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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Collection: Paul A. Volcker Papers Call Number: MC279  Box 11  Preferred Citation: Congressional Correspondence,July-October 1981 [Folder 2]; 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/c441 and haps://fraser.stlouisfed.org/archival/5297 The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. 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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Policy on Digitized Collections Digitized collections are made accessible for research purposes. Princeton University has indicated what it knows about the copyrights and rights of privacy, publicity or trademark in its finding aids. However, due to the nature of archival collections, it is not always possible to identify this information. Princeton University is eager to hear from any rights owners, so that it may provide accurate information. When a rights issue needs to be addressed, upon request Princeton University will remove the material from public view while it reviews the claim. Inquiries about this material can be directed to: Seeley G. 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  tion assigned M . Kichline  o  MARJORIE S. HOLT 4TH1F1STRICT, MARYLAND  411) WASHINGTON OFFICE: 2412 RAYBURN HOUSE OFFICE BUILDING  •  WASHINGTON. D C. 20515 202-225-8090  COMMITTEESt ARMED SERVICES  DISTRICT OFFICES:  SUBCOMMITTEFS: PROCUREMINT AND MILITARY NUCLEAR SYSTEMS MILITARY PERSONNEL  95 AOUAHART ROAD  n\ W " C 9  Congo:45 of tbe Ziniteb *tate5  R00M No. 211 GLFN BURNIE, MARYLAND 301-768-8050  21061  301-261-2008 kR BUILDING  r•  •  3DousSe of ilepretientatibt5  6i78  OXON HILL ROAD SUITE 303  OXON HILL, MARYLAND  Eilassbington, 13.e. 20515  20021  301-567-9212  August 24, 1981  1j) The Honorable Paul A. Volker Chairman, Federal Reserve Board of Governors 20th Street and Constitution Avenue, N.W. Washington, D.C. 20551 Dear Mr. Chairman: The tight money policy being pursued by the Federal Reserve Board is working effectively to defeat inflation, and I commend your leadership in formulating and implementing a policy that is as necessary as it is painful. You are correct in your determination that the rate of monetary growth should not accomodate inflation. however, I am deeply concerned that the effects of the policy are being felt unevenly. With interest rates running so high that the term "usury" has become obsolete, thousands of small businesses that rely on credit are experiencing disaster. Builders and other enterprises associated with real estate are in a depression. Many have already gone bankrupt and many others are on the brink. Farmers are in trouble. Retailers who depend on credit for their inventories are hurting badly. Bankruptcies in the first months of this year were 21 percent more than the bankruptcies during the same period last year, and business reorganization to avoid bankruptcy increased 36 percent. I agree with you that huge borrowing by the Federal government to finance its deficit spending has been a major source of pressure on the capital markets and a cause of high interest rate! You can count on me to continue my consistent work to cut spendin and move the government toward a balanced budget. Your anti-inflation monetary policy and the Reagan, Administration program of spending reductions and tax cuts will give our country a strong and prosperous economy in the future.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -  Page 2 August 24, 1981  Honorable Paul A. Volker  There is no doubt in my mind about it. But many small businesses in our country will have no future if interest rates remain at extremely lofty levels. I appeal to you to have some consideration of how monetary policy is affecting different sectors of the economy. I hope that the Federal Reserve Board will review the uneven effects of its monetary policy and diligently seek some mechanisms that will improve the availability of credi at reasonable terms to those sectors of our economy that are experiencing calamity. Sincerely, I 1  7uLi.kli'  i  i  4""1,1,54--i  Marjori S. Holt Memb r of Congress MSH/rg/s   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  HOUSE OF REPRESENTATIVES WASHINGTON, D  C 20515  BILLGRAMSON IST DISTRICT, OHIO  September 16, 1981  Hon. Paul A. Volcker Chairman Board of Governors The Federal Reserve System Washington, D.C. 20551 Dear Mr. Chairman: Once again your visit with our C M/SOS group was a high point of our breakfast programs . Your remarks were timely, informative and straight forward. touch.  Keep up the good job and let's stay in Sincerely,  •  • September 16, 1981  Mr. W. F. Broxterman President California Credit Union League 2322 South Garey Avenue 91766 Pomona, California Dear Mr. Broxterman: Senator Hayakawa has forwarded to the Board your letter endorsing the nomination of Mr. Arthur L. Summers as a member of the Board's Consumer Advisory Council. I can assure you that Mr. Summers' qualifications will receive full consideration when the Board selects new Council members sometime this fall, to fill the positions of individuals whose terms expire in December 1981. The Board appreciates your taking the time to call our attention to qualified individuals who could contribute to the Council's work. The Board makes a special effort to achieve a geographic distribution within the Council, as well as a balance in representation among various segments of the credit industry and consumer interests. This task is not an easy one, given the small number of positions (usually around 10) to be filled each year and the large number of highly qualified nominees. Again, thank you for your interest. Sincerely,  1Signed) Donald I. Wina Donald J. Winn Assistant to the Board cc:  Senator Hayakawa  CO:pjt (#V-255) bcc: Mrs. Bray (w/copy of incoming) Mrs. Mallardi   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • September 16, 1981  Mr. J. J. Quinn Senior Vice President California Canadian Bank 700 South Flower Street Los Angeles, California  90017  Dear Mr. Quinn: Senator Hayakawa has forwarded to the Board your letter endorsing the nomination of Mr. Michael E. Thomas as a member of the Board's Consumer Advisory Council. I can assure you that Mr. Thomas' qualifications will receive full consideration when the Board selects new Council members sometime this fall, to fill the positions of individuals whose terms expire in December 1981. The Board appreciates your taking the time to call our attention to qualified individuals who could contribute to the Council's work. The Board makes a special effort to achieve a geographic distribution within the Council, as well as a balance in representation among various segments of the credit industry and consumer interests. This task is not an easy one, given the small number of positions (usually around 10) to be filled each year and the large number of highly qualified nominees. Again, thank you for your interest. Sincerely,  Tsionoel nnriqm Donald J. Winn Assistant to the Board cc:  Senator Hayakawa  CO:pjt (#V-255) bcc: Mrs. Bray (w/copy of incoming) Mrs. Mallardi   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  Septerriber 16, 1981  Mr. Michael E. Thomas  Dear Mr. Thomas: Senator Hayakawa has forwarded to the Board your letter expressing your interest in serving as a member of the Board's Consumer Advisory Council. I can assure you that your qualifications will receive full consideration when the Board selects new Council members sometime this fall, to fill the positions of individuals whose terms expire in December 1981. The Board appreciates your interest in the Council. Sincerely, (Signed) Donald J. Winn Donald J. Winn Assistant to the Board cc:  Senator Hayakawa  CO:pjt (#V-255) bcc: Mrs. Bray (w/copy of incoming) Mrs. Mallardi   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  S. I. HAYAKAWA CALIFORNIA ./..RL,  G744:I  COM M ITTEES:  n  AGRICULTURE. NUTRITION. AND FORESTRY  t!Itt$  ../31 SEP i319311F)14.115, rl.!1  FOREIGN RELATIONS  Zfalez Zenctle r4/0SHINGTON, D.C. 20510  RECrn c  0'"FiCE_ Ors ri-Arel.C,E,QF THE CfitIRMAN '  SMALL BUSINESS  4-7g(  September 9, 1981  Mr. Paul Volcker Chairman, Federal Reserve System 20 21st Street Washington, D.C. 20551 Dear Mr. Volcker: I am herewith enclosing a resume from one of my constitu— ents, whom I have already notified of this action.  I would  appreciate your reviewing the resume and contacting the applicant as to whether you feel their qualifications would be beneficial to the new Administration. Realizing how busy you are at this time, I am most grateful for your attention to this matter. Sincerely,  4.067444-4"4"... ft0A. , C ci n S. I. Hayakawa SIH:pws Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • • •  •  ft.CALIFORNIA CREDITi M,sTIQN lir LEAGUE " August 25, 1981  Honorable S. I. Hayakawa 6217 Durkson Senate Office Building Washington, D.C. 20510 •  Dear Senator:  While we have contacted your office verbally, w2 feel it advisable to follow up with this letter regarding appointments to the Federal Reserve Board's Consumer Advisory Council. ;it- • i • "7 '  We wish to make our support known for the nomination of Arthur L. Summers, Manager, Marine Air Federal Credit Union, Santa Ana, California. Mr. Summers has extensive experience in the credit union movement and has been very involved in the area of consumer financial services. We feel Mr. Summers' experience and interest in this area would make him an excellent candidate for the Consumer Advisory Council. Senator, we have appreciated very much your support of credit union issues and, hopefully you will again be able to help on this important nomination. Special thanks. Sincerely/ I I  W. F. Broxterman President California Credit Union League  !'  X  . r   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2322 SOUTH GAREY AVENUE / POMONA, CA 91766 / (714) 628-6044  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Dear Senator HayaRawa,  411  Consumer Advisory Council Confirmation of Nomination Attaced is a copy of correspondence nominating me for me77.1)ership on the Consu7er Advisory Council of the Federal Reserve Systc:m. Being one of vour loyal constituents, I my nc,mination to the Council hope you will ai;r:?c. rt towards its acceptance. and lond it your ,c- tive s,Apo bAs you are aware, tl:c Cons -J:7er Adviscry Counc-il was esta lished in 1976 to i,:vdse the Board cf Governors -on the ection exercise of its dutics under the Co-ls -er Credit Prot me7±,ership Act and on other .--L-. 1 tc-d Tatters. T.::o Council's poscibl, t.) represent all is intc-nk:ed, to servoes interests in the area of consumer regulations. cash marr for the Fluor CorporIn mv position as :-‘f the monitert.! . aticn, I find that a menber Board and Council f:r scveral yeal warrantec: 'r the following reasons: with 7:.- v o  o  •  represents academic 7,e7lbers are not of en]v whether the needed and it is a c -t 1 ;0 .- 1 -t- -3it:- in its rcic: -.:ndations can exis sc.opL curront g:ven tho  A Or 1:',2.%.—  - AF alssence - al cc:7 - rte representation There is a:1 .: 1- X. the Jevelopr.ent on tl- e Ccu -- ,_13. Yet a r.jor pus :,i.'1.1iCeS has oftc_ coTe fion the corporate of new -se- to and in anti,..tion cf eDployee sector in in :I]e identification ti -7e has 1,cen eA Lee's. of e7.11-.3,7- yie services e77.entati i .Tipl c'e,zit" anaivsi .LntS. for brIil Iho 1- ankin.,-z and cerorate e to be toward The trend I:, financial services will contiion the autcr.,ated stfrvices. The need for individuals is obvious. Council well Nersed in both finance and systems cperitng background and conceTtual experI have both ience in tl,csc &IEAS.  illy 21, 1981 Page 2  Senator S.I. Hayata •  Council for someone In sunmary, there is a need on the conceptual and Olo can address issues from both a versed in consumer needs experiential viewpoint. Who is ve and can view issues from a non-instituticnal perspecti consumer, financial and the representing t:-,e inteests of concur with my nomination corporate sectors. I h:";)e you have a sincere desire and give it %- olJr full s.,ITTort as I tuents in a constructive to serve you an3 cur fellow consti and beneficial 7.anner. or has ucently written Flu . 3.R t tha e not to d ase You may be ple iciting additional support Representative R.E. Badham sol for my nomination.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Respectfu:: /f. /r;.(,-/  \lichael E. 14622 Oval Irvine, Cll.  UTS, •-  _-14  umlIMMI=Elk  CAPON IA CANADIAN BANK •  J. OU!NN •  ?X SO.:11w F,  P 5- FEE'.•1 CS  1.%•:3E:ES CA. 1%C.:PN.A XV7  June 26, 1961  P es nent  Board of Gicr1/4 ern ,-..,rs of the Federal Rescrve Sstem Washington, D.C. 20551  ar  dam  At-tention: Dolores S. Smith, Assistant Dire-0°r Divfsiun of Consumer and Communit% Affairs •••••  Consumer .Advisory Cou-bcil Tcomiration for :Nlembers!-,ip Mic!-ael E. T:~-,ornas  4 -  •••• • .  z  a-.  As a merr.l.per of the consumer finance corrr'unity for oxer t‘kenf years , 7•.:inate :Michael E. Thomas for men-,btrs)-lip on the Consumer Advisory Cc-,'..:7( has expt.rience and knowledge 4:,•- of. wql rarv view of c-,)- r.s.,r-;er and other ff7:-_:.; ., 1,i ir:c arca of electronic banking. .tis kr_,c%).-ri for his. desig 7. at:tc.,r-..afed teller serNices, etc., _ • serxices and cash imarq::-- -niti-nt.  ft:, the Cry,:ncil a V•ilh 1_,arficular :7E.-r for ti-,e 11._ • a -f.'if!ec in the 1: F to Flur_ir one c:T  plo-zased  •• •  \v'tile representing over 25,000 Fluor emplcyees natit,nwide, he ha.s1..k-c....me with tbe ban_king services neec.',s cif the C r and is. al-Att 4 C 4 1;( se fr(AY. corpo king -;2-1and rate v.ill bring to the 'he to see sc%eral sides of an issue, 1.,as,.- .d on hfs of practical derree in finance and business eccr,•?- iL s and as a ;ecturer on 'cs at in 4I,A arca, 1\lichael ic able to view iss..;(,- v.ithin a th.,refical  11:!d ex-/ensie e.xperience F s servic.i.s partment, where he ‘‘as IL this cariacity, he has learned the data ;,rocessing and has been alle to relate its  n.s develc; , ,:.--.,Pnt as a r.,-,er.-.1.,er for project s.ystelr:s ir, a•;:d c:.:-..straints of fo the putlic and pri‘fe. enriron-  In surnn,- a-Lry, I Leartily recommend !4ichael fur a :)osifion on the Consu mer Aevie•Dry Co:..1ncil. He offers a unique combination of expc•rtence, knov ledge d inferest in the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  September 15, 1981  The Honorable Ed Bethune House of Representatives 20515 Washington, D.C. Dear Mr. Bethune: Thank you for your letter of September 11 recommending Mr. John M. Sheffey to serve on the Board's Consumer Advisory Council. I can assure you that Mr. Sheffey's qualifications will ts receive full consideration when the Board makes the appointmen terms to the Council to fill the positions of individuals whose expire in December 1981. I appreciate your taking the time to bring him to our attention. Sincerely,  CO:pjt (#V-254) bcc: Mrs. Bray (w/copy of incoming) Mrs. Mallardi (2)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  ED BETHUNE  COMMITTEES:  2ND DISTRICT, ARKANSAS  BUDGET BANKING, FINANCE AND URBAN AFFAIRS  Congre55 of tbe Elniteb -Dtatos WASHINGTON OFFICE: 1535 LONGWORTH HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 (202) 225-2506  jOotifSe of iktpre5entatibeS Watbington, ri.C. 20515  DISTRICT OFFICE: 1527 FEDERAL BUILDING 700 WEST CAPITOL LITTLE ROCK, ARKANSAS 72201 (501) 378-5941  ./t **,"  September 11, 1981  -n  Honorable Paul A. Volcker Chairman Board of Directors Federal Reserve System Washington, D.C. 20551  CD .r71  1.1=1 C23  Fr, —0  1> .713  7:S  CD ••  EB/pc  . r   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ,  "" t  Your efforts to ensure that Mr. Sheffey's file is opened and that my interest in his behalf is made known to the appropriate officials would be greatly appreciated.  Member of Congress  •••  I ') • '  Mr. John M. Sheffey, of Little Rock, Arkansas, has expressed an interest in serving on the Consumer Advisory Council of the Federal Reserve Board.  Thank you for your cooperation in these affairs.  •  -71  CA) C.40  Dear Mr. Chairman:  CC; C...•  f"! 71  rr: -g""  e,r7;1'  , r•i r-,  Lr) --;  .=3  .-r,  •  •  • September 14, 1981  The honorable Robert W. Kastenmeier Rouse of hepresentatives Washington, D. C. 20515 Dear nr. .Lastenmeier: I am writing to provide further information regarding your AuL'ust 18 letter which included correspondence you had received from your constituent, Dr. Frank F. Gollin. Dr. Gollin was offended by an address form that was mailed to him with Tre:isury Lill tender from the Federal Veserve Lank of Chicago. Upon contactin8 management at the Federal Reserve Ban:.. of Chicago, we. were told that the form in question is used by Bank staff to inscribe the name and address of individuals requu.stin6 tenders, and then inserted into a window envelope with the tender. :lanagement at the Bank was upset with the scril)blir., 1 on Dr. Gollin's address form and reprimanded the employee L..o had 2repared the form. The elf,ployee, as as Bank mana6ement, extend their sincere apologies to Dr. Collin. Sincerely,  Donald J. Vinn Assistant to the Board  CLL:FMY:CO:vcd UV -233)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Ns. Egan  Young Nrs. nallardi  vi.  E'.:2.3 KASTENMEICR  Actioessigned Mr. Allison  STE.IC* VViSCONSiN  2232 riouf:t Orr Inv EIIIIL.DING PHONE. Awro Corr rd. 2Z.5-2906  11',MI OF I' Ir..E SIJITr r ‘5 kir.t,0•••A AVENUE WICCCNSIN PEIVUE  AP,A  •  Congt555 of the Unita Rpotato  •  JUDICIARY CHAIRMAN. SUBCOMm,T-rrE ON COURTS CIVIL LIBEriTit S AND THE ADMINISTRATioN Of JUSTICE SUBCOMMITTI E ON CIVIL AND CONSTITUTIONAL. RIGHTS  A')oti5e of ikepre5entatiM  SUBCONIMITTEE ON CrnmE  bliatffinton, D.C. 20515  COMMITTEE ON INTERIOR AND INSULAR AFFAIRS  517071  6r;F3,  E016.4•Atrrrr ON  SUBCOMMITTEE ON PUBLIC LANDS AND NATIONAL rAnKs  August 18, 1981  )k  Mr. Paul A. Volcker Chairman Federal Reserve Board Washington, D.C. 20551  (7;77 ; aka • C=  p-  •I  ar '40  •,  Dear Mr. Volcker:  32:2 -  ,L) Enclosed is some correspondence I recently recei ved from one of my constitugpts, Dr. Frank F. Gollin, which I think you will find to be self-explanatory. cq Any comments you might have on the issue he raise s about forms currently in use by the Board would be greatly appreciated. Thank you for your assistance in this matter, and I look forward to hearing from you. With kind regards,  Sincerely,  RWK:ml Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  //. Crd OBERT-;-W. KA4 ember of Congfess  A   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Fiffri.. I 4  "1 i,,  F. GALIN, M.D.  e  A  C,C •  k 4.  <  .s  Fit c; 11  Q  u.s 111/ 4CSCl/r8 -1--&--1, 1)- C-,  1-4- el v. C-c-v‘c  fir\  AsIs„t,/j 0,_;,L ) J-Y„  A -LC  r_C,4.2.,-r,  612 ÷0.-„_(  p,-,t;i1J1  t j,,  ,,,L  1r  r  ,7  J-  ett-  C7N,  0-‘4.11.  11-  -0 4  c(?_Itpki)  r r d a   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  P T,FA SE PR I NT :1Ati,E A ':.7) A • )1)1i 7.3S TiF,E.01,1  HEc K C  •  Doc,  E (;01_ L t/ [---) nvcKE-r-  suc  C I/  • .