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H.R. 2281

H.R- 421
MARCH 5, 1979

Serial No. 96-4
Printed for the use of the
Committee on Banking, Finance and Urban Affairs



H E N R Y S. REUSS, Wisconsin, Chairman
STEWART B. McKINNEY, Connecticut
F E R N A N D J. ST GERMAIN, Rhode Island
H E N R Y J. H Y D E , Illinois
R I C H A R D KELLY, Florida
F R A N K ANNUNZIO, Illinois
THOMAS B, EVANS, JR., Delaware
P A R R E N J. MITCHELL, Maryland
S. WILLIAM G R E E N , New York
District of Columbia
E D B E T H U N E , Arkansas
S T E P H E N L. NEAL, North Carolina
J E R R Y M. PATTERSON, California
CARROLL H U B B A R D , JR., Kentucky
South Carolina
JOHN J. L A F A L C E , New York
DON R I T T E R , Pennsylvania
JON HINSON, Mississippi
LES AuCOIN, Oregon
NORMAN E. D'AMOURS, New Hampshire
STANLEY N . L U N D I N E , New York
B R U C E F. VENTO, Minnesota
R O B E R T GARCIA, New York
PAUL NELSON, Clerk and Staff Director
MICHAEL P . FLAHERTY, General Counsel
MERCER L. JACKSON, Minority Staff Director

P A R R E N J. MITCHELL, Maryland, Chairman
S T E P H E N L. NEAL, North Carolina
NORMAN E. D'AMOURS, New Hampshire
DON R I T T E R , Pennsylvania


H.R. 2281
H.R. 421


Partee, Hon. J. Charles, member, Board of Governors of the Federal
Reserve System
Taylor, Paul H., Fiscal Assistant Secretary of the Treasury



Altman, Hon. Roger C, Assistant Secretary of the Treasury, letter dated
March 16, 1979, regarding debt management implications of H.R. 421__






Washington, D.C.
The subcommittee met at 8:40 a.m. in room 2220 of the Rayburn
House Office Building; Hon. Parren J . Mitchell (chairman of the
subcommittee) presiding.
Present: Representatives Mitchell and Hansen.
Chairman MITCHELL. Good morning, ladies and gentlemen.
The purpose of this morning's hearing is to consider testimonyconcerning legislation, H.K. 2281, that would extend the Treasury
draw authority of the Federal Reserve banks until 1984 and an alternative way of dealing with the same problem. Since the current authority, which was authorized by Public Law 95-534, is scheduled to
expire on April 30, 1979, it is necessary to reextend the authority, or
to legislate a different procedure to deal with unforeseen Treasury cash
While past legislation has not been substantively altered, there is
presently a proposal that would replace the current extension mechanism. The bill, H.R. 421, introduced by our colleague George Hansen,,
the ranking minority member of this subcommittee, would provide
authority to the Treasury to borrow securities instead of cash from the
Federal Reserve.
I n effect, the Hansen proposal would allow the Treasury, faced with
an unforeseen cash shortage, to borrow securities from the Federal
Reserve's portfolio, sell them in the open market, and subsequently
replace them when moneys from other sources become available.
I n the past, both the Treasury and Federal Reserve have strongly
supported extension of the current authority. And although extensions of this authority have been granted only for limited periods,,
usually a year to two, since initial congressional approval in 1942, it
nonetheless has proven an effective mechanism for Treasury debt and
cash management operations. Treasury draw authority is a safeguard
against uncertainties associated with estimating the amount and timing of receipts and expenditures, as well as a mechanism which provides the Treasury with a flexible debt management tool. Nonetheless
I have an open mind about the Hansen proposal.
[The texts of H.R. 2281 and H.R. 421 follow:]


| - |




To amenij the Federal Reserve Aet to extend the authority of the Federal
Reserve banks to buy and sell certain obligations.



.Mr. MITCHELL of Maryland introduced the following bill; which was referred to
the Committee on Banking, Finance and Urban Affairs

To amend the Federal Reserve Act to extend the authority of
the Federal Reserve banks to buy and sell certain

Be it enacted by the Senate and House of Representor

2 tives of the United States of America in Congress assembled,
3 That section 14(b) of the Federal Reserve Act (12 U.S.C.
4 355) is amended by striking out "May 1, 1979" and inserting
5 in lieu thereof "May 1, 1984", and by striking out "April 30,
6 1979" and inserting in lieu thereof "April 30,1984".



H. R. 421

To amend the Federal lleserve Act to provide authority for Federal Reserve
banks to lend obligations to the Secretary of the Treasury and for the
Secretary of the Treasury to borrow such obligations to meet the Treasury's
short-term cash needs.



Mr. HANSEN introduced the following bill; which was referred to the Committee
on Banking, Finance and Urban Affairs

To amend the Federal Reserve Act to provide authority for
Federal Reserve banks to lend obligations to the Secretary
of the Treasury and for the Secretary of the Treasury to
borrow such obligations to meet the Treasury's short-term
cash needs.

Be it enacted by the Senate and House of Representa-

2 tives of the United States of America in Congress assembled,
3 That (a) the first sentence of section 14(b)(1) of the Federal
4 Reserve Act (12 U.S.C. 355(1)) is amended by repealing the
5 proviso and inserting in lieu thereof a period.


(b) Section 14(b)(2) of the Federal Reserve Act (12

2 U.S.C. 355(2)) is amended by inserting,-"and to lend, under
3 the direction and regulations of the Federal Open Market
4 Committee, any such obligations to the Secretary of the
5 Treasury".

(c) Section 14 of the Federal Reserve Act is amended

7 by inserting at the end thereof the following:

"(h) The Secretary of the Treasury shall have the au-

9 thority to borrow obligations referred to in subsection (b)(2)
10 from any Federal Reserve bank and to sell such obligations
11 in the open market for the purpose of meeting the short-term
12 cash needs of the Treasury. Within six months after the date
13 of sale of such obligations, the Secretary of the Treasury
14 shall repurchase the obligations and return them to the Fed15 eral Reserve bank from which they were obtained.".

