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S. HRG. 98-238

RENOMINATION OF PAUL A. VOLCKER

HEARING
BEFORE THE

COMMITTEE ON
BANKING, HOUSING, AND URBAN
AFFAIRS
UNITED STATES SENATE
NINETY-EIGHTH CONGRESS
FIRST SESSION
ON
THE RENOMINATION OF PAUL A. VOLCKER TO BE CHAIRMAN, BOARD
OF GOVERNORS, FEDERAL RESERVE SYSTEM, FOR A TERM OF 4
YEARS ENDING AUGUST 6, 1987

JULY 14, 1983

Printed for the use of the
Committee on Banking, Housing, and Urban Affairs

U.S. GOVERNMENT PRINTING OFFICE
23-790 O




WASHINGTON : 1983

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
JAKE GARN, Utah, Chairman
JOHN TOWER, Texas
JOHN HEINZ, Pennsylvania
WILLIAM L. ARMSTRONG, Colorado
ALFONSE M. D'AMATO, New York
SLADE GORTON, Washington
PAULA HAWKINS, Florida
MACK MATTINGLY, Georgia
CHIC HECHT, Nevada
PAUL TRIBLE, Virginia




WILLIAM PROXMIRE, Wisconsin
ALAN CRANSTON, California
DONALD W. RIEGLE, JR., Michigan
PAUL S. SARBANES, Maryland
CHRISTOPHER J. DODD, Connecticut
ALAN J. DIXON, Illinois
JIM SASSER, Tennessee
FRANK R. LAUTENBERG, New Jersey

M . D A N N Y W A L L , Staff

KENNETH A. MCLEAN, Minority
(II)

Director

Staff

Director

CONTENTS
THURSDAY, JULY 14, 1983
Page

Opening statement of Chairman Garn
Opening statements of:
Senator Proxmire
Senator Heinz
Senator Riegle
Senator D'Amato
Senator Gorton
Senator Dixon
Senator Mattingly
Senator Sasser
Senator Hecht
Senator Lautenberg
Senator Trible
Senator Hawkins
Statement of Senator Cranston on the nomination of Paul Volcker

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WITNESSES
Paul A. Volcker, Chairman, Board of Governors, Federal Reserve System
Impact of increase in interest rates
Outflow of loan money to foreign borrowers
Serving a full 4-year term doubtful
Continued economic growth to reduce unemployment
Inflation fight brings on recession
Budget and trade most important to economic recovery
,
Improvement in housing and employment
Questions on sustainability of recovery
Present recovery called average by Fed
Congress should cut spending and increase revenues
Continued recovery and high deficits
Higher interest rates lowered inflation
Program of tight monetary targets
Slow economic recovery caused by high deficit rate
Fed should not get into budget decisions
Chairman's 4-year term should start after election
Fed policies have had administration support
Sustained reduction in unemployment is Fed goal
Mi growth, growth projections, and capital ratio
Policy adjustments may be needed
Japanese maintain an undervalued yen
Savings, interest rates, and new Board members
Biographical material on the nominee
Response to written questions of Senator Trible

14
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27
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64

AFTERNOON SESSION
Warren J. Hamerman, chairman, National Democratic Policy Committee,
New York, N.Y
Volcker policies caused worldwide depression
Worldwide depression could become a crisis
Renomination would crush U.S. and world economy
Prepared statement




(HI)

70
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71
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IV

Warren J. Hamerman, chairman, National Democratic Policy Committee,
New York, N.Y—Continued
Prepared statement—Continued
How Volcker caused the debt crisis
The old institutions are bankrupt
Debtors' cartel is forming
The national security question
Volcker is incompetent
National Democratic Policy Committee magazine article entitled
"LaRouche Opposes Volcker Reappointment'
National Democratic Policy Committee magazine article entitled " A
Programmatic Policy for Recovery"
Telegrams from various nations and organizations
Robert E. Merrill, vice president, Virginia Taxpayers Association
Reasons against Volcker renomination
Prepared statement
W. C. Smith, Pittsburgh, Pa
U.S. savings drained out of U.S. economy
Syndicated bank loans by money center banks
Prepared statement




Page

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RENOMINATION OF PAUL A. VOLCKER TO BE
CHAIRMAN, BOARD OF GOVERNORS, FEDERAL
RESERVE SYSTEM
T H U R S D A Y , J U L Y 14, 1983
U . S . SENATE,
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, D.C.
The committee met at 9:30 in room SR-325, Russell Senate Office
Building, Senator Jake Garn (chairman of the committee) presiding.
Present: Senators Garn, Heinz, D'Amato, Gorton, Hawkins, Mattingly, Hecht, Trible, Proxmire, Riegle, Sarbanes, Dodd, Dixon,
Sasser, and Lautenberg.
OPENING STATEMENT OF CHAIRMAN GARN

The CHAIRMAN. The Banking Committee will come to order.
I'm sure everyone is aware that the purpose of this morning's
hearing is to conduct the reconfirmation hearings for Paul A.
Volcker to be Chairman of the Federal Reserve Board.
Mr. Volcker, when you assumed the chairmanship of the Board
of Governors of the Federal Reserve System in August 1979, you
inherited an extremely difficult and precarious economic situation.
That year consumer prices were rising at the rate of over 13 percent and building inflationary expectations were pushing interest
rates upward to unprecedented levels. Putting our economic house
back in order required major changes in both the Federal Reserve's
monetary policy as well as in fiscal policy.
While I have many times been critical of specific Federal Reserve
actions since you have been chairman, I believe you have accomplished the basic redirection of monetary policy that was essential
to restoring our economy to a low inflation growth path. It is for
this reason that as long ago as mid-March, I publicly supported
your reappointment as Chairman of the Board of Governors.
Under your leadership the Federal Reserve certainly has acted
more responsibly in redirecting monetary policy than the Congress
has acted in redirecting fiscal policy. On that point I want to stress
that, as we look at the difficulties of this economy, the past high
interest rates, high unemployment, and the lack of growth that we
have experienced, I'm amazed at how well Congress has been able
to get away with placing a majority of the blame on the Federal
Reserve Board. We simply cannot separate monetary and fiscal
policy. They must work closely together. Congress, as is very evident, has not worked very closely in trying to match fiscal policy




(l)

2

with monetary policy. The proof of that is the ever-increasing deficits that we face, and Congress unwillingness to significantly cut
those deficits. It is my feeling that Congress must face up realistically to those budget deficits and send the proper signals to the financial markets of this country: That we are redirecting fiscal
policy, that they can anticipate lower deficits and eventually balanced budgets in this country, that interest rates will continue to
stay at high levels.
There is simply no reason why the financial markets should believe Presidents or Congresses. In my 9 years, I have not seen us
even approach targets for fiscal policy that we have anticipated or
said that we would. Every President comes into office promising to
balance the budget before the end of his first term. Every President
fails miserably. Every Congressman and Senator runs for reelection on the basis that he will be fiscally responsible and work for
balanced budgets. Despite all the rhetoric, all we have had is increasing budget deficits. I look back to the 1950's and the 1960's
and I would doubt very much that most people knew what the Federal Reserve Board was or who the Chairman was. If we had a
stable fiscal policy the Fed would be in the background once again.
I certainly do not say that the Fed does not have a major role to
play in all of this. It does. Your decisions are important, but certainly the blame and the credit must be shared. I believe the Fed
has done a much better job in this economic situation than has the
Congress of the United States. It is time we started putting our act
together, making the job of the Fed managing the money supply
much easier.
We are meeting this morning, Mr. Chairman, on the day following the conclusion of a meeting of the Federal Open Market Committee. I know that with the timing of this confirmation hearing, it
is not possible for you to discuss in great detail monetary policy objectives of the Fed for the next 12 months. We are caught in a situation where this hearing is required by law. You are required to
appear before the Banking Committee twice a year under the
Humphrey-Hawkins Act and that coincidentally occurs next week
when you will be detailing your objectives for the next 12 months.
As I would expect members of the committee would like detailed
answers to those questions and you are not able to give them today,
it seemed wiser to me to defer a vote on your nomination until
after we had held the Humphrey-Hawkins hearings. So that will be
the procedure of the committee. We will hold hearings this morning with you as the witness and this afternoon back in the Banking
Committee hearing room we will hold additional hearings based on
those who wish to speak either for or in opposition to your renomination. Then next week we will hold the normal 6-month Humphrey-Hawkins hearings and after those have been completed,
when you're more at liberty to speak in specific detail about the
actions of the Federal Open Market Committee, then I would
intend to call the committee together for a vote on your nomination.
Senator Proxmire.




3

OPENING STATEMENT OF SENATOR PROXMIRE

Senator PROXMIRE. Thank you, Mr. Chairman.
For the next 4 years, Chairman Volcker, you will have a job that
will certainly bring you more condemnation, denunciation, criticism, and at the end the overwhelming likelihood of failure. You
are about to ride into the valley of death with your present reputation. You could become a Herbert Hoover of monetary policy. You
will be the fall guy who takes a Niagara Falls dive for a necessity
to stagger along with the weight of a great debt. You will use your
very great skill and experience with the support you have won
with the American public to lessen the misery. You will do a good
job, better than anybody else could do, but make no mistake about
it, Chairman Volcker, these will be 4 bad years.
What makes it worse, Mr. Chairman, is you start off with the
warm approval of almost everyone and with the blind high hopes
of everyone that somehow you can keep interest rates down and
produce all the credit in the economy that homebuilding is going to
need and that auto buyers will need and farmers will need and
businessmen will need, while at the same time keeping that same
superprofessional grip on inflation that you have mastered so conspicuously over the past 4 years. Well, you just won't do it. You
can't. No one could.
I think we owe you, Chairman Volcker, a rousing vote of thanks
for your great job in bringing inflation down. In 1979 when you
took office, yours was the only anti-inflation game in town. Meanwhile, between the Congress and the administration, two administrations, we sharply increased spending, reduced Federal revenues
in relationship to our needs, and created not just a single year's
deficit but the assurance that we will have a series of deficits and
explode the national debt to more than $2 trillion over the next 4
years or so.
About an hour or so ago I talked with your predecessor, former
Federal Reserve Chairman William Miller, who was as you know
also Secretary of the Treasury, and he told me that I could say this
morning that you have an impossible job and that there's no way
that you can succeed or that monetary policy can succeed. It becomes a passive instrument when we have the kind of fiscal policy
we are following. And for some 26 years I have been sitting on this
committee listening to able Fed Chairmen like William McChesney
Martin and Arthur Burns and you tell us that monetary policy
cannot do its job of keeping inflation under control on a long-term
basis without a responsible fiscal policy that holds down Federal
borrowing. Brother, have we ignored that advice. We have created
a mammoth, ponderous, fire-eating dragon and monster. Think of
it—deficits not of $40 billion, $50 billion, or $60 billion, but this
year we would have more than a $200 billion deficit. In my judgment, we will have deficits at least that big or bigger for every 1 of
the next 4 years, while Paul Volcker will be chairing the Federal
Reserve Board.
Now some will say take it easy; things aren't really as bad as all
that, or are they? Consider, this moment and for the next few
weeks and months, the economic situation looks improving. Nominal interest rates are still down to about half their level of a couple




4

years ago. Inflation has dropped to a 5-percent level or below. Even
unemployment is improving, and the leading indicators have been
giving off a volume of plus signals month after month. These are
leading indicators—I repeat, leading indicators. They should foretell what will happen to the economy over the next few months
and they probably do. Let us not kid ourselves. The day of reckoning is not at hand, but it is coming. With massive Federal borrowing the economy cannot keep up unless we get a torrent of credit
from you and the Federal Reserve Board. As our recovery moves
ahead, plus as the international economy—that is, the world economic recovery of other countries finds its footing, the demand for
money can do nothing but accelerate, plus the colossal Federal
demand for funds, we know for certain that means that the Fed
will feed it or interest rates will skyrocket.
There are optimists. They tell us, don't fret; we still have an
enormous pool of unemployed workers; no inflationary pressure on
wages in sight; we have vast unused industrial capacity and no
pressure from higher prices from this country or anyplace else in
the world. We have a huge capacity to produce commodities of all
kinds and the global economy will keep its cool, so why not relax?
Where is the pressure coming from?
And all this is just another way of saying that we still have a
few months, maybe a year or so, of relative easy times of recovery
without inflation, but the time is coming and certainly within the
next 4 Volcker years when inflation or high interest rates or both
will choke off this recovery.
So, good luck, Paul, you poor devil. [Laughter.]
Now, Chairman Volcker, I just have one more thing to say. I
haven't mentioned the fact that as a principal bank regulator you
will preside over the Federal Reserve during the next 4 years when
we will see our 30,000 financial institutions adjust to the most dramatic structural changes in our history. With the initiative of this
committee we have erased most of the barriers that have prevented
competition between banks, savings and loans, and credit unions.
We have reduced restrictions for banks to get into other businesses
and other business to get into banking.
In the process we have left a great deal to the five agencies, including the credit union regulator, to regulate the financial institutions. The adjustment would be painful and difficult if we had one
regulator. With five regulators, it will be a matter of compromise
and negotiation and accepting partial and often inadequate adjustments.
So in all these areas, Mr. Chairman, I can just say, as Hamlet
said, and with the same feeling of deep black mourning to the skull
of his old, dear, dead friend, "Alas, poor Yorick." I say, "Alas, poor
Volcker." [Laughter.]
The CHAIRMAN. May I say to my distinguished colleague, the
ranking minority member and former distinguished chairman of
this committee, and note for the record, that we are in absolute
agreement. Until our fiscal house is put in order, Chairman
Volcker has a virtually impossible task, but I can't help but also
note that, although our statements were similar, Senator Proxmire
so much more eloquently and with so much more humor, I'm so
impressed with your statement I wish I had said it in that manner.




5

Senator Heinz.
OPENING STATEMENT OF SENATOR HEINZ

Senator HEINZ. Thank you, Mr. Chairman.
Chairman Volcker, I'm not going to be nearly as eloquent as Senator Proxmire, although I happen to agree with Senator Proxmire's
assessment. I would make a slightly more low key observation
which is this: your terms as President of the New York Fed and as
Chairman of the Federal Reserve Board have spanned a decade of
extraordinarily turbulent times. During that period, we have had
three recessions, a near-constant increase in Federal deficits, a continually rising unemployment, a half a dozen or more record-breaking peaks in interest rates, and until 1980 what appeared to be an
endless cycle of runaway inflation. I cannot think of a more difficult set of circumstances under which to develop and to practice
the art of conducting monetary policy. That is your responsibility,
of course.
During my tenure on this committee I have seen your expertise
and that of your colleagues on the Federal Reserve Board mature.
Frankly, in the 1978, 1979, and 1980 period I thought you made
some mistakes, but I do think that you and your colleagues have
matured and in a time when the economy itself is defying traditional theories of economic behavior, old theories of monetary
policy and management have had to be refined and reshaped to reflect new realities. You have experimented. You have not always
succeeded, but in recent years you do appear to have attained a
level of sophistication in monetary policy and its implementation
that has allowed you and the Board to hold the path of our economy to a very narrow channel, that channel being one between the
reignition of inflation and the reversion to economic stagnation.
It is this accomplishment of recent years that has brought you
your nomination for reappointment and has earned you the respect
of the financial community, both at home and abroad, and a reputation for professionalism and consistency.
This confirmation hearing today is your opportunity—indeed I
think it is a necessity—to reassure all the members of this committee and the public at large that your reputation for keen, moderate
judgment remains well-founded. While we may all hope for a quiet
and prosperous economic future, the road that we have to travel to
get there may hold some very great surprises. Traveling smoothly
on that road is going to necessitate your having a strong hand at
the steering wheel, a firm hand on the helm, and without it, we
can steer to one side of the road or the other and if we go off the
road, into inflation or into an economic tailspin.
You, whether you deserve it or not, as has been suggested by my
colleagues, will get the blame. Let me say on a personal note that
you have earned my deep, personal respect as a human being, as a
man who has demonstrated continually the ability to learn to grow
wiser, and to apply your new knowledge. I am confident that this
committee will find that you are the individual with the best experience and the greatest resolve to continue the administration of
monetary policy that avoids the tragedies of inflation and economic
distress.




6

Let me only add one thought. I don't imagine that your hearing
today is going to be totally without controversy, but to those who
would give you a rough time, I would just ask them what kind of
policy do they really want and what kind of a person do they want
administering it? In this body you often think that all the votes
you cast, and all the alternatives you're presented with and thinking of supporting are terrible until you consider the other alternatives. That is not meant to be a backhanded endorsement. It is a
measure of the job. Anybody in your job has a terribly tough time
and I hope that as people warm to the task of roasting the Federal
Reserve, which is one of the all-time great Washington sports, that
they will remember that the only thing worse than not having a
Federal Reserve or a Federal Reserve Chairman to kick around is
having someone that they are responsible for.
The Federal Reserve Board Chairman is the third most secondguessed position in America. You may wonder what the first two
are. Well, obviously, the President leads the list as the most
second-guessed person. Professional baseball managers are next.
You follow in that fine tradition. Good luck, Paul.
The CHAIRMAN. Senator Riegle.
OPENING STATEMENT OF SENATOR RIEGLE

Senator RIEGLE. Thank you, Mr. Chairman.
Mr. Volcker, let me first congratulate you on your renomination.
You have a most difficult job and I believe that you have given a
full measure of personal effort and commitment to these important
duties.
While I and others have sharply disagreed with certain of your
past policy actions, your professionalism, hard work and deep personal commitment to public service are widely admired. You have
always been candid and responsive to this committee and to me,
and that is much appreciated. While I respect your professionalism
and your valuable knowledge of the national and world financial
system, I am deeply concerned about certain past Federal Reserve
policy decisions that I feel have done far more harm than good. I
wonder if we will see a return to those policies in the future.
Specifically, I believe we witnessed a period of excessive reliance
on rigid monetarism at the Fed during your first term as Chairman
which drove interest rates to record levels and, in turn, plunged
the Nation and the world into the deepest recession since the Great
Depression. Clearly, other negative factors were also at work, but
deliberate Federal Reserve policies were a major cause of interest
rates that were too high for too long.
The economic damage that resulted is measured in the hundreds
of billions of dollars of profit reduction and in several million lost
jobs. Our international trade status was also badly damaged and,
as a matter of fact, the New York Times just 3 days ago ran a front
page story which shows our merchandise trade deficit this year will
be above $80 billion. Entire nations were driven to the edge of
bankruptcy. My own State of Michigan is experiencing double-digit
unemployment now for its 38th consecutive month, with the State
government itself nearly driven into insolvency.




7

When business and financial bankruptcies began to cascade last
year, the Fed clearly changed its policies and moved away from
strict reliance on arbitrary monetary aggregates and growth targets. Interest rates declined sharply and an economic recovery
began to occur. This brings us to the present moment where the
Fed has been allowing money supply growth well above its announced targets and economic activity has accelerated. Now the
Fed watchers are awaiting with keen interest and considerable apprehension a result of this week's Fed policy decisionmaking with
respect to the future course of interest rates. It's page 1 news because the world financial and economic structure remains in a very
fragile and perilous condition, as you well know.
Economic recovery must be sustained by appropriate monetary
policies as well as by appropriate fiscal, trade, and international financing policies. While all these policies ought to be carefully synchronized to achieve the best possible result, a major miscalculation on monetary policy could stop the economic recovery in its
tracks and subject the world economy to new dangers that I just
don't think it can tolerate at this time.
So I'm profoundly concerned about the future direction of Fed
policy and how in combination with other key policy variables
future Fed policy is going to affect interest rates. President Reagan's press secretary, speaking for the President, just this week has
given one instruction, presumably to yourself and to the Fed from
President Reagan himself, that he does not want interest rates
driven higher by Federal Reserve policy. So this concern extends
from the Senate Banking Committee to the White House and from
Main Street to Wall Street.
It is a profound matter of concern throughout the entire world.
Every nation and every international financial center around the
world fears high U.S. interest rates and has said so in the plainest
language, as you well know. In fact, that was a major topic of conversation at the Williamsburg meeting. It is widely ackowledged
that a sharp rise in U.S. interest rates will plunge the world economy back into recession or worse. In fact, the grave international
financial problems would create a crisis of confidence unless wise
and steady economic policy actions are taken by our Government
and the Federal Reserve System.
You are highly regarded in international financial circles, and
your international standing and reputation are valuable assets at a
time of international financial instability and high risk. Some observers have gone as far as to suggest that that may have been a
decisive factor in the White House decision to ask you to serve another term as Fed Chairman.
We here are charged with the confirmation responsibility for a
position which I believe at this time stands only second in importance behind the job held by the President himself. We have only
the options of accepting or rejecting your nomination, a nomination
the President alone is empowered to make.
As a practical matter, all indications are that you're likely to be
confirmed by a substantial vote, despite the deep concern that
many members on both sides of the aisle have about future monetary policy intentions.




8

Our purpose here, then, is to do the best we can to help illuminate and place upon the record your policy intentions under a variety of financial circumstances and it's fair to say that the whole
world is very intensely interested in what those responses will be
today and in your subsequent hearings.
For example, one of the questions in this country, is if unemployment begins to rise again, at what point would the unemployment
level itself prompt the Federal Reserve to reduce interest rates in
order to stimulate recovery? What lessons has the Fed learned
from its policies over the last 4 years? And while much has been
said about fiscal policy, as it properly should be and there are
many of us here who have worked very hard to try to preserve the
budget process in the Congress and try to achieve fiscal restraint, I
don't think that fiscal restraint alone can solve the problem of interest rates and tight money that are in an extreme degree, and,
on the other hand, I don't think that a loose fiscal policy can be
corrected by an inordinately tight monetary policy.
So my concern is that if we ever overdo it on the monetary side,
I think the real risk now is that we could actually tip the world
into a depression, and that's the last thing you or any of us here or
anybody wants to see. So I would hope as we go through this discussion today with care and precision that we could get from you
an indication as to what these future policies may look like and
what the lessons are that have been learned. Then, we will be in a
position to make some judgments together.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator D'Amato.
OPENING STATEMENT OF SENATOR D'AMATO

Senator D ' A M A T O . Thank you, Mr. Chairman.
Chairman Volcker, let me congratulate you for your renomination and for having covered the entire gamut in being praised,
buried, pitied, and resurrected all at the same time.
The fact is that the business community is worried. They are
concerned in terms of what the interest rates will do. There's a
deep feeling afoot that the monetary policies of the Fed may
unduly contribute to the rise in interest rates. This feeling is prevalent today not only in the business community but is also a
matter of concern to individual citizens as we all have learned in
making our rounds back home and talking to our people.
Indeed, I think that the economic prosperity of this country,
whether we are going to continue to move forward in economic
growth, is, to a large extent, to be determined by where interest
rates will be. So to that extent, I would hope that you would be
able to give to this committee your reflections as to what Fed
policy in terms of monetary restrictions will be, and in terms of
future attempts to curb inflationary growth utilizing the powers
that you exercise at the Fed. That is going to be the key element,
our primary concern. Will the Fed be unduly restrictive and thereby hamper the economic growth?
There are those who say that if we are able to maintain the
present interest rate levels, we will have a strong economic recovery, not necessarily one that will return us to the dangerous and




9

intolerable inflationary periods of the past and I would hope that
in the course of your testimony you attempt to address this notion
with some specificity.
Needless to say, I believe that your reappointment is supported
by the domestic and international financial communities. However,
the central, core question continues to resurface: Will we have a
monetary policy that will be unduly restrictive thereby creating a
situation where interest rates are higher than necessary to deal
with the problems of inflation?
I wish you the best and I would hope that you would be able to
address this concern.
The CHAIRMAN. Thank you, Senator D'Amato.
Senator Dodd.
Senator DODD. N O opening statement, Mr. Chairman.
The CHAIRMAN. Senator Gorton.
OPENING STATEMENT OF SENATOR GORTON

Senator GORTON. Thank you, Mr. Chairman.
I simply would like to add my congratulations to those of members who have spoken previously to Chairman Volcker on his renomination. It may raise some questions about his judgment that
he accepted that renomination, but it is, I believe, our good fortune
that he has done so.
It's obvious that no mechanical rules of conduct of the Federal
Reserve Board and its control of monetary supply can be applied
with mechanical results. That means that we are in a situation in
which the judgment of the Chairman and of the other members of
the Board are virtually of paramount importance not only to the
direct policy of the Board but to the economy of the United States
itself. In that judgment, on the part of the Chairman, I have a
great deal of confidence and I look forward to his own testimony
here this morning.
The CHAIRMAN. Thank you.
Senator Dixon.
OPENING STATEMENT OF SENATOR DIXON

Senator DIXON. Mr. Chairman, I will not take the time of the
committee for a long opening statement. I simply want to make a
few brief points.
First, I support the reappointment of Paul Volcker as Chairman
of the Federal Reserve Board. I was pleased to say so at some
length on the Senate floor on June 9, so I won't repeat my reasons
here today except to say that I believe that Chairman Volcker has
conducted himself admirably while performing what is an impossible job, and that he's played an irreplaceable role in wringing inflation out of the American economy.
As I stated at that time, however, I have not always agreed with
Federal Reserve Board policy decisions. I want to state in the
strongest possible terms that I disagree with, dislike, and would
oppose the rumored change in the monetary policy. In fact, I
cannot conceive of how tightening the monetary supply and driving
up interest rates which are already too high would be good for the
health of the American economy. I have been reading a lot about




10

how the recovery is so strong that it may be too strong and reignite
inflationary pressures. All I can say is that whoever has been
making those statements has not been to my State of Illinois or to
other States in our industrial heartland.
In Illinois, unemployment did not fall last month, Mr. Chairman.
It rose by four-tenths of 1 percent to 12.4 percent. Ordinary people
in my State are hurting and I simply don't see how increasing the
discount rate, tightening the money supply, and driving up interest
rates on homes, autos, and consumer purchases will help them at
all. We don't need the recovery dampened in Illinois, Mr. Chairman. We are already drowning. What we need is a strong, vigorous, sustained recovery, a recovery that has yet to reach Illinois.
The CHAIRMAN. Senator Mattingly.
OPENING STATEMENT OF SENATOR MATTINGLY

Senator MATTINGLY. I won't take up too much of your time. I'm
sure that you're going to be confirmed and most of us will support
your nomination.
I think it's interesting to see the great debate that we will have
over monetary policy with which Congress has so little control
over. I wish Congress spent as much time with fiscal policy. Thank
you, Mr. Chairman.
The CHAIRMAN. Senator Sasser.
OPENING STATEMENT OF SENATOR SASSER

Senator SASSER. Thank you, Mr. Chairman.
Chairman Volcker, I wish to extend to you my congratulations
on your reappointment. The last time you came before this body
for confirmation the vote was 98 to 0, an impressive vote for confirmation, and I might say that I voted for your confirmation at that
time also. But I would have to say to you today, Mr. Chairman,
that the vote will not be unanimous this time. I, for one, intend to
vote against your confirmation.
I would cast my vote against your reappointment as Chairman of
the Federal Reserve Board because I believe the monetary policy
followed by the Federal Reserve Board since October 1979 has stymied the economic growth of this country and seriously damaged
our economy. Our current economic problems can be traced in considerable measure to the high interest rate policies of the Federal
Reserve.
Unemployment still stands at 10 percent in this country. Eleven
million Americans are unemployed. During 1982, the Congressional
Budget Office has estimated that some 28 million people were unemployed at one point during the year.
On the business front, business failures have reached record
highs and business profits also record lows. More than 17,000 businesses failed according to Dun & Bradstreet in 1981; 25,000 closed
their doors in 1982. And the failure rate this year could push the
30,000 level mark. Corporate profits have taken a severe nosedive
and corporate profits after taxes are estimated to be $113 billion in
1983, $52 billion less than they were in 1979. High interest rates
have adversely affected our balance of trade. Our exports are
priced out of the world markets and cheaper priced imports contin-




11

ue to flood our domestic markets, putting even more of our people
out of work. By some estimates, our trade deficit this year might
hit the $70 billion mark.
But the cruelest indictment of the monetary policy that's been
pursued can be found in our record of no economic growth since
1979. High interest rate policies have stopped economic growth in
its tracks and I would say to you, Mr. Chairman, that as Chairman
of the Federal Reserve Board you must bear considerable responsibility—and there's plenty of responsibility to go around, plenty of
blame—but you must bear considerable responsibility for the
dismal performance of the economy over the past several years.
And I say to you, Mr. Chairman, that I do not opppose your renomination on personal grounds. Your integrity is above reproach.
You have conducted your responsibilities with a strong conviction
and a clear conscience. You are a man I think of substantial intellect. You are an exemplary public servant. You have accepted renomination to this job at a time when I think you're perhaps at the
crest of your prestige and prominence in the financial community
and you could have bettered yourself substantially financially by
going into the private sector, and I can only think that you continue to serve because you feel you can make a contribution to your
country. So my vote will not be based on personal reasons.
The issue is much larger than that. The vote should be based on
your record in conducting monetary policy that helps produce the
best economy for our country. In that regard, Mr. Chairman, I
judge the Federal Reserve Board's policies over the past few years
to have been seriously flawed.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Hecht.
OPENING STATEMENT OF SENATOR HECHT

Senator HECHT. Thank you, Mr. Chairman.
Mr. Volcker, this morning we have all had good laughs, but as a
former businessman struggling through the worst economic times
and the highest interest rates, since the depression, I'm quite anxious to hear of your plans on monetary policy on the continuation
of your term. I hope that you will address these plans.
Thank you very much, Mr. Chairman.
The CHAIRMAN. Senator Lautenberg.
OPENING STATEMENT OF SENATOR LAUTENBERG

Senator LAUTENBERG. Thank you, Mr. Chairman.
I'd like to say at the outset that Chairman Volcker, in addition
to his very considerable experience and expertise in financial
policy, has a special qualification that should not go unremarked.
He is a native son of New Jersey. He was born in Cape May, grew
up in Teaneck, and has been a resident for several years of my own
home city of Montclair, N.J.
So, Mr. Chairman, to paraphrase the poet William Proxmire, I
say, "I came not to bury Volcker, but to praise him."
In addition to those wonderful attributes, Paul Volcker's record
of public service is at the highest level of professionalism and in-




12

tegrity and it precludes any need for an extensive introduction. I
welcome him here from this New Jersey corner.
Mr. Chairman, Chairman Volcker, I have to say that I am concerned that the President might be putting you in a bind with respect to monetary policy and interest rates. Everyone knows we are
going to have record deficits this year and out into the future
unless we are willing to do something about fiscal policy. The
budget resolution passed by the Congress this year still leaves a
glaring deficit, but it's a step in the direction of whittling it down.
However, the President refuses to have anything to do with this
process. In fact, he has threatened to thwart a more responsible
fiscal policy by a string of vetoes. This puts enormous pressure on
the Fed as the only part of the government able to take action.
Mr. Chairman, I believe the President is trying to have it both
ways. On the one hand, he is urging the Fed to hold down the
money supply. But he says he does not want the Fed to raise interest rates. Further, he is unwilling to cooperate with the Congress
to hold down deficits. The fact is, the last administration's deficits
look insignificant compared to what we have now.
The Fed's instruments are blunt. If the President tries to pass
the buck to the Fed—and refuses to take responsibility for mounting deficits—there is only one thing the Fed can do. It will take
action to drive up interest rates. Higher interest rates will choke
off the recovery we have and, Mr. Chairman, we just can't have
that.
While national statistics seem to indicate an improvement in the
economy, I have to tell you that the situation in our State is actually deteriorating further. The unemployment rate in New Jersey
shot up from 6.8 percent in May to 8.4 percent in June. This means
that the number of people looking for work in our State has risen
in a single month by over 60,000. The total number of unemployed
in New Jersey now stands at 305,000. That probably underestimates the real situation by not including those people off the unemployment rolls or discouraged workers.
Mr. Chairman, I welcome you. I congratulate you on a job well
done and I hope to discuss further matters with you when we get
to questions.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator Lautenberg.
Senator Trible.
OPENING STATEMENT OF SENATOR TRIBLE

Senator TRIBLE. Thank you, Mr. Chairman.
I would join my colleagues in welcoming you here today. You are
to be congratulated for the job you have done over the last 4 years.
The time has come for us to hear from you today, so I will spare
the committee an opening statement.
But I do want to add just a personal note and say that it is the
opinion of this Senator that you have done a good job and you have
earned my confidence and support and best wishes.
The CHAIRMAN. Senator Sarbanes.
Senator SARBANES. I have no statement, Mr. Chairman.
The CHAIRMAN. Senator Hawkins.




13

OPENING STATEMENT OF SENATOR HAWKINS

Senator HAWKINS. Mr. Volcker, I welcome you here today and
I'm looking forward to the answers to some of the questions I have
since we last spoke. Thank you.
The CHAIRMAN. Senator Cranston could not be here today but
has requested his statement on the nomination of Mr. Volcker be
included in the record.
STATEMENT OF SENATOR A L A N CRANSTON ON THE NOMINATION
OF PAUL A. V O L C K E R TO B E CHAIRMAN OF THE B O A R D OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Senator CRANSTON. Mr. Chairman, I will vote against reporting
the nomination of Paul Volcker to be Chairman of the Board of
Governors of the Federal Reserve to the Senate.
I do so not because I have any personal objection to Mr. Volcker.
I think he is a capable, knowledgeable, intelligent, and dedicated
public servant.
But he is the architect and symbol of a cold, cruel, and callous
economic policy. I do not support that policy. It has deliberately
produced recession and high unemployment, bankruptcies, and
foreclosures and has broken the fair expectations of working men
and women, business people, farmers, and home owners, that they
should have a reasonable opportunity to earn a decent living and
lead a dignified life.
I will vote therefore against his nomination.
Monetary policy today is coming under increasing criticism even
from those who serve as apologists for an overall approach to the
economy that primarily works for the benefit of the very wealthy.
Monetary restraints have helped produce what may be only a
temporary end to inflation. Other factors—the world oil glut and
bountiful crops—have contributed to the present suppression of inflation.
Monetary restraints and escalating interest rates have proved
mainly successful only in blunting economic recovery. They are
only part of what is needed to restore our economy to full productivity and full employment without inflation and without high interest rates—goals to which I am irrevocably committed.
Extreme reliance on monetary policy has exacted too high a
price from too many innocent bystanders. I know we need a sound,
balanced monetary policy without unrestrained growth in the
money supply—but the Fed under Mr. Volcker has been too extreme. And we must not rely on the Fed alone.
The other instrumentalities of the harsh economic policies our
Nation has been pursuing for the past few years are the Reagan
administration and a compliant Congress.
Congress itself has yielded to the Federal Reserve enormous
powers—by default.
Today the newspapers report a major surge upward in the prices
of stocks.
Why? Because Paul Volcker suggested that the Fed might be
flexible in providing credit to the financial system.
With the raise of his eyebrows, the markets rise and fall 30
points. That's astounding. My colleagues should consider why that
23-790 0—83




2

14

is and what our own responsibility is for restoring strength and
fairness to our Nation's economy.
P A U L A. V O L C K E R , C H A I R M A N , B O A R D OF G O V E R N O R S ,
FEDERAL RESERVE SYSTEM

The CHAIRMAN. Mr. Chairman, before we start, may I have you
rise and be sworn in, please?
[Whereupon, the witness was duly sworn.]
The CHAIRMAN. Especially with the number of Senators we have
in attendance today, we will hold closely to the 10-minute rule.
Someone suggested even 5, but that makes it difficult to develop a
line of questioning. We will have 10 minutes but I would hope each
of you as you receive your notes, would stop within that period,
and we will stay as long as any of the members of the committee
wish to ask questions.
Before I ask my first question I would like to make one more
comment. A great deal has been said about the effect of monetary
policy on interest rates. My good friend from New Jersey has made
comments about the President's responsibility for deficits and I
would only like to make one factual comment on deficits, and it is
a factual comment because the Constitution makes it so. Only the
Congress of the United States has the ability to appropriate money.
No President or any Federal Reserve Chairman has ever spent a
dime not appropriated by Congress, not George Washington, not
Abraham Lincoln, not Ronald Reagan. The President can recommend a budget and he can certainly twist arms to get it passed. He
has the ability to veto, but ultimately a President does not spend
any money that was not appropriated by Congress. So I must stress
what I said in my opening remarks, if we don't like $200 billion
deficits, if we do not like $125 billion of interest on the national
debt, if we don't like $1.4 trillion national debt, then it seems to
me, rather than looking at the Chairman of the Federal Reserve or
this President or any other President, we are the only ones under
the Constitution of the United States who have the ability to
change the deficit figures, and when Congress comes to grips with
the $200 billion deficits and casts the tough votes to reduce them,
then we will start to see some improvement in this economy and
make the job of the Federal Reserve much easier.
Senator SARBANES. Mr. Chairman, would you yield on that point?
The CHAIRMAN. Yes; I would be happy to yield.
Senator SARBANES. As I understood your statement, it was that
neither the President nor the Federal Reserve can spend any
money unless it's appropriated, and I think that's correct with respect to the President. But my understanding is that the Federal
Reserve spends about $1 billion a year that is not appropriated,
that does not go through congressional review or congressional
scrutiny, and is not submitted to the Congress.
If I'm in error about that, I would like to be corrected.
The CHAIRMAN. Well, the Senator is technically correct, but the
remainder of that statement should then be that the Fed also returns a profit of over $14 billion a year to the general fund, reducing the deficits. I know of no other Federal agency who does that,
who helps reduce the deficit. That was not the intent of the Feder-




15

al Reserve. I think it clouds the purpose of the Federal Reserve.
They were intended to be an independent agency being self-operating from their own funds generated, but they have gone far beyond
that and produced a very sizable profit for the general fund of the
Treasury each year.
Senator SARBANES. But they do spend money without it being appropriated.
The CHAIRMAN. That is correct, but it certainly is correct that no
President has ever spent a dime that this Congress did not approve
and cannot.
Mr. Chairman, will you agree to avoid all conflicts of interest or
even the appearance of such conflicts in your service as Chairman
of the Federal Reserve Board?
M r . VOLCKER. Y e s , s i r .

