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The original documents are located in Box K40, folder "Wojnilower, Albert" 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. Arthur Burns 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United States of America his copyrights in all of his unpublished writings in National Archives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.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
DATE June 24, 1977
TO
Chairman Burns
FROM JAMES L. KICHLINE
The attached memorandum is an evaluation
of Albert Wojnilower's proposed capital
standard for banks which you had request-
ed. We believe that Wojnilower's
proposal has serious deficiencies and
would not contribute to the pursuit of
macroeconomic stabilization goals.
GERALD R. FORD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date June 24, 1977
To
Chairman Burns
Subject: Summary and Evaluation of
Wojnilower's Proposal for a
From Division of Research and Statistics
Capital Standard for Banks
(B. Wolkowitz & D. Tucker)
SUMMARY OF PROPOSAL: Albert M. Wojnilower, Senior Vice President and
Director of the First Boston Corporation, has proposed that relatively
fixed capital requirements be established for commercial banks as a
technique of economic stabilization. (See attached letter to Senator
Proxmire.) He suggests that all banks (or all above a certain size--
e.g., the largest 500) be required to maintain a stable ratio of capital
to total liabilities. The average size of the required ratio for each
bank should be based on that bank's actual ratio of the preceding year
or two; however, it is presumed that banks with low capital ratios will
be brought up to the national average. Banks failing to comply with
the requirement will be penalized by prohibiting them from acquiring
any risk assets until the ratio is restored.
The purpose of the proposal is to "enable the Federal Reserve
to restrain undesirable monetary expansion with lesser rises in interest
rates and disruption of financial markets. 1,1/ Wojnilower observes that
during periods of inflation banks have an incentive to expand money and
credit at rates of growth that may exceed Federal Reserve targets. Open
market operations designed to restrain monetary expansion may provide a
setting in which banks compete aggressively for funds, thereby driving
up interest rates. Consequently, present monetary policy practices
This proposal is not concerned with the protection of
depositors or stockholders in banks, although it may make a contribution
in that direction.
FORD LIBRARY
To: Chairman Burns
-2-
generate substantial cyclical volatility in interest rates. Furthermore,
banks have an incentive during such periods to circumvent Federal Reserve
policy by expanding and inventing new forms of borrowing not subject to
high reserve requirements or constrained by aggregate Federal Reserve
money supply growth targets (e.g., CD's and Euro-dollars).
Wojnilower's proposal would presumably deter such bidding for
funds and attempts to circumvent the aggregate constraints because it
requires that banks increase their capital as they expand their liabili-
ties. The rationale behind a constraint on bank liability expansion
based on capital is that capital is a relatively expensive source of
funds. Consequently, a bank will be less likely to expand its liabili-
ties if it has to match this expansion even partially with capital.
This restraint by banks, it is argued, will also reduce the cyclical
variability of interest rates.
EVALUATION OF PROPOSAL: If the demand for credit is relatively inelastic
during inflationary periods, banks may be able to pass along the
increased cost of funds resulting from having to expand capital along
with liabilities. Therefore Wojnilower's proposal, because it increases
the cost of funds to banks, could have the perverse effect of encouraging
even higher interest rates during inflationary periods.
Even if it would not have this perverse effect, it is diffi-
cult to see how Wojnilower's proposal could lead to lower interest rates
for any given level of the monetary and credit aggregates. Interest
rate levels are determined by the supply and demand for credit from all
sources, not just banks. While Wojnilower's proposal would restrain
FORD
To: Chairman Burns
-3-
the growth of credit going through banks and limit banks' ability to bid
up interest rates in their competition for funds, this would merely shift
some of the credit demands to other suppliers of credit, probably at
higher cost. In addition, the proposal might limit the growth of the
supply of money during expansionary periods, since banks might be con-
strained by the capital requirement not to expand their deposit liabilities
as much as would be permitted by the existing level of bank reserves set
by the Fed. If this result occurred, it would also tend to drive up
interest rates further, not stabilize them.
Furthermore, this proposal would appear to be somewhat inflex-
ible, since bank liability expansion will be constrained at all times,
not just during periods of inflationary pressure. Capital has historically
been a relatively expensive source of funds regardless of the state of
the economy, and this is especially true when equity markets are depressed
during a cyclical contraction. Therefore, the expansion of bank liabili-
ties and loans may be constrained, under this proposal, during periods
in which public policy favors expansion of the commercial banking sector
as well as during the inflationary periods to which Wojnilower refers.
Thus such a capital requirement, which is presented as a countercyclical
policy tool, could also have the perverse effect of prolonging a depressed
state in the economy.
The inflexibility of this proposal has broader implications
since the degree of constraint it would impose would not be constant
but rather would vary with price fluctuations in the equity market.
Wojnilower seems to regard this characteristic as an advantage of the
FORD
REAL
LIBRARY
-4-
proposal. However, these market fluctuations would complicate the
selection of an appropriate capital requirement for a given policy
objective.
For these reasons, the Wojnilower proposal appears to us to
be without merit for macroeconomic stabilization. The only possibility
for making capital requirements a potentially helpful complement to
open market operations would be to amend the basic proposal to make the
capital requirement a policy variable. That is, the requirement could
be adjusted periodically to respond to changing needs for a constraint
and to changing equity market conditions. This would require the crea-
tion of a new body of policy analysis dependent at least in part on the
condition of the equity market.
Attachment
GERAID FORD UNITED
THE AUTSOR FIRNT
Copy
CORPORATION
EMERAL
THE FIRST BOSTON CORPORATION INd.977 JUN -3 PM12:
55
MEMBER NEW YORK STOCK EXCHANGE,
OFFICE OF THE
20 EXCHANGE PLACE
NEW YORK, N.Y.
ALBERT M. WOJNILOWER
SENIOR VICE PRESIDENT AND DIRECTOR
CABLE: FIRSTCORP. N.Y.
May 31, 1977
The Honorable William Proxmire,
Chairman,
Committee on Banking, Housing and Urban Affairs
United States Senate
Dirksen Office Building
Washington, D.C. 20510
Dear Chairman Proxmire:
The following note is submitted in response to your request
for further background to my proposal to establish capital requirements
for commercial banks.
Purpose
Such requirements would enable the Federal Reserve to restrain
undesirable monetary expansion with lesser rises in interest rates and
disruption of financial markets. The intent of the proposal is strictly
to assist stabilization policy. It is not intended for the protection of
the depositors or shareholders in banks, although it may make some contri-
bution in that direction.
The Proposal
All banks (or all above a certain size -- say the largest 500
banks) should be required to maintain an at least stable ratio of capital
to total liabilities. The daily average ratio for each calendar quarter
should be required to be at least equal to that in the same quarter the
year before (or, if this requirement is not met, the same quarter two years
before). Failure to comply should be penalized by the prohibition of
any acquisition of risk assets until the required ratio is restored. Such
restoration could be achieved by raising new equity, curtailing or
eliminating dividends, increasing profits, or reducing liabilities.
The effect would resemble that of a special reserve requirement,
with the profound difference that the judgment as to what quantity of
reserves to supply, and to which banks, would rest with the market rather
than the Federal Reserve.
BERALE FORM
May 31, 1977
Page 2
Letter to Chairman Wm. Proxmire
The reason for allowing a "two-year-ago" benchmark in the event
the one-year-ago standard is not met is to avoid creating a disincentive
for voluntary increases in capital ratios. Some such provision is nec-
essary to permit banks to undertake "lumpy" additions to capital -- for
example, through a large public offering of stock -- without thereby lock-
ing themselves into a high base ratio that would restrict their ability
to grow in line with the addition to capital.
