there is a vote in the Senate, and I am informed that it is on an amendment by Senator Inouye of Hawaii to the international bank bill, so the Chair must cast a vote on that measure.

The hearings will resume just as soon as I get back. We regret the interruption.

[A brief recess was taken.]

Senator BYRD. The committee will come to order. You may proceed.

STATEMENT OF ALBERT E. SINDLINGER, CHAIRMAN OF THE BOARD, SINDLINGER & CO. OF MEDIA IN PENNSYLVANIA

Mr. SINDLINGER. While you were voting I went through my statement and underscored my statement to cut some time.

I am very grateful for the opportunity to testify today and I am going to ask that you put my complete text in the record. I am going to paraphrase to save some time.

I was very much impressed by Dr. Rinfret's remarks when he talks about legislative uncertainty among business. I am here today with a little different point of view.

I have the advantage that all of the information, all of the conclusions that I come to come from my conversations with people or daily interviews with people and it is the people of this Nation, the human beings who are often ignored in discussions such as this, and it is people who are directly affected by whatever policy government, including the Federal Reserve Board, eventually produces. It is people who, in the end, will determine whether the Government policies work or they will not work.

The worthy goals of this committee, I think, can be summarized, if we discuss how the economy works. I want to paraphrase and modernize a wise economist and how he put it in 1930: "When the monetary authorities in government of the world, especially within the United States-can figure out, and stop to think out-how to stop creating recessions," like the newest one just occurring in 1977, "the task of Congress will become relatively easy to create incentives for economic growth."

That was said by Dr. Hawtrey, teacher of Keynes, in 1930.

As I have read history, including my own data of the last 28 years gathered from talking to people, I have concluded that all recessions, just like all inflations, are provoked and fired by faulty monetary policy.

I am sorry Senator Long is not here because, if he were here, I could make a couple of points. When you asked me the question earlier today, Mr. Chairman, about the error in 1969, I will show you why it was an error in a couple of more pages.

Senator BYRD. You are speaking of capital gains?

Mr. SINDLINGER. Right. Recessions just do not happen. They are not functions of the inescapable supply and demand. Recessions are manmade by the errors in Government-inspired monetary policy.

As I address you today, this Nation is suffering the ill effects of just such a recent mistake.

During May, the Federal Reserve Board needlessly adopted a monetary policy of too much restraint that was manifested particularly in

the rise of interest rates. This restrictive stance resulted from a complete misjudgment of the Fed on the strength of the American economy and on the reading of their own figures.

Let me interject here, Mr. Chairman. Remember when I called you up and asked to appear in this hearing? I said, I hope that by the time the hearing is held that the error of the Fed will be made public. Do you recall that?

Senator BYRD. I recall that.

Mr. SINDLINGER. I would like to show you this morning's Washington Post. The headline says, "Morgan Guaranty cuts prime rate to 6.5 percent."

This made me right on exactly why I wanted to come and talk to you.

To keep this short, I would like to have you read with me on page 3. This mistake that the Federal Reserve Board made was in using only their seasonally adjusted figures. I want to point out to the committee and to the Congress that all Government figures are seasonally adjusted.

Here is your May issue of "Economic Indicators" which every Member of Congress uses as a bible, and it is put out each month by the Council of Economic Advisers and every figure in this book that is seasonally adjusted has an error inbuilt. It is a very wide error, the kind of an error that causes the Federal Reserve Board to make the mistake that they did a month ago.

Skip to page 4 and here you see a chart that is reproduced from a recent issue of the New York Times, and what the chart says, to save time, with that M-1, the money supply upon which Government decisions are made at the Fed showed an upward rise in the growth of M-1 when it was seasonally adjusted on a 4-week annual basis in an excess of 20 percent.

If those figures had been correct then the Fed actually would have been entirely proper and we would not have created another recession. If those figures had been correct, this headline would not have been in this morning's paper.

