reserves that commercial banks have. But these reserves may flow to member banks or to nonmember banks; they may go into small banks, or medium-sized banks or large banks, and whatever the size of the bank, it may be that time deposits rather than demand deposits are expanded. The fact is that all of these different types of banks and different categories of deposits Mr. VENTO. Dr. Burns Dr. BURNS. Let me continue, if I may, for another second. All of these carry different reserve requirements. Therefore, what happens to the money supply depends on what the American people do and on what banks do all over the country over short periods of time. We have an ability to influence what happens to the money supply only over periods of 6, 9, or 12 months-not week by week or month by month. Mr. VENTO. Dr. Burns, how do you reconcile that then with the short term interest modifications that are reflected, for instance, by the Fed then in these instances where you talk about short term changes in interest rates versus a long term type of change, since you signify that the impact only takes place over a longer period of time, that is your impact or that of the Fed? Dr. BURNS. The impact on the money supply will express itself only over a significant number of months-6 months to a year or thereabouts. As far as short term interest rates are concerned, the effect on these can be very prompt, because we do influence one interest rate, that is, the interbank lending rate, rather directly. Mr. VENTO. I am somewhat confused with your answer because you say in the short term you can't deal with these bubbles. Now you are telling me you can influence them. It gets back to the basic question in terms of the erratic behavior of the Fed with regards to interest rate and what it was in May. Dr. BURNS. Apparently my explanation is not very clear. Yes, we deal with different kinds of bubbles. The bubble of shortterm interest rates we can influence fairly promptly. The bubble—if that be the right term-in the money supply we cannot influence promptly at all. We have no way of doing it. If I may say so, there is no central bank in the world that can do that. If you would compare the degree of volatility month by month in the monetary growth of this country, with that of other countries around the world, you would find that the degree of volatility is smaller in our country than in any industrial country that I know of. I don't speak of that as a virtue; I present it as a fact. Mr. VENTO. Dr. Burns, do you recognize that there is a shortfall in terms of money supply in May, that it has drawn to a halt? Do you accept any credit for any participation in the lack of money supply in May. Any role as far as the Fed is concerned in that accomplishment? Dr. BURNS. I will say this: In view of the explosion in the money supply that occurred in April, we took steps designed to influence the growth of the money supply, expecting and hoping that there would be a reduction in the rate of growth. The month-to-month figures jump around and we don't have much influence one way or the other, but the response in May was welcomed by the Federal Reserve. Mr. VENTO. Was that the market you were shooting for? Dr. BURNS. Well, I would have preferred to see the money supply growth lower in May because there was too much liquidity created in the economy. In fact, I was pleased by the result, but I would have been pleased still more if the figure had been lower. You should have been as well, if I may say so. [Laughter.] Mr. VENTO. I wasn't and I will say I was not. I do think you had a major effect on it. My time has expired. Thank you, Mr. Chairman. The CHAIRMAN. Mr. Wylie. Mr. WYLIE. Thank you very much, Mr. Chairman. Thank you, Dr. Burns, for appearing here this morning. I must admit some personal feeling of confidence about the state of our economy with you as Chairman of the Federal Reserve Board. It's been rather difficult to gain continuity here this morning as you have witnessed by the going back and forth between here and the House floor. I am not sure my questions haven't already been asked. If they have, you can say so and indicate that the answers are already in the record. On page 9 of your testimony, you refer to some disquietude in financial circles. Could this disquietude be indirectly the cause of the rather unusual activity in the stock market as reflected by the unusual decline in the Dow-Jones average over the past week? Dr. BURNS. I don't think that I would want to link what has happened in the stock market during the past week to this particular factor or any other single factor. But I think I can say that financial circles are concerned over the fact that our budget deficit, instead of diminishing, is now projected to increase next year. Since financiers are anticipating business volume to expand and credit demands by private business and consumers to continue growing, there is a fear that interest rates may rise. This undoubtedly is one factor that is having some influence on the stock exchange-not on any given day or week perhaps, but on the general atmosphere