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NOMINATION OF DAVID M. LILLY MONDAY , MAY 17, 1976 U.S. SENATE, COMMI S, NG,ANDURBANAFFAIR TTEEONBANKING,HOUSI Washington,D.C. The committee met at 10 a.m.in room 5302 of the Dirksen Senate an) pres iding . r William Proxmire (chairm ceBui lding,Senato Offi . Proxmire andSparkman Present :Senators . cometoorder will The CHAIRMAN.Thecommittee ,Mr. fromMinnesota Senator toseethesenior We aredelighted ,here . Mondale Thenominee ,Mr.Lilly ,ishere . Mr.Mondale ,youmaygoright ahead ,sir . STATEMENT OF WALTER F. MONDALE , U.S.SENATOR FROM THE STATE OF MINNESOTA Senator MONDALE .Itisa great pleasure tobeheretointroduce a friend ofmine ,andoneoftheoutstanding citizens ofourState ,David Lilly , who hasbeennominated tofill theunexpired termon theFed eral Reserve BoardofRobert C.Holland . I wishtosaythatSenator Humphreycould notbehere .He isre turning from Minnesota .Butheasked that Iexpress his support for thisnominee . Mr.Lilly hashada distinguished career intheTwinCities andin my State ,and he isamuch respected memberofthecommunity . After graduating fromtheSt.PaulAcademy ,heattended Dart mouthandgraduated withadegree ineconomics .After hisgradua tion ,hewasassociated withthe First National BankofMinneapolis from1940to1941 ,prior toserving asAssistant UnderSecretary of theU.S.Treasury . He served intheU :S.Armyfrom1942 to1945 ,where he attained therankofmajorandwasawarded theBronze Starforhismilitary service . In1945 ,he joined Toro asthe vice president andgeneral manager . He became thepresident in1950andthechairman oftheboardin 1968 . At thepresent time ,he isa director oftheDayton -HudsonCorp. , General Mills ,Inc. ,theFirst BankSystem ,theFirst National Bank ofSt.Paul,andtheSt.PaulCompanies ,Inc. College ofCarleton oftheboardoftrustees thechairman He isalso School of totheGraduate Committee anda memberoftheVisiting a member at tobeing ,inaddition University Education ofHarvard . oftheAlumniofDartmouth large oftheCouncil (1 ) 1 2 Thatdoe sn't tell thewholestory . I consider DaveLilly oneofouroutstanding business statesmen in Minnesota. There areall kinds ofpeople .Somejust read their association jour nals ,andthat istheir position .DavidLilly isoneofabandofremark ableleaders inourStatewho readand learn andmakeup their own mindsandhaveinsisted that businessmen be morethanprofitmakers . Theymustbethat ,buttheyalso should becommunity leaders deep lyconcerned about thefuture oftheir communities ,their States ,and thiscountry : The President could nothavepicked a finer nominee thanDavid Lilly ,andI am delighted tobehere today tostrongly urge hiscon firmation . who appear .Mr.Lilly ,we swearinournominees TheCHAIRMAN beforethiscommittee. [DavidM.Lilly wassworn bythechairman .] Senator MONDALE . I might say,Mr.Chairman ,thatI speak forall Minnesotans .This isa remarkable person .AndIthink thePresident should bewarmlycommended . The CHAIRMAN. SenatorMondale was a member of thiscommittee foryears .We wishhestill werehere .Butwelost him. , Humphrey Senator ,Senator theother youthat totell Iwouldlike sup enthusiastically directly that hevery told hasalso thecommittee whoareheld arenotwoSenators .And there ports yournomination . fromMinnesota thanthetwoSenators regard inhigher I havea series ofquestions foryouona numberofthings I would like toaskabout ,Mr. Lilly .I will start offwiththefact thatyouhave hadextensive business experience and,ofcourse ,anybody whohasbeen successful property property inbusiness islikely toacquire andthat may represent aconflict ofinterest .And I wouldlike tomakesure that we clarify that . You stated inyourcorrespondence tothecommittee that youwill dispose ofyourholdings andbankstock prior toyourtaking office ;is thatcorrect? Mr. LILLY.That'scorrect . The CHAIRMAN .Two family trusts wereattained butneither you noryourchildren havea direct interest inthese trusts andyouwill abstain fromanydecision involving themainholding ,theFirst Bank System ,Inc. ,while youareamember