e have the problem completely licked until we know LAS. Mr. Chairman, would the Senator yield? I am through. LAS. I don't wish to interfere but merely follow up LAS. Surpluses, there has been a surplus for March, . You are actually showing a surplus for those 2 Let me get this straight. The indicators you have 1 are showing a surplus for 3 months, March, April, LER. That is right. But you don't want to rely upon that as yet because r wait until more figures come in and so you have ll showing? LER. That is right. the picture. n the past quarters in which we have been in surplus urplus and I don't think we are safe in assuming we nin hand, while we have two, three, or four quarters showing pretty much a consistent pattern. Senator Anderson? SON. I was very serious to get at that situation because ors last night said: before the Senate Committee on Foreign Relations 2 months if he did expect improvement in the balance of payments. He asked them what they were on the day he appeared, he nswer. The information referred to f LEPTS FROM THE RECENT STATE BOARD OF GOVERNORS OF The basic objectives of that part Feral Reserve System are, I hope, pansion of bank credit from a rate to something in the neighbo parable results in the area of nor reduce, in an orderly manner, their ember 31, 1963, level, to refrain fr beam-term investments by more t serable restraint in increasing t the first 2 months of 1965, the fl dow while providing adequate fina now the balance-of-payments problem is now worse nfortunately some of us didn't have ways of getting on last night, the people in my office who keep track ad gone home. I had figures showing the situation an it was. Is it your information that the situation vas? LER. No, sir; my information is that there has been mprovement covering the months of March, April, è no reason to believe that that situation shouldn't uch prefer to wait until we have the second quarter Senator ANDERSON. In your s Senator ANDERSON. It alway figures thoroughly in hand to give, I think, a more complete appraisal of the picture. What we have up to now is encouraging, Senator Anderson. Senator ANDERSON. Well, I agree with you we have to wait a while to be sure of it but the facts are right now it looks better even though there are factors that might maybe make it later look worse. Secretary FOWLER. It does indeed and I would suggest, perhaps I would like to provide for the record, if the chairman permits, some excerpts from the recent statement by Gov. J. L. Robertson of the Board of Governors of the Federal Reserve System in which he outlined the clear, very clear, evidence of the effect of the voluntary program among the banks which have been engaged in foreign lending activities. Senator LONG. I will instruct the reporter to put that in the hearings when you provide it. (The information referred to follows:) EXCERPTS FROM THE RECENT STATEMENT BY Gov. J. L. ROBERTSON OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM The basic objectives of that part of the President's program assigned to the Federal Reserve System are, I hope, fairly well known. We aim to reduce the expansion of bank credit from a rate of over $2 billion a year-which it attained in 1961-to something in the neighborhood of $500 million in 1965. To achieve comparable results in the area of nonbank financial institutions, we asked them to reduce, in an orderly manner, their holdings of liquid funds abroad to the December 31, 1963, level, to refrain from increasing their holdings of short- and medium-term investments by more than 5 percent during 1965, and to exercise considerable restraint in increasing their long-term investments. Barely 3 months have passed since the guidelines were distributed and we have data on actual transactions only for March and April, and that only for banks. It is already clear, however, that there has been a sharp reduction in the rate of expansion of bank credit; from over $2 billion in 1964, and about $400 million in just the first 2 months of 1965, the flow was reduced to $40 million in March and converted into a reflux of $140 million in April. We do not yet have specific data (but soon will) on capital flows through the nonbank financial institutions this year (their foreign credits increased 9.4 percent in 1964, from over $8 billion to over $9 billion), but the information we do have leads us to believe that they, too are cooperating wholeheartedly with the program. We are keeping in close touch with all these financial institutions. Regular reports and hundreds of face-to-face meetings with top management give us every reason to believe that the guidelines are being followed, and that the program will be effective in achieving a substantial reduction in the rate of capital outflow while providing adequate financing not only for U.S. exports but also for the needs of the less developed countries of the world. The reaction of the financial community to the program has been an encouraging example of the way in which American institutions can place the national welfare above their own shortrun economic interests. It is true that financial institutions recognize that their welfare is inextricably entwined with the preservation of a sound dollar and an effective international monetary system. Nevertheless, their willingness to cooperate and to refrain from taking competitive advantage of the situation exhibits an admirable sense of public responsibility. Secretary FOWLER. The bankers have done a great job in the early months. Senator ANDERSON. In your statement you say, "General reduction of debt is anticipated in the spring of 1966." Do you mean a reduction? Secretary FOWLER. That is a reduction from the peak level during this particular year. Senator ANDERSON. It always reduces the peak level, doesn't it? Secretary FOWLER. Sir? Senator ANDERSON. It always reduces from the peak level? RSON. You don't think anybody now living in see a reduction in the public debt, do you? ER. Yes, sir. SON. You do? LER. Yes, sir. SON. Well, I want to put down on the record that one time to take off the word "temporary" and I illiams has mentioned it again. LER. Did you say permanent debt? SON. Yes. I regard the $324 billion as permanent. SON. It will be permanent for the next hundred years LER. My comments reflect the view that I think it is and probable that we should have, sometime, a d with rather than to be constantly confronted with AMS. I think what the Secretary is stating is he is ction from a higher plateau to a higher foundation. RTHY. I would suggest we make it all temporary 0 billion, would that make people feel better? SON. I assure the Senator from Minnesota he would se I tried it several years ago. I tried to boost up to I didn't get but two or three votes. That was LER. For the information of the committee on that s considerable discussion in executive session in the ther to change the permanent ceiling at this time and fter much weighing of the problem, not to include a to that effect. Treasury and the Budget were instructed to conduct e months ahead of what criteria should be considered Congress did at some later time wish to change the ent debt ceiling figure. Fould like to have taken son Secretary FOWLER. I am not s pany under the laws of mo SON. $325 billion would be a very conservative figure level, wouldn't it? I am going on