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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
WILLIAM PROXMIRE, Wisconsin, Chairman
HARRISON A. WILLIAMS, Ja., New Jersey
JAKE GARN, Utah
ALAN CRANSTON, California
JOHN TOWER, Texas
JOHN HEINZ, Pennsylvania
ADLAI E. STEVENSON, Illinois
ROBERT MORGAN, North Carolina
WILLIAM L. ARMSTRONG, Colorado
DONALD W. RIEGLE, Ja., Michigan
NANCY LANDON KASSEBAUM, Kansas
PAULS. SARBANES, Maryland
RICHARD G. LUGAR, Indiana
DONALD W. STEWART, Alabama
PAULE. TSONGAS, M8888ch11Setts
KENNETH A. McLEAN, Staff Director
M.
WALL, Minority Staff Director
RoBERTS, Chief Economist
CoLI.INS, Special Counsel to the Minority
DANNY
STEvEN
JOHN ~-
M.
(II)
CONTENTS
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1
~nomic Advisers ..................................................................................................... .
16
Biographical material on the nominee ...................................................................... .
43
Answers to subsequent questions of:
Chairman Proxmire ............................................................................................... .
51
Senator Stevenson .................................................................................................. ..
61
Senator Stewart ..................................................................................................... ..
64
Statement of Senator John C. Culver ........................................................................ ..
71
Reprints of articles from:
Business Week ............... ...........................................................................................
74
Washington P08t ......................................................................................... 76, 77, 90, 92
New York Times ................................................................................................ 79, 92, 94
Washington Star.......................................................................................................
80
Wall Street Journal ................................................................................................ 83, 96
Des Moines Sunday Register..................................................................................
86
Communications from:
National Association of Home Builders .............................................................. . 101
National Lumber & Building Material Dealers Association .......................... . 103
National Farmers Organization ........................................................................... . 104
National Farmers Union ...................................................................................... .. 105
Iowa Cattlemen's Association ............................................................................... . 106
Small Business Legislative Council ..................................................................... . 107
National Federation of Independent Business ................................................. .. 110
National Cattlemen's Association ....................................................................... . 114
Reprint of Senate Resolution 434 ............................................................................... .. 123
(Ill)
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NOMINATION OF LYLE E. GRAMLEY
TUESDAY, APRIL 15, 1980
U.S. SENATE,
CoMMrrrEE ON BANKING, HOUSING, AND URBAN AFFAIRS,
Washington, D.C.
The committee met at 9:35 a.m., in room 5302, Dirksen Senate
Office Building, Senator William Proxmire (chairman of the committee) presiding.
Present: Senators Proxmire, Morgan, Stewart, and Garn.
The CHAIRMAN. The committee will come to order.
Mr. Gramley, would you rise and raise your right hand? Do you
swear the testimony you are about to give will be the truth, the
whole truth, and nothing but the truth?
Mr. GRAMLEY. I do.
The CHAIRMAN. Thank you, sir. Be seated.
Mr. Gramley, do you have a statement you would like to make?
STATEMENT OF LYLE E. GRAMLEY
Mr. GRAMLEY. I would like to make just a very few brief opening
remarks if I may, Senator Proxmire.
I have become aware that Senator Culver is opposing my nomination for this post and that his view is shared by the National
Association of Home Builders. There's nothing personal in that
opposition but Senator Culver has indicated that he believes this
current vacancy on the board should be filled with a person with
personal knowledge of the financial requirements of the small business and agricultural sectors of our economy, and the National
Association of Home Builders would be interested in having somebody concerned and knowledgeable about the financial problems of
the builders.
So I would like to say just a few words about what my background is in those areas.
First, my family has a background in the farming sector. My
father was a farmer. He lost his farm in the collapse of farm prices
after World War I and but for that fact I would have been born
and raised on a farm. I have relatives who are actively farming in
my native State of Illinois. My wife, whose native State is Iowa,
also has relatives who are active farmers today. I worked on a farm
both during my high school years and also afterward before I
joined the Armed Forces in 1944. I can milk a cow, both with a
machine and by hand. I have cared for, harnessed and driven
teams of horses. I have shocked oats, thrashed oats, made hay. I
think I know what the farming business is all about.
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I have not worked for a small business nor have I been an
enterpriser myself, but there were three occasions when I was a
Federal Reserve staff member when surveys were done of the
credit problems of small businesses-in 1955, 1957, and again in
1959. The 1959 survey is, I believe, the definitive, quantitative
survey of credit sources of small businesses even to this day. It's
very badly outdated, but to my knowledge, nothing better has ever
been done and I was one of five staff members at the Federal
'Reserve who designed that survey.
I would also mention that the Federal Reserve staff did a major
study during the early 1970's of housing finance and cyclical fluctuations in housing. I directed that study.
But beyond that, Mr. Chairman, it seems to me that dealing
effectively and intelligently with credit problems in these sectors
and doing so within the context of an overall sound and sensible
monetary policy requires more than just a personal familiarity
with the credit problems and with the credit requirements of small
businesses, farmers and builders. Credit problems in these sectors
cannot be dealt with in isolation. They have to be treated in the
context of the overall economy.
Doing so effectively, in my judgment, requires knowledge of the
overall functioning of credit markets and how individual credit
markets relate to one another. To develop an understanding of how
monetary policy affects commercial banks, financial markets more
generally, and ultimately real economic activity, seems to me essential, and that is the area in which I've worked the bulk of my
professional career.
That completes my opening comments.
The CHAIRMAN. Well, Mr. Gramley, you have precisely the kind
of background that I have always called for in Governors of the
Federal Reserve Board. You had a brilliant record in college at a
very good college, Beloit College in Wisconsin.
Mr. GRAMLEY. It certainly is.
The CHAIRMAN. You have a Ph. D. from Indiana University.
What was your field?
Mr. GRAMLEY. My field was business cycles, investment opportunities and business cycles, together with monetary economics.
The CHAIRMAN. You have a solid background in the Federal
Reserve, the Federal Reserve Bank of Kansas City for 7 years as an
economist. You also taught economics. You were a staff economist
on the Board of the Federal Reserve Board. You have been a
member of the Council of Economic Advisers. You're one of the top
economists in the country, recognized as such by everybody. As I
recall when you were appointed to the Council of Economic Advisers it was considered to be a very good appointment and I think it
was and it was heavily supported.
Mr. GRAMLEY. Thank you, Senator.
The CHAIRMAN. So often we have had people who have been
appointed to the Federal Reserve Board and very good, able, and
intelligent people but no background in economics, particularly in
monetary economics, and I have felt it's far too complex and difficult an area to get on-the-job training. We have to have people who
can move· right in and do the job right away, and I'm sure you
could.
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Frankly, I am concerned about the point that Senator Culver
raised. It's a good point. I think you're qualified. I think your
responses this morning have been extremely relevant and reassuring. But what concerns me is that we are in a very, very serious
situation for our home builders, one that I think has not really
been appreciated by most people here in Washington, including
some of the top economists. Those people are in a depression where
some are failing, as you know. More will be failing. And I mean
good, efficient firms where they're way over their head in the
interest they have to pay on the inventory they can't sell, where
they have laid off 90 percent of their employees and they're suffering very severely.
Somehow, it seems to me we have to find a way so that this
credit restraint program, which I enthusiastically support and say
we have to have, isn't so grossly unfair as it is to home builders
and it's beginning to have the same serious effect on farmers.
As you know, farm income is expected to drop this year. Farmers
are debtors. They have to borrow to put their crop in and to buy
their equipment. These interest rates are very cruel and tough for
them if they can get the money at all, and because the credit
restraint policy is so uneven, I think we should be looking for ways
in which we can exercise the overall restraint which I think is
absolutely essential to find some way of alleviating the very unjust
and unfair effect it has on farmers, home builders, and some other
small businessmen particularly.
So I hope that as Governor of the Federal Reserve Board you
would be very sensitive to that and helpful to us and your fellow
Governors in seeking ways that we can ease that unfair pressure.
One other point is that it's not only unfair to them, but I think
it's bad policy for the economy. In the home building operation
efficient firms are being knocked out, firms that should be in it,
and when we begin to recover from the situation you're not going
to have their efficiency and their capability and their experience
there to help the home building industry be as efficient as it should
be.
Mr. GRAMLEY. Mr. Chairman, I agree with those views entirely. I
would like to say in this respect that I think one of the important
purposes of the President's new anti-inflation initiatives announced
on the 14th of March was to accomplish just that-to reduce the
degree to which we are relying on high interest rates as a means of
slowing the economy and checking inflation.
There are two respects in which the President's program does
this. First, it puts in more fiscal restraint and thereby takes some
of the heat off monetary policy. Second, in invoking the Credit
Control Act of 1969 what I think we are going to accomplish is
more restraint on the credit side by lenders saying no rather than
by simply raising interest rates. I do think it's important that we
bring interest rates down as soon as we can, but I don't think it
would be right for the Federal Reserve to begin pushing interest
rates down now in anticipation of a moderation of inflation. I think
that would be most unproductive and it would lead to a revival of
inflationary expectations and make the problems the builders are
facing even worse.
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The CHAIRMAN. I agree wholeheartedly with that and I think
there's a strong sentiment in favor of that, certainly in the business community and perhaps in Congress, but I think we have to
find ways of doing that but also providing some way in which these
home builders who are so hard-pressed can do it.
Mr. GRAMLEY. I agree with that, too. As you know, we in the
administration are looking for what we can do and ways to do it
that would help the builders. Although no final decision has been
made, certainly we are looking very sympathetically at those problems.
The CHAIRMAN. Thank you. Senator Garn.
Senator GARN. Thank you, Mr. Chairman.
One thing that concerns me in general, certainly not with Mr.
Gramley particularly or any of the individuals I am going to mention, but as I have watched the last several Federal Reserve Board
appointments, they all seem to come generally from the same
geographical area of the country or at least from the Fed. Look at
Chairman Volcker from the New York Fed; Mr. Schultze, the only
exception, a Florida businessman; Governor Partee, an economist
with the Federal Reserve Board; Nancy Teeters, Congressional
Budget Office; Rice from the Washington, D.C. Bank; Governor
Wallich, the professor formerly with the New York Fed; Governor
Coldwell came from the Dallas Fed; and it disturbs me in general
that we are picking people from within the Fed system's geographical area that tend to be getting away from the geographical requirement of not more than one from one Fed district by picking
where they were born regardless of where they have lived or
worked for a long number of years. I just make that as an editorial
comment with no reflection on you whatsoever, Mr. Gramley, or
any of the others; but it disturbs me that we seem to be picking
from one area and I would have hoped that we would have stuck
with the geographical req11irements over the years because certainly the West, Midwest-anything but in the East Coast-that's
about what has been picked and also from the Federal Reserve
System itself.
I hope we are not getting an inbreeding there that is not good for
the long-term makeup of the Board.
Mr. Gramley, in 1976 the inflation was about 4.8 percent. Today
it's over 18 percent. It's quadrupled. The primary responsibility of
the Council of Economic Advisers is to advise the President how he
should direct and guide the country in fiscal policy and with what
has happened, you being a prominent member of the Council and
have been for the last 3 years, why should we confirm you to this
new post at the Fed when you have been part of a group that at
least this Senator considers has performed so poorly the last 3
years?
Mr. GRAMLEY. Well, as I look at what's happened to the rate of
inflation since 1976, I think the administration has to take responsibility for at least a part of what has happened, but certainly a
great part of the acceleration of inflation has occurred for reasons
that have been beyond our control. The increase of energy prices
has been a very large contributor to inflation.
Senator GARN. It's my understanding that last year it was 2.2
percent of the 13.4.
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Mr. GRAMLEY. Right.
Senator GARN. Housing was another 2 percent.
Mr. GRAMLEY. If you were to parcel out the increase in inflation
from the 5 percent figure in 1976 to the 13 percent figure in 1979,
about 2¼ percentage points of that would be the dirP-Ct effects of
rising energy prices of last year; about 2¾ percentage points would
be a consequence of increased cost of home purchasing and finance.
One or two percentage points would be the result of the awful
productivity experience we have had for which I think neither the
Carter administration as a whole nor the Council of Economic
Advisers is responsible.
Another 1 to 2 percentage points would be a consequence of the
fact that last year food prices rose by about 10 percent. They
actually declined somewhat in 1976.
So there is something left for which the administration's fiscal
policy could be considered responsible. Had we followed a more
conservative fiscal policy-and had we known productivity would
decline, I think we would have done so-the inflation rate in 1979
might have been 12.3 instead of 13.3, but we would still be dealing
with a very, very serious problem.
Senator GARN. Mr. Gramley, how can you separate out all those
things-food prices and whatever, and not take some responsibility-not the administration along, but some of us are rather upset
by this sudden born-again conservatism that occurred since January. What happened differently from January until March? I'm no
economist, but as I look and as Chairman Proxmire and I have sat
here together for years, we have been calling for balanced budgets
for 5 years, reduced expenditures and fiscal responsibility on the
part of this administration, this Congress. What happened suddenly from January to March that suddenly the Council of Economic
Advisers, this administration and this Congress suddenly want to
balance the budget?
Some of us think it should have been done a long time ago and
the inflation rate would not be 13 and it wouldn't be 12. It would
be considerably lower.
Mr. GRAMLEY. Well, Senator Garn, I do think that the opening
months of this year brought surprises for us in the administration
as well as for economic forecasters and businessmen around the
country. We had been expecting since the middle of 1979 that the
economy would slip into recession. It did not do so and indeed, even
today, although signs of recession are multiplying, I'm not at all
sure the economy is going into a recession. The economy was
considerably stronger early this year than we anticipated.
As a consequence of that, and of the worsening of inflationary
expectations that have been developing, the inflation rate accelerated to the 18 to 20 percent annual rate range.
We felt we had to do something about this. We felt the situation
was threatening to get out of hand. In retrospect, sure, we would
have· been better off to do it in January instead of waiting until
March. Still, it's better to do it now than to continue to let the
economy progress along as it had been with inflation worsening,
with inflationary expectations getting worse, and risking a very
severe economic collapse later on.
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Senator GARN. I'm still puzzled. You said in retrospect. That's
why I made the point that it's not hindsight at all. We have been
calling for these kinds of actions for a long, long time-not in
January, not last October-for a considerable amount of time.
Arthur Burns last September-this is not hindsight-he said, balance the budget, implement a comprehensive plan to eliminate
anticompetitive and over-costly regulations, maintain restrictive
monetary policies, reduce business taxes to increase productivity
performance.
There are a lot of people, not just politicians, not just Senators,
but noted economists who were giving this kind of advice, not
retrospectively, not in hindsight; and that's why I'm asking you
these questions.
Why were so many people ignored who were noted economists?
In other words, it doesn't seem to me it had to be hindsight to see
the condition of this economy. I think there have been some major
failures in economic policy by this administration and certainly not
the administration alone but by this Congress who suddenly have
become born-again conservatives, primarily because of political
pressure during an election year rather than looking at economic
trends that have not just occurred since January of this year when
a budget was put together.
Mr. GRAMLEY. Well, Senator, I do think that we have followed a
fiscal policy which has reduced the deficit over time. In retrospect,
we would have been wiser to follow a still more conservative fiscal
policy, to balance the budget sooner. I have to say that I think
some people were more correct than we were in assessing the
dangers of the inflation that was developing in our economy. Our
assessment was wrong in large part I think because we failed to
appreciate the effects that inflationary expectations were having
on spending decisions of consumers and businesses and we failed to
appreciate how poor productivity was going to be, and as a consequence, how rapidly our economy would reach its potential output.
In light of this, given what we know now, if we had the chance to
do things differently, we would.
Senator GARN. Again, as I have said on this committee for 5
years, we have heard about declining productivity and how we
needed to do something about it; but when you mention that the
budget deficit has been reduced, why? Because of reduced expenditures, cutting the size of Federal Government and its involvement
as a percentage of GNP and interference in the economy of this
country, or because of increased taxes?
Mr. GRAMLEY. ·wen, we have in fact reduced the Federal expenditures share of GNP, although we have not achieved the target that
we had hoped to, which is under 21 percent by fiscal 1981.
Senator GARN. I'm not aware--l've figured that next year receipts of the Government will be the highest level in history.
Mr. GRAMLEY. For receipts, that's correct.
Senator GARN. Even in terms of wartime financing, World War
II at 21 percent, the largest tax burden ever borne by the American people.
Mr. GRAMLEY. Right, but the share of expenditures in GNP did
decline in the early years of the administration, not as fast as we
would have liked, but--
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Senator GARN. But nevertheless, the major reason we have reduced the budget deficit somewhat and have hopes of balancing it
is due to massive increases in revenues.
Mr. GRAMLEY. There's no question but that the tax burden has
increased greatly.
Senator GARN. Because we're playing that game again this year.
We're talking about $15 billion worth of expenditure reductions
roughly and we are talking about $90 to $100 billion of increased
revenues, and yet the impression is attempted to be given that we
are going to balance the budget because we are drastically cutting
back the size of the Federal Government. We didn't spend $100
billion in the country in 1 year, Mr. Gramley, for defense or for
interest on the national debt or for everything we did until 1962, 7
more years before we spent the second $100 billion, 2 or 3 years for
the third; and when I came to the Senate the budget was only a
little over $300 billion and I have only been here 5 years and now
we are having an increase of $100 billion approximately in 1 year
and then we're going to balance the budget. I don't think that kind
of balancing the budget will have a significant impact on inflation
at all-one or two-tenths or three-tenths of a percent-I think
we're kidding people until we have some significant reductions in
expenditures, until we have some significant tax cuts on the supply
side to stimulate productivity; and that's why I'm disturbed.
I don't have much faith in the Council of Economic Advisersthis one or previous ones-or the fiscal integrity of this Congress
and the willingness to make the tough decisions that must be
made.
Let me go on. Do you favor the current Fed high interest rates?
Mr. GRAMLEY. I favor the policies that the Federal Reserve has
been pursuing as a means of trying to get inflation down, but as I
said in response to Senator Proxmire's comments, I think it's important that we see interest rates come down as soon as possible. I
think the present level of interest rates is doing a great deal of
damage to home builders, to farmers, to small businessmen and to
others. So I am strongly supportive of the President's recommendations in mid-March to tighten up on fiscal policy to take some of
the heat off monetary policy and to use the Credit Control Act of
1969 as a means of getting more restraint in the credit area by
having lenders say no rather than simply raising interest rates.
Senator GARN. Well, I think until we come up with a much
tighter fiscal policy-and we have relief in my entire career in the
Senate primarily on monetary policy and the Fed to try and control inflation without the cooperation of the fiscal side, and the sad
thing with me is we are not looking at just marginal operators who
come in and out of the business; we are dealing in my state with
some of the best businesses that have been around for a long, long ·
time, been doing well, not marginal ones at all. Automobile dealers-I expect within 6 months possibly as many as 25 percent of
the automobile dealers in my State will be out of business. They
can't carry $250,000 a year carrying costs and then they see Congress unwilling to take some of the tough decisions where people
that are producing nothing in the society-the transfer payments,
the entitlement programs that have grown out of all reason-but
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we are going to solve the problem of inflation on the backs of the
productive members of our society.
Well, I'm sure my time is up. The lights are not running but I
would hope, Mr. Gramley, on the Fed that you would work for a
more balanced approach.
Mr. GRAMLEY. I certainly would.
Senator GARN. To the problems of inflation and not election year
cosmetic solutions of balancing the budget with $15 billion reductions and $100 billion of tax increased burden on the American
people.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Morgan.
Senator MORGAN. Mr. Gramley, I have just seen your nomination
questionnaire and I haven't had time to examine it very carefully,
but insofar as qualifications on paper, you appear to be imminently
well qualified, especially if we use the same standards we have
been using for previous board members and for economic advisers.
Now I would comment that I do agree with Senator Culver's
letter-he's not here-that it's somewhat discouraging that I don't
see anything on your resume that indicates any experience at all
with the business community as such, certainly with small business, farmers; nor do I see that anywhere on the Reserve Board.
Is that not necessary or would that not be helpful?
Mr. GRAMLEY. Senator Morgan, I did make an opening statement.
Senator MORGAN. I'm sorry I missed it.
Mr. GRAMLEY. In that statement I pointed out that although I
have never worked for a small business nor have I managed a
small business, during my career in the Federal Reserve there
have been three studies of small business financing problems, one
of which I think is probably the most definitive, quantitative
survey of credit sources to small businesses and credit problems of
small businesses that exists today. It's outdated. It's old, but it's
probably the most definitive study, and I was one of the five staff
members that designed that survey.
I pointed out also that I think dealing with the credit problems
of particular sectors, like builders or farmers or small businesses,
requires not just personal knowledge of the credit problems in
those areas but how those credit problems relate to the overall
functioning of the economy and how monetary policy can effectively deal with them. Those are the areas in which I have worked the
bulk of my professional career.
Senator MORGAN. Well, I can understand that, but it seems to
me that somewhere, either on the board or the Council of Economic Advisers-and we went through this with the last nominationthere ought to be somebody with some real experience. You know,
we can sit up here and make studies and read studies, but it's not
as meaningful as it is when you go back home and talk to the
people and have the experience yourself.
For instance, I went back home during Easter weekend and I had
trouble renting my farm. I never had trouble renting my farm
before. I wasn't even concerned about it because there were always
people lined up before that had their names posted at the county
agriculture committee wanting to rent farms. I couldn't hardly
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rent them because nobody could get credit. When I did rent them, I
rented them at considerably less than I rented them for last year.
It just seems somewhere we are lacking in experience.
Well, let me go to something else. I'm for a balanced budget. I
have always been for a balanced budget because I come from a
State where we are required by law and by the constitution to have
a balanced budget. .I want you to tell me something. During the
last 2 years of the Ford administration we had the biggest deficit in
the history of this Nation and yet we had an inflation rate of only
5 percent. So if only to balance the budget is going to bring-if
that's all that's required to do something about inflation, tell me
why we had the low inflation rate with the biggest deficit in the
history of the Nation?
Mr. GRAMLEY. Senator Morgan, I don't think there's any single
solution like balancing the budget or slowing the growth of the
money supply that's sufficient to end the kind of inflation we are
dealing with in the United States, and I think if you look at the
experience of other countries you find confirming evidence of that.
The rate of inflation in West Germany obviously is much lower
than it is in the United States and yet their government deficit as
a proportion of their GNP is about the same as ours. The Japanese
economy has a lower inflation rate than we have and their deficit
as a proportion of their GNP is three times ours.
Balancing the budget, moving toward fiscal restraint, is one part
of a larger process that has to be engaged in if we are going to get
control of inflation. We have got to do a lot of other things, too. We
have got to solve our energy problem. We have got to increase our
energy independence. We have got to take steps, as Senator Garn
indicated, to improve productivity, and I believe we will.
Senator MORGAN. I think we all realize that there are a number
of factors, and that's an interesting point, but it's also true that
while we had the biggest deficit in the history of the Nation, we
had some pretty high unemployment rates, didn't we?
Mr. GRAMLEY. Indeed we did. The main reason for the deficit in
that period was the fact that the economy was so very depressed.
Unemployment went to a peak of 9 percent in the spring of 1975.
Whenever you have an economic collapse, you're bound to have a
drop in revenues and a very large increase in governmental expenditures for unemployment insurance and other things.
Senator STEWART. Would the Senator yield at that point?
Senator MORGAN. I would rather finish. I haven't got much time.
You know if our unemployment rate goes to 9 percent now,
would you expect our inflation rate to come down substantially?
Mr. GRAMLEY. An increase in unemployment to that level will
help a little bit, but I don't think big recessions are productive in
dealing with the kind of inflation that we have now.
Senator MORGAN. I don't think they are productive.
Mr. GRAMLEY. Certainly, I would not want to see the economy go
through a recession like that.
Senator MORGAN. I know nobody wants to, but the point I want
to make is we did have unemployment at 9 percent.
Let me ask you, in the first place, what do banks have to pay for
money they get at the discount window?
Mr. GRAMLEY. They are paying 13 percent.
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Senator MORGAN. And they are loaning it for 20 percent plus?
Mr. GRAMLEY. They are paying lots more for the bulk of the
money they are raising in markets other than the discount
window.
Senator MORGAN. How much can they get at the discount?
Mr. GRAMLEY. The discount window is not available to banks for
large amounts of continuous borrowing. The Federal Reserve requires banks to utilize the discount window cautiously and carefully. Indeed, for larger banks, a surcharge has to be paid for continuous borrowing.
Senator MORGAN. How much surcharge?
Mr. GRAMLEY. Three percentage points.
Senator MORGAN. Now all this talk about high interest rates in
all that I have heard and the last financial institutions deregulation act was to preempt all usury laws. Now I hear from the
legislators back home who are not willing to face the music in their
own legislature, they want us in Congress to preempt all usury
laws. Have we come to the time when usury laws have no place in
our society?
Mr. GRAMLEY. Well, I think usury laws have always been problematic when interest rates fluctuate as widely as they have in the
postwar period. It's very difficult to maintain lines of credit for
borrowers, available credit for borrowers, when interest rates go
well above usury ceilings. What happens is the credit markets dry
up. I think that's a problem basically, however, that the states
themselves should deal with.
Senator MORGAN. It's problematical too if interest rates on all
loans were 15 percent and then the banks would have to loan
someone at 15 percent or else they wouldn't be loaning their
money.
Mr. GRAMLEY. They could easily buy Government securities.
Senator MORGAN. Of course. That's where your balanced budget
comes in. But if the Government itself didn't pay any more-it
seems to me if we just throw all caution to the wind and everybody
wants to remove all usury rates everywhere-they want us to do it
here in Congress-Mr. GRAMLEY. As a general principle, I do not believe you can
control interest rates any more effectively than you can control
wages and prices with direct controls, even less so.
Senator MORGAN. Would you advocate removing all usury laws?
Mr. GRAMLEY. No, I wouldn't. I think this is a step the States
themselves have to take rather than to do it-Senator MORGAN. Mr. Volker and his crowd were over here
urging us to preempt State usury laws. Do you feel we should
preempt State usury laws?
Mr. GRAMLEY. I think we have gone far enough in the recent
financial legislation.
Senator MORGAN. We have pretty well exempted all of them.
There are a few left. Would you like to see them exempt the
others?
Mr. GRAMLEY. I think we ought to stick where we are for now.
Senator MORGAN. You talk about West Germany and Japan's
inflation rate. The price of oil has gone up about 115 percent or
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more since January last year. How much has our inflation rate
gone up in the last year?
Mr. GRAMLEY. Well, in 1979 we had an inflation rate of a little
over 13 percent as opposed to a figure of 9 percent the prior year.
In the first 2 months of this year our inflation rate has been 18 to
20 percent. The other countries besides the United States are experiencing the very same problem with rising prices.
Senator MORGAN. Let's start with 1979 because we have them. In
1979 our interest rate went up how much .over 1978?
Mr. GRAMLEY. Our inflation rate?
Senator MORGAN. Inflation.
Mr. GRAMLEY. About 1 percentage point up.
Senator MORGAN. Over 1978?
Mr. GRAMLEY. In 1979, no. It was about 4 to 5 percent.
Senator MORGAN. Over that same period of time, didn't the
inflation rate in West Germany more than double?
Mr. GRAMLEY. I don't have the figures in my head, Senator.
Senator MORGAN. Well, I would have asked you the same thing
about Japan. It did double.
Mr. GRAMLEY. I doubt very seriously that the Consumer Price
Index doubled in Japan. Wholesale prices have been more volatile
and for a while in Japan the depreciation of the yen was leading to
very rapid increases in the wholesale prices, and I wonder if that's
not the statistic you're citing.
Senator MORGAN. I think I'm citing the inflation rate. I'll have to
check it out.
Mr. GRAMLEY. There are different measures, Senator, and you're
undoubtedly correct for the measures that you're citing, but the
Consumer Price Index for our country as well as others does deviate quite differently from the wholesale price indexes.
Senator MORGAN. Mr. Chairman, are we going to hear from
Senator Culver?
The CHAIRMAN. Yes. He will be here tomorrow morning. He
couldn't be here this morning.
Senator MORGAN. Thank you.
The CHAIRMAN. Senator Stewart.
Senator STEWART. Mr. Chairman, are we going to vote in committee on this particular nomination?
The CHAIRMAN. Yes. We always do that if any member of the
committee asks.
Senator STEWART. I ask that we vote in the committee and I also
ask that Senator Culver and perhaps others be given an opportunity to make statements before this committee.
The CHAIRMAN. He will be here tomorrow. He was scheduled to
be here today and couldn't come today.
Senator STEWART. There may be some others and I would ask
that they be allowed to be given that opportunity and I ask that
the committee be given proper time to discuss this nominee and I
want to pick up on a number of things Senator Garn talked about.
Mr. Gramley, I mean no disrespect to you, but I am concerned,
Mr. Chairman, about picking from the Fed or from within the Fed
individuals to serve on the Federal Reserve Board, and I'd like us
to have ample opportunity and I would hope to discuss this with
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the chairman after this committee meeting because I am very
much concerned about it.
Mr. Gramley, you have had an opportunity to appear before me
both at the Small Business Committee and you and I have had the
opportunity, along with other members of this committee, to discuss the problems that are now being experienced by the housing
industry in this country.
What do you see as the possibilities for Federal Reserve activity
in that area? Are you aware of the difficulties they are having
now? Do you still feel the same way you felt when you appeared
before Small Business that perhaps it's not as difficult a situation
as the folks in the housing industry would have us believe?
Mr. GRAMLEY. I think the situation is vastly different now than
it was last November, Senator Stewart.
Senator STEWART. What would you do about it if you were a
member of the Federal Reserve?
Mr. GRAMLEY. I think the first and most important thing we can
do is to get our inflation rate down and I think the track we're
moving on now, by imposing more fiscal restraint, by using the
Credit Control Act of 1969 to try to get some restraint in the
expansion of credit through means other than just raising interest
rates is the most effective long-run solution to the problem.
Senator STEWART. Well, they're using interest rates as a part of
that.
Mr. GRAMLEY. As a part of it, but not entirely.
Senator STEWART. Explain to me. My folks have difficulty in
understanding the rest of the policy. They feel the impact of the
interest rates and they have difficulty understanding the rest of it.
The farmers Senator Morgan was talking about and the housing
industry that Senator Morgan was talking about and I have talked
about on different occasions-I'd just like to know what this administration plans to do and what you would do as a member of the
Federal Reserve to help alleviate that situation. I know that the
large size concerns have no difficulty in obtaining their money.
Many, many times they have no difficulty in passing that cost on
to other people. What in the world are you all going to do about
the difficulties that are now taking place within those industries?
What would you do about it?
Mr. GRAMLEY. I think, Senator Stewart, that we have taken
effective action. We've gotten a start.
Senator STEWART. What is that? Tell me.
Mr. GRAMLEY. We have put in fiscal restraint now which is going
to slow the economy. It's going to help moderate inflationary pressures. It is taking some of the heat off monetary policy.
Senator STEWART. When did you all decide to do this credit
allocation? After all the large size concerns borrowed all they
needed?
Mr. GRAMLEY. The steps that we took were taken after we saw
that the activities of the Federal Reserve-the switch in monetary
policy that the Federal Reserve had engaged in in October 6-was
no longer restraining credit to the desired degree in early 1980.
During the final 3 months of last year the growth rate of business
loans subsided substantially and it looked as though the October 6
program was sufficient to--
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Senator STEWART. What happened to that growth rate in the
business loan sector from January through March?
Mr. GRAMLEY. In January and February the growth rate in
business loans accelerated to over a 20-percent annual rate and it
was those developments that led the administration to the view
that something was needed in the way of allocation by the Credit
Control Act of 1969.
Senator STEWART. So now you're allocating credit and you're
allocating credit in those small business areas of the farmers, the
homebuilders, the retail merchants. Those are the people that the
bankers are being encouraged to allocate credit between, to make
the choices between, as a result of this credit policy.
Mr. GRAMLEY. Bankers are being asked in the voluntary credit
restraint program to restrict the growth of their loans to a range
from 6 to 9 percent. That exempts small business, farmers, and
others who are heavily dependent on credit.
Senator STEWART. So if a fellow operates a bank in a small town
in my State and he's got a farmer that's productive and he's got a
retail merchant that's been there for 25 or 30 years and he's
productive, he's asked by the Fed-they're not and you wouldn't if
you were there-to allocate credit between those people, to make a
decision as to whether or not one or the other of those continues in
productive life.
Mr. GRAMLEY. The banker is being asked to favor those borrowers, who are heavily dependent upon banks for credit and to restrict the growth of credit to other borrowers, particularly
large-Senator STEWART. Who are the other borrowers that little bank
down there doesn't loan to? There's not many people other than
those that he would be extending credit to.
Mr. GRAMLEY. There's no question, if you talk about very small
banks, their nonconsumer loans are primarily to smaller businesses, homebuyers, and farmers. So they have a difficult time
confining the growth of their total loans to 6 to 9 percent without
in effect choking back loans to those borrowers too. That's something that I personally think should be looked at sympathetically.
Senator STEWART. How would you look at it sympathetically if
you were a member of the board?
Mr. GRAMLEY. One way would be to adopt different standards for
loan growth for larger banks than smaller banks in recognition of
the fact that the customers they serve differ.
Senator STEWART. Do you think the Fed would be responsive to
that?
Mr. GRAMLEY. I don't know. You'd have to talk to them. I'm
expressing my own view on the situation.
Senator STEWART. You would make a difference in the amount or
percentage of loan growth that was allowed for small banks?
Mr. GRAMLEY. I would certainly want to consider that sympathetically, yes.
Senator STEWART. What would you do about the outflow of
money from those small rural areas into the large money centers
that took place because of the lack of activity on the part of the
Fed? What would you do about that? That occurred during the
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same period of time the large size firms in this country were
borrowing tremendous amounts of money.
Mr. GRAMLEY. I think the outflow of funds from the rural areas
and the small towns of the country to the money market centers
will depend primarily on what happens to interest rates. The Fed
in its use of the authority granted under the Credit Control Act of
1969 did in fact take into account what was happening to attract
funds to the money market centers by the money market mutual
funds; and they put on a reserve requirement to reduce the amount
of funds that were drawn into the money market centers and being
lent to businesses and being drawn out of the smaller communities,
and I think that's been helpful.
