The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
https://fraser.stlouisfed.org 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 Find it online: http://findingaids.princeton.edu/collections/MC279/c447 and https://fraser.sdouisfed.org/archival/5297 The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. They further agree to request permission of the Princeton University Library (and pay any fees, if applicable) if they plan to publish, broadcast, or otherwise disseminate this material. This includes all forms of electronic distribution. Copyright The copyright law of the United States (Tide 17, United States Code) governs the making of photocopies or other reproductions of copyrighted material. Under certain conditions specified in the law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or other reproduction is not to be "used for any purpose other than private study, scholarship or research." If a user makes a request for, or later uses, a photocopy or other reproduction for purposes not pertnitted as fair use under the copyright law of the United States, that user may be liable for copyright infringement. Policy on Digitized Collections Digitized collections are made accessible for research purposes. Princeton University has indicated what it knows about the copyrights and rights of privacy, publicity or trademark in its finding aids. However, due to the nature of archival collections, it is not always possible to identify this information. Princeton University is eager to hear from any rights owners, so that it may provide accurate information. When a rights issue needs to be addressed, upon request Princeton University will remove the material from public view while it reviews the claim. Inquiries about this material can be directed to: Seeley G. Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) email@example.com https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • BOARD OF GOVERNORS • QD 4 ,,,,,, OF THE .. •0 - -n 9i.*t\ \,i •• • -4 /- • L, • .1.. (-)' k,.. • • <1, •..<, fRAL iz-s. FEDERAL RESERVE SYSTEM 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 https://fraser.stlouisfed.org 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) https://fraser.stlouisfed.org 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 liptuk of ilepretientatiba https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis P11 astingtott, ri.C. HOUSE COM M ITTEE ON INTERIOR AND INSULAR AFFAIRS HOUSE SELECT COM MITTEE ON AGING 20515 February 23, 1982 d --n uo co :"") • -Ps Paul A. Volcker, Chairman Federal Reserve System Federal Reserve Building Constitution Avenue, N. W. Washington, D. C. 20551 "71 co on 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 BFV:mad THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS (L , • •.of GOvt •. • BOARD OF GOVERNORS OF THE *co -o % FEDERAL RESERVE SYSTEM 1— c•-l• >, (..). 44,.. • .-k ..1 e*` •.", . • Orv,o IVLK, ( v -5a) lo •‘AL RtS. • •..• • 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. https://fraser.stlouisfed.org 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) https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ITnifett Zfales -.Senate COMMITTEE ON BANKING, HOUSING. AND URBAN AFFAIRS WASHINGTON, D.C. c 20510 —• February 26, 1982 The Honorable Paul Volcker Chairman Federal Reserve Board 20th and C Streets, N.W. Washington, D.C. 20551 A Ln 7J (Jo 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 https://fraser.stlouisfed.org 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 . roXmTre, U -S. 1/771( • • *of GO BOARD OF GOVERNORS • OF THE •co •0 • FEDERAL RESERVE SYSTEM F- • •••••-,•-•1 :UUg WASHINGTON, 0. C. 205E1 (-) . RAL 120 ••• • •..