Full text of Monetary Policy Oversight : House of Representatives Hearings : Quarterly Hearings on the Conduct of Monetary Policy : Hearings Before the Committee on Banking, Finance and Urban Affairs, House of Representatives, Ninety-Fifth Congress, Second Session, March 7, 9; April 10, 1978

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QUARTERLY HEARINGS ON THE CONDUCT
OF MONETARY POLICY

HEARINGS
BEFORE THE

COMMI1:TEE ON
BANKING, FINANCE AND URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
NINETY-FIFTH CONGRESS
SECO::-iD SESSION
PURSUANT TO THE FEDERAL RESERVE REFORM ACT OF 1977
PUBLIC LAW 95-188

MARCH 7, 9; APRIL 10, 1978

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

U.S. GOVERNMENT PRINTING OFFICE
26-273 0

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WASHINGTON : 1978

HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN Ali'FAIRS
HENRY S. REUSS, Wisconsin, Chairman
THOMAS L. ASHLEY, Ohio
WILLIAM S. MOORHEAD, Pennsylvania
FERNAND J. ST GERMAIN, Rhode Island
HENRY B. GONZALEZ, Texas
JOSEPH G. MINISH, New Jersey
FRANK ANNUNZIO, Illinois
JAMES M. HANLEY, New York
FARREN J. MITCHELL, Maryland
WALTER E. FAUNTROY,
District of Columbia
STEPHEN L. NEAL, North Carolina
JERRY M. PATTERSON, California
JAMES J. BLANCHARD, Michigan
CARROLL HUBBARD, Ja., Kentucky
JOHN J. LAFALCE, New York
GLADYS NOON SPELLMAN, Maryland
LES AUCOIN, Oregon
PAULE. 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

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J. WILLIAM STANTON, Ohio
GARRY BROWN, Michigan
CHALMERS P. WYLIE, Ohio
JOHN H. ROUSSELOT, California
STEWART B. McKINNEY, Connecticut
GEORGE HANSEN, Idaho
HENRY J. HYDE, llllnois
RICHARD KELLY, Florida
CHARLES E. GRASSLEY, Iowa
MILLICENT FENWICK, New Jersey
JIM LEACH, Iowa
NEWTON I. STEERS, JR., Maryland
THOMAS B. EVANS, JR., Delaware
BRUCE F. CAPUTO, New York
HAROLD C. HOLLENBECK, New Jersey
S. WILLIAM GREEN, New York

PAUL NELSON, Clerk anrl Stal/ Director
MICHAEL P. FLAHERTY, Counsel
GRASTY CREWS II, Counsel
MERCER L. JACKSON, Minority Stal/ Director
GRAHAM T. NORTHUP, Deputy Minority Stal/ Director.
(IJ)

CONTENTS
Hearings held onMarch
7, 1978---------------------------------------------·------1978 _____________________________________________ ._______
March 9,

'.Page
1
83

April 10, 1978____________________________________________________

125

STATEMENTS

Dornbusch, Rudiger, associate professor of economics, Massachusetts Institute of Technology, Cambridge, :\lass_____________________________
Jordan, ,Jerry L., senior vice president and economist, Pittsburgh National Bank, Pittsburgh, Pa __________________________________ ._______
Klein, L. R., professor of economics, ,vharton School of Economics, University of Pennsylvania, Philadelphia, Pa _____________________ ._______
Miller, Hon. G. William, Chairman, Board of Governors of the Federal
Reserve System____________________________________________________

42
16
2
07

ADDITIONAL INFORMATION SUBMITTED

Dornbusch, Rudiger, prepared statement_ _______________________ ._______
Jordan, Jerry L., prepared statement_ __________________________ ._______
Klein, L.R., prepared statement with attached tables____________________
Miller, Hon. G. William:
Prepared statement______________________________________________
Resporuse for the record to questions of :
Chairman Henry S. Reuss____________________________________
Hon. Bruce F. Caput9________________________________________
Hon. Richard Kelly__________________________________________
Hon. John J. LaFalce---------------------------------·------Reuss, Chairman Henry S. :
Correspondence regarding Federal Reserve Board building guidelines
for the site of the Miami, Fla., branch facility, dated:
March 8, 1978______________________________________________
March 15, 1978_____________________________________________
Opening statemenL----------------~----------------------·------Questions submitted re Federal Reserve intervention in the foreign
exchange market and the System's swap arrangements with answers
received from Chairman Miller in a leter dated May 2, 1978________
Stanton, Hon. J. William, joint resolution introduced in House of Representatives expressing appreciation to former Chairman of the Federal
Reserve Board, Dr. Arthur F. Burns_________________________________

48
21
7
104
176
166
144
142

160
162
87
176
96

APPENDIX I

Questions submitted by members of the committee to Federal Reserve
Chairman G. William Miller, along with the Chairman's answers :
Hon. Frank Annunzio__________________________________________
Hon. Henry B. Gonzalez---------------------------------·------Hon. Mark W. Hannaford-------------------------------·-------

184
179
212

APPENDIX II

Letter from Federal Reserve Chairman G. William Miller dated March 29,
1978, with the record of policy actions of FOMC February meeting____

215

APPENDIX III

Briefing memorandum prepared by the staff of the Committee on Banking,
Finance and Urban Affairs_________________________________________

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(III)

249

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QUARTERLY HEARINGS ON THE CONDUCT OF
MONETARY POLICY
TUESDAY, MARCH 7, 1978

HousE OF REPRESENTATIVES,
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS,
Washington, D.C.
The committee met at 10 a.m. in room 2128 of the Rayburn House
Office Building; Hon. Henry S. Reuss ( chairman of the committee)
presiding.
Present: Representatives Reuss, Gonzalez, Minish, Annunzio, Hanley, AuCoin, Evans of Indiana, D'Amours, Cavanaugh, Vento, Barnard, Hansen, Leach, Steers, Evans of Delaware, Caputo, and Green.
The CHAIRMAN. Good morning. The House Committee on Banking,
Finance and Urban Affairs will be in order for the beginning of its
hearings on monetary policy for 1978.
We are very pleased to welcome this morning for our opening session a very distinguished panel of economists : Lawrence R. Klein, professor of economics at the ,vharton School; Jerry L. Jordan, senior
vice president and chief economist of the Pittsburgh National Bank;
and Rudiger Dornbusch, associate professor of economics at MIT.
The committee will hear from G. William Miller, the newly approved Chairman of the Federal Reserve Board later, but today we
inaugurate our first hearing under the legislation provided for by the
Federal Reserve Reform Act of last November.
That act provides for correlating and evaluating the conduct oi
monetary policy. Its effect is to focus these hearings more sharply on
the real world objectives--maximum production, stable prices, and
moderate long-term interest rates--which monetary policy is supposed
to pursue.
Accordingly, it is appropriate that we seek the advice of our panel
on the best feasible path of the domestic economy and the role of mone~ary policy in the pursuit of that path.
Professor Klein and Mr. Jordan will discuss this in detail. Professor
Dornbusch brings a new perspective to these hearings. Lately, it has
become apparent tht1,t monetary policy is being used to a limited extent in an unaccustomed role: To support the international value of the
dollar. This is being done, with considerable restraint, through the
mechanism of currency swaps with foreign central banks, and with
perhaps less restraint, by raising domestic interest rates above the
levels that otherwise would have been maintained.
I, for one, entertain some very grave doubts about the wisdom of
either of these policies, and I am delighted to have Professor Dornbusch to explain whether my doubts are well founded or ill founded.

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(1)

Professor Klein, will you start out i May I say that all three of you
have compendious papers and, under the rules and without objection,
they will be received in full into the record. Proceed in any way yon
wish-by reading it, summarizing it, whatever.

STATEMENT OF L. R. KLEIN, PROFESSOR OF ECONOMICS, WHARTON
SCHOOL OF ECONOMICS, UNIVERSITY OF PENNSYLVANIA,
PHILADELPHIA, PA.
Mr. KLEIN. Thank you, Mr. Chairman.
My presentation is focused on the economy as a whole in giving th1,
framework in which monetary policy must be conducted. It is not directly or wholly, in any sense, on monetary policy-though I will
come to that-but as it affects the prospects ahead. And what I have
really done is to take a look at the set of standard forecasts-forecasts that my own group is making for the next year-and put monetary policy in that kind of a setting.
One year ago, the unusually cold weather-beyond normal seasonal
adjustment-was a central issue in appraising the prospects for the
economy in the first quarter and the whole year, 1977.
As it turned out, the severe winter of January/February 1977 was
not a deterrent to economic growth, as many had expected. The first
quarter performance was the best in a long while, at 7.5 percent real
growth, and the year did not suffer.
The makeup in late February and March was very strong. The
weather disruption left its toll, however. Consumer prices increased
at a high 7 percent rate, partly because of a relative shortage of fresh
fruits and vegetables. Later in the year, prices rose less rapidly, and
the growth rate of real GNP also fell as the year wore on, but the
unemployment rate came down a bit.
What can we expect this year? The weather has again been unusually
severe, more from snow and blizzard, less from low temperature. After
last year's fuel shortages, particularly in natural gas, suppliers and
major industrial users were careful enough to plan in advance to have
ample reserves; therefore, this year's weather has been less disruptive
on account of fuel shortages. But something else is now responsible
for large fuel outlays and unfavorable changes in the fuel mix-namely, the coal strike.
Any major strike has ripple effects, and the coal strike is no exception. Coal carriers have been partially idle and coal users are having
to draw down stocks sparingly.
A main unfavorable aspect of the strike is that some power systems
are having to use-through generation or purchase-more oil-fired
electricity. This hurts the overall pocketbook as well as the trade
balance.
The January trade figures continue to paint a dismal picture of large
monthly deficits, and they also show strong oil imports. We have already had reports of slow industrial production, a small increment in
monthly personal income, and high price rises.
These add up to an inflationary first quarter and a drop in the real
growth rate below the figure for year end 1977, which is placed at about
4 percent for the final quarter of last year.

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The slow start that the economy is realizing, as a result of severe
winter storms and the coal strike :probably will not be fully made ur,
through compensatory spending m the second quarter, even if the
strike is settled fairly soon.
For the year as a whole, the best judgments for overall growth ara
at about 4.5 percent; some are fractions of a percentage point highe!'
or lower, but the central figure of 4.5 percent remains firm for the year
as a whole, implying some greater shows of strength, above 1977's final
quarter.
At this point, I would like to mention that I have appended, at the
end of my prepared statement, a table of summary statistics of the
standard fore{:ast, and distributed a supplementary table which deals
with a coal strike that is considerably prolonged.
The first table would be the outlook for the economy on the assumption that the coal strike was settled at the present time.
The second table assumes that the coal strike is settled, and coal
is delivered on a full-scale basis by the first of May. That, of course,
may even be optimistic at this point.
Nevertheless, the results of the two simulations are very interesting, in the sense that you can see very clearly the extent to which the
disruptive effects of the prolonged coal strike would hurt the growth
rates of the current quarter, and the next quarter as well-assuming
that it goes on to May 1. And in this assumption, we have written
in the constraint that about 1½ million people would be unemployed,
but it would not last for the whole quarter, if the thing were settled
by May 1.
The other interesting aspect is that, by the year end, the economy
ought to be back to its old track, corresponding to the absence of a
strike, and the yearly figures are not very seriously out of joint. They
are probably certainly within any kind of error band of each other;
so I would say that, on an annual basis, the coal strike is not the issue.
But it will have very disruptive effects in the short run. w·e would have
a very slow second quarter-and, indeed, this would show up in some
slightly higher inflationary effects in the near term.
Other features of this respectable but unspectacular forecast of
growth rates arc a higher inflation rate, up from about 5.6 percent last
year to about 6.1 percent this year-if we measure it by the GNP
defla,tor. The CPI and WPI each increa~ed at a higher rate than the
GNP deflator in 1977.
In 1978, the CPI should change at about the same rate as the GNP
deflator, but the WPI rate may be slightly lower. That is really because of the different treatment of social security and services in the
two indices. In the Wholesale Price Index we see only-mainly, only
goods and not services. It is expected that the services will be rather
strongly rising during the year.
The components of this GNP growth include an investment expansion of about 7.9 percent, a percentage point off last year's rate; a
slight drop in housing starts, hit very hard by severe weather in January/February; and a continuing trade deficit.
The merchandise deficit in January indicated no change in the overall trend for 1977, that gave us a record $27 billion deficit for the year,
but it is reasonable to expect some improvement later in 1978 as a result

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of the cumulative effect of dollar depreciation, potentially better agricultural exports, and the pumping of a great deal of Alaskan crude.
In addition, invisibles may be more favorable than they were in
1977. If the sinking of the dollar discourages some foreign tourism by
U.S. residents and if recovery in partner countries picks up a bit, our
overall deficit on goods and services together could improve. This is
what happens in the Wharton forecast for 1978.
You can see that in the table I have distributed, where the net export
position of goods and services is listed in row 30.
The GNP forecast is thus reasonably good for 1978, with some imbalances-the most serious being the poor outlook for the trade accounts. But the 1979 outlook is less robust and recovery may very nearly
come to a halt during 1980.
Implicit in the forecast for 1978 and the ensuing years is a significant tax cut, as proposed by the administration for the fiscal year
beginning October 1, 1978. This generates a pickup in what would
otherwise be a slowing pace of economic activitv, but it is not strong
enough by itself to keep the recovery going beyond 1979 because o.f
countervailing effects of social security tax increases and higher energy
prices.
Also implicit in this forecast is a continuation of a moderately strict
monetary policy. I would measure "strictness" by money market rates.
This instrument cannot readily be used, together with a fiscal stimulus,
in the near future because of pressures on the dollar.
Our severely adverse trade position weakens the dollar, and foreign
capital inflows must be attracted to keep the dollar from sliding even
further. This situation mandates relatively high U.S. interest rates.
The Wharton forecast has M 1 growing at about 5 to 7 percent each
quarter, and of course my numbers are quarterly compounded interest
rates-that is, the quarterly rate compounded four times a year; slightly different, perhaps, from the rate used in this committee's calculations.
M1 averages about 6.8 percent for the year, and that is a 12-month
average over a 12-month average-1978 over 1977; M 2 at about 8 percent and short-term interest rates increasing by about 75 to 100 basis
points over a yearly span.
On the tables that I have distributed, you will see money supply, on
lines 32 and 33, forecast, and various interest rates on lines 38 through
41.

These upward creeping rates tend to hold down new housing starts.
That is, in addition to the unseasonal weather effects. Recessionary
conditions are not generated, but the rate of housing capital formatimi,.should begin to decline slightly.
Most segments of the American economy are expected to participate fully in this moderate advance over the next year or two. Farmers
did not fare very well in 1977 in the sense that their income level
remained far below previous high va.lues.
Modest growth is projected again in 1978, but farm earnings are held
in restraint by crop limitations, soft prices, and sharply rising costs.
The food component of the CPI should rise by about 6 percent, reflecting an increase in prices received by farmers of about 6 percent, up to
the harvest season, with some seasonal slackening after that point.

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In midyear 1977, £arm prices were actually declining, and this held
consumer prices in check. We cannot expect such a consumer windfall
this year.
Another important £actor in the overall cost-price situation is tht:
average wage increase. Wage rates were held to a very moderate rate
of increase last year-7.5 percent-but total compensation rose by 8.6
percent because social security contributions continued their rise.
This will occur by a big jump in 1979, according to present legislation. There are not many major collective bargaining contracts coming due in 1978; the picture will be quite different in 1979. The miners;
settlement, though costly, should not set the tone for the labor market
as a whole.
During 1977, on a fairly steady basis, unemployment rates gradua1ly
declined. The monthly pattern is considerably confused by problems of
seasonal adjustment, but the official rates did fall. This occurred when
the real GNP growth rates were well in excess of 4 percent each quarter,
until the fourth.
The more moderate pace of expansion forecast £or 1978 should be
associated with less of a decline in unemployment, but the national
rate can be expected to fall below 6 percent by year's end. Movements
in labor force-often erratic-contribute a great deal to movement o_f
the unemployment rate.
I would say that if 1½ million people are displaced for an extra
month by the coal strike, up to May 1, then we would see the unemployment rate go back up from its present figure on a quarterly average presently being 6.3 percent; we would get it up at least to 6½ percent. And then, if the economy were. to resume its expansion after a
strike settlement, the general configuration of a slightly falling un employment rate getting down to 6 percent, or slightly below, would
be the general projection.
Corporate profits before tax rose b:v about 9 percent in 1977. This
was only a fair showing. This year's Wharton model projection is for
8.8 percent. Profits are a residual, and as such are subject to error :from
many sides-not the least of which is the erratic behavior of the "statistical discrepancy" in the national income and product accounts.
Between the middle of 1976 and 1977, the quarterly value of the discrepancy account fluctuated between $8 billion plus and minus $1.~
billion, practically as large as the fluctuation in profits.
Another large and important residual account is the Federal deficit.
Unfortunately, this year it is expected to be as large as or larger than
last-$50 billion and $57 billion, respectively, on a national incomr
and product accounts basis.
As long as the predominant policy initiative remains as a conven
tional use of fiscal policy through tax cuts, it ,vill be very difficult t0
keep the economy going forward at a reasonably good pace without a
large deficit-possibly, a rising deficit.
It is absolutely essential to introduce more supply-oriented structural
policies that get at some of the target vari,1bles of the economy without generating such large strains on the public budget.
This means that more private sector activity must be stimulated in
capital formation, jobs programs, and export lines in order to get
overall stimulus without deficit spending.

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These considerations call for more careful analysis of : tax stimuli
for private business investment; export incentives; and subsidization
job training in the private sector for the hard-core unemployed.
One can look at this projection and conclude that the economy if,
going forward in a slow, lackluster fashion that will leave high unemployment among many groups of the population and inflationary pockets in others. This kind of situation is crying for more structural
policies.
The world economic situation has great influence on our own; conversely, we have significant impact on the world. Last year, our performance was strong among the industrial democracies, but left us with
unbalanced trade and a weak dollar.
Hopefully, a number of our partner countries will be able to reflate
on a stronger basis this year than last. That should help the growth
of world trade which slipped to about 4 or 5 percent expansion last
year, and consequently our own trade suffered as we share in the world
total.
If a broad grouping of partner countries join with our fiscal stimulus
by introducing like measures, there can be an extra one-half or 1 percentage point added to the world growth rate of GNP and perhaps
even more to world trade.
World inflation has been slowly winding down, and this is clearly a
time for widespread coordinated reflation, when the dangers of sparking significant price rises are slight.
Reflation-not protectionism-should be the key to healthy mutual
recovery in the world economy as a whole.
Thank you.
[Mr. Klein's prepared statement with attached tables follow :]

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7
ECONOMIC PROSPECTS, March 1978
Statement by L.R. Klein before the
House Committee on Banking, Finance and Urban Affairs
House of Representatives, March 7, 1978

One year ago, the unusually cold weather -- beyond normal
seasonal adjustment -- was a central issue in appraising the
prospects for the economy in the first quarter and the whole
year, 1977,

As it turned out, the severe winter of January/

February 1977 was not a deterrent to economic growth, as many
had expected.

The first quarter performance was the best in

a long while, at 7.5% real growth, and the year did not suffer.
The make-up in late February and March was very strong.
weather disruption left its toll, however.

The

Consumer prices

increased at a high 7.0% rate, partly because of a relative
shortage of fresh fruits and vegetables.

Later in the year,

prices rose less rapidly, and the growth rate of real GNP also
fell as the year wore en, but the unemployment rate came down a
bit.
What can we expect this year?

The weather has again been

unusually severe, more from snow and blizzard, less from low
temperature.

After last year's fuel shortages, particularly in

natural gas, suppliers and major industrial users were careful
enough to plan in advance to have aople reserves: therefore this
year's weather has been l~ss disruptive on account of fuel shortages.

But something else is now responsible for large fuel out-

lays and unfavorable changes in the fuel mix, namely, the coal

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8
strike.

Any major strike has ripple effects, and the coal strike

is no exception.

Coal carriers have been partially idle and coal

users are having to draw down stocks sparingly.

A main unfavor-

able aspect of the strike is that some power systems are having
to use, through generation or purchase, more oil fired electricity.
the
This hurts/overall pocketbook as well as the trade balance. The
January trade figures continue to raint a dismal picture of large
monthly deficits, and they also show strong oil imports.

We have

already had reports of slow industrial production, a small increment in monthly personal income, and high price rises.

These

add up to an inflationary first quarter and a drop in the real
growth rate below the figure for year end 1977, which is placed
at about 4.0 percent for the final quarter of last year.

The

slow start that the economy is realizing, as a result of severe
winter storms and the coal strike probably will not be fully made
up through compensatory spending in the second quarter, even if
the strike is settled fairly soon.

For the year as a whole, the

best judgements for overall growth are at about 4.5 percent; some
nre fractions of a percentage point higher or lower, but the central figure of 4.5 percent remains firm for the year as a whole,
implying some greater shows of strength, above 1977's final quarter.
Other features of this respectable but unspectacular forecast
of growth rate are a higher inflation rate, up from about 5.6 percent last year to about 6.1 percent this year (GNP deflater). The
CPI and wrI each increased at a higher rate than the GNP deflater
in 1977.

In 1978, the CPI should change at about the same rate

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9
as the GNP deflater, but the WPI rate

may be slightly lower.

The components of this GNP growth include an investment
expansion of about 7.9 percent, a percentage point off last year's
rate, a slight drop in housing starts (hit very hard by severe
weather in January/February), and a continuing trade deficit.
The merchandise deficit in January indicated no change in the
overall trend for 1977, that gave us a record $27 billion deficit
for the year, but it is reasonable to expect some improvement
later in 1978, as a result of the cumulative effect of dollar
depreciation, potentially better agricultural exports, and the
pumping of a great deal of Alaskan crude.

In addition, invisibles

may be more favorable than they were in 1977.

If the sinking of

the dollar discourages some foreign tourism by US residents and
if recovery in partner countries picks up a bit, our overall
deficit on goods and services together could improve.

This is

what happens in the Wharton forecast for 1978.
The GNP forecast is thus reasonably good for 1978, with
some imbalances, the most serious being the poor outlook for the
trade accounts.

But the 1979 outlook is less robust and recovery

may very nearly come to a halt during 1980.

Implicit in the

forecast for 1978 and the ensuing years is a significant tax
cut, as proposed by the Administration for the fiscal year beginning October 1, 1978.
otherwise be a slowing

This generates a pick-up in what would
pace of economic activity, but it is not

strong enough by itself to keep the recovery going beyond 1979
because of countervailing effects of social security tax increases

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10
and higher energy prices.
Also implicit in this forecast is a continuation of a
moderately strict monetary policy.

This instrument cannot

readily be used, together with a fiscal stimulus, in the near
future, because of pressures on the dollar.

Our severely adverse

trade position weakens the dollar, and foreign capital inflows
must be attracted to keep the dollar from sliding even further.
This situation mandates relatively high US interest rates.
Wharton

The

forecast has M1 growing at about 5 to 7 percent each

quarter (averaging 6.8% for the year, 1978), M2 at about 8 percent and short term interest rates increasing by about 75 to 100
basis points over a yearly span.

These upward creeping rates

tend to hold down new housing starts.

Recessionary conditions

are not generated, but the rate of housing capital formation
should begin to decline slightly.
Most segments of the American economy are expected to participate fully in this moderate advance over the next year or
two.

Farmers did not fare very well in 1977 in the sense that

their income level remained far below previous high values.
Modest growth is projected again in 1978,but farm earnings are
held in restraint by crop limitations, soft prices, and sharply
rising costs.

The food component of the CPI should rise by about

6.0 percent, reflecting an increase in prices received by farmers
of about 6.0 percent, up to the harvest season, with some seasonal slackening after that point.

In mid year 1977, farm prices

were actually declining, and this held consumer prices in check.

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11
We ·cannot expect such a consumer windfall this year.
Another important factor in the overall cost-price situa~
tion is the average wage increase.

Wage rates were held to a

very moderate rate of increase last year, 7.5 percent, but total
compensation rose by 8.6 percent because social security contributions continued their rise.

This will occur by a big jump in

1979 according to present legislation.

There are not many major

collective bargaining contracts coming due in 1978; 1 the picture
will be quite different in 1979.

The miners' settlement, though

costly, should not set the tone for the labor market as a whole.
During 1977, on a fairly steady basis, unem9loyment rates
gradually declined.

The monthly pattern is considerably confused

by problems of seasonal adjustment, but the official rates did
fall.

This occurred when the real GNP growth rates were well

in excess of 4 percent each quarter, until the fourth.

The more

moderate pace of expansion forecast for 1978, should be associated
with less of a decline in unemployment, but the national rate can
be expected to fall below 6 percent by year's end.

Movements in

'labor force, often erratic, contribute a great deal to movement
of the unemployment rate.
Corporate profits before tax rose by about 9 percent in
1977.

This was only a fair showing.

projection is 8.8 percent.

This year's Wharton Model

Profits are a residual, and as such

are subject to error from many sides, not the least of which is
the erratic behavior of the "statistical discrepancy" in the
national income and product accounts.

Between the middle of

1976 and 1977, the quarterly value of the discrepancy account

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12
fluctuated between $8.0 billion and -$1.2 billion, practically
as large as the fluctuation in profits.

Another large and important residual account is the federal
deficit.

Unfortunately, this year, it is expected to be as large

as, or larger than, last, $50 billion and $57 billion, respectively
(NIPA basis).

As long as the predominant policy initiative

remains as a conventional use of fiscal policy through tax cuts,
it will be very difficult to keep the economy going forward at
a reasonably good pace without a large deficit, possibly a rising
deficit.

It is absolutely essential to introduce more supply

oriented structural policies that get at some of the target variables of the economy without generating such large strains on the
public budget.

This means that more private sector activity must

be stimulated in capital formation, jobs programs, and export
lines in order to get overall stimulus without deficit spending.
These considerations call for more ca_reful analysis of
tax stimuli for private business investment
export incentives
subsidization job training in the private sector for
the hard-core unemployed.
One can look at this projection and conclude that the economy
is going forward in a slow, lackluster fashion that will leave
high unemployment among many groups of the population and inflationary pockets in others.

This kind of situation is crying for

more structural policies.
The world economic situation has great influence on our
own; conversely, we have significant impact on the world.

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Last

25-273 0 - 78 - 2

13
year our performance was strong among the industrial democracies,
but left us with unbalanced trade and a weak dollar.

Hopefully,

a number of our partner countries will be able to reflate on a
stronger basis this year than last.

That should help the growth

of world trade, which slipped to about 4 or 5 percent expansion
last year, and consequently our own trade suffered,as we share in
the world total.
with our fiscal

If a broad grouping of partner countries join
~imulus, by introducing like measures, there

can be an extra 1/2 or 1 percentage point added to the world
growth rate of GNP and perhaps even more to world trade.

World

inflation has been slowly winding down, and this is clearly a
time for widespread coordinated reflation, when the dangers of
sparking significant price rises are slight.

Reflation -- not

protectionism -- should be the key to healthy mutual recovery in
the world economy as a whole.

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16
The CHAIRMAN. Thank you, Professor Klein.
Mr. Jordan~

STATEMENT OF lERRY L. lORDAN, SENIOR VICE PRESIDENT AND
ECONOMIST, PITTSBURGH NATIONAL BANK, PITTSBURGH, PA.
Mr. JORDAN. Thank you, Mr. Chairman.
My prepared statement is rather long, and I will only summarize it.
I appreciate this opportunity to present my views on monetary
policy. I have been very much encouraged by the role that congressional oversight has played in recent years. I think that in the 3 years
since these quarterly hearings began, the quality of the discussions concerning the issues involved in monetary policy have greatly improved,
and I think also the process of :formulation and implementation of
monetary policy within the Federal Reserve has improved. And I
think that there is hope for some further progress in the future.
The requirement that the Federal Reserve announce monetary
growth targets is potentially an important contribution to the objective of promoting economic stability, but only if these targets can be
relied upon. I cannot emphasize strongly enough how important it is
to retain and to strengthen the public disclosure of monetary policy
targets as an aid to the planning process in the private sector.
Last year the growth of money exceeded the Federal Reserve's targets by a significant margin, and it is widely believed that the same will
be the case this year.
These hearings are the appropriate forum for seeking from the
Federal Reserve some explanation :for the past errors and for assurances that they are serious about the announced targets.
I want to spend my time this morning commenting on what we can
and cannot expect from monetary policy, while not abandoning the
goal of ,g-radual reduction in the trend rate of inflation.
In addition, there are a few issues concernin,g the measurement and
implementation of monetary policy that should be dealt with over the
next few years.
In my prepared statement, I suggest that an appropriate role of
congressional oversight of monetary policv would be to monitor the
progress towards improving the quality of the monetary data and to
encourage reconsideration of the techniques that are used bv the Federal Reserve to achieve its monetary growth targets. I will not take
the time to repeat those recommendations in my oral summary, but
I will be glad to answer anv questions that you have about them.
On previous occasions the chairman and other members of this
committee, as well as several witnesses, have emphasized the importance of lags between monetary policy actions and observable responses in the economy. The pervasive effects of the severe winter
weather in recent months, especially when they are in combination
with the extended strike in a major portion of the coal industry,
should not cause us to lose sight of the foundation of very strong
demand that has been provi<led bv the highly stimulative monetary
and fiscal policies that began in 1977 and are continuing at the present
time.

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Federal Reserve Bank of St. Louis

17
Growth of the monetary base and the narrowly defined money supply during the last three quarters of 1977 was more rapid than at any
time in 30 years, with the exception of 1972. At the present time, the
growth o:f government spending at the Federal level began to accelerate in the second half of fiscal 1977 and is scheduled to rise 15 percent in the current year.
Normal lag relationships suggest that the strong thrust from these
monetary and fiscal policy actions assure that growth of total spending in the economy will be strong this year.
Gross national product rose almost 12 percent last year, up significantly from the 9.7 percent increase in 1976. That increase exceeded
every year since 1950 and was accompanied by a number of other
measures of economic performance that also indicated strength.
Total new automobile sales were close to a record. New single-family
housing starts of over 1.4 mi1lion were an alltime reC'ord. The actual
number of people employed in our economy increased by over 4 million, to achieve both the highest total number of people employed in
history by a significant margin, but also the largest portion of the
population of working age that we have experienced since World
War II.
These excellent results in labor markets do not mean that we don't
still have problems in unemployment, but they do suggest approaches
other than general stimulus to aggregate demand must be sought in
order to achieve the national objective of providing job opportunities
for all that desire them.
I am also confident that the overall rate of unemployment is going
to be below 6 percent sometime this year. At the same time that specially tailored programs are implemented to further reduce unemployment, overall monetary and Federal budget policies should be focused
on the longer term objective of achieving a much lower rate of inflation by the mideighties, if we are to maintain any hope of eventually
returning to the low average rate of inflation that prevailed in the
1950's and in the 1960's.
Aggregate demand policies must be moving in the direction of
achieving a growth of total spending in the economy that is less than
one-half the rate that was achieved last year.
In the last few years, Federal budget policies have been discussed
in the context of a 5-year plan, and I think it would also be appropriate to view moneta.ry policy programs within that time frame. Over
the next 5 years, we should be pursuing monetary policies that would
accompany a reduction in the growth of total spending in the economy
to about a 7 or 8 percent rate, which would be associated with a rate
of inflation of 4 percent or less, and a 3 to 4 percent growth of real
output.
Such a program would involve a grndual reduction in the rates of
monetary growth from the upper ends of the current target ranges
announced bv the Federal Reserve to no more than the low end of th~
current tanret ranges.
It should be emphasized that the stability in the growth rates of
the monrtary aggrrgatrs around thr. underlying trend, and only
gradual changrs in these average growth ratrs, are far more important
than the exact figures that are sought,or achieved.

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18
I also want to caution against a "whites of the eyes" approacn to
setting shorter run monetary growth targets. A substantial amount of
research effort has been devoted to demonstrating that the fluctuations
in the growth of the money supply around the underlying trend rate
are reflected primarily in fluctuations of output and employment,
while the trend growth of money over a period of several years is
reflected in the prevailing average rate of inflation.
The clear implication of this research is that a significant acceleration in the growth of money above the underlying trend can have a
short-run positive effect on output and employment. However, such
a policy sows the seeds of its own failure, since an unavoidable dilemma is created where a choice must be made between sustaining the
new higher growth of the monetary aggregates-and accepting a rise
in the trend rate of inflation----0r suffering the contraction in the
growth of output and employment that would be induced by a marked
reduction in money growth back toward, or below, the previous trend
rate.
This means that, in 1978, the continued outgrowth in the narrowly
defined money supply might be accompanied by a somewhat higher
rate of output and employment growth than would an immediate
return to the previous 6-percent itrend rate of growth of money.
However, continuation of the high rates of monetary growth this
year would create a situation where the Federal Reserve had no good
options remaining, once they began to focus on 1979.
If the Federal Reserve immediately returns to and maintains monetary growth within the announced target ranges, a severe credit crunch
and major recession can be avoided. But a continuation of the policy
actions of the past year for another 6 to 9 months would make it less
likely that the excesses can be corrected without suffering a major
economic adjustment.
I am going to skip some comments in my statement regarding the
amount of capacity or slack that remains at the present time, but
I would be happy to elaborate, if you desire.
I have no doubt that the movements in interest rates this year are
going to receive a lot of attention and discussion about monetary
policy. It obviously is going to be tempting to tolerate rapid money
growth and credit in an effort to prevent increases in interest rates
in order to promote increasPd private spending for invPstment and
to assure a continued strong flow of funds to the housing industry.
But, that option carries with it the danger of more serious problems
at a later time. Since investors pa:v increasing attention to the growth
of the mmwy supply, in forming their expectations about future inflation, a more rapid growth of money for the purpose of holding down
short-term interest rates would actually cause long-term interest rates
to rise more.
This is because managers of investment funds, as well as individual
savers, would attempt to avoid incurring the ca.pital loss that would
occur when the price of long-term bonds declined as thr, inflation
premium in bond yiPlds was ·revised upward.
The only wav to brin.!! about a permanent reduction in the long!,erm tnterest rates, including mortgage rates, is to permanently reduce
mflation.

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19
Last year, short-term market interest rates rose approximately 2
percentage points, and some observers interpreted that as a sign of
a more restrictive monetary policy. I disagree with that view. Since
the quantity of credit extended was rising at very rapid rates, the only
interpretation that follows from the rise in the price of credit is that
the demand for credit was rising even more rapidly than the ample
increase in credit supplied. That is a sign of a strong economy.
The rise in short-term yields last year occurred mostly in the spring
and summer, at a time when bank reserves and the money supply were
growing at the most rapid rates in over 30 years. Such a high rate of
monetary growth, accompanied by a rapid rise in s~ort-term. inte~est
rates, occurred in only one other year-1972. Certamly the mflat10n
of 1973 and 1974 suggest that the excessive monetary growth in 1972
was a better measure of monetarv stimulus than was the rise in the
price of credit.
It is important to emphasize that a year ago the forecasts of higher
interest rates in 1977 were based on assumptions of an acceleration
of growth in the money supply, not slower growth of money, than had
occurred in the previous year.
Similar]v. continued monetary 2Towth in 1978 at the rate that occurred in the final three quarters· of last year would imply a larger rise
in long-term interest rates this year and in 1979 than if the growth of
money was returned to and maintained at no more than the upper
limits of the Fed's announced targets.
If market participants can rei:v on the Federal Reserve to reduce
monetarv growth this year to their announced target ranges, the rise
in the short-term yields wi11 be viewed as only a temporary cyclical
increase. Consequently, the rise in Jong-term yields will be small, since
there will be no reason to revise further upwards their expectations
about the trend rate of inflation.
A brief comment nbout the outlook for housin_g in the next year
or two is warranted. If nothing else is done-and I am not suggesting
that othi>r things conld not be done-but if that is the case, and the
return of monetarv growth to the Federal Reserve's announced target rangps noes rPsi1Jt in incrPasPd short-term intPrest rates and causes
some disintermediation of savings from the thrift institutions and a
downturn in home construction aC'tivitv. there is no reason to believe
thi:,t. thP clowntiirn will hP. Vf'ry sharp nor Vf'rv long in dnration.
It is unfortunate that we cannot expert hom:;ing to stay strong indefinitely, but, because of developments last year, that cannot be expectPd. And, since it cannot, it wonld be. hPttf'r to Ruffer a mild downturn in the next yea.r or so and lay a foundation for resumed healthy
growth in the 1980's than it wonld be to promote vigorous activity this
~,ear and in 1979 and risk a subsequent deep and long contraction in
the induRtry.
Now, I want. to turn to a few comments about the role monetary
poliey might play in promoting Rome in<'rease in capital spending.
T~e experience of the laRt couple of yearR :=mggeRts that the traumatic events of 1974 and 1975 have cauRed businessmen to be very cautious about being too myopic in analyzing the stl'(lngth of final dPmand
for thPir products. The huRineRs community iR very sensitive to the
possibilitv that monetary and fiscal policies in the short nm will become overly stimulative and leave the Government with no alternative

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Federal Reserve Bank of St. Louis

20
but to combat accelerating inflation, either by administering a strong
dose of traditional monetary and fiscal restraint-which would render
any new investment unprofitable during the ensuing recession-or by
adopting some form of administrative controls over prices, which also
would render new capacity unprofitable for a while.
There is a desire by business planners to see Government avoid the
excesses of shortsighted stop-and-go policies in favor of more stable
policies that reflect the kind of patience necessary to promote a prolonged period of continued economic expansion.
In 1978, it is still possible for capital spending to continue to
strengthen in real terms, to match or exceed the pace of last year.
However, if high rates of monetary growth are the results of policies
designed to resist further increases in short-term interest rates this
year, then greater. uncertainties will be generated about the economic
environment that will prevail 2 or 3 years from now, when new capacity is becoming available.
As a result, corporate planners will want to go slow on major longterm projects until they have a better idea about the timing, depth,
and duration of the next recession and until the prospects for some
form of administrative controls over prices are assessed.
I do not believe that the controls are desirable or necessary, but in
business it is prudent to assume that they will be imposed if it appears
that monetary and fiscal policies are excessively stimulative and will
result in accelerating inflation.
In conclusion, monetary policy actions in 1978 will be critical in
determining whether another major recession should be expected in
the next few years. Contrary to conventional analysis, the probability
I would assign to the occurrence of a major recession in the next 2 or
3 years would be greater the more stimulative our monetary policy
action this year.
It is my hope that the Federal Reserve adheres to the monetary
growth targets for this year that are no higher than they announced
but greatly exceeded last year.
Thank you.
[Mr. Jordan's prepared statement follows:]

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Statement by
JERRY L. JORDAN
Senior Vice President and Economist
Pittsburgh National Bank

before the

Committee on Banking, Finance and Urban Affairs

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Federal Reserve Bank of St. Louis

House of Representatives
United States Congress

March 7, 1978

22
Statement by
JERRY L. JORDAN
Senior Vice President and Economist
Pittsburgh National Bank

Mr. Chairman and Members of the Committee:
It is indeed a pleasure to haye this opportunity to
present my views on monetary policy.

I would like to state

at the outset that I have been very much encouraged by the
role that Congressiona_l oversigh·t of monetary policy has
played in recent years.

In the three years since these

quarterly hearings began under Concurrent Resolution 133,
the quality of the discussions concerning the issues involved
in the conduct of monetary policy has greatly improved.
I think that the process of formulation and implementation
of monetary policy has been improved by these hearings,
and I am hopeful that further progress will be achieved
in the future.
The requirement that the Federal Reserve announce
monetary growth targets is potentially an important contribution to the objective of promoting economic stability,
but only if the targets

can be relied upon.

Decision

makers in the private sector, both management and labor
leaders, would find it valuable to know in advance the rate
of inflation that will be tolerated by the monetary authorities.

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Federal Reserve Bank of St. Louis

23
The credibility of the central banks' stated intentions
is the key to the success of ·monetary policies in Germany,
Switzerland, and other countries that also announce monetary
growth targets.

Last year the growth of money exceeded

the Federal Reserve's targets by a significant margin, and
it is widely believed that the same will be the case this
year.

These hearings are the appropriate forum for seeking

from the Federal Reserve explanations for past errors and
assurances that they are serious about announced targets
for the future.
In general, there is reason to be optimistic about
the outlook for our economy, and for that matter for world
economies in the years ahead.

There are some unavoidable

problems that must be dealt with in the next year or two,
but there is still time for a mid-course correction that
will lay a foundation for strong growth and declining inflation in the 1980's.
I would like to spend my time this afternoon commenting
on what can and cannot be expected from monetary policy
in achieving our national objectives regarding capital
formation and job creation, while not abandoning the goal
of a gradual reduction in the trend rate of inflation.
In addition, there are a few issues concerning the measurement and implementation of monetary policy that it is timely
to deal with over the next year, and I will suggest that

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Federal Reserve Bank of St. Louis

24
an appropriate role of Congressional oversight of monetary
policy is to monitor the progress towards improving the
quality of monetary data and to encourage reconsideration
of the techniques used by the Federal Reserve to achieve
its monetary growth targets.
I will begin with a brief summary of my views on where
we stand at the present time and the appropriate objectives
for monetary policy in 1978.

On previous occasions the

Chairman and other members of this Committee, as well as
several witnesses, have emphasized the importance of lags
between monetary policy actions and observable responses
of the economy.

The pervasive effects of the severe winter

weather in recent months, especially in combination with
an extended strike in a major portion of the coal industry,
should not cause us to lose sight of the foundation of very
strong demand that has been provided by highly stimulative
monetary and fiscal policies that began in 1977 and are
continuing at the present time.

Growth of the monetary

base and the narrowly defined money supply during the last
three quarters of 1977 was more rapid than at any time in
thirty years, with the exception of 1972.

At the same time,

the growth of government spending at the Federal level began
to accelerate in the second half of fiscal 1977 and is
scheduled to rise 15 percent in the current year.

Normal

lag relationships suggest that the strong thrust from these
monetary and fiscal policy actions assure that growth of
total spending in the economy will be strong this year.

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Federal Reserve Bank of St. Louis

25
In fact, the average 16 percent rate of increase of personal
income in the closing months of last year suggests that
additional stimulation of final demand is not necessary
at the present time.
Total spending in the economy as measured by Gross
National Product rose by almost 12 percent last year, up
significantly from the 9.7 percent increase in 1976.

That

increase has been exceeded in only one year since World
War II and was accompanied by a number of other measures
of economic performance that are equally satisfying.

Total

new automobile sales were almost a record and new single
family housing starts of over 1.4 million were an all time
Maybe most important, the actual number of people

record.

employed in our economy increased by over seven million
last year to achieve both the highest total number of people
employed in our history by a significant margin, but also
the largest proportion of population of working force age
employed that we have experienced other than during world
War II.
These excellent results in labor markets do not mean
that we do not still have problems with unemployment, but
they do suggest that approaches other than general.stimulus
to aggregate demand must be sought in order to achieve our
national objective of job opportunities for all that desire
them.

I am cbnfident that the overall rate of unemployment

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Federal Reserve Bank of St. Louis

26
will be below 6 percent sometime this year.

Progress

towards reducing unemployment further involves: much more
selective approaches to identifying who the unemployed are
and where they arei providing information to potential
employers and perspective employees, removing some of the
obstructions and barriers to employment that are faced by
many people1 and providing the kind of training and actual
work experience that will enhance the skills and productivity
of the unemployed in order that they can become active
participants in our economy at acceptable wages.
At the same time that specially tailored programs are
implemented to further reduce unemployment, overall monetary
and Federal budget policies should be focused on the longerterm objective of achieving a much lower rate of inflation
by the mid-1980's.

If we are to maintain any hope of even-

tually returning to the low average rate of inflation that
prevailed in the 1950's and early 1960's, aggregate demand
policies must be moving in the direction of achieving a
growth of GNP (total spending in the economy) that is less
than one-half the rate that was achieved in 1977.

In the

last few years Federal budget policies have been discussed
in the context of a five-year plan, and I believe that such
a time horizon also would be appropriate for discussing
the monetary policy program.

Over the next five years we

should be contemplating the monetary policies that would
accompany a reduction in the growth of nominal total spending to only a 7 or 8 percent rate that would be associated

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Federal Reserve Bank of St. Louis

27
with a rate of inflation of 4 percent or less and a 3 to
4 percent growth of real output.

Such a program would

involve a gradual reduction in the rates of monetary growth
from the upper ends of the current target ranges announced
by the Federal Reserve to no more than the low end of the
current target ranges.
It should be emphasized at this point that stability
in the growth rates of the monetary aggregates, and only
gradual changes in the average growth rates, are far more
important than the exact figures that are sought or achieved.
I will have more to say about this in a few moments, in
connection with some comments on appropriate monetary policies
to foster a greater rate of capital spending, but at this
point I want to caution against a •whites-of-the-eyes•
approach to setting shorter-run monetary growth targets.
A substantial amount of research effort has been devoted
to demonstrating that fluctuations in the growth of the
money supply around the underlying trend rate are reflected
primarly in fluctuations of output and employment, while
the trend growth of money over a period of several years
is reflected in the prevailing average rate of inflation.
The clear implication of this research is that a significant
acceleration in the growth of the money supply above the
underlying trend can have a short-run positive effect on
the growth of output and employment.

However, such a policy

action sows the seeds of its own failure since an unavoidable
dilemma is created wherein a choice must be made between

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Federal Reserve Bank of St. Louis

28
sustaining the new higher growth of the monetary aggregates
-- and accepting a rise in the trend rate of inflation -or, alternatively, suffering the contraction in the growth
of output and employment that would be induced by a marked
reduction in money growth back towards, or below, the previous trend rate.
In the present environment this means that in 1978
a continuation of 8 to 9 percent growth in the narrowly
defined money supply might be accompanied by a somewhat
higher rate of output and employment growth than would an
immediate return to the previous 6 percent trend rate.
However, continuation of the high rates of monetary growth
this year would create a situation where the Federal Reserve
had no good options remaining once they began to focus on
1979.

The choice at that time would be between continuing

the high rate of monetary growth and tolerating an acceleration of inflation into the 7 to 9 percent range next
year, or administering a dose of traditional monetary restraint in order to combat the emerging inflation and,
consequently, necessitating a credit crunch and recession
next year.
If the Federal Reserve immediately returns to and
maintains monetary growth at

no more than the upper ends

of the announced target ranges a severe credit crunch and
major recession can be avoided.

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Federal Reserve Bank of St. Louis

However, a continuation

29
of the policy actions of the past year for another six to
nine months would make it less likely that the excesses
can be corrected without suffering a major economic adjustment.
This outlook for the next year or two is influenced
by an interpretation of the "slack" or idle capacity in
the economy that differs significantly from the view put
forth by others, notably the Congressional Budget Office
staff.

Briefly, they take ·at face value the relatively

low capacity utilization numbers and the data that suggest
that there still is a large •gap• between actual output
and so-called potential GNP, and they conclude that we are
not in danger of "spilling-over• into a condition of excess
demand and rising inflation.
In my view their analysis might be correct only if
the long and deep recession of 1974 and 1975, and the •
associated decline in capacity utilization, had been caused
solely by prior restrictive monetary and fiscal policies.
However, we all know that that is not the whole story.
During 1973 and 1974 we experienced a number of major one
time •real shocks", such as the quadrupling of oil prices,
that decreased the real economic capacity of much of the
existing plant and equipment.

Given the much higher input

prices, especially for energy, substantially higher output
prices became necessary to restore profitability.

Many

of the basic industries such as steel, aluminum, rubber,
paper, glass and plastics had installed capacity that was

25-273 0 - 78 - 3

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Federal Reserve Bank of St. Louis

30
economically efficient only at much lower energy prices
than prevail today.

Some of this capacity was relatively

new and modern in a physical sense, but became economically
obsolete (unprofitable to operate) at prevailing output
prices in view of the significantly higher input prices.
Consequently, demand increases in these basic industries
have been met, and will continue to be met, with output
price increases long before full utilization of physical
capacity is reached.

This means that the capacity utili-

zation numbers are not a very reliable measure

of pressure

for price increases in this environment.
This analysis does not suggest that it is not possible
to achieve the old potential capacity output levels, but
it does suggest that the rate of inflation associated with
the achievement of those higher output levels may be considerably greater than a traditional •gap• analysis would
suggest.

On the positive side, it should be noted that

the fact that the nominal price of oil from OPEC has not
risen since the middle of last year and, therefore, the
real price of oil to the United States has declined, means
that (as long as it continues) there will be less inflation
than otherwise.

On the other side, the eventual resolution

of our own domestic energy policies will have a significant
bearing on the outcome regarding energy prices and availability.
I have no doubt that movements of interest rates are
going to receive a lot of attention in discussions about

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Federal Reserve Bank of St. Louis

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monetary policy this year.

It obviously is tempting to

tolerate more rapid growth of money and credit in an effort
to prevent increases in interest rates in order to promote
increased private investment spending and assure a continued
strong flow of funds to the housing industry.

But that

option carries with it the danger of much more serious
problems at a later time.
There is a view that rising short-term interest rates
tend to push up long-term interest rates, and tendencies
for short-term interest.rates to tise must be resisted by
the monetary authorities in order to avoid rising long-term
interest rates.

However, that view is not supported by

recent experience nor by theoretical analysis.

Since in-

vestors pay increasing attention to the growth of the money
supply in forming their expectations about future inflation,
a more rapid growth of money for the purpose of holding
down short-term interest rates would actually cause longterm interest rates to rise more.

This is because managers

of investment funds, as well as individual savers, would
attempt to avoid incurring a capital loss that would occur
when the price of long-term bonds declined as the infl~tion
premium in bond yields was revised upward.

The only way

to bring about a permanent reduction in long-term interest
rates, including mortgage rates, is to permanently reduce
inflation.

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Last year short-term market interest rates rose approximately two percentage points, and some observers interpreted
that as a sign of a more restrictive monetary policy.
disagree with that view.

Since the quantity of credit

extended was rising at historically very rapid rates, the
only interpretation that follows from the rise in the price
of credit is that the demand for credit was rising even
more rapidly than the ample increase in credit supplied.
That is a sign of a strong economy.

The rise in short-term

yields last year occurred mostly in the spring and summer,
at a time when bank reserves and the money supply were
growing at the most rapid rates in over thirty years.

Such

a high rate of monetary growth accompanied by a sharp rise
in short-term interest rates occurred in only one other
year -- 1972.

Certainly the events of 1973 and 1974 suggest

that the excessive monetary growth in 1972 was·a better
measure of monetary stimulus than was the rise in the price
of credit.
At the present time, participants in money and capital
markets seem to be expecting that short-term market interest
rates will rise one percentage point or more this year,
that inflation will be at least as rapid as last year, and
that long-term interest rates will rise by one-half percentage point or more.

It is generally accepted that the

money and credit markets will be much tighter this year
in spite of the somewhat slower real output growth that
is generally expected.

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Federal Reserve Bank of St. Louis

Market participants understand that

33
there is no reliable correlation between real growth in
the economy and movements in interest rates, as evidenced
by recent experiences such as 1973 and 1974.

The dominant

reason for expecting upward pressure on interest rates this
year is that the stimulative monetary and fiscal policies
of last year, and continuing into this year, have produced
strong credit demands in the private sector which are competing increasingly with the continuing large credit demands
of the government sector, all of which leads inevitably
to a substantially higher price of credit.
It is important to emphasize that a year ago the forecasts of higher interest rates in 1977 were based on assumptions of an acceleration in the growth of the money supply,
not slower growth of money, than had occurred in the previous
year.

Similarly, continued monetary growth in 1978 at the

rate that occurred in the final three quarters of last year
would imply a larger rise in long-term interest rates this
year and in 1979 than if the growth of money was returned
to and maintained at no more than the upper limits at the
announced targets.
I firmly believe that if market participants can rely
on the Federal Reserve to reduce monetary growth this year
to no more than the upper ends of the announced target
ranges, the rise in short-term yields will be viewed as
only a temporary cyclical increase.

Consequently, the rise

in long-term yields will be small since there will be no

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reason to revise upwards expectations about the trend rate
of inflation.
The reasons for the apparent paradox -- that slower
money growth means a smaller rise in interest rates -- lie
in the way market participants form expectations about
future credit demands and inflation and in their judgements
about actions that may be taken by the Federal Reserve to
offset undesired deviations of monetary growth from their
targets.

Even though traditional analysis holds that faster

growth of money implies lower interest rates and slower
growth of money implies higher interest rates, market participants have come to understand that it is actually just
the opposite.
Over

the past few years market participants have

recognized that when faster money growth actually is observed, higher short-term interest rates can usually be
expected as the Federal Reserve raises the Federal funds
intervention target rate in order to slow reserve availability and bring money growth back down into the target
range.

Conversely, when money growth persists for some

time at relatively slow rates, interest rates begin to
decline as market participants begin to expect that the
Federal Reserve will increase reserve availability in order
to promote faster growth of money to maintain target growth
rates.

The implication for the present environment is that

the way to promote lower long-term interest rates late this

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year and in 1979 is to allow the competition between government and private sector credit demands to raise short-term
interest rates as much as necessary while open market
operations by the Federal Reserve provide reserves at a
rate that permits money growth at no more than the upper
limits of the current long-term target growth ranges.
The obvious problem with this conclusion for economic
objectives in 1978 is that tolerating further increases
in short-term market interest-rates will be viewed by some
to be in conflict with the desire to promote a higher rate
of capital spending and to insure continued strength in
the housing industry.

The argument will be heard many times

this year that rising short-term market interest rates
increase the likelihood of an outflow of savings deposits
from the thrift industry, especially of short-term maturities,
and that, in turn, implies a reduced availability of funds
for construction and mortgage finance of housing.

While

that analysis by itself is undeniable, the various alternative policies and their implications must be considered.
For the Federal Reserve to merely peg short-term interest rates at near the current levels and tolerate a
marked acceleration in the growth of money and credit would
delay the occurrence of disintermediation and might assure
a continued strong· flow of funds to the housing industry
through this year.

However,

those same actions would

insure that inflation would accelerate substantially next

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year and a major credit crunch and recession would become
inevitable.
Cyclical movements in interest rates contribute to
cyclical swings in home construction activity, but it is
also true that high secular rates of inflation have a major
adverse effect on the housing industry and people's ability
to afford adequate housing.

Part of the reason that the

demand for housing was so strong last year and residential
housing prices rose so sharply was because of people's fears
about future inflation.

Even though housing prices have

risen sharply in the past decade, and in 1977 were substantially
higher than just one year earlier in some parts of the
country, there was considerable speculative activity based
on the assumption that general inflation would be greater
and new homes would become
to incomes in future years.

even more expensive relative
A policy of holding down in-

terest rates and permitting very rapid growth in money and
credit is not the solution to the problems of the housing
industry and the thrift industry, if it means continued
high rates of inflation.
Even if nothing else is done and a return of monetary
growth to the Federal Reserve's announced target ranges
causes increases in short-term interest rates and some
disintermediation of savings from the thrift institutions
and a downturn in home construction activity, there is no

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reason to believe that the downturn will be very sharp nor
very long in duration.

It would be far better to suffer

a mild downturn in the next year or so and lay a foundation
for resumed healthy growth in the 1980's than it would be
to promote vigorous activity this year and into 1979, while
risking a subsequent long and deep contraction in the industry.
Now I will turn to some comments about the role of
monetary policy in promoting an increased rate of capital
spending.

First, there is a view about the way government

economic policies influence capital spending plans of business
that I disagree with.

It holds that monetary and fiscal

policies can be used to stimulate current consumption spending
and thereby give business decision makers the confidence
to implement plans for increased productive capacity.
According to this view, the key to stimulating capital
spending is to take actions that cause this month's sales
to increase and order books to fill up.