The figures used to make that decision which affected people throughout the United States, were statistically artificial and are categorically wrong.

Thus, the decision was wrong.

On page 5, again, to save time, I have reproduced a chart showing M-1 in color as an overlay. The actual M-1 as it was counted by the Fed and as it was not read by the Fed.

In the April meeting of the Open Market Committee, it was determined that the short-term actual rate range for M-1 was to take no action unless the M-1 figure grew more than 10 percent.

I want you to look at the table on page 6. Here I show the last 28 weeks of the actual M-1 figures with the growth percentages shown in the column under that. There is no figure since January 19 that exceeds 7 percent. There was no justification in April to raise the interest rate, based on their own figures, because the target was 10 percent, and if they had looked at the raw data, looked at the information without relying completely on the seasonal adjustment information, they would never have made the decision that they did.

We will skip a couple of pages, and I hope we will read this at your leisure. I am going to get down to a point.

I have just two things that I want to stress to Congress. The simple attachment of the word "official" to government figures does not make them correct, and first, as we have discussed, it is a plea to Congress to substitute commonsense real figures for the artificial manipulations of the seasonal adjustment that are now ruling the decisionmaking roost.

The second point I want to talk about, I would like to see the battle against the flames of inflation fought from a different firehouse. The inflation firefight should not be waged at the firehouse down on Constitution Avenue, where the Fed is located, but the inflation fight should be fought here on Capital Hill where we are now sitting.

The Fed, by raising interest rates or raising the costs of money is not the way to fight inflation, because when you raise the price of money you are pouring gasoline on the fire to put it out.

The Congress, I believe, has enough sense to use cold water instead of inflammable materials to try to put out the fires of inflation.

Besides being panicked by the wrong information on monetary growth just a month ago, the Fed also was goaded into boosting interest rates by the faulty belief that bank credit was expanding too rapidly.

On this point, the Fed, to a great degree, also was trapped by the seasonal adjustment flaws, for seasonally adjusted-bank loans are up.

The purpose of these hearings, so we can keep it short, so we can have time for discussion, the purpose of these hearings is to create capital formation. I would like to discuss briefly how the economy works, and we will go to page 10.

After monetary policies establishes a recession, it is generally agreed that each economic recovery comes in two stages, the rebound of the typical cyclical cycle.

The consumer moves first. He regains confidence through expectations of greater household money supply and an optimistic view of his job security. This allows the consumer to loosen up and resume spending in a way that will absorb excess supplies that have been produced by business from wrong monetary policy which created the recession in the first place.

Once most of the excess has been absorbed, we are ready for the second stage which is an outgrowth of capital spending to enlarge productive capacity for meeting the increasing consumer demands. So to repeat, the first stage of early recovery is that the consumer moves first and the second stage of a recovery is for capital spending

to move.

Dr. Rinfret this morning talked about legislative uncertainty. What I am talking about with the various exhibits and documents that I have presented to go along with this testimony is to report the complete consumer confusion in the United States at this particular time.

This morning the subject of savings was mentioned and how important they are. I would like to instill a point.

One of the key measurements that we have been asking our people for the last 22 years is a series of questions on their spending plans and a series of questions on their savings plans. One of the key figures

that make our data the most accurate is the ratio of how people plan and are currently saving and the reason for their saving.

Over the years, when the economy was moving upward, about $8 of every $10 that was saved is being saved, or was being saved, for spending. People were saving up money to build a house or to buy a car or some item and with job security they would go in debt after they had saved money for an initial downpayment.

In March of this year, the savings desire in this country and savings were almost 16 percent year-to-year growth. We had $1 of every $10 being saved to spend, a reverse of over last year.

As of the last 3 weeks, we have now $8 of every $10 being saved, being saved out of fear. That is a reverse that has taken place since the 13th of April. What caused this?

On the 13th of April, the economy was moving up forward. Everything was going very well in our recapture of consumer confidence and we had a series of events that took place one after the other.