Chairman MITCHELL. Our witnesses today are the Honorable J .
Charles Partee, member of the Board of Governors, Federal Reserve
System, and Paul H. Taylor, Deputy Fiscal Assistant Secretary, Department of the Treasury. Before asking you both to testify, I am
going to ask my colleague, Mr. Hansen, to make his opening statement.
Mr. Hansen ?
Mr. H A N S E N . Thank you, Mr. Chairman. We are up pretty early.
Did you get the cow milked before you came ?
Chairman MITCHELL. No.
Mr. H A N S E N . It's not often that those of us on this side of the aisle
have the opportunity to hear testimony on one of our own bills, and I
thank you, Mr. Chairman, for this opportunity. This should stand as
an enviable example of fairness among other committees of Congress.
The authority for the Treasury to borrow directly from the Fed
instead of in the open market in the event of an unforeseen shortage

of cash has been m existence since 1942, except for some relatively
brief interruptions. I believe I am correct in saying that at the time
the draw authority was put in place the market for Government securities was not so well developed as it is today.
Now we have such things as repurchase agreements, book entry
securities, and telephone transactions involving even the largest sums.
While the draw authority may have been the only reasonable method
available in 1942 to supply emergency deficiencies of Treasury cash,
I doubt that the same can be said today. If we were starting all over
again, I don't think the mechanism of direct loans by the Fed to the
Treasury would be adopted.
The reason I say this is because there are one or two disadvantages to
the draw authority. Most importantly, it involves the creation of new
money to supply Treasury needs. Ordinarily, of course, the amounts
involved are not large enough, nor is the borrowing outstanding long
enough to present serious difficulties for monetary management by the
Fed. Nevertheless, the possibility exists that use of the draw authority
might increase the money supply by 1 percent, say, for a period of
several weeks. I n such an event, monetary policy management by the
Fed would be complicated by the draw authority.
The other disadvantage of the draw authority is that it involves
negotiations between the Treasury and the Fed that are not directly
subject to any market check as regards the terms of the borrowing.
The fact that the authority avoids the open market is exactly the
reason Congress has kept such a short rein on it for all these years,
limiting the amount that can be outstanding at any one time and
making the authority only temporary, requiring periodic renewal.
The mechanism I have proposed in H.R. 421 does not have these
disadvantages. I n brief, it involves borrowing securities from the
Fed's portfolio instead of the creation of money. When the Treasury
runs short of cash, it would be able to borrow securities from the Fed,
sell them on the open market, then repurchase them and send them
back to the Fed when the shortage was ended. The Treasury, in effect,
would be borrowing already-circulated money from the public, so no
difficulties would be encountered in monetary policy management.
Likewise, because the securities would have to be sold and then
repurchased on the open market in competition with all other borrowers, there would be a direct market test of the terms of the borrowing. Moreover, abuse of the securities borrowing authority would be
more difficult by far than abuse of the draw authority, because of this
market test.
Because the mechanism proposed in H.R. 421 has neither of the
disadvantages of the draw authority, the reasons for keeping a short
legislative rein on it are not present, and so H.Jt. 421 is a permanent
authority which would not require periodic renewal. The market will
perform the oversight that has had to take up congressional time
under the draw authority. As busy as our schedules are, I think this
is a particularly notable advantage of my proposal.
I Should note, by the way, that legislative counsel tells me that the
value of the securities borrowed would be included automatically
within the public debt subject to statutory limit, so in that respect
the securities loan would be on the same footing as the draw, and
would not expand total Treasury borrowing authority.

As I stated earlier, I think that if we were considering this matter
without any previous history for the draw, we would establish instead
a securities borrowing authority. The Fed knows how to loan securities
from its portfolio and the Treasury knows how to sell and buy its
own securities. With modern markets based on electronic bookkeeping
and telephone transactions, the securities borrowing authority is
clearly preferable to a draw authority that operates outside the market,
creates new money for Treasury spending, and is subject to abuse since
it can be fixed up between just a few people at the Fed and the
Of course, since the draw has been in place for nearly 40 years,
securities borrowing does involve a new way of doing things, always
a difficult subject for a bureaucracy to master. But the neeed for using
the authority seldom arises, and it seems reasonable to ask the Fed
and the Treasury to make a small effort to follow a little different
procedure when occasion demands. If they will cooperate, then we
can avoid the disadvantages of the old way and be relieved of this
burden of periodically having to renew the draw.
Mr. Chairman, I welcome the witnesses and look forward to hearing
the reasons they will offer for not changing to a more modern and,
I should say, more up to date proposal. And again, I thank you for
this opportunity to discuss one of my legislative ideas. I hope this
exemplary spirit of cooperation will be imitated by our colleagues.
F o r myself, I promise to continue in that spirit.
Thank you, Mr. Chairman.
Chairman MITCHELL. Thank you, Mr. Hansen. And the Chair renews its commitment to be completely bipartisan, as it has in the past.
I am completely open-minded about the Hansen proposition, and
there certainly are, in my opinion, advantages. A market check on
borrowing is something that the draw does not now have and which
could be meritorious. I n addition, I think the idea that my colleague
has advanced would eliminate the direct creation of new money or
the injection of new reserves. Those are advantages that I see. I hope
that both witnesses will address these points.
Mr. H A N S E N . Mr. Chairman, would you yield ?
Chairman MITCHELL. Delighted.
Mr. H A N S E N . I think there is a real advantage to this in a day and
age when we are feeling high interest rates and monetary shortages
and everybody's trying to get away from this program, which is so
aggravating to people in middle and low-income situations.
And I know the concern the chairman has for this, which I share
because I represent a pretty normal constituency, too. Anything we
can do to give relief to these people and do those things necessary
for their convenience rather than for the convenience of the bureaucracy would be well-taken.
Chairman MITCHELL. Fine. We will hear from the witnesses.
We have copies of your testimony from both gentlemen. If you so
desire, those copies can be entered into the record and you can speak
from them; or if you desire to read the entire testimony, it's up to
you. Would you lead off Governor Partee ?

