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NOMINATION OF PAUL A. VOLCKER
HEARING
BEFORE THE
COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
N I N E T Y - S I X T H CONGRESS
FIRST
SESSION
ON
THE NOMINATION
OF
P A U L A. V O L C K E R T O B E C H A I R M A N , B O A R D OF
FEDERAL RESERVE
GOVERNORS,
SYSTEM
J U L Y 30, 1979
Printed for the use of the
Committee on Banking, Housing, and Urban Affairs
U.S. GOVERNMENT PRINTING OFFICE
50-058 O
WASHINGTON : 1979
COMMITTEE ON BANKING, HOUSING, A N D U R B A N AFFAIRS
WILLIAM PROXMIRE, Wisconsin, Chairman
HARRISON A. WILLIAMS, JR., New Jersey
ALAN CRANSTON, California
ADLAI E. STEVENSON, Illinois
ROBERT MORGAN, North Carolina
DONALD W. RIEGLE, JR., Michigan
PAUL S. SARBANES, Maryland
DONALD W. STEWART, Alabama
PAUL E. TSONGAS, Massachusetts
JAKE GARN, Utah
JOHN TOWER, Texas
JOHN HEINZ, Pennsylvania
WILLIAM L. ARMSTRONG, Colorado
NANCY LANDON KASSEBAUM, Kansas
RICHARD G. LUGAR, Indiana
KENNETH A. MCLEAN, Staff
Director
M. DANNY WALL, Minority Staff Director
STEVEN M. ROBERTS, Chief
Economist
JOHN T. COLLINS, Special Counsel to the Minority
ANTHONY T. CLUFF, Assistant Minority Staff Director
(II)
C O N T E N TS
Page
Statement of Bill Bradley, U.S. Senator from the State of New Jersey
Statement of Harrison A. Williams, Jr., U.S. Senator from the State of New
Jersey
Mr. Volcker's answers to subsequent questions of Senator Armstrong
Table showing changes in Federal Reserve System Board of Governors membership by President
Biographical material on the nominee
Mr. Volcker's answers to subsequent questions of Chairman Proxmire
Statement of the Virginia Taxpayers Association
(Hi)
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2
14
27
45
53
58
NOMINATION OF PAUL A. VOLCKER
MONDAY, JULY 30, 1979
U . S . SENATE,
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,
Washington, D.C.
The committee met at 10:05 a.m., in room 5302 of the Dirksen
Senate Office Building, Senator William Proxmire (chairman of the
committee) presiding.
Present: Senators Proxmire, Stevenson, Riegle, Sarbanes, Tsongas, Garn, Armstrong, Kassebaum, and Lugar.
Also present: Senator Bill Bradley.
The CHAIRMAN. The committee will come to order. Mr. Volcker,
will you rise and raise your right hand.
[Witness sworn.]
The CHAIRMAN. We're honored to have the distinguished junior
Senator from New Jersey here to introduce the nominee. Senator
Bradley?
STATEMENT OF BILL BRADLEY, U.S. SENATOR FROM THE
STATE OF NEW JERSEY
Senator BRADLEY. Thank you, Mr. Chairman, members of the
committee. I'm pleased to be here with Paul Volcker today before
the committee, to which he certainly doesn't need an introduction.
Paul Volcker is a New Jerseyite, born in Cape May, N.J., raised in
Teaneck, educated at Princeton, a long-time resident of Montclair.
He is a citizen that our whole State is justifiably proud of. His
career and his record in the Federal Reserve, in the private sector
and certainly the Treasury during the chaotic days of the international monetary crisis in the early 1970's, all these are well known
to the committee. That career and record, I think, says that he will
be a Chairman of the Fed who is strong, independent and highly
respected.
In my view, as in the view of many of our European allies, Paul
Volcker is the right man in the right job at the right time. And it's
not completely New Jersey chauvinism, Mr. Chairman, when I say
that he is probably the best appointment that the President has
made.
The CHAIRMAN. Thank you very much, Senator Bradley. I have a
statement here from the senior Senator from New Jersey, which
I'll read.
(l)
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STATEMENT OF HARRISON A. WILLIAMS JR., U.S. SENATOR
FROM THE STATE OF NEW JERSEY
He unfortunately couldn't be here. He wanted to be here very,
very much but there was no way he would cancel the commitment
he made. He says—
It's my privilege to introduce Paul Volcker to the Committee and to recommend
in the strongest terms possible his confirmation as Chairman of the Board of
Governors of the Federal Reserve System.
I've known Paul Volcker on a personal level for many years. He's a native son
born in Cape May and educated at Princeton. On a professional level, Paul Volcker
has admirers in every country and corner of the world, as a result of his quartercentury involvement in domestic and international finance.
Paul Volcker is welcome to come to our hearing room, having testified before the
Committee on countless occasions during his extraordinary career. The Senate
should vote to confirm Paul Volcker with all due dispatch. The national and
international financial communities have already expressed their strong approval.
This is the Volcker rally that occurred last Wednesday. When the nomination was
announced, the stock market rose 10 points and the dollar moved ahead in foreign
markets.
I read this as a vote of confidence and proof positive that Paul Volcker possesses
all the experience and expertise necessary for understanding and solving the complex problems now facing the U.S. and foreign economies. Speaking for myself and
the people of New Jersey, we are pleased that Paul Volcker's past accomplishments
to the nation have been recognized; he has once again at some personal sacrifice
obeyed the call for even higher and more difficult service to his country.
Does any Senator who is present desire to make a statement
before we proceed to the questioning of the witness?
[No response.]
The CHAIRMAN. If not, Mr. Volcker, do you have any statement?
Mr. VOLCKER. I do not, except to say it is a great honor and
privilege to have the President nominate me for this post. I can
only promise to do my best, if the Senate sees fit to confirm me.
I might say that I'm particularly conscious that the Federal
Reserve has a great reputation, I think, for integrity and professionalism, and it would be my wish that that tradition could be
further advanced.
The CHAIRMAN. Because of a technicality, I'm going to have to
ask unaminous consent from the committee to waive the so-called
5-day rule. Committee procedures require that hearings on a nomination not be held until at least 5 days after the committee's
financial questionnaire has been received. We received Mr.
Volcker's completed questionnaire last Friday; however, in view of
the importance of this appointment and the need to have Senate
action prior to the August recess, I ask unanimous consent that the
5-day rule be waived.
I take it there's no objection.
[No response.]
The CHAIRMAN. Mr. Volcker, we're most impressed, I'm sure, by
what Senator Williams and Senator Bradley has said and by your
obvious qualifications. It's great to have a nominee for the Federal
Reserve Board who has devoted most of his adult life to the Federal Reserve System. As a matter of fact, I understand you started
with them when you were either out of college or just before you
got out of college.
Mr. VOLCKER. Right after I got out of college, I took a summer
job with the system before graduate school, that's right.
3
The CHAIRMAN. You've had other experiences, of course. You
were a vice president of the Chase Manhattan Bank. You were, of
course, a top official in the Treasury under, I think, three different
administrations, three or four, dealing primarily with monetary
policy as I understand it.
You've written and spoken on the issue many times. There's no
question of your competence and your experience. I think, however,
to many people in the country, you may be the personification of
Wall Street and international banking.
It isn't always a favorable view, as you know. You're viewed as a
hard money, big business conservative. What's your answer to the
fear that in the immortal words of William Jennings Bryan you
may choose to "crush down upon the brow of labor the crown of
gold," by pushing high interest rates to levels that would be punishing and create more unemployment and be very difficult for
small business, the farmer, and the working people.
Mr. VOLCKER. Let me say thus far, the great bulk of my career
was spent one way or another in the public service, as you pointed
out. And to some extent I will have to let that record speak for
itself. I do think this country faces great problems. I have spoken
out and I expect to continue to speak out on the need for stability,
broadly conceived—thinking of it in terms of our domestic inflation, thinking of it in terms of the value of the dollar internationally.
I speak out of a very strong conviction that this sense of stability
is necessary in order to assure the prosperity and growth of our
economy at home and to deal with those problems of unemployment, poverty and all the others. I don't think we can build on a
sense of instability—accelerating inflation, instability of the dollar
abroad—if we want to deal constructively with those problems of
the domestic economy.
For that purpose, I don't want interest rates any higher than
they have to be. Indeed, I think the broad record of history is quite
clear that the level of interest rates is very specifically related to
the level of inflation, and if we want low levels of interest rates—
which I think would be desirable—we have to recognize that that's
not going to be feasible until we have a more stable economic and
financial climate.
The CHAIRMAN. It's a perplexing and difficult problem for us.
The Fed, some critics say, has had a long record of boneheaded
decisions in contracting the money supply in the thirties, expanding it in the seventies, when we seem to be moving ahead and
suffering primarily from inflation. Now, with a recession upon us,
we confront the same penchant in the view of some people.
In March and April, you voted with the minority on the Open
Market Committee for a policy that would result in tightening
credit. Now you'll be the top man at the Fed, with more influence
than ever.
Does that mean we enter this recession with the likelihood of a
tight monetary policy and possibly interest rates at an even higher
level?
Mr. VOLCKER. I don't think it's appropriate for me to comment
on what particular moves might be necessary or desirable in the
near future. I'm only one member of the Federal Reserve Board, if
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I'm confirmed; I'm only one member of the Open Market Committee.
I would point out, with respect to very recent developments, that
the money supply, the money aggregates generally have been
rising at a pretty good clip, and I don't think there's any feeling or
any evidence around at the moment that the economy is suffering
grievously from a shortage of money.
The CHAIRMAN. Dr. Arthur Okun, who as you know, is a former
CEA Chairman and a highly respected economist, had an article in
the American Economic Review recently in which he took six
studies made since the Korean war, and he found that when the
Fed had tightened the money supply, reduced the rate of increase
in the money supply, that it had resulted in a reduction of the rate
of inflation, but the price had been very high, that 90 percent of
the reduction in the gross national product had been in production
of jobs and only 10 percent in price, varying from 6 to 15 in the 6
studies that he analyzed.
In other words, the price that had to be paid in tightening credit
was a terrific price in the loss of jobs and the loss of production.
Now admittedly, as he said, that was the first year, but he felt on
the basis of that study there's some evidence that this may not be
the way to cope with inflation.
What's your response to that?
Mr. VOLCKER. I'm not familiar with that particular study, but
I'm familiar with econometric studies which show, particularly in
the very short run, that the response of the inflation rate to a
slackening in economic activity is not very quick or rapid.
I think we have to be very careful about the implications of
studies of that sort. I think we're all familiar with the fact that
today we have both a high rate of inflation and, speaking broadly
now of the 1970's, a less satisfactory performance in terms of
unemployment, in terms of productivity, in terms of growth. And
part of the difficulty—and part of what has helped to account for
this—seems to me the fact that the prolonged nature of the inflation has changed expectations, it's changed the way people look at
their personal lives, and view the outlook for the economy, in an
unfavorable way.
We've ended up, if not with the absolute worst of both worlds,
with a lack of progress both on the inflation front and on the
employment front. I think that is symptomatic of the fact that we
cannot consider these over a period of time as opposing goals, but
we have to work toward them together, and that they're mutually
complementary over a period of time.
And we have to consider the short range tradeoffs, if you will, in
that longer term context. Indeed, I think it's fair to say the economy probably doesn't react the way you and certainly I were
brought up to think. In terms of economic analysis, we were taught
that an expansionary dose by whatever technique would improve
employment with maybe some risk of inflation. We proceeded on
that assumption for a long time, and we found the risks of inflation
become much greater and that reactions in terms of employment,
output and productivity get less.
I think that reflects a change of psychology on the part of the
American people in general that we have to take into account. It's
5
perhaps symptomatic of some of the new problems and, indeed, the
new opportunities for economic policy that we find some evidence
recently that actions that are interpreted as dampening the inflation rate have a favorable impact on the climate of financial markets—the long-term interest rates will decline instead of going
up—whereas actions that are interpreted as inflationary, which
may include easier money in some specific instances, have a rather
perverse effect on financial markets that is counterproductive.
I don't think we have any substitute for seeking an answer to
our problems in the context of monetary discipline. Now, that's not
at all to say that monetary policy alone can handle this problem.
Many other factors in Government policy and elsewhere enter into
this equation, and the more help we can get from those other
policies the better off we're going to be.
The CHAIRMAN. Might it also not be true that some of those
other policies, incomes policy perhaps, fiscal policy, might be more
appropriate and logical than monetary policy in a period such as
this? I notice also, I was just talking to Mr. Okun on the phone and
he pointed out to me that during this period we had a big contribution in rising inflation because of the way the Consumer Price
Index is constructed—in the way increases in interest rates themselves are treated in the CPI. They were one of the major reasons
for inflation to be exacerbated.
Mr. VOLCKER. I think it's an exaggeration to say higher interest
rates were one of the major reasons, but there's no question that
the level of interest rates paid by consumers enters into the Consumer Price Index, all other things equal. A rise in mortgage rates
contributes to that index's performance at a particular period in
time. But I would suggest, again, that if we don't deal with the
inflation problem in its overall context, I unfortunately don't know
of any way you can keep interest rates as low as they used to be.
The CHAIRMAN. My time is up. Senator Garn?
Senator GARN. Thank you, Mr. Chairman. Mr. Volcker, I'm
pleased with your nomination by the President and I appreciate
your call to me on last Friday and the discussion that we had.
I'd like to follow up on that telephone discussion of one of the
principal concerns I have about the Federal Reserve system and
that is its independence. In the 5 years I have been on this committee, I have not always agreed with the Federal Reserve's policies
and decisions. Sometimes I will agree with the Chairman that they
have been wrong, at least from my point of view. Nevertheless, I
think it is highly critical and important that the Fed have the
independence to make its own decisions away from undue influence
by this committee or the Congress or the administration, because
we tend to politicize the fiscal policy of this country and to politicize the monetary policy only adds to the burden of inflations and
deficits and economic problems of this country.
So I'm vitally interested that you, as Chairman be willing to be
very blunt, very candid, if you think we are wrong, when you
disagree not only with us at the Senate Banking Committee, but
with the President.
Once again, even though I may not always agree with your
actions when you become Fed Chairman, I do think the Federal
50-058
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Reserve Board was set up to be independent, to serve as a check
and balance on both Congress and the administration. And I think
generally it has worked very well over the years.
So, I would appreciate your expression of how you feel about this
particular subject and your role as Chairman of the Federal Reserve Board and the relationship with Congress and the President.
Mr. VOLCKER. I have a deep commitment to the independence of
the Federal Reserve as you describe it, Senator. I think we are the
creature of the Congress and Congress decided, in 1913, to set up
the Federal Reserve in a way that gave it some insulation from the
kind of political pressures that you described. They reexamined the
Federal Reserve in 1935, and reiterated, very wisely in my opinion,
that fundamental decision; and that is the law as it stands today.
I feel both comfortable and clear in my mind as to the role of the
Federal Reserve in that respect. I think it is consistent with all the
discussions I've had preparatory to taking this job.
Senator GARN. In the President's televised news conference last
Wednesday, he said he felt that the dollar was sound and he said
that you, referring to you as an expert on monetary systems, are a
person on whom he can depend. With respect to your appointment,
he said that "there is no doubt that you would work harmoniously
with me and Bill Miller, who will be the new Secretary of the
Treasury, and I believe this new team will be very effective."
Now, I don't want to read too much into that statement, but it
does disturb me a little because of my strong feelings about the
independence of the Fed, particularly its Chairman. The President's reference to you, Mr. Miller, and himself as a team is
interesting. In keeping with this analogy I would suggest that as
the first-string monetary policy quarterback, that you insist on
calling your own plays.
Mr. VOLCKER. I agree with that. Ultimately I think that the
decisions on monetary policy are those of the Federal Reserve, and
we have to call the shots as we see them. That is not inconsistent
in my mind with maintaining communication—communication
with this committee, with the Congress in general, with the administration. I don't think you can run policy in a vacuum in that
sense, but I want to be clear and reiterate that the ultimate decisions on monetary policy are those of the Federal Reserve, and
they might clash at some point with what an administration or
what this committee might think is appropriate in particular circumstances. I think that is inherent in this position. We can communicate; we should communicate as fully and freely as possible.
But when it comes to the ultimate decision I think the law and
tradition is quite clear.
Senator GARN. I would agree with you completely that communication is necessary. How would you describe the type of relationship you expect to have with Bill Miller and with the President?
Mr. VOLCKER. I've observed this process firsthand for a number
of years, from various vantage points running back certainly to the
early 1960's, and there have been a number of arrangements over
the years with Secretaries of the Treasury or other Treasury officials and Chairmen of the Federal Reserve or other members of the
Federal Reserve meeting with each other on a regular basis, once
or twice a week. There has been in other administrations an insti-
7
tution, the so-called quadriad, where the. Chairman of the Board of
the Federal Reserve occasionally discussed mutual problems in a
group including not only the Secretary of the Treasury, but the
Chairman of the Council of Economic Advisers and the Director of
the Bureau of the Budget.
In recent years, the Council of Economic Advisers had occasionally met informally not only with the Chairman, but with other
Federal Reserve Governors. There are various techniques for maintaining open lines of communication that I think are valuable.
Senator GARN. When the President or others in his administration spoke with you about this nomination, did they indicate an
awareness of the independent status of the Fed?
Mr. VOLCKER. I think that awareness was very clearly expressed
on both sides.
Senator GARN. SO that was no indication that they expected you
to be part of the administration or expected to assist in carrying
out the administration's economic program?
Mr. VOLCKER. NO. I think we have common goals in the functioning of the economy, but not in the sense that I think your question
may imply.