- • 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. https://fraser.stlouisfed.org 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). https://fraser.stlouisfed.org 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) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • • • • ••• • • • of Gove'• BOARD OF GOVERNORS OF THE • C • -n FEDERAL RESERVE SYSTEM ^ WASHINGTON, EL C. 20 55I [ [ [ [ • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e‘o • • k•4 StCt •• -L •( • •.. • • 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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- https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis erning letter of March 2 conc ur yo r fo u yo k an Th tices. debt management prac on gs in ar he ee tt mi your Subcom Messrs. Stephen H. at th u yo rm fo in to d I am please netary and Financial Mo r fo or ct re Di f af St the Axilrod, the Board's or Vice President of ni Se , ht ig nl er St d to Policy, and Peter D. , are looking forwar rk Yo w Ne of nk Ba e rv Federal Rese 23 at 10:00 a.m. h rc Ma on d ar Bo e th appearing on behalf of Sincerely, CO:vcd (V-50) bcc: y of incoming) Mr. Sternlight (w/cop Mr. Axilrod Mrs. Mallardi (2) sf• 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, https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely yours, Walter E. Fauntroy Chairman https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis DENNY S 2a DISTRICT., H 47. ce) GON ›. •• , o-) oc25-L4.c„,, c„, Congrems of tbe Ziniteb *tato f\I --- Lk, sk" Ct. 1" a Q cz)' 41: t:. 03 L./ sZ) 44 14.. 4.1j -"'". crq 44-1 S..: i.t. a* .91 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • 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 https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • ,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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S-G FY 985 S-G -?i--AFB FY 1984 ome S-G FY 1983 S-G OMB • • • • • • • 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis _ • • 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -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 https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis measured. The In other words, what • • .•.f G0Vt . ,..• ,1-4% '.. (-)' —crs *, ; co •. •0 • -n : '-A ...5 * cc' ..''''' . I-- • 12: Ll 44,. 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 To . Vo LC KER M R , rt\L;L CHA I RmAt.1) 30AZ oF FEPE-tz,Nt_. RESE'R C Wksl-itc,-4C-7-TCN) C. NAP‘c M Fizom: rip GovEIRRoizs 5;3 (.(\it 2.05.5" I LLAN Fk t VATE SO 8,1 ECT I NTEtZE ST s HA ATION gECOMMENT, LC.KER , i-HEIzE) YE-S) mcnvE Is sELFIsH. I AM /kw UN E M PLO)'E 1> /).N 'CT THE Ac-g oF 5-6 THEize ts ER #) kuTOmc-nvE Et\tc--*-1 #.(\ly usE K I MN& WSELF 11-1 EvE-Cz... 5E. kt401"1-1-6 THEEzE Vilt JOCs OF THaCT Ku4C) RAZ ma) Geo> REFW<EM CES NOTWITHSTAND ING-. 1-1V&E- /kW , Glzokk wc- A tzmY OF E. Vv. ThCit.;T GHO(cg Joil4E.17 WHO L LI' OR I kJ SasSTA KIT t A L PART. µ tAL151" t,ErEw P VA; PLE PEI•istoLiS ) (Nvt51-1-1E-44Ts it4Ntr), 0-11-1E-iz EssE-w-nALLT roMb Foczms oF 0 STABLE DO L LY I-1017E is OVR NCO NrE. you Cfm-fiE ALOki G TH&T- liorE WAS A PA M WET?' IT Is tglY EkRNEST 1-10rE THAT YOU CAVE FO R C p 'ID AN!D it•IFLATIONIST5 TC I TI-tE THE CKEAM PLASTIC — MONEY SEug\--rm S kATO CoN licE Vitt\ Jokikt H ST 51_ I M OW , NOT to I AKID WA‘I LS OF ET:. -n-tE &ppici-s_ VEZy -r-EuLY CC Vkirt AKD YOuRs) 77- G-Law t.R.p. ME-rz.Ew5ikum LL. Am STA44-1-bt4 J JOvRwki._ FILE https://fraser.stlouisfed.org 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/ https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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 • • .• .• •co COW. • cd?4,• 0• 4 . \`• • • -A 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 https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 63701 314:335-0101 https://fraser.stlouisfed.org 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 • 12 I • • • I • • • • • • • • • • • • e • • • . • • • • 8 • • • • • 9 • • • • • • f I • • • •• 4 • e,11, Before-tax Real • • • • • • I I • •• •: • 0 • • • I I • • • • • • • • I / 0 • I • • • • • • • • • /9 • ••• i oft, • ,•.4 •• • • • •• • • • 0 r;,'‘. •• : 4 , • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis %. * • • 0 V. Ib t'A 1/11 1* : j 1 Af l er-tax \ \ j / a j V.") t / 141 -4 t I ... I y -8 _11111111111111111111111111111J111111111111111111111111111 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. I . . I 1 li I 1 • to% I ill III I II • I A I ils,k • ti 14 )1 I A ) t e• •1 % II If I I I I 41 I II i IIP 01%1 I; I1 I 1 111 1 I A it ,i it tt ill .1 i U 1 •1 % I f •I , I nil ef 1 0141 0 I i I II W It 1 1 t; I I ill j tt I I 4 1 t § I I J i .