oftheBoard ;isthat correct ? Mr. LILLY.Yes,sir . TheCHAIRMAN .Others will beplaced inaablind trust . Canyouassure thecommittee that this will betruly blind andthat youwill notdiscuss these matters withthetrustee ? Mr.Lilly .Itisgoing tobesoblind ,Senator ,that thetrustee and my accountant aregoing toprepare the income taxandsign itwith my powerofattorney authority soI won'tevenseemy incometax statement ,andI will havenoway ofknowing whattheyhavebought and sold. TheCHAIRMAN .Yourleave ofabsence status withthecompany is solely tosecure a vested interest inthepension and insurance plans ; isthatright ? ::! 3 Mr.LILLY .That's correct .Moreaccurately ,itistosecure my interest intheinsurance planandintheprofit sharing planwhich isusedfor pension purposes . The CHAIRMAN . Thatbrings me toanother question thatconcerns me very much . uponyou. development unfortunate mean tovisit this I don't ral norsoftheFede t Gover nsinthe law istha visio One ofthepro tpeo ple entcanappoin rs,andthePresid rveBoardcanserve14yea Rese n term andthe outthat veforless than7 yearsandtheycanfill who ser r 14years.So theycanservefora maximum of anothe theycan serve 21 years. ingoutthetermofGov d ser ve-you areserv youcoul In yourcase orso. icewouldbeforabout12years ernor Holland.So yourserv Mr.Lilly .No ;there are21monthsleft inthis term. TheCHAIRMAN.Allright . Now,I raise that point because I am veryconcerned withwhathas happened intheFederal Reserve Boardinrecent years .We nowhave a situation whereitisa revolving door .Itisalmost a joke .Thereis nobody whohasserved onthat Boardexcept forArthur Burns for muchmorethan2years . One oftheideas ofhaving the14-yeartermissothatpeople can learntheir job ,develop experience , develop theconfidence andthe understanding ofourvery complicated monetary system andeconomic system andthenactonthebasis ofthat substantial experience . We now havea situation whereDr.Burnshasserved for6 years . He cameininJanuary of1970. Afterthat ,however ,look atthis : Gardner wasappointed February 13, 1976 —So hehasserved 3 months — Coldwell was appointed October 29, 1974 ; Jackson , ap ; pointed July 14,19 75;Henry Wallich appointed March 8,1974;and Partee hasserved sinceJanuary of 1976—5months. Thatmeanswehavea Boardof– Ican't sayrookies exactly ,but thatisalmostwhat itamounts to. Thatdoes several things .No.1,itgives the Chairman oftheBoard anextraordinary kindofinfluence because heiswitha group ofpeople who haverelatively little experience ontheBoardand, No. 2 ,itmeans that youjust don't havethekindofexperienced management ofour monetary policy which Ithink this country should expect andinview ofthe14-year term ,that 14-year termthat isspecified inthelawthat we contemplated inpassing this legislation . Therehavebeenproposals that we shorten theterm ,we makeita 7-year term .Somepeople even saya 4-yearterm .I haveresisted that on thegrounds thatwe thinktheBoardoughttobeindependent and this wouldinterfere withtheindependence . Itseemstome that something should bedoneabout this . Youhavegota21-month term ahead ofyou ,asyoupointed out ,and then whether ornotyouserve will depend inpart uponwhether you arereappointed andalso inpartwhether youareinterested inserving anylonger time . Do youhaveanyreaction inviewofthatrecord here? Can youhelp uswith this ? Whatwould beyourattitude ! 4 Wouldyoubeinterested perhaps inserving fortherest ofyour active career ontheFederal Reserve Board? Mr.LILLY . Well,I haveno ideawhatI wanttodo 21monthsfrom now ,Senator .I know thatI really wanttoserve this termout.And there areseveral things that I gotstarted onwhenIwastheChairman oftheboard of directors oftheMinneapolis Federal Reserve Bank andIwould like tosee those things through toconclusion . Butwhatitisgoing tobelike in1978 asfarasmy ownpersonal destiny isconcerned ,I just wouldn't wanttomakeanycommitment . I certainly haveahighregard fortheFed.And I share verymuch withyoutheconcern about theturnover . There isnot a GovernorleftthatI knew when I lefttheFederal Reserve