that has existed in recent months. Mr. WYLIE. Do you think the fact that the money stock data since 1972-indicates that in April 1973, April 1975, and April 1976, there was a jump in money stock, has any special significance. Consider that Dr. Heller said yesterday that this jump was due to no special factor. Are there special factors? Is the increase in money stock in any way related to what's happened in the stock market? Do you think that the fact and loose fiscal policy together lead to lack of confidence? Consider, too, the fact that interest rates are going up again as a result of this increase in our national debt? Does money stock become a factor in what happened in the stock market last week? Also, could you explain to me why the money supply jumped in April of this year and why this is almost a regular feature occurring every April now? Dr. BURNS. My answer may have a bearing on the question we were discussing just a moment ago. It so happens that people pay a good deal attention, indeed too much attention to monthly monetary figures. If we were to concentrate on weekly figures, the degree of volatil ity would be larger still. If we began publishing the daily figures that we actually have, the volatility would be truly enormous. I really wish that we at the Federal Reserve had not placed the public into the bad habit of following the weekly and monthly figures we do publish. I wish we had adopted a rule of publishing only quarterly figures. Perhaps some day we may have the courage to do just that. If we did it now, there would be an outery: The terribly secretive Federal Reserve Board is withholding all kinds of precious information from the public. This information is tending to confuse people. Turning to the month of April, there were some technical factors connected with social security payments and tax payments that caused an increase in the money supply larger than one would normally expect, but that could only account for a small portion of the excessive figure. Our basic interpretation was that checking account deposits were growing so rapidly because the volume of payments on account of business transactions was growing rapidly, and that preparation for an increasing volume of transactions payments was being made by the business community and by the general public. That was our guess at the time, it has been borne out by the facts concerning what happened to the physical volume of economic activity during the first half of this year. But the remarkable fact is-and this is what I think deserves attention that by acting promptly as we did, we restored an element of confidence in the business and financial community. As a result, longterm interest rates, in general-which are vastly more important to the future of our economy than short-term rates-actually moved down, instead of following the short-term rates in an upward direction. In general, they are lower now than they were in April. You know I don't mind criticism of Federal Reserve policy. As a matter of fact, criticism stimulates us to try to do better. But, I wish that some day somebody would get up and say that the Federal Reserve System has played some role in keeping interest rates declining over a period of over 2 years of a business cycle expansion, when normally practically invariably-interest rates begin rising just about the time that a recovery starts getting under way. I have to speak very honestly to you; I wouldn't be doing my job otherwise. As far as the Congress is concerned, and as far as my own conscience goes, if there is any criticism to be leveled against the Federal Reserve, perhaps that criticism ought to be that we have permitted the creation of a little too much liquidity. Mr. WYLIE. Mr. Chairman, I would like to ask just one more question-Dr. Burns can answer for the record. The CHAIRMAN. The gentleman's time has expired. He can ask the question. Mr. WYLIE. On page 17 of your testimony, you say the inference seems inescapable that we need governmental policies that offer decisive encouragement to capital formation. Unless recognition of that need conditions the evolution of policies in such major areas as energy, taxes, social security, welfare and governmental regulation there will be small hope of maximizing job opportunities in the next several years. I wonder if you would for the record talk about each of those major areas specifically and make recommendations as to what you think governmental policies should be in each of those areas and what the impact of such policies might be as an economic force. Dr. BURNS. That is a very large request. I will not be able to deal with it adequately in the time at my disposal, but I assure you I will do my very best, Mr. Wylie. Mr. WYLIE. Thank you very much, Mr. Chairman. The CHAIRMAN. Mr. Neal. Mr. NEAL. Thank you, Mr. Chairman. Chairman Burns, I find your comments the soul of reason in general, but I am personally concerned that, as you indicated a minute ago, that the Fed might deserve some criticism for letting the rate of growth of the money supply go too high. In the past 4 weeks, M, has