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From the desk of . .

WARREN L. SMITH, Member
Council o f Economic Advisers

11- 4- 68
F o r L a r r y L e v in so n
A tta ch ed is the r e v i s e d v e r s i o n
o f the p a p er on p r o p o s e d F e d e r a l
R eserv e reform s.

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R E F O R M O F T H E F E D E R A L R E S E R V E SYSTEM:
----SUGGESTED PROPOSALS

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11/4/68

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- T h e F e d e r a l R e s e r v e S y s t e m i s a p e c u l i a r m i x t u r e o f a n u m b e r o f ... ----------------

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r e g i o n a l ( o r F e d e r a l ) s t r u c t u r e c o m b i n e d w i t h a d e g r e e of c e n t r a l i z a t i o n of
key d e c i s i o n - m a k i n g th a t h a s i n c r e a s e d w ith th e p a s s a g e of tim e ; in d e p e n d e n c e
f r o m p o l i t i c a l p r e s s u r e c o m b i n e d in p r a c t i c e w ith c o n s i d e r a b l e r e s p o n s i v e ­
n e s s to t h e e c o n o m i c p h i l o s o p h y of t h e e l e c t e d a d m i n i s t r a t i o n . __W h i l e th e .. . .....
S y s te m h a s w o rk e d quite w ell in p r a c tic e ,

its existing s tr u c t u r e does r a i s e

s e v e r a l p r o b l e m s - - a c t u a l and p o te n tia l - - th a t a r e often cited a s needing
correction.

In th e m a i n ,

t h e s e p r o b l e m s r e l a t e to th e n e e d to a s s u r e th a t

a ll n a t io n a l e c o n o m ic p o li c ie s a r e c o o r d in a te d into a c o h e s iv e p r o g r a m th a t
b e s t p r o m o te s the n a tio n a l w elfare.
O n e s e t o f p r o b l e m s a r i s e s o u t of t h e n e e d f o r c l o s e - c o o r d i n a t i o n
b e tw e e n the f i s c a l and d e b t m a n a g e m e n t p o lic ie s p u r s u e d by the e le c te d
a d m i n i s t r a t i o n a n d th e m o n e t a r y p o l i c i e s p u r s u e d by the in d e p e n d e n t F e d e r a l
. R e s e r v e ---- T h e o r i g i n a l l e g i s l a t i o n c r e a t i n g t h e F e d e r a l R e s e r v e f i r m l y
e s t a b l i s h e d t h e t r a d i t i o n of i n d e p e n d e n c e , a n d i t h a s b e e n p r e s e r v e d t h r o u g h
all su b se q u en t a m e n d m e n ts.
F ederal R eserve

B oard,

L o n g t e r m s of o f f i c e f o r m e m b e r s of t h e

t h e e l i m i n a t i o n of t h e o r i g i n a l p r o v i s i o n f o r ex

officio m e m b e r s h i p of a d m i n i s t r a t i o n o ffic ia ls on the B o a rd , a n d the S y s t e m 's
e x e m p t i o n f r o m b u d g e t a r y c o n t r o l s a r e p a r t of t h i s t r a d i t i o n .




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h o w e v e r , w i d e s p r e a d r e c o g n i ti o n th a t a to t a ll y in d e p e n d e n t c e n t r a l b a n k is
in a p p r o p r i a t e in a d e m o c r a c y ,

a n d in p r a c t i c e th e F e d e r a l R e s e r v e h a s

t e p d e d to fo llo w a lin e th a t i s i n d e p e n d e n t w ith in b u t n o t of th e a d m i n i s t r a t i o n
c u r r e n t l y in office .

P r o p o s a l s 1 a n d 3 s u g g e s t e d b e lo w r e l a t e to th i s i s s u e .

T h e y p r e s e r v e th e System* s b a s i c in d e p e n d e n c e ,

w hile providing b e tte r

a s s u r a n c e th a n now e x is ts th a t m o n e t a r y p olicy w ill r e m a i n in h a r m o n y
w i t h t h e b r o a d e c o n o m i c g o a l s of s u c c e e d i n g a d m i n i s t r a t i o n s .
A s e c o n d s e t of p r o b l e m s r e l a t e s t o t h e n e e d f o r p o l i c y c o o r d i n a t i o n
w ithin th e F e d e r a l R e s e r v e itse lf.

T h e S y s t e m m a k e s u s e of f o u r m a i n

i
I

i

,

i n s t r u m e n t s to i m p l e m e n t m o n e t a r y policy:
a)

//

o p e n - m a r k e t p u r c h a s e s a n d s a l e s o f U 0 S 0G o v e r n m e n t
s e c u r i t i e s , w h i c h e x p a n d a n d c o n t r a c t t h e v o l u m e of
b a n k r e s e r v e s a v a i l a b l e to s u p p o r t b a n k le nding;

b)

c h a n g e s in th e d is c o u n t r a t e .c h a rg e d m e m b e r b a n k s
w h en th e y b o r r o w f r o m the d i s t r i c t R e s e r v e b an k s;

c)

c h a n g e s in r e s e r v e r e q u i r e m e n t s - - - i . e . ,

the p e r ­

c e n t a g e s of t h e i r d e p o s i t l i a b i l i t i e s th a t m e m b e r b a n k s
a r e r e q u i r e d t o h o l d i n t h e f o r m of c a s h r e s e r v e s ; a n d
d)

e s t a b l i s h m e n t of c e i l i n g s o n i n t e r e s t r a t e s b a n k s m a y
p ay on th e ir t i m e d e p o s its - - the s o - c a ll e d R e g u la tio n Q
ceilings.

