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Arthur F. Burns Papers
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The original documents are located in Box B1, folder "American Bankers Association (6)"
of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
WILLIS ALEXANDER
BOARD OF THE Mach! 1974
OF
FEDERAL RESERVE SYSTEM
1974 MAR -4 PM 1: 19
OFFICE We OF RECEIVED thought THE CHAIRMAN you might
find these of interest.
Will alyandr
FORD
GERALD August R.
THE AMERICAN BANKERS ASSOCIATION
SPEECH HIGHLIGHTS
Housing Finance and the Financial Institutions Act of 1973
Housing faces serious problems again this year, as it has in the
past and will again in the future in periods of inflation and rapidly rising
interest rates -- unless the mechanism for encouraging flows of funds into
the residential mortgage market is improved. The program outlined in the
Financial Institutions Act would be more efficient in generating such flows.
Of course, the best way to help housing is through the establishment
and maintenance of a stable economy. We have not reached that millenium yet,
so we must consider the alternatives.
The best alternative can be identified through a review of the
operations of our economic system -- and a recognition that housing is only
one part of a whole. Housing must compete for funds in the money market with
all other sectors of the economy. If we want to ensure that funds are
available for housing, we must take that competition into consideration.
The Financial Institutions Act looks at housing finance realistically
as a part of the general money market. It seeks to generate funds for housing
from the entire market, rather than from one specialized, restricted area.
When the market does not provide a large enough flow of funds, it seeks to
generate additional money by inducements extended to all, rather than to a
single source of funds. This would provide a steadier, more reliable flow
of funds than the present system.
The FIA recognizes the fact that the primary competition for funds
is not between banks and thrift institutions. It is between regulated
financial institutions and the unregulated portion of the money market. The
FIA attempts to broaden the base for housing finance by offering an incentive
-- a tax credit -- to all financial institutions to invest in it.
Such a system of incentives can provide any desired flow funds by
adjusting the size of the incentive offered. It would free the housing
industry from an unfortunate dependency on one type of financial institution
for long-term mortgage funds -- a dependency that makes housing excessively
sensitive to cyclical fluctuations in interest rates.
There are other actions that would help enhance housing's ability to
compete for funds. One would be the removal of all usury ceilings imposed
by state laws, an action similar to the removal of FHA and VA mortgage rate
ceilings. Another would be the introduction of variable rate mortgages --
that is, mortgages whose interest rates varied with interest rates in the
general money market. Finally, there is a need for a continued and perhaps
more active secondary market for mortgages.
FC
GERALD
HOUSING FINANCE AND THE FINANCIAL INSTITUTIONS ACT OF 1973
Remarks by
Rex J. Morthland
President
American Bankers Association
Before the
National Association of Home Builders
Houston, Texas
January 21, 1974
GERALD FORD CIBRARY
No one here can be unaware that housing faces serious
problems again this year. In fact, those problems are shared
by the entire economy, particularly in view of the uncertain
energy situation. I heard someone say this morning that if
Moses came down off Mount Sinai today, the tablets he would
bring would be two aspirin.
These problems may permeate the entire economy -- but few
would deny they strike particularly hard at the housing
industry. Construction equipment is idled by the energy
shortage. Houses stand incomplete because of shortages in
vital supplies. And perhaps most important, you're running
up against a shortage of money -- again. I'm reminded of
the Bill Mauldin cartoon of two G.I.'s sitting in a foxhole.
As bombs go off around their heads, G.I. Joe says to his
buddy, "Th' hell this ain't th' most important hole in th'
world. I'm in it."
Housing does face serious problems again this year, as it
has in the past. And it will again in the future -- unless the
mechanism for encouraging flows of funds into the residential
mortgage market is improved. I believe the program outlined
in the Financial Institutions Act of 1973 would be more
efficient in generating such flows. Let me explain why.
At the outset, we must recognize one simple fact that seems
to have been overlooked by most people: Since 1948, housing has
been considered a major priority in our nation -- and we've moved
heaven and earth in an effort to maintain a large, stable flow
GERALD
FORD LIBRARY
-2-
of funds into the housing market. But during periods of
inflation, these efforts have been largely unsuccessful,
because of another simple fact: housing is only one part of
our economy -- certainly an important part -- but only a single
sector, nonetheless. It must compete for funds in the money
market with all other sectors of the economy. And if we want
to ensure that funds are available for housing, we must take
that competition into consideration.
The fact that housing is a part of our economy means that
the housing industry is subject to all the stresses and strains
that occur within a free market system. In fact, it is even
more exposed and more vulnerable to changes in the economic
health of our society than most other segments. Your industry's
experience in 1966, 1969 and this past year documents that.
The question for us today is obvious: How can we help
housing to compete more effectively for funds in the money
market? How can we ensure that the housing industry will be
provided with a relatively stable flow of funds, particularly
during periods of inflation when high interest rates are
generated?
These aren't easy questions to answer. The
system of specialized thrift institutions, whose major purpose
is to provide residential mortgage funds, has not worked -- even
though they have been encouraged by successive grants of
privileges or inducements. Additional inducements might help a
little, but during periods of inflation, I don't think they
would help enough.
FORD i LIBRARY GERALD
-3-
The plain truth is that every time we go through a period
of rapid inflation accompanied by tight money, we run into
cyclical problems with the flow of funds to housing. It
happened in 1966, when residential construction expenditures
fell by about one-fifth. It happened in 1969. And it
happened again in 1973.
Given these cyclical problems, it seems to me that those
of us in this housing foxhole -- and I include myself in that
category -- should give serious consideration to alternative
solutions to these problems. Specifically, we should be
asking ourselves: Are there other methods of financing housing
that might better ensure a relatively stable flow of funds to
your industry?
I believe the plan outlined in the Financial Institutions
Act offers a better alternative because it looks at housing
finance realistically as a part of the general money market.
One of the basic purposes of the Act is to broaden the base
for housing finance by making it attractive for all financial
institutions to invest in it. As an incentive, the Act provides
for a tax credit based on residential mortgage income to
encourage all lenders to make housing loans.
Now, at the risk of appearing self-serving, let me point
out that other lenders besides non-bank thrift institutions
already are heavily involved in the housing market. For
example, banks provide about half the housing construction
loans in this country. And consider these figures in a report
released by HUD this past December:
QERALD FORD LIBRARY
-4-
-- By September 1973, banks had increased their new
commitments in long-term residential loans by 8 per cent over
September 1972. This compared with a 46 per cent decrease over
the same period for nine other groups of lenders.
-- Net acquisitions of long-term residential loans by banks
for the first three quarters of 1973 were 5 per cent higher than
the same period in 1972. That's $14.3 billion compared to $13.6
billion.
-- In the first nine months of 1973, acquisition of
residential construction loans by banks rose 16 per cent over
the comparable 1972 period.
-- Banks accounted for 25 per cent of the total net
acquisitions of residential long-term and construction loans
during the January-September 1973 period.
All of this involvement by banks in the housing market has
occurred without one dime of incentive. Consider how much more
extensively banks and other financial institutions might become
involved in housing if they had the added incentive of a
tax credit.
One may question whether the proposed 3.5 per cent tax
credit would generate the desired amount of funds for the
residential mortgage market. The size of the credit might have
to be increased or decreased to adjust the flow of funds.
We do suggest, however, two modifications in the tax
credit proposed in the Act to make it more equitable and more
effective. First, we believe it should apply to loans for
mobile homes and to all activities related to the provision
GERALD FORD LIBRAPT
-5-
of housing. This would include land development loans, lines
of credit to contractors, construction loans, warehousing of
mortgages, and permanent residential mortgages. Second, if
this incentive is to be effective, it must be applied uniformly
to all lenders -- without a graduation in rates -- on the income
flow from housing loans.
But despite these qualifications, I believe an incentive
available to all lenders could increase the flow of funds to
housing. Perhaps more important, it would free the housing
industry from an unfortunate dependency on one type of
financial institution for long-term mortgage funds.
Why do I say unfortunate? Because these institutions
depend almost exclusively on consumer-type time and savings
deposits as a source of funds for home financing. As a
result, the aggregate supply of residential mortgage credit
from private lenders declines when deposit inflows to these
institutions shrink.
During the last few years the swings in these deposit
flows have been massive. Look at the 1967-1969 period. When
money market interest rates rose rapidly, the increase in total
deposits at S&Ls and mutual savings banks was cut more than half.
But in 1970, short-term market interest rates fell substantially.
As a result, the net deposit inflow to non-bank thrift
institutions doubled -- regaining its 1967 level. And it more
than doubled again in 1971. We are caught in the same cycle
today. In the words of the Federal Reserve Board, "Such
GERALD FORD LIBRAR
-6-
alternations of feast and famine are bound to create instability
in mortgage credit supplies and in home building."
The Financial Institutions Act of 1973 recognizes the
problems inherent in this situation and attempts to alleviate
them by several actions. Among other things, it would broaden
the powers of non-bank thrift institutions. Federal thrift
institutions, savings and loan associations and mutual savings
banks would be authorized to offer checking-type accounts, NOW accounts
and credit cards to all customers. They would also be given
the authority to make consumer loans -- a step that could
increase their liquidity through a more rapid turnover of
part of their loan portfolio. Hence they should be less
vulnerable to the strains of tight money periods. But at the
same time, they would relinquish the special privileges that
originally were provided to help them weather such tight money
periods -- privileges which have proven largely ineffectual.
Perhaps most important, the Financial Institutions Act
recognizes the fundamental reality of housing finance: The
primary competition for funds is not between banks and thrift
institutions. The primary competition exists between regulated
financial institutions and the unregulated portions of the
money market.
Our experience last year is an excellent example of that
competition. When short-term interest rates began to climb in
the money market, savers began withdrawing money from both banks
and non-bank thrift institutions to invest in general money
market instruments. Thrift institutions -- banks and non-
GERALD FORD ARABA
-7-
banks alike -- could not compete successfully with the general
money market because their interest rates were strictly regulated.
Furthermore their ability to pay higher rates was limited by
a portfolio of long-term loans with fixed, relatively low-
rate loans. You know the results of that savings outflow.
You're living with them today.
The Financial Institutions Act takes an initial step in
correcting this basic imbalance in competition between the
regulated and unregulated sectors of the market. It would
eliminate interest rate ceilings on FHA and VA loans, thereby
wiping out at least one impediment to flexible earnings and
thus one restriction on the flow of funds to housing during
periods of high interest rates.
For these various reasons, then, I believe this Act offers
an improvement over our present system of housing finance -- a
system where housing is overly dependent on one source of funds
and excessively sensitive to cyclical fluctuations in interest
rates.
There are, of course, other measures which would supplement
this basic change.
One would be the removal of all usury ceilings imposed by
state laws, an action similar to the removal of FHA and VA
mortgage rate ceilings. During periods of tight money, these
laws seldom protect the consumer. They do restrict, however,
the amount of mortgage money available to him. During this past
year all of us have seen or heard of instances where usury laws
made it difficult for prospective home-buyers to find mortgage
BERALD R.FORD JORABY
-8-
financing because funds were placed in high-yielding obligations.
In fact, in certain regions of the country, or for certain classes
of loans, mortgage funds almost vanished.
A second beneficial action would be the introduction of
variable rate mortgages -- that is, mortgages whose interest rates
varied with interest rates in the general money market. Such
instruments would enable financial institutions to compete more
successfully for residential mortgage funds. It would be
particularly helpful to those institutions that borrow short and
lend long. And it certainly would offer an inducement to those
lenders who are reluctant to tie up money for long periods of
time because of concern over inflation and increases in interest
rates.
Certainly the concept of variable rate mortgages raises
major economic and consumer questions. How would lenders make
sure borrowers fully understood exactly what was involved in such
a transaction? Could economists develop a satisfactory
statistical measure on which to base variations in interest rates?
How far would interest rates have to fluctuate before mortgage
rates would change? If interest rates rose, would the borrower
make a larger monthly payment -- or would he simply pay the same
amount for a longer number of months to offset the higher rates?
Finally, I don't think we can ignore the need for a continued
and perhaps more active secondary market for mortgages. From a
practical standpoint, improvements and greater uniformity in
residential mortgage instruments and procedures almost certainly
would increase their negotiability.
BERALD FORD CIBRARY
-9-
All of these measures really are not much more than
palliatives -- measures designed to divert more funds into
housing and to maintain that flow of funds at a stable rate
throughout cyclical fluctuations of interest rates. The ideal
solution, of course, is to develop a stable, non-inflationary
economy in which short-term fluctuations in interest rates are
minimized. This depends upon sound governmental economic
policies, better fiscal policies and improved monetary policies.
But given the economic realities of 1974 -- continued inflation
coupled with shortages of energy, of capital and of certain
raw materials -- I doubt that we'll see the emergence of such
an economy any time soon.
So, recognizing the fact that interest rates almost
certainly will continue to fluctuate, I believe we must consider
the alternatives to the present over-reliance on specialized
thrift institutions. Of those alternatives, I believe the
Administration's Financial Institutions Act supplemented by
the other measures mentioned previously, makes the most sense.
It is based on the recognition that the residential
>
mortgage market is an inseparable part of the broader money
market and therefore subject to all the forces in that market.
And it recognizes that housing, although certainly an important
sector of our economy, must compete with other economic sectors
for scarce funds in that market.
It recognizes that housing to date has been overly
dependent on a single group of lenders -- lenders that specialize
in mortgage lending and thus accumulate assets having fixed
GERALD FORD LIBRARY
-10-
interest rates and a long average life. Consequently, the
average yield on their earning assets changes slowly when
current market interest rates rise (or fall). Therefore,
these non-bank thrift institutions are unable to compete for
the consumer's savings -- and to maintain their mortgage
lending -- when yields on market securities become considerably
more attractive.
For these reasons, the Act acknowledges that housing is
unusually vulnerable to fluctuations in interest rates and
stresses created by tight money. And it recognizes that
broadening the sources of housing funds under equal competitive
conditions almost certainly would increase the stability of the
flow of funds to housing.
Among other things, the Act attempts to meet two vital
needs. First, it seeks to increase the flexibility and stability
of non-bank thrift institutions by broadening their powers so
they can continue to be a major source of housing funds.
Second, the Act broadens the source of funds for housing
by offering an incentive to all financial institutions to
expand their long-term mortgage portfolios. A larger, more
diverse source of funds guarantees the housing industry a more
stable flow of money in periods of tight money and rising
interest rates.
Certainly the Act is not perfect. I've already pointed out
that bankers have reservations on certain parts of this package.
But given the current economic realities -- and the current state
GERALD FORD LIBRARY
-11-
of housing finance --- I believe it offers an attractive
alternative to our present system. I believe if you'll "try
it, you'll like it."
######
FORD i LIBRARY GERALD
SPEECH HIGHLIGHTS
Managing Change in Our Financial Structure
The Financial Institutions Act proposes to cope with numerous changes
that have occurred in our economic and financial system since the 1930's. The
outlines of that system were established by crisis legislation of that period.
