel bill by $30.0 billion, and the cost already exceeds 23c per gallon. $80.0 billion in increased interest and $30.0 billion in increased gasoline and fuel costs, is $110.0 billion dollars that the consumer will pay this year. Can the consumer afford this? Will he pay it?  No.  Yes.  Will he have solved any problems  No.  Will he probably pay more next year for both items?  Yes.  Does the administration; the business sector; anyone seem to have a viable solution? No., and Yes. There is one way. Pay 1007 of parity in the market place for all raw materials produced, either domestically, or from foreign nations. Then, given the problem of liquidating a $4.0 trillion claim against future income, with careful administration and restrained consumption, probably for the next 100 years, we can work it out without a depression. It is worth a trial run, even if it does challange some of the favorite concepts of our orthodox economic community. It will beat any depression that the economists can cook up. After 40 years of trial and error research, to prove to our awn satisfaction that the economic concepts of parity are valid and necessary in the operation of our economy, the, evidence has finally been provided to us. The foregoing is but a small sample of the mounting testimony available to us as we write this paper. We are firmly convinced that unless U.S. Farm Policy takes a 1800 turn, sincerely and in reality, in the very near future our nation is courting imponderable problems both at home and abroad. We can imagine that some readers, not in our organization, but well known to all of us are still amused at our naivete in suggesting early in this paper something about a design for economic equality originated by our reator. For their armisernent, let me repeat it again. "It is a promise from which almost miraculous benefits will flow to all man-kind, if realized. It is a promise from an infinite Creator, a Creator who, when he designed the bountiful earth, surely designed a method for all to share generously in its fruits. Or, Failing to implement His deEign, suffer incredible periodic social and economic disasters, which leave no one without some grevious hurt." For those who are curious, this problem, this historic inequity? is that if it is solved, it will most many imploring His divine assistance, earth -- but in conjunction with what things which are obvious, we advocate to learn and to teach God's design.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  do we expect a miracle from God to solve Our response is No. What we do expect certainly be more because of prayer by more than the genius of any of us on little genius we have. So, among other a determined effort, a prayerful effort,   https://fraser.stlouisfed.org A Federal Reserve Bank of St. Louis  411 For thostf wno are wondering, we can tell you that we do not ant icirate a near-term depressio:., although you know our philosophy is, "it 's better to ic out of debt, or speculative positions , 2 years too soon, rather tha n 30 days too late." Nor, do we forsee near-term run -away inflation, although this too is possible with an uncontrolled inf lux of Eurocurrency. The only thing that we are reason ably sure of is the fact that current banking statistics seem to us to be uncompromising and conclu siv e. And , given a continuation of existing public policy toward parity of farm pri ces , ano ther depression is very nearly a cer tainty. The date it will beg in wil l be more accurately pinpointed by history, than by anyone's foresight.  V. E. Rossiter, Sr. October 10th, 1979  Paul A. Volcker  waiet-pt‹   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 23, 1980  The Honorable Stanley N. Lundine !louse of Representatives Washington, D. C. 20515 Dear Conaressman Lundine: I have carefullv read your letter urgincl the formation of labor-management comrittees at Chrysler. Your essential point is well taken. Certainly if Chrysler is to recover and prosper, cooperative labor-management efforts can be very constructive. As to your specific suggestion, I will raise it with Secretary Marshall and other menbers of the Chrysler Loan Guarantee noard at an early date. Thank you for bringing this matter to my attention. Sincerely,  FGC:ccm #9  ,I0  le  Oon Winn will be iiscussing wit I. Corrigan.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  S:-ANLEY N. LUNDINE 39TH DISTRICT, NEW YORK COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS  •  DISTRICT OFFICES: Room 122, FEDERAL BUILDING P.O. Box 908 JAMESTOWN, NEW YORK 14701 PHONE: 716-4E14-0252  Congre55 of tic Uniteb *Wel:4  COMMITTEE ON SCIENCE AND TECHNOLOGY  180 STATE STREET ELMIRA, NEW YORK 14901  jOott5e of 11tprefSentatibt5  PHONE 607-734-0302  --SELECT COMMITTEE ON AGING  WartincIton, A. 20515  Room 606, 101 N. UNION STREET OLEAN, NEN YORK 14760 PHONE: 716-372-1816  430 CANNON 13UILDI4r3 WASHINGTON, D C. 20513 PHONE: 202-225-3161  January 10, 1980  The Honorable Paul Volcker, Chairman Federal Reserve Board 20th and Constitution Avenue, N.W. Washington, D.C. 20551  • -1  Dear Chairman Volcker: I am writing to urge you to consider encouraging the formation of labor-, management committees at Chrysler as part of the ongoing rescue effort.—; T hope you'll agree that cooperative labor-management activities could be particularly meaningful in this case. As you know, an amendment directing a federal effort to encourage such activity was proposed by Senator Javits during Senate consideration of the loan guarantee bill. Though conferees did not retain the provision, I believe the reason was primarily lack of time, rather than objections to the merits of the idea. Senate conferees were concerned with the scope of the amendment, which would have authorized the involvement of the Federal Mediation and Conciliation Service, and it did not seem practical at that point to rewrite the provision.  Ommor-  I feel strongly that cooperative labor-management efforts could be of great value to Chrysler and would significantly improve its prospects for recovery. The most successful domestic auto manufacturer, General Motors, has participated with the United Auto Workers in cooperative activities at a number of its plants. The GM projects have aimed to increase the involvement of workers in plant decisions--especially those affecting production processes. The joint efforts have meant improvements in labor-management relations, the quality of working life, and productivity at GM plants. Chrysler clearly can benefit from these kinds of improvements. The approach would also complement steps taken in the loan guarantee legislation to strengthen worker involvement in the recovery process. We have required Chrysler workers to make considerable financial sacrifices; we have provided the incentive of stock ownership to increase their stake in seeing the company succeed. By encouraging the establishment of labormanagement committees, we offer a means for exploring changes in work processes and solving a variety of problems that lie outside the scope of the collective bargaining process. As at GM, I believe such an effort would mean constructive changes in labor-management relations at Chrysler and enhance the company's ability to compete.  THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS  •-•   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .  y  -  Awl•seq.:44,44  .r• .  r NOV • .r* i* • .  •  p • •' aw.•  •• • 'it•11‘. ....• • •  qjbw• .• •  r ^h%•  • ••  ••  rar:se.: . +1  Page 2 January 10, 1980  I would hope, if there is interest in forming such committees at Chrysler, parties involved would call on the Mediation Service for technical or other help they might need. I believe the administration is requesting both fiscal 1980 supplemental and fiscal 1981 funding for a new Mediation Service program that would offer financial and technical support for labormanagement committees at the plant, community, or industry level. I would be happy to discuss these ideas further with you at any time, and greatly appreciate your consideration.  I  4v.464i.  00,4  Sincerely,  immor-  Stanley N. Lundine Member of Congress  40.,c  Lkt-4f.  SNL:me   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ;•-•:•  )  Mk7=7••••••  -  rs  • .- "% . . q,  —  ••••plr  4•  • %-;.:Lu.  ! •  ' at.; .  . ,;•  ••••••• ••  •  ‘v&A . •  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 22, 1000 She Seasrable Pereeed J. St 64-resin  fasteris  Selesseittee ea VSaaii1 Smetltetioas Sepervisioa, Ideialetiera mei Imerroace 6111111ttIle OM Sesitteg. flame amid gads Affairs eg Lipseseststiern leseldatees, D.C. MU Wage 411h1dinia Sit GOTIMktii Meek pen for yew letter reem ili di* limord** *Ism 0001 ' estala 11.1. POS, AM* veald prohibit ostf the Sesed from rejecting an applicAtive tio feru•elepaimuk Wadies seamy solely homes it involved a bash stook loaa uhish was ferapertod of net sets thee tueety-ftes years. In its testlaes. bears your Subesemittee. the Sesed append legislation similar te this bill ledi estia the belief Oat speaffie suedes& aptied is the adeinistratleo of the Isle Milding Ceara Ale slharld anse properly be reoteund adolaistratively. additise, the Semi Salt thet the tmenty-flew year debt retiremeat ported weld result fa sobattnitial imereeens is the already hemp volume ed debt eawriedbirsooptonolosek hold ing compeales and that this would affect adeseeely Ohe glameelal aeaspilmes e of ma of the satImes semiI city b. Is his testiest.. Opeowner Portas tediested that the Saud wield study the bask stook Sees LOOM. is this c , eneeties4 the Sewed. oa Deesiber 13. 1,79, pebilahed praised shaespe in the fiesnalal criteria applied in enembelk Wadies witiPeer fetmmtimes. Am lediested la enr proposed um volley statement, a a which is *******4 for your easeeatonse, ear priecipal ObjectivcerY e is this Sr44 has hese and asetisamee to be to minute the safety and senadles s of the bookies system. We believe that mar proposed chews see outirely moistest vitt slot abjeettes. At the sage tine, they ehemld sineeperehly improve the tressfersbility of smell eoomosity bashe. Altheosh eer watt.. called for essmsets tots. eaboitted three. Jeneery 31, 1 een report thAt as already ape pasateleg • large and wry posittve ream.. to the props.A1 free small basks aud bash haf ts* ssapeaiem.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ths Nomedble Yereeed J. St breath Pepe Tee  Some Mese eeStilisetisee sof ser geepseed policy soy well be lode after the eemmeses ace arnellyeed, bet obese seems to be little deibt thAt we eau iwkspistady addeees, ghee* ewe ededeistrotive pew. sedisses, the sonsegil a the peepeemeMe eirlUt* WOO cad at the same time Man the safety ant essesiesee seesidecelleme veostred by the iseb1is interest. es avettems, theeetere, to moss tistslaties 040k se LS. 5700. Sincerely.  iselosure  (Proles release dtd. 12/13/79.)  .1111421Aspit (FV-104) bees ibe. Ryan NV, Allison lie. Mallardi (2)  • BOARD Of GOVERNOR5 OF THE  FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551  11,4LikE-s.•  PAUL A  VOLCKER  ••• • • •  CHAIRMAN  January 22, 1980 The Honorable Spark M. Matsunaga United States Senate Washington, D. C. 20510 Dear Senator Matsunaga: I am replying on behalf of the Board to your letter of January 10, 1980, which was sent to each member of the Board, requesting the Board to reconsider its action of December 10, 1979, approving the application filed pursuant to section 4(c)(8) of the Bank Holding Company Act by Crocker National Corporation, San Francisco, California ("Crocker"), to acquire Bishop Investment Corporation, Honolulu, Hawaii ("Bishop"), and its subsidiary, Bishop Trust Company. Prior to its action the Board received objections from a number of interested parties. At the outset, let me assure you that in acting on Crocker's application, the Board carefully considered the issues raised by these parties, as reflected in the discussion contained in the Board's December 10 Order. A copy of that Order is enclosed for your convenience. Your letter urges the Board to grant petitions for reconsideration filed by several Hawaii financial institutions that had objected to Crocker's proposal while the application was pending at the Board. You state that the purposes of granting reconsideration would be to await final Congressional action on a bill that would, in effect, bar Crocker's proposed acquisition of Bishop, and to allow time to hold a hearing on the proposal in Hawaii. Your request that the Board grant reconsideration in order to defer action on the application pending possible Congressional action raises policy considerations concerning the timeliness and finality of Board actions. The requirement of timely Board action is evidenced by the statutory requirement of section 4 of the Bank Holding Company Act that the Board act on applications within ninety-one days of submission to the Board of the complete record on the application. Thus, consistent with its Congressionally mandated deadline, the Board, has, on at least three previous occasions, declined to honor requests by members of Congress to delay consideration of applications pending enactment of legislation. Moreover, the finality of Board actions is assured by the provision of the Act which limits the ability of parties to challenge Board actions by requiring that they seek judicial review within 30 days of the date of the Board's Order. In this case the Board acted on December 10, 1979,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ri  The Honorable Spark M. Matsunaga  -2-  and on January 9, 1980, the protestants filed an appeal with the United ij•iit rests States Court of Appeals. Thus, jurisdiction over the matter with that Court and it would not be appropriate for the Board to reopen the matter at this time. With respect to the question of a hearing, the suggestion that a hearing be held was not made until after the Board had acted. In particular, in March, 1979, the Board solicited comments and hearing requests from interested parties by publishing notice in the Federal Register of Crocker's proposal. Ten Hawaii financial institutions, as well as The Hawaii Director of Regulatory Agencies, interposed objections within the time period specified in the notice. Furthermore, during the ensuing months, the protestants were afforded additional opportunities to make submissions to the Board in order to expand IS their objections anI to rebut Crocker's responses to those objections. However, none S f the protestants requested a hearing wn the time period specified in the Federal Register notice, as required in the Board's Rules of Procedure. Finally, let me assure you that the Board was aware of the pendency of legislation that could affect Crocker's proposal, but for the reasons outlined above, the Board determined that it should not defer action on the application. It appears, however, that Crocker is aware that it may have to divest Bishop if the legislation is enacted as proposed, and has made appropriate provisions for that event. Sincerely,  Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .'  „ •0  '•()V7  -  .  BOARD OF t,r__JVI  ,  OF THE , 1 • ••  FEDERAL RESERVE SYSTEM  •.;  • • 4 4' '' ,.• • 0, 'riff ••4se 01. . • 1?ALREs .• ••....••  WASHINGTON. D. C. 20551  PAUL A. VOLCKER CHAIRMAN  January 22, 1980  The Honorable Daniel K. Akaka United States House of Representatives Washington, D. C. 20515 Dear Congressman Akaka: Your note of January 4, 1980, requests my comments regarding correspondence received by you from American Trust Company of Hawaii and Hawaiian Trust Company, both of Honolulu, Hawaii. This correspondence concerns the Board's action of December 10, 1979, approving the application filed pursuant to section 4(c)(8) of the Bank Holding Company Act by Crocker National Corporation, San Francisco, California, to acquire Bishop Investment Corporation, Honolulu, Hawaii. At the outset, let me assure you that the Board carefully considered the issues raised by American Trust and Hawaiian Trust when it acted on Crocker's application. The Board's Order of December 10, 1979, regarding this application discusses the comments submitted by those organizations in some detail, and I have enclosed a copy of this Order for your convenience. American Trust and Hawaiian Trust have urged the Board to grant reconsideration of its December 10 decision in order to defer action on Crocker's application pending possible Congressional action. This request raises policy considerations concerning the timeliness and finality of Board actions. The requirement of timely Board action is evidenced by the statutory requirement of section 4 of the Bank Holding Company Act that the Board act on applications within ninety-one days of submission to the Board of the complete record on the application. Thus, consistent with its Congressionally mandated deadline, the Board has, on at least three previous occasions, declined to honor requests by members of Congress to delay consideration of applications pending enactment of legislation. Moreover, the finality of Board actions is assured by the provision of the Act which limits the ability of parties to challenge Board actions by requiring that they seek judicial review within 30 days of the date of the Board's Order. In this case the Board acted on December 10, 1979, and on January 9, 1980, American Trust and Hawaiian Trust filed an appeal with the United States Court of Appeals. Thus, jurisdiction over the matter now rests with that court and it would not be appropriate for the Board to reopen the matter at this time.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Honorable Daniel K. Akaka  -2-  American Trust and Hawaiian Trust have also urged the Board to hold a hearing on Crocker's application. However, the suggestion that a hearing be held was not made until after the Board had acted. In particular, in March, 1979, the Board solicited comments and hearing requests from interested parties by publishing notice in the Federal Register of Crocker's proposal. Ten Hawaii financial institutions (including American Trust and Hawaiian Trust), as well as The Hawaii Director of Regulatory Agencies, interposed objections within the time period specified in the notice. Furthermore, during the ensuing months, these protestants were afforded additional opportunities to make submissions to the Board in order to expand upon their objections and to rebut Crocker's responses to those objections. However, none of the protestants requested a hearing within the time period speed in the Federal Register notice, as required in the Board's Rules of Procedure. Finally, let me assure you that the Board was aware of the pendency of legislation that could affect Crocker's proposal, but for the reasons outlined above, the Board determined that it should not defer action on the application. It appears, however, that Crocker is aware that it may have to divest Bishop if the legi2lation is enacted as proposed, and has made appropriate provisions for that event. Sincerely,  Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  NINETY-SIXTH CONGRESS  Room 2323 S  •  4110  BOB ECKHARDT, TEX.. CHAIRMAN JIM SANTINI, NEV. ALBERT GORE, JR., TENN. PHILIP R. SHARP, IND. ANTHONY TORY MOFFETT, CONN. ANDREW MAGUIRE, N.J. DOUG WALGREN. PA. RONALD M. MOTTL. OHIO MICKEY LELAND. TEX. TIMOTHY E. WIRTH, COLO. EDWARD J. MARKEY, MASS. HARLEY 0. STAGGERS, W. VA. (EX OFFICIO)  NORMAN F. LENT. N.Y. MATTHEW J. RINALDO, N.J. MARC L. MARKS, PA. TOM CORCORAN. ILL. WILLIAM IE DANNEMEYER. CALIF. JAMES T. BROYHILL. N.C. (EX OFFICIO)  RAYOURN HOUSE OFFICE  F3trLDING  PHONE (202) 225-4441  CONGRESS OF THE UNITED STATES  MARK J. RAABE CHIEF COUNSEL/STAFF DIRt CTOR  HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS OF THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE  WASHINGTON, D.C. 20515  January 24, 1980 Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20.551 Dear Mr. Chairman: Pursuant to Rules X and XI of the U.S. House of Representatives, the Subcommittee on Oversight and Investigations has been conducting a year-long inquiry into the relationship between energy policy, energy prices and inflation. As noted in our letter of January 7, we have found it necessary, as part of that investigation, to inquire into the role of monetary policy in general, and interest rates in particular as they affect pricing and production decisions in the economy. We had originally intended to invite you to testify at hearings held by this Subcommittee in late December. While we were in the process of establishing a mutually convenient date to receive your testimony, your staff requested that we consider the possibility of substituting written responses to carefully drawn questions in place of formal testimony. While this procedure is extraordinary for this Subcommittee, because much of the information that we sought is technical in nature, and because of the strong preference voiced by your staff for this alternative, the Subcommittee agreed to use the mechanism suggested by your staff to complete our record. On Tuesday, December 11, David Nelson and Milton Lower of the Subcommittee staff met with Mr. Brenneman, Mr. Fttin and other employees of the Fed at which time many of the questions contained in our letter of January 7 were discussed. At that time Mr. Nelson and Mr. Lower were given to understand that precise quantitative responses to all of our inquiries might not he possible, however, at a minimum, your office would be able to provide the relevant ranges of such quantitative responses even if they had to be labeled "staff estimates" rather than official policy. I was therefore very disappointed to receive your letter dated January 21 which addressed some of our questions in a vague, general manner and failed to address others altogether. Your reply simply did not provide the detail the Subcommittee needs to complete its record. Accordingly I am attaching a copy of our original letter   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Honorable Paul A. Volcker Page Two January 24, 1980  of January 7 and request that you construct specific responses to each of the inquiries listed therein. Of course, if you would prefer to present your responses in testimony before the Subcommittee that would be perfectly acceptable. If that is your preference please contact Mark Raabe, Chief Counsel and Staff Director of the Subcommittee at 225-4441 as soon as possible so that we may schedule the hearing. If you have any questions regarding the contents of the January 7 request please contact David Nelson or Milton Lower of the Subcommittee stafr at 225-5365. T would greatly appreciate receiving your written response by the close of business February 1, 1980. Thank you for your cooperation in this matter. Sir.1y, Nmow•Nsimill.gir  Bob Eckhardt Chairman Subcommittee on Oversight and Investigations Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Ps • —TY-SIXTH C01:GRCsS  •  Poem :123 R  •  :KHARCT. Trx.. cHA:RmAN  ecs  e-J.4 H:A_St OrriCC Su•LoiNti3 Pp.z•-t  2.11-4a41  • .11.4 SaNTtNI, wry. ▪  ALPIERT (-CRC. rNiur R, SM•An.  TrNN,  MArr.CA, J. Pl.•L:10, lidl•••:.  ANT),"_,• - ofr..  I: IT, CO..N.  ILL. r  CCA.Par V. A t_  L  R0N•LD  CONGRESS OF THE UNITED STATES  P  C,  :.. - •••NtudrvrR, CAL,Ir„  HOUSE OF REPRESENTATIVES  J•mrs T. P..7.•NILL. NC.  Pa,  (CX  CNIO  SUBCOMMITTEE CN 01ERSIGHT AND INVESTIGATIONS  *47:..vrY Lr.ANZ. TEX. TII , LoTNT C. 0., R1.4 COLO. CDAAND J.114Alt...rY. MOSS. N•..L.CT 0 ST•, :.C.U4S,  u•IRK J.  OF THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE  vA.  (r.A cr•pzic)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  &AMC  Cult, CO.:NSCLISTArr D:R, CTOR  WASHINGTON. D.C. 20515  .rmn  January  7, 1980  n Ave. 1 I'll' Dear Mr. Volcker: The Subcommittee on Oversight and Investigations has been conducting a year-long inquiry into the relationship between energy policy, energy prices and inflation. As part of that investigation we have found it necessary to inquire into the role of monetary policy, in general, and interest rates, in particular, as they affect pricing and production decisions in the economy. We would appreciate your written response to the following questions. 1. During the first nine (9) months of this year, inflation rose at an annualized rate of .•_e Of that, almost 4 points (3.969) or 29 percent of all inflation is due to teIrect impact of increases in energy prices (gasoline and home fuels). The Council on Wage and Price Stability estimates that an additional 2-4 points may be added to the CPI because of the indirect effects of energy I rices. These calculations IS not include the impact of the most recent round of OPEC price increases on world or domestic energy prices. In view of this massive increase in energy cost, how much influence can restrictive monetary policy have on consumer price levels? Speccally, what is your estimate of the rate of increase in the consumer price index for calendar 1980 assuming; (a)  Federal Reserve Board retains the money supply goals established last October;  (b)  The Fed allows the money supply to increase at a rate commensurate with the increase of fiscal year 1979 (third quarter 1978 through third quarter 1979);   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  r. Paul Vo1ckA10 Page Two January - 1980  (c)  •  The Fed establishes a growth rate for the money supply consistent with an unemployment rate of 6 percent or less?  2. Given the current restrictive monetary policy, what average levels of the prime inte-est rate and the principal mortgage interest rates do you ful-esee for calendar 1980? What direct and indirect impacts of ,these rates on the food, shelter, medical care and energy components of the consumer price index do you foresee for calendar 1980? Given the lag between interest rate increases and pricing and production decisions in the economy, how long do you estimate it will take for the economy to absorb the interest rate increases incurred in the last quarter of 1979 and any such interest rate increases you foresee for 1980? 3. Attached is a series of three graphs reproduced from the Council on Wage and Price Stability's inflation update dated November 21, 1979, in which the Council compares the trends in food and energy prices, underlying rates of inflation (defined as the overall CPI less food prices, cost of home purchase, finance, insurance and taxes, energy costs and the used car price index) and unemployment rates of the 1972-1973 period with that of 1978-1979. These graphs dramatically depict the consequences of food and energy price shocks of 1972-1973 on the inflation and unemployment of the 1974-1975 period. What role did monetary policy of 1973-1974 play in increasing the underlying rate of inflation and the unemployment rate depicted in those graphs for 1974-1975. What are your projections for the underlying rate of inflation for 1980 and the unemployment rates for 1980-1981? If you expect the current restrictive monetary policy to be more effective in controlling the underlying rate of inflation during 1980 than it was in 1974 and if you expect the unemployment impacts in percentage terms to be less in 1980 and 1981 than they were in 1974 and 1975, please explain the rationale behind such forecast. What distributional impacts do you expect restrictive monetary policy to have on ,the economy? How will each decile of income recipients in the United States fare under the twin impacts of the predicted inflation and unemployment during calendar year 1980? 4. The Council on Wage and Price Stability recently testified that the long term impact of steadily rising interest rates may be inflationary because it discourages new investment. What impact has the secularly upward trend in interest rates during the decade of the 70's had on investment and productivity?  •  z Paul Volcker(' Page Three January 7, 1980  •  To what extent is the secular trend responsible for the supply-side problems which seem beyond the control of short-term monetary and fiscal policy tools aimed at controlling aggregate demand. More specifically, to what extent has this trend aggravated the inflation -unemployment trade-off (outward shift in the P1' lips curve)? What implications do these higher interJst rates have for continuing stagflation in the 30's? What does this secular trend portend for the ability of the manufacturing and utilities sectors to convert to less oil-intensive production methods and the private economy as a whole to adopt desperately needed energy conservation technologies. We would appreciate your response to these questions by the close of business January 21. Should you have any questions regarding this request, please contact David Nelson, or Milton Lower of the Subcommittee staff at 225-5365. Sincerely,  Bob Eckhardt Chairman Subcommittee on Oversight and Investigations Attachments cc:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Mr. Jay Brennerman  c  •  •  BOARD OF riCIVERNOR5 OF THE  FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551  PAUL A. VO LC K ER CHAIRMAN  January 22, 1980  The Honorable Daniel K. Inouye United States Senate Washington, D. C. 20510 Dear Senator Inouye: I am replying on behalf of the Board to your letter of January 10, 1980, which was sent to each member of the Board, requesting the Board to reconsider its action of December 10, 1979, approving the application filed pursuant to section 4(c)(8) of the Bank Holding Company Act by Crocker National Corporation, San Francisco, California ("Crocker"), to acquire Bishop Investment Corporation, Honolulu, Hawaii shop"), and its subsidiary, Bishop Trust Company. Prior to its action the Board received objections from a number of interested parties. At the outset, let me assure you that in acting on Crocker's application, the Board carefully considered the issues raised by these parties, as reflected in the discussion contained in the Board's December 10 Order. A copy of that Order is enclosed for your convenience. Your letter urges the Board to grant petitions for reconsideration filed by several Hawaii financial institutions that had objected to Crocker's proposal while the application was pending at the Board. You state that the purposes of granting reconsideration would be to await final Congressional action on a bill that would, in effect, bar Crocker's proposed acquisition of Bishop, and to allow time to hold a hearing on the proposal in Hawaii. Your request that the Board grant reconsideration in order to defer action on the application pending possible Congressional action raises policy considerations concerning the timeliness and finality of Board actions. The requirement of timely Board action is evidenced by the statutory requirement of section 4 of the Bank Holding Company Act that the Board act on applications within ninety-one days of submission to the Board of the complete record on the application. Thus, consistent with its Congressionally mandated deadline, the Board, has, on at least three previous occasions, declined to honor requests by members of Congress to delay consideration of applications pending enactment of legislation. Moreover, the finality of Board actions is assured by the provision of the Act which limits the ability 5f parties to challenge Board actions   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  '  The Honorable Daniel K. Inouye  -2-  by requiring that they seek judicial review within 30 days of the date of the Board's Order. In this case the Board acted on December 10, 1979, and on January 9, 1980, the protestants filed an appeal with the United States Court of Appeals. Thus, jurisdiction over the matter now rests with that Court and it would not be appropriate for the Board to reopen the matter at this time. With respect to the question of a hearing, the suggestion that a hearing be held was not made until after the Board had acted. In particular, in March, 1979, the Board solicited comments and hearing requests from interested parties by publishing notice in the Federal Register of Crocker's proposal. Ten Hawaii financial institutions, as well as The Hawaii Director of Regulatory Agencies, interposed objections within the time period specified in the notice. Furthermore, during the ensuing months, the protestants were afforded additional opportunities to make submissions to the Board in order to expand upon their objections and to rebut Crocker's responses to those objections. However, none of the protestants requested a hearing within the time period specified in the Federal Register notice, as required in the Board's Rules of Procedure. Finally, let me assure you that the Board was aware of the pendency of legislation that could affect Crocker's proposal, but for the reasons outlined above, the Board determined that it should not defer action on the application. It appears, however, that Crocker is aware that it may have to divest Bishop if the legislation is enacted as proposed, and has made appropriate provisions for that event. Sincerely,  Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ction assi  O  gne-I  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 11111.•  Neal Petersen  DANIEL K. INOUYE  r- r.D4CrIKu1110   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FEOCIIAL BUILDING  ROOM 6104, 300 ALA MOANA BOuLEVARD  HAWAII  HONOLULU, HAWAII  96850  (808) 546-7550  ?..iCnifeb Ztafez Zenate ROOM 105. RUSSELL SENATE BUILDING WASHINGTON. 0 C. 20510 (202) 224-3934  January 10, 1980  Mr. Paul Volcker Chairman Board of Governors of the Federal Reserve System Federal Reserve Building Washington, D. C. 20551  tV.t-  Dear Mr. Volcker: There is a great deal of concern over the proposed acquisition of the Bishop Trust Company by the Crocker National Bank Holding Company. Since the Stewart Amendment to the Banking Act sets a November 1, 1979 deadline after which out-of-state acquisitions were to be prohibited, we believe your approval of this acquisition flies in the face of the intention of the Senate. We do not believe that it is in the best interest of the people of Hawaii to have outof-state corporations in control of state trusts. Since the Board of Governors did not approve the acquisition until December 10, 1979, the Senate passed Stewart Amendment, which we expect will be enacted in the final passage of the Act, would necessitate the divestiture of the acquisition. Therfore, to consummate the acquisition under these circumstances would be premature and disruptive to the clients of Bishop Investment Corporation and Bishop Trust Company, Ltd.  •  We strongly urge you to grant the requested reconsideration of your order of December 10, 1979. In addition to concerns over the implications of the Stewart Amendment, there is great concern on the part of the congressional delegation from Hawaii, from the State of Hawaii, and from the major financial institutions in Hawaii that a full and fair hearing be provided.  • ,••e".  The protestants request for a hearing to be held in Hawaii is most reasonable and appropriate in view of the importance of this decision and its consequences for Hawaii. Therefore, we strongly urge you to grant their  - .• • •  •  -4.••• •  '••  -  .  !  yb,p,  . -01••••  •  , , A -• •  • ; -49.-...,•••• • r •••••,.N., ••• .•••• • •0%. . .  •  Loam.  ••'  r • ••44,„• '• l•  .  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Mr. Paul Volcker January 10, 1980 Page two  request for such a hearing so that your decision can be based on all of the relevant information and that all can be assured that they have had a full and fair hearing. Deferral of final action would create relatively few problems and would be the prudent action for the Federal Reserve System to take at this time. On the contrary, proceeding with the acquisition at this time with the strong probability of divestiture being required would appear most unwise. We strongly urge that the Board of Governors defer final approval of the Crocker application to acquire Bishop Trust Company until final action on the Amendment is determined and you have had an opportunity to review the legislation and its applicability in this particular case.  lomper—  Thank you for your assistance. Aloha,  p•••••••••  DANIEL K. INOUYE United States Sen,a'to  SPARK M. MATSUN United States Se  r kw, /i • iv ?ft:  1  •.  T.  •  •  e•Ir-:,  .  *  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Jan...ary 21, 14V.  Me Memorable Mob it/kberdt Chairmen Sabeemmittee en Owereight emd leweetigstiome Censittee on interstate and Persian Commerce Mewee of Reeresemtatives Illehington, D. C. MIS Maar chairman Eckhardt: Your letter of January 7 raises a large nuebet of specific questions about the role of mometary tn effectimg prices and out4 in the economy as pert of your inquiry Into the relat1onsh0 ewes* energy policy, eseepp prices acid lunation. Your first set of questions asks about the relationshla befullest essey suwoly objectives and effects on the average level of prises, giveo the recast Large OfIC price increases. The Pedersl Swerve is mew in the presses of estebiishisig its nemetary Wets for IIISC which, seder the terms of the HomAreplieshine Act, I will report to the Cowles in the latter part of February. I will be glad to eend you a copy of eur congressielsel ret.vort as sone as it is com7eted. That re?ort will have mere specific criantitative information then 1 an able to supply at this time. Nowever, I. must add that 1 aloe believe that highly lrecise forecasts ef the effects of relatively smell differem4es in maw supply growth em either in.t.les or employment for • short period of time can be mere misleading than helpful. Secant and at OPEC pri.le increases, as you mete, have layed an Important role in contributing to inflation here and abroad. In ught of that, and given the inflationary momentum that already exists, it to especially important for public policies in general--aed eeeetary nolicy Is particular--to resist the spread of these further price pressures throughout the e:ouomp. We are at a criti,:al stage of the fight against imflattea, as suggested by the :a:settlement in the geld sad commodity markets. The priority attached to moving toward ',Lability seems to me particularly *portal& at this iweetwra in our economic and world affairs. At the same time, of :ours*, built-in inflationary forces oammet he diss'olled easily or quickly or without risklag ease downward adjustMeets in economic activity. The One price Lacrosse will tend to make it   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Menerable Sib Ilekbasdt Pepe Tie  mere difficult to lower the rote of Lunette* is MO, although I would lamect some progress to be nede during the Oeuroe of the peer. It alas tends to increase the risk of Immo butanes* adjustment. The money supply targets will be set with apprecistiom of both sides* but I met emphasise that i do nor believe we rAta escape the risk ot re_easion by accApting more iafletion. In the se4s eceelerating inflation seems likely to result sm, met lees, busiaess instability. With respect to your isecvnd set of guestiese aboA interest rates, Jt is Lepertmet to *trees that sunshield reductions in interest rates depend fundamentally ea redwing the rate of toilettes. As that is dome, the inflationary prestos on interest rates will declines as well sm the mosimal level of market interest rates, Any such decline of interest rates basically will reflect the reduced cost-price pressures in the economy* but to a degree will also reinforce downward pressures on comeumer pricee--.3ertioularty as thee* are imilusmosd by the isle of mortgage interest rates in the coesumer pries imam. ask about Lege betimes imeseest =tem and their impacts on the eceeeey. These teed to vary with eceseste comditions mid market expectations, but in goessel it dees take a number of months before the restrained growth in messy influences spending and pricAss. As that happens, interest rates shoild declies* est ries. Sat, in aeiweeles whether Leterest rates are high or Low, it is teportent to relate the level of market rates to the impacted rate of toilettes. For example* if a ries is rates La matched by expe:tattene of a higher rate of price in,.reaset the rise le market rates would mot be restrictive at all. Yes slap  ss compered with the 1972-73 period and its aftermath, it will Probably be mom difficult to restrain inflation under current circ aesemee. The oil aid feed price shocks of 072-73 occurred while growth te the **tim es produ:tivity use still reassembly strong. Our productivity performeitAt recently has deteriorated cessiderebly, emA enticilotions of continued inflation are were ,voreeeive than in the earlier -toried. Thus* the decline in inflation will peobebly occur at a slower Alt,A than after the earlier oil price *hock. At the same Use* may mutest*. should at be as sharp or as deep glace the ecossair atmaari better Warned and better ?simpered for the adjustments thee it was earlier. The need for capital formation* implied in your final question* is inteniified by the recent poor 2reductivity pert 5555 and by investments needed to adist to a mew world 01 eisergy shortage. Mut   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Ithe Memorable Bob Eckhardt Mans three  the sista level of oemteel Lateran rates has eet. is sy views played a siguificeet role is diseemragtag needed new imeestmeet. Mere tees inflation hes been a heats determents increasing the uneorteiaty of planning ter businessmen. La isalatiameederates the resulting more stable 41001110111c sad finemcial eavireement wilt help stimulate capital opsmilms. Efforts to sour immeetmeet W atteeptiog to make coedit champar aid/or mews avotlable Is pumathftatteeary circularities**, will way increase inflationary peeeenres oempesed the loppermilmn difficulties of festering sustainehle lomg-ree smith and are unlihely iu any 'mut to stimulate predu-Itive ismeetnielt. illioak yes for giving se the opportunity to comsat as pow laportast gosetisso. Staassoly. S‘f.:41.1 .yfolet  ECE:SVA:JPS:PAV:vcd (#V-1) bcc:  Messrs. Ettin and Axilrod Mrs. Mallardi (2)  NINETY-SIXTH CONGRESS BOB ECKHARDT, TEX., CHAIRMAN • •  JIM SANTINI, NEV. ALBERT GORE, JR., TENN. PHILIP R. SHARP, IND. ANTHONY TORY MOFFETT, CONN. ANDREW MAGUIRE, N.J. DOUG WALGREN, PA. RONALD M. MOTTL. OHIO MICKEY LELAND, TEX. TIMOTHY E. WIRTH, COLO. EDWARD J. MARKEY, MASS.  •  NORMAN F. LENT, N.Y. MATTHEW J. RINALDO, N.J. MARC L. MARKS, PA. TOM CORCORAN, ILL.  Room 2323 ak.YSURN HOUSE OFFICE BUILDING PHONE (202) 225-4441  CONGRESS OF THE UNITED STATES  MARK J. RAABE CHIEF COUNSEL/STAFF DIRECTOR  WILLIAM E. DANNEMEYER, CALIF. JAMES T. BROYHILL, N.C. (EX OFFICIO)  HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS OF THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE  HARLEY 0. STAGGERS, W. VA. (EX OFFICIO)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •41.  •  WASHINGTON, D.C. 20515  January 7, 1980  Mr. Paul Volcker, Chairman Board of Governors Federal Reserve System Federal Reserve Building 20th and Constitution Ave. 2 N.W. Washington, D.C. 20551 Dear Mr. Volcker: The Subcommittee on Oversight and Investigations has been conducting a year-long inquiry into the relationship between energy policy, energy prices and inflation. As part of that investigation we have found it necessary to inquire into the role of monetary policy, in general, and interest rates, in particular, as they affect pricing and production decisions in the economy. We would appreciate your written response to the following questions. 1. During the first nine (9) months of this year, inflation rose at an annualized rate of 13.7 percent. Of that, almost 4 points (3.969) or 29 percent of all inflation is due to the direct impact of increases in energy prices (gasoline and home fuels). The Council on Wage and Price Stability estimates that an additional 2-4 points may be added to the CPI because of the indirect effects of energy prices. These calculations do not include the impact of the most recent round of OPEC price increases on world or domestic energy prices. In view of this massive increase in energy cost, how much influence can restrictive monetary policy have on consumer price levels? Specifically, what is your estimate of the rate of increase in the consumer price index for calendar 1980 assuming; (a)  Federal Reserve Board retains the money supply goals established last October;  (b)  The Fed allows the money supply to increase at a rate commensurate with the increase of fiscal year 1979 (third quarter 1978 through third quarter 1979);   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Mr. Paul Volcker Page Two January 7, 1980 (c)  The Fed establishes a growth rate for the money supply consistent with an unemployment rate of 6 percent or less?  2. Given the current restrictive monetary policy, what average levels of the prime interest rate and the principal mortgage interest rates do you foresee for calendar 1980? What direct and indirect impacts of these rates on the food, shelter, medical care and energy components of the consumer price index do you foresee for calendar 1980? Given the lag between interest rate increases and pricing and production decisions in the economy, how long do you estimate it will take for the economy to absorb the interest rate increases incurred in the last quarter of 1979 and any such interest rate increases you foresee for 1980? 3. Attached is a series of three graphs reproduced from the Council on Wage and Price Stability's inflation update dated November 21, 1979, in which the Council compares the trends in food and energy prices, underlying rates of inflation (defined as the overall CPI less food prices, cost of home purchase, finance, insurance and taxes, energy costs and the used car price index) and unemployment rates of the 1972-1973 period with that of 1978-1979. These graphs dramatically depict the consequences of food and energy price shocks of 1972-1973 on the inflation and unemployment of the 1974-1975 period. What role did monetary policy of 1973-1974 play in increasing the underlying rate of inflation and the unemployment rate depicted in those graphs for 1974-1975. What are your projections for the underlying rate of inflation for 1980 and the unemployment rates for 1980-1981? If you expect the current restrictive monetary policy to be more effective in controlling the underlying rate of inflation during 1980 than it was in 1974 and if you expect the unemployment impacts in percentage terms to be less in 1980 and 1981 than they were in 1974 and 1975, please explain the rationale behind such forecast. What distributional impacts do you expect restrictive monetary policy to have on the economy? How will each decile of income recipients in the United States fare under the twin impacts of the predicted inflation and unemployment during calendar year 1980? 4. The Council on Wage and Price Stability recently testified that the long term impact of steadily rising interest rates may be inflationary because it discourages new investment. What impact has the secularly upward trend in interest rates during the decade of the 70's had on investment and productivity?   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Mr. Paul Volcker Page Three January 7, 1980 To what extent is the secular trend responsible for the suII ly-side problems which seem beyond the control of short-term monetary and fiscal policy tools aimed at controlling aggregate demand. More specifically, to what extent has this trend aggravated the inflation -unemployment trade-off (outward shift in the Philips curve)? What implications IS these higher interest rates have for continuing stagflation in the 80's? What does this secular trend portend for the ability of the manufacturing and utilities sectors to convert to less oil-intensive production methods and the private economy as a whole to adopt desperately needed energy conservation technologies. We would appreciate your response to these questions by the close of business January 21. $hould you have any questions regarding this request, please contact David Nelson, or Milton Lower of the Subcommittee staff at 225-536S. Sincerely,  Bob Eckhardt Chairman Subcommittee on Oversight and Investigations Attachments cc:  Mr._JI)s1st)IIK1siirp  FIGURE 1 411/ 1111  25  1974:1 - 1975:/ Resion  FCCD AND ENERGY PRICFS (3-month annrAlized percenta-ge rates of change)  1978 - 1979  20 19721- 1975 15 10  , II  III  Inv  II  I  III  TV  II  I  IV  III  II  I  '74  L-'73 or '79  '72 or '78  III  IV  '75  1974:1 - 1975:1 PJF-r-ssion  Pezt 15  UNDEPLYING RATE OF IrFLATION (3-month annualized percentage rates of change)  10 1978 - 1979 •........  5  0 I  111W II I 11.1 IV '72 or '78_-1-'73 or '79 11.  I  II  III '74  IV  I  II III '75  iV  1974:1 - 1975:1 t P_rcen 9 —   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  UNE\TLOY= RATE (Qiirterly Averages) 1979  1978  1972 - 1975  I  II  III  TV  '72 or '78  I  II  III  1-'73 or '79  IV  I  II  III '/4  IV  I  II  III  ,7c  IV   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 1$, 198C  the inesible Meseld V. Seentt United State, $ent* IftehlaSten, D. C. 20310 *gar Onager Stemort; Om behalf of the lendler* Of Ohs Mend, 1et se relvvachi to yoor letter of Jemmy 10 poserdias the Issods* regniation to Imolamot the Sla trestle rood Treaster At. lim ase ceopereod about the effect a the rosolatiem as the Mot Alabama $ank elf Tuscaloosa. MO cesseet, of coma s calmest am the merits of the Loewe dories the rmissmillkint M11‘404. I can, however, ear that mousy members of the Iserd iur ud1z4 pirself, as very sympathetic to your eemcerna about assulatery Modem amd wens to fisseslat instituting amd peeticularly smell business**. Beard staff hes been dire ted to ink into the facts of The first Alabama situation. We have aleo sighed the staff to try and determine how uridespseed the ‘riblee Ls. Finally, I vele SO Muni yes thet pen Vine will be ben& before the ammiewe of the Used elmi 014, ensider the  IMesieemLe And Tommtimi sesidetlem. Sieversly  NMI:DM:vcd (#V$) bga: M. I. Sutler  DONALD W. STEWART ALABAMA  •  •  • ANKING. HOUSING. AND URBAN AFFAIRS CHAIRMAN: INSURANCE —SUBCOMMITTEE RURAL HOUSING  ACAIICULTURE. NUTRITION, AND FORESTRY  FINANCIAL INSTITUTIONS  ?Anifeb :Sfafez -.Senate  CHAIRMAN: SUBCOMMITTEE ON AGRICULTURAL RESEARCH AND GENERAL LEGISLATION  WASHINGTON. D.C. 20510  SMALL BUSINESS GOVERNMENT REGULATION  RURAL DEVELOPMENT ENVIRONMENT, SOIL CONSERVATION, AND FORESTRY  GOVERNMENT PRDZUREMENT  January 10, 1980  Chairman Paul Volcker Federal Reserve Board 20th and Constitution Ave., N.W. WashingtVD. 20551 Dear Mr. Chairman: I understand that the Consumer Affairs Subcommittee of the Federal Reserve Board will soon be preparing final regulations on the Electronic Funds Transfer section of P.L. 95630. I would greatly appreciate the Committee's consideration of my comments regarding section 906 of the Act which deals with the documentation of transfers. While section 906(a) clearly states that documentation must be made available at the time of the transaction, sections 904(a)(2) and (3) and 904(c) add flexibility to the Act by permitting the FRB to modify the Act's requirements after analyzing costs/benefits of compliance for small firms. Section 904(c) in particular gives the FRB greater regulation writing authority than is traditionally found in other consumer credit legislation because it specifically allows modifications in the requirements if "such modifications are necessary to alleviate any undue compliance burden on small financial institutions". The First Alabama Bank of Tuscaloosa is a good example of a bank which will encounter severe problems in complying with the new law. They currently operate 5 computer terminals which provide no other service except dispensing cash. Because no receipts are dispensed at the time of the transaction, the bank, which purchased the machines at a price of over $12,000 each, would be required to replace them with new machines. There is a real possibility that the bank would be unable to replace all of the machines at once, resulting in a loss of service to the consumer -- a result directly contrary to the original intent of the legislation. The Bank has future plans to replace its cash dispensers with full service automated tellers but was hoping to delay that action for some time.  • 16.010 " ..  First Alabama has the capability to provide a receipt in the next business day's mail. This seems to be an acceptable means of providing documentation to the consumer without the expense of purchasing new equipment. An added  R• 4.•  •  6 •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • ••  ' Ata  `  '•-••: -•k,„ • • -• • •  •Pl•  •  Y:7‘0,7 , 4 ?  ,  "ZY,4•4. r • .0.40.:31.  VP   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Chairman Pau Page Two  Volcker  I  benefit to the customer in receiving a is the fact that if the access card is count is accessed without the customer will receive the receipt of withdrawal alerted to the fact.  ' '  receipt in the mail, stolen and the acs knowledge, they in the mail and be IL  My seat on the Small Business Committee in addition to the Banking Committee has provided me with an opportunity to see time and time again, the effect that regulations have on small firms when they are applied across the board without consideration for a company's ability to comply. In my brief careerSenator I have begun to see a growing awareness on the part of many in government to carefully consider the inherent differences in a small business' ability to meet the same regulations as larger instittions. I hope the Federal Reserve Board's action will reflect this attitude. I strongly urge you to consider using the authority in the law to allow small institutions with machines that only dispense cash, to continue using their present equipment and provide receipts subsequent to the transaction.  lumwr  111•011.1M.  Sincerely,  DONALD W. STEWART United States Senator DWS:jrd  0 %.  c :Ae N".  .  .  : • I.:•.„,•  •••''  • 4',  ..C$ A  --  • •  ,- • r • •  •  4.  1 PC',4' i `ciesi 444N.,.osisnmr . 1.1   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • ••• ...0of GOvki •  BOARD OF GOVERNORS  .• • 47 •0 •m  OFT HE  •  W•  FEDERAL RESERVE SYSTEM WASHINGTON,0  4e). cl •  ••••••• .  411 20551  e •TAI, • • •..• -  PAUL A. VOLCKER CHAIR MAN  January 17, 1980  The Honorable Chalmers P. Wylie House of Representatives Washington, D. C. 20515 Dear Mr. Wylie: Thank you for your letter of December 27 regarding correspondence you received from one of your constituents, Mr. Frank Wobst, president of The Huntington National Bank of Columbus. That correspondence includes a copy of a staff memorandum prepared by Mr. Bill Cooper, head of Huntington National's Operations Group, outlining and discussing the anticipated impact on the bank of the Board's Regulation E. You ask for an analysis of the considerations that led to the regulatory requirements described by Mr. Cooper. Regulation E implements the Electronic Fund Transfer Act, which was enacted in November 1978. Two major provisions of the Act, dealing.. with unsolicited issuance of EFT cards and with consumers' liability for unauthorized electronic fund transfers, became effective in February 1979. The Board issued final regulations last March to implement those statutory provisions. The remainder of the Act becomes effective on May 10, 1980, and the Board is in the process of preparing final rules to implement those provisions. Mr. Cooper's objections all relate to the documentation sections of the proposed regulation, which are at this time still in proposed form. The points he raises are discussed in the enclosed analysis which has been prepared by the Board's staff. The responses are numbered to correspond with Mr. Cooper's listed items. I hope that this information will be helpful to you. Sincerely,  aefJ /  Enclosure  eai(  7;  WIC Lfl  Ae<-t(  14t  Wilf/t  Zae dAtte 0 lit  141):/j1   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Board Staff Response to Points Raised by Mr. Cooper Regarding Regulation E  Cooper notes that the proposed regulation would require the bank to provide monthly periodic statements for savings accounts that can be accessed by means of automated teller machines (ATM) or by automated clearing house (ACH) entries.  