Senator STEWART. You're saying the flow of those funds from the
small communities to the large size money centers was a result of
interest rates?
Mr. GRAMLEY. High interest rates.
Senator STEWART. Who in the world exercised the use of interest
rates in an attempt to control monetary policy if it wasn't the Fed?
Mr. GRAMLEY. Well, I believe the way to look at this is that what
the Fed did was to try to slow the growth of money and credit, and
given the accelerated demand for credit growing out of an economy
that was rising and an inflation rate that was getting vastly worse,
interest rates simply had to go up.
Senator STEWART. What counsel have you offered to stimulate
the housing industry that's in just a depressed state in my State? I
don't know how it is countrywide, but it probably is the same.
What counsel have you offered as a member of the President's
Council of Economic Advisers?
Mr. GRAMLEY. Besides the general measures that I discussed
earlier, Senator Stewart, of need-Senator STEWART. I want to know what specifically you suggested.
Mr. GRAMLEY. We have been looking at ways to try to assist the
home builders, the housing industry. The administration has made
no final decision yet, but among other things, we are looking at a
modification of the 235 program, a program which involves deep
subsidies. We are looking at lessening the depth of those subsidies
and providing the assistance of that program more generally.
There are potential problems with it, but we are looking at it
sympathetically and we should know what the administration's
decision-Senator STEWART. How long are we going to wait? Until most of
them go bankrupt or until 50 percent of them go bankrupt? How
·
.
long are you going to wait?
Mr. GRAMLEY. The decision should be made in a few days.
Senator STEWART. When Chairman Volcker appeared before this
committee to explain the Fed's most recent credit tightening
moves, he made a statement that the Fed, where appropriate and
possible, would adjust the lending rate to small businesses and
others. Do you agree with that statement of Fed policy?
Mr. GRAMLEY. I do, and I think that's what has been done with
the Credit Control Act of 1969 as it has been used by the Board.
There's definitely an effort there to try to allocate the credit to
smaller firms, to farmers, to home builders.
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Senator STEWART. If we look at the report-how often, Mr. Chairman, are we supposed to get reports from the Fed? Is the committee supposed to get some kind of general report as to what kind of
activity has taken place?
The CHAIRMAN. We get a regular report on monetary policy
every 6 months, and the House gets a report every 6 months. We
also have periodic oversight hearings on monetary policy when
they seem appropriate. A special hearing was held, you will recall,
on March 18 to consider the use of the Credit Control Act of 1969.
Since the beginning of 1979 the Federal Reserve has testified over
15 times either on legislation or on oversight matters.
Senator STEWART. I would suggest we get something a little more
often on how the credit control actions are being pursued by the
Federal Reserve, Mr. Chairman, from the Fed in light of the difficulties the people are having now.
The CHAIRMAN. Senator Sarbanes and I have written to Chairman Volcker to make it very clear that we expect the committee to
be kept fully informed of development under the special voluntary
credit program. Chairman Volcker has responded positively to our
request, and I am sure that once the Federal Reserve has processed
the April reports from the banks that we will get a complete
report. We can discuss the need for additional hearings when we
have an executive session of the committee on the nomination of
Mr. Gramley.
Senator STEWART. That would be fine.
The CHAIRMAN. Which we will have probably on Friday.
Senator 8TEwART. That would be perfectly all right.
The CHAIRMAN. Any other questions?
Senator STEWART. Not right now, but I've got some more I'd like
to ask him in writing and get some answers before our meeting
tomorrow if I could.
The CHAIRMAN. All right. Fine. Senator Garn, do you have any
further questions?
Senator GARN. Mr. Chairman, I have maybe one or two more
questions. I would like to ask that the nomination hearing record
be included in this record from Mr. Gramley's nomination of January 26, 1977. There are some good questions there with responses
from Mr. Gramley. I understand the only record we have is in our
own hearing book and there are no copies of that testimony, so I
would ask unanimous consent that it be included in the record. It
is not long.
The CHAIRMAN. Without objection, so ordered.
[The earlier hearing record is reprinted as follows:]
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NOlllNATIONS OF WILLIA!I D. NORDHAUS AND
LYLE E. GRAllLEY
WEDNESDAY, .JANUARY 26, 1977
.
. . .
U.S. SENATE,
Co11:.\IITTEE ON BANKING, HousING AND URBAN AFFAIRS.
Washington, D.O.
The committee met at 10:05 a.m. in room 5302 of the Dirksen
Senate Office Building; Senator William Proxmire, chairman,-~presiding.
.
Present: Senators Proxmir-e. Spitrkm.m, SteYensc,n, and Bitten.
The CHAIR.\fA:\". Thr comrnittre will come to order.
Gentlemen, will you rise nnd raise your right hand.
[Witnesses sworn.]
The CHAIRlIAN. Some of the Senators may come. They have
indicated they will come a little later, but we usuull.r have a little
tardiness on the committee.
We are glad to haYe you two gentlemen before us-you have most
impressiYe backgrounds in economics, both in your academic training
and in your writing, and work since then.
It is interesting that we haYe sort of a different standard now on
public offidals.
·
I can remember when I was observing the Senate back in the 1940's.
I used to hear people who were appointed to various positions and
critics would always say they ha,·e ne,·e1· met a payroll.
.As far as I can see, neither of you gentlemC:n have ever met a
pa)Toll, but most people appointed to office an:1 elected to the Senate
these days, for thut matter, haYe neYer met a payroll either.
At the same time you haYe a Yery big economic responsibility, and
neithl'r you nor ~Ir. Schultze haYe been in positions in business or in
labor ciions.
. As I say, you haYI' most distinguished backgrounds as economics
mstructors and as economics experts: Dr. Gramley, at the Federal
Re;;en·e Board, and Dr. Xordhaus, as a most distinguished professorf·
but there is that interesting lack of what some people used to cal
practical experience.
I wotild like to nsk each of you if you feel any kind of limitation or
any way in which you would meet the criticism of some business
people nnd perhaps some labor officials tht1t the advice of those who
come to a position where you will be giving importnnt ndvice on the
economy an'd han not had that kind of pragmatic experience which
many business people feel qunlifies them on the real practical economy
we face?
Dr. Gramley, would you like to start off with that?
Dr. GRA:\ILEY. Senutor, in my o,.,,·n case, I woul<l say my contacts
with the business community during my period at the Federal Reserve
have been rather extensive.
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We hnve contacts throu(J'hout the network or Federal Reserve
banks, with the directon; of the Federal Reser,·e bunks, and I reel
thnt we ha,·e kept close contact with business thinking.
I haw not hntl direct contact with people in the labor field, but on
the staff of the Federal Reserve Board, we have 11lw1n-s had several
people who are eX!)erts in the labor field, and I haYe leaned heavily on
their adYiee. And I would intend to maintain my co11tt1r.ts with people
in the l11bor field and people who know business thinking.
The CH.URll.-\X. How about in the farm area?
Dr. GRAllLEY. Again I nm not an agricultural economist. I don't
pretend to know much about the agricultural sector of our economy,
and I would be leaning on the experts on the staff, just as I have
leaned on the staff nt the Federal ReserYe Board.
The CHAIRllAX. Sometimes in the past we hnYe had agricultural
economists as members of th<:\ Council of Economic Advisers, and
neither of you gentlemen h11vc tlirect experienr·e in the field of labor,
h'l."i1te;,., or a~rict1ltur~: is th,tt rnnect?
Dr. GR.-\.\ILEY. CmT~ct.
Dr. X ORDHA us. Correct.
The CHAIRll.-\.X. \Yhat would be your obserrntion, Dr. Xordhaus?
Dr. X 0RDH.n:s. I think that is an importnnt ob;;en·ntion, and it is
true the Connril in the past has been mnde _up of peoplP with academic
training. I think that trndition is continuing.
On the other h1111cl, although we arc not engaged in meeting payrolls,
we ,ue eng11ged in studying behuvior of the economy nnd also con,-ultini nry clo;;ely with those who either meet payrolls, or receive
them on the labor ,:ide.
I think there is ,-:ome difference, perhaps, between the responsibilities
of the Council anrl other deportments.
The Council by stntute is responsible for nch·ising the President on
mncroeconomic policies.
This i:, nn area in which it is important to study the economy as a
whole. as well ns to understand the inclh·idual eompo1wnts. Unlike
pro!!rnms in the labor area, those of the Dt>pnrtment of Labor or the
Department of Commerce, where it is terrib;_.- important to ha Ye close
contnr:t, perhaps eYen experi,mce, with busin('SS.
I think on the mncroeconomic side, it is nl;;o importnnt to giYe close
attention to studying the ten leave,; or whutenr deYiee is used.
The Ctt.\IR>LD.. You talk uhout the macro uppronrh. I think that
approarh has hPPn Yitnl and necessary, but there hus been a. feeling
on tlw p11rt of man-"· people that there ought to be more of an mtercst
in the mitro aspects of the economy, in pnrtitular industries und
p11rticular specific problems thnt tlc,·elop und without an uncler;,tanding of that kind of thing, without an nppreei11tion of thnt sort
of thing. the muero nppronch is likely to be pretty sterile and not
Yen· useful. How do YOII feel about thnt?
Dr. XoRDH.n-s. Well, I think it is very important to keep both the
macro- an,! the mieropietnres in mind. From year to year the situution
differ;:;.
For E'Xo.mple, in 197:{, 1974 and 1975, it was obYiou;:; that the macropir:ture wn,- larg-ely colored by influences in the energy nreu.
In 1973, before the energy r;risis, obviously, agriculture was really
critical.
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IC we had gone along without knowing those basic economic facts,
macroeconomic policy would have been probably not too coherent.
It is important to keep both the aggregate picture in mind and also
the individual sectors.
The Cu.-uR11Ax. Dr. Gramley, you have one very appealing and
distinguishing elernent in_your biography.
I notice you got your BA degree from Beloit College in Wisconsin.
Dr. GR.-L\ILEY. Ye~. indeed.
The CnAIR'.'I.-\X. It is 11 fine college. You grnduuted in 1951, I notice.
. Dr. Gra.mley, your nomination to the Council differs from almost
an~·one I have seen, in that you seem to have been a Federal Reserve
Board insider. for most of your career. Not only that, but you say you
intend to go back to the Feel; and not only that, you have been
extremely close to Dr. Burns, and you were perhaps his principal st11ff
man.
I think it is good to have coordination on monetary policy, and the
res~ of our ec()nomic policy, it is very vnhrnbln nnd useful.
····
It nuy be bdpfnl in securing u tl1'gree of coordination we have
!a.cKed in tbc past.
.\t the ,;ame time, I nm sure you can underst.and our concern, or at
lea:;t my concern, with the possibility that Dr. Burns, who is an
t>xtrnor<lin11rily able nnd wise nnd effective economist, might be
,·xtt·nding hi:; coun-:rl onr the Counril through yon, pnrticnlnrly in
iight of the foct that you hilw been identified with him for so long,
find you expect to go hnc:k to the Federal Reserve Bonrd. You tell
'.l"' thnt in your hiogmphy.
You sav You intend to return to the Federal Reserve Board when
you 11re tlirough.
What is yom reaction to a feeling th11t under these circumstances,
You m:n- be too do;;e to the Federal Reserve Board? Dr. Bums has
i.ndi,·ate·d a philosophy 11nd attitude which is quite different from that
of ,he Carter administration. Anrl perhaps it is the dominant feeling
in Congre;;s nncl the country that we need expansion of the economy,
im,: Dr. Burn,; ,,eem;.; more cautious and more Mncerned with inflation
an,:: le---- with :-etimulus.
·
Can you a;:-cure th that yom position will be one of vigorous in•.;':':1d:dence. and that YOU will be free to criticize the Federul Reserve
Board \·hen they <Je;.;e1:w c:ritici,-n1, ns we should expect from a ::\-!ember
of the Council of Economic Ach-isers?
Dr. GRA,ILEY. I would like to ;;uy a couple of things about. that,
Sern1 tor.
fir~t. if one reads the full statement of what I have indicated in
the mnterinls I haw submitted to the committee, one get.s a slightly
diffc-rent per;:pectin on my intentions for the future.
I •aid I per;;onalh· intend to return to the :Federal Reserve Board
upon my completion of Government service, but I also said that I
hase not rer·ei\·ecl nor ofren am· commitment in that regard.
And I h1,,:e al._o said that I intend to serve the full term on the
Co 1mcil.
If that term proves to be 4 years, at the time I woul? be thinking
abc.,;1t returning to the Federnl Reserve Board, the constituency of the
Boit,d i,- likel,· to be considerabh· different than what it is now,
particularly in. view of the rapid turnover of the Board members in
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recent years. Whether the Board wishes to have me back, I don't
b~.
-
· All I· ain indicating is that the natural course of my career would
lencl me not to. preclud~ the possibility of going back to the Federal
Reserve Board, and I wanted to be candid about that in my statement
to this committee.
The CHAIRll.-\:S. I oppreciate that candor.
You see, the problem is, the Federal Reserve Board may chanl{e
in makeup and I nm sure it will.
You are right. There has been turnover, a great turnover. I think
Dr. Burns is the only person who has been on the Bourd more than
2 years, more thun 2% yean;, and Dr. Burns' term expires within the
next year or so, und he may or may not continue.
His term as Chuirman expires, I should say.
Dr. GRA'.\ILEY. Expires in 19iS. But he could remain as a member
until 1084.
The SPf•r,n<! thin~ I would w1mt to say ubout this, SE'nator, is that
whik [ h,1Yr- 1\·orkcd do~eh with Dr. Ilurus, and I huve comidere<l ii
u pifrilrg~ to work wit Ii hi 111, I do not consider my ,·icws to be identical
with his.
I have an independent mind. The traditions of the Federal Reserve
Board Staff ha,·e alwuvs been thut the stuff maintains its own views.
It expresse;; it;; own Y1ews, openly, within the Board, and frunkly.
I haYe found that on not infrequent occusions I have found myself
disagrering ";th the Chairman.
The CHAIR'.\IAX. For example?
Dr. GRA'.\ILEY. Well, I think if I were to cite specific things, they
could be blown out of context, but let me give you one example.
You remember in the summer of 1975, when the recovery first got
under wav, there weie 11 number of economists who looked at the
target g:-o·wth rate;, of the monetary aggregates, which had then been
expressed by the Federal Re;.:erw Board, and they said that the increases plam1E'd by the Federnl Rf';;en·e Board would be inadequate
to finunce a good reco\·ery.
There were ;;omE' economists who thou;, '1t the growth r!l.te of :\11
during the first year of recowry might have to be as high as 8 to 10
percent.
·
Generally :;peuking. I sympathized with that view, ancl so indicated.
As it turns out. the Chairman, who clisugreed with that view, was
more right than I.
There wa;.: a very rapid increase in money turno,·er during the first.
vear of recoven·-we saw an increase of 8 percent.
• That was on·e occasion where I di;;ugreed quite substantially with
him, and I ;;o indicate<! to him.
The CH..\.IR'.\l.\X. How about the more distant and, thereforn, I
presume, kind of hi:-torical occasion, we can comment on it, perhaps
how about the 1972 posture of the Board, when they vigorously
stimulated the economy, increused ~1 1 by n substantial nmouut,
although unf:'mployment wus relutinly low und the economy wns
recovering, we were in 1m election ye1U' and many people urgued thut
was ouc of the mo:;t serious mistakes the Fed ever made?
What position did you tuke at thut point?
.
Dr. GR.BILEY. I would say, Senator, first, I tlunk we ought to
look back and remember there were quite a few Members of Congress
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who thought at that time that the monetary policy pursued in 1972
was appropriate. Intemally, I did express concem thut growth rates
of the monetary aggregates were too rapid at that point.
In retrospect, I think that view wns right.
I would like to acid one comment about that, Senator. There has
been an allegation, frequently in the pre,;,;, that a good part of the
price inflation on 1973-74 was due to excessive bv expansive monetary
policy in 1972. I disagree \\ith that view wholefienrtedly. I think the
inflation of 1973-74 wail very heavily influenced by the sorts of
speci,ll factors :\Ir. Xordhaus W1ls mentioning.
·
The CHAIR:MAN. That wasn't so much a politictll observation. There
were some pe<ple, perhnrs including myself, thnt argued that this
was a help to President Nixon when he was running for reelection in
1972. But the real criticism came from people who were monetary
economists, Professor Friedman and Dr. Beryl Sprinkel, who were
primarily outraged by whnt they thought was a monetary policy
that was most inappropriate and highly inflationary.
It wn;; the economists mther thnn politicians.
,,..
Dr. GP.A'.\lU:Y. I nm not il monet11ri'>t. I tl1ink it's importnnt to
lriok nt tl1i:· monPt,1ry nggreg:atc,; h.1· w,1y of eYnltwting thP effects of
monetary policy on the economy. But I think WP ha\'e to look nt
other things, too.
.
The CH.UR'.\IAX. I want to come bnck. I have a number of questions.
Senator Sparkman is here.
:3enntor SPAHK'.\L\X. Thank you, :\Ir. Chairman.
There i;;. a great difference between the chairman and me. He is a
truinrd eeonomist ond I nm not in anY sense of the word. All I can
do is tell when the times are good and when they are bod. I nm
interrstPd in many of the problems th11t affect our economy. But I
gnthc-r from the exchange with the chairman, your position ns to
the Federal Rc-ser\'e ond as to Dr. Burns is thnt YOU nre not beholden
to Dr. Burn;. or anybody else on the Federal Resen·e. You arc 11 free
agent on that, aren't you'?
Dr. Gn.n1LEY. That's correct. I haw not been beholden to the
Clrnirnrnn during myJieriod of sen·ice there. I havp worked for him,
but I lawe mnintnine on independent judgment ond I would intend
to do ;..o in the future.
:3enntor SPARK:IIAX. That's what the Federal Rcsen·e Board is.
;:uppn,ed to do, i,m't it?
Dr. GRA:IILEY. Indeed it is.
Se1111tor SPARK:IIAX. T<'ll me, I know th11t you wrote n book or at
lc-a,-t II paper, I don't know which entitled "Ways to :\loderute
Fluc-ttwtions in Housing Construction." It's n staff study. You
were the- nuthor of it?
Dr. GnA:11LEY. I directed the staff stuch·. I did not author it.
Senator SPARK'.\IAX. Well, did vou find a ,,·aY to do that?
Dr. GR ... ;JLEY. We had some· ideas, but that's n Yery difficult
problem, ~enator Sparkma?· We recommended a n~1mber of thin_gs.
~ome of otlr recommenclnhons the Board accepted m broad outhne
ilnd sent forward to the Congress as recommendations. I could go
onr briefly, if you like, what we had in mind.
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•
Senator 5PARKllAN. Well, just briefly, I don't care to go into it
in depth.
Dr. GRAllLEY. Let me mention four things we thought were
important. One was to bring an end to inflation. I think the inflation
of prices during the ~twar period has been an important reason why
the mortgage market has dried up from time to time and why we
have had such severe declines in housing.
A second recommendation was that we needed to use fiscal policy
more actively as a. macropolicy instrument, as a means of restraining
the economy when demand became excessive. In that respect, we
thought some consideration should be given to countercyclical variations in incen.tives for business investment.
Based partly on the staff study, the Board's recommendation in
this respect took the form of a variable im·estment tax credit. I have
had some second thoughts about that,_ but I think it's worth further
thought.
·
We recommended also steps to try to control the variability of
funds flowing to the thrift institutions. We thought it "·oulcl be worthwhile for tl-e thrift institutions to devote a small part of their total
assets to loans like consumers' loans, which would increase the cur.rent
income of the institutions.
We also suggested that very careful thought be given to variable
rate mortgages, with appropriate safeguards.
We also suggested lengthening of the liabilities of the institutions,
something I think has been done in recent years, to try to get a better
match between the maturities of their assets and their liabilities.
\Ve suggested that over time we ought to work toward removal of
regulatory ceilings on deposits, which at times have impeded the
capacity of the institutions to bid for funds and keep their deposits.
Those are the basic recommendations that we made.
Senator SPARK:\IAX. Well, I remember, it may haw been about that
time, that Dr. Burns was most helpful to the housing programs
generally. I don't remember what the details were, but I felt at the
time that he really pulled us out of the doldrums and made it possible
for us to have a good program.
It may have been that it had to do wi·h FX~IA and G~~fA and
the tandem. I think also about that time there was an arrangement
made with reference to bonds that the Treasury could offer and a
new fiscal policy from which housing could profit, but anyhow I did
feel that tlie Federal Reserve Board did do a great job in the fielcl of
hou;,ing at the time that it needed it badly. That's all.
The CuAIR:\1.-\.X. Senator Biden.
Senator BmEx. Thank you, Mr. Chairman.
I don't ha,·e au,· specific questions at this time other than to note
thnt from the m11i1ber of que;;tions I nm sure vou ha,·e, the rc,mm~~
of both the nominees are quite impres.-;in and 1 think that the Chairman of the Council should hu,·e a good deal of leeway in determining
with whom he would like to work. Unless there is any significant
conflict or <:onflict at all and/or any ,-ignificant departure from a
-philosophic point of ,·iew helcl by the Chnirnrnn of the Council, I
would know of no reason why I should not support both these men.
One thing h11s been clrnwn to nn- attention. I under,-tnnd you have
already nnswerecl and I guess I should rend it in the record rather
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than takin~ the time, that was Mr. Gramley's response to your
question about whether or not there is any conflict, potential conflict
in his hn,·ing been with the Fed and expre:;sed ns I understand it, from
the stat<'ment, am intention that he would hope that he would end
his career at the Fed.
I~ that correct?
·· Dr. Ga.\YLEY. Yes; what I did soy, Senator Biden, was that I am
speaking of a possibility, which may exi,.;t 4 years from now of my
returning to the Federal Resen·e Board. \Yhether such a possibility
will materialize or not I don't know. Lots of thing-s could happen
between now and 4 \"ears from now, but I w,mted the committee to
know that I would tbink of a normal course of progress for my career
a,; going back to· the Federal Resen·e Board, or to a Federal Resen•e
..
Bank, perhaps, as a means of finishing my career.
It's n natural kind of thing because my work during the 20 years
of my professional career has been in the area of nonfinancial economics
and monetary policy.
I l111.ve enjoyed publir. ;;enke ,·er,r much and I would want to
continue in that nrea. The Federal Resene would be ll natural place
where I would seek employment .
Senn tor BrnEx. Hopefully, there will be no need for you to s~ek
e~ployment at the end of 4 years; perhaps it should be 8 years with
a httle luck.
Your re,;pon5P to the Chnirmnn's que;;tion in rrgnrcl to whether
or not-wl111t your relation,;hip with Dr. Bum;; w,,s, whether or not
that ~rnuld ~e of any con,;equence in your performnnce of your respectl\'e dut1e,;. Any comment on that?
Dr. GH.nrLEY. What I said wn;; thnt I han worked ,·ery closely
with the Chairnrnn, I ltarn Yer~· great respect for the Ch11irman, he
is a Yery wi,;e nrnn, 11 man of great knowledge, a man of great experience, und I han con,-iclered it a pri,·ilege to work for him; but he has
no respect for 11 ,;tnff member who won't stand up for his own judgment,; nnd who won't expre,.;s them.
I hoYe felt entirely free during my period a;; a staff member there
·
to tell the Ch11irnrnn preci;;ely what I think.
Senator BmEx. You woul,l harn no inhibitions about telling your
new bo,-;s-Dr. GR.nrEr.Y . ~one ut all.
S('llnt,,r Bwr:x. (continuing]. If you thought the Chnirm,m of the
Fed, Dr. Burn,;, wn,; incorrect, you would ,;trongl~- and vigorou~ly
.
oppo,;e Dr. Burn;;' po,-;ition in your new capacity?
Dr. GaA::.rLEY. Absolutely. I spoke with ~Ir. Schultze concernmg
my association with the Chairman and conceming my general intention at some point perhups to return to the Federal R~serve
Board, I think the last thing :\fr. Schultze would want is Cha1r'?1an
Arthur Burns' representative on the Council. He does not consider
it a problem and neither do I.
Senator BmEx. Have you discussed with anyone at the Fed or Dr.
Burns in particular, any specific plans about returning?
Dr. Gn.,n1LEY. I have not.
I have asked no commitment.
I have given none.
Senator BmE:x-. Fine.
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That satisfies it.
.
Thank you very much.
The CBAIDAN. Senator S~venson?
Senator STEVENSON. I have no questions, Mr. Chairman.
The Cn,\IRlIAN. I have questions, for you, Dr. Nordhaus, but first
I want to follow up, because we have been talking with· Dr. Gramley
on his background, his interests.
.·
. First, let me ask you, Dr. Gramley, bow you feel as an expert on
the Council of Economic Advisers on monetary policv, particularly in
view of the fact that you will be able to act in a way that should
coordinate our overall economic policy? We are all very aware of the
independence of the Fed, indepeI1dent of the executive branch. You
will be in the executive brancli. How do you view your role in that
particular respect? What can you do to enable us to arrive at a more
effective· monetary· policy?
Dr. GRAllLEY. I think I am brin~ng two things to the Council.
One is a long exferience in economic forecasting. That will be one
of the roles that will play on the Council. To assist in the development of national economic forecasts. The second thing- I think I am
going to hring to hear is n Ion~ history of nssessing' the iml_)act of
monetary policy on economic activity. I hnve done thnt at the Federnl
Reserve. I will continue to do that. ~fy associntion with the Federal
Reserve helps in thnt respect, not becnuse of mY nssociation with
Chairman Burns, but rather because I have ,vntched monetary
policy ,vork. I have assessed the effects ·of monctnry policy and I will
continue to do so.
The CH.-\IR'.\U.N. Well, you assess the effects of it. Will you be saying,
in view of the fact the Fed is going to ndopt a pnrticular monetary
policy, therefore we need more or less fiscal stimulus, or would you
feel that in view of your expert knowledge of how the Fed works,
you might have some influence on the Fed on whnt thev might do,
you might tnlk to Dr. Burns or other members of the Federal Reser,e Board?
Dr. GRA'.\ILEY. I would certainly be talking ,vith members of the
Board, but I think the conversations would probnbly be more between
mvself and ~Ir. Schultze and ~Ir. Schultze and the Board members.
I i·ouldn't try to strongarm the people Ol' the Federnl Reserve. After
all. that is nn independent agency.
I think the independence of the Federal Reserve is something we
ou.,.ht to preserve.
f think we will need to consult with them. I will be talking with
~Ir. Schultze about my views on what monetary policy ought to be
a11cl what my views are with respect to the adequncy of monetary
policy, as it is being planned by the Federal Reserve nnd_ an1:1ounced in
terms of its longer rnnge growth targets, to meet the obJectlves of the
administration and of the Congress.
.
The CHAIR'.\IA~. You see whnt I nm concerned about, and I think a
lot of other people would be concerned about; we want to stimulate
the economy right now, for instance, nnd maybe for the next several
years, much more vigorously thnn Dr. Burns may wnnt_. He has_ mdicnted he would follow n more cnutious monetary pohcy. He Just
told u;; he has reduced the goal for thi-; yenr for the upper level of lVl1,
indicating he would expect the growth of the money supply to be less
than he indicated before.
.
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I take it your function would be to recommend to Mr. Schultze
what we could do with the rest of our economic policy to adjust to the
given fact of a fairly conservative and perhaps restraining monetary
policy.
·
·
Dr. GBAlILEY. Yes. That plusThe CHA1R11AN. That seems to be a one-way street. In other words,
the Fed decidecl what it wants to do and everybody has to adjust to
that.
Dr. GRAlJLEY. I don't think that is the position the Federal Reserve
has taken, as I understand it. The Chairman has said that the growth
rates of the mo~etary aggregates will :peed to be reduced over the
lonuer term, in order to have any reasonable hope to regain price
statility. That is a view with which I would associate myself. ..
Last year the growth of :\Ii, the narrowly defined money supply,
was 5.4 percent. All of us know that kind of growth in M 1 can't continue indefinitely. If we want to get back to price stability it has to--·
come down. But tlrn Federal l{eserve target for the year ending the
third quarter of 1977 is a range of 4J~ to 6}' percent for the growth of
:\11, I view that us adequnte. For the fourth qunrter of 1975 to the
fourth quarter of 1976 we hncl an increase of about 5)G percent in M 1
and that produced a growth of 10 percent in the gross national
product-The CHAIR~IAX. "·e had an um1sual Yelocity. \Ve often have that in
the initial stages of recovery. You can't expect to continue it. If you
have it, you will have to have a bigger increase in the money supply,
either that or-Dr. GR.DILEY. It seems to me rensonnble, for the next year to expect
that an incre11;:c of 4Yi percent in wlocity could be realized. There are
inno,·ntions going on in the financial markets thut I would expect to
continue during 1977. They might ode! as much as 1 to l½ percentnge
points to the increase in wlocitY. We will be going into the third year
of the recoYery but we ore doing so from conditions in financial
markets that npproximate those at. the trough of a recession. Interest
rate;, are now, m fact, lower than they were: at the trough of the
recession. l\"e haYe on economy that is liquid.
The CttAIR~IAX. That is right. That is the reason the Fed has been
able to get nwny with this policy. That is whnt. we are concerned
about.
Pc·ople don't core about really :\1 1 or :\f 2 or :\1 8 , for that matter; as
long as the interest rntes ;.;tny down, the Fed won't hnYe fl rroblem.
\\"hrn theY begin to ri'-e, that i;. when the test between the Fee and the
Council, depending upon the Yiewpoint, I would expect thnt is when
the real tC'st would be, 1md thnt is when we will be concerned with how
theY will react.
Let me ask you this: Dr. Schultze snicl, the most distinguishing
element of the new Council of Economic Ach-isers, when he tnkes over,
will be their concnn with international economic policy, and the blendin~ of international with domeca,tic policy, to be putting that together.
i--o thnt j;. the difference. Thut i, the big difference. That is what he
stre;;;;ed nnd emphasized.
.
I got the impression from him tho t one of the members of the Council
would be on expert in international economic policy.
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You gentlemen are both extremely well qualified. I am sure you will
have no trouble getting confirmed. I don't envision any opposition
at all.
But at the same time You do not seem, either one of you, to be
particularly specialists in tbat area or with a bnckground in that area.
In view of the stress thnt Dr. Schultze put on this, whnt happened?
Where is the expert on intemntionnl economic policy?
Dr ..Sehultzr is a di,-tingui;.hed economist, but thnt i;;n't his forte. I
don't think it is Mr. Xordhnus' forte; he is distinguished in many
other areas. If it is though, he can inform us. How are we going to get
this input on ~temational economic policy that will be sufficiently
im.r.ressive and expert that you will be able to have a new kind of
policy blend we ha\"en't had before?
Dr. GR.-\lILEY. I belieYe Professor Xordhaus is the proper person t-0
answer.
Dr. :KoRDH.-\US. I think there are renlly two ;;epnrate nspects which
,-hould be ;;ep,irnted. I thiuk, on the one hand. the monetary nncl
fownei11l ,,ide, my prc;;umption i;; tllilt Dr. Gmmle_,- with his long
experimce will haw somP sny in that, nncl I know hr has considerable
exr,ertise in that area.
!'lien, if we look nt whnt might be cnlled the renl ,-idr of the international ,-c·rne. whirh i1n·oh-£'~ roordinntion. ,-_nH·hronizotion, inter11ationnl macrorcorwrnie 011tlouk,- and ,ome of tl1t' oth<·r issur;: snC'h
ns energ,·, trnde, 11nd ,-o 011, thl' prP,-nmption ut thi., stnge is that I
will be the per,on primaril.,· re,;ponsihle for that. I 11111 not really sure
how Yon want to disrus,; it, S£'nntor.
I t'tiink tlwrc are two thing;;, One i;;, nlthout?"h m~- primnr.,· focus has
been on dome;..tie, in ;;omc of my miC'ro-nn11\ytie work, I hn,-e ;:pf'nt
ron,id£'rable 1unount of time ,;tudying' ptuticul11r problrm,; ,;u<:h n;; the
intenrntionnl £'nergy mnrket and a c-ertnin amonnt of ti111e worr,ying
t1bout internntionnl commodit,- 1H!TC£'ments 11-- weil n,; tlw international
11zg-re!!11te macro ,;itnntion \\:hic:h nlmo,t e,-£'n-boch- worrie,; nbout.
I(~-oti would like to go into ony pnrticular detail; __·
Thr CH_\IR)I.\X, I know you nrr an £'xpert in tlw em•rgy aren. You
han• \\Tittt•n n•ry doqnent, p<>r,-n11--i,·e nrti, Ip, in the enrrgy nren.
Of co11r,e, thnt hns inll'rnntio1wl implir·ation,. Bnt the ~Tt'llt 111'£'8 of
monetar.,-. intl'rnntionnl mouetnry policy. i, thnt on£' tl111t you l11we
hern r·on,·ernr,l t1ho11t--Dr. GH.DILEY. Xo. I haY£' not. :\Iy ,rnrk ha, hren prinr·ip.11ly in the
dome~tii- field.
The CH.·\IR:\L\~. There we ha,·£' thr prohlPn1.
·
Dr. GR.DILEY. I tl1ink we all will be learning'. c•xp1111ding our horizons
11 littlP bit.
Th,! f'fnIRll.\~. LN me n,k you. Dr. Gmmlc•y, nhnut honsin~. I
11111 <:oneerned ttbont that. Thi, <·omrnittee ha;; respon,.ibility for
hou,in!!. The former rhuirmnn of thi,- ro111111itte£'. :-O£'nntor Spllrkmnn,
w11--, J thought. ,·£'ry g-£'11ero11" with tlw Fl•d in his renrnrk,-; on tlwir
us"i,-,tnntl' in hou,-ing.
I wnuld:d be• quitr us fnyoruhle on tlH·ir effcr·t on hou"ing in the
p11,t. s\ .. you know. hou,-inµ: i, thP Xo. 1 ,-irtim of C\·ery c-redit
r-r11nr·l1. [n 19tif.i, it jn--t went through thl' floor. The fl':-t of the economy
wu"11·1 nffoeted too rn1wl1. A little hit perhnp,- L.,- the in<:ren,-£' in the
intere,-t ri1ll'. resulting from the ,!ow,lown in erNlit. but hou,-ing just
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went into a nosedive. That hns happened ngoin and again, because
interest rates are such a vital determining element in tho purchase
of housing.