And the system itself has been modified since then through amendments designed
to cope with succeeding crises -- all of which has resulted in an imbalance
in our financial system. The FIA is designed to restore balance, flexibility
and efficiency in that system and to encourage the creation of capital.
If the proposals outlined in the Financial Institutions Act of 1973
are to succeed, however, the ABA believes they must be based on three inter-
related principles. First, they should provide adequate funding for housing over
a long period of time. Second, they should give all financial institutions greater
lending stability during periods of rapidly rising interest rates. Third,
because the American public is best served by the free play of competitive
forces, there should be ground rules which provide competitive equality for
all institutions.
The only way to achieve these goals is through a comprehensive plan
such as that outlined by the Administration. There are, however, several areas
where the ABA believes the Administration plan is in need of modification.
The ABA continues to oppose compulsory Fed membership and the
imposition of Federal Reserve Requirements on nonmember banks. In attempting
to achieve a more equitable restructuring of reserve requirements, we must be
careful not to do irreparable harm to the duality of our banking system.
The ABA sees no need to phase out Regulation Q, at least for the
foreseeable future. The existing Interest Rate Control Act is flexible. It
permits the regulatory agencies to vary the ceilings if conditions warrant.
The ABA does believe that differentials in rates that the various kinds of
financial institutions are permitted to pay on time deposits should be phased
out.
The ABA opposes the continuation of NOW accounts for all financial
institutions. In 1933 Congress wrote into law a specific prohibition against
the payment of interest on checking accounts. This prohibition may need to be
reviewed in light of current conditions. But until such a review takes place,
we will oppose the backdoor skirting of the law that is represented by NOW
accounts.
Because we recognize the need for stabilizing the flow of funds to
housing, we favor in principle a tax credit on residential mortgage income to
encourage all lenders to make housing loans. But we believe this incentive
should be uniformly applied to all lenders -- especially in terms of its scope
and the rate of the tax credit. This means that residential-type construction
loans, mobile home loans and loans for new and existing housing should be
covered by this incentive.
GERALD FORD LIBRARY
2
The ABA believes that the best way to increase the flow of funds into
housing is to extend housing inducements to all segments of the financial system.
Such a system relies on the money market as a whole to finance housing, rather
than on a single specialized source of funds.
The ABA believes the FIA serves two important purposes: It provides
a means for the system to adjust to changes that have already occurred -- and
thus to restore balance to the economic system; and it provides a framework to
maintain that balance by adjusting changes in the future.
FORD is LIBRARY GERALD
MANAGING CHANGE IN OUR FINANCIAL STRUCTURE
Remarks by Rex J. Morthland
President, American Bankers Association
Before the Arizona Bankers Association
Phoenix, Arizona
November 1, 1973
FORDO :- LIBRARY GERALD
In the midst of all the turmoil on the national scene, one major event
seems to have escaped public notice. On October 12, 1973, the Nixon Administration
submitted to Congress long-anticipated legislation proposing major changes in
our financial structure. In any other year, the Financial Institutions Act
of 1973 would have warranted front page headlines. But in the current climate
of crisis and upheaval, it almost escaped notice.
I think this is unfortunate, because this legislation is indeed important --
not only for bankers but for the public it is designed to benefit. It proposes
major changes in our financial system -- changes that, as the Administration
says, are based on the belief that "the public interest is generally better
served by the free play of competitive forces than by the imposition of rigid
and unnecessary regulation." As we look at these proposals, I think it's important
to keep this underlying principle in mind.
Even if the proposals have escaped the notice of the public, we as bankers
cannot afford to let them escape ours. Indeed, we must take a very close look
at this package. And that is precisely what I propose to do today --- to look
long and hard at the Administration's proposed legislation, to examine what
the ABA believes should be our position on these proposals, and finally
to discuss where we go from here.
First of all, any discussion of the Administration plan is fruitless
unless we understand exactly what that plan is. The legislation is highly
complex and I know many of you have not yet had a chance to really read it through.
So let me take a few minutes to outline the general scope of what the Administra-
tion is proposing.
GERALD FORD LIBRARY
Page 2
The proposals fall into five main categories, the first category of which is
certainly the most controversial. It deals with the payment of interest on
deposits and new deposit powers.
The most controversial of these proposals would eliminate Regulation Q
ceilings over a 5 1/2 year period after enactment of the legislation. Under the
Administration's plan, the difference between rates paid by banks and those paid
by specialized thrift institutions would be maintained for a year and a half. Then
four annual increases in deposit interest rates paid by banks would phase out
existing rate differentials. As you would expect the thrift institutions already
have come out very strongly against both parts of this proposal. And while the ABA
has endorsed phasing out interest rate differentials, we do not believe that the pub
interest would be best served by eliminating Regulation Q ceilings now or in the
foreseeable future. I'll explain the rationale behind that position in a few minute
The Administration also is proposing that federal thrift institutions be
permitted to offer demand deposits, NOW accounts and credit cards to all customers -
both commercial customers and private individuals. These institutions would include
federally chartered S&Ls and mutual savings banks. Let me add that the ABA believes
such institutions should be given third party payment authority only for personal
accounts. Extending this authority to corporate accounts would not be consistent
with the role of specialized thrift institutions. By the same token, banks
would be permitted to offer NOW accounts and savings accounts to all customers.
A uniform interest rate ceiling - no higher than that for bank passbook savings --
would be set for NOW accounts held at both banks and thrift institutions.
GERALD FORD LIBRARY
I believe we all agree that for all intents and purposes, NOW accounts are
really nothing less than interest-bearing checking accounts. And for reasons that
I'll make clear in a moment, the ABA is opposed to making them available to either
banks or thrift institutions. It would seem, however, that the Administration
shares some of our reservations, because the Financial Institutions Act states that
the prohibition of interest payment on demand deposits will continue. Evidently the
Page 3
accounts and checking accounts would give thrift institutions time to attract NOW-
type accounts. In the words of the Administration, such a distinction would
"introduce a degree of gradualism into the new world of paying interest on demand
deposits."
Related legislative provisions call for the Federal Home Loan Bank Board and its
regional banks to serve as check clearing agencies with authority similar to that of
the Fed. In addition, thrift institutions would have direct access to Fed
clearing facilities. These proposals were only hinted at in the Administration's
August narrative plan and therefore deserve careful study before we can arrive
at a well-reasoned position. But even at this early stage, it's obvious that
they would have important implications for effective implementation of monetary
policy, and for correspondent banking.
A real surprise in the Administration bill is the inclusion of
so-called "truth-in-savings" provisions. These would require full disclosure
to customers of rates, terms, charges and restrictions of interest payments
on deposits. Much : : the language is identical to Senator Vance Hartke's proposed
proposed "Consumer Savings Disclosure Act," on which Senate
hearings were held Last June. And I think it's apparent that these provisions
were included to attract the support of consumer groups.
Our position on this is clear. We agree that every depositor should be
given the terms and conditions of his deposit in clear, understandable language.
And we hope that complicating regulations will not be necessary to guarantee this
obvious right.
The second major category of proposals deals with treatment of reserves on
FORD LIBRARY & GERALD
deposits held by various financial institutions. Under the Administration
legislation, the Fed would be given authority to set reserve requirements on
checking and NOW accounts for both member banks and thrift institutions that are
members of the Federal Home Loan Bank System. Reserves for non-member banks and
non-member thrift institutions would not be subject to Fed reserve requirements.
And state-chartered SSLs would not have to be members of the Home Loan Bank
system to be insured by the Federal Savings and Loan Insurance Corporation.
Page 4
These provisions are an improvement over the original Hunt Commission
recommendation of compulsory Federal Reserve membership and suggested uniform
reserve requirements for all financial institutions. But the debate on this issue
continues.
And the Administration has stated that the question of uniform reserve
requirements is beyond the scope of its recommendations --- and indeed, that such
requirements would "not necessarily" be harmful to the dual banking system.
I want to make it clear right now that the ABA does not agree. At our
recent annual convention in Chicago, the chairman of our Government Relations
Council stated the ABA's position quite clearly: "We will continue to oppose
compulsory Fed membership and the imposition of Federal Reserve requirements
on nonmember banks. Our job is to be sure that the Administration plan to
achieve a more equitable restructuring of reserve requirements does not do
irreparable harm to the duality of our banking system."
The third category of proposals deals with the complex area of taxation. The
objective is a uniform tax system for all financial institutions. Without going into
too much detail, let me just say that the Administration is proposing that the
special bad debt reserve provisions for thrift institutions be eliminated. Thrifts
would then compute reserves for loan losses in a manner similar to banks. At the
same time, however, the Administration is proposing a tax credit to offset the
potentially higher income taxes on thrift institutions and serve as an incentive for
additional mortgage lending. The credit would be equal to a percentage of gross
income received from residential mortgages. It would be available to all types of
financial institutions and would be calculated on a sliding scale keyed to the per
FORD is LIBRARY GERALD
cent of assets invested in residential mortgages.
In the interest of competitive equality, the ABA believes all competing
financial institutions should be covered by the same bad debt reserve treatment.
We therefore appland the Administration's proposals to put that principle into
practice. Furthermore, the proposed special tax credit for residential mortgages
would afford compensation for adjusting = financial institution's bad
Page 5
debt reserve treatment. The amount of tax credit would depend on how strongly a
financial institution is oriented toward housing. The decision would be made by eacl
individual financial institution under rules applying uniformly to all. I want to
talk a little more about this proposal a little later.
The fourth category of proposals provides increased lending and investment
powers for both specialized thrift institutions and banks.
Under the legislation, thrifts would be permitted:
- to make consumer loans up to 10 per cent of total assets;
- to make real estate loans in the same manner as national banks;
- to offer unsecured lines of credit to builders for construction financing;
- to make community welfare and development "leeway" investments up to
3 per cent of total assets; and
- to hold high grade commercial paper and corporate debt security invest-
ments =? == 13 per cent of total assets, phased in over five years.
Thrifts could use Laevay" authority and investment authority so that under some
conditions they could take consumer loans up to 23 per cent of assets.
By the same token, national banks also would receive expanded lending
powers. They would be allowed to make real estate loans on the same basis as other
loans and to invest up to 3 per cent of their assets in community welfare and develop
ment projects. In addition, the Fed and the Federal Home Loan Bank Board would
have more authority to define financial institution assets eligible for discount
and advances.
Of course, we all realize that these proposals constitute very broad additions
to the powers of thrift institutions. And some of them could well contri-
bute to the cyclical stability of these institutions as a class. The authority
to make consumer loans, for example, would increase their gross income and provide
some liquidity. through a more rapid turnover of part of their portfolios. This
would be particularly helpful to them in periods of tight money.
GERALD FORD LIBRARY
Page 6
But if thrift institutions obtain increased powers to enhance their cyclical
stability, they should not retain the special privileges they now have. In the
public interest and in the interest of more equitable competition among financial
institutions, the ABA will insist that thrifts be subject to the same limits on
deposit interest rates, uniform taxes and the same reserves --- before or when
they are given additional lending and investment powers.
My fifth and final category for summarizing these proposals is something of
a catch-all. The Administration proposes to eliminate interest rate ceilings on
FHA and VA loans. The ABA certainly supports such a proposal, because we
as bankers recognize the undesirable effects of usury laws in constricting
the flow of funds to housing and to other areas in our economy.
The Federal Home Loan Bank Board would be given additional authority to
charter federal stock thrift institutions having the same powers as federal mutual
S&Ls. And conversions of mutual thrift institutions to stock form would be made eas
We can certainly understand the desire for such changes since they would bring
about a complete "dual system" for both banks and thrift institutions. In
effect, the Administration proposals would give stock thrifts the power to choose
whether they preferred to be chartered by their home states or by the
federal government.
And finally, the legislation would give credit unions modestly liberalized
powers over rates and terms of loans. It would authorize the establishment
of a National Credit Union Administration Discount Fund to meet temporary
liquidity problems of insured credit unions. Incidentally, I think I should note the
GERALD LISA FORD
credit unions are not included in the Administration's definition of thrift institut
These, then, are the main points of the Financial Institutions Act of 1973.
I've briefly outlined the ABA's position on some of those points, but I would
like to take 2 few minutes more to elaborate on the rationale behind those
positions.
Page 7
I believe we all recognize that there are some very basic problems in our
nation's financial structure. And I believe that's true despite the tremendous
job that banks have been doing in trying to meet the nation's financial needs.
The problem is not so much in our own efforts as in the structure within which
we operate. And this problem shows up repeatedly in various sectors
of the economy. Housing is a good example.
Every time we go through a period of tight money, we run into cyclical problems
with the flow of funds to several areas, including housing. And this, in turn,
generates concern with the liquidity of thrift institutions -- and equal concern for
the stability of the housing industry made up of thousands of firms that are
important bank customers. In one respect, at least, the problems of housing finance
in 1966, 1969 and 1973 were useful -- they revealed some of the inadequacies of
our present financial set-up.
The Administration proposals are intended to minimize these inadequacies.
But if they are :: succeed, the ABA believes they must be based on three inter-
related principles. First, they should provide adequate funding
for housing over 2 Long period of time. Second, there should be prudent and
responsible changes in the powers of financial institutions to give them greater
lending stability during periods of rapidly rising interest rates.
And third, as the Administration says, because the American public is best
served by the free play of competitive forces, there should be ground rules
which provide competitive equality for all institutions.
Our position on the Administration's legislation is based on all three of
these principles or goals. And I think it's fairly obvious that the only way
we're ever going to come close to achieving these goals is through a comprehensive
coordinated plan for managing change in our financial system. Only through such
a plan would we be able to make major adjustments to meet the needs of all
financial institutions -- something we must do if we hope
GERALD FORD LIBRARY
Page 8
to bring about any sort of equitable balanced change. As the Hunt Commission said of
its own proposals, "We believe that piecemeal adoption of the recommendations
raises the danger of creating new and greater imbalances."
If we accept the need for a comprehensive approach to bringing about changes,
then I think we must recognize that among all the proposals we've seen -- including
Patman's package and the National Association of Home Builders' plan -- the
Administration's legislation presents the most acceptable approach to managing
these changes.
This is not to say, however, that we must endorse the Administration's proposals
without any modifications. Indeed, there are several areas where the ABA --
and I think most bankers -- would disagree with the Administration plan.
The most obvicus disagreement concerns the proposal to phase out Regulation Q
ceilings. We do agree it is essential to eliminate differentials in interest rate
ceilings for different competing financial institutions. Such differentials have not
achieved the purpose == protecting the flow of funds to housing, nor have they provi
stability in the financial system. Yet millions of our savings depositors have
continued to earn less on their savings than customers of thrift institutions.
This is economically unfair to our customers and competitively unfair to banks.
It may be that in the long run, the public interest could
be served by phasing out of all deposit interest rate ceilings. But the experience
of recent weeks raises real questions as to whether such action now is
in the best interest of both the borrowing and the saving public. Because of that
experience, Congress has approved a joint resolution requiring federal regulators to
establish ceilings on time deposits under $100,000. Clearly Congress is concerned
about the potentially detrimental effects of eliminating deposit rate ceilings.
The existing Interest Rate Control Act is flexible. It can accommodate 'change.