the basis we rode e each year and, therefore, it is an easier burden to LER. I would say in a range between $315 and $325 a reasonable figure. RSON. I don't blame you for saying that. LER. It depends on what your objectives are and wish to make them. The figure $315 billion was House committee. RSON. There is nothing about the excise tax cut that hat is going to contribute to the reduction of the LER. We view, as I think I indicated in the hearing mic effect of the excise tax cut to be roughly comparable cut of the same general proportions. Most econoupport that point of view. I found very few that their appraisal of the economic impact of the twoit and the excise tax cut. Senator ANDERSON. I do not question the economic value of it. I think it may throw us out of balance and it might be valuable. I would like to have taken some time on your comments on Mr. Martin's statement. Can you imagine anything more influential and better for the bear operators in Wall Street than Mr. Martin's statement? Secretary FOWLER. I am not sufficiently familiar with that segment of Wall Street, Senator Anderson, to have much judgment about it. Senator ANDERSON. I appreciate that answer. You referred, however, to what you called psychological changes being involved in this. When they had a wave of selling because of the report that President Johnson has suffered another heart attack, it wasn't psychological selling, was it? Secretary FOWLER. No, that was kind of scare selling. A man is not allowed to make a bad statement about a life insurance company under the laws of most States. But he can make a bad statement in Wall Street and get rid of it in fine state. I am not going to ask you but I hope if someday a man in Mr. Martin's position can make statements to influence the stock market as such I have no further questions. Senator DIRKSEN. May I ask a question? Mr. Fowler, I would like to know what was wrong with Bill Martin's statement? He has been Chairman of the Board for the last 14 years or more. He is a very cautious and a very knowledgeable and a very skilled person and in his statement he had to say something even though it was unpopular, and so in the fore part of his statement he just indicated the conditions that existed pre-1929 crash and their similarity to conditions that exist at the present time. And he couched it in terms of a warning so that what he called an orderly expansion or an orderly boom did not become a disorderly flop of some kind. A man of his age, who is 59 and he has been Chairman of the Board for 14 years doen't talk very lightly and in my judgment he doesn't talk for Wall Street and he was only doing what his conscience told him he ought to do by way of a warning because of the responsibility he carries as Chairman of the Federal Reserve System. Was there anything essentially wrong with his statement? Secretary FOWLER. No, Senator Dirksen. I have consistently taken the position in commenting on this privately and publicly that I read Chairman Martin's speech the following morning very closely and I have been quite surprised-Chairman Martin will have to speak for himself, but I judge him to have been surprised also-at the press handling and the market reaction to his statement. Of course it is all in the eyes of the beholder-Chairman Martin had told me previously he expected to make a talk at which he wanted to support very strongly the position I had taken on the seriousness of the balance-of-payments problem and the necessity for consistent maintenance of and carrythrough of the President's balance-ofpayments program. So, when I read the speech I focused, you might say, on the last two-thirds of the speech, the part that began on page 6 in which he said whatever differences economists may have about what were the factors that led to the depression in 1929-33, and these are matters of persistent dispute, there is little or no disagreement that we cannot allow to happen to the dollar what happened to the pound in 1931, and then the remainder of his speech was a strong and consistent plea that we have the national will and determination to take the necessary measures in line with programs that have been announced to deal with the balance-of-payments problem. I make no judgment about the use of the 1929 factors. I do think that the emphasis was all given to the so-called similarities between the two situations and very little press emphasis, at least immediate flagging, of the dissimilarities. A good deal of attention is now being given, I think, to the dissimilarities between the two situations, and men like Martin Gainsborough of the National Industrial Conference Board and many other economists are bringing out now day after day analyses of the dissimilarities between the two situations. But that instantaneous reaction was one that I don't think Chairman Martin anticipated and I have not been publicly critical of him or privately critical of him. Senator DIRKSEN. Would you yield further? Senator ANDERSON. Surely. Senator DIRKSEN. My concern was this: The sharp and severe criticism of Chairman Martin. Now, the Federal Reserve has been doing business for over 50 years. It was created back in 1913, and gave him some explicit powers, their open market operations, the rediscount rate, margins on stock purchases, interest, and other items. Suppose he failed and didn't issue a warning and then something happened, why he would be castigated from hell to breakfast if he hadn't exercised the responsibilities that the Congress put on the Federal Reserve System. Secretary FoWLER. Well, Senator Dirksen, I don't know whether you were here at the time last week when I said that we are in a period of very long and sustained expansion and I, for one, think it is the better part of prudence in a period such as this for business forecasters and commentators and public officials to look at business prospects and keep a somewhat open-eyed view to find any emerging imbalances or trouble spots and attempt to deal with them to some extent in advance. The way to deal with a recession is to avoid having it, if you can. I think, therefore, the continued examination of the ways in which we can sustain an expansion is a healthy exercise. I believe it is the duty and responsibility of those of us who are concerned to realize that it is the balanced character of this particular expansion which has given it its durability and its sustained effect over a long period of time. The retention of such a balanced character to the expansion requires us to be concerned with seizing additional opportunities to remove obstacles and burdens to further growth such as exemplified in the excise tax bill which was then pending before the committee, and it is important to have that continued emphasis on further expansion. It is also important to have the emphasis which Chairman Martin was giving the other day that it is possible to lose an expansion by having it go so far so fast that inflationary tendencies overtake it, and in effect it falls forward. I think both of these points of view are ones that all of us should keep in front of us. It is very healthy a thing to have them and I, for one, think it is perfectly natural when an economy is catching its breath, following very large increases in sales and production in the first quarter, that we return to a more normal |