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EXTENDING THE TREASURY-FEDERAL RESERVE DRAW AUTHORITY HEARING BEFORE THE SUBCOMMITTEE ON DOMESTIC MONETAEY POLICY OP THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS HOUSE OF REPRESENTATIVES NINETY-FIFTH CONGRESS SECOND SESSION APRIL 5, 1978 Printed for the use of the Committee on Banking, Finance and Urban Affairs 26-179 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 1978 HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS H E N R Y S. REUSS, Wisconsin, Chairman J. WILLIAM STANTON, Ohio THOMAS L. ASHLEY, Ohio GARRY BROWN, Michigan WILLIAM S. MOORHEAD, Pennsylvania CHALMERS P. WYLIE, Ohio FERNAND J. ST GERMAIN, Rhode Island JOHN H. ROUSSELOT, California H E N R Y B. GONZALEZ, Texas STEWART B. McKINNEY, Connecticut JOSEPH G.MINISH, New Jersey GEORGE HANSEN, Idaho FRANK ANNUNZIO, Illinois H E N R Y J. H Y D E , Illinois JAMES M. HANLE Y, New York RICHARD KELLY, Florida PARREN J. MITCHELL, Maryland CHARLES E. GRASSLEY, Iowa WALTER E. FAUNTROY, MILLICENT FENWICK, New Jersey District of Columbia JIM LEACH, Iowa STEPHEN L. NEAL, North Carolina NEWTON I. STEERS, JR., Maryland JERRY M. PATTERSON, California THOMAS B. EVANS, JR., Delaware JAMES J. BLANCHARD, Michigan BRUCE F. CAPUTO, New York CARROLL HUBBARD, JR., Kentucky HAROLD C. HOLLENBECK, New Jersey JOHN J. L A F A L C E , New York S. WILLIAM GREEN, New York GLADYS NOON SPELLMAN, Maryland LES AuCOIN, Oregon PAUL E. TSONGAS, Massachusetts BUTLER DERRICK, South Carolina MARK W. HANNAFORD, California DAVID W. EVANS, Indiana CLIFFORD ALLEN, Tennessee NORMAN E. D'AMOURS, New Hampshire STANLEY N. LUNDINE, New York EDWARD W. PATTISON, New York JOHN J. CAVANAUGH, Nebraska MARY ROSE OAKAR, Ohio JIM MATTOX, Texas BRUCE F. VENTO, Minnesota DOUG BARNARD, Georgia WES WATKINS, Oklahoma ROBERT GARCIA, New York PAUL NELSON, CUrkand Staff Director MICHAEL P. FLAHERTY, Counsel GRASTY CREWS II, Counsel MERCER L. JACKSON, Minority Staff Director GRAHAM T. NORTHUP, Deputy Minority Staff Director SUBCOMMITTEE ON DOMESTIC MONETARY POLICY P A R R E N J. MITCHELL, Maryland, Chairman STEPHEN L. NEAL, North Carolina GEORGE HANSEN, Idaho NORMAN E. D'AMOURS, New Hampshire HAROLD C.HOLLENBECK, New Jersey BRUCE F. CAPUTO, New York DOUG BARNARD, Georgia WES WATKINS, Oklahoma BUTLER DERRICK, South Carolina MARK W. HANNAFORD, California (n) CONTENTS STATEMENT OF Taylor, Paul H., Deputy Fiscal Assistant Secretary of the Department of the Treasury *w 3 ADDITIONAL INFORMATION SUBMITTED FOR THE RECORD Miller, Hon. G. William, Chairman, Board of Governors of the Federal Reserve System, letter dated April 4, 1978, supporting extension of the authority of the Board to purchase U.S. obligations from the Treasury on a direct basis up to a limit of $5 billion Taylor, Paul H., table submitted entitled "Direct Borrowing From Federal Reserve Banks, 1942 to Date" _ (in) 2 4 EXTENDING THE TREASURY-FEDERAL RESERVE DRAW AUTHORITY WEDNESDAY, APRIL 5, 1978 HOUSE OP REPRESENTATIVES, SUBCOMMITTEE ON DOMESTIC MONETARY POLICY or THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS, Washington, D.C. The subcommittee met, pursuant to notice, at 8:15 a.m. in room 2220, Rayburn House Office Building, Hon. Parren J. Mitchell (chairman of the subcommittee) presiding. Present: Representatives Mitchell, Barnard, and Hansen. Chairman MITCHELL. The hearing will come to order. First, a brief explanatory note. There is a Democratic caucus this morning at 9 a.m., which will deal with a rather controversial matter, rollback of the social security taxes; therefore, we wanted to complete our hearing so we could get to the Democratic caucus. In addition, eight other members were confirmed to be here. I am certain they will get here sooner or later. I know now precious everyone's time is; therefore, I would like to start the hearings on time this morning. The Subcommittee on Domestic Monetary Policy is holding this hearing and planning to markup legislation to extend until April 30, 1979, the authority of the Federal Reserve to purchase U.S. obligations, up to a limit of $5 billion, from the Treasury on a direct basis. Extensions of this authority have been granted on 21 