It permits the regulatory agencies to vary the ceilings --
QERALD FORD LIBRARY
Page 9
or suspend them altogether for deposits of over $100,000 -- if conditions
varrant. And in the interest of the saver-consumer, we would hope that the
regulatory agencies would recognize free market forces in establishing the maximum
limits on deposit interest rates. But we do not support total elimination of
those ceilings now or in the foreseeable future.
The second major area where we differ with the Administration is on the issue
of NOW accounts. A few minutes ago I said that we opposed them. Let me explain
why. In 1933 Congress wrote into law a specific prohibition against the payment
of interest on checking accounts. We believe this prohibition should be reviewed
in light of current conditions. But until such a review takes place -- and
unless Congress decides to remove that prohibition -- we will oppose the backdoor
skirting of the law that is represented by NOW accounts. To my mind, at least,
it makes no sense to continue this prohibition against payment of interest on demand
deposits while advocating NOW accounts for all financial institutions, as the
Administration legislation proposes.
The third area of difference with the Administration plan concerns incentives
for housing. As I said earlier, the Administration is recommending a tax credit
on residential mortgage income to encourage all lenders to make housing loans. And
because we recognize the need for stabilizing the flow of funds to housing, we would
favor this proposal in principle. But we believe this
incentive should be uniformly applied to all lenders -- especially in terms
of its scope and the rate of the tax credit. This means that residential-type
construction loans, mobile homes, and loans for new and existing housing should
be covered by this incentive.
Furthermore, we believe this incentive should be large enough to do what
FORD LIBRARY is GERALD
it is designed to do -- channel an adequate flow of funds into housing. The
administration is proposing a tax credit of 3.5 per cent of earned interest for fina
institutions wich at least 70 per cent of their portfolios invested in housing
Page 10
loans. The credit would be graduated downward for lenders with less than 70
per cent in housing loans. But the ABA believes that 3.5 per cent is not enough to
"have a substantive impact in encouraging all lenders to increase the funds availabl
for housing." We believe the credit should be increased and further, that it should
be applied uniformly -- without a graduation in rates -- on the income flow from hou
loans.
That brings us down to the present and that inevitable question: Where do we
go from here? Let me suggest one possible course of action. Once we accept the nee
for a comprehensive, coordinated approach to managing changes in our financial
structure, I believe we will find the Administration plan is our best chance to make
those changes work. And that implies a unified industry-wide strategy to work for t
modification of the Aiministration's legislative proposals -- to make those proposal
an acceptable means :: remedying the inadequacies in our present financial structure
- think we an: _= at good position to do precisely that. For one thing, the
proposals were submitted to Congress only last month. And while the Senate plans to
hold preliminary hearings with regulatory agency witnesses this month, the major par
of the hearings in both the Senate and the House won't get underway until next year.
It took 18 months for the Hunt Commission to come up with its recommendations --
and 21 months for the Administration to submit legislation to Congress. It's
unrealistic to expect Congress to act with any great speed on such important issues.
A11 of which means we have time -- time to make our position known, time
to explain the rationale behind our specific objections, time to offer alternatives
to specific proposals, time to persuade Congress of the need to make modifications
in the Administration plan. The ABA already has begun to assemble facts and in-
formation that will be needed to back up our position. We have begun studies of the
efficacy of mortgage lending incentives outlined in the Administration legislation.
And re working to assess the impact of
LIBRARY
Page 11
NOW accounts on interest rates charged to borrowers.
Beyond that, I believe we bankers must continue our very active dialogue
with key Administration officials, legislators and regulators on the broad issue
of comprehensive change in the nation's financial structure. I think we must
reserve the right to respond to any initiatives taken separately from the
Administration' proposals. And we should oppose vigorously any further attempts
to make piecemeal changes in the competitive structure of the nation's
fínancial institutions while the Administration proposals are under consider-
ation in Congress.
That is where are are now and where I think we should be going --- because
to my mind, we have little choice. In a world where change is occurring
at an ever increasing pace, we must work with the tools available to us. And
right now, the best tool available for managing those changes is the Administration
plan for financial reform. If we are willing to work with this plan, if we
can refine it to meet the financial needs of the American public more effectively, th
both the public and financial institutions cannot help but benefit. And isn't
that what banking is all about?
##############
GERALD FORD LIBRARY
SPEECH HIGHLIGHTS
The Consequences of Our Choices
We live in an economic democracy under which we have freedom of choice,
both as producers and as consumers. We have freedom of choice -- but not freedom
from the consequences of our choices.
Our economic system is highly complex -- every part is related to every
other part, and what affects one segment of the economy eventually will be felt
across the entire economic spectrum. There are at least five basic principles
that shape our economic system.
(1) Ours is an economy of scarcity -- witness the shortage of loanable
funds at interest rates considered acceptable by our society. In such a
situation we must take care to consider the interests of savers as well as
borrowers
individuals as a group are the net savers in our society
we owe it to them to make sure they get the highest possible return for their funds.
(2) As a society, we cannot consume more than we produce currently or
have accumulated out of past production. (3) Under our economic and democratic
system, we have relative freedom of choice -- we can decide how we want to
allocate our scarce resources. (4) Our economy allocates scarce resources
largely through a price mechanism in which all participants seek to maximize returns.
(5) In a capitalist economy, government can influence the direction of economic
forces or changes, but it cannot control all of them. In general, government's
function is to set and enforce the rules under which our economy operates.
These observations may seem overly simplistic, but a brief summary of our
attempts to control inflation during the 1960's and early 1970's will illustrate
their importance. Such a history highlights six points:
(1) People will observe controls voluntarily for only a limited period of
time--and then only when they believe others are equally affected by the controls.
(2) Effective controls of prices in one segment of the economy lead successively
to controls in other portions of the economy. (3) It would take a massive
bureaucracy to formulate and enforce such controls. (4) The forces of supply and
demand cannot be repealed by government edict. (5) We cannot control prices on
commodities produced mainly by other nations. (6) Other nations cannot be isolated
from the effects of our own inflation, nor are we isolated from their economic
problems.
GERALD FORD LIBRARY
THE CONSEQUENCES OF OUR CHOICES
Remarks by Rex J. Morthland
President, The American Bankers Association
Montgomery Chapter
Alabama Society of Certified Public Accountants
Montgomery, Alabama
November 6, 1973
LIBRARY GERALD R. FORD
THE CONSEQUENCES OF OUR CHOICES
WE LIVE IN AN ECONOMIC DEMOCRACY UNDER WHICH WE HAVE FREEDOM OF
CHOICE BOTH AS PRODUCERS AND AS CONSUMERS. IN THE WORDS OF
RECENTLY-DECEASED ECONOMIST LUDWIG VON MISES, IT IS A SYSTEM
WHERE WE "LET INDIVIDUALS CHOOSE HOW THEY WANT TO COOPERATE IN
THE SOCIAL DIVISION OF LABOR, AND LET THEM DETERMINE WHAT THE
ENTREPRENEURS PRODUCE." WE ALSO LIVE IN A POLITICAL DEMOCRACY
WITH FREEDOM OF CHOICE OF GOVERNMENTAL ACTION. IT WOULD BE
DIFFICULT FOR ONE TO EXIST WITHOUT THE OTHER. A MAJOR ADVANTAGE
OF THIS SYSTEM OF THE TWO DEMOCRACIES IS THAT EXCESSIVE USE OF
ONE KIND OF POWER--EITHER ECONOMIC OR POLITICAL--IS COUNTER-
balanced by the other. NO SUCH COUNTER-BALANCES EXIST IN ANY
OTHER FORM OF ECONOMIC OR POLITICAL ORGANIZATION. NOTE WELL, HOW-
EVER, THIS SYSTEM DOES NOT PROVIDE A SAFEGUARD TO ASSURE OUR
MAKING THE CORRECT CHOICES IN EITHER FIELD. MY THESIS, THEN,
IS THAT WE HAVE FREEDOM OF CHOICE BUT NOT FREEDOM FROM THE
CONSEQUENCES OF OUR CHOICES. WE MUST CONSIDER, AND BE WILLING
TO ACCEPT, THE CONSEQUENCES BEFORE WE MAKE OUR CHOICE.
OUR ECONOMIC SYSTEM ALSO IS A CAPITALISTIC, HIGHLY COMPLEX ONE
WITH ALL THE COMPLICATIONS AND PROBLEMS INHERENT IN DECISIONS
BEING MADE BY A NUMBER OF INDEPENDENT UNITS. IT IS BASED ON A
FIRM BELIEF THAT THE PRICING MECHANTSM, ALWAYS PULLING SUPPLY AND
DEMAND TOWARD EQUILTBRIUM--BUT NEVER QUITE REACHING IT--IS THE
KEY TO THE BEST USES OF RESOURCES--AND INDIRECTLY, TO A FREE AND
CREATIVE SOCIETY. EVERY. PART IS RELATED TO EVERY OTHER PART, AND
WHAT AFFECTS ONE SEGMENT OF THE ECONOMY, EVENTUALLY WILL BE FELT
ACROSS THE ENTIRE ECONOMIC SPECTRUM.
GERALD FORD LIBRARY
2
THE INTERRELATIONSHIP OF ALL SEGMENTS OF OUR ECONOMY IS A POINT
WE SOMETIMES FORGET PARTICULARLY TODAY WHEN CHANGE SEEMS TO BE
OCCURRING AT A MORE RAPID PACE. WE MUST MAKE DECISIONS ABOUT
PROPOSALS FOR CHANGE IN OUR FINANCIAL SYSTEM. WE FACE RECORD
HIGH LEVELS OF INFLATION. WE MUST DEVELOP NEW METHODS OF
SPURRING ECONOMIC GROWTH IN THE FACE OF SHORTAGES. AND AS WE
DEAL WITH THESE PROBLEMS, I'm CONCERNED THAT WE MAY ATTACK THEM
IN A PIECEMEAL MANNER-ONE AT A TIME--WITHOUT CONSIDERING HOW
THEY RELATE TO EACH OTHER AND HOW THE SOLUTIONS WILL AFFECT
THE ENTIRE ECONOMY.
FOR THIS REASON, IT SHOULD BE WORTHWHILE FOR US TO DISCUSS THE
PRINCIPLES THAT FORM THE BASIS OF OUR ECONOMIC SYSTEM. BEYOND
THAT WE NEED TO TAKE A LOOK AT SOME OF THE FUNDAMENTAL RELATION-
SHIPS BETWEEN PARTS OF OUR ECONOMY. INDEED, I BELIEVE WE MUST
DO THIS IF WE ARE TO MEET THE CHALLENGE AND CHANGE OF THE
SEVENTIES SUCCESSFULLY.
TO MY MIND, THERE ARE AT LEAST FIVE BASIC PRINCIPLES THAT SHAPE
OUR ECONOMIC SYSTEM. FIRST OF ALL, WE MUST RECOGNIZE THAT WE LIVE
IN AN ECONOMY OF SCARCITY. IT SIMPLY IS NOT POSSIBLE TO SATISFY
ALL NEEDS FOR GOODS AND SERVICES WITH OUR SCARCE RESOURCES. THE
REASON IS SIMPLE. OUR DESIRES INCREASE MORE RAPIDLY THAN OUR
PRODUCTIVE CAPACITY.
FURTHERMORE, THERE ARE SIGNS THAT WE MAY BE RUNNING OUT OF
QERALD FORD LIBRARY
CERTAIN VERY BASIC RESOURCES ALTOGETHER. FAR FROM BEING THE
AFFLUENT SOCIETY WF. ONCE CONSIDERED OURSELVES, MORE AND MORE
3
ECONOMISTS ARE BEGINNING TO DUB OUR ECONOMY THE SHORTAGE ECONOMY.
OF COURSE, THE PRIMARY SHORTAGE ON ALL OUR MINDS RIGHT NOW IS THE
ENERGY SHORTAGE. AND I CERTAINLY DON'T HAVE TO TELL IOWA
BANKERS HOW SHORTAGES OF FUEL ARE GOING TO AFFECT THE SUPPLY
OF FOOD IN THIS COUNTRY NEXT YEAR.
BUT THERE'S ANOTHER SHORTAGE I THINK WE SHOULD BE AWARE OF--THE
SHORTAGE OF LOANABLE FUNDS AT INTEREST RATES CONSIDERED ACCEPTABLE
BY OUR SOCIETY. WE'VE ALREADY EXPERIENCED A CERTAIN AMOUNT OF
CAPITAL SHORTAGE THIS YEAR. AND I'M AFRAID IT'S GOING TO GET
WORSE. INDUSTRY, CONSUMERS AND GOVERNMENT ARE ALL PUTTING
UNPRECEDENTED DEMANDS ON OUR LIMITED POOL OF CAPITAL. AND
JUDGING FROM THE WAY OUR POLITICAL-ECONOMIC SYSTEM HAS OPERATED
IN THE PAST. I THINK WE CAN BE PRETTY CERTAIN WE'RE GOING TO
CONTINUE FACING RECURRING INFLATIONARY PRESSURES AND PERIODS
OF RAPIDLY RISING INTEREST RATES.
UNDER SUCH CIRCUMSTANCES WE MUST TAKE CARE TO CONSIDER THE
INTEREST OF SAVERS AS WELL AS BORROWERS. THIS IS ESPECIALLY
IMPORTANT IF THE PUBLIC INTEREST WE"RE ALWAYS TALKING ABOUT IS
INTERPRETED IN TERMS OF INDIVIDUALS. INDIVIDUALS AS A GROUP ARE
THE NET SAVERS IN OUR SOCIETY. IN PERIODS WHEN CAPITAL IS SHORT,
WE OWE IT TO THEM TO MAKE SURE THEY GET THE HIGHEST POSSIBLE
RATE FOR THEIR FUNDS. TIIIS IS BOTH A MATTER OF EQUITY AND AN
INDUCEMENT TO SAVE MORE AND THUS REDUCE THE SHORTAGE.
GERALD ADDRAIT GERALD R. FORD
TALK OF SHORTAGES LEADS ME TO A SECOND BASIC ECONOMIC PRINCIPLE.
IT IS SIMPLY THIS: AS A SOCIETY WE CANNOT CONSUME MORE THAN
4
WE PRODUCE CURRENTLY OR HAVE ACCUMULATED OUT OF PAST PRODUCTION.
IF WE WANT TO CONSUME MORE THAN WE HAVE, NOW WE MUST PRODUCE
MORE.
THAT MEANS WE HAVE TO MAKE SOME CHOICES--AND THAT LEADS US TO THE
THIRD PRINCIPLE. UNDER OUR ECONOMIC AND DEMOCRATIC SYSTEM, WE
HAVE RELATIVE FREEDOM OF CHOICE. WE CAN DECIDE WHETHER WE
WANT TO CONSUME EVERYTHING NOW, OR SAVE SOME AND INVEST OUR
SAVINGS TO INCREASE FUTURE PRODUCTION. WE CAN DECIDE HOW WE WANT
TO ALLOCATE OUR SCARCE RESOURCES. BUT, WE DO NOT HAVE FREEDOM
FROM THE CONSEQUENCES OF OUR CHOICES. WE CANNOT ESCAPE THE
RESULTS OF OUR DECISIONS. AS I SAID IN MY INTRODUCTION, THIS
PRINCIPLE IS THE THESIS FOR THIS CHAT WITH YOU.
