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Federal Reserve Bank of St. Louis
Collection: Paul A. Volcker Papers
Call Number: MC279
Box 11
Preferred Citation: Congressional Correspondence, March 1982 [Folder 1]; Paul A. Volcker
Papers, Box 11; Public Policy Papers, Department of Rare Books and Special Collections, Princeton
University Library
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Federal Reserve Bank of St. Louis
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WASHINGTON, O. C. 20551
March 12, 1982
RAUL A. VOLCKER
CHAIRMAN
The Honorable Bruce F. Vento
House of Representatives
Washington, D.C.
20515
Dear Mr. Vento:
Thank you for your recent letter submitting several
questions as a follow up to my appearance last month before
the House Banking, Finance and Urban Affairs Committee. Your
questions deal with curbs on the use of bank loans to finance
speculative activities or mergers and corporate takeovers, the
possibility of legislation designed to prevent credit from
going to certain "undesired" uses, and the issue of contemporaneous reserve requirements.
I'm sure you recognize the practical difficulty of
defining "speculative" or "purely financial" purposes. With
regard to financing corporate takeovers, it can be said that
the volume of bank credit devoted to such activities has been
relatively small. Although there were a number of highly
publicized large credit lines arranged for such purposes in
the second half of 1981, some of those lines were never used
and others were drawn upon only temporarily. Furthermore,
only a portion of those credits were extended by U.S. banking
offices.
In any event, merger financing generally can be
expected to have little lasting impact on the cost and availability of credit to other potential borrowers. These transactions fundamentally involve a transfer of assets--not the
absorption of new saving. The sellers of stock to the
acquiring firm reinvest the proceeds, thereby making the
capital available to others. Under the circumstances, we
have felt it neither necessary nor desirable to take special
steps to curb takeover loans. More generally--and this
addresses your second question--the Federal Reserve has great
reservations about government intervention in the allocation
of credit. Decisions by the government regarding "desirable"
uses of credit would be highly debatable and arbitrary, and
would likely have unintended side-effects that impair economic
growth and efficiency. These lessons can clearly be drawn
from the nation's experience with credit controls in the spring
of 1980.
In regard to your final question, the adoption of
contemporaneous reserve requirements (CRR) may enhance somewhat
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Federal Reserve Bank of St. Louis
•
•
••••
The Honorable Bruce F. Vento
Page Two
the Federal Reserve's ability to control money over the very
short run. Under CRR, variations in reserve demands--and
pressures in the reserves market--would reflect variations
in reservable liabilities of depository institutions in the
current reserve period. Consequently, a tendency for deposits
to surge in a particular week would lead to a prompter
tightening of reserve market conditions under CRR, as enlarged
reserve demands in that week pressed against a limited supply.
This response, in turn, would immediately begin to restrain
the increase in the money stock. However, such a potential
gain must be weighed against the additional operating costs
that CRR would impose on the Federal Reserve and private
depository institutions. In addition, CRR might well increase
somewhat weekly volatility of short-term interest rates by
diminishing the ability of the Federal Reserve to insulate
reserve market conditions from purely transitory fluctuations
in money demand.
Evaluation of the advisability of returning to CRR
is made more difficult by the lack of clearcut evidence regarding
the extent to which monetary control would be improved. Moreover, CRR would not appear to be a significant factor in controlling money over longer periods of time, such as a quarter
or more, and studies indicate that short-run movements in money,
provided they are subsequently reversed, do not significantly
affect the pattern of economic activity and prices.
The question of CRR remains under active review by
the Board of Governors. We have received public comment on
a specific proposed plan, and we will be considering the issue
again in the near future.
I hope you will find these comments useful.
Sincerely,
CR:tif A. VoNot
TB:DJ:DL:LS:MP:JZ:pjt (#V-X 41)
bcc: Mr. Brady
Mr. David Jones
Mr. Lindsey
Mr. Slifman
Mr. Prell
Mr. Zeisel
Mrs. Mallardi (2)
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Federal Reserve Bank of St. Louis
Actin assignei Mr. Kichline
BRUCEF.VENTO
•
HOUSE COM MITTEE ON
BANKING. FINANCE AND
URBAN AFFAIRS
47.1 DISTRICT, POI INNESOTA
230 CANNON HOUSE OFFICE BUILDING
WAsmimoroN. D.C. 20515
(202) 225-6631
Congrefh:; of the tiniteb -'-)tate5
DiSTRICT OFFICE:
Room 150
MEARS PARK PLACE
405 SISLEY STREET
SAINT PAUL, MINNESOTA 55101
(612) 725-7724
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Federal Reserve Bank of St. Louis
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HOUSE COM M ITTEE ON
INTERIOR AND INSULAR AFFAIRS
HOUSE SELECT COM MITTEE
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20515
February 23, 1982
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Paul A. Volcker, Chairman
Federal Reserve System
Federal Reserve Building
Constitution Avenue, N. W.
Washington, D. C. 20551
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Dear Mr. Chairman:
Because of limited questioning time, I was unable to ask you several
questions during your recent appearance before the House Banking, Finance
and Urban Affairs Committee. I would, therefore, like to submit several
written questions to you at this time.
First, have you taken any steps to curb further bank loans for speculative
or purely financial purposes such as mergers and corporate takeovers?
Second, would you, as Federal Reserve Board Chairman, testify against the
establishment of credit conservation guidelines if legislation to implement
such a plan was introduced and examined by a committee of the House or
Senate? By credit conservation guidelines, I refer to a policy which,
while not allocating credit, would block credit from going to undesired
uses.
Third, certain economists have recently criticized the Federal Reserve
Board for its lagged reserve accounting(LRA) procedures. They have suggested that contemporaneous reserve accounting (CRA) would be more appropriate and would enhance the Fed's ability to monitor the growth in the
monetary aggregates and thereby better control short-term swings in the
money supply. Do you feel the Fed can or should adjust its accounting
procedures? Would CRA help the Fed control volatility in short-term
interest rates?
I would greatly appreciate receiving a response to these three questions.
I look forward to hearing from you at your earliest convenience.
Warm regards.
Sin
y yours,
ce F. Vento
ember of Congress
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WASHINGTON, D. C. 20SSI
March 12, 1982
PAUL A. VOLCKER
CHAIRMAN
The Honorable William Proxmire
United States Senate
Washington, D.C.
20510
Dear Senator Proxmire:
I am responding to your recent letter in which you
urge the Federal Reserve Board to impose margin requirements
on the new stock index futures contract, which recently began
to trade on the Kansas City Board of Trade (KCBT). Your letter
noted that the Federal Reserve has the plenary authority to
establish margin requirements on this contract under the
Securities and Exchange Act of 1934 and the duty to decide
whether to exercise this authority. In addition, you outlined
concerns that have been raised regarding adverse impacts the
stock index contract may have--including possibly causing a
diversion of capital from productive uses and economic injury
to unsophisticated investors. You also stated that the experience in the silver futures market over late 1979 and early 1980
illustrates the serious problems that can arise, if a futures
market does not function properly.
The Board is very much aware of its responsibility
to decide whether to set a margin on the new stock index futures
contract. In reaching a decision, moreover, the Board intends
to consider fully all concerns regarding possible deleterious
effects the contract may have on our economic and financial
system and on the financial health of individual investors.
The Board gave some consideration to the question
of whether to set margin on the stock index futures contract
prior to the time that the contract started to trade. However,
the Board decided and announced that it would not set margin
over the near term. In choosing this course, the Board took
into account a KCBT action which tightened the margin rules
applicable to its stock index contract. The decision was also
based on the desire to gain experience on the effect and
adequacy of margin levels as determined by actual trading
activity. The Board also wished to have additional time to
consider the complex issues raised by this question. In
particular, the Board must consider not only whether margin
is needed to forestall potential problems in the stock index
futures market but also how to coordinate margin regulations
on competing types of market instruments.
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Federal Reserve Bank of St. Louis
•
.f
The honorable
Page Two
•
Proxmire
The Board did, however, assert its authority to set
margin on the stock index futures contract and indicated that
it intends to review this question again within six months,
or at an earlier date should developments point to the need
for doing so. To be in position to set a margin should experience and subsequent analysis indicate the need for such action,
the Board has also published a proposed regulatory framework
for public comment. The comment received on this proposal
as well as a close monitoring of developments in the stock index
futures market--which the Board intends to do in consultation
with the CFTC--should prove particularly helpful for the Board's
future deliberations on this matter.
In closing, let me again assure you that the Board
is well aware of its responsibilities for determining whether
margin should be set on stock index futures contracts, has
the matter under review, and has taken the steps necessary
to provide the background information and analysis needed to
reach an informed decision.
Sincerely,
FMS:WRM:pjt (#V-52)
bcc: Mr. Struble
Mr. Bradfield
Mrs. Mallardi (2)
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Federal Reserve Bank of St. Louis
Action assigned Mr. Struble with info copy to Mr. Bradfield
•
JAKE GAFtN, UTAH, CHAIRMAN
JOHN TOWER, TEX.
JOHN HEINZ. PA.
WILLIAM L. ARMSTRONG, COLO.
RIC.HARD G. LUGAR, IND.
ALFONSE M. r.i'AMATO, N.Y.
JON?: H. CHAFEE R.I.
H•JIRISON SCHMITT, N. MEX.
•
HARRISON A. WILLIAMS, JR., NJ.
WILLIAM PROXMIRE, WIS.
ALAN CRANSTON, CALIF.
DONALD W. RIEGI_E, JR., MICH.
PAUL S. SA.-DANES. MD.
CHRISTOPHER J. DODD, CONN.
ALAN J. DIXON, ILL.
M. DANNY WALL, STAFF DIRECTOR
HOWARD A. MENELL, MINORITY STAFF DIRECTOR AND COUNSEL
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Federal Reserve Bank of St. Louis
ITnifett Zfales -.Senate
COMMITTEE ON BANKING, HOUSING. AND
URBAN AFFAIRS
WASHINGTON, D.C.
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20510
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February 26, 1982
The Honorable Paul Volcker
Chairman
Federal Reserve Board
20th and C Streets, N.W.
Washington, D.C. 20551
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Dear Mr. Chairman:
With the commencement of trading in stock index futures, I believe the Federal Reserve Board has both a special duty and a special
reason to consider whether to provide appropriate margin requirements
for these new investments as quickly as possible. I, therefore, compliment the Federal Reserve for moving ahead.
The special duty imposed upon the Federal Reserve Board stems
from the Securities Exchange Act of 1934. Under this Act, the Board
has plenary authority to adjust margin requirements to achieve a
variety of important economic investor protection and regulatory objectives: to prevent excessive speculation; to control the amount and use
of credit flowing into the financial markets; to protect individual and
institutional borrowers from the risks of market instability; and, of
course, to protect lenders and providers of credit from a reoccurrence
of the destabilizing circumstances of the early 1930's and late 1970's.
Recent history suggests that the Board should act expeditiously
to implement new margin requirements. Excessive speculation in the
silver futures market came dangerously close to undermining several major financial institutions, brokerage firms and corporations, jarred
confidence in the fairness of the markets, and involved such massive
potentially illegal activity that several government agencies are still
searching for answers. Because of your personal involvement, you are intimately aware of the dangers that were created in the silver futures
market and the force with which they reverberated throughout the economy.
The authorization of trading in stock index futures requires the
Fed to be alert to the spread of serious problems. Concerns have been
raised that trading in stock index futures is just another form of legalized gambling; that trading in such futures will divert capital from productive use in the equity markets at the very time the need for investable
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Federal Reserve Bank of St. Louis
-V
•
The Honorable Paul Volcker
February 26, 1982
Page 2
capital has never been greater; that unsophisticated individuals will
be confused by, and suffer economic injury as a result of, the distinctions between investing in stocks and hedging or speculating in stock
index futures.
If there is an economic purpose in the authorization of stock index futures, the Fed can set the level and types of margin requirements
to accommodate the special nature of these instruments. The Board's
handling of margin for stock option transactions demonstrates its sensitivity to the special requirements of new financial markets and products.
Sincerely,
to -ri atri
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March 12, 1982
PAUL A. VOLCKER
CHAIRMAN
The Honorable Edward M. Kennedy
United States Senate
Washington, D.C.
20510
Dear Senator Kennedy:
Let me first apologize for the inadvertent delay in
responding to your letter of late last year, which suggested
that the Federal Reserve take action on its own, or in conjunction with the President, to discourage banking and other
financial institutions from extending credit for "unproductive
purposes," such as mergers. Our mutual friend, Sol Linowitz,
brought this oversight to my attention, and I do want to
correct it promptly.
The point you raise has been a troublesome one,
partly as a matter of substance and perhaps even more as a
matter of appearances.
I distinguish between the two because the actual
volume of credit absorbed for takeovers and mergers is much
less than the announced totals for bank commitments for those
purposes. For instance, it is not at all clear that takeovers in the end absorb significant amounts of capital and
credit on balance. The reason is the funds borrowed for the
acquisition are in turn invested or loaned by the recipients
of the funds. In any event, the volume of bank credit involved
has been, by our tabulations, relatively limited. A number of
highly publicized large credit lines were arranged for takeover purposes last year, but most of those lines were never
used; of those used, only a portion of the credits were extended
by U.S. banking offices; and in some cases the loans were
partially or wholly repaid after a short time.
I am not entirely satisfied with that numerical
analysis. To some extent, the outstanding commitments may
cause banks to "reserve" available lending capacity for those
purposes. One can also question whether attention by business
management (and even bank lending officers) is not directed
away from measures, including expansion and modernization of
plant and equipment, that will improve productivity and reduce
costs for the nation as a whole. That, of course, is not a
problem that is particularly or peculiarly a matter of credit
policy.
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Federal Reserve Bank of St. Louis
•
•
The Honorable Edward M. Kennedy
Page Two
Moreover, experience suggests that efforts at credit
allocation, either through moral suasion or legislative mandate,
are not well adapted to making a significant contribution to
enhancing productive investment. It is very difficult in
practice to distinguish take-over or other financial transactions that are "unproductive" from those that are productive,
either directly or indirectly. Decisions, inevitably arbitrary,
imposed on such large and flexible financial markets as we
have probably result in more than minor confusion and could
have unintended effects. You may recall some of the unanticipated reaction to the Special Credit Restraint Program in 1980.
I was also interested at that time in the number of Congressional
inquiries I had urging "sympathetic attention" to the need for
bank credit to facilitate certain take-overs thought to be
advantageous to a particular community.
Having said all of that--and those reasons have been
persuasive to us in "staying our hand"--I recognize the difficulty of reconciling high interest rates and credit restraint
in the public mind with the use of large chunks of bank credit
for purposes that, at least on the surface, would not seem to
promote overall economic performance. I have indicated on
a number of occasions my own concern about the "merger fever"
absorbing bank credit. But the basic answers must lie in
improved incentives for new productive investment, and in an
economic environment in which long-term profits are recognized
to result from productive activity, rather than financial
transactions. That, of course, is consistent with our effort
to achieve a more stable financial and overall economic environment. I would also emphasize the relevance of the effort
to reduce the Federal deficit so that it absorbs less private
saving, leaving more available for financing needed capital
outlays.
Sincerely,
SLEau
SHA:PAV:pjt (0.7-329 from 1981)
bcc: Mr. Axilrod
Mrs. Mallardi (2).
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Federal Reserve Bank of St. Louis
•
March 12, 1982
The Honorable Henry S. Reuss
House of Representatives
20515
Washington, D.C.
Dear Henry:
During your chairmanship of the House Banking Committee,we corresponded several times about the practice of
delayed funds availability. You may be interested in the
enclosed statement just presented on this subject to the
Senate Banking Subcommittee on Consumer Affairs. The statement conveys our concern about the practice of delaying
availability on funds deposited by check to consumer checking
accounts--especially when delays are long relative to normal
check collection times and when customers are unaware of
the institution's policy. It also conveys our conviction
that non-regulatory approaches to the problem are available
and our belief that we can develop them.
Sincerely,
Enclosure
(Mr. Allison's statement dtd. 3/10/82)
IHREX
TEA:CO:pjt (#V-5 from 1979)
bcc: Mr. Allison
Mrs. Mallardi (2)
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Federal Reserve Bank of St. Louis
•
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Federal Reserve Bank of St. Louis
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PAUL A. VOLCKER
March 11, 1982
CHAIRMAN
The Honorable Jake Garn
United States Senate
Washington, D. C. 20510
Dear Senator Garn:
As promised during my February 10
appearance before the Senate Banking Committee,
I've attached a staff evaluation of the column
by Milton Friedman that appeared in the
February 15 issue of Newsweek. Hope this proves
helpful to you.
Sincerely,
a- e
41P
likluation of Friedman Newsweek Co umn
Thomas D. Simpson
In assessing variations in narrow money growth
in recent years it is
important to note that the narrow money stock
has been subject to a number of
highly unusual influences.
In particular, M1 contracted sharply followin
g the
imposition of credit controls in March 1980 and
later rebounded.
Contributing
to this pattern was a large contraction in mone
y demand stemming from the drop
in income and the subsequent jump in money dema
nd associated with the resurgence of income following the removal of credit
controls.
In addition, growth
in M1 over the first several months of
1981 was raised significantly by
the
new availability of NOW accounts nationwide
as the public shifted balances
from savings accounts and other non-demand depo
sit sources to newly-opened NOW
accounts.
More generally, money demand is highly volatile,
especially over
short periods of time, and in recent years there
have been times during which
sustained downward shifts in the demand for tran
sactions deposits have occurred,
reflecting more intensive application of sophisti
cated cash management techniques.
A number of measures are suggested by Mr. Friedman
to reduce variability in monetary growth.
These are: adopting contemporaneous reserve requ
ire-
ments; selecting a single monetary target; imposing
equal reserve ratios on the
monetary aggregate to be controlled; linking the
discount rate to a market rate;
and reducing defensive open market operations.
An evaluation of each of these
measures follows:
1.
Contemporaneous reserve requirements (CRR).
This proposal has
the potential for strengthening the relationship
between reserves and the money
stock in thg very short run of a week or month.
Departures of money from path
would give rise to more immediate pressures in the
reserves market that would
more promptly tend to return the money stock toward path.
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Federal Reserve Bank of St. Louis
However, the degree
•
•
2
of improvement offered by CRR is open to dispute among experts and would be heavily dependent upon whether it was combined with other changes, such as those listed
below.
Potential gains in monetary control from adopting CRR alone can be exagger-
ated, and lead to unwarranted assumptions as to its effectiveness. Over a longer period of time, such as a quarter or more, the contribution of CRR to monetary control would likely be smaller.
The Board has expressed a disposition to return to
CRR--pending investigations of its feasibility--and soon will take up this matter
again.
2.
A single monetary target.
In view of the vulnerability of the vari-
ous monetary aggregates to highly unpredictable influences in an era of rapid financial change, focusing on just a single measure of the money stock would lead to
much different outcomes for financial markets and the economy depending on the measure selected.
