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Ir  Co in(ar ess:ob,04 1 -D c 9el ) pr:/ A inMo.,r c   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1  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 Find it online: http://findingaids.princeton.edu/collections/MC279/c305 and haps://fraser.stlouisfed.orearchival/5297 The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. 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Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) mudd@princeton.edu   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  e"  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • L i,  v L..1 / 4 -;  ' • (1,  4-•  ---e  e  /  t  \  , k• t p t f ) t  .t 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' 1A-44-  Mr & Mrs. D. Lamott  •  (  alorcii 020,  1).)  '  # ettle-0  st-tio  ei)  To  iymf-e-Y  . Ge  172ez.,  ( //06- 5) 77/  C7./c0-a-)  yr;crx.)  6c.  fite)  6-D • 70  A  : Pc"")5IFBI( a/ r-7 4.7-5  w( /I neei co/Z "1"  S  //14e-  1-7er3(--1 4--%  ik.) 4.n 01js  RA)E>  ; rt--  w 16 c,  k 5  7-5, Gc,tid)z,t) vvia-xi  Po tf?-c.T1 c-;  i3  0F- T711 5 iv 4- n cu..) “.)I L.  77146" c PA.4V t-6 cc,, ci P0,3 Tus CALL 4?-7 -s — 42)/4/ C H cc:v.> Lo5 S e opevi -r-43c G.":  Dr2.67)5 or=  1 (  /1-67 (.:'";-  PSoc.  g  71:2.  9 C-74" 12-e 11-t:cg caz.,, 6,, re  M0  vvi Sd c)7- 45  t-rt  S  7)/1-0 A  ./‹.-c.,/ ciu.S  co  NS.  .; • 741?- C  trZA-)  Gcc,  7-"7/0-  ir /.S  ) /S zex  5/P--A161-  AA.)  rzczr  -reh-r f-712--o/u6: g.e-9crY4 cr.‹,  r  &)7-72-o c— , Oc-  Youiz 5   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - D  Cogeoaarto.OS )  ki.),41-G"  24)  .)1  eipc---13. rs  T-14C  el-1 ZE  •eloi o  " TO  7771t5-  77-/  v%/1-,D (b..)  A L. Leoz.,s  1 1  t  Lot  6---AM--ro(Z  t  I=  of:- lq gO. 7-7?.c.,,C. 1)  WI' LIAM PROXMIRE  Action assigned Mr. Petersen  WISCONSIN   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  'ZICnifeb Zfctfez Zerrafe 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  LES •i  s. mruss, wts.. ew,L.L.I/sce, I4E• Asorois.  G.L1.1 4,  LONG. LA.  p4Ep.o.y  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  MAW:API T . HECKLER. MAVS. 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 "•ri  Mr. Paul Volcker Chairman Board of Governors Federal Reserve System Washington, D.C. 20551  CPI rri C)-yr -TIN1  tan CC)  [.!  3IC =It 0  410  C)  r-r  r-1  rs: se  —13 311C  r  cz) 0ir  .1tib r14  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:   https://fraser.stlouisfed.org 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.  g  tat)  4:7)  1.  C . ) °*-)  XI  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Best wishes. Since el  /617,4,11(,. Lee H. Hamilton Chairman, Subcommittee on Economic Goals and Intergovernmental Policy  ,.1 A  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  pg44 ,g  RivoIS, WM, CHAIRMAN  Action assignei Janet Hart ROGER W. JEPEEN. lOwA.  RIC  \RD Hog-LINO. MO. 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.  CLANYNCE J BAIOWN OHIO MAOTGART T M. NECIALVIA, MASI.  7F. YEN ILILIAJH X. ItWA40 AULA  4AcK k.4 01:12/4c.L.v4;  Congres5 of the Unita'*tates  JOHNN.XCAJSIELOT.C.ALIP. CHALMERS P. WYLIC, ONIO  OA.  nprAMIRT. I °WARD•(ENNEVI. MAME. ( ... ;11MEWO.0 7 1PANIEE.1440A"  JOINT ECONOM IC COMM ITTEE (CPI.