Bank's boardofdirectors inMinneapolis in1973except for ArthurBurns. TheCHAIRMAN .Whatisthereason forthis ?Isitbecause thesalary adequate isn't ? I know one Governorhad to leavebecausehe wasn'tableto take careofhisobligations . Mr.LILLY .Bob Holland's statement speaks foritself .Withthree children incollege ,hecan't afford tobeaGovernor ofthe Fed. I think there isthesalary consideration thatshould be looked at, and there isalso theageandcareer stage oftheappointee . I think thatseveral thathaveleft wereyounger men.I of theappointees suspect thatperhaps if therecruiting werefroman older bracket , after children wereoutofcollege ,youmight havemoresuccess in finding people whocould afford tostay forthe14years . The CHAIRMAN. Do you thinkifwe takemen with a little more maturity andappoint them theywouldbemorelikely tostay ? Mr.Lilly .Thatwouldbemy opini on,yes ,si r. The CHAIRMAN . Itisvery difficult toprovide forchanges insal aries .A lotofitisgeared tothecongressional salary ,andthatisa difficult thing tochangeforobvious reasons . mit rthou ghtson thisandwhenyousub Butifyouhaveany furthe rate eyouelabo ldbehappy tohav ,wewou rremarks for the record you tyoucan. on ittoany exten Mr.LILLY .Allright ,sir . e betw een erenc The CHAIRMAN.Now ,what do you seeas thediff swith the t succes n,whic h you didwith grea ratio inga corpo manag y e Board,andthereb alReserv ToroCorp.,andmanagingthe Feder m? anbankingsyste theAmeric nsisto gatio cipal obli e,oneofyourprin cas usly , inthefirst Obvio h stock astwit ,at le fit . That is kindof thebottom line make a pro cipal motiva t theprin ly,thatisn' . Obvious rsand many others holde rve ral Rese ionin the Fede antmotivat n, or even a veryimport tio Board . ralReser veBoar d tryin gtodo? So what,inyourview ,istheFede ons igati How doyousee your obl ? ,the e Board has,as I seeit . Well, theFederalReserv Mr. LILLY y asp ectsidewhich itdealswithbothasa Boardand monetarypolic as partof theOpen Market Committee. And then ithas thebank onofbanks.And ulati lingwithreg atory side ,whereitisdea regul em erveSyst Res ility theFederal onsib ofrunning eisal sotheresp ther 5 it self .The 12 bank s ofthe Syst em areveryimport antpartsof our money tran sfersyste m. And inmanaging theSystem ,there isa bottom line concept ,I am happy tosay ,inboth thebanks ,andattheBoard .Theyarerunwith thatkindof a discipline . TheCHAIRMAN .I am still notclear inmy mindwhat ,inyourview , iswhat theFederalReserveBoard shoulddo.What shouldbe their objective inrelationship totheeconomy ? Mr.LILLY .Well ,itshould betrying tokeep the economy expanding ona basis that issupportable .Itshould notbeattempting toexpand theeconomy insucha waythat we getinto further inflationary problems . On theother hand, itshouldn't be sorestrictive that theeconomy does notexpand asrapidly asitsafely can. TheCHAIRMAN . How do youachieve thatbalance ?What do you lookfor? Right now,forinstance ,takethepresent situation wherewe have heavyunemployment ,a declining unemployment ,andwe havean in flationary situation thathasbeen very bad.Whatkindofmonetary policy should we follow ? Mr.Lilly .I think themonetary policy which we arefollowing is right oncourse . Certainly the lastseveral monthswouldindicate thattheFed is oncourse .And Ithink that theprojected growth inaggregates that they aretalking about wouldseemtobetheappropriate answer atthis time. However ,I think that there hastobea constant feedback toseeif yourassumptions areprovedor disproved . And presently I think that they arenotdoing badly . The CHAIRMAN . I agree .Ithasbeena goodyearfortheFederal Reserve . We havehadgrowthintheeconomy . We havehada reduc tion inunemployment .We have hadinterest rates falling formost of ye the ar. We havehadprices moderated .Andthatisagoodresult . Ijust wonder ifthat isthe result oftheFederal Reserve policy . everybody hassaidthatifyou aregoingtoget Afterall ,almost inthe togetgrowth andifyouaregoing rates interest tobeleveled . moneysupply ,youhavetohaveagreater economy