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For release on delivery
November 10, 1966
Approximately 7:00 P.M., EST


Remarks of
Board of Governors
of the
Federal Reserve System
at the
Joint Meeting of the Buffalo Chapters
of the
New York State Society of
Certified Public Accountants
and of the
Robert Morris Associates

Buffalo, New York
November 10, 1966

Possible topics for a joint meeting of bankers and
accountants are innumerable.

Large unanswered questions mark the

area in which your fields overlap.

One, about which I have felt

strongly for many years, has this year become more pertinent than

This is the need to reform our national budget on a more

rational basis in order to improve the control and operations of
Federal credit programs.
As bankers and accountants you preach the idea that
budgeting and accounting systems should furnish the necessary
information for making the best possible decisions.


against such a standard, budget treatment of the Federal credit
programs seems to fall short.
A move toward rationalization of this area through a
reduction in the amount of proliferation was attempted by this year's
Participation Sales Act.
not go far enough.
part of the problem.

This was a good idea, but to my mind it did

As we shall see, I believe it dealt with only one
Because possible improvements in cost and

efficiency are great, an active debate looking toward further reform
would be most worthwhile.
Change will not be easy because it conflicts with many
political shibboleths plus entrenched procedures. However, many
advances are possible and should be considered.

Certainly the idea


of a central Federal Credit management Corporation, as suggested
by both Under Secretaries of the Treasury, makes sense.


however, an even better and more direct result might be achieved
by a restructuring of our Federal budget and debt concepts.


credit programs could be gathered into a separate section of the

Decisions as to what amount of these programs should be

financed through guarantees and grant contracts, what through debt
creation, and what through taxes should be made on the basis of
current economic requirements and not on the happenstance of outmoded
accounting methods.

Such a separate credit sector is common in

many foreign as well as state and local budgets.

It is frequently

referred to as a "below-the-line" or credit budget.

The Credit Programs
Few recognize how all-pervasive Federal credit programs are.
While figures are not exact, more than 75 different programs are
scattered among almost all governmental departments and 10 or more
independent offices and agencies as well.

The variety of arrange­

ments for these programs is nearly as great.
partial guarantees of loans.

Others lend Government funds which

are then recouped through resale operations.
money borrowed from the Treasury.

Still others lend

Finally, some agencies lend

money they borrow themselves in the market.

Some include full or




25 billion of direct or guaranteed loans are

About a quarter of these are direct, while the rest

are insured or guaranteed.

The largest share of the money goes

for housing and community development programs: but other signifi­
cant areas include agriculture, utilities and transportation,
international activities, businesses, students, disaster areas,
hospitals, schools, and many more.

I find the full list of credit

programs a fascinating reflection of the growing pressures and needs
of our society.
There are strong forces which have led to the use of
credit rather than the traditional method of appropriations for these

Reasons for establishing the credit-type programs include:
Gaps in the credit market which private lenders are
not yet ready to fill.
Risks arising from its own actions which only the
Government can underwrite.
Subsidies for social reasons where the difference
between private and Government interest rates are
sufficient to make the program successful.
Aircraft, railroad, and ship loans where potential
losses to individuals may be high.
Programs aimed at insulating individuals and firms
from normal market fluctuations in the availability
of credit. FiflA, FHLBB, and many agricultural programs
are of this type.
In still other programs subsidies are increased by
lending at less than the Government's borrowing


Finally, there are credit aids for many desirable
causes, such as that of colleges or local governments
which have large capital needs, but insufficient credit to
borrow on their own securities.
An examination of modern trends shows a rapid increase in
the types of programs for which credit assistance makes sense.


undertakings as halting pollution, rebuilding our cities, improving
urban and inter-urban transportation, expanding our schools and colleges,
taking care of our aged in hospitals or homes, are all growing and
their capital needs are huge.
Under existing programs, gross loans made or guaranteed run
between $15 and $20 billion a year.

Earlier estimates indicated that

actual and contingent liabilities under these programs would soon
equal 50 per cent or more of the public debt.

With the heavy demands

facing the country, these estimates will soon be exceeded.

The Present Procedures
The present system of budgeting treats existing programs
in at least four different ways.

Guarantees and insurance of loans

are not counted as part of any of the regular budgets or of the public

Loans made from funds of certain agencies show up in the cash

budget, but not in the administrative budget or the public debt.
Under other programs such as some of those of the Export-Import Bank,
the Small Business Administration, and FNHA, loans may appear as
normal expenditures in one year, while the later sale of the resulting
loan-assets (or participations in them) may be recorded as negative

expenditures in subsequent budgets.

Still other programs are fully

reflected as current expenditures even though they result in the
Government receiving back mortgages, notes, or similar evidence of
Each Federal credit program must be authorized by Congress.
Programs are spread through many different parts of the budget in many

In most cases, annual administrative expenses must be voted.

On the other hand, the amount of loans made in a year, and the form
they take, normally is not subject to annual action.