My conversations

with business leaders do not support that view.
The experience of the last couple of years suggests
that the traumatic events of 1974 and 1975 have caused
businessmen to be very cautious about being too myopic in
analyzing the strength of final demand for their products.
The business community is very sensitive to the possibility
that monetary and fiscal policies in the short-run will
become overly stimulative and leave the government with
no alternative but to combat accelerating inflation either

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by administering a strong dose of traditional monetary and
fiscal restraint which would render any new investment
unprofitable during the ensuing recession, or adopting some
form of administrative controls over prices which would
also render new capacity to be unprofitable.

There is a

desire by business planners to see government avoid the
excesses of short-sighted "stop and go• policies in favor
of more stable policies that reflect the kind of patience
necessary to promote a prolonged period of continued economic
expansion.
A review of the conditions that made possible the
extended period of sustained growth in the 1960's suggests
that moderation in the monetary and fiscal policies pursued
early in the period, especially in 1961 and 1962, dispelled
the view that alternating short periods of growth and recession were inevitable.

Another development that contributed

to the length of the expansion of the 1960's was the willingness of the monetary authorities to suffer a correction
of

some excesses that were building up part way through

the period.

The 1966 credit crunch and the mini-recession

in the first quarter of 1967 were unfortunate and unpleasant,
but they were also probably unavoidable as a result of the
overheating of the economy that occurred in 1965 and early
1966.

Their

occurrence enabled the economic growth to

continue for three more years.

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In 1978 it is still possible for capital spending to
continue to strengthen and in real terms to match or exceed
the pace of last year.

However, if high rates of monetary

growth are the results of policies designed to resist further
increases in short-term interest rates this year, then
greater uncertainties will be generated about the economic
environment that will prevail two or three years from now
when new capacity is coming on stream.

As a result, corporate

planners will want to go slow on major long-term projects
until they have a better idea about the timing, depth, and
duration of the next recession and until the prospects for
some form of administrative controls over prices are assessed.
I do not believe that controls are desirable or necessary,
but in business it is prudent to assume they will be imposed.
Now I will turn to some comments about implementation
and measurement of monetary policy actions.

At the hearings

conducted by this Committee in July of last year, the subject of seasonal adjustment of the monetary aggregates was
raised, yet the situation is the same today as it was at
that time.

Two years ago a non-partisan committee of academic

economists, commissioned by the Federal Reserve and chaired
by Professor Leland Bach, made a number of recommendations
regarding the measurement of monetary statistics.

Yet no

action or explanation for failure to implement the recommendations
has been forthcoming from the Federal Reserve, and I think
it would be an appropriate role for Congressional oversight
to seek some progress on these issues, or at least some
reasons why the recommendations have not been implemented.

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At the mid-year review of the economy conducted last
September by the Joint Economic Committee, Congressman Ruess
presented

additional views with which I concur substantially

and will not repeat at this point, but will only say that
they are as relevant today as at that time.

In addition,

at the hearings of this Committee last July on monetary
policy, the subject of lagged reserve requirements was
raised and an analysis by the staff was included in the
record.

I would like to associate myself with the analysis

presented by the s~aff and suggest that on this year's agenda
for Congressional oversight the Federal Reserve should be
asked to plan a return to coincident reserve requirements
or provide a detailed defense of maintenance of the present
structure of lagged reserve requirements.
Finally, I concur with the concern expressed by a
number of observers regarding the emphasis placed on the
weekly money supply numbers, but I would like to suggest
that the Federal Reserve's continued emphasis on the weekly
average and even daily or hourly Federal funds rate is
equally cause for concern, and frequently has been a source
of past policy errors.

Neither the level of the Federal

Funds rate nor the weekly Ml and M2 measures are appropriate
short-term operating targets for the Federal Reserve.
Alternatively, the adoption of a reserve aggregate, such
as the monetary base, as a short-run operating target would
enhance the ability of the Federal Reserve to achieve its

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41
quarterly and annual money supply growth targets and also
to avoid wide cyclical swings of interest rates.

Again

there is an apparent paradox, in that excessive preoccupation
with short-run movements in interest rates and efforts to
stabilize them over weekly averages (or even daily) may
actually contribute to substantially greater swings in
interest rates over full business cycles.

In order to

minimize the long-run movements in interest rates the Federal
Reserve should allow them to fluctuate over a wider range
in the very short-run.
In summary, monetary policy actions in 1978 will be
critical in determining whether another major recession
should be expected in the next few years.

Contrary to

conventional analysis, the probability I would assign to
an occurrence of a major recession in the next two or three
years would be greater, the more stimulative are monetary
policy actions this year.

It is my hope that the Federal

Reserve adheres to monetary growth targets for this year
that are no higher than were announced, but greatly exceeded,
last year.

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Federal Reserve Bank of St. Louis

The CHAmMAN. Thank you, Mr. Jordan.
Mr. Dornbusch.
STATEMENT OF RUDIGER DORNBUSCH, ASSOCIATE PROFESSOR OF
ECONOMICS, MASSACHUSETT'S INSTITUTE OF TECHNOLOGY, CAMBRIDGE, MASS.
Mr. DORNBUSCH. I would like to address myself primarily to the
role of monetary policy in relation to the exchange rate, but I do
have to place the discussion in some perspective about the U.S. priorit~es on the macroeconomic scene and what should be the right policy
mix.
I find myself in some disagreement with Mr. Jordan.
First, I believe there is continuing high unemployment and that
sustained real growth considerably above the trend is required for
2 or more years to reduce unemployment to the point where structural policy should predominantly take over; tha~ unemploymen~
exists now both for the labor force and for the capital stock, and it
requires attention.
The first priority then should be continued expansion in aggregate
demand.
Second, we should be concerned about inflation, not to reduce the
level of the rate of inflation but to prevent by all means an acceleration in inflation. The experience since 1974 has taught us that we
can't use aggregate demand to reduce inflation at anything like a
price we should be prepared to pay. But we do have to be concerned
not to raise inflation, and I see implications in that for fiscal policy.
Third, we should be very much concerned about investment and
capital formation. That concern arises because the productivity growth
will have a dampening effect on inflation and because capital formation is required to absorb the labor force in the longer term and give
labor the real income growth that it expects. Investment and capital
formation should therefore stay in the, center of our attention in the
policy mix.
And, finally I think we should pay attention to the fact that growing competitiveness of new U.S. trading partners, primarily the LCD's
will force us increasingly to pay attention to shifting resources and
increasing productivity. I take it that a high investment economy is
a better environment in which to achieve that transformation.
Now, the policy mix to implement the variety of targets is, I think,
one that has a considerably easier monetary policy and a shift in fiscal
policy, first toward investm1:1nt and toward the, control of inflation, and
second, as the economy further recovers, toward some tightening.
I want to emphasize that at present I really don't see an excessively
expansionary fiscal policy. In my statement on page 4 I show some
numbers for the consolidated budget for State, local, and the Federal
Government. In real terms the budg1:1t deficit compared to years of
comparable slack. As a :fraction of GNP. it is c1:1rtainly exC'eedingly
low. So, I want to draw your attention to the fact that both for macroeconomics and for ca.pital market questions the consolidated budget
must be looked at and. of course, with large savings by State and local
governments, the Federal Government ought to be expansionary.

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The particular policy mix I would favor is that on the fiscal policy
side we use a considerably larger fraction of the tax cut that has been
proposed for excise tax reductions, wage subsidies for youth unemployment, and measures like that which have a direct effect on inflation.
I say that primarily because we have a number of factors, from the
coal strike to the depreciation, will already tend to raise inflation at
prevailing wages. We therefore ought to have this year extra policies
to be considere~ now in view of these new developments that will make
an inroad on that extra inflation and stabilize the rate at the prevailing
level.
Fiscal policy also requires a shift toward investment and capital
formation. There has been a neglect of the stock market at the expense
of the exchange rate.
On the monetary policy side, I don't really see that monetary policy
has by any means been very expansionary. I certainly don~ share Mr.
Jordan's belief that we had a monetary growth rate in excess of the
last 30 years, with the exception of 1971. Through February 1978 the
growth rate of M 1 was 6.6, since 1959, there are 4 or 5 years with comparable monetary growth. So there was certainly in the last year no
excessive monetary growth-there were erratic fluctuations in the
growth rate of money. We can pick our quarters, but 6.6 year on year
I don't think is an extremely high growth rate of M 1 for an economy
that has a built-in inflation rate of 6 percent.
Now, I want to come to the exchange rate and place it in that macroeconomic perspective I have laid out. First I want to point out some
facts about the exchange rate.
The first concerns the extent to which European currencies and the
yen have appreciated. I show on page 7 in my statement for the mark,
for example, an appreciation to the extent of 15 percent since the end
of 1976. There is a large appreciation, also, for the yen.
·what matters though for the United States is not the appreciation
of particular European or Far Eastern currencies, but what has happened to the average dollar. And to create an average we look at the
U.S. trading patterns. The last column shows the effective dollar
exchange that is adjusted for the U.S. trading pattern. When an attempt is made to adjust it for the U.S. trading pattern, of course, the
depreciation is much less, reflecting the importance, for example, of
Canada to U.S. trade. Canada in the world economy is very small, but
in U.S. trade it is very large. Canada has appreciated relative to the
dollar, and accordingly that tends to dampen the decline of the average
dollar relative to foreign moneys. In fact, the effective rate that is
shown here overstates the extent of the U.S. depreciation because it
does not include LDC's, most of whom are do11ar peggers.
If you turn to page 8 of my statement, you have a breakdown of U.S.
trade. The point that shonld come out of that table is that Western
Europe and Japan, even taken in combination, really account for less
than half of U.S. trade, and we should pay equal or more attention to
Canada and the developing countries when we talk about what has
hanpened to the dollar.
So one adiustment, then, in looking at dollar depreciation or appreciation of foreign currencies is to take into account the particular
pattern of U.S. trade.

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A second adjustment is necessary because we can't look at the exchange rate independent of prices. ffitima.tely we want to know what
are the real effects of a change in the exchange rate. For what we have
to adjust for price changes that have taken place. An exchange rate
that depreciates simply because one country's inflation rate is higher
than another's will have no real effects because it just makes up for
differences in inflation rates.
On page 9 in my statement I show inflation adjusted exchange rates,
and you will see in the first column that the dollar on that basis has
depreciated relative to its 1973-77 average by only 3 percent. Similarly,
the mark appreciation and the yen appreciation have been considerably
more modest than is shown by the large changes in nominal exchange
rates, so tJhat these rates here are more nearly what we expect to affect
trade flows.
Again, they are still an overstatement because they do not take into
account fully the U.S. trade pattern. If we made that adjustment, I
think the U.S. real exchange rate would show an even more modest
depreciation.
The next factor is exchange rate volatility, and I think is the main
concern expressed in newspapers-it affects financial markets when the
exchange rates go up and down because anybody that holds a position
is exposed to large speculative gains or losses. I don't think that the
volatility has so much an effect on trade activities. I do want to point
out, though, that the volatmty has been considerably less in 1976-77
than it had been, for example at the beginning of floating in 1973-74.
On page 10 in my statement I show charts designed to convey that
impression, although, of course, using as a benchmark a trend of 6
months is something very arbitrary. We could use 3 or 9 months. But
the point I want to make is that volatiliy has been reduced. Seventy
percent or more of the fluctuations in weekly exchange rates are explained by the trend. That poses a problem for intervention, to which
I will come back.
I want lastly to turn to another "fact." There has been widespread
argument that the dollar depreciation is due to excessive U.S. monetary growth. The argument was made only this morning by a Belgian
Government official. Implicit in that argument is a comparison with
Germany; namely that Germany had very tight monetary growth
compared to the United States.
I show on page 11 in my statement data for the United States and
for Germany, and of course, in the last quarter of 1977 the German
monetary growth for M1 was almost double the U.S. growth. It is grotesque to argue that the United States had very expansionary monetary
growth compared to Germany. Throughout 1977 they were roughlv
equal with Germany, a bit on the high side; in the last quarter, there
is a very strong depreciation of the dollar. The last quarter of 1977
shows, however, that the German monetary growth was considerably
larger than that in the United States.
I would also reject the notion that depreciation relative to the mark
is due overwhelmingly to inflation differentials because they are in
fact very modest. They are 2 to 3 percent. And one can't really see a
very large divergence. Current wage settlements in Germany are
threatening to be on the order of 5 to 8 percent, and you don't get
reduced inflation out of that. And in the United States, while, no doubt,

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the depreciation caused problems and a lot of protectionist measures
threaten to raise inflation, I don't see that it would produce a large
enough increase in inflation to warrant the exchange rate changes that
we have observed.
I come from facts about the exchange rate to the place of the exchange rate in the economy, and then I will ask whether, in effect, W-3
should use monetary policy to use the exchange rate for macroeconomic
purposes.
When the dollar depreciates relative to the rest of the world, it will
have three effects. We have, one, an effect on the level of prices in the
Uni,ted States; second, an effect on competitiveness and trade flows;
and third, we have effects in financial markets.
The price effects are important because independent of ·the level of
aggregate demand, a depreciation would produce an increase in prices.
Depreciation would raise import prices, given world prices, and that
would be more important for raw materials and agricultural commodities. For that class of goods that are important in U.S. trade-25 percent-there would be a direct impact on wholesale prices and on the
price level. When we look to manufactured goods and industrial supplies, the price effects are much more modest. It will take time and the
adjustment of U.S. prices to competitive prices would only be gradual
and partial, so for that class of goods the inflationary effect of depreciation would be considerably less.
We have to be very careful in that context to look at oil, because if
we had a sustained large depreciation of the dollar in terms of other
currencies, we would expect oil prices to increase somewhat as oil producers tried to protect their real position. But that is an administrative
price, and for that reason we can leave that as something to be considered but not be assigned too high a probability.
As to the real effects on trade flows we have to ask, how much would
a real dollar depreciation produce, and I conclude that the effects arc
quite limited. They are quite limited because the range of commodities where the United States can gain competitiveness relative to the
rest of the world is essentially manufactured goods and industrial supplies, and that accounts for perhaps 50 to 65 percent of U.S. exports,
and a smal1er fraction on the import side. So on the competitiveness
side, we clearly will gain, but we would not get an overwhelming advantage because we have a lot of agricultural goods where prices are
determined in the world market and equalized cross countries, and
there is no edge for competition then. That leaves us really with manufactured goods to have those gains.
There is a second reason why the competitive effects on trade flows
are likely to be limited, and that is because the United States cannot
effPctively depreciate relative to much of the rest of the world.
LDC's, Canada, a country like Mexico, will not allow the United
States to depreciate relative to them and gain competitiveness at their
expense. They are pegged to the dollar in real terms. They will go
with the dollar, and the only depreciation that the Uniwd States is
likely to achieve is relative to countries like Germany and the German
currency area and the yen. But that implies that to achieve a given
improvement in the trade balance through depreciation, the depreciation will have to be much larger. It only acts on a small segment or half
the segment of goods that the United States produces, and it only acts
25-273 0 • 78 • 4

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with respect to very few trading partners. And I think that accounts
in part for the large depreciation that we have observed; that you
have to change a lot relative to the mark to get a given improvement in
the U.S. real trade position.
The last point concerns the role of the exchange rate in respect to
financial markets-and I think that ties in with monetary behavior.
1Ve read now in the press that when the dollar depreciates, interest
rates rise because people anticipate that the Federal Reserve may
tighten monetary policy to prevent further depreciation. Well, if that
is correct. then, in fact, exchange rate targets will become much more
important in financial markets. Any time any disturbance works in the
exchange market, that would be interpreted as a sign for monetary
action and will go into interest rates. This is at present not the case, but
I can see with the exchange-rate-oriented monetary policy that this
might become a very fast and disturbing mechanism.
I come from here to the question of whether the United States should
use monetary policy to stabilize the dollar. And I have argued before
that we should have easier monetary policy to accommodate the growth
in investment, and from that perspective I don't see an advantage in
using monetary policy to stabilize the dollar.
In order to prevent the depreciation, we can ask, what would have
to happen to monetary policy. I think a year ago we would have argued
that a small increase in interest rates, 25 or 30 basis points, would
already produce an effect on the exchange rate and genemte some appreciation of the dollar owr 2 or 3 months. So a year ago we would
have argued, with modest interest increases, we can in fact stabilize
the dollar and save a lot of trouble. I don't think that is true anymore.
The dollar now is overwhelmingly dominated by expectations, not by
interest differentials, and I believe that it would. take considerably
more in terms of monetary policy to reverse the depreciation.
What people would want to see is an actual decline in the inflation
rate, and second, an improvement in the trade balance. To generate
that through monetary policy we would have to have a very sharp
slowdown if not actually a decline in economic activity. To improve
the trade balance through a depression you have to have a lot of
depression be.cause the trade sector is so small relative to the whole
economy.
I can't see that such a policy is in the U.S. interest, and so-both
because it would take actually a recession and, perhaps even importantly, because monetary policy should be expansionary for the purposes of investment and the stock market, I think that it would be
exactly the wrong policy assignment.
It hits been argued that the stabilization of the dollar is important
for U.S. economic activity because the present disruption of European
competitiveness will mean that their incomes decline and they will
import less from the United States. I think thnt is it fallacy, because
the only reason that their economic activity declines is because the
United States sells more abroad. It is true that as their incomes decline. that the U.S. benefits are red11ced; but it would not reverse them.
So that certainly should not he of worry to us.
I would argue, too. that declining U.S. economic activity could not
benefit most of the world becausC' LDC's that have a level of economic
activity constrained by their export earnings would have to contract

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along with the United States, and in the end, that can't be of interest
to the Europeans, either. In Europe the strategy has been to keep up
GNP through export growth. Once their exports decline because of
the U.S. decline in economic activity, engineered solely to restore the
dollar, there would be an increased recession abroad, and they would
ultimately have to expand through domestic policies, somethmg they
could very well do now.
So I conclude, then, that there is really no overwhelming U.S.
interest in stabilizing the dollar through dramatic monetary policy
moves, and I conclude, too, that I don't think minor monetary policy
moves would contribute much.
I want to address the last question of whether the United States
should intervene on the foreign exchange market. I separate that from
monetary policy. I take it that intervention might be more decorative
and might not be seriously matched on the domestic front by monetary
and interest rate implications.
The question of intervention is, of course, important because foreign official holders last year accumulated in excess of $30 billion in
the course of stabilizing the exchange rates. The concept of exchange
market intervention has been to prevent disorderly conditions and, of
course. it is hard to see how a group of central bankers in a year can
buy $30 billion that way. On average, they should not be buying any.
I take it then, that there was considerable fighting of trends, and
I would argue that that may well account for a considerable part of
the uncertainty that exists in foreign exchange markets now. It is
quite clear that traders do not know whether or not the Federal
Reserve will intervene, whether they will intervene after European
hours close, or whether Germany and the United States will pass an
agreement on how to share the losses of intervention.
I think the question of intervention now has created additional
uncertainty in the foreign exchange market. I am not familiar with
any evidence that on average intervention has smoothed exchange
rates in a beneficial way and in a way that has created certainty; in
fact, I am aware of the school of tliought that says intervention is
designed to create uncertainty in order to reduce speculation. But I
find it terribly worrying, if that is the conception that presided over
U.S. intervention policy.
I want to conclude that the best policy toward the dollar is a policy
of continued expansion with a very close watch to prevent accelerating inflation in the United States. The expansion should certainly
not have tight money as part of it. For the rest, the dollar problem
will be solved, in part. through the real depreciation that has occurred
and that restores U.S. competitiveness, and in part it will have to be
cured through increased expansion abroad that is now in prospect as
:foreign countries like Germany realize that they stayed considerably
below their proposed targets during the last year.
Thank you.
[Mr. Dornbusch's prepared statement follows:]

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STATEMENT BY
Rudiger Dornbusch
Associate Professor of Economics

Massachusetts Institute of Technology

HEARINGS ON fflE CONDUCT OF MONETARY POLICY

Before the Conm,ittee on Banking, Finance and
Urban Affairs
U.S. House of Representatives

March 7, 1978

49
Increased volatility of exchange rates, the sharp appreciation of
the DM and related currencies, as well as outright moves by the Federal
Reserve to orient monetary policy toward external targets have raised once
more the policy dilemma about the appropriate use of monetary instruments in
the conflict between internal stability and external balance.

The Federal

Reserve' s move in January to motivate a discount rate increase by exchange
rate considerations as well as the continuing upward trend of interest rates
suggest that the external objective is taking a dominant place in policy
setting.

I should like to argue that concern with the book losses of

foreign central banks should not take precedence over the requirements
of continued expansion in the domestic economy.

To make that case I will

first review what I consider the priorities for U.S. policy and then
place exchange rate considerations in that perspective.

U.S. PRIORITIES

In the short term the U.S. has an overriding interest in two objectives:
First, the continued move toward full employment along with attempts at
resolution of structural unemployment and poverty problems.

Unemployment

of labor and capital remains high even by the standards of those who will
make substantial adjustments in the conventional unemployment and capacity
utilization figures.

Certainly, in the case of labor, a figure of 5 -

S½

percent is now a more appropriate indicator of full employment from a macroeconomic perspective than the 4% of the fifties and early sixties.

Needless

to say, reaching that level in the near future requires continued real growth

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50
in the 4½-5% range.

Once that target is approached, macroeconomic policies

should increasingly give way to structural policies to cope with the large
residual labor market problem.

Second, the concern for stabilization of

inflation at its present level or, with good fortune, a progressive
reduction of inflation.

I believe it important to qualify that the main

concern should be with the prevention of accelerating inflation, not with a
reduction in inflation.

The lessons of the last few years have forcefully

established the point that low aggregate demand is a very poor instrument
with which to attack the inflation problem.
In a slightly longer perspective two further policy concerns must be
added, namely growth of capacity and productivity and adjustment to shifts in
competitive advantage.

Growth of capacity and productivity are essential not

only because of their desirable impact in dampening inflation, but also, of
course, to enable absorption of the labor force and the rising trend of real
incomes that labor expects to receive.
Shifts in competitive advantage over the intermediate term will become
an important issue for policy because of the rapid progress that developing
countries have been making in areas that figure prominently in traditional

U.S. manufacturing production.

If the U.S. is to meet that challenge without

resort to increased pTotectionism we must either be prepared for a longrun
trade balance problem or else achieve flexibility in production patterns
toward higher technology products and continued technological leadership.

This, of course, presupposes a high-investment economy and a relatively
homogeneous, high-skill labor force and thus ties in with the shorter run

macroeconomic and labor market problems and the policies chosen to meet
them.

The reason this question deserves attention in the present context is

that trade balance problems are likely to persist beyond the immediate problems
posed by oil 'and the U.S. c~clical position relative to the rest of the world.

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51
THE POLICY MIX

The policy priorities and concerns, as I have outlined them, suggest

the need for continued expansion of aggregate demand above trend.

They also

suggest an increasing effort to shift the composition of aggregate demand
toward investment.

Fiscal policy should be used with a view to its impact

on inflation and investment rather than consumption.
On the side of ~iscal policy I do not see a risk of excessive

stimulus.

The accompanying table compares the consolidated government

budget deficit in relation to GNP.

By the standards of that comparison,

fiscal policy in 1977 was by no means out of line, nor is the proposed budget
for 1978.

In passing I note that the relevant fiscal measure both for

questions of economic activity and for the capital market is the consolidated
deficit

of the entire government sector and that accordingly the large

savings of state and local government must be credited against the federal
deficit.

Table 1

BUDGET DEFICIT *
(Billion 1972 $s)

GNP GAP
%

DEFICIT AS%
OF GNP*

1958

19.1

6.1

2.8

1971

19.0

3.4

1. 7

1975

50.3

9.5

4.2

1976

26.6

7.0

2.1

1977

14.4

5.6

1.1

*Consolidated

deficit of Federal, State and Local Governments in the National
Income Accounts.

Source:

Economic Report of the President, 1978.

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52
The particular make-up of fiscal policy measures is in my judgement
unfortunate in that it does not include sufficient measures that work directly
to reduce or dampen price increases.

Rather than distribute the fiscal

drag of increased output and inflation in the form of income tax cuts I
should prefer a policy of foregoing social security tax increases, a more
important use of revenues to reduce excise taxes and a strong concern for

the use of fiscal policy to raise the profitability of capital and investment.
Fiscal policy should start showing more attention to inflation and the
stock market.
The monetary-fiscal policy mix in the recovery has been strongly marked

by relatively tight money for the control of inflation and easy fiscal
policy to support aggregate demand.

The lack of synchronization has meant

that, on top of other uncertainties and impediments, stabilization policy has
affected the composition of aggregate demand in a manner adverse to capital
formation.

The problem is apparently compounded as monetary policy is now

used to keep up the dollar rather than the stock market.
should

Interest rates

be allowed to rise further and, indeed, a rollback is desirable.

The difference between a high investment economy and the present
conditions is brought out in Table 2 where we compare the period 1964-69 with
the recovery period 1975-77.
Table 2

Ratio of Market Value to
Replacement Cost of Assets

Rate of Return
on Equity

Share of Investment in GNP

1964-69

1.24

7.5

10.3

1975-77

0.79

5.9

9.4

Source:

Economic Report of the President, 1978.

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53
The striking fact is of course the sharply lower incentive to investment reflected in a reduced, inflation-adjusted, after tax return on net
assets and the decline in the stock market relative to the reproduction
cost of capital.
Once we accept the position that inflation control through aggregate
demand is too clumsy a policy we can go a step ahead and reshape the policy
mix,

Fiscal policy should help control inflation; monetary and fiscal policy

should look to investment and the stock market.

As economic slack declines,

a tightening of policies should be concentrated on the fiscal side, leaving
room for investment to expand.

In a more immediate perspective, an easier

monetary policy is required because the slowdown in the growth of monetary
aggregates, in particular M2 , in combination with rising interest rates I shows
the signs of disintermediation and foreshadows reduced activity in the
construction sector.

SOME FACTS ON THE DOLLAR EXCHANGE RATES

To place the role of exchange rates in the U.s. economy in perspective
I will start with a review of some facts.

The central fact is the continuing

depreciation of the dollar in terms of the DMark and, to a somewhat lesser

extent, in terms of the snake currencies.

There is, of course, also the

depreciation of the dollar in terms of the Yen,
exchange rate changes since 1973:

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Table 3 reports some of these

54
Table 3
(March 197 3•100)

DM/$

Notes:

YEN/$

EFFECTIVE $ RATE

92.8

102.2

98.5

91.2

101.5

87.6

110.9
113.3

88.9

112.1

108.9

81.8

101.0
107.2

107.3

88.3
73.3

91.7

101.3

99.9

103.2

A decline in the index measures a depreciation of the dollar. The
effective exchange rate is formed, using multilateral trade-weights
for the group of ten major industrialized countries.

~ • Board of Governors of the Federal Reserve.

While there is some arbitrariness in the choice of the base period
the table reflects nevertheless the continuing depreciation of the dollar
in terms of the DMark and the more recent depreciation in terms of the Yen.
More importantly, though, the table shows that these particular two exchange
rates vastly overstate the depreciation of the dollar.

Once an adjustment

is made for the place of various countries in world trade the effective

exchange rate in the last column shows a considerably smaller depreciation.
The first point to recognize then is that we should not impute too much
importance or effects to the course of the DMark and the Yen exchange rates.
These rates do matter because they influence our competitiveness compared
to Germany and Japan in world markets and at home but they do not give
sufficient importance to the patterns of U.S. trade.

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55
The geographical pattern of U.S. trade summarized in Table 4 shows
the importance of Canada and LDC' s to be considerably larger than that of
Japan and Germany or even all of Western Europe.

Since Canada and LDC' s

have certainly not shared the appreciation of the European currencies, a more

comprehensive effective exchange rate index would show an even smaller external. depreciation of the dollar.

Table 4
SELECTED SHARES IN U.S. TRADE: 1977

U.S. Exports (%)

U.S. Imports (%)

Western Europe

29.0

18.4

Canada

23.3

19.6

Japan

8.6

12.2

OPEC

10.7

24.2

Developing Countries

23.1

Economic Report of the President, 1978

More importantly the exchange rate data, even adjusted for trade
patterns, do not make allowance for differential inflation.

To arrive at an

indicator of changes in competitiveness we have to turn to real exchange rates
or effective exchange rates adjusted for divergent price movements.

Real

exchange rate indices, adjusted for divergent movements in wholesale prices,

are reported in Table 5.

The table brings out quite strongly the fact that

U.S. competitiveness has not nearly changed as much as the movements in nominal
rates might suggest.

Indeed it is only the depreciation of the last half

year that has had an important effect on competitiveness.

Again,. the index

overstates the effective depreciation to the extent that it deemphasizes the

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56
role in U.S. trade of Canada and the LDC's who have moved with the dollar
if not depreciated relative to the U.S.

Table 5
REAL EXCHANGE RATE CHANGES: 1973-78
(March 1973=100)

U.S.

GERMANY

JAPAN

CANADA

1973

98.3

103.9

99.1

101.6

1974

97 .2

102.0

99.2

105.9

1975

98.6

105.2

92.0

100.3

1976

102.9

108.0

96.6

107 .1

1977

100.3

108.1

101.4

99.0

73-77

99.2

105.4

97 .4

102.9

Feb 78e

95.8

106.6

103.1

93.8

Notes:

Exchange rates adjusted for changes in wholesale prices. e=estimated.
The indices are trade-weighted multilateral measures using the group
of the ten major industrialized countries. A decline in an index
indicates a gain in competitiveness.

~•

"Price Adjusted Exchange Rate Indexes," Board of Governors of the
Federal Reserve, Feb 1978.
Having placed in perspective the depreciation of the dollar I turn next

to the question of volatility.

There is no doubt that there have been large

shortrun movements in exchange rates compared to their trend.

But, as Charts

1 and 2 show, that volatility has been less in 1977 than it was, for example,
in the early period of floating.

Indeed, taking as a measure of the trend a

six-month centered moving average we find that for the entire 1973-77 period
over seventy percent of the movement in exchange rates is explained by their
trend.

This suggests the difficult problem posed for intervention in "disorderly

markets" since the trend element accounts for so much of the exchange rate

movement.

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57
CHART 1

nm DOLLAR-OM RATE 1973/74

$/DM

CHART 2

THE DOLLAR DM RATE 1976/77

~ .10i:1:7

I\
.. ..
J. ••,\.• •••••~ ••••• ••',)--;..;

...

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... -· .

\/r v-

\.,
moving average

weekly rat

58
The last point I wish to make here concerns a non-fact.

over the course

of the last half year one widespread explanation for the dollar depreciation has
been excessive U.S. monetary growth.

The implicit comparison was with Germany.

Table 6 shows without question that in fact monetary growth in the U.S·. was as low
lower than it was in Germany throughout 1977 and particularly in the recent
period of accelerating depreciation. A simple monetarist" explanation for the
depreciation is therefore inappropriate.
Table 6
MONETARY GROWTII

(percent per year, seasonally adjusted)

U.S.

GERMANY

8.3
8.9

1977
1977/IV

9.4

6.6

10.s

13.2

7.0

7.6

Federal Reserve Bank of St. Louis and Deutsche Bundesbank.

I would also reject the notion that the large change in the dollar/DM
rate--15% since late 1976--reflects primarily divergences in actual or prospective
inflation.

The actual differential in inflation performance has only been two

to three percent over the last year.

Furthermore there is little reason to

anticipate either a significant success in Germany at further reducing inflation
or a severe worsening of the inflation outlook in the U.S.

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59
THE ROLE OF THE EXCHANGE RATE IN THE ECONOMY

To decide whether to use intervention,monetary policy or neither to
arrest the depreciation of the dollar it is helpful to identify the channels
through which exchange rate movements affect domestic policy objectives.
would single out three major channels:

Exchange rate effects on the price

level, the implications of exchange rate movements for competitiveness and
hence aggregate demand for U.S. goods and services and, lastly, a spill-over
from exchange rate changes to financial markets.
Depreciation of the exchange rate, given world prices, will raise U.S.
prices of imports and exports.

For some goods, in particular raw materials and

agricultural products, the !!XChange rate movement is quite fully passed through
and thus cannot avoid raising wholesale prices and consumer prices.

For other

commodities, the price effects are less pronounced in the shortrun, in part
because U.S. prices respond only gradually and partly to an increase in the dollar
prices of competitors.

For oil, which deserves special attention here, the

experience is mixed but we would expect a sustained, large depreciation to lead
to some increase in the dollar price of oil.

The net effect then of a depreciation

on the price level is hard to nail down very precisely.

Estimates that are

available would suggE1st a cumulative effect on consumer prices of a ten
percent depreciation to be of the order of one to two percent and taking well
over a year to materialize.
It is important to qualify the inflationary effects of depreciation in
respect to price behavior in the rest of the world.

If the depreciation merely

reflects divergent rates of inflation so that the dollar depreciates say at the
rate of 3% per year because our inflation rate exceeds that in the rest of the

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60
world by that amount, there is no further and additional inflationary
impact.· To some extent the dollar depreciation has reflected these divergent
inflation trends and accordingly we should adjust downward the inflationary
impact that we assign to observed depreciation.
I should also emphasize the strong difference in the inflationary
implications of exchange rate movements between the U.S. and countries like the
U.K., Switzerland and Germany.

These countries are considerably more open and

for that reason the price effects of exchange rates are more direct and pronounced.
It is of course in good measure for this reason that these countries were able
to reduce their inflation rates with the help of currency appreciation.
Exchange rate movements, to the extent that they are not fully offset
by compensating price sdjustments by domestic inflation or- foreign cuts in
profit margins, change relative prices and thus competitiveness.

Table S above

showed that the U.S. had achieved by February 1978 some gain in competitiveness.
The implications of that gain in competitiveness for the trade balance are,
however, limited for two reasons.

The first is that only manufactured goods

and perhaps industrial supplies fall into the group of goods where compensating
price effects are minor and thus the gains in competitiveness are important.
These groups, however, comprise only SO to 65% of U.S. trade.

In addition,

and perhaps more importantly, the dollar has not depreciated in real terms

compared to a large part of U.S. markets and competitors including Canada
and many LDC's.

These considerations provide, therefore, some bounds on the

demand-creating effects of a depreciation and the prospect of a major trade

balance improvement from this source.
Within limits then, a real depreciation acts in the manner of expansionary
monetary or fiscal po'licy.

It shares with these policies the expansionary

effects on demand, although the extent and timing of the effects is a matter of
conjecture rather than extensive experience.

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Unlike monetary or fiscal policy,

61
a depreciation has the undesirable side effect of a direct impact on inflation,
independent of aggregate demand. A very significant point of differeitce
arises because a real depreciation causes a shift in world demand toward our
goods but not an expansion· in world demand.

Such a policy is appropriate

when various countries are in different stages of the business cycle, not when
there is slack around the world.

In the present circumstances the only merit

of a depreciation would be that of a strategy forcing other countries to
substitute domestic expansion for a loss of net exports.
A final and important place of the exchange rate is in relation to
financial markets.

Such a channel is emerging in the U.S. at present because

financial markets see monetary policy being tied to exchange rate targets.
A depreciation of the dollar leads financial markets to expect a tightening of

monetary policy and thus increasing interest rates. 1

The expectation of rising

interest rates feeds into current rates and thus exerts adverse effects on

aggregate demand.

SHOULD MONETARY POLICY BE USED TO STABILIZE THE DOLLAR?

I have argued above that the exchange rate occupies an important place
in a macroeconomic perspective.

The question to be raised next is whether

monetary policy can and should be used to stabilize the dollar.

Such a direction

of policies is already showing in Federal Reserve actions and it is a demand
widely supported in the appreciating countries.

In these countries it is

argued that the dollar depreciation is starting to disrupt economic activity
and that it is in the U.S. interest to avoid such disruption because it cannot
1 see for example the New York Times, March 2, 1978, main financial page.

25-273 0 • 78
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• 5

62
fail to adversely affect U.S. exports.

This is, of course, incorrect because

the only way their economies can be disrupted is for the U.S. to gain in
trade at their expense.

Any secondary effects from their reduced income

levels--assuming no compensating domestic expansion--can only dampen but

not reverse the U.S. gains.

I take it then that the main case for a U.S. monetary policy to stabilize
the dollar must be to prevent the gains in U.S. competitiveness and the
domestic inflationary effects of depreciation,
to

reverse

doses.

To stabilize the dollar or

some of the depreciation monetary policy might be used in small

An increase in short term interest rates of 25 basis points might

create a sufficient interest differential to reverse capital flows to finance

the trade deficit and stabilize the dollar.

Such an effect can readily be

observed until early 1977, as shown in Chart 3 where the exchange rate is shown
to be influenced by the interest differential.

It is quite apparent, though,

that since early 1977 the exchange rate has come to be dominated by expectations
and that the dollar has continued depreciating even in the face of a rising
differential.
The conclusion then must be that to reverse the trend of a depreciating

exchange rate, monetary policy would have to be used in a much more dramatic
manner to attack the more basic factors such as the current account deficit
and inflationary expectations.

There is no doubt that to reduce substantially

the trade deficit monetary policy would have to create a major slowdown, if not
a contraction, in economic activity.

The same applies to the prospect of

reducing inflation through tight money.

I cannot see any good reason to attach

so much importance to exchange rate targets, all the more so since the real
,depreciation that has occurred does serve• to narrow the deficit.

A policy of

tight money would run directly counter to the needs of continued expansion and
a policy mix that favors investment.

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From a point of view of domestic objectives

63
it would be a first-rate mistake.

Even from a world point of view I cannot

see a merit since it would slow down worldwide economic activity and place·
increasing distress on many LDC' s and small industrialized countries whose
level of economic activity depends on their export earnings,

Without an

active use of monetary policy to stabilize the dollar where can we expect the
exchange rate to go?

The main determinant, given a U,S, conunitment to continuing

expansion without accelerating inflation, will be economic recovery abroad.
With world demand more nearly at full employment there will be a significant
reduction in the U.S. current account deficit and hence a reduced requirement
for a real depreciation.

Even at full employment, though, there is the need

CHART 3
THE DOLLAR EXCHANGE RATE AIID INTEREST RATCS:1974-77
Dl!/$

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64
for a real depreciation to offset reduced competitiveness stemming from the
oil price increase and growing competition from developing countries.
To achieve such a real depreciation the dollar has to depreciate significantly
relative to the DMark block and the Yen because those are the only currencies
relative to which a real devaluation can effectively be achieved.

Moreover,

since as I have argued above, the real depreciation will be effective only
for a small subset of the U.S. product range, the depreciation has to be
commensurately larger to achieve a given improvement in the trade balance.

take these considerations to be the main explanation for the sizeable
depreciation of the dollar and accordingly do not see at present a substantially
undervalued dollar.

INTERVENTION IN "DISORDERLY MARKETS"

The principle

of intervention in "disorderly markets" is shared among

central bankers and has been practiced on a massive scale during the last
year. Official accumulation of dollar balances in the last year have been
upward of $30 billion.

A large part of these assets were acquired by the U.K.

and Japan and Germany in an effort to stem the appreciation of their currencies

that

has since materialized.

They would thus hardly qualify as stabilizing

speculation on short term exchange rate movements.

The Federal Reserve

has also intervened, although on a much smaller scale.

Against this background

we are faced with a proposal that the U.S. float a major foreign currency loan

to accumulate a pool of foreign exchange assets with which to engage in massive
exchange stabilization.
I see· very little merit in such a proposal and would argue strongly that

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65
the Fed should stop altogether intervention in the foreign exchange market.
If foreign countries insist on stabilizing the dollar in order to prevent
increased U.S. competitiveness then it surely should not fall to the U.S. to
share in their capital losses.

That would amount to a U.S.-financed foreign

employment program which I consider a poor use of our fiscal resources.
A separate and more important objection to intervention is the overwhelming difficulty in telling trend movements from erratic, reversibl"e
disturbances.

I am not aware of any evidence in support of the view that

intervention has in fact --and on average--smoothed exchange rates relative to
their trends and thus created an atmosphere of increased certainty.

On the

contrary, one view of the role of intervention that has been advanced is that
"such intervention does nothing to solve the fundamental problems but it can
help to create individual uncertainty as to where and when the central banks
might intervene, thereby discouraging speculation against the dollar and
helping to maintain orderly trading conditions. ,.l

The implicit distinction

between orderly traders and speculators has no sound foundation in economics
and such a concept of the role of intervention would meet with strong
professional disagreement.

Nevertheless I believe that intervention may

well have actually worked to increase uncertainty and this all the more so in
view of the disagreement about the proper sharing of the burden and losses of

intervention.

I would therefore argue strongly that the Federal Reserve shouid

desist from all and any kind of intervention.

The best policy toward the dollar is to set a clear target of continued
domestic expansion with assurance that inflation will not accelerate.

Along

that path monetary policy should provide for increased investment and growth
in capacity and productivity.

If such a policy should imply continuing depre-

ciation than I cannot see any overriding consideration that should make us prefer
a stable, overvalued dollar.
1 statement by Tilford Gaines, Senior Vice President and Economist, Manufacturers
Hanover Trust Co., before the Subcommittee on International Finance, U• S • Senate,
February 6, 1978,

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66
The CHAIRMAN. Thank you, Professor Dornbusch and gentlemen.
All three of you in your statements appear to subscribe to the view
that we would be much better off with unemployment-attacking programs that were, so to speak, microeconomic, that were aimed at structural unemployment, rather than to place the emphasis that we are
apparently doing on overall macroeconomic methods of getting unemployment down.
Have I misinterpreted anybody?
Mr. KLEIN. I think it is not an all-or-none proposition; simply that
we should work on them.
I think the present tendency is to emphasize the macro, demand-side
stimulus. I would argue that that must be mixed. There must be some
of that, but there must be a much larger introduction of the structural
policies.
The CHAIRMAN. Would Mr. Jordan and Mr. Dornbusch generally
agree with that?
Mr. DORNBUSCH. Yes; I would agree with that argument, that once
we come to a 5½ percent, policies should become almost entirely structural, and that it should start now so that we don't have to have this
large shift in policies.
Mr. JoRDAN. I would agree that the structural efforts should be begun
now, but I think that an approach of gradually reducing total growth
and total spending in inflation, as an antiunemployment program out
into the 1980's-and we are concerned about unemployment in 1980,
1981, and beyond as much as we are today-should also begin. Reducing the amount of inflation is consistent with achieving maintaining
a lower unemployment rate later. So these are not alternatives of using
macro stimulus to get it down or using structural; they are really complementary approaches, if you view it over a longer time horizon.
The CHAIRMAN. If I follow you, you are even more against macro
excesses than your two colleagues.
Mr. JORDAN. I am against short-run macro policies. I think lonl?:-run
macro policies are the only way to get the unemployment rate down
and keep it down.
Certainly we could have more stimulative shotgun-ty:ee approaches
to the whole economy in 1 year, but then we would have to reverse
later and lose the benefits.
The CHAIRMAN. Maybe I should not have used "macro" as if it were
working in just one way. I am talking about macroeconomic policies
of stimulus. And you would agree with your two colleagues that we
would be better off with macroeconomic policies currently of somewhat
less overall stimulus and instead rely more on structural policies which,
among other things, costs less per job produced.
Mr. JoRDAN. Right; I agree.
The CHAIRMAN. There is an apparent disagreement which I would
like to get at between Mr. Dornbusch and Mr. Klein. Mr. Klein has
said that tinkering around with domestic interest rates, making them
higher than they otherwise would be for sound domestic reasons, is a
good idea because of the international position of the dollar.
You said something like that, did you not?
Mr. KLEIN. I think I said that monetary policy options are very
restricted now because of the dolJar position, and I think it is very
important that we maintain the dollar. I would say that there is more

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danger in the dollar depreciation, that we have undergone already
than is revealed in the trade-weighted exchange rate change, because
OPEC nations don't buy heavy amounts in Canada and Mexico, and
they are indexing against areas where they buy goods. Those are the
areas where we have had very heavy dollar depreciation. And the
whole world activity complex would look very different if there were
major shifts in oil prices.
The CHAIRMAN. If it were not for international considerations, you
would welcome a relatively low schedule of interest rates in this
country for their beneficient effect on capital investment, on housing,
and similar activities. Would you not?
Mr. KLEIN. Again, that is an area where structual policies could
be introduced.
As an example, one could have interest rates subsidization in housing markets, very selective structural-type policies.
The CHAIRMAN. Well, in departing from your view, which I find
very congenial, on the effect of a reasonably low structure of interest
rates in this country for domestic reasons, let me turn to foreign considerations. Have vou taken into account the charts presented by
Mr. Dornbusch that show that in the last year or two there is really
not much connection between the U.S. level of interest rates and
short-term capital movements? Also have you taken in account what
seems to me to be a commonsense observation: That foreigners really
are quite wacky and get in and out of the dollar for reasons which can
best be described as zany? Should we do that which is by your own
admission wrong with our own economy, namely, have higher interest
rates than would otherwise be the case, in order to humor the nuttiness
of foreign lenders?
It would seem to me a risky course.
I would like to have you expatiate on that a bit.
Mr. KLEIN. You see, I believe the dollar would have been under
much greater pressure, given the really outside trade balance that we
have had, the deficit, and the current account deficit, were it not for
some favorable capital flows.
Now, the capital flows from abroad are subject to a number of considerations, political stability in America versus political stability
abroad. If the French elections turn sour later this month, there will
be some capital outflows. Many things are influencing the capital
flows. The dollar has held up reasonably well, I believe. And I would
not dispute the charts.
Nevertheless, I think we still have an option in keeping the dollar
from getting worse by keeping what capital flows we have already
coming and perhaps inducing more.
The possibility of direct investment, like the Volkswagen plant in
Pennsylvania, are numerous on the scene, and I think that they would
be very helpful in some of our external problems.
I think that the dynamics of a very rapidly falling exchange rate
are ill-understood a:µd a very dangerous thing to play around with.
The side effects, particularly the oil effects, are very serious. For that
reason, I think we have a very strong obligation in doing whatever
we can to maintain stability of the dollar.
The_ CHAIR~L~N. My skepticism d_erives, in part, from my own observation that m recent years, for mstance, the Federal Republic of

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Germany practically bought up the State of South Carolina at a time
when German exchange rates were a great deal higher than those
prevailing in South Carolina.
There are so many other factors that I would hate to give the new
Chairman of the Federal Reserve Board, who will be before us the
day after tomorrow, the idea that he is going to win brownie points
around here by raising interest rates so as to help the dollar.
We should continue with this.
Professor Dornbusch i
Mr. DORNBUSCH. I wonder if I could take up a couple of the points
Professor Klein has made.
I think there is no doubt that interest rates will do something for
the dollar. The question is whether they could sufficiently reverse
the trend.
First. with respect to oil, I think that the oil producers are quite
well indexed. The inflow into the United States for placement in the
United States has been less than one-third, so that means that the
remainder must be in other developed capital markets. I assume it is
in Switzerland and in Germany and in England. Those are the appreciating currencies.
Then, to some extent, we overestimate the losses to the oil producers.
Of course, they have been investing in dollar assets. They have been
losing money on those investments but they have money in other
currencies making gains.
·
But, more importantly if you look at the rlollar, you ask yourself,
"Is it going to depreciate once more by that much, or is it going to
come backi"
Well, a lot of people say it is very low now, and it may perhaps be
already undervalued. It is not a time when you start shifting your
assets into Swiss francs.
The further the dollar declines, the more the probability that it
will go back, and I think that the dollar now is at the point where we
would not expect large shifts of capital out of U.S. assets.
I would note, too, that for direct investment in the United States,
the current exchange rate together with the labor-cost developments in
the United States, make the United States an excellent place to invest
in, compared to Switzerland or Germany. It is a first-rate investment.
Last, on the question of the rapid decline, I agree that we know
very little about the effects. but I think thev are not terribly drnmatic
as we have seen in 1973-74, where we had very large swings in the
exchange rate on the order that we have seen in the last months.
The increased alarm now comes from people who have monev in
dollars, including central banks, and they are taking losses; not losses
in the real values, but book losses. And there is pressure for the
United States to share in that.
If that argument is correct, then it is very much overstated. I think
we should worry much more about the fact that the stock market is
so disastrously low than the dollar.
Finally, when we say we should use high interest rates to keep the
dollar up, of course. that rloesn't come without a tradeoff. If we have
high interest rates. we shift the mix of aggregate demand even more
adversely away from investment, and I think that is not a policy the
United States should follow, even from an international point of view,

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because we need the investment to restore competitiveness and exploit
the advantages that the real depreciation gives us. And I think we
need the productivitiy growth that comes from investment to reduce
inflation.
So, I don't really see a strong case to use high interest rates for the
dollar. For one, we don't even know how high they would have to be.
It may be we would have to create enough of a recession for foreigners
to believe that inflation in the United States would come down, but
I don't even then see that would bring in the capital flows.
So, I am very skeptical of the argument that increased U.S. interest
rates would be a safe way of stabilizing the dollar without having
major inconveniences on the domestic scene.
The CHAIRMAN. Let me ask Mr. Klein. A foreign mark or Swiss
franc or a yen invested in the stock market on Wall Street is quite as
good for our balance of payments, is it not, as an equivalent amount
of foreign currency invested in a U.S. Treasury bill or a fixed-interest
bond?
Mr. KLEIN. We want the capital flow. There may be a difference in
direct investment, because that creates jobs. But it doesn't really
matter.
The CHAIRMAN. You see, there is one trouble with raising interest
rates higher than God ordained they should be raised from the
domestic standpoint, and that is that you scare the hell out of the stock
market and more people leave it. As the stock market goes down, you
may lose more on people shying away from the stock market than you
gain from coupon clippers investing in fixed-income securities.
Mr. KLEIN. Well, none of us do very well in forecasting the stock
market, and if one were to believe the financial journalists these days,
the slide of the dollar is contributing to the slide of the market. It is
very difficult to say which is the causal factor in this situation.
The CHAIRMAN. All we do know is that the Dow Jones is lower than
it was 12 years ago, and enthusiasm is minimal.
Thank you all very much.
I will now turn to Congressman Henry Gonzalez.
Mr. GONZALEZ. Thank you, Mr. Chairman.
I have some questions for Mr. Dornbusch, because of my particular
role on this committee and on the subcommittee.
The aspect of intervention that you mentioned, where, if it is so
successful, you lose money, is it not true that we pay interest on the
borrowed marks, for example, and eventually buy them back in the
open market with deflated dollars, and even though the swap arrangements that do exist may take care of some of those losses, is it not true
that the losses nevertheless are fairly substantial? And do you have
any idea what those would be to the Federal Reserve in the last few
weeks or months?
I believe you mentioned $30 billion last year.
Mr. DoRNBUSCH. That was a comment on the accumulation by foreign holders.
Mr. GONZALEZ. Do you have any idea as to the extent of the losses
or the range of the losses?
Mr. DORNBUSCH. If I can come, first, to the institutional arrangements, it is true that most of the foreign official dollar holdings are
held in Treasury bills and therefore pay 6½ percent, which compen
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sates considerably the foreign holders for some of the dollar depreciation.
Now, on the losses, I have seen two sets of numbers, one set by Milton Freidman, that argue that there were consistently large losses on
the order of, I believe, $100 million a year. I find that is a large number, but that is in a Newsweek column, I believe.
I think Gov. Henry C. Wallich of the Federal Reserve Board testified before the Senate 2 weeks ago that the gains were $25 million
last year. Those are the only two sets of numbers I have seen, and
I really have no idea what the order of magnitude is.
Mr. GONZALEZ. I did not get that last figure.
Mr. DORNBUSCH. $25 million.
So, one says they were large losses, and the other says last year
there was a gain, but I am not aware of what, in fact, the figures are
or how they are made.
Mr. JORDAN. If I may comment, I believe the Federal Reserve reported an exchange loss due to exchange transactions of $145 million
in 1977.
Mr. GONZALEZ. In 1977. But you don't have any idea about what
it would be, say~ the last 6 months?
Mr. JoRDAN. Well, the majority of their losses for last year would
have occurred in the latter part of last year. Under a swap arrangement, the United States and the foreign partner share the exchange
loss 50-50. Consequently, the amount of the loss in recent weeks, for
instance, or since they announced the massive intervention potential
beginning January 4, would depend upon how much of the intervention was conducted by us and by them. To the extent that it was
conducted by foreign central banks, there is no exchange loss to the
United States. To the extent that it was done by the Federal Reserve,
the swaps eventually have to be reversed; and if we have to buy back
the foreign currencies at a higher rate, then that loss will be shared.
Mr. GONZALEZ. One other question, more practical and more bothersome because of its immediate implications. I have had letters from
some of our service families stationed in Germany, for example, and
apparently they are suffering a lot more than the people back home
realize because of the loss of the value of the dollar and because most
are living on the economy in Germany.
What, if anything, can we do to rectify that? Now, I know we have
maintenance of value with the international monetary institutions,
but what about our own citizens, hapless citizens, that live in these
countries and are really suffering?
The letters I get are disturbing, and very little is being said about
that, if anything. Do you have any ideas or comments? What could
we do from the legislative standpoint to try to tide over these families?
Mr. DORNBUSCH. I take it you want to adjust for local prices, as yon
do with U.S. civil servants abroad?
Mr. GONZALEZ. Do you know of any policy that our Governmentand this would be an administrative matter, I am sure, probably concentrated in the Defense Department. But do you have any information as to the detrimental aspect of the depreciation?
Mr. KLEIN. One simple device, of course, would be to pay them in
local currency, estimated to give some level of living. It would cost
the U.S. Government more, but it would address their problem.

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I think other American institutions that function abroad, certainly
in scientific research centers abroad, follow a policy of no loss, no
gain. An American traveling abr<?act shall ~e protected from loss of
real income, either by local mfiation or unfavorable exchange rates.
And those kmds of tlungs can be calculated.
This is a difficult calculation, and it has to be revised fairly frequently, but a fairly simple policy in the c3:se of the military pert:ionnel would be to pay an eqmvalent amount m local currency.
Mr. DoRNBUSCH. I take it the State Department uses exactly t~e
arrangement that Mr. Klein outlined, and they have the indexes available, so if they wanted seriously to do that, I don't see much of a technical problem. You have a chart for all cities of the worl~, and Y<?U
find the total, and you compensate by a commensurate mcrease m
dollar payments.
.
_
Mr. GoNZALEZ. The State Department does do that, you say, with
respect to its employees i
Mr. DORNBUSCH. Certainly. AID does it. I am sure the State Department must do it.
Mr. GONZALEZ. Well, I am glad to hear that, because that must be
a recent development. I know, in reading Robert Murphy's memoirs,
he referred to the fact that they were underpaid, and when this kind
of situation was confronted, they made up in their pay for the losses.
So, I am glad to hear that, and it would be, then, I think, appropriate
to find out if the Defense Department has or should enact such a
policy.
There is just one final question, particularly to Mr. Jordan, because
you make reference to these two base years, 1972-73. Why is it that I
don't seem to see any reference-well, in anything I have seen from
economists-to the inflationary growth or spurt in 1973 to the rather
bad or defective sta,bilization, Economic Stabilization Act, and its
administration and its controls and its removal. The first part of 1973,
remember phase 3½, if I remember correctly, that is when we had
a tremendous, sudden, and quick increase on our price levels. And also,
I have seen very little reference to the inflationary phenomenon because, first, of the devaluations in 1971 and 1972, and then the rather
imprudent removal as well as the imposition of the stabilization program. I find no reference to that. Everybody that mentions the causes
or anything talks about the velocity of money or currency in the
market and expansionary policies of the Government, but nobody has
~pecifically referred to these two things as prime factors. And yet,
1t seems to me that, remembering that period, that cause and effect
seem to be clear.
Now, I am just a layman, and I am wondering if I am in error
and just haven't read enough, or whether there is, indeed, such an
absence.
_ Mr: JORDAN. I think you have to distinguish between an ongoing
mflationary process and a change in reported transactions prices and
what that does to the price indexes.
Monetary growth in 1972 was very rapid. The price indexes under
the phase 2 control program indicated an inflation rate of slightly less
than 3 percent, something that very few economists believed was real.
It was_ be~ause, in a se~se, the control program effectively controlled
the pnce mdexes. It did not necessarily effectively control inflation.

