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http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Collection: Paul A. Volcker Papers Call Number: MC279 Box 9 Preferred Citation: Congressional Correspondence, 1979 December; Paul A. Volcker Papers, Box II I II 9; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://finclingaids.princeton.edu/collections/MC279/c303 and https://fraser.stlouisfed.org/archival/5297 The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. 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Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 1. 609-258-3385 (fax) muddaprinceton.edu http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis December 31, 1979 The loaorablo JobsJ. fikedloo Miserity Leader Comes of isgoesestatives Ceshiestme, I. C. 20515 osier Mr. Rhodes: 1 ma pleased to respond to year Lofton a Deesmber It, Ca you **pros, disappoiorsmat that year amehmest Mi. C. fl. smamm. was not *beers be 117, to some se the Demodes Commoner Adviser, Council. As you know, osly thirtoos new mosibers wore sppoiated to the Cassell is 1979, fros o total et nearly 400 lodtwideels *he 'ors voessoondod for membership* Immesmeh as the Cassell'. nmebersbip collestively reproonsto the interests of our estlwo slalom in the area of semeamor credit vegetation, many Mighty qualified eed interested sesames/ lihs Mr. penbmo will mot hoot so opportunity to serve at this tige. Ten eay beam:OW that Mr* pioltoswill wilt be cossiderod vhse sew member* to the Coma are selected is 19110. Slew:rely, SZEaul A. JPirsed (UV-146) bee: Mrs. Mellardi (2)L.7 Janet Cart Ana Maris Bray (for follev-up) JOHN J. RHODES 1ST DISTRICT, ARIZONA f O H-232. THE CAPITOL WASHINGTON. DC. 2310 RAYBURN HOUSE °MC,. BUILDING WASHINGTON. D.C. 20515 JOHN J. WILLIAMS 20515 Office of die JAMES R. FELTHAM DENNIS J. TAYLOR ILeaber GERALD LIPSON CLARA POSEY Unita, tqatef5j.boursc of lArpregentatibto Zilasl)inqton. D.C. 20313 December 11, 1979 f f.l( ( 4f, The Honorable G. William Miller Chairman Federal Reserve System Washington, D. C. 20551 Dear Mr. Chairman: Understandably, I was most disappointed that my recommendee, Mr. R. D. Dunham, President and Chief Executive Officer of the Wells Fargo Credit Corporation, was not named to the Federal Reserve Consumer Advisory Council. It is possible, however, that at a later date a member of the Council may resign or be otherwise incapacitated. In that event, I urge that Mr. Dunham be considered for appointment as a replacement. Knowing as I do of his excellent qualifications, I am pleased to once again recommend him to you. urs incerely, 4, r**44L SIN John J. odes, M. C. Minority Leader Am; • JR/wjm lenne. "" • •i" http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ; • • • • • ' . . A •• "•••7 • •• r http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • ....... CM GOVe • BOARD OF GOVERNORS •0 ' • CO / OF THE FEDERAL RESERVE SYSTEM :c3 WASHINGTON,0 C. 20551 44, •• PAUL A. VOLCKER • IQAL •... • • CHAIRMAN December 21, 1979 The Honorable J. William Stanton House of Representatives Washington, D. C. 20515 Dear Bill: Your point about the ceiling on Bank "give aways" is well taken. The staff has this matter under study and it is expected to be considered by the Board in the near future. We will keep you informed of any developments. Best wishes, J. WILLIAM STANTON 11TH DISTRICT, OHIO • Action assignei to 0. Petersen ft! f T 2466 1tArilifin4 Dun twari WASHINGTON, D C. Pilopar 20515 PHONE: AREA Coor 202, 225-5306 Congre5.5 of the aniteb ikate5 COMMITTEE ON BANKING. EINANGU: AND Ar+p A (..oDE 216, 3, 12-6 in/ MANfon Prr,T Or t Irr. 10746 NORTH MAIN STREET 3f)otuse of Ikepre5entatibt5 Oino URBAN AFFAIRS Ulatsbingtott, ;3.e. 20515 COMMITTEE ON SMALL BUSINESS December 11, 1979 Hon. Paul A. Volcker Chairman, Board of Governors Federal Reserve Board Washington, D. C. 20551 Dear Chairman Volcker: It has recently come to my attention that under the Federal Reserve Board's regulation Sec. 217.2(b) of Regulation Q, the dollar value of so-called "give away" items which an institution provides in promotional campaigns is limited to $5 for investments of less than $5,000, and $10 for investments of $5,000 or more. I understand that this limitation was established in 1970. Since 1970, however, the value of the dollar has been continuously eroded by inflation to the point where a 1970 dollar is only worth 52ct today. In light of this situation, I would hope the Board and the other members of the Coordinating Committee would consider reviewing the current limitations. Possibly, the $5 limit could be increased to $10, and the $10 limit to $20. Please keep me informed of any plan for reviewing this issue. Sincerely, S. William Stanton JWS:jsn http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 411:C1 Am A C..00r 216. 274 11444 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis December 18, 1919 The Senewible Peva Sotainia Chairmen Subcommittee en Comm,faskill 44mmdttee es Staking, Moues end Sams Affairs limns of Representative Indelngton, D. C. 20515 Deer Chair--m Amemesio: Thcik yen for year letter of Sivelber 2$ requesties t formpl Do‘rd interpretstiom me the definition of suneutherised eteetronic fund unetutheft transfer" in Reemlittiee Si. Specifically, you iingeire mhethet en rimed electronic fuad treader has occurred in the following mese: An employee fureishes his mennotary with his cl.bctremic fund trmseder assess device (includieg the peesenel identificatins sember) sad iestrmets her for te withdrew $50 for him. She imstead vithdtmes '100, beeping On herself. It is your opteies that the empleyeres ammonia' institution because 'said met be limbic for sew enema withheld by the secretary, (k) the definition of lowolherieed electronic teed triumpher* Le 1 203.2 iated by e of Sepulaties I speeifiselly elladodes my trawlers "init ow farnisendwith the access devise pewee ether the. the awassomr has metia to the 411110.1110198 INISINIMS by the coMomOrt unless the coolkombir fled the fimemelal institsties involved that trawlers by that person furniebed ere me larger authorised.* Vies bottom that slime the employer the secretary with the seises device, any transfers made by her autos setically fall within the quitted exclusionary prowieima of 11 205.2(k). The staff of the Division af Consumer and Community Affairs agrees with your position. It is their unofficial opinioe that the transfers by the secretary in theee particular eircumstamess see met umeutharined transfers within' Obe 'easing of the Act mod tamolotioe, end that the eopleyer weld be fully liable for any lessee towelled es a result of her ese et the *cc.** device, until be notifies the instifttion. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The limmumMble ft.* Alemotie hiers Although pee 'requested a fermi Board interpretation ot Sega. letter 11, I de net believe that eseh ea interpretation is esseesery in light 44 the ittaft's Wads& that the statutory provision is elegy. Staastrely, ioickg :11114:vcd (#V-131) bcc: Ma. Barr Mrs. Mallardi (2) AMMala - .0.41111••••.. FRANK ANNUNZIO. ILL., CHAIRMAN GLADYS NOON SPELLMAN. MD. BRUCE F. VENT°. MINN. WALTER E. FAUNTROY. D.C. PARREN J. MITCHELL. MD. CURTIS A. PRINS. STAFF DIRECTOR TELEPHONE: 225-9181 Action assignei to Janet Harlirth info copy to Gov. Teeters THOMAS B. EVANS, JR., DEl . CHALMERS P. WYLIE, OHIO DON RITTER, PA. U.S. HOUSE OF REPRESENTATIVES NINETY-SIXTH CONGRESS SUBCOMMITTEE ON CONSUMER AFFAIRS OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS ROOM 212 HOUSE OFFICE BUILDING ANNEX WASHINGTON, D.C. 20515 November 28, 1979 1 1/1 3/ Honorable Paul A. Volcker Chairman Federal Reserve Board 20th St. & Constitution Ave., N.W. Washington, D.C. 20551 Dear Mr. Chairman: Misunderstanding of an important provision of Regulation E has resulted from an article in the October 17, 1979, issue of the American Banker entitled "EFT Act Legal Snarl Seen." The article indicates that if an employer furnished his secretary with his electronic fund transfer access device and told his secretary to go to an automated teller machine and withdraw $50 and she withdrew $100, keeping the extra $50, that this would be an unauthorized transfer and consequently the bank would be liable for the $50 loss. This is not true. Under the Electronic Fund Transfer Act (Section 903(11)) and Regulation E (Section 205.2(k)) the definition of an "unauthorized electronic fund transfer" clearly makes the employer liable in such circumstances. Consumer legislation is often criticized for being so pro-consumer that it is unfair to financial institutions. As a result, Congress made a special effort to provide in this law that a bank would not be liable in the circumstances described above because it would be unfair to impose liability on a bank since the loss was a direct result of the employer furnishing his access device to another person. I do not want this misunderstanding to go uncorrected because it is so serious. Accordingly, I would appreciate it if the Board would issue a formal Board interpretation with respect to section 205.2(k) of Regulation E to clarify that the definition of an "unauthorized electronic fund transfer" excludes any electronic fund transfer initiated by a person who was furnished with the access device to the consumer's account by the consumer, unless the consumer has notified the financial institution involved that transfers by that person are no longer authorized. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Thank you for your cooperation in this matter. Sincerely, sI Frank Annunzio Chairman ......... ,.•,,,0V7601,7.,. .• P . :!----- 777-::.\t .• N7/1 ,,,, ti" • , 0• . ce/ •:..' `,..• ;\ '''' • • Ct.- ••-.;, •• .•• s.\,ii • • • .....' :.ii t r o— • ... http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • E1OARO OF GOVERNORS FEDERAL RESERVE SYSTEM WA51-41NOTC:N, 0 C 205I ...-';',\.VU Hi :/.-1 • • •, ' •••• iii--':`" •. •• "k,ii- fit 1 • • • • • •.• • • PAUL A VOLCKER CHAIR MAN December 18, 1979 The Honorable Harrison A. Williams, Jr. United States Senate Washington, D. C. 20510 Dear Senator Williams: I have now had an opportunity to review in greater depth the issues raised in your exchange of letters with Chairman Williams of the SEC. The problems that have emerged in markets for mortgage-b acked securities seem to suggest, as you point out, the wisdom of detailed consi deration of the need for Federal legislation, or other Federal actic n, to support or complement efforts at self-regulation. Questions at issue relat e to the scope of possible regulatory action, the role of self -regulation, and the appropriate regulatory relationship of the government and its interested agencies to markets for government-guaranteed securities and possibly also maTets for closely related securities, such as issues of governmentsponsored agencies. As you know, tho market is now attempting to develop a frame work for self-regulation through PSA Self-Regulation, Incorporated. One cannot be certain at this point how well this effort will succeed. However, operating rules and standards of fair practice for trading mortgage -backed securities have now been adopted, and similar rules and standards for trading government-guaranteed loans are expected shortly. PSA Self-Regulation recently launched a promotional campaign designed to extend membe rship to at least the major firms that trade these instruments. In addit ion, both GNMA and the federil regulators of financial institutions have inaugurate d certain reforms and are planning others, with a view to imposing additional constraints on the types of market abuses that prompted your concerns. The rules adepted by PSA Self-Regulation attempt to address the key problems of customer suitability standards and margin for forward tr:asactions--the areas of industry practice that appeared to be most in need of upgrading. Nevertheless, there is still a question whether a stric tly private organization can encourage membership from enough of the firmsactiv e in the market to insure that these strengthened self-regulatory standards will be effective. Moreover, in seeking to skirt potential violations of the antitrust laws the PSA rules simply encourage individual firms to establish http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis "' • `40,4 .44- • • 4111P The Honorable Page Two arrison A. William;, Jr. 4 ,; • prudent constraints on risks, including maintenance margins. They do not seek to enforce any uniform industry-wide mark-to-market requirement. At this pint it is too early to say whether the combination of actions being taken by the federal regulatory agencies and PSA SelfRegulation, Inc., will prove sufficient to curb the abuses Oat have emerged in markets for government-guaranteed debt. Both types of action do seem promising, however, and the PSA effort represents an encouraging step toward the assumption of greater responsibility by market participants for policing themselves. For these reasons it would seem desirable before considering any additional government regulation to monitor closely the progress of steps already in train, until their viability can be reasonably tested. At the same time, it would seem desirable to begin a more general study of markets for government-guaranteed securities. Such a study would probably also have to consider other closely related markets--such as the market for federal agency securities. This study would consider, among other things, the details of trading and delivery of these securities as well as other operational characteristics of these markets. Its purpose would be to identify the scope and relative significance of problems that may have emerged in each market, along with any differences in the nature and extent of such problems from one market to another. The study would consider courses of action--including the specification of trading practices and other operating characteristics of markets—that might be used to supplement or reinforce efforts at reform already in train, if this seemed warranted. If the analysis did suggest that further regulation were needed, the study would consider alternative approaches to meeting the problems detected in the study. We would have in mind forwarding this study to the Congress early in the next session. To date no detailed study of this type has been made. The earlier study prepared by R. Shriver Associates for the Department of Housing and Urban Development—while very useful--focused essentially on forward transactions in markets for mortgage -backed securities. Moreover, it was concerned more with exploring the prospects for private self-regulation than with evaluating the possible need for and techniques of public regulation. I have discussed in a preliminary way the possibility of organizing the type of study outlined above with both Deputy Secretary Carswell of the Treasury and Chairman Williams of the SEC. They have responded favorably to the idea. Other interested agencies will, of course, have to be involved on a consulting basis, but primary responsibility should be limited to our three agencies if the study is to be completed reasonably early. We contemplate a report by April. Tittraffor•Iri The Honorable Harrison A. Williams. Jr. Page Three We are prepared to proceed in this way and would welcome your comments on this approach. In the neanwhile, the attachments provide the specific information you requested on our current regulations and procedures. Siplerely, ki ed Enclosures ///4- ?, =1( (t . ,, •• http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis , . , ,,,,, ,,,/. ()) e.- , 11 I , http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis '(1 ri'illest.(•(1, are (J)LVS ol ;y; n;: 1)11 1 existing and i on!: :tpr 1 i cable to the marketing, ( • 11Th ..1 11 .1 I Ils . n(I hi.r (.clera 1 1 y guaranteed I :1(• 111,1 1 " II( n;-, t (I;IL ed let t t Apr 11 1978 12 , purchase o t G21A sect'r ies on a (I..1;i yc.,1 (11. I I very has 1 s t h rough a brokt:r subject 1.i t. rfl tI n•:, re!•-•;.,-• I. tor t ort li t 1.‘t t ,.r interim 13()ar(1 pm51 L ion \yi th tn I cont. rac 1. ;I nd nr, 1I1 , n1111011.11 C. i 1. i(mnalre !or tp.-;c )ri i n ( dr:11 t cla Led .lay .1, 1978 1''Se rye Hanks o!0.(1 t 11( r I iii () to 11 r; yx am j, ;(11(1 • ;1 rs 1 et ter state member banks gu:ird aga I nst. quest ion ab 1 e 1•.11;!.ac t. Ions. sup.iry isory let ter :$1Z-171 dated Ju 1 y 7 , 197s I ()I- \%a rt1 i nr, the "Preliminary Exam i ners ' toniri i Fut ury!, chn nge Tri d(.'(1 Interest Rate )ii1 ton V I s • rwa rd Contracts, a id St'and- cnpy a ttached ). I)V SR-471 ins t. rue t cd (.omplet e a quest i 0 TIfla ire, to t I ;tiri) 1 i comme re i a I ;t1) 1e , 311 con junc t. ion w 1 111 each ,x am i nat. i on conduc I ed during the rma incHr o! .(111( Ai I Iv 1978. (Use of this quest i onna i re was lit )1 j zed thruur,Th Jun '30, 1979. ) • - , rv ,1 . 14`1•`, c ;111-‘ , ) Wit ‘...1 letter Slt- -t (and en - February 1.1 , 19.79 speci ly ing slaf f 's jrcquinLing' treatment of "standby" con t rt . 11;- 4' c(ip ,)1 C(.•1•11 ".• 111 - ;mil th:t t t. or 1 1 y COn- De 1 ivcry I it 1.rrt.t. Ralf' Ftiturys Con L rac ts" Pi ):1 ',thrall to re 1 (;t:-;P t%ilh con jtinc ic)ri re::u!;,.torv agencies. !orrial !:,oard enforcement proceedings have \!th-.;n th lt‘s. th.. "Policy Statement I ) 1 :1C( t t -;t rv ;17. 1 ()I.v.-ard (pt. mil :tndby con L rat.' s invol v i govern-nt-ruarant-..d or F. S. Treasury securit es, four state throurh the member hailL, lia\f. received supervisory attention :; because ol hanl; (i:,;!1A secil r w. third !!::111 losses resulting from in in lrom the bank t() imrchase securities. bank was Founi lo he enrared transactions in to standby question has been workin liquidity probtem resultin • , ontrar 11, morini: Two bank was found to be speculating lurv.:Ird contracts, the bank its way .)111 WO to charge ()It. "put" t() the banks pursuant t A (i:;!.1A intructed such contract activities. A Fourth small in speculative..securitios and U. S. government securities; these transactions were critici;:ed by Federal Reserve examiners as unsat . and un:-;ound and similar tran!--;;Icti.ms bolieved with http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis that in the bank has agreed not to engage in tlw future. In all cases, it is lhe examination process was adequate to deal th.. prohlf=; involved. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis January 3, 1980 The demerablo Thaws P. 0416111, Jr. Spesbor of the lioso of Isproseatotivas Washington, D. C. 20515 .lesr it. *Peaks" the board of Governors is plowed to submit its olormstaiiressaal Upon as Troth to Loadimg. The report 01041111 Wooditsa ismeileage, sato-moment, logislative recce nemdstiose, sad the Seores administrative femstioss umler the Troth is Leading Act for the year Sincerely, Eagleson* Speaker of the House of loprosostattves received Speaker of the House of Reproseatstivos by DJW:vcd bcc: Mrs. Mallsrdi (2) -- • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis lieseMber 13, 1979 The ileesseble wiliLen 144 Arestrases united State. Sestets Washington, D. c. 2t510 Deer Senator Ammetrsft. on urit.ing to you is reepemes to the vestige* seised in ye,r recent tatter about Senator rover'S vispeaed memeterf impeeeement legislation (S. 353). At the outsets ellen es to reiteenta the essence of or peettles as L outlined it to you duties or recent essiereeties. In brief, the Pedemel liseerve remains of the view that the 'Illesedaterr 41.roa h as eibedied in S. a5 is not esly the preferred but the practical *elution to the 'Fed ossibership 'nobles. Onst general av.IroavA is beth serkibte mad equitable sod it entails only a very emdest drain se Tresses, revestuse. the viewpoint of aemmeary policy, Ihove mooed that amp legislation terve the Ped with the canacity co obtain' is large seeu. loot of reserve balanose held at the Federal Ifteerve Smoke to memos the effettive and offit,ieet ceedent of useeLary matey. thibe IND OW, not be :precis* as to the theetheld Level et reserve beLencas necessary for lelicy, we have token the view that amy issielattee Should provide the potential, at limiest theme* as oottemel slasuraece peliQy" 7rovIstee, for a reserve bees of about $20 billies or mere in the content of 1977 deJosit leves. us hove alums viewed the teems at the adequacy of the reserve beam as isle Of central famertemoe* the chow is oar oNeretieg :reced4res Montag in ,senettion pith the Octsher It peewee underscores this point eves MOM forcefully. Yule As yes Mew, that theme, is eperetins pagesnisme entails plamfas sreater empheeis as cestsellieg the sepply of reserves as the apaeattems4 vehicle for controlling the maw Supply. avert the wide row of forces that con influeece the Lewd of room**--int_tudtag large swings in fleet assetimes attributed to things as unpredictable as enewstorms--ths smaller the reserve base the sroOtor the dietertimme amid (operational uncertainties. (Avon the ismortsece of the atm of the reserve base for peeped** of monetary _enrol 1 as caneeemsd that the level of the Meeerse ratios in S. 333 eightlosll lease eeirith as imsdequete level http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis lieeelble William L. Armstrong Pees We et reserve balamres. This priblem could be alleviated by raising the menimum reeerve ratio avinet transactions balamwes to L3 moment. Alternatively, authority could be granted to require a sccIplemental reoerve requireitent wiser all ty)ee of reeervable deposits. became. totemicties*, *swipes, eed ahort-term tine deposits are reservable %leder S. 333, a provtaisa stLavii2 to 3 percent of the total of stirb deposits to be required as enpvlemeetal reserve* uou'id appear adequate. if a reserve requiremeet structure different from that Ln S. 333 mere to be chosen, thee the supplemental provision might have Le be ad:oasted. As peu are well emeee, other ontentious issues arias in .onsAeratiee se S. 353. I Appreciate the opportunity to .oument further ea these ieetzes. Simmsly, SAW A. irobAef *GC:?AV wed (fI-134) toce: Mrs. Millard' (2) messrs. Corrigan, Axilrod WILLIAM L. ARMSTRONG COLORADO http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis /3V ?..1Cnifeb Zfafez Zenaie WASHINGTON. D.C. 20510 P41 November 30, 1979 The Honorable Paul Volcker Chairman Board of Governors of the Federal Reserve System Washington, D. C. 20551 tt Dear Mr. Chairman: As I mentioned to you last night, I am inclined to generally support Senator John Tower's Federal Reserve membership proposal (S. 353). I believe, however, that S. 353's range on reserve requirements does not provide the Federal Reserve with adequate tools to implement monetary policy. Senator Tower indicates he is willing to consider a higher level of reserve requirements. Therefore, I would appreciate having the Federal Reserve's recommendation for the most prudent range of reserve requirements which ought to be included in S. 353. Also, please prepare a separate recommendation, if necessary, on the assumption that S. 353 may be amended to include a supplemental reserve similar to that proposed by the Federal Reserve. 44kro - I look forward to hearing from you at your earliest convenience. • Best regards. 1:". 100/iely, L. Armstrong WLA:bb ' da - , -. I - •' • • . http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 4mbeft. 11, 1,79 Tht Soessable Willies ?reentry Chairmen Committee es Saehisli, 106,1105 am* Saban Affairs Seised States Soesto 4ushimstoa, D.C. 20518 Amor Cimino's" rsesedret Mesh yee fat your letter *f ftesolistr 6 regardimg you, Cymeittoes oversight bearings en audiessemmt of fair mortgage tomolimg Use ami riNgulattess. 1 an ploaesd to team pee that diversor low 8. teeters .111 testify se behalf of the Soma es SessibSe 21 at 100S0 situ Siesseely, SZPaul voutei CO:pjt (PV-142) bec:Oev. Teeters ilse Mart Mrs, Kollardi (2) ---- WILLIAM PROXMIRE, WIS., CHAIRMAN HARRISON A. WILLIAMS, JR., N.J. ALAN CRANSTON, CALIF. JOHN TOWER, T ADLAI E. STEVENSON, ILL. JOHN HEINZ, PA. JAW( GARN, UTAH RnBERT MORGAN, N.C. WILLIAM L. ARMSTR DONALD W. RIEGLF. JR., MICH. NANCY LANDON KASSESAUM, KANS. PAUL 3. SARRANES, MD. RICHARD G. LUGAR, NG. COLD. D. DONALD W. STEWART. ALA. '11Cniteb ,Statez „Senate PAUL E. TSONGAS, MASS. KENNETH A. MC LEAN, STAFF DIRECTOR M. DANNY WALL, MINORITY STAFF DIRECTOR COMMITTEE ON BANKING. HOUSING, AND MARY FRANCES DC LA PAVA, CHIEF CLERK URBAN AFFAIRS WASHINGTON. D.C. 20510 December 6, 1979 • 1 •1 Mr. Paul Volcker Chairman Board of Governors of the Federal Reserve System 20th and Constitution Ave., NW Washington, D. C. 20551 r— Cr) Dear Chairman Volcker: This letter will confirm the scheduled appearance of you or your designee on December 21, 1979 before the Senate Committee on Banking, Housing and Urban Affairs to testify at oversight hearings on enforcement of fair mortgage lending laws and regulations. ir;270, 1.111•11111110 In order to help focus your testimony, I am enclosing a memorandum prepared by staff which poses some specific questions. We would like you to incorporate responses to those questions in your testimony. The hearing will begin at 10 a.m. in room 5302, Dirksen Senate Office Building. Rules of the Committee require that you submit 75 copies of your written testimony at least 48 hours in advance of your appearance. Please deliver these copies to the attention of Mr. Steven Rohde, 5228 Dirksen Senate Office Building. If you have any questions, you may call Mr. Rohde at 224-9211. The Committee greatly looks forward to your appearance on December 21. Sincer W4 -rim Proxmir Chairman WP:srt •••••• http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - Y^'• e'15"_ ''‘""YeVarmi,,k7;7110. W1LLIA 11.1 PWO X Wile, ViI5 , r HARRISON A.. W 1.1....1AN4 1. JR.. 1.J. 1A-1-AP4 GRAN S TON. GAL.J F ADLA1 K. STiVVN SOK ILL. JOH l T OwlF JOH I4 HSI Pfl RCA CRT MOPVIA.N. N .C.. coptALD W I L.I.J AM 1.. W. PIIIGLJI, JR.. MICH. PAJL S. &AR II 41•4 • MO. • JP K r '•• T P COLO. STJONG, TRO HANCY LANDON KASSffSAUYI. KANS. k I CHAFI D G.. LIJ G.A.14 PO. IDOKA.LD W. 57 ICA AR T. ALA. PM.S. T SOHGA • 'ZICrtifeb ,, (Mafez Zenale MASS. COMMITTEE ON E1ANKING, HOUSING. AND KINNITh A. MC LEAN. STAFF DIA ICT0011 U. URrIAN AFFAIRS Aic.fr WALL. MIHOHITY STAF7 DIRICTOR SAAR V rnAmcsa D C LA PA VA, C.P11 CP C-1.-LAX WASHINGTON. D.C. 20510 December 6, 1979 Staff Memorandum Posing Questions for Response in Prepared Testimony of Board of Governors of the Federal Reserve System 1. Effects Test Under ECOA and Regulation B The legislative history of the Equal Credit Oppertnnity Amendments of 1976 makes clear that Congress intended Lhot the effects test should be used in the administrative enforcement of the Equal Credit Opportunity Act. The effects test is one of the most significant and far reaching aspects of the ECOA. Yet, in developing Regulation B, the Board failed almost totally to address this issue, by relegating the effects test to a very brief footnote (footnote 7 to section 202.6(a)) which provides no guidance at all on how the effects test is to be implemented under the ECOA. It appears that the effects test was not addressed in Regulation B because the Board believed that implementation of the concept should be left primarily to the courts. However, subsequent to the adoption of the amendments to Regulation B, the Board in connection with its enforcement of fair lending laws for State member banks, has made a very significant shift in its perspective on the effects test. The Board's new Compliance Handbook takes an affirmative posture on the effects test, by including an extensive discussion of the principle of the effects test, by providing some examples of practices which may violate the effects test, and by making it clear to examiners that they have a responsibility to examine banks for compliance with the effects test. Thus, it would appear that the Board no longer holds the view of the effects test which caused it, in 1976, to refrain from addressing the issue in Regulation B. )uestion -- Should Regulation B be amended to set forth the general concept of the effects test, and to provide illustrative examples of policies and practices which might violate the effects test? http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 2- 2. Collection of Racial Data Under Regulation B In order to monitor compliance with the ECOA, Regulation B provides for the recording of racial data on mortgage loan applicants. The sole method utilized, however, is self identification by applicants. Because this method of data collection has resulted in substantial missing data from the files, which severely impairs the utility of the data for monitoring compliance, the FDIC, Bank Board and the OCC have all found it necessary to include, as part of the substitute monitoring systems they have adopted, a provision for backup identification by visual observation or surname. In light of this experience, shouldn't Regulation i be amended to provide for such backup identification? 3. Adoption of Substantive Fair Mortgage Lending Regulations and Guidelines The Federal Home Loan Bank Board has had in effect for some time substantive regulations and ijuidelines which specify the kinds of practices which constitute prohibited discrimination in mortgage lending. Among other things, these regulations and guidelines 1) explicitly address neighborhood discrimination, 2) provide guidelines on the effects test, by setting forth the general principle of the effects test and providing a number of specific examples of practices which may have a discriminatory effect, and 3) address discrimination in marketing practices. Studies of lending patterns in California have indicated that similar regulations and guidelines adopted in ]976 by the State of California affecting State licensed savings and loan associations had a demonstrable impact in improving the flow of credit to historically mortgage deficient neighborhoods. Does the Board have any plans to adopt substantive regulations and guidelines such as described above? 4. Treatment of -Effects Test in Compliance Handbook a) From a review of the Compliance Handbook, it is unclear whether effects test problems noted by examiners are supposed to be reported in the open section of the report of examination, as opposed to the confidential portion. In order to facilitate the prospects of corrective action, a strong argument can be made that effects test problems should be reported in the open section to ensure that the bank's management and Board of Directors are notified of the examiner's conclusions and opinions. What is the intent of the Board on where effects test problems are to be reported? Should the Compliance Handbook be clarified to remove any ambiguity by providing clear instructions that effects test problems should be discussed in the open section? http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • b) In several places (page II. 1. /. and in the examiner checklist R-FH-2), the Compliance Handbook suggests that instead of using age of property as a loan criterion, a lender should consider the "remaining economic life". However, use of "remaining economic life" generally has had a very similar effect to the use of more explicit discrimination on the basis of the age of the property. Traditionally, many lenders have used an underwriting guideline that the lerm of the loan should not exceed its "remaining economic life". A strong argument can be made that such a guideline is a violation of the effects test, since its effect is to discriminate against older neighborhoods where minorities disproportionately reside, and since there is no overriding business purpose for such a rule. As discussed at considerable length in hearings held by the Committee last year (FNMA-FHLMC Underwriting, December 19, 1978), estimating remaining economic life is a very highly subjective process, and even if it could be accurately estimated it has questionable relevance to proper underwriting considerations since the future expiration of economic life need not at all mean that the value of the property will have declined, but instead merely that the improvements no longer add value above the value of the land. Indeed frequently the overall value of the property will have substantially increased. In recognition of problems with the use of remaining economic life for underwriting purposes, the Federal Home Loan Mortgage Corporation has changed its underwriting guidelines so that remaining economic life will not be considered unless it is documented by the appraiser to be five years or less. The reference on page II. 1.7. of the Board's Compliance Handbook to age of property and remaining economic life also refers to the option of evaluating the "condition" of the property in lieu of evaluating its age. If properly documented and implemented, the "condition" of the property can be a legitimate underwriting consideration, and should serve all business purposes that use of age of property and remaining economic life have been purported to serve. Question -- Should the Compliance Handbook be revised to delete support for use of remaining economiC: life as an underwriting factor, and to warn that its use may be discriminatory in effect? 5. Monitoring Violations a) From the information provided to the Committee, it appears that the Board's system for monitoring violations found by examiners focusses on total number of violations, rather than the number of patterns of violations. For example, it would appear that if an examiner discovers, say, ten violations of a given type in one bank, this would be reported as ten http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • • -4 • violations for that category in aggregating data among banks, instead of one pattern of violation. While this type of data is of some interest, its significance is somewhat questionabl e, since the number of violations reported could merely be a function of the number of files an examiner reviews in the bank. Rather than the total number of violations found of any given type, it is of much more interest to know how many banks were found to have a violation of a particular type. Does the Board have any plans to revise its system of monitoring violations to focus more on the number of banks found to have violations of various types? b) Does the Board have any plans to revise its monitoring system so that it can monitor the number of effects test problems identified by examiners? c) The Board's current system Cor monitoring violations discovered by examiners reports violations only by Regulation B section number (in addition, all Title VIII violations are reported without any breakdown). This system of categorization is not always helpful in determining the nature of the violation. By contrast, the Bank Board and the FDIC (particularly the FDIC) have more descriptive systems for categorizing violations, and which therefore provide for a betterunderstanding of the nature of the deficiency or violation. What changes, if any, are being contemplated in the Board's system? 6. Prescreening a) On Page 11.1.36 of the Compliance Handbook, examiners are instructed that interviews outside the bank (with former employees, applicants, brokers and dealers, or community groups) should be undertaken when any of the following conditions are present: 1) few, or nonexistent denials on file; 2) evidence of disparate treatment exists; 3) denials do not reflect bank policy or are inadequate; 4) racial composition of the community is not reflected in review of the bank's loan portfolio; 5) geographic disparities in mortgage lending patterns are not reflective of economic risk; and 6) complaints alleging discrimination are filed with Reserve Bank, other government agencies, or bank under examination. Given these criteria, particularly numbers 4 and 5 above, it would appear that such outside interviews should be occurring fairly often. Does the Board have any system to monitor how often these contacts are actually taking place, and to monitor the effectiveness of such contacts? If not, should such a monitoring system be instituted? b) Does the Board have any plans to utilize the technique of "testing" to determine how potential applicants are treated when they call or visit the bank? http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • _tS 7. Data Analysis The OCC, FDIC, and FHLBB have all been developing computerized data analysis systems to assist in detecting possible discriminatory lending practices. These systems could help target the examination process by identifying, for examiners, particular types of discriminatory lending patterns that may be occurring in the bank, and specific loan files and denied loan files which manifest the possible discriminatory patterns. Without such a system, the examiner is forced .either 1) to review a relatively small number of files, 'which if such files are not the files which manifest the disparity, in all likelihood the discriminatory pattern will go undetected; or 2) take the time consuming process of reviewing a large number of files, while still retaining a significant risk that discriminatory patterns may go undetected. Does the Board have any plans to reconsider its prior decision not to develop a data analysis system such as the ones being developed by the other three agencies? 