THIS MEANS THAT WE MUST HAVE AS MUCH ACCURATE INFORMATION AS
POSSIBLE BEFORE WE MAKE DECISIONS. I DON HAVE TO TELL YOU THAT
WE BANKERS MUST BE FULLY INFORMED. BUT THAT IS NOT ENOUGH.
WE MUST MAKE SURE THAT CONGRESS AND THE REGULATORY AGENCIES ARE
EQUALLY WELL-INFORMED ABOUT THE COMPLEX INTERRELATIONSHIPS IN OUR
ECONOMIC SYSTEM. EVEN MORE IMPORTANT, THE PEOPLE REPRESENTED BY
CONGRESS MUST COME TO UNDERSTAND HOW OUR SYSTEM WORKS AND THE
THE EFFECTS OF THEIR DECISIONS ON THE EFFICIENT FUNCTIONING OF
OUR SYSTEM.
ANOTHER POINT THAT MUST BE UNDERSTOOD CLEARLY BY ALL OF US IS OUR
FOURTH BASIC PRINCIPLE: OUR ECONOMIC SYSTEM ALLOCATES SCARCE
RESOURCES LARGELY THROUGH A PRICE MECHANISM THROUGH WHICH ALL
PARTICIPANTS SEEK TO MAXIMIZE RETURNS. AS SELLERS OF RESOURCES
GERALD ORD LIBRARY
5
REGARDLESS OF WHETHER THEY ARE LAND, LABOR, ENTREPRENURIAL SKILLS
OR CAPITAL -- WE ALL TRY TO OBTAIN THE (HIGHEST) PRICE THAT WILL
MAXIMIZE PROFITS. AND AS BUYERS, WE TRY TO OBTAIN THESE RESOURCES
FOR THE LOWEST POSSIBLE PRICE. THE SUM OF ALL OUR INDIVIDUAL
DECISIONS TO BUY OR SELL DETERMINES HOW OUR RESOURCES ARE ALLOCATED.
OF COURSE, THE ACTIONS OF GOVERNMENT HAVE A MAJOR IMPACT ON THE
DIRECTION OF OUR ECONOMY. AND THAT LEADS ME TO THE LAST PRINCIPLE.
IN A CAPITALIST ECONOMY, GOVERNMENT CAN INFLUENCE THE DIRECTION OF
ECONOMIC FORCES OR CHANGES, BUT IT CANNOT CONTROL ALL OF THEM.
GOVERNMENT CAN LIMIT EITHER THE PRICE OF A PRODUCT OR ITS QUANTITY;
IT CANNOT CONTROL BOTH. FURTHERMORE, OUR ECONOMY IS NOT INSULATED
FROM THE ECONOMIC PRESSURES OF OTHER COUNTRIES. CERTAIN SEGMENTS
OF OUR ECONOMIC SYSTEM ARE AFFECTED MORE BY THE ACTIONS OF FOREIGN
GOVERNMENTS THAN BY OUR OWN.
THIS IS NOT TO SAY THERE IS NO NEED FOR GOVERNMENT ACTION IN OUR
ECONOMIC DEMOCRACY. GOVERNMENT DISSEMINATES DETAILED, ACCURATE
INFORMATION ON THE WAY OUR ECONOMY IS PERFORMING -- INFORMATION
VITAL FOR EFFECTIVE PLANNING. IT PROMOTES COMPETITION AND GUARDS
AGAINST THE ABUSES OF MONOPOLISTIC POWERS. AND IT CONCERNS ITSELF
WITH SOCIAL PROBLEMS -- NEEDS NOT ALWAYS MET BY THE WORKINGS OF
ADAM SMITH'S INVISIBLE HAND.
BERALD FORD LIBRARY
IN GENERAL, GOVERNMENT'S LEGITIMATE FUNCTION IS TO SET AND ENFORCE
THE RULES UNDER WHICH OUR ECONOMY OPERATES. AND IN so DOING, IT ACTS
TO PREVENT THE EXPLOITATION OF THE ECONOMICALLY WEAK BY THE ECONOMICALLY
STRONG.
6
THE FACT REMAINS, HOWEVER, THAT THERE ARE LIMITS TO HOW MUCH
GOVERNMENTS CAN ACTUALLY DO TO AFFECT THE WORKINGS OF THE ECONOMY.
AS WE HAVE ALL LEARNED RATHER PAINFULLY DURING THE PAST FEW YEARS,
IF WE HAD NOT KNOWN IT BEFORE, FEDERAL REGULATORS CANNOT CONTROL ONE
OR TWO ASPECTS OF THE ECONOMY WITHOUT AFFECTING OTHER EQUALLY
IMPORTANT SECTORS. AND UNDER A FREE MARKET ECONOMY, GOVERNMENT
CANNOT CONTROL ALL ECONOMIC SECTORS AT THE SAME TIME.
THIS BRIEF SUMMARY OF FUNDAMENTAL ECONOMIC PRINCIPLES MAY SEEM OVERLY
SIMPLISTIC. BUT IT'S IMPORTANT TO KEEP THESE RULES IN MIND BECAUSE
THEY ARE THE VERY BASIS OF OUR ECONOMIC SYSTEM. THE CURRENT PROBLEMS
AND IMBALANCES IN OUR ECONOMY ARE AT LEAST PARTLY THE RESULT OF
FAILING TO OBSERVE THESE FORCES -- OF OUR FAILURE TO MAKE THEM WORK
FOR OUR BENEFIT.
BUT IF THESE RULES ARE so OBVIOUS, HOW CAN WE FAIL TO OBSERVE THEM?
I THINK THE REASON LIES IN THE FACTS THAT THEY ARE OBVIOUS, THAT
PROSPERITY HAS MADE US INTELLECTUALLY LAZY AT TIMES, THAT WE ARE
IMPATIENT AND SEEK QUICK, EASY ANSWERS, AND THAT WE SOMETIMES LACK
SELF-DISCIPLINE. AND, WE MAKE MISTAKES BECAUSE OUR KNOWLEDGE IS
NOT COMPLETE.
SOME OF OUR DECISIONS ARE BASED ON ONLY A LIMITED UNDERSTANDING OF
IIOW THE ECONOMIC SYSTEM ACTUALLY WORKS. AND BECAUSE WE DON'T
UNDERSTAND THE SYSTEM FULLY, WE SEEK EASY, SHORT-RUN, FAST-ACTING
SOLUTIONS TO OUR ECONOMIC PROBLEMS. WE MAY FORGET THAT EVERY PART
OF THE ECONOMY IS INTERRELATED WITH EVERY OTHER PART -- so THAT
FORD LIBRARY
7
SOMETIMES WE'RE SURPRISED WHEN THE SOLUTION TO ONE ECONOMIC PROBLEM
GENERATES A WHOLE NEW SET OF DIFFICULTIES. SOMETIMES WE UNDERESTIMATE
THE RESOURCES REQUIRED TO SOLVE A GIVEN PROBLEM -- AND SOMETIMES WE
OVERESTIMATE THE RESOURCES AVAILABLE TO SOLVE ALL PROBLEMS. WE
FORGET THAT THERE IS A LAG BETWEEN THE TIME AN ECONOMIC ACTION IS
TAKEN AND THE TIME ITS EFFECT IS FELT -- AND WE BECOME IMPATIENT.
WISHFULLY WE PERSUADE OURSELVES THAT ECONOMIC EVENTS CAN BE CONTROLLED -
NOT JUST INFLUENCED -- BY STATUTES AND REGULATIONS. AND FINALLY,
WHEN THE SCALES DROP FROM OUR EYES AND WE RECOGNIZE WHAT MUST BE DONE
TO SOLVE A PARTICULAR PROBLEM, WE SOMETIMES LACK THE DISCIPLINE TO
ACTUALLY TAKE THE NEEDED ACTION.
PERHAPS THIS SEEMS AN OVERLY PESSIMISTIC VIEW OF HOW THE PUBLIC,
LEGISLATORS, AND EVEN BANKERS MAKE ECONOMIC ERRORS. BUT I THINK
A BRIEF SUMMARY OF OUR ATTEMPTS TO CONTROL INFLATION WILL ILLUSTRATE
THESE OBSERVATIONS.
LET'S GO BACK TO THE EARLY ]960's, WHEN THE UNITED STATES WAS JUST
BEGINNING TO COMMIT MAJOR AMOUNTS OF RESOURCES TO THE VIET NAM WAR.
SOMEPLACE ALONG THE LINE, THE DECISION WAS MADE TO FINANCE THE WAR
WITHOUT INCREASING TAXES. THE RATIONALE BEHIND THIS DECISION IS
UNDERSTANDABLE. TAX INCREASES WOULD HAVE CUT INTO A RISING STANDARD
OF LIVING. IT MIGHT HAVE REDUCED SAVINGS. AND IN THE EARLY STAGES
OF FIGHTING, THE AVAILABILITY OF UNUSED RESOURCES MADE IT POSSIBLE
TO EXPAND PRODUCTION THROUGH FEDERAL DEFICIT SPENDING -- WITHOUT
GENERATING LARGE PRICE INCREASES.
GERALD FORD LIBRARY
8
BUT THE ULTIMATE RESULT OF THE DECISION NOT TO RAISE TAXES INEVITABLY
WAS INFLATION. BOTTLENECKS IN PRODUCTION BEGAN TO APPEAR AS INCREASED
PRODUCTION BEGAN USING ALL AVAILABLE SUPPLIES OF CERTAIN RESOURCES.
SUPPLIES OF THESE RESOURCES OR PRODUCTS COULD NOT BE EXPANDED FOR A
NUMBER OF REASONS. IN SOME CASES, SUCH AS AGRICULTURE, THE GOVERNMENT
ACTUALLY LIMITED PRODUCTION THROUGH PRICE SUPPORT PROGRAMS THAT HAD
BEEN INITIATED DURING THE ]930's. GOVERNMENT RESTRICTIONS ON IMPORTS
ALSO ACTED TO LIMIT THE SUPPLY OF CERTAIN PRODUCTS. UNION RULES AND
LOCAL CUSTOMS SOMETIMES ACTED TO LIMIT OUTPUT PER WORKER PER DAY.
AND IN CERTAIN AREAS OF PRODUCTION, IT WAS DIFFICULT TO INCREASE THE
NUMBER OF SKILLED WORKERS BECAUSE OF THE LENGTH OF TIME NECESSARY TO
ACQUIRE TECHNICAL SKILLS, OR BECAUSE OF UNION RESTRICTIONS.
FURTHERMORE, CERTAIN VALUABLE RESOURCES WERE STILL NOT BEING FULLY
USED. THE PRIME EXAMPLE WAS LABOR. IN THE FACE OF RISING PRICES,
UNEMPLOYMENT STILL CONTINUED AT UNACCEPTABLY HIGH LEVELS FOR A
NUMBER OF REASONS, GENERALLY RELATED TO THE INFLEXIBILITY OF WAGES
ON THE DOWN SIDE. A NUMBER OF FACTORS HAVE PREVENTED WAGES FROM
DROPPING TO LEVELS WHERE ALL AVAILABLE LABOR MAY BE EMPLOYED
ECONOMICALLY. OTHER UNEMPLOYED WORKERS LACKED MARKETABLE SKILLS --
THE WORK OF AN INCREASING AMOUNT OF UNSKILLED LABOR WAS BEING TAKEN
OVER BY MACHINES BECAUSE OF INCREASING WAGE LEVELS OR IMPROVED TECHNOLOGY.
EMPLOYERS WERE RELUCTANT TO TRAIN UNSKILLED WORKERS FOR SEVERAL REASONS.
IN SOME CASES, MINIMUM WAGE LIMITS MADE IT ECONOMICALLY IMPRACTICAL TO
HIRE TRAINEES. IN OTHER CASES, UNION WAGE SCALES WERE SOMETIMES TOO HIGH
QERALD FORD VIBRARY
9
TO PERMIT ECONOMICAL TRAINING PROGRAMS. AND, ON CONTRACTS WITH
THE FEDERAL GOVERNMENT, WAGE SCALES WERE SET BY THE GOVERNMENT AT
A LEVEL THAT SOMETIMES PROHIBITED ON-THE-JOB TRAINING. THEN,
CERTAIN SEGMENTS OF THE NATION'S MANPOWER POOL WERE SIMPLY NOT
MOBILE -- THEY COULDN'T GO WHERE THE JOBS WERE.
THE NET RESULT OF ALL THIS WAS PERSISTENT INFLATION, WHICH IN TURN
BRED A FIRM EXPECTATION OF CONTINUED INFLATION. INDIVIDUALS AND
BUSINESSES JUST ASSUMED THAT PRICES WOULD CONTINUE TO CLIMB AND
THEY ACTED ACCORDINGLY. THEIR ACTIONS IN TURN FUELED FURTHER
PRICE INCREASES.
THIS WAS THE SITUATION WHEN THE NIXON ADMINISTRATION TOOK OFFICE
IN JANUARY 1969. AND THROUGHOUT THE FIRST TWO YEARS, THE
ADMINISTRATION SOUGHT TO CONTROL THIS PERSISTENT INFLATION BY
ESTABLISHING A BALANCED FEDERAL BUDGET. THEY WORKED TO AVOID
RAPID INCREASES IN THE MONEY SUPPLY THROUGH MONETIZATION OF
ADDITIONAL GOVERNMENT DEBT. THEIR EFFORTS WERE PARTIALLY
SUCCESSFUL.
BUT THE WAR IN VIETNAM CONTINUED CONSEQUENTLY GOVERNMENT NEEDS
FOR SUPPLIES AND MATERIAL ALSO CONTINUED. FURTHERMORE, MANY
SOCIAL ACTION PROGRAMS BEGUN PREVIOUSLY EXPANDED UNDER PREVIOUSLY
ESTABLISHED SCHEDULES. AND WAGES CONTINUED HIGH OR ACTUALLY INCREASED
UNDER ESCALATOR CLAUSES IN WAGE CONTRACTS.
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10
THE NIXON ADMINISTRATION WAS OF COURSE CONCERNED ABOUT THE
PERSISTENCE OF INFLATION. BUT IT ALSO WAS CONCERNED ABOUT
PERSISTENT HIGH LEVELS OF UNEMPLOYMENT-- AND ABOUT STAYING IN
OFFICE FOR A SECOND TERM. IN 1971 THE GOVERNMENT TURNED AGAIN
TO DEFICIT FINANCING. AND IN 1972, THE FED BEGAN ALLOWING THE
MONEY SUPPLY TO EXPAND RAPIDLY.
AGAIN, THE RATIONALE BEHIND THIS COURSE OF ACTION IS PERFECTLY
UNDERSTANDABLE. THE POPULAR REACTION TO THE CREDIT CRUNCH OF
1969-70 HAD NOT BEEN FAVORABLE. THE VOTING PUBLIC HAD BEEN PARTI
CULARLY UNHAPPY ABOUT HIGH INTEREST RATES AND THE CURTAILMENT OF THE
FLOW OF FUNDS FOR HOUSING.