And the money supplyactua llydid notgrow verymuch. I wonder ifthis recovery hasmuchtodowithaction bytheFederal Reserve . Mr.LILLY .Well ,Senator ,Iam notanexpert onthe matter ,Ihasten tosaythat . I gather that thevelocity factor isoflarger importance inthe beginning oftherecovery cycle ,andthat isthe maincontributor tothe factthatthere hasnotbeenan interest ratebulgehere , eventhough there expansion activity without large hasbeensubstantial inbusiness increases intheaggregates . TheCHAIRMAN.Ihavesomeother ques tions . But,Senato ,youmay que rSparkman thewitne stion ss. SenatorSPARKMAN.Thankyou,sir . Whatisthesal ,asyouund ary ersta ndit? 6 Mr. LILLY.$42, 000. Senator SPARKMAN. The reason I askthatisbecause ourshasbeen $42,500 .And TheCHAIRMAN .Itwasincreased last year . SenatorSPARKMAN.Yes. TheCHAIRMAN.Fivepercent . Senat orSPARKMAN.Ihave beenlooki ngoveryourbiogra phica ldata. Youhavecert ainly had anact iveli feintheworldoffinan ce , it seem s to me . chairman oftheRepublican activities , too .Including And other . Somethe withyouractivities Committee . I am impressed Finance . youhavebeenwith companies hearing ,andIwas this a fewdaysagoabout withMr.Lilly Italked with .And I am satisfied andhisexperience withhisviews impressed mem hewill bea veryable here .Ithink ,withthedata thetestimony . able body berofavery And sometimes I think thatperhaps we donotkeepinmindsuffi ciently partthatthisBoardplaysinoureconomy theimportant . Itcanhavea tremendous influence up ordown. continue And Ihopeitwill tobeup. TheCHAIRMAN .Letme askjust a fewmorequestions . How doyouthinkyourservice on theboardoftheMinneapolis Bankwill beofusetoyouon theBoardoftheFederal Reserve ! Mr.Lilly .Inavariety ofways .IntheMinneapolis Board ,wehave workedveryhardtoinstall somenew concepts intheFed.We worked onobjectives setting ,andprograms toaccomplish those objectives ,and onmatching thebudgets up withthose programs andmeasuring per formanceat theend of theyear,as to what theydid withtheir budgets ,andwhether theydidachieve their objectives ornot. We tried torelate salary actions tothat performance . We worked withtheFederalReserveBoard itself withthe same idea— thatifin theSystem we couldhavesimilar objectives and budgets matched against theprograms toaccomplish those objectives ,thenwe would havea muchbetter controlling device andmuchbetter discipline and a sense ofbottom line performance .SoIhavebeen very muchinvolved inthemanagement oftheReserve banks . I am also verymuchconcerned withtherepresentation onthedis boardofdirectors trict .Ithink thatwe hada verygoodrepresentation inourclass B andclass C directors .And Iwouldlike tosee that kind ofrepresentation throughout thecountry . Of course ,we worked every monthonouranalysis oftheeconomic condition ofthecountry , andwe workedveryhardon makingour position knowntotheBoardofGovernors as towhatwe thought ought tobedonewiththediscount rate ,andwhatwe thought ought to bedone with reserves and so on. The CHAIRMAN. How didtheBoardreact tothatkindof advice ? Mr.Lilly .Itisdifficult totell ,exactly ,because youwere talking to a groupof 7 men.And whereyouropinion cameout,we couldn't al waysfollow . Sometimes we wereinagreement astothecourse to fol low and sometimes we weren't . TheCHAIRMAN .Wasthere anykind ofresponse toyour suggestions , whenthey wanted tofollow adifference course ? 7 Mr.LILLY .Withrespect toouranalysis ofeconomic conditions and actions oftheOpenMarketCommittee , atthattime ,asyouwill remember ,we wereunder the90-dayrequirement , andwe could not find outwhathadhappened until 90daysafter theevent . Butatthat time ourpresident would brief our boardofdirectors astowhattheBoardofGovernors andtheOpenMarket Committee haddoneandwhy theyhaddoneit ,andhow theyhadvaried with ouropinions . TheCHAIRMAN .Wouldyousuggest that wecould improve that by shortening that 90-dayperiod ? Mr.LILLY .Yes,sir ,Ido. TheCHAIRMAN.How brief shoulditbe? Mr.LILLY .Ideally ,itshould besimultaneous withtheaction . But TheCHAIRMAN .Why