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AUDIT OF THE FEDERAL RESERVE

HEARINGS
BEFORE TH E

SUBCOMMITTEE ON
DOMESTIC MONETARY POLICY
OF TH E

COMMITTEE ON
BANKING, CURRENCY AND HOUSING
HOUSE OE REPRESENTATIVES
NINETY-FOURTH CONGRESS
FIRST SESSION
ON

H .R . 4 3 1 6
A BILL TO AUTHORIZE AND DIRECT THE GENERAL AC­
COUNTING OFFICE TO AUDIT THE FEDERAL RESERVE
BOARD, THE FEDERAL ADVISORY COUNCIL, THE FEDERAL
OPEN MARKET COMMITTEE, AND FEDERAL RESERVE
BANKS AND THEIR BRANCHES

MARCH 18; APRIL 22, 23, 25, 29; AND MAY 8, 1975




Printed for the use of the
Committee on Banking, Currency and Housing

AUDIT OF THE FEDERAL RESERVE

HEARINGS
BEFORE THE

SUBCOMMITTEE ON
DOMESTIC MONETARY POLICY
OF THE

COMMITTEE ON
BANKING, CURRENCY AND HOUSING
HOUSE OF REPRESENTATIVES
NINETY-FOURTH CONGRESS
FIRST SESSION
ON

H.R. 4316
A BILL TO AUTHORIZE AND DIRECT THE GENERAL AC­
COUNTING OFFICE TO AUDIT THE FEDERAL RESERVE
BOARD, THE FEDERAL ADVISORY COUNCIL, THE FEDERAL
OPEN MARKET COMMITTEE, AND FEDERAL RESERVE
BANKS AND THEIR BRANCHES

MARCH 18; APRIL 22, 23, 25, 29; AND MAY 8, 1975

Printed for the use of the
Committee on Banking, Currency and Housing

U.S. GOVERNMENT PRINTING OFFICE
60-365 0




WASHINGTON : 1975

COM M ITTEE ON BANK ING , CURRENCY AND HOUSING
HENRY S. REUSS, Wisconsin, Chairman
WRIGHT PATMAN, Texas
W ILLIAM A. BARRETT, Pennsylvania
LEONOR K. (MRS. JOHN B.) SULLIVAN,
Missouri
THOMAS L. ASHLEY, Ohio
WILLIAM S. MOORHEAD, Pennsylvania
ROBERT G. STEPHENS, Jr., Georgia
FERNAND J. ST GERMAIN, Rhode Island
HENRY B. GONZALEZ, Texas
JOSEPH G. MINISH, New Jersey
FRANK ANNUNZIO, Illinois
THOMAS M. REES, California
JAMES M. HANLEY, New York
PARREN J. MITCHELL, Maryland
WALTER E. FAUNTROY,
District of Columbia
LINDY (MRS. HALE) BOGGS, Louisiana
STEPHEN L. NEAL, North Carolina
JERRY M. PATTERSON, California
JAMES J. BLANCHARD, Michigan
HAROLD E. FORD, Tennessee
CARROLL HUBBARD, Jr., Kentucky
JOHN J. L aFALCE, New York
GLADYS NOON SPELLMAN, Maryland
LES AuCOIN, Oregon
PAUL E. TSONGAS, Massachusetts
BUTLER DERRICK, South Carolina
PHILIP H. HAYES, Indiana
MARK W. HANNAFORD, California
DAVID W. EVANS, Indiana

ALBERT W. JOHNSON, Pennsylvania
J. WILLIAM STANTON, Ohio
GARRY BROWN, Michigan
CHALMERS P. W YLIE, Ohio
JOHN H. ROUSSELOT, California
STEWART B. McKINNEY, Connecticut
JOHN B. CONLAN, Arizona
GEORGE HANSEN, Idaho
RICHARD T. SCHULZE, Pennsylvania
W ILLIS D. GRADISON, Jr., Ohio
HENRY J. HYDE, Illinois
RICHARD KELLY, Florida
CHARLES E. GRASSLEY, Iowa
MILLICENT FENWICK, New Jersey

P a u l N e l s o n , Cleric and Staff Director
W i l l i a m P . D i x o n , General Counsel
M i c h a e l P . F l a h e r t y , Counsel
O r m a n S. F i n k , Minority Staff Director
G r a h a m T. N o r t h u p , Deputy Minority Staff Director

S u b co m m ittee on D o m e s tic M o n e ta r y P o lic y
WRIGHT PATMAN, Texas, Chairman
JOSEPH G. MINISH, New Jersey
HAROLD E. FORD, Tennessee
MARK W. HANNAFORD, California
STEPHEN L. NEAL, North Carolina
JAMES J. BLANCHARD, Michigan
W ILLIAM A. BARRETT, Pennsylvania




JOHN B. CONLAN, Arizona
GEORGE HANSEN, Idaho
W ILLIS D. GRADISON, Jr., Ohio

(II)

CONTENTS
Hearings held on—
March 18, 1975__________________________________________________
April 22, 1975___________________________________________________
April 23, 1975___________________________________________________
April 25, 1975___________________________________________________
April 29, 1975___________________________________________________
May 8, 1975_____________________________________________________
Text of H.R. 4316___________________________________________________
Testimony

K
l‘
1
147
185
207
227
283
285

of

Anderson, Jack; accompanied by Les Whitten--------------------------------------Irvine, Reed J., adviser, Division of International Finance, Chief of Inter­
national Development Section, Federlal Reserve Board-----------------------

3
70

Statements
Bartell, Robert M., public relations consultant and tax program coordinator,
Liberty Lobby_____________________________________________________
Freeman, Robert J., professor of accounting, University of Alabama-------Mitchell, Hon. George W., Vice Chairman, Board of Governors of the Fed­
eral Reserve System-----------------------------------------------------------------------Nader, Ralph, consumer advocate_____________________________________
O’Reilly, Kathleen F., legislative director, Consumer Federation of Amer­
ica _______________________________________________________________
Schuck, Peter H., director, Washington office, Consumers Union---------------Selden, Prof. Richard L., chairman, department of economics, University of
Virginia__________________________________________________________
Staats, Hon. Elmer B., Comptroller General of the United States; accom­
panied by Ellsworth H. Morse, Jr., Assistant Comptroller General; John
J. Higgins, associate general counsel; and Charles P. McAuley, assistant
director__________________________________________________________
A dditional I nformation Submitted

for the




288
228
186
187
207

148

Record

American Federation of Labor and Congress of Industrial Organizations,
(AFL-CIO), letter dated May 1, 1975______________________________
American Society of Travel Agents, Inc., letter from James A. Miller, vice
president, dated May 13,1975_______________________________________
Anderson, Jack, exhibits related to testimony:
1. “Media Accused of News Bias,” article from the Washington Post,
March 6, 1972_________________________________________________
2. Letter signed by Hon. J. L. Robertson, Vice Chairman, Board of Gov­
ernors of the Federal Reserve System, dated April 5,1972_________
3. Letter signed by Joseph R. Coyne, Assistant to the Board of Gov­
ernors of the Federal Reserve System, dated March 11,1975_______
4. Letterhead dated July 20, 1973, listing J. L. Robertson as a board
member of Accuracy in Media__________________________________
5. Federal Reserve form “Report of Outside Business and Teaching
Activities,” application of Reed J. Irvine, approved November 10,
1971 ________________________________________________ ^_______
6. “ How U.S. Subverted Chilean Economy,” syndicated column, dated
November 3, 1974______________________________________________

(in)

274
244

393
394
5
6
7
12
13
14

IV
A d d it io n a l I n f o r m a t io n S u b m it t e d for t h e R ecord—Continued

Anderson, Jack, exhibits related to testimony—Continued
7. Letter from Lester S. Jayson, Director, Congressional Research Serv­
ice with an attached memorandum from Charles R. Gellner, Chief,
Foreign Affairs Division and Johnathan Sanford, an analyst in that
division concerning dealings with Reed J. Irvine of the Federal Re- Page
serve Board, dated March 14, 1975--------------------------------------------16
8. Letter from Accuracy in Media, Inc., signed by Reed J. Irvine, dated
November 14, 1974--------------------------------------------------------------------22
9. Letter to Charles Gellner, Chief, Foreign Affairs Division, Library of
Congress Congressional Research Service, from Reed J. Irvine, dated
November 22, 1975, on official stationery of the “Board of Governors
24
of the Federal Reserve System, Office Correspondence” ----------------10. Advertisement of Accuracy in Media, Inc., from the Washington
Post of February 18,1975-----------------------------------------------------------30
11. “ Soured on Red-Baiter Sourwine,” syndicated column of Febru­
ary 4, 1975------------------------------------------------------------------------------31
12. and 13. Letters from Accuracy in Medica, Inc., signed by Reed J.
Irvine, regarding Jack Anderson column of February 4,1975, dated:
February 4, 1975------------------------------------------------------------------34
March 1, 1975-----------------------------------------------------------------------35
14. “The Aims of AIM : A Critical Look at One of the Press Critics,”
article by Daniel Epstein from the American Society of Newspaper
Editors Bulletin, March 1974___________________________________
36
15. Letter of Reed J. Irvine to the Washington Post, dated March 3,
1975 _________________________________________________________
42
16. AIM report of November 1974 with an attached excerpt from the
Congressional Record of February 24, 1975---------------------------------42
17. “Irvine’s AIM Is Way Off,” syndicated column, dated March 11,
47
1975 _________________________________________________________
18. Western Union Mailgram dated March 9,1975, signed by Francis G.
Wilson, president of Accuracy in Media, Inc---------------------------------48
19. Reprints of articles unfavorable about the oil industry sent to oil
companies by Accuracy in Media (AIM), requesting contributions—
50
20. Accuracy in Media (AIM) publication containing article, “CBS
gives bankers time to reply”___________________________________
56
21. Memorandum from Bob Kasen, of the Institute for American De­
mocracy, reporting on Accuracy in Media (AIM), dated March 1974_
58
21a. Letter of the U.S. Postal Service dated October 15, 1971, regard­
ing the mail application of Accuracy in Media (AIM) for eligibility
of reduced postage rates_______________________________________
65
22. Letters from L. S. Hembree, editor of the Anderson (S.C.) Inde­
pendent, dated November 13, 1974, and Tom E. Fallon, editor of the
Bay City (Mich.) Times, dated February 13, 1975, regarding Ac­
curacy in Media, Inc. (AIM )___________________________________
67
23. “Right-Wing Watchdog,” article by Juluis Duscha_______________
68
Bartell, Robert M., prepared statement_______________________________
275
Biemiller, Andrew J., director, department of legislation, AFL-CIO, letter
dated May 1, 1975_________________________________________________
393
Blanchard, Hon. James J., additional written questions submitted to
Reed J. Irvine____________________________________________________
142
Burns, Hon. Arthur F., Chairman, Board of Governors of the Federal
Reserve System, letter to Hon. Wright Patman, dated March 13, 1975— 137
Communication Workers of America :
Letter dated April 25, 1975, to Chairman Patman, re GAO audit of
Federal Reserve System_______________________________________
279
Statement by the AFL-CIO executive council on the Federal Reserve
and the Nation’s Monetary Policy_______________________________
280
Emry, Pastor Sheldon, Pheonix, Ariz., statement______________________
396
Freeman, Robert J., prepared statement_______________________________
249
Gradison, Hon. Willis D., Jr., information requested in regard to the mem­
bership of the Board of Governors of the Federal Reserve System,
1913-74 __________________________________________________________
213
Holland, Hon. Robert C., member Board of Governors of the Federal Re­
serve System, letters to chairman Wright Patman dated:
March 17, 1975________________________________________________
138
March 19, 1975________________________________________________
139




V
Additional I nformation Submitted

for the

R ecord—Continued

Irvine, Reed J .:
“A Vindictive Muckraker at Work,” article from the Louisville Times, Pase
March 20, 1975________________________________________________
96
“Anderson Piece Struck a Low Journalism Blow,” article from the
Nashville Tennessean, March 15, 1975___________________________
94
Extension of remarks____________________________________________
99
Positions held at Federal Reserve________________________________
97
Response to questions o f :
Chairman Wright Patman___________________________________
144
145
Hon. James J. Blanchard____________________________________
Statement of expenses charged to AIM, 1973-74____________________
80
Supplemental material submitted with attached exhibits___________
137
“The Wayward Press,” article from Air Force magazine, March 1975_
92
Kremer, Edward J., chairman, National Association of Insurance Agents,
Inc., letter dated May 2,1975-----------------------------------------------------------394
Liberty Lobby, prepared statement of Robert M. Bartell, public relations
consultant and tax program coordinator-----------------------------------------275
Membership of the Board of Governors of the Federal Reserve System,
1913-74, from the Federal Reserve Bulletin, November 1974_________
213
Mitchell, Hon. George W., Vice Chairman, Board of Governors, Federal
Reserve System:
Earnings and Expenses of Federal Reserve Banks—1973-74________
386
Response to questions o f :
Chairman Wright Patman_________________________________ 370, 399
Hon. George Hansen________________________________________
360
Touche Ross & Co., report dated February 4, 1975__________________
299
Staff Memorandum — Securities Transactions — Federal Reserve
Banks _______________________________________________________
297
Nader, Ralph, submission of study entitled, “ Scenario for Federal Re­
serve System in the Year 2000” ____________________________________
394
National Association of Insurance Agents, Inc., letter dated May 2, 1975_
Nicoll, John, letter dated April 16, 1975, to Peter H. Schuck, re Board’s
special survey on credit card plans------------------------------------------------193
Patman, Hon. Wright:
Bonds Held in Open Market Committee, Net Earnings on Bonds Be­
fore Payments to U.S. Treasury, Operating Expenses of all Federal
Reserve Banks; Dollar and Percentage Comparisons of Expenses
with Previous Years, 1914-74 (table)__________________________
222
Comparison of Federal Reserve Board Expenditures in 1972, 1973 and
1974 _________________________________________________________
373
Letters t o :
Chairman Arthur F. Burns, dated:
March 11, 1975__________________________________________
137
March 13, 1975______________ ____________________________
137
List of 109 Cosponsors of Bill Providing for GAO Audit of Federal
Reserve System_______________________________________________
288
Reed, J. Irvine, with attached questions, dated March 25,1975----142
Record, Robert Bruce, Los Angeles, Calif., statement__________________
395
Schuck, Peter H .:
Letter from the Board of Governors of the Federal Reserve System,
dated April 16, 1975, regarding Board’s survey on interest rates
charged by banks_____________________________________________
193
Attached tables:
Table 1—Rate Structure on Credit Card Plans____________
193
Table 2—Basis for Rate Differentials in Multiple-Rate Credit
Card Plans___________________________________________
193
Table 3—Relation of Credit Card Rates to State Ceilings----193
Table 4—Confidentiality Status of Information Reported on
Credit Card Plans_____________________________________
194
Table 5—Confidentiality Status of Credit Card Plan In­
formation, by type_____________________________________
194




VI

Staats, Hon. Elmer B .:
Attachment I—Background on Prior Proposals To Require a GAO Pa&
€
Audit of the Federal Reserve System-----------------------------------------154
Attachment II—Examples of Functions and Activities of the Federal
Reserve System Subject to Evaluation of Effectiveness of Results
Achieved as Part of Independent Audit by the GAO_____________
162
Attachment III—H.R. 4316______________________________________
163
Audit costs incurred in auditing Federal Reserve System----------------170
List of agencies ordered for full-scale audits_____________________
177
Watts, Glenn E., president, Communication Workers of America, letter
dated April 25, 1975, with enclosure________________________________
279
A ppend ixes

Appendix A.—Correspondence Between Chairman Patman and Dr. Burns
Concerning Federal Reserve Consumer Interest Rate Data__________
Appendix B.—Other correspondence submitted by Mr. Patman relating to
Federal Reserve Bond Release of Consumer Loan Interest Rates Charged
by Various Commercial Banks_____________________________________
Appendix C.—Four-Part Series on Banking Services Published by Con­
sumers Union in the “Consumer Reports” Magazines of January, Feb­
ruary, March, and May 1975_______________________________________
Appendix D.—“Business Week” of April 21, 1975, Article “Dissension at
the Fed: A Staff Revolt” __________________________________________
Appendix E.—“ Scenario for Federal Reserves System in the Year 2000,”
study of the Federal Reserve Bank of Cleveland_____________________
Appendix F.—Letter to Chairman Wright Patman From Hon. Elmer B.
Staats, Comptroller General of the United States, dated May 27, 1975,
reviewing the statement of Hon. George W. Mitchell, Vice Chairman of
the Federal Reserve System presented on May 8, 1975________________
Appendix G.—Additional Information Submitted by Chairman Patman
Concerning Salaries of Federal Reserve Personnel Earning $20,000 or
More ------------------------------------------------------------------------------------------




449
587
599
629
633

673
683

AUDIT OF THE FEDERAL RESERVE

TUESDAY, M ARCH 18, 1975

or

the

H o u se of R e p r e s e n t a t iv e s ,
S u b c o m m i t t e e o n D o m e s t ic M o n e t a r y P o l i c y
C o m m it t e e o n B a n k i n g , C u r r e n c y a n d H o u s in g ,

Washington, D.C.
The subcommittee met, pursuant to notice, at 1 0 :05 a.m., in room
2128, Rayburn House Office Building, Hon. Wright Patman [chair­
man of the subcommittee] presiding.
Present: Representatives Patman, Minish, Ford, Hannaford,
Blanchard, Conlan, Hansen, and Gradison.
Chairman P a t m a n . The committee will please come to order.
Mr. Clerk, please call the roll.
The C l e r k . Chairman Patman.
Chairman P a t m a n . Here.
The C l e r k . Mr. Minish.
M r. M in is h . H ere.
The C l e r k . Mr. Ford.
Mr. F o r d . Here.
The C l e r k . Mr. Hannaf ord.

[No response.]
The C l e r k . Mr. Neal.
[No response.]
The C l e r k . Mr. Blanchard.
Mr. B l a n c h a r d . Here.
The C l e r k . Mr. Barrett.
[No response.]
The C l e r k . Mr. C o n la n .
[No response.]
The C l e r k . Mr. Hansen.
[No response.]
The C l e r k . Mr. Gradison.
Mr. G r a d i s o n . Here.
The C l e r k . Five members present, Mr. Chairman.
Chairman P a t m a n . For the purposes of a hearing we have a quorum
and the subcommittee will please come to order.
Last Tuesday, March 11, the Washington Post and other newspapers
across the Nation carried a column by Jack Anderson and Les Whitten
alleging that the facilities of a Federal agency—the Federal Reserve
Board— were being used to promote the activities of a private organi­
zation called Accuracy in Media, Inc. The clear implication of the
column was that Reed J . Irvine was using his dual capacity as a high
official of the Federal Reserve and of Accuracy in Media, Inc., to
attack the news media.
()
l




2

These are serious allegations, and this subcommittee has primary
jurisdiction over the Federal Reserve, and it is our responsibility to
take a look at this situation. We have called Mr. Anderson, Mr. W hit­
ten, and Mr. Irvine for this morning’s hearing.
Without an appropriation’s review and without an independent
audit by the General Accounting Office, this subcommittee and the
Congress have only limited means of determining what any employee
within the Federal Reserve might be doing at any given moment. We
have no audit which would tell us what Mr. Irvine might be doing or
how any of the facilities or funds under the control of the Federal
Reserve are being spent. Hopefully, this hearing will provide answers
insofar as Mr. Irvine and Accuracy in Media are concerned.
The charges contained in the Jack Anderson column take on added
significance because of other recent revelations of attempts by the Fed­
eral Reserve to manipulate public opinion. This column appeared only
days after it was learned that the Chairman of the Federal Reserve
Board— Dr. Arthur Burns—had gone to great lengths to suppress
interest rate data and to use the Federal Bureau of Investigation to
investigate its possible leak to a respected news and consumer publi­
cation.
It was only a few months ago that we learned that the big business
and the big banking community had been enlisted to assist Dr. Burns
in an attempt to mold public opinion and congressional action against
legislation which would have required a full-scale audit of the Federal
Reserve. A t that time, this effort was headed by the Business Round­
table, an organization of the business fat cats, who literally swamped
Western Union with telegrams to sway opinion against the audit bill.
Without question, Accuracy in Media, Inc., has every right to carry
on its activities and its criticisms of the press. But it is a legitimate
question for this subcommittee and the Congress to inquire as to
whether there is a link—either directly or indirectly—between this or­
ganization and the Federal Reserve and the banking community. I am
impressed by the fact that Accuracy in Media, Inc. has on other occa­
sions exhibited high interest in the media’s coverage of banking and
Federal Reserve matters.
It is also legitimate for the Congress to inquire as to whether facili­
ties of the Library of Congress have been misused by Mr. Irvine—if
indeed he was operating as an official of the Federal Reserve. The sub­
ject matter of the Library of Congress research is not the issue before
this subcommittee but rather whether Government facilities have been
misused or used under false pretenses to help a private organization
carry on its attacks on the news media.
I have asked Chairman Arthur Burns to look into this matter at the
Federal Reserve and to submit a report to the subcommittee. I have
been informed that an “ internal inquiry” is underway and that this
information will be available in the next few days.
The questions which have been raised about the internal operations
of the Federal Reserve concern me greatly—and I am sure this concern
is shared by members of the subcommittee—but we should not be in a
posture of prejudging the case. It is the job of the subcommittee to
bring out the facts and we want to give all parties a proper opportunity
to be heard.




3

Let us see if our witnesses are here.
Mr. Jack Anderson and Mr. Whitten please be seated at the witness
table. Also Mr. Irvine, please take a seat at one of the microphones at
the table.
Now then, I think we are ready to proceed. Mr. Anderson will be our
leadoff witness.
Is that satisfactory, Mr. Anderson ?
Mr. A n d e r s o n . Yes, sir.
C h a irm a n P

atm an

. D

o

y o u h a v e a p r e p a r e d sta tem en t?

Mr. A n d e r s o n . Yes, sir.
Chairman P a t m a n . And you may submit all or any part of it in the
record at this point without objection, and if you desire to add addi­
tional extraneous matter to cover any point that comes up that you were
unaware of, you may do so when you examine your transcript for
correction.
So we will start with Mr. Anderson at this time.
Mr. A n d e r s o n . Well, Mr. Chairman, Les Whitten and I , because of
the seriousness of these charges, and so that there can be no doubt about
our testimony, would like to be sworn.
Chairman P a t m a n . Yes, fine. Stand up, please. We will swear the
other witnesses at the same time.
Do you and each of you solemnly swear that the testimony you shall
give before this Subcommittee on Domestic Monetary Policy of the
Committee on Banking, Currency and Housing of the House of Rep­
resentatives will be the truth, the whole truth, and nothing but the
truth, so help you God ?
Mr. A n d e r s o n . I do.
Mr. W h i t t e n . I do.
Mr. I r v i n e . I d o .
Chairman P a t m a n . A ll right, Mr. Anderson, you are recognized.
TESTIMONY OF JACK ANDERSON; ACCOMPANIED BY LES WHITTEN

Mr. A n d e r s o n . Thank you, Mr. Chairman. My name is Jack Ander­
son. I am here with my associate, Les Whitten. Our offices are located
at 1401 16th Street NW., Washington, D.C. We are appearing at the
request of the subcommittee to tell what we know about the curious rela­
tionship between Accuracy in Media and the Federal Reserve Board.
We have conducted only a limited investigation of the Accuracy in
Media-Federal Reserve Board connection. But we have uncovered a
few facts and raised some more questions. We will be pleased to tell you
what we have learned and to suggest possible lines of inquiry. I f you
have questions, we will do our best to respond.
The story of Accuracy in Media must be put in context. It goes back
to 1969 after Richard Nixon had been triumphantly installed in the
White House. Hie created an atmosphere, which is best described not by
a Nixon critic but by a loyal, longtime aide and admirer, speechwriter
William Safire.
In his absorbing book Before the Fall, he portrays the pre-Watergate, Nixon White House. He finds much to praise in Nixon. But as
Safire recalls those days, Nixon came to the White House flawed by a
“ primal hatred” of the press that was rooted in the real and fancied
grievances he had endured during a quarter century under its scrutiny.




4
“ The press is the enemy”—that was the constant watchword in the
Oval Office. Under press criticism, Nixon “ seethed inside,” Safire
reports. “ He took everything critical as a personal blast at him; when
he read a byline, the writer came to life in his mind, grinning evilly
at him.”
Once Nixon had the power of the Presidency at last in his hands, he
employed it in a multiple offensive that sought to cripple the elements
of the press he saw as hostile. He personally directed the campaign to
intimidate, malign, and discredit the press, according to Safire. The
press became an enemy to be hated and beaten.
In a memo to H. R. Haldeman, the President set the tone of his
press policy. He declared: “ The basic need is not P.R. but P.O. That is,
not public relations but Presidential offensive.” And to John Erlichman: “ I f we treat the press with a little more contempt, we will prob­
ably get better treatment.”
Vice President Spiro Agnew was selected to be the spear thrower.
His celebrated Des Moines speech of November 1969, accusing the
media of an incestuous left-wing bias, was approved line by line by the
President who, here and there, added a phrase to toughen it up. And
the ,followup attack by Agnew on specific newspapers was also ordered
by Nixon.
Just as Agnew began his poisonous campaign against the press,
Accuracy in Media suddenly appeared on the Washington scene. The
founder was Reed Irvine, a sitting Federal bureaucrat, making $37,000
a year as an economist with the Federal Reserve Board.
Irvine claims to give the Government a full working day, ostensibly
carrying out his attacks upon the press by moonlight. On the contrary,
we have proof that Irvine has used the Fed’s facilities and the tax­
payers’ time to conduct his antipress campaign.
This raises an intriguing question. President Nixon established the
notorious plumbers to conduct underground warfare against the press.
Was Accuracy in Media, similarly, an instrument of the dignified,
the prestigious Federal Reserve Board ? It would seem unlikely.
Yet we have established this much: Irvine had the support at least
of the Fed’s Vice Chairman J . L. Robertson, who remained a power
at the Fed until 1973. Robertson has acknowledged to us that, while he
was at the Fed, he discussed Accuracy in Media with Irvine.
A t the same time, the Vice Chairman of the Federal Reserve Board
began to imitate the Vice President of the United States. While the
Vice President blasted the press from the peaks, the Vice Chairman
echoed the same sentiments from the foothills.
There was the occasion in 1972, for example, when Robertson ex­
coriated the press in a speech before the Independent Bankers Asso­
ciation of America at Bal Harbour, Fla. He charged that newspapers
and the radio-television networks were undermining the credibility
of everyone “ who represents authority.”
The newspaper and broadcast people, he declared, were out of touch
with “ the deeply held views o,f what I believe to be the great majority
of American people.” Robertson’s speech was distributed by United
Press International, which reported it “ was unusual for Federal Re­
serve Governors.” It recalled similar attacks, said U P I, by Vice Presi­
dent Agnew. I submit the U P I report, Mr. Chairman, as exhibit 1.




5
Chairman P a t m a n . Without objection, it will be inserted in the
record at this point.
[Exhibit 1 the U P I report, “ Media Accused of News Bias,” from
the Washington Post of March 16 ,19 72 follows:]
E x h ib it 1
[From the Washington Post, March 6, 1972]
M edia . A ccused of N e w s B ia s

(United Press International)
B a l H arbour , F l a .—A

governor of the Federal Reserve Board today accused the
press of bias and inaccuracy in not reflecting the true feeling of most Americans.
J. L. Robertson, Vice Chairman of the board, told a meeting of the Independent
Bankers Association of America that newspapers, radio and television are “being
used to undermine the credibility of everyone who represents authority.”
He implied that network television coverage in at least one prominent case
had been slanted to try and convince the public of the need for a smaller defense
budget.
Robertson’s attack was unusual for Federal Reserve Governors who normally
confine their public remarks to financial and economic matters. The toughness of
his comments recalled earlier attacks on the press by Vice President Spiro T.
Agnew and Robertson used some of Agnew’s examples in making his point.
He said a small group centered in New York City controls most of the nation’s
news. “That explains, perhaps why we get the monotonous sameness of opinion
from our national news media, much of it very much at odds with the deeply held
views of what I believe to be the great majority of American people.”
Without mentioning names, Robertson criticized “one of the best known TV
commentators in the country,” for saying that two-thirds of the nation’s taxes
were spent on the military when, according to Robertson, the figure was 40 per­
cent in the last fiscal year and was going down.
He also accused the Columbia Broadcasting System of distortion in its 1971
documentary “The Selling of the Pentagon,” which criticized the Defense De­
partment for spending too much on public information programs.
“If the government could be denied the right to finance an information pro­
gram to maintain public support for national defense, then those such as the
commentator I discussed earlier would find it much easier to win public support
for really huge cuts in our national defense.”
Robertson, 64, is the senior member of the Federal Reserve’s seven governors
in terms of service. A former FBI special agent, he was appointed by Presi­
dent Truman in 1952 to fill out an unexpired 12-year term and was reappointed
to a full 14-year term in 1964 by President Johnson.

Mr. A n d e r s o n . The ammunition which Robertson fired at the press,
Mr. Chairman, came from Accuracy in Media. The proof is found in
a letter written on the official stationery of the “ Board of Governors
of the Federal Reserve System, Office of the Vice Chairman.”
In this letter, Robertson discloses that he “ found”—the Accuracy
in Media material— “ of value in preparing my Bal Harbour remarks.”
Not only does he cite Accuracy in Media as the source of his attack
upon the press, but his letter goes on to praise the Irvine operation.
Let me quote from the letter: “ Since you are doing research on crit­
icism of the media,” writes Robertson, “ you are doubtless familiar
with the publications of Accuracy in Media, Inc. I f not, look them up,
and you will find a great deal of material that will be helpful to you
in your research.”
To protect our source, Mr. Chairman, it was necessary for us to blot
out his name on the letter. But we submit the letter, with this small
deletion, as exhibit 2.




6
Chairman P a tm a n . Without objection, it will be inserted in the
record at this point.
[The letter submitted for the record as exhibit 2 by Mr. Anderson
follows:]
E x h ib it 2
B oard

op

G overnors

F ederal R eserve S y s t e m ,
O f f ic e o f t h e V i c e C h a i r m a n ,

of t h e

Washington, D.G., April 5 1972.
I do not know why you think it odd that a government
official in a position such as mine should criticize the media. You have an inaccu­
rate notion of the interests of people in this field if you think that we wear
blinders that prevent us from developing opinions on anything but monetary
issues. I have given a number of speeches and have written a book on some of
the broader questions facing our nation.
The material I used in my speech is in the public domain. Since you are
doing research on criticism of the media you are doubtless familiar with the
publications of Accuracy in Media, Inc. If not, look them up, and you will find
a great deal of material that will be helpful to you in your research. I found it
of value in preparing my Bal Harbour remarks.
I accepted the invitation to address the Independent Bankers Association
many months ago on the condition that I be given complete freedom in the choice
of my topic. General Walt happened to send me a copy of the manuscript of his
forthcoming book while I was thinking of an appropriate subject for my talk.
Knowing of my interest in this general area, he invited my comments on the
manuscript. I was impressed by what he had to say on the defense issue. This
combined with my own concern about the media to convince me that I should
utilize the occasion of the Independent Bankers Association meeting to speak
out on this subject.
I hope this information will assist you in your research.
Sincerely yours,
J . L. R o b e r t s o n .
D e a r --------- ------------— .

Mr. A n d e rso n . S o here we have the Fed’s Vice Chairman not only
using Accuracy in Media to help prepare his antipress speech, but
also using official Fed stationery to promote Accuracy in Media. Even
the Fed’s own spokesman, the capable Joseph R. Coyne, has conceded
that Robertson was interested in Accuracy in Media while he served
on the Board of Governors. I quote from Coyne’s written response
to our questions: “ J . L. Robertson did show an interest in A IM while
he was Vice Chairman of the Board of Governors.” And I offer this
as exhibit No. 3.
Chairman P a tm a n . Without objection, it will be inserted in the
record at this point.
[The letter from Joseph R. Coyne, Assistant to the Board of Gov­
ernors of the Federal Reserve System submitted by Mr. Anderson as
exhibit 3 follows:]




E x h ib it 3
BOARD

DF GDVERNDRS
□ F TH E

FEDERAL RESERVE SYSTEM
W A S H IN G T O N ,

D.

C.

20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD

March 11, 1975

Mr. Les Whitten
1401-16th Street, N. W.
Washington, D. C. 20036
Dear Les:
I
am responding to the questions you left with me recently
concerning the outside activities of Reed J. Irvine, Advisor in the
Board's Division of International Finance* Let me take each question
in sequence:
1.
You requested access to all documents in Mr, Irvine's files
that are not exempt from disclosure under the Freedom of Information Act.
Your request for access "to all documents in Mr. Irvine's files
that are not exempt from disclosure under the Freedom of Information Act"
is too broad and lacking in reasonable specificity to enable us to respond
affirmatively. As I am sure you are aware, the Freedom of Information Act
(5 U.S.C. 552(a)(3) (A) provides, in substance, that each agency, upon any
request for records which "reasonably describes such records and (B) is
made in accordance with published rules , . . and procedures . . . (shall)
make the records promptly available to any person." The Board's rules
regarding availability of information provide, in part, that with respect
to requests for access to records of the Board, such requests shall "des­
cribe such records in a manner reasonably sufficient to permit their
identification without undue difficulty." It is our judgment that the
provisions of the Act and of the Board's regulations together are reasonably
read as requiring far greater identification and specificity than your re­
quest for "all documents in Mr. Irvine's files." A request by you that
adequately identifies a particular subject of inquiry with sufficient
reference to the nature of documents sought, and dates thereof, if possible,
will be given prompt action by our staff.
I
have not treated this as an official request under the Freedom
of Information Act. If you wish to file an official request under the
Act, it should be addressed to the Secretary of the Board.




8
2. You requested that a hold be placed on Mr. Irvine's files so
that no evidence is destroyed.
We believe it unnecessary to respond to your request that a hold
be placed on Mr. Irvine's files. You may be assured that the Board is aware
of its responsibility under the law to maintain agency records and that such
actions as are appropriate to the full performance of this responsibility
will be taken with respect to files in Mr. Irvine's office or any other
records of the Board.
3.

Who authorized the Chile probe that he undertook?

Assuming that your reference to ,the Chile probe” is synonomous
f
with comments prepared by Mr. Irvine on the Jonathan Sanford paper, such
comments were provided by Mr. Irvine in his capacity as an Advisor in the
Board's Division of International Finance and Chief of the International
Development Section, He was not directed by his superior or by any member
of the Board to delve specifically into the Sanford paper. At his level
of responsibility, it is within his authority to submit comments of this
nature to other agencies.
4. Did he file any AIM material or correspondence with the
Federal Reserve?
To the best of my knowledge, he did not file any AIM material or
correspondence with the Federal Reserve.
5. Was he authorized to use Federal Reserve stationery for AIM
purposes and by whom* Why does he use it and does the Federal Reserve
approve?
He had not been authorized to use Federal Reserve stationery for
AIM purposes. Mr. Irvine states that no such improper use has been made.
The Federal Reserve does not approve use of its stationery for outside
purposes.
6. You requested to see personnel material that is available on
Mr. Irvine that is not exempt from disclosure under the Freedom of Information
Act.
You may inspect this material in my office. Please advise in
advance when you would like to see the material so that I may arrange to
have it available for you.
7. Did the Federal Reserve authorize him to use Fed facilities
for AIM purposes (telephone, office space)? Does the Fed approve?
The Federal Reserve has not authorized nor does it approve use of
its facilities for outside purposes.




9
8. What are the Federal Reserve's regulations for use of Fed
facilities and time for outside purposes (including stationery)?

A copy of the Board's rules regarding employee responsibilities
and conduct, which includes a response to this question, is enclosed.
9. Did the Federal Reserve authorize secretarial help for Mr.
Irvine for AIM purposes? Who typed the November 22nd memorandum? Was it
sent in a franked envelope?
The Federal Reserve did not authorize secretarial help for Mr.
Irvine for AIM purposes. The content of the November 22nd memorandum
fell within the ambit of Mr. Irvine's official responsibilities. It was
typed by his secretary and transmitted to the Library of Congress in a
Board envelope.
10. Did Mr. Irvine obtain the original Library of Congress Chilean
study as a member of the Federal Reserve staff?
Mr. Irvine advises that he obtained a copy of the study from the
Congressional Research Service in his capacity as Advisor in the Board’s
Division of International Finance.
11. Are Chairman Burns and Mr. Irvine friends?
Chairman Burns and Mr. Irvine are working associates in the inter­
national finance field. It is my judgment that Chairman Burns and Mr.
Irvine could not be considered ’
'personal" friends.
12. Did the Governors sanction any of Mr. Irvine’s AIM activities?
On Fed time? On non-Fed time? Did they encourage his AIM activities?
As required of all employees, Mr. Irvine filed a statement re­
porting outside activities undertaken on his own time, including activities
as Chairman, Board of Directors, AIM. This report was reviewed and ap­
proved by appropriate staff officials. I have no indication of any Board
sanctioning of Mr. Irvine's reported activities, nor any evidence of
Board action taken in opposition to such activities.
To my knowledge, none of the present members of the Board has
encouraged his AIM activities. J. L. Robertson did show an interest in
AIM while he was Vice Chairman of the Board of Governors and since leaving
the Federal Reserve has become a member of AIM’s National Advisory Board.
13.
Were they aware of his AIM activities, particularly with
relation to the Chilean case and including the Washington Post advertise­
ment of February 18?




10
To the best of my information and belief, several members of
the Board have been and are aware of Mr* Irvine’s activities but only in
a general way; none was aware of his specific activities in the Chilean
case or in the Washington Post advertisement of February 18.
14. Did the Federal Reserve authorize him to discuss AIM activities
with the present Chilean embassy?
No.
15. What has Mr. Irvine done for the taxpayer?
Mr. Irvine is an Advisor in the Board's Division of International
Finance. He is the Chief of the International Development Section in the.
Division. His assignment is to advise the Board on activities in the de­
veloping countries, including those in Latin America, Africa and the Far
East, and to monitor and analyze operations of the international development
financial institutions, which include organizations such as the InterAmerican Development Bank, Asian Development Bank and the World Bank.
He is also Federal Reserve staff representative to the National Advisory
Council on International Monetary and Financial Policies.
16. Has Mr. Irvine been given permission to provide material
developed by the Federal Reserve to other right wing groups? Has there
been any solicitation within the Federal Reserve on behalf of AIM? Has
any Federal Reserve official or Governor endorsed AIM or encouraged the
banks to assist AIM?
Except as noted below, the Board has not given Mr. Irvine per­
mission to provide material developed by the Federal Reserve to any outside
group. Mr. Irvine is authorized, as are all Board officials, to make
available to any member of the public any materials authorized by the
Board for public release. I am not aware of any solicitation within the
Federal Reserve on behalf of AIM. Nor do I have any information that
any present Governor or Federal Reserve official endorses AIM, except,
of course, for Mr. Irvine. Nor do I have information that any bank has
been encouraged to assist AIM. As I mentioned earlier, former Vice
Chairman Robertson is now a member of AIM’s National Advisory Board.
17. Has Mr. Irvine made use of Federal Reserve duplication
facilities for AIM?
Mr. Irvine states that he has not made use of Federal Reserve
duplication facilities for AIM. The Board has not authorized use of its
facilities for any outside purposes.




11
18.
Does the Federal Reserve have a list of contributors to AIM
and are any of them banks under the Federal Reserve’s jurisdiction?
The Federal Reserve does not have a list of AIM contributors
19.
regarding AIM?

Has the Federal Reserve investigated Mr. Irvine's activities
What were the findings and was any action taken?

In view of the questions you raised, an inquiry has been undertaken
into Mr. Irvine's AIM activities. As yet, no findings have been made* We
appreciate your bringing this matter to our attention.
Very truly yours,

Josepn k . uoyne
.
Assistant to the Board

50-365 O • 75 • 2
•
•




12
Mr. A n d e r so n . After Robertson left the Fed on April 30, 1973, he
gave his name to the antipress cause. A letterhead, dated June 20,
1973, lists “ J. L. Robertson” as a board member of Accuracy in Media.
And I offer this as exhibit No. 4.
Chairman P a t m a n . It will be inserted in the record at this point.
[The letterhead submitted for the record by Mr. Anderson as exhibit
4 follows: ]
EXHIBIT 4

IN
M S © I

i n c :
v
1232 PENNSYLVANIA
4 2 5 - 13th STREET,
WASHCS’GTON.'D.C.
,}202) 783J0VI; 7J7-93S7

Ambassador Eluridgc Durbrow/Dr. William Yandell Eliiott
Morris L. Ernst/Lawrcnce Fertig/Dr. Harry Gidconse
Reed J. Irvine/Eugene Lyons/Dr. Charles Burton Marshall
R. Adm. William C. Mott, USN (Rct.)/Edgar Ansel Mowrcr ‘
J. L. Robertson/Prof. Walter W. Scifcrt/Dr. Frederick Seitz
John E. Tilton/Dr. Frank Trager/General Lewis W. Walt, USMC (Ret.)
OF
G. Wilson, President!Alphons J . Hack!, Vice President
H. Kalish, Executive Secretary/John K. McLean, Treasurer

A /"
July 20, 1973
To the editor:
In a recent column, Jack Anderson charged that the ITT> subsidiary,
Scott Lawn Products Co., had provided free materials and gardening work
for the construction of a golf course for President Nixon at his San Clemente
home.'
A week later, Hr. Anderson was forced to admit in his column that
Scott Lawn Products Co. was not in fact owned by ITT at the time the golf
course was built. However, Mr. Anderson tried to justify his initial charge
that ITT was connected with the gift by saying that ITT was in the process
of acquiring ownership of Scott and that they had pressured Scott into providing
the materials and work.
The fact is that the three-^ole golf course was begun by friends of
the President in 1969. The request for materials from Scott Lawn Products
Co. was made through the Golf Course Superintendents Association. ITT had
no connection with Scott Lawn at that time and did not begin negotiations
to acquire that company until November 1970. ITT acquired Scott in April
1971, long after the golf course project was begun.
It is interesting to note that the value, at retail, of the products
contributed to the small golf course by Scott comes to only $2672.50.

Mr. A n d e r so n . It may be of incidental interest that this particular
AIM message was written in behalf of International Telephone and
Telegraph, a favorite Irvine pet.
Robertson’s departure from the Fed in no way disrupted Irvine’s
antipress campaign, which continued with more fury than ever. We
can also show that he used his Fed position and Fed facilities to carry
on the work of Accuracy in Media.
The Fed has denied any link with AIM.
Yet the Fed’s files show at least this much. On November 10, 1971,
the Board formally approved an application by Irvine to carry on




13
his AIM work as an “outside business activity.” The application also
indicated that he expected to direct Accuracy in Media on his Fed
salary. For the application states that he expected “no compensation”
from AIM.
And I offer this document as exhibit 5.
Chairman P a t m a n . That will be accepted and put into the record
at this point.
[The Federal Reserve form “Report of Outside Business and Teach­
ing Activities,” application of Reed J. Irvine, approved November 10,
1971, submitted by Mr. Anderson as exhibit 5 follows:]
EXHIBIT 5

C O N F I D E N T I A L ( FR )

REPORT OF OUTSIDE BUSINESS AND TEACHING ACTIVITIES
Please Check One

□

I am not engaged in any out&ide business or teaching activity.
j request permission to engage in the outside business or teaching octivity indicated below.

OUTSIDE BUSINESS A C T IV ITY OR CONNECTION
Nature of Activity

TEACHING A C T IV ITY

----------------

Nature of Assignment----------------------------

2. ehairm
an, Board of Directors, Accuracy i n Media

_______________________

Name and Address of Employer— I k ? . . P 3 ^ y i : . 9 . a ^ ° ni! N c me of School .

2. Warner Building, Washington, D. C.____
'About~$30 ^00 "per’year"
0
Income or Rate of Pay 2 . N compensation_______
o

____________

Days of Week and Time of Day Worked.

Days and Hours of Classes ..

Income or Salary__________

weekends
(If additional space is needed, please use back of this page)

N e
am

Reed J. Irvjne

Division_____ I F

( P le a s e type or p rin t)

Title of Position

Adviser___________
August

h 1971
,

Q£
l

(Signature)

/
CO N CU RREN CES
APPRO VED

. . .
(D ire c to r o f E m p lo y e e 's D iv is io n )

, iv i s io n o f P e rso n n e l A d m in istra tio n )




R .

C .

AND

A PPR O V A LS

(On B e h a lf of the B o ard )
H.

November

( I n i t i a ls )

10,

1971

(D o te )

Entered
Minutes
as of
November

10,

1971

( F o r U s e by O ffic e o f S e c re ta ry )

14
Mr. A n d e r s o n . Irvine had been active in AIM for several months
before he sought and obtained the Fed’s formal approval. During this
period, AIM had established itself as a militant, right-wing critic of
the press. It is unlikely that the Board gave its sanctions without
knowing what Irvine was doing.
The Fed still denies any responsibility for Irvine’s AIM activities.
I f we are to accept the denial, then we must conclude that Irvine vio­
lated title 18 of the United States Criminal Code. This states, quite
plainly, that it is a felony to use “Federal property of any kind for
other than officially approved activities” or to use “official information
not made available to the general public for furthering a private
interest.”
As evidence of the possible law violation, we can cite our own ex­
perience with Accuracy in Media. Irvine has been an outspoken
champion of the Chilean military dictatorship. He took offense, there­
fore, over a column we wrote last November 3. We quoted from a
Library of Congress study, then confidential, which alleged the InterAmerican Development Bank had contributed to the downfall of the
Marxist Allende regime by withholding loans.
I offer this document as exhibit No. 6.
Chairman P a t m a n . Without objection, it will be inserted in the
record at this point.
[The Jack Anderson column of November 3, 1974, entitled, “How
U.S. Subverted Chilean Economy,” submitted for the record as exhibit
6 follows:]
E

x h ib it

6

[From the column, “Washington Merry-Go-Round,” November '3, 1974]

How U.S.

S u b verted C h ile a n

E con om y

(By Jack Anderson)
W a s h i n g t o n —The

secret economic war against Chile’s late Salvadore
Allende is described in some fascinating documents that we have obtained. They
tell how the U.S. used economic subversion to undermine the Allende govern­
ment and set the stage for a military coup.
The documents raise the question of whether the U.S. has been trying covertly
to pauperize left-wing governments and replace them with military dictatorships
around the world.
The story began with the 1970 election of the leftist Allende. Although he was
freely elected, his Marxist views were distasteful to Washington.
They were even more distasteful to International Telephone and Telegraph,
which correctly anticipated Allende would seize its Chilean holdings. The con­
glomerate, therefore, sought to enlist the Central Intelligence Agency in an
undercover conspiracy against Allende.
We reported in March of 1972 that ITT wanted to “promote economic collapse
in Chile” and “force a military coup.” This is precisely what happened 18 months
after we wrote it. The story of how it happened can now be told.
At first, American Ambassador Nathaniel Davis cabled from Chile that the
“prospects of military intervention for the foreseeable future are extremely
small.”
Public opposition would have to become “so overwhelming and discontent so
great,” his secret cables stressed, “that military intervention is overwhelmingly
invited. It is held that military will wait for this public repudiation to become
more clear.” .
The U.S. then began to create the “discontent” that Davis had advised would
be necessary. Secretly and systematically, the U.S. sought to bankrupt the Al­
lende government by denying multi-national bank loans for Chile.




15
As the largest contributor, the U.S. virtually controls the Inter-American
Development Bank. A secret congressional study now states that the bank, which
is supposed to disregard the politics of borrowing nations, cut off loans to the
Allende government for almost three years.
As evidence that this was politically inspired, the bank quickly granted $97.3
million in loans to the new military leaders after they overthrew Allende last
year.
The World Bank, headed by former Defense Secretary Robert McNamara, also
refused Allende loans. But the congressional study found this consistent with
traditional World Bank policies against granting loans to nations with dubious
credit ratings.
However, we have obtained secret World Bank minutes, which apparently
were not available to the congressional experts. These show that McNamara
came under fire behind closed doors for withholding loans from the Allende
government.
The 54-page congressional study, prepared by the Library of Congress, charges
that the Inter-American bank totally cut off new loans to the Allende regime.
Since Chile had come to depend on these loans, the policy amounted to financial
strangulation.
“No new loans were proposed for Chile” states the secret study, “even though
1971 was a year during which the inflation rate was less than during the
previous years.” In other words, Chile should have been a better financial risk
but still got no loans.
This drying up of dollars continued in 1972, as Allende began sinking deeper
into the economic mire. In contrast, the bank granted Argentina $163 million
and Uruguay $10 million, although their inflation rates were no better than
Chile’s. Indeed, no other member nation “experienced as long a financial drought”
as did Chile during the Allende years.
As a case history, the study tells of an agricultural loan that Chile desperately
needed. The loan was to come from “a fund over which the United States exer­
cises a veto.” Allende made an urgent appeal for the money but was turned down.
A few months after he was shot to death, his military successors had no trouble
arranging a $22 million agricultural loan.
At the World Bank, meanwhile, the secret minutes show that McNamara
came under attack on Feb. 5, 1974, over his failure to loan money to the Allende
government. Delegates from Scandinavia, the Philippines, India and, more
mildly, Italy criticized his policy toward Chile.
During the Allende years, complained Denmark’s H.E. Kastoft, the board had
“not even been formally informed. . . of the bank’s lending policy toward Chile.
“Does the board have no role to play,” he demanded, “in case of termination
of lending operations?” He grumbled that “with hindsight one might wonder”
about the discrimination against Chile.
McNamara retorted that the loan he was now seeking for the Chilean junta
had been initiated by “the Allende government in April or May of 1973.”
But the fiery Dane would not be put off. He asked McNamara point blank why
“we have not been given timely opportunity to discuss and take a position on the
bank’s policy toward Chile.”
The Philippines’ Placido Mapa joined in the criticism. He said he “greatly
lamented the lack of action by the bank vis-a-vis Chile in the last three or four
years. India’s S.R. Sen said he was also “unhappy” over the way the Allende
government had been treated.
The economic strangulation left Chile gasping for money, its inflation gone
wild and its production disrupted by strikes. Thus Allende became vulnerable
to the military coup that the CIA and ITT had originally sought.
Footnote: World Bank officials were furious over both the leak of the minutes
and the charges against McNamara. One official said McNamara “had put his
neck on the line by sending a $7 million loan to the board when Allende was in
power.” He said the board had plenty of information on the bank’s policy toward
Chile.
At the Inter-American Development Bank, a spokesman pointed to early 1971
loans, to continuing payments under Allende on previous loans and to talks on
new loans as evidence that Allende was not the victim of financial discrimination.

Mr. A n d e rso n . N o more than 4 days later, the author of the con­
fidential Library of Congress study, Jonathan Sanford, happened to




16
approach Irvine on an unrelated matter. According to Sanford’s writ­
ten account of the meeting, Irvine changed the subject and asked who
had written the report we had quoted.
And I offer this as exhibit No. 7.
Chairman P a t m a n . Without objection, it may be included.
[A letter from Lester S. Jayson, Director, Congressional Research
Service with an attached memorandum from Charles R. Gellner,
Chief, Foreign Affairs Division and Jonathan Sanford, an analyst in
that division concerning dealings with Reed J. Irvine of the Federal
Reserve Board, dated March 14, 1975, submitted by Mr. Anderson as
exhibit 7 follows:]




17
E x h ib it 7
,

THE LIBRARY OF CONGRESS

M ■ // z
-< / %

.I f #

*

WASHINGTON, D.C.

*

C o n g r e s s i o n a l R esearch Service

20540

March 14, 1975

The Honorable
Wayne L. Hays, Chairman
Committee on House Administration
U.S. House of Representatives
Washington, D. C. 20515
Dear Mr. Hays:
The Acting Librarian, John G. Lorenz, has shown me your
letter of March 11 concerning the Jack Anderson column of the same
date. In that column reference was made to discussions between
Mr. Reed Irvine, an official of the Federal Reserve Board, and two
staff members of the Congressional Research Service, namely,
Mr. Charles Gellner, Chief of our Foreign Affairs Division, and >Xr.
Jonathan Sanford, an analyst in that division. You requested the
full facts concerning Mr. Irvine’s dealings with our Foreign Affairs
Division.
I
am enclosing a memorandum from Mr. Gellner and Mr. Sanford,
addressed to me, in which they relate such facts.
We know of no other dealings with Mr. Irvine or of any request
of a similar nature which he may have made of any other Library of
Congress staffers. The Library of Congress does receive copies of the
AIM Report which is published by Accuracy In Media, Inc.
Mr. Gellner and Mr. Sanford indicate they they were dealing
with Mr. Irvine solely in his capacity as an official of the Federal
Reserve Board. He never indicated his association with AIM. Had he
done so, his comments would have been received and considered in a
different light.
As you know, Mr. Gellner and Mr. Sanford have been requested
to appear at hearings on this matter to be held next week by the Domestic
Monetary Policy Subcommittee of the House Banking and Currency Committee.
With kind regards,

Enelosure




18
UNITED STATES GOVERNM EN T

Memorandum
to

L IB RA R Y OF CONGRESS

Lsster S. Jayson, Director
Congressional Research Service _^

(M

from

subject:

f

date: March 14

1975

9

<3^

Charles R„ Gellner,(QxLe?, Foreign Affairs Division
Jonathan E. Sanford, Analyst in International Relations
Foreign Affairs Division
Our dealings with Reed J. Irvine of the Federal Reserve Board

To the best of our recollection the following are the salient
facts regarding our dealings with Reed J. Irvine, an official of the
Federal Reserve Board (Division of International Finance).
August 197£a A report on relations between the multilateral
banks and Chile during the Allende period, written by Jonathan Sanford,
an analyst in CRS * Foreign Affairs Division, was delivered to a Con­
gressional office which had requested its preparation,
November 3. 197L.

Jack Anderson ran a column commenting on

U.S. policy toward Chile during the Allende period.
discussed the CRS report noted, above.

In that column he

No copy of this report had been

given to Jack Anderson, to any of his representatives or to any member
of the press*

Publication of the Anderson column resulted in requests

to CRS for copies of the report.

In consequence, the Foreign Affairs

Division requested and received permission from the Congressional office
for whom it had been prepared to provide copies o * the paper to those who
f
might request it, provided that the identity of that Congressional office
was not revealed.
November 5 or 7. 1974„ At this time Sanford was on leave
preparing his dissertation on U.S. policy towards the international




19
financial institutions.

In that connection, he was interviewing all

agency representatives on the National Advisory Council for Inter­
national Monetary and Financial Policy (NAC)— a body which coordinates
U.S. foreign lending operations— to obtain first-hand material for use
in his dissertation.

A representative of another agency being inter­

viewed had identified Mr. Irvine as the Federal Reserve Board's
representative on the NAC and Sanford interviewed him on this date
concerning his participation on this body.

At the outset of the inter­

view, Mr. Irvine called attention to the Anderson column and asked
Sanford who the author of the "secret study" [Anderson !s term] was so
he could find out more about it.

Sanford indicated he was the author

and, to forestall debate concerning its contents, suggested Irvine
request a copy from CRS.
In his conversations with Sanford and Gellner, Mr. Irvine
identified himself solely as an official of the Federal Reserve Board
and as the Board’s representative on the NAC.

This established Mr. Irvine

as an official in a position to be knowledgeable on the subject of
multilateral development bank lending to Chile.

Mr. Gellner considered

Mr. Irvine to be a responsible U.S. Government official who was concerned
about the subject treated in the CRS paper.

In response to Mr. Irvinefs

request the Foreign Affairs Division sent him a copy of the paper on
November 12, 1974, addressed to him at his Federal Reserve Board office.
Some days later, Mr. Irvine phoned Gellner and offered comments
on the paper.




Mr. Gellner suggested that he put his comments in writing

20
and send them to him.

Mr. Irvine agreed.

In this or a subsequent

telephone conversation Gellner agreed to send Mr. Irvine a response
to his comments.
November 22. 1974.. A memorandum under this date was delivered
addressed to Gellner from Mr. Irvine commenting on international lending
to Chile and the CHS paper.
stationery,

The memorandum was on Federal Reserve Board

A photocopy of the memorandum is attached.

December 1974— Januarv

. 1975. Partly as a result of

Mr, Irvine’s memo, revisions were made in the paper so as to preclude
certain misinterpretations of its contents.

In the course of revising

the paper in early December, Sanford called Mr. Irvine on the telephone
at his Federal Reserve Board office and briefly discussed certain aspects
of the paper with him,

A revised version of the CRS paper dated

December 13, 1974- was delivered to the House Foreign Affairs Committee
on January_, 1975*

The committee had requested a copy of the paper*

The Committee had previously conducted hearings on Chile and had indicated
that the CRS paper would .o incorporated in the published record of
fe
these hearings*
January 11. 1975. On this date the Washington Post published
a letter by Reed J. Irvine, identifying him as Chairman of the Board
of Accuracy in Media, inc„

A photocopy is attached.

This was the first

time that Gellner and Sanford learned of Mr. Irvine’ connection with
s
that organization.

This letter placed Mr, Irvine in a new light and

aroused questions as to his purpose in making comments on the CRS paper.
Gellner decided not to send a response to Mr* Irvine regarding his memo.




21
February IS. 1975. The Washington Post carried an advertise­
ment placed by Accuracy in Media, inc. and signed by Reed J. Irvine
concerning the original Anderson column,

A copy is attached,

February 22-23. 1975. Beekman Winthrop, representing
1 [MORE]1 magazine, a journalism review, requested and obtained
1
1
telephone interviews with Sanford and Gellner concerning the Anderson
column, the AIM advertisement, and our dealings with Mr* Irvine.
V/inthrop was writing an article on the Anderson-AIM controversy for
his magazine.
February 25. 1975. A representative of Jack Anderson's office
requested and received an interview with Gellner concerning our dealings
with Irvine.

He asked for and Gellner gave him a copy of Irvine's

memorandum.
March 3 1975. A representative of Jack Anderson* s office
.
telephoned Sanford to discuss this same e.ubject.
March 11. 1975. Jack Anderson's column on Reed J. Irvine
appeared.




22

Mr. A n d e r s o n . The surprised Sanford identified himself as the
researcher writer. He was completely unaware that Irvine might be
speaking in any other capacity than that of a Federal Reserve official.
Irvine never mentioned that he was seeking information for Accuracy
in Media. Sanford agreed, therefore, to furnish Irvine with a copy of
the study.
Thereafter, Irvine fired off one of his typical broadsides against us
on November 14. The attack upon us, in the name of accuracy, was
loaded with outrageous inaccuracies.
And I offer this as exhibit No. 8.
Chairman P a t m a n . Without objection, it will be included at this
point in the record.
[The letter from Accuracy in Media, Inc., signed by Reed J . Irvine,
dated November 14, 1974, submitted by Mr. Anderson as exhibit 8
follows:]
E

x h ib it

8
A

ccuracy

in

M e d i a , I n c .,

Washington, B.C., November 14, 1974.
To t h e e d i t o r : In a recent column (11/3/74), Jack Anderson charged that the
U.S. sought to bankrupt the Allende government by denying multinational bank
loans to Chile. He suggested that the U.S. had succeeded in this, bringing about
Chile’s “financial strangulation.” This conclusion by Anderson was based on the
assertion that Chile had come to depend on loans from the Inter-American
Development Bank, and these were cut off.
Anderson is in error. Disbursements of Inter-American Development Bank
(IDB) loans to Chile were actually higher during the three years Allende was in
office than in the three preceding years. The bank disbursed 79 million dollars
in Chile in 1971-73, compared to $70 million in 1968-70.
It is also incorrect that Chile was heavily dependent on these IDB loans.
IDB loan disbursements have never financed more than a fraction of Chile’s
imports. They were at their highest in 1972, when they amounted to $29 million.
This was enough to pay for about 2.5 per cent of Chile’s import bill. These loans
have also represented only a small part of Chile’s external borrowing.
Those who exaggerate the importance of the IDB loans to Chile and who
falsely state that denial of these loans to Chile was an important cause of
Chile’s economic deterioration under Allende are usually trying to transfer
the blame for Allende’s economic mismanagement to someone else.
Allende confiscated large amounts of foreign property without paying for it,
and he defaulted on most of Chile’s foreign debt. It is not surprising that many
lenders and investors were not eager to make new loans to Chile. However,
Allende did manage to finance a huge increase in Chile’s imports, partly by
using the money that should have gone for the payment of interest and principal
on the foreign debt. Imports rose from $1 billion in 1970 to $1.6 billion in 1973.
But even this was not enough to offset the inflationary pressures generated
by Allende’s fiscal and monetary policies and by the fall in domestic production.
The multinational banks could not very well signal their support of these harm­
ful policies by authorizing new loans for Chile. In the Allende years they dis­
bursed against loans that had been authorized before Allende took office. The
decline in new loan authorizations during the Allende regime will be reflected
in a lower level of disbursements in the period after Allende’s fall.
Sincerely yours,
,

.

A

,

cc: Jack Anderson, papers carrying the Anderson column.




R

eed

J . I r v in e .

23

Mr. A n d e r s o n . Irvine didn’t agree with the Sanford study, so he
protested to the Library of Congress. He went over Sanford’s head to
his boss, Charles Gellner, of the Library’s Congressional Research
Section. Gellner was also unaware of Irvine’s A IM role and assumed
Irvine was speaking as a Federal Eeserve official.
Gellner, therefore, listened courteously to Irvine’s complaints and
asked him to put his comments in writing. Irvine responded on
November 22 with a letter on official stationery under this letterhead:
“ Board of Governors of the Federal Reserve System, Office
Correspondence.”
And I offer this as exhibit No. 9.
Chairman P a t m a n . Without objection, it may be inserted at this
point.
[Testimony resumes on p. 29.]
[The letter submitted as exhibit 9 for the record by Mr. Anderson
follows:]




24
E x h i b it 9
B O A R D O F G O V E i.N O R S
o r THE

FEDERAL RESERVE SYSTEM

Office Correspondence
Tn

______ Mr. Charles Ge

From.

Reed J .

j)ate November 22, 1974

Subject: Comments on Jonathan Sanford's

Irvin e:

paper, "The Multilateral Development Banks
and the Suspension of Lending to Allende's
Chile"

This paper purports to show
(1) The failure of the IDB to make large new loan authori­
zations to Chile in 1971-73 was inconsistent with past lending policies
of the IDB and could be explained only as a result of political pressure
from the United States;
(2)
The drying up of credit from these institutions may have
been a major factor in bringing about hyperinflation in Chile under
Allende. (p. CRS-44)
Let us consider the second point first.

Mr. Sanford endeavors to show the importance of foreign
capital inflows to the maintenance of some semblance of financial sta­
bility in Chile. He says:
Because its balance of trade has usually been in
deficit, with export earnings inadequate to pay
for import costs, Chile has maintained stability
in its balance of payments largely through foreign
loans (mostly from the U.S. Government and the
multilateral banks) and through foreign investment
inflows.
Foreign loans and investments brought international
payments stability to Chile's accounts at the cost
of an increasingly weighty obligation to repay debts
and service foreign investments.
I would note only in passing that for a developing country
such as Chile foreign capital usually does not flow in to finance an
autonomous current account deficit. The inflow of capital to finanee
worthwhile ventures makes it possible for the country to run a current
account deficit. There would be little point in such a country re­
ceiving a large capital inflows merely to augment its international
reserves (unless it were rebuilding reserves from seriously depleted
levels). To the extent that such a country acquires foreign capital
for investment in sound economic projects, such as the large Chilean
mining ventures, it cannot be said that the objective or the result




25
of such borrov.ing is financial stabilization. Nor is it true, as
Mr. Sanford suggests, that the country's future is mortgaged by such
borrowings.
Presumably the increased productivity will easily permit
servicing of the debt and investment as well as generating increased
d r . s tic ir.come.
cre
There seerr.s to be an impression on the part of the author
that Chile's borrowing had been primarily to finance consumption.
This would have been true of some loans, such as PL 480 credits, but
it would surely not be true of loans made by the IBPJ) and IDB, which
are almost invariably associated with economic projects.
However, let us assume that some of these credits were used
to finance projects which the Chileans would have financed in any case
and were therefore in part, at least, balance-of-payments loans. How
important were these credits to Chile? The paper does not provide
numbers that will give an answer to that query.
The only figures mentioned for IBRD and IDB loans are
authorizations. Authorizations do not enter into the balance of pay­
ments. A loan authorization will not offset a single escudo's worth
of inflationary pressure unless and until it is translated into a dis­
bursement. Therefore, the paper should have examined the disburse­
ments against loans made by the IDB and IBRD to see how important
these credits were in the context of Chile's balance of payments.
The following table shows disbursements against these credits
for the years 1961-74 (U.S. fiscal years).

IDB and IBRD Loan Dlsbu rsements to Chile
(millions of dollars)

ID 3

IBRD

Total

1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974
0.8 5.9 17.1 21.7 10.4 18.9 20.3 24.0 25.9 27.4 29.1 22.3 18.5
6.3 6.5 10.3 7.5 8.3 16.7 10.5 13.5 11.4 17.6 28.1 11.9 6.2 11.8
6.3

7.3 16.2 24.6 30.0 27.1 29.4 33.8 35.4 43.5 55.5 41.0 28.5 30.3

Total IDB-IBRD Disbursements

.01 .01




.03

.04

.05

.03

.04

(FY)/Chilean Imports

.04

.04

.04

.05

(C.Y.)

.03

.02

.02(est.)

26
Vfuiie the comparison of disbursements of the IDC mid IBRD
loans with Chilean ii:iports is not precise because the latter data
are in calendar years while the disbursements are for fiscal years,
the figures do s e . ; that at most, these disbursements have financed
h-5 per cent of Chile’s imports. The decline in the percentage in the
later Allende years, after peaking at 5 per cent in FY1971, reflects
more the sharp rise in imports than the decline in disbursements.
Disbursements in 1971-73 were actually higher than in the three pre­
ceding years. Even the maintenance of disbursements at the record
1971 level of $55.5 million would have made almost no difference in
the financing of Chile's record current account deficit in 1973.
The difference between that figure and actual disbursements in FY 1973
would be equal to only 1.6 per cent of Chile's estimated imports for
1973.
Clearly these figures provide no basis for the notion that
the policies of the IDB and IBRD toward Chile were a significant factor
in bringing about the hyperinflation of the Allende years.
Since the paper largely exculpates the IBRD from any respon­
sibility, on the grounds that it was only following its normal reticence
to lend to Chile, we might note briefly what difference it makes to
our findings if we look only at IDB disbursements. We find that IDB
disbursements peaked at $29.1 million in the Allende year of 1972.
They were then 2.3 per cent of Chile's total imports.
In 1970, they
were equal to 2.6 per cent of Chile's imports.
It would be rather dif­
ficult to make an argument that this difference had any significant
impact on Chile's economy either way.
Hr. Sanford states that conceivably international lending to
Chile might have been increased enough to help the Allende government
finance its programs without producing hyperinflatior. However, he
does not point out that Chile did, in fact, succeed in financing record
current account deficits under Allende. The balance of payments table
on page 53 shows that the current account deficit reached the record
level of $504 million in 1972. Data supplied by the Central Bank of
Chile put the 1972 current account deficit at $615 million, followed
by a $404 million deficit in 1973. These are huge deficits, and they
obviously had to be financed from abroad, since Chile's international
reserves were down to a mere $34 million at the end of 1971, according
to Central Bank data.
It is noteworthy that even these huge current account deficits
were not enough to offset much of the inflationary pressure being
generated by the Allende policies.
The government's budget deficit
rose from 13 per cent of expenditures and 3 per cent of GNP in 1970 to




27
53 per coi;o of expendituros and 21 per cent of CInP in 1973. The
deficit was 2.9 billion e:;cudos in 1970, 26.6 billion in 1972 and
14i> billion in 1972. Translated into dollars at the most depreciated
exchange rate, the 1972 deLicit amounted to $578 million. At the
pre-coup exchange rate, the 1973 deficit amounted to $951 million.
If one takes into account multiplier effects and the fact that important
sectors of domestic production declined under Allende, one can appre­
ciate that massive foreign borrowing financing even larger current ac­
count deficits would have been required to enable Allende's Chile to
avoid severe inflation.
The IBRD and ID3 could never have provided the level of
financing required to offset the Allende inflation, even had they been
disposed to do so. It would have been irresponsible for them to have
done so. Allende's policies were wrecking the Chilean economy, and
the international development banks were never designed to underwrite
economic wrecking operations.
Sanford makes the point that loans had been made to Chile
(pre-AIlende), Argentina and Uruguay when those countries were ex­
periencing high rates of inflation. But it is one thirtg to make
loans to a country that is trying to bring an inflationary situation
under control by improving its domestic policies and quite another
thing to finance a country that simply intensifies its inflationary
policies if it manages to get a foreign loan. An international lending
institution would be open itself to the severest possible criticism if
it were to use its scarce capital to provide unlimited financing for
governments pursuing inflationist policies. It should have been noted
that Allende refused to negotiate stand-by arrangements with the IMF,
since the Fund would have required financial discipline as a condition
for a stand-by. Such agreements were regularly negotiated in the preAllende years.
This relates to the question of whether the IBRD and IDB
policies toward loan authorizations to Chile under Allende v/ere the re­
sult of U.S. pressure.
Both institutions had ample economic reason to
refuse to finance Allende's programs. The purpose of their loans is to
promote development.
If a country’s policies more than nullify the
developmental benefits that can be expected of a bank loan, it is rea­
sonable, and in my view necessary, for the bank to advise the borrower
to alter the harmful policies.
It is reasonable to refuse to make ad­
ditional loans if the lender has good cause to believe that the loans
may be used to support policies that are counterproductive.
Put in
more colloquial language, the banks are justified in not throwing their
money down rat holes.
The lenders had good reason to look askance at loans to

5 0 -3 6 5 0 - 7 5 - 3




28
Alienee's Chile. While it is true that the confiscations and defaults
did not begin the day Allende took office, the known philosophy and
public statements of officials of the Allende government did not augur
veil for the future of private investment in Chile, and this generated
caution on the part of foreign lenders and investors.
It did not take
long for actions to follow the words and confirm their fears.
One of the flaws in the Sanford paper that is particularly
surprising, coming from the Congressional Research Service, is the
very slight attention given to the legal requirement, embodied in
the Gonzalez Amendment, that the U.S. oppose loans by the IBRD and
IDB to countries that had confiscated U.S. property without arranging
to pay adequate compensation. The discussion on pp. 2-6 goes into
charges by Allende and various supporters that the U.S. was exercising
improper influence on the banks, and that it was illegal for the banks
to deny loans to Chile just because Chile had confiscated foreign
property. Not until page 38 is the Gonzalez Amendment mentioned,, and
even then the reader has to read to the end of a lengthy footnote to
find out what the amendment was all about.
The Gonzalez. Amendment made it crystal clear that the U.S.
Congress did not look kindly on uncompensated confiscations of U.S.
property. The officials of the international banks were certainly
aware of this feeling on Capitol Hill. They are at all times aware
of the fact that it is Congress that decides how much the U.S. will be
able to make available to these institutions to keep their capital
replenished. The reaction of Congress to large new loan authorizations
by the IDB to a country that had both confiscated U.S. property without
payment and had defaulted on debts to the U.S. would not be hard to
imagine. Mr. Sanford might have considered the impact on IDB replenish­
ment bills of authorizations by the IDB of large new credits to Chile.
He might have noted that in recent years Congress has been slow to
appropriate funds authorized for the IDB and other multinational banks.
The managements of these institutions are not so removed from reality
that they would go out of their way to adopt policies that they knew
would make it much more difficult to get Congressional approval of
replenishment funds. No particular pressure is required to keep an
institution from taking actions that it knows would endanger the supply
of funds vital to its survival. This is especially true when the
actions in question would be impossible to justify on financial, banking
and economic grounds. To highlight the charges of Salvador Allende on
the second page of the paper and to bury the Gonzalez Amendment in a
footnote on page 37 hardly seems to be the best way to educate anyone
to the realities of the situation surrounding loans to Ailende’s Chile.




29

Mr. A n d e r s o n . Not only was this A IM project presented as official
Fed business—the letter contained no mention of Accuracy in Media—
but the letter was also typed by a Fed secretary. Mr. Chairman, either
Irvine was acting for the Federal Reserve Board or he was not. I f
this letter was written with the Fed’s authorization, then the Fed
supported Irvine’s antipress activities. I f the letter was not authorized,
Irvine apparently misused his Fed position and Fed facilities in
violation of the law.
Meanwhile, Gellner still knew Irvine only as a Fed official and,
therefore, began to prepare revisions in the confidential study along
with a written response for Irvine. This would have provided Irvine,
incidentally, with still more Government information.
But Gellner, as he has recalled it, spotted an A IM letter in the
paper and recognized that the signer was the same Reed Irvine who
had been in touch with him. Gellner, therefore, immediately halted
work on the material he had been preparing for Irvine. Once Gellner
recognized that the material was intended not for official use but for
A IM ’s use, he knewT it w as improper and acted accordingly. Both
T
Gellner and Sanford have given us statements, emphasizing that
Irvine represented himself only as a Fed official and that they had
dealt with him on this basis.
The director of the Library’s Congressional Research Service, Lester
Jayson, agrees with his subordinates that Irvine’s contacts with the
Library of Congress were made under false colors. In a detailed letter
to House Administration Chairman Wayne Hays, Democrat, Ohio,
Jayson wrote:
“ Mr. Gellner and Mr. Sanford indicate they were dealing with
Mr. Irvine solely in his capacity as an official of the Federal Reserve
Board. He never indicated his association with A IM . Had he done
so, his comments would have been received and considered in a dif­
ferent light.” And you will find this information in exhibit 7.
Irvine, meanwhile, used the material he had obtained both from the
Fed and from the Library of Congress to attack the press. One of his
A IM articles is based baldly on the Library of Congress report.
When the 'Washington Post refused to publish one of his inaccurate
attacks on us, Irvine took out an ad in the 'Washington Post on
February 18 and, in the name of Accuracy in Media, published ma­
terial he had developed as a Fed employee.
And I offer this as exhibit No. 10.
Chairman P a t m a n . Without objection, it may be included.
[The advertisement of Accuracy in Media, Inc., from the Wash­
ington Post of February 18, 1975, submitted by Mr. Anderson as
exhibit 10, follows:]




30
EXHIBIT 10

From the Washington Post, February 18, 1975

A r t v w t l t w n a n t __________ Advertisement

___ _____

Advertisement

Advertisement

The Post-Anderson Cover-Up
We nt Accuracy in Media believe that journolists and newspapers have on
oWfjjption tocorrect their errors. The Code of Ethics of the Society of ProSessional Journalists says: "Mistakes should be corrected promptly and can.

d id lyW e hereby charge Jack Anderson and The Washington Post with
failure to observe this code.

The Error and the Correction.
The Jack Anderson column of November 3,1974, contained;serious errors of
fqct about the Inter-American Development Bank arid Chile. AIM sent a let-

ter correcting these errors to over 400 newspapers, including TheWashington Post. Here is the letter, as printed in The Miami Herald:

Multinational Bank Didn’t Foil ABende
In i recent column, Jack Anderson charged that the United States
sought to bankrupt the Allende government by denying multinational
bank loans to Chile. He suggested that the U.S. had succeeded in this,
bringing about Chile’s '‘financial strangulation.” This conclusion by
Anderson was based on the assertion that Chile had come to depend on
loans from the Inter-Anurican Development Bank, and these were cut
off,
Anderson is in error. Disbursements of Inter-American Development
Bank (IDB) loans to Chile were actually higher during the three years
Allende was in office than in the three preceding years. The bank dis­
bursed $79 million in Chile in 1971-73, compared to $70 million in
1968-70.
It is also incorrect that Chile was heavily dependent op theee IDB
loans. IDB loan disbursements have never financed more than a frac­
tion of Chile’s imports. They were at their highest in 1972, when they
amounted to $29 million. H us was enough to pay for about 2.5 per cent
of Chile’s import bill. These loans have also represented only a small
part of Chile s external borrowing.
'-----Those who exaggerate the importance of the IDB loans to Chile and
* ------------b that denial of these loans to Chile was an important
economic deterioration under Allende are usually try-

'n£ *° transfer the blame for Allende’s economic mismanagement to
someone else.
Allende confiscated large amounts of forera property without paying
for it, and he defaulted on most of Chile’s foreign debt. It is not surprising that many lenders and investors were not eager to make new loans
to Chile. However, Allende did manage to finance a huge increase in
Chile’s imports, partly by using the money that should have gone for
the payment of interest and principal on the foreign debt. Imports rose
from $1 billion in 1970 to $1.6 billion in 1973.
* toatfset ’ • ated by AUende’s fiscal and monetarv policies and by I____________
tic production. The multinational banks could not very well signal
their support of these harmful policies by authorizing new loans for
Chile. In the Allende years they disbursed against loans that had been
authorised before Allende took office. The decline in new loin authori­
sation during the Allende regime will be reflected in a lower level of dis­
bursements in the period after ADende’s fall.
REED J . IRVINE,
Accuracy in Media, Inc.
Washington, D.C.

No Correction in The Washington Post
When The Washington Post failed to print the above letter or make any correction, AIM took the matter up with the Chairman of the Board, Mrs. Kotharine Graham.
Mrs. Graham wrotei "The editors have received from Jack Anderson a

point- by- point rebuttal of your charges that satisfies them that your charges
are unfounded. It would therefore be unfair to Mr. Anderson to print your
letter. For this reason they have decided, and I agree, not to print this particular letter."

The Cover- Up
We immediately asked The Post for a copy of Jack Anderson's "point- bypoint rebuttal." To our utter astonishment, The Post refused ta send us a
copy or even let us see itl At most, they would give us only a general description of the contents orally.
We told the responsible editor, Mr. Philip GeyeKn, that this was totally un­
acceptable. We could not respond to an attack on our credibility if we were
not permitted to even see the letter.
Mr. Geyelin would not budge, but he let two things slip:
(1) He admitted that the Anderson reply had not satisfied him that our
charges were unfounded;
(2) The author of the letter had been asked if it could be sent to AIM, and he

had refused to permit it.
Th$ irony of this will not be lost on the readers of The Post. Jack Anderson
had incessantly criticized government for using the label "Secret" to hide its
L1
^
. . . .
blunders. Look who 'is using the .label now.
The Washington Post has been a powerful advocate of "openness" and
"freedom of information." It did not ask permission of the U. S. Government
to print the Top Secret Pentagon Papers. It has attacked the President of the
U. S. for claiming the right of "executive privilege" to cover- up matters that
ought to be open. But ft asks Anderson for permission to show AIM a letter
which obviously Anderson himself should have had the decency to send to
us. It honors his refusal. Long live "journalistic privilege!"

AIM's Charges Stand
Although we have not seen a copy of the alleged rebuttal, we know more money to Chile under Allende than in any previous three- year period.
enough about the contents to see that our charges have not been rebutted. Anderson cannot refute that. We showed that under Allende, Chile's im­
Mr. Geyelin admitted that he was not satisfied with the reply. He said it ports rose to record highs, while exports fell. We noted that the increased
was a "close thing," and that he would not print the correspondence be­ imports were paid for by borrowing from abroad and by using money that
cause it was not sufficient interest to the readers.
normally would have been used to service Chile's debts and to pay divi­
And yet The fast did print a tetter from a Congressman which repeated the dends on foreign investments expropriated by Allende. Anderson cannot
main error of the Andisrson column!
rebut that.
\
In a letter to Mrs. Graham protesting the cover- up of Anderson's errors by We hove reiterated to Mrs. Graham thot there is not the slightest evidence
The Post, v e pointed out that this was a matter of considerable importance, that the refusal of the Inter-American Development Bank to make substan­
tial new loan commitments to Allende had anything to do with the short­
The charg< that the U. S. and the World Bank and the IBRD were largely
responsible for Chile's economic difficulties during the ADende years has ages of goods and the severe inflation that characterized his administra­
been a dominant theme in leftwing propaganda. The Post has lent itself to tion. Anderson has failed to substantiate the charge that the I IDB was
the spreading of misinformation. It has a moral obligation to its readers to largely to blame for Chile's "financial, strangulation."
publish the facts.
We have asked Mrs. Graham to give this information to the readers of The
The fact is that Anderson did not refute our charges. (If he had done so, he -Post, os other papers have done. We have had no response.
would no doubt havei been delighted for us and all the world to see his AIM thinks the matter is important. The principle of correcting errors is even
refutation). We showed thot Chile never depended on the IDB loan dis­ more important. We are therefore paying The Washington Post to correct
bursements to pay for more than a very small percentage of its import bill. Anderson's error and to uncover The Post- Anderson cover- up.
Anderson cannot disprove that. We showed that the IDB actually disbursed

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Washington, D. C. 20005
( ) Send me the AIM Report. I enclose $3 for 1 year.
,() Thanks for correcting Anderson. I want to snare ii that. My contribution of $ is enclosed.
() I wont to know more about AIM.

