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Collection: Paul A. Volcker Papers
Call Number: MC279
Box 11
Preferred Citation: Congressional Correspondence, March-April 1981 [Folder 1]; Paul A. Volcker
Papers, Box 11; Public Policy Papers, Department of Rare Books and Special Collections, Princeton
University Library
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Congressional
March-April 1981
•
Action assignel ,Tanet Hart
,r:ARROLL HUBBARD
coNGREssmAN
1ST DISTRICT. K A/TUCK Y
2244
RAyPOPN 1400Sr OrFICr
nog DING
WASHINGTON D C 20515
(232) 223-3115
AT LARGE MAJORITY WHIP
COA1 A4 MTh:
BANKING. FINANCE AND
URBAN AFFAIRS
Comarc55 of die Unita! a)tatc5
ji)otifSe of 3Arprecklitatibui
MERCHANT MARINE
AND FISHERIES
CHAIRMAN. SUBCOMMITTEE ON
PANAMA CANAL/OUTER
CONTINENTAL SHELF
UlagOington, D.C. 20515
March 17, 1981
Hon. Paul Volcker
Chairman
Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, DC
20551
Dear Mr. Chairman:
I am writing today on behalf of Mr. Robert M. Duncan,
Executive Vice President of the Inez Deposit Bank, Inez,
Kentucky 41224, and his interest in being nominated to
serve on the Federal Reserve System's Consumer Advisory
Council.
I understand that generally, ten members arc chosen
each year from over four hundred applications and that the
Council's membership is intended to represent all interests
in the area of consumer financial services regulation. Further, I understand that at present there arc no members of
the Council from Kentucky.
No< would very much appreciate your thorough consideration of Mr. Robert M. (Mike) Duncan for the Consumer
Advisory Council.
Thank you for your kind attention to this matter and
with hest wishes for you, I am
S'ncercly yours,
Carroll Hubbard
Member of Congress
CH:lmg
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Federal Reserve Bank of St. Louis
ARL7N SPECTER
Action assignei Mr. Kichline
PENNSYLVANIA
COM M 177E1'1•
JUDICIARY
APPROPRIATIONS
VETERANS' AFFAIRS
'AlCrtifeb Zfalcz Zenate
WASHINGTON.
D.C. 20510
March 19, 1981
The Honorable Paul A. Volcker
Chairman
Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Dear Chairman Volcker:
I am prepared to accept the fact that interest rates
are closely associated with the rate of inflation.
Yet, I am deeply troubled by reports by Pennsylvania
businessmen and labor leaders that much industrial and
commercial activity is rapidly declining and increased
layoffs and bankruptcies can be expected in the months
ahead, largely due to the adverse effects of extraordinarily
high interest rates on credit and loan activities of all
types.
I have advised these Pennsylvanians that I believe the
first order of business is enactment by the Congress of the
reduced budget, or cuts of equal amount, which we have
before us.
I would appreciate a letter from you setting forth your
expectations as to how soon after the budget cuts we can
experience some relief in the high interest rates. Are
there other measures we in Congress should be providing to
relieve the deadening hand that high interest rates are
exerting on industry and commerce in the State of Pennsylvania
and the nation?
Your views would be most helpful to have.
Arlen Specter
AS/ww
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Federal Reserve Bank of St. Louis
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March 19, 1980
Congressman Bill McCollum
t.O. Box 732
Altamonte Springs, FL 32701
Dear Congressman McCollum:
I am writing you concerning the REPEAL OF THE MONETARY CONTROL
ACT OF 1980.
This was passed as a sneaky action by Pres.Carter's
administration. It becomes effective this June 1 and give the
"FED" the power to monetize any debt it wants to, even private
debt (no doubt CHRYLER- who should never have been loaned one
dime) even debt of other nations"'""'
The ulterior motive behind this act was to bail out the international banks who find themselves stuck with worthless loans
they pride to foreign nations. The spectacle of PANAMA CANAL
just won't go avay, even giving the canal to a know communist.
When will the banks realize you can't buy your way out of any
dilemna by asking government to print more paper. This action
means a bookkeeping transaction which transfer the banks
losses to the American people in the form of rising prices.
What is your stand on this affair and what action are you taking?
I am seriously interested, this could be our last chance to
save USA.
Urgent action is needed by all the Congress.
Sincerely,
11 I'
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Mr & Mrs. D. Lamott
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Federal Reserve Bank of St. Louis
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WASHINGTON. D.C. 20510
March 23, 1981
Mr. Paul Volcker, Chairman
Federal Reserve System
Washington, D.C. 20551
Dear Mr. \ VolckerirEnclosed is an inquiry from a constituent which I hope you
can answer. Please respond directly to him and send me a copy
of your reply.
Thank you for your assistance.
Sincerely,
William Proxmire, U.S.S.
WP: jkl
Enclosure
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Action assigned Janet Hart
CHAIRMAN
Pt,cHAPP7.-
ROGER W. JFPSEN. IOWA.
VICE CHAIRMAN
WILLIAM V. ROTH. JR.. DEL.
JAMES ARDNOR. 11. DAK.
STEVEN SYPAPAS. IDAHO
PAULA HAWKINS. rt.....
MACK MATTINGLY. GA.
rsPst t
MITCHELL. MO.
FRP - F it rK W. RICHMOND. N.Y.
CLA4fP4CE J. BROWN 01410
Congress of thc lititteb *tatr5
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JOHN
RYA/SeELOT. GAUP'.
CHALMERS P. wrLir, OHIO
LLOYD BENTSEN. TEX.
WILLIAm PROYMIRE. WIS.
JOINT ECONOM IC COM M I TTEE
(c'Yr Ait 0 py./14 7WAP4T
JAMES K. GALRRAITH.
EDWARD M. KENNEDY, MASS.
PAUL S. SARB.ANES. MD.
TO SEC. S •, OF PUBLIC LAW 304. 77TH CONORIESS)
EXECLETIVEDIRECTOR
WASHINGTON. D.C. 20510
March 25, 1981
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Mr. Paul Volcker
Chairman
Board of Governors
Federal Reserve System
Washington, D.C. 20551
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I have become increasingly concerned with the soaring cost of
purchasing a home. Inflation and the sharp increase in mortgage
rates are causing the dream of home ownership to fade for all but
a handful of the new families being formed each year in our
country. Two million new households were formed last year, but
only 1.3 million new housing units were built -- many at prices
far beyond the reach of young families.
The unheard-of level of mortgage rates has also forced banks,
saving and loan institutions, credit unions, and other mortgage
lenders to reduce mortgage activities. The yield on traditional
savings accounts has been overshadowed by the attractiveness of
new assets available to savers such as money market certificates.
In fact, S&L's alone lost $28 billion in deposits last year, and
the erosion continues today. In the face of a deteriorating
housing industry and declining opportunities for home ownership,
it is important that all unintended regulatory burdens on the
housing industry and home owners be identified and reduced.
Eliminating excessive and unintended regulatory burdens will
directly benefit homeowners, prospective homeowners, and the
housing industry without costing the Federal Treasury a dime. To
that end, I would like for your staff to assist me in evaluating
the impact on mortgage lending institutions subject to enforcement activities by your agency of several regulations applicable
to home mortgages. Could you please:
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Federal Reserve Bank of St. Louis
Determine the costs to these lenders, individually and
in the aggregate on a per-application or mortgage-loan
basis, of complying with all provisions of:
a.
The Real Estate Settlement Procedures Act;
b.
The Home Mortgage Disclosure Act; and
c.
The Truth in Lending Act regulations which become
effective on April 1, 1982.
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Dear Mr. Volcker:
(111
Mr. Paul Volcker
March 25, 1981
Page Two
2.
Determine the extent to which these institutions making
home mortgage loans are required under existing or proposed regulations to provide duplicative or similar information under the Real Estate Settlement Procedures Act
and the Truth in Lending Act.
I appreciate the scope of these two tasks. At the same time,
I urge you to give priority attention to them in light of the
very severe financial difficulties confronting the entire housing
industry. If you have any questions, please call me or have your
staff contact George Tyler with the Joint Economic Committee at
224-5171.
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Federal Reserve Bank of St. Louis
Best wishes.
Since el
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Lee H. Hamilton
Chairman, Subcommittee on Economic
Goals and Intergovernmental Policy
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Congressional Research Service
The Library of Congress
Washington, DC 20540
'July 30, 1980
TO
:
House Subcommittee on General Oversight and Renegotiation
Attention: Nancy W. Hunt, Minority Counsel
FROM
:
Dr. William Jackson
Analyst in Money and Banking
Economics Division
SUBJECT
:
Government bonuses for savings:
the
erm
'experience
Your request is for a summary of the experience of the West German economy
with directly subsidizing the financial saving of low-to-moderate income households.
Basing our response upon the materials you have provided us, plus another
study that we are attaching, it appears that the German savings subsidies are
significant contributory factors to--but not the entire causes of--the higher
rates of saving in that country than in America.
Although the cost of these
programs to the German government appears to be appreciable, they are generally
believed to have accomplished much of their aim of contributing to the prolongation of the investment-based German postwar economic -miracle.Since attaining independence, the Federal Republic of Germany has encouraged
private-sector accumulation of financial capital through a number of fiscal
measures, which it has modified periodically to direct their emphasis toward
low-to-moderate income recipients, especially workers.
The current versions
of these programs are summarized below, as derived from their description by
the West German Embassy and secondary sources i
your possession. 1/
1/ Undated letter from Harald W. Rehm, Finaricial Counselor, Embassy of
the Federal Republic of Germany, Washington, D.C. supplied to CRS by your office.
The basic secondary source are Byrne, William J. Fiscal Incentives for Household
Saving. International Monetary Fund Staff Papers, July 1976, pp. 455-489; and
unpublished testimony by Max Horlick of the Social Security Administration before
the President's Commission on Pension Policy.
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Federal Reserve Bank of St. Louis
pg44
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RivoIS, WM, CHAIRMAN
Action assignei Janet Hart
ROGER W. JEPEEN. lOwA.
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Urip. HAMILTON. IND.
Olt IS W. LONG. LA.
VICE CHAIIITMAN
WILLIAM V. POTH. JII
CAL.
JAMES ADVAIOXI. IE. OAX.
miTcmri.t... MD.
rrtrocrucw w. RICHMOND. N.Y.
PARAIEN J.
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MAOTGART T M. NECIALVIA, MASI.
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EXECUTIVE DIRECTOR
WASHINGTON. D.C. 20510
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March 24, 1981
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Mr. Paul Volcker
Chairman
Board of Governors
Federal Reserve System
Washington, D.C. 20551
Re:
Comments on proposed rule to revise Regulation C
implementing amendments to the Home Mortgage
Disclosure Act (Docket No. R-0350).
Dear Mr. Volcker:
This letter is in response to the request by the Federal
Reserve Board for comments on draft regulations to implement
revisions made in 1980 to the Home Mortgage Disclosure Act (HMDA).
The revisions are necessitated by amendments to that Act provided
in the Housing and Community Development Act of 1980 (P.L. 96-399).
I am convinced that certain of the Board's proposed regulations
go beyond the intent of Congress and do not minimize the regulatory
burden imposed by your implementing regulations on the home mortgage
industry. Both the original 1977 regulations and your proposed
revisions require mortgage lenders to provide more information to
enforcement entities than was specified in HMDA by the Congress.
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Federal Reserve Bank of St. Louis
Let me explain:
1.
The original 1977 and proposed 1981 regulations require
lenders to separately collect and report data on mortgage
loans that are both (a) originated and (b) purchased during
the applicable reporting period. While HMDA does not
require separate reporting, your decision to require it
doubles the volume of data which must be made available
to the public and to enforcement agencies by mortgage
lenders.
2.
Your proposed regulations require lenders, for the first
time, to collect data on loans intended for use in purchasing a home when that loan is not secured by a first lien.
That proposed provision directly contradicts the definition of "mortgage loans" subject to provisions of HMDA.
3.
The original 1977 regulations required that lenders make
data on mortgage loans available in six categories. Your
proposed regulations require data to be made available in
,Mr. Paul Volcker
March 24, 1981
Page Two
five categories. Yet, HMDA specifies that only
four types
of data be collected and reported, including tota
l originated
and purchased mortgage loans, home improvement loan
s, mortgage loans on non-owner occupied property, and gove
rnment
insured or guaranteed mortgage loans. The collecti
on of
additional data required by your proposed regu
lations
needlessly increases the cost to homeowners and
lenders
of complying with HMDA.
I urge you to more carefully craft rules designed
to implement
P.L. 94-200 and P.L. 96-399 to correct these thre
e instances of
regulatory law-making which go beyond the mand
ates of HMDA.
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Federal Reserve Bank of St. Louis
Sinc
ivi/.,/7,
Lee H. Hamilton
Chairman, Subcommittee on Economic
Goals and Intergovernmental Policy
•
CRS-2
Savings Bonuses Under the Savings Premium Law
Since 1959, the general public has been able to enjoy bonuses paid on certain contractual or one-time amounts placed as deposits in banks, savings and
loan institutions (building societies), or life insurance companies, plus certain
loans to and capital stock investments in employers' firms. 2/
The bonuses are
14 percent of cumulated deposits--increased by 2 percent for each dependent child-and are in addition to the other returns on the savings.
For individuals, the
maximum deposit eligible for these supplements is 800 DM per year, 3/ and the
maximum taxable income for eligibility to receive them is 24,000 DM.
These limits
are doubled for a married couple, whose income cutoff for earning savings bonuses
is also increased by 1,800 DM per child.
Savings deposited under this plan must
be immobilized for six years, if made in lump sums, or one year longer, if made
. in monthly or quarterly installments under a contractual plan, for the savers to
actually receive these supplements.
The federal government credits the bonuses
to the eligible accounts at the end of these periods.
Savings Supplements Under the Housebuilding Premium Law
This program is similar to the one described above, including the income
and eligible deposit limitations, except that its bonus payments are 18 percent
of cumulated deposits, and the sums deposited--with building societies--under it
need not be immobilized for specified times.
It has been in effect since 1952.
2/ Since the 1950s, savings have been encouraged through limited tax
deductions for savings placed into: life insurance, accounts earmarked for
residential construction, accounts of long maturity, and some securities (see
below).
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Federal Reserve Bank of St. Louis
3/
The foreign exchange value of the DM is approximate y $0.57.
,
.
CRS-3
Savers can withdraw their special accounts if they use the funds for constructing,
purchasing, or remodeling a house; these savings, plus bonuses, often form the
large downpayments required to buy residences.
The cost of the supplements is
shared by the federal and state governments.
Savings Bonuses Under the Law Promoting Wealth Formation by Employees
Since 1961, employed persons have been able to set aside a certain sum
(currently 624 DM) annually, if their incomes are less than the ceiling amounts
described above.
Such savings, when deposited in banks or savings institutions,
or lent to employers, have been eligible to receive bonuses of 30 percent of the
total amount saved (40 percent for parents of at least three dependent children)
since 1970; they had been free from most employment-related taxes prior to then.
The accounts must remain immobilized for seven years for worker to actually
receive these supplements.
Indeed, many employers go further, by bearing the
entire 624 DM yearly payment as an additional form of compensation to their
workers under union contracts.
Since 1969, bonuses on deposits pursuant to this
program have been in addition to any incentives to save under the programs to
promote savings and housebuilding.
Tax Relief for Savers
Coordinated with the general savings and housebuilding savings plans, in
that the tax benefits are not available if such savings bonuses are received,
is the Jong-standing deductibility of savings held with building societies or
invested in life insurance from taxable income--subject to certain limits but
without an absolute income ceiling.
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Federal Reserve Bank of St. Louis
Also, 300 DM of individuals' and 600 DM
.
CRS-4
of married couples' income from capital is exempted from federal income taxation.
Lump sums of 100 or 200 DM, respectively, can be deducted from taxable income
derived from capital--as expenses necessary to generate such income.
The last
two forms of tax relief are available regardless of the amount of savings supplements received.
Assessments of the German Savings Experience in Print
Analyses of the high rate of saving in Germany that are available in English
tend to suggest that numerous factors are responsible for it.
For example, the
attached explanation of saving behavior in West Germany (which CRS neither endorses
nor disregards, but rather simply transmits) attributes that country's accumulation
of savings to:
(A) a greater felt need for financial reserves providing protection
for contingencies and rainy days, brought about by characteristically pessimistic expectations about the future;
(B) a perceptible trend toward satiation with consumer goods making
it easier for a saving motive of given strength to be translated
into behavior;
(C) a policy of subsidizing mass saving, thus strengthening the
instrumentality of saving for medium and long-term accumulation;
and
(D) the ingrained practice of saving in advance of purchasing real
estate and consumer durables rather than incurring installment
debt, thus making saving highly instrumental for acquiring consumer investment goods. 4/
In such a view, the psychological factors favoring saving--including saving
for the purpose of spending the funds on big-ticket consumer purchases in the
future=-would be reinforced by subsidy and tax programs increasing the reward
(interest) for not spending but saving now, so that future consumption could
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Federal Reserve Bank of St. Louis
4/
Attachment 1, p. 212.
CRS-5
be -higher. 5/
Such a result has long been anticipated by economic theory, and
appears to have occurred to a certain extent in Germany.
Meanwhile, the rising participation rate of savers in the bonus and tax
programs has increased the government contributions to them to the vicinity of
2 percent of the public-sector budget. 6/
Concern over fiscal support of this
magnitude, as well as concern that the "small saver" be aided, apparently resulted
in limits being placed on the incomes of those eligible for the bonus programs.
We are continuing to develop a research design for a report to be sent to
you by early September, which will explore the implications of such proposals
for the American economy in general form, and anticipate meeting with you to
discuss this design.
Meanwhile, please let us know if we can be of further
assistance, by calling 287-7593.
Attachment:
Strumpel, Burkhard. Saving Behavior in Western Germany and the
United States. American Economic Review, May 1975, pp. 210-216.
nd
5/ In Germany, interest rates on conventional forms of savings have been
rather low. The bonus payments represent very large rewards to their recipients,
even after taxes and the impact of inflation--which has been lower in Germany
than in America--are deducted to show "real" earnings on savings.
6/
For the year 1977, savings promotion expenditures by the federal govern_
ment were 4.7 billion DM, while tax reductions by it for this purpose were 1.9
billion DM. "Current outlays - by the government were 495 billion DM in 1977.
These figures do not include aid to savings by states under the housebuilding
premium law. Organization for Economic Co-operation and Development. OECD
Economic Surveys: Germany. Paris, 1979. pp. 49, 67.
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Federal Reserve Bank of St. Louis
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WASHINGTON, O. C. 20551
April 2, 1981
PAUL A. VOLCKER
CHAIRMAN
The Honorable William Proxmire
United States Senate
Washington, D.C.
20510
Dear Senator Proxmire:
This is in further response to your request conce
rning
the legality of the Citi-Shopper customer discount
service that
is being promoted by Citibank. In my initial respo
nse, I indicated
that the program did not appear to violate Regulation
Q or result
in consumer problems, but that I would ask my staff
to review this
in more detail. This staff review, which was undertaken
primarily
by the Federal Reserve Bank of New York, was recently
completed
and I would like to summarize the results for you.
Citi-Shopper is a telephone shopping service for major
purchases that is owned by Comp-U-Card of America, Inc.,
a company that is independent from Citicorp. Through a
contract with
the Citicorp organization, Citi-Shopper is made
available to
Citibank's Visa and Master Card cardholders for a subs
cription
fee (currently, 30 days free, and then $18 for one
year, $27 for
two years). Citi-Shopper distributes catalogues
to subscribers
who then may make purchases using a toll-free
number. Subscribers
may use their Citibank charge cards to pay for
their purchases.
Comp-U-Card services such as Citi-Shopper are made
available, often as a fringe benefit, to members of
numerous
organizations. Often the subscription fee is absor
bed by the
organization, but many times, as is the case with
Citi-Shopper,
there is a separate charge to be paid by the membe
r-subscriber.
In the staff's review of this program, it was not able
to determine any relationship between Comp-U-Car
d and Citicorp
or its subsidiaries other than a contract with Citicorp Cred
it
Services, Inc., which is a direct subsidiary of Citic
orp. Under
the contract, Comp-U-Card performs all merchandising func
tions
and offers the service to those who hold cards issue
d by Citibank
(New York), N.A. and who wish to obtain the service.
Citicorp
Credit Services was formed as a subsidiary by Citicorp under
section 4(c)(1) of the Bank Holding Company Act to perfo
rm backoffice work for the credit card programs of the Citi
corp organization. The performance of such bank-office work is
a permissible
activity for such a subsidiary.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
h
.
The Honorable William Proxmire
Page Two
It is my understanding that the Office of the Comptroller
of the Currency, the primary regulator of Citibank, regards the
bank's interaction with Citi-Shopper as a promotional activity
related to credit card use, and is therefore permissible. The
Comptroller's Office has determined that Citibank is not in the
merchandising business and that Comp-U-Card's advertisements are
merely announcements of a service available to Citibank customers.
My staff has further reviewed the Citi-Shopper program
to ensure that it does not violate any statutes or regulations form
which the Federal Reserve has responsibility. Although that review
confirms my earlier report that there are no such violations, the
staff indicated that some price comparisons included in recent
mailing inserts prepared by Comp-U-Card did not appear to comply
with a Federal Trade Commission regulation concerning comparisons
of suggested retail prices (16 C.F.R. § 233.3). The staff contacted Citicorp Credit Service to make known these concerns. After
reviewing the mailing inserts, Citicorp stated that Comp-U-Card
would be instructed to revise these materials. To ensure continued
compliance in this regard, Citiccl:p intends to peripdically monitor
the mailing inserts from Comp-U-Card.
I hope this response answers any questions you may have
regarding the legality of this program.
Sincerely,
SZEa4
LSA:GTS:pjt (4V-390 from 1980)
bcc: Lee Adams
Gil Schwartz
Legal Records (2)
Mrs. Mallardi (2)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•111.
••••
BOARD 0- GOVERNORS
'F THE
•
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FEDERAL RESERVE SYSTEM
•
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WASHINGTON, D. C. 20E51
PAUL A. VOLCKER
RE!)
2. 1981
CHMRMAN
The Honorable Jake Garn
Chairman
Committee on Banking, Housing
and Urban Affairs
United States Senate
Washington, D.C. 20510
Dear Chairman Garn:
I am pleased to send you the Board's final version of Regulation Z,
implementing the Truth in Lending Simplification and Reform Act. It is the
culmination of joint efforts by the Congress and the Board to simplify and
improve disclosure requirements and reduce the burdens of compliance. The
length of the regulation has been reduced by about 40 percent, and overall
we believe it is a substantial improvement.
We have redesignated and consolidated the provisions implementing
the Consumer Leasing Act into a separate Regulation M (also enclosed). In
the past, these provisions were scattered throughout Regulation Z. Part of
the simplification process has focused on reducing the difficulty in using
and understanding the regulations, and we believe that combining these leasing
rules in a separate regulation -- which has limited applicability -- will
improve Regulation Z and also make the leasing rules easier to use by lessors.
There is another reason for our special treatment of the leasing
provisions and it relates to the need for statutory change. I would like to
urge that an effort be made to simplify the Consumer Leasing Act. The Truth
in Lending Simplification and Reform Act simplified disclosure requirements
in consumer credit transactions. Although the consumer leasing provisions
are part of the new act, they were largely untouched by the simplification
effort.
Although we could have simplified the leasing regulation somewhat
ourselves, the current statute is an impediment to real reform. We were also
discouraged by commenters from revising the regulation in any way that would
have required a costly reassessment of procedures and revision of forms without meaningful changes L- particularly if there is a possibility of further
statutory amendments that would force them to revise forms and procedures a
second time.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The Honorable Jake Garn
-2-
We therefore encourage Congress to continue the process begun with
the Truth in Lending Simplification and Reform Act by making parallel amendments
to the statutory leasing provisions. Such changes would include: (1) highlighting the most important information by segregating it from other disclosures
or contract terms; (2) eliminating detailed disclosures that are already covered
by lease documents, such as information about maintenance responsibilities and
warranties; and (3) encouraging advertising of leases by reducing required advertising disclosures, such as information about purchase options or end-of-lease
term liabilities.
You may also want to consider whether to revise the definition of
"consumer lease." Currently the consumer leasing requirements do not apply to
month-to-month leases that exceed four months. Many consumer commenters on the
Regulation Z revision expressed the need for disclosures in these transactions,
which now are neither "credit sales" under the Truth in Lending Act nor "consumer
leases" under the Leasing Act.
We would be pleased to submit additional specific recommendations in
the form of draft legislation. Currently we are asking for the views of our
Consumer Advisory Council on the major issues. Once this process is complete,
we will be in a position to present concrete proposals for your consideration.
Sincerely,
Enclosure
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
.
dr
,
.
IDENTICAL LETTERS SENT TO:
The Honorable Harrison A. Williams, Jr.
United States Senate
Washington, D.C. 20510
The Honorable John H. Chafee
United States Senate
Washington, D.C. 20510
The Honorable Christopher Dodd
United States Senate
Washington, D. C. 20510
The Honorable Fernand J. St Germain
Chairman
Committee on Banking, Finance
and Urban Affairs
House of Representatives
Washington, D. C. 20515
i
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The Honorable J. William Stanton
House of Representatives
Washington, D. C. 20515
The Honorable ihomas B. Evans, Jr.
House of Representatives
Washington, D. C. 20515
The Honorable Frank Annunzio
House of Representatives
Washington, D. C. 20515
1
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April 2, 1981
The Honorable John C. Danforth
United States Senate
Washington, D.C.
20510
Dear Senator Danforth:
Thank you for your letter of March 3 regarding correspondence you received from your constituent, Mr. Richard Goins,
President, First National Bank of Camdenton, Missouri, on the
quality of currency provided by the Federal Reserve Bank of
St. Louis.
I am naturally concerned with this report of service
and attitude at the Federal Reserve Bank of St. Louis. I hope
the situation is only isolated and not representative so far as
attitudes are concerne,I. However, I have been provided with some
explanation of the difficulty. The St. Louis Bank apparently had
excess inventories of circulated $10 and $20 denomination notes
which they were using to fill currency orders, before issuing new
notes in these denominations. This situation often occurs during
the months immediately following the Christmas season when
Reserve Banks receive a large amount of circulated currency that
was issued during the pre-holiday period. In all instances, the
Reserve Banks have attempted to pay out any available stocks
of fit currency before issuing new notes. Furnishing only new
currency for use in automated teller machines (ATM's) would not
be feasible over the long run, considering the rapid growth in
ATM use and the inventory required for an ATM.
We are also aware that there has been a general deterioration in the quality of circulating currency over the past few years.
Several steps are currently being taken to resolve the situation.
One of our major efforts involves the conversion of manual currency
processing equipment, to newly developed hiqh-speed currency processing equipment, which automatically performs a comprehensive
fitness inspection of each individual note put through the machine.
Those notes that are excessively soiled are automatically destroyed
during the verification process and newly printed currency is issued
in its place.