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to occur in the economy. They were most visible in the foreign and
in the agricultural sectors.
You remember the stories about the drowning of baby chicks and
the slaughtering of calves, and so on, followed by the lapse of the
control programs going into phase 3 and phase 3½, and so on. The
breakdown was the inevitable consequence of the pressures that were
being built up by monetary stimulus in an environment of controls.
The controls might have worked under phases 1 and 2, if monetary
stimulus had not become excessive in 1972.
But that is a problem with controls. You may get a relaxation of
the diligence of monetary authorities in pursuing their primary objective of price stability. I think that is what happened in 1972. The
controls had to break down. The price indexes, in a sense, played
catch-up, they jumped up to where they otherwise would have been
anyway if they had not been held down artificially in 1972. So, you
saw an acceleration in the reported rate of inflation to get up to
the higher level of prices.
That was warranted by underlying conditions. Then, late in 1973,
you had the sudden, sharp increase in oil prices, which sharply raised
energy prices relative to all other prices. Because of the weighting
given to energy in the price index, as you moved into 1974, a reported
:further acceleration in the rate of inflation occurred, raising the indexes to the higher level of prices associated with more expensive
energy.
Mr. GoNZALEz. But had you not had the quadrupling in oil prices,
would you not have had the cumulative effect, anyway, of that clumsy
removal?
Mr. JoRDAN. In 1973-:for most of 1973, I agree. But I think that
the further acceleration of inflation in 1974 would not have been nearly
so severe, or it might have subsided in 1974---as was generally expected
ot the time. Late in 1973, there was a general forecast of declining
inflation, and declining interest rates in 1974, and the bond markets
actually rallied briefly; the stock market rallied on the expectation
of lower inflation and lower interest rates.
It turned out to be wrong, because people were misreading the
effects of the oil price increase. And so we had to go through a very
difficult, unpleasant period in 1974.
All of that was a very, very high price to pay to correct some
imbalances that had been built up in the economy.
Mr. DORNBUSCH. I would like to agree with Mr. Jordan on the
monetary expansion in the early seventies, as the cause for the price
increase once the controls were relaxed.
It is a textbook example for monefarism, unlike the remaining part
of the seventies. You mentioned the depreciation as one of the causes.
I think the early seventies were a period of worldwide inflation, and
the United States was by no means out of line with the rest-although,
of course, the depreciation may have contributed to it.
And, finally, I agree entirely, too, th~t the timing of the price increases-as opposed to the average level over 1971 to 1974---was affected by the controls, but not the cumulative increase in the level o:f
prices.
Mr. GONZALEZ. Thank you, very much.

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The CHAIRMAN. Thank you.
Mr. Steers?
Mr. STEERS. I would like to address my question to any one, or all
three, o:f you. It relates to the continuing pile up o:f OPEC dollars,
both those that have already accumulated, and those which I presume
will continue to accumulate.
Is there, in your opinion, the likelihood that this pile up will :force
:further devaluation o:f the dollar-possibly by non-OPEC nations
who :fear :further devaluation, and want to get out before it is too
late?
Mr. KLEIN. Well, in the past there have been some runs on currencies that have been thought to be related to OPEC shifting o:f :funds.
I think, particularly, when sterling was under pressure, about a year
and a half ago or so, it was thought to be Nigerian :funds being withdrawn :from sterling balances on a massive scale.
Something like that could very well happen. I think the principal
issue is to make investments in the non-OPEC world attractive to this
large overhang, and particularly to make our own investment attractive.
Second, there is a big possibility o:f increasing our exports. Exports
have been very good, in terms o:f magnitude, to OPEC nations. Their
ability to absorb imports has been bigger than a lot o:f people thought
at the beginning o:f this whole episode, and larger sales to OPEC
as well as larger attraction o:f capital investment are probably the only
way we have to deal with this situation.
But, there will always be a certain overhanging potential :for speculative runs.
Mr. STEERS. Well, you say an "overhanging potential"; do you really
believe that it will continue to just "overhang"? Or, won't there be a
:further erosion of the dollar?
Mr. KLEIN. Well, I think not necessarily a steady erosion, but I
think the real danger is that there could be very sudden shifts. You
have to assume, in a situation like this, that a great deal o:f the OPEC
money will be shifted on political grounds, and not on the basis of the
underlying situation.
I think that really is the biggest danger in this situation.
Mr. STEERS. Mr. Jordan?
Mr. .JoRDAN. I find it useful to look at what happened to the oil
prices and the stocks o:f dollar-denominated assets acquired by the
OPEC countries in the :following way. Prior to October of 1973, the
prices of a barrel o:f oil and a bag of wheat on world markets were
roughly the same. One barrel of oil equaled one bag o:f wheat.
The OPEC countries said: We are going to change the terms of
trade. From now on, one barrel o:f oil is going to equal four bags of
wheat, or equivalent commodities, but we only want two o:f them now,
in the form of increased exports :from us to them-their importsand they wanted claims to the other two bags in the :future. That is
represented by their acquisition of dollar-denominated assets of one
:form of another-equities, land, hotels, or bonds.
Over the period since 1973 they have increased their current exports :from us, but also we've increased our current exports of their
output-oil-and we continue to give them claims to our future
output.

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That means that we haven't really, as a Nation, fully paid the price
0£ the oil price increase, yet. The wealth transfer from us to the oil
exporting countries has not really been paid, in the sense of reduced
standards 0£ living of the American consumers. Real output growth
in the future is going to have to be faster to meet the higher export
demand that their portfolio represents, or our standards of livingwhat the American consumer's 0r worker's income will buy-are going
to go down.
He is going to feel like he is working harder, producing more, but
not enjoying the fruits of his labor-unless we increase our investment and our ability to expand output to meet that increased demand
£or output.
Mr. Sn:ERS. Well, do you really see any prospect for the dollar not
to decline further, in view of what you have just said i
Mr. ,foRDAN. I think it has probably declined too much-I think
the dollar is currently undervalued. That is an opinion.
Professor Klein, I agree with your statement about the shifts, for
political reasons or whatever. I think what is happening to our equity
market, the stock market in this country and the dollar in foreign
exchange markets, are exactly the same; that there is a deterioration
in confidence about the prospects for investing in real long-lived
assets in America; that the after-tax, after-inflation returns are
perceived to have gone down. And, once that process stops and people
either stabilize in that expectation or start to revise up their expectation of returns from investing in this country, then both our equity
market will improve and the dollar will improve relative to other
countries.
But that will only happen once the perception, or the fears of
inflation in the future, stabilize or maybe improve.
Mr. STF.ERS. Mr. Dornbusch, will you pull your microphone to about
3 inches from your mouth-not a foot~ Because I haven't heard much
of what you have said, to be honest with you.
Mr. DoRNBuscu. ,vell, I disag-ree slightly with the prospects for
the return on capital in the U.S. economv. Because, for an asset
holder, of course, one wonk!. have to ask: ,Vhat else could she hold i
And yon don't really want to think of French stocks, or of British
stocks. The prospects in those economies-both economic and political-are much less promising than in the U.S. economy.
I think what is happening in the foreign exchange market is that
speculation has turned short term. Yon cannot really go after fundamentals if von are not certain that, in the next 1 to 4 months there
isn't a further depreciation that may offset the real g-ains that you
expect on trends that are very modest compared to what can happen
in the exchange market.
So I think, for that reason, it is true that we have to create an
atmosphere of more stability in setting out more clearly what the
pattern of the U.S. continued recovery would be. But I don't think
it is true that the U.S. assets have a lower expected return than those
in the rest of the world.
I think if we can get the stock market up, then we will have the
capital inflows.
Mr. STEERS. Thank vou, Mr. Chairman. That is all I have.
The CHAIRMAN. Thank you, Mr. Steers.

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Mr. Vento?
Mr. VENTO. Thank you, Mr. Chairman.
I enjoyed reading and listening to the comments today, and I hope
that we can have a better understanding, and be ready to question
thoroughly the new Chairman of the Federal Reserve Board.
One of the problems has been that last year, exclusive of OPEC,
we had a 22-percent increase in foreign trade. ·what is the impact of
that increase on devaluation?
Mr. KLEIN. Do you mean the increase in our imports?
Mr. VENTO. That is right.
Mr. KLEIN. Well, it is certainly the case that the big deficit on the
current account, and the big deficit on the merchandise account, have
been instrumental in pushing the dollar down.
It is a complicated process. There are other factors-inflation rates,
and growth rates, and interest rates, on a relative basis-but if we had
not had the OPEC increase-you can't subtract the whole $45 million-but I suppose if it can be said that, at old oil prices of 1973,
which is wishful thinking, we would have been-other things unchang-ed-close to balance.
Under that situation, I think the trade accounts would not have been
responsible for the kind of dollar depreciation we have. That is an
unreal situation because, if you did not have those oil prices, you would
have a lot of other things changing at the same time.
Mr. VENTO. What you are saying, I think, Professor Klein, is that
we should not try to leverage our changes in terms of devaluation,
solely out of the 22 percent increase in imports?
Mr. KLEIN. No. Because we had good exports.
Mr. VENTO. I think most of us probably agree with that, but it is a
sianificant rise as compared to what we have exclusive of OPEC,
which is sort of painted as being the only problem. And I guess that
it is not.
What is the likelihood of the ,Japanese, or the Western EuropeansWest Germany, specifically-increasing their gross national product,
or productivity this year, so that they become consuming? Isn't it,
in essence, a real problem?
What is going to happen? "What is the scenario going to be this next
year? If we read the statistics, it hasn't been good. Historically, they
have made some promises this year. "What can we realistically expect?
"What do you expect in terms of models that you might be developing
for this year ?
·
Mr. KLEIN. Well, as I implied in my statement, world trade growth,
and world production growth, were on the low side in 1977. They were
below beginning-of-the-year expectations, and certainly below the
pronouncements at the London summit of May of the major nations.
The _prospects for the coming year, in my opinion, are somewhat
better. That is to say, the growth in world tra<le oug-ht to be somewhat
larger in percentage terms in 1978 than in 1977. And, the growth rate
in some countries that had restrained or difficult problems last year,
will probably be somewhat better.
Evervbody in the forecasting fraternity has been pushing very hard
for higher growth rates in Germany and ,Japan. I would continue to
argue along those lines, but I think the most sensible policy is to have
a concerted reflationary movement among five or six other countries,

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in addition to Germany and Japan. I would consider the low countries, United Kingdom, Canada, Australia, as possible candidates helping to stimulate the world economy and obtain somewhat better growth
among those larger nations.
We will certainly help our exports a little, and make a small contribution to our trade position. However, the best hoped :for prospects
for next year don't put us in trade balance.
Mr. VENTO. Mr. Dornbusch 1
Mr. DORNBUSCH. I would like to add some remarks. I agree broadly
with what Professor Klein has said. I think one o:f the problems :for
our trade prospects comes :from the :fact that the stimulation in countries like Germany and Japan is mainly public-sector construction that
has very little direct impact on U.S. exports.
There will be induced spending that would benefit us, but that really
means that-Mr. VENTO. It is well insulated, I guess.
Mr. DORNBUSCH. Quite well insulated directly, and one assumes administratively, so that is the first qualification that the effect on U.S.
exports, even i:f the real income expands, will be quite a bit out.
The other is the problem o:f coordinating the recovery. I:f a country
like Canada is to expand, they really have to wait to see the actions in
the rest o:f the world. Because i:f they went ahead, their exchange rate
would depreciate and add to the inflationary problems.
So those countries that could profitably expand, along with Germany and Japan, certainly think o:f the United Kingdom, in that context and France, won't until they really S<~e the action. And Germany
has been very reluctant--except :for announcements.
But last on the medium-term trade position o:f United States, I really
don't see a very large improvement, either from the proposed energy
measures o:f the United States, or :from the depreciation.
The world recovery will do something, but I think we won't get rid
o:f the oil problem altogether. That will leave a residual problem, and
I think we are :facing growing competition :from LDC's that, in the
last 5 years, have really managed to go into manufacturing products.
They are cost competitive now. They have to pay off debt. They will
have to reduce their current account surpluses, and they will do it by
promotion o:f exports.
Whether they are totally competitive, or they will rebate valueadded taxes, or otherwise, I think the exports will show up and that
will be a problem :for the U.S. trade balance, once we go beyond the
cyclical position.
Mr. JoRDAN. I would like to add a :few comments.
Your original question was on the relation between the trade deficits
with the nonoil countries, and the devaluation o:f the dollar.
Our increased demand :for :foreign imports to us, i:f that had been
matched by :foreign demands--either :for our exports or their demand
:for our securities--earning assets such as bonds, equities, or whateverthen we would not have had the devaluation, or the depreciation, of
the dollar.
For the future, the solution to the deterioration in the dollar's value
lies in either increased foreign demand for our exports, our reduced
demand for their exports, or their increased demand for earning assets in this country-a portfolio effect.

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Of last year's increase in the trade deficit, about $1 ½ billion was
associated with the higher price of coffee. This year we are not going to
have that. Our total coffee bill is going to be less than last year, by quite
a bit, maybe less than 1976. That is a positive.
The higher quantity of steel coming into this country costs us an
additional $2 billion or more last year. The conservative estimates are
that we will have $1 billion lees in foreign steel costs this year. Optimists say it could be much greater than that because of the effect of
trigger prices and the effect of appreciation of other currencies.
As far as Germany and Japan, they have had very substantial
monetary and fiscal stimulus late last year, partly related to their intervention on the foreign exchange market. We have yet to see the
lagged effects of that on their domestic economies. Even if it is not as
strong as some people might desire, they pay for all of their raw materials-their inputs to production-in dollars. Japan imports 98 percent of its oil. They pay in dollars. The price of oil to them has gone
down 25 percent. It is the same thing as if Saudi Arabia cut the price
of oil to Japan.
They have a benefit from that. Everything they buy-the copper
ore from the Philippines, iron ore from Australia-is all paid for in
dollars, and it is all a lot cheaper to the Japanese now.
If there is any price effect there at all, they are going to be increasing
their demand for the imports from all of these other countries. Those
countries, in turn, are the ones, in large part, that have been lagging in
their demands for U.S. exports-especially for machine tools and intermediate capital goods-and the United States is going to be very
competitive on capital goods markets this year.
Countries like the Philippines and Australia are going to be able to
afford to buy more from us. So, the prospects really are very good.
Mr. VENTO. One other point you touched on. I paid close attention
to your remarks, Professor Dornbusch, on the intervention in terms
of devaluation and the concern about it. I don't know if that theory
is agreed to but, obviously, they were doing it for other reasons. They
were going to protect their own competitiveness by becoming involved. If I understand properly what you are saying, is that we
still pay the price but in a different way, and that it would be the
height of folly now to go back and buy that money back by floating
a large loan on which we pay interest, which, in essence, they have
bought to eliminate the competition with U.S. products which have
a lower price.
And I don't know what the others here-Professor Klein or Mr.
,Tordan-feel about that. I do understand your position correctly,
do I not?
Mr. DoRNBUSCH. Yes.
Mr. VENTO. And I am interested in what their reaction is to that.
I find that to be a very interesting observation, and I am wondering
if that iR shared by the otherR here.
Mr. JORDAN. I don't think it really should be viewed, as it often is,
as an "us versus the foreigners" kind of thing.
An exchange rate change influences domestic import competing industries as well as domestic consumers in the conntriPs on both sides
of the transactions. It is sort of an irony that with the dollar declining

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relative to the Germans, they are unhappy about it and we are unhappy about it, as though we are both losers from it.
And what is happening is that their export industries are becoming
less competitive relative to the United States because 0£ their appreciation, even though their consumers are benefiting, but it is less observable. Our import competing industries, steel and auto companies,
£or example, are benefiting by the decline 0£ the dollar, but that effect
also is not as readily observable as the adverse effectsMr. VENTO. Excuse me. Insofar as they intervene against the dollar,
though, we don't n_ecessarily benefit. I think they are doing it for
quite the other reason, are they not?
Mr. JORDAN. To benefit their exporting industries. And so our import competing industries don't benefit as much as i£ the foreigners
did not intervene to that extent. And by the same token, the effect on
our consumers 0£ higher costs 0£ foreign goods is not the same as if
they did not intervene.
Mr. VENTO. Well, there seems to be a real problem in this country
with regard to demand, control over inflation. Professor Dornbusch
has touched on a subject and some 0£ the things I think politically are
very hard to live with, that we ought to keep the value 0£ the dollar
high, and we can go through a whole scenario here that makes a good
campaign slogan, but not always very good economics. That becomes
a concern as we try to deal with this particular issue.
Well, I think we could go on quite a while. I know I have exceeded
my time, but I have just one other question which really relates back
to the quarterly reporting to the House and Senate.
What would have been the impact, for instance, in terms 0£ the
monetary targets i£ they had been followed last year-in other
words, i£ we had stayed within the bounds of those monetary amounts,
those monetary targets, the growth targets that were set here £or us in
wonderful charts last year at about this same time, Mr. Chairman,
and what would be the likelihood i£ we actually followed those
growth rates this year? ,Vbat would be the impact on us in this
economy? What would happen in the economy if we had followed
those growth targets?
Mr. JORDAN. I think we would have less concern about inflation in
the future than we now do. We would not have the dilemma that,
unfortunately, I think the Federal Reserve is going to face as we
move through the spring months.
A year ago we had a very nice situation of not having to face up
to an unpleasant short-run tradeoff. Now that is no longer the case.
I think interest rates would be lower now, both long and short term,
if monetary grow,th had been less than it was. If we had not had
the kind of excessive monetary growth that occurred, I think that
equity prices-the stock market-would be a lot stronger. If people
had not observed the Federal Reserve substantially exceeding their
monetary growth targets, they would not now have to contemplate
the implications of some sort of a tightening move to correct those
excesses. That is what the stock market is discounting, and that is
what has got the market scared.
Mr. VENTO. The effect on unemployment you said wasMr. JORDAN. I think unemployment would not have been
substantially different than it is.

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Mr. VENTO. What would our growth have been without thn.t
increase?
Mr. JORDAN. The growth of real GNP from fourth quarter to
fourth quarter was 5.9 percent, which was the highest rate that we
have experienced in some time. Nominal income growth, as I mentioned in my statement, was the highest that we have had since
1950. They would have probably been somewhat less. But now the
growth of real output is going to be less at some point in the future
than it would have been if we had had slower money growth. Certainly, it would have been somewhat less than in 1977. But now
it is going to be less sometime in 1978 or in 1979 as we correct thn
excesses that have been built in.
Mr. VENTO. In other words, if we had followed that pattern, all thf
benefits would have been at.tained?
·
Mr. JORDAN. We would have had a more stable past.
Mr. VENTO. And some additional benefits in terms of inflation and
long-term planning; that is what you're suggesting?
Mr. JoRDAN. Very definitely.
Mr. VENTO. Professor Klein?
Mr. KLEIN. Yes. I look at the same numbers and come out with quite
different conclusions. But if the monetary growth had been somewhat
lower last year, and indeed in between the two bands of your committee's charts, I think we would have had slightly higher rates of
interest, and with some time delay that might have had a restraining
effect on capital formation. Investment was not too bad, very close to
9 percent real growth last year. It would have had some effect on
housing, although this sector has long time delays; we would not have
seen very much of it in 1977.
I don;t really believe that we would have seen a very different inflation rate. The real swing factors in our inflation rate last year were,
as I said in my paper, the severe cold weather of the early months
which caused people to shift to a very heavy fuel mix and very heavy
imports of fresh fruits and vegetables-higher priced fresh fruits and
vegetables-and a big swing in the summer months to almost flat inflation rates in our price indexes, because agricultural prices were low,
and that was related not to money supply growth but to worldwide
harvest conditions. Agricultural prices are enormously important in
determining our Consumer Price Index and the swings in it.
So I think I would interpret the movement of inflation in this country in real terms and not in monetary terms last year. Had we had
those higher rates, though, higher rates of interest associated with a
more restrained growth in money supply, then there would be a spillover effect to the coming year, and in terms of the time delays in
capital formation decisions, we would be in for a little more trouble
than we are having at the moment.
Now, in the projection that I distributed this morning, there is a
tendency for an upward drift in short rates, a lit:tle bit in long rates
as well. The M 1 figures on that tabulation are just about in line with
the upper range of your committee's targets for M, g-rowth, so that the
slightly higher levels of M 1 last year, if projected with current policies in place, don't lead us to a very excessive growth rate in the coming
year.

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I would say that, all in all, monetary policy has been about on
target, if you take a longer view than just 1 year and if you think
of continuing present policies into the near-term future.
Mr. VENTO. Thank you.
I know I have way exceeded my time here.
The CHAIRMAN. Well, if Professor Dornbusch has something to
answer, surely he may.
Mr. DORNBUSCH. I would just say that I don't think monetary
policy was excessively stimulative. There is a direct effect from
money growth to inflation. Inflation is made out of aggregate demand and accidents. So if the Open Market Committee went out and
reduced the monetary growth rate, we really would not see a decline
in the rate of inflation in the near term. We would first have to go
through a reduction in housing construction, and the main channel
would be interest rates.
To know what would have happened on the interest rates under
<i. tighter monetary growth, we c-an look at Professor Klein's chart
and see what he has said would happen to interest rates this year.
I think the proposed monetary growth is on the tight side, and interest rates will be rising, and with the conventional lags it will reduce
investment spending and, in effect, housing construction.
Mr. VENTO. I will look at this point and comment, Professor, about
your comments concerning demand and inflation-and apparently
you don't feel that holds true necessarily for availability of dollars.
Although I think what you are saying is in an aggregate sense,
that demand as such does not have the correlation with inflation that
is attributed to it necessarily, but you are qualifying that in the
sense that you say there definitely is some relationship between the
availability in terms of monetary supply and interest rates so that in
that case demand does have an impact.
Is that accurate?
Mr. DoRNBUSCH. The linkages are between money, interest rates,
and spending, and the further linkage between the spending relative
to capacity, utilization, and inflation. But there is no direct effect from
money on inflation independent of the state of aggregate demand,
and I think that is amply demonstrated.
Mr. VENTO. Well, Mr. Chairman, if I might be permitted, I have
just one more question, it is just more really of a statement, but that
is with respect to foreign investment in the United States.
I appreciate Mr. Jordan's comments about it is not us and them,
because I think that holds true, especially with regard to foreign
investment in this country.
If I recall correctly, historically we have done very well in terms of
gathering capital resources from Britain and from all over the world
to build this country into what it is today. I am not really very concerned about the fact that we can get OPEC capital back in here, because I think it does tend to cause the type of growth that we need to
keep going, to keep the engine going, in terms of the world economy.
And I don't think the hope for Japan or Western Europe is very good
in terms of GNP overall growth unless they see us growing at the same
time, because their growth is so dependent upon exports to this country. And if we have an economy here which is in essence static, their

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likelihood of committing to more production and to more growth is
really a major disincentive, not just for them but for the world economy. And I don't know that all of us and all of our study and you
and your expertis~and it is of a very high caliber-have put together
the answers to all of these questions.
But I just wanted to finish by saying I wan~d to thank the committee for putting up with my long questioning and for your responses.
Thank you.
The CHAIRMAN. Thank you.
I want to express my gratitude to the panel for a really brilliant contribution to our deliberations.
Two days from now, you know, the new Moses will come down from
Mount Sinai with the tablets and tell us wha,t the monetary aggregates
may be. In advance of that let me ask you, Professor Klein, if you
would prefer a target band of 5 to 7 percent rather than the present 4
to 6½ percent for M1 ?
Mr. KLEIN. Right.
The CHAIRMAN. Professor Dornbusch, what would you prefer?
Mr. DoRNBUSCH. Five to seven and a half.
The CHAIRMAN. Mr. Jordan, if my understanding is right, you said
that you could sit still for the present 4 to 6½ percent if they really
stuck to it, but if you are going to go to 4- to 6½-percent target and
then wild deviations on the up side-would it be right to say that you
would sooner have an honest 5 to 7 percent than a fraudulent 4 to 6½
percent?
Mr. JORDAN. Definitely.
I would be just as concerned about shortfalls to the 1- or 2-percent
range for some reason as an overshoot into the 8- to 9-percent range.
The Fed should set a target and hit it.
The CHAIRMAN. I conclude with my plaudits to a superb panel.
Thank you very much.
We will stand in adjournment until 10 a.m. Thursday morning.
[Whereupon, at 12 p.m., the committee adjourned, to reconvene
Thursday, March 9, 1978.]

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QUARTERLY HEARINGS ON THE CONDUCT OF
MONETARY POLICY
THURSDAY, MARCH 9, 1978

HousE OF REPRESENTATIVES,
COMMITTEE ON BANKING, FINANCE AND URBAN .AFFAIRS,
Washington, D.O.
The committee met at 10 a.m. in room 2128 of the Rayburn House
Office Building, Hon. Henry S. Reuss, presiding.
Present: Representatives Reuss, Moorhead, St Germain, Gonzalez,
Minish, Annunzio, Hanley, Mitchell, Blanchard, LaFalce, Spellman,
Tsongas, Derrick, Hannaford, Allen, Lundine, Cavanaugh, Oakar,
Mattox, Vento, Barnard, Garcia, Stanton, Wylie, Rousselot, Hansen,
Hyde, Kelly, Leach, Steers, Evans of Delaware, Caputo, and Green.
The CHAIRMAN. Good morning. The House Committee on Banking,
Finance and Urban Affairs will be in session for its dialog with the
new Chairman of the Federal Reserve Board.
Some weeks ago, I was called by the Vice President, who announced
that the selection had been made-which he was very proud of-for
Chairman of the Federal Reserve. I said. "That is great; who is he i"
Mr. Mondale replied that his name was Miller.
"That is marvelous," I said. "We have not had a Milwaukee
brewer as Chairman of the Fed at any time in history." He then set
me straight.
After a little historical research, I think the President made an
extremely wise decision, and I think the Nation is very fortunate.
We are fortunate, in that one of the ablest and most respected members
of our committee, Congressman Fernand J. St Germain, of Rhode
Island, is a neighbor and friend of the new Chairman of the Federal
Reserve Board.
Mr. St Germain, I know you would want to make a little personal
statement, so I recognize you for that.
Mr. ST GERMAIN. Thank you, Mr. Chairman. I hope you won't hold
me to "little," because it is a most unusual opportunity for me to introduce the most unusual man to the committee as the new Chairman of
the Federal Reserve Board.
It is an honor for me this morning to present formally to this committee the new Chairman of the Federal Reserve Board. Today's headlines on our Nation's economy represent some awesome challenges for
this man as the new Chairman of the Board, as well as for each and
every one of us.
I have some thoughts, as a result of knowing him and listening to
him, as to why he accepted this challenge, and I feel that they will
tell a lot about why he is the man for the job.

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(83)

Recently, I heard Mr. Miller speak to a group of bankers from the
State of Rhode Island at a reception here in Washington, and he told
us why-at the summit of a lengthy successful business career-he decided to accept the President's invitation to become the Chairman of
the Fed.
In many ways, it was a simple reason. The strength of our economic
system is being sapped by uncertainty and indecision; but, Mr. Miller
believes in our system. He feels a debt to a society and a system which
means a great deal to him. He believes he can help to restore the vitality of our economy.
When you have those beliefs, clear, simple, and strong. you also have
a responsibility to serve, and that is why he chose to take up that
responsibility. Increasingly he sees the people and the leaders of our
Nation taking a morbid fascination in the negative-and missing the
positive: The enormous strength that we can build upon. He said and
I quote:
We talk about unemployment and forget that we have the highest employment
in our history. We focus on the battered dollar, yet we fail to note that it is still
the world's currency. We worry about our economy and our ability to produce,
and forget that we have the highest GNP in history. We turn our attention to
scandals or problems in one industry or another, and forget the vitality and
creativity and productivity that continue to make us the envy of the world. We
forget the positive.
As we look at the challenges facing us, we should all take a vow that for just
1 year we will stress the positiYe in our economy. and in our Nation-just for
1 year, let us look at what we haYe going for us. It is a far more imposing list
than any catalog of troubles and if we <'an just once start focusing on the positive,
we will find that list of troubles shrinking.

That is what Mr. Miller said to his colleagues from Rhode Island
the other evening.
I think we all share his convictions, and his faith in America.
We have all read, as well, about his achievements in his personal
life. His contributions to the Rhode Island community over the
years-despite the fact that he headed up a corporation that had
64,000 employees, and 180 major facilities here and abroad-he was
actively involved at all times in civic and national affairs.
He has concerned himself with urban problems, and the problems
of unemployment and of minorities.
He has been the chairman of the President's Committee for HIRE
that works to find job opportunities for Vietnam veterans. In the
sixties, he was on the President's Committee on Equal Employment
Opportunity, and the Chairman of its Industry Advisory Council.
He has been a director of the Coalition of Northeastern Governors,
an advisory group to the Governors. In Rhode Island, he has exercised vigorous leadership in several major projects important for the
revitalization of that State.
He is a man of unusual energy, superb intelligence, and very high
moral standards. And, you know, I hope that many of you will also
get to know his partner-his wife-who is a most unusual lady, as
well. And, as the old adage goes, "behind every man, there is a woman
who is responsible for his success," and in this instance it certainly
holds true.
To each and every one of you, my colleagues on this committee,
this is one of the very proudest days in my life and in long service
on this committee, to introduce Bill Miller to you.

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85
You know, he served in the Coast Guard, and the motto of the
Coast Guard is "Semper Paratus," always ready, and he has always
been ready.
.
He has just weathered some unusual storms, but he came through
them with flying colors. And we are very happy for that.
I would just conclude, Mr. Chairman, by saying to you and the
members of the committee, and to everyone here assembled, that perhaps we should give him a little hand because today, believe it or not,
is also his birthday
Happy birthday, Mr. Miller.
[Applause.]
The CHAIBMAN. Thank you very much, Congressman St Germain,
for your eloquent remarks. I associate myself with every syllable of
them, and I am sure every member, on both sides of the aisle, does
likewise.
I have prepared a somewhat lengthy 10-page opening statement of
my own. I gave Chairman Miller a copy of its yesterday and it is
available to the press. Under the rule, and without objection, I would
ask that it be inserted, in full, in the record. At this point, I would
just briefly like to sum up the opening statement and then we shall
hear from our witness.
I. too, want to welcome you, Mr. Miller, as the new Chairman of the
Federal Reserve.
The Federal Reserve Reform Act of 1977, which became law last
November, requires a somewhat greater precision of statement from
the Federal Reserve in these dialogs than was true in the past.
Specifically, it asks that the Federal Reserve take into accountand I am quoting-"past and prospective developments with respect
to production, employment, and prices."
The committee report on the legislation makes clear that this requires some discussion on matters of fiscal policy, monetary velocity,
and interest rates.
Last year, growth of the basic money stock came to 7.4 percent, the
highest since 1972. Looking back upon it, it does not appear to have
been excessively high and it did serve to fuel a healthy rate of growth,
without exacerbating inflation.
Projections are for a somewhat slower real GNP growth rate in
1978. Conse<1uentlv, in my view, a rate of monev growth similar to last
year's would imply a more moderately expansive monetary posture.
Such a policy may well be just what we neel.
I also hope that you will be able to comment on the relationship
of the new targets to the previously announced targets for the first
and second quarter of 1978.
As you no doubt know, to meet the target for 1978 for this first
quarter, money growth would have to be less than 1 percent per year
in the pre,sent quarter. This would seem to me a calamity, that none
of ns wish to advocate.
Over a longer horizon, another question of targets arises. The Economic Report of the President calls for a rate of growth of real GNP
of b~tween 4.5 and 5 percent this year and next, and a progressive reduct10n of unemployment to between 5.5 and 6 percent in the same
time.

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Your colleague on the Board of Governors, Henry ·wallich, recently,
in a speech, concurred that they are reasonable goals, and that they
can be reached. I ·would hope that you vrnuld find yourself in agreement with Mr. Wallich on that point. For the period beyond 1979,
however, the President and GoYernor allich, part company.
The President's Council of Economic Advisers looks for an unemployment goal that will continue falling to 4 percent by 1983. Governor
,vallich, for his part, denies that possibility, and favors what he instead calls a soft landing, meaning sustained growth rates of real GNP
between 3 and 3¾ percent from 1980 onward, with little or no decline
in unemployment from the level of about 5.5 percent.
We, of course, will be interested-if not this morning, as soon as
possible-in your views on that question.
Finally, the relationship between monetary policy and the international value of the dollar has become a matter of intense concern to
us all.
Members of this committee, including myself, are watching intently
the intervention in which our country is now engaged in trying to bet
the $20 billion or so that we may have to fool around with against the
trillions of dollars that are amassable by speculators on the other side.
[The complete opening statement of Chairman Reuss follows:]

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87
OPENING STATEMENT OF CHAIRMAN HENRY S. REUSS
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
AT HEARINGS ON THE
CONDUCT.OF MONETARY POLICY

BY THE FEDERAL RESERVE

It is a pleasure to welcome you, Mr. Miller, as the new Chairman of the Federal Reserve, to oui::-

first hearing pursuant to the

Federal Reserve Reform Act of 1977.
1.

This Act requires that the Federal Reserve present a more

complete statement than in the past of the basis on which monetary
policy has been formulated and the objectives· toward wh_ich it is
directed.

In the words of the Act, the Federal Reserve shall re-

port its targets for the growth of the monetary and credit aggregates, •taking into account past and prospective developments with
respect to production; employment and prices.•

Thus,~ statement

.of the rate of growth of real Gross National Product, of the rate
of unemployment, and of the rate of inflation that you believe
is compatible with_ the target ranges of monetary growth you are
announcing is now a formal requirement of the reporting system.
The Committee Report on this legislation further noted that
to meet this requirement would •require discussion of such matters
as fiscal policy, monetary velocity, and interest rates.•

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In par-

88
ticular, as the legislative history of the Federal Reserve Reform
Act of 1977 makes clear, a discussion of future trends in interest rates should be part of the Federal Reserve's quarterly report
to Congress.

In the Report (No. 95-774), I noted that since mod-

erate long-term interest rates are stated as a goal of monetary
policy, it is necessary for the Federal Reserve to present their
view of prospective developments in interest rates.

colleague,

Congressman Stanton, the ranking minority member, agreed •that
in his view, as in that of Chairman Reuss, it is 'implicit' that
interest rates be taken into account in the quarterly dialog, when
moderate long-term interest rates are stated as a goal of 1110netary
policy.• (p. 5)

we are not, of course, asking you to reveal your

short-term targets for the Federal funds rate.

Rather, you should

tell us whether or not you expect interest rates, both ·short-term
and long-term, to rise or fall, and whether the Federal Reserve
expects that its planned 1110ney growth path will tend to accommodate or·to oppose this trend.
2.
·percent.

Last year, growth of the basic money stock came to 7.4
'l'his figure, while the highest since 1972, was not ex~

cessive in context; it served to fuel a healthy rate of growth
without exacerbating inflation.

If anything, the Federal Reserve

leaned slightly against the wind of economic growth in the latter
part of the year.
Projections are for a somewhat slower real GNP growth rate
in 1978.

Consequently, a rate of money growth similar to last

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89
year's would imply a moderately more expansive monetary posture.

Such a policy may be just what we need.

Not pushed to excess,

it would lower interest rates, encourage investment,. and help us
meet some of the important capital needs that may otherwise face
us as bottlenecks a year or so hence.

It would of.fset the bias

toward consumption which has.characterized policy in recent years.
To keep the economy on a moderate overall expansion, we could offset such monetary encouragement with a little fiscal restraint -perhaps achieved by substituting a cost-effective direct attack
on·struct~al unemployment for some of the Administration's proposed tax cuts, as I have long advocated.

Incidentally, your views

on structural unemployment, and how we fight it, I find very similar to my own.
Your statement of the Federal Reserve's target growth.bands
for the year ahead will say much about the Federal Reserve ~oard's.
attitude toward s·uch a trade-off of monetary _ease and relative
fiscal restraint.

I ~ope the target band will be high enough

permit such a possible policy blend.

Even if it is not, X would

like your reaction, and that of the Federal Reserve, to this· idea.
3.

I wish you would also comment on the relationship of the

new targets to the previously announced targets for the first.and
second quarters of 1978.
Last Summer and Fall, as you know, the actual money supply
jumped far abov~ the upper target band.

Since this did not accom-

pany any fall in interest rates, but rather a rise, it is my view

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90
that unusually strong credit demands, not an unusually eccentric
monetary growth policy, was the cause of the divergence •. But there
is a consequence that remains to be dealt with.

Since such rapid

money growth took place last Summer and Fall, the targets set in
1977 for.periods ending for the first two quarters of 1978 are
now unrealistic.

To meet the target for 1978, first quarter, money

growth would have to be less than one percent per annum in the
present quarter.

It would have to be less than five percent per

annum over the_first two quarters of this year if the targets for
second quarter 1978 are to be met.

I do not advocate such reces-

sionary growth rates, and I hope you agree.
The Federal Reserve Reform Act, of course·, does not require
that any particular set of targets for the monetary aggregates
be met.

However, it will be a matter of great interest to this

Committee if the targets for the first and. second quarters should
now be disregarded, and we would appreciate your so saying.
4.

over a longer horizon, another question of targets arises.

The Economic Report of the President for 1978 calls for a rate
of growth of real GNP of between 4.5 and 5 percent this year and
next, and a progressive reduction of unemployment to between
and 6 percent in the same time.

5.5

In a recent speech, your collea-

gue on the Board of Governors, Henry Wallich, concurred that these
are reasonable goals and can be reached.

I trust I do not presume

too much in presuming that you are also broadly within this consensus.

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For the period beyond 1979, however, the President and Governor Wallich part company.

The budget projections presented in

the Economic Report are for unemployment to continue falling to
4 percent by 1983.
is a difficult goal:

The Council of Economic Advisers admits this
•for it would imply that actual GNP woul_d

exceed our present estimates of potential GNP".

Nevertheless,

with the aid of suggested structural and labor market policies,
the Council of Economic Advisers prepares to do battle with this
objective in mind.
Governor Wallich, for his part, denies the possibility of.
achieving 4 percent unemployment, •in the absence of an incomes
policy of a sort that so far.the nation has shown no willingness
to apply".

Mr. Wallich favors what he calls a •soft landing•:

sustained growth rates of real GNP between 3 and 3 3/4 percent
·from 1980 onward, with little or no decline in unemployment from
the level of about 5.5 percent.
Where, in your own view, do the limits to·the •art of the
possible" lie?

With what perspective on the prospects for long-

range real GNP growth and employment do you plan to guide monetary
policy over the next few years?

How, if required to do so, would

you plan to bring Federal Reserve monetary policy into the broader
canvas of a unified economic strategy?
S.

Discussion of long-range economic objectives leads to

another important issue:

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the appropriate format and subject mat-

92
ter for Congressional oversight of monetary policy.

This Committee

takes its responsibilities on this question very seriously.

worked hard to pass the. Federal Reserve Reform Act of 1977. to
tighten the links between Federal Reserve reporting.of long-range
monetary targets and the discussion of real economic objectives
maximum production and employment, stable prices, and moderate
long-term interest rates
is designed to achieve.

which the operation of monetary policy
Xn the past, getting forthcoming and open

discussion of these questions has not always been easy.

Z mn con-

fident that we can start today to put our interchange on a less
adversary, more open, and more informative basis-than we have had
in the past.

The Humphrey-Hawkins bill, currently under debate

in the House, will conduce toward this end.
6.

Finally, the relationship between monetary policy and

the international value of the dollar has become a matter of intense concern.
By law, the Federal Reserve may intervene in foreign exchange
markets only at the direction of the Treasury.

By long-es~lished

principle, intervention is called for only in response to •disorderly market conditions".

Xn August, 1975, after joint hearings,

the Subcommittees on Xnternational Economics of the JEC and on
Xnternational Trade, Xnvestment and Monetary Policy of the Banking
Committees agreed on the following recommendation:
The United States monetary authorities should intervene in exchange markets only to combat or pre-

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vent the emergence of disorderly conditions.
Intervention should not attempt to influence
the trend of exchange rate movements.
Lately, the Federal Reserve has intervened repeatedly to support the dollar.

Although it may be possible to maintain that

on each such occasion "disorderly conditions• prevailed in the
context of that day's trading, these conditions have shown a decided tendency to recur.

Each time, the dollar's fal.l is made

more severe, not less so, by the past efforts of the Federal Reserve and foreign central banks to support the dollar.
I want to distinguish two issues here.

First, there is the

use of swap agreements -- under which the Federal Reserve borrows
foreign currency from allied governments and uses it to purch~se
dollars, with repayment stretched out over weeks and months.

The

FRB now has swap lines totalling $20 billion with Germany, Japan,
Great Britain, and a few others·.

Perhaps -- and you can enlighten

us on this point -- some of those lines are no_w exhausted?
Swaps are an appropriate counter to truly disorderly market
condi~ions.

If.disorder is the problem, intervention will be short·

lived and successful.
trend.

Swaps cannot, however, stall a declining

Twenty billion dollars, cast into a $500 billion market,

can be lost in an afternoon.
cannot go on forever:

Speculators know that intervention

so today's rise merely ups the stakes and

the pressure for tomorrow's fall.

25-273 0 • 78 • '

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The policy, in•sum, is costly

94
and ineffective.
I would specifically like your comments on the following questions:
1)

With whom does the Federal Reserve have swap agree-

ments and in what amounts?
2)

To what extent have those agreements been used since

Of the swaps effected, what portion have now been

What has been the net profit or loss on each trans-

January l?

repaid?

action?

(I understand that these are then shared with participat-

ing foreign governments.)
5)
buted

.to

What evidence is there that the swaps have contri-

a stronger dollar over the past ten weeks?

Incidentally, I would appreciate from you, if not this morning, as soon as you review your testimony, a definition of •disorderly markets".

I have a dark suspicion that disorderly markets

are what happens when central banks intervene: when central banks
fail to intervene, markets are not "disorderly".

Cannot we do

better than this?
The second issue is the manipulation of domestic interest
rates -- the Federal funds rate and the discount rate -- to support the international/dollar.

On January 6, such a policy was

explicitly invoked to justify a rise in the discount rate from 6

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to 6.5 percent.

International objectives are also implicated in

the rise of the Federal funds rate from 6.56 percent in December
to 6.78 percent today.

The Treasury bill rate leaped 42 basis

points from December levels in the second week of January, and
has maintained this high level ever since.

Over the same time,

the basic money stock has declined about $900 million.

Are these

t~e causes or effects of Federal Reserve use of domestic credit
markets to support the dollar?

If so, was this also done under

explicit Treasury instruction?
I hope the answer is no.
ments, does indeed work.

For such a policy, unlike swap agree-

Higher interest rates attract foreign

capital, if there are not offsetting movements in foreign interest rates.

Higher interest rates also slow our economy~ includ-

ing our demand for oil imports, which improves our balance of payments and hence-relieves the real pressure on the dollar.
result:

The

a healthy dollar and a sick economy.

In current conditions, the Federal Reserve should refrain
from interest-rate intervention.

If surplus countries want to

hold the dollar up, let them lower their interest rates:

such

action tends to expand their economies, whereas if we do it the
effect is contractionary.
on real problems:
exports.

For our part, we should concentrate

controlling our use of oil and stepping up our

The Federal Reserve should abandon at once any use of

domestic monetary policy in support of exchange rate objectives.
Such objectives, under present circumstances, are inconsistent
with the objectives prescribed by law for monetary policy:

JllaXi-

mum production and employment, stable prices, and moderate longterm interest rates.

I look forward to your assurance that iri

the future the Federal Reserve will adhere to these objectives
and refrain from pointless, ill-fated foreign adventures.

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The CHAIRMAN. From this, you may well gather tha,t I am not
interventionists' most hearty enthusiast. I think this gives some sense
of what is on the minds of most of the members of this committee.
We now, under the rule, and without objection, will receive in full
your statement into the record, and ask that you proceed in any way
you would like.
Before that, however, I wish to recognize our distinguished ranking
minority leader, Congressman J. William Stanton of Ohio.
Mr. STANTON. Thank you, Mr. Chairman.
And Mr. Miller, I had my prepared remarks here to personally
welcome you, and not only by myself but on behalf of the minority.
Regrettably, not too many of us are here, yet, but I am sure that they
wiltbe coming along in a, couple of minutes.
I want to repeat that though, and to extend you a warm welcome,
and wish you the best in your new position.
One cannot move from one Chairman to another quite so quickly,
though, without just a couple of remarks about our past Chairman.
And I am sure tha.t you would agree, and I think it would probably
put it in the best light, Mr. Chairman, if I would inform the committee that here this afternoon in the House we are putting a joint
resolution forward to express our appreciation to Dr. Burns.
I am joined in this by my colleagues, on a nonpartisan effort, and
with Lud Ashley and all the members.
The CHAIRMAN. And would you add my name to the list?
Mr. STANTON. We will be coming back to the committee, and we are
glad to have your support, Mr. Chairman-I knew, of course, it was
there. The resolution reads:
To express the appreciation of the Congress of the United States to Dr. Arthur
F. Burns.
Whereas Dr. Arthur F. Burns has concluded 8 years as Chairman of the
Federal Reserve Board, a position ranked by many observers as second only in
importance only to the Presidency itself; and
Whereas Dr. Burns has served under five Presidents and has served them and
the American people faithfully and well; and
Whereas Dr. Burns, by his tireless efforts to protect the integrity of the American dollar both at home and abroad, and by his coUJnsel and advice in improving
the international monetary system, has gained unequaled universal reSl])ect among
the free nations of the world; and
Whereas Dr. Burns, as Chairman of the Federal Reserve has acknowledged
to a greater degree than any of his predecessors that the Board is independent
and a creature of Congress, and has also fought long and hard to show the wisdom
of keeping monetary policy decisions in the hands of our central bank; and
Whereas Dr. Burns, as an individual, blessed with high moral personal standards combiried with a keen sense of humor, and by his courteous, thoughtful and
forthright personality, has won the frieindship and admiration of individual
Members of Congreia;s and the American people ; and
Whereas Dr. Burns has served this Nation in various capacities since 1930-as President and Chairman of the National Bureau of Economic Research as
chairman of the President's Council of Economic Advisers from 1953 to 1956,
as a Member of the President's Advisory Committee on Labor-Management
Policy from 1951 to 1966, as Counsellor to the President in 1969, and as Chairman of the Federal Reserve Board from February 1, 1970 through March 8, 1978.
Now, therefore, be it
Resolved, by the Senate and, House of Representatives of the United, States
of Amerio(]) in Congress assembled, That the Congress herewith expresses its

appreciation to Dr. Arthur F. Burns for his long superb service to the United
S~tes of America and its people and does further express the hope that Dr.
Burns will continue in his role ·as senior statesman in economic affairs reflecting
'
his qualities of economic integrity and stability.

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Now, Mr. Miller, Dr. Burns is gone, and you are with us, and I know
that I can only express the sentiments that we heard at your swearing
in yesterday. I was sitting next to a Senator, and after your fine
remarks, he turned to me and he said, "I am glad he is not running
as a politician in my State."
And I would only forewarn you that we enter these hearings, which
we have set up, of course, by law, and having had an opportunity to
read your fine opening statement, that you will fully come to realize,
of course, that the questions you hear either from me or from the
chairman reflect personal opinions, not necessarily, in most cases, of
the Banking Committee.
I hope that Chairman Reuss would not push his five questions that
he has included in his opening statement, of which you and I received
a copy yesterday. These intervention operations are kind of like a poker
game, and I think to divulge the information that has been requested
would put our players in an international banking game of foreign
exchange transactions in a position of putting all of his chips and
his cards face up on the table, so that all of the participants in the
game could play with our chips without our players having to guess
blind about what the other players do.
This morning, the Washington Post carried a story about the
intervention of the Fed, which has reached a record, and it gives
details. I hope perha:ps, Mr. Chairman, that maybe reports such as
this, giving information only 6 weeks old, will satisfy your requirements without pressing for information right up to the minute which,
if divulged, in my opinion, could produce self-defeating and possibly
self-destruction reactions to the foreign exchange markets.
If Congress really wants to do something to improve the position
of the dollar, we should direct our efforts to controlling inflation
and a reduction of e.xpenditures resulting in a prospective budget
this year of at least $62 billion.
Mr. Miller, we welcome you, and good luck.
The CHAIRMAN. Thank you, Mr. Stanton.
Mr. Miller, would you now proceed?
STATEMENT OF HON. G. WILLIAM MILLER, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Mr. MILLER. Mr. Chairman, I want to thank you for your welcome.
And Congressman Stanton, I certainly appreciate your kind
remarks.
As I said yesterday, Arthur Burns is one of those people who truly
is a legend in his own time, and I am pleased and gratified to know
that you are planning this joint nonpartisan resolution to give recognition to his great service.
In connection with my own transition at the Federal Reserve, Dr.
Burns has been of tremendous help, which is just another demonstration of his unique qualities and character. 'He has been totally
supportive and has greatly eased my way into my new assignment.
I have the good fortune to be assuming the position of Chairman
of the Federal Reserve and to have my own Con,gressman here from
my own district to welcome me. It is :fortunate that Congressman St
Germain is on this committee. And Mr. Congressman, I am grateful

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98
for yo~r remarks. I know that you mean them from the heart, and I
appreciate them greatly, and I thank you.
I would also like to express to this committee, Mr. Chairman, my
personal appreciation that so many of you did attend the swearing-in
ceremony yesterday. I was very pleased that there was the interest
and willingness to do so, because I do believe we have the opportunity
to work together in some important areas, and I think that that demonstration of intel"est in the process of succession at the Federal
Reserve bodes well for a good working relationship in the future.
As you know, this is my first official appearance before any congressional committee. It is very propitious that it should be before
this committee, and I am pleased that it worked out that way.
Of course, we had scheduling problems, and it may have been that
the chairman had an arrangement with Senator Proxmire to delay
my confirmation until after the Budget Committee or the Joint
Economic Committee hearings so I could testify here first; if so, it
worked. But I am finally here.
Mr. Chairman, with your permission, I would like to read the
official report that is being filed today with this committee. It carries
out, as you know, the responsibility of the Federal Reserve, the Board
of Governors, and the Federal Open Market Committee to report
and consult with this committee on the monetary aggregates, taking
into account the prospects for production and inflation, and the
economic outlook for the country.
I don't know if this statement sets a precedent, but it is, I understand, the shortest ever delivered on this subject. I don't know whether
that will be favorably received or not. Since my nature is to be brief,
we may have even shorter re11orts in the future.
But I do say how pleased I am to be here, and that I do look forward
to participating in these sessions in the future.
During the past year, the Federal Reserve continued to pursue
the objective of :fostering financial conditions consistent with expansion of economic activity and moderation of inflationary pressure.
Gross national product-the broadest measure of economic activityrose 53/4 percent in real terms during 1977, about the same rapid pace
as we experienced on average in the earlier stages of the current
recovery. However, the rate of inflation remained disturbingly high.
Very recently, sales and production have weakened, but this seems
to reflect mainly-if not entirely-the temporary effects of the
unusually severe winter weather and the coal strike. ,vhile prolongation of the strike could lead to more extensive economic disruption,
basically our economy is strong, and the year 1978 should see continued expansion in economic activity at a moderate pace and a
further reduction in the unemployment rate. At the same time, recent
trends provide little basis for optimism with regard to an abatement
of inflationary pressures.
The brisk increase in production last year made it possible to reduce
unemployment significantly despite further large growth in the size
of the Nation's labor force. In the past 12 months. the jobless rate
has fallen more than a percentage point. Total empfoyment has risen
by more than 4 million, and the proportion of our population that is
employed stands at the highest level in the postwar period.