Why A Capital Requirement Is Needed
From a purely macroeconomic standpoint, major commercial banks
really do not need any capital, provided they are important enough so that
the banking authorities cannot afford to permit them to fail for fear
of triggering a run against the whole banking system. In periods of
inflationary intoxication such as 1973-74 or 1968-70, such banks perceive
considerable incentive to expand money and credit at rates of growth that
exceed Federal Reserve targets, and there is little or no market disci-
pline to prevent their doing so. As a result, efforts by the Federal
Reserve to restrain undue monetary expansion by open market operations and
other conventional means result in sharp increases in interest rates, as
these banks continue to bid aggressively for funds. The burgeoning of
interest rates and the accompanying turmoil in financial markets, in their
turn, make the Federal Reserve reluctant to tighten further in fear of
causing a "crunch." Such reluctance is quickly detected in the market-
place and tends to confirm inflationary expectations and actions. This
is particularly true under the regime of floating interest rates, in
which banks expect to protect or enlarge their profit margins by virtue
of prompt, semiautomatic increases in interest rates on a large fraction
of their preexisting portfolio of loans in response to every upward step
in money market rates. Banks also have an incentive to try to circumvent
Federal Reserve policy by expanding and inventing new forms of borrowing
not subject to high reserve requirements or to aggregate Federal Reserve
growth targets, such as CD's and Eurodollars among others. While the
banking system as a whole can escape monetary restraint by such tactics
only to a limited degree if at all, the ability of particular banks to
expand (or even their illusion that they will be able to do so) causes
interest rates to be bid up disproportionately. A game of "chicken"
develops between the banks and the Federal Reserve as a result of which
interest rates rise inordinately.
The present proposal would tend to deter such bidding by putting
banks on notice that they must increase their capital as their liabilities
increase. This would be only fair, since at present much of the true capi-
tal of these well-known banks, which enables them to attract deposits and
shareholders even in the most turbulent of times, derives from their pre-
sumed access to unlimited Federal Reserve credit in the event of emergency.
Absent a formal capital requirement, these banks enjoy a competitive ad-
vantage over other banks, financial institutions and businesses that lack
an equivalent Federal Reserve or other official backstop. Such capital
requirements would also be useful in minimizing the remote but terrifying
contingency that some time an epidemic of threatened bank failures might
FORD
overwhelm the human beings at the Federal Reserve and the FDIC.
BERALD
ABVRUT
May 31, 1977
Page 3
Letter to Chairman Wm. Proxmire
Some Technical Points
For these purposes, long-term debt should not be counted as
capital since the servicing of such debt by banks is also regarded by
the public as backstopped by the Federal Reserve. That is to say, a
bank unable to meet obligations on its long-term debt would probably
have to be regarded by the authorities as equally endangered as to its
survival, and as much a threat to general financial stability, as a bank
unable to meet deposit drains. Subordinated debt convertible into stock,
and preferred stock, might possibly be regarded as eligible for inclu-
sion in capital to a limited extent.
The proposed regulation does not presume to establish any given
capital ratio as appropriate for any particular bank. That issue re-
mains for the banking authorities and Congress to decide. Presumably,
efforts will continue to bring banks with low capital ratios closer to
the national average.
Thank you very much for the further opportunity to present
these viewpoints.
Respectfully yours,
albert in Emily School
in in his abse
AMW:es
SERVICE R. FORD LIBRARY
First Boston
Wojnilower
THE FIRST BOSTON CORPORATION
ZIGZAGGING ALONG THE STRAIGHT AND NARROW
SOME ASPECTS OF THE ECONOMIC AND FINANCIAL OUTLOOK*
The economic recovery has been progressing in a manner that gives
promise of a long life. Time and again, the widely-expressed fears of immi-
nent explosions in consumer, business, or Federal spending; shortages in key
materials; and major rises in prices, wages, and interest rates, are proving
unjustified. Indeed these very fears, by impressing caution and even timidity
on lenders and spenders, and by engendering an inordinately high volume of
security issuance and level of long-term interest rates, are themselves a
form of insurance that no economic runaway can develop.
The Bond Market, the Fed, and the Economy
Since early last year when the recession was ending, recurrent
concern that a new cycle of inflation, shortages, credit crunch, and recession
might be in the launching has touched off three or more major upheavals in the
bond market. Each of these episodes shared with the others a rather unusual
syndrome, and each exerted an adverse feedback on the economy. Every time,
an intense fall in bond prices was triggered by the same combination of a
turn in business news for the better, some bad behavior in a price index, and
a flare-up in the growth rate of the monetary aggregates usually followed by
Federal Reserve action to push up the Federal funds rate. In every case,
longer-term interest rates defied the textbook by shooting up as many or more
basis points as did short-term rates, as issuers of securities raced to
market with new flotations as though there were no tomorrow. And every time
the bear panic subsided after, in relatively prompt order, the monetary ex-
pansion slowed abruptly, the business statistics softened, and the price in-
dexes calmed down. Having had to sweat out these swings, it is sometimes
hard for market participants to believe that both short and long-term rates
are actually lower now than they were fifteen months ago when the business
upturn began.
The monotony of the pattern -- one that may well be repeated many
times more -- is unlikely to be a coincidence. When the Federal Reserve
responds to excessive monetary growth by pushing up short-term interest rates,
it is in the expectation that the public will be induced to switch out of
deposits into money market instruments, thereby retarding or reversing the
monetary expansion. This shift from deposits to securities is apt to be far
quicker and greater when, in reaction to the Fed's measures, not only short
rates but also intermediate and long-term rates as well as the volume of
*Prepared by Dr. Albert M. Wojnilower, Senior Vice President and
Director, for a press luncheon held on July 27, 1976, to announce publica-
tion of the 27th biennial edition of First Boston's Handbook of Government
FORD is GERALD LIBRARY
Securities.
- 2 -
new issues on offer also bulge suddenly and sharply. That is precisely
what has happened lately whenever short rates have ticked up and may well go
far to explain why it has seemed relatively easy to halt and reverse out-
bursts of rapid monetary expansion.
The repercussions on the economy are also more immediate and
severe. Familiar by now is the adverse impact of higher interest rates on
flows into savings deposits and the mortgage market. More important cur-
rently, however, is the climate of financial unease that sharp rises in
long rates create. After their recent lessons, builders and manufacturers
are anyhow jittery about making any large long-range commitments. They no
longer blithely assume that rises in interest rates or other costs can rou-
tinely be passed on to tenants or buyers. Thus any sizable increase in
long-term rates, even if transient, is meaningful. As a result, the launch-
ing of new ventures in income properties or plant expansion is delayed and
the construction and capital goods sectors understandably linger in a
relatively depressed condition.
The flood of new security issues in these times of market dis-
array tends to retard consumer buying as well. When institutional buyers
hold back, security prices must adjust until individuals are enticed to
absorb the overflow. Individuals may finance their security purchases by
drawing on deposits or by additional borrowing, but some must be made at the
expense of retail sales. While probably no one ever consciously decides to
buy Treasury bonds or A.T.&T. stock in lieu of a television set, it is
virtually an accounting necessity that consumers save more and spend less
whenever there is an unusually large outpouring of new security issues.
But then, as soon as the market has done its work in generating the
"good" news that monetary growth has slowed and the economic outlook softened,
the sunshine breaks through. Interest rates and the volume of new issues
fall, reopening the door to more rapid business expansion. The fact that we
had 11.4% real growth in the third quarter last year, followed by a drop to
3.3% in the fourth, then 9.2% in this year's first quarter followed by 4.4%,
probably reflects these financial-market flip-flops.