The bank currently provides statements  for these accounts on a quarterly basis. The periodic statement requirement is drawn from § 906 of the Act.  Section 906 generally requires monthly statements to be sent for  any checking, savings, or other asset account that can be accessed electronically.  This includes any account that can be accessed at a ATM.  The requirement applies for any cycle in which there is electronic activity. If no electronic transfer occurs during a cycle, the institution need not send a monthly statement, but must still send a statement at least quarterly. The Act creates a limited exception from the monthly statement requirement, for accounts that can be accessed electronically only by preauthorized transfers to the account.  (Whether Huntington National will  be required to send monthly statements will therefore depend on the type of ACH entries that are involved.)  Periodic statements need not be sent  fS r passbook accounts that qualify for this exception.  The bank may instead  update the passbook or provide the information on a separate document when the customer presents it for updating.  For  5.  S.  accounts that  I ualify for this exception, the bank may continue to provide quarterly statements. S rovisions.  The proposed regulation essentially tracks these statutory   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2-  2.  Mr. Cooper notes that payments to third parties such as  utilities, that are initiated at an ATM, must be described on the periodic statement. This is generally correct.  Sections 906(a)(5) and (c)(1) of  the Act require identification of the third party to be given on the terminal receipt as well as on the periodic statement.  The Board has  proposed an exception from this requirement with regard to the terminal receipt in cases where the name of the third party is provided by the consumer in a form that the ATM cannot reproduce. One reason that the Act requires the third party to be identified by name has to do with proof of payment.  Section 906(f) of the Act provides  that if documentation required by the Act indicates that an electronic fund transfer was made to another person, that documentation is deemed to constitute prima facie proof that the transfer was made.  3.  Mr. Cooper notes if the date of initiation of the transfer at  an ATM and the date of the posting are different (because of weekend use, for example), the periodic statement would have to show both dates. The Act requires disclosure of the date the transfer is initiated, both on the terminal receipt and on the periodic statement, but does not address the issue of a different posting date. final decision on whether to require two dates.  The Board has not made a Many of the financial  institutions that submitted comments on the Board's proposals mentioned the operational difficulties that would be involved in complying, and have suggested dropping the initiation date requirement.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • 4.  Mr. Cooper objects to a proposed requirement to show the  street address of the ATM's location, since it would mean printing the street address on receipts and reprogranniting in order to provide the location on the periodic statement. The Board has proposed requiring an identification (such as a terminal number, which many receipts now show) or a location of the terminal to be shown on the terminal receipt.  The periodic statement would have to  show the location of the ATM, but could use either a geographic location or a generally accepted name for a specific location.  5.  Mr. Cooper believes that if the bank is required to put the  customer's account number on ATM receipts, it will be necessary for the bank to reissue its EFT and Master Charge cards. Section 906(a) of the Act requires that the terminal receipt show the identity of the consumer's account to or from which funds are transferred.  In April, the Board proposed a regulatory provision to require  the receipt to show the number of the consumer's account.  In response to  comments that this requirement would create security and privacy problems, the Board modified the requirement in the second proposal, published in October.  Under that provision, the receipt would have to include the  number or other identification of the consumer's EFT card (not the personal identification number).  The purpose is to provide some means to tie the  customer or the customer's account to a particular transaction, both for error resolution purposes and with regard to the proof of payment question. The final regulation may provide options that will satisfy this objective without, it is hoped, imposing undue burdens on the institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -4  6.  Mr. Cooper notes that the three alternatives proposed by  the Board for notifying consumers about preauthorized transfers to the consumer's account are costly. Section 906(b) of the Act requires financial institutions to provide positive or negative notice (at the institution's option) of preauthorized transfers from the same payor that are scheduled to occur at least every 60 days.  There is an exception in cases where the payor  is providing notice of the transfer. The telephone option is one that the Board proposed in the April and October proposals. The Board has not made a final decision on whether to adopt this alternative or to implement only the two options that are set  forth in the statute.  7.  Mr. Cooper notes that EFT debits and credits would have to  be described on periodic statements, and that complying with this requirement would present some problems for the bank with respect to savings accounts. Except as discussed in response to item 1 above, § 906(c) of the Act requires that a consumer be given a periodic statement for each account that may be accessed by electronic fund transfers. "account" to include demand deposit, savings deposit, accounts.  The Act defines  or other asset  Thus, it seems clear under the Act that the periodic statement  requirements are intended to apply to the bank's savings accounts.  The  bank would have the option, however, of providing the information on an accompanying document if it wishes. The Board's proposed regulation essentially tracks these statutory provisions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5  8.  Mr. Cooper notes that the bank would have to mail disclosures  to its customers for ACH entries that it receives or that it originates, but he is somewhat uncertain about what is required. Section 905 of the Act requires disclosure of the terms and conditions of electronic fund transfer and sets out the specific items that, if applicable, must be disclosed.  The disclosures required of  Huntington National would thus depend on the type of electronic transfer service or services offered to its customers.  The bank may prepare its  own disclosures or may use model clauses issued by the Board to facilitate compliance.  9.  Mr. Cooper believes that service charges on a demand deposit  account must be broken down into a statement charge, check charge, and EFT charge. The Act and the Board's proposed regulation would require disclosure only of the charge for electronic fund transfers or for the right to make such transfers.  There is no requirement for itemizing check or  statement charges.  10.  Mr. Cooper mentions various deadlines that would apply to  a bank's investigation and resolution of alleged errors. It is true that the Act requires institutions to resolve errors within certain deadlines.  Generally, the bank would have to resolve an  error within ten business days of receiving notice from a consumer. Alternatively, the Act permits institutions to take a longer period if they need it--up to 45 calendar days from receiving the notice of error, provided the institution provisionally recredits the consumer's account for the amount of the alleged error and gives the consumer use of those funds during the investigation.  ,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  There is no requirement that a bank notify the customer within three days regarding an error discovered by the bank.  Perhaps Mr. Cooper  is referring to the Act's requirement that, in cases where the bank investigates a consumer complaint and determines that no error occurred, the bank send the consumer a written explanation within three days of making that determination.  11.  Mr. Cooper notes that the statement must include a telephone  number to call or an address to write to for inquiries in case of errors. This is correct.  Section 908(c)(4) of the Act requires financial  institutions to inform consumers of the address and telephone number to be used for statement inquiries or notice of an account error.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Jae ary  /he demerabie Jebm C. Cuitom gaited States $smehe neehteS0014 94 Cs 2691G woos larstew Calvet' / ass plowed to toopood to yew lett./ of Jou.Aary 16, is vbie.h yew enoneee disappetatmeat that pow meainea, so. Joss oidier, vim ass cheese le 1979 he ~we is the leard's cemommer Advimory Geomail. esniers veer Lopolatod As yea hum, solely thirtese s MC Emma a motel ad early 4c.c Almitwidual to the covecil who mere recommended few sembewabio. UMAOMmah ao the cover,il's amoborship 4OLLOctiloty repaliests the latereacs ad sow settee at tea, say htahly nettle La the sow of esnommws‘rodit qualified sod tatoessaed meatuses 11he Me. *Wow v411 mot hove empenomity to serve at this thous. Yam soy be seeemed that Ms. Oldie, will oasis be asmetderod Aso me meolbers to the Commit are selected to 1906. Stibeently  J/11:va4 (#V44) bee.  Ws. Mallardi (2) Jabot Mort Ago norLi Bray (for toil  -up)  .19a   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .0401 ,avy  o  die Memorable lepd Seeteem limited States ammeter ,L2 Federal leilding *netts, twee WU leer $anstet itenteess  Opoillat CO166  Timis you for WM WNW ei Jammer, II" 1.04#0, requestimg is is inquiry pee vemeOmed tree pm ainefittimme. mt. Demet4 r.  Mr. (410, me•relummeetative et Vetted liteelworkar* ince' 042 it Mighefir leei Compagy, tmetteted thet hie Males Slialbillialiktp La 4111041.1.1 with eons pembleee asarcuktot with &ha Fardhese et awing, "Gempenorie permit *avimge head Plam4 lbs isderia Waft *M. SaiLee, shadth woo as seetese bendiestie asset for Desomve NO she MOW Voel 0espeer, Lessee eoviese bee& La shitor4ea4k with the IOIPOrOttais prOldeme Ceswimmell itaitswtlifils las to GOMM &ries the fleet teener of lt79. tole Dallas Seeerwe leek issued 440 seeing, Weds Se rseibitis of the 440mo lest Csepel, 1670ell sesta. heed plea with tecersect registretleee. •:ammilleautkY. the 400 Miesse Compepy employees she *ewe entitled to weeeive savings beide with Sepeerker 07, limns deems did sot re /sive their book. the Federal Seam Meek if Deliee mos tabus the scrape nwsloaary to4cerrect tbta Llod *II 400 44mtegm heeds, mem. mod, is Jennery 111 ISO, the IT with eeptember lame dame. to the solmo-wiete *ghee' ampieyeee. 010 ale OM toed a MI kettor a miter Ina Itz. Jteseess see el the lembee Taal cempeeptempleyees effected by the peeleteasie the Bailee Peilexal Seeeeiel OWL I. Jimmie' MG heed, ehllh ehembil hem bees eset est hat espeegber)leo twisted Us the Jemmy 17 sultles eeettesseil atom Is hie DOcONAMMt 24:  wo mem NINV taarelaialicO this wog hews *eased Mr. Jiimisee aid *sedges ashes Noel cempepy empbsymmoimbei Wieldier met remedied bends dse sorbed etrosseeeety Wm teemed Weft ellidarn the Mat Swot )97,. we believe diet the Meal Memmirmtlbedifir Males has tehee   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Air 11s1,14041 Suitase Ni400 'Soo  time eta,. 06-01,404gy tie MPOOMMt * rOcurViiir--* be **4 taro tory* f um* WM,itAt Plows Ulla  chi* weer and dkat  keg* if WO AAIn be ef fortuear esitezatt e. ilia:stomily pita*,  (Signed) Donald J. Winn amosid J. Whet Somdal Aoolietans to the Dowd  Hr. Robert IL Boykin First Yi. Prig Went Federal Reserve Book of copy of iammelms)  (vLe%  1.E.B:c0:vcd (#V-18)  bcc:  mr. WaillAAM Mr. Bermudez Hrs. Hallard i  amnia  Action assignei to Mr. Wallace  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  IP  A  •on assigne-1 Janet Hart  o   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  OM  *  lA,0YD 01..N I  N  410  ASHING  CN  C  :15 1  January 11, 1980  Chairman Federal Reserve System Constitution Avenue bewteen 20th and 21st Streets, N.W. Washington, D.C. 20551  NJ  Dear Chairman: and I I recently received the enclosed constituent inquiry, would very much appreciate your providing me with any matter. pertinent information you might have regarding the Your kind assistance is greatly appreciated. Sincere_ly,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4 , (T1 sb 1" BOnt Lloyd Enclosure PLEASE REPLY TO: 912 Federal Building Austin, Texas 78701 ATTN: Luis Escareno  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ( ez 4  DEC 31 1972.  .1‘' 4  ' 443 /  „-  4_42,4,14-,) •  64-Y-) / 44-  (.40 • 4 -gee  ri/t/  47' •-re  <14•44-1--'-e)...- •  ,  Zf  "71--so , r  .-1-.46-0 , 11 •  •• „•  •  ./tv-r rir. V  -  • vel-e---tal../  eI  •  ••"; ,•••'1 a  4 7 7fi  --c  -1"  •••• i  .•  ,  ( ' ' - 5 j  ..1  • I  ." /) .....7 /.... is  ! ...0- 47 . .4.- jos /  .,  1  a  siJ  ,••t*".  4 •• 6...g.•-•1•4"..;;, ‘  .  '  -  /-  • /* •• / L.,‘••  .  • •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • •  ...011111114.• •our•  , *IMO N.. .4404.1141.16640.14  •  14.• • . • •••••I.... •••  •  1 I I  .  --i - - .) C •  \) .- s•-•?"•— ...,1.- -% \•.... r )-11/4.)—t-1-‘...<,--)-  --.—:  I  ';  C  ,  .4...AI... s).4. j 2' si,,,,A. , A,  •L• ..e,  ' . )  .. \ , -t . S1 S. ":  •  7 .. ..(..',  .\ , . )  I  .4\:0  ..  , ,,,.,., . ., , •:-. .• ,......„,.._ . t‘  ' t  t •  t  ,  t  •....\ .:N  .'„ \ 11, .., ik.%..t. A.', ••.\.,  1 r% .....1/4.1.,),  , - % ._, . ,,.,7. . . •.N  .:.•  ,.r,  \,,  11  • •'? )•,  ...) ......V" Oki • 2 ./., .  .  .2 s  .• P.J .  f ,  ' A C\  i  •  1 l  c,  N  ... ,,. ,, —  1  )N 110.,..,., 7 .  1  ... I-, , ..)  . .t.„C'ti... --..•  f  '...)  . --It-4 .." % 4 I .••  ) -1 '.•  1,..,  t ._  i  —. % . L) )  •,,P!;;. -•.-  •  ill;  1 ',..  i  ,1 / 4‘..N.:••  ..) _ .*•.".-  , - r• .1....\...,`. 1:*•  •:-  A .)...-: b• ..• _  '--.- . ''... .. )  •  f  4-. .  I\ - .._ P`..". • ;* .' .te. "..'.'  f •. 1..„.  i'  .......go  f . 1•  _..1', ,.. \ .A , 0 %. (•,.  • \, \,‘ li.‘ A P. rl A X 4'  I  t'••• •,  •  •  •  r.  ./•,•,,•,  „ I. I'  .•  40  k. e`‘. -•••••••  •' / 1 4  . • *,  P.- •r1. '  •;,) 1.‘•  k k • 1. •• •  •  -  • •  df•  ,•  A .  •  '; 1  %  :o P ..   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 17, 1980  The Honorable Jennings Randolph United States Senate Washington, D. C. 20510 Dear Senator Randolph: Thank you for your letter of January 14 concerning an invitation to speak at a conference spo nsored by the West Virginia Bankers Association on May 14-15. Unfortunately, my schedule over the coming months has filled up to the point where I have been forced to decline the Association's kind invitation. With kind regards. Sincerely,  cc:  Mrs. Mallardi  JRC:tjf 4/2C--   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January IA, I98C  rho illseerabla RiAsrd Stone United States Senator Aost Office lox 4t.,41 _silsheseees Florida 323(3 Re:  Your Filo 934bA4(PS  Jeer Senator Sterne: Immik you for stems se the eeportuetty to comment on the en 'Loped letter from your constituent! Ht. Sennett Asquith, concerning the effects on small businesses ef blab Utmost rates* which he believes to be ca,,sed by Polders'. Massase It is seamen Sec Latopoot rates to Lasagnes is periods of accelerating inflation.. Thaee periods are charamewised by rapid exrsometes ill this akstAllien Se geode end servt-es. whisk efterates as increased defend for beds to timause emeh nw;_hases. At the same time, leaders booms, relueSemt te eseesd credit ghee they empact orices to rise melees they receive u.emseesatise for Cho ds.. ins estioipeted in the purchesiog OSOOT of their capital. Thus bisb and !Wog interest rates sos, to s Isrge emeemt, an inevitabis result of high and rislng rates ef italstige. Lateroac rats increases OPOomAtueity help to moderate inflationary 9reesurea by disesseasimg the see of redit for nrojawto that de sot pronto, retem oa. enema high eno„zh to Justify the interest emsdimdisodbee. Lateran Mee *barged on bank loaus are detsrained by banks' coots of Curds aed by market ..,rescaves. AS in any COMfAtitiVO credit market, rates ou beak lens* Mad to adjust rather quiekly to overall credit Ameditiens and to inflationary espectatione, The Federal asserve's rwe is mot as a SUMO setter. sithewels the dis.ouat rate is 'est" by the Pederst Iseerve, it is seemelly adjusted after interes t rates in the spas market hese changed sad it efforts the cost of only a very smell hostiles of aember bed& liabilities. As ovidisocad by the &Aimee summated salesieber 4,• prtmery objective of the Federal Weave is to olP144 exteeeive wove% of the meow steAt amii beak credit. Odle ahieving such a goal may at times involve tamtiorary increases in serhet interest rates, war the longer run its *Mainmast will nsen a decltme in interest relies Ale the inflationary premium Okrinks along with leuerod amectatiose 04 future rates of Inflation.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Asooreble licherd Steps Pigs Toe  diotillise is eseeetiel to the sweetoot Vhilo monata27 taterest rate abeeemeet ehet geoid otos from redoes. isflatios, the cossod intoreet prehesstve *resift oew to piece to ozTliocted is Metes relpian are the Aditsistrotieses tete sederotkes. Imoisded in the currant, volostary efts sled price smIdetinee sad aeeempte to be dews the sloe of S he Wesel bmdget deficit. The Memel isserve hoe owl toleiher While So mho eposiel efforts to eseemmedsze the credit seeds of wen bueleemoes. lea etter of SeteboT 23 to amber bombe. Cheismee *richer said them Jleedias institutions mead to be siert to the oestiostes seed for .-redit es ressemble terms to Memo the basi seeds el the seeeemp, Ist aceemmedetios these seeds, we believe bombe shetILd tsks nalthostair care thee smell heedeemeew. emeamers, hemeheromes mod Simmers eanttanO to roost's s reeeemebte More of Aveitiblo forido.." helm this Letormattea Immo, helpful to you. PIOMme Let es know If Lcas be Oi bather aeoLotaoce. 91.ae.eraiy yaws.  Witm VIIlig, Ayeotant Wit:Zaftig*  BO:DISL:JLIE:JNI:ved (iff-153) bc,1!  Mrs. Mallardi Mt. Kichline Mr. Lindsay Ma. (*oar  to the 'Ward  RICHARD (DICK) STONE I-.  FLORIDA •  •  COMMITTEES  a  AGRICULTURE. NUTRITION. AND FORESTRY FOREIGN RELATIONS  '1"Zeniteb Zfafez Zenate  VETERANS  AFFAIRS  WASHINGTON. D C. 20510  December Our File:  Mr, Paul Volcker, Chairman Federal Reserve System 20th Street & Constitution Washington, D.C. 20551 Dear  18, 1979  q348140008  •  Ave., NW  Mr. Volcker:  Because of the desire of this office to be responsive to all inquiries and communications, your consideration of the attached is requested. Your findings and views, in duplicate form, along with return of the enclosure, would be greatly apprecia ted. It would also he helpful to me if your response is mailed to my office at the address below and INCLUDES THE FILE NUMBER SHOWN ON THE COMMUNICATION I HAVE SENT TO YOU. Cordially,  Richard (Dick) Stone RDS/lah Enclosure  PLEASE   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  REPLY TO:  POST OFFICE BOX 40R1 TALLAHASSEE, FLORIDA  32303  0.,•   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  •  V rxii0E\v-faiDA INC.  V0  INDUSTRIES  INTERNATIONAL BUILDING 2455 E. SUNRISE BLVD. FT. LAUDERDALE. FLORIDA 33304 •  PHONE 305-564 6435 6 7 8  November 9, 1979  Senator Richard (Dick) Stone United States Senate Washington, D. C. Dear Senator Stone: We all know that Schlesinger did more harm in the energy field and absolutely no good. He sounded like a representative of the oil interest wherever he spoke; their heavy profit proved that they did not invest in development as he assured would be done. We now have a new man in government who is going to destroy us faster than Schlesinger, he is Paul Volcker. If he upholds these interest rates, after 28 years in business, I will probably have to throw in the towel after this year, and because of him, I will pay no taxes (no profits). Multiply mc by 5,000,000 other businessmen and the unemployment and tragedies resulting within a year will be beyond belief and irrevocable. We small businessmen are the backbone of this country. We cannot survive with both interest rates and oil (plastic) 65% increase this year. It is later than you think. Sincerely,  • BENNETT ASQUITI I President BA:sd cc:  Paul Volcker  LOCATION OF PLANTS: MANSFIELD. OHIO  CAPE CANAVERAL  FLORIDA  CANOGA PARK, CALIFORNIA  RICHARD A. GEPHARDT 3D DISTRICT, MISSOURI  WASHINGTON OFFICE: ANNUM HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 PHONE: (202) 225-2671  •  WAYS AND MEANS COMMITTEE BUDGET COMMITTEE  CONGRESS OF THE UNITED STATES HOUSE OF REPRESENTATIVES WASHINGTON, D.C. 20515  DISTRICT OFFICE: 3470 HAMPTON AVENUE ST. LOUIS, MISSOURI 63139 PHONE: (314) 351-5100  January 14, 1980  Hon. Paul Volcker Chairman, Board of Governors Federal Reserve System Federal Reserve Building Washington, D.C. 20551 Dear Mr. Chairman: One of the nicest things about the holiday season is hearing from friends like you. I enjoyed your greetings and appreciate your thoughtfulness in sending them. Jane joins me in wishing you all  the best for 1980. Yours very truly,  Richard A. Gephardt 3rd District, Missouri RAG/mgs   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1/41.6(at4:, /8 1  January 14, 1,00  The Honorable Benjamin S. Rosenthal Chairman Subcommittee on Commerce, Consumer, and Monetary Affairs Government Operations Committee O. S. House of Representatives Washington, D. C. 20515 Dear Mr. Chairman: I an replying to your letter of December 11, 1,79, requesting that the Board vacate its order apprvving the acquisition of Marine Midland Banks, Inc., by the Bongkong and Shanghai Banking Corporation. Because of the fundamental nature of some of the questions raised in your letter, I directed the staff to review the record of the application with your points in mind to determine whetter there were legal or procedural irregularities or other grounds that dictate that the order be vacated. The staff has advised me that it has found none. A copy of its memorandum on the subject is attached, to which I would like to add a few observations of my own. In entertaining any request to resessider or vacate an order, the Board must take special account of the public interest in the finality of its administrative adjudications. Congress has reoognizem that this principle is central to preserving the integrity of the administrative process by prescribing in the Bonk Kolding Company Act that applicants such as the Hongkong and Shanghai Banking Corporation are, in effect, entitled to a final adjudication of their applications within 91 days after the record is complete, and that orders in those cases are open to judicial review for only 30 days. The Board tor its port has devoted substantial time and attention to reviewing its procedures for comment on applications and public participation to insure as mud: as possible that all relevant objections to a transaction can be brought forward while the case is pending. Once that is done and an adjudicative made, the Dotard by regulation requires interested parties to show promptly relevant facts that, for good cause shown, were not previously presented to the Board* in justification of any request that an order be reconsidered.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Honorable Benjamin S. Rosenthal  -2-  Your request raise. the issue whether the Ilemigkong and Shanghai Banking Corporation's applioation should be singled out for exceptional treatment and whether the Board elbeeld depart from the standards for disturbing its orders. After review and consultation with other members of the Board, 2 am unable to recommend to the Board that this be done. It would be an altogether undesirable precedent, in my view, for the Board to attempt to require reapplication for a transaction that has not changed in any material respect where there is no evidence of error or irregularity in the original proceedings. Avert from procedural questions that you have raised Mout the Board's action in this case and in a rulemaking proceeding .it years ago, which are matters addressed in the attached memoesmdum, your request ireeentially offers three grounds on which the Nerd might seek to vacate its order. First, you suggest the Bawd has taken insufficient aossunt of the Hongkong and Shanghai Banking Cleeporationle swetases membenk activities. In this regard, the Mingteng and Shansi Onnking Cespecation has been a bank holding oompeny foe eight years, and it cannot be said that the company's character and operations mere unfamiliar to the Board either in 1971 when the Board adopted its foreign bank holding company regulations or at the time the Board considered this application. Second, you correctly note that the Board is considering an amendment to its regulations that would redefine the class of foreign organisations that would qualify for certain exemptions from the nonbanking prohibitions of the Act. However, there is no suggestion that, assuming the Board amends its regulations, the Hongkong and Shanghai Banking Corporation will be unwilling to oomply fully and promptly with any requirement placed upon it as • result. Finally, you observe that the Board did not have the benefit of the Comptroller of the Currency's comments in considering those applications. As indicated in the attached memorandum, the Comptroller of the Currency was given notice of the application at an early stage in its processing. Furthermore, discussions occurred between this agency and the Office of the Comptroller of the Currency on the general policy issues involved in foreign acquisitions while the application was pending. Given that background and in view of the discretionary authority the Comptroller has in determining the merits of marine Midland Bank's conversion application, it appears inappropriate for the Board to vacate its order as you have suggested. I would, of course, be proposed to discuss with you and your Subcommittee issues of public policy regarding foreign bank acquisitions of domestic banks. Sincerely,  Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Nnorable Benjamin S. Rosenthal  bcc:  Governor Par tee Mt. Petersen [CC Log 113601 Mt. Mannion Mr. Ryan Kr. Dahl Mt. Gemmill Mr. McAfee Mr. Burley Na. Mallardi [#V-143J Mr. John Sbockey (OCC)  NIP aka ids  -3-  trrArr  CO  SY HON. SWAM= S. ROS1111111111L 2111ATMS TO 1111111116RM G1 APPLICATIONS BY T BAUM CONFORATION  By letter of December 11. 1979, maims somjamin S. Rosenthal of the Commerce, Consumer, and Monetary Affairs Suiedamittee of the House Committee on Government Operations has askee that the Board withdraw its approval of applications by the Hongkong end Shanghai Banking Corporation ("NBC") and two subsidiaries to acquire Marino Midland Banks, 1/ Inc. ("Marino") and its subsidiaries,- and to require new applications in order to avoid uncertainty about the legal validity of the Board's order and to permit a full review of public policy issues requiring clarification.  In this connection Chairman Rosenthal has expressed  particular concern about the consideration the Board gave to SISBC's extensive nonhank interests and about the effect of Marine's proposal to convert its subsidiary bank from a State bank to a matiomal bank. In response to this letter, Board staff has reviewed the record of the applications and has found no basis for requiring reapplication.  