·
Whnt do you SN' as the basic solution to this kincf of thing?
As I say, there is not the snme pressure now, because although
intere,..:t rates for housing are hil!h, theY hn,·e been stable for some
time. Around 9 percent.
•
Tf we hnn• another rrunrh und mort1?1lg"C intt>re,-t rntc,; go up to
J(), 11. or 12 pt•rrt·nt, we nre ~oing to hu,·p ti ,·(•IT, ,·cry roug-h con.
fronttttion. Whut do you sce n,- thc solution to this problem?
Dr. GnAllLEY. There i,; no ea,-y ;.;olution to thnt problem, Senator.
One of the thi11g-,; we found in the Feclcr11l Resen·e staff study of
fluctuntions"in housing WllS thnt n1ri11tions of this kind are not ·confined to our countiT. Prncticnlh· e,·cn· country ,mffers from them.
It is, in part, n function of the n11t11re o·r hou,cs thernseh·t>s, as durable
assets, postponable purchnsl'", ,.;o that thr oprrntion:-, not onlv of the
firnrneial mnrkcts, but 111,-.o thc rcal rn, rkf't,. trnrl to work
such 'i\
Wil_\. thnt liou,ing- i,.. ('l'o\\·d,,d ottt d!!•::,;_• ,, prrir,rl of r:-.trs,-. lll!/:?,Tl'g'1lh'
in
1
t!Pnrn11<I.
Thc <:;tt.\IR~u::-:-. In nlmoq eYer~· :., ',N countr-y thry plnre II priority
on hou::;mg nn<I find wny;, to as;;i::;t housing to 11 greater extent than
we are succe;;sful in doing.
Dr. GRA;\!LEY. We l1aw tried al:ao. but we haYm't been entireh;.ucce;:sful. I think we haw done n good bit in tlw way of Federal
housing 11ssist11nee. I think the best way to nYoid the roller coastcr
moYement in housing in the future h to run stnbilization policies in
w11ys that aYoid periods of excess aggreg11te denrnnd.
The CHAIR;\L\X. Her,:,, we han the President 2 wef'ks ago announcing
an eC'onomir: packagr, ii ;;.tiinulti:, to the economy. ~o mention of
housing. I am conYinr·etl this is the mo,,t effecti,·e, the least infl11tionury,
with the lea:;t po,sible effect on the deficit that he could haYe announced. This morning we arr told again, there is an additional
stimulus. The economic p11r:kage has been incrca;.ed because the winter
was so cold ...\gai11 nothing ut 1111 on housing. no housing element at
all. Xo mention of it. Xo apparent realization of whnt a useful and
con;;trncti,·e w11y this would be to stimulate the economy.
,rith thr pri\-ate ;;ector taking owr mo;;t of the work, with yery
littlr inflatio1rnrY rffect, thrrf' is n need for hou,ing. Last year wns the
wor:-t hou;;ing- situation we hacl in 40 Hilrs. ".hY~is this? How would
you !!entlf'men be nhle to help get the kind of economic input that we
obYiously are lackiug somewhere, in u:-ing housing as n way of restoring employment 11ml economic actiYity?
Dr. GR.U!LEY. Senn tor, I ,,·ould say to you, there is much _to be
done in the housing firld. I sympathize with that ,·iew; but I thmk to
ask no"· that the housing- industn· be pumped up as a means of
pumpinl! up the rest of the economj· is likely to put us right back on
that roller coaster 11g11in.
The Ctt.>.rn,rAX. \rel!. housing takes it on the chin when vou have a
credit crunch. Then when Yori haw a ;;it1111tion that calls out for
housing to he used IIS fi ;;timulm, they say we shouldn't use it for a
stimulus. The time nc,·er comes, it seems.
We haw set II g-oal in this committee in 1968, signcd into law by the
President of the United Stutes. 2.6 million housing starts a year. We
haYe never achieved that. 1975 we hnd 1 million. This year, this past
0
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year, 1976, maybe 1.6, 1.5. This year, 1977, the expectation would be
1.5, 1.6. A million short.
Every housing stnrt is two man-yenrs of work; a million more starts
means 2 million jobs. We are not asking to blow up housing out of
prol>ortion to where it ought to be; we are just saying: Go back to the
goa s. When HUD _made n study they didn't agree with many of our
~roposnls. They indicnted the go11ls ought to be around 2.3 million.
But on any basis, we are far short of the kind of housing we ought to
have.
Enn if you forget about economic stimulus, we ought to inci·ease
the number of housing starts. And you tell me that this isn't something
that should be in a package?
Dr. GR,DILEY. Wh11t I said was, I don't think we ought to try to
continue te use the hou:;;ing industry as the balance wheel for the rest
of the economy. I think that is the way you get on the roller coaster.
That is the wny it is going to be perpetuated. I think if we are going
to promote n progrnm for better housing, more housing, we have to
do so in 11 very careful way. We ought not to look upon housing as the
way to ,-timul11t1• an er·onomY :it a time whl'n the housing industry
right 110,..- is moving up and the prospects for housing look to be quite
good.
The CHAIR)IAX. Dr. Gramley, the prospects for housing, as I say,
the estimate;; nre 1.5 million for next year. In the Inst 2 or 3 months,
the reason we got the increase wa:;; why? The increase was entirely in
expensive hou;;es; nnrage cost of hou:<P, $50,000. Virtually no houses
in the Government-nssisted area. Yery few; less thnn 100,000. There is
a great disproportion, n great need for houses for people of modest
income.
,
Dr. GR.UILEY. I aaree fulh-.
The CHAIR)IAN. \Yhy coi.1ldn't we have a program that would
achieve that and mon nhead with it?
Dr. Ga.n1LEY. I think that progrnm has to be worked out carefully.
The CHAIR:'IIAX. I agree. The President iridicates he wants 11. $31
billion package over 2 ycnrs. If it doesn't include housing, we will
come along with th11t in this committee. I nm sure l\Irs. Harris will
probably make recommendations. And the President has coiled for a
$31 billion stimulus; any more is likely to be inflntionnry. Some of the
people in business and some of the economists nre saying that now.
Why shouldn't housing be incorporated with the sti'mulus package?
Dr. GaA.\ILEY. I w,1;,;n't privy to the planning for ,vhat was done in
terms of the fiscnl stimulus package, but I think the objective of that
package was to irnmre that we get an adequate real economic growth
rate in 1977, thnt we do it b~- means which are reasonably sure of
success, and in ways tho tare not going to generate the sorts of problems
.
we had in housing before.
Senator STEVExsox. I was interested in ~Ir. Nordhaus' comments
about macroeconomics in reference to energy a moment ago. The
feeling has been_ that it neglected many structural defects in the
national and international economy, to even begin to quantify the
consequences of, for example, energy prices for both inflation and GNP.
I have a general propo-;ition to put to both of you: Is it enough to rely
on macroeconomic efforts to, for example, stimulate the demands for
substantial rebates? What will happen? Are they not likely to end up in
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increased spending, or to shore up oil and steel prices? In other words,
infl11tionnry consequences.
Again, to cite another example, in light of what Senator Proxmire
was saying a moment ago about housing, if I am not mistaken, experts attribute about 2½ times as much to GNP now as housing; and
that raises large questions in my mind about an unselective approach
toward stimulation of demand. What is in this package for experts?
How do we begin or continue, if we should, to finance the oil-induced
payments deficits which are reaching pretty serious proportions in
most of the oil-consuming countries? Could you address yourselves
genemlly to such structurnl problems and the response to them and
the adequacy for conventionnl approaches to the recession and inflation, paired with the need for macroeconomic income policies, for
example?
Dr. XoRDHAUS. Senator, there are n number of questions you asked.
Let me start with one oft.he Inst ones. I think the stimulation package
which has been proposed i;; hirgely designed to r11.ise the level of
11.ggre~ate activity, with particular attention to the jobs question.
That 1s, of course, why the jobs and public sen·ices employment part
is so substantial.
Another point is the timing, where we are trying to find particular
components which cnn be put into effect and have their effect very
quickh·, that is in the current fisc11l year.
As far as some of the individual items, I do not think there is
anything in the packnge primarily designed to promote exports. I
think that is really something that has been deferred at the present
stage. will be handled by Vice President :\Iondale's trip, nnd also will
be discussed extensh·ely within the administration over the next few
months and discussed in the International Summit.
I presume the main way we nre going to export that growth, which
is the goal of the next few years, is to hnYe general synchronized
expansion of those countries around the world, or the OECD, especially the United States, Japan, and West Germany. That is on the
international front. As far as international macro situations are
concerned, I think really we are looking do,rnstream n little bit to
more coordinated policies, although we haYen't really put that
too-ether yet.
There were some other questions. I am not sure which you wished
to focus oh.
Senator STEVExsox. I raised a number of subjects illustratiyely.
The basic proposition is, can you rely on traditionnl aggregate demand
policies to stimulate the economy without inflation, or must we face
up to some structural problems" such as are reflected by increas~ng
demand, increasing prices, rising unemploYment nm! wage inflation
at the same time? One of the more spec1fic examples was income
policy, the incomes policy which was mentioned.
Could you both respond to that?
. ·
, Dr. ORDHAtiS. Maybe I ,viii say one wo_rd on th~ first question.
fhen Dr. Gramley will, I am sure, hnve his own Y1ew. Here I am
really speaking more in my views as an economist rather than the
administration.
The economic package at the current state of the economy will have
Yery little impact on inflation one way or the other. I think it is
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possible that, without worrying about the com~ition, over the next
2 years the inflation rate might be, 0.1, 0.2, and 0.3 percent higher
because of a higher level of activity. This is a result of real growth
rates that raise the real level of economic activity by 2 or 3 percent
after an extended period.
On the other hnnd, I think there are pnrts of the package that will
offset that. In particul11.r, my understandin~ is that the social security
tax credit, which is part of the package, will have a downward eff'ect
and may completely offset the upw11.rd effect.
.
On the incomes policy question, we have not really even studied this
yet. I think this is going to be one of the most important policy issues
for the Con~ss and the administration, but I think there will be some
discussions forthcoming over the coming months.
Dr. GRAllLEY. I do think there are a number of things that need t.o
be done.
···
I would classify them generally as struetur11I policies, policies that
are designed to make our labor and product markets work more
competitively than they have in the past, so ,ve can break the cycle
of continued inflation in the midst of high unemployment.
I think we ,vill need also to increase the rate of business investment. One of the problems of the recent past was that when we got
up to fairly full levels of resource use in the labor market, we found our
capacity was strained-we ran into shortages.
I think the rate of business investment will need to be increased
o,er the lonier term. That will require, over the longer term, making
sure the Fecteral deficit moves down as the economy moves to higher
le,els of resource utilization.
It will include also, I believe, some careful consideration of incenth-es to business investment.
Those are tasks for the future. They have to be thought out very
carefulh-.
The CH.tIRlIAX. Dr. Nordhaus, I am intrigued by your proposal to
ll"e the corporate tax systems to enforce a set of national guidelines on
,,age and price beha,ior. As you suggest, this could be done by imposing a sli<lmg scale of tax penalties on .items whose prices or wage
incrr·ases exceed the standard.
Do you think such a system could be implemented and practiced?
~,ould you favor going ahead with it? I know you have written a.bout
it?
Dr. XoRDHAUS. I am surprised, Senator. I don't ever remember
~ting_a word on that. I remember a story that was fabricated by a
Journalist-·
The CH.URlIAX. Attacking you for doing this even though you
didn't do it?
·
Dr. XoRDHAUS. I have never published a single word on it. I will
be happy to speak later on it. If you were reading Business Week
perhaps, that is a f11brication.
The CHAIRlUX. It's the last page of an article I have, under your
b,·line. It reminded me sometimes we get a terriblv intemperate letter
from ll constituent and we write back, we say, ~fr. Smith, did you
kn.ow some degenerate is writing letters under your name?
I'm sure if you say you didn't write it, you didn't write it.
62-252 0 - 80 - 3
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Dr. NoRDHAUS. There was something in the press, but in an article
I wrote as I recall published in May of 1976-.
The CHAIRllAN. This was an ·article entitled "Inflation Theory and·
Policy," in the American Economic Review, May 1976, pages 69 to 64.
Sets forth a framework and explains inflation and so forth. William
D. Nordhaus.
Dr. NoRDHAUS. I did in that article point a finger at the economics
profession for not being terribly innovative in their thoughts about
anti-inftation/olicy.
I mentione proposals that had been put forth by Governor Wallich
and Dr. Weintraub.
The CH.-\IR:UAN. I aln glad you make that clear. Perhaps you suggested in the course of the article, this is something that might be
thought about. You didn't propose it as a solution.
Dr. NoRDHAUS. That's correct.
. The CHAIR)f:\N. How do you feel about that kind of approach?
Do you think it has any practical possibilities or do you think it's
unlikely to be something we could do in the next few years?
Dr. NoRDHA'(j'S, Well, I will speak only as a pri,·ate citizen on this
because I have not really had a chance to discuss it. But I do feel that
the economics profession has.not been imaginative in helping people
devise schemes which would improve performance on the macroeconomic level and inflation and incomes policy in general.
There have been a number of attempts, I'm sure you know of in
particular, on the Continent, in Europe, and in Great Britain, to implement incomes policy. I think with the exception of the social contract
in Britain over the last 2 years, these are regarded as being either
failures or inconclusive. Thus we should stud~- the matter, but we
should not simply go back to things that we tried over the last 10 to
15 years as the onlv answer to solving our inflationary problems.
The CHAIR)I.-\X. Dr. Gramley told us about his feelings, that we
should take action to encourage a greater investment in the capital
sector. You published a paper recently, Dr. Nordhaus, showing a
long-term decline in the share of GNP going to capital. Do you recomment tax goal changes now to help investor recoup their share or
will the market yield whatever incentives are necessarv to investors
and savers under the existing situation?
•
Dr. XoRDH.ws. Again, speaking as a private citizen, I am slightly
skeptical about this approach for two reasons.
One is that I view the long-term decline in the rate of profit in the
American industry as a reflection of fundamental conditions:na,mely,
the fear of Great Depressions had receded, and things were much
less uncertain than they had been, say, in the early postwar period.
Therefore, the current lower rate of return on capital is not because,
as was viewed in the current economic report, that Government was
overrestrictive, but rather that this was simply a secular movement in
the rate of return, reflecting longrun conditions.
On the second point, I am perhaps less worried about the rate of
investment on ~he long ~er!Il· My own personal opi~ion, and I haven't
looked at ;;tuches on this m the lust day or two, 1s that the rat~ of
investment today is pretty much what you would expect given the
fact that we are in a depressed economy.
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The CH,\tR'.\IA:S, In what,?
Dr. X ORD HA cs. A depressed economy. If we were to get the economy
back to high levels of utilization, then the rate of investment would
climb more rapidly than GXP and would climb back t-0 more normal
le,·el;;.
I think the d11t11 put forth in chnpter 1 of the lu;;t Economic Council
report doe;; indic,lte thnt, in £net, the rntio of invegtment to GNP i!>
hiszher today than it was at similar lel"els of utilization in the past.
The CHAIR'.\U.:s. Then right now, do ~-ou feel that the wisest economic
policy is to stimulate the consumption, stimulate demand, so that we
can get mo,e economic activity and reduce the amount of vacant
capacity and thereby create a situation in which there w~uld be more
interest on the port of busine;;s in investing in plant and equipment?
Dr. X ORDH.u:s. Again, my opinion would be that some kind of
bulanced exp:m;;ion i;; not n bad idea. It cloe;;n't. 1enlly mnke n lot 6t
diif Prence whether the lion\: sh:ue i;; con~umption or it's hnlancc<l;,:ome con;;umption. some inve;;tment. some export, whatever-but
the main point i-:, I think there'll be n siznble recovery of investment
when the utilizntion of cnpncity gets high enough so it's worthwhile
for inn•;;tor.: to expnnd their cnpncity.
The CHAlR'.\tA::-.. Writing nbout infli1tion policy, you speak about
the di;.tinction between nuction market,:' nnd nclministcrccl markets:
The admiui,tered mnrkcts contain much of the' mnnufncturing, utility, and
g0vernment se!.'tor~. and the lnbor markets are progressively becoming admin-.
iHered.
If thnt's so. how do vou escnpe the dilemmn that the reduction of
inffotion i;; achiend onh· nt n ;;tnggering: co;;t in unemployment?
Dr. X ORDH.u-,.:. I don't think we do. I think thnt is a correct conr]u;,ion. I think it',- correct thnt to u-:e unemplo~·ment ns n policy to
redu<'e infl11tion inYolve-: enormou,; social co-:ts.
The CH.\IR'.\L\S. Then i;; your nn;:wer the answer tlwt I thought
~Ir. Gramley gave u:-, that the only wny to nwrcome this is th1011gh
"tructut:11 policie-<, thrnugh making labor more mobile nnd mnnpower
training nctivitie,, th11t kind of thing?
Dr. :\'oRDH.H's. Well. I think ,-tnrting: at the point we nre now, with
very low Jew],- of utilizntion nnd high lewl;; of unemployment, that
w(• con expand tlw ernnomy for a r:on,idernble nmount before we run
into the dnnger zone of rnpidly Ii,-ing price,- nnd wnges.
Th£· CHAHDI.-\X. When would you be 11ble to get down to, say, 6 or
13': percent?
Dr. X ORDHArs. Five percent, plus or minus n half percent; is where
I personnlh· think the dnnger zone is. I should a(ld that by "danger
zo!H~." I n1ean not that you get hyperinflation, but you get some
notireable increase in inflation. Once the danger zone is reached,
You then haw to think cnrefullv about how vou wnnt to proceed.
br!r·e the danger zone is reached it is importnnt to use micromensures
of the kind in both the lnbor market nnd the nroduct market; and
ar that point the question we nlluded to enrlier, ·of overnll or incomes
policies becomes relernnt. Since we are still a long way from the
dc.nger zone, price policies are not terribly relevant at the present
time.
The CH.UR'.\IAX. Yet in the last half of 1976, we had a considerable
increase in industrial whoiesale prices.
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Dr. NoRDHAUs. That is correct.
The CHAIRllAN. How do you explain that with a slack economy?
Dr. NoRDHAUS. I think it is pretty clear from the evidence that
I have seen that, by and large, the pricing behavior in the industrial
sector, which is the non-auction or administered market, is based
on average normal cost pricing behavior.
Since we are in nu economy where wages nre continuing to rise at
8 or 9 percent, and productivity growth is on the order of 3 percent-The CHAIRlUN. Unit labor costs aren't rising that high.
Dr. NoRDHAUS. Right. You would expect an administered pricing
firm will have .pricing behavior that gives 1t an average rate of inflation
around 5 to 6 percent, even in an J!eriod with some slack.
The CHAIRlU.N. During May to December, we got a bigger increase
than that.
Dr. NoRDHAUS. Are you talking about the wholesale price?
The CnAm,ux. Industrial wholesale price.
Dr. N ORDHAUS. We arc really gettiug off tr11ck. I would be delighted
to talk about-The CuAIR::\IAK. Is the index nccurnte, do you think?
Dr. N ORDHA us. In the long nm the index hasn't been too bad.
Since Nowmber of 1972, which I pick because it is a statistical
point, not n political point, the wholesale price index ha;; behawd in a
way that is unrepresentntin of underlying behaYior. In Aug-u;;t of 19i3
the official price index rose a}>j>roximately 50 percent foster than any
sensible rrice index you cou { haYe looked at. It is just clue to the
defects o this index.
•
I think the Bureau of Labor Statistics is aware of that, although
they don't appear to be promulgating it.
The CHAIRllAK. Dr. Gramley, as one who has sat at the feet of
Chairman Burns so long and been so closely associated with the
Board and Dr. Burns' philosophy, how do you respond to the answer
that Dr. Nordhaus gaYe to me, to wit, we cannot escope from the
dilemma that to reduce inflation, under present circumstances, by
relying on fiscal policies, fiscal monetary policies, we can only do it at
the staggering cost in unem_ployment?
Dr. GRA:\ILEY. I agree. I think we paid a very dear price to try to
get inflation down.
I think we need to move forward with a stimulath·e program, but
I also ugree that we are not going to succeed in reducing unemploy-.
ment much below the range of 5 to 5}~ percent without generating
stronger inflationary pressures unless we do something to moke our
lnbor nnd product markets work better:
,
..
I do think we need to do something m the wny of structural p~hc1es.
The CHAIR::\IA:--. Dr. Nordhaus, much of your work has been m the
energy field.
What would you advise President Carter to put his major emphasis
on in energy policy?
.
. .
Do you think 011 and gas regulation should be mamtamed, phased
out or abolished forthwith?
Dr. NoRoHAUS. I am not the President's counselor on energy, as
you know.
The CHAIR:\IAX. But he will look to you as to the economic
consequences.
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Dr. NoRDHAUS. We haven't discussed this, but I will give you some
personal beliefs on it.
I think there are clearly three quarters that have to be asked in this
area. One is the macroconsequences for which I think the Council
wjll be primarily concer_n~il; ttnd second _woultl be the distributional
c·o11Sc-q11enr:e,; of the pohc1cs . .Arni the tlurd would be the efficiency.
I think, as you know very well, there have been ,·ery serious reservations about letting energy prices rise, especially in the last 3 years,
because it is '\\cidely recognized that those are like excise tax increases
or they behave as such and, therefore, would choke off expansion
before it ever _got underway.
Therefore, I think we have to be very careful.
.
If we do h11Ye ,my kind of price increases, I think they have to be
off;;et by approprinte macroeconomic ;;tim11!11s, so thut the economy'
dc,s•on't head 11gi1in into the nosedi\·e, 11,; it did in 1974.
There i-; the ,-ccond question, which is the one of distribution. I
um Yery concnned per,-onally, a,; I nm sure eYeryonc is, that there>
not be windfall gains to those who for historical reasons had certain
con tracts which - are now changed or windfall lossc;.; on the part of
con;;umers in certain areas.
I think, Hgain, I don't know how much·we cnn do, but that has to
be kept in mind, I think.
Finally, on the efficiency side, I am concerned that in a Nation
which stres-;es energy conservation am! independenc-e, we arc heavily
;;ub;;idizing the tbe of our nonrenewable energy resource;;.
Thi-; i;- a fundanwntal point of effic-ienc;r of our own resource alloctltion that ha;; to Le kept in mind in viewing the schemes that we
brew up or may come out of Congre;;;-.
The CHAIR)!.\.X. Let me get back for a minute to that wholesale
prir:e index, becmi,,£• I think it i,- so important that we get our focts
t1:' ~traight il'i we can, and we rely on the;;e indexes so greatly .
•.\.n a b;;tract of your publications provided to me by the Law
Library of Congre;;,;, attributed to yon nnd your colleague, John
::-hoYen, contain'- tlw view thut the price index grossly exaggerates
th,:, eYti>nt of infl11 tion. You ;;ny the shortcomings and peculiarity of
this index ma~· huw distorted inflution figure;.; for 1972 and 1973 by at
lea,t two-third,. !,a that arcurate? If ;;o, what do you think we can
,lo to eliminate that di:-tortion in the wholesnle price index?
Dr. );onnH.u:;;. I don't hnw those numbrrs at my fingertips.
That is a correct-The CHAIR)IAX. That is 11n astonishing piece of information. We
ari:· l!oin~ to tukl' the wrong kind of economic policies, if our intelli~n1ee i;; that bncl.
- Dr. X ORDH.n·;;. I think it is a serious problem.
I rrmember di,,tinctly why we did thnt pircr of research, because
our local cfati11gni;.Jwd newspaper, thr Kew Haven Register, woulcl
(oi.tin11e to put eil!ht-column hrudlinr,-, """holesale price up 2.1
percent, at an anmrnl rate of so much."
· ,Ye ;,aid ":\Iy g-osh, i-. thnt renlly true?"
We looked at th,1t index carefully, and we decided there were two
fnndamcntal flaw,.
The fir,;t or,e wn;.;, in g"nNal, rertain goods are double-counted,
triple-counted or qua<lrnple~counte<l.
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For e:'l.ample, wheat i;; counted three different time:.. When it
pa;;se;; through as wheat, then when it passes through as processed,
and then a;; it pa;;se;; through finally in the wholesnlc transaction as
bread.
A wheat price increase-that was the period from November 1972
to .-\ugu;;t of 19i:l, of the great wheat inflation-was so magnified by
th<' p,nticulnr <·on,trnction th11t W<' thought we were having much
wor,;e inflation tlrnt we actually were. At leu,;t so thought the people
at the Xew Hn,·en Regist'!r, and I think it wns al;;o <.lisplayecl elsewhere.
There is another nren-I won't stress this at this stage--but this
index has a Yery narrow comtmction, and covers only about n third
of th(' economY.
Th11t i, Another problem. It also happened, but. not ns badly,
rlurin~ the oil price ;:.ituntion.
1f ,,-(' hn•(' our mni:-roeeonomic policie;; on that index, we nrl' basing
it nn ~rnnrthin1:: \\·liir·h ii C't o,;;;;h· di,.torted.
The CHAIR~I.-\X. I :1rn u· mcnibt!r of the ,Joint Economic CommitteP,
imd h1\·;e Ut'en conc:ernrd nbout th<' stnti-;tic,:; that come out.
$tati~tic:nl infornrntion is the most importnnt element in mnkin~
sound economic policy. Cnn you give me in writing 1111 indication of
whnt YOU think W(' mig-ht do to mnke thnt index more ,1ccu1i1te?
Dr.·:\" OHIJH.-\ r;,;. O(c-our~e.
The C'H .-\IR~L-\~. I would like wry much to get th11t. Dr. Shiskcn
come-; before our committee eY('l'\" month. We nre in touch with him
much more often than that.
·
He is. ns you know. il highly competent economi,--t ,mrl Yety nnxious
to do thing,- the right w1w.
,Ye wil(cenuinl,· be in· touch on thnt.
Dr. X OHDH.u·;,:. ·Let me comment on tlrnt.
Th('re w,i,; :1 conferenC'e ot the Burenu of Lnb01 · tati;,:tics, ns I
recall. in October of 197 5.
There w11;: ,-ome que.•tion about whether they were going to mnke
::'ome reYi,ion,-.
I don't know thnt they hnYe <lone nnythinr But they nre aware of \
tbi~ r,oliC'y.
The C'tt.-\IJOI.-\~ . ,Ylrnt orea~ of rr.;;ponsibility will you be asked to
o;,:,unw on the Council'? Eneqzy'? (nilntion? Something else?
Dr. :\" 01rnH_\l·" · I don't think tlrnt i" really completely spelled ont.
I would ":,y th,lt I would prolrn bly be in ch,nge of frontline duties on
the in tP11111 tio1rnl one! enN 1n- nnd :-ome other macro issur;;.
ThC' l'II.-\IH,I.-\:--. You Jian· tnlked about the current infl11tion.
\\"hot policie;; would you recommend, Dr. :\"01dl111u;;;, to 1e~luc:~ inflation further nt the pre~ent time? Yoluntnry methods, grnde)m('s,
what do you think would be p111<:tical?
. ..
.
.
Thi,- committee. n" \"OU know. Jrn,:; a re;;pons1b1hty m tln,; ureu.
\\"e hnn juri,diction o,·er wnge, pric:e c~mt1ols or hnlfwny measures
01 e\'£•n Yoluntan· me11Smes. l would hke ve1v much to get your
udYi(:e.
.
•
Dr. :\" on1>11 .n·,-; . :\g-nin we h11w not di:;cu;;,;ed thi,; either in the
Counf:il or with othe,~member~ of th(' ndminbtmtion .
J will gin you my own pt>r,-onnl opinion. I nm very l~esitnnt- to
u,;e macroeconomic policy becuuse of the enormous soc1ul cost. I
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think it is probably p1etty clear without structural measures you
cannot get the unemployment rate down to l percent but that doesn't
mean we have to keep it at 9 percent and as long as we keep awa1
from the _great danger zone of maybe l or 2 percent, I think that 1s
wisdom. I just have not yet formulated my opinion enough to give
you more than that at this time, but I assure you we will be studying
that.
The CH.o\lRll.o\:X. We are ve1y concerned about the approach of the
Council on Wage and Price Stability. Whether there should be orenotification Rn,J a nnmber of thine:s.
Dr. Burns has suggested some very constructive action we might
take in this area. So, any ideas you have we would be delighted to
hear.
You wrote ·in 1974 about resources as a constraint on growth
How do you interpret that as it a~ects the U.S. economy over the
next 4 years? Do you see any restramt on our growth because of \he
availability or unavailability of energy resources or other resources?
Dr. XoRDHAUS. I would be surprise,!, Senator, if there were any
serious resomce problems over the next 4 years. Really, that literature
•
worries about the 21st century and beyond.
I think the only_ questions that are really important are those
invohing energy. Here, I don't think it is a problem of availability
of energy. I~ is productiYe capacity and our problems of international
energy rel a t10ns.
The CHAIR:o.u:x. Would vou then feel it is desirable to have proposals
to favor a conservation of resources, tax incentives, penalties.?
Dr. X ORDH.-\US. Here we are on thin ice. I alluded to this earlier.
I think as a uation we are subsidizing energy consumption, in that
oil is our marginal source and costs $2.25 to $2.50 per Btu. Most
energy prices paid by consumers are anywhere from 10 to 100 percent
of that.
So, I think the first thing we hRYe to do is decide whether we want
to continue to subsidize energy consumption.
The CHAIR:'.IIA:X. I think rnu haYe indicated it would be desirable
to subsidize less, but we ha,·e to be careful how we phase that in or
we will abort the recoverv.
Dr. XoRDHAUS. AbsolutelY. That is correct. But there are really
two kinds of conservation. 6ne is induced by prices; another one 1s
nonprice conservation.
The Congress up to now, my interpretation, has favored the
nonprice energy conservation in the Corm of standards on automobiles, housin~, speed limits and so on.
·
I think there is also the consideration of appliances and those
items. I think those have a useful role to play. I think price conservation also has a useful role to pla:r.
The CHAIR:'.11.-\:X. One of your articles has the intriguing title, "The
Political Business Cycle." How do you expect the political decisions
of the new Council to differ in their impact on the econoI!}y from those
of previous Councils?
Dr. XoRDHAUs. I can't hear thnt.
The CHAIR:'.IIA.:X. Let me ask you the first one and giYe you a crack
ut the second part. How do you expect the politicul decisions of the
new Council to differ in their impact in the economy with thut of the
Greenspan council?
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Dr. NoRDRAus. I don't really know; Senator.
I would expect that in line with the policy of this administration,
that the Schultze council will be primarily oriented toward getting
the economy toward the appropriate level of economic activity, and
one that is obviously higher than under the Greenspan council.
The CRAIRllAX. That was the purpose of the Greenspan group, too.
They just had a-they certainly wouldn't-I don't thmk they would
a_gree that their purpose was to do anything except to give us what
they thought was long-term effective growth and greater degree of
employment and greater utilization of resources. That was their
objective.
But I am asking how you would differ. Dr. Greenspan certainly has
a i>hilosopqy quite different from that of Dr. Schultze.
I think the other members of the Greenspan council may differ
from you and Dr. Gramley, but I would like to know if you can give
us some specific indications of how this might work out in practice.
Dr. X ORDH.u;s. Well, my O\m reading of the last Council's work,
they were interested in economic growth in the I 980's nnd 1990's,
but not in the 19,0's. They might have been concerned t1bout the level
of utilization of the economy in the short run, but their forecasts, and
presumably the policies which were proposed or implemented to
obtain those forecasts, were not ones that were designed to insure a
rapid recovery. I think they were terribly concerned about inflation,
much more concerned about that than unemployment; ,rnd they had
a view which I don't share, that you were buying 11 lot of nnti-iniiation
policy by having very high unemployment rates.
That is n difference of scientific opinion.
The CH ..\IR:'11..\X. How about your view of business confidence as it
affects investment?
Dr. X ORDH.u-s. I think we may have alluded to this earlier. :\Iy
impression is that im·estment is not that far-off the track of what it
would have been in a Republican administration. I regard the main
current probiem of inxestment and business confidence is that we do
not have an economy nt a high level of utilization.
The CH ..\IR:'IIAX. Dr. Gramley, I don't mean to be a Johnny-one-note
on this Fed situation, but it is one of the intriguing aspects of your
appointment. In his testimony before this committee on January 11,
Dr. Schultze said the following, and I quote:
The Federnl Hesen·~ ought to accept as its basic objecth·e the explicit and
implicit target; for real economic growth and unemployment which are invoh·ed
in the Congre;,;.' action on the Pre;ident's proposal.
Do you think the Fed actually does accept this?
Dr. GRA:'IILEY. Yes. I believe so. I don't believe the Federal Reserve
tries to set its own independent target for what the unemployment
rate ouaht· to be or what the rate of economic growth ought to be.
I kno\\tfrom both prirnte conservations with the Chai~man and his
public statements. thnt he expects a rate of real ~rowth m 197_7 somewhere in the neighborhood o~ 6 percent; Th_at 1s t~e sort of mcrea~e
which :\Ir. Schultze was talkmg about m his testimony before this
committee. So, I don't think there is any divergence there.
The CHAIR~IAx. Well, there certainly has been a very clear, very
gentlemanh· and ,·en· thoughful and sincere difference of opinion
between Dr. Burns ai1d what I would view as the predominant view
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in the Congress, and I think the Carter administration. There seems to
be a very powerful concern with Dr. Burns, thnt iC we do _stimulate the
economy too much, if, for example, we act with a Yigorous jobs progr11m and a t11x rebate, that that will have inflationary consequences,
which he would feel would be most adverse and wrong. Am I unfair to
Dr. Burns in saying that?
Dr. GR.-\lILEY. He has mode general statements nlso of that kind but
I have not heard imy opinion expressed by hirn as to whethrr or not he
thinks the packaie of fiscal stimulants that are under consideration
now is likeh· to nave significant inflationan· consequences for 1977.
)!y own vie,,- is we have enough slack in the ·economy now so that we
can afford to go ahead with the kind of prudent, moderate program
which the administration is considering-a program which will reduce
the degree of fiscal stimulus as the economy improves during the
course or 1977 and on into 1978-without undue concern about the
inflationary potential inherent therein.