J. R. Van Evera,




Executive Secretary

like what we are doing, make a contribution to AIM to help us pay for this
message. Contributions are tax- deductible.

Name . .
Address.

zip .

Accuracy in Media, Inc. Telephone: 202— 783- 4407

31
Mr. A n d e rso n . The Fed, apparently, keeps a sharp eye on its em­
ployees’ misbehavior. Not long ago, a Fed employee showed Consumer
Reports magazine a Fed-compiled list of comparative interest rates
charged to consumers by the Nation’s banks. Any persevering person
could get the same information by calling on each bank. Having it
published, however, is easier on consumers and harder on overcharging
banks.
The thought of a public document reaching the public, it seems,
drove Federal Reserve Chairman Arthur Burns into a dudgeon.
He called in the FBI to hunt down the traffickers in his interest rate
list.
Yet Burns has not called in the FBI, so far as we can determine,
to investigate Irvine’s apparent criminal violations. Perhaps Burns
is more sympathetic toward employees who assail the press than those
who leak to the press.
This may be a good place to pause to explain the kind of accuracy
that Irvine peddles. His diatribes, issued in the name of accuracy,
have no more to do with accuracy than the Communist people’s
democracies have to do with democracy.
We should caution the subcommittee that Irvine is a specialist at
manipulating facts to form a false picture which, at quick glance,
appears authentic. He will shave a fact here, twist a truth there, re­
move a statement ever so slightly from context. Then he will present
the fabrication with such bold authority that the unsuspecting reader
easily can be taken unaware.
For the sake of brevity, we will cite only a few of his more obvious
distortions from our own experience.
On February 4, we wrote about the junketing, gambling, and money
wasting of Jay Sourwine, chief counsel of the Senate Internal Secu­
rity Subcommittee. One sentence deep in the seventh paragraph states
that the subcommittee’s only major achievement lately was “a crack­
pot report on marijuana prepared mainly by an outside consultant.”
And I offer this as exhibit No. 11.
Chairman P a tm a n . Without objection, it may be inserted.
[The Jack Anderson Column of February 4,1975, entitled, “ Soured
on Red-Baiter Sourwine,” submitted for the record as exhibit 11,
follows:]
E

x h ib it

11

[From the column, Washington Merry-Go-Round, Feb. 4, 19715]
S oured
(B y

on

R

ed-B a it e r

S o u r w in e

Jack Anderson with Les Whitten)

W a s h i n g t o n —The Senate’s weary old Communist-chasers, the last survivors
of the McCarthy era, are losing interest in the Red Menace. They would rather
bask in the tropical sun or gamble at Reno’s roulette wheels.
In pursuit of the pleasant life, the Senate Internal Security Committee’s top
watchdogs have arranged lately to look for subversives in such vacation spots
as Miami, San Juan, Mexico City and Reno. Their expenses, of course, have been
charged to the taxpayers.
Chief counsel Julian G. Sourwine, once a great grizzly bear of a man, is
Capitol Hill’s most renowned Red-baiter. The years have whitened his hair.
He has become rumpled and flabby. His fat fingers now tremble as he fidgets with
his tape recorder.




32

Gone are the days when Sourwine struck terror in the hearts of witnesses
who were hauled, willy-nilly, before the Senate Internal Security Committee.
In the heyday of McCarthyism, he was so powerful that he sometimes was re­
ferred to as the 97th Senator. (There were only 96 elected Senators in those
days). Today, Sourwine likes to putter in his yard and pamper the potted plants
in his basement hideaway. He has always had a weakness for the gaming tables.
So he also likes to slip away from Washington to play the roulette wheels in
Reno, where his mother and son happen to live.
Although Reno is not known as a center of Communist subversion, Sourwine
has stuck the taxpayers for his trips. One recent trip, for example, cost the
taxpayers $908.63 for air fare, car rental and per diem. He didn’t bill the tax­
payers for per diem during the days he actually spent in Reno, but he collected
for his other expenses.
Sourwine’s chief investigator, Alfonse Tarabochia, has also flown to Miami,
San Juan and Mexico City at the taxpayers’ expense. He owns property in Miami,
and relatives live in Mexico City.
Between the two of them, Sourwine and Tarabochia have spent thousands on
these junkets while their committee work has lapsed. Their most recent major
report has nothing to do with Miami, San Juan, Mexico City or Reno. It is a
crackpot report on marijuana, prepared mainly by an outside consultant.
Other recent reports have been the work largely of the FBI, CIA and Library
of Congress. The staff, nevertheless, has passed off these reports as their own
research.
They use code words to hide the identity of the agencies which actually pro­
duce the reports. In the routing slips and private references, the FBI is called
the “ Shrine” or “ Shriners” and the CIA is referred to as the “Masons.”
Sourwine, a tyrant in his small corner of the Senate basement, uses the
committee staff to type his personal letters, including orders for bulbs for his
home garden. The staff has also typed articles which he has written anonymously
for conservative publications.
One of his recent literary works, for example, was published in an anti-Communist journal called Twin Circle. Although Sourwine worked on the article
and had it typed on government time, he pocketed the $100 fee he got for his
efforts.
We found Sourwine surrounded by his potted plants in his dreary basement
domain. The walls were adorned with inscribed photographs of the great, all
attesting to the excellence and importance of Julian G. Sourwine.
He fixed our reporter, Rosanne Weissman, with his famous accusatory gaze.
“I am not a chiseler,” he announced. When she asked how his wife happened to
wind up on the congressional payroll, he replied icily: “I think you’re despicable.”
But he conceded that he may have had his personal letters and articles typed
by government clerical help. He also confessed that he played the roulette wheels
both in Nevada and abroad. But he hotly insisted that he always paid off his
gambling and other debts.
Tarabochia said: “There was always a reason for me going on these trips.
They all relate to hearings and the obtaining of information.” But he conceded
he had visited his family and friends on the trips.
Meanwhile, times have changed in the Senate Internal Security Committee.
The white-maned old Sourwine increasingly spends more time with a little circle
of trucking applauders. It isn’t like it used to be.
Diplomatic bias: We have detected a double standard in the press treatment
of left-wing and right-wing governments. Glowing reports have been published,
for example, about life under Communist dictator Fidel Castro. Even North
Korea’s Kim II Sung, one of the world’s most repressive rulers, has received
candy-coated coverage.
Yet the stories about South Korea have condemned President Park Chung
Hee for abandoning democracy. When he called for a national referendum on
the constitution and offered to step down if he loses the vote, the press immedi­
ately charged that the election would be “rigged.”
We have written critical stories about South Korea, including a graphic ac­
count of the kidnapping of opposition leader Kim Dae Jung by the Korean Cen­
tral Intelligence Agency.
But President Park has promised that members of both the government and
opposition parties will act as ballot box observers. He has also offered to let
foreign newsmen observe the referendum and report what they see.
At least, this is more than Kim II Sung has offered in North Korea.




33

Mr. A n d e rso n . Irvine ignored our charges against Sourwine and
issued two AIM letters attacking these 11 words.
And I offer the letters as exhibits 12 and 13.
Chairman P a tm a n . They will be inserted.
[The two Accuracy in Media, Inc., letters of February 4, 1975, and
March 1, 1975, submitted for the record by Mr. Anderson as exhibits
12 and 13, follow:]




34
E x h i b i t 12

Accuracy In Media, Inc.
777 14th Street, N.W.
Washington, D.C. 20005
(202) 783-4407
fiaDd J. Irvine
Crsjirrr.an of the Beard

February 4, 1975
11:45 p. m.
Mr. Jack Anderson
1401 16th St., N. W.
Washington, D. C. 20036
Dear Mr. Anderson:
In your column this morning you mentioned a report on marijuana issued
by the Senate Internal Security Subcommittee. You stated that the report
was prepared not by the subcommittee but by an outside consultant. You also
indicated that the report was of poor quality.
The subcommittee recently published a report of hearings on the subject of
the "Marihuana-Hashish Epidemic and it Impact on United States Security." The
hearings were held over five days and testimony was taken from 23 different
individuals. Nearly all of them were medical doctors, Ph.D.s or professors
with expert knowledge about marijuana. In addition to these statements, the
report contains over 80 pages of articles reprinted from scientific journals.
In view of the distinction of the experts assembled by the committee to
provide this testimony it seems highly inaccurate to characterize the report
as you did. Certainly it cannot be said that the report was the work of an
outside consultant.
It is clearly a report on hearings held by the subcommittee.
It would seem that you must have had some other document in mind, but I
understand that this is the only document that the Subcommittee has published
on this subject.
Could you tell us whether or not your reference was to this published volume
of hearings? Jf so, we would be interested in knowing how committee hearings can
be written by an outside consultant. We would also like to know what authority
you relied upon to judge the quality of the statements made by the expert witnesses
who either gave testimony or whose articles were reproduced in the appendix of
the report.
Sincerely

cc: The Hon. James 0. Eastland
Mrs. Katharine Graham
Mr. Charles Seib




35
EXHIBIT 13

Accuracy In Media, Inc.
777 14th Street, N.W.
Washington, D.C. 20005
(202) 7S3-4407
Reed J. Irvine
Chairman of the Board

March 1, 1975
To the Editor:
In a recent column (February 4), Jack Anderson discussed a
report on marijuana issued by the Senate Internal Security Sub­
committee. He said the report was poor in quality and had actually
been prepared by an outside consultant.
Mr. Anderson was apparently relying on inaccurate, hearsay
information. The report on marijuana published by the Senate
‘
Internal Security Subcommittee consists of extensive testimony
taken by the Committee from 23 experts with specialized knowledge
about marijuana and its effects on those who use it. They came
from foreign countries as well as from different parts of the U. S.
The hearings lasted five days, and the report is a highly useful
compendium of information about marijuana. In addition to the
expert testimony, it contains 80 pages of articles about marijuana
reprinted from scientific journals.
For those who wish to see for themselves how inaccurate
Anderson's description was, copies of the report may be purchased
from the Government Printing Office, Washington, D. C. 20401.
(Editors can probably obtain free copies from the Senate Internal
Security Subcommittee, Washington, D. C. 20510).
We have asked Anderson for an explanation of his characteriza­
tion of this report. We also asked what authority he relied upon
for the judgment that the quality of the report was poor. He has
not responded.
Sinp^relv yo^irs,

/Reed J J Irvine
Chairman of the Board
Accuracy in Media, Inc.
cc:

Jack Anderson and papers carrying
his column




36
Mr. A n d e rso n . The column was based, he charged, on “inaccurate,
hearsay information.” In fact, the 11 words were based on our reading
of the report.
Irvine also neglected to mention that one of AIM’s board members
is Lewis Walt, the very consultant who helped produce the crackpot
report. Another board member is David Martin, who is a staff member
of the subcommittee that we criticized and who also worked on the
report.
Irvine’s double-barreled attack constitutes a gross conflict of interest
which he carefully concealed from the recipients of his letters.
In his fund-raising literature, Accuracy in Media quotes Charles
Seib, the Washington Postfs press critic, as saying “AIM keeps us on
our toes.” Actually, Seib does not have a favorable opinion of AIM. In
a reference to Irvine’s former partner at AIM, Abraham Kalish, Seib
said: “Kalish is for accurac}- as long as it’s his kind of accuracy.” Seib
added: “He obviously represents a right-wing point of view.”
And I offer this as exhibit No. 14.
Chairman P a tm a n . Without objection, it may be inserted.
[The article, “The Aims of A IM : A Critical Look at One of the
Press Critics,” submitted by Mr. Anderson as exhibit 14 follows:]
E x h ib it

14

[F rom the American Society o f Newspaper E ditors Bulletin, March 19*74]
T h e A im s

of

A IM : A

Cr it ic a l L o ok

at

one

of t h e

P r e s s C r it ic s

(By Daniel Epstein)
Accuracy in Media (AIM), calling itself a nonprofit, nonpartisan educational
organization, has set itself up as judge and jury of the nation’s press. Using
letters, advertisements and publicized surveys, AIM is taking the media to task
for imbalance, distortion and bias—although critics of AIM contend the group
is more concerned with liberal bias than conservative bias.
Citizen pressure groups have had a significant impact on the media in the
United States, and this trend has shown signs of escalating. Consequently, it
becomes increasingly important for journalists, as well as the general public, to
familiarize themselves with various pressure groups, their' tactics, success and
credibility.
This is a report on one such pressure group.
Though AIM is quick to point out the “liberals” in its organization, its origins
are decidedly conservative. When the formation of AIM was announced, Group
Research—an organization which keeps tab on right wing groups reported that
Aim “comes out of an old study, luncheon and correspondence organization
called the Council Against Communist Aggression and Alexis de Tocqueville
Society. According to Group Research, this parent group included “a sampling of
trade unionists, writers, academics and organized right-wingers—all interested
in exposing the evils of communism/’
The man who does most of AIM’s work is its executive secretary, Abraham
Kalish. A Harvard classics major, Kalish has served as a feature writer for the
U.S. Information Agency; he is a retired professor of communications at the
Defense Intelligence School, run by the U.S. Army.
AIM’s president is Francis G. Wilson, a former professor of political science
at the University of Illinois. Wilson is chairman of the Committee for Consti­
tutional Integrity (a group trying to dissuade state legislatures from lowering
the voting age). His name appears on the letterhead of the American Conserva­
tive Union, and he’s 'a lecturer (in Group Research’s words) “on the right-wing
circuit.”
The chairman of AIM’s board of directors is Reed J. Irvine, a Federal Reserve
Board economist and contributor to William Buckley’s conservative National
Review. Vice president is Alphons J. Hackl, head of Acropolis Books publishing
company.




37
In addition, AIM has a National Advisory Board studded with prestigious
names from the ranks of diplomacy, academia and journalism. Those serving
on AIM’s board include Elbridge Dubrow (ex ambassador to Vietnam), Dr.
William Y. Elliott (served on the planning board of the National Security
Council), Eugene Lyons (retired Reader’s Digest editor), Rear Adm. William
C. Mott (ret., former assistant chairman of the Joint Chiefs of Staff), Frank N.
Trager (director of studies for the National Strategy and Information Center),
Morris L. Ernst (author, “The First Freedom” ), Edgar Ansel Mowrer (former
foreign correspondent), Harry D. Gideonse (chairman of the board of directors,
Freedom House) and, until his death, former Secretary of State Dean Acheson.
A look at AIM’s sympathizers further indicates something of the group’s
character. Congressmen friendly to AIM—those who have inserted AIM ma­
terial in the Congressional Record—include John Ashbrook (R-Ohio), Clarence
Brown (R-Ohio), Joel Broyhill (R-Va.), Philip Crane (R-Ill.), F. Edward
Hebert (D-La.), G. V. Montgomery (D-Miss.) and William Springer (R-Ill.).
While all these members of Congress have different ratings from the “con­
servative” and “liberal” groups, they share one common denominator; each is
rated as being 100 per cent consistent with the views of the American Security
Council’s National Security Index. This indicates support for increased defense
spending and aid to anticommunist countries around the world.
In an interview, Kalish said, “Yes, we are against Communism” but denied that
AIM operates on the basis of a conservative ideal. But in a discussion of alter­
native ideologies, Kalish added, that “the right wing corrects its errors, the left
doesn’t” in justifying AIM’s aim.
AIM’s way of looking at media performance has engendered some critics, who
accuse AIM of bias. Richard Gottschald, news director of WDIO-TV in Duluth,
Minnesota, wrote:
“AIM should be exposed for what it is : essentially a conservative group es­
tablished to play judge and jury, and to imply to the public that the media are
giving Americans an intentionally distorted view of our government’s acts and
policies. Using its own one-sided evaluations of stories, innuendo and nitpicking
critiques, AIM attempts to substitute its judgment for those of the media editors
and reporters.”
Charles Seib, managing editor of the Washington Star-News, said “Kalish is
for accuracy as long as it’s his kind of accuracy. He obviously represents a rightwing point of view.” James Cary, White House correspondent for Copley News
Service, wrote a long article about AIM in Seminar. He acknowledged that AIM
has succeeded in making some news organizations admit their errors, qualifying
“But since many of AIM’s complaints add up to value judgments, it in turn has
been accused of having its own bias and ax to grind, far over on the right of
the political spectrum.” Media critic Alfred Balk is skeptical about AIM’s brand
of media criticism. He wrote in Columbia Journalism Review :
“All that AIM has done is to strip away the irrelevancies that have made
media criticism elsewhere such a fuzzy business—the stuff about freedom of the
press, professional responsibilities, news enterprise. We can be pleased that more
accurate days are just around the corner.”
While maintaining that AIM is not a right-wing group, Kalish refuses to
divulge the sources of their financial support. In 1972, AIM had an income of
$50,000. Of that total, $11,000 came from seven foundations.
In response to queries about AIM’s finances, Kalish hands out a letter with
the salutation “Dear friend of AIM.” It begins, “The most frequent question
we are asked is, Who supports Accuracy in Media ?” The rest of his letter avoids
the answer. It says AIM received $50,000 in donations (noting that “ this is
one fifth of the annual income of one, top newscaster” ), that 65 “trade associa­
tions, professional groups, labor unions, women’s clubs, business firms gave sums
up to $100 each.” The rest, Kalish says, came from 700 individuals, in sums
ranging up to $5,000.
Leaving the question of who supports AIM totally unanswered, Kalish is
adamant in his refusal to identify specifically his sources of income. Since AIM
is chartered as a nonprofit, tax-exempt corporation, it is obliged to file with the
Internal Revenue Service a return showing its gross income and its expenditures.
An examination of AIM’s file at the IRS revealed little, it is filled with AIM’s
own publications, reprints from the Congressional Record, a sworn statement
that AIM is not a private foundation, and a Form 990 (for exempt organizations)
tax return.




38
AIM’s tax return applies to the period from 6-17-71 to 4-30-72. It shows gross
contributions, gifts and grants of $6,411.71. It indicates that AIM disbursed
$5,047.14 in that period, leaving a balance of $1,364.57. An inquiry to the IRS
about the sources of AIM’s contributions revealed nothing. A request made under
the provisions of the Freedom of Information Act to release documents brought
a reply. It said, in part “ Subsection 6104(b) of the Internal Revenue Code
provides in pertinent part that the names or addresses of contributors are not
authorized for public disclosure, and, we could not, therefore, make such in­
formation available to you.”
Whoever belongs to AIM and however they’re financed, it is an extremely
prolific and active organization. AIM is not the first group to challenge “ advocacy
journalism”—their major target—and its charge that media introduce opinion
as fact cannot be brushed aside.
AIM communicates its findings and theories to the public via prolific letters
to newspapers, advertisements, its own regular newsletter (AIM Report) and
promotional pieces. These are financed by $10 annual subscriptions, plus dona­
tions averaging $15 each. (AIM officers and board serve without compensation—
though Kalish, who works full-time for AIM, lists $100 yearly as pay—and parttime clerical help is hired on a contractual basis.)
A fair idea of AIM’s major concerns can be seen in some of the comments of
two issues of the AIM Report:
Accuracy in Media sues to Compel FCC Action on Fairness Doctrine Com­
plaints; Public TV’s Image hurt by Unbalanced Treatment of Controversial
Issues; What You Can Do (Listing and brief explanation of six recent AIM
complaints filed. All are alleged Fairness Doctrine violations.) ; The FCC Can
Act Quickly When It Wants T o ; The Press and the Panthers—Part I I ; FCC
Acts on AIM Complaint Against NBC on Pension Program; Other FCC Actions
Show No Enthusiasm for Battling Bias; Another Nail Driven in the Coffin of
the Fairness Doctrine; FCC Ducks Enforcement of Strict Fairness Requirements
of the Public Broadcasting Act; What You Can Do; What’s wrong with NBC?
AIM found many things wrong with NBC—one of which may be considered
typical of the day-to-day, unspectacular cases which AIM tackles.
The target, a segment of NBC’s “ First Tuesday” program, presenting two
young Chinese residents to tell the nation what San Francisco’s Chinatown com­
munity is really like. During the program the youths compared Chinatown to
Buchenwald and Auschwitz, implied people were so hungry they ate cats, claimed
that the government was proud of keeping elderly people in old buildings, thus
keeping the TB rate high and praised a bookstore selling “books from Red China,
books on revolution.”
AIM pointed out that this was a one-sided portrayal of a diverse ethnic com­
munity. They protested the imbalance to NBC, wrote to 175 NBC affiliates and
asked what NBC had done or intended to do to present a better-balanced picture.
AIM reported to its members that NBC’s reply was “not at all responsive,” and
noted that replies from the affiliates were still coming in. “They all complain
that NBC has not provided them with any programming that would balance the
T
one-sided picture on First Tuesday.” AIM explained: “most of them say that
they are taking the matter up with NBC.”
Also typically, AIM involved its members in the case, asking them to call
“the manager of your local NBC affiliate and (ask) him if he has received
and replied to the AIM letter. If he has not, urge him to do so.”
Sometimes AIM will simply w rite a letter correcting what they consider to
T
be errors of fact. Some of these letters have only earned AIM a reputation for
nitpicking. Here is an example, which appeared in Editor & Publisher.
“In ‘Shop Talk at Thirty’ in E&P of September 16, you say that ‘the Ameri­
can people’s trust in their government dropped nearly 20 per cent from 1964
to 1970. 20 per cent of those polled in 1964 distrusted the government and 39
per cent in 1970.’ This suggests that 80 per cent trusted to government in 1964
compared with 39 per cent in 1970. This represents a decline of 24 per cent, not
nearly 20 per cent. I presume that your figure of nearly 20 per cent was some­
how derived from the 19 percentage point differences in the figures you used
for the two years. If you were going to use figures on the number of people
who distrusted the government you should have said that the number who
expressed distrust rose nearly 100 per cent between 1964 and 1970.”
When AIM decides that its complaints aren’t being responded to or when
they don’t think enough of their letters are being printed, they turn to one of
their most potent weapons—the paid advertisement.




39
On March 7, 1973, a large AIM advertisement ran in The Washington Post,
proclaiming in display type: Letters the Editor of the Washington Post Refused
to Print. A blurb explained that the letters reproduced in the ad had been sub­
mitted to The Post by AIM members to correct “inaccuracies or misleading infor­
mation published in The Post and other papers. The editor has declined to publish
these letters.” AIM said it believes that the readers “ really do have a right to
know,” and was publishing them at their own expense—$1,800 in this case,
according to The Wall Street Journal. The letters dealt with John Stewart
Service (a recently-honored old China hand), amnesty, TV bias, and The Post’s
coverage of election-law violations by Nixon.
On March 11, The Post responded in an “ F.Y.I.” editorial, citing space limita­
tions and saying it felt no obligation to publish several letters from a single group
in a short span of time. At one point in the editorial, The Post said that AIM
was a lobby group with resources for getting their message across. The response
didn’t address itself to the errors alleged in the letters.
AIM shot back a letter saying the while diverse voices in a letters column
was a good thing, high priority should be given to letters correcting errors of
fact. Then AIM told The Post that the editorial had incorrectly identified AIM
as a lobby, asking for a correction.
The Post did not print this letter, but on March 16 ran an eight-line statement
saying that AIM, which does not take positions on legislation, was not a lobby,
as they’d incorrectly identified it.
Finally, on April 5, AIM ran an ad including everything—their original ad
with the unpublished letters, the editorial reply, the unpublished AIM letter
and The Post’s correction.
At the bottom of this super-ad, AIM asked the readers for their opinion of
who was right—AIM or The Post—and included a ballot for return to AIM.
As the basis for many of their letters and ads, AIM usually relies on its
surveys, conducted largely utilizing “content analysis”—a process fraught with
pitfalls for all but the most expert communications researchers.
An example of such a survey was released in an AIM statement and entered
in the Congressional Record by Rep. Clarence J. Brown (R-Ohio). The AIM
charge was that the television networks heavily slanted coverage of the Ervin
committee hearings on the media. The hearings themselves, AIM contended, were
“heavily stacked” with pro-media witnesses while spokesmen for consumers of
news media were “ sorely lacking.” AIM said the hearings, unbalanced to begin
with, were further distorted as ample coverage was accorded to media defenders
while media critics were largely ignored.
Perhaps the least significant among AIM’s communiques are its promotional
materials, the bulk of which go to people likely to be sympathetic to AIM. These
materials do give some idea of the way AIM views itself and its causes and
some light on the nature of the group—its educational and critical functions.
One brochure offers seven suggestions: (1) Obtain a packet of AIM publica­
tions (including critiques of CBS programs “Castro’s Cuba,” “Hunger in
America” and “ The Selling of the Pentagon” ; AIM bulletins and reports; AIM
study of media coverage of the HISC hearings on antiwar demonstrations;
critiques of OAS news story by A P ; and critique of a Washington Post column) ;
(2) read Herman Dinsmore’s “ All the News that Fits,” Edith Efron’s “The News
Twisters” and Joseph Keeley’s “The Left-Lelaning Antenna”—and ask: “Does
your local library have these?” ; (3) spread the AIM message to friends, at
parties, labor, business and fraternal meetings and on campus; showing by
specific cases how AIM has “actively, vigorously been carrying on the fight
against inaccurate slanted reporting” ; (4) “write letters to the Forums of your
local newspaper about AIM. Send us copies” ; (5) show local newspaper colum­
nists and TV editors AIM publications, asking for their cooperation and support;
(6) if an inaccurate or one-sided news report is observed, obtain all possible
facts, send appropriate letters to sources of inaccuracies, and “ send copies of
your letters to us” ; (7) organize informal luncheon and coffee groups to* discuss
“problems relating to the public and the news media.”
One promotional included a reprint (The Villager, New York, N.Y.) of a
column by AIM board member Morris Ernst, “ I Have a Concern.” In the column,
Ernst wonders:
why none of our media are concerned with the collapse
of our Noble Experiment, particularly in those increasing numbers of areas
where a single financial group owns the only paper, the only radio and the only
television. Why is that kind of monopoly of the mind of men unmentionable in our
mass media?”




40
The American press is not known for its love of outside criticism—witness
reactions to Agnew’s now-famous denunciations and the very mixed response
to the Twentieth Century Fund’s National News Council. As might be expected
AIM has come in for its share of scathing remarks.
For example, Richard Gottschald, WDIO-TV, Duluth, denounces AIM as
“another attempt at ‘Big Brotherism’ (and) a cleverly disguised extension of
the Agnew attacks of two years ago.” Howard Simons, managing editor, The
Washington Post, says: “They are biased and they’re trying to substitute their
news judgment for ours. But I don’t really worry about them. They’re more of a
pest than anything.”
Bill Leonard, vice president, CBS News, charges: “They are specialists in
tunnel vision. They’ve tried to look at life from their own point of view—rightwing.” Alfred Balk, Columbia Journalism Review, commented: “ From our deal­
ings with (Kalish) it appears that AIM has political or partisan motivations
even though the organization denies it. They do not seem to be equipped to do
a serious, professional job. Criticizing the media is a serious business and should
not be played at. You can only be constructive if you are really serious.”
Nevertheless, a large number of articles about AIM have been published which
neither condemn nor praise but give AIM’s own objections an airing and provide
Kalish with a forum from which to rebut his critics. A comprehensive piece was
written by John Pierson in The Wall Street Journal in May 1973.
The most comprehensive article thus far encountered on AIM appeared in
Seminar Quarterly. The author, James Cary (White House correspondent for
Copley News Service), explored AIM in some depth. “To a professional news­
man,” Cary said. “ . . Some of (AIM’s) criticisms do seem to come across as
weak, overdrawn and perhaps even as protests against change and the intrusion
of new ideas.”
Cary summarized his opinion of the justifiability of AIM’s opinions:
. there
is ample evidence that the American press has long been too self-satisfied too
ready to charge foul and violation of the First Amendment whenever anyone
dares question its prerogatives
there is more one-sided reporting today than
ever before . . there is more arrogance in journalists and intrusion of a new
philosophy; that the written and spoken word can and should be used to shape
change that newsmen think is desirable.”
In Cary’s opinion, there is a need for “a competent, highly informed, running
critique of the media product,” but whether AIM “is adequate for that role is a
question. Its own biases and less than worldly-wise approach to the news on
occasion” would indicate that a better job could be done by journalists themselves.
“But,” Cary concluded, “AIM does have a point.”
Seminar Quarterly, in an afterword to Cary’s article, asked if it was preferable
for journalism to undertake “systematic self-analysis” through “responsible”
bodies such as an ASNE committee or the National Media Center in Aspen, at
the risk of silencing “self-constituted arbiters” like AIM or the many local
journalism reviews. It concluded: “ Is it really desirable, or even possible, to
muzzle the watchdogs? Do not they, in their own way, provide a necessary afflic­
tion of the comfortable?
. better the democratic way, with every man free to
speak out, rather than an elite critical oligarchy or an autocratic government
censor.”
Both' the Nixon administration and Kalish have criticized what they see as
liberal bias in the news media, but Kalish denies any ties with the administra­
tion. Nor does the White House send him complaints about the media, he said.
The man who prepares Nixon’s daily news summary confirmed this: “ (AIM) has
done some very good stuff, but we haven’t had any contact with them.”
If Judge Learned Hand was right in believing that truth is most likely to
emerge from a multitude of voices, groups such as AIM perform a valuable (and
constitutionally protected) role in the democratic process.

W h a t T h e y Say A bout A ccuracy

m

M e d ia , I n c .

Accuracy in Media, Inc. (AIM) was founded to combat inaccuracies and
distorted reporting of the news by the major media. It has gained national atten­
tion because of its highly professional approach and its fearlessness in tackling




41
such media giants as The New York Times, The Washington Post and CBS, NBC
and ABC. We think AIM deserves your support, but don't take our word for it.
Read these unsolicited comments about AIM and its work, then decide for
yourself
“Accuracy In Media Inc.” is one public interest group that is doing yeoman
service as an ombudsman in policing radio, TV and the news media on inaccurate,
misleading and distorted news reporting and commentary, Lending banking a
hand is just one of AIM’s recent accomplishments.
A TV network’s “documentary” series on banking last year provoked strong
protests from individual bankers and the ABA over the distorted presentation.
These protests were brushed off by the network and it refused to give the ABA
network time to correct the errors.
The network changed its tune after AIM entered the picture and charged it
with violating FCC’s fairness doctrine
with the network agreeing to give
the ABA network time to correct the documentary’s errors.
AIM is wholly supported by contributions from concerned citizens and, in our
opinion, merits support.
Reprinted with permission from Pratt’s Letter, the Washington Banking
Authority.
“What this country needs is not a good five cent cigar, but a coast-to-coast
awareness that Accuracy in Media Inc. is the greatest thing to come along
since the invention of the printing press.” Alan Courtney, in the Miami Journal.

“Accuracy in Media is a non-profit, tax-exempt organization launched a few
years ago by a group of concerned citizens who had become increasingly fearful
that the content and presentation of the news by many sections of the media
were undermining the democratic process and threatening our freedom
AIM has not blinked at taking on some of the leading lights of the liberal
establishment. Perhaps its chief claim to fame has been its confrontations with
the Columbia Broadcasting System.”—Barron’s March 6,1972.

“AIM keeps us on our toes.”—Charles Seib, former Managing Editor, Washing­
ton Star-News, now ombudsman for the Washington Post, quoted in Wall Street
Journal, May 1, 1973.
“NBC has refused to buckle under pressure from a small but very active group
called Accuracy in Media
AIM’s most famous complaint probably had to do
with a 1972 NBC documentary called ‘Pensions: The Broken Promise.’
After
a long series of letters back and forth between AIM, the Commission and the
network, FCC’s staff decided that the program was biased
. This was the first
time the FCC had decided in favor of an AIM complaint, and the TV industry
was shocked.” TV Guide, February 9, 1974.

“I believe you must be the most thorough reader that The New York Times
has.
—Arthur Ochs Sulzberger, President and Publisher of The New York
Times, in a letter to AIM, January 29,1973.

“The aims of your organization are admirable and I appreciate them because
they will result in fewer of these occurrences in the future.”—Arthur “Red”
Motley, Chairman of the Board, Parade Magazine, commenting on error in Parade
pointed out by AIM, May 30, 1972.




42

(C)itizen-viewers may wish to keep in touch with organizations whose
purpose is to monitor the media. One such is Accuracy in Media, which publishes
an informative newsletter dealing with current instances of TV violations of
the Fairness Doctrine and other inaccuracies in the media.” Ernest W. Lefever
in TV and National Defense.
To those who see the menace in biased news, I suggest you subscribe to the AIM
newsletter, which keeps close tabs of the media.—Morris Ryskind in his syndi­
cated column.

Mr. A n d e rso n . Among the inaccuracies in Irvine’s Washington Post
ad was a glaring $17 million error in Irvine’s figures.
And I offer these as exhibits 15 and 16, and call attention to exhibit
i°.

Chairman P a tm a n . Without objection, they will be inserted.
[Exhibit 15, the letter of Reed J. Irvine to the Washington Post,
dated March 3,1975 and exhibit 16, the AIM report of November 1974,
with an attached excerpt from the Congressional Record of Febru­
ary 24, was submitted by Mr. Anderson for inclusion in the record:]
E x h ib it

15
A

ccuracy in

M e d ia , I n c .,

Washington, B.C., March 8, 1975.
E d it o r , T

he

W

a s h in g t o n

P ost,

Washington, B.C.
To t h e e d i t o r : In a statement published in the Washington Post on February
18, we reproduced a letter we had sent to a number of newspapers about the
International Development Bank and Chile. The point of the letter was that the
refusal of the IDB to approve substantial new loan commitments to Chile dur­
ing the Allende years did not account for the very serious financial problems
Chile encountered in that period. In the letter we pointed out that the Bank
had continued to disburse funds to Chile against loans previously committed.
We said that the amount disbursed during the Allende years was actually higher
than in the preceding three years—$79 million compared to $70 million.
This was based on information we had obtained from the IDB over the
telephone. We have since learned that there was an error in the total for the
three pre-Allende years, and that the correct disbursement figure was $87.8
million. It was not true, therefore, that disbursements were higher in the Al­
lende period. However, the point we wished to make remains valid. Chile’s
financial problems under Allende dwarfed the amount of credit obtainable from
international financial institutions, and the difference in disbursements of IDB
credits in the Allende years and the preceding Allende years could not have made
any significant contribution to either causing or solving those problems.
However, we regret the error, which is evidently the result of taking a
series of numbers over the phone rather than getting them in writing.
Sincerely yours,
R ee d J. I r v i n e .

E

x h ib it

16
A im

R eport,

Washington, B.C., November 1974.
A

nderson

E rr s A

g a in

Columnist Jack Anderson charged in his November 3 column that the U.S. had
“sought to bankrupt the Allende government by denying multinational bank
loans to Chile.” He suggested that the U.S. had succeeded in this, bringing
about Chile’s “financial strangulation” while it was ruled by the Marxist, Sal­
vador Allende.
This has been a popular theme on the left ever since the Chilean military
overthrew the Allende government in September 1973. AIM has previously
commented on such statements when published by The Washington Post and
broadcast over CBS. Anderson clothed his statement with seeming authority




43
by relating it to what he inaccurately described as “a secret congressional study.”
He wrote:
“The 54-page congressional study, prepared by the Library of Congress,
charges that the Inter-American Bank totally cut off new loans to the Allende
regime. Since Chile had come to depend on these loans, the policy amounted
to financial strangulation.”
Contrary to Jack Anderson’s statement, this study does not demonstrate that
the U.S. sought to bankrupt the Allende government or that it succeeded in
bringing about “financial strangulation” of Chile. Nor does this study demon­
strate that Chile’s economic well-being was dependent on loans from the InterAmerican Development Bank and that the country suffered severely when this
bank did not make new loan authorizations.
The fact is that loan disbursements by this bank to Chile never financed
more than a tiny fraction of Chile’s imports and they represented only a small
part of Chile’s external borrowing. Note that we are talking about disburse­
ments, actual payment of funds, not authorizations, a commitment to pay out
money at some future date. There is typically a lengthy lag between a loan
authorization by the Inter-American Development Bank and the actual dis­
bursement of the money. But it is the disbursement that pays for the imports.
What Jack Anderson failed to say was that loan disbursements by the InterAmerican Development Bank to Chile amounted to $79 million in 1971-73, the
Allende years, compared to only $70 million in the three preceding years. It is
quite true that loan authorizations fell off sharply during the Allende years, and
this will no doubt be reflected in lower disbursements in the post-Allende years.
W H A T THE STUDY SAID

The study Anderson referred to is titled “The Multilateral Development Banks
and the Suspension of Lending to Allende’s Chile.” It is by a young analyst
named Jonathan E. Sanford of the Congressional Research Service of the
Library of Congress. It was written at the request of a member of Congress,
and there is nothing secret about it.
Mr. Sanford examined the question of whether or not new loan authoriza­
tions to Allende’s Chile by the Inter-American Development Bank and the World
Bank were curtailed because of U.S. pressure. He found that the World Bank
had maintained a relatively consistent approach in its lending policy towards
Chile during the entire 1961-74 timespan. He found that the IDB had become
much more reluctant to authorize new loans to Chile under Allende than it
had been previously, and he believed that this may have reflected U.S. hostility
to Allende. Sanford’s study passes rather quickly over the important point that
under U.S. laws, our representatives on the boards of these multinational de­
velopment banks must oppose loans to countries which have confiscated U.S.
property without paying adequate compensation. Since Allende had carried out
such confiscations, it is hardly news that the U.S. was not supporting new loan
authorizations to Allende by these banks.
Sanford’s lengthy paper ended up with the conclusion that it was clear by
early 1972 that Chile was in serious economic trouble and that her “credit­
worthiness was debatable.” He made no effort to assess the economic impact
of disbursements of World Bank and IDB loans to Chile, much less conclude that
the policies of these institutions had resulted in Chile’s “financial strangulation.”
Indeed, Sanford pointed out that during the period when the World Bank
felt that Chile was not creditworthy, Allende succeeded in obtaining large new
loan authorizations, including $103 million in short-term credits from the
U.S.S.R. plus $446 million in long-term credits from communist countries. He
notes that Chilean foreign debt grew by a very large amount under Allende.
Statistics in his study show that Chile’s imports grew from $1 billion in 1970
to $1.6 billion in 1973. This hardly suggests strangulation.
Sanford reached this conclusion:
“ It is conceivable (though of course debatable) that a rapid and continued
increase in international lending and investment would have enabled the Allende
government to finance its policies of economic reorganization and social reform
without the necessity of resorting to the printing press.”
What this means is that if foreign lenders and investors had been willing to
ignore Allende’s confiscations of private property and defaults on Chile’s for­
eign debt and had been willing to not only maintain, but increase rapidly, their
loans and investments in Chile, they could have offset to a greater degree the
damage being done to Chilean production by Allende’s policies.
5 0 -3 6 5 O • 7 5 - 4




44
It was the policies of Allende that created hyper-inflation and exhausted
Chile’s foreign exchange reserves. It is false to suggest that these results were
produced because a single lender, the Inter-American Development Bank, re­
duced its authorizations of new loans to Chile. Jack Anderson owes his readers
a correction, but since we know from experience that he is slow to admit errors,
AIM has written a letter laying out the facts to 400 papers that carry his syn­
dicated column.
[F r o m th e C on g ression a l R e co rd , F e b ru a ry 24, 1 9 7 5 ]
A

M

e d ia

C o v e r -u

p

?

Mr. H e l m s . Mr. President, Accuracy in Media is an organization based in
Washington, D.C., which came into existence a few years ago to satisfy a des­
perate need for a responsible, private organization which would serve as a watch­
dog over the major mass media of America. These media proclaim themselves
constantly as “ watchdogs of government.” As one who has worked in the media
in the past, I am fully aware of how badly our so-called watchdogs of govern­
ment need to be watched themselves.
AIM has not confined itself to general grumbling about the sins of the media.
Instead, on an exceedingly modest budget it has undertaken to pinpoint par­
ticular abuses, inaccuracies, and imbalances in media operations, bring them to
public attention, and have them corrected—for AIM recognizes the crucial im­
portance of what could be called the “nervous system” of our society represented
by the media. If the “nervous system” is malfunctioning, the body politic may
make erroneous and damaging decisions.
Recently Accuracy in Media has scored a number of notable victories. It has
gotten the FCC finally to rule that an NBC documentary on private pension plans
was biased, and is fighting that ruling through the courts—with no encouragement
from the FCC, I might add—so that eventually the entire Fairness Doctrine may
be litigated in the Supreme Court. It has gotten the National News Council to
agree that a recent Jack Anderson column on the International Police Academy
was biased and inaccurate. It has analyzed the failure of mass media reporting
on the real issues at stake in the West Virginia textbook controversy. At the
moment it is engaged in an admirable campaign to bring the three major tele­
vision networks to adopt a code of ethics binding them to fairness and balance
in the reporting of news—against the most strenuous objections of the networks,
incidentally. In short, AIM’s activities are an inspiring example of what can be
done by individual citizens against such unresponsive corporate giants as CBS
and NBC.
Recently, Mr. President, AIM became concerned about another Jack Anderson
column, this time one asserting that the United States has “strangled” the Al­
lende government in Chile by cutting off multinational loans to it through the
Inter-American Development Bank, Reed J. Irvine, AIM’s board chairman,
analyzed that column in a letter and demonstrated its inaccuracy. To his amaze­
ment, however, the Washington Post, in which the Anderson column had ap­
peared, refused to print the letter, claiming that Anderson had effectively re­
butted AIM’s refutation in another letter. Anderson, however, that gallant foe of
secrecy and coverup, refused to permit AIM even to see his counterarguments,
and the Post declined to do anything further on this important issue. AIM was
therefore left with no recourse but to expend a substantial sum to purchase
an advertisement in the Post to bring its case to the public. I believe that story,
as set out in the advertisement of February 18, is worth bringing to the attention
of an even wider audience.
Mr. President, I ask unanimous consent that the advertisement entitled “The
Post-Anderson Cover-Up” be printed in the Record.
There being no objection, the material was ordered to be printed in the Record,
as follows:
[From the Washington Post, Feb. 18, 1975]
THE POST-ANDERSON COVER-UP

We at Accuracy in Media believe that journalists and newspapers have an
obligation to correct their errors. The Code of Ethics of the Society of Profes­
sional Journalists savs: “Mistakes should be corrected promptly and candidly.”
We hereby charge Jack Anderson and The Washington Post with failure to
observe this code.




45
THE ERROR AND THE CORRECTION

The Jack Anderson column of November 3, 1974, contained serious errors of
fact about the Inter-American Development Bank and Chile. AIM sent a letter
correcting these errors to over 400 newspapers, including The Washington Post.
Here is the letter, as printed in The Miami Herald :
MULTINATIONAL BAN K DIDN’T FOIL ALLENDE

In a recent column, Jack Anderson charged that the United States sought to
bankrupt the Allende government by denying multinational bank loans to Chile.
He suggested that the U.S. had succeeded in this, bringing about Chile’s “financial
strangulation.” This conclusion by Anderson was based on the assertion that
Chile has come to depend on loans from the Inter-American Development Bank,
and these were cut off.
Anderson is in error. Disbursements of Inter-Amerrican Development Bank
(IDB) loans to Chile were actually higher during the three years Allende was
in office than in the three preceding years. The bank disbursed $79 million in
Chile in 1971-73, compared to $70 million in 1968-70.
It is also incorrect that Chile was heavily dependent on these IDB loans. IDB
loan disbursements have never financed more than a fraction of Chile’s imports.
They were at their highest in 1972, when they amounted to $29 million. This was
enough to pay for about 2.5 per cent of Chile’s import bill. These loans have also
represented only a small part of Chile’s external borrowing.
Those who exaggerate the importance of the IDB loans to Chile and who falsely
state that denial of these loans to Chile was an important cause of Chile’s eco­
nomic deterioration under Allende are usually trying to transfer the blame for
Allende’s economic mismanagement to someone else.
Allende confiscated large amounts of foreign property without paying for it,
and he defaulted on most of Chile’s foreign debt. It is not surprising that many
lenders and investors were not eager to make new loans to Chile. However, Al­
lende did manage to finance a huge increase in Chile’s imports, partly by using
the money that should have gone for the payment of interest and principal on
the foreign debt. Imports rose from $1 billion in 1970 to $1.6 billion in 1973.
But even this was not enough to offset the inflationary pressures generated by
Allende’s fiscal and monetary policies and by the fall in domestic production.
The multinational banks could not very well signal their support of these harmful
policies by authorizing newTloans for Chile. In the Allende years they disbursed
against loans that had been authorized before Allende took office. The decline in
new loan authorization during the Allende regime will be reflected in a lower
level of disbursements in the period after Allende’s fall.
R

eed

J . I r v in e ,

Accuracy in Media, Inc., Washington, D.C.
NO CORRECTION IN THE WASHINGTON POST

When The Washington Post failed to print the above letter or make any correc­
tion, AIM took the matter up with the Chairman of the Board, Mrs. Katharine
Graham.
Mrs. Graham wrote: “The editors have received from Jack Anderson a pointby-point rebuttal of your charges that satisfies them that your charges are un­
founded. It would therefore be unfair to Mr. Anderson to print your letter. For
this reason they have decided, and I agree, not to print this particular letter.
THE COVER-UP

We immediately asked The Post for a copy of Jack Anderson’s “point-by-point
rebuttal.” To our utter astonishment. The Post refused to send us a copy or even
let us see i t ! At most, they would give us only a general description of the con­
tents orally.
We told the responsible editor, Mr. Philip Geyelin, that this was totally un­
acceptable. We could not respond to an attack on our credibility if we were not
permitted to even see the letter.
Mr. Geyelin would not budge, but he let two things slit):
(1)
He admitted that the Anderson reply had not satisfied him that our charges
were unfounded;




46
(2)
The author of the letter had been asked if it could be sent to AIM, and
he had refused to permit it.
The irony of this will not be lost on the readers of The Post. Jack Anderson had
incessantly criticized government for using the label “ Secret” to hide its blunders.
Look who is using the label now.
The Washington Post has been a powerful advocate of “openness” and “freedom
of information.” It did not ask permission of the U.S. Government to print the
Top Secret Pentagon Papers. It has attacked the President of the U.S. for claim­
ing the right of “executive privilege” to cover-up matters that ought to be open.
But it asks Anderson for permission to showT AIM a letter which obviously
Anderson himself should have had the decency to send to us. It honors his re­
fusal. Long live “journalistic privilege!”
A IM ’ s CHARGES STAND

Although we have not seen a copy of the alleged rebuttal, we know enough
about the contents to see that our charges have not been rebutted. Mr. Geyelin
admitted that he was not satisfied with the reply. He said it was a “close thing,”
and that he would not print the correspondence because it was not sufficient in­
terest to the readers.
And yet The Post did print a letter from a Congressman which repeated the
main error of the Anderson column!
In a letter to Mrs. Graham protesting the cover-up of Anderson’s errors by
The Post, we pointed out that this was a matter of considerable importance.
The charge that the U.S. and the Wolrd Bank and the IDB were largely respon­
sible for Chile’s economic difficulties during the Allende years has been a dominant
theme in leftwing propaganda. The Post has lent itself to the spreading of
misinformation. It has a moral obligatoin to its readers to publish the facts.
The fact is that Anderson did not refute our charges. (If he had done so, he
would no doubt have been delighted for us and all the world to see his refuta­
tion.) We showed that Chile never depended on the IDB loan disbursements to
pay for more than a very small percentage of its import bill. Anderson cannot
disprove that. We showed that the IDB actually disbursed more money to Chile
under Allende than in any previous three-year period. Anderson cannot refute
that. We showed that, under Allende, Chile’s imports rose to record highs, while
exports fell. We noted that the increased imports were paid for by borrowing
from abroad and by using money that normally would have been used to service
Chile’s debts and to pay dividends on foreign investments expropriated by
Allende. Anderson cannot rebut that.
We have reiterated to Mrs. Graham that there is not the slightest evidence
that the refusal of the Inter-American Development Bank to make substantial
new loan commitments to Allende had anything to do with the shortages of goods
and the severe inflation that characterized his administration. Anderson has
failed to substantiate the charge that the IDB was largely to blame for Chile’s
“financial strangulation.”
We have asked Mrs. Graham to give this information to the readers of The
Post, as other papers have done. We have had no response.
AIM thinks the matter is important. The principle of correcting errors is even
more important. We are therefore paying The Washington Post to correct Ander­
son’s error and to uncover The Post-Anderson cover-up.

Mr. A n d e rso n . It is noteworthy that his enormous goof was in the
field of economics; yet he is paid $37,000 a year by the taxpayers as an
economics expert.
On February 10, Irvine defended the Chilean torturers against
charges published in our column. The Chileans had offered us “ docu­
mentation,” wrote Irvine, to dispute the torture story. The truth is
that the Chileans refused to let us have documentation, which they
claimed to possess.
AIM’s response to our March 11 column, and I offer this as exhibit
17.
Chairman P a tm a n . That will be received for the record.




47
[The Jack Anderson column of March 11, 1975, entitled, “Irvine’s
AIM Is Way Off,” submitted for the record as exhibit 17, follows:]
E x h ib it
I r v in e ’s

AIM Is

17
W

ay

O ff

(By Jack Anderson with Les Whitten)
W a s h i n g t o n — Behind the bulwarks of the Federal Reserve Board, a $37,000a-year government economist has been directing a Watergate-style assault on the
press.
He is Reed Irvine, a strident, right-wing propagandist, who has used his fed­
eral post to gather ammunition for his anti-press campaign from unsuspecting
government researchers. He has also used Federal Reserve Board facilities, tele­
phones and stationery to prepare broadsides against the press.
His operation has certain similarities to that of the notorious White House
plumbers, whom former President Nixon assigned to hound the press. A spokes­
man denied, however, that the Federal Reserve Board had anything to do with
Irvine’s anti-press activities.
In this event, Irvine would appear to have violated the law. For the U.S.
Criminal Code bans any federal employee from using “federal property of any
kind for other than officially approved activities.’" It also bars the “use of . .
official information not made available to the general public (for) furthering
a private interest.”
If his superiors didn’t authorize the attacks upon the press, Irvine could be in
serious trouble on both counts. The statutory penalty for each is two years in
prison and a $10,000 fine.
The Federal Reserve official operates his anti-press campaign under the name
Accuracy in Media. He has attacked the New York Times, Washington Post,
and other assorted publications and TV documentaries. Ralph Nader and our­
selves are under fire from AIM.
In turn, the Irvine unit has defended not only the Big Banking complex but
also Big Oil, Brass Hats, right-wing dictatorships, ITT and the various govern­
ment agencies attendant upon them. While Richard Nixon lasted, AIM fre­
quently upheld his admiinstration against press criticism.
But AIM labors under even greater burdens than ideological bias and reverence
for sacred cows. The group has solicited and accepted financial contributions
from the beneficiaries of its favorable verdicts.
From its cluttered office, for example, AIM has sent appeals for funds to oil
companies and has received back secret oil contributions. In turn, Irvine has
blasted the New York Times, Newsweek and other publications for criticizing
oil company profits.
Irvine has also kept up a torrent of abuse against us, characterized by
misstatements, distortions and out-of-context quotations. Normally, we don’t
respond to irresponsible attacks, but Irvine’s charges reached such a volume that
we began to do some checking.
On Nov. 3, 1974, for instance, we quoted charges from a Library of Congress
report that the Inter-American Development Bank had helped to destroy the
Allende government in Chile by withholding loans.
Irvine, misusing his role as a Federal Reserve Official, obtained a copy of the
unpublished report from its author, Jonathan Sanford. Next, Irvine called
Sanford’s boss, Charles Gellner, to complain about the report. Gellner also had
no idea of Irvine’s AIM connection. “He said he was with the Federal Reserve
Board,” Gellner told us.
Accepting Irvine at his word, Gellner asked Irvine to reduce his objections
to writing. Irvine did this on Federal Reserve Board stationery. We have a
copy of the letter, clearly headed “Board of Governors of the Federal Reserve
System
Office Correspondence.”
Gellner, still thinking he was dealing with a government official, assigned
his staff to work on the Irvine letter. Not until Gellner belatedly discovered
Irvine’s AIM role, did he end his cooperation. Thereafter, Gellner refused to
furnish Irvine with more government information.




48
As Sanford recalls it, “We dealt with this guy as if it were official Fed policy.
We were victims of this thing.” Agreed Gellner : “Irvine was at least wearing two
hats.”
Meanwhile, Irvine used the material he had gotten under false colors to attack
our column. He took out a quarter-page ad in the Washington Post on Febru­
ary 18 to publicize the attack upon us.
Irvine’s misuse of his federal post turned out to be a factual disaster as well
as a possible criminal offense. The Inter-American Development Bank ran a brief
audit for us and found that our figures were accurate but Irvine’s figures were
off by $17 million. Irvine’s analysis of the Chilean situation was also so inept
that Sanford reacted by “laughing” F o o t n o t e . We have found it impossible to deal with Irvine. During one phone
conversation with our office, he asked no less than 10 times, with steadily height­
ening shrillness, whether we were tape-recording the phone conversation. We
were not. He has now refused to comment on our charges, except through a
laborious exchange of written interrogatories.

Mr. A n d e r s o n . AIM’s response to our March 11 column exposing
Irvine’s apparent law violations, was signed by Francis Wilson, the
figurehead president: “Irvine does his work for AIM nights and
weekends,” stated AIM. This is not true; he also works for AIM on the
taxpayers’ time.
AIM asserted, further, that Jonathan Sanford, the author of the
Library of Congress report, “knew Mr. Irvine to be an expert in” the
Chilean “ area and had previously sought and obtained an interview
with him.” This is a distortion; the interview was sought not to dis­
cuss the Chilean story but Sanford’s unrelated Ph. T). work.
And we offer this document as exhibit No. 18 and invite you to
compare it with exhibit No. 7.
Chairman P a t m a n . It will be inserted.
[Exhibit 18, Western Union Mailgram dated March 9,1975, signed
by Francis G. Wilson, president of Accuracy in Media, Inc., was
submitted for the record by Mr. Anderson:]
E

x h ib it

18

[Western Union Mailgram]
W
Jack A

a s h in g t o n ,

D.C., March 9, 1975.

nderson,

Washington, D.C.:
We are informed that you plan to publish a column charging AIM’s chairman,
Reed Irvine, with misuse of his Government position.
If our understanding of what you plan to say is correct, I suggest that you
evaluate your statements in the light of the following facts.
Irvine is Chief of the Developing Countries Section of the Division of Inter­
national Finance of the Federal Reserve Board in Washington. His official
responsibilities cover work on Latin America and the Inter-American Develop­
ment Bank. Acting in this capacity, on November 22, 1974, he submitted written
comments to the Congressional Research Service of the Library of Congress on
a study they had prepared dealing with loans to Chile by the Inter-American
Development Bank (IDB). The author of the study knew Mr. Irvine to be an
expert in this area and had previously sought and obtained an interview with
him. His supervisor, Mr. Charles Gellner, had asked Mr. Irvine to send written
comments on the paper. Mr. Gellner said this of Mr. Irvine’s memo: “We felt
as though it was a comment by a Federal Reserve official who was responsible,
and it seemed to be a comment by someone who was knowledgeable and should
be given serious consideration.”




49
The ORS report was subsequently revised, taking into account the comments
made by Irvine and others. It will soon be printed and it will carry this acknowl­
edgement : “The author wishes to thank several officials of the Treasury
Department, the IDB, the IBRD, and the Federal Reserve Board for their helpful
comments on earlier versions of this paper.” It was entirely appropriate for
Irvine to assist the CRS in this way in his official capacity. His agency and the
CRS recognize this.
On his own time, Mr. Irvine wrote a letter for AIM, which he signed, pointing
out errors in your column dealing with the CRS report. The report was not clas­
sified. None of the information in Irvine’s letter was classified. Irvine received no
compensation for writing the letter for AIM. No Government materials or facili­
ties were used in writing it. There was no violation of law or ethics. Irvine does
his work for AIM nights and weekends, which is his right. You were so informed
by him in a letter dated December 11,1974.
You were also informed by Mr. Van Evera on March 3, 1975, that Mr. Irvine
would reply to questions that you might submit in writing. You have been told
by letter and mailgram why Irvine does not wish to have any oral communica­
tion with you or your representatives. This relates to your propensity to take
statements out of context and to our belief that you tape conversations without
notifying other parties to the conversation.
We have informed editors of 400 papers that carry your column of these facts,
suggesting that they evaluate what you say in the light of this information. You
may wish to make a similar evaluation, avoiding any charge that you might
have acted maliciously or recklessly.
You should also know that we are thinking of raising in public the question
of whether or not it is a crime to point out errors made by Jack Anderson. How
does the kind of harassment you have carried out against Mr. Irvine fit into the
picture of Civil Liberties and the encouragement of free and robust debate?
We feel that this is a question that Civil Libertarians must ponder.
F r a n c i s G. W i l s o n ,
President, Accuracy in Media, Inc.

Mr. A n d e rso n . Anyone who sets himself up as a press critic, Mr.
Chairman, should have no reason to hide his financing. Yet Accuracy
in Media carefully conceals the sources of its money, because the list
of its contributors would betray a blatant conflict of interest. The Ir­
vine unit has solicited and accepted financial contributions from the
beneficiaries of its attacks.
It will take subpenas, Mr. Chairman, to get the full story. We can
prove only that AIM has sent the oil companies reprints of its attacks
upon those who write unfavorably about the oil industry and has
received back oil contributions.
And we offer a document showing this as exhibit No. 19.
Chairman P a tm a n . Without objection, it may be inserted here.
[Testimony resumes on page 56.]
[The attached document was submitted for the record by Mr. An­
derson as exhibit 19:]




50

E xhibit 19
[Samples of material sent to oil companies and presumably other business
soliciting funds.]

ACCURACY IN MEDIA, Inc.

ABRAHAM H. KALiSH
Dear Friend:
We would appreciate your
examining the enclosed material,
with the hope that you will then
give your support to our efforts
to help ensure the people’s right
to know the truth.
Sincerely.
"For evil to triumph, it is
only necessary that good me:
do nothing".

425 - 13th Street, N. W.
Washington, D. C. 20004
202-737-9357




Suite 1232

51

“IS T H E R E R E A L L Y A N E N E R G Y CRISIS?”
That question was posed in the lead o f a front page article
in
on January 14 ,19 7 4 . The author,
financial writer Edward Cowan, went on to ask: “ Or even a
genuine shortage? Is it all a contrivance of the oil industry?
Or just an honest but ghastly miscalculation by the
Government?

TeN Yr T e
h e ok i s
w
m

These questions are being asked, and there is confusion and
doubt in the public mind. Why?
The usual answer to a question o f this kind is that the
public has not been given all the facts. In the case o f the
energy crisis the news media in general appear to have done
a poor job o f alerting the public to the oncoming crisis.
Once the shortage became a matter o f concern to all, some
elements o f the media have actively spread doubt and
suspicion in the public mind, hinting or stating that the
crisis was a phoney perpetrated by the big oil companies.
Although discussions o f the coming energy crisis have
appeared in specialized publications such as
in recent years, relatively little o f this found its way
into the mass media. Until very recently the idea that we
might face a fuel shortage was generally poohpoohed.

Junl
ora

O&a
i G
l s

In 19 70, Lawrence Rocks and Richard Runyon, two
scientists from Long Island University, thought it would be
a good idea to alert the public to the problem by writing a
book on the subject for the general reader. They tried to
interest half a dozen o f the top publishers in the country in
the idea without success. They were told that their fears
could not be well-founded. One publisher said that if we
were faced with an energy crisis the government would have
told us. Lacking any word from on high, they simply were
not interested in looking at the facts marshalled by Rocks
and Runyon.
Rocks and Runyon finally found a publisher. Their book,

TeEeg Css (Crown, S2.95 in paperback) was finally
h nry ri,
i

published kite in 1972. It explained in simple, stark terms




why an energy shortage was looming ahead, what it would
mean for our economy and what we had to do to overcome
it.

TeT e o f Wichita Falls, Texas gave* this book a review
his
m
of 12C0 words, saying that it concerned the most profound
problem facing our civilization today, “ one that will soon
affect every man, woman and child in the United States.”

TeT e
h is
m

o f New York City also reviewed the book,
saying that it was “ generally harrowingly convincing.”
However, it devoted only 350 words to this book, and in
the same review it devoted 630 words to a discussion o f a
book by a young leftist who took the line that the laige oil
companies were deliberately “ orchestrating” fuel shortages
in order to raise prices.
Few other newspapers called the attention o f their readers
to
It appears not to have been reviewed
by the Washington, D.C. newspapers,
and
which would have been the best channels to bring it to
the attention o f government officials and members o f
Congress.

TeEeg Css
h nry ri.
i
Sr
t,
a

TePs Te
h ot h

Nor were the authors in great demand to appear on
television and radio talk shows. Only after the Arab oil
embargo made “ energy crisis” a household phrase did such
invitations begin to pour in.

TeN Yr T e
h e ok i s
w m

On December 23, 19 7 3 ,
said: “ Much
o f the skepticism about the energy shortage seemed to
come from the suddenness with which it began to dominate
official pronouncements and the news.”
The experience of Drs. Rocks and Runyon and the news
media treatment o f their book shows that awareness of the
energy shortage was not lacking among those who took the
trouble to examine the facts. Its “ suddenness” was at least
in part the result of the failure o f the news media to thrust
these unpleasant facts upon the public often enough and
prominently enough to bring about general awareness.

52
In addition to appearing in The New York Times Magazine,
the Hume article was sent out to papers subscribing to The
Times News Service-225 papers in the U.S. and 13 7
abroad.
HOW H U M E A N D S H E A R E R M IS L E D
The implication that the oil companies reaped exorbitant
profits in 19 73 and that this is evidence that they rigged the
oil shortage is common to both the Hume and Shearer
articles. It is probably the argument most frequently used
by the “ conspiracy theorists.” Brit Hume put it this way:
Exxon, the nation’s leading energy company, has seen
its profits rise more than 80 per cent in the third
quarter o f this year over the same period a year ago.
None o f the top five oil companies has reported third
quarter profit increases o f less than 50 per cent over
last year. Gulf, the third-leading oil producer, says its
profits are up 91 per cent from the third quarter of
last year.
There are some who believe the major oil companies
conspired to bring about these results.
Hume did mention that oil company profits had been
“ sagging” for several years. Shearer did not. The third
quarter o f 19 7 2 was a very bad quarter for oil company
profits. Tne third quarter o f 19 73 brought a sharp recovery,
partly because o f a partial unfreezing o f prices in the spring.
By comparing a poor quarter in a long string o f poor
quarters with one in which there was some catching up with
other industries, the critics gave the impression that the oil
company profits were exorbitant.
However, i f one looks at the rate o f return on equity, one
finds that the big gains for the oil industry in 1973 at best
brought the rate o f return up to the average for
manufacturing industry.
Moreover, the profit increases recorded by the oil
companies were actually lower than increases recorded by
some other corporations much in the public eye. For
example, the following table compares the profits o f certain
corporations in the first 9 months o f 19 73 with the same
period the previous year.

% increase
The New York Times
The Washington Post
American Broadcasting Co.
Top 1 1 Oil companies

in 19 73
(9 mos)
98.3
59.4
42.3
43.0

% return
on equity
yr. ending
16.6
16 .5
17 .1
11 .9

It appears that investors in the oil companies could have
found much easier ways o f increasing the return on their
investment. For one thing, they could have bought up The




New York Times, The Washington Post and A.B.C.
It is clearly highly misleading to read anything sinister into
the 19 73 rise in oil company profits. The energy companies
are going to have to attract huge amounts of capital if they
are to make the costly investments in new refineries, new
mines, new wells, pipelines, coal gasification plants, etc.
that will be needed if we are to have adequate energy in the
years to come. The flow o f needed capital to finance these
investments would be impeded if the profit prospects o f the
industry were considered to be poor. Last year’s reversal of
the downtrend in oil company profits is therefore favorable
from the point o f view o f attracting the investment needed
to Overcome the energy crisis,
^ j 1
*
* ^DID THE OIL COMPANIES TURN OFF
•

THE SPIGOT?
‘ T h e major oil companies were given a free hand. They
have used that hand to turn the oil spigot off and on at will
and manipulate and gouge the consumer.”
That statement by the governor o f Massachusetts was
published in The Times on January 1 7 ,19 7 4 . Thinking that
the governor had discovered some evidence that no one else
had spotted, AIM put in a call to him to learn the basis for
his charge. We were put in touch with an aide to the
governor, John Drew, who informed us that the statement
was based on information obtained from Time, Newsweek,
NBC News and figures published by the oil companies
themselves. He could not refer us to any single source, but
he promised to send a document that he had helped draft
that would make it all crystal clear.
AIM is looking forward to seeing the governor’s
documentation. In the meantime the closest approach to
documentation o f the charge that we have seen is The New
York Times article by Brit Hume. It provides an excellent
illustration o f the selective use o f data to support a case
that would not have held water if additional information
known to the author had been included or given greater
weight.
Let’s analyze Brit Hume’s case point by point.
1. Hume states corrcctly that in September 19 72
inventories o f home heating oil and crude oil were
dangerously low and that a serious fuel shortage seemed
inevitable as winter approached. He then said: “President
Nixon authorized the petroleum industry to import more
foreign crude ofl. It was the second time in five months he
had increased the allowable imports o f foreign oil, which
had been under tight government restriction since 1959.
Hume did not point out that most o f the September
increase was not an outright boost in import authorizations,
but only permission to borrow against 19 73 import quotas.

53
report on the same subject by a reporter for the Washington

CBS has revealed nothing whatsoever about its own
coverage o f the Hue massacres, and neither Sevareid
nor CBS has presented a single piece o f evidence to
show that the reporting o f the massacres was
anything but scanty. Indeed, Sevareid has said that it
would require considerable research to check his
impression that the coverage was heavy, and he has
said that he is unwilling to undertake that research.
This is tantamount to an admission that he criticized
Solzhenitsyn on network television without having
first checked the facts.

Post.
Fred Friendly, a former president o f CBS News, also
discussed this case in a January 10 speech in Washington.
Friendly, who has long been partial to one-sided TV
documentaries, thinks the NBC program on pensions was
great. He deplores the FCC decision, but he did say this:
Sirictly on professional standards, one can regret that
NBC News in its fairminded tradition did not choose
to use its own air to ventilate the issue once the
controversy arose. This is an issue o f continuing
importance, especially on Capitol Hill. NBC had
every justification to be proud o f its investigative
journalism. My criticism is that it got on its high
horse in its unwillingness, on its own terms, to devote
any additional prime time exposure to this continuing
controversy. The vent o f more air-time is the only
escape valve for a pressurized situation. NBC News
“ owned the story” of pensions. Pursuing it further
instead o f smothering it might have kept the FCC out
o f its newsroom, and NBC News out o f the
courtroom.

\\

A few weeks ago, we suddenly realized that we were in a
very precarious financial condition. We had funds on hand
to keep operating at current levels for only six more
months! So we outlined the situation and appealed to our
friends for funds. The returns have been much more
generous than we had even dared to hope. Including some
$8,000 we had been given previously in response to a
special appeal for funds for legal expenses, we have received
to date almost $50,000. What makes this especially
appreciated is that the total additional expense involved in
raising this sum was about one per cent o f the amount
received. This may well have established a world’s record,
and is especially welcome since it indicates to us the
appreciation o f our friends for what we are doing. We know
that we should send each donor a special letter indicating
something o f our gratitude for this wonderful response, but
we have a feeling that they would much prefer to have us
spend this extra time and effort towards the achievement of
our mutual goals. So we give you now our most heartfelt
thanks and the very best wishes for the New Year.

Mr. Friendly, we have news for you. That is exactly what
AIM and the FCC tried to tell NBC News.

SEVAREID vs. SOLZHENITSYN
Many AIM supporters have written to CBS about Eric
Sevareid’s inaccurate criticism o f Solzhenitsyn’s charge
that the Hue massacres were but lightly noted and little
protested in the West.
We know o f only one person who got a reply from Sevareid
himself. In response to Mr. Albert F. Gordon, Vice
President o f Kidder, Peabody & Co. o f New York, Sevareid
said: “ I thought the Hue massacre was heavily reported;
you apparently thought not. This is a matter of differing
impressions, hardly subject to precise measurement without
plowing through the whole o f the U.S. press and radio and
TV coverage in that period, which I do not propose to
undertake.”
Commenting on this in a letter published in Editor &
Publisher o f Jan. 5, 19 74, Reed J. Irvine o f AIM said:
We have presented to CBS and Eric Sevareid
considerable additional evidence demonstrating that
Solzhenitsyn was absolutely correct in his criticism o f
the scanty attention paid to the Hue massacres by the
news media in this country. We invited CBS to tell us
how heavily they covered the massacres in their
programs.




THANK YOU, FRIENDS OF
ACCURACY IN MEDIA

YOU CAN HELP
Become an AIM Monitor. If you hear an inaccurate
statement, send us the exact time, station and wording.

\ Also send complete clippings, as well as all the information
and references supporting your view.

%

We have found that gift subscriptions are one o f the best
methods for extending our influence. We offer a special rate
o f $5 which is retroactive. If you have already made a
donation to AIM, merely send us names and addresses o f
your friends.

ACCURACY IN MEDIA, INC. is a non-profit, educational
organization. Gifts and contributions are tax deductible.
Francis G. W
ilson, Pres. Abraham H. Kalish, Exec. Sec.

a sm

{or Accuracy

To err is
*hould never do it.
in the news
of a WashingtonThis is the stern th
b sed o rg a n a ^ n c A d Accuracy w
a
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thfi ad.
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Hanoi tnat the u .j . . .... checking
without ,.vi»rktn&
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Can ¥©y Trust
The Hew ¥©rk Times?
We rals* a question concerning th* report* of Anthony Lewis. on* of th* lop wrltsrs ot Th#
New Vork Tima*. Mr. Lewis' words *p*ak tor th*ms*W**.
1. "Haiphong. May 17—The Norn Vietnam*** say lh*y ar* daaring American mines tram th*
Haiphong harbor a* plan** drop tn*r-». and moving ships in and out. Indtpondmtn aovrees give tupport to fhaf slum " Lewi*. The Time* May 16. |Empr>s*i» added Thi* report a t * carried on th*
tront p*ga ot Tha Tim** «Y»n though Admint*lral>on official* bad informed th* pspar that it wa*
talM Their denial was included in th# i lc ' f j
2. ’’The only way to be certain (about the min*»we*ping) would b* atlandad inva*tigation or
observation ot th# harbor, which th* North Vietnam*** would not allow. So th* clawn cottid b* m*r*
bravado " t*wi». The
Ma» 20
. 3. "Th* con**n»i/» ot tsrsign ob**rv*ra h*ra (Hanoi) now i» that American m iiM f ha« an*c
tivsty cto**d North Vi*tnam port*." Lewi* Th» Tim**, May 23.
Fiv* day* altar th# disputed report was tmnt pag* rvew* in The Time*. Lewi* reported the con
s«n*u* that it was erroneous H* never identified the "independent source*' that were *upp«i«d
to have given it support
Why did this v*t*ran newsman report Hanoi a claim when Hanoi would not p*rnmt the inspec­
tion tnat he knew was essentia* to its verification’
A clue to the answ*r may b* found in thi* pas*ag* from Lewis' May 13 column:
r obfcgalion*. before
s professional association, schoat or

In form ation

p r ^ n . p rof w ' h' ute their stones » «
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5 - 13 :h Sirw t. N. W.
Washington, D. C . 20004
2 0 2 -7 3 7 -9 3 5 7




th* cru*ad* comes before his obligation to report the new* accurately end objectively.
This might esptain why L*wi« told th* readers of The Tim** on Aprif 19 that th* IM M Su ie *
had never offered total withdrawal ot troops from Vietnam in return for tne POWa, ' even in th*
secret talk*." The tact is that President Nixon revealed thu the United State* had oMervd to agree
to a deadlin* for withdrawal ot all American forces in *schange to* th* relea** ot atl prisoners of
war and a ceas*lir* in the secret talus in hi* te»evi**d address o» January 25. Th# preeident aald
North Vietnam had refected th* offer, continuing to msi*t that we overthrow th* South Vietnam#**
Government.''
Ardent advocacy which leads !o misleading repo-Mng should not be tolerated by any r*spon.
sible newspaper. No responsible paper should refus* to corroct promptly and promln*ntty serious
errors when they are pointed nut. T ie New Yori Tim** has refused to print our letten proteslinf
r* ---e say are numerous serious errors, such a* ihos* cited above, which Accuracy in Me4re has
«
pointsd o
> thi^i* n
#
If you thlnh you see reporting in The Times l h \ ii not obi*cti»* o. ____ ___ _______________...»
Editor and tell him so. Send us a copy ot your 4M||^|jMbnvemenl. We w»M send you infsrmetten
about serious errors in th* new* media
V *#

Suite 12 3 2

If your paper carrlea tt
would do your readers a service in calling this mes­
sage to their attention This statement wes originally
carried in The Afew York Timms of Jun* 30. 1372 and
ha* b»»n checked by The Time* for accuracy. It Is
brought to you a* a public service by Accuracy in
Media. Inc.. Warner Bldg.. We*hington. 0 . C 20004.

W M IMF/ SM¥ M M
HT
BO F

a c c u r a c y in media , inc .

A c c u r a c y in M e d ia , In c. (A I M ) w a s fo u n d e d to c o m b a t in a c c u ra c ie s an d d is to rte d re p o rtin g of th e n e w s b y
the m a jo r m e d ia . It has g a in e d n a tion a l attention b e c a u s e of its h ig h ly p ro fe s s io n a l a p p r o a c h a n d Its fe a r­
le s s n es s in ta c k lin g s u c h m e d ia g ia n ts as T h e N e w Y o rk T im e s . T h e W a s h in g to n P o s t a nd C B S , N B C a n d
A B C . W e think A IM d e s e rv e s y o u r s u p p o rt, but d o n ’t take o u r w o rd fo r it. R e a d th e s e u n s o lic ite d co m m e n ts
a b o u t Al?rl a n d its w o rk , then d e c id e fo r yo u rse lf. . . .

“ What this country needs is not a good five cent cigar, but a coast-to-coast awareness that Accuracy in
Media, Inc. is the greatest thing to come along since the invention of the printing press.” Alan Courtney,
in the M iami Journal.

“Accuracy in Media is a non-profit, tax-exempt organization launched a few years ago by a group of con­
cerned citizens who had become increasingly fearful that the content and presentation of the new* by many
sections of the media were undermining the democratic process and threatening our freedom. . . . AIM
has not blinked at taking on some of the leading lights of the liberal establishment. Perhaps its chief claim
to fame has been its confrontations with the Columbia Broadcasting System.”— B a rro n ’s, M arch 6, 1972.
“AIM keeps us on our toes.”— Charles Seib, M anaging Editor, W ashington S ta r-N e w s, quotad in W all Street
Journal, M ay 1,1973.

“ Nice going!”— William F. B uckley, J r., com m enting on an A IM critique of an article in National Review.
“ It gives me great pleasure and pride to know that an organization such as yours is keeping an eye on our
national media and addressing those obvious problems which occur. Keep up the good work!”— Rear
A dm iral Jerem iah A. Denton, Jr., U S N (re lu m e d P .O .W .).

“ I believe you must be the most thorough reader that The Mew York Times has. . . — Arth u r O chs S ulz­
berger, President and Publisher ot The N e w York Tim es, in a letter to A iM , Ja n u a ry 29, 1S73
“The aims of your organization are admirable and I appreciate them because they will result in fewer of
these occurrences in the future.”— Arthur “ R e d " M otley, Chairm an of the B oard, Parade M agazine, co m ­
m enting on error in Parade pointed out b y AIM , M ay 30, 1972.

“This is a singular, scholarly and valuable effort undertaken by private citizens to seek accurate, objective,
Ron-biased news reporting and commentary.”— Rep. Ph ilip Crane, co m m en ting on an A IM Report, C o n ­
gressional Record, A ugust 5, 1971, p. H 8099.
To those who se« the menace in biased news, I suggest you subscribe to the AIM newsletter, which keeps
close tabs on the; media.— M orrie Ryskind in his syndicated co lum n .

g Why not take Morrie Ryskind’s advice? Send a contribution to AIM to enable it to continue the good
a work it is doing. We will put you on the list for the AIM REPOST and the recording angel will put a
gold star by your name,

a
ta
a
5
5

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. . .

1232 Pennsylvania BIdg.
i *
! 425 13th Street. N.W.
Sut>scnb' to aim Peport . .
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J

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fT
educational organization. Your support is invited. Contributions
ars Ua-deduetibla.

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!

En clo sed ts S10 for a year's subscription to the AIM Report.
~ I also wish to support your efforts to improve- media accuracy.
E n c lo se c is my contribution ol S
(contributions are tai-deducti&le)




. . .

City

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55

56
Mr. A n d e rso n . AIM is also a staunch defender, not surprisingly,
of the bankers. The love affair between the bankers and the Fed, of
course, has been an open secret for years. In one of AIM’s publications,
it quotes boastfully from an article which reports that “Accuracy in
Media * * * intervened with CBS on behalf of the bankers.”
And we offer this as exhibit No. 20.
Chairman P a tm a n . Without objection, it will be inserted.
[The AIM Report of January 1974, submitted by Mr. Anderson as
exhibit 20, follows:]
EXHIBIT 20

"W'Yi
Published by

jJ£ M d
T i n r :ui

ACCURACY IN MEDIA, INC.

425 1 3 f h Street, N.W., Suite 1 2 3 2
Washington, D.C. 20004 • Telephone: 202-737-9 357

pjy wunin o - days, inis is no doubt one
reason the Council does not get many com­
plaints.)
The NNC responded promptly to AIM
on November 2, 1973. Your article was in­
accurate in saying that the decision came
after three months of correspondence. The
decision had two points:
(1 ). Since Mr. Sevareid’s statement was
labeled “ commentary” the NNC did not
consider it as falling under its purview.
(2 ). The Council thought that the pub­
lication by The New York Times of two
stories on a cold-blooded massacre of over
5000 innocent civilians could be considered
“ heavy” coverage. It thought that the con­
trast with the incomparably heavier cov­
erage of the My Lai massacre of 109 ci­
vilians was irrelevant since “ the My Lai
massacre involved the killing of defense­
less civilians by American soldiers, an act
unnrecedented in the history of our coun­
try.”

question was. which was correct.
Accuracy in Media informed Mr. Sevareid that we could find only two stories on
this terrible massacre in the New York
Times in 1968. There was no editorial com­
ment and no photos. By way of contrast,
we noted that The Times index for 1969
had no less than 3% pages of entries on
My Lai even though that story did not
break until the 11th month of the year.
We have presented to CBS and Eric Sevareid considerable additional evidence dem­
onstrating that Solzhenitsyn was absolutely
correct in his criticism of the scanty at­
tention paid to the Hue massacres by the
news media in this country. We invited
CBS to tell us how heavily they covered
the massacres in their news programs.
CBS has revealed nothing whatsoever
about its own coverage of the Hue mas­
sacres, and neither Sevareid nor CBS has
presented a single piece of evidence to

2-A—THE DETROIT NEWS—Tuesday, Jan. 8, 1974

tionai iNews Council apparently thinks that
reflects e;ood news judgment. Accuracy in
Media does not. Nor do we think that the
issue is “ petty,” the characterization ap­
plied to our complaint by Margaret Fisk.
Incidentally, your article did not men­
tion that the complaint on Newsweek’s arti­
cle, “ Slaughterhouse in Santiago,” was also
taken to the NNC by AIM. We have now
filed a total of five complaints with the
NNC to test them and to help them out by
giving them something to work on. We
could give them a lot more, since we have
not found the same lack of specific, ac­
tionable complaints that the NNC has en­
countered. We have taken up over 130
complaints in 1973. Our budget is about
one-tenth that of the NNC.
R eed J. Irv in e

(Irvine is chairman o f AIM, Washington,
D.C.)
January 5, 1974

. . . .

