Secretary BLUMENTHAL. If I might add something, Mrs. Fenwick. I don't think it's really as simple as all that.

Secretary Marshall, who's the strongest advocate of these same programs that you are endorsing, simply said, that is the maximum. He went back to see how much he could possibly do, and he said that is the maximum that I can say to you that we can handle over the next 18 months. That's not the end. He will do more, but that's the maximum that he can handle.

Mrs. FENWICK. Mr. Secretary, we have badly deteriorated roadbeds; the youth in our cities could be put out on flatcars and sent out to repair those beds. Would that be public service? No. Would that be public works, perhaps? Reforestation, there is another desperate need. We have income coming in from the lease of public forests. We could use that money. We have between $300 and $450 million a year. We could use this.

Secretary BLUMENTHAL. I believe 12,000 jobs would be for the National Park Service to do just that. But it's not enough. There can be more. But in terms of the time period available, Secretary Marshall felt that that was really the maximum that they could handle.

Mrs. FENWICK. Thank you, Secretary Blumenthal. Thank you, Mr. Lance.

Mr. MOORHEAD [presiding]. Mr. Leach?

Mr. LEACH. I would like to thank you for your patience in waiting for some of the younger members of the committee like the young lady from New Jersey and myself.

I just have one question, and that relates to the effects of the energy crisis on the capital markets. It seems to me if the energy crisis is as severe as many predict, there will be an effect on budget deficits and also an effect on the sources of funds available for the Treasury to tap. My question is really for you, Secretary Blumenthal. Do you intend to start an active program of attempting to sell U.S. Government securities abroad, especially among OPEC countries?

Second, will you ever make any political quid pro quos with regard to the sale of securities?

And third, do you believe there is ever a point in which the independence of our Government policy will be jeopardized by too heavy a reliance on foreign sources of funds to finance our debt?

Secretary BLUMENTHAL. Let me deal with the last question first. I do believe that we must develop on an urgent basis our own energy policies and that in doing so the question of lessening the dependence on our foreign source of energy is clearly an important consideration. It is my understanding that that is a matter to which Mr. Schlesinger will be directing his attention.

Second, as regards the effort, I agree with you that we must make every effort to insure-and I referred to that earlier that the resources and the surplus funds that are in the hands of some of the OPEC countries who have no other way to spend them are recycled back for productive use within the world economy.

There are various ways of doing that. I think some new ways have to be found. I expect us to be working with other countries to do that and to be working very directly with some of these OPEC countries to do that.

On the remaining question, is there a political quid pro quo, I really am not in a position to respond. I would say that in the international as well as the domestic sphere, I have found, at least in my limited experience, that it is very difficult to disentangle the economic from the political questions. Economics becomes politics, and politics becomes

economics.

Mr. LEACH. Well, more specifically, then, are there foreign policy political implications to your selling of U.S. Government Treasury notes to a foreign country?

Secretary BLUMENTHAL. I'm sure that all matters relating to economic policy, including foreign economic policy, will be coordinated within this administration through the economic policy group, on the executive committee of which, in addition to Mr. Lance and myself, are also represented by the Secretary of State. The Secretary of State is a member of that, so foreign policy considerations will be taken into account as those decisions are made.

Mr. LEACH. Well, maybe I am not being clear. My concern is what happens when a potentially hostile or unfriendly country owns a large amount of U.S. securities or is a potential purchaser of large amounts of U.S. securities and whether or not that ability to purchase or the fact that a good sum has already been purchased may not become a weapon to force the United States to adopt a different foreign policy position, vis-a-vis the Middle East. And will that be a consideration in the sale of securities?

Secretary BLUMENTHAL. I really can't say, because we really haven't discussed it yet. I think that the whole question of what the foreign policy implications of particular courses of economic action are will have to be discussed and considered very carefully.

Mr. LEACH. Thank you.

Mr. MOORHEAD. Mr. Caputo?

Mr. CAPUTO, Gentlemen, as I represent part of New York City, I'm really alarmed that you could not answer Mr. Moorhead's question about who is to head one department which is responsible for New York City's problem. I understand you will have a name in a few days. I'm somewhat concerned that you used the words "long run" to describe the commitment of the new administration to New York City. I had the impression that we had a short run problem. In fact, just about 24 hours from now we could default, and in the long run we may be dead, gentlemen, and then all we will need is a moritician's advice. So I hope you'll turn some short run attention to the problem of all cities, not just New York, and that you will have some identifiable people working on it.

I do believe there's a tradeoff between inflation and unemployment, and maybe we can correct the nature of the tradeoff. I think that fact is implicit in your written statement and in your oral testimony here today. I know that it is difficult to put numbers on the tradeoff, so I'll use my numbers to just try to sketch out what it is you recommended

to us.

Essentially, I think you are advocating an increase in the deficit by about $15 billion in order to keep inflation about at a constant 5 percent, and to reduce unemployment by about 1 million persons. And that may be a sensible strategy, prudent, I don't quarrel with the

numbers. In Georgia there is a saying about refraining from fixing unbroken items and in the Bronx there is a saying about not taking the first offer. And I would like to know what the other offer is. For instance, how much would we have to increase the deficit? How much would we have to spend to reemploy 2 million persons instead of the 1 million you are talking about, and what would that do to inflation? What's the next best choice to the one you have recommended?

I must say, as a guy who runs for office, it's a little hard to explain, setting out on a strategy that leaves some 612 million people unemployed, even if the strategy works.