notmakeitsimultaneous ? the problems ,getting kindsofoperating .Thereareall Mr.Lilly this isactually tocertify that involved ofall ofthepeople signature andsoon. isactually whattheysaid decided ,andthis whatthey ButasIunderstand it ,thetimeperiod hasbeenreduced to45days , andtheyareworking veryhardtogetbelow that 45days . And I thinkeverybody isinthespirit thatthattimeperiod oughttobe shortened asmuchaspossible ,andtheyareworking towards that ,and they havebeen trying togetridofthese difficulties . The CHAIRMAN. Mr. Francisfrom the St.LouisFederalReserve Board ,which hashada lotofimagination ,agrees with yournotion thatitought tobesimultaneous ,andhefelt itwaspractical tomake itsimultaneous . Why should there besuch difficulty ? Yousayyouhave togetthesignatures ofthe various people .Why does that take solong ?We candothat hereintheSenate ina couple hours or less . Evenifpeople were notatthemeeting ,they should knowwhatis going on,andthey should beinaposition toknowwhether they want tosign itornot. Mr.LILLY .Well ,Senator ,youandIareadvocating thesamething . But I am notprivyatthis pointtoalloftheproblems ,tobe ableto answer youspecifically .I really wouldlike togetinto this andseeif thetime can't be shortened . policy can agrees thatmonetary . Now everybody TheCHAIRMAN isserious dis .However ,there effect ontheeconomy havea profound policy affects the over just howmonetary amongeconomists agreement economy . Somesayitisthrough interest rates .Others sayitisthrough the supply ofmoney . Still others sayitisthrough other policies . Whatareyourviews onthat ?Canyoutell usexactly howyouthink monetary policy influences theeconomy ? Mr. LILLY. Well, I am one thatbelieves thatitisthe amount of moneyandcredit that isavailable ,that isthelarge influencer ofhow theeconomyisgoingtogo.Ifthere istoomuch available ,we tendto outrun ourcapacity because there aretoomanydollars outthere chas ing too fewgoods . Then monetary policy is ontheside ofextravagance . On theother hand,ifthere isnotsufficient credit available forthe 8 economy toexpand asconsumer confidence increases ,then monetary policy istoorestrictive . Therate ,tome,isaa useful indicator ofwhenyouhavetoomuchor too little .Iftherate — well ,Iwould sayIcomedownmoreontheside oftherate ofgrowth oftheaggregates ,thanI doontherate side . The CHAIRMAN .You see ,we havekindofaninteresting arithmetic problem here . Itlooks verysimple . Itlooks asifthepresent policy istoorestrictive .Itdepends onwhathappens tothevelocity . The Chairman oftheFederal Reserve Boardtestified before this committee acouple ofweeks ago .He testified that heexpects agrowth intheeconomy of about 7 percent andinflation ofabout6 percent . You addthat up,we will takeanadditional 13percent ofmoneyand credit that withazero velocity tofinance . However ,there isonly going tobeabout a6-percent increase inthe supply ofmoney ;according tothe recommendations hemade ,itwould bebetween 41/2 and7. Say6 percent isthemidpoint . Andthat leaves therequirement ofa tremendous increase invelocity .Inthepast ,arapid increase invelocity characteristic hasbeen ofarecovery period . In thelast yearwe hadanenormous increase invelocity .Itbroke records like all ,nothing itin25years . So itseems unrealistic toexpect we wouldhaveanything like that . Ifwe don't getthat ,itwouldlook asifweweregoing tohavea tight moneypolicy resulting ineither higher interest rates oranaborted recovery. How doyoufeel about that? Mr.LILLY .I think youcanbetooexpansionary atthis time .I think theeconomy ismoving along very well .I think ifyouallow theag gregates togrowtoofast ,youmightgetaninflationary rate inexcess ofthe61/2 percent that Chairman Burns talked about . And I wouldsuspect that there isprobably going to havetobea higher rate ,inorder that we donothavethat kindofexpansion . TheCHAIRMAN .A higher rate ofinterest ? Mr.Lilly .Yes,sir . TheCHAIRMAN .Sothat youdon't expand toorapidly ? Mr.LILLY .Yes,sir . The CHAIRMAN . Butinterest rates arealready highandlong -term