CBS gives bankers time to reply
By JOHN E. PETERSON
Newt W
ashington Buraiit

WASHINGTON — The CBS television
network, in an unprecedented gesture, volun­
tarily has agreed to correct errors made in a
1973 documentary series on American banking.
A CBS spokesman yesterday conceded the
series contained a number of “ fairly serious
factual errors” and said the network will allow
the American Bankers Association adequate
time on the CBS Morning News to “ set the
record straight.”
The five-part series, “ Report on Banking,”
was televised as a week-long feature of that
show last May.
The spokesman said the network’s decision to
correct the errors was the first time CBS had
agreed to make time available for corrections
without a specific order from a court or the
Federal Communications Commission.
The American Bankers Association had filed
a complaint with CBS News shortly after the




series was televised last spring. The bankers
charged the documentary was distorted in such
a way as to leave the public with the
impression that the Federal Reserve Board
allowed banks to lend money which they do not
have at exorbitantly high interest rates.
The bankers’ group specifically took excep­
tion to these “ glaring” errors:
• A statement that the Federal Reserve
“ allows banks to create money out of thin air.”
• A statement that the Federal Reserve
permits banks “ to lend out seven times the
value of their checking account funds and 9%
times the amount of money deposited in
savings accounts.”
• A statement that the bankers appoint
members of the Federal Reserve Board, which
has the power to regulate the banks, when in
fact members of the board are appointed by the
President.
At first, CBS rejected the bankers’ request

for time to correct the errors. CBS called the
errors “ relatively minor” and maintained that
efforts to correct them “ would be neither
roductive, nor intelligible, nor essential to the
asic understanding of the issues discussed.”
At that point, Accuracy in Media, Inc.
(AIM), a public interest group based in
Washington, intervened with CBS on the behalf
of the bankers. AIM pointed out that
statements contained in the documentary
impugning the integrity of the Federal Reserve
Board were "clearly subject to the personal
attack provisions of the FCC’s fairness
doctrine.”
Under the fairness doctrine, radio and
television stations and networks are required to
provide air time to individuals or organizations
who are attacked on their programs.
In agreeing to AIM’s demands that it provide
the bankers free time for correction of errors,
CBS insisted that the errors, while “ fairly
serious, do not in anyway distort the overall
picture of American banking contained in our
report.”

57
Mr. A n d e rso n . We have been told, but we have no proof, that AIM
has also received banking money. If this is true, the conflict would be
compounded by the fact that Irvine is a high official of the Federal
Reserve Board, which is supposed to regulate the banks. It is a pos­
sible issue that the subcommittee may wish to explore.
Standing behind Irvine is a board of directors composed in the main
of ex-military men, former ambassadors, rightest ideologues, retired
Red hunters and subsiding cold warriors who, estimable though they
may well be, are miscast as a press tribunal. Let me identify a few of
them.
David Martin, the Senate Internal Security staff member whom I
mentioned earlier, is a former Communist who has become a profes­
sional anti-Communist. He served for a while on the staff of the late
Senator Thomas Dodd, Democrat from Connecticut.
Lewis W. Walt, whom I also previously mentioned, is a retired
Marine Corps commandant and crony of Senator James Eastland,
Democrat from Mississippi.
Shelby Cullom Davis, the U.S. Ambassador to Switzerland, and a
former rich investment banker.
Elbridge Dubrow, a former Ambassador to Vietnam, and cochair­
man of the rightwing American Security Council’s Board of Strategy.
Wilson Lucom, an apologist for the Chile dictatorship.
Eugene Lyons, a Readers Digest editor who has been active in the
American Conservative Union board.
Murray Baron, a former AFL-CIO official, who worked with the
rightwing Committee for One Million.
Dr. Francis Wilson, AIM’s president, a rightwing academic, who
fought against lowering the voting age. He has also been active in
Young Americans for Freedom and the American Conservative Union.
And I would like to submit a memorandum on this subject as
exhibit 21.
Chairman P a tm a n . Without objection, it will be inserted into the
record at this point.
[Testimony resumes on p. 65.]
[The memorandum submitted by Mr. Anderson as exhibit 21,
follows:]







58
E x h i b i t 21

/,r?t.\j‘3 fcr Arnsrizjn Democracy, inc.

Z-jlii

I

•

1753 Ps.tr s/l-'srila A •/*., N.

V/. .

Wothinglon, D.

C. 2

GC03 • A nn Coda

20

2

•

March, 197b
H E N O R A N D U H

•0
1:

SUSTAINING ASSOCIATES, IAD

FROM:

BOB KASEN

SUBJECT:

A Report of the INSTITUTE FOR AMERICAN DET-30CRAGY
Concerning
ACCURACY IN MEDIA (AIM)
k25 - 13th St*, N. W,
Washington, D, C* 20C0U
(202) 783-9357
BACKGROUND

Organized in 195?, and launched officially in June, 1971, Accuracy
in Madia (AIM) is a non-profit., tax-exempt organization whose main
purpose is to act as a watchdog of ’Big1 Media, principally the
’
*
three major networks and major newspapers like The Washington Post
and The New York Tines»
In the June 18, 1973 issue of the Right Report edited by conserva­
tive publicist Lee Edwards, executive secretary Abraham H. Kalish,
says of AIM’s purpose: ,The news media have taken on the task of
!
watchdog of the government • But obviously, the news media also
needs a watchdog over them. We have no doubt that in any contest
where truth and falsehood grapple, truth will triumph; but especial­
ly in an electronic age, truth should be allowed to present its
case."
Kalish and AIM argue the media is biased toward the ’
liberal-left"
point of view, When charged with conservative bi*>s, he counters
with: "I make a special effort to find conservative error, but
we can’ make up cases if they don’ exist or if we don’t get any
t
t
ccrrolaints," (From a Wall Street Journal front page stoiy*
May 1, 1973).
One of Kalish’ favorite examples of his fair mindedness in process­
s
ing complaints is to point out AIM has persuaded the National Review
to correct four errors, including one against V/lllian R, Anderson,
when the Institute for American Democracy’ new president was still
s
a Tennessee Congressman in 1972,
AIK is a voluntary citizens organization operating with a staff of
30 volunteers (TIME magazine, 1972) and a budget of more than

$50, 000.

-more-

PROVIDING

KN O W LED G E

TO HELP SAFEGUARD DEMOCRACY

59
it was founded b 7 Reed J. Irvine, a former J^arine Corps Intelligence Officer ’
and
a long time ecor.onist with the Federal Reserve Board. Dr. Benjamin Ginsburg, a
fjr*:sr government employee, also helped found the organisation, serving briefly
as AIM * first executive secretary.
s
PERSONNEL

In fact, AIM i3 a one-man organization, achieving attention based on the efforts
of its executive secretary, Abraham H. Kalish, 6 8 , of Silver Spring, Md,
Xalish, a Harvard Classics Major, was a feature writer for the U. S. Information
Agency, 19U9-1958* From ’ £ 8 to 1971, when ha retired, Xalish was a professor
of corrssonicatioira for the Defense Intelligence Agency (DIA). DIA has been
thought of as tha Defense Department’ equivalent of the State Department’s
s
Central Intelligence Agency.
■While at DIA, Xalish*s job was to teach selected Pentagon officers "to write
clearly, concisely and accurately by making them prove or disprove various pub­
lished statements*" But the job was abolished, and Kali3 h challenged the deci­
sion, lost and decided to retire to live on his government pension while working
for AIM at an annual salary of $100.
Kalish has been active in Montgomery County politics, running and losing twice
in 1968 and 1970 for a seat on the Montgomery County School Board, He was a
candidate on the Conservative People’s Action Coraaittee ticket*
Dr. Francis G. Vftlson, professor of Government emeritus at the University of
Illinois, is AIM's president. Wilson, the author of several political science
book 3 , taught at the University of Illinois from 1939 to 19o7 and has led a
group called the Coranittee for Constitutional Integrity which is trying to per­
suade state legislatures not to lower the voting age.
AIM’s Vice President is Alphons J. Hackl, president of a Washington printing
company, Colortone Press,and Ox Acropolis Books* The latter, a publishing house,
whose titles include ITo Build A Nation," by President Park Chung Kse of Korea,
?
’v ' a Generation Gap?" by J. L, Robertson, vice chairman of the Federal Reserve
r: h t
Board, and ’The News Twisters," a study of the three major networks* treatment
’
of the 1 9 6 8 presidential election over a 6 0 -day period.
A Washington investment counselor, John K. McLean, serves AIM as Treasurer and
David S* Lichtenstein is General Counsel* Lichtenstein retired as a senior
attorney with the Federal Communications Commission and before that served with
the Federal Power Cor-mi33ion and the Department of Labor*
NATIONAL ADVISORY BOARD
Hurray Baron, labor relations consultant in New York City and former AFL-CIO of­
ficial; associated with Freedom House, New York City. Elbridge Dubrow, former
Ambassador to Vietnam* co-chairman, American Security Council Board of Strategy;
full tirae employee American Security Council, Institute of American Strategy*
Dr., Frank Trager, former professor of International Affairs, New York University;
au^ror, "Perspective on Vietnam," "The Nixon Doctrine: Asia"; director of
studies, National Strategy and Inforaation Center* Edgar Ansel Mowrer, former
foreign correspondent, now news editor, American Security Council newsletter.

5 0 -3 6 5 0 - 7 5 - 5




60
Lyons3 retired editor, Reader'3 Digest’ author, "Assignment in Utopiaj n
xrct.e biography of Herbert Hoover, and a book on the Soviet Union, "Worker's
F3. 2.di3 2 Lcsb," Dr. William Yar.de11 Elliott, Williams professor of Government,
r
e~eritu3} Harvard University, Elliott sailed on the National Planning Board
of the National SeCLiritv Council front 1953 to 1957, and is the author of
^Television’s Impact on American Culture," Morris L* Ernst, New York attorney
sir.ce 1915, worked in the field of civil liberties and labor relations. Author
of TThs First Freedom," Hear Admiral William C» Mott, retired, former assistant
*
’
chairr^n, Joint Chiefs of Staff and Judge Advocate General* Whan ha left the
IIa~.r Mott went to work as Executive Vica President of the Independent Telephone
,
Association, General Lewis W« Walt» retired* f omer commandant, U. S* Marine
Corpso Shelby Cullon Davis, U. &• Ambassador to Switzerland* J> L* Robertson,
r~
vice chairman, Federal Reserve Board* Harry B„ Gideonese, chairman, Board of
Directors, Freedom House* Lawrence Fertig, founder, Lawrence Fertig & Co*,
author, "Prosperity Through Freedom,” chairman, board of trustees, Foundation
for Economic Education. John S. Tilton, former president Suburban Press Foun­
dation, author, "Blind Behemoth,1 critical study of Press, 1972* 195U-1968,
1
owner, three weekly newspapers, suburbs, Twin Citis3, Minnesota. Now writes
weekly column for that group. Walter V * Seifert, professor, School of Journa­
/
lism, Ohio State University. Dr. Frederick Saits, president, Rockefeller
University, New York City.
ACTIVITIES
The National Broadcasting Company is appealing a ruling by the Federal Ccrcmunications Commission last Fall requiring the network to 1 alance” a 1972
’
b
documentary, "Pensions: The Broken Promise." The FCC ruled on a complaint
filed by AIM's Kalish who said the program gave a "grotesquely distorted picture"
of the nation’s private pension systems (TIMS magazine, Feb. U, 197U). Kalish
contended that the alleged failure to balance the show violated the Fairness
Doctrine by presenting only one side of a "controversial issue of public impor­
tance.1 (TIMS, Feb. l , 197U).
'
i
The FCC ruling has prompted the network to seek a reversal, in effect focusing
new light on the Fairness Doctrine, an important guarantor issues of public
importance will receive fair treatment* NBC is arguing the documentary does not
raise Fairness Doctrine questions, because the existence of some inadequate
pensions - the program’s subject - is a fact, not a "controversial" issue.

***
AIM helped persuade the American Broadcasting Co. to correct five factual errors
in a 1972 documentary, "Arms and Security: How Much is Enough?" Kalish said
he "welcomed" the corrections, but said that under the Fairness Doctrine ABC
still had the obligation to present opposing viewpoints. An ABC official said of
the errors: "There was one bad error, but the rest were trivial©" (Wall Street
Journal, May 1, 1973.)

H* *
r
AIM i’ a concession from the New York Times columnist, Anthony Lewis, in 1972,
von
after AIM placed an advertisement in the Times criticising Lewis for reporting




61
that :he North Vietnamese night 03 clearing mines from Haiphong Harbor as
quickly as U. 5. plants dropped them. Leuis said, “
Some of the AIM criticLcr. was justified, indead I filed a corrected piece from Hanoi immediately a . 2 or*. c l it was Quits wrong,!
rd
l

* -* -x
AIM spent a reported $U,2CQ for a series of advertisements in
Post. LY.cer the heading "AIM VS THE POST, Letters the Editor
Print,! The letters dealt with a variety of issues including
i
tion Cca-^aign Law Violations ar.d Aianesty. The Post responded
torial arguing it had no obligation to print the many letters
during a three-week period*

the Washington
••• Refused to
TV bias, Elec­
with an edi­
AIM had submitted

##*
When the Columbia Broadcasting System offered a series of programs, "Report on
BarJdr.g,1 in Hay, 1973, AIM complained to CBS the program contained a series
1
of errors, saying alleged false statements could lead to a charge the network
had violated the Fairness Doctrine. At first, CBS rejected the complaint
(AH 1 R2PQRT, Dec* 1973) but later offered the American Banking Association time
on a C3o Homing News show to respond#

***
AHi was turned down by the FCC in mid-173 in another complaint involving the
Fairness Doctrine. AIM complained that a WIBC New York radio interview with
Alger Hiss in Dec 0 13, 1972, dealt with a controversial issue of public impor­
tance in a ,one-sided manner."
r

***
In the first half of 1973, AIM lodged (AIM REPORT, June, 1973) over 60 complaints.
The New York Times led with 18 complaints filed against it, the Washington ?03t
was ne:rt with nine. Four complaints of inaccuracy were filed against the
Wash in gton Star-News3 and AH! said complaints were also filed against the New
York Daily NewsV ‘he Daily Oklahoman and the Orlando Sentinel Star.
T
In ?ths world of TV," AIM filed four complaints against NBC, and one against
r
V2JBC radio, New York, the Hiss interview. Also AIM questioned two CBS and one
A3C program in the same period. Public television wa3 complained about four
tiines and AIM appealed adverse FCC rulings on complaints filed earlier#
In the magazine field, AIM in the first half of 1973, complained about TV Guide,
Playboy, the Columbia and St. Louis Journalism Reviews.

***
According to AIM REPORT (June 1973) AIM has compiled a list of the leading syn­
dicated columnists carried by some 1,000 daily newspapers in the United States.
AIM says it has started writing to these columnists when it spots an error and
goes on to urge its supporters to ‘
'keep this capability in mind.”




62
brought a Rand Corporation consultant to V/ashington in 1973 to participate
in a televised discussion of vhsthsr a blood babh would follow a Communist
ti::20 V 3 r of V i e t nan, Kalish told Martin Agronsky, host of WETA~T7‘ “Evening
s
Edition, "that tha consultant vas needed to present "anti-blocdbath” Tiows
(W . d Street Jour-nall, May 1, r??3) of othsr participants*” Agronsky said
la cer the consul cant, Mrs* Howard Nutt., was a welcome addition, but denied that
without her the program would i - v been one-sided.
'ae

***
FINANCES
AIM started small. In the year ended April 30, 1972, the first year AIM had tax
exempt status, contributions totaled $6 ,1412, expenses $5 ,0 k7 *
It’s tough to find out about AIM despite its status and the requirement to file
specifics with the IRS* A recent inquiry (Sept. 1973) found no precise infor­
mation on file* However* sores general figures are public*
Of a reported $50,000 income in 1972, $11,000 cm e from foundations* Kalish in­
dicates that money comes from 6 5 trade associations, professional groups, labor
unions, women's clubs, business firms which contributed up to $ 1 0 0 each* The
rest, Kalish says, cones from up to 700 individuals, sums up to $5,000*
when the University of Missouri School of Journalism tried to find out the source
of AIM 1s support, the following response from the Government: "Under the In­
ternal Revenue Code subsection 6l0U, names and addresses of contributors are
not authorized for public disclosure, and we could not therefore make the infor­
mation available to you*M The request was made under the Freedom of Information
Act.
Kalish has said he expected 1973 to produce $65,000 income and he was looking
forward to $100,000 in 197U*
AIN publishes a regular monthly newsletter, AIM REPORT, and promotional material
financed by $10 annual subscriptions, plus donations averaging $15 each* Kalish
works full time for AIM. His salary is $100 a year* Clerical work is handled
on a contract basis, as needed.
IN THE RECORD

AIK’s activities have been entered in the Congressional Record by the following
Representatives i John Ashbrook (R-Ohio), Clarence Brown (R-Ohio), Joel Broyhill
(R-7a.), Philip Crane (R-Hl*), F. Edward Hebert (D-La*), G. V. Montgomery
{R-Kiss.), William Springer (R-Ill*)* Each of these men have been rated 100
percent on the American Security Council*s National Security Index*




63
COISSJITS

•J S 3ary, a 'irnite House Correspondent for Coplay ifaws Service, writing in
32--J
Se--ju-.ar Quarterly (Dec, 1972) said of AIM: ..."seme of criticisrj.3 do sssra to
cc.na across as 'weak and perhaps eveji as -protests against change and the in­
trusion. of new ideas., Cary go53 on to argue^ "there is ample evidence the
f
American press has long been too satisfied, too ready to charge foul and
violation of the First Amendment whenever anyone dares question its perogativss,i.there is more one sided reporting than ever before...."

Cary says there is need for "compotent, highly informed, running critique
of the madia product." 3ut he questions whether AIM is "adequate for that
role,"
Seminar» in an afterword to the Cary piece, questions if "it is really desir­
able to rsnzsle the watchdogs (like AIM)? Do not they, in their own way, pro­
vide a necessary affliction of the comfortable? ... better the democratic
way, with every man free to speak out, rather than an elite critical oligarchy
or an autocratic government censor."

**
Responding to a complaint by Kalish, CBS commentator Eric Sevaraid said,
Zalish was interested in challenging commentary he considered" ideologically
•unsold*" (Wall Street Journal, May 1, 1973)

*
Kalish counters the bias argument by pointing to AIM’ success in getting the
s
National Review to correct errors, once about William R* Anderson, now presi­
dent o f the Institute for American Democracy, then a Congressman from
Tennessee.

*#*
Charles Seib, managing editor of the Washington Star-News says, "Kalish is for
accuracy as long as it is his kind of accuracy.
He obviously represents a
right-wing point of view."

* ■*
*
lee Edwards3 editor of the Right Report, and author of "Ronald Reagan: A Poli­
tical Biography" has said of Kalishj " i is a bulldog," and '
re
’
worthy of support."
Edwards made the coranent to a political action conference sponsored by the
African Consevative Union and the Young Americans for Freedom in Washington
in late January, 197k*

** *
Richard Gottschald, news director of WDIO-TV in Duluth, Kirm., writing in RTNDA
Cormrdcator a Jan. 1973, said: **A-I-M should be exposed for what it is i essential­
ly a conservative group established to play judge and jury, and to imply to the
public that the media are giving Americans an intentionally distorted view.of
or-r governments acto and policies."







/ 1
1
111 14th Street, N.VV.

Chairman o f the Board

Washington, D.C. 20005

(202) 783-4407

Dear
Thank you for inquiring about Accuracy in Media. AIM was started
in 1969 by a few public-spirited citizens in the Washington area
who were deeply concerned by distorted and inaccurate reporting.
After studying possible ways of dealing with this problem, they
reached the conclusion that they could achieve the best results
by simply demanding that the journalists honor their professed
dedication to accuracy and objectivity. They saw, however, that
this had to be done by exposing specific violations of these
principles, not by generalized exhortation.
Accordingly, AIM set out to investigate complaints of inaccurate
and distorted reporting. It accepts complaints from anyone. If
a complaint is valid, AIM seeks a correction. If those responsible
refuse to make an appropriate correction, we try to publicize
the complaint. There are several ways of doing this. We have
been effective, and we have gotten the attention of the media.
The editor of one Washington paper was quoted in a Wall Street
Journal story about AIM as saying, "AIM keeps us on our toes."
The editor of the Washington Post has said that our letters of
complaint drive them up the walls. When the journalists know that
they may be called to account for bad reporting, they try a little
harder to avoid errors. An editor of one of the country's largest
magazines has told us that this has been our greatest achievement.
Who supports AIM? That is the question we are most frequently
asked. The answer is that we are supported bv people like you
who are deeply concerned about the influence of the news media
and who- respect the effectiveness of the work AIM is doing to
keep the media honest. No big foundations bankroll AIM. The
only person who depends on AIM for a living is our steno, which
means that we run a very lean operation. But we do need money
for office space, printing, legal expenses, etc. We publish a
fascinating monthly newsletter, the AIM Report, which goes to
several thousand people throughout the country. If you send us
a contribution of at least $10, tax-deductible, we will send you
the AIM Report. But what is more, we will be able to work more
effectively to give you accurate and objective reporting. Please help.
Sincerely yours,
J. R. Van Evera
Executive Secretary

65
Mr. A n d e rso n . Believe it or not, Mr. Chairman, Accuracy in Media
is recognized by the Internal Revenue Service as a nonprofit organiza­
tion. This enables contributors to deduct their donations to AIM from
their taxes. To this extent, AIM is indirectly subsidized by the
taxpayers.
AIM’s nonprofit status is also recognized by the Post Office, which
makes AIM eligible for reduced postage rates. Significantly, the Post
Office turned down AIM’s application twice. Not until the IRS
granted AIM its nonprofit status did the Post Office reluctantly go
along.
And I cite another exhibit and offer it as exhibt 21a.
Chairman P a tm a n . Without objection, it may be inserted here.
[The letter of the U.S. Postal Service dated Oct. 15, 1971, re­
garding the mail application of Accuracy in Media, Inc., submitted by
Mr. Anderson as exhibit 21a, follows:]
E x h i b i t 21 a
U .S . P o s t a l S e r v i c e ,

Washington, D.G., October 15,1971.

Our ref.: MCO :ie.
Subject: Yours of September 13, I :AS :MR:JEC :w—appeal of denial to mail at
special third-class rates—Accuracy in Media, Inc.
T o : Postmaster, Washington, D.C.
We have reviewed the application and related data submitted by Accuracy in
Media, Inc., to support their appeal of your denial of their application to mail at
the special bulk third-class rates.
Based on the file submitted, we concur in your ruling that insufficient evidence
T
has been submitted to establish that the organization qualifies within the mean­
ing of any of the eight categories or organizations named in Section 134.51, P.S.M.
to mail at the special rates.
Your file is returned.
D a r w i n F. S h a r p ,
Manager, Mail Classification Division,
Finance Department.
Enclosure.
O c t o b e r 22, 1971.
I :AS :M R:JEC :if.
Application Form 3624 (Appeal).
Re Accuracy in Media, Inc., Warner Building, Washington, D.C.
Enclosed are application and supporting papers to mail at the special bulk
third-class rates, which was denied and then appealed by this organization.
After a review of these files, the U.S. Postal Service is still of the opinion that
this organization does not qualify and denies the application to mail at the special
bulk third-class rates.
O c t o b e r 26, 1976.
A

ccu racy in

M

e d ia ,

I n c .,

Warner Building,
Washington, D.C.
G e n t l e m e n : Based on information supplied, and assuming your operations will
be as stated in your application for recognition of exemption, we have determined
you are exempt from Federal income tax under section 501(c) (3) of the Internal
Revenue Code.
We have further determined you can reasonably be expected to be an organiza­
tion of the type described in section 509(a) (2). Accordingly, for your first two
tax years, you will be treated as an organization which is not a private foundation.
At the end of your first two tax years, however, you must establish with
the Internal Revenue Service that for such two years you were in fact an
organization of the type described in section 509(a)(2). If you establish this
fact with the Service, you will be classified as a section 509(a) (2) organization
for all purposes beginning with the first day of your third tax year and you




66
must normally meet the requirements of section 509(a) (2) thereafter. If, how­
ever, you do not meet the requirements of section 509(a) (2) for your first two
tax years, you will be classified as a private foundation as of the first day of
your third tax year. Furthermore, you will be treated as a private foundation as of
the first day of your first tax year for purposes of sections 507(a) and 4940.
Grantors and donors may rely on the determination that you are not a private
foundation for your first two tax years, unless notice that you will no longer be
treated as a section 509(a) (2) organization is published in the Internal Revenue
Bulletin. However, a grantor or donor may not rely on such determination if he
was in part responsible for, or was aware of, the act or failure to act that resulted
in your loss of section 509(a) (2) status, or acquired knowledge that the Internal
Revenue Service had given notice that you would be removed from classification
as a section 509(a) (2) organization.
You are not liable for social security (FICA) taxes unless you file a waiver
of exemption certifications as provided in the Federal Insurance Contributions
Act. You are not liable for the taxes imposed under the Federal Unemployment
Tax Act (FPTA).
Organizations that are not private foundations are not subject to the excise
taxes under Chapter 42 of the Code. However, you are not automatically exempt
from other Federal excise taxes.
Donors may deduct contributions to you as provided in section 170 of the
Code. Bequests, legacies, devises, transfers, or gifts to you or for your use are
deductible under sections 2055, 2106, and 2522 of the Code.
If your sources of support, or your purposes, characters, or method of operation
is changed, you must let us know so we can consider the effects of the change on
your status. Also, you must inform us of all changes in your name or address.
If your gross receipts each year are normally more than $5,000, you are
required to file Form 990, Return of Organization Exempt From Income Tax, by
the 15th day of the fifth month after the end of your annual accounting period. The
law imposes a penalty of $10 a day, up to a maximum of $5,000, for failure to file
a return on time.
You are not required to file Federal income tax returns unless you are subject
to the tax on unrelated business income under section 511 of the Code. If you are
subject to this tax, you must file an income tax return on Form 990-T. In this
letter we are not determining whether any of your present or proposed activities
are unrelated trade or business as defined in section 513 of the Code.
You need an employer identification number even if you have no employees. If
an employer identification number was not entered on your application, a number
will be assigned to you and you will be advised of it. Please use that number on
all returns you file and in all correspondence with the Internal Revenue Service.
(See paragraph below.)
Please keep this determination letter in your permanent records.
Sincerely yours,
W i l l i a m D. W a t e r s ,
Acting District Director.
This determination is also applicable to your unincorporated predecessor
organization.

Mr. A n d e rso n . Thus, AIM is permitted to solicit tax deductible
dollars as an “ educational” enterprise and uses its special postal privi­
leges to attack the press.
Many newspapers treat Accuracy in Media as if it were a legitimate
press watchdog, rather than a propaganda operation for the special
interests. Other newspapers, which have taken a closer look at AIM,
have pegged it for what it is. L. S. Hembree, editor of the Anderson,
S.C., Independent, has put it this way:
“ Frankly, I don’t appreciate being lectured by any organization ap­
parently afflicted by paranoia symptoms usually associated with the
Ku Klux Klan syndrome.”
And I offer this as exhibit No. 22.
Chairman P a tm a n . Without objection, it will be inserted.




67
[The following letters from the editors of the Anderson (S.C.)
Independent and the Bay City (Mich.) Times were submitted for the
record by Mr. Anderson as exhibit 22: J
E x h ib it 22
The A

nderson

I ndependent,
T h e D a il y M a il ,

Anderson, 8.C., November IS, 1914.
M r . R eed J . I r v i n e ,

Accuracy In Media, Inc.,
Washington, D.C.
D e a r S i r : My reaction to your letter and propaganda of Oct. 3 1 ,1 9 7 4 ( received
Nov. 1 3 , 1 9 7 4 ) in regard to Mr. Marshall Field’s earth-shattering announcement
his papers plan to do what an overwhelming number of newspapers—including
these—already have been doing for years further undermines my trust in the
credibility and motivations of Accuracy In Media, Inc.
I read of Mr. Field’s great decision in E&P when it was published. You call it a
“newsworthy move that has not been generally reported in the press.” Why should
it be “newsworthy” when it has been generally policy of most of the press?
In re Mr. Jack Anderson and your running controversy with him:
You wrote Mr. Anderson: “As we have explained to you many times, we have
no intention of publicizing the names of our contributors. An important reason for
this is that there are unethical journalists who would not hesitate to harass sup­
porters of AIM in the hope that they might be intimidated and withdraw their
support.”
Frankly, I don’t appreciate being lectured by any organization apparently
affiliated by paranoia symptoms usually associated with the Ku Klux Klan
syndrome.
L. S. H e m b r e e , Editor.
T

he

B

ay

C it y T

im e s ,

Bay City, Mich., February 18, 1975.

Mr. J a c k A n d e r s o n ,
c/o United Features Syndicate,
New York, N.Y.
D e a r J a c k A n d e r s o n : Curiosity . .
and little else
leads me to seek
an explanation from you on why Reed Irvine has made a campaign out of attack­
ing you through Accuracy in Media, Inc.
The only mail I ever get from AIM is critical of you. Even a backwoodsy editor
knows that a lot of other columnists write a lot of things open to accuracy chal­
lenges. And yet, the AIM bulletins against your column continue to bomb away.
On an occasion or two I’ve used some of their charges in our Forum, right beside
your column, but now I’m convinced Irvine has a vendetta going
and I just
wonder why.
If you can enlighten me, I’d be appreciative. I have the greatest respect for
your integrity and the job you have done and continue to do in the interest of an
informed people.
I look forward to meeting you when you appear before the Town Hall crowd
here next fall.
Warm regards,
T o m E. F a l l o n .

Mr. A n d e rso n . Julius Duscha, the impartial critic who heads the
Washington Journalism Center, had this to say about the Irvine oper­
ation: “AIM is * * * a pressure group * * * the threat that AIM
poses to freedom of the press will be diminished in direct proportion to
the extent to which the media exposes its true aims.”
And I offer that as exhibit No. 23.
Chairman P a tm a n . Without objection, it may be inserted.




68
[The article, “Right-Wing Watchdog”, by Julius Duscha, submitted
by Mr. Anderson for the record as exhibit 23, follows:]
E x h ib it
R ig h t -W in g
A

23

W atchdog

TAX-EXEMPT, CONSERVATIVE GROUP CALLED A IM
MEDIA

KEEPS NEEDLING THE NATION’ S

(By Julius Duscha1)
From a small office overlooking Pennsylvania Avenue three blocks east of
the White House, Abraham H. Kalish, a sixty-eight-year-old retired Defense
Intelligence School communications professor and former U.S. Information
Agency writer, publishes a monthly newsletter criticizing the media and fires
off letters to editors and broadcasters taking them to task for news coverage
he deems “inaccurate.” Kalish is executive secretary of Accuracy in Media, a
non-profit, tax-exempt organization formed in 1969, which calls itself “America’s
Media Watchdog
protecting the right of the people to accurate, unbiased
news coverage.”
Kalish and Reed J. Irvine, a Federal Reserve Board economist, who founded
AIM and is chairman of its board, pepper The Washington Post, The New York
Times, and the television networks as well as other newspapers and magazines
and some broadcasting stations with complaints about their news coverage.
When their letters to editors are not published, they buy advertising space to
publish them.
AIM’s most notable success has been a complaint to the Federal Communi­
cations Commission alleging bias and unfairness in an award-winning 1972
NBC documentary, “Pensions: The Broken Promise.” Last fall the FCC found
that the program, which criticized the shortcomings of some pension systems,
did not present a balanced view of pension plans. NBC has appealed the decision
to the U.S. Court of Appeals in Washington. The decision marks the first time
the FCC’s controversial “fairness doctrine” has been applied to documentaries.
As media critic Ben H. Bagdikian has written in the Columbia Journalism
Review: “. . the judgment threatens to force broadcast journalism to retreat
even further from investigating the most urgent problems of society.”
Other major victories claimed by AIM include correction of errors in an
ABC documentary on defense spending; agreement by CBS to set the record
straight on errors in some broadcasts on banking, and the exposure of, in AIM’s
words, “misleading and biased media coverage of [the] December 1972 bombing
of Hanoi,” and “how elements of the news media had assisted the Communists
in using American POW’s for propaganda purposes during the war.”
Headlines from the AIM Report, the group’s newsletter, indicate some of its
other recent concerns: New York Times readers deceived on defoliation report;
press ignores George Meany’s criticism of detente; Erik Severeid vs. Alexander
Solzhenitsyn of news media coverage of the Hue massacres of 1968; press cover­
age of Solzhenitsyn’s letter to Aftenposten; U.S. media mum on Brezhnev visit
with U.S. Communist Party bosses; Jane’s fighting ships declares Soviet Navy
most powerful in world, but New York Times keeps this news from its readers.
Although AIM devotes a considerable amount of attention to defense and
foreign-policy issues, it has also given a good deal of space in its recent news­
letters to such other issues as coverage of the energy crisis (which it found
biased against the oil companies) ; a Newsweek error grossly overstating the
number of persons killed during the Chilean coup last fall and which was
pointed out by both The New York Times and The Wall Street Journal before
AIM’s critique appeared; and errors in the reporting on the scale of a massacre
in Mozambique.
Both Irvine and Kalish are avowed conservatives who see the American media
as staffed w
’ith liberal reporters and editors whose news judgment reflects their
political views.
1
J u liu s D u sch a is d ir e c t o r o f th e W a s h in g to n J o u rn a lism C enter. H e is th e a u th o r o f
t w o b ook s : “ A rm s, M on ey an d P o lit ic s ” and “ T a x p a y e r s ’ H a y r id e .”




69
Irvine is a fifty-one-year-old graduate of University of Utah who went to Ox­
ford as a Fulbright scholar and has worked for the last twenty-two years for the
Federal Reserve in Washington where he is now an adviser to the Division of In­
ternational Finance. Kalish, who has been AIM’s executive secretary for three
years, is a Harvard graduate who spent eighteen years as a foreign language
book cataloger in the Boston Public Library before coming to Washington to
work first for the US IA for ten years and then for the Defense Intelligence
School for thirteen years.
The two men met at a Washington luncheon group founded during the Korean
War by the late Arthur G. McDowell, who was education director of the Up­
holsterers Union. The purpose J>f the group, called the Council against Com­
munist Aggression and Alexis de Tocqueville Society, was to provide support
for the American effort in Korea. The group still meets monthly in the Empress
restaurant in downtown Washington. The thirty to one hundred persons who
show up for the luncheons include representatives from trade unions,- business
groups, the Government, and universities. The common bond of the loosely
organized group is a militant anti-Communism, and speakers at the luncheons
have included Russian refugees and many persons who have spent their lives
studying Communism or made anti-Communism almost a career.
Kalish says that AIM grew out of the McDowell luncheon group, but Irvine
contends that while he often discussed the idea with other members of the
McDowell group he also talked about it at informal meetings with other groups.
Whatever the precise origins of AIM, its primary interests have been foreignpolicy and defense issues, with emphasis on the need for continuing high defense
expenditures and general opposition to efforts by the United States to reach
agreements with either the Soviet Union or China.
AIM’s other officers and the membership of its National Advisory Board
further indicate its conservative, anti-Communist orientation. Francis G. Wil­
son, AIM’s president, is a retired University of Illinois professor of political
science who has been active in Young Americans for Freedom and the American
Conservative Union. Alphons J. Hackl, AIM’s vice president, is a Washington
publisher who put out Edith Efron’s “The News Twisters” and South Korean
President Park Chung Hee’s “To Build a Nation.”
Members of AIM’s advisory board include General Lewis W. Walt, a retired
Marine Corps commandant; William C. Mott, a retired Rear Admiral; Eugene
Lyons, a Reader’s Digest editor who has been an adviser to both YAF and
ACU; Elbridge Dubrow, a U.S. Ambassador to South Vietnam during the Eisen­
hower Administration and a member of the American Security Council’s Na­
tional Advisory Board; J. L. Robertson, retired vice chairman of the Federal
Reserve; Morris Ernst, the civil-libertarian New York lawyer; and William Y.
Elliott, Harvard professor.
Both Kalish and Irvine refuse to discuss AIM’s financing except in the most
general terms. They say that in the last year or two AIM has been spending
about $3,000 a month. Kalish estimates, “We may have spent $35,000 to $40,000
last year.” Most of the money goes for printing and mailing AIM’s newsletter,
which has a circulation of 5500, only half of which is paid. Kalish reported that
an appeal for funds last fall brought in $60,000, which is being used to pay
this year’s expenses. “I would doubt,” Irvine said, “that AIM’s total expenditures
since it started have amounted to $100,000.”
Both Kalish and Irvine give the usual explanation of keeping their funding
secret: that people would not donate money if their names were made public.
Kalish did mention that one donor gave AIM $15,000 last year, another donor
$5,000, and that ten contributors gave $1,000 or more. An examination of
AIM’s tax returns, part of which are public because it is a non-profit, tax-exempt
organization, indicates, however, that both Kalish and Irvine may be under­
stating the amount of money AIM has been raising.
AIM first obtained tax-exempt status in 1971, and in its initial report to the
Internal Revenue Service for the year ending April 30, 1972, it showed contribu­
tions of only $6,412 and expenditures of $5,047. But for the year ending April
30, 1973, a total of $83,202 in contributions was reported, and expenses amounted
to $52,730. The IRS does not make public the sources of the revenues involved
with tax-exempt organizations.
Neither Irvine nor Kalish takes a salary from AIM. Irvine works full time
for the Federal Reserve, and confines his AIM activities to his off-hours. Kalish,




70
who gets a government pension, spends all of his time on AIM activities. He
has an office in a three-room suite maintained by his wife, who has a secretarial
and telephone-answering business. AIM pays a modest rent for the office and
reimburses Mrs. Kalish for secretarial services.
There seems to be no connection between AIM and such Nixon Administration
critics of the media as White House aide Patrick J. Buchanan. Irvine organized
AIM in September 1969, two months before the first attack on the media by
former Vice President Spiro T. Agnew.
AIM appears to make no systematic effort to read and watch the media. Irvine
and Kalish read The Washington Post, The Neiv York Times, The Wall Street
Journal, and some other publications fairly regularly, and watch television news
programs sporadically. Others associated with AIM bring articles on television
programs to the attention of Irvine or Kalish. Often they come upon matters of
interest by pure chance. Irvine, for example, became concerned about the failure
of the American press to give coverage to the “Jane’s Fighting Ships’* comparison
of U.S. and Soviet naval strength only after he happened to notice a story about
the “Jane's” survey in a Mexico City newspaper brought to Washington by a Fed­
eral Reserve colleague who had been in Mexico.
AIM’s successes have not been overwhelming, but the organization is having
an impact, in part because of the nervousness of many editors and broadcasters
in the wake of the Nixon Administration’s attacks on the media in recent years.
It is noteworthy that of the first three formal complaints taken by the new
National News Council, one is from AIM. It concerns The New York Times’ cov­
erage of a scientific report on defoliation in Vietnam.
Pressure groups representing political or economic points of view have long
sought to influence the American media, and AIM is just such a pressure group
representing a conservative, militantly anti-Communist ideology. Editors and
broadcasters might well remember that as they weigh AIM’s complaints.
Richard Gottschald, news director of WDIO-TV in Duluth, Minnesota, has
written in the Radio and Television News Directors Association’s Communicator:
“AIM should be exposed for what it is : essentially a conservative group estab­
lished to play judge and jury, and to imply to the public that the media are giving
Americans an intentionally distorted view of our Government’s acts and policies.
Using its own one-sided evaluations of stories, innuendo, and nitpicking critiques,
AIM attempts to substitute its judgment for those of the media editors and
reporters.”
The threat that AIM poses to freedom of the press will be diminished in direct
proportion to the extent to which the media expose its true aims.
Mr. A n d e rso n . And that concludes my testimony, Mr. Chairman.

We will be happy to respond to your questions.
Chairman P a tm a n . Mr. Irvine will be next, and after Mr. Irvine
concludes—I assume you speak for Mr. Whitten too. He is one of your
associates, or do you want him to be heard ?
Mr. A n d erson . He tells me he had just one quick paragraph that he
would like to insert at this point, if that will be all right.
Chairman P a tm a n . We will hear from Mr. Irvine first.
You are recognized, sir.
TESTIMONY OF REED J. IRVINE, ADVISER, DIVISION OF INTER­
NATIONAL FINANCE, CHIEF OF INTERNATIONAL DEVELOPMENT
SECTION, FEDERAL RESERVE BOARD

Mr. Ir v in e . Mr. Chairman, my name is Reed J. Irvine. I live at
11120 Nicholas Drive, Silver Spring, Md. I am an adviser in the Divi­
sion of International Finance and Chief of the International Develop­
ment Section at the Federal Reserve Board. I have responsibility for
work on the Inter-American Development Bank and other similar in­
stitutions for work on the developing nations of the world.




71
I was under the impression that I was invited here today, not to talk
about Accuracy in Media or to defend its work, but to respond to
charges made in the Jack Anderson column of March 11,1975, where
he accused me of using my Government job to attack the press.
The only evidence presented by Mr. Anderson in his column, and the
only evidence he has presented to date to substantiate that charge, is
related to a memorandum that I wrote on November 22, 1974, to the
Congressional Research Service. Now let me give the facts.
Around November 3, 1974—Mr. Anderson has so said it was about
4 days later, I had forgotten exactly when it was—one Jonathan San­
ford came to my office at the Board, by appointment, to interview me
in one of my fields of expertise—U.S. policy and the development
banks. Mr. Anderson, I might note, had said this was to interview me
as an expert on Chile; that was not the case.
Mr. Sanford, as I recall, said that he was doing a dissertation—I
think at American University—on the question of U.S. policy direction
in this area of the development banks. During the course of our discus­
sion, since the Anderson column discussing the CRS report on IDB
lending to Chile had come to my attention, I asked Mr. Sanford if he
was familiar with that study, and he said that he was. Indeed, he was
the author of the study. Since this is in the field of my interests, I asked
him if it was possible to obtain a copy. Mr. Anderson had said in his
column that it was secret.
Mr. Sanford said that it was not secret, and that copies were cir­
culating on Capitol Hill and that I could obtain a copy simply by
calling CRS. Since the report did deal with the matter of official inter­
est to me in my duties at the Federal Reserve Board, I asked my secre­
tary to call the CRS and obtain a copy—which she did. I studied the
report, and in going over it, observed what appeared to me to be some
serious errors of fact and instances of misplaced emphasis.
At some point I called Mr. Charles Gellner of CRS to pass on my
observations about the report. I called Mr. Gellner rather than Mr.
Sanford because Mr. Sanford had told me that he was on leave of ab­
sence doing his work at American University. Mr. Gellner seemed to
be impressed with what I said; he asked if I would put my comments
in writing. I did so, and on November 22,1974, a memo covering these
comments was sent to Mr. Gellner. This, Mr. Chairman, was an official
document; it was strictly within the purview of my responsibilities as
a Federal Reserve official.
I sent copies to three of my superiors—the Director of my Division,
the two Associate Directors of my Division. I also sent copies to two
officials of the Treasury Department who were concerned with the
Inter-American Development Bank and its activities. I also sent two
copies to the office of the Executive Director at the Inter:American
Development Bank—the office of Mr. John Porges, the Executive
Director, and to his technical assistant. And since the report also was
concerned with the World Bank, I sent a copy to the office of the
Executive Director of the World Bank. Copies, of course, went into the
Federal Reserve files.
There was no further action necessary on my part. I had provided
Mr. Gellner with my observations and comments as he requested, and




72

subsequently, after I heard that Mr. Anderson was looking into the
matter and raising questions about this memorandum, I called Mr.
Gellner to ask him what was going on. He told me, and I wrote down
his words, that he considered this memorandum to be one from a
responsible official of the Federal Reserve who was knowledgeable,
and he said that it should be given serious consideration.
He also informed me that as a result of my memo, certain revisions
had been made in the Sanford study. He informed me that the report
was being printed, and he said that when printed it would carry an
acknowledgment from the author thanking officials of several depart­
ments for their helpful comments, and that included the Federal
Reserve Board—the comments that I had submitted.
Now Mr. Anderson has attempted to give the impression that I
wrote the memorandum as a private attack on the press. Mr. Chairman,
that is totally false. He failed to mention in his column that my work
at the Federal Reserve Board is closely concerned with the InterAmerican Development Bank and with Latin America, as well as with
other developing countries. I had a valid official interest in the study
because of my position and responsibilities, and that, Mr. Chairman,
has been fully recognized by my Agency in letters to both Mr. Ander­
son and to you.
Now it happens that I also wrote, on behalf of Accuracy in Media, a
letter commenting on his November 3 column which dealt with this
report. My letter on behalf of AIM was done on my own time, in my
own home; I did not do it for any compensation. It did not involve the
use of any material not available to the public, and it, of course, was
an official letter done for Accuracy in Media as part of my voluntary
service to that organization.
Mr. Chairman, I try very hard to draw a distinction between my
Federal Reserve Board work and my private activities. My major out­
side interest is Accuracy in Media; it is a District of Columbia corpora­
tion and I am the Chairman of the Board. I might say, Mr. Chairman,
I notice that the written statement that was prepared states that the
corporation was not organized in 1969; the corporation was not orga­
nized until 1971.1 am sorry I had not noticed that; that is an error.
I am chairman of the board. AIM is dedicated to correcting specific
errors in the news media. It also investigates complaints made by the
public against the media, and AIM has called attention to some of
Mr. Anderson’s inaccuracies from time to time. I do AIM work on my
own time, not using Government facilities or materials. I do it as a
public service, and I work through AIM and not as an individual in
most of these cases.
AIM has its offices at 777 14th Street NW., in downtown Washing­
ton. That office is run by an executive secretary, Mr. John R. van
Evera. The work I do for AIM is done at night and on weekends at
the AIM office or at my home. The AIM office has instructions, Mr.
Chairman, not to give my Federal Reserve Board number to telephone
callers in order to insure that we do not intermix my work for the
Federal Reserve Board and for AIM.
Now, Mr. Chairman, I want to thank you for presenting me with
this opportunity to respond to Mr. Anderson’s charges against me.
This is especially appreciated since the Washington paper which




73

printed those charges has not seen fit to publish my denial, nor any of
the many letters they have received protesting Mr. Anderson’s un­
warranted attack. This brings up one point that I want to make to put
this matter into proper perspective.
When we see that a journalist with an audience of millions can make
false and misleading statements with impunity, and when we see how
difficult it is to get such statements corrected, it is easy to understand
why an organization such as Accuracy in Media is needed. Let me just
say that AIM is not the vile, propagandist organization that Anderson
has portrayed it to be. On the contrary, it is simply dedicated to trying
to correct the serious errors that appear in the news media—errors of
the type which Mr. Anderson has propagated in his column about me.
It does so calmly and professionally, without rancor and without
personal vilification.
I thank you, Mr. Chairman.
Chairman P a t m a n . Mr. Whitten, I believe you have a statement,
however, I have a question for the last witness which I would like to
ask now. You can make a brief reply if you will and then make any
additional reply for the record. Regardless of how you may or may not
have identified yourself on various occasions, Mr. Irvine, do you not
think that there is a conflict of interest when you are working on bank­
ing and Federal Reserve issues for a private organization—Accuracy
in Media—while remaining on the payroll as a high-level employee
of the Federal Reserve? For example, Mr. Irvine, the December 1973
edition of the Accuracy in Media Report takes great pride in its claim
that the efforts of Accuracy in Media had gained the American Bank­
ers Association time on the CBS Morning News. The American
Bankers Association is a principal lobbying arm for the banking in­
dustry—an industry which your employer, The Federal Reserve,
presumably regulates from day to day. Is this not a conflict of interest ?
Mr. I r v i n e . Mr. Chairman, I see no conflict of interest. What I do
for Accuracy in Media is, as I say, a private outside activity much as
many people may be engaged in working for their church or civic
associations or other public spirited organizations. Since I am not
doing this work for private gain, there is nothing here that means that
I am doing this work in order to put money in my pocket.
Now it is true that Accuracy in Media has from time to time taken
up questions of inaccurate reporting about banking as it has about
many other things. I think it would be unfortunate if Accuracy in
Media, as an organization, were to be expected to wipe out of concern
the serious errors that may relate to banking or to economics or to any­
thing in which I, or which other officials of Accuracy in Media who
also have Government jobs or other jobs, might have interest and
knowledge.
AIM is an organization that is careful in what it says; it is not try­
ing to propagandize, it is simply correcting errors. And I think any
individual or any industry or any Member of Congress is entitled to
make complaints to AIM and indicate that if there have been errors
in the media, to ask that AIM to what it can do or may be able to do to
get those errors corrected.
Mr. Chairman, you raised this point of the CBS program on bank­
ing. There were, I think, many serious errors in that series of programs




74
on banking and CBS, as a result of the work of AIM, recognized that
those errors existed. As a result, CBS decided itself, we did not suggest
to CBS, that they have the American Bankers Association on. All
we asked CBS to do was to correct the factual errors. It was CBS’s
decision to ask the ABA, or to offer them time to appear on the pro­
gram. Mr. Chairman, that was not our suggestion.
Chairman P a t m a n . N o w Mr. Whitten, do y o u have a prepared
statement ?
Mr. W e l i t t e n . N o ,Mr. Chairman, I iust had a very brief statement
to make.
Chairman P a t m a n . All right, you are recognized for that purpose;
and after you conclude, I will yield to each member for 5 minutes to
ask questions of the witness.
Mr. W h i t t e n . Thank you, Chairman.
As one of the many distortions of Mr. Irvine, he accused me per­
sonally of tape recording him on one occasion, and had made a big
thing about that. Now that I am under oath, I would like to deny that.
He accused me first in a very hysterical conversation over the tele­
phone, and then reduced it to writing and sent it around to a number
of people. And I am grateful to have this opportunity to advise you
and him that I was not tape recording him; I did not and do not do
that sort of thing with people I talk to on the telephone.
Thank you very much sir.
Chairman P a t m a n . Mr. Minish, you are recognized for 5 minutes.
Mr. M i n i s h . Thank you Mr Chairman.
Mr. Irvine, you say that what you did you did on your own at nights,
in the evening, and on weekends for Accuracy in Media. Is that correct,
sir?
Mr. I r v i n e . That is correct.
Mr. M i n i s h . Can you tell me then if you were an economist for the
Agriculture Department that you would have available to you the
information that you have working with the Federal Reserve arid
which information was used in some of your communications ?
Mr. I r v i n e . I think that the information that I have used, Mr.
Minish, is publicly available to anyone who knows where to go and
knows who to ask for it or knows where to inquire for it.
Mr. M i n i s h . In 1973, Accuracy in Media, and the American Bankers
Association spent a great deal of time attempting to refute a program
on banking and the Federal Reserve which appeared on the CBS
Morning News in May of that year. What part did you play in this
activity, and did you contact the news media in an effort to refute this
program. ?
Mr. I r v i n e . The banking program came to our attention, Mr. Minish,
as I recall, through Mr. Abraham Kalish who was then executive secre­
tary of Accuracy in Media. As I recall, the ABA contacted Mr. Kalish
and indicated to him that they had some problems with the program
because there were errors in it. Mr. Kalish looked at the program—a
copy of the transcript was obtained, and in looking it over I agreed
that there were certainly a number of serious errors in the program.
The ABA, as I recall the story at the time had indicated that they
had made a detailed analysis of the program, and the errors in the
program, and it turned out, Mr. Minish, surprisingly enough, that




75
they decided not to proceed and they decided not to make their
analysis of the program available to AIM because it appeared that
they did not want to pursue the matter.
M r . M i n i s h . Well, let us get back to the question I asked.
Mr. I r v i n e . I had read the transcript, and the errors, the types of
errors that were made, were very obvious errors. I cannot recall pre­
cisely now, but such things as the statement Federal Reserve Board
members are appointed by the bankers, or that type of thing. These are
things that were common knowledge to me, and it was a very simple
matter for me. It required no special Federal Reserve knowledge or
anything on my part to point out to Mr. Kalish and others that there
were several serious factual errors in the program.
M r . M i n i s h . Did you contact CBS ?
Mr. I r v i n e . An informational letter was drafted which Mr. Kalish,
as executive secretary, sent to CBS, pointing out a number of factual
errors in the program.
Mr. M i n i s h . Mr. Irvine, did you contact CBS ?
Mr. I r v i n e . Did I personally contact CBS?
Mr. M i n i s h . Yes.
>M I r v i n e . Yes; I believe that I did have a telephone conversation.
r.
This went over for some period of time, Mr. Minish, and I recall one
occasion when I was home sick. As a matter of fact, I believe it was
after Mr. Alexander had appeared on the program. I recalled having
heard the program at home. I was in bed with the flu at the time, and
I called an official of CBS to make an inquiry because I was personally
rather disappointed that the response given by Mr, Alexander on the
program had not really been responsive to the factual errors that we
had pointed out to CBS.
Mr. M i n i s h . Were not documents and data used from the Federal
Reserve in this effort by Accuracy in Media.
Mr. I r v i n e . I do not recall any data being used. I think the errors
were simple errors and general knowledge to anyone who knows the
facts about the banking and general----M r . M i n i s h . Why did you contact CBS ?
M r . I r v in e . Y ou m e a n w h e n I p e r s o n a lly c o n t a c t e d th e m ?
M r . M i n i s h . Yes.
Mr. I r v i n e . I indicated, Mr. Minish, I was at home with the flu when

I heard the program. Mr. Alexander, when he appeared on the pro­
gram, did not address himself to the specific points that we had made,
and I called up the gentleman at CBS to find out whether they had
diverted him away from this.
Mr. M i n i s h . Did you contact them as an officer of Accuracy in Media
or as a representative of the Federal Reserve Board ?
Mr. I r v i n e . I told him undoubtedly when I called him that I was
Reed Irvine and I was calling on behalf of Accuracy in Media. As I
said, I was at home in bed at the time.
Mr. M i n i s h . That is all, Mr. Chairman.
Chairman P a t m a n . Mr. Conlan ?
Mr. C o n l a n . Thank you, Mr. Chairman.
First, I note that we are not as heavily deluged by the press as we
are on some of our activities, and I think maybe that is a compliment
to the broadcast media for their good sense in deciding not to get




76
drawn into a private affair which is trying to get organized under the
tent of domestic monetary policy.
While my record makes it obvious that I am not an apologist for the
Federal Reserve and, in fact, even go against my party’s leadership
in attempting to get an audit of the Federal Reserve, I have to say
that the connection between the Fed and the case before us is so tenuous
in terms of domestic monetary policy that I would be hard pressed
to understand the interest of the chairman in this matter if I were
unaware of the history of the past, perhaps, 46 years.
Two things strike me, even though I do not know Mr. Anderson or
Mr. Irvine, and I am relatively new to the Congress here, this being
just my third year. I see what appears to be a sense of umbrage by
some members of the press that they be criticized by citizens for what
some citizens feel to be inaccurate reporting.
I do not know the merits of this case. I only know that I, along
with many others in public life, feel that many times we have been
both inaccurately quoted and issues have been inaccurately portrayed,
because everyone in writing, no matter how objective he intends to be,
does have certain preferences, certain biases, that they have come to
over a period of time.
Mr. Anderson and I would have, perhaps, different views on the
Chilean situation. I went down to Chile as a member of this committee
with the Secretary of the Treasury a year ago at this time, for the
Inter-American Bank Board meeting. I was part of a congressional
delegation that has oversight over that Bank. I came back from Chile
with a different viewpoint than I took when I went.
So having seen what I read in the press, and then having talked with
people on the local scene in Chile who were totally unconnected with
the State Department or with the local leadership there, I came back
with a different impression than that which Mr. Anderson portrays.
I am wondering that perhaps we are faced here with a basic situation
where Mr. Irvine and his citizens group, called Accuracy in Media,
have challenged some members of the press, and Mr. Anderson and
those members of the press who have been criticized by Accuracy in
Media do not care for that criticism.
Now, the thing, of course, that I have observed is that the gentlemen
of the press very seldom give rebuttal time in their columns for views
other than their own. I do not know Mr. Anderson’s record in this line,
because his columns are not carried in my Phoenix newspapers, so I do
not see the column. But I do see that, in many instances, members of
the press do not give rebuttal time in their own columns to questions
that are raised by those who have a different viewpoint.
I am not saying that they should, but if they do not give rebuttal
time in their own columns, and if editors of papers do not give equal
rebuttal time, then there must be, in the interest of honesty and decency
in this country, some other alternative. And it appears that this Ac­
curacy in Media group has been forced by the local newspaper in
Washington, in this particular instance, to even go so far as to buy
an ad which, apparently, when the dollar came in, it was all right
to pick up the rebuttal.
So I just wonder if maybe we are getting into a private contest
between some members of the press who have the capacity to share
information and others who want to challenge them on facts.




77
I think it is quite clear in the testimony and reading Mr. Gellner’s
memorandum to us that Mr. Irvine stumbled upon this area of inquiry
in his capacity as a Federal Reserve official. He did what was clearly
his duty—to try and correct with some factual information the memo­
randum that the Congressional Research Service had put out. And I
think, in that case, all of us in the Congress would expect any member
of the bureaucracy to try and work out among themselves what the
factual situation is. And there may be some disputes about who comes
up with what conclusion.
But to that extent, I think Mr. Irvine was correct in doing his duty.
Now, the question is, Does he have any rights as an individual citizen
to share his viewpoint and to work in public service oriented organiza­
tions on the outside ? To that I can only say that I think I have ob­
served on some occasion—and I have seen columns in the Washington
Post and elsewhere—that investigatory reporters such as Mr. Ander­
son are pleased when men like the gentleman in the Air Force come
forth with information, and sometimes even classified information,
as to what is going on inside the Department of Defense. They have
no hesitancy bringing it forth to the American public.
When Mr. Ellsberg and others took classified documents and brought
those forth to the public, they had no hesitancy about sharing these
with the public.
Here I do not think there is any question of any classified documents
or anything else. I think the question here is, Does Mr. Irvine, as any
other Government official, have the opportunity to share and do outside
creative writing, or, in his own responsibilities as a citizen, speak out
or criticize matters in the press ?
I do not think that we could arrive at a conclusion that the millions
of faithful citizens working in public service should be denied the right
to express their personal viewpoints publicly, and it appears to me that
this is what we are coming down to.
I think if we have followed that position as a committee we would
be subject to an awful lot of shame from our own constituents.
I am not going to get into the merits of the pros or cons of Mr. Ander­
son’s allegations of General Walt as a crony of Senator Stennis. I do
not want to get into those areas and some of the high-powered terms
that are used, or the arguments whether Mr. Anderson’s interpretation
of international affairs is better than someone else’s.
I think the basic question here is. Does an official, whether appointed
or elected, as a citizen, have a right to express viewpoints criticizing
the press, as well as anything else ? I do not think the press, let alone
the Congress, should be immune from constructive criticism.
Mr. A n d e rso n . Mr. Chairman, may I respond ? It was not exactly a
question.
Chairman P a tm a n . Would you mind waiting until we have con­
cluded on this go around, and then we will be glad to hear you, Mr.
Anderson.
All right, Mr. Ford.
Mr. F ord. Thank you, Mr. Chairman.
The first question is to Mr. Anderson.
You mentioned you made an application for a reduced postal rate,
and that application was turned down twice before it was granted.
Do you know the reasons for the postal rate being rejected twice?




78
Mr. A n d e r s o n . Congressman, I am not certain of the reasons. I
understand them to be that they did not consider AIM a legitimate
nonprofit organization.
If you do not mind, I would like Les Whitten to respond further.
He has more information on that.
Mr. W h i t t e n . Thank y o u , sir.
The documents were put in as part of our exhibit 21a and the ruling,
as the Post Office turned it down, said—it was turned down once, and
then apparently they appealed, and it was turned down again, and it
said, “ Based on the files submitted we concur in your ruling”—that is,
the lower postal authorities—“that insufficient evidence has been sub­
mitted to establish that the organization qualifies within the meaning
of any of the eight categories of organizations named in section 134.51,
PSM to mail at the special rate.”
That was on October 15,1971. On October 22 it went to appeal and
the Post Office said, “After a review of these files the U.S. Postal
Service is still of the opinion that this organization does not qualify
and denies the application to mail at the special bulk third-class rate.”
It was only after the Internal Revenue Service—this was in October
or November 1971—at a time when there had been some charges of
politicization of the IRS, it was only when the IRS granted the appli­
cation for Mr. Irvine’s group that the postal authorities reversed them­
selves and did, in fact, give the postal privileges subsidizing Mr. Ir­
vine’s operation.
Mr. F ord . Mr. Irvine, AIM, just tell me what does that stand for?
Mr. I r v i n e . Accuracy in Media, sir.
Mr. F ord . On page i , paragraph 3 you refer to a memorandum you
wrote on November 22, 1974, to the Congressional Reference Service.
Were you referring to the Congressional Research Service ?
Mr. I r v i n e . I understood the name was the Reference Service, but
is it the Research Service ?
Mr. F ord . Mr. Chairman, if I am not mistaken, the name is the Con­
gressional Research Service.
Mr. I r v i n e . I had understood it to be the Reference Service, but I
may be wrong.
Mr. F ord . Let me ask you this, Mr. Irvine, have you received any
sort of warning, now or in the past, from any Fed official concern­
ing----Mr. I r v i n e . Excuse me, Mr. Ford ?
Mr. F ord . Have you received any sort of officiail warning, now or in
the past, from any Fed official concerning AIM work?
Mr. I r v i n e . Warning, no; sir.
Well, let me say, Mr. Ford, that last night I was informed by Gov­
ernor Holland that, as the chairman had indicated, that an investiga­
tion as a result of the chairman’s letter had been made, and Mr. Hol­
land called me to tell me that the letter had been sent to the chairman
on this matter—I believe that he has probably received it—which clears
me of any wrongdoing in the matter of this Chile memo and makes it
clear that what was done was perfectly proper.
Mr. Holland did say, as he talked to me, that probably in the future
it would be a good idea not to get involved in AIM activities that




79
might involve something that could be associated with my work. But
that was the only thing. Up until that time no one had ever said
anything, sir.
Mr. F ord. Have you received any compliments?
Mr. Ir v in e . Compliments? Well, as Mr. Anderson mentioned, we
know that Vice Chairman Robertson has long been interested in the
question of the media and accuracy in the medial, and I know that he
has been personally, in his individual capacity, supportive of AIM. I
do recall after one of my letters had appeared in the paper, somebody
said a great letter, or something like that. I do not know, things of that
sort, I am sure, have happened.
Mr. F ord. Y o u indicated that you receive no salary from AIM. Is it
also true that you received no compensation from any of the 2,000 con­
tributors to AIM ?
Mr. Ir v in e . I received no contribution from any of the contributors.
Let me clarify, Mr. Ford, what financial arrangements there do exist
in AIM. I do not want to mislead anybody. I want to be perfectly
accurate. It was decided by the board of directors, because I have given
many many hours of time in writing for AIM and doing material on
my own time for AIM, and it got to the point where this was becoming
something of a problem in my domestic life. My wife was objecting
to my spending so much time, and it made it difficult for me to do the
chores that a man might be expected to do around the house, such as
doing the painting and so on, and in 1973 the Board agreed that, the
board of directors of AIM, voted to offer to pay $250 for writing the
AIM report. This could be made available to whoever wrote the report.
As it turned out, I checked my records last night, and in 1973 I did
collect for my work in writing the certain issues of the AIM report
none of them connected with any matters connected with banking or
my official work, I collected $1,500. In 1974 I collected about $870 for
writing activities for Accuracy in Media. And that is the only com­
pensation I received in connection with that work. [For further ex­
planation, see Mr. Irvine’s reply to Congressman Blanchard’s question
No. 7 under the section entitled “Additional Information Submitted
.for the Record.”]
Mr. F ord. Thank you , Mr. Chairman.
Chairman P a tm a n . Mr. Blanchard.
Mr. B la n c h a r d . Yes; I have several questions, Mr. Chairman.
I must also express my reluctance to see us get too far astray from
the jurisdiction of our subcommittee, but I think the documents I have
looked at thus far do indicate that there may be a couple of important
issues our subcommittee should look into: One, the question of just who
you represent when you are working at the Federal Reserve, and, two,
whether information you obtain there is used for other purposes.
Pursuing the question of compensation, have you been reimbursed at
all for expenses?
Mr. Ir v in e . Yes; I have been reimbursed for expenses.
Mr. B la n c h a r d . That would be in addition to the amount you indi­
cated you received for the writing ?
Mr. Ir v in e . Yes; indeed.
Mr. B la n c h a r d . D o you have some figures you could give us on how
much you were reimbursed.




80
Mr. I r v in e . I did not come prepared with those figures, but I have
incurred expenses on behalf of AIM, for example, to buy office supplies.
I have an office in my home, and if I buy paper, or if I lay out money,
or things of that sort, I put in for reimbursement, naturally.
Mr. B la n c h a r d . Would it be fair to say that you regularly file a
statement for reimbursement, a monthly statement ?
Mr. I r v in e . Yes; I do.
Mr. B la n c h a r d . Could the subcommittee obtain copies of that ?
Mr. I r v in e . Well, I would have to ask counsel.
Counsel says he sees no reason why not.
Chairman P a t m a n . Without objection, you may insert them at this
point in the record.
[The material referred to follows:]
EXPENSES OF REED J. IRVINE CHARGED TO AIM
Month

Item

Amount

1973
January............___

Long-distance phone calls, home phone1............................................................................

$11.58

February.............____ Long-distance phone calls, home phone........................................................................
1 business luncheon..................................................................................................................

9.50
11.50

Total....................................................................................................................................

21.00

March................ ___ Long-distance calls, home phone.................... ............................. ........ .............................
April..................... ___ Parking fee.....................................................................................................................................

26.12
2.50

May...................... . . .

1 business luncheon..................................................................................................................
Long-distance calls, home phone.............................................................................................

5.00
3.40

Total....................................................................................................................................

8.40

June..................... ___ Business luncheon.........................................................................................................................
July...................... . . . Newspapers purchased...............................................................................................................

6.50
1.75

August................. . . .

6.75
3.35

Long-distance calls, home phone...........................................................................................
Parking fees...................................................................................................................................
Total.....................................................................................................................................

10.10

___ Long-distance calls, home phone...........................................................................................
Business luncheons and a dinner.......................................................................................... ..

12.22
45.33

Total....................................................................................................................................

September

57.55

October................ ____None...........................................................................................................................................................
November........... . . . Luncheon for AIM directors.....................................................................................................
December...........
Total for 1973....................................................................................................................
1974
January............... ................................................
February............. ................................................

42. 50
188.00

Long-distance calls on home phone............................................
Taxi fares and parking fees.............................................................

7.21
8.00

March.................. ................................................

Long-distance phone calls, home phone..................................
Newspapers and magazines bought............................................
Business luncheon.............................................................................

16.88
3.65
15.25

Total..........................................................................................

35.78

April..................... ................................................

Long-distance calls, home phone................................................
Newspapers and magazines bought............................................
Parking fees......................................................................................
Business luncheons...........................................................................
Reception for AIM supporters...................................................... .
Expenses on trip to Atlanta to attend CBS annual meeting..
Expenses on trip to New York to attend New York Times
annual meeting............................................................................ ..

3.23
14.35
7.45
21.03
81.17
130.73

Total..........................................................................................

285.46

See footnotes at e d of tables.
n




27.50

81
EXPENSES OF REED. J IRVINE CHARGED TO AIM—Continued
Month

Amount

Item
1974—Continued

May.................................................... .................... Long-distance phone calls, home phone...............................
Other phone calls.................... .................................................
Business lunch......................................................................
Newspapers and magazines..................................................
Expenses on New York trip....................................................
Taxi fares.............. .................................................................... _____

$11.71
4.00
10.50
9.65
10.50
14.75

Total.............................................................................. .........

61.11

June.................................................. ...................... Long-distance phone calls, home phone. .............. ..............
Parking fees......... ................................. .............. ...................
Newspapers........................................... ..................................
Taxi fare.................................................................................... ..........
Total............................................................................... ..........
July.................................................. ..................... Taxi fares....................................................................................
Parking fees............................ ............................. ...................
Business luncheons.................... ...........................................
Expenses on Schenectady trip (talk show).........................
Long-distance phone calls, home phone............................. .........
Total............................................................................... .........
August, September......... ............ .

Taxi fare........................ ............ .............................................. .........

24.40

236.00
1.20
2.00

63.60
7.50

230.65

23.25
122.38
13.56
197.34

217.60
3.50

Total................................................................ .............. .........

21.10

October........................................... ......................Long-distance phone calls, home phone...............................
Business lunch and dinner.................................................... .........

2.64
15.46

Total................................................. ............................. ..........

18.10

Business luncheon................. ................................................
Parking fee................................................................................ .........

21.65
5.65
.85

Total............................................................................... .........

28.15

December........................................ ......................Long-distance calls, home phone..........................................
Parking....................................................................................... .........

17.95
10.70

November......................................

Total................................................. ............................. ..........
Total 1974.....................................................................

28.65
754.50

1 These are calls made on my home phone for AIM business only.
2 Level or parking expense explained by the fact that I used my annual leave during the summer to work at the AIM
office.

Mr. C o n l a n . Would t h e gentleman yield for just a second?
Mr. B l a n c h a r d . Yes.
Mr. C o n l a n . Could we make that request of Mr. Anderson too ? Do
newspapermen ever get paid for information ? I think if we are going
to be objective, we ought to look at the whole thing. I do not want
to disturb any preconceived plans of the chairman.
Mr. B l a n c h a r d . Would you be able to supply us with a list of
contributors to AIM ?
Mr. I r v i n e . Mr. Blanchard, Mr. Anderson has made much of this
point that AIM does not make public its list of contributors and I
would like to, if I may, explain to you why we have adopted that
policy.
AIM is a small organization; it is a poor organization. It does not
have any big fat-cat foundations or others that are bankrolling it.
AIM has to solicit its contributions from the public, and it is not an
easy job to get people in all cases to expose themselves to the kind of




82

abuse that I have been exposed to at the hands of Mr. Anderson,
for example. If it is known that they are supporting an organization
such as Accuracy in Media they may be harassed. It has been our
feeling at AIM that in order to be able to get contributions from
people who may want to support AIM, that if they want their names
not to be publicized, that we ought to honor that request. There is
certainly a great danger of harassment and intimidation on the part
of those who would like to injure AIM by trying to cut off the little
financial support that it has had over the years. And for that reason,
Mr. Blanchard, AIM has refused—as has Ralph Nader, as have many
other organizations such as the NAACP, to publish its contributor
list. Now this serves an additional purpose, of course. These lists are
also in a sense, sucker lists; they can be used by people to go out and
pump or milk the list for their own purposes, and it is also desirable
to protect your contributors for that reason. And so we do not sell
our list, we do not rent it, and we w^ould prefer to keep it private.
Mr. B l a n c h a r d . But do you not agree that if we were to find that
you received a large amount of money that is reimbursement for
expenses incurred, and then added to money you received for writ­
ing, it would be a legitimate question for us to find out who is con­
tributing to AIM which reimburses you? You are a Federal
employee.
Mr. I r v i n e . Well if you were to find that out, let’s cross that bridge
when we come to it. You are not going to find out that I have re­
ceived a large amount of money in reimbursement for AIM
activities.
Mr. B l a n c h a r d . Well let me ask this. Does AIM receive financial
assistance from banks and banking industries ?
Mr. I r v i n e . I am sure that among our contributors are a number
of individuals in the banks and banking industry. It is not a large
amount, I don’t believe.
Mr. B l a n c h a r d . H o w about your colleagues? Are there other col­
leagues at the Federal Reserve who participate in the activities of
AIM?
Mr. I r v i n e . None of my colleagues at the Federal Reserve partici­
pate in the activities of AIM in any official capacity. That is, in any
official connection with AIM.
Mr. B l a n c h a r d . Have you discussed AIM with Dr. Arthur Burns ?
Mr. I r v i n e . Dr. Burns is aware of the fact that I am interested in
AIM. It is a matter of official record on my files at the Board, and I
am sure that he is aware of it.
Mr. B l a n c h a r d . Has he requested that you withdraw from par­
ticipation in AIM ?
Mr. I r v i n e . I am very proud to say that he has not made any such
request, and I think he respects my rights as ah individual and a
citizens to do with my spare time whatever I want as long as I am
engaging in activities that are legal and respectable and don’t bring
discredit upon the Federal Reserve.
Mr. B l a n c h a r d . Has he asked you which banks, if any, contribute
to AIM?
Mr. I r v i n e . He has never asked anything about anybody who has
contributed to AIM.




83
Mr. B l a n c h a r d . Thank you very much.
Chairman P a t m a n . I wanted to ask a question about your connec­
tion with the Federal Reserve.
Have you been on the payroll for any length of time ?
Mr. I r v i n e . I have been an official of the Federal Reserve—an em­
ployee of the Federal Reserve, Mr. Patman, since October 1951.
Chairman P a t m a n . October 1951 ?
Mr. I r v i n e . Right.
Chairman P a t m a n . Did you talk to Dr. Arthur Burns, the chair­
man, yourself about your employment?
Mr. I r v i n e . About my employment ?
Chairman P a t m a n . About your employment with the Federal
Reserve.
Mr. I r v i n e . Well I antedate Dr. Bums at the Federal Reserve by
several years Mr. Chairman. I was there in 1951; I believe Dr. Burns
joined the Board in 1970.
Chairman P a t m a n . And you have been on the payroll constantly
since that time?
Mr. I r v i n e . Since 1951, yes, sir.
Chairman P a t m a n . Since 1951. So you are an old hand at the
Federal Reserve?
Mr. I r v i n e . Yes, sir, absolutely.
Chairman P a t m a n . We have no record that the document mentioned
was received.
Mr. I r v i n e . Y o u mean the letter from Governor Holland?
Chairman P a t m a n . Yes, Governor Holland indicated in some com­
munications to you, I believe, that you should limit your activities in
some way. Do you remember that ?
Mr. I r v i n e . As I say, he called me last night—just last night—to
tell me that this letter had been sent, or would be sent. And in our
conversation—I don’t know if it was an official admonition, but it was
a suggestion on his part, that it would probably be wise to not, let’s
say, evoke this kind of controversy.
Chairman P a t m a n . Well tell us what the controversy is.
Mr. I r v i n e . Well the controversy that is of the type that Mr. Ander­
son has raised. It is a confusion on Mr. Anderson’s part, of course,
in that he was confused with what I did officially at the Federal Re­
serve in writing my memo to Mr. Gellner, with what I did for Accu­
racy in Media in writing a letter on his column. Now if all journalists
were accurate and precise, the problems of this kind would not arise, of
course.
Chairman P a t m a n . Well let me suggest to you that there are other
things that have been mentioned here. More than a year ago, we were
going to try to get an audit of the Federal Reserve System since it has
never been audited. We raised that question and were about to get a
vote in the House of Representatives. Dr. Burns was very much ex­
cited over that and did not want the Fed audited at all. Some people
would say, well what does he have to hide ? Well, of course, that is not
for me to say and I am not begging the charge, but that was the usual
reply when it was said that the Federal Reserve did not want an audit.
As the measure calling for a GAO audit of the Federal Reserve was
about to be voted on by the House, Dr. Burns contacted a lobbying




84
organization in New York which has considerable influence over the
affluent people in the Nation, especially the bankers, and banks of all
sizes. That organization is known as the Roundtable. People pay up
to $85,000 a year for the privilege of being on the Roundtable. When
they feel that the interests of the big banks are jeopardized, they go
into action and inform the people in an effort to promote support for
the banking industry. Do you know anything about the Roundtable in
New York?
Mr. I r v i n e . Mr. Chairman, I have heard of the organization, but I
have no direct knowledge of it.
Chairman P a t m a n . Y o u never conferred with them?
Mr. I r v i n e . Have I conferred with the Roundtable ?
Chairman P a t m a n . Yes.
Mr. I r v i n e . I think that I may have met somebody who is associated
with it at a lunch at which other people were present.
Chairman P a t m a n . Who did you confer with ?
Mr. I r v i n e . Well I don’t remember the name of the gentleman to
tell you the truth. I did not confer with him on the audit or any other
Federal Reserve business.
Chairman P a t m a n . Well it is a generally known lobbying organiza­
tion, is it not?
Mr. I r v i n e . Well they have a Washington representative who I have
met, but I don’t remember his name.
Chairman P a t m a n . Y o u do not remember any of them ?
Mr. I r v i n e . Well, I have no connection with the organization, Mr.
Chairman. To my knowledge they have never contributed any money
to AIM.
Chairman P a t m a n . Well, Dr. Arthur Burns was getting out of this
business of being Chairman of the Federal Reserve Board and going
into lobbying when he took it up with the Roundtable. That is a lobby­
ing activity.
Mr. I r v i n e . Mr. Chairman, you understand that I am here in my
capacity as Reed Irvine. I am not speaking here for the Federal
Reserve Board or for Dr. Burns.
Chairman P a t m a n . I know, but you are a representative of the
Federal Reserve Board and we have a right to ask you these questions.
Mr. I r v i n e . I don’t dispute your right to ask me. I want you to
understand that I don’t know anything about that particular matter.
This is the first time I ’ve heard of it, and I know nothing whatever
about it.
Chairman P a t m a n . Well you have been with the Board since 1951.
That is quite a long time. And you have been actively interested in
Federal Reserve Board affairs according to your own testimony, and
it occurs to me that you would recognize that in some respects even
your position is as a lobbyist working for Dr. Bums. He is a lobbyist,
he contacts members, he goes to the Rules Committee, he sees members
privately and asks them to vote against the audit bill. Of course,
the Federal Reserve has been with us a long time—about 60 years. It
has never been audited by the GAO, and a lot of members feel that it
should be audited. And in 1914 when they wanted to organize the 12
Federal Reserve banks, President Wilson did not agree to a central
bank, he was against it.




85
He induced the Congress that if they were going to have banks for
the country to take care of different regions, that they should do it
according to, say, 12 regions; each region organized like the other
regions and for the purpose of giving everybody in that area an
opportunity to use the Federal Reserve facilities. That was the object
of it. Well, of course, they had no money to go into business. They orga­
nized the Richmond bank or the New York bank or the Boston bank—
they had no money to do it, and so the bankers would not chip in and
furnish the money because lots of bankers did not favor the Federal
Reserve anyway. They had no money to start on. Congressional appro­
priations were out of the question because in the Constitution there is
a little statement about this, that no money shall be expended—public
money—unless it is appropriated by Congress. They did not want to
go before Congress; that is the last place they wanted to go, since, they
perhaps would be asked embarrassing questions.
So then they devised another way. The Federal Reserve has the
right to create money, to manufacture money. And so they decided,
well, we will just manufacture money and buy Government bonds that
are already outstanding that have been purchased by other people.
We will buy those bonds and not cancel them and have money to
operate in that way. During the first few years, they did not have
much accumulation, but during the last few years, they have had
tremendous accumulation. They have used a printing press free of
charge, created the money, and bought U.S. Government bonds, and
did not cancel them. They are in the portfolio of the Federal Reserve
bank—in the New York Federal Reserve Bank now. Right now, they
own 18 percent of the national debt in that portfolio—in the New
York Federal Reserve Bank—and it has been paid for once. Mr.
William McChesney Martin who was Chairman of the Federal Re­
serve Board longer than any other person, made that statement before
our committee.
Mr. Martin said that the bonds have been paid for once, but that
they were not canceled. Of course, the Federal Reserve collects interest
on them. When they are due, the Secretary of the Treasury pays the
interest amounting to $6 billion a year, which is used to pay the
Federal Reserve’s expenses, and they get that money without going
through Congress. It is a pretty slick trick. It is almost as bad as
counterfeiting.
Mr. C o n l a n . Mr. Chairman, could I ask a question please ?
Chairman P a t m a n . All right, my time has expired. I will have to
recognize Mr. Minish, and then you are next.
Mr. M i n i s h . Mr. Irvine, I have a copy—I finally had an oppor­
tunity to look through this Accuracy in Media, and there is no date
on it, but it is titled “ Is There Really an Energy Crisis ?”
Mr. I r v i n e . I believe that was the AIM report of January 1974.
Mr. M i n i s h . Oh yes, I see it crossed out. And you take issue with
some of the statements of one of the Governors who said that one of
the major oil companies were given a free hand, and they have used
that hand to turn the oil spigot off and on at will and manipulate and
gouge the consumer. And then, of course, you defend their profits.
In the first quarter of 1974, Exxon declared profits of $700 million
and then in a further check they found out that $400 million was set




86
aside for contingencies or whatever. Did you take the trouble to correct
that in your Accuracy in Media ?
Mr. I r v i n e . Mr. Minish, I think I am aware of the case. The fact
that there was a contingency element in the profits was in the press.
That’s all I know about it, just what I read in the press about it. If
the press reported it, there would be no point in AIM commenting
on it.
Mr. M i n i s h . Well I just thought that inasmuch as you defend the
oil companies here that you would also like to show the other side of
the coin in fairness.
Mr. I r v i n e . Accuracy in Media, Mr. Minish, confines its activities
to commenting on inaccuracies in the press. It does not comment on in­
accuracies made by Government agencies or private business or Mem­
bers of Congress or private individuals who may make misstatements.
AIM has its hands full in dealing with the press. It can’t possibly
branch out and try to cover the whole world.
Mr. M i n i s h . Well you are commenting in behalf of the oil companies
here.
Mr. I r v i n e . N o . On the contrary, Mr. Minish, I would not consider
that a comment on behalf of the oil companies.
M r . M i n i s h . Well y o u d e f e n d t h e i r p o s i t i o n .
Mr. I r v i n e . The article on the energy crisis, I think, was written in
the public interest, Mr. Minish. There had been many things stated,
and it was felt that it was important for the public to understand some
of the facts about the energy crisis which was verv much in the printed
press at that time. Certain articles that appeared in the press were in­
accurate in important respects. All ATM did was to try to correct those
inaccuracies.
M r . M i n i s h . Let me say, sir, that you could have confined your
statement to some other things, because all you did was publish the
same propaganda that the oil companies put out at the time.
Mi. I r v i n e . With all resnect, sir, I can’t agree that we were just
publishing propaganda. I think the analysis that we did was entirely
original and did not come from any oil company. Tt was something
that was done by AIM on the basis of analysis of what appeared in
the press, articles that were available in the press, information that
was available from congressional reprints, and so on.
Mr. M i n i s h . Well I still think vou should have made the correction.
When you saw they only made $700 million, out of courtesy to Ac­
curacy in Media, you should have said there was a mistake here; they
really made $1.1 billion.
Mr. I r v i n e . With respect to that. Mr. Minish, I can onlv tell you
that AIM does not have the facilities of the Associated Press or the
United Press or the New York Times. And the only way that people
at AIM would have had to know such an error existed as a matter of
fact would be that they read it in the press.
Mr. M i n i s h . Where did you get all the information you put here
about the oil shortage ?
Mr. I r v i n e . Well I can’t tell you specifically, but my recollection is,
as I said, that it came from various articles and congressional studies
that were available to the public.