The  Board's approval order was issued March 16, 19791 and is now final. tinder section 9 of the Bank Soldling Cowpony Act ("the Act") it is not subject to further judicial review.11 Staff believes that the Board complied with the procedural and substantive requirements of the Act and Regulation Y in its consideration of these applications and that  1/ 65 Federal Reserve Bulletin 354 (1979).  2/  A petition to have the Board's order set aside was dismissed with prejudice by the Second Circuit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2 neither the Board's pending reexamination of its foreign-based bank holding company regulations nor the proposed conversion of Marine Midland Bank ("the Bank") to national bank status dictates withdrawal of the Board's order. 1.  HSBC's nonlognk subsidivier were Tot sublect to anrkroval  in connection with its applications to acouirg Marine.  It is important  to remember that the Board was aware of HOISC and its operations and that ISSBC's nonbonk interests had been subject to review long before it applied to acquire Marine.  HEM had been a bank holding company  subject to the Board's jurisdiction since 1971. HSBC had controlled a single bank, The Hongkong Bank of California, since before June 30, 1968, and, accordingly, was required to register as a bank holding company after the 1970 amendments to the Act.  In  accordance with those amendments, SSOC's monbank investments made and nonbank activities comeenced before Jamuary 1, 1971, were grandfather.' for ten years, and those made and commenced before July 1, 1948, were grandfathered indefinitely.  All investments made later, and therefore  not grandfathered, had to conform to the Act and Regulation Y.  For  over seven years HSBC was required to file, and did file, periodic reports of acquisitions to the Federal Reserve System.  These reports  disclosed that no acquisitions were made that required Board approval. The Board's staff, nevertheless, undertook a thorough review de novo of HMIs nonhank interests in order to insure that the Board had a thorough acquaintance with HOBC's operations and character, to  -3.. ascertain HANC's financial and organisational capacity to serve as a source of stremith to Marin* on • continuing basis, and as a precaution to verify the pernissibility of each of those investments.  As a result  of this review, the staff criticised one indirect minority interest in a firs semducting business in the United States, and ROW disposed of that investment promptly and before the applicaticms were presented to the Semrd.  With respect to ISSINC's other nonbank interests, the re-  view verified that they were lawfully acquired and held. 2. o de  tame  It was unneceesary in connection with the alplicatione 6:12.  The staff verified that  whether MEW i  rin i  11  -  hanki  OC's nonbank investments in excess of five  percent' were permissible under the Act and Regulation Y whether or not NSW was principally engaged in banking. Two provisions of the Act most directly address the overmeas operations of foreign bank holding companies.  The first is section  2(h), which concerns foreign bank holding companies that are principally engaged in the banking business outside the United States.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The second  is section 4(c)(9), which is not similarly limited but concerns foreign bank holding companies 'the greater part of whose business is conducted outside the United States.' Because SSBC's nonbank investments, other than Marine's nonbank subsidiaries it was applying to acquire, were lawfully acquired and held under the autherity of section 4(c)(,), it was unneoessary to determine whether they might also be permissible under section 2(h).  I/  Section 4(c)(6) of tho Act permits a bank holding company to invest in up to five per cent of the voting shares of amy company.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .4. Section 4(c)(9) authorises the board to grant exemption from  the Act's nonbank prohibitions by order or regulation upon determining that  the exemption would not be substantially at variance with the  purposes of [the] Act and would be in the public interest."  The Board  in 1971 adopted exemptions by regulation, to which BSBC's nonbask investments conform.  A foreign bank holding company may make investments  that conform to the regulation without applying to the Board:2/ There was, therefore, no need to approve each investment at the time it wee made by  mac, or to approve those investments at the time 1119BC applied  to acquire Marine. 3.  It amears that MSBC is Rrincipally **levied iftbapting  outsid, the United States, in case that standard becoote a ca1oV4pt consideration in the fut. As Chairman Rosenthal notes, the Board has proposed to alter its regulation under section 4(c)(9) in order to restrict the exemption to foreign bank holding companies principally engaged in banking.'As was noted In connection with that proposal, most existing foreign bank holding companies would qualify as foreign  y  225.4(g); 12 C.F.R. 5 225.124 (related interpretation). 12 C.F.R. A description of the computations confirming NBC's eligibility for exemption under section 4(0(9) is attached as Appendix A to this memorandum. Chairman Rosenthal's letter disputes whether the Board ever made the requisite statutory determinations in proposing and adopting certain parts of its regulation. While the prefatory material to the regulation in susceptible of an ambiguous interpretation, it is clear from the context and related material that the determinations were properly made.  y An application is required, however, for the acquisition of voting shares of a company principally engaged in the United States in financing or facilitating transactions in international or foreign commerce.  44 red, !Ala.  24,864 (1979).  - 5bank holding companies under the proposed amendment.  The Board's staff  believes HSBC would meet the new definition, or any reasonably similar definition, even after its acquisition of Marine:21 Because of this probability, and because MSC's nonbank interests, or all but an insignificant number of them, on the same calculation, are likely to be permissible under section 2(h) of the Act regardless of the ultimate disposition of the regulation implementing section 4(c)(9), suspension of the Board's order pending the conclusion of the proposed rulemaking appears unwarranted.  In any event, if a nambank investment of any bank  holding company becomes impermissible, the Soard has adequate supervisory powers to require divestiture.  The staff has ma reason to believe that  NSW will not conform promptly to all future requirements placed upon it as a regulated institution. 4. The Soap determined that it was in the public interest  for  gm  to acouilre Marine and its ordtp s9 stites.  In determining  that the acquisition was in the public interest, the Board was aware that WSW engaged in an unusually wide range of permissible nonbank activities overseas.  Moreover, before acting on the applications, the  Board specifically reviewed the adequacy of regulatory and supervisory safeguards that would prevent Marine's association with hSBC and its affiliates from prejudicing the interests of the Bank or its depositors.  5.  TIa proposed conversion of the Bank into a netlonal association  40114 not, VatQuire an splat9ittioD "Hier the Act bx Marine or HSBC, and  the Board has decljned tp Seek such amlications.  y   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Staff computations are attached as Appendix B to this memorandum.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -6 On  'P16, 1979, subject to several conditions, the Board  authorised MSBC to acquire a controlling interest in Marine.  As stated,  this action was taken in conformity with the procedural and substantive LLequirements of the Act and the Board's regulations.  Since that order  was entered the Pederal Reserve Bank of•Mew York has, upor proper application, granted extensions of time within which the proposed transactions may be completed. Approximately three months after the Board's order, the Board's staff was aevised of Marine's intention to cause the Bank to apply to the Comptroller of the Currency for a national charter, principally if not exclusively to avoid further delay or an adverse decision from the Now York Superintendent of Banks which would prevent performance of Marine's contract with MSC.  The Board's staff advised the parties  that the statutory conversion of a wholly-owned subsidiary baulk by itself is not a transaction requiring Board approval under the Act and it is not a transaction that warrants reconsideration of approval earlirI er granted under the Act..1/ This position is grounded firmly in both law and policy. No provision of the Act gives the Board jurisidiction over the charter conversion of subsidiary banks, and a conversion by itself does not  y Nevertheless, the Board was advised of the Senk's conversion plan 4nd of the planned modification of some of the financial terms of the parties' contract. The Board declined to reconsider the applications as it mlght have done if it had considered those changes to be material.  - 7alter any of the facts relevant to the Board's consideration of a bank holding company application. Congress has prescribed that the State bank resulting from the conversion of a national bank °shall be considered the same business and corporate entity* as the national bank (12 U.S.C. S 214b), and the State law affecting the Bank's conversion, New York Banking Law S 137(2) (McKinney), contains an identical provision.  The Board's staff similarly considers that the conversion of  the Sank, if oonsummated, like other permissible changes in the subsidiary hank's business, will not affect NSBC's authority under the Board's order to acquire control of the Bank's parent holding company. The Board authorised KM to acquire Marine.  The order, which described  Marine's organization as it existed at the time, does not prevent the organization from changing before the transaction is consummated, without affecting the validity of the order.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Thome changes, of course,  must conform to relevant statutes and regulations and, where appropriate, be approved by the responsible agencies. Under this rule, the Board does not frustrate the decisions of other responsible authorities permitting conversions, mergers, and other structural changes.  Neither the Board nor an applicant should  be required to duplicate the application process for a transaction that will not have changed in any material respect.  Furthermore, in this  ease the Federal Reserve Bank of New York, in fact, gave the Comptroller of the Currency prompt notice of the application, and the Comptroller of the Currency is now considering whether the Bank should become a  national bank under 12 U.S.C. ;35.  In view of these circumstances  land affiliation of Merino and the careful regulatory scrutiny of the wet WAIN,* the contractual and MINK by the Board, the staff continues to ing company applieam modifications do not warrant reopening the bank bold tions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Avvendtx A.  Qualification of NSW as foteiqn bank holding comeanY  Under section 225.4(g)(1)(iii) of Regulation Y. as now written, to qualify as a foreign bank holiling company, a company must (1) be organised under the laws of a foreign country, and (2) have more than half of its consolidated assets located, or more than half of its conpsolidatod revenues derived from, outside the United States.  HBBC met  the condition by qualifying under the consolidated assets test.  Data  for year-end 1977 were used. As of year-end 1977, 'BBC reported total assets (less contra accounts) of U. S. $14.$ billion on a consolidated basis.  Except for  the $150 million in assets held by its then California subsidiary, these assets would virtually all be deemed foreign.  At the same time, the  consolidated assets of Marine totaled $12.1 billion. 'Thus, even if one assumed that the latter were totally U. S. assets (which they are not), BSBC would continue to meet the test of having rore than half its consolidated assets located outside the United States. Under the proposed redefinition of foreign bank holding company issued for comment in April 1979, the asset test would be changee to a deposit test in order to assure that the company was a banking organisation.  As of year-end 1977, HSBC had consolidated deposits of U. S.  $12.9 billion while the Marine organisation had total deposits of $10.1 billion.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Thus, HSBC would meet this test as well.  ARpendix B.  ES9C  _rinctptliY *Waged inIfnking.  A finding that LISHC is principally engaged in banking can be made on the basis of either an asset test or a revenue teat.  Data used in these  determinations are as of year-end 1977. WIC had total consolidated assets (excluding contra accounts) of U. S. $14.9 billion cm December 31, 1977.  The following majority-owned sub-  sidiary cowponies are presumed for purposes of this calculation to he wholly engaged in nonfinancial activities or in ectivities that would not be considered closely related to banking under the Sank Holding Company Act.  Company Wardley Australia Wardley Investments (Canada) Wardley Investments (N.X.) Wayhong NH Kellett Mew Hebrides) Kellett Investments Waybill'. Bolding* Carlingford NH Gatechurch Property mgt. 99 Bishopsgate Ltd. SDC International Pour Trustee Companies Nine nominee companies  Total assets ($ willionsta  %WOW' Investment Holding investment Holding • • • • • • • • • " is •  64.4 63.9 2.0 262.4 29.9 5.5 4.3 32.5 0.5 65.1  Property Management Property Holding Investment Holding Trustee Services Nominee Services  14.e 3.0  144 ..._  Total 349.4 This total is the equivalent of only 3.7 per cent of RSDC's total assets. On the revenue side, the following tabulation compares the of of the banking and finance subsidiaries to the total profit of MOW as of endr-1977. $ millions British Bank of the Middle Bast 1100.111ong Bank of California 1411104011 Bank Limited Mercantile Bank Limited Mortgage and Finance (Malaysia) Bhd. Wardley Limited Wayfoong Finance Limited Wayfoong Mortgage and Finance (Singapore) Limited The Bongkong and MiSmghai Banking Corp. TOtal  12.5 1.1 33.2 2.6 3.3 7.8 1.8 0.7 42.4 103.4  This amount is equal to 83.7 per cent of the group's consolidated net profit 4.41P VII* am4114num   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Notes Minority interests in nonbanking companies, such as Cathay Pacific Airways and Eastern Asia Navigation Company, are reflected in the asset figures for investment holding companias such as Wayhong NB Ltd.  Action- assigned to Mr. Petersen with copies to Messrs. Ryalir Gemmill for coordination of response.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  fto  SENJAMIN S. FtOSENTHAL. N.Y.. CHAIRMAN ROBERT T. MATSUI. CALIF. EUGENE V. ATKINSON. PA. FERNAND J. ST GERMAIN. R.I. JOHN CONY ERS. JR.. MICH. ELLJOTT H. LEVITAS. GA.  NINETY-SIXTH CONGRESS  Congrm of the Einiteb 5;)tato  LYLE WILUAMIL OHIO JIM JEFFRIES. KANS. JOEL DECKARO. IND.  MAJORITY—(202) 221-4407  iboufSe of 11epregentatibeZ COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE OF THE  COMMITTEE ON GOVERNMENT OPERATIONS RAYBURN HOUSE OFFICE BUILDING. ROOM B-377 WASHINGTON. D.C. 20515  December 11, 1979  Hon. Paul A. Volcker Chairman Board of Governors Federal Reserve System Washington, D. C. 20551 Dear Chairman Volcker: The House Commerce, Consumer, and Monetary Affairs Subcommittee is presently examining the issue of the foreign takeovers of United States banks, including the Federal Reserve Board's approval of the bank holding company application of the Hongkong and Shanghai Banking Corporation in March 1979. This examination has raised serious questions about whether the Federal Reserve Board's approval of the Hongkong and Shanghai application was made in conformity with the Bank Holding Company Act, whether it is in the public interest, and whether it will remain valid and applicable if the Marine Midland Bank is granted a national bank charter by the Comptroller of the Currency. Accordingly, in order to avoid any uncertainty on the legal validity of the Board's approval and to provide for a full review of the public policy issues that need further clarification, as specified below, I hereby request that the Federal Reserve Board (1) withdraw its previously granted approval for Hongkong and Shanghai to be a bank holding company under U.S. law and (2) require Hongkong and Shanghai to reapply for holding company approval if and when Marine Midland Bank is granted a national bank charter. I also request :that the Federal Reserve provide to this subcommittee a full analysis, at such time as any such reapplication by Hongkong and Shanghai is approved, of its findings with regard to the following points: (1) whether the business of the Hongkong and Shanghai Banking Corporation outside the United States is principally a banking business; (2) whether after acquiring a controlling interest in the Marine Midland Bank the Hongkong and Shanghai Banking Corporation will in the foreseeable future continue to be principally engaged in the banking business outside the United States; and (3) whether the acquisition of a controlling interest in the Marine Midland Bank by Hongkong and Shanghai Banking Corporation is (a) in the public interest and (b) not substantially at variance with the purposes of the Bank Holding Company Act, in view of the extensive nonbanking and nonfinancial activities in which firms controlled by, subsidiary to, or affiliated with Hongkong and Shanghai are currently engaged.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  2  The Bank Holding Company Act, under which the Hongkong and Shanghai Banking Corporation is required to apply to the Federal Reserve Board for approval before acquiring a controlling interest in the Marine Midland Bank, has the following general characteristics and specific provisions: As a general principle and purpose, the Act requires a clear separation between banking and commerce. Holding companies that own U.S. banks are prohibited, subject to certain exemptions, from owning nonbarvking firms at the same time unless the activities of the nonbanking firms are closely related to banking. 2.  Corporations that own or control nonbanking firms whose activities are not closely related to banking are therefore prohibited from becoming bank holding companies under U.S. law unless they can avail themselves of one or more specific statutory exemptions.  3.  Section 2(h) of the Bank Holding Company Act provides, as an exemption, that the prohibitions against nonbanking activities "shall not apply to shares of any company organized under the laws of a foreign country...that is principally engaged in business outside the United States if such shares are held or acquired by a bank holding company organized under the laws of a foreign country that is principally engaged in the banking business outside the United States...." (Emphasis added).  4.  Section 4(c)(9) of the Act provides, as an exemption, that the prohibitions against nonbanking activities shall not apply to "shares held or activities conducted by any company organized under the laws of a foreign country the greater part of whose business is conducted outside the United States, if the Board by regulation or order determines that, under the circumstances and subject to the conditions set forth in the regulation or order, the exemption would not be substantially at variance with the purposes of this Act and would be in the public interest." (Emphasis added).  5.  Section 3(b) of the Bank Holding Act provides that "Upon receiving from a company any application for approval under this section, the Board shall give notice to the Comptroller of the Currency, if the applicant company or any bank the voting shares or assets of which are sought to be acquired is a national banking association or a District bank, or to the appropriate supervisory authority of the interested State, if the applicant company or any bank the voting shares or assets of which are sought to be acquired is a State bank, and shall allow thirty days within which the views and recommendations of the Comptroller of the Currency or the State supervisory authority, as the case may be, may be submitted."  The facts that appear relevant concerning the holding company application of Hongkong and Shanghai and the Federal Reserve Board's approval of that application are as follows: A.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Hongkong and Shanghai Bank is not a bank in the usual sense but an international business conglomerate. The list of firms in which Hongkong and  •  3 Shanghai holds a direct or indirect ownership position of 25 percent or more, prepared by the bank at the request of the Federal Reserve, is 93 pages long, with many individual items per page. Only a small fraction of these controlled entities are banks. The total number of nonbanking firms controlled by Hongkong and Shanghai is in the hundreds, located all around the globe. These controlled firms engage in such diverse activities as airlines (Cathay Pacific), carpet trading, commodities trading, film production, food packing and trading, insurance, pharmaceuticals, printing and publishing, property development, limestone quarrying, shipping, telecommunications, timber and lumber production, and tourism, not to mention numerous other firms the nature of whose business is identified only as "holding" or "investments". In addition to its many businesses located in Hongkong and the United Kingdom, Hongkong and Shanghai has nonfinancial businesses incorporated and presumably headquartered in Belgium, Australia, Canada, New Zealand, Netherlands Antilles, Rhodesia, Peru, Chile, New Guinea, Panama, West Germany, Switzerland, France, Ireland, Holland, Liberia, Indonesia, Bermuda, Philippines, and Thailand. Many of these businesses presumably have operations in other nations as well. B.  The Federal Reserve has not made, either by order or by regulation, the determinations it is required to make under the provisions of Section 4(c)(9) in order to activate the exemption provided by that scction. The Federal Reserve's order approving the Hongkong and Shanghai application is entirely silent on the subject of the overseas nonbanking activities owned or controlled by or otherwise affiliated with Hongkong and Shanghai. In addition, the Federal Reserve has never by regulation made a determination that an exemption for certain overseas nonbanking activities from the general prohibition against unrelated nonbanking activities would be in the public interest and not substantially at variance with the purposes of the Bank Holding Company Act.  C.  The Federal Reserve has never made a formal determination that the overseas business of the Hongkong and Shanghai Banking Corporation is principally a banking business, as it must do in order to activate the exemption provided by section 2(h). Furthermore, there is no specific statutory test, nor has the Federal Reserve established by regulation any specific test, by which it will be determined whether a firm is principally engaged in the banking business, for the purposes of the Bank Holding Company Act.  D.  The holding company application of Hongkong and Shanghai did not provide, nor do any other documents of which I am aware provide, the financial information on which a comparison of the banking and nonbanking portions of the Hongkong and Shanghai organization could reliably be based. No gross revenue figures were provided whatever. Consequently, the revenues derived from banking and nonbanking activities can not be compared. The asset and income figures that were provided were derived by the application of accounting methods that differ from accepted U.S. accounting standards in certain important respects and that tend to produce a significant understatement of both assets and income. Furthermore, the asset figures provided appear to include only a proportionate share rather than the entire amount of the assets of firms in which Hongkong and Shanghai holds indirectly (through other firms) an ownership share of less than 100 percent. Finally, the income figures appear to include the income of unconsolidated indirectly owned firms only to the extent of dividends paid.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4 E.  In April 1979, subsequent to its approval of the Hongkong and Shanghai application, the Federal Reserve Board issued in connection with a proposed new definition of "foreign bank holding company" the following statement: "Although not required by the regulation, most foreign bank holding companies are also foreign banks with a high degree of banking expertise. The banking experience of such foreign banks has generally contributed to the managerial strength of their subsidiary banks. In the Board's judgment, it would be inconsistent with the purposes of the Act and would not be in the public interest for the exemptions afforded by section 4(0(9) of the Act and 225.4(g) of Regulation Y to be extended to a foreign organization that is not principally engaged in banking." (Federal Register, 44:24865; April 27, 1979.) (Emphasis added.) In other words, the Federal Reserve has now determined that it would not be in the public interest to permit a foreign corporation to avail itself of the section 4(c)(9) exemption unless it is principally engaged in the banking business.  F.  Hongkong and Shanghai filed its holding company application and the Federal Reserve approved this application when Marine Midland Bank, the U.S. bank it intended to acquire, held a New York State charter. Consequently, the statutory opportunity to express an opinion or object provided by section 3(b) of the Bank Holding Company Act (see item 5 above under the provisions of the Act) was afforded only to the New York Superintendent of Banks. Marine Midland has subsequently applied for a national bank charter, and presumably Hongkong and Shanghai will not actually acquire control of Marine Midland until Marine's application for a national bank charter has been approved by the Comptroller of the Currency.  The proposal and related application of the Hongkong and Shanghai Banking Corporation to acquire control of the Marine Midland Bank is unique and precedentsetting in U.S. bank regulatory experience because of (a) the very extensive nonfinancial business activities in which the Hongkong and Shanghai organization currently engages through its subsidiaries and controlled or affiliated firms and (b) the large size and unique market position of the Marine Midland Bank. In particular, this acquisition will represent a clear and prominent deviation from the general principle that banking and commerce must be kept separate, a principle that forms one of the essential cornerstones of our competitive banking system. Therefore, this proposal and the related holding company application require the most careful regulatory scrutiny to make certain that this proposed mixing of U.S. banking and overseas commerce in the Hongkong and Shanghai organization is in the public interest, nevertheless, and is in conformity with the express provisions of the Bank Holding Company Act. Furthermore, it is particularly important that the responsibility for regulatory scrutiny in this particular case, which involves ultimately, one must suppose, a national bank, must be carried not only by the Federal Reserve but also by the Comptroller of the Currency, as the primary federal regulator of national banks.