In some instances,

once an original authorization to borrow or guarantee has been made,
operations can continue without further congressional action, with
authorizations expanding automatically under flexible formulas.


other instances, annual obligations must be voted.
While everyone agrees that some logical reasons underlie the
spread of these programs, most observers conclude that budget peculiar­
ities have been a major factor in explaining the form of their growth.
Flexibility (or less charitably lack of control) in budget practice
has been a main cause of their proliferation.
Under the happenstance of our traditional accounting methods,
a credit program may have a differential and frequently much smaller
impact on the current administrative budget and the public debt than

TJ For a most detailed review, cf,, A Study of Federal Credit Programs,
Subcommittee on Domestic Finance of the House Committee on Banking and
Currency, 88th Congress, 2nd S. (Government Printing Office, February


does a similar program of direct expenditure or grant.

Thus most

proponents of action feel their prospects for obtaining successful
executive and congressional approval are improved by shaping it to
fall into the twilight budgetary zone occupied by the credit programs.
The difference in budget treatment may or may not be logical.
Under most of these programs valuable assets are being created.
Government receives a claim for future payments.


Any private

accountant would insist that such claims be reflected in a firm's
statement and in some cases the procedures do in fact come close to
those that would be followed in a private firm.

But in other cases

no note whatsoever is taken of the additional asset.

The Costs of a Poor Information System
Our present procedures seem to result in a budget and
accounting system that lacks rationality, and, in addition, is hap­
hazard and costly.

In consequence, Government money is wasted in

unnecessary interest and administrative costs.

More importantly,

Congress and the President are unable to exercise control over major
governmental programs.

Furthermore, as we have seen this year,

serious disturbances can be created in the money and credit markets.
Higher costs. The fact of increased costs is easy to find.
Each program basically sells equivalent goods— a Federal guarantee
that a debt will be paid.

However, this same commodity is marketed

in many forms and by varying instruments.

Some are sold in minute


quantitiess others in large ones.
extremely inefficient.


This diffusion and diversity is

It is costly to lenders to have to study all

the features of these different instruments in order to price them.
Numerous competing and conflicting administrative and
marketing staffs exist.
identical buyers.

Some lack needed skills,

¡"any call on

The overlapping doesn't create expanded markets.

The smaller the issue and the more complicated its terms, the more
likely it is that it will be distributed primarily to the same small
number of large, sophisticated investors but at a higher cost to the

Equivalent efforts, if unified, could offer securities

shaped with greater expertise to a broader range of markets.
Over and above waste in administrative and private lender
costs, the Federal Government has paid from one-eighth to threequarters of a per cent per year additional in interest on these issues
as compared to the price of U. S. Treasury borrowings.
This year's Participation Sales Act was a first attempt
toward avoiding some of this proliferation and solving some of these
problems, but I believe a still more basic reform is required.
Lack of control. The problem of coordination and control
arises from the conflicts in the budget system.

It is of the exact

type3 I feel certain, each of you warns your clients against.


is no single place where anyone can get an estimate of what will occur
as a result of the expenditures aided by Federal credit.

Some may


affect each of our three different budgets, but each may be handled
in rather unusual and peculiar ways.
Because of revolving funds, continuing authorizations,
independent rights to market debt, and other factors, it is most
difficult to review the current status of programs and to evaluate
them in the light of new conditions.
This year has shown how sensitive the economy and credit
structure are to minor shifts in expenditures.

The movements in

spending under credit programs have significant impacts on the Govern­
ment's basic goals as well as on its stabilization efforts.

To make

certain that credit-induced expenditures aid and do not hinder our
over-all goals, more knowledge is needed.
As a minimum Congress and the President require accounting
procedures which will enable them to compare the expected gains as
well as the economic impacts from each credit program.

An annual pro­

gram and budget review would enable them to estimate more clearly the
expenditures to be expected under existing authorizations.

They could

more easily weigh the economic and fiscal thrusts of these programs
and compare them with those planned for the rest of the Government.
Taxing or borrowing. If all credit programs were gathered
in one places it would be much simpler to measure their impact and
to determine the proper share to be financed through taxes or through

Little logic exists at the present.


It is the possibility of avoiding budgetary control and
fights over debt limits that causes so many proposals to be financed
through indirect credit means.

Sometimes, but not always, such end-

runs around the budget serve a useful purpose.

However, by attempting

to relate an expenditure's form in the budget to the manner in which
it is to be financed, we have gotten ourselves up a blind alley.


is the costly path reached by stressing the ever-balanced budget

It makes it difficult to get either surpluses or deficits

when we need them.

Too much emphasis has been placed on form rather

than content.
Wouldn't we be much better off if we faced up to our problem

These programs are different from other expenditures because

it is easier to measure the assets received.

This does not mean,

however, that they should be 100 per cent debt financed.

The proper

amount to be covered by taxes can only be measured as part of a
complete budget document.

I doubt that any of you would be willing

to advise your clients how much to borrow based on his purchases or
sales of one type of asset alone.

You would properly insist on examining

his entire expenditure and revenue program.
Debt management 5r» monetary policy. The present system
also can cause serious problems in our money markets.
has the basic responsibility for debt management.

The Treasury

Yet 20 or 30

treasuries in other departments or agencies are also given the
responsibility for issuing securities.

Many can proceed independently


of the Treasury.