BUT AGAIN, THE RESULTS OF THIS NEW COURSE OF ACTION WERE EQUALLY
PREDICTABLE. DEFICIT SPENDING AND AN EXPANDING MONEY SUPPLY
RENEWED PRESSURES ON PRICES. THE RESULTS WAS RENEWED INFLATION.
FOREIGN EXCHANGE PROBLEMS BECAME MORE PRONOUNCED. INFLATION IN
THE UNITED STATES PRICED MANY OF OUR COMMODITIES OUT OF THE
FOREIGN MARKETS--AND HELPED LEAD TO A DEFICIT IN OUR TRADE BALANCE
FOR THE FIRST TIME IN MANY YEARS.
OBVIOUSLY, I'VE LEFT OUT ONE MAJOR CHAPTER IN THIS BRIEF HISTORY
OF THE CURRENT INFLATION IN THE UNITED STATES. THAT IS THE
ADMINISTRATION'S WAGE AND PRICE CONTROLS PROGRAMS. WE'RE ALL
FORD
AWARE THAT THEY WERE PUT INTO EFFECT IN AN ATTEMPT TO BREAK
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INFLATIONARY EXPECTATIONS AND THUS TO LIMIT PRICE INCREASES.
so I WON'T TAKE TIME FOR A DETAILED RECITAL OF HOW PHASES I,
II, III, AND IV WORKED. I DO THINK IT'S WORTHWHILE, HOWEVER, TO TAKE
11
A LOOK AT WHAT WE'VE LEARNED FROM OUR EXPERIENCE UNDER THESE
CONTROLS PROGRAMS OF THE PAST TWO YEARS. TO MY MIND, THERE ARE
AT LEAST SIX POINTS TO BE NOTED. FIRST OF ALL, IT SEEMS OBVIOUS
TO ME THAT PEOPLE WILL OBSERVE CONTROLS VOLUNTARILY FOR ONLY A
LIMITED PERIOD OF TIME-- AND THEN ONLY WHEN THEY BELIEVE OTHERS ARE
EQUALLY AFFECTED BY THE CONTROLS.
SECOND, OUR EXPERIENCE HAS PROVED BEYOND DOUBT THAT EFFECTIVE
CONTROLS OF PRICES IN ONE SEGMENT OF THE ECONOMY LEAD SUCCESSIVELY
TO CONTROLS IN OTHER PORTIONS OF THE ECONOMY.
THIRD, IT'S APPARENT THAT A MASSIVE BUREAUCRACY WOULD BE REQUIRED
TO FORMULATE AND ENFORCE SUCH CONTROLS OVER MOST SEGMENTS OF THE
ECONOMY. WITHOUT SUCH A BUREAUCRACY, THE CONTROLS SIMPLY CAN NOT
BE ENFORCED. EVEN THEN, I BELIEVE THAT SUCH A BUREAUCRACY COULD
NOT POSSIBLY ANTICIPATE ALL THE INTERRELATIONSHIPS BETWEEN ECONOMIC
FORCES. AND I'M EQUALLY CERTAIN THAT UNEXPECTED PROBLEMS WOULD
RESULTS FROM EVEN THE MOST THOROUGHLY RESEARCHED CONTROLS.
FOURTH, THE LAWS OF SUPPLY AND DEMAND CANNOT BE REPEALED BY
GOVERNMENT EDICT. IF WE ARE NOT WILLING TO PAY A FAIR PRICE FOR
CERTAIN GOODS, THOSE GOODS SIMPLY WILL NOT BE AVAILABLE. LOOK
AT WHAT HAPPENED TO THE SUPPLY OF BEEF LAST SUMMER, WHEN THE
GOVERNMENT TRIED TO LIMIT AN INCREASE IN PRICES.
FIFTH, I THINK WE'VE SEEN THAT WE CANNOT CONTROL EFFECTIVELY PRICES
ON COMMODITIES PRODUCED MAINLY BY OTHER NATIONS. AND FINALLY,
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12
OTHER NATIONS CANNOT BE ISOLATED FROM THE EFFECTS OF OUR OWN
INFLATION. NOR ARE WE ISOLATED FROM THEIR ECONOMIC PROBLEMS.
BEYOND WHAT WE'VE LEARNED FROM THE RECENT CONTROLS PROGRAM,
HOWEVER, I BELIEVE WE NEED TO LOOK CLOSELY AT OUR ENTIRE
EXPERIENCE WITH INFLATION DURING THE PAST DECADE, BECAUSE IT
ILLUSTRATES WELL WHAT I'VE BEEN SAYING THROUGHOUT THIS ENTIRE
SPEECH.
FIRST OF ALL, OURS IS A POLITICAL AND AN ECONOMIC DEMOCRACY--
A SYSTEM WHICH WE DIRECT BY OUR OWN INDIVIDUAL CHOICES. WE HAVE
RELATIVE FREEDOM TO MAKE THESE ECONOMIC CHOICES--BUT WE DONT
HAVE FREEDOM FROM THE CONSEQUENCES OF OUR DECISIONS.
SECOND, WE LIVE IN AN ECONOMY OF SCARCITY. WE SIMPLY DON'T
HAVE ENOUGH GOODS AND SERVICES TO SATISFY ALL OUR DESIRES.
FURTHERMORE, AS A SOCIETY, WE CANNOT CONSUME MORE THAN WE
PRODUCE OR HAVE SAVED OUT OF PAST PRODUCTION. THIS MEANS WE
MUST ARRANGE OUR DESIRES AND NEEDS IN SOME ORDER OF PREFERENCE.
WE MUST ESTABLISH PRIORITIES, LEST WE DISSIPATE OUR RESOURCES
BY TRYING TO ATTAIN EVERYTHING AT ONCE--ONLY TO FIND WE HAVE
GAINED THE LESS IMPORTANT AT THE SACRIFICE OF THE MORE IMPORTANT.
THIRD, OUR ECONOMIC SYSTEM IS AN EXTREMELY COMPLEX MACHINE FOR
ALLOCATING RESOURCES. THE WORKINGS OF ONE PART OF THIS MACHINE
INEVITABLY AFFECT MANY OTHER PARTS. OUR EXPERIENCE IN THE CURRENT
INFLATION SHOWS THAT TRYING TO CONTROL ONE SEGMENT OF OUR ECONOMY FORD
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13
INVARIABLY LEADS TO EFFECTS SOMETIMES UNFORSEEN, IN OTHER SEGMENTS.
PRICE SUPPORT PROGRAMS CAN LEAD TO SHORTAGES OF CERTAIN GOODS,
WHICH IN TURN DRIVE UP PRICES, WHICH THEN LEAD THE GOVERNMENT TO
ATTEMPT PRICE CONTROLS. PRICE LEVELS IN FOREIGN COUNTRIES AFFECT
OUR BALANCE OF PAYMENTS, WHICH MAY MAKE IT NECESSARY TO DEVALUE OUR
CURRENCY, WHICH IN TURN FUELS INFLATION. THESE COMPLEX INTERRE-
LATIONSHIPS MEAN THERE ARE FEW EASY, QUICK, SIMPLE ANSWERS TO A
SINGLE ECONOMIC PROBLEM. IT SIMPLY IS NOT ADVISABLE TO ATTACK
ONE PROBLEM WITHOUT CONSIDERING THE POSSIBLE EFFECTS ON THE REST
OF THE ECONOMY.
FINALLY, OUR POLITICAL AND ECONOMIC DEMOCRACY WON'T WORK EFFICIENTLY
UNLESS WE ARE WELL INFORMED ABOUT THE NATURE, INTERRELATIONSHIPS,
AND FUNCTIONS OF THE SYSTEM. IT'S ESPECIALLY IMPORTANT THAT WE AS
BANKERS UNDERSTAND THE WORKINGS OF THE SYSTEM--AND EVEN MORE IMPOR-
TANT, THAT WE WORK TO HELP OUR CUSTOMERS, OTHER FELLOW CITIZENS
AND OUR POLITICAL LEADERS GAIN AN EQUALLY GOOD UNDERSTANDING.
THEY ARE THE ONES WHO MAKE ECONOMIC DECISIONS IN THE POLITICAL
ARENA THAT WILL HAVE A MAJOR IMPACT ON THE EFFECTIVE OPERATION OF
OUR ECONOMY.
DO WE REALLY UNDERSTAND HOW THE SYSTEM WORKS? I THINK WE DO--IF
WE TAKE THE TROUBLE TO UNDERSTAND THE LESSONS OF OUR EXPERIENCE
DURING THE PAST TEN YEARS. AS MARK TWAIN SAID, EXPERIENCE IS A
GREAT TEACHER, BUT YOU HAVE TO BE CAREFUL NOT TO LEARN MORE THAN
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14
SHE ACTUALLY TEACHES. A CAT THAT SITS ON A HOT STOVE BURNER
WILL NEVER DO IT AGAIN. BUT SHE WON'T SIT ON A COLD STOVE EITHER.
WE AS BANKERS HAVE LEARNED A GREAT DEAL FROM OUR. EXPERIENCE
DURING THE SIXTIES. THE QUESTION NOW IS WHETHER WE CAN PUT
THOSE LESSONS TO WORK IN MANAGING THE CHANGES THAT WILL CONFRONT
US IN THE MONTHS AND YEARS AHEAD. THAT IS THE CHALLENGE OF THE
SEVENTIES.
QERALO FORD LIBRARY
SPEECH HIGHLIGHTS
Capital Shortages In A Shortage Economy
Is there really a capital shortage in the United States? There
certainly is -- and it seems to be getting worse. Industry, consumers and
government are all increasing their demands on a limited pool of capital.
And the supply of capital is simply not growing fast enough to meet all the
demands. That in turn means we have a capital shortage.
Of course, in theory it's impossible to have a capital shortage in
a freely competitive market economy. But we live in a political and economic
democracy, where society and Congress have determined that interest rates
simply will not be permitted to rise without restraint in some sectors of the
economy. Hence, we have shortages of capital and our society has problems.
Consider the impact of capital shortages on the economy as a whole:
greater economic instability
lower potential productivity.
lower wages
recurring periods of inflation.
potential loss of foreign trade.
Beyond the obvious problems of rising interest rates, however, the
growing capital shortage will affect all of us in a much broader sense. With
limited amounts of capital available to meet relatively unlimited demands, we
must be very certain that our capital goes where it is needed most. And that
means we as bankers and our society as a whole must set up some priorities.
For government, it means a choice: to continue deficit spending and
thereby increase inflationary pressures; or to curtail some programs and allocate
scarce capital to those who can use it most.
.a political judgment full of
risk for the legislator.
What can we do to alleviate capital shortages? The ultimate solution
is to restore and maintain a relatively stable, non-inflationary economy. And
there are several ways to begin that restoration:
First, although not perfect, the competitive market system is still the
most efficient system for allocating scarce resources. Insofar as politically
feasible, it should operate freely, without restraints.
Second, the public and Congress need to recognize interest for what
it is -- a price for use of loanable funds determined by forces of demand and
supply. The government cannot control both price and quantity of any commodity
or service at the same time.
Third, we must support fiscal and monetary policies that will tend
to reduce inflation.
&
FORD
GERALD
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2
Finally, we must help the public and Congress understand the
importance of all lending and investment activities, including commercial
lending. We must promote a greater degree of economic literacy among bankers
--- ourselves -- which must in turn be disseminated among the electorate
and reflected in opinions expressed to legislators. All of us must look
at the economy as a whole and consider the consequences of our actions
(i.e., reactions in other parts of the economy) when we seek solutions to
any economic problem.
in
FORD
GERALD
CAPITAL SHORTAGES IN A SHORTAGE ECONOMY
Remarks by Rex J. Morthland
President, American Bankers Association
Robert Morris Associates
Phoenix Arizona
October 23, 1973
FORD is LIBRARY GERALD
This is the time of year when leaves turn scarlet and economists
sharpen their pencils in preparation for making economic forecasts. The crop
of forecasts for 1974 share a dominant theme: The theme of shortages in major
areas of the economy. After living through the first ten and half months of
1973, this should not come as a shock to anyone. The current energy shortage
is a number one topic in Washington. For the first time since World War II,
we face the prospect of rationing heating oil and other petroleum products this
winter. And after years of paying farmers not to produce too much wheat or
corn, among other agricultural products, we now are faced with a world-wide
food shortage. To make matters worse, we're also running out of fertilizer.
All kinds of shortages are cropping up across the entire economic spectrum.
For a few months this year, the Wall Street Journal was forced to cut down on its
news coverage because of a nation-wide scarcity of newsprint. Housewives who make
fruitcakes for Thanksgiving can't get any raisins. And let's hope that it's not
a cold winter, because antifreeze is also in short supply.
There's one shortage, however, that never seems to make it into the headlines --
despite its significance for our economy. That is the overall shortage of capital,
the grease that helps all the wheels in our economy turn.
Those of us in banking
are already quite familiar with capital shortages. They are now -- and will probably be
for years to come -- a central factor in our banking decisions.
We all know that capital is accumulated by not consuming all goods
that are produced. It is invested in either the form of equity capital or of
borrowed capital. And we all know that business and industry are having
problems attracting equity investment. But I think it's equally important to
recognize there's a real shortage of that other form of capital -- the form
bankers must deal with -- the funds we lend out to customers at interest.
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For this reason, I want to talk with you briefly about these
shortages -- to explore the demands that are creating them, to look at the
supplies or sources of capital in this country, and finally to take a look at what
we can do to alleviate the situation.
-2-
Is there really a capital shortage in the United States? There certainly
is --- and it seems to be getting worse as shown by projections for capital
spending by industry over the next few years.
Chase Manhattan economists predict that the domestic oil industry will
require about $200 billion by 1985. Power utilities will need about $70 billion
in outside capital in just the next five years. And one company alone -- AT&T -
estimates it will need $40 to $50 billion for modernization and expansion during
the next decade. According to McGraw-Hill, capital outlays by all industry and
business in the U.S. will approximate $106 billion this year. The figure for 1985
is $233 billion -- more than twice the 1973 total.
These are the traditional demands of industry for capital -- capital
to replace obsolete equipment, to expand operations, and to increase production.
Some of this demand traditionally has been met by equity investment. But I
think we're all aware there are some serious problems in our equity markets.
Stock issues have been curtailed greatly. In just the first six months of 1973,
more than 300 offerings were withdrawn as unsalable.
The impact of this trend on commercial lending has been dramatic. Henry
Kaufman, chief economist. for Salomon Brothers, recently noted that bank loans to business
have expanded nearly four times as fast this year as they did in 1969 - another year
when equity seemed to dry up. Obviously when business can't get capital in the equity
markets and when bank loan rates are held below those in the unregulated sector of
of the money market, it steps up its demands on commercial lenders.