For example, in 1981 Ml -B adjusted for shifts to NOW accounts ran
below the lower end of its target range over most of the year, while M2 and M3 ran
at or above the upper end of their ranges.
The weakness of M1 in 1981 is believed
to reflect extraordinary efforts by the public—in response to high interest rates-to streamline procedures for managing narrow money balances.
Unusually rapid
growth of M2 was in part related to the sharply rising share of this measure having
market determined yields.
Efforts to restore M1 growth to its range likely would
have been associated with both even faster M2 and M3 growth and adverse expectational effects, while efforts to ensure that M2 and M3 growth fell within their
ranges would have been associated with a larger shortfall of M1 and tauter financial conditions.
3.
A single reserve ratio on the aggregate to be controlled,
It is
widely agreed that a single reserve ratio on deposits in the monetary aggregate
to be controlled and no reserve requirements on other deposits would reduce slippage between the supply of reserves and this aggregate.
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Federal Reserve Bank of St. Louis
The Monetary Control Act
•
3
•
represents an important step in the direction of improving control over the narrow
money stock by establishing uniform reserve requirements on the transactions deposits of all depository institutions--3 percent on an initial reserve tranche
($26 million per institution in 1982) and 12 percent on all other transactions deposits.
By the terms of the Act, depository institutions are phasing in over time
to the new reserve structure, and thus uniformity will be achieved when this phasein process has ended.
In addition, the Board is given authority to lower to zero
the reserve ratio on other liabilities.
4.
Linking the discount rate to a market rate.
The discount rate in
relation to market rates affects the willingness of depository institutions to borrow reserves from the discount window and, in the case of a nonborrowed reserves
operating target, the overall supply of reserves and the money stock.
In view of
administrative constraints on borrowing and a general reluctance of depository institutions to borrow reserves from the discount window, linking the discount rate
to an open market rate could, with a nonborrowed reserves operating target, lead
to much sharper swings in interest rates and the money stock.
An expansion in re-
serve needs of depository institutions that was not met through open market operations, for example, would lead to more intensive bidding for reserves in the reserves market--as institutions initially attempted to avoid turning to the window -and the federal funds rate and other money market rates would rise.
Higher money
market rates according to the formula would lead to a higher discount rate which
would put still further upward pressure on money market rates and so forth.
Such
a policy would run the risk of excessive ratcheting of the rate structure upward
and downward in response to temporary disturbances to money demand or supply side
shocks and of contributing to cycles in the money stock.
With a total reserves or monetary base operating target, changes in the
willingness to borrow reserves would not affect the supply of total reserves as
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Federal Reserve Bank of St. Louis
- 4
•
•
changes in borrowed reserves would, in concept, be offset completely by open market operations.
Thus, with a total reserves or monetary base target pressures
in the reserves and money markets and monetary control would be about the same
regardless of discount window policy.
With a total reserves or monetary base
target, though, interest rate volatility would be greater as highly volatile
money demand movements would be reflected more fully in interest rate fluctuations.
5.
Reduce defensive open market operations.
Defensive open market op-
erations are intended to minimize the impact on the supply of reserves of fluctuations in noncontrolled factors affecting reserve supply, such as Federal Reserve
float and Treasury deposits.
In the absence of such defensive actions, the supply
of reserves would fluctuate widely on a day-to-day and week-to-week basis, thereby
causing fluctuations in the stock of money and money market condtions.
The measures suggested by Mr. Friedman would lead to more variability in
interest rates.
Their influence on the precision of monetary control would, on
balance, be uncertain, over a longer horizon of a quarter or so, although control
might be improved in the short run.
In general, measures to strengthen monetary
control in the short run, such as adoption of CRR and more emphasis given to con-
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Federal Reserve Bank of St. Louis
trolling total reserves, would also give rise to larger fluctuations in interest
rates, reflecting the highly volatile nature of money demand in the short run.
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: Magazine article
Citations:
Number of Pages Removed: 1
Friedman, Milton. "The Yo-Yo Economy." Newsweek, February 15, 1982.
Federal Reserve Bank of St. Louis
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March 11, 1982
E. Fauntroy
The honorable Walter
Chairman
ic Monetary Policy
Subcommittee on Domest
Finance and
Committee on Banking,
Urban Affairs
ves
house of Representati
5
Washington, D. C. 2051
Dear Walter:
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Federal Reserve Bank of St. Louis
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Mr. Axilrod
Mrs. Mallardi (2)
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1114.
WALTER E. FAUNTROY. D.C., CHAIRMAN
PARREN J. MITCHELL. MD.
STEPHcN L. NEAL, N.C.
DOUG BARNARD. JR., GA.
HENRY S. REUSS. WIS.
JAMES J. BLANCHARD. MICH.
CARROLL HUBBARD, JR., KY.
BILL PATMAN. TEX.
Chairman now decibing who will ap ear/ Mr. Axilrod has been
GEORGE HANSEN. IDAHO
given information copy
RON PAUL. TEX.
BILL McCOLLUM, FLA.
BILL LOWERY. CALIF.
ED WEBER. OHIO
JAMES K. COYNE, PA.
U.S. HOUSE OF REPRESENTATIVES
SUBCOMMITTEE ON DOMESTIC MONETARY POLICY
H2-179, ANNEX NO. 2
WASHINGTON. D.C. 20515
(202) 225-7315
OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
N INETY—SEVENTH CONGRESS
WASHINGTON, D.C. 20515
March 2, 1982
'
it`•
The Honorable Paul A. Volcker
Chairman
Board of Governors
Federal Reserve System
20th and Constitution Avenue, N.W.
Washington, D. C. 20551
;
A
.
Dear Paul:
On Tuesday, March 23, 1982, the Subcommittee on Domestic Monetary
Policy will hold hearings on debt management by the Department of the
Treasury. These hearings will explore the mechanisms by which the debt
is actually financed, the objectives the Treasury considers when financing
its debt, how these objectives are viewed by various entities including
the Federal Reserve System, the weaknesses and strengths of the government
securities market and the impact that such decisions have on costs which
must be paid by the government on the debt.
I would very much like you or your designee to participate in
these hearings in as much as the Federal Reserve serves as a fiscal
agent of the Treasury, buys and sells government issues for various
purposes, and has very often been an active participant in the absorption
of government debt through its monetary policies. I am, of course, very
much interested in the impact that current tight monetary policies have
on debt management and what portends for the future if these policies
are maintained.
These hearings do not, however, focus upon the conduct of monetary
policy. They are intended to focus upon the relative merits of long term
vs. short term debt at any given interest rate, the impact of financial
future markets, the use of special devices such as coupons, calls, and
variable rates, and the availability of alternative instruments which
are guaranteed by the United States and which may be tax exempt. The
Subcommittee will also focus upon the role of various dealer committees
and advisory groups and contemplated changes in debt offerings. Comments
from the unique perspective of the Federal Reserve System on debt financing
and its impact on financial institutions and on the economy would be
deeply appreciated and most helpful to our understanding of this increasingly
important component of our economy. Additionally, if you are able to
personally appear, your own experiences of the changes that have occurred
as you have seen them from the vantage point of the Treasury, where you
once served, to the Federal Reserve Bank of New York where you served as
President and, at an earlier time, as Manager of the Open Market Operations,
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Federal Reserve Bank of St. Louis
•
The Honorable Paul A. Volcker
•
_ 9 _
March 2, 1982
and now as the Chairman of the Board of the Federal Reserve System would
be invaluable.
This is the first time that this Subcommittee has delved into
this issue. Your cooperation and help to us in understanding what is
generally viewed as esoteric and complicated is important. Accordingly,
I would like you or your designee to testify before the Subcommittee on
Tuesday, March 23, 1982 at 10:00 a.m. in Room 2222 of the Rayburn House
Building. The Rules of the Committee require that 100 copies of your
statement be made available to the Subcommittee no later than 48 hours
prior to your appearance. You should bring with you additional copies
if you wish to assure that the press and others will have a copy of your
statement.
Any questions that you and your staff may have concerning this
request should be directed to Howard Lee, Staff Director of the Subcommittee,
who may be reached at 202-225-7315.
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Federal Reserve Bank of St. Louis
Sincerely yours,
Walter E. Fauntroy
Chairman
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Federal Reserve Bank of St. Louis
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WASHINGTON ADDRESS:
1207 LONGWORTH HOUSE OFFIC
E BUILDING
(202) 225-5711
jboule of Reprelentatibeti
tea5bington, D.C. 20515
March 10, 1982
SALEM ADDRESS:
4035 12TH S.E.
P.O. Box 13089
ALE14, OREGON 97309
(503) 399-5756
46
The Honorable Paul A. Volcke
r
Chairman
Federal Reserve System
20th St., and Constitution
Ave., N.W.
Washington, D. C. 20551
Dear Mr. Chairman:
I certainly appreciated the fi
ne breakfast
and the opportunity to talk
to you personally
about the difficult situatio
n that we face in
the economy.
I am enclosing our current pa
ckage of
propaganda on the freezing of
Federal spending
concept.
Anything further you might sa
y publicly
would, of course, add to the
credibility for
this proposal to cut down our
deficits.
Again, I appreciate very much
the opportunity
to meet with you.
DS:kp
AN OVERVIEW OF THE SMITAIIkASSLEY PROPOSAL
The Smith-Grassley proposal is not yet in legislative form, but is a concept
gaining wide support in Congress. The proposal addresses the spending side of
the Federal budget and does nOt specify any changes in the revenue side.
The Smith-Grassley proposal suggests an across-the-board freeze on federal
spending until the budget is balanced. This could occur as early as late
1984, depending on the economic assumptions used.
The Smith-Grassley proposal remains consistent with the Economic Recovery
Program -- it leaves the tax and other reforms in place and does not preclude
other actions consistent with the goals.
The Smith-Grassley proposal requires that a fixed spending ceiling be
established and adhered to, but leaves flexibility for legislative and administrative initiatives. It assures the availability of funds to continue base
programs and eliminates political gamesmanship to protect sacred cows and
satisfy special interest lobbies.
The Smith-Grassley proposal recognizes that even with the tax rate "cuts"
in place, revenues to the federal government continue to increase. OMB
data shows total tax revenues for the year ending 9/30/81 at $599.3 billion.
Their estimates for the next two fiscal years are $626.8 billion and $666.1
billion, respectively.
The Smith-Grassley proposal reinforces our commitment to a balanced budget.
The freeze on spending is as sensible as it is simple...and it can result in
a balanced budget nearly on target with the President's first goal.
Two Components of Smith-Grassley
1)
level federal spending until the federal budget is balanced
2)
preserve the newly-enacted personal tax reforms as the cornerstone
tor stimulating economic recovery
Highlights of Smith-Grassley
* freezes government spending at curi-ent levels while maintaining the
perogatives of the legislative and executive branches to establish program
priorities
* provides bi-partisan framework for resolving immediate budget issues; is
practical to implement and equitable
* maintains fiscal 1981 and 1982 initiatives for strengthening national
defense which will result in a significant increase in budget outlays in
fiscal years 1983 and 1984
* retains the current level of entitlement payments to annuitants and
allows for the addition of new annuitants as they become eligible; suspends
temporarily all cost of living increases until the budget is balanced
* frees capital for private investments through reducing federal demand
in the credit market to finance deficits
* provides incentives for federal agencies to better manage available
resources for necessary programs and to eliminate waste, fraud and abuse
* sends strong signals to the financial markets that Congress intends to
control federal spending and to make economic recovery the nation's number
one priority
* retains executive and congressional ability to act on emergency
situations, such as flood and disease control or national defense
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•
February 25, 1982
Discussion Paper Prepared b.L. Coquessman Denu Smith
an Adjunct to Economic Recovery"
"The Concept of a Freeze on Federal Spending As
the newly enacted tax reforms
A freeze on federal spending combined with
Houses of Congress and across
for individuals is gaining acceptance in both
the Economic Recovery Program.
America as a logical and expedient adjunct to
progressively reduce
The Smith-Grassley Proposal, a concept that will
t within the neNt three :ears,
federal deficits and provide for a balanced budge
is as sensible as it is simple.
the approved FY82
Under this concept federal spending would he frozen at
in balance or surplus.
level and would hold at that level until the budget was
ng the ;- Irti2 level,
Each functional area would have established as its ceili
accounts Involving enexcept for interest on the national debt and functional
beome eligible. Alt
titlements to allow for addition of new enrollees a; they
budget is balanced. Decost of living increases would he suspended until the
ude obligating
fense spending would be leveled, however, this would not precl
for defense or similar
previously authorized but unexpended budget authoritv
resource development
unexpended authorities for such activities as water
projects, etc.
to
1,e taken to limit spending
Administrative and legislative actions would
appropriate levels for off budget items.
spending is no new
To the Oregonians I represent the freeze on federal
to economic survival. My
idea and the urgency for a balanced budget is vital
ction state. The timber
state is, or was, the nation's leading timber produ
ed housing industry is
industry is the state's number one employer. The relat
high interest rates we have
literally on its knees as a result of the extremely
housing industry is not unique.
experienced over the last three years, but the
d.
In fact, no sector of the economy has been spare
straight
Industrial production in America ha dropped for the sixth
since January 1975. Outmonth and has just experienced its greatest decline
percent since last
put of mines, factories, and utilities has fallen 9.6
percent last month.
summer. Production of business equipment declined 2.3
annual rate of 3.6 million
Automotive construction dropped 22 percent to an
decades. This, in turn, plays
autos per year, the lowest production rate in two
n.
havoc on the steel and rail industries across the natio
most part, to the conOur economic difficulties are attributed, for the
tinuing high federal deficits which:
a strong national defense;
* erode our economic base essential for providing
mic viability of
* jeopardize our economic recovery and sap the econo
the nation:
ty to control federal
* generate uncertainty about the governmPnt's abili
performance of the
spending which depresses financial markets and impairs the
economy;
private investment
* drain the limited pool of capital necessary to finance
provide jobs.
for new plants, equipment, homes and small businesses that
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Federal Reserve Bank of St. Louis
•
na,
e 1
Oregon -- and the nation -- cannot continue to tolerate high interest rates
and federal deficits which crowd out private investment. With a personal savings
pool of approximately $160 billion, and with projected deficits of up to $157
billion, this leaves virtually no private capital available for investment to
stimulate the economy.
We need to bring deficits down .
. and down immediately.
SMITH-CRASSLEY PROPOSAL
The trillion dollar debt and escalating annual deficits are the results of
past policies. Our eomritment to economic recovery was evidenced last session
of Congress with significart steps toward cutting the growth of federal spending
and taxation. Yet our commitment to a balanced budget is moving further away.
The next logical step which remains consistent with the Economic Recovery
Program is a free2.e on federal spending that leaves previous reforms in place
and does not preelude other actions consistent with the goals. The SmithCrassley proposal establishes spending ceilings, but leaves flexibility for
legislative and administrative initiatives. It assures the availability of funds
to continue base programs and eliminates political gamesmanship to protect
sacred cows and special interest lobbies.
Before discussing the concept in more detail, note that we can achieve a
budget that is in balance or provides surplus revenues within three years
using revenue and economic assumptions developed by either CB0 or OMB. Each of
these cases was run through the CB0 economic model using relevant economic
assumptions. In each instance, the options were constrained by:
* establishing the FY82 ceiling for each function area
* suspension of all cost of living increases on entitlements
In addition, the interest on the national debt was calculated using
reduced deficits in FY82, FY84 and FY85.
The Smith-Grassley proposal does not 4clopt a specific mix of numbers or
cut specific programs. Nor does it endorse either of the two options. Both
are used purely to illustrate how and when we can reach a balance, if we invoke
level spending, regardless of the numbers used.
No one knows what the FY83 numbers will be until the year's end. Our
record on esttmating revenues, outlays and deficits has not been accurate in
the past. In ehe last 19 budgets, the deficits were underestimated 12 times,
the revenues were overestimated nine times, and the outlays were underestimated
11 times. There is little to lead one to believe that the FY83 estimates
won't also miss the mark. Unpredictability of economic factors and numerous
variables must be considered in planning and estimating budgets. Given those
uncertainties and the potential tor higher budget deficits than government
and independent forecasters have alluded to adds a strong argument for leveling
federal spending now.
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•
,Paee 3
•
The attached eable (page 3a) illustrates how we can achieve a balanced budget
base or the
by leveling federal spending within three years using either CBO's
Administration's proposed earget levels and economic assumptions.
The Smith-Grassiey Proposal addresses the three principal culprits for the
projected $91.(i hillion deficit in FY83:
intertlst on the national debt
Livine, adjue.tments ror entitltment programs
COSt of
national defense expenditures
These theee aeeas are covered tn e,ore detail below.
1NTF,REST
THE, DEBT
The thild largest co.nponent of the federei hudget is the interest wc pay oa the
,lation's debt well over ehe $1 trillion mnrk, the Administration
national .1e!)t. dtth
entimotcs Lhet WQ will spend $116 billion in interesL on the public debt in FY 82.
to $133 billion in FY83. By FY86 debt interest will be nearly
Thzt Ligutee will
'‘'.ecurity or
$200 billien -- significantly more than we aee spending currently on Social
on Defenee.
Under tile Smith-Grossle: budget proposal federal deficits over the next three
have
.“ears would be lowered by $450 billion. That is $450 billion less that we would
intereet savings through the Smirh-Grassley budget would be
to p,4 interest tm.
interest
*5 bIllion in 1983. $17 billion in 1984. and $33 billion in 1985. This reduces
jobs
rayments over the three years by $5-, billion. This $55 billion could be going to
creation, ta:, relief, or paying oil the national_ debt.
ENTI'llEMENTq
!tee.
The Smith-Grasslay proposal would suspend all cost of living increases and savings
general
would be significant -- approximateLy $34 billion in FY83 alone. In cddition,
aereemont exists that these adjusrments are a major cause of the upward eush on
inflation. As the l:conomic Recovery program continues to bring dawn infintion (down
to _).2% ia Doce-ober 1982), the loss of these COLAs should not create an undue bkrden
on eneit)ement beneficiaries.
Suspension or restraint of cost of living adjustment payments are not withoue
s
precedence. Civil service and military pay adjustments have been altered on nuerou
occasions. Moreover, social security benefits had not been indexed at all prio, to
.
New annuitants to entitlement programs would be provided for as they qualify unde
the Smith-Grassley proposal, In fact, in the Social Security program projected eavings
ent
from suspending COLAs Jnd the $2 billion revenue increases from the tax rate adjustm
reserve
should accommodate new beneficiaries and provide additional revenues to the trteit
solution le; developed (based on 8 sound economy), suspension of
y of
the cost: of living adjustments serves as a short term measure to maintain solvenc
the
elle entitlement funds. Leveling of federal spending and suspension of COLAs until
budget IF balanced will do more to enhance the solvency of the Social Security system
than anything else suggested to date.
Unt-11
IOng relln
Even if Interfund borrowing had Isen authorized for a longer period, all pre19'37
dictioes are that the cowbined funds would be =Lillie to meet their ohjieatiom, by
al the latest. and perhaps as early as 1983. Suspension of COLAs starting in .luly 1982
will restore $7 billian to the ailing Social Security system until the much needed
rocomputation of the CPI takes effect in 1985.