I wc,nlcl want to ,;:n- to von that I a1'-o am Yen- concerned about the
problem of inflation: I think it- nc·cds to he c;u-cfully considered .. I
think we cannot afford to follow policies either this year or next yeer
which are likely to set the spiral of intintion,ny price and wage increases
going again. "·e need to work carefully, cautiously and prudently and
I think the administration's program is designed to do just that.
Thr CHAIR)IAX. Do You think the Chairman of the Fed would have
no difficulty npproving the jobs proposals mode by the Carter administration?
Dr. GnA)ILEY. I wouldn't trv to answer for Chairman Burns on
tho t. I ju;,.t don't know what his ,·iew woul<l be.
I kuow he i,- concerned about the need for programs to increase
employment nnd in the past. ns for as I know. he has not objected to
public ;.en-ice employment progrnms in principle.
The CHAIR\IAX. lfove either of you gentlemen given thought to the
problem of our citie$. as peculiar and unique, different from the problems of the rest of the economv?
.
The fact thnt in our inner cities, for example, unemployment is very,
very high.
And abo. 1b You know. Xew ) ork CitY hu,- n ve1T difficult fi,-cal
prohlem now. 1111d mimy people £rel that pi·ohlem ma~: be ,-hared by n
number of other Ian.re cities in our countrv.
Let me 11,k Dr. :\"ordlrnu,-. do vou thirik th11t on the bn,.;i,- of vour
knowledge. ,-rudy. that othei· m11jor ritie" in nddition to Kew l"ork
mnv foee thr po,;;;.;ibility of default or b1rnkrnpt<·y·?
Dr. ::-,; onnn.n-;.. I nm nfrnid I nm not re11lly up to dnte on that,
~enator. I would jtH ;.ay one thinl!: tlrnt i". the fi,.cal difficulty of
our citie,.; grew out of the depth and dumtion of the current recession.
The CHAIR\IAX. Thut i,- whnt I wonted to follow up on. I a~e
with tlrnt nllll J think mo;.t people do. Do you think the propo:.-ed
economic: ,-tin111l11,; pnckage will be of really ,-i~.mificnnt help to the
eitie,.; in rcconry irn.J nvoiding that kind of problem"?
Dr. XoRIJHALS. Well. I think it i,.; u step in the right direction. I
pre,-11nw thut the countercyclir:al revenue ,-!wring will continue, imd
maybc cn•n he hc•.,frd up n littlP hit on•r the lll'Xt few .war,.;. B~1·,,11 ti11ui11!! unmtnr·vdic11l n•Yt'llUt· ,-h,1ri11'.!: ,n• 1·:111 11void one unfortunate'con,-equence of the reces,-ion. \Ye' arc µ-oing to Le looking llt
that careflllh-. hut I h11YC no furthc·r thot1!!ht,- on that nt thi,- time.
The CHAIR\1.-\X. _\,. I "!lid. unemployment i- running much higher
in the centrnl titie- than el;;cwher(•. Some people ,-;uggest the Fcdero.l
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Government ought to provide special incenth·es, perhaps an urban
development bank to get the industrv to locate there.
·
)Iany people feel that is counterproductive and you should let the
market decide these things, it would be better in the long run. Do
YOU haw a ,iew- on that?
• Dr. X ORDH.n·s. On the unc>mployment quc>stion it is pretty clear
that the main reason that unemployment rates are high in the cities,
higher than they were 3 years ago, is becau;;e of the state of the
economy. We do .~xpect there will be considerable improvement in
center city employment just a» a result of the improvement of the
econom, over the next few ,ears.
..
In acldition, the public· service employment package which is
uu,ler consideration, and will be considered by Secretary Marshal],
win be targeted-I don't know this for a fact, but ju:-t a hunch, a
g11e,-3--more to the> higher unc>mployment c-itie,: und nbo will lc>ad to
1111 anwliorntion of unc>mployment. I don't think thut it is really
der:ided for sme.
The CHAIR:\I.-\X. President-elect Carter indicated a special concern
for the citie5, a welcome concem. How do you belic>ve that the new
admini,;tmtion ,-hould go about formulating 11 policy toward the
e:itie,;? \Ylrnt ,:l10uld be the roh', if uny, of the Council of Economic
_.\.d ,·i,;er;.; in that proce,,s?
Dr. GA:'IILEY. I have no comment on that, Senator. I have not been
in,olwd in the diseussion,; with :\Ir. Schultze to the point where I
know. "-ltat rolf' hf' exper:ts the co1mcil to pln.y, or what role ihe rest
of the ,1dministra tion expec:h to play in that process.
The CH.\IR:'11.-\X. Dr. Xordhaus?
Dr. X OIWH.u·;-. I would echo that.
.
The CH.uR:-.1.-1.x. It seems to me the council could be very helpful
betitWi~ it is a bi~ economic problem ns well as 11 social problem, and
your nch·ise would be wry significant for that re11son. I am just about
throu~h. I maY ha,e n question or two left.
·
Let·-me 11sk "each of you ~entlemen this simple, blunt question.
First. Dr. Xorclhaus and then Dr. Gramley, what do you regard
us full emnloyment? What percent?
Dr. X vitDIL\ c;-. \Yell. there nre two nnswers to that. One is what
I would like unemployment to be, if there were no constraints on the
,;_y-,tem . ..\.nd the other is whnt I regard 11s attain11ble with current
institution,. That is not meant to be 11 waflle. but u reitlistic appraisal.
I would think an unemployment rnte well under 4 percent would
be where I would aim if somehow I knew how to ~et there without
lun·in~ unde;;irable side effects; but I think it is unattainable without
in.~titution,c and that we really can't hope ~o aim for much below
.j 1wrc:ent. That i;; ,;ort of II fuz;;n- r111u!"e. \\ e don't renlly know. I
don't think we can nirn much below t'Jrnt without worrying nbout
intfotion and imbalances in the labor market. That is my own personal
opinion.
The CH.-1.rn:-.1Ax. Dr. Gramley?
Dr. GP..\'.\ILEY. I would have to conrur with Dr. Xonlhaus' judgJtll'l\b. I ,101, ·, think it i,- po,;sible for .my eeonomi,-,t rc,-ponsibly to
,uµ-f[bt .1 ,-infdt· rnun ber whieh represents full employment..
•
The CH.\IR'i.\X. \rell, we lwYe hnd 4 percent for some time. !\ow
t!te ,idmini:-;tration, tlie la'-t admiuistration, Dr. Greensp11n came before the .Joint Er:onomir; Committee on ,Junuury 19 and saiJ they have
re\·ised that to -±.9 percent.
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Senator Humphrey, who was present, said that this is like you
haYe a flu epidemic and the administration announces the normal
temperature 1s not 98.6 but really 100.
Therefore, is nobody really sick?
Because people with ·temperatures up to 100 degrees don't reaJly
count. It was an interesting analogy.
You have to-you don't have to, but Dr. Greenspan picked 4.9
and others have said 4.0.
Let me put it this way: If we are aiming at a pragmatic goal, what
would :,you have us aim at over the next 4 years?
Dr. GRA:.-.rLEY. A pragmatic goal for the present, I mean by that a
goal ,vhich is achievable witl-.out setting off a new spiral of wageprice inflation, is probably under the present circumstances in the
neighborhood of 5 to 5½ percent.
I don't think we can be satisfied, as a Nation, resting at that level.
I think we have got to do what we can by wav of structural policies
to get the rate of unemployment consistent with price stability down
cousider1,bly, down to somewhere in the 4 percent range or below.
'fh11 CttArR:"IL\X. :\lny I usk you, Dr. Kor-dhaus, would you support
the new Humphrey-Hawkins bill?
•
The bill, as you know, is different from the old bill. It makes full
em_ployment 4 percent in effect instend of :1.
But pro,·ides that the ta1·get for inflntion will be no higher than it
was when the Humphrey-Hawkins bill is put in effect, so we should
not adopt policies that would be inflationary.
It proYides that the wage to be paid would be the minimum wageit hns a whole ::eries of strncturnl actions, including manpower trnining
and so forth.
Do you think this is a proposal that you could support, or might
sul!port, at lenst in principle?
Dr. XoRDHAt:S. I support the philosophy, but personally I think
it is terribly important not just for the next years but 10ally ove1
my lifetime, thnt we take care of some of the problems mentioned in
the bill.
.
Economi .. ts hnve not, been terribly kind to the bill. There are three
aspects to the bill:
One i,, an unemployment target, and another one is the inflation
tar!,d, and the third one is what institutions are going to be used to
attain tho;;e.
I think tho,.:e three things 1uc unnttninable. I think you can have
anY two of them but not all three at the same time.
But I don't see how we cun uttnin very low leYels of unemployment
over a su;;tnined period of time, with the rate,- of inflation tliat are
envisioned implicitly in thnt bill.
Of cour;;e, we mnx be wrong, but that's my impression:
The CHAIR:"11.-\X. Well, as I understand the way the bill would be
designed to opernte, it would, maintain that gonl of keeping inflation,
,my, at the• present time to 4.8 pe1cent of nn annual basis, that's
what it Wib in December of 1975, to December of 1976, that we would
ju;;t cool it und not be able to proceed with providing an expansion
for the economy, if the inflation got above thnt.
Dr. XonHHAl:S. Did you say we would cool it?
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The CHAIRMAN. We would cool the expansion. We would not continue to provide the additional jobs if inflation was getting above 4.8
percent, we would just have to settle for 6% unemployment or 6 pe1cent, whatever it was.
We wouldn't keep driving it to 4 percent if we got into double
digit inflation.
Dr. NoRDHAUs. I guess that implicitly recognizes them may be an
inconsistency between the three goals.
The CHAIRMAN. You have to reconcile it some way. That's the way
th(l)' have tried to do it.
Dr. GRAMLEY. Senator, I have not studied the new HumphreyHawkins bill in any detail.
From what I know about it, it has moved in the direction of taking
out of the old bill many of the objectionable features, but I would
want to reserve judgment until I have had a chance to look at it
carefully.
The CHAIRMAN. Gentlemen, I am very impressed with your
qualifications.
I think you are both extremely well qualified to be on the Council
of Economic Advisers.
I think you will bring a degree of competence and expertise and
imagination, innovation that we urgently need.
I see one problem, and one shortcoming. The problem is the connections you had, Dr. Gramley, in the past with the Federal Reserve
Board.
Others may not view it as a problem, but I do. I think we have to
watch it carefully.
You're a man of great integrity as well as great achievement, but
someone who has been on the Board so long and so close to Dr. Burns
for so long and intends to go back to the Federal Reserve Board, I
think there is something that should be watched and we should be
conscious of it.
I don't think it in any way disqualifies you. It may be an asset.
The second is, we were given to believe by Dr. Schultze that the
great innovation in the new Council of Economic Advisers is their
concern with international economic polic;v:.
You ~entlemen are both very well-qualified economists. This is not
your pnncipal area of interest. I think it's unfortunate that we don't
have that degree of expertise.
We can't have everything. Nobody is perfect, but I just wish we
had that.
Thank you very much.
The committee will stand adjourned.
[Whereupon at 11 :40 a.m., the hearing was adjourned.]
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Senator GARN. Mr. Gramley, what would you do differently from
the administration to combat inflation?
Mr. GRAMLEY. Now?
Senator GARN. Now?
Mr. GRAMLEY. Right now, I think we have a program in place
which is appropriate to the circumstances we face. I think we've
got a considerable amount of fiscal restraint entrained. I think it's
going to work promptly. I think we are going to see some slowing
of the economy in the second quarter. I think we are going to see a
substantial reduction of inflation over the remainder of this year.
So I think for now we have taken the steps we need to.
Over the longer run, we as a nation are going to have to do more
than we have by way of efforts to improve productivity; efforts to
increase energy independence; efforts to accomplish many of our
social and economic objectives-a cleaner environment, a safer
workplace, and so on-in ways that add less to costs and prices. I
think this is the area where public policy is going to have to work
much more carefully and cautiously in the future to have real hope
of bringing inflation down, but that's a long-run program, not a set
of actions for now.
Senator GARN. Well, this disappoints me that you're satisfied
with what has been done, because I happen to think that psychology and attitudes have a great deal to do with the economy and how
it functions, and some of the longer term solutions that are talked
about would have immediate short-term effects on the economy
because of the attitudes of business people, individuals to invest, to
save. The President's economic plan, as stated several times today,
stresses a balanced budget but it does not emphasize reduction in
regulations. As a matter of fact, in the President's speech he made
no mention whatsoever of the $100 billion of compliance costs due
to regulations and promote production as well.
Are these things considered by the administration?
Mr. GRAMLEY. Senator Garn, I think the effort that we've gotten
underway in the Carter administration to make governmental regulations more cost-effective, particularly in the environmental and
safety area, is one of the things we will be known for in the years
ahead. I think it is important to do something to increase business
investment incentives and improve productivity when room in the
budget becomes available, but I couldn't in good conscience recommend a tax cut of $5 billion or $7 billion or whatever for accelerated depreciation or some other form of investment incentives now
because I'm reasonably sure when that emerged from the Congress
it would have attached to it a $15 to $20 billion individual income
tax cut also, and then all hope for budget restraint is lost.
I think we need to move in that direction as rapidly as possible,
but now is not the right time.
Senator GARN. Mr. Gramley, we can't wait for room to be in the
budget. We must make room in the budget for tax cuts. That's the
thing that disturbs me. I have talked about a $100 billion increase
in revenues. We are talking about a $15 billion reduction in expenditures, a very miniscule part of a massive increased tax
burden on the American people. Now I'm getting tired of the
rhetoric that's coming out during an election year about how we're
making tough fiscal constraints on this budget. We ran this whole
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country on $100 billion 18 years ago-everything, defense, interest
on the national debt. Now this baloney that we are removing this
burden to solve inflation this year isn't just you and the rhetoric.,it's so damned ridiculous-$15 billion. I took $1.4 billion out of the
foreign aid budget last year all by myself. Then we're being told
how $15 billion-the American people need to know we are having
a $100 billion increase in revenue and it's coming off their backs.
This decreasing productivity, more money available for the Federal
Government to spend, and after the $15 billion reduction we're still
going to have $85 billion more than last year.
Well, I'm obviously not going to get any specific answers other
than fiscal policy is fine; we should do more but we can't do it right
now; we're going to wait. Well, I feel sorry for the home builders
and the automobile dealers and the American people who are
bearing this burden.
I am also concerned about the independence of the Federal Reserve, as I have mentioned, with everybody coming from governmental areas. I wonder where the independence will really come if
you, along with many of the others, are going to be confirmed as a
member of the Fed, and where that separation between this Congress and this administration and the Federal Reserve Board
comes. We're all just going to have a concerted policy to work
together and do effectively nothing. I see no point in me pursuing
this further, Mr. Chairman. Thank you.
The CHAIRMAN. Well, thank you very much, Mr. Gramley.
You've had kind of a rocky time this morning. I reiterate what I
said at the beginning. I think you are very well qualified for this
job. The questions, as they should be, were vigorous and challenging and I think it's to Senator Garn's credit that he's made such a
strong attempt to elicit responses from you on what is undoubtedly
the biggest economic and domestic problem we have.
I want to thank you very much. You have been extremely responsive. I think you are well qualified. We will take your nomination up Friday hopefully.
Mr. GRAMLEY. Thank you very much, Mr. Chairman.
The CHAIRMAN. The committee stands in recess for just a few
minutes. Senator Stevenson is holding a hearing on international
finance.
[Whereupon, at 10:25 a.m., the hearing was adjourned.]
[Additional information ordered inserted in the record follows:]
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STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES
Name:
Gramley
Elden
Lyle
...,,
-
"'""'
IOTNEI)
l'llsltlontowhlch
nominated:
Governor 1 Federal Reserve Board °":,':;,~nation:
Dale of birth:
...,,
14
1
1927 Place of birth:
Aurora, Illinois
(YEAI)
Full name of spouse:
Marital status: Married
Name and aps
5 __
of chlldnon:, _ _
A_l_a_n_ _ _2_
Lynn
Education:
March 17, 1980
Evelyn Lucille Wachtel Gramley
23
Institution
Dates
attended
Aurora College
1947-49
Illinois
Beloit College
Beloit, Wisconsin
I1:1di aaa Pnitrersity
Degrees
received
Dates of
degrees
AUXO:ta,
1950-51
J 252-SS
BA
1951
MA
1952
1956
Ph.D
Honors and awards: Ust below all scholarships. fellowships, honorary des-, military medals. honorary society
rnambershlps. and any other special recognitions for outstanding service or achievement.
PHI Beta Kappa
Fellowship, Indiana University, 1951-52
Honorary Doctor of Law, Beloit College, 1978
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44
Memberships:
List below all memberships and offices held in professional, fraternal, business, scholarly,
civic, charltable and other organizations.
Office held
(If any)
Orpnizatlon
American Economic Assoc, _________
1955 to Present
American Finance Assoc.
1955 to Present
National Economists Club Board of Governors 1971 to Present
Conf. of Bus, Economists _________
1975 to Present
Potomac Hunt Club
1970 to Present
Treasurer
Middletown Valley Hunt
Club
Potomac Polo Club
National Capital Polo Clu
1971 to 1978
=-~------
1970 to 1978
1971 to 1978
Employment record: List below all positions held since college, including the title or description of job, name of
employment, location of work., and dates of inclusive employment.
Federal Reserve Bank of Kansas City, 1955-62, Financial
Economist
University of Maryland, 1962-64, Associate Prof. of Economics
Federal Reserve Board, 1964-1977, Staff Economist,
Final position: Director of Division of Research
&
Statistics
Council of Economic Advisers, 1977-1980, Member
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Gowmment
experlonce:
Llst'any experience in or direct association with Federal, State, or local governments, in•
eluding any advisory, consultative, honorary or other part-time service or positions.
Member of Council of Economic Advisers, 1977-80
Associate Director of the Maryland Tax Study, 1963-64
Published
wrttlnp:
List the
tltl•. publlslws and
of books, articles, reports or other published materials
you have written.
Essays in rnmmercial Banking (coauthor}, Federal Reserve
Bank of Kansas City, 1962
Scale Economies in Banking Federal Reserve Bank of Kansas
City, 1962
The Maryland Tax StudyC&ssoc Director) Bureau of Business
and Economic Research, University of Maryland, 1965
Time Deposits in Moneta;c:y Analysis (with Sam B, Chase},
Federal Reserve Bulletin, October, 1965
The Tnfonnational Cmtent of Interest Rates as Indicators
of Monetary Policy, Federal Reserve Bank of Minneapolis, 5/68.
Guidelines for Monetary Policy -- The Case Against Simple
Rules, unpublished paper delivered at the Financial Conference
of the NICB
February 1969
Ways to Moderate Fluctuations in Housing Construction,
(Director), Federal Reserve Staff Study published by the
Federal Reserve Board, 1972
PoHtlcal
afllllatlons
and ectlvttles:
List all memberships and offices held in and services rendered to all political parties or
election committees durln1 the last 10 years.
None
62-252 0 - 80 - 4
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46
Political
contributions:
Itemize all political contributions of $500 or more to any individual, campaign organization, political party, political action committee or similar entity during the last eight
years and identity the specific amounts, dates, and names ot the recipients.
None
Qualifications:
State fully your qualifications to serve in the position to which you have been named.
(attach lhffl)
Future employment
relationships:
1. Indicate whether you will sever all connections with your present employer, business
firm, association or organization if you are confirmed by the Senate.
I will.
2. As far as can be foreseen. state whether you have any plans after completing govwn•
ment service to resume employment, affiliation or practice with your previous em-
ployer, business firm, association or organization.
I have no such plans
3. Has anybody made you a commitment to a job after you leave government?
No
4. Do you expect to serve the full term for which you have been appointed!
Yes.
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Potential canfllctl
at Inter.st:
1. Describe any financial arrangements or deferred compensation agreements or other
continuing dealings with business associates, clients or customers who will be affected by policies which you will influence in the position to which you have been
nominated.
None
2. List any Investments, obligations, liabilities, or other relationships which might involve
potential conflicts of interest with the position to which you have been nominated.
I have indicated to Federal Reserve Board Counsel that
I will liquidate any stocks presently owned that might
raise questions about conflict of interest.
3. Describe any business relationship, dealing or financial transaction (other than tax•
paying) which you have had during the last 10 years with the Federal Government,
whether for yourself, on behalf of a client, or acting as an agent, that might in any
way constitute or result in a possible conflict of interest with the position to which you
have been nominated.
None.
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4. List any lobbying activity during the past 10 years in which you have engaged for the
purpose of directly or indirectly influencing the passage. defeat or modification of
any legislation at the national level of government or affecting the administration and
execution of national law or public policy.
Testimony and discussions with members of the Cong;ress
in my role as Council Marnber .. only.
5. Explain how you will resolve any potential conflict of interest that may be disclosed by
your responses to the above items.
As indicated in my response to question 2.
Civil, criminal and
investigatory
actions:
1. Give the full details of any civil or criminal proceeding in which you were a defendant
or any inquiry or investigation by a Federal, State, or local agency in which you were
the subject of the inquiry or investigation.
2. Give the full details of any proceeding, inquiry or investigation by any professional
association including any bar association in which you were the subject of the proceeding, inquiry or investigation.
None.
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Statement of Qualifications
My entire professional career has been spent dealing directly
or indirectly with the focal questions of monetary policy.
From 1955 to 1962, I worked as a financial economist at the
the Federal Reserve Bank of Kansas City.
My responsibilities there
included economic forecasting, research and writing on commercial
banking, money and capital markets, and monetary policy, and advising
senior bank officials on issues in these areas.
From 1962 to 1964, I was an associate professor of economics
at the University of Maryland.
My area of specialization was
monetary monetary theory and policy; courses were taught at both
the graduate and undergraduate levels.
In 1964, I joined the staff of the Federal Reserve Board as a
financial economist.
During the 13 year period of my employment
with the Board, my areas of responsibility included economic
forecasting, analysis of developments in financial markets, advising
the Board and the Federal Open Market Committee with regard to ·
ongoing economic developments and the course of monetary policy.
During my final years at the Board, I was the Director of the
Division of Research and Statistics and Economist (Domestic
Business) to the Federal Open Market Committee.
In that capacity,
it was my privilege to work closely with the then-existing Chairman
of the Board, Arthur F. Burns.
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Since the beginning of this Administration, I have been
the member of the Council of Economic Advisers responsible for
macroeconomic analysis and policy issues.
That area includes
the analysis of financial markets and monetary policy, as well
as economic forecasting and fiscal policy.
Appointment to the Federal Board in these difficult and
critical times would be an enormous challenge.
If confirmed,
I will devote all of my energy to serving the Board and the
Nation well.
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ANSWERS TO SUBSEQUENT QUESTIONS OF CHAIRMAN PROXMIRE
Q.
Arthur Burns, your former boss when you were Director of
Research at the Federal Reserve Board, has indicated that
the Credit Control Act should be repealed; that it is a very
dangerous law to have on the books. Do you agree with him?
A.
I do not think that the Credit Control Act should be repealed.
While the Act provides for broad ranging powers to control
credit, it also contains an important check on the use of
those powers.
While the President can authorize the Federal
Reserve to impose certain types of controls, the Federal
Reserve Board must decide whether and how to implement
those measures.
Therefore, neither the Administration
nor the Federal Reserve can use the powers provided
under the Act unless both agree that such a course is
necessary.
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Q.
What role, if any, did you play in determining whether and
how the Credit Control Act of 1969 should be imposed?
A.
I was one of the economists in the Administration who favored
invoking the Credit Control Act of 1969.
I considered it
necessary that credit growth be constrained in ways that would
not force a further escalation of interest rates.
The
details of the credit control program were decided by the
Federal Reserve, not the Administration, but I believe the
measures taken will succeed in shifting part of the
burden of credit rationing from price to availability.
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Q.
Do you know of any evidence that suggests that money market
funds have added to inflationary pressure or have in any
way increased the amount of available credit?
A.
In early 1980, growth of credit to the business sector was
excessive.
Business loans at commercial banks increased
at annual rates of over 20 percent during January and
February.
Money market funds contributed to business credit growth
at the expense of other sectors.
Some of the funds used
to purchase money market fund shares was most likely diverted
from small banks and from thrift institutions, reducing the
availability of credit for small businesses, farmers, and
home buyers.
Most of the increase in large business loans
probably reflected a diversion of credit from one source to
another rather than a net expansion.
But I doubt that there
was a dollar-for-dollar effect in reduced credit expansion
elsewhere.
In any event, the redirection of credit flows
toward the mortgage market, small businesses, and farmers
that will result from limiting the growth of money in market
mutual funds seems to me to be desirable at this time.
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Q.
Does the Federal Reserve have sufficient authority, absent
the Credit Control Act, to limit credit expansion during
periods of rapid inflation such as this? If not what
additional authority should the Board have to limit the
quantity of credit through means other than allocation by
high interest rates?
Business credit continues to expand rapidly despite the
Special Voluntary Credit Restraint Program. Bank loan
commitments mushroomed early this year in anticipation of
credit controls, Should the Federal Reserve Board have
authority to limit the growth of business by bank loan
commitments to some multiple of bank capital?
A.
The traditional tools of monetary policy enable the Federal
Reserve to exert a significant amount of control over the
monetary aggregates.
Under present circumstances, however,
the response of growth in credit to changes in the rate of
expansion in the monetary aggregates depends largely on the
interest elasticity of spending.
Earlier in the postwar period, restrictive Federal Reserve
actions resulted in a fairly rapid reduction in the availability of credit to borrowers.
Because of a variety of
financial innovations occurring over the past two decades
or more, that no longer happens.
Changes in real interest
rates, not changes in credit availability, have become the
principal way that monetary policy affects spending.
One of the motivations in imposing the Credit Control Act
of 1969 was to reduce credit expansion without relying
totally on interest rates.
It is still too early to know
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whether the program has been successful, but lenders in
the consumer field have taken a variety of steps to restrict
credit expansions.
Moreover, in the business loan area,
the growth of business loans at commercial banks dropped
substantially in March.
The Credit Control Act of 1969 provides all of the authority
needed to limit the growth of bank credit.
Whether more
permanent regular devices are needed to permit the central
bank to slow down credit expansion through quantitative
restrictions needs very careful study, in my view.
I was a
strong advocate of the regulatory changes, including phasing
out of Regulation O, that have reduced the tendency for
monetary restraint to work through reduced credit availability.
But sole reliance on interest rates as the cutting edge of
monetary policy may be insufficient when the inflation rate
escalates as it has this year.
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Q.
Do you feel that the monetary targets provide Congress with
sufficient information about monetary policy? Let me have
your comments on (l) the failure of the Federal Reserve to
hit its targets in the past; (2) the very wide width of target
ranges; and (3) the relationship between monetary growth and
economic activity, that is GNP and employment.
A.
The monetary targets provide useful information about monetary
policy, but monetary policy cannot be evaluated by such measures
alone.
In presenting its reports to the Cohgress on the conduct
of monetary policy, the Federal Reserve goes well beyond the
monetary aggregate targets in the information it provides.
During the past three years, the growth of M2 has generally
fallen within the Federal Reserve's long-run growth ranges.
Growth of Ml has often exceeded the range, although that was
not the case in 1979.
In my judgment, the tendency of Ml
to overrun the target has not stemmed from an inability of
the Federal Reserve to hit the targets because of technical
or operating problems.
It stems from decisions during the
process of pursuing the target that achieving it would
have resulted in undesired consequences for interest
rates and economic activity.
Given the instability in money demand recently, the target
ranges are not, in my view, too wide.
For example, recent
staff work at the Council of Economic Advisers indicates that,
since the middle of 1974, estimated equations of the demand for
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MlA imply that a 2 standard error band in predicting
future MlA growth, even with perfect foresight of
future economic activity, is two percentage points,
even after allowance has been made for shifts in the
money demand function through dummy variables.
The relationship between money and economic activity has
never been very stable and has become increasingly looser
in recent years.
For example, the rise in the income
velocity of MlA slowe·d from 5.6 percent in 1978 to 4.3
percent in 1979 for MlA, despite the fact that interest
rates rose more sharply last year than in 1978.
The
introduction of a variety of financial instruments that
are close substitutes for money probably accounts for a
substantial part of the deterioration of the money-income
relationship.
While the growth of the monetary aggregates certainly cannot
be ignored in assessing the impact of monetary policy on
economic activity, it is not the only financial indicator
that should be taken into account.
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Q.
A.
Would you agree that the discount rate should be linked
to market rates to eliminate the subsidy element?
The question as to whether the subsidy element in discount
window borrowing should be eliminated certainly deserves
to be carefully examined.
I have long held the view that
the discount rate should vary more in line with market rates
than it has in the past.
However, simply pegging the
discount rate to market interest rates may not be desirable.
This policy would totally relinquish the-role the discount
rate plays as a signal of changes in monetary policy, and
that is something I would be reluctant to see happen.
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Q.
Should the discount window be reformulated to match the
needs of thrift institutions?
A.
It will almost certainly have to be.
The needs for assistance
to thrift institutions may be different from those of commercial
banks, particularly becaus& thrift institutions have less
asset liquidity than banks.
However, I would be reluctant
to see the discount window used as a source of long-run
accommodation to thrift institutions.
The proper role of
the discount window, it seems to me, is to provide short-run
accommodation due to unanticipated or in some cases seasonal
fluctuations in deposits and, of course, to serve as a
source of last resort.
Due to the number of institutions eligible to borrow from
the discount window, the non-price rationing methods
traditionally used by the Federal Reserve will be too
cumbersome.
The discount rate will probably have to be
more closely aligned to market rates in the future to
achieve adequate control over borrowing.
Also, some review
of existing rules governing eligible collateral for discount
borrowing will need to be undertaken for prudential reasons.
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o.
What would be your advice to this Committee and the Congress
on housing?
A.
As indicated in my oral testimony, the policies announced by
the Administration on March 14 will, given time, be beneficial
to the housing market.
The additional budget restraint will
take some of the burden of fighting inflation off monetary
policy; moreover using the Credit Control Act of 1969 to
reduce the growth in consumer and business borrowing will help
to make more funds available for mortgages at lower rates.
Other ways to help the housing industry are, and should be,
considered.
However, extreme caution is needed in the use
of budget funds for this purpose.
Significant relaxation
of fiscal restraint at the present time could easily result
in renewed upward pressure on interest rates and do grave
further damage to the housing industry.
The Administration has been looking at ways to assist the
housing industry without jeopardizing the goal of fiscal
restraint.
A modification of the Section 235 program is
one option under consideration.
A decision on this question
is expected quickly,
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ANSWERS TO SUBSEQUENT QUESTIONS OF SENATOR STEVENSON
Q.
When Chairman Volcker appeared before this Committee in
February, he said that "we have reached a time where we
need perhaps to do some surveys to get firmer information•
on the extension of credit for productive, rather than
speculative, purposes. However, in response to an inquiry
from me, the Chairman stated that there was no data that
would permit any submission for the record.
In light of press reports of bank credit used for takeover of a gambling casino nd metals speculation, don't
you think that such a survey is needed, particularly as
small businesses and farmers have difficulty in obtaining
credit to keep their businesses going?
What actions will you take, if you are confirmed as a
member of the Board, to assure that the Fed's October
direction to the banks to make productive loans is followed?
A.
As you know, the Federal Reserve did more than issue numerical
guidelines on the growth of credit on March 14.
The Board
also emphasized that it expected lenders to limit credit
extensions for speculation while continuing to make credit
available to productive enterprises heavily dependent on credit.
The Board is asking for regular reports from banks and
other lenders on their adherence to the guidelines.
I believe
that these reports should include not only data on the volume
of credit extension, but also information on the extent to
which lenders are adhering to the allocative guidelines.
These
reports should allow judgments to be made on the extent to
which lenders are meeting the credit needs of productive
enterprises.
Let me note that the question of the use of credit for
speculative purposes is something that has bothered me more
generally because of its potential impact on commodity
markets.
In light of developments in those markets since
last fall, I believe we must consider whether there is a
need for increased regulation in this area.
This
question is currently under review by a number of agencies.
I will be interested to see the results of this review and
will continue to monitor this situation if I
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Q.
As high interest rates are used as an anti-inflationary
tool in the U. s., central banks in other countries also
raise their interest rates to compete for international
currencies.
In addition to the informal consultations among central
bankers we now have, do you have any suggestions for a
more effective international monetary structure to prevent
the leap frogging of interest rates and to establish
greater coordination of central bank authorities in an
interdependent world?
A.
First, I think it is important to recognize that central
banks in other nations are not raising interest rates solely
in response to balance of payments problems or to the
increase in the value of the dollar.
Like the United States,
other nations face a serious risk of a spillover of oil price
increases into the rest of their economies.
Increases in interest
rates are part of the effort to try to prevent such a spillover.
I cannot think of any institution or structure that
would substitute for direct consultations among central bankers
and other economic officials.
No nation is ever going to surrender
its autonomy or its control over its own monetary and fiscal
policy to an international body.
We must continue to work
through existing mechanisms for increasing cooperation in the
areas of monetary and fiscal policy.
I believe that as the
perception of interdependence grows the recognition that such
cooperation is beneficial to all will also grow.
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Q.
The Council on Wage and Price Stability has been unable to
exert effective influence in restraining inflation. Mr. Kahn
has said the Council's record has not been a resounding
success.
Would you favor the establishment of an independent agency
with authority to require pre-notification of wage and
price increases in the largest industries and to suspend
temporarily inflationary increases?
If we don't toughen the Council along these lines, isn't
it likely that the President will be forced to impose
mandatory controls if inflationary pressures don't abate
substantially?
A.
I do not believe that the difficulties of restraining
inflation are a function of the fact that the Council on
Wage and Price Stability is a part of the Executive Office
of the President instead of an independent agency.
Rather, the efforts of the Council -- and of the wage-price
guidelines more generally -- have in large part been overwhelmed
by force majeure.
Price increases in areas beyond the reach of
the program -- in energy and mortgage interest rates -- have
been sq large that no program could have been successful
in holding down inflation.
I do not believe that prenotification of wage increases
is possible in a world of collective bargaining.
We have
asked for voluntary prenotification of price increases in
selected industries.
I would not want to go beyond that
at this point.
I do not believe that the President will be forced
to impose mandatory controls, which I think would be counterproductive.