How expensive would it be to be a little more ambitious? What would we have to pay? What would it do to inflation to get 2 million people back to work instead of the 1 million you're saying we're going to get back to work by the end of this year?

Secretary BLUMENTHAL. First of all, I comment on your comment, Mr. Caputo. There are some people, and they are known, who are working on the New York City problem, not the least of which is the person who has been nominated to be Deputy Secretary of the Treasury, Ken Axelson, who was deputy mayor of New York for a year and who knows the problems intimately. There are a number of other people. We have Treasury people in New York City working very closely with the folks there.

I was referring to the person who was being nominated to be Assistant Secretary for Debt Management, and since the President has not yet made a decision on that, I'm not really in a position to announce a name. That's the only reason that I was as obtuse as I was. As to the second matter, I wish it were that simple. I wish we could have a simple chart in which we could show what it would takewhat would happen with 2 million people off the unemployment rolls, 3 or 4 million. We could eliminate all of them and act on that basis and simply say that is more important than all of the other things. Unfortunately, it doesn't work that easily. These things take time. We expect to get 2-million people back to work, but it takes time to do that. If you do it too rapidly, unfortunately, then you do get into the kind of inflationary situation which would in the end have more people unemployed.

So, unfortunately, the connection is, when you go past a certain point it becomes sufficiently dangerous, that you really destroy the very things you are trying to create. So within a short period of time, if you're going to get an additional million people back to work, you have made a good beginning. You certainly are not satisfied with that result and you hope that will carry on and you can do more after that. Mr. CAPUTO. I think what I'm searching for is what the next option is that is inferior to the one you have recommended that we would be spending $30 billion over an 18-month period and seeing inflation rather than hold constant, which you predict, going up one percentage point in order to put 2 million people instead of 1 million people back to work?

Now, maybe you've got a better choice, but if you don't know what the alternative is, it's hard to know if you're choosing the right thing. Secretary BLUMENTHAL. Yes; the feeling is that if we spent as much as $30 billion instead of $15 billion we would be unlikely to be able to

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put a lot more people back to work. There is a declining scale there, and you wouldn't put all that many more people back to work. But the danger on the inflationary front would be very severe, and you would then in the end have more people unemployed because of inflation. Obviously, we are trying not to do that.

Mr. CAPUTO. Thank you, gentlemen, I think my time is up.

Mr. LANCE. We're not saying this is the perfect situation. It is our best judgment.

Mr. MOORHEAD. Are you finished, Mr. Caputo?

Mr. CAPUTO. I have been instructed that my time is up.

Mr. MOORHEAD. Well, let the records of the panels of the Committee on Banking, Finance, and Urban Affairs show that two of the most important officials of this administration, the Secretary of the Treasury and the Director of the Office of Management and Budget, have devoted over 311⁄2 hours of time to answering the questions of all of the members of this committee who attended, and that the committee should be deeply indebted to both of you gentlemen for the time you have spent. And we thank you very, very much.

When the committee adjourns, it will adjourn to meet at 10 o'clock tomorrow in this room, when we will hear from the Chairman of the Federal Reserve System.

[Whereupon, at 5:35 p.m., the committee adjourned, to reconvene at 10 a.m., February 3, 1977.]

CONDUCT OF MONETARY POLICY

THURSDAY, FEBRUARY 3, 1977

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS,

Washington, D.C.

The committee met at 10 a.m. in room 2128 of the Rayburn House Office Building; Hon. Henry S. Reuss (chairman of the committee) presiding.

Present: Representatives Reuss, Moorhead, St Germain, Neal, Patterson, Blanchard, Hubbard, Spellman, AuCoin, Tsongas, Hannaford, Evans, Allen, Lundine, Badillo, Pattison, Cavanaugh, Oakar, Vento, Barnard, Watkins, Stanton, Brown, Wylie, McKinney, Hansen, Hyde, Kelly, Grassley, Fenwick, Leach, Steers, Caputo, and Hollenbeck.

The CHAIRMAN. Good morning. The House Committee on Banking, Finance and Urban Affairs will be in order for its semiannual dialog with the Federal Reserve System.

We want to welcome Chairman Arthur F. Burns here, who has always been so helpful to this committee and whom we all know shares this committee's concern about the economy and the desire for a new start toward recovery.

If recovery is to work, it is clear that the Federal Reserve must play a leading role on the economic team. We are anxious that we don't repeat past mistakes on either the fiscal or monetary side.

Since the passage of House Concurrent Resolution 133 in March 1975, this committee has monitored the course of monetary policy closely. The Federal Reserve's presentation to us of its monetary projections for the following 12 months on a quarterly basis has made for a most constructive dialog.

I am not going to take time to quarrel over 2 years of monetary statistics and discuss the technical niceties of M1, M2 and all the other M's. What most people, quite understandably, are much more concerned about is the end result, measured in terms of jobs, economic activity, availability of credit, and lower interest rates.

But the past can occasionally instruct the future, so let me go back in history long enough to examine the Federal Reserve's interpretation of its responsibilities in late 1975 and early 1976 as the Nation was attempting to pull itself out of the recession. Although the Fed announced goals for the growth of M1, the basic money stock, before this committee in March 1975 for the 12-month period ending March 1976 of 5 to 7 percent, the growth rate actually realized in that year, as the chart over there shows, was 4.9 percent. For the 12 months ending in the second quarter of 1976 the target range was 5 to 72 percent, while (79)