interest rates areextremely high . Mortgage rates arerunning around 9percent . And bondrate maturities of10years ormorewill bearound 8 per cent .Theyarehigh . Mr.LILLY .Iam speaking oftheshort term . The CHAIRMAN.The shorter rates areturning up. Your advice isthesameasDr.Burns. He thought that interest rates wouldbehigher .Thatwastheview ofmostoftheexperts who testified before us. Idon't see howwecanjustify that inaneconomy inwhich wehave 7 million people outofwork ,an economy inwhichwe areoperating farbelowcapacity . Why shouldn't we be abletocontinue togrowrapidly andhow canwe, ifwe don't getan absolutely unprecedented increase inthe velocity ofmoney! 9 Why shouldn't we beable tomaintain interest rates atabout their presentlevel ? thinkyou .I don't -offiswithinflation .I thinkthetrade Mr.LILLY without ofthemoneysupply highexpansion canhavea continually . havinginflation TheCHAIRM AN.But theinf lation we havejus thad,hashad ver y litt lerelatio nship totoomuch money chasing toofew good s. prices increase infood . based ontheterrific Ithasbeen a strai There has beennositu wherewe havehad a ation nedeconomy, strained resources. reg with ardtoener gy. Mr.Lilly .Except TheCHAIRMAN .Canyounameanyarea where capacity isshort or skilled laborisshort? Mr. LILLY.Not atthemoment,no. TheCHAIRMAN . Yousay we have — andIwould like toaskyou about it .We havea Humphrey -Hawkins bill coming up.We have hearings before this committee inthe nextfewdays .That bill was introduced byyourSenator .And thepurpose ofthat bill wouldbeto putpeople toworkwitha colossal amountofFederal spending . The program ishighly controversial . In my viewitwouldbebetter ifwe could do itby traditional meth ods ,whereyoudon't havebigFederal spending ,butyoumakecredit moreavailable totheeconomy , sotheeconomy canmoveahead inthe private sector ,rather thanmoveinwitha colossal Federal spending program . How doyoufeel about Humphrey -Hawkins ? Mr.Lilly .I thinkitsobjectives arefine .I thinkthatwe should be trying togettoa lower unemployment rate thanwe havenow. ButI am notsure we canget tothekindofunemployment rate that thebill hasasitsobjective .I thinkthatithastobe doneovera much longer period oftime .To attempt todoitinthat short period oftimeisan inflationary exercise . TheCHAIRMAN .Iagree with youon theobjective .I think itisso important inoursociety toprovide jobs for those whowanttowork . Butthere isonepartofHumphrey -Hawkins that hasme verycon cerned andthat isthesection 402andsoforth ,thelast part ofthebill . Itdeals with prevailing wageandprovides that thewages paid are going tohave tobehigher than the minimumwageortheprevailing wage forsimilar work. people ifyouaregoing tohire knowhowTorowouldbeable Idon't wagesunderthatkindofa paying muchhigher without toexpand . prices buthigher and,how thatcanmeananything system Mr.LILLY.Iagreewith you,Senator. TheCHAIRMAN .So,itseems tome that theanswer istodosomething about that prevailing wage.Ifyoucould havethat kindofsituation we hadinthethirties ,where youpaymuchless forthepublic employ ment ,thenitseems tome,itisfeasible .MaybenotaslowasDr.Burns suggests butsomecompromise .Thatwayyouprovide awork oppor tunity forthe unemployed , and atthesametimean incentive for leaving public employment togotoworkintheprivate sector with outhaving topayapremiumwage ,whichwould translate itself into higher prices .What do youseeasthemostserious problem facing thecountry ,unemployment orinflation ? 