Senator GARN. Well, I agree and I don't mean to imply anything
except to stress over and over again—as I have served here for 5
years, in what I consider an absolutely fiscally irresponsible Congress—one of the reasons I feel that inflation would be much worse
without the restraint of the Fed, and why I'm so vitally concerned
that it remain independent and not yield to the pressures of Congress or this administration, I don't mean to single out this administration, any administration
Mr. VOLCKER. NO, exactly. Obviously there have been incidents
in the past where the administration and the Federal Reserve have
seen things somewhat differently. The other side of the coin is, I
suppose, that our job is made much more difficult depending upon
what an administration or a Congress does. Communication is important so that we can explain our own views on other policies that
may make our job easier and less a source of contention.
Senator GARN. A little over a week ago, the House passed the socalled Fed membership bill, H.R. 7, defining the voluntary nature
of present membership and the safety mechanism of universal
reserves. Universal reserves would be imposed under H.R. 7 if the
percentage of deposits subject to the Fed's reserve setting authority
under the voluntary approach falls below 67 V2 percent, then it
would become mandatory.
This was the compromise amendment proposed by Congressman
Stanton, endorsed and passed in the House by a rather large majority, 340 to 20, and I would just like you to explain what your
opinion of this approach to the Fed membership problem is.
Mr. VOLCKER. Let me say, first of all, I do think that this is a
critical problem for the Federal Reserve, for the strength of the
Federal Reserve, for its ability to carry out its mandate over a
period of time, and I hope with some urgency that this problem can
be resolved this year.
I don't want to—and I' m not competent to get into—all the
details of this issue in commenting on that bill as it emerged from
the House of Representatives. I obviously have been following the
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issue in a general way; in fact, I testified before this committee a
couple of years ago on the problem in general.
That that bill leaves me with some questions, let me put it that
way, on some particular points, but my impression is that it also
may provide a basis for constructive legislation. I would hope to
come back to the committee shortly and give you more detailed
comments on the direction in which we might go.
Senator GARN. My time is almost up, but let me just follow that
up with one more question. In 1977 you testified before this committee on the Financial Institutions bill S. 1664. You stated that
interest payments on required reserves would permit a direct
impact on the membership burden, indicating the financial burden
of Fed membership, and that this approach seems to be superior to
other possible solutions.
Do you still advocate that kind of approach?
Mr. VOLCKER. That was my view at the time. I still think it's an
attractive approach. The House has gone off in another direction. I
think there are alternatives to that approach, and whether the
idea of interest payments should enter into this final proposal in
some way is still very much an open question in my mind and one
I want to return to when I look at that bill in detail.
Senator GARN. Of course the House and Senate have gone in a
different direction. I- would agree with your 1977 position and Bill
Miller's 1978 position on interest and reserves.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Stevenson.
Senator STEVENSON. Thank you, Mr. Chairman. Mr. Volcker, I
welcome your nomination for, among other things, your grasp of
many of the international conventions on monetary policy.
Would you comment on the dollar's recent weakness and what, if
anything, the Fed should be doing to support the dollar?
Mr. VOLCKER. Let me put that in a little broader context, if I
may, Senator. Beginning in 1977 really—and running through the
early autumn, anyway, of 1978—the weakness was very pronounced, as you recall. A program was introduced on November 1,
1978, directed in part toward this-problem, directed also toward
domestic inflation, which I think lies behind this almost chronic
weakness in the dollar that we've had recently.
I was very much in support of that kind of a program. Indeed, I
think the program is desirable on domestic grounds as well international grounds.
Since that time, the dollar, in broad terms, has been much more
stable. It went up for a while, and now, as you point out, most
recently it has shown some weakness but that weakness is not of
the order or magnitude that it was earlier; I just want to note that
and keep it in perspective.
I do think that the dollar got too low considering all the circumstances last fall and it is damaging both to our domestic prospects
and to the international economy. Indeed, I think it's damaging, in
a broader sense, to the whole stance of this country in the world to
be operating with an excessively weak dollar. So I think it is
important to maintain stability in that relationship.
The most fundamental thing we can do about it, without question, is to deal with internal inflation. There isn't any answer over
9
a period of time without looking toward the conditions of the
internal economy. I think we also have to be sensitive to relationships that develop in the market from time to time, and respond to
them as appropriate, which depends upon a whole host of considerations: the specific international situation at the time, the situation
with the domestic economy at the time. It's very hard to give a
general answer suitable to all circumstances.
Senator STEVENSON. I didn't expect you to give a very specific
answer, but I'd hoped that you could do a little bit better than
that. You said inflation is behind the weakness of the dollar. Is it
also true that the weakness of the dollar is behind inflation?
Mr. VOLCKER. That is right. And, obviously, energy is a major
ingredient in this whole thing, and the more effective our energy
programs, the better off we'll be.
Senator STEVENSON. The Chairman brought up interest rates not
very long ago. You indicated that high interest rates do go directly
into the consumer price index. High interest rates also retard
investment and reduce productivity. They don't increase our capacity for production for such services as housing. They have other
effects on inflation beyond those which you mentioned, but I question how much control the Fed really has over interest rates.
It never has had much of a long-term control over interest rates,
and I wonder now if it isn't reducing much of what little control it
has over short-term rates. I say that because of the growing evidence of efforts by central banks to stabilize exchange rates, to
support their currencies, and perhaps to reduce the price of oil by
diminishing the value of the dollar. You get into a circularity
which always pushes rates up and rarely down. One country goes
up with the discount rate, the others have to follow suit, then the
first country goes up again.
Isn't that phenomenon taking place right now, and if that kind
of artificiality is intruding into the process, what should be done
about it?
Then what would you, as Chairman of the Federal Reserve
Board, do to initiate some cooperative efforts with others in similar
position to reverse that process?
Mr. VOLCKER. Let me say in general, Senator, I think it's very
easy to exaggerate—and it usually is exaggerated—how much control the Federal Reserve has over interest rates, primarily for the
reason I expressed earlier that interest rates are bound to be
related to the rate of inflation in the country. While interest rates
now are very high in nominal terms, we'd better put those interest
rates in the context of an 11 percent mortgage rate or an increase
in the Consumer Price Index at an annual rate of 13 percent the
first half of this year. And I'm sure the rate of housing prices is
going up even more rapidly than that. So interest rates don't look
so high in that context, in a real sense.
Now in this international dimension, I think you have pointed to
a potential problem. I am not sure that I would go quite as far as
you did in saying that this is a major problem at the moment,
when we have a general economic background of rising inflation in
most countries and fairly buoyant business conditions in most
other countries; they have a combination of rising inflation rates
and rising economic activity.
10
It's not unnatural or abnormal, in a period of that sort, to see
some increases in interest rates, but there is a problem potentially—or recurrently, if one projected ahead—of the kind that you
suggest. Given the impact of the oil situation and the potential
impact of the oil situation on economic activity, not just in the
United States but in other countries, I think it's very legitimate to
raise the question that you raised looking down the road not all
that far.
I don't know of any mechanical answer to the question other
than that I think it's important that we remain in contact with the
monetary authorities abroad; that this kind of problem is discussed,
as it is to a degree; that we don't get into a self-defeating or
artificial chasing of the tail where counties—not because of their
domestic situation and not because of the real economic situation—
engage in the kind of competition that you mentioned.
Senator STEVENSON. Your testimony is more soothing to the
bankers than it is to me, Mr. Volcker. Don't you see anything
abnormal about going into an international recession with interest
rates at 10, 12, to 15 percent?
Mr. VOLCKER. I think our economic situation is abnormal.
Senator STEVENSON. That's part of the problem.
Mr. VOLCKER. I certainly agree with that. Again, it's abnormal in
terms of all our history. You say going into a recession; I think
there is a clear danger there. It remains to be seen just how severe
that will be, and whether, in fact, in the end, this will prove to be a
recession. I certainly recognize the risk and the clear possibility
that that is the case. But what's abnormal is that we're going into
it with an inflation rate of the sort we have. That's what's unprecedented, and I think that the interest rates are a byproduct.
Senator STEVENSON. Isn't it true that banks right now, central
banks abroad, are quietly undermining the dollar in order to
reduce oil costs?
Mr. VOLCKER. NO; I think that is not true.
Senator STEVENSON. I've heard that from a central banker who is
doing it.
Mr. VOLCKER. That seems to be an exaggerated statement. I
think some foreign countries have found in recent years that an
appreciating currency is not altogether bad in that, among other
things, it is a rather powerful influence on maintaining domestic
price stability in general and on reducing their oil import bill, in
particular.
For that reason, I think a number of important countries would
not look happily upon a major depreciation of their own currency. I
keep looking at the overall international situation. There are very
few foreign monetary officials who are not disturbed by the general
instability that is associated with a significant decline in the dollar,
and I don't want to deny that you've put your finger on a problem,
in an underlying sense, of international monetary reform that has
preoccupied us for years in one guise or another.
In effect, we had something of the opposite problem in the early
1970's when I think the general feeling was the dollar was overvalued, but a number of countries were not very eager to see their
old competitive position—which had built up over a period of time
and became embedded structurally; it had some advantages to it—
11
undermined very rapidly. Now the psychology is somewhat in the
other direction, but the general problem remains of developing a
system and a consensus that in practice reconciles these differences
in approach—or instinct perhaps—in a harmonious way.
There is no automatic way to do that that I know of under
present conditions, but I also don't want to exaggerate the difficulties here, because I do think that there is a feeling of a common
interest in a more stable system.
Senator STEVENSON. Thank you. My time has expired.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Armstrong?
Senator ARMSTRONG. Thank you, Mr. Chairman. Could you tell
me, Mr. Chairman, what your timetable is for acting on this nomination?
The CHAIRMAN. Yes, we have a 2-day rule, as you know. I think
we simply have to abide by that. We'd like to waive everything we
can, but obviously members have a right—and some members here
want to read the transcript. I consider it the most important nomination that I think this committee will have this year, perhaps the
most important nomination, in many respects, the Senate will face.
So it will be Wednesday; Wednesday we will report to the floor. We
will poll the committee unless there's objection. I don't anticipate
there will be.
Senator ARMSTRONG. Mr. Chairman, there may be an objection to
that procedure, and let me at the outset explain why. And Mr.
Volcker, this has nothing to do with you or your qualifications, but
I'm concerned, as a matter of policy, that someone would be appointed to a position which you correctly underscore the importance of, and in a very brief time whose name would be submitted
by the President, come before this committee in 2 or 3 days, and
then be presented to the Senate and be confirmed. If there's meaning and purpose in this process of holding these hearings, it is in
part to give the country—the people who aren't in this room
today—a chance to comment on appointments. It may be that I
will object to acting with such speed, even though I'm also conscious of an August recess, and that's something I'd like to chat
with you about, perhaps in the next day or so.
The CHAIRMAN. YOU wouldn't object, though. I don't think an
objection would be in order to a meeting of the committee on
Wednesday.
Senator ARMSTRONG. Of course not.
The CHAIRMAN. If you want that, we'll meet on Wednesday and
the committee will
Senator ARMSTRONG. Well, I will follow up with you on that. And
Mr. Volcker, I stress that my concern is for the practice and the
custom, and perhaps we can find a way to accommodate that.
Mr. Volcker, I join with the others in welcoming you to the
committee, and I have several questions I'd like to raise. Obviously,
the job to which you've been appointed has a tremendous impact
on the day to day life of the country. Possible the most important
aspect of the job is the control of the money supply which has been
under discussion here this morning.
12
I'd like to ask a couple questions. First, do you feel that the
Federal Reserve has sufficient ability and power to actually control
the growth of the money supply?
Mr. VOLCKER. I think it's threatened, frankly, Senator. It's
threatened by two things. One is this so-called membership question that we referred to earlier. I'm not sure that that has eroded
our ability to the point where I can make the case that it's seriously undermined our powers yet, but it is latent in that situation.
Senator ARMSTRONG. Let me be a little more specific. If the
Governors sit down around the table and after weighing all the
economic evidence, decide they want the money supply increased in
the next quarter or the next 6 months or the next year by 3
percent or 4 percent or 5 percent, if they say look, our target for
Mi is so and so or for M2 is so and so, do they really have the
ability to fine tune it and to adjust it?
Mr. VOLCKER. If you're talking about the next quarter, my
answer is no.
Senator ARMSTRONG. HOW about the next year?
Mr. VOLCKER. In the next year, my answer generally would be
yes, again with the qualification that I was about to express. These
days financial markets are very innovative, and we find forms of
money or near money springing up—almost monthly, I suppose—
that are outside of our direct control, that leave some fuzziness
surrounding the concept of money itself. We are at a stage where
we're reexamining the definition of money. I'm not sure there is
a permanent answer to that question. In fact, I don't think there is,
because money depends upon a functional definition, and the functions of instruments in the marketplace change.
In general, I think if our sole attention were directed toward
affecting a number we pick out as the money supply, we could
come pretty close to that number in a year's time, or maybe less
than that. We can't, in a quarter's time
Senator ARMSTRONG. In the time available, I guess I'd like to boil
it down to this. Is it your feeling that the Fed is able to control the
money supply to a degree that is sufficient to hold down the
inflation rate, if it chooses to pursue that policy?
Mr. VOLCKER. Yes, at present. I think the real question is whether you can or should do this using money supply policy alone.
Money supply has an absolutely indispensable role to play here.
How easily that process of skewing down the inflation rate goes
will depend upon a lot of other policies in addition to the money
supply policy.
Senator ARMSTRONG. Mr. Volcker, in response to the chairman's
question about that, you declined to be very specific on how you
would exercise this responsibility and whether or not, in fact, you'd
like to slow the rate of growth of the money supply.
Mr. VOLCKER. Yes, I would; that is, over a period of time.
Senator ARMSTRONG. YOU would like to slow it down.
Mr. VOLCKER. Over a period of time, it's indispensable that we do
that if we're going to have price stability. Let me look through
some of the definitional problems at the moment. I think the
relationships are good enough that if the growth of money is excessive over a period of time, we're going to have inflation, and there's
no way
13
Senator ARMSTRONG. What would you characterize as excessive
in the long term?
Mr. VOLCKER. When I put an actual number on it, I do get into
definitional problems. Look at the narrow money supply, Mi. I
think old relationships would suggest, if we're really going to have
price stability—I'm going all the way now to a noninflationary
situation—we would not have very much growth in that particular
number, based upon the standard historical relationship, because
there's been a general tendency over the years for velocity to
increase; money turns over a little more rapidly. So you have real
growth in the economy at whatever rate—3 percent, hopefully
more—but you can take care of most of that real growth through
an increase in velocity, if you look at the narrowest definition. As I
also suggested, those relationships may be changing, and we may
need to modify the definition of money.
Senator ARMSTRONG. Without being too specific, is that the general policy that you favor?
Mr. VOLCKER. Ultimately, yes, I would like to get there. I'm not
going to get there tomorrow.
Senator ARMSTRONG. Well, let me ask this question. Since the
statutes require that the Federal Reserve support Treasury bondage-—
Mr. VOLCKER. The statutes require-—
Senator ARMSTRONG. It's my understanding that ultimately
you're required to support the debt issues of the Treasury. Am I
mistaken about that?
Mr. VOLCKER. I think the law is quite clear that there is no
direct relationship between the Treasury and the Federal Reserve
in that area. It was one of the principal concerns, I think, in the
authors of the Federal Reserve Act that there not be that kind of
direct relationship.
Senator ARMSTRONG. Has the Federal Reserve ever declined to
support a Treasury issue?
M r . VOLCKER. Y e s .
Senator ARMSTRONG. Thank you. I appreciate that, and that's
something I would like to be better informed on. My impression
was that that is nearly an automatic process.
Mr. VOLCKER. NO, not at all. In fact, except for limited instances,
the Federal Reserve is prohibited from directly buying Treasury
issues from the Treasury. Of course, we do buy them; we're in the
market all the time, because it is the instrument with which we
pursue our monetary policy with an eye primarily toward the
money supply. But we have no obligation to support particular
Treasury issues.
Senator ARMSTRONG. Could I raise a couple of personal issues?
Would it be your intention, if confirmed, for this appointment to
remain in the job through the term?
M r . VOLCKER. Y e s .
Senator ARMSTRONG. May I ask, in your resume you mention
that you have published a number of articles, and at least at the
time of the preparation of that resume, a list of them wasn't
available. Could you give us at least an outline of some of those
things and where we could get hold of those in the next day or two,
50-058
0 - 7 9 - 3
14
so that if we would like to read them—I really would like to read
some things just to get the flavor of your general economic theory?
Mr. VOLCKER. I think the easiest thing is for me to send all my
speeches and articles of the last few years.
Senator ARMSTRONG. It would be very helpful.
I'm concerned, as other members of the committee are, about the
issue of the independence which you would be able to exercise. May
I ask, when you were first approached by the administration to
undertake this job or to discuss doing so
Mr. VOLCKER. I don't remember the precise date now. Mr. Miller
called me one day—I suppose it was Monday—just to talk about
my feeling about names in general.
Senator ARMSTRONG. Did you say Monday or one day?
Mr. VOLCKER. Monday, I believe. I talked to the President on
Tuesday, if I recall correctly, and on Wednesday he talked to me
again.
Senator ARMSTRONG. A week ago?
Mr. VOLCKER. A week ago, yes.
Senator ARMSTRONG. Was there anything in your discussions
with the President, Mr. Miller, or others that would in any way
compromise your independence? Was there anything asked of you?
Mr. VOLCKER. Absolutely not. Quite to the contrary, I think there
was an understanding of the particular role of the Federal Reserve.
Senator ARMSTRONG. SO that you would be able to undertake this
task in a completely independent manner?
Mr. VOLCKER. Absolutely.
