Date: 1982-08-03
Speaker: ROBERT C. BYRD (democrat)
Chamber: S

Mr. President. I rise to introduce the Balanced Monetary Policy Act of 1982. legislation which Is designed to bring down interest rates and thus to move our Nation out of a tragic and everwidening recession. Bold action by Congress is imperative. because the administration has embraced two economic experiments which together have brought our Nation to the brink of depression. One of these. the "supply side" economic theory. which holds that tax cuts for the wealthy will bring prosperity to all. Is now widely recognized as a failure. The other administration economic policy Is less well known. but no less of a disaster. I refer to the administrations support of tight money and high interest rates. I he Federal Reserve Board. in October of 1979. undertook a dramatic and farreaching policy change. It embraced the monetarist economic theory that reducing the growth of the money supply is the only way to stop inflation. It therefore abandoned any attempt to control interest rates. The assumption was that if the growth of the money supply was sufficiently slowed down. and if Interest rates were allowed to float freely. inflation would be halted and in time interest rates would come down on their own. Stripped of all the technical Jargon. monetarists believe the only way to stop Inflation is to start a recession. Mr. Reagan. as a candidate for President. wholeheartedly embraced this monetarist dogma. As President. he has repeatedly affirmed his support for the Federal Reserves tightmoney. highinterest rate policy. Some of us. I must say. had severe doubts about the monetarist theory from the start. On October 19. 1979. only days after the Board adopted this new policy. I said on the Senate floor: Ultimately. to control inflation we must produce more. not less. Attempting to control inflation or protect the dollar by throwing legions of people out of work and shutting down shifts in our factories and mines is a hopeless policy. . . . The Congress will be watching closely to ensure that the recession of 1974 and 1975 will not be repeated. . We will watch with concern the impact of this policy on small businesses which depend on credit markets for financing. We will watch its impact on the construction industry. . . . Mr. President. we have now seen the results of this experiment with monetarism. Between October 1959 and October 1979that is. for the 20 years leading up to the new policythe prime rate averaged 6.5 percent.. and the Federal funds ratethe amount of interest that banks are allowed to charge one anotheraveraged 5.4 percent. Between October 1979 and October 1981the first 2 years of the new policyprime averaged 16.8 percent and the Federal funds rate averaged 14.9 percent. Those are shocking figures and they have had shocking results. Today. 10.4 million Americans are out of work. and. 2V2 million of them lost their jobs since Mr. Reagan became President. The unemployment rate stands at 9.5 percent. the highest level since the Great Depression. Five hundred small businesses are failing each week. and the rate is above that of 1929. Home and farm foreclosures are at levels unknown since the 1930s. The automobile and construction industries have been devastated. In 1981. domestic auto production and sales declined to 20year lows. and 1982 has proven even worse for U.S. automakers. In June of this year. sales of domestically produced passenger cars declined to an annual rate of only 4.6 million. a decline of more than 12 percent from last Junes depressed sales rate. The impact of high interest rates has been even more devastating on the housing industry. In 1981. new private housing starts and sales of new singlefamily homes declined to alltime record lows and. as with the auto industry. conditions have declined even further in 1982. In the face of widening economic disaster. In the face of immeasurable human suffering. in the face of pleas by corporate executives. conservative economists. and Republican officeholders for a change in the economic policy. the President and his underlings have no reply except to blame others for their mistakes and to assure us that prosperity is just around the corner. Mr. President. too many innocent lives have alheady been sacrificed on the "altar of monetarism." too many men. women and children are suffering because of the theories of economIc idealogues who do not have to pay the price of their mistakes. The White House. with its promises of recovery. is living in a dream world. Let us look for a moment at the real world. In a recent article in the Washington Post. reporter Dan Balz described the new economic realities better than any statistics can. His article concerned the thousands of new American migrants who have been arriving in Texas from the North and Midwest in search of jobs. Mr. Balz writes: These newcomers are now found increasingly in pawnshops. hocking their few possessions to buy a meal. in soup kitchen lines in the inner cities of Houston and Dallas. huddled in brokendown campers near a downtown park. at the unemployment offices applying for outofstate benefits. at the churches along the interstate highways that flow from the north. seeking emergency food assistance or money to fix a broken car. at the welfare office asking about benefits. at child welfare homes asking someone else to care for their children because they have been unable to find work. Mr. President. this is not a description of the America of the 1930s. This is not a fictional protrait from "The Grapes of Wrath." This is not some mythical kingdom called South Succotash. This Is the United States of America. the greatest nation of earth. in the summer of 1982. At this very moment. millions of