Governor PARTEE. Thank you, Mr. Chairman, Mr. Hansen. I think
maybe I will read mine. I t is very, very short, and it does speak to*
some of the questions that have been raised here.
I appreciate the opportunity to appear today to comment for the
Board on the two bills the subcommittee is considering that deal
with the authority of the U.S. Treasury to borrow directly from the
Federal Eeserve System. H.K. 2281 would extend the existing authority for 5 years. H.E. 421 would substitute instead a new authority
that permits the Treasury to meet its emergency cash needs by borrowing securities from the Federal Eeserve for resale in the secondary
Last June, I met with this subcommittee to explain why the Board
strongly supported a bill then being considered which was similar
to H.E. 2281 in that it called for a simple extension of the System's
existing authority to purchase U.S. Government obligations directly
from the Treasury in amounts up to $5 billion. Because the Board's
view on this issue has not changed, I would like to resubmit that earlier
testimony for the record. The major points offered then remain equally
applicable today.
Since the Treasury now often relies on short-dated cash management bills to cover low points in its cash balance prior to key income
tax payment dates, the direct borrowing authority of the Treasury
has come to be used only infrequently. I n fact, since 1975, the authority
has been activated only once. The Treasury had made more use of the
facility in earlier years, usually to offset cash drains just before funds
were available from quarterly income tax payments.
But the direct borrowing authority is still important as a standby
facility to be used in emergency situations. Such an arrangement provides assurance that the Treasury will be able to honor its commiitments without delay if unexpected developments suddenly shrink its
cash holdings. The Treasury, at its own initiative, can quickly arrange
to borrow from the Federal Eeserve, even on the same day of the
I t continues to be the judgment of the Board that this direct borrowing authority has functioned well whenever needed, and that the
facility contains prudent safeguards and limits. I n addition to the
$5 billion limit on drawings contained in the legislation, the Federal
Open Market Committee has imposed an operating ceiling of $2 billion on purchases that can be made by its open market account manager without special authorization from the committee.
H . E . 421 would substitute a more elaborate technique for providing
the Treasury with funds in the event of an unexpected need. I n such
instances, this alternative proposal would permit the Treasury to
borrow securities from the Federal Eeserve for reselling into the open
market. The Treasury would be required to repay the borrowed securities within 6 months. The bill^ as now written, does not limit ther
amount of securities that could be borrowed, nor does it specify
whether the value of the securities borrowed would represent in addition to the public debt—two issues that require clarification. However r
I understand in the latter case that it would represent such an addition by permitting very large transactions.

We assume that it is not the intent of the bill to give the Treasury
a way of circumventing the Federal debt ceiling through large-scale
borrowing and resale of securities from the Federal Reserve's portfolio. And we are concerned about the apparently open-ended grant
of power to the Secretary of the Treasury to borrow securities from
the Federal Reserve without prior consultation or approval from the
Even after these questions are resolved, however, the proposed alternative to the direct borrowing authority does not appear as desirable
as the present arrangement. Since Treasury cash management bills
can be announced, offered, and delivered within a few days under
present debt management procedures, what the Treasury appears to
us to need in addition is a backstop facility that permits it to acquire
a sizable volume of funds immediately without resort to the market.
If the Treasury were to meet such needs by borrowing securities
from the Federal Reserve and then reselling them in the market, it
might well be forced to pay a substantial premium over its usual
borrowing rate. The action would probably take market participants
by surprise and might have to be accomplished fairly late in the day.
I n highly unsettled market circumstances, moreover, the Treasury
could find it difficult or impossible to sell all of the securities needed.
W e understand that the objective of the bill is to insure that Treasury
borrowing always be subjected to the discipline of the market. While
the Board endorses such a concept as a general rule, in emergency
cases of the sort contemplated here that test could well be abnormally
unfavorable and not in the public interest.
The existing direct borrowing authority of the Treasury was established in 1942, when wartime financing required that the Federal
Government raise enormous volumes of funds through securities
markets. The authority was needed to provide assurance that the
Treasury at all times could meet its expanding obligations.
Under any future conditions of national emergency occasioned by
war or natural disaster, the Treasury might again face unanticipated
needs for immediate funds at a time when securities markets are in
general disarray. While the Congress probably would be in a position
to reestablish an emergency borrowing authority quickly in such circumstances, it seems far more efficient to maintain the existing standby
direct borrowing procedures in order to assure the Treasury the capacity to finance for at least a limited period—without the necessity of
such congressional action.
I n conclusion, the Board sees no need to introduce a new mechanism
for the Treasury to raise temporary funds since the present direct
borrowing authority has functioned effectively. Instead, we believe
that the Federal Reserve System should be empowered to continue
lending directly to the Treasury under the carefully drafted constraints of the current authority. Favorable action on H.R. 2281 will
achieve this objective, and the Board endorses the bill.
Chairman MITCHELL. Thank you, Governor Partee.
Mr. Taylor, it is good to see you again.
Mr. TAYLOR. Thank you.
Chairman MITCHELL. TTiank you for being here. You will proceed

