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On the other hand, the costs of the programs are spread over all taxpayers so that when spending is decided on a programmatic basis, the pressures for increased spending are always greater. The result is that the total of Government spending is higher, even though the majority of voters would oppose that higher total if given a chance. The simple arithmetic of pressures for increased spending over what the tax base can produce provides permanent and continuing deficits. This tendency could be kept in check by new constitutional fiscal ground rules.

The incentives to spend simply need to be changed. Replacing one set of legislators with another will not change those incentives. The evidence is clear that legislators and presidents prefer deficits to surpluses and prefer spending increases to spending cuts.

Familiar news stories that the dollar is falling on money markets abroad, that interest rates are rising, that consumer borrowing is rapidly increasing and that there is today an inflation psychology all point.

to the urgent necessity of the action now to balance a Federal A strongly worded amendment proposed by the Congress now would do more to restore confidence in the U.S. dollar than any other single action.

I point out that today we are going through another rerun of the Halloween dollar rescue of a year ago which now seems to be an annual celebration. This time it is coming 3 weeks earlier.

We have reached the situation with $1 trillion sloshing about in the Eurodollar markets that we have run out of the slack we had before that made brief budget deficits less dangerous to the economy than the future and current deficits will be. A balanced budget amendment proposed by Congress now would be a signal to the world that we have finally found the resolve to turn off the printing presses and live within our means.

Fifty years ago this month, by coincidence, the banks were overextended. We were poised at the verge of a Great Depression. It need not have happened but in the months and years prior to that depression, sober voices that were raised in warning that the country was on a course of disaster were ignored. Then, as now, there were many people ready to beguile their neighbors with all sorts of reasons for our problems-except the real reason.

The fact is we have been printing money. We have extended almost as far as we can with these policies which have been detrimental to our society. We are soon to face the day of reckoning.

When I was preparing this testimony, I consulted last week with Mr. Martin, who is accompanying me. He is an extremely qualified private economist, who is a money manager who has managed sums into the billions and his specialty is debt analysis of the banking system. The message that he gave me was so startling that I thought he would be best able to present this message to you. I think it is something that we really need to understand, that we are not going to be able to continue to print money in order to ward off a depression. If we continue the policies of deficit spending that we will be facing a depression and just as 50 years ago today our banks are overextended and illiquid.

Mr. Martin?

Mr. MARTIN. Mr. Chairman, I appreciate the opportunity to be here today

Senator Bays. I would hope you could make this brief, Mr. Martin. We thought there was only going to be one person testifying for NTU. I want to hear what you have to say but we have another witness and unfortunately we are going to have a vote on the floor in about 2 or 3 minutes that will cause me to be gone. So if you could sort of highlight your statement, we would appreciate it.

If you have a statement, we will put it in the record as if you had given it in full.

Mr. MARTIN. I will do the best I can.

Senator Bayh. The first I knew you were going to be here is when you showed up, which is fine. I am glad to have you here, but it sort of complicates our schedule a little.

Mr. Davidson. If I may, I would like to submit the rest of my testimony for the record. I thought since I am leaving out a portion of my testimony, that he might be able to better

Senator Bayu. That is fine. We will put it in the record. As you know very well, we are not in complete control of what is happening over on the floor. I want to alert you that I would like to have you highlight your statement. I may end up having to go over there and end up hearing none otherwise.

Mr. Martin. I will try to give you the highlights as best I can.

I appreciate the opportunity given to me by the committee and I want to acknowledge the National Taxpayers Union for allowing me at my request to come down here from my business and share with you some of my experiences.

I am disappointed not to see more members of the committee here because the experience that I wanted to share is one in which I hoped to bring you out of a state of unconsciousness and raise you to a level in which you may realize what is so in the world today. It pervades politics and it pervades some of the testimony that we have heard here today, some of which is not backed by sound economic principles or research.