A New Way to Manage the Economy
From a broader point of view, these alternations may be regarded
as flowing from new Federal Reserve techniques that really amount to an
attempt to employ a series of "mini-crunches" in order to forestall another
"maxi-crunch" and recession. In the past, generally speaking, Federal Reserve
policy tended to resist rises in interest rates long into the expansion phase
of the business cycle -- for as long as unemployment remained unduly high,
industrial capacity slack, and the cost-of-living rise reasonably steady. No
brakes were applied until the upward momentum of the economy, embodied for
example in large-scale construction programs launched beyond recall, was well
entrenched. But by that late hour, the tightening of money caused sharp and
irreversible rises in interest rates without much slowing down the economy.
Ultimately, savage credit-market confrontations became the only way to break
the inflationary wave.
FOR URBARY is 038830
- 3 -
Under present procedures, by contrast, any excessive gathering of
economic momentum is presumably revealed early on by a surge in the monetary
aggregates. Even though many outbursts in monetary growth turn out to be
temporary and of no fundamental significance, the Federal Reserve has been
taking no chances. It has reacted with alacrity and determination to beat
back every undue increase. Restraining forces are thus called into play
well before irresistible upward economic momentum has been established. The
business expansion is stretched out over a longer span and rendered less in-
flationary. A price is paid in limiting the speed and intensity of the upswing
and the level of the ultimate peak of prosperity, but on the other hand the
danger of imbalances leading to another serious recession is reduced corre-
spondingly.
Put still more abstractly, the Federal Reserve's monetary growth
targets (4 1/2 to 7% for M1 and 7 1/2 to 9 1/2% for M₂) really do not allow
for much more than a 10% rate of increase in nominal GNP. Subtracting an
embedded inflation rate of 5 or 6% hardly leaves room for breakneck increases
in real demand. Over the last two years, in fact, M1 has increased at a rate
of only 4 1/2%, which happens to be the lower bound of the Fed's most recently
announced target range.
Cautious Optimism on Inflation
The economic and monetary climate are thus propitious for the
containment and eventual further reduction of inflation. Prices of food and
oil may rise little more or possibly even less than the average price level.
To be sure, prices of many other raw materials have increased sharply, but
so long as items in widespread and irreplaceable use do not double, triple,
and quadruple in price (as happened to grains and fuels in 1972-74), the
impact on the overall price level is not large. Moreover, in offset, the
rate of increase is probably slowing in regulated prices -- such as utility
rates, insurance premiums, transit fares, local taxes, or postage stamps --
which have been belatedly reflecting the fuel cost and public-employee wage
explosion of 1973-1974. We appear to have returned to a more normal en-
vironment in which labor costs are the critical determinant of the price level.
Here recent developments have been encouraging. In the private sector, wage rates
in the first half of 1976 rose at a rate of about 7%; in the public sector,
they probably increased even less. While the pace of wage increase will
probably accelerate, even a 9 or 10% rate of gain (should that be reached) would
still, given average productivity improvement, remain consistent with mild
cyclical fluctuations in the pace of general inflation around a 5 to 6% base.
Interest Rates in a Crosswind
And what about interest rates? As with the economy and inflation,
the cyclical pressures are upwards, but the surprise is likely to be how mild
these pressures are. By many standards, such as the level of short rates,
the pace of inflation, or the degree of slack in the economy, long rates are
high. However, the likelihood that short rates will be rising, in a market
whose participants are much more worried about a major updraft in all rates
than they may be hopeful of a moderate decline, tends to keep long rates up
or even to lift them. But, as pointed out earlier, this asymmetry of viewpoint
LIBRARY
- 4 -
which keeps rates up also holds the economy down. In a marketplace increasingly
dominated on both the buying and issuing sides by gunslingers resembling the
late and unlamented stock market operators of the late 1960s, bond yields are
likely to persist in shuttling wildly up and down within the 8 1/4-9% range
(for triple-A utilities), based on nuances in the weekly money figures and the
Federal funds rate. The lower end of the range may predominate for the next
six or nine months, and the higher part over the balance of 1977. As for
short-term rates, the Federal Reserve's operating procedure probably will
continue to produce two or three upward lurches per year of 50-100 basis
points each, with some part of each rise being retraced in the intervening
periods of quiet. Paradoxically, if the market keeps long-term rates high,
then monetary growth and the economy will be weaker, tempering the rise in
short rates. Conversely, if the market lets long rates fall, monetary and
economic expansion would be furthered, and short rates might rise faster,
flattening the yield curve more rapidly.
These days more than ever, the volume of new issues is more a result
than a cause of interest rate movements and expectations. There has been a
fair diminution in the volume of flotations by domestic issuers compared with
last year's huge calendar, but it has not been nearly so pronounced as the
improvement in corporate cash flows and balance sheets would have indicated.
Moreover, the ebbing of domestic issues has been offset significantly by a
remarkable expansion of foreign, most notably Canadian, borrowing in this
market.
Corporations have turned to bond issuance at the expense of bank
loans. This is only natural. Bond issuance is cheap measured against a 7 or
7 1/4% bank prime rate -- raised to 8 or even 8 1/2% by compensating balance
requirements or their equivalent, and subject to a sizable upward float if
anticipated rises in money market rates materialize. Any time that issuers
cease to anticipate major increases in short rates or banks adjust their rate-
setting, a deep drought of new corporate bond flotations will set in.
Politics
Finally, what about the influence of the presidential election? It
is ironic that, probably for the first time in the postwar period, the normally
cynical market participants have not been taking it for granted that stock and
bond prices were somehow insured against decline till after Election Day.
When the candidates have promised good business or low interest rates, security
prices usually have declined. And perhaps rightly so, since the monetary
authorities seem to have been leaning to the tighter side sooner and harder
than they might have in an ordinary year -- recognizing that the taking of
overt restrictive measures shortly before or after Election Day might be in-
opportune. When, as now, the public is frightened and suspicious of the intent
and effect of governmental actions, the best thing officials and candidates
can do for themselves is to maintain a low profile. While the rhetoric may
change and occasionally get louder, actual policy moves are likely to be
modest and gradual.
One may reasonably hope, therefore, that the current economic ex-
pansion will not overheat badly, that the next recession will be distant and
mild, and that as these developments persuade the public that the economic
ATTEND
- 5 -
tragedy of 1968-1974 is not being replayed, substantially lower inflation
and interest rates can eventually be achieved.
Such an outlook may seem unduly optimistic, but it is asking less
of the future than has already been accomplished in the recent past. By way
of reminder, we take the liberty of citing below the opening and closing
paragraphs of the introductory section of the 27th edition of our biennial
Handbook of Government Securities, which is being published today.
During the past few years this country not only survived, but
to a remarkable degree, was able to recuperate from a brutal
series of blows to its pride, power, and pocketbook. Both Vice
President and President resigned under cloud of serious viola-
tions of the laws of the land. Our ally South Vietnam was
militarily overwhelmed by the North and Communist influence
spread in various parts of the globe. A group of relatively small
nations comprising the Organization of Petroleum Exporting
Countries asserted their control over the supply and price of
oil vital to the industry of the world. On the domestic eco-
nomic scene, inflation and interest rates reached unprecedented
fever pitch in 1974, with both short-term interest rates and the
cost-of-living escalating well into the double digits. The chill
of the worst unemployment in two generations followed soon
after. And here and abroad, bankruptcies, defaults, and near
misses involving major economic entities kept on multiplying
-in banking, real estate, insurance, retailing, even at the state
and municipal level-on a scale not experienced since the Great
Depression of the 1930s.