F r o m a s tr ic tly le g al standpoint,

pow ers over these in stru m en ts a re

d is tr i b u te d a m o n g the s e v e r a l d iffe re n t units w ithin th e F e d e r a l R e s e r v e




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i j y s t e m in a p e c u l i a r way*

R e s e r v e re q u ire m e n ts and R egulation Q ceilings

a r e c o m p l e t e l y c o n t r o l l e d b y t h e B o a r d of G o v e r n o r s i n W a s h i n g t o n ,
p o s e d of s e v e n P r e s i d e n t i a l l y a p p o i n t e d m e m b e r s .

com ­

Open m a rk e t operations,

o n t h e o t h e r h a n d , a r e in t h e h a n d s of t h e F e d e r a l O p e n M a r k e t C o m m i t t e e
( F O M C ) , w h i c h w a s e s t a b l i s h e d b y t h e B a n k i n g A c t of 1 9 3 5 a n d w h i c h is
c o m p o s e d of t h e s e v e n B o a r d m e m b e r s a n d f i v e o f t h e 12 R e s e r v e b a n k
presidents,

s e rv in g in r o ta tio n .

T h e se bank p r e s id e n ts a r e not P r e s id e n tia l

a p p o i n t e e s , b u t r a t h e r a r e c h o s e n b y t h e b o a r d s of d i r e c t o r s of t h e d i s t r i c t
R e s e rv e banks,

s u b j e c t t o c o n f i r m a t i o n b y t h e B o a. r d o f G o v e r n o r s .

Finally,

t h e d i s c o u n t r a t e a t e a c h R e s e r v e b a n k i s s e t b y t ^ t b a n k fs b o a r d o f d i r e c t o r s
w h ic h i n c lu d e s a m i x t u r e of p r i v a t e a n d q u a s i - p u b l i c r e p r e s e n t a t i v e s
s u b j e c t t o t h e " r e v i e w a n d d e t e r m i n a t i o n " of t h e B o a r d of G o v e r n o r s - .
In p r a c t i c e t h e F O M C h a s i n c r e a s i n g l y b e c o m e t h e f o r u m f o r a l l S y s t e m
p o lie y actiohs',

e v e n t h o u g h i t s l e g a l p o w e r s a r e l i m i t e d t o c o n t r o l of o p e n

m a r k e t operations,,

As a result,

policy actio n s a r e m u c h b e tte r c o o rd in a ted

t h a n t h e l e g a l d i s t r i b u t i o n of p o w e r s w o u l d s u g g e s t .
th at th e s e p r o c e d u r e s w ill continue.

M oreover,

But t h e r e is no g u a r a n te e

as p re s e n tly constituted,

th e F O M C in c lu d e s five m e m b e r s who a r e not P r e s i d e n t i a l ap p o in tees^ an d
it c a n a t t i m e s b e a r a t h e r u n w i e l d y p o l i c y m a k i n g b o d y .

Indeed, a m a jo r

p a r t o f t h e s u c c e s s f u l c o o r d i n a t i o n of F e d e r a l R e s e r v e p o l i c y in r e c e n t
&

It

y e a r s s t e m s f r o m t h e r e m a r k a b l e a b i l i t i e s of t h e p r e s e n t B o a r d C h a i r m a n
to a c h i e v e a c o n s e n s u s ,




a n d h e w i l l h a v e to r e t i r e f r o m t h e B o a r d on o r

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vario u s issues,

P r o p o s a l s 4,

5, 6, a n d 7 b e l o w d e a l w i t h t h e s e

w ith the l a s t t h r e e offerin g s u c c e s s i v e l y m o r e r a d i c a l

_

_

a l t e r n a t i v e s t o a c c o m p l i s h a s i m i l a r en d .
I n a s c e n d i n g o r d e r o f t h e i r l i k e l y d e g r e e of c o n t r o v e r s y ,
~

... ........... :
■

...~n
re fo rm proposals are:

1. a .

the seven

M a k e t h e f o u r - y e a r t e r m s of t h e C h a i r m a n a n d V i c e C h a i r m a n o f t h e

F e d e r a l R e s e r v e B o a r d e x p i r e on M a r c h 31 of y e a r s i n w h i c h a P r e s i d e n t of
th e U nited S ta te s is in a u g u ra te d ,
lob

so th a t th e t e r m s a r e a p p r o x i m a t e l y c o t e r m i nous

S e t t e r m s o f m e m b e r s o f t h e B o a r d t o e x p i r e o n M a r c h 31 of e a c h o d d

y e a r ( o r o f e a c h y e a r if P r o p o s a l #3 i s a d o p t e d ) i n s t e a d of on J a n u a r y 31

i/

of e a c h e v e n y e a r a s u n d e r p r e s e n t l a w .
P r o p o s a l 1. a . m a k e s t h e t e r m s of the ' C h a i r m a n a n d V i c e C h a i r m a n of
t h e F e d e r a l R e s e r v e B o a r d e s s e n t i a l l y c o t e r m i n o u s w i t h t h e f o u r - y e a r _____ _
V t e r m of t h e P r e s i d e n t of t h e U n i t e d S t a t e s .
controversy.