Senator ARMSTRONG. Thank you very much. I compliment you on
what you have said and, Mr. Chairman, I yield back my time. I
have a couple of questions which I perhaps would like to submit to
Mr. Volcker and ask that they be incorporated in the record.
The CHAIRMAN. Very good. Without objection, you can answer
those when you correct your remarks.
[The following information was received for the record:]
M R . VOLCKER'S ANSWERS TO QUESTIONS OF SENATOR ARMSTRONG
Question (l.a.). Many economists believe that we are now beginning a stagflationary cycle. Inflation is well into the double-digit range while real growth in the
economy appears to be grinding to a halt. Under the circumstances, what do you
consider to be prudent monetary and fiscal policy?
Answer. Under present circumstances, I believe a prudent monetary policy is
broadly reflected in the ranges for monetary growth recently adopted by the Federal Open Market Committee and discussed with your Senate Committee last week.
Because current problems stem in substantial part from inflation and inflationary
expectations, I believe we cannot prudently depart from disciplined monetary
growth without jeopardizing in a still more serious way prospects for future gains in
employment and productivity. I also believe the budget should be brought into
balance as soon as possible, but what is possible and prudent in the short run will
depend on business developments. As I suggested yesterday, a broad program of tax
reduction at this particular time seems premature. I believe that this is even more
true of expanded spending programs, which might add to the difficulty of achieving
budgetary balance.
Question (Lb.). What extent, if any, do you believe the federal budget deficits
constrain efforts to reduce inflation?
Answer. Federal budget deficits, other things equal, bring pressures on financial
markets and in some conditions may inhibit productive investment by the private
sector. For both reasons, budget deficits may make it more difficult to reduce
inflationary pressures both in the long and short run. However, the speed with
15
which we can move toward budgetary balance will depend on, among other things,
shorter-range business trends.
Question (I.e.). You mentioned in your testimony that it was your personal goal to
slow the rate of growth in the money supply to near zero while accommodating real
economic growth through increased monetary velocity. How soon do you expect to
implement this policy? Over what period of time would you expect to achieve this
goal?
Answer. You may recall that I noted that a very low rate of monetary growth
would be consistent with overall price stability. Under present circumstances, that
condition must be considered an objective that can be reached only over a period of
years and toward which we should move in prudent steps. The speed with which we
can move will depend in considerable part on the strength of price and cost pressures arising from other economic forces. We can begin to move in that direction,
but I cannot now reasonably suggest a precise date for reaching the objective of
essential stability in the stock of money and the general price level.
Question (2). While your served at the Treasury Department, you managed the
policy of demonetizing gold. At the time, did you foresee that the price of gold would
increase from $35 per ounce to more than $300 per ounce? In retrospect, was this
policy wise? Do you foresee circumstances under which the United States might
return to metallic backing for its currency? Would you favor or oppose such a
change?
Answer. I should note first that the process of demonetizing gold began before I
served at the Treasury Department and continued after that period of service. In
any event, I cannot say that I foresaw a price of gold at $300 per ounce. I can say,
and have always thought, that the combination of domestic inflation and instability
of the dollar internationally could prove unsettling in terms of both expectations
and economic performance. In retrospect, I believe a change in the value of the
dollar was necessary in the early 1970s. However, insufficient attention was paid to
the importance of damping inflationary forces arising during that period from a
variety of sources, among which the effects of the changes in the value of the dollar
through the devaluations of 1971 and 1973 were relatively minor. I do not foresee
circumstances under which the United States would return to backing the dollar by
gold, and I would not favor such a change.
Question (3). Last November, President Carter initiated the dramatic "dollar
rescue program." This forced the United States to borrow from the International
Monetary Fund for the first time since World War II. As a result, the United States
will have to issue bonds denominated in foreign monies. This is a critical benchmark in our economic history. At the time, many thoughtful people predicted the
program would ultimately fail. They may be right. The dollar is weak on foreign
exchange markets. Inflation continues unabated at double-digit levels at home. In
the past three months, monetary aggregates for the Federal Reserve have exploded
past its own targets. In light of this evidence, do you believe the President's
program is sound?
Does the program reflect that the United States has forsaken its role as the
world's economic leader?
As Chairman of the Federal Reserve, what would you recommend to strengthen
the dollar abroad and reduce inflation at home?
In light of the sharp monetary expansion, does it indicate that the Federal
Reserve has not placed an appropriately tight rein on money supply?
Answer. As I indicated yesterday, I was in full sympathy with the program
undertaken last November. It was desirable in light of the inflationary situation at
home and the instability of the dollar abroad, and it was fully consistent with
appropriate domestic economic policies. Obviously, the particular steps taken at that
time do not provide in themselves an adequate program for the future. Monetary,
fiscal, and other measures need to be kept under continuous review, but I do believe
the general direction and tenor of the measures taken were sound. And I do not
believe that these actions were in any way contrary to the role of the United States
as the world's economic leader. In fact, they supported that role.
In regard to measures to strengthen the dollar abroad and to reduce inflation at
home, I have touched upon those concerns in my testimony yesterday and in my
answer to question 1 (above). I would emphasize again that a successful attack on
inflation and on our external problems will require actions and programs that
extend beyond monetary and fiscal policies. Quite clearly an effective energy program must be an important ingredient in any solution, and I am very conscious of
the strong cost pressures arising both in the private economy and directly and
indirectly from a variety of government programs.
As you noted, there has been a sharp monetary expansion in recent months. I
would point out, however, that the period of rapid growth has been rather short.
16
Taking the first and second quarters of this year together, there is evidence of some
moderation in monetary growth. I am sure that the Federal Reserve will continue
to monitor developments closely and take those actions necessary to keep monetary
growth within appropriate ranges.
Question (4). The press recently reported an economic minister in a major Euopean government saying, "I hope that whoever becomes dominant will pursue a
conservative monetary policy, and not delude themselves into thinking they can
float the United States off its difficult energy and other economic problems by
adopting an inflationary policy." What is your reaction to this advice?
Answer. As I have stated, I find myself in broad agreement with the sentiment
expressed in the quotation. It would be an illusion to believe that we can resolve our
present dilemmas and difficulties by permitting inflation to accelerate or even by
maintaining the current rate. I believe that ultimately the only sound foundation
for the continuing growth and prosperity of the American economy is much greater
price stability.
Question (5). Although the Federal Reserve has no direct responsibilities for tax
policy, the Chairman of the Federal Reserve has influence on all economic decisions.
Therefore, I would appreciate knowing whether you (1) favor utilization of the tax
code to achieve income redistribution? (2) favor major tax reductions this year for
individuals and corporations? (3) favor faster depreciation allowances and postponement of Social Security tax increases to spur economic growth?
Answer. (1) The tax code has over a great number of years been used in part to
achieve some income redistribution and I would expect that that objective will
remain relevant. But also I believe we have learned that there are limits on the
extent to which the tax code can be used for that purpose consistent with the
achivement of other objectives.
(2) As I indicated yesterday, I believe consideration of tax reductions at this point
is premature.
(3) Should circumstances arise in which tax reductions appear desirable—and over
a period of time I hope such circumstances will arise—I believe attention should be
given to both faster depreciation allowances and some method of achieving relief
from heavy payroll taxes which tend to contribute to cost and price pressures.
Obviously before a decision could be reached, other desirable tax changes would also
need to be reviewed, and I recognize the importance of maintaining some relationship between social security taxes and benefits.
Question (6). The follow up on a question I asked earlier today. I understand, the
Federal Reserve is limited by law to the amount of U.S. Securities it can purchase.
The Federal Reserve, however, often works in concert with the Treasury to create
favorable conditions to enhance the marketability of these securities. If that fails,
the Reserve can, up to its statutory limits, purchase either directly or indirectly,
those outstanding securities. Is it appropriate for the Federal Reserve to work in
concert with the Treasury Department to create a financial climate favorable to
enhance purchase of U.S. Securities? To what extent, if any, does this responsibility
conflict with your advocacy of slowing the rate of growth of the money supply?
Answer. You refer to the Federal Reserve working in concert with the Treasury
to create favorable conditions to enhance the marketability of Treasury securities.
While that comment may be relevant to some earlier periods of history, particularly
in the period of World War II and its aftermath, I do not believe that it is a fair
characterization of relationships in recent years. There are very strict limits, recently reinforced, on the ability of the Federal Reserve to purchase securities directly
from the Treasury. While the Federal Reserve does purchase Treasury securities in
the open market, such purchases (and sales) are arranged in a manner to achieve
the objectives of the Federal Reserve with respect to monetary policy rather than to
meet the convenience of the Treasury in marketing its securities. The Federal
Reserve does of course consult with the Treasury Department about its financing
activities, and I would expect such consultation to continue.
As I suggested in my answer to your first question, a heavy supply of Treasury
securities on the market can influence adversely the climate in financial markets
generally and to some degree would be taken into account by the Federal Reserve in
arriving at decisions on monetary policy. That is one important reason why I would
like to see the Federal budget deficit eliminated over a period of time.
The CHAIRMAN. Senator Riegle?
Senator RIEGLE. Thank you, Mr. Chairman.
Mr. Volcker, following up with some other conversations we've
had, I gathered from your earlier response that you're not convinced yet that we are in a recession.
17
Mr. VOLCKER. NO, but I think there is a reasonable chance,
certainly.
Senator RIEGLE. YOU know it's very interesting
Mr. VOLCKER. Let me say that I think a very important factor in
our present situation has been the oil situation. This is, in the
short run, bound to be a bit of a knock to the economy, and some of
the particularly depressing figures recently, I think, stem rather
directly from that situation. I think, in particular, the automobile
industry
Senator RIEGLE. I'm concerned about that, too. There's an item
in the Wall Street Journal today reporting a very substantial additional layoff by General Motors, which has been one of the stronger
domestic companies. But it's interesting that the outgoing Chairman of the Fed said in the last 2 or 3 days that we are in a
recession and that you're coming in—looking at the same data—
and you're not convinced that we are.
Mr. VOLCKER. I wouldn't exaggerate that difference. Maybe I'm
too cautious a man, Senator. It would not surprise me at all if we
are. But I think the one thing that one cannot judge—and this does
depend on the energy situation, I think, on how much of the
impact the economy has had from that particular situation—is
whether this could conceivably prove to be quite temporary, if the
gas lines are going away. That's the one question I have in my
mind.
Senator RIEGLE. I hope that will be the case. Coming from Michigan which is the leading automotive State, although by no means
the only one—there are other States with major automotive manufacturing concentrations—I sense a very pronounced smell of recession.
Mr. VOLCKER. There is no question in that industry.
Senator RIEGLE. Let me go to the concern that I've heard some
people express about your nomination. As a person with very
heavy banking experience and a close knowledge of the relationship both of domestic banking and international banking and international finance, that your orientation would be very heavily in
that direction and less toward domestic economic policy as it would
relate to recession and unemployment. How do you respond to that
concern, which a number of people raise?
Mr. VOLCKER. Again, my basic approach, Senator, is to say that I
don't think these problems are really distinguishable over a period
of time. If we try to distinguish them, we get in trouble, because
we've got, to have the economy operating effectively domestically—
that's the ultimate object, in a sense—and it's not going to do that
if we let inflation get out of control or, indeed, if we let the
international situation get out of control. So I see them as part of
one piece.
I also note we have more than one instrument for attacking
these problems. That is true, in the overall sense, of the mix of
monetary and fiscal policy. I think it's also true in a more particular sense. We ran into a situation earlier this year certainly where,
with the unemployment rate still not much below 6 percent—high,
too high, in any kind of historical context; who wants 6-percent
unemployment—we had at the same time evidence of the beginnings and the actuality of shortages in some industries, of insuffi-
18
cient capacity, rising price pressures. All of which suggested that
the answer to that remaining unemployment problem wasn't going
to be found in overall demand measures. Anyone living in New
York City as I do, or in the Detroit area—in any of our large urban
areas—can't help but be conscious of the kind of unemployment
problem we have and the misery and degradation in those areas.
And you see enormous needs. You see unemployed. Now we've
got to have some way of getting at that problem, but the answer
may not be in an overall macroeconomic policy.
Senator RIEGLE. Here's the thing that worries me. You and I
have had a chance to meet and talk with some of the central
bankers from other Western economies. The other economies are
very sophisticated, I think, in terms of managing their economic
affairs, and in pushing down their unemployment rates. In the
United States, we're caught in a situation where the dollar is still
the lead currency. I'm not sure it makes sense for us to continue to
remain in a posture where we allow that to happen. Because it
seems to me we accept a bigger dose of the aggregate of Western
economies' problems than perhaps we ought to be taking.
But when you talk about a 6 percent average unemployment rate
in the country—of course it's very uneven. In some places it's 2
percent; in other places it's 20 percent. And what I'm concerned
about is that the monetary tool is such a blunt instrument that if
we're going to slow the economy down to fight inflation with tight
money and high interest rates, it has an altogether different kind
of effect in a depressed area than it does some place that's relatively healthy. And what I'm concerned about is insuring that the Fed
show the kind of sensitivity in its policies that would really take
into account the unevenness of the unemployment problem. It's not
just when you've got a 6 percent global unemployment rate, but if
we're on our way up to 7 or 9 or somewhere in that range, which a
lot of folks are predicting, I would not want to see monetary policy
managed with an eye on the international banking community
while we go through havoc in a number of industrial areas in the
United States.
How do we prevent that?
Mr. VOLCKER. I suppose I think that analytically we have two
different problems. Our job is, obviously, not to be insensitive to
unemployment in general, nationally, or to the rate of economic
growth. That's the name of the game in the long run. Where I may
have a difference—I don't know as I do—is that I don't think that
problem can be solved without the kind of stability of which I
speak, whether you're talking about the domestic inflation or international markets. That's got to be part of the framework of dealing
with that general national problem.
The point I was trying to make earlier is that I think there are
limits to what can be done with demand management, so to speak,
in dealing with the kind of unemployment problem you have in
Detroit or we have in New York. I think it takes, basically, a
different kind of policy at that point, which is not within the
competence of the Federal Reserve. That doesn't say it's not terribly important; in fact, it's crucially important, I think, to our
health as a society that we devise some way of getting at these
problems.
19
One of the things that strikes me when I go around the world is
that some other countries—for whatever reasons, cultural or otherwise—have at least succeeded in managing their economies without
such extreme pockets of poverty and unemployment.
Senator RIEGLE. If I may just interrupt you, that's exactly right,
and I've thought about that recently as I've looked at other countries. We are taking in a large number of boat people and the
Japanese agreed to take 500. They have in fact taken only 100.
Defense spending is another case in point. We carry far and away
the lion's share of the burden in per capita defense spending. These
are some of the things that account for why we're in this situation.
What I'm concerned about, and what I'd like to hear you give us
some indication of is, when the unemployment rate in the United
States starts rising, at what point does it trigger a sense of alarm
in yourself? As a member of the Federal Reserve, when do you say
it's time for you to reverse monetary policy to stimulate the economy of the United States and get people back to work? What level
would ring that bell in you?
Mr. VOLCKER. I honestly don't think I can answer that question
in those terms, because monetary policy is not the only instrument
of policy.
Senator RIEGLE. Understood.
Mr. VOLCKER. It depends upon a total approach. We have to
remain in communication with other economic policymakers.
Senator RIEGLE. But I'm sure you would agree that even if we
use the other tools, fiscal policy, or what have you, that if monetary policy remains restrictive and interest rates are going to be up
in the double digits, it would be very hard to give the economy a
lift.
Mr. VOLCKER. In a discussion of this sort, we always get into
some confusion on how to measure monetary policy. Looking at it
over a period of time, I think its fair for the purposes of my
discussion now to think of monetary policy in terms of what's
happening to the money supply; that doesn't tell you what happens
to the level of interest rates directly. You would expect, in a slack
economy, all other things being equal, and the money supply equally restrained—if that's the right word for what's been happening—
that interest rates would be lower than in a situation where the
economy is moving forward very rapidly, pressing against the limited capacity.
Having said that, I am going to come back to the basic point,
that the most important interest rates in this context are probably
longer term interest rates. Those interest rates are very heavily
dependent upon what expectations are concerning the future rate
of inflation. And, again, we sometimes have this phenomenon, as I
think I suggested earlier, that a policy which is interpreted as a
noninflationary policy is good for long-term interest rates—by
good, I mean declining long-term interest rates.
So you can escape, I think, from the basic relationship that
restrictive policies mean high interest rates. But we're not going to
deal with that interest rate problem that you're concerned with—
indeed, I'm concerned with over a period of time, because it is not
good, all things equal, for investment—until you recognize it as a
20
symptom of inflation. And we can't deal with the symptom without
dealing with the cause.
Senator RIEGLE. My time is up. I would just hope that we would
not get fixed on a course where the belief was that the economy
had to go through the wringer and that monetary policy would
remain restrictive, and we would endure an overly severe and
overly long recession partly because of the pressure of our friends
abroad. I hope that at some point we would fight for ourselves.
Mr. VOLCKER. There's no question about that. I don't want to
suggest that any of these problems are easy or that I know the
answer to all the questions. But in terms of dealing with the
international side of that equation and not having us the residual
country in which all problems end up on the doorstep of—if my
syntax is correct—I've had a certain experience in trying to deal
with the problem with my colleagues abroad for a number of years,
and I think I'm sensitive to it and conscious of it.
Senator RIEGLE. Thank you, Mr. Chairman.
The CHAIRMAN. Senator Kassebaum?
Senator KASSEBAUM. Mr. Volcker, I would just like to say it
certainly is a pleasure to have you here and have someone whose
name—just by the reputation of your name—has restored confidence in the money markets last week when the announcement
was made of your appointment. You mentioned economic stability.
Of course, that's what we've all been talking about.
I'd like to know what you consider, say, the top three priorities
in restoring economic stability?