Nor is industry the only segment of our economy making increased demands
on the nation's supply capital. In this, the so-called age of affluence, consumers
are claiming their fair share too. They have been educated to expect a higher standard
of living -- a standard of living dependent on high priced durables, such as automobiles
and larger homes with air conditioning, dishwashers. disposals. sophisticated
stereo equipment -- you know the list as well as I do.
DERALD FORD
-3-
Chief among the elements of this high standard of living is
housing. In this country we have made it a national priority to make sure
that every man, woman, and child has adequate shelter. And that means
millions of new housing units. Building this housing will require a huge sum
of money --- I doubt if anyone really knows exactly how much. The best
projections from HUD indicate that we should be building around 2.5 million
new units each year between now and 1980, if we want to meet the national
housing goal. I think this estimate may be a little high. But the fact remains
that millions of people do lack adequate housing. And we will need billions
of dollars -- capital -- to build that housing and make it available to those
who need it.
Government -- as well as industry and consumers -- are increasing
their demands for capital because of the expanding role of government. The
1960's saw increasing activity by governments at all levels -- federal, stąte
and local. We declared war on poverty, and our governments developed massive
programs to carry on the combat. We fought racial prejudice --- another war
that required new government programs and additional funding. We tackled
the housing problem with special housing subsidy programs. We began a
campaign to clean up our environment -- another laudable but expensive goal
GERTALD FORD LIBRARY
We developed programs to provide health insurance for those over 65.
And it all cost a great deal of money. During the eight years between
the Kennedy and Nixon inaugurations, the federal budget doubled. And more often
than not, governments at all levels spent more money than they took in. Deficit spending
was used
to finance our nation's social programs when Congress would not increase taxe
Of course, that money had to come from somewhere. It came from the
money and capital markets. The government's new and expanded programs
increased the demands on the national supply of capital -- they too helped add to
our capital shortage.
-4-
The cost of some of these programs can be felt all across the spectrum
of the American economy. Our national pollution cleanup program is a good
example. The initial cost of pollution control to the federal government was
fairly minimal -- additional manpower to enforce the new environmental laws.
But the actual cost of cleaning up -- and staying clean -- is incredibly high,
particularly for industry. The steel industry alone predicts that it will have to
spend up to $4 billion per year over the next seven years for capital outlays
including pollution control equipment, replacing obsolete facilities, and
expanding capacity to meet the demands of an expanding economy.
Nor are pollution control costs confined to industry. They strike equally
hard at state and municipal governments. According to the latest estimate from
the Environmental Protection Agency, the nation must spend $36 billion on treatment
plants and new sewers for municipal sewage disposal. For complete sewage treatment --
including rehabilitation of existing sewers --- we would have to spend more than $60
billion between now and 1990.
The consumer also helps bear the cost of this pollution cleanup. For example,
new automobiles coming out of Detroit are equipped with devices that cut down on emissior
of air pollutants. They also make the cars less efficient --- and that means they consume
more gasoline. In other words, these new devices add to the initial cost
of your next car and they make it more expensive to run. This also increases the
the demand for gasoline, which adds to our current energy shortage.
Thus we see that the demands on our pool of capital are increasing
GENHLD GF FORD
every day. The next question then is: do we have enough capital to meet these
demands?
Let's take a quick look at the traditional sources of capital in our
economy. First of all, capital comes from the retained earnings and depreciation
allowances of business and industry. In an expanding economy, however, these
are not enough to meet all of business' investment needs. This may even be true
for a stationary economy when a high rate of inflation eats away at the buying
power of the dollar.
-5-
Capital also is generated by individual savings. After all,
individuals as a class are the only net savers in our economy. Traditionally,
they tend to save for high-cost items -- thing such as putting their
children through college, their own retirement, unforeseen emergencies,
unemployment, and so forth. In the past they also have saved for major
consumer durables, such as a house or a car.
But these motives no longer seem to be as strong. For one thing,
governments now provide many of these items "free" or at a reduced cost,
-thereby reducing the necessity of saving. For example, the federal government
provides a nation-wide pension plan through social security. It offers
unemployment insurance protection to help those who lose their jobs. And for
those even more unfortunate, welfare payments help tide them over until they
get back on their feet. Medicaid and Medicare help defray part of their medical
costs. And state education programs provide all the education opportunities
one's children will ever need at a minimal cost to the consumer.
Furthermore, people seem to be more willing to borrow for major consumer
purchases -- vacations, education, boats and so forth. The traditional Calivinist ethic
is being replaced with the concept of "Pay as you enjoy" or even "Enjoy now, pay later."
Finally, potential savers realize that inflation eats away at the
purchasing power of every dollar they save. In a period of inflationary
expectations, consumers buy more today because they believe everything will be
more expensive tomorrow.
All of these forces together mean only one thing: the supply of capital
in this country is simply not growing fast enough to meet all the demands. And
that in turn means a capital shortage.
FORD & GERALD LIBRARY
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Of course, it's theoretically impossible to have a capital shortage
in a freely competitive market economy. According to economic theory, the
solution to any capital shortage is simply to let interest rates rise to
attract additional savings and at the same time to decrease the demand for
capital. At some point, supply and demand will be brought into equilibrium
and voila! No more capital shortage!
That's the theory. Reality is a little different. I'm sure I don't
have to tell you we live in a political as well as an economic democracy.
Society and Congress have determined that interest rates simply will not be
permitted to rise without restraint in certain areas of the economy. One of
those areas has been commercial loans by banks.
After our experience last spring, I think we're all aware what happens
when the government attempts to restrain interest rates in only one segment of
the market -- banking -- while the demand for capital is still increasing.
Nevertheless, the fact remains that there's a tremendous amount of public
sentiment against high interest rates. And that sentiment is reflected both
in Congress and in the regulatory agencies. It takes the form of jawboning.
And it manifests itself through statutory usury ceilings.
It all boils down to this. When capital becomes scarce, those of
us in banking are going to have problems. The government will try to enforce
lower interest rates than the market requires. The Committee on Interest and
Dividends will go into action. And the inevitable result will be disintermediation
from the regulated sector of the money market.
FORD i LIBRARY GERALD
-7-
Beyond the obvious problems of rising interest rates, however, the
growing capital shortage will affect all of us in a much broader sense. With
limited amounts of capital available to meet relatively unlimited demands, we
must be very certain that our capital goès where it is needed most. Arid that
means we bankers and our society as a whole must set up some priorities.
Look at the impact of capital shortages on the economy as a whole.
The overall effect is greater economic instability and lower potential
productivity. This in turn means lower wages, combined with recurring periods
of inflation. It means a potential loss of foreign trade, less foreign
investment in our economy. It means an economy that's slowing down.
For government a capital shortage implies the necessity of choice.
The government can choose to continue deficit spending to finance its
programs and thereby increase inflationary pressures. Or it can choose to
curtail some programs and to allocate scarce capital to those who can use it
most effectively. That's a political judgement full of risk for the legislator.
For bankers the capital shortage implies even more difficult
problems. As interest rates rise, we face the loss of our inventory of raw
materials --- loanable funds -- to unregulated sectors of the money market --
a loss due to ceilings on bank interest rates paid on savings and time deposits.
For bankers, too, capital shortages imply difficult choices. How
do we lend out our scarce funds most effectively? Do we allocate such resources
on the basis of price, i.e. interest rates received on loans? Or do we base
some of our lending decisions on social criteria, in effect lending at lower
GERALD FORD LIBRARY
rates to help meet social problems? Should we reduce returns to one group of
individuals -- savers -- to loan to other individuals -- borrowers --- at rates
below the general market? We must make these decisions in such a way that we
do not become a convenient whipping boy for the nation's economic problems.
-8-
Now the big question. What can we do to alleviate capital shortages?
I don't have any simple answers. The ultimate solution, of course,
is to restore and maintain a relatively stable, non-inflationary economy.
This in turn requires that we recognize the limits of our resources -- and
more, that we make sure we don't exceed those limits. That's the classic
answer --- and I'm the first to admit it's easier said than done.
How we actually bring this economic miracle about is an entirely
different matter. As I said before, there are no easy solutions. Nevertheless,
I would like to offer a few suggestions as to how we can begin.
First, the competitive market system is the most efficient system I know of
for allocating scarce resources. It's not perfect, but it's the best we have.
I think we must work to allow that system to operate freely, without restraints, insofar
as such free operations are politically feasible.
of course, there are some flaws in the free market system. It
doesn't always provide funds for pressing social needs. In such instances, we
can use inducements to channel capital into these high priority areas. But
such a system must be flexible and it must apply uniformly to all depository
institutions -- regardless of whether it consists of tax credits or subsidies.
Second, I think we must continue to help the public and Congress
recognize interest for what it is -- a price for use of loanable funds which
is determined by forces of demand and supply. The rate can be held down by
government fiat but all segments of the money market must be replaced if it is
to be controlled. And even in this case we must expect a reduction in the
amount of capital available. The government cannot control price and quantity
GER FORD LIBRARY
at the same time. In a competitive free market economy, it makes no sense to
to place limitations on interest rates, such as those outlined in usury laws.
Accordingly, we should work for the abolition of such laws.
-9-
Third, it's in your interest--indeed, in the interest of all segments
of our economy -- to support fiscal and monetary policies that will tend to reduce
inflation. On balance higher interest rates are caused by inflation rather
than being causes of inflation.
Finally, I think we must help the public--and Congress-understand
the importance of lending and investment activities. A good many other-
wise well educated people tend to assume that consumer lending and social
priority lending are more important than day-to-day business loans for example. I
certainly would agree that loans for housing or education are indeed worthwhile. But
it's important to understand one basic economic fact of life: all these other loan
activities depend on a healthy economy. And a healthy economy depends in turn
on a healthy level of business loans and investment.
Let me give an example. Housing certainly is a high priority area
in our society. Banks do make a substantial amount of residential loans and also
finance construction. But look beyond mortgage instruments themselves and
consider what goes into a house--plumbing, lumber, bricks, insulation--the
list goes on and on. Who produces these building materials? Industry. And who
provides a good deal of the capital for investment in industry? The answer is
obvious.
Furthermore we own substantial amounts of municipal bonds that make
community development possible. At the end of last year, banks had an estimated
$60 billion invested in municipal bonds-bonds to pay for roads, for sewers,
for schools, for police buildings--all the necessary physical facilities that make
a community of homes possible.
FORD i GERALD LIBRARY
-10-
But that's not the major point. That point is that a healthy level
of capital investment in business and industry is a necessary prerequisite
for a healthy, productive capitalist economy. Without such investment, few other
demands can be met.
It's a point worth remembering as we move into this new economic era,
when shortages may be the dominant characteristic of our economy. Certainly
it's a point to be noted when we make the choices that will allocate our relatively
scarce pool of capital--because these shortages are real. The demand for capital
is growing every day. And the supply of capital simply is not keeping pace--at
least not in our current overheated, inflationary economy even though current
interest rates are high by historical standards. How we deal with these capital
shortages--and the choices we make--may well shape the future of our industry--
and our economy--during the last third of this century.
FORD & LIBRARY GERALD
FEDERAL AGENCY RELATIONS
THE AMERICAN BANKERS ASSOCIATION 1120 CONNECTICUT AVENUE, N.W., WASHINGTON, D.C. 20036
FEDERAL ADMINISTRATIVE ADVISER
HAMPTON A. RABON
202/467-4200
April 3, 1974
Mrs. Catherine Mallardi
Secretary to Chairman Burns
Board of Governors of the
Federal Reserve System
Washington, D.C. 20551
Dear Mrs. Mallardi:
There is enclosed for your information a copy of the agenda for the next
meeting of the Government Borrowing Committee. Please call to Chairman Burns'
attention that the Committee will be meeting in our offices at 1120 Connecticut
Avenue, N.W. The building (Bender) has another entrance on L Street, near 18th.
Our Board Room is on the 7th floor.
The Committee will look forward, as usual, to meeting with Chairman
Burns at 4:00 p.m. on Tuesday, April 30, 1974.
I am also enclosing for Chairman Burns' information a list of the members
of the Government Borrowing Committee.
Sincerely,
Hampton Galor Galon
Hampton A. Rabon
HAR:fmm
Enclosures
FORD i LIBRARY 076870
AGENDA
GOVERNMENT BORROWING COMMITTEE
The American Bankers Association
April 30-May 1, 1974
Tuesday, April 30, 1974
9:15 a.m.
Committee meets in Board Room of
The American Bankers Association
1120 Connecticut Avenue, N.W.
(7th Floor)
10:00 a.m.
Committee to review slides in Room 2334
of the Treasury building
2/
11:00 a.m.
Committee to meet with Under Secretary
for Monetary Affairs, Mr. Paul Volcker,
in Room 4426 of the Treasury building for
backgrounding
3/
12:30 p.m.
Refreshments
1:00 p.m.
Luncheon. Chinese Room, Mayflower Hotel
2:30 p.m.
Committee to assemble in Board Room of
The American Bankers Association
1120 Connecticut Avenue, N.W. (7th Floor) 1/
Chairman Burns (Federal Reserve Board) will
meet with the Committee at 4:00 p.m.
6:00 p.m.
Reception
7:00 p.m.
Dinner. Cabinet and Pan American Rooms,
Mayflower Hotel
Wednesday, May 1, 1974
9:00 a.m.
Committee to assemble in Board Room of
The American Bankers Association
1120 Connecticut Avenue, N.W. (7th Floor) 1/
9:45 a.m.
Committee to report its recommendations to
Secretary Shultz and the Treasury Financing
Group in Room 4426 of the Treasury building 3/
1/ This location is on Connecticut Avenue across from the Mayflower Hotel.
2/ Treasury will use the regular projection room on the second floor in the southwest corner of
the building (corner facing the Mall and the White House)
3/ Conference with Under Secretary for Monetary Affairs and report to the Secretary of the
Treasury will be held in the 4th floor Conference Room on west side of the building near
the center elevators opposite the White House.
GERALD FORD LIBRARI
GOVERNMENT BORROWING COMMITTEE
Chairman: Robert M. Surdam
Chairman and Chief Executive Officer
National Bank of Detroit
RPA Box 116
Detroit, Michigan 48232
Andrew Benedict
Robert J. Gaddy
Chairman of the Board
Chairman and President
First American National Bank
Tower Grove Bank and Trust Company
P.O. Box 1351
3134 South Grand Boulevard
Nashville, Tennessee 37237
St. Louis, Missouri 63118
Alfred Brittain III
William M. Jenkins
President
Chairman
Bankers Trust Company
Seattle-First National Bank
P.O. Box 318, Church Street Station
P.O. Box 3586
New York, New York 10015
Seattle, Washington 98124
Robert E. Bryans
Ben F. Love
Chairman and President
Chairman and Chief Executive Officer
First National Bank of Casper
Texas Commerce Bank, N.A.
P.O. Box 40
P.O. Box 2558
Casper, Wyoming 82601
Houston, Texas 77001
Willard C. Butcher
C. Coleman McGehee
President
Chairman and Chief Executive Officer
The Chase Manhattan Bank, N.A.