occasions so far since it was first granted by Congress in 1942. The authority provides a backstop for Treasury cash and debt operations. It assures that the Treasury will be able to raise cash almost instantaneously in emergencies. It has been described by former Treasury Assistant Secretary David Mosso as "a key element in all of the Treasury's financial planning for a national emergency." Currently, the authority is scheduled to expire on April 30, 1978. Prompt action to extend it would appear to be in the public interest. At the same time, we must not forget that the authority makes it possible for the Treasury to use the Federal Reserve as its "handmaiden," and thus to avoid the discipline of the marketplace. If abused, this could cause excessive money creation and inflation. Because of the potential for mischief inherent in the authority, the legislation only extends the authority for 1 year. Our witness today is Paul H. Taylor, the Deputy Fiscal Assistant Secretary of the Department of the Treasury. We also have received a letter on the resolution from Hon. G. William Miller, Chairman of the Federal Reserve Board, which, if there is no objection, I will place in the hearing record at this point. (l) [The letter referred to from Chairman Miller follows:] BOARD OF GOVERNORS FEDERAL R E S E R V E S Y S T E M WASHINGTON, iJ.C. 2 0 5 5 1 6 . WILLIAM MILI.CH CK AIRMAN April 4, 1978 The Honorable Parren J. Mitchell Chairman Subcommittee on.Domestic Monetary Policy Committee on Banking, Finance and Urban Affairs House of Representatives Washington, D. C. 20515 Dear Mr. Chairman: I am -writing in response to your letter of March 30 requesting our views on the joint! resolution you are introducing to extend the authority of the Federal Reserve to purchase U* S. obligations from the Treasury on a direct basis up to a limit of $5 billion. That authority expires on April 30. The Board strongly supports extension of the authority. This authority has been used sparingly, principally at times when the Treasury has been faced with a temporary depletion of its cash balances, such as just prior to receipt of quarterly tax payments. Nonetheless, it has proven to be of great value and serves, geh> erally, as a needed safety-valve for Treasury debt and cash management operations. It provides protection for the Treasury in face of the inevitable uncertainties in estimating the amount and timing of receipts and expenditures. It also helps provide the Treasury with flexibility in managing its cash position and in the timing of its debt management operations. Because extension of the authority would not seem to raise controversial issues, the Board would endorse a longer extension than the one year suggested in your letter. An extension until October 31, 1981, as recommended by the Treasury, seems to us entirely reasonable. Chairman MiTCnftLL. I am always delighted that my colleague shows up on time, full of vim and vigor, every moriiing that we have an eariy morning hearing. Do you wish to make an opening statement, Mr. Barnard? 3 Mr. BARNARD. NO, thank you, Mr. Chairman. Chairman MITCHELL. If there are no other opening statements, we will now hear from you, Mr. Taylor. We welcome you, and you may proceed as you wish. We hava a copy of your testimony in front of us. Thank you very much for getting here at this awful hour of the morning, but I am afraid that it is the only hour at which we can get business done in an expeditious manner. STATEMENT OF PAUL H. TAYLOR, BEPUTY JTSCAL ASSISTANT SECRETARY OP THE DEPARTMENT OP THE TREASURY Mr. TAYLOR. Thank you, Mr. Chairman and members of the subcommittee. I am pleased to appear in support of proposed legislation to extend until April 30, 1979, the authority of Federal Eeserve Banks to purchase directly from the Treasury up to $5 billion of public debt obligations. Under current legislation, Public Law 95-154, approved November 7, 1977, the authority will expire at the end of this month. The authority has existed since 1942, and has usually been extended for 2-year periods, although there have been some lapses in recent years. In January 1977, the Department submitted proposed legislation to the Congress