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•
BUDGET COMPARISONS
(in billions of dollars)
00
S-G
701
701
797
797
763
763
725
869
740
669
725
971
740
-2
-188
-39
-77
-72
-208
+23
S-G
CB0
652
653
723
723
725
809
740
806
-59
-157
-88
-83
CB0
aevenues
.- .66
666
Jutlays
758
Difference
-92
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S-G
FY 985
S-G
-?i--AFB
FY 1984
ome S-G
FY 1983
S-G
OMB
•
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Page 4
NATIONAL DEFENSE
The foundation necessary for restoring and maintaining a strong national
defense is a strong and stable economy. While we cannot afford to relax our
commitment to a strong national defense, neither can we afford to ignore the
importance of a strong economy in the defense picture.
The real increase in defense spending provided since 1981, $400 billion
in new budget autherity and a ;51 billion increase in budget outlays, has
generated new inertia and momentum in restoring our national defense.
over accelerated defense spending that
We need Lc. exerelFo caution with
could jeopardize economic recovery. This very point was made by the President's
Council of Ee,onomic Advisors' and Congress' Joint Economic CJmmittee. The
committee in a recent report cautioned that the rapid Defense buildup could
undermine Loth our economic and military goals.
The $143 billion in unspent DOD budget authority enacted in prior yearE
plus the amount that would be provided under level spending in FY83 should
continue to sustain the momentum of restoring our national defense in FY83
and FY84, if necessary.
Additional funding does not necessarily buy a stronger defense. Our
defense can be strengthened as well through administrative actions within
the funding ceiling such as:
* disposal of excess or surplus military properties to reduce maintenance
cost and offset the spending freeze
* liquidation of the backlog of unobligated authorizations
* improvement of quality control efforts in the design and manufacturing
of weapon systems
For example, the disposal of excess or surplus military properties would
significanLly reduce maintenance costs and help offset increased defense
spending. The military base structure cutrently in place is premised on outmoded strategic requirements. We need to channel our efforts to fiaalize the
Five-year Defense Plan and orient our base structure to meet those requirements.
The current structure diverts scarce resources to unproductive use and dissipate:,
our defense capabilities.
We need to make stronger efforts to liquidate the $143 billion backlog of
unobligated authorization rather than add to the backlog.
We have developed the necessary momentum for restoring our national defense.
That momentum should continue through the period we are proposing for level
spending. Additional funding alone cannot guarantee a stronger national defense,
especially if it means further erosion of our economy.
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Federal Reserve Bank of St. Louis
•
•
•
v, ••
Page a
•
ALLEGIANCE TO THE TAX REFORMS
next two
The tekeling of federal spending under Smith-Grassley for the
Both actions
years goes hand-in-hand with the tax cuts presently in place.
ic recovery
will provide the strong stimuJi needed to accomplish the econom
course we set last year.
place,
It is important to remember that even with the tax reforms in
the next.
revenues to the federal government will increase next year and
See chart below:
Year Ended 9/30/81
(actual)
Year Ending 9/30/82
(estimated)
Year Ending 9/30/8 1
(estimated)
'OTAL
REVENUES
baliten
$626.8 billion
$666.1 billion
are an integral
Th_ nrabj.em is naL oa the revenue side. The tax reforms
form, would be
part of Cle economia reform package. Additional taxes, in any
a giant stea, backward.
spending,
A colleague on the Senate side has prOposed a measure to level
and would
but eliminate most of the tax reforms. This would be disastrous
years.
increase taxes on Americans by $200 billion over the next three
shawn when
it is important to note the consequences of that proposal, as
it was run through the Data Resources Inc. economic model:
billion in 1984
* personal taxes would increase $45 billion in 1983, $63
and $80 billion in 1985;
* real al.' would be down 8.9 percent;
'! 3.9 million more people would be out of work;
household);
* dispoSable income would be down $380 billion ($4000 per
* personal savinas rate would be slashed by half;
three percentage points)
* grGwth rate would be down to one percent per year (off
percent;
GNP deflator would be down an extra .06 percent to seven
near balance to
stnte and loaal operating budgets would have fallen from
tax increases
OVer $?0 billion'•in deficit, requiring large
million to 8.0 million
* aueo alles would 1-,e down 2.7 million units, from 10.7
would undermina
Reneging on promised relief from high marginal tax rates
to our economic recovery
the incentive ta work, save and invest that is the key
working men and women to an
and an ultiwately 1,alanced budget. It would subject
billion over the next three
increasingiy heavy tax burden (to the tune of $200
has had a chance to get
years), wipe out reneweei economic growth even before it
sible for almost 90 percent
started (mc7-.e than 14 million small businesses -- respon
-- are taxed at the personal
of all new jobs and most of our technological advances
needed to achieve a
income tax rates), foreclose the expanded revenue base
needed funds for private
balanced budget, deprive orcalit markets of desperately
the door once again to runaway
sector investment, and, by removing indexation, open
federal spendina.
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_
•
•
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
March 9, 1982
PAUL A. VOLCKER
CHAIRMAN
The Honorable Norman D. Shumway
House of Representatives
Washington, D.C.
20515
Dear Mr. Shumway:
Thank you for your letter of March 2 requesting comment on correspondence you received from your constituent,
Dr. Gary D. Conner, who asked for a definition of the "money
of account" of the United States.
As provided in the so-called "Mint Act" of 1792,
this country's earliest monetary statute, the "money of account"
of the United States is expressed in dollars or units of dollars.
In this connection, section 371 of Title 31 of the United
States Code specifically states that the money of account
shall be in terms of dollars. The dollar, therefore, is the
standard unit of value and money of account in our monetary
system.
Although the dollar as the standard unit of value
has been defined in earlier years in terms of gold content
(see 31 U.S.C. section 314), there is presently no requirement that the money of account be defined in terms of a gold
content. Such a requirement was eliminated when the United
States abandoned the domestic gold standard and discontinued
the coinage of gold in 1934 (see 31 U.S.C. section 315b and
446). As a practical matter, the value of a dollar today
should be viewed in terms of the goods or services that it
will purchase.
uent.
I hope this information is helpful to your constitPlease let me know if I can be of further assistance.
Sincerely,
•
CO:pjt (#V-55)
bcc: Mrs. Mallardi (2) 7
u
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-l.
Reply Twin be drafted by Cong. Liaison Office
NORMAN D. SHUMWAY
14TH DisTRIcT, CALIFORNIA
•
•
1228 LONGWORTH HOUSE OFFICE BUILDING
WASHINGTON, D.C. 20515
(202) 225-2511
commiT-mrs:
COM MITTEE ON BANKING.
fINANCE. AND URBAN AFFAIRS
.4
Mt4.6".:HANT MARINE AND
FISHERIES
Congrts'5 of Me Unite)etate5
Polite of l'epreantatibei‘
SELECT COMMITTEE ON AGING
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Federal Reserve Bank of St. Louis
Watbington, D.C. 20515
CHRIsToPHER C. SEEGER
ADM INI ST RATIVE ASSISTANT
1045 Nowni EL DoRADo. ROOM 5
STOCKTON. CALIFORNIA 95202
(209) 464-7612
LOIS SAHYOUN
DISTRICT CCDINATOR
un
-o
March 2, 1982
The Honorable Paul Volcker
Chairman
Federal Reserve Board
20th Street and Constitution Avenue, NW
Washington, D.C. 20051
Dear Paul:
I am enclosing, for your review and evaluation, a letter I recently
received from a constituent. As you will see, Dr. Conner is looking
for a definition of the "money of account" of the United States.
Your prompt attention is most appreciated.
With best personal regards,
Sincerely,
L
NL-,
NORMAN D. SHUMWAY
Member of Congress
NDS: dp
Enclosure
•
•
DR GARY D. CONNER
CHIROrRACTOR
9145 ELK GROVE BLVD.
art,
ELK GROVE. CA. 95624
TELEPHONE (916/ 685-4519
February 3, 1982
Norman D. Shumw3y
1228 Longsworth House Office Building
Was17ington, D.:.
20515
De-tr Mr. .:humway:
Thank you for your letter of January 2P., 1982.
Again I lsk, what is the "money of account" of the United 6tates of America?
question is rot askinFr how the money of account
is "it" that dollars are to be expressing?
GDC:sc
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measured.
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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
RE.
••.RAL
.• •.•
March 9, 1982
The Honorable Clarence E
House of Representatives
Washington, D.C.
20515
PAUL A. VOLCKER
CHAIRMAN
Miller
Dear Mr. Miller:
I am pleased to reply to your request for comment
on letters that you received from officials of banks and
thrift institutions in Ohio concerning deregulatory proposals
to be considered by the Depository Institutions Deregulation
Committee (DIDC).
As you know, the Committee has been charged by
Congress with an inherently difficult task--to phase out
deposit interest rate ceilings in order to increase the return
to savers while at the same time taking into consideration the
current difficult situation of depository institutions, including, prominently, many thrift institutions. At the Committee's most recent meeting on December 16, a decision was
made to postpone consideration of further deregulatory actions
until the Committee's next scheduled meeting on March 22. I
joined in that decision in part because some of the deregulatory
proposals on the agenda might have placed many thrift institutions under further earnings pressures at a very inopportune
time.
The Committee will reconsider various deregulatory
proposals at its meeting later this month. Itwould be inappropriate for me to comment on what decisions the Committee might
reach at that meeting. I would only note that as time goes on
the Committee's deregulatory mandate from the Congress and the
likely competitive position of all depository institutions visa-vis money market funds and other market instruments will
require continued consideration of further deregulatory actions
Let me assure you that, in consultation with DIDC
Chairman Regan and the other members of the Coniwittee, I will
give serious consideration to the various proposals for deregulatory action at our next meeting.
In keeping with your request, I am forwarding copies
of the letters that you sent me to the Executive Secretary of
the Committee for inclusion in the official records.
Sincerely,
NB:pjt (#V-49)
bcc: Mr. Skancke (DIDC)
Mr. Bernard
Mrs. Mallardi (2)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
S/Paul Vol_cker
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
CLARENCE E MILLER
Room 2208
RAmimBumom
WAsHrtmion. D.C. 20515
202-225-5131
TIXTH DISTRICT. 0100
COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEES:
TREASURY. POSTAL SERVICE AND
GENERAL GOVERNMENT
COMMERCE. JUSTIcE. AND STATE.
THE JUDICIARY AND RELATED AGENcIES
TECHNOLOGY ASSESSMENT BOARD
DISTRKT OFFICE:
212 SOUTH BROAD STREET
LANCASTER. Om) 43130
614-654-SM
CongrecZ of Me abiteb ibtateli
jboufse of ikepressentatitmg
713.C. 20515
February 22, 1982
Paul A. Volcker, Chairman
Depository Institutions Deregulation Committee
20th and Constitution Avenue
Washington, D.C. 20551
Dear Mr. Chairman:
Please find enclosed copies of correspondence which I have received regarding the
issues to be discussed at the next meeting
of the Depository Institutions Deregulation
Committee.
I am submitting this correspondence for informational purposes and for entry into the
Committee record.
I appreciate your attention to this matter.
incerely,
()()4,K)s.2CA_ Ltd/cal-A
Clarence E. Miller
Member of Cppgress
CEM:sz
77m
•
•
THE FINST NATIONAL BANK
ZANESVILLE. OHIO 43701
February 8, 1982
The Honorable Clarence E. Miller
Representative
Rayburn Building
Independence & S. Capital St., S.W.
20515
Washington, DC
Dear Representative Miller:
the
We are writing to express our concern with the inability of
its
Depository Institutions Deregulation Committee to carry out
responsibilities as assigned by Congress.
of
As background, our bank is located in the rural community
ely
Zanesville, located in southeastern Ohio. We are approximat
cutive
$147,000,000.00 in assets and have entered our 119th conse
year of financial service to our community.
,
The commercial banks, savings and loans - mutual savings banks
ems
and credit unions have problems to resolve. However, these probl
are going to be purely academic in the near future unless the above
the nondepository institutions are given the power to compete with
unfinancial institutions who are allowed to accept deposits, pay
unchallenged
regulated interest rates, and are permitted to remain
by competition and/or regulation!
, Inc. in
We have an office of Merrill Lynch, Pierce, Fenner & Smith
This unregulated
our community who offer their Cash Management Account.
nity an estimated
transaction account has conservatively cost our commu
to tell you that
five million dollars in lendable funds. We don't need
bank or into
M.L.P.F. & S. does not deposit those C.M.A. funds in our
any depository institution in our community.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I
;?ntgi
•
SHEET NO
THE Flf?ST N.-k ()NAL BANK
2
ZANESVILLE,OHIO
The Honorable Clarence E. Miller
20515
Washington, D.C.
from the local M.L.P.F. & S. office
In turn, our customers cannot obtain
a small business loan for receivable,
a car, mortgage or educational loan;
g or other types of loans.
inventory, plant and/or equipment financin
as ours who have for many years
In short, financial institutions such
needs of their communities, will
effectively met the bonafide financial
ctive because we are barred by
not be able to continue to be as effe
able funds. The longer we are
regulation from competing for local lend
diminish in meeting the financial
restricted the more our effectiveness will
needs of our community.
restore the competitive climate that
The D.I.D.C. is the vehicle needed to
eness in allowing all types of
will provide the highest degree of effectiv
unities' financial needs.
financial institutions to meet their comm
to oppose any legislation designed
, We urge you as our Representative (1)
ask the members of the D.I.D.C. to
to delay action by the D.I.D.C., (2) to
gulate deposit rate ceilings, and
exercise their current mandate to dere
with the D.I.D.C. considerations schedule
(3) to take no action to interfere
no interest ceiling transaction account
for March 22, 1982, and (4) to create a
with a $2,500.00 minimum deposit.
\2i
allow financial institutions to survive in
A level playing field is needed to
with financial institutions in small
the near future. This is especially true
and small businesses - the so-called
communities who serve the "little" guy
"backbone" of this country.
this matter.
Thank you for your consideration in
Sincerely,
William R. Hoag
President
WRH/rmd
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
January 29, 1982
The Honorable Clarence E. Miller
House Office Building
Washington, D.C. 20515
Dear Clarence:
It is our understanding there will be representatives of housing groups
and thrift institutions visiting the Hill the week of February 1, 1982.
The purpose will be to persuade Congress to either enact legislation or
pass a resolution directing the Depository Institutions Deregulation
Committee to defer any action on their agenda items for the meeting
of
scheduled on March 22, 1982. Included on the agenda is consideration
the establishment of a proposed schedule for the phaseout of Regulation
Q, which establishes rates that may be paid on deposits. Also scheduled
for consideration is the creation of a short-term instrument which could
be offered by financial institutions so they could be more competitive
with the money market mutual funds.
The Ohio banking industry considers it imperative for the DIDC to proceed
so that the banks may be in a position to properly plan and also to
compete in the market place. As you know, money market mutual funds are
approaching $200-billion, most of which have been accumulated in the past
eighteen months. Therefore, we strongly oppose any legislative mandate
which would either temporarily or permanently change the original
Q. We
4 Congressional intent to the DIDC for the phaseout of Regulation
,
the
hope that you will not support this type of effort and thereby permit
the
DIDC to fulfill the requirement set forth by the Congress under
Depository Institutions Deregulation Act of 1980.
Best personal wishes.
Sincerely,
Ralph E. Bolen
Executive Vice President
REB:lh
hairman of the Board
wILLIAM
N. LIGGETT. Cincinrar,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
i'
)
Pre,,ident
WILLIAM T. McCONNELL. Newark
Vice President
FRANK B FISHER, Ctot,r.'ar•O
Treasurer
PERRY B. WYDMAN, Dayton
Executive Vice President
RALPH E BOLEN. Colurnt'f.s
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
THE CENTRAL TRUST COMPANY
OF
SOUTHEASTERN
OHIO.
N A
February 4, 1982
The Honorable Clarence E. Miller
United States Representative
212 South Broad Street
Lancaster, Ohio 43130
Dear Congressman Miller:
The importance of two issues now under your consideration
is vital to the success of every Ohio bank, not to mention the
survival of a select number.
First, and foremost, is the authorization needed by Ohio
which
banks to offer an interest bearing transaction account
s.
would be competitive with the non -regulated money market fund
Secondly, but of equal importance, is the need for a
in
firm schedule to phase out Regulation Q, as called for
the Depository Institutions Deregulation Act of 1980.
Both issues, in my opinion, are absolutely necessary
nd
to provide the freedom and tools necessary to turn arou
peers.
an economy which reflects the actions of you and your
and
The need for a sound economy has never been greater,
quated
allowing the nation's banks to remain hamstrung by anti
management
regulations and through disadvantages in liability
will certainly serve to prolong these difficult times.
stry
The need for parity in the complex financial indu
you to
is sorely needed. I trust that I can depend upon
, may
expedite these two important issues. You, in turn avors.
l ende
depend upon my support in your future politica
Respectful ly
Gar C./ ith
V e President
GCS:krb
tit-1 E3
47
301 SECOND STREET • MARIETTA. OHIO • (614) 373-11
Menth,7- The Cerztral fiancurp,ratrwl.
,&2
•
THE VINTON COUNTY NATIONAL BANK
February 2, 1982
,,
Honorable Clarence E. Miller
ng
Room 2246, Rayburn Buildi
Washington, D. C. 20515
Dear Clarence:
DeregC (Depository Institutions
DID
the
t
tha
ned
cer
con
I am
al
let banks pay interest equ
to
g
hin
not
e
don
has
)
ulation Committee
ds.
to Money Market Mutual Fun
s &
out of local banks and Saving
A lot of money has moved
e Merrill
big Wall Street brokers lik
to
r
yea
t
las
the
in
ns
Loa
ng account
ches are offering a checki
Lyn
l
ril
Mer
The
.
etc
ch,
Lyn
and Savings
ve that permitted for banks
abo
far
es
rat
st
ere
int
with
in smaller
make loans or investments
not
do
y
the
r,
eve
How
& Loans.
communities.
her:
Please urge the DIDC to eit
a)
b)
s
Loans compete with big broker
&
s
ing
Sav
and
ks
ban
let
or
the
up reserves with the Fed
require the brokers to put
uld lower interest rates
same as banks do. This sho
offered by brokers.
y already
uld put up reserves. The
For safety's sake, they sho
with no certain protection.
ey
mon
s'
ple
peo
of
n
lio
have nearly 200 bil
have money for
hard for local banks to
gly
sin
rea
inc
be
l
wil
It
ssional help.
ities without some congre
mun
com
our
in
ns
loa
ing
deserv
y were
ngs are not as good as the
thi
nty
Cou
ton
Vin
in
e
Her
toward
of the job you are doing
ud
pro
ll
sti
re
we'
but
,
a year ago
balancing the budget.
Best regards,
kobert B. Will, Jr.