First and Merchants National Bank
One Chase Manhattan Plaza
P.O. Box 27025
New York, New York 10015
Richmond, Virginia 23261
A.W. Clausen
John A. Moorhead
President and Chief Executive Officer
Senior Chairman of the Board
Bank of America, N.T. & S.A.
Northwestern National Bank
P.O. Box 37000
Seventh and Marquette
San Francisco, California 94137
Minneapolis, Minnesota 55480
Richard P. Cooley
Ellmore C. Patterson
President and Chief Executive Officer
Chairman of the Board
Wells Fargo Bank, N.A.
Morgan Guaranty Trust Company
P.O. Box 44000
23 Wall Street
San Francisco, California 94144
New York, New York 10015
GERALD FORD LIBRARY
Gaylord Freeman
John H. Perkins
Chairman of the Board
President
The First National Bank
Continental Illinois National Bank and Trust Co.
P.O. Box A
231 South LaSalle Street
Chicago, Illinois 60670
Chicago, Illinois 60693
-2-
Government Borrowing Committee
EX OFFICIO
Howard C. Petersen
Chairman of the Board
Eugene H. Adams
The Fidelity Bank
President
Broad and Walnut Streets
The First National Bank
Philadelphia, Pennsylvania 19109
P.O. Box 5808, Terminal Annex
Denver, Colorado 80217
Robert V. Roosa
(Past President, ABA)
Partner
Brown Brothers Harriman & Company
Willis W. Alexander
59 Wall Street
Executive Vice President
New York, New York 10005
The American Bankers Association
1120 Connecticut Avenue, N.W.
D. Thomas Trigg
Washington, D.C. 20036
Chairman and Chief Executive Officer
National Shawmut Bank of Boston
W. Jarvis Moody
P.O. Box 2176
President
Boston, Massachusetts 02106
American Security and Trust Company
15th and Pennsylvania Avenue, N.W.
ADVISORY MEMBERS
Washington, D.C. 20013
(Chairman, ABA Savings Bonds Committee)
John J. Larkin
Rex J. Morthland
Senior Vice President
Chairman of the Board
First National City Bank
The Peoples Bank and Trust Company of Selma
95 Wall Street--23rd Floor
P.O. Box 799
New York, New York 10015
Selma, Alabama 36701
(President, ABA)
Donald C. Miller
Executive Vice President
George L. Whyel
Continental Illinois National Bank & Trust Co.
Vice Chairman of the Board
231 South LaSalle Street
Genesee Merchants Bank and Trust Company
Chicago, Illinois 60693
Flint, Michigan 48502
(President-Elect, ABA)
Leland S. Prussia, Jr.
Senior Vice President
ABA Staff:
Bank of America, N.T. & S.A.
Hampton A. Rabon
P.O. Box 37003
Director (202-467-4200)
San Francisco, California 94137
Lawrence Banyas
James R. Sheridan
Economic Consultant (202-467-4382)
Senior Vice President
North Carolina National Bank
P.O. Box 120
Charlotte, North Carolina 28201
QERALD FORD VIBRARY
December 1973
J. MORTHLAND
949
EUGENE H. ADAMS
Chairman of the Board
Chairman of the Board
The Peoples Bank and Trust Company
BOARD OF GOVERNORS
The First National Bank of Denver
Selma, Alabama
OF THE
Denver, Colorado
President, The American
FEDERAL RESERVE SYSTEM
Chairman, ABA Governing Council
Bankers Association
FRANK E. BAUDER
GABRIEL HAUGE
1974 JUN 10 PM 6:01
ABA
Chairman of the Board
Chairman of the Board
Manufacturers Hanover Trust
National
and Chief Executive Officer
Central National Bank
New York, New York
RECEIVED
Governmental
Chicago, Illinois
Chairman, ABA Symposium
OFFICE OF THE CH
MAN
Affairs
Chairman, ABA Government
on Inflation
Conference/
Relations Council
Symposium
on Inflation
June 7, 1974
July 17,18,1974
The Honorable Arthur F. Burns
Chairman
Board of Governors of the
Federal Reserve System
20th and Constitution Avenue, N.W.
Washington, D.C. 20551
Dear Chairman Burns:
On behalf of the American Bankers Association, I would like to invite you
to the National Governmental Affairs Conference and Symposium on Inflation which
will be held July 17 and 18 at the Washington Hilton Hotel, Washington, D.C.
The July 17 program will focus attention on perspectives of the financial
industries regarding changes in structure and powers, the relationship of trade
associations to the legislative process, competing financial institutions' views
of the marketplace, as well as some insights into the current Washington scene.
That evening, a reception honoring all Members of Congress will be held.
The following day, July 18, you will be joined by other key representatives
of business, government, academia, and labor from all over the nation for a
Symposium on Inflation. We feel there is an urgent need to bring together the
best-qualified authorities on our nation's economy and key leaders of the major
economic groups in our society for a discussion on the serious national problem
caused by inflation. It is our hope and belief that, through this dialogue of
diverse interests, a reasonable and realistic consensus for action can be derived.
A glance at the names of the speakers and topics listed on the enclosed
program clearly reflects that these sessions will provide participants with
meaningful information on many timely and important issues. Anticipating your
interest in these sessions, I am enclosing a complimentary registration. If
you plan on attending, please return it to us in the enclosed envelope.
Looking forward to seeing you on July 17 and 18.
Sincerely,
GERALD FORD LIBRARY
Jemy Gerald M. Lowrie
467-
Executive Director
attend 12/mertairin
Government Relations
4097
THE AMERICAN BANKERS ASSOCIATION
1120 CONNECTICUT AVENUE, N.W., WASHINGTON, D.C. 20036
Helenanuely
THE ABA
SYMPOSIUM
ON INFLATION
Program Committee
Chairman:
EDWIN H. YEO, III
Vice Chairman
Pittsburgh National Bank
Pittsburgh, Pennsylvania
WILLIAM F. FORD
Executive Director and Chief Economist
American Bankers Association
Washington, D.C.
TILFORD C. GAINES
Senior Vice President
Manufacturers Hanover Trust Company
New York, New York
ALAN GREENSPAN
President
Townsend-Greenspan & Co., Inc.
New York, New York
SAUL B. KLAMAN
Vice President & Chief Economist
National Association of Mutual Savings
Banks
New York, New York
LEIF H. OLSEN
Senior Vice President
First National City Bank
New York, New York
Ex Officio Members:
WILLIS W. ALEXANDER
Executive Vice President
American Bankers Association
Washington, D.C.
GABRIEL HAUGE
Chairman of the Board
Manufacturers Hanover Trust Company
New York, New York
THE AMERICAN BANKERS ASSOCIATION
1120 CONNECTICUT AVENUE NW WASHINGTON DC 20036
WEDNESDAY, July 17
PANELISTS:
I. W. ABEL
President
Conference Day
7:30 a.m.-5:00 p.m.
REGISTRATION
Welcome
EUGENE H. ADAMS
Symposium Day
United Steelworkers of America
CHARLES L. SCHULTZE
9:00 a.m.-12:00 p.m.
Senior Fellow
GENERAL SESSION
The Brookings Institution
ALAN GREENSPAN
President
Chairman, The First National Bank of Denver
Townsend-Greenspan & Company, Inc.,
Denver, Colorado
THURSDAY, July 18
New York, New York
Chairman, ABA Governing Council
Opening Remarks and Introductions
7:30-8:45 a.m.
A BUSINESS EXECUTIVE
REX J. MORTHLAND
Continental Breakfast
Chairman, The Peoples Bank & Trust Company
Selma, Alabama
REGISTRATION
President, The American Bankers Association
"Communicating Your Message
12:00-12:30 p.m.
in a Representative Democracy"
9:00-12:00 noon
RECEPTION FOR REGISTRANTS
THE HONORABLE BARBER B. CONABLE, JR.
GENERAL SESSION
United States House of Representatives
"Financial Institutions
Welcoming Remarks
12:30-2:00 p.m.
and the Public Interest"
REX J. MORTHLAND
LUNCHEON FOR REGISTRANTS
THE HONORABLE THOMAS J. McINTYRE
Chairman, The Peoples Bank & Trust Company,
PRESIDING:
United States Senate
Selma, Alabama;
GABRIEL HAUGE
President, The American Bankers Association
Panel Session:
SPEAKER:
"Depository Institutions-
THE HONORABLE WILLIAM E. SIMON
Present Concerns/Future Opportunities"
"Why We're Here"
Secretary of the Treasury
PANELISTS:
GABRIEL HAUGE
WILLIS W. ALEXANDER
Chairman, Manufacturers Hanover Trust,
Executive Vice President
New York, New York;
The American Bankers Association
Chairman, ABA Symposium on Inflation
2:15-4:00 p.m.
GENERAL SESSION
GROVER W. ENSLEY
Panel Discussion:
Executive Vice President
National Association of Mutual Savings Banks
"The Problem"
"The Action: Can We Do It?"
NORMAN B. STRUNK
THE HONORABLE HENRY C. WALLICH
PANELISTS:
Executive Vice President
Member, Board of Governors of the
United States League of Savings Associations
Federal Reserve System
ROBERT L. BARTLEY
Editorial Page Editor
Wall Street Journal, New York, New York
12:00-12:30 p.m.
RECEPTION FOR REGISTRANTS
"The Program"
THE HONORABLE BOB PACKWOOD
United States Senate
PAUL McCRACKEN
12:30-2:00 p.m.
Professor, Graduate School
THE HONORABLE KENNETH RUSH
LUNCHEON FOR REGISTRANTS
of Business Administration,
Counsellor to the President
University of Michigan,
"The Nature of Leadership"
for Economic Policy
Ann Arbor, Michigan
HUGH SIDEY
A MEMBER OF THE UNITED STATES
Chief, Time-Life News Service,
HOUSE OF REPRESENTATIVES
Washington, D.C.
Panel Discussion:
6:00-8:00 p.m.
"The Reaction"
"Summary and Appraisal"
CONGRESSIONAL RECEPTION
MODERATOR:
PAUL McCRACKEN
EDWIN H. YEO, III
Vice Chairman, Pittsburgh National Bank,
Pittsburgh, Pennsylvania;
There will be special activities
Program Chairman,
4:00 p.m.
planned for the spouses during the day.
ABA Symposium on Inflation
ADJOURNMENT
FEDERAL AGENCY RELATIONS
THE AMERICAN BANKERS ASSOCIATION 1120 CONNECTICUT AVENUE, N.W., WASHINGTON, D.C. 20036
FEDERAL ADMINISTRATIVE ADVISER
HAMPTON A. RABON
202/467-4200
June 19, 1974
Mrs. Catherine Mallardi
Secretary to Chairman Burns
Board of Governors of the
Federal Reserve System
Washington, D.C. 20551
Dear Mrs. Mallardi:
There is enclosed for your information a copy of the agenda for the next meeting
of the Government Borrowing Committee. Please call to Chairman Burns' attention
that the Committee will be meeting in our offices at 1120 Connecticut Avenue, N.W.
The building (Bender) has another entrance on L Street, near 18th. Our Board Room
is on the 7th floor.
The Committee will look forward, as usual, to meeting with Chairman Burns at
4:00 p.m. on Tuesday, July 30, 1974.
I am also enclosing for Chairman Burns' information a list of the members of
the Government Borrowing Committee.
Sincerely,
Hampton A. Rabon
HAR:fmm
Enclosures
wn
,FORD VIBRARY
AGENDA
GOVERNMENT BORROWING COMMITTEE
The American Bankers Association
July 30-31, 1974
Tuesday, July 30, 1974
9:15 a.m.
Committee meets in Board Room of
The American Bankers Association
1120 Connecticut Avenue, N.W.
(7th Floor)
1/
10:00 a.m.
Committee to review slides in Room 2334
of the Treasury building
2/
11:00 a.m.
Committee to meet with Under Secretary
for Monetary Affairs, Mr. Jack Bennett,
in Room 4426 of the Treasury building for
backgrounding
3/
12:30 p.m.
Refreshments
1:00 p.m.
Luncheon. Chinese Room, Mayflower Hotel
2:30 p.m.
Committee to assemble in Board Room of
The American Bankers Association
1120 Connecticut Avenue, N.W. (7th Floor)1/
Chairman Burns (Federal Reserve Board)
will meet with the Committee at 4:00 p.m.
6:00 p.m.
Reception
7:00 p.m.
Dinner. Pan American Room, Mayflower Hotel
Wednesday, July 31, 1974
9:00 a.m.
Committee to assemble in Board Room of
The American Bankers Association
1120 Connecticut Avenue, N.W. (7th Floor
9:45 a.m.
Committee to report its recommendations to
Secretary Simon and the Treasury Financing
Group in Room 4426 of the Treasury building 3/
1/ This location is on Connecticut Avenue across from the Mayflower Hotel.
2/ Treasury will use the regular projection room on the second floor in the southwest corner of
the building (corner facing the Mall and the White House)
3/ Conference with Under Secretary for Monetary Affairs and report to the Secretary of
the Treasury will be held in the 4th floor Conference Room on west side of the building
near the center elevators opposite the White House.
GERALD FORD LIBRARY
GOVERNMENT BORROWING COMMITTEE
Chairman: Robert M. Surdam
Chairman and Chief Executive Officer
National Bank of Detroit
RPA Box 116
Detroit, Michigan 48232
Andrew Benedict
Robert J. Gaddy
Chairman of the Board
Chairman and President
First American National Bank
Tower Grove Bank and Trust Company
P.O. Box 1351
3134 South Grand Boulevard
Nashville, Tennessee 37237
St. Louis, Missouri 63118
Alfred Brittain III
William M. Jenkins
President
Chairman
Bankers Trust Company
Seattle-First National Bank
P.O. Box 318, Church Street Station
P.O. Box 3586
New York, New York 10015
Seattle, Washington 98124
Robert E. Bryans
Ben F. Love
Chairman and President
Chairman and Chief Executive Officer
First National Bank of Casper
Texas Commerce Bank, N.A.
P.O. Box 40
P.O. Box 2558
Casper, Wyoming 82601
Houston, Texas 77001
Willard C. Butcher
C. Coleman McGehee
President
Chairman and Chief Executive Officer
The Chase Manhattan Bank, N.A.
First and Merchants National Bank
One Chase Manhattan Plaza
P.O. Box 27025
New York, New York 10015
Richmond, Virginia 23261
A.W. Clausen
John A. Moorhead
President and Chief Executive Officer
Senior Chairman of the Board
Bank of America, N.T. & S.A.
Northwestern National Bank
P.O. Box 37000
Seventh and Marquette
San Francisco, California 94137
Minneapolis, Minnesota 55480
Richard P. Cooley
Ellmore C. Patterson
President and Chief Executive Officer
Chairman of the Board
Wells Fargo Bank, N.A.
Morgan Guaranty Trust Company
P.O. Box 44000
23 Wall Street
FORD is LIBRARY 937870
San Francisco, California 94144
New York, New York 10015
Gaylord Freeman
John H. Perkins
Chairman of the Board
President
The First National Bank
Continental Illinois National Bank and Trust Co.