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5  On the basis of this analysis of the elements of the law and the facts cited above, however, it would appear that: The Federal Reserve's approval of Hongkong and Shanghai's holding company application did not comply with the express provisions of the Bank Holding Company Act with regard to the nonfinancial activities of Hongkong and Shanghai. The nonfinancial activities in which the Hongkong and Shanghai Banking Corporation engages through its many controlled and affiliated firms are so extensive as to raise serious doubt about whether Hongkong and Shanghai is, in fact, principally engaged in banking. The financial data that would be necessary to make a determination that Hongkong and Shanghai is principally engaged in banking, as required under the express language of section 2(h) and under the Board's determination cited above as item E in connection with a reliance upon section 4(c)(9), is not currently available. iv.  The fundamental public policy question of whether it is in the public interest for a major U.S. bank (Marine Midland) to be controlled by a foreign corporation (Hongkong and Shanghai) having very extensive nonfinancial activities was never seriously addressed or reviewed by the Federal Reserve Board.  v.  If Hongkong and Shanghai acquires control of Marine Midland under the holding company approval already granted by the Federal Reserve, after Marine has been granted a national bank charter, then Hongkong will have acquired control of a national bank without the Comptroller having been afforded the opportunity to express an opinion or to object, as provided in section 3(b) of the Act.  For the above stated reasons, I believe it is essential to the integrity of the bank regulatory process that the acquisition of control of the Marine Midland Bank by the Hongkong and Shanghai Banking Corporation not be permitted to proceed on the basis of the holding company approval already granted by the Federal Reserve in March 1979. I believe it is essential that the issues of public policy and conformity with the law that are discussed in this letter be resolved in full by the Federal Reserve before this acquisition of control is permitted to proceed. Finally, I believe it is essential that the results of this regulatory scrutiny be shared in full with Congress and the . . public. It is for these reasons that I am requesting that the Federal Reserve (1) withdraw its previously granted approval for Hongkong and Shanghai to be a bank holding company under U.S. law, (2) require Hongkong and Shanghai to reapply for holding company approval if and when Marine Midland Bank is granted a national bank charter. and (3) provide the subcommittee a full analysis, at such time as any such reapplication by HOngkong and Shanghai is approved, of its findings on certain matters raised in this letter. This analysis should address the following points: (1) whether the business of the Hongkong and Shanghai Banking Corporation outside the United States is principally a banking business; (2) whether after acquiring a controlling interest   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  6  in the Marine Midland Bank the Hongkong and Shanghai Banking Corporation will in the foreseeable future continue to be principally engaged in the .banking business outside the United States; and (3) whether the acquisition of a controlling interest in the Marine Midland Bank by Hongkong and Shanghai Banking Corporation is (a) in the public interest and (b) not substantially at variance with the purposes of the Bank Holding Company Act, in view of the extensive nonbanking and nonfinancial activities in which firms controlled by, subsidiary to, or affiliated with Hongkong and Shanghai are currently engaged.  Be jamin S. Rosenthal C airman  BSR:tv   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM WASHINGTON, D.C. 20551  PAUL A vOLCKER CHAIRMAN  December 6, 1979  The Honorable Jacob K. Javits United States Senate Washington, D. C. 20510 Dear Jack: For some time I have had in mind the issues raised in your recent letter concerning the appropriate unemploy ment target for 1980 and beyond. Thus, your letter provides me the opportunity to put these thoughts together in a more orderly fashion. Having said this, let me emphasize at the outset, I don't see any easy answ ers to the questions you have raised. In considering the many facets of this issue, several things are clear. First, it is apparent that the "threshold" unemployment rate referred to in your letter ts higher than it was in the past few decades and, indeed, higher than the 4 percent rate contained in the HumphreyHawkins Act. In January of this year, the President's Council of Economic Advisers, for example, placed the unemployment rate consistent with the economy operating at its full potential at 5.1 percent. Some would argue, and convincingly so, that the rate is even high er. Second, whatever the "threshold" level of unemployment, the experien ce of the past few years has illustrated all too vividly that exogenou s price shocks can have a devastating impact on the rate of inflation. Oil prices are the most visible example, but the phenomenon has also been apparent in agriculture and other commodity markets. Another point that is highly relevant to the question s raised in your letter is an analytical one. Implicit in much of our thinking about national goals for inflation and unemployment is the concept of the so-called "trade-off" between inflation and unemploy ment. At the risk of confronting head-on an element of economic theo ry which seemed to many of us to be both convenient and convincing, I simply am not sure that this "either-or" doctrine is a valid guide to publ ic policy in the current circumstances. Inflation may have gone too far for too long and inflationary expectations may have become too deeply embe dded for there to be any material trade-off in the current sett ing. That is, high and accelerating rates of inflation may have induced such distortions and dislocations in the economy--as, for example, in the planning and execution of capital spending programs --that any effort to "buy" less unemployment by "accepting" more inflation may ultimately resu lt in more, not less, unemployment.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  The Honorable Jacob K. Javits Page Two  This line of reasoning might, to some, suggest that the national goals embodied in the Humphrey-Hawkins Act are simply too ambitious and thai such goals should, at least temporarily, be modified. I am not inclined to that view. But, I must acknowledge that the prospects for realizing the interim goals for 1980, and perhaps even the 1983 goals, appear slim at the present time. But, if we follow prudent and disciplined public policies over a reasonable period of time, we may find that behavior can be changed in such a way that the ambitious goals of Humphrey-Hawkins will again seem attainable. To scrap or to prematurely compromise these long-term national objectives would run the risk of licensing public and private actions that would ensure more instability and distortions in our economic conditions that could only be a prelude to even more serious problems. My point is simply that we must give ourselves the opportunity, in the context of current structural realities, to test the viability of these goals against the standards of sustained, innovative and disciplined public policy. If we fail that rigorous test, then perhaps some adjustments in the goals would be appropriate and justified. All of this underscores, in my mind, the need for a firmly disciplined monetary policy that centers on achieving, over time, moderate non-inflationary growth in money and credit and for the continued reduction and ultimate elimination of federal deficits except when warranted by overall economic conditions. Within that framework, there is ample opportunity to use other elements of public policy in a constructive fashion. For example, I have argued on many occasions that at the appropriate time we seize the opportunity to implement changes in tax policy that will stimulate investment and productivity and lower cost structures. I regard initiatives in this direction--properly structured and timed --as one of the most essential priorities of public policy. Having said this, let me emphasize that in my view the time is not yet at hand when such a tax change would be appropriate. Such initiatives will not produce immediate results. Indeed, even if there is a modest deceleration in the rate of inflation in the near term--something I think we can reasonably expect absent another massive oil price increase--unemployment may well rise further as the longanticipated adjustment in overall economic activity materializes. In these circumstances, I can see a legitimate role for well-structured employment programs of the types referred to in your letter. In considering such programs, I would place a considerable premium on efforts that will not result in permanent additions to government spending that would push further into the future the day when we can achieve a balanced budget.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • The Honorable Jacob K. Javits Page Three  I do not claim sufficient expertise to render judgments as to those programs that would be the most effective. To the contr ary, I am impressed with the great difficulties of designing and admin istering effective programs in this area. But, I do believe that the Congress, in its wisdom, and in cooperation with the appropriate agenc ies of the Executive Branch can make important strides in this area. I appreciate your giving me the opportunity to comment on these important issues. Sincerely,  YPauf A. Void*   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Issorebbs Benjamin S. ligmesthal Choftsan ilbsemnittee en Care, Consamor end MUsatary Affairs Ounnittee os Government Operations Nenee of Sopeesentatives bleston, D.C. 20513 Amer Chsinmes **seethe's This letter is in response to yew seroset of Deesiber 14, 1979, for Leiermaten os tho evereons seshoeklee estivitiee of fiereign bask holdiss onapenias thee hem U.S. subsidiary boas with rota' assets in annese ei age0 sillies. Sur reeeede isdleate that there sr* currently 13 such balk holding esepeedee risistered with the federal Reserve. res/meed is • listles ttheme 13 biddies oeuipenios Movies the ease and seentry of ismemertlee er demAcile of the imetwidnel holding Ropether with the some. IseeRies, sod total aseeee of each of theirmslOW mem eidiary U.S. beaks. Y,u Also rasneeted that the Fedora Beeerve prowide . • semerPt charactorisetles ei the attest of the evereees uoubAukies businesses that vre directly er Indibreotly sesed eirseuesolled by or affiliated with  the bolding cempamy eel last espape in beeimeee ectivities.mhiels are set permitted to domestic leek holding eanposiee." Further. yen opted that this ieforeation ". • • used tidy distinguish between 'etignificase and 'insignificant or none' and Shismial be based only es the asebabsking activities that are int cenetiored 'closely rotated its beekilett e  The Seek &Meg Cespeur Act as amended has as awe of its principal purposes the sepereties of bookies sad immerse within the U.S. and is see teoended to epply to the activities of feretpe bask haldiee cesposiao outside the C.S. For this mums, the Poderal Soseerve has met requested detailed Sefernstimeeneseh activities. livever. the Semi momently propeood ler semment $ revised aeumel report fern for feeeipe bait beldius seepaciee eed facets% banks with direst banking offtome Is the u.S. Welk would require the report1M1 a ell solowriel tomtits twilmt" seeee. (lntleeed for your information is the lio•rdie press release emd Morel Resister meteriel sessersieg the prepseed, eopert.) The tollerw motMs that is eurreatty available (pm* se rieeehelder reports mods is   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  lie assurable Seaport* 11, iteseatirl Pao Us  date rebottle Os eppliestieme to immix* M.S. bemhe) sespeele melbeekle, that 12 of the 13 foretim bank biddies eempeelea he's ma seeroll epseetlemes r memdiemeeially misted Waimea, thet Li meametal te thei C modiAm basks edam lhla mem& be ampeeted In the gees of Mbe ispemeee toed m in monfteemeiet lane pmeemalms these Mahe restriet he* peatlelpatia aettettfee. ommeitth, Um First Aarbtest Corporstlon, 'enema of $ink of the Camm ed that of the 13 list 'Oetrolto MIcbAsefte 60 the may fors1'. belddms sempemy a seperste sebedmle ha* 041Mifteselt seam* setteitias. tmeteesd fa sameseedmi amp osepeedieg to the addittemai mmeetiama that yee 'aimed %seemed that vapor with alissifiemet seibeek estivities. US reeemtly its tereisa boldimsso ?Stet *rabies as dtvested e elbetamtial poetise ed meet the &weir** Comereamestly, it appear* thet ths eempemy 1411 es teepee meets ler to fere* he&dimi sempemy status. ctor , If you bass ray quest/mop please 44101110 John W. Ryas Dire a the Soares 0tristee ofSaalitas isperirtsirs mid IlassLetior (432-2893).  Sertatt &411.14,  StroMMWOr* Sgaul A. Volcker  Mmeimemese (Press release dtd. 10/29/79 JOWNIMOW:pit (PV-147) tees Jack Ryan it. Moupt Mrs. Mallardi (2)  Leai been assignei to Jack R n for cooriination of response with Messrs. Peter ani Gemmill   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  BENJAMIN S. ROSENTHAL, N.Y., CHAIRMAN ROBERT T MATSUI, CALIF. c.1/GENE V. ATKINSON. PA. FERNAND J. ST GERMAIN. R.I. JOHN CONYERS. JR., MICH. ELLIOTT H. LEVITAS. GA.  NINETY-SIXTH CONGRESS  Congre5 of tbe Ottiteb *tato  LYLE WILLIAMS, OHIO JIM JEFFRIES, KANS. JOEL DECKARD, IND.  PAAJoRiry—(202) 2.25-4407  3T)oti5e of 1-kepre5entatibet COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE OF THE  COMMITTEE ON GOVERNMENT OPERATIONS RAYBURN HOUSE OFFICE BUILDING, ROOM 6-377 WASHINGTON. D.C. 20515  December 14, 1979  Hon. Paul A. Volcker Chairman Board of Governors Federal Reserve System Washington, D. C. 20551 Dear Chairman Volcker: In order to place in a broader context the issues I have recently raised concerning the overseas nonbanking activities of the Hongkong and Shanghai Banking Corporation, I have determined that it would be appropriate for the Commerce, Consumer, and Monetary Affairs Subcommittee to review the extent of the overseas nonbanking activities of other foreign bank holding companies that control major U.S. banks and the adequacy of the data available to the Federal Reserve on this subject. I am writing, accordingly, to request a list and related information on the overseas nonbanking activities of all foreign bank holding companies whose U.S. subsidiary banks have assets in excess of $500 million. Please provide, first, a list of all such foreign bank holding companies. On this list please state for each such holding company: a.  The name and country of incorporation or domicile of the holding company;  b.  the name, location, and total assets of every subsidiary U.S. bank; and  c.  a general characterization of the extent of the overseas nonbanking businesses that are directly or indirectly owned or controlled by or affiliated with the holding company, and that engage in business activities which are not permitted to domestic bank holding companies.  The characterization requested under item c. need only distinguish between "significant" and "insignificant or none" and should be based only on the nonbanking activities that are not considered "closely related to banking". • Please provide this list as soon as possible and, if additional time will be required to prepare the supplementary material requested below, prior to the preparation of the supplementary material.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • Hon. Paul A. Volcker  2  December 14, 1979  Please provide, second, the following additional material for each holding company whose overseas nonbankina activities not closely related to banking are characterized as "significant" on the list requested above: a.  any list currently available to the Federal Reserve that identifies the name, location, and business activity of nonbanking firms owned or controlled by or affiliated with the holding company.  b.  any information currently available to the Federal Reserve that reports the percentage of the ownership of each such nonbanking firm that the holding company owns or controls, either directly or indirectly;  c.  any financial data currently available to the Federal Reserve that provides information on the extent or size of the nonbanking businesses identified above as compared with the size of the overseas banking business of the holding company. This should include, to the extent available, information on gross revenues, income, and assets;  d.  copies of all Federal Reserve approvals or denials issued within the past five years in response to applications filed by this holding company under the requirements of the Bank Holding Company Act, together with accompanying press notices and transmittal letters to the applicant or applicant's attorneys; and  e.  a statement of whether this holding company has been granted exemption from the nonbanking prohibitions of Section 4 of the Bank Holding Company Act under the provisions of Section 2(h), Section 4(c)(9), or some other section, together with a reference to that paragraph of any Board approval order that states the authority relied upon for this particular exemption.  As the subcommittee already has the list of nonbanking firms and the financial data of the Hongkong and Shanghai Banking Corporation, that corporation may be omitted from any response to this request. If any of the supplementary material requested above is considered confidential, then in lieu of the confidential material please state for each case: a.  the nature of the confidential material and the basis for the confidential classification;  b.  the reporting requirement under which it was supplied to the Federal Reserve; and  c.  a summary that indicates, as necessary, the number and types of nonbanking businesses involved and the relative sizes of the banking and nonbanking activities of the holding company.  The subcommittee reserves the right to obtain access to any such confidential material in the future if the information provided in lieu of the material requested is not sufficient for the subcommittee's evaluation.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  Hon. Paul A. Volcker  3  December 14, 1979  I am requesting this material in part to enable the subcommittee to determine whether a hearing may be necessary in late January on this aspect of the Federal Reserve's administration of the Bank Holding Company Act. Accordingly, I would appreciate a full response by Friday, January 11. SinCer ly,  Benja in S. Rosenthal Chairman  BSR:tv   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 11, 1980  111mosul. Rishomd (Plek) &tone Malted States Semmes, Pest Office *oz 4044 Tallahassee, Florida $IM Rex  9333170031  Dear Senator Stones Think you for your note of December 18 requesting segment as the enclosed correspoedense fres Wr. C.L. Vein esm, ouggestimg that Congress raise the ceiling rates am savings /Account* as that gavials get a "fair return" on their messy. Comgrese masted flexible interest rate control legislation in 1966 la respemee te e sharp riso in interest rates in mi4-1966 whisk cooed mei memmemers to shift their mimes to hitber yield eerket investigate.** Mier thrift institutions thus famed stmesbla deposit outflows for Ohs first time sines World tier I/. Sevimps egd loi,n associations and mmdmel **vials basks, beams* of seestraints se thJ kinds of assets they yarn permitted to hold, weirs unable to pay eortet-orisgiled rates of return on dwelts ethee those rates mere high. Commercial bombe, as the other hood, woes net so hampered hessuao their portfolios is mime diversified, with em moms maturity oemstderably shorter than that of thrift eaglets. ility sad allo mod the. to pay This odisseed commercisi b a nks competitive rates as deposits. The eseseememi shift of deposit flews from thrift imstitutioes resulted in a sheep eurtailmeet of residential mortgage lending. Pursuant to reibliet Law 89-597, the financial regulatory agencies established an interrelated structure of deposit rata ceilings. The rates were set by determining the neninem rates the thrift institetioes weld pay, given their portfolio returns. Rates for eommercial banks mere then set at a lower level to give the thrift instituting.• premium to help offset their competitive ditedventage commersia tunics. The legislation vos mower intended to be peresesat. In fact, the initial legislation sled sibeegeent removals have *tows bees for periods of less than two yesra. It bee also bees widely rocegaised that this legislation has been enticompetittve in fever of the thrifts, to the detriment of the smell or unsophisticated consumer. Theft ceiling rates have precluded smell savers from earning gerket rates of interest on their deposits. Additimally, thrift institutional still bave not been Able to   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Honorable Richard (Dick) Stone Page Two  compete in the dmpesit market, snd there has bean a deems/see in mortgage sow sweileble hums. of the proliferation of alternate investments as interest rates centime to climb during periods of inflation. A/though their asset portfolios are *till limited to fairly long-term teams, recent settees have strengthened portfolio earnimes potential for thrift institntiomse Mess seeiene *Delude authorisation by various states and the federal Some iammi1Woicleard for thrift institutions to offer ireriehle rate nertgegeo sod rollover *octanes that earn returme mere eenneeeerate with merlon ranee. In addition., seeest legislation (iPriblis Ler 16461) in:speeded tosperarily State usury limits on aortissas thereby perodtting thrifts to Osage morkat rates for their lemma. The Board bee smoportod efforts to abolish interest rats controls Soripied with efforts to libeftlise the asset powers of thrift imetitutioms. *radial abolition of ingenest rate sailing, mill work met enly to the benefit of thrift institution. and the fimemcial system, but to the benefit of smell sowers as well. legisletiam is pending that isseld remove interest rate seillage., leuever, As lose as the teemeset roes legislation masts, the board nest amply with its esedate. literefore, abe beard sad other federal financial regulatory egensies meet geriedieslly to &sterols* whether rwvieion of the interest rate selling's is oppreleriete. The latest action in this regard occurred as Desembsr 14, whim the Nord increased the calling rate of interest thst mesiost hobs may pay en tine deposits maturing in 90 days or more bat less dome on year, although the interest rate ceiling for savings accounts remmined at 5-1/4 per eiserm, The Board ale. ibee enememesd sewsrel mom manorial& of ttme degesits that pay interest at meereewsket rotes. Uses Inetruneets were authorised in 1978 and 1979 so sewers Issld be able to earn more equitable rotas et return on their deposits. 211160 may issue Uomeek money market certificates, with s minimum demselsatiss of 810,000, visioh pay interest at s rate equal Se the diseases rats for Treasury bills. Additionally, basks may now offer a am time &posit with a maturity of 2-1/2 years that me interest at rate* tied to the yield on U.S. Treasury seeuritine• There Is no racy:tired eilleinstiou for this certificate, oldies* Welts nay set minimums if they desire. I hope this isilsonation is useful. Please let ms law if I Can be of further sesisteene4 81aserely yours, DLR:CO:pjt (fV-149) Inc: Dan Rhoads Mrs. Mallardi  ,  Donald J. WINK 8pecial Assistant to the Board l'Alclosure  • RICHARD (DICK) STONE  COMMITTEES:  FLORIDA  AGRICULTURE. NUTRITION. AND FORESTRY FOREIGN RELATIONS  J1P1Iw!te  VETERANS' AFFAIRS  WASHINGTON. D.C. 20510  December 18, 1979 Our File:  9333170031  c)  MrPaul Volcker, Chairman Federal Reserve System 20th Street & Constitution Ave. Washington, D.C. 20591  NW Pr".. 6•••••••••aMiellh.-  Dear Mr. Volcker: Because of the desire of this office to be responsive to all inquiries and communications, your consideration of the attached is requested. Your findings and views, in duplicate form, along with return of the enclosure, would he greatly appreciated. It would also he helpful to me if your response is mailed to mv office at the address below and INCLUDES THE EILE NUMRER SHOWN ON THE COMMUNICATION I HAVE SENT TO YOU. ,ordiallv,  Richard (Dick) Stone RDS/vms Enclosure  PLEASE REPLY TO:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  POST OFFICE BOX 4081 TALLAHASSEE, FLORIDA  32303  •••  fr./  40  •  (  ti  . •  .1  4  .  (  •  r•  (/  • " •••••.-....)  , •••• A  ;  I  (.  (  c  --2  •••••-•  ("_(),/-7  / •  /. L  4i :  a  . •  ( 7  C  C  I  I•  t .•  _ 4  •  e  •  C._  ••  • (  4  ;  ,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .•  4  -  L  •  4  ,/ •  •  1 -v ' .•  •  . •  , ; •  •  L.)  •  , •":r . " "  t• • •  •  • .(• ••.  '' I, •  _  ;  (/  -e-  •  1,1  • 'C•r•••••'..) . c- • .  ,  :I . I-  C:  •  .  101••  . S"  4  •  ••• •  f: C  4 •. 00:_  (  •  e-  e"' I  es"  •c)  • .46....  t. A  p •  •  , •  ..  ? ,o,. 1, ..  C v/ .. . . y  e  / C  (  1  .  / /  •  IC7  C e  e . i.( ./ I'  e L. ‘,""t• ,,. /  •R  ...*  •  ...2/ •  .4..  . e --) ,/  ,-.4  •  4  ..  L  /.4_,  I-.' •.••••  ••••••• • ••••‘'  •  •  —•  ••-•  C/   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Jaw/wry  /be  Iiiii  18, 1,80  rLlessesdre  allkivaisa  Committoo as iloshissit liessiss mad Odom Affairs *sited Stases Somata Wiehisetos# DA. 2010 Wear Choisoms Preirdast Ibis& yowl for yaw linter efl esetify before row Cessiturots eiersisibit %Apt of the 'Word Ilseseve itistos.  7 isvitiss the Deartd lase os the Ha  I se Seeeed to Weis yes Idiot assisor iittlfiv E. coldw4-1 will oppoir mi behalf of the leee4 es Joseety rs et ioloo •••• Sisseraly#  CO:pjt OPV.4) beet Caw. Coldwell Nr. Wallas* tviespy a tesesise) Mrs. Mallardl (2)  N11111 ,  "NNW  WILLIAM PROXMIRE, WIS., CHAIRMAN HARRISON A. WILLIAMS. JR., N.J. ALAN CRINSTON, CALIF. ADLAI E. STEVENSON. ILL. •ROBERT MORGAN. N.C. DONALD W. RIEGLE. JR., MICH. PAUL S. SARRANES. MD. DONALD W. STEWART. ALA. PAUL E. TSONGAS, MASS.  JAKE GARN UTAH JOHN TOWER. TT_X. JOHN HEINZ. PA. WILLIAM L. ARMSTRONG. COLO. NANCY LANDON KASSE DAUM. KANS. RICHARD G. LUGVA,  KENNETH A. MC LEAN. STAFF DIRECTOR M. DANNY WALL, MINORITY STAFF DIRECTOR MARY FRANCES DE LA PAVA, CHIEF CLERK   https://fraser.stlouisfed.org IIMPlomt Federal Reserve Bank of St. Louis  'JCnc,Stafez „Senate COMMITTEE ON BANKING. HOUSING. AND URBAN AFFAIRS WASHINGTON. D.C. 20510  January 7, 1980  1 The Honorable Paul Volcker Chairman Federal Reserve Board The Honorable Irvine Sprague Chairman Federal Deposit Insurance Corporation The Honorable John Heimann Comptroller of the Currency Gentlemen: The Committee on Banking, Housing and Urban Affairs is planning to hold oversight hearings on the 1980 budget of the Federal bank regulatory agencies on January 25, 1980. The heriTing will begin at 10 A.M. and will be held in Room 5302 of the Dirksen Senate Office Building. For your information, I am enclosing a copy of the Committee's Guidelines for Witnesses.  Chairman WP:lmg  ••••••••  WILLIAM PROXMIRE, WIS., CHAIRMAN  •  HAVRISON A. WILLIAMS, JR., N.J. ALAN C.Ft AN'TON, CAU F. ADLAI K. STEVENSON, ILL.  JAKE GARN. UTAH JOHN TO ER, TEX. JOHN HEINZ, PA.  ROBERT MORGAN, N.C. DONALD W. RIF.GLE. JR., MICH. PAUL S. SARBANES. MO. DONALD W. STEW AR T, ALA.  WILLIAM L. ARMSTRONG. COLO. NANCY LANDON KASSEBAUM, KANS. RICHARD G. LUGAR.  PAUL E. TSONGAS, MASS. KENNETH A. MC LEAN. STAFF DIRECTOR M. DANNY WALL, MINORITY STAFF DIRECTOR MARY FRANCES DE LA PAYA, CHIEF CLERK  'Alertifeb Ztatez Zenate COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS WASHINGTON, D.C.  20510  (;l111)1:1,1NliS FOR WITNESS[S  1.  .  These guidelines apply to all hearings of the Senate Committee on Banking, Housing and Hrhan Affairs, unless otherwise indicated. All hearings will hegin at 10:00 A. N. in Room 5302, Hirksen Office Building, unless otherwise indicated.  