The CHAIRMAN. Will you agree to appear before this committee
and other duly constituted committees of the House or Senate
when you're requested?
M r . VOLCKER. Y e s , s i r .
The CHAIRMAN. Chairman

Volcker, while next week's Humphrey-Hawkins hearings will be the proper forum for you to discuss
the intended course of monetary policy over the next 12 months, is
there anything you would like to say on that subject this morning
in general? We will be questioning you specifically next week, as I
said in my opening remarks, and let me just say for those members
of the committee who were not here during my opening remarks
that because of the timing of these two hearings and the Federal
Open Market Committee meeting and completing their meetings
only yesterday, I do not intend to have the committee vote on the
nomination of Mr. Volcker until after we have completed the Humphrey-Hawkins hearings next week so that you will be able to question him more specifically on monetary targets for the next year.
Mr. VOLCKER. May I say first, Mr. Chairman, that I appreciate
your comments and those of your colleagues, as well as your personal support and that of others. I also appreciate your concerns,
and I think I understand some of your warnings, personal and otherwise.
In approaching the general question that you asked, let me say
that we all face the job of getting the economy on a sustainable,
noninflationary path. I have always felt, as you well know, that
getting the economy on a sustainable growth path goes hand in
hand with the necessity for financial stability and a noninflationary path.
In the most general terms, it's the job of the Federal Reserve,
and the job of all of us, to take the actions that are necessary to
achieve that. Some of the comments that have already been made
make it quite clear that the Federal Reserve is only one actor in
that drama. We are not going to do the job alone, but we do have a
large role to play. When we try to map out and conduct monetary
policy, we have in mind a basic objective of achieving growth in the
economy and sustaining that growth in a context of financial stability. Those basic, continuing goals motivate the tactics and strategy of monetary policy in the short run and over time.
That involves, constantly, the need to balance today's actions
against their consequences, taking the total environment in which




16

we have to operate over a period of time. That's as true today as it
has been at other times, perhaps particularly true today.
IMPACT OF INCREASE IN INTEREST RATES

The CHAIRMAN. Mr. Chairman, a great deal is said about what
would happen to the economy if interest rates go up and also about
the ability of the Fed to control those rates.
Would you describe for us in some detail what your ability is—as
a matter of fact, I was asked this morning if I was going to demand
of you that you hold mortgage interest rates below 13.5 percent.
What is the ability of the Federal Reserve to control mortgage
rates, auto loan rates, bond rates?
Mr. VOLCKER. Obviously, we have some influence and can have
some influence on interest rates, particularly short-term rates in
the short run. But nobody can control rates in any narrow pattern
regardless of what's going on in the economy generally. If you have
a high rate of inflation, if there are strong fears of rising rates of
inflation, if you have tremendous demands in the credit markets
from Government or elsewhere, there's nothing we can do over a
period of time to keep interest rates down.
Under other conditions—if there were confidence about the inflation outlook, with Government deficits under control—there's nothing the Federal Reserve could do to hold interest rates up over a
period of time, so our influence in a direct sense seems to me a
short-run influence.
In a more profound and meaningful sense, our influence over interest rates over time depends upon what contribution we can
make to the inflationary problem and to the sustainability of
growth. If our actions today can contribute to that result next year
and the years following, then we will have a favorable environment
for interest rates. If they do not do that today, we are left with an
inflationary situation in the future, and we are not going to have a
good environment for interest rates and nobody could give you any
assurance that interest rates could be held down.
The CHAIRMAN. Well, your answer is simply, then, I believe, that
there needs to be better coordination between monetary and fiscal
policy.
Mr. VOLCKER. There needs to be that; not just that, but that's an
important element. My answer is we are only one actor in the total
drama and our influence is more profound over time indirectly, if
you will, than in its immediate impact on the market in terms of
what open market operations did in any given week.
The CHAIRMAN. And specifically, whatever impact you do have
on interest rates would be more on the line of short-term interest
rates and not in the mortgage rates over a long period of time?
Mr. VOLCKER. Yes; that is unquestionably true.
The CHAIRMAN. SO when we're looking at mortgage rates, I
assume the primary responsibility in that area would be that of
fiscal policy and what we do here in Congress in attempting to
reduce the outyear deficits?
Mr. VOLCKER. The U.S. Treasury is borrowing about $750 million
on average each workday. That's a lot of money to be taking out of




17

the market constantly and, obviously, that does compete with other
demands for credit.
The CHAIRMAN. What is your estimate of the total amount
during the remainder of this year—expressed as a percentage of
net savings—that it will be necessary for the Federal Government
to borrow to finance the deficit? In the last quarter of 1982 it exceeded 50 percent of all the available savings in the economy,
which certainly makes much less available for tlie private sector.
I've heard some estimates that we would reach in excess of 70 percent this year.
Mr. VOLCKER. I haven't got a precise figure in mind for the next
few quarters. If one takes the net domestic savings potential of the
economy—recently about 8 percent of the GNP—and you're running a deficit in the neighborhood of 6.5 percent—looking at the
year as a whole this year—then your using over three-quarters of
savings this year.
Now one consequence of the size of the deficit is that we are, appropriately or not, in some larger sense drawing upon the savings
of the rest of the world to finance our own credit markets in very
large volume. That's the other side of the coin that I think Senator
Sasser and others mentioned; that is, the trade position, which has
certainly been deteriorating very sharply. We are running into a
large current account deficit. That is the other side of the coin of
drawing on so many foreign savings to finance our own credit markets. You cannot draw upon the savings of the rest of the world
without running a current account deficit, and that's what we're
doing. It's useful to put it in that perspective because that is one of
the consequences, one of the influences, that the Government deficit has. To the extent it adds to the total demands on credit and we
draw savings from abroad, the result is a weak trading position.
OUTFLOW OF LOAN MONEY TO FOREIGN BORROWERS

The CHAIRMAN. That leads me to another question. This afternoon we will hear witnesses who charge that U.S. interest rates
have been driven up because U.S. banks have loaned too much of
the U.S. savings pool to foreign borrowers, going the other direction from what you just stated.
To what extent do you believe this has been responsible for the
increase in U.S. interest rates in recent years, the outflow of loan
money to other countries?
Mr. VOLCKER. I don't think it is having any particular influence
currently. One can always argue that the less our banks or others
lend abroad, the more we import capital, the better our credit markets would be. But, on balance, as I just indicated, we are importing large amounts of capital currently. That hasn't always been
true; it was not true a few years ago. It is true now. I think it is
true that in some areas we have been a large net capital exporter,
but on balance we are currently a large net capital importer, and
we have not been a large exporter, on balance, for some time.
The CHAIRMAN. Thank you, Mr. Chairman.
Senator Proxmire.




18

SERVING A FULL 4-YEAR TERM DOUBTFUL

Senator PROXMIRE. Chairman Volcker, in my opening statement
I took it for granted that you're going to stay the route; you're appointed for 4 years and you would be with us for 4 years. On the
other hand, there's some indications this may not be the case.
For instance, the last time you were before the committee to be
confirmed you indicated that you expected to serve out your full 4year term. Now, however, I notice that in the personal statement
filed with the committee you don't feel committed to serve out your
full term and Time Magazine had an interesting observation on
this. They said the following:
For one thing, he told presidential aides—

This is you—
That he believed the Federal Reserve Chairman's term normally 4 years should
end at the same time as the President's. He said that the newly elected President
should not concern himself with the Fed in the busy early days of his term but
should terminate about 6 months afterwards even if it had been struck.

Was Time magazine accurate?
Mr. VOLCKER. I don't think entirely so. It is true, as I indicated
in my statement, that realizing, among other things, that this is
my second term and I have been here for a block of time already, I
don't feel that I necessarily desire to commit myself by saying to
you that I'm going to stay here for the four complete years for a
variety of reasons.
But, I also understand that in undertaking the job I commit
myself to stay a substantial length of time; I didn't want to absolutely promise that I would stay the full 4 years.
It's also true that in the past I, personally, and the Federal Reserve Board members have indicated that we would not oppose—
and in varying degrees, I suppose, we support—the idea that if the
Congress wanted to make a change in the timing of the appointment of a Federal Reserve Chairman—maybe there is no good
time—the least worst time to do so might be a year or so after a
presidential election to avoid the problem which can happen accidentally now; that is, of the job becoming open late in a Presidential term, perhaps in the midst of an election campaign and so
forth.
Senator PROXMIRE. The trouble with this scenario, as I see it, is
that this puts both the President of the United States and the
Chairman of the Federal Reserve Board in a short-term perspective
rather than a long-term perspective. I indicated that I thought we
might be all right for a few months, maybe a year or maybe a little
more, but that after that we are likely to be in very deep trouble.
The second part of that Time quotation—let me quote from
that—"more important perhaps, Volcker made it clear in private
talks—[quoting]—"that over the next 18 months he sees no reason
to crack down hard on the money supply again. In his opinion, inflationary pressures have subsided enough* so that the Fed can
safely make enough money available to meet the borrowing needs
of both business and government, given no gargantuan deficits, and
keep the economy rolling."




19

Mr. VOLCKER. I don't recognize that part of the quotation at all,
in terms of any conversations I've had. In appearing before this
committee and elsewhere, as you well know, I have consistently expressed great concern about the possible conflict more than latent
in the very large, persisting budgetary deficits during a period of
economic expansion I have not fully shared, to say the least, the
sense of relaxation perhaps that some have had that that would
only be a problem several years down the road. When it becomes a
problem depends partly on how fast the economy and, therefore,
private credit demands expand.
As things now stand, as I think your own statement implied, we
are in something of a potential Catch-22 situation. You've got the
economic expansion, which is good, and you've got a fairly rapid
expansion, which is good on the face of it, but it brings closer the
day when you've got a potential conflict with the continuing large
budgetary deficits.
Senator PROXMIRE. Chairman Volcker, there have been times in
the past when the Fed has departed from its monetary targets
during Presidential campaigns. The classic case that people think
about was in 1972 when the Fed allowed an expansion in the
money supply which many feel helped the election of President
Nixon. There's a feeling around the country that this is the expectation in the campaign coming up.
Can you give this committee an unqualified pledge that your
policies as Chairman will be governed solely by the needs of the
economy regardless of how those policies affect the fortunes of
either political party?
M r . VOLCKER. Y e s .
Senator PROXMIRE. NOW

last Tuesday the Federal Open Market
Committee met to determine the course of monetary policy over
the next couple weeks. What decisions were reached in that meeting?
Mr. VOLCKER. At the meeting yesterday or earlier?
Senator PROXMIRE. Last Tuesday. This is Thursday. That was a
couple days ago.
Mr. VOLCKER. Tuesday and Wednesday. I think that falls within
the terms of Chairman Garn's injunction, if I might say so. I would
greatly prefer to address that matter specifically, in terms of the
targets, in the regular hearings which come up next week. I don't
think you will find those decisions terribly dramatic, but I don't
think I should discuss them in specific terms now but rather lay
them out carefully in a prepared statement as we normally do in
that connection.
Senator PROXMIRE. Well, the reason I asked that is because by
and large the Federal Reserve has not been forthcoming for weeks
after the Federal Open Market Committee meets. Meanwhile, the
big brokerage houses and the other big institutions have their experts at work and within hours after the Fed has met they seem to
have a pretty good line on what's going to happen. The rest of the
country doesn't know and it seems to me it puts at a disadvantage
the rank and file people in this country and also the Congress for
that matter.
Why shouldn't this be disclosed as soon as you're through? Why
shouldn't we get the minutes the next day?




20

Mr. VOLCKER. Some times I think that would not be harmful.
Other times it would be harmful. As a matter of general practice, I
think it's necessary to retain some time period, because the market
might over-react to what they interpret the words to mean when
conditions may change within the month, something that's taken
account of in the committee deliberations. I think you would get
overreactions and misinterpretations more frequently than the reverse.
Senator PROXMIRE. Don't you get that even more so when you
have all kinds of rumors and guesses and so forth by pretty highpowered people who are close to the Fed operation?
Mr. VOLCKER. There's a whole industry that devotes itself to
trying to guess what the Fed is doing and the significance of our
actions. You can pick up the paper any day and these presumably
sophisticated interpretations are displayed for everyone to see,
sometimes conflicting interpretations. But I do think that in ordinary circumstances, as a matter of routine, immediate publication
would impair our attempt to convey the full flavor of a situation
accurately without boxing ourselves in in terms of ability to react
flexibly to what happens. We have taken that position, as you say,
traditionally, and I think it's the appropriate position.
CONTINUED ECONOMIC GROWTH TO REDUCE UNEMPLOYMENT

Senator PROXMIRE. Let me ask a couple quick questions. The
Democratic leader, Senator Byrd, asked us to ask you these questions. The first is, will you conduct monetary policy in such a way
that the economic growth over the next couple years will be adequate to reduce unemployment significantly?
Mr. VOLCKER. Obviously, our aim is to have an economy in which
unemployment is reduced and we are prosperous. I can answer
that question, "of course, yes." If I may just say in that connection—and I'm repeating myself—what we are interested in is being
able to say that through the years, in sustaining the advance. It's
much more important that that condition be sustained than precisely what happens next month or next quarter or for a period of
time.
Senator PROXMIRE. Along the line of sustaining it, is the current
6- or 7-percent growth rate so fast as to justify tightening monetary
policy?
Mr. VOLCKER. We have had a preliminary estimate of 6.6 percent, I believe, in the second quarter. If I had to guess, I would
think the final figures might show a higher rate of increase than
that. An increase of that sort in this particular quarter of recovery
is not itself a source of concern. We have an inventory change. It's
very typical in this period of recovery that you have a big growth
quarter; and, we start from a very low level. We have a long distance to go, so that kind of increase at this stage of the recovery is
in itself not a source of concern.
We have to look at a variety of other indicators, as well as to
what overall economic activity might be, for the sustainability of
the recovery in the future, and that is related, of course, to the inflationary side of the coin.




21

Inflation at the moment is down. The last couple of months have
shown a higher Consumer Price Index, but that comes after a
string of very low, in fact, virtually no change in prices, for some
months; there were some special factors in April and May. The inflationary trend, I think, is still favorable, but again, we have to
look ahead and anticipate conditions that might change that in the
future.
Senator PROXMIRE. My time is up, Mr. Chairman. Thank you.
The CHAIRMAN. Thank you, Senator Proxmire.
Senator Heinz.
Senator HEINZ. Thank you, Mr. Chairman.
Chairman Volcker, this has proved to be an interesting hearing
so far. You have been blamed for just about everything. You have
been blamed for high interest rates. You have been blamed for this
recession. You have been blamed for the international financial
crisis.
The only two things I can think of that you haven't been blamed
for are herpes and giving away the Panama Canal, but we're not
through with the hearing yet. [Laughter.]
Chairman Volcker, almost everyone agrees that the 1981-82 recession resulted from high interest rates. A lot of people blame
those high interest rates on you. Let me put it to you directly.
You became Chairman of the Fed in 1979. Did you and was it
your intent to drive up interest rates; and if you did drive up interest rates, why did you do it?
Mr. VOLCKER. It was certainly not my intent to drive up interest
rates to the degree that they rose. I did not have that in mind as
my anticipation of what would happen. What we did have in mind
was a feeling that the economy over a period of time would not
prosper—we wouldn't have the kind of performance, we wouldn't
have the kind of productivity, and we wouldn't have the kind of
employment that we want—if that kind of serious, accelerating inflationary period were left unchecked. As part of any long-term
program to restore the growth of the American economy you had
to deal with that inflation problem as a matter of priority and, in
dealing with that inflation problem, you ran into deeply entrenched expectations and behavior patterns. It was a difficult
period, perhaps more difficult than I expected—and I wasn't a
great optimist on that score.
Senator HEINZ. Are you saying that you had to increase interest
rates to fight inflation?
Mr. VOLCKER. We had to restrain monetary and credit growth as
the only tool within our control; and that, colliding with inflationary expectations, colliding with a number of other factors in the
economy, including expectations, produced a high level of interest
rates for a while. There's no question about that.
Senator HEINZ. In March of 1 9 8 0 interest rates broke the 20 percent barrier, the prime rate as one indicator, for the first time in
our history. Were you responsible for interest rates going over 20
percent?
Mr. VOLCKER. I think what was responsible for interest rates was
the accumulating inflationary psychology and momentum in a fundamental sense. Those interest rates would have gone that high
and they would be higher today if you had let the inflation contin-




22

ue. In that sense I would describe our policy over a period of time
as just the opposite; we laid the groundwork for getting interest
rates down and it was the only way, given the tools at our command, we were going to eventually get interest rates down.
Senator HEINZ. In March 1980 President Carter imposed credit
controls on the economy. Did you favor or oppose those controls?
Mr. VOLCKER. We were not particularly happy about some aspects of those controls. He considered it very important as part of a
total program. Some parts were quite acceptable to us in terms of
what we call "voluntary restraints" on banks. Some aspects we had
some concern about, but thought as part of the total program they
were acceptable.
Senator HEINZ. It is generally viewed that in part as a result of
the imposition of credit controls interest rates spiked up in March,
April, and May 1980, then the Federal Reserve noticed there was
an election coming in November and pushed the so-called magic
button and brought interest rates down, and then after the election
had to change course again and as a result interest rates went to
20 percent in December 1980.
Is that accurate; and if not, why not?
Mr. VOLCKER. It's not my interpretation of those particular
events. After that period, when the money markets got quite tight
and there were credit controls, there was a precipitous drop in the
economy for about a quarter. It was very sharp and it didn't last
very long. There was also a precipitous drop in the money supply
for a period of a couple of months.
In retrospect, as part of time, it's apparent that those phenomena—the sharp drop in the economy and the money supply—were
directly related partly to psychological effects of the credit control
program. Interest rates dropped very sharply coinciding with a decline in the money supply when we were providing a lot of reserves
to reverse the fall in the money supply. The money supply had
begun rising, as I remember, by June, and accelerated during the
fall. During that period we were progressively moving against the
increase in the money supply and interest rates were rising from,
as I remember it, late July or August right through the election
period. It didn't make everybody entirely happy, but I would point
out there was an increase in the discount rate in September.
INFLATION FIGHT BRINGS ON RECESSION

Senator HEINZ. SO what you're saying is you started fighting inflation before the election?
Mr. VOLCKER. There's no question.
Senator HEINZ. Let me ask you about the inflationary expectations you mentioned. You said they were building up or they were
high. What caused them to build up? What made them high? How
long did that period of buildup take and what did they consist of,
and what is different about it from today's economic climate?
Mr. VOLCKER. I think the explanation for that lies in all the
postwar history, but particularly the period since the Vietnam war.
We had maintained a reasonably good record on price stability
through mid-1965; it was actually quite good and prices were effectively stable and we had a very nicely operating economy in the




23

early 1960's. But progressively, after 1965, the inflation rate began
moving higher. It was uneven and it came down during some recession periods, but it remained at higher levels during recession periods and reached new peaks during expansion periods right through
the late 1970's. That situation was complicated, among other
things, by the oil crisis. That's not entirely an independent event,
in my judgment, but acceleration in energy prices was partly related to a feeling that inflation had taken hold in the United States
and elsewhere and after 10 or 15 years of that trend people began
to count on it. And, once they begin expecting it, once they begin
managing their business affairs or personal affairs in the expectation of inflation, the thing begins accelerating and it doesn't help
business activity. Any feeling that you get some stimulus to business out of the inflationary process goes away once people begin
anticipating it, and they begin anticipating it even faster than it
happens.
Senator HEINZ. TO summarize what you're saying—and tell me if
this is right or wrong—are you saying that the 1981-82 recession
was inevitable, or if not inevitable, that the only other alternative
would have been high inflation and interest rates to match?
Mr. VOLCKER. I'm not sure it was entirely inevitable—certainly
in its severity—but it would have been inevitable to some degree.
You can always go back and say if we had managed our affairs perfectly, with the benefit of hindsight—I'm not speaking now of the
Federal Reserve in particular, but if all of governmental policy had
been perfectly arranged—we could have dealt with this problem
with less pain. Of course, that's not the real world.
Senator HEINZ. Let me phrase the question a little more precisely because you took over in 1979. At that point, not at 1973 or at
1971 when President Nixon put on wage and price controls, but in
1979, in your view, was a recession at this point inevitable? As you
look back, is there any way we could have avoided it?
Mr. VOLCKER. A S I look back, maybe so. I would have appreciated
at that time that there was some substantial risk in the process of
dealing with the entrenched inflation, particularly if other instruments of policy were not totally supportive, and they never are. I
don't say that as great criticism, but in this particular case there
was a very heavy burden on monetary policy itself, which increased the risks.
Senator HEINZ. Are you saying that Congress could have taken
some action to avoid it?
Mr. VOLCKER. Public policy in general could take some action.
The fiscal side is one dimension, but there are many other governmental policies that tend to keep the inflation process going. Some
of those policies are very deeply entrenched, and you don't realistically expect them to be revolutionized in a short period of time, I
suppose.
Senator HEINZ. I would agree with you on that. I remember a
hearing that Bill Proxmire held in the Banking Committee where
four or five previous Chairmen of the Council of Economic Advisers
were called before this committee and they all advocated a list. It
was remarkable. They were liberal Democrats, conservative Republicans, and they all advocated a list of initiatives almost to a man—
accelerated depreciation, lowering the deficits, less regulatory in-




24

terference in the economy, measures to improve productivity. It
was significant to me that by the end of 1980 not a single one of
those recommendations had ever been acted upon either by the
Congress or by the White House.
Mr. VOLCKER. If I might add one point that I think is crucial in
evaluating this situation, Mr. Chairman. We talked about the risk
of recession and whether it was inevitable as part of getting rid of
inflation. Let me say with all the conviction I can muster, if we
had collectively let that inflation go ahead, eventually we would
have had much more severe economic difficulties than in fact we
have had. The quicker you can take care of these problems, the
better off you are. That's the lesson you see in many countries
around the world, including many developing countries today.
The CHAIRMAN. Senator Riegle, before I turn to you, let me make
a procedural comment. It's my usual practice in the Committee to
record the arrival of Senators and call on them in that order
rather than on the basis of seniority and on each side. If any of you
wish to make individual arrangements beyond that, if you have
time constraints and want to talk to those Senators junior to you
who would be called on first, that would be fine with me. Short of
letting me know that, I will call on you on the basis of the time
you arrived at the hearing.
Senator RIEGLE. Thank you, Mr. Chairman.
BUDGET AND TRADE MOST IMPORTANT TO ECONOMIC RECOVERY

It's very hard in a 10-minute period or even in this whole session
to get right down to the things that perhaps we should most try to
talk about and to illuminate, but let me try to get to what I think
is the central concern that I have. I'm just asking you to use your
best professional judgment now.
If you take the major elements of our economic policy mix as
they exist today, the momentum that we have had and the track of
monetary policy which of course you're intimately involved with,
but also the fiscal trendlines that you see, the international trade
picture which you're also well aware of and the international financial debt problems and some of the other financial structure
problems, I'm wondering when you put the whole economic puzzle
together today whether it is your feeling today that if we just stay
on our current trendlines in those major policy segments, if all of
that working together is going to sort of bring us right on through
with a nice, sustained recovery with the things that we're looking
for, namely, a low inflation rate, moderate interest rates, reducing
unemployment levels and so forth.
The reason I want to try to frame it that way is that as I try to
do that and as we all try to do that and especially in light of the
dramatically changed world economic picture even in the last 5
years—it's just transformed itself—I have the feeling that we are
not going to get all of the nice outcomes we would like to see
unless further major policy adjustments are made on the margin.
Fiscal policy is one that's been mentioned here, but I think trade
policy, for example, ranks right up with it simply because the numbers and the job and economic strength consequences are rising to
the size that I think make that now self-evident.




25

But what I'm concerned about is this. So much of the discussion
here is whether monetary policy is one element on the margin, it
can or cannot have that much effect in the overall outcome of
things. Clearly it can have some effect and you, yourself, have said
that today. But I'm wondering if it's your view that other major
policy changes are going to have to be made here out over the next
year or two in these other areas in order for this whole thing to be
able to work together.
Mr. VOLCKER. Let me approach answering that question by
saying, first of all, as I've tried to emphasize in earlier appearances
before you, that I think we have a lot of ingredients that can give
us sustained noninflationary growth, but we don't have all the ingredients. We have gone a long way toward developing that base,
and I think the performance of the economy recently is consistent
with that vision. But if I had to rank the concerns that loom in my
mind as posing the risk, where changes are needed, I would continue to put the budgetary problem first on the list. That becomes
more urgent, as I said before, the faster the economy recovers.
That is not unrelated, as I said earlier, to some of the trade problems that you have emphasized because of the way that works in
the financial markets, the effects it has on the exchange rate, on
the flow of capital and through that mechanism on the trade picture.
Senator RIEGLE. Let me then ask you this more focused question.
If the fiscal policy is going to remain loose, as it is I think today,
with deficits running above $200 billion out over say the next 3 or
4 years, is that a condition in your mind that is so destabilizing as
one of the major policy elements here that it in fact does leave
monetary policy in an impossible position? In other words, I think
you have to at this point, both in terms of the experience we have
been through and the fact that this is a reconfirmation hearing—I
think you've got to speak in very plain language if you feel that
deficits above $200 billion are unworkable and could precipitate an
undoing of the struggling of what we have been trying to do. I
think you have to say so in very plain language publicly to this
committee, to Casper Weinberger and everybody else. And if we're
not going to say that and tiptoe around that and finesse that issue,
then I think we are leading ourselves down the road that Senator
Proxmire was talking about before, and that is that we are postponing a day of reckoning that's going to hit us like a ton of bricks,
and I don't think any of us want that.
So if the deficits are going to remain above $200 billion, does that
leave us with an unworkable policy mix in your judgment?
Mr. VOLCKER. "Unworkable," I suppose, is a matter of degree,
but I don't want any ambiguity about the fact that I think that is a
major risk that might disrupt what I think could be a very satisfactory—more than satisfactory—performance with very favorable
long-term consequences.
When I look at the risk to that, the complications to that, the
deficits stand out clearly as No. 1, and I don't see how you can
expect equitable financial markets and rapid economic growth with
those kinds of deficits.
Senator RIEGLE. Well, I think, then, you may have another
aspect in your job that is growing here. That is, everybody is jaw-




26

boning you. The President is jawboning you. You're getting a certain amount of it today. I think on this issue because you're positioned where you are you may have to do more jawboning on that
and in other areas like spending, including defense spending. In
other words, if the risk is high of deficits of $200 billion throwing
this whole thing out of bounds so nobody can correct it, then I
think we are going to have to hear much, much blunter comment
about it. I hope that took place in the meeting with the President. I
don't know whether it did or not. You may or may not want to
comment about that. But it seems to me the risks we are running
here are enormous.
Mr. VOLCKER. I agree with that. However, just to repeat, I think
a lot of the groundwork has been laid for a much more favorable
economic performance, and I think we are seeing some of that.
That in no way diminishes that risk.
IMPROVEMENT IN HOUSING AND EMPLOYMENT

Senator RIEGLE. Let me just quickly jump to the housing issue. I
was out in Michigan over the weekend. I talked to a number of
builders. We've got a tough market situation out there anyway
with unemployment still at 15 percent, but they tell me the recent
uptake in interest rates which we have seen in FHA upward revisions and so forth have pretty much shut down the housing recovery there, and I'm getting signals that way from other parts of the
country as well.
Is that what you're hearing, and what would be your feeling
about what level of concern you would have if the housing recovery
were to start to stop here simply because interest rates for mortgages are starting to move back out of range?
Mr. VOLCKER. Housing has done very well in the last 6 months,
as you know. I do not have the kind of reports that you do, but I
certainly think that housing is and remains a very vulnerable
sector in terms of any prolonged or sizable interest rate increases
there might be. That comes back, of course, in considerable part, to
the budgetary problem.
Senator RIEGLE. Unemployment today, how serious a problem do
you see that as being in the country? How much progress do you
think we have made on it and how heavily does the concern about
unemployment sort of weigh into the Fed policy discussions and decisions here?
Mr. VOLCKER. It weighs very heavily. We obviously have a
historically high level of unemployment; whether it's historically
high or not, it's much too high. We have had, in recent months,
very sizable increases in employment. We have begun to see the
unemployment rate go down, but it's going to take some time for
that unemployment rate to go down to anything like the level you
or I would consider satisfactory. Again, the job is to get that unemployment rate down in a way that it will stay down, not to get it
down for the rest of this year and then run into another roadblock,
but to get on a pattern where it can continue to come down and
then stay at a more reasonable level.
Senator RIEGLE. I'll come back to that in the next round. I want
to just move to the international debt situation. We are hearing a




27

lot about Brazil now perhaps coming to the judgment or being
unable to respond to its repayment requirements here that are
upon it. How serious is that situation and then, of course, I'd like
to drop back to the other countries that are in the greatest difficulty.
Mr. VOLCKER. The problem is serious in Brazil and it's amplified
because it's part of a much larger problem of developing countries
in Latin America and elsewhere. I would note that just today
Brazil is taking some very strong actions to deal with its problems,
and I feel quite optimistic about that situation now because I think
there are indications they are facing up to very tough problems in
that country and have begun to take the kind of forceful actions
that are necessary to lay a base for the necessary confidence in financial markets and in the rest of the world outside of Brazil. That
problem, with the cooperation of a lot of people, can be managed.
Senator RIEGLE. My time has expired. I will come back to these
things in a later round.
The CHAIRMAN. Senator D'Amato.
Senator D ' A M A T O . Thank you very much, Mr. Chairman.
Chairman Volcker, it seems to me we are in a catch-22 position
in that we constantly hear the theme that deficits are creating this
great problem.
It seems evident to me that one way to ease the growth of deficits is through a strong, sustained economic recovery, assisted with
lower interest rates which would enhance our revenue base and
reduce our interest payments on our monumental national debt.
Without that economic recovery, and consequent large-scale unemployment, those deficits are going to continue to be unacceptably
high.
However, if we do not maintain interest rates at acceptable
levels, basically the levels that we have today or maybe even lower,
it is doubtful that we are going to have a sustained economic recovery. I think that is the real catch-22 that in which we find ourselves. It is not good to have people just preaching about the size of
the deficit. Congress certainly has a primary responsibility here,
but by reducing unemployment, by creating a situation where business and industry are paying taxes and people are paying taxes
and the revenue scene is enhanced should we not see an easing of
our deficits?
QUESTIONS ON SUSTAIN ABILITY OF RECOVERY

Mr. VOLCKER. Yes. You've got to judge the significance of the
deficit in terms of performance of the economy. There's no doubt
that if the economy is in recession or sluggish the deficit is going to
be bigger, but it's not that part of the deficit that we worry so
much about. There's going to be a big deficit even as the economy
recovers—unless something is done about it—and it's that part
that remains after the economy recovers that's a source of the difficulty. You're still left with a deficit, let's say, in the range of $100
billion with full recovery. You have a deficit running 2.5 percent of
GNP, maybe more, in a condition of prosperity and full employment. This implies that the Federal Government is going to be preempting a share of the credit flows without any precedent during a




28

recovery period. It's inconsistent—and that's the catch-22 part, I
suppose—with the kind of credit demands that come from the private economy with the assumption of a prosperous, growing, fully
employed private economy. That's the problem, and it remains a
problem, let's say, in the $100 billion magnitude. That's the current
situation of the deficit. Part of that will be taken care of by growth,
but the problem is not all of that is going to be taken care of by
growth.
Senator D'AMATO. In light of the low rate of inflation, why is the
real rate of interest still as high as it is, and would you give us
some historical perspective on that?
Mr. VOLCKER. The real rate of interest is, in a sense, impossible
to measure. You're measuring the nominal interest rate against
what people expect inflation will be. With respect to the long-term
markets, while we have had an inflation rate for the last 12
months on the order of 3.5 percent using the Consumer Price
Index, I don't think expectations of bond buyers or bond sellers or
home buyers or home sellers are for an inflation rate to persist
that low over a period of time; there's still a substantial feeling of
uncertainty about what the risks are of inflation increasing.
That is one factor that makes the rate of interest high. And, of
course, that is related in part to the posture of policy—monetary
policy or fiscal policy—and what judgments people make as to
those policies in the future. After going through a 15-year period of
accelerating inflation, it takes more than 2 years of improvement
to instill confidence that the trend has changed fully.
A lot of progress has been made in that direction and people
don't feel nearly as concerned about inflation as they did a couple
of years ago, but it's a matter of degree.
Another factor is—I'm sorry to keep coming back to the same
issue—but Senator Riegle encourages me by saying that I don't
make enough noise about it; that's not what everybody says—that
you have this very large deficit which needs to be financed at
levels that are without precedent and will continue high, given the
current stance of policy, well into the period of recovery and
beyond.
Senator D'AMATO. Again, Mr. Chairman, without a sustained recovery, there really is little hope of reducing that deficit appreciably, given the political realities in attempting to reduce our budget.
I have heard the rhetoric for 2V2 years. I hear people talking about
how they are going to reduce deficits. The same people that are
talking about reducing deficits are voting to increase every entitlement program.
So the question remains: Is this recovery too fragile at this point
in time to have an increase in interest rates? Wouldn't that imperil
that economic recovery?
Mr. VOLCKER. I would not judge the recovery at this particular
point in time—and this is a short-term perspective—as particularly
fragile. As you cast your mind forward into late 1983 and 1984, I
think you can raise a lot of questions about the sustainability of
recovery and certainly the kind of recovery we would like to see—
housing, business investment and all the rest—at this or a higher
level of interest rates. So I would make a distinction between the




29

problems that potentially lie ahead, potentially and the vigor of the
recovery at the moment, which seems to me quite substantial.
Senator D ' A M A T O . I believe that if we do get a substantial increase in those interest rates, we are going to see that housing recovery decline. We are going to see that the growth that we really
need is not going to take place, and I think there are many people
who fear this sequence of events.
As always, perception is very important as we dicussed yesterday. It just seems to me that the release of these M money figures
on a weekly basis does not give any degree of reliability or continuity that people can count on. The fluctuations in the weekly releases help to exacerbate fear and uncertainty in the business community. Would not it be better to release such figures less frequently in order to diminish that effect?
Mr. VOLCKER. I place no confidence in M on a weekly basis.
Senator D ' A M A T O . Say that again.
Mr. VOLCKER. I've said this many times. The weekly M figures
bounce up and down, and on a weekly basis they are meaningless.
That's not quite the situation we have now. We do have weekly
fluctuations obviously, but we have had very sizable growth in that
particular figure for a period of 9 months, and that has been a
source of some concern to some people. It's that pattern of growth
over a period of months that should be the source of concern if it's
a source of concern at all, not the weekly fluctuations.
PRESENT RECOVERY CALLED AVERAGE BY FED

Senator D ' A M A T O . Let me ask you this, Mr. Chairman. Given
that the Federal Reserve has clearly taken an anti-inflation, slow
growth money supply course, and I do not argue with that policy,
what prospects do you see for interest rates in both the near term
and long run?
Mr. VOLCKER. I have expressed this thought on many occasions.
If we conduct ourselves appropriately, if we maintain the progress
on inflation and disappoint some of those expectations that it's
going to rise that I referred to earlier, the prospect—I'm almost
tempted to say the inevitability under those conditions—is that interest rates are going to come down over a period of time.
I'm addressing the long run now. Again, a major complication in
the short run and a complication for the long run as well—both directly and because many people find it incredible to think that inflation will come down if the deficits remain so large—is that deficit problem, which runs in the other direction and certainly complicates life now and potentially in the future.
Senator D ' A M A T O . I would like to add that I believe there is
somewhat of an overemphasis on the inevitability that deficits will
lead to inflation. Obviously, we cannot accept $200 billion deficits
year after year. But, the private sector can play a major role in reducing those deficits through the benefits of sustained economic recovery.
Mr. VOLCKER. That's what we're racing to a degree now. Let me
say that I don't think those deficits make inflation inevitable by
any means, but if they persist, it's going to force the economy into
the kind of contortions you wouldn't like and I wouldn't like. It
23-790 0—83




3

30

could impact on housing. It's going to impact on business investment. You may be able to keep inflation down, but you're going to
lead to a very unbalanced recovery. That's the optimistic view, and
it's not very satisfactory. It doesn t bode well for the sustainability
of the private growth and it doesn't bode well for continued growth
in productivity and a lot of other things. I don't think it's inevitable that the deficit means inflation, but it certainly puts pressure
on financial markets and it puts pressure on us in a very direct
sense.
Senator D'AMATO. Thank you very much, Mr. Chairman.
The CHAIRMAN. Senator Dixon.
Senator DIXON. Mr. Chairman, there's a remarkable type of information flowing from the hill here and I think being disseminated by the news media and the country now that the economy may
be improving at such a rapid rate that something ought to be done
to dampen this improvement. That certainly is not the response I
get when I go back home to my State and I would like to ask you,
first of all, are you or the folks at the Fed now contemplating any
increases in the discount rate or any marked tightening of the
money supply?
Mr. VOLCKER. I don't think it's appropriate for me to comment
specifically on the discount rate question.
In terms of the general posture of policy, it's fair to say that it's
rather obvious we haven't taken any very drastic or strong actions
in recent weeks. But it is also true that you could characterize
policy in the last month or two as being slightly less accommodative to large growth in money or liquidity than it has been earlier.
When one evaluates the business scene, as I said earlier, there's
obviously nothing the matter with the economy expanding and
there's nothing fearsome in itself about the growth in the second
quarter or the growth you see immediately ahead. But you also
have to look at the implications of what's happening on the financial side and with liquidity for the sustainability of the economy
over a period of time. Mi growth on the face of it has been quite
rapid, but that I think involves a lot of uncertainties about what
the trend in Mi should be in a new institutional environment with
lower levels of interest rates, with payment of interest on transactions accounts Mi that we didn't have historically; we haven't put
so much weight on that for some months, as we've indicated.
But if you look at the total picture in recent months, against the
background of economic growth, we have had, not an alarmingly
rapid growth, but growth on the rapid side in liquidity and money,
however defined.
Senator DIXON. NOW some economic advisers in the country suggest that we have had a strong economic growth recently. Others
say it's average. How would you characterize it in the last few
months?
Mr. VOLCKER. I can give you the results of a statistical exercise.
If you average past recoveries, put monthly figures for this recovery against that, it falls right about in the average.
Senator DIXON. An average recovery. Well, an average recovery,
in your view, would not call for any drastic response from the Fed;
would that be a fair interpretation of what you have said here?
Mr. VOLCKER. Not in itself, that's right.




