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TO AMEND THE FEDERAL RESERVE ACT

HEARING
BEFORE

THE

SUBCOMMITTEE ON
DOMESTIC MONETARY POLICY
OF

THE

COMMITTEE ON
BANKING, CURRENCY AND HOUSING
HOUSE OE REPRESENTATIVES
NINETY-FOURTH

CONGEESS

S E C O N D SESSION
ON

H.R. 14848
A B I L L T O A M E N D S E C T I O N 14(b) O F T H E F E D E R A L R E S E R V E ACT, A S A M E N D E D , T O E X T E N D F O R T W O Y E A R S
T H E A U T H O R I T Y OF F E D E R A L R E S E R V E B A N K S TO PURCHASE UNITED STATES OBLIGATIONS D I R E C T L Y F R O M
T H E TREASURY

S E P T E M B E R 22, 1976

Printed for the use of the
Committee on Banking, Currency and Housing

U.S. G O V E R N M E N T P R I N T I N G O F F I C E
77-649




W A S H I N G T O N i 1976

COMMITTEE

ON BANKING,

CURRENCY

AND

HOUSING

H E N R Y S. R E U S S , Wisconsin, Chairman
L E O N O R K . (MRS. J O H N B.) S U L L I V A N ,
Missouri
T H O M A S L . A S H L E Y , Ohio
W I L L I A M S. M O O R H E A D , Pennsylvania
R O B E R T G. S T E P H E N S , JR., Georgia
F E R N A N D J . ST G E R M A I N , Rhode Island
H E N R Y B. G O N Z A L E Z , Texas
J O S E P H G. M I N I 3 H , New Jersey
F R A N K A N N U N 2 I 0 , Illinois
T H O M A S M. R E E S , California
J A M E S M. 1 I A N L E Y , New York
P A R R E N J . M I T C H E L L , Maryland
W A L T E R E. F A U N T R O Y ;
District of Columbia
L I N D Y (MRS. H A L E ) B O G G S , Louisiana
S T E P H E N L . N E A L , North Carolina
J E R R Y M. P A T T E R S O N , California
J A M E S J. B L A N C H A R D , Michigan
C A R R O L L H U B B A R D , JR., Kentucky
J O H N J. L A F A L C E , New York
G L A D Y S N O O N S P E L L M A N , Maryland
L E S A U C O I N , Oregon
P A U L E . T S O N G A S , Massachusetts
B U T L E R D E R R I C K , South Carolina
P H I L I P H . H A Y E S , Indiana
M A R K W. H A N N A F O R D , California
D A V I D W. E V A N S , Indiana
C L I F F O R D A L L E N , Tennessee
N O R M A N E . D ' A M O U R S , New Hampshire
S T A N L E Y N . L U N D L N E , New York

A L B E R T W. J O H N S O N , Pennsylvania
J. W I L L I A M S T A N T O N , Ohio
G A R R Y B R O W N , Michigan
C H A L M E R S P . W Y L I E , Ohio
J O H N H . R O U S S E L O T , California
S T E W A R T B . M t f K l N N E Y , Connecticut
J O H N B . C O N L A N , Arizona
G E O R G E H A N S E N , Idaho
R I C H A R D T . S C H U L Z E , Pennsylvania
W I L L I S D . G R A D I S O N , JR., Ohio
H E N R Y J . H Y D E , Illinois
R I C H A R D K E L L Y , Florida
C H A R L E S E . G R A S S L E Y , Iowa
M I L L I C E N T F E N W I C K , New Jersey
R O N P A U L , Tezas

PAUL NELSON, Clerk and Staff Director
WILLIAM P . DIXON, General Counsel
MICHAEL P . FLAHERTY, Counsel
GRASTT CREWS It, Counsel
ORMAN S. FINK, Minority Staff Director
GRAHAM T . NORTHUF, Deputy Minority Staff Director

SUBCOMMITTEE

ON DOMESTIC

MONETARY

POLICY

S T E P H E N L . N E A L , North Carolina, Chairman
J O S E P H G. MINTSH, New Jersey
J O H N B . C O N L A N , Arizona
M A R K W. I I A N N A F O R D , California
J A M E S J. B L A N C H A R D , Michigan
L E O N O R K . (MRS. J O H N B.) S U L L I V A N ,
Missouri
C L I F F O R D A L L E N , Tennessee
N O R M A N E . D ' A M O U R S , New Hampshire