• • of GOvk ••  o  -4) •  4 2_ /  BOARD OF GOVERNORS  .co  OFTHE  FEDERAL RESERVE SYSTEM  •0 • -n •  WASHINGTON, D. C. 20SSI ••  •  <v:  IYALRES  PAUL A. VOLCKER CHAIRMAN  September 10, 1981  The Honorable William V. Roth, Jr. Chairman Committee on Governmental Affairs United States Senate Washington, D. C. 20510 Dear Chairman Roth: I am pleased to submit views regarding the executive oversight provisions in S. 1080, the "Regulatory Reform Act," as you requested in your letter dated July 30, 1981. The executive oversight provisions of S. 1080 (new section 624 of Title 5 of the United States Code) would authorize the President, or an officer to whom he delegated this authority, to monitor, review, and ensure agency implementation of the "major rule" procedural requirements of S. 1080 (new sections 621 and 622 of Title 5) and to report annually to Congress on agencies' compliance with these requirements. The President's exercise or nonexercise of this oversight authority would not be judicially reviewable. "Major rule" is defined in S. 1080 as a rule that causes or is likely to cause "an annual effect on the economy of $100 million or more in direct or indirect enforcement and compliance costs"; or likely to result in a substantial increase in costs or prices or cause "significant adverse effects on competition, employment, investment, productivity, innovation, the environment, public health or safety, or the ability of enterprises where principal places of business are in the United States to compete in domestic or export markets," or "other effects that warrant subjecting the rule to a regulatory analysis. . . ."   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ,  • The Honorable William V. Roth, Jr.  • -2-  The "regulatory analysis" that would be required for all major rules must contain a complex, detailed description and comparison of the benefits and costs of the rule, and of reasonable alternatives to the rule, based upon a detailed record. In addition, except where a statute directs otherwise, the analysis must also explain why the benefits of the rule justify its costs, and why the rule is more costeffective than the alternatives in achieving the objectives of the rule. Since the executive oversight provisions would apply to implementation of the "major rule" concept, I believe it would be appropriate to review the necessity for adopting this proposal. As I understand it, when the major rule concept applied, it would require the addition to the regulatory process of a series of detailed and complex cost benefit analyses. I am concerned that these new requirements will result in a substantial increase in paperwork, additional costly informational burdens on both the agency involved and the public, judicial challenges, and, most important, lengthy delays in administrative action. It is my judgment that the objectives of regulatory simplification and avoidance of unnecessary regulation would not be accomplished by an additional layer of administrative requirements. Executive oversight as applied to this "major rule" concept would add still another unnecessary complexity. However, there is an additional reason to be concerned about the provisions for executive oversight in the rulemaking process, particularly with respect to the operations of the Federal Reserve System. As I know you are aware, the Congress created the Federal Reserve System in 1913 as an independent entity in order to emphasize the insulation of the credit regulation process from the function of financing the government. Long experience demonstrates that the separation of these two functions can make a vital contribution to a more stable and effective domestic monetary system. Therefore, I would be particularly concerned about executive oversight as applied to the functions of the Federal Reserve System. This is not only true because of the broad policy considerations I have just outlined, but also because of the fact that this would run directly counter to one of the major objectives that Congress sought to achieve in creating specialized agencies. The significant mandate that the President would receive under the executive oversight concept   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • The Honorable William V. Roth, Jr.  • -3-  to interfere in the regulatory process could significantly defeat the purpose of assuring regulation based on expert judgment on the merits of both general policy and particular cases. This is not to say, of course, that the regulatory process should not be subject to Congressional scrutiny and to the requirement of the adoption of every step feasible to lighten and simplify the existing regulatory burden as well as the avoidance of unnecessary regulation in the future. These objectives, I wish to reemphasize, can be achieved most efficiently by analysis of individual agency functions rather than through the adoption of new, across-the-board requirements that rigidify and expand regulatory burdens as well as impair basic Congressional policies calling for regulatory independence and expertise through the multiplication of decision-making layers. I appreciate having had this opportunity to offer these comments on S. 1080.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely,  •  ILLIAM  • 't  V. ROTH, JR.,  H  $'• CT!  r*FRCY. II L . A ••-  1••1:111.4 M, • .01,N c Alt 1 .•1411 r••ic  MATH1•5, JR. MD. mr+  •• • (4.(P.4  MAIN/ R. MINN.  L.A$.41(ON C1fIL SAM  ICAIN GL CNN JIM  cLA.  NUNN, GA e.ASCf F/  ONIO 1 If NN.  CARL L(VIN. MICH.  WARREjpINNROCIM A N.  •  CHAIRMAN  THOMAS F. A".I f TON. 1.4rhipy FA, JP." K • ON. WASH.  ['AVID PRYOR, ARK.  MACK MA TT,NGLT. GA.  JOAN M  pet ,  9juilei  falc,:. Zenate  MC TNTEF, STAFF DIRCCTOR  COM M I TTEE ON GOVERNMENTAL AFFAIRS WASHINGTON. D.C.  20510  July 30, 1981  (-0 C:^1  :'11 • •••  2=I fir  C)  •.r)  • :• n • .- '23 -; • --:  The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System 20th & Constitution, N.W. Washington, D.C. 20551  '  r91 V  Dear Mr. Volcker: Immediately after the Senate reconvenes from its August recess, this Committee will take up consideration of S. 1080, the Regulatory Reform Act. In this regard, the Committee would like to have the views of the Board of Governors of the Federal Reserve System on the provisions of the bill relating to Executive Branch oversight. Specifically, as reported from the Judiciary Committee, Section 624 of S. 1080 provides that the President shall have "authority to establish procedures for agency compliance" with the bill's new requirements for major rulemakings, including the preparation of regulatory analyses. This authority could permit the President to implement oversight provisions similar to those found in section 3 of Executive Order 12299. As reported by the Judiciary Committee, such executive oversight arrangements would apply equally to executive branch agencies and the independent regulatory commissions. The Committee will be considering the inclusion of executive oversight provisions in S. 1080 at the Committee's markup in early September. For this reason, it is essential that we have the views of the System on this important issue no later than September 4, 1981. Sincerely,  William V. Roth, Chairman WVR/jlm   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  r.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  111A-4.  iliput,4k,  a3a) BOARD OF GOVERNORS OF THE  •co  FEDERAL RESERVE SYSTEM  • -n P--j •  • -A  WASHINGTON, O. C. 20551  -1' 44 •  .RAL RES°' :•• • •..• •'  September 4, 1981  The Honorable Leon E. Panetta House of Representatives Washington, D.C. 20515 Dear Mr. Panetta: Thank you for your letter of August 10, inquiring about a banking practice described by your constituent, Mr. Donald L. Thomas. The accounting procedure described by Mr. Thomas varies among banks and is an unregulated competitive banking practice. Based on the description provided by Mr. Thomas, it appears that his bank, Wells Fargo, performs the accounting function of charging and crediting customer accounts at the end of each day rather than immediately as deposits or withdrawals are made. Other banks and financial institutions may have "online" computer systems which can accommodate immediate accounting. Such systems would be quite expensive, however, and each institution would carefully weigh the value of this type of service in the context of its overall marketing program before instituting it. While Mr. Thomas is not specific as to whether he deposited a check or cash, it would certainly be reasonable to allow some time--at least a day--for a check to be collected. When a check drawn on one bank is deposited in another bank, the check must be physically transported to the bank on which it is drawn before the bank in which it is deposited can obtain funds. If a bank releases funds before it receives funds it is essentially making an interest free loan, secured only by the check which may ultimately be returned. Normally account terms and conditions, including all relevant charges and banking practices affecting the customer's use of a bank account, would be expected to be communicated to the customer at the time the account is opened. It is  ab   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  The honorable Leon E. Panetta Page Two unfortunate that advance knowledge of the posting proc edure we,s apparently not provided to Mr. Thomns in this inst ance. If it had been, he could have adapted his company' s payroll transaction in light of the bank's practice or, in the alternative, he could have shopped at other banks for acco unt terms that were more to his liking. I hope the foregoing information is helpful to you. Please let me know if I can be of further assi stance. Sincerely, (Signed) Donald J. Winn Donald J. Winn Assistant to the Board LCM:TEA:AFC:sep Of V-232) bcc: Mr. Allison Mr. Meeder (2) Mrs. Mallardi  LEON E. PANETTA  Action assigned Mr. Allison  •  16TH DISTR.CT, CALIFORNIA  WASHINGTON orr'cr. 431 CANNON Housc OFFICE BUILDING WASHINGTON, D.0  BUDGET CHAIRMAN TASK F: 111 .t"rv oN REcoNcILIATION AND BUDtiET EAVoRCEMENT BUDGET COMMITTEE  Congre5 of tiie Einiteb f:potatc5  DISTRICT OFFICES, 380 ALVARADO STREET MONTEREY, CALIFORNIA  31)otte of ileprecSentatibeZ  (Ott k  HOLLISTER, CALIFORNIA  Musbinclton, :1).C. 20515  (408) 637-0500 SALINAS, CALIFORNIA  •  • •  MAJORITY REGIONAL WHIP   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  93940  (408) 649-3555  AGRICULTURE HOUSE "11 111%4!NI ST RATION  20515  (202.) 225-2861  COMm ITTE ES s  (408) 424-2229 SAN LUIS OBISPO, CALIFORNIA  August 10, 1981 le ;  (8o5) SA3-0154 SANTA CRUZ, CA LIFORN (408) 429-1978  Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Federal Reserve Building Constitution Avenue and 20th Street, N.W. Washington, D.C. 20551  CD Cz5 rr?  -n • rri 140 v3  Dear Mr •-•1  Enclose is a copy of a letter I recently received froM a constituent. In it, the constituent expresses concern' about the practices of banks (and other financial institutions) which permit the bank to make use of a depositor's assets before the depositor receives credit for a transaction. I realize that these are not illegal actions, but I would appreciate your letting me know the rationale for permitting such procedures. I look forward to hearing from you. Thank you for your attention to this matter.  Since PANETTA ,Meinber of Congress  LEP:btd Enclosure  2:31   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  7 (  •  nett ,  n n  Dear Con6rer;cmLin PrincIttn: our sm7.11 busine es being It's a sad st -Jte of ,Iff.,irs when I continu:tlly over-liowered by the hicrarchic%1 Lure ucracy of lar6e 11 busineJsman corlIorrItions, or in est3•.nce, Lig bucines::;. kr:: inorfotive ,Ach Niy...]1, 1 1 ,uc,m,.Lins" in sml] cmpany becomes as he tries tt) tzAce on the F•Ir6o 17.:Int'. made the Ruce:Aly, an incident with inecpity seem intolerable. To bc more L.;ecific, I recently mNde a lflri;0 b:Ink deposit in the Fnrgo ;- ank in Capitol -1, only to discover our locrtl morninf; ;Ales° s!T:.e funds v:ere not available to mu fur u:,e until the folloAn u to my chn,Tin, T found all other banks on this busine:J: dny. dul..yed poztin i. system, it seemed to me there was certainly SOMQt.in6 vironc ;‘ii.th a sy. te:., that su favored the larce corporAtion; F.:rtr,o obviously mkes lovls nnd investments against sine , , my fund:; when they are deposited, while my own options are frozen until th,. ni.xt 1)usiness d y. The liAri:e corporation with techilology ,t its :isposD1, then proceeds to hide behind a cloak of red ta.pe and co::;.uter errors, while my busine.;; continu , :; tu functic,n on a 'iccordinr, to the ncwis of !r,y m.r;tomors anci my dly tu ability to Provi3e jouds and serviceL;. needed to cover tht funds in (post:ion, .:. ere 1,,' to :.orsen Yy emnloyee wunt'Lo the bnk to cash his check 'only my 11:;0 the mornin t;'s dei:osit would not n v(: it di:;nonored l'ortunr_ltely, my e:Lployee came to :1:(!.,r until the folJuv.in6 1;e; Lut hai he _one to Lhc Labor (;o1Lis:_jon, I woul'I hate to thin of the consequences!  con Lir :-d.  • r , T • • s_;r()• • ' •• n 1_ t, 2 t • • ,• r:  •  ,  . • •  1.,( .-  • 3. .  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' P • ••4.1'$•• 1.. e i",,,  f  • P.. 440,-411,', ,.. ..di"..}... ;  8-,-'"'•'" c••••• ••• It i:•.-  '..4"•C7i•-"%;  4 A.,,,,A, • :It; • ... 4 , . "1.- ••• •  .. 1:: •. ..,,  s',. ,44 -., • ,. , r Vr' tit,.  . -jx•-•,.. „r..• ,•••$••••,‘ i-t•ar It.4Vto, ( ,, -40,?;, 7-1,...,, ,,. • :.: . .i4.4.,, -•:Ala\ . ..t ....,,„' t. r 4, it"  ;.'"11,'.j, v,.•  waft   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  September 3, 1981  The Honorable Doug Barnard, Jr. Houuc of Representativeu Washington, D.C. 20515 Dear Mr. Barnard: During tho hearing on Juno 25 you askod for my comments on H.1Z. 4040.  I am pleased to  enclose a copy of tho information I provided for the record of the hearing. Sincorely,  Sgaul  Vpicket  Enclosure bcc: Carl MintZ (House Banking Subcom. on Domestic Monetary Policy) CO:pjt bcc: Don Kohn  ov.4.0,04-4LL  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  insert page 63 Mr-Ming before Su;' (nrnittee on Dangaic Monetary Policy, liodillnanking held 1 June 25, 1981711, Chairrian Volcker subsoil! ‘ntly furnished the folloaing information:  '40'40 calls for far-reaching changes in the laws governing the separation of investment and commercial banking.  As I mentioned above, the  Board has in the past supported bank underwriting of municipal revenue bonds, but it has not considered the role of banks in the market for corporate bonds and it has been a number of years since it addr essed the issues surrounding full bank participation in the business of offe ring and distributing shares of investment companies.  In light of the magnitude and importance of the  changes-implied by your proposals, I would like to withhold final judgement on them pending a fresh look at these issues in the context of the evolution of the financial system and its regulation since the early 1930s.  The Board's  staff is preparing background material for such an evaluation, which I expcct to occur some time this fall. Whatever views might be developed about the prop er division of commercial and investment banking over the long run, I would like you to know that I have serious reservations about the wisdom of allowing banks and other depository institutions Lo offer money market mutual funds at this time. The convenience of purchasing these very liquid instrume nts at local offices of depository institutions, as well as Lhe aura of safe ty and soundness that they would acquire by being associated with such an inst itution, could make them very attractive lo people currently holding savings and smaller denomination time deposits.  Outflows from these deposits would have to be met either  by acquisition. of higher-cost funds through markei-r elated instruments or by reductions in earning assets.  Further, because of InvesLment Company Act  restrictions on self-dealing, the investment company's assets could not be reinvested in the CDs of the bank or S&L advi ser without an exempting order  •  •  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  from the SEC. a  •  Thus, purchases of shares in a money mark et fund sponsored by -  or S:.1. would not necessarily keep these funds from being invested out-  side the service area of the sponsoring inst itution.  Depository institutions  would benefit from offering fund shares by maintaining a financial relationship with customers who might otherwise have moved their savings to an existing money market fund, and they would gain a small amount of income from servicing and advising the funds.  However, smaller banks and thrifts could find  that. offering such funds, or having them offe red by other depository institutions, would significantly erode deposits and reduce earnings at a time when the profitability of these institutions is already under considerable pressure. A more direct way of approaching the prob lem would be to permit banks and thrifts a deposit instrument that would compete more directly with money market funds, a matter within the prov ince of the DIDC, upon which I serve.  In considering that possibility, we have needed to take account of  the strong concerns of depository institut ions about maintaining current, relatively low cost, sources of funds.  To put the point directly, the heavy  pressures on earnings of many depository inst itutions limit flexibility in taking steps that otherwise, and at the appr opriate time, would appear desirable.  •  • September 3, 1981  The Honorable Jake Garn Chairman Corrunittee on Banking, Housing and Urban Affairs United States Senate Washington, D:C. 20510 Dear Chairman Garn: I am transmitting the enclosed Board staff report on the impact of high interest rates on the houaing, automobile, agriculture, and small business sectors. You will recall such a study was requested by Senator Riegle during my testimony before the Banking Committee on July 22. As waa agreed, the study brings together data and other sources of information that could be made available in a short period of time and does not reflect original research specifically undertaken for this purpose. Sincerely, Wool A. Volcker  Enclosure cc:  The Honorable Donald W. Riegle, Jr.  JLK:PAV:pjt bcc: Mr. Kichline Mrs. Mallardi (2)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  it • i  i  A •  %  •  • September 1, 1981  THE IMPACT OF HIGH INTEREST RATES ON THE HOUSING, AUTOMOBILE, AGRICULTURE, AND SMALL BUSINESS SECTORS  1  A Study by the Staff of the Board of Governors of the Federal Reserve System  i   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  P .   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  CONTENTS  Page  I. II. III. IV. V. VI.  Background  1  Summary and Conclusions  2  Housing Sector  6  Automobile Sector  17  Farm Sector  28  Small Business Sector  39   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  THE IMPACT OF HIGH INTEREST RATES ON THE HOUSING, AUTOMOBILE, AGRICULTURE, AND SMALL BUSINESS SECTORS  I.  