I expect· to see a slowdown in inflation in the
second half of 1980.
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COUNCIL OF ECONOMIC AOVISERS
WASHINGTON
April 15, 1980
Dear Senator Stewart:
Enclosed are written answers to the questions your
staff gave me after the hearing this morning.
Question 2
has been omitted because I answered it orally.
Sincerely,
tt';-<
$_
/J7"
Lyle E. Gramley
Honorable Donald Stewart
United States Senate
Washington, D.C. 20510
Enclosures
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Ql. In 1972, when you were on the staff of the Federal Reserve
I understand you preparedaa study on "Ways to Moderate Fluctuations in Housing Construction.• What are some of the best ways,
in our opinion, to help smooth out some of these short term
eye es in housing production?
1
A.
The Federal Reserve staff study published in 1972 contained
a number of suggestions for ways to smooth cyclical fluctuations
in housing that have since been put into effect.
These include
relaxation or removal of usury ceilings, more flexible administration of the FHA-VA ceiling rates, movement toward putting
depository interest rate ceilings on a standby basis, and
granting of consumer loan powers to thrift institutions.
None-
theless, as experience this year indicates, housing is still
bearing a heavy share of the burden of monetary restraint.
The channels through which monetary restraint is adversely
affecting housing this year appear to differ from those of ten
years ago.
At that time, monetary restraint affected housing
largely by reducing the availability of credit to potential
homebuyers.
Now, the principal effect on homebuilding appears
to be coming, not from inability of borrowers to obtain funds,
but from extremely high interest rates on both mortgage
loans and construction financing.
Increases in mortgage
interest rates have been much larger recently than in previous
periods of tight money, in large measure reflecting the unprecedented level of inflation and the sharp rise in costs
of funds to mortgage lenders.
As the 1972 Board staff study pointed out, cyclical
fluctuations in housing would be very moderate if inflation
were kept under better control.
More reliance on fiscal
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policy, rather than monetary policy, to curb inflation would
also be of great benefit,
Steps to reduce the dependence of
the thrift institutions on short-term deposits such as the
6-month money market certificates would also be helpful.
There are, however, steps that can provide help to the
housing industry only over the long run.
The answer to
question 4 below indicates what I believe needs to be done
to offer more immediate relief.
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Q3. At that same small business committee hearing you mentioned
that the Administration had formed an interagency housing
committee to appraise the economic outlook for the housing
industry. Has that committee reached any conclusions about what
can be done to alleviate the depressed industry at this time?
..
A,
The interagency housing committee to which this question
refers concluded its appraisal of the then-existing outlook
for housing around the first of December.
reported to the Economic Policy Group.
I
Its findings were
That group discussed
with the President the possibility of a supplemental appropriation
for the Brooke-Cranston program in the fiscal 1981 budget.
I •
A decision was made not to seek a supplemental appropriation
at that time.
/·
Since eaz:.J.y December, the outlook for housing has
worsened'appreciably.
The Administration is therefore
reviewing options to provide assistance to housing in this
difficult period in ways that do not substantially enlarge
the budget deficit, including a redirection of the Section
235 program to provide a shallower subsidy to a large number
of housing units.
A decision is expected shortly.
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Q4. What t~e of government action to relieve the pressure
in the housing industry do you feel is justified at this time?
A.
As I indicated in my oral testimony, I believe the
steps announced by the President in mid-March will help to
relieve the pressure on the housing industry.
The additional
fiscal restraint will help to relieve monetary policy of
some of the burden of moderating inflation, and the use of
the Credit Control Act of 1969 will help to slow credit
expansion in ways other than just higher interest rates.
I believe direct assistance to the housing industry
would also be desirable to remove the burden of an inventory
of unsold houses that has become extremely heavy because of
the recent sharp decline of housing sales and extremely high
construction loan rates.
As the response to question 3
indicates, the Administration is considering ways to accomplish
that without large additions to budget outlays.
A decision
will be made quickly.
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QS. When Chairman Volcker appeared before this committee to
explain the Fed's most recent credit tightening moves, he made
a statement that the Fed "where appropriate and possible would
adjust the lending rates and other terms to take account of
the special needs of small businesses and others.• Do you agree
with tha stated Fed olic? What do ou feel the Fed should do
to work towards that goal?
Perhaps some Jawboning, perhaps
some buidelines for banks to follow in determining which borrowers
should take priority in a time of need)
A.
As I indicated in my oral testimony, I agree with that
stated policy of the Federal Reserve.
The guidelines for
banks set forth by the Federal Reserve in the voluntary credit
restraint program are consistent with that position.
I also
believe, as I indicated in my oral testimony, that consideration
should be given to establishing higher target growth rates of
loans for smaller banks whose nonconsumer loans primarily consist
of loans to builders, farmers, or other small businesses.
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NOMINATION OF LYLE E. GRAMLEY
WEDNESDAY, APRIL 16, 1980
U.S. SENATE,
ON BANKING, HOUSING, AND URBAN AFFAIRS,
Washington, D.C.
The committee met at 9:30 a.m., in room 5302, Dirksen Senate
Office Building, Senator William Proxmire (chairman of the committee) presiding.
Present: Senators Proxmire, Stevenson, Morgan, Tsongas, Stewart, and Garn.
The CHAIRMAN. The committee will come to order.
Yesterday we had before us the President's nominee to become a
Governor of the Federal Reserve Board, Lyle Gramley. In my judgment, Mr. Gramley is extremely well qualified. He, however, was
challenged by other members of the committee and this, of course,
is an extremely important appointment.
Mr. Gramley will be appointed to the Board for the full 14 year
term and, of course, the Board does determine the monetary policy
of this country and the availability of credit and has a profound
influence on interest rates and on the progress of the economy
generally.
We are very happy to hear from the distinguished senior Senator
from Iowa, Senator Culver, who has very strong feelings on this
matter. Go right ahead.
CoMMITI'EE
STATEMENT OF JOHN C. CULVER, U.S. SENATOR FROM THE
STATE OF IOWA.
Senator CULVER. Thank you very much.
Mr. Chairman and members of the committee, I appreciate the
opportunity to testify this morning regarding the nomination of
Mr. Lyle E. Gramley to a 14-year term on the Board of Governors
of the Federal Reserve System.
I am here, as you indicate, Mr. Chairman, in opposition to Mr.
Gramley's confirmation.
I wish to make it clear from the outset that my opposition to this
nomination should in no way be taken as a reflection on Mr.
Gramley's personal integrity or his professional abilities as an
economist and monetary policy expert. His record in that regard
speaks for itself. It would appear to be a record of demonstrated
competence and success in increasingly difficult and complex positions.
My opposition, Mr. Chairman, to this nominee stems from my
firm conviction that the current vacancy on the Federal Reserve
Board of Governors should be filled with an individual whose back(71)
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ground and experience provide a personal knowledge of the financial requirements of agriculture and small business, as well as the
impact of monetary policies on these sectors of the economy.
I have urged the President, Mr. Chairman, to nominate such an
individual to the Board twice in the past 2 years. I am not a
"Johnny-come-lately" to this concern and to this heartfelt belief
that this Board desperately needs broader representation. Once in
1978, I wrote the President and urged this course and again this
year after the current vacancy opened up. I strongly believe that
we need such an individual on the Board.
It should be noted that over the past 3 years I have been generally supportive of the administration's policies. I am not one of its
detractors.
However, the impact of present Government policy in the monetary and agricultural policies on the Midwest region of the country,
in my judgment, threatens the very survival of that economy and
that economy is the Nation's greatest food producing region. Obviously, it is not only my own State that is affected. The farm and
small business economies of Nebraska, Minnesota, Wisconsin, and
the Dakotas and many other States across the Nation are looking
at deep recession, if not full-scale depression at point-blank range.
This, in turn, threatens not only the well-being of the entire
Nation, but our national security as well. There is much talk these
days, Mr. Chairman, about the need for a stronger defense. Without a strong agricultural economy, this Nation would be weak
regardless of any buildup of Armed Forces and nobody understands
this any better than the Russians who spend one-quarter of their
GNP on agriculture and can't feed themselves.
The administration has failed to keep faith with its pledges to
the farm community of America. At the time of the grain embargo,
we were told that the farmers would not be called upon to bear a
disproportionate burden of the sacrifice. That promise has just not
been fulfilled.
What does it take to make the administration understand the
gravity of the situation? This is one supporter who has run out of
patience. In Iowa, many people rejoiced in the election of a farmer
President. Now we feel we have been deserted in our hour of
greatest need?
If standing fast for the nomination of a Federal Reserve Board
member with agricultural and small business orientation will help
move the administration to change policies that have brought a
vital sector of our economy to its knees, I think this committee will
have performed a service that is clearly in the Nation's best interest.
Monetary policy, as you know, Mr. Chairman, is a highly complex tool of economic policy and its exercise has far-reaching effects
on both the domestic and international economy. It is not a tool to
be placed under the control of narrow special interests. By the
same token, the exercise of monetary authority should not be
concentrated in the hands of a group of narrowly focused individuals with homogeneous experience, homogeneous philosophies, and
homogeneous intellectual backgrounds.
The current and traditional makeup of the Federal Reserve
Board of Governors borders dangerously close to this homogeneity.
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Mr. Gramley's nomination provides no remedy to this situation. It
aggravates the condition.
I sometimes wonder, Mr. Chairman, looking over the membership of that Federal Reserve Board and the history and the fights
we had in the House back in 1976 on broadening those Boards-I'm
afraid that this incestuous relationship, if it continues, will perhaps
mean that we are going to have f>8<:>Ple on that Board for 14 years
with an incestuous breeding that s going to have everyone with an
eye in the middle of their forehead before their term expires.
Mr. Chairman, it's time-no, it's long overdue-it's long overdue
to diversify the makeup of this Board, the highest monetary policy
board in the Nation. I have looked at the background of each and
every one of these people. I think it's unconscionable. We talk
about no more than one person from any one of these 12 Board
districts. All you've got to do is be born somewhere back when and
suddenly that qualifies you for that geographic representation.
Every one of them is coming out of the New England or Northeast
background, out of big banks, big corporations, or academia, or
government.
There's no practical experience at all represented on this Board
today. Now we need somebody for this. Diversification should start
by placing at once on this Board a person who understands and is
sensitive to the economic role of small business and agriculture.
Monetary policy, by its nature, is a blunt policy instrument. But
I reject the contention that it cannot be exercised with greater
sensitivity toward these important sectors of our economy-and
small business and agriculture are important. Together they account for nearly 60 percent of the Nation's employment, 50 percent
of its gross national product, 97 percent of all the Nation's business
enterprises and, of course, 100 percent of our food production.
In addition, small business is responsible for nearly 90 percent of
all new net jobs created in the economy. Small business and agriculture are highly diversified, highly competitive, yet most businesses, including farmers, that can be classified as small possess
certain common characteristics.
They are more highly dependent than large businesses on commercial bank financing. In testimony last October before the House
Small Business Committee, Mr. Robert Berney of the Small Business Administration presented evidence of this fact of economic
life. The smallest size category of manufacturing businesses demonstrated debt-to-equity ratios five times greater than the larger size
class of manufacturers.
Similar distinctions exist in construction, wholesale, and retail
trades. Mr. Berney also presented evidence that during the past 20
years small companies have become increasingly dependent on
bank debt to provide needed capital while large corporations have
experienced a decline in their bank indebtedness to total debt
ratios.
When these factors are combined with the fact that large corporations borrow more heavily from commercial banks during tight
money periods and that large corporations are the first in line for
whatever bank credit is available, tight money policies can have
severe and dramatic implications for small businesses and, as I
have said, our farmers are similarly affected.
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Another common characteristic of farmers and small businesses
is that they generally operate in more highly competitive environments than large businesses. Consequently, they tend to be price
takers. They sell at prices established through the competitive
process and buy materials at prices established all too often by
large corporations with substantial market power.
Farmers and small businesses, as a result, have substantially less
ability than large businesses to pass on the higher cost of financial
capital d_uring tight money periods. When such periods coincide
with declining economic activity, as is the case today, they are hit
first and they are hit hardest.
There are other common characteristics of farmers and small
businesses that should provide guides to economic policymakers in
selecting measures for controlling economic activity. I have cited
these examples to demonstrate that all sectors of the economy are
not affected in the same way by the same policies.
If our economic policy is to be successful, Mr. Chairman, in
providing stability and growth, it cannot be done-certainly it
cannot be done equitably through measures that are insensitive to
the unique characteristics of the small business and of our farm
sectors.
The devastating impact that scarce money and high interest
rates are having on these firms is, in my opinion, clear evidenceclear evidence of the insensitivity of Federal monetary officials to
their needs and operating characteristics. The record of this impact
is being documented daily in the Nation's press. It speaks with
convincing force.
I would like to submit, Mr. Chairman, for the record a sampling
of articles that illustrate the real world impact of the Federal
Reserve Board's actions.
The CHAIRMAN. Without objection, we would be happy to have
those in the record.
Senator CULVER. Thank you.
[The information follows:]
[From Business Week, Mar. 31, 1980]
HERE CoMES THE CREDIT CRUNCH
Invoking the martial law powers of the 1969 Credit Control Act as a final blow to
an economy that has been stubbornly resisting recession, President Carter has
dramatically upped the odds for a fullblown credit crunch. The selective credit
squeeze that is already hitting housing, small businesses, and some consumer sectors can be expected to sweep the economy in coming weeks.
Unless the Fed flinches, all but the most creditworthy corporations will soon find
credit scarce at any price. Increased bankruptcies seem inevitable. And there is a
growing sense that strains on the banking system are reaching the point where a
large financial institution or corporation could collapse.
With the prime rate now hitting 19 percent, with banks paying effective rates of
23 percent to sell three-month certificates of deposit, and with big corporations
under the gun for the first time since World War II to report on their credit use to
the Fed, the deep strains in the financial system will only intensify. The further
plunge in February housing starts to 1.3 million annually from 1.4 million in
January-provoked by the Fed's earlier tight money policy-is the forerunner of
what is to come.
Savings flows, which the Fed hopes to redirect to banks and savings and loans by
putting a stiff 15 percent reserve requirement on popular money market mutual
funds, are more likely to spill out now in the money market. Because money fund
yields will be lower, savers will probably increase their Treasury bill purchases. On
Mar. 17, close to one-third of the $3.3 billion sold went to small investors. And with
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:te
depreeaed bond market cloeed to all but a handful of top-rated utilities, credit
emands at commercial banks will build to a fever pitch.
Business borrowing levels off
164
•
-~
Commercial and industrial loan,
by large Federal Reserve
.........: : _ . . - - - ,
152
reporting banu
1eo
158
156
. . .,.
.
••:
,~ . ~·
.
,.
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Data : hderal Rue,w Bank of St. 1..oul~.
e.~esa.~/'_,~ ·--s:
Not cosmetic.-The flash point for these converging borrowers-as it has been in
all previous credit crunches-will be the banking system. But the trigger will be in
the hands of the Fed. With the powers it now has, there is little question that the
Fed can control loan growth to the 6 percent to 9 percent range it has set for the
banking system. It can restrict corporations, consumers, and investors at the
source-but the risks to the economy and costs to growing companies will be high.
As bankers and corporate executives combed through some 40 pages of credit
control regulations, the dominant question was: How serious is the central bank? "I
believe they are [serious]," says Beryl W. Sprinkel, economist for Harris Trust &
Savings Bank in Chicago. But, he warns, "We have loan commitments to honor. If
there is a conflict between their /foals and our word to long-standing customers,
then something will have to break.'
Fed officials are aware of the conflict. After briefing executives of 50 large
domestic banks and top U.S. officers of 15 foreign banks on the new program in
Washington on Mar. 17, Fed Vice-Chairman Frederick Schultz said: "This is not
cosmetic, and there very well may be conflicts. It is up to the banks to do the
rationing. We will be watching them."
Low reserves.-----COmpanies and banks have heard that kind of tough talk from the
Fed before, of course, only to see the resolve fade. Now, say many economists, things
are different. "Financial institutions cannot operate for any long period in this
environment," says Jerry L. Jordan, an economist at Pittsburg National Bank.
"Ninety-five percent of the financial institutions may be sound. But it is that other
5 percent that will make the difference," he warns.
Fed officials share the worry that the strain may be too much for some institutions. They publicly signaled their concern by holding the emergency borrowing
discount rate at 13 percent when they boosted the rate for larger banks to 16
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percent on Mar. 14. Says Fed Chairman Paul A. Volcker: "The quicker we get
through this period the better."
The paradox is that large banks themselves still feel flush with cash. That was a
major reason that few refused the major corporations' requests for massive Jines of
new credit in the days preceding the Carter program. "In terms of our ability to sell
large CDs, we're well below the peaks that we were at in 1974," says Bankers Trust
Co. economist Jay N. Woodworth. But broad statistical measures of banking system
tightness are at peaks. "The ratio of purchased funds to Joans is up more than 40
percent from 1974 levels, and reserves are as low as they were in 1974," says Allen
Sinai, of Data Resources Inc. "There will be financial failures and bankruptcies, and
some banks may be required to do a very large amount of inventory financing in
the next few months," he says.
Offshore loans.-Credit markets are also throwing off symptoms of tightness.
Multinationals are scrambling to nail down offshore loans from foreign banks in the
hope of beating the Fed's domestic restrictions, and some companies are beginning
to work out swaps of dollars for foreign currencies in an effort to get around the
Fed (page 38). Low-rated companies, meanwhile, are sprucing up their credit ratings
by buying letters of credit from their banks (page 84). And, predicts George A.
Needham, managing director of First Boston Corp., there will be a dramatic increase in filings of convertible debentures and other forms of equity financing,
which seems not be covered by the Fed regulation.
The Fed will get to show its resolve soon. Its 6 percent to 9 percent limit on bank
loan expansion will bite as companies enter a peak seasonal borrowing period.
Heavy Treasury borrowing, such as the $6 billion in bills sold Mar. 19, will make
market pressures even greater.
But five days after the Fed announced its program, many companies contacted in
a Business Week survey were still unaware that they will be required to report to
Fed district banks on commercial paper and offshore borrowing. Some 300 selected
companies will get a special review if they are using the commercial paper market
heavily, warns Vice-Chairman Schultz. But to the extent the Fed closes that route,
and some borrowers already cannot sell commercial paper, they will turn to their
banks for funds.
Mounting complaints.-Hypersensitive financial markets began questioning the
Fed's monetary resolve only hours after they opened on Mar. 17 and 18, when
market rates failed to take off. While the Fed's program sopped up $1.4 billion in
new bank reserves overnight, some analysts now fear the central bank will offset
the policy by pumping new funds into the system.
In the political world in which the Fed operates, the concern will be about a
crunch. Already, complaints over credit card restrictions are mounting, and they
will snowball if only top-rated corporations are getting loans.
With business borrowing continuing to rip, the immediate test for the Fed will be
how tough it will be on business credit. Or as Pittsbur~h National's Jordan puts it,
the test is "How long it will be before something snaps. '
[From the Washington Poet, Apr. 10, 1980]
BANKERS FEAR PINCH OF
FEo's Lm
ON LoANS
(By James L. Rowe, Jr.)
NEW YORK, April 9.-Many major bankers fear that it will be difficult, or impossible, to meet loan commitments they have made to their business customers and
comply with the Federal Reserve dictum that loans should grow no faster than
between 6 percent and 9 percent this year.
In early January, loan commitments to businesses were already at a high level,
and those commitments grew sharply in late February and early March after
rumors began to circulate that President Carter would impose some form of credit
controls.
Businesses went out and hit up their bankers for increases in their credit Jines so
they wouldn't be cut out if the president invoked lending restraints-as he in fact
did on March 14.
"These weren't the kind of companies you could say no to. These were the name
corporations in America," said the chief lending officer at a major bank.
Bankers say privately that they feel they will be caught between the Scylla of
their promises to their customers and the Charybdis of the Federal Reserve regulations.
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"We could well be placed in the unenviable po11ition of either going back on our
word to our customers or facing the Fed's wrath. And our word is our bond," said
the top lending officer at a major money center bank. "We would not say in
business long if we promised our customers credit, made them par, for their lines,
then told them the funds were not there when they asked for them. '
Critics who believe that big bankers-or for that matter, small bankers-played a
significant role in the speculative boom that helped feed the current inflation don't
mind seeing them squirm now. Government officials and others blame the banks for
feeding speculation by supplying huge amounts of credit to finance corporate takeovers, commodity speculation and excessive purchasing by consumers.
At the same time, however, bankers have the critical role of fulfilling legitimate
borrowing needs of businesses. If credit is unavailable, or severely restricted in the
coming months, the recession that was foreordained (although months late) will be
much worse than it has to be, many bankers say.
Although loan demand declines during a recession, it usually increases-t10metimes sharply-during the early stages as businesses are forced to finance inventories they no longer can sell. For example during the severe recession of the mid1970s, it was not until the spring of 1975 that loan demands declined noticeably,
although the recession took hold in the fall of 1974.
This year the strain that businesses could put on their bankers may have been
greater than in 1974 and 1975. A chaotic bond market-record high interest rateshave kept many companies borrowing short term from their banks rather than
selling long-term debt securities to the public.
According to a Chemical Bank survey of 135 major banks, loan commitment
totaled $379.6 billion at the end of January, while only $138.5 billion of those credit
lines had been tapped.
Between the end of January and early March, companies added to those lines at
levels that can be measured in the tens of billions of dollars, according to Edward
Palmer, chairman of Citibank's executive committee.
Chemical Bank said "there is a real possibly that massive and sudden increases in
bank loans could occur," although that is not its most likely scenario for 1980.
But if the bond markets remain unsettled and the nation's corporations find
themselves stuck with goods they cannot sell, then banks likely will find themselves
besieged by businessmen who want to draw on their credit lines.
During the 1974-75 recession, businesses increased their use of credit commitments to 45.7 percent of their outstanding lines, according to Chemical Bank. At the
end of January, businesses had drawn only 36.5 percent of their available lines.
If businesses should behave as they did in 1974-75, even ignoring the large
increases in commitments that occurred in late February and early March, then
business loans "could surge by some $35.5 billion," the bank noted. That is equivalent to 20 percent of the outstanding loans.
Not all bankers are pessimistic. Many feel that they will be able to satisfy their
customers' needs by tapping smaller banks whose credit demands aren't as strong as
at major banks. But parceling out loans in small packages is a time<onsuming and
expensive way to do business.
Others say they hope that the recent stability in the bond market will convince
some of their customers to sell debt securities rather than borrow from their banks,
even though interest rates remain at near-record highs.
Nonetheless, most bankers feel itchy. The longer it takes the nation to slide into a
recession, the longer it will be before loan demand subsides.
At a time of high inflation-when it takes a bigger loan to finance the same
physical amount of inventory than it did a year ago-a ceiling of between 6 percent
and 9 percent on loans increases looms as a difficult, if not impossible, goal.
[From the Washington Poot, Mar. 26, 1980]
SMALL FIRMS HERE HIT
(By Martha M. Hamilton)
The recession may not have arrived yet for the rest of the country, but for area
amall businesses the future is now-and bleak.
For them, the squeeze is already on, with high interest rates, unwilling lenders
and a slump in the housing industry all adding more strain to the normally difficult
task of surviving as a small business.
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"The small entrepreneurs are out in the first trench," said Charles S. Caldwell, a
partner in the Commodore Hotel corporation. "After the tanks roll over the first
trench, they're going to hit all the rest of y'all."
Caldwell and his partner have been hit by rapidly rising interest rates on the
money they borrowed to buy out other interests and to improve the hotel. "When I
signed this note last June, it was 13 ¼ percent, or high enough, and now it's over
21.5 percent," said Caldwell.
The increase will cost Caldwell about $100,000 more than he would have paid if
the rates had remained what they were when he borrowed approximately $1.3
million last summer.
"You can't find any long term money in this market, and I've been looking for it
for nine months," he said. Like many other borrowers, Caldwell found the only
loans available were loans with fixed rates that have floated sky-high, along with
the increase in the prime rate to which they are pegged.
"I'm kind of fortunate to be hit with these escalating costs going into the best
season of the year in April, but ;You're supposed to be putting your chestnuts away
for the winter," said Caldwell. "I m giving all my chestnuts to the bank."
"Borrowing money in the auto parts business is a thing of the past," said the
owner-manager of a medium sized auto parts warehouse and distribution center in
northern Virginia. "We are very nervous. We're not sure what we can do. We just
can't borrow money. We have to cut the costs of operations and that amounts to
real soul-searching," he said.
The dealer, who asked that his name not be used, borrowed money two years ago
to expand and diversify his business. At the time he got the loan, which carriers a
variable interest rate, the interest rate was about 8 percent, he said.
Now he expects to pay 21.5 percent when he rolls over the loan-a rate equal to
the gross profits of the auto parts business.
"It puts you in a very tight squeeze," he said. The auto parts dealer has been able
to adjust so far by not hiring replacements when workers leave, by reducing bonuses to himself and other executives and by delivering reduced services for more
money.
The tighter things have gotten, the more time and attention he has had to devote
to making ends meet. "All of a sudden, I'm out of the parts business and into money
management," he said.
For other businesses, money is not available at any price. "We're managing to
keep just above water," said Mary Kovacs, whose family owns and manages the
Port O' Kings Wine and Cheese shop on Braddock Road in Fairfax County.
The family took over the business in July. "So far we're managing to break even,
but there's no profit being made. Every month it's a hassle to get the bills paid,"
said Kovacs.
"What we really need is money to expand the business and that's what's unobtainable," said Kovacs. Banks will not lend money for the expansion that the
Kovacs family believes would increase business, because the business has no track
record, she said.
"If we can hang on for a year and then go back to the bank, maybe we'll have
better success," she said. "We're better off than some others because we can hang
on. But the money is going from the right hand to the left," she said.
In the meantime, she and her husband are working about 150 hours a week to
make the business survive, said Kovacs.
William C. Goode, president of Goode Refrigeration in Prince William County,
said that the only loan he has sought lately was a vehicle loan for which he paid
13.5 percent. "That's a rate that would prohibit me from borrowing any more for
vehicles," he said.
He has a line of credit tied to the prime rate, but he hasn't had to borrow on it. If
he did, "it certainly would ouch," said Goode.
"Most people in my type of business and my size aren't even able to go in and ask
a bank for money," said Goode. "Construction has fallen off to such a degree that I'm
not sure a bank in its right mind, even at 20 percent, would lend money to a
small business tied to construction," he said.
Goode supplies central heat and air conditioning systems for newly built homes,
and services commercial heating and cooling plants. That service business, pared
down operations and the lingering effects of a very good year will help carry him
through the current hard times, he said.
"If the interest rates stay what they are, I wouldn't be surprised to see some 30
percent of the small businesses go out of business," he said.
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[From the N- York Tl-. Mar. 21, 1980]
F AJUaJl8 FACE A CuDIT SQuau:
BOUOWINO C08TB All UP MOU THAN &Cl PDCENT
(By William Robbim)
. PALM1!:R, Noa.-This village in central Nebraska is only a dot on moat maps, but
it has a bank, several busineeaee and a population of about 400. Because it serves
farmers who till level acres of good crop land stretching in all directions, it has
some big worries.
There is trouble in farm country, and it clouded the faces of Dale Friedrichson,
John Forbes and Dennis Joeeph recently as the denim-dad growers of com, hogs
and cattle dropped by the State Bank of Palmer. Like farmers around Aurora and
Central City and elsewhere in the Middle West, their most troublesome immediate
problem is credit and its coats.
The cost of the copious bank credit farmers need to operate has soared more than
50 percent in the last year. With crop prices down, many are unable to clear up last
year's operating debts before seeking new funds for another planting season. And
the increased coat of bank loans come atop soaring prices of other needs, especially
fertilizer and fuel, which have risen 30 to 50 percent this spring compared with last
year.
The resulting problem has strained the liquidity poeitions of many Middle Western banks reached in the last few days, and it has left bankers worried about
meet~ all their farm clients' needs.
"It's like running into the wind with a funnel in _your mouth-you're just sucking
air." said John A. Dinsdale, vice president of the Palmer bank and a partner with
his brother, Roy, in ownership of 13 other Nebraska banks, in describing the
difficulties of farming clients.
FarmDebt
Source: Agrk:ulture Oepe~t
Banks in Nebraska and elsewhere in the Middle West generally say they must
charge farmers interest rates of 16 to 17 percent-less than the 19 percent prime
rate in big cities but still a sharp increase of agricultural credit. Even so, they say
they face a tight squeeze between the charges and their own money costs, and they
see no proepect of immediate relief.
Nationally, total outstanding indebtedness of farmers, including mortgages on
their land, reached $137.5 billion on Jan. 1, 1979, according to the Agriculture
Department. That figure included $62.5 billion of loans not related to real estate,
including $5.2 billion of low-interest Government price-support loans on crops. Of
the total, real estate loans accounted for $72.3 billion.
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Refinanced mortgages
Preliminary figures as of Jan. 1, 1980, indicate that farmers' total indebtedness
rose to $161.8 billion, including $4.5 billion of price-support crop loans. The Agriculture Department estimates that 53 percent of the total was real estate debt.
An increasing part of the real estate debt, Government economists say, is a result
of farmers refinancing mortgages on their property-at prevailing interest rates-to
provide funds to carry their rising operating costs. No estimate of the dollar amount
of refinancing being done was available.
"This could take me out of farming," said Mr. Friedrichson, a tall, broad-shouldered grower whose blond hair and ruddy skin looked weathered beyond his 42
years. "Another year like this and I'll be lining up my equipment for a farm sale."
Like Mr. Forbes, Mr. Joseph and others, he said increased costs would wipe out the
profit margin he squeezed from his farming last year.
"My dream is that one day I'll be able to retire with some dignity," he said. "Now
I just don't know. Last year my fertilizer cost was $37,000. They tell me that will be
up over 30 percent this year. I paid $40,000 in interest and that will be up 50
percent. Fuel costs also will be up 50 percent."
Mr. Forbes, a slender young farmer with more precise data, spoke with seething
anger and frustration over a situation that he said was not of the farmers' making.
He blamed mainly President Carter's curtailment of grain sales to the Soviet Union
and charged that not enough had been done to soften the impact.
"Last year I needed $2.30 a bushel to break even," he said. "This year it will be
$2.42. And do you know what the price of corn is today?" A local grain elevator was
quoting $2.18 a bushel.
Mr. Forbes pulled out a sheet of figures. "In 1976 repairs cost me $5,250," he said.
"In 1979 it was $20,000. My interest cost was $38,000 in 1976. In 1979 it was over
$100,000. God knows that it will be this year.
"In 1978, my fertilizer cost $28,746 and it was $48,068 in 1979. Now they tell us it
will be up another 30 percent this year. My diesel fuel and gas bills were $10,869 in
1976 and they were $24,215 in 1979, and they'll be up another 50 percent in 1980."
"Want to hear a real sob story?" Said Mr. Joseph. "I'm a hog producer." He fell
silent as if that were enough to say. Hogs were selling at about $35 a hundredweight, sharply below last year's figures. A year ago, hogs brought about $48 a
hundredweight on the Omaha market. Most farmers also say today's prices are
below the cost of production. Agriculture Department studies show that costs are
more than 40 cents a pound.
In nearby Central City, Wayne Thompson, a fertilizer dealer, was also talking
with his banker, Terry L. Trueblood, president of the Farmers National Bank.
"I've never felt so pessimistic starting a season," said Mr. Thompson, who said he
was worried primarily about how farmers would pay for the fertilizer they will need
this spring.
In Aurora, Dan J. Armbruster, president of the Farmers State Bank and Trust
Company, pulled out a file and said: "Here's a farmer who could pay us off if he
could get 25 cents more a bushel for the corn he's got in his bins. He'd like to wait
for a better price, but we're going to have to insist that he sell his corn for what he
can get now. That will leave him owing us $5,000, but that way we can carry him
for another year."
Mr. Armbruster, like most other bankers reached, said the bank's current loan-todeposit ratio was higher than he liked to see at this time of year. Most country
bankers say they feel fairly comfortable with loans at 75 percent of deposits, but
some were citing current levels as high as 90 percent.
Mr. Armbruster's current level was 88 percent, down from 98 percent last year. A
bank examiner said in a written report last October, from which Mr. Armbruster
quoted, "The sole source of relief from this severely strained liCJ,uidity position seems
to rest entirely with the successful marketing of farm products. '
[From the Washington Star, Apr. 6, 1980)
lowA FARMERS STAGGERED BY EcoNOMIC
Bwws
GLOOMY FARMERS FEEL CAUGHT IN ECONOMIC BIND
The decline in the farm economy, with farmers caught in the middle of
soaring production costs, lower prices and a credit crisis, is a significant
development not widely reported to urban dwellers. The following article
tells whats happening in one part of the nations bread basket.
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DEs MoINES, lowA.-The spring of 1980 hM become an ominous time for Iowa
farmers. Trouble is in the air, farmers 88y-perhaps the most trouble since the hard
times of the 1930s.
"We're caught in a squeeze, and it's going to get wonie," 88y& Loren Klein, 33,
who fal"DlS near Granville, in Sioux County. "I tell you, you don't sleep well these
nights."
Berkley Bedell, who represents northwest Iowa in Congre1111, agrees. "We're facing
absolute disaster," he 88ys. "We're going to have a large number of bankruptcies.
There's never been anything like this since World War II in my area."
Consider these specifics:
A year ago hogs were selling for $48.20 a hundredweight; today they're bringing
less than $30.
Last spring a bushel of soybeans was worth $7.06; today the market price is $5.45.
Cattle sold for $72.90 a hundredweight a year ago; now the price is $65.
Corn prices are up from a year ago-$2.10 compared to $1.99 in central Iowa-but
they're down from where they were before President Carter imposed the Russian
grain embargo. They had risen above $2.30 before the embargo, but even that price
was below the cost of production-estimated at $2.43 a bushel for 1979.
A year ago a gallon of diesel fuel cost 63 cents; today it costs about 92 cents, a 46
percent jump. The costs of fertilizer and farm chemicals are up, too.
Last year farmers were getting loans with interest rates of 11 percent; now
interest rates are 14 to 18 percent.
IkJwn in the mouth
"We've had times when there were low prices for a commodity or two," 88ys an
low-a agricultural official. "But nothing like this. Almost everything a farmer raises
or produces except milk is a losing proposition. You can't blame them (farmers) for
being down in the mouth about things.'