*  JAMIE X. GALDPIAFTH.  FO PUrItUANT TO SIC.  r  Toy° EMMEN. irk.  • Or P1.JOLIC LAW )04. YETH CONGRITIS)  EXECUTIVE DIRECTOR  WASHINGTON. D.C. 20510  "1;% -/I  March 24, 1981  r— —dm c3 < rrt < rig tP)  . f  —77  fi •  •••••••  t'  (."  7r.  CZ)  r- •  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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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).   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •••••  •• of ▪ Govt4; •• —0 Nger% • c. .• • 71  C  • ,:siressisr.  BOARD OF GOVERNOPc, TH E  FEDERAL RESERVE SYSTEM  ,•  • •..• • •  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 •  4" ..•  •0 • -r1  FEDERAL RESERVE SYSTEM  •  • .-k  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  1  c  v  (\ciClcv\k;, V- G(1)  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  rry  Honorable Paul A. Volcker Chairman Federal Reserve System Twentieth Street and Constitution Avenue, N.W. Washington, D.C. 20551  C")rn 2la) Zb  412 C13 .....,  3=s -V MD i N) =a ar .:' •fiCA  -rt f", C.: l'71  0, c ..,  • • lt , > al r gis ...... )c) -c. A, -ri -../ cr) rn -4 rn ::17 ..r. c.) --r. rrl < tri " 1 f..," .r) Z -< c,/, cp Fp  LI  •,  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,  Z  /////:///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 -n  tic) cc)  r "1 r'"  DO  : ' 1 I.-  OIC 2=11 73  >. CD  (ia ammom•  rn <  . tr/  .C1  r  =7„,..." '  --0 :.r C3  <  n  rn 7,  tfl  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, 4412 Switch Willo, Austin, Texas 78759. 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  :Ar  ••  .-4 IT1  (..")  .•  RICHARD DAVIS. BUILDER  fi I  tc  ,  r  yo':\ ftp  r" 17: S4 —  , P80 Faruary A thcre wx; much tal k ab(:ut  i:ack  t'OC:  3ankr; drorrim- thoir Nembernhip in t'ic, ta:ier  thr,' ca!  were at that tima bills  ..;yrtem.  Ihe! e  .1r3rity  by Froxmire, S.55, ayul John Tower,  mc an uryi;.. L.-. o!)  r;rmtlemen, can yr2u plcasc and any  At  ther pPrtinc! t information rela Lc0  UO::0*  occ.1  mcnbt r:-. par ti c today  percc  .  !ftlt  •I  rItatu::: of out  t  .^1 n ) • „,  .1 2 I .  ,  P.cf.,);)mrliHft  ,z 1, i :: that i mi  t!lat  declinr.??  , banli: 1;1-)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  'Pas to  t that Li mc ler:  thr: L.•E(1.1..  . fl ld r  t le:  uod:ite  ire all en thir,..  •   https://fraser.stlouisfed.org 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:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Ms. Bray (w/copy of incoming) Ms. Smith Mrs. Mallardi (2) -//  • ofccivt'• •  • _- •r .* .S..` • :  • , **** •  •  BOARD OF GOVERNORS o THE  re) ff ,• 7. • • r•-• •  FEDERAL RESERVE SYSTEM WASHINGTON,  C  20551  a  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • (-% CA)tet• . • •.+ 0' 1? •. . z - ' : 'Ct. ,: k ( ti :Cr. -...:. C „ • ••••  'Y c  ....- - --:. \,!•/11:rirrii .,.,, ..• , 4 ,iiii ..,,_,;-:-., ,. .• ,, ,- „  BOARD OF 50VERNORS o THE  FEDERAL RESERVE SYSTEM 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   https://fraser.stlouisfed.org 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  .w •• of GOVt • .*0  •0  BOARD OF GOVERNORS  o• 2:  44"1",.".  