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Statement by-
Arthur F. Burns
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on Banking, Housing and Urban Affairs
United States Senate
October 20, 1975
I am pleased to have this opportunity to present the
views of the Board of Governors on S. 2285, the "Federal
Reserve Act Amendments of 1975.
M
Let me state emphatically at the outset that while this
bill has been characterized as a "reform" measure, it would,
if enacted, profoundly alter the premises underlying the Nation's
.central bank.
In the Federal Reserve Act, Congress took great
care to insure that the Federal Reserve would be an independent
body insulated from political pressures or control.
The foundation
of that independence is the System's exclusion from the appropriations process.
To make the System now dependent upon
annual appropriations by Congress would materially compromise
the independence of the Federal Reserve.
One may differ with the Board's judgments on monetary
policy matters, and one may even believe that Congress erred
in conferring such independence upon the Federal Reserve.
But
there should be no misunderstanding about the implications of
this legislation: If Congress now sees fit, after more than 60
years of experience, to abandon the concept of a truly independent
central bank, then Congress itself must be willing to assume both
the burden and the responsibility of formulating monetary policy.
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Wlth this preliminary comment, let me now turn to
the specific provisions of S. 2285.
First, it would subject
the expenditures of the Federal Reserve to the Congressional
appropriations process, with a ceiling to be set on the amounts
that could be spent by both the Board and the Federal Reserve
Banks.
Second, it would require Senate confirmation of the
appointments of Federal Reserve Bank presidents.
Third, it
would require Senate confirmation of the President's appointment
of the Chairman of the Board of Governors.
Fourth, it would
authorize each of the seven members of the Board of Governors
to hire a personal staff.
Fifth, and finally, it would require
that tiie 'President's, nomination of members of the Board give
due regard to a fair representation of labor and consumer
interests, in addition to financial, agricultural, industrial,
and commercial interests - - a s presently specified in the Act.
The thrust of S. 2285, taken as a whole, is to bring the
Nation's central bank into the arena of intense political scrutiny
and pressure.
As I have already noted, this is a radical departure
from the concept that was envisioned by the 63rd Congress which
established the Federal Reserve System, and by every succeeding
Congress since then.
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A change in the basic structure of a government agencyis justified when some major defect has been discovered in its
structure.
Such is not the case with the Federal Reserve.
On
the contrary, its structure has enabled it to serve the country
well through the years, and there is no need to change it at the
present time.
To be sure, Members of the Congress may, from time
to time, be concerned about policy decisions of the Federal
Reserve, but this of itself is surely no reason to force a restructuring of the institution itself.
Policy judgments concerning
money and credit, and their relation to employment and prices,
are bound to differ.
Congress has already established a pro-
cedure that enables it to review Federal Reserve policies - namely, House Concurrent Resolution 133 adopted earlier this
year.
This procedure, I believe, is so far working well.
I have
already testified twice in response to that Resolution, and I will
be testifying again before this Committee later this month.
The Federal Reserve System, as you know, was established
more than 60 years ago.
If a fresh start were made, the Congress
might devise a structure similar to what we now have or perhaps
move in a, quite different direction.
Before I joined the Board
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of Governors in early 1970, I thought I saw all sorts of opportunities for change in the System.
But I soon realized that the
structure whose basic shape was devised by Woodrow Wilson,
Carter Glass, and Robert Latham Owen worked quite well.
In establishing the Federal Reserve, Congress deliberately decided that the national interest required that the
central bank be insulated from political pressures stemming
either from the Congress or the White House.
The Congress
therefore endowed the Federal Reserve with the capacity to
exercise, within reasonable restraints, its best judgment on
how to protect the Nation's money and foster its effective use.
The maintenance of independent judgment by the central
bank is essential if monetary policy is to play its proper impartial
role in fostering economic growth and maintaining financial stability.
The independence of the Federal Reserve neither is - - nor should
be - - absolute.