Mr. VOLCKER. The top single priority seems to me to be to deal
with this problem of inflation that we've inherited and that has
indeed been somewhat exacerbated recently. And that is very
much tied in, both as cause and effect, with the energy situation
which, of course, is an important problem in and of itself.
Now, in mentioning those as priorities, in some ultimate sense
the priority is the growth and prosperity of this economy. I simply
put those others as a matter of priority because I think they are
essential avenues, essential parts of the solution to achieving the
growth, prosperity, and productivity that we want. We haven't
done so badly on growth, actually, in the aggregate sense in recent
years. We sure have not done well on productivity. We have not
done particularly well on investment which, of course, is related to
the productivity situation.
We are going to have to restore the basic preconditions for that
kind of growth and productivity that we want. In a sense, when I
put the emphasis on stability and on inflation and on energy,
they're kind of approximate goals to that ultimate goal in employment and growth.
Senator KASSEBAUM. YOU said earlier, I believe, that you saw no
evidence of any shortage of money in the market right now. Does
this mean that you do feel that interest rates should be higher?
Mr. VOLCKER. I don't think I want to begin my career as Chairman by projecting just where interest rates might be or where they
should be. I guess that's something we have to continue to look at
as time passes, and it depends on too many crosscurrents in the
economy for it to be sensible for me to try to make a prediction at
this point.
21
Senator KASSEBAUM. Thank you.
The CHAIRMAN. Senator Sarbanes?
Senator SARBANES. Thank you, Mr. Chairman.
Mr. Volcker, you're extraordinarily qualified for this position. I
think it's very important that there not be a hiatus or an interruption in the chairmanship of the Federal Reserve in terms of the
office being filled. Therefore, I think your careful and prompt
confirmation an important item. I would not regard it as desirable.
In fact, I would see the potential of some serious difficulty if
Chairman Miller were to leave the Fed and go over to the Treasury
and the office of the Chairman would remain vacant even for a
fairly short period of time, given the volatility of how the markets
move.
I want to ask you three procedural or process questions before I
get to matters of substance. First, how much of a role as a public
spokesman on economic policies generally do you think the Chairman of the Federal Reserve should assume?
Mr. VOLCKER. I suppose your emphasis there is on "generally." I
think the Chairman of the Federal Reserve inevitably is thrust into
the role of being a public spokesman for the Federal Reserve. I
think Federal Reserve policy is important. I think it cannot be
conducted in a total vacuum, so inevitably one is drawn into commenting to some degree on related policies. But I do not see it as
my function to defend or develop detailed economic programs in
other areas.
Senator SARBANES. HOW open do you think the Federal Reserve's
decisionmaking process should be?
Mr. VOLCKER. I think it's inevitably quite open in the context of
our society and at the insistence of this committee. In fact, I don't
see how it can be more open than it has been. I think when we
deliberate on specific monetary policy actions and explore the alternatives for a particular period ahead, that must be a closed
process. But that is entirely consistent with coming here and elsewhere and defending the nature of the actions that we have taken
and exploring in general terms alternatives for the future. I make
this distinction between the ultimate decisionmaking in very concrete terms, month-to-month and week-to-week, which I think has
to be a deliberation that proceeds privately.
Senator SARBANES. Well, now accepting for the moment the parameter that the Fed Chairman will not be commenting about
economic policy all over the landscape but would focus more
on the Fed's particular area and that certain specific decisions
have to be taken in the manner you've just described, how much of
a responsibility do you feel for enunciating and explaining the
decision in a way that the press and the public can understand it
as opposed to sort of a Delphic utterance. [Laughter.]
It being handed out by the Fed, and
Mr. VOLCKER. I understand the problem, Senator. I wish I could
promise that I would be so articulate in this area that I would
always be crystal clear to everybody. I would like to be. I'm not
sure that it's safe for me to make a promise that may be beyond
my capacity.
Senator SARBANES. YOU might be able to make a real contribution. You bring enormous skills and really a lifetime career essen-
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22
tially in the Federal Reserve system, and one of our problems may
be that these policies are not being adequately and sufficiently
explained. I'm not talking about someone sitting there when you
feel you have to go into a closed session because of the sensitivity
of the specific decision, but once it's made—and really opening
yourself up to explaining it, responding to the press in terms of its
inquiry, because we can bring you here at any time. The nature of
the response we get depends on how forthcoming you are before
the committee. And I'm just trying to get some feel for the possibility you see in that area.
Mr. VOLCKER. Let me make one comment on that in general
terms; it may or may not go in the direction you're speaking of, but
I think it does go in that direction. I would not call it a byproduct,
but a major element in the approach that has been taken in recent
years—and my understanding is with the sympathy, even at the
urging of this committee—is to place more emphasis on monetary
targets, on the money numbers. This is, among other things, a
vehicle for explaining to the public what our essential policy is, the
nature of that policy, the way we think it works. Indeed, it's
helpful in explaining policy to ourselves sometimes and putting a
discipline on these short run actions.
And I would like to think that this has helped and will, indeed,
continue to help to provide the kind of vehicle for explaining our
objectives, explaining particular actions in a longer run context in
a way that is understandable to a much broader public than some
of the arcane and elusive descriptors that have been used in the
past.
There are always limitations on that process, and one of the
serious limitations we have at the moment is that recently the
meaning of those money supply figures is not as crystal clear as
one would like to see it, which gets us into complications about
what modifications in analysis have to be made, which in turn
spins out into additional complications, and so on.
But I think that this committee has pioneered in making these
conversations more intelligible. I hope we can build upon that, and
I hope we can maintain reasonable confidence in the money supply
figures.
Senator SARBANES. The third procedural question I wanted to
touch on was an issue that has already been raised with you, and
that is this question of how one reconciles the independent role of
the Federal Reserve with the necessity to coordinate overall economic policies so you don't have different organs of the Government working at cross purposes. Of course, you respond with an
emphasis on close communication consultation. You've watched
that problem over the years. When and under what arrangements
do you think it would be best addressed?
Mr. VOLCKER. AS you say, I have watched this process over a
number of years, and the precise way it works is influenced by
personalities on both sides of the street. But I do believe, among
other things, that as a kind of basic framework, there should be
some regular procedures for meeting together with the chief economic officers, in particular the Secretary of the Treasury. There
should be some kind of regular pattern, in addition to all the
consultation that must go on in an ad hoc way. That has been the
23
experience so far, and it's worked pretty effectively since the late
1950's. We've had 20 years or more of this kind of procedure. It has
not prevented all arguments. It hasn't prevented some disagreements. They are inherent in the situation. But, by and large, the
situation has been pretty satisfactory.
Senator SARBANES. DO you see the regular procedure that you
feel needs to exist and be carried out essentially involving the
Chairman of the Fed and the Secretary of the Treasury? Or do you
see a quadriad?
Mr. VOLCKER. YOU know, whether it's the quadriad or some other
particular group is certainly in large measure shaped by how the
President, himself, would want to do it. I think continuing communication with the Secretary of the Treasury is a part of the tradition, so to speak, and, indeed, given his role in the administration,
it is a natural focus; but the process is not limited to that focus.
Senator SARBANES. I see my time is about to expire. I will withhold—are we going around again?
The CHAIRMAN. Yes. Senator Lugar?
Senator LUGAR. Mr. Chairman, Mr. Volcker, it seems to me one
of the ironies of this hearing and the speed as well as the reception
that your nomination has received in the press and the financial
community is that the policies of the administration give such a
sense of unease to people that your nomination in itself is perceived as being a strong bulwark, and therefore a responsible activity of the committee would be to confirm you rapidly and try to
bring about a degree of confidence through that situation alone.
It's an ironic one and puts you in a difficult position, because it's
anticipated that a good number of things are going to occur
through your leadership. And indeed they may.
But if you could go back historically for a moment, what would
you have to say about how things worked out in the two devaluations of the dollar in 1969 and 1973 in which you were involved.
Were your expectations in terms of monetary stability worldwide
were fulfilled, or what went wrong in the process?
Mr. VOLCKER. My hopes, at least, were not all fulfilled. I think
we faced a difficult situation then from the standpoint of the
United States and from the standpoint of the world. A change in
exchange rates was necessary; it had become necessary, unfortunately. The risk in making that change—in dislodging some well
accepted conventions, if you will—was of contributing to a kind of
atmosphere of uncertainty and instability.
Now I don't by any means blame everything that happened on
those devaluations. The inflationary situation has been much more
central. But, to some degree, that change probably contributed to
the sense of instability. It was maybe inevitable in the situation. I
devoted a good deal of effort, as you may recall, during and after
those devaluations, to trying to negotiate a stable international
monetary system. I think it made me extremely uneasy at the time
when as a country we became a little overly enamored of the view
that we could forget about exchange rates and take the attitude
that, "We'll just let these floating rates go where they will, and
that'll take care of all the problems." If the dollar went down, it
was no great concern of ours.
24
I think that kind of attitude contributed to the problem. I think
it was always an illusion. What we have learned—but learned from
harder experience than I would have wanted to go through, ideally—is that we couldn't ignore these things. I think that's the lesson
of what's happened in recent years. In a sense, that lesson culminated in the program that we had in November, which I do think
was kind of a psychological watershed—I hope it was—in the way
we deal with problems of economic policy.
We have to recognize not only the inflation problem, but also
that we have to shape an effective domestic policy in a context of
what's going on in the world. The United States has shrunk in
relative terms as part of the world. The amount of international
transactions has increased enormously, whether we look at trade—
which has more than doubled from 10 or 15 years ago in relation to
the economy—or the amount of investment transactions that go on.
The ease of communications internationally has produced a different kind of world where we can't ignore exchange rates, not because our primary emphasis is on what's good for the world—
although that's not unimportant—but because the question is, How
we can run our internal economy?
I'm saying we can't run our internal economy without some
awareness of how we fit into the world; we can't run it effectively,
and we can't reach these objectives in employment, for instance, if
we ignore that.
Senator LUGAR. YOU have just characterized the November activities as a watershed of sorts. I'd like you to follow on it in this way:
Are you stating essentially that that activity had to be taken by
the Fed at that point in conjunction with the Treasury Department, because the worldwide condition—a potential run on the
dollar, for example—was so great that domestic considerations
really had to be subordinated, or in fact there was no hope for
reconciliation of domestic and international policies.
Mr. VOLCKER. NO, I would state it quite differently, Senator. I
think it was a watershed in the sense that there was a recognition
that policy could not be shaped without taking account of international considerations. I do not see that as inconsistent with domestic goals.
I would state it the other way around. We're not going to have
an effective, total economic policy, including the domestic objectives, unless we're willing to face the complications that the international situation creates. Now facing that doesn't make it any
easier. It's a complication of the real world. What I'm saying is we
can't ignore it, because our domestic goals will be undercut. It's not
an either/or situation.
Senator LUGAR. In the current situation, this may just be a topic
or pause that we're going through. But the thought has been that
the action by the Fed in recent days has been caused substantially
more by an attempt to assure people abroad than by specific domestic considerations.
Is that your characterization?
Mr. VOLCKER. Again, I hope this is a situation where there's no
sharp dichotomy between the domestic and the international considerations. The international consideration, the concern that was
25
expressed at the dollar, was certainly something that properly
needed to be taken into account recently, in my judgment.
That happened to coincide with a period when the money supply
was increasing quite rapidly. If one just looks at the so-called
domestic criteria, there remains that effort to work toward domestic monetary discipline, which, of course, is completely consistent
over a period of time with what is necessary to keep the dollar
stable internationally. So even in this recent action I don't see a
sharp dichotomy.
Senator LUGAR. Mr. Volcker, attempts are underway in this
Congress to repeal or modify the Credit Control Act. What is your
judgment about the wisdom of repealing the Credit Control Act?
Mr. VOLCKER. Very frankly, I've perhaps not been as acutely
aware of the fact that that statute still existed as I should have
been. I think the fact that I have not been so acutely aware of it
reflects my feeling that I do not see the circumstances arising in
which the law would be particularly useful.
Senator LUGAR. SO it would be fair enough—as one of the cosponsors of that act, I would raise it from that viewpoint—that you
would tend to favor our attempt to move it off the statute books?
Mr. VOLCKER. I don't see why I should object. I understand that
the Board of Governors has taken the position that they also don't
see any strong reason to get rid of it, although they don't see any
intention of using it.
Senator LUGAR. Would you favor paying interest to banks on
reserves held in the Federal Reserve?
Mr. VOLCKER. We had some discussion of that earlier. My position, going back over some period of time, is that this could well be
the most logical and straightforward way of squaring the circle
that I see here—the need for maintaining reserve requirements at
adequate levels, but at the same time not so penalizing the institutions upon which the reserve requirements are placed that they're
put at a competitive disadvantage in the marketplace. This issue
comes back and affects our ability to conduct monetary policy.
Now, the discussion in the House has taken a somewhat different
tack. It's possible that we can work out the situation without the
payment of interest on reserves. I'm open to exploring those avenues as well.
Senator LUGAR. Would you favor continuation of purely voluntary membership on the part of the banking institutions in the
Federal Reserve Board?
Mr. VOLCKER. If you're going to have purely voluntary membership—and there are attractions to that, philosophically and otherwise—I think you then have to be willing to go pretty much all the
way in relieving the costs of membership. It just doesn't make
sense to me to rely upon voluntary membership to preserve the
strength of the Federal Reserve, when at the same time you penalize the banks who voluntarily choose to be members.
Now, there's been a problem, quite clearly, in meeting those
preconditions that it seems to me are necessary to make a fully
voluntary system operate. There is also the problem that a system
that looks adequate on a voluntary basis today, probably would
have to be reexamined over a period of time to make sure that new
26
institutions didn't spring up too freely and again push the voluntary sector too far.
I'm not philosophically opposed to voluntarism. After watching
this debate proceed now over a period of 2 or 3 years, I guess I'm a
little skeptical that the preconditions of voluntarism consistent
with a strong Federal Reserve can be met.
Obviously, the mandatory approach gives another avenue.
Senator LUGAR. Thank you very much.
The CHAIRMAN. Mr. Volcker, commercial banking is notorious in
its discrimination against minorities—blacks, women, and even
white male Jews and Catholics. We have hearing records that are
just replete with the evidence.
Mr. VOLCKER. You're speaking of their employment practices?
The CHAIRMAN. That's right, employment and promotion, particularly promotion with respect to women. Women are hired, but
they're rarely promoted.
What did you do in 4 years as president of the New York Federal
Reserve Bank to overcome this discrimination?
Mr. VOLCKER. I can speak directly to the situation at the Federal
Reserve Bank of New York. I would not at all categorize its practices as discriminatory when I arrived there. But we have had
what I think is a pretty good record in both employing and advancing women and minorities.
We have a very sizable proportion of women both on our senior
staff and on our officer staff. The proportion of minorities has
increased substantially. And we have pushed just as hard as we
can in that direction.
It's not easy. It becomes progressively more difficult as one gets
at higher levels. In New York we run an institution that has a
great many minorities on the total staff. Our problem, as with
other organizations has been in finding the most qualified among
them, and pushing them ahead into the senior and official
positions.
The CHAIRMAN. AS Chairman of the Federal Reserve, what would
you expect to try to do with respect to the commercial banking
industry generally?
Mr. VOLCKER. I suppose, No. 1, show a good example. We in the
Federal Reserve
The CHAIRMAN. Let me just interrupt. It's more than a good
example, isn't it? The fact is that as you employ, as examiners and
so forth, blacks and others who haven't been given a chance, it
gives them a chance to get the training and the expertise, which is
the principal reason, in my view, that they haven't been hired.
Mr. VOLCKER. That's right.
The CHAIRMAN. This is something that I think the bank regulatory agencies have been very remiss in affirmatively pursuing.
Mr. VOLCKER. I suppose we have something of a conflict of interest when one looks at that. As we find good people, which we do,
we love to keep them. But historically the Federal Reserve—particularly the Federal Reserve banks and particularly in the areas
of economic research and bank examination, as you point out—
have been a kind of training ground for competent staff for banks
generally.
27
So, I think we can do something in that area, not just by example, as you say, but as a part of our normal existence, as we train
these people, as banks become aware of them through their normal
contacts, they are going to be hiring them away from us.
In terms of the actual enforcement of the statutes on employment practices of the banks, to the best of my knowledge, those
areas don't come under the Federal Reserve, but rather the Treasury and other agencies.
The CHAIRMAN. It's my understanding that you enforce the statutes with respect to State member banks, which are considerable, a
thousand banks. That would really set an effective example.
Mr. VOLCKER. I do think, although I would only have to speak
here from general impression, that your initial statement about the
banks would have been valid some years ago. I think in my particular area, which is all I can talk about, the situation is considerably better.
The CHAIRMAN. We'll be happy to send you some of the documentation we have had before us, because it's still shocking, according
to the witnesses who have testified within the last few months.
Now, you told Senator Armstrong that you will serve out your
term. That was a little ambiguous. You have two terms. You have
one term that's 4 years and one term that's what, 12 V2 years?
Mr. VOLCKER. Right.
The CHAIRMAN. I hope you will serve until 1992, God willing.
Could you clear that up?
Mr. VOLCKER. I am being appointed, Senate willing, as Chairman.
I have no other position or intention in mind at present. I answer
in the spirit of being appointed as Chairman.
The CHAIRMAN. What can we do to overcome this very serious
problem we have of turnover on the Board? We have an average
turnover of about 2 % years now, as you know. They're supposed to
be appointed for 14 years, and with this turnover we have a loss of
independence, a loss of competence, expertise, experience and so
forth—all the things that the people who established the Federal
Reserve were counting on.
Mr. VOLCKER. We have a loss of experience, certainly, and I do
think it is disconcerting.