OF THE  FEDERAL RESERVE SYSTEM 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  dor   https://fraser.stlouisfed.org 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)  •  rscvis„ - /0(0  A  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.   https://fraser.stlouisfed.org 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)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • • of GOVt' • R+% 0•  .* • co •0; 0 • -n '  *,  *11111$  BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM I— • • A... .  RAL RES • •..• •  WASHINGTON, D. C. 20551  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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  een The Honorable Bill Gr Page Three   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  rs turn available to save re of te ra x ta rte af ain which increase the However, I am not cert s. ng vi sa e at iv pr e at incenwill tend to stimul signed to provide such de be n ca ms ra og pr ve it that cost-effecti n to encourage savings, ke ta ch oa pr ap l na fi • ns in tives. Whatever thc corresponding reductio by d ie an mp co ac be it ted is important that creased savings genera in e th e, is rw he Ot s. the federal outlay Treasury's increased e th g in nc na fi up d en rnwould of necessity confidence in the gove ic bl pu , me ti me sa e th deficit. And, at use in order could be ho l ia nc na fi s it t ge ment's resolve to seriously eroded. to is further opportunity th me ng vi gi r fo n ai be Thanks ag pe these comments will ho I . al os op pr s ng vi comment on your sa helpful. Sincerely, SZ fag!  WR:FMS:JLK:RS:vcd (V-103) 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)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .•  .   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  SEASONAL ADJUSTMENT OF THE MONETARY AGGREGATES  A Committee Report  January 1981  •  • s••  ,„ '• ' \>-4 •  ,*) 1  .  Congrete mono! cad  'Otte d St,tteS  AmerR a  PROCFEDINGS AND DEBAT!:  OF "I III;  97 1h  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 _ _ https://fraser.stlouisfed.org 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 .•• 0 ( 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ((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.  Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  https://fraser.stlouisfed.org  4   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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 1305) 946-552  3038 E. COMMERCIAL BOULEVARD FORT LAUDERDALE, FLORIDA 33308  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,  .   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ..••••... COVE•R4• ,..  BOARD OF GOVERNORS  0• • 4:0 •. 0 ' • -n • —1,  OF THE  FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551  • tc` •. PAUL A. VOLCKER  .RALRO. • •..• •  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-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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)   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5-  Mr. Stanton 4.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -8-  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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  -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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -12-  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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.  •   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A•dip  v.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org 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 •••   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.  •   https://fraser.stlouisfed.org 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.  • • •• •••   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The present role of   https://fraser.stlouisfed.org 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*   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Like the penalty rate   https://fraser.stlouisfed.org 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.  •   https://fraser.stlouisfed.org 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.  •   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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 POBI PIT J. DOLE. to•14S 0011  •POD. ORI •,  •  wit  2nNN  V  ROTH  Niv:•ILL 1,1  JP  J6,41.4  ( -HAI FF.  MALC,  %Al  P./  t  Affirms tymmc  sTr v. • •  t  C.RAS:t.  r  ." •  !PI  PINT . - FN.  TI •  VAT5ttNAr..A.  FL PAI ..  AY')  14PI PIC.11/  CH•11  rCt  , "ARK  PA.  KALL00..  LONG. t •  t/A0PIY 11". PIYIPCI  o•NroveTti ••••  L  CHAIPIMAN  K A40YP41.1AN  DAIK- 1/6. 144,,AIT L. POO 1  LA  'ZCnife6 Zialcz Zenale  MRA7,LVY. N J. .)•,40 1.  y. !ow  rt'..r.  AO rcur  L  1.4•41•••  comMIT TEE ON FINANCE  A  WASHINGTON. D.C. 20510 ..1:,111, 1 PO' Lo/Kl. L SY tPIP•  'Pi 141,4%14 1  s c Dow.% It TAP I DIIIII....10111  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 /  I(  L  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 4011'4'4 ,-„ /44 yet t,i, 1,1..  -7444,  _  3 "", 8  --  i -.4._ti . n  . --.---" ,..,„...,,r"----, 7.M 45 :..,07 .-;'*;tr ÷:?.i : ,:_cl. ..10.1 r.:A7 :fit.:'''':-.1.7-:;::::-. :2-gr:i4.--z---...--2.-. 7117! 1 1 7r: 1  -- i 11,, :::"rit-7:. A-4 1 . ,-j,a4  J -,,ne1 ' 111ad:AV.4"4..r... __—.  Main Office Phone (314) 346-3311  FD:-C  .1 . 7.1 4: :(4 !I  and Osagr_l Beach Branch Phone (314)348-3171  allimMEM  ••••  Ir  • •  First Naiional Bank F LINN CHEEK CANIDENTON  P.0 BOX 157 /  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, • / /27 ev! /Richard Coins President  RG:md  10. . .11°4 4. ( • _  lb—  Tir211 •  _.4   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  _  •  .e. ••••• • •••. • -.•'..;*\ — •  -.;  7 1. )6  ""  rrifir1,!E  !. W •.;  E.  'T 4 :ft . .• Ze•t  .-  —  _  I  ,- 11 AZ4  ... 2 -  Main Office  fill, -74n -nil  MeiC  and Osage Beach Branch 1.0 117i  M."  -  -//1A  IIR  W. HENSON MOORE  ASHINGTON orrice. 2CA RAYBURN HOUSE Orricr  6TH DISTRICT. LOUISIANA  WASHINGTON. COMMITTEE ON WAYS AND MEANS  (202) 225-3901  SUBCOMMITTEES.  DISTRICT OFFICES  PI/RLIC AS'oSTANCE AHD L  mriorurNr Comp.' rc  141virrott Mt AsuR   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  04  Congre5 of tbe anittb  tate5  —nLENNio  C. 20515  236 F EDOSAL Bt.ILD'NG 750 FLORIDA STREIT BATON  Rou,.r.  LoilistANA  70801  (504) 144-7679  34)oluSe of ilepresSentatibt5  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 WHM:cuf Enclosures  .4, 4,4%  0.••.  ...1,11111111114.4-  •.  