Background In response to a Congressional request, the Board staff prepared  the following study on the impact of high interest rates on four sectors of the economy: housing, automobile, agriculture, and small business.  Given  the time constraints, the study was prepared with information from already available sources. There are distinct limitations in the precision with which the impacts of high interest rates on the named sectors can be pinned down quantitatively.  These limitations are the result partly of the normal diffi-  culties in sorting out causal influences in a complex economy; they also are related to the paucity of hard data pertaining to some areas of activity, especially small businesses.  Moreover, there is the more fundamental question  of distinguishing in the performance of these sectors between the direct effects of high borrowing costs and the effects of the general sluggishness of growth in real income and output over the past two years--a development that can be related to a complex of factors, including the interaction of strong inflationary pressures and monetary restraint.  Within the practical constraints  imposed by these problems, an effort has been made to assess the dimensions of the difficulties encountered by the four selected sectors and the role of high interest rates in those developments.  :  •  • -2-  II.  Summary and Conclusions (1) It is clear that homebuilding, auto, and agricultural indus-  tries have fared poorly during the past year or two.  The pace of housing  starts has fallen by more than half from the cyclical peak rate of 1979; domestic auto sales have declined a third from the 1979 pace; and net farm sector income has fallen 40 percent, in real terms, since 1979.  It is less  clear that the performance of small businesses as a group has been disproportionately bad during this period when the economy as a whole has recorded rather small gains in real output on balance; there are no aggregate data upon which to base a firm judgment.  However, the small business sector  cuts across industrial categories; in some lines of business small enterprises likely have prospered (for example, in growth industries such as energy and advanced technology), while in others (including the three already mentioned) they have encountered great difficulty. (2) The restraint on credit markets is reflected mainly in the level of interest costs rather than in the availability of credit.  For ex-  ample, in both the farm and small business sectors concern generally is expressed over the cost of credit but not over its availability.  This is in  distinct contrast to earlier episodes of monetary restraint when widespread problems of credit availability were encountered by sound enterprises. (3) Interest rates have contributed more substantially to the falloff in activity in some sectors than in others.  The change in credit con-  ditions certainly has taken a major toll in the homebuilding industry.  The  demand for goods that are, in essence, investments yielding a flow of services or income over a period of years will tend to be comparatively sensitive to movements in interest rates; to the extent that they represent large outlays,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -3-  which typically require credit financing, or are deferable, that sensitivity will be further enhanced. (4) As interest costs have climbed to record levels, a number of innovations or market developments have evolved to ease the burdens of potential borrowers.  For example, in the housing market means have developed to  provide "below market rate" loans--such as through state and local government mortgage revenue bonds--or a variety of creative techniques have been employed to minimize the mortgage payment burden, especially in the early years of the mortgage contract.  In the business sector, evidence indicates that rates on  small loans at banks have risen less in recent years than rates on large loans. (5) Inflation itself has taken an appreciable toll on activity. The current slump in homebuilding reflects in part an inevitable unwinding of some of the inflationary excesses of recent years, which saw house prices spiral upward to the point that many potential homebuyers would have been forced out of the market even if interest rates had not risen so much.  Higher prices  also have been a significant factor depressing demand for automobiles; higher car prices account for nearly 5 times as much as higher interest rates in the rise of average monthly payments for a typical new car loan since late 1979. (6) In the farm sector, factors other than interest rates dominate the forces generating reductions in farm income.  The slump in farm income  since 1979 is attributable more to persistent drought conditions in some regions, and to the changing tastes of consumers and their resistance to rising meat prices in a period of constrained real income growth.  High interest rates,  however, have created stresses for some farm businesses, especially those that have invested substantially in land and machinery in recent years--leveraging themselves heavily with short-term debt.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • -4-  (7) In the small business sector, rising interest rates likely have been a more serious problem than for large-sized firms because smaller firms on average are characterized by higher debt-to-equity ratios and heavier reliance on shorter-term or variable-rate loans.  Business failure rates are  up substantially, but this may reflect general product demand conditions rather than interest rate-related cash flow problems per se.  Moreover,  rising bankruptcy figures may exaggerate the deterioration in the fortunes of small businesses, because a liberalization of federal statutes has made it more attractive to seek the legal shelter of bankruptcy status. (8) On the whole, high interest rates are imposing considerable restraint on the economy, with some sectors inevitably experiencing greater stress than others owing to the nature of the goods or services they produce and their particular financial characteristics.  However, the difficulties of  the sectors examined reflect as well a variety of factors apart from high interest rates; the distortions and imbalances created by the escalation of inflation and inflationary expectations are important among these.  High  interest rates do apply pressures inducing greater cost and wage efficiencies, assisting in the process of achieving a noninflationary environment.  It is  clear that this process is uncomfortable, but a failure to address the problem of inflation would, over the long haul, impose far greater costs on the economy than do the current high interest rates. (9) Recognition of the unevenness of the impact of monetary restraint does raise the issue of whether excessive reliance is being placed on monetary policy in fighting inflation.  While a moderation of the growth  trend of money is an essential ingredient in an anti-inflation strategy, the pressures on the private business sector arising from interest rates could   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  s  .  . .  •  • -5-  be alleviated by reduced federal government demands on the credit markets. This underscores the importance of further progress in the effort to move the federal budget toward balance.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  •  -6III.  The Housing Sector  Housing activity typically has fluctuated more widely than the economy in general.  This instability primarily can be attributed to the  fact that housing transactions involve the sale of a long-lived asset and typically are dependent on outside financing.  These characteristics--  along with the fact that a home purchase often can be temporarily delayed-make the effective demand for housing highly sensitive to the cost and the availability of credit.  Owing to fluctuations in effective demand for  shelter, the housing industry has been characterized by large swings in output and employment as well as by the entrance and exit of many small, weakly capitalized firms from the market as economic conditions dictate. The Current Downturn Housing production and sales have been greatly reduced in recent years, reversing a strong rebound in the mid-1970s.  Total private housing  starts declined from over 2 million units in 1978, to 1.8 million units in 1979, and to less than 1.3 million units last year.  In the past two months,  starts have fallen to about 1 million units, at an annual rate.  Home sales  also have declined sharply; in June 1981 sales of existing homes were down almost a third from the record pace registered in 1978.  Likewise, June  sales of new homes were at their second lowest monthly level since 1970. Thus far, the current housing downturn has about equaled the  _  length of the slowdown that started late in 1972 and continued through early 1975.  During that period private housing starts fell to around a million  unit annual rate and hovered at that level for three consecutive quarters--a severity that has yet to be sustained in the current slump.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -7-  The diminution of activity has been accompanied by an appreciable slowing in the rate of increase of home prices.  During 1978, the average  price of an existing home sold rose 19 percent, and the average price of a new home (adjusted for quality changes) was up almost 14 percent.  These  unsustainable rates of inflation have come down sharply as market activity has softened (chart on page 8).  During the year ending in the second quarter  of 1981, the average price of existing homes sold rose 9-1/2 percent while the new home price series, after quality adjustments, was up 8-1/2 percent.1 Elements Contributing to the Current Housing Downswing Perhaps the single most important cause of the currently depressed state of the housing market is the increased cost of acquiring housing services. While this is true throughout the industry, it is most evident in the singlefamily sector.  The average monthly payment for principal and interest on  newly purchased homes has increased dramatically in recent years.  For instance,  the carrying cost on an average new home actually financed in July 1981 was 175 percent above the level only five years earlier.  As shown in the chart  on page 9, the increased financial burden of a home purchase has far outstripped growth in average disposable income. Skyrocketing monthly payments have reflected two factors: increased mortgage interest rates and elevated home prices.  The relative contributions  of these factors are illustrated in the table on page 11, in which both historical data and some hypothetical comparisons are presented.  As a frame of  reference, average monthly payments on a typical new home purchase rose almost  1. Recorded price increases, in fact, understate the true deceleration in home prices. The widespread use of below market "creative financing" for both new and existing home sales means that net proceeds from a sale are less than the selling price would indicate.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I  RECENT CHANGES IN AVERAGE HOME PRICES Percent change from year earlier ---' 22  1.11•1=•••••••••  111•••  . / / / / 0MP  0•••••=11   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  OM  Ifte  41% *eft lik*.  •%, 4441,  .......  18  •  \  /  \  /  \  /  /  \  /  \  /  \  aft  e ‘  \  1  /  e , % /  I x / • % Il \ i • I  0•40  e„..  ... \ Average sales price % of existing 1 homes sold %  14  j0  1  •••••••••  %  %  •  •  New homes (quality adjusted index)  — 10 • ,111%  OMIIMIIIII4  1978  1 1979  t  1 1980  t  I 1981  i  6  •  • -9  TYPICAL MONTHLY PAYMENTS FOR NEW HOMES AS COMPARED TO AVERAGE DISPOSABLE INCOME PER HOUSEHOLD (Percent change from a year earlier)  Percent  VIE•••••   https://fraser.stlouisfed.org • Federal Reserve Bank of St. Louis  Average Monthly Payments for Principal and Interest  35  Disposable Income Per Household 30  25  20  15  10  5  1978  1979  1980  1981  .Source: Monthly payments for conventional mortgages from the Federal Home Loan Bank Board. The 1981 numbers are for the second quarter.  •  • -10-  four-fold during the decade of the 1970s from $220 to the current level of just over $850.1  Higher interest rates have contributed to the increase  in carrying costs, but, if home prices had remained at 1970 levels, the sharp increase in mortgage interest rates during the ensuing decade would have raised average monthly payments only to about $340.  Instead, prices of  homes purchased have escalated much more rapidly than inflation in general during recent years, with the national average price of a new home sold currently approaching $90,000.  This compares with an average price of $35,000  in 1970 and of $65,000 as recently as three years ago.  When home prices in-  crease, downpayments rise and the larger loan amounts result in larger monthly payments.  Even if mortgage interest rates had not risen at all since 1970,  at current home prices an average monthly payment would be almost $570.2 Of course, the effect of high mortgage interest rates are not necessarily permanent burdens for homeowners.  Since households are generally  quite mobile, most mortgages are not held for the full term of 25 or 30 years. Even if a family were to remain in the same house, a very high rate mortgage could be refinanced--albeit at some cost--when interest rates fell.  In  addition, homebuyers have not had to absorb the full force of the increase in monthly payments.  Most new homebuyers deduct the interest portion of their  mortgage payments in computing income subject to federal income taxes.  1. The average interest rate on conventional loans actually closed in July was well below the rate usually reported for new, fixed-rate conventional loans. This reflects normal lags in financial markets as well as the fact that many loans are made at lower contracted mortgage interest rates. Indeed, if measured at the 17 percent average commitment rate for fixed-rate, conventional loans that has been reached this summer, the average monthly payment for a typical home would have exceeded $1000. 2. The full increase in monthly payments is the product of the individual interest rate and price effects plus the joint effect of concurrent changes in these factors.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  I  • -11-  CHANGES IN THE TYPICAL MORTGAGE PAYMENT ON A NEW HOME PURCHASED  Period 1970  Mortgage Interest Rate 8-1/4  Downpayment  Monthly Payment  $ 35,000  $ 7,000  $ 221  New Home Prices  1979  10  65,000  13,000  473  Recent  14  90,000  18,000  867  14  35,000  7,000  337  90,000  18,000  568  Illustrative Calculations Recent Interest Rates, 1970 House Prices Recent Home Prices, 1970 Interest Rates  8-1/4  Note: Illustrative figures for level-payment fixed-rate 25-year 80 percent conventional mortgage loan, largely reflecting Federal Home Loan Bank Board data for loans closed. The recent interest rate is based on data from the FHLBB which show the average contract rate for new home loans closed in July was 14.05 percent; the effective rate--including points and charges--was somewhat higher at 14.65 percent.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .  •  • -12-  During the 1970s inflation raised the marginal tax bracket of many families, lowering the after-tax cost of mortgage payments. Notwithstanding the damping influence of high carrying costs on new home purchases and construction, the slowing of activity in recent periods has been in some part a reaction to earlier inflationary developments.  During the late 1970s, when home prices increased more rapidly than  the general rate of inflation, large capital gains accrued to homeowners. These high returns encouraged many households to purchase a home as a residence with a view toward obtaining a hedge against inflation and spurred others to buy houses for speculative purposes.  Such investment motives were  encouraged by the fact that the bulk of monthly payments in the early years of most mortgages--as well as property taxes--are deductible for federal tax purposes. Price increases of almost 20 percent per annum could not be sustained indefinitely, and, in part, the current slowdown in activity no doubt has reflected that reality.  As buyers anticipated further price in-  creases, purchase prices rose to "capture" expected future appreciation. Thus, unanticipated capital gains became harder to garner.  This, in turn,  had a depressing influence on real estate market activity. The production of rental housing also has been depressed.  While  high construction and permanent financing costs have contributed to profitability problems in this sector, contractors also have faced other difficulties.  In an inflationary environment, prospective costs are highly uncertain  for real estate ventures that take considerable time to complete--as is the case with apartment buildings.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Further, rent increases have lagged behind  •  • -13-  rising operating costs.  During the last five years average rents advanced  just over 40 percent, while costs of operation rose almost 70 percent.  The  risk of undertaking new rental construction also has been aggravated, in some areas, by the existence or threat of rent control laws. Responses to High Mortgage Interest Rates As mortgage interest rates have climbed to record levels, a number of innovations have evolved to ease the burdens on potential homebuyers. Deregulation of the thrift industry and the continued development of secondary mortgage markets have helped to break the pattern of past periods of high interest rates, when housing was virtually cut off from funds.  Also, means  have developed to provide "below market rate" loans, including, prominently, state and local government mortgage revenue bonds. Many new developments in mortgage finance attempt to overcome the disproportionate financial burden imposed during the first years of a standard contract.  High monthly payments relative to family budgets--or to lender  qualification standards--have discouraged homebuying even when buyers still feel that purchasing a home would be a prudent investment.  This is especially  true with a standard, level-payment mortgage which concentrates the real burden of monthly payments in the first years of the contract when buyers' incomes are low relative to longer-term prospects. Graduated payment mortgages now are available in which payments are designed to increase more in line with income growth. have been helped by seller financing concessions.  Many purchasers  Builders have offered  "buydowns," in which they pay part of the buyer's mortgage for the first several years.  Similarly, many sales of existing homes involve the assump-  tion of existing, low-interest mortgages and/or a "second" mortgage--often   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -14-  at below-market rates.  