31

Senator DIXON. I just want to point out, Mr. Chairman, that as I
said in my opening remarks, unemployment in Illinois is 12.4 percent right now. The unemployment figures have gone up. We have
102 counties in our State. Of those 102 counties, 89 have unemployment figures larger than the national average. The chairman was
talking a moment ago about having you back here shortly under
the provisions of the Humphrey-Hawkins legislation passed by the
Congress. I think that called for an unemployment target range of
about 5 percent. Certainly the country doesn't have that kind of experience and, quite obviously, for many of us in the industrial
heartland the unemployment rate is quite a bit higher and I would
suggest that, given those circumstances, that drastic responses at
the Fed are not called for right now.
CONGRESS SHOULD CUT SPENDING AND INCREASE REVENUES

Mr. VOLCKER. Anything that I would think of as drastic is not
going on at the moment. But let me say that the policy problem
again—and I know I'm repeating myself—is always trying to look
ahead, as best we can to see how to sustain this recovery, and that
gets involved in the inflationary problem.
We have had a good inflation performance relative to what we
had before; we have had moderation in prices and wages. A test remains ahead, as the economy expands, as to whether those moderate attitudes will remain in place. I think it's critically important,
whether one looks at it from the standpoint of business pricing or
the wage negotiation process, that people do have, first of all, confidence that inflation will remain under control, that they conduct
themselves accordingly, as best we can encourage them to do so
with concern over their competitive position, in part through the
conduct of monetary policy. That, in the end, will be an immense
contribution in sustaining recovery and dealing with that unemployment problem that you're rightly concerned about.
It's absolutely critical that those attitudes remain conservative
or moderate, if those are the right words.
Senator DIXON. Getting back to monetary growth, Mr. Chairman,
Mi increased at approximately a 13.3-percent rate during the first
4 months of this year. During the last 4 weeks, however, Mi has
grown at a 7.7-percent annual rate.
Now does this decline in monetary supply growth rates signal
that the Federal Reserve has already begun to tighten the monetary supply?
Mr. VOLCKER. I think that's too short a period to draw much conclusion from. Senator D'Amato was referring to weekly figures.
You have expanded it to a few weeks. That's still too short a period
on which to make any reliable judgment.
As I indicated, we have been what I would term as slightly less
accommodative in recent weeks, but I wouldn't expect to see any
quick reflection of that necessarily.
Senator DIXON. Of course, what concerns me there is the targets
you suggested to the committee last year or the beginning of this
year were 4 to 8 percent monetary growth in Mi .
M r . VOLCKER. Y e s .




32

Senator DIXON. YOU had it up to 13.3 percent for 4 months. You
dropped it now to 7.7. What concerns me and I'm sure others is if
you tried to conform to your original targets you would have to
drastically reduce further those monetary growth targets and I'm
afraid it could have a very adverse short-term impact on interest
rates.
Mr. VOLCKER. Obviously, I will specifically discuss that next
week, but I don't want to leave you hanging for a week.
Senator DIXON. Thank you.
Mr. VOLCKER. I don't think you should necessarily conclude that.
Given all that has happened so far, given that we have said quite
clearly that we have been a bit cautious about assessing what the
appropriate trend in Mi may be and have not given that full
weight—as our actions have indicated and in our policy deliberations—that restoring that precise pattern of Mi for the year as a
whole isn't necessarily a high priority.
Senator DIXON. Very good.
The CHAIRMAN. Senator Hecht.
Senator HECHT. Mr. Volcker, the top questions I had in my mind
have already been answered. As a practical man, I do not wish to
dwell in the past. I'm interested in the present and far more interested in the future. I plan to withhold my questions until you
present your future plans next week. I hope at that time you would
address what plans you have to prevent high interest rates again
or perhaps you could address that question today.
Mr. VOLCKER. I will address at least one part of it. Maybe I unfairly read into your question the implication that the Federal Reserve alone has the tools to prevent high interest rates when other
factors are moving strongly in the other direction. I do not believe
that is true, so I'm not going to be able to tell you how the Federal
Reserve all by itself can prevent the risk of higher interest rates.
I have indicated here and I think over a period of time that if we
can maintain progress against inflation the interest rate trend is
going to be in the other direction. It's going to be downward over
time. We will do our best to create the conditions that make that
possible, in the sense of what we would expect to happen if policies
are successful, but I don't think you should be led to the thought
that we have full control over that.
Senator HECHT. Well, continuing on, I have always heard that
the mark of a great economist being great is to always reach for
something unattainable. Now, you know, and I know, and everyone
in this room knows that there is no way we can cut our budget
$200 billion this year.
What can we do to stop interest rates from going higher and get
some revenues back in? I have also been told that a 1-percent drop
in unemployment will take $30 billion off the deficit. If interest
rates rise, we are certainly not going to get these revenues in and
we are going to have higher unemployment. Can you address that?
Mr. VOLCKER. What you can do in my terms is quite simple. It
may be hard for you to do. You can come back here after you
recess and do some spending cutting and revenue increasing looking toward 1984 and 1985 and get that enacted and provide a great
deal of reassurance to the markets, both about the direct impact of




33

Treasury financing on the financial markets and on the outlook for
inflation.
Now you don't have to do it by $200 billion. They would be satisfied under those terms with something considerably less, and the
rest of the deficit would go away from economic growth, as you suggested.
Senator HECHT. A S you just mentioned, you advocate higher
taxes?
Mr. VOLCKER. I would prefer, if you can do it, that you do it on
the spending side. I think that would be desirable in economic
terms.
You may have other priorities, national and personal security. I
can't tell you the answer to that. I will tell you, in economic terms,
I'd love to see you do it on the spending side.
To the extent you can't do it on the spending side, I can't rule
out revenue increases because I think the deficit is a matter of
great priority.
Senator HECHT. What is the threshold for a deficit decrease that
would prompt a drop in rates?
Mr. VOLCKER. I don't know whether I want to give you a specific
number. Try $50 billion as a first step. [Laughter.]
Senator HECHT. Like I said before, an economist searches for the
unattainable.
Mr. VOLCKER. I understand your skepticism or concern, but all I
would say is, don't, as a Senator, expect the unattainable from the
Federal Reserve.
Senator HECHT. HOW can we work together?
Mr. VOLCKER. I think that's a relevant question.
Senator HECHT. What's the answer?
Mr. VOLCKER. It sounds very self-serving for me to say I think we
are doing our best and I'd like to see some action on the budgetary
side.
Senator HECHT. Well, I'll wait to hear from you more next week.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Sasser.
Senator SASSER. Mr. Chairman, I'm going to defer to my colleague, Senator Lautenberg, who preceded me here.
Senator LAUTENBERG. That's the precedence of this day only.
The CHAIRMAN. Did I goof?
Senator LAUTENBERG. A little bit, but not seriously. I wanted to
talk to you about that.
The CHAIRMAN. Well, I appreciate Senator Sasser's honesty.
Senator LAUTENBERG. Thank you, I, too.
CONTINUED RECOVERY AND HIGH DEFICITS

In response to my opening comments, my distinguished chairman
reminded me that spending was the province essentially of the
Congress and though one editorial the policy doesn't make, I did
read the statement that appeared a couple days ago that obviously
the budget is out of balance not because the Congress ignored the
President's wishes but because of voting for both defense increases
and tax cuts that followed them. Now I'll go on, if I may, to some
questions I have for Chairman Volcker.




34

It seems to me one of the ironies of this hearing—here I start
with a quote, Mr. Volcker. Mr. Volcker, it seems to me that one of
the ironies of this hearing and the speed as well as the reception
that your nomination has received in the press and in the financial
community, is that the policies of the administration give such a
sense of unease to people that your nomination in itself is perceived as being a strong bulwark and, therefore, a responsible activity of the committee would be to confirm you rapidly and to try
to bring about a degree of confidence.
If you had a sense of de ja vue, Mr. Chairman, you should. What
I just read is a quote from a former member of this committee at
your nomination hearing 4 years ago.
Not a whole lot has changed except that the management of the
Federal fiscal policy is now in much worse shape. In 1979, the deficit was $27.7 billion. This year, it will be above $200 billion, and
under the President's budget, there will be another $500 billion in
Federal red ink over the next 3 years.
Now you commented before about the relationship of the deficit
to GNP and GNP growth. I'd like to ask you what your assessment
is of the impact of deficits of this magnitude on the financial markets and the prospects for a sustainable recovery. Really, what
choices will you have for action, assuming the recovery continues
at this current rate and there is no serious effort to bring those
outyear deficits under control?
Mr. VOLCKER. I think the most benign or optimistic view you
could take of it, Senator, is that you would be squeezing the interest rate sensitive parts of the economy—housing, business investment, perhaps the automobile industry. The economy as a whole
might continue to expand simply because the Government is putting out so much purchasing power, but it wouldn't be a very satisfactory expansion. Interest rates would be higher than otherwise,
certainly, without predicting where they might be. It would diminish the chances of this longer term expectation that I described to
Senator D'Amato. That would be the good news.
The bad news would be that in a volatile, uncertain expectational situation, you get still sharper reactions in financial markets
that would clearly threaten and abort the recovery itself. You
wouldn't have a balanced recovery; you would just threaten that
the recovery would be prematurely curtailed.
You could take another course, I suppose, with the Federal Reserve somehow trying to accommodate that at the expense of inflation rising. I don't think that policy would work because that
would only add to the threat of the second kind of scenario—concerned and frightened financial markets. You might be successful
for a matter of months, but you couldn't be successful for very long
in maintaining any kind of an equilibrium in the financial markets
under those conditions.
Senator LAUTENBERG. YOU said you could do something about
squeezing the senstive parts. How do you squeeze them?
Mr. VOLCKER. They would be squeezed by interest rates being
higher than would otherwise be necessary.
Senator LAUTENBERG. But in order to get those interest rates
higher, that would have to be an overt action on the part of the
Fed?




35

Mr. VOLCKER. I don't know what you think of as overt action.
Senator LAUTENBERG. Curtailing the money supply, raising the
discount rates.
Mr. VOLCKER. Either way, you're going to have a problem. If we
maintained a fixed course—did not curtail the money supply but
just maintained the money supply at a level that it would otherwise be—and you squeeze the Government financing into it, you're
going to get a higher level of interest rates.
If you took the opposite course and said, we don't care what the
increase in the money supply and the increase in liquidity will be
and we'll accommodate it all, then you're certainly going to get inflation and get higher interest rates anyway, and get it still higher.
Senator LAUTENBERG. Let me ask you this. Have you discussed
this problem with the President or his advisers, and, if so, did the
subject come up in the context of your renomination?
Mr. VOLCKER. I don't think it's appropriate to discuss a particular conversation with the President, but my views on this matter
are no secret to the administration.
Senator LAUTENBERG. All right. Let me extend the question.
Have you agreed to play the bad guy and take the heat off for offsetting inflationary pressures that might come about as a result of
our fiscal policy?
Mr. VOLCKER. Not explicitly.
Senator LAUTENBERG. HOW about implicitly?
Mr. VOLCKER. Implicitly, it depends upon what events prove to
be. I can't be quite so pessimistic as Senator Proxmire.
Senator LAUTENBERG. There's been a reporting of a split in the
administration concerning economic policy. The law firm of Regan,
Feldstein and Stockman is apparently concerned about the combination of huge deficits and accelerating recovery, of monetary
growth above the targets. This group would favor, as I read it, applying the brakes now.
The White House, though, discounts these concerns and sees the
current pace of economic expansion as the solution to our
problems.
How do you feel about the views of each of these factions, if I can
call them that?
Mr. VOLCKER. I don't think I can comment on that. I may comment more generally. The comment that applies perhaps not particularly to the administration but to Congress and to a great
many people looking at this problem is that there is a general concern about the deficits. It may be held more strongly by some than
others, but it is quite general and pervasive.
The problem that you and others in politically responsible places
have is balancing that concern against other priorities you have,
whatever those priorities may be—whether for defense spending,
for not raising taxes, for particular spending programs.
From my perspective, the difficulty is that the deficit problem deserves very high priority—in an economic policy sense, first priority—but sometimes gets submerged among these other problems.
It's not that anybody welcomes the deficit and doesn't see it as a
problem.
Senator LAUTENBERG. In response to an earlier question about
what you might do about deficits, you said that you preferred




36

spending curtailment first, but I think I did hear you say that revenue enhancement might follow if you've cut spending to the bone.
How would you enhance revenues, Mr. Volcker?
Mr. VOLCKER. You're asking me a question that's really beyond
the area that I like to get into. I have enough problems of my own
without suggesting precisely how you might go about it.
Senator LAUTENBERG. A S a fellow resident of or former resident
of the same town, we can talk privately here, and why don't you
just give me your inside view?
Mr. VOLCKER. Let me give you a nice, general response. If you
have to raise revenues to deal with the deficit problem—in light of
what you can do on expenditures and recognizing that that side is
preferable—I'd try to do the revenue side in a way that is most
consistent with preserving and enhancing incentives for savings
and the investment side of the economy. Those are very general
guidelines, but I'd try to arrange it to the maximum extent possible that way.
Senator LAUTENBERG. Thank you.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator Lautenberg.
Senator Hawkins.
HIGHER INTEREST RATES LOWERED INFLATION

Senator HAWKINS. I've listened to all the questions and answers
here today and it seems to me that as the deficit forecasts widened
late last year, interest rates fell. And now, as predictions on future
deficits are falling, rates are going up. Is that correct?
Mr. VOLCKER. That's not my reading of the record. If you just
look at the broad sweep of history with deficits going up and down,
you will see an immediate correlation between larger deficits and
lower interest rates. Why is that? It is because they are both related to the business cycle.
If you just look at average experience, you will see a big deficit
in the middle of recession; interest rates are low and private credit
demands are low in recession, so you will get a big deficit and low
interest rates.
What you've got to do is abstract from the state of the economy
in making the connection. Those analyses would suggest that once
one adjusts for the cyclical state of business, the larger deficits are
going to give you higher interest rates. In a colloquy with Senator
D'Amato earlier, I indicated that the reality and prospect of what
have been termed "structural deficits" is one factor which is holding up interest rates abnormally today, relative both to the state of
business conditions and to the recent rate of inflation.
Senator HAWKINS. Mr. Volcker, when you became Chairman in
1979, the prime rate was 12 percent. During your term, it was
above this level 70 percent of the time. Do you feel this had much
to do with the fact that the GNP has grown only 2 percent after
adjustment for inflation over the past 4 years?
Mr. VOLCKER. A S we discussed earlier, the economy obviously is
going through a very difficult period. I think that that was, to some
extent, a price we paid for the inflationary process and getting the
inflationary process under control.




37

I think the economy would have had even more difficulty had
that inflationary trend continued and accelerated.
Senator HAWKINS. But we have paid a price, in terms of slow
growth and high unemployment, for slowing inflation.
Mr. VOLCKER. The job now is to avoid letting inflation rise again
and paying the price over again. We've paid the price once. Let's
consolidate these gains. I think that's the only basis upon which we
can expect the economy to have sustained growth. By the time I
finish here, I hope the prime rate is substantially lower, reflecting
a more stable economy, a more satisfactory economic performance,
and a longer period of disinflation.
Senator HAWKINS. IS it wise to urge slow growth now if we want
to keep the national debt down?
Mr. VOLCKER. Wise to urge slow growth? I urge a sustainable
growth, and that involves more than the the rate of speed in a
quarter or two. We do need to keep the deficit down, yes, if what
we want is sustainable growth; the speed in a quarter or two is not
critical to that much larger goal.
Senator HAWKINS. I'd like to ask you some questions on the pricing of services supplied by the Fed to member banks. The GAO recommended a 1982 report that the Federal Reserve should move
faster to achieve the Monetary Control Act's objective of pricing
services to banks without subsidies. Previously, the justification for
subsidies was that it compensated member banks for their failure
to receive interest on reserves.
Now that you're recommending that interest be paid on reserves
and this will be very costly for the American taxpayer, why not immediately eliminate the subsidy on the delivery of the services to
the banks?
Mr. VOLCKER. We are now in a position where I can say that for
priced services we have reached the overall objective of the Monetary Control Act. It's possible that we will have revenues in excess
not only of cost but of the so-called private sector adjustment
factor. At least we are running there at the moment, which allows
for the equivalent of a profit that a private institution would make.
There are some very limited services that we are deliberately
subsidizing within the framework of the Monetary Control Act.
Those subsidies are being phased out. The principal example is
automated clearinghouses where we are phasing it out on a schedule, but there was a decision to subsidize it for a period of time in
the hopes that that service, which is basically in the interest of the
banking system and the efficiency of the financial system, would
grow rapidly. The intention now is to phase that subsidy out.
Some particular services are still running below the objective of
the Monetary Control Act, but that's in the process of being
changed now. There's been some pricing introduced just in the past
few weeks that should bring balance in those services.
Overall, we expect this year we will have fully met those objectives.
Senator HAWKINS. Including the GAO statement that the Federal Reserve float was averaging about $4 billion daily at the time of
the Monetary Control Act?
Mr. VOLCKER. It's much lower now. I think it's in the area of $ 1 . 8
billion; within a matter of months, what float remains will be




38

priced. We are meeting that objective during the course of this
year.
Senator HAWKINS. Thank you.
The CHAIRMAN. Senator Sasser.
Senator SASSER. Thank you, Mr. Chairman.
PROGRAM OF TIGHT MONETARY TARGETS

Chairman Volcker, you testified earlier this morning in response
to Senator Heinz that you didn't expect the two bouts of 20 percent
interest rates that occurred in 1980 and 1981. Now, in retrospect,
do you regard these 20 percent interest rates as justified? Justified
in terms of fighting inflation?
Mr. VOLCKER. I suppose I do, considering everything that took
place at those times. I'm not sure they were avoidable and I suppose, in that broad sense, they were justified.
Was it ideal that we had to have those kind of interest rates? Obviously not. I wish we didn't have to have them. I wish other policies had provided enough support so it wasn't necessary.
Senator SASSER. Well, following up on that, do you regard the recessions of 1980 and 1981 and 1982, together with the 10-percentplus unemployment that we have experienced—is that justified in
terms of combating inflation?
Mr. VOLCKER. A S I said, I think we paid a heavy price for dealing
with the inflationary process. Looked at over a period of years, all I
can say is that if we let that process go on further, we would have
had still more difficulty.
Senator SASSER. DO you know of any specific alternative policies
in 1981 that could have averted the recession of 1981-82?
Mr. VOLCKER. When you ask, averted any difficulty, that's a
tough question. I can certainly think of policies that would have
made for a smoother adjustment; I'm not just talking about Federal Reserve policy, obviously.
Senator SASSER. I'm sure you're not, because I agree with you,
Mr. Chairman, that the Federal Reserve should not take full responsibility for the recession of 1980 and certainly not for the recession of 1981-82; but I do think that the Federal Reserve policies
largely contributed to it.
Now, if there were other policies that we could have followed
which would have eased this problem of the recession we had in
1981 and 1982, why weren't these policies advocated to the Congress by the Federal Reserve at that time?
As I recall, sir, in your appearances before other committees in
this Congress on which I serve, you provided consistent support for
the economic program of the Reagan administration in the spring
of 1981 which, acting together with the Federal Reserve Board, I
think created the recession of 1981 and 1982. Certainly those economic policies are largely responsible for the structural deficit that
we now have.
Was this a mistake in advocating these policies at that time?
Mr. VOLCKER. We would have to go back and look at the record,
Senator. I would be glad to provide you with testimony I made
during that period of time; I think you will find during that period




39

I recommended consistently quite a series of actions that were
never taken.
Senator SASSER. I don't recall, just searching my memory this
morning, Mr. Chairman. This is the first time I've heard you raise
the issue that perhaps we might be well advised to raise revenues.
M r . VOLCKER. O h , n o .
Senator SASSER. I recall

well the testimony that we should cut
spending, but this is the first time I recall you advocating raising
revenues as a way of combating the structural deficit. But I am incorrect in that?
Mr. VOLCKER. Yes; you are incorrect in that.
Senator SASSER. Chairman Volcker, you have never fully endorsed the set of economic doctrines and all this monetarism that's
become voguish in recent years in Great Britain and to some
extent in this country. Nevertheless, under your chairmanship, the
Federal Reserve has from 1979 through the middle of 1982 followed
a rigorous program of tight monetary targets.
Now to the relief of many, including myself, in the summer of
1982, the Federal Reserve decided to relax its monetary targets and
since then money growth, by all measures, has been rapid.
In setting money targets for 1983, the Federal Reserve has again
showed flexibility and you stated that in February 1983 you would
pay less attention to Mi than you had previously. But now there
are rumors that you might return to tightening monetary policy in
response to fluctuating money growth, and who knows what this
will mean for the economy?
Would you give this committee an unqualified assurance that
you will base monetary policy decisions on the performance of the
economy rather than on the mechanical monetary supply targets?
Mr. VOLCKER. I don't know quite what you mean by that dichotomy. The growth in money is one part of the total economic performance.
Let me, if I may, correct the record as you read it. I do not read
monetary expansion in all its dimensions as you indicated since
last summer as being more rapid than before. That is true of Mi. I
do not believe it's true of M2 and M3 unless you include a period
for M2 when the money market deposit account was being introduced; there was an explosion in money market deposit accounts
which affected and distorted greatly the M2 figure during that
period of time. Otherwise, both M2 and M3, bank credit, total
credit, have been following a growth pattern very much similar to
the pattern they had been following earlier; and, indeed, today
they are roughly consistent with the targets that we established at
the beginning of the year.
I don't want to suggest that policies since the middle of last year
have ignored all measures of monetary growth or all those measures of monetary growth are somehow skyrocketing. They are not.
I have indicated repeatedly that in looking at these monetary numbers we have to use a degree of judgment, particularly in a period
when the institutional setting is changing rapidly and when the
economic setting is changing rapidly, so that past relationships between those aggregates and the economy may be changing; that requires judgment. In making that judgment, we have to look at
what's going on in the economy generally and we have to look at




40

what price trends are. We have to look at leading indicators of
either price trends or the economy. We look at the exchange
market. We look at all those factors that I take it from your question you think are relevant; I agree they are relevant, and we look
at them.
SLOW ECONOMIC RECOVERY CAUSED BY HIGH DEFICIT RATE

Senator SASSER. Mr. Chairman, my fear and I think the fear of
perhaps others in the country—and judging from what I read in
the press, perhaps even a fear of some in the White House—is that
we may set these arbitrary monetary targets and as we start exceeding those targets in the growth of Mi we start pulling back;
and interest rates, as a result, go up and we snuff out this recovery
of the economy.
A distinguished economist the other day stated that this recovery
is like a three-stage rocket: that the first stage is that of inventory
replacement and we are well into that; and the second stage is
return of consumer confidence and consumer spending, and certainly we are well into that; but the third and most critical stage
that really puts us into orbit is when business starts expanding its
investments, and we are seeing predicted for 1983 lower business
investment than we saw in 1982 for capital expansion which was
lower than we saw in 1981.
So that's really my concern, Mr. Chairman, that we are going to
move back to arbitrary money growth targets and that's going to
snuff out this recovery before that third stage can really reignite
and move us into a period of substantial, continued and sustained
recovery.
So that's why I seek assurances from you that you will base your
judgments more on the performance of the economy than on what
I consider and others consider to be arbitrary monetary targets.
Mr. VOLCKER. Let me say, first of all, that there are some indications already, rather sooner than most people expected, that business investment may be expanding, particularly in the equipment
area, although there are certainly weak spots; certainly commercial construction remains a weak spot in the economy and I suspect
will for some time.
But to deal with your broader question, obviously we do not
think that the monetary targets are arbitrary and capricious. We
recognize considerable uncertainty in evaluating those targets. A
certain amount of flexibility is necessary, and I agree that we have
to look at various indicators of economic performance in arriving
at a final judgment on monetary policy.
That does not mean that it is no longer useful to look at the rate
of monetary growth and reach judgments on that matter in the
light of all the surrounding circumstances.
I would add only one other comment, which is I suppose repetitious of what I said earlier in terms of your three-staged rocket. I
think that there is some truth in the normal analysis of a cyclical
recovery, and it is precisely in that context that I think we have to
look beyond what's happening, let's say, this quarter in the economy or in financial markets in reaching our policy judgment as to
what's going to produce the best environment 6 months from now,




41

9 months from now, 1 year from now. If things get out of control in
a monetary or inflationary potential sense now, it's not going to
help 1984.
Senator SASSER. My time has expired. Thank you, Mr. Chairman.
The CHAIRMAN. Senator Dodd.
Senator DODD. Thank you, Mr. Chairman.
Chairman Volcker, you have been very patient this morning. Let
me focus on a line of questioning that was being developed by Senator Riegle because I, for one, will support your renomination primarily because I think you have been consistent during your term.
Repeatedly, in your appearances before the House and the Senate
you have maintained a view that your job was to set monetary
policy based on fiscal policy, that it was the executive branch's job
and the Congress job to set that fiscal policy, and our monetary
policy would be reflective of that fiscal policy.
I realize it's been a historical tradition of the Fed to not become
involved in the specific legislative proposals, but consistently over
the last 2% years at any rate, you have maintained and you have
again this morning maintained that the No. 1 problem we face is
deficits; that, in fact, the high deficit rate is what is causing a slowdown in the economic recovery.
In the February 18, 1981 program for economic recovery, the
President predicted and forecasted the following level of deficits: in
1982, he said we would have a deficit of $45 billion; in 1983, $22.9
billion; and in 1984 we would show a half billion dollar in surplus;
in 1985, a $6.9 billion surplus; and by 1986, almost a $30 billion surplus in our deficit picture.
Now, obviously, you and I didn't know what David Stockman
knew when he gave his interview to the Atlantic Monthly; that
those figures were basically wrong and nobody knew what they
were talking about at the time.
I wonder if you might tell us, based on the Fed analysis, what
the deficit picture will look like over the next 3 years?
Mr. VOLCKER. Somebody sitting down and making those estimates obviously has to make some judgments about what Congress
is going to do or the character of the budget resolutions, and you
get involved in some noneconomic judgments when you make that
kind of an estimate. But I think our analysis, allowing not only for
the uncertainties in any forecast but the uncertainties in the political judgment about how much in fact is going to be done by the
Congress, does suggest that those deficits will remain in the $200
billion area for the next couple of years.
FED SHOULD NOT GET INTO BUDGET DECISIONS

Senator DODD. NOW, if that's the case, and we know roughly—
and obviously there have been some minor adjustments, but the
President's proposed increase in defense spending was roughly $250
billion over 5 years and the tax cut would be roughly $750 billion
over 5 years—$1 trillion.
Now you're repeatedly rather outspoken in your testimony about
budget cuts. You talked this morning again about the structural
deficits, that normal economic growth would pick up some of those
deficits and a sluggish economy obviously would cause some of it.




42

My concern has been why you haven't been more outspoken, if in
fact the deficits are the major problem, when we were talking
about the massive increases in defense spending and the KempRoth tax cut—why you did not tell the Congress in more outspoken
terms that those were going to contribute to the failure of sustained recovery.
Mr. VOLCKER. I think you can find a lot of evidence in the record
that I spoke about the deficit. You may not find in the record quite
the same explicitness about any particular measure to take, just as
today I'm a bit reluctant to comment on a particular measure.
I'm interested in the bottom line and I don't consider it the province of the Federal Reserve to suggest to the Congress whether defense spending is good or bad or whether a particular tax program
is good or bad outside of some general limits.
Senator DODD. Mr. Chairman, it contributes to the No. 1 problem
that you have identified. Let's say in retrospect, Kemp-Roth is a
fait accompli. It's law now. It's been adopted and signed. Do you
think Kemp-Roth is wrong?
Mr. VOLCKER. I expressed reservations at the time about the size
of that tax cut and, as you remember, going through the congressional process, it suddenly got bigger than the administration had
initially proposed.
Senator DODD. SO it would be your conclusion today and you're
telling this committee that in fact this was a mistake?
Mr. VOLCKER. Given everything else that has happened. But the
problem I have is, you could have, theoretically, had that tax cut
and, if expenditures had been cut by another $50 or $100 billion,
you would be all right.
Senator DODD. Then it's in combination with the $ 2 5 0 billion increase in defense spending.
Mr. VOLCKER. It's no particular measure that does it, because one
measure can always be offset by something else; it's the net total,
and I don't really think I should be in the position of saying which
particular measure deserves the priority.
Senator DODD. This wasn't just a small measure.
Mr. VOLCKER. NO, and we had a lot of discussion about it, and I
think I did express some reservations—maybe not as clearly or as
forcefully as you might have liked or in some sense I might have
liked, in retrospect. The problem still remains now and in the
future. I don't think it's basically my job to suggest to you what the
national priorities that are inherent in the budgetary process
should be.
Senator DODD. I know that's been the tradition of the chairmen
of the Federal Reserve Board and I appreciate that, but I think you
and I have come to appreciate the fact that when Paul Volcker
speaks, people listen, that you and the Federal Reserve enjoy a
status that goes beyond what people normally assume motivates or
drives the President of the United States or the Congress, either as
a whole or individually; and that when we are talking about the
No. 1 problem in terms of a sustained economic recovery, then the
Chairman of the Federal Reserve is rather quiet about two major
provisions that are going to create this very problem I'm perplexed
why you can't speak out on those matters.




43

Mr. VOLCKER. It's drawing a line—and it's a very delicate line—
between speaking and intruding, if it had any influence anyway, on
what I think are political decisions—in the wider sense of the word
political—that you people in Congress are called upon to make. I
can tell you what I think is necessary and desirable at the bottom
line, from the standpoint of economic policy, but I can't tell you
what good defense policy is or what good social policy is.
Senator DODD. I wasn't expecting you to come out and take a position on particular defense items. We are talking about the total.
Mr. VOLCKER. Even the total defense budget. It's not my business. I know it contributes to the deficit. From the economic standpoint of the deficit, reducing the defense budget is a good thing.
Whether it's a good thing for the country, balancing all the priorities, is a judgment you have to make.
Senator DODD. I want to jump to the subject of the I M F now. We
still have pending before the Congress—the Senate has passed it
but the House has not—the loans to the IMF.
Is it your opinion that that will be satisfactory to satisfy and
meet the commitments of the Third World countries?
Mr. VOLCKER. The quota increase and the increase in the GAB, I
think, will be adequate for any foreseeable time period, for several
years. But you have given me the opportunity to say that the absence of that increase would be a devastating blow to the capacity
of the IMF to do its job over the next few years.
I think that legislation is an absolutely crucial element in managing the international financial strains which are evident. Some
progress has been made and the situation has been managed thus
far, but the potential needs remain very large, and that legislation
is needed, both in terms of the quantities involved and the psychological message that would send.
Senator DODD. Well, I agree with you on that. I think you're correct.
My concern is, as you know, many Members of Congress are
being questioned by their constituencies as to whether or not even
this amount is appropriate. My concern is whether or not this
amount, assuming Congress will adopt it, is going to be adequate or
are we going to find ourselves back here again within a year or so?
Mr. VOLCKER. Not within a year or so.
Senator DODD. YOU don't see that?
M r . VOLCKER. NO.

Senator DODD. Thank you. Mr. Chairman,
Thank you.
The CHAIRMAN. Senator Sarbanes.