The System is duty-bound to implement the will
of Congress expressed in legislation, and the Federal Reserve
has been ever faithful to that duty* It is under the guidance of
the principles set forth by Congress, especially in the Federal
Reserve Act and the Employment Act* that the Federal Reserve
has formulated^ and executed monetary policy*
Ik doing so, it has
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served as a vital non-political entity in a highly political
envir onment*
Since the inception of the Federal Reserve System, the
law has provided that the expenses of the Board are to be paid
out of semi-annual assessments levied upon the 12 Federal
Reserve Banks.
This and other outlays of the Federal Reserve
Banks are paid from earnings derived principally from Federal
securities acquired through the System's open market operations.
These operations are carried out pursuant to law and with the
objective of maintaining sound economic and financial conditions.
Spending of the Reserve Banks, in turn, is subject to review
and supervision by the Board of Governors.
The operations of the Board and the Reserve Banks have
been conducted in a highly responsible mannef • As far as I know,
policy decisions have not been influenced in any way or at any
time by partisan considerations.
Nor have they been influenced
by the possibility that the budget of the Board or the Reserve
Banks might be slashed because of Congressional displeasure
with this or that monetary measure.
The Federal Reserve's
decisions have thus been governed by the Nation's permanent
interest, no matter how unpopular they might be in the short-run.
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In the Board's judgment, the requirement of S. 2285
that Congress mandate a ceiling on Federal Reserve expenditures
is not aimed at control or reduction of public expenditures.
Even the complete elimination of all Federal Reserve expenditures
would amount to less than two-tenths of one per cent of the
Federal Government's budget.
The real aim of the proposed
expenditure ceiling is to shift control over monetary policy,
but not the responsibility for it, away from the Federal Reserve
to Congress or its committees.
It would obviously be impossible for Congress to determine an expenditure ceiling for the Federal Reserve without
first examining individual items of expenditure.
Congress
would thus be forced to address itself to such questions as the
level of resources needed to formulate and implement monetary
policy, the size of the Board's domestic research staff, the
size of its international finance section, the scope of its legal
and regulatory staffs, and so on.
Similarly, the budgets of the
individual Reserve Banks would be subject to review and change,
with the obvious possibility that some regions would be favored
or disciplined more than others.
Clearly, political influence
could be brought to bear on the System by reducing or threatening
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to reduce the funds available to it, or by ordering a diversion
of funds from one function or Bank to another.
In assuming any such responsibility, Congress should
ask itself whether it is ready and willing to undertake the highly
complex and politically perilous task of shaping the course of
monetary policy.
Much the wiser course for Congress, I believe,
is to confine itself to general oversight of the Federal Reserve -~
a function that Congress is already taking quite seriously*
As I suggested earlier in my testimony, Congress should
legislate only when there is a need to correct a defective condition*
There is nothing about the Federal Reserve that at the present
time requires drastic legislative treatment, such as is proposed
in S, 2285* The fact is that the Board and the Federal Reserve
Banks have managed their operations in a financially conservative
manner, and especially so in recent years.
In the relatively few
cases where an expense item has seemed questionable to the Board,
prompt action has been taken to avoid a recurrence.
Any responsible
analysis of Federal Reserve expenditures will show that they have
been reasonable in light of the System's rapidly growing workload,
the increased duties imposed by Congress, and the rise in the
cost of doing everyday business.
-8-
While the work of the Federal Reserve in the fields of
monetary policy and bank regulation is well-known, a large part
of System resources is devoted to activities which are of lesser
interest to the general public but which are nevertheless essential
to assuring a smoothly operating financial system.
These services
include check clearing, distribution of coin and currency, wire transfer
of funds, and processing of savings bonds, besides the huge task of
acting as the Federal Government's fiscal agent and banker.
The Federal Reserve1 s growing expenses in providing these
services have been held down by substantial and continuing improvements
in productivity*
Thus, while the measurable output of the Federal
Reserve System has approximately doubled in the past eight years,
this has been accomplished with only a 41 per cent increase in
System personnel.
Here are some examples of this increased
efficiency:
The Federal Reserve Banks now process over
46 million checks daily, up from 22 million in
1967, If we operated at the productivity level
of 1967, the staff requirement would be 48 per
cent (or 3025 employees) larger than it is now.