Finally, financial institutions have offered many of  their new adjustable or renegotiable mortgage loans at initial interest rates below the rate for standard, fixed-rate mortgages; lower rates early in such mortgages often come, however, at the expense of uncertainty about mortgage costs in the future. The Effect of High Interest Rates on Home Builders The primary effect on home builders of high interest rates is the diminution of demand for their product.  But high interest rates also have  discouraged the output of new housing by pushing up construction loan rates and increasing the cost of production.  Further, while the number of unsold  new homes on the market has remained low in historical perspective, the cost of carrying these inventories has been quite high.  Weakened housing demand  makes the builder's ability to pass on these costs more difficult than would otherwise be the case. Data for business failures are not available for the residential construction sector alone.  However, for the entire construction industry,  failures have increased more sharply in the last three years than in previous downturns.  Dun & Bradstreet reports an increase of 160 percent in the number  of such failures since early 1978; this compares to just over 110 percent in the 1972-1975 period.  Some of this increase may be explained by recent  liberalization of the bankruptcy laws, which has made it more attractive for businesses--as well as individuals--to seek the shelter of the courts than formerly was the case.  In any event, the level of failures relative to the  number of operating builders has continued to be quite low. Current financial difficulties probably have fallen most heavily on small home builders, who often are at a competitive disadvantage in periods   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -15-  of high interest rates.  Their sales are not so broad in terms of numbers or  geography as larger competitors, so that a given downturn in sales may be more likely to cause extreme financial distress.  Moreover, small builders  are typically less well capitalized than larger producers and, thus, are more exposed financially to cyclical downturns.  Finally, because of their  more uncertain prospects, small builders are more likely to be squeezed out of financial markets when money is tight and lenders become more selective. These problems were confirmed in a recent survey by the National Federation of Independent Business which found that more than two-fifths of small business respondents in the construction industry indicated that interest rates and financing was their most important problem; in the same survey, fewer than one-fourth of other small businesses responded similarly. Coping with High Housing Costs While construction of housing units has been curtailed sharply, households have made numerous adjustments in an effort to meet their shelter needs. home.  Some households have looked for alternatives to buying a "traditional" For instance, manufactured (mobile) homes have been providing a lower-  cost form of shelter for many households.  In May of this year--the most  recent reading available--mobile home shipments were running 15 percent above the average 1980 pace, despite the fact that financing costs for such units were running at record levels.  In addition, many households have im-  proved and/or expanded their existing living quarters.  While spending on  new housing units declined 16 percent between 1978 and 1980, outlays on additions and alterations rose more than a third. Even households seeking new housing units have made adjustments to limit their monthly mortgage payments.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  During the late 1970s the average  •  • -16-  price of a new home sold rose more than construction costs, as homebuyers were upgrading the units being bought.  Besides reflecting a desire for  increased amenities, many buyers apparently purchased larger and more expensive homes to enhance the investment value of the unit.  That is to say,  many homebuyers bought "all the house they could afford," expecting to maximize their capital gains.  Since late 1979 this pattern has been reversed,  with the average price of new homes sold rising less than basic costs.  Also,  condominiums and cooperatives--a generally less expensive form of ownership-have increased in popularity.  In the first quarter of 1981, such units in  multifamily structures were started at an annual rate of 233,000--the fastest pace since such data has been reported (1974).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -17-  IV.  The Automobile Sector Sales of domestic autos in the first half of 1981 were at a 6.5  million unit annual rate, about the same as the 1980 average but down nearly 25 percent from the average selling pace during the 1970s.  Sales of domesti-  cally produced trucks have been even more hard-hit recently, off more than one-third from the peak selling rate in 1979.  At the same time, employment  and profits at auto makers and related industries have suffered. These difficulties in the motor vehicle sector of the economy are related to a number of factors.  In part, the drop in sales and production  is due to the typical cyclical volatility in auto and truck demand.  The  problems in the motor vehicle sector also are related to recent credit market conditions, which have affected the cost of financing new car and truck purchases.  However, the current problems in the industry appear to be related  mainly to longer-term trends in automotive demand.  These include: the high  cost of buying and operating a new car, sluggish household income growth, and the squeeze on family budgets over the past few years arising from rapid increases in the prices of necessities such as food and energy.  Moreover,  the industry has been plagued by intense foreign competition and by government regulations that have necessitated large investments to comply with emission control standards and improved fuel efficiency requirements. Current financing conditions for autos at retail Interest rates on new consumer auto loans are at record levels, although they still are well below the prime rate charged by banks on business loans or the best available commercial paper rate.  Interest rates  on new auto loans averaged 16 percent in May for 36-month loans financed by   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -18-  commercial banks.  This compares with an interest charge of about 13 percent  at the end of 1979 and a rate generally around 10 percent in the early seventies.  In recent years, commercial banks have held almost 60 percent  of automobile credit outstanding, although their market share dropped to 52 percent in 1980.  Finance companies--primarily the subsidiaries of the  auto manufacturers--expanded their share in 1980 by an equivalent amount, to about 30 percent of the market.  New-car interest rates have risen over  the past two years at these lenders as well, though not so steeply as at banks.  In contrast to the usual 1-to-2 percentage point spread of finance  company over bank rates, the average rate on a new-car loan at finance companies was also 16 percent in May. Despite the high level of interest rates, the effect on average monthly payments has been relatively small.  The 3 percentage point rise in  interest rates for automobile loans since the end of 1979 has added about $9 to the average monthly payment rate for a typical car loan (see the lower panel of the table on page 19).1  At the same time, the sticker price of  a typical new domestic car has gone up about $1,900, adding about $44 to monthly payments--five times the amount added by higher rates.  An increase  in the average new car loan maturity to 45 months has provided a small offset, reducing typical monthly carrying costs by $2.50. There have been reports of reduced availability of auto loans at commercial banks, and auto installment credit outstanding has contracted a bit at banks over the past year and a half.  However, finance companies have  helped maintain an ample flow of credit to the auto market, with the finance  1. These figures are based on an assumed 20 percent downpayment with an average loan balance of $5,600 financed in late 1979.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -19NEW-AUTO LOANS Typical Prices and Loan Terms  Period  Price of new carsl (dollars)  Amount financed 2 (dollars)  Interest rate3 (percent)  Maturity4 (months)  1979-Nov.  7,000  5,600  12.85  44.3  159.42  1980-Feb. May Aug. Nov.  7,254 7,507 7,821 8,646  5,803 6,006 6,257 6,917  13.28 15.72 13.91 14.29  44.5 44.4 45.0 44.8  165.84 179.26 179.24 200.13  1981-May  8,936  7,149  16.04  45.2  211.79  Monthly payment (dollars)  1. Initial price of $7,000 has been rounded for computational ease; the estimated average price of a domestic auto in the GNP accounts in November 1979 was $7,190. Price in subsequent months is determined by multiplying the initial price by an index reflecting percentage changes in the unweighted average of manufacturer's suggested list price for base car of four popular models: Oldsmobile Cutlass, Chevrolet, Ford Fairmont, and Toyota Corolla. 2. Calculated as 80 percent of price from first column. 3. Average most common finance rate on 36-month new car loans at a sample of commercial banks. 4. Weighted average maturity on all new-car loans at finance company subsidiaries of the domestic auto manufacturers. Data on loan maturities at commercial banks are not available; however, qualitative evidence suggests that the maturity structure of auto loans is similar at commercial banks and finance companies. 5. Calculated from Board's Regulation Z tables on annual percentage rates.  Change in Monthly Payment From November 1979 And Distribution By Source of Change  Period  Total change in monthly payment from November 1979 (dollars)  Dollar amount of change in monthly payment due to change in Car Interest price rate Maturity Interactionl  1980-Feb May Aug. Nov.  +6.42 +19.84 +19.82 +40.71  +5.78 +11.55 +18.70 +37.49  +1.18 +1.18 +2.94 +3.99  -.56 -.56 -2.24 -1.40  +.02 +.02 +.42 +.63  1981-May  +52.37  +44.09  +8.93  -2.46  +1.81  1. Reflects concurrent changes in price, interest rate, and maturity.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  :  •  • -20-  affiliates of the major auto makers playing a major role and at times offering major interest rate concessions to car buyers. Evidence from consumer surveys on respondents' views about credit conditions is mixed.  On the one hand, the University of Michigan Survey  Research Center reported in July 1981 that 25 percent of those surveyed who answered that the market condition for autos was poor gave as a rationale: "High interest rates; credit is tight." response.  This is a near-record high for this  On the other hand in response to a separate question, "tight"  credit has been mentioned by less than 10 percent of respondents who gave an economic factor as an item of unfavorable news for the past several months. This compares with 25 percent of the respondents complaining about tight credit during the credit control program in April of last year. Nonfinancial Factors Affecting Household New Auto Demand The high cost of buying and operating a new car, relatively sluggish growth of real personal income, and rapid increases in the prices of necessities are probably the main factors depressing the demand for autos. factors, perhaps the most important is the high cost of autos.  Of these  Throughout  most of the fifties and sixties, car prices were on a downtrend relative both to other prices and to disposable personal income.  This downtrend was  interrupted in 1974 and for the next five years the ratio of new car prices to other prices and income was more or less stable.  However, since 1979 the  price paid for a typical new domestic auto has moved up quite sharply. top panel of the table on page 19.)  (See  The 27 percent increase in the sticker  price of four popular domestic models over the past two years compares with only a 16 percent increase in nominal disposable personal income.  Reflecting  these movements, households responding to the University of Michigan's consumer   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -21-  attitude survey have consistently reported over the last few years that high car prices are the major deterrent to purchasing a new auto.1 As a result of the rapid increases in car prices--and the high average prices paid for domestic units--households increasingly have chosen to hold on to their used cars, making repairs when needed, rather than buying new ones. For example, in 1970 less than 12 percent of registered passenger cars were more than 10 years old; by 1980 the figure had climbed to almost 21 percent. This behavior is not surprising, since it is estimated that last year it was 40 percent cheaper to drive a typical used car than a new 1980 mode1.2  Con-  sequently, the average age of the passenger car fleet has increased from 5.5 years in 1970 to 6.6 years in 1980--the highest level since the mid-1950s (chart on page 22). The high costs of operating a car have led to less intensive use of the auto stock, and this has reduced replacement demand.  The near tripling  of gasoline prices in recent years has resulted in increased annual fuel costs of about $500 per passenger car.  Reflecting these higher costs, the average  number of miles driven per year has dropped from 10,184 miles in 1972 to an estimated 9,400 miles in 1980.  Rising operating costs also were a factor in  the shift toward smaller cars--a market where foreign producers play a large role.  A study by the Hertz Corporation shows that the average cost to own  and operate a subcompact car was just over 38 cents a mile in 1980; this compares with a cost of 44 cents for mid-size cars and 48 cents for larger cars.3  1. Only in May 1980, during the period of credit controls, were high interest rates and credit conditions mentioned nearly as often as high prices. 2. Estimate is from Hertz Corporation. 3. This differential reflects depreciation and insurance in addition to gasoline per mile expenses.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .,  •  • -22-  Sluggish growth of real disposable personal income also has been a major factor in the poor sales performance of the auto industry.  Since 1973,  gains in real disposable income per household have averaged only 0.6 percent per year, compared with a 1.9 percent trend over the preceding two decades (chart on page 23).  Moreover, most family budgets have been under extreme  pressure from increases in the prices of necessities--such as food and energy-relative to income growth.  In the 1959 to 1973 period, outlays for necessities  decreased as a share of family disposable income from 30 percent to less than 25 percent.  This trend was reversed in 1974, however, and most families must  now allocate about the same share of disposable income to these necessities as they did in the early sixties (chart on page 24).  Thus, with income growth  slow and prices of necessities rising rapidly, households have found less room available to purchase discretionary goods such as new cars. Truck sales The sharp decline in truck sales over the past 1-1/2 years reflects a number of factors: high interest rates, the general slowdown in economic activity last year, and a reluctance by business to invest in plant and equipment in an uncertain inflationary environment.  In addition, demand for  vans and smaller trucks--many of which are purchased for consumers' use--continued to be sensitive to the relatively low fuel economy of these vehicles. Moreover, foreign competition has been even more intense for trucks than in the passenger car market.  Recognizing this problem, in August 1980 the  tariff on imported light-duty trucks was raised from 4 to 25 percent. Economic Health of the Industry Reflecting the weakness in auto and truck demand, firms in the motor vehicle industry posted losses of more than $4 billion in 1980, and they still were running in the red during the first quarter of this year   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  REAL DISPOSABLE INCOME PER HOUSEHOLD  IIMMEINIMMIII  ---* 16,000  simmoill  eie e  .e  e  e  e  e ....... 14,000  e  aro  --- 12,000  ....1 10,000  01.1....  ,-I 55  1  I 57  I  I  I  59  Trend Fitted 1955-1973   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I 61  I  I 63  I  I 65  I  I 67  i I 69  1  I 71  I  1 73  I  I 75  I  I 77  [  I 79  8,000  I 81   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FOOD, GASOLINE, AND UTILITIES AS A PERCENTAGE OF DISPOSABLE PERSONAL INCOME  ---. 32  —30  • 28  1  Iv •P••  ---° 26  1  •144 eke. ete.  24  %lb 1104 , elii  i14,,, esaib 0,60 •61. eagb  ...-.. 22  111111_1111111111111111 59 61 63 67 69 71 73 75 77 79 81 65 Trend Fitted 1959-1973  20  •  •  •  .  -25-  (table on page 26).1  During the years 1976 through 1978, the motor vehicle  industry accounted for more than 10 percent of all profits in manufacturing. The rubber and plastic products industry (not shown on the table) is an important supplier to the auto industry.  This industry reported lower profits  in 1980 than in 1979, with net profits per dollar of sales around 2 percent. According to industry reports, profits improved substantially in the first quarter of this year, rising to 3.6 cents per dollar of sales. Weak profits also have affected retailers.  Although the number of  dealerships has been declining steadily since 1956, last year 1,600 dealerships handling domestic makes of passenger cars went out of business--the largest one-year decline in retail outlets since 1966 when Studebaker left the car business.  Another 220 dealerships folded in the first quarter of this year.  High inventory carrying costs and the marked slowdown in automotive sales have played an important role in the troubles facing dealers.  However, part  of the problem for automotive dealers is related to the used car market.  It  is estimated that about 20 percent of most new car dealers' dollar volume is accounted for by used cars.  But used vehicle sales by car dealers have been  declining in recent years, putting a further squeeze on profit positions. With a more stable price environment and the associated easing in credit market conditions over the longer-term, the automotive and related industries should be in a good position to benefit from renewed prosperity. Indeed, part of the improvement should be attributable to changes which have contributed to recent losses--e.g., the substantial retooling and other costs  1. Second quarter data on profits in the motor vehicle industry are not yet available in the National Income and Product Accounts. Industry reports, however, indicate that the three largest auto makers posted small profits in the second quarter.