8. Enforcement Actions a) What policies and procedures does the Board have in effect or in the planning stage to ensure that violations of fair mortgage lending laws and regulations which are discovered by examiners are halted? b) What policies and procedures does the Board have in effect or in the planning stage to ensure that the effects of past violations are corrected? c) What is the status of the uniform enforcement guidelines proposed well over a year ago? What substantive issues, if any, need to be resolved, and what is the timetable? http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis teselber 14, 1979 The H norable Charles 1. Seemett H u$* of Representatives Washington, D.C. 20515 Deer Mr. $.tt; I am pleased to :agreed to your request for comments regarding the issues raised in the Deemiher 3 letter to yes fromft. Earl Poiteveet. As you knew, this letter was another in a regent series that you have referred to us; earlier letters evidently aseseed in the mails, for the teeelber 3 letter raises a =Mbar of cuestione to Which we responded in reettens replies (se* letters from Chairmen Ifoloker dated *member 16 and flemenber 30). Chink the one rest of the Seeeiher 3 letter that might rectuire sons further discussion is the questime seised in the first paragraph etgardieg the role of the diseount rate. Mt. Poitevent overstates the impertamoe Se the dieseegt rate as a detecedgmat of other interest rates. great extent, its role is this regard is in fact mite limited. To the discount rata is adjusted by the Feder*/ Meemme simply to hoer it in liee with other interest rates, in order to eteid creating imeontives for ageber banks to rely unduly on the !federal Seeorve discount window as a sem* of reeseves or landahla hods. It is in part the fact that the System does attempt to maintain this alignment that accounts for the use of the discount rata as a base for some usury ceilings, for meet states wisely desire to avoid permitting their usliry califs's* from getting so tow relative to prevailieg rapt* that credit ?limitability is curtailed. tnelooad tee sem el tha Maderal batizajimmu.Nutgam, videb oily ramie helrial to NW. Poitsoest. It explains in &seater detail the federol Semeireese ere:otiose and their *poet on Ohs sesmom• Sincerely yours, Donald J. Wise Special Assistamt to the Board !%ncloeure KJP:JPIS:pjt (FV-137) bcc: Mike Prell Mrs. Mallardi ALLAMIlt AMOIMMIIMIW http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • • stongre5goftbelinittbilotates jDoust of iltprtrstntatiors glastington. 3D. C. 3 December 5, 197 9 Honorable Paul A. Volcker Chairman Federal Reserve System Washington, D.C. 20551 Sir: The attached comnumication is sent for your consideration. Please I nvestigate the statements contained therein and forward me the necessary information for reply. Please refer to the date of my letter to you in your response. Sincerely, CEB:lm Charles F. Bennett. Enclosures . _einIer 0..)I(:ongress P.S. Please !%1 refer to your November 16, 1979 response to me. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Earl S. Poitevent, Jr. 4301 Venetia Blvd. Jacksonville. Florida 32210 (904) 389-5446 December The Honorable Charles House of Representatives Washington, D.C. 3, 1979 ennett Dear Charlie: Thanks for sending Yr. Volcker:s letter of Nov. 16th. Fie downplays the significance of the Fed's discount rate on interest rates. Everyone in the money lending business; banks, insurance companies, savings and loans, etc. all tie their rates, either directly or indirectly, to the Fed's discount rate. That is why I feel Congress should establish the Fed's discount rate as it controls the national economy. The State of Florida has had to raise it's usury rate from 1O fo 18 to accom'Odate the Fed's 12% discount rate. It is true that the banks Are paying more interest to their savings depositors and also some interest on checking accounts but this is a direct result of the Fed's tight money high interest rate policy. The Fed's policy seems to be oriented to protect the holders of the t916.5 billion Eurodollars outstanding. In fact all of the Fed's moves have been anti borrower And pro lender. Whereas my encyclopedia says the Fed was formed to protect the borrowers of the nation by insuring ample funds at competitive non usurous rates. Mr. Volcker admits the Fed has increased it's assets by .100 billion in the last nineteen years to t150 billion. The Fed has milked this money out of the economy by manipulating the Government bond market by running interest rates up and down on various pretexts. These Federal securities and/or cash, in my opinion, should now /turned t over to tie Treasury because with V965 billion Eurodollars outstanding there is no longer any reason to protect the value of U.S. Government bonds. As a matter of fact the Government is now floating bond issues in Europe. I do not understand Mr. Volcker's comment on balance of payments. It is hard for me to believe with ,965 billion 4. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- Eurodollars outstanding our national banks would be loaning money to foreigners and especially so since the article I sent to you indicates we are borrowing the Eurodollars back everyway we can to keep our own economy going. As for protecting the international value of the dollar this can only be done by the holders of the Eurodollars, and it is to their vital interest to do so. Actually, they are more "over the barPel" than we are. The only mistake we can make is to borrow the Eurodollars back at any rate other than a bargain rate (say For the more interest we pay for Eurodollars the more they are debased. Congress can strike a blow for the Eurodollars by getting interest rates down in this country and, as stated before, this can only be done by Congress stepping in and setting the Fed's discount rate as the Fed's Board of Governors are oriented to lenders not borrowers. With best wishes and assuring you of my deep appreciation for your help, I remain, Sincerely, • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis FEDERAL RESERVE SYSTEM tpt4 () • PA.1, A voicKrn CHAIRMAN November 16, 1979 The Honorable Charles E. Bennett House of Representatives 20515 Washington, D.C. Dear Mr. Bennett: to comment on the recent I appreciate having the opportunity Earl S. Poitevent. Mr. Poitevent is letter from your constituent, Mr. interest rates on inflation and the concerned about the effect of high international value of the dollar. is central to the Comestic Dealing with the sources of inflation ed States. Among the many problems and international objectives of the Unit n is that high interest rates tend to associated with high rates of inflatio in the form of an inflationary result, as lenders require compensation value of the loans. Recent Federal premium for the depreciating real that with more effective control over Reserve actions offer the promise s egates and bark credit, inflation pressure the growth of the monetary aggr run. Over the short run, however, can be better countered over the long expansion are likely to be accompanied slower rates of monetary and credit rates, at least short-term rates, to by a natural tendency for interest interest rates, however, serve evenrise higher than otherwise. Higher ging the use of credit for less tually to moderate inflation by discoura , an attempt by the Federal Reserve productive expenditures. In contrast ng, d be short-lived and largely self-defeati to hold down interest rates woul and to a more rapid increase in money since such a policy would only lead credit and ultimately higher inflation. of the pervasive influence We have recently seen clear evidence ar ctations on the value of the doll of inflation and inflationary expe ral position in the international internationally. Given the dollar's cent its external value is particularly financial system, we must recognize that about our economic policy. sensitive to perceptions and expectations inflation is essential to improve Consequently, our ability to deal with long-term stability of the dollar. concerning the balance Regarding Mr. Poitevent's observations last year nearly $18 billion that note to vant rele is it , ents of paym and foreign residents in interest was received by U.S. residents from me d the amount we paid out. Inco other income payments, which erivalle accounted for more than $25 billion from U.S. direct investments abroad foreigners. the $4 billion we paid out to of receipts, which far exceeded JI• oir • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ihe Honorable Page Two larles E. Bennett • Neither the Federal Reserve nor the "Fed's membe r banks" necessarily profit by hiy,h interest rates. The interest rates charged by banks on loans are mainly influenced by the costs of ohtai niv additional deposit and non -deposit funds to lend, which have recently incre ased markedly. The impact of the discount rate on bank lending rates is much less significant, since wember bank borrowing from Federal Reser ve's discount window remains a small fraction of their liabilitie s. The Federal Reserve doe.; nnt profit from high interest rates, since the surplus earnings•of the Federal Reserve arc, as a matter of course, trans ferred to the Treasury. Federal ReseLve assets, which Mr. Poitevent asks about , increased from $50 billion in 1960 to $150 billion today. This expan sion consists almost entirely of increased holdings of U.S. government securities , and is primarily the counterpart on the assets side of the Federal Reser ve's balance sheet of expansien of desired currency holdings by the public. The recent actions taken by the Federal Reserve should haste the n day when interest rates can decline and more stable conditions can be restored to credit and capital markets, thus pInviding a foundation for rentwed and sustained economic growth. In the meantime, these actions are not intended to, and will not, cut off the supply of money and credi t to the economy. Failure to deal with inflation would carry long-term risks that far outweigli the short-term costs associated with these actions. Sincerely, '44)1/0/4-u- http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis beeeelbee 14. 1911 ithe Ilemotabto illesjeela 4, Issoadeol Cheisamme Ilkireemitto• ea Camemies esemow goof lifesetery Cessittoe es ihmeeeseen Ofeestieso Meow a aegesoestettle• ifoehlastog, OA* MIS Sew thelloesa ileieesekels d he tooleeed eels iota* of the Beard otell ameteoglo sommoote potoestod to the yeuf leture le me of tooesbire 3. These emseeethi woo itee et seeelletioe• Sews Le 'In sis itemeoppe *Sib tits prepesell sod allop &et* 1118.11asin ikeikereattas eetetteo MOO)of the Side eddies iheriesyaloe sestleoe s I abaft teleoesta sit leeollso ha* beidies oligniooslea slosten that was a.tolossot peetios oil eamoesellis on •imegereteest 0 *metiers *COOL heolhoillortofly toe the **j sot isquereed boa ow Uwe fleireeemoto oe *Ism 411lipmeseied by lieeelpi esetirel best stall osesosediee hoes &Saud tow th• oullesee asommoit• The oftelledei goo•tved ee Sllogra es tido oshjoet emiermilies olosems 104684.1184 la the prepeesi ouliesides mai* k. aopeo4eso. wish goer lotope, tt be* set low outtased. Sioseesty. VPaut A. Yokfer 4/11171 & 1029/71 from Peel Gordwor: tit; sad 03/71 alltspjt (rf-133) vnin from Trod Dahl Saban Ceses bees or. lotoiroso from Alai Cordon's) WelellOOMILI (Memos Atie 5/14/71e Wt. Ile.fot lierbity Or. ombl Mallardi (2) L,/,' p. Ø S. ROSENTHAL. N.Y.. CHAIRMAN -FIT T. MATSUI, CALIF. ENE V. ATKiNSON, PA. P 1.14NAND J. ST GERMAIN. R.I. JOHN CONY(RS. JR., MICH. ELLIOTT H. LEVITAS. GA. Copies sent to Messrs. Petersen an-1 Ryan for cooriOtion of response • OHIO a . ANS. NINE IND. Coitgres' of tbe triniteb a)tate5 m &Kw rre —WO Z25-4407 3E)oti5e of 1epre5entatitie55 COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS RAYBURN HOUSE OFFICE BUILDING. ROOM 0-377 WASHINGTON, DC. 20515 December 3, 1979 Hon. Paul A. Volcker Chairman Board of Governors Federal Reserve System Washington, D. C. 20551 Dear Mr. Chairman: The Commerce, Consumer, and Monetary Affairs Subcommittee is currently reviewing the Federal Reserve Board's approval last March of the bank holding company application of the Hongkong and Shanghai Banking Corp. The subcommittee is particularly interested in how the Board treated the overseas nonfinancial activities of HSBC in reaching its decision to approve. In connection with this review, I am writing to request certain Board staff memoranda that were prepared for the Board in 1971 at the time the Board was considering staff proposals for the portions of Regulation Y dealing with overseas nonbanking activities. The particular memoranda requested are as follows: 1. Three memoranda dated May 14, June 11, and October 29, 1971, with attachments, by Paul Gardner, Jr.; and 2 A memorandum by Messrs. Dahl and Gemmill referenced on page 2 of the June 11 Gardner memorandum. I understand that certain passages of these memoranda report the views expressed by certain other central banks and that these passages may be regarded as sensitive. While the subcommittee reserves the right to request complete copies of the above memoranda at some later time, for the purposes of the present request it would be acceptable to send copies from which the particular passages reporting the views of certain central banks have been deleted. In addition, I would appreciate having copies of any other memoranda to the Board by Mr. Dahl, Mr. Gemmill, or other staff that analyze or discuss the treatment under the Bank Holding Company Act of overseas nonbanking activities http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis .„ • Hon. Paul A. Volcker 2 December 3, 1979 owned or controlled by foreign bank holding companies and that were prepared for the Board in connection with its 1971 regulations on this subject. Memoranda whose sole purpose is to summarize public comments on the proposed regulations need not be supplied at this time. SiTerel / i ( Benj min S. Chal man BSR:tv http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis osenthal A*, http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • lemesiber 13, ii79 rho denorable Richard A. Gephardt .0 of Repsomentatives .4hingtes, B. C. 2013 • 1r Mr. fephowdt: I eppre.,iste the opportunity of .onnenties is the interesting yeu love offered as am alteraative to the inpositiom of a rigid Unit en federal apendies. Like you, 1 hews been conrerned Chet the vario s mechanistic teabelques that have been susseeted for lioitiag federal aiiendle" cetIld introduce eatteuely destabilising elongate to the budgetie" 'rectos, and La ?articular could sigaifieantly impede the severameat's ability to react effe,:tively to unfolding econseic deoeLooneets. I totally agree with whet I perceive is the thrust of your proposal—that is, in the prok_ees of *acidic' es sseedieg Levels, the Googrese moot be ever alert to the economic stabilisation implications of its decisions. Budget decisions profoundly affect the outlook for e gagenL- activity and inflation. end I believe that the Censuses would be Nokias 4 serious error is obsadontes its asehority te ad* Shoes isperteat decisions as tiesibly ao possible. let recemniaies Oho plobLees with rigid speeding limits, I am not certain that your poopseal Mee mot Lateedup!le rigidities of its own. As I understand it, 'roar psepeselimmuld have the Censuses a)prewe revenue eed expenditure tarots esmeiseemt with a surplus or deficit total at anigarly stage Le the budiet preseee. leboompont decisions by the Budget Committees and the Ceagreseusuld be constrained by those totals. This is Lamm ways aa attra4- tive peepseal. Sets I ale afraid that suLh a peacesa would tend to deprive the existies budget process of sone of its value as • forum in whiA net ielrequently cenflictins 'pais of reoeur:74, allocation on the eoe heed mod stabilisation policy on the other are debated mad reseived. The census that derives Coen such a pewees is, it mess to me, highly desirable free both a political sod econoni, stomdpoint. As yoe correctly point out, the /*derma Reserve- as well as other eteesals esemclos mad the iefoomel publiw—has an important role to play in adivisteis on the ocsoonic hoplicetisee of fiscal Pcolicy. gut. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Memesuble Richard A. Gephardt Page Dee e the Budget Committees in their osasidotetleas currestly do receive advic iefrom the Federal Beier,* ee well se May ether severemeet agemcies-t cludieg the council of Beemend4 Advtsers and the Gengressismal Budge r stance Offi e--as well, ma from missy private groups, regarding the prope dures of fiscal policy. Mile your proposal. would formalise these proce ment of and perhaps immure the presentation of a more quantified state that it the fiscal policy kapiicatiew of budget totals, I an comeerned the eir be at a cost that transeseds the benefits. I am semetased that impettaat 400410sa currently gives esteeidereile weight to this advice as an *pot in the budget process. Mut meat importantly, I ma persuaded that the ultimate respossibility for balanciag the imolai amd ec000mic claims on the budget, amd deciding as a specific *poodles target, must 'Amasses to As is the heads of elected officials. I usdersteed sad share your cower's* about the seed to restrain federal *presiding. The ap_bievenest sad eabstemesce of discielime over ht federal mooed/ft is an absolute ositessity if inflatios is to be broug under control. But I ma afraid that wy faith in achieving this sad through ostabliehmeat of "constraints"'--however epecific and however retienall•—has weakened through the years. imperience indi:;ates that ways cask &tarp be fouled by imaginative patsies to ciremmeest any formal liaitatien when there is a desire to de as It is, after all, the desire that will be boy to the action, Is these difficult times, it is reassuring to know that individual Osugreeenee like yourself are seriously addressing thee* eamolex budgetary issues in en innovative way. Thank you again for giving as the 04-)ortuaity to calmest on your prooisal. Siacerely, See;11 A. Volcker .11F:IMB:JI:JLK:vcd (V-133) Fralick bcc: Messrs. Kiddies, Zeta'', Struble, Mrs. Mallardi (2) RICHARD A. GEPHARDT 3D DISTRICT. MISSOURI • • wAsmiNGToNarrim 218 CANON HOUSE OrricK ButuDIN1 WASHINGTON, D.C. 20515 PHONE:(202) 225-2671 WAYS AND MEANS COMMITTEE BUDGET COMMITTEE http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis CONGRESS OF THE UNITED STATES HOUSE OF REPRESENTATIVES WASHINGTON, D.C. 20515 DISTRICT OCTICEs 3.470 HAMPTON AVENUE ST. Louis. MISSOURI 63139 PHONE (314) 351-5100 November 27, 1979 41(5 Honorable Paul Volcker, Chairman Board of Governors of the Federal Reserve System Federal Reserve Building Washington, D. C. 20551 Dear Mr. Chairman: As you are no doubt aware, the House is beginning active consideration of spending limitation legislation, As an alternative, I have beeff working on a proposal that I believe would help depoliticize Congressional budget decisions but offer the flexibility needed to develop fiscal policy in accordance with changing economic conditions. I want to bring this bill to your attention since it has significant implications for the Federal Reserve Board. The enclosed material provides a complete explanation of my proposal as well as the reasons why I believe it represents.a more reasonable and workable alternative to spending limits. Basically, my proposal is for the Congress to develop and approve a concurrent resolution on fiscal policy before the Budget Committee begins mark-up of functional spending limits in the First and Second Budget Resolutons. By a specified date (February 1 in the case of the First Resolution and July 15 in the case of the Second) the Federal Reserve Board would submit to the Budget Committees its recommendations for the appropriate surplus or deficit level, in light of economic conditions, to pursue a successful economy for the following Fiscal Year. On the basis of the Fed's recommendations as well as hearings to receive testimony by economists in and outside the governemnt, the Budget Committees would report a concurrent resolution setting total outlays, revenues and subsequent surplus or deficit. The resolution would have to be approved by both Houses of Congress by a specified date prior to the time when mark-up of the regular concurrent budget resolution would begin. This procedure, in my view, offers a number of advantages. Above all, it would enable the Congress to set budget totals on the basis of economics before special interests bring their cases to the Congress. With total outlays and deficit numbers in place, the Congress would have to make the hard choices between programs competing for a share of a limited sum of money. I think this procedure would permit us to make reasoned economic decisions without relinquishing any of our power over the purse. It would also allow for improved coordination of monetary and fiscal policies. I http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- I would be interested in your comments on this legislation, not only with respect to its impact on the Fed but also the effect it could have on the nation's economic policy. I look forward to hearings from you and would be happy to discuss this proposal with you if you have any questions about it. Yours v,ry truly, Richard A. Gephardt 3rd District, Missouri RAG:fs • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Concurrent Resolution on Yl.scal Policy Honorable Richard A. Gephardt of Missouri The attached dit.cuqsion paper was prepared tae assistaace C1 01-2 Congressional Office. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis rah r1r,There is anothi.J- way to app.soach this proticm. As l understand it, the move7q7.nt to at!oot a ficcal policy. rule is mot'svated by the belief that political preso-os chronicAlly bias thejudyet toward deficit. Thus, Congress is con -,idcring „lutority over budget balance to a mechanicel rule in order to inyJi3trt ficel policy from political pressures. Ho.,.;ever, thv such a rulE would - be its in;ibility to exercise jud771c.nt about Cianging ecchcmic conditions'. Thern rniltive both 511()ds Conores: rhc_;-! per17:its 1— • (;s1,(1:Tsc could requir Peserv Boarc:. to ,-ecerriv.-:nd a surpius (deficit) for the cuilpj fiscal Ir. TWs r- corruicndatinn would be suliwitted ic the Housp and Seaate Vodott.. Ccrejttees e.it least one mohth beforc the first and Secood UOnn otner cconomir Ota Upir disusal, the Con'::rGst-jorio.1 OMB, c..crrirr,s1.s, etc., gei. 4% -c!-;:ritt;-(y would revemP.i, c°,:tidY 3nd 1,11‘,1s within whiro the budyet wcu'id be (i,tablished. no". i.(. of the ef!ty W 4 Ln , 0%• r,1 C'.T . I!! 1 !. rOlV re(TvrivrApri tv et havf. the iilocrtrit.'f:Yit, ryoliey ...snonsibl.? for fisca -1 ar.d r, '.:.;-clus or di!,fir:it. er,(1 cn 'rfoufj before d:,(..idino on actual, specific outlays. 17):2 th recorrsti7vciation on fisci help clari fy the major Off 94. t..1-) fr.sch;.-i-i'.k.:11 cjit'? ri; fif'; • , • . . 4• i r• ;" • , ..)rf . det.c;r';niltion oi the applopriatc! fiscal policy requires jipio!ent in the interprPtatior, of !Ale available dat?, and such judt writtE.:f.; into a mechanical rule. 9reat rare bel'oro it cives up any of itS adup%ing a mechdriical culr!, it must :iy V;!.!1%.1 This rule t.i0PfitS of og,...iost its cost.:.. tpdr:.;11 7..iii- fH( it to be ;:),Ie separately (.:r1(crn .ino S!!Daratimt t'12 decision a!id hcicif the specifics of thc. in th,i , al!iw the C, mgress to # .:01at.t. itsg?lf s;Tit, at from co!!.,ideratins 5y (=,, Ivinu VINP5er!, tho pxilse that thry favor a 1 ln proccss ot the prior impnscd r $,Ailt to cyercis S 00.0• BALANC1,23 FE fl.11):,iiT EASED Oh FISCAL rot ICY RECOMMENDED BY THE FVUERAL RLSERVE 1301.) AqD ACTELI UPON We 1 IE CCNGRESS MR. GEPHARDT Amend the Congressional Budget Act to require tie Federal Reserve Board rInd 1 1,n ,.n n n r ivetwr drld outlays and wol!irl le4t fl%cd1 f respectivei r-r,p a t.t, runerr-f?ndtior'7 ict by vx1c, rrPnt-. RoIution or otnerf'vc, CC( , !I° 31H y he submitted and St-cond any other ar ecti r'endd 1"vel te a ;Ind rw..,!s L.Iprcpriate inP2N5 t) levels to bc lo th2 '; , igrerion?.1 Bw!net Procoss 9iSCUSSVJN: A rigid balanced budget rule likely would have a destabilizing effect on the economy. It would require fiscal policy to be restrictive in cH Y,i-:1,1:1..!vr? in i -0,-.T,71r,plic model Om119tion done ,by ht;(1(-1F-t rile would reccssion, re!.ulting in , •, „ 1975 and rc'iaining C/ !"? 1 ,1 clven be destabilizing. f1exftle rcle mav ar l eprtn siic or trie budnet r-ile i't(-)plillv surpiJ'; .7Jr:rr.%r(!la( tc tre dcgree of c1a6, existing in the economy. sk,!!Id Thu is!;rplus vhrn ntili7.etiol is high ind in deficit when t, th su:7h a contingency rule is that it reouires a reliable low. inCi:ator of er:c,,,omic slack woose reaninf; does not change over time. And we indicator. simply do not I,Fi.r! hard f;.- rt it reT;ires jud-; 7nt to assess current economic tichtness of the ecrlomy. Ani2 there is oo way to date and detormiNc write judgm,::nt into .1 c:chr.nical budnet d 13rce rule. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • • ive r 1 •:t VI n, • ' i LI .1P; 1 t) V. I 'Alen t".'4 . 1.‘ 11 I1 1 • 1. : .i i .i 1 , 1A • 1 i •! i 1,1-•. C,-t:. .,:l.• nt .... ...,I • t. l'il(!. i••Q ion rrant.; fe•r el : '.:1!t :: tc, • e!i.. . :•",•1 Lz t 0 ••••,lei ..1 e '1,;• i r t Ili t i,•0 f — t s at: th..i.....11‘. t fl . ' t. :' C r7,.(1i,;11 ,;("1,001s. The p-,, p.,c.al was b:-.:-zed on 0 ril- 0 1 1 1; (I.!' t in the filWIng tbat hvalth manywwer is no longer in short supply and 1 r,..ro ,rint r rolo fcr the Forieral government would be "beefed ! I.-, l•-.• •,,, ,!iii-t.,..-; -it t • 1-;;;1•,• ' li ,.al ; i ; r• ',. !'„, i ; l. s s j 1 '.', ..3 2.'' ''• i 11. , 1 7, l''' : '• : I '. 'I i!. n I 1 ....."! '; •I", : r• •;•,‘ il .? ( 11 : 11 t I ( r •••,!.1,,..._ !', ,1 1... <, ; o, !, 1 n1:1 t l Nf • • I • 't • •tt •1! 1.rr• !d„, !:lys iteihts to parents :•••• t'• it (•'.1.1dri•n beLan to t hat Fc third] ••'). t''t:::•,-:•!-; i‘e e:.:7,•-,•,,!.;! to heir rrfd(1.1e income t !Ian choosing ard hi •,111•r e:hicat ;on. r(' t•1 1;011'.;•. tr‘:!‘ •'• It I r::.' i t.. iad " nror'te t 11cri ir; tuit :r•n: t bi Ocnt z,ssi::tance. Only failure of t- he two Eouses of Conress to r(ach agreemnt on tax credits for clementrPrv rd secondary education prevented the duplication frcm becoMing public law. 3. As the HOPSV Ways pnd Itean3 Committee has bons. _ dcbated legiFIation to control tax expenditures resulting from Lax exempt bonds to finance mortgages, two competing lobbies seem to be gaining benefits. The bill now under consideration in Committee would continue some tax exempt mortgage bonds, as one Froup t.int , ,Thd e::.empt from taxation interest en savings accounts, a -lvocated.. If (cl'greFt; 1-111s to as roriAe hr 6 oimononts proviions break.-; and choo,,o • repeLents of melt5;otljt to L. the rrevr:it, p.aye l)otH reform ie•.is1.-Ition ww_lid be efff:ctivelv ellminated. , !lOrt^;WO If Congri proc_es regnirco tc 1,1d •-•et a (!ef'icit level '),-fr-J- c produe71,1!:ea t!1P5,0 "decisions", the Congress would have been chcice. polite 1.%-tIld be violated. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis irto the budget )therwise the buciFet resolution on fiscal • • • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Unfcrtunately, cvtn a rore flexible spending limitation rule may ultimately FP &itabili/ing. the approprizte s!'..?ndinc An eptimd.ily designed rule would determine ?.rd, ulti,flately, the :7C S. of the budget surplus or deficit, according to the degree of slack existing in the economy. The buJget should be in surplus when utilization is high and in deficit whcn l:yq. A urot)lem with suzh a continocncy rula is that it We simply do not have such an indicator. change over time. rhs hard fact is that it rcquires judoment to assess current econo;lic data ant c(termine thc tightness of th2 economy. to wri2 ju6Ti1-nt irtn ThJJ.E. nc.lt me:tn;r.1 requir2s a r!iaoit: i!Idicator of econc)mic Vnwever, there is no N'ay Pleilanical badi-Ffq balance cr spending rule. thz..t both allows Congress lit(3,ne.ive to a m7chanicel s to in ul?.tc f- 1sr:11 rolic: ircm short-tecm poliLical pressures and permit judrent to he ..-Kercised in budget decisiors Oven ctkl:;ging economic conditions. recomm!)ne file Conc)r could ri.T;ire the redlri Rcserve Board to This recommen- s cr d2F1cit for the •(Irt,ing fiscal year. !..urp,u de I on (ird Se1.3t:: E1Id3t. Ci)Tmittees at to tk;c, ;Id : Jr's, i Us ing other economic data at their disposal, e.g. the reoommendations of the CougressioN41 BudrA Office s OMB, economists, etc., the respective Cormitts wiuld recomend and the House and Senate would then set surplus ished. or deficit *levels vi thin whith the bud1:2t wr:old be establ Ihe5e :9vels would not rIcessarily be the same an those iecommended by the fLdPral Reserve floarcl, but at least wf-! hive the indepcnnt judgrit of tir2 governmental entity m:)st reponsible fo- fiscal and for monrAary Wicy On 'Lhe 1,dte of ihe economy i-trid the relative need nur.olus or e(?ficit. 2 ••• http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis EXTENSION OF REMARKS Richard A. Gephardt CO1OURRFNT RESOLUTION ON FISCAL,POLICY hON. RICHARD A. GEPHARDT Of Missouri In The House Of Representatives Friday, November 2, 1979 • -No Sr.-:;er., I am tod-iy itro&cing legi!.-lation that Conyr.ess;iel.1 3uljet Act -to r?(;uire tha Federal Reserve w:uld PrJard to suinit tc th.2 House of Representatives and the Senate a recommended levc! of surplus or deficit, bascd on anticipated levels of revenue .74nd outlay and ether cc;:morric data tc) purue a successful eccnemy for the no.i.t fif-c!ll year. This data would be submitted at least one month before thr! First ,1!1:1 Sec:ond Budg2t. PPso!utions, respectively. Using the submitted reconvcrThtions and any other apprepniate r..2cormcw!ationf„ each HCUSP wcu:d then act by Concurrent resolution to establish the surplus or deficit level to be utilized by the House and Senate 3udget Committees in the Congressional Budget Process. r.c.Kis to find a new proposal being offered to i:)7siro hil1,7tncr. or, ) ,s tYese dre noble rN7-.ogq limit Federal spending. t. pf ai Ii'Kspe we While ar:hir.vr! someday, we should . tilt a -1,jid ti.71ced buCcjLt rule lqcly would have a cff.2t cr. the econmy. It wou1c! require fiscal policy to LP restrictive in reeesions and stirdulative in boGms. A macroeconomic ro1c:1 sisruiation u3ne Cy Data Resources, Inc., indicates that a rigid balancer] buduet ru12 would lilv greatly deepened and pro1on9ed the 1974- both 19.75 recessicin, resulting in unemployment rates ahuut 11 percent in 1975 anl 17f, end refraining above 9 percent as late as 1977. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The important point i5 th t Cong -es,, would take into consideration and decide on the ov, -L11 si7e of tho hudcet before deciding on actual, specific outlays. 'r.ral Reserve roard recucrendltion on In sum, cor.sif:eiaLion of fiscil policy as an a ternative to a p.e,:hanical rule does help clarify the wajor issues in the debate: The movement of Congress toward ceding its authority over policy fro.:1 short.t,-- rm rrcssures. The 6, .qerrvinaL.ion of the appropriate fiscal policy requires , nt in the iotorpretatior, of the availi, 12 dat?.. and judgm,, ..ch jujrjr.J:rt cannot Le written into a mechanical rule. Connress should want to exercise great care before it gives uo of its authority mer fiscal polIcy. it must carQfully weigh This rulP viould Before all)/ iloptinj a 11:2cIlarical rJle, benefits of such a change against its costs. a derision concerning the Federal deficit to be made separately and before addressing the specifics of the budget. I recommend teSncurren Resolution on Fiscal Policy to you. 0 AIIIIIIIIIIIIMPNINIO • • CM 771/-- / 13 .• .•• BOARD OF GOVERNORS OF THE • -n '42 • • •-Arrfrr • •• A' • • FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20SSI • (,) • • 1?A L tif-5;• • •• • • • PAUL A. VOLCK ER 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 oppo rtunity to put these thoughts together in a more orderly fashion. Havi ng 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 "thresho ld" unemployment rate referred to in your letter is higher than it was in the past few decades and, indeed, higher than the 4 percent rate contained in the Humphrey Hawkins Act. In January of this year, the Pres ident'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 exogenous pric e shocks can have a devastating impact on the rate of inflation. Oil pric es are the most visible example, but the phenomenon has also been appa rent in agriculture and other commodity markets. Another point that is highly relevant to the questions raised in your letter is an analytical one. Implicit in much of our thin king about national goals for inflation and unemployment is the conc ept of the so-called "trade-off" between inflation and unemployment. At the risk of confronting head-on an element of economic theory 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 public policy in the current circumstances. Inflation may have gone too far for too long and inflationary expectations may have become too deeply embedded for there to be any material trade-off in the current setting. That is, high and accelerating rates of inflation may have induced such distortions and dislocations in the economy--as, for example, in the plan ning and execution of capital spending programs--that any effort to "buy " less unemployment by "accepting" more inflation may ultimately result in more, not less, unemployment. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis .•••=m•=•1=11, . http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis S • 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 that 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. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The aseerahle Jae* K. Jevits Page three do mot clots saficient Ersverties to raider jokes*a es to the castrem es theee programs that would be the most effecttve. inpreeeed with the greet difficulties of desigining and administering edgective peewees in this ores. But, &believe that the Congress, seeperotien vith the appropriate ofOlOtOS of the La it* wisdom. NA IMMeutive Bram* coned* beperteet etridee is this area. I appreciate your giving ea the lopartsoity to agoallne on them impertent imenee• Sincerely * Sgaul A. Volcker ZGZ:vcd (#V-123) ) -44,-1; bcc: Hesars. Corti&aa, Ztickler, Zsisel, Lichliast,(t Mrs. nailer& (2) JACOB K. JAVITS NEW YORK • REGIONAL COMMITTEES: FOREIGN RE LATIONS HUMAN RE SOURCES GOVERNMENT AL AFFAIRS JOINT ECON OMIC http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Room 511 110 EAST 45r)4 STREET NEw YORK, NE W YORK 1001 7 Cniteb Ztafez Zen ate Room 222 FEDERAL OFFI CE BUILDING 111 WEST HURO N STREET BUFFALO. NEW YORK 14202 WASHINGTON . D.C. 2051 0 November 13 OFFICES: 1979 Room 420 LEO W. O'BRIE N FEDERAL BU ILDING CLINTON SQUA RE ALBANY, NEW YORX 12207 Dear Mr. Volc ker: The onset with six per of persistent double-dig i c about the va ent unemployment raises q t inflation l u our thinking idity of the assumptions estions un a employment" u bout the maximum sustaina derlying bl n country in 1 employment rate appropria e "full 980. te for our The interim g oal of four p as codified ercent unempl in the Humphr oyment, e y-Hawkins Ac unrealistical t, ly uing changes i low, given the recent an may be d continn the demogr aphic composi the U.S. labo tion of r force. • If true, th is could have reaching eff profound and ects on our n farational econo in the decad mic policy e which begin s next year. there be acc eptance of a higher numeri Should old for the cal threshso unemployment, -called "full employment" r both for our it would have important im ate of understanding pl current high of and respon ications r s sures to be a ate of inflation and for t e to the h d high rate of opted to reduce further t e meahe current unemployment. If, as some a rgue, we are p even slightly resently at below -- the - or "full employm ployment rate en stimulative a for our country, then adop t" unemtion of gg could be most regate fiscal and moneta ry p im the unemployme prudent; and further redu olicies ct nt rate would through more have to be ac ions in ta hi CETA, local pu rgeted employment policies eved blic works an d job trainin like g, etc. I would deep ly appreciate this question and making rec your considering ommendations respect to th e policies th at might be p with roper. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Paul A. Volcker November 13, 1979 Page 2 I hope you may be able to act expeditiously on request and look forward to hearing from you shortly. With best wishes, The Honorable Paul A. Volcker ChaiLman Board of Governors of the Federal Reserve Federal Reserve Building Room B-2046 20th and Constitution Avenue, N.W. Washington, D.C. 20551 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • • -0' c BOARD OF GOVERNORS OFTHE FEDERAL RESERVE SYSTEM WASHINGTON, O. E. 205SI • • • • << e,'":.^.• est. . - It'4L '• . . .. •' PAUL A. VOLCK ER • CHAIRMAN December 11, 1979 The Honorable Henry J. Nowak Chairman Subcommittee on Access to Equity Gapital and Business Opportunities Committee on Small Business House of Representatives Washington, D. C. 20515 Dear Chairman Nowak: Enclosed are answers to the questions raised in your letter of November 13, 1979, in connection with your Subcommittee's recent hearings on "Monetary Policy and its Effect on Small Business." I have tried to be as responsive as possible but, as I am sure you will understand, it is extremely dcult to answer questions about future monetary policy actions except in general terms. The policy response of the Board or the Federal Open Market Committee to specific adverse developments must in any event reflect consideration of those developments in the context of the overall economic and financial environment at the time. Sincerely, ataVaititt Enclosures 4 QUESTION 1 Question. Under the Credit Control Act of 1969, the President may authorize the Federal Reserve Board to regulate extensions of credit "...for the purpose of preventing or controlling inflation generated by the extension of credit in an excessive volume...." ** Does the Board have contingency plans in the instance that the President invokes this authority? ** What actions would be taken to insure that small business receives favorable treatment in such a situation? Answer. The Board does not have any such plans at present. Control Act of 1969 is very broad. The Credit It permits the Board--but only upon authorization by the President--to regulate any or all aspects of any or all kinds of credit transactions. be invoked. We have no expectation that the Act will In any case, there is no way of anticipating which aspects of which types of credit the President might at some time in the future authorize the Board to control. Nor is it clear what degree or method of control would be most appropriate to the specific situation. Under these circumstances, development of contingency plans to cover an almost infinite number of possibilities does not seem feasible. For the same reasons, it is almost impossible to decide in advance what actions would be appropriate and necessary, in the event that the President activated the Credit Control Act some time in the future, to insure that small business borrowers were not treated unfairly. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • QUESTION 2 Question. The international position of the dollar has firmed since the actions of October 6, 1979, but the record trade deficit reported for September will put pressure on it in the coming mon•ths. Will the Board maintain a stance of restraint in order to support the dollar if the domestic economy weakens severely? Answer. Current projections of thetrade deficit generally indicate that the U.S. position is likely to improve over coming months, even if crude oil prices rise significantly further. If the domestic economy were to "weaken severely" as you suggest, U.S. imports would weaken S. This woulI strengthentrade picture and should help to sustain the dollar's international value. Consequently, under the conditions you postulate, the international and domestic objectives of monetary policy would not be likely to come into conflict. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis a, QUESTION 3 Question. Given the fact that a significant portion (one-third to one-half) of the current inflation rate is attributable to increases in crude oil prices, is it likely that inflationary expectations can be relieved if the OPEC countries continue to increase their petroleum prices at high rates during 1980? ** Will the Board act to accommodate credit needs brought about by higher cost oil imports by raising the monetary growth targets? Answer. There is little doubt that continued very rapid increases in petroleum prices would hamper our efforts to achieve an early, substantial reduction in inflationary expectations. But I think such price increases would more likely delay and moderate, rather than prevent, such a reduction. The steps the Federal Reserve has taken should temper people's expectations of future increases in other prices, and contain the secondary impact of oil price increases on the general price level. I hope we will not see another year of huge increases in OPEC oil prices, but if they do occur, we should be better able to absorb them than in the past. There is no way of knowing, at this point, how the growth targets for the monetary aggregates might be affected next year by sharply higher costs of imported oil. sidered. Too many other factors would also need to be con- The oil-price situation might or might not be a crucial factor. petroleum As I pointed out on another occasion, the larger the increase in is prices and the morq, inflationary pressure it exerts, the more need there for transactions balances. The extent to which money' demand might need to be accommodated would depend, at least in part, on general economic and financial conditions. It is clear, however, that any significant degree of such accommodation would limit the success of our efforts to contain inflation. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis QUESTION 4 Question. Will the discount window continue to be as freely available to banks over the next several months, or is a tightening anticipated here as well, if growth in the aggregate pick up? Answer. The Federal Reserve System has developed standard guidelines that govern member bank access to the discount window. These rules do not change with the general stance of monetary policy; they remain constant in all phases of the economic cycle and are not affected by changes in the monetary aggregates. Only in this way is there assurance that member banks facing similar needs for Federal Reserve credit are treated similarly by the twelve different Federal Reserve Banks. When changes in monetary policy are desired, the instruments used by the Federal Reserve are open-market operations, adjustments in the discount rate (but not in the rules of access to the discount window), and changes in member bank reserve requirements. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis QUESTION 5 j Question. How will the widespread use of alternate sources of loanable funds (e.g., money market certificates, Eurodollar borrowings, etc.) and the outflow of time deposits into higher yield instruments not subject to reserve requirements, affect the Board's ability to control the monetary aggregates? ** What effects, if any, will the new policy emphasis have on the shift of deposits, subject to reserve requirements, into other instruments? Answer. It is not clear that bank issuance of nondeposit liabilities in the aggregate has a significant impact on growth of the monetary aggregates. But it is clear that such issuance contributed to rapid growth of bank credit in the first three quarters of 1979. In order to help reduce expansion of bank credit, the Federal Reserve on October 6 imposed on member banks, Edge Act corporations, and agencies and branches of foreign banks an 8 percent marginal reserve requirement on the excess of these institutions' total managed liabilities over a base amount. The affected liabilities include large time deposits ($100,000 and over, with maturities of less than one year), net Eurodollar borrowings, repurchase agreements against U.S. government and federal agency securities, and federal funds borrowed from institutions not subject to federal reserve requirements. In order to improve control of bank credit further, marginal reserve requirements were also imposed on loans made by • 1 foreign offices of member banks to U.S. residents, and on assets sold by affected institutions to related offices abroad.' The existence of money market certificates (MMCs) does not appear 1.1 :1 1 11 ,, to pose a serious problem for control of the monetary aggregates. Member bank MMCs are subject to reserve requirements similar to those applied to other small time deposits and savings accounts; thus, the MMC neither permits ' member banks to escape reserve requirements nor impairs Federal Reserve control over the volume of member bank deposit liabilities. Moreover, bank MMCs are included in M-2 and, together with MMCs issued by thrift institutions, in the broader aggregates. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Therefore, growth of the monetary aggregates is unaffected by shifts of the public's funds between MMCs and other small time deposits and savings accounts--which are also included in M-2 and broader aggregates--in response to changes in the difference between the yield on MMCs and fixed, regulated, interest rate ceilings on those other accounts. In contrast, difficulty in measuring and controlling the volume of monetary assets could arise from the availability at nondepositary institutions of highly liquid assets that bear market yields, are not subject to reserve requirements, and are not currently included in the definitions of the monetary aggregates. The new emphasis on controlling reserve aggregates, rather than confining short-term movements of the federal funds rate, may have opposite impacts over the short versus the long run on the volume of funds shifted out of deposits and into other instruments. The new strategy is expected to allow the Federal Reserve to attain more closely its objectives for growth of the monetary aggregates and bank credit and at the same time to make short-term market interest rates more responsive to changes in credit demands. Consequently, under recent economic conditions, market yields likely have risen more rapidly than they would have done under the former policy, and for a time funds may shift more quickly from deposits subject to fixed interest rate ceilings into instruments bearing market yields. However, over the long run, as inflation is more effectively restrained than it would have been under the former policy, and as growth of nominal credit demands therefore slackens to a larger extent, short-term market interest rates are likely to decline faster and further under the new strategy. If so, shifts of funds out of deposits subject to fixed rate ceilings would in the future tend to slow or to be reversed both more promptly and to a larger extent. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis QUESTION 6 Question. How can the small business community and the SBA become more involved in the policy making process at the Federal Reserve? Answer. There already exist a number of channels through which the small- business community and the SBA can provide inputs to Federal Reserve decisionmaking: the Federal Reserve consults with trade associations during development of Board rules or regulations that are likely to have direct effects on small-business operations; officials of small banks and other small businesses serve on the boards of directors of Federal Reserve district banks and branches; represultatives of state bankers' associations (many of whose members are small) meet annually with the Board; and informal contacts are maintained between SBA and Board staff and between SBA officials and Board members. Some of these channels are undoubtedly not utilized as fully as they could be. In particular, senior staff throughout the System would, I am sure, be happy to have more opportunities to meet with small-business representatives to discuss matters of mutual concern. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis QUESTION 7 Question. Mr. Schultz mentioned in testimony before our Subcommittee that: "individual bankers have told us that they will be making particular efforts to hold down the rates charged on loans to small businesses." ** Haw many banks have indicated that they follow a dual prime arrangement? ** What is the geographic distribution of the participants? ** What is the average interest rate differential participant banks charge on their larger and small loans? Answer. Unfortunately, we know of no current hard information on the number of banks with some kind of dual prime arrangement. The latest data we have derive from a survey conducted by the Small Business Administration back in April. At that time, 107 commercial banks reported they were offering special small business rates tied to the prime rate. That group included 21 of the 100 largest banks in the country, and 41 of the 300 largest banks. In addition, many small banks have indicated that they do not typically lend at the prevailing prime rate but rather lend at rates below the national prime rate. Banks that reported having a "two-tiered" prime rate arrangement were somewhat dispersed across the country. According to the Small Business Administration's list of participants, all but one of the New England states were represented,along with many other states along the eastern seaboard, in the north central part of the country and in the southwest; only one west coast bank was a participant, however. In their initial announcements, many participating banks specified a fixed differential between the prevailing prime rate and the small business base rate. For most banks, the small business rate would be 125 or 150 basis points below the prevailing prime rate. The average interest rate charged on business loans of small size acquired by commercial banks has increased far less than that on large business loans. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis While that pattern may not necessarily reflect the impact of "twS -tiered" prime rate programs, it nevertheless does suggest that interest cS sts for small businesses have not increased in step with the prime rate. For example, responses to the Federal Reserve's Survey of the Terms of Bank Lending indicated that the average rate on business loans of $25,000 or less increased by only three-fourths as much, between February 1977 and August 1979, as the average rate on business loans of more than $100,000. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Se. QUESTION 8 Question. Please supply any and all information regarding the Federal Reserve's involvement in the dual prime interest rate. This information should include: (a) the activities of the Committee on Interest and Dividends during the July 1972 - September 1974 period; and (b) the activities of the Federal Advisory Council during the same period. Answer. Information on this subject was provided to the Subcommittee by Vice Chairman Schultz as an insertion in his testimony of October 30. QUESTION 9 Question. Please update the attached chart on "Long-Term Commercial and Industrial Bank Loans (Other Than Construction and Land Development)". Answer. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The updated chart is attached. •-, • LONG-TERM COMERCIAL AND INDUSTRIAL BANK LOANS (OTHER THAN CONSTRUCTION AND LAND DEVELOPMENT) August 6-11, 1979 Percentage Distribution by Size of Loan ($000) Total - All Banks Number of loans Amount of loans ($000) Percent of change from August 7-12, 1978 Number Amount 48 Large Banks Number of loans Amount of loans ($000) Percent of change from August 7-12, 1978 Number Amount Smaller Banks Number of loans Amount of loans ($000) Percent of change from August 7-12, 1978 Number Amount Source: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis All Sizes $1-$99 $100-$4Q9 $500-$(499 $1,000 and Over 29,692 $1,888,703 94.6 19.0 2.8 8.9 6.4 65.7 64.8 46.2 75.3 49.0 -50.3 -41.0 20.4 24.2 298.0 85.9 2,455 $748,157 78.3 5.6 12.6 8.6 3.8 8.7 5.3 77.1 -2.8 6.5 -6.6 3.6 0 7.1 49.2 51.1 33.0 3.2 27,237 $1,140,551 96.1 27.8 2.0 9.2 0.3 4.9 1.6 58.1 75.8 93.6 87.4 58.0 -61.5 -53.8 2.8 804.0 514.1 . Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release, E.2. • • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis usL:ember 12, 19/9 The flemerable Thomas P. o'Neill, Jr. Spelher of the douse of Seprosentativea iftehtegton, u. u. 20315 Dear Mr. Speaker: Pursuant to your staff's request, I au writing to inform you of our position on pending legislation which, for tax purposes, would exclude from gimes income certain interest earned on savings. The legislative proposal attesots to increase saviage by raising the aftertau rate of return on oavlilge accounts at meet depository institutions. The impact of the proposal on totil household savings is likely to be small .lartly lissome the after-tax rates of return would be raised for only a mall portion of total savings. The maximum amount of interest that can be excluded is relatively small, and the exclusion would apply be exiatimg as well as new deposits. This means that individuals already aerates the menkroo would have me incentive to save additional amounts under the proposal, to thee* savers the ex.lision serety would represent a tax cut. Sven for those individuals earning less Chan $100 in eligible interest, the T'assibis incenti4e to save veuld diminish ever time as deposit belam.es increosod--which could occur with shifts of existing assets or through additiees1 saving* dire ted to eaviags accounts. The ,rormsal in general dmes not seen to be a particularly cast-effective way to en.ourage increased ?rivets saving. Moreover, even if aggregate savings, were increased, Unlacing the resulting larger federal budget deficit would absorb some of these resources mh1,71) might have been available for private investment. The enlarged budget deficit itself mould tend to exacerbate the problem of inflation. I hope these comments will be iseful,. Sincerely (FF: bcc: JLK) KAG:RIX:vcd z Mrs. Mallardi (2) v' http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Mogramber 29, 1979 The MaramObla Jaen T. hroybill Seen of lepronetattwas Vaalikthatagi .C. 2051S Dear Mg. BroAllis This is is reepeeme te peer roKmest am behstf ad sew of yens sosetitents, Mt. Seemey neer* semsersing the desire of the Lions Clob of Merth Corollas to ellotaie 908 tiserfamor silver dollars to be distribsted at a Christen party he the Wed. As pout nett is mere, the *oars staff cootasted the iherlotte $unoth 0 the Madero& iseerre Bea at Righuom4 as issenhos 21, awl wronged for the faiikiery et Stoonhower 4sUar soles to the First Wetiesal Ink of Lemarimileverfier 2ö. Stare 'Wesel Mown Soho amity sbip seismsisosaadard nate, we lhossiaload a bag WAN vadmir thee the Me reseeetedA Tau memtimusi that the L4sue Club would prefer Plenehower calm he.the SOWS S. Ardor. eels is diffieelt for the blind *Mom to reeesulftwo Canaliaraties was given to this igen is the &mime of the Mathew sada. Seissessestileee ad the listless/ redowetion Mhe Nino se well ee its Mirth Cerelim diMpear, wogs sigitested 111 the ant to !tosses the dmeiss, tactile Ihresteeristios, else sod *their feetwee of the Asthma, 414111 Wets it was hineedueed. It we. as remelt of dissuasions wok as this that the Me ausisms4 the Asthea. sees with as elevest04110d Wog ber4er to dietimisigib it from the astrter. wa were happy fobs 4400iStaa00 SO meals' the delivery of the silver dollars eartiet they slight be seeildble tee the Christmas party• StIMMktei7, WINtMLSOLS:WW:Ot (PV-125) bec: Mr. Wallace P14.1.safrudA; JAMES T. BROYHILL 10714 DISTRICT, NORTH CAROLINA ROOM 2340 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 202-225-2576 S • Congre DISTRICT OFFICES: 318 SOUTH STREET GASTONIA, NORTH CAROLINA (7041 864-992.2 of tbe Ziniteb 6tateg 224 MULBERRY STREET, SW. LENOIR, NORTH DAROUNA 28645 (704) 758-4247 30ouiSe of ileprefSentatibei COMMITTEES: BUDGET INTERSTATE AND FOREIGN COMMERCE Room 310 POST OFFICE BUILDING HICKORY, NORTH CAROLINA 28601 tilassbington, D.C. 20315 (70.4) 328-8718 November 19, 1979 ROSA/ Uonorable Paul A. Volcker Lliairman Board of Governors of the Federal Reserve System Federal Reserve Building Washington, D.C. 20551 Dear Chairman Volcker: I have been contacted by Mr. Barney Cloer and the Lions Club of Lenoir, North Carolina, concerning their desire to obtain 500 Eisenhower silver dollars to he distributed at a Christmas party for the blind to be held in early December. I realize that this coin is difficult to obtain in such a large quantity; however, the Club would appreciate any assistance which you can provide in this regard. The new Susan B. Anthony coin is difficult for the blind citizens to recoanize and for that reason, the Club would prefer obtaining the Eisenhower coins. If possible, the Club would like to have the 500 coins arrive at the First Union National Bank of Lenoir before November 26th. I realize the time involved may present g'problem; however, I would appreciate any assistance which you can provide. Thank you in advance for your time and cooperation. best r VVeN (7 rds, s T. Broyh 1 I.laj jber of Congress JTB:sa http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 28052 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Illesesher 114 1919 Patteroos The ILsourablek Jim Mose el iteerseesistlionts leseideigtes, p.C. MU am Mr. lhotterooet Sy letter dosed entehor 22, 1 treseodteed to yes the ileaves V*se regarlites the peepeeedwouptios in WA, 22SS for Wm* Wats fiefosiss with total susses of NO aillies or lees from the bill'. prow *Wow prohibitive hankb.lfl soposise Inemeagegiss is Leeman. setivitioe. Yang.