The CHAIRMAN. A loss of independence, inasmuch as the person
is appointed by the President and I think you tend to have more of
a feeling of obligation.
Mr. VOLCKER. Recent Presidents have appointed, if not all the
Federal Reserve Board, virtually all the Federal Reserve Board,
and I think it's fair to say that that was not the intention.
The CHAIRMAN. And President Carter will make his fifth appointment to the seven-man Board in January.
[The following table was ordered inserted in the record at this
point:]
CHANGES IN FEDERAL RESERVE SYSTEM BOARD OF GOVERNORS MEMBERSHIP BY PRESIDENT
President and dates of term
Wilson, 1913 to 1921...
Harding, 1921 to 1923.
Coolidge, 1923 to 1929
Number of
changes in board
4
5
Number of
positions filled
at end of term
5/5
3/6
1/6
28
CHANGES IN FEDERAL RESERVE SYSTEM BOARD OF GOVERNORS MEMBERSHIP BY PRESIDENT—Continued
President and dates of term
Hoover, 1929 to 1933
Roosevelt 1933 to 1945
Truman, 1945 to 1953
Eisenhower, 1953 to 1961
Kennedy, 1961 to 1963
Johnson, 1963 to 1969
Nixon, 1969 to 1974
Ford, 1974 to 1977
Carter, 1977 to present
Number of
changes in board
2
10
9
3
2
3
5
5
5
Number of
positions filled
3t end of term
2/6
7/7
5/7
2/7
2/7
3/7
5/7
5/7
4/7
Mr. VOLCKER. The turnover has been too rapid, I fully agree. But
I don't think that comments upon the competence of the individuals. I think we have been extremely fortunate in being able to
have very competent people on the Federal Reserve Board. But I
agree with you that generally the turnover shouldn't be nearly so
rapid.
I don't know what all the answers are. I do know you're aware
that the salary question inevitably enters into the judgment of
some of the people that have served or, perhaps more importantly,
some of the people that have not wanted to serve.
Beyond that rather concrete factor, I think it's difficult to comment further. I rather sense that the sheer regulatory burden,
much of which is initiated by the Federal Reserve pursuant to acts
of Congress, may be a factor in terms of being forced to deal with
so many specific decisions that are rather unlike what one conceives of as the general function of the Federal Reserve Board. But
I wouldn't want to overemphasize that.
The CHAIRMAN. I hope we can work with you in easing that
regulatory burden. As you know, I've been pushing hard to get a
single bank regulatory agency. It would not be the Fed and it
would relieve you of that burden. I'm delighted to hear that there
is at least one reason why you might
Mr. VOLCKER. I want to make a distinction.
The CHAIRMAN. I was afraid you would. [Laughter.]
Mr. VOLCKER. A very proper distinction, Mr. Chairman, between
the bank supervisory role—I am on the record a number of times
as saying I think this role is important to the Federal Reserve and
it has never, by the Federal Reserve Board, generally anyway, been
thought to be a burden—and extensions of the regulatory power
into, shall I say, some nontraditional areas in recent years.
But the Congress has seen fit to charge the Federal Reserve with
these responsibilities. I have taken it, in part, as a compliment that
we've been considered an agency that could develop and administer
these fairly and without prejudice. To the extent Congress decisions
have been based upon that conception, I have to agree with those
decisions. It's partly a matter of internal organization, perhaps,
and maybe we can have some ideas on that.
The CHAIRMAN. A proposal that would certainly affect the independence of the Fed is one in the House that was advanced from
the subcommittee, as I understand it, and it would provide that the
chairmanship of the Fed be coterminous with that of the President,
29
start a year after he is elected, and let each President, in effect,
appoint his own Chairman of the Board of the Fed.
How do you feel about that?
Mr. VOLCKER. I am generally aware that that issue has arisen.
And of course, it's an old issue. It goes back to the early 1960s. And
through the years I have had a certain sympathy for the concept.
I must confess, upon looking at it face to face and being forced to
rethink the concept a little bit, I can see certain problems that
would arise with very short terms created when a chairman
became disabled or left for whatever reasons. Perhaps it's not as
easy a question as I thought it was in the past.
While I have had some sympathy for the proposal—and I would
say that—I think there are also some problems. Maybe I can think
about it a little more.
The CHAIRMAN. According to a report of the New York Times on
Friday, you said at a press conference that you were going to take
a tough stand on inflation and that you wanted to reduce inflation
quickly. Of course, we'd all like to reduce inflation quickly.
Mr. VOLCKER. Right.
The CHAIRMAN. But what specific anti-inflation actions do you
have in mind?
Mr. VOLCKER. I don't doubt that I said "quickly" at some point,
but I think I probably said—I certainly did not suggest that this
was something that I had any magic solution to. I did not say that
it was an easy problem or that anyone should have any anticipation that there is some way the inflation problem is going to be
gone next year. That's obviously not the case.
The present situation we have is not with inflation on the
downswing; it's on the upswing.
^
What I meant to convey was that this was a matter of real
priority, and I think we should proceed as quickly and effectively
as we can. It's been getting worse, not getting better.
Now the big setback this year was certainly from the OPEC oil
situation. But the sooner we can get* on top of this situation, the
sooner we can turn around the rising trend and make it a declining
trend, I think the easier we will find it to restore an expectation
that the problem can be dealt with.
What we're finding now is the reverse, in a sense a perverse
psychology; the American people have, I suspect, become convinced
as never before that inflation is here to stay and that it may rise.
That affects activity; it affects the way they invest; it affects what
they buy; it affects what they do. It makes our job more difficult.
The first priority is to demonstrate that that's not the case, that
we don't face a situation where inflation inevitably has to rise. And
I hope—and perhaps at this point I should put it no more strongly
than that—that we can get that psychology turned around through
persistence and disciplined policies, arid as we do we can find it
possible to move more rapidly to restore stability.
The CHAIRMAN. But to reduce inflation quickly, you feel that you
would retract that?
Mr. VOLCKER. I retract an implication. I don't think this is what
I said or implied the other day, so I don't think I'm retracting
anything.
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30
I don't want to give any impression that we have a solution
that's going to make the inflation rate from here on out begin
declining very rapidly. We're not at that stage yet. The first thing
we have to do
The CHAIRMAN. My time is up. I just wanted to know whether or
not you felt we could begin to turn it around.
Mr. VOLCKER. I would hope we can begin to get the psychology
turned around.
The CHAIRMAN. SO that it's not rising as rapidly as it did?
Mr. VOLCKER. I certainly hope it would stop rising as rapidly;
that's an attainable goal. And I hope leveling it off is a quickly
obtainable goal. And I hope that we could begin to see some declines in the foreseeable future. I think it's terribly important we
do. But we are at a very high level, so there's nothing we're going
to do in a matter of months to get rid of inflation.
The CHAIRMAN. Senator Garn?
Senator GARN. Thank you, Mr. Chairman.
Mr. Volcker, the chairman asked you a question, and I will
pursue it, as far as this bill passed by the House subcommittee last
week on making the Chairman of the Federal Reserve Board's
term take place 1 year after a President has been elected. This
certainly was not aimed at you, because the bill was in progress a
long time before you knew you were going to come here.
It is not prospective, but it would affect your term and you would
be through, at least on your initial appointment, by January 1982,
only having served 2V2 years. I only bring it up, not to pursue it
further right now, but I hope that you would think about that, not
in terms of your own term but the overall situation of what that
would do to the Federal Reserve, would it politicize it; and the
thing you mentioned to the chairman about short terms.
Mr. VOLCKER. The problem I see, not thinking of my own situation, is that you could possibly face a situation where an incoming
Chairman had a much shorter term even than I would have under
these circumstances. I don't know how you'd deal with that particular aspect.
If governors served a longer term, and we didn't have the situation that we have had in recent administrations where the President was appointing the whole Board or close to the whole Board, I
would not be completely negative about the idea that after a reasonable lapse of time a President ought to have a chance to look at
the situation and not have to be at the whim of the calendar as to
when a Chairman happened to be appointed to office.
There's kind of a dilemma here, as I see it.
Senator GARN. Not for purposes of this hearing, but I would
appreciate it if you had more thoughts on that, that you could
bring them before the Senate. Because I understand the dilemma. I
have real concerns about the type of situation described: very
short-term; no continuity whatsoever. You get a Chairman in and
he has very little opportunity to start to work, and the President
has gone and started the cycle all over again.
An article in Business Week 2 weeks ago was entitled "The
Politicization of the Research of the Fed." The thrust of the article
is that the research efforts of the Fed's economists are being forced
into a mode and shape that's politically determined by the staff
31
and the Board of Governors. The article indicates that evidence of
suppression is the strongest in the New York and the Philadelphia
Reserve banks. Economists pointed to instances of censorship in
research papers, resulting from sensitivity to official Board monetary policy.
What's your reaction to that?
Mr. VOLCKER. My reaction to the article was that I frankly didn't
comprehend what they were talking about. If the burden of the
article was that I review what goes into our quarterly review,
indeed I do review important output of our research department. I
review it to see whether it's sensible, to see whether it's of a high
quality. I review the output of the research department of the
Federal Reserve Bank of New York; if that's all that article was
saying, I plead guilty.
It seems to me an appropriate role for the president to have an
interest in what the economists are producing and to review their
conclusions. That seems to me to be all that article was saying, and
if that's what it's saying, I do it.
Senator GARN. They cited one specific
Mr. VOLCKER. The specific examples that they cited were an
article on New York City, and an article on the money supply and
how it should be computed. As to the former, anybody that's interested can read the article and see that it does not agree with what
the Federal Reserve Board staff had published a few months earlier. It was in the form of a comment, in fact, on those proposals,
and came out with a somewhat different position.
So that's one answer to the accusation that the Federal Reserve
Board staff was totally dominant. In fact, I agreed with the general
thrust of the article that was printed.
As to New York City, the only specific comment I would make is
that it is true that I have tried to build up our urban research
area. I think that's appropriate in terms of the problems that we
had not just in New York City but elsewhere.
The only specific criticism I ever recall making on articles in our
quarterly review on New York City is that perhaps they were too
rosy, rather than the reverse, and might give a false sense of
calmness, rather than pointing out the degree to which the problem still existed.
Senator GARN. Chairman Proxmire and I, having been deeply
involved in New York City for 5 years, would share that view, that
their optimism has been beyond the expectations that have taken
place.
Mr. VOLCKER. I have not been accused, other than in that article,
of being unduly rosy about what New York was doing.
Senator GARN. Thank you, Mr. Chairman. I have no further
questions.
The CHAIRMAN. Senator Stevenson?
Senator STEVENSON. Thank you, Mr. Chairman.
I sense, Mr. Volcker, that you recognize that inflation, employment, levels of economic activity in the United States, and the
economic condition of the country are rooted in a world that is out
of control. I hope so. I know it's out of control, but I hope you share
that perception.
Mr. VOLCKER. It is disturbed, at the very least.
32
Senator STEVENSON. YOU perhaps are being more diplomatic
than I.
The United States once gave that world economic leadership. It
virtually created the postwar international monetary system. And
then it undercut the Bretton Woods arrangements that were created by linking the dollar to gold.
Now, hundreds of billions of Eurocurrencies, supposedly dollars,
are sloshing about the world in mysterious ways, seeking safety
and high rates of return. In this unstable environment, the dollar's
reserve role has become extremely expensive for the United States
in these conditions. It's no longer regarded as a reliable unit of
value. Nothing is in this world.
So levels of international trade and investment are depressed by
uncertainty. Sterling may be coming back into fashion.
How should the international monetary system be reformed, reliance on the dollar be reduced, and the United States give this
world some international leadership? And if the executive branch
is unwilling or unable, what's the international role of the Fed, or
could it be, under a strong Chairman?
Mr. VOLCKER. I'm sure you're not expecting me to outline a
specific plan for monetary reform this morning, which I am not
capable of doing. I tried that once a few years ago.
I do think that this kind of reform effort is, in a real sense, more
difficult than it was in the Bretton Woods period you referred to,
because then we stood astride the world like some kind of colossus—with the British, to be sure—and in a relatively small conclave, we were able to get together and establish a system the
objectives of which were pretty widely agreed to, from a situation
in which the United States had the strength and power to support
and underwrite the system.
It wasn't so much the formalities of the system as the informalities—the Marshall plan, the subsequent aid program, the fact that
the United States was willing to be discriminated against in trade
and payments at that time, the fact that we were willing and could
carry the defense burden—that made that possible.
Now the world has changed. Relatively, we're much smaller;
relatively, we cannot carry with the same ease all the burdens that
we carried at that time. Yet we're still the largest single unit. We
still have to show some leadership, because nobody else is going to
do so in the same way. And we've got to do it under more difficult
circumstances, in a more collegial world, if you will. The underlying problem with which we are grappling is that when one looks at
the picture of a world which is facing many more problems, as you
suggested, in energy and elsewhere, it suggests the need for both
political and economic innovation.
I think we see some of that political innovation coming into
place—I'd like to think so—through the apparatus that's been developed at the top, for instance, in these economic summits, which
provide a kind of focus for collaboration not just at the summit
itself, but through all that implies for relationships in between
summit meetings and attitudes between summit meetings.
And, on the economic side, there are some implications for the
role of the dollar and substitutes therefor. This is a very difficult
area, but we can't expect to run the world, in my opinion, with the
33
same degree of reliance on the dollar that may have been suitable
when the United States was in the position of having almost 50
percent of world GNP and, in terms of financial markets and
financial arrangements, was perhaps even more dominant than
that 50 percent of GNP would imply.
It's a different world now, so there has to be some way of sharing
the responsibilities. That was not true in the same way earlier.
This is always a difficult matter, economically and politically.
You asked about the international role of the Federal Reserve.
We have a close interest, obviously. We have direct operations
through our foreign currency desk in the international area, and
we have contacts with foreign central banks. But, by long tradition,
it is also true that the Treasury has the primary leadership in this
area. By tradition, also, the Federal Reserve has worked very closely with the Treasury in this area, and I would hope that would
continue.
Senator STEVENSON. Would a substantial across-the-board tax cut
be appropriate in 1980 or 1981?
Mr. VOLCKER. I don't want to project that far ahead. I don't think
it's appropriate right now. I think fiscal policy is obviously something you want to look at, particularly should the worst of the
present prognostications be borne out. The administration has been
on a course, as I understand it, toward fiscal restraint which I
think is appropriate in dealing with this chronic budgetary deficit
we have had.
I have strong sympathy for that approach. But, obviously, it has
to be reviewed in the light of economic circumstances as they
emerge. Let's see what happens in economic activity before pronouncing that judgment.
Senator STEVENSON. Are you familiar with the Fed's regulations
for Edge Act corporations?
Mr. VOLCKER. In a general way.
Senator STEVENSON. DO you support them?
Mr. VOLCKER. I'm generally sympathetic with the direction in
which they've moved.
Senator STEVENSON. Through these institutions, with their liberalized powers to finance trading
Mr. VOLCKER. While I have not engaged in those discussions firsthand, my understanding has been that this approach was broadly
consistent with the tenor of congressional wishes, as expressed
during debate about the International Banking Act.
Senator STEVENSON. I wish you hadn't brought that up in the
Chairman's presence, but you're absolutely right. [Laughter.]
And finally, Mr. Volcker, let me just remind you that until such
time as the Chairman's reforms become law—and I suggest you not
hold your breath—there is the Federal Financial Institutions Examination Council, recently created, which does afford the regulatory agencies, including the Federal Reserve Board, the opportunity to, as it were, coordinate their regulatory activities. I hope you'll
take advantage of that opportunity.
Mr. VOLCKER. I hope so, too. Indeed, I think I've testified before
this committee that I would hate to see the central bank lose all
supervisory responsibilities, because I think it does help support
our monetary policy responsibilities.
34
The point is sometimes made that the responsibilities conflict. I
can imagine circumstances in which that is true. But I'd rather
have the conflict out there in the open, to be reconciled within the
Federal Reserve, rather than have two different agencies running
off in different directions.
I think we can and will make some progress through this Examination Council, particularly in dealing with some of the irritations,
big or little, that arise from inconsistencies, big or little, in attitudes of the different agencies.
Senator STEVENSON. Thank you.
The CHAIRMAN. Senator Riegle?
Senator RIEGLE. Thank you, Mr. Chairman.
Mr. Volcker, I wanted to pursue with you the whole issue of
capital investment and capital requirements in the United States,
stretching out, through the decade of the 1980's. And the reason I
want to get into this is that every month it seems the story becomes more alarming in terms of what our capital requirements
are. And also, at the same time, our capital losses, including the oil
account and the trade account, is not as favorable as it might be.
But when I look at the period, say, in the early 1980's—let me
just give you two or three specifics and then I can frame the
question.
In the auto industry right now, assuming the auto industry in
the United States stays in its current form, they're anticipating
having to spend about $50 billion from 1980 to 1985 just in the
normal course of meeting new product modifications and requirements. The Government regulation burden on top of that is estimated to add another $30 billion. So there's an $80 billion price tag
that attaches just to that one private sector component.
Then you've got the whole question of what's going to be spent in
terms of strategic weapons. The President is now talking about the
M - X missile, a very expensive proposition, somewhere probably
between $30 billion and $100 billion.
We've got housing needs, we've got all kinds of infrastructure
problems. I gather that the water system in New York and probably most of the older American cities needs to be replaced. When I
go around the cities in Michigan, I find that capital improvements
and capital expenditures have been lagging for the last several
years because the moneys had to go for operating budget activities.
And so we're running down our physical plant in the country.
And that leaves aside both the whole question of our industrial
base generally and how modern and up-to-date it is, say, versus the
Europeans' or Japanese.
And now the synfuels are on the horizon, and the President's
asking for, about $88 billion that he wants to recommend to be put
in there.