One small 88mple of this troubled spring: Don Struthers of Collins recently got
the shock of his pork-producing career when he couldn't even get a bid on his
market ready pigs. Then when a buyer finally made a bid, it was a money-losing $29
a hundred pounds. "I can't remember when I sold hogs that low," says the 36-yearold farmer.
People who have dealt with Iowa farmers for a long time say there is a sense of
crisis. In coffee shops and traverns, listeners hear more than the habitual complaints. There is an element of alarm in the conversations, an uncommon alarm.
Iowa and the rest of the Midwest farm belt have been hit by a staggering series of
economic blows-many of them engineered by the Federal government.
They include the embargo on grain shipments to the Soviet Union imposed in
January by President Carter, the administration's budget-cutting and tight-money,
anti-inflation policies, the collapse of two key regional railroad systems and a
decision by the administration to forgo any program to pay farmers to keep land out
of grain productions-a policy aimed at providing consumers with cheaper food.
Within this host of problems, tight credit has taken the spotlight recently. Interest rates have soared as the government's money-tightening policies have taken
hold.
Reminiscent of depression
Iowa Secretary of Agriculture Robert Lounsberry says the current money situation in the state is "the worst credit crunch . . . during my 11 ;years in state
government and (is) reminiscent of the Great Depression of the 1930s. '
Lounsberry estimated that 20 percent of Iowa farmers are in "a crisis."
Some see the tight money policy as part of a cruel scheme to force farmers to
produce less.
Michael Hall, a private agricultural consultant in Washington, D.C., puts it this
way: "The people at the White House Office of Management and Budget and at the
Council of Economic Advisers opposed all of the (Agriculture Department's) attempts to pay farmers to take some land out of production because they knew that
these conditions which we're seeing today would accomplish the same thing and it
wouldn't cost them anything. They've put farmers right up against the wall."
Iowa Gov. Robert Ray offered similar thoughts when he criticized a USDA plan to
boost interest rates on loans to farmers from 9 percent to 13 or 14 percent.
"It ap~ars that this is the federal government's way of getting a set aside
program, ' the Republican governor said.
Dewayne Bloem, manager of the Alden Cooperative, a grain elevator, said farmers
are scrambling for money. Some, he said, are "borrowing" by not paying their
property taxes; that means they will be assessed a penalty of 1 percent of the
amount of their tax bill for each month that it goes unpaid.
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"Where else can you borrow money for 12 percent?" Bloem asks.
Renters pulling out
One banker said he was not making any machinery loans.
Cash renters-farmers who pay a set figure to the landlord for the land they
farm-are beginning to feel the squeeze.
There are rumors that some renters are telling landlords that they can't afford to
pay the rent that was agreed upon last fall.
The squeeze is showing itself in other ways.
"We're starting to see some of our area farmers selling off some of their larger
equipment and going back to a smaller operation," said a northern Iowa implement
dealer. "They may be getting rid of all the rented land they have and are only going
to farm the land they own."
Jim Leach, an Atlantic farmer, has reduced the number of cattle he's feeding from
300 head to 200 this year. When he bought his cattle last fall, with money borrowed
at 11 percent interest, "you sort of had to grit your teeth when you took that,"
Leach said. Now, he says, interest rates are up around 16 percent. When his cattle
are sold, he says, "I don't think I'll be back for more."
Leach also plant to cut corners this year by reducing the amount of fertilizer that
he uses. He figures that way he'll cut $10,000 off the cost of planting 550 acres.
Presumably, though, that could mean lower yields this fall.
"I'll get through this one," says Leach, "But I don't know about any more."
John Schnittker, a private agricultural consultant in Washington, said he believes
the current economic Upper Midwest are the worst since the farm recession of the
early 1950s that resulted in the loss of hundreds of thousands of small- and mediumsized farms.
"I've never seen people as despondent over a situation as they are about this,"
Said Harlan Hummel, owner of a lumber firm in Hawarden in northwest Iowa.
"I'm just afraid we might be into something much deeper than we realize," said
Robert Scroggs, president of Scroggs Feed and Grain in Hawarden. "What if we find
land values start to go down next?
Bruce Berven of the Iowa Cattlemen's Association at Ames reported a lot of gloom
at a recent meeting of his marketing advisory committee. "Everybody is down
mentally, and very concerned about what's happening and what might happen,"
Berven said. "They're concerned about markets, prices and about how long they can
exist in feeding or raising cattle."
Berven reported that some cattlemen, trying to scrape up springtime funds, are
even sending pregnant cows to slaughter, within weeks of spring calving.
"It's hard to imagine time so tough that a cattleman sells off cows that should be
producing a calf in 60 days or so, but that's what's happening, too," Berven said.
U.S. Rep. Tom Harkin, D-Iowa, summed up the situation this way in a recent
weekly news column:
"There were 150 farmers who came to Washington last week. . . . They met with
top administration and congressional policymakers . . . Their message simply stated
was this: The farm economy is on the edge of disaster. Corn prices are down 30
cents a bushel due to the Soviet grain embargo ... farmers face depressed prices
when thef need cash from last year's crop to pay off loans coming due and to put in
this years crop ... A credit crisis and skyrocketing production costs combined
with lower prices is driving many farmers out of business . . . When they go under,
the rest of the nation's economy won't be far behind."
Congress has approved an additional $2 billion in emergency farm cridit to be
distributed by the Farmers Home Administration, a measure sponsored by Harkin.
USDA officials said recently the money will be distributed quickly under a plan to
be devised by high-level department officials, and they emphasized that areas which
have been hit hard by credit problems would receive special attention.
When President Carter cut off the sale of 17 million tons of grain to the Soviet
Union on Jan. 4, there were promises of special measures to ease the burden on
farmers.
Now there is a growing belief on Capitol Hill and among some private experts
that the Carter administration promises aren't being ker,t.
"Up to now, they have made only empty promises,' said Schnittker, a former
assistant agriculture secretary in the Johnson administration. "I couldn't be more
critical of them. The handling of the embargo has been one of the most poorly
carried out USDA actions I've ever seen."
"Their first mistake," Hall said of the administration, "was the embargo. Their
second mistake was the repeated assurances to farmers. Then, they didn't deliver,
and these interest rates are a result of their erratic trade and economic policies."
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USDA economist William Moat. hllll promised that the department will begin
buying both corn and wheat steadily and said the program would continue on a
weekly basis until grain prices at the farm level begin to rise.
Another department economist acknowledged the USDA hllll not fully lived up to
the administration's pledges to farmers.
"Everybody here hllll made an honest-t~oodne88 noble effort, but in trving to
execute, there probably have been some foul-ups," he said. "One of these (oul-ups
has been in purchlllling grain. This business of taking six weeks to announce you're
going to purchase grain, then llllking for bids, them making a decision is far too
long. The department hllll meant well, but we didn"t quite get the job done."
Robert Delano, president of the American Farm Bureau Federation, recently
called for an end to the grain embargo, charging that it Willi ineffective and damag-
~Ftoarmers
farmers.
. .
k.
.
·r.
t
t·,me
are h a rd est h"t
1 among c1t1zens ma mg economic sacri ices a a
when soaring inflation and near impo11Bible credit conditions have caused a cash
flow crisis in rural America," he said.
Also, DeVon Woodland, president of the National Farmers Organization at Corning, has called for "unified effort." by all major farm organizations to put profitability back into hog production.
Woodland said that with hogs below $30, it was time for cooperative action to
reduce breeding stock by up to 20 percent in order to reduce the supply of hogs and
help future prices for butchers.
Iowa Farm Bureau President Dean Kleckner called for farmers to continue "orderly marketing" of hogs rather than take part in "panic selling" because prices
have dropped.
[From the Wall Street Journal, Apr. 7, 1980]
CJumIT DROUGHT
LEAVES FARMERS SHORT OF CASH FoR SPRING PLANTINGS-IT CoMES
JuST AB THEIR CoSTs ARE WIPING OuT PROFITS; LosING $15 ON EACH Hoo
(By Meg Cox)
LENox, lowA.--On a chilly spring afternoon, 35-year-old David Schweers is selling
out of farming. Gathered around the auctioneer and the neat lines of farm equipment area 150 neighbors who have come not so much to buy anything as to judge
for themselves how bad things are.
Much of the machinery sells for Jess than Mr. Schweers had hoped. His biggest
John Deere tractor can't find a buyer at all, even after he offers to finance it
himself at 12 percent interest.
Mr. Schweers's neighbors have little incentive to buy here; there has been a sale
of a farmer's machinery almost every day for several weeks in this are of southwestern Iowa, and often eight or nine on Saturdays. The reason for the auction-goers'
stinginess is also a major cause of this deluge of sellouts: a severe farm credit
crunch.
Some of those quitting farming were poor managers. And there are still plenty of
land-rich farmers whose greatest pinch this year will be cutting back on buying new
machinery. But other farmers are forced to sell out simply because they couldn't
borrow enough of a limited supply of money to put in a crop this year.
And some, like Mr. Schweers, just figure they are "getting out while the getting's
good." They could get money, but the interest cost has as much as doubled in a
year, helping push the cost of producing many farm products above the selling
price.
Thia i8 the worst
Credit is tight for everyone, as the government tries desperately to rein in
inflation. But unlike consumers who can postpone a new car or stereo, farmers must
have money at this time of year to plant-an average of $50,000 or more for fuel,
fertilizers and weed or insect killers. And most of them borrow it.
"I've got farmers and bankers from all over hollering at me about how they're out
of money," says James Lee, an assistant administrator for the Farmers Horne
Administration for the Farmers Horne Administration in Washington, D.C. "This is
the worst credit crunch we've ever had. It's worse in some States than others, but I
don't know of any where it isn't critical."
It certainly has been critical at the Farmers Horne Administration, or FrnHA.
This so-called lender of last resort, where farmers turned away by banks can
normally get loans if there is any chance at all they will pull through, recently ran
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out of money. It had to wait weeks for the government to approve an extra $2
billion in emergency loan funds to last through fiscal 1981.
That money began trickling down to country offices last week. Farmers who
couldn't wait, says an FmHA official near Lenox, "had farm sales." He adds that
even some who were saved at the last moment "may just find the agony prolonged."
Old customers only
Visits to all sorts of agricultural lenders in this area show that the crunch is
pervasive. Most rural banks won't take new farm customers, and others are restricting their service area. At Mr. Schweers's bank in Lenox, farmers who live more
than about 10 miles away won't get a cent this year regardless of how credit-worthy
they are.
Longtime farm customers at the Iowa State Savings Bank in nearby Creston find
that money comes with some warnings this year: "Don't buy any new farm equipment or make any capital investments, even minor ones," says Joseph Knock,
president of the bank. The bank is even asking farmers to use less fertilizer this
year, because it price up up 30 percent from last year. Doing that will cut yields,
but Mr. Knock says the bank's money is tight and cuts must be made.
Because of the squeeze at rural banks, more farmers than ever are pouring into
Production Credit Associations and Federal Land Banks. The two are part of a
system of farmer-owned cooperatives and provide short-term and long-term loans,
respectively. In a four-state area including Iowa, the Federal Land Bank alone saw
a 60 percent surge in new money lent between February 1980 and a year ago, partly
because of farmers' efforts to spread their mounting short-term debt over longer
periods.
No more cushion for banks
Though credit costs vary, farmers are paying sharply higher rates in almost all
cases. With a temporary removal of State usuary ceilings by the federal government, farmers are paying 15 percent to 18 percent for operating loans at their local
banks, up generally from 9 percent to 10 percent a year ago. The Production Credit
Associations raise money in the bond market, so their rate is up too; in Creston, the
rate is 14.65 percent, up from 10.15 percent a year ago.
The jump in rates at rural banks wouldn't have been so brutal if the banks hadn't
been cushioned from increases for years, says Marvin Duncan, economist at the
Federal Reserve Bank of Kansas City. The banks found two things happening, Mr.
Duncan says: Farmers' credit demands have soared in recent years, while rural
savers got savvy, putting their money elsewhere for higher rates. For the first time,
rural banks had to look outside for funds and complete aggressively for them, he
says, and they had to raise the rates on loans.
What's more, some sources of farm loans have dried up, including insurance
companies. Prudential Insurance Co. of Chicago, for example, has $2 billion in
agricultural loans outstanding, mostly mortgages. But it hasn't issued a new farm
loan for more than a month, and a spokesman says it won't until the "will interest
markets" calm down.
Even with the leap in interest rates, the credit crunch wouldn't hurt farmers so
much if they weren't already caught in a crunch of another sort, a cost-price
squeeze. One farmer who sold out says, "Everything we have to buy went up and
everything we sell went down."
Net farm income is expected to drop about 25 percent this year from the nearrecord $33 billion of 1979, the Department of Agriculture says, while farmers' net
costs are expected to rise 20 percent.
Grain prices, hit in January by embargo on exports to Russia, have been falling
because of surluses and aren't expected to recover soon. Raymond Daniel, an economist with Chase Econometrics, predicts it will cost Midwest farmers an average of
about $2.34 a bushel to produce corn this year, while the price keeps sliding from
the $2.11 a bushel farmers in southwestern Iowa were getting the day Dave
Schweers sold out. Mr. Daniel predicts that soybeans will cost farmers $5.75 a
bushel to grow this year but will sell in the fall at far below the current $5.45 or so.
Hog growers are losing up to $15 a pig because of an oversupply of pork. And all
that cheap port has kept consumers shunning high-priced beef,.so that many cattle
feeders are in the red again. Market analysts say high interest rates are discouraging farmers from buying more young cattle to fatten.
With almost every variety of farmer up against hard times, it's no wonder rising
interest rates and scarce money are the last straw for many.
Dave Schweer's situation illustrates that. "I haven't got enough money to cover
last year's expense, and all my crop is sold," he explains. "The question I asked
myself is: 'Do I borrow money for last year's expenses and more to put in this year's
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c:rope at 15% interest, when I'm looking at a loa in every buahel'.>' The answer I
gave myaelf waa 'No.' "
Livif18 on wife• earnings
Although he's a aensible, well~ucated man. a Certified Public Accountant, and
he didn't overextend hirruielf by buyina Iota of fancy new equipment and buildinas
88 aome young farmen1 have, Mr. Schween1 aaya that he "just l(Ot tired of making
ends meet." If his wife hadn't worked also, 81 a teacher, he wouldn't have lasted
this long, he says.
The gently rolling farmland of BOuthwNtem Iowa ii far from the state's richl'1!t,
and Mr. Schweers surmiAea that "if I had 400 acres in northern Iowa that waa paid
for, I'd probably stick this out." Al it ia. there are other pa.saions to pun1ue; he will
manage an almO&t-completed alcohol fuel plant that 40 local farmen1 have banded to
together to build, and he ii running for the state senate.
Among the throng of men sipping coffee and swapping horror stories at Dave
Schweers's farm sale are I08t of grim-faced farmen1 who don't have the choicea he
does. His own father, Art Schweers, aged 60 and the father of 11, ii one of them.
"I've been farming since 1942," says his dad, "and I've never Been a year 88 bad 88
this one. The bankel"I thought I was broke three times over the yean1 and I never
believed them, but now they've got me BCared. I've got $6:,0,000 in net worth and I
can't get any money so far to put in a crop. Trouble is, we got no cash flow, meaning
we can't get more money for our products than what they cost ua. I don 't know
what we'll do yet."
Hog disease and hail
Although he ii the same age 88 Dave Schween1, 35, William Parrish isn 't blessed
with the same broad educational background or good prOt!pecta. Mr. Parrish was
forced out of farming by inability to borrow-his auction was about 10 days before
Dave Schweer's-and he h88n 't the slightest idea how he will make a living now.
He had been farming 10 years and, in the la.st one, Mr. Parrish was growing com
and aoybeana on 740 acres. In hindsight, he might not have bought the last 300
acres, he says, had he known the aetbacka nature had in store for him. First his 300
110ws developed disease problems, 110 he 110ld them. Then la.st year, hail ruined much
of his 110ybean crop just weeks before harvest.
Because of the meager crop, he couldn't repay la.st year's emergency loan to the
FmHA, Mr. Parrish explains. "So when I went back this year for money to plant,
they said 'No way.' "
Mr. Parrish plans to go to town now and look for a job. But "I was born and
raised on a farm," he says, "and I don't know anything else."
It will be some time before the dust clears and an accounting can be made of how
many farme!"I went down in the great credit squee7.e of 1980. At least in this area,
mO&t farmers seem to be hanging onto their land and just selling the equipment,
hoping they can rent the land to another farmer and farm it themselves again some
day.
Land fever cools
There's no way of telling how much land is changing hands, but it's clear the
eurging demand and price jumps of recent years have eased, and some farmers
report land going for considerably leas than its appraised value. The pattern of
bigger farmers swallowing up the land of smaller ones apparently is continuing.
Agriculture analysts are quick to say that the future of farming remains bright.
"The retrenchment in farm income this year isn't part of a trend," says Mr. Duncan
at the Fed bank in Kansas City. "The longer-term outlook for farm prices is quite
favorable."
But that's little solace to those caught in the current squeeze, some of whom are
not only financially but also psychologically at the end of their rope. Kenneth
Wernimont, a psychotherapist at a private clinic in Waterloo, Iowa, says he is
&eeing case after case this sping of "severe depression" among farmers, several of
whom have been hospitalized.
His patients, Mr. Wernimont explains, "say they simply can't borrow enough
money and at a rate that gives them a chance to make a profit. Even farmers with
many years in the business don't know what's to become of them."
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[From the Des Moines Sunday Register, Mar. 30, 1980]
A TROUBLED SPRING IN THE low A CouNTRYSIDE: SEEDS OF DISASTER
The spring of 1980 has become an ominous time for Iowa farmers. Trouble is in
the air, farmers say-perhaps the most trouble since the hard times of the 1930s.
"We're caught in a squeeze, and it's going to get worse," says Loren Klein, 33,
who farms near Granville in Sioux County, "I tell you, you don't sleep well these
nights."
Berkley Bedell, who represents northwest Iowa in Congress, agrees. "We're facing
absolute disaster," he says. "We're going to have a large number of bankruptcies.
There's never been anything like this since World War II in my area."
Consider these specifics:
A year ago hogs were selling for $48.20 a hundredweight; today they're bringing
less than $30.
Last spring a bushel of soybeans was worth $7.06; today the market price is $5.45.
Cattle sold for $72.90 a hundredweight a year ago; now the price is $65.
Corn prices are up from a year ago-$2.10 compared to $1.99 in central Iowa-but
they're down from where they were before President Carter imposed the Russian
grain embargo. They had risen above $2.30 before the embargo, but even that price
was below the cost of production-estimated at $2.43 a bushel for 1979.
A year ago a gallon of diesel fuel cost 63 cents; today it costs about 92 cents, a 46
percent jump. The costs of fertilizer and farm chemicals are up, too.
Last year farmers were getting loans with interest rates of 11 percent; now
interest rates are 14 to 18 percent.
"We've had times when there were low prices for a commodity or two," says an
Iowa agricultural official. "But nothing like this. Almost everything a farmer raises
or produces except milk is a losing propasition. You can't blame them [farmers] for
being down in the mouth about things.'
One small sample of this troubled spring: Don Struthers of Collins last Thursday
got the shock of his pork-producing career when he couldn't even get a bid on his
market-ready pigs. Then when a buyer finally made a bid Friday, it was at a moneylosing $29 a hundred pounds. "I can't remember when I sold hogs that low," says
the 36-year-old farmer.
Sense of crisis
People who have dealt with Iowa farmers for a long time say there is a sense of
crisis. In coffee shops and taverns, listeners hear more than the habitual complaints. There is an element of alarm in the conversations, an uncommon alarm.
Iowa and the rest of the Midwest farm belt have been hit by a staggering series of
economic blows-many of them engineered by the federal government.
They include the embargo on grain shipments to the Soviet Union imposed in
January by President Carter, the administration's budget-cutting and tight-money,
anti-inflation policies, the collapse of two key regional railroad systems and a
decision by the administration to forgo any program to pay farmers to keep land out
of grain productions-a policy aimed at providing consumers with cheaper food.
Within this host of problems, tight credit has taken the spotlight recently. Interest rates have soared at the government's money-tightening policies have taken
hold. Last spring, an Iowa farmer typically would have paid 11 percent interest on a
loan from a rural bank to finance his spring fertilizer, seed and other planting
expenses; this spring, he'd be lucky to get the loan at 16 percent.
Worst credit crunch
Iowa Secretary of Alr;:iculture Robert Lounsberry says the current money situation in the state is ' the worst credit crunch. . . during my 11 xears in state
government and [is) reminiscent of the Great Depression of the 1930s. '
Loundsberry estimated that 20 percent of Iowa farmers are in "a crisis.''
Some see the tight money policy as part of a cruel scheme to force farmers to
produce less.
Michael Hall, a private agricultural consultant in Washington, D.C., puts it this
way: "The people at the White House Office of Management and Budget and at the
Council of Economic Advisers opposed all of the [Agriculture Department's) attempts to pay farmers to take some land out of production because they knew that
these conditions which we're seeing today would accomplish the same thing and it
wouldn't cost them anything. They've put farmers right up against the wall."
Iowa Gov. Robert Ray offered similar thoughts last week when he criticized a
USDA plan to boost interest rates on loans to farmers from 9 percent to 13 or 14
percent.
"It apl?,8ars that this is the federal government's way of getting a set-aside
program, ' the Republican governor said.
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Corn·
Soybeans
Market Price a Bushel
Market Price a Sushel
Corn ProdMctton Costs:·
Estimated For Iowa 1976-80
.........
''
$7.06
........
::::i....~
U11or
.....
T.... c.t/AaN
,.. ......
197111
'
$$7.01
.197711
'1979I/
197911
111Q2/
s\sa.09
$78.26
$15.22
......
63.80
15.01
60.30
60.30
62.35
71.10
16.29
16.20
18.00
lLOO
18.00
98.00
98.00 102.00 112.00
$223.96 $242.68 $252.76 $267.57 $IOS.4t
$ 2.04 $ 2.21 f 2.3() $ 2.43 .• ... .
tg:===m=::=
Soybean Production Costs:
197!5 1979 N.OW
1915 191,
~o,.
1 · ...
Lendlna R~te A
_v••·~·
Production Cfedlt Association'
0
cg:
Diesel Fuel
One Gallan
CJ'
'<
CJ
0
rv
±,
11!76 1979 1980
=.::
.....
,__
Ullor
1976~ 1977 11
$32.59 $40.23
1~791/
$46.32
'
197911
$50.49
, ,
32.80
14.11
32.50
34.10
36.15
17.90
15,51.
15.51
.._.
88.00
98.00
'98.00 102.00
T-c.t/~ .$167.U $186.24 $193.93 $207.04
,.. .....
• 4.79 • 5.32 • 5.t4 • 5.92
111Q2/
-.01 ·
,
, 44.10
'17.N
111.00
$ZJJ.01
• 1.47
~~======
14.00%
;;;·
(D
a.
-
Estimated For Iowa 1976-80
1976 1979 1980
00
-::i
88
Dewayne Bloem, manager of the Alden Cooperative, a grain elevator, said farmers
are scrambling for money. Some, he said, are "borrowing" by not paying their
property taxes; that means they will be assessed a penalty of 1 percent of the
amount of their tax bill for each month that it goes unpaid.
"Where else can you borrow money for 12 percent?" Bloem asks.
One banker said he was not making any machinery loans. "Of course, if a
customer blows up his tractor after he gets into the field we're going to help him,"
he said.
Cash renters-farmers who pay a set figure to the landlord for the land they
farm-are beginning to feel the squeeze.
There are rumors that some renters are telling landlords that they can't afford to
pal, the rent that was agreed upon last fall.
'There are going to be a lot of places that could be up for rent this spring," said
Chuck Ehm, a Creston banker.
"If a farmer can't afford to farm a place at a set price then he would probably
have to let it go," said Ehm.
"It is also getting a little late for some landlords to find someone else to farm the
land-at least at a high rent rate."
The squeeze is showing itself in other ways.
"We're starting to see some of our area farmers selling off some of their larger
equipment and going back to a smaller operation," said a northern Iowa implement
dealer. "They may be getting rid of all the rented land they have and are only going
to farm the land they own."
Jim Leach, an Atlantic farmer, has reduced the number of cattle he's feeding
from 300 head to 200 this year. When he bought his cattle last fall, with money
borrowed at 11 percent interest, "you sort of had to grit your teeth when you took
that," Leach said.
Now, he says, interest rates are up around 16 percent. When his cattle are sold,
he says, "I don't think I'll be back for more."
Leach also plans to cut comers this year by reducing the amount of fertilizer that
he uses. He figures that way he'll cut $10,000 off the cost of planting 550 acres.
Presumably, though, that could mean lower yields this fall.
"I'll get through this one," says Leach, who has been farming since 1962, "but I
don't know about any more."
Hall, the agricultural consultant, said the administration's "economic policies,
some of which have been made for political purposes, are going to haunt us late this
summer." He said there are strong indications that hog and cattle production will
be cut back-as in the case of farmer Leach-and that herds will be liquidated.
USDA economist William Moats said many rural banks depleted their locally
generated funds much earlier this year than in previous years. This forced these
banks, he said, to tum to correspondent banks in Chicago for money. And this
money carried with it much higher interest rates than the country banks were
having to pay their own depositors.
Vance Haesemeyer, a banker from Stanwood, Ia., told a congressional subcommittee last Tuesday, "We can't charge more than about 18 percent interest, and our
money is costing 17 percent. I don't like sitting across the desk and charging a
farmer that much, especially when I know what he's getting for his products."
The Production Credit Association, a major source of short-term money for operating expenses of farmers, has been lending at 14 percent. Last year PCA charged
10.88 percent.
John Schnittker, another private agricultural consultant in Washington, said he
believes the current economic problems among farmers in the Upper Midwest are
the worst since the farm recession of the early 1950s that resulted in the loss of •
hundreds of thousands of small and medium-sized family farms.
"I've never seen people as despondent over a situation as they are about this,"
said Harlan Hummel, owner of a lumber firm in Hawarden in northwest Iowa.
"I'm just afraid we might be into something much deeper than we realize," said
Robert Scroggs, president of Scrog~ Feed and Grain in Hawarden. "What if we find
land values start to go down next? '
Bruce Berven of the Iowa Cattlemen's Association at Ames reported a lot of
gloominess at a recent meeting of his marketing advisory committee.
"Everybody is down mentally, and very concerned about what's happening, and
what might happen," Berven said. "They're concerned about markets, prices and
about how long they can exist in feeding or raising cattle.
"And they're worried about where they can get money [credit] because some
bankers are saying they will give only short-term notes, and then renegotiate
interest rates in 30, 60 or 120 days.
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"How can a cattleman plan his business if he doesn't know for sure what his costs
will be? That's what's happening out there today, and it has people feeling down."
Berven reported that some cattlemen, trying to scrape up springtime funds, are
even sending pregnant cows to slaughter, within weeks of spring calving.
"It's hard to imagine times so tough that a cattleman sells-off cows that should be
producing a calf in 60 days or so, but that's what's happening, too," Berven said.
U.S. Representative Tom Harkin (Dem., la.) summed up the situation this way
last week in his weekly news column:
"There were 150 farmers who came to Washington last week • • • they met with
top administration and congressional policy makers . . . their message simply stated
was this: The farm economy is on the edge of disaster. Corn prices are down 30
cents a bushel due to the Soviet grain embargo • • • farmers face depressed prices
when the;y need cash from last year's crop to pay off loans coming due and to put in
this year s crop • • • a credit crisis and skyrocketing production costs combined
with lower prices is drivin, many farmers out of business • • • when they go
under, the rest of the nations economy won't be far behind • • •"
Congress has approved an additional $2 billion in emergency farm credit to be
distributed by the Farmers Home Administration, a measure sponsored by Harkin.
USDA officials said Friday the money will be distributed quickly under a plan to be
devised by high-level department officials and they emphasized that areas which
have been hit hard by credit problems would receive special attention.
When President Carter cut off the sale of 17 million tons of grain to the Soviet
Union on Jan. 4, there were promises of special measures to ease the burden on
farmers.
Now, there is a growing belief on Capitol Hill and among some private experts
that the Carter administration has failed to live up to those promises.
"Up to now, they have made only empty promises," said Schnittker, the agricultural consultant, and a former assistant agriculture secretary in the Johnson administration. "I couldn't be more critical of them. The handling of the embargo has
been one of the most poorly carried out USDA actions I've ever seen."
Following the embargo, the USDA announced a series of actions. The department
raised price supports on corn and wheat slightly. It began to buy grain export
contracts from the companies that had sold commodities to the Russians, and it
announced it would buy $4 million tons of wheat and up to about 9 million tons of
com in order to take supplies that would have gone to Russia off the domestic
market.
While the USDA has begun the process of relieving the grain companies of their
financial obilgations involved in the Russian sales, it has yet to make major purchases of corn.
"Their first mistake," Hall said of the administration, "was the embargo. Their
second mistake was the repeated assurances to farmers. Then, they didn't deliver,
and these interest rates are a result of their erratic trade and economic policies."
The USDA further infuriated many farmers this past week when it began to sell
some 700,000 tons of soybeans it had acquired from grain companies following the
Russian embargo.
Representative Edward Madigan (Rep., III), referring to this action and to reports
the USDA is seeking to sell other grain contracts it has bought from large exporting
firms, said, "The farmers' own government, which at least ought to be an ally in
these depressing times, turns against them and seeks to dump those stocks on the
market to depress prices even further."
USDA economist Moats said the department will begin to buy both corn and
wheat steadily beginning on Monday. He said the program would continue on a
weekly basis until grain prices at the farm level begin to rise.
Moats said farmers in the Upper Midwest were more seriously affected by the
embargo because the sales cutoff involved so much corn.
One leading USDA economist acknowledged the USDA has not fully lived up to
the administration's pledges to farmers.
"Everybody here has made an honest-to-goodness noble effort, but in trying to
execute, there probably have been some foul-ups," the economist said. "One of these
foul-ups has been in purchasing grain. This business of taking 6 weeks to announce
you're going to purchase grain, then asking for bids, then making a decision is far
too long. The department has meant well, but we didn't quite get the job done."
This economist said the USDA also could have significantly increased grain price
supports, at least temporarily. The USDA, for example, increased the loan rate on
corn from $2 to $2.10. Many officials strongly believed the rate should have been
boosted to $2.50 for 60 days to 90 days to provide needed cash for farmers to plant
1980 crops.
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Late last week, Robert Delano, president of the American Farm Bureau Federation, issued a statement calling for an end to the Soviet grain embargo, charging
that it was ineffective and damaging to farmers.
"Farmers are hardest hit among citizens making economic sacrifices at a time
when soaring inflation and near impossible credit conditions have caused a cash
flow crisis in rural America," he said.
Also Friday, DeVon Woodland, president of the National Farmers Organization at
Corning, called for "unified efforts" by all major farm organizations to put profitability back into hog production.
Woodland said that with hogs below $30, it was time for co-operative action to
reduce breeding stock by up to 20 percent in order to reduce the supply of hogs and
help future prices for butchers.
Iowa Farm Bureau President Dean Kleckner called for farmers to continue "orderly marketing" of hogs rather than take part in "panic selling" because prices
have dropped $3 to $4 per hundredweight the past week.
[From the Wuhington Poet, Mar. 28, 1980)
SMALL BANKS
DISCOVER
BIG CrrY INTEREST RATES
(By James L. Rowe, Jr.)
HELENA, ARK.-Bart R. Lindsey gestured toward the sign displayed prominently
near the tellers' cages in the First National Bank of Phillips County.
"Look at that sign," said the 35-year-old vice president of Helena's biggest bank.
"It tells our problem."
The sign reads simply: "Our Six-Month Money Market Certificate Pays You
14.956 percent." Similar signs sit in lobbies of banks-large and small-across the
United States.
"It didn't used to be that we worried much about what went on in New York.
Now we do," said Lindsey.
Unlike big banks-which "buy" most of the funds they lend to their customers on
the open market and adjust their business lending rates in tune with those fundraising costs-small banks rely mainly on their own customers to supply the deposits from which they make loans to consumers, merchants, small businesses and
farmers.
Bankers and their business customers are accustomed to fixed-rate loans-those
based on the relatively stable cost of funds to the bank-not on the rates New York
or Chicago banks must pay for their big certificates of deposit or commercial paper.
But with the advent of the consumer-size certificate of deposit-sold in minimum
denominations of $10,000 with rates tied to the interest the Treasury pays each
Monday when it auctions bills on the open market-small rural banks have discovered New York.
When farmers begin to come in for loans to finance their spring plantings, they
will come face to face as well with New York interest rates.
"We had $2.8 million of our deposits shift to money market certificates in one
week in February alone," said William H. Brandon, Jr., president of the $42-millionasset bank. All of that $2.8 million came out of either passbook savings accounts
which cost the bank 5.25 percent, or long-term certificates which depositors bought
months or years ago at interest rates of about 6 percent or 7 percent. Brandon said
that depositors are cashing in those certificates despite heavy interest penalties
federal regulations require when a certificate is redeemed prior to maturity.
He said a year ago the bank had $11 million in checking accounts (which pay no
interest but cost the bank the equivalent of 4 percent), $9.5 million in 5 percent
passbook accounts, and $12 million in certificates, which cost an average of about
6.5 percent.
Today, the checking accounts run about the same, but passbook savings deposits
(which now pay 5.25 percent) have declined to $7 million. About $16.5 million is in
"expensive, hot money," Brandon said, mainly the short-term consumer-sized certificates that have been yielding close to 15 percent in recent weeks.
The bank actually gained a temporary, if perverse, earnings boost last year
because of the popularity of the new certificates. Brandon said that so many
customers cashed in their old, low-interest certificates early and paid the interest
penalty that the bank did not have to pay out thousands of dollars of interest as it
had expected.
Of course this year "we'll be paying 15 percent on those funds compared to about
6½ percent last year," he said.
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"Remember 10 years ago when everyone was talking about how smart corporate
treasurers had become in taking advantage of the earning power of their money?
Well, consumers in small towns are just as savvy today. They don't leave their
money at 5.25 percent when they can earn 15 percent," Lindsey said.