T h is p r o p o s a l should r a i s e little

C h a i r m a n M a r t i n h i m s e l f s u g g e s t e d s u c h l e g i s l a t i o n i n 1952,

and th e F e d e r a l R e s e r v e h a s r e c e n t l y r e a f f i r m e d its s u p p o r t fo r s u c h a plan
?
T
i n ' r e p l y i n g t o a s e r i e s of q u e s t i o n s s u b m i t t e d b y C o n g r e s s m a n P a t m a n .
P r e s i d e n t K e n n e d y m a d e a s i m i l a r r e c o m m e n d a t i o n in a m e s s a g e s u b m itte d
to t h e C o n g r e s s o n A p r i l 17,

1 96 2, b u t t h e p r o p o s a l d i e d i n c o m m i t t e e .

T h e p r o p o s a l w o u l d n o t m a t e r i a l l y c h a n g e t h e e x i s t i n g i n d e p e n d e n c e of
the F e d e ra l R e se rv e .

B y e n a b l i n g a n e w P r e s i d e n t t o a p p o i n t p e r s o n s of

h i s o w n c h o o s i n g to t h e t o p p o s i t i o n s i n t h e F e d e r a l R e s e r v e S y s t e m , t h e




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A^IKIS-TKATI'OLY .eeSTTTTMTTKir
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p r o p o s a l would, h o w e v e r ,

p r o v i d e a m e a s u r e of a s s u r a n c e t h a t e c o n o m i c

p o lic y w ould be c o o r d in a te d to w a r d a c h ie v in g a g r e e d n atio n a l o b je c tiv e s .
P r o p o s a l lo b is a h o u sek eep in g change.

A p r o p o s a l s i m i l a r to th i s ,

e x c e p t w i t h a n e x p i r a t i o n d a t e of J a n u a r y 31 of e a c h o d d y e a r w a s i n c l u d e d
■ '..... i ...... .

.......... .

i n P r e s i d e n t " K e n n e d y ^ m e s s a g e of A p r i l 17,

19 62 .

T h e F e d e r a l R e s e r v e ’s

r e s p o n s e s to t h e P a t m a n q u e s t i o n s a l s o s u p p o r t s u c h a p r o p o s a l .
U n d e r p r e s e n t law, a n ew P r e s i d e n t m ightTTave to w a it a full y e a r
b e f o r e h a v in g a n o p p o r t u n i ty to a p p o i n t a new m e m b e r to th e F e d e r a l R e s e r v e
Board.

A n y c h a i r m a n c h o s e n b e f o r e t h e n w o u l d t h u s h a v e to c o m e f r o m

existing B o ard m e m b e r s .

T h e p r o p o s a l e n s u r e s a v a c a n c y on t h e B o a r d

a f t e r a b r i e f t r a n s i t i o n follow ing the P r e s i d e n t i a l in a u g u ra tio n .

The reason

f o r s e t t i n g t h e e x p i r a t i o n d a t e s a t M a r c h 31 . r a t h e r t h a n J a n u a r y 31 u n d e r
both l . a .

a n d l . b . i s t o g i v e t h e P r e s i d e n t a l i t t l e t i m e to b e c o m e f a m i l i a r

w i t h e c o n o m i c i s s u e s a n d p r o b l e m s b e f o r e h a v i n g to c h o o s e h i s F e d e r a l
R eserv e B oard C hairm an,

/ ■

.....

S o m e p r o c e d u r e w o u l d h a v e to b e e s t a b l i s h e d t o s h i f t t o t h e n e w t e r m i n a ­
tion d a te s.

P e r h a p s th e s i m p l e s t s o lu tio n w ould be to ex ten d i m m e d i a t e l y

a l l e x i s t i n g t e r m s b y 14 m o n t h s s o t h a t t h e y w o u l d t h e n e x p i r e on t h e n e w l y
e s t a b l i s h e d t e r m i n a l da.tes„

E a c h new a p p o in te e w ould th e n s e r v e for the

a p p r o p r i a t e le n g th of t e r i r u




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R elax geographical and o c cupational qualifications for m e m b e r s of the

- f e d e r a l R e s e r v e B o a r d ,. Q u a lific a tio n s sh o u ld .b e s p e c ifie d l a r g e ly in t e r m s .

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■
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of c o m p e t e n c e , i n d e p e n d e n c e ,

•
a n d o b je c tiv i ty to d e a l w ith th e r e s p o n s i b i l i t i e s

c h a r g e d to t h e F e d e r a l R e s e r v e .
T h e p r e s e n t r e s t r i c t i o n s on B o a r d a p p o i n t e e s a r e c o n t a i n e d i n S e c t i o n
10 of t h e F e d e r a l R e s e r v e A c t :

M s e le c tin g m e m b e r s of th e B o a r d , not
In

m o r e t h a n o n e of w h o m s h a l l b e f r o m a n y o n e F e d e r a l R e s e r v e d i s t r i c t ,

the

P r e s i d e n t s h a l l h a v e d u e r e g a r d t o a f a i r r e p r e s e n t a t i o n of t h e f i n a n c i a l ,
agricultural,

industrial, and c o m m e rc ia l in te re s ts ,

s io n s of th e c o u n t r y . n

T hese constraints,

and g eo g rap h ical divi­

e s p e c i a l l y t h e l i m i t of n o m o r e

than one m e m b e r f r o m any F e d e r a l R e s e r v e d is tric t,

c a n b e a b a r r i e r to

s e c u r i n g t h e b e s t q u a l i f i e d p e r s o n s a s m e m b e r s of t h e B o a r d .