In tandem with developing this equipment, the Federal
Reserve is establishing quality-control standards for the high-speed
machines that will allow only currency of an acceptable quality to
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
Thc Honorable John C. Danforth
Page Two
pass through for packaging and redistribution. Currency processed
according to these standards has been independently tested by several
major commercial banks in order to determine their suitability for
ATM's. The first such test was at Chemical Bank in New York, whose
ATM's functioned satisfactorily with the fit currency generated by
our high-speed equipment operating under the now standards. Further
tests of the quality standards were conducted by Manufacturers
Hanover of New York and First National Dank of Arizona. High-speed
currency furnished for these tests was also found to be satisfactory
and confirmed that appropriate sorting settings on the high-speed
machinery will provide notes of acceptable quality for ATM use.
The St. Louis Reserve Bank is in the process now of converting to
the new equipment.
I greatly regret that the operations of Mr. Goins' bank
were disrupted by the quality of currency shipped to the bank. I
think I can assure you that the situation will continue to improve
as the Reserve Bank completes its conversion to high-speed currency
processing. I would also hope that nr. Goins brings his concerns
about attitudes and services directly to the attention of officials
of the Bank.
Sincerely,
SZPaul A. YPickeE
SOA:TEA:PAV:pjt (#V-66)
bcc: Mr. Lawrence K. Roos, President, FRB of St. Louis
Mr. App
Mr. Allison
Mrs. Mallardi (2)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
April 2, 1981
The Honorable Charles Pashayan, Jr.
House of Representatives
Washington, D.C.
20515
Dear Mr. Pashayan:
Thank you for your letter of March 31 enclosing correspondence from Mr. Gerald C. Ccllins concerning the reser
vability
of deferred compensation accounts under Regulation D. Thes
e
accounts are maintained and controlled by employers in accor
dance
with IRS requirements. Because of this, Regulation D curre
ntly
requires that these funds be regarded as nonpersonal time
deposits,
subject to a 3 per cent reserve requirement. The Board
has asked
the staff to review this matter and to present to the Board
its
recommendations for a possible amendment to Regulation D.
Consideration of the staff recommendatikins is scheduled for
April 8.
I will be pleased to keep you advised of the Board's
actions in this matter.
Sincerely,
S/Paul A. Vokker
CO:pjt (#V-111)
bcc: Mrs. Mallardi (2)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
'
CHARLES PASHAYAN, JR.
CON1MITTEE ON
INTERIOR AND INSULAR
AFFAIRS
17rm DISTRICT, CALIFORNIA
129 CANNON BUILDIMG
WAs• mimotom. D.C. 20515
(202) 225-3341
COM MITTEE ON
POST OFFICE AND CIVIL
SERVICE
CONGRESS OF THE UNITED STATES
HOUSE OF REPRESENTATIVES
C.
-71
(-7
March 31, 1981
-r)
•-•4
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Honorable Paul A. Volcker
Chairman
Federal Reserve System
Twentieth Street and Constitution Avenue, N.W.
Washington, D.C. 20551
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Dear Mr. Chairman:
Enclosed please find a copy of the letter I have received
from a constituent, Mr. Gerald C. Collins, in regards to a
recent ruling by the Federal Reserve.
I should appreciate your addressing the concerns Mr. Collins
has raised.
Your prompt attention to this matter shall be greatly
appreciated.
)
.//7Sincrely yours,
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/////:///7
Member of Congress
Enclosure
PLEASE REPLY TO:
0
WASHINGTON OFFICE
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
0 HOME OrricE. Fitrsmo Courvry
1533 EAST SHIELDS AvErvut. SUITE A
FelEsmo. CALIFORNIA 93704
0
Hour Orricr. KING, Cowry
804 NORTH IRWIN
HANFORD, CALIFORNIA
93230
0 HOME OFFICE, TULARE CouNTY
3746 WEST MINERAL KING, SUITE D
VISALIA, CALIFORNIA 93291
CALIFORNIA FEDERAL
March 19, 1981
Representative Charles Pashayan
1427 Longworth House
Washington, D. C. 20515
Re: Regulation D
Dear Sir,
Thank you very much fcr the support you have given the Savings & Loan Indus
try
over the last few years. Most of the lenislation that has been passed will
benefit our industry and mere importantly, allow our industry to meet
the
savings and housing needs of Americans in the future.
Unfortunately. a recent ruling by the Federal Reserve was contrary to the above
.
The new Federal Reserve Regulation D has certain provisions that, in
effect,
will deny the consumer maximum retirement benefits and not allow finan
cial
institutions to compete on an even basis for Deferred Compensation (reti
rement)
Accounts.
Specifically, Regulation D classifies Deferred Compensation Accounts as "nonpersonal" which requires reserves. Other retirement accounts such as
IRA and
Keough Accounts do not require reserves. This inconsistency in the treat
ment
of retirement accounts does not make sense. Pesides, it was our indus
tries
understanding during dialogue with the Federal Reserve staff that Reser
ve
Requirements would be waived.
Please write Paul Volcker, Chairman of the Federal Reserve Board, advising him
of this oversight and discrepancy in Regulation D. We would like the Regul
ation changed as described above. If you anree, please encourage Mr. Volck
er
to do so in your correspondence.
Sincerely,
j
a‘
,
1,2) C. CA',14;..
Gerald C. Collins
Vice President
Regional Manager
GCC/dh
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
501 West Main Street/Visalia, California 93277/Teiephone• 209/732 4554
April 3, 19fll
The Honorable John Tower
United States Senate
Washington, D. C. 2051
0
Dear Senator Tower:
Thank you for your lett
er of PIarch 26 enclosin
spondencc you received
g correfrom rr. Richard Davis.
!Ir. Davis is
seeking information abou
t the progress of legisl
ation that was
introduced to stem the
attrition of membership in
the Federal
reserve System.
As you are aware, the De
pository Institutions De
tion and ronetury Contro
regulal Act of 1980 was enacte
d on rarch 31,
1980 (Public Law 96-221
). The P.ct is expected to
improve monetary control by imposing
universal reserve requir
ements on all
depository institutions
, including mutual saving
s hanks, savings
and loan associations,
credit unions, and commer
cial banks. Such
universal reserve requ
irements were needed to
meet the problem of
attrition in l'ederal Rese
rve membership, which wa
s eroding the
effectiveness of moneta
ry policy hy lowering the
portion of total
deposits subject to Syst
em reserve requirements
. Prior to the
passage of the :-:onetary
Control Act, many banks
effectively could
avoid reserve requiremen
ts by not being members
of the Federal
reserve System. In addi
tion, all nonhank deposi
tory institutions
were not subject to rese
rve requireents. As in
stitutions increasingly gave up member
ship, the Federal Peserv
e found it more
difficult to maintain an
adequate degree of cont
rol over thc
monetary aggregates. Univ
ersal reserve requirem
ents resolve
the uneven and inequitabl
e level of reserve requ
irements applicable
to similar accounts at va
rious financial instit
utions. The Act
also extenOs access to Fe
deral Reserve services,
such as discount
and borrowing privileges
, to nonmember depository in
stitutions.
For rr. navis' informat
ion, I am pleased to encl
copies of Public Law 96
ose
-221 and the June 1980 Ted
cr
al Reserve
Bulletin, which contains
an article (beginning at
pa
ge 444)
sunuaarizing the legisl
ation.
I hope this information
is helpful.
know if I can be of furt
her assistance.
CO:vcd (#V-110)
bcc: Mrs. Mallardi
Enclosures
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Please let me
Sincerely,
(Signed) Donald J. Winn
Donald J. Winn
Assistant to the I3oard
A
Reply will be prepared by Cong. Liaison Office
4111
••
JAKE GARN, LiTAN
JONN TOtrR, TFX.
JOHN HEINZ. PA.
WILLIAM L ARMSTRONG, COLO.
RICHARD G LUGAR. IND.
ALFON'Ar M
AMATO. N Y.
JOHN H ciiihrirr R.I.
HARRISON SCHMITT, 14
MEX
CHA!RMAN
HARRICON A. WILLIAMS, JR., N.J.
IAM PROXMIRE. WIS.
ALA.! CRANSTON, CALIF.
DON•LD W. RIEGLE. JR., MICH.
PAM. S. S AAAA NES. MD.
C
10PHEIR J. DODD. CONN.
•LAN
DIXON. ILL.
M. DANNY WALL, STAFF DIRECTOR
!RECTOR
HOWARD A. MENELL. MINORITY A
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
c-
'ZICItifcb ,Jfates Zenate
COMMITT EE ON BANKING. HOUSING. AND
Amp couresEL
URBAN AFFAIRS
WASHINGTON. D.C.
20510
March 26, 1981
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The Honorable Paul A. Volcker, Chairman
Board of Governors of the Federal
Reserve System
Washington, D. C. 20551
Dear Mr. Volcker:
I am enclosing a copy of a letter I have received from Mr. Richard
Davis,
I shall appreciate receiving a report from you concerning the
questions he poses in order that I may properly respond to him.
Thank you for your attention to this matter.
Sincerely,
John Tower
enclosure
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
April 3, 19111
The Honorable Crcgory W. Car:Ion
Uollse of R:Trerentativen
Valhington, D.C. 2:)515
near Mr. Carmen:
Thank you for your March 25 letter reporting on the financial
condition of thrift institutions in the State of New York. As you might
expect, the Yoder/11 P.!servn Board, the Federal DepoAl Insurance Corporation nnol thm Fc.drral Home Loan Dank Board have been closely monitoring
the financtal condition of the thrift indurAry for sale time.
In the sccond tlalf of 19(.) the thrift industry gencrally succcoded
in attracting sizable deposit flaws, but thin effort roquired the payment of
!lubstantially highcr deposit rates as the period progressed. As a result of
their large portfolios of fiNed-rate long-terra port7.ages, the higher deposit
co3tn sharply reducryd their earnings and by late in the year many individual
institutions wre ner.periencing negative earnings. Such corning:: pressures
Ilnve continued in the carly months of this ynar, although the most recent
&•clin.ns in intereat rates have temded to ease this presoure comUlat.
TIle thrifts have allocated a large portion of their cash flow to
aP.netn so that their problms has been one of earnings and capital
rather C,on liquidity. IlDwir?r, in tha last couple of months deposit flows
!lave slaw7d. If continued erosion in eaposit gratrth should place particular
thrift institlItions in a serious liquidity biud that cannot bc ameloriated
throunll borrowing fran usual sources, the Federal Loserve in, of course,
prepared to provide needed liquidity through itn diqcourt windoci—on a fairly
,ztz7nd.-d 1)ssis if necessary.
r-:
The Fed ,..lral Resrva, the federal agencie responsible for supervising the thriftindustry, and the Administration havr been reviewing mawIres nat might be taken to a-;f:ist depository institutions who3e capital
ponitions ay. being pressed by lances resulting from the mismatch betwen
thr:ir as.nyt returns and liability costs. It 13 my hope that our review will
loon result in propcmals to the Congress for lcginlation that wolild fscilitnte capital asstntance to otherwise viable thrift institutions.
I hope these corimnnts
8TC
useful.
Sincerely,
FCEttin:PMKcir/kt
V-109
S/Paul A. VOichel
..41b
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
April 3, 1981
The honorable Wyche Fowler, Jr.
House of Representatives
Washington, D.C.
20515
Dear Mr. Fowler:
Thank you for your letter of March 23, referencing your
constituent's difficulty in obtaining a $1,000 Federal Reserve
note for a sales promotion.
Let me emphasize that individuals are not restricted by
regulation or any provision of law from obtaining $1,000 notes that
are still part of our nation's circulating currency. There is not,
however, an abundant supply of these notes since the $100 bill is
the largest denomination currently printed by the Bureau of Engraving
and Printing (BEP), and the Federal Reserve System is destroying
rather than reissuing any note of $500 or above that it receives from
the commercial banking system.
This reduced availability of large denomination notes
stems from a joint
:cision by the Federal Reserve and the Treasury
Department--based on costs to the taxpayer--to discontinue the
issuance of Federal Reserve notes of the $500, $1,000, $5,000 and
$10,000 denominations as of July 1969. The rationale for this
decision was that the demand for these large denomination notes,
which had been declining sharply over two decades, had become insufficient to warrant the additional production and storage costs
associated with their continued issuance.
Large denomination notes were first authorized primarily
for interbank transactions by an amendment to the Federal Reserve
Act in 1918. Shrinking demand for these notes prompted the decision
to discontinue their printing in 1946. Even with this decision,
the supply that was on hand in 1946 did not diminish to the point
where continued circulation would have required additional printing
until 23 years later, in 1969. Surveys at that time indicated
that large dollar transactions could be conducted effectively with
checks or $100 notes. Today, our electronic funds transfer system
is the principal means by which the banking industry effects large
transactions, and we continue to believe that the demand for
currency in denominations larger than $100 would not justify the
substantial costs associated with its issuance.
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The Honorable Wyche Fowler, Jr.
Page Two
Although a majority of the $500 and higher denomination
notes have been removed from circulation over the years, some do
still circulate. Your constituent may be able t000btain a
$1,000 note by contacting financial institutions in his or her
area, especially the larger ones, and asking them to sei aside
any $1,000 note they may receive in the course of business.
I hope this information is useful to your constituent.
Sincerely,
S/Paul
JHE:TEA:pjt (4V-96)
bcc: Mr. Epps
Mr. Allison
Mrs. Mallardi (2)
Volcket
•
April 6,
19el
The klonorable Paula Ilawkins
United LAates :enator
P. 0. ZA).›. 2000
Ainter Park, Florida
32790
1)(,:.1r Senator lawkins:
Thank yeu fur your letter of Forch 31 requesting comment
on a letter you received frow. Er. Harry Z. Rosenberg, who
objects
to tbe practice he has observed of banks delaying the avail
ability
of funds received as a result of wire transfers and other
financial transactions. The FecLeral Reserve 6anks offer a
wire
transier service that allows dek ository institutions holdin
c,
balances with a Reserve i;ank to transfer funds to the accou
nt
or any otner depository institution holding balances with
a
Reserva bank. The Fecit,rol Rserve reollation governing
this
activity requittas depository institutions reeeivinc funds by
wir tr-ansfer to
11;e
pronptly available to these custortiers.
ilowever, therc; are a nuJper of other fun:is transfer systems
opurated idy the private sector. TheJe networks, which are not
regulated, arc not governe6 by the Fuderal Reserve reculation
s.
Va..= are not aware of any intentional actions on the
part of idanks to uelay thcir customer transactions.
th more
than 14,000 comi:orclal 1,anking institutions in the nation to
uurve tno needs of iAlsiness, we would Gxi,ect colvetition among
these banks to p.rovicL:) the incentive to handle clLstollier transactions en a tincly
Lielay Z; in
delivery of a transfer can occur because of
numan error and 1,-:achinc failure. In addition, the volume of
transactions nas increase.,6 significantly (luring the past coupl
o
of years, which cr.ln compounc: the prol:ilem of delays.
We wc;u1,: be 14eascd to assist Mr. Rosenborq in investigating any specific instancos in which he L)elieves Federal
Reserve
wire transfurs were Oclayc! Ly a bank.
hol.c this infor:.natio
n is helpful.
know if I can be oi furthcr assistanc.
(LL,m000:pjt ON-115)
bcc:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Please let me
Sincerely,
Mrs.
4illiem P. raloni
Ansistant to the Soard
April 7, 1981
The Honorable Carroll Hubbard
House of Representatives
Washington, D. C. 20515
Dear Er. Hubbard:
ding
Thank you for your letter of March 17 recommen
Board's Consumer
nr. Robert M. Duncan for membership on the
ive additional
Advisory Council. We would be pleased to rece
Mr. Duncan's
information from you and others in support of
interests, or
nomination, including any special knawledge,
it. This
experience that he has relating to consumer cred
h, Pssistant
information should be sent to Dolores S. Smit
Affairs, Board
Director, Division of Consumer and Community
ington,
of Governors of the Federal Reserve System, Wash
members
D. C. 20551. Our next selection of new Council
positions
will take place sometire this fall, to fill the
.
of individuals whose terms expire in December 1981
I appreciate your taking the time to call our
contribute
attention to qualified individuals who could
rt to achieve
to the Council's work. We make a special effo
well as a
geographic distribution within the Council, as
of elf,
balance in representation among various segments
tatk is not
credit industry and consumer interests. Our
tions (usually
an easy one, given the small number of posi
high qualifications
8 to 10) to be filled each year and the
of many of the nominees.
Again, thank you for your interest.
Sincerely,
A. u!61u,,
AMB:DSS:WRM:vcd (#V-93)
bcc:
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Federal Reserve Bank of St. Louis
Ms. Bray (w/copy of incoming)
Ms. Smith
Mrs. Mallardi (2) -//
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PAUL A
April 8, 1981
VOLCKER
CHAIRMAN
The Honorable Jake Garn
Chairman
Committee on Banking,
Housing and Urban Affairs
United States Senate
Washington, D.C.
20510
Dear Mr. Chairman:
We are forwarding a copy of the report made by Arthur
Andersen & Co., Certified Public Accountants, covering the audit of
the financial statements and records of the Board of Governors of the
Federal Reserve System for the year ended December 31, 1980 and a
copy of the Board's 1980 Budget Performance Report.
A copy of each of these has also been provided the General
Accounting Office.
Sincerely,
Enclosures
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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WASHINGTON,0 C
20SSI
April 8, 1981
PAUL A vOLCKER
CIAAIRMAN
The Honorable Fernand J. St Germain
Chairman
Committee on Banking,
Finance and Urban Affairs
House of Representatives
Washington, D.C.
20510
Dear nr. Chairman:
We are forwarding a copy of the report made by Arthur
Andersen & Co., Certified Public Accountants, covering the audit of
the financial statements and records of the Board of Governors of the
Federal Reserve System for the year ended December 31, 1980 and a
copy of the Board's 1980 Budget Performance Report.
A copy of each of these has also been provided the General
Accounting Office.
Sincerely,
diteladh,t_
Enclosures
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Federal Reserve Bank of St. Louis
April 9, 1981
The Honorable John C. Danforth
United States Senate
Washington, D. C. 20510
Dear Senator:
I have your letter about KMOX in
St. Louis. I haven't heard anything
from them, but we'll try to work something
out when I do.
Sincerely,
PAV:ccm
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WASHINGTON, D. C. 20551
PAUL A. VOLCKER
April 9, 1981
CHAIRMAN
The Honorable Paul Laxalt
United States Senate
Washington, D. C. 20510
Dear Senator Laxalt:
Thank you for your letter of March 18 requesting comment
on the enclosed statement of Mr. W. C. Smith supporting bills
that would exempt from federal taxation the interest income on
time and savings deposits used to support residential mortgage
lending.
Under thic legislation, taxpayers will be able to exclude
an additional $200 in interest and dividend earnings ($400 on
joint returns) from their 1981 and 1982 taxable income. I am
concerned that high marginal tax rates do reduce the incentive
to save. However, I am not sure the proposed legislation is the
best way to correct the problem.
While the Federal Reserve Board is deeply committed to
the objective of maintaining an adequate flow of funds to finance
housing activity, we would be reluctant to support measures
exempting from taxation interest income on deposits supporting
mortgage lending. The degree to which such a policy would
significantly increase the availability of mortgage credit or
reduce its cost is not clear. Moreover, even if thrift institutions experienced sizable new inflows--or significant cost
reductions--it is not altogether clear that mortgage rates
would decline appreciably. As mortgage rates began to decrease,
other lenders in the mortgage market--such as life insurance
companies or pension funds--would shift to other long-term
instruments offering a relatively more attractive yield. The
movement of these investors out of mortgages would tend to
offset the initial downward pressure on mortgage rates.
Absent a sizable reduction in mortgage rates, savings
incentives similar to those supported by Mr. Smith are unlikely
to stimulate 'residential construction, and the revenue loss
from tax exemption will widen the federal deficit. Thus, I
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Federal Reserve Bank of St. Louis
The Honorable Paul Laxalt
rage Two
believe that an cxeAption of interest income could
represent ;'
significant departure from current policy efforts tc trim
the
federal budtjet deficit, and one that pntentially could
he quite
inflationary.
The axceptionally high interest rates that we have
experienced in recent years are the by-product of a stubb
ornly
high rate of inflation. In a very real sense inflatio
n is the
root cause of the problems currently being faced by the
thrift
industry and the mort(jage market. Only when inflaeon
ary pressures arc brought under control--through diligent appli
cation
of prudent monetary policy and budgetary discipline--will
mortgage rates be reduced appreciably.
I hope you will find these comments useful.
Sincerely,
s/Paul A. VolskeE
MM:EM:DLK:JLK:RS:vcd (#163)
bcc:
Messrs. Moran, McKelvey, Kohn and Kichline
Mrs. Mallardi (2)
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April 9, 1981
The Honorable Lee H. Hamilton
Chairman
Subcommittee on Economic Goals
and Intergovernmental Policy
Joint Economic Committee
Washington, D.C.
20510
Dear Chairman Hamilton:
Thank you for your comment letter of March 24 concerning
the Board's proposal to implement the Home Mortgage Disclosure
Act (HMDA) amendments of 1980.
You note that the original and the proposed regulation
both require reporting of data on originated mortgage loans
separately from data on purchased mortgage loans. In your opinion, the statute does not require separate reporting. The Board
believes that both the language of the Act and the 1975 legislative
history support the view that Congress intended originations and
purchased loans to be reported separately. The separate reporting
requirement may in fact be easier for depository institutions to
report separately than to have to aggregate the origination and
purchase data for each census tract. However, we will give this
issue careful consideration in adopting the final regulation.
You also referred to the proposed requirement for the
collection of data on purchase money mortgage loans that are
secured by junior liens. The staff tells me that the definition
of "mortgage loan" in the Act is rather broad, and appears to
cover ony loans secured by residential real estate, not only
first lien mortgage loans. However, there may be good policy
reasons for covering only first lien loans, and the Board will
certainly consider this matter carefully in light of the comments
on the proposed changes.
Finally, you note that the Act requires loan data to be
collected and reported according to four categories, while the
propooed regulations would require five categories. The difference
basically lies in the fact that the regulation requires a breakout of loans on multi-family property. It is believed that there
is some value in treating one-to-four family dwellings separately
from multi-family property; however, the board will give further
consideration to this matter.
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Federal Reserve Bank of St. Louis
The Honorable Lee H. Hamilton
Page Two
Let 'lie also aesure you that the Board is keenly aware
the
need to minimize regulatory burdens, and that we are
of
attempting to do so in this case--while at the same time carrying
out the responsibility to imclement this statute. Thank you
again for your comments on the Board's proposal.
Sincerely,
S/Paul A. Voickec
DSS:RS:pjt (01106)
bcc: Dolores Smith
Mrs. Mallardi (2)
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Federal Reserve Bank of St. Louis
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April 9, 1981
PAUL A. VOLCKER
CHAIRMAN
The Honorable Bill Green
House of Representatives
Washington, D.C.
20515
Dear Bill:
I appreciated receiving your recent letter indicating
why you feel that H. R. 1397 will prove effective in encouraging
household savings and is preferable to an approach based on tax
incentives. The materials from the Congressional Research Service
(CRS) and Wall Street Journal , which you were kind enough to enclose
with your letter, were also useful. You asked for my views on
how a savings subsidy could be structured to minimize the possibility that households, in order to obtain added returns, would
simply shift funds from an unsubsidized asset form into a subsidized form. You also asked for suggestions about savings
vehicles that would conflict with the DIDC's mandate to deregulate
interest rates.
After having carefully reviewed your letter and the
materials which accompanied it, I am still concerned that the
additional savings which implementation of your proposal might
generate may not be sufficient to warrant the added Treasury outlays. Admittedly, we are all operating with very limited information in this area. It may be true, as you say, that focusing
on moderate income groups will prove an effective approach to
promoting savings in the United States. But as the CRS study by
Dr. Jackson indicates, it is not possible to know with certainty
how any income group would respond to an additional inducement
to save.
There is also a large area of uncertainty about how
applicable the German experience may be for the United States.
I do not question the judgment of Dr. Lambdorff, with whom you
spoke recently, that the subsidies offered in his country have
promoted savings. However, as the discussion by the CRS indicates, there are a number of other important factors that have
had a strong influence on the savings propensities of the German
people, and it is impossible to disentangle the relative effects
of each.
As for your point that the proposed subsidy will not
affect the near-term budget position of the Federal Government,
I am of two minds. I very much agree that it is desirable to
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Federal Reserve Bank of St. Louis
The Honorable Bill Green
Page Two
minimize the Treasury's deficits over the critical period of the
next few years. If we are to make substantial inroads into the
current inflation psychology, we must follow policies that convince the public that the federal budget will be brought into
balance as soon as it is feasible to do so. However, I would
still be worried about a program which has little or no impact
on the immediate budget but commits the Federal Government to
large expenditures in the future. To an important extent, it
is just such programs that are responsible for the unacceptably
rapid growth of federal outlays in recent years. Nor, am I
sure that programs that have a deferred impact on the budget
will necessarily minimize the reaction of the private sector.
After all, participants in the financial markets are acutely
aware of the governmental programs that have led to our current
budget difficulties and would likely respond to the prospective
effects of a new program about as much as to its current effects.
In addition to the general issue of whether total savings
of the household sector would be increased by a subsidy program,
there is the additional question of the extent to which households
will shift assets from an unsubsidized to a subsidized form and/or
rechannel savings flows in this way. To the extent such substitutions do occur, of course, the cost of a subsidy program will
be increased relative to the amount of additional savings generated. I am afraid that I have no practical answer to your
question as to how a program might be established to effectively
target incentives exclusively to new savings flows. There is no
simple way of telling the extent to which changes in household
holdings of a specific asset reflect an added increment of savings
rather than a shifting of funds from other assets.
With regard to the creation of a savings vehicle for
subsidized savings accounts that would not interfere with the
DIDC's deregulation mandate, the approach currently used for
IRAs and Keogh plans merits examination. In particular, individual "subsidy" accounts could be established at banks and
thrift institutions and, perhaps, other financial institutions.
The custodians of these accounts could be free to invest deposited
funds in existing financial instruments at market determined rates
of return. They could also be charged with certifying to the
Treasury when deposits have remained in the account for the
required time period and are eligible for a subsidy.
In case I seem too negative, let me emphasize again
that I share your concerns about the current level of saving
and capital formation. I also agree that providing incentives
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Federal Reserve Bank of St. Louis
een
The Honorable Bill Gr
Page Three
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Federal Reserve Bank of St. Louis
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bcc:
Messrs. Kichline, Struble, Ramm
Mrs. Mallardi (2)
N=111M111.
April 10, 1961
The Honorable Walter E. Fauntroy
Chairman
Subcommittee on Domestic Monetary Policy
Committee on Banking, Finance and
Urban Affairs
iiouse of Representatives
Was hi ngton, D.C.
20515
Dear Chairman Fauntroy:
I very much appreciate your letter of April 1.
I too believe that thu discussion of our mutual concerns in
the context of the informal gathering last week was most worthwhile, and I know that the other members of the Board and the
Reserve 13ank Presidents also share that vie.e4 and were very
pleased to be able to meet with you and the other Subcommittee
members. I hope that we can do something similar on other
occasions.
With respect to your suggestion of a meeting with
the members of the Congressional Black Caucus, I would welcome
the opportunity to meet with the members of the Caucus for an
informal discussion whenever that could be arranged. If your
staff would contact Don Winn on 452-3457, we will be pleased
to work out the details.