It would have been daft optimism in 1974 to have predicted
that the body politic not only would withstand these shocks,
but also manage to regain passable health and composure in
time for the bicentennial celebrations of mid-1976. Notwith-
standing all the disheartening experiences, however, the gov-
ernmental process did revive; domestic unrest, as expressed in
demonstrations, riots, and politically-motivated violence, sub-
sided; and the international influence of the United States
recovered, albeit not to the preeminence of the 1950s and
1960s. The underlying inflation slowed to perhaps as little as
5%-a rate far too high for the long pull, but nonetheless
dramatically reduced from its peak. Between early 1975 and
1976, real output rebounded by 7%, the unemployment rate
receded from near 9% to 7½%, and the number of persons with
jobs advanced to a new record. Stock prices rebounded strongly
from ten-year lows and interest rates fell appreciably. The finan-
cial structure, though still shaken and beset, had been shored
up and seemed safe from holocaust. The state of affairs was far
from the best of all conceivable worlds, but perhaps not so far
from the best attainable in the aftermath of the havoc that had
been wreaked.
GERALD R. FORD LERARY
- 6 -
Withal, despite the apparent return to a more orderly state
of existence, the experiences of the concluding years of the bi-
centennium left many scars-some of them unhealed, some
never to heal-on incomes, balance sheets, thought habits, and
lives. The comforting concepts of a universe of limitless bounty,
and a world within unbounded reach and power of the United
States to lead, evanesced. Unemployment was declining, but
toward 7%, not 4% or 5%. Inflation had receded, but only a
handful of optimists thought the rate could be brought lasting-
ly below 5% any time soon, Most banks were recovering their
composure, but few were believed near completing the write-
off of major loan defaults. Except for single-family homes, the
real estate industry lay in the doldrums and certain parts,
notably real estate investment trusts, had been smashed to
smithereens. The ability of the so-called third and fourth-
world countries (except those producing oil) to cope with
internal strains and to meet their debts remained in doubt.
At home, the agony of New York City clouded the future
not only of its creditors and its hitherto world-leading financial
community, but of all its citizens and those of other urban
centers.
Compared, however, with the narrowly averted catastrophe
of contagious bank and commercial failures, disintegrating
foreign exchange and domestic financial markets, and run-
away inflation and mass unemployment, the world appeared
almost hospitable. America seemed to have lowered its voices
and sights, but within this new restrained perspective, a cautious
optimism was trying to emerge.
FORDS is LIBRARY DERALD
(212) 344-1515
ALBERT M. WOJNILOWER
Senior Vice President and Director
THE FIRST BOSTON
20 EXCHANGE PLACE
CORPORATION
NEW YORK
First Boston
BOARD OF
THE FIRST BOSTON CORPORATION
FEDERAL
RESERVE SYSTEM
1975MAR 28 PM 2: 11
OFFICE RECEIVE CHAIRMAN
For your information this is a letter that I recently wrote
to a Washington economist. Also appended are some tables
having to do with the flow of funds and the financing of
the deficit for 1975.
Additional copies are available through Mrs. Braha, ext. 788.
GERAL K. 7022 SECTION
FIRST
THE
BOSTON
THE FIRST BOSTON CORPORATION
MEMBER NEW YORK STOCK EXCHANGE, INC.
20 EXCHANGE PLACE
ALBERT M. WOJNILOWER
NEW YORK, 10005
SENIOR VICE PRESIDENT AND DIRECTOR
CABLE: FIRSTCORP, N.Y.
March 18, 1975
At your request, below are some hasty comments concerning the financial
impact of the contemplated large budget deficits.
The main issue to be resolved, in my judgment, is not the financial but
the economic impact of the deficits. If the deficits, in conjunction with
monetary easing, do not stimulate a strong recovery in the growth of GNP
(real or inflation), then private credit demand will remain depressed,
and Treasury financing will offer no particular difficulty. My own view
is that budget deficits on the order of $40 billion for the current fiscal
year and $80 billion for fiscal 1976, or even somewhat larger ones, are
unlikely to produce a revival of economic activity (or inflation) strong
enough to create general financial congestion until 1977 at the earliest.
Indeed, in the absence of such large deficits, total credit demand may well
be insufficient to allow the Federal Reserve to promote adequate monetary
expansion without creating "sloppy" money markets in whose wake all manner
of domestic and international troubles follow. In the first ten weeks
of this year, for example, the Treasury has been borrowing at a $70 billion
annual rate (not seasonally adjusted) and monetary expansion has remained
negligible.
A substantial part of the increased Treasury financing, it may be noted,
directly replaces borrowing that would otherwise have to be done by the
public. This is particularly evident with respect to the $25 billion or
so enlargement of the deficit caused by reduction in corporate tax revenues
reflecting the recession and likely profits-tax reduction. Were corporations
to have to pay this $25 billion, they would have to borrow every penny from
private lenders. The financial markets will find it much easier to absorb
high-quality and highly liquid Treasury securities than to furnish huge
additional amounts of credit to corporations.
The same argument also applies, though more indirectly and to a lesser de-
gree, to the role of the deficit vis-a-vis the financial position of
individuals. Until there is a substantial economic recovery, we should
be talking about "substitution" of Federal for private borrowing, rather than
about "crowding out".
FROM DEBLEY
Page two
March 18, 1975
It is likely, by the way, that foreign official buyers--OPEC and others--
will finance a substantial part of these budget deficits. So far in
calendar 1975, they have acquired over $6 billion in government securities
and this figure is likely to be multiplied many times in the next couple
of years. It is inherent in present world financial structure, I believe,
that much of the budget deficit must be financed externally, whether by
foreign support of the dollar, or through other developments--such as a
further drastic drop in dollar exchange rates or controls on international
capital flows--that have the effect of keeping multi-national business and
other funds "captive" to the U.S. money markets.
Of course I may be wrong, and economic activity may revive strongly and
promptly. In that case, and especially if the Federal Reserve pursues
appropriately cautious policies, "crowding out" will develop as it should
if renewed inflation is to be avoided. To reduce the "risk" of early over-
strong recovery it might be useful to keep some considerable part of
forthcoming tax remission in forms that are not automatically repetitive.
That would also assuage market fears of a future runaway in interest rates--
fears that are already operating to raise interest rates now and partly
countervailing the impact of expansionary government policies.
You can see that I believe that a financial market problem is in any case
unavoidable once the economy gains momentum. It would be helpful if there
were broader recognition that budget deficits and monetary expansion create
liquidity, and that when, finally, people want to spend that liquidity,
short-term interest rates are likely to and probably should rise sharply.
But, the desired revival of spending can't really begin until after sizable
amounts of "excess" liquidity have already been created. Market participants
are well aware of the dilemma and therefore insist, after every credit squeeze,
on stockpiling enough liquidity to safely carry them through the next one.
This attitude retards economic recovery. What to do? Some conclude that
fiscal and monetary easing should be correspondingly more aggressive. Others
will emphasize the future problems such policies build in. Personally, I would
tend to the aggressive side, but it must be underlined that it is only a
question of when and not whether the financial confrontation will occur.
This "no-win" trade-off is the penalty we have to pay for our past mistakes.
It cannot, in my judgment, be avoided by any policy that currently has any
political chance of adoption--if indeed by any policy designed and executed
by human beings rather than gods.
It is my understanding that the above comments are furnished in the nature
of an expert opinion and will not be used in a manner intended primarily
for adversary or partisan purposes.
Thank you for this opportunity.
Sincerely yours,
Albert M. Wojnilower
Senior Vice President, Economist
vota
SEAL
- 4 -
Approximations to a Projected Flow of Funds for Calendar 1975
$ billion
Net increase in U.S. Gov'ts/agencies
80
Acquired by:
Commercial banks
28
Rest of world
35
Federal Reserve
6
Nonbank financial
10
Corporations
6
State & local gov't
2
Dealers, etc.
3
Individuals
-10
Commercial Banks
Uses
Sources
U.S. Gov'ts/agencies
28
Pvt. demand dep.