They could

_ . . . b e - p a r t i c u l a r l y , t r o u b l e s o m e 4 o a.~new P r e s i d e s
c h a i r m a n h a p p e n s t o c o m e f r o m a d i s t r i c t a l r e a d y r e p r e s e n t e d on t h e B o a r d *
T h e p h il o s o p h y th a t t h e r e s h o u ld b e s o m e s o r t of b a l a n c e d r e p r e s e n t a ­
tio n on th e B o a r d p r o b a b l y sh o u ld b e r e t a i n e d in th e law.

But a m o r e flex ib le

guicie w o u l d b e q u i t e u s e f u l .

T h is could b e a c c o m p lis h e d by changing the .

p r e s e n t r e s t r i c t i o n to r e a d :

M s e l e c t i n g t h e m e m b e r s of t h e B o a r d ,
In

w h o m s h a l l b e p o s i t i v e l y q u a l i f i e d i n t e r m s of c o m p e t e n c e ,
a n d o b j e c t i v i t y to d e a l w i t h h i s n e w r e s p o n s i b i l i t i e s ,

e a c h of

independence,

the P r e s i d e n t sh all

h a v e d u e r e g a r d t o a f a i r r e p r e s e n t a t i o n of t h e v a r i o u s e c o n o m i c a n d




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f i n a n c i a l i n t e r e s t s a n d g e o g r a p h i c a l d i v i s i o n s of t h e c o u n t r y . n
.... T h e 1.96.1 R e p o r t of t h e i n d e p e n d e n t a n d h i g h l y r e s p e c t e d C o m m i s s i o n _________ __
on M oney and C re d it r e c o m m e n d e d a change along th e s e g e n e r a l lines,
w i t h c o m p l e t e e l i m i n a t i o n of g e o g r a p h i c a l a n d o c c u p a t i o n a l q u a l i ­
fications.

O p p o s i t i o n to s u c h a c h a n g e m i g h t c o m e f r o m t h o s e i n t h e C o n g r e s s

a n d e l s e w h e r e w h o f e a r p o t e n t i a l d o m i n a t i o n of t h e F e d e r a l R e s e r v e by
" e a s t e r n m o n e y i n t e r e s t , M th o u g h it is not c l e a r how s t r o n g th is fe e lin g
m ig ht. ..b e., ^ T h e p r o p o s a l isi c l e 3 . r l y n o t w o r t h a m a j o r h a s s l e .

A fall-back

p o s i t i o n - - if on e is n e e d e d - - m i g h t p e r m i t a p p o i n t m e n t of a t l e a s t two
m e m b e r s f r o m the s a m e F e d e r a l R e s e r v e d is tric t.

3.

S h o r t e n t h e t e r m s o f m e m b e r s o f t h e B o a r d f r o m 14 to 7 y e a r s ,

p e r m i t m e m b e r s to be elig ib le fo r re a p p o in tm e n t.
w ould th e n e x p i r e in e a c h s u c c e s s i v e y e a r ,

and

One of th e s e v e n t e r m s

*

r a t h e r t h a n in e v e r y o t h e r y e a r

a s is now th e c a s e .
N u m e r o u s p r o p o s a l s h a v e b e e n m a d e to s h o r t e n th e t e r m s ,

though they

ty p i c a l l y h a v e b e e n c o u p l e d w i t h o t h e r m o r e r a d i c a l s u g g e s t i o n s t h a t t e n d
to o b s c u t e t h e i s s u e .
recognized:

T h e d a n g e r s of m a k i n g t h e t e r m s t o o s h o r t a r e f u l l y

T h e B o a r d ’s in d e jje n d e n c e would be t h r e a t e n e d a n d q u a lif ie d

ca n d id a te s m i g h t not find the p o s itio n a t t r a c t i v e .

But the p r e s e n t 1 4 -y e a r

*

* S e c t i o n 10 a l s o h a s a r e s t r i c t i o n t h a t B o a r d m e m b e r s w h o r e s i g n b e f o r e
th e ir full t e r m is up can n o t be e m p lo y e d in a c o m m e r c i a l b a n k f o r a t le a s t
2 y e a rs a fte r th e ir resignation.
T h i s , r e s t r i c t i o n m i g h t b e s h o r t e n e d to 1
y e a r to g i v e p r o s p e c t i v e a n d e x i s t i n g m e m b e r s a l i t t l e m o r e f l e x i b i l i t y i n
planning t h e i r p o s t - B o a r d c a r e e r s .



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- 8

t e r m s a r e c l e a r l y l o n g e r t h a n n e e d e d o n t h e s e g r o u n d s ~~ a s t h e F e d e r a l
R e s e r v e i t s e l f h a s a c k n o w le d g e d in its r e c e n t r e p l i e s to th e P a t m a n q u e s ­
tions.