I

will stop there.

CHAIRMAN'S 4-YEAR TERM SHOULD START AFTER ELECTION

Senator SARBANES. Thank you, Mr. Chairman.
Chairman Volcker, I want to pursue further a subject on which
Senator Proxmire touched. I take it that it is your position, and the
position of the Board of Governors of the Federal Reserve, that the
term of the Chairman should be a 4-year term, to begin at the end
of the year in which a President takes office.
There have been various proposals over the years that it should
begin anywhere from 6 months to a year after a President comes




44

into office. That would, to some extent, take it out of the immediate political context would still enable the President to have a
Chairman of the Federal Reserve with whom he felt comfortable
and vice versa, and I take it you would support legislation of that
sort.
Mr. VOLCKER. Yes. To be precise, I think the natural time to do
it—and it happens to be convenient technically—would be January
31, when the term of a member of the Board of Governors would
expire anyway, so there would be an automatic opening on the
Board if there was a desire for a new appointment.
Senator SARBANES. The current system, has no rationale to it.
The Chairman gets 4 years from whenever he's named, which
means it could fall at any point in the Presidential cycle. There is
no definitiveness to it and therefore it's a matter of constant speculation one way or another. We have the situation now where your
reappointment is coming up more than 2V2 years into the 4-year
term of a President.
Would you agree that there is no rationale to it, really?
Mr. VOLCKER. It's got no particular rationale except maybe the
virtue of being accidental, which takes it out of any connection
with the political process, narrowly construed. I think the major
danger of the present system, as I see it, is that suppose by accident an appointment came up in the midst of an election process or
in its immediate aftermath; that would be bad, and the only thing
that prevents it now is the accident of history.
We did have a long period—accidentally, but it happened de
facto to be the case—when the appointment was a year after the
President took office. It just happened to be the way it fell for a
good many years. Then it got thrown off that cycle when Chairman
Miller resigned before his term was up.
Senator SARBANES. And you think that cycle was, all things considered, probably a more desirable way to approach it?
Mr. VOLCKER. All things considered, it's probably more desirable.
It's got one difficulty which the Board has noted from time to time;
that if you have it on a fixed cycle instead of 4 years from whenever the appointee takes office, you do run into the chance in case
of a resignation or death, that you would have a very short term.
Senator SARBANES. You have made the recommendation that
that be tacked on and you have a term that could run as long as 5
years.
Mr. VOLCKER. Exactly.
Senator SARBANES. NOW I take it, in reading your disclosure
statement to the committee, that in fact, even if the law were not
to be changed, we might be put back on that cycle that existed
before because you have made it very clear, at least as I read it,
that you don't intend to serve out fully this term. That is my understanding.
Mr. VOLCKER. That may state it a little too strongly. What I
don't want to do is suggest to the committee that I feel obligated to
stay the full term. I don't want to suggest there's any commitment
one way or the other, except that I did suggest I didn't necessarily
want to be committed to staying the full term.
Senator SARBANES. The question then, Mr. Chairman, is this: at
the time of your first nomination, you were asked, "Do you expect




45

to serve the full term for which you have been appointed?" Your
answer was "Yes." This time the question is, "Do you expect to
serve the full term for which you have been appointed?" and the
answer is, "I do not feel committed to do so."
Mr. VOLCKER. Correct.
Senator SARBANES. NOW I take it that that difference in response
has some significance.
Mr. VOLCKER. It has some significance. I remember very well the
question. I didn't remember answering the question in writing,
before, but I remember it arising in the oral testimony, and if I
make a commitment to the committee that I'm going to stay the
full term, I mean to honor that commitment. I didn't want to be
quite so firm about it this time.
Senator SARBANES. I read these answers in conjunction with your
previous statement that you regard it as desirable for the Chairman of the Federal Reserve to serve 4-year term beginning roughly
a year or so after a new President is installed. The date you used
was January 31.
Mr. VOLCKER. I'll put those two positions together in this way, if
I may. When I say I wouldn't want you to think I feel committed to
serve the full term, I recognize very clearly the undesirability of
not serving through the election.
Senator SARBANES. That's another point you made. I was just
going to go into that.
Mr. VOLCKER. I recognize very clearly the undesirability of leaving in a short period of time after the election.
Senator SARBANES. And you also recognize the desirability, as a
general proposition, that a newly elected President, within a year,
say,of the time he takes office, should be able to name a Chairman
of the Federal Reserve?
Mr. VOLCKER. I at least recognize that if I did leave sometime in
that time period or thereafter, it's not inconsistent with my view as
to what is appropriate over a period of time.
Senator SARBANES. A S I understand it, as a general proposition,
you don't think the Federal Reserve Chairman should be picked in
an election period?
Mr. VOLCKER. That is correct.
Senator SARBANES. And you don't think he should be picked immediately after a new President comes in because the President
needs to settle into the job?
Mr. VOLCKER. That is correct.
Senator SARBANES. But you do think that a newly elected President, roughly a year after he comes in, ought to be able to name a
Chairman of the Federal Reserve to a 4-year term, roughly coordinated with his term?
Mr. VOLCKER. On balance, I think that that's desirable and have
said so before. I would not have taken that attitude 4 years ago because it would have given me a very short term by the accident of
history, and I think I have been around long enough so that particular consideration is irrelevant.

23-790 0—83




4

46

FED POLICIES HAVE HAD ADMINISTRATION SUPPORT

Senator SARBANES. I take it that throughout your tenure as you
have dealt with this administration, you have felt that the administration supports them and approves of the policies you're pursuing
at the Federal Reserve. Is that correct?
Mr. VOLCKER. I can let them speak for themselves.
Senator SARBANES. No, I didn't ask what they thought. I asked
what you felt about what they thought. In other words, your view
was that you were following policies which the administration supported; is that correct?
Mr. VOLCKER. There have obviously been particular times, if I
read the press correctly and assume the reporting was accurate—
and sometimes there were direct quotations—when they weren't
particularly happy. I think there were quite a few occasions of that
sort, liberally reported.
But having said that—I think we have had some colloquy about
this before—in terms of the broad thrust of policy, I think they
must have been reasonably satisfied.
Senator SARBANES. Mr. Chairman, you're a good witness because
we have had this colloquy before.
Mr. VOLCKER. And you got a consistent answer.
Senator SARBANES. In July 1982, I asked you, "Would you say the
policy the Federal Reserve is pursuing in the monetary area is a
policy which the administration wishes it to pursue, that the Federal Reserve and the administration are consonant on monetary
policy?" And you responded, "I am, as I said before, not aware of
any real problems in that respect. I think they have generally been
supportive of what we are trying to do and the general way we go
about it, but I guess you would better address the question to
them." And I said, "No, I'm interested in knowing your perspective
of their view of your role. I take it from your answer that your perspective is that they in fact support the policy which you are pursuing; is that correct?" And you responded, "In general terms,
that's certainly my impression, yes."
And I take it you would continue to respond that way?
Mr. VOLCKER. In terms of the broad thrust. I suppose my renomination would be broadly consistent with that view at least.
Senator SARBANES. Well, I would say so. And I was just going to
say, wouldn't you be reasonable in assuming that the policies you
were pursuing are satisfactory or agreeable to the administration,
first on the basis of your reappointment and, second, because the
President, when he did so, said, "I have today asked Chairman
Paul Volcker to accept reappointment for another term and he's
agreed to do so," and—this is the President speaking—"and I
couldn't be more pleased."
So I take it you feel that you have followed policies consistent
with and supportive of the approach which the administration
wishes you to take?
Mr. VOLCKER. I find your wording a little bit prejudicial. I have
to let the record speak for itself. I think the President also indicated, quite correctly from my standpoint, that we have a certain
independence, and I presume he doesn't want to associate himself
with every policy decision we make. If you interpret as a policy de-




47

cision a decision to change the discount rate, to change the monetary target, to provide funds or withdraw funds through openmarket operations, I don't think they want to be associated with all
those decisions. I think they have clearly disassociated themselves
from some of those decisions.
But if I can make a distinction between policy at that level and
policy in its broadest sense—a concern about inflation, a concern
about maintaining control over the money supply and liquidity—
then, yes, I think that has been in accordance, as I understand it,
with their feelings of an appropriate monetary policy.
Senator SARBANES. Well, you don't have discussions at the Federal Reserve, do you, that you're pursuing a policy counter to or contrary to what the administration wishes you to follow? Have you
done that?
Mr. VOLCKER. We don't have discussions at the Federal Reserve
Senator SARBANES. DO you feel that you have followed policies
contrary to what the administration wishes you to pursue?
Mr. VOLCKER. Again, I'd have to make the distinction I just
made. I think we are conscious at times that a particular decision
we make may not be quite
Senator SARBANES. If you haven't followed such policies, why
were you reappointed?
Mr. VOLCKER. I presume in the broadest sense there is a consistency, just looking at monetary policy itself. I take it there is a
broad sense of sympathy as to the basic objectives, the basic approach. I just don't think I can pin down that that means agreement on every particular policy decision. We have had many differences with the administration on particulars of monetary policy
and on other matters. We do not always take the same positions on
legislative matters, for instance.
Senator SARBANES. DO you feel you have gone against the administration with respect to monetary policy, or that you have generally followed a course satisfactory to them, which they support?
Mr. VOLCKER. All I can say is that we are following a course on
monetary policy, in its most basic sense, that seeks to have sustainable economic growth and, inherent in that process, in my judgment, is maintaining control over inflation. At this level, I think
there is agreement.
Senator SARBANES. And you feel that the administration has
been supportive of what you have been doing?
Mr. VOLCKER. I think they are supportive of that concept, as I
understand it, yes.
Senator SARBANES. Thank you, Mr. Chairman.
The CHAIRMAN. Senator Proxmire.
SUSTAINED REDUCTION IN UNEMPLOYMENT IS FED'S GOAL

Senator PROXMIRE. Mr. Chairman, I just want to follow quickly—
I realize the hour is late and I will be as brief as I can on this, but
I'm still somewhat shaken with this notion which didn't occur to
me before, that you might not serve the 4-year term and therefore
you will have a narrower perspective, as every President has as he
nears his reelection. That's why I asked you whether you would




48

give this committee an unqualified pledge that your policies as
Chairman will be governed solely by the needs of the economy regardless of how these policies may affect the fortunes of either political party, especially in next year's presidential election. You
simply said yes.
That was one question you answered this morning that I think
was confined to a single three-letter word. I want to know how unequivocably, how absolutely, how final, how firm, how sure, how
total, how positive that three-letter answer is. Could you massage
that little yes, in with a few adjectives?
Mr. VOLCKER. I would have thought any massaging would have
suggested some qualification, which I didn't want to convey. It
seems to me all I can do is repeat yes without any qualification.
Senator PROXMIRE. SO you wouldn't differ with my interpretation
that your answer was unequivocably absolute, final, firm, sure,
total, and positive?
Mr. VOLCKER. Yes. I should say no, I would not differ.
Senator PROXMIRE. It is absolute, it is final, it is firm, it is sure,
it is total, it is positive?
M r . VOLCKER. Y e s .
Senator PROXMIRE.

Good.
Now, in all fairness, I think in part the answer to Senator Dodd's
questioning which I thought was very useful to us—and I know
some people have criticized you for not being sufficiently specific
due to the timing—you wrote me a letter in response to a request
from me in 1981. Here are two sentences from that letter. "It is
critical that tax cuts be conditioned on the maintenance of budgetary discipline—[quoting]—our national security and other needs
clearly place limits on the amount of tax reduction that would be
prudent at this time—[quoting]—at more satisfactory levels of economic activity could be counterproductive."
I think that's about as explicit as we could expect to get.
Now let me ask you a followup question on the question that
Senator Byrd wanted to be sure you were asked. Don't we need economic growth of at least 5 percent to make a significant dent in
unemployment so that the hardest hit States and communities
share in the recovery?
Mr. VOLCKER. You've got to put some time dimension on that.
You will make a significant dent on unemployment with lesser
growth than that—depending on what you mean by significant—
but 5 percent is not an exceptional growth rate for the early stages
of recovery. I would think we would probably do better than that
this year.
Senator PROXMIRE. Well, in a conflict between staying within
your target range for the monetary aggregates and reducing unemployment, which way would you decide?
Mr. VOLCKER. I can't answer that question, given that amount of
information. Ultimately, obviously you want to reduce the rate of
unemployment. The question is how you get there and how you get
there most sustainably, and you probably put that question in a
very short-term context when I would prefer to look at it in a
longer term context.
In a longer term context, if you reached the judgment that sustainable reduction in unemployment required not keeping within




49

some monetary guideline, then that would suggest the monetary
guideline is wrong and you ought to change it. I put the question in
the context of sustained reduction in unemployment, and the monetary guidelines are designed to reach that.
I come back to this point because I think it's fundamental to my
thinking and you ought to be aware of it: I don't think you're going
to get that sustained reduction in unemployment except by paying
attention to inflationary problems at the same time. I think you've
got to go together on these things. Otherwise we will be thrust
back in the same position that we were in earlier in the late 1970's,
when you had an inflationary situation damaging to business development. I have no trouble in answering that question, and the
objective, in a larger sense, over a period of time, is to get unemployment down. You've got to combine that with financial stability.
MI GROWTH, GROWTH PROJECTIONS, AND CAPITAL RATIO

Senator PROXMIRE. NOW we are all concerned—you are and all of
us are—about rising interest rates. The markets have a fixation
with Mi and at times so does the White House which now wants
the Mi slowed without rising rates. At the same time, the administration is complacent about the enormous deficits. We have a slack
economy, 10 percent unemployment, and less than 70 percent industrial capacity.
No one knows what Mi growth really means any more because
the Super NOW accounts and the regular NOW accounts under the
old definition of Mi, the growth over the past 6 months has been
only 5 percent. As a matter of fact, currencies are up $8 billion,
demand is up $4 billion, seasonally adjusted. Why should anybody
pay attention to Mi growth if we can't interpret it accurately, and
yet the Fed has been unable to reflect attention away from it? Why
not put Mi aside and concentrate on monetary base?
Mr. VOLCKER. We have deemphasized Mi, but
Senator PROXMIRE. YOU have tried, but it always comes up.
Mr. VOLCKER. I don't think that's quite fair. It always comes up
in some sense. You say we don't know what Mi means. I wouldn't
want to define precisely our judgment on Mi for some of the reasons you suggest; but when the changes get large enough, that
raises a question. While we don't give Mi the same weight that we
gave it earlier, that might change if we had more confidence over a
period of time. That doesn't mean there isn't some area between
giving Mi full weight and ignoring it entirely, especially when the
changes are very large. We have not been in a position of ignoring
Mi entirely. It is one factor based upon some analysis of what's
going on in the economy, with all these other factors that Senator
Sasser and others are worried about. We look at all those and
evaluate Mi in that context, but we just don't put blinders on and
refuse to look at the figure.
Senator PROXMIRE. NOW I have been told that last October the
so-called green book prepared for FOMC, the Open Market Committee members, contains an estimate that real growth in 1983
would average zero percent compared to 1982 and inflation would
average 2 percent. These projections were substantially under the
amount of growth in inflation being predicted by other forecasters.




50

My question is, No. 1, Were these projections in fact provided for
the Open Market Committee?
Mr. VOLCKER. I don't remember any projections of that sort.
Senator PROXMIRE. You don't remember those?
Mr. VOLCKER. NO. I don't think we ever had a projection like
that. The figure we presented to the committee earlier in February
indicated growth in 1983, and that now appears highly probable.
Senator PROXMIRE. This so-called green book is prepared for the
Open Market Committee. It's not squared with the consensus of
projections by outside economists. Does it bother you that the Fed
may be basing policy on staff projections not subject to rigorous
criticism by outside economists?
Mr. VOLCKER. NO: that is one factor in policy consideration. The
Federal Reserve banks go through similar exercises. They reach
their own view. We, of course, have access to outside projections. I
wouldn't overestimate the weight put upon that particular set of
projections. They are fallible like other projections, and at least I'm
well aware of that fallibility. We do have an expert staff and what
I want to get from them, just speaking as one Governor, is their
best, unbiased, private, if you will, assessment of what they think
is going on; that's important to me, but it's just one factor in the
equation.
Senator PROXMIRE. I apologize to the chairman of the committee.
I do have one more question and the chairman has graciously permitted me to ask it.
Recently the Federal Reserve announced that the Nation's largest banks must maintain at least 5 percent capital ratio. I'm delighted to see that. I think that's an extremely important decision.
As we all know, they have been below that and they have been in
jeopardy because their capital ratio has been, in my judgment, too
low.
How will that regulation be enforced and what happens to the
large bank that falls below 5 percent? Do you just talk to them or
are there real teeth in the regulation?
Mr. VOLCKER. I don't think we envisage that regulation as something you have to meet on a weekly or quarterly basis, although it
is a very firm policy. I might add, in stating the policy, we raised
the question that sometime in the future we may want to raise
that ratio. It's not the kind of thing a bank cannot fall below, but if
it does it will be talked to, in the first instance, and if the bank
remained below, it would be asked for plans with respect to capital
ratios and other things that would affect our attitude toward applications for expansion where there is a drain on their capital position.
Through that kind of process, through the normal examination
process, there would be, I think, ample opportunity to bring pressure to bear progressively to conform to the policy. But it does not
mean for periods of time a particular bank could not fall below.
Some banks just now introducing that policy in that particular
form are below and we would expect some of them would take
some time—not too long, I hope—to get up to this minimum, but
we don't have a fixed or rigid time schedule in that respect.
Senator PROXMIRE. That's very reassuring. I very much appreciate it.




51

The

CHAIRMAN.

Senator Riegle.

POLICY ADJUSTMENTS MAY BE NEEDED

Senator RIEGLE. Mr. Chairman, I'm going to try to go through
this as quickly as I can, and I would appreciate you being as explicit as you can as we do it.
I want to pick up where we left off before in trying to make
sense of the overall policy mix—fiscal policy, monetary policy,
trade policy, other factors that fit together to create what is really
I think quite a revolutionary and new economic environment as
we're trying to chart our way forward.
Here's my concern. If we take a major piece of policy and look at
where they are and the course we are now on, the fiscal policy you
now say the Fed is anticipating deficits out over the next 2 years,
but I think you could as well have said 3 years, in the $200 billion
range. The merchandise trade deficit is estimated at about $70 billion and it's rising. It's up from about $36 billion last year, so
you're almost getting an exponential rate of change, and that tends
to be a byproduct of these other policies. I don't see any appreciable change in the savings rate in this country in terms of any fundamental change in pattern that's going to create a new pool of
saving to feed into the system beyond what we have seen before.
When I add all these things together, I say to myself, I don't
think this policy mix, if left as it is, is going to work indefinitely
without creating an inescapable upward pressure on interest rates
which in all likelihood is going to snuff out the recovery. It's more
a question of when that would happen, and I think the financial
markets themselves have sort of reached that judgment.
I think that's one of the reasons that long-term rates are hanging as high as they are and there's so much nervousness and you're
talking to the same people I am, not only in terms of the decisions
that are reflected in where those rates stand, but what they say to
you in private conversations.
The reason I want to pin this down is this. If we need to make
some major adjustments in different core areas of economic policy
in order to get the overall policy mix that we need and that's a
constraint that monetary policy has to bump up against and everything else, then I think today, right here, we've got to make that as
explicit as possible and we've got to get it out in the open and
make sure everybody understands it.
And I gather that you're saying delicately that the mix we now
have is not guaranteed to work, that it's going to have to be adjusted and that the fiscal policy part is one significant part that you
have touched on and I don't know how far you might be prepared
to go with any of the others, but we have also touched on the international lending relationships in financing, steps that have to be
taken here, because it seems to me that's a critical part in another
way if we were not to get the IMF quota increases that I think impinges on this in a very risky way.
What I'd like you to do here is try to be as explicit as you can be
in saying what the other policy areas of adjustment are needed
here, and are they needed to make this thing work, and if it's your
private and professional view that this whole thing may self-de-




52

struct at some point if we don't make these adjustments, no matter
how it's done—I'm not asking you to get into the details. I'm
asking you to make the larger assessment here. If we are running
a high risk that this thing will self-destruct unless those adjustments are made, then I think it's very important that this be said
and understood. I think there are a lot of people around here that
would be inclined to agree and perhaps that would move us ahead
to some of these adjustments that are going to have to be made.
Otherwise, I'm afraid this may all land on the notion that monetary policy being the final step that has to resolve beyond too many
things it can't do.
Mr. VOLCKER. Let me make a couple points that will make it
very easy for you, I'm sure. You covered the budget, and I think
the risks in that situation are apparent, even with a relatively optimistic view. I wouldn't underestimate the importance of the progress we have made against inflation in helping to keep interest
rates lower, even with the budget situation looming there, but certainly the budget makes them higher than they otherwise would
be.
You spoke about other areas. I referred earlier to the importance
of maintaining moderation in pricing and wages. You have referred, and perhaps I touched upon, the international economic and
financial problems. I think a major contribution that the United
States can make and must make to that larger world situation,
while at the same time contributing to moderation at home, is to
avoid protectionism. You can put it either in the negative or the
positive. Let's not take any more restrictionist measures, and let's
think, with the economy moving ahead, of removing those that
were put in under the pressure of recession. I think that would
send a very clear and helpful signal to the community at large
about domestic competition in pricing and at the same time make a
very real and really essential contribution, as came out very clearly at the Williamsburg conference, to the world situation and the
problems of the developing countries, our neighbors to the south
and elsewhere.
Senator RIEGLE. Well, I hear what you're saying. I don't want to
get off on the protectionism thing because the whole world is honeycombed with protectionism, some even financed by central banks
and other trading competitors. So that's a major problem.
Let me ask you this question. If the deficits do stay above $200
billion, aren't we almost certain to see interest rates forced back up
and this recovery at some point start to go the other way? I mean,
can we really live with that? I'm talking about with a realistic expectation that we are going to get sustained economic growth,
we're going to have a low inflation environment, we're going to see
unemployment coming down.
Mr. VOLCKER. You're quite right that that is a major worry. I'm
reluctant to say that it is inevitable because we have one countervailing force, and that is the progress we have made against inflation. If we lose that and combine that with those budget deficits,
then, yes, I would say it's inevitable. The budget deficits put a lot
of pressure on, and they will keep real interest rates high, whatever the inflation rates do.
Senator RIEGLE. I've seen that.




53

Mr. VOLCKER. We're starting out with a high level of nominal interest rates and a high level—in the loose sense of the word—of
real interest rates. I know that deficit will keep real interest rates
higher than they should be, but I still have this vision that if we
can combine recovery with continued progress against inflation
we've got a source of downward pressure on interest rates that will
be very helpful. There's no question it's directly countered by the
deficit situation. Where the net balance is, I don't know.
Senator RIEGLE. Some people are saying today that everything
that needs to be done has been done, that we are now on the right
course and we don't need any other major economic policy adjustments. It's just a question of sort of going on down the road.
I can't bring myself to share that view. I see too many things
that tell me we've got too many contradictions here that we've got
to resolve. I think I hear you say that too. You're obviously careful
not to say it in too pointed a way.
My point is, if you think there are major things out of line here
that threaten this whole situation working out properly, then I
think the time to say that is now because if we don't make the
changes we are going to end up with the worst consequence, and
that may be no way out of this thing.
Mr. VOLCKER. I don't think I'm disagreeing with you. You seem
to think I'm not saying it loud enough. I'm saying it as loud as I
can, but in the context of wanting to be accurate. What I'm saying
is bad enough and I'm not going to be more alarmist than I think
the situation deserves. It seems to me I've said things that are not
very happy, to say the least.
Senator RIEGLE. Let me just try one last time. Would you generally agree with the proposition that our overall economic policy
mix still needs some major adjustments here?
Mr. VOLCKER. Yes; and I think the deficit is the No. 1 problem,
and I urge that action be taken to deal with that if you want to
devise any kind of assurance of an orderly, sustained recovery.
Senator RIEGLE. And if it doesn't happen, we run a very high
risk?
Mr. VOLCKER. Yes; without any question.
Senator RIEGLE. I want to ask you one other thing.
Mr. VOLCKER. They are not necessary risks.
JAPANESE MAINTAIN AN UNDERVALUED YEN

Senator RIEGLE. I want to ask you one other thing about the general situation because I wonder if you believe that the dollar is
overvalued in relation to the Japanese yen and how do you explain
the fact that while U.S. interest rates have declined dramatically
the Japanese yen has appreciated very little? We seem to be
caught in a situation here where that differential consistently
works to our disadvantage.
Do you think in any way that somehow this is being artificially
maneuvered or do you have a concern about it?
Mr. VOLCKER. I don't think it's being maneuvered in the sense of
a conscious monetary manipulation by the Japanese Government
or the Japanese Central Bank to maintain an undervalued yen.
Indeed, I think, on balance, the responsible authorities there are




54

concerned about the yen being too low relative to other currencies
generally, and that has some disadvantageous byproducts for them,
ranging from putting more pressure on internal prices than is necessary and increasing pressure abroad, and all the rest. I don't
think they are artificially manipulating them in that sense. There
are problems with the Japanese trade policy; structural problems.
Senator RIEGLE. I'm familiar with those.
Mr. VOLCKER. But I don't think the yen is being artificially manipulated.
Senator RIEGLE. It seems awfully strange to me that we never
seem to see this swing in our favor. It seems always to be in an
adverse situation.
Mr. VOLCKER. I don't think that situation is entirely comprehensible to many economic analysts who have looked at it, either in
Japan or here. You can understand some elements of it, but they
have a growing current account surplus and we, of course, have a
growing current account deficit. The interest rates are much more
closer in line, as you note, than they were a year ago, although our
interest rates are still higher than theirs, and they would put a lot
of weight on that factor. For a while I think an important factor
was the fact that they had liberalized the outward flow of capital. I
don't think they did that to manipulate the yen, but it had the
effect of depreciating the yen, because for the first time many investment institutions in Japan engaged in a large diversification
abroad; they spent yen and bought dollars in the process, but that
happened 2 or 3 years ago. I would think the initial so-called stock
effect would be pretty well washed out by this time. Of course, the
exchange rate has been around the current level for quite a period
of time and it doesn't get jarred in a different direction, but I can't
fully explain it to my own satisfaction and therefore to yours.
Senator RIEGLE. My time is up. I think you need to do some more
work on it because we are in deep trouble there and the trends are
in the wrong direction.
The CHAIRMAN. I'd like to inform the Senator from Michigan
that I do not own nor intend to own a Japanese car.
Senator RIEGLE. Thank you. Now if you will just go to the
Chrysler legislation next time, we're all set.
The CHAIRMAN. I hope Chrysler never needs any more legislation.
Senator Dodd.
SAVINGS, INTEREST RATES, AND NEW BOARD MEMBERS

Senator DODD. Just very quickly, I'd like to pick up on Senator
Riegle's last line of questioning with one add-on.
As I understand it, the deficit, while we have all recognized its
importance, really becomes important as it relates to the rate of
savings. Do you agree with that?
M r . VOLCKER. Y e s .
Senator DODD. There

have been some estimates as to what the
savings rate growth figures would be like. What would be your estimate under the coming years as to what we might expect in a very
optimistic way as to the rate of increase in savings?




55

Mr. VOLCKER. I would hope that it would go up, but I think,
given our economy, it's wrong to count upon a really dramatic
change. I think we have taken some measures in tax policy and
elsewhere that favor savings relatively, at least in the sense of removing what were relatively impediments for savings before. I
would hope that would have some effect over a period of time.
Maybe even more important would be a feeling of greater stability in terms of inflation. But if one looks way back, in postwar history anyway, the American savings rate by international standards
has been low, and I would not expect that the American savings
rate is going to jump to the German savings rate. If it increased by
1 percent, that's a pretty big percentage increase. That's helpful,
but it still doesn't cure a 3-percent budget deficit.
Senator DODD. In light of that, it seems to me that regardless of
what monetary policy is, we are going to be faced with an interest
rate hike. If you tighten monetary policy, you get an interest rate
hike. If you loosen monetary policy, you get a likely new round of
inflation which would also require the raising of interest rates.
While you didn't use the word inevitable and while certainly the
Fed is going to play a part in all this, I'd like to know whether or
not you think I'm off base by suggesting that you're out of the
game, that regardless of what you do in monetary policy we're
going to have a rise in interest rates.
Mr. VOLCKER. It depends upon what time period you're talking
about. My basic point of departure would be that if we can maintain and continue the progress against inflation over time, interest
rates are going to come down. Now that prospect can be disrupted
for a period of time, to the extreme over a longer period of time if
the deficits are big enough. Given where we're starting from, I
don't want to suggest that I think a rise in interest rates is inevitable, particularly in nominal terms. If we continue to make progress
on inflation, even the current level of interest rates, in effect, becomes higher in terms of real impact; we are starting from a
higher level.
Senator DODD. Would you suggest as a doctor might suggest that
a little bit of medicine now might hedge or protect us from having
to take a stronger dose later?
Mr. VOLCKER. In terms of the kind of immediate policy problems
we find, I think if some action is necessary and desirable now to
curb the threat of inflation rising later, and if that action is taken
for a relatively small cost, to use that word, you will get a very
large benefit in terms of the basic outlook for interest rates. You
will create a situation in which you will maximize the chances of
interest rates coming down in the future.
I fully accept the basic analysis that you gave earlier with a
little different kind of twist, that sometimes a restraining action in
the short run will be just the thing that's necessary to avert the
risks of a much bigger rise in interest rates later. That's, of course,
the kind of question we have to raise for ourselves right now, because—particularly with that deficit sitting out there—if we permit
the inflationary process to get started again, we're clearly going to
have higher interest rates and of some size.
Senator DODD. Thank you.




56

The CHAIRMAN. Mr. Chairman, Senator Tower was not able to be
here for obvious reasons. He's managing the defense authorization
bill on the floor. He had one question.
Small businesses are among the first in our economy to feel the
impact of rising interest rates. What would be your opinion of the
appointment of a representative of small business to the next vacancy on the Federal Reserve Board?
Mr. VOLCKER. I think the Federal Reserve Board ought to have a
variety of backgrounds represented on it, including small business.
That's a useful perspective. We've got seven members and there's a
lot of variety in backgrounds. I don't like to think of any of them
as representative of a particular group—small business or farming
or banking or any other group. I don't think a particular group
should feel that it has a vote in a direct sense on the Federal Reserve Board. But having people with those backgrounds is useful. I
think a variety of backgrounds on the Board only adds to the realism of our discussions and sensible policy judgments.
The CHAIRMAN. I would agree with you. There are many suggestions before the committee over the last 2 or 3 years for representatives of particular groups and I don't know where that stops when
you start that. I have been critical in the past of the lack of geographical representation and that the spirit of the law, if not the
letter of the Federal Reserve Act, has been violated in the concentration of people who have spent a good deal of their life in Washington and they might have attended college in California and
therefore that qualifies them for that Federal Reserve district. I
would agree that I do think we need broader representation than
possibly we have had in the past and certainly adherence to the
geographical requirements of the Federal Reserve Act.
Mr. Chairman, we appreciate your patience today. We have been
fortunate in not having any votes on the floor. The hearing will
continue with additional witnesses on Chairman Volcker's renomination at 2 p.m. in the Banking Committee hearing room, SD-538.
Also, next week, at the Humphrey-Hawkins hearings, Chairman
Volcker will be back before us. With the approval of Senator Proxmire, it is my intention that at the conclusion of Chairman
Volcker's testimony next Thursday that we will conduct a vote on
the recommendation for his new term as Chairman of the Federal
Reserve.
The committee stands in recess until 2 p.m.
[Whereupon, at 12:55 p.m., the hearing was recessed, to be reconvened at 2 p.m. this same day.]
[Biographical material on the nominee follows:]




57
STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES
VOLCKER

PAUL

ADOLPH

Name:_
D a t e of

Federa! Reserve System
D a t e of b i r t h :

Marital status:
N a m e a n d ages
of c h i l d r e n : .

27

5

(DAY)

(MONTH)

(YEAR)

nomination: July 8, 1983

Place o b r h Cape May, N. J.
f it:
Full name of spouse: B a r b a r a

Married

Marie

Bahnson

Volcker

Janice L. Volcker Zima, 27
James P. Volcker, 25

Institution

Education:

Dates
attended

Degrees
received

Dates of
degrees

Princeton U.

1945-49

B. A.

1949

Harvard U.

1949-51

M. A.

1951

London School
of Economics

Honors and awards:

List below all scholarships, fellowships, h o n o r a r y d e g r e e s , m i l i t a r y m e d a l s , h o n o r a r y society
m e m b e r s h i p s , a n d any o t h e r special recognitions f o r o u t s t a n d i n g service o r a c h i e v e m e n t .

Harvard Bus. School Club of NY & Wash.-Bus. Statesman Awards,
198 3? Honorary degrees: Hamilton College 198 0; u. NuLie Dame,
1980; Adelphi U., 1981; Fairleigh Dickinson U., 1981; Princetoi
U. 1982; Dartmouth C. 1983; New York U. 1983; BiyanL College,
1983. Arthur S. Flemming Award; Alexander Hamilton Award;
William F. Butler Award, Fellow, NABK; Tax Foundation Public
Service Award, 198 0; Bank Administration Inst. Medal, 1983;
—General Leslie Graves Award, MacArthur Medal, Phi Beta Kappa,
Rotary Foundation Fellow, Administration Fellow (Harvard U.)
etc~.
—




58
Memberships:

List below all memberships and offices held in professional, fraternal, business, scholarly,
civic, charitable and other organizations.

(approx.)

Office held
(if any)

Organization

Council on Foreign Relations

B of D

American Council on Germany
American Friends ot the "
London School of Economics

B of D

Rockefeller Foundation
American Red Cross
Endowment Fund

B-Trustees

1975-79

1975-79
1972-79?

Trilateral Commission
Mayo Clinic Foundation

B-Trustees

1979-present

Employment record: List below all positions held since college, including the title or description of job, name of
employment, location of work, and dates of inclusive employment.

erv_e_ Board, S-/6/79 fo present-

9/74 to 7/75

-Reserve^Bank of New-York^ 8/7 5-8/5/79
Woodrow Wilson School of Public & Int. Affairs,
Princeton University (teaching^

er_Secxetary)
1965 to 1969 - Chase Manhattan Bank, NY/FdrvafdDjj>itann?ng0f
Dir. Fin. Analysis & Deputy
1962 to 1965 - Treasury Department/
Under Seeretary
1957 to 1961 - Ch^s^ Mqnhat-t-an Bank/.-F inane La 1 F.^pnnmi st1952 to 1957 - Federal Reserve Bank of New York - Economist
1—~
and—Special Assistant




59
Government

experience:

List any experience in or direct association with Federal, State, or local governments, including any advisory, consultative, honorary or other part-time service or positions.
Chairman , Federal Reserve Board, 1979 to present
President, Federal Reserve Bank of New York, 1975 to 1979
Treasury Department,

1969 to 1974 and 1962 to 1965

Federal Reserve Bank of New York, 1952 to 1957
Dept. of Commerce, Balance of Payments Adv. Comm.

1967-68

Advisor to Committee on Reorganization of the Government
for Foreign Policy
1974-75
Dept. of State Review Bd. for Career Ministers (1975)
Published
writings:

List the titles, publishers and dates of books, articles, reports or other published materials
you have written.
"The Rediscovery of the Business Cycle" 197 8
•Newspaper articles, reports, reprints of
etc. on economic policy -- I have no

Political
affiliations
and activities:




speeches,

listing.

List all memberships and offices held in and services rendered to all political parties or
election committees during the last 10 years.

None

60
Political
contributions:

Itemize all political contributions of $ 5 0 0 or more to any individual, campaign organization, political party, political action committee or similar entity during the last eight
years and identify the specific amounts, dates, and names of the recipients.