87

Mr. M i n i s h . Well I did not see any of these things in the congres­
sional studies, and I take my time to read them.
Mr. I r v i n e . Well there was a huge volume o f them.
M r. M

in is h

.D

o

y o u c h e c k th e m a ll f o r a c c u r a c y ?

Mr. I r v i n e . The congressional studies ?
Mr. M i n i s h . They make mistakes here too, you know.
Mr. I r v i n e . You’ve got me there. I f our sources are inaccurate, we
make mistakes. And we have made mistakes occasionally.
M r . M i n i s h . Have you checked these out for accuracy ?
Mr. I r v i n e . Checked the AIM report ?
M r . M i n i s h . Yes.
Mr. I r v i n e . Well let me say this, Mr. Minish. AIM has only one
thing going for it, and that is its credibility. If it is consistently in­
accurate, as Mr. Anderson charges, then I have said that it will and
it should die.
M r. M

in is h

. O r c h a n g e th e n a m e.

Mr. I r v i n e . N o . I would say that it should go out of existence if it
is not accurate itself. If Mr. Anderson can demonstrate, as he charges,
that AIM is a terribly inaccurate organization, he can destroy it much
more easily than by making charges against me personally.
Mr. M i n i s h . That is all, Mr. Chairman.
Chairman P a t m a n . Mr. Conlan.
Mr. C o n l a n . Thank you, Mr. Chairman.
One thing has occurred to me here. I appreciate the chairman’s con­
cern about our domestic monetary policy, and I share some of his
concerns. I think that perhaps, though, we have the wrong man to
talk with about policy matters at the Federal Reserve, because I be­
lieve his work only deals with the Inter-American Development Bank
and other similar institutions, and for work on developing countries.
So I think when we finish here today, we might get into some of these
broader policy matters as a whole.
Chairman P a t m a n . This is a preliminary hearing; we will have
other hearings. If you have any witnesses in mind, their names may
be submitted.
Mr. C o n l a n . Well, I think in the domestic monetary policy line,
I certainly agree with you. We should look into some of those matters.
As I have indicated, I have supported you in the past on the matter
of an audit of the Federal Reserve. But passing that, I just have a
couple of questions here.
One, Mr. Irvine, I am a little intrigued with your publication. I
have not seen it, and I know the members on the Republican side of
the aisle knew nothing about this hearing or things that are going on
until yesterday when we got some material. Could you send us a
sample copy or two, and could you tell us, Mr. Irvine, how we can get
a subscription to it ? How does one get it ?
Mr. I r v i n e . Y o u are very kind, Mr. Conlan.
Mr. C o n l a n . Let us put the address in the record for the people
who might be interested in knowing more about it.
Mr. I r v i n e . I d o h a v e s o m e s a m p l e c o p i e s w i t h m e .
Mr. C o n l a n . What is the address and how do you subscribe to it ?




88
Mr. I r v i n e . The AIM report is published each month by Accuracy
in Media, at 777 14th Street, NW., Washington, D.C. 20005. Recently,
in line with the anti-inflationary program announced by President
Ford, we lowered the subscription price from $10 to only $3.1 do not
think there is any other publication that has made a comparable con­
tribution to the anti-inflationary program. If anybody wants to send
$3 to AIM, he will find this a stimulating, provocative, and accurate
report on what is going on in the news media.
Mr. C o n l a n . I have just one or two further questions. Why do you
suppose Mr. Anderson devoted an entire column and his testimony
here today to leveling these charges against you personally ?
Mr. I r v i n e . Well, Mr. Conlan, Accuracy in Media receives com­
plaints from the public about inaccuracies. Let me say, lest anyone
think that I am carrying on a personal vendetta against Mr. Anderson,
that that is not true. As a matter of fact, this will hurt his feelings,
I know, but I do not even read his column, and that is the truth.
Accuracy in Media has received more complaints about Jack Ander­
son’s inaccuracies and Jack Anderson’s column than about any other
single journalist. We take complaints as they come in and we try to
handle them, we trv to process them, we try to investigate them. On
handling the complaints against Mr. Anderson, we have tried to be
scrupulously fair and accurate because we know that we are treading
in a very dangerous area when we tangle with Jack Anderson. There
is no doubt about that. I have been warned many times that this is a
very dangerous business.
So what we have done, I think almost without exception although
T
there may have been one or two, is if we get a complaint, and it looks
like it is a valid complaint, we first send a letter to Mr. Anderson
outlining the complaint and asking if he has any comment on it. Of
all the complaints we have sent to Mr. Anderson, he has never once
responded; he has never once said there is an inaccuracy in this, or
this is wrong; and that being the case, we have given him a decent
interval—sometimes as much as up to a month—to allow- him time to
reply. I f he has not replied and we believe that the complaint is valid
and accurate, we then send out letters to the newspapers that carry
Mr. Anderson’s column. We have a list of 400 papers that publish the
Anderson column regularly.
The great advantage that a columnist such as Mr. Anderson has
had in the past has been that he could attack someone like me or you
or any member of this subcommittee. You would read about it in the
Washington Post, and you mi^ht write a letter to the Washington
Post. Maybe the Washington Post would publish it and maybe it
would not. It has not published mine, in response to the Anderson
column, and it might not publish vours.
But there are several hundred other papers—I do not know quite
how many Mr. Anderson has—but I know we have a list of 400 that
carry his column. Even if you got your letter published in the Wash­
ington Post, there are all your constituents: there is everyone else
out there who is still misinformed and misled by the charges that have
been made.
I think the thing that has probably stimulated Mr. Anderson is the
fact that we are reaching his papers He knows because we have put




89
on the letters, we send him copies of the letters that go out, and they
go out marked acc papers carrying the Jack Anderson column.” This
means that for the first time, I think in his experience, something
effective has been done to call attention to the errors in his column, to
most of the papers that get his column.
Chairman P a t m a n . The time of the gentlemen has expired.
Mr. C o n l a n . Mr. Chairman, I have tentatively come to the conclu­
sion that maybe our subcommittee might be better to concentrate on
domestic monetary policy rather than being a part of a debate over
journalistic concerns between Mr. Anderson and Accuracy in Media.
I have been prompted by people to get into asking Mr. Anderson
questions: Does he know Jake Lewis, Mr. Patman’s press secretary,
or Baron Shacklet-te, his administrative assistant? Has he been in­
volved with Mr. Lewis or Mr. Shacklette in setting up these meetings ?
And is he involved in, and for how long and how far back, with all
these kind of things ? I do not know anything about them because I am
new in Congress, and I am not interested in these types of things. But
I do think that if we would stay out of the personality field and con­
centrate on domestic monetary policy, our credibility as a subcom­
mittee would be better. Let these journalists do their own little thing
with the public, and let the public judge who is correct and who is
7
incorrect.
Chairman P a t m a n . Yes, sir. The $84 billion in that portfolio is
very important, and that could be a reason why a lot of people do not
want the audit of the Federal Reserve.
Mr. Anderson, I promised to give you an opportunity to reply to a
criticism. You may do so now.
Mr. A n d e r s o n . Thank you, Mr. Chairman.
I was a little surprised that Congressman Conlan would ask Reed
Irvine why I wrote a column rather than ask me. It seems that I would
be the most logical one to explain why I wrote a column. The Congress­
man has given the impression or tried to give the impression that there
has been some kind of a feud going on between Accuracy in Media and
my column, and that I have simply responded because of that.
Now, Accuracy in Media has been in existence since 1969, contrary
to what Mr. Irvine has just told you under oath. He said that it was
not organized until 1971. That is a falsehood. It was actually formed
in 1969. It was incorporated in 1971. This is typical of the distortions.
Mr. C o n l a n . He said incorporated, Mr. Anderson.
Mr. A n d e r s o n . He said organized.
In any case, whatever words he may have used, the record will be
the best indication of just the exact words that he used. He clearly—
and this is typical of tlie way he counterfeits and twists the facts—he
tried to give the impression that we were wrong when we said in our
testimony that Accuracy in Media appeared on the scene in 1969. It
did appear on the scene in 1969. Yet he tried to give the impression
to this subcommittee and to the public that we had been inaccurate
in so stating. Whatever language he used, it was clearly his intention
to try to make it appear that we had somehow misrepresented or some­
how gotten our facts wrong.
Now, since 1969, Accuracy in Media has been attacking me on a
regular basis. I regret that you do not read the column. If you did,




90
you would know that at no time have I ever written about Accuracy
in Media until just very recently. I have not responded to these
attacks because I have known, as most of the press knows, that Accu­
racy in Media is not a legitimate press critic. It is not a legitimate
press watchdog. As has been pointed out here, it defends the oil indus­
try and takes money from the oil industry. It defends the banks and
it takes money from the banks. It is an advocate of the special inter­
ests. It is a defender of rightwing causes. It is, in short, a propaganda
outfit, and I do not normally respond to attacks from the extreme left
or the extreme right. I am constantly attacked by both, and I ignore
those attacks. I am not engaged, Mr. Congressman, in any kind of a
feud with Accuracy in Media. I wrote about it because I got informa­
tion which indicated that the Federal Reserve Board, which is an
important institution, might be involved with Accuracy in Media. I
have spelled out the information in a column.
In response to the request of this subcommittee, I have given de­
tailed testimony complete with exhibits to back up what we wrote in
the column.
Mr. C o n l a n . What do you consider a legitimate press criticism, or
who would be legitimate people? Are there some American citizens
who are illegitimate people, who cannot criticize ?
Mr. A n d e r s o n . Mr. Congressman, if I were to write a story about
you, I would expect you to respond to it, not Accuracy in Media. If
you have a complaint about something that I write, I would expect
to hear from you; I would not expect to hear from some rightwing
propaganda outfit. I am not going to respond to them over something
that I wrote about you. I will respond to you.
Mr. C o n l a n . Would you put a Congressman’s or someone else’s re­
sponse in your column ?
Mr. A n d e r s o n . A s a matter of long time practice, we never write a
story about anyone without contacting them and giving them an oppor­
tunity to respond. There have been occasions when they do not re­
spond. That will not stop us from goin.<r ahead with the story. If they
subsequently send in a response, we will use it, even after it has been
published. And, anytime that we have ever made a mistake, and any­
time that we have ever been guilty of an inaccuracy, and that happens
to us, we always run a retraction.
Mr. C o n l a n . In your column, do you ?
Mr. A n d e r s o n . Absolutely. We have always done that. That is our
policy. I tell my reporters I want the facts.
Mr. C o n l a n . Could you give us some examples for the record of
where you have done that ? I think it would help clarify a lot of things.
Mr. A n d e r s o n . Well, I would have to go back into the record; but
just off the top of my head I will cite a couple, just from memory. To
the best of my recollection I wrote a story reporting that Senator
James Buckley, when he first came to the Senate, had sought a posi­
tion on the Senate Interior Committee. That is unusual.
Chairman P a t m a n . Mr. Anderson, if you will excuse me, I promised
to recognize Mr. Ford and Mr. Blanchard. We will hear them, and then
we expect to adjourn.
Mr. F o r d . Thank y o u , Mr. Chairman.
I have only two questions to Mr. Irvine.




91
Mr. Irvine, do you plan to continue your role with AIM, or do you
yourself feel that because your integrity and credibility have been pub­
licly questioned, that you could not continue your Fed role in good
faith ?
Mr. Ir v in e . Mr. Ford, I do not think that my integrity has been
publicly questioned by anyone that I need to be concerned about. I had
prepared a longer statement that I was going to make. I was informed
that the statements ought to be limited to 10 minutes. I noticed that
Mr. Anderson took about 25 for his opening statement. But, I had said
in the statement that I thought of giving to this subcommittee, that
I would hope that the word would go out from this committee room,
that no civil servant need be afraid to expose and correct errors that
he knows are being disseminated by the news media. I had said:
Let it not be said that we must allow error to triumph because combating it
is not in our job description. Truth will not be free to combat error if many hun­
dreds of thousands of some of our most knowledgeable citizens, our civil servants,
must tremble in fear before columnists such as Jack Anderson.

Yes; I intend to continue, and I think that what I have done in my
spare time devoting many hours of service to this cause is something
that many people throughout this country appreciate. Many Members
of Congress, I might say on both sides of the aisle—Congressman
Henry Gonzalez, for example, a member of the Banking Committee
have been very appreciative of some of the work that Accuracy in
Media has done; Congressman Hebert has put material in the record
from Accuracy in Media, recognizing the great value it has in correct­
ing the distortions of the media. I think it would be a grave disservice,
simply because I had been subjected to personal abuse and harass­
ment with unfounded charges, if I should cringe and creep away into
a corner and say I cannot take the heat.
Mr. F ord . S o you do feel that your role with AIM will serve the best
interest of the taxpayers.
Mr. Ir v in e . Mr. Ford, my role with AIM has nothing to do with the
taxpayers. It has to do with all of the citizens of this country who are
dependent upon the news media for accurate and fair information. I
do not work for AIM at the taxpayers’ expense.
Mr. F ord. Does the Federal Reserve print a newsletter ?
Mr. I r v in e . The Federal Reserve prints a monthly bulletin, the
“ Federal Reserve Bulletin.”
Mr. F ord. Could you extend some of your comments to that monthly
bulletin; some of the articles you have been writing for AIM, could
you extend them to that monthly bulletin also ?
Mr. Ir v in e . “The Federal Reserve Bulletin,” Mr. Ford, deals with
the economy. It carries articles about the economy and various aspects
of the domestic economy. It has no connection with Accuracy in Media.
Chairman P a tm a n . All right.
Mr. Blanchard?
Mr. B la n c h a r d . Yes; I again want to repeat my feeling that I do
not believe our subcommittee should really get into the question of
whether AIM has a right to exist—obviously it does—and whether
Government employees have a right to engage in free speech. I think
they do.
I am still a little curious about the funding of AIM, though, as it
relates to you personally, and whether or not you have used resources

50-365 O - 75 • 7
•




92
of the Fed to advance the cause of AIM, and perhaps the cause of the
private interests.
Earlier, we were talking about compensation for your expenses.
Are you deducting items like your office in your home, and things like
that, as a charitable deduction ?
Mr. I r v i n e . Not as a charitable deduction; as office expense.
Mr. B l a n c h a r d . Are you considering a portion of that as expenses
for AIM, or is it solely as an employee of the Fed.
Mr. I r v i n e . No; I get no compensation from AIM for the use of
my facilities at home.
Mr. B l a n c h a r d . D o you have any relatives on the payroll of AIM,
or who have been reimbursed by AIM ?
Mr. I r v i n e . Yes; I have a son who has done work for AIM. He is
a high school student and he does things like stuffing envelopes and
that sort of work for AIM from time to time.
Mr. B l a n c h a r d . D o you know what kind of compensation he has
received ?

Mr. I r v i n e . He receives the m i n i m u m wage.
Mr. B l a n c h a r d . Getting back to the sources of contribution to AIM,
have there been foreign sources of support to AIM ?
Mr. I r v i n e . Not that I am aware of.
Mr. B l a n c h a r d . H o w about participants in the Inter-American
Development Bank?
Mr. I r v i n e . What do you mean, sir—individual people who are em­
ployed by the Inter-American Development Bank ?
Mr. B l a n c h a r d . Well, for one, yes.
Mr. I r v i n e . I am not familiar with it at all. We have several thou­
sand contributors, and I could not tell you who these people are or
where they work. I have not gone over it with that object in mind.
Mr. B l a n c h a r d . I have no further questions.
Chairman P a t m a n . Gentlemen, you have been very cooperative, and
we appreciate your appearance and your forthrightness in answering
questions. If some of the subcommittee members who are not present
care to ask you any questions in writing, you may answer them when
you have examined the transcript. Will that be satisfactory ?
Mr. I r v i n e . Mr. Chairman, could I ask for your permission to insert
in the record three articles. Since Mr. Anderson has introduced a great
deal about Accuracy in Media, I would like to introduce an article
from the Air Force Magazine, entitled, “The Wayward Press,” an
article from the Nashville Tennessean, “Anderson Piece Struck a Low
Journalism Blow,” and last, an article from the Louisville Times, “A
Vindictive Muckraker at Work” :
Chairman P a t m a n . Y ou may do that. You may have permission to
do that.

[The articles referred to follow:]
[F r o m A ir F o r c e M a ga zin e, M a rch 1 9 7 5 ]
T

he

W

ayw ard

P r ess

Probably the most prevalent complaint about American newspapers and tele­
vision is their reluctance to correct errors. There is no tradition for it in the
profession, if it is a profession. We hear a lot these days about doctors being
sued for malpractice—it has become a new peril in the operating room—but the
press, with few exceptions, remains stubbornly in favor of standing on its mis­




93
takes. Of course, that is one of the things Freedom of the Press is all about. No­
body challenges the right of the publisher to print lies, except when they provide
the basis for libel suits. At the same time, there is an increasingly vocal con­
tingent, in this era of consumer activism, demanding more responsibility in the
practice of journalism.
It is time to call attention to the Ralph Nader of this inky business. His name
is Reed J. Irvine, and he is Chairman of the Board of Accuracy in Media, Inc.
It is a little more than live years ago that Irvine, supported by a few friends,
$200, and a post office box number, set out to organize the business of criticizing
the press and television news organizations. The natural result has been a mini­
mum of attention for AIM in the public prints—it is not considered cricket to
mention AIM in news columns or broadcasts—while this gadfly is becoming in­
creasingly potent.
There no longer is any doubt: newspaper and television network proprietors
now are aware of AIM. They have had thousands of letters; a few columnists
and congressmen are publicizing the AIM effort; the Federal Communications
Commission has been forced to rule on AIM complaints. And, in a few cases, AIM
money has been used to buy advertising space, in which complaints against the
newspaper are printed after the editors have refused to acknowledge error.
Much of this action involves issues of concern to our national defense effort.
Back in 1972, AIM bought a two-column ad in the New York Times to charge
that Times correspondent Anthony Lewis had reported as fact from Hanoi that
the US mining of Haiphong harbor was ineffective. The facts indicated other­
wise. To AIM, there was no reason to believe Anthony Lewis was anything but
an advocate, and it was able to quote Lewis himself in the a d :
“The issue [stopping the war] is now paramount. It comes before other obli­
gations, before personal ambition or comfort. For the ordinary citizen that means
participation in some form of political expression, however inconvenient
involving one’s professional association, school, or other activity in the attempt
to stop the war.”
AIM knew it had identified an openly advocate journalist.
“We believe that Mr. Lewis has enlisted in a crusade. We believe that he feels
his obligation to the crusade comes before his obligation to report the news ac­
curately and objectively. . . Ardent advocacy which leads to misleading report­
ing should not be tolerated by any responsible newspaper.”
Mr. Lewis, of course, still works for the Times.
Irvine, meanwhile, has acquired a bit of nonvoting stock in the Times company
and last spring appeared at a stockholders’ meeting. He offered a resolution pro­
posing that the newspaper should adopt a code of professional ethics, including
a clause to the effect that criticism of news coverage must be reported and
heeded. He even quoted the Times Chairman and President, Arthur Ochs Sulz­
berger, who had said publicly that the press must earn respect. The Irvine resolu­
tion was ruled out of order. By Mr. Sulzberger.
One major victory for AIM involved an ABC broadcast in September of 1972,
in which the network admitted it made several mistakes in a documentary called
“Arms and Security: How Much Is Enough?” Here is Irvine’s own account of
what AIM achieved on the air :
“It [ABC] admitted it had erred in saying that sixty percent of the American
tax dollar goes for defense, amending the figure to forty percent. It admitted
that it had been incorrect when it said that the President’s blue ribbon defense
panel had characterized our defense policies as sufficient. It acknowledged that
the panel had not made such a judgment and that seven of the sixteen members
of the panel had signed a supplemental report which said that the strategic
military balance was running against the United States.
“ABC conceded that it had erred in saying that the American Security Council
had criticized the blue ribbon defense panel, and informed its audience that the
Council had circulated the supplemental statement to the panel’s report. ABC
also conceded error in saying that the B-52 was a supersonic bomber.”
Another AIM challenge to network television was made in 1971. The case was
that of the CBS documentary, “The Selling of the Pentagon.” This was a TY
show designed to expose the Defense Department’s public-relations activities, but
was turned into a diatribe by skillful cutting and rearranging of the film. The
result was both inaccurate and vicious.
AIM challenged CBS to reply to the many questions raised about the accuracy
and editing procedures used in “The Selling of the Pentagon.” CBS gave the same




94
reply to all critics, including the editors of Air Force Magazine. Answers would
be prepared and sent to all critics. They never were, but AIM persisted in its de­
mand. About ten months after the initial broadcast the answers were quietly
inserted in the Congressional Record, by Rep. Ogden R. Reid, who happens to be
a former President and Editor of the New York Herald Tribune. As Irvine has
pointed out, the lack of fanfare and publicity for this CBS document is due to the
fact that CBS had to admit to the errors and questionable editing. AIM prepared
an analysis of the CBS reply, and used the CBS method. It was inserted in the
Congressional Record under the headline: “CBS Digs a Deeper Hole,” by Rep.
F. Edward Hubert, then Armed Services chairman.
NBC’s most prolific pontificator, David Brinkley, has felt the sting of AIM.
Irvine says AIM caught Brinkley using false statistics to try to prove that the
US today is more militaristic than Prussia was in its heyday. NBC refused to
make a retraction. AIM bought advertising space again, this time in the Wash­
ington Post and exposed the Brinkley fraud.
Most recently, AIM has challenged a New York Times account of the ecological
impact of the use of herbicides in the Vietnam War. Again, persistence was
necessary. It took two months, but the newspaper finally ran another article
with accurate information. To experienced observers, it appears that the first
account, called “incomplete, slanted, and erroneous,” was leaked to the paper
by disgruntled and unidentified members of the National Academy of Science.
Currently, AIM is involved in what has become a court battle with NBC over
a television documentary called “Pensions: The Broken Promise.” The film
was an expose of failings in privately administered pension plans. There was
minimum suggestion of the fact that there are many successful private pension
plans. AIM went to the Federal Communications Commission and filed a com­
plaint, charging this was not fair. The FCC ruled against NBC, saying it had not
complied with the fairness doctrine. The network immediately went to the US
Court of Appeals and won a ruling that the FCC had erred in this case. The
vote in court was two to one. AIM has asked for a rehearing.
For support, AIM depends on contributions from hundreds of supporters all
across the country. The organization describes itself as nonpartisan, nonprofit,
and educational. Gifts are tax-deductible. The small staff in Washington ana­
lyzes news coverage and follows up on complaints from friends and supporters.
If the media do not correct errors spotted by AIM, the organization will publi­
cize the fact. A monthly newsletter, AIM Report, is available by subscription
and sent to patrons. AIM is not a lobby.
AIM’s leadership is diverse. The first advisory board included Dean Acheson.
Today, Morris L. Ernest, the liberal attorney and author, is a member of the
board, along with Dr. William Y. Elliott of Harvard, Dr. Harry Gideonse, Clare
Boothe Luce, Eugene Lyons, and Walter W. Seifert, Professor of Journalism at
Ohio State University. The President is Francis G. Wilson, of the University of
Illinois.
AIM is doing to advocacy journalism what Ralph Nader did to General Mo­
tors. It may also be true that AIM has a better case, with more public support,
than Ralph Nader could achieve. On the basis of the record, it has better documenation. What it needs is greater public support for a more worthy cause.

[F ro m th e N a sh v ille T en n essean , M ar. 15, 1 9 7 5 ]
A

nd erso n

P ie c e

Stru ck

a

Low

J o u r n a l is m

B

low

Editor's note: The following letter is a rebuttal to a column by Jack Anderson
which appeared on this page in the March 11th issue of The Tennessean.
(By Frances G. Wilson, President, Accuracy in Media)
We believe you will soon receive (Editor’s note: we have and published) a
Jack Anderson column devoted to an unfair and inaccurate attack on Reed J.
Irvine, chairman of Accuracy in Media (AIM ).
Indications are that Anderson will charge Irvine with misuse of his position
as a government economist. Please evaluate Anderson’s charges in the light of
the following facts.




95
Irvine is chief of the developing countries section of the Division of Interna­
tional Finance of the Federal Reserve Board in Washington. His official respon­
sibilities cover work on Latin America and the Inter-American Development
Bank.
Acting in this capacity on Nov. 22, 1974, he submitted written comments to the
Congressional Research Service of the Library of Congress on a study they had
prepared dealing with loans to Chile by the Inter-American Development Bank
(IDB).
The author of the study knew Mr. Irvine to be an expert in this area and had
previously sought and obtained an interview with him. His supervisor, Mr.
Charles Gellner, had asked Mr. Irvine to send written comments on the paper.
Mr. Gellner said this of Mr. Irvine’s memo: “We felt as though it was a com­
ment by a Federal Reserve official who was responsible, and it seemed to be a
comment by someone who was knowledgeable and should be given serious
T
consideration.”
The CRS report was subsequently revised, taking into account the comments
made by Irvine and others. It will soon be printed and it will carry this ac­
knowledgement : “The author wishes to thank several officials of the Treasury
Department, the IDB, the IDBD, and the Federal Reserve Board for their help­
ful comments on earlier versions of this paper.” It was entirely appropriate for
Mr. Irvine to assist the CRS in this way in his official capacity. His agency and
the CRS recognize this.
On his own time, Mr. Irvine wrote a letter for AIM, which he signed, which
criticized a Jack Anderson column dealing with the above CRS report. This
report was not classified. None of the information used in Mr. Irvine’s letter was
classified. Mr. Irvine received no compensation from AIM for writing or sending
it. There was no violation of law or ethics. Mr. Irvine does his work for AIM
(at) nights and on weekends, which he has every right to do. Mr. Anderson was
T
informed of this in a letter dated Dec. 11, 1974.
The Washington Post asked Mr. Anderson to comment on AIM’s criticism of
his column on the IDB and Chile. Both he and the Post have refused to show his
reply to AIM. AIM had to buy space in the Post to print our letter, and we
criticized Mr. Anderson and the Post in the ad for refusing to show us his alleged
rebuttal.
However, we knowThe did not answer our specific criticisms. After our ad was
printed, we learned of a minor error in the letter, which apparently resulted
from mistranscription of a series of numbers taken over the phone.
This in no way vitiated our statement that curtailment of IDB lending to Chile
w not a significant cause of the economic chaos in Chile under Allende’s rule.
ras
The error was that we had indicated that in the three years preceding Allende
IDB disbursements to Chile averaged $23.3 million a year. The correct figure is
$29 million, compared to the $26 million in the Allende years. None of these figures
was used by Mr. Anderson. He did not mention disbursements.
Mr. Anderson may charge that Mr. Irvine refused to discuss his charges. On
Oct. 4, 1974, AIM informed Mr. Anderson by letter that he should communicate
with AIM in writing only. Why? Because on that day Mr. Irvine had a phone
conversation with Les Whitten of Mr. Anderson’s office, during which it became
clear that Mr. Whitten planned to misquote him.
When challenged, Mr. Whitten said: “The Q and A will show. .
This in­
dicated that we was taping, and Mr. Irvine terminated the conversation and wrote
T
to Mr. Anderson about it, demanding a copy of the tape. Mr. Anderson did not
reply.
AIM has received numerous complaints about inaccuracies in the Anderson
column. Our practice is to give him a chance to comment on any complaint before
we send out a letter to the press. He has never taken the opportunity to refute
any of our complaints.
Instead of devoting his time to improving the accuracy of his reporting, he has
mounted an unfair, inaccurate attack on the man who has had the courage to
T
confront him with his errors. This type of crude intimidation to stifle criticism
is abhorrent to all good journalists.
It is the kind of journalism AIM was founded to combat.
T




96
[F r o m the L o u is v ille T im es, M ar. 20, 1 9 7 5 ]

A

V in d ic t iv e M

uckraker at

W

ork

The nation’s most widely distributed muckraker columnist has shown himself
to be a vindictive, self-serving operator who would be called to judgment by his
professional peers if they had the guts to match their pretensions.
Jack Anderson is the name. Heir to the error-soiled mantle of his mentor, Drew
Pearson. Distributor of the 1972 “scoop” that—minus any proof—depicted Mis­
souri Sen. Tom Eagleton as a drunken driver. Producer through the years of
other phony or misleading “revelations” syndicated to the readers of 900 news­
papers along with more valid disclosurers that have kept the column viable.
Now what Anderson has done should make readers of the Louisville dailies
grateful that the column is absent (the suburban Jefferson Reporter and The
Frankfurt State Journal still run Anderson’s mixtures of gold and garbage).
For Anderson and partner-in-rumor, Les Whitten used their column last week
to get even with a nagging gadfly who had drawn blood. It was a cunningly un­
balanced misuse of reporter power—the kind that feeds public mistrust of all
media.
The victim w Reed J. Irvine, a senior economist for the Federal Reserve
’as
Board. Privately, he is a founder and chairman of Accuracy in Media, which bills
itself as “ a non-partisan, non-profit citizens’ organization that protects the
people’s right to accurate, unbiased news coverage.”
With Whitten’s help, Anderson made Irvine the target of a vicious personal
attack. “Fed aide uses job to attack press” was the headline used in The Wash­
ington Post.
The column accused Irvine of having misused his government job to gather
information for rebutting the press in ways that, if true, would make Irvine guilty
of criminal acts.
He was said to have misled other federal officials into supplying information
they believed was intended for Federal Reserve use.
Beyond that, Anderson portrayed Irvine and Accuracy in Media as oil-company
hirelings. “ Secret contributions” from oil firms were described as a prelude to
blasts by Irvine against press criticisms of oil profits.
Irvine denies all the charges. Of the allegation that Big Oil, in effect, brought
Accuracy in Media’s press criticisms, he says vehemently, “We have never asked
for anything from anybody in the process of taking a position.”
And any careful observer of Irvine and the generally conservative, proPentagon, pro-corporation zealots involved with him must tend to believe the man.
As one Washington press observer says, “ In terms of what routinely goes on
here, what Irvine may have done was a minor sin. The real question is : Would
Anderson have jumped on him this way if Irvine had not successfully zapped
him? What Anderson set out to do was destroy a man!”
One of the “zaps” came last month. The National News Council upheld an Ac­
curacy in Media complaint that Anderson had misused quotes in a column last
August.
Under the title of “The Torture Graduates,” as the New York Post chose to call
it, the columnist had reported “some chilling views about torture tactics” devel­
oped by foreign students at an International Police Academy run by the U.S.
State Department.
News council members agreed that Accuracy in Media was correct m saying
Anderson had misrepresented the attitudes of students whose papers he quoted.
Moreover, the council found that Anderson had misrepresented as contemporary
the quoted student papers that, in fact, had been written between 1965 and 1967.
Anderson’s immediate response was to belittle in his column the thoroughness
of the associate director of the new council who had examined the documents.
In last week’s column, designed to torpedo Irvine and Accuracy in Media,
Anderson made no mention of the police academy case.
That is not the way a journalistic scavenger works. Instead Anderson likened
Irvine’s operation “to that of the notorious White House plumbers .
assigned
to hound the press.” Irvine, he wrote, “has . kept up a torrent of abuse against
us characterized by misstatements, distortions and out-of-context quotations.
Anderson, interviewed yesterday, said two press groups are reviewing the
“ torture graduates” report and “ I’m willing to bet they’ll find in our favor, that we
were fair and responsible.”




97
As for Irvine, Anderson insisted the column attack on him was justified because
evidence of a former Federal Reserve Board vice-chairman’s interest in Accuracy
in Media proved “an anti-press campaign conducted out of the Federal Reserve.,,
Somehow it doesn’t wash. The Anderson who pounces upon an official for
gathering information to rebut leaked material is the same Anderson who won a
1972 Pulitzer Prize as the pipeline through whom sources leaked secret papers
showing a U.S. tilt toward Pakistan in the Pakistan-India war.
It is the same Anderson who told an interviewer, “We don’t use the column to
blackjack anybody.”
Oh no? Up until Drew Pearson’s death occasioned Courier-Journal cancellation
of the column, a thick file here reflected the protests of individual’s unfairly
pilloried by Pearson and his legman Anderson through stories never properly
checked (and sometimes rejected by The Courier-Journal).
Now, as then, papers that carry the columns give as an excuse, “He does seem
to get a lot of good stuff nobody else does.”
The gains so made are not worth the price of vindictiveness and a double-standard rumor mill. Maybe that’s why The Washington Post sheepishly runs Anderson
on the comics page.

Chairman P a t m a n . On the CBS program, Mr. Irvine, you stated
that you contacted CBS. Did you also contact any other media about
this program ?
Mr. I r v i n e . Another media?
Chairman P a t m a n . Yes. Did you not go to media offices during your
normal working hours at the Federal Reserve?
Mr. I r v i n e . N o ; I did not go during my normal working hours. I
think that the instance you are referring to was that I had lunch over
at the Press Club one day, and I dropped down to the office of the
“American Banker” and discussed with an individual, a girl there,
something about the matter—I was accompanying, as I remember
Mr. Kalish, who was the executive secretary of AIM. We had some
question about their covering the story.
Chairman P a t m a n . I will just ask you one other question.
Mr. I r v i n e . Yes, sir.
Chairman P a t m a n . Would you state each position you have held
with the Federal Reserve, what the duties were, the term of each
position, and the compensation received ?
Mr. I r v i n e . I w i l l b e h a p p y t o d o t h a t .
[In response to the request of Chairman Patman, the following
information was submitted for the record by Mr. Irvine:]
POSITIONS HELD BY REED J. IRVINE AT FEDERAL RESERVE
Date
Title and Responsibilities

From—

Economist, Division of International Finance, Far Eastern Oct. 9,1951
Section with responsibility for area from Japan to Indonesia.
Chief, Far Eastern Section, Division of International Finance, Sept. 21,1958
with responsibility for work on area from Japan to
Afghanistan.
Chief, Asia, Africa and Latin America Section, Division of Jan. 1,1962
International Finance with responsibility for work on
countries in those continents.
Associate Adviser, Division of International Finance and June 8,1964
Chief of Asia, Africa and Latin America Section. Covered
same area as above. Also responsible for staff work on
National Advisory Council on International Monetary and
Financial Policies, Development Loan Staff Committee and
foreign missions.
Adviser, Division of International Finance, with essentially Nov. 1,1965
the same responsibilities as above. The name of the section
for which I have responsibility was changed to International
Development Section.




Salary
To—

Beginning

Ending

Sept. 21,1958

$4,200

$8, 570

Jan.

1,1962

9,890

13,730

June

8,1964

13,730

17,210

Nov.

1,1965

20,000

20,000

To date

21,000

37,000

98
Chairman P a t m a n . Mr. Anderson, do you have something?
Mr. A n d e r s o n . Yes. I recognize that time is short. There are many
things I would like to add. I will add them to the record later. But I
think this much needs to be said now, because you may want to call
additional witnesses.
Mr. Irvine has committed perjury here today. He was sworn; he is
under oath. He has stated under oath that he did not use any of his Fed
facilities or Fed time to promote AIM’s activities. That is a lie; that
is perjury. I am going to suggest to you, and will be glad to cooperate
with titie subcommittee in supplying witnesses. One witness that I would
suggest for example that you call is the former national editor of the
Washington Post, Larry Stearn. Larry Stearn received a call from
Mr. Irvine stridently criticizing the Washington Post coverage of the
Chilean story. Mr. Stearn Avanted to call back and he called Mr. Irvine
at his home and found him not there. His home advised him that he was
at the office, and that indeed is where Mr. Stearn found him.
Mr. C o n l a n . Y o u mean, when a newspaperman calls you, you are
not supposed to reply to him ?
Mr. A n d e r s o n . He called the newspaperman from his Fed office
using Fed telephones to promote AIM activities, to criticize the Wash­
ington Post. He has just testified, Mr. Congressman, that he does not
do that. Now I am to cite a witness and would be glad to have him
called to have him tell you, under oath, whether or not he got a call
from Mr. Irvine at the Fed office promoting AIM’s activities.
Mr. I r v i n e . Mr. Chairman, if I could make a rejoinder that, I do
not recall testifying or anybody asking me whether I ever made a tele­
phone call that might have concerned an AIM matter from my office
phone. If anybody had asked me that, I would have said yes, I have
on occasion done that. I have on occasion, and as a matter of fact, re­
ceived calls from Mr. Anderson’s office on AIM business. As a matter
of fact, I have refused to accept them.
Chairman P a t m a n . I will announce that hearings will continue on
this subject of the Federal Reserve audit and matters relating to the
operations of the Federal Reserve after the Easter recess. I think that
it would be in order to allow each one of these witnesses an opportunity
to extend their remarks to the extent of inserting additional material
that is relevant to the discussion here this morning.
Is there objection to that unanimous consent request?
Hearing none, therefore, you may extend your remarks to bring up
anything you desire in explanation or otherwise that you would like
to place in the record.
[Testimony resumes on p. 137.]
[Under the unanimous-consent request granted above, the following
extension of remarks was received from Mr. Irvine for inclusion in
the record:]




99
EXTENSION OF REMARKS OF REED J. IRVINE
Mr. Chairman, Mr. Anderson has made many statements here today that are in­
accurate and which should be corrected for the record.

I am not sure that in

the time available I can correct every single inaccuracy in his statement, but
I shall try to cover the most important ones.
Mr. Anderson began by saying that he had conducted "only a limited investigation
of the Accuracy-in-Media-Federal-Reserve-Board connection."

Since there is no

connection, a very short investigation would be all that would be required to
have established that fact.

However, it is my information that Mr. Anderson has

been laboring since at least early December 1974 to try to establish his claim
that I have been doing AIM work on Board time.

I understand that his associate,

Mr. Whitten, has had numerous conversations with the Board's press officer about
this matter.

I would say that given the fact that Mr. Anderson had nothing to

go on and still has nothing to go on, the time he has spent on this investigation
is far out of proportion to its importance.

It would appear to me that he has

devoted all this time and energy to this relatively insignificant matter, not
because he thought there was some great scandal involved, but because he was de­
termined to find something that he could use to intimidate me.
Mr. Anderson tried to make it appear that the organization of Accuracy in Media
was somehow related to the animosity of Richard Nixon toward the press.
gation is totally inadequate.

His investi­

Accuracy in Media was an idea that my friends and I

had been working on long before 1969.

We had been concerned for several years about

the problem of distorted reporting and its consequences for our society.

We had

been particularly concerned about the role that TV reporting had played in fanning
the flames of violent disturbances.

One example of this that had been given wide

attention was the coverage of the Democratic National Convention in 1968.

This

had been criticized by leading Democrats, by other newsmen, and it had been in-




100
vestigated by the FCC.

One of our first overt moves was to suggest to the TV

networks that they themselves establish an organization that could try to set
and enforce standards to be followed by the TV newsmen and camera crews.

This

suggestion was made by me in letters to the networks, but it was rejected.
tried to get a prominent newsman to start such an organization.

We

That failed.

We finally decided to do it ourselves, with little more than a letterhead and
postoffice box.
1969.

The announcement of AIM’s organization was made in early September

Mr. Anderson suggested that this was after Vice 'President Agnew "began

his poisonous campaign against the press."

The fact is that AIM's organization

preceded the famous Agnew speech in DesMoines, Iowa.
knowledge of the Vice President's plans or intentions.

We, of course, had no
It is ridiculous to

suggest that there was any connection between our announcement, which the press
completely ignored, and the actions taken by the Vice President of the United States.
Mr. Anderson says that the founder of AIM was Reed Irvine, a bureaucrat making
$37,000 a year.

When AIM was organized, I was a bureaucrat making $22,500 a year.

There were others involved in its organization, notably Dr. Benjamin Ginzburg,
retired staff director of the Senate Subcommittee on Constitutional Rights, who
was AIM's first Executive Secretary.

I had no formal position in the organization

at that time.
Mr. Anderson refers several times to my "anti-press" campaign.

Those who

are familiar with the work of AIM know that AIM is dedicated to improving the press,
not to tearing it down.

AIM is not "anti-press."

It deplores broadside attacks

on the press which are based on generalized charges without evidence to back them
up.

The worst enemies of the press are those in the profession who through care­

lessness or deliberate distortion of news reporting bring discredit on the press
and undermine its credibility.




AIM is against those who do this, and we endeavor

101
to both correct the errors they have made and to show greater concern for accuracy
in their future work.

This is an activity that is applauded and encouraged by many

responsible journalists.

It is disliked primarily by those who are inclined to be

inaccurate and who would prefer that their readers not know about their errors.
In my opening statement, I discussed the case of the memorandum which I wrote
as a Federal Reserve Board official to Mr. Charles Gellner of the Congressional
Research Service.

That statement makes it clear that this was a perfectly proper

thing to do in my official capacity, and there is no need to go into it again, except
that I would like the letter to you from Governor Holland dated March 17, 1975,
inserted in the record.

This makes it clear that the Board agrees that my action

in writing to Mr. Gellner was fully within the sphere of my official responsibilities.

[Letter referred to follows:]




102
B O A R D OF G O V E R N O R S
OF TH E

FEDERAL

RESERVE

5Y5TEM

W A S H IN G T O N . O. C. 2 0 5 5 1

R O B E R T C. H O L L A N D
M EM BER O F TH E BOARO

March 17, 1975

The Honorable Wright Patman, Chairman
Subcommittee on Domestic Monetary P o lic y
Committee on Banking, Currency and Housing
House o f R epresentatives
Washington, D.C.
20515
Dear Mr. Chairman:
Chairman Burns has re fe rre d to me f o r fu rth er re p ly
your l e t t e r o f March 11, 1975, regarding the a lle g a tio n s in a
Jack Anderson/Les Whitten column that Reed J. Ir v in e , A dviser
in the Board’ s D iv ision o f In tern a tion a l Finance, used h is
o f f i c i a l p o s itio n to fu rth er the purposes o f an o u tsid e organ i­
za tion . As Chairman Burns advised in h is response o f March 13,
in my cap acity as Board member resp on sib le fo r in te rn a l admin­
is t r a t io n , I am in charge o f the Board’ s in q u iry in to the charges
in volvin g Mr. Irv in e*s a c t i v i t i e s . Certain o f the questions that
you have asked must await the outcome o f th is in q u iry , which is.
nearing com pletion. I w i ll advise you o f developments and o f the
relevant re s u lts o f th is in q u iry.
Turning to those o f your questions th at are su s ce p tib le
to immediate response, Mr. I r v in e ’ s o f f i c i a l d u tie s are as fo llo w s :
He i s an Adviser in the Board’ s D iv ision o f In te rn a tio n a l Finance
and i s the Chief o f the In tern a tion a l Development S ection in that
D iv ision . He has r e s p o n s ib ilit y fo r m onitoring and analyzing
a c t i v it i e s in the developing cou n tries and op era tion s o f the
in tern a tion a l development finance in s t it u t io n s . He a lso i s the
Federal Reserve s t a f f rep resen ta tive to the N ational Advisory
Council on In tern a tion a l Monetary and F in an cial P o lic ie s (NAC).
Regarding the fo re g o in g , Mr. Irv in e has the r e s p o n s ib ilit y o f
providing appropriate advice to the Board, p rim a rily through
the D ivision o f In tern a tion a l Finance.
Mr. Irv in e sta te s that in h is ca p a city as a Board
o f f i c i a l , he obtained from the C ongressional Research Service




103
at the Library o f Congress a copy o f a Chilean study prepared by
Mr. Jonathan Sanford. Mr. Irv in e submitted comments on th is study
to the Library o f Congress in a memorandum dated November 22, 1974.
The content o f th is memorandum was w ithin the sphere o f Mr. I r v in e ’ s
o f f i c i a l r e s p o n s ib ilit ie s at the Board.
You have inquired as to what value the in q u irie s made
by Mr. Irv in e could serve in carrying out h is o f f i c i a l du ties as
an employee o f the Federal Reserve. Mr. Irvin e*s d u tie s , set
fo rth gen erally above, in clu d e— among oth ers—monitoring and
analyzing the operations o f the Inter-American Development Bank
and the In tern a tion a l Bank fo r R econstruction and Development
(World Bank). In h is ca p a city as Federal Reserve s t a f f repre­
sen ta tiv e to the NAC, Mr. Irv in e provides a n a ly sis o f questions
l i k e ly to come b e fo re the NAC and advises the Board on p o s itio n s
to be taken by the Federal Reserve in NAC d iscu s sio n s. Matters
concerning the Inter-American Development Bank and the World
Bank, in cluding the loan p o li c ie s o f those in s titu tio n s v i s - a - v is
p a rticu la r co u n trie s , freq u en tly are considered in the NAC. The
C ongressional Research S ervice study prepared by Mr. Sanford
d ea lt with the p o li c ie s o f the Inter-American Development Bank
and the World Bank toward C h ile , and thus was relevan t to the
an alysis and advice Mr. Irv in e gave in h is o f f i c i a l d u ties as
an employee o f the F ederal'R eserve.
As to your fi n a l q u estion , the Board has never condoned
the use o f i t s f a c i l i t i e s fo r ou tsid e purposes and never authorized
Mr. Irv in e to use Board f a c i l i t i e s to fu rth er h is work as an
o f f i c i a l o f Accuracy in Media. As required o f a l l employees,
Mr. Irv in e f i l e d a statement rep ortin g ou tsid e a c t i v i t i e s under­
taken on h is own tim e, in cluding a c t i v i t i e s as Chairman, Board
o f D ire cto rs , AIM. This rep ort was reviewed and approved by
appropriate s t a f f o f f i c i a l s , in d ica tin g that the Board ra ised
no o b je c tio n s to such ou tsid e a c t i v i t i e s by Mr. Irv in e in h is
personal ca p a city . The Board has n eith er endorsed nor opposed
Mr. I r v in e ’ s ou tsid e a c t i v i t i e s .
No present member o f the Board has authorized or
sanctioned any use by Mr. Irv in e o f Board personnel o r f a c i l i t i e s
in connection with any ou tsid e a c t i v i t i e s . I do understand that
the former V ice Chairman o f the Board, J. L. Robertson, did
evidence a personal in te r e s t in Accuracy in Media w hile at the
Board and that subsequent to h is leaving the Federal Reserve in
1973, he became a member o f AIM’ s N ational Advisory Board.




104
As sta te d , I vri.ll respond to the remainder o f your
qu istion a ur>on com pletion o f our in q u iry. I a n tic ip a te i t s
etiot* y»:.\1tor to my nppaarance on b eh a lf o f the Board b e fo r e
yx ir Subcov:
la te r this week. I understand that you have
"iO
Hr. Irvine*u appearance b e fo re the Subcommittee,
that Jn r-ap.ponse to n o tic e of the fa c t contained in your
2Hr.;h 13 jj iic r to Chairman Burno, you have been advised by
CLairuan )>inx.; that tha Ecard has uo o b je c t io n tc Mr* Ir v in e ’ s
end testimony ou h ie own b e h a lf.
S in cerely youra,

A/
R&bert C. Holland

TJO1C: CP: RCH/1r
>
be:

Mr. Irvins;




105
I would say that Mr. Anderson’s statement suggesting that Mr. Gellner thought
I had obtained a copy of their report under false colors is not supported by Mr.
Gellner’s statements to me.

He informed me when I asked about this charge that

that was not the way he had construed the matter.
Mr. Anderson said that I used the report obtained from the Library of Congress
to attack the press.

That is false.

official comments on it.

I read the report and gave Mr. Gellner my

Independently I wrote a letter for AIM which criticized

the Anderson column which had been based on the CRS report.
use of the report and did not even refer to it.

The letter made no

I would emphasize again that I

was not paid for writing the letter for AIM, and I did it on my own time.

It might

be noted that Mr. Anderson, who presumably had no right to receive the CRS report
if it was not being made available to the press and public, used it as material for
his column for which he was paid very handsomely.

Thus if anyone is to be criticized

for using this report for private purposes it is Jack Anderson.
Mr. Anderson has charged that I am expert at "manipulating facts to form a
false picture."
on.

As I have said, Mr. Chairman, AIM has only its credibility to go

If Mr. Anderson can show that AIM is inaccurate, he can destroy it very quickly.

It is interesting that the example that he used in his statement to prove his
point reflects only on his own credibility, not mine.

We did indeed expose the

fact that Mr. Anderson's description of the report on marihuana issued by the
Senate Internal Security Subcommittee was inaccurate.

The fact that the inaccuracy

consisted of only one sentence certainly did not exculpate the author.

It was a

serious indictment of an important public document, but it was obviously written
by someone who had not even seen the document.

The report in question was obviously

not prepared by an outside consultant, since it was a report on hearings that
the Subcommittee had held.

It covered testimony taken from 23 individuals who

had expert knowledge about marihuana and its effects.




It also included some 80

106
pages of articles on marihuana from scientific, journals.

The work on the hearings

and the report was done by a member of the staff of the subcommittee, Mr. David
Martin, not by an outside consultant.

Mr. Martin is also on the Board of AIM.

Mr. Anderson seems to think that in pointing out that his reference to the sub­
committee report was totally inaccurate, AIM should have mentioned Mr. Martin's
connection with AIM.

I do not see that this is relevant.

or not Anderson’s description was factually accurate.

The question is whether

We sent him a letter in

which we indicated that he must have been talking about some other document,
since it was obvious that the report we had in our possession did not fit the
description he gave in his column.
inserted in the record.

I would like to have a copy of this letter

Mr. Anderson never replied to it, and in his testimony

he said nothing to indicate that our criticism of his statement had been inaccurate.
I would also like to insert the letter we subsequently sent to newspapers on this matter

[Letters referred to follows:]




107

Accuracy In Media, Inc.
777 14th Street, N.W.
Washington, D.C. 20006
(202) 783-4407
Reed J. Irvine
Chairman of the Board

February 4, 1975
11:45 p. m.
Mr. Jack Anderson
1401 16th St., N. W.
Washington, D. C. 20036
Dear Mr. Anderson:
In your column this morning you mentioned a report on marijuana issued
by the Senate Internal Security Subcommittee. You stated that the report
was prepared not by the subcommittee but by an outside consultant. You also
indicated that the report was of poor quality.
The subcommittee recently published a report of hearings on the subject of
the "Marihuana-Hashish Epidemic and it Impact on United States Security." The
hearings were held over five days and testimony was taken from 23 different
individuals. Nearly all of them were medical doctors, Ph.D.s or professors
with expert knowledge about marijuana. In addition to these statements, the
report contains over 80 pages of articles reprinted from scientific journals.
In view of the distinction of the experts assembled by the committee to
provide this testimony it seems highly inaccurate to characterize the report
as you did. Certainly it cannot be said that the report was the work of an
outside consultant. It is clearly a report on hearings held by the subcommittee.
It would seem that you must have had some other document in mind, but I
understand that this is the only document that the Subcommittee has published
on this subject.
Could you tell us whether or not your reference was to this published volume
of hearings? Jf so, we would be interested in knowing how committee hearings can
be written by an outside consultant. We would also like to know what authority
you relied upon to judge the quality of the statements made by the expert witnesses
who either gave testimony or whose articles were reproduced in the appendix of
the report.

cc: The Hon. James 0. Eastland
Mrs. Katharine Graham
Mr. Charles Seib

50-365 0

-

75 - 8




108

Accuracy In Media, Inc.
777 14th Street, N.W.
Washington, D.C. 20005
(202) 783-4407
Reed J. Irvine
Chairmen of the Board

March 1, 1975
To the E d ito r:
In a recen t column (February 4 ) , Jack Anderson d iscu ssed a
rep ort on marijuana issu ed by the Senate In te rn a l S e cu rity Sub­
committee. He s a id the re p o rt was poor in q u a lity and had a ctu a lly
been prepared by an o u tsid e co n su lta n t.
Mr. Anderson was apparently r e ly in g on in a ccu ra te , hearsay
in form a tion . The re p o rt on marijuana p u blish ed by the Senate
In te rn a l S e cu rity Subcommittee c o n s is ts o f ex ten siv e testim ony
taken by the Committee from 23 exp erts w ith s p e c ia liz e d knowledge
about marijuana and i t s e f f e c t s on those who use i t .
They came
from fo r e ig n co u n trie s as w e ll as from d if fe r e n t p a rts o f the U. S.
The hearings la s te d f i v e days, and the re p o rt i s a h ig h ly u se fu l
compendium o f in form a tion about marijuana. In a d d itio n to the
exp ert testim on y, i t con tain s 80 pages o f a r t i c le s about marijuana
r e p rin te d from s c i e n t i f i c jo u r n a ls .
For those who wish to see fo r themselves how in a ccu ra te
A nderson's d e s c r ip t io n was, co p ie s o f the re p o rt may be purchased
from the Government P rin tin g O f f ic e , Washington, D. C. 20401
(E d itors can probably ob ta in fr e e co p ie s from the Senate In tern a l
S ecu rity Subcommittee, Washington, D. C. 20510).
We have asked Anderson fo r an explan ation o f h is c h a r a c te riz a ­
t io n o f th is re p o r t. W a ls o asked what a u th ority he r e lie d upon
e
f o r the judgment that the q u a lity o f the re p o rt was poor. He has
n ot responded.

cc:

Jack Anderson and papers carrying
his column




Accuracy in Media, In c.

109
Mr. Anderson has mentioned in

his column and in his testimony a statistical

error that was found in our letter to the editors criticizing his column on Chile
and the IDB.

It is true that for some reason we obtained a figure for the total

disbursements of loans by the IDB to Chile for the years 1968-70 that was incorrect.
The figure we had was $70 million, and after our ad appeared in the Washington Post
on February 18, 1975, we learned that the figure should have been $88 million.
This did not in the least affect the thrust of our argument.
ments in the Allende years were $3.

It meant that disburse­

million a year less than in the three preceding

years, not $3 million a year greater, as we had thought.

Either way the difference

is insignificant when one considers that Chile was spending over a billion dollars
a year on imports.

A decline in receipts from loan disbursements of that magnitude

could not possibly explain the serious economic difficulties that befell the country,
as Anderson had charged.

I would like to point out that after the error was called

to our attention, we wrote a letter to The Washington Post pointing it out.
did not publish the letter.

this error to be included in the record.

[Letter to The Washington Post follows:]




They

I would like a copy of our letter to The Post correcting

110

Accuracy In Media, Inc.
777 14th Street, N.W.
Washington. D.C. 20005
(202) 783-4407
Reed J. Irvine
Chairman of tht Board

March 3, 1975
Editor
The Washington Post
115C)a5th S treet, N. W
.
Washnington, D. C. 20005
To the ed itor:
In a statement published in the Washington Post on February 18,
we reproduced a le t t e r we had sent to a number o f newspapers about
the International Development Bank and Chile. The point o f the le t te r
was £hat the refu sa l o f the IDB to approve substantial new loan
commitments to Chile during the Allende years did not account far
the very serious fin a n cia l problems Chile encountered in that period.
In the le t te r we pointed out that the Bank had continued to disburse
funds to Chile against loans previously committed. W said that
e
the amount disbursed during the Allende years was actu ally higher
than in the preceding three years—$79 .m illion compared to $70 m illion
This was based on information we had obtained from the IDB over
the telephone. W have since learned that there was an error in the
e
to ta l fo r the three pre-Allende years, and that the*correct disburse­
ment figure was $87.8 m illio n . I t was not true, th erefore, that d is ­
bursements were higher in the Allende period. However, the" point
we wished to make remains v a lid . C h ile 's fin a n cia l problems under
Allende dwarfed the amount o f cre d it obtainable from international
fin an cial in stitu tio n s , and the d ifferen ce in disbursements o f IDB
cred its in the Allende years•and the preceding Allende years could
not have made any sig n ifica n t contribution to eith er causing or
solving those problems.
However, we regret the error, which is evidently the result of
taking a series of numbers over the phone rather than getting them
in writing.




I ll
Hr. Anderson asserts that we were wrong in saying that the Chileans had offered
documentation of their side of the story about charges by one Amy Conger that she
had been tortured in a Chilean jail.
provide him with documentation.

Mr. Anderson says the Chileans refused to

AIM has a copy of a letter dated December 16, 1974

from Mr. Rafael Otero of the Chilean Embassy to Mr. Anderson in which he discusses
this case in detail and encloses a copy of a report on the matter from the "Fiscalia
Milltar" to the Government of Chile.
documentation of this case.

Other journalists were supplied with full

There is no reason why Mr. Anderson could not have

obtained them if he really wanted them.
Mr. Anderson misquotes a letter from Dr. Francis G. Wilson, president of AIM,
to editors.

Dr. Wilson had said that Jonathan Sanford of the CRS had called on

Mr. Irvine, knowing him to be an expert in the area of the subject that Sanford's
report for the IDB had dealt with.

Anderson distorts this to say that Wilson

said Sanford ’knew Mr. Irvine to be an expert in" the Chilean "area..."
’
We have discussed the question of AIM's financing, and I would add only one
thing.

AIM has been financed very modestly.

Its total budget in a year does

not begin to compare with the budget of Mr. Anderson's office.

AIM has been able

to function because, like Ralph Nader, we have had the support of people who are
willing to work for nothing or for very little.

It is unfortunate that Mr. Anderson

clouds this essential fact with his efforts to suggest that we are in the pay of
the CIA or sinister groups out to get the press.

These charges are baseless.

Finally, Mr. Anderson went over the list of AIM's National Advisory Board very
selectively in an effort to give a distorted picture of its composition.

He did

not mention that Murray Baron was one of the founders of Americans for Democratic
Action, a leader of the Liberal Party in New York, and a member of the Board of
Freedom House.




He alluded only to his connection with the Committee of One Million,

112
suggesting that this was a conservative organization.

Actually it was a broad-based

organization which included both liberals and conservatives.
He also skipped over Morris L. Ernst, one of the founders of the American Civil
Liberties Union, and the grand old man of civil liberties in this country.

He

skipped Dr. Harry Gideonse, Chancellor of the New School of Social Research, another
distinguished liberal.

He skipped Marx Lewis, a veteran trade unionist, who

early in his career served here on Capitol Hill as administrative assistant to
one of the few congressmen ever elected by the Socialist Party.

He skipped Professor

Frank Trager, Professor of International Affairs at New York University and a
distinguished liberal.

He did not mention that the Hon. Dean Acheson proudly

served on the AIM National Advisory Board until his death.

I do not accept Mr.

Anderson's characterizations of the the board members he did name, nor his characteri­
zation of my personal philosophy, but I do want to emphasize that AIM tries to
maintain a balanced position that will appeal to both responsible liberals and
conservatives.

A recent article in the New York Times quoted me as saying that

there was some truth in the statement that AIM was a "political propagandist group."
This was a misunderstanding of my statement that we all have our political philosophies,
I included, but that in AIM we try to keep our personal views from influencing the
way in which we handle complaints of errors.
I want to say a brief word about Mr. Anderson's charge that I once called
a reporter for the Washington Post from my office phone.

As I said, I would not

deny that I sometimes use my office phone for personal calls, as do all officials
in the government that I know.

I have emphasized that I bend over backwards to

try to avoid such calls that might involve AIM.

I recall once talking to Mr.

Laurence Sterne of the Washington Post to call to his personal attention an error
he had made in an article about Chile.

As I recall, this call was made after

normal working hours, and I think that I simply identified myself as Reed Irvine,




113
Mr. Chairman, this concludes my response to Mr. Anderson.

As you know,

The Federal Reserve Board has made a thorough investigation of his charges and
has found them to be groundless.

I ask that the letter to you reporting on

the outcome of this investigation be included in the record.




114
S u p p l e m e n t a l M a t e r ia l S u b m it t e d
F or Th e Record
B y R e e d J. I r v i n e
What is Accuracy in Media?
by
Reed J . Irvine
Jack Anderson's recent attack on Accuracy in Media gives a totally misleading
impression of what this organization is and what it does.

Let's set the record

straight.
AIM is a nonprofit, nonpartisan, educational organization.

It was organized

in September 1969 by a few public spirited citizens who were deeply concerned about
their country's future.
democratic society.

They regarded the news media as the eyes and ears of our

The media provide us with the vital information we need to make

important decisions that affect our economy, our liberties and our security.

If the

media do a poor job and provide us with distorted or flawed information, we can
very well end up making some very bad decisions.
Contrary to what Jack Anderson has said, AIM is not "anti-press."

Responsible

veteran reporters have said that AIM is the best thing that ever happened to the
press.

If the AIM concept works, if the press can be made more accurate and more

fair, public respect for the press will rise.

That is one of AIM's major goals.

AIM is dedicated to improving the news media by pressing for accurate, fair
reporting.

It does not issue broadsides criticizing the news media as an institution.

What it does do is investigate complaints of specific instances of inaccurate or
unfair reporting.

In the past few years it has received hundreds of complaints,

ranging from false charges that flouridation of water causes sickle cell anemia
to a complaint that a major documentary by NBC on private pension plans was one-sided
and therefore unfair.
professional manner.

These complaints are investigated and acted upon in a calm,
If investigation indicates that an error has been made, AIM

tries to get a correction.

Sometimes it succeeds.

Sometimes it is necessary for

it to buy space in the newspaper to get a correction made.




115
AIM is not a large organization,

and its work is dbne largely

by volunteers who are dedicated to the cause of accuracy and fairness.
Its only strength lies in its own credibility.

If it were careless

with the truth, as Anderson charges, it would not and should not survive.
It would be laughed out of existence.
The fact that it has survived and grown in influence even while
critiquing the giants of the media is ample proof that its criticisms
have been accurate.
work A IM does.

Let me cite just a few examples of the type of

On February 4, the Anderson column carried an item

about a document published by the Senate Internal Security Subcommittee
on marijuana.

Anderson said the report was poor in quality and had

actually been prepared by an outside consultant.
that night

AIM wrote to Anderson

(at 11:45 p . m . ) : pointing out that the document on marijuana

that had actually been issued by the Subcommittee was

really a report

of hearings which included the testimony of 23 experts and 80 pages
of articles reprinted from scientific journals.

We asked Anderson

whether he had some other document in mind and what was his authority
for the judgment that the statements by the experts in the document as
published were of poor quality.

Not having received any reply to these

questions from Anderson, we sent out a letter to the papers on March 1
in which we described the committee Report accurately and mentioned
the fact that Anderson had not answered our questions.— ^
Another criticism that we made of Anderson related to a column
he published on August 3, 1974, in which he used statements taken out
of context to suggest that students at the International Police Academy
had "developed some chilling views about torture tactics."

l.See exhibit A




116
We wrote to Anderson about this on September 7, pointing out
that in five out of six cases he had quoted the students out of context

2/

and had misrepresented what they had said—

When no reply was received

from Anderson, we sent a shorter letter on this subject to his papers
3/
on September 17r We also filed a complaint with the National News
Council in New York.

The National News Council made its own independent

investigation.

They reached exactly the same conclusion that we did,
4/
and they released that decision to the press on February 5, 1975 —
Anderson subsequently published a bitter attack on the National
News Council, but he has yet to demonstrate that the charge that he
misrepresented the views of the students by taking their quotes out
of context is u n f o u n d e d ^
Lest you think that AIM specializes in correcting Jack Anderson,
let me point out that I personally do not read his column unless it
becomes the subject of a complaint.

It seems that we receive more

complaints about him than any other single journalist, but T assure
you that we have devoted the bulk of our energies to much more important
matters.
For example, AIM was very much involved in exposing the errors
and unethical editing of the CBS documentary,

"The Selling of the

Pentagon," a few years ago.

In a sense, AI M got in the last word

in that famous controversy.

It pressed CBS for its answers to the

criticisms that had been made of the program by AIM and others.

When

those answers were quietly slipped into the Congressional Record in
December 1971. AIM did an analysis of them which Congressman Hebert
thought highly enough of to put into the record on February 16, 1972r^
2. See Exhibit B
3. See Exhibit C
4. See Exhibit D




5. See Exhibit E
6. See Exhibit F

117
Another famously inaccurate CBS documentary,
was aired before AIM was organized.

"Hunger in America,”

It was strongly criticized in

Congress, notably by Congressman Gonzalez, and by Secretary of Agri­
culture Orville Freeman.

The program contained some very serious

errors, and when CBS planned to air it again last year, AIM took
an interest in the matter.

We suggested that it not be broadcast

unless the admitted serious errors were either taken out or unless
attention was called to them.

The documentary was not broadcast.

A IM probably achieved its greatest fame as a result of winning
a landmark decision from the Federal Communications Commission against
NBC.

The FCC, for the first time in history,

documentary, "Pensions:
of the fairness doctrine.

found that a network

The Broken Promise," reflected a violation
It was found that the program was one-sided

and that no other programing to achieve balance had been presented by
the network.

This case was appealed to the courts.

After one panel

reversed the FCC, AIM applied for and obtained an unusual rehearing
en banc in the Court of Appeals, only to see the FCC throw the case away
Anderson said that AIM had criticized Ralph Nader, but he did
not point out that we also defended Nader and obtained a correction of
a serious charge that had been made against him in B a rron's .

We

were able to positively verify the fact that Nader had not told an
Australian audience that he considered the solution to our problems
to be some form of socialism or communism, as had been alleged.

Our

letter correcting this error was published in the May 27, 1974 issue
of Barron* s

^

Speaking of Nader, I might point out that an article in the
March 1975 issue of Air Force Magazine referred to me as the Ralph

7. See Exhibit G




118
Nader of journalism.

Permit me to quote one paragraph from this

article in order to put this public service into proper perspective.
Probably the most prevalent complaint about American newspapers
and television is their reluctance to correct errors.
no tradition for it in the profession,

There is

if it is a profession.

We hear a lot these days about doctors being sued for malpractice.
but the p r e s s , with few exceptions, remains stubbornly in favor
of standing on its mistakes.

Of course,

Freedom of the Press is all about.

that is one of the things

Nobody challenges the right

of the publisher to print lies, except when they provide the
basis for libel suits.
vocal contingent,

At the same time, there is an increasingly

in this era of consumer activitism, demanding

more responsibility in the practice of journalism.

It is time

to call attention to the Ralph Nader of this inky business.

His

name is Reed J. Irvine, and he is Chairman of the Board of
Accuracy in Media,

8/

Inc.—

That article was written by a veteran traditional journalist,
Claude Witze.

On the other side, appearing at about the same time,

was an article by a very young journalist in Nicholas Johnson's new
publication, A c c e s s .

Allison Zippay wrote this:

AIM's methods are strong and effective.

Their proficient

use of a variety of reform tactics has succeeded in penetrating
a unsually unapproachable media.
watchdog" of media giants,

A self-proclaimed"fearless

the organization has at least dared

to put a crack in broadcasting's glass house.
8. See ^The Wayward Presa," Air Force M a g a z i n e , March 1975, p. 12




119
These two views, one from a veteran traditional journalist writing
in an establishment publication and the other from a young girl writing
for an anti-establishment publicationfboth reflect respect for what
AIM has done in a short period of time with very limited resources.
They also reflect a growing awareness of the need for responsible
criticism of the news media.
except themselves.

The news media criticize everyone

If no one is permitted to criticize them, under

penalty of the type of harrassment that Jack Anderson specializes in,
then we are lacking any check on one of the most powerful institutions
in our society.

Our political system is one of checks and balances,

and the wisdom of that system has been proven over time.

It is only

proper that the news media be part of this system, both as one of
the checks on government and as an institution to which some checks
apply.
Since the First Amendment has been increasingly interpreted in
recent years as barring almost all governmental checks on the-news
media, we are left with private action to provide this neeeded service.
This is the role that organizations such as Accuracy in Media and
the National News Council have been created to play.

They are often

called "self-appointed critics," but in our free society it is only
proper that they should be self-appointed.

Another way of putting

it is to say that they are voluntary organizations started by citizens
in response to a felt need.
It has been said that they lack "legitimacy," but in this free
country of ours free speech is legitimate, and one does not have to
obtain a license from the-government or any organization in order to
make legitimate criticisms of the press or any individual or institution.




120
One of the key principles of our society is that free and robust
debate should be encouraged.

The news media and journalists are not

only instrumental in enabling the debate to take place, but their
own performance is a legitimate topic for debate.

No one has the

right to rule out of order any individual or group who wishes to
participate in that debate.
judged on their merits.
expressed?

Contributions to the debate should be

Are they factually correct?

Are they well

Are they fair?

Those are the proper questions to be asked.

The issue is not

whether the participant is "legitimate" or "illegitimate," whether
he is a pauper or a prince, whether he is a conservative or a liberal.
The individuals who want to curb freedom of speech by drawing such
distinctions as these are totally out of touch with the spirit of
our Bill of Rights.

It is an old but true principle that we must

defend the First Amendment rights of those with whom we disagree
if our own rights are to be secure.

We know that it is not.proper

for the government to snuff out those rights.
for the press, or a powerful journalist,

Is it any more proper

to intimidate and silence

those bold enough to criticize their errors and ask that they adopt
and honor a code of ethical conduct similar to that recommended by
the Society of Professional Journalists or the code of ethics of
9/
the American Society of Newspaper Editors?—
If journalists can be persuaded to adopt and honor such a code
of ethics, which is one of the objectives of Accuracy in Media,

the

country will be better served and the news media will be more highly
respected.

9. See Exhibit H




121
E x h ib it A

Accuracy In Medici, Inc.
777 14th Street, N.W.
Washington, D.C. 20005
(202) 783-4407
Reed J. Irvine
Chairman of the Board

March 1, 1975
To the E d itor:
In a recen t column (February 4 ). Jack Anderson discu ssed a
rep ort on marijuana issu ed by the Senate In tern a l S ecu rity Sub­
committee. He sa id the re p o rt was poor in q u a lity and had a ctu a lly
been prepared by an o u tsid e con su lta n t.
Mr. Anderson was apparently r e ly in g on in a ccu ra te , hearsay
in form ation . The re p o rt on marijuana pu blish ed by the Senate
In te rn a l S ecu rity Subcommittee c o n s is ts o f exten siv e testimony
taken by the Committee from 23 experts with s p e c ia liz e d knowledge
about'm arijuana and i t s e f f e c t s on those who use i t
They came
from fo r e ig n co u n trie s as w e ll as from d if fe r e n t parts o f the U. S.
The hearings la s te d f i v e d a ys, and the re p o rt i s a h ig h ly u se fu l
compendium o f in form ation about marijuana. In a d d itio n to the
exp ert testim ony, i t con tain s 80 pages p f a r t i c le s about marijuana
re p rin te d from s c i e n t i f i c jo u rn a ls .
For those who wish to see fo r themselves how in accu rate
A nderson's d e s c r ip tio n was, co p ie s o f the re p o rt may be purchased
from the Government P rin tin g O f fic e , Washington, D. C. 20401.
(E d itors can p robably ob ta in fr e e co p ie s from the Senate In tern a l
S e cu rity Subcommittee, Washington, D. C. 20510)
W have asked Anderson fo r an explan ation o f h is c h a r a c te r iz a ­
e
tio n o f th is re p o r t. W a ls o asked what a u th ority he r e lie d upon
e
fo r the judgment that the q u a lity o f the re p o rt was poor. He has
not responded.

Accur'acy in Media, Inc.
cc:

Jack Anderson and papers ca rry in g
h is column




122
E x h ib it B

Accuracy In Media, Inc.
777

14th Street, N.W.

Washington, D .C .

20005

(202) 783-4407
Reed J. Irvine
Chairman of the Board

September 7, 1974
Mr. Jack Anderson
1612 K S tr e e t, N. W
.
Washington, D. C.
Dear Mr. Anderson:
Our a tte n tio n has ju s t been called to serious Inaccuracies 1n your
column of August 3 , 1974 about the In tern atio n al Police Academy.
This column quoted from six papers prepared by train e e s a t the academy.
The quotes you selected were employed to support your statem ent th a t "many
students graduate w ithout showing much e ff e c t of th e ir 'hum anitarian' tra in in g ."
W have examined the papers 1n questio n , and we find th a t 1n fiv e of the six
e
cases the passage used 1n your column did not fu lly and accurately r e f le c t the
views of the w rite r of the paper on the su b ject of the use of th re a ts and
force in In terro g atio n . By taking statem ents out of co n tex t, 1 t appears to
us th a t you have done an In ju s tic e both to the w rite rs of these papers and
to the In tern atio n al Police Academy. W are c a llin g th is to the atte n tio n
e
of the e d ito rs of the newspapers th a t reg u larly publish your column, but we
believe th a t you y o u rself should run a c o rre c tiv e statem ent in your column.
Let us compare the quotations you employed with oth er statem ents which
are found in the papers in question.
1.
You quoted Lam Van Huu of South Vietnam as saying: "What do we mean by
'fo rce and th r e a t? ' Physical fo rce--b eat1n g , slapping, e le c tro c u tin g . T hreats—
p hysical, shaking a f i s t 1n the face of the subject; v erb al, saying, 'L iste n ,
I'm going to break your neck 1f you d o n 't confess."
This 1s taken from page 7 of Lam Van Huu's paper. "What Do W Mean by
e
Force and Threat" 1s the heading of a section of the paper. The heading
1s followed by th is sentence, which you omitted w ithout In d icatin g any omission:
"There are two cases which the judges have very often considered as
'fo rce and th r e a t' or 't o r tu r e ' used 1n In te rro g a tio n ."
There follows the quotation you used beginning with "Physical fo rce."
I t 1s obvious th a t Lam Van Huu was merely providing a d e fin itio n and
was not advocating or defending the use of force and th r e a ts . This would have
been apparent to your readers had you not omitted the sentence quoted above.
The omission was necessary 1n order to perm it you to make the quote serve your
Intended purpose.




123
You did not make any reference to the next sectio n of Mr. lam Van Huu's
paper in which he lis te d no fewer than nine reasons why force and th re a ts
should not be used. You conspicuously omitted h is conclusion found on page
10, which reads:
Thus the use of force and th re a ts 1s not only a method th a t 1s vicious
and inhumane but also dangerous and u sele ss. Those th a t are fo r force
would do b e tte r to q u it the police force and take up the c a re er of boxing.
Is i t not c le a r th a t th is paper leads to a conclusion ju s t the opposite
of the one^suggested 1n your column, i . e . , th a t Lam Van Huu graduated from the
Intern atio n al Police Academy w ithout showing much e ff e c t of "humanitarian"
tra in in g ?
2. You quoted Tdan D1nh Vol of South Vietnam as saying: "Based on
experience, we are convinced th ere 1s ju s t one sure way to save time and suppress
stubborn criminal su s p e c ts--th a t 1s the proper use of th re a ts and fo rce."
You neglected to point out th a t th is student q u a lifie d th is statem ent
1n a very Important way. He thought the use of force and th re a ts could be
ju s tif ie d when time was of the essence, fo r example, when information was
needed quickly to prevent a serious tragedy or d is a s te r . He also lis te d a
number of reasons why force and th re a ts should not be used, and you did not
tro uble to point out th a t he said: "But 1n any case we can never fo rg et our
maxim: ’L iberty, ju s tic e and hum anity.' I f we fo rg e t th is main maxim and
abuse the use of th re a ts and force 1n In terro g atio n s we cannot, w ithout doubt,
reach our aim and we w ill lose public confidence, and the policemen w ill become
the te r r o r is ts of the people."
The inclusion of th a t quotation would c le a rly have not supported your
contention th a t Tdan D1nh Vol showed no sign of having benefited from humanitarian
tra in in g .
3. You quoted Inspector Madhav Blckrum Rana of Nepal as saying: 'Wany
times police o ffic e rs have gained valuable clues by the use o f (d ru g s ). . .The
water to rtu re is a simple and an cien t method of le ttin g a tap to d rip on a
man's head a t a c e rta in in te rv a l. This 1s very e ffe c tiv e 1n breaking a tough
man and can make a raving lu n a tic of any human being a f te r an h o u r..."
The Inspector was c le a rly giving a d escrip tio n of some of the methods
used 1n Interrogatio n h is to r ic a lly and a t p resen t. The statem ent about drugs
(sodium pentathol and alcohol) 1s found on page nine of his paper. The d escription
of the Chinese water to rtu re 1s found on page eleven. In between, one finds
a reference to Madame Tussaud's Horror Chamber 1n London, which the author says
presents a fine example of the methods used 1n medieval tim es. He then discusses
some more recent h is to ry , saying:
In modern times sane of the methods used 1n Nazi Germany and Soviet
Russia are whippings, use of thumb screws, removal of fin g er and toe n a ils
without a n e sth e tic , breaking limbs and tig h ten in g metal bands by slow de­
grees around the su sp ect's head, and underfeeding and drugging to
weaken a su sp ec t's re s ista n c e , coupled with long relays of Interro g atio n
la stin g many hours w ithout a b re a k ...

50-365 0 - 7 5 - 9




124
The inspector then goes Into the descrip tio n of water to r tu re , which
you c ite d , w ithout the s lig h te s t suggestion th a t he favors the use of the
medieval rack, the methods of Nazi Germany and Soviet Russia or the water
to rtu re .
The
he said:
the th ird
which the

inspector lis te d the pros and cons of th ird degree methods, and then
"As we see from the above discussion of the methods of In te rro g atio n ,
degree method 1s fa r outweighed by the method of Interro g atio n 1n
th re a t and force 1s not used."