Federal regulators dreamed up the money market certificates so that banks and
savings and loan associations would be able to compete for their depositors' money
during periods of high interest rates. In earlier high-interest-rate periods, consumers
often withdrew their funds from bank accounts-where interest ceilings were set by
law-and used the proceeds to buy investments such as Treasury bills.
During those periods (although the interest rates then pale by comparison), bigcity consumers were more prone to withdraw their funds, or disintermediate as the
economists call it, than were their rural counterparts. But with the bank-offered
money market certificates, depositors have to go no further than the nearest teller
to triple their interest yields.
As a result, however, First National of Phillips County has money to lend its
customers, especially the farmers who will need loans soon to finance their spring
planting.
But that money is going to cost the farmers a lot more than it did last year.
John King, who farms about 4,000 acres in the county, found out last week that
he will have to pay at least 16 percent for the $200,000 he thinks he will need to
borrow between now and next fall's harvest. Last year he paid 10 percent.
"I'm happy to have the money. Price matters, but I've got to have the money,"
the 47-year-old farmer said. "There is no way a farmer can go without borrowing
unless he goes out of business."
But King said he is being squeezed: All his cost are rising at the same time that
the price he expects to get for his soybeans is down 25 percent because of the
president's embargo on further grain shipments to the Soviet Union. Interest is not
an inconsequential cost to King, reportedly one of the most successful independent
farmers in this old Mississippi River town, about 65 miles southwest of Memphis.
Last year he paid an interest rate of about 8 percent, and this ate up 10 percent
of the $700,000 he grossed, King said.
Although King will get the money he needs to finance his current harvest, bank
officials told him he can just about forget borrowing any money if he wants to buy
more land. King has been adding to his land holdings steadily for the last 25 years,
but is resigned to buying no more in 1980.
If current customers cannot expect to have any new ventures financed by First
National-there might be some limited exceptions to the general policy, Lindsey
said-new customers might as well forget it, especially those who need to borrow
small amounts of money.
Arkansas bankers face more strictures on the amount they can charge customers
than do their counterparts in other states. The 100-year-old state constitution sets a
usury ceiling of 10 percent that cannot be corrected by an act of the legislature as it
has been in other states.
Nationally chartered banks such as First National use a loophole in the National
Banking Act to charge one percentage point more than the Federal Reserve discount rate (now 13 percent). But state-chartered banks such as Farmers and Merchants here cannot use that loophole for loans of less than $25,000.
"We're turning down a lot of their customers," said Lindsey.
All Arkansas banks can charge up to 5 percentage points more than the discount
rate on loans of more than $25,000 because Congress passed a special law to
override the Arkansas constitution. That law expires at the end of the year.
"We'll have the money for our regular customers," said Brandon, who is bracing
now for the big seasonal upsurge in farm lending. He expects farm loans to balloon
from about $3.7 million to $8 million in the summer.
"Right now, we've got a loan-to-deposit ratio of 61 percent. We'll go close to 80
percent this summer. But we'll fi~ht loans as much as we can. We're going to shoot
for liquidity. We're a little scared,' Brandon said.
That is just what the Federal Reserve wants the banking system as a whole to do:
lend less money in order to restrain spending and fight inflation. But bankers such
as Brandon say that rural banks do not make the speculative types of loans that
fuel inflation.
Instead, he said, the loans his banks make go mainly from local depositors to local
borrowers (usually the same people) who use the money to grow crops, but necessities and finance inventories.
Indeed, Phillips County is fighting for its economic life. Agriculture, the backbone
of its economy, has mechanized over the years, throwing thousands on the unemployment and welfare rolls and convincing many to leave for good. The county's
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population has shrunk in half in the last 30 years. More than 30 percent of its
35,000 citizens are on welfare, and its unemployment rate runs close to 13 percent,
according to John Gatling, head of the newly organized Economic Development
Council.
One victim of high interest rates and scarce money in Phillips County is Al
Willinger, who heads a new barge building companay that so far has put 50 Phillips
County residents to work. Willinger needs $500,000 to finance steel and salaries for
the $2.4 million worth of barges he has on order. His life is further complicated
because Brandon is on this board of directors and First National could not make
him a loan even if it were possible otherwise because of the interlock in directors.
[From the Washington Poet, Apr. 10, 1980]
EMERGENCY MEETING YIELDS No NEW HELP FOR FARM BORROWERS
(By Art Pine and Martha M. Hamilton)
The White House, concerned about a sudden dearth of farm credit that threatens
spring planting, called an emergency meeting yesterday to review the situation, but
apparently decided there was little more that Washington could do.
In an hour-long meeting called by Vice President Mondale, top presidential economic and agricultural advisers heard status reports on various Joan programs the
government has recently put into effect.
However, sources said later there were no new proposals on how the administration might further ease the squeeze on farmer's borrowings and none is considered
likely. Officials indicated only that they would continue to monitor the situation.
Portions of Minnesota, Nebraska, North Dakota, South Dakota and northeastern
Iowa are affected by the credit squeeze. In many areas, farmers cannot obtain Joans
for seed and fertilizer.
The crunch has occurred despite pleas from the Federal Reserve Board for banks
to keep lines of credit open to other financial institutions and small businesses, even
in the face of government credit-tightening.
Administration officials say the government has taken some steps that are likely
to ease the situation. A week ago, President Carter signed a bill providing for $1
billion in federal farm loans. And the United States has purchased wheat and corn
from farmers.
Carter is also expected to sign a bill now before Congress that would allow
farmers who missed out on earlier com reserve programs to participate now.
Yesterday, Fed officials met with leaders of 15 national and regional farm organizations to talk over the credit drought, but they apparently reached no agreement.
Reuben Johnson, Washington lobbyist for the National Farmers Union, said later
that Fed Chairman Paul A. Volcker declined to use authority in a 1969 credit
control law to order banks to make loans available to farmers.
"From my vantage point, I didn't see any ray of hope or any kind of change
coming out of the Fed that is going to solve our problem," Johnson said. "When
Volcker [dismissed] the credit control act • • • I got up and walked out."
Farm economists say the credit squeeze stems from a variety of factors, including
high Joan-to-deposit ratios in the rural banks, depressed commodity prices, and
losses stemming from transportation tie-ups last autumn.
[From the New York Times, Apr. 12, 1980]
BUSINESS LoANS 8oAR
$1.36
BILLION
NEW YORK BANKS RESPONSIBLE FOR MOST OF INCREASE
(By Robert A. Bennett)
Business loans soared by $1.36 billion at the nation's large banks in the financial
week that ended April 2, the Federal Reserve Bank of New York reported yesterday. Almost three-quarters of the surge took place among the 10 largest New York
banks, where business borrowings rose by $993 million.
The increase, which was the largest since the $1.45 billion rise that occurred last
Dec. 19, runs counter to the Administration's current policy, which requires banks
to restrain the growth in their loans.
The Federal Reserve's figures also showed that banks were being increasingly
squeezed by the credit-restraint program. Penalties on certain types of borrowings
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by bank.a came into effect in the week ended Wednesday. These penalties, or
"marginal reserves," quadrupled to an average $2 billion a day from $469 billion the
previous week.
Reserves are funds that banks must keep in noneaming accounts at the Federal
Reserve. The marginal reserve requirements are imposed on funds that banks "buy"
from corporations and other banks.
Higher reserve requirement
As part of its latest credit-restraint program, the Federal Reserve on March 14
raised the marginal reserve requirement, the amount of reserves that must be held
against any increase in their purchased funds, to 10 percent from 8 percent. The
change became effective in the week ended Wednesday. Also effective that week,
the Federal Reserve lowered the level of purchased funds that banks can keep free
from the marginal reserve requirement."
The greater their marginal reserves, the more costly it is for banks. The Fed
instituted the marginal reserves to discourage banks from obtaining money for
relending.
Reserves are depoeita that banks must keep in noninterest-bearing accounts at the
Federal Reserve.
Money Supply:-M-lA
Narrow money IUpplyeupply, 11-1A,
· ~
•cumncy.in ,CRulalion and
checking accounts. Weekl1 averages In ·
-
bllliofla of dollars,~ adjuated
,
.
$380
375
370
Nc:N.: DEC .
te,.,
••
JAN.
MARCH
A360·
Bank economists were surprised by the sharp upswing in business borrowings. "I
can't fully explain it,'' said Frederick W. Deming, senior vice president and econ~
mist of the Chemical Bank.
"One week a trend doth not necessarily make," cautioned Jay N. Woodworth, vice
president and economist of the Bankers Trust Company.
Different basic assumptwna
Mr. Woodworth and Mr. Deming start from different basic aaaumptions about
business-loan trends. Mr. Woodworth believes that the rate of increase in business
borrowing baa been on the decline, while Mr. Deming believes that borrowing baa
continued relatively strong.
62-252 0 - 80 - 7
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Mr. Woodworth stresses that during March business loans at the New York banks
declined at a seasonally adjusted annual rate of 5 percent. From his perspective, the
latest week's rise brought the annual rate of increase since the beginning of the
year to the level that prevailed at the end of February.
Mr. Deming, however, contends that analysts must look beyond merely lending by
the major New York banks and to credit extension by banks outside New York and
borrowings in the commercial paper market, through which large corporations lend
among themselves. On this basis, Mr. Deming says, business loan demand has been
strong all along.
The latest commercial-paper figures can be used for support by either Mr. Woodworth or Mr. Deming. Total borrowings, by both financial and non-financial companies, declined by $128 million in the week ended April 4, the Fed reported. But
borrowings by business from the commercial-paper market rose by $519 million.
To Mr. Woodworth, convinced that the recession is under way, the latest increase
in borrowings from the major New York banks appears either to be a fluke or an
indication that a sharp drop in sales has reduced corporate cash flows and sent
treasurers scurrying to the banks.
To Mr. Deming, the increase is viewed as a collision between ebbing inflationary
forces, in which rising prices and continuing relatively strong demand for goods and
services are causing some companies to increase their borrowings, and rising recessionary forces, in which declines in sales are causing other companies also to
increase their borrowings.
Neither of the economists, however, says he is certain as to the cause of the surge
in business borrowings during the latest week.
[From the New York Times, Apr. 13, 1980)
CoRPORATE LENDING:
A
TIME To START SAYING No
(By Steve Lohr)
At 23 Wall Street stands a sober gray edifice, which houses an immense purse for
corporate America known as The Morgan Bank. It is geared to serving institutional
clients, both domestically and abroad, and first among them are the 200 largest
corporations in the United States.
Peter B. Smith is a 45-year--0ld executive vice president of the Morgan Guaranty
Trust Company of New York, the nation's fifth-largest bank. He is in charge of the
bank's corporate lending in this country and these days, he says, corporate lending
is in a state of ferment.
This turbulence is the result of many factors. Some of them-the
internationalization of financial systems, the development of the commercial paper
and Eurodollar markets, and other structural shifts-have been gathering force for
years. More recently, the overriding feature of the financial markets has been the
startling run-up in interest rates; the rate at which banks lend to their most
creditworthy corporate customers, the so-called prime rate, reached an unprecedented 20 percent a little more than a week ago. Inevitably, the more companies pay for
the money they need for current operations and new facilities, the more consumers
must eventually pay for their products.
The soaring interest rates during the last 18 months, when combined with the
structural changes in financial markets, have altered not only the methods but also
the very character of corporate lending-the give-and-take between the bank lending officers and the top financial executives at companies. Long-standing relationships between corporations and their traditional banks have frequently been cast
aside, as corporate financial managers, scrambling for the cheapest interest rates,
shopped around the globe.
The rules of the gentlemen's club gave way to the best deal the corporate treasurer could find. And the corporate executives were in command because, until
recently, it had been a buyer's market for loans; funds were plentiful since 1976,
even if the interest rates were high. Bank lending officers were the supplicants,
knocking on the doors of executive suites trying to entice corporations to borrow or
sign up for some of the banks' expanding array of advisory and other services.
But now, because of the Federal Reserve's credit-tightening program announced
last month, yet another new element has been added to the fabric of corporate
lending. Under the Fed's guidelines, loan growth this year must be held in a range
of 6 to 9 percent. In contrast, industrial and commercial loans increased about 13
percent last year, while during the first quarter of 1980 this lending has risen an
estimated 20 percent.
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By restricting credit growth, the Government hopes to reduce the amount of
money available to both consumers and corporations. thus slowing the economy and
cutting inflation. Interest rates. too, should then eventually recede, since there is
less demand for money in a slower-moving economy.
In the Fed's credit-curbing strategy, the banking system plays a key role. In a
sense, it is the police force for the Government program. the mechanism through
which credit growth will be controlled, especially corporate credit. As one banker
put it. "We've been called into the Fed's posse."
Mr. Smith of Morgan Guaranty is one of the top deputies. His office is just off
Morgan's main banking room, a cavernous expanse of wood and marble, set off in
sedate browns, grays and greens. It looks. in the common phrase, like it's supposed
~ a s though J. Pierpont Morgan himself had designed it, which he did. Over the
years, while its major rivals have pursued the consumer market ·with abandon, the
venerable Morgan Bank has not, sticking largely to its blue-chip corporate clients.
Mr. Smith, a Yale graduate. has been with Morgan Guaranty for 2'2 years. He is a
tall, lean man whose dark brown hair is flecked with gray. His speech is temperate
and measured.
It is somewhat premature. he sari, to judge the precise extent and effects of the
Fed's new program. "But clearly,' he said, "we're entering a period when we're
going to have to start saying 'no.' And to the extent that we have to restrict or
ration credit, we will do it on the basis of our long-term relationships with corporate
clients-the ones that have been maintained."
Maintaining a relationship, in bankers' parlance, generally means that the client
keeps some of its reserve funds on deposit with a bank. Corporate customers often
"pay" a bank by placing money in such noninterest-bearing accounts. The bank, in
turn, makes money be investing these deposits elsewhere. A corporation may use
such an arrangement to pay for specific loan commitments or services. But it is also
sort of mutually understood that this financial tie goes along with such hard-tomeasure benefits as being able to call a bank's chief economist at any time for
advice, and other such amenities.
With credit tightening, these friendly relations are starting to look quite valuable
indeed. As Mr. Smith noted, "We will become arbiters of who gets money and who
doesn't."
Concerned that borrowed funds will soon become scare, many corporations are
rushing to change their "lines" of credit with banks to "committed facilities."
Simply put, a line is an agreement between a bank and a corporation that if the
company needs a certain amount of money, the bank will be ready with a loan.
A commitment is a legal obligation by the bank to lend money to the company, if
asked. And corporations pay more for a commitment, usually about one-half of 1
percent of the sum committed.
In St. Louis, the Ralston Purina Company two weeks ago arranged a sizable
committed facility with a group of 10 banks, according to Kenneth N. Kermes,
senior vice president and chief financial officer. Morgan Guaranty is one of Ralston
Purina's three main banks, along with the Bank of America and the Continental
Illinois National Bank and Trust Company of Chicago.
These arrangements are seen primarily as precautionary measures by the corporations, who want to be sure that thev are not squeezed out of the borrowing
markets altogether by the Fed's controls. Some analysts have expressed concern
that if a substantial portion of commitments outstanding were demanded, it might
play havoc with the Fed's loan-growth guidelines. And if the commitments were not
honored by the banks, that could prompt a rash of law suits from the corporations
seeking funds. However, traditionally less than half of these commitments are used.
The commitments may well not be used simply because the Government's program is expected to slow the economy, thus diminishing the corporate need for
funds. "What you have now is a lot of people like me trying to lessen the demand on
Morgan and the other banks," said Mr. Kermes.
Partly because of the anticipated recession and partly because of the continuing
rise in interest rates, Ralston Purina is trimming its capital budget. This year,
according to Mr. Kermes, the big corporation, whose lines include animal feeds, pet
foods and restaurants, plans to spend about $215 million. "Just three months ago,''
he said, "we were talking about $240 million to $250 million."
These cuts will result from reducing maintenance and upgrading programs on
facilities and equipment throughout the company. "What we lose is some of the
ability to make productivity gains," said Mr. Kermes.
Mr. Smith of Morgan was asked about the long-term effect of the continuing high
rates of interest. "I think we're now gettinf to the point where these rates are going
to bite, and some projects will be put off,' he said. "But for the most part, I think
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companies will go ahead with their plans and the higher interest rates will simply
be built into the price of their products."
"Paying a high prime rate for a year or two is not going to kill a project for us,"
said Will M. Storey, executive vice president and chief financial offier of the Boise
Cascade Corporation, a producer of forest products.
This is a familiar refrain among executives of companies in capital-intensive
induatries, as is Boise Cascade. Many of their projects have payback schedules of 20
years or more, 80 a year or two of extraordinarily high rates is not a grave concern
for them.
Typically, these companies fund big projects by issuing long-term bonds, which
carry maturities of up to 30 years. With interest rates 80 high, many corporate
issuers are shunning the bond market to avoid having to pay 1\igh interest for
decades.
Instead, they arrange short-term loans, hoping to move into long-term bonds
when rates decline. This, too, adds to loan demand at banks, as they try to accommodate the corporate dropouts from the bond market.
"The real question for us," said Mr. Storey, "is when things settle down, what will
the long-term rate by?"
Still, he admits that because of the higher inflation and interest rates, Boise
Cascade recently raised by "a percentage point or two" its so-called hurdle ratesthe anticipated rate of return needed to justify a new project.
Like Ralston, Boise has Morgan Guaranty as one of its three leading banks. It,
too, recently decided to expand its total of committed bank credit lines to "somewhat more than $40C, million."
"The banks," he said, "certainly weren't beating on our doors telling us to borrow
more money, but they also told us not to worry. But for companies who have not
been paying commitment fees all along it may be another story. They may be in for
a rude awakening when they go to their banks."
[From the Wuhington Star, Mar. 19, 1980]
MOST FIRMS MOVING AHEAD WITH SPENDING PROGRAMS
Buainessmen, like consumers, are proving hard to rein in.
With banks charging their best corporate borrowers 19 percent, the bond market
in disarray and a recession widely forecast, corporations might be expected to slash
purchases of equipment and to defer plans to build factories, offices and warehouses.
Some are. But most are continuing a fairly ambitious capital-expenditure program
for 1980-and their plans aren't likely to be changed much by President Carter's
new anti-inflation program. Some evidence from people in a position to observe the
action:
Frank T. Cary, chief executive officer of International Business Machines Corp.,
says, "I don't know of any other time in the history of IBM when ... demand for
our products has been greater."
Machine-tool executives say orders are booming.
General Electric Co's big Industrial Products Group "hasn't seen any customers
deferring programs or canceling orders because of the interest rate and bond-market
situation,' a spokesman says.
Plant construction "prospects are extremely encouraging" says Charles A. Shirk,
r,resident of Austin Co., an international engineering and construction concern.
'Some of the smaller outfits aren't proceeding with some of their projects," he adds,
but he says big companies, which do most of the nation's capital spending, are going
right ahead.
And despite the new Carter program, Mead Corp. "will stick with our (capitalspending) plan for the near term," says James W. McSwiney, chairman and chief
executive officer of the forest-products company. "If we're wrong, we'll have a
corrective period. We'll eat bread and water for 12 months."
The random comments are backed up by the Commerce Department's recent
statistics. The agency reported that U.S. companies plan to spend $196.78 billion for
plant and equipment this year, up 11 percent from the 1979 total. A department
survey conducted in January and February showed manufacturers planned a 14
percent rise in 1980 outlays and non-manufacturing concerns an 8.6 percent increase. Similarly, a Conference Board survey of the 1,000 largest manufacturing
companies projected a 13 percent rise in spending this year. The business-research
organizations says capital appropriations for future projects rose 8.5 percent in the
1979 fourth quarter from the third period.
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Discounted for inflation, however, these spending plans look much Jess ebullient:
"Real" additions to plant and equipment this year would edge up a slim 1 or 2
percent, following a 5 percent increase last year. So the 1980 projections hardly
presage an investment boom.
In any event, capital spending this year seems to be stronger than might have
been expected last fall, when a recession generally was believed to be imminent, or
now, &Illid lowering interest rates. However the absence of any sudden cutback may
be explained partly by the relatively modest increases in such spending in recent
years. In addition, changes in capital spending totals normally lag behind changes
in overall economic activity. Investment programs often require months of planning
and then years of construction work; and once projects are embarked upon, companies are highly reluctant to abandon them half-finished.
Thus the 1980 projections don't prove that high interest rates and economic
uncertainty aren't affecting capital spending. They undoubtedly are-but much of
the effect won't be felt until late this year or in 1981.
Moreover, high interest rates don't affect all companies equally. Many small
concerns are delaying projects ranging from buying factory equipment to building
restaurants. Electric utilities are announcing deferrals or cancellations of new generating plants with alarming regularity-a harbinger, perhaps, of power shortages
after 1985. Railroads are slowing freightcar ordering. And companies ranging from
American Greetings Inc., a card and gift concern, to Lamsom & Sessions Co., which
makes such basic items as nuts and bolts and railroad-car parts are deferring some
minor outlays to reduce borrowing.
Also, some builders of shopping centers, apartment houses and other commercial
structures say they won't start new projects now. "You can't go ahead with a new
shopping center if you have to finance it at 16 percent or 17 percent interest rates,"
says Samuel H. Miller, vice chairman and treasurer of Forest City Enterprises, a
Cleveland real-i!!!tate developer and builder. "That's a one-way road to the poorhouse."
On the other hand, many big companies say they don't expect to cut back at all.
Some have already accumulated the cash for 1980 programs, and Jendable funds,
although very costly, are still readily available. Most companies are reluctant to let
what they regard as a short-term surge in interest rates interrupt their long-term
plans. And-probably most important-concern about worsening inflation began
late last year to override concern about a possible recession.
The damn-the-torpedoes approach is illustrated by American Telephone & Telegraph Co. The Bell Systems has budgeted 1980 capital spending at about $16.7
billion, up 5.7 percent from 1979. That figure, "has been scrubbed to the bare bones
already," a spokesman says, adding that any reductions would impair future service.
And H.S. Cody Jr., assistant treasurer, says that "we haven't set a limit" on the
interest rates that Bell will pay. "We believe our customers expect us to pay
whatever the market requires to provide them with good service."
At many companies, two possible development could alter the present investment
philosophy.
One would be a credit crunch so severe that companies wouldn't get money at any
interest cost. To ward off that danger, some companies are resorting to borrowing in
advance of needs and, fearing a federal program of credit controls, more companies
have been firming up credit lines with banks.
The other development would be a severe recession which would slash companies'
cash flow and change their expectations about the need for added capacity. Already,
electric utilities and tire makers are in such a slump and are curtailing spending.
In fact, high interest rates are more likely to curtail capital spending by slowing
the economy than by directly discouraging borrowing.
Still another reason soaring interest rates haven't snuffed out more expansion
programs is that many companies believe the high cost of money is only a temporary problem. They hope to refinance their loans later at lower interest rates.
Besides, most are borrowing only a small part of their total outlays, and many
average out money costs rather than measure each project against the highest loan
rate that they pay.
Senator CULVER. I have met numerous times during the past
several months with bankers, small business people and farmers
from my State. In Iowa, talk of recession has given way to real
fears of depression, bank failures and farm foreclosures; and those
fears are mounting with each passing day.
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Many of the banks in the upper Midwest long ago ran out of
loanable funds. Some of the best farmers in my State tell me they
cannot afford to restock their cattle feeding operations as long as
interest rates are above 20 percent. The Nation's cattle herd is
already at its lowest level in a decade, yet Iowa cattlemen are now
sending to slaughter cows that were 6 to 8 months pregnant.
And it is not agriculture alone that is suffering. Home building,
as you know full well, and construction in Iowa, as across the
Nation, have slowed dramatically. In some areas building has completely ground to a halt and many small builders face liquidation.
Young farmers, many of whom have been struggling to get themselves established, have found all their hard work is for naught.
Caught in a squeeze between soaring costs and declining prices,
this year's monetary actions dealt many of them a death blow.
I met twice last month with the Chairman of the Federal Reserve Board, Mr. Volcker. On one occasion, the meeting was attended by representatives from the Northwest Iowa Farm Business
Coalition, who explained in painful detail what the Board's actions
were doing to Iowa's farmers and business people. Mr. Volcker's
response was that everyone was going to have to tighten his belt,
an assertion that, in principle, is fine, but it does not coincide with
the painful reality in Iowa where credit was tight even before the
latest moves of the Federal Reserve Board.
And I noted in the morning paper where the largest banks in the
Nation are now showing record profits and it looks like while
everybody has got to take in their belt, some just buy a bigger belt
and put it in the first notch.
The impact is not distributed with any semblance of equity Ol'
sound economics. Last week the New York Times reported that
loans to businesses during the week ending April 2 were up dramatically. Almost three-quarters of the increase was accounted for
by the 10 largest New York banks.
I feel confident that few of those loans went to farmers or small
businesses in Iowa or anywhere else. If the large corporations are
doing any belt tightening, it is certainly not apparent. What is
clear is that the Federal Reserve's policies represent a noose
around the necks of many of America's farmers and small
businesses.
The Fortune 500 are borrowing at record rates and Iowa farmers
cannot get money to put their crops in the ground.
The needs and potential contributions of a vast army of workers,
businessmen and farmers are being choked off by policies that
presume to fight inflation, while undermining the productivity and
jeopardizing the very survival of the most efficient, the most productive sectors of the economy.
It is not my intention today, Mr. Chairman, to present specific
recommendations for monetary policy changes. I have already communicated to Chairman Volcker some of my thoughts on this subject and doubtless will have additional recommendations along that
line in the future.
My purpose here is to present to this committee the desperate
need for a new perspective which I feel should and indeed must be
incorporated into the monetary policy deliberations of the Federal
Reserve Board.
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The best way I know to accomplish that objective is to place on
the Board someone who possesses that perspective, someone who
understands and shares the high priority that farmers and small
business enterprizes have earned.
Lyle Gramley does not possess that perspective. I understand
that yesterday, Mr. Chairman, Mr. Gramley provided the committee with an extensive biographical sketch of his agricultural experience. When the chairman posed this question to Mr. Gramley at
his confirmation hearing for his present position in 1977, however,
he responded, I think more candidly and I think perhaps more to
the point. "I don't pretend to know much about the agricultural
sector of our economy, and I would be leaning on the experts on
the staff," said Mr. Gramley on the occasion of his confirmation
hearing in response to a question from you, Mr. Chairman.
Mr. Gramley also mentioned his role in Federal Reserve surveys
of small business credit needs during 1955, 1957, and again in 1959.
During this period he was a financial economist at the Federal
Reserve Bank of Kansas City and participated in these surveys.
Apparently the 1959 survey was the last such study conducted and
is long out of date.
Following a brief excursion into academia from 1962 through
1964, Mr. Gramley returned to the Federal Reserve Board, this
time to the staff of the Board of Governors. From 1969 to 1977, he
successively held the positions of Associate Director, Deputy Director, and Director of the Board of Governors Division of Research
and Statistics in that bureaucracy.
To my knowledge, during that period no survey of small business
credit comparable to the 1959 survey was conducted under his
direction.
I would urge this committee to review the record of Mr. Gramley's testimony on October 23, 1979 before the Senate Small Business Committee. Senator Stewart, who of course is here today,
chaired that October hearing. My reading of that record, in which
several members of the Small Business Committee repeatedly questioned Mr. Gramley concerning the specific impact on small businesses of then current fiscal and monetary policies reveals no
indication-reveals no indication of an understanding of or sensitivity to the possibility that the impact on small business might be
different from that on large businesses.
To small business, that difference, Mr. Chairman, frequently is
the difference between life and death.
I agree with the chairman of this committee that a candidate for
a seat on the Federal Reserve Board should possess extensive
knowledge and experience in general economic and monetary
policy. I am convinced that in a Nation of 220 million people they
all don't come out of the Ivy League. They all don't come out of
New York banks and large corporate board rooms or out of the
bureaucracy of the Federal Government. I am convinced that a
candidate can be found that possesses these qualities, yet also has a
more intimate understanding of the impact of monetary policy on
small businesses and farmers, which as I have pointed out constitutes over half of the national economy.
Mr. Chairman, the views I have presented to the committee are
not mine alone. I would also like to submit for the record commu-
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nications I have received from numerous organizations and associations endorsing this effort to broaden the makeup of the Federal
Reserve Board.
The CHAIRMAN. We would be happy to incorporate those in the
record.
[The information follows:]
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National Association of Home Builders
15th and M Streets, N.W., Washington. D.C. 20005
Telex 89-2600
(202) 452-0400
Meni1J Butler
April 14, 1980
11180 Presideat
The Honorable William Proxmire
Chairman
Senate Committee on· Banking Housing and Urban Affairs
5300 Dirksen Senate Office Building
Washington, D.C.
20510
Dear Mr. Chairman:
On behalf of the more than 121,000 members of the National
Association of Home Builders, I am writing to express our views
concerning the nomination of Lyle Gramley as a member of the
Federal Reserve Board.
It is with some reluctance that we urge that this Committee
not recommend the confirmation of a nominee for any major Federal
position, but we feel strongly that we have no other choice regarding
the filling of this vacancy on the Federal Reserve Board at this time.
As this Committee is well aware, the housing industry is in
a state of crisis. And the almost exclusive use of the "tight
money• policies of the Federal Reserve Board in an effort to combat
inflation bas resulted in a precipitous decline in housing starts
and sales with its attendant loss of jobs and revenue to the
Treasury. Traditionally, housing has been •at the end of the whip"
of the FED's policies.
we believe that a nominee for the Federal Reserve Board should
be keenly aware of the impact of high interest rates on the housing
industry and on potential homebuyers as well as on small businesses
and consumers in general. we do not find that Mr. Gramley has
recognized the extent of the crisis in housing or the devastating
impact of the high interest rate policy. This is not intended as any
personal or professional critism of Mr. Gramley. We are certain
that he is extremely competent in the area of monetary policy.
we would urge that this nomination be rejected and that serious
consideration be given by the President to the nomination of a
small businessman for this important position. Someone who has
been "at the end of the whip" of the FED's policies could help
bring a fresh and needed perspective to the deliberations of the
Federal Reserve Board.
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The National Association of Home Builders shares the concerns
to be expressed by Senator John Culver in his testimony before the
Committee regarding the nomination of Mr. Gramley.
We appreciate the opportunity to present our views and
respectfully request that this letter be made a part of the
Committee's hearing·record.
Sincerely,
~~----
Merrill Butler
President
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....
,._
-.J
i
NATIONAL LUIIIER AIIJ IIUI.D.a
March 27, 1980
Honorable John CUlver
United States Senate
Washington, D.C. 20510
Dear Senator CUlver:
The National Lumber and Building Material Dealers Association,
representing 15,000 small retail businesses throughout the Nation,
on March 7, 1980, endorsed with our full support your letter of March
6, 1980, to President Carter proposing a small businessperson or a
farmer for the vacancy on the Federal Reserve Board of Governors.
The NLBMDA recorded our support of your proposal to President Carter
and requested his consideration of a small business/farm appointment
by mailgram on March 7, 1980.
Accordingly, it is our understanding that the President has
placed the name of Lyle Gramley for the FRB Board of Governors
position. We do not feel that this nomination meets with the intent
and tone of your proposal. The NLBMDA does not want to record any
personal bias towards Mr. Gramley, and while we recognize that he
may be a monetary policy expert, we feel he lacks a certain sensi ti vi ty
to the problems of supply economics and small business. Another
concern about his confirmation involves his response to a question
at a White House briefing on the President's Economic Policy which
indicated that he does not understand the severity of the housing
crisis. He sllll'lllarily dismissed the subject with a remark that he
did not feel things were as bad as he was being told.
The National Lumber and Building Material Dealers Association
reaffirms our support of your position on the Board of Governors of
the Federal Reserve and urge you to express our position during
the confirmation hearings before the Senate Conmittee on Banking,
Housing & Urban Affairs.
Sincerely yours,
m.
r >r~
Ml\RTIN
ve Vice President
JMM/jh
1990 M Street,
N.W,, Suite 350
Washington, D. C. 20036
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--------
FARMERS ORGANIZATION
NATIDNAL
•
~.!:
11111A all • 111/m-nn
......... OffloeW. . . . -4nl'EMIMl,.._I.W.
WMHINGTON, D.C. ID02f
...,._1'111
April 14, 1980
The Hon. John Culver
United States Senate
Washington, D. c. 20510
Dear Senator Culver:
We appreciate your concern regarding the current high
interest rates and lack of adequate credit for farmers,
ranchers and small businessmen in rural communities.
Consequently, we support your efforts to secure appointment
of a member of the Federal Reserve Board who possesses
real experience in rural banking and a collllllitment toward
adequate credit policies for rural producers.
With best regards·,
Sincerely,
, ~-•)
~e.~7
Director, Washington Office
[ } / / ~ FOR
AGRICULTURE
THROUGH
NFOJ
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.J::!
IU National
Farman Union
Offit» of tM Prnident
April 10, 1980
The Honorable John C. Culver
United States Senate
344 Russell Senate Office Bldg.
Washington, D.C. 20510
Dear Senator CUlver:
National Farmers Union is pleased to join you in calling
on the President of the United States to appoint to the Federal
Reserve Board of Governors an individual who is knowledgable of
the financial requirements of agriculture and small business.
The delegates to the most recent National Farmers Union
convention meeting in Denver, Colorado, March 2-6, 1980 adopted
the following statement relative to the Federal Reserve Board:
"The Federal Reserve Board should be
compelled to conform its policies to the
goals of the 'Full Employment and Balanced
Growth Act of 1978'. The Federal Reserve
statutes should be amended to require representation on the Board of agriculture,
small business and labor."
I am attaching for your information excerpts from the 1980
policy statement of the National Farmers Union dealing with
Economic Policy.
The Nation's farming and small business sector are facing
economic catastrophe. We believe it imperative that a member
be appointed to the Board of Governors that can represent those
interests that have been so long denied a voice in setting our
national monetary policy.