In some cases, the Treasury's advice must be

followed; in others consultation is required, but no more than that;
in still others independence is theoretically complete.
In September, because of the problems created by this
situation, the President assumed greater responsibility for agency
securities in order to minimize their interference with national
The monetary operations of the Federal Reserve also suffer
under the present system.

The coordination of debt management and

monetary policy is made far more difficult by the proliferation of
debt instruments and debt managers.
Under recent Congressional action, the Federal can operate
in all obligations issued or fully guaranteed by a United States

Numerous problems arise, however.

Under the existing diffuse

procedures, the blocks of securities available for purchase are often
small and not readily tradeable.

Because the markets for these

securities are thin, any activity by the Federal Reserve in these
securities may cause extremely uneven jumps or market price reactions.
In addition, with so many different agencies involved, issues are
constantly entering the market.

Any action to buy one, as opposed to

another, might raise questions of favoritism.

Uhile the timing of

monetary action and Treasury offerings are carefully coordinated, like
coordination is nearly impossible with respect to the constant
appearance of new agency issues in the market.

A Federal Credit Management Corporation
As we have seen, at least three elements seem to be missing
from the present situation:
(1) The Government lacks a unified approach as a
borrower to the money and debt markets.
(2) There is no single sector of the budget which
contains the myriad of programs, and which
shows the form of the commitments being assumed
by the Government, as well as present and
potential costs.
(3) Me have no basic understanding and theory of
the role for Federal credit programs in the
whole picture of the budget and economic activity.
The first two elements could be furnished either by a new
"Federal Credit Hanagement Corporation," or by a more direct move to
a reshaped budget with the Treasury assuming the same duties and
responsibilities which the agency would otherwise perform.
The Credit Management Corporation or the Treasury would
assume the existing authorizations to borrow, sell participations,
grant guarantees, etc.
the required funds.

The central credit agency would borrow all

These funds could be raised through a single

agency series, a separately designated set of Treasury obligations,
or they could be simply an expansion of existing Treasury operations.
In any case, necessary action would be taken to insure that the debts
were full-faith obligations of the Federal Government.

It would be

expected that they would sell under the same terms and conditions and
have the same relationship to monetary operations as existing Treasury


While the raising of funds and the relationships to the
money markets would be centralized, this would not be true of the
operations of the separate programs.
as at the present.

They could continue to function

Their relationship to the Treasury or the agency

would be similar to that of the other parts of the Government to the
Treasury now.

They viould receive their funds as a result of congres­

sional action and need not even be concerned with how and when their
monies were raised.
Congress would continue to authorize the form, nature, new
obligations, and similar factors for each program separately.


agency's authorization could include the right to borrow from the
central agency as well as the terms, interest rate, and amount of
subsidies involved.

The cost of each program would be made explicit.

The amount to be charged each borrower would be set while the cost to
be subsidized would be appropriated to the program agency so that it
could repay the central credit agency.
In those cases where loan guarantees serve a logical need
and are not primarily a method of avoiding the present constraints
of the administrative budget and the public debt ceiling, they should
be continued.

These would mainly be those cases where the private

lender in reality acts as a co-insurer or serves a major underwriting
or servicing function.



Either of these proposals could lead to a careful re­
examination of our existing budget operations and doctrine.


advantage some might see in the Federal Credit Management Corporation
would be that it would not break with existing traditions.
Corporation could be treated like many existing ones.


It would have

as the security behind its borrowing, the various loans, contracts,
or other assets which now stand behind the 75 or more separate

In addition, it would have a direct governmental guarantee.
No questions would have to be raised concerning the relation­

ship of existing programs to the logic of the debt ceiling.

The need

to list the FCilP operations with respect to each of the other programs
might give a central place where a total view of the various programs
could be gained, but even this would not be necessary.

The present

assortment of ad hoc financing and budgetary arrangements could continué.
In contrast, showing all Federal credit programs as part
of the budget, but in a separate unified form, would require a complete
rethinking of the logic of our existing system.

Authorizations to

cover all the programs either through taxes, guarantees, or Treasury
borrowing would be in one place.

The real costs of programs, whether

from current taxes, future commitments, or lending of the Government's
name, could be compared.

Decisions could be made with respect to

this group of programs as a whole not simply on an individual basis.



Obviously, I believe a re-examination of our present system
to be most worthwhile.

There is ample room for progress.


quicker v e get down to examining the potential gains and losses from
a change the better off we will be.
The national budget system envisaged here might avoid many
of the disadvantages of present operations:
Congress would be able to weigh the needs of the
credit sector more easily both with respect ot its
individual components and in relation to other
parts of the budget.
The ability to measure the economic impact of
Federal action would be improved.
The administrative costs as well as interest costs
to the Government would be less.
Technical problems of debt management and monetary
policy would be simplified.
Experience shows that budgeting reform at any level is
extremely difficult.

The history of accounting and granting of credit

shows how glacially we seem to move at times.
progress does occur.

On the other hand,

Your presence here testifies to the interest in

better information systems.

Ue can hope for an enlightened debate

that will bring us toward a more rational solution to these problems.