The p r o p o s e d 7 - y e a r t e r m w ith p o s s ib ility of r e a p p o in tm e n t r e p r e ­

s e n t s a. c o m p r o m i s e t h a t - w i l l p r e s e r v e t h e t r a d i t i o n a l i n d e p e n d e n c e a n d y e t
m a k e "p o s s i b l e a " s o m e w h a t q u i c k e r t u r n o v e r of n e w i d e a s o n t h e B o a r d to
th e p o te n tia l i m p r o v e m e n t of m o n e t a r y policy.

It w ill a l s o g iv e a h e w P r e s i ­

d e n t a m e a n i n g f u l o p p o r t u n i t y o v e r t i m e t o a p p o i n t m e m b e r s s y m p a t h e t i c to
h i s . a d m i j i i s t r a t i o n t s. b a s i c , g o a l s .

4.

v
—

C e n t r a l i z e a l l p o w e r to e s t a b l i s h th e F e d e r a l R e s e r v e d i s c o u n t r a t e ,

e i t h e r in th e B o a r d of G o v e r n o r s o r in a new ly c o n s t i t u t e d F e d e r a l O pen
M a rk e t C om m ittee.

Present

r e s p o n s i b i l i t i e s f o r settin g the d is c o u n t r a te

a s s i g n e d t o t h e b o a r d s o f d i r e c t o r s of

the in d iv id u a l R e s e r v e b a n k s would

be te rm in a te d .
E a c h R e s e r v e b a n k i s a d m i n i s t e r e d ni n t h e p u b l i c i n t e r e s t " b y i t s b o a r d
„of n i n e d i r e c t o r s , - s u b j e c t t o s u p e r v i s i o n o f t h e B o a r d o f G o v e r n o r s .

Three

„of these__dix_e.c_tor_a„are a p p o i n t e d b y t h e F e d e r a l - R e s e r v e B o a r d , w h i l e t h e
o t h e r s i x a r e e l e c t e d b y t h e m e m b e r b a n k s of t h e d i s t r i c t ,

—

w ith all po sitio n s

s u b j e c t to v a r i o u s r e s t r i c t i o n s d e s i g n e d to i n s u r e b r o a d r e p r e s e n t a t i o n an d
p r e v e n t b a n k e r d o m in a tio n . .A m o n g d i r e c t o r s ! r e s p o n s i b i l i t i e s is the pow er,
e n t r u s t e d t o t h e m b y S e c t i o n 14 of t h e F e d e r a l R e s e r v e A c t , to " e s t a b l i s h
f r o m ti m e to ti m e ,

s u b j e c t t o r e v i e w a n d d e t e r m i n a t i o n of t h e B o a r d of

G o v e r n o r s of t h e F e d e r a l R e s e r v e S y s t e m ,




r a t e s of d i s c o u n t t o b e c h a r g e d

&PMIN IS THAI IV}£LY
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- 9 -

b y t h e F e d e r a l R e s e r v e b a n k f o r e a c h c l a s s of p a p e r , w h i c h s h a l l b e f i x e d
d t h a v i e w to a c c o m m o d a t i n g c o m m e r c e a n d b u s i n e s s ; b u t e a c h sucFi b a n k
:

s h a ll e s ta b l is h su ch r a t e s e v e r y f o u r te e n days,

o r o f t e n e r if d e e m e d n e c e s -

i

s a r y by the B oard. n
T h e d iffu sio n of a u t h o r i t y o v e r d is c o u n t r a t e s r a i s e s a t l e a s t tw o p o te n ­
tial problem s:

T h e p o s s i b i l i t y t h a t a n i n d e p e n d e n t b o a r d of d i r e c t o r s m i g h t

n o t g o a l o n g w i t h a c o n s e n s u s d e c i s i o n on a p a r t i c u l a r c h a n g e in t h e d i s c o u n t
ra te ; and the p o s s ib ility th a t so m e individual d i r e c t o r s m ig h t en co u n ter a
c o n f l i c t of i n t e r e s t i n m e e t i n g t h e i r p u b l i c r e s p o n s i b i l i t i e s a t t h e R e s e r v e
b a n k a n d t h e i r p r i v a t e r e s p o n s i b i l i t i e s to t h e i r o w n f i r m s .
been infrequent,

P ro b lem s have

a n d t h e ’’r e v i e w a n d d e t e r m i n a t i ^ i " c l a u s e d o e s g i v e t h e

F e d e r a 1 R e s e r v e B o a r d c l e a r a u t h o r i t y to e n f o r c e c o n f o r m i t y of r e g i o n a l
d i s c o u n t r a t e s w i t h n a t i o n a l d e c i s i o n s if s u c h i s d e s i r e d .