13 +5.9%
Municipals
6
Gov't. "
"
O
Mortgages
5
C/D's
10
Consumer credit
0
Other time
29
Domestic bus. loans, paper
4
Stocks/bonds
6
International
10
Other domestic
2
Security loans
5
Foreign
-2
58 +8.3%
58
A.M. Wojnilower
3/20/75
FORD 4 LIBRARY
- 5 -
Nonfinancial Corporations
$ billion
1975
1974
Profits after tax
50
65
- Dividends
30
30
+ Foreign profits
5
10
- IVA
2
36
+ Capital consumption allowance
79
72
Internal funds
102
81
Fixed investment
114
116
Inventory change
- 5
10
109
126
+ Discrepancy
13
13
122
139
= Net financial investment
-20
-57
Liquid assets
18
12
Consumer credit
0
1
Misc. (net) assets (mainly foreign)
14
- 1
Net trade credit
2
5
= Funds to be raised
54
75
Bonds
31
21
Stocks
6
3
Mortgages
7
11
Bank loans (domestic)
O
28
Paper/other loans
10
12
A.M. Wojnilower
3/20/75
SECURITY i. FORD LIBRARY
- 6 -
Households - Net Change in flows from 1974
Floors
Personal saving
+22
99 (Nat'l income a/c)
Plus Debt incurred
Mortgage
- 6
Consumer
- 6
4
Security
+ 2
Other
+ 4
Available for investment
+16
Money
+6
10
Time/savings dep.
+20
79
Municipals
- 4
8
Corporate bonds
+ 9
6
Stocks, mutual funds
+6
7
Private life, pension reserves
+ 2
U.S. Gov'ts
-23
-10
A.M. Wojnilower
3-20-75
SECURITY FORD
LIBRARY
THE
ADINOA
CORPORATION
THE FIRST BOSTON CORPORATION
MEMBER NEW YORK STOCK EXCHANGE. INC.
20 EXCHANGE PLACE
NEW YORK. N.Y. 10005
ALBERT M. WOJNILOWER
VICE PRESIDENT AND DINECTOR
CABLE: FIRSTCORP, N.Y.
March 18, 1975
Dr. Nancy Teeters
Assistant Director
House Budget Committee
221 House Office Building Annex
Washington, D. C. 20515
Dear Nancy:
At your request, transmitted through Len Santow, below are some hasty
comments concerning the financial impact of the contemplated large budget
deficits.
The main issue to be resolved, in my judgment, is not the financial but
the economic impact of the deficits. If the deficits, in conjunction with
monetary easing, do not stimulate a strong recovery in the growth of GNP
(real or inflation), then private credit demand will remain depressed,
and Treasury financing will offer no particular difficulty. My own view
is that budget deficits on the order of $40 billion for the current fiscal
year and $80 billion for fiscal 1976, or even somewhat larger ones, are
unlikely to produce a revival of economic activity (or inflation) strong
enough to create general financial congestion until 1977 at the earliest.
Indeed, in the absence of such large deficits, total credit demand may well
be insufficient to allow the Federal Reserve to promote adequate monetary
expansion without creating "sloppy" money markets in whose wake all manner
of domestic and international troubles follow. In the first ten weeks
of this year, for example, the Treasury has been borrowing at a $70 billion
annual rate (not seasonally adjusted) and monetary expansion has remained
negligible.
A substantial part of the increased Treasury financing, it may be noted,
directly replaces borrowing that would otherwise have to be done by the
public. This is particularly evident with respect to the $25 billion or
so enlargement of the deficit caused by reduction in corporate tax revenues
reflecting the recession and likely profits-tax reduction. Were corporations
to have to pay this $25 billion, they would have to borrow every penny from
GENERAL K. FORD LIBRARY
Page two
March 18, 1975
private lenders. The financial markets will find it much easier to absorb
high-quality and highly liquid Treasury securities than to furnish huge
additional amounts of credit to corporations.
The same argument also applies, though more indirectly and to a lesser de-
gree, to the role of the deficit vis-a-vis the financial position of
individuals. Until there is a substantial economic recovery, we should
be talking about "substitution" of Federal for private borrowing, rather
than about "crowding out".
It is likely, by the way, that foreign official buyers--OPEC and others--
will finance a substantial part of these budget deficits. So far in
calendar 1975, they have acquired over $6 billion in government securities
and this figure is likely to be multiplied many times in the next couple
of years. It is inherent in present world financial structure, I believe,
that much of the budget deficit must be financed externally, whether by
foreign support of the dollar, or through other developments--such as a
further drastic drop in dollar exchange rates or controls on international
capital flows--that have the effect of keeping multi-national business and
other funds "captive" to the U.S. money markets.
Of course I may be wrong, and economic activity may revive strongly and
promptly. In that case, and especially if the Federal Reserve pursues
appropriately cautious policies, "crowding out" will develop as it should
if renewed inflation is to be avoided. To reduce the "risk" of early over-
strong recovery it might be useful to keep some considerable part of
forthcoming tax remission in forms that are not automatically repetitive.
That would also assuage market fears of a future runaway in interest rates--
fears that are already operating to raise interest rates now and partly
countervailing the impact of expansionary government policies.
You can see that I believe that a financial market problem is in any case
unavoidable once the economy gains momentum. It would be helpful if there
were broader recognition that budget deficits and monetary expansion create
liquidity, and that when, finally, people want to spend that liquidity,
short-term interest rates are likely to and probably should rise sharply.
But, the desired revival of spending can't really begin until after sizable
amounts of "excess" liquidity have already been created. Market participants
are well aware of the dilemma and therefore insist, after évery credit squeeze;
on stockpiling enough liquidity to safely carry them through the next one.
This attitude retards economic recovery. What to do? Some conclude that
fiscal and monetary easing should be correspondingly more aggressive. Others
will emphasize the future problems such policies build in. Personally, I would
tend to the aggressive side, but it must be underlined that it is only a
question of when and not whether the financial confrontation will occur.
STATE it. 7025 DEBART
Page three
March 18, 1975
This "no-win" trade-off is the penalty we have to pay for our past mistakes.
It cannot, in my judgment, be avoided by any policy that currently has any
political chance of adoption--if indeed by any policy designed and executed
by human beings rather than gods.
It is my understanding that the above comments are furnished in the nature
of an expert opinion and will not be used in a manner intended primarily
for adversary or partisan purposes.
Thank you for this opportunity.
Sincerely yours,
as
AMW: fb
P.S. Would you mind if,I circulated these remarks within my firm or to
clients? And, just now I have been invited to a Thursday P.M.
meeting at the Treasury on this issue. Can I use this there?
STATE FORD Janes
Approximations to a Projected Flow of Funds for Calendar 1975
$ billion
Net increase in U.S. Gov'ts
75
Acquired by:
Commercial banks
25
Rest of world
35
Federal Reserve
5
Nonbank financial
10
Corporations
5
State & local gov't
2
Dealers, etc.
3
Individuals
-10
Commercial Banks
Uses
Sources
U.S. Gov'ts'/agencies
28
Pvt. demand dep.
13 +5.9%
Municipals
6
Gov't.
11
"
0
Mortgages
5
C/D's
10
Consumer credit
0
Other time
29
Domestic bus. loans, paper
4
Stocks/bonds
6
International
10
Other domestic
2
- Security loans
5
Foreign
-2
58 +8.3%
58
A.M. Wojnilower
3/20/75
AIRPORT . TOTAL
page 2
Nonfinancial Corporations
$ billion
1975
1974
Profits after tax
50
65
- Dividends
30
30
+ Foreign profits
5
10
- IVA
2
36
+ Capital consumption allowance
79
72
Internal funds
102
81
Fixed investment
114
116
Inventory change
- 5
10
109
126
+ Discrepancy
13
13
122
139
= Net financial investment
-20
-57
Liquid assets
18
12
Consumer credit
0
1
Misc. (net) assets (mainly foreign)
14
- 1
Net trade credit
2
5
= Funds to be raised
54
75
Bonds
31
21
Stocks
6
3
Mortgages
7
11
Bank loans (domestic)
0
28
Paper/other loans
10
12
A.M. Wojnilower
3/20/75
R.