P.O. Box A
231 South LaSalle Street
Chicago, Illinois 60670
Chicago, Illinois 60693
-2-
Government Borrowing Committee
EX OFFICIO
Howard C. Petersen
Chairman of the Board
Eugene H. Adams
The Fidelity Bank
President
Broad and Walnut Streets
The First National Bank
Philadelphia, Pennsylvania 19109
P.O. Box 5808, Terminal Annex
Denver, Colorado 80217
Robert V. Roosa
(Past President, ABA)
Partner
Brown Brothers Harriman & Company
Willis W. Alexander
59 Wall Street
Executive Vice President
New York, New York 10005
The American Bankers Association
1120 Connecticut Avenue, N.W.
D. Thomas Trigg
Washington, D.C. 20036
Chairman and Chief Executive Officer
National Shawmut Bank of Boston
W. Jarvis Moody
P.O. Box 2176
President
Boston, Massachusetts 02106
American Security and Trust Company
15th and Pennsylvania Avenue, N.W.
ADVISORY MEMBERS
Washington, D.C. 20013
(Chairman, ABA Savings Bonds Committee)
John J. Larkin
Rex J. Morthland
Senior Vice President
Chairman of the Board
First National City Bank
The Peoples Bank and Trust Company of Selma
95 Wall Street--23rd Floor
P.O. Box 799
New York, New York 10015
Selma, Alabama 36701
(President, ABA)
Donald C. Miller
Executive Vice President
George L. Whyel
Continental Illinois National Bank & Trust Co.
Vice Chairman of the Board
231 South LaSalle Street
Genesee Merchants Bank and Trust Company
Chicago, Illinois 60693
Flint, Michigan 48502
(President-Elect, ABA)
Leland S. Prussia, Jr.
Senior Vice President
ABA Staff:
Bank of America, N.T. & S.A.
Hampton A. Rabon
P.O. Box 37003
Director (202-467-4200)
San Francisco, California 94137
Lawrence Banyas
James R. Sheridan
Economic Consultant (202-467-4382)
Senior Vice President
North Carolina National Bank
Gerald M. Lowrie, Executive Director
P.O. Box 120
Government Relations (202-467-4097)
Charlotte, North Carolina 28201
William F. Ford, Executive Director
Research and Planning (202-467-4018)
December 1973
BERALD FORD VIBRARI
me
FEDERAL AGENCY RELATIONS
THE AMERICAN BANKERS ASSOCIATION 1120 CONNECTICUT AVENUE, N.W., WASHINGTON, D.C. 20036
FEDERAL ADMINISTRATIVE ADVISER
HAMPTON A. RABON
September 30, 1974
202/467-4200
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Mrs. Catherine Mallardi
Secretary to Chairman Burns
1974OCT- I PM 01
Board of Governors of the
Federal Reserve System
OFFICE OF RECEIVED THE CHAIRMAN
Washington, D. C. 20551
Dear Mrs. Mallardi:
There is enclosed for your information a copy of the agenda for the next meeting
of the Government Borrowing Committee. Please call to Chairman Burns' attention
that the Committee will be meeting in our offices at 1120 Connecticut Avenue, N. W.
The building (Bender) has another entrance on L Street, near 18th. Our Board Room
is on the 7th floor.
The Committee will look forward, as usual, to meeting with Chairman Burns at
4:00 p.m. on Tuesday, October 29, 1974.
Sincerely,
Hampton A. Rabon
HAR/rh
encl.
FORD i LIBRARY GERALD
AGENDA
GOVERNMENT BORROWING COMMITTEE
The American Bankers Association
October 29-30, 1974
Tuesday, October 29, 1974
9:15 a.m.
Committee meets in Board Room of
The American Bankers Association
1120 Connecticut Avenue, N. W.
(7th Floor)
1/
10:00 a.m.
Committee to review slides in Room 2334
of the Treasury building
2/
11:00 a.m.
Committee to meet with Under Secretary
for Monetary Affairs, Mr. Jack Bennett,
in Room 4426 of the Treasury building for
backgrounding
3/
12:30 p.m.
Refreshments
1:00 p.m.
Luncheon
2:30 p.m.
Committee to assemble in Board Room
of The American Bankers Association
1120 Connecticut Avenue, N. W. (7th Floor)
Chairman Burns (Federal Reserve Board)
will meet with the Committee at 4:00 p.m.
1/
6:00 p.m.
Reception
4/
7:00 p.m.
Dinner
Wednesday, October 30, 1974
9:00 a.m.
Committee to assemble in Board Room
of The American Bankers Association
1120 Connecticut Avenue, N. W. (7th Floor)
1/
9:45 a.m.
Committee to report its recommendations to
Secretary Simon and the Treasury Financing
Group in Room 4426 of the Treasury building
3/
1/
This location is on Connecticut Avenue across from the Mayflower Hotel.
2/
Treasury will use the regular projection room on the second floor in the southwest
corner of the building (corner facing the Mall and the White House).
3/
Conference with Under Secretary for Monetary Affairs and report of the Secretary
of the Treasury will be held in the 4th floor Conference Room on west side of the
building near the center elevators opposite the White House.
4/
Place to be announced at a later date.
GERALD FORD LIBRART
WILLIS ALEXANDER
Dr.Bwns Buns
Date September 11, 1974
The enclosed report was
delivered by first class mail to
the desk of the chief executive
officer of 13,800 banks as the
Association's initial step in
enlisting their active participation
in the national war on inflation.
The responses are most
encouraging.
Willi GERAL /8. R. FORD LIBRARY
THE AMERICAN BANKERS ASSOCIATION
Executive Report
September 4, 1974
OFFICE OF THE
Good Morning!
RECEIVED
1974SEP 17 PM 114 19
RESERVE SYSTEM
THE
BOARD OF GOVERNORS
Neither you nor I can cure inflation in the next seven days, but
together we can make a start.
The American Bankers Association has been invited by the President
to participate in the Economic Summit September 27-28, and we need
your help.
As you know, the Summit will be preceded by a number of specialized
sessions to consider the facets of the primary problem. The ABA has
been asked to participate in three of these, and by the time you read
this, the first will be scarcely a week away.
On September 12, a meeting in Atlanta will consider the difficulties
connected with housing and construction. On the 13th, we will
participate in a Chicago session on the problems of agriculture.
Washington will be the site on the 20th when the subject will be banking
and finance.
To participate effectively, ABA officers need your assistance.
At the request of Rex Morthland, I urge you to meet immediately with
your officers and directors for the purpose of developing ideas that
may contribute to the solution of the inflationary problem. While no
idea should be prematurely discarded, it may serve to focus your thinking
if you consider some of the suggestions already made, and try to assess
their impact on your customers and your community. Among these are:
Methods for increasing the flow of funds to savings, including the
possibility of relief from taxation on the first $1,000 worth of interest
on savings or dividends on stock;
A variable-rate Certificate of Deposit coupled with a program
aimed at eliminating usury statutes; and
Assistance to housing either through tax incentives to lenders,
direct subsidies to buyers, or subsidies to thrift institutions.
Obviously, these only scratch the surface, but they are all
possibilities that have been brought to public attention. As recognized
community leaders, we must be credible in what we say and do. As you
FORD
Route to:
LIBRARY
THE AMERICAN BANKERS ASSOCIATION 1120 CONNECTICUT AVENUE, N.W., WASHINGTON, D.C. 20036
make suggestions, do not overlook steps you and your bank can take to make
this crusade succeed.
Let me repeat that we are anxious to hear your reactions to proposals
already being aired, and to record any ideas that your discussions may
generate. The ABA's Economic Advisory Committee -- assisted by the staff --
is prepared to read, analyze and consolidate this material in order to
reflect your thinking in this series of important meetings.
I believe we should also keep in mind that while there is an economic
basis for inflation, its cure may result in large part from a blunting
of the inflationary expectations to which we have all fallen prey.
Reversing this psychological element in the equation may prove the greatest
challenge of all.
Clearly, time is our greatest enemy in this effort. As you read this,
our first opportunity to contribute may be only a week away. Others will
follow shortly thereafter. I urge that you react with all possible speed.
America stands in need of your expertise and support.
Sincerely,
Willis W. Alexander
P.S. Please route your replies directly to me. I'll see to it they
get immediate attention.
FEDERAL AGENCY RELATIONS
THE AMERICAN BANKERS ASSOCIATION 1120 CONNECTICUT AVENUE, N.W., WASHINGTON, D.C. 20036
FEDERAL ADMINISTRATIVE ADVISER
HAMPTON A. RABON
December 19, 1974
202/467-4200
Mrs. Catherine Mallardi
Secretary to Chairman Burns
Board of Governors of the
Federal Reserve System
Washington, D. C. 20551
Dear Mrs. Mallardi:
There is enclosed for your information a copy of the agenda for the
next meeting of the Government Borrowing Committee. Please call to Chairman
Burns' attention that the Committee will be meeting in our offices at 1120 Connect-
icut Avenue, N. W. The building (Bender) has another entrance on L Street, near
18th. Our Board Room is on the 7th floor.
The Committee will look forward, as usual, to meeting with Chairman
Burns at 4:00 p.m. on Tuesday, January 21, 1975.
I am also enclosing for Chairman Burns' information a list of the
members of the Government Borrowing Committee.
Sincerely,
Hampton G. Golon
Hampton A. Rabon
HAR/rh
encl.
LIBRARY GERALD ? FORD
AGENDA
GOVERNMENT BORROWING COMMITTEE
The American Bankers Association
January 21-22, 1975
Tuesday, January 21, 1975
9:15 a.m.
Committee meets in Board Room of
The American Bankers Association
1120 Connecticut Avenue, N. W. (7th Floor)
1/
10:00 a.m.
Committee to review slides in Room 2334
of the Treasury building
2/
11:00 a.m.
Committee to meet with Under Secretary
for Monetary Affairs, Mr. Jack Bennett,
in Room 4426 of the Treasury building for
backgrounding
3/
12:30 p.m.
Refreshments
1:00 p.m.
Luncheon
2:30 p.m.
Committee to assemble in Board Room of
The American Bankers Association.
Chairman Burns (Federal Reserve Board)
will meet with the Committee at 4:00 p.m.
1/
6:00 p.m.
Reception
7:00 p.m.
Dinner
Wednesday, January 22, 1974
9:15 a.m.
Committee to assemble in Board Room of
The American Bankers Association
1/
10:00 a.m.
Committee to report its recommendations to
Secretary Simon and the Treasury Financing
Group in Room 4426 of the Treasury building
3/
1/
This location is on Connecticut Avenue across from the Mayflower Hotel.
Treasury will use the regular projection room on the second floor in the southwest
corner of the building (corner facing the Mall and the White House).
3/
Conference with Under Secretary for Monetary Affairs and report of the Secretary
of the Treasury will be held in the 4th floor Conference Room on west side of the
building near the center elevators opposite the White House.
4/
Place to be announced at a later date.
GERALD FORD LIBRARY
GOVERNMENT BORROWING COMMITTEE
Chairman: Robert M. Surdam
Chairman and Chief Executive Officer
National Bank of Detroit
RPA Box 116
Detroit, Michigan 48232
Andrew Benedict
Gaylord Freeman
Chairman of the Board
Chairman of the Board
First American National Bank
The First National Bank
P.O. Box 1351
P.O. Box A
Nashville, Tennessee 37237
Chicago, Illinois 60670
Henry G. Blanchard
Gabriel Hauge
Chairman of the Board
Chairman of the Board
Commercial National Bank of Kansas City
Manufacturers Hanover Trust
P.O. Box 1400
350 Park Avenue
Kansas City, Kansas 66117
New York, New York 10022
Alfred Brittain III
William M. Jenkins
President
Chairman
Bankers Trust Company
Seattle-First National Bank
P.O. Box 318, Church Street Station
P.O. Box 3586
New York, New York 10015
Seattle, Washington 98124
Robert E. Bryans
Ben F. Love
Chairman and President
Chairman and Chief Executive Officer
First National Bank of Casper
Texas Commerce Bank, N.A.
P.O. Box 40
P.O. Box 2558
Casper, Wyoming 82601
Houston, Texas 77001
Willard C. Butcher
C. Coleman McGehee
President
Chairman and Chief Executive Officer
The Chase Manhattan Bank, N.A.
First and Merchants National Bank
One Chase Manhattan Plaza
P.O. Box 27025
New York, New York 10015
Richmond, Virginia 23261
A.W. Clausen
John A. Moorhead
President and Chief Executive Officer
Senior Chairman of the Board
Bank of America, N.T. & S.A.
Northwestern National Bank
P.O. Box 37000
Seventh and Marquette
San Francisco, California 94137
Minneapolis, Minnesota 55480
Richard P. Cooley
Ellmore C. Patterson
President and Chief Executive Officer
Chairman of the Board
Wells Fargo Bank, N.A.
Morgan Guaranty Trust Company
is
FORD
P.O. Box 44000
23 Wall Street
San Francisco, California 94144
New York, New York 10015
GERALD
LIBRARY
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Government Borrowing Committee
EX OFFICIO
John H. Perkins
President
Willis W. Alexander
Continental Illinois National Bank and Trust Co.
Executive Vice President
231 South LaSalle Street
The American Bankers Association
Chicago, Illinois 60693
1120 Connecticut Avenue, N.W.
Washington, D.C. 20036
Howard C. Petersen
Chairman of the Board
J. Rex Duwe
The Fidelity Bank
President and Chairman
Broad and Walnut Streets
The Farmers State Bank
Philadelphia, Pennsylvania 19109
P.O. Box 305
Lucas, Kansas 67648
D. Thomas Trigg
(President-Elect, ABA)
Chairman and Chief Executive Officer
National Shawmut Bank of Boston
W. Jarvis Moody
P.O. Box 2176
President
Boston, Massachusetts 02106
American Security and Trust Company
15th and Pennsylvania Avenue, N.W.
ADVISORY MEMBERS
Washington, D.C. 20013
(Chairman, ABA Savings Bonds Committee)
D. Dean Kaylor
Senior Vice President
Rex J. Morthland
National Bank of Detroit
Chairman of the Board
P.O. Box 1041A
The Peoples Bank and Trust Company of Selma
Detroit, Michigan 48232
P.O. Box 799
Selma, Alabama 36701
Donald C. Miller
(Past President, ABA)
Executive Vice President
Continental Illinois National Bank & Trust Co.
George L. Whyel
231 South LaSalle Street
Vice Chairman of the Board
Chicago, Illinois 60693
Genesee Merchants Bank & Trust Company
One East First Street
Leland S. Prussia, Jr.
Flint, Michigan 48502
Executive Vice President
(President, ABA)
Bank of America, N.T. & S.A.
P.O. Box 37003
ABA Staff:
San Francisco, California 94137
Hampton A. Rabon
Director (202-467-4200)
James R. Sheridan
Senior Vice President
Lawrence Banyas
North Carolina National Bank
Economic Consultant (202-467-4382)
P.O. Box 120
Charlotte, North Carolina 28201
GERALDO FORD LIBRARY
Gerald M. Lowrie, Executive Director
Government Relations (202-467-4097)
William F. Ford, Executive Director
Research and Planning (202-467-4018)
October 1974