First, we had the overnight announcement that the public was not going to get a tax rebate. I was against the idea of the tax rebate in the first place. Once you promise the people that you are going to do something and people have gone out and spent it, especially with the cold winter, you do not suddenly take it away from people if you are trying to build confidence.

In that 1 week following that 1 day's announcement we had the sharpest drop in our measurement of any time in the last 22 years. Then we followed this up with a television blitz explaining to the American people how they had to compromise on the energy problem, with only 53 percent of the people believing that we had an energy problem. Then on top of this we had the publicity that social security is going broke.

We interviewed people across the Nation who were worried if they were going to get their next social security check because how could they get their check if they had seen on television that social security was broke?

To top this off, on the 6th of May, the Federal Reserve Board raised interest rates falsely to dampen confidence.

Let's look at a chart on page 13. I think it is very interesting. I did not realize you were going to ask this question.

This chart starts in 1966. This is our level of confidence.

You notice that confidence started to fall in 1969. What was the date Congress raised that?

Senator BYRD. Raised the capital gains?

It was done in the 1969 Tax Reform Act.
Mr. SINDLINGER. I think it was in April.

Senator BYRD. The Tax Reform Act of 1969 was passed in December 1969.

Mr. SINDLINGER. April 1969 was when our confidence started to fall and you can see what confidence has been doing since then, and then we had a recovery in 1972 which was a result of the wage and price freeze. Then we had the oil embargo in 1973 and then we had the recession in 1974.

Now I want to flip to page 14 because I want to save some time for some questions.

We were recovering from the recession, the lull that was at the lowest point ever measured, in January 1975 and we were well on our way to complete economic recovery with the tax rebate.

Mr. Chairman, you and I have had many conversations about that during that particular time. My point was that the Government needed to give confidence to people to restore their confidence in money and we gave them the tax rebate, and the economy was turning around very, very sharply.

So what does the Federal Reserve Board do? The Federal Reserve Board, in June, got panicked over the seasonally adjusted figures, raised interest rates, and aborted the economy. Strikeout No. 1.

Then the consumers recovered from this by the end of 1975 and in November of 1975, if you remember, I forecasted that the stock market should turn up and the stock market did turn up in December and confidence followed it. We had a boom recovery well on its way in May of 1976 and what does the Federal Reserve Board do? They again misread their seasonally adjusted figures and raised interest rates and aborted the economy for a second time.

So that is strikeout No. 2.

We recovered from that blow late in 1976 and we started to build up in 1977. We had a temporary abortion of confidence for the deepfreeze month of February and we were rebounding sharply until we had the history that I just cited following May 13.

Skipping over to the next page, the Feds strike out in 1976 to abort the recovery. As you know from our reports I have sent you I have been warning the Fed for 2 years that they were going to make this error. Last February and March I had many meetings at the Fed and I warned them that they were going to make the same error the same week in 1977 that they made in 1976, and the argument was given to me, the economy is booming and capital spending is late, but capital spending will follow soon behind.

And I said, no, it will not follow soon behind because you have aborted two recoveries; now you are going to abort the third.

The reason capital spending is not moving today is that the second segment of the economy cannot work until the first sector goes through. If we are going to let monetary policy abort three recoveries in 3 successive years, how in the world are we ever going to get capital spending for all of the reasons that we discussed here today.

To cut this short, because the hour is late, I now come to my conclusion on page 16.

One of the things that I am asking this committee to recommend to Congress is that we change the idea of fighting inflation by raising the price of money.

My thesis and if we had more time, you will see a document in here when you raise the price of money, that is the same thing as raising the price of wages and raising the price of a commodity. It is inflationary in itself. Just to raise interest rates falsely on an error compounds the problem.

What we are doing in raising the price of money under the guise of fighting inflation, we are fueling inflation.

I want to suggest that Congress adopt the Democrat philosophy of low interest rates and marry this with the Republican doctrine of a balanced budget.