STATE
ADVISITY FORD
Households - Net Change in flows from 1974
Levels
Personal savings
+22
99 (Nat'l income a/c)
less Debt incurred
Mortgage
- 6
Consumer
- 6
4
Security
+ 2
Other
+ 4
Available for investment
+16
Money
+6
10
Time/Savings dep.
+20
79
Municipals
- 4
8
Corporate bonds
+ 9
6
Stocks, mutual funds
+ 6
7
Private life, pension reserves
+ 2
U.S. Gov'ts
-23
-10
A.M. Wojnilower
3-20-75
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March 17, 1975
Dear Mr. Wojnilower:
It was good of you to take the time to
think over the problem we discussed, and to
write me so fully. You have my warm thanks.
With kind regards,
Sincerely yours,
Arthur F. Burns
Mr. Albert M. Wojnilower
Vice President and Director
The Fisst Boston Corporation
20 Exchange Place
New York, New York
BERALD 2 HOLD
THE FIRST BOSTON
BOARD OF GOVERNORS
OF THE
CORPORATION
FEDERAL RESERVE SYSTEM
THE FIRST BOSTON CORPORATION
1975 MAR 13 PM 3: 48
MEMBER NEW YORK STOCK EXCHANGE,
OFFICE OF RECEIVED THE CHAIRMAN
20 EXCHANGE PLACE
ALBERT M. WOJNILOWER
NEW YORK, N.Y. 10005
VICE PRESIDENT AND DIRECTOR
CABLE: FIRSTCORP, N.Y.
March 10, 1975
#512
Dr. Arthur F. Burns, Chairman
Board of Governors of the Federal Reserve System
Twentieth St. and Constitution Ave., N.W.
Washington, D.C. 20551
Dear Dr. Burns:
When we last met, you asked me to write if, on reconsideration, I still
held that inflation of inventory prices was not a sufficient reason for
higher short-term interest rates.
I have been through many rounds of thinking on what turned out to be a
more complex question than I had imagined. Much depends on what is held
constant and what base situation is used as a benchmark. Here is where
I came out.
Quite aside from the issue of inflation, any desired or actual increase in
the ratio of net inventory (or any other) investment to GNP will raise the
level of interest rates above what it would otherwise be. Resources must
be diverted from consumption. Assuming that the public's savings pro-
pensities or schedules are given, an increase in interest rates is
necessitated. While inflation may be the cause of the rise in the invest-
ment/GNP ratio, the resultant rise in interest rates would be the same
whether there was inflation or not.
But this is not the whole story.
What about the effect of inflation on the replacement cost of inventories?
If I bought inventory for $10 and must now replace it for $11, the critical
issue becomes the price at which I sell my old inventory. In the securities
business, I would also be selling my old inventory for $11, which would
enable me to finance an equal quantity of new inventory without additional
resort to credit. The same result holds if I sell my inventory to
another firm at $10, but they resell it to an ultimate user at $11. Then
I must borrow an extra dollar, but the other firm has an extra dollar to
lend.
SEAL
R.
FORD
AMYUNT
Page two
March 10, 1975
If, however, I make a final sale at the old $10 price, then I must indeed
demand a net additional dollar of credit to maintain a constant physical
inventory. Your original question thus appears to resolve into the
empirical issue as to whether actual transactions pricing (not accounting,
which is irrelevant) is done on a historical or current (opportunity)
cost basis. While I would be inclined to argue that opportunity cost has
recently predominated (especially because of fear of future price controls),
there is surely a good deal of historical cost pricing as well. To that
extent, greater inflation will have increased the net demand for credit
and raised interest rates. Thus, you are right.
For symmetry, let us consider the case of deflation. If I had bought stock
at $10 and must now sell it at $9, I will be short one dollar of what I
need to pay off the loan that financed my original inventory purchase.
Even though a new unit costs only $9, my credit demand will remain at $10.
Thus, again, under opportunity cost pricing, price level changes do not
affect credit demand. If, however, I am able to sell my old stock at
$10 (as, for example, grocery stores may be trying to do with their old
sugar), then I can pay down $10 of old borrowings and need to incur only
$9 in new ones. Under historical cost pricing, again, credit demand
prompted by inventory replacement moves up and down in line with the
price level.
The foregoing sketch deliberately ignored the influence of money and ex-
pectations. Inflation presumably raises the demand for money balances.
If this demand is not accommodated by the "right" increase in the "right"
basket of monetary aggregates (whatever these "rights" may be), the rate
of interest will rise. Some would also argue that a rise in the actual
and/or anticipated rate of inflation would by itself raise the rate of
interest. My observation is, however, that institutional restraints,
transaction costs, and other market imperfections greatly reduce if not
eliminate such expectational effects, especially for short-term rates.
It is always a privilege to be able to visit with you.
Sincerely yours,
a Wopiclor
AMW:fb
A
SERVICE
May 3, 1974
Dear Mr. Wojnilower:
Before leaving for Europe, Dr. Burns asked me to
thank you for your letter of April 26th and its enclosures.
Sincerely yours,
Catherine C. Mallardi
Administrative Assistant
to the Chairman
Mr. Albert M. Wojnilower
Vice President and Director
The First Boston Corporation
20 Exchange Place
New York, New York
STATE
1.
THE FIRST BOSTON
BOARD OF GOVERNORS
CORPORATION
FEDERAL RESERVE SYSTEM
OF THE
THE FIRST BOSTON CORPORATION
1974APR 29 PM 1: 11
MEMBER NEW YORK STOCK EXCHANGE. INC.
OFFICE OF RECEIVED THE CHAIRMAN
20 EXCHANGE PLACE
NEW YORK, N.Y. 10005
ALBERT M. WOJNILOWER
VICE PRESIDENT AND DIRECTOR
CABLE: FIRSTCORP, N.Y.
#680
April 26, 1974
Dr. Arthur F. Burns, Chairman
CM-m
Board of Governors of the
Federal Reserve System
20th Street & Constitution Ave., N.W.
Washington, D.C. 20551
Dear Dr. Burns:
Some weeks ago I wrote you that I had
responded to two advertisements soliciting purchases of
gold coins. The answers have only just now come in.
One company offered only U.S. coins and
thus was mainly numismatic in its appeal. Interestingly,
however, they guaranteed for the indefinite future to
repurchase at the original price any coins bought through
them.
The other, whose flyer I am enclosing, offers
Mexican and English gold coins, and also solicits Swiss
bank accounts.
Best regards.
Respectfully yours,
alarm Wombur
Albert M. Wojnilower
Vice President and Director
Encl.
K.
FORD
LIBRARY
New York Bullion Exchange
Division of Giannini Financial Corp.
1841 Broadway, New York, N.Y. 10023
Telephone [212] 757-2516
GERALD
FORD
Fact Sheet for
SILVER BULLION, GOLD COINS
PLATINUM BULLION & INVESTOR SERVICES
DESCRIPTION
BROKERAGE COMMISSION
SILVER BULLION: Silver Bullion is refined silver in bars assaying at least
New York Bullion Exchange does not charge brokerage commission
.999 fineness, and is stamped with one or more of the official brands or
when buying or selling silver, silver medallions, gold coins, or platinum
markings customary in the trade. Bullion is the least expensive form of
bullion.
owning silver. Bullion is available in bars weighing 100, 500, and 1,000
ounces.