I became alarmed several years ago when I saw the level of corporate earnings were rising at an astronomical rate. Corporate earnings across the board in the last 5 years have risen almost 300 percent. That's a staggering figure. I asked myself, where does this money come from? It obviously does not come from foreign countries. We do not run a balance-of-payments surplus, we haven't for quite some time. We have not had a trade surplus for 36 consecutive quarters. Because of this enormous accumulation of money by U.S. corporations, I undertook a detailed study of the U.S. budget. Contrary to the testimony that has been submitted today and accounts that I read in the newspapers, and statements emanating from our administration, the Federal budget deficits on a yearly basis are in the hundreds of billions of dollars. These figures of $30 billion, $42 billion, $50 billion are absolutely fictitious. A study of the U.S. budget reveals the following: There are substantial sales of assets made, such as gold, oil leases, and other properties belonging to the people of this country and the revenues that come from the sale of those assets are included in the budget as current income. Responsible corporations, utilizing standard accounting procedures would include that income and it would be a nonrecurring gain, a special footnote item. So the masquerade continues. Administration after administration includes revenues from sales of assets as ordinary income. In addition, Americans have come to believe that there is a trust fund for their social security moneys. The truth is that the collection of social security withholding goes into the general fund and is included as revenue. If one removed the difference between the amount of money that should be set aside to pay the people who have contributed to this fund for future years, you would find the budget deficits per year probably are exceeding $500 billion.

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The aggregate of corporate earnings reveals the amount of money that is in circulation in our society. It has but one source—the Federal Government. This money has been bidding for goods and services. Prices continue to rise at an accelerating pace. Our national administration has continued to delude people by telling them that inflation was these rising prices. These rising prices are not inflation. Inflation is the creation of money and money aggregates by the Federal Government and the Federal Reserve Board. These money aggregates are ping continue to cause prices to rise until we enter into a cycle of superinflation or hyperinflation. At that point, every person in this room and every person in this country will lose their individual freedom and liberty.

It should be a matter of grave concern. Fluctuations in gold and other precious metal markets are merely mirrowing the fear and distrust that pervades this country with the average citizens. They are frightened and concerned. They know that something is wrong but they do not understand what is wrong. What is wrong with this country is that there has been a permissive printing of money by our administration, an almost cavalier attitude about it.

In April of 1978, I wrote to the new Chairman of the Federal Reserve Board, G. William Miller. I warned him that his testimony before the Senate Banking Committee; namely, that prices would only rise 5 percent during 1978 and 1979 was impossible. Prices for future delivery of commodities and money aggregates indicated that prices at best would be contained in the double digit increases. We are now running at the rate of almost 13.3 percent per annum and we are going to be going higher.

I further warned him that interest rates were not going to peak at 9 percent but were going to escalate very quickly to 13 percent. Mr. Miller wrote me, it is impossible, I will stake my reputation and my job that interest rates will peak at 9 percent.

I have recently communicated with Mr. Paul Voelker and Mr. Miller and warned them that as we move to 15-percent interest rates, we are going into a new explosive supercycle and interest rates could explode upward to 17-25 percent and at that point you will be on the verge of anarchy and a breakdown in the banking system of this country.

Long lines are forming at savings and loan institutions right now because disintermediation is taking place. For those of you who don't know what disintermediation is, let me tell you what it is because it is going to be as fearful as the energy shortages for you in the coming months.

Banks believing money had stability have lent money to people for their homes, their cars and for their businesses. They began lending money at rates of 6 percent and have recently lent money in enormous


sums at 10 and 10% percent. They believed that that would represent a good return for the future. Where did they get this money to lend? They got it from the bank depositors. They pay these depositors anywhere from zero to 8/4 percent and usually those rates were accompanied by some gifts. Right now I am sure many depositors would like to return those gifts.

People are lining up to remove the money from savings banks and thrift institutions, they are going to put their money in liquid asset funds now yielding between 11 and 13 percent and money market instruments yielding 10 and 11 percent and rates that are higher.

Certificates of deposits and commercial paper are now yielding between 12 and 14 percent. The banks are caught in a dilemma, they have lent money for 20, 30 years at rates that average 8 percent. They relied on having money at 7 or 8 percent. That money is being taken away from them. They have but two choices. Right now one of those choices is being exercised as they scramble into the liquid money market to try to get funds to retain their solvency.

Their other alternative will be to call in business loans and debts that are outstanding in order to maintain some degree of liquidity. When we get that, we are going to have a money crunch that will be the darkest hour in the history of this country.

