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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* YT oA u Tm a yE N proceed o u MOSSO, wish. F I S C A L ASSISTANT S E C R E T A R Y OP S EM T OF D as A VyI D 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. Days used ...... „ . .... .... . ...... 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 amount at any time (millions) Number of separate times used Maximum number of days used at any one time $422 1,302 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 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.
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