SILVER MEDALLIONS: Silver Medallions are struck from silver
MONTHLY INVESTMENT PLAN
planchets assaying at least .999 fineness, and weigh 1 Troy ounce each.
Each medallion is struck with a guarantee as to weight and purity and
You may participate in our monthly investment plan for the purchase
thus is the most convenient negotiable silver in the world.
of silver bullion, silver medallions, or platinum bullion. Minimum
subscription is $25.00 a month. Your monthly investment may be made
GOLD COINS: Mexican, English and United States' gold coins are
by check or by a Check-O-Matic Plan whereby your bank makes your
offered in bulk to pu chasers of 100 or more coins.
monthly investment from your checking account. When your monthly
PLACER GOLD: Unrefined nuggets and grains. Americans can legally
investment plan account contains sufficient funds to purchase a 100
own placer gold.
ounce bar of silver, 25 medallions, 1 ounce of platinum bullion or 1 ounce
of placer gold, it is immediately shipped to you.
PLATINUM BULLION: Platinum Bullion is refined in 1 through 50 ounce
plates. Our platinum assays at least 99.9% pure. Platinum is the most
precious of metals and is the most convenient medium of storing your
ORDERING BY MAIL
wealth.
PRICES
You may order by sending your personal check, cashier's check, or
money. Use the last price known to you. If the price has gone up, we will
SILVER BULLION The New York Spot Price for silver is quoted daily in the
bill you the difference and ship upon receipt of amount due. If the price
Wall Street Journal. New York Bullion Exchange gives daily buy-sell
has dropped, we will refund the overage at the time we ship.
quotes on all its silver bars.
SILVER MEDALLIONS: The tooling and workmanship required to strike
ORDERING BY TELEPHONE
our gem quality medallions commands a premium over bullion of the
same weight and purity of silver. Hence, New York Bullion Exchange
daily quotes higher buy and sell prices on medallions than on bullion.
The prices of silver bullion, silver medallions, gold coins, and platinum
bullion may change at any time, so we cannot give you an exact price on
GOLD COINS: New York Bullion Exchange gives daily buy-sell quotes
this Fact Sheet. However, if you call our Precious Metals Broker, or call
on Mexican, English, and United States' gold coins.
our home office at (212) 757-2516 we will give you the day's price. If you
decide to invest, we will trust your word and confirm your order over the
PLACER GOLD: Placer Gold is quoted daily by New York Bullion
phone. You can then send your check for the exact amount.
Exchange.
PLATINUM BULLION: Platinum Bullion is quoted daily by New York
Bullion Exchange.
INVESTOR SERVICES
DELIVERY
SWISS BANK ACCOUNTS: New York Bullion Exchange believes that
SILVER BULLION & SILVER MEDALLIONS: On orders over 1,000 ounces,
every sophisticated person of means should maintain at least a portion
delivery will be made from the nearest depository. West of the
of his funds in Gold-backed Swiss Francs, deposited in accounts in Swiss
Mississippi is shipped FOB Los Angeles; east of the Mississippi is shipped
banks. The Swiss franc is safe currency, solidly backed by 82% gold
FOB New York. Shipping charges include insurance. New York Bullion
(compared to the approximate 4% for the dollar). Switzerland has a
Exchange will ship via the least expensive method available. Delivery
record of monetary stability unmatched by any other country in the
runs from two to six weeks, depending on conditions in the silver
world. New York Bullion Exchange handles all arrangements in
market. On orders for less than 1,000 ounces, your Precious Metals
connection with establishing an interest bearing account at one of our
Broker will deliver to your home or office, and collect nominal shipping
correspondent banks in Switzerland. Accounts may be opened in the
and insurance charges.
client's name or in the form of a "numbered" account. Our service fee for
such arrangements is $300.00.
GOLD COINS: Delivery will be made by registered, insured mail;
postpaid.
PLACER GOLD: Delivery will be made by registered, insured mail;
postpaid.
CLIENT PORTFOLIO ANALYSIS: New York Bullion Exchange provides a
client portfolio analysis service. Upon completion of a CPA form, our
PLATINUM: Delivery will be made by registered, insured mail;
staff of financial analysts will review the client's portfolio, submit a
postpaid.
detailed analysis, and submit recommendations on the most effective
WEIGHT VARIATION
ways the client can protect his assets in face of threatening economic
conditions. Our staff is comprised of experts in the fields of equities,
We guarantee all silver and platinum bullion to be of at least the
debt, real estate, international banking, and finance. No charge is made
weight per bar ordered.
for this service.
CHRONICLE OF THE DEATH OF THE DOLLAR
'33
Government prohibits U.S. citizens from owning gold bullion.
Government recalls all gold coins and repudiates gold certificates (paper
currency). (Value of a $20 gold piece is now $125.)
'65
Government stops minting coins of 90% silver.
'67
Government is unable to hold the price of silver in the free market at $1.29
per ounce and silver becomes a free market.
'67
Government is now calling in and melting all silver coins in circulation, but
will not allow citizens to do the same.
'68 Government will no longer redeem silver certificates (paper currency) for
silver bullion.
'68 Silver hits a high of $2.56½ per ounce
'69
Treasury lifts melting ban on silver coins.
'69
Treasury Department has sold over 2 billion (2,000,000,000) ounces of silver
from its stockpile and now has only a few million ounces remaining.
'71
Government gold reserves drop from $22 billion ($22,000,000,000) in 1957
to just over $10 billion ($10,000,000,000,)
'71
Government removes the 25% gold backing for paper currency.
'71
Government stops redeeming dollars held by foreign countries for gold at
$35.00 per ounce.
'71
Dollar devaluated. Revaluation of all major foreign currencies is, in effect, a
devaluation of the dollar.
'73 Wage and price controls dropped.
'73 Dollar devaluated
'73
Gold Hits $100/ounce
?? Next dollar devaluation.
BERALD
in
New York Bullion Exchange
1841 Broadway
New York, New York 10023
FORD LIBRARY
(212) 757-2516
GOLD & SILVER BULLION/COIN VALUE REPORT
MID
N.Y.
$1000 BAG
LONDON
BRITISH
U.S. DE
MEXICAN
COLUMBIA
COIN VALUE
MONTH
SILVER
%
SILVER
%
GOLD
%
SOVEREIGN %
$20
%
50 PESO
%
5 PESO
%
OVERALL
PRICE
BULLION/OZ.
COINS
BULLION/OZ.
GOLD COIN
GOLD COIN
GOLD COIN
GOLD COIN
CHANGE (%)
A
X Gold
Coin Aver-
Jan.1972
1.51
1180
46.17
14.00
72.50
69.00
13.40
age only
Apr.
1.54
+2.4%
1195
+1.3%
49.43 +7.1%
14.50
+3.6%
76.50
+5.5%
66.75 -3.2%
14.25
+6.3%
+3.05%
July
1.70
+12.7%
1285
+8.9%
67.05
+45.2%
18.30 +30.7%
84.75 +16.9%
90.05 +30.5%
17.50
+30.5%
+27.15%
Oct.
1.80
+19.4%
1350
+14.4%
65.10
+41.0%
18.15 +29.6%
85.50 +17.9%
89.00 +28.9%
17.10 +27.6%
+26.00%
Jan.1973
2.04
+35.2%
1466
+24.2%
65.01 +40.8%
22.50 +60.7%
112.50 +55.2%
100.25
+45.3%
21.25 +58.6%
+54.95%
Apr.
2.22
+47.6%
1660
+40.7
89.30 +93.4%
29.20 +108/6%
147.50 103.4%
134.00 +94.2%
28.25 +110.8%
+104.25%
July
2.80 +85.4%
2045
+73.3%
119.90 +159.7%
45.00 +221.4%
199.00 +174.4%
185.00 +168.1%
44.00 +228.3%
+197.97%
Aug.