Sincerely,
SL Eau!,
DJW:pjt (4V-113)
bcc: Mrs. Mallardi (2)
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
SEASONAL ADJUSTMENT
OF THE
MONETARY AGGREGATES
A Committee Report
January 1981
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PROCFEDINGS AND DEBAT!:
OF "I III;
97
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CONGRESS, FIRST SESNION
WASHINGTON, FRIDAY, JANUARY 23, 1981
SAVINGS AND RETIREMF:NT
INCOME INCENTIVE ACT OF 1981
Mr. MOORE. 1`.1r. Speaker, as individual taxes climb, cii• ;)osable income
dwindles and personal savings become
a necessary income supplement to
meet costs imposed by inflation instead of an investment reserve to
Iwilich regular deposits were once
made. A.s a result, personal SaViIHI'S
rates in this Nation are pitifully low
especially when compared to those of
otht-r major industrial nations.
On the average, Japanese worL rs
sr. ve four times as much as we do,
West German savings are triple our
rate. and Canadians rave twice our
It% -I. In the last dera:le our savings
rates have fslien wi,he each of theirs
hris risen.
It is no r.-.7.-st cry why Americans save
so
to.ily or why Japan, West
C.i,.rmany, Canada, and other countries
11 ,ve a comparat ive abundance of savings capital upon w hich to draw for
.)nomic expansion a.nd competition
with us.
In Japan interest earned on the first
$2,,
,,000 of individual savings is tax
e. In West Germs.ny, families with
children and with low- to mocierate-incrmes are given sufficient tax cuts for
long-term saving to cause 94 percent
of blue collar workers to establish and
regularly add to their savings acco7ints. In Canada. employee contributions to ersployer-sponsored pension
plans are tax deferred in amounts up
to $3,300 per year and individuals
having their own retirement plans can
defer taxes on up to $5,500 in annual
additions. This is by no means an inclusive list of their savings incentive or
nat ions offering them.
By comparison, we are pikers in the
savings gamr and. for this rea.son, we
are losing it. Until language I initiated
in the House won approval as part of
the Windfall Profit Tax Act approved
in the last Congress, this Nation fully
taxed every dollar of interest income
received by individuals. The $400
maximum annual exclusion granted
last year for interest and dividend
Income in 1981 and 1982 tax years appears paltry v. hen compared to savings
incentives in Japan, West Germany, or
CP nada, but it is a step in the rivht. direction and one that should have been
tre.ien long ago.
NIuch more needs to be done to give
a favorable real aftcr-tax rate of
return on sa.vings to track or hopefully
stay ahead of inflation. Foreign experience shows savings can best be built
by reducing the tax imposed on it. Our
tax on savings is particularly onerous
P...5 interest income is taxed at the
highest rate an individual must pay
and commonly' it pii ; taxpayer into
a higher tax bracket when added atop
earned income as our tax policy instructs.
To counter this bu:lt in tax bias
ava.inst savings, Senator JOHN CHAFFE
and I are jointly intro(nicing a till to
build upon the pre:crit interest and
disidend exclusion and expand individUal retirement account eligibility and
benefits. Our Savinr; and Retirement
Income Incentive Act of 1931 is a natuTal extension of guidance given by the
Senate Firralce Cor, .Htr•e late last
year in its omi
bill. It em
braces
desired
objec,...e.,
simple
of
yet
_ _
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Federal Reserve Bank of St. Louis
functional design, tax adjustment to
account for intercst and dividend
income damage caused by inflation,
self-reliance in retirement income
management, first-time home ownership, new savings formation, anti 1.•ocational or college education for the
account holder's children. It ha.s won
approval by more ft.an 23 national orgarii;.at ion.s represent ing investment
and financial communities. the Nation's largest retirement organLations,
and national military organization.s.
Initial estimates put its static revenue
cost at some S4 billion in the first year
with savings formation encouraged by
iN terms giving azi early cost recovery.
Econometric tests are underway. In
view of recent surres in personal debt.
growth, and record low rates of personal savings, it 1.s extremely timely. It
also only reward.s retirement savings
beyond artivity already provided
under mandatory employer -sponsored
plans.
Nlany notions on savings formation
are being offered these days. Senator
CHAFF:I:, who serves as chairman of the
Subcommittee on Sa,:ings. Pension.s,
and Investment Policy, and I are convinced this bill get'; highest !narks
when all objective te:-ts are applied,
especialy in terms of the wide range of
worthy purposes served on an equal
basis and at a reasonable cost.
l'or this reason, 'A
have ree,
mended its inclusion in the fortiwurning tax cut recommendations of the
administration and Senator CHAFF F. intends to begin hearings on it at an
early date.
A summary of the bill, a list of organir.ations supporting or in most ca.ses
endorsing it, as well a.s the measures
full text follow:
BILL SUMMARY
The "Savings and Retirement Income Incentive Act of 1981" is designed to increase
the incentives for individual savings and investment in the following ways:
(1) The bill makes permanent the e%:clusion from ta.x of the first $200 (MO on a
joint return) of dividend and interest
income and increases that amount to $500
01.000 on a Joint return) when an individual or spouse attains the 54!C of 65.
(2) The bill pe-miN the use of individual
retirement accounts (IRA's) by er,:nloyees,
theluding zovernment employees and military personnel, who are covered by employer-sponaored retirement plans and increases
the maximum allowable deductible contributions to these accoonts from $1.500
r
year undt•r existing Ow to $2,000 per year or
the total amount of the employee's earned
income, v. hichever is le
(3) In lieu of a contribution to a separate
IRA, the bill permits an employee to make a
$2.000 per year tax deductible. voluntary
contribution to his employer -sponsored retirement plan, If the plan so permits.
(4) The bill permits additional voluntary
non-deductible contribution.s of $2,000 per
year phis an additional $3,000 over the employee's lifetime to either an IRA cr an employer-sponsored plan thereby increasing
the size of the account no that the cxpense
of managing and promoting such savings
plans will be more easily absorbed. Tax Ls
deferred on earnings from ell
contributed to the account so that the employee's total sa.vings are
enhanced by such
contributions. This proOsion Ls similar to
existing law regarding corporate penalon
plans and Keogh ohms for the self-employed. Thus, for example, in une ye•ar an
individual could make a dt duct
centribution to an 112A uf $2,000 and a non-deductible contribution of Elr.'..0o0; thereafter. he
could make annually a deductible contribution of $2,000 and a non-&-ductible contribution of $2.000.
(5) F'inally, the bill pet
an eloolovt e
to withdraw without penalty up to $111,000
No. 13
from the account in order to purchase a
first home or to pay for the higher education of his children. (The amounts so withdrawn are subject to income tax in the year
of withdrawal.) Tnis provision will make
IRA's attractive to younger employees who
are hesitant to inve::t funds for retirement
savIng:s which may still be needed for major
family commitments.
FNDr)1F.MYNTS OR STATF:MENTS OF SUPPORT
American A:-.socia!lon of Retired Persons.
National Retired Teachers Association.
National A.s..,ociation of Retired Federal
F.:melte:ea s.
Merrill Lynch, Pierce, P'enner tk. Smith,
Inc.
National Aasocia'ion of Federal Credit
Unions.
Credit Union National Assoeiation. Inc.
Inve-tn!ent roniyany Institute.
U.S. Leaviie of Savings Assoeiation.s.
National Savings and Loan League.
National Consumer Finance A.csociation.
Nafional A.,-sociation of Mutual Savings
13:tr.ks.
Independent Bankers AfSOCIAt Ion.
Chief V.'arrant ar,d Warr,Lrit Officers A.ssoriat ion, U.S. Coaq Guard.
U.S. Army I.Varrar.t Officers Aa.sociation.
Anieric::ti Security Council.
Resent. Exinsted Association.
National As.:ociation for Uniformed Services.
Veteratm of Foreign Wars of the United
States.
Marine Corps Lenue.
Non COMM
d Officers Association.
Diaableal Officers A.s.iociat ion.
A!.., ociat ion of the United States Army.
Navy League of the United States.
Army Mutual Aid A.sc‘miation.
Retired Officers A.
,
:.ociation.
Military of the World Wars.
H.R. 1250
A bill to amend the Internal Revenue Code
of 1954 to increa.,T the allot.vable contribu•
tions to individual retirement plans and to
allow employees a deduction for savings
contribut ions to employer retirement
plans or to 111(11%h:till retirement arcounts
Be it enacted by the Scnate and House of
Representahres of the Unittd States of
America in Congres3 assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the "Savings Fuld
Retirement Income Incentive Act of 1981".
SEc. 2. AMENDMENTS TO MAKE PERMANENT
CURRENT INTERF-ST AND DIVIDEND ExCLUSION AND To INCREASE SUCH EXCLUSIONS TOR PERSONS OVER AGE 65.
Section
404(ci of the Crude Oil Wind(a)
fall Profit Tax Act of 1980 is amended Lo
re'a.(de)nSE
r(
"
;TEC:T
v.SIVE DATE.—The amendments
made by thLs section shall apply v..ith respect to taxable years beginning after December 31, 19eo."
(b) Paragraph (1) of Section 116(b) of the
Internal Revenue Code. a.s amended by Section 4044) of the Crude 011 Windfall Profit
Tax of 1980, Ls amended to read as follows:
"(I;
Xl?k4UM DOLLAR AMOUNT.—
"(AF GENERAL EXCLUSION.—Except 6.s provided th subparagraph (B), the aggregate
asnount excluded under subsection (A) for
any taxable year shall not exceed S200($400
in tl.e case of a joint return under section
6013).
"(B) In the ca.se of an individual v..ho hits
attained BR(' 65 before the close of the taxable y‘-ar or v.ho Is married RS of the cic.se
of the taxable year to an individual who has
attained age t;5 before the close of the taxable year, the aggregate amouht excluded
under subsection (a) for any taxable year
shall not exceed $500 ($1.000 in the ca.se of a
joint ruturn under suction 6013)."
SEC. 3. INCRF.A!;E IN PT.RMISSIBLIC CONTRIBUTIONS TO INDIVIDUAL Rrriarear.per AcCOUN7S.
(a)Section 219(b) of the Internal Revenue
Code of 1954 (relating to retirement sal/Ines) Is !intended—
(1) by deleting the v.ords "an amount
equal to- from paragraph (1), by striking
111
41 .••
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i e,
oears
!nib
t•
` • anoeinta". and
aertIng in li
by etriking oet a1,500" aro Naar it appears
ao. in.serting in lieu thereof "$2.000".
(2) by deleting par.-ten:ion (2) and rudesignating paragraphs (3) I hrroigh (7) as paragraphs(2) through (6).
b ) Section 4973(b) of such Code is amended to r••rtd res fonowa:
"ft)) EXCFSS CONTP111 'TIONS.—For our; • s of this section. in the case of kali% icioal retirement acrounta. individual retirer nt annuities. or borols. the term 'exceas
( • rritoitions' moles!! e -(1-ri of -1) the eats
)
11
-(A) the amount cot
oed for the taxable year to the accou its or for the anniirollover cordriitna or bond.s (other ttain
button described in section 402( a a 5 ),
403(a)(4),
408(d)(3).
403(b)(8).
or
409(b)(3)(c)). over
"( Bi $2.000 plus the amount allov:able as a
deduction under section 219 for suet) coio :1bution.s. and
"(2) the amount determined under this
subsection for the precediros ts.xanle year.
redursed (but not below zero) by the sum
of —
A) the diatributions out of the account
for the taxable year a Inch were included in
the gross income of thy payee under section
40ia d
a
-(11) the distributions out of the account
so-tam
for the taxable
408(da 5) applies, and
• .c) the eXee'S (if AM; of—
",.) $2.000 plus the maximum roe. sod al2Ia tor
lowable a.s ....dor-tam wider secti
the taxable year over
• . di the amount cororil lied (determined
without regard to section 219(c)(5)) to the
s.: counts or for the nee dties or bonds for
t! e taxable year.
'I la. amount deterrnin• .1 under the preced1 (but not below
ing sentence snail be re .I
aero) by the exceas (if any) of 8,000 over the
d for
aagregate of the EUDOUII:S
each prior taxable year In excess of the num
of f 2,000 and the amount allowable as R de,
d : tion under section 219 of such prior tax.
able year.
(c) Sertion 408 of mu, Code is amended—
(1) by striking out '•$1.500- wherever It ;spar/ars and Inserting In lieu thereof '44.000".
(2) by adding tn parsarnoh (1) of subsection (a) the following sentence: "For purtaoses of the preceding sentence If contributiens for any taxable yertr exceed $4.000 on
behalf of any individoal, they shall not be
taken into account except to the extent that
f.irn excess contributionr, a.hen aggregated
with any similar exceea contributions for
prior taxable sears, exceed $2,C00."
(3) by itmendirg paraaraptis (1) and (2) of
atioseeticn (c.1) to read as folowa:
'(1) In calanat..—I'a
as. otherwise aprosided In thia subsection. aro: arnoent or annuity contract paid or dint ributed out of an
Individual retirement ac.count or under an
Individularetirconent annuity' to any dLstribsatee shall be taxable to him in the year in
atuah so distributed under section 72 (relating to annuities).
"(2) COMP'JTATION OF raareoares' CONTRIVITIONS.--FOr purposes of this paragraph
and section 72. any salmon's for v.hich ft deduction is allowed under (scion 219 shall be
treated P-S an employer con t ribut ion."
(4) by deit(Mg the words "or 2.:0" from
p.aagraplis (4) and (5) of subsection (d)
v. herever they app(sar.
(a) by amending subsection (fi_
(A) by inaerting before the period at the
end of parneraph (1) thereof "unli•ss such
dLstribution is a qualified wlthdrawal as defined in paragraph (4)", and
(B) by adding at the end thereof new
paragraphs(4) and (5) to read a.s
"(4) QUALIFIED WITHDRAWAL.—Paragraphs
(1) and (2) shall not apply to any withdrawal during a taxable year in which the individual has nia.-le no prior qualified withdr ay. als —
"(A) which is tao•cle"ti) to pay the ouslified educational exithlal for whose
pepaes of Child Of the
•t aned. or
benAit the trust is
connacti.so a on the purchre e of
•
:
by the built idio
the that dwellaie too.
to• a -count Ls mainai fur a:liwa
tained which constitutes his principal residence,
"(B) which Is not less thrtn $2.000, but
which when aggregated with all qualified
withdrawals In prior tayable years does not
exceed $10.0nn, nnr!
"(e) which will not. ralase the fair market
value of the account inone handy after the
althdrawal to be less than $2,000.
"(5) DEE1NTTIONS.—
'"
n rt. ru , (•,;
reo, nre :"or courses o'
14,n:e erin, at tonal inat it nee and
"Mit a reaaonable al t ?ince for meals and
lodgIng.
FI.IGIBI E EDUCA
1NAL INSTITUTION.—
The term 'eligible e.' aslonal institution'
aris—
RII institution o nigher education. or
"(11) vocational
.1.
"(C) INSTITUTION OF HIGHE.R EDUCATION.—
The term 'institution of higher education'
means the institutions deaeribed in section
1201(a) or 491(b) of the Higher Education
Act of 1965.
'(I)) V(aATIONAL SCHOOL—The term 'vocational school' means an area vocational education school' as defined in section 195(2) of
the Vocational Education Act of 19.63 which
Ls in ar.y State (as defined in section 195(11)
of such Act.)"
'ad) Section 73 of the Internal Revenue
Code of 1954 (relating to annuities: certain
proceerLs of endowments and life insurance
contracts) is amended by redesignating subsection (o) as subsection (p)and by inserting
after aubsection (n) the follosing new subsection:
s(o) TREATMENT OF DISTRIBUTIONS FROM
INDIVIDUAL RFTIREME.NT ACCOUNTS.—For pur•
poses of subsections (cal )(A) and (e)(1)(13),
any contribution made by an individual to
an individual retirement account which is
alloy:NI as a deduction under section 219
shall be treated rLs an amount contribilted
by an employer which Ls not includible in
the gross income of such employee."
(e) Section 2039 of the Internal Revenue
Cade of 1954 (relating to the Estate Tax) is
arneeded by repealing subsection (e) thereof
and rediaiwnating subsection (f) as subaection (e).
(f) Section 2517(h) of the Internal Revenue Code of 1954 (relating to the gift tax) is
run( tided by striking the parenthetical
phraas "(other than oarngraphs (4) and
(5))"
substituting "(other than paragsapti • 4))."
:-3r.c. 4. /knot/aloe-a or RETIREMENT SAVINGS
Drove-non.
Part VII of sub( haoter B of chapter 1 of
such (N)de (relating to additional itemized
deductions of inclividoals) is amended by repealing section 220 and by substituting
therefor the folloaing new section:
"Sac. 220. DEDUCTION EOR OBTAIN EMPLOYEE.
RETIRAMENT SAVIN(.S C(NTRIBUTIONS.
"(a) GENERAL RULE.— In the case of an eligible employee. described in subaection
(c)(2), there shall be alloy, ed as a deduction
the qualified retirement savings contributions of such individual for the taxable year.
"(1)) Iasterarroars AND RESTRICTIONS.—
"( I) MAXIMUM DEDUCTIoN.—The amount
allott able A.S a deduction under subsection
(a) to an eligible employee for any taxable
year may not exceed the lesser of—
"(A) the amount of the cornpen.sation
in the eligible employee's gross
income for such taxable year. or
$2.0u0.
°co) ALTERNAT I VE DEDUCTION.—No deduction shall be allov:ed under subsection (a)
for the taxable year if a deduction Ls allowed onder section 219 for the taxable
year.
-1V) DEFINITIONS AND SPECIAL RULES.-(1) QUALIFIED RFTIREMENT SAVINGS CONTrIFIUTION.—FOr purpc:rs of this section,
the term 'qualified retirement savings contribution' means any contribution in cash.
other than A mandatory contribution, made
by an individual as an employee to or
under—
"(A) a plan described in section 401(2)
whic.11 includes a trust exempt from tax
under section 501(a),
"(B) all annuity plan described in section
403(a),
"(C) a qualified bond purchase plan described in section 405(a), or
"(D) a plan described in section 805(d)(3)".
"(2) ELIGIBLE EMPLOYF:E.—For purposes of
this section. the term 'eligible employee'
nien.ns any individual who is an active participant for any part of the taxable t ear in a
olan deseiihed in par .-1,:ra;•11 (1).
"(3) RF(-ONTRIRITTED AMOUNTS.—No deduction allowed under this section vdth reypect
to a rollover contribution described in section 402(a)(5), 403(a)(4), 403(b)(8), 408(d)(3),
or 409(b)(3)(C).
"(4) AMOUNTS CONTRIBUTF.T) TO AN INSURANCE coreramor.—No deduction shall be al-
lowed under this section for that portion of
the amounts paid which are properly allocatile, under regulation.s prescribed by the Secretary. to the cost of life insurance.
(5) NI ARRIED INDIVIDUALS.—III the MSC of
.(A) QUALIFIED Er/Lc/171; NAL EXPENSE.—
Thr torm 'qualified doeational expense' an !rola. !'lai WhO is married (roz determined
wider soction 143(a)). the maximum deducmr rao• • i) tuition and fees ra (wired for the en- tion 1111(i, r sobsect ion (h) ahall be computed
rollment or Wanda:ice of a student at an seoarati It for eaen individual, and this section shall be Replied aithout regard to any
eligible educational hist notion,
"(II) fees, booka, auppiiea and equipment communits• property laws.
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((i.
T1MF
t1) N
CoNTRIAITVINS
DEEMFD
For oerooses of this seetion,
tax•
payer st all be deerned to have made a con•
tribution on the la-o. day of the preceding
taxalde year if the contribution is made on
aceount of such taxable year and is made
not litter thrin'the time prescribed by law.
for f::ing the return for such taxable year
(including extensiors thereof).
"(7) Comerasarina —For purposes of this
section. the term 'compensation' includes
earned Income as defined in section
401(c)(2).
"(8) MANDATORY CoNTRIBUTIONS.—For
poaes of this section. the term 'mandatory
centributions' means amounts contributed
to the plan by the employee which are required as a condition of employment, 8.3 a
condition of participation in such pla.n. or AS
a condition of obtaining benefits under the
plan attributable to employer contributions.
"(d) SIMPLIFIED REPORTS.—The Secretary'
shall Laue regulations which prescribe the
time and ina.riner in which simplified reports shall be filed by the employer or plan
administrator of a plan receiving contributions deductible under this section."
SVC. 5. TREATMENT OF DISTRIBUTIONS FROM
PLAN To WHICH EMPLOYEE MADE Dental-1111X CONTRIBUTIONS.
(al Subpart A of part I of subchapter D of
chapter 1 of such code (relating to retirement plans) is amended by inserting after
rubrection (1) of section 414. the following
ne.v siiheet ion:
"(no DVDT:(TIFILE FMELOYEE CONTRIBUTioNs.--F.)r purposes of this title. other
than for virposes of section 401(a)(4) and
(5). 404. 410(ba 411, and 412, any amount
ylilch is allowed a.s a deduction under section 220 as
qualified retirement savings
contribution shall be treated ELS an employer
contribut ion."
(b) Section 414(h) of such Code (relating
to tax treatment of certain contributions) is
amended by inserting after ''any amount
contributed" the folloaing: "(other tha.n an
.mount described le sabsection (m))".
St.C. 6. TECHNICAL AND CONFORMING AMENDMADE -
MENTS.
(a) FiTATF AND GIFT TAX EXCLUSION.—
) E';TATI. TAX.—StIhSeCtiOh (C) of section
2039 of such code (relating to exemption of
annuities under certain trusts and plans) is
amended by. adding at the end thereof the
follov.ing new sentence: "For purposes of
this subsection, any contribution allowed as
a deduct:on under sections 219 or 220 shall
be con.,(1, r...1 a.s made by a person other
than the decedent."
(2) Grrr TAX.—Subgection (b) of section
2517 of such code (relating to transfers attribotalle to employee contributions) is
unended by adding at the end thereof the
T'ollowing new sentence: "For purposes of
this subsection, any contribution allowed a.s
a deduction under sections 219 or 220 shall
*)e con.sidered as rtade by a person other
'Ilan the employee."
(h) OTHER AM ENDMENTS.—
( I) Paragraph (10) of section 62 of such
Code (defining adjusted gross income) if,
amended by striking out "(relating to retirement savipgs for certain married individuals)." a.nd inserting in lieu thereof "(relating to deduction for certain employee retirement savings contributions)".
(2) So much of section 72(f) of such code
as precedes paragraph (1) thereof Ls amended to read (LS follows: "In computing. for
purposes of subsection (c)(1)(A). the aggregate Eunount of premiums or other consideration paid for the contract. for purposes of
subsection (dal). the consideration for the
contract contributed by the employee. and
for purposes of subsection (e)(1)(B), the aggregate premiums or other considerations
paid, amounts which an employer is required to report. pursuant to regulations
promulgated under section 220(d) with respect to an amount paid by an eligible employee (a.s defined in section 220(c)(2)) as a
qualified retirement savings contribution
shall be excluded. and amounts contributed
by the eoiployer shall be included, but only
to the extent that—".
(3) Section 415(a) of oich Code is amendto r,1). alirg rtrarl wh (3) thereof.
(4) The table of sections for part VII of
subchapter B of chapter 1 Ls amended by
striking out the item relating to section 220
and inaerting in lieu thereof the follossang:
"Sec. 220. Deductions for certain employee
retirement savings contributions."
Sec. 7. rEFECTIVE DATES.
(a) GENERAL RULE.—Except a-s provided in
subyection (b). the amendments made by
this Act shall apply to taxable years beginning after December 31. 1980.
(b) FSTATE AND GIFT TAX PROVISIONS.—
(1) FNTATE TAX.—The runenclments made
by section 4(a)(1) shall app/y to the estates
of decedents dying after December 31. 1980.
(2) Girr rax.—The amendment made by
section 4(a)(2) shall apply to transfers after
December 31, 1980.
A
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: Report, news release
Citations:
Number of Pages Removed: 24
Roger Seasonwine Associates, Inc. "Americans and Retirement: The Financial Crisis. A
Report About A Survey Among 1,000 Americans. Prepared for the American Council of Life
Insurance." February, 1981.
"Congressman Henson Moore: Republicans Advance Thrift Incentive for Reagan Tax
Plan." [Press release], February 12, 1981.
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3. S. 243--Senators Chafee, Warner,
and
Savings and Retirement Income Incentive Thurmond
Act of 1981
a. Permanent interest and divided excl
usion (sec. 2 of the bill)
Present law
Individuals may exclude from gro.ss income
up to $200 ($400 on a
joint return) of dividends and interest.
income received from domestic
sources (Code sec. 11G). This provision is
beginning after December 31, 19s0, and befoeffective for taxable years
19S2, th,exclusion reverts to prior law, re January 1, 1983. After
und
applied only to dividends and was limited er which the exclusion
to $100 ($200 in the case
of a joint return). This is reflected in
the revenue estimates (below)
for 1983 and later.
Issues
This section of the bill specifically rais
the is.sue (1) whether the
partial exclusion for dividends and interestesshou
ld be made permanent,
and (2) whether the amount of the excl
usion should be increased for
individuals who are age 65 and older.
Explanation of provision
Section 2 of S. 243 would make permanent
the partial exclusion of
dividends and interest by individuals.
In addition, the provision would incr
excludible to $500 ($1,000 in the case ofease the aggregate amount
a
dividual who attains ago 63 before the clos joint return) for an ine of the taxable year or vrho
is married, at the close of the taxable year
, to an individual who is at
least 65 years old.
Effective date
'rho provisions of section 2 of S. 243 would be effective for taxable
years beginning after December 31,1980
.
Revenue effect
Fiscal year budget receipts would be redu
ced by $105 million in
1991, $771 million in 1982. $1,742 million in
1983, $4,278 million in
1984, and $4.391 million in 1985.
h. Individual retirement and savings acc
ounts (secs. 3-6 of the
bill)
Present law
An individual rrenerallv is entitled to ded
uct the amount contributed to an individual retirement account or
annu
chase retirement bonds (referred to collecti ity, or used to purvely as "IRAs"). The
limitation on the deduction for a taxable year
15r:vr, of compensation for the year or $1.500. is generally the lesser of
TTnder a spousal IRA,the
$1.500 contribution limit is increased to
$1,750 for a year if (1) the
contribution is divided equally between an
individual and the spouse
(11)
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12
of the individual,and (2) the spouse has no c.ompens
I lowever, no IRA deduction is allowed for a taxa ation for the year.
ble year to an individual who is.an active participant during any part
year in a qualified pension, profit-sharing, or stock bonuof the taxable
sheltere41 annuity maintained by a tax-exempt organiza s plan, a taxtion or educational institution, 4)r a governmental plan whet her
or not. qualified).
Except. for tax-free roll-overs and certain amounts
ance, nondeductible contributions are not permitte paid for life insurd to bo made to an
IRA. Income and gain on amounts held under an IRA
until distributed. All distributions from I R..ks are incl are not taxed
udible in gris
income. Distributions may be made from an IRA with
out pena
after age 591
/
2 or in the event of disability or death. Amounts heldlty
in
an IltA can qualify for exclusions under the estate tax
and
gift
tax
rules.