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ••  a  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -26-  MANUFACTURING AND MOTOR VEHICLES AND PARTS BEFORE-TAX PROFITS WITH INVENTORY VALUATION ADJUSTMENT  Total Manufacturing  Motor Vehicles  Billions of Dollars, SAAR 19761977197819791980-  69.2 76.1 85.3 88.9 74.5  7.2 9.2 8.9 4.3 -4.3  1980-Q1 -Q2 -Q3 -Q4  92.1 61.3 68.5 76.2  -2.9 -8.8 -4.8 -0.8  1981-Q1  91.4  -1.7  ---Percent Change from Preceding Period, SAAR--19761977197819791980-  31.7 10.0 12.0 4.2 -16.1  278.9 27.8 -3.3 -51.4 n.a.  1980-Q1 -Q2 -Q3 -Q4  73.9 -80.4 55.9 53.1  n.a. n.a. n.a. n.a.  1981-Q1  107.0  n.a.  n.a. = Not applicable; level of profits is negative in the period.  Source:  National Income and Product Accounts, Bureau of Economic Analysis.  e.  •  •  •  • -27-  associated with the production of small, fuel efficient cars that meet government regulations and are also more competitive with imported units.  Moreover,  movements within the industry to consolidate production of key products and an increasing willingness to make joint-ventures--both with domestic producers and foreign companies--should lead to increased productivity. Two factors that have put domestic automakers at a disadvantage with foreign competitors are their high average labor costs and a perception by the public that foreign made autos are higher in quality.  However, U.S. manu-  facturers have taken steps to try to reduce these disadvantages.  Workers at  Chrysler agreed early this year to a pay cut that returned their straight time wage rate to the level prevailing at the end of 1979; they also agreed to forgo any additional wage hikes for the duration of the current contract (due to expire September 1982).  Actions such as this should help to narrow the 70  percent compensation differential between U.S. and Japanese automakers.1 In addition to controlling labor costs, domestic manufacturers have undertaken strenuous efforts to improve the quality of their products--especially those that compete most directly with foreign models.  Despite the recent wage con-  cessions and quality improvements, the domestic industry still faces strong competitive pressures from abroad. The situation for dealers should improve.  They are becoming more  involved with the distribution of foreign units and their profits should benefit from this increased volume, although most industry experts expect the market share of foreign units to fall back with the increased competition of better designed U.S.-made smaller cars.  Also, the manufacturers are actively  working with dealers in developing lucrative "after-sale" business, which at present mainly consists of service still under warranty.  1. New York Times, June 3, 1981, page D-1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ..,  •,  II  •  • -28-  V.  The Farm Sector The farm sector is now experiencing its seventh consecutive quarter  of relatively low profitability (see table on page 29).  Although this slump  has occurred during a period when interest rates have risen to historically high levels, a glance at the data on farm income for the past decade would suggest a need for caution in drawing conclusions about causal linkages. For instance, the last period of relatively weak farm profitability, 1976-77, occurred during a period of lower interest rates.  Farm income then rose  rapidly in 1978-79 even though interest rates had started to climb.  And  earlier, in 1973, the highest farm income in history was recorded while market interest rates were rising sharply. As these historical references indicate, the farm sector has experienced relatively severe income cycles over the past ten years.  First  came the extraordinarily profitable years of 1972-73, then an income slide that by 1976 had carried the real earnings on farm assets below their longerterm trend of annual increases averaging 4 percent since the mid-1950s. This longer-term profit growth had been accompanied by an equivalent average annual increase in the real price of farm real estate; furthermore, the relatively high price/earnings ratio placed on farm assets--averag4 ng about 25--reflected expectations that such real growth in asset earnings would be sustained.  The income recovery of 1978-79 returned farm profitability to  approximately the longer-term trend to which farm real estate values were evidently related.  The swift return to lower earnings that ensued seemingly  was an unexpected shock. Higher interest rates could have cut into net farm income in four ways: (1) by increasing production expenses directly, through higher interest :   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ..   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -29-  Table 1.  Farm income and expenses (quarterly, seasonally adjusted annual rate, billions of dollars)  Gross farm income  Farm production expenses  Q3 Q4  120.4 124.1 126.9 138.9  97.7 99.1 100.4 107.2  22.7 25.0 26.5 31.7  1979-Q1 Q2 Q3 Q4  148.2 152.8 152.5 154.1  114.8 116.9 120.2 124.9  33.4 35.9 32.3 29.2  1980-Q1 Q2 Q3 Q4  149.3 146.0 151.9 155.1  126.0 129.0 132.2 135.6  23.4 16.9 19.7 19.5  1981-Q1 Q2  157.7 165.2  139.4 142.2  18.3 23.0  Quarter 1978-Q1 Q2  Source:  U.S. Department of Agriculture.  Net farm income of farm operators  •  •  •  • -30-  charges on debt owed by the farm sector; (2) by increasing production expenses indirectly, as higher interest charges paid by nonfarm manufacturers and suppliers of goods and services to the farm sector are passed along in the form of higher prices of these farm inputs; (3) by reducing gross income through adverse effects on the demand for farm output; and (4) by changing the time-path of gross income if higher rates cause producers to alter their marketing patterns. Data available permit rough empirical estimates of the first two of these effects.  To establish a perspective for such estimates, it is first  useful to quantify the extent to which farm income has fallen below its 1979 level.  As such income is to be compared with interest expense, it must in-  clude the net rent of farm landlords as well as the net income of farm operators, because landlords owe part of the farm debt and thus pay part of the interest included in farm production expenses.  The table on page 31 shows  that the combined net farm income of operators and landlords, labeled "net income of farm sector," totaled $38.1 billion in 1979.  Between 1979 and the  first half of 1981 (1981-H1), the price deflator for personal consumption expenditures rose 17.1 percent; thus, to provide the same purchasing power, such income would have had to total $44.6 billion (annual rate) in the latter period.  As also shown in in the table, actual sector net income totaled $26.5  billion (annual rate).  Thus the reduction in annual net income, in terms of  current purchasing power, was approximately $18 billion as of the first half of 1981. The rise in interest rates on outstanding farm sector debt is estimated to have accounted for $2.4 billion, or 13 percent, of this drop in real net income.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Thus, so far, for the farm sector as a whole, the direct  Table 2.  Farm income and expenses (annual, billions of dollars) -  Gross farm income  Year  Farm production expenses  Net farm income of farm operators  Net farm income of farm sector  Farm cash flow of farm sector  Farm cash flow of farm sector plus farm operators' off-farm income  1977  108.7  90.3  18.4  22.4  37.8  63.1  1978  127.5  101.1  26.5  31.4  48.7  76.8  1979  151.9  119.2  32.7  38.1  57.8  91.0  1980  150.5  130.7  19.9  25.7  47.4  83.4  1981-Hla  161.4  140.8  20.6  26.5e  49.0e  87.0e  a - Annual rate. e - Estimated for this report. Source: Notes:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  U.S. Department of Agriculture. Data for the first half of 1981 (1981-H1) are shown at annual rates. Gross farm income includes cash receipts from farm marketings, government payments, net change in inventory of livestock and stored crops, home consumption of farm output, and the rental value of operators' dwellings. Share rents and government payments received by landlords are also included. Farm production expenses are as reported by the USDA. expenses as well as net rent paid to farm landlords.  They include landlords' farm production  Net farm income of farm operators is gross farm income less farm production expenses. Net farm income of farm sector is net farm income of farm operators plus net rental income of farm landlords. Farm cash flow of farm sector is net farm income of farm sector plus the capital consumption allowances that were included in farm production expenses.  Table 3.  Outstanding farm debt, interest paid, and interest rates  Year  Average outstanding debt (billions of dollars)  Annual interest paid (billions of dollars)  Implicit I Addendum: Average interest rate on loans made (percent) average Production Federal interest rate Commercial credit (percent) associations banks 11 =s Non-real-estate debt  1976 1977 1978 1979 1980  43.1 51.2 60.3 70.4 80.1  3.2 4.0 4.9 6.6 8.5  7.39 7.76 8.13 9.34 10.62  n.a. 8.8 9.6 11.8 15.1  8.4 8.1 9.0 10.9 13.0  1981-H1  86.5e  9.9a,e  11.50e  17.9  14.3  •  Real estate debt 1976 1977 1978 1979 1980  53.7 60.3 67.4 77.3 88.2  3.9 4.4 5.1 6.1 7.3  7.18 7.24 7.60 7.96 8.29  8.6 8.3 8.4 9.2 10.4  1981-H1  95.0e  8.1a,e  8.55e  11.0  Total debt 1976 1977 1978 1979 1980  96.8 111.5 127.7 147.7 168.3  7.0 8.3 10.0 12.7 15.8  7.27 7.48 7.85 8.62 9.40  1981-H1  181.5e  18.1a,e  9.96e  a - Annual rate. e - Estimated for this report.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  N.)  •  Table 3.  .  Debt and annual interest paid, U.S. Department of Agriculture; interest rate on loans made by commercial banks, Federal Reserve survey of terms of bank lending to farmers (dollar-weighted average of effective rates on non-real-estate farm loans of $1,000 or more made in the first full business week of the second month of each quarter); interest rate on loans made by production credit associations and Federal land banks, computed for this report as the unweighted average of quoted rates on the first day of each quarter, as compiled by the Farm Credit Administration (stock purchases and loan fees required of borrowers from these cooperatives are not taken into account in the average rates shown).  Source:  Note:  (continued)  Average outstanding debt was computed for this report as follows, in order that the seasonal pattern of debt outstanding be reflected in the annual average: (1) quarterly average institutional debt (compiled in Federal Reserve Board Statistical Release E.15, "Agricultural Finance Databook--Quarterly Series") was estimated by averaging amounts outstanding at the beginning and end of each quarter; (2) annual average of institutional debt was estimated by averaging the quarterly averages computed in step 1; (3) annual average institutional debt was alternatively estimated by averaging amounts outstanding at the beginning and end of each year; (4) annual average total debt was first approximated by averaging amounts outstanding at the beginning and end of each year (USDA estimates of noninstitutional debt are made only as of January 1); and (5) the amount obtained in step 4 was adjusted by multiplying by the ratio of the amount obtained in step 2 to the amount obtained in step 3. These computations were performed separately for non-real-estate and real estate debt, and the results were summed to obtain average total debt.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  411  I Lo.) UJ 1  •  •  • -34-  cost impact of higher interest rates has been small.  The key factor is that  a relatively large amount of outstanding intermediate- and long-term farm debt was incurred in earlier years at lower fixed rates; also, a significant amount of recent new debt consisted of drought-related Farmers Home Administration disaster loans bearing an interest rate of 5 percent.  Consequently,  the average rate on all outstanding debt rose relatively slowly toward the new higher level of rates on most other new loans.  As shown in the table on  page 32, the average rate paid on all outstanding farm debt in the first half of 1981 is estimated to have been 9.96 percent, up from 8.62 percent in 1979. Total interest paid rose from $12.7 billion to an estimated $18.1 billion (annual rate).  But much of this increase resulted from a sizable growth in  the amount of outstanding debt, from $147.7 billion to $181.5 billion.  Thus  even if the average interest rate had remained at its 1979 level, interest paid would have risen to $15.6 billion.  Only the remaining $2.4 billion of  the total increase is attributable to the higher rate. Some individual farm operators, of course, have experienced a much greater relative increase in their average interest rate--in particular, those highly leveraged operators who have employed significant short-term financing.  Because short-term borrowing often tends to minimize immediate  interest expense while maximizing financial flexibility, persons seeking rapid financial progress may choose such financing in spite of the obvious risk of greater susceptibility to cash-flow problems should interest rates subsequently rise.  In effect, some individuals chose to take above-average  risks in the hope of above-average short-term gains, and their timing proved, in retrospect, unfortunate.  Data on the number of these or other cases of  individual farm financial distress are limited, however.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Foreclosures, which  % ,  i ..  •  • -35-  would tend to be a lagging indicator of severe problems, in 1980 accounted for 0.13 percent of farm transfers, about the same as the average proportion over the past two decades. Average interest rates being paid by nonfarm businesses also have lagged behind advances in rates on new loans, thus holding down the size of the indirect impact of higher rates on farm expenses for nonfarm inputs. If firms supplying farm inputs had credit experience similar to that of nonfinancial corporate business in general, a full pass-through of their own cost increases attributable to higher interest rates paid since 1979--which may not have been possible, given demand conditions--would have raised the price of their final sales by about 1.0 percent.  Annual farm sector purchases of  such inputs have recently totaled about $60 billion; thus, at most only about $0.6 billion, or 3 percent, of the reduction in real net farm income resulted from this indirect impact of higher rates. The third avenue through which, as was noted above, higher interest rates might have reduced net farm income was by reducing demand for farm commodities.  Stagnant gross farm income has been the proximate cause of the  decline in net income.  After rising above $150 billion in the second quarter  of 1979, gross farm income failed to advance significantly further until the second quarter of this year (table on page 29).  In an environment of general  price inflation approaching 10 percent annually, two years of stalled growth in gross income had a devastating effect on net income. High interest rates undoubtedly have had some effect on the growth path of gross farm income.  However, these effects have worked mainly through  indirect channels and are thus hard to disentangle from other causal factors-such as the impact of languishing labor productivity on real consumer income-that have probably been more important in limiting farm income growth.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  More than  •  • -36-  likely, the direct effect of high interest rates in limiting the demand for farm output has been quite small since, by and large, final consumer purchases of farm output are neither credit-financed nor highly postponable.  Thus an  increase in rates should have relatively little influence on either the level or timing of consumer food purchases. While the direct effects are probably small, many observers have argued that high interest rates have restricted farm income growth indire ctly through exchange rate effects that limit farm export demand.  According to  this argument, high U.S. interest rates contribute to the strength of the dollar in exchange markets and thereby make U.S. goods more costly relative to those of other countries.  Conceptually, there is merit to this argument;  however, the magnitude of the exchange rate effect on recent farm income developments could easily be exaggerated.  Although exports of the major U.S.  crops in the 1980-81 marketing year will apparently fall short of earlier expectations, these exports are still at very high levels by historical standards.  Moreover, the cash receipts of farmers producing our major export  crops have in general held up better than the incomes of livestock producers, who--in the short run--should not be much affected by exchange rate developments. Yet another way in which interest rates might affect farm prices and farm incomes is through their effect on the pattern of crop and livestock marketings.  Rising interest rates make it more costly to finance inventories  and thus encourage increased near-term marketings at the expense of long -run supplies.  This argument has been cited especially often in the popular press  as a factor explaining the weakness in livestock prices in recent quarte rs. However, as with exchange rate factors, it is easy to exaggerate this effect.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -37-  For example, while cattle marketings so far in 1981 have run somewhat above earlier expectations, there has not been a massive selloff of breeding animals that would severely limit future supplies; indeed, the nation's cattle inventory as of July 1 was 2 percent above its year-earlier level, and the pool of animals targeted for entry into the breeding herd was up considerably from a year earlier.  In contrast, the pork industry is cutting back from  recent output levels, but these cutbacks appear to be part of the normal cyclical process that has characterized that industry for several decades. The marketing decisions of crop farmers may also be influenced to some extent by high interest rates that raise carrying costs.  However, for these storable  commodities, increased marketings and lower prices in the near term would, with all else constant, be offset by reduced marketings and higher prices later in the marketing year. Thus, although interest rates are affecting gross farm income in various ways, these effects do not represent the dominant factor limiting income growth.  Among other factors, it is notable that real per capita  incomes have grown little over the past year and a half, and that at least temporarily the pattern of consumer spending appears to have shifted away from red meats, particularly beef--a factor which helps explain the adverse income developments of livestock producers.  