I frankly say I don't know where we're going to get all the
capital. I don't see it and I'm alarmed about it. It seems to me that
we're caught in a situation where generating the kind of capital
that will be needed and investing it, which we must do to stay
competitive and to try to make some improvement in productivity,
is almost beyond our capacity.
35
Now, two things I'm interested in. One is your own assessment of
the capital requirements, looking out over the next several years,
and how you see this extraordinary period of capital need.
And second, how do we think of how we try to accommodate the
monetary policies of the United States to meet that internal need,
when we're caught in this bind that Senator Stevenson and I have
been raising with you of international finances?
Mr. VOLCKER. I have looked at this question in the past. I have
not looked at it very recently, with synfuels and all the rest added
to the picture. It's very hard to come to a concrete judgment about
just where the best balance may lie. The need is certainly enormous, there's no question about that.
This country, in the past, has shown an enormous capacity to
generate capital. I think our ability to do so has been undermined
in recent years. It's been undermined by the persistence of big
deficits. It's been undermined by a fairly high dropoff—I think
you'd have to call it a failure—of private savings flows.
Let me come back to this uncertainty about the future and
uncertainty about inflation. You can't expect to sustain high savings rates—which will be needed, I think—if people are so uncertain about the purchasing power of what they're saving.
The performance of financial markets in providing a return on
our capital has been absolutely dismal for a decade. The stock
market is lower than it was back in 1962. Bonds have not been a
good buy for anybody in recent years, despite the current level of
interest rates, in real terms. So in part the answer has to be tied
up with this general problem of restoring stability.
Now beyond that, and if we can accomplish that, certainly interest rates would be lower and monetary policy could help set a
favorable environment. But I would also point out—and it's particularly relevant to this box that you and Senator Stevenson have
seen—that monetary policy isn't the only instrument here. I think
there is a real question about whether our taxation practices have
not been biased against savings and, more particularly, looking at
the demand side of the equation, biased against investing and
investment incentives.
I've long held that view. If I read correctly what's been going on
in this city as well as elsewhere in the past year or so, I think
there is more awareness of that now. The last tax bill, I think, was
more favorably shaped on that dimension, and it also stimulated a
lot of discussion about alternative ways of proceeding on a tax
program that takes some of the weight off investment activity.
I think that's very healthy. Now, the other dimension, which you
mentioned specifically in connection with the automobile industry,
is this regulatory pattern. Obviously, our country has objectives
other than investment and growth. The environment, safety,
health, all the rest, are important objectives in and of themselves.
I certainly don't know all the answers in this area, but there
must be some better way of weighing the tradeoffs and providing
the degree of protection to social objectives that is essential without as much confusion and as much regulatory burden as we've
succeeded in producing recently.
Now, if I knew the answer on how to accomplish that, whether
were within my responsibilities or not, I would slip you the answer.
36
I know it is a very difficult problem, it's one we've got to deal with
somehow.
Senator RIEGLE. This is the thing that concerns me. It also, I
think, relates to the point that Senator Sarbanes was making
earlier about once we know enough to be educated, to go ahead and
do it.
It seems to me that the strategic margins of the United States
have been dissipated. I'm talking about certain built-in advantages
that we had with cheap energy and other competitive advantages
with respect to the rest of the world. And this was before sinking a
lot of capital into the Viet Nam war and other things, but it seems
to me that where we stand in 1979 versus a decade or a decade and
a half earlier is that we have pretty much exhausted our strategic
margins.
I don't think we can afford very many big mistakes at this point,
if any, which sort of puts synfuels up in a different position because we can't afford to do something that is going to cost $88
billion twice. If what we pick doesn't pan out I'm wondering if you
and others aren't going to have to think outside of the forum that
we've normally thought in in terms of how we'd handle the creation of capital and the availability of capital.
I agree with you that we're going to have to do things with tax
policy, and we're developing some things, tax base, incomes policy
legislation and some tax indexing legislation and something to deal
with depreciation and so forth, but beyond that we're just tinkering. It may be useful tinkering, but it seems to me we're going to
have to make a series of very sophisticated capital investment
decisions as a nation that relate to our strategic future, our survivability, and our maintaining a position of strength in the world.
It's not just on the economic side. It comes over into defense
matters as well. We've sort of gone speeding into the future with
the old institutional arrangements and I'm not sure that we're set
up today to, on a timely basis, to make very sophisticated capital
judgments quickly, weigh these tradeoffs between what may be
publicly desirable, versus what the private economy might decide
to spend money on, and to work our way through a very tough
period. I'm just wondering if that is the kind of view that you're
developing as well, or for any kind of a situation which may
involve having to think maybe even in terms of some new mechanisms, some new ways of tackling that kind of aggregate decisionmaking.
It seems to me we're losing ground today. I don't see us with an
effective inflation program. We're way behind in the energy area,
and I'm not sure that we can afford much more of that. It may well
be that we have an institutional insufficiency here, that we've got
to somehow rearrange ourselves and tackle these decisions
differently.
Mr. VOLCKER. Let me say, I think the economy has had some
hard knocks recently in terms of coping with inflation and the
instability generally, but I have great faith in the ability of the
market to sort out a good deal of this and I think that's got to
remain our principal reliance, looking at industry broadly.
I don't have any doubt in my mind about that. There are also
major strategic decisions of the kind you suggested, the prime
37
example being energy. You talked about $140 billion programs that
raise very directly the question that you suggest.
Senator RIEGLE. Can we afford that amount of capital?
Mr. VOLCKER. I think we can afford what we have to afford. But
when you talk about making those decisions as part of a Government plan, it's very important that the right strategic decisions be
made. What kind of mechanism is applied to that, what kind of
decisionmaking apparatus is applied—I don't know what the administration might have in mind. But I agree that those are very
important decisions.
And the structure of that program, the way those decisions are
arrived at, is bound to be crucially important to the future of this
country, given the strategic role that energy plays. Now, within
that area, given my own predilections, I think a lot of weight has
to be given to normal market incentives and judgments. That's one
way to disburse the decisionmaking so that all the eggs don't go in
one basket. But there is, I'm sure, a role for Government in this
area. I don't have the answer to just how that is sorted out, but I
agree with the general tenor of what you're saying.
The CHAIRMAN. Senator Sarbanes.
Senator SARBANES. Mr. Volcker, do you think the inflation we've
been experiencing is attributable to an excess of aggregate demand
in the economy?
Mr. VOLCKER. I think it's always a combination of things. If say,
one looks back over the past 9 months, then, yes, I think that in
some industries operating with a sense of shortage or potential
shortage demand pressures are an element in the inflationary picture.
But inflation is a very complicated process, in my view. It doesn't
just depend upon what the state of aggregate demand is today, but
what it was some time ago, and the collective experience of business, labor, and everybody operating in the economy as to what
they expect prices to be doing and how they try to protect themselves from what they expect and how they go about trying to
increase their real income. Everybody likes to increase their real
income, but when we haven't got any productivity growth there's
no way we do that collectively.
But part of the inflationary process, I think, is that it leads to a
very crude way of reconciling all those different demands so that
people don't get what they really are aiming to get; things come
out differently at the end of the inflationary cycle.
Senator SARBANES. Every time we try to take the price indicators
apart, we tend to come back finding inflation tied to particular
sectors, food, energy, right now housing costs, of course, which is
tied to the interest rates. At the same time, we still have a relatively high level of unemployment and some unused productive
capacity.
Yet all the talk is on the question of lowering aggregate demand
and letting, in effect, the whole economy go soft instead of focusing
on the particular sectors in terms of what might be done there. At
least on the supply side analysis.
Mr. VOLCKER. The supply side analysis is very important. We
need more emphasis there, and I've seen some movement in that
direction. I do add, however, that decomposing the price indices all
38
the time, and saying inflation is just due to this factor or that
factor or the other factor, can be very misleading.
There's always some element in the index that's going up more
rapidly than another element, and you can run around dealing
with particular elements and find a different element springing up
on you in the future. And sometimes it's not possible to deal with
particular elements as effectively as one might like to.
So one has to look at the overall patterns as well as the particular elements. Take the energy situation, which is without question
a major contributor to inflation. Even there, I'm sure the behavior
of energy prices isn't entirely insulated from what's been happening with inflation in the world generally and in the United States
in particular, and what's been happening with the dollar. What's
been happening to interest rates also pops up in the price indices,
but what's been happening to interest rates is clearly related to the
overall inflationary movement, and you can't deal with interest
rates in isolation either.
When you begin getting the momentum going in the other direction, that's one factor that will help you on the index, because as
inflation begins going down, interest rates will go down. So hopefully, you can get the spiral to begin unravelling in the other
direction.
Senator SARBANES. You're prepared to entertain the prospects of
across-the-board, as I understand it from an earlier question, an
across-the-board general tax cut if the economy goes softer than it
now is, is that correct?
Mr. VOLCKER. I would certainly entertain the idea of a tax cut. It
seems to me, based upon history, that it would be more desirable to
place the emphasis there than on spending, if and when fiscal
policy becomes desirable. I would also say, in connection with the
conversation that I just had with Senator Riegle and indeed with
some other factors that you've just been pointing out, that when
you design a tax cut, you've got all kinds of opportunities for
helping to deal with the investment problem and helping to deal
with the cost problem.
Senator SARBANES. The point I want to make there
Mr. VOLCKER. Speaking of payroll taxes in that particular
area
Senator SARBANES [continuing]. Is that if you're going soft with
growing unemployment, the pressure is on not to have that kind of
tax cut, but to have one that's going to move you back rather
quickly. Now if that's the case and if you make an analysis over
the long run that we have not been doing some of the things we
should be doing to boost the productive side of the economy—which
may include not only tax cuts but certain Government expenditure
programs, in the energy area for one—wouldn't it be more prudent
to move now before you move into a crisis situation, which will
almost dictate a certain remedy to you in order to deal with that
immediate problem?
Mr. VOLCKER. That's a tough one, but we do have a budgetary
problem now. I would fully agree with you, with all the force that I
can command, that if we come to the point of deciding that a tax
cut is appropriate, we ought to design that tax cut not just for a
short-term benefit, but to be as consistent as we can with what we
39
need to do over the long run on productivity and investment and
inflation.
Senator SARBANES. My point on that is that if you wait to do that
until the short-term problem is quite serious or severe, then the
answer is going to be a short-term answer.
Mr. VOLCKER. We're caught in a dilemma. I accept what you say
about a risk. On the other hand, I don't want to be premature
about it either. So
Senator SARBANES. Let me go to another area.
Do you think that it should be an objective of our policy that we
move the dollar less off the center stage internationally as the
central currency and we seek to develop alternatives to that?
Mr. VOLCKER. I'm not sure I see how to do that or that I would
welcome a kind of forced policy in that direction. As I see the
structure of the international economy emerging, that will perhaps
be a natural consequence, and we ought to be able to deal with
that situation.
Let me go back in history. That was one of the considerations we
had in mind in developing the SDR and activating the SDR in the
first place. That's become rather quiescent in recent years for
fairly obvious reasons: The supply of international liquidity has
been going up too fast; we've had a lot of disturbance in international markets, and the occasion was not right for creating more
SDR's. There is some discussion of so-called substitution accounts
now, which would enhance somewhat the role of the SDR and
perhaps, to some degree, diminish the burdens on the United
States and on the U.S. dollar. There are a lot of problems that
would have to be worked out if we were going to be able to
negotiate that, but it's nothing we should resist.
Senator SARBANES. Are we paying now a heavy price or a heavy
cost for having the dollar at center stage internationally?
Mr. VOLCKER. There are advantages and disadvantages, and I
don't know where the net lies. I don't think it's a central issue of
U.S. policy, as I see it, to maintain that. We're certainly not maintaining it in any kind of an artificial sense; then it would become a
burden. But we cannot ignore the fact that the dollar at present is
kind of central stage internationally, and it affects not only our
economy but the economy of others.
Senator SARBANES. It's interesting to me that we get this sharp
criticism on occasion internationally about the status of the dollar
and its condition, but none of the countries that criticize are prepared to move their own to center stage and assume the obligation.
Mr. VOLCKER. I think that's right; that's quite clearly right,
which is one of the limitations on what we can and should do. I
think you can expect, judging from history—and I'm sure it will be
true in the future— that almost anything we do will be criticized.
In this area, all we can try to do is what we think is sensible,
taking into account something of the needs of the world economy
as well as our own. I'm not troubled by the feeling that in the end
those things may be synonymous and what's good for the dollar at
home is good for it abroad.
Senator SARBANES. I see my time is about to run out. I just
wanted to close with this thought; I think you have an opportunity
to make an enormous contribution as Chairman of the Federal
40
Reserve. You've worked within that system for a quarter of a
century. I, for one, think that the term ought to be 4 years and the
year after the President's elected. You have to have some connection or tie to the political forces in a democratic society. That
doesn't mean you'll lose your independence, because that really
rests on the integrity of the people who hold the office.
You put someone in there for 14 years, and if he had no integrity
you wouldn't have any independence and someone could take it for
a year and if he had integrity you would have independence. I
think there's a need for the Fed to sort of explain itself to the
country and not just to the banking community. The banking
community has greeted your appointment with great favor. And it
seems to me that base is obviously secure to you.
And there's a case to be made for exercising your leadership as
the Chairman to explain the Fed and its policies to the country in
such a way that the country comes to understand and perceive
what its role is, and understand its concern with the broad economic problems in terms of maintaining a healthy economy. I think it
means dealing both with inflation and unemployment if we want
an economy where we're using our resources.
Mr. VOLCKER. There's no question about that.
I have great sympathy for what you are saying. I probably
should not let your comment go by without saying that through the
years I have not been entirely happy with my own or anybody
else's ability to make some of these issues come home to the
American people in a concrete way.
Money and the Federal Reserve are a great abstraction. I accept
what you're saying, and I accept that it's quite a challenge.
Senator SARBANES. Thank you, Mr. Chairman.
The CHAIRMAN. I just have a few more questions, and I apologize
for the lateness of the hour. You said in response to a question
from Senator Riegle that you wanted to rely on faith in the market
for encouraging investment and developing the kind of investment
we need. Does that mean that you would agree that we ought to
strike as quickly as we can the limitation on the rate of interest
that can be paid on passbook savings for the small saver and the
rate of interest that can be paid on demand accounts, either by a
NOW account system or some other system?
Mr. VOLCKER. AS you know, we were moving pretty rapidly to
limit the effectiveness of those ceilings, and I think the whole tenor
of events in this kind of inflationary situation certainly limits the
usefulness of those kinds of devices.
The CHAIRMAN. I hope we can move rapidly. We've got a bill, the
best Senator Cranston and myself could put together, that seems
the most practical, but it's phased out over 10 years. It seems a
long time.
Mr. VOLCKER. My hope would be, Senator, that if we can deal
with this inflation—and I think we must within the kind of period
envisioned by that bill or not long after anyway—and inflation
begins going in the other direction, the market rate should come
down, and you could then deal with the situation in the short run
in the nicest way of all. The ceilings will become ineffective by
effective rates in the market declining below the ceilings.
41
Now, as you know, the problem that we have at the moment is
that we have an institutional structure which is essentially built
on the concept of borrowing short and lending long. That was a
great business for a good many years. It's not such a great business
when interest rates are rising and when we reach the level of
interest rates we have now. So we have a transitional problem
which I don't think makes it possible—as that bill recognizes—to
just say, "Well, tomorrow we're going to get rid of all the regulations."
The CHAIRMAN. One part of the anti-inflation program that
many people feel has worked pretty well is the wage guideline.
That has held wage increases in 1979 below what they were in
1978, in spite of the inflation. Of course, there's a terrible price to
pay for the working person, but it worked. Do you feel that can
continue to work, or do we need some kind of a tax inducement to
strengthen that guideline—some kind of real wage insurance?
Mr. VOLCKER. Let me say I think it may have had some usefulness in the past year. I don't think it can continue to work by itself
if all the other forces are going toward more inflation. So it can
make a contribution under the appropriate circumstances, but it is
threatened if other inflationary forces get out of control.
So far as the tax base approach is concerned, I've been somewhat
intrigued by it. I think I once wrote the committee in that connection. But while somewhat intrigued, I don't feel that I've seen a
really practical, workable scheme that allows me to say I'm ready
to support that kind of a program.
The CHAIRMAN. Given the fact that in the short run, decontrol of
oil prices is going to contribute to inflation, would you recommend
that the President go ahead with decontrol of oil prices?
Mr. VOLCKER. Yes; I think we have to face up to this.
The CHAIRMAN. DO you think he should speed it up as some
people have advised? Do his best to eliminate them entirely—the
controls?
Mr. VOLCKER. I don't think I'm knowledgeable enough about that
particular situation. I think we have to face the decontrol issue,
despite our present problems. Let's face it and get it over with. I
wouldn't comment on a complete and precise timetable.
The CHAIRMAN. Officials of the Federal Reserve seem to be confused on who's responsible for the manufacturing capacity utilization statistics. In fact, I had one top official of the Federal Reserve
say that the Joint Economic Committee was responsible. The fact is
that the Federal Reserve Board gathers the information. Yet, some
people at the Fed have complained about how it's out of date.
Arthur Burns did. Chairman Miller did. Will you as Chairman of
the Federal Reserve do your best to bring it up to date?
The talk about 85 percent capacity utilization is ridiculous. We're
at 95 or 97 percent. Will you try to do something about that?
Mr. VOLCKER. I'm familiar with the complaints, Mr. Chairman.
That's the extent of my knowledge, and I will look into it.