In p r a c t i c e ,

how­

e v e r , t h e B o a r d h a s s h o w n s o m e r e l u c t a n c e to o v e r r u l e t h e d i s t r i c t b a n k s .
T h e p r o p o s e d c h a n g e i n t h e l a w w o u l d p r o v i d e g r e a t e r a s s u r a n c e of s u c h
c o n fo rm ity and w ould m o r e c l e a r l y a s s ig n re s p o n s ib il ity fo r t h e s e i m p o r t a n t
policy
m o n e t a r y / d e c i s i o n s to o f f i c i a l s s e r v i n g c o m p l e te l y in th e p u b lic i n t e r e s t .
If t h e p r e s e n t r e l a t i o n s h i p s b e t w e e n t h e B o a r d a n d t h e R e s e r v e b a n k
p r e s i d e n t s a r e r e t a i n e d o r if P r o p o s a l #6 t o a b o l i s h t h e F O M C i s a d o p t e d ,
p o w e r o v e r t h e d i s c o u n t r a t e s h o u l d b e c o n c e n t r a t e d i n t h e h a n d s of t h e
Board.

O n t h e o t h e r h a n d , i f P r o p o s a l #5 to s t r e n g t h e n t h e F O M C b y m a k i n g

R e s e r v e b a n k p r e s i d e n t s s u b j e c t to P r e s i d e n t i a l a p p o i n t m e n t is a d o p te d ,




- 10 -

i t w o u l d b e a p p r o p r i a t e t o c o n c e n t r a t e p o w e r s over- t h e d i s c o u n t r a t e ,
v p th a l l o th e r i n s t r u m e n t s of m o n e t a r y policy,
j

together

in the F O M C .

G r e a t e r c o n c e n t r a t i o n of F e d e r a l R e s e r v e p o w e r s h a s b e e n r e c o m m e n d e d

i

!

in a n u m b e r of p la c e s ,
C redit.

i n c l u d i n g t h e R e p o r t of t h e C o m m i s s i o n o n M o n e y a n d

T h a t R e p o r t p r o p o s e d t h a t 1 T h e d e t e r m i n a t i o n of t h e r e d i s c o u n t r a t e
1

(the s a m e fo r a ll R e s e r v e banks) should be v e s te d w ith the [ F e d e r a l R e s e r v e ]
B o a r d . n O p p o sitio n , if i t e x i s t s ,

p r e s u m a b l y w ould r e f le c t the g e n e r a l

c o n c e r n t h a t s o m e h a v e o v e r a n y f o r m of c e n t r a l i z a t i o n .

5. a .

M a k e p r e s i d e n t s of t h e 12 R e s e r v e b a n k s s u b j e c t t o a p p o i n t m e n t b y

t h e P r e s i d e n t of t h e U n i t e d S t a t e s a n d c o n f i r m a t i o j ^ b y t h e S e n a t e .
such appointm ents,

In m a k i n g

t h e P r e s i d e n t c o u l d b e r e q u i r e d t o p a y d u e r e g a r d to

th e a d v i c e of th e B o a r d of G o v e r n o r s .
P resently,

R e s e r v e b a n k p r e s i d e n t s a r e a p p o i n te d to 5 ~ y e a r t e r m s by

t h e b o a r d o f d i r e c t o r s of e a c h R e s e r v e b a n k ,
of G o v e r n o r s .

su b ject to a p p ro v a l by the B oard

In t h e i r r o l e a s m e m b e r s o f t h e F O M C a s w e l l a s i n o t h e r

w a y s , t h e s e p r e s i d e n t s h a v e i m p o r t a n t r e s p o n s i b i l i t i e s in m a k i n g a n d i m p l e ­
m enting m o n e ta ry policy d ecisio n s.

(The p r e s id e n t s ,

p re s e n tly have s o m e influence over the discount rate ,

through th e ir d ire c to rs ,
but th a t w ould be

r e m o v e d b y a d o p t i o n of P r o p o s a l #4. )
T h e C o m m i s s i o n on M o n e y a n d C r e d i t, a n d s o m e o t h e r s ,

have reco m ­

m e n d e d t h a t m o n e t a r y p o l i c y d e c i s i o n s s h o u l d b e o n l y i n t h e h a n d s of p u b l i c
officials.

To ach iev e this,

t h e y p r o p o s e e l i m i n a t i n g t h e r o l e of R e s e r v e

b a n k p r e s i d e n t s in f o r m u l a t i n g m o n e t a r y p o lic y by a b o l is h in g th e O pen



ADMINISTRATIVELY 6CNI?
TD£NIIA3
r

- 11 -

M a rk e t C om m ittee.

The le s s e x t r e m e - p r o p o s a l m a d e h e r e w ould a c c o m p li s h

th e s a m e end by c o n v e rtin g the R e s e r v e b a n k p r e s i d e n c y into an e x p lic itly
p u b l i c of fice*
TJie m a i n _ a d v a n t a g e t h a t maY b e " x l a i m ^ d _far th ^ ^
th at of th e CM C is th a t it w ould r e t a i n tr a d itio n a l regiorial re p re s e n ta .tio n i n
m o n e ta r y policy d ecisio n s.
in c h a r a c t e r ,

Since th e beginning, the S y s te m h as b e e n F e d e r a l

w i t h t h e h e a d of e a c h R e s e r v e b a n k p l a y i n g a k e y r o l e b o t h

— i n c o l l e c t i n g - a n d r e p r e s e n t i n g t h e v i e w s of h i s p a r t i c u l a r r e g i o n -in n a t i o n a l ~ - c o u n c i l a r i d i r i - ‘acl;rrdri^
region.

b a n k i n g - arid ’- c r e d i t - - ^

W e r e th e R e s e r v e b a n k p r e s i d e n t s to a c t s o le ly in a n a d v i s o r y

c a p a c i t y w i t h n o a c t u a l v o t e o n p o l i c i e s , t h e r e w o u l d p r o b a b l y be_ a s i g n i f i c a n t
d o w n g r a d i n g th*e s t a t u r e of t h e o f f i c e a n d o f t h e p e r s o n s i n i t 0

This could

i m p l e m e n t i n g p o l i c i e s , b u t a l s o on th e a b i l i t y to a t t r a c t h i g h - c a l i b e r p e r ­
sonnel throughout the R e s e r v e banks.
The p r o p o s a l m ig h t involve a s a la r y p ro b le m .