None

Qualifications:

State fully your qualifications to serve in the position to which you have been named,
(attach sheet)

Presently serve in position; see attached.
Future employment
relationships:

1. Indicate whether you will sever all connections with your present employer, business
firm, association or organization if you are confirmed by the Senate.

Not applicable

2. As far as can be foreseen, state whether you have any plans after completing government service to resume employment, affiliation or practice with your previous employer, business firm, association or organization.

No

3 . Has anybody made you a commitment to a job after you leave government?

No

4.

Do you expect to serve the full t e r m for which you have been appointed?




I do not feel committed to do so.

61

Potential conflicts
of interest:

1. Describe any financial arrangements or deferred compensation agreements or other
continuing-.dealings with business associates, clients or customers who will be affected by policies which you will influence in the position to which you have been
nominated.

Pension rights from service at Federal Reserve
Bank of New York

2. List any investments, obligations, liabilities, or other relationships which might involve
potential conflicts of interest with the position to which you have been nominated.

None

3 . Describe any business relationship, dealing or financial transaction (other than taxpaying) which you have had during the last 1 0 years with the Federal Government,
whether for yourself, on behalf of a client, or acting as an agent, that might in any
way constitute or result in a possible conflict of interest with the position to which you
have been nominated.

None

23-790

0—83!




5

62
4 . List any lobbying activity during the past 1 0 years in which you have engaged for the
purpose of directly or indirectly influencing the passage, defeat or modification of
any legislation at the national level of government or affecting the administration and
execution of national law or public policy.

None, apart from contacts in connection with official
duties.

5. Explain how you will resolve any potential conflict of interest that may be disclosed by
your responses to the above items.

None to my knowledge

Civil, criminal and
investigatory
actions:

1. Give the full details of any civil or criminal proceeding in which you were a defendant
or any inquiry or investigation by a Federal, State, or local agency in which you were
the subject of the inquiry or investigation.

None, apart from suits brought in connection with
official duties

2. Give the full details of any proceeding, inquiry or investigation by any professional
association including any bar association in which you were the subject of t h e proceeding, inquiry or investigation.




None

63
Addendum to Volcker Statement
Qualifications

VOLCKER, Paul A. — Sworn in August 6, 1979 to fill the unexpired
portion of a term as a Member of the Federal Reserve Board ending January 31,
1992. Mr. Volcker was designated Chairman of the 3oard for a four-year term
beginning August 6, 1979.
PAUL A. VOLCKER was born September 5, 1927, at Cape May, New Jersey.
He earned his B.A. at Princeton University in 1949 and an M.A. in political
economy and government at the Harvard University Graduate School of Public
Administration in 1951. He attended the London School of Economics in
1951-52. Mr. Volcker's first association with the Federal Reserve System
was as a summer employee at the Federal Reserve Bank of New York in 1949
and 1950. He returned to the New York Bank in 1952 as a full time economist,
and remained with the Federal Reserve until 1957, when he became a financial
economist at Chase Manhattan Bank. In 1962 Mr. Volcker joined the United
States Treasury as Director of Financial Analysis and in 1963 he became
Deputy Under Secretary of the Treasury for Monetary Affairs. From 1965 to
1969 he was a Vice President of Chase Manhattan Bank. In 1969 he was
appointed Under Secretary of the Treasury for Monetary Affairs, where he
remained until 1974. During this time Mr. Volcker was the principal United
States negotiator in the development and installation of a new international
monetary system departing from the fixed exchange rate system installed
following World War II. He spent the academic year 1974-75 at Princeton
University as a Senior Fellow in the Woodrow Wilson School of Public and
International Affairs.
Mr. Volcker became President and chief executive officer of the Federal
Reserve Bank of New York on August 1, 1975. He continued in that office until
he became Chairman of the Federal Reserve Board. As President of the Federal
Reserve Bank of New York Mr. Volcker was a continuing Member of the Federal
Reserve System's principal monetary policy making body, the Federal Open
Market Committee. He was elected Vice Chairman of the FOMC August 19, 1975.
As Chairman of the Federal Reserve Board Mr. Volcker is Chairman of the FOMC.
Mr. Volcker has received honorary degrees frcm Adelphi University, 1980;
University of Notre Dame, 1980; and Fairleigh Dickinson University, 1981.




64
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TRIBLE FROM PAUL A. VOLKER

In February before this committee, you stated that
"over time the growth of money and credit will need to be
reduced to encourage a return to reasonable price stability."
You also said that financial stability "will require that we
avoid excessive growth of money and credit because, sooner or
later, that growth will be the enemy of the lower interest
rates and stability we need."
How do those statements square with Fed policy which
allowed Ml to grow 12.2 percent during the year ending in May,
and now has Ml way above its target?
Recent institutional and behavioral changes have made
it even more important to look at the behavior of money and
credit aggregates as a group in assessing whether their growth
rates are consistent with a return to reasonable price stability.

Growth rates of M2, M3, and domestic nonfinancial debt

are all consistent with their ranges, though their growth has
picked up somewhat recently.
Ml is the only aggregate whose growth has run well
above target.
factors.

This has been accepted because of several

Looking at Ml itself, there has been continuation

into this year of the very unusual, large decline in its
velocity that developed last year.

This decline in velocity,

which may be abating now, appears to be related at least in
part to the fact that NOW accounts--in effect interest-bearing
checking accounts introduced on a nationwide basis at the
beginning of 1981—have come to be an important component of
that aggregate.

As market rates declined sharply last year,

the spread between interest rates available on NOW accounts and
other outlets for liquid funds narrowed more than proportionately, apparently stimulating demand (with a lag) for NOW
accounts relative to income.




65
Other factors may also have been important for a time,
including the high degree of economic and financial uncertainty.

You will recall that, because of these reasons, we

indicated in our earlier testimony less emphasis would, for a
time, be placed on Ml alone, and that the judgments about movements in the aggregate would need to be tempered by analysis of
business and financial developments generally.
While the underlying trend in Ml may be shifting, that
should be a more gradual process.

We indeed should be alert to

the probability that, cyclically, sizable increases in Ml
"velocity," more in accord with historical experience, are
likely.

Consequently, we look toward substantial slowing of

the recent rate of increase in the targets we will be presenting .
Taking account of the aggregates as a whole and institutional changes, I believe we are on a course consistent with
encouraging a return to price stability over time—and we must
remain so.

The weight placed on Ml in particular will be

reviewed regularly.




66
Since early May, long term interest rates have headed
upward. Do you think that rapid money growth, and the failure
to keep all money measures within their target ranges, has contributed to this by worsening inflationary expectations and
creating uncertainty about what the Fed is up to?
I believe the recent rise in long-term rates reflects
several factors.

To help assure that growth in money and

credit will remain consistent with progress toward price stability, in an environment of accelerated real economic growth,
the posture of monetary policy has been slightly less accommodative in recent months; in other words, pressure on bank
reserve positions has been increased to a degree.

This in

itself has been accompanied by some rise in money market rates,
which often gives rise to some temporary sympathetic response
in longer-term rates.

The recent rise in long rates also

appears to reflect the impact of the acceleration in economic
recovery on actual credit demands, which were appreciable in
the second quarter, and anticipation of further increases in
the future.

The potential conflict with continuing, large

federal credit demands is, of course, a matter of great concern, and the speed of the economic recovery has tended to
advance those concerns.
I do not exclude some influence from anticipations
that more rapid monetary growth might induce further Federal
Reserve actions to restrain money and credit growth.

As that

implies, in an expanding economy with heavy Treasury deficits,
action to restrain money growth tends to increase market pressures, even though, in the long run, the effects on inflation
and interest rates may be favorable.

I also agree that con-

siderable skepticism remains about the inflation outlook, but I
would not single out recent growth in the aggregates as the
principal or major source of new concerns.




67
Recent newspaper reports say that Administration officials want the Federal Reserve to restrain monetary growth
through open market operations, but not by raising the discount
rate. Do you agree with that advice?
Whether the Federal Reserve should raise the discount
rate in the process of restraining money growth depends on many
factors, such as probable "announcement" effects on attitudes
in domestic and international financial markets as well as the
more routine problems connected with effective administration
of the discount window.

But, basically, it depends on an

assessment of whether a strong surge in demand for credit at
the discount window by depository institutions, given the relation of the discount rate to market rates, is itself fueling
excessive monetary expansion.

If it is, the restraint on money

growth from holding back on provision of reserves through open
market operations--which is the fundamental means of controlling money—may need to be reinforced by discount rate action.
That is a judgment that can be made only in the context of
particular circumstances, taking account of overall economic
and financial conditions.
tools are complementary.




In most instances, over time, the

68
VThat role does the international debt situation play
in the Fed's reluctance to slow the growth of money and credit?
I have pointed to the debt problems of many countries
in the developing world as one of the major threats to financial stability and to a healthy recovery of the U.S. and world
economy.

These problems are among the many factors that the

FOMC takes into account in reaching decisions on the implementation of monetary policy.

In the short run, increases in

interest rates from any source or any slowing of economic
growth does tend to complicate the problems of international
finance, and that factor has been weighed by members of the
Committee.

Over time, however, I believe lower interest rates

and sustained growth will depend upon success in containing
inflation, and that consideration is a major element in policy.

Do you conceive of rapid money growth in the United
States as a way to alleviate international debt problems?
No.

The ultimate resolution of the serious interna-

tional debt problems confronting the world economy today will
depend in part on achieving a sustained, non-inflationary
expansion of the U.S. economy.

The contribution that U.S. mone-

tary policy can make to such an expansion is to ensure that
progress against inflation is consolidated and extended, which
will require restraint on the growth of money and credit over
time.

In this context, rapid monetary growth in the United

States would not long alleviate international debt problems.
Indeed, excessive growth would ultimately exacerbate those problems if it were to contribute to a rekindling of U.S. inflation.




69
A number of suggestions have been made that there
should be an independent audit of the Federal Reserve's
finances and policies.
Would you support such an audit?
or redundant?

Or is it unnecessary

I believe that there are an adequate number of audits
of the Federal Reserve.
several levels.

The System is already reviewed at

An independent outside public accounting firm

reviews the financial statements of the Board in accordance
with generally accepted auditing standards.

In addition, the

U.S. General Accounting Office performs numerous audits of the
Board and the Reserve Banks.

These audits include reviews of

various programs of the System including activities in the
supervisory, consumer and pricing areas.

In particular areas,

such as "priced services" we ourselves have sometimes initiated
independent reviews.
The Board also conducts annual examinations of the
"accounts, books, and affairs" of each Reserve Bank in accordance with the provisions of the Federal Reserve Act.

In

addition, the GAO performs various special audits of the
Federal Reserve as requested by committees of Congress.
Our monetary policies are, of course, continually
under Congressional and public scrutiny and debate.

Accord-

ingly, I do not believe that there is any need for additional
regular audits of the Federal Reserve.




70

AFTERNOON SESSION

The committee reconvened at 2 p.m., in room SD-325 in the Russell Senate Office Building.
The CHAIRMAN. The committee will come to order. We are continuing the hearings that started this morning on the renomination and confirmation of Paul A. Volcker to be Chairman of the
Board of Governors of the Federal Reserve System.
We have three witnesses before us this afternoon: Mr. Warren J.
Hamerman, chairman of the National Democratic Policy Committee; Robert E. Merrill, vice president, Virginia Taxpayers Association; and W. C. Smith, Pittsburgh, Pa.
Gentlemen, we are happy to have you before us. Mr. Hamerman,
if you would like to begin.
S T A T E M E N T O F W A R R E N J. H A M E R M A N , C H A I R M A N , N A T I O N A L
DEMOCRATIC POLICY COMMITTEE

Mr. HAMERMAN. Yes. Mr. Chairman, the argument has been
made that it is necessary to reconfirm Paul Volcker as Federal Reserve Chairman on the grounds that he will be a symbol of stability for the international economy. I would argue that it is just the
reverse, that the renomination of Paul Volcker could well trigger a
world financial collapse.
VOLCKER POLICIES CAUSED WORLDWIDE DEPRESSION

To that end, I would like to read at the opening a telegram received late last night from Brazil addressed to the Senate Banking
Committee, signed by the president of the Union of Engineers of
the State of Rio de Janeiro in Brazil. It reads as follows:
At a meeting held in Brasilia in the month of April, 93 unions representing 1.5
million workers in the Brazilian State enterprises condemned the accord with the
International Monetary Fund in light of the damage that this represents for workers and for national sovereignty. At the moment when the United States Senate is
deciding on the maintenance of Mr. Paul Volcker on the Federal Reserve Board it is
important that we register our protest against the economic directives imposed by
the American Government on countries such as Brazil.

It is signed Jorge Bittar, president of the Union of Engineers of
the State of Rio de Janeiro.
I also received, addressed to myself to be read at the opening of
my testimony, a telegram from the president and secretary general
of the UTRABOC Trade Union in Colombia, in Bogota, Colombia.
This telegram and message is from the Union of Workers of
Bogota. It reads as follows:
In the name of thousands of workers, we reject the policy of high interest rates
which have caused poverty, misery and unemployment. We expect the nonconfirmation of Mr. Paul Volcker.

Signed by Pedro Rubio and Jorge Carrillo, the president and secretary general of UTRABOC in Bogota, Colombia.
These two gentlemen are also on the National Federation of UTC
of trade unions in Colombia, which is the national trade union federation associated with President Belisario Betancourt of Colombia.
I also have with me, which I would request to be put into the
record, telegrams from leading industrialists, trade union officials




71

from the various nations in Western Europe, including West Germany, Italy, Sweden, and France.
One very special telegram is from France which is quite short,
which I would like to read, from Gen. Revault D'Allones France,
who is a member of the Committee of France and was an aide to
Marshall Le Cler—the liberator of Paris alongside DeGaulle—
during World War II. He has been a French military attache in
many nations of the world. He is the author of the report, "In Defense of Europe" for the "Europa list^ of the RPR. His statement
reads:
I support the policy of President Reagan, in particular, for beam weapons. I am
opposed to high interest rates for both civilian and military purposes in the United
States and Europe. I oppose Mr. Paul Volcker's renomination.

The rest of the telegrams from abroad are from Spain, Sweden,
Italy, trade unions, industrial leaders, and so forth; as well as statements from various officials throughout the United States, in particular, trade union officials, leaders of farm organizations who
oppose the renomination of Paul Volcker, and as well the leaders
of various minority organizations such as the NAACP and so forth
who call upon the Senate not to confirm the renomination of Paul
Volcker.
I would request that all of these be put into the record.
The CHAIRMAN. They will be. And your full statement will be
placed in the record as well, each of you. We will place your entire
statements in the record.
Mr. HAMERMAN. Excellent. Then if I may proceed just to give an
oral summary of my testimony. I am speaking on behalf of Lyndon
H. La Rouche, Jr., chairman of the advisory board of the National
Democratic Policy Committee, who has a statement attached to
mine, which I wish to put into the record as well.
The CHAIRMAN. It will be so entered into the record.
WORLDWIDE DEPRESSION COULD BECOME A CRISIS

Mr. HAMERMAN. Mr. La Rouche demands that Paul Adolph
Volcker not be confirmed for a second term as Chairman of the
Federal Reserve System, as I do as well in the statement which I
am submitting, on the grounds of the national security of our Republic as well as the national sovereignty of our allies and trading
partners in Ibero-America, Asia, Africa, and Europe.
All would be gravely threatened with the renomination of Paul
Volcker. We are currently in the midst of a worldwide economic
depression that at any moment could ignite into a full-fledged
global financial crisis. Mr. Paul Volcker is the symbol of the cause
of that worldwide depression.
He is so viewed by the nations of Ibero-America, Africa, and
Latin America. He is viewed as a Malthusian mechanic who, if in
the position of Federal Reserve Chairman, would institute policies
which would cripple the economic well-being of those nations.
Most of the heads of state of Latin America have spoken out in
the period from 1979 to the present and currently about the policies of Paul Volcker and how they have caused, helped to contribute causally to the current world debt crisis, which is beyond




72

repair within the current confines of the existing world monetary
system.
We are dealing with a crisis which, in aggregate, contains $840
billion in external debt from the developing sector nations. The
nation of Brazil, one of whose leading trade union organization—I
read from their telegram at the beginning—alone owes nearly $100
billion in external debt; Mexico, $80 billion. Ibero-America as a totality owes an aggregate of $320 billion in external debt.
These nations of the developing sector have all documented on
record the damage done by the high interest rate policy of Paul
Volcker, which he pursued beginning in 1979. They fear—just as
fears were expressed during the Senate committee hearings this
morning—the rumors that Paul Volcker may again raise high interest rates in and of itself could cause a collapse of the world financial system.
These rumors are being heard throughout the capitals of the developing sector nations as well as in Washington. Most of the nonalined nations, under the chairmanship of Indira Gandhi, over 100
nations, have had leaders over the past 6 months condemn the policies of high interest rates, how they've contributed to causing the
world debt crisis; specifically, the policies pursued by Paul Volcker
since 1979, as well as the policies of the International Monetary
Fund which they oppose because of his conditionalities policies.
The institutions of the old world economic order would view the
return of Paul Volcker to the Federal Reserve as a signal to impose
an even greater round of brutal austerity conditions onto the developing sector nations. This would be unacceptable to the political
leaders as well as the populations of those nations. And therefore,
they are in the process of forming a debtors cartel. Most specifically over this summer period a debtors cartel among our Latin
American allies is forming.
On the 24th of this month there will be a meeting in Caracas
which will celebrate the 200th birthday anniversary of Simon Bolivar. Many heads of state of Ibero-American nations will be there.
Also, the King of Spain will be there.
In the draft documents for that conference, language is now
being composed to announce the formation of a coordinating committee of Latin American nations to deal with the external debt.
There will be several other conferences held over the course of this
summer. I note them in my written testimony.
In particular, on August 1 special representatives of every IberoAmerican head of government will meet in Santo Domingo, the Domincan Republic, to formulate these policies. Then beginning September 5 the Inter-American Economic and Social Council, of the
Organization of American States, begins its meeting in Caracas as
well, where political solutions to the global debt crisis will be discussed.
Most recently, Indira Gandhi, on behalf of 100 nations at the
UNCTAD meeting, the United Nations Committee on Trade and
Development, called upon the conference for discussing a new
global framework to the betterment and mutual advantage of both
the nations of the North—namely, the advanced sector nations like
the United States—and the nations of the developing sector to discuss an augmentation of world trade and a reorganization of the




73

world economy. In their terminology, they are calling for a "new
world economic order," to replace what Indira Gandhi correctly
termed the current "neo-colonialist" system.
Lyndon H. La Rouche, Jr., has a specific plan which is known as
Operation Juarez, which would allow for a reorganization of the
debt of the Third World nations around augmenting economic production and foreign trade from the United States.
RENOMINATION WOULD CRUSH UNITED STATES AND WORLD ECONOMY

I believe that Paul Volcker will not pursue those policies and
that most of the political leaders and institutions, be they trade
unions or heads of state in the developing sector, know that Mr.
Paul Volcker will not pursue those policies. Therefore, a renomination of Paul Volcker could be the signal to ignite that process
which will lead to the developing sectors' dropping of the "debt
bomb" sometime over the next period.
In summary, Paul Volcker will, if nominated, spend the next
year or so in the position of Chairman of the Federal Reserve at a
moment of great crisis, tension and strain to the international economic system.
I think under those conditions it is fair to ask whether or not
Paul Volcker is a man who can be trusted at that time of great
crisis which is pending for not only our Nation but for the governments representing the vast majority of the 4.5 billion humans on
this planet. And I would say not.
Paul Volcker has publicly stated in 1979 in a public conference
in London, England, "A degree of controlled disintegration of the
world economy is a legitimate objective for the 1980's." I would
argue that Paul Volckers' policies, since he has been the Federal
Reserve Chairman, have competently implemented that particular
"controlled disintegration" policy.
Furthermore, Paul Volcker has an entire career for that policy
which my written statement summarizes, beginning in 1971 when
as an under secretary of the Treasury he played a principal role in
taking the dollar off of gold and convincing John Connally and
President Nixon to take certain measures which created the Eurodollar market which led to world inflation.
Second, in 1979, as is well known, Paul Volcker created, through
the high interest rate policies beginning in October 1979, the beginnings of an economic depression in the United States. That depression was then generated, transferred, in the collapse of our production and trade, to the rest of the world.
I think that Paul Volcker has a long track record as being on the
scene at every principal point at which a major policy decision has
been made which has, in fact, contributed to the current world financial crisis; and has played a role in making the wrong decision
at each of these points.
He is the wrong man for a very great and important job, at the
worst time imaginable, because of the shocks to the world eeonomy
which we can expect over the following period. No amount of bluffing on his part or anyone else's can avert the reality of this coming
period.




74

Finally, I think I make a cogent argument in my testimony that
there is also a national security element, in terms of the intentions
of our adversaries; namely, the Russians, and Yuriy Andropov. On
June 15 at the Central Committee Plenum in Moscow, Yuriy Andropov gloated about the dangers that the "capitalist economic
system of the West" was undergoing, and outlined an entire strategy in the speech which is now publicly available—or excerpts are
publicly available. Andropov outlined a strategy for exploiting
those difficulties over the coming period.
Yuriy Andropov would wish to see as Chairman of the Federal
Reserve an individual who had a proven record and would be
viewed around the world as a man who would generate instability
rather than solving the particular problems as they need to be
solved at this point. Andropov would relish the reconfirmation of
Volcker.
As Lyndon La Rouche demonstrates in the accompanying analysis in the written record, the great financial crisis which we are in
may or may not be at best postponed a few months. There is no
recovery; there is merely a hoax of a recovery, if one is proceeding
to look at the state of the world economy as a whole, or indeed, our
national economy, in terms of the basic sectors of our industrial capacity— machine tools and the agricultural sector.
Were Paul Volcker to be confirmed, the United States and world
economy would not merely continue to shrink; the nationally sovereign finances of the U.S. Government itself would be threatened.
The Swiss Bank for International Settlements has been demanding
surveillance control to put the U.S. internal economy into order.
As I referenced, Yuriy Andropov at the Central Committee meeting in Moscow also was basing a strategy on the fact that the
United States would not have the ability to defend itself in a financial crisis.
Paul Adolph Volcker has mismanaged the United States to the
point where our national security as well as the national sovereignty of most of the nations of the north and south are both threatened. A vote cast for Paul Volcker would be a vote cast against the
fundamental principles on which our republic was founded and
looked to as a temple of liberty and beacon of hope for all mankind.
My testimony in written form goes through these other elements.
Thank you very much.
[The complete statement and telegrams from various nations
follow:]




75

Testimony of Warren J. Hamerman
July 14, 1983
Before the Senate Banking Committee

Were Paul Adolph Volcker to be confirmed for a second term
as Chairman of the Federal Reserve System, the national
security of our republic, as well as the national sovereignty
of our allies and trading partners in Ibero-America, Asia,
Africa, and Europe, would be gravely threatened.

We are

currently in the midst of a worldwide economic depression that
at any moment could ignite into a full-fledged global financial
collapse.
The accompanying statement by Lyndon H. LaRouche, Jr.

—

"LaRouche Opposes Volcker Reappointment" -- identifies how Paul
A. Volcker wittingly helped to bring the world economy to its
current miserable condition, as well as defines the precise
plan of emergency action required to solve the global monetary
collapse.

Lyndon H. LaRouche, Jr. is the chairman of the

Advisory Board of the 23,OOO-member National Democratic Policy
Committee (NDPC), the founder of Executive Intelligence Review
magazine, board member of the Fusion Energy Foundation,
co-founder of the Club of Life and a prospective candidate for
the Democratic presidential nomination.

In August 1982

LaRouche authored a book entitled OPERATION JUAREZ which has




76
been widely utilized by Ibero-American leaders in defining
their current strategies.
The sovereign nations of the developing sector owe more
than $840 billion in external debt; our Ibero-American
hemispheric allies alone owe well over $300 billion of that
debt.

At the same time, the advanced sector nations -- the

United States, Western Europe, and Japan -- have an aggregate
unemployment of well over 30 million and an unutilized
manufacturing and agricultural capacity in the 30-35 percent
range.

World trade is drastically collapsed.

Above all, PAUL A. VOLCKER MUST NOT BE REAPPOINTED FEDERAL
RESERVE CHAIRMAN ON THE GROUNDS OF NATIONAL SECURITY.

The

renomination of Paul A. Volcker threatens our national security
on two principal counts: (1) Volcker's "Controlled
Disintegration" policy for the economy of the United States and
our allies is exactly Yuri Andropov's strategic orientation to
"collapse capitalism"; (2) Volcker's contingency plan for
dealing with the debt crisis is to give up U.S. national
sovereignty over our banking system and place the U.S. banking
system as a "backstop" of last resort for the Swiss-controlled
Old World Economic Order and its institutions.
Brazil's imminent default against the Bank for
International Settlements may plunge us into the crisis before
most of us expected.

This is the last phase of a process that

Paul Volcker set in motion in October 1979.




Mr. Volcker, as

77
you recall, flew home from an International Monetary Fund
conference to "save the dollar" by raising interest rates; as I
will show, the collapse of the dollar then was the result of
policies which Mr. Volcker had put in place years earlier, and
his plan to "save the dollar" in 1979 has bankrupted our
debtors and will shortly bankrupt us.
The Old World Economic Order, centered in Swiss control of
the corrupt institutions of Fritz Leutwiler's Bank for
International Settlements (B.I.S.), the International Monetary
Fund (I.M.F.) and World Bank, is bankrupt and financially
beyond resuscitation.

When Paul Volcker hiked U.S. interest

rates to usurious levels in October 1979, other nations were
forced into increased rates and borrowing charges as part of a
desperate attempt to "paper over" the corpse of the Old World
Economic System.
Paul A. Volcker's notorious high-interest rate policy at
the U.S. Federal Reserve has ballooned unpayable debt
obligations to astronomical levels.

Brazil's debt alone

converges on $100 billion, followed by Mexico ($80 billion),
Argentina and Venezuela in the $40 billion range, and Chile
(approximately $30 billion.)

Virtually every head of

government among our Ibero-American allies has denounced the
high-interest rate policy of Paul Volcker as having catalyzed
this world debt crisis.

Indira Gandhi of India, the chairman

of the Movement of Non-Aligned Countries numbering more than

23-790 0—83




6

78
100 nations, has identified the fundamental fact that without
an economic recovery of the nations of the South there can be
no recovery in the North, and that the debt question is central
to achieving such a true prosperity.
The monstrous magnitude of the world debt overhang,
completely overwhelms the recent media hoax about a U.S.
economic recovery.

The so-called economic "upswing" has been

caused by cut-rate auto loans and a temporary increase in
supply of medium-priced mortgage money for construction.

Mr.

Volcker and Treasury Secretary Don Regan have shifted the
illiquidity of the private sector onto the Federal budget, with
a $100 billion per annum rate of issuance of off-budget
mortgage bonds and similar chain-letter devices.

As interest

rates, inevitably, continue to rise, the chain-letter recovery
will fold up.

However, the collapse in U.S. capital goods and

agricultural sectors —

as even the U.S. Commerce Department

has been forced to admit -- far and away floods out the
statistical rises in the auto and construction sectors.

How Volcker Caused the Debt Crisis

The resolution of the debt crisis begins with
understanding how Paul Volcker's policies helped to cause this
crisis.

In fact, approximately $200 billion of Ibero-America's

$310 billion foreign debt is the result of Volcker-regulated




79
usury, capital flight, and declines in trade.

Nearly

two-thirds of all Ibero-American debt has nothing to do with
any spending or development at all, in the same way that the
debts accumulated by American farmers over the past few years
have nothing to do with increased investment in agricultural
development.

Instead of extending "hard" credits for

production, only non-income-generating "soft" loans for debt
service have been given.

Now the international institutions

threaten to "foreclose" on entire nations.
The American decision to float the dollar and suspend gold
backing for U.S. foreign payments in August 1971 taken by then
Treasury Undersecretary Paul Volcker and enforced by George
Shultz, Treasury Secretary after 1972, created an unregulated
banking pool of nearly $2 trillion.

This so-called Eurodollar

market put a permanent floor under interest rates, siphoned
credit away from production and into speculative channels, and
provided means for looting of "flight capital" from the
economies of developing nations.
When Volcker drove the United States' federal funds rate,
which stood at 8 percent, up to 14 percent in October 1979, the
discount rate and hence the prime rate was forced up from the
5-7 percent range to the 20 percent range.

Other nations were

forced to raise their rates -- on penalty of suffering massive
runs on their currencies and flight-capital operations —

as

investment funds otherwise shifted toward the U.S. to take




80
advantage of the relatively higher money market rates.
Ibero-American economies paid $114 billion in interest charges
alone between 1979 and 1982.

More than 80 percent of all

short-term debt contracted since 1979 and an increasing share
of long-term debts have been contracted solely for the purpose
of rolling over past obligations and meeting the debt service
costs of Volcker's policies.

As Volcker then contracted credit

deployment to industry and agricultural investment in the
United States, an industrial depression was begun.

The Old Institutions Are Bankrupt

Depression in the United States and Europe meant shrinking
markets for raw materials and other exports of developing
sector nations, in particular.

The U.S.A. alone absorbs 42

percent of developing sector manufactures exports.
resulting collapse of developing sector economies —

The
undergoing

an asset-stripping austerity through the infamous
"conditionalities" of the I.M.F. —

shut off any potential

markets for U.S. exports, in turn.

Thus, during the Volcker

years, U.S. output of tangible wealth collapsed an average of 6
to 10 percent per year.

The developing sector nations were

forced to finance at ever increasing short-term roll-over
rates.

During the summer of 1982 the debt payments crisis

erupted into public knowledge around the Mexican situation.




81
Now the debtor nations are, in fact, in default on their
financial obligations to Swiss, London, and New York banking
houses.
The bankrupt institutions of the Old World Economic Order
have a conscious policy toward the developing sector countries
—

deploying upon them the "Four Horsemen of the Apocalypse":

war, famine, pestilence, and death.

The racist genocide policy

of I.M.F. conditionalities is designed to "reduce the
dark-skinned populations" of the world.

The infamous "Global

2000" Policy of the Carter Administration was the population
control correlative of Volcker's "Controlled Disintegration"
financial policy.
The day-to-day brutal reality of this policy is what is
propelling the leaders of the developing sector into concrete
actions.

They know, and the international financial

institutions know, that any collective or chain-reaction
default totaling several hundreds of billions of dollars in
developing sector debt would be sufficient to bring $1 to $2
trillion in worthless international financial paper crashing
down.
Paul Volcker is lying when he argues that only his
renomination and contingency plan to "buy up" the bad loans of
the developing sector can avert a world financial crisis.

In

fact, his renomination is guaranteed to trigger a world banking
collapse under conditions unfavorable to the United States.

In

fact, the renomination of Paul Volcker is looked upon extremely




82
negatively by the Ibero-American leaders who are now
determining whether or not to drop the "Debt Bomb." A U.S.
Senate vote for Paul Volcker could well be the trigger for the
Debt Bomb.
The one orderly planned solution to the debt crisis is the
LaRouche Plan of Action, which reorganizes the debt of Third
World debtors as part of an agreement to build infrastructure
projects in their economies and create the institutions of a
New World Economic Order.

Volcker has been a principal

saboteur of such orderly solutions as are now immediately upon
the agenda.

Debtors' Cartel Is Forming

On July 24 in Caracas, Venezuela, on the occasion of
Bolivar's 200th birthday .anniversary, the presidents of six
leading Ibero-American nations and the King of Spain will meet
to announce what is expected to be a continent-wide coordinated
strategy for dealing with their debt.

In a preparatory meeting

just held in that same city by the Congress on Latin American
Political Thought, the basis was laid for declaring a LATIN
AMERICAN COORDINATING COUNCIL ON FOREIGN DEBT and establishing
an Ibero-American Common Market as a defense against the
Leutwiler and International Malthusian Fund (I.M.F.) policy of
forcing the "foreclosure" of entire nations through head-tohead confrontations.




On August 1, special representatives of

83
every Ibero-American head of government will meet in Santo
Domingo, Dominican Republic, to elaborate these policies.
Then, beginning September 5, the Inter-American Economic and
Social

Council (C.I.E.S.)

of the Organization of American

States begins its meeting in Caracas.
Members of the U.S. Senate, if you were to reconfirm Paul
Volcker as chairman of the Federal Reserve you would be placing
the very symbol of the world financial crisis in the driver's
seat at the moment that the front wheels of the car edge off
the cliff.

The National Security Question

In 1979, shortly before President Carter appointed Paul
Volcker, Volcker stated in London at a Memorial for British
economist Fred Hirsh: "A DEGREE OF CONTROLLED DISINTEGRATION OF
THE WORLD ECONOMY IS A LEGITIMATE OBJECTIVE FOR THE 1980s."
This policy was described in a series of reports compiled
during 1975 and 1976 by the New York Council on Foreign
Relations under the title "1980s Project."
On June 15, 1983 Yuri Andropov gloated before the Central
Committee plenum in Moscow that the world of capitalism was
experiencing an uncontrollable economic and social
disintegration crisis.

It has been officially stated Soviet

policy, beginning with Patriarch Pimen of the Russian Orthodox




84
Church and subsequently reiterated by Andropov and the KGB, to
"roll back" President Reagan's proclaimed new strategic
doctrine of March 23, 1983 -- the doctrine of "Mutually Assured
Survival" through the research and deployment of new laser and
other energy beam defensive systems capable of "beaming the
bomb" or shooting down enemy missiles in flight.
Paul A. Volcker's policy of "controlled disintegration" of
the American and world economy makes the implementation of
President Reagan's March 23 policy impossible.

Defense

spending has not caused our budget deficit -- Volcker's
policies did.

For each one percent rise in interest rates, it

has been shown that $5 billion is added to the federal deficit,
on account of higher pay-out rates for Treasury bills, etc.
The effect of the abrupt rise in the prime rate under Volcker
was devastating on federal finances.

Usurious interest rates

also meant a rapid shrinkage of the federal tax base, due to
multiplying unemployment and contraction or shutting down of
farms and factories.

The government began paying out more,

even as it took in less.
In a typical lie, Volcker, whose high interest rates under
Carter are largely responsible for the way the federal deficit
has mushroomed out of control, has been a leader of the faction
which demands that the President slash spending to "balance"
the budget.

Members of the Senate, will you buy the argument

that an American "Unilateral Disarmament" would erase the
deficits?




85
Volcker's policies have already significantly eroded the
industrial base of the U.S. economy, the foundation of our
national security.

Industry has been run into obsolescence and

collapse, especially our machine-tool industry and our basic
industries.

We are down to about 100,000 full-time

family-operated farms, facing a food crisis.

Our basic

economic infrastructure has collapsed: water-management (ports
and inland waterways), energy production, transportation and
the basic infrastructure of our cities have fallen into decay.
As Lyndon H. LaRouche, Jr. has emphasized, over the post-war
period as a whole the percentage of our labor force employed as
operatives in agriculture, manufacturing, mining, construction
and transportation has shrunk from 62 percent in 1946, to about
25 percent in 1983.
A World War II war production mobilization, FDR-style but
without the war, around the crash development of laser and
other energy beam defensive systems can get our nation out of
the "Post Industrial Society" mess it has been subjected to.
As Yuri Andropov knows, with Paul A. Volcker as Federal Reserve
Chairman such a policy can never be implemented.

I assure you,

members of the Senate, that Yuri Andropov will smile in
gratitude at each of you who casts a vote for Volcker's
renomination.
In the great strategic crisis phase we are entering, the
Swiss old-money financial interests are in league with the




86
Russians.

The oldest and dirtiest elements in world finance,

the Nazi-linked Swiss and other Central European banking
groups, expect that the collapse of the Third World debt will
lead to the collapse of the American dollar and the debt of the
United States government itself.
Furthermore, the more than $800 billion in developing
sector debt now threatens to explode.
protect American national security?

Is Volcker's policy to
No.

Volcker's priority is

to preserve the institutions of the Swiss-controlled Old World
Economic Order.