The CHAIRMAN. Because it is your responsibility. I'm sure you're
acquainted with the proposed takeover of Marine Midland by Hong
Kong-Shanghai Bank. Senator Heinz and I have proposed a moratorium on foreign acquisitions until we can study them and get a
42
report on them. American banks are an inviting target. What's
your position on the takeover of U.S. banks by foreign banks?
Mr. VOLCKER. I delivered myself of a speech on that subject fairly
recently which I'd be glad to submit for the record. It goes on for
some pages on this subject.
The CHAIRMAN. Give me a few sentences summary.
Mr. VOLCKER. In general, the point I made was that, in considering the International Banking Act, Congress, or the Federal Reserve or anyone else didn't consciously consider this problem of
large bank takeovers. I don't see any kind of emergency problem
there. I do think it's worth looking at again to see whether the law
might be modified in some respect for the long term future, but I
see no immediate problems.
To the extent there is a problem, the most difficult aspect of it to
me is the real and apparent inconsistency between the way we deal
with banks internally and the way we deal with banks externally.
The CHAIRMAN. That's exactly right. That's the heart of it, and
that's why we would like to have a little time to think it over.
Mr. VOLCKER. Right. It gets involved with McFadden Act questions; that is the most difficult aspect of the thing to me and, as it
applies, the solution can't be found in the direction of dealing with
foreign banks exclusively. You've got to look at them in that other
context.
The CHAIRMAN. Senator Riegle, did you have more questions?
Senator RIEGLE. Are you finished?
The CHAIRMAN. Yes. I have a brief charge to the Chairman,
which I will make at the end.
Senator RIEGLE. Thank you, Mr. Chairman.
It seems to me, Mr. Volcker, that you're really moving into a
very different job from the one that you're leaving. It seems to me
that being president of the New York Fed is a totally different ball
game than becoming the Chairman of the Federal Reserve
System—in fact, taking on a very substantial leadership position
and responsibility on behalf of the United States—all of the United
States—the banking community, the nonbanking community, and
so forth. And I know from your background and from our conversations that you have a very solemn feeling about the weight of that
kind of responsibility.
In today's New York Times—I'm sure you've had a chance to
take a look at it—one of the articles in here in which you're
mentioned is headlined: "Europeans Pin Hope on Volcker; See Fed
Nominee as Key Economic Link." It's a very nice piece in terms of
the friends that you have abroad, and I think it's fine that there is
that kind of feeling in Europe toward you and toward your professional accomplishments, and I think that's going to be helpful at
least in part in doing this job, but I think the other side of it
relates to a lot of what's been said here today, and that is that I
think you're in a position of having to be a different kind of a
hardball player now than was true as president of the New York
Fed, and I can see occasions arising where your friends abroad and
mine and others here may not feel as friendly because of the
nature of the change in position and the fact that they're going to
have to deal with you in a different way. You've been, in a sense,
in different kinds of policy positions in the past.
43
Mr. VOLCKER. May I be reassuring to you, Senator Riegle? There
were periods in my career when these same foreign officials
weren't all that happy with me.
Senator RIEGLE. I'm sure that's right. It seems to me that what
has changed, though, is the fact that we're in very hard times. But
I think it's obvious for anybody that takes a passing look at our
major European—and Japanese as well—trading partners that
they are doing the best they can to maximize their situation,
whether it's by virtue of the fact that the dollar is still center stage
as the international currency or through trade policies or through
defense spending and differentials or whatever. Our trading partners have become—and our Western Allies have become—very
sophisticated in moving their product problems offshore into our
country to the extent that they have.
Mr. VOLCKER. There's no question of that. I think I know where
our priorities lie, and we can't always expect them to fall nicely
into accord with what the foreign countries find most comfortable
at the moment. I've also had the conviction that in the long run
our objectives have to be consistent; we're all living in one world.
I would like to think that it is helpful that I have an acquaintance and even a friendship with a good many foreign officials, but
that does not mean that we're going to see the issues eye to eye.
Senator RIEGLE. I would agree with that. Let me tell you my
immediate concern, and that is I have a serious sense of alarm that
we may be headed into a recession that's worse than people are
anticipating. I hope I'm wrong, but there are a lot of things that I
think lend weight to that kind of a feeling that that may be what's
happening. I don't know how our international friends will view
the notion of the United States taking a higher level of unemployment for awhile and a more serious recession as a way to fight
inflation. But my concern would be that if we allow ourselves to go
in that direction very far, I'm not sure there are any net gains to
be had. As you well know, every time the unemployment rate goes
up 1 percent, the deficit enlarges by $18 billion. So we could be in
this very quick ratchet the wrong way, if we're having to absorb a
very large increase in unemployment that's taking place in this
country.
My concern is this. I would hope that as Chairman of the Federal
Reserve System, you would be fighting aggressively for policies
that are first and foremost good for this country but obviously in
the context of the fact that we're in a very complex and ever
tightening set of relationships with the rest of the world, our allies
first and then others. And obviously that part can't be ignored.
But it seems to me that we're going to need somebody who's very
strong and effective on behalf of the American economy at this
stage of the game. And if I can just add one other thought to it,
we're into a very politicized environment at the moment. I think
the President's Cabinet shuffle bears that out. The commentary by
observers across the spectrum, I think, reflects that. And you've got
at least half a dozen Republican candidates running for President a
year ahead of time and moving into a situation where politics is
apt to be more a consuming part of the puzzle than maybe has
been true this far ahead of normal Presidential elections.
44
It seems to me that the leadership burden that passes to you
right now is an extraordinary one. And to be strong enough to try
to fashion, through the monetary side of things, Federal Reserve
policies—strategies that are good for the country, good for the
United States, good for the people of the United States, the public
and private sector workers as well as managers, is really an enormous burden to take on right now.
I don't think that you fall short in terms of your determination
to do that. In fact, I m confident that you don't, but I would feel
that I wasn't doing my job right if I didn't try to emphasize from
the window through which I look the enormous responsibility you
take on at this time because of these unique factors. And I certainly wish you the best with it.
Mr. VOLCKER. I fully agree with the basic point you are making. I
am one man, but I will do my best.
The CHAIRMAN. Mr. Volcker, just let me sum up my position in a
minute or so.
We've had some excellent Chairmen of the Federal Reserve
Board. I don't think we've had anybody that's had quite the degree
of relevant experience that you've had, and add to that experience
the fact that you're obviously articulate, intelligent—you come in
with a great deal to offer to the country as well as to the Board.
You have, however, with this experience and with your background, had one constituency most of your life. That's the banking
constituency—the hard money, conservative, Wall Street, international constituency. And at the same time, you do have—it's obvious to all of us—a very clear, pragmatic streak. You're no ideologue. You're not a person who is just going to, as I, interpret what
you've said here in your responses for the record—you're not going
to be one who is just going to say: "By God, we're going to follow a
monetary policy that's going to get down inflation, come hell or
high water."
You realize in the first place that monetary policy is very limited, and the Federal Reserve Board's powers are limited.
Mr. VOLCKER. There are a lot of other policies involved in this
problem that we're in.
The CHAIRMAN. And it will require persistence, of course, and
the recognition that it's going to take time. At the same time, it's
going to require a flexibility and a recognition that the price that
some people have to pay, especially people who are not affluent
and who suffer most from unemployment, can be very serious
indeed.
I think we're very lucky to have you as the nominee. I think
President Carter deserves a lot of credit for having selected you. In
my judgment, your're the best man he could have picked for the
job, and you'll do a great job.
Thank you very much.
Mr. VOLCKER. Thank you very much.
The CHAIRMAN. Incidentally, we will meet at 9:30 on Wednesday
morning as a committee to act on your nomination.
Mr. VOLCKER. Thank you.
The CHAIRMAN. The committee stands adjourned.
Whereupon, at 12:45 p.m., the hearing was adjourned.]
Additional material ordered inserted in the record follows:]
45
STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES
VOLCKER
Name:
PAUL
(USD
A.
(FIRST)
Position to which Chairman, Beard of Governors of
nominated:
the Fer^ral Tteserve System
Date of birth:
5
(DAY)
Marital status:
9
27
(MONTH)
(YEAR)
Married
(OTHER)
Date of
nomination:
,_Q
7/25/79
P| a C e of birth: Cape May, N e w Jersey
Full name of spouse: Barbara Marie (Bahnson) Volcker
Name and ages
of children:
Son: James Paul Volcker
Education:
21
Institution^
Dates
attended
Degrees
received
Teaneck High School
1939-1945
Princeton University
1945-49
B.A.
Harvard University
1949-51
M.A.
Laidan School of
Eocnanics
1951-52
Dates of
degrees
Honors and awards: List below all scholarships, fellowships, honorary degrees, military medals, honorary society
memberships, and any other special recognitions for outstanding service or achievement.
Administration Fellow - Harvard University
Rotary Foundation Fellow
Phi Beta Kappa
Fellow/ National Association of Business Economists
William F. Butler Award, N.Y. Chapter of NABE
Fleming Award, Alexander Hamilton Award, Exceptional Service
Award (U.S. Treasury), General Leslie Graves Award
46
Memberships:
List below all memberships and offices held in professional, fraternal, business, scholarly,
civic, charitable and other organizations.
Office held
(if any)
Council on Foreign
—Relations
American Council on
Germany
American Friends of London
School of Econonics
Rockefeller Foundation
American National Red Cross
Bd. of Directors
1975 - present
Bd. of Directors
1975 - present
Bd. of Directors
Bd. of Trustees
?
- present
1975 - present
Bd. o f Trustees
1 972 (?) - prpgprvt-
Mayo Clinic/Foundation
Bd. of Trustees
1979
Trilateral Ccnmission
Member
1975 - present
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.
8/75
-
President-Federal Reserve Bank of New York, 33 Liberty St., N.Y., N.Y.
—Central Bank Presi rtentPrinceton University/ Princeton, N.J. - Senior Fellow (Also did
Q/7.
'
/4
~
U
ransniH-ing
^nrk)
1/69-7/74
U.S. Treasury, Washington, D.C. - Under Secretary
1965-1969
1961-1965
Chase Manhattan Bank, N.Y., N.Y.-V.P. & Director of Forward Planning
U.S. Treasury, Washington, D.C.-Dir., Office of Financial Analysis and
—Deputy Under Secretary
1957-1961
1952-1957
Chase Manhattan Bank, N.Y., N.Y. - Financial Economist
Federal Reserve Bank of New York, 33 Liberty St., N.Y., N.Y. Economist, Special Assistant
Sumner jobs - including positions at U.S. Treasury and
Federal Reserve Bank of New York
RAPT,TTO
47
Government
experience:
List any experience in or direct association with Federal, State, or local governments, including any advisory, consultative, honorary or other part-time service or positions.
See Employment History
Also: Department of Commerce Balance of Payments Advisory
Committee (1967-1968)
Advisor to Canmission an the Reorganization of the Government
for Fnrpign Pnliry ("Murphy Commissioallj—(1974-1975)
Department of State Review Board for Career Ministers (1975)
Published
writings
List the titles, publishers and dates of books, articles, reports or other published materials
you have written.
I have had a sizable number of articles, lectures, reports and
speeches published as or in books, in professional journals, in
other periodicals, or in official publications, but have no
current listing.
Political
affiliations
and activities:
List all memberships and offices held in and services rendered to all political parties or
election committees during the last 10 years.
None
48
Political
contributions:
Itemize all political contributions of $ 5 0 0 or more to any individual, campaign organization, political party, political action committee or similar entity during the last eight
years and identify the specific amounts, dates, and names of the recipients.
None
Qualifications:
state fully your qualifications to serve in the position to which you have been named,
(attach sheet)
See attached
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.
Yes, except to extent inherent in new position.
2. As far as can be foreseen, state whether you have any plans after completing government service to resume employment, affiliation or practice with your previous employer, business firm, association or organization.
No
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
49
Potential conflicts
of interest:
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.
Pension rights from service at Federal Reserve Bank of New York.
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.
None, to rny knowledge.
3. Describe any business relationship, dealing or financial transaction (other than taxpaying) 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.
50
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.
None.
Congressional contacts have been in connection w i t h
official duties.
5. Explain how you will resolve any potential conflict of interest that may be disclosed by
your responses to the above items.
Remove source of concern
Civil, criminal and
investigatory
actions:
(none to m y knowledge).
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.
Defendant in suit brought b y Senator Riegle against Presidents
of Federal Reserve Banks serving on Federal Open Market Cannittee.
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
51
EXCERPTS FROM
PAUL A. VOLCKER
BIOGRAPHY
Paul A. Volcker, president and chief executive officer of the Federal
Reserve Bank of New York, joined the bank on August 1, 1975, completing the
unexpired portion of a five-year tern of his predecessor, Alfred Hayes.
He was
appointed to a full five-year term on March 1, 1976.
Before joining the New York Fed, Mr. Volcker, 51, pursued a varied
career in public service and banking.
From 1969 to 1974, he was under secretary of the Treasury for monetary
affairs.
His five-and-a-half-year tenure under three secretaries, covered a
period of rapid change in international and domestic financial affairs.
Mr. Volcker played a central role in developing international financial
initiatives by the United States during the transition from fixed to floating
exchange rates and acted as the principal U.S. negotiator throughout the period.
A number of important innovations were introduced during Mr. Volcker's
term of office in the area of domestic financing, including the auctioning of
Treasury notes and bonds and greater centralization of U.S. agency borrowing.
After leaving the Treasury, Mr. Volcker became senior fellow at the
Woodrow Wilson School of Public and International Affairs at Princeton University
for the academic year 1974 to 1975.
Previously, Mr. Volcker served in a variety of positions with the
Treasury, Chase Manhattan Bank, and the New York Fed.
His experience with the New York Fed began in the summers of 1949 and
1950, when Mr. Volcker worked as a research assistant in the research department.
In 1952, he returned to the New York Fed as an economist in the research department
and, in 1955, he became a special assistant in the securities department.
Two
years later, he resigned to become a financial economist at Chase Manhattan Bank.
52
2
In 1962, he joined the Treasury as director of the Office of Financial
Analysis and, in 1963, was appointed deputy under secretary for monetary affairs.
In 1965, he rejoined Chase Manhattan as vice president and director of forward
planning.
As under secretary of the Treasury, Mr. Volcker also served as a member
of the board of the Overseas Private Investment Corp. and the Federal National
Mortgage Association.
He is currently a. member of the board of directors of the Council on
Foreign Relations, the American Council on Germany and the American Friends of
the London School of Economics.
He also serves on the board of trustees of the
Rockefeller Foundation and the American National Red Cross Endowment Fund.
Among various awards in the course of his career, he has been named as
one of the 10 Outstanding Young Men in Government; received the Alexander Hamilton
award, the highest award given officials of the Treasury Department, and received
the first William F. Butler award from the New York Chapter of the National
Association of Business Economists.
Mr. Volcker earned a master of arts degree in political economy and
government from the Harvard University Graduate School of Public Administration
in 1951 and a bachelor of arts degree, summa cum laude, from Princeton in 1949.
From 1951 to 1952, he was a Rotary Foundation Fellow at the London School of
Economics.
He is married, has two children and lives in Manhattan.
September 1978
53
ANSWERS TO
QUESTIONS FOR THE RECORD FOR MR. VOLCKER
FROM SENATOR PROXHIRE
1.
Has the White House counsel reviewed your financial statement
for any potential conflicts of interest?
The White House counsel has reviewed my financial
statement
for any potential conflicts of interests, and I am informed such
counsel has concluded no actual or potential conflicts of interest
exist.
2.
If you are confirmed in the position as a member of the Board of
Governors of the Federal Reserve System, will you agree to
appear before the Committee or any other appropriate Committee
of the Congress and testify without reservation?
If confirmed in the position as a member and Chairman of
the Board of Governors of the Federal Reserve System, I agree to appear
before the Senate Committee on Banking, Housing, and Urban Affairs or
any other appropriate committee of the Congress and to testify without
reservation.
3.
Do you favor reserve requirements on repurchase agreements?
Do you see the need for reserve requirements on Eurocurrencies
imposed not only by the Fed, but also by foreign central banks?
Many bankers have complained about the rapid growth of the
commercial paper market.
Do you see the need for the Fed to
have some control over the expansion of the commercial paper
market?
Repurchase agreements entered into between a bank and its
customer enable the bank to expand its loans and investments while
providing the customer with a highly liquid investment that can
readily substitute for demand or short-term time deposits.
Deposits
of banks are, of course, subject to reserve requirements set by the
Federal Reserve, and this facilitates control over money supply
bank credit.
Because repurchase agreements are substitutable
for
and
54
2
deposits from the standpoint of some depositors, and are at least
a partial substitute for deposits from the standpoint of the issuing
bank, there is a clear argument for subjecting them to reserve
requirements on grounds of both monetary control and equity.
Indeed, repurchase agreements on all bank loans and investments
except U.S. Government and Federal Agency securities have been
subject to reserve requirements for some time.
Whether reserve requirements should in practice be extended
as well to RP'son U.S. Government and related securities would
depend on weighing the benefits for monetary control against the
possible costs to the public from reducing the attractiveness of
U.S. Government securities to banks and from placing banks who deal
in those securities at a disadvantage relative to .nonbanks.
At
present, the question is further complicated by the differential
treatment of member and nonmember banks.
As you know, the Board has recently asked for public
pomment on such a reserve requirement proposal.
While heretofore
I have believed the costs of extending reserves to RP's outweighed
the benefits, at least so long as the membership issue is unresolved,
I will of course want to review the situation in the light of public
comment on recent proposals, the changing economic situation, and
legislative action with respect to reserve
requirements.
Reserve requirements on Eurocurrencies are one among a
number of i s s u e s — i n c l u d i n g prudential measures, such as monitoring
55
2
liquidity and capital ratios, and better statistical
reporting—now
under study within the Federal Reserve and elsewhere.