* (2) ei ay bettor *tells& shot the emeoptieseesid alto the eel. of pesperty sad mslty toessesse es well se the ander• grLt** ed seek tesenouse• Iwield Me to tabs Obis oppostsaity to assess, that statement* While Mho OP minim anosptims sill in fee* monhoriso 4melitytes book leldlias eenpsmdse Oesmingm1.sommerel ineenemss Sielpivales togas/se iss aey 4etivttimil, ft *ill ala autteariar 111111111writille astivitioe. lametheleas,ths osesptios greatly supeede tilie agape el immense linsa Whet seek commies uoy offer se gest. lase it world imstbaciss web balk WM* eangondss to sell ineoneues onmstotod to as eassesies eroitt, suds se hielth, miss end ate Assussemo, sad ismswasse1isprestmesly met authorised by the llosed, stemily„ fidelity, tom of rent. besineeo imeersepttos mod oes sod esespooey isseresso. fleeIly, Iismaidt tibs to seta ems esimption 00 la ca. 22SS. esooselles to same la immerses* estivitioe AMA,w•s14 lostuts bilat is seameties with sum.,of the loadiss sittimPitime of their soomemor ffatmose substAiariss, egos est seatide Usibtotios oft tits typt laSsitmese aottvitioo dot sagi be essiestail dronesises diesetess, sweeties sepses* to estbswiss be Wolin stressiso to ewes is bath weir usilerwritiss tosetiese is assiestiss iritb eortain of tbo Sesiims estivirtis of oommatie threw subsiiilite of bask betties asieesies. Um* goo for the oppeeweasity to asimost Morass lissemears siPaul A. Val.cku Mallitpje (PV-29 preview earreepseilises) bite: Mhoilefer Risikitt Mire. lieliardi (2) 22,5. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Illessidoes 50, lbellowebleuillimPassakis iletemee Ilimesitsee es Saidlgtos.su odsligsboe &Mars IWASse Stout* Smell iftelimmaes, SAw MIN Ser. fauktouss APanidess Meek Ise ibt peer Sestet if lieelbst 26 reserdies yews Sa IOW is bill to peemits iitats tbeeessed dissaisesis heortme beds sod esker ttommidel imetlemsfees se assed State memaysoilfte sod asilie She some imSemeet rose em Immo as isetleeol beds* 1 aelp4smeed so Whom leo that 'tee 4botemma ?redbrick 11. if the lewd moilosoispe Vesegibew 17, edieate 1411 appear es at VMS a.m. Sdatikk COON:pjt (#V430) beat Goo. Schultz Jim !Walla* Mo. 1641.4nrdl (2) http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis AolootAbor The Meneesido Chew 1979 is Soisiott Imo mflopeematativae Noe tagitaa, 0. c. 22313 allet SEA begaillaS ma glad he everploasat IF 'tattier eg smasher 14 (espy Ogiolseed) by ,Ameasmelas the aleilember 12 totter tem yam tillietitINIONIe Sty SIM $. • tenant tle. Is O ssi w. Poitoseet. vetuaratoe his iisit about the offee.ta of KO 611111111111* OMNI SU istlatheso with pant atm straits as M1I meshes Is samittrials dos* of • ts. the roapeitao foto el S Lt ahemL4 fin* be NOW alies Sibs ifilesse or *iris bal lea? maw tissue is the stusimmala artiste es *bleb rieltaisat refereed se aa estimate ot the aim of do Pasedieltar aesbet, orarotstoo the mimes U1117 Sipataws se de seert. Seth a Lugo aulhor teraeraea a alballastial oimat bisalliele it tirAtallia sU e• Suremllotiar baollimes deubla that Moho the with auk other. Nem rolovaat essimeee• of the alas of the Statrodellast sarhet ellaibusto that &obi* Gountiag oil cartel* other 111iMalli... *SUM tablIMISSE la die liplet44 flaw,. PI :TT$•. lieeodellar • essolmika atae the maw of $133 bill/ea NMI WallIs1610-6410411 aro bill alit $173 tali. ilarevisr, it eat he elalsoliag to foci" oily ea beresitageSE lhameellsero byI. S. teatdmata. amomp1o: while ll• S.--baeoll bombe did battemt (aot.) asie $27 Union tem be *mauls She faltall Mem dories doe fix*: thems guanors of 1S7S, thoey also isissef rola* to formieuesa tom ths-r S. dlt.sesomottas tO *banal.(aist) dialog the. WM& rksza, tiurias this period 44 11.0hessil babe tora sot boresarroSEor y abort $11 bitHes,IlkiNIPIOr, 11,41missie Mao rota met jailme of easel WS. $4 Wiles ellP ilesetemorev lbws sae riamiot omens greestalle that tio SNOW bee Won depoileaa as Iferolge Imeletre. o• MOM Sblie die most oasis* SE t.forhera1 aseeree sU home the oble elm IaOssees rota* cos &ilium mai sere Stehle WIMP dIelleso saa be et d asettra osieles. dem pooridltes• ibisilleLlea for isemormi sag siessIsei ireamomat solmisb• s MAW vied (IN-129) Ix:et Itames. Munn and Henry saeumaar ilanardi (2) s/Paul A. VolckeE "Mr 111 CHARLES E. BENNETT MEMBER 3D IDISTR,-7T FLORIDA ARMED SERVICES COMMITTEE CHAIRMAN OF SEAPOWER SUBCOMMITTEE JOHN W. FARLEY ADMINISTRATIVE ASSISTANT THOMAS J. MILLER LEGISLATIVE ASSISTANT Congre5 of tbe Unitcb fitatO SHARON H. SIEGEL LAURA M. BISHOP SARAH J. SCOTT CHERYL L. WRIGHT iDoufSe of leprefSentatibeg JACKSONVILLE OFFICE 352 FEDERAL BUILDING 32202 Mactington, D.C. 20515 TELEPHONE 904-791-2587 TERI A. WOLF PATRICIA A. CAHILL SECRETARIES November 26, 1979 JOHN W. POLLARD, JR. BRENDA DONALDSON Honorable Paul A. Volcker Chairman, Federal Reserve Board Room P 2046 20th Street & Constitution Avenue, N.W. Washington, D. C. 20551 ammEn.-- Pfr Dear Mr. Chairman: I refer to my October 29 letter and the October 20 letter which stimulated this, copies of which are enclosed herein. I have now received the enclosed November 12 letter from my constituent and a copy of a clipping from the Wall Street Journal. I am not a master of matters of this type, but know that you are and would appreciate your consideration of what Mr. Poitevent has said and any observations that you might pass on to me that I could pass on to him. With kindest regards, I am Sin erely, Charles E. Bennett CEB:clw Enclosures cc: Honorable Frederick H. Schultz w/enclosures - http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis October 29 an-I 20 letters were resnoniei t, y Chairman Volcker on 11/16-International Oivision is in the process of preparing response to November 12 constituent letter. THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS • •' : - 1.4, FieX, http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis October 29, 1979 Honorable Paul A. Volcker Chairman, Federal Reserve Board Room B 2046 NW 20th Street and Constitution Avenue Washington, D.C. 20551 Dear Mr. Chairman: ter from Mr. Poitevent, I received the enclosed Oc6ober 20 let I would appreciate andouts!.anding man in my home community and to make with regard to an observations that Trn might bet able enough of an expert in the things that he has said. I am not solutions may be. the handling of money to know that the With kindest regards, I am Sincerely, Charles E. Bennett CE3:js cc: Honorable Frederick H. 6chultz w/enclosure http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • Earl S. Poitevent, Jak October 20, 1979 The Honorable Charles E. Bennett 2107 Rayburn Building Washington, D.C. 20515 Re: U. S. Federal Reserve Inflation Policy Dear Charlie: There is an old saying, "In business you hire men and you hire money." How in the world the Federal Reserve can fight inflation by making money more expensive defies reasonable deduction. If it Is true, then the AFL - CIO is remiss (if not unpatriotic) In not demanding 15t-20% wage increases to fight Inflation. Of ell people, Jimmy Carter should know high interest rates create inflation. After all, he used to borrow two to three million dollars a year to conduct his business. How much would the price of peanuts have to be raised to accommodate 10% additional interest costs? However, the damage to the home front of high interest rates is possibly surpassed by the long term damage to the dollars' international value. It is estimated there is now, or soon will be, seven hundred billion dollars overseas. We are expected to borrow this money back at approximately the rediscount rate, or some 12+%. So we pay out some seventy billion in interest to further debase the dollar. Our balance of trade deficit and foreign aid debases It even further. If this trend is not reversed there will be two trilliun dollars overseas in less than ten years. Now what would happen if the rediscount rate was lowered to 50 The foreign money lenders would yell bloody murder. The dollar would temporarily dip against the foreign currencies, our manufacturers could modernize their plants, and balance of trade would develop In our favor. Our trading partners would suffer some temporary disruption to their economies. They 1 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis would probably have to resort to deficit spending to shore up their economies. Their currencies would ultimately be somewhat debased. Our dollar would be strengthened. The Arabs would stop buying gold and raising oil prices. Who profits by high interest rates? The al Federal Reserve does by its manipulation of the feder bond market. The Fed's member banks do by using the rediscount rate as a basis for loaning out their money (legal usury). The foreign lenders do. Who gets hurt? The general public from grocery and auto buyers to home buyers --- also, the Federal Reserve Banks chief competitors (the Savings and Loan Associations). It is certainly hoped that you and your colleagues can put a rein on the Fed's unbridled power to put the economy of this country on its knees at the whim of a few unelected officials espousing esoteric views. After all good times and their accompanying s'de effects --- low unemployment, good state revenue, et cetera --- ain't all that bad --- unless you happen to be a masochist, an international money lender, or a trading partner who is used to getting the better bargain. This country sorely needs a stable economic period of several years with reasonable interest rates and sufficient monies to conduct manufacturing, trade, and to rebuild the efficiency of our plants. The Federal Reserve Boards' activists policies preclude this. So why not abolish the Federal Reserve Board --- not the Federal Heserve --- and let Congress set the rediscount rate and the bank reserve rate. That's about all the Board does and Congress already sets Income Tax rates, Sociql Security rates, et cetera. Believe me, it is not all that complicated. If the rates were set fairly, they could easily last 20 years to everyones advantage. Your views on the above would be appreciated and it would be germaine and interesting to know what http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis the assets of the Fed are now and what they were 20 years ago and where the money came from. I remain, Sincerely, ( IX( Earl S. Poltevent, Jr. I might add that a 5%rediscount rate would P. make the prime about 7% and the average loan about 8%. ESP:map http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Earl S. Poitevent, 4301 Venetia Blvd. Jacksonville, Florida 32210 (904) 389-5446 November 12, 1979 The Honorable Charles E. Bennett 2107 Hayburn Building Washington, D. C. 20515 Dear Charlie: Thanks for your letter of October 29. In it you mentioned that you had not been too much involved in the management of money. Please permit me to draw you 9 rough analogy of why high interest rates result in additional inflation. Suppose you and I are in separate businesses, and we need to trade with each other. We agree to accept each other's notes. Such notes are to carry 10% interest, and we are to settle out at the end of each year. Now further assume the scenario remains the same for twenty years, namely you buy .1.:1,100,000 from me and I buy ,4:1,000,000 from you. At the end of the first year we settle up. You return ,?1,000,000 of my notes but I only return 990,000 of yours because you had a trade deficit of ::t100,000 on which you owe me n0,000 in interest. So I start the second year still holding 1.10,000 worth of your notes. I will start the following year holding 1231,000 of your notes, the eleventh year holding $1,753,114 of your notes (1,000,000 trade deficit plus $753,114 accumulated interest), and so on through the end of the twentieth year et which time I will hold $6,064,441 of your notes (2,000,000 trade deficit and 84,064,441 accumulated interest). Accordinw to the Wall Street Journal of 10/26/79 (article attached), we now have i$965 billion Eurodollars (your notes) outstanding. We are borrowing these Eurodollars back at 16% or more. If we borrow 90,-2; of them back we will ship an additional 1.39 billion overseas for interest. Now add this to our trade deficit (say :30 .1 billion) and there will be right at $1.13 trillion Eurodollars outstanding this time next year. • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Everyone gets excited when our trade deficit goes up. And, also, when our deficit spending goes up to run the government, and they should, those are inflationary factors. But, I submit, they do not hold n candle to the inflationary force of paying 16% interest to borrow back 't965 billion Eurodollars, or a high percentage thereof. I believe it would get the nation's attention if these interest figures were published along with the trade deficit figures as they are the same as a trade deficit. As far as the American economy is concerned the monies spent for defense, welfare, etc. stay in this country. Whereas, the monies we ship overseas for interest on Eurodollars both reduce our national money supply and make us just that much more dependent on foreign lenders. This is why I think the Congress should establish the rediscount rate. I do not believe it should be over 4% as this would allow the banks to loan their monies out at 7; or 8%, which they can live with and still return their stockholders a very handsome profit. It is ironic that with the elaborate checks and balances built into our Constitution to protect the populace against excesses of power we end up with an activist Federal Reserve Board of Governors. They have deliberately put American industry in the clutches of foreign lenders while singing a siren song of fighting inflation the hoax of the century. With best regards and hoping you have heard something from the Fed and Rep. Reuss by this time, I remain. Sincerely, Earl S. Poi event. Jr. ESP:map Removal Notice The item(s) identified below have been removed in accordance with FRASER's policy on handling sensitive information in digitization projects due to copyright protections. Citation Information Document Type: Newspaper article Citations: Number of Pages Removed: 1 "Loophole Is Found In Federal Reserve's Tight-Credit Policy." Wall Street Journal, October 26, 1979. Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • ••oofGoVt4'•• • f2 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM •••5. WASHINCiTON. D. C. 205I PAUL A. VOLCK ER CHAIRMAN December 11, 1979 The Honorable Mario Biaggi Member of Congress 21-77 31st Street, 2nd Floor P. O. Box 5101 Queens, New York 11105 Dear Mr. Biaggi: I have read the letters from two of your constituents and I understand their concerns. The real estate industry clearly faces difficulties as a result of rapid inflation, and the monetary policy actions necessary to contain that inflation, interest rate ceilings, and other factors. Sharp increases in interest rates in financial markets generally, and on residential mortgages in particular, followed in the wake of monetary policy actions announced by the Federal Reserve on October 6. I believe that decision and our current policy must be evaluated in the context of events leading up to October 6. In brief, those circumstances were highlighted by an acceleration in inflation and inflationary expectations; a burst of speculative activity in the gold, commodity and foreign exchange markets; renewed downward pressures on the dollar in foreign exchange markets; and rates of growth in money and credit far in excess of those compatible with achieving noninflationary growth in the economy. If this combination of events was permitted to persist, the results would have been still higher inflation, still higher interest rates, and an even more difficult adjustment in economi c activity. In light of this situation, the need for forceful action by the Federal Reserve seemed clear. But, it does not diminish the legitimacy of your constituents' concerns about the impact on the housing market. Certainly, I am sensitive to the credit needs of the mortgage markets, zoi well as the needs of the small business community and the consumer. I have taken steps to stress these needs to the banking community in letters, speeches and personal conversations. I very much look forward to the day when we can have substantially lower interest rates. A sustained reduction in the levels of interest rates would foster the orderly distribution of credit throughout various sectors and regions of the economy and reduce hardships of which your constituents write. Achieving that environment will mean that we have succeeded in damping inflation and inflationary expectations. Si it erely, 7 Ct,a0alt&t" BOARD OF GOVERNORS OF THE FEDERAISERVE SYSTEM •(", Date To: From: JAY BRENNEMA ( 1 Per Conversation ( ) For com ents and suggestions ( 1 For your information ( ) Phone me re attached The attache0 letter has been rered to Jim Kichline on this date, for response by next Friday, Nov. 30. http://fraser.stlouisfed.org/ t Federal Reserve Bank of St. Louis ( 1 Over • MARIO BIAGGI COMMITTEES, mfOOTH DISTRICT. NEW YORK EDUCATION AND LABOR SUOCOMMITT EC S• LABOR MANAGEMENT RELATIONS POST SECONDARY EDUCATION WASHINGTON OFFICE: 2428 RAYRURN NOUSE OFFICE BUILDING WASHINGTON. D C. 20515 (202) 225-2464 Congres'of tfic Ziniteb ptatc5 3ipti5e DISTRICT orricrs of ilepregentatibesS SELECT EDUCATION ft"fo MclicHANI -MARINE AND FISHERIEV BRONX 2004 WILLIAMSBRIDGE ROAD BRoNx. Nrw Yogic Washington, D.C. 20515 SUEICOMMITTEESI CHAIRMAN, COAST GUARD AND NAVIGATION 10461 (212) 931-0100 MERCHANT MARINE QUEENS PANAMA CANAL SrcoNo FLOOR 21-77 31ST STREET November 16, 1979 P.O. Box 5101 QUEENS. NEW YORK 1 SELECT COMMITTEE ON AGING SUBCOMMITTEE: 11105 CHAIRMAN. HUMAN SERVICES (212) 932-4448 DEMOCRATIC STEERING AND POLICY COMMITTEE Paul Volcker, Chairman Federal Reserve Board Washington D.C. 20551 SELECT COMMITTEE ON NARCOTICS ABUSE AND CONTROL (EX-OFFICIO) CHAIRMAN, AD HOC CONGRESSIONAL COMMITTEE FOR IRISH AFFAIRS Dear Mr. Volcker: ammoom.— I am enclosing copies of two letters I have received from Mr. Bill Karsonis and Mr. Willard Rose, both real Estate Brokers in my Queens District Constituency. The letters explain their grievances in full detail. I would appreciate your looking into this situation for these brokers and advising them of the results of your inquiries. I am certain that my office will be receiving further communications from other businessmen in the area, therefore, any correspondence you may acquire on this problem should be forwarded to my Queens District offfice. In this way I will be able to properly respond to my constituents should the need arise again in the future. Thank you for your cons matter. ion and assistance i. this ely Yours MA IOBIAGGI, M.C. MB:mm Enc. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED F BERS • , • ;7•• V • •t. - ' .r .•• •• . ^• . t.., . avlbjelr•Op! . tt • KARTSONIS REALTY REAL ESTATE SALES- RENTALS - MORTGAGES 43 08 BROADWAY ASTORIA LI NY 11103 TEL(PHONE 278 8500 November 2, 1979 Dear Representative Biaggi: It is unfair for the federal government to fight inflation by making mortgage money virtually unavailable for the buyers and sellers of home As a matter of fact, in the long run, this apprcach only adds to inflation. In addition to getting the executive branch to change its ill-considered policy, Congress can do a number of things to alleviate the situation. In the field of FHA mortgages, you should force HUD to authorize a more realistic interest rate. Right now, the amount of "points" required at FHA closings is bringing financial hardship to the parties involved and even causing cancellation of many sales. More money for conventional mortgages can be provided through the New York mortgage agency ("Sonny May") and similar progiams, but this won't happen until Congress clarifies the status of tax-exempt bonds used for this purpose. Realtors support other measures to attract more money to thrift institutions, such as exempting savings accounts from income tax. New York State has another problem in the form of an outmoded usury law. However, even if we get this changed at the state level, a major part of the difficulty is being caused by Washington. On be;lall of your constituents who are unable to buy or sell a home, I urge you to do something to reverse the disastrous federal policies that are harming the housing market in this state and throughout the nation. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Sincerely, Bill K. Kartsonis • f ltr„ STaAile WEBER & ROSE REALTY, INC. 18-22 College Point Blvd College Point, New York 11356 (212) 939-4200 • November 1, 1979 Congressman Mario Biaggi 21-77 31st Street Flushing, New York 11352 Dear Congressman Biaggi: making ment to fight inflation by ern gov l era fed the for air unf It is of le for the buyers and sellers lab vai una lly tua vir ey mon ge mortga adds long run, this approach only the in t, fac of ter mat a As homes. to inflation. branch to change its ill-conive cut exe the g tin get to on In additi ber of things to alleviate the num a do can ss gre Con , icy sidered Pol situation. a should force HUD to authorize you , ges tga mor FHA of ld In the fie now, the amount of "points" ht Rig e. rat st ere int tic more realis ties financial hardship to the par ng ngi bri is gs sin clo FHA required at cellation of many sales. involved and even causing can can be provided through the ges tga mor nal tio ven con More money for and similar programs, but ") May y onn ("S ncy age ge New York mortga ies the status of tax-exempt rif cla ss gre Con il unt pen this won't hap bonds used for this purpose. t more money to thrift inrac att to es sur mea er oth Realtors support tax. savings accounts from income ing mpt exe as h suc s, ion tut sti form of an outmoded usury the in m ble pro r the ano New York State has at the state level, a d nge cha s thi get we if n law. However, eve n. being caused by Washingto major part of the difficulty is e, unable to buy or sell a hom are who nts tue sti con r you On behalf of disastrous federal policies the e ers rev to ing eth som do I urge you to this state and throughout the in ket mar g sin hou the g that are harmin nation. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Sincerely, LTY, INC. CENTURY 21 WEBER & ROSE REA Willard L. Rose, Jr. Lic. Real Estate Broker ,••••••••••••• .• • of GOVe' • • .6 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON,. O. C. 20551 &AL REs..- PAUL A. VOLCKER CHAIRMAN November 30, 1979 The Honorable J. William Stanton House of Representatives Washington, D. C. 20515 Dear Bill: In your letter of November 21, 1979, you aske d for Federal Reserve views on the amendment to H. R. 4986 by Senator Heinz that would place a moratorium on foreign acquisitions of U. S. banks and would require a study by the Board, in consultation with other supervisory agencies, of issues raised by such acquisit ions. Bank supervisory agencies and the Cong ress have in the past devoted considerable attention to the operation of foreign banks in the United States. In the course of implementing the International Banking Act, the Federal Reserve has been reviewin g a number of aspects of foreign banks' operations in this country. This review has included, importantly, issues concerned with the acqu isition of existing U. S. banks by foreign bank holding companies and supervisory problems that might be associated with such acquisitions. Last February, the Board adopted a statement of policy setting forth several of the steps it is taking to ensure effective supervision of foreign-owne d banks. I enclose a copy of that statement. Study of foreign banks' operations in this country is necessary on a continuing basis as an integral part of our supervisory and regulatory responsibilities. Federal Reserve staff is enga ged in examining our experience with foreign bank holding companies, and I understand that work is also in progress at other supervisory agen cies. There is no evidence at the present time that foreign ownershi p has produced harmful consequences for our banking system or for bank customers. However, we need to monitor the situation closely. In this conn ection, we recently issued for public comment a proposed reporting syst em for foreign banks and bank holding companies that will improve considerably our information on them and on their transactions with their U. S. bank ing offices. The Federal Reserve would be happy to report to Congress on the results of our ongoing efforts in this area. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • • The Honorable J. William St anton Page Two A moratorium would no t aid in the continuing and evaluation in which we process of review and the other bank supe rvisors are and will engaged. It would restri be ct the ability of U. S. banks to strengthen capital base through sale their s of stock to foreign banks. More genera there is always the danger ll y, that such a step coul d mistakenly be cons as a reversal of this tr ued country's long-standin g policy regarding fore investment—namely, "nei ig n ther promote nor di scourage inward or ou investment flows or ac tw ar d tivities." As always in measures of this ki there is also the poss nd, ibility of foreign re taliation which in this could affect U. S. bank cane s' overseas operatio ns. For these reasons on foreign acquisitions of the Federal Reserve believes that a moratorium U. S. banks is unnecess haps as an alternative, ary and undesirable. any legislative lang Perua ge deemed appropriate by Congress could provide th at the Federal Rese the rve and other interested cies initiate a fresh st ag udy of the question enand report back to the on the results of the Congress study. Such a repo rt to the Congress could to coincide with the ap be timed praisal of experien ce with th*, Internatio Act which, under that nal Banking law, is to be suppli ed to the Congress in 1980. September I very much appreciate the opportunity to comm ent on this important issue. Sincerely, , Enclosure RFG:FRD:TEA:EGC:vcd bcc: (#V-126) Messrs. Gemmill, Dahl , Allison, Corrigan Mrs. Mallardi (2) BOARD OF GOVERNORS OF THE FEDERA ERVE SYSTEM Date To: From: JAY BRENNEMANL ( ) Per Conversation ( ) For comments and suggestions () For your information ( ) Phone me re attached 2he attached letter has been assigned to Robert Gemmill in International Finnnce for a response by next Friday, December 7. It will reflect support of the study proposed in the Heinz amendment, but not of a moratorium on foreign acquisitions. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ( ) Over • HENRY S. REUSS, WIS., CHAIRMAN MAS L. ASHLEY. OHIO . LIAM S. MoORHEAD, PA. FERNAND ). ST GERmAIN, R.I. HENR e B. GONZALEZ, TEX. JOSEPH G. MINISH, NJ. FRANK ANNUNz10. ILL. JAMES M. HANLEY, N Y. PARREN J. MITCHELL. MD. WALTER E. PALPNTROY, D.C. STEPHEN L. NEAL. N.C. JERRY M. PATTERSON, CALIF. JAMES J. BLANCHARD, MICH. CARROLL HUBBARD, JR.. KY. JOHN J. LAFALEE. N.Y. GLADYS NOON SPELLMAN. MD. LES AuCOIN. OREG. DAVID W. EVANS. IN). NORMAN E. D'AmOuRS. N.H. STANLEY N. LUNDINE. N.Y. JOHN J. CAVANAUGH. NEBR. MARY ROSE OAKAR, OHIO JIM MATTOX, TEX. BRUCE VENT°, MINN. DOUG BARNARD. GA. WES WATKINS. OKLA. ROBERT GARCIA, N.Y. MIKE LOwRY, WASH. TX • • U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS NINETY-SIXTH CONGRESS 2129 RAYBURN F. HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 Iv, J. WILIEIAM STANTON, OHIO CHALmErts P. %Vt. tr. 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 G‘zEEN. N.Y. RON PAUL. TEX. ED BETHUNE. ARK. NORMAN D. SHuMWAY. CALIF. CARROLL A. CAMPBELL, JP.. S C. DON RITTER, PA. JON HINSON. MISS. US-47.0 November 21, 1979 Hon. Paul A. Volcker Cheirman, Board of Governors Federal Reserve Board Washington, D. C. 20551 Dear Paul: I was personally disturbed by the Senate's action on H.R. 4986 when it adopted an amendment by Senator Heinz that would place a moratorium on the foreign acquisition of U.S. banks. This summer the Federal Reserve testified against such a proposal at hearings before the Senate Banking Committee. I would appreciate your current thoughts on the Heinz amendment before we go to conference with the Senate on H.R. 4986. Sincerely, • J. William Stanton JWS:gwn http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • • •Q OF GOVtii...• CL BOA1RO OF GOVERNORS jk.%; 1 -.• ; '13 • 0[THr FEDERAL RESERVE SYSTEM •C • ylf • WA -o-4INGTON.D.C. ,21351 .:1 :• 11111 December 19, 1979 AL RO'.• • •..• • The Honorable Howard H. Baker, Jr. United States Senate Washington, D.C. 20510 Dear Senator Baker: Thank you for your letter of November 30, in which you enclose a request for information from a constituent, Mr. Jacobs H. Doyle. Mr. Doyle asks for a copy of Regulation Z and all interpretations of that regulation. He also requests information about court interpretations of the Federal Trade Commission's rule on the Preservation of Consumers' Claims and Defenses (16 CFR Part 433). I am enclosing a Regulation Z pamphlet which contains the Board's official interpretations of Truth in Lending. There is no digest available, however, of the more than 1500 staff interpretations of the regulation. Mr. Doyle may wish to consult the Consumer Credit Guide, a loose-leaf publication issued by Commerce Clearing House, Inc., 4025 W. Peterson Avenue, Chicago, Illinois 60646. This CCH Guide contains all the staff interpretations together with a topical index; no such index is available from the Board. It may be that a public library in Nashville subscribes to this reporting service, and Mr. Doyle may not need to purchase the publication. The staff of the Board's Division of Consumer and Community Affairs would be happy, of course, to answer any particular questions Mr. Doyle may have about Regulation Z. The staff is not aware of any court decisions concerning the Federal Trade Commission's rule entitled Preservation of Consumers' Claims and Defenses (the "Holder in Due Course" rule). That rule, which has been in effect since May 14, 1976, imposes requirements upon sellers of consumer goods and services. The FTC has recently indicated its intent to broaden the rule to cover creditors who finance these consumer purchases. (Enclosed is a copy of the Federal Register notice discussing the Commission's proposal.) The Board has certain responsibilities under § 18(f) of the Federal Trade Commission Act (15 U.S.C. § 57(a)) to promulgate a substantially similar rule applicable to banks, and will be considering how to best fulfill its responsibilities in the near future. I hope you will find this information helpful. Sincerely yours, Donald J. Winn Special Assistant to the Board Enclosures \occ. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis I Hart. Response beiniireparei by Ms. JOHN SPARKMA.N, ALA.. CHAIRMAN FRANK CHURCH, IDAHO CLAIBORNE PELL, R.I. GEORGE MC GOVERN, S. OAK. HUBERT H. HUMPHREY, MINN. DICK CLARK, IOWA JOSEPH R. BIDEN. .IR.. DEL. JOHN GLENN, OHIO RICHARD (DICK) STONE, FLA. PAULCSARDANES,MO. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis CLIFFORD P. CASE. N.J. JACOB K. JAVITS, N.Y. JAMES M. PEARSON. KANS. CHARLES H. PERCY, ILL. ROBERT P. GRIFFIN, MICH. HOWARD H. MAKER, JR., TENN. 11Cnifeb Ziafez Zertate COMMITTEE ON FOREIGN RELATIONS WASHINGTON, D.C. NORVILL JONES, CHIEF OF STAFF AVNER E. KENDRICK. CLARK CHIEF 20510 415 November 30, 1979 Mr. G. William Miller Chairman Federal Reserve Building Constitution Avenue between 20th and 21st Streets Washington, D.C. 20551 Dear Mr. Miller: have enclosed correspondence fro m Mr. Jacobs H. Doyle, which I believe is self-explanator y. I am grateful for your review of this matter, and for any information you might provide that will assist me in responding to this inquiry. Please respond to the att ention of my Staff Assistant, Ms. Lee Hunt. Sincerely ard H HHBJr:rdt Enclosure r r, r. a O JACOBS H. DOYL E ATTORNEY•AT-LAW 428 STAHLM AN BUILDING 19i9 NOV -s Ali 10: 39 PHONE 26-4169 ARK'. 415 NASHVILLE, TENNE.•;SEE 37201 November 2, 1979 Senator Howard Baker U. S. Senate Office Buildi ng Washington, D. C. 20510 Dear Senator Baker: The Federal Reserve Board and the Federal Trade Commission are putting out regula tions governing negotiable instruments, warranties, an d other trade practices. Wh at I would like to have is a co py of Regulation Z and all the interpretations with referenc e to same (like a digest). The holder in due course for warranties are covered in Volume 16, Federal Regulation s. Are there any interpretations and decisions of the Co urt? I would appreciate a copy of those or, if not, te ll me where I can obtain it. With the best of wishes. Sincerely yours, ) 11, ( - C Jacobs H. Doyle ,/ JHD/djm http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OFTHE //-- FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 c_ •TAL RES " :• • .. • • • PAUL A. VOLCKER CHAI R MAN December 18, 1979 The Honorable Harrison A. Williams, Jr. United States Senate Washington, D. C. 20510 Dear Senator Williams: I have now had an opportunity to review in greater depth the issues raised in your exchange of letters with Chairman Williams of the SEC. The problems that have emerged in markets for mortgage-backed securities seem to suggest, as you point out, the wisdom of detailed consideration of the need for Federal legislation, or other Federal action, to support or complement efforts at self-regulation. Questions at issue relate to the scope of possible regulatory action, the role of self-regulation, and the appropriate regulatory relationship of the government and its interested agencies to markets for government-guaranteed securities and possibly also markets for closely related securities, such as issues of governmentsponsored agencies. As you know, the market is now attempting to develop a framework for self-regulation through PSA Self-Regulation, IncorporaLed. One cannot be certain at this point how well this effort will succeed. However, operating rules and standards of fair practice for trading mortgage-backed securities have now been adopted, and similar rules and standards for trading government-guaranteed loans are expected shortly. PSA Self-Regulation recently launched a promotional campaign designed to extend membership to at least the major firms that trade these instruments. In addition, both GNMA and the federal regulators of financial institutions have Inaugurated certain reforms and are planning others, with a view to imposing additional constraints on the types of market abuses that prompted your concerns. The rules adopted by PSA Self-Regulation attempt to address the key problems of customer suitability standards and margin for forward transactions--the areas of industry practice that appeared to be most in need of upgrading. Nevertheless, there is still a question whether a strictly private organization can encourage membership from enough of the firmsactive in the market to insure that these strengthened self-regulatory standards will be effective. Moreover, in seeking to skirt potential violations of the antitrust laws the PSA rules simply encourage individual firms to establish http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Harrison A. Williams, Jr. Page Two prudent constraints on risks, including maintenance margins. They do not seek to enforce any uniform industry-wide mark-to-market requirement. At this point it is too early to say whether the combination of actions being taken by the federal regulatory agencies and PSA SelfRegulation, Inc., will prove sufficient to curb the abuses that have emerged in markets for government-guaranteed debt. Both types of action do seem promising, however, and the PSA effort represents an encouraging step toward the assumption of greater responsibility by market participants for policing themselves. For these reasons it would seem desirable before considering any additional government regulation to monitor closely the progress of steps already in train, until their viability can be reasonably tested. At the same time, it would seem desirable to begin a more general study of markets for government-guaranteed securities. Such a study would probably also have to consider other closely related markets--such as the market for federal agency securities. This study would consider, among other things, the details of trading and delivery of these securities as well as other operational characteristics of these markets. Its purpose would be to identify the scope and relative significance of problems that may have emerged in each market, along with any differences in the nature and extent of such problems from one market to another. The study would consider courses of action--including the specification of trading practices and other operating characteristics of markets--that might be used to supplement or reinforce efforts at reform already in train, if this seemed warranted. If the analysis did suggest that further regulation were needed, the study would consider alternative approaches to meeting the problems detected in the study. We would have in mind forwarding this study to the Congress early in the next session. To date no detailed study of this type has been made. The earlier study prepared by R. Shriver Associates for the Department of Housing and Urban Development--while very useful--focused essentially on forward transactions in markets for mortgage-backed securities. Moreover, it was concerned more with exploring the prospects for private self-regulation than with evaluating the possible need for and techniques of public regulation. I have discussed in a preliminary way the possibility of organizing the type of study outlined above with both Deputy Secretary Carswell of the Treasury and Chairman Williams of the SEC. They have responded favorably to the idea. Other interested agencies will, of course, have to be involved on a consulting basis, but primary responsibility should be limited to our three agencies if the study is to be completed reasonably early. We contemplate a report by April. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Harrison A. Williams, Jr. Page Three We are prepared to proceed in this way and would welcome your comments on this approach. In the meanwhile, the attachments provide the specific information you requested on our current regulations and procedures. S27erely, 1 ,hY/ Enclosures • Attachment :;t.quested Attached, as requested, are copies ol existing and pending Federal Reserve regulations applicable to the marketing, purchase, and sale of GNMA and other federally guaranteed securities. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis They I. include: Mrs. Homer's letter dated April 12, 1978 pertainin to the purchase of GNMA securities on a delayed delivery basis through a broker subject to Rewilation T. Board letter Z-8255 dated May 4, 1978 setting lorth an interim Board position with respect to forward contracts, announcing a forthcoming questionnaire for use by examiners, and sugosting that Reserve Banks sendsa letter (draft enclosed in Z-8255) to state member banks alerting them to guard against questionable securities transactions. 3. A supervisory.leLter SR-171 dated July 7 1978 Forwarding the "Preliminary Examiners' Questionnaite: Exchange Traded Interest Rate Futures Contracts, Forward Contracts, .1.in'd Standby Cont.r;lets" (copy attached). SR-471 instructed examiners to complete a questionnaire, to the extent applicable, in conjunction with each commercial examination conducted during the remainder of 1978. (Use of this questionnaire was subsequently authorized through June 30, 1979.) A supervisory letter SR-527 (and enclo.;tir dated February 11, 19.79 specifying staff's recommended accounting treatment of "standby" contracts to purchase securities. 5. A copy of the "Policy Statement Con- cerning Forward Placement or Delayed Delivery Contracts anu Interest Rate Futures Contracts" that the Board is about to release in conjunction with t!ie otlwr h:ink reulatory agencies. Although no Formal Board enforcement proceedings have thus kir hcen necessary on forward or standby contracts involving government-guar:Inteed or U. S. Treasury securities, four state member lmnks have received supervisory attention through the examination pr, wess because of such contract activities. Two s:-.1.2_11 banks were instructed to chare off losses resulting from GNMA securities being "put" to the banks pursuant to standby contracts. A third small bank was found to be speculating in GNMA forward contracts; the bank in question has been working its way out ol liquidity problem resulting from the bank honoring its contracts to purchase securities. A fourth small bank was found to be engaged in speculative securities transactions in GNMA and U. S. government securities; these transactions were criticized by Federal Reserve examiners as unsafe and unsound and the bank has agreed not to engage in . similar transactions in the future. In all cases, it is believed that the examination process was adequate to deal with the problems involved. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Deeedber 17, 19/9 1ho illemeembhe Dees 101141114, Jr. Swim of Repramewtattues 116011d1tton, D.C. 20515 DPW ancrterd I I appuociete the oessero indicated Is yam mesas letter pleas to maws. the difiereatiel on stoney sestsardies WWI rapine mertat sertifiormes Is Meer of thrift lustiteeiees. lho regulatory assesias did not tab,$ea as action in edam • series of ch4nges to adjust interest real esiiimes that vi11 so tete offset OR Jenunry 1. Ileramar, eo iudioeSed As Ohs enclosed pees reheess, the asencies, MOM ether action* datilmmd to aid smw11 SWOP SW increase the ability of ell 40peeitory lustitetieme to eve., Air foods, did suarstie• the tutrodnetten of. sew lomier-tess deposit isstrorseet Agee selling vete is hired to uelhet yieldi ea 24/2 year itimisury aitte. Thismew instrument does seustmee She differential in foyer of thrifts but will mot ewes the esumeselel basks to the dia.istevardistion risky *het meld hove bees seeeeleted with reimposing the diffoesstia se mew swarkat certificates. Sincerely* S/Paul A. Nag Rnelosure (Press release dtd. 12/14/79) SCS:DJW:pjt (PV-141) bees W. ttin Nre. ftllardi (2) \ A DOUG BARNARD, JR. ction assignei to Steve Axillio 10TH DISTRICT, GEORGIA p. COMMITTEES: BANKING, FINANCE AND URBAN AFFAIRS Congre5 of tbe tiniteb SMALL BUSINESS tate 30ouge of 1epre5entatibeg tillatbington,;1).C. 20515 DISTRICT OFFICES: STEPHENS FEDERAL BUILDING Room 128 P.O. Box 687 ATHENS, GEORGIA 30603 (404) 546-2194 NEW FEDERAL BUILDING Room 114 816 WALKER STREET P.O. Box 10123 AUGUSTA, GEORGIA 30903 (404) 724-0739 NEWTON COUNTY EXECUTIVE OFFICE BUILDING COVINGTON, GEORGIA 30209 (4C)4);787-2110 December 7, 1979 // The Honorable Paul A. Volcker Chairman, Board of Governors of the Federal Reserve System Washington, D.C. 20551 •-; Dear Mr. Chairman: For the past several days, I have been seeing a number of stories in the press that suggest that the Interagency Coordinating Committee is planning to reimpose the differential on money market certificates at all interest rate levels. I strongly disapprove of such a move, and hope that you will use your influence to oppose the reintroduction of the differential on money market certificates bearing an interest rate of above 9%. 111.111111amil... Not only does this come at a time when a House -Senate conference committee is considering the total phaseout of Regulation Q and the differential it also appears to be contrary to the attempts of the Federal Reserve to reduce inflation through more strict controls on the money supply. In such circumstances, this would appear to be a regressive step. While there is the arguement that reimposing the differential would help thrift institutions to compete with money market mutual funds, I do not believe that this competitive edge should come at the expense of commercial banks. I am also aware that a differential would help thrifts in certain parts of the country which are under pressures not seen nationwide. However, in neither case does the imposition of the differential appear to be the best or even the only way to address these problems. At this time, I can see no justification for reimposition of the differential on high interest money market certificates and I again urge you to oppose such a move. I look forward to hearing from you on this matter. Sincerely, DBJr/ns •• , http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis I . • 1. fry • V •.• \ http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis November 29, 1979 Ite Memorable Bill Nelson limes of Representatives 20315 Ilachiosees. D.C. Roar Its. ileleons Meek you for your letter of Meveiber 7 regarding • mawspeper article seat to you by eme of Ivor semotitoests regarding the recent error is the money stock data. For your imfermstion, emeleeed is a letter I sent to Chairmen Proxmire which provides detailed bechgrommd informatics related to the source of the error, its probable effects as flooncial markets, and actions taken by the Federal Reserve to provost such ins unfortunate error in the future. The BOOT4 hos ompopod outside soomeel to provide assurance that the errors in do now stock data more lomftortent and that as individual or iestitutisa obtained improper sollientage from preparation, revision or rele*se of this. figures. A private Washington, D.C. law firm will be principally responsible for this investigation which will cover Nmoufaeturers Hanover Trust Company, the Federal Reserve Rank of New York, sad the Federal Reserve Board. I au confidemt that these efforts will provide the cssursoce that viii perult all of us to put this unfortumate episode to rest. sianessly, Enclosure (Ltr. dtd. 11/7/79) DB:DLOLIC:pit (FV-122) bcc: Messrs. Lichline, Lindsey, Beck, Jorgenson, Schwartz Mrs. Mallardi (2) • BILL NELSON FLOVIDA .•• ycv. 714 Congre55 of tbe Zfiniteb tateE4 NINTH DISTRICT 1513 LONGWORTH HOUSE OFFICE BUILDING WASHINGTON. D.C. 20515 )ott}5e of ikeprecSentattbei5 (202) 225-3671 November 7, 1979 Mr. Paul- A. Volcker Chairman Fedral Reserve Board Twentieth Street and Constitution Avenue, N.W. Washington, D.C. 20551 Dear Mr. Volcker: 811111allma. Please find enclosed a copy of a newspaper article which was sent to me by a concerned constitutent of mine. I would appreciate it if you could supply me with information to adequately respond to his coacern. Thank you for your assistance. Sincerely, hsh enclosure MOW% IN RESPONSE, PLEASE REPLY TO: fl 210 BREVARD AVENUE 65 EAST NASA BOULEVARD. SUITE 202 MELBOURNE. FLORIDA 32901 Cocon. FLORIDA (305) 724-1978 (305) 631-1978 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 32922 FEDERAL BUILDING. SUITE 300 ORLANDO, FLORIDA 32801 BREVARD COUNTY COURTHOUSE TITUSVILLE, FLORIDA 32780 (305) 841-1776 (305) 268-1776 .; • - J s.., ., VI • " •• ft krtci.J4? sts Removal Notice The item(s) identified below have been removed in accordance with FRASER's policy on handling sensitive information in digitization projects due to copyright protections. Citation Information Document Type: Newspaper article Citations: Number of Pages Removed: 1 Associated Press. "Fed's $3 Billion Error Sends Financial Markets Into Chaos." 1979. Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Jeceiber 5, 1979 rable t. Tamps The Chairman Subcommittee on Cossnmer Affairs Committee on Bashisso limeing and Urbou Affairs ilited States Senate Ihmaingtoa, D.C. 20510 SSW Sharma* Tomas s 1 sm respeedins to your letter of Noveaber 26, which relweats intermit°s relative to the scheduled hearings as the Rule of 7S's rebate method. Euelesed is the tale yea recuested„ which shows the calculation el differences beton,* the astuerial rebate amount mod the tule of 711's rebate emewat for beth seasoner complaints you referenced. ?lease let se hmew if 1 caa be of further assistance. Siomerely years, Dontld J. Winn Special Assistant to the lewd inelosure TRBOMB:CO:pjt (#V-128) bee: Tim Burniston Mrs. Mellardiv WILLIAM PROXMIRE, WIS.. CHAIRM ARISON A. WILIJAMS, JR., N.J. ALAN CRANSTON, CALJF. ADLAI E. STEVENSON. ILL.. ROBERT MORGAN. N.C. DONALD W. RIEGLE, JR., MICH. PAUL S. SAREANES, MO. DONALD W. STEWART. ALA. PAUL E. TSONGAS, MASS. JAKE GAR N. UTle JOHN TOWER. TEX. JOHN HEINZ. PA. WILLIAM L.... ARMSTRONG, ODLO. NANCY LANDON KASSESAUM, KANS. RICJIAJID G. LUGAR, IND. Action assigned to Set Hart Allnueo eanatess e.,E)enatC COMMITTEE ON BANKING. HOUSING. AND URBAN AFFAIRS KENNETH A. MC LEAN. STAFF DIRECTOR WALL, MINORITY STAFF DIRECTOR H. MARY PRANCES Dg LA PAVA. CHIEF CLERK DANNY WASHINGTON. D.C. 20510 November 26, 1979 t?.,140 foommiw••• The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20037 FAA Dear Mr. Chairman: As you know, the Consumer Affairs Subcommittee has scheduled hearings on December 10th and 11th on S. 2002. Your staff has supplied the subcommittee staff with copies of complaints and inquiries relative to the Rule of 78's. In reviewing those complaints, it would appear that additional assistance from your staff would be helpful in determining the difference between an actuarial rebate and a Rule of 78's rebate. Pkhrd4, momm I believe it would be helpful to the deliberations of the subcommittee, if your staff would provide documentation in the form indicated in the enclosure for the following cases: 1. 2. p.-4;g2f- Michael Gilmore Centerville, Ohio; liwneRNIPP" Control No. 09366 Received 7/13/77 I would appreciate this information by December 3, 1979. Best wishes. rest:' r 44444, - aul E. Tsongas Chairman Loma.- ' S. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • •)..‘ . • •<••‘' •• s. ' —* • ... • • .. ..: • • 7•3• • • ,v •••••• .• . • •• . 44.,,e • • -- •T ' •••:,7••• ACENCY State Year http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Contract Terms Rebate Data Complaint - Inquiry No. Amt. financed: APR: Finance charge: Number of payments: Total of payments: Monthly payments: Date of loan: Date of 1st payment: Date rebate amt. quoted: Remaining payments: Complaint - Inquiry No.: Amount necessary to pay off loan Rule of 78 Rebate Actuarial Rebate Difference • • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • Dessuber 19, 1.979 The nosereble Ms Glenn gaited States Semite Washington, D.C. 20510 neer Senator Glean: Thank you for your letter of Deer 4 informing us of the soo. corns of your constituents, Andre A. Mobiles sad Gerald P. Sieblieg, about the effects of high interest rates en email businesses. The concerns they have expressed are shared by nen, besimesomem, end the Nord fully alder* stated* the points made in their letter. Is all of his public stetson*, and in various contacts with the bankimg csemunity, Chairman Volcker he urged banks to be as respeusive as possible to the eredit needs of smell businesses and other regulpr customers for seeing kesiesse activity. We awe attaching a sopy of his Letter to neiber bash, em this subject. A number ell MAO hevia, in turn, responded that they have takes special measures to deal with the needs of smell businesses, Including looms below the regular prime rate in some comm. The smaller banks is the country are, of course, esionted primarily toward the needs of small business customers. None of this, of course, makes the existing situation at all easy for many businessmen in the Nieblinge position. We do believe, level of interest rates fundameetally however, that the preeeSth1 reflects, sad is au suegrewth of, the inflationary process. Only it we succeesfully deal with inflation can we have a reasosable expectation of lasting relief frost credit market pressures. The Federal Reserve's present policies. whieh are aimed at getting better control over the growth of mousy and credit, are showing sips of meeting their objectives, and we shield not be surprised to set sem* oasing ts1 credit market pressures usider the circumstances. Monetary policy he. an important role is winding dews inflation, but other measures including fiscal discipline sad rediction of costly, excessive Federal regulations as mentioned in the Otsiblinge letter are alas essential in this proses*. Hopefully the difficulties that the Ilisblings described will be reduced mod a MOWO favorable climate for business will emerge at grewtk in new moderates mod more balance is restored to time esessny. JH:JPB:pjt (#V-139) bcc: Jon Hiratsuka Mrs. Mallardi Sisserely yews, d‘ lir Weald 1:" Winn Special Assist/it to the Board (T.tv. AtA 1A//1,70 tn rhimf Pyiebemit4,01-^ Off4&ft1'. nf one.h Momhe,r http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis December 4, 1979 The Honorable William Proxmire Chairman Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. 20510 Dear Mr. Chairman: Attached is an analysis of the revenue implications of S. 85 in the original version and with the revisions that we have talked about. In both cases, that calculation is supplemented by a column assuming the requirements of the bill are only applied on a voluntary basis (columns 2 and 4 marked S85V and Rev. S85V). Looking at the revised S85 only, the revenue loss is estimated at $65 million more than with a mandatory bill. (In all cases we assume full charge for services.) All these are 1977 computations. As you know, reserve coverage is already 2 to 3 percent below the 73.1 percent indicated on the table for the voluntary versions. It seems clear to me that significant loss of revenue will arise in any event if nothing is done in the relatively near term. Ultimately, the revenue loss for the voluntary version will depend on where the "trigger" is set for kicking in the mandatory system. At that point revenues will rise to that indicated by the mandatory calculation. Our intent would clearly be to get a trigger as high or higher than the House 67.5 percent, hut even at that level, I would expect the trigger to be reached before too long, particularly with a significant requirement on nonpersonal time. Sincerely, WiiieL Attachment PLAN: Exemptions: Ratios: Transactions Savings Nonpersonal Time Other Time Reserves (billions) Members Nonmembers Total 5/5 Actual 1977 27.3 0 27.3 Reserves Released 111 St of Reserve Recuirement Changes (millions) b/ evenue from Service Charges Revenue from Float Charge Cl •M• MD Cost after Taxes (55 percent marginal rate) 3, 12 0 6 0 S. 85 17.2 3.5 20.7 5/5a/ 3, 12 0 6 0 S. 85 V 17.2 10/10 3, 12 0 3 0 Rev. S. 85 10/10 a/ 3, 12 0 3 0 Rev. S. 85 V 17.2 13.2 2.2 15.4 13.2 13.2 6.8 10.2 11.9 14.1 428 (410) (247) 668 (410) (247) 791 (410) (247) 935 (410) (247) -99 5 60 125 Number of Conmercial Banks Exempt Members Nonmembers 0 8868 2 109 2 8868 2 110 9 8868 With Required Reserves Members Nonmembers 5664 0 5662 8759 5662 0 5662 8758 5662 0 With Reserves at 7ed net.bers ::on-embers 5587 0 3382 3467 3382 0 2350 2451 2350 0 73.1 72.9 100.0 86.7 73.1 67.8 1C0.0 77.8 73.1 62.8 Percent of Total Deposits At Banks with Required Reserves At Banks holding Balances at Reserve Banks Percent of Transactions Deposits 73.7 100.0 At Banks with Required Reserves 73.7 100 0 73 7 73.5 88.5 69.1 80.1 4t Banks holding Balances at Reserve Banks 64.4 a/ nembers only. b/ Includes vault cash shift for members. C' Based on float outstanding of $3.8 billion in December of 1977. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 4 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis December 4, 1979 The Honorable William Proxmire Chairman Committee on Banking, housing and Urban Affairs United States Senate washington, D.C. 20510 Dear Mr. Chairman: Attached is an analysis of the revenue implications of S. 85 in the oriqinal version ant3 with the revisions that we have talked about. In both cases, that calculation is supplemented by a column assuming the requirements of the bill are only applied on a voluntary basis (columns 2 and 4 marked SRSV and Rev. T435V). Looking at the reviseC SSS only, the revenue loss is estimated at $65 million more than with a mandatory bill. (In all cases we assume full charge for services.) All these are 1977 comrutations. As you know, reserve coverage is already 2 to 3 percent below the 73.1 percent indicated on the table for the voluntary versions. It seems clear to re that significant loss of revenue will arise in any event if nothing is done in the relatively near term. Ultimately, the revenue loss for the voluntary version will depend on where the trigger" is set for kicking in the mandatory system. At that point revenues will rise to that indicated by the mandatory calculation. Our intent would clearly be to get a tri9cjer as higll or higher than the Uouse 67.5 percent, but even at that level, I would expect the trigger to be reached before too long, particularly with a significant requirement on nonpersonal time. Sincerely, Attachment 44