Mr. TAYLOR. Mr. Chairman and members of the subcommittee, I am
pleased to have the opportunity to comment on proposed legislation,
H . E . 2281, to extend tor 5 years, through April 30,1984, the authority
of Federal Reserve banks to purchase directly from the Treasury up
to $5 billion of public debt obligations. Under current legislation,
Public Law 95-534, approved October 27, 1978, the authority will
expire at the end of next month.
The authority has existed since 1942, and has generally been extended for 2-year periods, although there have been some lapses in
recent years. I n the last Congress the Department submitted proposed
legislation to extend the direct-purchase option to October 31, 1981.
Your committee, however, suggested a 1-year extension with the
view to holding oversight hearings on the authority. While those
hearings were conducted on June 27, 1978, the committee bill was
not enacted into law until the fall—providing the Department, in
effect, with a 6-month extension. The approval of a 5-year extension
would provide clear recognition of the noncontroversial nature of this
backstop to the Treasury's cash management responsibilities.
The primary purpose of the authority, as stated, is to serve as a
backstop for Treasury cash and debt operations, permitting more,
effective and efficient management of our cash and credit reserves, and
allowing us to target lower than otherwise required cash balances in
our demand accounts with Federal Reserve banks.
There have been observations made that the authority has not been
used frequently in recent years and therefore the need for its continuance may have diminished. We acknowledge that the lapse of the
authority on a number of occasions in recent years has prompted the
Treasury to design cash management bill financing techniques which
afford a considerable shortening of the time needed for raising significant sums of money.
However, the value of the direct borrowing authority from the
Fed does not rest on the frequency or extensiveness of its use or on
its relation to other Treasury cash and credit initiatives, but rather
rests on its availability as an emergency backstop for Treasury cash
needs, by assuring our ability to obtain needed funds almost instantaneously in the event of any kind of unpredictable or unanticipated
financial emergency, such as unexpected cash drains or unexpected
interruption of cash inflows.
The Treasury normally makes allowance in its cash and debt management planning for relatively minor financial emergencies. This
is possible only because the Treasury has adequate recourse to shortterm funds through our regular weekly bill issuances and the aforementioned cash management bills, wliich can provide funds to the
Treasury in as few as 3 days. As a result of these instruments, from
the close of calendar year 1975 to the present, we have made only a
single use of the direct Fed borrowing option.
Despite the quick cash-raising techniques developed by Treasury
and the related lack of usage of the authority in the past few years,
we are still convinced that we need the Fed borrowing authority,
which provides for almost instantaneous or "same day" availability
of funds in the case of extreme financial emergencies.

At this point, I would also like to point out that any borrowing
under the Fed authority is subject to the public debt limit, is promptly
reported in the daily Treasury statement of cash and debt operations, is also publicly reported in a weekly Federal Eeserve statement,
and in the Federal Reserve Board's report to the Congress.
The subcommittee has requested the Department also to comment on
a bill, H.R. 421, which provide a substitute source of short-term funds
for the Treasury by a modification of the present authority.
The methodology provided in H.R. 421 would be cumbersome from
t h e standpoint of Treasury's fiscal operations and would not provide for immediate funding of emergency cash needs since market
sales of such securities in any significant size would have to be accomplished by early afternoon of any particular day in order to avoid
undue disruption to the market. This contrasts to the practice under
the current authority of accomplishing the Fed borrowing at any
time prior to the closing of the transcripts of activity in the accounts
for the day. Thus, the bill would not meet the Treasury's need for a
backstop in the form of immediately available funds.
We understand that the intent of H.R. 421 is to assure that Treasu r y borrowing activity is subject to market forces. I would like to
reiterate Treasury's past testimony that we would not attempt, through
the direct-purchase option, to influence credit conditions or otherwise
tavoid the discipline of the marketplace. Our policy has been and continues to be that our debt obligations should be offered directly in the
market and that purchases of Treasurj^ obligations by the Federal
Reserve should normally be made through that same market.
H.R. 421 also raises a number of broader questions from the standpoint of Treasury debt management policy and possible adverse effects
of the market for Treasury securities. We would like to submit further
comments on these aspects of the bill, and as you heard, the Federal
Heserve representative's comments on the bill addressed the implications for open market operations.
I n conclusion, I would summarize the Treasury position as favoring a 5-year extension of the present authority. Mr. Chairman, the
Department views the authority as a temporary accommodation to be
used only under the most unusual financial circumstances. We believe
that adequate controls exist for its use, since it is fully disclosed and
is subject to the discretion and control of the Federal Reserve itself;
and that the authority is too important as a cash management tool to
be permitted to periodically lapse because of erratic extensions. Therefore, we urge prompt consideration of H.R. 2281 to assure continuity
cof this authority through April 30,1984.
T h a t concludes my prepared statement, Mr. Chairman. I will be
glad to respond to any questions.
Chairman MITCHELL. Thank you very much, Mr. Taylor.
I n both sets of testimony, you emphasize the time factor that under
the present arrangement—that it can be a 1-day operation. Would
the Hansen proposition suggest any inordinate delay if it is operative ?
Under the present operating procedures, you could move quickly.
Under the Hansen arrangement, maybe not that same afternoon, but
certainly by the next day, the next afternoon, things could be worked
out. May I hear from you on the problem that you see with reference
t o the time factor in the Hansen bill ?