In addition, drought and other  special forces have adversely affected the incomes of farmers in certain regions. Finally, past periods of high interest rates were often associated with reduced credit availability at institutions engaged in farm lending, particularly at the larger commercial banks.  At present, with interest-rate  ceilings on major types of deposits removed or tied to market rates at banks   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -38-  of all sizes, the potential for credit-availability problems has been greatly reduced; however, interest rates on bank loans necessarily have become more responsive to movements in market rates that change banks' cost of loanable funds.  With farm credit readily available, farm sector debt outstanding  increased by 10.6 percent in 1980 even though amounts of expenditures that are often credit-financed rose more slowly or, in the case of machinery purchases and real estate transfers, actually declined. ings has continued in 1981;  The rise in borrow-  during the first half of this year, farm loans  outstanding at major lending institutions are estimated to have risen by about $10 billion, or 7.7 percent.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  • -39-  VI.  Small Business Unlike the other three sectors on which this report focuses, that  is, agriculture, housing, and autos, the small business "sector" includes firms operating in all parts of our economy.  Therefore, generalizing about  the impact of high interest rates on small businesses is difficult, since the impact on such a diverse group of firms depends to a great extent on factors specific to each industry. There are two other major problems in any analysis of small business conditions.  First, there is no consensus on how to define small busi-  ness, although there is general agreement that small businesses account for a very large percent of firms in the United States.  According to the report  by the White House Commission on Small Business,1 there are about 12 million small firms in the United States, accounting for more than 97 percent of all businesses.  The second problem, which in part reflects the definitional prob-  lem, is the lack of a comprehensive data base on small business.  There are,  however, a number of sources of information that can be used in evaluating small-business conditions.2  1. America's Small Business Economy: Agenda for Action, Report to the President by the White House Commission on Small Business, April 1980. 2. These sources include, but are not limited to, the following: Economic Letter, National Small Business Association; Federal Monetary Policy and its Effect on Small Business. Report of the Committee on Small Business, U.S. House of Representatives, September 30, 1980 (House Report); The Heller/Roper Small Business Barometer, Walter E. Heller International Corporation Institute for the Advancement of Small Business Enterprises; Quarterly Economic Report for Small Business and unpublished data, National Federation of Independent Business (NFIB Survey); Quarterly Financial Reports of the Federal Trade Commission (QFR); Statistics of Income compiled by the Internal Revenue Service (SOI); Survey of Terms of Bank Lending, Board of Governors of the Federal Reserve System (STBL).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -40-  Small Business Financing Despite the heterogeneity of small business, the vagueness of definition, and the limited data base, there are some relatively common financial characteristics of small businesses that permit a rough assessment of the impact of credit conditions on the group as a whole.  First, small business  firms tend to place a relatively heavy reliance on debt financing.  Particu-  larly for new firms, access to equity capital may be limited by the high risk of failure.  For small businesses generally, however, fixed transactions  expenses may make equity offerings prohibitively costly.  Thus, small busi-  nesses on average have higher debt to equity ratios than larger businesses.1 Moreover, for firms that are otherwise similar, the debt-service burden relative to cash flow tends to be higher for small businesses than it is for large companies. Another common feature of small businesses is that, while they may have several potential sources of credit, including trade credit, finance companies, and the government, they do tend to rely heavily on commercial banks for financing.  For example, according to survey data supplied by the  National Federation of Independent Business for April 1980, more than 80 percent of the responding small business borrowers list a bank as the source of their most recent business loan.  A survey taken for the House Subcommittee  on Access to Equity, Capital and Business Opportunities yielded similar results. These characteristics of small business suggest that the impact of high interest rates on this sector will depend considerably on the loan rates charged by banks and on the small businesses' perceptions of credit availability.  1. Evidence of higher debt to equity ratios for smaller firms as compared to larger firms can be seen in the QFR, SOI, and the House Report.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  4  -41-  In this regard, data suggest that current credit conditions do not appear to be having a disproportionate effect on the level of rates paid by small businesses.  The Federal Reserve Board's May 1981 Survey of Terms of Bank Lending  shows that the weighted averages of commercial and industrial business loan rates for all loan size classes, for all bank size classes, and for both long and short maturities were generally over 19 percent (see table on page 42). The smaller loans at the small banks, which likely represent loans to small businesses, tended to have lower average rates than the loans at the large banks.1 In addition, the historical data from the same survey show that small loan rates have increased less than large loan rates since 1977 reversing the spread of small loan rates over large loan rates that prevailed at that time. These data are consistent with NFIB's two quarterly polls of its members for 1981.  These show that small firms paid an average of 17.6 percent  on short-term loans in the first quarter of 1981 and 18.9 percent in the second quarter.  The number of loans at rates of 18 percent or less increased  slightly to 64 percent in the first quarter of 1981 from 60 percent in the fourth quarter of 1980, but declined substantially to 40 percent in the second quarter.  Recent data prepared by the Small Business Administration (SBA) show  that about 45 percent of the loans made under the SBA's 7(a) loan guarantee program for fiscal year 1981 through May 31 were at rates below 17 percent. Thus, although interest rates are high by historical standards, small businesses have not experienced disproportionate increases in rates they must  1. It should be noted that large businesses tend to have better access to commercial paper and other financing vehicles, often at relatively attractive rates, so that the comparison of bank rates does not give a complete picture.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  -42-  SURVEY OF TERMS OF BANK LENDING WEIGHTED AVERAGE INTEREST RATE ON LOANS MADE DURING MAY 4-9, 1981 (Rates in percent; loans in thousands)1  SHORT-TERM COMMERCIAL AND INDUSTRIAL LOANS  All banks 48 large banks Other banks  All Sizes  $124  $2549  $5099  $100499  $500999  $1,000 & over  19.99 20.29 19.45  19.45 20.64 19.34  19.87 20.69 19.71  19.10 20.52 18.82  19.93 20.36 19.79  19.58 20.18 19.28  20.14 20.28 19.45  LONG-TERM COMMERCIAL AND INDUSTRIAL LOANS  All banks 48 large banks Other banks  All Sizes  $199  $100499  $500999  $1,000 & over  19.25 19.20 19.40  19.22 19.90 19.10  19.34 19.54 19.26  19.48 19.32 19.70  19.23 19.16 19.68  CONSTRUCTION AND DEVELOPMENT LOANS2  All banks 48 large banks Other banks  All Sizes  $124  19.09 20.17 18.72  19.83 21.62 19.74  $2549  $5099  $100499  $500 & over  19.06 21.09 18.89  19.06 21.01 18.87  20.74 20.56 20.79  19.35 19.89 18.89  LOANS TO FARMERS  All banks 48 large banks Other banks  All Sizes  $19  $1024  $2549  $5099  $100249  $250 & over  17.88 19.54 17.54  17.50 18.64 17.46  17.59 18.42 17.55  17.67 18.88 17.59  17.78 19.01 17.63  17.97 19.36 17.77  18.46 19.82 17.07  1/  The approximate compounded annual interest rate on each loan is calculated from survey data on the stated rate and other terms of the loan; then, in computing the average of these approximate effective rates, each loan is weighted by its dollar amount.  2/  The average interest rate calculation for the $50-99 thousand category excludes one outlying loan record.  (Continued)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • -43-  (Continued) Note:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The survey of terms of bank lending is taken of about 340 banks selected to represent all sizes of banks. The sample data are collected over one business week and used to estimate lending terms at all insured commercial banks. Short-term loans have original maturities of less than one year, and long-term loans have maturities of one year or more. Construction and land development loans include both unsecured and loans secured by real estate. Thus, some of the construction and land development loans would be reported on the statement of condition as real estate loans and the remainder as business loans. As of 12/31/80, average domestic assets of 48 large banks were $11.4 billion and assets of the smallest of these banks were $2.3 billion. For all insured banks, total domestic assets averaged $105.8 million. The survey of terms of bank lending to farmers covers about 250 banks selected to represent all sizes of banks. The sample data are collected over one business week and used to estimate lending terms at all insured commercial banks. Loans secured by real estate, purchased loans, foreign loans, and loans of less than $1,000 are excluded from the survey.  .  •  •  ,  -44-  pay for loans from one of their key credit sources.  Rising interest rates  have, however, imposed a substantial cash flow burden on many small businesses because of their heavy reliance on debt financing.  This likely was reflected  in the finding of the March 1981 Heller/Roper Small Business Barometer that almost 40 percent of the small businesses surveyed have put off modernization or expansion because of high interest rates; comparable information does not exist for large business, so it is impossible to gauge the relative severity for small firms. Problems of credit availability do not appear to have worsened markedly for small businesses this year.  Forty-five percent of the respondents  to the July 1981 NFIB survey described themselves as a regular borrower; only one fourth of these reported that money was harder to get than three months earlier.  This proportion was about the same as in the April 1981 survey.  Inflation High interest rates are not the only factor creating stresses for small businesses.  Many of the troubles confronting small businesses are  directly or indirectly the product of an escalating inflation.  Indeed, from  1973 until the second quarter of 1981, when there were indications that the rate of inflation might be slowing, the NFIB survey respondents cited inflation most frequently as the single most important problem facing their business. Interest rates and financing replaced taxes as the second most often cited problem only in recent quarters and replaced inflation as the most frequently cited problem in the second quarter of 1981.  While the House Report respon-  dents indicated that inflation was second to financing and interest rates as the most important problem facing the business at the actual time of their survey in April 1980 (when interest rates had just risen unusually rapidly), :   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  w 1  .  I  •  •  .  -45-  the most pressing problem cited for the near term was that the business believed it would not be able to pass through added costs to customers and still remain competitive.  The White House Commission Report also stressed  the importance of reducing inflation as a major objective for small business. Inflation affects small businesses in several ways. variable price changes make business planning difficult.  Frequent and  Increases in input  prices and wage rates result in a squeeze on cash flow if the business operates in an environment in which competitive pressures or sluggish demand prevent it from passing along the entire increases to its customers.  To cover  cash needs, businesses are forced to borrow more--and at high interest rates that themselves reflect inflation expectations and the effects of monetary restraint required to damp inflation forces.  Some businesses have found that  they cannot continue to cope with the strains created by inflation. Bankruptcy The substantial increase in bankruptcy filings since the end of 1979 (see chart on page 46) is an indicator of the difficulties experienced by small business.  Business bankruptcies, which ranged between 2100 to 3200  on a seasonally adjusted monthly average basis from 1976 through 1979, have been running between 3000 and 4300 since the beginning of 1980.  The interpre-  tation of these numbers is unclear, however, since they reflect not only the economic conditions but also the revision of the Federal Bankruptcy Code that took effect in October 1979 as a result of the passage of the Bankruptcy Reform Act of 1978.  Changes in the code have made filing of bankruptcy less  onerous and have provided particular relief to eligible sole proprietorships. They are permitted to file under Chapter 13 which allows them to retain their assets as long as they are regularly repaying debt.  If the proportion of  businesses continuing in operation, rather than liquidating, after the filing   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  BUSINESS BANKRUPTCIES (seasonally adjusted)  Number of filings '5,000  illnommome  --- 4,000  •  111.•••••••  1011••••=0  --- 3,000  ammonia  Illmwommo  29000  ammmoll.  • 1,000  1111=4,  0  411•••.=••  1  1  1  1  1  1  1970 1972 1974 1976 *Prior to 1974, monthly estimates are derived from quart erly data. Source: Administrative Office of the U.S. Courts and Federal Reserve. Latest data plotted: June 1981.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1  1 1978  0 1980  ••  •  • -47-  of bankruptcy has risen as intended under the new code, the increased number of filings may not be as serious as it appears.  Federal Reserve Board Actions The Federal Reserve is pursuing its efforts to understand and deal with the particular financial problems of small business.  As a matter of  continuing policy, the Board encourages commercial banks to take into consideration the special needs of their small business customers.  Also, each of  the Federal Reserve Banks has recently appointed a Community Affairs Officer who serves as a point of contact and information exchange on issues and problems that may be of special concern in the local area, including those related to small businesses.  The Board, in conjunction with an interagency  task force on small business finance, has underway a project specifically focusing on the financing needs of small businesses.  An important part of  the project is an interview survey of commercial bank small-business lending practices at a small sample of banks throughout the country.  The results of  the survey will be available early next year and should yield further insights into the impact of credit conditions on small businesses.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  MEI  •  • •  ..••  GOyk-' .  BOARD OF GOVERNORS OF THE " 4  - •  FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551  RaLftt.s • • •..• • •  September 3, 1981  PAUL A. VOLCKER CHAIRMAN  The Honorable Richard Bolling Chairman Committee on Rules House of Representatives Washington, D.C. 20515 Dear Chairman Bolling: I am writing in response to your request for the views of the Federal Reserve Board on proposals to improve congr essional review of federal programs, specifically H.R. 2 and H.R. 58. As you know, I have emphasized in congressional testimony that a high priority must be given to slowing the momentum of growth in federal spending if the budget is to be broug ht into balance. Appropriate consideration must also be given to impro ving economic incentives by reducing the historically high ratio of tax revenues to GNP. To that end the Congress has just enact ed a far-reaching program of tax reductions, including index ing personal income taxes, that will have the effect of permanently constraini ng growth of federal revenues. In these circumstances it is all the more important that spending restraint not be a one time effort, but that Congress continue to build on the progress it has made in that direction. Further progress by Congress in controlling government expenditures would clearly be assisted by enhancing the congressio nal review of authorizations. The experience of this year indicates that federal spending that is "uncontrollable" under curre nt law can be controlled if Congress is willing to change existing laws, particularly in those areas that are not subject to effective limitations on spending through the annual appropriations proce ss. A regular cycle of reauthorization of a much larger number of programs and a systematic plan for detailed review of the most important programs or groups of programs appears likely to assist the Congr ess to expand the controllability of the budget while meeting high priority needs. It also appears entirely appropriate to extend procedures for such systematic review to special tax provisions, or so-called "tax expenditures," since direct spending and tax expenditures are frequently alternative means for achieving the same program objective.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Honorable Richard Bolling Page Two  I would note that, as recognized in the proposed legislation., there are some types of programs where success and viability dependt on assured continuity. In these cases there would be little to gain and possible adverse consequences from the uncertainty that would result from including them in a new review effort. Finally, it appears desirable to integrate procedures for program revivu and reauthorization with the existing budget process to the maxlmum extent possible. I do not believe that it is appropriate for the Federal Reserve to go be-land these general observations since the detailed provisions of these bills are concerned with congressional procedures and administration reporting, areas which are outside the responsibilities and expertise of the Federal Reserve System. I appreciate the opportunity to comment on these bills. Sincerely, Seaut A. Vol_cliec SL:FMS:JSZ:RS:pjt (#V-190) bcc: Mr. Zeisel Mr. Struble Ms. Lepper Mrs. Mallardi (2)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  a  •  •  •  RICHARD fot ING, MO., cHI.RIMIAN rrrE P. FLA„ GiLL.111 w. LoN  LA.  outuin.i. Tf NN., JAMES RAMAING MINORITY MEMBER  Pinttp-irebriittionmartog  •  Reprtilentatibt5 Committei. on Aufai  A NTHomy C. ME It ENSON, CAur. mARTiN FROST. TEx. DAVID E. soNtort. MICH. TONY P. HALL, 0)-410  GENC TAyLOR. MO. JOHN J. RHo01111, ARIZ.  