to extend the direct-purchase option to October 31, 1981. I understand, however, that, prior to taking up that measure, the subcommittee desires to hold oversight hearings on Treasury debt management policies, and that the 1-year extension you are now considering would merely provide interim authority. The primary purpose of the authority is as a backstop for Treasury cash and debt operations, permitting more economical management of our cash reserves and allowing us to carry lower than normal balances in our checking accounts at the Federal Reserve Banks when the need arises. The purchase option has been used sparingly. However, its value does not rest on its frequency or the extensiveness of its use, but its availability as a backstop for Treasury cash 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 normal conditions, the Treasury has wholly adequate recourse to short-term funds through our weekly Treasury bill auctions or the short-term cash management bills which can provide funds to the Treasury in as few as 3 days. From the close of calendar year 1975 to the present, we have made only a single use of the option, and that use wjas limited to a $2.5 billion draw to maintain a maximum cash balance just prior to expiration of the legislation establishing the temporary ceiling on the public debt in the fall of 1977. In the more distant past, the authority was used during periods when disruptions occurred in the financial markets at the same time the Government needed to raise cash to maintain Government functions, tlusually, the authority is not used for long periods, the average length being from 2 to 7 days; only twice in the past 35 years has the Treasury Jiad to draw funds in this manner for 20 days or more at any one time. The accompanying table shows the instances of actual use. 4 [The table referred to 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 Days Used 19 48 none 9 none none none 2 2 4 30 29 15 none none none 2 none 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 none none none none none none 1970 1971 1972 1973 1974 1975 1976 1977 none 3 7 8 21 9 1 10 1 16 none 4 Maximum Amount At Any Time (Millions) $ 422 1,302 -. 484 »— •«. 220 180 320 811 1,172 424 ---207 — «— -• •• •- .. 169 153 596 1,102 __ 610 38 485 131 1,042 — 2,500 Number of Separate Times Used Maximum Number Of Days Used At Any One Time 4 4 2 1 6 28 7 • • 2 2 2 4 2 2 1 1 3 3 2 1 1 3 1 4 1 1 2 9 20 13 • • 2 • • 3 3 6 12 7 1 6 1 7 4 Note: Federal Reserve direct purchase authority expired October 1, 1977, and was reinstated November 1, 1977, until April 30, 1978. Office of the March 9, 1978 Fiscal Assistant Secretary The authority is subject to the public debt limit, and its use is reported in the daily Treasury statement, the weekly Federal Reserve statement, and in the Federal Reserve Board's Annual Report to the Congress. Thus, the Department views the authority as a temporary accommodation to be used only under unusual circumstances. In that connection, it is important to emphasize that any direct recourse by 5 the Treasury to Federal Reserve credit under this authority is subject to the discretion and control of the Federal Reserve itself* The authority is an invaluable cash-management tool, however; and the Department urges prompt consideration of the proposed legislation to erasure, that it does not expire pn April 3Q, 1978*. That concludes iny prepared statement, Mr. Chairman. L will be glad to respond to any questions* Chairman MITCHELL. Thank you very much. Thi&is a rather routine matter, and I don't have a large number of questions. I /v^ould just observe, as you have noted, that we do intend to have oversight hearings on Treasury debt management. I think, pending the holding of those hearings, that the 1-year extension is the best and most effective way to handle this issue. The House Joint Resolution 816, was placed in the hopper on Monday, and we hope it will move quickly...If-, enough members show up between now and 9 , I will try for a quick markup on the bill and move it right through. Congressman Barnard? Mr. BARNARD. Thank you, Mr. Chairman. Mr. Taylor, how do you determine the rate of interest on. these