are, in many cases, 1,000 or 2,000 or 3,000 miles away from North Dakota. Having made those judgments in our State, we do not now want to see the dismantling of several decades of banking laws in the name of deregulation.

My view, in short, is that rural areas of America such as North Dakota are best served by networks of independent financial institutions, and that we need to create economic conditions in which those networks of institutions thrive. Local ownership and management of those institutions serve our States very well, and has for many decades.

I am not one who is against progress just because progress represents change, but I don't think that we, in a time of financial turmoil in this country, in most cases caused by tight money and high interest rates, should move precipitously in an area of regulation which has developed over many years to our benefit. The specific bill that you are discussing today, as I mentioned, does deal with savings and loans. And my concern is that the Secretary of the Treasury and many others in Congress would lead us to believe that deregulation of all thrift and banking institutions somehow serves the best interests of the American consumer. I think there is substantial evidence in the country that shows that the opposite is true.

I want to encourage your committee to move very carefully and very, very slowly, on the issue of deregulation regarding this and subsequent legislation. And that, in very brief, is my statement, Mr. Chairman.

REVOLUTION TAKING PLACE

The CHAIRMAN. Congressman, I appreciate your testimony. I would say, however, in response, to your advice that we use caution-most of the issues that are encompassed in this bill were being discussed before I became a member of this committee 7 years ago. They are not new issues that arise out of current monetary policy or current problems of the thrift institutions.

In 1975 we passed the Financial Institutions Act in the Senate. It was not passed by the House. Over and over again this committee has considered these items. The matter of municipal revenue bonds has passed the Senate before.

So I wanted to make sure you understood that, that we are hardly proceeding precipitously. These issues have been around for a long, long time, even before this Senator came to the Senate. Second, I would say that the comments you just gave are almost exact duplicates of what I said many times as a new Senator several years ago, as a member of this committee. But I think that we have to face where the real competition is coming from. I made the comments again in the hearing this morning, I wish we could go back to some prior day where we had S. & L.'s doing their thing, and commercial banks doing theirs, and securities people minding their own business.

But we simply are seeing a revolution taking place. The Independent Bankers undoubtedly tomorrow will testify against change. I don't think there is any doubt about that. I think we have to take stock of where the competition is coming from; $150 billion in money market funds, and going up. Even after the inter

est rates come down I do not see these new types of instruments changing.

American Express buying Shearson; Prudential buying Bache; and so on. To caution us to be very careful about deregulation is good advice, but if we do not proceed with some equity and fairness, then these small, independent institutions are going to lose their businesses, but not the Chase Manhattans and the big ones who want to have unlimited interstate branching-and this bill certainly does not address that.

It only addresses interstate branching in troubled institutions. After all, intrastate has been explored. We don't want to have any panic or run on the financial institutions. And so the part that addresses interstate branching is very limited and very narrowly defined.

I think Congress cannot sit back and see this revolution take place without trying to address these problems, to consider them carefully. You look at the example of Sears, the world's largest retailer, that now owns a very large savings and loan and a fullservice securities. They have no prohibitions as to geographical areas whatsoever. They will be able to come in and offer all kinds of services through their stores, in North Dakota, and Utah. Utah is also a rural State with small financial institutions.

But I think we cannot wish for something in the past with this new competition of nonfinancial institutions engaging in financial services, and in banking services that traditionally have been proscribed by these rules and regulations.

I think it is important that the Congress address those problems and start taking a look at them-carefully, as you say-but recognizing that we have an entirely different ball game now. New competitors who don't have to play by the same rules that the small banks and S. & L.'s in your State and in mine have to play by. And I worry about that competition, and I think-I make no bones about it-I think it is incredibly unfair.

I have said over and over again until peopler are tired of hearing it in this committee that I don't like what the securities industry is doing. At least if they would be honest about it, and sit at that table and say, "Yes, we are at least getting in on the fringes of the banking business," but they sit there in my hearings, and say, "Oh, no; no, we're not. We are not at all. You just keep Glass-Steagall and McFadden, keep everybody all tied up, while we go about our business. Don't put any rules and regulations on us."

So again, I appreciate your testimony and your suggestion that we proceed carefully. We will. But "carefully," I hope, is a matter of weeks in the case of some of these things, and months in the case of the larger issues, and not the years we have been struggling with of these issues.

Mr. DORGAN. Well, Senator, I appreciate your comments, and agree with most of them. My concern is that the leadership coming from the Secretary of the Treasury and some others would move us more quickly than I think we should move, and in directions in which I think we should not move, with respect to financial institu

tions.