10 Mr.LILLY .I guess I would like toanswer that question inanother way.I think the mostimportant problem facing this country today is thewhole energy question andthefact that we donothaveanenergy policy inthis country .Itisanalmost impossible situation forsome bodytrying toruna manufacturing business nottoknowwhathis energyfutureis. energy ? with theFeddeal .How does TheCHAIRMAN . Mr. LILLY.Itdoesn't The CHAIRMAN .Then,let's confine ourselves totheareawhereit does. Ididn't frame that question very well .Whichisthe moreimportant policy then ,the moreimportant problem ,unemployment orinflation ? Mr.LILLY.Inflati oninmy opi nion ,si r. TheCHAIRMAN .Butinflation hasmoderated ,rather sharply and unemployment isstill very high . Mr.Lilly .ButI think unemployment iscoming down.And itwill continue to come down . As the confidence levelincreases , therewill bemorecapital investment andmoreemployment . As longasyou havethatinflationary expectation ,yourlong -termrates are goingto stay high andyouarenot going tohavethekindofcapital invest mentsthatareneededtofurnish new jobs . So ifyoutakecareof inflation , I believe declining unemployment willfollow . TheCHAIRMAN .Do youthink there isa tradeoff between inflation andunemployment ? Mr.Lilly .Thereisovertheshort term .Butoverthelongterm , don't thinkso. The CHAIRMAN .Don't youthink thePhillips curve isstill a viable concept ? Mr.Lilly .I verydefinitely do.And thatiswhy I am concerned about theHumphrey -Hawkins bill forthatreason ,thatthelevel of unemployment we aretalking about there brings youright into the Phillips curveareaandI think youaregoing tohavea substantial inflationary rateuntil you getthecapital investment necessary to furnish those jobs .Butthis isa long -termthing . The CHAIRMAN. How canyou havean attitude ofconfidence inthe business community iftheyfeel that theFedisgoing toslamon the brakes because oftheir fear ofinflation ,particularly inhousing ,home construction ?Thiscommittee isresponsible for housing andhousing hada verybleak yearlast year ,a little better this year . Many other industries areverysensitive to thelevel of interest rates and the monetary policy .How canyouexpect theeconomy togrow? Mr. Lilly. I thinkthelevelof businessmen's confidence isrelated tohow effective theythink theFedisgoing tobeincontrolling infla tion . Iftheyfeel that theFedisnotgoing tocontrol inflation ordo everything itcantocontrol inflation they arenotgoing tohavethe confidence they would otherwise .Theyarenotgoing tobewilling to makelong -termcommitments .As farasthehousing side ofitiscon cerned . I don't suppose there isanybody in this roomthatismore interested innewhousing starts thanI havebeenforthelast 30 years ,particularly those detached housing units withlarge lawns . (Laughter .] I just can't see anywaythat monetary policy candoanything to helphousing starts intheshortrun.And the bestanswer istaking 11 theinflationary expectation out of thelong -termrate ,which would havealarge impact onthecost ofhousing . with every overwhelming that record isjust .Butthe TheCHAIRMAN , ofmoney upthesupply timetheFedtightens crunch ,every credit .About againandagain .Ithashappened into a nosedive goes housing and supply ofthemoney there will bea tightening 3 or4 years every . adepression goes into interest rates goupandhousing Now,yousay that that tight money policy isthe Fed's wayoffight inginflation andthat that isbetter inthelongrun.Butitcouldn't be much worseforthehousing industry . Mr.Lilly .Intheshort ran ge,that iscorre ct .. : The CHAIRMAN.Canyoudiscuss theeffectiv ofthethree eness instru men tsof mone tarypolicy andthecirc umsta ncesund erwhich you wouldpref erone again sttheothertwo? requirements and openmarket . You mean thereserve Mr.Lilly ? rate andthediscount operations The CHAIRMAN .Yes,sir. Mr.LILLY . Well , itismorefashionable today , I guess tousethe openmarkettransaction methodthantheother two because ofthe relative ease ofusing it .As fortheuseofbankreserve requirements ,I don't remember that reserve requirements werechanged morethan onceortwice inthefive years I wasintimately connected withthe Federal Reserve .The useofthediscount rate wasalways aninteresting exercise because we werenever sure whether we should signal themar ketorfollow themarket .Itwas verydifficult tousethediscount rate asa device because ofthat .You hadtomakeitclear that youwere signalling themarket orfollowing themarket . So,Iguess fromthe point ofviewofmy observation ofthepractitioners ,theopenmarket operations seemto be theonesthatareeasiest tohandleand