WILLJAMD.CW)SSY,JR. MINORITY C.01.R4SCL  iiias'bing-ton, 0.C. 20515  SAYERS. in.  STAPP DUIt1LCT   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Diri.J111- RT L. LATTA. OHIO TRENT LOTT. miss  3DOUCSt of  JOHN JOSEpH moAKLEY. MASS. SHIRLEy CHIsHoLM. N.y. So C. ZEIrterrT-ft, N.y. riuTLER r.,t- Raicx S.C.  A. A  Action assigntl Mr. Kichtine  July 8, 1981  al C) ""cl "T1  Honorable Paul Volcker Chairman Federal Reserve System Washington, D.C. 20551  LID CO  =I ' . a  1 C.0  r  Dear Mr. Chairman: GE)  =ni  Later this yevir, the Committee on Rules, at the subcammitteeT;levdE will hold further hearings on proposals to improve congressional !review) of Federal programs. The legislation to be considered includes ELR. 2°1 and H.R. 58. These hearings are a continuation of the Committee's efforts to develop procedures for comprehensive and coordinated oversight. The current budget reconciliation and reduction efforts point out the need for ongoing program review to provide better information about the performance of programs, and to enable committees to make informed choices. Your views on H.R. 2 and H.R. 58 are requested. Copies of these bills are enclosed to assist you in the preparation of your remarks. Your comments should be submitted not later than August 14. Should you have any questions regarding this request, please contact Maggie O'Kane in the subcommittee office at 225-1037. We would appreciate having the name and telephone number of the person to wham primary authority for the preparation of these materials is delegated.  Richard Bolling Chairman  Enclosures:  2  c • :-  /I 0:73 "T-1 rry  Sincerely,  r  • BOARD OF GOVERNORS  •  OF THE  • co '• '0 • -r1  .• /:  .. `,474 ,..1.,..;,,, ,.1, ci r.l ,; ...., •K 11!I .., r 1  --..../74-3.•  ..e.-44,;(--,-,L: ..4ic ,,u7s'..* •••...•  FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551  September 3, 1981  PAUL A. VOLCKER CHAIRMAN  The Honorable Charles E. Schumer House of Representatives Washington, D.C. 20515 Dear Mr. Schumer: Thank you for your letter of July 28 enclosing a copy of your letter to the New York Times. The Board of Governors shares your concern relative to the maintenance of a compe titive financial environment. On July 8, Governor Gramley testified on mergers in the financial industry before the Subcommittee on Monopolies and Commercial Law of the House Judiciary Commi ttee. Rather than repeat his testimony, I am enclosing a copy of his statement and will just comment briefly on the points raise d in your New York Times letter. With respect to the issue of the long run effects of deregulation, I doubt that this country would ever evolv e a European style financial system. We have over 14,000 comme rcial banks alone, and even though there are many bank mergers each year, many new banks are formed. In addition, the antit rust laws, which are incorporated in the Bank Merger Act of 1960 and the Bank Holding Company Act of 1956, should prevent the development of excessive nationwide concentration. Moreover, despite recent mergers, we believe that the financial system has become increasingly competitive. New produ cts and services have been developed, existing firms have been permitted to expand their services, and new firms are offering new financial services. The result has been an intensified level of competition that has benefited consumers and business firms. We do not believe that such competition will eliminate the small financial entrepreneur. Our studies, one of which is mentioned in Governor Gramley's testimony, indicate that the small bank can compete quite profitably with much larger banks. The Board remains vitally concerned with the implications ot tinancial concentration for our political and social insti tutions, and we will continue to examine mergers and other finan cial changes in terms of their potential impacts on the concentrat ion of financial resources. Sip9erely,  Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  [Caw  eeeceeuzeLpeitee ift144.49-4A4A -fulkawileuf/12,jx_xtutaiiatial-14--f40?-4- kattel, Cut_  • CHARLES E. SCHUNILr-  146 CANNON FA  COW-in-Tr ES  •  Congrtf.',5 of tOt Elniteb *tater')  f. •NC;. FINANCE A Nbr. 1.09 BAN AFFAIRS  .,OST OtUICE AND CIVIL 5E1-2\10  OrlrICE Bott.01,4c.  WASNINGION. D.0  411  DISTRICT, NEW YORK  2501 Avr•rtir BROOKLYN. NEW YORK (212) 7413-3P00  11:29  ',)0115c of ikepreclitatitic5  •  Z.ZIasbington, Ti.C. 20515 July 28, 1981  C:1 ''.1 ...1  I9  The Hon. Paul Volcker Chairman, Board of Governors Federal Reserve System Constitution Avenue, NW Washington, D. C. 20551  (......z.  !. . . )._ 1'7 i  '- J , .17 ‘tt -J C.') s  C-----  CZ,.71  ''ir-7 --ix) ::.' .1  r---  ,.  LI  ,,,,,,;,_  -....„  . . '---ir .5 -:". 1  --  '•••• •' • • -4  Dear Mr. Volcker: Within the past month, the potential failure of a number of "thrift" institutions has elicited a spate of articles and proposals concerning the future composition of all of our financial institutions. Myriads of suggestions have reached Congress proposing reorganization of not only the thrift industry, but the commercial banking, securities, and insurance industries as well. These proposals range from complete deregulation of financial institutions to a variety of tighter controls than now exist.  For this reason, I will be joining Representative Fernand St. Germain, Chairman of the Financial Institutions Subcommittee, for hearings in Washington on this subject. The hearings begin on July 28, 1981, and continue, after the August Congressional recess, through September and October. I hope you will contact me if you have any suggestions about who should testify. I am also enclosing a copy of a letter published in the New York Times a few months ago in response to what I thought was a rather hasty editorial in support of quick removal of many financial controls. I welcome your comments on the letter. Sincerely, ( y ( 440 e CS—Ckt-"L CHARLES E. SCHUMER Member of Congress CES/joy Enclosure THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS  :.‘  f  I believe that these proposals, which if enacted would have an immense impact on the national and international economies, have received far too little private study and public comment. And, though many groups have made specific proposals to benefit their particular corner of the financial world, no one has yet developed an overall blueprint for the future of our financial institutions. Before we begin to tamper with the law, Congress should have a clear vision of what it hopes to achieve.  J  '..2  g..; r • 3,7 ) , -ri i i  r:r-'i  Z-* ;;/  ., .  C:.  :2-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2;515  (202) 225-6616  !-)1 •  .1  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  Schumer, Charles. "If Financial Darwinism Is Allowed to Prevail." New York Times, April 27, 1981.  Federal Reserve Bank of St. Louis  https://fraser.stlouisfed.org   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • • .**SS)  GOvt ••  R •  BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20SSI  'A-1( '`c64".• • Res - ' itAL • •• •• •  PAUL A. VOLCKER CHAIRMAN  September 3, 1981  The Honorable Ed Jones Chairman Subcommittee on Conservation, Credit, and Rural Development Committee on Agriculture House of Representatives Washington, D.C. 20510 Dear Chairman Jones: Thank you for your letter of August 25 inviting testimony before your Subcommittee on the report to Congress prepared by the Commodity Futures Trading Commission concerning various aspects of the silver market during late 1979 and early 1980. I am pleased to designate Mr. E. Gerald Corrigan, president of the Federal Reserve Bank of Minneapolis, to appear before your Subcommittee. Prior to becoming president of the Minneapolis Bank, Mr. Corrigan served as my special assistant and in this capacity was very much involved in our deliberations with respect to the silver market. Please let me know if I can be of further assistance. Sin erely,  cc:  bcc:  The Honorable James M. Jeffords  Mr. Corrigan (w/cop Mrs. Mallardi (2) ,/ CO:sep (WV -239)  of incoming letter)  . r 4 , 00 -ovrs.  •  •  TENN.,  CHAIRMAN BERKLEY BEDELL, IOWA DAN GLICKMAN. KANS. TOM DASCHLE S. DAK. BYRON L DORGAN N. OAK. DAVID R. BOWEN MISS. TOM HARKIN, IOWA GLI-P4N ENGLISH OKLA. FLOYD J. FITNIAN. IND. 1-10P4 IL PANETTA, CALIF.  IL THOAAAS COLEMAN, MO. PAT ROBERTS KANS. JOHN L. NAPIER,  jOoti5e of 11epre.s'entatibr5 (Committee  Otgriculture  BERYL ANTHONY JR., ARK.  rwror_picx w.  RICNMOND, N.Y.  ▪(KIKA) Or LA GAR r EX Of T IClu At,  TEX., ..  JAMES M. JETTOROS, VT.. RANKING MINORITY MEMBER  Ibubcommittec Coniscrbation. Crebit, anti laurai Mbrlopment  JOE SKIIrrI. N. 14tX. SID MORRISON. WASH. CLINT ROBERTS. II. OAK. STIEVI GUNDERSON. WIS. COLIMA [VANS. IOWA WILLIAM C.. WAMPLER. VA, ILX OFFICIO AIIMBIER  IMOLA ALLICIr. 0.11140ItITY CONSUL.TANT  Awn 1301, tongthortb 11.1oufst Office Aluabing  IROSEIIT A. CASHOOLLAR, BTAFT DIRECTOR  Ulastington, AC. 20515 •  August 25, 1981  t —V1  'Xi  The Honorable Paul A. Volcker Chairman, Board of Governors of the Federal Reserve System Federal Reserve Building Washington, D. C. 20551  rt": , •  .• • -......  ;Ls.) „ fs•  .. 4  Dear Mr. Chairman: On October 1, 1981, at 9:30 A.M. in Room 1302, Longworth House Office Building, the House Agriculture Subcommittee on Conservation, Credit, and Rural Development will hold a public hearing on the report to Congress prepared by the Commodity Futures Trading Commission concerning various aspects of the silver market during late 1979 and early 1980. As you know, Section 7 of P.L. 96-276 required this report by the CFTC in conjunction with the Federal Reserve Board, the Department of the Treasury, and the Securities and Exchange Commission. The report was delivered to Congress on May 29, 1981. We would appreciate you, or your designee, appearing as a witness during this hearing to advise the Subcommittee of your agency's role in preparing the report and to discuss findings and conclusions contained in it. For further information regarding this hearing, please contact Robert Cashdollar, Staff Director of the Subcommittee, at 225-1867.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  With kindest regards and best wishes. incerely  James M. Ranking M no  Ed Jon Chairman  y Member  0//  : • :41   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • September 3, 1981  The Honorable John Heinz Subcommittee on International Finance and Monetary Policy Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. 20510 Dear Chairman Heinz; Enclosed is a copy of a report on foreign exchange operations by the Treasury and the Federal Reserve covering the period from February 1981 through July 1981. The report will be printed in the September issue of the Federal Reserve Bulletin. It is being released to the press for use in tomorrow morning's newspapers. Sincerely,  SZPaul A, Volcker  Enclosure JRC:pjt bcc: Hrs. Eallardi (2) Identical letters also sent to: Sen. Proxmire (ranking minority member of Senate Bkg. Subcmte. on International Finance) rN,04( Chrmn. Patterson (House Bkg. Subcmte. on International Investment-I—and —Mcrnutary—Rallay))  Vice Chairman Roger W. Jepsen, JEC Clarence J. Brown (ranking minority—House side--JEC) Lloyd Bentsen (ranking minority--Senate side--JEC)  •  •  • September 3, 1981  The Honorable Henry S. Reuss Chairman Joint Economic Committee Washington, D.C. 20510 Dear Chairman Reuss: Enclosed is a copy of a report on foreign exchange operations by the Treasury and the Federal Reserve covering the period from February 1981 through July 1961. The report will be printed in the September issue of the Federal Reserve Bulletin. It is being released to the press for use in tomorrow morning's newspap,rs. Copies of the report are also being sent to the Chairmen of other interested Committees. Aaditional copies are enclosed for the use of members and staff of your Committee. Sincerely,  S/Paul A. VolckeE  Enclosures (30 copies) Identical letters to:  Chairman Jake Garn, Senate Banking, 20 copies Chairman St Germain, House Banking, 50 copies  JRC:pjt bcc: Mrs. Mallardi (2)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  4111  A  •  NNW  (\)- aLia) BOARD OF  .30VERNORc_.3 THE  FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551  September 2, 1981  pAuL A.  voLCKER  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: Your letter of September 1 asks about the present status of thrift industry use of the discount window. As you know, consistent with the Monetary Control Act of 1980, the Federal Reserve System extends credit at the discount wind ow on the same terms and conditions to banks and other depository inst itutions offering transactions accounts or nonpersonal time deposits. Credit is available for traditional short-term adju stment purposes and, as circumstances warrant, to meet longer-term needs in the interest of assuring the sound functioning of depository institutions at time of strains on liquidity. These prog rams were set forth in the revision of the Federal Reserve Boar d's Regulation A, published in September 1980. As I previously noted, almost 500 thrifts as a matter of contingency planning had filed, or were in the process of filing, the general agreement needed before credit can be provided under any Federal Reserve lending program. This number has now grown to about a thousand. Such agreements are a norm al part of the System's relationship with eligible depository institut ions, whether or not they actually borrow, and virtually all memb er banks have long had them in place. In the light of several requests for extended credit by thrifts, the Federal Reserve recently anno unced discount rates applicable to extended credit for deposito ry institutions facing sustained liquidity pressures. Applications for such credit thus far have been fairly limited, but a more sizable number of thrifts have indicated they plan to apply. Many have specifically asked about the conditions under which they woul d be eligible to borrow under the extended credit program. In all its lending programs, the Federal Rese rve acts essentially as lender of "last resort"-that is, borrowing institutions are expected to borrow from the Fede ral Reserve for liquidity   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  'The Honorable Fernand J. St Germ:lin Page Two  pul- i,osc..; only when other sources of funds are not reasonably availablc. This long established principle grows, among other considerations, out of need to reconcile Federal Res erve lending policies with the basic requirement that the gro wth of Federal Reserve credit--of which Federal Reserve loans are one component--be restrained to amounts appropriate to mee t objectives with respect to monetary and credit expansion. Accordingly, to be eligible for discount window credit at the Federal Reserve, a depository instit ution must show that it has made reasonable efforts, under prevai ling market circumstances, to maintain fund flows from usual source s, including special industry lenders. Institutions which, despite suc h efforts, are experiencing sustained liquidity pressures may obtain advances under the extended credit program. The discount rate applic able to such credit at present is 14 percent for the first 60 days, 15 percent for the next 90 days, and 16 percent thereafte r. Advances may be outstanding for up to 9 to 12 months, and if necess ary, credit may be extended beyond that period. However, as borrow ing is more extended, more rigorous or definite measures to assure ultimate repayment of the loan would be required. The credit will be fully collaterali.zed, - " with collateral valued at 90 percent of its estimated market price. The amount of funds available to an ind ividual institution will, of course, depend on an assessment of its need, in consultation with the institution's primary superv isor or special industry lender, as appropriate. If an instit ution is a member of the Federal Home Loan Bank System, it is expected that its local Home Loan Bank will maintain its outstanding credit to the institution and will ordinarily also provide a portio n of the new borrowing need. Other borrowing institutions are expected, as may be reasonable under existing market circumstances, to show evidence of a continuing effort to maintain inflows from deposits and other market sources, and as appropriate to draw on existing bank lines. Moreover, while obtaining extended credit at the discou nt window, bbrrowers are expected to draw upon internal liquidity (including Federal funds sold) to the extent such liquidity is in excess of their minimum operating needs. Borrowing under the extended credit pro gram may also involve a number of other asset adjust ments by the borrower. Sales of longer -term assets (such as Govern ment and Government-related securities, corporate bonds, or mortgages ) will be encouraged where they can be accomplished without unreas onable loss. Outstanding loan commitments may be accommodated, and some minimal new lending might be needed for an institution to rem ain viable in serving its immediate community and existing deposi tors or to meet requirements   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • The Honorable Fernand J. St Germatn Page Three  -ith issuance of "All-Cavers" certificates. Maintaining a prosonc,_: in the marhet in "mortgage banh.ing"--that is, originating and promptly placing loans with other investors--would also be consistent with the program. However, borrowing institutions would not be expected to undertake loan expansion programs beyond this framework. When the sustained liquidity pressures that caused the institution to borrow from the Federal Reserve abate, the institution is expected promptly to begin reducing its indebtedness to the rederal Reserve. To insure full undcrntanding and effective administration of the program, each borrower is expected to work out a written plan with the Federal Reserve Bank that details how it expects to strengthen its financial position and encourage a reflow of funds from other sources. The Federal Reserve will, in the process, consult closely with the borrower's applicable supervisory agency. I am enclosing the administrative guidance provided Federal Reserve Banks as a framework for appraising individual applications under the extended credit program. It should be understood, of course, that discretion and judgment must necessarily be exercised by the lending officers familiar with the circumstances of the particular borrower. Sincerely,  rt0,1 Saaml A. YuIcket Enclosure SHA:PAV:pjt (0-N-242) bcc: Mr. Axilrod Mrs. nallardi (2)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  Administrative Guidance To Aid Federal Reserve Banks in Implementing Provisions of Regulation A Pertaining to the Extended Credit Program for Depository Institutions Facing Liquidity Strains  Eligibility.  