President
cc:
Gerald Lowrie
ation
American Bankers Associ
596-5266
McArthur, Ohio 45651 — Phone
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
ne 669-4651
Wilkesville, Ohio 45695 — Pho
"
"A DIFFERENT KIND OF BANK
ESTABLISHED 1367
STREET
MAIN OF, 33 SOUTH FIFTH
1 • 614/452-4533
ZANESVILLOHIO 4370
ZANESVILLE
FEDERAL
SAVINGS
December 11, 1981
And Loan
Association
ence E. Miller
The Honorable Clar
Room 2208
ce Building
Rayburn House Offi
20515
Washington, D. C.
f ,/
Dear Clarence:
fice in a
your Washington of
to
y
da
e
th
in
g written late
cember 14th.
This letter is bein
desk on Monday, De
ur
yo
h
ac
re
ll
wi
it
fervent hope that
ngs banks
of the mutual savi
e
os
th
us
pl
ry
st
the past
and loan indu
ly concerned over
st
We, in the savings
ju
e
ar
n,
io
at
ci
we are
t bankers asso
ons Committee and,
and the independen
ti
la
gu
re
De
ns
io
ut
heduled
sitory Instit
e next meeting sc
th
actions of the Depo
at
s
on
ti
ac
ed
of their propos
extremely fearful
81.
for December 16, 19
ngs accounts.
new types of savi
r
fo
s
al
os
op
pr
ceiling)
ll consider four
unt OTO interest
co
ac
Clarence, they wi
"
rd
ca
dil
"w
of
blish a $25,000
jumbo certificate
a
y
They are: (1) esta
el
iv
ct
fe
ef
-(a
tice of withdrawal
ansaction account
tr
ee
with a one-day no
fr
gin
il
ce
m
unt
te a $5,000 minimu
minimum 91-day acco
0
00
deposit; (2) crea
0,
$1
a
te
ea
ng account); (3) cr
ll discount
type of NOW checki
-week Treasury Bi
13
e
th
to
ed
ti
te
terest ra
unt.
with a floating in
ar "wild card" acco
ye
34
w
ne
a
te
ea
rate; and (4) cr
ly
's refusal to comp
DC
DI
e
th
of
p
to
on
oposals would come
Committee.
Action on these pr
the House Banking
of
ty
ri
jo
ma
a
with the wishes of
e
loan associations ar
d
an
s
ng
vi
sa
's
Ohio
uded.
y-six percent of
al year, mine incl
sc
fi
81
19
As you know, sevent
e
th
r
s fo
ve had
bottom line figure
regulations we ha
st
pa
e
and will show red
th
th
wi
nger
tween our
ot survive much lo
Our industry cann
. The mismatch be
DC
DI
e
th
by
s
al
nt
e new propos
the DIDC seems be
d
an
n
io
at
tu
to endure and thes
si
r
ted ou
r assets have crea
liabilities and ou
e problems.
on exacerbating th
to do three things
rs
to
na
se
d
an
n
me
congress
asking all of our
We, in Ohio, are
:
for our industry
als
of the four propos
e
ag
ss
pa
e
th
t
DC and protes
1) Write the DI
approved.
proposals not be
e
th
ng
ti
es
qu
re
by
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1,
• :•
. •••
i
r
76 OR 872-3908
D, OHIO 43762 614/826-76
OR
NC
CO
W
NE
•
ET
RE
ST
WEST MAIN
614/452-5411
NEW CONCORD OFFICE: 1
ZANESVILLE, OHIO 43701
VD
BL
NE
WI
DY
AN
BR
1201
COLONY NORTH OFFICE:
AESVILLE
rEDERAL
SAVINGS
And Loan
Association
2)
3)
place
authorizing Congress to
is
ch
whi
35
5/
R.
H.
t
or
Supp
s of
present or future action
y
an
on
ze
ee
fr
h
nt
mo
xa si
the DIDC, and
the
s for the restructuring of
ll
ca
ch
whi
36
5/
R.
H.
t
Suppor
rve
irman of the Federal Rese
Cha
the
ng
mi
na
y
eb
er
th
DIDC,
Federal Deposit Insurance
Bank, the Chairman of the
nk
the Federal Home Loan Ba
of
an
irm
Cha
the
d
an
n
Corporatio
mbers of the committee.
to be the only voting me
now.
support and assistance
r
you
d
nee
we
,
ce
en
ar
Cl
ipt of this letter.
Monday to confirm the rece
I will call your office
Sincerely,
G. R. Dice,
President
GRD:cst
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
BANK ONE
Paul A. Bamett
President
BANK ONE OF POMEROY, NA
Corner of Court and Second Streets
Pomeroy, Ohio 45769
614 992-2133
February 5, 1982
Mr. Clarence E. Miller
U. S. House of Representatives
Washington, D. C. 20515
Dear Mr. Miller:
to contact our representOnce again it becomes necessary
cific phase-out schedule
atives for backing to adopt a spe
nic that it has been the
for Regulation Q. It seems iro
n the greatest stumbling
creators of the plan who have bee
block in its enforcement.
of the thrift institutions
I fully understand the pressure
implementation, but this
on the Congress to postpone its
in aiding the battered
certainly has had little effect
is driving banks into the
savings and loan industry. It
and thus reinvestment in
same situation. Deposit growth
ing to serve is limited
the very communities we are try
rates. The longer we
since we cannot pay competitive
omes to recapture the
wait, the more difficult it bec
non-regulated investment
deposits that we have lost to
munities are the biggest
houses. The consumer and our com
loser.
strict phase-out schedule
I encourage you to vote for a
al footing for the funds
so that we can compete on an equ
ic recovery of the country.
that are so vital to the econom
Very truly yours,
President
PAB:mg
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
'
ESTABLISHED 1867
-
51
•
f
BANK ONE
B. T. Grover, Jr.
President & Chairman of the Board
BANK ONE OF ATHENS, NA
Post Office Box 550
Athens Ohio 45701
r;
February 2, 1982
Mr. Clarence E. Miller
Room 228, Rayburn Bldg.
Washington, D.C. 20515
Dear Clarence:
of
to the upcoming meeting
ip
sh
on
ti
la
re
in
u
yo
g
I'm writin
cise
Congress, has yet to exer
by
d
te
ea
cr
,
dy
bo
is
Th
D.I.D.C.
their March 22 meeting,
at
t,
an
rt
po
im
is
It
e.
their mandat
permitted to proceed
is
ss
re
ng
Co
by
d
te
ea
cr
that this body
, (2) to create a new
st
re
te
in
of
on
ti
la
gu
re
de
with (1) the
l institutions to compete
ia
nc
na
fi
it
rm
pe
ll
wi
h
,
instrument whic
felt that in the December
s
wa
It
s.
nd
Fu
et
rk
Ma
with the Money
is purpose but because
th
l
il
lf
fu
d
ul
wo
dy
bo
is
1981, meeting th
ial
Congress but other financ
om
fr
ly
on
t
no
s
re
su
es
pr
of
action.
d to delay any further
de
ci
de
dy
bo
e
th
,
ns
io
ut
it
inst
freedom, the quicker
te
le
mp
co
in
e
at
er
op
s
te
The quicker money ra
to the
and their costs reduced
e
iz
il
ab
st
s
te
ra
e
se
ll
we wi
consumer.
ove is appreciated.
ab
e
th
of
n
io
at
er
id
ns
co
You're
Sincerely,
B. T. Grover, Jr.
President
BTG:jh
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
51
ESTABLISHED 1867
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
March 9, 1982
The Honorable J. William Stanton
House of Representatives
Washington, D.C.
20515
Dear Bill:
Thank you for your letter of February 22 forwarding a copy of a letter from Mr. Donald C. MacMillan.
Mr. Macnillan's words of encouragement are certainly
welcome and I have so informed him.
As always I appre-
ciate your good counsel and continued support.
Sincerely,
;
/wM:
CO/
:pjt (#V-43)
bcc:
Mrs. Mallardi (2)v
• WI LLI AM STANTON
1 I'm Disrmicr. OHio
•
•
•
•
2,466 RAVIN/RN EklILDING
WASHIFIGTON, D.C. 20515
PHONE: AREA Cooc 202, 225-5306
COMMITTEE ON
BANKING. FINANCE AND
URBAN AFFAIRS
tate5
ji)ou5e of Atpretentatibui
170 NORTH ST. CLAIR STREET
PAINESVILLE, OHIO 44077
PHONE. AREA C.ODE 216, 952-6167
MANTUA POST OFFICE
10748 NORTH MAIN STREET
MAN-ruA. OHIO 44255
PHONE: AREA CODE 216. 274-8444
fillassbington, 31D.C. 20515
COMMITTEE ON
SMALL BUSINESS
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Congre55 of tbe Elniteb
DISTRICT OFFICES:
1((
February 22, 1982
Honorable Paul A. Volcker, Chairman
Board of Governors of the Federal Reserve System
Washington, D. C. 20551
C r:
CD
Dear Paul:
You might not have seen this letter from one of my
constituents -- private citizen Donald C. MacMillan.
Mr. MacMillan is not alone, by any means, in his
observations.
Sincerejy
)
,
Willi
WS:ag
Stanton
•
•
DONALD C. MAcMILLAN
FE b. 18 I98Z
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Federal Reserve Bank of St. Louis
•
•
•
BOARD OF GOVERNORS
..
'co
.0
-m
• ..4
..*5'
11
OF THE
FEDERAL RESERVE SYSTEM
.
.1.
F-- •
(,) •
-1- •
'--)
4<,
WASHINGTON, D. C. 205S1
March 9, 1982
PAUL A. VOLCKER
CHAIRMAN
The Honorable Charles McC. Mathias, Jr.
United States Senate
Washington, D.C.
20510
Dear Mac:
Thank you for your letter of March 1 requesting comment on correspondence you received from Mr. H. Furlong Baldwin,
Chairman of the Board of the Mercantile-Safe Deposit & Trust
Company. Mr. Baldwin expressed concern that the Depository
Institutions Deregulation Committee might continue to postpone
action on various deregulatory proposals.
As you know, the Committee has been charged by Congress with an inherently difficult task--to phase cut deposit
interest rate ceilings in order to increase the return to
savers while at the same time taking into consideration the
current difficult situation of depository institutions, including, prominently, many thrift institutions. At the Committee's most recent meeting on December 16, a decision was made
to postpone consideration of further deregulatory actions until
the Committee's next scheduled meeting on March 22. I joined
in that decision in part because some of the deregulatory
proposals on the agenda might have placed many thrift institutions
under further earnings pressures at a very inopportune time.
The Committee will reconsider various deregulatory
proposals at its meeting later this month. It would be inappropriate for me to comment on what decisions the Committee might
reach at that meeting. I would only note that as time goes on
the Committee's deregulatory mandate from the Congress and the
likely competitive position of all depository institutions visa-vis money market funds and other market instruments will
require continued consideration of further deregulatory actions.
Let me assure you that, in consultation with DIDC
Chairman Regan and the other members of the Committee, I will
give serious consideration to the various proposals for deregulatory action at our next meeting.
Sincerely,
ka4
NB:CO:pjt (0-48)
bcc: Mr. Bernard
Mrs. Mallardi (2) v/
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Federal Reserve Bank of St. Louis
•
CHARLES McC. MATHIAS, JR.
MARYLAND
•
•
REPLY TO:
158 RUSSELL SENATE OFFICE BUILDING
WASHINGTON. D.C. 20510
'Alertifeb Zfalez Zertate
J;•
WASHINGTON. D.C. 10310
C
March 1, 1982
CrD
Honorable Paul A. Volcker
Chairman
Board of Governors of the Federal
Reserve System
Depository Institutions Deregulation Committee
20th and Constitution Avenue, Roam B-2120
Wash.ingtonyD.C. 20551
Dcar Mr.
I am enclosing a letter front H. Furlong Baldwin of the MercantileSafe Deposit and Trust Company in Baltimore.
I will appreciate your careful consideration of the points he raises.
Thank you for your attention to this matter.
With best wishes,
Sincerely,
Charles Md.C. Mathias, Jr.
United States Senator
CM:rdb
Enclosure
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Federal Reserve Bank of St. Louis
0
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
MERCANT1LE-SAFE DEPOSIT Ei TRUST COMPANY
H. Furlong Baldwin
Chairman of the Board
(301) 237-5251
February 8, 1982
The Honorable Charles McC. Mathias, Jr.
United States Senate
358 Russell Senate Office Building
Washington, D. C. 20510
Dear Mac:
I am writing to you to ask that you urge the members
of the Depository Institutions Deregulation Commission to
expeditiously eliminate deposit ceilings imposed on
financial institutions.
Existing legislation mandates the phasing out of
Regulation Q. Further delay in getting this program
underway will continue to adversely affect the financial
institutions of the United States by restraining them in
meeting competition from nonregulated providers of financial
services. Further delay is not in the public interest nor
is it in the best long run interest of the financial
community generally. Such delay will not assure any retention
by financial institutions of traditional, low cost core deposits.
The fact is, these deposits are eroding rapidly in the face of
market pressures regardless of regulation.
Thank you for your consideration.
Sincerely yabIT.g.p._
e4,2k
H. Furlong Bal
HFB/rnh
Two Hopkins Plaza / P.O. Box 1477 / Baltimore, Maryland 21203
in
•
•
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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
1
WASHINGTON, D. E. 20E5
\
•
March 9, 1982
PAUL A. VOLCKER
CHAIRMAN
The Honorable Bill Emerson
House of Representatives
20515
Washington, D.C.
Dear Mr. Emerson:
letter regarding interest
Thank you for your recent
rates and monetary policy.
have eased somewhat since
As you know, interest rates
are,
te high historically. They
qui
ll
sti
are
y
the
but
te,
you wro
lation.
higher than the rate of inf
bly
era
sid
con
o
als
e,
not
as you
made.
couple of points should be
a
nk
thi
I
re,
sco
ter
lat
On this
lationessing "real", that is, inf
ass
in
nt
eva
rel
is
t
wha
First,
lation,
expected future rate of inf
the
is
es
rat
st
ere
int
ed,
adjust
bebt that market participants
dou
to
son
rea
le
amp
is
re
and the
el
e will remain at the same lev
rat
ion
lat
inf
ent
rec
the
t
lieve tha
not
e in real interest rates is
ris
a
,
ond
Sec
ad.
ahe
rs
in the yea
lation
the transition to lower inf
ing
dur
nt
pme
elo
dev
g
sin
a surpri
n that
restraint--particularly whe
ry
eta
mon
of
icy
pol
a
er
rates und
mentary action on the fiscal
ple
com
by
ed
ani
omp
acc
not
policy is
side.
iture actions you pointed
end
exp
the
t,
pec
res
t
tha
In
constructive. However, the
are
nly
tai
cer
ter
let
r
out in you
budgetary picture has raised
l
era
fed
t
ren
cur
the
t
tha
fact is
ficits in the years ahead,
-de
gwin
gro
and
e-siv
mas
fears of
aCongress and the Administr
the
by
en
tak
are
ps
ste
or
unless maj
il
to raise more revenue. Unt
or
r
the
fur
ng
ndi
spe
cut
tion to
t
federal policy simply doesn'
l
ral
ove
en,
tak
are
s
ion
such act
ial markets with a credible
anc
fin
the
and
lic
pub
the
present
prices and interest rates.
on
res
ssu
pre
ng
uci
red
for
program
as passing the buck. But
I hope you won't view this
of
relaxation of the tensions
a
e
com
wel
ld
wou
,
too
I,
although
t
high interest rates, I jus
ned
tai
sus
e
hav
t
tha
s
credit market
e, acting alone, can bring
erv
Res
l
era
Fed
the
how
t,
don't see
basis. I can only say tha
le
nab
tai
sus
a
on
ult
res
about that
past few weeks, I've been
the
in
l
Hil
the
to
ps
tri
ss
in my many
of most members of Congre
ty
ivi
sit
sen
the
by
d
age
very encour
t we will be able to work
tha
e
hop
ry
eve
e
hav
I
m;
to this proble
ament.
out of the current predic
together and get ourselves
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Federal Reserve Bank of St. Louis
Sincerely,
MJP:JSZ:WRM:DJW:pjt (#V-38)
bcc: Mr. Prell
Ms. Wing
Mrs. Mallardi (2) v/
S/Paul A. Volcket
BILL EMERSON
MEMBER OF CONGRESS
10TH DISTRICT. MISSOURI
AGRICULTURE COMMITTEE
SUBCOMMITTEES:
COTTON, RICE AND SUGAR
WHEAT, SOYBEANS AND FEED GRAINS
OFFICES;
111
Surrc 413
CANNON BUILDING
WASHINGTON, D.C. 20515
Congret5 of the aniteb gptate5
31)eue of ilepre.5entatibes
DEPARTMENT OPERATIONS,
RESEARCH AND FOREIGN AGRICULTURE
latatingtort, 13.C. 20315
202:225-4404
THE FEDERAL BUILDING
339 BROADWAY
CAPE GIRARDEAU, M ISSOURI
P.O. Box 12.8
HILLSBORO, M ISSOUR
63050
314:789-3561
February 19, 1982
The Honorable Paul A. Volcker
Chairman
Board of Governors of the
Fed3ral Reserve System
Washington, D. C. 20551
Dear Chairman Volcker:
This letter is to express my deep concern regarding the
recent rapid rise in the prime interest rate. The jump to
seventeen percent represents the highest level in three months.
Last June I wrote to you and explained the devastating impact
high interest rates are having on the housing industry in Missouri.
In your response to me you stated: "the only way we are likely to
achieve a lasting decline in interest rates,...is through a lowering
Of inflation". In June of 1981 the annualized rate of inflation
was 8.4 percent.
Today it stands at 4.8 percent annualized rate
for the month of December, a decrease of almost fifty percent.
Moreover, Congress reduced federal spending by $35 billion in FY 82
and the President's FY 83 budget request would save an additional
$56 billion. These two factors dictate a corresponding response
from the Federal Reserve Board.
The homebuilding industry offers an excellent example of
the bankruptcy of the Federal Reserve Board's policy of recession
to stop inflation. By virtually halting housing construction,
current policies simply bottle up demand for housing and will spur
greater inflation in the future.
Once again, inflation is down and the growth of federal
spending is down. I think the time for interest rates to come
down is long past due.
With best wishes, I remain
Sincerely,
BILL EMERSON
Member of Congress
BE/jbb
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Federal Reserve Bank of St. Louis
63701
314:335-0101
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Federal Reserve Bank of St. Louis
•
•
March 8, 1982
e, Jr.
The Honorable Barber B. Conabl
house of Representatives
20510
Washington, D.C.
Dear Mr. Conable:
requested
Enclosed is the information you
Ways and Means Committee
curing the hearing before the
hed a copy of this to
on February 23. I have furnis
in the record of the
the Committee for inclusion
hearing.
of further
Please let me know if I can be
assistance.
Sincerely,
Enclosure
(insert page 16)
CO:pjt
bcc: Mike Prell
k,-/
Mrs. Mallardi (2)'
Identical ltrs. also sent to:
Cong. Duncan (insert page 27)
Cong. Gradison (insert page 42)
Cong. Martin"(insert page 69)
•
•
Insert page 16 (February 23, 1982 House Ways & Means Hearing)
Chairman Volcker subsequently submitted the following
information for the record.