Many qualified plans provide for contributions by
and the employee. In many cases, the employee both the employer
contributions are
mandatory (i.e., required as a condition of employment,
of participation in the plan, or a condition of obtainin a condition
g additional
employer-derived benefits). In other cases, employee contribu
tions are
voluntary, and the amount, within limits, is left to the
discr
etion of
the employee. A plan Carl provide for both mandator
tary employee contributions. In any case, neither empl y and volunployee contributions to a qualified retirement plan mayoyer nor emdisc
IT1 favor of employees who are oflicers, shareholders, or highriminate
pensated. Generally, in the case of voluntary employee cont ly comributions,
within certain limits, there is presumed to be no disc
rimination so long
as there is an equal opportunity for all employee
s to make such contributions. Income allocable to an employee's contribution
plan is generally not taxed to the plan or to the empl s to a qualified
oyee before the
income is distributed or made available to the employee
ployee's beneficiary. I lowever, the employee is not entitled or the emtion or exchision for employee contributions to the plan. to a. deducBenefits held
in a qualified plan can qualify for exclusions under
the estate tax and
gift tax rules to the extent the benefits are not attribut
able to employee contributions.
1 n the case of tax-sheltered annuities (including custodial acco
unts
invest ing in shares of a regulated investment company) purc
hase by
certain tax-exempt institutions for their employees or purchase d
d
schools for teachers. employees are entitled to an exclusion, withby
in
limits, from gross income for amounts paid by the employer on a
sala
reduction basis. Amounts invested in a tax sheltered annuity purchasery
d
by a tax-exempt organization can qualify for exclusions unde
r the
estate tax and gift, tax rules.
Issue
The issues am whether the present tax incentives for individu
retirement savings accounts should be expanded and whether distr al
tion from the accounts also should be allowed for .educational ibupurposes and for the purchase of the first principal residence.
•
13
Explanation of the bill
Deductible contributions
The bill would increase the annual limi
savings contributions to 100 percent of thet on deductible retirement
first $2,000 of compensation. includible in gross income. In addition
, the bill would extend
eligibility for deductible. roirement savings cont
uals .who are artive participants in qualified ributions to individplans, tax-sheltered
annuity programs, or governmental plans. The hill
special $1,750 deduction limitation for spousal IRAswould delete the
.
tinder the bill, deductible retirement savings contribu
tions could
be made by an individual to (1) a qualified phui
in which the individual is an active part icipant or (2) to an IRA. No
deductio
be allowed, however, for mandatory employee contributions n would
to a plan.
Contributions to a qualified plan or to an IRA made
before the time
for filing the tax return for a year could Ix% taken into
account as if
made on the last day of the year for which the return is
tiled.
rnder the bill, benefits attributable to deductible empl
butions to a plan would be taxed under the same rules oyee contrithat
benefits attributable to employer contributions. A.ccordi apply to
ngly. these.
benefits would generally be taxed only when distr
ibuted or made
available to the employee or a beneficiary. unless rolled
to another qualified plan or to an IRA.. Such benef over tax-free
its could also
qualif v for exclusion under the estate and gift tax
provisions.
Deductible employee contributions to a plan would
be treated
employee contributions, however. in testing' whether the plan meetas
s
the requirements for tax-qualified status and whet
her
the
meet
plan
s
the requirements of ERISA.
'Ile bill provides for simplified reports with respect
to deductible
cinploee contributions received by plans.
Nondeductible corztributions
The bill would allow nondeductible contributions to
be made
.11though no deduction would Ix. allowed for the contributo an
tions
and they would not
excluded from estate or gift tax under the
usual rules applicable to IRAs. the earnii4.,Ys attribut
ductible contributions would not be taxed until distr able to nondeibuted. Nondeductible contributions would be subject to an annual
limit of $2.000.
Nondeductible contributions of up to ct,C,000 could be
made over an
lifetime in addition to the amount contributed under the
S2.000 annual limit for nondeductible contributions.
Under the bill, the
limits for nondeductible contributions would be appl
ied only after the
limit on deductible contributions for a year is
exceeded.
Distributions for education and housing purp
oses
Where nondeductible contributions have been
distributions from the IRA would be allocated made to an IRA.
under the usual
annuity rules to determine the taxable portion,so
that the part of ench
distribution consistina of nondeductible contribution
s would not be
taxed. The bill would permit distributions to be
made from an IRA
without penalty to pay for certain educational
expenses and would
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14
permit.
rilint ions in connectio
ing purchased by the owner of n with the purchase of the first (Nellthe I It.k if the dwelling is used
as that
individual's principal residence
.
NVi
thd
rnw
als
for
edu
cat
ion
al
or the purchase of a dwelling
expenses
could rot be less than $2..000 an
not reduce the amount held in
d could
the
1h.
bel
k
ow
$2,
000
.
Als
o,
tot
drawals for t hese purposes cou
ld not twettninlate to mom tha al withn S10,00
I'titter the hill, withdrawals for
education.al expenses could be ma 0.
pav for ( ) tuition and fee
de
s at itit (Attention:11 institution,
(...).) fees.
lpooks, supplies. and equipment
for courses of instruction, an
a reasonable allowance for mea
d (3)
ls and lodging. .1n institution
qualify as an educational instit
would
educat ion 2 Or a Vora(iOnal school ution if it is an institution of higher
.'
Effective dates
(;enerally, the amendments ma
de bv the bill would apply to tax
year, beginning after 1980.1
1e estate and gift tax amendments able
a pp ly to estates of
would
decvdents who die after 1980 a.n
d
to
tra
nsfers made
after 1980 (respectively).
Revenue effect
ft is estimated that this bill wil
l decrease budget receipts hy $1
million in fiscal year 1981, $2,
754 million in 1982, $2,992 millio 18
1983.$3.Q0 million in 1984 and
n in
$3,907 million in 1985.
'As (kilned in section 1201(1
0 or 491(10 of the Higher Edu
cation Act of 194.1.
'As defined
section 19512) of the 'Vocat
ional Eibiention Act of 19t;.1
State Ins deline‘l
in any
seetioli19104) of that Act ).
lifiRRY
SH:
Z. R
[11G
Office
Res
•
13051 771-22t
1981 HAR -2 kg 1D.24
February 20, 1981
'
•
4
PIF,)
Senator Paula Hawkins
F7E3 26 1981
-G.5E-WV 123
f.l!At.11,
FLORIDA
L
Dear Senator:
I would like to call to your attention
a growing practice by both major
and smaller, domestic banks and most
international and foreign banks that
I can assure you is infuriating business
men both of my small calibre up
to the largest. These firms and business
men can sight far , more examples
and probably more of a flagrant nature
than I and business associates of
my acquaintence have experienced. I
am referring to the common and ever
increasing practice of these banks taki
ng advantage of the present high
interest rates in delaying the normal
banking transactions such as wire
transfers and funding of letters of cre
dit and numerous other transactions
whereby they have been able to make use
of the clients or depositors funds,
from a minimum of one extra day up to
as much as a week or more longer than
thuse transactions normally use to
take.
•
The depositor, victim, is given all sor
ts of excuses such as a break down
of the telex machines and computers, to
a delay in the mail, to a misplacing
of documents. Each incident is a dif
ferent excuse and almost any person I have
spoken to engaged in financial transa
ctions has had experiences of this nature
.
Most of these peop.:e just express a
feeling of utter frustration because they
do not know to whol7 these practi
ces could be reported, who could regulate them
and who could stop them from occurr
ing.
I believe this is a matter that eve
ntually involves huge sums of money
improperly
manipulated by these most honorable
"institutions". I would like to reques
t that
you refer this matter to the pro
per committee or p,31- ti.-3s who could make a
thorough
investigation. I feel quite certai
n such an investigation would develop
findings
far beyond what I have suggested
.
"!""7,
.
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..••••...
COVE•R4•
,..
BOARD OF GOVERNORS
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OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
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PAUL A. VOLCKER
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• •..• •
April 14, 1981
CHAIRMAN
The Honorable Arlen Specter
United States Senate
Washington, D. C. 20510
Dear Senator Specter:
Thank you for your letter asking me to comment on the
relationship between federal spending and interest rates and
soliciting my advice on measures Congress might take to lessen
the impact of high interest rates.
We agree that high interest rates are fundamentally
caused by rapid inflation. Disciplined monetary and fiscal policies are essential to curbing inflation, and thereby effecting a
lasting reduction in interest rate levels. Cutting federal
spending is a key part of this process because it reduces demands on productive capacity and credit markets, and helps to
convince the public that high rates of inflation will not be
tolerated. By lessening federal borrowing requirements,
reductions in expenditures accompanied by lower federal budget
deficits will offer some immediate relief to financial markets,
but a substantial decline in interest rates, and their maintenance at a lower level, will require a permanent reduction
of inflation accompanied by an easing of inflationary expectations. This process will not be easy, and I cannot reliably
predict when we will experience appreciable results. Inflation
has become deeply entrenched in our economy over the last 15
years, and we may have to endure a period of slow economic
growth and relatively high interest rates before we can restore
confidence that inflation is being brought under control.
The speed with which the economy and financial markets
respond to anti-inflationary policies will depend both on the
vigor with which we pursue these policies and the public's perception of our willingness to stay on course. In this context,
I believe a thorough review by the Congress and the Administration
of various federal measures that tend to raise costs and prices
could be very helpful. Action to pare unwarranted regulations,
.P-
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The Honorable Arlen Specter
Page Two
for example, would not only reduce costs for businesses
and consumers, but woUld build public confidence in the direction
of
policy and speed the response of markets to our effor
ts.
I hope you find these comments helpful.
Sincerely,
DLK:JLK:vcd (V-90)
bcc:
Mr. Kichline
Mr. Kohn
Mrs. Mallardi (2)
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Federal Reserve Bank of St. Louis
April 14, 1981
The Honorable J. William :tnnton
Uouse of representatives
Washington, D. C. 20515
Dear nr. Stanton:
I am pleased to furnish you with a copy of
my responses to the written questions you nuhmitted
in connection with the hearing heid on February 26.
Please let me know if I can be of further
assistance.
Sincerely,
SZ Patil
Enclosure
CO:vcd
bcc: Mrs. Mallardi (2)
Gov. Gramley
Messrs. Prell, R. Smith, Kaiman, Allison
Chairman Volcker subsequently submitted the following
responses to written questions from Congressman Stanton
in connection with the hearing before the House Banking
Committee on February 26, 1981.
Mr. Stanton
1.
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M-1B
(a)
In Table 1 of your testimony, you present two M-1B
target ranges for 1981. One is 3-1/2 to 6 percent
for 1981 growth after adjusting for ATS and NOW accounts.
The other is 6 to 8-1/2 percent before the adjustment.
My question is this: For M-1, measured inclusive of
ATS and NOW accounts, which is the M-1B you report and
we see, and which averaged $413 billion in the fourth
quarter of 1980, are you targeting it to grow by 3-1/2
to 6 or by 6 to 8-1/2 percent this year?
Our basic target is for growth in M-1B of 3-1/2 to 6 percent
over the year ending in the fourth quarter of 1981, abstracting
from the effects on M-1B of shifting into NOW accounts.
Based
on our staff's projections of the impact of such shifting, we
are estimating that achievement of that targeted growth will
result in an observed increase in M-1B of between 6 and 8-1/2
percent from the $413 billion fourth quarter level of 1980.
The estimate of the impact of NOW account shifts will be
reviewed from time to time.
(b)
In the White Book that accompanied President Reagan's
February 18th message to Congress, it is said that:
"the economic scenario assumes that the growth rates
of money and credit are steadily reduced from the 1980
levels to one-half those levels by 1986." Assuming
that "steadily" means beginning now and continuing until
1986, is it possible that if M-1B grew as much as 8-1/2
percent this year it would be at variance with Administration expectations, or do you think they know that you
have in mind some new M--M-1B after adjustment for ATS
and NOW accounts?
I believe that the 3-1/2 to 6 percent range is the economically
meaningful measure of the targeted growth of M-1B and that our
target is thus entirely consistent with the Administration's
assumption.
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(c)
Implicit in your decision to target observed M-1B growth
at 6 to 8-1/2 percent this year, is the assumption that
the rate of rise of its velocity will fall 2-1/2 percentage
points this year because of the spread of ATS and NOW
accounts. However, if this is a wrong assumption, if
ATS and NOW accounts once opened behave like other transactions deposits no matter where they came from, then
won't you be preserving rather than fighting inflation?
While we have no "official" economic forecast, and thus no
unique velocity forecast, the
ense of your assumption that
measured M-1B velocity would be expected to slow relative to
trend as a result of transfers from savings accounts is correct
I believe it unlikely ATS/NOW accounts will behave just like
demand deposits because of the savings component.
We will be
monitoring closely the behavior of the monetary aggregates
throughout the year.
If it becomes evident that the growth
ranges as we have developed them are inconsistent with the
fundamental objectives of policy--fighting inflation being
preeminent--then we will adjust them.
(d)
Will you publish at least monthly M-1B after you adjust
it so that we can monitor its behavior, and tell us
how you adjust it?
As I indicated in my testimony, we intend to keep the Congress-and the general public--apprised of our estimates of the adjusted
growth of M-1B.
We have already begun to do so, presenting
data that permit others to construct alternative estimates if
they wish to do so.
(e)
Will you avail yourselves of the opportunity to revise
your thinking and target in July, if the facts then
warrant?
We certainly will be reassessing our targets--on both
adjusted
and unadjusted bases; and for all the aggregates--prior to
the
July report to the Congress under the Humphrey-Hawkins
Act.
-3-
Mr. Stanton
2.
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Suppose there are large tax cuts relative to expenditure cuts, while
at the same time the Fed cuts money growth 2, 3, and 4 percentage
points. What will happen to interest rates?
In the short run, interest rates presumably would be higher than otherwise, all other exogenous factors being equal.
The larger federal
deficit would add to Treasury demands'on the credit market; it would
also tend to expand the aggregate demand for goods and services, and
the resultant stronger desire for transactions balances would press
against a smaller money stock.
-4Mr. Stanton
3.
How can real interest rates increase very much in the United States from
cutting tax rates in view of the demonstrated international mobility of
capital?
It is true that with capital free to move internationally there is a longrun tendency toward equalizing of real rates of interest among countries.
However, it seems to be the case that div'ergences among real interest rates
can persist for some time, as purchasers and suppliers of goods and services
adjust to changes in prices among countries.
Moreover, market imperfections,
including various controls on capital flows, may prevent a complete equalization of international interest rates.
Because the U.S. economy is such a
large part of the world economy, however, a rise in real interest rates here,
though moderated by the tendency of capital to flow in from abroad, would
tend to raise the level of real interest rates in the world economy.
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Mr. Stanton
4.
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There is considerable dispute about the effects of a
tax cut
on real activity and inflation. Demand management orien
ted
economists tell us cuts in tax rates will operate to
increase
real activity (at least when, as now, there is plenty
of slack
in the economy--more than in 1963) and also to incre
ase inflation. Supply siders tell us cutting tax rates will
increase
real activity and decrease inflation. Thus, there is
agreement
that real activity will be increased by cutting taxes
--but
disagreement about the inflatipnary impact. What do you
think? Could it be a stand-off?
Tax cuts, considered in
isolation, result in people having
more disposable income; some of this is saved, some spent
.
As a result there is likely to be a tendency to increase
consumption.
Other things equal (including the money supply)
there will also be a tendency to increase interest rates,
restraining private investment and spending, as a result
of the larger deficit, at least in the short run.
The addi-
tional consumption can add to inflationary pressures, with
the degree of impetus to prices d pending in part on prevailing
levels of resource utilization in the economy, but if money
is held unchanged that effect would be dissipated over time.
The question is whether investment would be dampened in the
process with long-term adverse effects.
Tax reduction will also have incentive effects tending to
add
to supply.
Whether the net effect will be to improve investment
and ease pressures on prices is at issue, and would depend partl
y
on the design of the tax reduction.
What does not seem to me
at issue is that the effects will be favorable if tax reduction
is accompanied by spending cuts--the point I have emphasized
.
Mr. Stanton
5.
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In your statement, you caution observ
ers of monetary policy to avoid
placin und
g
ue reliance on weekly monetary aggreg
ate figures and you
emphasize that short-term swings in the
monetary aggregates should
not be disturbing provided there is
an understanding of the Federal
Reserve's monetary control over tim
e. In this regard, should the
Federal Reserve consider shifting fro
m weekly to monthly money supply
reporting? If the Board and the FOM
C feel that weekly monetary statistics tend to be unreliable, would
it be reasonable to delay publication of the M-1 statistics until
they are final?
In a recent letter to Senators Garn
and Proxmire I indicated that
the Board is considering several alt
ernatives to its current publication procedures for the monetary
aggregate data.
abandonment of weekly publication or
some delay.
public comment on these proposals.
These include
We have invited
7
••
Mr. Stanton
6.
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Federal Reserve Bank of St. Louis
The advent of automated teller machines has created a great
demand for high quality currency. Given the various services
the Fed already performs for depository institutions, has the
Fed considered contracting with depository institutions to
provide high quality currency to such institutions at an
appropriate cost plus profit? It is my understanding that the
Fed does not currently provide such a service.
The question of charging depository institutions for high
quality
currency has undergone intensive review.
A proposal addressing
this issue is under consideration by the Board of Governors.
The proposal, brought to the Board by a special study group
set up to make recommendations on this and other cash questions,
is that depository institutions should not be charged for
receiving automated teller machine (ATM) quality currency.
There are several reasons urged by the study group for continuing to provide this service to the depository institutions
free of charge.
One, there is a general policy that currency processing
activities are deemed to be governmental responsibilities
and that governmental responsibilities are not priced.
The
sorting of currency according to quality would be classified
as such a processing activity.
Two, Reserve Banks are now in the process of installing stateof-the-art high speed processing equipment that can provide
the type and quantity of high quality currency needed for
use in ATM's.
These high speed machines are already producing
high quality notes at a number of Federal Reserve offices.
The ATM quality currency produced by this equipment is regularly
distributed to depository institutions as it becomes available.
Further, by 1984, each Federal Reserve office which
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processes more than 100 million notes annually will run all their
machineable currency on this new equipment.
This currency,
in combination with the distribution of new notes, should
ensure that depository institutions receive sufficient quantities
of ATM quality currency.
Charging for currency processed on
high speed equipment in the interim period would not increase
the supply of ATM money, but might unfairly alter patterns
of distribution that are currently set up on the basis of
efficiency and need.
Finally, furnishing only new currency for the rapidly growing
ATM market is not recommended as a long term policy because
the amount of new currency required for such purposes will
soon exceed the amount needed to replace note redemptions in
any given year.
Since the currency system will only accom-
modate that quantity of currency which the public demands at
any time, the issuance of excess quantities of new currency
would eventually strain on Federal Reserve facilities to
store ever increasing quantities of reusable fit currency.
I do not know whether the Board will deem these arguments
persuasive, as against. the alternative you suggest.
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Federal Reserve Bank of St. Louis
April 14, 1961
The Honorable George Hansen
House of Representatives
Washington, D. C. 20515
Dear Mr. Hansen:
I am pleased to furnish you with a copy of
my responses to the written questions you submitted
in connection with the hearing held on February 26.
Please let me know if I can be of further
assistance.
Sincerely,
Sgaul A. Volckec
Enclosure
CO:vcd
bcc:
Mrs. Mallardi (2) ,
Messrs. Prell, Lindsey
Chairman Volcker subsequently submitted the following
responses to written questions from Congressman Hansen
in connection with the hearings before the House Banking
Committee on February 26, 1981.
Mr. Hansen
1.
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What is the real meaning of a "prime" lending rate at a bank?
Is it not misleading to publicize such a rate as the "best"
rate, when in fact loans are offered at discounts to everyone?
Should the federal government do something to put some definition on the term and make it more uniform and thus more meaningful and useful to the consumer--particularly that small
businessman or farmer who only borrows occasionally and who
does not engage in overnight loan practices?
The meaning of the term "prime rate" has indeed become obscured
by changes in bank lending practices.
However, the below
prime lending that has occurred has generally involved special
categories of credits--usually very large, very short-term
loans, which differ in character from the bulk of loans that
are tied to the prime rate.
Thus, the misunderstanding and
possible inequities involved are not so great as might appear
the case at first blush.
I don't think that it would be useful
for the federal government to get directly involved in the
matter of trying to define the "prime rate."
Bank lending
rates to particular customers necessarily and properly involve
a variety of credit and customer considerations, and attempts
to arrive at and enforce an official definition would, all too
likely, tend to create artificialities and distortions of
lending practices.
Our primary reliance must be on maintaining
a highly competitive financial system, with a variety of
choices by borrowers.
I would also hope,in their own self-
interest in maintaining well understood relationships with
their clients, banks will consider means of clarifying their
use of the "prime rate" terminology.
2-
Mr. Hansen
2.
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Federal Reserve Bank of St. Louis
Some question has arisen about whether the various Federal
Reserve Banks are really getting detailed and useful information reflecting actual market and credit conditions from
different parts of the country. If so, are they responsibly
including it in their evaluation process so there is full
awareness of such conditions? Are they then, in a systematic
way, passing this information on to the Federal Open Market
Committee and the Board of Governors? Do you regard this
flow of information as an impoKtant current justification for
the regionalized structure of the Federal Reserve System,
which seems to be unique among central banks? If this
function is not being fulfilled--and I have evidence that
this is sometimes the case--should Congress examine the
regional structure with a view to altering it so as to assure
that this function is consistently served?
I believe that the Federal Reserve Banks are providing intelligence about economic developments in their regions in a way
that is useful for monetary policy.
The economic research
and other departments of the Banks provide their Presidents
with information on economic and financial developments in
their districts.
They also communicate information to the
Board staff and Board members through various channels, ineluding regular formal reports before each Open Market
Committee meeting.
I might add the Federal Reserve is not quite unique in a
regional structure--the German central bank, for instance, was
in certain respects modeled on the Federal Reserve.
I would
be interested in any specific suggestions you might have about
uses
of appropriate regional information, or how our intelli-
gence network might be improved in that respect.
Mr. Hansen
3.
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Federal Reserve Bank of St. Louis
In your statement and in your report, you refer several times,
as you did under oral questioning, to the superiority of present
operating procedures in open market operations, especially saying
that these procedures are fully adequate for periods of a month
or longer. If that is so, why was the growth of money so
explosive for six months together in 1980, particularly in
view of the statement in your July report that it would not be
the aim of the Federal Reserve to move back onto the target
path in one extraordinary movement, after the stall-dive
behavior of the aggregates early in 1980?
The volatility of the money stock last year--not
from month
to month but over several months--was largely a reflection
of the extraordinary nature of the economic circumstances.
Focusing on the developments of the summer and fall, to which
you refer, the money stock did indeed grow at a very fast rate
over a period of several months,
The economy during that time was
growing rapidly--much more rapidly than almost anyone had
expected or realized at the time--and this was boosting the
public's demands for transactions balances.
In retrospect,
it also appears that the public had abnormally reduced deposit
holdings following the introduction of special consumer credit
restraints in the spring, and sought to rebuild those balances
later.
The Federal Open Market Committee's targets for monetary
expansion were much lower than the growth that actually
occurred and we did not provide non-borrowed reserves to
support the rapid growth.
The rapid money growth was clearly
reflected in an increase in the need of banks to borrow the
reserves required to support the increase in deposits and in
a pronounced tightening of the money markets.
This tightening
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4
did tend to set in motion adjustments in the behavior of banks
and the public that contributed to a deceleration of monetary
growth late in 1980 and on into early 1981.
The process of
restraint indeed took longer to "take hold" than we anticipated, and because the deceleration occurred late in the period,
the monetary aggregates did end up high relative to their
ranges for 1980 when measured on the conventional fourth
quarter average basis.
However, taking a broader view and
rccognizing events around year end, the "misses" were minimal
or nonexistent.
I believe (and there is a great deal of evi-
dence to support the belief) that it is the general trend of
monetary growth over substantial periods that is significant
in terms of achieving the fundamental objectives of policy.
5-
Mr. Hansen
4.
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Federal Reserve Bank of St. Louis
In addition to moving to contemporaneous reserve accounting,
would it be helpful for the Federal Reserve to stagger reserve
settlement days over each week?
The advantages and disadvantages of staggering reserve accounting
periods have been studied over the years.
These studies have
suggested that the advantages of reduced reserve management
pressures on depository institutions late in the reserve
settlement week and the associated smoother day-to-day movements
in the federal funds rate under a system of staggered accounting
would come at the expense of a looser relationship between the
monetary and reserve aggregates and an accompanying deterioration in monetary control.
The source of both outcomes is the characteristic of a staggered
system that allows institutions to transfer reserve surpluses
or deficiencies among themselves through federal funds transactions across settlement weeks.
This characteristic provides
an automatic mechanism for smoothing the impact on the federal
funds rate of self-correcting, short-run fluctuations in noncontrolled factors affecting reserves, such as float.
However,
the studies suggested it also can lead to the avoidance of
systemwide balancing of reserve positions every week.
In
response to a permanent policy-induced change in reserves,
institutions would be able to delay more basic balance sheet
adjustments that would affect the monetary aggregates by
transferring their reserve position imbalances to other
institutions in the federal funds market.
could accumulate over time.
Systemwide imbalances
Once institutions began undertaking
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•
more basic balance sheet adjustments, such as asset purchases
or sales, the elimination of the overall accumulated reserve
imbalances could even require larger asset transactions and
associated deposit changes than would be sustainable in the
long run given aggregate reserves.
These complications in the reserves to money relationship would
impair the Federal Reserve's ability to predict the consequence
for movements in the money stock over time of a particular
reserve target.
A system of staggered accounting could well
overturn the benefits for short-run monetary control potentially
available under contemporaneous reserve accounting.
The
Federal Reserve is currently studying the operational feasibility
of contemporaneous reserve accounting, as well as appropriate
implementation schedules, and I intend to review again the
evidence on staggered settlement days.
Mr. Hansen
5.
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Federal Reserve Bank of St. Louis
Is there anything the Federal Reserve can do through monetary
policy to predictably affect the division between growth and
inflation in the space of, say, a year? If it can, is this
in line with the Administration's thinking of what is needed
for the next year? If it can't, why should the Federal Open
Market Committee particularly worry from week to week about
the emerging strength or weakness of the economy and try to
react to it?
I don't believe that the Federl Open Market Committee any
longer, if it once did, takes the kind of "fine tuning" approach
of the sort you suggest.
deal with inflation.
Our continuing effort must be to
We do, of course, feel it is important
to keep abreast of short run developments in the economy and
financial markets.
There is some area of inevitable uncertainty
attending the specification of monetary targets and their
impacts on the economy, and we constantly assess incoming
information that may shed light on those matters, and perhaps
help us in adjusting our operations toward the specified targets,
or, much more rarely, signal the need for adjustments in targets
in order to maintain policy on the correct course with respect
to the achievement of the ultimate objective of a stable,
growing economy.
There is little the Federal Reserve can do directly, through
the ordinary tools of monetary policy, to affect the inflation/
growth "trade-off".
However, expectations may indirectly affect
the outcome, although without predictable precision.
Those
expectations would be influenced by monetary as well as other
public policies in ways not easily distinguishable, but related,
I believe, to perceptions of willingness to persist in policies
of restraint.
8
Mr. Hansen
6.