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The advance of production and employment during the past year
was broadly based, with most of the major sectors of aggregate
demand registering good gains. Consumer spending followed an
uneven course during 1977, but for the year as a whole growth was
substantial by historical standards. Residential construction
continued to provide considerable impetus to expansion, with singlefamily housing starts reaching an exceptionally high level and multifamily building also posting appreciable gains from earlier depressed
levels.
Business fixed investment expanded somewhat more rapidly in
1977 than in earlier years of the recovery, although such investment
continued to lag well behind its performance in previous cyclical upswings. The pace of governmental spending-at both the Federal and
the State and local levels-also picked up last year.
As domestic activity expanded rapidly, our imports of goods from
abroad continued their steep climb, boosted by our increasing appetite
for imported oil. Meanwhile, the sluggish performance of economic
activity in other major industrial countries limited the demand for our
exports. As a result, our trade deficit deepened from about $10 billion
in 1976 to more than $30 billion in 1977.
The widening of the trade deficit contributed importantly to the
downward pressure on the exchange value of the dollar over the past
several months. The Federal Reserve, in cooperation with the Treasury,
has taken steps to counter disorder in foreign exchange markets and
to emphasize U.S. concern about the integrity of the dollar. But the
key to a sound dollar and a stable world financial system lies ultimately
in the resolution of some of our fundamental, longer range economic
problems. In particular, we must establish an energy policy that promises to reduce our reliance on foreign sources of petroleum; we must
create a better climate for business investment, so as to enhance labor
productivity and to increase our international competitiveness; and
most importantly, we must make progress toward the restoration of
domestic price stability.
One of the great disappointments of the past year has been the lack
of progress in reducing the pace of inflation. Wage increases have
continued to outstrip gains in output per hour worked; unit labor
costs in private industry have again risen substantially; and prices
have been trending upward at about a 6-percent annual rate.
Prudent monetary management is, of course, an essential ingredient
in the control of inflation over the longer run. Too much money
growth would add to inflationary pressures and would tend to encourage still larger increases in wages, costs and prices.
Confronted with very strong demands for money and credit this
past year, the Federal Reserve took actions to moderate monetary
growth and to help insure that inflationary forces would not get out
of hand. Although interest rates have risen, domestic financial markets have remained supportive of economic growth. Supplies of credit
have been ample, with the total volume of funds raised in the Nation's money and cnpital markets approaching $400 billion in 1977a record both in dollar terms and as a percentage of GNP.
In the household sector, mortgage loans accounted for the bulk of an
unprecedented increase in indebtedness. Families sought mortgage

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credit not only to finance the purchase of homes, but also to fund
other expenditures and to add to their holdings of financial assets.
. Meanwhile, consumer installment credit grew very rapidly, especially during the first half of the year when sales of new cars were
strongest.
Borrowing by nonfinancial business firms also rose sharply in 1977.
The volume of new publicly offered bond issues fell off somewhat from
the preceding year, as many of the larger, higher rated companies had
completed the restructuring of their debt in 1975 and 1976. But lower
rated firms continued to place large quantities of bonds privately with
life insurance companies and other lenders. And companies of all types
tapped financial institutions for increased amounts of mortgage and
term loans, as well as for short-term credit.
Governmental demands for credit in 1977 remained exceptionally
large by historical standards. Borrowing by State and local units surpassed previous levels by a wide margin. A substantial portion of the
increase in tax-exempt bond issuance was for the advance refunding
of debt obligations incurred in prior years when interest rates were
higher, but States and municipalities also borrowed large amounts for
current and future capital outlays. At the Federal level, the outstanding volume of Treasury debt rose by the third largest amount in history, as a consequence of the TT.S. Government's large budget deficit.
Financing of the continued Federal deficit contributed to upward
pressures on interest rates last year-a year in which private credit
demands were especially strong.
In an environment of briskly expanding economic activity and credit
demands, the monetary aggregates also tended to grow more rapidly
last year. The public's demand for M 1-currency and checking account balances-strengthened considerably, and growth in this measure of money accelerated. Over the year as a whole, M 1 grew about
7½ percent, as the chairman pointed out, well in excess of the range
established by the Federal Reserve. The broader monetary aggregateM2 and M 3-grew at rates near the upper end of the ranges that had
been adopted by the Federal Reserve in early 1977.
Knowing that a sustained, rapid monetary expansion would threaten a buildup over time of inflationary pressures, the Federal Reserve
began in early spring to be less accommodative in its provision of
reserves to the banking system. The adjustment of policy was a cautious
one, in view of the possibility that the burst of monetary expansion
that had developed might reflect simply a transitory swing in the
public's demand for cash balances. But as relatively rapid monetary
expansion continued, the Federal Reserve gradually exerted increasing
restraint in the provision of bank reserves relative to the strong demands for them.
As a result, the Federal funds rate-the rate banks pay to borrow
reserves from one another on an overnight basis-rose about 1¾ percentage points from April to October. Subsequently, as you know, in
early ,January, the discount rate was ,increased to 6½ percent a.nd the
Fed funds rate was moved slightly higher to help stabilize conditions
in the market :for dollars on international exchanges.
OveralJ, since last April short-term market rates of interest have
risen about 2 percentage points. Intermediate- and l®g-term yields

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have also risen, with increases largest in the market for Treasury
securities, where rates have adjmited up~ard by 3/4, t? 1½ -percentage
points over the past 10 months. These mcreases m interest rates on
long-term securities may well have reflected some increase i~ the inflatiQIJ. premium, as investors reacted to the lack of progress m reducing inflation. Nevertheless, despite the increase of the past year, most
short-term rates are still less than 1 percentage point above their
levels 11,t the beginning of the present economic expansion in early
1975, and corporate and municipal bond yields are significantly below
their levels then.
Growth rates for all the monetary aggregates have slackened appreciably, on average, in the last few months. Growth in M2 and Ma
has slowed in part because the rise in interest rates on market instruments has made them more attractive to some savers than interestbearing deposits at banks and thrift institutions. At the same time;
however, demands for loans at depository institutions have remained
stroing. Under the circumstances, these institutions have had to supplement their deposit flows by borrowing and by reducing their holdings
of liquid assets.
Althoug-h these pressures may be causing depository institutions to
become a bit more cautious in their lending policies, credit supplies
still appear to be ample. Moreover, the financial condition of the key
nonfinancial sectors remains generally strong. It fa true that household debt burdens, as measured, for example, by the ratio of consumer
and mortgage loan repayments to disposable income, are historically
high, and they deserve careful monitoring. But to date, there has been
no rise in delinquency rates, so that families appear thus far to be
handling their increased indebtedness well. Businesses added further
to their liquid assets last year, and corporate balance sheets on the
whole appear to be strong, although there is considerable variation
from firm to :firm. And State and local governments, with record operating surpluses in 1977, appear in the aggregate to enjoy a healthy
:financial position.
Thus, financial cornlitions remain supportive of expansion in economic activity. As 1977 drew to a close, aggregate demands for goods
and services were strong. As I noted earlier, severe winter weather and
the coal strike have caused some steep declines in economic indicators
recently. However-assuming a reasonably prompt resumption of activity in the coal industry-we can expect favorable underlying trends
soon to reassert themselves.
Growth of employment and income has been substantial over recent
quarters, and consumer confidence has remained high. Consumer spending, therefore, should grow at a reasonably good pace, and would be
bolstered later this year by the proposed tax cuts.
In the business sector, new orders for nondefense capital goods have
continued the uptrend that began about 3 years ago, and presage further expansion in business fixed investment.
In addition, the rate of inventory accumulation is likely to accelerate in coming months; inventory investment has slowed in the fourth
quarter, and stocks are lean in many product lines. Moreover, with
prospects for our exports improved by the likelihood of stronger economic growth abroad this year, it appears that our foreign trade deficit will not deteriorate further.

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Overall, it is the Federal Reserve's judgment that trends in the national economy favor continued expansion at a moderate rate in economic activity and a further reduction in the rate of unemployment
over the course of 1978.
There is, however, less reason to be sanguine about progress in curbing the rate of inflation. Food and material prices have risen substantially in recent months. And labor costs continue to rise at a relatively
rapid rate.
The decline in the value of the dollar on international exchanges is
another cause for concern. It not only contributes to upward pressures
on domestic prices but also threatens to erode business confidence here
and abroad.
The monetary growth ranges that were adopted by the Federal
Open Market Committee at its February meeting are expected to prove
consistent with continued expansion in economic activity, as well as
with a gradual winding down of inflation over the long run.
For the year ending with the fourth quarter of 1978, the M1 growth
range was set at 4 to 6½ percent. A range of 6½ to 9 percent was established for M 2 , which includes, in addition to M 1 time and savings
deposits other than large CD's at commercial banks. And a growth
range of 7½ to 10 percent was adopted for M3 , which includes, besides
M2 , deposits at nonbank thrift institutions.
The ranges for M 1 and :M 2 are identical to those that the committee
previously had adopted for the year ending in the third quarter of
1978. The range for M 3, however, has been adjusted downward by onehalf percentage point in light of the higher level of market interest
rates now prevailing and the apparent effect of these rates in retarding
growth in time and savings deposits at thrift institutions. All of the
ranges adopted by the FOMC anticipate a deceleration of monetary
expansion from the growth rates actually recorded in 1977. Progress
over time in this direction is necessary to insure the ultimate achievement of reasonable price stability.
Specification of growth rates for the aggregates is, of course, subject to considerable nncertaint~,. The rate of growth in money needed
to support economic expansion depends in part on changes in the
velocity of money, that is, on the rate at which the public uses the existing stock of money to finance transactions. In recent years, regulatory
changes and financial innovations have encouraged increases in the
velocity of M1 by enabling the public to economize on demand deposits.
However, the retarding effect of such changes and innovations on the
demand for M1 apparently diminished in 1977, when M1 growth
accelerated.
Thus far in 1978, growth in M1 has been quite moderate, but it is
far too early to say whether this marks a slower trend in growth or
is simply a transitory development in a highly volatile series.
The behavior of the broader aggregates-M2 and M3-will be affected in the year ahead by the constraint placed on the ability of
depository institutions to attract funds under existing regulatory
ceilings on deposit rates.
Banks have adjusted to the recent marked slowing of inflows of
deposits subject to rate ceilings in part by offering increased amounts
of large-denomination time deposits, which are not subject to ceilings.

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iSome of these deposits, mainly large-denomination deposits issued in
nonnegotiable form, are included in M 2 and Ma; they have tended to
sustain growth in these aggregates, especially M 2 , in recent months.
There are other factors that may work to sustain growth in the
broader aggregates in the years ahead. To some extent, the recent slowdown in inflows of savings and also small-denomination time deposits
may represent a one-time shift of highly interest-sensitive funds; if
so, once the shift has been completed, deposit growth should strengthen
somewhat.
Moreover, the fact that longer term time certificates, which are
subject to heavy penalties for early withdrawal, account today for
a larger share of interest-bearing deposits-especially at thrift institutions-suggests that overall deposit growth should be less volatile
than in the past.
Nonetheless, if heavy demands for money and credit should place
further upward pressure on market interest rates, deposits subject
to regulatory rate ceilings will be placed at a substantial competitive
disadvantage. In such a circumstance, growth in M 2 and Ma could fall
short of the ranges. Upward adjustments in the ceiling rates on some
or all categories of time deposits may be required to avoid a potential
distortion in the flow of credit through our financial system, to promote equity £or small savers, and to insure the availability of loans
to home buyers and others who rely on institutional sources of credit.
We recognize, however, the considerable uncertainties surrounding
the shorter run relationship between ~rowth rates of the monetary
aggregates, on the one hand, and the behavior of output and prices on
the other. The Federal Reserve will continue, therefore, to maintain
a vigilant and flexible approach, putting the Jongrun performance of
the economy above the pursuit of any fixed monetary growth rates.
Economic and financial developments in the current year, it should
be noted, will depend to an appreciable extent on governmental policies beyond the province of the Federal Reserve. The outcome of legislative action on energy policy and on taxation will have a considerable
influence on the strength of business investment and on international
confidence in the dollar. So, too, ·will this Nation's ability to find a
way to reduce the upward wage-price pressures that continue to plague
our economy.
Thank you, Mr. Chairman.
[Chairman Miller's prepared statement follows:]

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Statement by
G, William Miller
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on Banking, Finance and Urban Affairs

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I am pleased to appear today, for the first time, to
present the Federal Reserve's report on the conduct of monetary
policy.

This will also be our first report since passage of the

Federal Reserve Reform Act of 1977, which originated in this
Connnittee and which wrote into law the monetary oversight hearings
that had been held quarterly in recent years.

These hearings

have provided a useful forum for discussion of economic and
financial conditions and monetary policy,

I have no doubt that

they will continue to do so, and look forward to participation in
them.
During the past year, the Federal Reserve continued to
pursue the objective of fostering financial conditions consistent
with expansion of economic activity and moderation
pressures,

of inflationary

Gross national product--the broadest measure of economic

activity--rose 5\ per cent in real terms during 1977, about the
same rapid pace as we experienced on average in the earlier stages
of the current recovery,

However, the rate of inflation remained

disturbingly high.
Very recently, sales and production have weakened, but this
seems to reflect mainly--if not entirely--the temporary effects of
the unusually severe winter weather and the coal strike,

While

prolongation of the strike could lead to more extensive economic
disruption, basically our economy is strong, and the year 1978
should see continued expansion in economic activity at a moderate

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pace and a further reduction in the unemployment rate.

At the

same time, recent trends provide little basis for optimism with
regard to an abatement of inflationary pressures.
The brisk increase in production last year made it possible
to reduce unemployment significantly despite further large growth
in the size of the nation's labor force.

In the past twelve months,

the jobless rate has fallen more than a percentage point.

Total

employment has risen by more than 4 million, and the proportion
of our population that is employed stands at the highest level
in the postwar period.
The advance of production and employment during the past
year was broadly based, with most of the major sectors of aggregate
demand registering good gains.

Consumer spending followed an

uneven course during 1977, but for the year as a whole growth was
substantial by historical standards.

Residential construction

continued to provide considerable impetus to expansion, with
single-family housing starts reaching an exceptionally high level
and multi-family building also posting appreciable gains from
earlier depressed levels.

Business fixed investment expanded some-

what more rapidly in 1977 than in earlier years of the recovery,
although such investment continued to lag well behind its performance
in previous cyclical upswings.

lhe pace of governmental spending--

at both the Federal and the State and local levels--also picked
up last year.

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As domestic activity expanded rapidly, our imports of
goods from abroad continued their steep climb, boosted by our
increasing appetite for imported oil.

Meanwhile, the sluggish

performance of economic activity in other major industrial countries
limited the demand for our exports.

As a result, our trade deficit

deepened from about $10 billion in 1976 to more than $30 billion in
1977.
The widening of the trade deficit contributed importantly
to the downward pressure on the exchange value of the dollar over
the past several months.

The Federal Reserve, in cooperation with

the Treasury, has taken steps to counter disorder in foreign exchange
markets and to emphasize U.S. concern about the integrity of the
dollar.

But the key to a sound dollar and a stable world financial

system lies ultimately in the resolution of some of our fundamental,
longer-range economic problems.

In particular, we must establish an

energy policy that promises to reduce our reliance on foreign
sources of petroleum; we must create a better climate for business
investment, so as to enhance labor productivity and to increase our
international competitiveness; and most importantly, we must make
progress toward the restoration of domestic price stability.
One of the great disappointments of the past year has been
the lack of progress in reducing the pace of inflation.

Wage

increases have continued to outstrip gains in output per hour worked;
unit labor costs in private industry have again risen substantially;

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and prices have been trending upwarp at about a 6 per cent annual
rate,
Prudent monetary management is, of course, an essential
ingredient in the control of inflation over the longer run,

Too much

money growth would add to inflationary pressures and would tend to
encourage still larger increases in wages, costs, and prices.
Confronted with very strong demands for money and credit
this past year, the Federal Reserve took actions to moderate monetary
growth and to help ensure that inflationary forces would not get out
of hand.

Although interest rates have risen, domestic financial

markets have remained supportive of economic growth.

Supplies of

credit have been ample, with the total volume of funds raised in the
nation's money and capital markets approaching $400 billion in 1977-a record both in dollar terms and as a percentage of GNP.
In the household sector, mortgage loans accounted for the
bulk of an unprecedented increase in indebtedness.

Families sought

mortgage credit not only to finance the purchase of homes, but also
to fund

other expenditures and to add to their holdings of financial

assets.

Meanwhile, consumer instalment credit grew very rapidly,

especially during the first half of the year when sales of new cars
were strongest.
Borrowing by nonfinancial business firms also rose sharply
in 1977.

The volume of new publicly offered bond issues fell off

somewhat from the preceding year, as many of the larger, higher-rated

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companies had completed the restructuring of their debt in 1975
and 1976,

But lower-rated firms continued to place large quantities

of bonds privately with life insurance companies and other lenders,
And companies of all types tapped financial institutions for increased
amounts of mortgage and term loans, as well as for short-term credit,
Governmental demands for credit in 1977 remained
exceptionally large by historical standards.

Borrowing by State

and local units surpassed previous levels by a wide margin.

substantial portion of the increase in tax-exempt bond issuance was
for the advance refunding of debt obligations incurred in prior
years when interest rates were higher, but States and municipalities
also borrowed large amounts for current and future capital outlays.
At the Federal level, the outstanding volume of Treasury debt rose
by the third largest amount in history, as a consequence of the
U.S. Government I s large budget deficit.

Financ.ing of the

continued Federal deficit contributed to upwa~d pressures on interest
rates last year--a year in which private credit demands were
especially strong.
In an environment of briskly expanding economic activity
and credit demands, the monetary aggregates also tended to grow
more rapidly last year.

The public's demand for M-1--currency and

checking account balances--strengthened considerably, and growth
in this measure of money accelerated.

Over the year as a whole,

M-1 grew about 7\ per cent, well in excess of the range established

25-273 0 - 78 • 8 i

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by the Federal Reserve.

The broader monetary aggregates--M-2 and

M-3~-grew at rates near the upper end of the ranges that had been
adopted by the Federal Reserve in early 1977.
Knowing that a sustained, rapid monetary expansion would
threaten a build-up over time of inflationary pressures, the Federal
Reserve began in early spring to be less accommodative in its provision of reserves to the banking system.

The adjustment of policy

was a cautious one, in view of the possibility that the burst of
monetary expansion that had developed might reflect simply a
transitory swing in the public's demand for cash balances.

But as

relatively rapid monetary expansion continued, the Federal Reserve
gradually exerted increasing restraint in the provision of bank
reserves relative to the strong demands for them.
As a result, the Federal funds rate--the rate banks pay
to borrow reserves from one another on an overnight basis--rose
about 1\ percentage points from April to October, reaching a level
of about 6\ per cent.

And the discount rate at Federal Reserve Banks

was raised in two steps to 6 per cent by late October.

Subsequently,

in early January, the discount rate was increased to 6\ per cent and
the Fed funds rate was moved slightly higher to help stabilize
conditions in the market for dollars on international exchanges.
Over-all, since last April short-term market rates of
interest have risen about 2 percentage points.

Intermediate- and

long-term yields have also risen,with increases largest in the market
for Treasury securities, where rates have adjusted upwards by

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1\ percentage points over the past 10 months.

Tilese increases in

interest rates on longer-term securities may well have reflected
some increase in the inflation premium, as investors reacted to
the lack of progress in reducing inflation.

Nevertheless, despite

the increases of the past year, most short-term rates are still less
than 1 percentage point above their levels at the beginning of the
present economic expansion in early 1975, and corporate and municipal
bond yields are significantly below their levels then.
Growth rates for all the monetary aggregates have slackened
appreciably, on average, in the last few months.

Growth in M-2 and

M-3 has slowed in part because the rise in interest rates on
market instruments has made them more attractive to some savers than
interest-bearing deposits at banks and thrift institutions.

At the

same time, however, demanQs for loans at depository institutions
have remained strong. Under the circumstances, these institutions have
had to.supplement their deposit flows by borrowing and by reducing
their holdings of liquid assets.
Although these pressures may be causing depository
institutions to become a bit more cautious in their lending policies,
credit supplies still appear to be ample.

Moreover, the financial

condition of the key nonfinancial sectors remains generally strong.
It is true that household debt burdens, as measured, for example,
by the ratio of consumer and mortgage loan repayments to disposable
income, are historically high, and they deserve careful monitoring.
But to date, there has been no rise in delinquency rates, so that
families appear thus far to be handling their increased indebtedness

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well.

Businesses added further to their liquid assets last year, and

corporate balance sheets on the whole appear to be strong, although
there is considerable variation from firm to firm.

And State and

local governments, with record operating surpluses in 1977, appear
in the aggregate to enjoy a healthy financial position.
Thus, financial conditions remain supportive of expansion
in economic activity.

As 1977 drew to a close, aggregate demands

for goods and services were strong.

As I noted earlier, severe

winter weather and the coal strike have caused some steep declines
in economic indicators recently.

However--assuming a reasonably

prompt resumption of activity in the coal industry--we can expect
favorable underlying trends soon to reassert themselves.

Growth of

employment and income has been substantial over recent quarters,
and consumer confidence has remained high.

Consumer spending, there-

fore, should grow at a reasonably good pace, and would be
bolstered later this year by the proposed tax cuts.

In the business

sector, new orders for nondefense capital goods have continued the
uptrend that began about three years ago, and presage further expansion
in business fixed investment.

In addition, the rate of inventory

accumulation is likely to accelerate in coming months; inventory
investment had slowed in the fourth quarter, and stocks are lean in
many product lines.

Moreover, with prospects for our exports

improved by the likelihood of stronger economic growth abroad this
year, it appears that our foreign trade deficit will not deteriorate
further.

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Over-all, itis. the Federal Reserve's judgment that trends
in the national economy favor continued expansion at a moderate rate
in economic activity and a further reduction in the rate of
unemployment over the course of 1978.

There is, however, less

reason to be sanguine about progress in curbing the rate of inflation.
Food and material prices have risen substantially in recent months.
And labor costs continue to rise at a relatively rapid rate.

The

decline in the value of the dollar on international exchanges
is another cause for concern.

It not only contributes to upward

pressures on domestic prices but also threatens to erode business
confidence here and abroad.
The monetary growth ranges that were adopted by the
Federal Open Market Conmittee at its February meeting are expected
to prove consistent with continued expansion in economic activity,
as well as with a gradual winding down of inflation over the longer
run.

For the year ending with the fourth quarter of 1978, the M-1

growth range was set at 4 to 6~ per cent.

A range of 6~ to 9 per

cent was established for M-2, which includes, in addition to M-1,
time and savings deposits other than large CD's at coimnercial banks.
And a growth range of 7~ to 10 per cent was adopted for M-3--which
includes, besides M-2, deposits at nonbank thrift institutions,
The ranges for M-1 and M-2 are identical to those that the
Coimnittee previously had adopted for the year ending in the third
quarter of 1978,·

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The range for M-3, however, has been adjusted

114
downward by~ percentage point in light of the higher level of
market interest rates now prevailing and the apparent effect of
these rates in retarding growth in time and savings deposits at
thrift institutions,

All of the ranges adopted by the FOMC

anticipate a deceleration of monetary expansion from the growth
rates actually recorded in 1977,

Progress over time in this

direction is necessary to ensure the ultimate achievement of
reasonable price stability,
Specification of growth rates for the aggregates is,
of course, subject to considerable uncertainty,

The rate of growth

in money needed to support economic expansion depends in part on
changes in the velocity of money--that is, on the rate at which the
public uses the existing stock of money to finance transactions,
In recent years, regulatory changes and financial innovations have
encouraged increases in the velocity of M-1 by enabling the public
to economize on demand deposits.

However, the retarding effect

of such changes and innovations on the demand for M-1 apparently
diminished in 1977, when M-1 growth accelerated.

Thus far in 1978,

growth in M-1 has been quite moderate, but it is far too early to
say whether this marks a slower trend in growth or is simply a
transitory development in a highly volatile series.
The behavior of the broader aggregates--M-2 and M-3--will
be affected in the year ahead by the constraint placed on the ability
of depository institutions to attract funds under existing regulatory
ceilings on deposit rates.

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115
slowing of inflows of deposits subject to rate ceilings in part by
offering increased amounts of large-denomination time deposits, which
are not subject to ceilings.

Some of these deposits, mainly large-

denomination deposits issued in non-negotiable form, are included in
M-2 and M-3; they have tended to sustain growth in these aggregates,
especially M-2, in recent months.
There are other factors that may work to sustain growth
in the broader aggregates in the year ahead.

To some extent, the

recent slowdown in inflows of savings and also small-denomination
time deposits may represent a one-time shift of highly interestsensitive funds; if so, once the shift has been completed, deposit
growth should strengthen somewhat.

Moreover, the fact that longer-

term time certificates, which are subject to heavy penalties for
early withdrawal, account today for a larger share of interestbearing deposits--especially at thrift institutions--suggests that
overall deposit growth should be less volatile than in the past.
Nonetheless, if heavy demands for money and credit should
place further upward pressure on market interest rates, deposits
subject to regulatory rate ceilings will be placed at a substantial
competitive disadvantage.

In such a circumstance, growth in M-2

and M-3 could fall short of the ranges.

Upward adjustments in

the ceiling rates on some or all categories of time deposits may
be required to avoid a potential distortion in the flow of credit
through our financial system, to promote equity for small savers,

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and to ensure the availability of loans to home buyers and others
who rely on institutional sources of credit,
We recognize, however, the considerable uncertainties
surrounding the shorter-run relationship between growth rates of
the monetary aggregates, on the one hand, and the behavior of output
and prices on the other,

Tile Federal Reserve will continue, therefore,

to maintain a vigilant and flexible approach, putting the long run
performance of the economy above the pursuit of any fixed monetary
growth rates,
Economic and financial developments in the current year, it
should be noted, will depend to an appreciable extent on governmental
policies beyond the province of the Federal Reserve,

Tile outcome

of legislative action on energy policy and on taxation will have a
considerable influence on the strength of business investment and on
international confidence in the dollar,

So, too, will this nation's

ability to find a way to reduce the upward wage-price pressures that
continue to plague our economy,

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The CHAIRMAN. Thank you, Chairman Miller, for a superb debut. I
am going to confine my remarks to one comment which I hope you will
not think is ungracious, and one question which I hope you will like.
The comment is this. You were sworn in as chairman 0£ the Fed at
2 :43 yesterday afternoon, according to my watch. You have not had
an opportunity to meet with the Federal Open Market Committee. So
£ar as I know, you have not had a formal opportunity even to meet
with your six colleagues on the Federal Reserve Board. You have had
something less than 24 hours to prepare your paper. I think you have
done remarkably well at being able to get up here at all this morning.
I congratulate you.
Having said that, however, it is my duty to point out that you can do
better.
In the first place, the law requires that the Fed-and I am quoting:
"take into account past and prospective developments with respect to
production, employment, and prices." This means quantitative estimates. That is what we have been getting from Dr. Burns, and it is
really necessary for us to have them in order to do our job.
The legislative history also requires discussion on such matters as
fiscal policy, monetary velocity, and interest rates.
We respect the independence 0£ the Fed. I£ the Fed has cheers £or
the fiscal policy 0£ the administration, let us hear them; i£ it has suggestions for their improvement, let us hear those, too. Only thus can we
achieve our job.
Third, I do have difficulty with the action apparently taken by the
Federal Open Market Committee in lowering the band for M 3-that is,
cash, checking accounts, and importantly, deposits at savings and loans
and mutual savings banks.
The action taken by the Federal Open Market Committee in lowering the range from 8 to 10½ percent to 7½ to 10 percent, to me that
spells higher interest rates mandated by the Fed. To me that spells a
blow at the housing market which displays increasing signs 0£
fragility.
Fortunately, in just a £ew days, on March 21-that is a week from
Tuesday-there will be a meeting 0£ the Federal Open Market Committee which also includes the £ull membership 0£ the Board 0£ Governors 0£ the Federal Reserve System. I would welcome it, if just as
soon a£ter that March 21 meeting you would provide us with a written
statement which more nearly conforms to the exacting requirements 0£
the law. I would hope, too, that the gentlemen assembled would take
a look at that action in lowering the target on M 3 • I am £earful 0£ the
consequences 0£ what has tentatively been done, and in any event, let
us have a record before us which shows who 0£ the 12 voted what way,
and i£ there are dissenters, and I would not mind seeing a £ew, have
them give us the reason £or their dissent. I would hope then that with
that additional statement from you we could fill in some of the gaps.
And let me say again, I think you did a remarkable job in the time
g:iven you, and these comments of mine are not intended to be ungrae1ous.
Do you think you would be able to accommodate us after March 21?
Mr. MILLER. I would be very pleased to.
Mr. Chairman, I do thank you for your comment. I would point out
that I have not participated in a board meeting or in an FOMC meet-

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ing. I thought it would be improper to do so until I was officially
sworn in.
As you know, the FOMC is made up of the seven governors and
five presidents of the Reserve Banks, and its action on the aggregates
is based upon a review of the staff's presentation on economic performance and projections.
In the past the Federal Reserve has not had a procedure-or perhaps one is not possible-where the FOMC can itself adopt a specific
quantitative measure of the future outlook for production, for GNP,
and for other developments. It may be necessary that such projections
presented to this committee reflect my personal analysis and summary
of the situation-that may be necessary because of the difficulty for a
committee to vote on projections.
The CHAIRMAN. I understand perfectly. In fact, that is the way
Chairman Burns did it.
And as the record many times discloses, he would give his views as
his own. We would ·be very pleased indeed to have yours on such matters rather than in the more collegial form.
Mr. MILLER. I would be pleased to do that.
The CHAIRMAN. And we are very grateful.
Now, on my question.
The Chairman of the Fed('ral Reserve, as you know, must fit his
recommendations into a complex economic environment, taking into
account the administration's objectives, the Federal budget, the need
for jobs, and the inflationary situation. It is widely accepted that general macroeconomic policies alone, among which monetary policy
plays a central role, cannot bring us to the President's goial of 4.0 to
4.4 percent unemploymE>nt by 1983 without generating intolerable
inflationary pressures. What I feel is needed, in addition to traditional policies, is a large-scale program aimed at reducing structural
unemployment-by as many as 1 million persons over the next few
years.
Clearly, if a program on so large -a scale is to work, it must involve
a meaningful public-private partnership. One way to achieYe this
might be to expand on the work already undertaken by the National
Alliance of Businessmen, about which you, as an outstanding past
leader of that group, know a great deal. We could have, for example, a
nationwide network of local business councils, non-profit organizations with federally-funded staffs, who would help match private-sector jobs with the hard-core unemployed, and direct a much expanded
progmm of federally funded training subsidies where they are most
needed.
·would you be willi~ to lend your support, your leadership abilities, and your special ·knowledge and qualifications in this area to
such an endeavor? What, in your view, would be the most effective
way of putting it together? Do you feel that the Federal Reserve, with
its many local contacts, might be of help? ould not such an effort to
create a meaningful public-private partnership to reduce structural
unemployment cost less per job created, and have a more enduring
impact, than primary reliance on traditional across-the-board tax
reductiorn, and would it not make easier your job of coordinating monetary policy with overall macroeconomic objectives?
Mr. MILLER. Mr. Chairman, I do appreciate your question, because
I agree with you completely: Macroeconomic policies will not be

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able to produce the reduced level of unemployment that all of us
seek as a national goal without unleasing a degree of inflation that
would be self-defeating. In fact, we could unleash inflationary forces
that would bring us right back to high unemployment. So I think you
are absolutely correct in saying that if we rely upon macroeconomic
policies, we are going to have enormous difficulties and perhaps not
achieve our unemployment goal.
I agree with you, also, that our technique, therefore, should be to
target. in and address specific programs to the structurally unemployed; we do have very taxing problems and very difficult ones to
overcome, because of the special social and demographic changes that
have occurred.
Your suggest.ion of local business-government partnerships and
training councils is, I think, an excellent approach. ·If the attack
on 81".mctural unemployment is to be successful, I feel that we do need
such a partnership of the public and private sector, as you indicated.
The jobs, ultimately, will have to be in the private sector, if we are
going to succeed. If we continually shift resources into the public sector, I think we will shrink our economic base-again, with self-defeating consequences.
So I would concur that, if there is a way to stimulate the employment
of those who are disadvantaged and those who are caught in the isolated traps of structural unemployment through some such publicprivate partnership, it would be of great advantage.
Something along these lines, as you know, is now being worked by
the National Alliance of Businessmen and the administration. There is
also provision in the President's fiscal year 1979 budget for funds to do
some of this. It had not occurred to me that the Federal Reserve might
have a role in this, but I would certainly be delighted to lend whatever
assistance I could to such an effort because I think it is a very important one. I don't know what the appropriate role for the Federal
Reserve Board and reserve banks would be. But I will certainly be
openminded and willing to look at what we might do, because I think
this is a very, very important mission.
The CHAIRMAN. Well, I am delighted at your answer.
Mr. Moorhead?
Mr. MooRHEAD. Thank you, Mr. Chairman, and welcome, Chairman
Miller. We are very pleased to see you, and I think your first appearance has been a stellar one, sir.
Mr. Miller, on page 8 of your testimony you state that local governments in the aggregate appear to enjoy a healthy financial condition.
There is one notable exception to that with which I have been concerned recently and in recent hearings, and that is New York City.
We have received testimony that if the present Federal aid is not
continued or some form of Federal aid, that New York City may face
bankruptcy.
Have you given any consideration to the national and international
imnlications of such an event?
If you have not, sir, and would prefer to answer that for the record,
I would be very happy to have you do so.
Mr. MILLER. Mr. Moorhead, I think I can answer now.
I have, personally, given consideration to this matter-as we all
have, as interested citizens and as a person who has had facilities and

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reasons to do business in that city in the past. The Federal Reserve
has been doing studies on New York City's outstanding securities, how
they are held by banks, and the impact of default. I would think that
New York's default or bankruptcy would have wide-ranging implications.
I do not think that New York's bankruptcy would cause a serious or
lasting problem for the banking industry; I think that no doubt could
be handled. But I think the effects on markets and on interest rates for
municipal securities would be unfortunate, and should be avoided if at
a11 possible.
.Mr. MooRHEAD. Thank you, sir.
On another subject, on page 2 of your testimony you said that business fixed investments continued to lag well behind its performance in
previous cyclical upswings.
And then on page 3 you state that we must create a better climate for
business investment.
Are you in general agreement with the administration's program for
promoting business investment, and would you like to make any additional suggestions that we might consider i
Mr. MILLER. Mr. Congressman, it seems to me that the tax package
contains reductions on an order of magnitude that is probably the
most that should be considered-given the interrelations of that tax
package with deficits and with rates of inflation, and given its impact
on the economy, generally.
I would personally like to see more of that package concentrated on
policies that would generate fixed business investment. Business investment is anti-inflation investment; it is a job-creating inve51:ment.
And, as we expand, if we don't start soon to place more emphasis in
this area, we are going to run into bottlenecks and we are going to continue to trig1rer more inflation.
So I would like to see more emphasis on business investment. using
whatever resources are available and whatever the Congress feels is
appropriate in the way of tax reductions. I would like to see the tax
package targeted a little bit more than it is toward generating this kind
of investment.
Personally-and this is personally-I do believe that more emphasis
on higher rates of depreciation would, perhaps, be one of the most effective ways to stimulate investment. This approach defers taxes; it
does not reduce taxes. And, to the extent that it stimulates investment,
it is an approach with its own ability to generate revenues and increased business activity.
So. I would think some more emphasis along those lines would be
desirable.
Mr. MooRHEAD. Turnin1r now to the question of inflation, T quite
agree with you that excessive monetary growth would add to inflationary pressures and-however, you give us little enconra,gement, as a
matter of fact. On pa!!'e 9 you say that you can't be sanguine about the
progress in curbing- inflation.
Do you have any suggestions for us along the line of curbing
inflation?
I realize that your position is: You are i;roing to try to prevent a
worsening of the situation. Is there anything you can suggest to us to
improve the situation~

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Mr. MILLER, Since the President nominated me to the Federal Reserve on the 28th day of December, developments have, I would say,
worked a little against us on the inflation front. So I am more concerned about inflation today than I was then.
Curbing inflation is therefore going to have my very, very high
priority. The Federal Reserve is examining its options, but, as you
know, many of the possible remedies are not within the jurisdiction
of the Federal Reserve; they relate to activities other than monetary
policy.
The President, in his economic package, has proposed elements o:f
moderation. I think we are going to have to focus stronger and harder
on them, and see if we can find the will-not only in the private sector but in the Government sector-to begin to take some steps to show
that we are serious. If we don't take those steps, I am afraid that the
consequences will be ones that none of us will like. The sooner we
realize that inflation is a very serious matter, the sooner we can begin
to control it.
Now, I have taken quite a cut in salary as my contribution to fighting
inflation; what are you in Congress going to do 1 [Laughter.]
Mr. MOORHEAD. My time has expired.
The CHAIRMAN. Mr. Stanton 1
Mr. STANTON. It is time to change the subject.
Mr. Miller, the chairman of our committee made some suggestions to you that will, without a doubt, lengthen your next statement
before our committee, and probably the previous statements were a
little bit longer, too, because we always looked forward to not only
hearing a report on monetary policy but to hearing what the monetarists and the monetary policy leaders think of the effect of fiscal policy,
what it has on this monetary policy. I would only point out that it is a
two-way street, and I would hope in the future you would take every
opportunity that you so wish, to show that effect and what it means.
The coJloquy that you had with the chairman on unemployment
made me think that this afternoon-well, not this afternoon, but
within a few minutes. we will be back onto a bill called the Humphrey-Hawkins bill, and I had R question or two, but I hesitate to
ask thPm if you are not at all familiar or if you don't want to comment
on the bill.
Shall I take a shot at it and see if you can comment 1
Mr. l\frLLF.R. Sure.
Mr. STANTON. The crux of the bill. as it affects monetary policy, is
in section 108. title I. and this is the procedure in which the monetary
report oft he Federal RPserve would come to Oongress.
Now, in the oriidnal bill, which was sort of oppn ended. and none of
us knew exactly what it meant, thPre was a statPmPnt somewhere
that this should be turned over to Congress and Congress shall do
with it ns it sees fit and so forth.
The chairman of onr committee took that and made some improvemi>nts. berausP what he has done now. in an amPndment that will be
offPrPd this a.ftPrnoon. is really direct that report to onr committee
rather than Congress in general, and we would then have our comments about it.
After the chairman madP that change, Mr. AshlPv and I were to
add an amendment originally that-to the effect of-language that i9

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before this committee now, as far as these hearings, and it is sort of
a policy of the Con~ess-that would simply state: Nothing in this
aot shall be interpreted to require that policieR propoRe<l. by the Board
of Governors of the Federal ReSPrve be followed if the Board of
Governors and the Federal Open Market Committee determine that
thev cannot or should not be followed bemmse of changin.g- conditions.
This. is in the language of our present hearing-s, arid the chairman
has accepted onr amendment, and so we will have a f11ll committee
amendment which we are in agreement on going to the floor here this
afternoon.
And my question to you is: With thi.R language imd protection, as
we want to keep the independence, which the President spoke about
yesterday, of the unique position of the Fed-do you think this
language is sufficient, or do you approve of the language i
,Tnst so we could have your thoughts on that. I would appreciate it.
Mr. MILLER. Con~ei>sman Stanton, I was pleased with Chairman Reuss' statement about structural unemployment because I think
it reflected a recognition that there is no way to mandate a monetary
policy-a prudent monetary po1icy-to reduce unemployment to a
level that may, perhaps, be a very wise objective from the point of
view of national policy.
It is still my view that the Humphrey-Hawkins bill, in reflecting
that national policy. should continue to emphasize that price stability
is a part of that package, and that we must be cautious because of the
interaction of these conflicting objectives.
I would also say that one of the geniuses of our monetary svstem is
its flexibility, and I would think that :inv la.nguage in the bill that
could be interpreted to destroy that flexibility would not be in the
national interest.
I think the language that you have just cited would be very desirable; it is an excellent choice of words to make clear that there is no
intent to lock the Federal Reserve into policies that would be against
the national interest and that we must be allowed to retain the ability
to be able to respond to what is going on in the real world, day to
day and hour to hour.
I also would add thitt this committee is conducting An effective dialog with thf:1 Federal Re&>rvc in the consultation on monetary policy,
and it would seem to me that it would. be unnece..,~itrv to layer on any
additional structures. It seems to me we have a good operating structure now, and the reporting responsibilities are where they properly
belong.
Mr: 8TAXTON. Thnnk vou, Mr. Chairman.
Tlie CHAlRMAN. Thank vou, Mr. Stanton.
I note that there is a rollcall, and without objection, we will stand
in re,.cesP. for 7 minutes.
Mr. AxNuNzm. Mr. Chairman, point of order before you recPss.
We will probably be going into the 5-mi.nnte rule. and under that
rule I don't think we. are going to get permission to sit. I am inst wondering if you would ask for unanimous consent for those of us that
have some questions, and if ,ve are not sitting, we would like to submit
those questions for the record.

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I have already written to Chairman Miller. I have received an
answer from him. But I want further answers to the problems that
confront my subcommittee.
The CHAIRMAN. Yes. I am embarrassed by the time constraints
under which we are operating, and I would certainly want to yield to
the sense of the meeting.
It is agreeable with those numerous members who have not had a
chance to inquire of Chairman Miller personally that their questions
and supplementaries may be put to him in writing with the understanding that replies will be made by March 21, which is 10 days off,
and is the date of the next Federal Open Market Committee meeting?
If there is one single objection to that, I will not order it. Is there
objection?
Mr. DERRICK. Reserving the right to object, apparently, we are going
to run into more of the same today as we had yesterday, and I think
it is going to be very impractical to try to continue at this point. I will
not make an objection, but I would suggest that we adjourn now for
the day.
The CHAIRMAN. The Chair would like to get a sense of the meeting
on the following. The Chair would like to propose that we now adjourn
this hearing and that we have heard and welcomed Chairman Miller
and that we have heard his willingness to respond to any questions put
to him in writing within the next few days, as promptly as possible,
and to get us an answer as close to March 21 as possible; that Chairman
MilJer further has agreed that following the March 21 Federal Open
Market Committee meeting there will be a further supplementary
written report; and it would be this chairman's intention that if nobody requested a further personal appearance by Chairman Miller, we
could then lock the proceedings up and take whatever action is
dictated.
You have heard the proposed proposition. Is there objection to that
procedure?
Mr. RoussELOT. Mr. Chairman 1
The CHAIRMAN. Mr. Rousselot.
Mr. RoussELOT. Could you restate what you are proposing.
The CHAIRMAN. I ask unanimous consent that we now adjourn;
that members have a reasonable time to present in writing to Chairman Miller any questions they may have.
.
Mr. RoussELOT. He may spend the next 2 weeks just answermg
questions and he has other jobs to perform.
The CHAIRMAN. Let me put the proposition then, if there is objection-I ask unanimous consent that we now adjourn; that members
have a reasonable time to put questions in writing to the Chairman;
that the Chairman, Mr. Miller, will endeavor to answer those questions expeditiously. having in mind the fact that March 21-Mr. KELLY. Mr. Chairman, rPsPrving the right to object-The CHAIRMAN continuing]. Having in mind the fact that March
21 is the next meeting of the Federal Open Market Committee; and at
that time, with all of the evidence before us, if any one member £eels
that a further hearing is required, the Chair will then, without question, recall Mr. Miller.

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Is there objection~
Mr. KELLY. Mr. Chairman, reserving the right to object; what is the
reason we could not attempt to proceed today~
The CHAIRMAN. Because the general flavor of things on the floor
yesterday leads me to believe that my request for permission to proceed under the 5-minute rule would be greeted with derision. So I am
not even going to try to do that.
Is there objection i [No response.]
If not, thank you very much, Mr. Miller.
We now stand adjourned.
[Whereupon, at 11 :15 a.m., the committee adjourned, subject to the
call of the Chair.]

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QUARTERLY HEARINGS ON THE CONDUCT OF
MONETARY POLICY
MONDAY, APRIL 10, 1978

HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS,
Washington, D.O.
The committee met at 10 :07 a.m. in room 2128 of the Rayburn
House Office Building, Hon. Henry S. Reuss ( chairman of the committee) presiding.
Present: Representatives Reuss, St Germain, Gonzalez, Annunzio,
Mitchell, LaFalce, AuCoin, Derrick, Hannaford, Allen, Lundine, Pattison, Cavanaugh, Barnard, Stanton, Brown, Wylie, Rousselot, Hansen, Kelly, Grassley, Leach, Evans of Delaware; and Caputo.
The CHAIRMAN. Good morning, ladies and gentlemen and Chairman
Miller.
The House Committee on Banking, Finance and Urban Affairs will
be in order for continuation of its quarterly hearings on the conduct
of monetary policy.
Chairman Miller, welcome back for this continuation.
I first want to thank you for your comprehensive letter of March 29,
answering the majority of the questions that were left hanging; and
under the rule and without objection, that letter will be received in
full into the record.
[The letter referred to with attached record of policy actions of the
I!'ederal Open Market Committee held on February 28, 1978, mav be
found in appendix II.]
The CHAIRMAN. In that letter you gave, for the first time, your written estimates for the rate of real growth, unemployment and inflation
which you expect in the year ahead. Your assessment differs -in some
particulars :from that of the administration. Perhaps today during the
course of the questions you will be able to give us some of the reasoning behind that difference.
Several other questions that I raised in my opening statement on
March 9 have not yet been fully discussed. These concern: Ma, that
form of money which consists largely of the deposits made by savings
and loans customers in their institutions.
There I expressed distress, you will recall, that the Fed-before you
ioined it, I ·was glad to report--at its February 28 meeting, singled out
Ma, of all things, to cut down on; the bands on M 1 and M 2 were kept
uniform, but on Ma, upon which the housing of the Nation depends,
that was cut down.
I did not like the looks of it. I asked the Open Market Committee to
reconvene and take another look at it, and get your input. Let us dis-

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cuss that right now. The Open Market Committee did reconvene. ,vas
my uneasmess abont what they had done conveyed to you then?
Mr. MILLER. Yes, Mr. Chairm:1n, and the FOMC will be meeting
again next week, at which time new ranges for the aggregates will be
developed for the coming 4 quarters. At that time the ranges will all
he reconsidered. rmd we hope to be reporting back on them in April.
That report will be to the Senate Banking Committee, but certainly
we will send a record to you.
The CH.\IRMAN. ,vm yon convey. with redoubled urgency. my feeling that of all the dogs that do not deserve to be kicked around, it is the
housing one?
Mr. MILLER. I think the-The CHAIRMAN. It is outrageous. I do not know what they thought
they were doing.
Mr. MILLER. The members of the FOMC, I believe, felt-and I am
not sure of this, because as you point out I wasn't there; and also they
are now thinking about the matter in hindsight-I believe they felt at
that time that, with the higher level of interest rate, there was a slowing of flows of :funds to thrift institutions.
I think those ranges reflect the realization that that was beginning
to happen. which is Yery much of concern. I am sure the members of
the FOMC were influenced somewhat by the actual trends in that direction. This is something I am sure we will discuss :further this
morning.
The CHAIRMAN. Convey to them further that projections :frequently
carry the seeds of their own destruction, and, that if they project a
lower rate of M 3 and then start raising ceilings on regulation Q and on
everything else, they are going to get precisely the disintermediation
which they are wringing their hands about avoiding.
Mr. MILLER. I will certainly convey your message to them, Mr.
Chairman.
The CHAIRMAN. I had hoped that that message was going to be conyeyed at the March 20 meeting. Was it ?
Mr. MILLER. Yes, sir. But preparation had not been made at that
time to set new ranges. This will be done at the meeting next week.
The CHAIRMAN. There was no vote on March 20?
Mr. MILLER. No, sir.
The CHAIRMAN. Hence, of course, you did not vote on it.
Mr. MILLER. Right.
The CHAIRMAN. In the minutes of the meeting of February 28-that
is when the deed was done and happily it was the day before you were
made Chairman of the Fed, so you were not there-I note on page 20,
that two members actually believed they had not "done in" housing
enough, and that reducing the M:1 growth range, which was done,
should have been clone with even more fiendish vigor. ,vho were those
two ·citizens?
Mr. MILLER. I am not aware of who thev were, because the minutes
that I have are the same that :von have, and I do not feel it appropriate
for me to be privy to information from that meeting, since I was not
confirmecl until a few davs lnter, as you know.
The CHAIRMAN. Watilcl vou ask· one of your associates to call and
find out who those people ,-iere? After all, we are residents in a responsible democracy. ·when decisions which vitally affect the housing in-

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dustry are made, we, the Congress, have a right and a duty to know
who is doing what. I do not see any reason why that information cannot and indeed, at this very moment, is probably being made public.
Mr. MILLER. Mr. Chairman, I think it has been the procedure of the
FOMC-again I am learning about it-but I understand the procedure has been such that, in order to provide full freedom for discussion and to avoid the possibility of inhibition of expressions of
viewpoints, the names of members who express those viewpoints are
generally not made available. They were made available in the fuller
records that were released many years later.
Those memoranda of discussion, of course, have been suspended
recently; I hope that they will be reinstated so that there will be a
historical base for analyzing decisions.
I do think that if we started bringing to this committee the name of
each person who expressed a viewpoint, there is the· danger that the
members ·will begin to speak for your consideration. They will restrain
themselves from sharing frankly their views, which may be at variance
with the great majority of the FOMC members, and may, indeed, as in
this case, not be reflected in the final committee action.
So I hope you will bear with us and recognize we do not want to
begin a procedure that would, perhaps, undermine the very way in
which the FOMC is able to act objectively and get a collegial decision
and find a consensus after the fullest kind of dialog.
The CHAIRMAN. I really cannot understand that, because here in the
committee we make our decisions in open forum. If my friend, Mr. St
Germain, and I disagree on something, we sound off, give our reasons,
good or bad, and let the truth come out.
I do not see why a board, five members of which are not even
democratically selected, should have the cloak of anonymity thrown
over it until we are all dead. So, I want to record myself as completely
out of sympathy with the secrecy cloak of the Fed.
No one is going to jump on soineone because he made a statement
with which we disagree. We will disagree with it, but I do not see
why he should be immune from criticism.
So convey-speaking just for myself-my utmost outrage at this
violation of democratic process and my hope that, under the new
administration, it will be put into the trash can, where it so richly
deserves to reside.
I have a few other questions which were raised in my opening statement. We still do not have the Federal Reserve comments on fiscal
policy _and on prospective develop!Ilents in interest rates and velocity.
We still do not have the Fed's Judgment on the need to revise or
abandon now unrealistic money growth targets still in effect for the
next few quarters.
. Every day we read in the Nation's press that, whoops, sorry, but
vital m~tters lik~ M 1 and M 2 have been badly misguessed by the 800
economists workmg for the Federal Reserve. This does not endow us
wit~ gr~at_ coi:fidei!ce in the process by which thoPe decisions are made.
I thmk it is high time we looked at the whole statistical basis.
We_ ·would like your view, too, on appropriate long-term goals for
reducmg _unemployment, goals which, as you know, I am heartily in
ac~ord wit_h, and have frequently commended before and do so again
tlus mornmg.

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We want your comments on the appropriate format for monetary
policy oversight, and particularly, we would like your view on the
future scope of intervention in foreign exchange markets in support
of the dollar. I suspect that there may reside some genial differences
between us. I think the Fed does more harm than good by trying to rig
the dollar market under the guise of quieting disorderly conditions.
I think it is a failure so far, and I really would like to know about it.
Earlier, we had an opportunity for questions from Mr. Moorhead,
and I think, Bill Stanton had his time at bat. So we will start out this
morning where we left off, Mr. St Germain.
Mr. ST GERMAIN. Thank you, Mr. Chairman. I welcome the Chairman back again.
Chairman Miller, by now, hopefully the Fed has had an opportunity
to analyze and review the President's new urban policy. What I would
like to know is how you and the Fed feel that this policy, if enacted
more or less in its entirety by the Congress, will impact on general
economic conditions and monetary policy.
Second, assuming the program is enacted basically along the lines
as presented by the President, how does the Fed feel, or how does it
plan, rather, to accommodate the urban policy?
It could be you would like to give us a few remarks on that at this
time and expand for the record. I would understand if that were the
case.
Mr. MILLER. Congressman St Germain, I am pleased to comment on
the urban program. I am sure that all of us are concerned about the
plight of our central cities. There is a long history as to why there has
been pressure on the central cities and why they have lost some of their
vitality as important parts of our economic structure.
Part of the reason, of course, has been the very change in the nature
of cities which, in ancestral times were places of defense; later, of
ceremonial activity; and then of mercantile activity. In the Industrial
Revolution, they became the centers of production, where the necessary
labor forces could be readily available.
But, in the era of the postindustrial revolution, we have seen thP
dispersal of production facilities away from the cities; and we have
seen the influx of those persons displaced from agrarian activities into
the cities. And the resulting mismatch of jobs and people has creater1
a tremendous difficulty.
Generally, I thi.nk the urban program presented by the President is fl
good one. It has been noted that it has no one centerpiece of policy; in
many ways, I think that is a benefit, because there is no one simple
solution to urban problems, but rather a series of answers that addresic:
themS"elves to the reestablishment of a balance.
There are only a limited number of things that can be done to re
habilitate cities and to create employment for the people who residP
there. One is to transport urban dwellers who are unemployed to places
of employment each day and return them. But that creates an enormous logistic problem and it doesn't work.
Another is to physically move people from the cities to other areas
where they can be near oportunities for employment. But this also i;.:
a massive undertaking, and we do not have the structure for doing it.
A third possibility is to bring jobs hack to the cities, to make the
opportunity for employment available.

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I think the program presented gets at a great number of problems.
It will do a great deal to bring us back to where a mix of activities
in the city-transactional business, production, financial activities,
service industries, entertainment, cultural activities-can mesh into
vital whole.
So I commend the program. I believe that it shows some prudence in
its financial commitments. It is neither meant to be a cure-all, nor is it
meant to be an expensive solution through massive injection of money.
But it appears to be addressed to solving a whole series of structural
problems and to creating incentives that should go a long way toward
making progress in this regard.
The CHAIRMAN. Thank you.
Mr. ST GERMAIN. Thank you. Dr. Burns-Dr. Miller.
Mr. MILLER. Neither Dr. Burns nor Dr. Miller is here!
Mr. ST GERMAIN. '\Vhat I meant to say was, Dr. Burns, back in
1974, wrote to banks in agricultural districts, expressiug the concern
of the Fed with the crunch for capital for feedlot operators in the
Midwest. He urged that Federal Reserve oificials make clear to those
banks in their districts that there was an obligation to meet the local
credit needs of those cattle operations. Now I am wondering, has the
Federal Reserve given any thought or has it done anything in the area
of sending the signals to the banks, serving urban areas, that they too,
like banks in the agricultural areas, which were referred to in 1974,
have a clear obligation to serve local needs, including inner-city
banking efforts?
Mr. MILLER. We are fortunate that Congress has helped in this
regard: the Community Reinvestment Act is now law, and it does
provide that banks shall have an obligation to meet the credit needs
of their communities.
The Federal Reserve, along with the other bank regulatory agencies,
has commenced a series of hearings across the country-the last of
which, I believe, will be in New York on April 20-in order to gain a
more widespread understanding of how these responsibilities of banks
might be met. The inputs -we have received from people in all walks of
life have so far been extremely helpful, and from this process will
come regulations which I think will f!O a very long way toward clarifying the responsibilities of banks in the communities where they
operate. where they draw their capital.
And I believe we will find that our action does contribute positively
toward supporting the urban programs that are now being presented
to you.
Mr. ST GERMADL 1Ve11, I say that mv subcommittee is planning to
hold hearings, as well. on this 'as soon as the agencies have completed
their hearings. No doubt we will be asking you for your contributi<:ms
and reaction, as a result of the hrarings that you and the other agencies,
well, you, the Fed, and the agencies have held on this topic.
One last question.
Prior to the Easter district work period, I. in a press release, stated
my intent to introdnre legislation whirh I did. indeed, introduce on
Wednesday last, which would remove the prohibition of payment of
interest on demand deposit acconnts. It seems to me that the new
regulation the Fed has had comments on which w~:mld pern~it ant<;>matic transfer accounts is just another step at cll'cumventmg this

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prohibition and, for that reason, I felt that we should address the
problem directly. For many years now there have been overt methods
employed by financial institutions to get around this and the regulatory agencies have looked the other way.
Now, of course, the Fed has this proposed regulation.
My legislation would, in fact, remove the Federal prohibition
entirely and give checking account powers to all financial institutions.
Has the Fed had an opportunity to look at that particular legislation
as contrasted to the regulation, its proposal at this time?
Mr. MILLER. Mr. St Germain, I hope that I can soon stop repeating
what I am about to say.
T-tie automat~c tr!lnsfer proposal was initiated just before I became
Chairman, but 1t will soon come before the Board for final determination. I hope that, in making a determination about that proposed
regulation, we will do nothing at the Fed that would tend to circumvent the direction of Congress or the laws.
Today, as you know, the mechanism of banking is evolving through
the natural forces of the market.
New techniques have been developed for consumers to gain better
access and better returns from their own banking resources. We have
seen the development of NOW accounts in New England; we have
seen the development of telephone transfers from savings accounts.
If savings moneys can be transferred by telephone or by walking
into the bank every day or by sending a list of instructions, then one
might say it follows logically that transfers can be left to a standing
order. This regulation, I hope, would be only consistent with serving
the consumer and serving the needs of banking, rather than intended
in any way to circumvent the will of Congress.
Having said that, I will say that, as you know, the Federal Reserve
has supported the concept of N01V' accounts nationwide through legislation. Although we have not discussed this at the Board, my personal
opinion is that the Federal Reserve would support your own proposal,
because it would offer a uniform and equitable opportunity for all of
the depositary institutions to compete fairly, and it would also provide
additional service and additional opportunity for income to consumers.
Mr. ST GERMAIN. I will admit that I anticipated your answer. How
ever, I wanted to take the opportunity to bring it out into the public
eye a little more and just make one further comment. That the intent
here in allowing all institutions to have demand deposit accounts that
would pay interest would be to do so without the differential.
I think that is an important point.
Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from California, Mr. Rousselot.
Mr. RoussELOT. Thank you, Mr. Chairman. Mr. Chairman, we are
appreciative that you are here so soon after your last appearance and
your willingness to subject yourself to questioning by Congress. I was
most interested in your letter of March 29 to the chairman of this
committee and found it to be helpful. I have quoted from it several
times since.
My question relates mostly to the econometric model of the Federal
Reserve Board. My understanding is that you have your own econometric model which you use from time to time, and in the past we have
not been privileged to know what its projections might be.