The attached charts depict the behavior of "real"
interest rates over the past 50 to 60 years.
The measure of
inflation expectations, which must be deducted from the
observed nominal interest rate, is based on the actual behavior
of consumer prices in the recent past.
It will be observed
that, although the present level of real rates is relatively
high, that level has been equaled or exceeded in prior periods.
Moreover, the recent bout of high real rates has been a brief
one, thus far.
In addition, for many borrowers, the effective
after-tax cost of credit is not as high on a comparative basis
as it has been at many times in the past when tax rates were
lower.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
.
NOMINAL, BEFORE-TAX REAL, AND AFTER TAX REAL INTEREST RATES
Long-Term Treasury Bond
Percent
Quarterly
16
•
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Federal Reserve Bank of St. Louis
%.
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1925
1930
1935
1940
1945
1950
1955
1960
1Q65
1970
1975
1980
1. The before-tax real interest rate is the difference between the nominal interest rate on long-term
Treasury bond and the expected rate of inHation, where the latter is computed as a 12-quarter
moving average of actual inflation rates (using the Consumer Price Index). The after-tax real
interest rate is computed by subtracting the expected rate of inflation from the after-tax nominal
interest rate, where the latter is given by the product of the nominal interest rate and 1 minus
the tax rate. The tax rate used here is the effective corporate income tax rate on a NIPA basis.
2. Latest data plotted is February 18, 1982.
12
NOMINAL AND REAL INTEREST RATES
THREE MONTH TREASURY BILLS
SOLID LINE SHORT DASH -
NOMINAL
REAL
20
10
1 I.
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1982
annualized percentage increase in the
MONTHLY DATA. Real interest rate series is computed by subtracting the
-equivalent Treasury bill rate.
conqumpr Price Index during the preceding three months from the nominal coupon
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
,
NOMINAL AND REAL INTEREST RATES
LONG TERM TREASURY BONDS
.
24
NOMINAL
REAL
SOLID LINE =
SHORT DASH =
16
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MONTHLY DATA. Real interest rate series is computed by subtracting the percent
rm Treasury bond interest rate.
Price Index during the preceding twelve months from the nominal long-te
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
INTEREST RATES
NOMINAL, BEFORE-TAX REAL, AND AFTER TAX REAL
Three-Month Treasury Bill
Percent
---20
Quarterly
16
12
Nominal
8
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on
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s (using .the
er moving average of actual inflation rate
uart
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n by the prointerest rate, where the latter is give
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minu
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and
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s.
tive corporate income tax rate on a NIPA basi
1982.
2. Latest date plotted is February 18,
•
•
Insert page 27
(February 23, 1982 House Ways & Means Hearing)
Chairman Volcker subsequently submitted the following
information for the record.
Note on merger/acquisition financings.
The accompanying list summarizes developments with
respect to some of the major bank credit arrangements made last
year in connection with merger and acquisition activity.
As
the list makes clear, the reported loan commitments greatly
overstate the magnitude of actual borrowing activity, and a
large share of the commitment/lending activity involved banking
offices abroad.
Moreover, bank loans have frequently provided
only short-term "bridge" financing.
The impact of takeover
loans on changes in domestic commercial bank credit was noticeable in some months, but over 1981 as a whole the net impact
was very small.
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Federal Reserve Bank of St. Louis
•
•
A summary of large corporate merger/acquisition financings in 1981-82
Fluor
Arranged a bank credit line for takeover of St. Joe Minerals.
Overall size of line was not reported, but Fluor took down a $1 billion
loan, all from U.S. banks*; no repayment yet reported.
Conoco
Arranged $3 billion bank credit line, $2.4 billion of it with
U.S. banks.
Line was arranged for possible defensive purposes and evi-
dently was not drawn upon.
Mobil
Arranged a $6 billion bank credit line, one-third of which was
with U.S. banks.
It took down $6 billion, of which $1.65 billion was from
U.S. banks, in July but repaid all in August when it failed in its Conoco
takeover attempt.
It borrowed an estimated $0.2 billion from U.S. banks in
November (total loan was $4 billion), at which time it was involved in an
unsuccessful attempt to acquire Marathon Oil; no repayment has been reported.
Texaco
Arranged a $5.5 billion bank credit line for takeover purposes,
initially with Conoco as the target.
No actual borrowing is reported.
DuPont
Arranged a $4 billion bank credit line; took down $2.5 billion from
U.S. banks in acquiring Conoco and then repaid the bulk in the fourth quarter
with the proceeds of market borrowings.
Repayment of the last $0.9 billion
of the loan has not been reported.
*"U.S. banks" refers to domestic offices of U.S. banks plus U.S. branches and
agencies of foreign banks. This is the scope of the banking system in the
Federal Reserve's bank credit series.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
%
•
•
.
-2-
Cities Service
Arranged a $4 billion credit line for defensive purposes; no borrowing is reported.
Marathon
Arranged a $5 billion credit line for possible defensive uses;
$1.2 billion was taken down at U.S. banks (total loan of $5 billion) but
repaid after agreement with U.S. Steel.
Pennzoil
Arranged a $2.5 billion credit line for possible acquisition purposes; no takedown reported.
Gulf Oil
Arranged a $6 billion bank credit line for possible acquisition;
no borrowing reported.
U.S. Steel
Arranged a line of just over $4 billion; only $0.3 billion was
borrowed at U.S. banks (total loan, $3.2 billion) in connection with the
Marathon acquisition and this has not been reported repaid.
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Federal Reserve Bank of St. Louis
•
•
Insert page 42 (February 23, 1982 House Ways & Means Hearing)
Chairman Volcker subsequently submitted the following
information for the record.
Table 1 shows an estimate by Federal Reserve staff
of total credit obtained by nonfinancial sectors of the economy
that might, in telms of historical patterns, be consistent with
the Administration's GNP forecast for FY 1982-84.
As may be
seen, absent the enactment of the Administration's deficit reduction program, the Treasury will be absorbing a very large share
of aggregate credit flows (and these figures on federal borrowing
do not include guarantees or sponsored agency takings).
These data employ Administration estimates of the
deficit.
The CB0 has estimated significantly higher deficits,
before or after assuming enactment of the President's budget.
Note also the appropriate historical comparisons
for fiscal 1984 should be with earlier prosperous business years,
not with recession years when Federal financing is normally
an exceptionally large share of credit markets.
Table 2 gives some hypothetical saving projections,
based on patterns observed in earlier years.
While the range of
possible outcomes is substantial, the figures indicate that the
federal deficit will be absorbing a comparatively large share
of total private saving in the economy unless major steps are
taken to cut spending or increase revenues.
It is interesting
to note thsat the deficit-to-saving ratio looks especially high
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I.
•
•
.
2
_
in comparison to earlier experience in relatively prosperous
times, which is the appropriate comparison for projections based
on an assumption of a high level of business activity.
Note that these data are Administration deficit,program and GNP estimates; other estimates (e.g., by the CBO) suggest
higher deficits and consequently greater strain on our savings
capacity.
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Federal Reserve Bank of St. Louis
.
•
•
Table 1
S
FEDERAL BORROWING AND CREDIT MARKET
Federal borrowing from
the public
($ bil)
($ bil)
1972
152
19
12.8
198
19
9.8
1973
1974
187
3
1.6
1975
174
51
29.2
242
83
34.3
1976
310
54
17.2
1977
1978
379
59
15.6
413
34
8.1
1979
70
20.6
1980
342
405
79
19.6
1981
115 (118)2
27.4 (28.11 2
1982e
420
108 (164)
21.9 (33.2)
1983e
494
97 (181)
17.7 (33.0)
1984e
548
Fiscal
XS-L.1U_
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Federal borrowing as a
% of funds
raised
Total funds
raised by
nonfinancifl
sectors
1
2
(%)
equities.
Nonfinancial sectors, excluding
Administration's deficit
the
ume
ass
es
hes
ent
par
in
s
ber
Num
reduction program is not enacted.
of the United States Government,
get
Bud
Fp
is
lys
Ana
l
cia
Spe
Source:
4, which are staff projections
198
and
3,
198
2,
198
for
ept
1983 exc
nomic and budget projections.
based on Administration's eco
Table 2
•
DEFICITS, GNP AND SAVING
Fiscal
Tears
*1965
1966
1967
1968
1969
*1970
1971
1972
*1973
*1974
1975
1926
1977
*1978
*1979
1980
1981
Deficit as
% of
GNP
Budget
Deficit
($ billions)1
-1.6
-3.8
-8.7
-25.2
3.2
-2.8
-23.0
-23.4
-14.8
-4.7 (-6.1)
-45.2 (-53.2)
-66.4 (-73.7)
-44.9 (-53.6)
-48.8 (-59.1)
-27.7 (-40.1)
-59.6 (-73.8)
-57.9 (-78.9)
Deficit as % of Deficit as % of
net nongross nonfederal saving2 federal saving2
0.2
0.5
1.1
3.0
0.4
0.3
2.2
2.1
1.2
0.3 (0.4)
3.1 (3.6)
4.0 (4.5)
2.4 (2.9)
2.3 (2.8)
1.2 (1.7)
2.3 (2.9)
2.0 (2.8)
1.5
3.2
6.7
17.7
2.3
1.9
13.5
11.9
6.6
2.0 (2.6)
18.2 (21.5)
22.8 (25.2)
13.0 (15.6)
12.3 (15.0)
6.6 (9.5)
13.3 (16.5)
11.7 (15.9)
3.0
6.1
12.9
34.5
5.0
4.2
29.3
24.9
13.1
4.2 (5.5)
45.8 (53.9)
53.2 (59.0)
29.1 (34.7)
27.0 (32.6)
15.9 C23.0)
35.2 (43.6)
31.5 (42.9)
"Baseline")3
Potential Deficits with No Saving Plan (Administration's
-147 Cn.a.)
-167 (n.a.)
1983
1984
4.3 (n.a.)
4.4 (n.a.)
21.2 (n.a.)
20.7 (n.a.)
n.a.
n.a.
Administration's Proposed Deficits
..92 (-107)
-83 (-97)
1983
1984
Deficit
adjusted to
62 unemployment
2.7 (3.1)
2.2 (2.6)
13.2 (15.4)
10.3 (12.0)
n.a.
n.a.
High Employment
High Employment
High Employment
Deficit as % of
.
Deficit as % of
Deficit-as % of
g
potential GNP sross nonfederal saving4 net nonfederal savin
's "Baseline)3
Potential Deficits with No Savings Plan (Administration
1983
1984
90
128
2.5
3.2
13.7
18.0
37.0
48.6
5.3
6.2
14.4
16.7
Proposed Deficits
1983
1984
35
44
1.0
1.1
"off-budget" programs financed
1. Unified budget deficits; data in parentheses include
by U.S. government.
it) plus net foreign invest2. NIPA gross saving excluding NIPA fBabral surplus (or defic
less capital consumption allowment (sign reveried); net nonfederal saving equals gross
ance vith adjustment.
r.
3. CB0 estimates of baseline deficit are somewhat highe
average of high employment years
4. Saving as percent of potential GNP equals ratio in
in the 1970s.
, and
nt rates of 4.92, 4.0%, 5.2%, 5.0%, 6.3%
loyme
unemp
;
years
erous
prosp
*Reasonably
5.8%, respectively.
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Federal Reserve Bank of St. Louis
"111•..
•
Insert page 69
•
(February 23, 1982 House Ways & Means Hearing)
Chairman Volcker subsequently submitted the following
information for the record.
In March 1981, the Administration's budget projected
a deficit of $22.8 billion in FY 1983, assuming $28.9 billion
of unspecified spending reductions that were to be proposed in
the 1983 budget and implemented in that year.
Therefore, in
the absence of those additional spending reductions, the deficit
would have been estimated to be $51.7 billion (abstracting from
the "second round" interactions between alternative budget
deficits and the economic forecast underlying the budget projections).
In the absence of deficit reducing measures, but
assuming the Administration's defense program and other minor
increases in outlays, the deficit for FY 1983 is now projected
by the Administration to be $147 billion.
(The Congressional
Budget Office "baseline" projection is for a FY 1983 deficit of
$157 billion.)
The Administration estimates that about $89
billion of the rise in the projected deficit between last
March and the present is attributable to revised economic
assumptions.
This total subdivided the following way:
Effect of lower nominal income on tax receipts
Net effect of higher unemployment but lower
inflation on outlays
Effect of higher deficits and higher interest
rates on interest outlays
$52.6 billion
5.3
31.1
$89.0 billion
Another way of looking at the question of the effect
on budget estimates of revised economic assumptions to note
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Federal Reserve Bank of St. Louis
•
•
•
-2
•
-
that the projection of unemployment in FY 1983 1.3 percentage
points higher than was projected a year ago would imply a
deficit about $35 billion larger.
In combination with higher
interest outlays, about $66 billion of the upward revision in
the deficit is therefore readily explainable.
The remaining
$29 billion of upward revision reflects the lagged effects
of weaker economic conditions in 1982, technical re-estimates
that reduce receipts (or add to outlays) and some short-fall
from outlay saving goals set in the 1982 budget.
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Federal Reserve Bank of St. Louis
•
te
•
•
4
.•
c.)..
•.
4,
Of GOViii,
A
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
OF THE
•
••42
•0
•'n
s
e• a,
BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 205S1
[U 1'
March 8, 1982
PAUL A. VOLCKER
CHAIRMAN
The Honorable Dan Coats
House of Representatives
20515
Washington, D.C.
Dear Mr. Coats:
Thank you for your recent letter expressing your
concerns that high interest rates may prevent a healthy economic
recovery.
I think it is important to stress that the Federal
Reserve is not conducting monetary policy with the objective
of maintaining high interest rates. We are attempting to steer
what is admittedly a difficult course between excessive monetary
expansion that would rekindle now subsiding inflationary pressures, on the one hand, and Insufficient monetary growth that
would starve the economy of the financial wherewithal to grow,
on the other. We believe that our present targets for the
monetary aggregates are appropriate, but we stand prepared to
adjust them if events should indicate that we have misjudged
the implications of the numbers we've set--a possibility to
which we obviously must stay alert in the rapidly changing
financial environment we have today.
The consensus of the Federal Open Market Committee
members when we met last month to set our targets for 1982 was
that the economy was likely to turn upward by midyear responding
to the combination of rising defense spending and the July tax
cut. The unusually severe winter weather has made incoming
data rather difficult to interpret, but on balance such a forecast still seems like the best bet.
But this is not to say that the outlook is entirely
satisfactory; that would be far from the truth, as I perceive
it. While the near-term fiscal stimulus can be viewed as
buttressing aggregate demand in the economy as a whole, the
large current and prospective budget deficits have rather
disturbing implications for credit market pressures and interest
rates. Unless strong action is taken to cut those deficits,
there is the clear danger of a continuing squeeze on potential
private borrowers and of a crowding out of the capital formation we desperately need to enhance productivity and raise
living standards. Unfortunately, accelerated monetary expansion cannot solve this problem, for any perception that the
•
•
The Honorable Dan Coats
Page Two
Federal Reserve is backing away from its commitment to antiinflationary restraint would reduce the confidence of savers
and encourage the unproductive and speculative behaviors that
have only recently begun to disappear; "inflation premia" in
interest rates would be increased by borrowers and lenders,
and the credit-sensitive sectors of the economy will suffer
more.
I applaud your efforts to cut federal spending. I
believe that decisive action by the Congress and the Administration to reduce the budgetary imbalance would do much to reassure
investors and could have dramatic impacts on credit market conditions. I can assure you that my colleagues and I on the Board
want to do everything we can to lay the base for solid economic
growth and renewed prosperity--and we shall work with the Congress
toward that end.
Sincerely,
MJP:JSZ:WRM:pjt (#V-44)
bcc: Mr. Prell
Ms. Wing
Mrs. Mallardi (2),
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Federal Reserve Bank of St. Louis
•••
DAN COATS
4TH DISTRICT, INDIANA
•
•
20515
(202) 225-4436
DISTRICT OFFICE:
326 FEDERAL BUILDING
FORT WAYNE, INDIANA
ENERGY AND COMMERCE
SUBCOMMITTEES:
ROOM 1427
LONGWORTH HOUSE OFrICE BUILDING
WASHINGTON. D.C.
COMMITTEES:
Congre55 of the tinittb Eptate5
polio of RepreOntatibei4
46802
(219)424-3041
FOSSIL AND SYNTHETIC FUELS
OVERSIGHT AND INVESTIGATION
SELECT COMMITTEE ON AGING
astington, 10.12:. 20515
February 25, 1982
Mr. Paul A. Volcker
Chairman
Federal Reserve Board
Washington, D.C.
J511
4
Dear Mr. Chairman:
It is becoming clear that if the present high interest rates
are not lowered, this year's promised economic recovery will not
materialize.
Although there was some downward movement this week, the
current level of interest rates still defies all economic reason.
Both the current inflation rate (5.3% over the past four months)
and the current recession call for much lower interest rates than
16%, the current prime lending rate.
The cost of money is extraordinarily high in relation to
inflation and to the state of the business cycle. I cannot understand why the Federal Reserve Board would adopt policies that
result in increased interest rates at the same time the Federal
Reserve Board publishes statistics showing a 3% decrease in
industrial output and a new seven year low in factory capacity
utilization.
It is becoming increasingly clear just by examining the results
that the policies of the Federal Reserve are in direct conflict
with those of the Administration. It is important to Prevent
excessive monetary growth so that unacceptably hiah inflation does
not accompany economic expansion. However, interest rates will
not fall unless the monetary supply is large enough to provide
the private sector with sufficient funds. In my opinion, such
action can be undertaken with little risk of re -kindled inflation
given our current economic recession. It is far preferable to the
current tight money-supply policy that costs the nation lost
output and high unemployment.
Congress also must assist in the effort to lower interest
rates by controlling the size of the federal deficit. There is
no question that the current projected budget deficits for the
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Federal Reserve Bank of St. Louis
cont'd
,
#1
i
Page 2
next several fiscal years are too high. I am
working with my
colleagues in Congress to try to control thes
e deficits by
identifying federal programs that can be furt
her reduced or
eliminated.
I trust that Congress and the Federal Reserve
Board can
work together to promote those policies
that will result in lower
interest rates and the revived economy that
is so important to
the people of Indiana and of the nation.
Member of Congress
DC:kmc
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Federal Reserve Bank of St. Louis
•
•
March 4, 1982
The Honorable Patricia Schroeder
House of Representatives
20515
Washington, D. C.
Re:
Dockstader/RP
Dear Ms. Schroeder:
Thank you for your letter of February 8 requesting
comment on correspondence received by your office from
I regret that it
Mr. C. F. Dockstader of Denver, Colorado.
was necessary for Mr. Dockstader to write again concerning
his correspondence, but our records do not indicate receipt
Mr. Dockstader has observed that
of his July 27 letter.