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Federal Reserve Bank of St. Louis
The recent behaviors of the consumer price index and the
GNP
deflator have been very different. Do you judge one index to
be better than another for the general purpose of assessing
the strength of inflationary pressures and the appropriat
eness
of various possible policy responses?
There is no single price index that is an unambiguous, allpurpose indicator of inflation.
The consumer price index has
clear problems, particularly in the treatment of housing,
that have been quite generally recognized.
The GNP implicit
deflator has other shortcomings, including a tendency toward
some volatility as a result of the shifting weights that
characterize its construction.
The GNP consumption deflator
may give a better reading.
In general, I do believe, in present circumstances of volat
ile
and high interest rates, the consumer price index is often misleading, but a variety of indices, including the producer price
index, is necessary to properly assess inflationary developments.
Mr. Hansen
7.
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Federal Reserve Bank of St. Louis
Tho first chart on page 27 of your report shows that nonborrowed
reserves wore really quite stable from May to the end of 1980.
The monetary base, adjusted for reserve requirement changes,
increased from May to November by about 10 or 11% (on an
annual basis), then turned nearly flat. M-1B likewise increased
rapidly from May to November, then went flat. Apparently,
stabilizing nonborrowed reserves through the period did not
result in stable money growth. In view of the record, would
not stabilizing of the monetary base have resulted in much
more stable monetary growth?
Under present institutional arrangements, with banks able to
borrow from the Federal Reserve, we cannot have assured control
over the monetary base (or total reserves) in the short run,
in any event, it is not possible to say precisely what pattern
of monetary growth might have occurred had the System stabilized
the growth of the monetary base over this period.
There are
considerable dangers in ex post comparisons of the sorts you make
in your question, for the monetary base was in fact determined
endogenously along with the money stock.
The base is most heavily
influenced by currency outstanding, rather than deposits which
account for the bulk of the money supply.
As a general matter,
it should be noted that the staff's study of monetary control
procedures suggested that nonborrowed reserves are a better
operating target than the base under current institutional
arrangements.
In the period to which you refer, the money stock was growing
rapidly at first and the System did not accommodate that
expansion through a corresponding provision of nonborrowed
reserves.
As banks were forced to turn to the discount window
to satisfy their reserve requirements, this put upward pressure on market rates of interest and encouraged adjustments
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•
-10-
by banks and the public that contributed to the weakening of
monetary growth later in the year.
At times, nonborrowed
reserves were reduced in the light of the rapid growth in
total reserves to speed up the adjustment process.
The rise
in borrowing was reflected in the growth of total reserves
and the base.
If, instead, the System had been attempting to adhere to a
path for total reserves or the base, the initial surge in the
monetary aggregates would have required a reduction of nonborrowed reserves from what actually occurred.
(Absolute
adherence to a total reserve or base path in the short run in
the face of a surge in money would, for all practical purposes,
be impossible because it is necessary to meet the demands for
currency and required reserves.)
In such a circumstance,
money market conditions would have tightened even more
abruptly than they did.
Such a development presumably would
have prompted a quicker deceleration of monetary expansion,
but the precise timing and dimensions cannot be estimated with
any certainty.
Furthermore, it is conceivable that there
might have been subsequent oscillation in money, and interest
rates as the System attempted to hold total reserves or the
base on a steady course in the face of short-run disturbances
to money demand and the reserves-money or base-money multipliers.
•
-11-
Mr. Hansen
8.
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Federal Reserve Bank of St. Louis
Professors lamcs M. Johannes and Robert H. Racshe of the Department of
Economics at Michigan State University have presented extensive evidence
(see the Econometrics Workshop Paper No. 7914) to show that, given their
forecasting models the forecast errors at the various steps of the procedure are such that the monetary base is the dominant policy guide, compared to nonborrowed reserves. They say "We are unaware of any publicly
available forecasting technique that dominates our results, or reverses
the rankings of the two policy guides." Does the Federal Reserve's own
forecasting technique overthrow these. findings? If so, why were the
results in actual practice so poor in 1980? If not, why does not the
Federal Reserve adopt the superior policy guide? In any case, why does
not the Federal Reserve publish its forecasting techniques?
The Federal Reserve staff study on the new monetary control procedures completed in February contained a paper entitled "Monetary
Control Experience Under the New Operating Procedures" that addressed
in detail the conclusions reached by Professors Johannes and Rasche.
This paper first compared the accuracy of forecasts of the various multipliers (ratios of a monetary aggregate to a reserve measure) by the
Johannes-Rasche model with the accuracy of multiplier forecasts made
judgmentally by the Board staff in deriving reserve targets.
Multiplier
forecasts by Board and San Francisco Reserve Bank econometric models also
were examined.
From October 1979 to October 1980 the accuracy of the staff
judgmental forecasts was superior on average to the accuracy of the JohannesRasche model forecasts, particularly for the nonborrowed and total reserve
measures.
The Board monthly model, whose equations have been made avail-
able to the public upon request, also yielded closer multiplier predictions
than the Johannes-Rasche model.
The Board staff paper also examined how closely money could be controlled using alternative reserve measures as fixed operating targets
over monthly periods.
The Board and San Francisco models were simulated
so as to abstract from the effects of movements in reserve measures that
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are induced by movements in money and that potentially distort the multiplit.r rvsults.
Thus, these tests focused solely on the relationship
going from reserves to money.
The results indicated that the short-run
connection between nonborrowed reserves and money was more reliable than
the connection between the monetary base and money, under the current
institutional and regulatory structure.
Moreover, under a different
regulatory structure embodying more predictable required reserve ratios,
total reserves were more reliably connected to money than the monetary
base.
The Federal Reserve came very close to attaining its announced
ranges for growth of the narrow monetary aggregates over 1980 as a
whole, despite sizable gyrations in monthly growth rates.
The money
stock is inherently noisy in the short run, and not amenable to precise
week by week or month by month control.
However, the variability of money growth last year apparently was
accentuated by an unusual combination of factors that destabilized the
demand for money as the year progressed.
These factors included sharp
swings in economic activity and the imposition and subsequent removal of
the credit control program.
Had 1980 been a more "normal" year, money
would have been much more likely to have remained within the bounds of
the FOMC's longer-run range.
This conclusion is documented in detail
in another paper in the overall staff study, "Money Market Impacts of
Alternative Operating Procedures."
The forecasting procedure used by the Federal Reserve in setting
and adjusting its targets for reserve aggregates is predominantly based
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Federal Reserve Bank of St. Louis
- 1 3on judgmental estimates of near-term relationships among financial
variables.
Unlike an approach utilizing only the Board's monthly
model, this forecasting technique, by its very nature, cannot be
reduced to a simple set of equations or formulas that might be
published.
-14-
Mr. Hansen
9.
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Federal Reserve Bank of St. Louis
The appendix to the Federal Reserve's report contains results of
staff
studies, ostensibly showing that no alternative policy procedures,
specifically targeting the monetary base instead of nonborrowed
reserves,
could have resulted in smoother money growth and more stable
credit markets in 1980. These results lean heavily on model simulations.
These
models gave us atrocious instabilities in 1980. Why should their
results
be trusted to evaluate hypothetical alternatives?
The staff research evaluating alternative reserve measures as
potential operating targets relied in part on simulations of the
Board
and San Francisco Bank econometric models.
But these simulations high-
lighted the impact on the money stock of the errors each month in
the
models' equations.
In other words, the model simulations were designed
to estimate the extent to which unexpected developments would disturb
money from its predicted level when different reserve measures in turn
are maintained at predetermined levels.
Thus, the simulations did not
ignore that fact that model equations are subject to error, but instead
indicated the closeness of monetary control that is possible with different reserve targets in the face of these errors.
The results, which apply only to each model specifically, should
be viewed as tentative, because no model perfectly represents the nonrandom, underlying structure of the economy.
However, the fact that the
results comparing nonborrowed reserves with the monetary base were simila
r
for two models with quite different structures suggests some confid
ence
in the general validity of the results.
In any event, while the two models did suffer rather large errors
in several months in 1980, it would be a mistake to blame the
observed
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Federal Reserve Bank of St. Louis
-15-
instabilities last year on the models, which were not relied on to any
significant degree in conducting monetary policy.
The model errors
reflected last year's instabilities, but the cause of these instabilities was
the economic factors discussed in the last question, not the
models themselves.
•
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Federal Reserve Bank of St. Louis
Arril 14, 1981
The Honorable Pon Paul
House of Representatives
Washimjton, D. C. 20515
Dear Dr. Paul:
I am pleased to furnish you with a copy of
my responses to the written questions you submitte(I
in connection with the hearincj held on February 26.
Please let me know if I can be of furthcr
assistancc.
Sincrrely,
Enclosure
CO:vcd
bcc:
Mrs. Mallardi (2)
Messrs. Adams and Prell
Chairman Volcker subsequently submitted the following response
to a written question from Congressman Paul in connection with
the hearing before the House Banking Committee on February 26, 1981.
Dr. Ron Paul
During a hearing conducted by the Economic Stabilization Subcommittee on February 25, Professor Amitai Etzioni suggested a
device to reduce the annual interest payments on the national
debt: the sale of gold-backed bonds. He pointed out that three
weeks ago a private firm in Europe sold gold-backed bonds at 3.5%
interest. I am enclosing a copy of his remarks in which he makes
this suggestion. What is your reaction to this idea? Would you
endorse it as a way to balance the budget, which you emphasized
so much during your testimony?
While I can unders and the concerns that prompted Professor
Etzioni's suggestion, I have several reservations about his
proposal.
The essence of the proposal is that the Treasury sell
indexed bonds -- in this case tied to the price of gold.
have generally been opposed to most forms of indexing as they
reduce support for controlling inflation and in some cases
actually help spread price increases.
Professor Etzioni's
proposal would place the U.S. Treasury in the position of
speculating on the future price of gold, and in effect betting
against those who buy the bonds -- I think this is inappropriate,
The proposal's overall intent seems to be to reduce the cost of
public borrowing now, and shift some of the burden into the
future when the bonds would be paid off.
However, if we are
unwilling to pay the financing cost of the Federal deficit
associated with current levels of government spending, a more
appropriate response would be to cut the budget.
If we wanted
to finance current spending at the expense of reducing our
assets, we could always sell gold directly.
Americans now
also have unrestricted opportunities to own gold in the form
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Federal Reserve Bank of St. Louis
2
of bullion, U.S.-produced medallions, foreign coins, claims on
gold held in bank vaults, futures contracts, and in other forms.
There is no reason to believe the ownership of a claim on the
U.S. gold stock could provide, as Professor Etzioni suggests,
benefits that are superior to those afforded by available
investment opportunitics.
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Federal Reserve Bank of St. Louis
A•dip
v.
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Federal Reserve Bank of St. Louis
April 14, 1981
The Honorable james K. Coyne
House of Representatives
Washington, D. C. 20515
Dear nr. Coyne:
I am pleased to furnich you with a copy of
my response to the written question you submitteet in
connection with the hearing held on February 2G.
Please let me hnow if I can be of furtl.er
assistance.
Sincerely,
:77,-,ut A•"
ii...,LA0(
Enclosure
CO:vcd
bcc:
,/
Mrs. Mallardi (2)
Mr. Prell
•••
Chairman Volcker subsequently submitted the following response
to a written question from Congressman Coyne in connection with
the hearing before the House Banking Committee on Feb. 26, 1981
Mr. Coyne
What impact does our government's growing credit requirements have
on national interest rates? How much, according to your econometric
models, could interest rates be brought down if we could maintain a
balanced federal budget for a period of 2-3 years or even longer?
All other things equal, a larger federal deficit implies higher
market rates of interest.
I don't think, however, our econometric
model can offer any simple answer to your question regarding the
impact of a balanced budget for several years.
It would yield a
variety of answers depending on the economic circumstances and
other aspects of governmental policy--and any quantitative results
would, as with all econometric models, be subject to a considerable
degree of uncertainty.
However, it is fair to say that reduced
federal borrowing will result in less pressure on credit markets
and in general, significantly lower interest rates.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
April 14, 1981
The Honorable William D. Lowery
House of Pepresentatives
Washington, D. C. 20515
Dear Mr. Lowery:
I an pleased to furnish you with a copy of
my responses to the written questions you submitted
in connection with the hearing held on February 26.
Plevse let me know if I can be of furtl)er
assistance.
Sincerely,
•,
A
' -1 44i k •
11 tv
- 11 J4:
Enclosure
CO:VCd
bcc:
Mrs. Mallardi (2),/
Messrs. Prell, Pizer, Kohn, Seiders, Keir
Chairman Volcker subsequently submittel the following responses
to written questions from Congressman Lowery in connection
with the hearing before the House Banking Committee on
February 26, 1981
Mr. Lowery
Exports and Protectionism
Mr. Chairman, recently Dr. Fred Bergsten, Former Assistant Secretary of
the Treasury for International Affairs, warned that continuing high
interest rates will erode the competitiveness of U.S. exports, which have
been growing at twice the rate of overall world trade for the past three
years. He also warned that the U.S. faces massive protectionist pressures
in the future. Would you comment on Dr. Bergsten's concerns and what role,
if any, the Federal Reserve will play in these matters.
High nominal interest rates are symptomatic of high inflation rates,
and consequently, they are likely to be associated with a deteriorating
competitive position for U.S. exporters.
The efforts of the Federal Reserve
to reduce the rate of inflation will, over time, help to bolster U.S. competitiveness and create an environment conducive LO a lower level of interest
rates.
On the question of protectionist pressures, there is no doubt that
they are rising both here and abroad.
To a degree this is 47-reaction /o low
growth rates and high unemployment rates in most industrial countries.
There
are probably instances in which exports of some products from some countries
are being encouraged by subsidies of one kind or another, and we would support
a strong reaction in such cases.
More generally, however, we believe that
to turn back the tide of protectionism it will be necessary to pursue economic
policies in the industrial countries that will support expansion without stimulating inflation.
The policy of the Federal Reserve is to foster that kind of
environment for the United States.
sP
•••
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Federal Reserve Bank of St. Louis
Mr. Lowery
Mr. Volcker, there has been some discussion of the possibility of establishing
an IRA-type account for housing down payments. Should mortgage interest rates
continue to stay at present levels, would you favor such an instrument for
first-time homebuyers?
No, I would not.
As a general matter, one must approach tax deferral and
exclusion proposals very cautiously for they tend to involve the certain loss
of tax dollars and enlargement of the federal deficit with uncertain benefits
to the economy in terms of additional saving.
The specialized plan you inquire
about addresses a symptom of our current problem--high interest rates discouraging home purchases--rather than the problem itself, inflation.
Moreover, it
would put into place an additional subsidy program for housing that prove
difficult to dismantle when the need had passed.
The most effective way to
eliminate the housing affordability problem is to curb inflation through consistent application of monetary and fiscal restraint.
•
Or
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Federal Reserve Bank of St. Louis
•P
3
Mr. Lowery
Mr. Volcker, there has been much discussion of the fact that mortgage
interest
rates are included in the CPI, and as is stated in the Report (page
41) the
rise in mortgage interest rates in late 1980 included in the CP1
"exaggerates
the true change in the average cost ot living." However, in my
District in
California, the 30-year, fixed rate mortgage is fast disappearing.
Do you
feel that with the current trend of VRM's and other less conventional
mortgage
instruments, interest.rates on these types should in fact be included
in thc
CPI, perhaps adjusted periodically?
It is widely recognized that the present treatment of home purchase
costs in the Consumer Price Index has significant shortcomings.
The index
does not reflect in a satisfactory way the fact that homeownership involves
both consumption and investment characteristics.
There is less agreement,
however, concerning the most appropriate treatment of financing and other
homeownership costs in the CPI.
The proliferation of adjustable-rate home
mortgages adds another complicating technical factor in the construction of
the index.
In a true cost-ot-livin
index, the owner-occupied houing component
would measure changes in the average cost of consuming the flow of shelter
services provided by owner-occupied homes.
This cost cannot be measured
directly, however, since there arc not corresponding market transactions for
which prices can be collected.
The Bureau of Labor Statistics currently
is experimenting with a number of housing variants that represent attempts
to measure the ideal concept indirectly.
These alternatives have been under
discussion at the BLS and elsewhere for some time and are being reviewed for
the next CPI revision.
The BLS is also considering how to deal with adjustable
rate mortgages in the current CPI homeownership measure, but appropriate data
are quite limited at prescnt.
•
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Federal Reserve Bank of St. Louis
•
-4-
Mr. Lowery
The Competitive Environment Ahead
What is your response to these competitive pressures faced by all depository institutions? How should we in Congress begin to approach these
issues? Isn't it time that we thoroughly review the Glass-Steagall Act
with the view toward permitting depository institutions to compete for
services similar to those which their competitors in the investment business now offer?
You are certainly correct in indicating that there have been significant changes in the institutional structure of financial markets and that
there are strong pressures toward further change.
It is important that we
not permit outmoded regulations and statutes to impede an evolution of the
markets in the directions dictated by fair and constructive competitive
forces; we must, of course, at the same time make sure that the financial
system remains sound and does not become a chink in our economic
armor
as
we confront the many unpredictable shocks that can arise.
•
The Board is addressing some of the issues you raise.
The question
of equitable competition between money market mutual funds and depository
institutions is one of these.
A variety of Glass-Steagall issues, in-
cluding revenue bond underwriting,
have, as you know, come to the fore
in recent years, and I think it is inevitable that many more will.
•
•
•• •••
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Federal Reserve Bank of St. Louis
-5-
Mr.
Lowery
Lower Inflation Rate
Given, the inflationary forces and the inflationary
which are embedded in our economy, is it reasonable
that the inflation rate can be cut to 8.3% as early
as has been predicted, even assuming that President
entire program of tax and spending cuts is enacted?
kind of inflation rate can we reasonably expect?
expectations
to assume
as next year,
Reagan's
If not, what
I see no fundamental reason that the rate of inflation cannot
be cut to 8.3 percent next year.
I think that such a result could
be achieved with the least strain on our financial fabric if the
federal deficit is kept to a minimum.
But you are quite right
in focusing on the inflationary expectations embedded in the
economy.
Whether we can achieve both a significant deceleration
of inflation and strong economic growth is dependent in large
measure on our success in turning the expectational momentum of
inflation around--and I believe that a firm, credible commitment
to monetary and fiscal restraint is essential to achieving an
easing of inflationary expectations.
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Federal Reserve Bank of St. Louis
-6Mr. Lowery
Mr. Chairman, now that the Federal Reserve's discount window
is available to all depository institutions, perhaps it is time to
examine new ways to have the discount rate set in a manner that would
improve monetary policy. Some observers, such as Milton Friedman,
have suggested that Lhe discount rate should be linked to a market
rate such as the Treasury bill rate, so that it becomes a floating
rnte which changes continually rather than at uncertain intervals.
Perhaps it should he viewed as a penalty rate inthe future.
Has the Federal Reserve given any consideration to such a review
of the discount rate? If so, what are you doing in this regard? If
not, why not?
The staff of the Federal Reserve recently undertook an assessment of the procedure for setting the discount rate, as part of a more
general review of its first year of experience with targeting open
market policy on bank reserves.
In this review consideration was
given to the questionwhether monetary control would be improved
by maintaining the discount rate conSistently at a penalty above a
pivotal short-term market rate,such as the federal funds rate, or
by using a fLoating discount rate, tied in some fixed spt:ad relationship to a key market rate.
The staff's study revealed that the two
techniques offer both advantages and disavantages relative to the
current approach; these are summarized below.
The Board will continue
to consider alternatives to present practices with respect to the
administration and pricing of discount window credit.
Penalty
DiSCOUIll
Rate
A penalty discount rate would tend to limit the discount window
to a strict lender of last resort role.
As a result, borrowers would
be accommodated only when fhey had lost access to their usual market
sources of funds (due to their own management errors), or when there
was a more general squeeze on financial liquidity.
•
•
.10
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Federal Reserve Bank of St. Louis
The present role of
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Federal Reserve Bank of St. Louis
-7
the discount window as a buffer in accommodating temporary bank needs
for reserves would thus be largely eliminated, and any tendency for
bank reserve demands to exceed or fall short of the supply being provided through Federal Reserve open-market operations would produce
quicker and substantially sharper responses in market interest rates.
Where the overshoot or undershoot in demands for reserves
resulted from a deviation of money growth from the FOMC's desired
target rates, this more rapid response of market interest rates would
be helpful, since it would tend to bring money growth back on target
more quickly.
Unfortunately, however, reserve needs often deviate
from expected levels for reasons that have no relation to the underlying demand for money, and sharp interest rate responses to such
changes would often be counterproductive.
For example, bank demands for excess reserves may ,deviate from
forecast levels, or the deposit mix that determines required reserves
may differ significantly from the projected pattern.
With the discount
window no longer serving as a buffer, any such stochastic discrepancy
between the demand for and supply of reserves would be reflected in
a much sharper response of interest rates than is now the case.
There
would be no guarantee that these rate responses would be consistent
with what was needed to keep growth in the monetary aggregates within
their desired r anges, nnd
tim es they could actually run counter to
such needs, thereby exacerbating deviations of money growth from the
desired targets.
•
geh
•
-8
Finally, it should be noted that under thee present system of
lagged bank reserve accounting, it would be technically impossible to
keep the discount rate consistently at a penalty relative to the
federal funds rate.
Since required reserves in the current week
depend on deposits two weeks before, in any situation where open
market operations failed to cover all of the demand for required
reserves (as might happen as a result of Federal Reserve misestimates
of independent factors like float and currency in circulation that
also affect bank reserves),the banking system would have to turn to
the discount window to bring the total supply of reserves into equilibrium with demand.
individual banks with reserve shortages would
seek first to meet their needs in the federal funds market.
But
because the supply of federal funds were insufficient to meet the
total demand for reserves
(due to the Fed's misestimat4Tof the need
for open market action), the federal funds rate would be bid quickly
up to and above the discount rate. Only then would banks turn to the
discount window to bring the supply of total reserves into balance
with demand.
This process of reaching an equilibrium could thus be
expected to increase
the volatility of market interest rates.
Tied Discount Rate
Advocates of a tied discount rate have generally suggested
linking the discount rate in a fixed spread relationship to the
federal funds rate, the 90-day Treasury bill rate, or some more
general index of short-term market rates.
cP
•
So*
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Federal Reserve Bank of St. Louis
Like the penalty rate
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Federal Reserve Bank of St. Louis
9
approach, the objective of a tied rate would beYto insulate the volume
of borrowed reserves against changes in market interest rates, so that
adjustments to persisting deviations from targeted money growth rates
would occur more quickly.
If the federal funds rate were selected as the tie, any attempt
to link the discount rate to very recent levels of the federal funds
rate could produce large, possibly explosive, movements in both the
federal funds rate and other market rates.
For example, if today's
discount rate were tied to yesterday's federal funds rate, anything
causing a change in yesterday's funds rate would lead to a further
change in today's funds rate because of the tied increase in today's
discount rate.
This would induce still further changes in tomorrow's
discount and funds rate, and so on.
This technical problem of induced interest rate volatility could
be damped if the discount rate were tied to some lagged value of the
federal funds rate instead of a very recent rate.
The rationale for
such a backward looking fed funds rate tie would be essentially twofold.
First, it would allow for some variation of the spread of the
current fed funds rate over the discount rate and thus, by tolerating
some increase in the volume of borrowed reserves, limit the risk of an
interaction with the discount rate that ratchets the fed funds rate
upward.
This in turn would help to minimize the possible pitfall of
linking the discount rate too tightly
to a current rate series that is
heavily influenced by strictly temporary shifts in demands for reserves
•
11.
•
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Federal Reserve Bank of St. Louis
-10-
and not reflective of a basic trend in the demand for money.
At the
same time, a lagged tie of this type would help to keep spreads of
market rates over the discount rate from reaching the unacceptably
large proportions that have developed at critical points under the
existing system of establishing the discount rate on a discretionary
basis.
However, a tie of this type--with a sufficient lag to avoid
too close a linkage to relatively current adjustments in money market
conditions--would be quite unwieldy.
For example, at times when the
federal funds rate was declining, this approach would produce
a penalty discount rate (with all its attendant problems)
unless a special judgmental adjustment were made.
Use of a 90-day bill rate or a broader index of similar shortterm rates as the tie, rather than the one-day federal funds rate,
77
.•
•
would help to minimize the destabilizing influence of very temporary
changes in reserve demands.
But it would also introduce certain
technical complexities that could prove troublesome.
For example,
experience shows that in periods as short as the interval between
FOMC meetings, most market rate series will frequently show temporary
supply-demand distortions relative to the structure of other similar
rates.
Thus, any series used as an automatic tie would have to be
reviewed regularly to determine whether temporary market factors were
creating distortions that indicated a need to set the automaticity
aside.
•
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Federal Reserve Bank of St. Louis
-11-
Where other central banks have introduced.tied rate procedures
for setting their discount rates, they have always had to wrestle with
the question whether the objective of tieing should take precedence
over other policy considerations.
Generally, to accommodate other
overriding policy needs, the rules for those-other ties have had to
be breached frequently.
After a period of mixed results, the
experiments have typically been abandoned.
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Federal Reserve Bank of St. Louis
April 14, 1921
The Honorable Uorman D. Shumway
House of nepresentatives
Washington, D. C. 20515
Dear Mr. Shunway;
I am pleased to furnish you with a copy of
my responses to the written questions you submitted
in connection with the hearing held on February 26.
Please let me know if I can be of further
assistance.
Sincerely,
S/Paul A. Volckt
Enclosure
CO:vcd
bcc:
Mrs. Mallardi (2).Messrs. Prell, Simpson, Lindsey, Humphrey, Ring
Chairman Volcker subsequently submitted the following responses
to written questions from Congressman Shumway in connection
with the hearings before the House Banking Committee on
February 26, 1981.
Mr. Shumway
1.
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Federal Reserve Bank of St. Louis
To
as
in
In
what extent have the revenues accruing to the Treasury
a result of the Federal Reserve requirement increased
the past two years? What is the projection for FY 1982?
future years?
The primary source of Federal Reserve revenues is earnings
on our portfolio of government securities.
Most of these
revenues are returned to the Treasury each year, after a
deduction for Federal Reserve operating expenscs.
Revenues
accruing to the Treasury solely as a result of Federal Reserve
reserve requirements represent about one quarter of the
System's earnings on its securities holdings.
Revenues
derived from reserve requirements were $2,080 million in
1978; $2,640 million in 1979; and $2,995 million in 1980.
The increase in revenues over the past two years (1978-80)
from reserve requirements alone is thus $915 million, or
44 percent.
The main source of this rise was the 33 percent
increase in the average return on the System's portfolio
from 1978 to 1980.
Average reserve balances at the Federal
Reserve Banks grew 8.5 percent during this period.
The projection for revenues from reserve requirements alone
in fiscal year 1981 is $2.5 billion.
projections are:
For future years the
$2.3 billion in fiscal year 1982, $2.0
billion in fiscal year 1983, and $1.8 billion in fiscal year
1984.
Reserve requirement
revenues fall because of the
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Federal Reserve Bank of St. Louis
2-
reduction in reserve requirements mandated by the Monetary
Control Act.
However, as you know under the Monetary Control
Act we have begun charging for the services provided by the
Federal Reserve Banks.
Total revenues from reserve require-
ments and service charges will be higher than if the Monetary
Control Act had not been passed.