I am not suggesting that we should wish for what was yesterday. But I do think that there are some who wish for a tomorrow that I

don't want to see in North Dakota, and that I think you would not want to see in Utah, with respect to financial institutions that now serve Utah and North Dakota.

And I am concerned that the present problems that face the savings and loan industry have been created by the tight money policy of the Federal Reserve Board, yet will allow dramatic changes in financial institutions to take place much more quickly than otherwise would be possible. I see that movement over in the House of Representatives, and I am concerned about it in Congress generally.

The CHAIRMAN. I would only make one other comment. Don't place all the blame on the monetary policy of the Federal Reserve. The problems of high interest rates are far beyond their discount rate and their managing the money supply. I don't really care who the Chairman of the Federal Reserve Board is; Congress over the years has created our trillion dollar debt and continues to add to it each year.

And the major driving force, in my opinion, is fiscal policy. I am not a monetarist. I sat here all these years listening to the testimony, and I hear about fine tuning. I think the economists are kidding themselves. Liberal, conservative, Democrat and Republican economists as well have testified on that particular position, and most of them have been wrong. And they talk about it like they can fine tune it to the tenth of a percent. And they are kidding themselves. They are living in a dream world.

So the point I wanted to make is that even if you had interest rates go down tomorrow, for whatever reason-Congress suddenly gets their act together, the Fed has as much power as some people seem to think they have, and you had single-digit inflation ratesit would not change my mind one bit on the need for looking at these problems. I think we are very shortsighted if we do not address them. And this again is not something that is being looked at only as a result of the current high interest rates. It has been going on for a long time, because those markets have been changing prior to getting involved in these very high interest rates.

DEREGULATION HAS TO BE THE ANSWER

So I hope when the interest rates come down that we do not stop trying to look at how we ought to restructure, because again, I would agree with you, I don't want a few big banks controlling North Dakota, but I also don't want Sears, American Express, and Shearson. Right now that small independent banker is caught in between, and I think it is our responsibility in the Congress to try and protect those small people. I don't think it will happen by maintaining the status quo at all. And I think deregulation in whatever extent has to be the answer.

Mr. DORGAN. Well, I respect your assessment. But it is my judgment that the monetary policy has created tremendous problems for financial institutions, and we don't share the same view with respect to the power of the Federal Reserve Board. I revere the memory of old Wright Patman, who tried desperately for decades to change it. And I think we ought to change the structure of the Federal Reserve Board.

I do think that the Fed's tight money policy has created artificial high interest rates, at least six real points above the rate of inflation, with the economic rent above that. I think this Fed policy has caused real distortions in the competitive position of financial institutions, and has put the savings and loan institutions in particular in a very precarious position. And I am worried that a lot of folks would use that and other economic conditions to force changes in the banking structure that would have little chance of passage at this point were that not the case.

The CHAIRMAN. Well, we generally agree, but we do disagree on that point. I think the bodies we both serve are the major culprits, and that is where the major restructuring ought to occur if we want to solve the problem.

I appreciate your testimony and your willingness to come today. Thank you very much.

Mr. DORGAN. Thank you.

The CHAIRMAN. The committee will be adjourned until 9:30 a.m. tomorrow. The witnesses tomorrow will be representatives of the American Bankers Association and the Independent Bankers Association of America. Wednesday the hearings will also be at 9:30 a.m., and we will hear the US Savings and Loan League, the National Savings and Loan League, the National Association of Mutual Savings Banks, the National Association of Realtors, the Mortgage Bankers Association, the National Association of Home Builders. On Thursday, to complete the hearings of this week, also at 9:30 a.m.-the first panel will be the Investment Company Institute and the American Council of Life Insurers; the second panel is the Securities Industry Association, the Dealer Bankers Association, and the Independent Insurance Agents of America; and a third panel will be the National League of Cities, the National Association of Counties, the U.S. Conference of Mayors, the National Governors Association.

The committee is adjourned.

[Whereupon, at 11:10 a.m., the hearing was adjourned.] [Copies of the bills referred to at this hearing follow:]

To amend the Federal Reserve Act to provide that deposits of State and local overnments will not be subject to reserve requirements, and for other purposes.

IN THE SENATE OF THE UNITED STATES

September 30 (legislative day, September 9), 1981

Mr. LUGAR introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs

A BILL

To amend the Federal Reserve Act to provide that deposits of State and local governments will not be subject to reserve requirements, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 That (a) section 19(b)(6) of the Federal Reserve Act (12 4 U.S.C. 461(b)(6)) is amended-

(1) by inserting "(A)" before "The requirements";

(2) by adding at the end thereof the following:

=