P r e s e n t s a l a r i e s of

R e s e r v e b a n k p r e s i d e n t s r a n g e f r o m $3 5, .000 t o $7 5, 00 0, w e l l a b o v e F e d e r a l
pay s c a le s .

A n d a t s o m e of th e b a n k s o t h e r s e n i o r o f f i c e r s a l s o e a r n s a l a r i e s

above the F e d e r a l s c a l e s .

T h e s e p r o b le m s could b e solved,

of c o u r s e ,

if

F e d e r a l s c a l e s a r e r a i s e d to a m o r e r e a l i s t i c le v el.
One o t h e r d ifficu lty w ith the p r o p o s a l is th a t it m ig h t b e c o n s i d e r e d
a n o m a l o u s t o h a v e t h e p r e s i d e n t s of p r i v a t e l y o w n e d i n s t i t u t i o n s ~~ t h e s t o c k
of e a c h F e d e r a l R e s e r v e b a n k i s o w n e d b y t h e m e m b e r b a n k s i n i t s d i s t r i c t - s u b je c t to P r e s i d e n t i a l a p p o in tm e n t.



M oreover,

the p r o p o s a l w ould in t r o d u c e

- 12 -

f u r t h e r a s y m m e t r y i n t h e s t r u c t u r e of t h e F e d e r a l . R e s e r v e S y s t e m c o m ­
p a r e d w i t h t h a t of o t h e r q u a s i - G o v e r n m e n t i n s t i t u t i o n s .

The F e d e ra l Home

!
iLoan b a n k s ,

the F e d e r a l L and B anks, the F e d e r a l I n t e r m e d i a t e C re d it

b a n k s , a n d th e B a n k s f o r C o o p e r a t i v e s a r e a l l s y s t e m s with. P r e s i d e n t i a l l y
appointed b o ard s and re g io n a l o ffic e rs chosen by m e a n s o th e r than P r e s i ­
dential appointm ent.

O n e w a y to c i r c u m v e n t t h e s e p r o b l e m s ,

becom e troublesom e,

w o u l d b e to r e t i r e a l l F e d e r a l R e s e r v e b a n k s t o c k .

P resently,

if t h e y s h o u l d

m e m b e r b a n k s of t h e F e d e r a l R e s e r v e S y s t e m a r e r e q u i r e d

to s u b s c r i b e to F e d e r a l R e s e r v e s t o c k a c c o r d i n g t o a f i x e d f o r m u l a .
corporate sense,
m em bers.

In a

th e r e g i o n a l R e s e r v e b an k s a r e th u s " o w n e d 1 by t h e i r
1

If t h e s t o c k w e r e r e t i r e d a n d t h e R e s e r v e b a n k s t h e r e b y c o n ­

v e r t e d e n t i r e l y t o p u b l i c s t a t u s , t h e c a s e f o r P r e s i d e n t i a l a p p o i n t m e n t of
R e s e r v e b a n k p r e s i d e n t s w ould c l e a r l y b e c o m e m o r e a c c e p ta b le - - indeed,
it w o u l d a p p e a r t o b e a l o g i c a l a c c o m p a n i m e n t o f s u c h a c h a n g e .
m i s s io n on M on ey and C r e d it and o th e rs ,

The C om ­

including R e p r e s e n t a ti v e P a tm a n ,

h a v e r e c o m m e n d e d r e t i r e m e n t of F e d e r a l R e s e r v e s t o c k a s a d e s i r a b l e
r e f o r m i n a n d of i t s e l f .

It i s g i v e n s u b o r d i n a t e s t a t u s h e r e s i m p l y b e c a u s e

it i s n o t d i r e c t l y g e r m a n e to t h e c e n t r a l i s s u e o f a c h i e v i n g b e t t e r c o o r d i n a ­
t i o n of e c o n o m i c p o l i c y .

6.

A bolish the F e d e r a l Open M a rk e t C om m ittee,

co n cen trate all pow ers

o v e r F e d e r a l R e s e r v e o p e n m a r k e t o p e r a t i o n s i n t h e h a n d s of t h e B o a r d of
G overnors,




a n d r e d u c e t h e s i z e o f t h e B oa. rd f r o m s e v e n t o f i v e m e m b e r s .

13 -

T h i s p r o p o s a l c l o s e l y f o l l o w s t h e on e m a d e b y * t h e C o m m i s s i o n on M o n e y
a n d C r e d it n o te d in th e d i s c u s s i o n above.