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Demand for currency and coin services has
increased 36 per cent since 1967, while the
number employed iii performing this function
has grown only 18 per cent - - o r half as much.
The number of U. S. Treasury checks processed
by the Federal Reserve Banks has increased 109
per cent since 1967,
The staff required to handle
this job on behalf of the Treasury has increased
only 43 per cent in the same period*
The number of Federal tax deposits handled by the
System for the Internal Revenue Service has increased
180 per cent since 1967.
Despite this increase, the
Federal Reserve Banks have reduced their employment
in this area by 5 per cent.
Similarly, the number of entries in the accounts of
member banks handled by the System has increased
since 1967 by 106 per cent.
Again; despite this
increase, productivity improvements have made
possible a reduction of our staff in this area by
24 per cent.
-10Th e System continually seeks to improve the efficiency of
its operations.
Significant improvements of productivity are again
being achieved this year, and the prospects for 1976 and beyond
are excellent.
In fact, the total number of individuals employed
by the System will be somewhat lower in 1976 than in 1974, despite
a projected 10 per cent increase in the measurable volume of our
output.
In addition to working on productivity improvements, the
System frequently reviews its operations with the aim of eliminating
or reducing expenditures without, however, allowing the quality of
its services to suffer.
The System remains fully attentive to the
needs of the public, the financial community, the Treasury and
other Government agencies.
The real issue raised by S. 2285, however, is not
efficiency or economy of operations.
It is demonstrable, as I
have indicated, that we are operating both efficiently and economically.
The real issue is the independence - - within the bounds of national
economic goals established by Congress - - of this Nation's central
bank, and its ability to formulate judgments that are free from the
pressures of the shifting tides of politics that Congressional
expenditure control could impose.
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This Committee also has before it a related proposal
that would subject the Federal Reserve to an audit by the General
Accounting Office.
With your permission, I will indicate the
Board's thinking in opposition to this proposal by inserting into
the record the testimony on GAO auditpreseiited by Governor
Mitchell at a hearing of the House Banking Committed earlier
this year.
Iii summary, the Board believes:
First, that an audit by the GAO of the Federal Reserve1 s
accounts and expenditures would be a needless duplication of
present efforts and would result in unnecessary additional
expenditures.
Second, that to authorize the GAO to audit Federal Reserve
policies, including the processes by which those policies are reached,
would unwisely inject a third party into the sensitive area of monetary
policy.
Third, the passage of House Concurrent Resolution 133 has
completely altered the context in which the question of GAO audit
must be considered.
This resolution already provides for a review
of Federal Reserve policy by the responsible committees of Congress.
An audit such as thaj provided for in S. 2509 would, to say the least,
be literally superfluous.
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Before leaving this matter of budget control and GAO
audit, I would like to quote from a report that was issued after
extensive study and long deliberation by a Congressional committee.
That report said m p^rt:
"The independence of the Federal Reserve System is
b^sed, not m legal rights but on e^qpediency.
Congress,
desiring that the claims of restrictive monetary policy
should be strongly stated on appropriate occasions,
has chosen to endow the System with a considerable
degree of independence, both f^oin itself and from the
Chief ExQCutivet . • It is naturally limited by the
overriding requirement that all pf the economic policies
of the Governnaent - - nionetary policy and fiscal policy
^rptong them -«-• be coordinated with each other in such a
way to maj^e a rne^ningfui whple* The independence of
the Federal Eeserve Systern is desirable^ not as an end
in it§elf, but as a rnean^ of contributing to the forrnulation
of the best over-all economic policy^ to our judgment, the
present degree of independence of the System is about
tjxat best suited for this purpose under present conditions.11
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That quotation is taken from a report issued in 1952 by a
distinguished Subcommittee of the Joint Committee on the Economic
Report,
The statement is just as valid today as when it was written.
Let me now turn briefly to the other parts of S. 2285.
The Board has no objection to the provision that would
subject the President's choice of the Chairman of the Board of
Governors to Senate confirmation.
As this Committee is aware,
Board members are appointed for a 14-year term.
The term of
Chairman is for four years, but he may be reappointed.
At present,
Board members are named, subject to Senate confirmation, only as
Board members.