2.63
+74.2%
1970
+66.9%
103.00 +123.1%
35.75 +155.4%
174.00 +140.0%
154.00 +123.1%
34.75 +159.3%
+144.45%
Sept.
2.63
+74.4%
1970
+66.9%
104.00 +125.2%
36.75 +162.5%
170.00 +134.4%
153.00 +121.2%
34.75 +159.3%
+144.35%
Oct.
3.01
+99.4%
2100 +80.0%
101.25 +119.3%
35.25 +151.8%
173.50 +139.3%
148.50 +115.2%
33.50 +150.0%
+139.08%
Nov.
2.83
+87.4%
2035 +72.5%
91.25 +97.6%
34.00 +142.9%
168.50 +132.4%
135.00 +95.7%
32.50 +142.5%
+128.38%
Dec.
3.20 +112%
2210 +87%
109.00 +136
44.50 +217%
203.00 +180%
172.00 +150
40.50 +200%
+187%
Jan.1974
3.98 +164%
2710+130%
132.50+187%
46.50+232%
230.00+217%
197.00+186%
43.00+221%
+206%
NEW YORK BULLION EXCHANGE
FORD DEBARY
NOTE: ° Change Based on January 1972 Base Prices
Division Giannini Financial Corp.
1841 Broadway New York, N.Y. 10023 (212) 757-2516
BOARD OF GOVERNORS
OF THE
THE FIRST BOSTON
FEDERAL RESERVE SYSTEM
CORPORATION
1974 MAR -4 PM 4: 39
THE FIRST BOSTON CORPORATION
OFFICE OF RECEIVED THE CHAIRMAN
MEMBER NEW YORK STOCK EXCHANGE,INC.
CABLE ADDRESS
20 EXCHANGE PLACE
FIRSTCORP, NEW YORK
March 1, 1974
NEW f YORK, N.Y. 10005
Dr. Arthur F. Burns
Chairman
Board of Governors of the
Federal Reserve System
20 Street & Constitution Ave., N.W.
Washington, D.C. 20551
Dear Dr. Burns:
Thank you again for the time you spent
with me on February 28. As you may recall, you raised
a question about gold coins. The two enclosed advertisements
appeared in the New York Times that very morning. I have
answered both from my home address and will send on to you
whatever material they send me.
Sincerely,
Albert M. Wojnilower
Director and Economist
Encl.
SEAL R. FORD
(212) 344-1515
ALBERT M. WOJNILOWER
Vice President and Economist
THE FIRST BOSTON
20 EXCHANGE PLACE
CORPORATION
NEW YORK
Gold
Rare
SILVER
GOLD, PLATINUM
GIANNINI FINANCIAL
announces the opening of its newest offices
Management
NEW YORK BULLION EXCHANGE
OUR COMPANY:
We are not coin or silver retailers, we are bullion brokers,
therefore we offer a complete range of precious metal
investments.
Rare Gold Management
We offer both U.S. and European hallmarked silver bullion.
A service of First Coinvestors, Inc.
Our silver is .999 fine, certified, and a guaranteed buy-back
F.C.I. Building-200 I.U. Willets Road
is included.
Albertson, New York 11507
We also offer Gold; Placer and all legal coins.
The precious metal investments of our Los Angeles clients
have appreciated over 50 per cent since January of this year.
Name
For a FREE BROCHURE-Write or Call Today:
Address,
NEW YORK BULLION EXCHANGE
1841 Broadway, Suite 1008, New York, N.Y. 10023
City
State
Zip
(212) 757-2516
Telephone
I am interested in investing in Rare
Gold Coins. Please send me full details
about Rare Gold Management.
Enclosed is my check for $300 or
$
(any multiple of $300) to start
my investment/collection portfolio. I
understand that I can return the rare
gold coin(s) within 30 days for full re-
fund without any further obligation.
Also send me full details on Rare Gold
Mnagement services
The First Boston Corporation
BROADCAST
January 25, 1972
ALL OFFICES (Including Zurich and London)
BRIEF NOTES ON THE DEFICIT
The new budget estimates, which call for a $38.8 billion deficit in
fiscal 1972 and $25. 5 billion in 1973, are both interesting and puzzling. While
they are largely free of the gimmicks common to earlier budgets, they also
imply a spending speed-up over the next few months of unprecedented (peacetime)
rapidity.
The new estimates include lower revenue figures than before, the
reduction being attributed to lower-than-expected profits and incomes. However,
it has been apparent all year from economic data and from the daily reports of
tax collections, that receipts would fail to come up to the initial highly optimistic
predictions. Indeed, the new estimate of about $198 billion for the current fiscal
year is very close to the figure that I have been using ever since August 16.
The real surprise is on the expenditure side. In the July-December
1971 period, expenditures were only about $112 billion and they would seasonally
tend to be somewhat smaller in the following January-June period (reflecting
lower farm support outlays). To reach the estimate of $236. 6 billion in total
spending for the full year, expenditures in the current six months would have to
jump to about $125 billion. The rise is apparently to be accomplished (if it can
be done) by shifting forward $8 billion or more of payments to defense contractors
and to state and local governments from the summer to the spring. In addition,
the assumption is made that over $2 billion in revenue sharing funds will have
been paid out by June 30.
As a result of this immediate bulge in spending, the increase in spending
for the next fiscal year is held to less than $10 billion, when it would otherwise
have been well over $20 billion. By this ploy, the government appears to have
succeeded in getting the press to highlight the smallness of the expenditure
rise and to attribute the deficits mainly to revenue shortfalls. It may also have
succeeded in preventing the opposition from offering significant new spending
programs of its own, partly because of the huge deficit and partly because the
new budget already shows sizable increases in spending or forward commitment
authority in virtually every important category.
The government may also feel that the increased budget deficit will
buoy the economy. However, the recipients of the added funds that may be spent
in the next few months are not getting more money; they are just getting it
sooner. They will not spend appreciably more; rather they will simply buy the
extra short-term securities the Treasury will have to issue. Because nonbanks
FORD
will more or less readily absorb the added securities, moreover, the deficit
is unlikely to push the Federal Reserve into a more expansionary posture, as
LIBRARY
the government might have intended.
-2-
Indeed, the impact on the real GNP may well be adverse. Inflation fears
are likely to be inflamed, partly because few people will believe that next year's
spending increase will be as small as is projected. (If the government is to
spend as fast as possible to June 30, why shouldn't it continue to do so later
on?) As a result, issuance of new securities and sales of speculative holdings
are likely to accelerate, while sophisticated buyers become more cautious.
The consequence might be that interest rates, long rates in particular, would
rise -- on an expectation of huge budget deficits that may not materialize and
that do not have strong stimulative qualities¹ When interest rates rise before
rather than after business improves, and when individuals are forced to become
buyers of securities because institutions stand aside, strong economic upturns
are unlikely to develop.
The large budget deficits are also apt to impart an upward bias to marginal
wage and pricing decisions and to increase the odds on new international troubles
that might lead to new direct controls on dollar inflows by foreign countries.
In the abstract, given the sluggishness of the economy and high unemploy-
ment, a deficit close to $40 billion might well be justified. However, just as
deficits of less than $5 billion frightened capital during the Depression, so deficits
of $40 billion, because of the potential inflationary repercussions, frighten
people today. It may well be that, Milton Friedman to the contrary, the public
and perhaps even the economists are not all Keynesians any more.
(Billions of dollars)
Fiscal Year
Expenditures
(Year Ending June 30)
and net lending
Receipts
Balances
1971
211.4
188.4
-23.0
1972
236.6
197.8
-38.8
1973
246.3
220.8
-25.5
AW