grown at an annual rate of 13.8 percent; in the past 8 weeks it has increased at 9.1 percent. Over the last year, the last 52 weeks, it has grown at approximately 7 percent. All of these figures are well beyond the target range that you set and announced, which I think most people on this committee thought was reasonable. You say in your statement that sound monetary policy is a prerequisite to the achievement of the employment and price goals set forth by the administration. I couldn't agree with you more. Frankly, this concerns me. I don't understand it. I don't see the need for it over the last year. I know it is hard for you to handle it on a month-to-month basis. That's the virtue of looking at it year on year. I would just hope that you would keep it, the growth of the money supply, within the limits that you have set for yourself and I wish you would assure me that you would and I wish that you would also tell me why you have not over last year. Dr. BURNS. First of all, if you look at a moving average for the 12-month period, we have stayed within the limits that we set for ourselves. However, we were close to the top of our range, and I would have been far more pleased if the rate of growth in the money supply had been somewhat lower. Therefore, basically I think your criticism is justified. I share your feeling and I assure you this is very much on my mind and on the mind of every member of the Federal Reserve. We don't want to cause a wrench in the economy, but we know our duty, and I assure you we will discharge it. There are forces here that are a little difficult to control in the short run, but over the longer run we will approximate the objective that we have set for ourselves and that you seek-though perhaps we ought to be criticized for not having a stringent enough objective. As I tried to say, this is a delicate area. If we move too far in the direction of limiting the growth of the money supply, we might cause difficulties in the economy, and, of course, we don't want to do that. By and large I do think that our monetary policy has been found to be satisfactory and has encouraged the confidence of the business and financial community. Mr. NEAL. Well, I certainly believe that that is absolutely true. I think you could help inspire some more confidence by pushing it down lower. I am convinced personally that we will pay the price for not keeping it down, down the road, instead of paying it now. Isn't it true that during the past year there has been ample liquidity in the economy? Dr. BURNS. There has been, but may I say this: I am so frequently criticized in congressional circles on the ground that Federal Reserve policy is too restrictive, that hearing you criticize the Federal Reserve on the ground that we have permitted the money supply to grow too rapidly is music to my ear. [Laughter.] Mr. NEAL. I just said to someone a few minutes ago, I know that you are whipsawed in both directions on this question. Dr. BURNS. If I am really whipsawed in both directions, then I think things are going quite smoothly. [Laughter.] When I am whipsawed in a single direction, I get a little unhappynot because those who do the whipsawing are necessarily right, but because I often have the feeling that they are entirely wrong. [Laughter.] The CHAIRMAN. The gentlelady from Ohio, Ms. Oakar. First, I would like you to address yourself and/or respond in writing, to your statements on page 23. Dr. Burns, you say that the velocity of M1 is increasing. You state that this is not surprising, that America is turning to a wide range of substitutes for traditional checking accounts, and you mention NOW accounts, share drafts, and so forth. I would like to add EFT to this list and solicit your views on this. Do you take a need for stability in the financial services world to mean a framework of rules and regulations for electronic fund transfer? Do you have any recommendation to the committee regarding EFT development and/or regulations? You know right now there are virtually no rules or regulations. The American public should be very concerned about this. We are turning to EFT's and we have no checks on that kind of a system. Dr. BURNS. Yes; we do have some regulation guidelines in the making. I will be very glad to discuss this question thoroughly for the record. MS. OAKAR. Thank you. I want you to know I have a bill to submit with regulations. I would certainly like to have your comments on them. [Chairman Burns submitted the following reply for inclusion in the record, in response to a letter from Ms. Oakar of July 29:] Hon. MARY ROSE OAKAR, CHAIRMAN OF THE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM, Washington, D.C., August 9, 1977. DEAR MS. OAKAR: I am pleased to respond to your request for comments on H.R. 8387, a bill you have introduced that would provide standards for the establishment and operation of consumer service electronic funds transfer systems. I also wish to express my great pleasure in having had the opportunity to meet with you recently to discuss this bill and other matters of mutual interest. 94-542 O 77-8 |