Mr. TAYLOR. A S it is right now, if we have an emergency we could
very well not know the extent of it until the close of a particular day.
And at that point, we could then draw on the Fed or ask the Fed for
that exact amount of funds to cover whatever our particular shortage
would be on that particular day.
As I understand Mr. Hansen's bill, it would mean that—let us say
we would know by the close of business today that we had a cash
shortage—we would not be able to cover that cash shortage until the
next day, because we would have to then get together with the Fed
and find out which securities they would be able to loan us from the
portfolio, or we would have to anticipate in advance an emergency
draw, which we may not be able to do.
I am just saying the Fed authority gives a little more flexibility,
in that we would be able to know, by the end of a day, how much we
needed; and under Mr. Hansen's bill we would have to anticipate
that need, say, at least a day before in order to sell the next day and
be able to cover that shortage.
We may or may not have that kind of lead time. That would be my
Chairman MITCHELL. If we are talking about a disaster or a problem of great magnitude, such as what you anticipated for the authority, wouldn't there be any way you could anticipate it ?
Mr. TAYLOR. No; this would also be true of just a plain estimate.
I n other words, we haven't estimated that cash exactly as we should
have. Normally, there are very large out flows of cash in the first 10day period of a month, the trust funds alone draw out about $10
billion. So you could just mis-estimate, even though I think we've
got a very good system now, and we have some very good cash
But as I say, it would give us a little extra time in the present
authority versus, I think, Mr. Hansen's suggestion.
Governor PARTEE. I think it is a question of just a day or two, Mr.
Chairman. I believe that the Government markets typically operate
on the basis of sale one day and payment the next. And you would
have to first make the security sale for cash, which would be a
peculiar thing. And then you would have this business of what time of
the day it took place. The last go-around that the manager would
conduct up in New York ordinarily prior to 1 o'clock ? And the Treasury's need could very well be an afternoon event, making the security
saie just a little out of the ordinary.
I t would mean a poorer price, possibly, for the Treasury security.
There would be a little loss because of the poorer yield, the poorer
price on the security, and a little inefficiency that otherwise wouldn't
I t is not a major issue, but it represents a difference between two
Chairman MITCHELL. That is what caused me to ask the question.
T really don't see where the time factor is really that different in the
Hansen bill. What time does your day officially end ? You say at the
end of the day. W h a t does that mean ?
Mr. TAY*LOR. We actually get in our reports by, I would say, 8
o'clock the next morning. I n other words, our information flows froih
the Fed cash balances by teletype, and we have all our reports, I would
say, in by around 8 o'clock.

Chairman MITCHELL. Then obviously, you have got time the next
day to operate under the Hansen bill, haven't you ? What would be the
holdup? W h a t would be the hangup? You state your reports are
really in at 8 o'clock. You find out whether you need more money or
not at that time, right ?
Mr. TAYLOR. Yes.
Chairman MITCHELL. YOU are going
Mr. TAYLOR. Well, that is true.
Chairman MITCHELL. OK.
Governor PARTEE. My point simply

right into a business day ?

was that if the Treasury finds
it needs money on a particular day and goes about selling securities,
it won't get the money until the following day. There is a 1-day delay
in payment for securities.
Chairman MITCHELL. YOU might even be able to get it that same
Governor PARTEE. But it is a special technique if you have to get it
the same day. Ordinarily, the government securities market deals on a
1-day turnaround basis. You buy it 1 day, pay for it the next. That
is the way it works.
Chairman MITCHELL. OK. This is going to be difficult, because I am
going to ask both of you gentlemen to think through a position that
is opposite to the position that you have taken. You advocate a 5-vear
extension, which appears reasonable no matter what mechanism is in
place. Maybe that is reasonable. W h a t are any dangers that you see
at all in a 5-year extension ? Suppose some abuses do take place during that time. I t would take some extraordinary action on the part of
the Congress to clean up those abuses. I realize we have had no abuses
up to this point and I would anticipate that none would take place.
But I am a little concerned about whether there are any dangers at
all, and I will turn to my colleague a little later on for the same question. Are there any dangers at all that you perceive on such a long
extension ?
Governor PARTEE. I see none whatsoever, Mr. Chairman. In fact,
I would make it indefinite and subject it to oversight because there are
many corporations that have standby authority to buv with the approval of the Secretary. The Federal Homeowners Bank and the
Securities Investment Protection Corporation have such authority,
and I believe that F N M A and F D I C all have it. These are all indefinite extensions.
I t seems to me that this is simply the last step in the linkage—
that is, the Treasury's ability to draw on the Federal Reserve—that
makes the whole thing cash effective. I would just extend it indefinitely, if it were up to me.
Mr. TAYLOR. I would see no problem with that at all, particularly
based on the past history of how it has been used.
Chairman MITCHELL. W h a t is the average number of securities
tra ded in a day, the dollar volume ?
Governor PARTEE. I t is billions and billions. Often, the manager of
our one account will trade a couple of billion in a day.
Chairman MITCHELL. Then I am concerned about your testimony
where you point out that there could possibly be some disruptions in
the market under the Hansen arrangement. You are talking about a
maximum of $5 billion as the top. We have never gone that high,
have we?

Mr. TAYLOR. $2% billion is the highest.
Chairman MITCHELL. Would %2y2 billion really disrupt the market ?
Mr. TAYLOR. I am not a market expert, so
Governor PARTEE. No, it certainly wouldn't. My point, Mr. Chairman, was the other way around. If a market were disrupted, it might
be very difficult to consummate the transaction. If the market were
already disrupted because there had been an earthquake because the
San Andreas Fault had broken up and down California, or if war
had been declared, or if some major event of that kind had occurred,
you might find the market would not be functioning very well.
If the Treasury needed money at that time, they couldn'te get it
whereas they could get it by this emergency if they could borrow for
a day or 2 from the Federal Reserve.
Mr. TAYLOR. Let me make the point again. I probably didn't emphasize it correctly. When you mentioned about when we had our
reports and closed our books for the previous day, at that point, say
it is 8 o'clock the next morning, we are actually getting our accounts
in for the previous day. If we had to cover that shortage by Mr.
Hansen's methods we would have to sell in the market that day, for
the quickest we could get delivery or settlement would be for that
So it would not cover, in that aspect, the previous day's balance.
We would be covering the overdraft 1 day later.
Chairman MITCHELL. 24-hour life ?
Mr. TAY*LOR. Yes.
Chairman MITCHELL.