work with . TheCHAIRMAN .Suppose theFedisfaced withthechoice ofincreas ingbankreserves through openmarketoperations orthrough an equivalent reduction inreserve requirements .Doyousee anydifference onthe impact oftheU.S.Treasury between those twomethods ? Mr.Lilly .Well ,ifyouincrease bankreserves thenmoreGovern mentbondswill bebought bytheFederal Reserve andby banks . TheCHAIRMAN .There isadifference .Openmarket operations ,what istheeffect ofthat ontheTreasury ? IftheFed eralReserv e Boar d engages inexpandi ngthemoney sup plybybuyi ngsecurit ,what ef doestha ies fect thave? Mr.LILLY .Well ,I guess I wouldn't wanttoseethebankreserves expanded toorapidly because oftheproblem ofkeeping member banks The CHAIRMAN.Now ,waitaminute . I am notdiscussing that .I see— let's assume that youaregoing to, forwhatever reason youaregoing toexpand themoneysupply and itisamatter ofwhich device youuse .No.1,youdoitbybuying securities .Ifyoudothat obviously theincome oftheFederal Reserve Systemincreases .Doesn't it? Mr. LILLY,Yes. TheCHAIRMAN .What happens tothat ?Wheredoes itgo? Itgoes totheTreasury . 12 Now,supposing youdoitbythereserve requirement route orreduc ingthereserve requirements .Then,whathappens toit ,who gets the profit there ? reserve requirements ,youthenhave .Well ,ifyoureduce Mr.Lilly , whichcanbeusedtoincrease inthebanking system morereserves credit . The CHAIRMAN .Right . Ithasthesameeffect asbuying securities . Butthebigdifference asfarasUncleSam isconcerned orthetax payerisconcerned isthattheopenmarket operations result inthe taxpayer getting a little break .Thereserve requirements result inthe banker getting thebreak . Now,because theFederal Reserve isoriented toward thebanksand workswiththebanks closely andmeets withthebanks andtalks with thebanksandpeople gobackandforth between theFederal Reserve andthebanking system there issomesuspicion thattheFed hasa temptation atleast tothinkin termsofreducing reserve require ments .Theyhaven't doneit .Therecord doesn't establish that .Butit issomething that wearealways alittle suspicious about . Mr.LILLY . I guess I havenotheard this particular argument .And I guess ,asI say , inallthetimeI was involved intheFed,itwas so seldom thatwe tookany action on bankreserves , I neverreally thoughtaboutthematter. TheCHAIRMAN .Ihopeitremains that way. Mr.Lilly ,I agreewithSenator Sparkman ,thatyouhavea fine background .I havealways felt thatwe ought tohavepeople onthe Federal Reserve Boardwho havehad a really profound training in monetary economics . Thatisa minority position . Itisnotthelaw. ButI think itisa verycomplicated economy we haveandwe are better served with that kind going ofexpertise .Ifweare tohavepeo plefromoutside ofthatarea ,I think youcertainly qualify . You havehadgoodexperience intheMinneapolis bank . Greatsuccess in business ,andI think youbring a goodviewtoit.I hopeyoucanstay there long enough sothat youcandevelop thekind ofunderstanding youneedandthenuseit .And I hopeyouwill beindependent ,one who doesn't hesitate todisagree withtheChairman inspite ofhis great record andfine personality . He tends todominate that board . Letme askyoua final question .Will youbeable tocomeupand testify whenyou areasked todosobythis committee orother appro priate committees ? Mr. LILLY.Yes,sir ,I will ,Senator . TheCHAIRMAN .I just hada note putbefore me bymy administra tive assistant ,saying youobviously areoneofthe best qualified men we haveeverhadbecause youarea rose grower .You belong tothe American RoseSociety .Isthat true ? Mr.Lilly .Yes,sir .And I guess that gives yousomefeeling ofthe depth ofyourquestionnaire . Thatfact wasdiscovered amongevery thing else there istoknowabout me bythedepth ofthequestionnaire . Iremarked tosomebody thatI felt asifI hadrunthrough theHalls oftheSenate naked , filling outthat questionnaire . TheCHAIRMAN .Imustsaythat people who aredevoted toroses are remarkable just people . Itisgoodtohave youasanominee .
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