G E O R G E H A N S E N , Idaho
W I L L I S D . G R A D I S O N , JR., Ohio

(n>

CONTENTS
Pan
Text of H . R . 14848

—
STATEMENT

2

—

3

OP

Mosso } David, Fiscal Assistant Secretary of the Treasury
A D D I T I O N A L I N F O R M A T I O N S U B M I T T E D FOR T H E

RECORD

Burns, Hon. Arthur F., Chairman, Board of Governors of the Federal
Reserve System, letter dated September 20,1976, supporting H . R . 14848Mosso, David, table submitted entitled "Direct Borrowing F r o m Federal
Reserve Banks, 1942 to Date"




<m)

3
5

TO AMEND THE FEDERAL RESERVE ACT
W E D N E S D A Y , S E P T E M B E R 22, 1976
H O U S E OF R E P R E S E N T A T I V E S ,
SUBCOMMITTEE ON D O M E S T I C M O N E T A R Y P O L I C T
OF T H E C O M M I T T E E ON B A N K I N G , C U R R E N C Y AND HOUSING,
Washington,
B.C.

The subcommittee met at 9:20 a.m. in room 2220 of the Raybum
House Office Building; Hon. Stephen L . Neal (chairman of the subcommittee) presiding.
Present: Representatives Neal, Hannaford, Allen, and Hansen.
M r . NEAL. M r . Mosso, if it's all right with you, we will go ahead
and begin and we will try to get a quorum in a few minutes.
M r . Mosso. Fine.
M r . NEAL. Let me say at this time, for the record, that this morning
the Subcommittee on Domestic Monetary Policy will hear testimony
on H . R . 14848, which would extend for 2 years the authority of the
Federal Reserve to purchase U.S. obligations from the Treasury
on a direct basis. Extensions for this authority have been granted on
19 occasions so far since originally being granted by Congress in 1942.
This authority has been described as a debt management tool particularly useful in tax anticipation periods. The Treasury also has
argued in the past that the authority reduces short-term borrowings
and thus interest costs. On the other hand, the authority makes it
possible for the Treasury to use the Fed as its handmaiden and thus
to avoid the discipline of the marketplace. If abused, this could cause
excessive money creation and inflation.
[The text of H . R . 14848 follows:]




(1)

2

d i m CONGRESS V V
2D SESSION

14848

4

i n

i

A

IN THE HOUSE OF REPRESENTATIVES
July 28,1076
Mr. JIEUSS introduced the following bill; wltich was referred to the Comiuittce on Banking, Currency and Housing

A BILL
To amend section 14 (I)) of the Federal Reserve Act, as amended,
to extend for five years the authority of Federal Reserve
hanks to purchase United States obligations directly from
the Treasury.
1
2'

Be it enacted by the Senate and Ilouse of Representee
lives of the United States of America in Congress assembled,

3 That section 14 (b) of the Federal Reserve Act, as amended
4 (12 TJ.S.C. 355), is amended (1) by striking out "Xovem5 her 1, 1976" and inserting in lieu thereof "November
6 1978"; and (2) by striking out "October 31, 1976" and
7 inserting in lieu thereof "October 31,1978".
I

Mr. NEAL. Our witness this morning is Fiscal Assistant Secretary
of the Treasury David Mosso. Immediately following the hearing
the subcommittee will proceed to mark up "the bill.
Incidentally, I would like to mention here that there is an error
in the title of the bill which states that the extension is for a 5-year
period. That should read 2 years.