The inspector did n o t, i t is tr u e , condemn the use of force and th re a ts
u nqualifiedly, arguing th a t th ere were conditions in his country which
would ju s tif y "the judicious use of o ff ic ia l se v e rity or the use of th re a ts
and force to some ex ten t in the hands of scrupulous in te rro g a to rs as a la s t
r e s o r t..." Obviously th is is a fa r cry from your im plication th a t the in ­
spector was an advocate of the use of the Chinese water to rtu re and making
"raving lu n atics" of suspects. I t is also q u ite d iffe re n t from your a sse rtio n
th a t the inspector said "to rtu re" is p ra c tic a l and necessary as a la s t re s o rt.
4. You quote another student from Nepal, Kula Nand Thakur, as saying
th a t "carelessness" by In terro g ato rs had caused death, thereby creatin g "another
tro u b le." One 1s presumably supposed to In fe r from th is th a t Thakur was
defending to rtu re while callo u sly suggesting th a t care ought to be taken to
avoid k illin g the suspect.
The statem ent you quoted 1s found on page 9 of Thakur's paper in a
paragraph th a t reads as follows:
The use of th re a ts and force during In terro g atio n cannot be s a i d . ..
useful to e x to rt the rea l cause of the commission o f a crim e...Tim e and
patience 1s needed and tru th 1s th ere . A m atter of fa c t, a p o lice o ffic e r
has heavy works to perform and has no so much time to U nger on a case,
so to get rid of i t he tr ie s to solve the problem immediately by”use of
th r e a ts , force and physical coercion. Instead of d e te rio ra tin g (decreasing)
the crime 1n th is way, he causes the number to in crease. Many c rim in als, 1 t
has been observed, are so accustomed to r e s is t physical force th a t they
die of beating and to ru tre ra th e r than speak the tr u th . In some cases,
I have seen th a t due to the carelessness of the in te rro g a to r while using
physical force h it some tender p a rt of the body o f the suspect and causes
death, thereby cre a tes another tro u b le. These incid en ts cause very bad
repercussions 1n the public...W e are p ro te c to r and not oppressor. Therefore
we have to discard th is theory to ta lly to adapt ourselves according to
the advancement of the so c iety .
This statem ent would seem to in d icate th a t the humanitarian tra in in g a t
the International Police Academy was having an e f f e c t, the precise opposite
of what your o u t-of-co n tex t quotes were designed to demonstrate.
5. You quoted Gonzalo Wllches Sanchez of Colombia as saying: " It 1s
understandable th a t 1n Innumerable cases, the In terro g a to r is forced to use
systems of moral or physical coercion to obtain tru th th a t the person knows."
You did not point out th a t th is w rite r made 1 t c le a r th a t he did not




125
mean " b ru ta lity or to rtu re" 1n re fe rrin g to "physical coercion." He also
emphasized th a t he was not advocating the use of methods th a t were Ille g a l
The only case 1n which you appear to have c o rre c tly represented the
views expressed 1n the paper of the tra in e e 1s th a t o f the man from Z aire.
W tr u s t th a t you were misled by incomplete Information supplied to
e
you by your researchers and th a t you w ill want to a c t promptly to c o rre c t
the misleading Impression th a t your colunn created concerning the work of
the In tern ational Police Academy and the views o f the fiv e foreign train e e s
on the subject of the use of force and th r e a ts .

ccT: Mr. Ned Schnurman, National News Council




126
toe vashingtonvost

s.tvrd*y,A<*.z.?*?4

cx5

Q
uestionableMeans ofInterrogation
By Jack Anderson
Students at the International
Police Academy,sc'uo.il nm by
the Stat*- l)epanrn-nt. to train
jforei£U policemen, have devel­
oped some chilling views about
torture tactics.
Afit r a lenr.thy investigation,
we U four.d no evidence that
a\c
the academy actually advocates
third-decree methods. But we
have read several student pa­
pers which discuss the use of
torture to break suspects.
“As a last icsort. . . ” wrote a
Nepalese inspector, tenure is
'practical and necessary.”
A South Vietnamese police­
man wrote that ‘ threats and
force can put out any truth in 2
luis'im
uRitiKic.”
A Zaire ofiicer agreed “force
or threats*’ will expedite an investination but \v;.n.c*d: 'This
trctie m :>t not be known by the
u
public.”
Another student f*-om Nepal
told bow “carelessness” by intorrcnators had caused death,
thereby creating '‘another trou­
ble.”
The State Department-run
academy has been accused of
teaching torture tactics. The
m
ovio “State of Siege,” for ex­
ample, showed the school’s
graduates torturing political
prisoners.
An .investigator for Sen.
James At'tnuvck (It S.D.) told us
he had *eon a m
ur.Ver of theses
v.vittcn by the ar.ite.iiy’s stu­
dents jn
> t-rtvre tac­
.i
tics. The papers were written in




English, Spanish and French,
he said, and were kept in
locked, steel cabinets.
M associate Joe Spear, acy
eompanicd by Spanish and
French translators, paid a call
upon the police academy, which
is located in an old streetcar ga­
rage called the “Car Bam” in
Georgetown.
They were shown evidence,
selected by the school’s admin­
istrators, which tended to prove
the school dot.sn’t teach torture
tactics. Their own documents,
how ver, reveal an ambivalent
e
attitude toward torture.
For example, the lesson plan
includes instruction in “Inter­
views and Interrogations.” This
teaches foreign policemen to
Question suspects in sound­
proof, windowless rooms with
“bare walls.”
They are instructed to use
.such interrogation techniques
as “emotional appeals,” “exag­
gerating fears," and psychologi­
cal,.'jolts.” They are taught to
observe the “physical state of
the subject” for “sweating,”
“color changes" “dry' mouth”
and rapid pulse and breathiug.
The lesson plan also states,
however, that “so-called third
degree tactics” should not be
used. It is argued that these
techniques lower the interroga­
tor’;; ••self-respect,” impair “po­
lice efficiency," lower “the es­
teem of the police in the public
eye,” and lettd to “false confes­
sions and miscarriages of jus­
tice.”

The foreign policemon. who ; Gonzalo Wilches Sanchez, Co­
comc to the academy from such lombia—'it is undeniable that
repressive governments as Bra­ in innumerable cases, the inter­
zil, Chile, Pakistan, South Viet­ rogator is forced to use systems
nam and Uruguay, are told "a of moral or physical coercion to
prisoner must be treated ac­ obtain truth that the person
cording to legal and humanitar­ knows.”
ian principles.”
Bemonatu Mpanga, Zaire—
But our examination of the “The use of force or threats dur­
student papers showed many ing an interrogation can be seen
students graduate without as one of our police tactics to be
showing much effect of their used for the expedition ol an in­
“humanitarian” training. Here vestigation ... Above all, the
are a few excerpts:
press ... should not liave the
Tdan Dinh Vol. South Viet­ slightest information about our
nam
—“Based on experience, we methods of procedure.”
are convinced there is just one Footnote: Abourezk has intro­
sure way to save time and sup* duced legislation that would
press stubborn criminal sus- eliminate the State Depart­
pects—tlnt is the proper use of ment’s Office of Public Safety,
threats and force."
which runs the International
Police Academy.
•LamVan Huu, South Vietnam
—“What do we mean by ‘force Washington Whirl—Army Sec­
and . threat?’ Physical force— retary Howard Callaway has fro­
beating, slapping, electrocut­ zen the reserve* promotion of
ing. Threats—physical, shaking former Nixon campaign lawyer
a fist in the face of the subject; Paul O’Brien, who was impli­
verbal, saying ‘Listen, I’mgoing cated in the Watergate hush
to brenk your neck if you don’t money case. A Pentagon spokes­
m told us Callaway discov­
an
confess.’ ”
ered O'Brien had been pro­
Inspector Madhav l’.iekrum moted to brigadier general,
Rana, Nepal—“M
any a times po­ froze him in his rank as colonel
lice officers have gained valua­ and is now giving the case “fur­
ble clues by the use of (drugs)... ther evaluation” . . .Sen.Strom
ond (It-S.C.) and Rep.
The water torture is a simple Thurm
and ancient method of letting a Wayne Hays (D-Ohio) feel they
tap to drip on a man’s head at a are too well-known to bother
ith
certain interval. This is very ef­ w name tags. At a recent tes­
fective in breaking a tough man timonial dinner, both men
and can make a raving lunatic of scorned name tags claiming
any human being after an hour that “everyone knows me.”
cl«?4.t:r.i(*d e»tu S n ic
F r* y d ***

127
E x h i b it C

Accuracy In Media, Inc.
777

14th Street, N.W.

Washington. D .C .

20005

(202) 783-4407
Reed J. Irvine
Chairman of the Board

September

17,

1974

To the editor:
In a recent column (8 /3 /7 4 ) columnist Jack Anderson attacked the Intern atio n al
Police Academy, which 1s run by the U. S. government to tra in police o ff ic ia ls
from developing co u n tries. Anderson said:
A fter a lengthy in v estig atio n we have found no evidence th a t the
academy actu a lly advocates third-degree methods. But we have read
several student papers which discuss the use of to rtu re to break
suspects.
Anderson then quoted from six of these papers, suggesting th a t the quotes
"showed many students graduate w ithout showing much e ff e c t of th e ir 'hum anitarian'
tra in in g ."
By taking statem ents out of context, Jack Anderson has m isrepresented the
views of the authors of fiv e of the six papers he c ite d . For example:
Anderson quoted Lam Van Huu of South Vietnam as saying: "What do we mean
by'force and th re a t? ' Physical force—b eating, slapping, electro cu tin g . Threats—
physical shaking a f i s t in the face of the subject; verbal, saying, ‘L isten, I'm
going to break your neck 1f you d o n 't confess."
Anderson implied th a t Lam Van Huu was advocating such measures. What
Anderson concealed from his readers was th a t Lam Van Huu a f t e r defining what
was meant by "force and th re a ts ," went on to give nine reasons why police In te rro ­
gators should not use force and th r e a ts . He did not te l l his readers th a t Lam
Van Huu concluded his discussion with th is strong denunciation of the use of force:
Thus the use of force and threats is not only a method th at 1s vicious
and Inhumane, but a lso dangerous and u s e le ss. Those th at are for -force
would do b e tter to q u it the p o lice force and take up the career o f Foxfng.

Another train e e gave a b rie f h is to ric a l review of the use of to rtu re , going
back to medieval times. In the course of th is he b rie fly described the Chinese
water to rtu re . Anderson quoted th is descrip tio n and implied th a t the train ee
was advocating I ts use. The tra in e e c le a rly did not advocate th i s , nor did
he advocate the other measures he described th a t were used 1n medieval Europe
and in Nazi Germany and Soviet Russia.
Mr. Anderson's in v estig ato rs examined 56 papers out of nearly 5000 prepared
by train ees a t the In tern atio n al Police Academy. He quoted from six of the 56,
and by taking the statem ents out of context he misrepresented the views of 5 of
the 6 authors. He completely ignored a ll statem ents th a t did not support his
exercise in advocacy journalism .
cc: Jack Anderson and a ll papers carrying
the Anderson column




128
E x h ib it D

© )c toasjjington |tost
FEBRUARY

6,

1975

^

Jack A nderson Column
Is Found ‘ Inaccurate’
NEW YORK, Feb. 5 (AP> —
The National News Council
said today a syndicated Jack
Anderson
column
entitled
“The
Torture
Graduates”
made biased and inaccurate
use of quotations from source
letters.
Accuracy in Media, a Wash­
ington-based group, had filed
the complaint against the col­
umn with the National News
Council, a private organizatori
that investigates allegations
against the national news me­
dia.
The column, which appeared
in The Washington Post Aug.
3, 1974, asserted that “ students
at the International Police
Academy, a school run by the
State Department to train for­
eign policemen, have devel­
oped some chilling views
about torture tactics.”
Accuracy in Media charged
that statements from papers
written by five students at the
acadcmy were taken out of
context to support the asser­
tion




Tho council said members
of its staff examined the five
papers and “ found that the
quotations by Anderson do in
fact misrepresent the attitude
of the students toward torture
as set forth in their papers.”
The papers were written in
1965-67, a fact that was not
mentioned in the column, the
council findings said.
Anderson said in a letter
dated Dec. 30 that the state­
ments in the column were sup­
ported by sources whose iden­
tity he could not reveal. The
council said that if support ex­
ists, it was Anderson’s respon­
sibility to develop and publish
it
Anderson could
not be
reached for comment on the
council's findings. However,
reporter Joseph Spear, who re­
searched the story, said, “ We
think they are absolutely
wrong. They have not yet
done a thorough job. We feel
justified in what we wrote.”

129
E x h i b it E

Accuracy In Media, Inc.
777 14th Street, N.W.
Washington, D.C. 20005
(202) 783-4407
Reed J. Irvine
Chairman of the Board

February 19, 1975

To the E d itor:
The N ational News C ouncil r e c e n tly issu ed a fin d in g that colum nist
Jack Anderson had been g u ilt y o f d is t o r t io n and inaccuracy in a column
he had w ritte n la s t f a l l about the In te rn a tio n a l P o lic e Academy. The
C ouncil was a ctin g on a com plaint f i l e d by Accuracy in Media.
In a recen t column (2 /1 0 /7 5 ), Anderson attacked the Council and
i t s fin d in g . He sa id : "We spent se v e ra l months in v e s tig a tin g the
Academy, in clu d in g the tr a in e e s ' a ttitu d e s toward t o r t u r e ." He con­
tra ste d th is w ith the statement that the A sso cia te D ire cto r o f the
N ational News C ouncil had spent the b e tt e r part o f a day going over
the relev a n t documents at the Academy.
A nderson's statement con fu ses the iss u e and Ls u n fa ir to the
N ational News C oun cil. The C ouncil was not concerned with Anderson's
in v e s tig a tio n o f the Academy. I t was concerned with statements he
p u blish ed taken from s ix papers w ritte n by students at the Academy.
Anyone w ith a command o f.E n g lis h , Spanish and French, or with the
a ssista n ce o f a t r a n s la t o r , cou ld determine in a few hours whether
or not the qu otation s Anderson l i f t e d from these s ix papers were
tru ly re p re se n ta tiv e o f the views o f the authors or whether they
were taken out o f con tex t and d is t o r te d . Accuracy in Media found
that f i v e out o f the s ix were so d is t o r te d . The N ational News C ouncil
made an independent in v e s tig a tio n and f u l l y confirm ed our fin d in g s.
I t i s m isleading fo r Anderson to ta lk o f h is in v e s tig a tio n extend­
ing over many months. The fa c t is that h is peop le spent only fiv e
hours at the Academy going over a t o t a l o f 55 papers. They took
qu otation s from on ly s ix o f th e se , the same s ix that we and the
N ational News C ouncil examined. I t i s apparent that they were able
to make on ly a very s u p e r fic ia l examination o f 55 p a p e rs, many w ritte n
in fo r e ig n languages and by hand, in the f i v e hours a v a ila b le to them.
I f the N ational News C ouncil spent one hour per paper, they did a
much more thorough jo b than Anderson cou ld p o s s ib ly have done.
W fin d no m erit in the te stim o n ia l to Anderson’ s accuracy from
e
Senator James Abourezk. This is roughly comparable to Anderson g iv in g
a te stim o n ia l to Les_W hitten. Abourezk, at the time A nderson's column
appeared, was try in g to e lim in a te the In te rn a tio n a l P o lic e Academy.
Anderson’ s d is t o r te d column was a b ig a s s is t fo r him. Anderson was
h elp in g him, and he would be u n gra tefu l not to come to Anderson's a id .
A nderson's d is t o r t io n s helped k i l l - the In te rn a tio n a l P o lic e Academy.
But at le a s t the p u b lic should take note o f the methods he used.

c c : Jack Anderson and a l l papers
carryin g h is column




130
E x h ib it F

United States
ofAmtnc*

F o/. 118

Congressional 'Record

»
PROCEEDINGS AND DEBATES OF THE Q 2 a CONGRESS, SECOND SESSION

W A SH IN G TO N , W EDN ESDAY, FEBR U A R Y 16, 1972

HON. F. EDWARD HUBERT
XN THE HOUSE. OF B S ’SKSWTATTVBB

Wednesday, February 16, 1972
Mr. HUBERT. Mr. Speaker, it has been
nearly a year since the nostrils of Amer­
ica's* television audience were choked
with the stinch of the irresponsible, poli­
tically carious presentation disguised by
the title, “The Selling of the Pentagon."
The odor has never faded, as is wit­
nessed by the most recent analysis pub­
lished by Accuracy in MmM*, an Inde­
pendent organization which will not let
the truth die.
And after 1 year of squeamish, pusil­
lanimous explanations by the Columbia
Broadcasting System, the truth con­
tinues to emerge. The following speaks
for itself:
fFtaan ATM Bulletin, Feb. 1, U»72|
OB8 K i p u b to C uries' Q r a m o m About
February 23 will mark the anniversary of
ttoB tin t A r a b g a t flu CBS controversial
docomentary. T h e Selling o f the Pentagon."
Claude Wltae o f tbe Air roree'TSaimaf, Cont w m i n F. Edward Hubert. Chairman of the
Boom Armed Services Committee, and Ac­
curacy In Media were among Uxe severest crit­
ics of this program. On March 30. 1971. AIM
a m a 7-page letter to Richard 8. Salant,
President o f C88 News, asking for his com­
ment on many Inaccuracies a* questionable
points In tbe documentary. In our letter to
Mr. Salant, we said that we agreed with
a statement made by Soger Modd In the
broadest, which said: “Nothing la more es­
sential to a democracy than the tree flow o f
Information.
Misinformation,
distortion,
propaganda all interrupt that flow.” AIM
said that “The 8elllng o f the Pentagon” con­
tained a great deal o f misinformation and
distortion. We wanted CBS to clear up the
disputed points as quickly as possible,
cas rmoMxsn ooM f m in m w mtrt.r
On March SB. 1971. Mr. Salant replied to
AIM saying that be had decided to wait for
the myriad of complaints and charges to ac­
cumulate and then prepare a comprehen­
sive analysis. He said: "When this analysis
is completed and at such t in s as we deter­
mine its release is appropriate, I will inclnde
you an our distribution list.’*
Many months passed and no reply to the
questions was forthcoming. AIM raised this
with CBS from time to time. We urged our
supporters to write to CBS to prod them Into
releasing the promised analysis. Finally, in
December 1971, CBS Informed us that we
could find the long-awaited analysis in the
Congressional Record for nmwmhet IB and




and K 13007. There was no press release, no
announcement that CBS bad met Its critics
head-on and had shown them to be wrong.
No oopy o f the reply was sent to the principal
critics. We all had to look It up in tbe Con­
gressional Record, where tt bad been Inserted
by Congressman Ogden Bald, who said he
obtained It from the president o f the BadioTelevlslon News Directors Association. The
press has completely overlooked this latest
word In the greai controversy over the CBS
documentary. I t appeared that that was pre­
cisely what CBS wanted. Tbe less publicity
the better.
cas « B U n a r w m o m
CBS does not claim to be infallible, but
AIM’s experience is that It will rarely admit
an error. Mr. Salant appeared on TV on the
nightjar March 38.1971. to reply to the critics
of T h e Selling o f tbe Pentagon.” He said:
"We are prood o f "The Railing o f the Ita ta gon* and CBS News stands behind it." Hs
said they could refute every aharge o f the
critics who had appeared on the air—Cong.
Hubert, Secretary Laird and Vice PnaWont
Agnew. Nine* months later. In the statement
quietly slipped into the Congressional Peoord
CBS admitted that not all at tbe criticisms
could be refuted. For CBS that was quite an
admission. That was why they sought no
publicity foe their statement, we hpUeve.
CBS now actually ooncedes that five points
o f criticism wave to some extent justified. It
admits that the editing o f one of the answers
Assistant Secretary o f Defense Henfcln gave
to a CBS question might not have caapeyed
accurately what Mr. Henkln actually said.
CBS also admits that It was wrong In saying
of defoliated areas that “ nothing will grow
there any moee." It agrees that it should
have mentioned that one o f the Pentagon
films it ortttctenrt was actually produced by
CBS. CBS also concedea that tt greatly ex­
aggerated the number of offices In the Penta­
gon, and allows that It should not have used
language that Implied that It had to track
down the industrial War College team that
was putting on a National Security «f« in » T
In Peoria, Illinois.
In addition to these admissions at error.
CBS mafces de facto admissions o f error in
two other oaess. In the broadcast, OBS had
said that a still unpublished r e p o t o f .the
prestigious 20th Century Fund bad estimated
real total spending by the Defense Depart­
ment on public affairs at $190 million, com­
pared with the budget figure at $80 million.
CBS now concedea that the report of tbe
20th Century
it contained no such figure. CB8 tries to wrig­
gle out of this embarraaelng situation by
showing that such a figure was used in some
o f tbe research done for the study. However
It was also clear that the figure was hot used
in the published study precisely because it
could not be verified and tbe 20th Oentury
Fund quite properly would not accept it as
valid. CBS was therefore both wrong and
unethical in foisting off such a figure on its

N o . 20

' The second tfe facto admission o f error
relatee to the CBS charge that Pentagon ex­
penditures on public affairs In 1971 were ten
times the 1969 level. CBS now admits that the
1969 figure far public affairs expenditures was
not comparable to the 1971 figure because
different definitions for "public affairs ex­
penditures” were used in these two years.
AJU THX ADMITTED EM OKS SWUOtTS?

Tes. Three of them are quite serious. The
Improper editing o f the Henkln Interview,
which CBS now concedes, was one of the ob­
jects of the heaviest attacks of tbe critics of
the documentary. For example, Martin Mayer
In the December 1971 issue of Harpers maga­
zine said this about the editing of the Henkln
interview: "This episode shows at least sub­
conscious malice, a desire by the producers
o f the program that the man In charge of
the Pentagon selling apparatus look bad on
the home screen." Reed J. Irvine, writing in
the August 10. 1971 issue of National Review,
said that In editing the Henkln Interview,
CBS dkl more than make Mr. Henkln look
bad. He stated In his reply to one o f CBS's
questions bis Justification for spending pub­
lic money to inform the public o f the reasons
why we need national defense. Since CBS was
clearly out to prove that such expenditures
were wasteful, the mangling of the Henkln
Interview was necessary to make sure the
viewers were not provided with any effective
counter-arguments to the point CBS wanted
to make.
CBS, o f course, does-no go very far In ad­
mitting that it might have done better by
Mr. Henkln. Discussing the transposition of
answers that Mr. Henkln gave to Incorpo­
rate them as parts of answers of different
•questions, CB8 says: “ Upon revlew. one
might Judge that a fuller answer could have
been broadcast by including, in the compo­
site answer, the seoond sentence of the ‘orig­
inal’ answer . .
CBS concedes that edit­
ing involves subjective judgments and that
others may disagree with the judgments of
CBS. It Insists, however, that in editing the
Henkln interview Its intent was to condense
clarify, not to deceive. The admission
that it might have done better by Mr. Hen­
kln la limited and grudging, but it is a step
forward from the previous insistence by CBS
President Prank Stanton that the editing
was completely fair.
The two errors cited above relating to the
amount of money the Department o f Defense
spends on public affairs are serious because
In the documentary CBS placed a great deal
o f emphasis on the amount o f money being
spent on these activities. It used the false
$190 million figure In comparison with the,
combined news budgets o f the three com­
mercial television networks, showing a graph
on the TV screen that told the viewer that
the Department of Defense spent more to tell
Its story •to the people than all three net­
works spent to bring them the news. The
exaggeration of the else of the Pentagon
expenditures at the beginning o f the pro­
gram helped establish the Important nature
o f th *;sobjeet o f tb* documentary.

131
E 1234

CONGRESSIONAL RECORD — Extensions of Remarks

February 16, 1972

anything an employee of a company does. In­
the fact that the editing was clearly contrary
cluding civic activities, can be attributed to
to the rules later adopted.
the firm that employs him.
Theee are the most obvious criticisms to
(8) CBS aocused the lecturers for the In­
be made of the CBS defense of its editing of
dustrial College off the Armed Forces ot vio­
the MacNell speech and the Henkln inter­
lating military regulations in discussing for­
view. CBS is actually dishonest in suggesting
eign policy Implications o f Vietnam. It was
that there was no “Significance to tbe fact
criticized for not pointing out that the talks
that it took a sentence out o l proper chron­
given by these speakers had been cleared
ological order to begin the synthetic state­
not only by Defense but by the State Depart­
ment it created for Col. MacNell. The sen­
ment. The Assistant Secretary o f Defense
tence was: “Well, now we're coming to the
says this Is all the regulations require. CBS
heart of the problem, Vietnam." This was
Insists that the talks violated regulations, no
then followed by a statement the colonel had
matter who cleared them. Since nation*! de­
made about Thailand and two sentences that
fense and foreign p<dlcy are frequently inter­
be had quoted from the Premier of Laos con­
twined, It would seem clear that the Depart­
cerning Southeast Asia. The latter two sen­
THE UEOas CBS REFUSES TO ADMIT
ments o f Defense and State are In a better
The purpose of the CBS reply Is not to ad­ tences were taken ao completely out of con­
position than CBS to determine whether or
m it and apologize for errors in The Selling of text that they were not shown as quotations
not a speech runs oounter to government
the Pentagon. although that Is grudgingly at all in the CBS synthetic statement.
regulations and policy.
Why waa It necessary to introduce state­
d ate In a few cu es Bather. CBS set out to
(4)
CBS was charged with having fa&ely
ments about Thailand. Laos, Cambodia and
dS*s»» t b t : tfce critics, not CBS. had erred.
suggested that friendly Congressmen, spe­
other Southeast Aslan countries with the
T h ai O k reply Is mainly an effort to rebut
cifically Cong. P. Edward Hubert, had been
the m m enxH criticisms made at the docu- statement on Vietnam which CBS took out
“ used” by tfae Pentagon In broadcasting In­
of Ite proper order? CBS did this for the very
mentary. In addition to the points already
terviews that they had made with Ma J. James
discussed. the CBS reply takes up the fol­ good reason that it wanted to lead into Col.
Rowe. Tills was vigorously denied by Oong.
MacNell's synthetic statement with this:
lowing criticisms:
Hubert, who denied that the Interview with
<1) The editing of the remarks of Col. “The Army has a regulation stating: Per­
MaJ. Rowe, was produced at the suggestion
sonnel should
speak on the foreign
John MacNell. which Involved creating a syn­ implications onotU.S. involvement In policy
Of the Pentagon or that th e broadcast to his
f
Viet­
thetic statement from widely separated sen­ nam." It would appear that CBS wanted to
home district lnvotvod the use of Pentagon
tences in his speech;
funds. This could easily have been the infer­
create tbe impression that Col. MacNell was
(2) The circumstances surrounding the
ence drawn by those who beard the CBS
speaking in violation at that regulation. The
appearance of the Industrial War College lec­ easiest way to do this was to lead off the
statement. CBS says the program did not say
ture team In Peoria. 111., especially whether
that the Pentagon produced the H6bert-Rowe
statement
or not the visit was arranged by Caterpillar synthetic taken out ocreated for him with a
Interview or that It was the Pentagon’s idea.
sentence
f order. CBS seems not
Tractor Co.;
However, It undermines this denial by
to h i latnnH the mwming and ttopprtance
(3) Whether or not the IWC lecturers vio­ of
stressing that Oong. Hubert thanked the
that what tt d*d
lated regulations In discussing foreign policy; to context. If It can still say was fair editing
colonel wtio served as liaison with the Houae
Ool.
(4) The accuracy of the statement that the then noMacNell’s statement with CBS.
Armed Services Commltee for bringing MaJ.
one’s words are safe
Pentagon "used" sympathetic Congressmen
(2)
CBS described the National Security Rowe to him. *n»ey d o not seem to oonsider
to Interview military heroes such as MaJ.
that Cong. H6bert might have asked the
Seminar given by tbe Industrial War College
James Rowe to counter anti-war reporting.
ooianel to bring MaJ. Rowe, who was famous
tn Peoria, HI., this way: “ The Pentagon has
(6) The charge that CBS used false pre­
for surviving five years o f captivity as a VC
tenses to obtain a tape of the interview of a team ot colonels touring the country to
prisoner and who successfully escaped, to see
lecture on foreign policy. We found them In
M&J. Rowe by Congressman Hubert;
him While denying that tt meant to imply
(6) The charge that CBS falsely suggested Peoria, 111., where they w en Invited to spealc
what tt implied, CBS persists in conveying
to a mixed audl&noe o f civilians
military
that the Pentagon spent about $12 million reservists. The invitation was arranged by
th»
unfair implication.
a year on films to be shown to the public;
(6)
Cong. Hubert charged that CBS ob­
Peoria’s Caterpillar Tractor
did
(7) The charge that CBS gave a mislead­ &39 million of business last Co.. which the
tained Che tape o f his Interview with MaJ.
year with
ing Impression about a film narrated by
Rowe by telling ills office that It wanted lit
Defense Department.”
Robert Stack;
In connection with a documentary It was
Every one o f these sentences Was cjial(8) The charge that CBS Implied that an
doing on prisoners ot war. CBS denies this,
expensive war game was staged for the bene­ lenged by the critics. The team did not come
saying that It was public knowledge that It
from the Pentagon, but from the- Industrial
fit of a few VIP civilians;
was doing a documentary on public infor­
<0) Charges that CBS selectively edited ja War College. In addition to colonels. It in­
mation activities o f the Department o f De­
film of a press briefing by Jerry Prtedheim to cluded a Navy captain and a State Depart­
fense at the time It obtained the Hubert*tape.
it appear that be was unresponsive to ment civilian. The seminars cover S3 topics,' CBS asserts that no one on Its staff ever
including foreign policy, and they are given
newsmen s questions:
represented that the tape It wanted from
each year in seven locations throughout tbe
Cong Hubert was to be used for a POW
<101 ditto Cor a Saigon news briefing; and country, primarily Tor the benefit o f military
documentary.
<111 Chsxpec that CBS gave a wrong lm- reservists. They were Invited to Peoria by the
On the contrary, says CBS, they said they
premOam to saving that the U-S had resumed Association at Commerce o f Peoria, which
wanted the film In connection with a docu­
tonmiMag <£ Starth Vietnam.
shared sponsorship with the 9th Naval Dis­
mentary on Pentagon public relations ac­
CBS n t m a so admit that there was merit trict.
tivities. This is flatly contradicted by Oong.
to any at these charges. but In every case its
CBS, in a lame rejoinder, Justlflsa its
Hubert's press secretary and by the Congress­
refutation la weak and unconvincing.
phrase, "a team o f colonels,’’ by asserting
man. Oongreaman Hubert has put Into the
record letters or memos from the offices of
(1)
CBS Justifies creating a synthetic that the Navy captain is equivalent to a
live other congressmen who assert that they
statement and putting it the mouth of Col. colonel and the Btate Department civilian
was a recurve It. colonel. It does not explain
were approached by the same CBS staffers
John MacNell on the ground that each of the
who approached Congresman Hubert’s office
sentences used was actually said by Col. Mac- why it called this a “Pentagon” team rather
to obtain tapes of Interviews with MaJ. Rowe.
Neil and their meaning was not altered. It than identifying the responsibility o f the
Four o f them said they were told that OBS
admits that one ot the sentences was taken Industrial War College (Industrial College
wanted these tapes In connection with a
out of chronological order, but It does not of the Armed Forces), but It Justifies the mis­
documentary tt was doing on POW*. CBS
mention that this is contrary to the CB8 leading term by saying that the military
makes no mention o f this evidence confirm­
Operating Standards for News and Public officers are all subject to the authority o f the
ing Oong. Hebert’s charge that the CBS staff
Affair*, which state that this kind of trans­ Pentagon. It admits that it should not have
sought tapes ot interviews between congress­
position must not be done without Inform­ said it "found’’ them in Peoria. It admits that
men and MaJ. Rowe under the protense that
ing the audience. This rule was adopted In the team lectures on many subjects other
they were working on a documentary on
June 1*71, after the controversy about The than foreign policy, but It defends the mis­
POWs. in a delightful evasion. CBS says:
SeElng ot the Pentagon. But If CBS says that leading statement by saying that the broad­
"Months after the Rowe-H6bert program
there was nothing wrong with this kind of cast did not say the team lectured only on
was delivered to Mf. Seabrooks, Mr. Branon
transposition in The Selling of the Pentagon, foreign policy. Presumably if the listeners
inferred that, that was their mistake.
contacted Mr. Hubert’s offloe and the offices
we wonder how seriously CBS intends to en­
o f other Representatives to obtain informa­
force its new regulation.
CBS says it waa justified in saying that
tion with respect to additional Congressional
The same point can be made about the Caterpillar arranged the Invitation* 4>Scaus8
interviews with Major Rowe and other mili­
editing of the Henkln interview, which also an official o f Caterpillar was co-chairman o f
tary personnel. Including other former pris­
Involved clear violations of the rules against the committee that arranged the seminar and
oners o f war. I t In at this point, seemingly,
the transparing of answers to questions with­ they were told that he and his associates were
out giving an indication of this to tbe au­ very helpful “in heading up the committee
dience. tn tta dteeo a w n o t the editing of the and m»iklng all the necessary arrangements."
Henkln interview. CBS makew no mention of CBS would apparently have us believe that
The other three admitted error* are sig­
nificant In that they cast light on the bias
and carelessness of CBS. The bias Is clearly
shown In the Incorrect description of the
results of defoliation In Vietnam. The truth
could easily have been ascertained by CBS.
but It would not have been so dramatic. The
exaggeration of the number of offices in the
Pentagon by a factor of 6 shows the same
kind o f bias, as does the implication that
CBS bad to “ find" the Industrial War Col­
lege lecturers. The criticism o f the film.
“Road to the Wall,” would have been blunted
If CBS had correctly attributed Its produc­
tion to CBS rather than to the Pentagon.




132
February tOf 1972

CX>NGJRESSIONAL RECORD — Extensions of Remarks

E 1235

anything an employee of a company does, in­ that the confusion b^gan. The focus on addi­ being asked, the first three of which Mr.
cluding civic actlvitlco, can be attributed to tional Rowe Interviews and other POW inter­ Friedman declined to answer or oould not
views may well have been the genesis of the answer. In the CBS portrayal, his response
th f firm that -roploys him.
rate was only 60 per cent compared with tbe
(S )
CSS accused the lecturers for the In­mlsuuSerstanding which arose.”
We are expected to baileve that five Con­ actual 80 per cent which CBS says prevailed
dustrial Ocllege oft tbe Armed Faroes off rk>Hf f m military n g u U tto u in discussing for- gressional offices all got the Impression that for the entire briefing. CBS aay*: “This Is a
CBS wanted these tapes in connection with fair representation which does not reflect
elgn pettier implication* o l Vietnam. It « m
criticized to t not pointIn* o at that the talks a documentary on POW’s even though they adversely on Mr. Friedhelm." What CBS se­
given toy «**»• speakers bad been cleared were all presumably told that CBS wanted lected to show was dearly not typloal o f
not only t*y Dsflnue bat by tbs State Depart- them in connection with a documentary on Mr. PriedJieim’* performance at tbe briefing.
fjcktnt. The Assistant Secretary of Defense Defense Department public relations activi­ CBS appeared to be trying to make the point
says this U »U tbe regulations require. CBS ties That is too strange a coincidence to be that the press briefings are an occasion
when the press Is trying, without much suc­
lnsfists that the talks victatad regulations, no swallowed.
(6) CBS devoted nearly one-fourth of “ The cess, to extract information from unwilling
v**ttar who rteared «u?m. Since national detmtm *r*A faceit;** poiief are frequently inter­ Selling of the Pentagon" to films made by Defense Department spokesmen.
twined. it w w M rc*m clear ttiat Uio Depart- the military and available to the public. It
Ttx introducing Mr. Friedhelm, CBS de­
n\~rtta o f JtW«use and State sra In a better said that most of the films were made orig­ scribed him as an “ adversary" of the press.
position than CBS to determine whether or inally for troop information but a large num­ *n*e briefing was described as a “confronta­
o o t a 8Brt«sH rnnfi counter to giiTecmuent ber was later released for public showing. It tion,” and CBS said off Mr. Friedhelm: “Ha
said that the Pentagon spends over 913 mil­ does not, o f course, tell all he knows; he
regulations wkI policy.
(4) c m w»s d ittytd m th having falsely lion a year on films. Later, in criticizing anti­ wouldn't have his job long If he did." There
flugpM**! ***** firWMlly Oocgreaomen, spo- communist films made by the Pentagon, CBS followed tbe carefully selected segment from
(dfinOir Onwg. F. BSdward Hubert, had been said: “But to the filmmakers at the Penta­ the briefing showing Mr. Friedhelm avoiding
~u«wl~ I t h e Pentagon in broodoasting tn- gon, with at least 913 million a year to spend, answering reporters* questions. That is what
tervkur* O u t they twvl made with MaJ. James 1M6 seems to have lasted a whole genera­ CBS calls a “ fair” representation. The same
Bowes. TUia v u vigorously denied by Cong. tion.” One could easily infer from these kind of treatment was given tbe press brief­
XttiMTt. who denied that tbe Interview with statements that a very large part of the $12 ing in Saigon for exactly tbe same reason.
lfbsj. Bowe was prodaceri at tba suggestion million goes for films that are Intended for CBS said the dally press briefing there waa
o< tbs P«Jt*pon or that the broadcast to his public release. The Pentagon notes that the “ known among newsmen In Saigon as the
b o m district tnvotvr*l the use o f Pentagon great bulk of th e films are made for troop Five O'clock Pollies.” It indicated that ttoa
fruvts. ThUi/w ad ewrtly have »>*en the tnfer- training, research development, recruiting, most popular phrase at the briefing was
<noe dr*wn by thane who heard the CBS medical and religious use. It charges that "n o comment."
■tafewow*. CPA says the program, did not say CBS was wrong in implying that the $12
It then Illustrated this by showing a film
that tto# £toafa*£nn produced tbe H£bert-Bowe winimn m films was largely used to influence cUp o f the briefer declining to answer ques­
ftntarviow or that it was the Pentagon-8 Idea. the public. CBS responds that It had no in­ tions. The Defense Department
that
B o m r n , it undermines this denial by tention o f implying what most o f th e viewers this was not a typical scene. CBS does not
■IjuiMln.ij that Cong. Hubert thanked the probably Inferred from what was said.
(7) It is charged that CBS showed Robert deny that the sequence It showed was not
arional «4v> ewvwd m liaison with the House
typical. Instead It argues that the briefer
MxamA Services Coeamltee far bringing MaJ. Stack narrating a Defense Department film should have been authorized to answer the
' Homy t» JMro. Tfcry < not aaeni to ooastder In a way that suggested that he was doing a particular queetlrihs that be was shown de­
fe>
Vr*& Cong. JFWbert might have asked the film on the use erf weapons In Vietnam when, clining to answer. Arguable
n»«* m y
In fact, the film was about unarmed recon­ be. It does not get CBS off the hook far pro*
flCfcsMl fe » bring MaJ. Bowe, wtvo was famous
<
foer surviving Ads ye*rs of captivity as a VC naissance pilots. The brief film clip used by sentlng an atypical weqnenee and iissslnp tt
prisoner and wtv> auocessfuUy escaped. to s*o CBS did give the Impression that Stack was off to the viewers as completely i q m a ntaWni. White denying that it meant to Imply going to Udk about guns In Vietnam. CBS tlve at tbe dally briefings.
What it Implied. CBS pendstb* to oonveylng says they had no Intention o f implying
(10)
CBS was criticised tor saying that tha
this and that "n o such implication was
the H n u unfair Implication.
phrase "protective reaction” means that the
(8)
Cone. Hubert charged that CBS ob­ created.” Nevertheless, the Inference was U.S. resumed the bombing at Worth Vietnam.
tained
tap* o ' bis fcdtanrtew with MaJ.
(8)
“The Selling at tbe Pentagon'* gaveThe Defense D epartm oil states that ’‘protec­
Bowe by tailing his office that it wanted %
tive reaction” means a w r y limited kind a t
In oounectlon with a documentary It waa many viewers (be Impression that a large
doing o o prt»pners off war. C53S denies this, military training exercise called
SMylp« thAt it was peddle knowledge that It Strike” was put on for the benefit o f a small emphasizes that this does no* mean the re­
« m doing a doiNDfntasr on puMlc lnfor- group o f civilian VIP's. Deecriblng this mili­ sumption of the widespread bnmWng off
—
w t M U w nf tho Department o f De- tary exercise, CBS said: “ An air and land North Vietnam carried out prior to Novem­
( n w « t the time It obtained the Hubert tape. assault on enemy territory m simulated for ber 1968. CBS responds that ft only said the
C3VI Mwrtn t£»at do one m iti staff ever the visitors.” 01m Defense Department points _ bombing had resumed, without saying that
I ttmt'ttM tape It wanted from out that the training exercise would have large scale bombing had been resumed. They
i be rand for a POW taken plaoe with or without the VIP visitors say that thaJMfense Department hM made
and that many other observe!^ including
it dear that "protective reaction**, bombing
On tfee cnciPM . myu CEH they said they military personnel saw It. The answer CBS is different ftw n the pre-NovtaHber 1068
y
3.
w in tiii tba Mat in onno*et»on with a docu- gives Is that it did not say that the exercise bombing. CBS
not the slightest dis­
■wntiry an ftnfawn o public relations ac- would not have taken place in the absence tinction O this Mni*i *n<i many in >*»* audi­
ff
off the VTP visitors, that It was other than a ence could well have been misled Into think­
tMHM. This *s flatly contradicted by Ooog.
Hubert's press secretary and by the Oangrassing that the pttrase. “ the X
TJS. t ----------------n t n . Ctongpesman F f t « t has put Into the
hftwihtng q£
—u
rw om m ttsr or memos from the ofltaea at
UA bad r---------------------five other oongresicnen who assart that they
(9)
It was charged that CBS showed As­
were approached tty the areas CBS staffers
who approached Coneresman Hubert's office sistant Secretary o f Defense Jerry Friedhelm
to nbtela tapM of interv
iews with MaJ. Bmra. declining to answer half of the questions he
Although CBS once claimed to have a a
Four of them said they ware told that CBS was asked at a press briefing when actually
— w art
it
ta*v«s In connection with a at that briefing he responded to 31 o f the 34 answer for every one o f the arttjrhans off '~Tbm
#smitrrntnry It » m doing on POW a CBS questions ssked. Tbe complaint waa that CBS Selling o f the Pentagon,** its oompjrshsnsl*
a t k s s do mca£lon of *■ »< evidence oonflrm- deliberately focused on those questions that reply to the critics leaves many questions un­
* «
fcag Gang. HAwrt's charge that the CBS staff Mr. Friedhelm declined to answer for se­ answered. AIM criticised S3 points tn the
aoagbt tapes o f Interview* between congreea- curity reasons to create the Impression that CBS documentary, and CBS dealt with on ly
xnen and MaJ. Bowe under the
he did not provide the press with much in­ 18 o f thees in its "aomprehenalve'* reply. Tan
they wwe wortting'cn a doc
formation. It was charged that OBS used the points, with 30 questions attached, w r v com ­
FORTs. In a delightful evaeten. CBS i
same technique to Indicate that press brief- pletely Ignored.
a tta r the B oss-ffib ert program
Among the questions CBS avoided Were
s iM lrered to l*r. Seahrooka, Mr. Branon comment” answers to iftswamens’ questions. theae: ( l ) was it not inaccurate and nrffatr
CBS said that at the Frledhalxn brisling to suggaat that John Wayne narrated De­
rt*s dfflns and the offices
mtaUvea to obtain
at least 58 questions were asked and Mr. fense Department films In return for help in
Frtcdhplm was unable to sn aw t I t o f theee making "The Orasn BaretsT" (3) Bow does
oosopletely far varying reasons. This meant CBS define its phrase. “Pentagon propa­
80psr «s*rt o f the questions ganda.** and wyuld any tactual description
k n t* at this point, a
.
cbs stw
m sis questions




n V tn m
orth ie a "

133
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T h a t til w h y C BS haa n o t answ ered AIM 's
deep p ro b in g question*.

M r. S p e a k e r, i f an yo n e La fu rth e r In ­
te re ste d in th e typ e o f p ro p ag an d a, su ch
a s w as evid enced b y th e "B e llin g o f th e
Pen tag o n '* p ro g ram , I add th is b it o f
In fo rm a tio n fro m C la u d e W ltze ’a colum n
in A ir F o rc e m a g a zin e :
I P rom M r F orce m agazin e, February 1072]
I n ease an y on e Is still Interested. “ T h e
Sam n g o f th e P e n ta g on " is available for
rental. I t c a n be obtain ed fo r a fee o f $60
fro m A m erican D ocu m en tary Film s, a n o n papAt
orga n isa tio n with, offices
« t 330 W es t 44Ux 8 1 , Mew Y o r k . tf.Y . 10034.
oe f n a S79 B ay £tk* S a n Fraixiagp, C a lif.

February 16, 1972

A m erican D ocu m en tary F ilm s advertises
th a t It circu lates “ F ilm s fo r A g ita tion .” I n
a d d ition t o th e C B S m asterpiece, y ou c a n se­
le c t fro m a list th a t in clu d es, f o r exam ple,
“ 79 Sp rin gtim es,’’ d escrib ed as “ a brillian t
Im pressionist biog ra p h ica l trib u te t o H o C h i
M ln h .” A n d th ere Is “ H anoi, M artes 18,”
w h ich Is a "m o v in g salu te t o th e V ietn am ­
ese.” p resu m a bly th ose in N orth V ietnam .
T h en th ere Is available, “ Stagolee: B obby
Seale In Prison .” a film in w h ich th e Pan­
th er leader speaks ou t, an d a n oth er p ictu re
in w h ich A ngela Davis tells it lik e It J»,
fro m h er view p oin t In JaU.
T h e A m erican D ocu m en tary F ilm catalog
does n o t in c lu d e "R o a d t o th e Wall,** a d o c ­
u m en ta r y p rod u ced b y CB S f o r th e D epart­
m e n t o f Dcftense t o 1962.

134
E x h ib it G

BABBON’S
NATIONAL BUSINESS AND FINANCIAL WEEKLY

BARRON’ S
M

ore o n

N

MAILBAG

ader—

To the Editor:
It would appear from the corres­
pondence you have published that
Ralph Nader’9 denial that he told an
Australian audience that the answer
to the problems ho had criticized “ is
socialism or communism of one sort
or another” has not settled the ques­
tion in the minds of some of your
readers.
Accuracy in Media has made in­
quiries of two people who attended
the dinner addressed by Mr. Nader
in Australia at which the remark
was allegedly made according to a
report published in The Australian.
One was Mr. J. A. Caro, Managing
Director of Samuel Taylor Pty.,
Ltd., who asked the question that
produced tho alleged response by
Mr. Nader.
Mr. Caro has informed us that
Tho Australian carried a letter from
an associate of Mr. Nader’s, Barry
O. Jones, pointing out that The Aus­
tralian had erred in attributing this
statement to Mr. Nader. Mr. Jones
stated that Mr. Caro had asked if
Mr. Nader was arguing that what
was needed was socialism or com­
munism of one sort or another.
Mr. Caro confirms this. In his let­
ter to AIM ho wrote: “ From mem­
ory again, Mr. Nader’s reply in gen­
eral terms refuted that some sort of
socialistic system was tho inevitable
conclusion from the tenor of hi9
argument. I must say that I found
his answer to my question rather
unsatisfactory, but nevertheless, I
must agree with his refutation of
the accuracy of the facts as outlined
in the original ‘Australian’ account.*1
This was confirmed also by Dr.
H. C. Coombs, who was master of
ceremonies at the Nader dinner. Dr.
Coombs has written to AIM sayinj,
“ The reported response to the ques­



tion is quite contrary to the
spirit of what Mr. Nader said
as I recall it. Kis emphasis
was on the need for a higher
level of social responsibility
in industry end commerce,
and on the importance of
governments exercising ef­
fectively and independently
of business interest their
function as protector of the
community interest. Such a
view of the relationship be­
tween government and indus­
try and commerce 13 not
compatible with aa advocacy
of socialism or communism.”
We believe tkat you
shoul4 print this letter to
clear up any remaining
doubts about the inaccuracy
of the quote attributed to Mr.
Nader by The Australian
which appeared in the Bar­
ron’s article of September
24, 1973.
R eed J. I r v i n e
Chairman of the Board
Accuracy In Media Inc.
Washington

MAY 27. 1974

135
E x h ib it H

Editors may adopt
new code of ethics
A fter seven months of discussion and
rewriting, the American Society of
Newspaper Editors will consider the
adoption of a “ Statement of Principles”
to replace its 52-year-old “ Code of Eth­
ics or Canons of Journalism .”
The new statement which will be
considered at the A S N E convention in
Washington on April 15 -18 was w rit­
ten by the specially-appointed A S N E
Ethics subcommittee. The committee
members were Mark Ethridge Jr .,
Paul Poorman, John Sengstaeke, Ralph
Otwell, Jim Powell, Norm Cherniss and
Abe Rosenthal.
According to Ethridge, chairman of
the subcommittee, the original code
was written in 11)23 and has stood v ir­
tually
unchanged since.
However,
Ethics Committee chairman Bob Clark
called for a revision on the belief that
it may be dated.
Although there are many changes,
Ethridge said much of the code was
preserved in spirit if not wording. Sec­
tion II of the old code dealing with
Freedom of the Press “ had to go,” he
said. Other sections, tlje committee
found, were confusing or fuzzy, such
as the section on ‘‘news communications
from private sources.”
The draft which will go before
A S N E members was presented to Eth­
ics Committee members in Louisville
and sent out to the board of directors
as well in Jan u ary. A fte r suggestions
and critiques were sent to the commit­
tee, the final d raft evolved.
Following is the 1923 Code of Eth­
ics and the rewritten version which
will be voted upon in A p ril:

CODE OF ETHICS
or
Canons of Journalism
AMERICAN SOCIETY
OF NEWSPAPER EDITORS

i.
R E S P O N S IB IL IT Y — The right of a
newspaper to attract and hold readers
is restricted by nothing but considera­
tions of public welfare. The use a news­
paper makes of the share of public
attention it gains serves to determine
its sense of responsibility, which it
shares with every member of its staff.
A journalist who uses his power for any
selfish or otherwise unworthy purpose
is faithless to a high trust.

I.
I
FR EED O M OF T H E P R E S S —Free­
dom of the press is to be guarded as a
vital right of mankind. It is the un­
questionable right to discuss w'hatever
is not explicitly forbidden by law, in­
cluding the wisdom of any restrictive
statute.

h i.

IN D E P E N D E N C E — Freedom from
all obligations except that of fidelity
to the public interest is vital.
1. Promotion of any private interest
contrary to the general welfare, for
whatever reason, is not compatible with
honest journalism. So-called news com­
munications from private sources
should not be published without public
notice of their source or else substantia­
tion of their claims to value as news,
both in form and substance.
2. Partisanship, in editorial com­
ment which knowingly departs from the
truth, does violence to the best spirit
of American journalism ; in the news
columns it is subversive of a funda­
mental principle of the profession.
IV.

S IN C E R IT Y .
T R U TH FU LN ESS.
A C C U R A C Y — Good faith with the
reader is the foundation of all journal­
ism worthy of the name.
1. By every consideration of good
faith a newspaper is constrained to be
truthful. It is not to be excused for lack
of thoroughness or accuracy within its
control, or failure to obtain command
of these essential qualities.
2. Headlines should be fu lly w ar­
ranted by the contents of the articles
which they surmount.
V.

I M P A R T I A L I T Y —Sound practice
makes clear distinction between news
reports and expressions of opinion.
News reports should be free front opin­
ion or bias of any kind.
1. This rule does not apply to socallel special articles unmistakably de­
voted to advocacy or characterized by a
signature authorizing the w riter’s own
conclusions and interpretation.
VI.

F A IR P L A Y — A newspaper should
not publish unofficial charges affecting
reputation or moral character without
opportunity given to the accused to be
heard; right practice demands the giv­
ing of such opportunity in all cases of
serious accusation outside judicial pro­
ceedings.
1. A newspaper should not involve
private rights or feeling without sure
w arrant of public right as distinguished
from public curiosity.
2. It is the privilege, as it is the
duty, of a newspaper to make prompt
and complete correction of its own
serious mistakes of fact or opinion,
whatever their origin.
D E C E N C Y — A newspaper cannot
escape conviction of insincerity if
while professing high moral purpose it
supplies incentives to base conduct, such
as are to be found in details of crime
and vice, publication of which is not
demonstrably for the general good.
Lacking authority to enforce its canons
the journalism here represented can
but express the hope that deliberate
pandering to vicious instincts will en­
counter effective public disapproval or
yield to the influence of a preponderant
professional condemnation.

E D I T O R B P U B L I S H E R for March 15, 1975
i




Draft
Statement o f Principles
AMERICAN SOCIETY
OF NEWSPAPER EDITORS
ARTICLE I - RESPONSIBILITY

The purpose of gathering and dis­
tributing news and opinion is to serve
the w elfare of the people. Those who
abuse this function and purpose abuse
their public trust.
ARTICLE II FREEDOM OF THE PRESS

Freedom of the press is a vital right
of the people in a free society. It
must be defended against infringement
or assault, from any source, public and
private. Journalists must be con­
stantly alert to see that the public’s
business is conducted in public, and
must oppose those who would use the
press as a servant of government or
any special interest.
ARTICLE III - INDEPENDENCE

A newspaper must avoid both im­
propriety and the appearance of im­
propriety, conflict of interest and the
appearance thereof. Promotion of any
interest contrary to the general wel­
fare, for whatever reason, is not hon­
est journalism. Newspapers and news­
paper people should accept nothing or
pursue activities which might compro­
mise or seem to compromise their in­
tegrity.
ARTICLE IV.TRUTH AND ACCURACY

Good faith with the reader is the
foundation of good journalism. E very
effort must be made to assure that the
news and editorial content of the news­
paper is accurate and in context and
that all sides of an issue are pre­
sented fairly. Editorials should be held
to the same standards of accuracy and
honesty as news reports. Correction of
significant errors should be made
promptly and appropriately.
ARTICLE V - IMPARTIALITY (or
IDENTIFICATION)

Sound practice makes a distinction
between news reports and expressions
of opinion. Articles which express opin­
ion or offer personal interpretation
should be clearly identified.
ARTICLE VI - FAIR PLAY

Journalists should show respect for
the dignity and rights of people en­
countered in gathering the news and
should be accountable to the public. A
newspaper should not publish unoffi­
cial statements affecting reputation or
moral character without opportunity
given to the accused to be heard. With­
out clear and pressing reason, sources
of information should be identified.
These principles are intended to pre­
serve (or establish*), protect and en­
hance the (a*) bond of trust and re­
spect between American journalists and
the American people.

136

National joimiaMst’s grouip
adopts standard of conduct
The following Code of' Ethics was
adopted by the Society of Professional
Journalists, Sigma Delta Chi at their na­
tional convention last month in Buffalo,
N.Y.:
“ Sigma Delta Chi, Professional Jour­
nalistic Society, believes the duty of jour­
nalists is to serve the truth.
“ We believe the agencics of mass com­
munication arc carriers of public discus­
sion and information, acting on their Con­
stitutional mandate and freedom to learn
and report the facts.
“ We believe in public enlightenment as
the forerunner of justice, and in our Con­
stitutional role to seek the truth as part
of the public’s right to know the truth.
“ We believe those responsibilities carry
obligations that require journalists to per­
form with intelligence, objectivity, ac­
curacy, and fairness.
“ To these ends, we declare acceptance
of the standards of practice here set
forth:
“ I. RESPONSIBILITY: The public’s
right to know of events of public impor­
tance and interest is the overriding mis­
sion of the mass media. The purpose of
distributing news and enlightened opinion
is to serve the general welfare. Journal­
ists who use their professional status as
representatives of the public for selfish or
other unworthy motives violate a high
trust.
“ II. FREEDOM OF* THE PRESS:
Freedom of the press is to be guarded as
an inalienable right of people in a free
society. It carries with it the freedom and
the responsibility to discuss, question, and
challenge actions and utterances of our
government and of our public and private
institutions. Journalists uphold the right
to speak unpopular opinions and the privi­
lege to agree with the majority.
“ III. ETHICS: Journalists must be free
of obligation to any interest other than
the public’s right to know the truth.
“ 1. Gifts, favors, free travel, special
treatment or privileges can compromise
the integrity of journalists and their em­
ployers. Nothing of value should be ac­
cepted.
“ 2. Secondary employment, political in­
volvement, holding public office, and serv­
ice in community organizations should be
avoided if it compromises the integrity of
journalists and their employers. Journal­
ists and their employers should conduct
their personal lives in a manner which
protects them from conflict of interest,
real or apparent. Their responsibilities to
the public are paramount. That is the
nature of their profession.
“ 3. So-called news communications from
private sources should not be published or
broadcast without substantiation of their
claims to news value.
“ 4. Journalists will seek news that
serves the public interest, despite the ob­
stacles. They will make constant efforts to
assure that the public’s business is con­
ducted in public and that public records
EDITOR




8C

are open to public inspection.
“ 5. Journalists acknowledge the news­
man’s ethic of protecting confidential
sources of information.
“ IV. ACCURACY AND OBJECTIVI­
TY : Good faith with the public is the
foundation of all worthy journalism.
“ 1. Truth is our ultimate goal.
“ 2. Objectivity in reporting the news is
another goal, which serves as the mark of
an cxpericnccd professional. It is a stan­
dard of performance toward which we
strive. We honor those who achieve it.
“ 3. There is no excuse for inaccuracies
or lack of thoroughness.
“ 4. Newspaper headlines should be ful­
ly warranted by the contents of the arti­
cles they accompany. Photographs and
telecasts should give an accurate picture
of an event and not highlight a minor
incident out of context.
“ 5. Sound practice makes clear distinc­
tion between news reports and expressions
of opinion. News reports should be free of
opinion or bias and represent all sides o f
an issue.
“ G Partisanship in editorial comment
.
which knowingly departs from the truth
violates the spirit of American journal­
ism.
“ 7. Journalists recognize their responsi­
bility for offering informed analysis, com­
ment, and editorial opinion on public
events and issues. They accept the obliga­
tion to present such material by individu­
als whose competence, experience, and
judgment qualify them for it.
“ 8. Special articles or presentations de­
voted to advocacy or the writer’s own
conclusions and interpretations should be
labeled as such.
“ V. FAIR PLAY: Journalists at all
times will show respect for the dignity,
privacy, rights, and well-being or people
encountered in the course of gathering
and presenting the news.
“ 1. The news media should not commu­
nicate unofficial charges affecting reputa­
tion or moral character without giving the
accused a chance to roply.
“ 2. The news media must guard against
invading a person’s right to privacy.
“ 3. The media should not pander to
morbid curiosity about details of vice and
crime.
“ 4. It is the duty of news media to make
prompt and c(Jmplete correction of their
errors.
“ 5. Journalists should be accountable to
the public for their reports and the public
should be oncouraged to voice its
grievances against the media. Open dial­
ogue with our readers, viewers, and lis­
teners should be fostered.
“ VI. PLEDGE: Journalists should ac­
tively censure and try to prevent viola­
tions of these standards, and they should
encourage their observance by all news­
people. Adherence to this code of ethics is
intended to preserve the bond of mutual
trust and respect between American jour­
nalists and the American people.

P U B L I S H E R for December 8, 19?3

137
Chairman P a tm a n . Without objection, the committee will stand in
recess to reconvene at the call of the Chair.
[The following information was submitted for inclusion in the
record:]
A

d d it io n a l

I

n f o r m a t io n

S u b m it t e d

for

the

R

ecord

U.S. H o u s e o f R e p r e s e n t a t i v e s ,
Washington, B.C., March 11, 1975.
H on. A

rthur

F. B

u rns,

Chairman, Federal Reserve Board of Governors, Federal Reserve System,
Washington, D.C.
D e a r M r . C h a i r m a n : According to the Jack Anderson column appearing in
today’s Washington Post, a high-level employee of the Federal Reserve System
(Reed J. Irvine) has been charged with using his position to gather information
to further private interests which have nothing to do with his position with the
Federal Reserve Board. Of even greater seriousness, howT
ever, is the use of this
information, obtained under false pretenses, to attempt to harass the press and
hamper their reporting of news of major public interest.
In connection with this matter, I would like to have furnished to the Subcom­
mittee on Domestic Monetary Policy the following information:
1. A specific description of Mr. Irvine’s official duties as an employee of
of the Federal Reserve.
2. What relationship the information sought by Mr. Irvine has to his
responsibilities as an official of the Federal Reserve?
3. What value could the inquiries made by Mr. Irvine serve in carrying out
his official duties as an employee of the Federal Reserve?
4. To what extent has Mr. Irvine been using the facilities of the Federal
Reserve to carry on his duties as an official of Accuracy in Media, Inc. ?
5. To what extent has the Federal Reserve examined the use of Federal
Reserve facilities to carry on the activities of Accuracy in Media, Inc. ?
6. When did Mr. Irvine’s superiors first become aware of the use of Federal
Reserve facilities for Accuracy in Media, Inc. ?
7. What steps were taken when this information came to the attention of
Mr. Irvine’s superiors
8. Have you or any other employees of the Federal Reserve either directly
or indirectly authorized or condoned in any manner the actions of Mr. Irvine
in connection with Accuracy in Media, Inc. ?
Dr. Burns, these questions take on a special urgency in light of the recent
revelations that you and your agency have been attempting to suppress the release
of interest rate data to the new’s media. The actions of Mr. Irvine, as described in
the Jack Anderson column, seem to me more of the same—additional evidence of
what is apparently a deeply-held distrust of the press and the public’s right to
know* within the Federal Reserve.
As I have indicated to you, the Domestic Monetary Policy Subcommittee is very
interested in looking at these questions—including both the suppression of the
interest rate data and the Irvine case—and I trust that we will have prompt
replies.
Sincerely yours,
W r i g h t P a t m a n , Chairman.
C h a ir m

a n of t h e

F

B

oard of

ederal

R

G o verno rs,
eserve S y s t e m ,

Washington, B.C., March 13,1975.
Hon. W r i g h t P a t m a n ,
Chairman, Subcommittee on Bomestic Monetary Policy, Committee on Banking,
Currency and Housing, House of Representatives, Washington, B.C.
D e a r M r . C h a i r m a n : I am pleased to respond to your letter of March 11 con­
cerning allegations printed in a Jack Anderson column that Reed J. Irvine, an
Adviser in the Division of International Finance, used his official position to
further the purposes of an outside organization.
An internal inquiry into these charges is presently underway under the direc­
tion of Governor Robert C. Holland, the Governor in charge of the Board’s internal




138
administration. I have asked Governor Holland to advise you promptly regarding
any aspect of your letter that he feels can appropriately be addressed at this time
and to keep you advised of developments including any findings made as a result
of the inquiry.
Sincerely yours,
A

rthur

F. B

u rns.

B oard of G o vern o rs,
F ederal R eserve S y s t e m ,

Washington, D.C., March 17,1975.
Hon. W r i g h t P a t m a n ,
Chairman, Subcommittee on Domestic Monetary Policy, Committee on Banking,
Currency and Housing, House of Representatives, Washington, D.C.
D e a r M r . C h a i r m a n : Chairman Burns has referred to me for further reply
your letter of March U, 1975, regarding the allegations in a Jack Anderson/Les
Whitten column that Reed J. Irvine, Adviser in the Board’s Division of Inter­
national Finance, used his official position to further the purposes of an out­
side organization. As Chairman Burns advised in his response of March 13, in my
capacity as Board member responsible for internal administration, I am in
charge of the Board’s inquiry into the charges involving Mr. Irvine’s activities.
Certain of the questions that you have asked must await the outcome of this
inquiry, which is nearing completion. I will advise you of developments and of
the relevant results of this inquiry.
Turning to those of your questions that are susceptible to immediate response,
Mr. Irvine’s official duties are as follows: He is an Adviser in the Board’s Division
of International Finance and is the Chief of the International Development Sec­
tion in that Division. He has responsibility for monitoring and analyzing activities
in the developing countries and operations of the international development
finance institutions. He also is the Federal Reserve staff representative to the
National Advisory Council on International Monetary and Financial Policies
(NAC). Regarding the foregoing, Mr. Irvine has the responsibility of providing
appropriate advice to the Board, pritnarily through the Division of International
Finance.
Mr. Irvine states that in his capacity as a Board official, he obtained from the
Congressional Research Service at the Library of Congress a copy of a Chilean
study prepared by Mr. Jonathan Sanford. Mr. Irvine submitted comments on this
study to the Library of Congress in a memorandum dated November 22, 1974.
The content of this memorandum was within the sphere of Mr. Irvine’s official
responsibilities at the Board.
You have inquired as to what value the inquiries made by Mr. Irvine could
serve in carrying out his official duties as an employee of the Federal Reserve.
Mr. Irvine’s duties, set forth generally above, include—among others—monitoring
and analyzing the operations of the Inter-American Development Bank and the
International Bank for Reconstruction and Development (World Bank). In his
capacity as Federal Reserve staff representative to the NAC, Mr. Irvine provides
analysis of questions likely to come before the NAC and advises the Board on
positions to be taken by the Federal Reserve in NAC discussions. Matters con­
cerning the Inter-American Development Bank and the World Bank, including
the loan policies of those institutions vis-a-vis particular countries, frequently
are considered in the NAC. The Congressional Research Service study prepared
by Mr. Sanford dealt with the policies of the Inter-American Development Bank
and the World Bank toward Chile, and thus was relevant to the analysis and
advice Mr. Irvine gave in his official duties as an employee of the Federal Reserve.
As to your final question, the Board has never condoned the use of its facilities
for outside purposes and never authorized Mr. Irvine to use Board facilities to
further his work as an official of Acccuracy in Media. As required of all em­
ployees, Mr. Irvine filed a statement reporting outside activities undertaken on
his own time, including activities as Chairman, Board of Directors, AIM. This
report was reviewed and approved by appropriate staff officials, indicating that
the Board raised no objections to such outside activities by Mr. Irvine in his
personal capacity. The Board has neither endorsed nor opposed Mr. Irvine’s out­
side activities.
No present member of the Board has authorized or sanctioned any use by
Mr. Irvine of Board personnel or facilities in connection with any outside activi­
ties. I do understand that the former Vice Chairman of the Board, J. L. Robert­
son, did evidence a personal interest in Accuracy in Media while at the Board
and that subsequent to his leaving the Federal Reserve in 1973, he became a
member of AIM’s National Advisory Board.




139
As stated, I will respond to the remainder of your questions upon com­
pletion of our inquiry. I anticipate its completion prior to my appearance on
behalf of the Board before your Subcommittee later this week. I understand
that you have also requested Mr. Irvine’s appearance before the Subcommittee,
and that in response to notice of the fact contained in your March 13 letter to
Chairman Burns, you have been advised by Chairman Burns that the Board has
no objection to Mr. Irvine’s appearance and testimony on his own behalf.
Sincerely yours,
R o b e r t C. H o l l a n d .
B oard of G o ver n o rs,
F ederal R eserve S y s t e m ,

Washington, D.C., March 19,1975.
Hon. W r i g h t P a t m a n ,
Chairman, Subcommittee on Domestic Monetary Policy, Committee on Banking,
Currency and Housing, House of Representatives, Washington, D.C.
Dear Mr. Chairman : I advised you on March 17 that the Board was conduct­
ing an inquiry into the allegations made in a Jack Anderson/Les Whitten column
that Reed J. Irvine, Adviser in the Board’s Division of International Finance,
had used his official Federal Reserve position in behalf of a private group,
Accuracy in Media, Inc. Certain of the questions raised in your March 11 letter
on this matter were answered in my letter of March 17. I am now in a position
to answer the remaining questions in your letter and to advise you of the relevant
results of our inquiry.
You have asked about the extent to which the Federal Reserve has examined
the possible use of its facilities by Mr. Irvine to carry on the activities of Ac­
curacy in Media, Inc., the extent of any such use by Mr. Irvine, and whether
there has been any direct or indirect authorization or condonation of any actions
of Mr. Irvine in connection with AIM.
As a result of the allegations made in the Anderson column on March 11,
an examination was made of Board records (including those in Mr. Irvine’s office)
commencing with the date that Mr. Irvine became associated with AIM to deter­
mine if there were official Board letters or other material referring to AIM
which would substantiate the Anderson allegations concerning Mr. Irvine. In
r
addition, interviews were conducted with employees, both secretarial and profes­
T
sional, in Mr. Irvine’s section to determine whether the allegation of use of Board
facilities for AIM purposes was substantiated. Both the records search and
interviews of employees were conducted in the presence of an employee rep­
T
resentative to assure fair treatment of Mr. Irvine’s interests in the matter.
Our findings are as follows:
1. Our review of official Board files and the interviews conducted cause us to
conclude that Mr. Irvine did not abuse his official position through use of Federal
Reserve facilities on behalf of AIM.
2. Mr. Irvine’s identified contacts with the Library of Congress and his
memorandum of November 22, 1974 to Mr. Charles Gellner, made with respect to
the Chilean study, were within the purview of his official responsibilities as
detailed in my letter of March 17.
3. The inquiry did bring forth two official letters signed by Mr. Irvine which
touch on the subject of AIM. One was a letter written by Mr. Irvine to Mrs.
T
Clare Boothe Luce dated November 3, 1972 concerning one of Mr. Irvine’s official
trips which made a passing reference to AIM. The second was a letter dated
July 24, 1973 to a Mr. Luis B. Mey from Mr. Irvine which likewise referred to
AIM as an aside. Other than these letters, copies of which are attached, the
files did not reveal correspondence from Mr. Irvine with references to Accuracy
in Media, Inc. While the contents of these letters indicate carelessness on Mr.
Irvine’s part, and Mr. Irvine has been instructed to avoid any such references in
the future, in my judgment they are not of such nature to be inconsistent with
our finding that Mr. Irvine did not abuse his official position through use of
Federal Reserve facilities on behalf of AIM.
In conclusion, I will state that the Federal Reserve Board has not endorsed the
activities of AIM. As a matter of policy the Board requires all of officials of the
Board to report outside business and teaching activities, and Mr. Irvine had
formally notified the Board of his position as Chairman of AIM’s Board. The
Board of Governors did not oppose Mr. Irvine’s private activities undertaken on
his own time on behalf of AIM.
Sincerely yours,
R o b e r t C. H o l l a n d .
50-365 O • 75
•

10




140
r o v c - b ir 3, 1972

Mi*3 . C ; ,re Soothe Luca
l4559
1c Avcr.ua
Honolulu.
9u315
Eear Hrs, Luce:

.

,

Ar U

I apologise for not: havir.f- written to you sooner*
Ambassador Durbrov senc he a copy of your_letter in i . . c *
-lii
you hir.dly indicated your villi^?;r.ecs Co see Dr. cr.d Ilrs.
Durr.s ar.d ~a if v:e ccrr.o to ha v:aii. I vas very such
that this vould be possible, but there vr.3 a good
of
uncertainty about tho trip and just vhen it ni^ht C c* e piace.
. ;
K ' . it he 2 been necessary to postpena in for at lec/sc a few
ow*
months.
It is possible that vs will make it in late Jar.tiai-y
or xebruary of r*e:;t year.
I hope that it rill be possible to rn-ke a rtop in.
ihn.'aii at that tinu, I know the Lurr.3 v;ould like to toe. it
s^ain, end I vould very rr.uch like to c.esi you.
AIM is dolr.g quite nicely. 2 shall enclose a couple
of clippings showing the'use that ia bainj trade of o ; . of
cre
the AIM reports, t.v.ich r_iy be of interest to you* Ycur support
ie greatly r.ppr-ec.iated.
Kith best uishas, I rer_ain,
"

* \
’\ {-

Sincerely yours.

Reed J, Irvino

Advisor
Division of International Pinance

.

j

M 3 r,
T

Enclosi:ra

Ifcs-i i.

“Y ‘
.SJI:bb

rcr1
1




Uzzr: Lrir

y

y

P

Y

141
1973

Hr. Luic B. Msy
A y - Ro que Stiznz Pe£a 760
Buenos Air as, Argentina
£*ear Luic:
I vao pleased to receive your letter and to l e e m nors
about the cor.fercncs st the University of ik&ras&i.
X shall be
lonklt>3 forward to hearing frcn. Hr. Esquenazi-Kayo.
I was interested in ycur ccnseenta about the recent
political developments there. It is unfortunate uhct 1st so cany
countries the institutions of higher learning ere so corrupted by
the Marxists. Perhaps rr/ nest project, a 5 n? off shoot of Accuracy
r,
irx Kedie, will ha to orgnniza a group called Accuracy in Academia
to focua cn thet prcb i:c:.
2
I gather froa your note that you definitely will plea
to care to Washington. I do not heve nny suggestions for & title
for tho Call; right at the ccscant, but I think that people barn
vould be r.03t interested in aer-e kind of r-nalyeis of Percnist
econnnic thinking. what do y e n think? • Also let es Icacs/ the data
that vculd be best for you.
I shell be looking iorvard to hearing frcn youour best re^erds to your vife.




Sincerely your3,

Reed J- Irvine
Adviser
Division of Intcmotianel Finance

Give

142
H

ou se

op

R

e p r e s e n t a t iv e s ,

Washington, D.C., March 25,1975.
M r. R

eed

J . I r v in e ,

Chief, Developing Countries Section, Division of International Finance, Federal
Reserve System, Washington, D.C.
D e a r Mr. I r v i n e : Thank you for appearing as a witness at the Domestic Mone­
tary Policy Subcommittee hearing on Tuesday, March 18, concerning the audit
of the Federal Reserve System and related matters.
In order to complete the hearing record, would you please answer the attached
questions at your earliest convenience and return them by Friday, March 28.
Sincerely yours,
W r i g h t P a t m a n , Chairman.
1. Mr. Irvine, you are an employee of the Federal Reserve System, a primary
responsibility of which is the regulation of banking organizations. Yet, as an
official of Accuracy in Media, Incorporated, you have been involved in, and per­
haps have even led, efforts by that organization to defend the interests of the
banking industry. The criticism levelled by AIM against CBS for its morning
news series on banking in May 1973 is a case in point. To say the least, this situ­
ation gives rise to questions-of-confiict of interest. Under the circumstances, I ask
that you supply the Subcommittee on Domestic Monetary Policy with a list of
banking or banking-connected contributors to AIM for each year of AIM’s
existence.
2. Mr. Irvine, does Accuracy in Media, Incorporated, receive any of its funds
from any government agency?
3. Mr. Irvine, your name appears as the signatory of various letters to the
editor in connection with Accuracy in Media’s efforts to answer a variety of
news stories and columns.
In many instances, you cite statistics, and I want to know whether these were
gathered by you in your capacity as a Federal Reserve official or whether you
obtained this from government sources as an employee of Accuracy in Media,
Incorporated?
For example, a letter to the editor, dated October 23, 1973, to the El Paso,
Texas, Times takes issue with a column by Tom Wicker in which you include
certain data which you say is “according to the Office of Management and
Budget.
How did you obtain this data—in what capacity?
4. When you sent your AIM letter out on November 14, did you have a copy
of the Library of Congress report which was sent you as a Fed official on
November 12?
5. What Fed governors or employees assisted you in any way with AIM? On
Fed time? Not on Fed time?
6. Did you use Fed telephones in any way for AIM purposes? Fed clerical
r
help? Any Fed supplies?
7. Did you write or help write the mailgram for Mr. Francis Wilson responding
to the Anderson column on your apparent Federal Reserve conflict? Did you do
it on Fed time?
8. Did other government employees assist you in AIM work? David Martin?
Ambassador Davis? Any federal employees as consultants?
9. What outside writers did you use for your AIM activities as suggested in
your IRS filings? Did you use any government friends or acquaintances to assist
you in getting your IRS non-profit status? Your postal status?
10. Have you discussed your AIM activities with any other Federal Reserve
officials? If so, with whom and for what purpose?

A

Q u e s t io n s of C o n g r e s s m a n J a m e s J . B l a n c h a r d fo r R eed J .
I r v in e , W it n e s s B e fo re t h e D o m e s t ic M o n e t a r y P o l ic y S u b c o m m it t e e of
t h e H o u s e B a n k i n g , C u r r e n c y a n d H o u s i n g C o m m i t t e e o n M a r c h 18, 1975.

d d it io n a l

1. During your testimony on March 18, 1975, and in response to the question,
“Are there other colleagues at the Federal Reserve who participate in the
activities of AIM?” You answered that none of your colleagues participate in
any official capacity. Have any of your colleagues at the Fed participated in




143
AIM in any capacity whatsoever? If yes, who? If yes, when? If yes, what role
did they play with AIM?
2. Are you aware of any bank officials in Latin American countries who con­
tributed money to AIM? If yes, who? If yes, how much?
3. Are you aware of any banks in Latin American countries that contributed
to AIM? If yes, which banks?
4. Did you participate in any way with the activities of the committee to
Reelect the President (Nixon, that is) ? If yes, what did you do? If yes, when?
5. Initially, in your appearance you testified “I do AIM work on my own time,
not using government facilities or materials.” Later, you admitted that you have
made telephone calls for AIM on Fed time. Now, it is clear you wrote letters
about AIM and even some new group called “Accuracy in Academia” on Fed
time. The initialling of the secretary indicates you also used a Fed secretary to
write the letters. Therefore, could you tell m e:
(а) Why you at first said you did no AIM work at the Fed?
(б) How you explain the two letters in view of your denial? (The letters
referred to may be found on pages 140-141.)
(c) Based on your logs and recollection, who did you discuss AIM with
at the Fed or on Fed time? By phone? By letter? I request all available
documentation of these occurrences.
(d) The number and amounts of time you discussed AIM on Fed time
with J. L. Robertson and others? What Fed supplies did you use for AIM?
(e ) The names of Fed personnel who were used in typing two letters that
appear on pages 140-141. The names of other Fed personnel who did any kind
of clerical, messenger or other work for AIM at any time?
6. When you wrote your attacks on Anderson’s column about the Chilean
economy, was the Library of Congress report in your hand? When did you re­
ceive it? Did you identify yourself as an AIM person to its author? When did
you reveal your AIM position to the Library?
7. You say you received only Fed compensation at the time you were writing
the Chilean material for AIM. Could you detail the issues of AIM publications
for which you received the $2370 mentioned in your testimony? Did this writing
overlap with your Fed duties in any way ?
8. You have testified that you contacted the networks and the bankers on
certain AIM projects. Please detail the hours when this occurred. Was this
Fed time ? If not, please explain.
9. In view of the obvious ties between the bankers and the Fed, please pro­
vide the names of all contributors to your group associated with the banks?
With the Fed? With other financial institutions? With bank-financed industries?
10. You say on page 42 you do not “work for private gain.” Please tell us
whether you have ever been compensated by the Fed for your AIM work?
Please explain if you do not work “for private gain,” how it is you told the
committee you received $2370 from AIM as compensation.
11. On Page 60 you tell of your talks with Dr. Burns and of his awareness
of your interest in AIM. The letter that appears on page 7, evidences a close
relationship with Dr. Burns. Please amplify fully on your discussion with Dr.
Burns on AIM.
12. Chairman Patman brought out your ties with the Roundtable. You say that
were minimal. Please amplify fully.
13. Congressman Minish brought out your group’s defense of the oil industry
on plage 68. Could you clarify any times with the oil industry and any contri­
butions made by them? Were they influenced in any way by your high position
with the Fed, which controls much financial policy affecting the oil industry?
What material was provided AIM by the oil companies or by the American Petro­
leum Institute. Did you meet recently with members of the American Petroleum
Institute? Were contributions to AIM discussed? Did your Fed job figure in
their contributions? What other oil people have you discussed AIM and con­
tributions with?
14. Did you ever use material developed by you in your Fed jobs for AIM?
15. On page 83 I asked you about your deductions of space in your home as
office space. Your answer was rather vague. Please clarify, with full figures
about your deductions for home office space.
16. Do you know, on a personal basis, G. Gordon Liddy? If yes, how do you
know him?




144
[The response by Mr. Irvine to Chairman Patman’s and Congress­
man Blanchard’s questions follows:]
S il v e r S p r in g , M

d .,

March 27,1975.

Hon. W r i g h t P a t m a n ,
Chairman, Subcommitte on Domestic Monetary Policy, Committee on Banking,
Currency and Housing, House of Representatives, Washington, D.C.
D e a r C h a i r m a n P a t m a n : Attached are my responses to the additional ques­
tions asked by you and Congressman Blanchard.
In going over my records, I find that I made an error in testifying as to the
amount I received for writing the AIM Report in 1974. In the quick check I
made the night before the hearing, I inadvertently missed a payment of $500.
The total recived in 1974 was $1379.50, and I would like to have the record
corrected to show that. I have mentioned this in my response to Congressman
Blanchard’s question #7.
Sincerely yours,
R e e d J. I r v i n e ,
an sw ers

to

q u e s t io n s

of

c h a ir m a n

patm an

1. With all due respect, AIM has not been engaged in defending the interests
of the banking industry, and I do not feel that the case which you mention gives
rise to any conflict of interest on my part. AIM is concerned with the correction
of factual errors of all types in the news media.
As I explained at the hearing, AIM has a policy of not disclosing the names
of its contributors. AIM feels constrained to protect the confidentiality of its
contributors because of the possibility of harassment by those in the media who
may be the object of AIM criticism. This is a policy followed by many similar
organizations, such as Ralph Nader’s group and the NAACP.
2. No.
3. By telephone inquiry as a private citizen.
4. I do not recall when I received the Library of Congress Report, but I do
know that I had read it prior to the time that I wrote the letter on the Anderson
column. However, I did not refer to the report in the letter, nor did I make any
use of it in writing the letter.
5. None.
6. As I said at the hearing, I have from time to time made or taken personal
calls on my office phone, as does every other government official that I know.
Some of these calls have occasionally been related to AIM matters, but I have
made every effort to minimize such instances. I do not use FRB clerical help
or supplies in doing AIM work.
7. I drafted the mailgram for Dr. Wilson. This was done over the weekend
at my home.
8. David Martin has assisted AIM in that he serves on the AIM board and
tenders advice from time to time. This has been done on his own time. Ambas­
sador Davis is on the board, but his location has not made it possible for him
to take an active part in AIM activites. AIM has not used federal employees as
consultants or assistants, except for me and Mr. Martin, at noted above.
9. I did not use any outside writers for my AIM activities. As I have indicated,
I received some compensation for writing AIM Reports. None of the other outside
writers was employed by the government.
I was not involved in getting AIM’s IRS non-profit status or postal status,
and I did not call upon any friends to assist in that.
10. I notified the Division of Personnel of my intention to assume the position
of Chairman of the Board of AIM in 1971. I believe that I also notified Governor
Robertson, and I mentioned it to Chairman Burns some time later. I thought it
was appropriate that they be informed of this outside activity. When AIM did
something that attracted attention publicly, friends and associates who knew
of my association with the organization sometimes made comments to me, and
media criticism has sometimes been a subject of lunch table conversation with
my friends.