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As you know, in Budget Committees of the House and Senate and
several other committees of Congress subscribe to the services of various econometric models.
Would it be your thought that maybe it would be helpful to share
with us from time to time projections that come from your econometric
models, since as a Board you make judgments which may in part be
based on the model, and since your whole system, I am sure, uses it
from time to time~
Mr. MILLER. Mr. Congressman, let me give you what I think is the
range of possibilities. I am sympathetic to your need, and my letter
was intended to be responsive to the matter of making available to this
committee and to Members of Congress more quantitative projections.
I am sympathetic to your need to l:now what we are trying to accomplish-in some way other than in generalities.
Mr. RoussELOT. We would like to know on what assumptions about
the economy your judgments are based, and we would like to have the
benefit of the model in making certain judgments of our own concerning economic issues.
Mr. MILLER. And what we base our judgments on. Let me give you
the range of possibliities. If we should conclude that the best alternative is to present to you our staff models, the problem, as I see it, is
that inevitably the staff would begin to shape the model for its public
value rather than for its value in presenting the hard economic realities
that we need to consider at the FOMC. I would hope that staff members could remain completely uninhibited, even by the prospect that
their work would be subject to scrutiny other than the scrutiny of
those to whom they are accountable for their work.
Having said that, I will offer two other choices. One is for the
FOMC-it has never been able to do this-but for the FOMC to develop some method of making its own judgment about the information
presented and shaping its own projections. It is hard to get 12 people
to agree to anything and that creates a problem, although this alternative should be considered.
The other alternative is for the Chairman-having seen and worked
with the staff data, and having listened to the comments and inputs of
all members of the FOMC-to reduce this information to his personal
projection and to bring you what I hope would be an educated judgment of how all those factors, comments, inputs, regional viewpoints
could be synthesized into something that would be helpful to you. I
have done this in my letter; perhaps the method can be improved in
the future.
I must confess to you that the ranges I have given to you are not
the ranges presented by the staff. They are, however, ranges which,
since we met, I have had a chance to discuss with some members of the
FOMC. I think they are consistent with the general consensus of the
FOMC, although there may be individuals who would be above or below the ranges.
I hope, as we work together, that I can develop something that is
useful to you and yet allows us to keep our staff as an internal source
of information, whose opinions are not colored by a desire to speak
to you rather than to speak to us.
Mr. RoussELOT. I appreciate your comments. The reason I think it
would be helpful is that I know that the Budget Committees and many

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of our committees here in Congress subscribe to several outside econometric model services, and many of our judgments are made on the
basis of those models. I also believe it vmuld be helpful to us, especially
in this committee when we are discussing monetary policy issues with
you as you come up to appear before us every 6 months, to know how
much of a part of the Fed's own econometric model plays in the judgments that you make.
So I appreciate the comment and also appreciate your response to
the chairman of our committee.
The CHAIRMAN. The gentleman's time has expired.
Mr. RousSELOT. That is certainly unfortunate.
The CHAIRMAN. The gentleman from Texas, Mr. Gonzalez.
Mr. GoNZALEZ. Thank you, Mr. Chairman.
Mr. Chairman, dollar depreciation obviously contributes to our inflation, or at least the experts seem to think so. However, more dangerous than that, it could lead to such things as OPEC demanding
payment in something other than the dollar unit, as for instance China
announced last week, in which the news reports indicated that China
was demanding payment in Swiss francs rather than dollars. Or it
could lead to OPEC valuing its oil in some other unit.
Now, this could lead to panic. On the other hand, it could also
lead to a price rise by OPEC. Either way, it seems to me extremely
urgent to do something to protect the dollar. I am not going to follo,v
up at this time on the intervention question that the chairman raised,
because I raised that question the first time when we had the first hearing, from Professor Dornbusch, I believe.
Do you believe that a tight monetary policy would be one key step
to take now in protecting the dollad
Mr. MILLER. Congressman Gonzalez, the issue you raise is a very
serious one, and I concur with you that the depreciation of the dollar
against some key currencies has, even in the last 6 months, fed in a
significant amount of inflation and potential inflation to our economy.
It does create other prospective difficulties for us-such as its effects
on the method of pricing oil, and such as its effects on international
money markets and the flow of capital-which could upset our economy
or could have an adverse impact on it.
I think the real solution, however, is not just to use monetary policy,
but to look at the fundamental reasons which cause the problem. The
fundamental reason for the dollar's decline is the large deficit in trade
and in current accounts that we have incurrPd: a large one in 1976;
an unprecedented, record one in 1977; and a continuing trend of such
<lefirits in 1978.
Therefore, it seems to me that we need to look at the. fundamentals
and at least to make a change in the trend in those deficits in order to
strengthen the doUar. One of the wavs to do that is to reduce our
dependency _upon forPign oil. One of th·e best ways to do that is to have
an energy bill from Congress as soon as possible so that we can establi~h a baseline in our policy. And if it is not a perfPct law, at ]past it
will be one :from which we can learn and make adjustmPnts and move
forward to try !O reduce this very heavy dependency on imported oil.
In 1973, we imported 8½ bilJion dollars' worth of petroleum nnd
petroleum products; lust year, $445 billion-which, of course was a
major contributor to our $30-plus bimon deficit last year.
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The second thing that influences the value o:f the dollar is inflation.
Those who hold dollars look at the realities: that 6-percent inflation
means that the value o:f the dollar in 12 years will be 5~ cents and that
the value o:f a dollar in 24 years will be 25 cents. Inflation reduces the
purchasing power of those holding do11ars; and that does create
problems.
.
.
.
.
The decline o:f the do1lar feeds mflation, and mflat10n :feeds the
decline o:f the dol1ar; so we have a serious problem, which is related
to our oil import problem.
.
.
Monetary policy under these circumstances :riust be prudent; 1t
must strike a balance between the degree to which, on the one hand,
the dollar could be aided, and the degree to which, on the other hand,
our economy would be slowed, creating problems o:f underutilized
resources and unemployment.
.
. .
So, we have a verv tough dilemma. Because o:f that dilemma, 1t 1s
our preference and ·belief that the national interest would best be
served by attacking the problem, first, with an oil policy and, seco~d,
with a strong anti-inflation program, rather than relying so heavily
on monetary policv.
Mr. GONZALEZ. However, in your testimony the last time, March 9you thought that this :foreign trade imbalance would show no further
deterioration.
However, the month o:f February shows the largest of all, $4.5
billion.
Mr. MILLER. Mr. Congressman, the trade figures in February were
a disappointment. And if we continue to have trade deficits at the rate
we had :for the first 2 months of this year, we would have a much larger
deficit for the full year. And that is o:f concern to me; the information
in Feb11uary was somewhat unexpected. I am convinced that we have
an even more serious problem than I expected a month ago, which
makes it more urgent that we have an energv bill and more urgent
that we have a strong anti-inflation program. ·
It also makes it urgent that ,ve try to stimulate opportunities for
exporting American goods to help close this gap.
You know, there has been a good deal of discussion about our trade
deficit in which two components of it have been noted. One is oil
imports, which is on everybody's list of what creates the problem. The
other is relative growth rates between our economv and the economies
of other indnstrializPd nations, the argument here.being that when WC
have a higher relative growth rate than other countries onr economy
absorbs many imports in addition to oil because wc need them to keep
our economy growing at that high rate. Moreover, we cannot export as
much beca,nse o:f the lower growth rates elsrwhere.
As yon know, thPre has bern considerable discussion of this issue;
somr of thP REC countriPs have bPPn mePting rrcrntlv to discus,:
whethPr they have an~, prospects for adjusting 'their gro'wth rates to
help close somP of that gap.
·
But I think corrrcting the tradr imbalnnre takrs a number of efforts.
The problrm of oil imports mnst bP arl<lr<'s."!rrl. and a change in the
rrlative growth rates would be helpful so that there is less disequilibri11m in trade.
Bnt it is also important that we bring down our inflation rate.

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Mr. GoNZALEZ. Mr. Chairman, I am very disturbed, because you
depend-The CHAIRMAN. The gentleman's time--Mr. GONZALEZ. I just want to complete this, that is all, Mr.
Chairman.
The CHAIRMAN. Very well.
Mr. GONZALEZ. Then I am afraid we are open to a karate punch,
which is what I am afraid of now.
Mr. Mu.LEH. If we do what, sir~
Mr. GoNZAL)<]Z. If we are going to wait on this mission represented
by the so-called energy bill pendmg now, I am afraid we are leaving
other options that I feel something is demanded now to avoid a karate
punch.
Mr. MILLER. As you know, I have felt the first step is to have an
energy bill. I have felt that, in the absence of an energy bill in the
very near term, other actions should be taken.
Mr. GONZALEZ. I ask unanimous consent that I may be permitted
to offer in writing four questions for the record.
The CHAIRMAN. Is there objection?
Hearing none, the gentleman is accorded that privilege.
[The questions submitted by Congressman Gonzalez, and answers
from Chairman Miller, may be found in appendix I.]
The gentleman from Illinois, Mr. Annunzio.
Mr. ANNUNZIO. Thank you, Mr. Chairman. I want to join the other
members of the committee in welcoming Chairman Miller back to
the committee. I want to commend him for his appearances, two occasions now before our committee, his straightforwardness, his candid
and open answers.
And I am hoping that that will continue on his part.
I think the committee enjoys answers that are straightforward, especially in language that we can all understand.
Mr. MILLER. That is the only language I know, Mr. Annunzio.
Mr. ANNUNZIO. Chairman Miller, like all of my colleagues, I was
at home for the Easter recess. And one of the major problems, at least
everywhere I went, I was confronted with was the cry of inflation.
I represent a district that is predominantly middle class. The average
voter in my district is about 50 years old or over, many people living
on fixed income. We hear so much about unemployment and other
issues. But the burning question in their mind is inflation. The high
prices. Now it is permeating thtir pocketbooks and their style of living so that as all of us know, inflation has reached a point where it
absolutely defies textbook solutions.
I know that the idea of wage and price control is not something
that any of us like to think about. But I am wondering if the economy
continues on its present course, would you and your colleagues favor
a wage and price control program?
Mr. MILLER. Congressman Annunzio, I would not favor direct wage
and price controls. And I know of no one in the government who
would. The reason is very simple. I don't think they will work. Our
experience has shown that, in this very large, dynamic economy with
its inherent characteristics of large private inputs and options, direct
wage and price controls work only in periods of national emergency,
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Our experience trying them this decade, during a period of serious
inflation but without such a national emergency, was very unfortunate. We saw distortions, and we saw the breeding of additional inflationary forces that we are still fighting today.
So I would be completely opposed to direct wage and price controls. I am in favor of making inflation our No. 1 priority in terms
of domestic policy, because it 1s as insidious a force as your constituents have informed you. As I mentioned at our last meeting and as
I have said since, even from the time I was nominated on December 28
until today, it is pretty apparent to me that inflation has become a
more difficult problem than I anticipated.
Therefore, it deserves tremendous attention. It deserves a marshaling of all the resources of lead~ship and action we have to counter
it. And it requires that we must all discipline ourselves and give the
inflationary impact of what we do much greater consideration in our
decisionmaking.
Mr. ANNUNZIO. Thank you, Chairman Miller, but I should mention
that absent the national emergency, having reached that proportion,
I want to go on record this morning stating that as far as I am concerned inflation is not only our No. 1 priority to be resolved, but it
has reached a point of national emergency. And for years this committee has passed legislation giving the President of the United States
the authority to use wage and price controls as a standby measure, I
appreciate your answer.
You feel it is not a national emergency. But when you talk to the
people, as far as they are concerned it is a national emergency, and
I do feel that the administration must seriously think about some
kind of a policy to bring our economic system back into order.
Mr. Chairman, I have just one more question. Chairman Miller,
another question that has concerned me for some time is about regulation Q. As my colleagues know, I have proposed on many occasions
that regulation Q be made a permanent regulation. I am tired of year
after year regulation Q being held hostage. The last several years I
have sponsored legislation trying to get it extended to 2 years. I think
the most we ever got it extended was 1 year.
Now, at least in my opinion, one of the best ways of insuring an
adequate mortgage money supply is the maintenance of this quarter
of 1 percent differential allowed the savings and loan industry.
I would like to know how you feel about this differential or whether
or not it is important to grant some type of such benefit to S. & L.'s
in order to insure mortgage money?
Mr. MILLER. Congressman Annunzio. I share your emphasis on the
need for adequate capital resources to finance our housing needs. I
think that is critical. I know that the thrift institutions and the
S. & L.'s have performed a great function in many parts of the country
in this regard. I also know that we have seen improvement in the fundamental stability of those sources of capital, both because of the
greater dependence today than we have seen in the past on longer term
deposits in those institutions, and because of the availability of backup
resources from nondeposit sources of funds. Those are all encouraging
things. As to the differPntial, it is my undm,tanding that there is a
task force working on thiR problem now and that the FedPral Reserve
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when I have heard all of the inputs from those sources, I can better
answer your question.
But I will say, categorically, that I think it's essential that we maintain a financial structure that accommodates the housing industry
that is the key to our economic progress.
Mr. ANNUNZIO. My time has expired and I thank the gentleman.
Mr. MILLER. Thank you.
The CHAIRMAN. The gentleman from Florida, Mr. Kelly.
Mr. KELLY. Thank you, Mr. Chairman.
I yield to my colleague for 1 minute.
Mr. BROWN. You talked about the energy problem and the potential
for a legislative solution. You said if that did not occur, you would
then advocate other actions. What other actions were you alluding to 1
Mr. MILLER. It seems to me that petroleum importation has become
too critical to sustain our own economic well-being, and that our dependence on foreign oil has become excessive; this has created the
problems I mentioned.
In the absence of congressional action, it seems to me that the
President could well give consideration to direct action on imports,
either through some sort of fee-which he is authorized to impose
under certain circumstances-or through a quota.
If we come to that, I have expressed myself publicly as preferring
the fee approach. But I think that in a few weeks, if we do not expect
to have congressional action, the President might well consider that
initiative on his own. That initiative wouldn't have to last :forever; it
could be an approach to be in force only as long as legislation hasn't
come forward from Congress to address the problem.
Mr. BROWN. But, Mr. Chairman, the thing that bothers my mind, and
appears to be almost an intellectual schizophrenia, is you can talk about.
imposing a $5-per-barrel fee or even higher, I have heard, in order
to effect conservation, I presume, and you some way walk the
tightrope of saying that wouldn't be inflationary but will effect
conservation.
But if you give the producers that $5 per barrel, that is going to
neither effect conservation and it will be inflationary.
How can you possibly walk that line~
Mr. MILLER. In the first place, I think any program that lets market
forces loose to solve our problem-by creating incentives for development of new sources, or by shifting to old sources, or by reducing or
conserving our use of energy-any of those things will add to the
unit cost of energy. Unless we offset that with a reduction of our
utilization of energy, there will be a new addition to cost which will
be inflationary.
But let me assure you that the alternative is even more inflationary.
The decline of the dollar since last September will add about threequarters of 1 percent to the inflation rate in this country by the Pnd
of this year. A $5-per-barrel crude oil tax would add less: nnd if it
returned the dollar to where it was last September, we would be even
better off.
So, in terms of the tradeoffs in this very complicated area, if we
continue to be at the mercy of oil exporting nations and make no significant progress in reducing our dependence, we are faced with inflationary pressures from petroleum in any case: and we are faced
with problems with the dollar that add more inflation.

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It is not an easy task, but if we could agree that inflation is so
serious that it is an emergency-I think I can agree with Congressman
Annunzio on that-then it is important that we take some steps which
will not be popular with everyone. But I think these are steps that we
have to take, medicine we have to take.
If we fail to have the courage to take these steps, then I think the
inflationary forces we have been predicting may turn out to look low.
If that is true, we will have far more problems in sustaining our
growth and providing the employment levels we want.
Mr. BROWN. Mr. Chairman, I have more than used up my time. I
just would like to say that an import fee doesn't cause any kind of incentive for greater production of oil and gas in this country; the incentive for increased oil and gas production is increased profitability.
I have never seen a tax provide production or profit to any concern.
Thank you, Mr. Kelly.
Mr. KELLY. I would like to ask you this question. The difference in
the growth rate between the United States and our trading partners
has been to a very large measure due to the artificial stimulation of
the economy; isn't that true i
Mr. MILLER. No; I wouldn't say artificial-Mr. KELLY. In either event, the "stimulation to the economy was the
result of buying jobs, creating jobs.
Mr. MILLER. I would put it in a little different perspective, because so many things have happened in the last 10 years and many
shocks to our economic system have been incurred.
Mr. KELLY. Have we been trying to stimulate the economy i Has
the Govnnment been doing that?
Mr. MILLER. Certainly the actions of the Government have been
stimulative in the last "few years.
Mr. KELLY. Has that been the purpose of it, to stimulate the
economv?
Mr. MILLER. I don't know. I would haveMr. KELLY. Was that the announced purpose'l
Mr. MILLER. I would have to ask each of you how you perceive it.
I think one of the purposes was t o Mr. KELLY. Excuse me, Mr. Miller. I didn't ask you how we perceive it. I asked was it the announced purpose of the Government to
artificially stimulate our economy by Government expenditures; was
that the purpose of it i
Mr. MILLER. I think Govern.ment expenditure levels have been a
part of an economic pro~am that was stimulative and was so intended.
The 0HAIRMAN. The time of the g-entleman has expired.
Mr. MILLER. I am not sure I understand the question. Obviously
defi"its are stimufai-ive, but I am not sayin~ Congress voted deficits
to be stimulative. They may have voted deficits because they wanted
to l'f'd11ce the high level of unemployment. for example.
Mr. KELLY. The administration announced that it wanted to stimuJatr the economy; iR that not soi
The CHAIRMAN. The gentleman from Maryland.
Mr. MITCHELL. Mr. Chairman, will vou note the time that is being
given to me so I can be sure to Q"et my 5 minutes with no intruRions?
Mr. Millrr. let me comme:nt briefly on two things. No. 1. I do not
share your enthusiasm for the urban policies proposed by the admin-

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istration. I know that the mayors and the Governors must make some
soothing sounds about it because they are to be the recipients of it.
But it is inadequate, it is underfunded, and it will not have the impact we desire. I state that very flatly. I am primarily concerned with
this proposed policy because of the lack of attention given to the unemployment problem. I think there is a growing feeling in Congress,
in this country, and hopefully in the administration, that white
America is back to work but black America is not. Nevertheless, you
say, let's start restraining, moderating our policy, and leave blacks
pretty much where they are in the unemployment picture. I must
make that comment because that is the way I feel.
It is clear that the urban policies proposed by the President will
not have the kind of impact that many of us desire.
The second comment is with reference to Chairman Reuss' earlier
discussion about the Federal Open Market Committee's secrecy. I
share the chairman's concern. Why should there be double standards?
Chairman Reuss is right. We in Congress are required to have open
sessions, open discussions. I see no reason why the deliberations of
the Federal Open Market Committee ought to be closed and held in
secrecy, as you indicated.
The CHAIRMAN. Would the gentleman yield very briefly?
There may be a way out of this dilemma. Chairman Miller has
suggested that it might inhibit the freedom of action of the Federal
Reserve Board of Governors if they were required to state their reasons. We have on our committee, a subcommittee chaired by the gentleman from Illinois, Mr. Annunzio, which has evolved a device for
protecting the anonymity of witnesses, and I would ask the gentleman from Illinois if he and his staff would be able to devise masks of
some sort-Mr. MITCHELL. Mr. Chairman-The CHAIRMAN [continuing]. For Federal Reserve members who
are afraid to state in open court-Mr. MITCHELL. Mr. Chairman, with all due respect to the Chair,
I would wish that that question would be put to him after I finish. I
have so little time to propound some questions.
The CHAIRMAN. I will not impose further.
Mr. MITCHELL. I appreciate the kindness of the Chair.
Some feel that if the money is restrained, Mr. Miller, interest rates,
especially short-term rates, will rise. That is generally the thinking.
However, we had a different kind of phenomenon last year. As you
know, M1 growth accelerated to nearly 8 percent, and short-term
interest rates jumped about 2 percentage points.
My question thus is: Will restraining money growth increase or
decrease interest rates, including short-term rates?
Mr. MILLER. Of course, the answer depends on the rate of growth
of the economy. Last year, the rate of growth of Mi-7.8 percentwas faster than the FOMC had established in its ranges. But nonetheless, with the 5¾ percent real growth of the economy, the result
was some increase in short-term interest rates.
If the economy had grown at a slower rate, I would say interest
rates would not have increased. So it was the interrelationship of the
rate of growth of money and the growth rate of the economy that
produced this effect.

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I might comment on your observations, because I agree with them.
I think we cannot be satisfied and cannot be complacent about the problem of unemployment. The rates of unemployment for many groups
of Americans, certainly black Americans, and certainly many other
disadvantaged Americans, is far too high.
As we have discussed before, however, there is a limit to what macroeconomic policy can do to improve that picture. We need, I think, to
have a complete economic program which includes some targeted programs for structural unemployment.
I would make just one other important comment to respond to your
issue on the urban program.
Mr. MITCHELL. Would you hold for just a moment on that, because
I wanted to raise a question about the macroeconomic approach on
unemployment.
Mr. MILLER. Certainly.
Mr. MITCHELL. As you know, 4 million jobs were created in 1977, and
though the white rate of unemployent decreased, the black rate remained the same. In fact, it actually increased for black teenagers
and for some others. The most recent statistics from the Department
of Labor indicate that that black unemployment continues to increase.
Recognizing the limitations of the monetary policy approach, what,
if anything, specifically would you try to do to help ameliorate that
situation 1
Mr. MILLER. We would try to seek solutions that do not leave monetary policy as the sole counterforce to our inflation problem. My message has been-and my message today clearly is-that the inflation
situation is so serious that it will impact and threaten the opportunity
for jobs for all Americans. The burden of inflation certainly will fall
heavily on those who need jobs the most.
If inflation continues, regardless of monetary policy, interest rates
will rise for long-term capital. There will be ~ slowdown in housing;
there will be a slowdown in business; there will be a slowdown in the
economy; and there will be an increase in unemployment resulting
from inflation.
If the Federal Reserve is left to deal with the problem alone, it has
one of two choices: It can try to act soon to restrain the forces of inflation by restricting the growth of the monetary aggregates, in which
case the economy would slow down early and, perhaps, moderately; or
it can increase the rate of growth of the money supply to finance the
higher levels of inflation-can open the printing presses to pay the
price of inflation-in which case inflation will accelerate, economic dislocation in 2 or 3 years would be very substantial, and there would
be even greater unemployment and greater distress.
So we have a very serious dilemma. That is why we are trying to encourage our economic counterparts in the Federal Government to take
a strong hand against inflation: so that we can, in monetary policy,
maintain conditions for growth.
That is what we-Mr. MITCHELL. My time is up. I see where you are coming from. You
needn't say more. The essence is fight inflation, make that the No. 1
priority. Fight inflation by reducing fiscal spending, reducing stimulus, thus leaving blacks pretty much where they are. That is the
pattern.

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Thank you very much, Mr. Chairman.
Mr. MrLLJ<,R. No, even in my own outlook for the year, you will notice that I contemplate further reduction in unemployment. I contemplate that only by getting inflation under control can we have
conditions for growth in the economy that would get us to the lower
unemployment levels we all want.
If we fail to control inflation, then we will have-whether we like
it or not, regardless of what we do-a slowdown in the rate of growth.
The CHAIBMAN. The gentleman from New York, Mr. LaFalce.
Mr. LAFALCE. Thank you, Mr. Chairman.
Mr. Miller, there is presently before the Fed a proposal that would
permit the creation of a domestic-international bankin(! branch. It
would require a change in regulation Q and regulation D, insofar as
interest on short-term deposits are concerned, and reserves on those
deposits.
It is a rather technical process. If you are familiar with it, I am
wondering as to your present thoughts on it.
Mr. MILLER. This is the domestic-international banking facility?
Mr. LAFALCE. Yes.
Mr. MILLER. I think it's an intriguing idea.
Mr. LAFALCE. The entire Euro-dollar market is outside the United
States: London, Cayman Islands, Bahamas, and so forth, and the jobs
attendant with it. It just seems to me as if it is an excellent proposal,
and that the requisite changes in the Fed regulation are necessary before we can bring those jobs back here.
Mr. MILLER. Congressman LaFalce, I think that it is an intriguing
idea that deserves consideration. I have studied it only briefly so far.
I would have no objection to taking a harder look at it. I think we
have to be careful and be sure that it will accomplish what is intended,
and that it will not create some leak in the dike for domestic banking
to creep in somehow.
And the segregation of the activity-Mr. LAFALCE. We already do regulate under regulation M certain
overseas operations. While it is a problem, it is certainly one I think
we can deal with. I hope you wouldn't approach the problem with the
perspective of: How can we deal with it?
I might go on to the second question-and I have three, so I hope
you will be brief on the second one.
I am concerned with the apparent exodus of brmks from the Federal
Reserve System; and the usual refrain from the Fed is: Let us have
interest on reserves. It seems to me we need some total approach to the
problem. We have to understand the problem better, and then need
some total approach to it. I am wondering what you are contemplating
along those lines.
Mr. MrLLER. I think there are several ingredients necessary to a
comprehensive solution. First, because of the burden of membership,
we need to find some method for compensating for sterile reserves.
That, of course, would lessen the burden on member banks.
I would like to couple that approach, however, with the establishment of explicit pricing for Federal Reserve services. I believe ultimate equity depends upon having those who use the services pay for
them; it is not fostered by just having a pool from which some people
get benefit and some don't.

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The third ingredient I think is needed is some way to shelter the
Treasury from any loss of revenue from paying interest on reserves.
The Federal Reserve might have to make up the difference in revenue
for a couple of years to ease the transition.
And a fourth aspect is whether, once we have explicit pricing and
some form of compensation to the banks for their required reserves,
we don't also want to look at opening up access to some Federal Reserve services on a broader basis. Member banks would be the only
ones entitled to direct access to the discount window; but perhaps
nonmembers could use some of the other services of the Federal Reserve to assure that there is a competitive environment for arranging
the best payments mechanism we can.
Mr. LAFALCE. Very good. I will be looking forward to your explicit
discussion and presentation of those proposals.
Mr. MILLER. Thank you.
Mr. LAFALCE. Now my last question: We have twin evils in this
society of ours, unemployment and inflation. You have stated your
opinion that at the present time inflation should be our No. 1 priority.
I happen to concur with that at this point in time. Take that concept in concert with the fact that the Federal Reserve is a creation of
Congress, that it is independent of the executive branch of Government, although it must work in cooperation with it of course, and
answer this question: What do you contemplate the role of the Federal
Reserve to be concerning executive legislative initiatives such as social
security bill, the minimum wage bill, the Humphrey-Hawkins billdo you think it should be within your province to speak out on these
executive legislative initiatives insofar as they impact problems as
you perceive them within our society, particularly the No. 1 problem
of inflation i
Mr. MILLER. Mr. Congressman, I want to clarify my position. It is
my position that we must attack the problems of unemployment and
inflation together, because :t believe they are interrelated. We cannot
have full employment if we don't have low inflation, and we cannot
have low inflation if we don't have full employment; these goals are
related.
My only point is that we have made some good progress in the last
12 months on the jobs front, but we are off target on the inflation front.
So we have to give it more focus, more emphasis, and more priority,
but not lose sight of the fundamental goal of full employment and
prosperity and sound values in our system.
The role of the Federal Reserve in the broader economic sphere is,
I think, manifold. One of our jobs, of course, is to counsel and to
express to the other economic policymakers in the Government our
views on the matters you point out, so that as polic-ies are shaped, we
have a chance to make our snQ"gestions and evaluations known; and I
think we have open channels for doing so.
I am sure we will hRve an opportunity to make our inputs as
policies are shaped. I think we have a RP<'ond obligation. and that is
to speak with candor on our views of the proposals after they are
developPd.
And, hopefnlv, our persuasivP ability will bt> Rnch that many of the
proposalR will be consistent with our views. On others, perhaps. we
will make additional suggestions or adjustments; or we may find

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some proposals that we think are incorrect. So I think our role is,
first, to be an internal source and collegial voice in developing policies;
and, second, to be an independent voice on the adoption and implementation of policies.
Mr. LAFALCE. I would just wonder if you have any comments on
the present proposals in Ways and Means to roll back some social
security increases we enacted last year, and on the HumphreyHawkins bill that the Senate still has to consider in the future.
Mr. MILLER. Those are pretty big questions. I don't know if the
chairman is going to give me time to answer them right now or not.
The CHAIRMAN. Because we have many members who have not had
an opportunity to ask questions, and the gentleman's time has expired,
if Chairman Miller would be good enough, when he goes over the
transcript, give the complete answer to Mr. LaFalce's question.
Mr. MILLER. Certainly. I would be glad to.
[Chairman Miller subsequently submitted the following information for inclusion in the record at this point:]
Thank you for the opportunity to comment on the social security tax increase
and the Humphrey-Hawkins bill which has passed the House and is pending in
the Senate.
Increases in social security taxes are a two-edged sword. On the one hand,
they directly increase the costs of production and contribute to inflation. At the
same time, higher social security taxes reduce workers' take-home pay, thereby
eroding their total purchasing power and probably increasing their future wage
demands. Because inflation is a serious threat to continuing economic expansion,
careful consideration must be given to the proposals pending before the Ways
and Means Committee. However, a simple, temporary rollback of these tax
increases, or some other quick fix designed to ameliorate the near-term inflation
problem, is not enough. The increases in social security taxes were enacted because of an underlying tendency for long-term benefit disbursements to outrun
program revenues, an unacceptable state of affairs for all parties. A more appropriate approach would be to reconsider the entire existing social security program, including eligibility criteria, benefit levels, and benefit escalation.
Since I have already responded to Congressman AuCoin's question concerning
the Humphrey-Hawkins bill, there is only one additional comment I wish to make
at this time. The bill, as passed by the House, mandates the development of fiveyear projections and the adoption of long-term goals partly based on such
projections. Given the track record of economic forecasts during the 1970's, I fear
thate such forecasts may be seriously misleading, and create additional undesirable rigidities in Federal Reserve macroeconomic policymaking.

The CHAIRMAN. The gentleman from Iowa, Mr. Grassley.
Mr. GRASSLEY. Thank you, Mr. Chairman.
Mr. Miller, I have a general question or two dealing with the independence of the Fed. I think the independence of the Federal Reserve
System is very closely connected with the maintenance of a sound
monetary policy in this country, so you understand then what direction
I am coming from when I ask these questions.
Previous Fed Chairmen and previous administrations usually met to
discuss general matters, at breakfast, or other meetings, particularly
with the Secretary of Treasury of those administrations.
My first question to you is: What kind, how often and in what environment do you have discussions with administration officials; and
are these discussions any compromise of the principles of independence
of the Fed1
Mr. MILLER. I will answer in reverse order. I think there is no
compromise of the independence of the Fed in c~rrying on_ discussio~s
with other officials in the Government who are mterested m economic

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policy. There is none because we continue to use these discussions only
as a basis for considering matters of mutual interest and policies of
mutual ,concern.
I do meet with the Secretary of the Treasury once a week if we are
both in town. Our staffs tend to meet once a week. These meetings may
not involve me; they may just involve some of our staff working on
technical aspects or coordination of our activities. We act as fiscal
agent :for the Treasury and do a lot of other things with the Treasury.
I usually meet periodically with the Chairman of the Council of
Economic Advisers. And I also meet occasionally with the officials in
other agencies of the Government who are dealing with economic
issues.
As you probably know, on occasion the President asks for a number
of us to come in and sit down with him and discuss economic matters;
that may, I think, be a continuing procedure.
Mr. GRASSLEY. From that standpoint, I would detect that your
relationship with the administration doesn't depart too much from
what we have been told have been the patterns of previous administrations and previous chairmen.
Mr. MILLER. I know of no difference. I have really picked up the
agenda that was established by Dr. Burns.
Mr. GRASSLEY. Are you taking any new and/or different actions to
insure the independence of the Fed as it might be within your power
to so doi
Mr. MILLER. I don't know of any action that is necessary. Our commitment to independence is absolute. I think there is no one in the
Federal Reserve who is not fully committed to the concept of independence. I detect, in the arrangements that have been made since I
succeeded Dr. Burns, no evidence of efforts to subvert that independence. I do not think our discussions entangle us or require us to
become silent supporters of something in which we don't believe. So I
haven't found any forces at work that seem to require a new initiative
as far as independence.
Mr. GRASSLEY. This final question would probably give you an opportunity to sum up what you have previously said. But is the
independence of the Fed in any danger from either political pressure
from this administration or from the Congress~
Mr. MILLER. I don't detect it at this time. The President has stated
over and over again that he believes in the independence of the Fed.
He has stated that, at the time that I was nominated and at the time
I was sworn in. There was a slight slip when I was sworn in giving us
constitutional blessing, but I know it is only the Congress that has
created the Fed, not the Constitution-although perhaps that is an
amendment we should look into. [Laughter.]
Mr. GRASSLEY. I would at this point yield the balance of my time to
Mr.Kelly.
Mr. MILLER. I didn't finish answering his question last time, correct i
Mr. GRASSLEY. Mr. Kellv.
Mr. KELLY. I thank the 'gentleman for yielding.
Mr. Chairman, I would like to pose· two questions to Mr. Miller
in the event he doesn't have time to answer, and ask that he answer
for the record.
One of th(lse questions is does the Fed have authority to make direct
loans to the city of New York in order to solve their financial problems,

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and are you contemplating anything in this area and to what extent
has the Fed given consideration to the New York problem. Does the
Fed have plans to finance New York City in the event the Congress
decided not to? What rationale would you have £or why the Fed
would undertake the risk when the marketplace would not and the
investors there would not voluntarily do so?
The other question I have is, you have indicated that you commend
the President's urban policy. One of the things the administration is
going to do is to solve the problems of the city. The problem of the
city primarily is that it is losing its jobs. In the.recent past, 85 percent
of the new jobs in the private sector in the United States have been
created in the South and in the West. The northeast and the northcentral part of the United States has either been losing jobs or growing more slowly. The jobs are fleeing that part of the country because
of high taxes, high utilities, industrial wages and union control.
Now, isn't the administration simply financing inefficiencv when
they pour money into a political and social solution such as the Presiden~'s urban policy rather than trying to solve the problems of inefficiency that have caused the distress?
The CHAIRMAN. The time of the gentleman has expired. If it is
agreeable with Chairman Miller-Mr. MILLER. I will be happy to answer those for the record, yes, sir.
[ Chairman Miller subsequently submitted the following materiai for
inclusion in the record at this point:]
In response to your first question, municipalities, along with other types of
institutions that are not members of the Federal Reserve System, may obtain
credit directly from Federal Reserve Banks under certain conditions specified
by the Federal Reserve Act, However, these statutory condlitions and the regulations established to administer them set rather narrow limits on the scope
of such borrowing.
Paragraph 13 of Section 13 of the Act authorizes Federal Reserve Banks to
lend for periods of up to !JO-days directly to individuals, partnerships and
corporations-subject to whatever restrictions are imposed by the Board of
Governors-so long as the borrowing is secured by U.S. Treasury securities
or by tl1e fully-guaranteed obligations of a Federal agency. For this purpose the
term "corporation" includes State and local governments.
Paragraph 3 of Section rn of the Federal Reserve Act permits the Federal
Reserve to make emergency loans to individuals, partnerships, and corporations
under terms that accept a broader range of collateral than paragraph 13. However, the statutory language for these loans sets other conditions that constrain
their use. They can be made only in "unusual and exigent circumstances" ; they
must be approved by not less than fi,·e members of the Board of Governors; the
Federal Reserve must obta1in evidence that the borrower is unable to secure
adequate credit accommodations from other lending institutions; and the loans
must be endorsed or otherwise secured to the satisfaction of the Federal Reserve
Bank. In short,. more limitations on these loans are cited in the statute itself
than in the case of paragraph 13 loans.
Emergency loans made under these provisions of the Federal Reserve Act
would thus be at a higher rate than the basic discount rate and would typically
have to meet several criteria. Other credit sources would have to be exhausted;
unusual and exigent circumstances would have to exist; the borrower would
need to be solvent and to have adequate collateral; the borrower's need would
he for i,hort-term accommodation and his hasic financial position would have to
permit early repayment : and the lJorrow~r would need to show that failure to
obtain Reserve Bank credit would risk a significant economic and financial
impact on the surrounding area, the region, or the nation.
Some members of Congress have suggested that Section 14(b) of the ll'ederal
Reserve Act provides the Federal Resen·c with a more ex,plicit mandate to
provide broad financial support directly to New York City. The 'language of 14(b)
states that a Federal Reserve Bank has the power to: " . . . buy and sell, . . .

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bills, notes, revenue bonds. and warrants with a maturity from date of purchase
of not exceeding six months, issued in anticipation of the collection of taxes or
in anticipation of the receipt of assured revenues by any Srate, county, district
political subdivision, or municipality in the continental United States, . . . such
purchases to be made in accordance with rules and regulations prescribed by
the Federal Res~rve Board:". '.l'here is nothing in the Federal Reserve Act or
its legislative history, however, to suggest that this provision contemplated the
purchase of municipal securities as a means of aiding financially distressed
communities.
'£he System's largpst purchases of municipal notes under this authority occurred during the 1914-1917 period before the establishment of a formal or
centralized Federal Open Market Committee. '£his was an era in which open
market operations were not used as an important instrument of monetary policy.
Some purchases of municipal warrants were made by individual Reserve Banks
as a means of providing these hanks with a source of income, but not to assist
financially troubled communities.
Examination of Board records indicates that a few purchases of municipal
obligations took place up to 1933 essentially as an accommodation for members
banks that were experiencing liquidity problems at a time when authority to
lend to banks through the discount window was more limited than it is now. lu
no instance were purchases made by Reserve Banks to provide ·assistance to
financially distressed mulliicipalities. Since 1933, the Section 14 (b) authority to
purchase municipal warrants has not been used.
The practical basis for Federal Reserve lending to municipalities and other
nonmember institutions is thus quite limited. The System can be a lender of
last resort on a short-term basis when unusual and exigent circumstances exist,
and certain other criteria are met. Whether any such loan is appropriate depends, of course, on conditions at the time of loan application, including an
evaluation of the borrower's ability to repay, the likely financial and economic
impact of a failure to obtain System credit, and the· adequacy of available
collateral. Most importantly, with regard to the possibility of a loan to New
York City, the Federal Reserve would have to assess the risk that a precedent
would be set, making it difficult to avoid lending to a large number of similar
borrowers. If such lending were undertaken, the Federal Reserve would inevitably become enmeshed in the tasks of monitoring loan compliance, judging
the eligibility of competing prospective borrowers, and allocating credit among
those units. Coping with political pressures generated by this process is not the
proper province of the Federal Reserve and could seriously interfere with the
effective management of general monetary policy.
You also asked whether the President's urban policy would result in "financing inefficiency" rather than solving the fundamental problems of the cities.
The President's urban policy does not involve large new outlays of funds.
Rather, it largely attempts to simplify and to redirect ~xisting Federal programs to secure the maximum benefit from local public and private resources.
As I see it, this is a suitable purpose for a sound urban program ; this is, not
to distort decision of business firms as to where they should locate, but to
promote policies that help in the orderly movement of workers and jobs to
more effieient areas while minimizing the social costs of such changes.
The competitive disadvantage to business firms of high taxes, wages, and
energy costs is a serious problem for many areas of the country. In general,
the Federal government should not promote policies that distort firms' decisions
to adjust to such cost differentials. When employment opportunities shift, we
want to encourage people to move to those jobs. However, there are social costs
involved in rapid and massive locational changes. The areas receiving new
migrants frequently have to construct new housing, sewer systems, and schools.
Community services of all types often become strained.
However, the burdens are usually more troublesome for communities losing
population and jobs. The existing social capital often becomes under-utilized
and then decays. As President Carter has suggested, our existing cities and
towns are valuable national assets. Their social capital can be utilized, rehabilitated and complemented so that it can make private investment more
profitable. 'Federal expenditures on roads, dams, and other public works have
done much to increase private investment in the South and the West. Why incur
the costs of investing in new social capital when useful assets are already in
place? The problem of the mature economies in the North and Mid-West are
further compounded by the fact that our-migration often involves the loss of
skilled workers while the unskilled workers remain behind. The proposed urban

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policy is aimed at encouraging public and private investment in lagging economic
areas in a way that fully utilizes these remaining physical and human resources.
In addition, there is a human element to be considered. Many workers have
strong attachments to their homes and families where they now live. These attachments imply that labor market adjustments to economic incentives in new
areas frequently occur with a long lag. We should pursue policies that encourage and help younger workers to migrate to growing areas. At the same time,
it is important to help those who remain in slower growing regions by providing meaningful economic opportunities.

The CHAIRMAN. The gentleman from Oregon, Mr. AuCoin.
Mr. AuCoIN. Thank you, Mr. Chairman.
Mr. Miller, you indicated to the gentleman :from New York that
you would respond to his questions for the record. It turns out that
his questions and mine are almost identical.
I came here anxious to hear your point of view, that inflation was
the No. 1 problem, because I happen to agree with that, and I compliment you :for the answers you gave to Congressman Mitchell. Given
the No. 1 priority that should be assigned to inflation and given the
emergency nature o:f that problem and I emphasize the term "emergency," does it make sense to you for the Congress to pass a Humphrey-Hawkins bill that puts a specific target :for unemployment rates
but speaks only in broad terms of what our objectives ought to be
on the inflation side? Does that kind of legislation make sense to you
given the emergency priority you have put on inflation 1
Mr. MILLER. I would prefer, Mr. Congressman, to see a more explicit reference to the inflation side in the Humphrey-Hawkins bill.
If you recall, the previous legislation on this issue that still is very
important is the Employment Act of 1946. In that act, we established
a national policy of full employment without citing a specific level;
the definition of full employment was left to circumstances as they
developed.
But that act also has language, often forgotten, that explicitly provides that full employment will be achieved by creating conditions for
investment and growth in the private sector of the economy, and with
price stability. I think those principles ought to be reaffirmed, and
that if we are going to set specific numbers for employment, it would
be well to look also at some explicit objective for inflation.
Mr. AuCoIN. So to that extent you see a defect in the HumphreyHawkins legislation processing through the Congress?
Mr. MILLER. I see a preference in terms o:f the process and conditions under which Humphrey-Hawkins would operate. I see that it
could work without a specific number on inflation, but I would prefer
to have that target. I think the number would have to be developed
in the Congress, and I think you can't overlook that it would have to
be developed each year.
Mr. AuCoIN. Given the emergency priority that you assign to inflation, do you think it is wise to roll back the social security tax increase that Congress recently passed? This is after all, in a way, a
tax on labor which is going to be passed along through the economy
and reflect itself in higher prices.
Mr. MILLER. The social security tax increase that we have already
had, and the one that will go into effect in January, certainly adds to
costs. Since we have a cost-push inflation, anything we could do to
eliminate or reduce those costs would be helpful in the fight against

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inflation. I hope the Congress will addres the issue of a reduction in
the increase in social security taxes, but only in conjunction with either
adjusting the benefits or finding a means for funding them that does
not leave us with a constant, underfunded situation or that does not
merely add to the Federal deficit, because that is also inflationary.
Mr. AuCorN. Would you support general funding?
Mr. MILLER. I would prefer not to use general funds for social security. It would seem to me that some of the thoughts about a temporary
tie-in to the COET tax, or something like that approach to funding
social security, should be studied. I don't know if it is the right solution or not, but it should be studied-if it were temporary and if we
believed that over, say, a 2-year period the Congress would address
some fundamental reforms in the social security system.
It may be desirable to find such a temporary linkage to give time.
I would hope that if there were, say, a 2-year period for Congress
to look at social security, we might consider some of the options for
private funding of social security benefits-moving it out of the
Government system, which is cost ineffective, and perhaps letting
people buy the same benefits in a competitive arena. It might turn
out to be a lot cheaper.
Mr. AuCorN. Are you prescribing a reform of the social security
system by which social security then would become optional?
Mr. MILLER. No; by which it could be contracted in or contracted
out of the public system.
Mr. AuCoIN. So one could opt to purchase from the private sector
if one had means to do so, and one could stay within the public
sector, the public finance program if he were not able to go the
other direction ?
Mr. MILLER. It seems to me that is one possibility. Pension funds
which are already in existence, might be a vehicle for providing the
same benefits at a much lower cost. One can see the possibility of maintaining a public system for those who don't have an alternate
mechanism.
Mr. AuCorN. Don't you see a weakness that you might create with
the system itself if you allow some people to opt out~
Mr. MILLER. No; I don't think so. The British are going in this
direction.
Mr. AuCorN. The British are going many directions that I wouldn't
want this countrv to follow.
Mr. MILLER. This is one they have gone into directlv. Maybe it is
part of the reason that their inflation is beginning to drop.
Mr. AuCorn. My time has expired.
The CHAIRMAN. The gentleman from South Carolina, Mr. Derrick.
Mr. DERRICK. Thank you, Mr. Chairman.
Chairman Miller, on a relative scale of zero to 10 in the area of
inflation, where would you put the enerl!Y crisis that we now face and
where would you put the continued deficit financing by the Federal
Government?
Mr. MILLER. I would put them both in the high part of the scale of
zero to 10. They are different kinds of problems, yet I would pnt them
both in, say, the 80 percentile range of importance in fighting
inflation.
Mr. DERRICK. So you think they are equally important?

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Mr. MILLER. Yes; I really do. The energy problem will build up and
will continue to erode our economy if we don't start the process of
independence. We can't correct our dependence on foreign petroleum
products in a hurry. But unless we start the procedure, we are going
to have the continuing threat of inflationary pressures for a long, long
time. That is why it is such a high priority.
On the other hand, we do have more ability to make choices in solving the problems of our deficit. That is, the discipline imposed by
spending and taxing. I think that with the fourth year of expansion
underway, and with the deficit projected to be larger than in the current fiscal year, one would say there is a high order of importance to
bring discipline into that area.
Mr. DERRICK. Two questions, on each one of these areas, as to the
deficit. Would you care to comment on any specific areas that the
Congress might address in the budget i
Mr. MILLER. Well, I would-Mr. DERRICK. On the revenue side.
Mr. MILLER. Well, on the revenue side-Mr. DERRICK. Excuse me.
Mr. MILLER. On the revenue side, Congress is considering a tax cut
that would add about $25 billion-actually when you net it out, I
think it is slightly less that that-to the deficit.
There, my own preference would be to adjust that tax cut a little
toward more incentive for fixed business investment, because I think
that if we are going to have a tax cut, more of the flows ought to go
in the direction of job-creating investments that would be anti-inflationary in their impact. So I would like to see more emphasis in that
direction.
Particularly, I would like to see more emphasis on faster writeoffs
or higher depreciation allowances for fixed investment, because I think
this will stimulate investment and do more for our economy long term
than just increasing consumer demand.
I also feel that it is very important that the aggregate net reduction not be increased, and that, if anything should be considered, it
is perhaps comjng out on the skinny side of the proposal.
Mr. DERRICK. You are all for these business incentives, as an alternative for the tax cut 1
Mr. MILLER. Looking at the proposed allocation between business
and individuals, I think I would weight a little more of the tax cuts,
toward incentives that would create investment. I am not saying that
I would therefore increase the amount allocated to a reduction of corporate income taxes, because while a reduction of corporate income
taxes does improve a corporation's ability to invest, it doesn't insure
that there will be an investment. On the other hand, a higher depreciation level means the tax is cut only if there is, in fact, an investment.
Mr. DERRICK. What you are really speaking of is an accelerated investment tax credit.
Mr. MILLER. That is, of course, a form of forgiveness of tax. Higher
rates of depreciation are a deferral of taxes.
I prefer deferral of tax through faster writeoff rather than an increase in the amount of tax credit. I think it is more efficient; I think
the Treasury comes off better per dollar of tax incentive.

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Mr. DERRICK. I have one more I want to slip in here, please. On the
matter 0£ energy-do you see rationing as a final alternative, i£ we
don't get a handle on the energy situation?
Mr. MILLER. Congressman Derrick, I hope not.
Mr. DERRICK. Well, I hope not too.
Mr. MILLER. I think rat10ning is an extreme that we shouldn't have
to come to.
We have adopted a policy so far where, by whatever means, we are
providing all 0£ the energy resources needed. And while we have had a
dislocation or two, because 0£ weather, we have basically had all the energy we wanted. We haven't really tried to use rationing as a technique,
because it is so inequitable and results in such distortions. I think the
better approach is to use the market system and to price energy in
terms 0£ Btu's on a basis that promotes the use 0£ the kinds 0£ energy
that are most plentiful and most efficient. One 0£ the reasons that I am
less enthusiastic about quotas £or restricting importation 0£ petroleum
than I am about a fee is that there are problems 0£ how to administer
a quota, and some 0£ the possibilities are akin to rationing and that
bothers me.
Mr. DERRICK. Thank you very much.
The CHAIRMAN. The Congresswoman from New Jersey, Mrs.
Fenwick.
Mrs. FENWICK. Thank you, Mr. Chairman. My questions have been
answered, specifically, the budget deficit, but I want to ask the Chairman whether or not the higher taxes and particular the social security
taxes, and the rise in minimum wage, have not fostered higher unit
costs, because they do foster demand £or higher wages, quite understandably. I got a letter from a man who got a $20-a-week raise 0£
which he received $8.67 by the time the Government was through with
him. This is really beyond bearing, and makes a barrier to employment.
I think the higher minimum wage creates a barrier to employment
also, particularly for the structurally unemployed.
We have no less-than-minimum wage £or young people, 16 or 17
years old, who might otherwise be employed. The minimum wage
simply makes it not economic and sensible £or business to employ
them. I think that we have an effect here on inflation with these Government-imposed costs which foster unemployment.
I share with my colleagues from Maryland an absolute horror 0£ the
tragedy 0£ unemployment. I think we have done everything we can to
encourage businessmen to buy machines instead 0£ employing people.
We have done it deliberately with Government action.
I am so afraid my 5 minutes will go.
I was interested in the proposal that we lift our oil to the OPEC
price. Why isn't that going to be immensely inflationary?
Why suddenly would we go up to $13 or $14 or even higher, if OPEC
goes higher? Isn't that a tremendously inflationary prospect for bus,
mess and everybody, and a terrible cost to the consumer?
It troubles me very deeply. Then, finally, double taxation of divi•
dends. Don't you think i£ perhaps we made business pay profit tax on
everything, except what they pay out in dividends, that we would have
a more equitable tax in that each individual receiving the dividend
would then pay according to ability to pay. We might get more equity

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capital too, instead of debt capital, for businesses which wanted to
expand~
Mr. MILLER. I will comment as long as the Chairman gives me time
on those matters. I agree with you, many of the things the Government
has done and the Congress has done are, indeed, inflationary, including
some that you mentioned.
With the high rate of unemployment among teenagers, and the apparent phenomena that once a person is beyond age 24 the probabilities of employment are much higher, it would make sense to maintain
a lower minimum wage-perhaps even a differential-for teenagers.
Experience shows that young people who, perhaps still live at home,
and who get some employment and get into the world of work and
learn to understand it, do work their way into more useful jobs, more
creative jobs, more valuable jobs, very quickly; and a lower minimum
wage would help them get started.
On the oil tax, I must say that, yes, any market force that allows the
product to rise in price in the face of scarcity, brings about the longterm reduction of inflation, because it forces us to shift away from that
resource and find alternative ones. If we don't do that, we are merely
living in a dream world; the shortage makes the price higher anyway,
but we have never made the shift and never developed a new system.
We must remember that our economy, our Nation, has been blessed
with an open continent with unlimited, boundless resources. Therefore,
we built an economy based on inefficient use.
Mrs. FENWICK. Right.
Mr. MILLER. The Japanese and Europeans had shortages and no
local sources to tap, so they built automobiles that were lighter.
Mrs. FENWICK. I understand. It is so clear.
Mr. MILLER. We have to force ourselves in the direction of making
the shift.
Mrs. FENWICK. In that regard, I have been hoping that we would
have a 5-percent automatic mandated drop in imported oil-a quota.
\Ve might then bend our minds a little more constructivelv to conservation and to replacing oil with alternate sources of energy.
But you don't approve. You think the quota system would be difficult to administer~
Mr. MILLER. That is an alternative, and I am not opposed to it. I
just can see that it will have more administrative burdens and lots of
problems.
I wouldn'~ want to reject it. But my intuition tells me that a fee
would be a simpler and more direct and more effective way of going.
Mrs. FENWICK. My time has expired. Could you just give us a word
on double taxation of dividends~
·
Mr. MILLER. Yes. I think we do need to look at the reform of our
tax system. I agree with the President that many features of it are
unattractive and are not working well. I think sorrie integration of the
structure, so we don't have double. taxation on dividends, is needed.
As to h?w we go about it. I am open minded. We also need to look
at taxat10n of what we ca11 capital gains. Sometimes it is good to try
to apply the same sort of taxing theory to one form of income as we
app_ly to ~ther _form~ of i~come,. but the result has been to dry up
capital, to impair the mcentive to mvest. That has reduced the creative

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:force :for jobmaking. In that sense, we aren't doing ourselves much o:f a
:favor.
I think we have to look at the taxation o:f capital i:f we do, in :fact,
want to create rewards for doing what we should do.
Remember, the nations that have been growing faster and providing
:fuller employment than the United States are ones that invest more of
their GNP in fixed investment. The Japanese invest about 25 percent
and the Germans over 20 percent; we invest about 9 or 10 percent.
Mrs. FENWICK. I know.
Mr. MrLLER. So we do need to look at this matter seriously. I do not
believe that would be antiemployment; it would be proemploym~nt.
And it would ·be pro-people. Any system that epcourag-es the normalization and investment of capital to create jobs and wealth is in favor of
people.
Mr. STANTON. The gentleman :from California.
Mr. HANNAFORD. Mr. Chairman, I appreciate your candor and durability both. I have one more question. It relates to what you were just
discussing. The other day in a discussion, you mentioned and discussed
at some length structural inflation. I assume this is energy, food and
fiber,. wage escalatory clauses, and so on. I have two parts to the
question.
One, could you assign a portion of our inflation rate to that matter?
"\V-ould it be hal:f our inflation rate or such a matter?
Second, and most importantly, it bothers me, related fo what you
have just said, that we are taxing illusory income in capital gains. in
dividends that don't exist, because o:f the structural-which implies
a measure of permanence to-inflation. This is a disincentive to save,
to invest. Perhaps that is part of the problem of the stock market, and
an incentive to consume and to buy tangible things, land and gold,
and so on.
I:f we have this more OI' less permanent nature to inflation, does this
not call for a somewhat general reappraisal o:f our tax structure, so we
tax only real effective interest rates nnd real effective income instead

o:f this 'illusory income, about 6 percent of which is washed a.way by
inflation?
Mr. Mu..r,ER. Congressman Hanna.:ford, I think you are absolutely
correct. As long as we have this inflation and it continues to persist,
we have a tax structure that is working to validate the inflation. Those
who are receiving income on their capital are receiving part of the
interest as a, return of the purchasing power of their capital. The
longer thev lend it out, the higher their interest rate has to be in order
to get bH ck their purchasing power. e are taxing capital.
Mr. HANNAFORD. "\Ve are taxing up the interest rate.
Mr. MILJ.Jm. Therefore.. we are driving up inflation, and regardless of what the Federal Reserve does, this will result in higher longterm interest rates. Neither vou. nor the chairman. nor mvself, nor
anyone else is going to lend money at 25 years even for an 1mportant
investment, if nt the end of 2/'i :vears we exp('ct. to u-et back 25 cents of
our dollar. and in the meantime, to have had the interest taxed away
at very high rates.
So ;,ou · are ahsolutP]y correct. I ciin't. give v·ou a nnmbPr on how
much "of Ollr infl~tion is now struchm1.l. beciimie It lot of our inflntion
was started by, first, unfunded expenditures for Vietnam-the failure

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to pay for the war; and second, fuel and food price rises that resulted
from dramatic changes .
. No'Y what we are seeing is cost push inflation that goes in the other
~1rect10n: _a~out 50 percent of_ J\merican wage earners and other
mcome recipients now ha.ve their mcomes indexed to changes in the
CPI.
N!)w, i~ we create a sy_stem in ~his country where there is no penalty
for mflation, then we will have mflation. If we create a system where
there is_no pen~lty for inflation,_and we have inflation, we will destroy
economic vitality,_ because we will destroy the capital base. And there
can be no economw growth and there can be no jobs without savings,
investment, and productivity. It is just as simple as that .
. Mr. HANNAFORD. But, essentially, we are discouraging saving and
mvestment.
Mr. MILLER. Absolutely.
Mr. HANNAFORD. By taxing inflation?
Mr.MILLER.Absolutely.
Mr. HANNAFORD. We are encouraging consumption?
Mr. MILLER. We have run our economy on a philosophy
of consumption.
Mr. HANNAFORD. Purchase of land and some of these other things
that are having explosive increases in cost. Thank you.
Mr. MILLER. Yes.
Mr. HANNAFORD. I yield the balance of my time.
The CHAIRMAN. The gentleman from Tennessee, Mr. Allen.
Mr. ALLEN. Thank you, Mr. Chairman. Chairman Miller, summarizing what you have said, I take it you consider that energy policy
is the No. 1 thing of importance if we are to get any handle at all on
inflation, which you consider as the No. 1 problem that we should
address.
Asked about wage and price control, you took the conventional position that this admmistration and others have taken, that you would be
opposed to wage and price control. Yet there is one area in which the
Federal Reserve can have an important effect.
That is in monetary policy and interest rates. Follow me in seeing
if you agree that, in addition to wages chasing prices, and prices
chasing wages, that most economists fail to take into account in this
inflation the amount of interest that is included in the price of everything we buy.
For example, we start with the producers of the raw material,
farmers, mine operators, most of them operate on borrowed capital,
and they have to pay interest on that borrowed capital. And they have
a markup that they have to charge when they sell their products to
the processors.
So, the interest is marked up and compounded by that markup. Then
it goes to the processors. And the processors, too, largely are operating on borrowed capital. And they have to pay the price that includes
compounded interest from the original source of raw materials.
And they must add to that their own interest charges and add to
that their markup. And from there it goes from the processor to the
wholesaler who also operates on borrowed capital, and who also has a
given amount of markup that he must require in order to come out
and make a profit.