Federal Reserve notes bear the words, "This note is legal
tender for all debts, public and private," and has asked why
the word "for" is used in place of the phrase "in payment of."
The legal status of Federal Reserve notes is determined by section 392 of Title 31 of the United States Code.
That section says:
All coins and currencies of the United States
(including Federal Reserve notes and circulating
notes of Federal Reserve Banks and national banking associations), regardless of when coined or
issued, shall be legal tender for all ddbts,
public and private, public charges, taxes, duties,
and dues.
The parentheses appear in the statute.
Federal law, rather than the words used on the face
of the notes, 'gives the notes their status as legal tender in
The wording on U. S.
payment of all debts, public and private.
currency, including Federal Reserve notes, therefore follows
the language enacted by Congress.
I hope this information is helpful.
know if I can be of further assistance.
GTS:JHJ:CO:vcd (V-35)
Mrs. Mallardi ,
bcc:
Mr. Schwartz
Mr. Jorgenson
G.C. Log #54
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Federal Reserve Bank of St. Louis
Legal Files (2)
Please let me
Sincerely,
(Signed) Donaid J. Wing
Donald J. Winn
Assistant to the Board
Action assigned Mr. Bradfield
PACTRICIA SCHROEDER
IsPOISTRICT. DENVER, COLORADO
ARMED SERVICES COM M ITTEE
POST OFFICE AND CIVIL
SERVICE COMMITTEE
DISTRICT OFFICE:
1767 HIGH
STREET
Concire55 of tbe Elniteb
80218
DENVER, COLORADO
(303) 837-2354
WASHINGTON OFFICE:
2410
RAYBURN
jOoluse of RepresSentatibe5
HOUSE OFFICE BUILDING
WASHINGTON, D.C.
tate5
20515
(202) 225-4431
Illastington. 0.42:. 20515
Refer reply to:
Dockstader/rp
February 8, 1982
Mr. Paul A. Volcker, Chairman
Federal Reserve System
Twentieth St. & Constituent Ave., N.W.
Washington, D.C. 20551
RE:
C.F. Dockstader
Dear Mr. Volcker:
I am writing you on behalf of the above-named constituent
who has inquired of my office. I have enclosed a copy of
Mr. C.F. Dockstader's letter to you of July 27, 1981
I would appreciate your responding to Mr. Dockstader.
With kind regards,
Sincerely,
44AL(
7k
Paq-icia Schroeder
Memtier of Congress
PS:rpb
Encl.
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Federal Reserve Bank of St. Louis
THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS
•
•
January 21,
Hon. Pat Schroeder
House PO
Washington, DC
eD
c)
,vv
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1982
MC
Dear Pat:
In my files I found, to my disappointment,
that the FRS had not answered my letter of
July 27, 1981.
Would you please try to get me an
answer to it2
Thank you.
Cordially,
C. F. Dockstader
P. O. Box 19523
Denver, Colorado
Zip not needed
Enclose copy of carbon of letter mentioned.
•
•
•
•
77DnI7X1,
Rr3715TE
57:77.7M
1981
JulY I-7,
Govr2.711zs
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Ir.r.,,hlwiton, D. C.
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:s
wri:5
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notos
PRIVAJV.
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aVolD
Voacral
roaTz, PnLic,
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TE711DFR
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the vord
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Why
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PAV,2=
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
...
vl.a0(:.
Ofor0
used
.01
•
Cordia117,
19523
Boa
117,71ASS
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,17 to:
Colorado
DenIor,
P_IT:E
01
ek-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
March 4, 1982
The Honorable John Heinz
Chairman
Subcommittee on International Finance
and Monetary Policy
Committee on Banking, Housing and
Urban Affairs
United States Senate
20510
Washington, D.C.
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 August 1981 through January 1982. The report
will be printed in the March issue of the Federal Reserve
Bulletin. It is being released to the press for use in
tomorrow morning's newspapers.
Sincerely,
SiPaul k Volsket
Enclosure
JRC:pjt
bcc: Mrs. Mallardi (2)
Iaentical letters also sent to the attached list.
•
•
•
iir
:
Senate
Chrmn. John Heinz
Subcmte. on International Finance and Monetary Policy
Committee on Banking, Housing and Urban Affairs
William Proxmire
Ranking Minority Member
Subcmte. on International Finance and Monetary Policy
Committee on Banking, Housing and Urban Affairs
House
Chlmn. Jerry M. Patterson
Subcmte. on International Development, Institutions and Finance
Committee on Banking, Finance and Urban Affairs
Thomas B. Evans
Ranking Minority Member
Subcmte. on International Development, Institutions and Finance
Committee on Banking, Finance and Urban Affairs
JEC
Vice Chrmn. Roger W. Jepsen
Clarence J. Brown (ranking minority of JEC, House side--sent to main offc.;
Lloyd Bentsen (ranking minority of JEC, Senate side--sent to main offc.)
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
•
•
March 4, 1982
The Honorable Henry S. Reuss
Chairman
Joint Economic Committee
20510
Washington, D.C.
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 August 1981 through January 1982. The report
will be printed in the March issue of the Federal Reserve
Bulletin. It is being released to the press for use in
tomorrow morning's newspapers.
Copies of the report are also being sent to the
Chairmen of other interested Committees. Additional copies
are enclosed for the use of members and staff of your
Committee.
Sincerely,
Enclosures
(30 copies)
Identical letters to: Chairman Jake Garn, Senate Bnkg., 20 copies
Chairman St Germain, House Bnkg., 50 copies
JRC:pjt
bcc: Mrs. Mallardi (2)
PN:314....-44A-( V,3(p)
”arcl! A, 1182
The Honorable John D. Dingell
Chairman
Committee on Energy and Commerce
Rouse of Representatives
Washington, D. C. 2n51.5
near Chairman Dingell:
I am responding to your letter of February 18, in which you raised
a number of questions and issues regardine marRin requirements on the stock
index futures contract of the ransas City Roard of Trade (KCBT). /n addition, you asked that
nrovide you with a copy of the letter the Board sent
to the Commodity Futures Trading Commismion (CFTC) in connection with this
matter and a copy of the Federal Reserve's aevance notice of proposed rulemakine (pertaininF to margin on stock index futures cnntracts and related
instruments) that has been approved for publication in the Federal Register.
I have enclosed these documents as well as the press release the Federal
Reserve leaned in makine them public.
Turnine to your questions, you requested an explanation of the
basis on which the Foard decided not to sot margin requirements on the KCBT
stock index contract by regulatory action at this time. In deciding on this
course the Foerd took into account the KCAT's decision to raise its initial
marein and to tighten other margin rules. At the sane time the Roard recognized the need to gain experience on the effect and aeequacy of margin levels
based on actual market developments. Moreover, in order to be in a position
to take regulatory action to set marRin reeuirements if this should prove to
he necessary in the light of market developments, the Foard decided to publish
a proposed regulatory framework for public comment. To these ends the noard
has also instructed the staff to keep market developments under close review
in consultation with the CFTC staff. The information gained from this experience and from puh/ic comment will he very helpful to the Board when it reviews
this matter again as circumstances require nr, at the outside, within the next
six months.
'You have aeired how the KCBT ln percent margin Is roughly equivalent
to the marRins met out hy the Federal Feserve for stock options. The Board's
decision not to take regulatory action at this time was based on the considerations outlined above rather than on any specific equivalency test. Indeed,
in view of the differences between existing stock options and the new stock
index futures contract, additional work is required to determine whether 'margins to achieve the sane reRuletory obiectives for both types of instruments
should necessarily be numerically equivalent. In this connection, I would
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Federal Reserve Bank of St. Louis
The n000rable John
Pees, ?
to stress that thare are 4 larAs nulAer of factor* that -luat tn Se
veinhed in makinf!. such A determination. The nes4 to evaluate all nf the
various elements e72rhagises the importance of the ioarl's Jectsion to key?
T)ercent
msrejn levels antler review in orJer to Tokei,is *loth wi-=stiler the
level is adequate anA whether riaeulatorf action vtll he required tn
light of morket devolonisents.
You slats metal how
there is no lege obligation
margin to he maintained. In
thts matter untier review and
warrant regulatory action.
!hile
s voluntarily imposed marvin is
an the '!""Lir, the otostrd evosets the V' ilarcest
addttion, as T noted *hove, the Ploar4 is kenpino.
can Wry action, If market developments shoull
The Federal Reserve intends to rely prismrilv on cm surveillance
41""C
fnr assurance that 'such marrins are kept in place and enforeed. rhs'
doe, not have authority over the KrnT'A msr7las. Snt the 1.00lrei understand,
that, hecsuse of provisions of the (17',"r:'s net capita) rule*, ths IrCBT reports
ell changes in isrpin regulation, to the Commisston. As for enforcement, the
rAFTr: holds reriodic reviews to tosnre that the exchange is enforcinf, all of
its rules including 7iarlin rules. Staffs of the C?T':' en4 lgoara have worked
out format arrangements to cnoviinete vonttorinve of suarlmt develo4nents srd
to exchantte tho information ir,lealned from throe activities.
You indicatei that ynn are concerne4 about the fin:tinge of the CA1
audit of the flPTC. Milt audit notoi a report !Nuked on s .7.1r7C staff perio,lic
review nf the PINT #ich showed fieficienciss in the rr".T's survoillanre
rute enforcement activities. 7he CF.Tft hos loforraed the Soarl that it is
settsfied that these deficiencies have Seen correete4 hv the rrs7 and that
the exchaTte is in compliancy with the e!vTr99 retnlmtion.
, tn 7nur reruest for coment or legislative
finally, with regar'
recommendation pertaining to the *mr.i's authority to set margin on fume—
tionsllv equivalent flturos and options, T would. ltks to emphasise th*t the
Boar:i has asserted Its jurtsdiction to tripoli* marsis requirements on stock
index future's 'halo...! an its interpretation af extetins statutory authority.
Specific Congressional authorization for margin requiromonts on this finan—
cial instrument would clarify mattere an4 avail potential litimatton.
will be happy, of course, to answer any further questions you
nay
A.ncerely,
c,
Sec:
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Federal Reserve Bank of St. Louis
4r. '.3tru$,le
7ose
'!1). '7ritfe (1)
S/Paul
Vol.ckeE
Action assigned rred Struble -who will consult with Mike Bradfield
NINETY-SEVENTH CONGRESS
•
•
JOHN D. DINGELL, MICH., CHAIRMAN
JAMES H. SCHEUER, N.Y.
RICHARD L. OTTINGLR, N.Y.
HENRY A. WAXMAN, CALIF.
TIMOI HY E. WIRTH. COLO.
PHILIP R. SHARP, IND.
JAMES J. FLORIO. N.J.
ANTHONY TOBY MOF F LTT, CONN.
JIM SANTINI, NEV.
EDWARD J. MARKEY, MASS.
THOMAS A. LUKEN. 01110
DOUG WALGREN. PA.
ALBERT GORE, JR., TENN.
BARMARA A. MIKULSKI, MD.
RONALD M. MOTTL, OHIO
PHIL GRAMM, TEX.
AL SWIFT, WASH.
MICKEY LELAND, TEX.
RICHARD C. SHELBY. ALA.
CARDISS COLLINS. ILL.
SYNAR. OKLA.
W. J. •.EIILLY- TAUZIN, LA.
RON WYDEN, OREG.
RALPH M. HALL, TEX.
JAMES T. BROYHILL. N.C.
CLARENCE J. BROWN. OHIO
JAMES M. COLLINS. TEX.
NORMAN F. LE- NT. N.Y.
ED.•.ARO R. MADIGAN, ILL.
CARLOS J. MOOFtHEAD, CALIF.
MATTHEW J. RINALDO, N.J.
MARC L. MARKS. PA.
TOM CORCORAN. ILL.
GARY A. LEE. N.Y.
WILLIAM E. DANNEMFYTR, CALIF.
BOU WHITTAKER, KANS.
THOMAS J. TAUKE, IOWA
DON RITTER. PA.
HAROLD ROGERS, KY.
CLEVE BENEDICT, W. VA.
DANIEL R. COATS, IND.
THOMAS J. BLILEY, JR., VA.
31)1:m5c of iktpre5entatibeg
Committee on (energy anb Commerce
1:oont 2125. 1;apburn
°Ma 3).luilbina
Z.Z1azbington, D.C. 20515
February 18, 1982
,f
FFtANX M. POTTER, JR.
CHIEF COUNSEL AND STAFF DIRECTOR
••
Honorable Paul A. Volcker
Chairman
Federal Reserve Board
20th St. & Constitution Ave., F.W.
Washington, D. C. 20551
Ln
Dear Mr. Chairman:
This letter is with reference to the recent acticn of the
Federal Reserve Board concerning the margin requirement on the
recently-approved Kansas City Eoard of Trade stock index futures
contract on the Value Line Index. We are in the process of
evaluating, among other things, the effects cf your decision on
the series of similar options contracts pending or soon to be
pending action at the Securities and Exchange Commission.
Accordingly, I would appreciate your cooperation in providing me
with copies of the following documents and responses by the close
of business on Monday, March 1:
1. A copy of the letter to the Commodity Futures Trading
Commission (CFTC) referenced in the attached liashington Post
article.
2. An explanation of the basis for your decision to accept
the "voluntary" KCBT roughly 10% margin. Pow is a "voluntary"
margin binding and how will it be enforced? We have some
problems with your reliance, particularly in light of the results
of a recent GAO audit of that exchange, finding serious
surveillance and rule enforcement derogations. For your
convenience, a copy of page 211 of the GAO Report is enclosed
herewith. Also, how is this 10% margin "roughly equivalent to
the margins set by the Federal Reserve for stock options"?
The
requirements of 12 C.F.R. 220.8(f) and 12 C.F.R. 220.8(j) would
appear to be materially different.
3. A copy of your notice of advance rulemaking as approved
for publication in the Federal Register.
I woulC, of course, appreciate any additional comments you
may have on this subject, including any recommendations you may
have, legislative or otherwise, going to your authority to set
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Federal Reserve Bank of St. Louis
•
•
Honorable Paul
Volcker
February 18, 1982
Page 2
margins on functionally equivalent futures and
options on
particular stocks or indexes. I may have
further questions after
reviewing these niaterials.
If you have any questions regarding this reQ
uest, please
feel free to contact our cou
Ms. Washin ton at (202)
225-2927.
Sincerely,
JOI
D. DINGELL
CHAIRMAN
Enclosures
cc:
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Federal Reserve Bank of St. Louis
Honorable Fernand J. St. Germain
Chairman
Committee on Banking, Finance
and Urban Affairs
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
Knight, Jerry. "Stock Index Futures Set; Fed Backs Off." Washington Post, February 18,
1982.
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
•
•
March 3, 1982
The Honorable John C. Stennis
United States Senate
Washington, D.C. 20510
Dear Senator Stennis:
I am pleased to reply to your request for conment
on letters that you received from bankers in Mississippi. As
you noted, these bankers expressed concern that the Depository
Institutions Deregulation Committee might continue to postpone
action on various deregulatory proposals.
As you know, the Committee has been charged by
Congress with an inherently difficult task--to phase out
deposit interest rate ceilings in order to increase the
return to savers while at the same time taking into consideration the current difficult situatinn of depository institutions, including, prominently, many thrift institutions. At
the Committee's most recent meeting on December 16, a decision
was made to postpone consideration of further deregulatory
actions until the Committee's next scheduled meeting on
March 22. I joined in that decision in part because some
of the deregulatory proposals on the agenda might have placed
many thrift iLstitutions under further earnings pressures at
a very inopportune time.
The Comnittee will reconsider various deregulatory
proposals at its meeting later this month. It would be inappropriate for me to comment on what decisions the Committee might
reach at that meeting. I would only note that as time goes on
the Committee's deregulatory mandate from the Congress and the
likely competitive position of all depository institutions visa-vis money market funds and other market instruments will
require continued consideration of further deregulatory actions.
Let me assure you that, in consultation with DIDC
Chairman Regan and the other members of the Committee, I will
give serious consideration to the various proposals for deregulatory action at our next meeting.
Sincerely,
NB:slb (V-37)
bcc: Normand Bernard
/
Mrs. Millardi (2)v/
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
fami
Assigned to Mr. Bernard for reply
•
JOHN TOWER. TEX., CHAIRMAN
sTRom riluwmoNo. S.C.
BARRY GOEDNA LER. ARIZ.
JOHN W. WARNER. VA.
GORDON J. HUMPHREY, N.H.
WILLiAM S. COHEN, mAINE
ROGI R W. JF.PSEN. IOWA
DAN Q1/4.AYLE. IND.
JEFIEMIAN DENTON. ALA.
•
JOHN C. STENNIS. MISS
Nf:Y M. JACKSON. WA.
HOWARD W. CANNON, NEV.
HARRY F. BYRD. JR.. VA.
SAM NUNN, GA.
GARY HART. COLO.
J. JAW- S FxoN, NEM/.
CARL LEVIN, mICH.
Patrrifc Zinfez ,Senate
CCMMITTEE ON ARMED SERVICES
RHETT El. DAWSON, STAFF DIRECTOR ANO CHIEF COUNSEL
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Federal Reserve Bank of St. Louis
WASHINGTON.
D.C. 205 10
February 16, 1982
Honorable Paul A. Volcker, ChaiLman
Depository Institutions Deregulation Committee
20th and Constitution Avenue, Room B-2120
Washington, D. C. 20220
•!'„," I
Dear Mr. Chairman:
I am enclosing herewith copies of letters which I have received
from bankers in Mississippi about the fear that the Depository
Institutions Deregulation Committee is going to again Postpone action
on its proposal to permit banks to have partial competitive parity
with other depository institutions and money market funds.
I would appreciate it very much if you would look into this
matter and let me know the status of the Committee's proposal at
this time and what can be anticipated in the future.
Sincerely,
A
/
JCS/kbc
Enclosures
t7ohn C. Stennis
United States Senator
-•
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ACKERMAN, MISSISSIPPI 39735 • P. O. DRAWER B • 601/285-5278
G. WAYNE SMITH
PRESIDENT
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Federal Reserve Bank of St. Louis
February 5, 1982
Senator John C. Stennis
205 Russell Building
Washington, D.C. 20510
Dear Senator Stennis:
I have learned that pressure was brought on the DIDC
Committee to postpone action on proposals to permit
banks to compete,or at least enjoy partial parity,
with the money market funds. The funds are now $200
billion and growing and this is equal to the deposits
of 11,000 commercial banks in this nation.
Congress has been unwilling to place rate ceilings on
the money market mutual funds. I feel that regulated
depositories should be able to compete with these funds
in order to keep our deposit base from eroding and thus
losing local available capital for local needs.
I urge you to (1) oppose any legislation designed to delay
action by the DIDC, (2) to ask members of the DIDC to
exercise their current mandate to deregulate deposit rate
ceilings, (3) and to take no action to interfere with the
DIDC considerations scheduled for March 22nd.
I respectfully ask for a reply to this letter.