So far, I doubt
the Eurocurrency markets have been a major source of inflationary
pressure or currency instability independent of other factors at
work, including national policies, mainly because the Euro-markets
are closely linked to domestic markets.
However, the studies under-
way should throw further light on that issue.
Moreover, I do
believe competitive imbalances between the Euro-markets and national
markets may artificially speed the growth of the former, with
potentially undesirable consequences for monetary control and international financial stability.
Whether or not reserve
requirements
are a practical and useful means of dealing with the competitive
imbalances and potential control issues will depend in major part
on the form of domestic legislation on reserve requirements and the
attitudes and policies of other countries concerned, since the
effectiveness of reserve requirements would depend upon action by
a sizable number of countries.
I would also note, reserve require-
ments have to be judged against the constructive role thus far played
by the Euro-markets in intermediating between borrowers and lenders
in a period of large worldwide payments imbalances.
With regard to the commercial paper market, I do not
anticipate the need for the Federal Reserve to have direct control
over its expansion.
Interest rates in that market are fairly closely
related to the Federal funds r a t e — t h e interest rate most directly
affected by monetary policy operations--and
in that way Federal
56
4
Reserve policy indirectly influences the commercial paper market.
It should be noted, however, that, as in the case of Euro-dollars,
the expansion of the commercial paper market has been influenced
by reserve requirements on large short-term time deposits offered
by banks, which have made it costly for banks to raise funds in the
maturity areas favored by commercial paper issues.
Consequently,
there is an incentive to channel a larger portion of funds outside
the banking system which is under the direct surveillance and control
of the monetary authorities.
Over the longer run, it does seem to me
structurally desirable that banks be able to compete on more equal
terms, thereby spreading market risk over a broader range of lenders.
Consequently, the issue is raised of the nature of reserve requirements
(if any) on time deposits of banks because no comparable
requirement
is placed on the commercial paper market.
4'.
Starting in 1975, about the time you became President of the
New York Fed, the Federal Reserve has reported its plans and
objectives for monetary policy to the Congress on a regular
basis. The reporting requirements are now part of the Federal
Reserve Act. Although they have gone through some considerable
change, the requirements still focus on target ranges for the
monetary and credit aggregates.
The most recent report contained
an economic forecast which represented a consensus of the Board,
an addition to the reporting process that I think is helpful
and important and which hopefully will be continued. How do
you view the monetary policy oversight process?
Do you have
any suggestions for improving the flow of information on monetary
policy?
The monetary policy oversight process has, from my previous
vantage point, worked well.
The emphasis on projected "targets" or
"growth ranges" for the monetary aggregates as a means of facilitating
57
5
communication and policy intentions, has seemed to me particularly
useful, and that innovation of course owes much to your Committee.
I have no spe.cific suggestions for improving the flow of information
on monetary policy at this time, but I do look forward to working closely
with your Committee in this area.
While I have some concern that undue
emphasis on economic forecasts may inadvertently suggest a precision in
assessments of the outlook that is not p o s s i b l e — a n d may occasionally
be counterproductive in terms of developing policies that take
suitable account of inevitable u n c e r t a i n t i e s — I am confident that
as we gain experience, further improvement can be made in communication
and the policy process.
58
VIRGINIA TAXPAYERS ASSOCIATION
LYNCHBURG, V A .
24505
Statement by Kenneth White, President
Opposing Confirmation of Paul A. Volcker as Federal Reserve Board Chairman
before
U. S. Senate Committee on Banking, Housing, and Urban Affairs
July 30, 1979
S/Ir. Chairman, my name is Kenneth white and I am President of the
Virginia Taxpayers Association, a federation of local taxpayer organizations
and individuals from all 10 congressional districts in Virginia.
The
Virginia Taxpayers Association was organized six years ago as a broadbased taxpayer organization working to reduce government taxes and spending
at all levels of government -- local, state and federal -- and to preserve
the freedom of the individual American citizen.
The VTA has become widely
known not only across Virginia but among followers of the taxpayer
movement all over the United States, and reports of our activities have
been carried in publications printed in many other states.
Cn June 21
of this year the Virginia Taxpayers Association presented testimony before
the Senate Judiciary Committee regarding the cost of a proposed federal
paid holiday on Martin Luther King's birthday January 15, and following
our appearance we were publicly commended for our testimony by Senator
Strom Thurmond, the acting committee chairman.
Since the passage of
Proposition 13 in California last year, we have taken the lead in Virginia
in working for similar legislation and for the right of initiative and
referendum in our state, as already exists in 23 other states, and our
positions have received comment and discussion in several newspaper
- 1 -
59
editorials.
A Lynchburg, Va. News lead editorial specifically favoring
our VTA position on the Panama Canal treaty was reprinted in the
Congressional Record July 18, 1978.
We regularly testify a number of
times each year before the Virginia General Assembly, we have assisted
in the continuing defeat of the so-called Equal Rights Amendment in the
Virginia legislature, and we have appeared on television programs across
the state in a leadership role on the subject of state general obligation
bonds, among many other activities.
We submit that we are a recognized
spokesman for the fast-growing grass-roots taxpayer movement in this
country, and that our views are widely shared and supported by millions
of American taxpayers.
The appointment of Paul A. Volcker to serve as Chairman of the
Federal Reserve Board is not just a personnel question, it is also a
financial policy and tax question.
An oft-quoted statement which I be'lieve
all of the members of this committee will agree with is that "inflation
is the cruelest tax of all."
Inflation certainly is a tax, and like other
taxes, it can be said to be made in Washington.
As you all know, inflation
is the number one problem for most Americans today.
Parenthetically, just
this past week, on July 26, the Virginia Taxpayers Association encountered
an additional reason to become concerned about inflation, when Governor
John Dalton announced that the soaring inflationary spiral may force him
to recommend a bigger-than-usual wage boost next year for some 80,000
state employees, which of course will require increased tax payments from
Virginia taxpayers.
We are firmly convinced there can be no informed consideration of
inflation without covering the all-important role of the Federal Reserve
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System, which Mr. Volcker has "been proposed as the head of.. The president
of the Federal Reserve Bank of St. Louis, Darryl R. Francis, admitted
on May 22, 1972* in a speech in Minneapolis that the growth of the money
supply, which the Federal Reserve supposedly regulates, "has been the
primary cause of the acceleration in the average rate of inflation."
More bluntly, the noted author and financial analyst, Dr. Martin
Larson, in his 1975 book, "The Federal Reserve and Our Manipulated Dollar",
said of the Federal Reserves
"
by financing the huge deficits of the
federal government and emitting a flood of fiat currency, it has created
and continues to create irrepressible pressures for inflation, which,
unless curbed and terminated, will bring this nation to economic ruin."
So the question before this committee today is whether the
President's nominee, Mr. Volcker, will in fact do anything to prevent the
Federal Reserve from continuing to create these irrepressible and
intolerable pressures for inflation, and we submit the record shows that
he will not, and therefore should not be confirmed as Chairman of the
Federal Reserve Board.
The Associated Press news story of July 26 announcing Mr. Volcker's
nomination stated thati
"While at Treasury, he helped to engineer the
two formal devaluations of the U. S. dollar in 1971 and 1973......."
In other words, the Associated Press is openly telling us that Mr. Volcker
as Undersecretary of the Treasury for Monetary Affairs deliberately helped
to destroy the value of our dollar, to increase our taxes,, rob us of our
property and inevitably increase the price of almost everything we buy.
And yet this is the man that is now being considered to head the Federal
Reserve Board!
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Incidentally, this same Associated Press news story also saidi
"The Federal Reserve Board chairman is sometimes referred to as the
second most important person in government after the President, because
of the considerable influence the board has over the nation's economy,
through its manipulation of interest rates."
This committee must be informed in no uncertain terms that the
arrangements under which this nomination is being considered by Congress
are absolutely intolerable.
To schedule a brief confirmation hearing for
a position as important as this only three working days after the
nomination was announced gives most concerned citizens and organizations
totally inadequate time to research the background and qualifications of
the appointee and present this essential information to the reviewing
committee.
Moreover, to take the position, as this committee openly has,
that "we're going to push this confirmation through since there is no
opposition"
when the committee schedule has been designed to quickly
prevent emergence of any opposition
is a clear indication that this
committee realizes there are skeletons in the Federal Reserve and Paul
Volcker closets which the committee does not want to uncover, or at least
does not want too many people to know about.
The Virginia Taxpayers Association reminds this committee that the
Chairman of the Federal Reserve Board is not simply a member of the
President's Cabinet whom the President is supposedly entitled to choose
on some pretended basis of "compatibility" between the President and one
of his assistants.
Instead, the Federal Reserve Board is a creation of Congress itself
although the Virginia Taxpayers Association along with many other
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Americans is satisfied this creation is nowhere sanctioned by the
Constitution
and is supposed to be entirely independent of the
Executive Branch.
Congress alone therefore has the final responsibility
of deciding who the Federal Reserve Board Chairman shall be.
The showing
to date that Congress does not want to take this immense responsibility
seriously, at a time when members of Congress themselves assuredly know
of the intimate connection between the Federal Reserve Board Chairman and
inflation, tells the public unmistakably two things*
(1) that Congress
has no intention of doing anything basic whatsoever to really solve the
horrendous inflation situation facing Americans todayi and (2) that
Congress wants to continue the Federal Reserve inflation cover-up.
It was the Virginia Taxpayers Association that originated the
statementi
"Taxpayers are the boss", which was carried on the national
Associated Press wire last year and shown on network television following
the success of Proposition 13, and we believe we are competent to advise
this committee that if Congress continues to demonstrate unwillingness to
do its duty in this all-important area of inflation, the five or six million
Americans who are now refusing to file income tax returns for one reason
or another or to pay income taxes will steadily increase in number until
they become a formidable political force.
If this is what you gentlemen
want, you may perhaps continue to ignore the taxpayer movement, but we
do not recommend such a course.
Getting back to Mr. Volcker, it was he who was quoted as saying
in Paris July 2k, 1969»
"Well we got this thing launched", referring to
the Special Drawing Rights gimmick, which was described by the Wall Street
Journal on October 7, 1969 in these words»
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most of the world's nations to agree to create a new reserve asset
literally out of thin air......Paper gold is essentially a bookkeeping
device, not a circulating medium", and again by the Wall Street Journal
November 18, 19691
"Tricky little bookkeeping arrangement".
This
"tricky little paper gold arrangement" of Mr. Volcker's was designed to
back up what the January 1979 Reader's Digest describes as our "phony
money", and what the Virginia Taxpayers Association described as
"really counterfeit currency" in our Senate Judiciary Committee testimony
for which we were commended June 21.
Or, as the new 1979 book,
"Tax Target 1 Washington" by Gary Allen, with introduction by Howard Jarvis,
puts it 1
"You thought you were carrying money around in your pocket?
Actually, it is the unsecured and unredeemable debt of the government.
We have switched from money to debt as a medium of exchange!"
And so if
Americans don't like our present "phony money" created by the Federal
Reservw System
and the recent increased flight to real gold at $307
an ounce proves that they don't
Mr. Volcker can apparently be counted
upon to create some different kind of "phony money" to back it up
if this is what Congress considers "financial statesmanship".
Mr. Volcker
as president of the Federal Reserve Bank of New York seems to fit the
pattern discussed in the St. Louis "Fed" Review of August, 1971 on page 2kx
"Those individuals who rise in central banks are people who can impress
other people that they can keep their heads no matter what — - and no
matter whether it is true or not."
It appears clear to us that a chief task of the Chairman of the
Federal Reserve Board ought to be not only to stop such record increases
in the money supply as occurred in the week ending June 6, but to plan for
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an orderly phasing out of unredeemable Federal Reserve Notes and an
orderly phasing in of a constitutional currency in which Americans and
all the rest of the world could justifiably have confidence.
While
Mr. Volcker undoubtedly has a great deal of experience, unfortunately
his kind of experience is the opposite of what is needed today, and
despite his recent "conservative rhetoric" there is no real evidence in
his record that he is interested in the goal of a constitutional currency.
of the kind
We need instead the competence, ability and true statesmanship/displayed
by the late renowned Louis T. McFadden, a successful Pennsylvania banker
and for 12 years chairman of the U. S, House of Representatives Committee
on Banking and Currency, whose historic and penetrating analysis of the
Federal Reserve System on the floor of the House on June 10, 1932 has been
reprinted many times.
The Associated Press story that was referred to earlier says that
the 1971 and 1973 devaluations which Mr. Volcker helped to engineer were
"forced on the United States because of its weakening position in the
international economy."
Members of this committee are well aware that
instead of being "forced on the United States", the basic 1971 monetary
situation was in fact brought about by the Federal Reserve System, by
Kr, Volcker and the other senior officials in the Treasury Department, and
by the reckless deficit spending of Congress.
What taxpayers believe they are entitled to know is the connection
between the devaluation which Mr. Volcker helped to engineer, and which
was officially announced by President Nixon August 15, 1971. and the top
secret Bilderberg Conference which had been held in Woodstock, Vermont
April 22 to 25 of that year, and which had been hosted by Mr. Volcker's
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backer and former boss at the Chase Manhattan Bank, David Rockefeller.
The Boston Globe of April 23, 1971 said that particular Bilderberg
Conference was also attended by then Presidential Assistant Henry A.
Kissinger and Senator Adlai Stevenson 3rd (who is a member of this Senate
Committee on Banking, Housing, and Urban Affairs), and other sources listed
as additional attendees Rep. Henry S. Reuss, now chairman of the House
Committee on Banking, Finance and Urban Affairs, Prime Minister Trudeau
of Canada, Baron Sdmond de Rothschild of France, and representatives of
England, Germany, Italy, Switzerland, 3elgium, Norway, Sweden, Denmark,
the Netherlands, Finland and Turkey.
Prince Bernhard of the Netherlands,
official chairman of the secret conference, would only reveal publicly that
the prime topic of the conference was "the possibility of a change of the
American role in the world and its consequences", and an aide to Rep. Peter
H. B. Frelinghuysen, "of New Jersey, who also attended, admitted that
"international and monetary policies" were discussed.
The logical inference
is that in helping to engineer the 1971 devaluation, Mr. Volcker as
Undersecretary of the Treasury was in fact carrying out decisions made at
the secret and privately sponsored Bilderberg Conference, and we submit
that, in view of the importance of the many persons who attended that
conference, this conclusion would be quite difficult to refute without
detailed testimony on the witness stand of a number of those who attended
the conference.
We know of no section of the Constitution which authorizes
U. S. government officials to take instructions from private organizations,
and we believe this alone would be sufficient to disqualify Mr. Volcker
from Senate confirmation to any post requiring such confirmation.
Another serious subject requiring further consideration is the
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glaring confusion and lack of understanding in the area of monetary
matters on the part of the President who appointed Mr. Volcker, and whose
judgment in such appointments is therefore highly suspect.
This confusion
and lack of understanding is clearly demonstrated by the President's
appointment of G. William Miller to be Secretary of the Treasury, with
whom the President would presumably be "compatible".
Mr. Miller's record
as Chairman of the Federal Reserve Board shows that instead of being
knowledgeable, competent and correct in his policies, he has actually
been an outstanding failure, since the inflation which he as Federal
Reserve Chairman is supposed to minimize has in reality skyrocketed to
record levels during his term of office.
We in the Virginia Taxpayers
Association are sufficiently informed to know that inflation is not just
"created by the OPEC nations" but actually comes from Washington, and that
whenever the U. S. money supply is increased as fast as it has been,
thereby lowering the value of all so-called "dollars", any foreign nation
selling oil to the U. S. must continually in its own self defense raise
the price of oil as measured by these ever-depreciating "dollars".
Mr. Miller's recent "conservative-sounding" warnings about the risks of
inflation, we believe, are largely designed to mask and cover up his own
record of failure to slow down inflation.
And if the President wants as
his own Secretary of the Treasury such a conspicuous failure as a monetary
and financial leader, what else may we reasonably expect from his appointment
of Mr. Volcker to be Federal Reserve Chairman?
It should further be noted
that the Associated Press story announcing the Volcker appointment saysi
"..,.he has had a ma.ior influence over economic policy for some time"
(emphasis added).
Can any member of this committee think of any major
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lasting success in economic policy which the United States has enjoyed
in recent years, and for which Mr. Volcker might be responsible?
On the
contrary, we submit that it appears to most American taxpayers and
consumers that economic conditions have pretty consistently been going
down hill.
There is neither time nor space here to review Mr. Volcker's
astonishingly incorrect prediction early in this decade that the U. S.
"will accept a new international currency by the summer of 1973"» his
reported covert commitment to Japanese officials in 1973 not to invoke the
Anti-Dumping Act, as had been threatened, against the influx of cheap
Japanese imports, at a time when the U. S. trade deficit with Japan was
already running at more than $4 billion a yean his membership in the
internationalist one-world Council on Foreign Relations; or his connection
as a special consultant to the Trilateral Commission, about which the
label "international conspiracy" has been used so many times that U. S. News
& World Report among many others sought to deny that any conspiracy existed.
Present "approved terminology" regarding the privately organized
Trilateral Commission
founded by David Rockefeller and early including
Jimmy Carter as one of its members
as applied in an Associated Press
news story of July 26, 1979» is merely that "Carter has used (the commission)
as a recruiting ground for his administration."
In summary, the Virginia Taxpayers Association believes that,
despite the encomiums of praise heaped on this nominee by all "establishment"
sources, there is more than enough evidence to show that Mr. Volcker's
"experience" will not in fact be beneficial to the United States or
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contribute to the strength of its monetary system, that on the contrary
inflation can be expected to accelerate at a dangerous rate under his
administration, and that his nomination as Chairman of the Federal Reserve
Board should therefore be rejected by the United States Senate,
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