To be eligible for extended Federal Reserve credit,  an institution will have to show that it is experiencing sustained liquidity pressures despite reasonable efforts, under prevailing market circumstances, to maintain fund flows from usual sources, including special industry lenders. Operating plan.  To insure effective administration of the program,  each borrower as a condition of the loan is expected to work out a written plan with the Federal Reserve Bank, spelling out a specific method for strengthening its financial position and for encouraging a reflow of funds from private sources within a reasonable period of time.  In developing this  plan, the Federal Reserve will consult closely with, and expect concurrence from, the borrower's applicable supervisory agencies.  Among other things,  the plan will include a financial forecast that identifies the institution's expected operating plans, its projected funding needs, the economic assumptions on which these projections are based, and the specific steps the institution intends to take to improve its liquidity position and repay its borrowing.  If the urgency of a borrower's need for funds provides  insufficient time for working out the full details of the borrowing plan, Federal Reserve credit will at the outset be advanced on a day-to-day basis until the plan for extended borrowing can be completed. Loan amount.  Limits on loan amounts should not be set arbitrarily,  given the need for flexibility in accommodating the specific needs of individual institutions.  However, in cases where borrowings from the Federal  Reserve are relatively heavy, monitoring of loan performance, in concert   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • - 2  with the borrower's primary supervisor and insurer, will have to be especially rigorous. Loan duration.  In general, advances under the extended credit  program could be expected to be renewed from time to time, but it is anticipated that these advances ordinarily would not be renewed beyond nine to twelve months.  However, if a borrower's need justifiably continues beyond a year,  the credit may be extended.  As a matter of principle, the more protracted  the borrowing, the firmer the measures the borrower will be required to take to insure ultimate repayment of the loan.  Loan contracts will be  drafted in the form of demand obligations, with repayments consistent with these policy Guidelines. Use of other sources of funds.  Institutions borrowing under this  program will be expected to evidence a continuing effort to maintain deposit inflows.  Further, to the extent that borrowing needs result from erosion  in other than consumer deposits, borrowers will be expected to evidence a continuing effort to refund discount window credit in these nonconsumer deposit markets where reasonable terms can be obtained.  These other markets  include, but are not limited to, commercial bank back-up lines, repurchase agreements, mortgage warehousing, and large denomination CD's. Reliance on internal liquidity.  While using the discount window  for this purpose, borrowers will be expected to trim their holdings of cash equivalents (including federal funds sold) to the minmum levels consistent with their operating needs.  Also, to the extent practicable, they will  be expected to apply temporary excess cash balances to the reduction of discount window loans.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • Sales of assets.  To minimize drawings of other extended credit,  borrowers will be encouraged to cover as much of their funding need as feasible through the sale of assets (such as Government and federal agency securities, GNMA pass-through certificates, corporate securities, and mortages) where such sales can be accomplished without experiencing unreasonable market losses. Limits on investment growth.  Users of the window under this  program will generally be expected to eschew any increase in security investments while borrowing.  In addition, cash reflow from maturing  obligations should be used, to the extent feasible, to reduce reliance on the discount window. Limits on expansion of loan portfolio.  While obtaining discount  window credit under this program, institutions will be permitted to accommodate outstanding loan commitments.  While some minimal new lending  might be needed for the institution to remain viable in serving the immediate community and existing depositors or to meet requirements associated with issuance of "all-savers" certificates, the institution will not be permitted Renewed forward commitments may be per-  to engage in an expansion program.  mitted in the context of a prearranged plan when operating improvements indicate clearly that an institution can repay its debt to the Federal Reserve in the relatively near-term. Collateral procedures.  Loan collateral should be held either  under a third party custody arrangement or, if some Reserve Banks believe this to be necessary, at the Reserve Bank itself.  Collateral should be  valued at 90 percent of its estimated market price and revalued frequently, perhaps monthly.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FERNAND J. ST GERMAIN, R.I.. CHAIRMAN HENRY S. REUSS', WIS. HENRY D. GONZALEZ, TEX. JOSEPH G. MINISH, N.J. FRANK ANNUNZIO, ILL. PARREN J. RdITCHELL, MD. WALTER E. EAUNTROY, D.C. ST, .:PAEN L. NEAL, N.C. JERRY M. PATTERSON. CALIF. JAMES J. BLANCHARD, MIcH. CARROLL HUBBARD. JR., KY. JOHN J. LAFALCF, N.Y. DAVID W. EVANS, IND. NORMAN E. D'AMOUPg4. N STANLEY N. LUNolt,t • MARY ROSE OAKAR. 0$4‘(,) JIM MATTOX, TEX. BRUCE F. VENT°. MINN. DOUG BARNARD, JR., GA. ROBERT GARCIA, N.Y. MIKE LOWRY, WASH. CHARLES E. ScHUMER. N.Y. BARNEY FRANK, MASS. DILL PATMAN, TEX. WILLIAM J. COYNE. PA. WEENY H. HOVER, MD.  •  •  U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING,'NANCE AND URBAN AFFAIRS NINETY-SEVENTH CONGRESS 2129 RAYBURN HOUSE OFFICE DUILDINC3  WASHINGTON. D.C. 20515  September 1, 1981  J. WILLIAM STANTON. OHIO CHALMERS P. WYLIE. OHIO STEWART- B. McKINNEY. CONN. GEORGE HANSEN, IDAHO HENRY J. HYDE, ILL. JIM LF.ACH, IOWA THOMAS D. EVANS, JR., DEL. RON PAUL, TEX. FD BETHUNE. ARK. NORMAN D. SHUMWAY, cAur. STAN PARRIS. VA. ED WEBER, OHIO BILL McCOLLUM. FLA. GREGORY W. CARMAN. N.Y. GEORGE C. WORTLEY, N.Y. MARGE ROUKEMA, N.J. DILL LOWERY. CA1_IF. JAMES K. COYNE, PA. DOUGLAS K. DEREUTER. NEBR. 223-42.47  Honorable Paul Volcker Chairman, Board of Governors Federal Reserve System Washington, D. C. 20551 Dear Mr. Chairman: You are aware of my intense interest in the use of the discount window of the Federal Reserve System by the savings and loan industry as authorized by legislation. I am most interested in receiving, as soon as they are final, your regulations governing the use of the discount window.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely,  Fer-nand J. St Germain Chairman  .• •• •• • .• C°VtR4,•. •• • Q. •**Sr ///,<4. .  •-,  C  t40  •  •  : • • 144., •  • %N PAL W 1.C".• . I. " • .. • •  OOARD OF -30VERNORS m THE  FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551  September 2, 1981  PAUL A. VOLCKER CHAIRMAN  The Honorable Jake Garn Chairman Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. 20510 Dear Chairman Garn: When last I appeared before the Senate Banking Committee on July 22, you questioned me about thrift industry access to the Federal Reserve Discount Window. In that context, I would like to update you on the status of thrift industry use of the discount window. As you know, consistent with the Monetary Control Act of 1980, the Federal Reserve System extends credit at the discount window on the same terms and conditions to banks and other depository inst itutions offering transactions accounts or nonpersonal time deposits . Credit is available for traditional short-term adjustment purposes and, as circumstances warrant, to meet longer-term need s in the interest of assuring the sound functioning of depository institutions at time of strains on liquidity. These programs were set forth in the revision of the Federal Reserve Board's Regu lation A, published in September 1980. As I previously noted, almost 500 thrifts as a matter of contingency planning had filed, or were in the process of filing, the general agreement needed before credit can be provided under any Federal Reserve lending program. This numb er has now grown to about a thousand. Such agreements are a normal part of the System's relationship with eligible depository institut ions, whether or not they actually borrow, and virtually all member banks have long had them in place. In the light of several requests for extended credit by thrifts, the Federal Reserve recently announced discount rates applicable to extended credit for depository inst itutions facing sustained liquidity pressures. Applications for such credit thus far have been fairly limited, but a more sizable numb er of thrifts have indicated they plan to apply. Many have spec ifically asked about the conditions under which they would be eligible to borrow under the extended credit program.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  The Honorable Jake Garn Page Two  in all its lending programs, the Federal Reserve acts essentially as lender of "last resort"--that is, borr owing institutions are expected to borrow from the Federal Rese rve for liquidity purposes only when other sources of funds are not reasonably available. This long established principle grows, amon g other considerations, out of need to reconcile Federal Reserve lending policies with the basic requirement that the growth of Federal Reserve credit--of which Federal Reserve loans are one component--be restrained to amounts appropriate to meet obje ctives with respect to monetary and credit expansion. Accordingly, to be eligible for discount window credit at the Federal Reserve, a depository institution must show that it has made reasonable efforts, under prevailing market circumstances, to maintain fund flows from usual sources, including special industry lenders. Institutions which, despite such efforts, are experiencing sustained liquidity pressures may obtain advances unde r the extended credit program. The discount rate applicable to such credit at present is 14 percent for the first 60 days, 15 perc ent for the next 90 days, and 16 percent thereafter. Advances may be outstanding for up to 9 to 12 months, and if necessary, credit may be extended' beyond that period. However, as borrowing is more extended, more rigorous or definite measures to assure ultimate repayment of the loan would be required. The credit will be full y collateralized, with collateral valued at 90 percent of its estimate d market price. The amount of funds available to an individual inst itution will, of course, depend on an assessment of its need, in consultation with the institution's primary supervisor or special industry lender, as appropriate. If an institution is a memb er of the Federal Home Loan Bank System, it is expected that its local Home Loan Bank will maintain its outstanding credit to the institution and will ordinarily also provide a portion of the new borrowing need. Other borrowing institutions are expected , as may be reasonable under existing market circumstances, to show evidence of a continuing effort to maintain inflows from deposits and other market sources, and as appropriate to draw on existing bank lines. Moreover, while obtaining extended credit at the discount window, borrowers are expected to draw upon internal liquidity (includi ng Federal funds sold) to the extent such liquidity is in excess of their minimum operating needs. Borrowing under the extended credit program may also involve a number of other asset adjustments by the borrower. Sales of longer-term assets (such as Government and Government-related securities, corporate bonds, or mortgages) will be encouraged where   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  • "rhe Honorable Jake Garn Page Three  accomplished without unreasonable los s. Outr:tanding may be accommodated, and some inini:-.11 miy;.i. be n,2e..ied for an institution to remain viable in serving its immediate community and existing depositors or to meet requirements associated with issuance Of "All-Savers" certificates. Maintaining a presence in the market in "mortgage bankin g"--that is, originating and promptly placing loans with other inv estors--would also be consistent with the program. However, bor rowing institutions would not be expected to undertake loan expansion programs beyond this framework. t7,1:1  When the sustained liquidity pressures that caused the institution to borrow from the Federal Reserve abate, the institution is expected promptly to begin reduci ng its indebtedness to the Federal Reserve. To insure full unders tanding and effective administration of the program, each borrow er is expected to work out a written plan with the Federal Reserv e Bank that details how it expects to strengthen its financial pos ition and encourage a reflow of funds from other sources. The Federal Reserve will, in the process, consult closely with the bor rower's applicable supervisory agency. I am enclosing the administrative guidan ce provided Federal Reserve Banks as a framework for apprai sing individual application under the extended credit program. It should be understood, of course, that discretion and judgment mus t necessarily be exercised by the lending officers familiar with the circumstances of the particular borrower. Sincerely,  S/Paul A Volcker  Enclosure  SHA:PAV:WRM:pjt 0V-3 242) Inc: Mr. Axilrod Mrs. Mallardi (2)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  September 1, 1981  The ifonorahle Dale Bumpers United States Senate Committee on Appropriations Vashington, D. C. 20510 Dear Senator Bumpers: I an pleased to respond to your request for comment on a letter that you received from Mr. A. P. Eason, President of First Federal Savings nn,i Loan Association of Fayetteville, Arkansas. In his letter, Mr. Eason expressed his opposition to recent prnposals by the Depository Institutionn Deregulation Committee thnt contemplate increasen in certain interest rate ceilings, includine those on pass— book—type savinls accounts. As you know, the Depository Institutions Dereeuletion Act of 1980 requires the Committee to vote by September 30 of this year on whether to raise the rate on passbook savings nnd similar accounts by at least one guns-ter of a percentage point. To foster public input on this issue, the Committee decided at its June 25 meeting to ask for public comment on a proposal to raise the ceiline by 5 percentage points. I would stress that the proposnl represents but one of many possible options And did not reflect consensus of the thinking on this issue at the June 25 neeting. I have not made up my own mind on this question, but I am reviewing the many comments that hnve been received and the other information thnt haa been r,enarated. The next meeting of the Committee is scheduled for September 22. Sincerely,  00411 UB:cak 0231 cc: Mr. Ettin   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  '•{\ (,v._06k,,4,12k -1(Vv  dew  IIATI , t I  MA FIK  r  CIIAIRMA  i •AIJI TROXM'PE,  Kr, `,"  r Iiihr  Loovrt_t P. JAIN(  0  Action assigned Mr. Ettin•  •  C ' •• N .  '.P.4 C. P•TINNIS. P.A 33.  .nr.rir c. nYRD. W. VA. K. 1.4ottyc. HAwAii 1 , ... sr F . P•r•LI IN.:. 3 C.  •  14  !••P4$1- L.  • ,.•  JAKr HAP' . :'  r.r  '1  r  7 P  •  .s•t•,  •;  144•,,K • • •.  J•MI •“. fir .• I  4.4,  4.4  0.  • •'' !•4  44  J. Di NNL1 T .20NNSTON. LA.  o<  •  .FF11 C). P4110C`Lr .. .TON. KY.  .4P  ALF (•••• , 1 P4F 144 ACP( IV • r • •,  r. CAGLE- MN, , 1 40. LA...10N Cr4iLIES, ri...A.  1.,•- ••••S  -  •.17.4 N. 111/11DICK, N. OAK.  •r  V.A.( .I. ECANY. VT.  .4  A SCI R. TENN.  •  %%ARK,•• Al1  •..,15 or  'ZCnifeb Zfater-./ Zertafe 1,98/ aut.; 7 n,N 10 COMMITTEE ON ArPROPRIATIONS WASHINGTON  August 7, 1981  • ' DOMPFli 1. AFIK.  Air r VAS.4.Pt   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  D.C. 20510  EF.NE.1141. Arta.  D'INITCT01111  r. PA `., N1TY STAFF' DIRECTO"  [ .11 //°  Mr. Paul Volcker, Chairman Federal Reserve Board 20th and Constitution Avenue 20551 Washington, D.C. Dear Mr. Volcker: Enclosed is a letter from Mr. A. P. Eason, Jr. I am sure Mr. Eason concerning recent DIDC proposals. would be interested in your response to his concerns. Thank you for your attention and assistance in this matter. Sincerely,  Dale Bumpers DB:bpm Enclosure  . Paul Volcker L.-  4)  .r  .  first fAeral savings  •  AND LOAt. A!--,!--,0c:IATION OF FAYE T  1st PLACE  ▪  P O. BOX 1647  -  irvia I  FAYETTEVILLE. ARKANSAS 72701  •  501 / 521 3424  July 28, 1981  Mr. Gordon Eastburn Acting Executive Secretary repository Institutions Deregulation Committee koc,-, 1954, Department of the Treasury 15th Street and Pennsylvania Avenue, N.W. .,ishington, D. C. 20220 Re: Docket Number D-0020 and D-0021 Lear Mr. Easturn: I am gravely concerned about the most recent proposals of the DIDC. As I ar:. sure you know, the savings and loan industry is in serious trouble. If these pror9sals are enacted, it would greatly accelerate the industry's difficulty, and might possibly result in the elimination of the savings and loan business as a viable part of the financial structure of our country. I must relate these proposals as to how they would directly affec t our institet.ion. I organized this association and opened for business in November of 1953. Our current assets are slightly in excess of $90,000,000. ln our twenty eight and c:,e half years of operation, I feel that we have done much to benefit the Northwest Akarsas area. At the time we were making long-term real estat e loans, we were alsG conducting a conservative operation and building.our reer ves so they have elwy7-, been in excess of the Federal Home Loan 5ank requiremen ts. The changes in the interest rates over the past year and . a half have rade it imnossible for us to cntinue to have a profitable operation. In fact, we are curre ntly losing over $100,000 a month of our net worth. If the latest proposals are adopt ed, this could eujly double the amount of our loss. I do not believe that increasing the passbook rate, or any of the other prop:,sals, will do anything other than increase our cost of money at a time we can ill afford to have it happen. I would urge you to defer any further rate increases until we have had time to restructure our assets so we can properly compete for fnnds. Sincerely, First Federal Savings and Loan Association of Fayetteville  A. P. Eason, Jr., Pr sident cc: Senator Dale Bumpers Senator David Pryor Congressman John Paul Hanuaerschmidt   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  MALL BPANCH OJAI t. rAvr T':  lr  tr,VA•4' AS 72701 14114  PRAIRIE GROVE BRANCH POST Ot FICA ROx PPAIRIF GDOVE Auk ANCAS 72/53 PHONE NO 2105  [WO •:.I- u.NGS BRANCH p, • r•I 1 - 1 pc,k ,  F 1 H"  g.o. NIA': A :'  h;"!.  72E3Z
Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102