Action assignel Mr. Allison rA31  0  VIWO  waswo.crom.DC. zesIS (202) 225-3801  C  WYCHE FOWLER, J R.  tr/sm.scran oirxr, 1501 LOPIGWORTN HCR/St °Fritz Bu;Lrok.  DISTIICT OrTIC4 SIT•F 1.25. WkLIAld•OtrY/11 32 PIACKIIITI STRICT A 11.A/ITA. GIONC.11 30303 (101) 61114207  5111DIMICT.GMICII  COMMITTEE ON WAYS AND MEANS  Congreis5 of tbe *tatesS TE?ouve of Arpres'entatibe  SELECT COMMITTEE ON INTELLIGENCE  Eastington, 19.C. 20515  '  rarch 23, 1981  •Y•fi PIO jrVIti;  •'010 „,  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.  — • l`c;:Xliler.L.  ...~.10010C  _  .  Thank you for your assistance regarding this matter.  4A ,  • ver: -ter, . :•:PP,714 11k . k 1WV • •  t i/ F.'  ' 121 AKOI-V4 /ow  cerely,  ......4%  ''''../ " 0 " r  .°  lir  AD a .  Ilit .0...; ..... r o.  . i " .." , 1: . 1" ifr ' .  ED  ... •••  d:) 1  Ilir  % 7  .t  ' P ii -'.vt.. .; , . , %.....  16 *.i. • , 4.  ...  - ..- r••• 41,..„ . ........... .  Iv  d1 / 4 .......•-••••  FOWLER, JR.  r mber of Congress t.,  Y.&  "  •"  •••  ,•••  .•••••  . 1••••  .• • ..   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  t  ' *.k*'""' 34% .t  f:6-4rY"' 46.  ,,;  4"4-ts; t`;`;I  71P ' . •  •..'4m •  -  ..  xl-/-4* • >4;4044:1:;•001-L. b4,••,;(:04047.;.'4.4-,‘;,..•""N .  .c-fo .  • • AVVY-  -  .4111ft.......,41111•10111.11111•1111111111111.101L2”—  BILL GREEN  WASHINGTON Orlr/CEr 1417 LoNGwonTH Housr Orricr BUILDING  DISTR'CT, Nrw Ycorc  WASHINGTON. D C. 20315 COMM IrTS.K ON A PPROPR I ATIONS  SuncommITTErs, HUD-INDEFENOF_NT AGENCIES DISTMCT OF COLUMBIA  (202) 225-2436  Congre55 of tfic laniteb *tam otifse of l'NeprOentatitiefS  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  rn  C-1 C.)  n 4 -11/1 (n rn __Jo)  c " )  rn < -(7)rvi  I:: no  Dear Paul:  r  co nic  (...)  2=2  3:C  :z) LO I appreciate your taking the time to comment on my savings proposalln yanr letter of March 4, 1981.  7r-  I  < f"-i "')  (.1 -4 r  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)   https://fraser.stlouisfed.org 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  U3 Co 22  Honorable Paul Volcker Chairman Federal Reserve Board Washington, D.C. 20551  cly rr/ :gis  vb.  =3 -11 C3  CI  c.•-• •—•  <  ac  r 11 (.1•1  Dear Mr. Chairman:  : 44)  crA  dam.. 0.0  r",  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  1 I sts. L.ONGWORTI-1  Congre55 of tije Ziniteb *tatas  ASHINGTON,  jOoti5e of i;eproSentatibef5  ASSIST ANT REGIONAL WHIP 'OW IGN  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  41••••  (/)  C) It)  IL/ tt --.1k)>•  CM  g:34•M rr:(. 70 .1--At ti) 11. LA... %Ai  C/".)  0=  cm  icr cc) IrJ ;   https://fraser.stlouisfed.org 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  C)  March 31, 1981  (*TN -  3=1 CDn7  -1 Cr)  —",  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  .T=e  rn  Cr) -< ce) Ci,  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 PH/mps Enclosure t m!lit • t,,  Please respond to:  eo  e fe) n rT1 7'.)X CD r  (.1)  C,  P.O. Box 2000, Winter Park, FL Npr"  32790  I AOMINdIVINIPI‘v•IP.110.1111•••10w.dr,••.