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. Then from the wholesaler, it goes to the retailer who also is operatmg on borrowed capital, and must add into the price of what he
charges, the interest rate plus markup.
Then we finally come to the consumer. And if he buys, as many
people in my district have to buy, on monthly payment plans, he has
to pay 18 percent interest more. Over a period of time.
Now, do you not consider that in viewing this problem of inflation,
that interest rates and the monetary policy controlled by the Federal
Reserve bank are a vital factor to be considered? I have not heard any
of that discussed here today. That is, the part that interest plays in
the price, the ever-escalating prices, of what we are having to pay for
what is being produced in our services and commodities on the market
today.
Mr. MILLER. Yes, the interest rate is, of course, a factor. And interest
rates are much influenced by inflation. All studies have indicated that
the real cost of money is-plus or minus-in the 3-percent range, and
that the difference between 3 percent and the interest rates paid at all
those stages of production in the economy that you mention is inflation.
Depending upon the creditworthiness and type of credit the real cost
of money is somewhere around 3 percent for long-term capital. It is
also clear to me that there is no way to solve the problem by reducing
the cost of interest without creating more inflation, and thereby working against yourself.
Those who have savings and have the means to make long-term investments or lend money for long-term investments will not do so at
low rates in an inflationary environment. If the Government or the
Federal Reserve tries to manage the rates to bring them down, to
make interest rates cheaper, we will both fuel inflation and dry up
capital, because as we have seen in many other nations, when inflation
is a persistent worry and there isn't any assurance that capital is
secure, that capital will fly.
It will go into gold; it will go into real goods ; and it will no longer
go into investment in productive capacity. And the result of that is a
snowballing effect; you would create a worse problem.
So as true as what you say is, there is no way to wash out that interest cost except by getting inflation under control. As soon as we bring
down the rate of inflation, the rate of interest will drop; and as soon
as the interest rate drops, costs will drop; and then we can bring inflation down more and bring costs down more. So, we need a program
that starts that ratcheting oft' of the inflation rate at a half a percent
a year until we are down to zero, or as near to it as we can get.
Mr. ALLEN. My time is up, but I would comment that the Federal
Reserve has increased its rate at the discount window by approximately 2 percent in the past 12 months. At the same time, inflation has
accelerated.
Mr. MILLER. Yes. I don't know what would have happened had the
Federal Reserve not done so. I suspect that the inflation rate today
would be much higher, and therefore our problem an even more seriouR
one.
The CHAIRMAN. The gentleman from Iowa, Mr. Leach.
Mr. LEACH. Chairman Miller, coming from an agricultural district,
I have a couple questions regarding your import fee proposal and its
impact on agriculture. The administration has come out with very few

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figures indicating exactly who will be paying any type of petroleum
sales tax.
We have heard some comments that a tax might fall heavier on
lower class people than higher class. However, 16 percent of all petroleum is consumed in the agricultural sector. A higher crude oil fee, in
effect, means that the American farmer is going to be facing substantially higher costs of production.
Would you favor any type of agricultural exemption in terms of a
passthrough on an oil import fee?
Mr. MILLER. To be perfectly frank, I have not considered the question, and therefore I am not sure I can answer you. I suppose my
reaction would be that if we started exempting one sector of the
economy, there would be political pressures to exempt them all.
I suspect if we really want to solve the problem, we are going to
have to create some penalty for the consumption of products which
are in short supply or develop alternate kinds of supplies of energy.
I suspect I would be very reluctant to see an exemption; one can
make a case for exemption of everyone, so one shouldn't exempt in
the first place.
Mr. Ll!lACH. Let us pursue this, again from an agricultural perspective. Net farm income in 1977 was 50 percent lower in real terms than
in 1973. We have also seen farm debt increase to $120 million, about
double the 1973 level.
Would you comment on the state of the farm economy from a banking point of view? In Iowa over half of our banks have over half
their assets extended in agricultural loans. For farmers higher petroleum costs imply substantially higher costs of production. Do you
think this has, or should have, any impact on the administration's
agricultural proposals?
The CHAIRMAN. It is the Chair's intention, it now being 5 of 12,
to, of course, recognize the 4 or 5 members who have not yet had a
chance to inquire. The Chair would hope that we could finish at 12 :30
or so, and thus allow ourselves and Chairman Miller to go about our
business.
Is there any objection to that proposed course of conduct?
Chairman Miller, does that sound all right with you?
Mr. MILLER. Yes, sir, Mr. Chairman.
We have been concerned about the status of banks that are in agricultural finance, and the point you make is well taken for several
reasons; not only because of the change in farm income, but also because, in the inflationary period of a few years ago, there was a good
deal of bidding up of farm land. The psychology of continuing- inflation led to the financing of a lot of properties and created unduly
heavy debt burdens. This was, perhaps, unwise.
While we are concerned about it. I think we have both a banking
network that can handle it, and, of course, the backup of the discount
window and other lending procedures that will, I believe, cushion any
problems.
Of course, the Federal Reserve window is available only to members or available to other banks only through members. Our viewpoint
is that the situation is less satisfactory than we would like, but it is
not one that should be of real concern.
Mr. LEACH. Does this mean that you would pledge the discount
window in the event of an agricultural catastrophe?

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Mr. MILLER. I think we have always been standing b;y in all areas.
The purpose of the discount window is to provide liqmdity to banks
when there is some sort of squeeze-if it is necessary to restructure
loans, or to change amortization schedules. The purpose of the discount window is to create liquiditv in the banking system so that we
do not have any kind of interruptions in its soundness.
Mr. LEACH. Thank you very much. I appreciate your concern for
agriculture.
The CHAIRMAN. Has the gentleman concluded?
Mr. LEACH. Yes.
The CHAIRMAN. The gentleman from New York, Mr. Lundine.
Mr. LuNDINE. Mr. Chairman, I. was fascinated by your previous
discussion of the relative specificity that we should put on our establishment of policy goals with regard to unemployment and inflation.
Do you think it might be helpful for Congress to adopt a fairly comprehensive anti-inflation policy, establishing specific goals for reducing inflation and setting forth in some detail the specific means that
might be utilized to achieve those goals?
Mr. MILLER. My first preference, always, is to persevere and also
to retain as much flexibility as possible. So my instincts are against
legislation that establishes quantitative levels.
None of us, I believe, can project what the conditions of the Nation
will be 10 years from now, none of us sitting in this room could predict what would be wise and prudent and appropriate then. Circumstances may change and the numbers we lock in may not be the ones
we would like.
'
In the 1990's, for example, there will be a shortage of labor in the
United States. We now think we have very serious unemployment
problems, and we do. But by the 1990's, we will have a shortage of
labor. So. our problem will be entirely different. Inflation may be a
different kind of animal at that time, and unemployment may be of
a different dimension. And I think we should bear that in mind.
When Congress legislates specific numbers, the numbers are very
hard to change later. I would prefer either for Congress to legislate
numbers for a limited number of years-for example, to legislate for
what we see over the next 5 years-or to say that each year we will
~et a 3-year horizon. That way we wouldn't lock ourselves in 20 years
from now only to find ourselves with guidelines that are not appropriate under completely new circumstances in the world.
So I like to have flexibility and a living system.
Mr. LuNDINB. Might we also do that by some sort of a formula
which takes last year's inflation rate and adjusts for productivity, in
order to arrive at a specific goal?
Mr. MILLER. Yes, that is a possibility. But I think you see what I
am getting at.
Mr. LuNDINE. Yes.
Mr. MILLER. I am not objecting to having strong goals and strong
targets for what we want to accomplish, but I hate for people in 1978
to affect those who may be having different kinds of problems in 1992.
Mr. LuNDINE. Absolutely. Turning to money supply, the revised
estimates for growth of 1977 basic money supplies were 7.8 percent
M1 , of course, 7.8 percent. That is 1.3 percent above the top band 6.5
Fed target range given the Congress earlier.

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We have had testimony, and eminent economists have said that
the Fed could come within a half a percentage point of that target
if it wanted. Now, I recognize that in your letter to Chairman Reuss,
of March 29, you indicated that the relative monetary aggregates are
far from precise. But how serious is the Fed really in achieving •' ·
targets, and is such a wide differential really explainable i
Mr. MILLER. I cannot speak for the past. I think there have been
some technical problems m recent years. Over the last 10 years we
have seen a period of unprecedented economic dislocations: the financing or failure to finance the war in Vietnam is one; the wage and price
controls of 1971, 1972, 1973 are another; the increase in the price of
oil and the boycott is another; and the working of that phenomenon
into food and a series of worldwide crop failures are another. In the
process, interest rates became much higher than we had ever experienced in our adult lifetimes.
As a result, a whole new system for cash management and for the
use of the payments and settlements mechanism grew up which
changed the velocity of money. So, all of these things made it more
difficult to manage the money supply than would have been the case
in more tranquil times.
Having said that, I will tell you what my purpose is. My purpose
is to tell you that the ranges for the aggregates have been established
by the FOMC, and that we will work extremely hard to see that we
live within those ranges. And if we cannot live within those ranges,
we will come back and give you new ranges so you know where we are
going. That is my purpose.
You will judge me later as to whether we have accomplished that.
Mr. LuNDINE. Thank you.
The CHAIRMAN. The gentleman from New York, Mr. Pattison,
whom I will appoint chairman pro tempore. I will be back in 5 minutes.
Mr. PATTISON. Thank you.
Mr. MILLER. You are in charge of your own stopwatch.
Mr. PATTISON. I will take unlimited time.
Mr. Chairman, I know from the Wharton index of capacity utilization that we have now made a rather steady climb up to somewhere
above 90 percent, both in manufacturing and-manufacturing, mining
and utilities. I guess that would indicate that the effect of deficit,
budget deficit, would be more serious than it would have been a year
ago, when capacity was somewhere in the 1980's.
I would like you to comment on that.
And also in relation to that, I would be interested in your comments
on such things as the tuition tax credit which now seems to be pushing
hard on us, as to whether that would be wise, quite aside from the
virtues of it or merits of it, from an inflationary standpoint .
Mr. MILLER. You are certainly correct that the longer we go in an
economic expansion and the more of our capacity we utilize, the more
risk there is in a stimulative budget if we are trying to continue to
bank the fires of inflation.
So far the budget deficits, per se, have not necesRarily worked themselves through in a way that has contributed to inflation, but I think
we are at the point where we have to be really concerned about that.
As I have said, I am somewhat disappointed that, in this fourth
year of expansion, we expect to enter the next fiscal year with a higher

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deficit than in the current fiscal year. That is, I think, an unfortunate
trend, and one that I hope we will work to change.
When we come into a period of high utilization, we always run the
risk of bottlenecks and, therefore, of price pressures.
But I might comment on a couple of other things. One is that productivity is lagging, as it often does in an expansion. But productivity
is critical in creating jobs, and so we have got to be serious about it.
One aspect of productivity is the better use of human resources,
which creates a more stable environment; and down the learning curve
a greater output per man-hour is realized.
But there also needs to be capital investment. The longest period
of peacetime expansion we experienced in this country with price
stability was 1961 through 1965. In that period we had a doubling of
fixed-business investment, and at the beginning of that period we
introduced new incentives for business investment-tax credits, and
liberalized depreciation. We had a boom in business investment; we
had full employment, price stability, and increasing real incomes.
At this stage, I believe that, because of the high rate of capacity
utilization and because of the lagging productivity, we need to create
the incentives to start building the capital stock back up. That will
not only provide jobs, but will increase productivity and give us a
chance to work against inflationary forces.
Mr. PATTISON. I fully agree with that, but I would like you to just
very briefly comment on tuition.
Mr. MILLER. Thank you. I have to say that many of the proposals
before Congress are meritorious. No doubt the tuition credit idea is
meritorious as a form of tax relief; but it is inflationary.
Because it is inflationary, I don't believe we can afford it at this
time.
Mr. PATTISON. Thank you very much. With that, I will yield 5
minutes to the gentleman from Nebraska.
Mr. CAVANAUGH. Thank you.
Mr. PATTISON. Those are the second bells of a live quorum. We have
10 more minutes. We can do Mr. Cavanaugh. I understand we are
going to go to 12 :30 p.m. We will either miss the live quorum or-Mr. CAPUTO. I will go and come back.
Mr. PATTrsox. Fine. The gentleman from Nebraska.
Mr. CAVANAUGH. Thank vou.
Mr. Chairman, I am pleased that you have consented to return to
the committee today due to the briefness of the time we had with your
previous testimony before the committee. I have read that testimony,
as well as your testimony before the Budget Committee on March 15,
and your letter of March 29; and I am still unclear as to what your
personal goals are in terms of the economy and in what context the
monetary targets of the Open Market Committee were arrived at.
The only references to projections in terms of unemployment or
inflation that I can find in any of those documents is in your letter of
March 29. Those do not seem to be projections so much as anticipations.
Could you explain upon what projections the monetary targ-ets of
the Open Market Committee were arrived at in terms of inflation,
unemployment and fiscal, the level of fiscal defict i
Mr. MILLER. Congressman Cavanaugh, the proces.c; of the FOM{;
is as follows. "\Ve have a briefing from the staff, who give their assess-

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ment of the outlook in the key area.-s of performance of the economy.
The members of the, FOMC ·are from various parts of the country,
and they are experienced in what is happening in various markets.
They canvass information from their own boards of directors, :from
those ,vho are bankers as well as those from other industries. And so
we have inputs not only from the staff, but from these regional sources.
The members of the FOMC listen t-0 all of this information and
make their own assessments; and then, as a collegial body, they establish the various ranges for the monetary aggregates and give a directive to the trading desk at the Federal Reserve Bank of New York
as to ho-w to operate in the market to create the conditions for aggregate growth that are consistent with their view.
- It is very hard :for 12 people to agree on one set of economic projections. So what I have done in my letter is to indicate-after having
heard the most recent development of projections by the staff and
listened to all of the inputs-what seems to me to be reasonably to be
expected from :fourth quarter of last year to fourth quarter of this
year. These are not my targets; this is an indication of what I think
would be the range of probabilities absent-Mr. CAVANAUGH. Mr. Chairman-Mr. MILLER. My target, personally, is always to have less inflation
and less unemployment and, if necessary, to have higher growth to get
there. But, of course, that is a wish rather than a probability.
What I have given, instead, is my assessment of what I think will
actually happen.
Mr. CAVANAUGH. Mr. Chairman, are you saying that the Federal
Rese:rve has n'?t set the monetary targets based upon aggregate economic targets m terms of growth, unemployment and inflation 1
Mr. MILLER. The FOMC considers the direction of the economy and
the aggregate levels that will be able to maintain the performance of
the economy while countering inflationary forces. They are not trying
to create a model and run the aggregates to get there. They are trying
to look at the state of the economy-at the possibility of price actions
and employment actions and production actions-and, based on their
assessment of velocities, trying to adjust the monetary aggregates in
order to achieve e;ertain economic targets, within a range-that part
of vour statement 1s correct.
Mr. PATTISON. The gentleman's time has expired. The Chair will
ask that the.committee will adjourn for 5 minutes, awaiting the return
of the chmrman and the other members who wish to continue
questioning.
[Recess.]
The CHAIRMAN. The committee will be in order again. There are a
few additional questions that now-absent members want to ask but
'
I have one little one.
this
hearings
the
of
completion
near
the
at
First of all, let me say,
morning, that I think I speak for every member of our large committee, when I say that you have earned our respect.
Mr. MILLER. Thank vou.
The CHAIRMAN. I think you have handled yourself beautifully.
Now to go from the sublime to the ridiculous. We have a little
exchange, of course, about the Miami, Fla., office of the Fed.
Mr. MILLER. Yes.

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The CHAIRMAN. That was a problem you inherited. Last March, long
before your time, the Fed adopted a guideline which said-I am reading from it:
Candidate sites for analysis should not be limited to traditional city center
locations but rather should encompass a wide range of possil.Jilities-including
suburban and industrial park properties. Sites which permit future lateral
expansion, minimum excaV'ation, large floor areas, adequate surface parking,
and sufficient exterior maneuvering space for loading facilities on the building
perimeter should be given piority consideration.

Pursuant to that, within the last year, and in defiance of the uniform wishes of the city fathers of Miami, the association of commerce, labor and everybody else, while there was a desperate need
for a Fed office in the central city to do something about employing
minority groups and other poor people who needed jobs and could
have received them there, somehow or other the Fed ignored these
needs and instead followed the guideline I just cited. ·so the decision
was made before you ever got there to hunt down these new Fed installations miles and miles out to create new suburban sprawl someplace in the hinterland of Florida.
I objected to that under the pre-Miller Federal Reserve, and then
seeing you on the scene, and knowing the noble job you have done in
helping to keep Textron in Providence, R.I., in other ways recognizing the needs of the central city, I made a bold move to write you a
letter asking you to reconsider. You very nicely replied to me on
March 15, 1978.
Under the rule, without objection, I ask that the correspondence
from me to you of March 8 and the correspondence from you to me
of March 15 be included in the record.
[The correspondence referred to follows :]

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HIENfl.Y S. REUSS, WIS., CHAIRMAN

ltlCMARD JCIELLY, FLA.
st'EWART ■• McKINNEY, CONN
MIWCl!NT FENWICK. N..I,

EDWARD W. PATTISON, N,Y,
HERMAN aADILLO, N.Y,

MARY ROSE DAKAR. OHIO
JAMES M. HANLIEY, N.Y,
.tOHN J, CAVANAUGH, NOR.

U.S. HOUSE OF REPRESENTATIVES

.IIM MATTOX, TUC.

SUBCOMMITTEE ON THE CITY
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
OF THE
NINETY....l~H CONGRESS

104 HOUSE OFFICE BUIL.DING ANNEX I

WASHINGTON, D.C. 20515

March 8, 1978

The Hon. G. William Miller, Chainnan
Board of Governors of the Federal Reserve System
Federal Reserve Building
Constitution Avenue, N. W.

washi.ngton, D. C. 20551
Dear

Chainnan Miller:

I trust that under your leadership the Federal Reserve System will sbo"7
new concern f= the critical p:roblen of WlalPloyment in our w:ban centers.
One of the first steps you could take to evidence this conoem w:ruld be to
wit:Mraw the Board's March, 1977 anti-city guidelines for the location of
Federal Reserve facilities, and reverse the subsequent decision to locate
a new Miami branch facility in the suburbs rather than downtown.
The March, 1977 location guidelines provide:

Cami.date sites f= analysis should not be limited to traditional
city center locations but rather should encarpass a wide range of
possibilities-including suburllan and industrial park properties.
Sites which pennit future lateral expansion, minimum excavation,
large flo= areas, adequate surface parking, and sufficient exterior
maneuvering space for loading facilities on the building perimater
should be given priority consideration.
While the opening !hrase of the guidelines :inplies that there is to be
a choice beboeen central city and suburban locations, the actual criteria
specified make it clear that, with sane fortuitous exceptions, only suburban
sites can be considered.
At a t:iire when the General Services Administration is drafting a new
Executive Order f= the President that will arphasize rrore than Executive
Order 11512 of February 27, 1970, the need to retain and locate Federal
facilities in central cities, it is highly inappropriate f= the Federal Reserve
Board to be taking the opposite tack. As we all know, Federal policies
working at =ss-purposes have been one of the underlying causes of urban
distress.

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The Hon. G. William Miller
March 8, 1978
Page 2

Your active leadership of efforts to revitalize dawntcMn Providence,
Rhode Island is a matter of recon:1. Miami, Florida is also seeking to preserve
and bring new vigor to its dawntcMn business district. Yet, the Federal
Reserve Board, overruling the recamendation of the Atlanta Federal Reserve
Bank, has chosen a sul::m:ban location for the Miami branch facility, which
will provide a new .inpetus to sprawl patterns of develop!letlt.
It will be said that too nuch has been spent on the suburban site to
reverse the decision re,,. Such an arguirent is specious. Ground-breaking has
not :yet taken place. And if constructed as planned, the facility's hidden
cx>sts to the people of Miami will be felt for decades to care. At a mininum,
I urge :you to halt further work on the site until you personally have had a
chance to review the costs and benefits of the suburban and downtown locations.
As for the Board's location guidelines, I am sure you will wish to ask
their speedy revision, so that the Governors of the Federal Reserve System
can be brought into step with the 1\dministration on urban policy.

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Sincerely,
)

I -C.'
Henry

Chainnan

Reuss

'·,

162
B □ AR □ □ F G □ VERN □ RS
OFTHE

FEOERAL RESERVE SYSTEM
WASHINGTON, 0. C. 20551

G. WILLIAM MILLER
CHAIRMAN

'Mlrfch 15, 1978

The Honorable Henry s. Reuss
Chairman
Committee on Banking, Finance
and Urban Affairs
House of Representatives
Washington, D. C. 20515
Dear Mr. Chairman:
Thank you for your letter of March 8 commenting on the Board
of Governors' site location policies for new facilities and which expresses concern over the decision to construct the new Miami Branch
building in the west Dade area.
As you know, I have been concerned with urban revitalization
for years and believe the Federal Reserve should promote this goal
whenever there is a reasonable opportunity consistent with its responsibilities. However, in the Miami situation there was a lack of
flexibility in available downtown sites and the analysis of the
Atlanta Reserve Bank and the Board showed a considerable extra cost
for construction and for operations.
Let me contrast this decision by noting that a site has been
approved for the Baltimore Branch in the center of town, where a site
of sufficient size was available for efficient construction and future
expansion. Planning for new downtown construction in San Francisco
and modernization and enlargement of downtown offices in Oklahoma
City and Omaha have also been approved. In Richmond, Philadelphia,
Boston, and·Minneapolis, new buildings were constructed in downtown
locations, and, in some of these cases, within redevelopment areas.
I am advised that the Board's building guidelines for new
facilities are not administered mechanically, but are designed to
lead to the construction of the most efficient structures possible
considering the purpose of the building. Federal Reserve Branch
functions, as you may know, are largely high volume production-type

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The Honorable Henry S. Reuss
Page Two

operations, and are especially amenable to low rise buildings for
efficiency. The intent of the guidelines is to select sites for
building construction that are large enough to accommodate current
operational requirements and future expansion.
I hope we have an early opportunity to visit on matters
you believe most important between the Congress and the Federal
Reserve.

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164
The CHAIRMAN. While in your reply to me, unfortunately from my
point of view, you pointed out that you had done the right thing in
Baltimore-the city branch there which our friend, Congressman
Parren Mitchell, I know, feels very grateful for; and in Omaha, putting something down there for which our friend, Congressman Cavanaugh, I am sure, wells up with gratitude, too-you did not yield on
Miami.
You said that, "* * * considerable extra cost for construction and
for operations" appears to be the case in that out-of-town site, as opposed to the Miami site. You also did not say anything about my
request that you withdraw what, I consider to be, a very ill-advised
policy guideline of March 1!177.
I have two comments. One, my staff, with all due respect to the
staff of the Federal Reserve, believes that the staff of the Federal
Reserve is dead wrong, and that jt is not going to save any money
to put the Miami branch out in the hinterland. Could our staffs get
together and see who is right on that before the-Mr. MILLER. I would be delighted.
The CHAIRMAN [continuing]. Bulldozers start bulldozing1
Mr. MILLER. I would be very delighted, and I certainly will be
pleased to reconsider that guideline. I am hopeful we won't have this
problem come up again. I am hopeful that we can be supportive of
the who]e urban rehabilitation and revitalization that is being undertaken. I hope the Fed can do its part. I would be pleased to do both
things you ask, Mr. Chairman.
The CHAIRMAN. That is great.
Mr. MILLER. Both things-to review our guideline and see what the
facts are a:bout Miami.
The CHAIRMAN. My staff will be available to sit down with yours.
You have answered my second question before I asked it. I think it
is particularly important that you take a look at, and I would hope
remove with a pair of tongs, and dump it in the wastebasket that
March 1977 location guideline, because it directly violates the President's urban policy statement of March 28, which of course came after
your letter to me. The President said, in so many words, "Put Federal installations in the cities."
So I really think there is a marvelous face-saving opportunity for
the Fed. As vou know, I will join you in a hollow square any time
the executive· branch threatens your independence and wants you to
print money out of hand. But, when it comes to independence in matters of where we put our Fed installations, I really think there ought
to be rnlidarity, so I am delighted to have your answer.
Mr. Barnard, were you given an opportunity 1
Mr. BARNARD. Not yet.
The CHAIRMAN. You are now recognized.
Mr. BARNARD. Thank you, Mr. Chairman.
Mr. Chairman, I want to compliment you on your endurance today.
You have done an outstanding job with regard to all those questions.
I have a•.very simple question. I would like for you to respond to a
question, if possible, both from your experience as chief executive officer of Textron, and now as Chairman of the Board of the Federal Reserve System.

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Are we witnessing the demise or at least severe crippling of the free
enterprise system 1
Mr. MILLER. We are witnessing a threat to the private enterprise
system. That is of deep concern to me. We see, too often, I think, that
our solution-and the leaders of private interprise have been somewhat
guilty of this themselves-is to look to Government intervention and
not to rely upon market forces.
We have some great assets in our private enterprise system. First,
is that it is undoubtedly the most effective system ever invented. It
produces better goods and services for more people at lower cost than
any other system, ever devised. And, second, it is an economic system
that gives freedom of choice in how we work, where we work, and
what we do; it is impossible to enjoy personal freedoms without that
system. Inflation, and the trend to solve it with more and more public
input, are a threat to our system. Eighty percent of the goods and
services in this country are still produced by the private sector.
We need to maintain and enhance that. We need to reduce, slowly
the percentage of GNP represented by the Federal sector and to increase that represented by the private sector.
Mr. BARNARD. Thank you very much.
Mr. MILLER. And congratulations on an outstanding Masters tournament in your district.
Mr. BARNARD. Well, thank you.
The CHAIRMAN. Mr. Caputo.
Mr. CAPUTO. I would just like to say: There have been a series of
events which damaged chances of new legislation for New York City
by June 30. I am sure you are aware there was a $700 million State
tax cut enacted in the last 15 days, a large pay increase for middle management, followed by a 6-percent increase, plus productivity wage increase, for the transit authority, technically a State agency.
Discoveries of new dollars by the city management seems to particularly offend Members of Congress. A present deadlock in negotitions
with the city employees, discussions of somewhere between $600 million and $800 million a year costs for the settlement out of a $14 billion
budget does not seem like a lot, but it particularly offends Members of
Congress.
On top of that, we have a congested congressional calendar of 10
weeks to do something. I spoke with you at breakfast with the Monetary Policy Subcommittee last week. My concern is that the Fed started
out and estimated cash flow requirements for the city in the event of
a strike. Obviously cash outlays go down abruptly. Certain forms of
government revenues dry up, like State aid to education is predicated
on school attendance. But I would think there would be substantial
chan~e in the cash flow of the city in the event of a strike.
I also believe that under existing law the Fed has authority to make
loans to municipalities. In the event Congress does not act to give the
Treasury authority, your organization would be the only place in the
Federal Government where something could be done. I would want to
question whether you have had a chance to look into this since I asked
you about it last, and whether you have specifically considered a condition you would want to impose upon the city in the event you used
the authority to provide financing, short-term or long-term, to the
city government.

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Mr. MILLER. Congressman Caputo, I really thank you £or bringing
this to my attention the other day. Prior to our discussion, my concern was to be sure that the Federal Reserve was equipped to deal with
any liquidity problems 0£ banks who hold municipal securities, or any
problems that might arise because customers 0£ banks hold such
securities.
I do not think the problem would be so much a failure to realize on
those securities as it would be some delay in realizing on them.
But since you raised the matter, we have been looking at what alternative plans or authorities or programs the Federal Reserve might
have, and what policies it might pursue. I think I have to say honestly
that I start off with a reluctant attitude hE)cause it is important that
New York City solve its own problem, and not £eel that there is someplace to go and get more relief rather than £acing up to the actions that
it must take.
I really hoI?e very much that New York City can solve its problems
and can oonvmce the Congress and the Treasury that it has a sound
plan that will work it back to self-sufficiency; I hope we do not have
to come into the picture. But I will certainly follow up and be prepared
to know what we can do and to evaluate the alternatives very carefully.
I thank you for bringing the matter to my attention.
[Chairman Miller subsequently submitted the following material
for inclusion in the record at this point:]
Municipalities, along with other types of institutions that are not members of
the Federal Reserve System, may obtain credit directly from Federal Reserve
Banks under certain conditions specified by the Federal Reserve Act. However,
these statutory conditions and the regulations established to administer them
set rather narrow limits on the scope of such borrowing.
Paragraph 13 of Section 13 of the Act authorizes Federal Reserve Banks to
lend for periods of up to 90-days directly to individuals, partnerships and
corporations--subject to whatever restrictions are imposed by the Board of
Governors--so long as the borrowing is secured by U.S. Treasury securities or
by the fully-guaranteed obligations of a Federal agency. For this purpose the
term "corporation" includes State and local governments.
Paragraph 3 of Section 13 of the Federal Reserve Act permits the Federal
Reserve to make emergency loans to individuals, partnerships, and corporations
under terms that accept a broader range of collateral than paragraph 13. However, the statutory language for these loans sets other conditions that constrain
their use. They can be made only in "unusual and exigent circumstances" ; they
must be approved by not less than five members of the Board of Governors ; the
Federal Reserve must obtain evidence that the borrower is unable to secure adequate credit accommodations from other lending institutions; and the loans must
be endorsed or otherwise secured to the satisfaction of the Federal Reserve
Bank. In short, more limitations on these loans are cited in the statute itself than
in the case of paragraph 13 loans.
Emergency loans made under these provisions of the Federal Reserve Act
would thus be at a higher rate than the basic discount rate and would typically
have to meet several criteria. Other credit sources would have to be exhausted;
unusual and exigent circumstances would have to exist; the borrower would
need to be solvent and to have adequate collateral; the borrower's need would be
for short-term accommodation and his basic financial position would have to
permit early repayment ; and the borrower would need to show that failure to
obtain Reserve Bank credit would risk a significant economic and financial
impact on the surrounding area, the region, or the nation.
Some members of Congress have suggested that Section 14(b) of the Federal
Reserve Act provides the Federal Reserve with a more explicit mandate to provide broad financial support directly to New York City. The language of 14(b)
states that a Federal Reserve Bank has the power to: " ... buy and sell, . . .
bills, notes, revenue bonds, and warrants with a maturity from date of purchase
of not exceeding six months, issued in anticipation of the collection of taxes or
in anticipation of the receipt of assured revenues by any State, county, district,

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political subdivision, or municipality in the continental United States, . . . such
purchases to be made in accordance with rules and regulations prescribed by the
Federal Reserve Board;"
'l'here is nothing in the Federal Reserve Act or its legislative history, however,
to suggest that this provision contemplated the purchase of municipal securities
as a means of aiding financially distressed communities.
The System's largest purchases of municipal notes under this authority
occurred during the 1914-1917 period before the establishment of a formal or
centralized Federal Open Market Committee. This was an era in which open
market operations were not used as an important instrument of monetary policy.
Some purchases of municipal warrants were made by individual Reserve Banks
as a means of providing these banks with a source of income, but not to assist
financially troubled communities.
Examination of Board records indicates that a few purchases of municipal
obligations took place up to 1933 essentially as an accommodation for member
banks that were experiencing liquidity problems at a time when authority to
lend to banks through the discount window was more limited than it is now. In
no instance were purchases made by Reserve Banks to provide assistance to
financially distressed municipalities. Since 1933, the Section 14(b) authority to
purchase municipal warrants has not been used.
The practical basis for Federal Reserve lending to municipalities and other
nonmember institutions is thus quite limited. The System can be a lender of last
resort on a short-term basis when unusual and exigent circumstances exist, and
certain other criteria are met. Whether any such loan is appropriate depends, of
course, on conditions at the time of loan application, including an evaluation of
the borrower's ability to repay, the likely financial and economic impact of a
failure to obtain System credit, and the adequacy of available collateral. Most
importantly, with regard to the possibility of a loan to New York City, the
Federal Reserve would have to assess the risk that a precedent would be set,
making it difficult to avoid lending to a large number of similar borrowers. If
such lending were undertaken, the Federal Reserve would inevitably become
enmeshed in the tasks of monitoring loan compliance, judging the eligibility of
competing prospective borrowers, and allocating credit among those units. Coping with political pressures generated by this process is not the proper province
of the Federal Reserve and could seriously interfere with the effective management of general monetary policy.

The CHAIRMAN. Mr. Evans, did you have a question?
Mr. EVANS of Delaware. Thank you, Mr. Chairman.
Let me say at the outset that I have enjoyed very much being here.
l\fr. Chairman, I appreciate tremendously the important task that you
have accepted, and the responsibility. I am impressed with your
candor. I am very impressed with your quiet yet positive approach to
helping to solve some of the problems we have.
But I am concerned that people talk about inflation, not yourself,
sir, but people talk about inflation, talk about unemployment, talk
about the problems that we have in unemployment, especially among
teenagers, minority groups, and yet our actions are very inconsistent
in terms of reaching the goals that we all want to achieve of trying to
reduce unemployment and do something about inflation.
I am more and more convinced that Government is part of the
problem rather than part of the solution to that problem. And I would
like to just discuss a few things about the Carter tax reform proposal,
if I may, because you have identified inflation as the No. 1 issue today.
We have talked about the balance of payments and problems there.
We have talked about unemployment. We have talked about monetary
policy. You have identified capital formation as very crucial to
productivity. And it is.
But you cannot have capital formation unless you have confidence.
That is an intangible. But in order to have confidence, it seems to
me that you need to be able to determine with some degree of pre
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dictability where the administration is going to stand. I just do not
understand the President's emphasis on the "three-martini lunch." I
never have had three martinis at lunch.
Mr. MILLER. I£ you did, you would not be able to do anything after
lunch, I am sure.
Mr. EVANS of Delaware. Right, not after lunch, either. But eliminating the alternate means of computing capital gains, it seems to
me, is a disincentive to capita] formation. The approach of the Carter
administration as far as domestic international sales corporation seems
to me to be a disincentive as far as employment and as far as jobs are
concerned. I would just like to have your comments.
Mr. MrLU<:R. Well, it is true that many things that have been done
by the Government-certainly in all good will-have created inflationary forces. There is no question that those actions should be reversed. I think it is easy to understand this question of confidence a
little more if we look at it in the context of where we are now.
I continue to refer to the last 10 years because these last 10 years
have been as dynamic in change and magnitude of change as any I
have ever seen in my life. I won't recite again the liturgy of events,
but the result is not only a heritage of inflation, but also some serious
breakdown in esteem for institutions as a result of Watergate.
We certainly do have-all of us have-a somewhat more cynical
view of our essential institutions. That is a temporary phenomenon,
because those institutions are representative of the American people,
and they will recrystallize and they will strengthen.
Bnt in the meantime, there is a certain fracturing of the process
by which decisions are made in Government. There is a certain tendency to lose discipline in governmental managements. We tend to
refer to this as lack of confidence in Government.
I don't think that is really true. It is just a natural aftermath of
some very dramatic events. The American people in their hearts and
in their minds are confident people; they are optimistic people. And
I think we are going to see a rebuilding of confidence in institutions,
and in the process of Government.
And this process starts with gaining confidence in ourselves. I£
each individual in this room and each individual in America would
say something positive about every problem he faces for the next 12
months-take the attitude that there are no problems but only opportunities to do better-you would be amazed after 12 months at how
much confidence we would have in ourselves and in Congress and in
the President and in our country, and how much progress we would
make.
Mr. EVANS of Delaware. Could I proceed for 1 minute, Mr.
Chairmani
The CHAIRMAN. Is there obiection i
Hearing none, Mr. Evans, please proceed.
Mr. EVANS of Delaware. I, too, have u;reat confidence in this country, and I think there is nothing we can't overcome working together.
I think we have overcome Watergate; we will ovrrcome Korea, or
anything else we have here in America. But I do think it is awfully
important for the Government to be consistent, consistent in its proposals. rather than counterproductive and sometimes inconsistent.

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My point of view here is just to bring that up so that we can develop together a solution to these problems. I congratulate you, Mr.
Chairman, on the fine job that you are doing, and I hope that the
pipeline you have to the White House is a good one, and that the
ears over there will be open rather than plugged.
Mr. MILLER. Thank you.
The CHAIRMAN. The time of the gentleman has expired. Mr. Brown.
Mr. BROWN. Thank you, Mr. Chairman.
It is very good to have you here this afternoon. I think your essay
on confidence is tremendous. However, I sat on the Joint Economic
Committee last Friday morning and heard Dr. Shiskin report that
there is a little improvement in employment, a little decrease in unemployment; but at the same time output stood still, which means
that from a productivity and inflationary standpoint, it was bad news
rather than good.
We didn't have as many people in the labor force in the month of
March as we had before, and anyone that's studied those statistics
over the years knows that when you don't have many people going
into the labor force this month-you will next month and to the extent
you get them, unemployment can jump since entrance into the labor
force has as much of an impact on unemployment figures as do people becoming employed, because that is the ratio, of course, that develops the figure.
But I will try to be confident, nevertheless, Mr. Chairman. The
thing that I am interested in is, to the extent that you can tell us,
what you have done, what do you expect to do, and how critical is
the value of the dollar problem.
Mr. MILLER. The value of the dollar has been a difficult problem.
It's been brought about by fundamental imbalances of the last few
years. It's been brought about because of large deficits in our balance
of trade and payments, unprecedentedly large ones.
Those deficits have been fueled by our excessive dependence upon
jmported oil and oil products, and by an ambition or aspiration for
this country to go back to a fuller use of its capital resources, at a
rate which has accelerated its requirement for imported materials and
products.
Because we have had this pattern both in our growth rate an.d
dependence on oil, we have run up deficits which have created an excessive supply of dollars in the hands of foreigners; and these holdings have bid dollars against other currencies, creating- disloC'ations.
"\Ve in the Federal Reserve and in the Treasury, as you know, have
intervened in the market to be sure that any relative change in
currency value would be orderly, that we wouldn't see any conditions
which would upset financial markets. And we have done this with the
belief that we should simultaneously address the fundamental issues.
If we in the United States take aC'tion as to energy, and if we take
action as to inflation-not with the idea that we can solve the problems
overnight, but that we can start hack in the right direction-if we
show progress in the right direction, the dollar will be strong and
sound, and will appreciate.
If we do not address the fundamentals, th~n our bridging- actions
and intervention will be of limited effectiveness, because they can

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only cushion the changes that will take place in any event. It is my
conviction that we can address the fundamentals. We can change the
trends, and we can establish the dollar as sound and worthy currency
and as a key to the international monetary system.
Mr. BROWN. Then you don't look upon your intervention a.shaving
any real significance other than adjusting temporary distortions; is
that correct i
Mr. Mn,LER. It seems to me all vou can do with bridging actions is
to make sure that change in the ·value of currency is orderly. Once
there is a decline in the relative value of our currency, our goods become cheaper in foreign markets: we may be able to export more;
but the sad thing is that the rate of current growth in imports is
quite high, and that their price goes up. That, in turn, allows
domestic prices to go up in a competitive way, and the whole cycle is
inflationarv.
So decline of the dollar is a problem, not only because of the general
importance of the currency in such matters as pricing oil, but also
because it feeds in as an inflationary force and works against us.
Mr. BROWN. Mr. Chairman, we have blamed energy for our balanceof-trade-deficit problem. I think we have overemphasized the significance of our energy imports. They still don't equal a third of our deficit
problem, do they!
Mr. MILLER. Oil imports last year were $45 billion, and our balanceof-trade deficit was $30-plus billion. Incidentally, in 1973 our imports
of oil-Mr. BROWN. I mean with respect to total imports.
Mr. Mu..LER. Our total imports in 1917 were about $150 billion.
Mr. BnowN. So $45 biJlion would be less than a third.
Mr. MILLER. Yes.
Mr. BROWN. So we are talking about somewhere between a quarter
and a third.
Mr. MILLER. Yes.
Mr. BROWN. Since our imports of petroleum products onlv constitute a quarter to a third of total imports, you have to look at total
imports if you are looking at where the deficit is.
Mr. Mu,LER. That is rig}:it.
Mr. BROWN. It is very nice to blame the deficit all on one commodity,
but we know that isn't true.
What was our balance of trarle deficit with West Germanv last vear i
Mr. MILLER. I think our deficit with the Federal Republic of Germany was about $1.2 billion.
Mr. ~Row~. 1\-1iat would you think, Mr. Chairman, if there was in
connection with our European theater common security efforts, we
were going to embark upon a program that would involve almost let
us sav anywhere from $1 billion to $2 billion more in purchases th~re i
Would that botheryoui
Mr. MILLER. If you are talking net additional purchases, that would
be a concern. brcause it workR in exactly the opposite direction-Mr. BROWN. I£ we were going to commence purchasing those things
we are not purchasing now, assuming the rest of the situation is the
same that would be almost doubling our present balance of trade
deficit with West Germany.
Wouldn't that be of some criticality to you i

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Mr. MILLER. It would. But Congressman Brown, I would have to be
careful not to answer you out of context, because if you are talking
additional purchases by the Defense Establishment, these may oe the
basis for sustaining continued purchases from the United States. So
you have to look at the net effect.
If we are selling $1 billion from this side and spending $1 billion
over there, that nets to zero. So I would have to look at the net effect.
As you know, there are usually tradeoffs on these decisions as to military equipment; and I am not familiar with the particular problem
you mention.
Mr. BROWN. But assuming all that you say to be true, wouldn't you
think there couldn't be a less timely time to do it?
Mr. MILLER. Well, if it resulted in a net increase in our purchases
abroad, it is bad timing. That is why I have to know the net effect;
if we are going to sell some F-16's to make up for it, th.en it is fine. We
would create jobs :for the suppliers o:f engines and aircraft assemblers
and we would make up for the purchases very rapidly and help our
employment situation.
Mr. BROWN. Are you suggesting there should be then a tradeoff, that
there should be an increase in the consumption or purchase of our
goods if we are going to purchase theirs, as a tradeoff, right?
Mr. MILLER. Yes, and as you know-Mr. BROWN. If that doesn't exist then you would be disturbed.
Mr. MILLER. I would be concerned. As you know, because the maintenance of strategic forces in Europe is important to our security, but
does cost us money, in the past there have been counterpurchase arrangements. Usually, we have been the net gainer on purchases for
weapons systems. Purchases :from the United States have been an offset to the costs of our maintaining forces abroad. Maintaining forces
in Europe becomes a far more costly situation because of inflation.
Can you imagine what happens to our Armed Forces living in Germany with the change in value of -the deutsche mark? So that problem concerns me.
All the things that work in the direction of worsening the deficit
and, therefore, worsening the problem of the dollar do concern me. I
don't mean to duck your question, because I agree with you.
I also don't want to imply, though, that we shouldn't make tradeofl's. If we can gain some sales by making some purchases, let us do
that, too.
And we may have to look for some relief for our military personnel
because we cannot allow the kind of pressure on their family budgets
that takes place with their need to purchase, on the local market, items
that are priced in dPutsche marks.
Mr. BROWN. Mr. Chairman, one final thing. Would you not see this
as somewhat inconsistent?
If there was pressure being applied by the defense establishment in
the Federal Republic of Germany to, eay, purchase German equipment having- the kind of impact we have been discussing here upon
the dollar, while at the same time the Economic Ministry and others
are saying that we should get the dollar back on a sound basis.
Mr. MILLER. Yes; I think there is a kind of interesting problem. In
a sense, many other nations would like to see the U.S. growth rate
continue so it can continue to import their products into this country.

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At the same time they are very critical of the value of the dollar,
which implies we would have to change the level of importation.
So, there is a certain aspect here of trying to have it both ways. We
can't continue to be the source of economic growth for another country
by importing from it unless we can also sell back. So we do have that
kind of problem; I agree with you 100 percent.
Mr. BRowN. Thank you.
My time has expired.
The CHAIRMAN. Mr. Wylie.
Mr. WYLIE. Mr. Chairman, I want to compliment you for an excellent performance and I might say that I find much in which to
find consolence in your views. I noticed a publication from the Federal Reserve Bank in St. Louis, which says that the monetary basis
is expanding a great deal faster than M1 •
Moreover, there has been almost no growth in checking deposits
over the last few months while currency component of M 1 has been
accelerating. Can you give me an explanation for this buildup in the
public holdings of currency?
Are they socking it away, is the money going abroad or what? But
this now amounts to about $400 for every man, woman and child in
the United States.
What implications does this have or do you see other monetary and
fiscal policies of the immediate future?
Mr. MILLER. It's a phenomenon that is interesting to me. Mr.
Axilrod, who is staff director for Monetary Policy for the Board, reminds me that in terms of the nominal growth of the economy, the
growth in currency in circulation is not really out of line. In terms
of currency as a component in M 1 , I think it has grown because of
the slower growth in demand deposits; and that, of course, may well
be related to new payment mechanisms that are available to depositors.
I think you should be aware, and we should all be aware, that M1 is
going to change in importance to us in the next year, as consumers
gain access to readily spendable cash that is not in a demand deposit
form. We are going to see M1 change somewhat. This may be a healthy
change if, as a result, consumers do actually increase their own return
on their idle money.
Mr. WYLIE. Well, on page 8 of this report published March 31,
1978, I notice that the currency component has increased very steadily
over the past few months whereas the demand deposit component has
remained relatively flat. That was the thrust of my question.
Mr. MILLER. I think you nre absolutely correct.
Mr. WYLIE. As to whether people are putting it in the sock or
whether that money is going out of the country, going abroad. You
might want to expand on that but that brings me to another question. This is a good place for me to ask something about the International Banking Act of 1978, which the House passed on Thursday.
The CHAIRMAN. 367 and 2.
Mr. WYLIE. 367 and 2.
I know there is a difference of opinion on the thrust of that. The
Chairman reminded me it passed 367 to 2. Former President Lyndon
Johnson once said that if you pass a bill by more than one vote you
have probably given up too much. That is where I come out on this
bill. This is not the bill I would submit that the Federal Reserve

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Board suggested to us or Dr. Arthur Burns suggested to us some time
ago.
. a ch ance £or a d"ff
. . h ere,
I have the feeling there 1s
1 erence o£ opm1on
that we may have worked some 3 years and harmed the Nation.
But in any event, we did pass it.
.
I think also it proved that the State regulators are mor~ persua~1ve
than I first thought and maybe they have a more persuasive const~tuency than the Federal Reserve Board or they have a larger constituency.
. 1t
. seems to me as 1.£ 1·t 1s
. d"ffi
It £or you
But wh at I wou Id 1·k
1 e 1s,
1 cu
to control monetary policy with the rapid increase in foreign deposits
in the United States, and with little or no control by the Federal Reserve over those foreign deposits. And does the bill, which we passed
on Thursday, address that problem sufficiently in your opinion, and if
you are not familiar with the bill, maybe you would want to answer
£or the record.
Mr. MILLER. I would be happy to answer, because I think the Federal Reserve would have preferred some improvements in the international banking bill, as it passed the House. I appreciate your support.
I wish you'd been more effective in persuading Mr. Brown to help
us, but-Mr. WYLIE. Thank you. I wish I had been more effective, too.
Mr. BROWN. Will the gentleman yield?
Mr. WYLIE. Yes, I would be glad to yield.
Mr. BROWN. Mr. Chairman, I would respectfully suggest that you
have got a lot more legislation today than you would have had if Mr.
Wylie's views had prevailed in submitting that to the House floor.
Now, you have still got another body to work in and I think you have
a better-Mr. WYLIE. I refuse to yield further. I didn't want to get into an
argument here.
But I appreciate what you have said and your support and I have
a -feeling that the future will show that we were more right on Thursday than is now apparent.
With that I thank you, Mr. Chairman. My time is up.
Mr. MILLER. Thank you again £or your support. We will work on a
couple o-f matters that we think will improve the bill, but we do appreciate the gains we have made.
After all, we will have some further control. One 0£ the main things
I am personally concerned about is the multi-State branching limitation, which is what the State supervisors worked so hard against. My
reason is simply this: a foreign organization can buy a maior U.S.
bank, operate through the State, and then establish branches in many
other money centers and operate a national banking system; our own
domestic banks can't do that.
Mr. "'\V'YLIE. Precisely, correct and maybe siphon off some of our
Americim dollars.
Mr. MILLER. And take deposits and make loans overseas. I hate to
see us back into a new banking pattern without understanding what
we are doing. I hope this will be thought about a little more. Maybe
the Senate will see that that could become a problem. I. at least, would
prefer to restrict foreign branch banking at this point. until we look
at the issue much harder.

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If Congress, after really seeing the implications, still feels it is
proper to _permit this for foreign banks but not U.S. banks, then it
could take this action.
Mr. WYLIE. Yes, it is hard for me to understand why we as a Cong_!'c.ss aUow foreign branch banks a competitive standing over our own
U.S. banks, but in any event. I am sorry we are a little late, because I
lost my seniority position, but I am glad to have this chance to talk
to you again.
Thank you, Mr. Chairman, for a very impressive performance.
Mr. MILLER. Thank you.
The CHAIRMAN. I would just add before closing, Chairman Miller,
that to me a very, very important part of the international banking
bill is the section which gives the monetary authority to the Federal
Reserve to publish reserve requirements. That section is largely the
handiwork of the gentleman from Michigan, Mr. Brown.
I think he was right on track and would you not agree that in that
important portion of the total at least the Fed is reasonably well satisfied?
Mr. MILLER. We are very pleased and very much appreciate the very
overwhelming vote in favor of that section. That is a very important
step, and we are very glad to have the authority because it is a necessary part of monetary control. But it is part of the problem of unfair
competition to allow major foreign banks to operate in this country
·.vithout reserve requirements.
So, I thank you for that.
The CHAmMAN. Did you want to add anything?
Mr. BROWN. Well, Mr.. Chairman, I just would say, Chairman Miller, that one thing, I don't think the Fed has been terribly notable for
in the years that I have served in the Congress is the ability to check
the political pulse of the Congress. And all I am saying is that I respectfully suggest, you got much more than you would have had by the
very action that you condemn.
Mr. WYLIE. As I said before, State bank regulators are more powerful than we thought.
Mr. MILLER. Yes.
Mr. BROWN. You know, you had the bill written once before pretty
much as the Fed wanted, and it got nowhere. I think now it has a
chance to receive action in the other body, and a move toward the Fed
position can be accomplished.
Mr. MILLER. Wonderful.
. Mr. BROWN. But without the vehicle, there would be nothing there to
improve.
Mr. MILLER. You are correct. We must certainly learn to read pulses
better; maybe we will need some new pulse readers.
Mr. BROWN. I don't thinl:: it is a matter of reading, I think it is a
matter that in the past, the Fed hasn't wanted, many times, to believe
that which was obvious to everyone else. And you know, being right
oftentimes isn't as important as being President:
Mr. MILLER. Thank you for drawing us out of our shell and getting
us to these meeting-s with one another because in this way we can learn
and be instructed. Next time we will be more alert.
Mr. BROWN. I would remind you to go back and check some of your
predecessors, that I was the champion of the Fed's position on the so
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175
called audit bill. And there again, there was a failure to recognize political reality. Upon that occasion, I found myself almost in Mr.
Wylie's position.
Mr. WYLIE. Almost.
The CHAIRMAN. In conclusion, I would just somewhat disassociate
myself from the remarks of my friend, Mr. Brown. I think the Fed
has, over the years I have been here, been quite successful in its legislative relations. I would not want anything that he has just said to encourage you to become even more overwhelmingly successful in the
years ahead.
Anyway, you have delivered yourself nobly this morning. We are
very grateful. We learned a lot. I think we shall all become better
friends.
We shall now stand in adjournment.
I will have questions to submit in writing to you on some of the international problems of monetary affairs and you can include your answers to them in the record.
Mr. MILLER. Thank you very much, Mr. Chairman. Thank you for
your courtesies this morning. I appreciate the opportunity to be here.
The CHAIRMAN. We now stand adjourned.
[Whereupon, at 1 p.m., the hearing was adjourned, subject to the
call of the Chair.]
[The following letter containing questions submitted by Chairman
Reuss re Federal Reserve intervention in the foreign exchange market
and the System's swap arrangements with Chairman Miller's answers
follows:]

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BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, 0. [. 20551

G. WILLIAM

MILLER

CHAIR MAN

May 2, 1978

The Honorable Henry S. Reuss
Chairman
Committee on Banking, Finance
and Urban Affairs
House of Representatives
Washington, D. C. 20515
Dear Chairman Reuss:
Thank you for your letter of April 12 regarding Federal
Reserve intervention in the foreign exchange market and the System
swap arrangements.
For your convenience, I have repeated each question and
followed it with my response:
1.

In my opening statement of March 9, I asked you to
provide this Committee with a definition of "disorderly markets" -- that mysterious condition under
which central bankers intervene in foreign exchange
markets. Can you now supply such a definition?

Answer: The determination of whether a foreign exchange
market is disorderly is in the last analysis a matter of judgment.
Several years ago the Federal Reserve prepared a statement identifying
the characteristics of disorderly markets, and this statement still
represents our view:
Disorderly markets have certain features in common:
exaggerated rate or price movement, wide spreads in
quotations, a stifling of the intermediary role of
professional dealers, and an unresponsiveness of prices
and orders to the fundamentals operating at the time.
Disorderly markets are by their nature unstable; in the
absence of some stabilizing influence, disorder can
increase to the point at which the market ceases to
function.

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2.

On March 7, the first day of our hearings on the Conduct of Monetary Policy, Professor Rudiger Dornbusch
of the Massachusetts Institute of Technology testified:
"I am not aware of any evidence in support of the view
that intervention has in fact -- and on average -smoothed exchange rates relative to their trends and
thus created an atmosphere of increased certainty .
• • • I would therefore argue strongly that the Federal
Reserve should desist from all and any kind of intervention". Would you comment on this remark?