Obviously, these projec-
tions of revenues are sensitive to assumptions about the
extent and composition of deposit growth and about interest
rate movements; consequently, they must be viewed as quite
uncertain.
Total Federal Reserve earnings will also be
affected by other factors such as the growth of currency.
3
Mr. Shumway
2.
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Federal Reserve Bank of St. Louis
What accounts for this rapid rise in revenues, which have
apparently more than doubled in only five years?
By 1980, Treasury revenues specifically due to reserve
requirements, $2,995 million, had grown by 71 percent from
their 1976 level.
However, total Federal reserve payments
to the Treasury in 1980, $11.7 billion, were $5.8 billion
more than in 1976.
Most of this rise was due to an increase
in the average rate of interest earned on U.S. government
securities, which rose from 6.70 percent in 1976 to 9.73
percent in 1980, reflecting the upward trend in rates.
The
remainder was due to earnings derived from additional holdings of securities, which averaged $128.2 billion in 1980
compared with $96.8 billion in 1976.
This substantial
increase in security holdings largely reflected the continuing growth of currency in circulation, which in 1980
averaged $38.9 billion more than in 1976.
A smaller portion
reflected the increase in reserve balances described in
question 1.
-4-
Mr. Shumway
3.
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Federal Reserve Bank of St. Louis
During the protracted debate leading to passage of the
Monetary Control Act, the Treasury Department insisted
that a minimum acceptable revenue floor existed, and that
the reserve requirement had to be sufficient to limit
revenue losses. In fact, it is my recollection that the
reserve requirements eventually established were based
more on this concern with revenues, rather than with the
questions of monetary control. Do you think this is an
accurate assessment of the situation?
The Treasury was indeed concerned with the potential revenue
effects of the Monetary Control Act.
To address that concern,
the Federal Reserve provided revenue estimates to the Treasury.
These were later published in the Congressional Record-Senate
(March 27, 1980, pp. S3172-4).
These estimates showed that,
compared to an environment without the MCA, passage of the MCA
should on balance lead to a modest increase in Treasury revenues.
The concerns of the Federal Reserve, naturally, were with the
monetary control implications of the MCA.
is enhanced when more financial
Monetary control
institutions are subject
to reserve requirements in excess of vault cash holdings.
The legislation subsequently adopted by Congress represented
a balancing of the need for improved monetary control, the
revenue concerns of the Treasury, and other economic considerations.
the MCA.
Thus no single concern dominated the final form of
5
Mr. Shumwai
4.
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Federal Reserve Bank of St. Louis
As a result of the mandatory reserve provisions of the
Monetary Control Act, certain competitive burdens are being
disproportionately borne by many small and medium banks -particularly as the deregulation process accelerates. As
you are aware, non-member banks were given an eight-year
phase-in period in which to reach their required level of
reserves, while similar banks, who had been members of the
Fed, were forced to meet their full reserve requirements
immediately. I have been contacted by several banks who
feel this is quite unfair. One way in which the problem of
disproportionate reserve burdens might be somewhat mitigated
would be to reduce the reserve requirement. In view of
recent revenue increases, what are your thoughts?
The reserve requirement provisions contained in the Monetary
Control Act reflect detailed and lengthy negotiations among
a variety of interested groups.
While all similar financial
institutions will ultimately have the same reserve requirements, this will not happen until after a prolonged phase-in
period.
Thus, you are correct that member banks will be
required to maintain higher reserves than otherwise similar
institutions during the phase in,
However, member banks'
reserve requirements will be less than would have been the
case without the Monetary Control Act.
If there was sufficient
Congressional interest, it would be possible to amend the
Monetary Control Act to have more uniform reserve requirements
sooner.
The benefit of doing this would, of course, have to
be weighed against the cost in terms of foregone revenues
to the Treasury as well as any impact on monetary policy,
With respect to institutions that left the Federal Reserve
System shortly before the Monetary Control Act was passed,
the legislation is quite specific,
It specifies that those
4r
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Federal Reserve Bank of St. Louis
-6
nonmembers that left the System between July 1, 1979 and
March 1, 1980 are to be regarded as member banks for reserve
requirement purposes,
The legislative history of the Act
indicates that the purpose of this provision was to ensure
that member banks that left the System while the MCA was
being considered actively by the Congress would not obtain
a windfall reserve requirement reduction as a result of the
nonmember bank phase-in provision; indeed, it was felt that
such former members were better able to restructure their
assets to comply with higher reserve requirements than other
nonmembers.
Although it might be argued that some relief
could be granted to these former member institutions by
lowering their reserve requirements, the.Act requires the
Board to establish uniform reserve requirements for all
types of depository institutions, thereby precluding
selective changes for some types of institutions,
-7-
Mr. Shumway
5.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Would you briefly
targets are set?
relied upon? How
reached in recent
describe the process by which monetary
What specific economic criteria are
consistently have monetary targets been
years?
This set of questions is very broad and might require
dozens of pages to treat fully,
I shall follow your
indication that I may be brief,
The Federal Reserve's
Report to The Congress on Monetary Policy discusses these
issues in much more detail.
The Federal Open Market Committee sets the targets for
monetary growth in light of a broad range of analysis and
information brought to it by the staff of the Board and the
Reserve Banks on all aspects of the economy and financial
markets.
The FOMC members also, of course, have insights
drawn from their own extensive contacts in the private and
public sector.
It is impossible to pinpoint a set of
specific economic criteria" that are determining in the
decision-making process.
The broad goals of policy have
been laid out repeatedly, including in the Humphrey-Hawkins
Act.
Our decisions have been framed consistently with a view
toward maintaining a stable, predictable policy of applying
the monetary restraint needed to fight inflation and restore
a stable, growing economy and a sound dollar internationally.
The record over the last few years in achieving monetary
growth objectives has been reasonably good.
There has been
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
8-
a general deceleration in monetary growth over the past
few years.
Growth of the narrow monetary aggregates in
1980 was within one quarter percentage point of the target
range.
Most importantly, we believe we have succeeded in
imposing a crucial restraint on inflationary forces,
Action assigned Mr. Allison
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March 3, 1981
Honorable Paul A. Volcker
Chairman
Federal Reserve Board
Constitution Avenue between
20th and 21st Streets
Washington, D.C. 20551
Dear Mr. Volcker:
I am enclosing a copy of a letter I recently received
from a constituent. Frankly, I am very concerned about some
of the problems the First National Bank of Linn Creek,
Camdonton is experiencing.
Would you please let mo know whether anything can be
done to alleviate these problems?
SinCOrely,
,ohn
Inclosure
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Danforth
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
First National Bank
OF LINN CREE
P 0 BOX 157 /
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CAMDF WON
CAMDENTON. MISSOURI 65020
February 20, 1981
The Honorable John C. Danforth
United States Senate
Washington, D.C. 20510
Dear Senator Danforth,
ressed
two issues. First of all I was quite imp
ing
ard
reg
ay
tod
you
g
tin
wri
I am
which
Reagan's economic address to the Congress
ent
sid
Pre
by
d
age
our
enc
y
ver
and
time
ning. I feel very strongly that now is the
was televised on last Wednesday eve
essary in
to realize that sacrifice is going to be nec
,
lic
pub
an
ric
Ame
the
we,
for
to a
er for our economic conditions to return
ord
in
y
ntr
cou
the
of
s
tor
sec
all
part and fi:
ed to make any sacrifice necessary on my
par
pre
am
I
.
ion
dit
con
ble
sta
I am in
h those friends and customers with whom
wit
ent
val
pre
be
to
g
lin
fee
t
tha
President'c
e the same position of support for the
tak
can
you
t
tha
e
hop
I
t.
tac
con
proposals on this matter.
all
few months ago, law was enacted whereby
a
y
onl
t
tha
all
rec
l
wil
you
Secondly,
.
isdiction of the Federal Reserve System
jur
the
er
und
e
cam
ons
uti
tit
ins
financial
ng.
member of Federal Reserve System all alo
a
n
bee
e
hav
k,
Ean
al
ion
Nat
a
We, as
p was due to the fact that it was comshi
ber
mem
t
tha
ing
hav
for
son
rea
Our only
ch we did not choose to abandon. We have,
whi
r,
rte
Cha
k
Ban
al
ion
Nat
a
as
pulsory
service and the attitude of the Federal
the
h
wit
d
fie
tis
-sa
dis
te
qui
n
bee
however,
es
ret to tell you that the attitude and servic
Reserve Pank in St. Louis. I reg
fear of any
ctment of the new law which removed the
have deteriorated since the ena
old
bers. There are a number of inequities for
further exodus of reserve mem
in,
fronted with the new charges being phased
members, i.e., we are being con
for the
full reserve basis and expected to pay
inasmuch as we are still on a
all on
ed at the Fed while the new members are
service fees now being implement
service.
a long term phase-in program for
ely
to you developed this past week. We rar
g
tin
wri
my
in
ed
ult
res
t
tha
The issue
we
vices or consideration from Fed. When
ser
any
,
get
er
nev
ost
alm
and
ask for,
ence
ally get new currency. This is an inconveni
ask for used currency, we usu
of new
week we asked for a certain denomination
that can be overlooked. Last
new
tic Teller Machine which is adjusted for
currency to accomodate our Automa
ernal
fall within the scope of their present int
currency. Since this did not
group
e advised that we should call a service
rulings, we were denied. We wer
expense
This could be done, but at considerable
in to re-adjust our machine.
vice this
easily accessible to the people who ser
since we are a r:iiral bank, not
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F LINN CHEEK CANIDENTON
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CAMDEN TON. MISSOURI 65020
February 20, 1981
The Honorable John C. Danforth
equipment. It should also be noted that frequent discrepancies occur in
the count of used currency when dispensed from Automatic Teller Vachines
when the machines are adjusted for used currency. Fed has been sending
us currency that we have to sort, the recent mutilated rate being about
40%, and it should also be noted that the quality of currency sent to us
frcm Fed has been so poor we have to return a large portion of it to them
as it should have been mutilated before it was sent to us. This may seem
a rather insignificant matter to you in your office but it disturbs and
distresses me greatly that we are required by Government regulations to
keep substantial reserves in a Federal Reserve Bank and get absolutely no
assistance or cooperation from them.
I would hope that you could share my view in this regard now and also when
considering future federal regulatory authority.
truly yours,
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/Richard Coins
President
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2CA RAYBURN HOUSE Orricr
6TH DISTRICT. LOUISIANA
WASHINGTON.
COMMITTEE ON WAYS AND MEANS
(202) 225-3901
SUBCOMMITTEES.
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Federal Reserve Bank of St. Louis
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MOBILE OFFICE
1-4AM MOND TELEPHONE
Wassbingtort, Z.C. 20515
March 4. 1981
(504) 145-4929
6
Honorable Paul A. Volcker
Chairman
Federal Reserve System
Federal Reserve Building
Washington, D.C. 20551
Dear Mr. Chairman:
Consistent with our conversation at the Ways and Means
Committee hearing of March 3. I am enclosing for your review
legislation I have introduced to serve as a comprehensive
yet cost-efficient means to encourage savings formation and
address a series of social purposes as well. On February 24.
Senator Chafee who serves as Chairman of the Senate Finance
Committee's Subcommittee on Savings, Pensions and Investment
Policy. began hearings on this measure which he has
sponsored in the Senate.
Our "Savings and Retirement Income Incentive Act of
1981" will significantly increase savings for all income
It is a natural extension of present incentives
levels.
for savings and action taken by the Senate Finlace Committee
late last year in its omnibus tax cut bill. It embraces
desired objectives of only tested provisions, corrections
of problems in . existing provisions, significant incentives
to increase savings, self-reliance in retirement income,
first-time home ownership, new savings formation and
vocational or college education for the account holder's
children. It has won approval by more than 25 national
organizations representing investment and financial communities,
the nation's largest retirement organizations, and national
military organizations which have helped in the almost oneyear drafting effort.
Initial estimates put the static revenue cost at roughly
$3.5 billion in the first year with savings formation encouraged
by its terms giving an early cost recovery. Econometric tests
In view of recent surges in personal debtt
are underway.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Chairman Volcker
March 4. 1981
Page 2
growth, and record low rates of personal savings. it is
extremely timely.
It also only rewards retirement savings
beyond activity already provided under mandatory employersponsored plans.
The bill greatly extends the utilization of Individual
Retirement Accounts and makes them more flexible. For further
explanation, please take a look at the enclosed statement I
submitted with introduction of the bill on January 23 along
with the endorsements or statements of support given it.
I have also enclosed a survey recently taken by Roger
Seasonwein Associates, Inc. of New Rochell, New York. showing
Americans would save more if given a tax incentive to do so
that would beat inflation damage now done to savings.
In
summary, it finds half the nation's workforce is saving
nothing for retirement and 44(:; say they will not be able
to afford to retire. Other findings also merit your inspection.
I would appreciate receiving your comments on this
mi.asure and I await having the opportunity to review them.
With kindest personal regards. I remain
Sincerely
W. Henson Moore
Member of Congress
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Enclosures
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COMMITTEE ON
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SELECT COMMITTEE ON
INTELLIGENCE
Eastington, 19.C. 20515
'
rarch 23, 1981
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Honorable Paul A. Volcker
Chairman
Federal Reserve Board
20th and C Streets, N.W.
Washington, D.C. 20551
co?
Dear Mr. Volcker:
.•
I am writing on behalf of a constituent of
mine regarding current restrictions placed on
the circulation of $500 and $1,000 bills.
Apparently, an individual can not obtain
a $500 or $1,000 bill due to existing regulations on these two denominations of paper
currency. My constituent wanted to use a
$1,000 bill for a sales promotion and was
unable to leaally obtain a bill of
this size. is this regulation necessary?
Since we are trying to reduce unnecessary
regulations, I would appreciate your review
of this restriction on the availablity of
$500 and $1,000 bills.
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WASHINGTON. D C. 20315
COMM IrTS.K ON A PPROPR I ATIONS
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DISTMCT OF COLUMBIA
(202) 225-2436
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NEW YORK OFFICE:
GRAND CENTRAL. rosT OETICE BUILDING
110 EAST 45TH STREET
NEW YORK. NEW YORK
10017
(212) 826-4466
Zilazbinton, D.C. 20315
March 25, 1981
Honorable Paul A. Volcker
Chairman
Federal Reserve System
20th & Constitution Avenue, N.W.
Washington, D.C. 20551
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I appreciate your taking the time to comment on my savings proposalln yanr
letter of March 4, 1981.
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I agree with you that a key issue in any program for a savings incentive, whether
by tax relief or a direct subsidy, is whether it truly produces new savings, as
opposed to simply shifting savings that would occur anyway into a savings program
that is a beneficiary of the incentive. As you know from our telephone conversation some time ago on research regarding personal savings, that is why I am
concerned at the lack of reliable research on United States personal savings
habits.
My reasons for preferring a subsidy to a tax incentive approach have been as
follows:
1.
The West German experience seems very positive. I enclose two Congressional
Research Service studies made at my request that document that. In addition,
during the recent visit to Washington of Dr.Otto Graf Lambsdorff, the West
German Minister of Economics, I had the opportunity to chat with him and he
insisted that, to a considerable degree, the program had produced new savings
and not just a shift into the program of savings that would have occurred in
any event. He confirmed the CRS opinion that the program appeared to have
effected a significant long term change in savings patterns in that a significant portion of savers continued their savings even after the subsidy had
been paid.
2.
A tax incentive appeals primarily to upper income taxpayers. Because
such persons tend to save anyway, it appears that a tax incentive program
is more likely to cause only a shift in savings forms than a low and moderate
income savings subsidy program. There seems to be widespread agreement that
the savings rider to the windfall profits tax generated little or no new
savings - at considerable cost.
3.
Furthermore, we need to target the modest income families where the marginal
propensity to save is lower. The op-ed article in the Wall_Street Journal
of March 23, 1981 written by Michael Evans clearly shows the dissaving that
has occurred in the $15,000 and under family income category. My proposal
targets these families.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
THIS STATIONERY PRINTED ON PAPER MADE WI TH RECYCLED FIBERS
.
•••••,.•
..-
,
Honorable Paul A. Volcker
March 25, 1981
Page Two
4.
A major advantage of my subsidy proposal over a tax program is that my
program calls for no outlays for seven years, as opposed to a tax program,
where the revenue loss is immediate. This is particularly important since
it seems clear that for the next couple of years the Reagan economic
program envisages significant federal deficits. Encouraging savings to
avoid monetizing the deficits or crowding out private investment ought to
be a part of that program, and a program where the cost of encouraging the
savings does not have to be paid until the Reagan economic program can
take effect seems useful.
I should certainly welcome any thoughts your staff or you may have as to how
a savings subsidy program could be structured to minimize the possibility of
simply shifting savings from an unsubsidized to a subsidized account.
I am also open to your suggestion regarding how to provide a savings vehicle
that does not conflict with the DIDC's mandate to deregulate interest rates.
Member of Congress
BG:ad
Enclosures (3)
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Federal Reserve Bank of St. Louis
THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS
i
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
Evans, Michael K. "The Source of Personal Saving in the U.S." Wall Street Journal, March 23,
1981.
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
UNITED STATES SENATE
WASHINGTON, D. C.
JOHN C. DAN FORTH
March 27, 1981
MISSOURI
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Honorable Paul Volcker
Chairman
Federal Reserve Board
Washington, D.C. 20551
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Dear Mr. Chairman:
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Recently, you received a letter from frOb .
Hardy of KMOX-Radio, St. Louis, asking you for
an interview the week of May 11. KMOX is the
largest and most successful station of the CBS
network; its listening audience is of the highest caliber. I believe you would find the
exchange interesting and enjoyable, and hope
you will be able to fit this into your schedule.
Sincerely,
John C. Danforth
cp
Response will be prepared by CLO
ROBERT J. LAGOMARSINO
COMMITTEE ON
FOREIGN AFFAIRS
19TH DISTRICT, CALIFORNIA
SoisCommITTFEs:
mit
SIIILDING
D.C. 20515
202-225-3601
INTEFINATIONAL rcoNomic POLICY
AND TRADE
RANKING MINORITY MUMBI
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L.ONGWORTI-1
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jOoti5e of i;eproSentatibef5
ASSIST ANT REGIONAL WHIP
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INTER-AMERICAN AFFAIRS
POLICY TASK F')RCE
CHAIRMAN
COMMITTEE ON
INTERIOR AND INSULAR
AFFAIRS
Wassbinciton, D.C. 20515
March 30, 1981
SUBCOMMITTEES:
PACIFIC AFFAIRS
RANKING MINORITY MCPARIR
NATIONAL PARKS AND INSULAR AFFAIRS
OVERSIGHT AND SPECIAL
INVESTIGATIONS
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Federal Reserve Bank of St. Louis
Mr. Paul Volcker
Thairman, Federal Reserve Board
Rashington, D.C.
M
:
,7 1t0ear Mr. Chairman:
Wtac)
Enclosed is the self-explanatory letter from my
foonstituent, Robert J. Broomfield, concerning Deferred
tompensation Accounts. Your consideration of Mr. Broom'field's remarks, and your comment would be appreciated.
Thank you for your assistance.
Sincerely,
SINO
gress
RJL:vbr
Encl.
THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS
•,4
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Senator Lagomarsino
2332 Rayburn House Office
Washington D.C. 20015
Dear Senator:
Recently the Federal Reserve Board ruled that Deferred
Compensation Accounts are considered "non personal"
and would require that Savings and Loans set up
reserves for them as required in Federal Reserve
Regulation "D".
By keeping this reserve requirement in the regulation,
Banks and Thrift institutions will not be competitive
because of the necessity of putting cash in reserves.
IRA and Keough accounts are considered a different
catagory, yet the Deferred Compensation Accounts and
the IRA and Keough accounts are all retirements accounts.
If the reserves are not removed, then the public will
have been denied a greater retirement benefit and this
is especially important today with the ever increasing
cost of living.
Please send a letter to Paul Volcker, Chairman of the
Federal Reserve and request strongly that they reconsiCer
the reserve requirement.
Thank you for your help.
Sincerely,
Robert J. Broomfield
r1
PAULA HAWKINS
- • FLORIDA
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Crrifeb Zfafez -.Senate
WASHINGTON, D.C. 20510
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March 31, 1981
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Mr. Paul A. Volcker
Chairman of the Board of Governors
of the Federal Reserve System
Federal Reserve Building
Constitution Avenue, N.W.
Washington, D.C. 20551
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Dear Mr. Volcker:
Enclosed you will find a copy of correspondence which I
have received from Mr. Harry Z. Rosenberg concerning
certain banking practices that he feels are irregular.
You will find the letter self-explanatory. Per a recent
conversation between one of my aides and Mr. William
Maloni, I would appreciate your checking into the matter
for me and providing the information which will help me
respond to my constituent further. I know that the matter
will be carefully and objectively reviewed, and I am grateful for any assistance you will be able to render.
aula Hawkins
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Action assigned Gil Schwartz
CARL LEVIN
MICHIGAN
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April 1, 1981
Paul Volcker
Chairman
Federal Reserve Board
20 and C Sts. N.W.
Washington, D.C. 20551
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Dear Mr. Volcker:
Enclosed is a copy of a letter from Mr. Glen Harnden
concerning the Monetary Control Act of 1980.
Mr. Harnden is concerned that the Monetary Control
Act will allow the Federal Reserve Board to monetize the
debts of private corporations, as well as State, Local
and Foreign Governments. Mr. Harnden feels this will
result in forcing the tax payers to absorb the losses
that might occur.
I would like you to respond to the concerns
expressed by Mr. Harnden. Please direct your response
to Jim Callow (224-9118) of my Washington office,
Thank you for your cooperation and assistance.
I look forward to your informative and timely reply.
Sincerely,
ditd!
Carl Levin
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https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CHARLES 14. PERCY, ILL.. CHAIRMAN
es,x rq. JR , TENN.
JESSE HELMS. N.C.
S. 1. HAYAKAWA, CALIF.
FUCHARD G 1.11GAR. INC.
CHARLFS MC C. MATHIAS, JR., MD.
HOW A ral
RAMC'. L. ACA;SCEIAUM, KANS.
pruov BOSCHWITZ. MINN.
LAWRY PRESSLER, S. DAK.
Response will be prepared by CLO
Et_AISORNE PELL, n 1.
P. OIDEN. JR.. DEL.
JOHN GLENN, 01410
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PAUL S. SARRAMES. MD.
EDWARD ZORINSPY. HERR.
PAUL E. TS0mGAS, MASS.
ALAN CRANSTON. CALI,.
CIIRISTOPHER J. DODD.
CONN•
April 3, 1981
'Ziertifeb Zfafez -.Senate
COMMITTEE ON FOREIGN RELATIONS
WASHINGTON. D.C. 20510
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Mr. Paul A. Volcker
Chairman
Federal Reserve Board
20th and Constitution Avenue, N.W.
Washington, D.C.
20551
Dear Mr. Volcker:
I would appreciate receiving your comments
on the enclosed
article which appeared recently in the Chic
ago Sun-Times.
I have received inquiries from concerne
d citizens who fear
the Federal Reserve will be used to bail
out insolvent
foreign nations.
Thank you for your attention to this matt
er.
Sincerely,
"")
Charles H. Percy
Chairman
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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
LaMont, Douglas F. "Poor Nations Move Closer to Default on Huge Debt." Chicago
Sun-Times, 1981.
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
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7PNAND J. ST GERmAIN. R.I., CHAIRMAN
HENRY S. REUSS, WIS.
HENRY B. GONZALEZ. TEX.
G. mINISH. N.J.
FRANK ANNuNZIO, ILL.
PARREN J. MITCHELL, MD.
WALTER E. FAUNTROY. D.C.
STL"HEN L. NEAL. N C.
JrR16.,; P.4 PATTERSON, CALIF.
JAMES J. BLANCHARD, MICH.
CARROLL HUBBARD, JR., KY.
JOHN J LAFALCE. N.Y.
GLALrS NoON SPELLMAN, MO.
DAVID W. EVANS. IND.
NORMAN E. DAMOuRS. N.H.
STANLEY N. LUNDINE. N.Y.
MARY RCSE OAKAR, OHIO
Jim MATTOX, TEX.
BRUCE F. VENTO, MINN.
DOUG BARNARD, JR., GA.
RODERT GARCIA, N.Y.
MIKE LOWRY, WASH.
CHARLES E. SCHUMER, N.Y.
BARNEY FRANK. MASS.
BIL1. PATMAN. TEX.
WIU-IAM J. COYNE. PA.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON BANKING, FINANCE AND URBAN AFFMRS
N I NETY-SEVENT H
2129 RAYBURN HOUSE
CONGRESS
OFFICE 13UILOING
WASHINGTON, D.C. 20515
April 3, 1981
J. WILLIAM STANTON, OHIO
CHALMERS P. WYLIE, OHIO
STEWART B. McKINNEY, CONN.
GEORGE HANSEN, IDAHO
HENRY J. HYDE. ILL.
JIM LEACH. IOWA
THOMAS B. EVANS. JR.. DEL.
RON PAuL, TEX.
ED BETHuNE, ARK.
NORmAN D. SNUMWAY. CALIF.
JON HINSoN. MISS.
STAN PARRIS, VA.
FD WEBER. OHIO
8:U.. McCOLLUM. FLA.
GREGORY w. CARMAN. N.Y.
GEORGE C. WORTLEY. N.Y.
MARGE ROUKEMA.
BILL LOwER Y. CALIF.
JAMES K. COYNE, PA.
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Dear Mr. Chairman:
I am concerned about your recent proposals put forward
for
public comment on the weekly money supply data. The
reason for these
proposals, as I understand it, is your concern about
the inaccuracy
of the weekly monetary data.
The inaccuracy of the weekly money supply data has been
brought to the attention of the public in numerous
hearings. It was
precisely to help remedy this problem that I was told by
experts
inside and outside the Federal Reserve that the most
important feature
of the Depository Institutions Deregulation and Monetary
Control Act
of 1980 with respect to control of the money supply was
the requirement that all depository institutions with checkable accou
nts regularly
supply the Federal Reserve with monetary data.
A primary source of error in the money supply, defined
to
include currency, coin, and checking deposits of the publi
c (called
"M-1B"), has been the inability to obtain data from non-m
ember banks on
a weekly basis. Estimates of non-member bank deposits were
the Federal Reserve in June and January of each year. Theseobtained by
benchmark
reports often caused large corrections in the monetary data.
Now,
under the Depository Institutions Deregulation and Monet
ary Control Act
of 1980, this source of error is corrected.
Therefore, it seems to me that you should be supplying
much
more accurate weekly estimates of M-1B. If this is not
the case, I
wish you would tell us why the claims for better monet
ary data made at
the time of the hearings on the Monetary Control Act
were incorrect.
If exact data on the depository institutions transactio
ns accounts are
not available to the Federal Reserve, how is compl
iance with federal
reserve requirements monitored?
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Federal Reserve Bank of St. Louis
Hon. Paul Volcker
April 3, 1981
Page 2
I fully understand the need for seasonally adjusted data.
It is my understanding that the seasonal adjustment methods used by the
Federal Reserve have been called into question by some experts who
claim that it badly distorts the money supply data. I think that the
Federal Reserve should improve its seasonal adjustment procedures if
these criticisms are at all valid.