3  Committee rules require that all witnesse!: submit at I east 100 copies or their written statements 18 hutir prior to their appearance. Sundays and holidays arc not to he included in determining this 48 -hour period Statements should he delivered to Room S300, Hirksen Office Building, Washington, O. C. 20510. Strict adherence to this rule is essential in order that Committee memhers may review the statements before the hearing, thus enabling the participants to more thoroughly discuss the issues involved. Statements W ill not he released to the news media prior to the day of your testimony.  4  Oral presentations must he limited to a brief summary not to exceed 10 minutes. Your complete statement will he printed in the hearing record.  5.  Please complete the attached card and bring it to Room 5300 prior to the hearing. You will be given copies of statements of those testifying with you at that time.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Your cooperation is appreciated.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 9, 1.  The immorable Beery S. Reuss Chodemon Committee em Sonkics, Timmer. mod Urban' Affairs *mop of SopreomeSottrom lashington, D.C. 20313 Seer Chairman Menses Mask yes for your letter of Joinery 7 regarding my tonically bodice your Coemdttee on the Csmdect of Monetary Policy rutt Popleynent and Salaamed Growth Act of 1979. pursues* Ia I 10:00 LAI.  /oohing forward to appearimg se Behreory 19 at  Sincerely.  CO:pjt (tV-3) bcc: Mr. Azilrod (w/copy of incoming) Mrs. Mallardi (2)  HENRY S. REUSS, WIS., CHAIRMAN 7HOMAS L. ASHLEY, OHIO WILLIAM S. MOORHEAD, PA. FERNAND J. ST GERMAIN, R.I. HENRY B. GONZALEZ. TEX. JOSEPH G. MINISH, N.J. FRANK ANNUNZIO, ILL. JAMES M. HANLEY, N.Y. PARREN J. MITCHELL, MD. WALTER E. EAUNTROY, D.C. STEPHEN L. NEAL. N.C. JERRY M. PATTERSON, CALIF. JAMES .1. BLANCHARD, MICH. CARROLL HUBBARD. JR., KY.  •  •  U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS  JOHN J. LAFALCE, N.Y. GLADYS NOON SPELLMAN, MD. LES AuCOIN, OREG. DAVID W. EVANS, IND. NORMAN E. D•AMOURS, N.H. STANLEY N. LUNDINE. N.Y. JOHN J. CAVANAUGH, NEBR. MARY ROSE OAKAR, OHIO JIM MATTOX, TEX. BRUCE F. VENTO, MINN. DOUG BARNARD, GA. WES WATKINS, OKLA.  NINETY-SIXTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING  WASHINGTON, D.C. 20515  J. WILLIAM STANTON. OHIO CHALMERS P. WYLIE, OHIO STEWART B. McKINNEY, CONN. GEORGE HANSEN, IDAHO HENRY J. HYDE, ILL. RICHARD KELLY, FLA. JIM LEACH, IOWA THOMAS B. EVANS, JR., DEL. S. WILLIAM GREEN, N.Y. RON PAUL, TEX. ED BETHUNE. ARK. NORMAN D. SHUMWAY, CALIF. CARROLL A. CAMPBELL, JR.. S.C. DON RITTER, PA. JON HINSON, MISS. 225-4247  January 7, 1980  ROBERT GARCIA, N.Y. MIKE LOWRY, WASH.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Honorable Paul A. Volcker Chairman, Board of Governors Federal Reserve System 20th -and Constitution Avenue N.W. Washington, D.C. 20551 Dear Chairman Volcker: I look forward to your appearance before the Committee on Banking, Finance and Urban Affairs on Tuesday, February 19, 1980, at 10:00 a.m. in our Committee chambers, 2128 Rayburn House Office Building. Your report on the conduct of monetary policy, pursuant to the HumphreyHawkins Full Employment and Balanced Growth Act of 1979, will be especially important to the members of our Committee. We will be especially interested in hearing a comprehensive explanation of the new policy which you announced on October 6, 1979; how this policy is being carried out and what its effects will be on the American economy. Sincerely,  Henry S. Reuss Chairman HSR/jt   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Janoary 7, 19ti:  Miserable Alma crenstem Cheimmos tat imetitstimie Adipleemmittee ee *a Ameittee on Sembhms, lessies and Whoa 4faise Limited State* Owe** $saehLagtoo, D. C. 2031C Mar Mr. Cbelimmes. Thmok ye • tor year letter of December 21 regarding your imilwemotttee4s bearing em lame, Merbet Rimds. Ism pLeseed to Worm you that ermnier J. Merle* Pert** will Oppose en behalf of ea* Beard ea Jammew 24 at 10:0C a.e. Siscarely,  CO:vcd (?1-15r) bac:  a0v. Parte. Vt. Proll Nes. Mallardi  Am. WILLIAM PROXMIRE. WIS., CHAIRMAN HARRISON A. WILUAMS, JR., NJ. ALAN CRAirISTON. CAUF. / ADLAI E. STEVENSON. ILL. ROBERT MORGAN. N.C. DONALD W. RIEGLE, JR., MICH. PAUL S. SARBANES. MD. DONALD W. STEWART, ALA. PAUL S. TSONGAS. MASS.  JAKE GARN, UTAH JOHN TOWER. TEX. JOHN HEINZ, PA. WILLIAM L. ARMSTRONG, COLO. NANCY LANDON KASSEBAUM, KANS. RICHARD G. UJGARI, IND.  KENNETH A. MC LEAN, STAFF DIRECTOR M. DANNY WALL. MINORITY STAFF DIRECTOR MARY FRANCES DE LA PAVA. CHIEF CLERK  ••  07)  rZlertifeb Zfatez ,S_enafe COMMITTEE ON BANKING. NOUS-114G;AND URBAN AFFAIRS WASHINGTON. D.C. 20510  December 21, 1979  The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20037 Dear Mr. Chairman: This will confirm an invitation to you to testify before the Financial Institutions Subcommittee on "Money Market Funds". The hearing will be held on January 24, 1980 at 10:00 a.m., Dirksen Senate Office Building, Room 5302. The committee focus will be on regulation of money market funds, their impact on the regulated financial intermediaries, and monetary policy implications of the funds. All testimony must be delivered to the Banking Committee 48 hours in advance of the hearing. Should you have any questions concerning this hearing, please call Carolyn Jordan, Staff Director of the Financial Institutions Subcommittee at 224-7391.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  et,  Sincerely,  •  Cston hairman  ;140.  .• 4". •  1- • •_.  • ..•  r/ •  •. 4-4.•  WILLIAM PROXMIRE, WIS., CHAIRMAN HARRISON A. WILLIAMS, JR., N.J. ALAN CRANSTON, CALIF. ADLAI E. STEVENSOIN, ILL ROBERT MORGAN, N.C. DONALD W. RIEGLE. JR., MICH. PAUL S. SARBANES, MD.  JAKE GARIN, UTAH  •  •  JOHN TOWER, TEX. JOHN HEINZ, PA.  WILLIAM L. ARMSTRONG, COLO. NANCY LANDON KASSEBAUM, KANS. RICHARD G. LUGAR, IND.  DONALD W. STEWART, ALA. PAUL E. TSONGAS, MASS. KENNETH A. MC LEAN, STAFF DIRECTOR M. DANNY WALL, MINORITY STAFF DIRECTOR MARY FRANCES DE LA PAVA, CHIEF CLERK  'AlCniteb Ztafez „Senate COMMITTEE ON BANKING. HOUSING, AND URBAN AFFAIRS WASHINGTON.  D.C. 20510  (;HIOF1,1NES FOR WITNESS1.  ihese guidelines apply to all hearings of the Senate Committee on Banking, Housing and Hrhan Affairs, unless otherwise indicated. All hearings will beg in at 10:00 A.M. in Room 5302, Oirksen Office Building, unless otherwise . indicated. 3.  Committee rules require that all witnesses suhmit at least 100 copies of their written statements 18 hours prior to their appearance. Sunday s and holidays arc not to hi' included in determining this 48-hou1' period. Statements should be delivered to Room S300, Oirksen Office Building, Washington, D. C. 20510. Strict adherence to this rule is essential in order that Committee memhers may review the statements before the hearing, thus enabling the participants to more thoroughly discuSs the issues involved. Statements will not he released to the news media prior to the WIN. of "our testimony.  4.  Oral presentations must he limited to a hrief summary not to exceed 10 in Your complete statement will he printed in the hearing record.  S.  Please complete the attached card and bring it to Room 5300 prior to the hearing. You will be given copies of statements of those testifying with you at that time.  Please supply the address to which you prefer the reporter's transcript delivered for your correction. Kindly turn this card in at Room 5:100 Dirksen Oflice Building prior to giving your testimony.  01•••••-.  ion is appreciated.  ••••••2 (Name)  (Organization)  (Business address)  (City and State) SF.N ATE  RAN  110t'SINI; AND  URBAN  (Phone)  (ZIP Code) AFFAIRS COM MITTEE 36-545-h  • • "'A..., • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  GPO  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • . ' 00f ▪ GOVt • •  O  CA4  BOARD OF GOVERNORS  .4 ,  OF THE  FEDERAL RESERVE SYSTEM  •0  • r•  '  WASHINGTON. 0. C. 20551  6) •  A'ALREs*"•'  • •..• •  PAUL A. VOLCK ER CHAI R MAN  January 7, 1980  •  The Honorable William E. Dannemeyer House of Representatives Washington, D. C. 20515 Dear Mr. Dannemeyer: Thank you for your letter of December 7 in which you express concern about the problem of inflation. Let me assure you, on behal f of the members of the Board, that those of us in the Federal Reser ve System share that concern. Your letter raises a difficult analytical problem. There is general acceptance of the notion that inflation cannot proce ed for long without the nourishment of monetary expansion, but whether or not excessive growth of money historically has been the source of the initial impetus for episodes of inflation is a much more debatable proposition. I think it would be fair to say that in many instances the inflationary impulse arose from other forces--for example, surges in food or energy prices--and that the more rapid expansion of the money stock that occurred at such times reflected Federal Reserve effor ts to cushion the impact of these shocks on real economic activity. As a more general matter, the economy has exhibited a substantial inflationa ry bias owing to various structural characteristics, and, again, monetary growt h has tended to be more rapid as a result. I might also note that the relationship between money and inflation is not so simple as suggested by the formula that monetary growth equal to the trend growth of real output will spell price stabi lity. Many factors can alter the relationship between money and prices over time. Changes in financial technology alter the turnover, or income velocity, of money. Indeed, such changes are at the root of our current efforts to redefine the monetary aggregates. In addition, certain broad aggregates, such as the M-2 you cite, include interest-bearing assets in which much of the public's financial savings is held and that bear no relationship to immediate transaction requirements; as a consequence, such aggregates may often grow faster than real output without inflationary impact.  -   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  S  •  The Honorable William E. Dannemeyer Page Two  Nonetheless, monetary growth did appear to be excessively rapid in the spring and summer of this year. If sustained, there would have been little hope of reining in the inflation afflicting the nation. Developments in the commodity and foreign exchange markets indicated a skepticism about the commitment of policymakers to the restoration of price stability, and carried with them the danger of serious distortions a4d economic disruption. In these circumstances, the Federal Reserve had Co move decisively to curb the growth of money and credit. The actions announced by the System on October 6 were designed to further this goal. The discount rate was increased from 11 to 12 percent; an 8 percent marginal reserve requirement was imposed on increases in "managed liabilities," which had financed much of the recent rapid expansion in bank credit; and the method used in open market operations was changed so as to help ensure that monetary growth objectives will he achieved, with greater emphasis in day-to-day operations now being placed on the supply of bank reserves and less on the federal funds rate. Prior to the action of October 6, the System manipulated the Federal funds rate in order to affect growth of the monetary aggregates. However, in an environment of high and variable rates of inflation and rapid institutional change the relationship between short-term interest rates and money had become less reliably predictable, so making more difficult the attainment of monetary objectives. While the System is under no illusion that the new operating procedures will promote tight short-run control over the monetary aggregates, we believe that they represent an improved technique. The change also underscores the System's commitment to attain its annual targets for moderate growth of the monetary aggregates. Because expectations of a high inflation rate have become embedded in the public's behavior, unwinding the current inflation unfortunately will take some time. Too abrupt a reduction in the growth of money and credit could severely disrupt economic activity, since the inertia in the inflationary behavior of business, labor, and investors-associated in part with existing contractual obligations--could not be overcome rapidly. However, the Federal Reserve recognizes the inflationary dangers of too little restraint on money, and we remain firmly committed to a policy of slowing monetary growth gradually to rates consistent with price stability. While monetary policy discipline is essential, a comprehensive program is needed to fight inflation. Efforts to hold down the size of the federal budget deficit must be continued. Businesses and labor must exercise restraint in setting wages and prices. Attention must be given to removing the structural impediments to competition and innovation, and to evaluating with care the cost and price implications of otherwise socially beneficial legislative initiatives. The cooperative efforts   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  **(01144 . ,..tivilWAS4000110hitippter110011110440036M111111011411110  The Honorable William E. Dannemeyer Page Three  of the Federal Reserve, the Congres.,, and the administration, aswell as of business and labor, are all required to bring about an environment conducive to a more prosperous economy with stable prices. Sincerely,  oAlLt_  _ Allred to Mr. Axilrod for respo ii. Al oard Members received an cal letter from Cong. Dannemeyer. We would recommend that one response will be sent, signed by Chairman Volcker, after it has been circulated to all Board Members.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •• cal  'WILLIAM E. DANNEMEYER 39ii DISTRICT. CALIFORNIA 0  •  CO4AMITTEES INTERSTATE AND FOREIGN COMMERCE  WA34VNGTON OFFICE 1206 LONG.vORToi HOUSE OFFICE BUILDING WASHINGTON. D.C. 20515 (202)225-4111 DISTR:CT orrIcr• 1370 BREA BOULEVARD SuITE 108 FULLERTON, CALIFORNIA 92635  POST OFFICE AND CIVIL SERVICE  Congre5 of die  992-0141  tate5  )1:ni5e of ikepreWitatibefi Riazbington,;3.C. 20315  December 7, 1979  Mr. Paul A. Volcker Chairman Federal Reserve Board of Governors 20th and Constitution, N.W. Washington, D.C. 20551 Dear Mr. VoLcker: There is no more vexing problem facing the 96th Congress than that of inflation. Its insidious consequences nervade the life of all of us and must be addressed if the nation is to remain the strong leader of the free world that it has been since the second World War. In order to arrive at a solution to inflation, the cause must be studied and understood. In an attempt to do this, I am addressing a basic inquiry to each member of the Board of Governors of the Federal Reserve System. The attache graphs and tables were prepared by one of your member banks and were sent to my office regularly. The materials show the real growth in the nation's Gross National Product and the growth in M2 (money stock plus net time deposits). As may be noted by even a cursory examination of the graphs, the money supply has grown at a rate substantially faster than that of the GNP.. There are many that would point to this as the root cause of inflation, that is, too much money chasing too few goods and services. My question to you is simply this: Why has the Fed continued to pursue the policy of increasing the money supply at a rate in- excess of the growth rate i.n real GNP? I feel that this question may be addressed irre's'nective of the question of the legitimacy of the monetarist theory regarding inflation.  . • "  4i. • — 40.44.444.4..  44.04OF.IR=111 , .  I.  .  *No:  4  Your response to this inquiry is appreciated. -  Kindest Regards, ,:77V444.  WED/cd Enclosures  g ham E. Dannemeyer Member of Congress  "MOW   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4;-  GREItS NA I I ONAL MMOJC I  S  RATIO SCALE QUARTERLY TOTALS AT ANNUAL RATES RATIO SCAL TRILLIONS OF DOLLARS SEASONALLY ADJUSTED TRILLIONS OF DOLLAR 2.5 2. #9.11410/ 2.4 2. 2.3 . 00 73915 2. 2.2 2. 2.1 2. 2.0 2. CURRENT DOLLARS 1.9  1. I. 1. 1.  I I /PI OM. 71  1.8  4%  1 .!  #10. 37  47 6%  /ST CV,. VI  . 4308  0.9 1.3 1  7,5.07 2. 7% -7.3,  '.' ',-  4-)  0.9 19/1  19/2  1972 DOLLARS.  '.•  : t t 1973 1974  1,=1  19/5  0. 1976  1977  1978  19/9  SOURCE: U.S. DEPARTUENT OF COWLERCE PERCENTAGES ARE ANNUAL RATES OF CHANGE FOR PERIO DS INDICATED. LATEST DATA PLOTTED: 3RD OUARTER PRELIWINARY   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  PREPARED BY FEDERAL RESERVE BANK OF ST. LOUIS  13  •  (.41'1*.S  44.47! 0441 PP P....JZT 1 4 CUIP'417 t:ALANS 44...'iL. "US DI C*B.PaGe 141Tlat  _ 2- 75  __  (7. 1 kIT(0  M1111.P.1 OF ODLLAbs  1110  _ AWYJAL .47ES_ 2-79  _  3-75  4-75  2-76  1-76  3-76  4-7e  1-77  :-77  4-772-78-  3-77  1-79  4-78 -  1.4540 _  -  -  18.-6 --  I ,•98.0 - 1 s5-6;-.0  .  7.7*$  13.7  - 9.0- -  14.C.  11.8  14•7  10.3  iese  10.3  12.4  12.3  -- 10.0  11.b  11.i•  -- -- --1 •54e:0--.-1,653-•-7 ''.. •3  1,683.1 1.715 Al  - 9.9- - 7.7 - 0.0  4-70  10.0  11.4  11.1  4.1  9.4  1-77  10.6  11.9  11.7  io.e,  .o  0.1 • 10.1  _ 8-.9-- 9.7  11.0  12.5  1.756.1 1 ,1120.2  15.4 ____  2-77  1.8  11.9  11.0  11.3  10.6  .5 -12.6 11- i4.1 - 1-2.8  4- 1 7  1C--.7 - 1-i-.7 - 11.0  1 0.8  11.1  10.6  11.1  10-.3 -ICJ  12.C.  -4 11.  11.-3-  1C'.0  1 D.R  2;.-71- 1-11•2  11--ao  12-00 - 11.4  i.e  3...78  12.f.  11.9  11.1  11.4 1.--b  iz.o  •  12.0  -9 7 3;'  11  •  1-75  4-74  2-7!  12•3  11.2  11.2  10.4  8.7  - 10.5  9.7  8.5  1,971.3  0.4  2,01163 2,104.2  - 12.2- 13.9-19.8 11.3  11.7  12.2  12.5  12.1  11.9  11.9  12.9  15..3  - 1248 uk1wIi,41  ,*.j,  2,159.6  1i...0 14.8  11.7  11.5  11.9  12.3  12.6  12.2  12.1  12.1  12•11  14.0  12.i- 12.6- 10.6  1-1.4  11.1  /1.4  11.8  1-2.0  -1-1.6  11.4  11.3  11.8  12.5  10•7  10.6  11.2  11 .4  11 .1  11.4  11.7  11.9  11.5  11.-4----lf•  1-2.2 --11•7  10.8  10.7  3-75  /5  1-76  2-76  3- 76  4-76  1-77  7-77  4-77  2-78  3-78_ 4.-78  11.5  ri.1 --/1.1  -  11.6  11.7  1,1070.0 -- --.1,930.5  3-77  1-78  2914 2-0-  8.6  6.7  2.329.8  8.9  11•0  1-79  2-79  ITh1II T1AL _Ou4RTER P- Plitt LIP11001 111.Y  -  PREPARED 89 JEDETIAL RFSER.9E OCTUSER 19. 1979  PIK_ Of _ST. IOWA  cotoss NAT losiat. PRODuCT 114 1972 001.141tS 4,44',..1LL it 41ES OF CH404GE .1.pADE (Ard P71koPINAL----OUARTER 4-74  3-75  IN11141 CiARIER  2.3  1- 75  2-75  8.4  1C.5  -3-75  4- /5  1-76  2  16  3-76  4:76  1-77 - 2-77  3-77  4.-77  1-711  2-78  3-78  4- 71  1-79  P1111LPIS OF DOLLARS 444uLL PLIES_ 2- r9  1,27C.0 --  - 4•to 1 -76 2-76  3.7  6.5  6.5  i•  I 0.7  5.2  6•5  4-16  5.6  3.6  5.4.  4.4  4.4  .-  1.267.4.  2.5 2.8  3.1  a.0  3.3  3.5 1,315.7 --  1-77  4.2  5.65.0  - 5.6  2-78 1._  4-7e  4,4  .5 '  4.4  5.4i  5.4.  5.3  5.0  4.9  S.2  5.1  S.7  6.8  ,..e  .111,crio  1,331.2  4.9  5.4  6.0  6.9  5.9  7.0  4.5  4.9  5.2  5.7  4.6  4..6  2.2  ...7  4.c,  S.?  4.8  4.e  4.1  5.0  M.3  4.7  4.3  4.6  5.8  1..6  4.6  .0  ,.2 '  4.6  5.0  5.2  4.7  j _ i:9 63 15 12 :3  1.395.2  4.6  .4 .  5.6  0 4%  3-Z79  3.4  1.9  4.0  4.0  3.5  .4 1.2.9  1.8  4.5  4.4  4.1  4.2  3.7  3.8  3.9  3.9  4.-74  1-75  2-75  3-75  4- 25  1-76  2-76  3-76  4-76  1-77  2-77  1 .• lu.0  2.9 --- 3.0  3-77  4-77  3.0  2.0  1.7  1-78  2-78  3-78  I 0.4]  4-  re  n.o  1 -79  2- 79  141114i. CUARTE P-  PRFLIM)NARY   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  12  PPIPAGM) F'll‘RAL OLTOMER 19, 1979  k"."(VE  6A4l C/F  ST. COWS  ___  MONEY SOK PL US NE_ 1 RATIO SCALE BILL IONS OF 001 L ARS 960 ---940 - • 920 900 --' 880  1 II.4E  Arse...as  ocisT at.FuSTII  DEPOSITS.? ) RATIO SCALE BILL IONS OF DOLLARS 960 938 8 940 •10.17 920 900 •4. II 830 860  j  860  •I. 51  840  840  820  820  800  800 -  780 760  / •Il II -  --  740  780 760  ...  740  120  720 -  700  700  •9.6r  680  680  660  660 •  640 620  ----.6. lly"  620  -  k  t_  t  t  t  A --':.  4  600 t 580  640  A  /Jr ers v./  4 -  t  600 580  560  560 1974  1975  1977  1976  1978  1979  LICORF,ICT, OtwANO DEFOSilS, SAVINGS DtPOSiTS, TIF OtPOSITI OPEFF ACCOu4T Tim( CERTIFICATES OF DEPOSIT OTWEI INAN WICCITIAS.E Hut CERTIFICATES OF DEPOSITS ISSUED IN DENCIIINAT IONS 08 1100.000 CI IRORE SR LARGE WILY REPORTING CClowERC:AL PERCENTAGES ARE A 4 NUAL AATES OF LATEST DATA PLOTTED , OcIona  CmANCE POI FERiODS Io4DiCATED,  PIEF•AlD IT FIDEA•L 11(1(11111 ps;1881Y S1fICJI, PLUS *T1 0•0084:4 C 11, A.9vuA1 1EI.8 1'.4•1 P“.3841H  O•NP  OP  ST  Lout  11 1.9 Dt PUS1TS In2/ MATE S OF (s349C.E.  1811141. MOPRTPE 3-78  4-78  5-78  62:78  7-76  8-78 _9-18_10-78 11-78 12 -76  1-79 _ 2-79  3-79  4-79  5-79  1111L10P45 0F__ 00%.I A145 6-19  7-79  8-79  9-79  21.e 830.3  10.7  9.7 816.7  _ 10.1  0.0 (.42.6  ___7-78  9.8  9.3  8.8  s.9  9.8 _  9.8  10.3  _ . 6 .  8-7_8  10.2  9-78  102_7  10-78  10.1  9.8  9.9 _10.2  _ 13-76  9,5  9.1  9.0  _ 12-78  6.7  8.3  1-19  7,7  2 -79  7.2  _3-79  e.9  11.8 650.5  10.5_10.7  11.4 _12.6  13.5 1165.6  10.6  10.0  6.6  9.1  9.1  8.3  5.7  4.9  8,1  e.0  7.9  .. !.9  4.8  3.9  2.9  7.2  2.9  6.7  6.3  5.3  3.3  2.2  0.9  -1.1  2.7  6.4  2.1  5.7  4.8  3.1  7.3  1.4  0.8  2.4  6.5  6.2  5.9  5.5  4.6  3.2  2.6  2.0  1.7  3.1  3.9  7.7  6.9  6.8  6.5  5.9  4.0  4.6  4.5  4.9  6.9  9.3  15.0  8.6  6.4  5.8  4.9  4.7  4.7  5.0  8.6  8.0  10.2  5.5  7.3  7.2  6.7  6.0  6.0  6.1  2.6  8.1  9.8  11.8  10.1  15.2  670.2  6/5.0 015.1) _ 876.1 879._5 •-75,  ,•.•,-74 .  1,-79 7-79 8-79 ,.  19  10-79  7.5  7.4 7.9 8.2 8.4 8.7 11.7  3-78   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7.0 7.6 _ 8.0 0.2  8.8 7.•  093.6 9u4.•  7.9  7.8  7.7  7.4  2.8  6.8  7.0  7.6  9.1  10.5  17.3  11.4  14.4  13.7  8.1  8.1  F.0  7.7  7.7  7.3  7.5  8.1  9.5  10.7  12.1  11.4  13.5  17.6  11.6  7.8  8.0  0.6  9.9  11.0  17.3  11.7  11.3  17.7  17.3  12.9  8.1  8.7  9.8  10.8  11.8  11.3  12.5  11.8  11.2  10.9  9.0  4-19  5-79  6-79  7-19  8-79  9-79  8.5  8.4  1.4  8.4  8.1  7.7  13.5  e.5  7.4  7.4  7.2  7.8  4-78  bb4.8  5-78  2 /8  1-78  (-18  7.9  go -la 10-78 11-78 12-78  1-79  2-79  3-7v  914.1_ vId.5 41.9 38.8  CHIT 141. 84084181  8RIP•91.1) 81' Ft Of 8Al FiLIVEM8lit 9. 1979  NISI/491 8484 OF  ST. LULUS   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 7, 1980  Ihe Minegebli Benjamin S. Rosenthal °Neiman Snibeemmittee on Commerce, Consumer sad Minetary Affairs Committee on Government Operations asese of Representatives Washington, D.C. 20515 )ear Chairman Rosenthal: Thank you for your letter dated December 7 requesting specific information regarding the redemption of a Treasury bill by your constituent, Hr. Thurman Aldermen, and more general information regarding problems encountered by individuals purchasims and redeeming Treasury securities. We contacted the Treasury Department regarding Mr. Alderman's redeaption check and were advised that the check had been issued and moiled by the Treasury in a timely fashion. The Treasury Department is currently researching Mr. Alderman's lost check claim and will be contacting him shortly. Before addresoing your other cuostions, I think that I should first explain that the Federal Reserve Banks act as the Troneury's fiscal agents when they issue or redeem Treasury bills, bonds, end motes. The Banks are only authorized by the Treasury to perform certain duties, such as accepting payments for security purchases, issuing discount checks, glaking definitive delivery of bearer securities, and redeeming definitive securities presented to the Bank at maturity. When individuals such as Mr. Alderman purchase Treasury bills through a Reserve Bank, the role of the Bank is limited to issuing the first discount check and forwarding the purchase application, or tender form, to the Treasury Department. The Treasury establishes and wintains the book-entry account, issues the customer's statement of accounts, and then either processes the rollover reruest or dispatches the redemption check at maturity. We contacted every Federal Reserve Rank regarding your ruestion about timely processing at the Banks. There have been no significant or repeated delays in any Rank's handling of Treasury bill, bond, and note purchases or redemptions within the past twelve months. The Banks have avoided such delays by increasing their levels of automation and/or occasionally working overtime.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  norable Benjamin S. Rosenthal T Page Two  We are not able to estimate with ealy degree of accuracy the number of complaints received by ths Federal Reserve Sado regarding Treasury security transactions bessese complaints have boss received in various areas within each Bank by telsOlinme ss well as letter. The majority of the 4WDplaints, however, involved late receipt of book-entry statements of assomots from the Treasury Deportment or Postal Servioe delays, tee areas that the Banks do not control. $ome Bank, also roestved complaints Meet their ova busy telephone information lines. Those Dodo hsve addressed this pribias by revising their prosodieea and, in some oases, aceuiring new telethons e tlipment. we have atitsmpOsi to identify all the securities related incuiries or eemplaints resolved hose at the Board during calendar year 1979. In descending order, the categories were: general information--47 (2 from same constituent), Treasury policy and procedures--29 (9 fres saw constituent), System policy,--7 (3 from same constituent), Reserve Beak error-3, commercial bank error--1, and Internal Reserve Bank procedure--1. Copies of this correspondence are enclosed. T-Jur remaining ruestione related to the feasibility of compensating swan investors for lost interest. In that connection, we are aware that Congressman Richard Gephardt has recently introduced a bill, H.R. 6054, which would authorise compensation for interest lost. I hope this informption is useful to your Subcommittee. inseritly S/Paul A. VolckiA  Enclosures (Copies of letters that were enclosed are obtainable from ms. Decorleto.)  DD:114DJW:pjt (#V-140) bcc: Mr. Wallace Donna Decorlep Mrs. Mallardi  Action assi nei to Bill Wallace   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  BENJAMIN S. ROSENTHAL, N.Y., CHAIRMAN ROBERT T. MATSUI, CALIF. EUGENE V. ATKINSON, PA. FERNAND J. ST GERMAIN, R.I. JOHN CONYERS. JR.. MICH. EU..10TT H. LEVITAS, GA.  • KAr--  •  LYLE WILUAMS,, OHIO JIM JEFFRIES, KANS. JOEL DECKARD.  NINETY-SIXTH CONGRESS  Congre55 of the Uniteb 464)tate5 3Dott5e of ikeprefSentatibefS  MAJORITY-(202) 225-4407  COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE OF THE  COMMITTEE ON GOVERNMENT OPERATIONS RAYBURN HOUSE OFFICE BUILDING. ROOM 0-377 WASHINGTON. D.C. 20515  •.  December 7, 1979  Hon. Paul A. Volcker Chairman Board of Governors Federal Reserve System Washington, D. C. 20551 Dear Mr. Chairman: A citizen from my district, Mr. Thurman Alderman, has written me about the redemption check from a matured delay he has experienced in receiving a Treasury bill. He also suggests federal legislation to compensate small investors for the interest lost when redemption payments are delayed in this way. A copy of his letter is attached. Mr. Alderman has still not received his check, and consequently my first request is for your assistance in straightening out his problem. I would appreciate any help you arc able to provide. The issues raised by his letter also deserve some more general attention, however, and I am writing to ask for certain information relating to sales of Treasury securities to small investors, including an analysis of his proposal for compensation for loss of interest. As you know, the Commerce, Consumer, and Monetary Affairs Subcommittee which I chair has responsibility for oversight concerning the activities of both the Treasury and the Federal Reserve. Consequently, please treat this letter as both a constituent request and a subcommittee oversight inquiry. The information I am requesting, both for Mr. Alderman and for the subcommittee's information, is the following: 1.  