At a Washington meeting of the Swiss Bank of

International Settlements in July 1982, Volcker worked out
dollar "swap" arrangements, whereby the Fed, in the event of a
crisis, would pump billions into the $1.7 trillion Eurodollar
markets to bail-out international speculators based in
"offshore,/' crime-infested money centers.

Volcker Is Incompetent

With Volcker in control, the principal weight of any
financial crash will fall upon the people of the United
States.

The principal creator of the "Eurodollar bubble" in

the first place is none other than Paul A. Volcker.

In 1971

then Undersecretary of the Treasury for Monetary Affairs
Volcker convinced Treasury Secretary John Connally, who duped
Nixon into taking the dollar off of gold on August 15.




This

87
allowed a previously negligible, unregulated "offshore"
financial system called the "Eurodollar Market" to mushroom
from $50 billion in dollar-denominated assets at the time to
its current $1.7 trillion.

By "floating" the dollar, the

world's reserve currency, free of gold, Volcker gave the
Eurodollar bankers the power to artificially create the "aroma"
of money as commercial lending credits, and then denominate
those fictitious credits as U.S. dollars.

The Eurodollar funny

money then began to flood the U.S. markets, generating monetary
hyperinflation.

Volcker's 1979 high-interest policy was the

attempt of an incompetent surgeon to "correct" a man's limp by
sawing off his other leg.

Volcker "succeeded" in shutting off

credit to U.S. industry and agriculture.
By the time President Reagan was in office, industrial
output in the United States had fallen 8 to 10 percent
overall.

Volcker had reduced auto production 22 percent;

reduced home-building 50 percent? reduced steel production by
10 percent; and caused American farms to go bankrupt at the
rate of 2,000 per week.

The Savings and Loan Institutions were

caught in the vise of receiving an average of 8 percent income
on home mortgages, while forced to pay out at the new high
15-20 percent rates.

Then in March 1980 Volcker had a

principal hand in deregulating the already shaky banking
industry through the Monetary Control Act of 1980 that helped
to "milk" local financial institutions.




In October 1980 the

88
Federal Reserve authorized the establishment of unregulated
"International Banking Facilities," bringing unsavory
"offshore" banking practices "onshore."
At the same time Volcker and the Swiss imposed
credit-squeezing policies on both the U.S. and other nations.
In June 1982, Volcker told a Council of the Americas audience
at the State Department that the International Monetary Fund,
whose "conditionalities" have nearly destroyed many debtor
nations' economies, should be given supranational powers to
control international credit flows, forbidding any private bank
from lending to Third World nations.

This, combined with the

stated policy of having the I.M.F. conduct "surveillance" or
"putting-the-house-in-order" operations, would destroy the
sovereignty of nations.

On January, 27, 1982 Volcker demanded

that the bankrupt I.M.F. be bailed out by the U.S. Congress,
telling a session of the Joint Economic Committee: "Timely
action by the Congress is essential to assure that I.M.F.
resources are commensurate with possible need."

Finally, in

June 1983, as Volcker's colleague, Swiss National Bank
president Fritz Leutwiler pushed Brazil into a confrontation,
Volcker drew up secret contingency plans to deal with a debt
collapse by having the Federal Reserve buy at or near par the
"bad debts" of the large commercial banks and back these
purchases up by nothing other than a spree of
"hyperinflationary" Treasury printing, according to the




89
authoritative weekly Executive Intelligence Review July 12,
1983.

LaRouche has aptly called this "creative book-keeping

methods."
As LaRouche demonstrates in the accompanying analysis, the
"Great Crisis" may at best be postponed a few months.

Were

Volcker to be reconfirmed, the U.S. and world economy would not
merely continue to shrink.

The national sovereign finances of

the U.S. government would be threatened.

The Swiss Bank for

International Settlements has been demanding "surveillance"
control to "put the U.S. internal economy in order." Since the
June plenum of the Central Committee in Moscow, the ability of
the United States to defend itself in a financial crisis has
become a principal feature of Soviet strategic calculation.
Paul Adolph Volcker has mismanaged the United States to
the point where our national security, as well as the national
sovereignty of most of the nations of the North and South, is
threatened.

A vote cast for Paul Volcker is a vote cast

against the fundamental principles upon which our republic was
founded and looked to as a "temple of liberty and beacon of
hope for all mankind."




90

National
Democratic
Policy
Committee

Lyndon H. LaRouche. Jr.
Chairman
Advisory Council
Warren Hamerman
Chairman

Post Office Box 26 • Midtown Station, 233 W. 38th Street • New York, New York 10018 • (212) 927-4444

LaRouche Opposes
Volcker Reappointment
by Lyndon H. LaRouche, Jr.
I oppose the re-appointment o f Paul Adolph Volcker as chairman o f the Federal Reserve System. For practical reasons, I cast
humility aside, to cite the evidence that I am the world's most
accurate economic forecaster, and state that anyone who considers
Mr. Volcker to have performed on behalf o f the interests o f the
people o f the United States does not know that the world and the
United States are presently sliding downward in a general economic depression, and teetering on the edge o f the worst international financial collapse in modem history.
Naturally, in his o w n fashion, Mr. Volcker has displayed a
certain variety o f competence. During the spring of 1979, prior
to his nomination by President Jimmy Carter, Mr. Volcker publicly avowed that he was in sympathy with a policy which he
described as "controlled disintegration" o f the economy. That
policy was described in a series o f reports compiled during 19751976 by the New York Council on Foreign Relations, a series
of reports entided the "1980s Project," and later published in at
least substantial part by McGraw-Hill under a grant from the Eli
Lilly Endowment. In his functioning as Federal Reserve chairman
since October 1979, Mr. Volcker has faithfully followed those
specifications for disintegrating the U.S. economy, and has done
that work with what may be described as "success."
It should be underlined in this connection, that the first o f the
regular LaRouche-Riemann quarterly forecasts for the U.S. economy, published in the international news weekly Executive Intelligence Review during early November 1979, was dedicated
to forecasting the effects o f Mr. Volcker's policies upon the U.S.
economy. That forecast of November 1979 has been accurate for
the entire period to the present date. I must add that the LaRoucheRiemann quarterly forecasts have been the only regular forecasts
published by either the federal government or private forecasting
services which have been consistendy accurate over the period
since November 1979. Usually, forecasts published by other agencies have been proven more or less absurd when compared with
later results.
On the basis o f past performance, it can not be said that I did
not forewarn repeatedly of the consequences of keeping Mr.
Volcker in the position of Federal Reserve chairman.




The LaRouche-Riemann forecasts for late 1979 and early 1980
forewarned that Volcker's policies would push the economy o f
the United States through a double-dip recession, and then into
a general economic depression. It was forecast that the first recession would become visible at the close o f February 1980—exactly
as this did occur. W e forecast that a temporary leveling-off o f
the downward slide o f the economy would occur over the fall,
winter and spring o f 1980-81, which did occur as forecast. W e
also forecast, also during 1980, that the second dip downward
would erupt during summer and fall o f 1981, which did occur.
W e warned that this would bring the world's economy to the
brink o f a full-fledged economic depression.
W e entered a new worldwide economic depression at the beginning o f 1982. Also as forecast, the world entered into a more
or less permanent state o f international financial crisis during the
summer o f 1982.
True, there are people who actually believe that an upswing
occurred during winter 1983. What did occur was an upswing in
building up a massive, unsold automobile inventory, which can
not be sold o f f without lowering automobile manufacturers' production by a far greater amount than the temporary increase used
to build that massive inventory-bulge. The truth is that levels o f
world trade in manufactured and agricultural goods have continued
to collapse over this entire period, to the effect that whole groups
among indebted exporting nations are in general no longer paying
principal due on account of their foreign debts, and many have
ceased also paying the interest payments due on that debt. They
simply have no foreign-trade earnings to earn the currency needed
to pay external debt.
A very substantial portion of the increased unemployment in
the United States itself" is the direct result o f the collapse o f the
purchasing power o f so-called developing-sector nations.
As a result o f the situation in international affairs which Volcker's Federal Reserve policies have produced, the economy of
West Germany is presendy in a state o f collapse from which it
could never recover under present international monetary arrangements. Italy's economy is a corpse wandering looking for an
undertaker—or a new Mussolini. France's economy is being driven

91

to the brink of collapse. Denmark's debt-ratios are worse than
those of most developing nations. Most OPEC nations are now
operating at substantial net deficit, as aresultof collapse of demand
for energy-supplies. During the recent conference in Moscow,
Soviet General Secretary Yuri Andropov gloated publicly over
the prospects of Soviet world-rule being nourished by the results
of Mr. Volcker's policies of "controlled disintegration."
It would not be unfair to describe Paul A. Volcker as Secretary
Andropov's preferred choice for U.S. Federal Reserve chairman.
We have glanced at the highlights of Mr. Volcker's past performance. Let us look at the future.
The foremost fact facing the Executive and Congress of the
United States is that we face an early international financial collapse whose first wave would wipe out between $1 and $2 trillion
of financial values. Under present International Monetary Fund
and Federal Reserve policies, such a break could collapse as much
as three-quarters of U.S. savings and other banking institutions,
a fact being viewed with cold-blooded amusement among leading
Swiss banking circles.
When this financial collapse will occur can not be predicted,
of course. When it might probably occur can be forecast. I explain
the highlights of the situation.
Most nations of Ibero-America are at present in a de facto
aggravated state of financial default. Should any of the world's
banking-centers choose to do so, the Swiss Bank for International
Settlements, for example, it has every legal right at this moment
to declare most of those nations in default. Such action, which
Swiss bankers have threatened to take repeatedly during the recent
period, would collapse over $300 billion of the present external
debt of Ibero-American nations. The collapse would fall chiefly
upon the City of London.
Since summer 1982, nations have successively plunged into a
state of de facto financial default. In an effort to delay a chainreaction collapse of the international financial system, the U.S.
government, the international monetary institutions, and the private banking systems, have resorted to methods most charitably
described as "creative bookkeeping." This has consisted chiefly
of loaning debtor-nations back their own unpaid IOU's at pyramided interest-charges. In other words, the international monetary
and banking institutions have been playing the game of "pyramid
club," constructing a hyperinflationary chain letter in unpaid and
presently unpayable international debt.
This process, affectionately described as "debt rollover," came
to the end of its first round at the close of the first quarter 1983.
Then began the second round, whose governing genius was the
fact that no matter how bankrupt a debtor is, he is never officially
bankrupt until either he himself or one of his creditors declare
him so. In other words, as long as none of the principal debtornations declared a debt moratorium, and as long as no official
monetary agency or banking institution declared them in default,
we might all stroll about whistling merrily, assuring ourselves
that a solution to the debt-crisis was just around the comer.
We hear such things as, "you will see, Brazil will come to its
senses, and accept IMF conditionalities, and then all will be back
in order." What utter nonsense: the specific wisdom of the IMF's
conditionalities policy is to offer nations loans for which the IMF
presently lacks deposits, on condition that the nations in question
collapse their production. This is like telling a bankrupt individual
that he will only change his state of employment from full-time
to part-time employment. The spectacle created by the present




IMF president, Mr. de Larosiere, does tend to make Mr. Volcker
appear a towering pillar of economic sanity, if only by comparison.
Ah, but we also hear of an "economic upswing" in both the
U.S. and West German economies, economic "upswings" which
exist in fact only in the fertile imaginations of certain statisticians.
I call your attention to a series of dates, the closing financial
booking-dates of June, July and August. Without bookkeeping
tricks vastly more "creative" than those we have witnessed during
the recent ten months, we can not get through those dates without
the triggering of either a large-scale debtors' cartel or the alternative of chaotic financial defaults. One might hope it would be
the former, since this would force an orderly international monetary negotiation, whereas individual nations' separate actions
would produce nothing but uncontrolled chaos.
It is not technically beyond the realm of the possible that
someone will push through something astronomically absurd in
the way of "creative bookeeping methods," to put this bankrupt
system through the remainder of 1983. Soviet General Secretary
Yuri Andropov would have long-range strategic reasons to be
most pleased if such an illusory, temporary solution were attempted. Such methods would collapse a great part of worldtrade levels as presently exist. It would merely postpone, not
prevent the collapse, and would trigger an international hyperinflation resembling that which struck Germany during the early
1920s.
Everything in the past performance of the Federal Reserve
under Volcker's chairmanship suggests that his future performance in that office would assure us the worst possible outcome
of the worsening crisis by which we are presently gripped.
Fortunately, a general financial collapse is not unavoidable.
The United States recovered from a Great Depression through
the mobilization of 1939-1943. If the lessons from that past experience are mastered, we can overcome the present disaster,
even at this late date. The question is posed, therefore, whether
or not Mr. Volcker would be a force of opposition to the methods
we are obliged to launch. It is on this point that I now consider
Mr. Volcker's reappointment potentially a strategic as well as
economic and financial disaster for our nation.
I summarize, as briefly as possible, the two measures of action
required to solve both the present economic crisis and also the
international financial crisis. It should be clear that Mr. Volcker's
past performance and stated policy-outlooks would make him in
effect a saboteur of economic and financial recovery at the Federal
Reserve System.

The Economic Problem
The essential economic problem of our nation is that since the
inauguration of the so-called "Great Society" program, we have
torn down our national research-and-development capabilities,
and have effected no significant advance in our productive technology, except in the form of left-overs from research and development accomplished during the pre-1967 period.
The one exception has been the growth of the data-processing
industry. However, the general use of data-processing investment
has been in areas of application of administrative clerical procedures, where computers have assisted us in counting more easily
the effects of unchecked collapse of the manufacturing, construction, energy-production, and agricultural sectors of the economy.
In terms of the productive powers of operatives employed in either

92
transportation or production of industrial and agricultural goods,
we have progressed into stagnation and presently decline. In terms
of physical output of production per member of the adult laborforce, or the population as a whole, the true dimensions of the
problem become clearer.
The liquidation of employer-firms and farms in transportation,
mining, manufacturing, construction, and agriculture are more
immediately noticed. What tends to be less noticed is the erosion
of basic economic infrastructure, built up during previous decades,
chiefly before 1967, but now collapsing. This includes our basic
mass-transportation infrastructure in categories of freight, intercity and intra-city transport, our energy-production, our watermanagement-systems, our harbors, our inland waterways, and
the basic economic infrastructure essential to industrial employment in our cities. It is proper to think of such basic economic
infrastructure as analogous to a farmer's improvement of his
acreage; without those improvements, the fertility of the farm
collapses, to the degree no skill or diligence in other aspects of
fanning can repair the damage done.
At present, there is no prospect for repairing the accumulated
damage done to our basic economic infrastructure. The budgeted
levels of maintenance collapse year by year, as also the number
of high-technology workplaces in service for production of physical output contract. We are well down the road toward economic
Hell on this account. We are relatively worse off today than we
were at the end of the 1930s Great Depression in 1939, and the
new economic depression has only recently begun.
The deceptive feature of this decline is the social effect of a
shift toward what is called variously a "post-industrial society"
or "technetronic society." In 1946, we employed 62 percent of
our total labor force as operatives in industry, transportation, and
agriculture. Today, less than 25 percent of the available national
labor force is so employed. That ratio of overhead costs to direct
production costs has shifted from 38/62 to 75/25. That has been
the principal economic cause for postwar inflation, as distinct
from monetary causes. However, this also means that the contraction of employment of operatives in industry, transportation,
and agriculture, has less political weight in the minds of the
population and political parties than during earlier decades. The
result is, that whereas we have already a deepening economic
depression in our goods-producing sector, the slower rate of employment in administrative and service categories causes us to be
less politically sensitive to the underlying realities than the population and government would have been during earlier decades.
Buried within this overall picture, there is another set of economic facts ominous for our nation's future. The economic strength
of a modern nation depends upon relatively high and rising ratios
of employment and investment in capital-goods production relative to consumer-goods production. It is the turnover in the
capital-goods sector which limits the rate of growth of technology
and per capita productivity in ail sectors.
Into the 1974 period, the dangerous long-term trends were
covered over by high levels of consumption of output of basic
industries such as steel, by investments of agriculture and construction, as well as the crucial automotive sector. The collapse
of the automotive sector brought the accumulated rot to the surface: our nation's basic industry, like that of Western Europe, is
now dying at accelerating rates of loss of in-service capacity and
accumulated obsolescence.
Under what might be considered as ordinary or normal ar-




rangements, no recovery of the U.S. economy would be foreseeable over the indefinite future. The rate of investment which
we might generate potentially, on the basis of existing levels of
technology, would not be sufficient to match the general rate of
continued collapse of combined industrial and agricultural investments, and of basic economic infrastructure. Without a massive injection of very advanced productive technologies, no
recovery of the U.S. economy is conceivable even under the most
favorable conditions of long-term credit-issuance.
What will cause a recovery, if anything causes it at all, will
be the spillover of beam-weapon and related technologies into
the civilian economy. The use of high-powered lasers as machinetools exemplifies the point to be made. By building up an oversized
capital-goods sector around the development and deployment of
strategic A B M defense-systems based on these new physical principles, a doubling or even trebling of U.S. per capita output over
the remainder of this century is an eminently feasible objective.
Such an economic mobilization will require both a large-scale
generation of new, long-term credit at low-interest-rates, and a
selective steering of the greater portions of primary issues of such
credit, at very nominal interest-rates, into both defense and civilian
industries, as well as injections of advanced technologies related
to the defense effort within the civilian goods-producing sectors.
This effort will pay for itself, in terms of governmental budgets,
if we focus attention on the way in which the federal, state, and
local tax-revenue base is expanded by such a forced-draft recovery. We shall require investment-tax incentives which are fairly
generous, but we must at the same time increase the tax-revenue
basis to offset this as well as reversing present trends in budgetdeficits. The expansion must occur in such a way that the larger
average tax payments per capita are not a net burden, relative to
present taxpayers' burdens.
Some will describe this as a return to a "military economy."
We have a choice between deploying methods which some abhor
as "military economy," and enjoying the continuing plunge into
economic Hell.
In any case, we are presently in a strategic situation comparable
to approximately that of 1938. I believe that actual war can be
avoided, most probably, but it will not be avoidable unless Moscow comes to the negotiating table prepared to negotiate on the
basis of the President's long-range U.S. strategic doctrine. The
Soviet leadership will not negotiate on a workable basis until it
is convinced that our commitment to implement the President's
doctrine within as brief a period as five years is firm and efficient.
Once they are convinced that we are going to survive as a leading
economic and strategic power for the remainder of this century
and beyond, they will finally recognize that they have no sane
choice but to go to war or negotiate on that basis.
It is true that military goods can not be consumed generally
as civilian-economy goods. For that reason, military expenditures
have the form of economic waste. However, let us look at the
military-goods output of our laboratories .and industries as analogous to expenditures for a massive research-and-development
effort. What we must measure is not the price of the military
goods as such. What we must measure is the benefit spilling over
into the civilian economy in the form of new high-technology
investments which would not otherwise be possible.
We require, most urgently, a strategic ABM defense-system
to tree our nation from the nightmare of thermonuclear threat.
However, beyond that, what we require is economic strength.

93
including the means to provide fruitful employment, and also
acceptable conditions o f Life for our young and aging, as well as
the working-age population.
W e require that our monetary institutions be in tune with the
strategic and vital other interests o f our republic at this dangerous
juncture. Where, in your hearts, do any among you believe that
Paul A . Volcker stands on these matters?

Financial Reforms
The solution to the present international financial crisis is elementary. It has two parts. First, we require agreement to convert
the presently overiiung debt-balances o f debtor nations into longterm, negotiable financial assets. This requires only the change
of present financial obligations for suitable issues o f long-term,
low-interest bonds, issued by either the governments or central
banks o f the debtor nations. Second, to ensure the future ability
of those nations to pay due amounts on such bond-issues, we
must aid them in increasing their output and world-market earnings, through new issues o f long-term, low-interest credit issued
specifically for those categories o f combined agricultural, industrial, and infrastructure! investments which will assure the needed
increase o f the debtor's ability to pay.

central banks, or international monetary institutions as they are
presently constituted. They have failed consistently for a dozen
years, and will continue to fail; the failure is a built-in feature o f
their present policies and composition. This is a matter which
can be solved only by action o f the governments of sovereign
states.
W e can and must put a lid on monetary inflation, but this will
require what some will lament as draconian actions taken in
common among governments. The measures required could be
implemented during the coming weeks, if the will to do so were
available.
I must report that my proposals to this effect are widely circulated among governments and other influential institutions in
many parts o f the world, as illustrated by the wide circulation o f
an August 1982, book-length treatment of the Ibero-American
case, Operation Judrez. Henry Kissinger and our State Department have thus far been opposing this even to the point o f deploying some rather extraordinary, and sometimes legally irregular
measures. Nonetheless, as the resolutions o f the recent NonAligned Nations meeting at New Delhi, India, attest, the prevailing disposition among governments o f the developing nations
is for a government-to-government reorganization o f the international monetary order. There is no politically practicable solution available except this approach.

This requires a rigid system of fixed exchange-rates among
currencies, disciplined by a gold-reserve basis in relations among
governments and central-banking systems. Pricing o f replacement
monetary-gold at its true market-value for production o f required
added amounts from mines, must be adopted for this purpose.
In some cases, where existing currencies are in hyperinflationary
disorder, a currency reform resembling that o f President de Gaulle's
heavy-franc measures must be instituted, together with measures
o f capital-flight and exchange-controls, to ensure that monetary
speculation does not once again foster disaster o f the sort experienced under the floating-exchange-rate system we have suffered
since August 1971.

This general monetary reform is needed to defend our nation's
banking-system, now massively overexposed to the debt crisis,
from a potential chain-reaction collapse. This measure is also
urgently required strategically, both for political reasons, and for
economic reasons. W e urgendy require a vast expansion o f the
capital-goods markets potentially represented by developing nations; otherwise we can not provide the needed economic recovery
at home the breadth and depth o f market required to sustain it.

This is a matter which could not be resolved by the existing
monetary order's institutions. The present financial crisis is beyond anything manageable by the private banking system, by

Let us put our nation back to work. The best way to assist
that, is to put Paul A . Volcker out o f work, at least out o f
employment by our Federal Reserve System.

In your hearts, I am certain, you have no doubt where Paul
A . Volcker stands with respect to such urgent measures.

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7

94

A Programmatic Policy for Recovery
by Lyndon H. LaRouche, Jr.
During the 1 9 7 9 - 1 9 8 0 period of the campaign for the 1980
presidential nomination, the Democratic candidate LaRouche
issued a series of programmatic proposals, together with analytical prognoses for the consequences the nation would suffer
if such remedies were not adopted. If we, today, compare the
programs and prognoses of the various candidates for the 1980
presidential nomination, honest men and women will agree
that the LaRouche prognoses were correct, and the competing
prognoses flatly wrong.
In principle, nothing need be changed today in the proposals
offered during 1 9 7 9 - 1 9 8 0 . Only a few points need be added,
to bring the proposals up to date with the problems which
have been added to our national repertoire of daily agony since.
W e reduce the essential proposals for action n o w — n o t waiting until January 1985—in the form of identified points of
legislative and related action by our Federal government. After
listing summaries of each such proposal, we conclude with
relevant comments in summation.

The U.S. Bank Act of 1 9 8 3 - 1 9 8 4
A single act of Congress, in accordance with Section I, Articles §8 and §9, transforming the Federal Reserve System in
entirety into the Third Bank of the United States.
1. The Federal Reserve System is "federalized," made a
subsidiary institution of the Executive Branch of the Federal
government, subject to the inalienable constitutional powers
of the Congress.
2. Limitations on Bank Lending. N o banking institution
which is or has been formerly a member of the Federal Reserve
System, shall make any new loan, except as a renewal of an
existing loan, which is in excess of its actual deposits of currency plus specie, less required reserves.
3. Creation of Credit. The only means for creation of new
volumes of lendable credit by banks within the territories and
possession of the United States, shall be the issuance of goldreserve-denominated-currency-notes of the Federal Treasury
of the United States. Each issuance shall be authorized by an
Act of the Congress, and such notes shall be placed in circulation through the rediscount functions assigned to the Third
Bank of the United States.
4. The Rediscount Function. The Third Bank of the United
States (the "federalized" Federal Reserve System), shall employ




new issues of Treasury currency for rediscount action only
against new individual loan-agreements, for which the specified
and restricted application of loaned funds is consistent with
both general principles of prudence applicable to any bank
loan, and according to lists of categories of approved types of
loans eligible for such rediscount-treatment.
5. Loan-Agreements Approved for Rediscount. Except for
such purposes of national defense or other national emergency,
as authorized by Act of the Congress, all rediscounting of loanagreements with use of new issues of Treasury currency shall
be for investment in such forms of improvement and expansion
of public and private ventures as increase the per-capita production of tangible goods of the nation as a whole.
6. Loan procedures for Rediscount. In the case an individual
loan-agreement is approved for rediscount participation by the
Third Bank of the United States, the authorized disbursements
officer of that Bank shall draw a check against the issue of
Treasury currency authorized to be distributed for this purpose.
The sum advanced by means of this check shall bear a prime
charge of not less than 2 percent and not more than 4 percent
per annum. Ordinarily, this check shall be issued to a private
bank which is a corresponding bank of the Third Bank of the
United States, and that corresponding bank shall be authorized
to make a reasonable service-charge for administration of the
Third Bank's part of the total loan-agreement on account of
which such disbursement is made.

Comments
This proposed Act:
(a) Eliminates the intrinsically m o n e t a r y - i n f l a t i o n a r y
"Keynesian multiplier" from the operations of the bankingsystem as a whole.
(b) Implicitly obliges the U.S. Federal Government to issue
new volumes of lendable currency, adequate to the indicated
classes of increased borrowing-requirements of the U.S. domestic economy and its export-activities in connection with
tangible-goods production. This "compensates" the economy
for the sharp constriction of lending-power caused by condition
(a).
(c) Restricts the main flow of newly created credit, either to
the national defense, or to investments in infrastructural or
agro-industrial tanglible-goods production investments at

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95
competitive levels of technology. It limits loans for other applications to lending-power generated by deposits o f currency
placed physically with private banks. The included objective
is to shift the composition of employment of the labor-force
from a 28 percent employment of productive operations to the
range of between 4 0 percent and 50 percent over the remainder
of the century.
(d) Allows unlimited expansion, provided it occurs in a climate o f advancing technology, and under the impact o f the
credit-expansion and lending stipulations of this Act is counterinflationary within the limits of impact of national defense
spending. It is therefore, also, implicitly a full employment Act.

The U.S. Tax-reform Act of 1983-1984
1. General Purpose o f T a x - R e f o r m : (a) T o exterminate taxable-income advantages from parasitical investments in groundrent, usury, and monopolistic forms of commodity-price speculation; (b) T o afford preferred tax-treatment to such portions
of private savings and corporate profits which are invested in
the manner stipulated for rediscount-action by the Third Bank
o f the United States; (c) T o shift the burden of taxation from
the basic income of households to parasitical forms of capitalgains income associated with ground-rent, usury, and c o m modity-price speculation.
2. Personal Income-Tax of Households. T o increase the percapita exemption of income of households step-wise to $5,000
per annum.
3. Investment-Tax Credits. T o provide tax-credits for investments in technologically-progressive production of tangible
goods and infrastructural improvements bearing upon the production and transportation of such goods, and to extend these
benefits to the household saver and private lending-institutions—in ratio to paid-in balances of the investment in which
they share. This investment tax-credit provision shall replace
capital-gains treatment except for the case of realization of
inventions and research-and-development.
4. General Taxation. The operating budget of the Federal
Government, as distinct from the capital-investments budget,
should be balanced. A general, graduated income tax adequate
to this purpose, adapted to the afore-listed conditions, shall
be drafted to meet this requirement.

National Infra-Structure Projects Acts
1. General Purpose of Acts. These acts shall establish or
refurbish Federal Authorities in such areas of either public
works or privately-held public utilities, which bear directly
upon the following categories of infrastructure:
2. National Fresh-Water Supplies and Management.
3. National Transportation: including canals, harbors, railways, and Federal highway systems, and interfaces and warehousing functions providing the interface among modes of
transport.
4. National Energy-Production: especially facilitating completion o f nuclear-energy and related high energy-flux density
generating modes, with Federal override over costly impediments; giving priority to low-cost, long-term construction and




permanent-financing loans for this purpose.
5. Urban basic infrastructure. Utilities, public transportation, and urban infrastructure for technologically advanced
modes of tangible-goods-producing industries.

The U.S. Foreign-Banking Act of 1983-1984
1. General Purpose o f Act: (a) T o facilitate the establishment
of a new international monetary system, based on gold-reserve
relationship among states, and a system of fixed currencyvalues; (b) to provide for reorganization of debts of nations
indebted to the U.S. Government or to financial institutions
which are private institutions established within and according
to the laws of the United States; (c) T o protect the United States
from unwholesome practices of foreign financial institutions.
2. U.S. Currency. Henceforth, the only form of lawful currency issued by the United States shall be gold-reserve-denominated U.S. Treasury notes. Imbalances on national account,
involving this new issue o f currency shall be resolved by goldreserve transfers to nations which have entered into agreements
to conduct their affairs in the same mode.
3. Gold-reserve Value. Monetary gold shall be priced at a
market-price based on the price determined by cost-plus-profit
by gold-mining, taking into account the volumes of gold bullion
which must be produced.
4. Reorganization o f Foreign Loans. If a debtor-nation shall
require reorganization of its debt-balances, it shall issue goldreserve-denominated bonds from a national bank based on the
same principles as the Third Bank of the United States. These
bonds shall be rediscountable security for authorized exportloans within the United States' banking-system, and shall be
eligible for use of purchasing the old loans to be reorganized.
The old loans shall cease to accrue charges after the cut-off
date established for such exchanges by agreement o f the Federal
Government of the United States, and the bond-issues presented
in purchase of the old loans shall be equal to accruals up to
that cut-off date. The bonds shall bear a yield of between 2
percent and 4 percent per annum, on the basis of gold-fixed
parity of currency in which the bonds are denominated.
5. N o foreign financial institution which does not maintain
the standards of banking specified for banks of the United
States may acquire any p a n of the ownership of a bank doing
business in the United States, and may not itself conduct business within the United States. Any foreign bank doing business
within or sharing ownership of a bank established within the
United States must provide full transparency of its total operations to bank-auditing agencies of the Federal Government
of the United States.
These several Acts adequately outline the policy for recovery,
otherwise explicitly or implicitly stated in preceding portions
of this policy-memorandum.
What needs to be stressed is that the depleted infrastructure
and goods-producing capacity of the U.S. economy prohibits
a genuine, sustainable recovery unless investment-capital is
contracted to a high degree in the most advanced capital-goods
technologies, the same spectrum of technologies implicit in the
development and deployment of a full-scale strategic A B M
defense-system.

96
The following is the text of the telegram fro® the
President of the Union of Engineers of the State of Rio de
Janeiro, Brazil; accompanied by a translations
CHAIRMAN
SENATE BANKING COMMITTEE
UNITED STATES SENATE
WASHINGTON y D.C.
EM ENCONTRO REALIZADO EM BRASILIA NO MES DE ABRIL, 93
SINDICATOS REPRESENTANDO 1,5 MILHOES DE TRABALHADORES EM
EMPRESAS ESTATAIS BRASILEIRAS CONDENOU 0 ADORDO COM 0 FMI EM
VIRTUDE DOS PREJUIZOS QUE ESTE REPRESENTA PARA OS TRABALHADORES
E PARA A SOBERANIA NACIONAL.
NO MOMENTO EM QUE 0 SENADO
AMERICAN DECIDE SOBRE A MANUTENCAO DO SR. PAUL VOLCKER NO FRB,
E IMPOTANTE REGISTRAR 0 NOSSO PROTESTO AS DIRETRIZES ECONOMICAS
IMPOSTAS PELO GOVERNO AMERICANO A PAISES COMO 0 BRASIL.
ASSINADO
JORGE BITTAR
PRESIDENTE DO
SINDICATO DOS ENGENHEIROS NO
ESTADO DE RIO DE JANEIRO

CHAIRMAN
SENATE BANKING COMMITTEE
UNITED STATES SENATE
WASHINGTON, D.C.
AT A MEETING HELD IN BRASILIA IN THE MONTH OF ABRIL, 93 UNIONS,
REPRESENTING 1.5 MILLION WORKERS IN BRAZILIAN STATE
ENTERPRISES, CONDEMNED THE ACCORD WITH THE IMF IN LIGHT OF THE
DAMAGE THAT THIS REPRESENTS FOR WORKERS AND FOR NATIONAL
SOVEREIGNTY.
AT THE MOMENT WHEN THE U.S. SENATE IS DECIDING
ABOUT THE MAINTENANCE OF MR. PAUL VOLCKER ON THE FEDERAL
RESERVE BOARD, IT IS IMPORTANT THAT WE REGISTER OUR PROTEST
AGAINST THE ECONOMIC DIRECTIVES IMPOSED BY THE AMERICAN
GOVERNMENT ON COUNTRIES SUCH AS BRAZIL.




SIGNED
JORGE BITTAR
PRESIDENT OF
THE UNION OF ENGINEERS OF THE
STATE OF RIO DE JANEIRO

97
Walter Boehnke, factory council arid member of the Deutsche
Angestellten Gewerkschaft (DAG, Uest-German white collar workers
union)
As an active trade unionist in the Federal Republic of Germany I
am shocked to hear that Paul Volcker is going to be appointed as
the new chief of the U.S. Federal Reserve for another four years.
We did not overlook here how the high interest rate policy
conducted since. 1979 ruined the international economy. It was
Paul Volcker who started the policy of tight money and high
interest rates. For us trade unionists this meant for the last
four years that unemployment figures Jumped up, that speedup
increased and real wages decreased. We still remember quite well
how in 1980 Volcker demanded to lower workers' living standards.
No, there won't be an upswing with this man. The crisis will come
to the peak while in the U.S. one has to take notice of the
following: The Federal Republic of Germany is existentially
dependant on the export of 40 X of her products. High interest
rates strangulate trade between nations. For this reason I
explicitly support Mr. LaRouche's plan for a reform of the
worldwide monetery system and a global employment program in the
framework of the New World Economic Order. LaRouche is perfectly
right that nobody on this world has to starve if North and South
would closely cooperate in technological "great projects" in
agriculture, infrastructure and industry. Instead of Volcker's
poverty program I support LaRouche's program for world
development.

Werner Lamps, member of the West-German Metall workers Union
(IGM) and No. 1 candidate of the EAR for the state parliament of
Bremen .
As trade union representative in the North German ship building
industry I can only be astonished: 35 years ago we succeeded with
the help of the Americans to prevent the horgenthau plan that
would have me^cjft the total demontage of German industry. Today
the same evil of i ndustr i a 1 r a z i ng comes back to us f rom the
United States incorporated by Paul Volcker. His renewed
appointment to the Chief of the U.S. Federal Reserve must not
come through. For four years we were suffering from the results
of his devastating high interest rate policy. I can legitimately
claim that he is co-responsible for the loss of more than 50 % of
the production capacitiy in the steal and ship building industry.
As a trade unionist and politically active citizen I strongly
support the way out of the world economic crisis presented by the
program of Lyndon LaRouche. Worldwide and therefore also in
Northern Germany this program is well-known as "Operation
Juarez". This Program points out realistic ways how economic
growth and full employment can be created in North and South.