T h e m a i n a r g u m e n t a g a i n s t it is

<

t h a t i t w o u l d d r a s t i c a l l y a l t e r t h e t r a d i t i o n a l r e g i o n a l c h a r a c t e r of t h e F e d e r a l

i
R e s e r v e S y s t e m b y s h a r p l y d o w n g r a d i n g t h e s t a t u r e of t h e R e s e r v e b a n k
p residents.

On t h e o t h e r h a n d ,

th e c h ie f a r g u m e n t in it s f a v o r is th a t it

w o u l d s h a r p l y r e d u c e t h e s i z e of t h e b a s i c g o v e r n i n g b o d y o f t h e S y s t e m
( w h i c h i s n o w t h e F O M C ) , t h e r e b y f a c i l i t a t i n g t h e p r o c e s s of a r r i v i n g a t
c l e a r - c u t policy d ecisio n s.
Q u e s t i o n s a b o u t o p t i m a l s i z e of a d e c i s i o n - m a k i n g b o d y a r e n o t e a s y to
answ er.

P resently,

t h e F O M C i s c o m p o s e d of t h e s e v e n G o v e r n o r s of t h e

F e d e r a l R e s e r v e B o a r d p lu s fiv e of the R e s e r v e b a n k p r e s i d e n t s ,
in r o ta tio n .

serving

T h e o t h e r s e v e n p r e s i d e n t s a l s o a t te n d m e e t i n g s of th e C o m -

: - m i t t e e a n d e x p r e s s t h e i r - o p i n i o n s , - but- do n o t - h a v e a- f o r - m a l - v o t e A - s - n o t e d
earlier,

th e r e m a r k a b l e t a l e n t s of th e p r e s e n t B o a r d C h a i r m a n in r e a c h i n g

a c o n s e n s u s h a v e e n a b l e d t h e C o m m i t t e e to w o r k e f f e c t i v e l y .

But an a r g u m e n t

can b e m a d e th a t a s m a l l e r p o lic y m a k in g body w ould be b e t t e r .
T h e p r o p o s a l to r e d u c e th e s i z e of the B o a r d f r o m s e v e n to fiv e m e m b e r s
h a s c u s t o m a r i l y b e e n l i n k e d t o e l i m i n a t i o n of t h e F O M C ( t h e C M C r e c o m ­
m en d atio n included both p ro p o s a ls ).

If t h e F O M C i s r e t a i n e d i n i t s p r e s e n t

f o r m , it w o u ld p r o b a b l y b e d e s i r a b l e to k e e p th e s e v e n - m e m b e r B o a r d so
th a t B o a r d m e m b e r s w o u ld c o n t in u e to c o n s titu te a m a j o r i t y in th e F O M C ,




ADMINISTRATIVELY

.uwiaA iAF"

- 14 -

7;

C o m p l e t e l y r e s t r u c t u r e t h e B o a r d of G o v e r n o r s ,

leaving the C h a irm a n

a n d two o th e r m e m b e r s in W a s h in g t o n a n d p la c in g the f o u r o t h e r m e m b e r s
a t th e h e a d of f o u r s u p e r r e g i o n s s ta n d in g o v e r s e v e r a l p r e s e n t R e s e r v e

. I
.
— d i s t r i c t s . - AH d e c i s i o n - m a k i n g r e s p o n s i b i l i t y w ould th e n b e p la c e d in th is

i

new ly constituted B oard.
T h is is a new p r o p o s a l.

It w o u l d r e t a i n t l i e ~ p r e s e n t r e g i o n a l c h a r a c t e r

of t h e F e d e r a l R e s e r v e S y s t e m , w h i l e r e d u c i n g t h e s i z e o f t h e p o l i c y m a k i n g
body.

P o l i c y d e c i s i o n s w o u ld b e c o m p l e t e l y in th e h a n d s of p u b lic ly a p p o in te d

officials.

R e s e r v e b a n k p r e s i d e n c i e s w ould b e s o m e w h a t d o w ngraded, but

a t l e s s c o s t i n t e r m s o f l o s t r e g i o n a l i s m t h a n u n d e r P r o p o s a l #6.
' F o r exam ple,

th e f o u r s u p e r r e g i o n s could divide the U nited S ta te s into

N o r t h e a s t [ c o m p r i s i n g F e d e r a l R e s e r v e d i s t r i c t s 1 (Boston),
and 3 (Philadelphia.],

C e n t e r [wit h d i s t r i c t s 4 ( C l e v e l a n d ) ,

2 (New Y ork),

7 (Chicago), and

V
i

8 (St.

Louis)],

S o u t h [ w i t h d i s t r i c t s 5 ( R i c h m o n d ) , 6 ( A t l a n t a ) , a n d 11 ( D a l l a s ) ] ,

and W e st [ including d i s t r i c t s 9 (M inneapolis),
F rancisco)]*

10 ( K a n s a s C it y ) , a n d 12 ( S a n

E a c h of t h e R e s e r v e b a n k p r e s i d e n t s w o u ld r e p o r t to a n d

ad v ise the G o v e rn o r heading his p a r tic u la r region.

T he G o v e r n o r s w ould

th e n a s s e m b l e in W a s h in g to n (or e ls e w h e r e ) f o r po licy d e lib e r a tio n s ,
lik e th e p r e s e n t m e e t i n g s of th e F O M C .




A D I ' 1ISTE AT IVILY < o ; *lUSHilAT'
-MIh
dvi

much


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102