145
ANSWERS TO QUESTIONS FROM CONGRESSMAN BLANCHARD

1. There are a few employees of the Federal Reserve who subscribe to the AIM
Report or have made small contributions. None is under my supervision and
none of them participates in AIM’s work.
2. No.
3. No.
4. No.
5. a. and b .: The letters in question were not in any sense work for AIM. They
were written in connection with official business, and the references to AIM
were nothing more than casual remarks intended to add a personal touch, much
as I might refer to my family or my garden in an official letter to someone
who might know members of my family or who might have visited my home. I
do not consider an occasional telephone call as being inconsistent with what
I said about doing AIM work on my own time, not using government facilitiies
or materials. Any time that might have been taken by such occasional calls has
been offset many times over by the uncompensated overtime that I have put in
doing FRB work at the office and at home over the past 23 years. I know of no
official who.never makes or takes a personal call on his office phone.
c. See answer to Chairman Patman’s question #10.
d. I do not recall any specific conversations with Governor Robertson about
AIM on Fed time, but I am sure I informed him of my intention to assume the
chairmanship of AIM in 1971. I do not use Fed supplies in my work for AIM.
e. The initials on the letters indicate that they were typed by Bertha Brown
and Theresa Newman. This was not clerical work for AIM, and I know of no
Fed personnel who have done work for AIM.
6. I had read the Library of Congress report on IDB-IBRD loans to Chile
before I wrote the critique of Anderson’s column. I do not recall the date that I
received it. I did not mention AIM to Mr. Sanford or anyone else at the Library
of Congress. It would have been inappropriate for me to have done so, since
I was dealing with Mr. Sanford and Mr. Gellner in my official capacity. As I
testified, I had a valid official interest in the report, and I used it for a proper
official purpose. (See letter from Governor Holland to Chairman Patman of
3/17/75).
7. I was compensated for writing the following AIM Reports: 1973—May,
June, July, August-September, November, December; 1974—January, February,
March, April, September, October. This work did not involve any overlap with
my duties at the Federal Reserve Board. In rechecking my records to reply
to this question I discovered that I had overlooked the payment that I received
for September and October 1974 when I made a quick check the night before the
hearing. I will ask that the record be corrected to show that I received a total
of $1379.50 for writing the AIM Report in 1974.
8. As I testified, the call to the CBS official was made from my home when
I was in bed with the flu. The other incident mentioned was not a call on a
banker, but a very brief visit to the office of the newspaper, the American Banker,
during my lunch hour. I do not recall the date.
9. See reply to Chairman Patman’s question #1.
10. I have not been compensated by the Fed for my (AIM work.
My work for AIM has been motivated solely by my interest in promoting a
free, accurate and responsible press. I would do precisely as I have done working
for AIM nights and weekends without the incentive of monetary compensation.
The money I received in 1973 and 1974 was a token payment to help keep peace
in my home and to cover expenditures for household maintenance that I was
unable to do myself because of the amount of spare time, including my summer
vacation, that I spent doing work for AIM.
11. I simply informed Chairman Burns of my outside activity which was on
record with the Division of Personnel.
12. I have no ties with the Roundtable.
13. AIM has not defended the oil industry. We have merely corrected some
inaccuracies published in the press concerning the energy crisis. AIM has no
ties with the oil industry. It has received very modest contributions from a few
oil companies. I am sure that my job had nothing to do with this. I presume
that the contributions were motivated by the interest of the donors in encourag­




146
ing greater accuracy in news reporting. In making a quick check of our files,
I find only two documents received from persons connected with the oil industry.
One is a transcript of a program on energy aired by ABC on which we took no
action. The other relates to difficulties one of the oil companies had in getting
commercials aired on TV. I do not recall that we did anything about that either.
The only occasion on which I have met anyone connected with the API occurred
several months ago quite by chance. I went to the Hilton Hotel one evening
to meet a visitor from out of town. He invited me to join him at a reception in
the hotel and later suggested that we dine together. He invited several other
people at the reception to join us for dinner, and two of them were on the
staff of the API, as I recall. We went to a nearby restaurant in which Jack
Anderson has an interest. One of the API staffers recognized Jack Anderson
at a nearby table, and introduced us. The attendance of the API staffers at this
social dinner was coincidental. I talked about AIM and its work, but I do not
recall any mention being made of possible contributions from API.
See reply to Chairman Patman’s question #1.
14. The work I do for AIM depends on information available to the general
public. In some cases such information may first come to my attention as a
result of my professional interests. However, I have not provided AIM with
information that I would not disclose to any member of the public, and I have
not used my Fed position to develop material for the use of AIM.
15. In 1973, I took a deduction for the office in my home of $578. I have not
yet filed a return for 1974.
16. No.

[Whereupon, at 1 2 :05 p.m., the subcommittee recessed, to reconvene
at the call of the Chair.]




147

AUDIT OF THE FEDERAL RESERVE
TUESDAY, APRIL 22, 1975
H ouse of R epresentatives ,
S ubcommittee on D omestic M onetary P olicy
of th e C om m ittee on B a n k in g , C urrency and H ousing ,

Washington, D.O.

The subcommittee met, pursuant to notice, at 10 :15 a.m., in room
2128, Rayburn House Office Building, Hon. Wright Patman [chair­
man of the subcommittee] presiding.
Present: Representatives Patman, Minish, Hannaford, Neal,
Blanchard, and Gradison.
Also present: Representative Johnson of Pennsylvania.
Chairman P a tm a n . This morning the subcommittee meets to con­
sider H.R. 4316, a bill cosponsored by 109 Members of the House of
Representatives. This legislation will allow the General Accounting
Office to conduct full-scale audits of the entire Federal Reserve System
for the first time in its 61-year history of this mammoth monetary and
regulatory agency.
1
predict that this hearing will be one of the most important hear­
ings that has been held in the history of this country during the last
200 years because it reaches into the questions that concern us most
today involving monetary matters, interest rates, and almost every­
thing else relating to money. I believe that any member who takes ad­
vantage of the opportunity to hear the witnesses we will have before
this subcommittee and will keep up with the testimony will be amply
well paid in the knowledge that he will obtain.
Considering the importance of this agency to the Federal Govern­
ment and the day-to-day lives of every citizen, it is amazing that so
much controversy, so much negative thinking, is still existing about
this simple suggestion that Government auditors should be able to
get inside the Federal Reserve. Judging from my mail, many citizens
of this Nation do not understand Congress’ apparent timidity in this
area. And I mean timidity in the monetary field.
This is an agency which handles transactions in excess of $24 trillion
annually and it will not be long until we will go beyond the trillions.
In fact, the portfolio of the Federal Open Market Committee contains
almost $87 billion of Government securities—and please notice this—
which have been paid for once with the money and credit of the U .S.
Government. Therefore, it really should be canceled.
The Federal Reserve draws between $5 and $6 billion annually in
interest on these bonds. It is out of this huge slush fund that the
Federal Reserve finances its operations without coming to the Con­
gress for appropriations or appropriations review, despite the fact




(1 4 7 )

148
that the Constitution of the United States says, and I am quoting the
Constitution of the United States:
“ No money shall be drawn from the Treasury; but in consequence
of appropriations made by law.”
The expenditures of the Federal Reserve have been increasing dra­
matically in recent years, and we have only the most recent surface in­
formation about the causes. Since 1970, operating expenses of the
Federal Reserve have increased 70 percent, and reports are that we
can expect these expenses to continue to rise rapidly.
In this day of open government, surely the Nation’s most important
economic agency should be expected to let the Congress and the
people know what it is doing. This is an agency whose policies can
literally decide whether people have jobs or whether we shall have
prosperity or depression. Its power is vast and its decisions on mone­
tary policy—whether effective or ineffective— are of serious conse­
quences to the state of the economy. It is inexcusable for the Congress
not to insist on the maximum information about this agency and this
can only be accomplished when we have full unhindered audits by the
General Accounting Office.
This legislation before us is not radical. It simply subiects the
Federal Reserve to the same type of audits which are conducted in
other major Government agencies including those with highly sensi­
tive subject areas such as the Defense Department and the various
regulatory agencies. There is absolutely no reason to exempt the Fed­
eral Reserve from scrutiny by the Congress watchdog agency.
For too long the Congress has been satisfied to accept the Federal
Reserve’s own idea of what should be known about the Federal Re­
serve. This kind of self-serving secrecy which this policy has gener­
ated will be ended by the enactment of H.R. 4316 and I am hopeful
that the subcommittee and the full committee will act swiftly on this
legislation.
This morning our witness is the Honorable Elmer B. Staats, the
Comptroller General of the United States. Many of us have known
General Staats for a long time and I personally have the utmost con­
fidence in him and the General Accounting Office. I am confident that
the G AO can carry out these audits of the Federal Reserve in a highly
competent and prudent manner.
General Staats, do you have a prepared statement? You may pro­
ceed as you desire.
STATEMENT OF HON. ELMER B. STAATS, COMPTROLLER GENERAL
OP THE UNITED STATES: ACCOMPANIED BY ELLSWORTH H.
MORSE, JR., ASSISTANT COMPTROLLER GENERAL: JOHN J. HIG­
GINS, ASSOCIATE GENERAL COUNSEL; AND CHARLES P. McAULEY,
ASSISTANT DIRECTOR

Mr. S ta a ts . I do have a prepared statement and with your per­
mission I will read it and will be prepared to respond to questions.
Chairman P a tm a n . Yes, sir, and after you finish we will yield to
each member 5 minutes to be<rin with to interrogate you.
Mr. S ta a ts . We appear here today at your request to present our
views on H.R. 4316, which authorizes and directs the General Account­




149
ing Office to audit the Federal Reserve Board, the Federal Advisory
Council, the Federal Open Market Committee, and the Federal Re­
serve banks and their branches.
This bill is essentially the same bill that was originally considered
by the House Committee on Banking and Currency in 1973. The
principal changes are the addition of specific references to the Federal
Advisory Council, the Federal Open Market Committee, and trans­
actions of the System Open Market Account as being subject to audit
by the General Accounting Office.
Proposals for a GAO audit of the Federal Reserve System have a
long background. Appended to my statement is a brief resume of the
extent of our existing audit authority over the Federal Reserve System
and congressional consideration of prior efforts for a more extensive
G AO audit. These are in attachment I.
The Federal Reserve System has a number of important control and
regulatory functions relating to the Nation’s system of money and
credit. For example, it can expand or contract the supply of money and
credit by purchasing and selling U.S. Government obligations. A s of
December 31, 1974, the Federal Reserve System owned U.S. securities
totaling nearly $86 billion.
The financial statements of the 12 Federal Reserve banks for the
calendar year 1974 showed total earnings from operations of $6.3
billion of which 96 percent was derived from interest on U.S. Govern­
ment securities. Total operating expenses of these banks in that year
were $548 million including about $41 million in assessments for the
expenses and other costs of the Board of Governors. Losses and other
deductions amounted to about $78 million. Member banks were paid
dividends of about $53 million and about $ 51 million was transferred
to surplus. The remainder of the net earnings of about $5.5 billion was
transferred to the U.S. Treasury.
In view of the very important part that the Federal Reserve System
plays in the Nation’s system of money and credit, we believe, as we
testified in 1973, that the Congress should provide for a G AO audit of
that system. H.R. 4316 provides for an annual audit of the several
entities of the system together with an annual report to the Congress
on the results. Special or preliminary reports are also expected when
deemed desirable. Specific provision is made in the bill that such
reports shall include any comments and recommendations that the
Comptroller General considers advisable, including recommendations
for more economical and efficient administration and disclosure of any
activities observed during the audits which are carried on without
authority of law. The bill also provides for access by the General
Accounting Office to all records and properties of the entities subject
to audit.
The bill provides no restrictions of any kind on the scope of the
G AO audit or on access to records for audit purposes. This is satis­
factory to us. In fact, if we are to be authorized and directed to audit
the Federal Reserve System, we would recommend that the authoriz­
ing law contain no restrictions.
Last year when legislation on this subject was being considered,
charges were made that a G AO audit would undermine the independ­
ence of the Federal Reserve System with respect to its monetary and




150
credit operations and damage the Nation’s monetary policymaking
system. Needless to say, we do not concur in this view.
Should the Congress wish to restrict the audit to take into account
this criticism, one restriction that could be written into the law would
be to specifically provide that our audit reports to the Congress or its
committees shall not contain conclusions or recommendations with re­
spect to the economic effects, as opposed to the efficiency and economy,
of open market and discount operations.
We understand also that there is concern about our examining trans­
actions conducted by Federal Reserve banks on behalf of foreign
central banks which have a high degree of sensitivity from an inter­
national standpoint. A similar restriction on including information
on such transactions in our reports could be provided in the law if
Congress wishes to do so.
However, we do not believe it would be desirable to provide any
other restrictions on our auditing or reporting if the overall objective
of the legislation, as we understand it, is to be achieved.
The bill would require the G AO to make an annual audit. Instead
of prescribing that we make an audit each fiscal year of the several
entities of the System, we recommend that the requirement be changed
to provide simply that the General Accounting Office be directed to
audit the named entities of the Federal Reserve System. With this
change, coupled with the provision that the audits be made under such
rules and regulations as the Comptroller General shall prescribe, the
bill would give us the needed flexibility to make selective reviews on
a continuing basis of different aspects of the System without the con­
cern that the literal wording of the law requires a complete audit every
year. This audit policy has evolved as a satisfactory way of providing
useful information and needed assistance to the Congress with respect
to other major agencies of the Government and we believe that it
should also apply to the Federal Reserve System.
Even if this suggested change is adopted, the bill could still, as it
now does, require that we report to the Congress once a year on the
results of the audit work performed during the year, in addition to in­
dividual reports that we would make during the year.
Under the Budget and Accounting Act of 1921, and the Budget and
Accounting Procedures Act of 1950, determination as to the frequency
as well as the scope of the auditing performed in other Government
agencies is left to our judgment. These judgments are made in the light
of congressional interests in specific programs and problems as they
become known to us and, as the 1950 act requires, after giving “ due re­
gard to generally accepted principles of auditing, including the effec­
tiveness of accounting organizations and systems, internal audit and
control, and related administrative practices.”
The bill provides that the G AO audit would be made under such
rules and regulations as we would prescribe. In accordance with our
regular policy, any rules or regulations that we would prescribe would
specifically require our auditors to review and evaluate the nature
and effectiveness of the organizations and systems of internal man­
agement control of the several entities of the Federal Reserve System
in determining the nature and extent of G AO audit work to be per­
formed. In particular, we would want to make a comprehensive review
of the internal and external auditing already being done. This step is




151
in conformity with generally accepted principles of auditing and is
also essential in avoiding unnecessary duplication and expenditure of
effort.
The reason for our mentioning this point is in recognition that some
auditing is now being done within the Federal Reserve System. It is
our understanding that:
—A firm of independent C P A ’s makes an annual audit of the ac­
counts of the Board of Governors and renders an opinion on the
Board’s financial statements which is included in the Board’s annual
report to the Congress.
— The Board’s staff of field examiners examines each Federal Re­
serve bank and branch once each year.
— The annual examination of the Federal Reserve Bank of New
York includes an audit of the accounts and holdings relating to the
System open market account and the foreign currency operations con­
ducted by the New York bank under policies of the Federal Open
Market Committee.
— Representatives of a firm of independent C P A ’s accompany the
Board’s examiners on their examination of one Reserve bank each
year, to evaluate the adequacy of the examination procedures.
— Each Reserve bank has internal auditors who work on a yearround basis. Their work programs are reviewed by the Board’s
examiners.
Except for the opinion of the C P A firm on the financial statements
of the Board of Governors which is included in the Board’s annual re­
port, no reports on the auditing being performed within the Federal
Reserve System are submitted to the Congress, to our knowledge.
Under our standards for audit of governmental activities we con­
sider that the full scope of an audit should include:
First, an examination of financial transactions, accounts, and re­
ports, including an evaluation of compliance with applicable laws and
regulations.
Second, a review of efficiency and economy in the use of resources,
and
Third, a review to determine whether desired results are effectively
achieved.
Examinations of financial transactions, accounts, and reports and
compliance with applicable laws and regulations include performing
enough analysis and verification work to arrive at opinions as to
whether financial transactions are carried out in accordance with ap­
plicable legal requirements and are properly accounted for, and wheth­
er the financial reports present fairly the financial positions, changes
in financial position, and result of operations of the various entities
being audited. Audit reports on such work would disclose any pro­
gram, financial transaction, or undertaking which, in our opinion, is
carried on without authority of law. In performing this kind of an
audit we would, as described earlier, first make a careful review of the
nature and adequacy of the internal management control systems in­
cluding the audit work already being performed within the Federal
Reserve System before determining how much additional auditing by
us would be needed.
In reviewing matters of efficiency and economy, our objective is
to find out whether the entities being audited give due consideration




152
to conservation of resources and minimum expenditure of effort in
carrying out their operations. We are interested in finding out whether
there are unnecessary or inefficient or unjustifiably costly procedures,
whether there is unnecessary duplication of effort, whether work is
being performed which serves little or no useful purpose, whether
equipment is being inefficiently used, whether there is overstaffing, and
whether there are faulty buying practices which result in paying un­
necessarily high prices or just buying too much.
In carrying out this kind of work we do not undertake to arrive at
overall opinions as to whether an organization is operating efficiently
and economically but we do try to identify problem areas and pro­
pose recommendations for greater efficiency and economy. This kind
of audit work also includes determining the causes of any inefficient
or uneconomical practices found as a basis for proposing constructive
recommendations for improvement. H.R. 4316 specifically provides for
audit work of this nature since it requires that we include in our re­
ports “ recommendations for attaining a more economical and efficient
administration of the entities audited.”
In reviewing the results of authorized programs or activities our
primary purpose is to find out whether the objectives contemplated
by the authorizing body or bodies are being achieved. In other agencies
of the Federal Government, we have gained a great deal of experience
in making such reviews, and the Congress has expressed a growing
interest in obtaining reports from us on the results of this kind of
audit work. The most recent general expression by the Congress on
G AO auditing is in the Congressional Budget and Impoundment Con­
trol Act of 1974. This act provides that we shall review and evaluate
the results of Government programs and activities carried on under
existing law. These reviews may be made on our initiative, when
ordered by either House of Congress, or when requested by any con­
gressional committee having jurisdiction over the programs or
activities.
Other than the discount and open market operations, there are
numerous functions and activities of the Federal Reserve System on
which evaluations of results achieved or effectiveness of operations
could be made as a part of our audits. Some examples of these functions
are listed in attachment I I to my statement.
Section (d) of H.R. 4316 authorizes us to employ necessary person­
nel and obtain temporary and intermittent services to carry out the
required audit of the Federal Reserve System without regard to the
provisions of title 5. United States Code.
We recommend that this proposed authority be modified in favor
of providing that, in carrying out the responsibilities assigned by
the bill, we be authorized to employ experts and consultants at rates
not to exceed level V of the executive schedule under section 5316 of
title 5, United States Code. A t this time we estimate that it would be
desirable to have^ authority to employ five such individuals. This is
similar to a provision included in the Congressional Budget and Im­
poundment Control Act of 1974 which placed additional responsibili­
ties on the GAO.
Our specific suggestions for changes in H.R. 4316 that I have dis­
cussed together with some other minor word changes are shown in
attachment I I I to my statement.




153
In summary, Mr. Chairman, we believe that H.R. 4316, with the
changes suggested in this statement, would provide for an adequate
audit of the various entities of the Federal Reserve System and enable
us to provide substantial assistance to the Congress in carrying out
its oversight responsibilities of the Federal Reserve System.
Now if you just want to turn to attachment I, in the interest of
saving time in our prepared statement we have included some back­
ground here on prior proposals for auditing by the General Account­
ing Office, tracing the history back to the time when initially we did
have this authority. That authority was removed in 1933 and since then
the G AO has had only very limited responsibility, namely authority
to review the cancellation and destruction of currency unfit for circula­
tion. That is the only authority we have been given since that time.
Attachment I I is placed here because of questions raised in our hear­
ing in 1973 as to what kinds of areas might we look at in reviewing
the effectiveness of the Federal Reserve System’s operations. These
are some examples. They are not all-inclusive but they are examples
of the kinds of things that we might conceivably look at.
Finally in attachment III , we have simply marked up the bill which
is before the subcommittee to reflect the two changes which I have
indicated that we would recommend. I f you look on page 4 of attach­
ment III , we have included language which would reflect the kind of
restriction which is referred to should the subcommittee so decide but
which we are not recommending.
[Testimony resumes on p. 167.]
[Attachments I, II, and I I I referred to by Mr. Staats, follow:]




154
A t ta c h m e n t 1

BACKGROUND ON PRIOR PROPOSALS TO REQUIRE A GAO
AUDIT OF THE FEDERAL RESERVE SYSTEM
Until 1933, GAO audited the expenditure vouchers of the
Federal Reserve Board but not of the banks.

The audits were

made because of the ruling of the Attorney General in 1914
that the funds obtained by assessment by the Board from the
banks to meet the expenses were public moneys.

The Banking

Act of 1933, however, superseded this ruling by declaring that
these funds were not to be construed as Government funds or
appropriated moneys.

With this change, the GAO audit of the

Board's expenditure vouchers was discontinued.
On occasion, the General Accounting Office has assisted
the House Committee on Banking and Currency in its work relating
to the Federal Reserve System.

In 1971, it also completed at

the request of the Chairman of the Joint Economic Committee a
study of the reporting system operated by the Federal Reserve
Bank of New York for dealers in Government securities.
With one exception, however, the GAO does not have the
authority to make audits of the several entities of the Federal
Reserve System.

The exception is the responsibility assigned

by the act of May 20, 1966, to audit the cancellation and
destruction of United States currency unfit for circulation.
Specifically, this act provides that:




155
A tta c h m e n t I
-

2

-

"The Comptroller General of the United States shall
audit the cancellation and destruction, and the
accounting with respect to such cancellation and
destruction, of any currency of the United States
unfit for circulation, regardless of who is responsible
for, and regardless of who performs, such cancellation,
destruction, or accounting.

The Comptroller General

shall have access to any books, documents, papers, and
records which he deems necessary to facilitate an
effective audit pursuant to this section."
This audit authority was provided in connection with the
change in procedures to transfer authority to destroy unfit
Federal reserve notes, previously vested by law in the Comp­
troller of the Currency, to the Secretary of the Treasury.
The destruction of most unfit currency is carried out in
Federal Reserve banks.

GAO has since reviewed these activities

of the Federal Reserve banks on a selected basis each year.
Three reports on this work have been submitted to the House
Committee on Banking and Currency.

In addition, 20 reports

have been submitted to the presidents of the specific Reserve
banks.
Generally, GAO has not found major deficiencies in the
administrative procedures and controls over these activities.

50-365 0 - 75 - 11




156
A tta c h m e n t I

- 3 -

The question of whether there should be a GAO audit of
the Federal Reserve Board and the Reserve banks was discussed
during consideration of the legislation vrtiich resulted in the
Government Corporation Control Act of 1945.

The primary pur­

pose of this act was to provide greater congressional control
over wholly-owned and partly-owned Federal corporations.

It

was determined that the Federal Reserve Board and banks should
be excluded from the audit provisions of that act.

Apparently,

the main reasons for this determination was that the Board
exercised strong control over the Reserve banks and all of the
stock of those banks was owned by member banks rather than by
the Government.
A bill introduced on July 20, 1959, in the 86th Congress,
H.R. 8302, would have directed .the Comptroller General to
conduct an audit of the Federal Reserve System for the period
commencing with the enactment of the Federal Reserve Act,
December 23, 1913, and ending December 31, 1958.

The Comp­

troller General objected to this measure because it would have
required an audit for a 45-year period which, as he then stated,
constituted Ma tremendous task vrtiich would drain our audit
manpower assigned to defense and other important Government
expenditures.1
1




157
A tta c h m e n t I

- 4 In subsequent years other bills were introduced, but not
enacted, which would have required GAO to audit the Federal
Reserve System.

In commenting on such legislation, the Comp­

troller General offered no opinion on whether such an audit
by the GAO was advisable, but stated that if the Congress
wanted such an audit made, it would carry out the congressional
intent by making whatever audits the Congress wished.




158
A tta c h m e n t I

- 5 During the 93rd Congress, H.R. 10265 was considered which
included provision for a GAO audit.

In testifying on this

bill before the House Committee on Banking and Currency, the
Comptroller General, for the first time, took the position that,
in view of the important part the Federal Reserve System plays
in the Nation's system of money and credit, a GAO audit should
be provided for.
The Committee reported this bill with certain amendments
on October 12, 1973.
1.

The

amended bill provided that:

The Comptroller General make^ under such rules and
regulations as he shall prescribe, an audit for at
least one of each three fiscal years of the Federal
Reserve Board and the Federal Reserve banks and their
branches, the Federal Advisory Council, and Federal
Open Market Committee, and all clearing facilities.
However, the scope of the audit was specifically
restricted to exclude—
a.

Examination reports of member banks

b.

Transactions conducted on behalf of foreign
central banks.

c.

Operations concerning open market transactions and
discount policy determined by the Federal Reserve
Board to be sensitive until at least one year
after the operations.




159
Attachment I
-

2.

6

-

Representatives of the GAO were to have access to
records

and properties necessary for making the

audits and they were to be afforded full facilities
for verifying transactions with balances or securi­
ties held by depositaries, fiscal agents, and custo­
dians of such entities.
The bill provided for reports for each year for which
audits were made plus special audit reports to the Congress,
with copies to the President of the United States, the Federal
Reserve Board, and the Federal Reserve banks.

The reports

were to include such comments and recommendations as the
Comptroller General deemed advisable, including recommenda­
tions for obtaining a more economical and efficient administra­
tion of the entities audited and disclosure of any program,
financial transaction, or undertaking observed in the course
of the audits which, in the opinion of the Comptroller General,
had been carried on without authority of law.
The bill also provided authorization for employing addi­
tional personnel and obtaining other services necessary for
carrying out the required audits without regard to civil service
and classification laws and 5 U.S.C. 3109b.




160
Attachment I
- 7 -

H.R. 10265 was considered on the floor of the House of
Representatives on May 30, 1974, and subsequently amended
before it was passed.

As amended, the bill provided only for

an audit at least once every three years of the administrative
expenses incurred on or after January 1, 1974, of the Federal
Reserve Board and the Federal Reserve banks "for the purpose of
ascertaining that administrative funds are properly accounted
for and that fully adequate accounting procedures and systems
for control of such funds have been established so as to assure
efficiency and economy of operations."
The amended bill defined the term "administrative expenses"
as specifically excluding "any extension of credit, purchase or
sale of securities in the open market, or transaction in foreign
exchange pursuant to the Federal Reserve Act."
In making provision for GAO access to necessary records
for purpose of making the audit, the amended bill specifically
excluded reports of examination of banks and "records, reports,
files, or other papers, things, or property containing or
revealing information publication of which in the judgment of
the Board would have a seriously adverse effect on the conduct
of monetary policy or on relations with a foreign government or
foreign central bank".




161
Attachment I
-

8

-

The amendment to the bill which restricted the GAO audit
to administrative funds was opposed by the Comptroller General
as of marginal value to the Congress.
The Senate did not act on the House-passed bill.




162
Attachment II
EXAMP 1ES OF FUNCTIONS AND ACTIVITIES OF THE FEDERAL RESERVE
SYSTEM SUBJECT TO EVALUATION OF EFFECTIVENESS OF RESULTS
ACHIEVED AS PART OF INDEPENDENT AUDTT b y t h f r An
.

Board of Governors supervision of Federal Reserve Banks:
Supervision of member banks of the Federal Reserve System
Reserve bank advances to individuals, partnerships, and
corporations.
Issuance and retirement of Federal Reserve notes.
Clearinghouse operations.
Acting as depositaries and fiscal agents of the United States.
Acting as fiscal agents of Government departments and agencies
in guaranteeing loans made by banks and other private financ­
ing institutions to finance procurement of materials and
services for national defense.
Involvement in issue and redemption of U. S. Government
securities•
Regulating and supervising the foreign operations of U. S.
commercial banks.
(12 U.S.C. 601-631)
Administration of the Bank Holding Act which is designed to
control bank holding company expansion and prevent the
expansion of bank holding companies into businesses not
related to banking.
(12 U.S,C. 1841-1850)
Approval of bank mergers. The Board shares this responsibility
with the FDIC and the Comptroller of the Currency. The Board
is required to approve mergers in which the acquiring,
assuming, or resulting bank is a State member bank. (12 U.S.C.
1828c)
Establishing rules and regulations for carrying out the
provisions of the Truth in Lending Act whose purpose is
to assure meaningful disclosure of credit terms to consumers.
Enforcement is shared with the other bank regulatory agencies
and the Federal Trade Commission.
(15 U.S.C. 1601)
Establishing rates of interest which may be paid by member
banks on time and savings deposits.
(12 U.S.C. 371b)




163
A tta ch m en t I I I

-JSSS- H. R. 4310
IN THE HOUSE OF REPRESENTATIVES
Marcii 5,1975
Mr.

(for himself, Mrs. S c lli v a n , Mr. R oe, M s. A bzuo, Mr. Vic.orito,
Mr. E c k u a r d t, Mr. F a s c e ll, Mr. S o la rz , Air. J oh n so n of California, Mr.
E va n s of Indiana, Mr. Anni nzio, Mr. M i l l e r of California, Mr. D in g e ll,
Ms. C o lli n s of Illinois, M r. Zr.iERETrr, Mr. 1>ia«gi, Mr. C a rn e y , Mr.
D om inick V. D a n ie ls , Mr. Davis, Mr. M o llo iia n , Mr. C h a r le s II. W ils o n
of California, Mr. Rees, Mr. M e t c a lf e , Mr. G ilm a n , and Mr. S a ra sin )
introduced the following hill; which was referred to the Committee on
Banking, Currency and Housing
P atm an

A

B IL L

To authorize and direct the General Accounting Office to audit
the Federal Reserve Board, the Federal Advisory Council,
the Federal Open Market Committee, and Federal Reserve
banks and their branches.
1

B e il, enacted. bfl (he Senate rend House of Tlcprescnta-

2

tires of the l/iiitcd Stales of America in ( !on<fress assembled,

3 That (a) the Comptroller General of the United States shall^
4 malt ft, under such rules and regulations as he shall prc5 scribe, *** audit fer each fiscal yenr of the Federal Reserve
6 Board, the Federal Advisory Council, the Federal Open
I




164
Attachment III

2
1

Market Committee, and all Federal Eeserve banks and

2

their branches/ including transactions of the System Open

and facilities,

3 /^arket ^c,countf r e m t l i timmgk- veoogniyrrl flonlore.
4

(b) In making the audit required by subsection ( a ) ,

5 representatives of (he General Accounting Office shall have
6 access to books, accounts, records, reports, files, and all
7 other papers, things, and property belonging to or in use
8 by the entities being audited, including reports of exami9 nations of member banks, from whatever source. They shall
1° be afforded full facilities for verifying transactions with
11 balances or securities held by depositaries, fiscal agents,
12 and custodians of such entities.
13
^

(c) The Comptroller General shall, within six months
after the end of each fiscal year, or as soon thereafter as may
be practicable, make a report to the Congress on the results
work performed for such year,

of the audit/required by jubs e e i i a n and he shall make
^

any spccial or preliminary reports he deems desirable for the
information of the Congress. A copy of each report made

19 under this subsection shall be sent to the President of the
United States, the Federal Eeserve Board, and the Federal
21

Eeserve banks. In addition to other matters, the report shall

22

include such comments and recommendations as the Comp-

23

trollcr General may deem advisable, including recomrnenda-

2*

tions tor attaining a more economical and efficient administra-

2^

tion of the entities audited, and the report shall specifically




165
Attachment III

3
1

show any program, financial transaction, or undertaking ob-

2 served in the course of the audit which in the opinion of the
3

Comptroller General has been carried on without authority

4 of law.
(d) The Comptroller General is authorized to emplj

6 suclsjjersonnel and to obtain such temporary and^kfllcrmit7 tent servicfosfis may he nccessary to carrvptffthe audits rc8 quired by subsectifca^fa), without^tfgard to the provisions
9 of title 5, United States^ft^T governing appointments in
10 the competitive sepfitie, and sucli^iijdividuals may be paid
11

without regfp*Tto the provisions of chapters5Jsand subchapter

12

Illpf'chaptcr 53 of such title relating to classification and
General Schedule pay rates.
(d)

In carrying out his responsibilities under

this Act, the Comptroller General is authorized to
employ not to exceed five experts on a permanent,
temporary, or intermittent basis at a rate (or the daily
equivalent) for individuals not to exceed that prescribed,
from time to time, for level V of the Executive Schedule
under section 5316 of title 5, United States Code.




166
Attachment III

- 4 If restriction on content of reports to be added:
Provided, however, that the reports required by this sub­
section shall not contain any information concerning transactions
conducted on behalf of foreign central banks or contain any
conclusions or recommendations with respect to the economic
effects (as opposed to the efficiency and economy) of open
market and discount operations.




167
Chairman P a t m a n . What are the two changes of which you suggest
consideration ?
Mr. S t a a t s . Specifically, the two changes we suggest are to remove
the requirement for an annual audit to give us authority to make re­
views throughout the course of the year, but to report once a year. With
this change, the bill would not require us to make a complete audit once
a year, but would allow that to take place over a longer period of time.
The second change is to give us authority to hire five people who are ex­
perts in this area at rates of pay which do not exceed level V of the
executive pay schedule.
Those are the two changes that we recommend.
Chairman P a t m a n . Have you finished, Mr. Staats?
Mr. S t a a t s . Yes, I have finished. I will be very happy to respond to
your questions.
Chairman P a t m a n . In the beginning of your statement, you bring up
one of the most important monetary problems that we have in our
Government today, and that is in regard to what is known as the port­
folio of the Federal Reserve banking system. Now, the portfolio, as I
understand it, is about $86 billion; and, of course, something that is
hard to understand is where the Federal Reserve gets its money. Un­
der the Federal Reserve Act, it has the {>ower to create money. It has
the power to manufacture money, and it has more power than any
other Government financial agency. In calendar 1974, total earnings of
the 12 Federal Reserve Banks snowed earnings from operations of
$6.3 billion, of which 96 percent was derived from interest on U .S.
Government securities.
Now, that is the part to which I wanted to invite your attention. In
that case, I think any audit should certainly cover this point thor­
oughly. You know, that is manufactured money, and I do not think
anyone would want the Federal Reserve Board, or anybody else, to
have unlimited power to issue money that is manufactured like a
printing press would manufacture it. And that is what is contemplated
here, and is actually happening.
Now, that is $86 billion in Federal securities in the portfolio in the
Federal Reserve Bank of New York. I succeeded, after about 30 years,
in getting a copy of that portfolio. It had never been obtained before,
and never published. It took me 30 years to get it, and I had to go
through some embarrassing moments in order to persuade them to let
me have it. That portfolio has $86 billion in Government bonds,
principally. And those bonds are handled by the 20 dealers—the Fed­
eral Reserve has 20 dealers on Wall Street. Those 20 dealers are the
only ones who can buy Government bonds for the Federal Reserve
System. They buy these bonds and get credit for the purchase from
tlie Federal Reserve Bank that they want to give the credit. Of course,
they do not pay any money at that time. But when a person wants the
money, just like when he files a promissory note with any bank, he
gets a credit on the books for the money that he has borrowed, and
he can draw that money out any time he wants to for the purpose that
he wants to. That is the same way that these $86 billion of bonds were
paid for, just on the credit in the Federal Reserve banking system. It
is Government money and credit that is used to by those bonds, and I
have always insisted that the professors teaching economics almost
invariably say that when the obligor in the credit instrument and the




168
obligee become the same person or the same entity, the debt is paid.
There is no question about that.
Therefore, I think that particular attention should be given to that
statement that you made, Mr. Staats, because it shows conclusively that
the debt is paid, and there is no reason why it should be allowed to
remain in the portfolio in the New York Federal Reserve Bank. The
people have to continue to pay interest on those bonds. Anyone can
now review that portfolio which I placed in the Congressional Record.
Each bond or each security has an explanation as to the amount of in­
terest that it draws when it is due. Congress does not appropriate the
money to pay the interest despite the fact that the Constitution says
that no money should be paid out by the Government that is not ap­
propriated by the Congress.
A t this time I will yield to you, Mr. Minish, so that you may ques­
tion Mr. Staats. Mr. Minish, you are recognized for 5 minutes.
Mr. M i n i s h . Mr. Staats, the Federal Reserve Board maintains that
noninterference with the internal management of the Federal Reserve
will provide better monetary and credit policies. This really means no
audit of the Federal Reserve by the GAO.
Mr. S t a a t s . I am not sure that I can interpret very well what they
have in mind, or anyone would have in mind, with that kind of a state­
ment, because we are in the business of reviewing operations through­
out the whole Federal Government.
We do not run into this kind of concern that we are interfering with
policy determinations, because in fact we would not be coming in prior
to a decision with respect to monetary policy, but rather we would be
looking at the overall financial condition of the system. We will be
looking at their internal controls, their auditing practices. We would
be looking at the way they carry on, you might say, the internal busi­
ness operations of the system. Their administrative costs are over a
half billion dollars—$548 million in 1974. This is a big operation, even
in Federal Government terms. We would also be looking at the ma­
chinery and the system by which they reach their determinations.
Somehow, in 1973, when this matter was before the Congress, the
statements were made to the effect that we would “ be looking over their
shoulder” at the time they were making the decisions. This just is
not true. It is not true anywhere else in the Government. I do not know
why it would be true here. But those statements were made. They rep­
resent a misunderstanding of what the law would provide, and what
our practice would be normally.
M r. M in ish . M r. Staats, I suppose the difference would be that in
using GAO, there would be a comprehensive audit over which they
would have no control, but if there were independent C.P .A .’s, they
would have some control over them. Would you agree ?
Mr. S t a a t s . Well, one of the questions that obviously we would
have— and I should think Congress would have—is what kind of
guidelines do they give the C.P.A. firm ? While we have not had any
authority to look in detail at their operations, we do have some concern
as to whether or not even the system that they have is an adequate
system. For example, the C.P.A. firm observes the audit of the Board’s
field examiners for one bank each year. That means a 12-year cycle.
There is a question of what happens to these audit reports—who re­
views them. It is our understanding that, for example, unlike other




169
large organizations such as the International Bank, there is no audit
committee of the Board.
We are not suggesting that we have concluded that there should be
one. But at least, it seems to us to be a legitimate question. These are
the kinds of concerns that we would be addressing.
Mr. M i n i s h . Well, let me ask you this. You have no concern that you
could adequately audit the Board to protect any necessary confidenti­
ality ?
Mr. S t a a t s . N o , not at all. We are dealing with confidential material
through the whole Government. This point was made previously that
internal conversations, and things of this type, would be purveyed by
our people to the press and to Members of Congress. We do not know
on what basis that kind of statement was made, because it does not
exist elsewhere.
Mr. M i n i s h . Thank y o u , Mr. Staats. M y time has expired.
Chairman P a t m a n . A ll right. Mr. Gradison ?
Mr. G r a d i s o n . Thank you, Mr. Chairman.
Mr. Chairman, first I would like to state that I think that the prob­
lem before us has been oversimplified by saying that the need for a
policy audit of the Federal Reserve is kind of a self-evident truth. A t
the time this matter was up for consideration by the House last year,
all former Secretaries of the Treasury of both parties indicated their
opposition to that kind of an audit. There must have been some reason
for their concern. A number of former Secretaries of Commerce of
both parties indicated their opposition to the policy audits. There must
have been some reason for their concern; and a number of former members and chairmen, as a matter of fact, of the Council of Economic
Advisers of both parties, indicated some reservations, and in fact ob­
jection, to the policy review.
With regard to the General Accounting Office’s functions in looking
over the financial affairs of the Fed, in a sense, they would be acting
as auditors to review the work of other auditors. I do not know—and I
hope we can find out at some stage—how much money is being spent by
the Fed for audit work. I understand that it might be in excess of
$7 million, including the costs of internal audit work being carried on
today within the banks, the branches, and the Board itself. Now, how
much more cost we want to pile on top of that is something I think we
should consider. But with respect to the policy matters themselves, I
am really troubled by the thought that we would seriously consider
turning these policy judgments over to somebody else.
We have recently passed a measure, Mr. Chairman, which began as
House Concurrent Resolution 133, to deal with precisely this ques­
tion. And in it we say, in the conference report, that it is anticipated
that hearings would be held soon after April 1 , and again after Ju ly 1,
to inform the committees and the Congress of the policies pursued
during the first half of 1975, and to consult about objectives and plans
with respect to ranges of growth and so forth. In other words, this is
our concern, and it is a proper concern. The Fed is our creation. But we
have provided a mechanism, and we have done it in the last month or
two, and I would certainly think that we should give that mechanism
a chance to operate before we go about creating some new machinery
as well.




170
In addition, Mr. Chairman, I would point out that there is no better
way for us to get judgments as to the job, the policy review of how the
Fed has gone about doing its work, than the hearing process which
we have been using and will continue to use. We are able to call, at
no cost, upon experts from throughout the United States to come
before this subcommittee, and testify as to the job the Federal Reserve
has done, and they do that. And it would seem to me that that kind
of review is going to be not only more timely, but also less expensive,
than paying the General Accounting Office to do— what? To go out
and hire some experts, because that is what we were told is going to be
done; five experts from outside to come in and advise with them on
what kind of a job the Fed has been doing from a policy point of
view ? We can get it free, without the necessity of turning to someone
else.
I then turn to my first question. What is the cost of doing the full
job of carrying out the mission which would be done under your pro­
posal—not just the hiring of the outside people, but the proper alloca­
tion of the time of the people who are already on your staff that would
be involved in this work ?
Mr. S t a a t s . Well, let me answer your specific question first. We
would not be able to give you a specific figure until we saw what kind
of a bill you enacted.
Mr. G r a d i s o n . I am asking what would it cost to carry out the bill
which you are recommending, that specific bill? You made a recom­
mendation— what will it cost you to do that job ?
Mr. S t a a t s . It would not be a large cost. We would be glad to fur­
nish for the record some range, based on similar-size operations.
Mr. G r a d i s o n . Are you not prepared at this time to tell us the cost
of carrying out your own recommendations ?
Mr. S t a a t s . N o ; we do not have a specific figure, because we have
suggested some changes here. But we can supply that. For example, we
do audit other financial institutions. But it would not be a large cost.
I would like to say that for the record.
Mr. G r a d i s o n . Could you supply this at a later time for the record ?
I think we really should have that when you come up here with a rec­
ommendation for doing a job. I think it should be expected we are
going to ask what it is going to cost.
Mr. S t a a t s . Well, we can supply that. There is no problem here.
But I do not want to give you a figure without some basis for it.
Mr. G r a d i s o n . Thank y o u .
[In response to the request of Mr. Gradison, the following informa­
tion was submitted for the record by Mr. Staats:]
R

eply

R

e c e iv e d

F rom M

r.

Staats

As brought out in the prepared statement, if GAO is authorized and directed
by law to audit the Federal Reserve System, the first step would be to make a
careful review of the nature and adequacy of the internal management control
systems including the audit work already being performed before determining
what additional audit work would be required. Until such preliminary survey
and review work is performed, it is not possible to make a precise estimate of
the audit costs GAO would incur in carrying the required auditing.
If H.R. 4316 were enacted to give the Comptroller General flexibility to make
selective reviews each year, as suggested in the Comptroller General’s state­
ment, rather than a complete audit each year as provided in the bill, an alloca­
tion of audit staff resources to such work would be made giving due regard to all




171
other audit work throughout the Federal Government which GAO is required to
perform. It is estimated at this time that the annual cost for such work would be
approximately $750,000.

Mr. S t a a t s . But let me, if I may, respond to the broader concern
which you have expressed. You are quite correct in saying that the
subcommittee can hold hearings with respect to the operations and
policies of the Federal Reserve System, and of course, it has. But
similar kinds of hearings are held by all the legislative committees
with respect to the agencies over which they have oversight. Our role
is one of assisting the Congress in providing an independent analysis
of the financial operations, the economy and efficiency of the opera­
tions, and with respect to any observations we have on how they
arrive at their program decisions. W e have no directive powers; you
understand that, I am sure. A ll we can do is develop, with the help
of trained professionals, the kind of suggestions for improvement that
we think the Congress might consider.
We do that in a variety of ways. We do it, in many cases, in the
form of a statutory requirement for a particular study; and as I have
indicated here, beginning in 1970, the Congress directed that we assist
the committees of Congress having oversight in developing cost and
benefit studies on programs. This part of our work has increased very
substantially in response to requests that we have had from com­
mittees of the Congress. But overall, we feel that the concern which
you have expressed here has been aired, and has been decided in the
affirmative— that there is a value of having an independent arm of
the Congress, one that is nonpartisan and certainly one that tries
to secona-guess the policies of an agency—to come up with sug­
gestions on ways to improve the processes by which that agency under­
takes its work. The cost involved here seems to me very, very small
in relation to the importance of the program that is involved.
Mr. G rad ison . Mr. Chairman, my time has expired. I am the only
member of the subcommittee on our side who is present today, and I
ask unanimous consent for 1 additional minute.
Chairman P a t m a n . Without objection, so ordered.
Mr. G r a d iso n . Thank you.
Mr. Chairman, there are two major elements in the development of
Government policies that affect the economy of the United States.
One has to do with monetary policy, and we are talking about review­
ing monetary policy and making sure it is doing the job. And the other
has to do with fiscal policies. A s the members of the committee know,
I am not tremendously impressed with the job, nor do I think is the
American people tremendously impressed with the job, that has been
done over the years in carrying out fiscal policies. Is there any way
that we could, if we should decide as a Congress, involve the General
Accounting Office in reviewing the way in which monetary policy is
developed by the Federal Reserve Board, also find a way to ask the
General Accounting Office to advise us on the way that fiscal policy
is developed by the Congress?
Mr. S t a a t s . Are you asking me that question ?
Mr. G r a d iso n . Yes. You seem to be willing to take on this job of
reviewing with the help of outside experts the way in which monetary
policies are developed, and have been in the past by the Fed. I am

50-365 0 - 75 - 12




172
asking whether you would be willing to take on the same task with
respect to the way that fiscal policies are developed by the Congress.
Mr. S t a a t s . Yes, indeed. In fact, we have done just that in terms
of the assistance we were asked to provide for the study committee,
which resulted in the Congressional Budget Act. We appeared before
the Ullman-Whitten committee, and helped them to a very great
extent. I testified subsequently three different times with respect to
the provisions of the statute, and we believe that an agency such as
ours that is concerned particularly with fiscal affairs of the Gov­
ernment can provide a useful analysis of the way in which the
budgetary-----Mr. G r a d iso n . But you are referring there to the procedures alone,
with respect to the Fed. Are you just going to limit your review to the
procedures which they follow once the policy is decided in implement­
ing it? Or rather to, as I understood it, to the policies themselves
as they relate to their total impact on the objectives with regard to the
needs of the economy.
Mr. S t a a t s . Well, I testified before this committee in 1973— and
I think the record will support me—that we would be primarily con­
cerned, with respect to monetary policy, with the processes by which
the Board arrived at their conclusions. We do not see our role as
being particularly useful in terms of coming up to a conclusion that
the money supply, the M 1, should increase at, say, 6 percent or 8 per­
cent or 10 percent. You can get all sorts of economists to come before
your subcommittee, and it is largely a subjective thing. I just attended
an economic outlook conference here in the last week of all the lead­
ing monetarists in the country, and they are 180 degrees apart. That
kind of a judgment is the judgment, I think, that you gentlemen
have to make, based on that kind of testimony. But I do think that
we could give this subcommittee and the Congress some useful judg­
ments with respect to the processes by which the Open Market Com­
mittee functions. That is a distinction that I tried to make then, and
I would repeat it this morning.
Now, I would like to go back—I think it bears on your immediate
question—to the statement you made with respect to the letters that
were obtained from former Cabinet officers and others, most of whom
are personal friends of mine. I know them well, and I have worked
with them over the years. But if the question were raised with me
as to whether I believed in the independence of the Fed, I would
write a letter supporting that too. I really do not think that is a
relevant question to the one that is before tfie subcommittee, if I may
say so.
Mr. G r a d iso n . That was not the question to which the letters were
directed, either.
Mr. S t a a t s . I have read most of those letters, and they are con­
struing a G AO audit as synonymous with a challenge to the independ­
ence of the Fed.
Mr. G rad ison . They were specifically referring to opposition to
H.R. 10265; not to some general theory, but to a specific measure which
was under consideration at that time. And this is true of each of
the documents that I am referring to ; the one from the former Secre­
taries of the Treasury, Secretaries of Commerce, and members—I
believe Chairmen—of the Council of Economic Advisers.




173
Mr. S t a a t s . Y e s ; I have read all those letters. But the context of
those letters, I think, if you will examine them, is in terms of GAO
audit coming in and monitoring the policies of the Fed. That is not
what the bill provided. You cannot find anything that I have said,
or that any language of the bill, I do not believe, which is written in
such terms.
Mr. G r a d iso n . Thank you, Mr. Chairman.
Chairman P a t m a n . Mr. Hannaford.
Mr. H a n n a f o r d . Y e s; thank y ou , Mr. Chairman.
Mr. Gradison’s questions regarding the decisions relating to fiscal
policy I think are quite significant. Fiscal policy and monetary policy
decisions, both, I think should be sometimes subject to political con­
siderations. Historic evidence has made that apparent in the past. I
welcome, therefore, an opportunity to see some other judgments about
monetary policy decisions independent of the Federal Reserve Board
itself.
Mr. Staats, how many employees does the Federal Reserve System
have?
Do you know that figure ?
Mr. S t a a t s . H o w m a n y em ployees?
Mr. H a n n a f o r d . Overall nationally ?
Mr. S t a a t s . I do not have the figure offhand.
Mr. H a n n a f o r d . It is something on the order of 30,000; is it not ?
Chairman P a t m a n . Recently I asked Chairman Burns that question
and he said there are 28,000 employees.
Mr. H a n n a f o r d . They have an income from their portfolios that
the Chairman often refers to as $6.3 billion.
Is that correct?
Mr. S t a a t s . That is right. Total earnings, $6.3 billion.
Mr. H a n n a f o r d . And I am told that they have an expenditure for
their operations of some one-half billion dollars.
Mr. S t a a t s . $548 million.
Mr. H a n n a f o r d . I s there any discipline in the absence of an audit,
an independent audit, to compel efficiency in the operation of that very
large establishment?
How do we know that without the discipline of any competition or
audit independently, how do we know that five secretaries are not
doing the work of three or two ?
Mr. S t a a t s . Well, let me just say in general terms that with respect
to any organization that spends $548 million in operating costs, I be­
lieve that with the kind of people we have got we can find ways to
save a good deal of money. I can say that without having gone inside
the building at all. I can say that with respect to any operation.
I think our record demonstrates over the years that we have been
able to come up with ways of making savings which the agencies
themselves accept as real savings. For example, last year, in 1974, we
were able to come up with recommendations that added up to $562 mil­
lion of savings that the agencies themselves accepted as being worthy
of their putting into effect.
There are many other recommendations we made that were not ac­
cepted and many others that could not be translated into dollar terms.
But I would say without much fear of contradiction that we could
find ways to save money that the Fed itself would accept.




174
H r . H a n n a f o r d . Y e s ; I w ou ld find it rem arkable i f there were n o t a
great deal o f inefficiency under the circum stances w ith such a large
institution w ith ou t surveillance or w ith ou t any com petition in the
m arketplace or a n y th in g else to com pel discipline.

You have, in fact, audited a goodly number of other agencies and
made policy recommendations to them.
Mr. S t a a t s . Yes, indeed. There are very few exceptions to our audit
responsibility in the entire Federal Government. The Federal E e­
serve System is one of them. We have not audited the C IA . We have
not audited the Defense Intelligence Agency to any extent. But these
are the principal exceptions of any consequence.
Mr. H a n n a f o r d . D o you know why the Congress in its wisdom in
the act of 1933 declared that these funds which the Attorney General
had previously said were public funds and which appear to me to be
quite public funds, were, by that act, declared not to be public funds?
Mr. S t a a t s . It was just a straight statutory declaration, I believe,
that these were not Federal funds. Congress, by the same stroke of a
pen, could declare that they are Federal funds. We think that they
are.
Mr. H a n n a f o r d . That is quite clear to me that they are public
funds.
Well, thank you, Mr. Staats.
Chairman P a t m a n . Mr. Blanchard.
Mr. B l a n c h a r d . Thank you , Mr. Chairman.
I find it hard to believe that for all these years the Fed has not been
audited when I hear so much talk about Congress attempting to know
what is going on and oversee the operations of Government agencies.
I notice that later in our hearings, I think next week, a representa­
tive of the Federal Reserve Board will testify. I myself would be in­
terested to see you and the representative testify at the same time. And
at the risk of being unfair to the Fed, I would like to ask you a couple
of questions. One, is without violating any confidentialities, I am curi­
ous if you have discussed the issue of the audit with Dr. Arthur Burns
or principles at the Fed ? And again, without violating any confidences,
what are the major objections raised—I hear the objection of the prob­
lems of secrecy and things like that—what are the popular objections
raised against an audit of the Fed and what is your response ? And I
want to make note-----Mr. S t a a t s . Well, I have discussed this question with Dr. Arthur
Burns, whom I have known for many, many years, on a number of
occasions and George Mitchell, who will be testifying before this sub­
committee, on a number of occasions, and they can state their own
position, and I do not wish to put words in their mouths. But based
on the testimony presented last time, this matter was before the sub­
committee, I believe it was the position that they had no quarrel with
our looking at their financial system. They had really very little quar­
rel with our looking at the economy and efficiency of their operations.
But they were worried about our going beyond that in terms of any
other part of their operations.
Now I must say, and this is my own personal interpretation, that
part of this, I think, grows out of a natural reaction to people who
have not been subject to a G AO audit and therefore are in unfamiliar




175
territory in the sense that they have not had first hand experience with
our procedures and how we operate.
For example, this concern is that we would have access to records,
information on which decisions have not yet been made. That is not
true at all, but this is one of the kinds of statements that has been
made. The statement has been made that we would take individual
positions of members of the Open Market Committee and make those
available to different people, the press, or otherwise. Obviously, this
is not the case. We would not do that. But these are, in our opinion,
the kinds of concerns of an agency that has not had experience with
our organization. I do not belittle them, but I just do not believe that
they have a proper understanding of how we function.
Mr. B l a n c h a r d . In your testimony you refer to the fact that there
are parts of an audit conducted in-house at the Fed. You mentioned
that with one exception those reports on the auditing being performed
within the Fed are not submitted to the Congress, to your knowledge.
I found that rather interesting.
Do you have any reason to believe that parts of these audits are
supplied to members and you might not know about them? Or is it
simply that you are quite sure categorically that Members of Con­
gress would not have access to these reports ?
Mr. S t a a t s . I think the best answer I could give to that is that if
you look at the annual report there is one short paragraph there
that states the result of the external audit. In no sense of the word
would that satisfy me. I f I were responsible, I would personally be
willing to take somebody else’s word for it but I would like to have
a lot more information than that provides.
Let me take this occasion, though, I think it is related to your point,
to point out that the bill that passed the House previously was de­
signed to accomplish a financial audit and, you might say, an economy
and efficiency audit, a management-type audit. But unfortunately,
the language which was included in the bill which passed the House
would not have done that. This was faulty draftsmanship. But Mr.
Ashley, who sponsored the bill, is on record in the dissent on H.R.
10265, which was a bill before the committee at that time, in which he
was joined by about 10 of his colleagues they made it very clear that
it was their intention to provide for a financial audit and for an exam­
ination of the management of resources to evaluate the efficiency and
economy with which they are procured and used.
Now this statement was made on the floor also, but the reason I
want to bring it up is to make it clear that in our opinion the language
which was included to carry out that intent was faulty and would
not have, in fact, allowed us to do it. The language, as we interpret it,
would have simply enabled us to look at little more than the account­
ing system of the Fed and even then on a limited basis.
Now they use the words “ economy” and “ efficiency” in the language
but if you can only look at the accounting system, you cannot really
do very much about anything beyond that.
From the point of view of rendering an opinion on a financial state­
ment, which would do for a Government corporation, we could not
have done it, nor could we have looked at ways that you could make
savings in the operations of the Fed under that language.




176
A s I say, I think it was faulty language for carrying out the intent
that those who entered the dissent to the full committee bill in 1973.
Mr. B l a n c h a r d . Thank you. My time is expired.
Chairman P a t m a n . Mr. Staats, I would like to ask you the follow­
ing questions.
The first one is, Mr. Staats, for the sake of absolute clarity on this
matter, it is my understanding that you would prefer a bill which does
not restrict the General Accounting Office in any way in auditing the
Federal Reserve System.
Is that right ?
Mr. S t a a t s . That is right. This would be the same position we would
take on any other program.
Chairman P a t m a n . Yes, sir.
Another one, Mr. Staats, in the course of its work. G AO audits
various entities of the Defense Department, does it not 2
M r . S t a a t s . That is correct.
Chairman P a t m a n . Does this work entail examination of classified
or sensitive material ?
Mr. S t a a t s . Oh yes, yes. A great deal of it does. Many of our reports
are classified.
Chairman P a t m a n . Can you give us examples of G A O ’s access to
sensitive or classified information in connection with G A O audits of
other types of Government agencies ?
Mr. S t a a t s . Yes; indeed. These involve military assistance, State
Department operations, the Defense Department’s operations, and
many operations of the Government.
Chairman P a t m a n . Atomic Energy ?
Mr. S t a a t s . Atomic Energy, yes; indeed.
Chairman P a t m a n . And all the military affairs ?
Mr. S t a a t s . Right.
Chairman P a t m a n . Has access to this type of material ever resulted
in undermining or in any way damaging the ability of Government
agencies to function property ?
Mr. S t a a t s . Not in our opinion, nor do we have any indications that
the agencies feel that Avay about it.
Chairman P a t m a n . Another one, please.
Now this one you may answer more fully when you receive your
transcript.
Mr. Staats, on page 3 of your statement, you say, “ I f we are to
be authorized and directed to audit the Federal Reserve System, we
would recommend that the authorizing law contain no restrictions.”
On page 11 of your statement you say, “ In summary, Mr. Chairman,
we believe that H.R. 4316, with the changes suggested in this statement,
would provide for an adequate audit of the various entities of the Fed­
eral Reserve System.”
The changes you advocate do not in any way restrict the bill as it was
introduced. Is that correct ?
Mr. S t a a t s . That is correct.
Chairman P a t m a n . Very well. Now I want to ask you one other
question for the record.
In fiscal year 1974, the Federal Reserve System had expenditures of
$542 million, a 33-percent increase over fiscal year 1972. Do you con­
duct full-scale audits of agencies that are considerably smaller and




177
less important in terms o,f overall policy impact than the Federal Re­
serve System ?
Mr. S t a a t s . Y e s; indeed. We are required by law to do so.
Chairman P a t m a n . Has there been any question or criticism of your
activities in relation to these agencies ?
Mr. S t a a t s . Well, I do not think we could say in general that there
has been. Many times our conclusions differ from those of the agency,
and those differences set forth in our reports. But those are areas where
we have legitimate reasons to differ. We think it is a service to Congress
to have those differences placed before it.
Chairman P a t m a n . Do you consider your work in auditing these
agencies to have been valuable ?
Mr. S t a a t s . Well, we think it has been. We trust it has been. Cer­
tainly the Congress has relied on us more and more over the years.
Chairman P a t m a n . When you examine your transcript, would you
mind submitting for the record a sample list of such agencies?
Mr. S t a a t s . Yes; we will.
Chairman P a t m a n . That w ill be fine.
[In response to the request of Chairman Patman, the following in­
formation was submitted for the record by Mr. Staats:]
R

eply

R

e c e iv e d

F rom

Mb.

Staats

GAO audits many Federal agencies which are smaller than the Federal Re­
serve System and others which many people would consider as being less im­
portant in terms of the impact of their policies on the Nation. Some of these are:
Export-Import Bank of the United States; Federal Home Loan Bank Board—
Federal Home Loan Banks and Federal Savings and Loan Insurance Corpora­
tions ; Federal Deposit Insurance Corporation; Panama Canal Company; Na­
tional Credit Union Administration; Overseas Private Investment Corporation;
Railroad Retirement Board; Renegotiation Board; Small Business Administra­
tion; Farmers Home Administration; Rural Electrification Administration;
Rural Telephone Bank; Commodity Credit Corporation; Federal Crop Insur­
ance Corporation; Maritime Administration; Food and Drug Administration;
Community Development Corporation; Government National Mortgage Associa­
tion; Bonneville Power Administration; Southwestern Power Administration;
Southeastern Power Administration; Federal Prison Industries, Inc.; Bureau
of Engraving and Printing; and Bureau of the Mint.

Chairman P a t m a n . N o w , then, I want to go back to this main ques­
tion. I am afraid that the main question is not being seriously con­
sidered by many Members of Congress who have not studied the matter
in depth. They are very sincere, I know, in their approach, and I am
not accusing them of not being so, but I want to emphasize one thing
that is very valuable in this hearing. The Federal Reserve is allowed to
manufacture money. It does not cost them a penny. They use that
money to buy Government bonds and the bonds are not canceled. Now
then, when the bonds become due, the Treasury must pay those bonds,
and the Government has not paid anything for them. They should
have been canceled for that reason.
That being true, I asked Dr. Burns a question in a hearing not so
long ago before this subcommittee. I said, Mr. Chairman, who owns
the title to the $70 billion of bonds in the open market portfolio that
have been purchased on credit initiative? That is the same portfolio
that you mentioned a while ago when you saM there is $86 billion in it
now, which is correct. Dr. Burns said the $70 billion on the books of
the Federal Reserve banks are owned by the Federal Reserve banks.




178
Now that looks to me like that is a complete departure from our
monetary system, if we are going to let the Federal Reserve own those
bonds. They collect interest on them after they have been paid, and
then when they become due they collect the principal. That seems to
me like there is something wrong with this system that we are using
because the Federal Reserve would be allowed to own these $86 billion
in bonds.
I asked Dr. Burns, I said, who owns them, and he said the Federal
Reserve banks own them, as distinguished from the Government. So
I think it is a serious question here. I f we let the Federal Reserve con­
tinue to do that, they will not only have squatters’ rights, as we say in
the West, on land titles, but a precedent set as to what they can do
in the future. I f they can take the money that they create without any
reserves of any kind behind that money and buy bonds that are interest
bearing and do not cancel them when they are bought, why they have
a privilege there that no other financial institution on Earth ever had,
to my knowledge. A counterfeiter is fined heavily if he is caught doing
what the Federal Reserve is doing.
In addition the Federal Reserve is collecting $542 million a year for
expenses. Who pays that $542 million ? That is what I want to impress
upon everyone about this hearing. Well, that $542 million was paid by
the taxpayers when they had to pay the coupons on these bonds to the
Federal Reserve as they become due.
But the Constitution says that no expenditure made by Congress of
the Government’s money shall be made unless the Congress approves it.
So many people believe, Mr. Staats, that this is a device for the Federal
Reserve to make an end run around Congress’ jurisdiction and never
have to come before a congressional committee and be required to an­
swer questions as to what they are going to do with the money that they
want.
I f this is carried to its logical end, the Federal Reserve will not quit
with just $86 billion in its portfolio. It has been increasing the port­
folio by the billions every year in the last few years. They will go
ahead and they will buy the entire national debt if they want to in
exactly the same way. There would be no restriction against them
doing it. And then, after they own the entire national debt and get
about $35 billion a year interest on it, none of which cost them any­
thing, they will then commence to acquire private bonds or the bonds
of States, counties, and cities and other political subdivisions. There
will be nothing to stop them.
It looks to me like if we do not settle this question and settle it now,
we are in for a lot of questions involving the solvency and security
of this Nation.
Would you like to comment on that ?
Mr. S t a a t s . Well, I do not believe I have any general comment to
make, Mr. Chairman. One specific point that might be made here is
that the $548 million is included in the interest account which is a
budgetary item in the Federal budget. So, it is Federal money, and
it derives from interest paid by the Treasury on bonds held by the
Federal Reserve System.
Chairman P a t m a n . I know. But those bonds are paid for and, there­
fore, they should have been canceled. They are keeping bonds that
have been paid for and should have been canceled when they were paid
for. But they were not.




179
Now then they are collecting interest on those bonds until maturity
of the bonds, and then they will get the full amount.
Mr. S t a a t s . Well, of course, any unused money reverts at the end
of the year to the Treasury, and as I pointed out here in this last year
it was $ 5 ^ billion.
Chairman P a t m a n . Mr. Johnson is recognized.
Mr. J o h n s o n . Thank y ou , Mr. Staats.
I want to welcome you here today. We have been around this track
before. I personally heartily approved last year the bill that would
limit your audit to administrative functions. I cannot find any objec­
tions to your trying to reduce the number of employees they have and
saving money and audit their internal accounting procedures and
maybe change their way of handling computers. But when you start
getting involved in the policy of the bank, that is where I draw the
line. I cannot help but feel that this bill is a sinister attempt to destroy
the independence of the Federal Reserve System. I cannot help but
feel that those who want to destroy the System or limit it so that it is
an ineffectual organization are using you as an innocent pawn in their
drive to completely destroy our central banking system.
Now that is the way I feel about it, and it is no reflection upon you
because I think you do a highly capable, wonderful job as the head
of our General Accounting Office, and I am proud of you. I want you
to return to your attachment I I of your statement, and I will ask you
some questions about it.
I notice after you get down away from the accounting phase of
your audits, you get into policy questions for instance, involvement in
the issue of redemption of U.S. Government securities. Bill Simon
has to sell some $60 billion worth of bonds to balance the Federal
deficit, and of course he is going to need the cooperation of the Federal
Reserve. Now if you are going to audit that, what will you do, wait
until the end of the year and send us the statement, saying: Well, we
see that Bill Simon sold $35 billion worth of bonds and Arthur Burns
helped him unload $ 15 billion on member banks.
Now just how would you audit that and how would you comment
on that, and what service would you render by looking into that par­
ticular activity ?
Mr. S t a a t s . Mr. Morse will respond.
Mr. J o h n s o n . In other words, you would be auditing policy ques­
tions for what took place, and you would be giving us a history of what
took place?
Go ahead, I would like to hear what you have to say.
Mr. M orse. Well, you are exactly right. We do our work on a post­
audit basis, not during the work but afterward. In this particular ex­
ample we would try to find out why they do what they do and how they
do it; and if everything looks fine, we will say so. I f we think the
procedures can be improved, we would say so, and we would make rec­
ommendations in that direction. But we would not try to assess the
validity or the wisdom of the objectives themselves that they are try­
ing to carry out.
Mr. S t a a t s . I f I may say so, I think we have something of an
analogy here in terms of the policy operations of the State Depart­
ment or the Defense Department. You will not find in any of our re­
ports a conclusion that says we made a mistake in going to Vietnam,




180
or that we made a mistake in not intervening to prevent the Turks
from going into Cyprus. This is not our concern. But I do think there
is a parallel here in terms of the concern expressed by the Federal Re­
serve System that we would go in and try to do a second-guessing job
on policy decisions. We are more concerned with the adequacy of the
staffing, the adequacy of the procedures and the process by which
those decisions were reached. You will not find in any of our reports
in the most sensitive areas of that type the kind of conclusions which
the Fed seems to be concerned about our reaching.
Mr. J o h n s o n . N o w , as to your auditing their administration of the
Bank Holding Company Act, they make a decision saying, let us say,
that a bank holding company can buy an insurance agency. That is a
big question.
Now you would audit that, and what would you do at the end of
the year? You would say, well, we notice the Fed said that their banks
can operate insurance agencies. Well, so what. How would you com­
ment on that ? W hy would that be within the scope of an audit, let us
say?
Mr. S t a a t s . Well, obviously, we cannot tell you what we would say
without having looked at it. I know you do not expect us to do that.
But it seems to me that since they have a specific act to administer,
we could advise the subcommittee and the Congress as to whether or
not there were questions there.
Mr. J o h n s o n . I have time for just one more question on another sub­
ject. Also, you would approve bank mergers. Now, a year later, say,
you found they permitted the merger of the banks in Hackensack,
N .J .; would you say that they went outside the scope of the law in
permitting the merger of this bank, and would you say that it creates
a monopoly, so you would challenge that policy decision ? How would
that be the subject of an audit ?
M r . M orse . We would start with the law itself. It gives them au­
thority to carry out that function. We would want to know what the
Congress intended by giving that authority. We would then try to
find out how they set up their procedures to do it. Then we would look
at specific cases in an effort to evaluate what kind of a job they are
doing, and thereby reach some judgment.
Mr. J o h n s o n . Would you send a group of auditors to Hackensack,
N .J., and have them go up and down the street and canvas businessmen
like the Fed does before they permit the merger?
Mr. S t a a t s . We would not do that, but we might be interested in
knowing how careful a job they did.
Mr. J o h n s o n . Then you would be auditing the policies?
Mr. S t a a t s . We wouid be auditing their system by which they reach
the policy decision, that is right.
Mr. J o h n s o n . Thank you. M y time is up.
Chairman P a t m a n . Mr. Blanchard?
Mr. B l a n c h a r d . I have a couple of questions. I will try to make it
brief. This whole debate of whether or not to audit the Fed really
intrigues me. Those who want it claim the Fed is sinister—and I think
they are sincere; and those who do not want it—and I think they are
sincere—believe that those who want the audit are sinister.
I do not think I am sinister, and I do not think you are, either, and
I do not think the two gentlemen on my left are either. I just do not




181
know why there is all this fuss about it. So I am trying to educate my­
self before I make a decision.
The question that I would like you to comment on is, I f your job were
today to tell us why not to audit the Fed, what would be the best argu­
ment you could advance to me as to why not to audit the Fed ?
That is, perhaps, unfair, but I would be interested.
Mr. S t a a t s . N o ; that is a fair question. I f I were in a debating tour­
nament and had to pick one side, and then pick the other side, as I
have in my years gone by, I think the main argument would be that
this is an extremely sensitive area and therefore the Congress should,
in effect, exercise less oversight with respect to how this job is done,
than it does with respect to other parts of the Government.
I think that would be the essential point I would make. Now, the de­
cision, it seems to me, that Congress has to make is whether or not the
Fed is something so different from other parts of the Government, as to
put them in a special category where they do not receive the same kind
of oversight that the rest of the Government receives.
I think this is the critical issue that you gentlemen have to reach.
My own view is that independence is a relative thing. We have inde­
pendent regulatory commissions, also. But they are subject to the
same kind of reviews on appropriations and audit that any other part
of the Government is.
They would stoutly maintain, also, that they are in an independent
status, and some of them even argue that they are part of the legislative
branch. I have even heard some people from the Federal Reserve Sys­
tem say that they are an agent of the Congress, and not a part of the
executive branch.
I do not really see quite where you draw the line on the basis of in­
dependence so that it enables an agency to escape the normal controls
of oversight which are provided for the rest of Government. I had to
think a long time, I might say, before I reached the conclusion that
I did in 1973, because the G AO up until that time had taken a com­
pletely neutral position as to whether or not it should audit the Federal
Reserve System.
Mr. B l a n c h a r d . Let me pursue that argument you have advanced,
which you have hashed out and resolved. Your office has audited a wide
spectrum of Federal agencies. To what extent do you take into account
their differences ?
I know, for example, that a representative of the Fed has been wor­
ried that you will treat the Fed when you audit it like every other
agency, and not understand its uniqueness.
Do you have a standard method of auditing? Or do you take a sub­
stantial amount of time in deciding how you will audit an agency and
allow for its diversities?
Mr. S t a a t s . Every case is a case on its own, and has to be looked at
separately. I think you will find in our statement here something to
the effect that if this law were to be enacted, we would want to spend a
good deal of time just acquainting our people with more detail than
you can by just reading the literature, as to now this system functions.
Now, this could be done through interviews, and through visitation in
the banks, and in the offices of the System. Then we would make the
judgment as to how we could relate our traditional audit techniques
to make a contribution.




182
We go through what we call a survey process on any new program—
a survey being for the purpose of becoming knowledgeable about an
agency and how it operates and looking at issues, problems and condi­
tions which might warrant examination on our part.
There are some general techniques that we follow, but I would be
inclined to answer your question, more specifically, that we try to take
every case by itself. Take the regulatory agencies like the IC C or the
F C C or the S E C . You face many of the same questions there, from an
audit standpoint, that you would face in looking at the Federal Re­
serve System, in my opinion.
We are not concerned so much with whether S E C made the right
or the wrong decision on a registration statement. We are not con­
cerned with whether the F C C made the right decisions concerning a
rate increase for A .T. & T. These are matters of judgment which lie
within the province of the agency that has that responsibility.
We are interested in the processes and the procedures by which those
decisions are reached. And, if we think we can find ways to improve
them, then ultimately, hopefully, we will have improved the end
product.
Mr. B l a n c h a r d . One final question. In one of the attachments to
your statement, attachment II, you list examples of functions and
activities of the Fed that you would look into, or that should be
examined.
One of them is the function of regulating and supervising the for­
eign operations of the U.S. commercial banks. To your knowledge, has
there been any investigation of, or audit of that function by any other
agency or congressional committee ?
Parenthetically, I find it incredible that we would not know, in this
Congress, how the Fed relates to foreign operations of the U.S. banks.
Mr. S t a a t s . Well, this is, of course, simply a listing of the various
functions which would be subject to audit under the bill as we are rec­
ommending it. We would never contend that we would be the sole
source of information to the subcommittee. We very seldom are on
anything that we look at.
But, I do think that we could take a look at how they administer
that function.
M r . B l a n c h a r d . D o you know o f any other grou p or agency th a t
h as tried to do th at ?
Mr. S t a a t s . Pardon ?
Mr. B l a n c h a r d . Are you aware of any other Federal agency or

body which has attempted to look into how the Fed supervises the
foreign operation of U.S. banks ?
Mr. S t a a t s . The only one that we would know of would be this
subcommittee.
Mr. B l a n c h a r d . Thank you very much.
Chairman P a t m a n . N o w just one or two other things before we con­
clude this morning’s session.
Now, if the bonds in the $86 billion portfolio were canceled when
they become due and paid for, just like other deficits or debts are
canceled when they are paid, that would reduce the national debt by
$86 billion. Then we could use that $86 billion, if we decide to do so,
or if we needed it, for priority items like housing.
Our country is in terrible shape on housing. We all bought environ­
mental quality as a good slogan and something that is realistic and




183
should be carried out, but how can you have environmental quality
without safe, adequate housing for people who need homes at reason­
able prices and at reasonable interest rates? This $86 billion could
be allocated for housing construction. And that would come in mighty
handy now and would be very helpful to the country.
I think we should have allocation of credit in this country and make
sure that the most deserving things for which credit is needed and
wanted should be served first. Housing should be one of the priorities.
However, $86 billion is being horded by the U.S. Government through
the Federal Reserve banks.
They are not using it for any purpose on Earth except to collect
the interest on it. And the interest is not really due because the bonds
have been paid for, and therefore, that cancels the interest on the
bonds.
It just does not make any kind of sense, in my book, to have it run
that way. That is what we want to determine in these hearings.
Tomorrow at 10 a.m., here in this room, we will have as our witness—
Peter H. Schuck of the Consumers Union, and Kathleen F . O’Reilly,
legislative director of the Consumer Federation of America.
I am sure they will throw some light on these subjects, too. I want
to thank you and your associates very much, Mr. Staats. Would you
like to identify them, for the record ?
Mr. S t a a t s . Ellsworth H. Morse, Jr., to my left here, is the Assist­
ant Comptroller General and has been working in this area a good
deal. John J . Higgins, to my right, is associate general counsel. And
Charles P. McAuley is one of our assistant directors who has followed
the Treasury work closely.
Chairman P a t m a n . Thank you very much, gentlemen, for your
appearance and for your valuable testimony.
Mr. S t a a t s . Thank you for having us, Mr. Chairman. We are de­
lighted to be here.
Chairman P a t m a n . I know you gentlemen desire to work in the
public interest. Thank you, sir. The subcommittee will stand in re­
cess until 10 a.m. tomorrow morning.
[Whereupon, at 1 1 :45 a.m., the subcommittee recessed, to reconvene
at 10 a.m., Wednesday, April 23,1975.]







184

185

AUDIT OF THE FEDERAL RESERVE
WEDNESDAY, APRIL 23, 1975

of

H ouse of R e p r e s e n t a t iv e s ,
S u b c o m m it t e e o n D o m e stic M o n e t a r y P o l ic y
t h e C o m m it t e e o n B a n k i n g , C u r r e n c y a n d H o u s in g ,

Washington, D.C.

The subcommittee met, pursuant to notice, at 10:10 a.m., in room
2128 Rayburn House Office Building, Hon. Wright Patman [chair­
man of the subcommittee] presiding.
Present: Representatives Patman, Minish, Ford, Hannaford,
Blanchard, and Gradison.
Chairman P a t m a n . Call the roll, Mr. Clerk.
The C l e r k . Chairman Patman.
Chairman P a t m a n . Here.
The C l e r k . Mr. Minish.
[No response.]
The C l e r k . Mr. Ford.
Mr. F ord. Here.
The C l e r k . Mr. Hannaford.
Mr. H a n n a f o r d . Here.
The C l e r k . Mr. Neal.
[No response.]
The C l e r k . Mr. Blanchard.
[No response.]
The C l e r k . Mr. Barrett.
[No response.]
The C l e r k . Mr. Conlan.
[No response.]
The C l e r k . Mr. Hansen.
[No response.]
The C l e r k . Mr. Gradison.
Mr. G r a d iso n . Here.
The C l e r k . Four Members present, Mr. Chairman.
Chairman P a t m a n . A ll right.
This morning we welcome representatives of two consumer organi­
zations. I am glad to see the consumer represented because after all,
it is the consumer who bears the brunt of the Federal Reserve policies.
In recent years, I have had a great deal of contact with the Consumer
Federation of America, and I know this organization represents
literally millions of consumers in every area of this Nation. In a rela­
tively short time, C F A has become a powerful public interest force—
something the consumer has long needed. It is making a difference
here on Capitol Hill, and I am delighted that C F A has taken such an
interest in monetary affairs and the Federal Reserve.