One other question for Governor Partee. On
page 2 of your testimony, I think your points on the Hansen bill
are well taken. The bill does not limit the amount of securties that
could be borrowed. I think that is just a technical thing to put into
the Hansen bill. I t also doesn't specify any type of approval for the
borrowings. I think the correct language could be worked out without
a great deal of difficulty.
Would changing the Hansen proposal with regard to these two areas
of concern make the bill a little more acceptable ?
Governor PARTEE. I certainly think those problems concerning the
amount and the approval of the FOMC ought to be corrected because
it is the FOMC's securities that are going to be borrowed.
Chairman MITCHELL. More specifically, my question was, if we get
those difficulties worked out would you support the Hansen bill ?
Governor PARTEE. N O . A S I say on the next page, even after you
resolve these questions, presumably favorably, we still regard it as a
more cumbersome and less effective procedure than now exists. This
is principally because it might not give fail-safe funds in an emergency, due to the condition of the Government securities market.
Chairman MITCHELL. Mr. Hansen ?
Mr. H A N S E N . Thank you, Mr. Chairman.
Following up from where you left off, Mr. Chairman, Governor
Partee are you familiar with page 2 of the bill? Do you have one
before you?
Governor PARTEE. Yes. Page 2 ?
Mr. HANSEN. Section 14(b)(2) of the Federal Reserve Act is
amended by inserting, "and to lend, under the direction and regulations of the Federal Open Market Committee, any such obligations
to the Secretary of the Treasury".

Now, doesn't that give you the supervision and the control between
the Fed and the Treasury you are talking about ? I t seems to me you
are not very familiar with this legislation.
Governor PARTEE. Yes. There is no limit on the volume of securities
borrowed. Mr. Hansen: "* * * any such obligations to the Secretary
of the Treasury." "* * * under the direction and regulations of the
Federal Open Market Committee," means we could have rules and
might imply an approval process of the kind we have had before.
Mr. H A N S E N . You were discounting something you hadn't even
Governor PARTEE. I t is all right. My people told me it was not clear.
Let me look into that question, because this is obviously in my testimony as a result of this concern with your proposal that we have not
had, under our present authority.
Mr. H A N S E N . My concern, Governor Partee, is that in following
you through your testimony and picking out—this is just an example—
picking out some of the remarks you had about this proposed legislation, it is obvious it has not been given adequate study by either you
or the Treasury. Before you come up here and make recommendations
like you have made, for or against any piece of legislation, whether it
is this or anything else, you really ought to take more time, or your
people, your analysts down there, ought to take more time to be sure
that your facts are correct, that the bill has been analvzed properly.
I sincerely feel that your testimony today has been ill-prepared by
whoever is responsible for helping you.
Governor Partee, does the Fed now loan securities ?
Governor PARTEE. Yes; to the Government securities dealers.
Mr. HANSEN. And what amounts of such loans have been made ?
Governor PARTEE. They could be quite large at times. We do it to
provide the specific issues for delivering the market needs on a dayto-day basis.
Mr. HANSEN. H O W long does it take to initiate and complete such a
Governor PARTEE. The arrangement of the loan, which is called a
scale-purchase agreement, is done in the morning, either for that day
or for the next day, just as would be the case with the Treasury.
Mr. HANSEN. Would it take any longer to loan to the Treasury?
Governor PARTEE. N O ; you can lend to the Treasury the same way,
whether by direct borrowing or by providing securities.
Mr. HANSEN. YOU talk about the concern of being too late in the
day and not being able to take care of a transaction until the next day,
and you might be under some kind of an emergency circumstance.
Isn't it conceivable that the transaction or the securities could be
acquired in the evening and the negotiation completed the next morning, early? Aren't you really begging a point when you are talking
about any delay that might be incurred that would be significant
beyond what you are able to do now on the borrowing authority ?
Governor PARTEE. Our concern, Mr. Hansen, is that the Treasury
might not know until after the normal trading day had ended—typically at 1:30 or so—that it had a problem. And its problem would
be for the next day.
And so, the transaction would need to be as of the end of the day
or as of the opening of the next day, so that the Treasury had the
money good.

Mr. H A N S E N . YOU could initiate the proceedings for the change the
night before?
Governor PARTEE. If you knew the Treasury were going to have this
problem, absolutely.
Mr. TAYLOR. There is a possibility that on a day that we have this
shortage, that the market would not be open. There are occasions
when the market is not open. Again, I am not making any big deal,
but that could be a consideration.
Chairman MITCHELL. Would the gentleman yield just a moment?
Mr. HANSEN. Surely.

Chairman MITCHELL. Has that ever occurred. Have you ever faced
a shortage when the market was not open ?
Mr. TAYLOR. I can't say that we have or haven't. We haven't had the
problem in this context.
Mr. H A N S E N . If the market isn't open, do you need the money ?
Mr. TAYLOR. If you have got to sell the next day to cover the
shortage of the previous day, yes, that would be a consideration. I t
would be an additional length of time that you had your overdraft
Mr. HANSEN. If the market's open, you can't sell ?
Mr. TAYLOR. I am saying if the market's not open the next day
after wTe had a shortage, then you could have a problem. Again, I am
not making a big deal out of it. I am saying that is another possibility.
Mr. H A N S E N . Gentlemen, would you please explain in detail the
circumstances surrounding the last use of the draw authority on
October the 1st, 1977. The real differences between that and my bill
is that you couldn't do it in secret if my proposal were in place, isn't
that correct?
Mr. TAYLOR. Again, if you are saying secret, I don't think that was
done in secret, and the aspect of it was publicized.
Mr. HANSEN. Maybe that is a heavy use of the word. I n confidence
or in private.
Mr. TAYLOR. YOU would like us to go through the mechanics of what
we did or what ?
Mr. HANSEN. Surely. I think that would be a good exercise.
Mr. TAYLOR. A S you know, I think this was September 30, 1977,
that you are speaking of. A t that point, it looked very possible that
Congress would not extend the debt ceiling, the debt authority, and
it would lapse and go back to its statutory ceiling of $400 billion.
At that point, we were trying to make sure that the Government
was in the best possible position to pay its bills. We wanted to make
sure that the Government didn't default on paying its bills. So we had
some latitude within the ceiling before it expired, the temporary ceiling, before it expired on September the 30th.
We had, I believe, about $2.5 billion within that ceiling. So what
we did was use that $2.5 billion to get additional cash, so that until
Congress was able to pass the debt extension, we would make sure that
we had a maximum amount of cash to carry us over.
I t is my responsibility to see that we have cash to pay our bills. So
we were trying to make sure that we had the maximum amount of
cash for the very reasons I mentioned. And, of course, in doing that,
we consulted wTiith the Federal Keserve Bank of New York, the open
market desk, to make our needs known.