• IIVI1% 1 I /Y • 10 I 01 • 20 • 30 if tl 40 1922 1932 1942 1952 1962 1972 50 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 • 1 I 1 I 8 1 I V I I 1 , i I i I. %I I I I % i i I Ilk I i 1 . I I tie . t i V• • ‘i 1 i . A I Iii : tl II I II Cl 1 I T di II $ II II 8. i W-' r. i, i ., I% i 91 1 I I i 10/ 1/ 1 ii ‘ ,I 1 IN t 1 / 1 . I 1 I • I I I I I Y s 1 I r 1 I t I I I I e ei 11 e 1 if1 A I I I I I e 83 1 le el ei' s e lit l t, 1 1 I I I • I 1 I 1 I / i % i % I, , l YI I I 1 / • / 1 I 1 • 1P • 111, I' I r Nil ir 0 I 4141"1.,1, t61 r 1i 11 I / 1 1 ? I 1 iI r % 11 041"*" ii‘' 1.° ‘1 kfli / s ei el ., 8 11 .1 I I I I I I I I I I _ I I I I I I I I I 16 ll si I II • 1922 1932 1942 1952 1962 1972 - 1982 age increase in the Consumer 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 • • • • • • • • • • elril e • a • .. ... .. .. .. i e.s . ..:1 1 1 I ". ‘. 1 •• .. ••• 0 i 0• . • • 9 \-1 1921 W U3.1 1 Wit Ili II leo 9 04. IF ws" ..%0 1 • 9 S • 9 •. • 9 • 9 9 1 1 11 " y 0- i0 4 :1 :'t: •I • . •• . iI I / x... ("::/1 9. %et _ 0% 09 eft • 9 • • • ILI 0 • . m• . •• 41,3;%le—taX4 1 •• •es• ", tee A:•,..• i/\ i ----1'. ".4/ Lis: 1vs/ After-tax Real :• /01 av If k • */ v ;• 11‘i e -4 ‘is -8 1 .1 19. 1" U7 II A P—W 1-6 , 1 1i 1 11, I l Jk "J -12 rate on threedifference between the nominal interest the is rate rest inte real ax re-t 1. The befo of inflation, equivalent basis) and the expected rate on coup a on d sure (mea s bill sury month Trea s (using .the er moving average of actual inflation rate uart 12-q a as uted comp is er latt where the the expected interest rate is computed by subtracting real x r-ta The afte x). Inde e Pric Consumer n by the prointerest rate, where the latter is give nal nomi x r-ta afte the from n atio infl rate of is the effecs the tax rate. The tax rate used here minu 1 and rate rest inte nal nomi thof duct 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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), https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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 or 1-0/NRD Ir.r.,,hlwiton, D. C. 7)Gccz 7rIcnas: :s wri:5 Gtato notos PRIVAJV. rosc:rve aVolD Voacral roaTz, PnLic, rOR TE711DFR LLGAJJJ the vord Is Why OF": PAV,2= https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ... vl.a0(:. Ofor0 used .01 • Cordia117, 19523 Boa 117,71ASS P. O. ,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.) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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: https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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: https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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 -• • • . nkof ckell• • . ,r • ; e-N •-••• I ••- ......,; 7. • ••• ACKERMAN, MISSISSIPPI 39735 • P. O. DRAWER B • 601/285-5278 G. WAYNE SMITH PRESIDENT https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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 • '171"7-17F:: , • Ek` \-.11.1 - TA\T 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 https://fraser.stlouisfed.org 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 • r —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 https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • ROBERT H. MICHEL I8TH DisTREcT, 11_1_11401s https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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 JCS/jjb -1111111% ..•••... ... ..• of Govq4, / , s.. o .0 • •• • CO .. +....0:ir CP •0 .-11 • -4 : .5. :1,., , 1- • • BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM it: WASHINGTON, D. C. 20551 it"-• .i.r.7"). .4 ' <4,-,.... %!r• - <<, . •• 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) https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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)(-/ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '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. MowARO m. METEEMBAUM. MAO 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. NANcy ith_tmooAt PLAMMWAum. °Amt. mmat. optimm 6. MATCH, tirrAtt 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 CO NJ t -11 M1 r ) 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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%! https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis It's time we bring some order to government,