Was the redemption delay experienced by Mr. Alderman due entirely to problems in the Post Office, or might there have been a delay on the part of the Federal Reserve Bank or the Treasury in mailing his check?  2.  What delays (if any) have been occurring in general in Federal Reserve Bank handling of Treasury security purchases and redemptions by small investors within the past 12 months?   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  2  3.  What steps has the Federal Reserve taken to deal with these problems? What steps not yet implemented are under consideration?  4.  Approximately how many investor complaints and congressional inquiries has the Federal Reserve received within the past year concerning such delays or other administrative aspects of the Federal Reserve's programs for small investor purchases of Treasury securities?  5.  Please provide a summary of these complaints and inquiries, identifying the principal areas of complaint and the number of letters that referred to each area.  6.  As an illustrative sample, please provide copies of at least ten such investor complaints, together with copies of the Federal Reserve responses in each case.  7.  Is there any administrative program through which small investors such as Mr. Alderman can be compensated for the interest lost due to delays in Treasury or Federal Reserve processing of their redemptions?  8.  If there is no such program at present, please .provide an analysis of the feasibility of such a program, taking into account the benefit being received by the Treasury from extended use of the investor's funds when such delays occur.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  SIncer_el  Benjamin S. Rosen hal Chrman  BSR:tv Attachment  • — or-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  10  •---  L.4,.vemher 2, 1972 . •••••••••••••••••••••••  ConEressan 3tnjam1n hosenthal House Office Building Washincton, D.C. 2015 Dear Er. Rosenthal:-  1979  _ t7.) -  -  July 16, 1579, we purchased directly from thd Federal :,eserve Board Bank at 33 Liberty Street two (2) Treasury Notes of  each or total of  , Issue Date of July 19, 1979. They were thirteen (13) weer:s bills and were not for roll-over.  Instead we  were supposed to receive the hedemption Check of on October 19, 1979.  The A'ashington, L.C. office claims  it was mailed out to us October 18, 1979.  To this date,  we still have not received it and are concerned about a check of that size floating around.  e realize there is  supposed to be a big backlog of mail in the Morgan St. Station due to conveyor belt problems. In addition, we find that there is no provision for being _paid for the loss of interest during these intervening weeks since October 19; and the same is true if or when we have payment-stopped which would cause another delay of three or four months.  We hereby request that you sponsor  a bill to see that purchasers of Government Securities be compensated, loss of interest just as the money market funds would do in this instance. Very sincerely yours,  thurman ;L. —Traerman   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 7, 1960  Tbe Benerable Richeed Stamm United States limmehat Pest Office lien 4081 Tallahouree. 'Lerida 323(3 Re:  Your Flies 93404W2, 03. 07, and 09  Deer Senator Stone Thank you for your letters of leeelber Lb requesting cements on the ems/seed nerreeeitedeese free several et your cometituemts, whe discussed the implications if Federal Reserve Aolicy for the mortgage sod bemoan markets. the major Objective of recent redosel Reserve oelfcy has been to aeotain the ageompate growth a messy and credit so as to lessen domestic Inflationary pressures emd strengthen the ilasition of the dollar en foreign en.lhemge markets. Progress toward mewrieg on adequate supply if eertsoge credit at rememble rates of fatale.* enquires that lenstimery srammees be redwood. By **optimising Seerdieettly easy memetery pelicy, the Pedsrai Aseerve mlitht be ebbe no twee the general level of interest rates to doselina—inclodimenortipses rates—teed foster a more ample supply at mortgage redit. Aelem-meive increase is supplies of essay and credit, however, would provide only toupees*, relief. Before hea leaders and beeleelee would adjust their behavior to s quickened pees ed inflation, sad interest rates weuld rise sharply deepite the entoouring of newly crested seamy. Lunettes aid high interest rates Oled to go together. as history amply demenetriates, aid both lead to serio..s difficulties for honebuyere. Due ti strong demographic made, demigod* for mortaigo rredit it housing are ept to be Large fa *ming yOtere. mom demo& can nevertheless be mot without a reemrsemoe el inflation provided that inflationary empectatiome aid speculative buying tendencies can be reduced. Over the linge! term, of ow:rse, the Federal Meeerve sins to supply sufficient credit to finance orderly aceeemla growth while returning: to a meninfletimmery environment. in recent years a number of fiamnsial meabst developments hewn lessened the sensitivity ef the mentileee end housias markets to  IWO interest rate*, thereby spreedime die impect if credit restraint   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  the Memorable Richard Uses Map  more broadly through the economy. These inneVstions include the 6-ensth money merhet certificAtes introduced in Jame 1978 and the 3C-memth smell paver ,ertificatse autherised as of January ls 196U, new noadeposit sources of ftmds for &Was* sod tees associations various types of mertgege-heaked ,yass-chrough seeuriCee, sad mortgage revenue bond issue. by anniaipalities. in addition, although the severnmest does mot formally control the allelestton of -redit by se tor, the Federal Reserve recently *shed member oommerclot hanks to ovoid Atndise for sneeulative purooses and to channel their available funds into credit for Drodoctive nut/miles, au:h as homiabuilding. As suggested by your constivionts, the battle against Inflation should at be waged by the Pederal MMOSEve alone. In oartieular, *proiste memeLary aelicy at be a ceemmied by disf-ifdieed fiscal peltcy. Governmemt expenditures most he restrained and esceesive deficits avoided. Noreover, a tax policy 'which encourages wrings, investmemt, and productivity should be employed so as GO redu• inflationary pressures ever the Longer tees. The mats and benefits of regulatory requiremeets at all leves ei speocumemt also need to be evaluated .arefully. Mespensible and effective government flolicies to redu.e inflationary pressures else should essourage restraint by business and labor in their :Iris* and logs division& / hope you find these oemmests helpful. I can be of any further assistance.  Please let me know if  Siacerely yours,  Donald J. Winn Special Assistant to the Beard Enclosures  DFS:.11.1{.vcd (Nog. 637, 638, V-151, V-152) bcc:  Niagara. Kichllne, Seiders Mrs. Mallsrdi (2)  •••••  RICHARD (DICK) STONE COMMITTEES:  FLORIDA  AGRICULTURE, NUTRITION, AND FORESTRY FOREIGN RELATIONS  '11Crtifeb ,Sfatc55 Zenate  VETERANS' AFFAIRS  WASHINGTON. DC. 20510  December Our File:  Paul Volcker, Chairman Federal Reserve System 201 Street & Constitution Waghington, D.C. 20551 Dear  18, 1979  Stimium•-  9349140009  Ave., NW  Mr. Volcker:  Because or the desire of this office to be responsive to all inquiries and communications, your consideration of the attached is requested. Your findings and views, in duplicate form, along with return of the enclosure, would be greatly appr eciated. Tt would also be helpful to me if your response is mailed to my office at the address below and INCLUDES THE FILE NUMBER SHOWN ON THE COMMUNICATION I HAVE SENT TO YOU.  =IL  Cordially,  Richard (Dick) Stone RDS/lah 7nclosure  161  -  ' 0=  PLEASE   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  REPLY TO:  POST OFFICE BOX 4091 TALLAHASSEE, FLORIDA  •  • ••• •  32303 ••••  IN 1.••  • • •*.A .  •  r7 4: 4'  ) ‘ 4.  ... . P‘ii••1› -flt  SAID  Pr  044;•%1  6 drj POI.1E • .(1ILDERS ......,t,Zy D A SSOCIATION a  1  PkiGs  OF MID FLOPIDA  "s1 SF 626 N. Lake Formosa Drive, Orlando, Florida 32803 (305) 898-7661  November 20,  19_79_  C. A. Schmitz President Michael Ashington-Pickelt, First VICE,President Ron Leach • Second Vice President  .Richard Stone United States Senate ' Washington, D.C. 20510 -Dear Senator Stone:  Betsy Godfrey Treasurer Ed Kelly Secretary Paul E. Mashburn, Jr. Immediate Past President George Hansford Immediate Past Second Vice President Richard D. Allison Executive Director   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I am.wr-iting-t-o express my concern that the high interest rate policy of the Federal Reserve Board and the Administration has led to great -danger for the home building industry, the home b-uying public, working people, and the American people in general. The National Association of Home Builders has projected that continuation of this policy will lead to: a deeper and longer national recession; a 50% decline in new home construction during 1980; • loss of jobs for 1.5 million workers in the housing industry and related areas; . denial of the opportunity for homeownership for millions of young families of moderate income; ▪  loss of $24 billion in annual wages;  ▪  loss of $6.4 billion in annual tax revenue;  • increased government expenditures and higher budget deficits for unemployment compensation and other government programs. I b.elieve that this policy is unfair and it will not even be effective in fighting inflation in the long term. Demand for housing is at record levels and will increase substantially during the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Honorable Richard Stone November 20, 1979 Page Two 1980's as the children of the postLwar baby boom seek to purchase their first homes. Any reduction in housing production today will only lead to an increased inflationary surge as the economy recovers after the recession. There are alternative solutions . which will not force housing to bear the brunt of this high interest policy. I urge you to consider policies and programs which would help increase national productivity, save jobs, encourage investment by business and savings by consumers, reduce unnecessary and costly government regulations, and reduce the federal budget deficit. Among these options are: Reactivation of the "Brooke-Cranston" GNMA tandem for purchase of single-family and multi-family mortgages. . Continued use of tax-exempt revenue bond financing as an essential source of mortgage finance for families of low, moderate and middle-income both for rental and home ownership. . Tax exemption for interest earned of up to $1000 on passbook savings to encourage savings to encourage savings and increase productivity. I would like to hear what you are planning to do to prevent a collapse of housing production with its catastrophic consequences for. millions of home buying families and working people. Thank you for your prompt attention to this urgent matter. Sinceie y,  /7, Al Charles  Jay /Immed( te Past Second Vice President Florida Home Builders Association CJ:aew  RICHARD (DICK) STONE  •  COMMITTEES  FLORIDA  AGRICULTURE. NUTRITION. AND FORESTRY FOREIGN RELATIONS  ?Artiteb Zfatez Zenate  VETERANS  WASHINGTON. D.G. 20510  December Our File: c Mr: Paul Volcker, Chairman Feral. Reserve System 20t3) Street & Constitution WaSh'ington, D.C. 20551 Dear  18, 1979  9348140003  51 Ave., NW  Mr. Volcker:  Recause of the desire of this office to be responsive to all inquiries and communicatio ns, your consideration of the attached is requested. Your findings and views, in duplicate form, along with return of the enclosure, would be greatly appreciated. It would also be heloful to me if your resp onse is mailed to my office at the address below and INCLUDES THE FILE NUMRER SHOWN ON THE COMMUNICATION I HAVE SENT TO YOU. Cordially,  Richard (Dick) Stone RDS/lah Enclosure  PLEASE  •  I'm.— Vti"..7•••  r •  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  'r  REPLY TO:  •  .•• r,  POST OFFICE BOX 4091 TALLAHASSEE, FLORIDA  r••:. •  j I'446;  32303  .  AFFAIRS  •  oft 4Ie   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  November 26, 1979  93//vcce:._3  James S. Warner  Senator Richard Stone United States Senate 20510 Washington DC Dear Senator Stone: Please consider changing the Federal Reserve Board's policy of high interest rates which affect home mortgages. This policy causes hardships on prospective homeowners, the building industry and many allied industries and in the long run will not help inflation. When the projected recession is over there will be a strong surge of home-buying and a resultant spiraling inflation again. Halting exorbitant government spending is the only way to stop current inflation. Please consider policies and programs which would increase productivity, not decrease it. Thank you for your prompt attention to this matter. Sincerely, at4,44,1 1-14-44 arner ames S. P  LLOYD BENTSEN  COMMITTEES:  TEXAS   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FINANCE ENVIRONMENT AND PUBLIC WORKS JOINT ECONOMIC  '11Cniteb Zfatez „Senate WASHINGTON, D.C.  20510  January 2, 1980  Mr. Paul C. Volcker Board of Governors of the Federal Reserve System Washington, D.C. 20551 Dear Paul: I have received your Christmas card and want to thank you for your thoughtfulness. Best wishes for a Holiday Season of joy and happiness.  Sin  Lloyd Bentsen   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  January 3, 1980  The Meeereble Seery S. Reuss Choirs's Committee ea Seekleg, Finance end Urban Affairs House of Representatives Washington, D. C. 20315 Dear Chairman Muss: The Soard of Governors is pleased to forward to you its eleventh Asseel Swart on Truth La Loading.  The  report severs coeditor emplioncs, enforcement, legislative resemmeedatiese, mad the &seed y* adainistrattwe functions under the Teeth Is Undies Act for the year 1979. Sincerely, Yuit.,4A,4.  Faclooure Identical letter sent to Chairman Proviire Identical letters also sent to those on ottsehed list. DJW:vcd bcc:  Mrs. Mallard' (2)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Senate Jake Garn Paul Tsongas, Chairman, Subcmte. on Consumer Affairs, Senate Banking Donald W. Riegle Paul S. Sarbanes William L. Armstrong Nancy Landon Kassebaum House J. William Stanton Frank Annunzio, Chairman, Subcmte. on Consumer Affairs, House Banking Gladys Noon Spellman Bruce F. Vent° Walter E. Fauntroy Parren J. Mitchell Thomas B. Evans, Jr. Chalmers P. Wylie Donald Ritter Benjamin S. Rosenthal, Chairman, Subcmte. on Commerce, Consumer, and Monetary Affairs, House Govt. Ops. Cmte. Lyle Williams  Copies of report (w/o ltr.) sent to: Ken McLean Danny Wall John Quinn Beth Climo Paul Nelson Mercer Jackson Curtis Prins Jim Kutcher Frank Maguire Don Tucker   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Jumary 3, 19bC  lhossable Charles Bouviott lienee of lepeeemmtattves ashimetan* 16 C. 2015 Mr.aftwitt;  As yam hoer. 440 of your •ratttU Mr. IIVI Poitevenc, bee raised 4 amebas at memetary petity i44,414 14 TWAMMI 11101448 a totters that yem have imeomeded Our responsesto'OW reque0414 fie cOMMIXO clearly hod met meselved the queetteme fees Mt. mettommetse wilewootmt. !a a telephone ceeveroatios with Mt. JAB Parlay of yew staff, it was agreed that a mete effective appmeech misht be for menbus of the Board's staff me nontagtMr. Oeiteweet direttly by oboes and to explore the tissues with him. On December 31, Sc. David Umdsey, Chloe of the lemitime Section, and Or. lam Vomit, Chief of the Istereettemel Demktes Sootiest had a leesthy cammereettee with Mt. Pritevemt. now dia.:wised the sualyti al sad fectilal quastimee immelved, sawmill as the 11104T4. nifillicY vetting. As prebt0401 to Mr. Nativist, wewill be omadime hi* a csoy of Autirmen 10,14kot's remeAs 4114p141.4i14$ 944414t Federal Useerve Yh he it moo mot clear that Wt. POiteedat was rememeded of the *laden of the Syetesie po1Letee) me hepe that 44 baa a better 4aoretriedlng woo a out thinking. Sistemrely vows, (Signed) Don7.1 T. 'vVina  Mewed j. Winn Special kaaistant to the beard  MJP:vcd (Nos. V-148 & V-154) bec:  Mrs. Mallardi (2) lir. Frail Mr. Lindsey Mr. Terrell  CHARLES E. BENNETT  JOHN W. FARLEY  MEMBER  ADMINISTRATIVE ASSISTANT  30 DISTRICT. FLORIDA ARMED  sr:RvIccs  COMMITTEE  CHAIRMAN OF SEAPOWER SUBCOMMITTEE  Congrussi of tbe Unita( *tato 30otizt of 1krpregentatibec3  SHARON H. SIEGEL  EZIaiSbillritOnt 33.e. 20515  CHERYL L. WRIGHT  JACKSONVILLE orricc 352 FEDERAL Bult..DiriG  THOMAS J. MILLER LEGISLATIVE ASSISTANT  LAURA M. BISHOP  32202  TELEPHONE 904-791-2587  December 17, 1979  JOHN W. POLLARD, JR.  SARAH J. SCOTT TERI A. WOLF  ,  PATRICIA A. CAHILL  BRENDA DONALDSON  SECRETAR I ES  Honorable Paul A. Volcker Chairman Federal Reserve System Washington, D. C. 20551  Lama  Ta„.  Dear Mr. Volcker: I appreciate your patience in handling correspondence coming to me from Mr. Poitevent, my constituent and I enclose a second page of a recent letter that he wrote to me after receiving what I sent on to him. I know you are very busy, but if you could have someone give me any further input on the things that he specifically addresses to you in the enclosed second page of his letter, specifically the first paragraph and the latter part of the third paragraph, it would be appreciated. With kindest regards, I am Sirrrely,  L.TL Charles E. Bennett  . fc :7;W h : 11 7 4 th  CEB:pc Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .  .a.  S.  11  •=•1111  wh' er -: •  THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS  -  .  •sr."7,•  1  I.  -410   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Honorable Charles E. Bennett December 11, 1979 Page Two  would ask Mr. Volcker what interest rate he Incidentally, I wish you _ would think fair if the whole economy was controlled----interest rate, dividends, wages, rents, corporate profits, the works, and whether or not the Fed would support such a program. Also, whether or not he thinks our economy should be protected against the $965 billion Eurodollars outstanding. The first paragraph of Mr. Weintraub's letter reads like a dog chasing his tail. He says the Fed does not have too much to do with interest rates and also that the Fed has a crucial role. He also says if banks could borrow cheaper from the Fed than from other banks, they would just make more money and it would not lower interest rates----that is not so. The Fed could announce it was closing its discount window and lowering its discount rate to 4% (where it should be) and all inter.est rates would come tumbling down. If Mr. Weintraub I wonder if Representative Reuss has seen his does not realize that helSnaiva, letter? There is real concern about the second paragraph of Mr. Weintraub's letter concerning the control of the growth of the money supply. As I understand it, the Federal Government is going to let the money supply increase about 37. annually over the next four to five years, In this connection, I am attaching an article out of the Florida Times Union of November 9; you will note the M1 figure as of 10-31-79, was $376.5 billion and the M2 $938.2 billion. The article does not mention the $965 billion Eurodollars (shall we call them El) outstanding. As I understand it, the M1 figure is included in the M2 figure. Thus, it is assumed there are approximately $1903.2 billion (M2 + El) outstanding. Since we are paying interest to borrow back the Eurodollars, as well as suffering a trade deficit and providing foreign aide, it looks to me like we are going to be shipping more money overseas than we are going to create, thus, starving our own industry of operating funds. M41.13e Mr. Volcker could explain all this too. And, also, what exact figures are usecia-WE-5.-publishes tIn fheM-money supply. It would also be very useful to know what controls are used on borrowing back Eurodollars, how many are being borrowed at this time and approximate interest rates. I hope you will bear with me on all of this as I feel the Fed's present biased policy is Un-American and counter-productive. With best regards, I remain Sincerely,  Earl S. Poittevent, Jr. ESP,Jr/nr Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Jesuitry 2,  Ths lemerable centres e otghi in name of Representatives iNdhington. A. C. 20515  so.r Hr. Coughlin: Thai* you for your resent Latest request/mg omement ems letter yen ree.:eived free yo,.r constiteeets Mr. MI, nael C. nohl, onceirmieg high interest rates. It is tree that sharply increased interest rotes have foltowed is the wake of the memetery ;o1 icy actions announced by the rederal Reserve en Orteber 6. lbws actions were deeigeed to restrain inflationary ores. aurae by previdiel gweeter asc,ramce chat growth la the supply of money Whit remain within otoscribed move sod that rerent ex:emptys rates of .redit =pansies will be reduced. no, Mibl ie c.oncern regarding the effects of theme actions es emall busieSSOSs to medsrstandable. Recognizing the labials timely to be posed for small businesses, howebuyers, as certain other berlowelm, I wrote to the chief emecutive offliers of Sresb esommecial tanks ea October 23, 1979, urging that bending isatitatiems be as reslonswe as peeetble to the -ontiautmg seed for credit by Chess groves. Rswent policy actions did precipitate sharply higher interest rates. more rewently tsterest rates have moved bedew the peek ievels reeehed is October and november. The federal Misery* =eta attempt to bring down interest rates is the sear term by providing fer larger incredal= to the money supply; however, owfb action* mould Shortly be reflected in a quickened pswe of inflation and inflationary exlectations. In time, aed the time could be short, the res.-itimmeLd be higher, not ;veer, interest rates. It is only through a reduction of inflationary pressures and expectations that interest rates at ex7,eriecwe sustained &climes. Our o1 idea are aimed at that goal. The astral of toilettes is nwessary to a hie'e a healthy &Alimony, whic.h will prowLde the typo of environment in which omen business an Jroper. Sincerely, SP:JUL: :vcd (#V-132) bee: Mt. Kichline Me. Pianelto Mro. Mallardi (2)  S/Pa!A. VolckeE  To Mr. Kichline for preparati on of response  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  LAWRENCE COUGHLIN 13T11 0!S1RICY. PENNSYLVANIA  •  r '  COMMITTEE ON  WASHINGTON OrTICE, 306 CANNON BUILDING (202) 22S-6111,  DisritcY Orncr. 4C7 Oitt Hommobitat Pi* WarmsIt. POINSTIvANIA 1,401  APPROPRIATIONS  trongrefS1 of tbe Ziniteb §i§•tate 31)otile of IleprefsentatibeTS  RANKING KNOtiTy SUBCOMMITTEE ON MUD-INDCIENDENT AGENCIES 0.41411(1  (219  171-4040 596-1755  Plastington, 13.C. 20515  SUBCOMMITTEE ON TRANSPORTATION  •f•- — • "'s: . " *.• • 1.11111111111111"11111111111111191111111114 . ..)W46-tv.•,,tv,  -4,  •  4W/  November 29, 1979  Honorable Paul A. Volcker, Chairman Federal Reserve System 21st Street and Constitution Avenue, N.W. Washington, D.C. 20551  70;--%,..61x,:,— •,7 ,.. 4. ; „* 1.. .. I-'45%.›ISA:..4 ‘ , 0:67/  0 iqear Mr. Volcker:  . Nio.  %  e,&P,- .. 0--44k'.a.,1 -4-•---.4.1.4,...04.pre+.,4  iiiiimomift.  Enclosed is a copy of a letter I have received from a constituent, Mr. Michael C. Nahl. Since Mr. Nahl's comments pertain to the policies of the Federal Reserve Board, I am forwarding his letter to you for your consideration.  11111111111 " 4 " 41"4*Iiitri' , --_ • • _ .•  s  .4..  •••7'' WI %Par  • _ •41%, ;‘7.17  .• •  With all best wishes,  rdially,  Le  •••'II1411•1014104••••••••••••••=.44.....•••••••••••••=...  LAWRENCE COUGHLI  —  •  LC:rb Enclosure  .4e-er „Vet.44 '4 C  r  . ._ .. . . •,`..  l'="• •  ....  . ,.  ••• .•••  I. •— ...  .  . a • •% .. . t fik e Or. ' 4Via • maY'l l i. d.. 1•4••• •' kk • v  a  014.•••• kk,' 4"....'km.•• Mt ". !' , k  ,  .  •  •.•  •  .•  •  • ')  ••• ••••  ..  •  _•14 ••• • .  • r . ........••• li•  • ,o• 40t ‘.  • . .  ...  •  I  •••-• •N ..,. Z. ••  .•• .... .r ..  4 •  •.  •  ....  *s• •••  -  I  •••• " " •  •  -"Pa. •••••••• ••3C. ".  i•••  , 4  41.,..••••••••••  • •  •  detk... •As,.•••/••• . • ."/41 .1.0   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .1.1 Vf " , •"-*  •  .•  •  j•-••••••• • f '•••  _ „ ..•••• ••  . •  41tet.'711""•'•04--..1fifr14.; 1 ;-.roc  rit.". ).  ; 02: "  .4•  • ' L. 'AMIN ' ''. Il'Obj t .'..J• • Pu:.‘k ••••  - •  t •  .  •  a. , ..„ -•••• 7 .14,  17'  , ;,4  2,04 • ides ' 1•44../k41....  4-I•  Arty  GENERAL REFRACTORIES 50 MONUMENT ROAD. BALA CYNWYD, PA 19004  I'  4;i.  4111 A.;  r.  41-1  COMPIkNY  (C a '.  (215) 667-7900  MICHAEL C NAHL DIRECTOR - PLANNING & CORPORATE rEVIEVOPMENT  November 12, 1979  Congressman Larry Coughlin 13th Pennsylvania District 432 Cannon House Office Building Washington, D.C. 20515  Dear Congressman Coughlin:  Enough is enough.  These astromically high interest rates are killing me  If you allow the FED to keep squeezing the little business/ man such as myself any longer, many of us will be bankrupt. Please help.  and my business.  Sincerely,  C  MCN/jad   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  WILLIAM PROXMIRE. WIS.. CHAIRMAN HARRISON A. 1p.t4.JJAMS. JR., N.J. ALAN CRANSTON. CALJF. • ADLAI E. STEVENSON. ILL. ROISERT MORGAN. N.C. DONALD W. RIEGLE, JR.. MICH. PAUL S. SARRANES. MD. DONALD W. STEWART, ALA. PAUL Z. TSONGAS, MASS.  JAKE GARN. UTAH 11111 JOHN TOWER. TVA. JOHN HEINZ. PA. WILLIAM L. ARMSTRONG. COLD. NANCY LANDON KASSESAUM, KANS. RICHARD G. LUGAR. ND.  KENNETH A. MC LEAN. STAFF DIRECTOR M. DANNY WALL, MINORITY STAFF DIRECTOR MARY FRANCES DE LA PAVA, CHIEF CLERK  'ZCnifeti Ztafez -.Serrate COMMITTEE ON BANKING. HOUSING. AND URBAN AFFAIRS WASHINGTON, D.C.  NIB  20510  January 2, 1980  Governor Nancy Teeters Board of Governors of the Federal Reserve System Constitution Avenue between 20th and 21st Streets Washington, D.C. 20551  ; 11,te r;  0 . 0 : 7 1111...••••••.  Dear Governor Teeters: I wish to thank you for your participation in the hearings on S. 2002. There is no question that the Rule of 78 is a hidden prepayment penalty which costs U.S. borrowers hundreds of millions of dollars each year. Moreover, uncontrovertod estimates of as high as $600 million did not include the hidden penalties incurred by second mortgage and home improvement loan borrowers. While everyone agreed that these particular sectors of the lending market had increased tremendously in recent years, we lack any hard data on either the extent of this market or the incidence of prepayment for longer term loans of this type.  fr4,4  As I have previously indicated, I do not see any likelihood that disclosure of this practice to borrowers would in any way ameliorate the abuses. Following a review of the testimony and the written statements of witnesses and other interested parties, I have decided to consider two optional revisions of my original legislative proposal: A.  A complete prohibition of the use of the Rule of 78 in precomputed consumer credit transactions, phased in over a threeyear transition period; or  B.  A prohibition against the use of the Rule of 78 in precomputed consumer credit transactions with terms greater than 48 months, effective 18 months after enactment.  Option A would involve a two stage transition. A prohibition of the use of the Rule of 78 in transactions having a term in excess of 48 months would become effective 18 months after enactment. While substantial dollar penalties may be imposed upon individuals who prepay longer term consumer transactions subject to the Rule of 78, it was   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  /61 _  r ":7r  11111111=•16•••••••••  Assonie610111101111P  .••••••••••••••••=••••••...  •  also evident through the hearings that the cumulative dollar penalty imposed upon short term borrowers quite probably exceeds $100 million dollars annua lly. Additionally, the Rule of 78 distorts the disclosed annual percentage rate of short term loans by at least .5'0 nationally and quite probably by a higher percentage in the majority of prepaid transactions. No justificat ion was offered other than the fact that it was a very substantial reven ue producer for lenders who employ it. The three-year transition period in Option A would permit lenders to petition their state legislatures for rate increases on shorter term loans, where appropriate. Option B would halt the hidden penalty exacted by the Rule of 78 only in longer term transactions. The record contains a considerable amount of knowledgeable testimony that the changeover from a Rule of 78 rebate method to an actuarial rebate method would be a relatively uncomplicated proce ss. An 18 month transition should be adequate under the circumstances. In addition to the options set forth, above, I will also consider authorization of a reasonable acquisition fee as well as any possible conflicts with state laws which may occur as a result of enactment of either optional revision. I am hopeful that these proposals provide a framework for const ructive dialogue as this legislation undergoes revision prior to markup befor e the full committee. I look forward to your participation in this proce ss. I remain willing to forego the legislative process should lende rs voluntarily curtail the abuses inherent in the Rule of 78. I recog nize that the likelihood of this occurring are slim indeed, in view of the subst antial profits involved. Since ••••  thIt  Paul E. Tsongas, Chairman Consumer Affairs Subcommittee  •-....- •-:.  .4.,  1 • •-•• Digitized.for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I ... _  , ...  .•  s.  •  , , • ' . . : e t f:1 %.:. ' 1. . " .....t. ,,. ."......"cr 1..4 vinf . NP_.. A.010 •' ' I s.:,s 11; i ,„,11. i... . ..?,.. 1 ....::. , *e• !...,f . sr , . ..  . .  1-...  4 '41".  •  " ' •.- .•  y.,-.T..1" ,,...."..:. .—,. `....e".t.L.. . 'r:iet.„ ° .. • ••• -6,4:Yai  NINETY-SIXTH CONGRESS BOB ECKHARDT. TEX., CHAIRMAN JIM SANTINI, NEV. ALBERT GORE. JR., TENN. IILIP R. SHARP. IND. ANTHONY TOBY MOFFETT. CONN. ANDREW MAGUIRE. N.J.  CONGRESS OF THE UNITED STATES  TOM CORCORAN. ILL. WILLIAM IE DANNEMIEYER. CALIF. JAMES T. BROYHILL.  DOUG WALGREN. PA. RONALD M. MOTTL. OHIO MICKEY LELAND, TEX.  •  NORMAN F. LENT. N.Y. MATTHEW J. RINALDO. MARC L. MARKS. PA.  ROOM 2323 Houst OrriCE Btxt.otN0 PHoNt (202) 225-4441  RAYBURN  NC.  (rx OFFICIO)  MARK J. RAABE CHIEF COUNSEL/STAFF DIRECTOR  HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS OF THE  TIMOTHY E. WIRTH, COLO. EDWARD J. MARKEY, MASS. HARLEY 0. STAGGERS, W. VA,  COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE  (rx orricio)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  WASHINGTON. D.C. 20515  January  7, 1980  Mr. Paul Volcker, Chairman Board of Governors Federal Reserve System Federal Reserve Building 20th and Constitution Ave., N.W. Washington, D.C. 20551 Dear Mr. Volcker: The Subcommittee on Oversight and Investigations has been conducting a year-long inquiry into the relationship between energy policy, energy prices and inflation. As part of that investigation we have found it necessary to inquire into the role of monetary policy, in general, and interest rates, in particular, as they affect pricing and production decisions in the economy. We would appreciate your written response to the following questions. 1. During the first nine (9) months of this year, inflation rose at an annualized rate of 13.7 percent. Of that, almost 4 points (3.969) or 29 percent of all inflation is due to the direct impact of increases in energy prices (gasoline and home fuels). The Council on Wage and Price Stability estimates that an additional 2-4 points may be added to the CPI because of the indirect effects of energy prices. These calculations do not include the impact of the most recent round of OPEC price increases on world or domestic energy prices. In view of this massive increase in energy cost, how much influence can restrictive monetary policy have on consumer price levels? Specifically, what is your estimate of the rate of increase in the consumer price index for calendar 1980 assuming; (a)  Federal Reserve Board retains the money supply goals established last October;  (b)  The Fed allows the money supply to increase at a rate commensurate with the increase of fiscal year 1979 (third quarter 1978 through third quarter 1979);   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  411  Mr. Paul Volcker Page Two January 7, 19S0 (c)  The Fed establishes a growth rate for the money supply consistent with an unemployment rate of 6 percent or less?  2. Given the current restrictive monetary policy, what average levels of the prime interest rate and the principal mortgage interest rates do you foresee for calendar 1980? What direct and indirect impacts of these rates on the food, shelter, medical care and energy components of the consumer price index do you foresee for calendar 1980? Given the lag between interest rate increases and pricing and production decisions in the economy, how long do you estimate it will take for the economy to absorb the interest rate increases incurred in the last quarter of 1979 and any such interest rate increases you foresee for 1980? S. Attached is a series of three graphs reproduced from the Council on Wage and Price Stability's inflation update dated November 21, 1979, in which the Council compares the trends in food and energy prices, underlying rates of inflation (defined as the overall CPI less food prices, cost of home purchase, finance, insurance and taxes, energy costs and the used car price index) and unemployment rates of the 1972-1973 period with that of 1978-1979. These graphs dramatically depict the consequences of food and energy price shocks of 1972-1973 on the inflation and unemployment of the 1974-1975 period. What role did monetary policy of 1973-1974 play in increasing the underlying rate of inflation and the unemployment rate depicted in those graphs for 1974-1975. What are your projections for the underlying rate of inflation for 1980 and the unemployment rates for 1980-1981? If you expect the current restrictive monetary policy to be more effective in controlling the underlying rate of inflation during 1980 than it was in 1974 and if you expect the unemployment impacts in percentage terms to be less in 1980 and 1981 than they were in 1974 and 1975, please explain the rationale behind such forecast. What distributional impacts do you expect restrictive monetary policy to have on the economy? How will each decile of income recipients in the United States fare under the twin impacts of the predicted inflation and unemployment during calendar year 1980? 4. The Council on Wage and Price Stability recently testified that the long term impact of steadily rising interest rates may be inflationary because it discourages new investment. What impact has the secularly upward trend in interest rates during the decade of the 70's had on investment and productivity?   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Mr. Paul Volcker Page Three January 7, 1980 To what extent is the secular trend responsible for the supply-side problems which seem beyond the control of short-term monetary and fiscal policy tools aimed at controlling aggregate demand. More specifically, to what extent has this trend aggravated the inflation-unemployment trade-off (outward shift in the Philips curve)? What implications do these higher interest rates have for continuing stagflation in the 80's? What does this secular trend portend for the ability of the manufacturing and utilities sectors to convert to less oil-intensive production methods and the private economy as a whole to adopt desperately needed energy conservation technologies. We would appreciate your response to these questions by the close of business January 21. Should you have any questions regarding this request, please contact David Nelson, or Milton Lower of the Subcommittee staff at 225-5365. Sincerely,  Bob Eckhardt Chairman Subcommittee on Oversight and Investigations Attachments cc:  Mr. Jay Brcnnerman  .1. •.  4  1974:1 - 1975:1 S 1:2-1  41•  35 30 25  FCCD 71:ND ENERGY pRIczs (3-month annIlal -e pe_rcent;-ig rates of change)  1978 - 197'—  20 19721- 1975 15 10  ,  ,I III  II  I  IV  II  I  wq....-w....L  wocirmeorrararMimmoirso!,..MMS44241.4.4vermtworermarormomm.;..041.1444-  •  III  IV  I  LI  IV  I  LT.I  LI  17  1 75  '74  L-1 73 or '79  '72 or '78  LLI  1974:1 - 1975:1  LNDEPLYLNG PATE CF n:FLAT cti (3-tronth annnA1ized percentage rats of change)  10   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1578 - 1979 ........  1972 - 1975  I 1 r I .1MW 4661.0WeVorwerwom4...m.41Wmr.4..4Wrinswl"w4M.M4rW1 .  II  I L-  I  IV  III  LI  III IV  I  II  IV  I  II  1 74  1-'73 or '79  '72 or '78  III  III 75  I.V  1974:1 - 1975:1 ion ..  PATE (Q1.1,-47-terly Averages)  UNE`TLOYMENT  1978 i 1979  4  fl 1972 - 1975  II  III  IV  — 172 or '72  /  II  III  1-'73 or '79  IV  I  II  III  IV  71-  I  TI  7.7  . . . • . • ..  .• lo•(.0%/r :•  POARE DT- CiLivEr.low,  •. \ C:o .  ..-.--:,;-:::. .•  •  f_,  OFT IE  ',* 1.'  .. .,.  FEDERAL RESERVE SYSTEM  • :7  •  NIA1;NGTON. 0 C. 205E..,1 ••% •..  • •• . •• •••• . ,••• •• 9„-• •. rirAi .•  .• NANCY H. 7EETERS  MEMBER OF THE GIOARE)  December 20, 1979  The Honorable Sam M. Gibbons Chairman Subcommittee on Oversight U.S. House of Representatives Washington, D.C. 20515 Dar Chairman Gibbons: As requested in your letter of December 3rd, I am pleased to provide additional information in connection with the Underground Econo:-Ay hearings held on September 10, 1979. Sincerely, /714  / Enclosure  ithiTIPC" •••`"*" :Twg . ""ri--1•:''f:•:;• •11:••••?' . 4i..1•:!..:• • • ., •:• •: •••• '!;• '.:•. • • •I•   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  q4"..1 1,1.1• •  o •  '11'1 •.‘  ,•.  :• $ .1%  ,.••• • 1‘ • '"  •  • ,•fr;  t, 1.•! r f.4 tz 41k• • i•••,' • •-: !r;'7 .113  •-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Crinparison o  1.  the_ Monot iiry_ 71112r_oach _ y _ _ _ to _ the _ _ _IRS's _Metho _ _ _ _ _dolo9 _  Has the l'.!dersil Reserve System been able to accurately antic ipate the rise in demand for currency in recent years? If you have had problems, do y)u attribute them to an upsurge in the undergrGund econo my? If nct, to what then? AL the a,.11r!ate lovel the Federal Reserve has been able to accurately ;:ati,7ipate th.? rise in the demand tor currency.  rl'he IRS report calculates that average household holdings of currency is somewhere between $800 and $1,000. As discussed at the hearing, low income households tend to deal more in currency. However, these amounts, as average, are so high that this factor alone does not seem capable of explaining such amounts. Iat other facto rs are you aware of that might contribute to such high averages? First, a cautionary ii-.3te might be raised about the use of averages in this analysis since average holdings may provide a misleading estimate of what a typical individual might hold. !or example, in 1975, per capita (not per household) currency holdings were about $330. While this figure night seem high, it does not necessaril y mean that a ron picked at ranlom would be expected to hold such an (amount. Same Would hold larger amounts and some smaller. And it is quite possible that a relatively small fraction of the population might hold a si7.eahle portion of the total currency stock. Wv? do know that the size distribution of demand deposit frIldin2s is highly skewe d; in 1975, six tontns of one percent of demand deposit account holders held about half of all demand deposits according to estim ates compiled the FDTC. If the same were true for currency holdings, it would imply that the vast majority of the population (99.4 perce nt) would have per capita currency holdings of $165, i.e., half that of overall capita currency holdings. Turnini to the question directly, we do not have a coherent microeconomic explanation of the factors explaining the magni tude of average household currency holdings. SOW.? currency is held in coin collections or is hoarded, but most is used for transactio ns. The relatively high rate with which currency appears to chang e hands and the stable relationship between aggregate consumption expenditures and the curr.?ncy sLock attest to this interpretation. Undou btedly some part of currency transacti.ms represent underground transactions, but the magnitudes involved are not known.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2-  Is the Underground F,concxny a Problem for the Federal Reserve System?  3  at do you hel are the implications of the underground economy for the conduct of monetary policy by the Federal Reserve Board? The underground economy potontially has important implications for the formulation anl i!Iplementation of monetary policy objectives. Unlerground economic activity may affect the behavior of the monetary a:flregat2s in ways that weaken the links between money and nominal speridim Por example, shocks hitting the economy may have considerably different impact on underground activity than above-ground activity and thereby affect, say, M-1 holdings. There is, howver, no clear-cut evidence to suggest that the underground eooromy hls had or is having any important impact on the conduct of monetary policy. As noted earlier, there has been a predictable relationship between aggregate currency holdings and aggregate consumption spenlitli. If this relationnip 're to (Ieteriorate, a variety of studios including an examination of the underground economy w;)ull be und._,rt..:ken.  4.  At a ikY,P1154er 15, 1979 Joint Ecv.nxImic Colnittee hearing, James S. Henry stited: "W, need to reexamine the long-run effects that a more coplete EFTS !ystola of transactions, with less use of cash, might tv-we on various forms of illicit activity." Undoubtedly some income goes unr.?ported to the Internal Revenue service because people do not have access to convenient bank accounts, and would not otherwise keep accurate r.N7:)rd5 fo tax purposes. Furthermore, undoubtedly some workers who are likely not to report their cash income get paid in cash when they would be paid by bank account if personal drafts were more readily accepted in our economy.  (.1)  Ds the Federal R-rv,rve think that the underground ,?conorny should be a consideration in destennining whether to improv.i electronic funds transfer systems and whether to mal,:e them morc? available? n';o of el-ctrcnic funds trinsfer systems (EFTS) is on a voluntary basis. Acurate information about the rebetween cash transactions in the underground economy and any associated check transactions is not presently available. Hence, it is not possible to estimate the impact, if any, of activity in the underground economy on the utilization of FrTS facilities.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • -3-  p).-..s the P(yleral Rr.‘serve intend to study this question of th ! relationship between banking policy and the und2rground economy in the near future? Mat are your plans? 'rho Federal ReeLve has no plans to undertake such a study.  11"hat can the Federal Reserve and Banks in General do to liele_Solve the Problem of Unreported Incme?  5.  DJ you think that riire pockets of income tax noncompliance could he uncovered if VA required that smaller amAints of currency deposits and transfers hid to he reported to the Treasury? Are there other .ictions or enforeement tools that should be considered by bank If small a:1)Ants of currenev deposits and transfer; at corarcial banks ha i to b .. retorted to thi Treasury, wr? be that additional nocVots- or noncornpliance he uncovered. However, these additional reportin1 ri.\laireiry.nt.s would result in an increasingly vigorous bookkeepin j - task 1,A7 colrnercial hanks. This prospective impact upon c-mam(Tcial shpul.-1 he fully evaluated before other reporting ro idirernents imp!-;(-, _.‘1.  b.  Please ellhorato on the rorence made at the hearinl to Federal Reserve coo,)eration with the Comptroller of the Currency and the FDIC to improve exa:aination procedures and to have commercial hanks monitor currency flow-; b.Ater. The Federal Risserve is currently w-..)rking with the Federal Deposit Insurance Cortoration and the Comptroller of the Currency to develop mpre uniform approach for exapining all Financial Institutions' monit,-)ring of currency flows under the auspices of the respective alencies' authorities. At the beginning of this year, the Rank Secrecy Act Committee, LI subcoarlittee of the Federal Financial Irr;titutioas Council, decided that all the bank regulatory agencies needed a Iditional detailed guidelines for examination. Thus, a c)m;olillt.d effort is underway to improve training and develop nure stand-ardized procedures for exarination at each of tho. respective 4:)reover, at Treasury's request to re-cnforce training of examiners in this area, the Federal Reserve sent a Federal Reserve Bank official, to the Miami area to conduct a seminar for Bank examiners.  4e,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4-  Since this official is recognized by all three regulator the exprt in Fia-inc.:ial 'institution:3' monitoring of curr in all li1:-?1iN101, he will also be instructing at the in ex am i n on hesCccCLro.)uontpiltt. ef for t aPn(l uvrFae rcaeert oe t Te hloeisrf l' xle ra l Tosi t n Off iceaotif t rol of the C u r rency aIcnnsod ed aiCvl rRpee re:;ult in the implementation of standard evenhand witshould procodires for checUng commercial hanMs compliance Secrcy Act.  as  hr? ials ion  Are Additional Stiklies Norxiod?  7.  In light ot the IRS report has the Federal Reserve Board considered undrtaking rore thorough studies of currency flows and other effects of a large underiround economy on our banking system? Please describe any current or contemplated studies, other than those described in your an.;wrs to previous questions, that the FRB is undertaking or cooperatimi with. The Federal Reserve System is not conductinl any additional studies of the undc?rground economy per se. There are ongoing studies of the behavior or nowtary aggregates and various aspects of the payments ;1,2chanism. Blit. the focus of these studies is not on the underground ..conomy.  0  DAVID BOREN  CHAIRMAN, SUBCOMMITTEE UNEMPLOYMENT AND RELATED PROBLEMS  OKLAHOMA  WASHINGTON OFFICE:  COMMITTEE ON FINANCE  440 RUSSELL BUILDING  'Unita)Zfafez Zerrafe  WASHINGTON, D.C. 20510  WASHINGTON, D.0  STATE OFFICES:  20510  NUTRITION AND FORESTRY  621 NORTH ROBINSON, SUITE 350 OKLAHOMA CITY, OKLAHOMA  MEMBER: COMMITTEE ON AGRICULTURE,  73102  ROBERT S. KERR BUILDING  December 28, 1979  440 SOUTH H04J STON TULSA, OKLAHOMA 74127   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Mr. Paul Walker Board of Governors of the Federal Reserve System Washing ..;r1 C. 20551 Dear  len..  Thank you for your beautiful Christmas card. Your thoughtfulness and expression of friendship is much appreciated and has added to the joys of the Holiday season for us. Receiving Christmas cards and messages from friends is one of the nicest things about this season. Molly and I hope that 1980 will be a happy and successful year for you and yours. Sincerel  David L. 116i-en United States Senator DLB/min  t..4C3 C=::0  CD  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  C41 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTE M OFFICE OF THE COMPTROLLER OF THE CURRENCY FEDERAL DEPOSIT INSURANCE CORPORATION  November 20, 1979  The Honorable William Proxmire Chairman Committee on Banking, Housing and Urban Affairs United States Senate Washington, D. C. 20510 Dear Mr. Chairman: In response to your November 16, 1979 letter to each of us regarding proposed legislation to provide loan guarantees to the Chrysler Corporation, enclosed is a report prepared jointly by our supervisory experts which reflects the best opinion from our respective staffs in this matter. If you have any further questions concerning the report, please do not hesitate to contact John E. Ryan, Director, Division of Banking Supervision and Regulation, FRB, (452-2893); Paul M. lIoman, Senior Deputy Comptroller of Bank Supervision, OCC, (447-1770); John J. Early, Director, Division of Bank Supervision, FDIC, (389-4297). Sincerely,  Paul A. Volcker Chairman, Federal Reserve Board  CI,  lifi ll . Ieimann Comptroller of the Currency (1  t;( Irvine II. Sprague Chairman, Federal Deposit Insurance Corporation Enclosure  BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM OFFICE OF THE COMPTROLLER OF THE CURRENCY FEDERAL DEPOSIT INSURANCE CORPORATION  Staff Report on Bank Loans to Chrysler November 20, 1979  This memorandum is submitted in response to questions raised by Senator Proxmire in a letter dated November 16, 1979, concerning bank lending to Chrysler Corporation. That letter notes that in testimony before the House Banking Committee, John McGillicuddy, Chairman of the Board of Nlanufacturers Hanover Trust, which is the lead bank in the Chrysler loan arrangements, indicated that: (1) the regulators, through the Shared National Credit Group, have reviewed the Chrysler situation and concluded that existing credits are classified; (2) because of this the banks are now on notice that they must proceed with caution; (3) extension of new money to Chrysler would, by virtue of the regulators' decision, create the possibility of lawsuits for breach of fiduciary responsibility; (4) new loans on an unsecured basis are not feasible by the banking community; and (5) the banks must evaluate not only the risks associated with the Chrysler Corporation, but also they must be mindful of the regulatory assessment of the risks. Senator Proxmire requested an indication to the Committee by the Federal banking agencies as to:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (1)  the current basis for evaluation of Chrysler credits;  (2)  the accuracy of Mr. McGillicuddy's statements, especially those relating to limitations being placed on the banks by the regulators with respect to new loans; and,  -9, (3)  it be accepted, would have on the evaluation of existing and new Chrysler credits. Each of these subjects is addressed below.  (1) Current Basis for Evaluation of Chrysler Credits The bank regulators are charged with the responsibility of promoting a sound banking system and for protecting bank depositors who provide the bulk of the funding banks use in meeting the credit needs of the nation. In discharging this responsibility, banks are examined to determine their condition and future viability to serve the public. A key element of the examination is the appraisal of a bank's loan portfolio since this usually represents the largest source of risk and greatest potential for impairment of the bank's condition and future viability. The loan appraisal process is performed individually with respect to each bank; however, in the case of large, shared loans, a somewhat different approach is taken from the case with loans held exclusively by a single bank. These loans are evaluated under a program called the Shared National Credit (SNC) Program. Bank credit to Chrysler Corporation is included within the SNC Program. This program was developed to provide uniformity in the examination process of evaluating major credits ($20 million or larger) that are shared by two or more banks. Under this program, a team of three or more examiners (representing the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation) examines these credits at the lead or agent bank;   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  the effect that the Administration's proposal, should  -3discusses the loan with management; and, arrives at an appraisal which then also applies to the participated portions at other banks when those participants are subsequently examined. The analysis of the Chrysler Corporation loan was based on the books and records of Manufacturers Hanover, upon statements made to the examiners by lending officers of the bank and upon other information obtained from other sources thought to be reliable. On the basis of this review, the examiners determined that the Chrysler Corporation loan had well defined weaknesses that could jeopardize the orderly liquidation of the debt and that there was a significant possibility that bank lenders might sustain some loss lithe deficiencies were not corrected. Extensions of credit to Chrysler Corporation's major subsidiary, Chrysler Financial Corporation, were subject to criticism but were not classified.  (2) The Accuracy of Mr. McGillicuddy's Statements With respect to Mr. McGillicuddy's first and second points, we have confirmed above that loans to Chrysler Corporation are classified. Considering the current classification and Chrysler's financial difficulties, we presume that the banks will proceed with caution. However, we believe that decisions with respect to classified loans should be based on the bank's own analysis of the situation taking all factors into account. As to Mr. McGillicuddy's third and fifth points, we note that any time a borrower suffers significant financial reversals, a lending institution must carefully weigh the merits of facilitating -- through additional lending -- the prospect for a return   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • 4  to profitable operations and full debt repayment against potential losses that may occur if the financial viability of the company cannot be sustained. For example, many banks extended additional funds or modified terms on classified real estate ventures following 1974 in the interest of averting or minimizing losses. Supervisory policy does not require criticism of the practice of making additional advances to borrowers whose loans have been classified if such additional advances are prudent in view of the bank's overall financial condition and the future prospects of the borrower. Lending institutions must assess the risk that additional lending to a troubled company might increase the likelihood of lawsuits by shareholders. The possibility exists that classification of a loan by the regulators might be used by potential litigants as evidence that management should have been aware that the loans contained more than the usual degree of risk. Of course, the possibility of litigation exists in troubled loan situations regardless of whether new advances are made and irrespective of loan classifications by the regulators. With regard to Mr. McGillicuddy's fourth point regarding the feasibility of the banking community making new loans on an unsecured basis, we believe that it is inappropriate for the bank regulators to make broad general comments covering the entire Chrysler relationship with its banks. We reiterate that each bank will have to exercise prudent business judgment about the continued prospects and viability of Chrysler Corporation and whether additional credit, secured or unsecured, should be extended and on what basis. This judgment also will include a determination of the risk involved in relation to the bank's total portfolio risk and other special circumstances.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .  •  • -5-  (3) The Effect of the Administration's Proposal on Existing and New Loans To the extent that approval of the Administration's proposal would provide an additional $3 billion, it would, at a minimum, improve the short-term cash flow prospects of Chrysler and might see the company through to the time when -- with new products or otherwise -- profitable operations could be resumed. New loans and existing loans will be evaluated on their terms and conditions and vis-a-vis the terms and conditions of the Government guaranteed loans and the evolving situation with respect to Chrysler. However, since so much remains uncertain at the present time, it would be inappropriate for us to predict future examiner evaluations. Of course, the examiners would not classify loans that were fully guaranteed by the C. S. Government.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis
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