I am
Si
erel
GWS/lm
MAKING YOUR FUTURE BRIGHTER
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Federal Reserve Bank of St. Louis
•
Hank of
I
I
-
•
Mississippi
"
February 4, 1982
.
Senator John C. Stennis
205 Russell Building
Washington, D.C. 20510
RE:
DIDC Deregulation Schedule
Dear Senator Stennis:
On March 22, 1982, the DIDC will again consider action
on proposals to permit banks and bank customers to begin
competing, on at least a partially equal footing, with other
depository institutions and money market funds. As you are
aware, tho groups which continue to profit from these
inequities arc socking to postpone action.
Further inaction will place added strain on many banks
and will further limit the availability of already scarce
funds to bank customers. The argument that money market
funds are placed in bank deposits is only partially correct.
Most small local banks are excluded.
Please oppose any legislation designed to delay action
by the DIDC, and please actively encourage members of the
DIDC to exercise their mandate to deregulate deposit rate
ceilings.
Your help and consideration will be appreciated.
Very t,rul
r urs
-
Paul S. Thomas, III
Vice President
Bank of Mississippi
in West Point
•
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,
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id 177,LA )7
Green- villeiOn.lilndputrident Bank • Alember F.D.I.C.
Ray K. Smith
Chairman and Chief Ex-ecutive Officer
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
February 5, 1982
Senator John C. Stennis
205 Russell Se.nate Office Building
Washington, D. C. 20510
Dear Senator:
I uil.:lcrstand there are offr.)rts undon.,ay to p-iss a
Concjressional Resolution that would dire.ct the Depository
Institutions Deregu]atory Committee to delay any uction
-t..owards further dc,regulation of interest rate ceilings
until after the November 1982 elections. This le9islation
would eliminate any possibility the banks and thrift
institutions might have to obtain authority to issue an
instrunent or offer an account that could be sorry:Tv:hat
callpetitive with the money market mutual funds for at
least a year.
As you know, Congress has refused to flkike any
atte,upts to regulate themonoy market mutual funas to the
extent our industry is. Not only are they relieved of
reserve requirements, capital requirements and axunpt
from the need of complying with regulations, such as the
Community Reinvestment Act (that Congress felt at one time
wns necessary for the best interests of the public), but
they have a rate advantage in the marketplace that makes
it impossible for us to =Fete.
If you have the opportunity to oppose this
resolution, I strongly urge you to do so. Not only are
the MMMFs creating a trunendous disintermediation of
funds -- but the situation is just not fair.
Thanks very rcuch for your consideration.
%,Try truly yours,
_.,)
Cnairman of the Board
MKS:jh
MAIN OFFICE 540 MAIN STREET• GREENVILLE,. MISSISSIPPI 38701
POST OFFICE BOX 959• TELEPHONE(601)378-3902
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Federal Reserve Bank of St. Louis
One Deposit Guaranty Plaza
Jackson, Mississippi
Phone 601 354-8283
Telecop!er 601 354-8408
•
E. E3. Robinson, Jr.
I M.POSI GUARANTY NAHONAL BANK
February 5, 1982
The Honorable John C. Stennis
204. Russell Building
Washinton, D.C. 20510
Dear Senator Stennis:
We are exceedingly disappointed at the D1DC's postponement until
March 22, 1982, action on proposals to permit banks to have partial
competitive parity with other depository institutions and money market
funds. We continue to see funds diverted into money market mutual funds,
money which could be made available to promote economic activity in
Mississippi.
We are now hearing that the same pressure groups which caused the D1DC to
postpone action until March 22, are trying to secure passage of a congressional resolution or bill directing the D1DC to delay any action until
after the elections in November, 1982. Such a delay would only make matters
worse with the continued outflow of funds from banks and other depository
institutions to the unregulated money market mutual funds. These funds are
currently approaching a total of $200 billion which is more than the total
deposits of approximately 11,000 banks. The delay until November, 1982,
would surely balloon the dollar amounts to even higher levels.
We urge you to oppose any legislation designed to delay action by the DIDC
and to ask members of the DIDC to exercise their current mandate to deregulate
deposit rate ceilings, particularly those which would affect a bank's
ability to compete with the money market mutual funds.
Sincerely,
E. B. Robinson,
President
EBR:sj
Grow With Us
•
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—4 .(
BANK OF EDWARDS
1.)
-P..0.. Box• 318, Edwards, Mississippi 39066, Telephone (601)852-2141
February 3, 1982
Cecd F. Robbins. PresiCunt
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Senator John C. Stennis
205 Russell Building
Washington, D. C. 20510
Dear Senator Stennis:
I want to express my concern over the failure of the
Depository Institutions Deregulation Committee at its last
meeting to act on the two proposals (1) thc adoption of the
proposed 3; year deregulation schedule for deposit instruments and (2) establishing a now short-term deposit instrument with competitive rates that will permit a measure of
parity for banks and other regulated institutions and their
customers.
I urge you to oppose any legislation designed to delay
aCtion by the D1DC on these proposals at their next meeting
scheduled for :larch 22.
With kindest personal regards,
Sin
e y,
oul
C. F. Robbins
President
CFR/ph
March 3, 1982
The honorable Dennis i:eConcini
United States Senate
Washington, D. C. 20510
Dear Senator DeConcini:
In response to your question of this morning,
enclosed please find the Executive Sulmary of our
Semi-annual Report to the Congress on Monetary Policy.
The table on page 7 shows the annual average growth
rates of the monetary aggregates over recent years.
Sincerely,
Enclosure
1
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Federal Reserve Bank of St. Louis
NMS:dmg-b
•
•
March 3, 1982
The honorable Bill Lowery
House of Representatives
Washington, D.C.
20515
Dear Mr. Lowery:
Enclosed is the information you requested
during the hearing before the House Banking Committee
on February 10.
I have furnished a copy of this to
the Committee for inclusion in the record of the hearing.
I hope this will be useful to you.
me know if I can be ofifurther assistance.
Sincerely,
:or
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Federal Reserve Bank of St. Louis
Enclosure
CO:pjt
bcc: Mike Prell
Cal Rosenberg, House Banking Comm.
Mrs. Mallardi (2) L/
Please let
•
Insert page 122
•
(February 10, 1982 House Banking Hearing)
Chairman Volcker subsequently submitted the following
information for the record.
Table 1 shows an estimate by Federal Reserve staff
of total credit obtained by nonfinancial sectors of the economy
that might, in terms of historical patterns, be consistent with
the Administration's GNP forecast for FY 1982-84.
As may be
seen, absent the enactment of the Administration's deficit reduction program, the Treasury will be absorbing a very large share
of aggregate credit flows (and these figures on federal borrowing
do not include guarantees or sponsored agency takings).
These data employ Administration estimates of the
deficit.
The CB0 has estimated significantly higher deficits,
before or after assuming enactment of the President's budget.
Note also the appropriate historical comparisons
for fiscal 1984 should be with earlier prosperous business years
not with recession years when Federal financing is normally
an exceptionally large share of credit markets.
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Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
•
Tab le 1
FEDERAL BORROWING AND CREDIT MARKETS
Fiscal
Total funds
raised by
nonfinancipl
sectors
Federal borrowing from
the public
($ bil)
Federal borrowing as a
% of funds
raised
(%)
1972
152
19
12.8
1973
198
19
9.8
1974
187
3
1.6
1975
174
51
29.2
1976
242
83
34.3
1977
310
54
17.2
1978
379
59
15.6
1979
413
34
8.1
1980
342
70
20.6
1981
405
79
19.6
1982e
420
115 (118)2
27.4 (28.112
1983e
494
108 (164)
21.9 (33.2)
1984e
548
97 (181)
17.7 (33.0)
1
Nonfinancial sectors, excluding equities.
2
deficit
Numbers in parentheses assume the Administration's
reduction program is not enacted.
the United States Government,
Source: Special Analysis F, Budget of
staff projections
h
1983 except for 1982, 1983, and 1984, whic are
et projections.
based on Administration's economic and budg
•
Insert page 123
•
(February 10, 1982 House Banking Hearing)
Chairman Volcker subsequently submitted the following
information for the record.
Table 2 gives some hypothetical saving projections,
based on patterns observed in earlier years.
While the range of
possible outcomes is substantial, the figures indicate that the
federal deficit will be absorbing a comparatively large share
of total private saving in the economy unless major steps are
taken to cut spending or increase revenues.
It is interesting
to note that the deficit-to-saving ratio looks especially high
in comparison to earlier experience in relatively prosperous
times, which is the appropriate comparison for projections based
on an assumption of a high level nf business activity.
Note that these data are Administration deficit program and GNP estimates; other estimates (e.g., by the CB0) suggest
higher deficits and consequently greater strain on our savings
capacity.
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Federal Reserve Bank of St. Louis
41.-s
Table 2
111
DEFICITS, GNP AND SAVING
Budget
Deficit
($ billions)1
Fiscal
Years
-1.6
-3.8
-8.7
-25.2
3.2
-2.8
-23.0
-23.4
-14.8
-4.7
-45.2
-66.4
-44.9
-48.8
-27.7
-59.6
-57.9
*1965
1966
1967
1968
1969
*1970
1971
1972
*1973
*1974
1975
1976
1977
*1978
*1979
1980
1981
Deficit as
% of
GNP
(-6.1)
(-53.2)
(-73.7)
(-53.6)
(-59.1)
(-40.1)
(-73.8)
(-78.9)
0.2
0.5
1.1
3.0
0.4
0.3
2.2
2.1
1.2
0.3
3.1
4.0
2.4
2.3
1.2
2_3
2.0
•
Deficit as % of
gross nonfederal saving2
(0.4)
(3.6)
(4.5)
(2.9)
(2.8)
(1.7)
(2.9)
(2.8)
1.5
3.2
6.7
17.7
2.3
1.9
13.5
11.9
6.6
2.0
18.2
22.8
13.0
12.3
6.6
13.3
11.7
Deficit as % of
net nonfederal saving2
(2.6)
(21.5)
(25.2)
(15.6)
(15.0)
(9.5)
(16.5)
(15.9)
3.0
6.1
12.9
34.5
5.0
4.2
29.3
24.9
13.1
4.2
45.8
53.2
29.1
27.0
15.9
35.2
31.5
(5.5)
(53.9)
(59.0)
(34.7)
(32.6)
i23.0)
(43.6)
(42.9)
Potential Deficits with No Saving Plan (Administration's "Baseline")3
-147 (n.a.)
-167 (n.a.)
1983
1984
4.3 (n.a.)
4.4 (n.a.)
n.a.
n.a.
21.2 (n.a.)
20.7 (n.a.)
Administration's Proposed Deficits
4'92 (-107)
-83 (-97)
1983
1984
Deficit
adjusted to
6% unemployment
2.7 (3.1)
2.2 (2.6)
n.a.
n.a.
13.2 (15.4)
10.3 (12.0)
High Employment
High Employment
Deficit-as % of
Deficit as % of
potential GNP zross nonfederal saving4
High Employment
Deficit as % of
net nonfederal savinE
Potential Deficits with No Savings Plan (Administration's "Baseline)3
1983
1984
90
128
2.5
3.2
13.7
18.0
37.0
48.6
5.3
6.2
14.4
16.7
Proposed Deficits
1983
1984
35
44
1.0
1.1
1. Unified budget deficits; data in parentheses include "off-budget" programs financed
by U.S. government.
2. NIPA gross saving excluding NIPA fabral surplus (or deficit) plus net foreign investment (sign reversed); net nonfederal saving equals gross less capital consumption allowance with adjustment.
3. CB0 estimates of baseline deficit are somewhat higher.
4. Saving as percent of potential GNP equals ratio in average of high employment years
in the 1970s.
5.2%, 5.0%, 6.3%, and
*Reasonably prosperous years; unemployment rates of 4.9%, 4.0%,
5.8%, respectively.
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Federal Reserve Bank of St. Louis
•
ROBERT H. MICHEL
I8TH DisTREcT, 11_1_11401s
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Federal Reserve Bank of St. Louis
//
I-1-232. THE CAPITOL
WASHINGTON, ID C. 20515
225-0600
Office of tbe Republican /caber
itiniteb *totes; Tbouse of ilepreoentatibto
aobinciton, 3ID.C. 20515
March 2, 1982
Mr. Paul A. Volcker, Chairman
Board of Governors of the Federal Reserve System
Constitution Avenue, N.W.
Washington, D.C. 20551
Dear Paul:
Thank you for agreeing to see my Farm Bureau people on Wednesday,
March 10 at 4:00 P.M. Those attending bill be:
Harold Steele, President, Illinois Agricultural Association
John White, Jr., Vice President
John Beatty, Director
Lyle Grace, Director
Leonard Schultz, Director
Robert Weldon, Vice President, Finance & Treasurer
I am hoping to accompany them if Floor action permits me to get
away.
Sincerely yo rs,
Robert
chel
Republican Leader
RHM:SY
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Federal Reserve Bank of St. Louis
•
•
March 2, 1982
The honorable John C. Stennis
United States Senate
Washington, D. C. 20510
Dear Senator Stennis:
Thank you for your letter of March
1.
I am looking forward to my appearance bef
ore the
Appropriations Committee and discussin
g with you
the issues raised in your letter.
Sincerely,
Sdaml A. Yo!diet,
CO:vcd (#V-46)
bcc:
Mrs. Mallardi (2) ,=
After liscussing with Susan Lepper, CLO will iraft response
JOHN TOWER, TEX., CHAIRMAN
/
STROM THURMOND. S.C.
BARRY GOLDWATER, ARIZ.
JOHN W. WARNER, VA.
GORDON J. HUMPHREY, N.H.
WILLIAM S. COHEN, MAINE
ROGER W. JEPSEN, IOWA
DAN QUAYLE. IND.
JEREMIAH DENTON, ALA.
JOHN C. STENNIS, MISS.
HENRY M. JACKSON, WASH.
HOWARD W. CANNON, NEV.
HARRY F. BYRD. JR., VA.
SAM NUNN, GA
GARY HART, COLO.
J. JAMES EXON, NEBR.
CARL LEVIN, MICH.
SWETT B. DAWSON, STAFF DIRECTOR AND C.HIEF COUNSEL
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Federal Reserve Bank of St. Louis
?..1Cnifeb Zfalez Zenafe
COMMITTEE ON ARMED SERVICES
WASHINGTON. D.C• 20510
March 1, 1982
The Honorable Paul A. Volcker
Chairman, Board of Governors of
the Federal Reserve System
Constitution Avenue between 20th and 21st
Washington, D. C. 20551
Dear Mr. Chairman:
I look forward to your appearance before our Appropriations
Committee on Thursday, March 4. It is a great opportunity to benefit
from your thinking and experience on these current matters of fiscal
and monetary policy which are critical to the Nation's economic
future.
For my benefit I hope you will share your thoughts on a fiscal
and monetary plan which will contribute to reduced interest rates,
higher employment, and sustained economic health.
It is my view that our Nation has the resources and the will
to continue as the world's most promising economy, but we are now
casting about for a plan which is credible and will demonstrate
measured economic results as the plan is executed.
In this regard I would greatly appreciate hearing your recommendation for a fiscal and monetary plan to reduce long-term interest
rates to a level which would encourage capital investment in new
industries and new homes. Of course I would be honored to hear -J our
ideas and thoughts on the structure of our money system and on how
fiscal policy can be used to foster sustained prosperity.
With warm regards,
•
n C. Stennis
ted States Senator
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BOARD OF GOVERNORS
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WASHINGTON, D. C. 20551
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March 1, 1982
PAUL A. VOLCKER
CHAIRMAN
The Honorable Ron Paul
House of Representatives
Washington, D.C.
20515
Dear Mr. Paul:
Thank you for your letter of February 22 asking
whether the Federal Reserve Board has any comments on H.R. 5362,
a bill which would amend the Truth in Lending Act to prohibit
the imposition of surcharges on service station operators who
honor credit cards issued by gasoline companies. The Truth
in Lending Act is implemented by the Board's Regulation Z.
Although there are related provisions now in the
Truth in Lending Act prohibiting retailers from imposing such
surcharges on their customers, we have virtually no experience
with regulations affecting the relationship between petroleum
companies and their retailers. As a result, we do not have the
expertise to provide comments on the substance of the proposal.
Although the language of the bill pertains to credit
charges, the testimony already received by the Subcommittee
points out that the bill is related to broader issues of fair
dealing between oil companies and retailers of gasoline. It
involves questions of petroleum pricing, marketing, antitrust
considerations, and no doubt a host of other specialized issues
which have long histories--all of which are outside the experience of the Federal Reserve.
This lack of expertise suggests to us that whatever
problem H.R. 5362 is intended to address could be better
resolved by amendment to a statute other than the Truth in
Lending Act. We understand that restrictions on petroleum
company credit arrangements were administered in the past by
the Department of Energy, and we are confident there are more
germane statutes (for example, the Petroleum Marketing Practices
Act) to which the provision might be added.
Again, thank you for providing us with the opportunity
to comment.
Sincerely,
GG.NS:pjt (#V-40)
bcc: Mr. Garwood
Mrs. Mallardi (2)
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Federal Reserve Bank of St. Louis
JOSEPH G. MINISH, N.J.
FRANK ANNUNZIO, ILL.
PARREN J. MITCHELL, MD.
WALTER E. FAUNTRCY, D.C.
STEPHEN L. NEAL, N.C.
JERRY M. PATTERSON. CALIF.
JAMES J. BLANCHARD, MICH.
CARROLL HUBBARD, JR., KY.
•
•
CHAIRMAN
FERNAND IJ. ST GERMAIN, R.I.,
REUSS. WIS.
HENRY
HENRY Ei. GONZALEZ, TEX.
U.S. HOUSE OF REPRESENTATIVES
N AFFAIRS
COMMITTEE ON BANKING, FINANCE AND URBA
JOHN J LAFALCE, N.Y.
DAVID W. EVANS, IND.
NORMAN E. D'AMOURS, N.H.
STANLEY N. LUNDINE, N.Y.
NINETY-SEVENTH CONGRESS
ING
2129 RAYBURN HOUSE OFFICE BUILD
MIKE LOWRY. WASH.
CHARLES E. SCHUMER, N.Y.
BARNEY FRANK. MASS.
BILL PATMAN, TEX.
WILLIAM J. COYNE PA.
STENY H. HOYER, MD.
JIM LEACH, IOWA
THOMAS B. EVANS, JR., DEL.
RON PAUL. TEX.
ED BETHUNE, ARK.
NORMAN D. SHUMWAY, CALIF.
STAN PARRIS. VA.
ED WEBER, OHIO
BILL MCCOLLUM, FLA.
GREGORY W. CARMAN. N.Y.
GEORGE C. WORTLEY. N.Y.
MARGE ROUKEMA, N.J.
BILL LOWERY, CALIF.
JAMES K. COYNE, PA.
DOUGLAS K. BEREUTER, NEBR.
WASHINGTON, D.C. 20515
MARY ROSE OAKAR. OHIO
JIM MATTOX, TEX.