GWS:gp
Attachment
12025 East 45th Avenue • Denver, Colorado 80261 • Phone (303) 371-1760
600 Continental Bldg. • 1012 - 14th Street, N. W. • Washington, 0. C. 20006 • Phone (202) 628-9774
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,.J
,.j
;_
5
123 Airport Raad, - · Iowa 50010
515·233-3270
April 9, 1980
The Honorable John Culver
344 Russell Senate Office Building
Washington, D.C. 20510
Dear · Senator Culver:
The Iowa Cattlemen's Association would urge the U.S. Senate
not to ratify the appointment of Mr. Gramley to the Federal Reserve
Board. We feel that someone from outside the system with an understanding of the financial needs of agriculture and small businesses
is needed. Mr. Gramley does not have the background to provide us
with this much needed approach to the monetary matters of this
nation.
The current policies of the Federal Reserve Board are
devastating to cattle producers and farmers in general. Increased
production costs, primarily from increased interest costs, at the
same time that American consumers are concerned about the economy
and have cut back on their beef purchases have put producers in a
precarious situation. We are already seeing production cutbacks
and continuation of existing policies will be even more cowiterproductive.
Your assistance in this matter will be greatly appreciated.
Sincerely,
&:,{-- ario&.~
-~
Robert G. Anderson, President
RGA/bsc
-------------1,0WA CATTLEMEN'S ASSOCIATIO----------
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ThtNalimal
5mal llu5n!ss
As,oc,aoon Bl.-.g
1604K~ N.W
Wawqon. D.C. 2IIIOr>
l,tepllon,,
12()2/~7400
Busi
~isla.
Council"
April 11, 1980
The llollorlble John C. Culver
United States Senate
344 Russell Senate Offfce Buflding
Washington, o.c. 20510
Dear Senator Culver:
The Small Business legislative Council applauds your announcement concerning the need for small business representation on the Board of Governors of the
Federal Reserve System.
Current trends in our economy necessitate representation at the topmost
levels on all national economic policy boards and agencies of the federal
government. We wil 1 be working toward this goal and we support the efforts of
those who share the same belief.
The lives and future economic status of 14 million small businesses and
their 59 million employees are dependent upon the decisions of these governmental bodies. This is too great a segment of our society to be ignored,
especially since small business suffers disproportionately from downturn in
our econany.
Recent reports of • jawboning" for smal 1 business credit needs, attributed
to the chairman of the Federal Reserve Board, indicate an awareness of small
business credit problems, but such "jawboning" is simply not enough. It is
obvious that we need more than a mere "awareness" among the Governors of the
Federal Reserve System. Small business needs act ion.
Senator Culver, to the extent that your remarks today and your efforts in
the Senate next week are aimed at getting the President to nominate, and the
Senate to confirm, a qualified individual to represent small business interests,
to fill the vacancy on the Board of Governors of the Federal Reserve System,
your effort has the support of the Small Business Legislative Council, whose 76
llll!lllber associations, with their affiliates, represent more than four million
sma 11 bus i nesses.
Herbert L1 ebenson
Executive Director
Attlcllnent:
SBLC Membership List
•Of U.. Natlonal Small
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108
The Na1,onal
Srn<lll Business
kso.: 1a11on Bu1ld1ng
1604 K S1reet. N W
Washington. DC 20CXl6
Telephone
[202/ 296- 7400
Small
Business
Legislative
Council*
MEMBERS OF THE SMALL BUSINESS LEGISLATIVE COUNCIL
American Association of Nurserymen
American Metal Stamping Association
American Textile Machinery Association
American Trucking Associations, Inc.
Association of Diesel Specialists
Association of Independent Corrugated Converters
Association of Physical Fitness Centers
Association of Steel Distributors, Inc.
Automotive Affiliated Representatives, Inc.
Automotive Warehouse Distributors Association, Inc,
Building Service Contractors Association International
Business Advertising Council
Christian Booksellers Association
Direct Selling Association
Eastern Manufacturers and Importers Exhibit, Inc.
Electronic Representatives Association
Forging Industry Association
Furniture Rental Association of America
Independent Bakers Association
Independent Business Association of Michigan
Independent Business Association of Washington
Independent Sewing Machine Dealers of America, Inc,
Institute of Certified Business Counselors
International Franchise Association
Local and Short Haul Carriers National Conference
Machinery Dealers National Association
Manufacturers Agents National Association
Marking Device Association
Menswear Retailers of America
Minnesota Association of Commerce and Industry Small Business Council
Narrow Fabrics Institute, Inc,
National Association for Child Development & Education
National Association of Brick Distributors
National Association of Catalog Showroom Merchandisers
National Association of Floor Covering Distributors
National Association of Home Builders
National Association of Plastic Fabricators
-more-
3/80
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National Association of Plastics Distributors, Inc.
National Association of Plumbing-Heating-Cooling Contractors
National Association of Realtors•
National Association of Retail Druggists
National Association of Trade and Technical Schools
National Beer Wholesalers' Association of America, Inc.
National Building Material Distributors Association
National Burglar &fire Alann Association
National Candy Wholesalers Association, Inc.
National Coffee Service Association
National Concrete Masonry Association
National Electrical Contractors Association, Inc.
National family Business Council
National fastener Distributors Association
National Horne furnishings Associ•tion
National Horne Improvement Council
National Independent Dairies A~sociation
National Insulation Contractors Association
National Meat Association
National Office Machine Dealers Association, Inc.
National Office Products Association
National Paper Box Association
National Paper Trade Association, Inc.
National Parking Association
National Patent Council, Inc.
National Pest Cootrol Association
National Precast Concrete Association
National Shoe Retailers Association
National Small Business Association
National Society of Public Accountants
National Tire Dealers & Retreaders Association, Inc.
National Tooling and Machining Association
National Tour Brokers Association
National Wine Distributors Association
Power and Communication Contractors Association
Printing Industries of America, Inc.
Sheet Metal &Air Conditioning Contractors' National Association
The Roller Skating Rink Operators Association
Web Sling Association, Inc.
Wine & Spirits Wholesalers of America
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110
NFIII
NatioNI ,..,.llui,
.......It...._
(,I
April 14, 1980
Mr. Stuart E. Eizen•tat
Assistant to the Preaident for
Domestic Affair• and Policy
The White House
Washington, D. C. 20500
Dear Stu:
NFIB, on behalf of it• 600,000 a.all and independent buaine•s
member•, urges you to nominate to the Federal Reaerve Board a
person with a clear underatanding of the situation that •mall
business occupies in our national economy. The Federal Reserve
Board's responsibilities over credit and monetary matters have
a direct impact on small busineas. As an aggregate,
business occupies an extraordinarily important role in the national
economy. But as individual participants in that •Y•tem, amall
businesses are uaually the first to feel economic pressures and
the least able to respond to those praasures.
Small business' confidence in the ability of the Federal
Reserve to chart practical and effective economic policy would
be enhanced by the appointment of a Federal Reserve Governor
with an understanding of •mall business. Buainess and financial
experts frequently have practical experience with large corporate, academic or financial institutions. While the per•pectives
from such vantage points are not necessarily contrary to the
perspectives of smaller business NFIB •trongly feels the
Federal Reserve Board would benefit by additional exposure to
small business considerations. Appointment of a Board Governor
qualified by knowledge or experience with small business will
achieve more informed and effective Federal Reserve Board policies.
Thank you for considering the views of small businesa.
With
best wishes.
,,..i•,J~
.~.
Jame~'D.
ike" McKevitt
Direct
of Federal Legislation
JDM:scw
/
/
Federal Leg1sta11ve Office 490 L·Enfant Plaza East. S. W. Suite 3206. Washington. 0 C 20024
Telephone (202) 554-9000 • Home Oflice San Malec. Cal1lorn1a
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l
ARTICU: VI
2
ECONCJilC POLICY AND THE FAMILY FARM
3
A.
National Economic Policy
4
S
cannot isolate
of the national economy,
6
7
8
9
from what
reduced by economic
happening in the
The demand for our farm
ia
and high unemployment,
The
which farmers must pay to produce and live are imflamed by
energy
inflation, and low productivity in industry,
The severe depression in our agricultural economy is a special
10
problem requiring urgent attention to avert a worldwide food crisis
11
as dangerous to world stability as the energy crisis,
12
received by American farmers are the lowest of any country in the
13
world, and the lowest in purchasing power of any time in history
14
except the years 1931 and 1932.
lS
prices into balance with returns in other sectors on labor, invest-
16
ment, management, and risk must be initiated at once.
17
Positive
Current prices
to raise farm
Our government must take vigorous steps to reach full employment,
18
to dampen inflation rates, and to encourage higher productivity.
19
This is basic to the attainment of a balanced federal budget, the
20
strengthening of the dollar, and to a healthy national economic
21
recovery.
22
23
Because current monetary and fiscal policies are neither curbing inflation nor spurri~g sufficient employment growth, better
24
strategies must be developed and implemented.
2S
hard choices must be made,
Tough decisions and
We recommend a brief freeze on prices,
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1
wages, interest, and profits, with provision for adjustments to
2
enable farmers and others whose returns are currently below those
3
prevailing generally in the economy to "catch up", followed by
4
selective price and wage controls where needed.
5
The provisions of the Federal Reserve Act of 1913 are the root
6
cause of the inflation, both in our national economy and in inter•
7
national influence such as the escalating oil, silver, and gold
8
prices.
9
We, therefore, call upon Farmers Union leadership to become
10
informed as to the provisions of the Federal Reserve Act and the
11
workings of the Federal Reserve System, the Federal Reserve Board,
12
and the Open Market Colllllittee, with the intent to offer leadership
13
to Congress to lead the way out of our economic dilelJllla.
14
15
16
B.
Farmers and Inflation
Farming costs are currently 14 percent above a year ago and
17
43 percent above the level just three years ago.
18
costs and inflation are reducing total United States net farm income
19
by several billion dollars a year.
Obviously, high
20
Inflation has a particularly punishing effect upon farmers.
21
Although it may add somewhat to the level of prices received by
22
farmers, it has a more pronounced effect on the cost side and, with
23
prices a third below parity, it is not possible for farmers to
24
pass on the burden to others in the economy.
25
Farmers, therefore, have perhaps a greater stake than most
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1
others in the economy in success in reducing inflationary pressure
2
to manageable levels.
3
4
5
6
7
c.
Money and Credit Policy
Farmers are drastically injured by the current high interest
rates being employed, without success, to dampen inflation.
As of January 1, 1980, farmers had outstanding debts of $157
8
billion and it is predicted that debt will grow by $25 billion dur-
9
ing the year.
·'l.O
Interest outlays by farmers, which were $11.9 billion in 1979,
11
are expected to reach $14 billion in 1980.
12
in four years and a ten-fold increase since 1960.
13
This would be a doubling
At the same time, interest payments on the federal debt in fis-
14
cal year 1981 are now projected at $80 billion, a major cause of the
15
difficulty in balancing the federal budget.
16
A better remedy is available in the form of the emergency powers
17
conferred on the President by the Emergency Credit Control Act of
18
1969, under which the President may limit credit use, may prescribe
19
interest rates and credit terms and, if needed, allocate credit to
20
productive uses.
21
able to continuing the present totally ineffective policies.
22
Severe as such actions would be, they are prefer-
The Federal Reserve Banking Board should be compelled to conform
23
its policies to the goals of the "Full Employment and Balanced Growth
24
Act of 1978".
25
r~quire representation on the Board of Agriculture, small business,
The Federal Reserve statutes should be amended to
and labor.
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[Mailgram]
APRIL
15.
Hon. JOHN CULVER,
Russell Senate Office Building,
U.S. Senate, Washington, D.C.
Regarding nominee for Board of Governors of the Federal Reserve System. National Cattlemen's Association urges nomination of person who has working knowledge of agriculture and small business and is conversant with credit needs of these
segments of economy.
B. H. (BILL) JONES, Vice President.
(Mailgram]
NATIONAL LUMBER AND BUILDING MATERIAL DEALERS AssocIATION,
Washington, D.C., March 7.
President CARTER,
White House, Washington, D.C.:
This mailgram is a confirmation copy of the following message: National Lumber
and Building Material Dealers Association, representing 15,000 small retail businesses throughout nation, endorses and supports Senator John Culver's letter of
March 6, 1980, to you proposing small businessman or farmer for vacancy on
Federal Reserve Board of Governors, your consideration appreciated.
JOSEPH W. HOBSON, Staff Vice President.
[Mailgram]
loWA CATTLEMEN'S AssocIATION.
President JIMMY CARTER,
White House, Washington, D.C.:
The Iowa Cattlemen's Association strongly supports Iowa Senator John Culver's
recommendation that a person knowledgeable of the credit needs of farmers and
small businessmen be appointed to the Federal Reserve Board. The availability and
cost of working capital is having a depressing effect on agricultural production
today.
ROBERT G. ANDERSON, President.
Senator CULVER. These organizations include the National Farmers Union; the National Farmers Organization; the Iowa Cattlemen's Association; the Small Business Legislative Council, a consortium of 76 associations representing more than 4 million small
businesses; the National Federation of Independent Business; the
National Lumber and Building Materials Dealers Association; the
National Association of Home Builders; and the National Cattlemen's Association; and I respectfully ask the members of this committee to listen to the voices of these organizations in the immediate weeks ahead.
Their members for too long have been the silent victims of
policies designed by and for the corporate board rooms of America.
Thank you very much, Mr. Chairman.
The CHAIRMAN. Thank you, Senator Culver. I very, very much
welcome this kind of challenge. We don't have enough of it. We
automatically approve nominations in this body and I think it's a
mistake. We have the authority to advise and consent and we
rarely use that authority as we should. You and I and Senator
Garn and Senator Stewart have opposed nominations in the past,
but it's rare that we have a Senator come and actually appear and
challenge a nominee and do it on the basis of very, very careful
research which you obviously have done. You know a lot about Mr.
Gramley. I dare say you know more about him than members of
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this coll)fnittee knew although he appeared before us, as you say,
for the Council of Economic Advisers and we went into some detail
on that.
So I think this is a very healthy challenge on your part and I
welcome it.
I think we ought to, however, put Mr. Gramley's nomination into
perspective and I'm delighted to see a Harvard man tell a Yale
man who's chairman of this committee that the Ivy League has too
much representation.
There are all kinds of ways we can criticize the Senate and the
Federal Reserve Board and others. My own view, however, is that
what we need on the Federal Reserve Board is, above all, somebody
who understands monetary policy. That's what their job is.
I think you can make the argument that we ought to have
farmers on the Board. We ought to have businessmen on the
Board. In fact, you can go to the legislation and you can establish
that we need that, and you say very wisely that we need somebody
who has both. But it seems to me that's hard to find.
Isn't it true that with all the limitations that Mr. Gramley has,
he's had at least some farm experience? He worked on a farm in a
limited way, but he's worked on a farm.
Senator CULVER. Mr. Chairman, you yourself asked him the question on the occasion of his 1977 confirmation hearing. I read that
with considerable interest, but you specifically asked him what-in
obviously searching for this kind of representation and broad background-The CHAIRMAN. You're right. You quoted accurately, and he did
admit as you say-Senator CuLVER. I think that's a far more honest and candid
acknowledgement. He knew in anticipation of my appearance here
today-I'll just read it. I think it's very useful. "The Chairman.
How about in the farm area?"-in terms of searching his background-"How about in the farm area?" "Mr. Gramley. Again, I'm
not an agricultural economist. I don't pretend to know much about
the agricultural sector of our economy." There isn't a better witness than he is on his own qualifications, and "I would be leaning
on the experts on the staff just as I have leaned on the staff of the
Federal Reserve Board."
Now he came in here yesterday and he said he would have been
brought up on a farm but they went broke so he missed that
opportunity. Well, unfortunately, a lot of them are experiencing
that opportunity today in my State.
The second thing is he had a relative that he thought still had
farms, one of them even in Iowa, which was a convenient recollection. And the other thing he said is he could milk a cow.
Well, with all due respect, Mr. Chairman, I think that hardly
qualifies for bringing to bear on the policies of the Federal Reserve
Board any standing to speak to agricultural and small business
economic matters.
I must say, Mr. Chairman, I wasn't looking for cheap demagogic
points when I said we've got a Board here-and you know it
ypurself-you have seen what Chairman Reuss has done in the
House-this is the most incestuous historical background and
record imaginable. It's the height of elitism to say that out of a
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Nation of 225 million, the only way you know anything about the
Federal Reserve Board is to be born and bred in the high priesthood of the Federal Reserve Board itself. As I said, if it's any more
incestuous, they are all going to have a single eye in their forehead-the consequences of that inbreeding will be policies which
have no real application and have dangerous consequences to the
people that are really out there making it go around.
The CHAIRMAN. Now, Senator Culver, I'm simply saying that he
is a man who has worked on a farm. As you say, he's not an
agricultural economist, but he's worked on a farm. He did have an
experience that I think would be very valuable to him of having
his father go broke on a farm and he has some experience with
what that is. It means something. It would be better than if he had
never worked on a farm or never had come from a farm background.
Furthermore, he did make a study-and you said it is dated-it
was fmished in 1959 and it's more than 20 years old, but it's still
the defmitive study of the credit needs of small business. It's about
time we had another one, but that was a study which is highly
respected and indicates that as a monetary expert, a man with
good training, a man who has worked in the Federal Reserve for
years, that he had the responsibility of studying small business.
Senator STEWART. Would the Chairman yield?
The CHAIRMAN. I will yield in just a minute.
Furthermore, he was the author of what is the most comprehensive study of housing. I argued with him on housing. I didn't like
his housing policy. I disagreed with the gentleman that he succeeds
on the Federal Reserve Board because I didn't like his monetary
policy. But I cannot argue with a man who's appointed to a position for which he's qualified, even though I disagree with his
ideology and disagree with his position. He understands housing.
He has a different view, but he studied it thoroughly and came up
with what is one of the most comprehensive studies the Federal
Reserve Board has ever made of housing.
So in the small business area and in the housing area, both of
which are tremendously affected, as we all know, right now by
monetary policy, he's a man who's established a strong background.
If you went through my questioning of Mr. Gramley before you
could also tell I was very critical of him as an appointee to the
Council of Economic Advisers. Frankly, he had been under the
tutelage and jurisdiction of Dr. Arthur Bums, a man for whom I
have the greatest respect but with whom I disagree very strongly
with respect to monetary policy; but I think he's also a man who is
qualified for this particular job.
And you make a very strong case against the Federal Reserve
Board. I disagree with it, but it's a strong case. If you look at the
members of the Board, however, of all the members, this man
probably has more background, limited as you think it· is in the
small business area and particularly in the housing area, of any
member of the Board.
So for those reasons, I would hope that we don't take the position
that a man may be qualified but he's not been an agricultural
economist. He may be qualified, but he hasn't. actually operated a
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small business and therefore he shouldn't be appointed to the
Federal Reserve Board.
Senator CuLVER. Well, Mr. Chairman, my only point would be
when we speak of qualifications, is that's exactly what I'm trying
to address here today-the qualification which, in my judgment,
are so desperately lacking on the present board and in the board's
history, and as a consequence the formulation of policy that is not
properly sensitive to the distinctions that are so critically important in the nature of this economy. The fact that this one individual can lay some tenuous claim to some relative competence which
relatively might be more than some others on the Board, in my
judgment, is just a tragic and woeful reinforcement of my point.
I emphasized at the outset this is in no way addressed the
personal character of the nominee or the qualifications in a highly
technical sense, given the traditional background of this nominee.
What I'm saying is that the present policies of this administration
are economic disasters and I'm totally convinced that, after numerous efforts and repeated urgings on this administration in 1978 and
again now, this is the only way to get representation on the Board
that is more compatible and congenial with the real needs of the
people I represent-which happen to be right across the river from
people, with all due respect, which you represent-and that is more
responsive to their concerns because these policies are bringing
about economic recession and depression and I think unnecessarily
so.
When we speak of qualifications, I must say, with all due respect,
I don't see why those qualifications should be limited to somebody
who spent a lifetime in the bureaucracy of the Federal Reserve
Board itself or who compounds the traditional skewing of the representative character which I understand from the legislative history of the Board is supposed to exist.
So, I think when we speak of qualifications, that's exactly what
we're addressing here, is qualifications to do the job. And whether
or not we are going to use this opportunity to broaden and make
more reflective of the economy of this country and its needs than
what we are getting as a result of policies that come out of the
academic libraries.
The CHAIRMAN. Senator Culver, I'm going to have to leave. I will
come back because it looks as if there's enough Senators here so
you will be questioned for 15 minutes or so. I will come back as
soon as I give my speech on the floor. I'm going to ask Senator
Morgan to chair the meeting while I'm gone. I will be back.
Senator GARN. We'll take care of that this year.
The CHA1RMAN. I'm sure you will.
Senator GARN. What I'm referring to is when Senator Proxmire
and I change seats, John, and he becomes the ranking minority
member.
Senator CULVER. I might help you do it. You'd better be nice to
me.
Senator GARN. I have always been nice to r,ou. John, I'm pleased
that you are here to testify today and I don t have any particular
questions. I do have some remarks that I would like to make,
actually a repetition of yesterday.
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First of all, you may be interested to note that I had the testimony from 1977 placed in the record in its entirety because I felt, in
addition to the question that you brought up today, that his testimony in many other aspects was noteworthy to today's hearings.
So the entire hearing record from that 1977 confirmation was
placed in the record yesterday in addition to what you mentioned.
Second, I'm concerned about this appointment, not as an individual-I think what the chairman says is correct-Mr. Gramley is
well qualified by all of our traditional methods of looking at somebody's background-Ph. D. in economics and all that-but I happened to mention yesterday and I will do so again today that as I
have watched the Federal Reserve Board appointments over the 5
years I have served on this committee, they are all tending in one
direction. And this is not a reflection on any individual member of
the Board, but if you look at the recent appointments with one
exception, Mr. Schultze, a Florida businessman, Mr. Volcker came
from the Fed, from the New York Fed. Mr. Partee was an economist at the Federal Reserve Board, another inside appointment.
Nancy Teeters came from the Congressional Budget Office. Mr.
Rice came from the Washington, D.C. bank. Mr. Wallich, a Yale
professor, formerly with the New York Fed.
So you look at all of them and they are all basically coming from
the same geographical area, from the same general sort of background.
Mr. Gramley is another one of those. Again, I want to stress it
isn't personal disagreement with any one of them individually or
their qualifications, but I think we are seeing the Fed stacked with
a particular line of thought and background and we have also
found out that they get around the geographic requirement of not
having more than one appointee from each Federal Reserve District by picking any sort of thing, like if they were born or they
went to school or whatever-any tie with an area, they can say,
well, 30 years ago they lived here, therefore we can appoint them
from that geographical area.
Now I think that qualification was put in for a very specific
reason, to give some diversity of thought geographically around
this country. It would seem to me it ought to be somebody who had
been living, working in that geographical area to have a feel for
that. I'm sure in your years here in Congress you've found out that
people think differently in Iowa than they do here on the Potomac.
They certainly do in my State and I think that diversity of thought
comes from geographical distribution which has been ignored not
only by this President but many others. It's not peculiar to this
particular administration.
One thing that I have always, the entire time I have been on this
committee in 5 years, fought for is the independence of the Fed.
Whether I agree with them or not is not nearly so important as
that their decisions be independent of this body, meaning the Congress, and the administration. Whether I agree with them or not, I
don't want them to be politically influenced. Again, I'm not insinuating at all that Mr. Gramley would be called by the President or
by the chairman of this committee or Henry Reuss and do exactly
what they ask him to do. I doubt that very much. Nevertheless,
he's coming from the President's Council of Economic Advisers.
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Yesterday, in questioning, he said that he fully agreed with the
economic policies that were going on right now from the administration, from the Fed. That disturbs me alone, that he's so satisfied
with the-well, it isn't fair to say he's satisfied with the economy
right now-certainly he would not be the condition it's in, but
satisfied at least at this point with the proposed solutions to those
problems. I'm one who is not. I'm one who is concerned, like you
are, that certain segments of the economy, particularly farmers,
homebuilders, and automobile dealers are being hit rather inordinately hard compared to other sectors of the economy in almost a
total disregard, as we have had testimony from many people before
this committee-"Well, so be it, we have to take our lumps and
we've got to get this thing over with. We might as well take them
now."
Well, I have a hard time feeling that a deliberate recession is the
best answer to inflation. So Mr. Gramley's satisfaction with the
present economic policies disturbs me somewhat too, but the major
thing that I'm concerned about is the overall picture of looking at
these past appointments and where we are heading.
So your remarks on that I would certainly agree with. I have not
yet made up my mind whether or not to vote for Mr. Gramley for
this position, but at this point I'm certainly leaning against it.
Again, not as an individual rebuke to him, but a pattern that I see
developing on the Federal Reserve Board that I think could potentially affect their independence, but certainly getting an inbreeding
of thought that I think goes too far in one direction and does not
give the diversity of economic thought or certainly the diversity of
background and the various areas of the economy and certainly not
into geographical dispersal of thought around this country.
So if I do end up voting against Mr. Gramley, it will be for those
general principles and I hope to send the message that we would
like a broader representation on the Federal Reserve Board than
we have been getting.
Thank you very much for coming today.
Senator CULVER. Thank you, Senator Garn.
Senator STEVENSON. I have no questions.
Senator MORGAN. Just let me say this, Senator Culver; that I
have read your statement that appeared yesterday and I ap})reciate
your position. You raise an issue that I have raised in almost every
confirmation hearing that's been before this committee with regard
to the Federal Reserve and to the President's Council of Economic
Advisers. It just seems to me somewhere along the line we need
some people-some people-maybe not all of them-in these positions that are in contact with the real world.
As I said yesterday, you can't really understand the plight of the
farmer today in America unless you have been out into the
countryside itself. I went home during the Easter recess and rented
my own farm. Since we got all our ethics rules I can't farm it
myself any more. And every year up to this year there's been a
waiting list posted at the county ASE office of people who wanted
to rent farms. This year I had to scour the countryside to find
somebody who was willing to take it at a 25-percent reduction less
than what I was able to rent them for last year, and. one of the
main concerns was farm planting financing. Here it was planting
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time and they didn't know whether they were going to be able to
finance their crops.
So you raise some real questions and I won't belabor the point,
but I appreciate your bringing it to the attention of the committee
because it's something I feel like in government we need some
people who have been out in the world.
Senator STEWART. Mr. Chairman and members of the committee,
I want to commend-I don't know which one is chairman-I want
to commend Senator Culver on your very fine statement that you
made and I want to say to you that I join with you in opposition to
the nominee. I do so for a number of reasons, the general reason as
you state, but also because I disagree with his positions that he's
taken as a member of the Council of Economic Advisers to the
President, and I don't mean any disrespect to the gentleman at all,
but his insensitivity that he's expressed in public meetings and
private meetings with me on the Small Business Committee.
I've got some questions I want to ask you, but you raised a point
that I think the committee needs to be made more aware of than
perhaps some of them may be. I know I wasn't until I read an
article that appeared in the New York Times Sunday edition of
their newspaper.
You indicated that farmers in Iowa were having difficulty borrowing money to plant their crops this year. In Alabama, they are
too. This article talked about corporate lending that was going on
at this time in this country despite the fact that the small business
concerns, the homebuilder, the farmer, was having difficulty. Boise
Cascade just in the last week or so had gotten a line of credit
committed to them of some $400 million. In addition to that, the
Ralston Purina-and I'm not picking any companies out-I'm sure
this is true generally-had arranged with 10 large size banks a
large size commitment for loans.
Now when Chairman Volcker was here before the Banking Committee we asked him about the allocation of credit and he said that
he would pay particular attention to the interest of small business,
to the interest of the farmer, to the homebuilders, and recognize
their plight, and that they would question severely the activities of
the larger banking institutions in their granting of loans to the
large size concerns in this country.
Obviously that's not being done and I think that's something
that needs to be addressed by the Fed and by this administration
and I don't see the sensitivity to that situation.
I welcome joining with you in opposition. I'm going to say to the
members of the committee that I hope we reject this nomination
and if we don't, I hope it's rejected on the floor, and I plan to go to
the floor and fight it because if I don't, this type of-not that he's
not an expert in the field-I don't think this type of thought ought
to be governing monetary policy.
If the Senate rejects the nomination of Lyle Gramley and the
Board vacancy is actually filled with a person with views more
sympathetic to the plight of small businesses, farmers, and homebuilders, the question will be raised, John, that you will have other
special interests clamoring for representation on the Board.
How do you respond to that question? What do you say in response to that?
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Senator CULVER. First of all, I don't believe in any way what I'm
advocating here is special interest in nature. I think in the 16
years I have been in the Congress I have voted consistently for the
strong independence of the Federal Reserve Board. What I'm talking about here is a representative character in terms of the general
qualifications on the Board that is more consistent and compatible
with the original intent of Congress, as I understand it, and one
that guarantees that that remarkable and unique independence
that you're according it will be used in ways that are compatible
and in the best interest of the population of the full Nation and its
needs.
Small business and agriculture represent every industry in this
economy and 60 percent of the Nation's labor force. I'm advocating
broader representation on the Board and, frankly, there may be
other groups such as consumers and labor who could legitimately
charge insensitivity on the part of the Federal Reserve Board. In
my view, the Federal Reserve Board should be composed of members with a broad range of experience and expertise. Not all of the
Nation's monetary policy experts lie in the Northeast. They don't
all lie in Government. They don't all lie in academia. They don't
all lie in the big banks and big corporations of this country, and
they don't all lie within the Federal Reserve System itself
I think that in a Nation of 220 million people this idea that this
is such a highly esoteric specialized science, that we don't have
people with agribusiness or small business backgrounds that can
bring to bear that kind of talent and qualification to make that
Board perform better I think is just elitist and absurd on its face.
Senator STEWART. It may be the fact that it has become a small
group of people from whom you can pick to serve on the Board has
lent itself to the insensitivity that some of us now find there.
What difference will it really make, though, for the Board to
have this kind of representation? You're talking about one member
with one term. How do you respond to that, because I'm quite sure
that's going to be raised?
Senator CULVER. First of all, I don't think anybody is under any
illusions that one member of the Board of Governors is going to in
and of themselves revolutionize monetary policy. The Federal Reserve Board of Governors, of course, as we know, is made up of
seven members who make joint decisions.
In addition, there's an Open Market Committee and the directors
of the 12 district banks, all of whom are involved in various aspects
of both setting as well as carrying out policy decisions.
In my judgment, the Board of Governors role in national monetary policy is, however, the most pivotal and the most crucial.
Board members themselves make their own final decisions on votes
as well as recommendations to other economic policy boards with
whom they interact in our Government. A person who understood
the implications, for example, for farm and small business operators of an increase in interest rates this winter, for example, could
have at least pointed out to that Board in its deliberations the fact
that the planting season was coming up right at the time when
interest rates would peak, and that in many rural areas the economic life of entire communities revolves around agricultur~. Such·
a person I think could have also pointed out that in the wake of
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the embargo decision by this administration farm prices were depressed. Costs have gone up 20 percent. Farm income is to go down
25 percent next year. Therefore, in the wake of those actions, the
economy in Iowa, the economy in Minnesota and Nebraska and the
Dakotas, were all dangerously affected. Farm prices were depressed
and additional interest costs could not be passed on and had to be
borne. These interest costs represent a substantial portion of total
costs in the cattle industry, of course. Cattle producers can't
expand their herds. The inflationary implications of this has to be
understood at the Federal Reserve. It has to be understood that
this will lead to liquidations of these herds and much higher beef
prices. If this is understood by the Board of Governors, it seems to
me they could tailor and modify their own policies to adjust to the
crucially productive sides of our rural economy at the same time
they're trying to tum off the more speculative activities.
Senator BTEwART. Do you have a particular person in mind for
this position?
Senator CULVER. No; I don't have a particular nominee in mind.
I don't really see that that's our responsibility. I think that's the
President's responsibility to make those nominations, and it's our
responsibility to advise and consent on those recommendations. I
have listed a number of national organizations who support my
opposition to this nomination and they, in tum, have suggested
names to me. I don't think in this great Nation of ours, we would
be at all hard-pressed to come up with a distinguished candidate
for nomination who embodies the kind of background, training and
expertise of the general description that I'm referring to.
Senator STEWART. Thanks, Senator Culver. My time is up, but I
do want to say again that I will join with you in opposing the
nomination and the acceptance of Mr. Gramley as a member of the
Federal Reserve Board. I would hofe that other members of the
committee would join with me. That s based, again, not necessarily
on his qualifications but on the general feeling that the Board
ought to be broader and more diversified, but also on the difficulties that the people that I represent are havin~ as a result of the
Fed's monetary policies and this administrations fiscal policies and
if we can send any message at all downtown, I hope it's one that
should say there should be more sensitivity to the needs of the
farmers, the homebuilders, the small business interests in my
State, many of whom are near depression state as far as their
economic situation is concerned.
Senator GARN. I have no more questions.
Senator STEVENSON. Very well. Thank you, Senator Culver.
Senator CULVER. Thank you, Mr. Chairman.
Senator STEVENSON. The committee is adjourned.
[Whereupon, at 10:25 a.m., the hearing was adjourned.]
[The following resolution was ordered inserted in the record:]
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96TH
CONGRESS
2D SESSION
s• RES• 434
ExpreBBing the sense of the Senate that nominations to the Board of Governors
of the Federal Reserve System should reflect careful consideration of the
requirements for regional and economic interest representation contained in
the Federal Reserve Act.
IN THE SENATE OF THE UNITED. STATES
MAY 15 Oegisl&tive day, JANUARY S), 1980
Mr. CULVER (for himseH, Mr. STEWART, Mr. BUMPERS, Mr. l>uBKIN, Mr.
MBTZENBAUM, Mr. SASSER, Mr. M:c0oVERN, Mr. HOLLINGS, Mr. BAUCUS,
Mr. EAGLETON, Mr. EXON, Mr. DOLE, Mr. JEPSEN, Mr. THumlOND, Mr.
MAGNUSON, Mr. NELSON, Mr. MORGAN, and Mr. BENTSEN) submitted the
following resolution; which was considered and agreed to
RESOLUTION
Expressing the sense of the Senate that nominations to the
Board of Governors of the Federal Reserve System should
reflect careful consideration of the requirements for regional
and economic interest representation contained in the Federal Reserve Act.
Whereas the Board of Governors of the Federal Reserve System
has responsibility for the conduct .of monetary policy and
control of rates of growth of the 111-onetary and credit aggregates which affect the economic well-being of the Nation;
Whereas the Federal Reserve Act requires that not more than
one Governor shall be selected from any one Federal Re-
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@FedFRASER