Answer: Direct evidence that intervention operations
have smoothed exchange rate movements is difficult to obtain, since
it would require determining what exchange rates would have prevailed in the absence of intervention. There is, however, indirect
evidence in the fact that the System has realized profits each year
on its foreign exchange intervention operations under the regime
of floating exchange rates. The profit criterion is one measure
of the success experienced by the Federal Reserve in smoothing
exchange rate movements, although, as you know, it is not the only
relevant criterion.
3.

The Federal Reserve press release of March 13 lists
the banks with which the Federal Reserve now has
reciprocal currency arrangements and the amounts
of each:
a.

To what extent have those arrangeme.nts been
used since January 1: how many days and in
what amounts?

Answer: As reported in our quarterly report, System drawings
in January on German mark s.wap lines occurred on 10 days and amounted
to $451 million equivalent; System drawings i.n Swiss francs occurred on

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178
one day and amounted to $19 million equivalent. According to our
established procedures, data on drawings and repayments in the
February-April period will be published in the June Federal Reserve
Bulletin.
b.

Of the swaps effected, what portion have not been
repaid?

Answer: None of the swap drawings during January were
repaid in that month.
c.

What has been the net profit or loss on each
swap transaction over the last year?

Answer: We do not normally assemble the data on profits
and losses~action by transaction. For the calendar year 1977,
however, we realized total profits of $4.9 million on transactions
related to current operations, i.e., excluding transactions connected
with repayments of pre-August 1971 Swiss franc swaps.
d.

What evidence is there that the swaps have contributed to a stronger dollar over the past year?

Answer: There is little empirical evidence on the effects
of intervention, whether financed by swap drawings or from existing
balances. System intervention has been for the purpose of countering
disorderly conditions. In recent months, when the dollar has been
under downward pressure, such intervention may have helped prevent
the dollar from falling to unrealistically low levels. But intervention has not been intended to keep the dollar exchange rate at
levels above those justifiable by fundamental economic conditions.
e.

Are negotiations underway or in prospect to ex-

tend swap agreements with any one?
Answer:
swap agreements.

There are no negotiations underway to extend System

Please let me know if I can be of further assistance.

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APPENDIX I
THE FOLLOWING ARE QUESTIONS SUBMITTED BY
MEMBERS OF THE COMMITTEE TO FEDERAL RESERVE CHAIRMAN G. WILLIAM MILLER, ALONG WITH
THE CHAIRMAN'S ANSWERS
BOAR □

OF GOVERNORS
OFTHE

F"ECERAL RESERVE SYSTEM
WASHINGTON, C. C. 20551

D. WILLIAM MILLER
CHAIRMAN

April 20, 1978

The Honorable Henry B. Gonzalez
House of Representatives
Washington, D.C. 20515
Dear Mr. Gonzalez:
Enclosed are responses to the questions posed in
your letter of April 11.

A copy of these answers has been sent

to the Committee staff for inclusion in the record of the hearing
on April 10.

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Please let
me know if I can be of further assistance.
I
Best regards,
Sincerely,
!Signed) G. William Miller

180
Questions forwarded by Congressman Gonzalez and responses furnished
by Chairman Miller to be included in the April 10 hearing.

Question #1
Professor Rudiger Dornbusch of MIT told this Counnittee on
March 7, "I am not aware of any evidence in support of the view that
intervention has in fact -- and on average -- smoothed exchange rates
relative to their trends and created an atmosphere of increased
certainty. I would, therefore, argue that the Federal Reserve should
desist from all and any kind of intervention."
Would you coimnent on this?
~:

The Federal Reserve's objectives in intervening are

no_t to influence the trend in exchange rates• but simply to counter
disorderly markets.

In trying to counter disorder, the Fed has attempted

to see that there is good "two-way" business in the exchange market so
that when there is large selling of dollars by private holders, the
System may purchase dollars (i.e., sell foreign currency) and like-

wise reverse its activities when private holders are rapidly buying
dollars.

Indeed the System has generally attempted to achieve a posi-

tion of zero net intervention over an extended period of time so as
not to alter fundamental trends.
While it is difficult to determine what short-run exchange
rate fluctuations would have been in the absence of central bank
intervention, it may be noted that the System has realized profits
each year on its foreign exchange operations related to intervention
under the regime of floating exchange rates.

The earning of profits

by selling foreign currency at a time when prices were high and subsequently purchasing it ~ack at lower prices suggests that the Federal
Reserve may have moderated fluctuations in exchange rates which would
have occurred without official support.

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-2-

Question #2
Your predecessor felt that it is urgent to prevent the
further decline of the dollar. He was willing to go so far as to
recommend some dramatic step like disposing of our gold stock, !Q.
show our determination to maintain a strong dollar. Do you share
his sense of urgency, and what steps other than market interventions
would you take to keep the dollar from depreciating further?
Answer:

It is an urgent matter to adopt policies that will

strengthen the U.S. economy.

A healthy economy that invites confidence

in the future will lead to a stronger dollar.

Intermediate bridging

measures can help prevent unwarranted depreciation of the dollar while
such confidence is being built, but can never substitute for the actions
needed to create sound fundamentals on which a strong dollar can be
based.

We must reduce the rate of inflation.

Controlling and

reducing government deficit would contribute to reducing our rate of
inflation.

Secondly, we need a sound energy policy, which is chiefly

the responsibility of Congress.

If Congress fails to act, the Admin-

istration should take the less desirable but necessary measures that
I have recommended elsewhere.

An effective energy policy and a

reduction in the rate of inflation would contribute to confidence in
the U.S. economy, prompting the investment we need for sustained
growth.

Because I feel that a strong dollar depends upon a strong

economy, I would not suggest that we reduce our rate of economic
growth to improve our trade balance, but rather look favorably on
the efforts of our trading partners to achieve a sound rate of growth
in their economies.

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-3-

Quest ion //3
In your testimony of March 9 you stated your belief that
our foreign trade deficit will not show further deterioration. However,
the recent1y announced $4. 5 billion deficit for February is the largest
monthly deficit. Are you still confident that the trade deficit will
be no worse this year than in 1977?
Answer:

In my testimony of March 9, I said "with prospects

for our exports improved by the likelihood of stronger economic growth
abroad this year, it appears that our foreign trade deficit will not
deteriorate further."

In light of the very large U.S. trade deficits

recorded in January and February of this year, it is reasonable to
question whether the trade deficit for all of 1978 can be held to the
rate of 1977.
You will note that in my March 9 statement I linked prospects
for the U.S. trade balance to prospects for a recovery in our exports.
In this connection, the results recorded for January and February were
somewhat disappointing because they revealed a reduction in our
non-agricultural exports from the fourth quarter of 1977.

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-4-

Question #4
We speak of gold as being ·demonetized. Yet, there is still
a strong attachment to gold, and it seems to move up or down with
currencies,
If gold has been demonetized, why are we holding so much
of it at Fort Knox, and in the vaults of the New York Fed?
Answer:

The Second Amendment to the International Monetary

Fund's Articles of Agreement, which came into force on April 1, 1978,
provides for a gradual reduction in the role of gold in the international
monetary system.

The Secretary of Treasury has stated that it is

U.S. policy to sell gold from time to time, and on April 19 the Treasury
announced a schedule of gold auctions to be held in 1978.

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BOARD OF GOVERNORS
OF"THE

FE □ ERALRESERVESYSTEM
WASHINGTON, □ .

C. 20551

G. WILLIAM MILLER
CHAIRMAN

March 22, 1978

The Honorable Frank Annunzio
House of Representatives
·-Washington, n.c.
20515
Dear Mr. Annunzio:

I am pleased to furnish my·ans~ers to the two
questions you transmitted to me via staff at the hearing
before the House Banking Committee on March 9.
I have provided the House Banking Committee
with a copy of this letter and the enclosure for inclusion in the record of the hearing.
With best regards,
Sincerely,

Enclosure

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(The following are written questions from Congressman Annunzio
to Chairman Miller, along with the Chairman's answers.)

Question #1

Submitted by Congressman Annunzio to Chairman Miller
on March 9, 1978

Mr. Miller, shortly after you were nominated by President
Carter as Chairman of the Board, I wrote to you concerning a Board
proposal that would allow member banks to transfer funds from
customers' checking accounts to savings accounts, in effect creating
interest on demand deposits. I pointed out in my letter that it was
my feeling that the Board was legislating rather than regulating and
that this area was one that should be left to the Congress.
You replied, in your letter to me, that you have not taken
any part in the deliberations leading up to the decision and that
you would study the matter at a later date. I wonder first if you
now have a position on this matter and secondly I wonder if under
your term as Chairman, the Board will contiDlle its Walter Mitty
dream that it is a legislative rather than a regulatory body. I
am deeply concerned that time and time again Congress enacts laws
or fails to enact laws and the Board does not agree with the position
of the Congress, and through regulation, either nullifies the laws
or creates a law when none exists. I would suggest that if the members
of the Board want to legislate, then they ought to resign from the
Federal Reserve System and run for Congress. I note that Dr. Burns
will soon be unemployed and perhaps he might set a precedent for the
Board by running for Congress, and then he could legislate through the
front door rather than the back door.
I would appreciate your comments on this, particularly as
to whether or not the Board will implement its NOW accounts by regulation proposal.
Answer:

Since becoming Chairman, I have reviewed soma of

the issues raised by the automatic transfer of savings proposal.
have questioned the Board's regulatory authority in this area.

You
Prior

to public announcement of the proposal, I understand that the Board
carefully considered the effects such a service could have.

deciding to announce this matter for public comment a second time,
t~e Board indicated that the proposal represented an additon4l convenient way in which a depositor may withdraw his or her funds from
a savings account.

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In the area of deposit accounts, Congress has

186
given the Board the authority to define terms, establish rate ceilings
and prescribe rules regarding the manner in which deposits may be
withdrawn.

At present, a depositor at a bank or savings and loan

association may withdraw savings deposits by telephone or use a savings
account to pay bills directly through the use of third-party transfer
services.

The automatic transfer feature would eliminate the often-

times cuni>ersome requireDEnt that the depositor actually make a
telephone call to the bank to transfer funds.
The proposal does not result in the paYDEnt of interest on
demand deposits since the proposal requires that the funds to be
transferred remain subject to the bank's ability to require the
depositor to provide a 30-day notice prior to withdrawal.

This

reservation of the right to require 30-days notice is what presently
distinguishes savings deposits from time deposits.

In addition, the

proposal requires that the depositor forfeit interest earned during
the previous 30 days on the funds transferred.

This may as_sist in

preserving the_ distinction between demand and savings deposits.
The automatic transfer proposal would not, in fact, authorize
NOW accounts since separate savings and checking accounts must be
maintained by the depositor who desires to make use of the service.
Under the proposal, a depositor would not be permitted to write checks
against his or her savings account but rather could only draw checks
against a separate checking account maintained at the bank.

The Board's

proposal, therefore, can be distinguished from NOW accounts, which
permit

depositors to write checks directly against _interest earning

accounts.

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Thus, the Board believes that this proposal is clearly
within its regulatory authority.

Let me assure you.that on this

or any other issue the Board will be ser$itive to the limitations
of its authority and will exercise all due care in not exceeding
its jurisdiction.
With respect to the substance of the transfer proposal, the
Board has received voluminous public comment.

I have not formed a

final opinion on the advisability of moving ahead with the proposal
and will not do so until I have weighed very carefully the comments
received.

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Question #2

Submitted by Congressman Annunzio to Chairman Miller
on March 9, 1978

Mr. Miller, legislation is soon to go before the full
Senate which is labeled a Truth in Lending Simplification law. I
am deeply concerned, as Chairman of the Consumer Affairs Subcotmnittee
of the House, that this bill is not a Christmas tree bill that we all
are familiar with in this body, but rather a Halloween bill in that
it is costumed as legislation to help small businessmen.
The legislation contains a provision that would forgive many
Truth in Lending crimes cotmnitted by lenders in the amount of hundreds
of millions of dollars. It also contains a Hitler clause which
states that if the magnitude of the crime is so great that requiring
repayment would affect the solvency of the business, that no restitution need be made.
In short, a business which only breaks the law a little bit
would be punished but a business that stole millions of dollars from
consumers would get away Scot free.
I would like to know if, as the new Chairman of the Federal
Reserve Board, you favor this soft approach to financial criminals.
Answer.

My time at the Board has been so short that I have

not had time personally to study the question you have asked, whether
a financial institution's safety and soundness should be taken into
account in determining whether adjustments in customers' accounts
should be required whenever Truth in Lending violations are discovered.
I have been informed that the Board did not make any recommendations
with respect to this issue in the course of the Senate Banking, Housing
and Urban Affairs Connnittee's consideration of the Truth in Lending
simplification bill.
Enclosed is a copy of material published in the Federal
Register by the Board and the other regulatory agencies seeking public
comment on several Truth in Lending enforcement policy questions.
am told the subject is addressed in this material.
reached final decisions on these issues.

The Board has not

I will be reviewing this

matter and taking into account the comments we have.received,
including the views you have expressed, as this issue ·is given further
consideration by the Board.

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· ·.~
,

FEDERAL
- -

•

....

RESERVE

Thia release has been issued on behalf of
the following Federal regulatory agencies:
Comptroller of the Currency
.Federal Deposit Insurance Corporation
Federal Home Loan Bank Board
National Credit Union Administration
Board ~f Governors, Federal Reserve System
October 18, 1977

For immediate release

Uniform guidelines for the enforcement of the Truth in Lending law
and its regulatory rules were proposed for public comment today by the

five Federal agencies that regulate banks, thrift institutions and credit
unions.
Comment should be sent by

November 21, 1977 to Interagency

Enforcement Policy•• Regulation Z, Washington, D.C.

20219.

The joint notice of the proposed guidelines said they are intended
to "promote improved and uniform enforcement of the Truth in Lending Act
through corrective action, including reimbursement, for borrowers who have

been overcharged or otherwise harmed by violations of the Act."
The Truth in Lending Act was passed in 1968, and, at the direction of
Congress, the Federal Reserve Board wrote rules -- Regulation Z -- to
:Implement it.

The Act calls for disclosure of the true coat• of credit

extended for consumer purchases.
The Truth in Lending Act was the first of a dozen Federal consumer
credit protection laws enacted in the last decade.

These acts, and

regulations spelling out their meaning and what may and may not be done
under them, have created a new body of law so large and complex that
provision of standard criteria for their enforcement baa become necessary.
Consequently, the five Federal agencies have joined in proposing
uniform guidelines for enforcement of Truth in Lending and Regulation z

25-273 0 • 78 • 13

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-2-

and they expect to issue further enforcement
credit protection

law■

guideline■

for other conaumer

and regulations.

The agencies joining in today's proposal are the Board of Governors
of the Federal Reserve Syatem, the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Federal Home Loan,Bank Board
and the National Credit Union Administration.
In a statement accompanying their enforcement proposals the
agencies said:
"It is felt that coordination among the agencies is desirable in
order to bring about uniformity in the administrative action• that will be
taken when violation& of the Act are detected •••• It is administratively
impossible to fashion an appropriate remedy for every type of violation. The
guidelinea ••• outline the corrective action the agenciea intend to require
when violationa ••• have caused measurable monetary injury to customers •• ,. It
should be emphasized that it will continue to be the policy of the enforcing
agencies that •• ,prospective correction of any violation will be required
that is, creditors will be required to take whatever action is necessary to
inaure that the violation does not recur.,,.
"The guidelines are not intended to substitute for •• ,administrative
authority any of the agencies has to enforce the Act, nor are they intended to
forecloae the customer's right to bring civil action to recover for
violations of the Act."
The agencies

■aid

willful and knowing violations will be brought to

the attention of the Department of Justice.

The guidelines may be modified

by the agencies to be responsive to specific circumatancee, and they will

be reviewed and modified as continued special examinations of financial

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-3-

institutions for compliance with the consumer credit protection laws yields
more information.
"In all cases," the joint statement added, "the financial condition
of the creditor and the coat of corrective action will be considered in
applying the guidelines."
In connection with a number of their proposals, the agencies cited
specific questions on which they would particularly like to have coament.
In part, the guidelines propose corrective actions that would be
required when violations of key provisions of the Act are discovered.

These

guidelines are listed, beginning with Guideline 4, under the heading
Corrective Action for Specific Violations.

They include:

Violations Involving Improper Disclosure of the Annual Percentage
Rate or Finance Charge (total cost of credit to a customer) (No. 4):
The agencies distinguish several types of violations involving the
Annual Percentage Rate (APR) and the finance charge.

They are:

1. Where the APR is understateiilf •nd the finance charge is
either correct or not disclosed:
--The creditor would be allowed to charge no more
for the credit than the understated APR indicates,
and must take action to ensure this.
2.

Where no APR is disclosed and the finance charge is either
correct or not disclosed:
Alternate 1:

The creditor would calculate what APR
is actually being charged and take action
to ensure that the customer does not pay
more than that, reduced by one-quarter of
one per cent in the case of a first mottgage
loan or one per cent in all other cases.

"Understatement" of· the APR or finance charge means an
APR or finance charge that is less than what the customer is actually paying,
resulting in an overcharge. See definitions Noa. 18 and 19 in the
guidelines.

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Alternate 2:

Whatever rate is disclosed on the loan
note or conditional sales contract
would be considered the "disclosed" APR
and the customer could be charged no
more than that •

Where the APR is correctly disclosed but the finance
charge is understated, the creditor would be required
to pay the difference between the actual and the
understated finance charge to the customer,

Where both the APR
the creditor would
action appropriate
caused the largest

No reimbursement would be required when no finance
charge is disclosed and the APR is correct. The agencies
feel that customers are more likely to be misled by misstatement of the finance charge than by no disclosure
of it.

and the finance charge are understated,
be required to take the corrective
to whichever of the understatements
overcharge.

Additionally, the agencies proposed three types of actions for
correcting an understated APR.

These are:

--A lump sum rebate and reduction of the amount of each
remaining payment;
--Reducing the number of remaining payments;
--Reducing the amount of each remaining payment.
The agencies said each of these is administratively feasible and
all would lower the actual rate paid by the customer to the level of the
understated APR.

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-5Violations Involving the Improper Disclosure of Credit Life,
Accident, Health or Loss of Income Insurance(No. 5).
premiums for such insurance to

The Act allows

be excluded from the Finance Charge if

the customer is clearly and conspicuously informed that the insurance is
optional.

If the customer wants the insurance, the customer must sign and

date an affirmative statement to that effect. The agencies proposed that if there
is no written diaclosure that the insurance is voluntary it should be treated as

having been required,

and its cost must be included in the finance charge.

If the disclosure was made but the cost of the insurance was not
stated or the customer did not sign a statement saying it was desired,
the agencies proposed that the customer should be given another chance
to accept or reject the insurance.

If the customer wants to cancel the

insurance, the creditor would be required, under alternative proposals,
to (1) refund some or (2) all of the premiums paid.

The agencies said

their alternative proposals for partial or entire refunds were made in
light of the facts that even if the customer in the end rejects the
insurance, some benefits were received while it was in force.
Other guide1ines constitute

proposed general policies, dealing with

such matters as the difference in treatment of intentional and unintentional
violations, how far back in time corrective action should reach and minimum
amounts for which correction should be required.
Intentional Violations (No. 1):
The agencies defined intentional violations as (1) those an
enforcing agency can reasonably determine to have been knowingly commited,
permitted or approved by a creditor's managerial personnel or board of
directors, or (2) a ~iolation that an enforcing agency determines to have

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resulted (a) from a deliberate or sustained ignorance of, or indifference to,
the law on the part of the creditor's management, including the board of
directors, or (b) a deliberate or sustained omission concerning, or
misrepresentation of, the requirements of the Act in the creditor's
policies and procedures.
All intentional violations resulting in an overcharge would require
corrective action, regardless of the dollar amount involved.
Unintentional Violations (No, 2):
(1)

All unintentional violations resulting in an overcharge would

require corrective action if the overcharge, or the estimated average
overcharge per customer, is one dollar or more.
(2)

Where the overcharge or estunated average for a type or class

of loan is determined to be less than one dollar:
A -- Generally, no corrective action is to be required.

If, however, in the discretion of the agencies,
the aggregate amount is considered substantial,
a corrective action may be required.

B -- Corrective action is to be required
in the case of any customer accounts identified in
a sampling of the creditor's practices as having
been overcharged by one dollar or more.
In a discussion section following Guideline No. 2 the agencies said they
were tryins to strike a balance between harm to the customer and coat of
corrective action programs to creditors who violate Truth in Lending requirements unintentionally. "Therefore," they said, "the agencies propose that in
cases of unintentional violations, if an examiner, by sampling or some other

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-7technique, detects a type or a class of loan for which the overcharge is
one dollar or more, corrective action will be ordered for that type or

class of loans.

Creditors ••• will be given the right to produce their own

average overcharge est:lmates."
Period for which Corrective Action is Required (No. 3):
Alternate Proposal 1:

Corrective action shall be required for

all violations since July 1, 1969 (date when Truth in Lending became
effective).
Alternate Proposal 2:

Corrective action would be required

for all violations within the scope of the·Guidelines occurring within one
year prior to the date of examination

of a creditor by an enforcing agency.

In discussing these alternatives the agencies said they have
determined that

the statute of l:lmitations for civil remedies in the Truth

In Lending Act does not control administrative enforcement of the Act, such

as proposed under the Guidelines.

However, they said, they are concerned

~bout requiring creditors to take corrective action for violations back to
1969 since retroactive enforcement has only recently been required by the
agencies.

On the other hand, they said, they recognize that any time

limitation will cut off some customers from relief for losses.
The statanent of the agencies, and their proposed guidelines, ara
attached.

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I I I I I

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DEPARTMENT OF THE TREASURY
COMPTROLLER OF THE CURRENCY
Regulation Z
JOINT NOTICE OF PROPOSED STATEMENT OF ENFORCEMENT POLICY
AGENCIES: The Board of Governors of the Federal Reserve
System, the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the Federal Home Loan Bank Board, and
the National Credit Union Administration
ACTION: Proposed Statement of interagency enforcement policy
- Regulation z.
SUMMARY: This proposed statement of enforcement policy sets
forth uniform guidelines which the Board of Governors of the
Federal Reserve System, the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Federal Home Loan
Bank Board, and the National Credit Union Administration
propose to use to enforce the Truth in Lending Act and
Regulation z. It is intended that specific, standardized
guidelines will promote improved and uniform enforcement of
the Truth in Lending Act through corrective action, including
reimbursement for borrowers who have been overcharged or
otherwise harmed by violations of the Act. Realizing the
value of public participation in the formulation of these
guidelines, the agencies are requesting comments on these
guidelines and have designated specific issues for comment.
DATES: Comments must be received on or before November 21, 1977
(30 days from publication in the Federal Register).
ADDRESSES:

Written comments should be addressed to:
Interagency Enforcement Policy - Regulation Z
Washington, D. C. 20219

FOR FURTHER INFORMATION CONTACT: Mark Medvin, Federal Reserve
Board, 202-452-2412; Thomas Vartanian, Comptroller of the
Currency, 202-447-1884; Peter M. Kravitz, Federal Deposit
Insurance Corporation, 202-389-4427; Harry w. Quillian, Federal
Home Loan Bank Board, 202-376-3556; Harry J. Blaisdell, National
Credit Union Administration, 202-254-8760.
SUPPLEMENTARY INFORMATION: This document is intended as a
statement of the guidelines that the federal regulatory
agencies involved propose to use in enforcing the Truth-inLending Act and Regulation z.

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It is felt that coordination among the agencies is desirable
in order to bring about uniformity in the administrative
actions that will be taken when violations of the Act are
detected. To that end, the agencies have developed a set of
proposed policy guidelines for measuring and correcting the
conditions resulting from certain violations of the Truth in
Lending Act.
It is administratively impossible to fashion an appropriate
remedy for every type of violation. The guidelines which
follow outline the corrective action that the agencies
intend to require when violations which have caused measurable
monetary injury to customers are discovered. It should be
emphasized that it will continue to be the policy of the
enforcing agencies that, whenever any violation of the Act
is detected, prospective correction of the violation will be
required--that is, creditors will be required to take whatever action is necessary to insure that the violation does
not recur. For example, a creditor which is found to be
using forms that do not comply with the type size requirements
will be required to obtain new forms which do comply. These
guidelines, however, are intended to address the most serious
types of violations, those which result in overcharges to
customers. Based upon the expertise and experience acquired
by the various agencies through examinations of lending
institutions throughout the country and investigations of
consumer complaints, several substantive violations which
cause measurable damage to customers have been identified,
and guidelines for correcting the conditions resulting from
these violations are proposed.
These guidelines are not intended to substitute for any
other administrative authority that any of the agencies has
to enforce the Act, nor are they intended to foreclose the
customer's right to bring a civil·action to recover for
violations of the Act. Further, where apparently willful
and knowing violations are found, the agencies will notify
the Department of Justice. The guidelines serve only to
reflect the enforcement policies of the agencies and to
specify the actions which the agencies feel are appropriate
to correct the conditions resulting from violations which
cause overcharges to customers. As guidelines, they may be
modified in the discretion of the agency so as to be more
responsive to specific or unique circumstances which may
exist. As new examination data concerning the extent and
type of violations are received, the guidelines will be
reviewed and revised as appropriate. In all cases, the
financial condition of the creditor and the cost of corrective
action will be considered in applying the guidelines.
This statement of enforcement policy is proposed to announce
formally and to solicit public comment on the course which
the federal regulatory agencies involved propose to follow
in enforcement actions. It is hoped that the publication of

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this proposed general statement of policy will promote
uniformity of enforcement and provide notice to consumers
and creditors of the type of action that can be expected
when violations resulting in overcharges are found. Comments
are requested on the entire proposal and specifically on the
designated issues.
AUTHORITY

These guidelines are proposed pursuant to the enforcement
authority contained in 15 u.s.c. 1607 and 12 u.s.c. 1818(b)
in the cases of the Federal Reserve Board, the Federal
Deposit Insurance Corporation, and the Comptroller of the
Currency, pursuant to 15 u.s.c. 1607 and 12 u.s.c. 1464(d) (2) and
1730(e) in the case of the Federal Home Loan Bank Board, and pursuant
to 15 u.s.c. 1607 and 12 u.s.c. 1786(e) (1) in the case of
the National Credit Union Administration.
DRAFTING INFORMATION: The principal drafters of this document
were Mark Medvin, Federal Reserve Board; Roberta Boylan,
Comptroller of the Currency; Peter M. Kravitz, Federal Deposit
Insurance Corporation.
PROPOSED STATEMENT
In consideration of the foregoing, the following statement
of enforcement policy is proposed:
STATEMENT OF ENFORCEMENT POLICY
DEFINITIONS
1. "Act" means the Truth-in-Lending Act, 15 U.S.C. 1601 et
~-• and Regulation z, 12 CFR 226.
2. "Actuarial method based on scheduled payments" means a
method of computing rebates of unearned finance charges in
which the ratio of interest earned in a given period of time
to the amount of the principal owed during that time is
constant; the scheduled payment is allocated first to interest
earned and the remainder is used to reduce principal.
3. "Annual percentage rate (APR)" means "annual percentage
rate" as defined in 12 CFR 226.2(g).
4. "Corrective action" means a course of conduct to be
undertaken by a creditor at the direction of an enforcing

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agency to correct the conditions resulting from past violations
of the Act.

"Creditor" means a "creditor" as defined in 12 CFR
226.2(s) and which is supervised by an enforcing agency.
6.

•customer"

means "customer" as defined in 12 CFR 226.2(u)

7. "Enforcing agency" means the Board of Governors of the
Federal Reserve System, the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Federal Home Loan
Bank Board, and the National Credit Union Administration.
8. "Estimated average overcharge• means the average amount
each customer is overcharged for a specific violation within
the scope of these guidelines, based on a sampling of similar
types or classes of loan accounts by an examiner of an
enforcing agency.
9. "Finance charge"
12 CFR 226.2(w).

means "finance charge• as defined in

10. "Intentional violation" means 1) any violation which an
enforcing agency can reasonably determine to have been
knowingly committed, permitted or approved by managerial
personnel or the board of directors of a creditori or 2) a
violation which, in the determination of an enforcing agency,
resulted from a deliberate or sustained ignorance of or
indifference to the requirements of the Act on the part of a
creditor's management, including the board of directors, or
a deliberate or sustained omission concerning or misrepresentation of the requirements of the Act in the creditor's policies
and procedures.
11. "Lump sum method" means a method of adjustment for
determining the amount that will be returned to a customer
when a loan has been paid in fulli the amount will be calculated
in accordance with the maturity reduction method.
12. "Lump sum/payment reduction method" - means a method of
adjustment under which a cash payment equal to the amount
the customer has overpaid (including time value) will be
returned to the customer and the remaining payments on the
loan will be reduced to the level at which they would have
been had the payments been computed at the understated APR
at the outset.
13. "Maturity reduction method" - means a method of adjustment
under which a loan will be restructured to reduce the number
of payments that the customer is required to make to pay off
the loan so that the customer will not pay at a rate in
excess of the understated APR.
14. "Method of adjustment" - means a calculation to determine

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the adjustment necessary to correct overcharges resulting
from APR violations.
15. •overcharge• means a charge imposed by the creditor in
excess of charges disclosed or required to be disclosed in
accordance with 12 CFR 226 and as computed in accordance
with these guidelines.
16. "Payment reduction method" means a method of adjustment
under which the amount of each remaining payment on the loan
will be lowered so that the customer will not pay at a
rate in excess of the understated APR.
17. "Reimbursement" means corrective action involving
monetary adjustment for overcharges for other than APR
violations.
18. "Understated APR" means a disclosed APR, rounded to the
next higher one-eighth of one percent, which is less than
the APR calculated in accordance with the Act.
19. •understated finance charge" means a finance charge
disclosed at a dollar amount which is less than the finance
charge calculated in accordance with _the Act.
20. "Violation"

means a violation of the Act.
GENERAL POLICIES

INTENTIONAL VIOLATIONS

UNINTENTIONAL VIOLATIONS

(a} All unintentional violations which result in overchar es
shall require corrective action i the overc arge or t e estimated avera e overchar e er customer is one dollar or more.
b I the overcharge or the estimated average overcharge
ger customer for a type or class of loans is determined to
e less than one dollar, no corrective action shall be
required except as hrovided in haragraph (c} unless, in
the discretion oft e agenc~ t e ag regate amount of all
overcharges is considered s stantia.

Alternate paragraph (b}:

(c} Where the estimated average overcharge for a type or class
of loans is less th~n one dollar, any customer accounts

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identified in the sam le which have been overchar ed b
ol ar or 1110re s all be subJect to corrective action.
DISCUSSION

one

In many cases, the costs involved in the corrective action may
be far greater than the amount of 1110netary damage suffered by
the customer. The agencies believe that the imposition of a
corrective action program on a creditor who had unintentionally
violated the law ~ay be unnecessary where there is negligible
harm to any customer. Therefore, the agencies propose that,
in cases of unintentional violations, if an examiner, by sampling
or some other technique, detects a type of loan (e.g. mortgage,
installment, open-end) or a class within that type of loan (e.g.,
all loans involving amounts financed greater than $1,000) for
which the overcharge or the estimated average overcharge is $1
or more, corrective action will be ordered for that type or
class of loans. Further, to afford creditors the opportunity to
confirm or rebut the accuracy of estimated average overcharges
they will be given the right to produce their own average overcharge estimates.
When estimated average overcharges are less than $1 per
customer but the total of all overcharges is substantial, it
may not be equitable to allow the creditor to keep amounts to
which it is not entitled. It has been suggested that, in
these cases, each agency may exercise its discretion to order
the creditor to use such amounts in a manner which would
further the purposes of the Truth in Lending Act.
It should be noted that, where estimated average overcharges
are less than $1, any account in the sample which has been
identified as having been overcharged $1 or more should be
reimbursed since the cost of identifying those accounts and
computing the overcharge has already been incurred.
The agencies have advanced the es·timated average overcharge
proposal under the assumption that the costs involved in
requiring corrective action for amounts less than $1 would
probably outweigh the benefits of such action and would be
unnecessarily burdensome when the violation was unintentional.
In the case of intentional violations, however, corrective
action should presumably always be ordered because the creditor
has inflicted financial harm upon its customers.
In distinguishing between intentional and unintentional
violations of the Act, the agencies do not mean to equate
"intentional" violations as defined in these guidelines with
"willful and knowing" violations as defined in 15 u.s.c. 1611.
However, if, in the determination of the agencies, an
intentional violation was committed willfully and knowingly,
the matter will be referred to the Department of Justice.
Designated Issues
1. Is one dollar a reasonable minimum estimated average
overcharge amount to trigger corrective action for unintentional
violations of the Act?
2. Where the estimated average overchar~e is less than the
amount that would trigger corrective action, but the total

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-7of all overcharges is substantial, should corrective action
be ordered? If so, in what form?
3.

PERIOD FOR WHICH CORRECTIVE ACTION IS REQUIRED

corrective action shall be required for all violations within
the sec e of these guidelines occurrin since Jul l, 1969.
Alternate gui eline 3.
3.

PERIOD FOR WHICH CORRECTIVE ACTION IS REQUIRED

Corrective action shall be required for all violations within
the scope of these guidelines occurring within one year prior
to the date of the examination by the enforcing agency.
Discussion
The agencies have considered the time period for which
One proposal is that
corrective action will be required.
corrective action should be required for all violations within
the scope of the guidelines since 1969 when the Act became
effective. Another proposal is that the creditor only be
required to take corrective action for violations occurring
within one year prior to the date of examination to
maintain consistency with the one-year statute of limitations
for Truth-in-Lending civil actions.
The enforcing agencies have concluded that the statute of
limitations for civil remedies in the Act does not control
The agencies are
administrative enforcement of the Act.
concerned, however, about the desirability of requiring
cred:iM:ors to take corrective action for violations occurring
as far back as 1969 since retroactive corrective action has
only recently been imposed by the agencies. On the other
hand, it is recognized that a corrective action program which
addresses violations occurring within. any limited time frame
will provide no relief for some customers who have suffered
harm as a result of a violation.
Designated Issue
3. Should corrective action be required for violations
occurring since July l, 1969, when the Act became effective,
or should it be limited to violations occurring within one
year prior to the date of examination? Is any other time
period appropriate? Should a longer time period be specified
for long-term obligations (e.g. real estate loans) than for
short-term obligations (e.g. auto loans).

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CORRECTIVE ACTION FOR SPECIFIC VIOLATIONS
4. VIOLATIONS INVOLVING THE IMPROPER DISCLOSURE OF THE APR
OR FINANCE CHARGE
(al Where there is an understated APR and the finance charge
is either correct or not disclosed, the creditor shall take
corrective action to insure that the customer's true cost of
credit does not exceed the understated APR.
(bl Where no APR is disclosed and the finance charge is either
correct or not disclosed, the creditor shall calculate the
APR it charged the customer and shall take corrective action
to insure that the customer's true cost of credit does not
exceed the actual APR reduced b one- uarter of one ercent
in the case o
irst ien real estate transactions, an one
percent in all other consumer credit transactions.
Alternate paragraph (bl:
(bl Where no APR is disclosed and the finance char e is
either correct or not isc ose, the rate isclose on the
note or conditional sales contract evidencing the transaction
will be considered the "disclosed APR"; the creditor shall
calculate the APR it charged the customer and shall take
corrective action to insure that the customer's true cost of
credit does not exceed the "disclosed APR". If no rate is
disclosed on the note, the creditor shall calculate the APR
it charged the customer and shall take corrective action to
insure that the customer's true cost of credit does not exceed
the actual APR reduced by one-quarter of one percent in the
case of first lien real estate transactions, and one percent
in all other consumer credit transactions.
(cl Where there is an understated finance charge and the APR
is correct, the creditor shall reimburse the overcharge which
is the difference between the actual and the understated
finance charge.
(dl Where
proper y

is disclosed and the APR is
ursement is require.

(el Where there is an understated finance charge and an understated APR, the creditor shall take appropriate corrective
action for the larger overcharge.
(fl Corrective action for understated APR violations will be
made by a method of adjustment as defined in the guidelines.

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Discussion
1. APR Violations

204
-9One of the most important items of information furnished to a
borrower under the Truth-in-Lending Act is the Annual Percentage
Rate (APR). The APR is a term of art which is described in
12 CFR 226.5. Essentially, it represents the true cost of
the credit extended and reflects not only the rate of interest
but also the total of certain other costs which the customer
must pay as a condition of the extension of credit. Congress
intended that the uniform disclosure of a rate would enable
borrowers to shop for and compare consumer credit costs and
make informed credit decisions.
Where the creditor discloses a rate but actually charges a
higher rate, the affected accounts must be adjusted.
For the
purpose of calculating the adjustment, the disclosed APR will
be rounded to the next higher one-eighth of one percent and
termed the "understated APR". This tolerance recognizes
the flexibility suggested by the rounding provisions found in
15 u.s.c. 1606 and 12 CFR 226.5 and would not unfairly
discriminate against creditors which try to disclose the
exact APR as a service to their customers rather than utilize
the method of rounding permitted by the Act and Regulation Z
to disclose less precise rates.
Where the creditor discloses no APR to the customer, a serious
breach of the creditor's responsibility under the Act has
occurred. Technically, while it may be said that since no
APR was disclosed, none can be charged, the agencies feel that that
would be a windfall to customers and a severe hardship to
creditors. On the other hand, those creditors who fail to
make such important disclosures should be treated at least as
severely as those who did make disclosures, even though
inaccurately. Consequently, the agencies propose that in such
a situation the actual APR should be computed and the creditor
should be required to adjust affected accounts to reflect an
APR which is lower than the actual APR by certain specified
margins. Those specified margins will be based on a comprehensive
data base compiled by the agencies after a review of a
sufficient number of examination reports to determine typical APR
diclosure inaccuracies found in various types of credit
transactions.
Based upon information which the agencies now
have, it is proposed that the actual APR charged on first lien
real estate mortgages should be reduced by one-quarter of one
percent since that appears to be the most common margin of
APR disclosure error. Further, until an even more comprehensive
data base can be established through further examinations, all
other credit transactions will be corrected by a reduction of
one percent in the actual APR.
An alternate proposal is to consider the rate disclosed on the
contract or note as the "disclosed APR" and to require corrective
action if the actual APR is higher.
Another alternative, to adjust the APR and lower the finance

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charge to the lowest rate which was available in the market
area at the time the loan was made, under the assumption that
the customer might have obtained credit at another institution
which provided that lower APR if the customer had been given the
tools to shop for that credit, was not included in the proposal
because adequate rate information on local markets is not readily
available.
2.

Specific Methods of Adjustment
for APR Violations.

When the disclosed APR is less than the APR actually being
charged, an adjustment of the loan will be required in order
to bring the rate actually being charged down to the understated
APR. Simply reimbursing the difference between the APR
charged and the understated APR will not accomplish this goal
since the effect of the overcharge increases as the length
of time between the inception of the loan and the error adjustment date increases. The agencies have considered a number of
methods of adjustment. Some are attractive for policy reasons
but are administratively unacceptable because formulas and
programs to enable creditors to make the adjustments are extremely
difficult to develop and use. Three adjustment methods,l/ all
of which have the effect of lowering the actual rate paid by
the customer to the understated APR and are administratively
feasible, are proposed. The dollar adjustments for each method
vary because the time periods over which the total adjustments
will be made are different. The proposed methods are:
(l) Lump sum/payment reduction
The remaining payments on the loan would be reduced to
the level at which they would have been had the payments
initially been computed on the basis of the understated APR,
and a lump sum money adjustment equal to the amount that the
customer has overpaid (including time value) would be returned
to the customer.
Example: On a 12-month loan having an amount financed of
$1,000 and calling for 12 payments of $100, where a $120 total
overcharge has been found and six payments have been made,
the customer would receive $61.83 in cash and each remaining
payment would be reduced to $90. The dollar adjustment to the
customer under this method is $121.83.
(2)

Maturity Reduction

The loan would be restructured in such a way as to reduce the
number (not the amount) of required payments. The amount of each

l The lump sum method defined in the guideline i~ proposRd
only for loans that have been paid in full. It incorporates
the maturity reduction method.

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payment in the revised schedule (except the last) will remain
the same as in the past.
Example: A loan having an amount financed of $1,000 and
requiring 12 payments of $100 per month would be adjusted to
require only 10 payments of $100 per month and one payment of
$72.05 if the total overcharge resulting from an understated
APR is $120. The dollar adjustment to the customer under this
method is $127.95.
(3)

Payment Reduction

The amount of each remaining payment on the loan would be
lowered so that the total finance charge does not exceed that
permitted by the revised payment schedule and the understated
APR.
Example: On a 12-month loan having an amount financed of $1,000
and calling for 12 payments of $100, where a $120 total overcharge
has been found after six payments have been made, each remaining
payment would be reduced to $79.25. The dollar adjustment to
the customer under this method is $124.50.
It is anticipated that, because of cost and administrative
factors, only one adjustment method will be adopted. After a
determination has been made as to the method of adjustment
that will be required, technical assistance will be available
from the agencies to creditors for making adjustments for APR
violations.
The agencies recognize that all methods will require adjustments to the creditor's records and notification of changes
to customers.
3.

Finance Charge Violations

The agencies recognize that customers may be misled by
understated finance charges even though the disclosed APR is
accurate. In such situations, adjustment of the finance
charge will be required. Reimbursement will be made by
repaying to the customers the difference between the actual
and disclosed finance charge.
Where the correct APR has been disclosed, but there is no
disclosure of the finance charge, the agencies have considered
various standards for corrective action. Although the finance
charge is an integral part of the disclosure requirements, the
Act assumes that its reflection in the APR is the essential
tool contemplated by the disclosures. In all transactions
subject to the Act the APR must be disclosed; however, in
certain transactions no finance charge disclosure is required.
Further, the agencies feel that misstating the finance charge
is more likely to-mislead a customer than omitting that
disclosure, particularly since the finance charge can normally

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-:Ube computed from the other disclosures. Consequently, where
the APR is correct and there is no disclosure of the finance
charge, the agencies propose that no corrective action be required.
Designated Issues
4. Which method of adjustment (i.e., the "maturity
reduction method", "the payment reduction method", or "the
lump sum/payment reduction method") is preferable? Is any
other method preferable?

commentors should address:
(1) any accounting problems
associated with the various methods, (2) whether more than
one adjustment method should be adopted, (3) if more than
one method is adopted, who should determine which method to
use (customer/bank/enforcing agency), and (4) the costs
associated with the various options.
5. VIOLATIONS INVOLVING THE IMPROPER DISCLOSURE OF CREDIT
LIFE, ACCIDENT, HEALTH OR LOSS OF INCOME INSURANCE.
(a) If the creditor has not disclosed to the customer in
writing that.credit life, accident, health, or loss of income
insurance is optional, the insurance shall be treated as
having been required by the creditor and im roperly excluded
from the finance charge. The overcharge wi l result from an
understated finance charge and, possibly, an understated
APR. The creditor shall take aperopriate corrective action
for the larger overcharge. The insurance will remain in effect.

(b) If the creditor has disclosed to the customer in writing
that credit life, accident, health or loss of income
insurance is oetional, but there is either no signed insurance
option or no disclosure of the cost of the insurance, the
creditor shall be re~uired to send a written notice to the
affected customers disclosing the cost of the insurance and
notif in them that the insurance is o tional and ma be
cancelled wit in 45 days to obtain a full refund of all
premiums charged. If the creditor receives no response
within 45 da s, the insurance will remain in effect and no
further correct ve action wil be require
Alternate paragraph (bl:
(bl If the creditor has disclosed to the customer in writing
that credit life, accident, health or loss of income insurance
is o tional but there is either no si ned insurance o tion or
no disclosure of the cost of the insurance, the ere itor shall
be required to send a written notice to the affected customers
disclosing the cost of the insurance and notifying them that
the insurance is optional and may be cancelled within 45 days
to obtain a partial refund of premiums charged. If the
creditor receives no response within 45 days, the insurance
will remain in effect and no further corrective action will be

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required.
Discussion
The Act requires that premiums for credit life, accident,
health, or loss of income insurance written in connection
with any credit transaction be included in the finance charge
unless the customer is clearly and conspicuously advised in
writing that the insurance is optional. If the insurance is
desired, the customer must sign and date an affirmative
statement to that effect after having received written disclosure of the cost of the insurance. These requirements are
imposed to insure that premiums which are excluded from the
calculation of the cost of credit are voluntarily incurred
by the customer.
Since voluntariness is the basis for excluding the insurance
premiums from the finance charge, the agencies believe
that if there is no written disclosure that the insurance is
voluntary it should be treated as having been required and,
therefore, improperly excluded from the finance charge.
Corrective action will be ordered as discussed in the section
on APR violations or in the section on understated finance
charges, depending on which method is more beneficial to
the customer.
If the optional nature of the insurance was disclosed in
writing but either 1) the cost was not disclosed or 2) the
customer did not sign the insurance option blank, the
agencies believe that the creditor should be required to
write to and inform the customer that the -insurance was
optional, disclose its cost, and offer to cancel the insurance
if requested, In cases where the customer expresses a desire
to cancel, the creditor should be required to refund some or
all of the premiums paid. On the one hand, the customer has
received benefit from the insurance coverage during the period
it was in effect; on the other hand, the customer did not want
the insurance. Alternate courses of corrective action are
set forth in the guidelines.
If the required insurance authorization is signed but not
dated, no corrective action need be taken since the lack of
date disclosure is deemed to be of little significance in
establishing whether the insurance was optional.
Designated Issue
5. Where the proposed guidelines require notice to customers
that credit life, accident, health or loss of income
insurance was optional and may be cancelled, should the
entire premium be reimbursed if the customer cancels? If not,
on what basis should a partial reimbursement be made?
6.

VIOLATIONS INVOLVING THE IMPROPER DISCLOSURE OF PROPERTY

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-14INSURANCE, INCLUDING VENDOR'S SINGLE INTEREST INSURANCE
(a) If a creditor has not included the property insurance
premium in the finance charge when required by 12 CFR §226.4(a) (6),
corrective action will not be required.
(b) If an insurer providing vendor's single interest insurance
has not waived lts right of subrogation against the customer
and the premium has been excluded from the finance charge,
the creditor shall indemnify the customer for any loss
incurred as a result of a subrogation action by the insurer.
Discussion
The agencies believe that if property insurance is improperly
excluded from the finance charge, the resulting situation
should not be treated as an overcharge. Even required property
insurance is excludable from the finance charge if the creditor
discloses the cost of the insurance if purchased through the
creditor and that the customer has the option to select the
insurer. Based upon the agencies' review of examinations
conducted up to this point, the agencies have not found evidence
of abuse in this area as there is with credit life insurance.
However, the agencies believe that borrowers might be harmed
if the insurer has not waived its right of subrogation
against the customer when vendor's single interest insurance
is required since the insurer may sue the customer for amounts
it paid to the creditor. Consequently, in that situation,
creditors would be required to establish procedures to indemnify
customers for any harm caused by that failure where the
insurance has been improperly excluded from the finance charge.
7.

VIOLATIONS CONCERNING PREPAYMENT PENALTIES AND REBATES

(a) Where the finance charge is computed on the outstanding
balance and the creditor has not disclosed a prepayment
penalty, none can be collected and those already collected
are overcharges which shall be reimbursed.
(b) Where the finance charge is computed on the outstandin~
balance and the creditor has char ed a re a ent enalt in
excess o that disclosea, the di ference is an overcharge
which shall be reimbursed.
(c) Where the finance charge is precomputed and there is
neither a disclosure that no rebates of unearned finance
charges will be made nor a disclosure of the method of
computing the rebates, the failure to rebate unearned finance
charges is an overcharge.
The amount of reimbu~sement shall be
the rebate of unearned finance char es in the event of earl
payment o the obligation as speci ied under state law; if
state law is silent, the actuarial method based on scheduled
payments shall be used to determine the amount of the reimbursement.
(d) Where the finance charge is precomputed and a method of

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-15computing
disclosed
customer,
rebate is

rebates of unearned finance charges has been
but the actual rebate is less favorable to the
the difference between the actual and the disclosed
an overcharge which shall be reimbursed.
Discussion

Regulation Z, 12 CFR 226.B(b) (7), requires that the method of
rebating unearned finance charges be disclosed, and if no
rebate will be given, that fact must be disclosed. The
regulation also requires disclosure of the amount of any prepayment penalties (12 CFR 226.B(b) (6)).
The guideline is
self-explanatory.
B.

VIOLATIONS CONCERNING LATE FEES

(a) Where a creditor has disclosed the amount of late fees to
be imposed in the event of late payment, any late fees collected
in excess of those disclosed are overcharges which shall be
reimbursed.
(b) Where a creditor has not disclosed the amount of late fees
to be imposed in the event of late payment, none can be imposed
and those already collected are overcharges which shall be
reimbursed.
Discussion
The guideline is self-explanatory.
9.

ITEMIZATION OF MISCELLANEOUS FEES AND CHARGES

If a creditor has not itemized and disclosed the charges found
in 12 CFR 226.4(b) and has not included them in the finance
charge as required by that section, the resulting disclosure
violation, by itself, shall not constitute an overcharge and
corrective action shall not be required.
Discussion
Regulation z, 12 CFR 226.4(b), lists certain miscellaneous
charges which may be excluded from the finance charge if they
are itemized and disclosed to the customer. The agencies
believe that if the charges are not itemized and disclosed,
and are excluded from the finance charge, the resulting
violation is only of a technical nature.
The customer's
ability to shop is not impaired since comparability of the
APR and finance charge is not destroyed; the nature of the
violation does not justify requiring corrective action.
PUBLICATION FOR COMMENT
The Administrative Procedure Act does not require notice

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and solicitation of co11D11ent in connection with the establishment of statements of enforcement policy or guidelines (5
u.s.c. 553(b)), and it permits them to become effective
illDllediately (5 u.s.c. 553(d)). However, in consideration of
the agencies' desire to solicit public participation on these
issues, they have elected to afford an opportunity for
co11D11ent on these proposed guidelines. CollDllents should be
addressed to: Interagency Enforcement Policy-Regulation z,
Washington, D. c. 20219.
Dated:
Stephens. Gardner
Vice Chairman of the
Board of Governors of the
Federal Reserve System
Dated:
John G. Heimann
Comptroller of the currency
Dated:
George A. Le Maistre
Chairman, Federal Deposit
Insurance Corporation
Dated:
Robert H. McKinney
Chairman, Federal Home
Loan Bank Board
Dated:

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Lawrence Connell Jr.
Administrator, National
Credit Union Administration

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I

BOARD OF GOVERNORS
DFTH&:

•

FE'.OE:RAL RESERVE: .SYSTEM
WASHINGTON, 0. C. 20551

G. WILLlfM MILLER
CHAIRMAN

March lS, 1978

The Honorable Mark W. Hannaford
House of Representatives
Washington, D.C.
20515
Dear Mr. Hannaford:

Thank you.for your _letter of March 9 and·your thoughtfulness during my transition. I am pleased to enclose responses
to the questions contained in your letter.

I have furnished a copy of this letter along with the
enclosure to the House Banking Committee for inclusion in the
record of the March 9 hearing.
I am looking forward to working with you in the months
and years ahead.
With best regards,
Sincerely,
(Signed) G. l'/il!fam Miller

Enclosure

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(The fellowing are written questions from Congressman Hannaford
tc Cha.irman Mi•ller, along with the Chairman's answers.)
1. Hany econr>t1ists point to the i,1ck of business capital
inveslmc,nt l'.S a primary factor contril>uti!)f; to high infbtion and
un,·t1ploym,•n·~. At-. a mnttr·r of foct, we have h,'ld an cxpanrling labor
force and a declining po;,utation of investor:;. It is estimiltt•d that
the rcchic-t:io:1: in th\! r,1.::;:•,er of investors since '1.%9 has 1:esult:ed in
a loss of al,out $103 bHlfo11 in eqvity capital, and that this capital
could have hecn .l,scc! to cicatc about: four million new jobs in 1:he
private sector. What ·t;ypes of d1anges i.n capJt.al. gai.n$ taxation do
you bclie·vc should be ('~:plored to generate busi.ncss capital investment?
An;;wcr.

Ch,mgi.n;; the capital gains taic la~ would not, . in

my vi£n-1, be the most effective way to encourage busin~ss investment

spcndi.ng.

Neasures that woulcl d~.rectly reduce the cost of new capital,

such as a further increasa in the investment tax credit or a libe1·alizat:r.on of dcpi::e.ciPt;.on rules, would probably have a greater impact on
investment spendi.ng per dollar of lost revenue to the government.
A reduction of taxes on capital gains would tend to increase
investment spending hy encouraging greater savfogs and incrP-asing the
rate of return on investment.

But more favored treatment of capital

gofi,~ would aj,ply to rct.urus on alrcudy created cf•:,ital goC'<ls as well

as new i.nvestrncnts.

'.l11us, the Treasury would suffer r.-,vcnuc lo1Jses

without achieving a commensurate increase in new business investment.
DespUc the clrnwbacks, the Congress ciay want to explore
possibfo changes in the capital gains tax law.

Consideration might

be given to permitting an investor hold°ing an asset with ·a capital
gain to shift into a new asset wi.thout incurring an immedi.ate tax
liability,

This, of course, is• the approach presently followed

in the law when indivi.dualn change their home ownership.

Another

!eatllre worth/considering would be to allow the asset holder to
acljMt for the ih1pact of inflation on the value of his asset before
calculating his tax liability,

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2. During the last session of Congress, I introduced
legislation to reinstate detailed memoranda of discussion of the
Open Market Committee and stipulated that these documents be
released to the public after a three-year lag. Dr. Burns testified
in support of this bill, and I would appreciate your views as well.
Answer.

I have taken the opportunity to review Chairman

Burns' testimony of November 17, 1977, regarding your legislation,
H.R, 9465.

Chairman Burns expressed sympathy for the concerns

underlying this legislation and I share that sentiment.

At the

same time, I concur in Chairman Burns' judgment that certain amendments to the bill may be necessary in order to assure against
premature disclosure of the memoranda and to avoid release of
sensitive material relating to foreign governments or institutions.
Chairman Burns expressed the view that mutually satisfactory
amendatory language could be worked out and I know that preliminary
discussions to this end took place at the staff level in December
of 1977,

I will direct members of the Board's staff to resume

promptly contacts with your staff, with a·view to achieving a mutually
resolved position on this legislation.

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APPENDIX II
LETTER FROM FEDERAL RESERVE CHAIRMAN G. WILLIAM MILLER WITH THE RECORD OF POLICY ACTIONS
OF FOMC FEBRUARY MEETING
G □ VERN.rlRS
OF THE

BOARD OF

FEDERAL RESERVE SYSTEM
WASHINGTON, □ .