BRUCE F. VENTO, MINN.
DOUG BARNARD. JR.. GA.
ROBERT GARCIA, N.Y.
J. WILLIAM STANTON. OHIO
CHALMERS P. WYLIE, OHIO
STEWART B. MCKINNEY. CONN.
GEORGE HANSEN, IDAHO
DAVID DREIER, CALIF.
February 22, 1982
225-42.47
d'
Honorable Paul A. Volcker
Chairman
Board of Governors of the Federal
Reserve System
Federal Reserve Building
Washington, D.C. 20551
Dear Chairman Volcker:
Committee's
On Tuesday and Wednesday, February 23 and 24, the House Banking
e as Ranking Minority
Subcommittee on Consumer Affairs and Coinage, on which I serv
d the Truth in
Member, is scheduled to hold hearings on H.R. 5362, "A bill to amen station
ice
Lending Act to prohibit the imposition of a surcharge on any serv
" Chairman Annunzio
operator who honors a credit card issued by a gasoline company.
owing Wednesday's
has announced his intention to mark up the bill (immediately?) foll
hearing.
that the SubIn preparing 4 or these proceedings, it has come to my attention
agencies or departcommittee has not requested comments from any of the Federal
slation. In view
ments which might be expected to have an interest in this legi
g the Truth in Lending
of the fact that the Federal Reserve is charged with enforcin
ng the hearings
Act and that it testified before the Senate Banking Committee duri
ommittee should
on the Cash Discount Act of 1981, I believe the members of the Subc
on this bill.
have the benefit of your views before they are asked to vote
on any
I therefore extend to the Federal Reserve this request for comments
cy. Similar reaspect of the bill which falls within the jurisdiction of the agen
on and the Department
quests are also being submitted to the Federal Trade Commissi
of Energy.
it would be
Because a very short time remains before the scheduled markup,
ider the views of
most helpful to all members of the Subcommittee who wish to cons
The Subcommittee
your agency if we could receive your comments as soon as possible.
h 2, 1982 for
staff informs me that the hearing record will remain open until Marc
the inclusion of any additional comments you may have.
s is very much
Your cooperation under these difficult and unusual circumstance
appreciated.
cc: Hon. Frank Annunzio
RP/f/1
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Sincerely,
/7
vo.4.4
Ron Paul
Member of Congress
•
•
Harch 1, 1982
The honorable Rudy Boschwitz
United States Senate
Washington, D. C. 20510
Dear Senator Boschwitz:
In response to the letter of February 19 from Lillian,
I would like, first, to express my appreciation of your balanced
view of what we are trying to do here. It is especially welcome
to see in your newsletter a clear description of the market
forces that determine interest rates and a recognition of the
danger -that an expansionary monetary policy could foster inflationary expectations and thus push long-term interest rates
up rather than down.
I naturally welcome your concern about the prospect of
budget deficits that persist into periods when it is assumed
that the economy will be expanding. Although the current deficit
is, in large measure, cyclical, future deficits have a major
"structural" component. That is, they are projected to occur
despite the growth in revenues and reduction in unemploymentrelated outlays that result from an expanding economy. These
structural deficits threaten to defeat the objectives of a
healthier housing sector and stronger business investment.
In regard to your budget plan, I can't "officially"
comment on specific proposals for spending reductions and
revenue increases. I am sure, however, that your formulation
of an alternative budget plan will contribute significantly to
debate on the challenge of bringing deficits down below what
would occur in the absence of any action. Somehow, we all have
to get together on this, and certainly your thoughts go directly
to the issue.
I look forward to another breakfast, or seeing you
otherwise.
Sincerely,
SL:JZ:NS:PAV:vcd (#V-39)
bcc: Ms. Lepper
Ms. Wing
Mr. Zeisel
Mrs. Mallardi (2)(-/
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'yr, V. DOIMEMICI, N. MIDI.. CmAnithiM4
EAMEST V. HOLLAND*. S.C.
LAWTON CHEJU. FLA.
JOSEpt4 Pt. •10104. JR.. MA—
J. SEMNIETT JoISIMIT014. LA.
JIM SA•Writ. TENN.
NARA AMONEWS, N. DAIK.
STEVEN D. Symms, IDAHO
CHARLES °AMULET. IOWA
OMIT HAAT, COLD.
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DONALD W. PAWILE. Ae.. MICH.
DANIEL ritTAICK 0010WAMAN4 pi.Y.
J. AWAKE MOikt. MEM.
WOWERT w. °AETNA, WIS.
DAN QUAYLE, IMO.
SLADE ellOPITOM. WASH.
•
•
WILLIAM L. ARMITiliohle, COLO.
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JOHN TOWER. TIM.
#altrtileb Zfrifez Zenctle
COMMITTEE ON THE BUDGET
WASHINGTON. D.C. 20510
ETErmall 6111 1 , OTAPW OIRECTOR
LIZMIET14 TANKERSLEY. MIACIIIETT ETA.FT DIRECTOR
February 19, 1982
UD
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Ca.
Honorable Paul Volcker
Chairman
Federal Reserve Board
20551
Washington, D.C.
00
.
OD
Dear Mr. Volcker:
Rudy asked that I send his budget proposal to you for
your comments. The details are outlined in the enclosed
release.
He also wanted you to know that you have his continued
support. The one bright spot in the current downturn is the
inflation rate, for which we can thank your consistency.
As Rudy says, he will continue to "hang in there" to get
government spending down -- to support what you're doing.
He'll probably contact your office in the near future
for yet another breakfast meeting. Rudy and others have
found them very useful.
Sincerely,
Lillian Saunders
Legislative Assistant to
Senator Rudy Boschwitz
LS:mem
Enclosure
P.S.
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I think you're doing great!
; SENATOR RUOtrz
S
NEW
• RELEASE
MINNESOTA
BOSCHWITZ DISCUSSES FY83 BUDGET
INTRODUCTION
If interest rates were lowered to 8% (maybe even 10% or 12%),
within two weeks the economy would be humming, optimism restored,
and unemployment reduced.
and
So why doesn't the government do something about it
listen, while they're at it, why not reduce interest not to 8%
but to 6 - and inflation at 2 or 3% would be a good idea too!
The truth is Washington can't turn interest or inflation rates
on and off like a faucet. Believe me, if we could we would.
In fact, no group would like to reverse the economic picture
more than politicians. If we could quickly lower interest rates
and inflation, return optimism and prosperity, we would be hailed
something we in the political game love to be. Our
as heros
now that's a prospect worth
re-elections would be assured
thinking about.
in the short run,
So if we could, we would, but we can't
that is. The government and all economic factors affect the
economy only in the long term, so our policies have to be longer
range.
And just as we can't switch on lower interest or inflation rates,
people have to recognize (and do) that Reaganomics did not switch
it was a long time in coming.
on the recession
BUT WHAT ABOUT THE POOR, THE UNEMPLOYED?
Long term economic planning is fine, but as Harry Hopkins
(FDR's right-hand man) noted, the poor eat every day. But today,
unlike the '30s, the government provides a safety net of social
programs, and despite what you hear, Reagan has tampered little
with basic programs. In 1930 the government spent just a few
cents of every dollar spent in this country. Today government
spends 43 cents of every dollar spent in this country and most of
it is for social welfare.
HOW DID WE GET WHERE WE ARE?
An easy money policy? Yes that's part of it ... so is
excessive government spending that leads to deficits, that lead
to an easy money policy, that leads to inflation ... and inflation
is at the root of our problem. In recent years working people's
income has risen quite a bit less than inflation. While during
the '50s and '60s inflation averaged about 2% working people's
income grew a good deal faster. Since their wages grew faster
than inflation, they could buy more and more -- their standard
of living rose. But in the '70s this reversed. Inflation drove
the price of goods up faster than wages and people could buy less,
so fewer people were needed in factories to make -- plywood, for
instance -- and all other consumer items. That, of course, caused
unemployment.
While we have many economic problems inflation lies at the
base of them all.
Few people realize that the inflation of the '70s is new
to the American society. Our country was built in an inflationfree economy. Excluding about 10 war years, for the 138 years
ending in 1930 the average rate of inflation in the United
States was 6/100 of 1%!
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Few people now.member that in 1971 Pres.nt Nixon imposed
wage-and-price controls because inflation was getting out of hand .
it has risen to 4.8% annually. Today that seems a very acceptable
level (but it really isn't). In 1971 it seemed terribly high.
• •
Interest rates reflect inflation too. If inflation is 12%,
can you borrow a dollar at 6%? At the end of the year you'd
give the banker his dollar back plus 6 cents, but the dollar
depreciated in value 12 cents. Under those circumstances, would
you loan your money out at 6%? Of course not. As a rule-ofthumb interest rates are the inflation rate plus 4%.
SO WHAT CAN AND SHOULD WE DO?
There are three basic things the government should do:
(1) lower the growth rate of government spending to eliminate
deficits; (2) hold a steady, (but not restrictive,) course on
the expansion of the money supply; and (3) give incentives for
capital formation, saving, productivity and work.
Why is there so much emphasis on balancing the budget?
In a way balancing our governments affairs is not much different
than your own obligation of fiscal responsibility in your home, business
farm, or school district ... or your checkbook. But when the U.S.
government has large deficits, it has greater borrowing abilities
than the rest of us. Last year to cover its deficits, the government borrowed about 40% of the new funds available. When one
borrower takes 40% of all available funds, there's hardly enough for
the rest of us. We're "crowded out" of the ability to borrow,
as the economists like to say. Government borrowing creates so
great a demand for money that the demand for money exceeds the supply
of money and up go interest rates.
How is the budget effectively controlled? By cutting it?
No -- rather by slowing its growth. The federal budget has four
parts and the percentage of each part and the approximate dollar
amount is charted below (on the basis of figures of the 82
budget):
Defense
Interest
Entitlements
Approp.
% of total
24%*
11%
47%*
18%
=
Approx $ amt
(billions)
172
83
340
130
= $728 billion
100%
One other point about the budget. There are budget oulays.
That's the amount of money to be actually spent. Then there's
budget authority. That's authorized but not necessarily all
spent in the year authorized (an aircraft carrier may take four
years to build, but the funds are all authorized in one year and
then outlaid over four). The figures I'm using are all outlay
figures. Sometimes outlays and authority are confused. It's easy
to do.
One final thing is the government's budget (fiscal) year.
It goes from October 1 to September 30. As you read this and
say to yourself "Why don't they change 1982?" We can't, as a
practical matter, because our fiscal year is already almost half
over.
DEFENSE
Defense has prior to this year, been a decreasing part of
the federal budget. During the Vietnamese period defense funds
went disproportionately to that conflict. Research, development,
and building of military material and equipment were neglected.
They do have to be restored and I have supported a real increase
in military expenditures. But the President's rate of proposed
defense spending increase has to be lowered. As a practical
matter we won't get a decrease in the growth of spending in other parts
*All military pensions are in the Entitlement segment because they
are treated as entitlements. They are normally included in the
defense segment in budgetary considerations.
of the budget unleiftwe moderate the growth rliik in defense.
The President's prNibsal is for a 16% (compoullid) rate of
growth. My suggestion would be 12% (compounded), still much
faster than entitlements (which on the other hand have grown
faster in the past):
Budget Outlays (Billions)*
Reagan Proposal
Boschwitz Proposal
1982
1983
1984
1985
1986
172
172
205
193
235
216
273
242
311
271
12
19
31
40
Budget Savings (billions)
of Boschwitz proposal
ENTITLEMENTS
Entitlement programs are largely the social safety net that
make payments directly to people. The 10 largest and the 1982
budget outlays of these 10 (in billions) are:
Social Security (155)
Medicare (49)
Civil Service Retirement (20)
Unemployment Compensation (24)
Medicaid (18)
Supplemental Security Income -- SSI -- (8)
Aid to Families with Dependent Children
AFDC -- (8)
Railroad Retirement (5)
Veterans Pensions (4)
Students Loans & Grants (5)
So these 10 amount to $296 billion of the total entitlements of
$316 billion. Military Retirement (15) and Food Stamps (12) are
often treated as entitlements which would raise entitlements to
$343 billion (the figure I have used below).
This has been the growth part of the budget in recent years,
shows
as much under Republicans as Democrats. The following chart
the yearly cost of entitlements at the beginning and end of each
Presidency:
(in billions)
Beginning
Kennedy (3 years)
Johnson (5 years)
Nixon-Ford (8 years)
Carter (4 years)
28
31
58
195
End
31
58
195
304
Average dollar growth/year
1 billion per year
n
5
"
17
27
II
II
II
II
II
.
In 20 years the entitlement programs grew over 1000%
This chart is not to suggest that these programs are not
es wages
needed or unworthy of such growth. But working peopl
rt these
have not grown nearly as fast, and wages are what suppo
1982
programs. Social Security cost $11.6 billion in 1960. In
the following
it will be $155 billion. If your wages had kept pace
they
would have happened: if your wages were 5,000 in 1960
support
would be $67,000 in 1982. Will they be? Yet our wages
en
Social SJcurity, and there should be some relationship betwe
how the two rise.
slow its growth.
My plan is not to cut a single program - just
so costs rise
Most of these programs are indexed to inflation,
ed or existing
with inflation. Also new programs are often start
d, the Congress
ones expanded in coverage. If for a four-year perio
new programs
continues all programs but determines to start no
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lement
*Excludes military retirement benefits which are an entit
for four years
or expand coveragIllin any existing program,
only increases the programs at the rate of 3% the
following budget savings would take place:
Cost of Entitlement
Programs
Current Policy Budget
Boschwitz Plan - all
programs grow at 3%
a year
1982
1983
1984
1985
1986
343
343
373
353
401
364
433
375
466
386
20
37
58
80
Budget Savings (billions)
of Boschwitz Plan
APPROPRIATED PROGRAMS
The appropriated programs are generally not directed at
individuals but rather at policy goals, such as education, good
roads, clean air, housing, etc. The 11 largest appropriated
programs and the 1982 budget outlays of each (in billions) are:
Education (13)
Housing (9)
Highways (8)
Veterans Medical Care (7)
National Aeronautics & Space (6)
Environmental Protection Agency (5)
Community Development (5)
Employment and Training (5)
National Institute of Health (4)
Urban Mass Transportation (4)
Foreign Aid (3)
These 11 programs total 60 billion. The budgetary action we took last
year slowed the growth of appropriated programs already. My program
is let the actions we took for the '82 budget impact '83 as planned,
but make no further cuts in programs, and in '84 through '86 let
all programs grow by 3% from an 83 base year.
1982
1983
1984
1985
1986
Current Policy Budget
131
124
135
142
146
Boschwitz Plan (3%
growth on 83 base)
131
124
128
132
136
-
-
7
10
16
Budget Savings
of Boschwitz Plan
INTEREST
(or how the rate goes down)
At the beginning (sorry this has gotten so long) I noted
that the Federal government does not set interest rates. The
marketplace for money does. Supply and demand control, plus the
rate of inflation (or what the expectation is with regard to the
rate of inflation -- if the banker expects it to be 12%, he won't
- loan at 6% as in my earlier example). If the demand for money is
high because the government is borrowing 40% plus of the newly
available funds, interest rates will be high. Of course, the
Federal Reserve could dramatically increase available funds. That
would level out the supply and demand for money. But, then, if
the money supply rises too fast, inflationary expectations will
rise and that will drive interest rates up!
But if the budgetary path I have outlined here were adopted,
the government would in relatively short order not be borrowing
nearly as much, the need for expanding the monetary supply would
ease, and the expectation of the inflationary rate would come
down very substantially.
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The intereseavings shown below are, 411refore, based
on lower rates and less to be borrowed.
i
.
v.
1984
1985
1986
94
95
112
97
121
97
124
97
4
15
24
27
1982
1983
Current Policy
Boschwitz Proposal
83
83
SAVINGS of Boschwitz
Proposal
_
?
I believe it's a sound way to restore better and stable
economic times. It's the way the American dream -- for
rich, poor, old and young alike -- can be realized.
"REVENUE ENHANCEMENT"
What a nice term! So much better than "tax increases." But
some we must take back if we are to balance our affairs. We should
not, however, increase the personal or corporate rate -- in fact
hopefully we can reduce them further in the future. Nor should we
change the newly adopted accelerated depreciation rates.
We should, however, do the following: tighten up the minimum
tax (particularly for large corporations); change the recently
enacted (1981) law allowing the transfer of depreciation and
investment credits (ITC) by loss (and other) corporations; revoke
some of the additional advantages given the energy industry in
1981; remove certain advantages pharmaceutical companies have in
Puerto Rico; the government should sell rather than give away export
quotas in textiles and other goods (the government should be a lot
firmer with countries that block our exports); over the years
ingenious accountants and lawyers have developed tax shelters
call them what you wish) and many don't have
(loopholes
much bearing to tax equity. We've reduced top rates ... now
we have to reduce tax avoidance. It's the only fair and sensible
thing.
The goal would be to increase revenues by 20 to 25 billion
a year, or 3% higher than present collections.
IN SUMMARY ON THE BUDGET
So if we slowed the growth of defense and entitlement and
appropriated programs, and if we "enhanced" revenues, the
following would be a summary of what would happen:
BUDGET SAVINGS OF BOSCHWITZ PROPOSAL
1983
1984
1985
1986
Defense-Budget Savings
12
19
31
40
Entitlement
20
37
58
80
Appropriated
-
7
10
10
4
15
24
27
Total Budget Savings
Plus "enhancements"
36
20
78
20
123
25
157
25
Total of Boschwitz Changes
Less Budget deficit under
current policy (not
including Reagan changes)
56
98
148
182
1982
Interest
Total (deficit) or Surplus
under Boschwitz proposal
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(146) (165)
(90)
(67)
jjja) (175)
(20)
+7
111
CONCLUSION
111
Some of my Senate colleagues or economists or others may
come up with other plans
and they may be better. I know
one of my colleagues (a Democrat) wants a crash budget program
to balance her up in a year! Tempting and I'd vote for it, but
I don't think 50 others will in an election year.
My plan is more reasonable. My plan is based on these
assumptions (1) recognize that the government has grown faster
than the economy and faster than wages for many years; (2) don't
get into a political fight
by making huge cuts in some programs
and none in others (as the President proposes) (3) for
a 4 year period (5 years if necessary) make the government grow
slower than wages and the economy by cutting no programs but the
growth rate of all of them; and (4) recognize that defense has
been neglected (not everyone agrees with that to be sure) and let
it grow faster than the rest of the budget, but not as fast as
the President wants.
One other question: can these programs be controlled and
stay within a 3% growth pattern? The answer is no in many cases.
So underlying legislation that defines who is entitled and to
how much has to be changed
not by much (programs certainly
to
be
gutted)
but some changes will have to be made.
won't have
Our government can and should continue to serve as the "safety
net" that is often talked about. We are now working on the nature
of the programatic changes and will write more about them soon.
Incidentally, don't hesitate to feed in your ideas about these
changes and also your thoughts and reactions to my plan.
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It's time we bring some order to government,
@FedFRASER