transactions? Mr. TAYLOR. That is by agreement with the Fed. This current agreement has been in effect for a number/jrf years. It is one-quarter of 1 percent below the bank discount rate at the Federal Reserve Bank in New York. That Would currently be if. we borrow today, for instance, 6K percent, The discount rate is 6$ percent awently. Mr. BARNARD. That seems fair enough. That is the only question I have, Mr. Chairman. Chairman MITCHELL. The distinguished ranking minority member has joined us, Mr. Hansen. I might indicate, while we are waiting for M& Hansen, that, in his correspondence. Chairman Miller did suggest we vote ior more than a 1-year extension. Unfortunately, it is .the opinion of the Chair that we cannot honor that; request, primarily because of the scheduled hearings by the subcommittee, and we will so advise Chairman Miller. Mr. Hansen? Mr. HANSEN. Yes, thank you. I arrived during the last part of your statement, and have now read the first part, and appreciate your being -here this mornifig. I only have a couple of questions. One, in your mind, do you feel it is possible that the tax and loan account legislation just passed might alleviate the need' for this request? Mr. TAYLOR, No, sir, I personally donft think so. This is still, as I mentioned in my testimony, primarily an emergency tool insurance if you will, and enables us to target minimum §ash balances at a particular time. And I would still foresee .times,. £ven with the tax and loan investment authority, that we would still have to draw all of our money from the tax and loan account and still have a total shortage of cash at a given time, particularly in an emergency. And so I would not see that that would negate the need for this. Mr. HANSEN. Are we talking polarization here, in terms of yes or no? How about somewhere in the middle? Does it reduce the need? Mr. TAYLOR. NO, sir. I don't think so, not for this type of emergency borrowing. 6 I might make a point that the amount that is being asked to be renewed, the $5 billion, has stayed the same since 1942. However, if you relate it to Government outlays in 1942, when this authority was established, Government outlays were in the vicinity of $35 billion. They are projected for 1979 at somewhere around $499 billion. So, relatively speaking, the amount has definitely been reduced in relation to the outlays. In fact, I guess our cash flows now are approaching, if not already there, $1 trillion a year. So, from that standpoint, you could say that the amount has gone down, relatively, to the size of the outlays, but it is still a very helpful device for us to have. Mr; HANSEN. I always get a kick out of these analogies—based on gross national product or cash outlays or whatever, because some people try to relate the national debt to this and say, "Well, it really isn't Rowing, if you look at it in proportion." But, if we ever have a bust in our economy and our GNP, for instance, went down, even though you would be producing the same amount of goods, you would not get the same amount for them, and then you would not find that the proportion rises rather fast. So, there is always cause to worry about the proportionating that goes on. I also am amused by this business regarding insurance. You are not the only ones, so don't take it personally. But people always sav they want insurance. I think, really, what they want is a signed blank check. Mr. TAYLOB. Well, the answer, I would rive is that we have used this authority sparingly, and we recognize the responsibility to use it discretely and only when we absolutely need it. So, we have used it, very judiciously, in my opinion. We have used it once, since 1975. That has been the span since I have been directly connected with this authority. Mr. HANSEN. I don't quarrel with that. I was teasing you a little bit. I hope the chairman can successfully stall for a quorum. But I am about through, except to say that I appreciate the fact that we are going to have oversight hearings, and I think that is the time to get into some of the nuts and bolts of these things. Mr. Chairman, I have no further questions. Thank you. Chairman MITCHELL. Thank you very much. I am not