I have a letter from the Chairman of the Board of Governors of
the Federal Reserve System, Hon. Arthur F. Burns, that, without
objection, will be placed in the record at this point.
[The letter referred to follows:]
CHAIRMAN O F THE BOAHD O F

GOVERNORS

FEDERAL RESERVE SYSTEM
WASHINGTON. O. C . 2Q5SI

September 20, 1976

The Honorable Stephen L . Keal
Chairman
Subcommittee on Domestic Monetary Policy
Committee 'on l i n k i n g , Currency and Housing
House of Representatives
Washington, l5. C. 20515
5)ear K r . Chairman:
The Board strongly supports H. I U 14S4S. a b i l l
vhich amends section 14(b) of the Federal feserve Act, as
amended, to extend u n t i l October 31, 1978, the authority
of the Federal Reserve Banks to purchase United States
obligations d i r e c t l y from the Treasury. We strongly urge
t h a t t h i s l e g i s l a t i o n be enacted i n t o law during the
remaining days of t h i s session of the Congress* ~

Sincerely yours,

Arthur F . . Burns
M r . N E A L . M r . Mosso, we are delighted to have y o u this morning*
Y o u E a E proceed A V I o wish.
S T A TmMy N T OF D as y Du MOSSO, F I S C A L ASSISTANT S E C R E T A R Y OP
THE TREASURY

Mr. Mosso. I am pleased to appear in support of H.R, 14848, which
would extend until October 31,1978, the existing authority of the Federal Reserve-banks to purchase directly from the Treasury up to $5
billion of public debt obligations. In the absence of congressional
action, tliis direct-purchase authority will expire at the end of October 1976.




4

The purpose of the direct-purchase authority is to contribute to
the efficient management of the public finances. It was first granted
i n its present form i n 1942, and it has been renewed for temporary
periods on 19 separate occasions. The authority lapsed on three occasions in recent years: from July 1 until August 14, 1973; from
November 1, 1973, until October 28, 1974; and from November 1 to
November 12, 1975. I n some cases, these lapses traced to unrelated
and^ controversial amendments which had been attached to the borrowing authority bill. The authority itself has never been controversial.
Since 1942 the authority has been used on only £ limited number
of occasions. However, its value does not rest on the frequency or
extensiveness of its use but its availability as a backstop for Treasury cash and debt operations, permitting more economical management of our cash position and assuring our ability to provide needed
funds almost instantaneously in the event of any kind of emergency.
During the periods when the authority was not available, the Treasury
had to maintain higher cash balances, and a higher public debt, than
would otherwise have been the case.
The direct-purchase authority is available to provide an immediate
source of funds for temporary financing in the event of a national
emergency on a broader scale. During emergencies it is possible that
financial markets would be disrupted at a time when large amounts
of cash had to be raised to maintain Government functions. Consequently, the direct-purchase authority has for many years been a
key element in all of the Treasury's financial planning for a national
emergency. This is a major reason why the authority should be continued for at least $5 billion, even though $1.3 billion is the largest
amount that has ever actually been used in the past.
The Treasury Department views the authority as a temporary
accommodation to tie used only under unusual circumstances. I n
that connection, it is important to emphasize that any direct recourse
by the Treasury to Federal Reserve credit under this authority is
subject to the discretion and control of the Federal Reserve itself.
W i t h that safeguard, and in view of the fact that the authority lias
never been abused, the Department recommended a 5-year extension,
to October 31, 1981. As introduced, however, H . R . 14848 provides
for a 2-year extension, to October 31, 1978, which we understand
reflects the position of your comhiittee. The Department would prefer
the longer authority and believes that it can be justified in terms of
its limited use, but in view of the committee's position, we do not
object to this change in the Treasiny draft bill.
The accompanying table provides details on the instances of actual
use. The borrowings are promptly shown i n the Daily Treasury
Statement and the weekly Federal Reserve Statement, assuring the
widespread publicity that is the best possible deterrent to abuse. The
Federal Reserve also includes the information i n its annual report t o
the Congress. And, of course, this borrowing, like other Treasury
borrowing, is subject to the debt limit.




IThe table referred to by M r . Mosso follows:]
DIRECT BORROWING FROM FEDERAL RESERVE BANKS, 1942 TO DATE

Calendar year
1942.
1943.
1944
1945
1946
1947
1948._
1949
1950.
1951
1952
1953
1954.
1955
1956
1957
1958.
1959
1960.
1961
1952.
1953
1964
1965
1966
1967
1968.
1969.
1970
197 1
197 2
197 3
1974
197 5
1976.

„

....
....

. ......