You will have a standstill to productivity in business the likes of which you have never seen. I say to the members of the committee here that we are on the threshold of a superhyperinflation in this country. This is not a doomsday prediction. Thirteen percent interest rates a year ago would have seemed like a doomsday prediction to you. We are going to rapidly move to 15 percent, perhaps in the next week or two and from there you will reach a blowout stage where anarchy will be a distinct possibility.

Bank robberies in New York are just a harbinger of what is going to take place in this country. I do not believe that the American people, as I have experienced them, want this. They do not understand what has happened to them. They are suffering betrayal by their Government. People who worked most of their lives believing that they could send children to college or retire have been betrayed by our Government. Our Government does not seem to care about this.

My own disappointment is heightened by the fact I have tried to communicate with the administration, with my own Congressmen and Senators, with the Chairman of the Federal Reserve Board, they chose to ignore me. They perceived that anyone they are not familiar with politically has nothing to offer of any value. I came here today leaving my business and responsibilities. I am disappointed that the committee can only grant me a few minutes and practically none of the committee is here. I only hope that they will read the record-

Senator BAYH. Mr. Martin, don't you suppose you ought to be thankful the committee gives you the opportunity to be heard? I can't speak for the other members of the committee. You are an eronomist. I assume you have some credentials. A lot of other people would like to be here. They don't have a chance to be here. At the sarne time you are beating us over the back, I hope you give us a Little

Mr. Martin. Thank you, Mr. Chairman, I appreciate that.

Senator Bayh. Forgive the interruption. It is awfully easy for you to sit in New York or someplace else and castigate the Members of

Congress and then when we give you a chance to be here, you are critical. I don't think that is necessarily in good taste. I am glad to have a chance to hear what you have to say.

I will be glad to study carefully anything else in your testimony. Unfortunately, and maybe this is symptomatic of a greater problem. All of us have three places to be. I apologize for the fact I have had to be on the telephone trying to keep a minicrisis from exploding, as far as our intelligence matters are concerned. It is not that we are disrespectful to you and certainly not to Mr. Davidson or his organization, but we are trying to balance a lot of responsibilities. I have never possessed any significant degree of expertise in the science or the field of economics. I have talked to a lot of economists. Are you an economist, Mr. Martin?

Mr. MARTIN. I am.

Senator Bayh. You paint a rather bleak picture. And certainly the circumstances you describe today about what is happening are accurate. Many of them I read about in the newspaper and I assume they are accurately reported.

Are there other economists who share your conclusions as to where we are headed?

Mr. Martin. There are many, alarmingly so. One of the most respected money managers in the world today is the Bank Credit Analyst. It is a rather expensive financial service which studies banking liquidity. It circulates to most major banks in the United States. Their most recent issue states that the responses of government seems to indicate that only an economic Pearl Harbor in the United States will mobilize the people to act to effect the changes that are needed to avoid answering the type of questions that Senator Thurmond was asking; namely, how are we going to pay off these debts? Benjamin Franklin said, “experience keeps a dear school but fools will learn in no other."

I, too, have come to the belief we are not going to change in any other way, we are going to have to face a crisis that is so great, so alarming and so painful, that for decades afterward, we will elect political candidates who dare not mention deficit spending:

I believe that experience is what will happen. For the first time, I have found people realizing that this inflation is quite serious.

This year, the First National City Bank of New York, someone I would hardly expect to participate in this area included a section in their annual report entitled “Is Inflation Inevitable.” They circulated this report throughout the world. I was overjoyed when I realized that they had done so. To this moment I don't know what the impact has been. Business seems so strong with all of this printed money around, people are at restaurants and gambling casinos. You are unable to reserve a hotel room anywhere and there is this false prosperity that is going on.

At the end of this is a great betrayal of a large section of our population, young people, older people, people on fixed incomes, middle class, teachers, civil servants, and this inflation is going to do more than cause economic problems, it already has begun to undermine a belief in the justice of a free enterprise system. People no longer believe there is justice. It is just a game out there, how to get more of these dollars that is emanating from Government, how to get a larger share

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