And we borrowed t h a t $2.5 billion within the ceiling. I t was to
maximize our cash and put us in a position to be able to pay the Government's obligations. I think that is a good purpose.
Mr. H A N S E N . When did we find out about this? How many days
expired befores this became known ?
Mr. TAYLOR. YOU mean before the use of it ?
Mr. HANSEN. Yes.
Mr. TAYLOR. I don't know.
Governor PARTEE. I t would

have been in the Federal Reserve statement the next Wednesday.
Mr. HANSEN. September 30th was a Friday. I don't think anyone
found out about it until the next week. I s that correct ?
Mr. TAYLOR. By Tuesday, I would imagine.
Mr. H A N S E N . I guess in a day and age of open government, even if
we are just talking about some minute differences, isn't it best that
we adopt the approach that best assures things being done in the
And I can't see, where you have only used the draw authority once
in all these years, I can't envision anyplace where the extreme urgency
that you seem to think might happen would occur where one system
would be that much better than the other.
And you are saying, Governor Partee, that you think there ought
to be an ongoing authority. Well, my bill provides an ongoing authority and it does it without the tinkering of a printing press. I t does
it with legitimate exchange, in a day aiad age wThen it can be done
effectively and efficiently.
I guess I can't understand why you get the mental block over there
that is so obvious this morning about being able to change and do
something a different way.
Mr. TAYLOR. I am pointing out from a cash management standpoint
that one is, I think, a little more flexible then the other.
Obviously, there is a difference of opinion or you wouldn't have put
H.R. 421 in. The present draw authority in my opinion is more flexible.
I do apologize for not having comments on debt management implications in the testimony. That will be up no later than the end of
this week.
Although I am not a market expert, a surprise in the market is one
of the worst things to do to the market. And it would be a surprise to
have $2.5 billion worth of securities unannounced.
I think, as Governor Partee mentioned, that could drive the yields
up or our price down. And so, we do a little worse on it. Again, that
is not being a market expert. I can't give you all the nuances of it. I do
know that the market's very jittery and just doesn't like surprises of
any kind.
But again, I would bow to our experts in Treasury to give you the
comments on the market impact. And I do apologize for not having
that this morning.
Mr. HANSEN. One further point. I t does seem, if you are talking
about flexibility, that you have to have flexibility governed by certain
restraints in Government. And it appears to me that there are proper
restraints and constraints envisioned in the approach in H.R. 421 that
probably ought to be in Government, constraints which are not unnecessarily encumbering. This might be for jrour good, as well as the
Nation's considering the fact that you are being accused much of the
time, at the Fed at least, of having a runaway printing press.

I would think if you could properly handle the draw in a different
way, this would improve your public image, the public image of this
Government, as being responsible—through transactions that are taken
care of just as they would be under any other circumstances. I don't
think you can show me where there would have been much of an
impairment on what you needed to do, if you had done it under the
new proposal, and there are many pluses for doing it this way.
Maybe we have got an idea that can work if its given a chance.
That is the last point, Mr. Chairman. I just don't see where that
concern voiced by these gentlemen really would hold up or that the
kind of problem they envision would occur
Chairman MITCHELL. Comments, gentlemen?
Governor PARTEE. One comment on the printing press. I really don't
see that there's any difference in the two techniques from the standpoint of money supply or the Federal Eeserve statement.
If the Treasury borrowed securities from us, we would show a loan
to the Treasury, that is, a loan to the Treasury on our asset side, just
as we do when we deal with the Government securities dealers. We
don't take those Governments off our books because we have an obligation to repurchase them, and we would have a similar obligation to
repurchase from the Treasury.
Therefore, it would show as an additional loan. I n either case the
Treasury would have more funds, so that we would have the same
money supply impact as the cash advance procedure—unless it is
offset by Federal Reserve market operations.
I haven't fully thought through the accounting of this, but I don't
think that there is a difference of the kind that Mr. Hansen says.
My only argument for the way that we have been doing it, Mr.
Hansen, is my fear that the Government securities market ultimately
would not be there because of some catastrophe to permit the Treasury
to pay its bills. I t would only be 2 or 3 days at the rate of expenditure,
and the Congress might not be there for 2 or 3 days to establish a
special new authority.
Mr. HANSEN. Don't you have emergency bank regulation No. 1 for
that kind of situation ?
Governor PARTEE. Emergency bank regulation No. 1 ?
Chairman MITCHELL. Governor Partee or Mr. Taylor, would you
please answer that? You are talking about operating a bank and
I think one of the biggest problems you could forsee would be that
of the national debt ceiling limit. You can see that one coming down
t h e track, because it has happened before. You know, you have to
vote on it.
Governor PARTEE. I can't envision a problem on that.
Chairman MITCHELL. I don't expect you to make a decision until
after we have received your testimony, Mr. Taylor, on debt
I think this Congress, the 96th and the 97th and 98th and all future
Congresses are going to be concerned with new approaches, not for the
^ake of newness, but in terms of efficiency and effectiveness and good
Ruminate on this, if you will, and let me hear from you. If we can
iron out some of the questions to which Governor Partee alluded to,
what is the possibility of having two draw authorities: The Hansen

proposal for operating in a "normal" situation, and the present authority, in reserve, to be used for extraordinary, catastrophic disasters ?
Governor PARTEE. I n an emergency ?