••  Action assigned Gil Schwartz  CARL LEVIN MICHIGAN  Zfafez ,,,T3enctie  0 ° E4 R7JE'r::-3Ett-R\it -4E'Elt1513:SC:1) E5  WASHINGTON. D.C. 20510 ‘Sg‘  OFF  April 1, 1981  Paul Volcker Chairman Federal Reserve Board 20 and C Sts. N.W. Washington, D.C. 20551  TWVk  It -6 Pit 9:  RECEIV E3 ICE. OF 1-ii.  4f/"'  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  CL/jc  1   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  iosrmi  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  un Go  CIP gzi  lop  1:71  co„ -Tim  r."  73  73c,C1  et)  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 CHP:gmg Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -z) r  rn < c-) 410  M  . .  tit Gn  g (f) v.! -‹ --4  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  •  ;;  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. Z2S.4247 -1 rn  Frl  =2 -1 )  47 : rrl :37  LIP 14,.. nra  r" : -7-1 (71  The Honorable Paul Volcker Chairman Federal Reserve Board Washington, D. C. 20551  rn  F717„7. rn tr..)  C. ) C , rrl n  01  xm nm  FxLT  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?  -y)  c.  — 4 en C-D <r • < rrt rq :1"  r.'")  .1 PI  t  •  %.   https://fraser.stlouisfed.org 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 rman  VIP . .• • • •.  •.of GOI/t11'•4.,•. .*0 . / , ofic\ e'OP% •0 t  • -,  f.' • ' 72 ; .. *...d tf  4.1 4.,,0  .44:).. %GP,,,,(„,,,,.. RA,„,.s.•.  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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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  bcc:   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  ..  .  • of GOV( •• ' • 44.9 _ :-____-,•. .•_•r .;,0-.= k" 0 • • .. ,,,d ,,3,. •P,. .. • - ,-.,-, *r., IN ?4, '''...• •,, ./.. .:41. , .s. , , ' I- • .-.:.•..[Fpv:„.  ',.I.LLP1.4-: . i-Vi i:i-t.":•  BOARO OF "-CIVERNORS 0; • ,I r•  FEDERAL RESERVE SYSTEM wASHINGTON, D. C. 20551  y  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  7!,  (3/24/81 ltr/L, to Garn & 471,M,Z •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •.  Si  erely,  .1  aaJ2  ILL 64ZAZ140 /0,  ‘t ?e,e4- a/di  cl./tAlexiteAr -(1-t -( 4treaiftra A  NJAMiN S. POWNTHAL.  •  Y  CHAIRMAN  Action assigned Janet Hart  JOHN CC 4vEPS, JR., MICH. Et/GENF ATKINSON, PA, STEPHEN L. NEAL, N C. DOUG ISAPNARD, JR.. GA  •rtrfe  A  PFYSER  N.Y. •  LYLE WILLIAMS, nwo HAL DAUS. NEISIR. WILLIAM P. CLINGER JR., PA JOHN HOLM. MO.  NINETY-SEVENTH CONGRESS  engross of the Ziiiiteb 41,tato  MAJORITY- (202)  229-4407  3bou5e of ilepre5entatibeZ 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  1  c=, -.I -../  — um co  ri Tr: PI  CI  I=8  rr1  7.ri Tv'  r_, I . 7.11  -10  r--  131  C,A,  =P  7'r ,. CI n1 —cm' tr, fot  "T1 rn c, :r. r"  rn:z c--) 1'71 —C., r.... m -1 c,„  —  Ln  ...... 7,=-...... -<T1-..„...< 1...., .. ..  _at  =3 vb ar-‹ co :cal w -4, ccer  CO  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  c,  rv i--.-  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   https://fraser.stlouisfed.org 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  COMMITTEE ON BANKING. FINANCE AND URBAN AFFAIRS  Congrecz of tbe tiniteb  tato:4  Z73 C.HESTNUT STREET (603) 656-6800 (603) 666-7526 ToLL FREE: 1-800-562-3602  MERCHANT MARINE AND FISHERIES COMMITTEE CHAIR`IP‘N SURCOMMIT1LE LANOOF4APHY  ji)ourSe of Reprefqntatibei5  PORTSMOUTH. NEW HAMPSIIIRE 03901 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  v  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  44r  Honorable Paul Volcker Chairman Federal