98
(1) General Revault D'Allonnes France, member of Committee France
and Its Amy, Aide to Marshall Le Clerc, World Mar II, Military
Attache in many countries, author of report, "In Defense of
Europe," for the 'Europe* list' of the RPR, in favor of
development of bean weapons.
I support the policy of President Reagan, in particular, for
beam-weapons. I am opposed to any policy of high interest rates,
blocking productive investments necessary for both civilian and
military purposes, in the United States and in Europe. I oppose
Mr. Volcker renomination.
(2) Werner Dietrich, former First General Secretary, Metal Workers'
Trade Union, Dortmund.
The present mass-unemployment in West Germany, in the steel
industry of the Ruhr region in particular, and the associated
contraction of the West German economy, is primarily due to Paul
Volcker's high-interest rate policy.
I demand that the relevant U.S. authorities reject Volcker's
renomination.
<3> Mr. E. Wenzel, factory council chairman of IG Metall (Metal
Worker's Trade Union), Frankfurt West Germany.
In the name of my fellow workers, I oppose the renomination of
Paul Volcker as chairman of the Federal Reserve because his
interest rates policy has caused the collapse of West German
export markets in the developing countries. Therefore, another
four years of Volkcer's policies would the United States from
supporting the New World Economic Order that our industries need
so urgently.

July 12 < N S I P S ) — T h e following message was sent today by the Union
of Workers of Bogota and Cundinamarca (UTRABOC), to Mr. Warren
Hamerman, Chairman of the National Democratic Policy Committee.
Mr. Hamerman will read this message as part of his testimony
against the reappointment of Paul Volcker as head of the Federal
Reserve during Senate Banking Committee hearings this Thursday.
UTRABOC is the largest labor union in the city of Bogota and the
Department of Cundinamarca, Colombia, jmd. is_part .of _ the^UTG_labor.
confederation.
"In the name of thousands of workers, we reject the policy of
high interest rates which has caused poverty, misery and
unemployment. We expect the non-confirmation of Mr. Paul Volcker."
Signed by
UTRABOC
Jorge Carrillo, President
Pedro Rubio, Secretary General
Bogota, Colombia
July 12, 1983




99
(4) Raphael Lune Gijon; Maria Teresa Tome de Hurgay member Club of
Life, Spain.
I am against the confirmation of Paul Volcker as Chairman of
the Federal Reserve because of the negative effects of his
actions on the world economy.
(5) Kurt Frankborn, Chairman of the Industrial Association "Utvekla
Sverige" (Develop Sweden), with a membership of 500 firms. Mr.
Frankborn is Executive Director of Hoegstad Aluminum in Mjoelby,
Sweden.
As a Swedish industrial entrepreneur and as representtive of
Swedish high-technology oriented industry, I oppose the high
interest rate policy Paul Volcker stands for, a policy which has
destroyed export markets for Swedish nuclear industry in
countries like Mexico and Turkey, just to mention two examples.
The high interest rate policy of Volkcer has also had a
devastating effect on domestic industry, like our ship-yards,
steel industry and pulp industry. Therefore, as Chairman of
Utveckla Sverige, an association of small and middle-sized
industry corporations, I think that to confirm the reappointment
of Paul Volcker will be a catastrophic and disastrous decision
for Swedish industry.
(6) Modesto Dematte, Italian Agriculture Trade Union, Come, Italy;
recipient of the Medal of a Knight of Honor of the Italian
Republic.
I believe there can be no farmer anywhere in the world who is
not aware of the disastrous consequences of the high interest
rate policies of Paul Volcker for the agricultural production of
one's own country, and for world food supply. Such policies which
destroy food production in a hungry world are as direct a cause
of death as a bullet in the brain. I therefore appeal to the
Congress of the United States to not confirm the renomination of
Paul Volcker as Chairman of the Federal Reserve, and am convinced
that Congress would thereby be lending the greatest possible
support to President Ronald Reagan.




100

LABOR OPPOSES PAUL VOLCKER
"We, the undersigned trade union leaders, demand that the
U.S. Senate move immediately to deny the confirmation of Paul
Adolph Volcker as Chairman of the Federal Reserve.
We further
demand that the House of Representatives resolve as well to
repudiate Volcker's policies which have destroyed both our
industrial and labor resources.
"Now, Volcker would have the U.S. bankrupt our currency
further by buying up the worthless financial paper of the major
New York bank, as a chain reaction collapse begins over the
next weeks or months.
"LaRouche's proposal to reorganize the debt to open up vast
new markets for U.S. capital goods, including the sale of
nuclear power plants, must be implemented now.
"Lane Kirkland and our national leadership must speak
loudly and organize mass agitation to force Volcker out.
Anyone who does not act forcefully to dump Volcker now is the
friend neither of American Labor, nor of America itself."
Endorsers:
Uayland Cushman, Sgt.-at-Arms, UAW Retirees #148, Downey,
Ca1 ifornia
Henry Hartinez, Financial Secretary, Painters #1348, Los
Angeles, California
Tom Simmons, President, IAM #946, Riverside, California
Eddie Peralta, Business Representative, Teamsters #986, Los
Angeles, California
ffar shall- ifoTrtvny""Business Agent, Lumber and Sawmi 11" Workers
#2288, Los Angeles, California
Marco Aguilar, Financial Secretary, Metal Polishers #67, Los
Angeles, California
Corbett Bagley, Business Agent, Laborers #1184, El Centro,
California
Claude L. Swigart, President, Building and Construction
Council, Southwest Michigan
J.T. Lewis, President, Building and Construction
Council, Jackson, Tennessee

Trades

Trades

Lucky McClintock, President, Central Kentucky Building and
Construction Trades Council
Dwayne Brown, President and Business Agent, Carpenters
Brewer, Maine




#621,

101
Peter A. Risberg, Business Manager, IBEW #388, Stevens Point,
Wisconsin
Kern, Inyo, Mono Building Trades Council, Bakersfield,
California
Doug Zimmerman, Secretary, Kern, Inyo, Mono Building Trades
Council, Bakersfield, California
Walter J. Scott, Business Agent, Carpenters #944, San
Bernardino, California
Jim Wright, Business Agent, Boilermakers #732, National
California

City,

James M. Ryan, President, Steamfitters *101,
Secretary-Treasurer, Building and Construction Trades Council,
Memphis, Tennessee
Cordis Diuas, President, Building and Construction
Council, Memphis, Tennessee

Trades

John W. Zerbe, President, Bricklayers #12, former
secretary-treasurer, Building and Construction Trades Council,
Flint, Michigan
W.B. Sanders, President, West Kentucky Building and
Construction Trades Council, Paducah, Kentucky
Jim McManus, Business Agent, Plumbers #24, Summit, New Jersey
John Cleary, Secretary-Treasurer, International Brotherhood of
Teamsters #892, Jersey City, New Jersey
Joe Chaneyfield, Vice-President, Service Employees
International Union #305, Newark, New Jersey
Michael Marco, President, Building and Construction Trades
Council, Delware, Greene, Ulster, Sullivan Counties, New York}
President, International Brotherhood of Teamsters #445,
Newburgh, New York
Dale Snyder, Business Manager, Bricklayers #11, Binghamton, New
York
K e n Mulftei^sen, -Presitlent, A m e r i c a n f e d e r a t i o n -of^Gra in * i l 1 ers
#36, Buffalo, New York
Anthony Inorio, Treasurer, Laborers #455, West Haven,
Connecticut
Robert Keith, President, International Longshoremen's
Association #1543, Jacksonville, Florida
George Elrod, President, St. Joseph Velley Building and
Construction Trades Council, South Bend, Indiana
(organizational affilations for identification




only)

102
FARMERS OPPOSE VOLCKER
Dear Congressmen:
"We urge you to oppose the $8-5 billion appropriation for
the IMF and the reappointment of Paul Volcker as Chairman of
the Federal Reserve Board.
The policies of the IMF and the
Federal Rserue, which bleed the real economy in the name of
'monetary stability' have brought on the Second Great
Depression of the 20th century.
Senate bill #24, sponsored by
Walter Huyddleston <D-Ky) points the way to the solution of the
international debt crisis by declaring a moratorium on the FHA
farm debt in the U.S., Brazil.
Mexico, and other
Ibero-American countries are forming a debtors' cartel to force
the same type of moratorium on the IMF.
"In the interest of national security, President Reagan
should accept these moratoria and dump Volcker and the IMF.
"The U.S. can model its new North/South relations on the
historical precedent set by Abraham Lindoln and Mexican
President Benito Juarez.
"Therefore, the Senate should confirm as chairman of the
Fed only a nominee who will accept these arrangements as a
basis for new credit and monetary policies which promote
capital goop3Eexports as the only means for economic recovery."
Patrick O'Reilly, farmer, Canby, Minnesota; Chairman, Minnesota
National Democratic Policy Committee
Annabelle Bourgois, Baldwin, North Dakota; chairwoman of North
Dakota National Democratic Policy Committee and former
candidate for U.S. Senate
Joe Rolling, Arco, Minnesota, member, NFO; School Board of Arco
Dean Nichols, former president, Indiana NFO
Alan Cover, Kansas NFO National Director, Abilene, Kansas
Don Berdahl, farmer, Towner, North Dakota
Roger Wells, Axtell, Nebraska; NDPC Chapter

Chairman.

Tom Kersey, National Chairman, Agriculture Policy
Unadilla, Georgia

Committee,

Hxrry^Tii.'^i.i^irr&l" "STTiTat ions -for idenTiTTc aTi on " on I y >




103
MINORITIES OPPOSE VOLCKER
Proposed Resolution to Terminate
Paul Volcker's Destructive Activities and Policies
"Paul A. Volcker has recently been renominated to be
chairman of the Federal Reserve Bank for another four—year term
by President Reagan.
Volcker, over a three and one-half year
period, has insittuted a policy of keeping interest rates in
the 16% range.
This has directly brought about the collapse of
manufacturing and agriculture, and an increase by several
millions in total unemployment.
It has also destroyed the
capability of the developing sector nations to obtain credit
for their own productive economies, and purchase of American
goods.
"During World War II, when recovery from the depression
occurred, interest rates stayed below 1 1/2 %. We need a
mobilization of our population and productive resources similar
to 1939-43.
"We believe it urgently necessary to block Reagan's
nomination of Volcker.
We call upon all people of goodwill to
run for office as a means of preventing Volcker's nomination
and the policies Volcker represents."
Endorsers:
Ralph Cassimere, Chairman, Region 6, NAACP (Oklahoma, Texas,
Arkansas, Louisiana and New Mexico)
Leslie Brown, Oklahoma, Chairman-Elect Region 6f

NAACP

Rev. Lamar Keels, Arkansas State President, NAACP
Alex Johnson, Arizona State President, NAACP
Ed Hales, Sr., President, Washington D.C. NAACP
Barbara Simmons, Vice-President, Washington D.C-

NAACP

PFred Watkins, Chairman, Dallas, Tx.4
Rev. Wade Watts, Chairman, Oklahoma State NAACP
Alfred Rucks, Chairman, New Mexico NAACP
Willie E. Ziegler, Secretary, Freep»ort-Roosevel t, L.I., New
York NAACP
Dr. William Gibson, President, South Carolina

NAACP

Dr. Evelyn Roberts, Member, NAACP Nationa Board; Ohio
Mary E. Robinson, Member, NAACP National Board?
Iowa-Nebraska NAACP




President,

104
Joe Eddie Roy, President, Colorado NAACP
Louisa Fletcher, Member, NAACP National Board*
-Kansas NAACP

President,

Roberta Fann, Executive Committee, Cleveland, Ohio NAACP
Jesse Goodwin, First President, Detroit, Michigan
Lydia Sims, President, Washington State NAACP
Enolia McMillan, President, Maryland

NAACP

Rupert Richardson, Member, National Board; President, Louisiana
NAACP
O.G. Christian, President, West Philadelphia

NAACP

Neal Adams, former area Chairman, Dada, Broward and Monroe
Counties, Florida
Albert Sankes, Chairman, Montgomery County, Maryland
(organizational affilations for identification

NAACP

only)

Texas Labor Opposes Volcker
"We, as leaders of labor, want to express our outrage at
the appointment of Paul Volcker to another four years as
Chairman—of the Federal Reserve.
Paul Volcker is more
responsible than any individual in the last four years for the
unemployment now crippling our nation and for skyrocketing
budget defeicits which threaten further cuts in vital programs
affecting working people. We take this opportunity to urge
Senators Tower and Bentsen in the strongest terms to vote
against the confirmation of Paul Volcker in the U.S. Senate."
Endorsers s
Bob Ritchie, Business Representative, Bricklayers #6, Ft.
Worth, Texas
Pete Ludwick, Business Agent, International Association of
Machinists Lodge #776, Ft. Worth, Texas
Herb Kratz, Business Agent, Millwrights #1421, Arlington, Texas
(organizationa1 affiliations for identification purposes only)




105
NAACP MEMBERS OPPOSE VOLCKER
Proposed Resolution to Terminate
Paul Volcker's Destructive Activities and Policies
"Paul A. Volcker has recently been renominated to be chairman of the Federal Reserve Bank for another four-year term by
President Reagan. Volcker, over a three and one-half year period,
has instituted a policy of keeping interest rates in the range of 16%.
This has directly brought about the collapse of manufacturing and
agriculture, and in increase by several millions of total unemployment. It has also destroyed the capability of the developing sector
nations to obtain credit for their own productive economies, and purchase
of American goods.
"During World War II, when recovery from the depression occurred,
interest rates stayed below 1.5%. We need a mobilization of our
population andp roductive resources similar to 1939-43.
"We believe it is urgently necessary to block Reagan's nomination
of Volcker. We call upon all people of goodwill to run for office
as a means of preventing Volcker's nomination and the policies
Volcker represents."
Endorsers:
John Holland, Cooksville, MD.
Naomi Adams, Cleveland, OH.
Bruce Wormley, King William, VA.
Gertrude Dungee, King William, VA.
Terence Bramley, Fort Wayne, IN.
Robert Price, Silver Spring, MD.
Yolanda Williams, Wichita, KS.
Ernest Madden, Valley, CA.
Raymond Landrey, New Orleans, LA.
Aria Moore, Williamstown, N.C.
Brandon Farlander, River Ridge, LA.
Regina Winn, New Orleans, LA.
Betty Clark, Elyria, OH.
Kelly Beshearn, Saint Joseph, MO.
James Rountree, Detroit, MI.
Ronald Walker, Saint Albans, NY
Vernon Smith, MI.
Lee Donis, Lorraine, OH.
Marion Webb, Aberdeen, MD.
Eloise Edwards, Tupelo, MS.
Sandra Fields, Willowgrove, PA.
Lamarr Keels, Camben, ARK., President, NAACP of Arkansas
Mary Patton, Columbia, SC.
Louis Braxton, CA.
Jennifer Keys, Omaha, NB.
Wilmer Hogan, Omaha, NB.
Mamy Scriber, Baltimore, MD.
Bernice Burton, New Brunswick, CT.
Mrs. Tommy Walker, Lancaster, PA.
George E. Boggs, Ailes, MD.
Ester Robertson, Los Angeles, CA.




106
Dorothy Eure, Omaha, NB.
James Mitchell, AL.
Michael Ray Hall, Omaha, NB.
Olive Stuart, Marion, OH.
R. Henderson, Woodward, TX.
Mrs. E.E. Denkin, Kendall Park, MS.
Christine Reed, Macomb GA.
Reverand Silvester McClain, Wells, TX.
Alice Hopps, Albakurque, NM.
Jenny Montgomery, New Orleans, LA.
Betty Ekperikpe, New Orleans, LA.
T.E. Burke, New York, NY
H.C. Massefy, Ogden, UT.
George Freeman, Akron, OH.
Nider Garland, Wilburforce, OH.
Robyn Battle VI, Detroit, MI.
William Travers, Waldorf, MD.
L. Michelson, New York, NY.
C. Luskin, Cheyenne, WY.
W.B. Flemming, Corpus Christi, TX.
A. Taylor, Bess, AL.
Walter Marshall, Winston Salem, NC.
Garrie Cooper, Weston, AR.
Earl Matthew. New Orleans, LA.
J.G. Arradondo, Nashville, TN.
Madeleine Rhone, Chicago, IL.
Dorothy Watson, Houston, TX.
Gale Evans, New Orleans, LA.
Pauleen White, Germantown, MD.
Will a Butler, Texas City, TX.
Laverne Bond, Memphis, TN.
Ernice Burgess, St. Louis, MO.
Carolyn Tindall, S. Orange, N.O.
Robert Beverly, Butler Gienn, VA.
Reginald Beverly, Butler Glenn, VA.
Victor Talier, Providence RI
Sarah McClamm, Marlboro, NY
Mrs. Taylor, Amity, NY




107

Proposed Resolution to Terminate teeD
Destructi
ue Activities and Policies of
Paul A. Volcker, Federal Reserve Chairman
(Currently before NAACP National Convention in New Orleans)
"WHEREAS: Paul A. Volcker has recently been renominated to
be Chairman of the Federal Reserve Bank for another four-year
term by President Reagan; and
WHEREAS: Paul A. Volcker has, over a three and one-half
year period, instituted a policy of keeping interest rates in
the 16% range, which has directly brought about the collapse of
manufacturing and agriculture, and an increase in unemployment
of several millions of people; and
WHEREAS: Paul A. Volcker's policy has adversely affected
the capability of the developing sector nations to obtain
credit for their own productive economies, and consequently
affected their capability to purchase American goods; and
WHEREAS: During World War II, when economic recovery from
the Great Depression occurred, interest rates stayed at or
below the level of one and one-half percent, exactly the
contrary to Volcker's policy; and
WHEREAS: We need a mobilization of the population and
productive resources of the United States similar to that of
World War II, but that mobilization should be based on using
our industry and wealth*F\I9structive rather than
destructive purposes such as war; and
THEREFORE, BE, IT RESOLVED, that the NAACP believes it
urgently necessary to block Reagan's nomination of Paul A.
Volcker to serve another term as Chairman of the Federal
Reserve.
Endorsed and Passed by at NAACP National Convention by:
Region One, NAACP (California, Washington, Oregon, Alaska,
Hawaii, Nevada, Arizona)
Region Six, NAACP (Louisiana, Texas, Arkansas, Oklahoma, New
Mexico)
(Submitted to the Convention Resolutions Committee as an
Emergency Resolution)
(organizational affilations for identification only)




108
Flint, Michigan NAACP Opposes Volcker
"The Executive Board of the Flint Branch of the National
Association for the Advancement of Colored People being
informed that the Federal Congress is being urged by Paul
Adolph Volcker, Chairman of the Federal Reserve Board, to
bailout the private international banks by loans of 8-5 billion
dollars to the Internatona1 Monetary Fund, finds as follows.
"The international debt crisis is of such a magnitude that
the present proposal is a band-aid approach to a dying patient
-- the present international private banking system;
"The debtor countries are essentially healthy, being
wealthy in people and resources;
"The Federal Reserve Board under Volcker has pursued a
relentless program of high intY>$xwd tight money depriving
U.S. industry and population of their life's blood —
credit,
and has thereby put thousands of businesses into bankruptcy and
has thrown millions of hard-working, productive people out of
work into soup kitchens and on welfare;
"The current world depression was brought about by these
views of the oligarchy dominating the International Monetary
Fund, the World Bank, the private internatona1 banks and the
Federal Reserve Board;
"The draconian conditiona1 ities imposed on loans by the
International Monetary Fund to the debtor countries of the
private international banks will worsen the depression and will
cause starvation, pestilence, chaos and untold human misery in
the underdeveloped debtor countries and more unemployment n the
advanced industrial countries including our own.
"The owners of the international private banks are experts
only in looting the working people of the world and have
demonstrated their incompetence and stupidity many times in
bringing the people of the world wars and economic depressions
and it is time the political power of this oligarchy be broken.
WHEREFORE, BE IT RESOLVED:
1. Not one penny of U.S. taxpayer money be used to bailout
private international banks.
2.
The United States of America shall remonetize gold as
the reserve basis of the U.S. monetary system and shall
federalize the Federal Reserve System to insure its service to
the prosperity of this nation and terminate its branch status
of the private banking oligarchy.
3.
The Unied States shall not Join the oligarchy's Swiss
Bank for Internatona1 Settlements.




109
4.
The United States shall initiate meetings with the
debtor nations and industrial countries willing to participate
to establish a new international banking system.
>i
5.
The United StatesQall encourage the generation of
credit necessary to expand trade and industrialization, secured
by the future production as the ability to repay.
6. The United States shall adopt as policy that the world
framework must be established by which the under-developed poor
nations may elevate themselves to our pre-Volcker level to
replace the present Volcker policy of forcing us down to the
lowest level of the backward nations so he may subsidize the
private banks and make good their usurious bad debts.
7.
It is further resolved that a copy of this Resolution
be forwarded to the National Office of the NAACP for action,
the Michigan Conference of Branches, to the Michigan
Corigressiona 1 Delegation and to the President of the United
States."
(Unanimously Adopted at a Regular Executive Meeting held May 2,
1983.)

Statement of Tom Kersey
Opposing Confirmation of Paul A. Volcker
"I feel very strongly that the confirmation of Paul
Volcker's reappointment as Federal Reserve Chairman will take
away any hope, however dim it might be, that agriculture will
have an opportunity for any kind of recovery for the next four
years.
" We feel that the Congress of the United states should
look at the things that have happened in agriculture in the
past four years — at the conditions we face today and what the
realistic projections for the immediate future are, and realize
that with Paul Volcker's policies not only will we face a
starving world, but a starving nation in the very near future."
Tom Kersey, National Chairman, Agriculture Policy
Unadilla, Georgia

23-790

0—83




8

Commmittee,

110

MICHIGAN CONSTITUENCIES OPPOSE VOLCKER
"We urge you to reject the $8.4 billion bailout of the
International Monetary Fund and the renomination of Paul
Volcker as Chairman of the Federal Reserve Board.
"The policies of the IMF and the Federal Reserve, which
bleed the real economy in the name of 'monetary stability,'
have brought on the second Great Depression of the Twentieth
Century.
"The U.S. should support the call of developing-sector
nations for debt reorganization and creation of a new source of
low-interest rate credit, which can lead to a boom in U.S.
capital goods exports to these nations.
"The U.S. Constitution wisely places solely in Congress
power over the supply of currency and its value.
The Federal
Reservodhould be reformed into an arm of economic policy
subject to the control of our elected representatives.
The
Senate should confirm as chairman only a nominee committed to
using credit and monetary policy in the service of economic
growth."
Endorsers s
Max Dean, Executive Board, Genesee County Democratic
State Coordinator, NDPC, Flint, Michigan

Party?

Jay H. Kegerreis, Vice President, Secretary, Treasurer,
Glastendert, Inc.; Member, Governmental Affairs Committee,
National Assn. of Food Equipment Manufacturers, Saginaw,
Michigan
Ted Albert, Former Democratic Party Chairman, Gegobic County
T. Calvin Jenerou, President, Upper Peninsula Building and
Construction Trades Council, AFL-CIO, Manistique, Michigan
C.L. Lepine, Chairman, Division 831, Brotherhood of Locomotive
Engineers, Dearborn, Michigan
Stanley Glass, President, IAM *82; Vice President, District
Lodge •£<>, IAM, Detroit, Michigan
Ed Bivens, former mayor, Inkster; former chairman, National
Black Republican Council}
i
— (ur ydniidtlmial af i 1 1 s t ion's tlor ident if icatTon'onTy)




Ill
STATEMENT OF BILLY DAVIS
CANDIDATE FOR GOVERNOR OF MISSISSIPPI
Gentlemen:
I am a farmer from South Mississippi and a candidate for
Governor.
Since the late AO's, I have seen the systematic
destruction of agriculture in the United States,
However,
since 1979, we in the agricultural baseline productive sector
have seen the monetary policy of the Federal Reserve weak havoc
with our productive capabilities.
We attribute this to the
policies implemented by Mr. Paul A. Volcker.
In retrospect, we observe that the only sector of America
which seemingly benefitted from such policies has been the
speculative sector.
Not directed to production of real
tangible goods, very handsome paper profits have been amassed
by groups not the least interested in the true wealth of
America or its people, except what they can garner from their
earnings.
Heavy industry and agriculture have given their
virtual lifeblood to maintain some semblance of progress, but
are being wiped out.
The position of the average American
today is analogous to the citizen of pre-1776; the difference
being that the destroyers of productivity are from within our
country as well as without.
The pinnacle of this assault is in
my belief Paul A. Volcker.
The world needs American goods more today than ever before,
especially south of the Tropic of Capricorn, and the trade and
credit policy of the United States is locked into a third party
relationship with the IMF, which is not only draining our
national fiscal stability, but setting up the Treasury of the
U.S. as the lender of last resort to fund a world indebtedness
beyond the average citizens's imagination.
Not only would this
policy result in the collapse of the American dollar and world
commerce, buTTQ would create hyperinflation which surely would
be the epitaph of American industry and obligate generations
President
yet unborn to taxation not of their own making.
George Washington in his Farewell Address (draft written by
Alexander Hamilton), warned us of Just such entanglement.
Mr.
Volcker would have the U.S. totally submissive to Just such a
profile to the benefit of a select few financial centers,
foreign and domestic.
I urge you to consider ,the potential
TBT~srtftItutents
should Mr . Vo 1 cker"be~ conf 1 rmed* a n d
he then openly move us even further into such entanglements
contrary to our national security. I commend to your
deliberations the story of the cave in Plato's "Republic," and
Amos 8:4.
Billy Davis, Candidate for Governor of Mississippi?
Mississippi
0291o




Laurel,

112
Telegram to Venezuelan President Luis Herrara
Supporting Global Solution to Debt

President Luis Herrera
Palacio de Miraflores
Caracas, Venezuela

Campins

Campins

Sr. Presidents
"We support your efforts to organize a global solution to
the problem of Ibero-America's debt which can allow the
economies of the Americas — including that of the United
States — to grow again, as you stated most recently in your
Independence Day address.
We also endorse the call of the
Caracas Congress on Latin American Political Thought for the
formation of a Latin American Coordinating Counci1 on Foreign
Debt.
"In the United States, we will be organizing ouer 50
simultaneous conferences to support the efforts of the July 24
Bolivarian Day summit in Caracas to achieve these same goals.
And we commit ourselves to use all our powers to ensure that
President Reagan sends a high-level U.S. delegation to the
September OAS meeting on finances and development, which is
ready to deliberate on a rational, moral solution to our common
economic problems."
Endorsers:
Kern, Inyo, Mono, Building Trades Council,
Ca1 ifornia

Bakersfield,

Doug Zimmerman, Secretary, Kern, Inyo, Mono Building
Council, California

Trades

Jim Wright, Business Agent, Boilermakers #732, National
Ca1 ifornia
Tom Kersey, National Chairman, Agricultural Policy
Unadilla, Georgia

City,

Committee,

Huber t Karthy-President, internatiorTai i_ongshoT^emen^s^
Association #1543, Jacksonville, Florida
(organizational affilations for identification purposes only)




113

The

CHAIRMAN.

Mr. Merrill.

S T A T E M E N T O F R O B E R T E. M E R R I L L , V I C E P R E S I D E N T ,
VIRGINIA TAXPAYERS ASSOCIATION

Mr. MERRILL. I have a prepared statement of which Lori has
extra copies if you don't have an extra copy, but which I would like
to highlight for a few minutes.
My name is Robert Merrill. I am vice president of the Virginia
Taxpayers Association. For more than 10 years, the Virginia Taxpayers Association has been working at the State and national
levels to prevent excessive Government spending and promote a
sound economy. You will recall, Senator Garn, that part of the
statement we gave this committee on July 30, 1979, was placed in
the Congressional Record, for which we thank you. Today I come
before you to ask again on behalf of the taxpayers that you not reconfirm the appointment of Paul Volcker to the chairmanship of
the Federal Reserve Board. We feel sincerely that the best interests
of you and the citizens of this country are better served by someone
else.
I shall focus my initial remarks on the statement by President
Reagan when he announced the appointment of Mr. Volcker to be
chairman. President Reagan said: "Paul Volcker is a man of unquestioned independence, integrity, and ability." I will leave the
comments on the integrity and ability to others. But I do want to
concentrate on independence.
REASONS AGAINST VOLCKER RENOMINATION

Now, we don't know exactly what President Reagan meant when
he said "independence." Independent of whom or from whom we do
not know. But I submit that Mr. Volcker is not independent.
Rather, he is attached to the megabanking world and is doing what
is best for them, not what is best for the U.S. taxpayer. His every
action is to strengthen the influence of the megabankers and the
megabanks, and use tax funds to prevent the fall of these banks
due to their unwise lending to poor credit risks.
Mr. Volcker has also displayed a disregard for American principles by his membership in both the Trilateral Commission and the
Council on Foreign Relations. As we told this committee 4 years
ago—the goals of the Council, in the words of Mr. H. Rowan
Gaither, himself a CSR member, are to so change the social and
economic life of the United States that it can be comfortably
merged with the Soviet Union into a one-world socialist government. That is not what I want, and I don't think that's what you
want.
But this is what the committee faces. This is what you face. The
conventional wisdom we heard this morning says, "Don't rock the
boat. Reappoint a man who would at least not cause a complete collapse." But I say to you, refuse to confirm the appointment of a
man whose true goals, though unspoken, are the ultimate demise
of our Republic.
So let's look at the record. Mr. Volcker came to power in 1979,
when inflation as measured by the increase in the Consumer Price
Index was rising at around 14 percent per year. And we'll give him




114

partial credit for the reduction of the current rate to 4 to 5 percent;
however, some credit must be given to those poor people standing
in the unemployment lines looking for jobs or for unemployment
checks. They have made their sacrifice.
At the same time, interest rates were allowed to rise to the high
teens for construction and 15 V percent for corporate borrowing.
2
This action put a damper on business and construction and caused
a severe depression. Business failures mushroomed, and unemployment rose above 10 percent, meaning over 10 million unemployed.
Was this severe a depression necessary? Certainly, most of the
blame for this severity can be placed on the policies of the Federal
Reserve Board.
Now, perhaps the worst aspect of the recent monetary history
under Volcker's Federal Reserve leadership is the instability and
volatility of the money supply growth. This was reinforced to me
this morning, listening to the questions and answers by Mr.
Volcker in the other Senate building. Frankly, I got the impression
when he was all done that he was going to fly this country by the
seat of his pants. He didn't come out with anything definite, of
course. Maybe he will next week, but I doubt it. We're going to be
dragging along by the seat of our pants with whatever Mr. Volcker
wants to do.
Now, in the expanding economy that we all want, a steady
growth in the money supply is necesary, as nothing is so devastating to the businessman as to be whipsawed between plus and
minus growth rates one after the other. Now, no matter whether
you doubt the significance of Mi, M2, and M3, they do mean something. And the quantities and the change in those quantities does
not make a good picture. Need I remind Senator Garn of the letter
you got from Mr. Volcker in late 1980 bragging that at least the
money growth rate in the United States was better than the
growth rate in other countries.
Now, wait a minute. That was not so. As later admitted by the
Federal Reserve and pointed out by Milton Friedman, the comparison reported by Mr. Volcker was not on a comparable basis, and
thus was not valid. When the numbers were reworked by Milton
Friedman, a different picture was shown.
The money growth rate of the United States was no better than
the other countries', but the important thing is that the United
States as a world leader in financial matters should have the most
stability and the greatest credibility in the matter of monetary affairs.
I wish this morning I was in the position of Senator Garn, because I would love to have asked Mr. Volcker this question about
this letter, and if he has written you an apology, I apologize for
criticizing Mr. Volcker, but if he hasn't, I think it's high time he
did write a letter to clarify this attempt to fool the American
public and certainly this committee.
Also one wonders about the sharp drop in the Mi money supply
last week. Was that only coincidental? Or could it somehow be related to the impending hearings taking place today?
Also, one wonders when we remember the tremendous increase
in the money supply just prior to the Presidential election in 1980.




115

However, as important as all these foregoing matters are, they
are overshadowed by the reactions of the market. What does the
market say? If we look at the price of gold, it was close to the 300
level at the beginning of Mr. Volcker's term. Recently it was above
440, and now it is down around 426. What is this telling us? I believe the gold buyers are saying that inflation is coming back, and
they do not trust Mr. Volcker when he says he plans to control inflation. Likewise, if you liked the stock market at its recent high of
1250, it was, in my opinion, saying the same thing: Inflation is
coming back, and interest rates are going up. That tells me, too,
that inflation is going to come back.
In other words, Mr. Volcker does not have credibility in the
market, because, as I said in the beginning, he is not independent.
Now, one very serious matter which I didn't intend to discuss in
my remarks, although it's in my writeup, is about the International Monetary Fund. But after listening to Mr. Volcker this morning,
I am convinced we need a comment on that. I greatly fear that the
IMF is merely a method of transferring our savings to world debtors, World Banks—anyway, out of this country. I wish that the
House would turn down the IMF.
Finally, in conclusion, I want to say again how strongly we feel
that Mr. Volcker should not be reconfirmed by this committee, but
instead, a man more responsive to the needs of our country and the
average American citizen, someone else, should be made Chairman
of the Board of the Federal Reserve.
Thank you.
[The complete statement follows:]




116

VIRGINIA TAXPAYERS ASSOCIATION

Teli

804

277-5255

LYNCHBURG, VA. 24505

Statement by Robert E. Merrill, Vice President
before
U. S. Senate Committee on Banking, Housing and Urban Affairs
Opposing
Reconfirmation of Paul A. Volcker as Chairman of Federal Reserve Board
July 14, 1983

Mr. Chairman, my name is Robert Merrill, and I am Vice President
of the Virginia Taxpayers Association.

For more than 10 years the Virginia

Taxpayers Association has been working at the state and national levels to
stop excessive government spending and promote a sound economy, and you,
Mr. Chairman, will recall placing in the Congressional Record (August 1,
1979» page S 11301) part of the statement we gave this Committee July 30,
1979 when Paul Volcker first came before the Committee for confirmation
as Chairman of the Federal Reserve,

At that time, we were the only

organization in the country to correctly warn this Committee that if
Volcker were confirmed, and here I quote from our prepared statement then,
(QUOTE) "inflation can be expected to accelerate at a dangerous rate"
(UNQUOTE).

And that is just what happened.

In the eight months between

November, 1978 and July 31i 1979» the price of gold had risen a total of
112.00 Federal Reserve note "dollars" an ounce, or an average increase of
1^.00 paper "dollars" a month.

Yet only two months after Mr. Volcker

assumed the chairmanship, the price of gold zoomed from 296.70 FRN (New York)
on July 31, 1979 to ^42.00 FRN on October 2, 1979, an average increase of
over 72.00 Federal Reserve note "dollars" a month.




Clearly inflation had

117
accelerated dangerously under the new Volcker chairmanship, just as we
predicted, with notable international lack of confidence in the American
"dollar", and the Federal Reserve Board therefore changed its targeting
system in October, 1979» in an attempt to better control the money supply.
I mention these facts not only for the purpose of introducing
our VTA credentials but also to fill in an important "information gap"
which many of Mr. Volcker's large "cheering section" in the media and
elsewhere seem to be unaware of when they so frequently applaud him for
"bringing down inflation."

The same people in this "cheering section",

we submit to you, are in just as much error today as they were four years
ago, when they unanimously hailed Volcker as "the man we can really have
confidence in, a savior for our troubled economy."

And it is surely

essential for members of this Committee, and other Americans, to recall
under whose tutelage as Federal Reserve Chairman the country suffered a
lot of the recent years' inflation in the first place.
As further background information for this Committee, we in the
Virginia Taxpayers Association are proud also of having been the only state
taxpayer organization testifying before the House Ways and Means Committee
May 1, 1980 in opposition to the then-proposed withholding tax on dividends
and interest, and we have a reasonable expectation of being on the prevailing
side on this issue again in the present Congress.

Last fall the Virginia

Taxpayers Association presented a statement to the Senate Finance Committee
opposing a flat-rate income tax, and we believe our side will prevail here
also.

In December, 1982, I presented to the House Ways and Means Committee

a VTA statement on the gasoline tax increase, and back in June, 1979, we




118

testified successfully before the Senate Judiciary Committee against cost
to taxpayers of an additional national paid holiday, our testimony later
being reprinted in its entirety in the Congressional Record (November 8,
1979t page E 55^7)•

As a resident of Greenwood, Virginia, my own public

service includes leadership as Foreman of a special Albemarle County Grand
Jury appointed a few years ago to investigate the county government over
a period of some months.
Today I come before you to ask again in behalf of taxpayers that
you reject the appointment of Paul Volcker to the chairmanship of the
Federal Reserve.