Chairman MITCHELL. Yes; if you will think on that. A t least it gives
us an opportunity possibly to try this new approach to see if it works.
And if at any time it doesn't, then you have got the other authority
to back you up.
Mr. TAYLOR. We will look at it.
Chairman MITCHELL. Can you examine that proposition, please, and
let me know as soon as you possibly can whether it has merit or not?
Mr. TAYLOR. Yes; we will do that.
[Subsequently the following letter was received for the record:]

W A S H I N G T O N . D C.



MAR 161979

Dear Mr. Chairman:
I am pleased to respond to your letter to Paul Taylor
of March 5, 1979, regarding the debt management implications
of H.R. 421, "To amend the Federal Reserve Act to provide
authority for Federal Reserve banks to lend obligations to
the Secretary of the Treasury and for the Secretary of the
Treasury to borrow such obligations to meet the Treasury's
short-term cash needs".
We-understand that H.R. 421 is being considered as a
substitute or, with amendments, as a supplement to the
Treasury's current authority to borrow up to $5 billion
from the Federal Reserve banks,-which was discussed in
detail in Mr. Taylor's testimony before your subcommittee
on March 5.
H.R. 421 would repeal the present authority of the
Federal Reserve to-purchase up to $5 billion" of obligations
directly from the Treasury and would authorise the Federal
Reserve to lend obligations, without limitation on the
amount, to the Treasury from the Federal Reserve's portfolio.
The Treasury could then sell such obligations in the open
market for the purpose of meeting its short-term cash needs
and would be required to repurchase the obligations and
return them to the Federal Reserve within six months.
We understand that the intended purpose of H.R. 421
is to help assure that Treasury borrowings from the Federal
Reserve will have essentially the same monetary and market
effects as Treasury's direct market borrowings. As indicated
below, we believe that this purpose would not be furthered
by H.R. 421.

- 2 Under the present authority. Treasury borrowings have
taken the form of special certificates of indebtedness which
are issued to the Federal Reserve. These borrowings have
provided the Treasury with an immediate source of funds to
meet unforeseen developments which generally occur within
a day or two when there is insufficient time to raise funds
through the issuance of securities in the market. They can
be redeemed as soon as the events which necessitated their
use are corrected or when market financing can be accomplished.
Also, they do not have to be issued until the Treasury's
cash balance with the Federal Reserve actually becomes
negative. In such a case immediately available funds can
be credited to the Treasury very late in the day.
Under the alternative approach provided in H.R. 421,
the Federal Reserve would lend securities to the Treasury
which the Treasury would sell in the market in order to
obtain funds to replenish the Treasury"s cash balance.
If the Treasury's balance were not adequate when Treasury
checks were presented for clearance this would result in
nonpayment until such time as the funds could be obtained
in the market. If this were late in the-day, it may not
be possible to obtain funds until the next day. Thus, if
H.R. 421 were enacted, there would still be a need to
extend the present borrowing authority in order to assure
immediately available funds to the Treasury.
The present borrowing authority does not create
problems for monetary policy. The Treasury's borrowing
can be offset by the Federal Reserve through its open
market operations. When such offsetting transactions
are undertaken, the current arrangement merely results
in a change in the type of securities held in the Federal
Reserve's portfolio. The special certificates issued by
the Treasury are exchanged for marketable debt securities
held by the Federal Reserve which are sold in the market,
possibly with a repurchase agreement. Thus, the net
effect is essentially the same as if the Treasury had
borrowed from the market rather than from the Federal

3 The arrangement provided by H.R. 421 could be disruptive
to debt management and potentially damaging to the market.
As noted above the Treasury might not be able to sell the
securities that the Federal Reserve lends to the Treasury
in time to provide the funds necessary to meet the negative
cash balance, particularly if such developments occur late
in the day. Moreover, the Treasury would have to decide
which specific security to borrow and how to sell it in
the market. Since the Treasury is not structured to undertake such operations they would presumably be carried out
by the Federal Reserve acting as our agent. Any particular
security sold would have to be repurchased to meet the
requirement in H.R. 421 that the security be returned to the
Federal Reserve within six months. To accomplish this,
the Treasury would have to purchase the same security in
the market, which may not be readily available at the time,
and this could result in market disruption and excessive
costs to the Treasury. The market disruption problem
could be avoided if the Federal Reserve, as agent for the
Treasury, were to sell the security with a repurchase
agreement, to assure its return to the Federal Reserve.
However, the net effect on monetary policy and on the
market would be essentially the same as under the present
borrowing authority.
In summary, H.R. 421 would not be an effective substitute
for the present borrowing authority in meeting the emergency
cash needs of the Treasury. Also, since the current borrowing
authority is responsive to market forces and does not adversely
impact bank reserves or monetary policy, it does-not appear
that any useful purpose would be served by amending H.R. 421
so that this approach could be used as a supplement to the
present borrowing authority.
Accordingly, we recommend that the present borrowing
authority be extended for five years, as provided in H.R. 2281,
and we recommend against enactment of H.R. 421.

Assistant Secretary
The Honorable
Parren J. Mitchell, Chairman
Subcommittee on Domestic
Monetary Policy
House of Representatives
Washington, D.C. 20515

Chairman MITCHELL. Gentlemen, thank you very much. Please get
the debt management testimony as quickly as possible. Obviously, we
want to mark this bill up quickly. We want to handle the draw authority early in this session, so we don't have the same problem as
we had last year.
Mr. TAYLOR. We will try to have it up by the end of this week.
Chairman MITCHELL. Fine. Thank you very much, gentlemen.
[Whereupon, at 9:30 a.m., the hearing was adjourned, subject to
the call of the Chair.]