Reserve Board Constitution Avenue, N.W. Washington, D.C. 20551  -111  av  CO  )bC3,11  • m n rn <  Dear Chairman Volcker:  c-)rn me,  7D 70  NO CD M2  31C  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 d.  rrio Cf) r-r1  -T1  < 1-" ,1 441  (:) -4  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  -  LIILL McCOLLUM •  5114 r  11411CT, FLORIDA  Cong. Liaison Office will prepare response  Congrt of the Zilniteb 5ztato  COMMITT N N.tz; F I CE APA5 rn31 .X1),1 AFUMRS  brx  y  ( :•1041VITTR ON aHELJUDCIM7kRY ic;  Cr <  31,,pufSe of teprefSentatibes azbington,;D.C. 20515  c  I ') ••••• C3 C\J  ) r  LaJ  CX  la/  on cr.)  113  DISTRICT Of r ICES. SUITE 345 701 EAST ALTAMONTE DRIVE ALT/440MS SPIIINO11, LORIDA 32701 (305)830-6655 Sutra 221 5800 U.S. 1-1104.4w4y 19 Nosw-rm HOUDAY. FLootioA 33590 (813)937-4231  I  QZ ••• Er  1313 Lowatrown4 Houst Orrfcr BUILDING WASHINGTON, D C. 20515 (202) 225-2176  %Ai  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 BMcC:lwf Enclosures   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ,. ti't {, : ‘. „ NI# 1 :(:7 : il• - /,  /)''. ti l I`;/  I Kt;.'Y / . I 1-•:--1)' ‘Veliv '‘'' I‘'7.a':e ' ( (e ! 7(r/ll'i . ',,!( 10 4 :-. • 1 / / / I t. , 1 t---- • i) iii. / 1 74;t:it',1 iL(,r1,:. .(/ (..-" ;1 r(i-if . C 1: cf(-,9 it i A ,,,--N (N1 • ,, . . r) : 7 t if )‘ i -1".- - ((le 'ii0(1:(( i 7( Y1 f 1 i• 1-*1447 , . 1. _ ti,a i) ki1 t 1 017 U Lfir 1  -1  ( 1(zIti...1-.;, 1 (,/,A.t ',.)i? ‘.tir., \  1 ....... . _  I  1  g . 1  I  ' , I )  r11 '  •  . k  ' -‘  • ‘)  ' i  i f  I .Ai — 1  *  '''  .1 1 '4.1A4 1 , (. , ...••  l: t/  '/ 4t '• .  r/  I  , h  ,/  r  t6 6  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  /14 / 1 4  t/  ,'  / 41 L(.1  i •, , . I, ' — ,14 . -Ike..:. ,_1-a.,4 ; „.,,,,,,, , .  . it, 0, y, .,/.1 .,  (z..,b  '' TI , ,-,11. 7,14: I(Ite- 1-il:i it-4.. .re'l'il./ i,,- 4-  .. 1 i  - I, .-V•7/,•  ,f !:(- i )"tt  i ...!  ) ),  :"ft ; 1 1  4 I- 1  ,.  1,-0-- 1'1 4.).,te f:(  r 'I kii  */)‘7 1-11 1/ -1 i) ,..) ) I.1 4 - p 1. tinc4 ( v :eP riw gill  .• -  . .•  .  1,  • II';:1 k  "41441-  / ' et , *Lie  :.; .., i i  C..L.4/ : l/f(4 I.-II ' : 4:‘ ''' i ( ' 41 . 91yettelf i VI° - 1 ,, r'./ 1... 'Yr , / 1? a. • t.L...) y :1, , .11•Lf0 .(I IS).; )to t ; • V ' lit. I:: '.< 1;, I ir.1-ir';1 .'t. 'i,1 1,.: t J - tiL,  ligs-, ::.t. 5„pf) .,1.iillfilf t; . I- P , • .. , .-1 t-'41 17 1.. ,1„ ,•..•. ,. c c., "  4i.,. ..„  ,  i . ..  J  •  jI  ,t  I r  • (  c(  ; ,.,1.f.,/: ,. 1.1;1,4,,... ,i , A.)f  , - ,.  1  Nit L't •  •  •  ;  i Y-, (,  ,F p.....1...r;;r et. t:.te• il4L;,,,714,/'  4  •  'fat  ,  •  •'  -  •  ,- • 11/2..t, (-et , ('(:?tf ti (.1 e ;it • sti  A'  C -•  0. 14, 1  //i  /  7 'i:1•••••1 1  i?Lit. ci  -c  t,/ 1r-  '• (./ /  /0, 1.••••• •e'e  l'it4ift)tek.)  ••) • •  1,* r--  t  ' -4  t '.4 • •  7  - f-  "•' ' ( l'1" ,  ,  ,  .J,-  tt  I •-*-- r.r..Ct  i  /-ttd,t,'t h...1) b .  ' t 1.1  ,  • 4,—r- • Iti'cK  (.;)141-14Lat  -7. -7 )• • Zee 'XI/ / . -  .r i I .i :- (t' ,t //:i I , .. z e,  1  ,)=4‘11€  it.do  eG4  11le 10)41141  i (  ftittf 11/  "1/J(  (///  /f-.47),47.er  "(c- ti,  /7 1 te• • • ii ( ( '-se  74 .4'  •/ if •  i'( ( A)74AL  ZU  eVe/164(  ••••••••  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  IR   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 ‘, (y Mrs. Mallardi   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  al'  • A. A .4• . 