stalling. I really want to learn something. I have been here not 7K years, and I am one of the Members of the Congress who feels that for as long as he has been here, he is still in the process of learning. Ifou did use the authority last fall? Mr. TAYLOR. Last September. Yes, sir. Chairman MITCHELL. NOW, in terms of that use, just for my own enlightenment, would you track through the mechanics of how that authority was used; how the decision to use it is arrived at? What kind of timespan does it take for the Fed to provide you the funds when the Treasury needs them? 7 Mr. TAYLOR. Well, I think the decision was made, when it looked like the temporary ceiling—which, at that time, I think, was $700 billion—was not going to be extended before it expired on September 30. So, at that time, we wanted to maximize our cash balances to carry us over to pay our bills as long as we could, iii ease the debt limit bill was not passed in time. Well, it so happened that it didn't. I think it was 4 days before the debt ceiling passed, and we were able to borrow again. So, what we did, we worked as we always do, very closely with the staff of the Open Market Committee in New York and, based on the remaining ceiling that we had available to us on Seipt&nber 30— $2% billion—we borrowed within that amount to gfct as much cash as we needed to carry us as long as we could. Mr. BARNARD. Mr. Chairman, would you yield at this point? Mr. MITCHELL. Mr. BARNARD. Yes. T h a t is what confuses me. Wouldn't that $2% billion have also been included in the debt ceiling? Mr. TAYLOR. That's correct. We had, prior to the ceiling reverting from $700 billion to $400 billion, we had within that $700 billion ceiling, $2% billion approximately that we could use. And so we used that prior to expiring on September 30. Mr. BARNARD. B u t that is part of the total? Mr. TAYLOR. Yes, it is part of the debt ceiling. Chairman MITCHELL. Besides the staff of the Open Market Committee and the Treasury, are any other agencies getting involved in preparing this recommendation? Mr. TAYLOR. N O . Chairman MITCHELL. Then final approval, of course, is with whom? Mr. TAYLOR. With the Open Market Committee. I t is with the Fed* Mr. BARNARD. I n the history of this program, I notice it has never gone over $2% billion. That is the highest one-time amount t h a t has been negotiated. Has there ever been any thought about how much this ceiling would be? I suppose it would be the national debt. Mr. TAYLOR. D O you mean the ceiling on Mr. BARNARD. On these negotiations. Mr. TATLOR. $5 billion is the statutory ceiling. Chairman MITCHELL. Just one more. The decision process starts with the Open Market Committee staff, then the Treasury, and then final approval is really with the Federal Reserve; correct? Mr. TAYLOR. Yes, sir. Chairman MITCHELL. I n effect, then, are you saying that the Federal Reserve really has a sort of veto power over the decision? Mr. TAYLOR. Yes, it is they loaning us funds. So, it is up to t h e m to say yes or no. They have the authority to do that. Chairman MITCHELL. Well, I mentioned somewhere in my opening statement about possibilities for mischievous behavior. I was not referring to the Fed at t h a t time, b u t all sorts of strange things can happen. Again, it is one of those matters t h a t I think we ought to look at, whether or not we have had a negative experience, whether or not a veto power ought to rest with the Fed. 8 Mr. BARNARD. Mr. Taylor, does the Fed maintain enough liquidity that it could invest in these Treasury bills? Now^ they are investing reserves; areji'fc they? Mr. TAYLOR, I am not positive as to how that works. Mr. BARNARD. It looks like to me, if they had this Uquidity in their operations, they could have already had it invested. Mr. TAYLOR- I think their loan to us has the effect of increasing bank reserves, Chairman MITCHELL. Thank you very much, sir, for being with us. I would ask the members who are present if they could remain available a while and have some coffee, at least until 9, in hopes that some other members would get here. Gentlemen, thank you very, very much for being here. [Whereupon, at 8:33 a.m., the hearing was adjourned.] O