Americans are suffering terribly. and needlessly. because this administration has lost its economic gambles. Today. high interest rates are "public enemy number one." More than any other single factor. they have caused this present. tragic recession. The economist Lester Thurow summed up the problem succinctly in a recent Newsweek article: Capitalism. a system where individuals invest today to get more back tomorrow. simply doesnt work with high interest rates and the stagnant business conditions they create. The truth of this proposition is everywhere around us. The administration may choose to hide its head. ostrichlike. in the warm sands of economic dogma. but the rest of us must face the facts. We cannot tolerate these skyhigh interest ratesrates that until recently would have been considered usurious. Congress must act to bring down these killer interest rates before they bring down our economy and the strength and security of our Nation. Mr. President. the Constitution authorized Congrf s to "coin money" and "regulate the value thereof." Congress created the Federal Reserve Board in 1913 as an instrument to asist in the carrying out of that mandate. But over the years the Board has tended to do the bidding of the administration in power. We have seen that happen recently. as the administrations economic ideologues have pursued their experiment with high interest rates and achieved such disastrous results. It is time for Congress to wrest control of monetary policy from the hands of a tiny band of monetary ideologues in the White House. the administration. and the Federal Reserve. It is time for basic economic policy once more to be set by those elected officials who must bear the final responsibility. It is time to restore commonsense. balance. and stability to monetary policy. To that end. I am today introducing the Balanced Monetary Policy Act of 1982. As we all know. economics is a highly technical field. But at bottom what we are dealing with in this legislation is very simple. We are talking about jobs. We are talking about growth. We are talking about economic recovery. We are talking about the lives and wellbeing of hardworking Americans who deserve better than the uncertainty and hardship that the present administration has inflicted upon them. Let me outline the specifies of my legislation. The heart of this bill is a requirement that the Federal Reserve Board reestablish the traditional relationship between interest rates and inflation. Historically. shortterm interest rates like the prime rate have run 1 to 4 percentage points above inflation. This Is a level we can live with and that can give us jobs and economic growth. My bill does not say that Congress should tinker with the technical details of monetary policy on a daytoday basis. Rather. the act mandates the broad. fundamental goals ofibalance. public disclosure. and stability. This bill makes affordable interest rates once more a clearly defined national goal. It will restore balance to our monetary policy by requiring the Board to set targets for both money growth and real interest rates. In recent years. the Board has veered from one extreme to anotherfrom ignoring inflation to ignoring high interest rates and the deep recession they cause. This bill is intended to stop this economic extremism and get us back to a balanced. commonsense middleoftheroad policy. The Federal Reserve Board has many tools at its disposal to bring rates down to reasonable levels. It has shown one way to bring rates down in the last few weeks as it lowered its socalled discount rate. which is the rate at which it loans to banks. By lowering this discount rate from 12 to 11 percent. the Fed has helped drive the prime rate down from 16.5 to 15 percent. But we have seen small drops in shortterm interest rates before. only to have them wiped out by new increases in rates as the administrations tight money policy came Into conflict with increasing budget deficits and business borrowing. My bill would bring interest rates down by making them an explicit part of Federal Reserve planning and assuring that the recent drops in the prime rate are maintained and expanded. If the prime rate were now at the historic levels mandated by this bill it would be somewhere between 9 and 11 percentwhich is the goal of this bill. The Fed has other tools besides the discount rate to reestablish the traditional relationship between interest rates and inflation. For Instance. the Federal Reserve could bring down the "Federal funds" rates. which are the bank rates the Boaro controls most directly. These socalled Federal funds consist of the money that banks lend to each other overnight to help meet cash requirements of their daytoday activities. The Board can raise Interest rates on these loans by selling securities to banks. which the banks pay for. thus removing cash from their vaults and draining money from the total available for banks to lend to each other. Alternatively. the Federal Reserve can lower interest rates by buying securities from banks. thus providing banks with cash that makes more money available to the Federal funds markets and lowers the price of that money. Using these purchases and sales. known as open market operations. the Federal Reserve can maintain reasonable control over the Federal funds rate. While my bill would bring balance back to Federal Reserve policy by requiring it to make interest rates a significant part of its policy targets once more. it would not bring us back to the days when easy money fueled high inflation. The most important difference between the interest rate targets established by my bill. and the old interest rate targets set by Federal Reserve Board is that the targets in my bill contain a countercyclical