19
48
None
9
None
None
None
2
2
4
30
29
15
None
None
None
2
None
None
None
None
None
None
None
3
7
8
21
None
9
1
10
1
16

Maximum
number of
days used
at any one
time

4
4

6
28

484

2

7

220
180
320
811
1,172
424

1
2
2
4
2
2

;2
l
2
9
20
13

207

...
...
....

Number of
separate
times used

$422
1,302

Days used

......

.

Maximum
amount at
any time
(millions)

1

2

169
153
596
1,102

1
3
3
2

3
3
6
12

610
38
485
131
1,042

1
1
3
1
4

7
1
6
1
7

...

...

Source: Office of the Fiscal Assistant Secretary, Sept 20,1976*

M r . Mosso. As an essential backstop to our cash management
operations and as an insurance policy against financial emergency,
this authority should not be allowed to expire.
That concludes my statement, M r . Chairman. I will be glad to
Tespond to any questions.
M r . NEAL. Thank you, M r . Mosso. I note that you have included
i n your statement a list of the times from 1942 to date when this
authority has been used. Could you tell us for the record some of the
reasons why this authority was used, aside from the financing needs
during World War II?
M r . Mosso. Well, it has been used a number of times in the more
distant past as an offset to the impact on the banking system, in
terms of impact on bank reserves, as an offset to tax payments that
would be coming i n in large amounts. The present schedule is, of
•course, April 15, but i n earlier days it was in January. So it was sometimes used in that context, in order to provide the banking system
•with reserves in anticipation of large tax payments. ^
I n more recent years it has been used on occasions to keep the
Government from having to carry a larger than necessary average
cash balance at times when borrowing requirements were otherwise
heavy. But, more important, it has been used as a cushion for estimating errors in our estimates of cash flow and borrowing requirements.




6

What it comes down to is this: when we plan our borrowings for
the coming months or quarter, whatever the period is, we do it on
the basis of what we estimate our cash balance will be. Now, those
estimates, as with any estimates, are subject to error, and they have
been subject in recent years to a fairly wide range of error because of
the high volatility of the balances. So when we have this authority as
a standby, we can run our cash balances as low as we think is prudent,
based on our estimates, and then we can go ahead and do our financing
and announce it in advance. If we miss our estimate on the low side,
we have this backstop authority that lets us take up the slack. So it
just permits more orderly financing for us.
M r . NEAL. Y o u say that the importance of the authority is its
availability as a backstop for Treasury debt and cash obligations.
H o w would the absence of this authority affect Treasury cash and
debt operations?
M r . Mosso. Well, i t essentially would require us at certain times
to cany a little higher cash balance than we would otherwise feel is
necessary.
I n other words, we would have to conduct our borrowing operations
in a way that gave us a cushion in the cash balance, a cushion against
unforeseen net outlays that might otherwise drain off the cash. So it
comes down simply to the fact that we would' be carrying, on the
average, a higher cash balance.
M r . NEAL. Would you agree that many times i n the past the F e d
has acted as the Treasury's handmaiden by monetizing the Federal
debt?
M r . Mosso. N o t through use of this authority, no, sir. There is
no instance that I am aware of where this authority has been used in
that sense.
M r . NEAL. I didn't really mean to limit it to this particular authority,
M r . Mosso. Well, in a broader sense, I don't think it's right to use
the term "handmaiden," although, certainly, the Federal Reserve
is conscious of what is going on in the money and securities markets,
so that, undoubtedly, they have conducted operations at times that
would make for orderly markets. Now, that would be of benefit to
the Treasury, but i t is also a part of their central bank responsibility
for conducting monetary policy. So I really think it is a matter of
carrying out their own responsibilities rather than doing something
for the Treasury.
M r . NEAL. I than£ you, M r . Mosso. I have-no further questions at
this time.
M r . Hannaford?
M r . HANNAFORD. M r . Chairman, I have no questions.
M r . NEAL. M r . Allen?

M r . ALLEN. I have no questions, M r . Chairman.
M r . NEAL. M r . Hansen?

M r . HANSEN. I understand this has been relatively noncontroversial
and still remains so. I don't think there is any need to belabor it. So
I just thank the gentleman for appearing this morning.
[Whereupon, at 9:35 a.m., the subcommittee adjourned to reconvene
immediately to mark up the subject bill.