Sincerely,
Fei. and J. St G -t--main
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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
April 10, 1981
•• • •
PAUL A. VOLCKER
CHAIRMAN
The Honorable Stephen L. Neal
House of Representatives
Washington, D. C. 20515
Dear Steve:
As I mentioned to you briefly the other night, I was a
little disturbed on reading your "additional views" in the Monetary Policy Report of the House Committee on Banking, Finance
and Urban Affairs--not because I sensed any difference in fundamental approach to monetary policy but because your statement
seemed to be based on certain technical misunderstandings of our
announced targets for 1981. Obviously, I'd like to clear that
up.
In the statement you indicate doubts that the 3-1/2 to
6 percent 1981 target range for adjusted M-1B represents "a reduction of one-half percent from the actual growth of adjusted
M-1B in 1980," as you suggest that I stated. The one-half point
reduction refers to a comparison of target growth ranges for
1980 and 1981. The 3-1/2 to 6 percent range for 1981 is by that
amount lower than the comparable 4 to 6-1/2 percent range for
1980. Relative to the actual growth of adjusted M-1B in 1980,
the growth range adopted for 1981 would entail a larger reduction.
Last year, M-1B adjusted rose by 6-3/4 percent. Thus attainment
of the target range adopted in 1981 would mean a slowing in growth
of at least three-fourths of a percentage point if actual growth
of adjusted M-1B this year is at the upper end of the target
range and by two percentage points if the midpoint of the range
is achieved.
The second and third enumerated points in your statement
also appear to be based on technical misunderstandings. Your
second point states that the Federal Reserve "arbitrarily increased its [meaning M-1B's] 1980 growth upward by one-half
percentage point" by using an "artificially heightened base"
for its adjusted M-1B target ranges for 1981.
It makes no real difference whether the 3-1/2 to 6
percent targeted growth range for M-1B is launched from the
base of the actual observed series or from a series adjusted
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Federal Reserve Bank of St. Louis
7
- The Honorable Stephen L. Neal
Page Two
to subtract previous shifts from interest-bearing assets into
NOW/ATS accounts. Perhaps an example will make this clear.
Suppose the level of observed M-1B in the base period were
1,500 and the M-1B level adjusted to exclude funds that had
previously been shifted into NOW/ATS accounts from interestbearing assets were 1,200. Suppose further that target growth
for M-1B is set at 5 percent and this target rate represents
growth adjusted to take out the effect of new shifts into
NOW/ATS accounts from interest-bearing assets. The announced
target for 1981 is based precisely on such a concept. This
means that the growth rate of 5 percent as applied to the
1,500 level would yield a level at the end of the period of
1,575. That level reflects growth in M-1B during the period
other than increases originating from new shifts from nondemand deposits and also perforce growth in all of the preexisting NOW/ATS accounts.
Suppose, however, the 5 percent growth rate were taken
from the lower level of 1,200, as you seem to imply it should.
That would yield a level of 1,260 at the end of the period.
But the pre-existing 300 of NOW/ATS accounts that had earlier
been shifted from non-demand deposits still exist and indeed
would have grown during the period. If their growth had been
around 5 percent (yielding an increase of 15), then you can
see that the 1,260 translates into, and is equivalent to,
the earlier level of 1,575, because the difference is the
300 of pre-existing NOW/ATS accounts plus 15 in their growth.
As you can see, the higher base level of 1,500 does not artificially inflate either the level or the growth rate of the
adjusted M-18 series.
I am confused by your third point--not as a matter of
arithmetic but of meaning. The target abstracting from shifts
is 3-1/2 to 6 percent as you note in earlier parts of your
statement. I believe that best represents the substance of
what we are trying to achieve--that is, avoiding the distortions
of institutional change. The higher range of 6 to 8-1/2 percent represents our estimate at this time of the actual behavior
of M-1B, including the effect of shifts, that is consistent with
the more meaningful target conceptually. If shifts are very
large and/or more come from non-demand deposits than we had
assumed, this range for actual M-1B growth would need to be
adjusted upwards--and vice versa if shifts are smaller or less
come from non-demand deposits, It is, in any event, substantially
the same target as the "adjusted" 3-1/2 to 6 percent. If the
adjusted target is disinflationary, so must be the unadjusted.
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Federal Reserve Bank of St. Louis
6 The Honorable Stephen L. Neal
Page Three
Put another way, in the transition the public will readjust thi-ir asset holdings and shift funds from existing demand
deposits and also from savings and other interest-bearing accounts
into NOW/ATS accounts. Shifts into NOW/ATS accounts from nondemand will have the arithmetic effect of raising the observed
growth rate during the year in M-18. This occurred in 1980, and
will probably occur to an even greater extent in 1981 as NOW and
similar accounts are introduced nz:tionwide at all depository
institutions. But these shifts are of no real macro-economic
significance, since thcy reflect a stock adjustment in the
public's existing portfolio of money and near-monies in response
to a structural change. Our target range for M-1B of 3-1/2 to
6 percent abstracts from such distortions by focusing on growth
of adjusted M-18--that is, adjusted to exclude the effects new
shifts into NOW/ATS accounts from non-demand deposits. As noted
earlier, that growth range entails a substantial decline in the
rate of growth of adjusted M-1B this year relative to last. This
is the significant economic measure of progress toward reduced
monetary growth.
Finally, I should mention that, beginning with the March 13
H-6 money stock release, the Federal Reserve now publishes estimates
of the magnitude and sources of shifts of funds into NOW/ATS accounts from demand and non-demand deposits. Consequently, those
interested can track results on a monthly basis of an adjusted
M-1B series.
I would be glad to get together and talk about this further
at any time. These complexities can be a source of confusion, and
detract from understanding what we are trying to achieve. I have
the strongest interest in trying to be as clear and open as possible to minimize potential confusion.
SHA:PAV:vcd
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https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Mr. Axilrod
Mrs. Mallardi (2)
40
,
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
April 10, 1981
PAUL A. VOLCKER
CHAIRMAN
The Honorable W. Henson Moore
House of Representatives
20515
Washington, D.C.
Dear Mr. Moore:
Thank you for your recent letter with which you enclosed
a copy of H. R. 1250, the Savings and Retirement Income Incentive
Act of 1981, and other related materials. I appreciate your asking
me to comment on the proposed legislation.
Due at least in part to the interaction of the tax code
with inflation, the current environment has created a serious problem of inadequate saving and capital formation which your bill
seeks to address. The principal task before us in resolving this
proOlem is to bring down inflation through appropriate budget and
monetary policies. Within the limits imposed on revenue losses
by the necessity to pursue a prudent fiscal policy, changing the
tax system in ways that will increase incentives to save also
could be helpful. Nevertheless, I have some concerns about particular features of your bill.
Although I would not question that the $200 interest and
dividend exclusion helps to promote saving by some of our households--perhaps particularly by certain lower-income households-I am concerned that much of the benefit of the exclusion goes to
savers who already receive more than $200 of interest and dividend
income. Consequently, this proposal may not be efficient if the
additions to the federal deficit are compared to the additional
saving promoted.
I have indicated in the past that I am intrigued by the
possibility of some expansion of Individual Retirement Accounts
(IRA's) as a way to stimulate savings. However, I think it is
very difficult to design an effective incentive. The opportunity
to shelter part of income from tax will no doubt encourage some
households to increase their total saving and place additional
funds into IRA's while continuing to make the other investments
planned before the tax change. Increasing the after-tax return
to savings in IRA's may encourage more stable long-term financial
planning and thrift than other savings incentives because the investment in an IRA is not subject to easy withdrawal. The magnitude
of the aggregate savings response is difficult to determine because
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ea
The Honorable W. lienson 1,ioore
Page Two
some households may decide to channel the same funds into an IRA
which they previously would have invested in some other way. That
possibility increases to the extent the restrictions on withdrawal
of funds from IRA's are relaxed.
In r:um, while I also believe that we must increase savings.
I have substantial doubts whether a $200 interest and dividend
exclusion is an effective way of doing so. My intuition is that
some change in tax exempt retirement accounts may be promising.
However, any judgment of the effectiveness of that approach would
have to rely heavily on the amount of new savings generated relative to the tax revenues foregone. I simply do not have the information needed to make such a judgment.
Sincerely,
S/Paul A. Volcker.
REM:FMS:JLK:pjt (4V-67)
bcc: Messrs. Kichline, Struble, Mains
Mrs. Mallardi (2)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
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wASHINGTON, D. C. 20551
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April 10, 1981
• • . • •'
PAUL A. VOLCKE P
CHAIRMAN
The Honorable Fernand J. St Germain
Chairman
Committee on Banking, Finance and
Urban Affairs
House of Representatives
Washington, D. C. 20515
Dear Chairman St Germain:
I read your letter on the money supply data with concern.
After all of the work you went through to help with passage of the
Monetary Control Act, I can understand your reaction if you thought
we were considering changes in frequency of publication because of
inaccuracy in the data. However, I'm afraid there has been some
misunderstanding. We trid to make clear our concern is not with
any "inaccuracy" in the data but with the inherently volatile
nature. The point is weekly changes may not be at all indicative
of underlying trends, but the market reacts, and sometimes overreacts, to them.
The fact is the data is better, in the sense of more
comi_lete and accurate, than before. In the early months of any
new reporting system problems arise, but I believe they are very
largely behind us.
So far as the seasonal adjustments are concerned, weekly
seasonals of any series are notoriously difficult. We have devoted
considerable effort over the years to improve ours, including long
studies by outside experts. We are always working to improve the
data, but the problem, to repeat, is the inherent volatility of
the series even after removing seasonal influences.
I have no preconception that we should not continue to
publish weekly, but in response to concerns by Senators Garn,
Proxmire and others, as well as internally, we simply want to
sample "consumer" opinion.
I am enclosing copies of my letter to the Senators and
alsoefa recent report by outside experts we asked to review our
seasonal adjustment procedures;OrI hope this clarifies matters.
If it does not, I would be anxious to discuss the issue with
you.
RS:PAV:vcd (#V-114)
bcc: Mrs. Mallardiu7.
Messrs. Axilrod, Ettin,
Lindsey, Simpson
Enclosures
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NINETY-SEVENTH CONGRESS
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COMMERCE, CONSUMER, AND MONETARY AFFAIRS
SUBCOMMITTEE
OF THE
COMMITTEE ON GOVERNMENT OPERATIONS
RAYBURN HOUSE OFFICE BUILDING. ROOM B-377
WASHINGTON, D.C. 20315
April 13, 1981
Hon. Paul A. Volcker, Chairman
Board of Governors
Federal Reserve System
Washington, D. C. 20551
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near Mr. Chairman:
Under Section 171 of the Truth in Lending Act and Section 226.29 of the
FPderal Reserve's newly revised Regulation Z (effective April 1, 1981), the
Federal Reserve Board is required to exempt from the requirements of the federal
Truth in Lending Act certain types of consumer credit transactions in any
individual state that applies for such an exemption, providing certain
conditions are met. I am writing to inquire whether the state of Delaware has
been granted such an exemption or has applied for such an exemption, or whether
Thard staff or any Board Governor has received any informal indication that
Delaware intends to apply for a Truth -In-Lending exemption. I am also requesting
a statement of the Board's general policy toward the granting of such exemptions.
If Delaware has applied for such an exemption, please supply to the subcomalittee a copy of the complete application and copies of any accompanying correspondence, as well as copies of all correspondence from Board staff or members in
connection with the exemption application.
If Delaware has not applied for an exemption, then please notify this
subcommittee in writing if the Board receives such an application from Delaware
at any time within the next two years, and supply the requested documents at that
time.
With regard to the Board's general policies on the granting of state
exemptions from Truth in Lending, please include in the requested policy statement a specific enumeration of the standards that must be mPt by a state in order
to meet the statutory requirement for "adequate provision for enforcement" of the
similar state requirements. In addition, please state whether the Board requires
a state to have established clear authority and intention for state examiners to
conduct on-site examinations of federalTy chartered financial institutions as
necessary conditions for the granting of a Truth in Lending exemption.
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Federal Reserve Bank of St. Louis
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If authority and intention to conduct on-site examinations of federally
chartered institutions are not required by the Board as necessary conditions for
dn exemption, please explain how the Board believes that adequate enforcement can
be assured if on-site examinations cannot or will not be conducted?
Sincerely,
Benjamin S. Rosenthal
Chairman
BSR:tb
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Federal Reserve Bank of St. Louis
NORM D'AMOURS
Cong. Liaison Office will prepare response
DISTRICT OFFICES.
MANCHESTER. Nrw HAMPSHIRE 03103
720 Nautili CDTTON FEDERAL BUILDING
-"". 1ST DISTRICT. NEW HAMRSHIRE
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BANKING. FINANCE
AND URBAN AFFAIRS
Congrecz of tbe tiniteb
tato:4
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LANOOF4APHY
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425 AND 426 FEDERAL ButuDiria
60 DANIEL Sii.trr
(603) 431-13749
(603) 436-7720. EXT. 707
Eleutington,173.e. 20515
April 15, 1981
WASHINGTOPOWTIM
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2242 RAYBURN HOUSE OPT10E 13UILDING
WASHINGTON. D.C. 20515
LAcomm. NEW HAMT1HIRIE 03244
123 FEDCRAL BUILDING
719 MAJP4 STREIT
(603) 524-7165
(202) 225-5156
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Honorable Paul Volcker
Chairman
Federal Reserve Board
Constitution Avenue, N.W.
Washington, D.C. 20551
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Thank you for your response of March 24th to my ingurry L/5
concerning the availability of NOW accounts
to governmentat
4"units and other nonprofit groups. I am pleased
to hear that
the Board's staff has been asked to study NOW acco
unt eligibility
criteria and prepare recommendations for the Boar
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I am somewhat concerned by recurring reports that the
Board's
staff is considering a recommendation that certain
groups which are
now eligible for NOW accounts lose their eligibil
ity. Such a
recommendation would run completely contrary to
the deregulation
philosophy of the new administration and the
intent of Public Law
96-221, the Depository Institutions Deregula
tion and Monetary Control
Act of 1980.
I support your initiative to provide greater consiste
ncy among
the categories of depositors eligible for NOW accounts
. I firmly
believe, however, that this objective must be met
by expanding the
types of eligible depositors, not by restricting
the types of eligihle
depositors. In particular, I hope the Board will remo
ve the arbitrary
distinction which makes public educational groups (lik
e school boards)
eligible, but which makes other governmental units
ineligible.
I stand ready to assist y
Si
in any way I can.
erely,
Norman E. D'Amours
Member of Congress
NED/mr
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
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WASHINGTON, D C. 20515
(202) 225-2176
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April 16, 1981
Honorable Paul Volcker
Chairman Federal Reserve Board
Washington, D.C. 20551
Dear Mr. Chairman:
Attached please find copies of two letters from constituents
of mine concerning a provision of the Monetary Control Act.
This provision amends Section 14 of the Federal Reserve Act
to allow the Federal Reserve to buy in the market obligations
of foreign governments or agencies.
Any assistance you could provide me in responding to the
comments and concerns of these constituents would be deeply
appreciated. Thank you for your time and attention to this
matter.
BILL McCOLLUM
Member of Congress
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Enclosures
https://fraser.stlouisfed.org
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https://fraser.stlouisfed.org
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April 15, 1981
The Honorable Robert J. Lagomarsino
House of Representatives
Washington, D.C.
20515
Dear Mr. Lagomarsino:
Thank you for your letter of March 30 enclosing correspondence you received from Mr. Robert J. Broomfield, asking that
the Board consider the status of deferred compensation plan accounts
under Regulation D--Reserve Requirements of Depository Institutions.
Regulations of the Internal Revenue Service require that these
accounts be maintained and controlled by employers, with no beneficial interest for the individual employees other than the rights
normally accruing to a general creditor. Under Regulation D such
accounts presently are regarded as nonpersonal time deposits and
are subject to a 3 percent reserve requirement.
In response to requests such as yours, the Board has
amended Regulation D, effective April 30, 1981, to treat nontransferable time deposits representing funds cf deferred compensation
plans established pursuant to Subtitle D of the Revenue Act of
1978 as personal time deposits exempt from reserve requirements.
A copy of the press release and F_Olg.kal Req.j.s.ter notice of this
action is enclosed.
I hope this information will be useful to you.
let me know if I can be of further assistance.
Sincerely,
(Signed) Donald J. Winti
Donald J. Winn
Assistant to the Board
Enclosure
(p.r. dtd. 4/10/81)
JA:AFC:pjt (4V-117)
bcc:
Mr. Alexander
Mrs. Mallardi
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Please
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https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
April 16, 1981
Mr. George Gary
Route 8
Hayward, Wisconsin
tf.
54843
Dear Mr. Gary:
Senator Proxmire has requested that we
respond to you
directly concerning your letter to him
dated March 1, 1981.
With your letter you enclosed copies of
two teller's receipts
for transactions conducted with The
Peoples National Bank of
Hayward. You note that although the
phrase, "Automatic Transfer
of Funds," appears on both receipts,
according to your records
neither transaction was a transfer of fund
s, and you request an
explanation as to why the receipt cont
ained this language.
It appears that the phrase, "Automatic Tran
sfer of Funds"
on the receipt copies, along with the addi
tional designs and phrases
is an advertisement for a service the bank
is offering. Our staff
contacted The Peoples National Bank of
Hayward and learned that
the bank routinely prints these and similar
advertisements and
messages on its teller's receipts. Acco
rdingly the phrase, "Automatic Transfer of Funds" seems to be unre
lated to the transactions
evidenced by the receipts.
I regret the confusion in this matter, and
hope that
this explanation is helpful to you. Plea
se let me know if I can
be of further assistance.
Sincerely,
William R. Maloni
Special Assistant to the Board
cc; Senator Proxmire
TW:CO:pjt (4V-100)
bcc: Mr. Winer
Mr. Schwartz (C-75)
G.C. Log (4124)
Legal Records ‘,
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BOARD OF GOVERNORS
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WASHINGTON, D. C. 20551
RALRE..
•
April 23, 1981
•
PAUL A. VOLCKER
CHAIRMAN
The Honorable Charles H. Percy
Chairman
Committee on Foreign Relations
United States Senate
20510
Washington, D.C.
Dear Chairman Percy:
Thank you for your letter of April 3 requesting comments
on an article by Douglas Lamont appearing in the Chicago Sun Times.
Under the Monetary Control Act of 1980, the Federal Reserve is authorized to purchase obligations of, or fully guaranteed by, foreign
governments and their agencies. The legislative history of the Act
indicates that Congress intended this authority to be used only in
conjunction with the Federal Reserve's normal activities in the
foreign exchange market.
In the course of foreign exchange operations, the Federal
Reserve from time to time acquires balances in foreign currencies.
Before passage of the Monetary Control Act, there was no convenient
way in which foreign currencies held by the Federal Reserve could
be invested to earn interest. As indicated by Senator Proxmire on
the floor of the Senate on March 27, 1980, during the Senate's
consideration of the Monetary Control Act, the purpose of this
provision is "to provide a vehicle whereby such foreign currency
holdings could be invested in obligations of foreign governments
and thereby earn interest. This authority would be used only to
purchase such obligations with foreign currencies balances acquired
by the Federal Reserve in the normal course of business." (126 Cong.
Rec. S 3168) In my testimony before the Senate Banking Committee on
September 26, 1979, I indicated that the purpose of the provision
was to add to the present list of assets currently eligible for
purchase by the Federal Reserve short-term government securities
so as to enable the Federal Reserve to invest its non-interest
bearing foreign currencies in interest bearing obligations.
(These earnings are ultimately paid over by the Federal Reserve
to the U.S. Treasury.) It was never the intent of the Federal
Reserve to use this provision to "bail out" foreign governments
that may be in danger of defaulting on their debts. We believe
it is clear that the authority is to be used only in conjunction
with the Federal Reserve's normal foreign exchange operations.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The Honorable Charles H. Percy
Page Two
,so
With respect to purchasing foreign obligations of
developing countries, the Federal Reserve has not purchased and
has no plans to purchase obligations of developing countries, and
does not consider the new provision of law as a basis for loans
of the kind apparently envisaged by Mr. Lamont. As noted above,
the Federal Reserve would only buy short-term liquid obligations
of foreign governments with currency balances of those foreign
countries acquired in connection with foreign exchange operations
undertaken for other purposes in order to earn a return on what
would otherwise be non -interest bearing currency holdings. As
indicated in the Board's Annual Report, reciprocal currency
arrangements exist with the following countries only: Austria,
Belgium, Canada, Denmark, England, France, Germany, Italy, Japan,
Mexico, the Netherlands, Norway, Sweden, and Switzerland.
I appreciate the opportunity to clear up any misunderstanding that may have resulted from the article you brought to
our attention.
Sincerely,
CI,7 1 A.
GTS:pjt (4V-120)
bcc: Gil Schwartz
Mrs. Mallardi (2)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1110 NASA ROAD 1
RON PAUL
22ND DISTRICT, TEXAS
SUIrE 100
Housrons, TEXAS 77058
(713) 486-8583
Room 1234
LONGWORTH HOUSE OFFICE BUILDING
WASHINGTON, D.C. 20515
Comm of Me Elnittb
tate5
6711 BELFORT AVENUE, SUITE 307
HOUSTON, TEXAS
(202) 225-5951
77087
(713) 226-4636
ji)ousie of Reprefientatibel
2116 THOMPSON HIGHWAY, SUITE 105
HOUSTON CONGRESSIONAL HOT LINE
attingtott, 3111.C. 20515
(713) 237-1550
RICHMOND, TEXAS
77469
(713) 226-4568
LAKE JACKSON CONGRESSIONAL HOT LINE
101 OYSTER CREEK PRIVE
JACKSOIDTEXM 77566
-"I
(713E217-301
(713) 297-0202
April 23, 1981
COMMITTEE ON BANKING,
FINANCE, AND URBAN AFFAIRS
C)
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Mr. Paul Volcker
Chairman, Federal Reserve Board
Washington, D.C.
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You are invited to a Members-only reception and dinner hosted by the Foundaetn
for Rational Economics and Education, Inc., with which 1 am associated.
Dear Mr. Volcker:
Loew's L'Enfant Plaza Hotel
/440 L'Enfant Plaza East, S.W.
Washington, D.C. 20024
Tuesday, April 28th
Cocktails:
Dinner:
5:00 p.m.
6:00 p.m.
We will have the opportunity to discuss the role of gold in the monetary system
with some of our outstanding economic thinkers:
Mr. Lewis Lehrman, President
The Lehrman Institute
Dr. Arthur Laffer
Professor of Economics
University of Southern California
Dr. Murray Rothbard
Professor of Economics
New York Polytechnic
Dr. Roy Jastram
Professor of Economics
University of California at Berkeley
Dr. Hans Sennholz, Chairman
Department of Economics
Grove City College
Mr. Robert Bleiberg, Editor
Barron's
Mr. Lehrman will discuss Where the Fed Has Gone Wrong, and Dr. Sennholz will
talk about Inflation and Social Instability.
The next day, these men will participate in an all-day seminar in Room S-207 in the
Capitol for Members and staff. The seminar topics are listed on an enclosed sheet.
It would be wonderful if you could put the dinner on your calendar. Your appointment secretary could call Pat Blackwell at 225-5951 to let us know if you are able to
come.
(ci
Sincerely,
e
Ron Paul
Member of Congress
RP/lr
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
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BOARD OF GOVERNORS
CF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
April 28, 1981
PAUL A. VOLCKER
CHAIRMAN
The Honorable Carl Levin
United States Senate
Washington, D. C. 20510
Dear Senator Levin:
Thank you for your letter of April 1 concerning the
authority of the Federal Reserve to purchase securities. The
original Federal Reserve Act, enacted in 1913, permitted the
Federal Reserve to purchase various types of securities in the
open market. At that time we were permitted to purchase U. S.
Government and agency securities, bankers' acceptances, bills
of exchange, and certain short-term State and local government
securities. The purpose of this authority originally was to
provide Reserve Banks with the opportunity to earn a return on
their funds. There was never any indication that the authority
was to be used to "monetize" the debts of private organizations
and State and local governments, and I can assure you that we
have no intention of doing so. Indeed, virtually all of our
securities holdings consist of U. S. Government and agency
obligations ($124 billion) purchased in conjunction with open
market operations and the course of issuing Federal Reserve
notes.
The Monetary Control Act of 1980 (P.L. 96-221) did
amend the open market authority of the Federal Reserve to permit us also to purchase obligations of foreign governments and
their agencies. The legislative history of the Act indicates
that Congress intended this authority to be used only in conjunction with the Federal Reserve's normal activities in the
foreign exchange market.
In the course of foreign exchange operations, the Federal
Reserve from time to time acquires balances in foreign currencies.
Prior to the passage of the Monetary Control Act, there was no
convenient way in which foreign currencies held by the Federal
Reserve could be invested to earn interest. As indicated by
Senator Proxmire on the floor of the Senate on March 27, 1980,
during the Senate's consideration of the Monetary Control Act,
the purpose of this provision is "to provide a vehicle whereby
such foreign currency holdings could be invested in obligations
of foreign governments and thereby earn interest. This
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The Honorable Carl Levin
Page Two
authority would be used only to purchase such obligations with
foreign currencies balances acquired by the Federal Reserve in
the normal course of business." (126 Cog. Rec. S 3168) In my
testimony before the Senate Banking Committee on September 26,
1979, I indicated that the purpose of the provision was to add
to the present list of assets, currently eligible for purchase
by the Federal Reserve, short-term government securities so as
to enable the Federal Reserve to invest its non-interest bearing
foreign currencies in interest bearing obligations. (These
earnings are ultimately paid over by the Federal Reserve to the
U. S. Treasury.) It was never the intent of the Federal Reserve
to use this provision to "bail out" foreign governments that may
be in danger of defaultin; on their debts. We believe it is
clear that the authority is to be used only in conjunction with
the Federal Reserve's normal foreign exchange operations.
With respect to purchasing foreign oblioations of
developing countries, the Federal Reserve has not purchased
and has no plans to purchase obligations of developing countries. As noted above, the Federal Reserve would only buy
short-tern liquid obligations of foreign governments with
currency balances of those foreign countries acquired in connection with foreign exchange operations in order to earn a
return on what would otherwise be non-interest bearing currency holdings. As indicated in the Board's Annual Report,
reciprocal currency arrangements exist with the following
countries only: Austria, Belgium, Canada, Denrark, England,
France, Germany, Italy, Japan, Mexico, the retherlands,
Norway, Sweden, and Switzerland.
I hope that this is helpful to you.
know if I can be of further assistance.
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Federal Reserve Bank of St. Louis
Please let me
Sincerely,
S/Paul
GTS:vcd (#V-116)
bcc:
Gil Schwartz
Mrs. Mallardi (2)
Vo!ckeE
‘sy
BOARD OF GOVERNORS
or THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
April 28, 1981
PAUL A. VOLCKER
CHAIRMAN
The Honorable Bill McCollum
House of Representatives
Washington, D. C. 20515
Dear Mr. McCollum:
Thank you for your letter of April 16 requesting comment
on correspondence you received from your constituents regarding a
provision of the Monetary Control Act and the authority of the
Federal Reserve to purchase securities.