(1 8 5 )

186
Consumers Union is an older consumer organization and, of course,
we are acquainted with the “ Consumer Reports” which this organiza­
tion has published for so long. In trying to expand its coverage in the
monetary areas, “ Consumer Reports” recently ran into the stone wall
of secrecy at the Federal Reserve and Consumers Union learned first­
hand just how little regard Dr. Bums and the Federal Reserve Board
has for the public’s right to know. I understand that the Consumer
Union’s representative will have more to tell us this morning about the
“ cops and robbers” games played at the Federal Reserve over public
information.
Let us welcome Kathleen O’Reilly of the Consumer Federation of
America—We are glad to have you, Ms. O’Reilly—and Peter Schuck of
Consumers Union. We are glad to have you, Mr. Schuck.
Ms. O’Reilly, I would appreciate if you would proceed first and then
we will hear from Mr. Schuck, and then we will interrogate you both.
So, first we will hear from Ms. O’Reilly. You may proceed as you
wish. You are recognized, Ms. O’Reilly.
STATEMENT OF KATHLEEN P. O’REILLY, LEGISLATIVE DIRECTOR,
CONSUMER FEDERATION OF AMERICA

Ms. O ’R e i l l y . Thank you , Mr. Chairman.
Good morning, gentlemen. M y name is Kathleen O’Reilly. I am an
attorney and the legislative director of the Consumer Federation of
America. Consumer Federation of America is the Nation’s largest con­
sumer organization. It is composed of over 200 national, State and lo­
cal nonprofit organizations that have joined together to espouse the
consumer viewpoint.
C P A and its member organizations represent over 30 million con­
sumers throughout the United States. Among our members are: Con­
sumers Union, publishers of “ Consumer Reports” ; 17 cooperatives and
credit union leagues; 45 State and local consumer organizations; 66
rural electric cooperatives; 27 national and regional organizations
ranging from Nationwide Insurance to the National Board of the
Y.W .C .A . to the National Education Association; and 16 labor organi­
zations.
Mr. Chairman, I appreciate having the opportunity to appear today
in support of an audit of the Federal Reserve System by the General
Accounting Office. Our country is experiencing the worst recession in
recent memory. In the opinion of many it has already reached depres­
sion proportions. Every increase in the unemployment rate, every con­
sumer purchase in the marketplace and every consumer attempt to se­
cure a loan brings with it a continuing erosion of consumer confidence
in the Federal Reserve System. Obviously the monetary policy of the
Federal Reserve Board is one of the most critical factors determining
the direction of our Nation’s economy. Accordingly, the present eco­
nomic crisis is viewed by many as evidence that the Federal Reserve
structure is not adaptable to the U.S. economy and is unresponsive to
its long-run interests.
The Federal Reserve banks deal with the most basic of commodities,
money, and it is public money. The sheer enormity of the billions of
dollars passing through the System each year requires a thorough,
competent control and audit scheme. Yet Congress, the only public




187
body directed to oversee the Federal Reserve System, has not been em­
powered to require that an external audit of the System be undertaken
by its auditing arm, the General Accounting Office.
Consumers earnestly hope that Congress is becoming more com­
mitted to its very serious oversight obligations. It follows, however,
that Congress must have at its disposal the information this type of
audit would elicit if Congress is to adequately determine whether the
programs and financial transactions are being carried out in accord­
ance with applicable legal requirements and whether a more economi­
cal and efficient administration is feasible.
Sensitive to the independent nature of the Federal Reserve System,
C F A nonetheless feels that this independence would not be threatened
by a G AO audit, especially because the G AO has a well-known reputa­
tion for both competency and integrity. It has been stated that the
Federal Reserve banks and branches increased their expenses 210 per­
cent between 1964 and 1972. It is more the nature of these expenses
which is even more appalling to the consumer than the amount.
It is absolutely incredible that memberships, dues, or contributions
were made to organizations such as the Miami Association of Indus­
trial Nurses, the National Association of Power Engineers, and the In­
stitute of Sanitation Management.
Images of Federal Reserve Board elitism are not dispelled by re­
ports of expenditures for athletic equipment, the International De­
sign Conference in Aspen, Halloween parties, baseball games, boat
cruises, and an annual card party. These and many more items of a
similar nature are reminiscent of a fraternity club budget. They are
outrageously inappropriate when subsidized by taxpayers who are
struggling with an ever-decreasing budget just to make ends meet. It
is clearly improper for any governmental entity to be isolated from
external review. The shield of independence relied upon by the Fed­
eral Reserve System has been exploited for too long. It is time to pierce
the secrecy which such independence has created.
Thank you, Mr. Chairman.
Chairman P a tm a n . Thank you , ma’am.
We will take advantage of the opportunity to ask you questions
later.
A ll right. Mr. Schuck, we are glad to have you.
You may proceed in your own way.
STATEMENT OP PETER H. SCHUCK, ESQ., DIRECTOR, WASHINGTON
OPPICE, CONSUMERS UNION

Mr. S c h u c k . Thank you, Mr. Chairman, and members of the
subcommittee.
Consumers Union wishes to thank the subcommittee for its invita­
tion to testify at these hearings. We support this legislation, although
we do believe that the bills should be modified in several respects,
which I shall mention in a moment.
Let me begin by stressing our recognition that monetary policy is
an exceedingly arcane specialty and one fraught with numerous un­
certainties and policy dilemmas. While it is tempting to cast about
for scapegoats for the economic difficulties which beset the American
economy, we must constantly remind ourselves of a number of facts.

50-365 0 - 75 - 13




188
First, the stagflation which now afflicts us appears to be a rather
widespread international phenomenon and not simply an American
problem.
Second, and related to this, domestic economic conditions are in­
creasingly shaped by international economic factors, many or most of
which are largely outside the control of American policymakers.
Third, any monetary policymaker, even making the rather absurd
assumption that he or she had perfect information and control, would
be confronted by agonizing choices—inflation versus recession, shortrun versus longrun, domestic versus international, one economic sector
versus another economic sector, et cetera—and there is no obviously
right way to resolve these value conflicts.
Fourth, the Federal Reserve System’s ability to control this rapidly
changing, complex economy through monetary policy appears to be
diminishing, rather than increasing, as its control over the Nation’s
monetary reserves continues to shrink.
Chairman P a tm a n . N ow , just a moment. We are not hearing you
distinctly. Suppose you pull the microphone up a lettle closer. That
might be an improvement.
Mr. S ch ttck . Finally, the kinds of decisions that the Fed is called
upon to make are so uniquely sensitive and complex that we should
think very seriously before taking action that might politicize such
decisions, in the sense of subjecting them to the overwhelming pres­
sures of short term, partisan considerations. On the other hand, of
course, we should not pretend that these decisions are purely technical
matters either; clearly, they are not.
This is not to say that the Federal Reserve Board has not erred in
its monetary and regulatory roles. We prefer to leave those ultimate
judgments to the economists and politicians, however, comforted in the
knowledge that there is bound to be substantial, perhaps eternal, dis­
agreement among them about such matters. It is to say, however, that
there is no simple solution to, or explanations of, our present travails,
and that little is to be gained and much may be lost if, out of a wellintentioned effort to audit the Federal Reserve System, Congress im­
poses undue political pressures on that system to respond to the more
short term concerns which necessarily and properly 'preoccupy
Congress.
In short, the relatively strained relations between Congress and the
Fed evident in recent months are a manifestation of a creative, healthy
tension, a tension which Congress wisely institutionalized in estab­
lishing an independent Federal Reserve System.
We believe that on the whole, that tension and that independence
have served the Nation and consumers well. It is clear that Congress
and this subcommittee share that belief. Accordingly, we urge that
the Board be required to identify without delay those areas which it
regards as so sensitive or confidential that they should not be included
in the GAO audit, and that the subcommittee modify the legislation
to exempt from the audit such of those areas which it feels might, if
investigated, result in undue politicization of the Federal Reserve
System.
A s I understand it, the Board’s opposition to a GAO audit has
been so thoroughgoing and undiscriminating that it has never really
indicated what those areas would be in the event that the audit were




189
in fact authorized by legislation. An additional modification that we
would suggest is that the Federal Reserve System be required to pay
the cost of the audit out of its surplus in the event, that the Con­
gress opts in favor of the third audit alternative discussed by Comp­
troller General Staats in his October 1973 testimony on this subject,
thus insuring that the G A O ’s valuable work will not be jemsardized
by the resource commitments necessary to an adequate performance
audit of the Federal Reserve System.
Consumers Union believes that for all of its earnest protestations of
concern, the Federal Reserve System will survive, and indeed will
almost certainly benefit from an outside audit at least once every 63
years, particularly an audit limited in scope as suggested above. While
the Fed insists that it is already audited by outsiders, the assertion by
Mr. Staats that there is “ some question as to the adequacy of the audit”
is entitled to considerable respect by this subcommittee. And in at
least one area of Fed policy, public disclosure of consumer informa­
tion, the Board both has conclusively demonstrated the need for an
independent audit and has pinpointed a policy area on which the
GAO might profitably focus some attention in me course of its audit
of the Federal Reserve System.
The Board, as you know, collects a great deal of information from
commercial banks pursuant to its monetary and regulatory responsi­
bilities. Indeed, Board representatives inform me that the Fed con­
ducts upwards of 50 regular surveys in which statistical and other
information is obtained on a systematic basis from individual banks.
A t least some of that information is undeniably valuable to consumers
shopping for the best terms on loans, savings accounts, and other bank­
ing services. Yet so far as we can tell, none of it is routinely dissemi­
nated to the public. Indeed, quite the contrary is the case. The Fed
has bent its efforts— and, incredibly enough, those of the courts and
the F B I as well—toward preventing the release of such information
to the public.
During the summer of 1973, San Francisco Consumer Action, a
particularly effective and resourceful consumer group serving the bay
area, sougfit our assistance. It seems that S F C A had launched an
effort to publish a consumer’s guide to banking institutions, and as part
of that effort, wished to list the interest rates charged on a variety of
consumer installment loan categories by each of the major banks in
the bay area. S F C A had learned that the Fed collects this data each
and every month from some 370 banks across the country, including
some in the bay area, and that the Fed in fact published the data in
this G -10 survey, but only in aggregate form. S F C A asked the Wash­
ington office of Consumers Union to assist it in obtaining this informa­
tion from the Fed so that it could more easily and accurately compile
the listings for the booklet.
We requested the Fed to give us access to the interest rate data, but
without success. In September 1973, we were obliged to file suit against
the Board under the Freedom of Information Act. The Fed’s position
was that this information was confidential because the Board had
assured the banks that it would be treated as such. We argued that this
information was not confidential, that the Board had not in fact as­
sured the banks of confidentiality with respect to this survey, and that
under well established case law under the Freedom of Information




190
Act, such an assurance, even if given, would have no legal effect
whatsoever.
The Fed filed with the court a number of affidavits from bankers
and Fed officials detailing the tragic and baleful consequences to the
banks and to the Fed itself if the interest rate information were pub­
licly disclosed. The horribles that were predicted included: The de­
struction of the Fed’s data-gathering capabilities; the submission to
the Fed of inaccurate data by banks; a refusal by the reporting banks
to participate in the survey; competitive harm to reporting banks;
impairment of relationships between the banks and their customers;
and misleading of consumers by those who would publish the
information.
In making these blanket claims, predictions, and representations to
the court, the Board apparently played rather fast and loose with the
facts.
First, the Board vigorously resisted our suit and made these claims
without even bothering to find out whether or not the reporting banks
did in fact consider this information confidential, and if so, whether
that confidential status extended to all or only some of the information.
Second, even if the Fed considered this information to be confi­
dential, and even if it was correct in that determination, the Board was
obligated under the Freedom of Information Act to determine whether
all or only some of the requested information was confidential, and
whether all or only some of the banks considered it to be so, and to
publicly disclose what was not confidential. The Board did none of
this but simply made a blanket claim of confidentiality for all of it and
for all banks.
Third, the Fed never indicated whether the few banks whose affi­
davits were submitted were selected at random or not, but in view
of the striking similarity in wording of the affidavits and in view of
what subsequently transpired, I have the firm impression that the
Board made no effort to determine how the reporting banks actually
felt about disclosure, but instead tried to create the impression that
the few banks submitting affidavits were representative of the 370
banks in the survey.
Most shocking, however, is the fact that in December 1973, the
Board conducted a special survey of banks participating in the G -10
survey, inquiring as to whether the banks considered the interest rate
information with respect to credit card loans—one of the loan cate­
gories at issue in the lawsuit—to be confidential. Of the 17 1 banks
responding to this special survey, 73.7 percent stated that the infor­
mation was not confidential, a statistic that made an utter mockery
of the Board’s position in the lawsuit, at least with respect to the credit
card loan category.
Yet, the Board never even revealed to the court the existence of
that special survey, much less its dramatic, and legally relevant, find­
ings, and to this day has never done so. I only learned of the existence
of this survey in a discussion with Board officials on April 3, 1975,
when I happened to ask if any such surveys had ever been conducted.
In May 1974, the U .S. district court held that all of the information
that we had requested was in fact in the public domain, was not confi­
dential, and must be made publicly available by the Fed under the
Freedom of Information Act. The Board immediately obtained a stay




1 *1
9
of that judgment pending appeal, and filed an appeal. In November
1974, the court of appeals remanded the case to the district court for
further findings. In January 1975, after having been held up bv the
Board for almost 1 y2 years, we offered to settle the case on the follow­
ing basis: We would agree to obtain the data on a prospective basis
only, beginning with the February reports, thus enabling the Board
to save face with the banks to whom it claimed, contrary to fact, to
have assured confidentiality, and we would agree not to seek some of
the data to which the district court had ruled the Freedom of Informa­
tion Act entitled us, but which was of less interest to consumers.
On February 19, 1975, I was informed by a Board official that the
Board had information that our magazine, Consumer Reports, was
publishing some of the interest rate information in its March issue,
that the Board viewed this matter with the gravest concern, that Chair­
man Burns was “ determined to get to the bottom of this,” and that
the Board was requesting that Consumer Reports refrain from publish­
ing the information.
I replied that it was too late to stop publication of the information
and that even if it were not too late, that Consumer Reports would
feel an obligation to its readers to publish it, particularly in a period
of inflation, high interest rates, and high unemployment, a period in
which consumers needed all of the help they could get.
I subsequently was informed that in view of these developments,
the Board was breaking off settlement negotiations.
Several days later, the Washington Post brought to light the fact
that Chairman Burns had requested the F B I to conduct a criminal
investigation of the apparent theft of the information. This was fol­
lowed by congressional inquiries into the matter, including correspond­
ence from Chairman Patman to Chairman Burns. A s a result of
these revelations, the Board informed me on March 3,19 75, that it had
authorized its staff “to determine from the member banks of the Fed­
eral Reserve System voluntarily participating in this G -10 survey
the extent to which the interest rate data they report on form 835
may be generally available to the public.”
Note that the Board decided to take this elementary step not be­
fore it rejected our original request for information, not before it
forced us to bring suit, not before it submitted affidavits to support its
insistence that disclosure of this information would be calamitous
for the industry and for the Board, not before it took an appeal, and
not before it tried to pressure Consumer Reports to suppress the in­
formation—but only after the most intense public embarrassment and
congressional pressure had been brought to bear, and after we had
made it clear that we would go back to the district court to establish
once again our legal right to the information.
The results of the Board’s survey were given to me informally on
April 3 , 1975, they have never been made public by the Board. And
with good reason, for they could hardly be more damaging to the
Board’s position in this whole sorry affair. O f those banks with a single
interest rate for a particular consumer loan category, over 90 percent
responded that none of the information reported to the Fed was con­
fidential. Even in the case of those banks which charged customers
varying interest rates for consumers loans, more than 50 percent
stated that none of the information was confidential. It also turned out




192
that despite all of the Board’s predictions that disclosure would cause
large numbers of banks to drop out of the survey, only about 10 fewer
banks had reported to the Fed after the public listings of banks and
rates in “ Consumer Reports” than had reported before the listings
were published.
When the Board officials showed me the results of their own survey,
I assumed that this now ancient controversy was finally at an end and
that the Board would now comply with our original information re­
quest. I was buoyed in this conviction by the results of two small
surveys which we conducted ourselves, in which every bank surveyed
stated that the information was not confidential. I did not count on the
Board’s tenacity, however, for their initial response was that they
would continue to withhold any of the interest rate information which
a bank deemed confidential—however unreasonable that bank might
be in view of the results of the Board’s own survey. It was only after
I threatened to go back to court to obtain all o f the information, ret­
rospective as well as prospective, that the Board backed down and
agreed to make all of the data public beginning May 1 , 1975.
This story, unfortunately, does not have a very happy ending. First,
Consumers Union incurred enormous expense to fight this 20-month
legal battle, expense which it can ill afford and which the Fed refuses
to pay.
Second, and most tragic, the Fed employee who gave “ Consumer
Reports” the information that the court, the banks, and the Fed now
concede is publicly available under the Freedom of Information Act,
was forced to resign from the Fed in the face of a threat of criminal
prosecution by the Justice Department.
We hope that this costly battle for public disclosure of consumer
information in the possession of the Fed will not have been waged
in vain.
We have made a formal request to the Fed for reports routinely
submitted to it concerning interest rates paid by banks on time and
savings deposits, and charged by finance companies for a variety
of consumer loans. We shall soon have an opportunity to see whether
the Fed has learned anything from this case about its legal obliga­
tions under the Freedom of Information Act.
But quite apart from this narrow legal issue, we urge this sub­
committee, and the G AO in its audit, to devote considerable attention
to the following questions: What kinds of information are gathered by
the Fed? What kinds of information should be gathered by the Fed?
How useful is information to consumers in the form in which it is
collected? How could its usefulness to consumers be increased by
collecting it in a different form or by processing it? What opportuni­
ties exist for requiring the Fed and other banking regulators to gather
and disseminate useful consumer information from regulated financial
institutions, and/or to require the regulated institutions themselves
to disseminate such information ?
Judging from our experience, the Fed needs a good deal of out­
side assistance both in asking the right questions and in answering
them. The G AO audit and a vigilant Congress can provide that help.
Thank you.
Chairman P a tm a n . Thank you, sir.
I want to ask you about that statement that you received on April 3,
1975. Do you have that; do you ?




193
Mr. S c h u c k . N o ; that was oral. Now, are you referring to the survey
that they had conducted?
Chairman P a tm a n . Yes.
Mr. S c h u c k . Y e s ; I have that in writing.
Chairman P a tm a n . Would you mind filing it for the record?
Mr. S c h u c k . Not at all, I would be happy to.
Chairman P a tm a n . Without objection, it w ill appear at this point
in the record.
[The material referred to follows:]
B
F

oard o f

ederal

R

G o v e r n o r s,
Sy s t e m ,

eserve

Washington, D.C., April 16, 1975.
Consumers Union of the United States, Inc. et al. v. Board of Governors
of the Federal Reserve System (U.S.D.C., D.C., Civil No. 1766-73).
P e t e r H. S c h u c k , Esq.,
Consumers Union of the United States, Inc.,
Washington, B.C.
D e a r M r . S c h u c k : Enclosed per your request are copies of tables reflecting
the results of the Board’s special survey on the confidential status of the in­
terest rates charged by participating banks in the G-10 survey for credit card
plans. At our meeting on April 3,1975, copies of the results of the Board’s special
survey on the confidentiality of the interest rate data for the other four sub­
categories of consumer installment credit were furnished to you.
Sincerely yours,
R e:

John

N icjoll ,

Beputy General Counsel.
Enclosures:
TABLE 1 — RATE STRUCTURE ON CREDIT CARD PLANS
Number of
banks
Total number of banks with credit card plans................................................

171

Single rate plans................................................................................. ...........
Multiple rate plans........................... ........... ........ ...........................................

37
134

Percent

10 .0
0
21.6
78.4

TABLE 2.—B A SIS FOR RATE DIFFERENTIALS IN MULTIPLE-RATE CREDIT CARD PLANS
Number of
banks

Basis for differential

Percent

1 134

1100.0

70
25

Total number of banks with multiple rates...................................................
Rate differential related to:
Amount of credit balance on consumer purchases.............................................
Amount of credit balance on cash advances............................................... ......
Cash advances at different rate than consumer purchases irrespective of amount___
Class of customer........... .......................... ........ .......................... ............
Other........................... ................. .........................................................

52.2
18.7
49.3
67.2
10.4

6
6

90
14

1 Figures do not add to totals because some plans include more than one type of rate differential.
TABLE 3.— RELATION OF CREDIT CARD RATES TO STATE CEILINGS
All banks
---------------------------------Number
Percent
Total, banks with credit card plans....................
Rates in all respects:
At State ceilings.................... ..........................
Not at State ceilings..........................................
No applicable statute...................................... ....... 6




171

100.0

Single
rate
plan

Multiple
rate
plan
37

134

126
73.7
32
39
22.8
5
3 . 5 ......................................

94
34
6

194
TABLE 4 — CO NFIDENTIALITY STATUS OF INFORMATION REPORTED ON CREDIT CARD PLANS
All banks
Number

Percent

Single
rate
plan

Multiple
rate
plan

Total, banks with credit card plans.................. ................ 171________ 100.0___________ 37___________ 134
Information considered confidential................... ........
Information considered not confidential.......................

T a b l e 5 . —Confidentiality

45
126

26.3
73.7

7
30

38
96

status of credit card plan information, by type

Type of information:
Number of banks
Range of rates__________________________________________________
16
Most common rate-----------------------------------------------------------------------18
Number of loans_________________________________________________
38

Chairman P a tm a n . I am very much concerned about that. I cannot
understand why the Federal Reserve is so anxious to keep things like
that private. It appears to me it would be in the public interest. Do
you have that impression, too ?
Mr. S c h u c k . Well, I quite agree.
Chairman P a tm a n . The issue is that of keeping interest rates secret,
like the Fed is always keeping its proceedings secret. I think it is harm­
ful to the general welfare of the public. Now, if you know where you
can get the best price, I think it is helpful to you, and if the Fed had to
disclose this information, I think it would be helpful to the people.
One of the worst evils we have in this country is, of course, secrecy in
public affairs on matters affecting all the people. Now, if a person
wants to get the best price, and it is available to him, he would probably
avail himself of that opportunity to save a lot of money. I have always
heard that the four greatest evils we have in our Nation are poverty,
ignorance, disease, and crime. Poverty is at the head of the list. I do
not know of anything that creates and perpetuates poverty more than
excessive interest rates. I do not think people object to paying rea­
sonable interest rates, and most lenders do not object to receiving
reasonable interest rates. But exorbitant interest rates, I think, are
just beyond what people should be required to pay.
A t this point, I will yield to the other members for questioning. Mr.
Hannaford is next. Mr. Hannaford, you have 5 minutes.
Mr. H a n n a fo rd . Mr. Chairman, I thank you. I thought that these
were very fine statements that the people presented us, and I appre­
ciate it very much. I really will not take 5 minutes.
I thought it was quite an adventure that you, Mr. Schuck, went
through with the Fed. Maybe you ought to sell it and then you could
recoup some of your losses by selling it commercially. You seem to
imply that you feel the Fed is appropriately insulated from political
decisions, political interference for partisan purposes. Do you have that
feeling ?
Mr. S c h u c k . A t the present time ?
Mr. H a n n a fo rd . Yes.
Mr. S c h u c k . I think the Fed is subject to a fair amount of pressure,
lust from the general temper of the times, and the statements of the
Members of the Congress, and the Fed’s perceptions of the way in
which the tide is turning, and so forth; pressures which are large




195
and generalized. It seems to me that that will continue, and that is a
very, very healthy thing.
Mr. H a n n a fo r d . This is not exactly within your field, but do you
feel that there have been decisions made in the Fed that seem to re­
flect a partisan political interest?
Mr. S c h u c k . I really am not prepared to comment on that.
Mr. H a n n a fo r d . That, of course, is a concern that we have, and I
think it is a concern that you expressed. Once we start having someone
look over the Fed’s shoulder, and making subjective judgments about
their policy decisions-----Mr. S c h u c k . Well, I take comfort in the knowledge that the GAO,
as Ms. O’Reilly pointed out, is reputed to have the highest integrity
and nonpartisan coloration; and I have great confidence that if the
G AO conducted the audit, Mr. Staats would make very clear to th£
auditors that they were to be extremely careful in this regard.
Mr. H a n n a fo r d . It seems to me that would be correct. I am not
worried about the G A O ’s confidentiality. But as I understood your
earlier remarks, there is a possible cleavage regarding those decisions
that are purely related to an audit of the efficient operation of the Fed,
and recommendations from the point of the efficient functioning of
the Fed which is a very important part of it. And then, the other ques­
tion as to whether or not this subcommittee is going to use that precise
information in making a subjective judgment about the efficacy of the
decisions from a policy matter. That is the second part, and that is the
part that I understand that you would take exception to. Is that cor­
rect ? Do I understand your remarks ?
Mr. S c h u c k . Well, it is not clear exactly how the audit would work.
It has never been done before, obviously, and it is not clear what use
would be made of the information, what restrictions would be placed
on its publication, and so forth. It seems to me that the Congress has a
perfect right to be fully informed about what goes on at the Fed, and
to express its opinions very forcefully about it. That is a very different
kind of pressure than the kind of pressure we normally think of as
partisan pressure, which involves controlling employment at the Fed,
extensive ex parte contacts with Fed members, and that kind of
pressure. I think the first type of pressure is entirely appropriate. I
suppose that is what you have in mind, and it seems to me that the
G AO audit is entirely consistent with that.
Mr. H a n n a fo r d . Well, that is the point that I think we will be
centering on, and it is one that gives us some problem. Thank you
very much, Ms. O’Reilly and Mr. Schuck, for your very fine state­
ments. I yield back the balance of my time, Mr. Chairman.
Chairman P a tm a n . Mr. Gradison ?
Mr. G rad ison . Thank you, Mr. Chairman.
Mr. Chairman, I have no questions about the desirability of an ap­
propriate audit of the efficiency of the Fed, in terms of fiancial manage­
ment and things of that kind; and I do not really think that is the
issue we are facing in these hearings. It is a question of how much
further we should go. I would first like to inquire of Ms. O’Reilly a
little bit further what she had in mind when she uses the sentence, “ The
sheer enormity of the billions of dollars passing through the System
each year requires a thorough, competent control and audit scheme.” I




196
think it is this question of control that is really what some of us are
very much concerned about, and I wonder what you had in mind.
What are we going to control ?
Ms. O ’R e i l l y . Right now, the Federal Reserve Board has the con­
trol of billions of dollars. Independence is healthy and laudatory.
But if that control is not subject to a review by Congress, it can grow
from independence into an autonomy which results in the formulation
of polices which are not being scrutinized by anyone. Then, instead of
a healthy independence, you have something that can easily get out of
control.
Mr. G r a d iso n . D o you believe we have that today ?
Ms. O ’R e il l y . I think there is something drastically wrong with
the financial structure of this country, that has led us to double-digit
inflation, recession, and increasingly high unemployment rates. I think
the consumer is frustrated that because as a result of the secrecy in the
whole Fed System, consumers have not been able to have an effective
input into the monetary policies of this country.
Mr. G r a d iso n . D o you think the fiscal policies adopted by this Con­
gress have something to do with the double-digit inflation, the unem­
ployment, and the economic problems which we face, as well as what­
ever the Federal Reserve might be doing ?
Ms. O ’R e i l l y . Obviously, that is also a very serious component.
But the determination of the supply of money is also a very critical
factor of this Nation’s economy.
Mr. G radison. M y feeling is that the principal concern of the con­
sumers in my district is inflation, and I do not think they really care
much about what happens with the Federal Reserve one way or an­
other. I do not think most of them know what the Federal Reserve is,
and I do not think they should have to worry about that. That is our
job. But I think there is a genuine concern that we have some kind of
a balanced mechanism coming out of Washington as a totality, which
has somewhere built into the structure an entity that is going to show
great concern about the question of inflation itself, which has very
direct impact upon consumers. And I think that is one of the concerns
that I have about the question of the audit. I am concerned about our
total relationship with the Federal Reserve and its ability to carry out
an anti-inflationary program in an effective manner. Would you share
my view that the main concern of consumers today is inflation ?
Ms. O ’R e il l y . It is inflation. But I think the informed consumer
realizes that the Federal Reserve Board determines policy that affects
many consumer decisions. One of the most important areas is actual
credit allocation, and its effect on the consumer’s ability to get a loan,
so that they can acquire home ownership for example. There is a really
distressing shrinking percentage of Americans who are able to achieve
that American dream, and this is very distressing. Also, the existence
of jobs is an outgrowth of the fiscal policies of the Federal Reserve
Board, to the extent that if industry is able to maintain an economi­
cally healthy enough stature they can maintain full employment. So
I think that unfortunately not enough consumers realize just how
important Federal Reserve Board policy decisions are, and this is just
indicative of consumer unawareness that stems from too much Fed
secrecy.
Mr. G r a d iso n . I want to point out to both of the witnesses that
yesterday, the Comptroller General appeared before us; and at the




197
risk of putting words in his mouth, I would like to say that my inter­
pretation of what he said was that the General Accounting Office, as
it is presently staffed, is not competent to carry out a policy audit ot
the Federal Reserve. And the reason I say that is that the witness
indicated that the first thing they would have to do is to hire five highpriced outside consultants in order to carry out that job. I wonder,
therefore, why you look particularly to the General Accounting Office
rather than, for example, to this subcommittee or a counterpart sub­
committee in the other body, to carry out this task of congressional
oversight of the activities of the Fed.
Mr. S c i i u c k . Well, we have taken no position on which of the three
suggested audits ought to be conducted. That matter is obviously a
very difficult one that depends on a great deal of accounting expertise
that I certainly do not have. My understanding of Mr. Staats’ testi­
mony 2 years ago w as that he felt that it was within the competence of
T
the G AO to conduct it. But if it were not, then I think quite clearly
that would be a very relevant consideration. But that would certainly
not rule out the more limited types of audits that he also suggested.
Mr. G rad iso n . I have one final question, Mr. Chairman. I happen to
sit on the Government Operations Subcommittee, which went into the
matter of the litigation. I have to say, in all frankness, that I think we
got half the picture this morning. The other half is that there was, and
there continues to be, a question of just what the application of the
Freedom of Information Act should be under the laws which we
passed in this Congress, as it applies to certain data collection by the
Fed. Also, the survey which you are talking about was a sample sur­
vey. In our own district, I would assume that at the most, one or two
banks would have supplied information to that survey; making that
information public without requiring information to be made public
by other banks in that market area might not give the consumer the
kind of information that he would need in order to make an intelligent
choice.
Therefore, I have one final question I would like to ask both of
our witnesses. Would you support, as I would, legislation to require
the posting in a public place of the rates or range of rates being
charged by each lender as a means of cutting through this problem?
The reason I ask it that way is that there are something like 14,000
banks. The survey covered—what was it, 375 or in that order of mag­
nitude? So there are 13,000 and some-odd that were not covered at
all. It would seem to me that the way to deal with this problem is not
so much to get in a public fight, or even a legal fight, with the Fed,
but to come to the Congress and say, the consumer is entitled to this
information. Only the Congress can force that information to become
available, and that we should mandate a posting of these rates so
that the consumers in the market area will not have to have any
problem of finding out where they can get the best deal. And I just
wonder how you feel about that kind of disclosure and legislation,
and whether you would support the concept.
Mr. S c h u c k . Certainly, the concept is a very appealing one. It is
one that I have suggested in my testimony, and I understand the
subcommittee and other subcommittees may be looking into, and I
think it is a very, very important one for precisely the reasons you
have suggested. One question that the subcommittee might wish to




198
inquire into is whether the Fed has the authority already to require
this disclosure. It seems to me that under the Federal Trade Com­
mission Improvements Act enacted last year; it went into effect this
year—it may well be that the Fed has the authority to require this
type of disclosure as part and parcel of its authority to prevent
deceptive practices in the banking industry, just as the F T C would
have the authority with respect to nonbanking institutions.
Ms. O ’R e i l l y . We would likewise endorse the concept of such a
regulation. But we do not feel that such a regulation would be any
more than a starting point in providing Congress with the type of
thorough information it needs to
1
* lj“\ oversight
efficiently
obligation to determine whether
exercising its statutory obligation.
Mr. G r ad iso n . Thank you, and thank you, Mr. Chairman.
Chairman P a t m a n . Thank you. Mr. Ford?
Mr. F ord. Thank you, Mr. Chairman. I have a question for Ms.
O’Reilly.
Yesterday Mr. Staats told the subcommittee that previous G AO
audits of other agencies produced some $562 million in savings for the
taxpayers last year. In your statement on page 3 you mention many
examples of completely questionable expenditures on the part of the
Fed.
Can you think of any reason the Fed could justify membership dues
and contributions to the Miami Association of Industrial Nurses, for
example ? I am curious where you were able to locate information that
the Fed spent money for these various dubious causes.
Ms. O ’R e i l l y . The source of my information was the hearings con­
ducted on October 2 and 3, 1973, on H . R . 10265, involving this same
issue. Chairman Patman submitted a Banking and Currency staff re­
port which listed even more flagrant examples of an apparent mis­
spending of Federal money. There were some 260 organizations at that
time to which the Fed was paying dues and membership moneys. And
I would be glad to supply you with a copy of that statement.
In response to your question as to whether there is any apparent
justification for such expenditures, I certainly cannot think of any.
I do not think the average consumer would find it anything but out­
rageous that money was spent in such a fashion.
Mr. S c h u c k . I have an additional comment. In my relationships,
in my dealings with Fed officials over this issue I have noticed a curious
thing. Whenever they have cdme to my office and we have talked and
they have been ready to leave I have said to them, “ You know, you can
get a cab at the corner. There is a very convenient place to get a cab.”
And they say, “ No, let us call, and one of the Fed limousines will come
and get us.”
Now I cannot imagine any reason why the taxpayer should pay for
that type of extravagance. We are not talking about a lot of money but
I think symbolically it is very offensive and would be very offensive to
the taxpayers of this country if they realized that Fed officials—and I
am not talking about members of the Board, I am talking about middle
and upper middle level officials at the Fed—are riding around in limou­
sines when they can take cabs at a very, very low cost.
Mr. F ord . We are trying to cut that out.
Mr. Schuck, in your statement you have told us the details of Con­
sumers Union v. Federal Reserve Board. We are seeking here to focus




199
on ways that Congress can make the Fed more responsive and responsi­
ble to the taxpayers without jeopardizing their independence from
political pressure.
In the meantime can you think of any voluntary services the Fed
provides the consumers ?
Mr. S c h u c k . There undoubtedly are some services. I do not know
of any that are of any consequence other than educational services de­
signed to acquaint the public with the way in which the Fed operates.
As Mr. Gradison pointed out, I doubt if there are many people that
know what the Fed is or really care. They care about the results of the
Fed policies. I do not know of any substantial consumer protection
activities conducted by the Fed, though that may be more due to my
own ignorance than anything else.
Mr. F ord. Mr. Chairman, I yield the remainder o f my time back to
the Chair.
Chairman P a t m a n . Mr. Blanchard.
Mr. B l a n c h a r d . Thank you, Mr. Chairman. I came in late and did
not hear Ms. O’Reilly’s statement but I did read it and I got into the
tail end of yours, Mr. Schuck, so I only have a couple of questions.
I understand from your testimony, Mr. Schuck, that you support an
audit with a few modifications. The major one is that you would per­
mit the Fed within reason to designate those areas that need to be con­
fidential or need to remain confidential, and then after that allow a
full scale audit of the Fed.
Is that correct ?
Mr. S c h u c k . That is not quite correct.
What I suggested was that the Fed be given an opportunity to desig­
nate for the subcommittee those areas which it considers to be highly
sensitive, and then that this subcommittee look over that list and de­
termine for itself what it wishes to exempt from the audit.
Obviously, given the story that I have told about the Fed’s claim of
confidentiality, I do not think that any claim should be taken at face
value without further investigation by the subcommittee, and the sub­
committee should make the final judgment.
Mr. B l a n c h a r d . I take it from your testimony, Ms. O’Reilly, that
you tend to feel that there ought to be a total and complete audit with­
out any restrictions placed upon it.
Ms. O ’R e il l y . That is right. I feel that to have an audit without an
examination of monetary policy would be utterly meaningless because
it is monetary policy that is really at the heart of the Federal Reserve
Board System. A thorough audit would be the appropriate starting
point for Congress in evaluating the effectiveness of the System.
Mr. B l a n c h a r d . A s you may know, this subcommittee eventually,
and I think perhaps over a long period of time, is going to look into
the possibility of completely rewriting the Federal laws on financial
institutions with an eye to an overhaul of that system.
I know you probably deal with a number of consumer areas and I
do not know how much time you have spent in examining and evaluat­
ing the financial institutions of this country, but I do have one ques­
tion in case you have an opinion. Do you think that an audit of the
Fed, would be a necessary part of any process in which we tried to
rewrite and update our laws relating to financial institutions ?
Mr. S c h u c k . Well, that, of course, depends on what the audit turns
up, but my guess is that the audit will turn up some areas which will




200

recommend, and which will form the basis for recommendations for,
legislative changes.
We have testified on the Financial Institutions Act and we have
views on a number of issues related to that, some of which involve the
Fed and some of which do not. But I think that it is very likely that
the audit will turn up a number of areas that will call for a change by
Congress.
Ms. O ’R e il l y . C F A has not yet released an analysis o f the Financial
Institutions Act, although we are currently examining it. We will be
more than willing to submit a Avritten answer to that question when
that examinaion has been completed.
Mr. B l a n c h a r d . I appreciate it, and one final question, which I
think I will probably be asking everybody, which is the way I kind of
view this issue. And that is, from your experience and your thinking
on this whole matter, can you think of any really good reasons why
Congress should not audit the Fed?
Mr. S c h u c k . Well, I think I have set forth in my statement the con­
siderations that bear on this question. I think that on balance, Con­
gress clearly ought to require an audit of the Fed.
Mr. B l a n c h a r d . Well, Ms. O’Reilly, if you were a lawyer for the
Fed, not in the last case they had but in this one, what arguments
would you make for us to refrain from having to have this audit?
Ms. O ’R e il l y . I think I would fall back on the issue of “ independ­
ence.” That has surface appeal. But independence without account­
ability is a fraud on the American public. It is inconsistent with the
principles which have always determined how various Government
agencies were to be structured. Absent the argument of “ independence”
I do not know how the Fed’s position can be justified. The confiden­
tiality issue can be adequately safeguarded by the GAO. They have a
demonstrated ability to provide a very thorough, nonpartisan audit
and to preserve the confidentiality of any information involved.
Mr. S c h u c k . I suppose the only other argument is one that Mr.
Gradison mentioned, which is the notion that the G AO lacks the tech­
nical competence to adequately audit a very complicated area.
I suppose the response to that is that if the G AO has to go out and
hire them, well it will go out and hire them, and indeed, it can hire
the same people that the Fed has been hiring over the years, but can
ask them to ask different questions. I think that would be very useful
and it might cost the Government some money, but it will probably
save more money in the long run.
Mr. B l a n c h a r d . Thank you.
Chairman P a t m a n . Thank y ou , sir.
I would like to ask you if you know of any effort that is made by
the Federal Reserve to acquaint consumers with their rights and to
make sure that they are not discriminated against ?
In other words, what is the Federal Revenue doing to protect the
public in that respect ?
Mr. S c h u c k . I know of nothing. They have issued regulations, but
if you are asking if they have conducted a campaign to inform con­
sumers of their legal rights, I know of no such campaign.
I notice that they proposed for public comment just yesterday
regulations relating to sex discrimination in the extension of credit;
and how widely they will publicize these proposed regulations and
solicit comments from the public at large, I do not know.




201

Chairman P a tm a n . That was in the Federal Register?
Mr. S c h u c k . Yes.
Chairman P a tm a n . Would you comment on that, Ms. O’Reilly?
Ms. O ’R e i l l y . I am not aware of any movement or effort on the part
of the Federal Reserve Board to educate consumers as to their rights,
or to educate them concerning the safeguards available which would
insure that their rights are protected.
Mr. G ra d ison . Mr. Chairman.
Chairman P a tm a n . Yes, sir.
Mr. G rad ison . Would you yield just briefly ?
Chairman P a tm a n . Yes, sir.
Mr. G rad ison . In the testimony that was given us yesterday by the
Comptroller General, it included, and I am just going to quote this
and stop, the following. In the list of functions and activities of the
Federal Reserve:
Establishing rules and regulations for carrying out the provisions of the
Truth-in-Lending Act whose purpose is to assure meaningful disclosure of credit
terms to consumers. Enforcement is shared with the other bank regulatory
agencies and the Federal Trade Commission.

Thank you, Mr. Chairman.
Mr. S c h u c k . Well, the question, as I understood it, was whether the
Fed conducted any campaign to educate consumers about their rights
under the truth-in-lending law. They may. I am just ignorant of
any. I know of none. But it may be that they do.
Chairman P a tm a n . Y o u hear of many consumer horror stories in­
volving individuals in the banking business or the lending business
and many other businesses, and you wonder why these situations have
not been detected before the situation became so bad. I could name
some of them, but I shall not. Have you heard of horror stories in
regard to the violation of usury laws ?
Mr. S c h u c k . Sure.
Chairman P a tm a n . And what about you, Ms. O’Reilly ?
Ms. O ’R e i l l y . That is right, Mr. Chairman.
Chairman P a tm a n . D o you have any book or publication that con­
tains these horror stories that you uncover in the business that you are
engaged in now ?
Mr. S c h u c k . Well, we have a file of letters, but no; there is no
compendium of horror stories.
I would like to just follow up on your previous question. Consumer
Reports published a four-part series on banking that has just been
concluded containing a lot of very useful, I think, information on how
consumers can shop for credit and shop for the best terms on savings
deposits and so forth. There is no reason in the world why the Fed
should not be publishing this type of information, should not be
taking it as a major function of the Fed to disseminate this kind of
information to consumers.
For example, our survey, on the basis of data that we obtained from
the Fed, as I described, show that there are very, very significant
disparities in interest rates for a given consumer loan category between
lending institutions in the same city. Well, many consumers do not
know that. Many of them believe that there is just one single rate, and
all banks charge it. The Fed ought to be telling them that they should
shop for credit, that credit terms can be negotiated, that there is not




202

a fixed rate, and advice of a very practical nature that would, in the
long run, assist consumers very greatly.
Ms. O ’R e i l l y . On that same point, I would like to emphasize that
what is being discussed is the relationship between a bank and a cus­
tomer. This is a very unique relationship because there is an inherent
intimidating influence that often leads borrowers to conclude that they
have no negotiating power. A consumer who is not informed of his
options and who does not have easy access to the varying rates within
his own locality, cannot effectively influence the terms of the mortgage
or the loan. There is an awesome quality about sitting down opposite a
banker who is completely in the driver’s seat as to all the terms of the
loan agreement.
This is quite different from the situation where a consumer can buy
a refrigerator or a stereo based on aggressive, comparative shopping,
by waiting for specials or have some input into negotiating with the
salesmen. That quality is completely absent in the bank-customer
relationship.
Chairman P a tm a n . It really causes me some concern that people who
have such a valuable franchise. I think the bankers in the United
States have the most valuable franchise of the bankers of any country
of the world that I have read about. They have so many privileges and
opportunities to take advantage of the people, and so little is done
to protect the people from these disadvantages and excessive interest
rates and charges.
It is really disturbing to anyone who gives it much thought and
attention. What do you say about that, Mr. Schuck ?
Mr. S c h u c k . Well, I think it is clearly true that most consumers,
when faced with a banker, feel very, very disadvantaged. The fact,
however, is that there are some options available to consumers, which
they do not really know about. We get lots of letters from people who
are under the impression that there is only a single rate paid on
savings accounts and that there is only a single rate charged for cer­
tain categories of loans, and the fact is that it is not true. There are
very, very substantial differences in the same city. There is a great deal
of consumer ignorance in the banking area, and we try to dispel as
much of it as we can, but it ought to be the Fed’s job to do so and
not simply to regulate the banks, as they now are doing.
Mr. P a t m a n . I assume that you believe that it is the duty of the
bank or anyone who has a franchise from a State or the Federal
Government to render service to the people as well as to the banks, that
they should not be under obligation to protect the banks in all instances
and at the same time never make any effort to protect consumers ?
Do you keep up with what they call the loan-shark industry in this
country ? Do you ever go into that ?
Mr. S c h u c k . We have not really. One of the things we have sought
from the Fed very recently is the interest rate data filed with them
by finance companies which may give us an opportunity to inform
consumers as to those who have to go to finance companies rather than
banks.
Chairman P a t m a n . Y o u acquaint the consumers with the informa­
tion you have ?
Mr. S c h u c k . Well, we hope to get it from the Fed. We have asked
the Fed for it, and we will see what happens.




203

Chairman P a tm a n . Well, I hope you get it.
Mr. Hannaford, I believe you wanted to ask a question.
Mr. H a n n a f o r d . No, Mr. Chairman. Thank you very much.
Chairman P a t m a n . Mr. Blanchard, did you want to ask a question ?
Mr. B la n c h a r d . Yes. There is one area I wanted to touch on with
Ms. O’Reilly. You have kind of woven it into your answers, but would
you care to tell us specifically what the Consumers Union thinks would
be some of the specific needs that could be met for consumers, which
could result from an audit of the Fed? You have touched on it piece­
meal in other answers.
Mr. S c h u c k . Well, at the end of my testimony, I indicated----Mr. B la n c h a r d . I am sorry, Mr. Schuck. I was addressing my ques­
tion to Ms. O’Reilly. I see at the end of your statement what you have.
Mr. S c h u c k . Y o u mentioned Consumers Union. That is why I
answered.
Ms. O ’R e i l l y . Virtually every customer decision is affected by the
monetary policy of the Federal Reserve Board. If there were an evalu­
ation and thorough audit it could lead to an effective congressional
oversight of the Federal Reserve and possibly a restructuring of some
of that system. Consumers would hopefully have more input on mone­
tary decisions before the fact rather than after the fact.
I think really the critical job shortage, credit allocation, and the
high price of commodities in the market today are probably the three
areas that are most directly affected by the present Fed policies.
Mr. B la n c h a r d . And I have one final question for both of you.
In the list of priorities, that is, measures Congress could take to aid
consumers and promote the public interest, in your opinion, where do
you rank an audit of the Fed ? How important is it to your groups,
and in your opinion where on the hierarchy of important measures
does an audit stand ?
Ms. O ’R e i l l y . CFA’s number one priority is the creation of the
Agency for Consumer Advocacy. This is the touchstone to effective
consumer representation at all Grovemment levels.
In addition, we feel that an audit that would lead us to a review
of monetary policy, would rank very high on CFA’s list because ob­
viously the supply of money is directly related to such areas as the
high cost of health care, the existence of variable rate mortgages,
credit availability, and so forth. Virtually every consumer decision is
affected by monetary policy.
Mr. S c h u c k . I would agree that our top priority would be the estab­
lishment of an Agency for Consumer Advocacy, which would enable
a more systematic representation of consumers before the Fed as well
as other Government agencies.
Mr. B la n c h a r d . Thank you.
Chairman P a tm a n . Could each of you give us some samples of hor­
ror stories in the consumer lending business ? Do you have publications
like that ?
Mr. S c h u c k . We do not. We receive letters occasionally and usually,
unless people authorize us to release their names, we do not release
them. We do not publish information like that.
Ms. O ’R e i l l y . I would be happy to review our records and supply
you with any samples that we presently have. We do not have any
publication that has documented these horror stories.

50-365 0 - 75 - 14




204

Chairman P a tm a n . Earlier you mentioned recent publications on
consumer credit.
Would you repeat that, please, sir ?
Mr. S c h u c k . I am not sure. Oh, yes, we published a four-part—in
“ Consumer Reports” we published a four-part series on banking and
we would be happy to supply that for the record.
Chairman P a tm a n . Well, would you please supply this subcom­
mittee, the staff, and the chairman of the committee, with that
information ?
Mr. S c h u c k . I would be delighted to. [The material referred to ap­
pears in appendix C.]
Chairman P a tm a n . Mr. Gradison.
Mr. G ra d iso n . Mr. Chairman, I would just like to request that we
broaden that inquiry and ask, in addition to any horror stories, if your
files include any indications of—and God knows there must be some
in this great country—where consumers got a fair shake from a lend­
ing institution, that you include those as well.
Ms. O ’R e i l l y . Surely.
Chairman P a t m a n . The issue of usury laws, I think is a very serious
one in this country.
I was a district attorney for 5 years in Texas and I received knowl­
edge and information of what is going on there and it really surprised
me. And I later found out that it was nothing compared to what goes on
in some of the larger cities. Of course, in Texas we do not have any real
large cities except maybe Houston and Dallas and Fort Worth and
San Antonio. But even in a city like New York some of the worst crimes
have been published along the lines of taking advantage of consumers
on violations of usury laws.
I read one here awhile back where a collector for a loan shark
stopped a fellow driving a car and told him:
Now you owe the concern I am collecting for, a certain high priced loan
company, and you have not paid. And this is the second time I have asked you
about it. And I want to know if you are going to pay it.

And the fellow in the car did not seem to indicate that he was going
to pay much attention to it. He had his arm on the window of the car.
The collector broke the guy’s arm. That was a rather cruel way of col­
lecting bills. But that was in one of the largest newspapers in the
country.
In another case, the collector wrote a note to a fellow who was sup­
posed to pay on a high interest loan and told him. “ Now if you do not
pay this in a certain number of days, you will find that your automo­
bile has been blown up.”
There are other stories but I thought those were rather unusual.
We should give some study and consideration to the apprehension of
criminals in the lending business. Many years ago, I introduced a bill
providing for a $25,000 reward for the arrest and apprehension of a
public enemy. Do you have any suggestion ?
Have you ever gone into that at all ?
Mr. S c h u c k . Listening to your story, I was struck with the fact that
in view of the inflation that has occurred, $25,000 would not get any­
body to do anything today.
Chairman P a t m a n . Well, we were talking in the past on the $25,000.
We would have to bring it up to date.




205

Mr. G r a d i s o n . Mr. Chairman, maybe we can get the General Ac­
counting Office in the act, too.
Chairman P a t m a n . I do not know that an audit would affect it.
Mr. H a n n a f o r d . Mr. Chairman, I think those who are robbing us
today are doing it in such a subtle manner that the reward would not
do any good in any event.
Chairman P a t m a n . Well, anyway, it is worthy of consideration.
At this time I would like to announce that the hearings on providing
for GAO audit of the Federal Reserve will resume on Friday morning
at 10 here in this room. At that time we will hear the testimony of Prof.
Richard T. Selden of the Department of Economics of the Univer­
sity of Virginia, and I know we will all look forward to hearing the
professor.
I do desire to thank the witnesses for appearing here today and
delivering their testimony. You have rendered a real public service and
we certainly thank you. And if you have any additional information
that you would like to include in your testimony, I am giving you
permission to extend your remarks in the hearing records.
Mr. S c h u c k . Thank you, Mr. Chairman.
Ms. O ’ R e i l l y . Thank y o u , Mr. Chairman.
Chairman P a t m a n . Thank you very much.
[Whereupon, at 11:25 a.m., the subcommittee adjourned to recon­
vene on Friday, April 25,1975, at 10 a.m.]







AUDIT OF THE FEDERAL RESERVE

FRIDAY, APRIL 25, 1975

of

H ouse of R e p r e s e n t a tiv e s ,
S u b c o m m it t e e o n D o m estic M o n e t a r y P o u c y
t h e C o m m it t e e o n B a n k i n g , C u r r e n c y a n d H o u s in g ,

Washington, D.G.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room
2128, Rayburn House Office Building, Hon. Wright Patman [chair­
man of the subcommittee] presiding.
Present: Representatives Patman, Hannaford, and Gradison.
Chairman P a t m a n . The subcommittee will please come to order.
We have Prof. Richard T. Selden this morning, chairman of the
department of economics of the University of Virginia.
Professor, we appreciate your presence this morning.
You may proceed in your own way, sir.
Mr. S e ld e n . My statement is not terribly long; I think maybe it
would be most efficient if I just read it.
Chairman P a t m a n . That will be fine.
STATEMENT OF PROF. RICHARD T. SELDEN, CHAIRMAN, DEPART­
MENT OF ECONOMICS, UNIVERSITY OF VIRGINIA

Mr. S e ld e n . I am certainly honored to have this opportunity to
comment on H.R. 4316. The proposal to subject the Federal Reserve
System to regular audits by the General Accounting Office has, of
course, been made on a number of earlier occasions, and it has received
careful study through lengthy hearings of the Banking, Currency and
Housing Committee, and in the committee’s very important Com­
pendium on Monetary Policy Guidelines and Federal Reserve Struc­
ture, which was published in 1968.
Perusal of a large fraction of this interesting and informative ma­
terial leads me to conclude that nearly everything worth saying on the
subject has already been said by earlier witnesses. Perhaps the main
contribution that can be made today is to provide an assessment of the
various arguments that have been put forth, and to place the audit pro­
posal within the larger context of a comprehensive program of mone­
tary reform.
Let me begin then by speaking about the audit proposal per se. I
begin by posing a question: Is there a logical distinction between the
Fed and other Federal agencies ?
Proponents of a GAO audit of the Federal Reserve System have
emphasized that every other branch of the Federal Government, re­
gardless of the nature of its function, is subject to regular audit by
the GAO. Moreover, the Federal Reserve Board, but not the Federal




(2 0 7 )

208
Reserve banks, was audited by the GAO from its creation in 1921 until
the Banking Act of 1933 exempted the Board from such audits.
Proponents argue that there is no logical basis for distinguishing
between the Fed and other units of Government. Opponents, on the
other hand deny this, holding that audits by the GAO would seriously
compromise the Fed’s traditional independence from both the legisla­
tive and executive branches. They also maintain that GAO audits
would violate confidentiality requirements that other units of Govern­
ment do not face.
Even if one believes that independence of the Fed in some sense is
a good thing, and that it should be protected carefully against erosion
through GAO audits, mandatory disclosure of policy plans, congres­
sional specification of policy guidelines, shortening of terms of mem­
bers of the Board of Governors, and like measures, it does not follow
that audit by the GAO would undermine the Fed’s independence.
During the October 1973 hearings of the House Banking and Cur­
rency Committee, Comptroller General Staats outlined three types of
audits that the GAO might perform: First, a fiscal audit to determine
the authenticity of reported data and the legality of activities; second,
an efficiency audit to determine whether or not operations are being
conducted in the most economical fashion; and third, a program audit
to determine the extent to which legislative mandates are, in fact, being
achieved.
I do not see how any of these three types of audits would endanger
Fed independence any more than such audits by Haskins & Sells or
Touche Ross & Co. would. As I understand it, audit reports would be
filed with appropriate committees of the Congress, including, I as­
sume, the House Committee on Banking, Currency and Housing.
Where alleged irregularities were detected, these committees would
schedule hearings at which Federal Reserve officials would present
their views on the alleged problems, and would outline remedies in
instances where problems were generally acknowledged to exist. The
Fed would continue to formulate monetary policy independently of
the legislative branch, as long as it complied with its legislative man­
dates. And independence from the executive branch would be wholly
unaffected by the audits.
The confidentiality argument against GAO audits of the Fed is not
at all convincing to me. It takes various forms. One argument is that
member bank examination reports contain highly sensitive informa­
tion that, if disclosed, might have adverse consequences for the banks.
However, it is not clear that access to examination reports would be
crucial to a GAO audit of the Fed; and in any event, the GAO cur­
rently has access to all sorts of confidential material from other
agencies.
A second confidentiality argument is that information leaks result­
ing from the audits might be useful to speculators. Since the audit
reports would be filed many months after policy actions are taken, it
is hard to take this argument seriously. Still another argument along
these lines is that dissemination of the views of individual policy­
makers would inhibit free debate, leading implicitly to a danger that
unwise policies would be adopted.
My own view is that GAO could be expected to use discretion in safe­
guarding sensitive material. Moreover, while it is understandable that




209
policymakers would prefer to cast their votes anonymously, thus avoid­
ing the hazard of being secondguessed by Members of the Congress
and by the public at large, I believe that policy performance is more
likely* to be improved than worsened by closer public scrutiny.
In answer, then, to the question posed at the outset, I am not per­
suaded that there is any thing special about the Federal Reserve that,
in principle, argues for its exemption from the ordinary audit processes
that apply to other units of the Federal Government.
Next, I want to consider some practical matters. While I do not
find a logical basis for distinguishing between the Federal Reserve
and other Government agencies with respect to the appropriateness
of audit by the GAO, neither would I expect important gains to flow
from such audits. Let me state clearly that all of my contacts with the
Fed have been as an outside observer who has visited the Board of
Governors or the various Federal Reserve banks from time to time, and,
on rare occasions, has served as a consultant to the Federal Reserve.
From these contacts, I have gained a strong impression that the Fed­
eral Reserve is a highly efficient and conservatively managed organi­
zation, and I doubt that an audit by the GAO would uncover signifi­
cant irregularities. The examples cited in earlier committee documents
of questionable expenditures by the Fed leave me unconvinced on this
score. The preponderance of tnese questionable items appear to have
been reasonable expenditures.
GAO audits are not costless, of course. Before the Congress moves
to establish a GAO audit of the Fed on a continuing basis, it should
carefully consider whether the probable benefits of the audits would
outweigh the costs. The Congress should also bear in mind the old
adage that the best is the enemy of the good.
It is often counterproductive to tinker with a generally smooth op­
eration in the hope of achieving perfection. The goal should be to
strive for the best performance, rather than to seek logical consistency
as an end in itself. In this particular instance, it is not clear to me that
the benefits of regular audits by the GAO would be worth the costs.
The above judgment is based on one person’s admittedly casual
observations. I would not be surprised to learn that others have come
to a contrary conclusion. In order to resolve such doubts, I would
see considerable merit in a one-time audit of the Fed by the GAO,
primarily for the purpose of evaluating the effectiveness of the Fed’s
own auditing procedures. This sort of audit might, of course, be
repeated in a few years if new doubts were to arise later on about the
suitability of the Fed’s own audits.
Whether we have in mind a regular annual audit, or the one-shot
sort of audit mentioned above, I would strongly recommend that
the GAO confine itself to the fiscal and efficiency audits delineated by
Comptroller General Staats. At present, the GAO has no special competence to evaluate monetary policies, and I see no point in asking
the GAO to develop such competence.
Instead, the Congress might consider forming an independent mone­
tary policy review board, which would meet early each year for the
purpose of appraising policy actions undertaken by the Fed in the
preceding year. I have in mind a Board of about 11 members, 5 of
whom would be appointed by the President, and 6 by the Joint
Economic Committee, or perhaps the two banking committees.




210

In order to assure fresh thinking, terms of Board members should
be limited to 2 years. Ideally, the Board’s report would be published
at about the same time as the Economic Report of the President, and,
therefore, would be available as an input for the annual hearings of the
Joint Economic Committee. In my judgment, this kind of policy audit
would be considerably more illuminating then anything that the
GAO would be likely to produce.
Let me turn now to the broader issue of monetary policy oversight.
The primary impetus for the GAO audit proposal, I suspect, is con­
gressional dissatisfaction with Federal Reserve policies in recent years.
It is widely believed that the Fed has committed serious errors, and
that many of these errors might have been avoided if there had been
proper congressional oversight of monetary policy. The audit proposal
is viewed as a necessary step toward this policy oversight objective.
I strongly support the idea that Congress should play a greater role
in the realm of monetary policy. However, I do not regard GAO
audits of the Fed each year as either necessary or sufficient to ac­
complish this aim. I would like to complete these remarks by indi­
cating briefly why I believe that congressional oversight of monetary
policy is in order.
It is common knowledge that our Constitution has reserved to
the Congress the power to coin money and to regulate the value
thereof. In accordance with this basic power, the Congress created
the Federal Reserve System in 1913, and over the years, it has dele­
gated most of its monetary functions to the Board of Governors.
This does not mean, however, that Congress can avoid responsibility
for monetary policy. If Congress is dissatisfied with the conduct of its
monetary agents, it has the right—even the duty—to issue instruc­
tions that wul lead to more satisfactory results.
The contrary view—that is, that Congress should stay clear of
monetary policy—is deeply entrenched in American society. It is
nurtured in part, one suspects, by Federal Reserve officials themselves,
who have no wish to become subject to closer control by Congress, and
by the financial community, which fears the proliferation of Govern­
ment regulations of its activities.
But such vested interests aside, there is a widely held sincere dis­
trust of congressional competence in the monetary area. Elected
officials, it is argued, will not take a sufficiently long-term view of the
consequences of monetary policy actions, but will be biased instead
toward dramatic steps that will win votes in the short run while ulti­
mately harming the country.
As a specific example, consider the level of interest rates. The ex­
tremely high rates of recent years have given rise to great unrest.
There have been calls in the Congress for Federal Reserve action to
bring interest rates down. Presumably, the Congressmen who make
these statements believe that it is a simple matter to reduce interest
rates—all that is needed is to have the Federal Open Market Commit­
tee expand bank reserves by purchasing a few billions of Government
securities.
Yet, such analyses are highly simplistic; they ignore a basic propo­
sition that most economists now accept—that the reason for today’s
high interest rates is the excessive monetary growth fostered by the
Federal Reserve throughout most of the past decade. A policy of




211

accelerated monetary growth would indeed tend to lower interest
rates during the next few weeks, but the longer run results would be
just the opposite.
Now many careful students of the subject are convinced that mone­
tary policy is too important to be left to the politicians; that it should
be vested instead in an independent central bank. As a believer in
democratic institutions, I cannot accept this. Nor, as an economist, can
I accept the easy assumption that Congress is bound to do a worse job
of guiding monetary policy than the Fed has done. The Fed’s record
is hardly reassuring in this regard.
I have long been struck by a curious asymmetry in our thinking
about monetary policy and fiscal policy. Why do we never hear pro­
posals for an independent fiscal authority ? Surely the powers to tax
and to appropriate funds are just as subject to political abuse as the
power to determine the rate of monetary growth. And surely, a cor­
rect analysis of fiscal policy makes intellectual demands on our law­
makers as great as those that apply to monetary policy. Congress
jealously guards its powers over the purse strings. It should do the
same with regard to its monetary powers.
This is not the place for a full discussion of ways of enhancing con­
gressional oversight of monetary policy. The recent adoption by H.
Con. Res. 133 is a big step in the right direction. The semi-annual hear­
ings before the banking committees of both Houses should do much to
remove the unnecessary mystique that has surrounded monetary policy,
and should help bring this important policy area under democratic
control.
I sincerely hope that the Subcommittee on Domestic Monetary
Policy will extend the scope of its current inquiries beyond the GAO
audit issue to include the whole range of measures for improving con­
gressional oversight of monetary policy.
Thank you very much.
Chairman P a tm a n . Thank you , sir.
Now this morning I think we should go into the question of the
Open Market Committee. Specifically, the formation of the Open Mar­
ket Committee, its functions, and the amount of the transactions per
year to show that it is a matter of such great importance.
Another area of concern is the 14-year term of the Governors. I do
not think it was ever intended that a Governor should, before his term
expires, persuade the President to appoint him to the unexpired term
of another Governor. By reappointing this person who has served, say,
13 years—that gives him the equivalent of about a double term, instead
of one term of 14 years.
#
I want to ask some questions about that, and especially about the
Open Market Committee.
Now the transactions of the Open Market Committee, I have been
told, aggregate about several trillion dollars a years. Is that correct,
Professor ?
Mr. S e ld e n . I am sorry; would you repeat that?
Chairman P a t m a n . The total transactions of the Open Market Com­
mittee represent several trillion dollars a year.
Mr. S e ld e n . I do not believe that is quite right. These figures are
published in the annual report of the Federal Reserve Board and I do




212

not have it readily at hand. But I believe the number is less than a tril­
lion; but it is a big number; it is a very big number.
Chairman P a t m a n . It is my understanding that the Open Market
Committee handled about $25 trillion last year. We are approaching a
time when we will have to adopt something else, I guess quadrillions
would come next after trillions.
Mr. S e ld e n . Quadrillions are next.
Chairman P a tm a n . And my information is that we have about $2^2
trillion in debts in the United States.
Mr. S e ld e n . Yes.
Chairman P a tm a n . N o w other divisions of agencies of the Federal
Reserve also handle large quantities of money. Which ones, would you
say, in their order of importance, handle the largest amounts of money
in finances and credit ?
Mr. S e ld e n . Branches of the Government at large ?
Chairman P a t m a n . Yes, sir.
Mr. S e ld e n . Well, there are many. Of course, one thinks of the De­
fense Establishment, the Department of Defense. But if you are talk­
ing about credit activities of the Federal Government, of course HUD
and the Department of Agriculture have extensive programs. There
are a large number of them.
Chairman P a t m a n . N o w then, the Board of Governors, of course,
is comprised of seven members; and they are appointed by the Presi­
dent with the advice and consent of the Senate, for 14-year terms.
Do you consider that the law gives the Federal Reserve Board the
power or the agencies of the Government the power to permit a person
to serve more than a 14-year term by being appointed, to say, another
term?
Mr. S e ld e n . I would not have an opinion as to exactly what the
statute says. I am aware, of course, that many Governors have served
for more than 14 years.
Chairman P a t m a n . Well, Mr. Martin served about 27 years, did he
not?
Mr. S e ld e n . I think he was appointed in 1951, and I believe was
succeeded in 1970. So that would be 19 years.
Chairman P a tm a n . That is right. I believe that is correct—19 years.
Mr. G ra d iso n . Mr. Chairman ?
Chairman P a tm a n . Yes, sir?
Mr. G ra d iso n . Mr. Chairman, I think it might be helpful if the
staff could prepare for us—and it may be available from the Federal
Reserve—the statistics on how long members have served, broken
down by different periods of years. I think we will find that it has been
an exception rather than the rule for members to serve as long as 14
years; and indeed there have been two members resigned before their
terms have expired within the last year, one just the other day; and
of course, Dr. Brimmer last year.
I think these numbers might be instructive, and I think they will
show that while the 14-year term is provided, it is very rarely used.
[The information requested by Mr. Gradison in regard to the mem­
bership of the Board of Governors of the Federal Reserve System,
1913-74, follows:]




213
[From the Federal Reserve Bulletin (November 1974)]
M EMBERSHIP OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, 1913-74
Federal Reserve
district

Name
APPOINTIVE

Date of initial
oath of office

Boston_________

Aug. 10,1914

Other dates and information relating to membership 2

MEMBERS 1

Charles S. Hamlin_______

Paul M. Warburg________ _New York____________ do______
Frederic A. Delano_______ Chicago_______________do______
W. P. G. Harding________ Atlanta_______________ do______
Adolph C. Miller_________San Francisco__________do______
Albert Strauss______
New York______ Oct. 26,1918
Chicago_________ Nov. 10,1919
Henry A. Moehlenpah
Edmund Platt______
New York_______ June 8,1920
Cleveland_______ Sept. 29,1920
David C. Wills______
Minneapolis_____ May 12,1921
John R. Mitchell
Milo D. Campbell________ Chicago__________ Mar. 14,1923
Daniel R. Crissinger______ Cleveland________ May 1,1923
George R. James________ St. Louis_________ May 14,1923
Edward H. Cunningham___ Chicago_______________do______
Roy A. Young___________ Minneapolis_____ Oct. 4,1927
Eugene Meyer___________ New York_______ Sept. 16,1930
Wayland W. Magee_______ Kansas City_____ May 18,1931
Eugene R. Black_________Atlanta__________ May 19,1933
M. S. Szymezak_________ Chicago_________June 14,1933
J. J. Thomas____________ Kansas City__________ do______
Marriner S. Eccles_______ San Francisco____

Nov. 15,1934

Joseph A. Broderick_______New York_______ Feb. 3,1936
John K. McKee__________ Cleveland_____________ do______
Ronald Ransom_________ _Atlanta______________ do______
Ralph W. Morrison_______ _Dallas__________ Feb. 10,1936
Chester C. Davis________ _Richmond_______ June 25,1936
Ernest G. Draper________ _New York_______ Mar. 30,1938
Rudolph M. Evans_______ _Richmond_______ Mar. 14,1942
James K. Vardaman, Jr___ St. Louis_________ Apr. 4,1946
Lawrence Clayton________ Boston_________ Feb. 14,1947
Thomas B. McCabe______ Philadelphia_____ Apr. 15,1948
Edward L. Norton________Atlanta__________ Sept. 1,1950
Oliver S. Powell_________ Minneapolis__________ do______
Wm. McC. Martin, Jr______ New York_______ Apr. 2,1951
A. L. Mills, Jr___________ San Francisco_____ Feb. 18,1952
J. L. Robertson__________ Kansas City_
__ ______ do_____
Paul E. Miller___________ Minneapolis_____ Aug. 13,1954
C. Canby Balderston_____ Philadelphia_____ Aug. 12,1954
Chas. N.Shepardson_____ Dallas___________ Mar. 17,1955
G. H. King, Jr___________ Atlanta_________ Mar. 25,1959
George W. Mitchell_______ Chicago_________ Aug. 31,1961
J. Dewey Daane_________ Richmond_______ Nov. 29,1963
Sherman J. Maisel_______ San Francisco____Apr. 30,1965
Andrew F. Brimmer______ Philadelphia_____ Mar. 9,1966
William W. Sherrill______ Dallas___ ______ May 1,1967
Arthur F. Burns_________ New York_______ Jan. 31,1970
John E. Sheehan________ St. Louis________ Jan. 4,1972
Jeffrey M. Bucher_______ San Francisco_____June 5,1972
Robert C. Holland_______ Kansas City_____ June 11,1973
Henry C. Wallich________ Boston_________ Mar. 8,1974
Philip E. Coldwell________ Dallas__________ Oct. 29,1974
See footnotes at end of tables.




Reappointed in 1916 and 1926. Served until Feb. 3,
1936, when his successor took office.
Term expired Aug. 9,1918.
Resigned July 21, 1918.
Term expired Aug. 9,1922.
Reappointed in 1924. Reappointed in 1934 from the
Richmond District. Served until Feb. 3, 1936, when
his successor took office.
Resigned Mar. 15,1920.
Term expired Aug. 9, 1920.
Reappointed in 1928. Resigned Sept. 14,1930.
Term expired Mar. 4, 1921.
Resigned May 12,1923.
Died Mar. 22, 1923.
Resigned Sept. 15,1927.
Reappointed in 1931. Served until Feb. 3, 1936, when
his successor took office.
Died Nov. 28, 1930.
Resigned Aug. 31, 1930.
Resigned May 10, 1933.
Term expired Jan. 24, 1933.
Resigned Aug. 15, 1934.
Reappointed in 1936 and 1948. Resigned May 31,1961.
Served until Feb. 10, 1936, when his successor took
office.
Reappointed in 1936,1940, and 1944. Resigned July 14,
1951.
Resigned Sept. 30,1937.
Served until Apr. 4,1946, when his successor took office.
Reappointed in 1942. Died Dec. 2,1947.
Resigned July 9, 1936.
Reappointed in 1940. Resigned Apr. 15,1941.
Served until Sept. 1,1950, when his successor took office.
Served until Aug. 13,1954, when his successor took of­
fice.
Resigned Nov. 30,1958.
Died Dec. 4, 1949.
Resigned Mar. 31,1951.
Resigned Jan. 31,1952.
Resigned June 30,1952.
Reappointed tor term beginning Feb. 1, 1956. Term
expired Jan. 31,1970.
Reappointed in 1958. Resigned Feb. 28, 1965.
Reappointed for term beginning Feb. 1, 1964. Resigned
Apr. 30,1973.
Died Oct. 21,1954.
Served through Feb. 28,1966.
Retired Apr. 30,1967.
Reappointed in 1960. Resigned Sept. 18, 1963.
Reappointed for term beginning Feb. 1,1962.
Served until Mar. 8,1974, when his successor took office.
Served through May 31, 1972.
Resigned Aug. 31,1974.
Reappointed for term beginning Feb. 1, 1968. Resigned
Nov. 15,1971.
Term began Feb. 1, 1970.

214
[From the Federal Reserve Bulletin (November 1974)]
MEMBERSHIP OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, 1913-74
Name

Date
CH A IR M E N 3

Charles S. H am lin...____ _____________________________________________ Aug. 10,1914 to Aug. 9,1916.
W. P. G. Harding____ ___________________ ____ _________________________Aug. 10,1916 to Aug. 9,1922.
Daniel R. Crissinger__________________________________________________ May 1,1923 to Sept. 15,1927.
Roy A. Young________________________________________________________ Oct. 4,1927 to Aug. 31,1930.
Eugene Meyer_______________________________________________________ Sept. 16,1930 to May 10,1933.
Eugene R. Black_____________________________________________________ May 19,1933 to Aug. 15, 1934.
Marriner S. Eccles____________________________________________________ Nov. 15,1934 to Jan. 31,1948.
Thomas B. McCabe___________________________________________________ Apr. 15,1948 to Mar. 31,1951.
Wm. McC. Martin, Jr__________________________________________________ Apr. 2,1951 to Jan. 31,1970.
Arthur F. Burns______________________________________________________ Feb. 1,1970.
VICE C H A IR M EN 3
Frederic A. Delano___________________________________________________ Aug. 10,1914 to Aug. 9,1916.
Paul M. Warburg_____________________________________________________ Aug. 10,1916 to Aug. 9, 1918.
Albert Strauss_______________________________________________________ Oct. 26,1918 to Mar. 15,1920.
Edmund Platt________________________________________________________July 23,1920 to Sept. 14,1930.
J. J. Thomas__________________________ ______________________________ Aug. 21,1934 to Feb. 10,1936.
Ronald Ransom______________________________________________________ Aug. 6,1936 to Dec. 2,1947.
C. Canby Balderston--------------------------------------------------------------------------------- Mar. 11,1955 to Feb. 28,1966.
J. L. Robertson______________________________________________________ Mar. 1,1966 to Apr. 30,1973.
George W. Mitchell___________________________________________________ May 1,1973.
EX-OFFICIO M EMBERS i
SECRETARIES OF THE TREASURY
W. G. McAdoo_______________________________________________________ _Dec. 23,1913 to Dec. 15,1918.
Carter Glass_________________________________________________________ _Dec. 16,1918 to Feb. 1,1920.
David F. Houston______________________________________________________Feb. 2,1920 to Mar. 3,1921.
Andrew W. Mellon_____________________________________________________Mar. 4, 1921 to Feb. 12, 1932.
Ogden L. Mills_______________________________________________________ _Feb. 12, 1932 to Mar. 4,1933.
William H. Woodin____ _________________________________ ____ _________ _Mar. 4,1933 to Dec. 31,1933.
Henry Morgenthau, Jr_________________________________________________Jan. 1, 1934 to Feb. 1, 1936.
COMPTROLLERS OF THE CURRENCY
John Skelton Williams________________ ____ ___________________________
Daniel R. Crissinger__________________________________________________
Henry M. Dawes_____________________________________________________
Joseph W. McIntosh__________________________________________________
J. W. Pole___________________________________________________________
J. F. T. O'Connor_____________________________________________________

Feb. 2,1914 to Mar. 2,1921.
Mar. 17, 1921 to Apr. 30, 1923.
May 1,1923 to Dec. 17,1924.
Dec. 20,1924 to Nov. 20,1928.
Nov. 21, 1928 to Sept. 20,1932.
May 11, 1933 to Feb. 1,1936.

1 Under the provisions of the original Federal Reserve Act the Federal Reserve Board was composed of 7 members,
including 5 appointive members, the Secretary of the Treasury, who was ex-officio chairman of the Board, and the Comp­
troller of the Currency. The original term of office was 10 years and the 5 original appointive members had terms of 2, 4, 6,
8, and 10 years, respectively. In 1922 the number of appointive members was increased to 6, and in 1933 the term of office
was increased to 12 years. The Banking Act of 1935, approved Aug. 23,1935, changed the name of the Federal Reserve
Board to the Board of Governors of the Federal Reserve System and provided that the Board should be composed of 7
appointive members; that the Secretary of the Treasury and the Comptroller of the Currency should continue to serve as
members until Feb. 1,1936; that the appointive members in office on the date of that Act should continue to serve until
Feb. 1,1936, or until their successors were appointed and had qualified; and that thereafter the terms of members should
be 14 years and that the designation of Chairman and Vice Chairman of the Board should be for a term of 4 years.
2 Date after words Resigned and Retired denotes final day of service.
3 Chairman and Vice Chairman were designated Governor and Vice Governor before Aug. 23,1935.

Chairman P a t m a n . Thank y o u , sir.
Now the dealers in Government securities, they are selected by the
Federal Eeserve Board, are they not? There are about 20 of them
normally ?
Mr. S e l d e n . Yes. The ones that the Federal Reserve Bank of New
York conducts its Open Market operations with are selected by the
Federal Reserve Bank of New York, I believe. There are 20 of those
recognized Government security dealers.
Chairman P a t m a n . They are selected by the New York bank.
Mr. S e l d e n . I b e l i e v e s o .
Chairman P a t m a n . N o w , of course, the New York bank is like the
other banks—two-thirds of the directors of that bank are appointed by
member banks. Is that not right ?




215
Mr. S e l d e n . Yes, sir.
Chairman P a t m a n . Nobody else has anything to do with the voting
except the banks.
Mr. S e l d e n . Yes, sir.
Chairman P a t m a n . But the banks actually designate and appoint
two-thirds of the nine members of the Board ?
Mr. S e l d e n . That i s correct.
Chairman P a t m a n . Is that not giving a lot of power to the banks
in running a big agency like the Federal Reserve System? There are
12 Federal Reserve banks, and out of the 9 from each Board, twothirds of them in every case are selected by the banks by a vote. That
is the way it is, is it not?
Mr. S e l d e in . My own view is that—and I think this is a view which
you have expressed on a number of occasions in the past, sir, is that the
ownership of Federal Reserve Bank stock by the member banks is an
anomaly which should be terminated; and I further would like to see
Open Market operations conducted by the Federal Reserve Board
rather than by a separate agency, the Federal Open Market Committee,
which includes, as you know, the five members chosen from the presi­
dents of the Federal Reserve banks.
Chairman P a t m a n . The Federal Reserve Board has a secret room.
I do not suppose anybody is supposed to enter it except certain people,
and that is under very unusual circumstances and conditions. The Open
Market Committee is supposed to be composed o.f 12 members—that is,
the 7 governors and 5 presidents. That makes up the 12. The law says,
the Federal Open Market Committee, hereinafter referred to as the
Committee, which shall consist of members of the Board of Governors
of the Federal Reserve System and five representatives of the Federal
Reserve banks, shall be selected and hereinafter provided.
Now, you would think then that just 12 people would go in there.
But the seven other Presidents who are not the members of the com­
mittee come right in with them. They cannot cast a vote, but they
can use any method to make arguments that they want to, and they
are recognized for that purpose.
They have never had a transcript of the hearings of the Open
Market Committee. Did you know that ?
Mr. S e l d e n . I am a little shocked to hear that. I thought that a
transcript was taken.
Chairman P a t m a n . N o . Four people take notes on the proceedings
and then each one summarizes from his notes his understanding of
what happened. Then from that they will get up a report of the Open
Market Committee that day. It is made public 5 years later.
Now, one time we went into the question of how many people
would know about the deliberations of the Federal Open Market Com­
mittee for the purpose of determining how many people would have
an insight as to its policies. The determination was made that there
are about 2,500 people, because so many of these people who are di­
rectors of the banks of the Federal Reserve that are also interested
in other financial institutions and other banks and have considerable
interest in maybe the stock exchange and everything else. They were
about 2,500 of them that know what happened, but the rest of the
public is in the dark.




216
It occurs to me that if everybody knew what was going on, the
public interest would be better served. I have not gone into that as
fully as I would like to.
Are you concerned with this issue ?
Mr. S e ld e n . Yes. As I said I am rather shocked that there is not
an actual transcript taken. I had always assumed there was.
Chairman P a t m a n . Instead of having just the 12 members of the
Open Market Committee, they have all kinds of lawyers and account­
ants and statisticians—about 38 people altogether.
Mr. S e ld e n . D o not forget economists.
Chairman P a tm a n . Yes, sir, economists. But I am not so sure that
they pay too much attention to all of their economists. Well, na­
turally they would not because they have views that the others do not
have. But 38 people in that room, where the law says that 12 mem­
bers shall only be the Open Market Committee.
Does that seem to you like it is a correct interpretation of the statute
to let 38 come in ?
Mr. S e ld e n . Well, I think it is normal for support people to come.
That is, if a president from, let us say, the Federal Reserve Bank of
Chicago happens to be a member of the Federal Open Market Com­
mittee in a given year, I think it is normal and natural and beneficial
for him to have an economist or someone else sitting behind him who
can help him with problems that come up.
Chairman P a t m a n . I can see where that probably could be helpful.
Mr. S e ld e n . I do think that it is a little curious to have the other
seven Reserve bank presidents participating to the extent that they
apparently are participating in everything except a vote.
Chairman P a t m a n . It occurs to you that it is sort of a violation of
the letter of the law ?
Mr. S e ld e n . It seems peculiar to me. I am not a lawyer.
Chairman P a tm a n . Well, there are several things in the statute that
are not clear to me. Now you take the dealers. They have been selected
by the Federal Reserve Board. Now they have lots of power. They
are all domiciled in New York.
Now those 20 dealers, they can be banks, they can be individuals,
they can be organizations incorporated for that purpose only, or any
other form of entity that the Federal Reserve Board will accept. They
have what you might say are two tollgates on their offices. I f people
have the bonds that they bought from the Government and they want
to sell those bonds to the Open Market Committee so as to get the cash,
they deliver the bonds to one of the dealers, the bonds go through the
gate—I guess you would call it the input—and the people get their
money for the bonds. Then they have another tollgate, we will say
on the other side—that is where the bonds are sold out to the public
and get cash for them for the Open Market Committee. Of course,
there is nothing in the law that keeps them from selling those bonds
and getting cash a number of times, not just one time but a number
of times.
I think Senator Root in his statement before the Congress before
the law was passed brought that out. Are you acquainted with his
statement ?
Mr. S e ld e n . Only from your calling my attention to it earlier.
Chairman P a tm a n . S o those things are very troublesome, in view




217
of the fact that there is no limit to the amount of money that the
Federal Eeserve can create. You see, they manufacture money free
of charge. They do not even pay for the money that is manufactured.
They get that for nothing; and they create money in other ways on
the books of the bank.
That is a lot of power for a few fellows to have.
If you have any questions I will yield to you, Mr. Gradison.
Mr. G r a d i s o n . Thank y o u , Mr. Chairman.
First, with regard to "the points which you have raised, Mr. Chair­
man, about the Federal Open Market Committee, it seems to me the
central issue is who makes the decisions. I can understand how the
Federal Reserve Board with seven members would not want to have
more than seven additional votes cast by nonmembers; and therefore it
would have devised a plan like this which would permit the Federal
Reserve Board to retain control of the decisions of the Federal Open
Market Committee, but also would make it possible for the presidents
of all of the banks to have input.
My own experience has not been with the Federal Reserve System
but with the Federal Home Loan Bank System. I served for some
years. I think for 5 years, as chairman of the board of one of those
banks. My impression was that the Federal Home Loan Bank Board
did its best work when it had the maximum opportunity for input
from representatives of the regional banks, in that case also 12 from
all over the country. This input is not so much a matter of who votes,
but having a chance to be heard at the time that decisions are made.
Now, economic conditions are not the same all over the United
States at any one time. Even in this time of serious unemployment and
recession, there are parts of the United States which are doing quite
well. I think that this is the kind of factor which has to be taken into
account. Even in the operations of this committee, which has 43 mem­
bers, it is not unusual to have some people in the room when we are
making decisions who are not the elected members. They do not cast
votes, but they serve a very useful purpose by making suggestions and
assisting us in carrying out our work. We are still the ultimate deci­
sionmakers, and that is the point I am making—that when it is all
said and done, there are only in that instance 12 people who can cast
votes, and a majority of them are appointed by the President of the
United States and serve by confirmation of the U.S. Senate.
I want to get back to your testimony.
My understanding is that you would support the idea of a fiscal
management efficiency type of audit of the Federal Reserve, is that
correct?
Mr. S e l d e n . Yes, sir.
Mr. G r a d i s o n . Y o u mentioned in your statement House Concurrent
Resolution 133, which was recently passed, and which will go into
effect around May 1, with the first hearing on the Senate side, as I
understand it.
Now, what I wanted to ask you as my first question is this. Do you
feel that we should gain some experience under the operations of that
resolution before we pass additional legislation that has to do with
the way in which the Congress goes about supervising or reviewing
the work of the Federal Reserve?