approach which dampens inflation before its begins to rage out of control. In the preOctober 1979 period. the Fed paid attention to interest rates. without any concern for Inflation. Since October 1979. the Fed has concerned itself with only inflation and not at all with interest rates. My bill would establish a balanced approach to both these concerns. The Federal Reserve Board would be required to keep real interest rates positive. that is. interest rates would have to stay above the level of Inflation. Thus. the Board would have to watch both inflation and interest rates. By keeping interest rates only slightly above inflation during recession and letting the spread rise as inflation began to build. the Fed could increase demand as a recession began to set in or it could slow loan demand before policymakers needed to use recession to fight inflation. The Federal Reserve Board would continue to report to Congress twice a year. as under current law. In the first report. due no later than February 20 of each year. the Board would establish its targets for the growth of monetary and credit aggregated consistent with the traditional spread between shortterm interest rates and inflation for the calendar year in which the report is presented. In cases where there is a sudden increase in unemployment or inflation. my bill provides an escape clause designed to assure that the Federal Reserve Board can act to smooth out sudden surges in prices. The escape clause lets the Federal Reserve Board establish targets for interest rates above or below historic levels. as long as the Board notifies Congress in writing within 10 days of such changes and explains the reason for these changes. My bill is not a straitjacket on Fed policymaking. It does anticipate that under certain severe conditions the Board may need to react suddenly. and provides a mechanism for the Board to do so. There is nothing in this bill that will encourage inflation. We must continue the fight to lower inflation. But. once again. we must have a balanced policy. one that emphasizes lower interest ratesand economic recoveryalong with the fight against inflation. We must keep both goals in mind. To ignore either goalas this administration has doneis to court disaster. We can look to West Germany for proof that such a balanced policy can succeed. There the central bank has paid attention to many economic variables including both interest rates and monetary growth. and the Germans have both lower inflation and lower unemployment than we do. with their unemployment at 5.8 percent 4nd inflation running at only 5 percent. Nor. Mr. President. can we lessen our fight against huge Federal deficits. We need to reduce this administrations record deficits. and we will continue to propose constructive ways to do so. But. once again. the point is balance. We must fight both battlesfiscal policy is part of the problem. but we must consider monetary policy along with it. We must never forget that high interest rates are a direct cause of high deficits and that by lowering interest 8S9700 rates we can lower our deficits. This is true in two ways. First. high interest rates depress the economy. Increase unemployment. and thereby cause both lowered tax revenues and higher spending for unemployment benefits. It has been. conservatively estimated that each additional percentage point of unemployment adds $25 billion to the deficit. Thus. the 2.1 percentage points that the unemployment rate has climbed during the Reagan Presidencyfrom 7.4 to 9.5 percenthas increased our deficit by more than $50 billionhalf of what the administration projects it to be in fiscal year Second. highinterest rates significantly increase the interest we must pay on our national debt. In fact. interest on the national debt is the fastestgrowing element of the Federal budgetfaster growing. for example. than either defense spending or social security. Ten years ago. interest payments took up 6 cents of every dollar spent by the Federal Government. For 1983 those interest payments will have more than doubled. to 13 cents out of every Federal dollar. These net interest payments will cost $97 billion in 1983almost the entire projected deficit for that year. Clearly. to lower interest rates would directly and dramatically lower our Governments annual deficits. We all want a balanced budget. and clearly lower interest rates would be a vital first step. Mr. President. we cannot accept the premise that the only answer for inflation is recession. This is not an either/ or choice. We have that again. but only if we pursue balanced. sensible policies that will lower interest rates. Along with the need for balanced monetary policy. is a great need for the Federal Reserve to conduct its business in a more open. public manner. It has developed a tradition of secrecy that can only be harmful to public trust and ultimately to our economy. The American public is directly affected by the decisions of the Federal Reserve and the American public has a right to know what it is doing and why. My bill would therefore require the Board to make public its plans and goals in a variety of ways. Such public exposure would have the added advantage of bringing increased stability to the financial community. As things now stand. bankers and economists are secondguessing the Federal Reserves everchanging policy and this uncertainty creates a great many unnecessary and costly problems for our economy. To require the Board to report regularly to Congress. to publicly announce its policy changes. and to set )iearly. rather than weekly. goals will go far toward bringing new stability to the financial community. Mr. President. I ask unanimous consent that the text of the bill be printed in the RECORD.