C. 20551

G. WILLIAM MILLER
CHAIRMAN

March 29, 1978

The Honorable Henry S. Reuss
Chairman
Committee on Banking, Finance
and Urban Affairs
·
House of Representatives
Washington, D. C. 20515
Dear Mr. Chairman:

In response to a question you raised at the February
monetary policy oversight hearing about the slight downward adjustment in the longer-run range established for M~3, I am enclosing
a copy of the policy record for the February FOMC meeting. That
record summarizes the Committee's discussion of the longer-run
ranges that were set for the one-year QIV 1 77 to QIV '78 period.
You will see that the decision was unanimous.
I also indicated at the hearing that I would let you have
my personal views, in quantitative terms, on projections of key
economic variables that would be ·consistent with the ranges for
the monetary aggregates set at the February FOMC meeting. At this
time, I would anticipate a moderate expansion in real GNP over the
year--with growth averaging perhaps in a 4 to 4½, per cent range
from the fourth quarter of 1977 to the fourth quarter of 1978. In
this assessment, I have assumed that there will be a tax cut of
about $25 billion effective in the fall of the year. Consistent
with such a GNP projection, it is probable that the unemployment
rate would decline to the 5t-6 per cent area by the fourth quarter
of 1978. Because of continuing strong cost pressure-s, however, the
average level of prices--as measured by the GNP implicit price
deflator-:-seems likely to increase by around 6!, to 7 per cent over
the same period.
While these projections reflect my views at this time, the
economy is subject, as always--and particularly in today's climate,
to unexpected changes and forces that cannot be anticipated in
advance. Historical experience indicates that the linkage between
growth in the monetary aggregates and in rates of change of

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The Honorable Henry S·. Reuss
Page 2

production, employment, and prices is far from precise. Factors
other than monetary policy importantly influence trends in economic
activity and prices, and many of these are subject to substantial
uncertainty--for example, the timing, magnitude and composition of
any tax cuts; the behavior of Governmental outlays for goods and
services; shifts in business and consumer confidence; eco~omic
developments abroad; OPEC pricing decisions; and world agricultural
conditions. Thus, quantitative projections, though they may be a
convenient indicator of the economic outlook, should be viewed as
provisional and subject to considerable margins of error~
Projections of likely economic developments over the
year ahead are, of course, quite separate and distinct from the
nation's ultimate goals. We urgently need to make progress in
lowering the rate of inflation, as well as to achieve further
reductions in the unemployment rate. Recent experience, in my view,
strongly suggests that the nation is experiencing more difficulty at
present in containing inflation than it is in reducing unemployment.
Structural unemployment does remain as a major problem.
I welcomed your connnents on this subject at the hearing, and concur with
your proposals to overcome structural unemployment through targeted programs rather than through reliance solely on monetary policy. I will
be pleased to support this approach in any appropriate way.
I look forward to continuing our dialogue on monetary policy
and trust that we will make further progress in enhancing public
understanding of the policy process.
Sincerely,

Enclosure

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RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
Meeting held on February 28, 1978
1. Domestic policy directive
The information reviewed at this meeting suggested
that retail sales, industrial production, and housing starts
had been adversely affected in January by unusually severe
weather. It appeared, however, that there had been little
change in the underlying economic situation.
In the fourth quarter of 1977, according to estimates
of the Commerce Department, real output of goods and services
had grown at an annual rate of 4.0 per cent, down from a rate
of 5.1 per cent in the third quarter. However, final sales in
real terms had expanded at a considerably faster pace than iff
the third quarter, and the rate of business inventory
accumulation had slowed sharply. The rise in average prices,
as measured by the fixed-weighted price index for gross
domestic business product, had stepped up somewhat to an
annual rate of 5.5 per cent in the fourth quarter from 5.0
per cent in the third.
Staff projections for the year 1978, like those
prepared just before the Committee's meeting in mid-January,

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-2-

were based on assumptions that included reductions next fall
in Federal income taxes. The projections continued to
suggest that growth in real GNP would be sustained at a good
pace throughout the year, although the over-all rate was
somewhat below that anticipated earlier because of scaleddown projections for housing starts. auto sales, and total
government purchases of goods and services.

It was still

expected that the rise in prices would remai~ relatively
rapid and that the une111>loyment rate would decline
moderately further over the year.
The latest projections suggested that growth in
output would be less rapid in the first quarter of 1978
than had been expected earlier, in large part because of
the adverse weather, but that the weather-related losses
would be about made up later. Thus, it was expected that
growth of consumer spending in real terms--which had been
exceptionally rapid in the fourth quarter of 1977--would
slow even more i.n the current quar.te.r than tiad been
anticipated and that expansion in business fixed investment
and in residential construction also would fall short of

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earlier expectations. It was anticipated that growth in
consumer spending would pick up fn subsequent quarters-particularly in the fourth quarter. following the reduction
in personal income taxes assumed to take effect on October 1.
Business fixed investment was still projected to expand
moderately over the remaining quarters of 1978, owing in part
to stimulative modifications of the investment tax credit
that were assumed to be retroactive to the beginning of the
year. It was now anticipated, however, that residential
construction activity would begin to edge down after midyear
1n response to the less favorable mortgage market conditions
that now appeared to

developing.

In January industrial production declined 0.7 per
cent--about as n,ch as it hid risen over the preceding
3 months--as the unusually severe weather caused widespread
absenteeism. reduced workweeks, and disruptions to supplies.
Moreover. auto manufacturers curta;led assemblies in an effort
to control dealers' inventories. and the ongoing strike of
mineworkers reduced production of coal further.

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Nonfann payroll employment continued to expand
in January, and after adjustment for strikes, the gain
was in line with the monthly-average rise during the
second half of 1977. Increases were again sizable in
manufacturing, trade. and services. Because of the
unfavorable weather. however, construction employment
declined, and the average workweek of production workers
in nonfann establisflnents fell sharply. The unemployment
rate edged down to 6.3 per cent from 6.4 per cent in December.
The total value of retail sales declined about 3 per
cent in January, according to the Census Bureau's advance
estimate, after having expanded 5 per cent over the preceding
3 months. Sizable decreases in January were reported for
almost all major categories of stores, at least fn part
because of the weather. Unit sales of new domestic autos
declined 10 per cent to the lowest rate since late 1976,
when supplies had been limited by a strike in the auto
industry.
Private housing starts fell from an annual rate of
2.2 million units in December to 1.5 million units in January.

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Declines occurred in all regions of the country and were
especially large in areas that had suffered major stonns.
Manufacturers' new orders for nondefense capital
golls fell 5 per cent in January after having risen about
9 per cent in December. However, the machinery component
changed little in January after an increase of.almost 8 per
cent in December.
The index of average hourly earnings for private
nonfam production workers rose sharply in January, in part
as a result of the increase in the Federal minimum wage from
$2.30 to $2.65 per hour at the beginning of the year. Increases
were especially large in trade and services, where adjustments
in the minimum wage have tended to have more widespread effects.
The consumer price index for all urban consumers rose
0.8, per cent in January, almost twice the monthly-average

increase in the second half of 1977. About two-thirds of
the rise in January was attributed to price increases for
foods and beverages and for housing, although prices advanced
for all major categories of expenditures.

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-6The increase in the wholesale price index for January--

0.9 per cent--also was considerably more than the average rise·
during the second half of 1977. In January average prices

•

both of farm products and foods and of industrial c0111110dities
a~vanced substantially.
In foreign exchange markets, after almost a month of
calm.the dollar came under renewed downward pressure around
mid-February, and its :,rade-weighted value against major
foreign currencies declined about 1-1/2 per cent during the
second half of the month. Almost all major currencies rose
against the dollar; the largest appreciations were registered
by the Swiss franc and the German mark.
The U.S. foreign trade deficit increased appreciably
in the fourth quarter of 1977. It appeared that the dock
strike, which halted containerized shipments through Atlantic
and Gulf Coast ports between October 1 and November 29, had

depressed recorded exports more than recorded imports. After
allowance for the apparent effects of the strike, the deficit
was still slightly larger in the fourth quarter than in any of
the first three quarters of the year. A deficit of $31 billion

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-7(international accounts basis) was estimated for 1977 as
a whole, up from $9 billion in 1976.
At U.S. commercial banks, total credit expanded
substantially in January, after having changed little in
December. The January expansion, which was about in line
with the average rate of growth during the fourth quarter
of 1977, was attributable chiefly to a rebound in loan
expansion. Growth in business loans and in loans to
finance security holdings accelerated, and expansion in
real estate and consumer loans apparently remained large.
As in earlier months, banks financed a sizable part of the
January increase in total loans by reducing their holdings
of Treasury securities.
For nonfinancial businesses the January pick-up in
loan growth was especially evident at smaller banks.

Lend-

ing to nonfinancial businesses also rose somewhat at large
banks during January, but it remained below the pace of late
1977, and these businesses managed a sizable net run-off of
their outstanding c011111ercial paper.

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-8-

The narrowly defined money supply (M-1) expanded
at an annual rate of 7-1/4 per cent in January, but data
for early February suggested a decline from the January
level. From the fourth quarter of 191.6 to the fourth
quarter of 1977, M-1 had grown 7.4 per cent. compared
with 5.6 per cent in 1976 and 4.4 per cent fn 1975.

Growth in M-2 picked up in January to an annual
rate of about 8-1/4 per cent--from 5-3/4 per cent in
December--reflecting some strengthening in inflows to
banks of time and savings deposits other than negotiable
CD's. From the fourth quarter of 1976 to the fourth quarter
of 1977, M-2 had grown 9.6 per cent, compared with 10.9 per
cent in 1976 and 8.3 per cent in 1975.
Deposit growth at nonbank thrift institutions
continued to slow in January, and M-3 expanded at an annual
rate of 8 per cent--about the same as in December. Over the
four quarters of 1977, M-3 had grown 11.6 per cent.

'j} At the t;me of this meeting, revision of the measures of the
monetary aggregates to reflect. among other things, new benchmark
data for deposits at nonmember banks had nearly been completed.
It was reported at the meeting that. according to tentative
estimates, the benchmark adjustment would raise the 1977 growth
rates of M-1 and M-2 by 0.4 and 0.2 of a percentage point,
respectively.

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-9-

At its January meeting the C011Hnittee had decided
that operations in the period inmediately ahead should be
directed toward maintaining about the prevailing money market
conditions, provided that the monetary aggregates appeared to
be growing at approximately the rates then expected. Specifically,
the Conmittee sought to maintain the weekly-average Federal
funds rate at about 6•3/4 per cent, so long as M•l and M-2
appeared to be growing over the January-February period at
annual rates within ranges of 2-1/2 to 7-1/2 per cent and
5 to 9 per cent, respectively. The members also agreed that
if growth in the aggregates appeared to be approaching or
moving beyond the limits of thetr specified ranges, the
operational objective for the weekly-average Federal funds
rate should be varied in an orderly fashion within a range
of 6-1/2 to 7 per cent. It was understood that very strong
evidence of weakness in the monetary aggregates would be
required before operations were directed toward reducing the
Federal funds rate below the 6-3/4 per cent level.
Data that became available during the inter-meeting
period suggested that growth in the monetary aggregates over

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-10the January-February period would be well within the

specified ranges. The Manager of the Systaa Open Narlcet
Account. therefore, conttnued to atm for a Federal funds
rate of around 6•3/4 per cent. Over the 6-week inter-meettng
pertod, the funds rate averaged 6.76 per cent. and weekly
averages showd only mtnor deviations from that level.
Other short-term interest rates also changed little
on balance.over the inter-meeting period. even though shorttenn credit demands remained relatively st110ng. Longer-tem
interest rates showed mixed changes for the period. Yields
on State and local govemaent bonds declined somewhat further,
whereas those on Tr,easury. Federa 1 agency. and corporate
securities edged higher.
Interest rates on mortgages rose during January, and

some tightening ~f nonrate tenns was reported as well. In
order to cover mortgage take-downs in the face of weakentng
deposit flows. savings and loan associations increased their

re11ance on advances frc11 the Federal home loari banks and·
oth~r nondepostt sources of-funds. This-contrasted wtth the
typical pattern in January,of reductions 1n borrowings.

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-11In the Conmittee's discussion of the economic
situation and prospects, the members agreed that the
expansion in activity was likely to continue throughout
1978. Most members thought that the staff's GNP projection
was reasonable, but

two

or three members believed that growth

in real GNP would fall somewhat short of the projected rate.
Several members emphasized that the degree of uncertainty
with regard to economic prospects and projections had been
increasing.
It was observed that at the current stage of this
business expansion some deceleration in growth toward a rate
that could be sustained for the longer term would be a desirable
development. The conment was also made that some deceleration
would be acceptable in light of the inflationary pressures in
the economy and of recent developments in the foreign exchange
markets.
Considerable concern was expressed that the rate of
inflation might accelerate significantly as the year progressed.
The conment was made that prospects for inflation had been
inhibiting business decisions to invest in fixed capital, and

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-12it was suggested that an acceleration would adversely affect
confidence and would dampen expansion in spending of other
kinds. Such price behavior, ft was noted, would pose
difficult questions concerning the appropriate role of.
monetary Po 1t cy.
Two members expressed the view that over the year the
rate of unemployment was unlikely to decline very much. Another
member believed that a realistic objective for the unemployment
rate now was considerably higher than it used to be, perhaps as
high as 5-1/2 to 6 per cent.
One of the members who thought that the staff's
projection for real GNP represented the most likely outcome
nevertheless cited certain elements in the situation that could
cause growth in output to fall short of the rates projected.
He suggested, first, that the sizable decline in stock prices
over the 6 weeks since the January meeting of the Committee
indicated a continuing lack of confidence in prospects for
business activity and profits. which could undennine the
progress of the expansion. Like others, he agreed with the
staff expectation that the economy would rebound from the

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effects of the severe weather and the coal strike. Nevertheless,
he was concerned about the possibility that the loss of incoa
because of those developments, even though temporary, could
have enduring effects on cons1111er demands and on the general
course of the ecor10111Y. With respect to the U.S. foreign trade
position, he did not see clear signs of the sort of expansion
in activity abroad that would significantly reduce the trade
deficit. Another member expressed agreement with this view of
prospects for the trade deficit, while a third was somewhat more
optimistic.
One of the members who believed that growth in real
GNP would fall somewhat short of the rate.projected by the
staff also believed that the shortfall would be concentrated
in the second half of the year. In his view, growth in output
would be buoyed until midyear by a rebuilding of inventories
as well as by

the

recovery from the effects of adverse weather

and of the coal strike. However, he thought that problems
would develop later in the year in residential construction and
in some other sectors of the economy. Another member expressed
the view that the staff expectations for housing starts, even
thoug~ scaled down since the January ~eting, were still
high.

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Several members conmented that they agreed with the
scaled-down projections for both housing starts and auto sales,
and some noted that for several months they had viewed the staff
projections for those sectors as too high. It was observed that
the outlook for those sectors was still relatively strong and
that demands were likely to be supported by adequate supplies
of credit and a willingness of cons1.111ers to assume debt. With
respect to housing, the tendency of consumers to perceive homeownership as a good fonn of investment in .a period of inflation
also was mentioned as a factor likely to support demand.
It was observed in the discussion that the current
business expansion--now about 3 years old--had developed some
serious imbalances. U.S. merchandise imports were much too
high relative to the behavior of the world economy. Business
fixed investment was low in relation to growth in over-all
production, and a few members expressed doubts of significant
improvement during 1978. State and local governments were
running a sizable surplus in their accounts. thereby draining
purchasing power from the private sector. Outstanding consumer
credit was high in relation to personal income. Wage increases

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-15were high in relation both to improvements in productivity and
to the level of unemployment. Corporate profits were low in

relation to personal income and to costs of production. Prices
of c0111110n stock were low relative to corporate profits. And
the state of general confidence appeared to be unduly low in
relation to the actual performance of the economy.
One member expressed the view that confidence was being
adversely affected by the large _deficit in the Federal budget.
He added that the budget estimates were based on the assumption
of continued moderate growth in economic activity, and that if
a recession should develop the deficit could swell to such a
size that it might take many years to return to financial
stability. Another member noted that under present fiscal
policies the Federal deficit apparently would remain substantial even if a state of high employment were reached.
At this meeting the Conmittee reviewed its 12-month
ranges for growth in the monetary aggregates. At its meeting
in October 1977, the Conmittee had specified the following
ranges for growth over the period from the third quarter of
1977 to the third quarter of 1978: M-1, 4 to 6-1/2 per cent;

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-16M-2, 6-1/2 to 9 per cent; and M-3, 8 to 10-1/2 per cent. The
associated range for growth in commercial bank credit was 7 to
10 per cent. The ranges being considered at this meeting were
for the period from the fourth quarter of 1977 to the fourth
quarter of 1978.
In the CORlllittee's discussion of the 12-month ranges,
all but one member expressed a preference for retaining the
existing range for M-1. This member suggested that the upper
limit for M-1 be reduced by 1/2 of a percentage point and the
lower limit be raised by a corresponding amount, yielding a
range of 4-1/2 to 6 per cent. In the case of the broader
aggregates, most members favored no change in the existing
range for M-2 and a reduction of 1/2 of a percentage point in
the range for M-3. Two members, however, preferred a reduction
of 1/2 point in the range for M-2. One of them also suggested
a reduction of 1 point, while the other advocated a reduction
of either 1 or 1-1/2 points, in the M-3 range.
The nearly unanimous preference of members for retaining
the range of 4 to 6-1/2 per cent for M-1 reflected several
considerations. First, it was observed that any increase in the

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-176-1/2 per cent upper limit of the range could strengthen
inflationary expectations, which already appeared to be
intensifying, and could accentuate the current weakness of
the dollar in foreign exchange markets. Second, because
the rate of growth of M-1 in 1977--about 7-1/2 per cent--had
significantly exceeded the upper limit of the Co11111ittee's
earlier ranges, it was suggested that a decision now to reduce
the range might lack credibility. Third, it was noted that if
the actual rate of growth in M-1 during 1978 were to fall within
a 4 to 6-1/2 per cent range, that would represent a significant
slowing from the 1911 rate.

Indeed, one Conmittee member observed

that if--as seemed likely--some slackening were under way in the
processes of financial innovation that recently had been
facilitating economies in transactions balances, an unchanged
rate of growth in M-1 could be interpreted as involving an
increase in monetary restraint. Finally, it was suggested
that current uncertainties regarding the economic outlook
militated against an adjustment in the M-1 range. While
Conmittee members found these considerations persuasive, it
was observed in the discussion that further gradual reductions

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in monetary growth ranges would be needed over time if growth
rates consistent with general price stability were to be
achieved.
Several COlllllittee members noted that if during the
coming year M-1 growth were to be constrained within a 4 to
6-1/2 per cent range and nominal GNP were to expand as fast
as economic forecasters were generally projecting, an
appreciable increase in the velocity of M-1 would be required.
While they believed that such an increase in velocity might
develop, they indicated that they would be prepared to accept
M-1 growth rates that were relatively high with respect to the
range if the increase in velocity fell short of the required
amount. Other members stressed the importance of constraining
growth in M-1 within the range specified.
The member who preferred the growth range of 4-1/2 to
6 per cent for M-1 based his recommendation on two considerations.
First, by lowering the upper limit of the range, the Conmittee
would be providing a further indication of its resolve to resist
inflationary pressures and in the process perhaps help to provide
some near-tenn support for the dollar. Second, by raising the

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lower limit of the range, the Conllltttee might offer some
reassurance to those.who had expressed concern that the Federal
Reserve might not be sufficiently alert to the possibility of
a softening in the economy later this year. Other members of
the Committee took exception to this proposal. In addition to
the arguments offered against a reduction in the upper limit of
the M-1 range already noted, it was suggested that a narrowing
of the range would imply much greater certainty than in fact
existed regarding the precise rate of monetary growth appropriate
under present circumstances.
In considering the longer-run growth ranges for M-2 and
M-3, members took note of the sharp reduction in flows of savings
to depositary institutions that had occurred during recent months.
It was suggested that part of the cutback in such inflows might
reflect temporary factors, and that over coming months growth
in large-denomination time deposits not subject to interest rate
ceilings could well expand further. providing some offset to the
continued slow growth expected in other deposits.

It was noted

that in the past the large-denomination deposit instruments of
the types included in M-2 and M-3 had been issued primarily by

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banks. but ft was suggested that in the present circumstances
thrift institutions might begin to make greater use of such
instruments as a source of funds.
In view of these considerations. most members of the
Connittee were inclined to retain the existing range for M-2
and to reduce the range for M-3 by only 1/2 of a percentage
point. The members recognized that the attaimient over the
coming year of growth rates for M-2 and M-3 within such ranges
might require an increase 1n the regulatory ceilings on deposit
rates. The two members who suggested some reduction in the M-2
growth range and a reduction of more than 1/2 of a percentage
point in the M-3 range believed that under present circumstances
the ranges favored by the majority were higher than those
appropriately associated with a 4 to 6-1/2 per cent range for
M-1.

At the conslusion of its discussion the Committee
decided ta retatn the existing ranges for M-1 and M-2 and to

reduce both the upper and lower limits of the range for M-3
by 1/2 of a percentage point. Thus. the new ranges. which
applied to the period from the fourth quarter of 1977 to the

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-21fourth quarter of 1978, were 4 to 6-1/2 per cent for M-1,
6-1/2 to 9 per cent for M-2, and 7-1/2 to 10 per cent for
M-3. The associated range for growth in c011111ercial bank
credit rematned 7 to 10 per cent. It was agreed that the
longer-run ranges, as well as the particular aggregates for
which such ranges were specified, would be subject to review
and modification at subsequent meetings. It was also understood that short-run factors might cause growth rates from
month to month to fall outside the ranges contemplated for
the year ahead.
The COlllllittee adopted the following ranges
for rates of growth in monetary aggregates for
the period from the fourtli quarter of 1977 to the
fourth quarter of 1978: M-1, 4 to 6-1/2 per cent;
M-2, 6-1/2 to 9 per cent. and M-3, 7-1/2 to 10
per cent.
Votes for this action: Messrs.
Burns, Volcker, Coldwell, Guffey, Jackson,
Mayo, Morris, Partee, Roos, and Wallich.
Votes against this action: None. Absent
and not voting: Mr. Gardner.
In the Corrmittee's discussion of policy for the period
inmediately ahead, it was suggested that recent developments in
the foreign exchange markets militated against any marked easing
of money market conditions at this time, and that the uncertainties

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-22in the economic situation militated against any marked firming.
All of the members favored directing initial open market
operations during the coming inter-meeting period toward the
objective of maintaining the Federal funds rate at about the
prevailing level of 6-3/4 per cent. and a majority preferred to
continue giving greater weight than usual to money market
conditions in the conduct of operations until the next meeting.
With respect to the range in which the funds rate might be
varied if the February-March growth rates in the monetary
aggregates appeared to be deviating markedly from expectations,
most members advocated retention of the 6-1/2 to 7 per cent
range agreed upon at the January meeting. However. two members
suggested narrowing the range to 6-3/4 to 7 per cent. and one
proposed widening ft to 6-1/2 to 7-1/4 per cent.
The members did not differ greatly in their preferences
for growth in the monetary aggregates for the February-March
period; most favored ranges of 1 to 6 per cent for M-1 and 4-1/2
to 8-1/2 per cent for M-2. However. a few members were inclined

to set the lower limit of the 2-month range for M-1 at zero. on
the grounds that the acceptance of temporary weakness in the

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-23-

monetary aggregates that might develop from time to time would
improve the chances of holding average growth over the coming
year within the longer-run range agreed upon earlier in this
meeting. One of these members also suggested that, given the
relative volatility of M-1 and M-2, a range for M-2 that was
4 percentage points wide might best be associated with an M•l
range 6 points in width; accordingly, he favored a 2-month
range of Oto 6 per cent for M-T. Another- member
suggested that the ranges for both M-1 and M-2 be narrowed
to 3 percentage points, in order to achieve prompter adjustment

of the funds rate to growth rates in the aggregates that were
unduly rapid or slow.
At the conclusion of the discussion the C011111ittee
decided that operations in the period inmediately ahead should
continue to be directed toward maintaining prevailing money
•rket cond1t1ons, as represented by the current 6-3/4 per cent
level of the Federal funds rate. However, the members agreed
thit if growth in the aggregates should appear to approach or
move beyond the limits of their specified ranges, the operational
objective for the weekly-average Federal funds rate should be

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-24varied in an orderly fashion within a range of 6-1/2 to 7 per
cent. For the annual rates of growth in M-1 and M-2 over the
February-March period, the Comittee specified ranges of 1 to
6 per cent and 4-1/2 to 8-1/2 per cent, respectively. It was
understood that in assessing the behavior of the aggregates.
the Manager should give approximately equal weight

the

behavior of M•l and M-2. The members also agreed that in the
conduct of day-to-day operations. account should be taken of
emerging financial market conditions, including the conditions

in foreign exchange markets.
As customary, it was understood that the Chainnan mtftit
call upon the Committee to consider the need for supplementary
instructions before the next scheduled meeting if significant
inconsistencies appeared to be developing among the Cornnittee's
various objectives.
The following domestic policy directive was issued to
the Federal Reserve Bank of New York:
The infonnation reviewed at this meeting
suggests that retail sales, industrial production.
and housing starts were adversely affected in
January by unusually severe weather. It appears.
however, that there has been little change in the
underlying economic situation. Employment increased

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-25-

further in January and the unemployment rate
edged down from 6.4 to 6.3 per cent. Both
the consumer price index and the wholesale
price index rose substantially. The index
of average hourly earnings advanced sharply,
as higher minimum wages became effective at
the beginning of the year.
After a period of calm, the dollar came
under renewed downward pressure around midFebruary, and its trade-weighted value against
major foreign currencies has declined about
1-1/2 per cent. The Swiss franc and the
Gennan mark have registered the most
pronounced appreciations against the dollar.
M-1 expanded apprec1ab ly in January but
declined somewhat in early February. Growth
in M-2 picked up in January, reflecting some
strengthening in inflows to banks of time and
savings deposits other than negotiable CD's.
Infl0\'1s to nonbank thrift institutions
continued to slow. Market interest rates
have changed little in recent weeks.

In light of the foregoing developments,
it is the policy of the Federal Open Market
Conmittee to foster bank reserve and other
financial conditions that will encourage
continued economic expansion and help resist
inflationary pressures, while contributing
to a sustainable pattern of international
transactions.
Growth of M-1, M-2, and M-3 within
ranges of 4 to 6-1/2 per cent, 6-1/2 to
9 per cent, and 7-1/2 to 10 per cent,
respectively, from the fourth quarter of
1977 to the fourth quarter of 1978 appears

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-26-

to be consistent with these objectives.
These ranges are subject to reconsideration
at any time as conditions warrant.
At this time, the Committee seeks to
maintain about the prevailing money market
conditions during the period inmediately
ahead, provided that monetary aggregates
appear to be growing at approximately the
rates currently expected, which are believed
to be on a path reasonably consistent with
the longer-run ranges for monetary aggregates
cited in the preceding paragraph. Specifically,
the Connittee seeks to maintain the weeklyaverage Federal funds rate at about the
current level, so long as M-1 and M-2 appear
to be growing over the February-March period
at annual rates within ranges of 1 to 6 per
cent and 4-1/2 to 8-1/2 per cent, respectively.
If, giving approximately equal weight to M-1
and M-2. it appears that growth rates over
the 2-month period are approaching or moving
beyond the limits of the indicated ranges,
the operational objective for the weeklyaverage federal funds rate shall be modified
in an orderly fashion within a range of 6-1/2
to 7 per cent. In the conduct of day-to-day
operations, account shall be taken of emerging
financial market conditions, including the
conditions in foreign exchange markets.
If it appears during the period before the
next •eting that the operating constraints
specified above are proving to be significantly
inconsistent, the Manager is promptly to notify
the Chairman who will then decide whether the
situation calls for supplementary instruction's
from the Conmittee.

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-27Votes for th;s action: Messrs.
Bums. Volcker. Coldwell. Guffey. Jackson.
Mayo. Morris, Partee. Roos, and Wallich.
Votes against this action: None. Absent
and not voting: Mr. Gardner.
Subsequent to the meeting, on March 10. nearly final
estimates indicated that in February M-1 had declined and M-2
had increased relatively little. For the February-March period
staff projections suggested that the annual rate of growth in
M-1 would be below the lower limit of the 1 to 6 per cent range
specified by the Conmittee in the next-to-last paragraph of the
domestic policy directive issued at the February meeting.
Growth in M-2 for the 2-month period was projected to be close
to the lower limit of the Conmittee's range of 4-1/2 to 8-1/2

per cent for that aggregate. It appeared, however, that the
weakness in the aggregates might reflect the prolongation of
the coal strike and the severe winter weather and, therefore.
might prove to be temporary.
During recent weeks the Federal funds rate had averaged
about 6-3/4 per cent. In light of the behavior of the aggregates,
the Manager would, under nonnal circ11RStances. have sought to
reduce the funds rate within its specified range of 6-1/2 to
7 per cent.

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-28-

Against that background, and in view of recent
developments in foreign exchange markets, Chairman Miller
rec011111ended at a telephone conference meeting on·March 10
that the Manager be instructed to continue aiming at a
Federal funds rate of 6-3/4 per cent for the time being.
On March 10, 1978, the Conmittee modified the
domestic policy directive adopted at its meeting
of February 28, 1978, to call for open market
operations directed at maintaining the Federal
funds rate at about the prevailing level of
6-3/4 per cent for the time being.
Votes for this action: Messrs.
Miller, Volcker, Burns, Coldwell, Eastbum,
Jackson, Wallich, Willes, Winn, and Kimbrel.
Votes against this action: None. Absent
and not votin9: Messrs. Baughman, Gardner,
and Partee. (Mr. Kimbrel voted as alternate
for Mr. Baughman. ) .
2. Authorization for foreign currency operations
Paragraph 1D of the Conmittee's authorization for
foreign currency operations authorizes the Federal Reserve
Bank of New York for the System Open Market Account to maintain
an over-all open position 1n all foreign currencies not exceeding
$1.0 billion, unless a larger position is expressly authorized by

the Comnittee. On January 17, 1978, the Conmittee had authorized
an open position of $1.75 billion.

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-29-

At the meeting.on February 28 the C011111fttee authorized
an open pos1tieri Gf $2.0 billion. This action was taken in
view of the scale of recent and potential Federal Reserve•
operations in the foreign exchange markets undertaken pursuant
to the Cdlllll1ttee;s foreign currency directive.

Votes for this action: Messrs.
Burns, Volcker, Coldwell, Guffey, Jackson,
Mayo, Morris, Partee, Roos, and Wallich.
Votes against this action: None. Absent
and not voting: Mr. Gardner.
On March 10, following the telephone conference held
on that day, Conmittee members voted to approve a delegation of
authority to Chairman Miller to negotiate an increase in the
System's swap arrangement with the German Federal Bank of an
amount up to $2 billion if he determined that the detailed
arrangements were satisfactory. The Conmittee also voted to
approve a concurrent amendment to paragraph 2 of the
authorization for foreign currency operations to raise
correspondingly the amount specified there for the swap
arrangement with the German Federal Bank. The Chairman
approved an increase of $2 billion on March 11. Accordingly,
paragraph 2 of the authorization was amended, effective on
that date, to read as follows:

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-30-

The Federal Open Market Conmittee directs
the Federal Reserve Bank of New York to maintain
reciprocal currency arrangements ("swap" arrangements)
for the System Open Market Account for periods up to
a maximum of 12 months with the following foreign
banks. which are among those designated by the Board
of Governors of the Federal Reserve System under
Section 214.5 of Regulation N. Relations with
Foreign Banks and Bankers, and with the approval
of the C011111ittee to renew such arrangements on
maturity:

Foreign bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for Intemational
Settlements:
.
Dollars against Swiss francs
Dollars against authorized
European currencies other
than Swiss francs

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Amount of
arrangement
(Mi 11 ions of
dollars equivalent)
250
1.000
2.000
250
3,000
2.000
4,000
3,000
2.000
360
500

250
300

1,400
600

247

-31Votes for this action: Messrs.
Miller, Volcker, Burns, Coldwell,
Eastburn, Jackson, Partee, Wallich~
Willes, Winn, and Kimbrel. Votes
against this action: None. Absent
and not voting: Messrs. Baughman and
Gardner. (Mr. Kimbrel voted as alternate
for Mr. Baughman.)
This action, which enlarged the System's swap network
with 14 central banks and the Bank for International Settlements
to $22.16 billion, was taken as part of the cooperative effort
announced on March 13 by U.S. Secretary of the Treasury Blumenthal
and Minister Matthoefer of the Federal Republic of Germany.

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APPENDIX III
BRIEFING MEMORANDUM PREPARED BY THE STAFF
OF THE COMMITTEE ON BANKING, FINANCE AND
URBAN AFFAIRS
J. WIWAM STANl'OH', OHIO
GARIIY BROWN, MICH.
CNALMCltS P. WYUL OHIO

MDIRV ._REUSS.WIS., CHAIRMAN
THOMAS L ASHLEV. OHIO
WILLIAM 9. MOORHEAD, PA.

JOHN N. ROUSKLOT, CAUi'.

Pl:RNAND J. ST GERMAIN. R.I.

HENRY .. GONZALEZ, TEX.
.IOSEPH G. MINISH. N.J.

FRANK ANNUNZIO, IU..
JAMESM.HANLEY. N.Y.
PARl'lbf J. MITCHELL MD,
WALTEII E.FAUNTROV, O.C.
STEPHEN L N£AL N.C.
JERRY M. PATTERSON. CALIF.
JAMES J. IILANCHARD. MICH.
CARROU. HUBBARD. JR., KY.
JOHN J. UP'ALCE, N. V.
GLADYS NOON $PEU.MAN. MD.

U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
NINETY•FIPTH CONGRESS
2129 RAYBURN HOUSE OFFICE; BUILDING

WASHINGTON, D.C.

20515

l.£S AUCOIN. OREG,
PAULE. TSONGAS. MASS..

BUTLER DERRICK, S.C.
MA"K W, HANNAll'ORD, CALIF,
DAVID W. EVANS. INO.
CLIFFORD Al.L.EN, TENN.
NOfllMAN It. D'AMOURS, N,H,
STANLEY N. WNDINE, N,Y,
EDWARD W, PATTISON. N,Y,
JOHN J. CAVANAUGH, NEM,
MARY ROSE OAKAR, OHIO
JIM MATTOX. Tl!X.
IIJltUCE I", VENTO, MINN.
DOUG BARNARD, GA.
WES WATKINS. OKLA.
ROBERT GARCIA. N,Y,

STEWART a. McKINNEY, CONN.
GEORGE NANSEN. IDANO

MIENRY J. HYOS:, ILL.
IUCMAAD 1(1£1..LY, Pf.A.
CHARLES L GR,\SSI..EY, IOWA
MIWC£NT FENWICK, N.J.
JIM LEACH. IOWA
NEWTON I. STPtRS. JA., MO.
THOMAS 8. EVANS. JR., Pa.
IIIIUCIE P', CAPUTO, N.Y.
HAROLD C. HOL.U:NNCK. NJ.
e. WILLIAM GREEN. N.Y.

BRIEFING MEMORP,NDUM

Quarterly Hearings on The
CONDUCT OF MONETARY POLICY
March 7, 9 and April 10, 1978

Prepared by
The Staff of the
C"ommittee on Banking, Finance
9 nd Urban Affairs
Pursuant to the Federal Reserve Reform Act of 1977

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250
on March 7, 1978, the following witnesses appeared at 10:00 a.rn.:
Professor Lawrence R. Klein
Department of Economics
University of Pennsylvania
Mr. Jerry Jordan

Senior Vice President and Chief Economist
Pittsburgh National Bank
Professor Rudiger Dornbusch
Department of Economics
Massachusetts Institute of Technology

On March 9, 1978, the following witness appeared at 10:00 a.m.
and will appear again at 10:00 a.m. on April 10, 1978:

Mr. G. William Miller
Chairman
Board of Governors
Federal Reserve System

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REPORTING REQUIREMENTS UNDER THE
FEDERAL RESERVE REFORM ACT OF 1977
P.L. 95-188
The Federal Reserve Reform Act requires that the Board of
Governors of the Federal Reserve System shall consult with Congress
at quarterly hearings rotating between the House Banking Committee
and the Senate Banking Committee. At the hearings the Federal
Reserve is required to
1)

provide their objectives and plans for ranges of
growth of monetary and credit aggregates for the
coming twelve months (In the hearing today, the
twelve month period ends with the fourth quarter
of 1978);

take "account of past and prospective developments
in production, employment, and prices"; and

discuss past and prospective developments for longterm interest rates -- a requirement which, as
the Committee Report notes, follows directly from
the provision of the Act that establishes "moderate
long-term interest rates as one of the objectives
of monetary policy".

These reporting requirements will reveal a more complete pie~
ture of the Federal Reserve's monetary policy than would be pro~
vided by merely stating its monetary target ranges. Presumably,
the Fed's projections will take into account the effect of its
monetary policy on these important aspects of our economy -- production, employment, prices and interest rates.

MONETARY POLICY AND THE ECONOMY
The rate of growth of real Gross National Product (GNP) slowed
progressively through 1977 as the recovery matured. The annual
rate of growth from the previous quarter fell from 7.5 percent
in the first quarter, to 6.2 percent in the second, to 5.1 percent
in the third, to 4.2 percent in the fourth. Average GNP growth
year-over-year came to 4.9 percent, down from 6.0 percent in 1976,
but still about 2.5 percent higher than the average rate of growth
in the European Economic Community.

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2

Money

A significant development in reported monetary
statistics has occurred since the beginning of these hearings
on the Conduct of Monetary Policy. On March 23 the Federal
Reserve revised their money stock data for the 1975-77 period.
Part of the revision was due to incorrect estimates of nonmember
bank deposits amounting to a $1.6 billion mistake in underestimating those deposits at the end of 1977.
The new monetary estimates for 1977 show that the basic
money stock, M~l, grew by 7.8 percent, not 7.4 percent as
previously stated.
There have been two previous periods since World War II
in which monetary growth grew at rates around 8 percent.
Therefore, 1977 is one of the three periods of fastest monetary
growth since World war II.
The two other periods of fast monetary growth were in 1969,
when the annual rate of growth from the first quarter of 1968
to the first quarter of 1969 was 8 percent, and the period from
the fourth quarter of 1971 to the second quarter of 1973, when
the annual rates of growth rose as high as 8.5 percent.
Velocity
The income velocity of money -- GNP divided by the money
stock -- returned to near its long-term trend rate of growth of
between 3 and 4 percent per annum in 1977. Chart 3 depicts this
development.
Interest~

Short-term interest rates rose steadily over 1977. The Federal funds rate, tracked by the interest rate on three-month Treas·
ury bills, jumped sharply in the fourth quarter -- from 5.9 percent in August to 6.56 percent in December. Since then it has
continued to edge upward, to 6.78 percent last week, a rise of
217 basis points in thirteen months. Chart 4 traces the recent
history of short-term interest rates, as well as the essentially
stable level of the effective yield on new home mortgages.
Chart 5 shows the relat-ionship of short-term interest rates
the Federal funds rate, in thfs case -- to stock prices, measured
by the New York Stock Exchange Composite Price.Index. The relationship is\highly ,.:i!mrl!rse: falling interest rates mean rising
stock prices, and vice versa. The reason is simple: short-term·
government securities are a.liquid substitute for common stocks.
When the Federal funds rate, the 3-month Treasury bill rate and
other short-term interest.rates rise, investors shift from stocks
to higher-yielding government bills, causing stock prices to fall.

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253
3

Charts 6 through 12 are designed to convey a quick overview of the state of the economy at the present phase of the business cycle.
Inflation
Chart 6 shows that inflation as measured by the Consumer Price
Index stabilized in mid-1977, having risen sharply in late 1976
and early 1977. Currently the rate of inflation continues to hover
between 6 and 7 per.cent per year.
Unemployment
Chart 7 shows that while average unemployment has declined
by nearly a third from peak levels near 9 percent in 1975, with
teenagers making strong gains in the second half of 1977, unemployment among blacks has not declined since the trough of the recession.
Chart 8 shows the continued steady rise of total employment.
GNP and Investment
Charts 9 and 10 show that while real GNP has been recovering
uninterruptedly since early 1975, real Private Non-residential
Fixed Investment has not yet surpassed its pre-recession high.
Capacity Utilization
Charts 11 and 12 show that, by the index prepared by the Wharton School of Finance, capacity utilization remains well below
the inflationary levels attained in 1974, both overall and in the
bottleneck-prone manufacturing, mining, and utilities sectors.
Outlook and Objectives
Due to the significant revision in monetary data estimates
for 1977, one of the primary questions for monetary policy is,
"How can we improve our monetary data?" Such improvements
appear essential if the Federal Reserve is to conduct an
appropriate monetary policy, and the Congress is to carry
out its oversight responsibilities in judging that monetary
policy.

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254

A second question concerns the future path of monetary
policy from the 7.8 percent level of 1977. Any attempt to pull
monetary policy down too rapidly will induce a recession in the
same manner as such a breaking of monetary policy following the
period of monetary growth in 1968. The last half of 1969,
monetary policy was very slow, and a recession followed in
1970. A similar breaking of monetary policy preceded the
recession of 1974-1975.
A third question is "How serious is the Federal Reserve
about achieving its targets?" The Fed was following a long
range target path in 1977 with an announced upper limit of
It missed by a wide margin, if we are to
6.5 percent.
believe the latest estimate of 7.8 percent as the final
If the public, especially a participant in the
revision.
financial market, is to believe that the.Fed has control of
the money supply, we must have improved performance from the
Fed. Such an improvement must first begin with better
statistics on monetary growth.

International Considerations
The cause of our currency decline remains, undoubtedly, our
high deficit in the balance of payments (current account), which
is itself due to high imports of oil and sluggish world demand
for U.S. exports. Chart 13 shows the dramatic recent deterioration of the current account balance and of the balance of trade.
swap agreements under
Conventional means of intervention
which the U.S. borrows foreign currencies from other governments
time path of exchange
the
alter
can
-dollars
buy
to
them
uses
and
rate movements, but they cannot reverse the trend. At present,
the Federal Reserve has $20 billion in "lines" to foreign central
In a market awash
banks that may be drawn upon for this purpose.
with over $500 billion in footloose funds, $20 billion does not
the
intervention,
Reserve
Federal
make a very big dent. If, by
dollar is boosted a little on one day, the effect is chiefly to
give it further room to fall on the next. Since the borrowed currencies must then be repaid, the swap having failed, in depreciated dollars, the policy also loses money. Speaking to the National
Press Club on March 2, President Carter recognized the essential
futility of this approach, and declared his intention not to extend its use beyond the function it traditionally serves: to help
It would be interesting
re-establish order in disorderly markets.
to hear Chairman Miller's opinion and intentions on this question.

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255
5

(According to a 1975 joint report of the Subcommittee on International Economics of the J.E.C. and the Subcommittee on International Trade, Investment and Monetary Policy of the House Banking Committee:
Disorder emerges in exchange markets when for any
reason dealers are unable to form reasonably firm
expectations about direction or extent of exchange
rate movements in the immediate future. In effect,
fear overwhelms normal expe'ctations upon which the
ability to do business is based. Disorder is manifested by unusually wide spreads between bid and
asked prices and by a severe drop in the volume of
transactions from normal levels.
In practice, it is not likely that the Federal Reserve and Treasury adhere closely to this technical definition in deciding when
to intervene. Most observers believe that the Fed bases its decision purely on judgment.)
Higher interest rates, by contrast, do act to improve our
exchange rate -- but in a way few will find attractive. They attract foreign capital to our shores, increasing the demand for
our currency and hence its price. But the effect is slower real
GNP growth at home, as domestic borrowers feel the pinch of higher
interest rates; Slower economic growth means fewer imports. Naturally, this means a lower current account deficit: hence a •healthier" dollar.
It is perhaps pertinent to point out that to use monetary
policy in this fashion, under present circumstances, is in contradiction with the mandate of the Federal Reserve Reform Act of 1977,
which directs the Federal Reserve to "maintain long run growth
of the monetary and credit aggregates commensurate with the economy's long run potential to· increase production". Other things
equal, higher interest rates for foreign exchange purposes imply
a departure from this standard. As Chairman Reuss noted on the
floor of the House:
Such moves merely transfer disorder from the foreign
exchange markets to the domestic credit markets.
While the short-term impact on the dollar may be
dramatic, it soon may.be offset by corresponding
rises in interest rates in foreign credit markets,
rather than yielding a permanent exchange rate adjustment. And the domestic impact of higher interest rates may be devastating: on the stock market, already slumping - partly in response to
tightened monetary conditions - on business and
investor confidence, on the level of investment
and even on the health of the economy itself;

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256
6

It would seem relevant to determine to what extent the
Federal Reserve is now pursuing a policy of higher interest
rates for exchange rate purposes, and to what extent it plans
to continue to do so in the future.

Prepared by Banking Committee
Staff
Robert Auerbach
James Galbraith

In answer to Chairman Reuss' questions raised at the
February 9th hearing, Chairman Miller submitted the-following
letter.
Attached

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Federal Reserve Bank of St. Louis

******

257
CHART 1

MONEY SUPPLV AND FEDERAL
RESERVE TARGET RANGES
(Quarterly Data)
$ Billion

360....-.------------.
MONEY SUPPLY (M1)
340

320

300
Actual Money Supply (M1):
currency and demand deposits

280
O~ a 2 3

~a 2

3 4

~a 2

3 4 1a 2 3 4

'---1975_/ '---1976-7 '---1977_.:; L1978_7

Note: The target range for 1st quarter 1976 was set for average M1 for March 1976.
Actual M1 shown above is for the entire 1st quarter 1976 to provide consistency with other M1 observations.

Data Source:

Quarterly observations and target levels calculated f,om money supply
series of the Board of Governors of the Federal Reserve System as
:::-avise:! in }!arch 1978.
Prepared by Congressional Research Service, Library of Congr~ss.

25-273 0 - 78 - 18
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Federal Reserve Bank of St. Louis

258
CHART 2

MONEY SUPPLY AND FEDERAL
RESERVE TARGET RANGES
(Ouarteriy Data)
$ Billion

900-----------~
MONEY SUPPLY (M2)

850
Upper and Lower
Federal Reserve Targets

800
750
700

650
.........,Actual Money Supply (M2): currency,
demand deposits and consumer type time
and savings deposits at commercial banks

600

0 .__'---'---'---'---'---'---'---'---'---'---'---"--'---1-....1
10 2 3 41 JO 2 3 41
\_

JO 2

3 41 JO 2 3 41

1975_/ '--1976--' '---1977_/ '--1978_/

Note: The target range for 1st quarter 1976 was set for average M2 for March 1976.
Actual M2 shown above is for the entire 1st quarter 1976 to provide consis•
tency with other M2 observations.

Quarterly observations and target levels calculated f,om money supp
series of the Board of Governors of the Federal Reserve System as
revised in March 1978.
Prepared by Congressional Research Service, Library of Congr~ss.
Data Source:

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Federal Reserve Bank of St. Louis

259
TABLE 1

FEDERAL RESERVE SYSTEM ONE YEAR TARGET RANGES AND ACTUAL
GROWTH RATES FOR HONETARY AGGREGATES
(Growth rates in percent)

Ml
Target

Actual

Target

l. March 1975 to March 1976

5.0 - 7.5

5.0

8.5 - 10.5

9.5

10.0 - 12.0

12.3

2. 1975:Q2 to 1976:Q2

5.0-7.5

5.2

8.5 - 10.5

9.5

10.0 - 12.0

12.0

5.0 - 7.5

4.5

7.5 - 10.5

9.3

9.0 - 12.0

11.5

4.5 - 7.5

5.7

7.5 - 10.5

10.9

9.0 - 12.0

12.8

4.5 - 7.0

6.3

7.5 - 10.0

10.9

9.0 - 12.0

12.8

6.6

7.5 -

9.5

10. 7

9.0 - 11.0

12.4',

Period covered

....
··········

··········
1975:Q4 to 1976:Qi. ..........

3. 1975 :Q3 to 1976:Q3
4.

5. 1976:Ql to 1977:Ql

..........

.......... 4.5 7. 1976:Q3 to 1977 :Q3
·········· 4.5 8. 1976:Q4 to 1977:Q4 .......... 4.5 9. 1977:Ql to 1978:Ql .......... 4.5 10. 1977 :Q2 to 1978:Q2 .......... 4.0 11. 1977:Q3 to 1978:Q3 .......... 4.0 6. 1976:Q2 to 1977:Q2

12. 1977:Q4 to 1978:Q4

Ml
M2
M3

..........

7.0

M3
Actual

Target

Actua

6.5

7 .8

7.5 - 10.0

11.0

9.0 - 11.5

12. 7

6.5

7.8

7.0 - 10.0

9.8

8.5 - 11.5

11.7

6.5

7.0 -

8.5 - 11.0

9.5

6.5

7.0 - 9.5

8.5 - 11.0

6.5

6.5 - 9.0

8.0 - 10.5

4.0 - 6.5

6.5 - 9.0

7.5 - 10.0

= private demand deposits plus currency.
= Ml plus bank time and savings deposits other than
= M2 plus .deposits at mutual savings banks, savings

large negotiable CD's
and loan associations and credit

unions

NA = not applicable.
NOTE;

Actual growth rate data are based on money supply series of the Board of Governors
of the Federal Reserve System as revised in March 1978.
Prepared by Congressional Retearch Service, Library of Congress

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INCOME VELOCITV OF MONEY CMl>
PERCENT CHANGE FROM SAME QUARTER, PREVIOUS VEAR

E
R
C

E
N
T

t..;)

1973

197 ◄

1975

1976

1977

Data sources: Board of Governors of the Federal
◄/7/78
Reserve System and Department of Commerce, Bureau
of Economic Analysis,
Prepared by Congressional Research Service, Library of Congress

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INTEREST RATES
FEDERAL FUNDS.RATE CLINE>
AVER~QE Y.~~LD ON •. MONTH TREASURY·BlLLS (DOT)
EFFECTIVE-YIELD. ON NEY HOME MORTQAQES CDASH>

u...----------------------~u
p
E

" -------.-.----, ...... ---

C
E

N
T

()

:x:
)'
:,:J

41----+----+-----+-----f-----+----t4
19?3

19'14

19?5

uns

1977

Data sources: Board of Governors of the Federal"
Reserve System, Department of the"Treasury and
Federal Home Loan Bank Board,
·

1978
◄"'7,1'78

Prepared by Congressional Research ~ervice, Library of Congress

..,.

~
0)

I-'

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Federal Reserve Bank of St. Louis

$TOCK PRICES

AND INTEREST RATES
FEDERAL
FUNDS
RA'l'E <t.INE)
14_.,...,.,,..,.__,~.._,.....;...;,.;;;.;;;.;,.;.;.;.;;.,,_.,.;;;.;,;;:;..;;....;.;;.;.;~..;..;;;.;;.;..;;;;;..;..,,-=-,e--,..,,...,
..,,.,..--,,...GS
NYSE COMMON STOCK PRICE INDEX, COMPOSITE <DOT>

....,,.,."....
.
..-"'-• "' . ',.•
\

p
E
R
C
E
N
T

'
,

"'
_,

•

.,
I I
,'

\.·,

I
I

:
:
t

•...

: \ ,,·.:
:• •,:•

.''•

I
I

••
••
••
I

40
I
•

:,-. ~.

t •1 I

4--------------------------- 35
19?3

15174

1975

1978

19??

Data sources: Board of Governors of the Federal
Reserve System and New York Stock Exchange.
Prepared by Congressional Research Service, Library of Congress

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Federal Reserve Bank of St. Louis

CONSUMER PRICE INDEX
PERCENT CHANCE OVER 18 MONTHS

------------..- 13

13
12

p
E
R

E
N
T

4.-t-----tr------1----+----+----1-----11- 4
19?3

19?4

19?5

19?6

19?7

1978

4.1'7/78
~ata source: Department of Labor, Bureau of
Labor Statistics.·
Prepared by Congressional Research Service Library of Congress

:,:
:,,

t-:l

c,.;

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Federal Reserve Bank of St. Louis

UNEMPLOYIIIENT RATES
MONTHLY RATES1 SEASONALLY ADJUSTED
¥-T~E~E~N-AQ~E.,....(~T~O~P~>.--N~O~N~WH~l~T~Ee=,;(~M~lD~D~L~E~)-.-T~O~T~A~L.....,.(~BO~T~T~O~M~)--aa

16.

E
R
C
E
N
T

1913

19?4

lD?S

19?6

1977

Data sour•ce: Department of Labor, Bureau of
~ -~-- Q~~tistics..

1978
◄nns

...,

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TOTAL EMPLOVMENT, HOUSEHOLD SURVEY
S£ASONALLV Al)J'UST£D l"IONTHLV DATA_ _ _ _ _r-g ◄
g4--,.----=-===::.:.=.:;.;...~;.;;,;:;.;.;;;;;;:..;~;;.;..;.;.;.;.;;;.;....;;.;..;.;..;,;

t.
t.
I

0
N

s
0
F

:::;
~

E
M
p

t.
0
V

E
E

Ul?3

1Sl74

19?5

Ul?S

19?7

Data source: Department of Labor, Bureau of
Labor Statistics.

15178

...,,7/78

Prepared by Congressional Research Service, Library of Congress.

l\j
~

C;t

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Federal Reserve Bank of St. Louis

1 ◄ 00

QROSS NATIONAL PRODUCT
QUARTERLY DATA IN CONSTANT DOt.t.ARS
SEASONALLY ADJUSTED AT ANNUAL RATES

1 ◄ 00

8
I
L

t.
I

1350

1300.

1300

1250

0
N

s
0
F
1
9
?

D
0
L
I.
A

::d
8
10

1200

us0-+----i------+-----11-----+-----1i-11se
19?6
U1?3
19?4
1D7?
Data source: Department of Commerce, Bureau of
Economic Analysis.

◄nns

Prepared by Congressional Research Service, Library of congress

~
~
~

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Federal Reserve Bank of St. Louis

PRIVATE NONRESIDENTIAL FlKED INVESTMENT
QUARTERLY DATA IN CONSTANT DOLLARS
SEASONALLY ADJUSTED AT ANNUAL RATES

135

13S

t.
t.
I

130

125

0
N

0
F

1
9
7
2

:,:

:,,

120

,._.
0

0
0

:,,

115

110- - l - - - - - ~ - - - - 1 - - - - - - - 1 - - - - - t - - - - - t - 1 1 0
1Sl?S
1Sl?3
ISl?S
1SI?◄
1

Data source:. Department of Commerce:
Economic Analysis.

Bureau of

Prepared by Congressional Research Service, Library of Congress.

t,:)
CJ)

-..J

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Federal Reserve Bank of St. Louis

WHARTON
INDEX OF CAPACITY UTILIZATION
IN MANUFACTURING

100

,rf

II
:it

:,:

>
~

........

t.:i

0:,

75----------------------75
1973

1974

1975

1976

Data source: Wharton Econometric Forecasting
Associates, Inc,
Prepared by Congressional Research Service, Lib~ary of Congress

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Federal Reserve Bank of St. Louis

100

WHARTON
INDEX OF CAPACITY UTILIZATION
IN MANUFACTURING. HINING, AND UTILITIES

100

'"II
~

a:
UI

:,::
:I'
:0
>-3

....
"'

75-1-----+-----+-----+-----+----"-75
1974
1975
1978
1973
1877
Data sourqe1 Wharton Econometric Forecasting
Associates, Inc,
Prepared by Congressional Research Service, Library of Congress

t..:l

0:,

c.o

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Federal Reserve Bank of St. Louis

BALANCE OF PAVMENT.
ON CURRENT ACCOUNT CLINE>
AND ON MERCHANDISE TRADE <DOT>
◄

B
I
L

I
n:,:

0
N

0
F

-2

>-3

-4

A
R

,...

L
L

:,,,

-6

...
·----

-s
-10

-6

.·..

-s
-10

1973

19?◄

1976

1977

◄,nns
Data source: Department of Commerce, Bureau of
Economic Analysis.
Prepared by Congressional Research Service, Library of Congress

t...:>
--:i

Full text of Monetary Policy Oversight : House of Representatives Hearings : Quarterly Hearings on the Conduct of Monetary Policy : Hearings Before the Committee on Banking, Finance and Urban Affairs, House of Representatives, Ninety-Fifth Congress, Second Session, March 7, 9; April 10, 1978

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