We sincerely feel that the best interests of you and the

citizens of the USA would be better served by someone else.
I shall focus my initial remarks on the statement by President
Reagan when he announced the nomination of Mr. Volcker to be Chairman of
the Federal Reserve Board.

He said, "Paul Volcker is a man of unquestioned

independence, integrity and ability."

I will leave comments on integrity

and ability to others and will concentrate on independence.

Now, we don't

know exactly what the President had in mind when he used the word
"independence"

independent of whom or from whom we do not know.

But

I submit that Mr. Volcker is not independent, rather that he is attached to
the megabanking world and is doing what is best for them, not what is best
for the U. S. taxpayer.

His every action is to strengthen the influence of

the megabanks, and to use tax funds to prevent the fall of these banks due
to their unwise lending to poor credit risks.
Mr. Volcker has displayed his lack of regard for American principles
by his membership in both the Trilateral Commission and the Council on
Foreign Relations, as we told this Committee four years ago (in a portion of




119
our statement that was not reprinted in the Congressional Record).

Goals

of the CFR, in the words of H. Rowan Gaither, himself a CFR member, are to
so change the social and economic life of the United States

that it can

be comfortably merged with the Soviet Union into a one-world socialist
government.
This, then, is what you on the Committee face.

Mo doubt the

"conventional" wisdom says "Don't rock the boat, and reappoint a man who
at least has not caused a complete collapse."

But I say to yous

Refuse

to confirm the appointment of a man whose true goals (though unspoken) are
the ultimate demise of our Republic.
So let's look further at his record.

Mr. Volcker came to power

in 1979 when inflation as measured by the increase in the consumer price
index was running at a

percent rate, and we will give him partial credit

for a reduction to the current rate between four and five percent.

(Some

credit must also be given to those unemployed standing in lines who have
made their sacrifice.)

At the same time, interest rates were allowed to

rise to the high teens for construction and to 15*5 percent for corporate
borrowing.

This action put a damper on business and construction and

caused a severe depression.

Business failures mushroomed and unemployment

rose above 10 percent, meaning over 10 million people looking for work.
Was this severe a depression necessary?

Certainly most of the blame for

the severity of this depression can be placed on the policies of the Federal
Reserve.

The analysis of this matter by Professor Barbara R. Bergmann of

the University of Maryland, carried in the June 29 Minneapolis Star and
Tribune under the headline "Volcker's Reward for Hurting the Nation", is so
concise and well reasoned that we are appending Professor Bergmann's entire
column to our statement as Exhibit "A".




120
One very important additional fact that no member of Congress
should be allowed to forgett

the Volcker-directed increase in interest

rates also has cost Americans billions in increased taxes just to pay for
extra servicing costs on the national debt, and since Mr. Volcker follows
closely governmental spending and taxing decisions and is more than well
aware of the continually growing U. S. deficits, he has known his interest
hikes would have a lasting injurious effect on U. S. taxes and the economy
an effect which in more placid times could have been described as
nothing less than a disaster by itself.
But perhaps the worst aspect of recent monetary history under
Volcker's Federal Reserve leadership is the instability or volatility of
money supply growth.

In the expanding national economy that we all want,

a steady growth in money supply is necessary, as nothing is so devastating
to business activity as being whipsawed from plus to minus growth rates in •
rapid succession.

Now, no matter whether you doubt the significance or

accuracy of the M-l, M-2, M-3 figures, they do mean something, and the
instability of these quantities does not make a good picture.

Need I remind

Senator Garn of the letter from Mr. Volcker in late 1980 bragging that at
least the money growth rate in the U. S. was more stable than in foreign
countries.

But wait a minute; that was not so.

As later admitted by the

Federal Reserve and pointed out by Milton Friedman, the comparison reported
by Mr. Volcker was not made on a comparable basis and thus was not valid.
When the numbers were reworked by Mr. Friedman, a different picture was
shown.

The money growth rate variability of the U. S. was no better than

other countries, but the USA as a world leader in financial matters should
have the most stability thus generating the greatest creditability.




A

121
question to Mr. Volcker on this point and his answer would be a worthwhile
addition to these proceedings.

Also, one wonders about the sharp drop in

the M-l money supply last week.

Was that only coincidental, or could it

somehow be related to the impending Committee hearing taking place today?
One wonders about this when we also remember the tremendous increase in
money supply just prior to the presidential election in 1980!
However, important as all the foregoing matters are, they are
overshadowed by the reactions of the market.

What does the market say?

Certainly in the days preceding the meeting of the Federal Open Market
Committee this week, the attitude of people in the market itself can only
be described as one of justifiable nervousness, anxiety and concern.

They

just don't know what is going to happen, what Mr. Volcker is really going
to do.

If we look at the price of gold, which admittedly has not been a

"star performer" in recent months, it had been close to the 300.00 level
as we said at the beginning when Volcker became Chairman August 1, 1979?
recently the level above 440.00 was reached and now the price is around
426,00.

What is this telling us?

I believe the gold buyers are saying

that inflation is coming back and they do not trust Volcker when he says
he intends to control inflation.

Likewise, if you liked the stock market

at its recent high of about 1250, it was, in my opinion, saying the same
thing*

inflation is coming back.

It certainly does appear that interest

rates are going up, at least to some degree.

In other words, Mr. Volcker

does not have credibility with the markets largely because he is, as we
said before, not independent.
One further very serious matter requiring amplification here is
Volcker's role regarding the International Monetary Fund, an organization




122
receiving considerable debate in Congress this week.

The distinguished

analyst M. Stanton Evans wrote earlier this year that the Federal Reserve
chief (QUOTE) "has been the leading figure in promoting a further allocation
of American funds to IMF, and by all accounts is also the major U. S.
strategist on this issue" (UNQUOTE).

Evans also pointed out that Volcker,

who in his official duties as Fed Chairman is supposed to help insure that
U. S. banks are following sound practices

that they maintain themselves

on solid footing, don't engage in reckless policies, and take reasonable
care of depositors1 money

actually had been hard at work urging private

bankers, and specifically smaller banks, to keep the dollars flowing to the
foreign deadbeats, while the IMF bail-out was serving as the other prong
of the Volcker pitchfork.

In a November, 1982 speech, for example, Volcker

made the astonishing statement that new loans by U. S. banks to help take
care of developing countries "should not be subject to supervisory criticism.'
In other words, the Fed would not apply strict standards of accountability
in such cases.

The evidence in short is that the central figure who is

supposed to use the powers of his office to promote sound banking practices
in the United States instead has been using those powers, to pressure banks
into unsound practice.

Why isn't this Committee looking into this dangerous

and actually scandalous "Volckergate"?

As far as the Volcker-promoted extra

appropriation to the IMF is concerned, with all the new money it is now
looking for from several countries, the IMF will receive, as well known
columnist Patrick Buchanan has said, "more than an immense slice of the
accumulated savings of Western people.
lethal leverage over the American banks

With it goes unprecedented clout,
to a claque of international

bureaucrats who bear no allegiance whatsoever to the United States.




What is

123
taking place is not simply a transfer of savings, but a transfer of
sovereignty."
So to conclude this VTA presentation, I want to say again how
very strongly we feel that Mr. Volcker should not be reconfirmed by this
Committee, but instead a man more responsive to the needs of the vast
majority of average citizens

and someone who will be more willing

than Volcker, as we said four years ago, to prepare for a transition to
a constitutional currency that will truly safeguard the future of all
Americans
Thank you.




should be made Chairman of the Board of the Federal Reserve.

124
MmwapoUs S a and Tribuna
tr
Wad., Juna 29, 1983

JK

Volcker's
reward for
hurting
the nation
By Barbara R. Bergmann
Callage Park, Md.

Paul Volcker, whose stewardship a*
the Federal Reserve made interest
rates go through the roof, made additional millions of people experience
the miserable insecurity of unem»
ployment, and caused the destrut*
tlon of thousands of businesses, has
been rewarded by reappointment
from President Reagan.
As remarkable as the reappointment:
itself were the apparent pleasure
with which the president's actios
was received on Wall Street and thtf
calm indifference that greeted t t
throughout the rest of the country.
One might say Volcker has been to
economic policy what Anne McCill
Burford was to environmental pdff*
cy. In fact, the comparison is probat
bly unjust to Burford. Her sins seem
to have been those of omission; slfe
did not personally do any polluting*
Volcker's sins, however, are of the
activist variety. He maintained a ruinously constricting bold on the money supply. The lack of indignation in
most quarters at his reappointment
is testimony to the country's contiai*
ing confusion over economic policy^
and to its short attention span.
The president's advisers know very
well that the last 2ft years have
been a terrible time for the United
States, and that mistakes in econonv
ic policy were made that deepened
and prolonged the misery, with little
or no compensating benefit Some of
those mistakes were made by
Volcker and some by the administration. It is reported that the White
House staff originally contemplated
sacking Volcker in the hope that thtf
public could be persuaded to put all
of the onus on him. Now, with aq
economic upturn in progress, the administration apparently has decided
that the voters will not be in a blaming mood.




There is plenty of blame to gtt
around: billions of dollars' wortfr o*
lost output, just to start with,,to
which must be added the extra sify
ddes, heart attacks, ruined careers,
broken marriages and child abuse
that researchers have traced to the
prolonged hard times. Apportioning
the blame between the White House
and the Federal Reserve is mora
difficult than toting up the casualties*
but certain facts are clear.
High blame attaches to Volcker's
willingness to allow interest rates;
which were within his sphere of com
troi, to reach stratospheric levels, im
late 1979, and then to allow them fo
remain there through the middle of
1982. That three-year period of excessively high Interest rates strangled home, automobile and appliance sales, and depressed business
investment
Businesses and individuals were
pushed to bankruptcy. High interest
rates have affected the foreign-exchange markets, making it harder
for our businesses to compete
abroad and at home. In effect the
rates exported some jobs and killed
others outright
It is true that the stiff dose of medicine that Volcker administered , to
the nation has substantially reduced
(at least for a time) the economy^
inflationary momentum. But it has
been done at a very high, and probably unnecessary, cost in human su&
fering and lost output A slower and
less violent approach to squeezing
inflation out of the economy would
have been less painful.
If Volcker deserves so much of the
blame for the depth of the troubles
of the last, few years, how muctt
blame is left over for the White
House?
Volcker's defenders would argue
that Reaganomics (which is simply a
policy of huge tax cuts for richer
citizens) brought on deficits that
forced the chairman of the Federal
Reserve to press harder on the monetary brakes than he otherwise
would have had to do. There is some
truth to that But Volcker was not
forced to press that hard. The major
White House error was a failure to
get him to ease up sooner.

The current upturn, which the president is hoping will make us all forget
the last two years, is a result not ofReaganomics but of the economy's
natural tendency to rebound —
something that it has done seven
times since 1947. However, before
any rebound could take hold,
Volcker had to ease up and allow
interest rates to fail, which he has
done.
Perhaps the person who eased up is
a "new Volcker," and it was he who
got reappointed. If the "old Volcker"
should reappear, however, to reoccupy the chair of the Federal Reserve
System, the president and the rest of
us will surely rue this reappointment
Barbara R. Bergmann is a professor
of economics at the University of,
Maryland.

Exhibit "A"

125
Vol. 118, No. 133

Investors
fear Fed
decisions
By The Associated Press
The U.S. financial markets slumped Tuesday on another wave of investor concern that the Federal Reserve Board will act soon to push interest rates higher.
Stock and bond prices fell sharply as the the Fed's
policy-making arm, the Federal Open Market Committee, opened a two-day, closed-door meeting in Washington. The panel meets regularly to set and review the
nation's monetary policy.
The panel, as a matter of policy, does not immediately disclose its decisions. Some clues are expected
Thursday, however, when Paul Volcker, the Fed chairman, testifies before Congress.
Many observers expect the committee to tighten the
availability of reserves in the banking system, an action that may have the effect of forcing interest rates
higher.
The prospect of higher interest rates has unsettled
the financial markets because many people believe a
surge in borrowing costs could derail the economic recovery.
The Dow Jones average of 30 industrial stocks,
which had gained more than 8 points in the week's
opening session, tumbled 17.02 points in moderate trading, to 1,198.52. It was the first time the Dow had
dropped below 1,200 since June 10.
Prices of long-term government bonds were down
about $10 for each $1,000 in value.
Analysts said the markets may have been hurt by a
report from the investment firm Salomon Brothers, in
which its chief economist, Henry Kaufman, predicted
that interest rates were trend slightly higher over the
rest of the year.
Kaufman's economic forecasts are widely watched
in the investment community.
In Paris, an official of the Organization for Economic Cooperation and Development told a news conference "there is nothing to suggest nominal U.S.
interest rates will go down" any time soon.

Sylvia Ostry, head of the OECD's economics and
statistics department, said continued high U.S. interest
rates are "a serious cause for concern," since the high
cost of borrowing is likely to restrict the growth of business investment.
In its semi-annual economic forecast, the OECD
said the United States is expected to continue leading
the industrial Western nations out of their long recession. The agency said economic growth in the United
States should average 3 percent this year, compared
with a 2 percent rate for the 24 OECD members as a
whole.
The OECD also said in a separate report that is
expected oil prices to hold steady for the remainder of
the year, despite a modest pickup in oil consumption.
In other economic developments Tuesday:
• Global Industries, a unit of Chemical Bank's economic research department, predicted that U.S. car
sales will rise 16.5 percent this year from 1982, when
sales hit a 21-year low. So far this year, car sales are
running 13.6 percent ahead of last year.
• The House approved a bill that would give local
governments $500 million a year to create public works
jobs for the next three years.

Lynchburg, Va. NEWS
July 13, 1983
Page 1
Exhibit "B"

23-790 0 — 8 3 — 9
—




126

The

CHAIRMAN.

Mr. Smith.

S T A T E M E N T O F W . C. S M I T H , P I T T S B U R G H , P A .

Mr. SMITH. Thank you, Senator. First I would like to express my
personal appreciation to you, Senator Garn, and to Senator Hecht
and the other members of the Senate Banking Committee for the
opportunity to appear here today and express my opinions in this
matter.
My name is W. C. Smith, president of Franklin Towne Realty,
Inc., engaged in the business of residential construction, real estate
sales, and land development. I am a member of the National Association of Home Builders, and also a director. I am a director of the
Builders Association of Metropolitan Pittsburgh, I am a realtor,
and I am an attorney.
I appear before this committee as an individual to oppose the
reappointment of Paul Volcker as Chairman of the Federal Reserve Board.
U.S. SAVINGS DRAINED OUT OF U.S. ECONOMY

Mr. Volcker should not be reappointed to be Chairman of the
Federal Reserve Board because his nonperformance of his duties
has been a major cause of the world banking crisis and the defaults
in foreign loans. His nonfeasance has been the cause of high interest rates and unemployment in the United States and Europe. His
lack of performance has been primarily responsible for the large
number of failures of U.S. financial institutions and businesses and
the increasing monopoly on banking by U.S. money center banks.
The inaction and lack of supervision by Mr. Volcker has permitted
and encouraged U.S. money center banks and foreign banks tapping the U.S. pool of credit to become major funding sources for
the deficits of foreign governments and the expansion of foreign
governments' social programs.
Since 1979, the market for U.S. savings has gone from a regional
domestic dollar market to an integrated international monetary
market which has drained U.S. savings out of the U.S. economy.
The principal intermediaries in exporting the U.S. savings for a
higher rate of return were U.S. money center banks and foreign
banks registered in the United States, both of which were under
the control and supervision of the Federal Reserve Board.
The potential problems arising out of this change were recognized in a Group of Thirty on risks in international bank lending,
which I might add, one of the persons involved in the writing of
the paper was the former Controller of the Currency, John Heineman, which stated that the growing integration of national banking systems combined with the rapid expansion of bank lending
across national borders raises a wide range of issues for both banks
and banking supervisors.
Among the questions raised were. Should banks be left totally
free to decide the extent to which they should finance countries'
deficits? Henry Wallich, a member of the Federal Reserve Board in
a 1979 article in the Columbia Journal of World Business, fall
1979—which I would recommend that all the staff members of the
Banking Committee and the members of this committee read— rec-




127

ognized that the absence of Reserve requirements on Eurodollar
loans made by U.S. banks placed the domestic economy of the
United States at a competitive disadvantage.
He stated that the reduction in the volume of bank credit to the
U.S. economy could produce an increase in U.S. interest rates. He
specifically recognized that if the U.S. money center banks or a foreign bank registered in the United States were to transfer funds
into a Eurodollar deposit, it would deplete the pool of credit in the
United States, thereby driving up interest rates.
What actually happened during the tenure of Mr. Volcker as
Chairman of the Federal Reserve Board was that U.S. money
center banks exported U.S. savings to fund the deficits and social
programs of foreign governments for a higher rate of return.
Why did they get a higher rate of return? The reason is because
lack of Reserve requirements, FDIC insurance, and what was not
mentioned by the members of the Federal Reserve Board at the
time, the fees that are gained by the banks in these transactions,
which don't show in the interest rate.
Money market funds, such as Merrill Lynch, acted as the branch
banks for both U.S. money center banks, European banks, and Japanese banks, making dollar-denominated loans to foreign governments in Europe, Mexico, and throughout South America.
I have in my file here a rather interesting list of the Japanese
banks and foreign banks specifically, whose CD's were incorporated
in specific Merrill Lynch money market funds, and also Shearson
funds.
In 1981 the Federal Reserve Bulletin reported that U.S. bank
loans to foreigners increased by over $90 billion. The Bank for International Settlements in the fourth quarter report of 1981 stated
that the United States was by far the largest contributor of the $43
billion in new funds during the preceding quarter, with banks in
the United States alone in that quarter appearing to have provided
over $20 billion.
While the Congress of the United States and the President were
attempting to restrict Federal expenditures and expansion of social
programs and to encourage savings for investment in the U.S.
economy, U.S. money center banks under the supervision of the
Federal Reserve Board were exporting the same U.S. savings for a
higher rate of return to support the deficits of foreign governments
and encouraging and funding the expansion of foreign governments' social programs out of U.S. savings.
U.S. money market funds, through the purchase of the Eurodollar CD's and foreign banks' CD's, exported by March 1982 $43 billion of U.S. savings.
This is an unpublished report from the Treasury and the person
over there who compiles this report. I can give you their name. I
talked to them yesterday and it peaked at $48 billion.
Eurodollar time deposits of U.S. nonbank residents increased in
the fourth quarter of 1981 to $60 billion. That's reported in the
Federal Reserve Bulletin of April 1982 at page 212.
Now the interbank deposits of U.S. banks in French and German
banks became a source of credit, which was not otherwise available
within those economies to fund the French and German bank loans
for the Russian gas pipeline.




128

SYNDICATED BANK LOANS BY MONEY CENTER BANKS

If you look at the loans made by Dresdener Westdeutschlandesbank and the French banks and cross reference those with the interbank deposits of U.S. money center banks, you'll find out where
the funding came from for the Russian gas pipeline.
The Russian gas pipeline could have been stopped merely by
stopping the transfer of U.S. savings into the interbank deposits of
the German and French banks that funded the Russian gas pipeline.
The people of the United States, out of their savings, funded the
Russian gas pipeline. Syndicated bank loans were made to Belgium
and Sweden to support the deficits of those countries, which facilitated the dumping of steel in the United States.
I have here a tombstone on a loan to Sweden which shows the
participation of all the money center banks, plus for the first time
I saw in public the introduction of about 100 regional banks in the
United States as participants in the loan to Sweden.
What that meant at that time, that these money center banks
were now coordinating and drawing down the regional savings of
the people of the United States which otherwise would have gone
into automobile loans, business loans, and residential mortgages
and transferring them to funding the deficit of a foreign country.
We could stop the dumping of steel from Belgium, Sweden, and
several other countries if we didn't fund their deficit. It's the most
direct and simple way. The only reason they're able to continue an
inefficient steel industry and export steel to the United States and
dump it is because we've been funding their deficits.
Syndicated bank loans were organized by money center banks
which involved regional U.S. banks, which drew credit from the regional economies and transferred them to foreign economies, created higher interest rates and unemployment in the United States.
The growth of the huge syndicated loans which leads being taken
by the money center banks and with the creation of regional coordinators has in effect set the interest rate for U.S. dollars, not only
in the integrated international monetary market but in the domestic market as well.
When you have 100 banks sitting down and coordinating with
each other a business transaction, they're setting the price of
money. Now if the steel industry, the gypsum industry, the plywood industry—if any other industry in the United States had the
lead companies and producers of that industry sit down at the
table and set the price of a product for delivery to a customer, and
then did it for every other major customer, they'd be indicted by
the Justice Department.
I would submit to this committee that there is a serious line of
inquiry, or should be a serious line of inquiry, on the impact of syndicated loans by money center banks relative to its impact on price
setting and maintaining higher rates of interest in the United
States.
The CHAIRMAN. Mr. Smith, if I could interrupt for the moment.
That is a vote. We'll have to leave in about 6 minutes. We have a
series of votes on defense, so I just want to warn you when you
finish your testimony so you didn't get caught short.




129

Mr. SMITH. Thank you, sir. What did the Chairman of the Federal Reserve Board do while all those things were occurring in the
domestic and international banking systems?
The answer is, nothing. At a January meeting in 1981 and in Las
Vegas at the homebuilders' convention I personally questioned the
Chairman and asked him was it not true that now the consumer in
the United States, the homebuyer in the United States, and the
Government of the United States were now competing in an international monetary market for a limited supply of U.S. savings dollars.
At that stage he acknowledged it. He said, yes. But let me comment like he commented today and a few other times, "but we get
some money flowing in."
Now all of us know that the quantity of supply of credit within a
pool of credit is going to affect interest rates. The only reason the
money supply is coming back in the Treasury bills of the United
States today is because of the default on loans in the money center
banks and the persons who were holding CD's and deposits in those
banks sought out a safe harbor and they transferred those funds
from deposits in Citicorp, Continental Illinois, and other banks into
U.S. Treasury bills.
That has helped us. But this is no reason why we should still tolerate, in the words of Mr. Wriston, "an uneven playing field."
What are the answers? Because I heard somebody ask that question this morning. The answers are quite simple; one of them is a
suggestion that Henry Wallich had, reserve requirements, which in
effect impose a tax on Eurodollar loans.
We want an even playing field for the consumer, the business
and the Government of the United States in competition with foreign governments and foreign businesses when we're competing for
U.S. savings dollars.
Right now the advantages are in favor of foreign governments
and foreign businesses. I submit to you that the reason that there's
a higher spread on interest rates today is the growth in syndicated
loans which enable the money center banks to coordinate their efforts, plus the alternative of marketing those funds outside the
United States.
The greatest thing that's happened to the economy of the United
States is two things: One is the Garn-St Germain bill, which in
effect started redirecting funds back into the regional economies of
the United States, the regional banking system, and financial institutions.
The other was the default on foreign loans, which then had the
regional banks, the S&L's and individuals, start to get out of the
paper and the money center banks.
These two things together have brought a flow of funds back into
the regional communities of the United States and out of the
money center banks.
Now I happen to have available here—and I was just reading it
today, I picked it up today—a June 22 issue of the American
Banker. It points out that the hundred top banks in the United
States, 38 percent of their loans went to foreign-based businesses—
38 percent.




130

There's still a growth of foreign loans and interestingly enough,
one of the banks is close to us here geographically, the largest percentage gains in foreign loans were posted by Union Trust Co. of
Baltimore, First Interstate Bank of Arizona in Phoenix.
Union Trust foreign loans were up 206 percent to $181 million.
First Interstate's were up 204 percent.
Apparently there are some banks which can still learn that there
are some foreign customers which have creditworthiness. I know of
one instance from Mellon Bank in Pittsburgh. I saw a loan to the
Government of New Zealand for the New Zealand forest products
industry.
There are in some parts of the world creditworthy foreign borrowers and the banks of the United States continued to transfer
our savings.
The answer is either something in the nature—and I'm thinking
of the Banking Committee—a regulation or a reserve requirement,
a liquidity requirement or something in that category, or in the alternative, an interest equalization tax which previously existed to
handle similar matters, or an export tax on the credit issued by
banks, which is in support of U.S. exports.
Something along those lines has to be done.
Now the Chairman of the Federal Reserve Board was cognizant
of these facts, or should have been cognizant of them. If he was not
cognizant of these facts and its impact on interest rates in the U.S.
economy, he shouldn't be reappointed.
I sometimes continue to wonder if he realized the significance of
them after a conversation I had with him yesterday, and here he is
testifying today.
The alternative is that the Federal Reserve Board understood the
implication of the differential in Eurodollar deposit profits for U.S.
money center banks and understood the implication of a drawdown
on the pool of credit of the United States, and fostered this because
it advanced his interest in reducing the pool of credit in the United
States so as to reduce demand in his personal attack on inflation.
In doing that, he encouraged foreign loans to foreign countries
and foreign businesses which at the present time have put the
world banking system in jeopardy.
If he intellingently undersood that and permitted it to occur, I
think also he should not be reappointed.
Paul Volcker is not indispensable. His principal political support
is from the banking system that he has failed to adequately regulate.
Irrespective of what this committee does on the confirmation of
Mr. Volcker, I suggest that this line of inquiry should be pursued, a
profitable differential that exists from making Eurodollar loans
and making loans in the U.S. economy. I think this is a serious
matter and even if you confirm Mr. Volcker and pursue this and
solve the problem, I think the best interests of this country would
be well served.
[The complete statement follows.]




131

Before U.S. Senate Banking Committee
TESTIMONY OF W. C. SMITH BEFORE THE BANKING COMMITTEE
OF THE UNITED STATES SENATE CONCERNING THE
APPOINTMENT OF PAUL VOLCKER AS CHAIRMAN
OF THE FEDERAL RESERVE BOARD.
My name is W. C. Smith, I am president of Franklin
Towne Realty, Inc. engaged in the business of residential
construction, real estate sales and land development. I
am a member and director of the National Association of
Home Builders, a director of the Builders Association of
Metropolitan Pittsburgh, a Realtor, and an attorney.
I appear before this committee as an individual to
oppose the reappointment of Paul Volcker as Chairman
of the Federal Reserve Board. Mr. Volcker should not
be reappointed to be Chairman of the Federal Reserve
Board because his non-performance of his duties have been
the major cause of the "World Banking Crisis and the defaults
in foreign loans. His non-feasance has been the cause of
high interest rates and unemployment in the U.S. and
Europe. His lack of performance has been primarily responsible for the large number of failures of U.S. financial
institutions and businesses and the increasing monoply of
banking in the U.S. by Money Center Banks.
The inaction and lack of supervision by Mr. Volcker
has permitted and encouraged U.S. Money Center Banks and
foreign banks tapping the U.S. pool of credit to become
major funding sources for the deficits of foreign governments
and the expansion of foreign governments social programs.
Since 1979 the market for U.S. savings has gone from
a regional domestic market to an integrated international
monetary market which has drained U.S. savings out of the
U.S. economy. The principal intermediaries in exporting




132
U. S. savings for a higher rate of return were U.S. Money
Center Banks and foreign banks registered in the United
States. Both which were under the control and supervision
of the Federal Reserve Board. The potential problems arising
out of this change were recognized in a "Group of Thirty"
paper on "Risks in International Bank Lending," which stated
"that the growing integration of National Banking Systems
combined with a rapid expansion of bank lending across
National Borders raises a wide range of issues for both
banks and banking supervisors...." Among the questions
raised were "should banks be left totally free to decide
.,. the extent to which they should finance countries...
deficits?"
Henry Wallich a member of the Federal Reserve Board
in a 1979 article (Columbia Journal of World Business,
Fall 1979) recognized that the absence of reserve requirements on Eurodollar Loans made by U.S. banks placed the
domestic economy of the U.S. at a competitive disadvantage.
He stated that the reduction in the volume of bank credit to
the U.S. economy could produce an increase in U.S. interest
rates.
What actually happened during the tenure of Mr.
Volcker as chairman of the Federal Reserve.Board was that
U.S. Money Center Banks exported U.S. savings to fund
the deficits and social programs of foreign governments
for a higher rate of return. Money Market funds such as
Merill Lynch acted as the branch banks for both U.S. Money
Center Banks, European' Banks and Japanese Banks making
dollar denominated loans to foreign governments in Europe and
to Mexico and throughout South America,
In 1981 the Federafl Reserve Bulletin reported that
U.S. Bank loans to foreigners increased by over $90 Billion
Dollars. The Bank for International Settlements 4th quarter
report stated that the U.S. was by far the largest contributor
of the $43 billions in new funds during the last quarter,




133

with banks in the U.S, alone appearing to have provided
over $20 billion,
While the C o n g r e s s of United States and the President
were attempting to restrict federal expenditures and expansion
of social programs and to encourage savings for investment
in the U.S. economy, U.S. Money Center Banks under the
supervision of the Federal Reserve Board were exporting
the same U.S. savings for a higher rate of return to support
the deficits of foreign governments and encouraging and
funding the expansion of their social programs out of U.S.
savings.
U.S, Money Market Funds through the purchase of the
Eurodollar C,D.'s of U.S. and foreign banks exportedrby
March of 1982 $43 Billion dollars of U.S. savings, (unpublished report of the Treasury) Eurodollar time deposits
of U.S. non^bank residents increase in the 4th quarter of
1981 to $60 Billion dollars.(Federal Reserve Bulletin, Apr. 82 p. 212)
The interbank deposits of U.S. banks in French and
German banks became a source of credit which was not otherwise available within those economies to fund French and
German bgnk loans for the Russian gas pipe line,
Syndicated bank loans were made to Belgium and Sweden
to support the deficits of those countries which facilitated
the dumping of steel in the United States.
Syndicated bank loans where organized by the U.S.
Money Center Banks which involved regional U.S. banks which
drew credit from the regional economies of the U.S. and
transferred them to foreign economies creating higher interest
rates and unemployment in the U.S.
The growth of huge syndicated loans with leads being
taken by the Money Centfer Banks and with the creation of
regional "Co-ordinators" has in effect set the interest rate
for U.S. dollars not only in the intergrated international




134
monetary market but in the domestic market as well. If the
plywood, gypsum, cement or steel industries coordinated and
syndicated their marketing and price setting in the same
fashion as Money Center Banks syndicated loans, there would
be serious anti-trust and price fixing implications. I
would suggest that the growth of these practices of large
bank syndications of foreign loans and the establishment of
the interest rate and fees for these loans is a major factor
in the present unusually high spread over the cost of funds.
What did the Chairman of The Federal Reserve Board
do while all these things were occuring in the domestic
and international banking systems, the answer is nothing.
In January 1981 in a public meeting I. personally raised the
question with the chairman as to whether or not U.S. consumers,
businesses, and government were competing now in an international
monetary market for a limited supply of U.S. savings. The
Chairman at that time acknowledged that this was so,
While foreign governments were increasing their, debt
in dollars raised from the U.S. pool of credit creating
increase risks for the world banking system and driving up
interest rates in the U.S., the chairman of the Federal
Reserve Board did nothing. While foreign banks including
European and Japanese banks were tapping the U.S. pool of
credit and sayings to make loans to their own governments,
and the Japanese to make loans to Mexico and throughout
South America, the chairman did nothing.
Either chairman Volcker did not recognize or understand the significance of the transfer of U.S. savings from
the U,S. pool of credit to fund foreign governments and
foreign businesses and its implication on interest rates,
unemployment, the recession and the risk of bank failures,
or he did understand such implications and had other motives.
If he did not understand these implications he should not
be reappointed to be Chairman of the Federal Reserve Board.
The alternative is that the chairman Volcker fully
understood that the pool of credit in the United States
was being depleted by the transfer of U.S. dollars to foreign




135
borrowers and that served his overall personal strategy of
reducing the supply of credit in the United States so as
to reduce the demand for goods and services in the U.S.
Economy. If this alternative is accurate then he
intentionally permitted the expansion of foreign loans
which placed in jeopardy the international banking system
and the international economy. In view of either alternative
he should not be reappointed as Chairman.
The Federal Reserve Board and the Chairman had
available to them several different tools which could have
prevented these problems from occurring. Henry Wallich in
in his 1979 article recognized several of these possible
tools. Among his suggested solutions are reserve requirements
for Eurodollar loans which could relate to the magnitude
and the type of loans. This would eliminate the competitive
disadvantage of domestic U.S. borrowers. Other tools which
could be utilized are capital requirements having, a relationship to foreign loans. Another tool could be liquidity
ratios similarly related to foreign loans. Additional
direct limitions could be placed based on the risk factors
involved. Absolutely no leadership has been asserted
by Chairman Volcker in avoiding or correcting these problems.
Only after he had brought the world banking system to
the edge of disaster did he act to in effect organize a
bail out to be funded by tax payers of the United States.
The major factors that have started to turn this economy
around have been the Garn-St. Germaine Bill which started to
direct deposits back into regional financial institutions, and
the impact of potential defaults of foreign borrowers which
has detered further expansion of foreign lending, directing
lending policies back *into the U.S. domestic economy rather
than high risk foreign loans.
The chairman constantly makes reference in his appearances
before Congress to the U.S. government deficit, but he has




136
totally ignored the deficits of foreign governments that are
being funded out of the U.S. pool of credit. And he has taken
no action which he has the power to take to diminish the
utilization of the U.S. pool of credit to fund foreign
governments deficits.
The U. S. pool of credit has been tapped directly
and indirectly by virtually every country in the world,
through U ? S. Money Center Banks and foreign banks doing
business in the U.S. This has been done directly by loans
to France, Canada, the Canadian Provinces, Mexico, the South
American Countries, New Zealand, Belgium, Denmark, Sweden, etc.
and, indirectly through interbank deposits of U.S. banks
in French, German, and Japanese banks. These interbank
deposits are utilized to fund loans to Communist countries
and including funding the Russian gas pipe line through
interbank dollar deposits of U.S. banks in French and
German banks,
In any other industry or business Paul Volcker would
have been discharged and replaced. But in the U.S., where
the banking industry has been dominated by Money Center
Banks which have profited by exporting U.S. savings to
support foreign governments and foreign business loans to
the detriment of U.S. economy, he has been advocated for
reappointment to represent the interest of these banks.
His political support comes primarily from those whom
he has failed to properly supervise. The chairmanship of
the Federal Reserve Board should not be given to any person
with past affiliation' or bias toward Money Center Banks
and international banking. The appointment should go to a
person whose orientation is toward the domestic economy of
the United States and Regional financial institutions and
businesses in the U.S.
The confirmation of Paul Voelker for reappointment




137

to the Chairmanship of the Federal Reserve Board would be
a travesty. The person who has brought the world banking
system and the world economy, and the banking system and
the economy of the United States to the edge of disaster
should not be rewarded by reappointment but rather discharged for his failures and non performance.

Respectively submitted,

W. C. Smith
7800 Perry Highway
Pittsburgh, PA 15237
412-364-4411

The CHAIRMAN. Gentlemen, we appreciate your willingness to
testify and I certainly don't disagree with you on the nature of the
problems in the economy, they're very well founded. The only place
I would disagree with you is in closing and where we would have a
fundamental disagreement—forget Paul Volcker as an individual,
look at the Fed as an institution, all seven members. Do they have
the inordinate power that you and other people think they have?
I just don't subscribe that they can cause all these things, such
as—herpes, AIDS, and everything else. [Laughter.]
All three of you, in ascribing all these problems to the Fed in
general, just about totally ignored this irresponsible body of which
I'm a member; $200 billion deficits have something to do with these
problems; $1,400 billion long-term deficit; and $125 billion of interest on the national debt has something to do with all the problems
you've talked about, and Paul Volcker hasn't had anything, nor
has any other Chairman, to do with the irresponsibility of this
body.
Thank you very much for your willingness to testify. The hearing
is adjourned.
[Whereupon, at 2:45 p.m., the hearing was adjourned.]





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102