The original Federal Reserve Act, enacted in 1913, permitted the Federal Reserve to purchase various types of securities
in the open market. At that time we were permitted to purchase
U. S. Government and agency securities, bankers' acceptances,
bills of exchange, and certain short-term State and local government securities. The purpose of this authority originally was to
provide Reserve Banks wjth the opportunity to earn a return on
their funds. There was never any indication that the authority
was to be used to "monetize" the debts of private organizations
and State and local governments, and I can assure you that we
have no intention of doing so. Indeed, virtually all of our
securities holdings consist of U. S. Government and agency
obligations ($124 billion) purchased in conjunction with open
market operations and the course of issuing Federal Reserve
notes.
The Monetary Control Act of 1980 (P.L, 96-221) did amend
the open market authority of the Federal Reserve to permit us
also to purchase obligations of foreign governments and their
agencies. The legislative history of the Act indicates that
Congress intended this authority to be used only in conjunction
with the Federal Reserve's normal activities in the foreign
exchange market.
In the course of foreign exchange operations, the Federal
Reserve from time to time acquires balances in foreign currencies.
Before passage of the Monetary Control Act, there was no convenient
way in which foreign currencies held by the Federal Reserve could
be invested to earn interest. As indicated by Senator Proxmire on
the floor of the Senate on March 27, 1980, during the Senate's
consideration of the Monetary Control Act, the purpose of
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Federal Reserve Bank of St. Louis
The Ponorable Bill McCollufa
Page Two
cle whereby such
L:ection 105(b)(2) of the Act is "to provide a vehi
ol)ligations of foreign
foreign currency holdings could be invested in
y would be used
governments and thereby earn interest. This authorit
currencies balances
only to purchase such obligations with foreign
se of business."
acquired by the Federal Reserve in the normal cour
Senate Banking
(126 con. nee. S 3163) In my testimony before the
the purpose of
Committee on Septeber 26, 1979, I indicated that
assets, currently
the provision was to add to the present list of
short-term government
eligible for purchase by the Federal r.eserve,
invest its nonsecurities so as to enable the Federal reserve to
bearing obligations.
interest bearing foreign currencies in interest
ral reserve to
(These earnings are ultimately paid over by the Fede
Federal reserve
the U. S. Treasury.) It was never the intent of the
or foreign governto use this provision to "bail out" corporations
debts. We
rlents that may be in clanger of defaulting on their
only in
believe it is clear that the authority is to be used
ign exchange
conjunction with the Federal Reserve's normal fore
operation:;.
of develWith respect to purchasing foreign obligations
hased ana has no
opirvj countries, the Federal Reserve has not purc
tries. As noted
plans to pirchase obligations of developiny coun
rm liqui(1 obliabc.vc, the Federal neserve would only buy short-te
nces of those
gations of forei9n governments with currency bala
normal foreign
foreign countries acquired in connection with our
what would
e;:chantie operations in order to earn a return on
. r‘s imliotherwise be non-interest bearing currency holdings
ency arrangecated in the Doard's Annual report, reciprocal curr
Austria, Belgium,
ri.ents exist with the following countries only:
y, Japan, :\lexico,
Canada, Denmarh, England, France, Cernany, Ital
and.
the Netherlands, Vorl•ay, Sweden, and Switzerl
nOcrI appreciate the opportunity to clear up any misu
standing on this issue.
Sincerely,
S/Paul A. Volcitec
GTS:AFC:vcd (#V-124)
bcc:
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Federal Reserve Bank of St. Louis
Gil Schwartz
Mrs. Mallardi (2)
#1,
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Federal Reserve Bank of St. Louis
April 28, 1981
The Honorable Uorman E. D'Amours
House of Representatives
Washington, D. C. 20515
Dear nr. D'Amours:
Thank you for your letter of April 15 commenting
on NOW account eligibility requirements. As mentioned in
Donald Winn's lctter to you of April 15, which apparently
crossed in the mail with your letter, the Board of Covernors
has requested public comment on a proposed interpretation
of Regulation Q (Interest on Deposits) concerning the
classes of depositors that are eligible to maintain NOW
accounts at member banks.
The Board appreciates receiving your comments
and they will be made a part of the public record on the
proposal. I can assure you that your views will be given
careful consideration by the Board before it makes a
final decision.
Sincerely,
Wra_ul A. Volckec
CO:vcd (V-123)
bcc:
Paula Rice (for distribution)
Mrs. Mallardi (2)
•
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
April 29, 1981
PAUL A. VOLCKER
CHAIRMAN
The Honorable Lee H. Hamilton
Chairman
Subcommittee on Economic Goals and
Intergovernmental Policy
Joint Economic Committee
Washington, D. C. 20510
Dear Chairman Hamilton:
Thank you for your letter of March 25, regarding the need
to cut down on unnecessary regulatory burdens on the housing industry and on home owners. You ask that the Board assist you in determining the costs to mortgage lending institutions--individually and
in the aggregate, and on a per application or per loan basis--of
compliance with the Real Estate Settlement Procedures Act (RESPA),
the Home Mortgage Disclosure Act, and the Truth in Lending Act.
The Board shares your concern about unneeded regulations
that increase the operating burdens of lending institutions and
that add to the costs ultimately passed on to consumers. In 1978
we instituted a regulatory improvement program, on a Board-wise
basis, to take account of the burden imposed by regulations.
Under this program, our staff is directed to consider and to
present the Board with recommendations, including non-regulatory
alternatives wherever possible, to minimize regulatory burdens
while achieving the intended purpose. In many cases, of course,
statutory requirements are fairly explicit, and the Board does
not have the flexibility to modify the requirements,
You may be interested in the enclosed regulatory analysis,
which was prepared by the Board's staff in connection with the
recently adopted revision of Regulation Z (Truth in Lending). As
noted in the summary on page one, we believe that the major changes
made by the Board will, on balance, produce net benefits by substantially reducing regulatory burden, without sacrificing important
consumer protections. Although we cannot estimate accurately either
the long-term savings or the short-term costs associated with
changing to the new requirements, we believe that there will be
cost savings to institutions that are subject to Truth in Lending.
I also enclose, with regard to the home mortgage disclosure
requirements, the regulatory analysis that accompanied the Regulation C proposal published in February 1981. It starts on page 13
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Federal Reserve Bank of St. Louis
The Honorable Lee H. Hamilton
Page Two
of the enclosed Federal Register material. You will note that pages
two through five review some of the basic findings (including costs
of compliance) of a study that was jointly conducted by the FHLBB
and the FDIC in 1977 and published in 1979. (If you should want a
copy of the full report--entitled "Analysis of the Home Mortgage
Disclosure Act Data from Three Standard Metropolitan Statistical
Areas"--it can be obtained from either of the two agencies.) The
economic impact of the revised regulation, as proposed, is discussed
beginning at page 8.
The Board will continue to give careful consideration to
minimizing the cost and other burdens imposed by our regulations.
I cannot be too encouraging, however, about the prospect of our
being able to determine the exact compliance costs borne by lending
institutions that are subject to the Federal Reserve's jurisdiction.
The reason is that, in order to obtain such information, we would
need to impose an added reporting burden on lending institutions.
We are reluctant to do so. Unless an institution is already
analyzing costs for its own purposes, the cost of providing such
data could impose a significant additional expense on the institution. We would not expect any lender to incur such costs unless
the lender independently determined that the information was otherwise useful to it.
To the extent that institutions have the information readily
available, we may be able to obtain some data about on-going Truth
in Lending costs under a limited survey that the Board is planning
to conduct among selected financial institutions. The major focus
of this survey, however, is on the collection of data about the
costs and benefits of complying with Regulation E. Regulation E,
one of the Board's newest regulations, implements the Electronic
Fund Transfer Act, which has imposed a fair amount of compliance
costs on institutions that offer electronic transfer services.
Again, with regard to both Regulations E and Z, we will be asking
only for information that banks can assemble easily.
You also ask that we determine the extent to which lending
institutions are required under existing or proposed regulations
to provide duplicative or similar information under RESPA and Truth
in Lending. In drafting revised Regulation Z, we made a special
effort to eliminate such duplicative requirements. Without going
into a technical explanation, let me just mention that we were
able to coordinate the timing requirements for RESPA and Truth in
Lending disclosures. In addition, we have eliminated Regulation Z's requirement regarding the itemization of the amount
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Federal Reserve Bank of St. Louis
4
1
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The Honorable Lee H. Hamilton
Pggc Three
financed for crolitors that provide good faith estimates under 71.ESPt..
Since much of the information is duplicative, the PESPA disclosures
can substitute for the amount financed itemization. Similorly, we
were able in draftinv Regulation 7, to avoid somo duplication with
regulations insued by other federal awncies (the regulations of
thc Federal Home Loan Dank Board and the Office of the Comptroller
of thc Currency, with respect to varihble rate mortgages, for
example).
In closing, lot me assure you that we will continue to work
at keeping re(:;ulatory burdens to a minimum, and to be sensitive to
the need for avoiding unnecessary costs.
Sincerely,
S/Paul A. tio,v,ct
Enclosures
DSS:DJW:vcd (#V-105)
bcc:
Ms. Smith
Mrs. Mallardi (2)
••••TOIIIM
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Federal Reserve Bank of St. Louis
April 30, 1981
The Honorable Benjamin S. Rosenthal
Chairman
Subcommittee on Commerce, Consumer, and
I•Ionetary Affairs
Committee on Government Operations
House of Representatives
Washington, D. C. 20515
Dear Chairman Rosenthal:
Thank you for your 7\pril 13 letter asking whether Delaware
has been granted an exemption from the Board's Regulation Z and
what the Board's policy is on the granting of such exemptions.
Delaware has not applied for an exemption from the federal
Truth in Lending law, and our staff has received no indication that
it intends to do so. If it does apply, we will be happy to provide
you with a copy of the application and relateci eocuments.
In determining whether a state has adequate provision for
enforcement, so as to qualify for an exemption, tl,e Board considers
information about the funding and the number and qualifications of
the personnel engaged in enforcement. We also look at the state's
examination procedures and practices. If the state wishes its
exemption to cover federally-chartered institutions, it must also
reach an agreement with the appropriate federal agency to ensure
adequate enforcement of state law as to those institutions. A
state's showing of procedures for contlucting on-site examinations
of feCerally-chartered institutions would be one way of demonstrating
that its law contains adequate provision for enforcement. The rules
on obtaining exemptions, including a list of the documents necessary
for a complete application, are set forth in the enclosed appendix
to I:egulation Z and in the accompanying explanatory material.
Please let me know if I can be of further assistance.
Sincerely,
Sil aul
Enclosures
LCG:CO:vcd (#V-121)
bcc: Ms. Goldfaden
Mr. Garwood
Mrs. Mallardi (2)
VolckeL
'
tor
It
JAME GARN. UTAH. CHAIRMAN
HAPHII,SON A. WILLIAMS. JR.. N.J.
WILLIAm rwoxmiper wis.
JOHN TOWLE/. TE
.X.
SOHN HEINE. P•.
'WILLIAM L. ARMS RCNG
RiCHARO G
FONSE.
JOHN H
UGAR
COLO
AMATO. 14.Y.
I.
C NA,rFF
AL AN CRANSTON. CALIT.
DONALD W. RIEGI. IT. JR., MICH.
IND.
PAUL S
SARRANIES. MO.
CHR,STOPHIR J. DODD. CONN
HArtrilsorsa SCHMITT. N "AE,
ALAN J. DI.ON. ILL.
M. DANNY WAl L. STAFF- DIRECTOR
HOW •Rn A. MENIELL. MINORITY
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Federal Reserve Bank of St. Louis
?.1Cnifcb Ztafez -.Senate
COMMITTEE ON BANKING, HOUSING, AND
'RECTOR AND COUNSEL
URBAN AFFAIRS
WASHINGTON, D.C.
20510
January 19, 1981
The Honorable Paul A. Volcker
Chairman
Board of Governors
Federal Reserve Board
Washington, D.C.
20551
Dear Mr. Chairman:
During the last year and a half the Federal Reserve has been basing its policy decisions on rates of growth of the monetary aggregates
while permitting interest rates to fluctuate in a fairly broad range.
Previously, since 1975, the Federal Reserve had set targets for growth
of the monetary aggregates, but had permitted short-term interest rates
to fluctuate only in a narrow range. While both approaches use the
monetary aggregates as the principle guide to policy decisions, the current approach focuses much more attention on short-run changes in growth
of the money stock. This is unfortunate since it is changes in money
growth over a year or more rather than short-term fluctuation in money
graArth, that have a significant effect on the econamy.
Despite repeated warnings fram you, and other Federal Reserve Chair- If
men before you, money market participants follow the weekly changes in
the monetary supply measures religiously. At times large weekly changes
in the money supply have lead to large short-term changes in interest
rates no doubt contribute to uncertainty, instability in the financial
'
markets, and heightened inflationary expectations. We understand that
this coming year the weekly Ml-A and Ml-B statistics are likely to be
i I
even more erratic and uncertain than in the past because of the implet
mentation of various parts of the Depository Institutions Deregulation
and Monetary Control Act -- especially because of nationwide NOW accounts,
the imposition of universal reserves, and a significant increase in the
amount and types of data that will be collected by the Board. Money
market decisions based on such data could certainly add to an already
uncertain financial atmosphere.
It is our understanding that the Board has considered the very preliminary nature of the weekly money supply data in the past and whether
these data should continue to be published. We also understand that
the Board has concluded that even thcugh the data are subject to frequent
and sometimes large revisions the Board feels that data should continue
to be published because of the potential for a challenge under the Freedom of Information Act. For the reasons given below we think the Board
should reconsider the issue of whether or not the weekly publication of
•10
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Federal Reserve Bank of St. Louis
The Honorable Paul A. Volcker
January 19, 1981
Page Two
monetary data serves a useful purpose.
First, as indicatedabove the Board has often indicated publiclY
that the weekly data are highly uncertain and subject to large revisions
and has cautioned observers not to rely on them. Nevertheless, "Fed
watchers" continue to cling to the weekly data releases as if they were
gospel. Thesepreliminarydata may be contributing to instability in
interest rates.
Second, the Board has for some time published M-2 and M-3 data only
monthly, with a lag of several weeks, and this has not resulted in any
adverse effects on financial markets. Given the possible increased uncertainty of the M1 measures due to changes caused by implementation
of the Depository Institution Deregulation and Monetary Control Act it
is not at all clear that the M1 measures should be relied upon in the
near future as an indication of changes in the economy or Fed policy.
Third, it is our understanding that the Federal Reserve may be the
only major central bank that issues weekly data. Most publish money
stock data only monthly, and this does not seem to create any problem
in their financial markets.
Fourth, it is highly unlikely that weekly economic data, either
financial or non-financial, adds very much to our understanding of what
is going on in the economy, and that even monthly data may contain a
substantial amount of noise.
WO would like to have theBoard's view on this issue as soon as
possible. In general we believe that anything that can be done to add
same stability to our financial markets should be given seriouF thought.
While our minds are open on this particular issue, the factors we have
mentioned above suggest quite clearly that the weekly money supply data
contribute little to our understanding of the underlying economy and
that they may add to uncertainty and speculation in financial markets.
Sincerely,
S4a_lz
aks
Jake Garn
Chairman
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Federal Reserve Bank of St. Louis
March 24, 1981
The Honorable Manuel Lujan, Jr.
House of Representatives
Washington, D. C. 20515
Dear /Ir. Lujan:
On behalf of the nembers of the Board, I
want to thank you for your letters of March 18 expressing your support for the application of El Pueblo
State Bank of Espanola, New Mexico, to become a onebank holding company.
Your letters have been made a part of the
record on this application, and I will be happy to
advise you when the Board reaches a decision.
Sincerely,
(Signed) Donald 1. Winn
Donald J. Winn
Assistant to the Board
CO:vcd (V-89 & #162)
bcc:
Sid Sussan
Bill Sweet
Sue Mitchell
Mrs. Mallardi
•
Action assigned Mr. Kichline
rrnNAND J. SE GERMAIN. R.I., CHAIRMAN
4,4(
v
Rruss, %us.
Nrtv B. GONZALEZ. TEX.
jo5EPIII G. MINISH, N.J.
FRANK ANNUNZIO, IL.L.
"'ARM 4 ) PAITC:4ELL., MD.
WAL TI I/ F.. FAtiNTROY. D.C.
STEPHt N L. NEAt , N.C.
JERRY M. PATTERSON, CALIF.
JAMES J. Di ANCHARD. MICH.
CARROLL HUBBARD. JR.. KY.
joliN J
AFALCE, N.Y.
J. wILLIAm STANToN. OHIO
CHALMERS P. WYLIE. OHIO
STEWART B. MCKINNEY. CONN.
U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
GLADYS NO1N SFr' t MAN, MO.
DAVID W. EVANS. INU.
NORMAN E. D'AMOultS.
sTANLEY N. LUNDINE. N.Y.
MARY ROSE OAKAR. OHIO
JIM MATTOX. TEX.
NINETY-SEVEKTM CONGRESS
2129 RAYBURN HOUSE OFFICE BUILDING
WASHINGTON, D.C. 20515
BRUCE F. VEKTO, MINN.
DOUG BARNARD. JR., GA.
ROBERT GARCIA, N.Y.
MIKE LOWRY. WASH.
CHARLES E. SCHUMER. N.Y.
BARNEY FRANK. MASS.
BILL PATMAN. TEX.
WILLIAM J. COYNE,PA.
February 13, 1981
RoN pAuL. TEX.
ED BETHuNE, ARK_
NORmAN D. SHUmWAY. CALJF.
JON HINSON. mISS.
STAN PARRIS. VA.
ED WEBER. OHIO
BILI. McCOLLUM. FLA.
GREGORY W. CAR mAN. N.Y.
GEORGe C. WORTLEY. N.Y.
MARGE ROUKEMA, N.J.
BILL LOWERY. GAUP'.
JAMES K. COYNE. PA.
LIS-42E7
Honorable Paul Volcker
Chairman, Board of Governors
Federal Reserve System
Washington, D.C. 20551
Dear Chairman Volcker:
I understand that the Federal Reserve has conducted a
survey during February of short-term business lending rates
below the prime rate. The information in this survey of approximately 340 banks is especially important in this period of
crushing high interest rates.
I am most interested in receiving the results of that
survey as rapidly as possible as I am now looking into the
problems posed by advertising a prime rate which is not the
lowest rate charged on short-term business loans.
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Federal Reserve Bank of St. Louis
GEORGE HANSEN, IDAHO
HENRY J. HYDE, ILL.
JIM LEACH. IOWA
THOMAS B. EVANS, JR.. DEL.
Sincerely,
Fe
Ch
and J. St Germain
rman
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Federal Reserve Bank of St. Louis
March 25, 1981
The Honorable Jake Garn
Chairman
Committee on Banking, Housing
and Urban Affairs
United States Senate
Washington, D. C. 20510
Dear Chairman Garn:
Thank you for your letter of March 16
forwarding additional questions in connection with
your Committee's hearing on February 25.
I am
pleased to enclose my responses to the questions.
Please let me know if I can be of further
assistance.
Sincerely,
Enclosure
CO:vcd (#V-86)
bcc: Mr. Prell
Mr. Zeisel
Mrs. Mallardi (2)
•
CHAIRMAN VOLCKER'S RESPONSES To WRITTEN
QUESTIONS SUBMITTED BY
CHAIRMAN GARN AS A FOLLOW-UP TO THE HEARING
HELD BEFORE THE
SENATE BANKING COMMITTEE ON FEBRUARY
25, 1981
(1)
The equation of exchange is perhaps hest viewed ns a mathematical
identity defining the concept of velocity.
as correct today as it ever was.
In that sense it certainly is
However, it can serve as a framework for
policy only in the broadest terms.
As T have stressed on many occasions, the relationship of money to
spending—that is, velocity—is a rather loose one, especially in the
short run.
The problem of defining money is a facet of this looseness.
In the short run, velocity is nuite variable and not fully predictable.
And the same is true of the division of changes in nominal spending between
Rains in real output and inflation.
This variability and unpredictability
does argue for a cautious approach to monetary activism or fine-tuning.
In a longer run context, however, there are discernible trends to
velocity that enable one to relate in a rough way the growth of money to
the growth of nominal GNP.
Moreover, over such long periods--several years
in length--it is possible to define the trend of real GNP, particularly of
potential output; given that reference point, one can relate the trend
growth rate of money to the trend of inflation, at least to a useful
approximation.
It is this long-range connection between money and inflation
that underlies the Federal Reserve's view that a moderation over time in
monetary expansion is an essential part of the fight against Inflation.
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Federal Reserve Bank of St. Louis
-2-
(2)
I believe that it is appropriate to focus maior attention in the design
of a tax cut package on the implications for capital formation.
Higher levels
of saving and investment are needed to improve productivity nerformance and
thus pave the way for the reduction of production costs and for rising living standards.
How to provide the maximum incentives for canital formation
at the minimum cost in terms of lost federal revenues is a complex technical
matter on which I cannot offer definitive answers.
I am inclined to think
that incentives lor investment are likely to be the most cost-effective
approach, with the investment essentially bringing forth the corresponding
saving; however, there undoubtedly is some role for direct incentives to
saving as well.
Unfortunately, many of the proposals I've seen in this area
appear likely to be rather inefficient.
For example, the interest exemption
legislated last year probably will provide little impetus for additional
saving since many people already have interest income in excess of the exemption level.
It is important that savings incentives he focused on en-
couraging additional saving--and particularly additional total saving, not
just saving in one form that represents a substitution for other forms.
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Federal Reserve Bank of St. Louis
3
Thrift institutions are facing some significant difficulties today;
(1)
"massive loan aid - would not, however, appear an imminent requirement.
Even if credit assistance in some form were provided at some point, it is
not at all clear that it would have an inflationary impact.
If such assis—
tance were provided through the Federal Reserve discount window, the impact
on overall reserve availability could be offset through open market opera—
tions to keep monetary expansion within hounds.
Credit assistance might
be provided through other channels, of course, but I see no necessary
reason for such an impact on inflation or interest rates.
The dangers in a major financial crisis tend generally to run in the
direction of recession and deflation.
The Federal Reserve, in its role
as lender of last resort, would make every effort to prevent a liquidity
crisis from arising as a result of anticipated or actual institutional
failures.
It is important, however, that we not exaggerate the dangers of
such developments and undertake rash - hail out- actions on a broad scale.
It might indeed he said that an excessive readiness through the years to
bring forth a federal safety net when financial institutions or businesses
have encountered difficulties has fostered a disdain for traditional rules
of sound finance and has contributed indirectly to the inflationary process.
Thus, while we cannot afford a cumulative financial disturbance, we must
he willing to allow the market to exert a measure of discipline if we are
to encourage the sort of financial and business practices that form the
foundation of a stahle economy.
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Federal Reserve Bank of St. Louis
-4-
(4)
Mr. Stockman has, I believe, revised his statement a bit.
It is my
understanding that he is not predicting a quick return to such low rates.
In any event, there is an important and accurate element in Mr. Stockman's
general view--namely, that a reduction in inflationary expectations is the
key to a significant, sustained decline in interest rates.
The rapidity of financial innovation does remain a concern as we attempt
(5)
to set appropriate targets for monetary expansion and then to achieve those
targets.
The impact of NOW accounts is a dramatic example, but, as you sug-
gest, it is just one of many changes affecting the behavior of money.
I
don't think we can as a practical matter put an end to such innovation--nor
would it be desirable.
But I would wtsh that there was a more general appre-
ciation of the need, in such an environment, for some flexibility in policy.
I find it difficult to square the obvious fact of dramatic change in institutions and markets with the calls from many of our critics for more rigid
approaches to monetary policy.
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Federal Reserve Bank of St. Louis
-5
The movements of the narrow monetary aggregates have, as you say,
(6)
been distorted recently by the introduction of NOW accounts on a nationwide
basis.
The growth of NOW balances has been somewhat faster than we expected
before the year began, and the degree to which shifting from demand deposits
has accounted for the inflow to NOWs has been
bit greater than expected.
The weekly M-1 numbers are extremely "noisy."
Given the large random
fluctuations they exhibit, I have always cautioned against placing great
importance on any weekly change.
We have examined the question of whether
our publication policy should he changed, and are soliciting public comment
on this issue at this time.
Our thinking on this score was outlined in a
recent letter to you, which I am submitting here for the record.
The issue of the discount rate is a complex one.
(7)
It was examined in
some detail in the recent staff study of the Federal Reserve's monetary
policy operating procedures.
I am uncomfortable about the "subsidy" problem;
the use of surcharge on frequent borrowing by large banks has reduced the
extent of the phenomenon, but it does not eliminate it.
As I have indicated
in Congressional testimony (and is discussed at length in the staff study),
the concepts of a tied or penalty discount rate are not without their shortcomings.
The Board is continuing to wrestle with this question in the hope
of finding a solution that avoids unreasonable subsidies but does not at
the same time introduce new difficulties in monetary control or unduly exacerbate short-run interest volatility.
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Federal Reserve Bank of St. Louis
-6
Short- and long-term interest rates tend to fluctuate together (al-
(R)
though the amplitude of fluctuation in long rates generally Is smaller),
but this
need not he so over every particular time span.
The broad move-
ments in rates over the past year or so certainly have conformed to this
pattern, and in recent weeks both short- and long-term security yields
have dropped.
Temporary departures from this pattern may reflect unusual
supnly conditions or other special factors.
It is true that long-term interest rates are still very high by historical standards, and this Is an Indication of prevailing concerns about
the persistence of high rates of inflation.
Lowering those expectations
is certainly important to provide an environment more conducive to improved
economic performance.
Loan commitments do constitute a potential call on the resources of a
(9)
hank.
Rising levels of unused commitments in effect represent a reduction
in the liquidity of the banking system, all other things equal.
By the same
token, they represent a source of liquidity for the business firms holding
the commitments.
We at the Federal Reserve watch the loan commitment figures
to gauge both the liquidity of the banks and the potential borrowing by businesses.
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Federal Reserve Bank of St. Louis
-7
(!n)
Unennloyment is high bv historical standards on average across the
country, and especially high in some areas where there are concentrations
of industries—such as automobile manufacture--that are experiencing
particular difficulty. It is worth noting, however, that the proportion
of the population employed is also at
high level.
Structural changes
in the work force have tended to push average unemployment rates above
the norms of the past.
There clearly is a role in employment policy for well-designed programs to increase the mobility of labor and for action to remove the restraints on wage flexibility that inhibit hiring, particularly of lower
skilled workers.
!That is most critical over the long run, however, is the
adherence to anti-inflationary monetary and fiscal policy that will foster
a stronper economy that is more competitive in world markets.
(11)
The Hoard has not undertaken any detailed studies of the regional
impact of high interest rates.
Certainly, there is the possibility of
a differential impact, owing to relative concentrations of capital intensive industry or cyclically sensitive durahle goods production.
In the
present instance, the cyclical problems experienced in the state of
Michigan have been reinforced by difficulties associated with the failure
of the U.S. manufacturers to gear their production of automobiles to models
that are competitive in terms of price, quality, and fuel economy with
foreign-made cars.
It would be fair to say, however, that all areas of
the country are sharing in the difficulties caused by the high interest
rates that have been the result of inflation and the effort to contain it.
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Federal Reserve Bank of St. Louis
@FedFRASER