The President designates one of the seven members
of the Board to be Chairman.
This selection is not now subject to
Senate confirmation.
In my own case, this Committee knew when I appeared before
it on December 18, 1969, that I would be designated Chairman of the
Board of Governors.
In effect, then, the Senate confirmed my
nomination both as a Board member and as Chairman.
But the Senate
did not have the opportunity to intervene when I was redesignated as
Chairman in January 1974. I see no difficulty whatever with the
suggestion that the Congress should have the right to review the
qualifications of the person designated as Chairman each time that
designation is made.
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Next, the Board would have no objection to broadening of the
areas to be considered by the President in the appointment of Board
members provided it be clearly understood that, in discharging their
responsibilities, Board members continue to represent the public
interest as a whole and not a particular constituency.
We do not
think it wise to emphasize a narrowness of background in the selection
process.
Board members should be qualified to deal with the many
complex and sensitive problems that face the Board.
These problems
require a good understanding of government finance, money markets,
banking operations, and credit problems.
Board members must be
able to weigh the effects that their decisions may have upon labor,
consumers, agriculture, housing, industry, commerce, and all
other areas affected by their actions.
Let me turn next to the proposal for Senate confirmation
of Federal Reserve Presidents.
This provision would lessen the
interest of some, perhaps many, of the best qualified persons for
these important qua si-government positions.
At the least, it would
represent an unnecessary hurdle in an already thorough selection
process.
Senate confirmation might also tend to subject the post
to political influences.
Since these positions are geographically
spread around the country, they could become subject to the type
of influence that was once exercised when postmaster appointments
-15were subject to Senate confirmation.
That, I submit, would
contravene the basic purpose of the Federal Reserve Act.
The last provision in the bill to which I wish to address
ray self would authorize each Board member to hire a personal
staff at salaries he deems appropriate, providing the total compensation of his staff did not exceed four times his own annual salary
as a Board member.
The underlying premise of this provision
seems to be that the creation of such personal staffs will enhance
the independence of Board members and encourage diversity of
opinion.
I am compelled to take issue with this premise.
The
qualities of independent thought and expression do not depend upon
the availability of a personal staff.
Rather they are qualities that
must inhere in the individual Board member.
No amount of staff
assistance will convert an unimaginative or compliant Board member
into a vigorous independent advocate of new policies.
And a Board
member who has the ability and interest to express his own thoughts
forcefully will not be less independent or provocative by the lack of
a large personal staff.
During my time on the Board, we have been
extremely fortunate in having as Board members highly able and
thoughtful men who have brought a diversity of experience and
viewpoint to the Board.
Our deliberations have never lacked the
expression of differing points of view.
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We are also fortunate in having a highly professional,
highly competent staff •-- men and women who are available to
assist all members of the Board.
The technical resources of our
staff are enormous, and it would be practically impossible - - as
well as unnecessary - - for each Board member to attempt to
duplicate these resources within his personal office.
To the
extent that individual Board members need personal assistants
for the performance of their official duties, they already have
them.
And I might add that the members of the Board's staff
are never reluctant to express their own views.
Both I and my
Board colleagues defend the independence of our staff members
as vigorously as we defend the .independence of the Federal Reserve
itself.
In conclusion, S, 2285, in its key aspects, would weaken
the Federal Reserve's ability to reach dispassionate judgments in
behalf of our country's betterment.
The freedom, within the context
of national economic policy laid down by the Congress, to arrive
without fear or favor at decisions best calculated to serve the Nation's
over-all interest is the Federal Reserve1 s most precious asset.
And
it is the Nation's guarantee of an unbiased hand on the monetary rudder.
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Consequently, although the Board does not object to
every provision of the legislation under discussion, we see no
clear need to adopt any of it.
Indeed there are strong reasons, as
I have indicated, for opposing its key provisions.
The world's
history is littered with the economic wreckage caused by political
domination of the monetary function.
Your predecessors in the
Congress acted wisely in providing a design for the Federal Reserve
that insulated it from politics.
The Board urges you not to overturn
a structure that has stood so well the test of time and experience.
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