1‘“ A  . 1.f it 4  .•  .  .  ,  . • ,1  • .I • •t  fl:ti  ,t1 . • "c 1 t, I,i.Vr. • . „: 1A '. • ',./.. , .• Ih. ,„ •  t•I'.,,,  le.'• „1 .f•. •-/ --, •1  , • 41. .  •.•  •-. • \  ••  .' ".. t1 • ...•1 ,4 ,  ..A#4, : -A.,,; 14v.  '. '‘..,' • l t ., ,i t  ,  i,..44,  t. g.'  ',‘  .  %  ,  F &311/  ..r.i. 1' 44 t1:4;‘ : :IC , • ,,' c..v...  't  ,t %  .  •• ••• •  % if1. t I  ' t' ,• e . 'N .  • t..; d 1  .- .  41 / ' :).‘ 1‘-; 4  ..i lri: ..'l•5 c z,,*.  V1 ,1 1• . -ij - .•  •  1 !, *1 • .•• _ . I •....•. I• I)-  . . ., ••  . 'h,  I  •,ol _ I  .... .  k.  r N.' ..'.• I,. q r • ,i  V.'t 1 • 1..% t 1.14'‘ 1 t  - :t t  ' 11 . i'‘. ?::\' ' ' -„ •'' . \ 4. t ,. •I. •.  1 t1k•1r  A f .• .N • i ,o i tp i "f  . -  „,r -  .11  • '4% 1 • • •  J. 1 . • i -,:i ..r .  1  ,  ,e,  ''S- ''' `;-.4.? ,.  *h.c.' f. -x . 1,* t.P ' e 1•I  t  ''  ili....  1  .11.:1 "Sr-..i•vie ': 5....•,i. t... t., •  ta4  ' _AL) : .,  ,-'(  >. i. ,• .v,. ,1 ) .•• •. -  1  k 11) i ? ',.• ., t '! ' . F • kt •.1 .s t r•. .. • i '  1'11  ' % i  .1 i  1 i .,— t:, Ivift.4, :  i  'al •  •- y • II  i 1 I  i , . ".• v 13 %\ n , 4  .•• -s  4.. 1... 40eii  • - '1 , .,) ,.. +1...\. , :, •.: 1 .  I '  i  7 (  -• It•• 41.it '.'; s I  s•i  i  t., 1 1 - ; 1 tfi. 1• , b 1...,.% g, % , ‘.:' • 1 \ t. N' )' ••$, N,t'ii ' t \•(.% • 1. t . 't -'/ si )1 I ,11; •  • •'  itit 1 . .: 4 1"  i vl i COP  : 4' :. '( 1-6 : ° ; . 1 i '; 1' 1 ( 1•  ja,' '11).4 '%;,. . 1 • 41 l '.. ' ..  1....•ri  , %  1  b t,•w  4 : ' 4. :if,i 'It  t  *a. i  .  C gA,00.  .i  •  •  yo,  ,i, / c :, ,. . 4 A4 1 4  TION  4t. -,, 104'441 .  . 1 Y4 tItlY  i '  ..  I • •  ASK US FOR MORE INFORM A  ill'  • .• ' •  c-' .,  :F.k $.1 , ••11t  „ zit4 1  ,YWAiD,,,WISC ' +1, ONSIN  •  44',..- •  . ..  i  ,, •./P ..  .L.ii%. I* ..- . . ft. • 1.• '''i' 4, 1 •" li.  ', '. I' )  ..:  i  4 -.• f .•‘ '4 • .* , t•. • e •.  ': ...ii., ... ; e r... .  - 'tit .  cr.'s,:  4 ,-.I, . • 4Ai e1  ...• -.. ,..•  ‘4:./ ,,.  ii."!.e .•.0  .  !..  1..  • li't .../ .. . ,• •  ' • ,  ::.  I i:I.  t• %  ,.  i  ., i  ,1,..4..:  ''Yr  -  i  t.",.,•  •  •,.  ,  TRANSFER O F FUNDS  FROM SAVI NG TO CHECKI S ACCOUNTS NG ACCOUN TS IIIIIIIIIII IW THE PEOP LES NATION ' CHI( AL BANK "KING OF HAYWAR A( CO(INITS I D I 4  i_ •• •  t  4 . •  AUTOMATIC  GOOD NEWS  •  54843  •  druiadallIlibar  •  •  •  • •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  E  L}  r. „ 13  ••  •R4/.  (•. • of GOV  BOARD OF GOVERNORS OF THE  :C  FEDERAL RESERVE SYSTEM  •-4  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) r-rt  Mr. Paul Volcker Chairman, Federal Reserve Board Washington, D.C.  -111-*1  ra.  1:2  3,-  -17 = 1 -  r"  N.) rri  4 4-  C")rn 7.E  -"CP 711C  c  (2/C3 -14-CII  fv, •-•••• *17,  0) -1•43 • -< rd-) CD 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  de,  (4_\.0  . • of G0vidi.. •• •0 ; tr . •co .. '0 1 —,., i— '--k t-, .1. L, ..fe ' .4, ''''.' •.RAL RES . • •..• •  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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Gil Schwartz Mrs. Mallardi (2)  #1,   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis
Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102