218
On page 5 of your statement, you indicated that—toward the bottom
of the page—that Congress, instead of giving certain powers to the
General Accounting Office, the Congress—and I quote—“might con­
sider forming an independent monetary policy review board.”
In your judgment, does the review process embodied in House Con­
current Resolution 133, which is now law, go as far as you would like
to see us go at this stage, along the lines of having some mechanism for
congressional input and review of the decisions of the Federal
Reserve ?
Mr. S e ld e n . Well, as I indicated before, I certainly do applaud that
resolution, and I think it is an important first step. I suspect that good
legislation grows slowly rather than making big steps all at once. It
does seem to me that this does not go far enough.
I am particularly concerned that apparently there is not going to
be a good mechanism, even now with the adoption of this resolution,
for coordinating monetary policy with fiscal policy.
We have got the new Committee on the Budget—I have forgotten
the name of it exactly—which apparently is going to try to talk about
fiscal policy, in a very broad way, for the Congress. And now we are
going to have something for monetary policy.
It seems to me that these ought to be coordinated through some
mechanism. I am not at all convinced of the value of the suggestion
that I make here on page 5, of a special board. I am convinced that the
General Accounting Office is not the proper vehicle for doing this, and
I think the whole thrust of what I am talking about here is that there
is congressional responsibility which I feel has been shirked.
And now this new Resolution 133,1 think, is a very important step
toward asserting congressional responsibility, so I think that that is
very good.
Mr. G ra d iso n . I am delighted with your mention of the tying of fiscal
and monetary policy more closely together. There is a real need for that
in our economy today. Indeed, it seems to me perfectly reasonable that
as the Congress involves itself more through one mechanism or an­
other in trying to help chart the way for monetary policy—and we are
moving in that direction—that it might be very wise for the Federal
Reserve to be encouraged, or perhaps “ asked” by the Congress, at least
once a year, for its specific recommendations on fiscal policies.
Now, this is something that I really do not fully understand. It
would seem to me extremely important in the interest of coordination
to have the views of the Board of Governors of the Federal Reserve
System in terms of what would be an optimum level or range of ex­
penditures or income or deficits or surpluses, so that the Congress
would have the best possible advice we can get from that arm which is
carrying out monetary policy and so we can tie them more closely
together.
Does that make sense to you as a concept ?
Mr. S e ld e n . Well, I think so. And certainly, that is not a new burden
that is being imposed upon them, because they spend a great amount of
time and energy analyzing fiscal policy, and all other aspects of policy,
and so they are well informed.
Mr. G ra d iso n . Of course they are.
One final question. The Comptroller General, while he did not use
these exact words, did indicate that as the General Accounting Office




219
is presently staffed, it does not have the competence to carry out a pro­
gram or a policy audit of the Federal Reserve.
Indeed, he said that the first step they would have to take would be
to go out and hire five outside experts, or consultants, in order to help
carry out that task.
In view of your own high level of professional competence and
reputation, and your own experience in watching the operations of the
Fed, I would like to ask you this question.
If you were retained by the General Accounting Office as one of the
five experts to assist them, what kind of things would you look into ?
What would be the half-dozen major things that you, yourself, would
like to examine if you were given free rein to dig into that sort of
thing, from the point of view of an outside consultant ?
Mr. S e ld e n . I would like to have more detailed information than you
get through these published records of Open Market Committee meet­
ings, which are published now 45 days after the event, I think.
That is fine that those are published, but they are very vague and
general, really. One economist many years ago somewhat facetiously
suggested that the open market account manager, the vice president
of the Federal Reserve Bank of New York, should be prohibited from
being in the room when the Federal Open Market Committee has its
deliberations so that that would force the Federal Open Market Com­
mittee to have an explicit directive that could be—that there could
then be some accountability as to whether or not the actual directive
had been complied with.
So I think if there is going to be a meaningful audit by the Con­
gress or by some creature of the Congress, it has to get into more de­
tail—not waiting for 5 years, but current information about what the
intent was.
For example, if we look at what happened in this country between,
let us say, July 1974 and February 1975, we all know that the rate of
monetary expansion in this period was slow. And apparently it was
slow even by the standards that the members of the Federal Open Mar­
ket Committee themselves were holding to. One cannot be certain of
this, but my discussions lead me to believe that even the Fed officials
were surprised at the relative slowdown in the rate of monetary
growth. How can this happen ? I think this is a policy mistake. I think
that it probably reflects the adoption of improper operating proce­
dures, and I think somebody ought to call them to account for that so
that we do not have repetitions again and again of this kind of mistake.
Mr. G ra d iso n . I s it possible—is it just possible that the failure of
monetary aggregates to grow as rapidly as the Fed might desire, or as
you and I might desire, might be the result of circumstances com­
pletely beyond their control such as a lack of demand for loans ?
Mr. S e ld e n . It is possible, but this is the kind of standard examina­
tion question that we give our students at the University of Virginia
and elsewhere about whether monetary policy is like a string that you
can pull with, but cannot push. It has been alleged that the situation
of the last 6 or 8 months is, indeed, an illustration of the string that
you cannot push.
But I do not think that is right. I think, really, the problem is that
the Fed has been dedicated to an interest rate target instead of a mone­

50-365 0 - 75 - 15




220

tary aggregate target. Thjey were rather alarmed by the rate at which
interest rates were falling in the latter half of 1974. They thought that,
for balance of payments reasons, for example, and for other reasons,
too, just maintaining orderly financial markets, that they should guide
ancl moderate this decline so that it would not be too rapid and
disorderly.
Clearly they had the means to do that. But the consequences of do­
ing it were that the monetary growth did not go up as rapidly as it
could. Specifically, sir, if there is not a demand for loans—and we do
know that demand for loans has been weak in recent months because
of the recession—if the Fed creates bank reserves, banks will still find
it highly profitable to use these reserves to buy U.S. Government se­
curities, or other types of open market assets.
There does not have to be a demand for loans in order for the
banking system to create money. All there has to be is the wherewith­
al!, the reserves.
Mr. G ra d iso n . What if the banks use those funds to reduce their
own indebtedness and improve their own liquidity situation?
Mr. S e ld e n . They have, of course, paid off indebtedness to the Fed
itself, and probably their Eurodollar borrowings from Europe, and
maybe borrowings in commercial paper markets, but I think it is
simply a question of magnitudes.
I f the Fed creates reserves and the banking system mainly uses
those reserves to pay off debt, the Fed simply creates more reserves.
There is some amount of reserve creation which will have the desired
result. And I think the Fed knows that that is true. I think they have
simply been guided by an interest rate objective, trying to keep the
rates from falling too rapidly, and it has had this unfortunate
consequence.
Mr. G ra d iso n . Thank you. Thank you, Mr. Chairman.
Chairman P a t m a n . With your permission, I will continue what
1 brought up awhile ago about the bonds in the Open Market
Committee.
The Federal Reserve Act was signed by Mr. Woodrow Wilson,
2 days before Christmas, in 191'3. And I have here the amount of
bonds held by the Open Market Committee every year since that time.
The first year, it was $16 million. The next year it was $55 million.
The next year $122 million. And then, $300 million. And then in 1924
$540 million; 1929, $511 million, and it reached $1 billion in 1932.
Many people believe—and I believe there is much justification for
believing it—that this was created for the purpose of saving the banks,
or the Federal Reserve, the trouble of going before a congressional
committee. You know, the Constitution says that no expenditure shall
be made of the public’s money unless it is appropriated by the Congress
of two Houses, and signed by the President.
Well, the Federal Reserve is getting around that through Open
Market Committee transactions. Now they have bought, in all, up to
date, in their 61 years of existence, $86 billion in Government bonds.
The effect of this $86 billion is very inflationary. There is $86 billion
in the pockets and tills of the people that would not be there were
it not for the creation of this money.
That is correct, is it not, Professor Selden ?
Mr. S e ld e n . Yes, sir.




221

Chairman P a t m a n . N o w then, when these bonds are paid, we do not
know what happens to the proceeds.
Mr. G ra d iso n . Mr. Chairman?
Chairman P a t m a n . Yes, sir.

Mr. G ra d iso n . The witness mentioned a moment ago that he would
like to see, or like to have seen perhaps, a more rapid increase in
monetary growth in the last 6 months or a year than we have seen.
You mentioned a moment ago that the ownership, or the holdings
of those large amounts of securities by the Federal Reserve is infla­
tionary and under certain circumstances I am sure that is true.
Chairman P a t m a n . Not the ownership of the bonds, but it is the
money that is paid out for the bonds.
Mr. G ra d iso n . Precisely. Now, if additional infusions of funds into
the credit markets were done by the Federal Reserve, to meet Profes­
sor Selden’s stated objective, then this total amount of securities owned
by the Federal Reserve today would be even larger. And the infla­
tionary potential would be even greater.
So that I just simply want to be sure that we are talking about the
same thing. Because the chairman has just indicated, and I think very
appropriately, the inflation potential of this situation.
And yet Dr. Selden has said that he does not think we have gone
far enough along those lines. Or do I misunderstand you ?
Chairman P a t m a n . When this $86 billion is paid out, the bonds
received in the portfolio are not canceled. But they should be canceled
because the debt is canceled.
Is that not right, professor?
Mr. S e ld e n . That sounds reasonable.
Chairman P a tm a n . If the debt were canceled, the people would not
have to pay interest on them. But the fact is that they are paying $6
billion a year in interest on those bonds.
Now Mr. Martin said that when they are paid for once, that is all
they should be paid for.
Mr. S e ld e n . I wonder if I could have an opportunity to respond to
Mr. Gradison’s comment of a moment ago ?
Chairman P a t m a n . Certainly you may.
Mr. S e ld e n . Of course the first half of 1974 was quite different from
the second half of 1974, and we had excessive monetary expansion in
the first half of 1974 and that is part of the reason why all those
bonds came into the ownership of the Fed.
But, we had a slowdown after that. I certainly agree with what was
said about the inflationary potential of Government security purchases
by the Fed. That is what has been wrong with our economic policy for
several years. We have had excessive monetary growth, and I am very
much afraid that the excessive monetary growth that took place during
most of the period from 1970 up until the middle of 1974 is going to
ensure inflation in the 6 to 8 percent per year range through the end
of 1978.
So I am very responsive to the idea that we have an inflation prob­
lem and that we have got to do something about it. But I do think in
the second half of 1974 there was a lull which took place; and I think
that was an unfortunate lull.




222

However, I do not think you can really atone for the earlier error
of excessive money creation by having a period of no money creation
lasting as long as 6 months. I think that is going too far.
Mr. G ra d iso n . Mr. Chairman, may I pursue this line of inquiry ?
Chairman P a tm a n . May I get this in the record, please ?
Without objection, I would like to insert in the record at this point,
a statement of the bonds held in the Open Market Committee, by years,
from the time the bank was created on up to today. And also the net
earnings before payments to the U.S. Treasury that indicates that the
banks earn a lot of money. They earn only 3 percent of their income.
The rest is interest paid on Federal securities. And their operating
expenses have increased terrifically in the last very few years.
[The following material was submitted for the record by Chairman
Patman:]
BO NDS HELD IN OPEN MARKET COMMITTEE, NET EARNINGS ON BO NDS BEFORE PAYMENTS TO U.S. TREAS­
URY, OPERATING EXPENSES OF ALL FEDERAL RESERVE BANKS; DOLLAR AND PERCENTAGE CO M PARISON S
OF EXPENSES WITH PREVIOUS YEARS, 1914-74

Bonds held in
open market
committee

Year
1914-15________
191 6
191 7
191 8
191 9
192 0
192 1
192 2
192 3
192 4
192 5
192 6
192 7
192 8
192 9
193 0
193 1
193 2
193 3
193 4
_
193 5
193 6
193 7
193 8
_______
193 9
194 0
194 1
194 2
194 3
194 4
194 5
_______
194 6
194____________ 7
194_____8 ___
1949..................
195 0
195 1
_______
195 2
______
195 3
_______
195 4
195 5
195 6
_______
_______
195 7
195 8
195 9
196 0
196 1
196 2
196 3
196 4
______

Net earnings
before payments
to U.S. Treasury

$16,000,000
$-141,459
55,000,000
2,750,998
122,000,000
9,582,067
239,000,000
52,716,310
300,000,000
78,367,504
287,000,000
149,294,774
234,000,000
82,087,225
436,000,000
16,497,736
134,000,000
12,711,286
540,000,000
3,718,180
375,000,000
9,449,066
315,000,000
16,611,745
617,000,000
13,408,249
228,000,000
32,122,021
511,000,000
36,402,741
729,000,000
7,988,182
817,000,000
2,972,066
1,855,000,000
22,314,244
2,437,000,000
7,957,407
2,430,000,000
15,231,409
2,431,000,000
9,437,758
2,430,000,000
8,512,433
2,564,000,000
10,801,247
2,564,000,000
9,581,954
2,484,000,000
12,243,365
2,184,000,000
25,860,025
2,254,000,000
9,137,581
6,189,000,000
12,470,451
11,543,000,000
49,528,433
18,846,000,000
58,437.788
24,262,000,000
92,662,268
23,350,000,000
92, 523,935
22, 559,000,000
95,235,592
23,333,000,000
197, 132,683
18,855,000,000
226,936,980
20,778,000,000
231,561,340
23,801,000,000
297,059,097
24,697,000,000
352,950,157
25,916,000,000
398,463,224
24,932,000,000
328,619,468
24,785,000,000
302,162,452
24,915,000,000
474,443,160
24,238,000,000
624,392,613
26,347,000,000
604,470,670
26,648,000,000
839,770,663
27,384,000,000
963,377,684
28,881,000,000
783,855,223
30,820,000,000
872,316,422
33,593,000,000
964,461, 538
27,044,000,000
1,147,077,362




Operating
expenses
$2,320,586 .
2,273,999
5,159,727
10,959,533
19,339,633
28,258,030
34,463,845
29,559,049
29,764,173
28,431,126
27, 528,163
27,350,182
27,518,443
26,904,810
29,691,113
28,342,726
27,040,664
26,291,381
29,222,837
29,241,396
31,577,443
29,874,023
28,800,614
28,911,600
28,646,855
29,165,477
32,963,150
38,624,044
43,545,564
49,175,921
48,717,271
57,235,107
65,392,975
72,710,188
77,477,676
80,571,771
95,469,086
104,694,091
113,515,020
109,732,931
110,060,023
121,182,496
131,814,003
137,721,655
144,702,706
153,882,275
161,274,575
176,136,134
187,273, 357
197,395,889

Expenses—
dollar
comparison
with previous
year

$-46,687
+2,885,728
+5,799,806
+8,380,100
+8,918,397
+6,205,815
-4,904,796
+205,124
-1,333,047
-902,963
-177, 981
+168,231
-613,633
+2,786, 303
-1,348,387
- 1 , 302,062
-749,283
+ 2 , 931,456
+18, 559
+2,336,047
-1,703,420
-1,073, 409
+110, 986
-264,745
+518,622
+3,797,673
+ 5 , 560,894
+4 , 921, 520
-5,630,357
-458,650
+8, 517,836
+8,157,868
+7 , 317,213
+4,767,488
+3,094,101
+14,897, 315
+9,225,005
+8,820,929
-3,782,089
+327,092
+11,122,473
+10,631, 507
+5,907,652
+6,981,051
+9,179, 569
+7,392, 300
+14, 861,559
+11,137, 223
+10,122, 532

Expenses—
percentage
comparison
with previous
year

-

2.01

+126.9
+112.41
+76.46
+46.11
+21.96
-1 4 .2 3
+ .6 9
+ 4 .4 8
- 3 .1 8
-.6 5
+ .6 2
- 2 . 23
+10. 36
- 4 . 54
- 4 . 59
-2 .7 7
+11.15
+ .0 6
+ 7 .9 9
-5 .3 9
-3 .5 9
+ . 39
-.9 2
+1 .8 1
+13.02
+ 1 7.14
+12. 77
+12.93
-.9 3
+17.48
+14.25
+11.19
+6 .5 6
+3 .9 9
+18.49
+ 9 .6 6
+ 8 .4 3
-3 .3 3
+ .3 0

+10.11
+ 8 .7 7
+ 4 .4 8
+ 5 .0 7
+ 6 .3 4
+ 4 .8 0
+9 .2 2
+6 .3 2
+5.41

223
BONDS HELD IN OPEN MARKET COMMITTEE, NET EARNINGS ON BONDS BEFORE PAYMENTS TO U.S. TREASURY,
OPERATING EXPENSES OF ALL FEDERAL RESERVE BANKS; DOLLAR AND PERCENTAGE COM PARISONS OF
EXPENSES WITH PREVIOUS YEARS, 1914-74— Continued

Bonds held in
open market
committee

Net earnings
before payments
to U.S. Treasury

_ 40,768,000,000
_
_ 44,282,000,000
_
_ 49,112,000,000
_
_ 52,937,000,000
_
_ 57,154,000,000
_
_ 62,142,000,000
_
_ 70,000,000,000
_
_ 70,600,000,000
_
_ 76,000,000,000
_
_ 81,059,000,000
_

1,356,215,455
1,702,095,000
1,972,376,782
2,530,615,569
3,097,829,686
3,567,286,887
3,440,451,196
3,328,112,382
4,440,998,464
5,654,000,000

204,290,186
207,401,126
220,120,846
242,350,370
274,973,320
321,373,386
377,000,000
414,000,000
495,000,000
547,000,000

Total____ _________________

41,757,146, 741

5
6
7
8
9
0
1
2
3
4

Expenses—
percentage
comparison
with previous
year

+6,894,297
+3,110,940
+12,719,720
+22,229,524
+32,622,950
+46,000,000
+56,000,000
+37,000,000
+81,000,000
+52,000,000

+ 3 .4 9
+ 1 .5 2
+ 6 .1 3
+10.10
+13.46
+1 7
+1 7
+10
+19.56
+10

6,461, 414, 578

Year
196
196
196
196
196
197
197
197
197
197

Expenses—
dollar
comparison
with previous
year

Operating
expenses

Net earnings before payments to U.S. Treasury— total 1914-74— $41, 757,146, 741
1970-74 total net earnings before payments to U.S. Treasury— 20,430,848,929
49 percent of the net earnings before payments to U.S.
Treasury since 1914 have occurred since 1970.
Total operating expenses 1914-74_______________________________
6,461,414,578
1970-74 total operating expenses-----------------------------------------------2,154,373,386
33 percent of all the operating expenses since 1914 have
occurred since 1970.

Chairman P a t m a n . Mr. Hannaford ?
Mr. H a n n a f o r d . Thank you, Mr. Gradison. I am in no great hurry,
but I got here so late that I guess I have first choice. I felt especially
guilty about being late for this meeting, Mr. Chairman, since I was
the one who suggested we have subcommittee hearings on Friday. But
I was tied up in my office.
I certainly found your statement most worthwhile, Dr. Selden, I
thought you said some things that were quite constructive, and dif­
ferent from what we have heard before.
I assume from your statement that your position would be some­
thing like this. That you would subscribe to what we are proposing in
regard to a one-time-only audit, addressing itself to auditing the insti­
tution and its efficiency to be sure that the house is in order, but not
to lock it into an annual audit?
Mr. S e ld e n . I think that that is right. In fact, having read just last
evening General Staats’ testimony of earlier this week, I gather that
he is not too eager to be in a regular annual cycle either.
Mr. H a n n a f o r d . And that you would not want to use that audit as
a vehicle for making a subjective judgment about the efficacy of the
monetary policy being pursued by the Fed?
Mr. S e ld e n . I do not think that that is the best forum for that kind
of discussion.
Mr. H a n n a f o r d . And, that you approve House Concurrent Resolu­
tion 133?
Mr. S e ld e n . Yes, sir.
Mr. H a n n a f o r d . As a sort of stepping off place for Congress to
exercise oversight upon its responsibilities in monetary policy? And,
perhaps some relationship between that and fiscal policy?
Mr. S e ld e n . Yes, sir, I think it should go further, probably.
Mr. H a n n a f o r d . I agree with all of this. So, when somebody says
something you agree with, you think they are awfully smart. I just



224

would say that your statement stops at the edge of my understanding.
And that is, I do not know where we go from there.
You implied .that there is another step that Congress ought to take.
And, if you have that instruction in your catalog of lectures or any­
thing of that sort, I certainly would appreciate it, or if you could say
anything on that subject now ?
Chairman P a tm a n . And, if you desire when you receive your trans­
script, you may ^
extend your remarks and include other information
which is relevant.
Mr. H a n n a f o r d . Yes; but I would appreciate it if you would just
have a brief remark on that. Dr. Selden.
Mr. S e ld e n . Well I really am not very familiar with the way in
which the Congress organizes itself to do its business. It does seem
to me that the Joint Economic Committee would be a good forum.
It seems to me that it should involve both Houses of the Congress
simultaneously. There may be some other reason why the Joint Eco­
nomic Committee is not the proper place, but it seems to me that that
would not delimit it as to fiscal or to monetary, nor would it be limited
as to House or Senate.
The JEC would seem to me to be in a unique position to take an
overview of the whole position. So, that would be my off-the-cuff kind
of reaction to that.
Of course, this undertaking would require staff support. You can­
not just do it on top of all the other duties that you have. I think
that there would have to be adequate staff, and I am not sure what
adequate staff is.
Mr. H a n n a f o r d . Well, that is the kind of thing that I think needs to
be done, and you are really going to have to hire when you talk about
adequate staff, for such a judgment.
You are going to be talking about staff that is competent enough in
these subjects to sit in judgment on the judges. Not necessarily that
they are wiser than the judges, but that the judges know there is some­
one there sitting in judgment on them.
Mr. S e ld e n . We know that the staff of the Federal Reserve Board
and the Federal Reserve Banks is highly competent. And I think
if we are going to give a searching criticism of their actions, we are
going to have people of comparable competence to do so.
Mr. H a n n a f o r d . Yes; but people who might well be looking at it
from a different point of view ?
Mr. S e ld e n . Absolutely.
Mr. H a n n a f o r d . Very good. Well I appreciate that. If I have any
time left, I will yield it back to the chairman.
Chairman P a t m a n . Thank you, Mr. Hannaford. If it meets with
the approval of you gentlemen, we will stand in recess until Tuesday
morning.
Mr. H a n n a f o r d . Mr. Gradison had a statement to make.
Chairman P a tm a n . Yes, sir, if you would like to, g o ahead.
Mr. G ra d iso n . I thank the chairman. I think the witness today
has been extremely helpful and I have no additional questions at
this time.
Chairman P a tm a n . And I want to express my appreciation to you.
Your statement is excellent. It is thought-provoking, and it will
help us greatly. Thank you very much for your contribution; and




225
if we desire to hear from you further, we will get in touch with you
and arrange for some time that will be mutually satisfactory.
Without objection we will stand in recess until 10 a.m., Tuesday,
April 29,1975, at which time Dr. Arthur Burns has been notified that
we want him as a witness. He has not exactly said that he is accept­
ing our invitation, but he has just used the argument that he is awfully
busy and he just did not have time to do anything else at this time.
The hearing is recessed until Tuesday, April 29,1975, at 10 a.m.
[Whereupon, at 11:15 a.m., the subcommittee recessed to reconvene
at 10 a.m., Tuesday, April 29,1975.]







AUDIT OP THE FEDERAL RESERVE

TUESDAY, APRIL 29, 1975

of

H ouse of R e p r e s e n t a tiv e s ,
S u b c o m m it t e e o n D om estic M o n e t a r y P o l ic y
t h e C o m m it t e e o n B a n k i n g , C u r r e n c y a n d H o u s in g ,

'Washington, B.C.
The subcommittee met, pursuant to notice, at 10:05 a.m., in room
2128, Rayburn House Office Building, Hon. Wright Patman [chair­
man of the subcommittee] presiding.
Present: Representatives Patman, Minish, Ford, Hannaford, Neal,
Blanchard, and Gradison.
Chairman P a t m a n . The clerk will call the role.
The C l e r k . Chairman Patman.
Mr. P a t m a n . Here.
The C l e r k . Mr. Minish.
Mr. Minish . Here.
The C l e r k . Mr. Ford.
[No response.]
The C l e r k . Mr. Hannaford.
Mr. H a n n a f o r d . Here.
The C l e r k . Mr. Neal.
[No response.]
The C le r k . Mr. Blanchard.
[No response.]
The C l e r k . Mr. Barrett.
[No response.]
The C l e r k . Mr. Conlan.
[No response.]
The C l e r k . Mr. Hansen.
[No response.]
The C l e r k . Mr. Gradison.
[No response.]
The C l e r k . Mr. Neal.
Mr. N e a l . Here.
The C le r k . There are four members present, Mr. Chairman.
Chairman P a t m a n . The subcommittee will please come to order.
The witnesses for this morning’s hearings on H.R. 4316, a bill to au­
thorize and direct the General Accounting Office to conduct a full scale
audit of the Federal Reserve System, are: Ralph Nader, consumer ad­
vocate; Robert J. Freeman, professor of accounting at the University
of Alabama, and Robert Bartell, public relations consultant and tax
program coordinator of Liberty Lobby.
Welcome to the hearings, gentlemen. I am sure that your testimony
will be of the utmost interest to all members of the subcommittee.




(2 2 7 )

228

We will hear Mr. Nader first. We will ask you to present your state­
ment first and then yield to questions. Mr. Nader, you are recognized,
sir.
STATEMENT OF RALPH NADER, CONSUMER ADVOCATE

Mr. N a d er. Thank you, Mr. Chairman, members of the subcommittee.
The Federal Reserve System is the only domestic agency of any im­
portance in the Federal Government which has refused to consent to
an examination and audit by the General Accounting Office, which is
the arm of Congress. This has deprived Congress of the ability to
evaluate both the efficiency of Federal Reserve operations and the ef­
fectiveness of Federal Reserve programs.
As a result, Congress does not have the information necessary for
informed legislative judgments. This is additionally true, because Con­
gress has no appropriations leverage over the Federal Reserve, which
is not funded by appropriated funds.
In a nutshell, this is precisely why this bill is important. Without
this bill, the legislative branch of Government and our system of checks
and balances has been removed from any role, herein.
It is often stated by way of justification for the status quo that the
Federal Reserve deals with highly delicate and highly complex mate­
rial relating to the Nation’s money supply, among other matters, and
that it is an independent agency and must retain this independence
from any accountability. It would call accountability, political
interference.
The premise that the Federal Reserve is independent has to be ques­
tioned. It is not independent of the banking industry. That alone,
quite apart .from principles of checks and balances and accountability,
would command support for the bill that you have before you. Any­
body who even tries to contend that the Federal Reserve retains an
arms-length relationship and an independence with the banking in­
dustry, which is interlocked with personnel and other connections with
the Federal Reserve tightly all over the country, is trying to support
an insupportable assertion.
Legislation authorizing a full-scale. General Accounting Office ex­
amination and audit of the Federal Reserve System on a recurring
basis is needed. There is probably no human institution on earth that
does not develop undesirable patterns of behavior, to say the least, if it
is insulated from public scrutiny and examination, and, when that
human institution is an institution that deals with money, big money,
the likelihood of a deteriorating posture is even greater.
But, to make that judgment requires more than an analysis of the
end results of the Federal Reserve’s operations. It requires a penetrat­
ing analysis of how the Federal Reserve arrives at its decisions, who
influences the decisions, and how it proceeds to expend its moneys in
implementing these decisions.
General Accounting Office examinations have never been accused of
being politically tainted, as far as I know; in fact, the GAO’s verbal
style is so severe that often, when it finds the most outrageous examples
of waste in the Federal Government, its style precludes media cover­
age*
Thus, this bill is not assigning a function to a congressional com­
mittee; it is assigning a function to a highly nonpartisan, technical




229
and verbally subdued investigative arm of the U.S. Congress. Finan­
cial audits of the Federal Reserve System’s operations will determine
if expenditures are justified; for example, you have put in the record,
Mr. Chairman, examples of large expenditures, relatively speaking,
for banquets and for dues and for moving expenses, all of which, if
they do not add up to the largest cost overruns that we are accustomed
to observing in other Departments of Government, still add up to a
state of mind that might demand greater efficiency, but also greater
accountability.
I believe that the entire Federal Reserve System spends almost onehalf billion dollars a year, and, even on today’s scale, that is not an
insignificant figure. A cost analysis of the Federal Reserve clearing
systems is essential for sound legislative judgment in choosing between
alternative payment systems.
Reports which evaluate Federal Reserve programs are required in
order to determine whether the Fed is adequately handling problem
banks or adequately protecting consumers. Finally, detailed informa­
tion on credit and monetary policy decisions is essential in* order to
enable Congress to coordinate fiscal policy with the Federal Reserve’s
monetary policy, and to insure that actions taken by the Federal
Reserve are not arbitrary or capricious, but, rather, supported by solid
economic data.
After all, the Fed’s decisions are not exactly noncontroversial. They
not only breed controversy in Congress, but they breed controversy
throughout the country in public dialog, and it would help in develop­
ing a consensus about what should be done to have a more enlightened
public, to understand why the Federal Reserve arrives at these deci­
sions. After all, a number of bankers know why the Federal Reserve
arrives at these decisions. A number of their delegates know why they
arrive at these decisions. Why should private bankers be put in such
a preferred situation ?
The Open Market Committee is a study all by itself in terms of how
these members are chosen, but it is quite clear that the banking indus­
try has a very powerful role in that decision.
There is presently no mechanism to police operational expendi­
tures of the Federal Reserve System. Given the natural tendency of
Federal bureaucracies to generate wasteful expenditures, this is a
serious defect. The Federal Reserve has unlimited access to the interest
on the $80 billion or $85 billion of Government securities, which are
held by the Federal Reserve System. As a result, the Federal Reserve
has no need for appropriations from Congress and is never required
to submit a budget to congressional scrutiny.
Ideally, Congress should enact legislation that would credit all inter­
est on these Government securities to the U.S. Treasury and, thus,
require the Federal Reserve, like any other Federal Agency, to seek
appropriations from Congress. Until this basic reform is enacted, how­
ever, the Federal Reserve System’s operating budgets should be sub­
jected to this proposed GAO audit.
Now, in the last session of Congress, Mr. Staats, in order to clarify
the dialog, I assume, articulated three types of audits, which the GAO
could do. One dealt with an audit:
Both for the purpose of arriving at opinions as to whether financial transactions
are carried out in accordance with applicable legal requirements and are properly




280
accounted for and whether the financial reports present fairly the financial posi­
tion and results of operations of the various entities in the system.

Type 2 would include the first, which I just quoted, function, but
in addition would include: Selected examination of the management of
resources, such as computers and other equipment, buildings and per­
sonnel, to evaluate the efficiency and economy with which resources are
procured and used.5 And, type 3 would include type 1 and type 2, but
5
would also include, “ reviews of the results of the programs and activi­
ties of the system, including the extent to which its established objec­
tives are being achieved.5
5
Now, type 3 would include a GAO study of the bank examination
system by the Federal Reserve, which, I think, is something that is
very much in need of analysis. There is probably no more secret and
more murkier area in the area of Federal regulation broadly con­
ceived than bank examinations. I also assume that it would go into how
the Federal Reserve handled the Franklin National Bank debacle.
Now, the public deserves an explanation of not only what happened to
Franklin National in detail, but how the Fed really bailed it out.
After all, it lent to the Franklin National more than $1 billion, and
the continuing argument that the public should not be told the truth
because the public would be unduly alarmed, is one that is antithetical
to any respect for an informed public or the operations of a democracy.
Obviously, if you carry this unduly, alarm the public syndrome too far,
the public will be given one major unduly alarmed experience, which
could be the collapse of the banking system.
There are, as T mentioned, indications that certain expenditures by
the Federal Reserve System are wasteful or inappropriate. The ques­
tion is not merely the dollar level of these expenditures; the question
is whether these expenditures are lubricating improperly fraternal re­
lationships between the Federal Reserve and private banking institu­
tions, and that is a sufficient reason, quite apart from the dollar level
of the waste, to go into these matters.
Some of these abuses involve activities of the various Federal Re­
serve banks. In the midst of the current economic crisis, while the entire
Federal Reserve System had encountered serious difficulties in achiev­
ing its money supply targets, the Federal Reserve Bank of Cleveland
diverted a substantial amount of the time and energy of its economic
staff to a planning group study of the ways in which the bureaucratic
power of the Federal Reserve System could be enhanced. This plan­
ning group has produced, at a cost of $100,000, a grandiose study en­
titled, “ Scenario for Federal Reserve System in the Year 2000.5 The
5
study concludes, and I quote:
The Federal Reserve will thus accede to the duties of the Comptroller of the
Currency, the Federal Home Loan Bank Board, and the supervisory authority
for Federal credit unions, as well as the duties of parallel supervisory authori­
ties in the states. The Federal Reserve will also administer the Federal Deposit
Insurance System for all banks, assuming the functions of the FDIC and the
FSLIC.

Questionable expenditures, Mr. Chairman, relating to this study
which produced considerable irritation among some of the staff in the
Cleveland bank. Perhaps, your committee could inquire further into
the genesis of this eifort and why it was undertaken, and at what level
was the go-ahead given.




231
Mr. P a t m a n . May I interrupt? Do you have a copy of that study
for the record ?
Mr. N a d e r . We w i l l try and produce a copy of that study.
Mr. P a t m a n . Without objection, it may be inserted in the record.
[The study referred to entitled, “ Scenario for Federal Reserve
System in the Year 2000,” may be found in appendix E.]
Mr. N a d e r . There is a tendency in evaluating the Federal Reserve,
Mr. Chairman, to evaluate it in its past, and while that is necessary,
I think, it is also very important to evaluate it and its projected future
not only in terms of the kind of projected consolidation here under its
aegis of other bank regulatory functions, which would give us, obvi­
ously, the most awesome power without consumer accountability, but
also to see what kind of direct consumer impact that the reserve sys­
tem’s activities would have.
For instance, is the check clearing system encouraging the develop­
ment of electronics funds transfer, with all its implications for further
removing the consumer from a contractual feeling of paying his or
her bills and further removing the control of the consumer over his or
her money, quite apart from the privacy aspects of this system.
Questionable expenditures have also been made by the Board of
Governors of the Federal Reserve System. In 1974, the Chairman of
the Board of Governors, Dr. Arthur F. Burns, conducted a lobbying
campaign of dubious legality designed to block enactment of the very
same legislation which the subcommittee is now considering, a GAO
audit of the Fed, and I think there is little doubt that he was spending
his time urging influential people in the financial community around
the country to urge upon the Congress the defeat of the proposed
legislation. And I think that that is contrary to a Federal statute which
prohibits Federal officials from reaching out to the public in order to
indirectly lobby the Congress. They can directly, in effect, lobby the
Congress by their urgings but not by building up a constituency to
lobby the Congress from the overwhelming vantage point of the execu­
tive branch of Government utilizing taxpayer funds. The Board of
Governors has also recently expended a considerable sum of public
money on legal expenses in order to prevent the disclosure of informa­
tion on interest rates on consumer loans. Disclosure of this information
is clearly in the public interest. All of these expenditures have reduced
the size of interest payments to the Treasury and this has come at the
taxpayer’s expense.
As everybody knows, the Federal Reserve System operates an elabo­
rate check clearing system. In 1974, the System handled 35 billion
pieces of paper worth $24 trillion. The volume of checks processed is
increasing almost geometrically and the clearinghouse may soon ex­
perience the same overload that is presently causing the deterioration
of the Postal Service.
Recently, several Federal Reserve banks, including the banks of
Atlanta, San Francisco, and Minneapolis, have begun to operate auto­
mated clearinghouses which substitute electronic funds or magnetic
tapes for paper entries. Both the traditional check clearing systems
and the new automated clearinghouses are, in effect, public utilities
and it is essential for Congress to determine how efficiently they are
operated by the Federal Reserve System. The substitution of electronic




232

funds for checks and cash raises serious questions of public policy. It
is not all one way. There are considerations for this and considerations
against it. But unfortunately, the movement for EFTS is going for­
ward before the study of it is completed. That includes the Presidential
Commission, whose directors have not yet been appointed, as well as
congressional deliberations.
In addition to the difficult task of providing for adequate consumer
safeguards, a decision must be made as to whether these payment
systems can be more efficiently operated by a public utility approach
or by competition between private systems.
The Congress and the National Commission on Electronics Funds
Transfers simply cannot make this judgment without a detailed cost
analysis of the clearinghouse operations of the Federal Reserve Sys­
tem. Consequently, I believe the GAO should be given authority to
conduct such a cost analysis of the Federal Reserve’s clearing systems.
Moving briefly to the subject of evaluation of Federal Reserve pro­
grams, the Federal Reserve System collects a massive amount of data
on banking operations. We know, for example, that they have different
banks typed in terms of their stability, in terms of whether they are in
trouble or whether they are not in trouble, and this information is
highly confidential. Unfortunately, information which would be of
benefit is not always collected and disseminated by the Federal Re­
serve even though it could disseminate it publicly.
The Federal Reserve has been unwilling, for example, to collect and
make public for individual banks the following important informa­
tion : Interest rates on consumer loans; the mortgage lending pattern
by geographic area; and the amount of small business loans.
The GAO should evaluate the data collection and dissemination po­
tential, and actual by the Federal Reserve. No longer is the Federal
Reserve, for example, in the situation of not having consumer protec­
tion responsibilities because we know it has. Congress has given it
consumer protection responsibilities. This Federal Reserve, as the
lender of last resort, plays a crucial role in handling problem banks
and bank failures. These operations have been shrouded in secrecy and
Congress has had only limited access to the information necessary for
an. informed judgment on the need for new legislation that would pro­
vide for more efficient handling of problem banks and bank failures.
The GAO should conduct an investigation of the Federal Reserve’s
operations in this area. Suppose several major banks in this country
collapse? Would not Congress then be given the burden to try to do
something about it? And on what basis of information is it going to
have to try to foresee and forestall such situations. Already some
banks have collapsed and it could get worse.
The Federal Reserve is also charged with enforcing consumer pro­
tection laws against system member banks other than national banks.
The Fed and other banking agencies, however, have been slow to amend
their banking procedures to encompass consumer protection as well as
their traditional concern with bank solvency. Surveys by public in­
terest research groups in 11 States—that is Indiana, New York, Maine,
Florida, New Jersey, Minnesota, California, Massachusetts, Iowa,
Michigan, North Carolina—have documented that some banks have
not been complying with the truth-in-lending laws. Banks have also
failed to provide consumers with the name and address of credit bu­




233

reaus when a loan has been denied on the basis of adverse credit
information.
I think the members of the subcommittee will recall that Congress
passed a law once giving consumers the right to have that information
based on a denial of credit.
In December 1974, the U.S. Commission on Civil Rights found that
the Federal Reserve had failed to enforce compliance with title VIII
of the 1968 Civil Rights Act. The GAO should conduct an investiga­
tion of the examination procedures of the Federal Reserve to determine
whether violations of consumer rights and civil rights are being
detected.
The Office of Saver and Consumer Affairs should be the focal point
of this inquiry. The claim that examination reports and data on prob­
lem banks may contain data on individual banks which should not be
publicly disclosed does not provide support for the withholding of
this information from the GAO and Congress. The GAO receives in­
formation in confidence from many agencies, including the Defense
Department, State Department, Federal Home Loan Bank Board, in
fact. The GAO is permitted to examine the examination reports and
the problem bank reports of the Federal Home Loan Bank Board, the
very same reports denied by the Federal Reserve.
Even when violations of consumer protection have been detected,
the Federal Reserve has not provided remedies for the injured con­
sumers. The Federal Reserve has not used its cease-and-desist power
to protect consumers, and even if it were used, it is doubtful that it
would do more than enjoin future violations.
Administrative fines that are returned to the consumer and notice
of the right to bring suit will most likely be necessary to provide mean­
ingful remedies for consumers whose rights have been violated. The
GAO should examine the Federal Reserve’s enforcement procedures
and make recommendations to Congress for additional enforcement
and remedial powers for the Fed.
And finally, a review of the Federal Reserve’s monetary and credit
policy, which is perhaps the most controversial area and the most im­
portant function of the Federal Reserve System. The Board of Gov­
ernors and the Federal Open Market Committee frequently review
data on the state of the economy, choose economic objectives, and then
select the targets for the money supply that will hopefully move the
economy toward the chosen goal. The minutes of the meeting of the
FOMC are not published until 5 years after the meeting. A cryptic
summary of the meeting which fails to spell out the FOMC’s long.run
objectives or monetary targets is published 45 days after the meeting.
The GAO and Congress should be able to examine the transcript of
all meetings of the FOMC without any timelag. Congress cannot co­
ordinate fiscal policy with monetary policy unless it is fully apprised
of the data and projections used by the FOMC, the longrun economic
projections chosen, and the money targets selected.
The economy cannot be rationally managed until mutual under­
standing develops between fiscal and monetary authorities.
Just some months ago, at the same time that Dr. Bums was vigor­
ously opposing any credit allocation suggestions, he was sending letters
to the heads of the various branch banks urging them to urge the banks
in the cattle areas to loan money to cattlemen rather than have these




234

banks take their money and send it to the profit centers of the larger
Chicago and New York banks.
Well, that is a kind of credit allocation, jawboning, and those let­
ters were not easily accessible. That is just an example of information
which would put on the table whether Dr. Burns is really against
credit allocation or whether he is against Congress developing criteria
for credit allocation. That is just one example of how an understand­
ing of the Federal Reserve’s true intentions and true policies can be
furthered by using your arm, the GAO, to find out what is going on.
Congress should have immediate access to the data and projections
that are used by the FOMC in selecting monetary targets. Chairman
Burns has often argued that disclosure of the FOMC decisions and
data would result in disruption in money markets. Yet even the con­
servative editors of Business Week have recently called for the dis­
closure of monetary targets to both Congress and the public. Full
public disclosure of this data would work to stabilize financial markets
and restore confidence in a better managed Federal Reserve.
Most important, full GAO access to the FOMC operations would
work to insure that monetary targets are not arbitrary or not sup­
ported by the economic facts. When the Federal Reserve conducts
its money operations under a shroud of secrecy, there is no guarantee
that its decisions will be related to the economic analysis provided by
its own staff.
We have learned in the study of the Cost of Living Council, which
permitted a rise in the price of old oil in December 1973, from $4.25
to $5.25 per barrel, that it contradicted its own staff’s studies. Its own
staff study said that there was no support for this data or for raising
the price of old oil, and indeed, whatever evidence that could be com­
piled argued against it.
A recent example of this problem occurred when Chairman Burns
on April 18, 1975, refused to provide the Joint Economic Committee
of the Congress with the Federal Reserve’s projections for the sup­
ply and demand for credit for the months ahead. The refusal to pro­
vide this data to Congress can only be explained by the recognition
on the part of the Chairman that the economic data of the Federal
Reserve’s staff does not support his public policy pronouncements,
or that if he released this data, then Congress would develop an ap­
petite for the release of more data.
The GAO should be given the authority to obtain data and pro­
jections which are providing the basis for monetary policy.
I think a clear distinction, Mr. Chairman and members of the sub­
committee, should be made between disclosure of information and
what use is made of it. And to confuse the two, as the opponents of this
bill are doing, is to try to utilize speculative suggestions as a block
for information flow.
I noticed that in all the testimony opposing this bill, there has
never been the suggestion that the GAO has in the past misused its
authority and engaged in politicking. And I think that is important
to keep in mind.
There are other areas where the GAO could certainly provide
Congress with a good look-see, the areas of the decisional processing
and the bank holding company implementation by the Federal Re­
serve. Part of the insurance industry is very upset at the way the
Federal Reserve is letting banks go into more and more not directly




235

bank-related businesses. There is, of course, the vast area of the
Federal Reserve banks’ operations on an international scale in terms
of its relationships with other central banks and its obvious role in
the way large U.S. banks operate internationally.
These are, again, areas that for too long have been too secret, and
as a result power builds up in the hands of the few at the expense
of the many.
I think in conclusion, Mr. Chairman, it can be stated that this bill
is long overdue. It has impressive support now in both the House
and the Senate, and it deserves quick passage. For too long, while
every American realizes the power of money in society in terms of
economic and political power—for too long money has been obscured
behind a monetary curtain called the Federal Reserve System.
And whether you take the argument from constitutional principles
or from consumer protection principles, or from legislative oversight
principles, the case for GAO’s scrutiny on a recurring basis of the
Federal Reserve System is overwhelming.
Thank you.
Chairman P a t m a n . N o w , Mr. Nader, I would like to read you two
or three questions that I have, and if you would not like to expand
on them at this time as fully as you would like to, you may do so
when you examine your transcript. Will that be satisiactory ?
Mr. N a d er. Yes.
Chairman P a tm a n . First question, Mr. Nader, in my view, every
consumer in the Nation ought to know what the Federal Reserve’s
monetary policy is and how it intends to achieve it, because monetary
policy decisions and the way in which they are implemented largely
determine the level of employment, the cost of money, and all other
goods and services in the marketplace.
For this reason alone, I would assume that you and all other con­
sumer interest groups would favor a General Accounting Office audit
of Federal Reserve monetary policy and the economic effects of
that policy. Is that correct ?
Mr. N a d er. Very much so.
Chairman P a t m a n . N o w then, another question. We still have only
the Fed’s word for what happened regarding the forced resignation
of a Federal Reserve employee who was made the target of an FBI
investigation at the request of the Board.
Tlie employee disclosed to Consumer Reports magazine what cer­
tain commercial banks were charging for various types of consumer
loans. After forcing the employee out, the Federal Reserve decided to
make this information available on a continuing basis to consumers as
long as the banks surveyed agreed to do so.
What role could the GAO have played under authority granted by
H.R. 4316 to prevent irrational conduct like this from occurring,
Mr. Nader?
Mr. N a d er. One, by itemizing the information which the Federal
Reserve is withholding from the public without any legal justification.
I think that would clearly be within a type 3 audit as conceived by
Mr. Staats.
The power of the Federal Reserve is illustrated in this case that you
mentioned. This man was fired for releasing information which, first
of all, is public, if someone had the resources to go around to hundreds

50-365 0 - 75 - 16




236
of banks and ask them what their interest rates were on loans. He was
fired for releasing information which a court of law stated was prop­
erly public and its withholding was not in accordance with the Free­
dom of Information Act, and yet he has not been reinstated, and I
think that in order to foster general justice it would certainly be
worthwhile for the subcommittee to inquire into this particular case
and ask of the chairman why that gentleman has not been reinstated
for doing something which both the Fed now agrees should have been
public and which a court of law said was unlawfully withheld from
the public.
Chairman P a t m a n . You stated the Federal Reserve initiated this.
Who in the Federal Reserve initiated this case against this innocent
person ?
Mr. N a d e r . I do not know at what level the decision to remove him
was made.
Chairman P a t m a n . N o w then, we have several witnesses and we will
yield for 5 minutes. If necessary would you be willing to come before
the subcommittee again at a time that is mutually satisfactory?
Is that OK?
Mr. N a d e r . Yes; that is certainly fine.
Chairman P a t m a n . All right, Mr. Minish.
Mr. M i n i s h . Thank y o u , Mr. Chairman, Mr. Nader.
Business Week of April 21, titled “Dissension at the Fed,” and I
want to quote from the article:
[The article quoted from appears in appendix D.]
In contrast every indication is that Burns and the Board will be extremely
cautious in feeding money into the recovery. The growth rate of the money supply
has picked up in the past month but Burns and the staff agree so far all it
amounts to is squiggles in the chart, just static. Burns, the staff believes, will
hold fast to his belief that inflation is the enemy that must be beat, even at the
cost of high unemployment for awhile.

Do you have any comment on that ?
Mr. N a d e r . Well, obviously, I could comment on the advisability
of the policy but I think more to the point of this hearing, it indicates
that Chairman Burns is dealing with very serious issues of public
policy and not the arcane, specialized world of money manager con­
trols. He is dealing with a policy which is going to affect housing, a
policy which is going to affect economic recovery, a policy that is
going to affect fixed incomes, and I think that that example illustrates
why it is absolutely insupportable for the Federal Reserve to be given
this kind of Olympian privilege as if it is just making the kinds of
calculus that only a few mathematical geniuses are entitled to make. It
is making the same kinds of judgments as you would make in passing
legislation in Congress only through a different way, and what we
should always ask in any public policy formulation is what is the im­
pact of the policy on human beings, and if it is as serious as the Federal
Reserve’s impact, this kind of immunity and nonaccountability simply
cannot be tolerated.
Mr. M i n i s h . Well, would you agree with me that maybe their priori­
ties are a little mixed up ?
Mr. N a d e r . Well, I personally certainly do agree. I think that they
tend to be very insensititive to unemployment, for one, and they also
tend to be very insensitive to their consumer protection responsibilities
and to the importance of the competitive banking system and a com­
petitive financial institution system.



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Mr. M i n i s h . I told the former Secretary of the Treasury, who was
here a couple of years ago, a story that happened in my district where
one fellow came over to see me at a picnic and says, “ Congressman, the
price of pork chops is $1.50 a pound, and that’s a lot of money.” And
then he said to me that he remembered when it was 15 cents a pound,
and I said, “ So do I, but I did not have the 15 cents to buy it.”
Now the point of the story is that we have to have people and that
while inflation is a problem, if the man is not working the pork chops
can be 15 cents a pound or $1.50, there is no way that he can buy it.
Mr. N a d e r . And what happens when you have both inflation and
unemployment %
M r . M i n is h . T h a t m a k e s it a ll th e w o r s e .
Mr. N a d e r . That is the unique paradox

of the current economic
scene.
If we had to just have one, that is bad enough. But when we have
to have both, it indicates that the Federal Reserve needs to pulsate
more with the broader value systems of this society and those value
systems are percolating through the Congress, which is the reason for
this bill.
Mr. M i n i s h . I am quoting in the same article one of the Fed staffers:
The Fed has the power to offset the entire tax increase and to hear the dis­
sidents tell it. Burns may very well use his power in exactly that way.

Mr. N a d e r . Well, there again, power without accountability.
Mr. M i n i s h . Thank you. That is all, Mr. Chairman.
Chairman P a t m a n . Mr. Hannaford.
Mr. H a n n a f o r d . Thank you, Mr. Chairman, and thank you, Mr.
Nader, for an excellent statement.
I agree with your analysis very much. When you take an institution
that has an $86 billion bloated portfolio that nets $6.3 billion in its
own revenues it can do whatever it wishes. The Federal Reserve
System has 28,000 employees, and yet is never subjected to the disci­
pline of competition or surveillance of the Congress.
A private institution under those circumstances for that many years
would be quite remarkable if there were not some very serious in­
efficiencies at the very least.
I assume, Mr. Nader, that you would subscribe to audits type 1,
2, and 3 of Mr. Staats and on an annual or at least prescribed periodic
basis.
Mr. N a d e r . Yes, I would.
Mr. H a n n a f o r d . And that that would involve ultimately, though
not precisely in this legislation, some mechanism for congressional re­
view of the basis for monetary policy so as to have some coordination
of it with fiscal policy.
Mr. N a d e r . That is right.
Mr. H a n n a f o r d . I am interested in your suggestion that Congress
enact legislation to appropriate all of the funds, that $6.3 billion that
I just mentioned, and thereby, the Fed would be subject to the same
appropriate constitutional requirements of other public institutions.
I learned just the other day that Congress in 1933 declared those
funds not public funds, and this is the reason that we are in the situa­
tion of having to enact this legislation.
You mentioned that Dr. Burns had done some jawboning in the law
of credit allocation. I do not know if you are aware that in his testi-




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inony before this subcommittee on our bill for credit allocation, and
this is one reason that that bill was put aside for sort of negotiation,
Dr. Burns as a compromise in the direction of credit allocation indi­
cated that he would accept a jawboning kind of credit allocation, and
that he would negotiate on that subject, but he could not accept any­
thing else.
I think what he was saying was that he trusts his judgment and no
one else’s. But that apparently is his basis for credit allocation.
I have no further questions, Mr. Chairman. I thank you, Mr. Nader,
for a fine statement.
Chairman P a tm a n . Mr. Gradison, would you like to ask some ques­
tions now of Mr. Nader?
Mr. G ra d iso n . N o ; I do not, Mr. Chairman. Not at this time. I do
want to explain that we have just had a Republican conference. In
fact, it is still going on, and this is the reason that Members on our
side have been unable to be present. It began at 9:30 and is still
underway.
Chairman P a tm a n . Thank y ou , sir. Now Mr. Neal.
Mr. N e a l . Thank you, Mr. Chairman.
Mr. Nader, I, because of my own overriding concern with Vietnam
and thinking that I ought to be thinking about that problem instead
of this, I have had to miss a lot of the testimony, and I intend to read
it very thoroughly before we go along much further, but at this point
I am very curious as to your opinion as to why the opposition to
this bill. What characterizes those that are opposed to the bill? Who
benefits?
Mr. N a d er. Well, I think the opposition to the bill comes from two
sources. One is the natural desire by any Government agency to con­
trol its own shop without having to explain it to the Congress or be
accountable to the Congress, and the interests of the bankers in deal­
ing in a fraternal context with the Federal Reserve with very little
public scrutiny.
I think there is nothing new about this. We see this tendency in Viet­
nam policy, for example, as well as many other Government-business
interlocking type of situations. But it has been a very comfortable
world for the banks and the Federal Reserve. They turned the debacle
of the 1930’s into a generation or two of insularity from both congres­
sional scrutiny and the public. It is not only the Congress that is suf­
fering here; the public cannot get basic information. It has nothing to
do even with more arcane areas of monetary policy decisionmaking. It
is best illustrated by Consumer s Union’s attempt simply to get a list
of bank interest rates which are public but just for their convenience
the rates should be made available by the Federal Reserve.
Mr. N e a l. Can you point to specific examples of members of the
fraternity benefiting from the cozy arrangement or particular banks
benefiting ?
Mr. N a d er. Well, they benefit from an extraordinar ily powerful tilt
toward banking desires on the part of the Federal Reserve. The Fed­
eral Reserve, for example, could be more of a consumer advocate, and
that would upset the banks.
Mr. N e a l. None of us really benefit from tough economic times. The
banks are not benefiting from recession. Many banks are in trouble,




239
as a matter of fact, and especially those that have heavy real estate
investments.
So it would be very hard to make a case, I think, to say that banks in
general benefit from policy, and I agree with you that Federal Reserve
policy has, I think, very consciously encouraged unemployment. But
who benefits ?
Mr. N a d er. Yes. Now, you can make the argument, as you are, that
in the long run this is not good for the economy, and anything that is
not good for the economy is not good for the banks. But bankers are
notoriously concerned with the shortrun. If you look at bank profits
in this supposed time of recession, they are at really remarkable levels,
and the best illustration I know of responding to your proposed dis­
tinction here is the redlining phenomenon.
Now, one can say that the more banks that redline for short term
objectives, the more insurance companies are going to redline and the
more other businesses are going to redline a particular area in the city,
and the more it is going to go downhill. As an area of the city goes
downhill and deteriorates, and blight advances, there is less business
for banks, there is less business for insurance companies.
So in the longrun it is a self-defeating policy. But in the shortrun, it is preferred because like any financial institution creaming off
the top, getting the more rewarding, immediate business tends to be­
come the first priority.
Now, the Federal Reserve could provide data for the public indicat­
ing the geographical pattern of bank mortgage loans so that we could
more readily see which areas of New York City or which areas of De­
troit are being in effect redlined. That is, refusal to sell, so that Con­
gress and consumer groups and local officials can proceed and urge the
policy as they see fit on the basis of solid information.
Now, one can say that is the best thing for the banks in the longrun, because as the blight is driven back, then there is more prosperity
in more bank branches. But again, one has to view with wonderment
how the short term interests of these bankers can lead to longer term
harm to the economy as well as to the financial institutions, unless they
simply want to develop a kind of expendable economy that they do not
want to do business with and just work on the cream.
Mr. N e a l . I think it is a very interesting question because I think,
my own feeling is that I would just, and I would just like a response
to this, if you can, is that there is certainly no benefit to the policy
for anyone over the long haul that I can see. It seems to me that the
policy of Dr. Burns and those that agree with him is more a philo­
sophic one quite honestly held, but that I think is wrong. And of course,
I agree with you that this sort of policy ought to be made by the Con­
gress instead of the Federal Reserve, but it just seems to me that we
might, move or we might make a more telling case for it if we rejectsome sort of conspiracy theory, which I am not indicating that you are
advocating by the way.
Mr. N a d er. It is a fraternity theory.
Look at the paradox of our present economic situation. When in the
past in our country’s history have we seen a period of several recession
and substantial unemployment at the same time, when we have seen
sharp increases in bank profits, apart from the few that failed, obvi­




240

ously ? It is troubling when there is a divergence between the state of
the economy and the state of bank profits or corporate profits. There is
something new working here that economists are not ready to under­
stand and explain.
Mr. N e a l . Where do you see the problem, that problem in the bank­
ing industry? Do you see it in terms of not adequate competition?
Mr. N a d er. That is one, definitely. One is inadequate competition.
Another is----Mr. N e a l . Let’s pursue that for a second. How might we encourage
jthat, encourage more competition ?
Mr. N a d er. Well, there are several ways. One is to lift the restric­
tions on savings and loans and others to compete with commercial
banks more, provide more of an overlap. The second is to break up
some of the big banks under the antitrust laws. The third is to severely
restrict to the tentacle spread of the bank holding company situation.
Mr. N e a l . I am sorry, I didn't hear that.
Mr. N a d er. T o discourage the spread of the bank holding company
acquisition of leasing companies and finance companies and insurance
agencies and the like.
And finally, a rather difficult judgment as to whether bank branch­
ing really does increase competition. In New York State, for example,
the argument for branch banking was that there are too many banks
upstate that really are local monopolies and it would be good if Citi­
bank and Chase can go in with their branches to stir up the system. But
what is happening is that the little banks are being swallowed up,
driven out, by the big city banks and eventually you will have state­
wide banks in New York, but you will not have any more competition;
you will have less competition. The figures in New York are quite
stunning. Here is the Empire State in the United States of America—
this is not Appalachia—and 48 percent of the bank mortgages are
going out of State. This is called the strip mining phenomenon. They
are not only going out of the rural areas to the money centers but they
are also going out of New York City to Switzerland and international
financial transactions and the like.
Well, there is a strong argument that bank deposits are other people’s
money and the best and healthiest type of banking system is the one
that can use other people’s money for improvement in credit, et cetera,
in the community, recycle it.
Now this is not to say that there should be a 100-percent recycle but
it is to say that if a State like New York, which is not conceived of
as a capital flight State—usually capital flies to New York, not out—
we have almost half of the New York mortgages going out of the
State.
Mr. N e a l . What percent of that, do you know, that is going out of
the country as opposed to out of the State ?
Mr. N a d er. I do not have that figure in terms of numbers, but again,
I think that is a difficult figure to get with any precision, just like it is a
difficult figure to find out if a New York bank has 15 branches in the
Bronx, how much money is it taking in from the Bronx and how’ much
money is it loaning out to the Bronx ?
Those require study. They are not available at the flick of a finger,
in other words; you have to engage in a special study to get the data.
And then you have the further problem of the deterioration of the




241
cities themselves, capital starved in a city where above the fifth floor
of buildings there is plenty of capital, New York City being a classic
example of that. There are areas of New York City where 500,000,
600,000 people live and there are no mortgage funds from the private
sector.
I think the biggest service that this subcommittee and the Congress
can perform over time is to find ways by which people around the
country can get educated about money, about banks. This has been
decried repeatedly by some economists that students go through 16
years of school and they graduate with honors from college but they
do not understand the elementary principles of money and banking
unless they happen to specialize in it, which very few do.
I think when the chairman put out his “ Primer on Money” that was
just soaked up by people all over the country, not only because it was
a good job, it was because there was nothing else comparable to it. And
you can see how, although you are dealing with the most important
subject economically in the land, I would assume—you see how many
people from the media are here and how much coverage has this bill
really gotten over the last few years, and how much coverage do the
principles underlying this bill receive.
It just reflects the fact that the public has been processed to be
almost illiterate about money and banking functions and the jargon
helps, you know. The more technical the jargon, the more frightened
people are of understanding it. Lawyers perfected that technique
years ago.
Mr. N e a l . Thank you.
Chairman P a t m a n . I just want to take the time that I have to men­
tion the points involving the country’s interests here and how serious
they are. You take the Federal Reserve. It operates in secrecy, and the
Federal Reserve on Constitution Avenue is the most secretive place in
the country, I guess. The Open Market Committee goes in there about
every second Tuesday to decide what monetary policies will be. They
are so secretive that only 12 people can be on that committee. But in
truth and in fact the 12 are 7 of the Board of Governors. They come in
first. And then the 5 representatives of the 12 Federal Reserve banks
come in, and then without authority of law 7 presidents of the other
7 Federal Reserve banks, they march in and become a party to this.
There are 25 or -S people around the committee, consultants and peo­
O
ple like that, all in secret. And when the day is over and the minutes
are made, you could not tell from the minutes what they had done to
save your life. And then for 5 years the records are held secret and
nothing is said about it and only a summary is released in 45 days.
Now during that time other people are getting this information direct
from the secret group there and they know exactly what is going on
and they make lots of money out of it.
Mr. N e a l . Mr. Chairman, would you yield on that point ?
Chairman P a t m a n . Yes.
Mr. N e a l . The other central banks throughout the world, do they
operate in secrecy ?
Chairman P a t m a n . Not to my knowledge. This subcommittee is the
only subcommittee that had a survey made of central banks. We have
a report of that survey which shows they do not have secrecy. You take
Mexico; you will find lots of houses for plain people for median-




242

income workers and poor people, lots of houses just beyond the Rio
Grande that you do not have here. And the reason is that in Mexico
the central bank requires the commercial banks to make a certain
percentage of their loans to low and moderate people for housing.
Lots of central banks do things like that, but our bank does not.
In fact, when we were in a real depression on housing, and we are
again right now, and when people were having to pay for three houses
to get one house, the Federal Reserve, when asked if they would
help on the housing financing, said no, it cannot do that. That is for
the commercial banks. Of course that meant high interest rates.
Now we are not living in a democracy if we uphold a policy like
that 6f not allocating credit at all so that poor people have a chance.
High interest rates are the worst enemy of poverty. High interest rates
create poverty. There are millions of people today in the United States
of America in poverty and their families will go to their graves
in poverty because of excessive and high exorbitant interest rates.
And that is what we are considering here today. Now the reason for
that is there are 14,500 commercial banks in the United States and 50
of those banks have a majority of the deposits and assets of all the
14,500. Does that not indicate that there is some sort of a conspiracy
or monopoly existing here? Why of course it does. And then there is
something worse than that. There are 3,000 banks, trust company
banks, that have less supervision over them than even the commercial
banks in many respects.
Now out of those 3,000 banks there is $4 billion in deposits and 25
of those banks have a majority of those deposits. Now if that is not
enough to warn the American people that there is something radically
wrong, I do not know what will. But we have some examples even
worse than that.
The Federal Reserve banks had an idea that they had to ac­
cumulate Government bonds. I placed in the record yesterday the
amount purchased each year from the time this act was signed in
1913 by Woodrow Wilson on December 23. They had $16 million the
first year. The next year more. The next year more. And it kept on
climbing and climbing and climbing. They acquired these bonds by
manufacturing money. The Federal Reserve does that without any re­
serve, without any excuse.
Would you like me to yield, Mr. Blanchard, at this point?
Mr. B l a n c h a r d . Yes; Mr. Chairman, I had a couple of questions,
and please excuse me for being late but I was in another subcommittee
which happens far too often here.
Mr. Nader, as I understand it you referred in your opening state­
ment to the study called “The Scenario for the Federal Reserve System
in the Year 2000.” I was curious about that. If you have a copy of it,
could we have one inserted into the record and could we also know
how that study arose. I would be very curious.
Mr. N a d e r . Yes; we will try and obtain a copy for the record. I do
not think we can explain how it arose. I think the inquiry has to be
directed toward the people in the Cleveland branch.
Chairman P a t m a n . The point I am trying to make is that this is a
most dangerous thing that America has ever had facing it. You know
we cannot survive too long this way if people just say it does not
amount to anything, the only thing they know about money is that




243

they do not have enough of it and just laugh it off. But it is getting
very serious. It is costing so much.
It is destroying our country. In fact, the Federal Reserve has bought
18 percent of our entire national debt. It did not cost the Federal Re­
serve a penny. They took the Government’s money and bought that.
Now then, they did not cancel the debt. The professors say in teach­
ing about credit instruments, they say that when the obligor and the
obligee become the same person or entity, the debt is canceled. But
they do not cancel the debt; they keep it there in that portfolio in
the New York City bank. And one of these days I suggest that our
subcommittee ought to go over there and see this portfolio. I have been
over there twice—once in 1932 and once 20 years later. And it is real
interesting.
We are really facing the brink of disaster if we do not do something
about it and do something about it now. They can buy 18 percent of
the national debt without cost to themselves and collect the interest
on it every year, although the debt has been paid once. Mr. William
McChesney Martin testified to that in answer to my question, and
others have, too.
Now if they can take 18 percent and get $6 billion a year interest on
it, why they can acquire the whole national debt of over $500 billion
and get $35 billion a year interest on it. They can spend that any way
they want to.
These things must be gone into and the only way to do it is to do it
by an audit.
Now, Mr. Nader, we apologize to you. You wanted to leave about
this time or before.
Mr. N a d er. But you have encouraged me to make one more point, if
I could.
It is interesting how the public view of the Federal Reserve is
shaped. I recall, for example, when I had economics No. 1 in college,
we were studying the Federal Reserve with a 100-page paperback that
was put out by the Federal Reserve, and thousands and tens of thou­
sands of students all over the country have learned about the Federal
Reserve from the Federal Reserve.
And I think it might be worth looking into the educational dissemi­
nation program by the Federal Reserve to see how extensive it is at the
present time. Maybe they have gone into video since I was in college.
But. it is interesting to note that many economic professors supinely
accept this kind of material without any critical appraisal of it or with­
out any alternative information.
In fact, when I was at the university it was considered that any
criticism of the Federal Reserve was a kind of far out, kooky criticism
shrouded with international banking conspiracy syndromes and the
like.
Well, the fact of the matter is that to whatever words you want to
use, these gentlemen do get together, both private and public, both na­
tional and international, they do come to decisions and whether you
choose to call it a conspiracy or a fraternity or just a common interest
commonly arrived at, it all spells enormous power, secret and
unaccountable.
Mr. B la n c h a r d . Mr. Chairman, I have one quick question that I
would like to ask Mr. Nader.




244

Given the fact that the seven Governors of the Board have 14-year
terms, it seems to me that we might not even be debating the issue of
an audit if the method and manner and length of terms of the Fed were
different.
Have you considered changing the way we appoint the Board and
their length of term ?
Mr. N a d er. Well, I think the length is inordinately long, the term
of 14 years, first of all just in terms of personal drying up of imagina­
tion. I mean the people tell you very often anybody that has been in a
job like that for more than 5 or 6 years pretty much dries up in terms
of new ideas. Just on that basis alone, quite apart from the turnover of
positions and policies, I would favor a shorter term.
Mr. B la n c h a r d . Thank you, Mr. Chairman.
Chairman P a t m a n . N o w then, Mr. Nader, I repeat I am awfully
sorry we kept you so long.
Now, I want to reiterate something I have said. The most lucrative
franchise in the United States of x\merica is held by the chartered
banks. The most lucrative franchise in the United States of America
or in any country in the world is held by the chartered banks in this
country. Nobody wants to do them an injustice. We want a good bank­
ing system and we support it, but we do not want one that does an in­
justice to everybody else and is refusing to do anything to correct the
terrible mistakes that are being made now that are creating so much
poverty and so many hardships and destroying our country.
We are on the brink of a depression right now in housing and many
other things, and we have got to do something to come out of it.
Thank you very much, Mr. Nader, and we will keep in touch with
you, and we will probably ask you to come back later.
Mr. N a d er. Thank y ou , Mr. Chairman.
Chairman P a t m a n . All right. Now we have the other witnesses here.
Mr. Robert Freeman. Come around, Mr. Freeman. From the Univer­
sity of Alabama. And Robert Bartell of the Liberty Lobby.
Are you ready to proceed, sir ?
Mr. F r e e m a n . Yes, sir.
Chairman P a t m a n . All right, proceed, sir.
Now, Mr. Bartell, is he here ?
Mr. B a r t e l l . Yes, sir.
Chairman P a tm a n . All right, do you want to come around, Mr.
Bartell, and we will hear you two gentlemen now. Mr. Freeman is
first. You are recognized to present your testimony.
STATEMENT OE ROBERT J. FREEMAN, PROFESSOR OF ACCOUNTING,
UNIVERSITY OF ALABAMA

Mr. F r e e m a n . Thank you, Mr. Chairman. I am Robert J. Freeman,
professor of accounting at the University of Alabama.
Chairman P a tm a n . We are glad to have you, sir, and you may
proceed in your own way. You may have your testimony put in the
record and elaborate on it, or you may use excerpts, any way you
desire to do so. Or you may ad lib it.
Mr. F r e e m a n . Thank you, Mr. Chairman.




245
I apologize that you did not receive my prepared statement before
today. You were sent copies of this last Wednesday, and apparently
I have another audit to do on why it did not get to you on time. But in
view of the time limitations, I think I would, if it is acceptable to
you, more or less just highlight this. You have it in front of you.
Chairman P a t m a n . It will all be printed in whole, and it will be
made available to people all over the Nation, especially to the libraries.
Mr. F r e e m a n . Well, as I say here in the statement, and perhaps
you would like to follow through as I highlight certain points, I
am not appearing as a proponent or opponent, either one per se, of
this legislation, but I have been requested to meet with you in an
advisory capacity to discuss concisely and in nontechnical terms the
nature and scope of contemporary public sector auditing, its potential
applications and benefits, and its limitations. To this end I have pre­
pared this written statement which is rather concise, and I hope it
would serve you now and in the future as a frame of reference in
these deliberations.
In studying prior testimony over the years, it seems that one of the
biggest points of noncommunication has been the fact that the term
“auditing” has been used in so many different ways. On the one hand,
some people using the term “ auditing” visualize an accountant exam­
ining financial statements and that is the extent of it.
Others view auditing as something that goes much beyond that,
involving a much broader investigative process, perhaps conducted
by an interdisciplinary team, which could go into almost any aspect
of finances, legal compliance, efficiency, economy, and effectiveness.
And this is indeed in keeping with the contemporary definition and
auditing in the public sector. But the key point here is, I think, that
the effect of such different uses of the same terms, even when people
think they are using the same term, has, in the past at least, led to
communications breakdowns between those testifying, between them
and the congressional committee and among members of the commit­
tee itself.
So I would hope that you would give careful attention to problems
of terminology which may seem to be unimportant. It seems impera­
tive that members of this subcommittee be aware of this potential
communication problem, that you make appropriate inquiry of wit­
nesses before you to make sure of the sense in which they are using
the term “audit” or “auditing,” and that you yourselves share a
common frame of reference among yourselves.
As I begin, for example, on page 2, if you are following with me,
I inserted a contemporary definition of auditing. I think even a cursory
review of it would show that auditing is accepted as a much broader
function than just accountants auditing financial statements.
This contemporary definition recognizes and emphasizes that the
audit function must be user oriented. The type of audit that is appro­
priate in the private sector for profit-seeking enterprises may not be
the same type of audit, and is not the type of audit appropriate to the
public sector. Further, audits concern any assertions, either stated or
implied, about economic actions or events. The field is wide open, more
or less, and the criteria that an auditor in the public sector uses go far
beyond such things as generally accepted accounting principles, to in­
clude other reasonable or agreed upon standards of evaluation.




246
Figure 1 on page 3 is a very simple illustration. The key point here
is where the audit fits in. Whenever you have a higher authority, such
as Congress, which has delegated its authority to a subordinate, such
as the Federal Reserve System or other Federal agencies, it frequently
comes to a point where that higher authority cannot personally go
down and audit its subordinate, the person to whom it has delegated its
authority. This is where the auditor comes in, because auditing may
be simply defined as a process designed to enhance management con­
trol and accountability wherever a higher authority such as Congress
has delegated authority to a subordinate and it wishes to hold that
subordinate accountable.
And the higher authority, therefore, whenever it itself cannot go
down, will engage an auditor—which should be independent of the
subordinate, otherwise it is not really a credible audit, as you shall
see—to be assured that the assertions or actions of the subordinate are
indeed credible and appropriate, to gain additional information that
they may wish, independently of the people at the subordinate agency,
and, perhaps as a byproduct, obtain the independent auditor’s observa­
tions and recommendations as an independent observer.
So the auditor in the public sector in modern terms serves, in effect,
as an extension of the higher authority or an agent of the higher au­
thority, but—very importantly serves in a staff or advisory capacity as
opposed to a line capacity.
The next question becomes what should the auditor audit ? What is
the appropriate scope of an audit ? This really boils down to the fact
that the appropriate scope depends upon the level of accountability to
which the higher authority seeks to hold the subordinate. And the
proper scope of the audit then depends on one’s notion of account­
ability.
A basic tenet of management in the public sector and private sector
is that authority can be delegated dowmvard but responsibility cannot
be delegated. This is pointed out in figure 2 on page 5. The higher
authority may delegate to a subordinate, and that subordinate may
delegate even to another subordinate.
Theoretically, the responsibility upward would equal the authority
delegated downward. In fact, wherever we find this in life, we find
that accountability is only a part of the total responsibility because as
human beings it is very difficult to hold one accountable for the full
extent of his responsibility.
In figure 3 on page 6 1 have blown up one of those boxes, for example,
a subordinate agency or any Federal agency. The entire square there
might indicate the total aspects of one’s responsibility. Notice if only
financial resource inflows, outflows, and balances are considered within
the framework of accountability, only a very small part of the total
responsibility is subject to audit. Yet, this can expand, and has ex­
panded in the public sector, beyond just dollars-in and dollars-out ex­
penditures to compliance with the laws and regulations, and, more re­
cently, to economy and efficiency of management of financial, human
and other resources; and, perhaps most important in the public sector,
to achievement of objectives or progress toward objectives for which
the authority has been delegated.
Now the potential scope of an audit in the public sector in modern
terms—this is all over the world, Mr. Chairman, not just the United




247

States; the Comptroller General’s standards are consistent with those
that had been adopted worldwide for public sector auditing—leads us
to a potential scope of audit that might be visualized as in figure 4
on page 6.
I will not take the time to go over this in detail, but obviously it
involves those same elements of the audit that Comptroller General
Staats has previously inserted into the record. They include not only
financial accountabilities we think of in the traditional sense—dollars
in, dollars out, and did you comply with the law—but more im­
portantly, the efficiency and economy and effectiveness of the auditee
organization, the subordinate organization.
I might point out to you figure 5, in which I have tried to clarify
audit terminology a bit. The Comptroller General referred to—and
you referred to today—the type I, type II, and type III audits as a
gradation or a cumulative process. I have attempted to illustrate how
this ties in with accountability in figure 5.
I might point out, though, that in fact—as contrasted with viewing
this as an additive process always—any one element of this process
might be attacked independently, as noted in figure 6. And I might
have you turn here to page 11. This is extremely important because I
think what we think of as the fiscal audit is what many view as the only
legitimate audit. In fact, what I have called here type A, type B, and
type C, to distinguish them, illustrates that an auditor, given proper
authority, might take any one thrust. He need not try to audit the
whole agency—or all aspects of effectiveness, economy, and efficiency,
but in fact would take a commonsense approach trying to get to the
major problems that have not been covered by other persons.
Not very important, also, I think, is that when we think of a finan­
cial or fiscal audit, this is the type of audit where an auditor could
audit an entire organization every year, or see that someone else did,
and could render a rather concrete opinion in the sense that he knew
he audited the entire universe and could say in his opinion that the
financial statements, for example, were properly reflected. But when
we get into type B or C audits—the efficiency, and economy, and ef­
fectiveness audit, or, as the Comptroller General talked about the type
II and III audits—you must realize that only certain programs are
selected for audit in each period according to congressional wishes or
according to what appear to be the major problems, that the auditing
queries focus both on forming judgments and conclusions on past per­
formance and on assisting the Congress or the audit report recipient
and the agency being audited in doing a better job in the future.
Again, the difference is not so much trying to get $12.15 that was
misspent back, but trying to do a better job in the future. These bene­
fits are very hard to quantify, but in the public sector this is where the
most benefits obviously are.
I would point out again that the auditor is not expected to measure
the unmeasurable or to arrive at a concrete opinion, like an agency
was 61 percent efficient or 74 percent effective. He is expected to meas­
ure as best he can to assess the economy and efficiency and effectiveness
of the programs or activities under audit and, independently to the
higher authority, give his own findings, judgments, and conclusions.
So this type of audit must be considered less routine, not necessarily




248

done every year. And it frequently must be done by an interdisciplin­
ary team.
This is what I call the variable scope audit, if you please. Looking
at this variable scope audit concept in this fashion both highlights the
flexibility of this approach to auditing—to go where the action is, so
to speak, and not waste a lot of time with trivia—and points up the
need to clearly define the type of audit authorized or the type and
scope of a particular audit.
I keep looking at my watch, Mr. Chairman, because I do not want to
take too much time.
[Testimony resumes on p. 274.]
[The prepared statement of Mr. Freeman follows:]







249
Statement of
R cbett:

J.

Freem an

Professor of Accounting, The University of Alabama

Before the

t ubc oan i t cee on j)ca es t i c M netary PoJ icy
>
r.
o
.
C r j i Iie' on Banking. Cui tc . v y and Housing
o i ' . :..*
-ij

II.

S.

iJcur. -e o f

R e p resentatives

April 2 9

, 197 5

250
Mr. Chairman and Members of the Committee:

I appreciate the invitation to meet with you today, and hope that I can
assist you in your deliberations with respect to the proposed legislation you
are considering.
posed legislation.

I am not appearing as a proponent or opponent of that pro­
Kather, I have been requested to meet with you in an

advisory capacity to discuss concisely and in nontechnical terms the nature
and scope of contemporary public sector auditing, its potential applications
and benefits, and its limitations.
To this end I have prepared a brief written statement for your considera­
tion and inclusion in the record of these hearings.

Rather than read this

statement, I would prefer to discuss it informally and respond to questions
either during the course of my remarks or at their conclusion, as you may
prefer.
"Auditing j Auditing1
1
The terms "auditing” and "audit" are frequently used, but seldom defined.
They are particularly troublesome when used in testimony before a committee
such as this because those using these terms may appear to be talking about;
the same thing, and may believe that they are, when in fact they are not.
Analysis of recent congressional testimony indicates that some persons using
t.he terms “auditing" and "audit" visualized an accountant examining financial
statements for conformity with accepted or prescribed accounting and reporting
standards, and perhaps to assess the legality of financial transactions occur­
ring during the period under audit.

This image is consistent with traditional

dictionary definitions of these terms and much of auditing practice, particu­
larly in the private sector.

Others using the terms "auditing" and "audit1
'

visualized a xauch broader investigative process conducted by an interdisci­
plinary team that might focus on virtually any aspect of an entity’s finances,




251
le g a l compliance, managerial economy or e ff i c i e n c y , and program e ffe ctiv e n e ss.
This image i s in keeping with contemporary auditing approaches and d e fin it io n s ,
p a r tic u la rly in the p ublic s e c to r .
The obvious e ff e c t o f such d iffe r in g usage o f the satce terras is a
communications breakdown between those t e s tify in g , between them and the congres­
s io n a l committee, and among members o f the committee.

Meaningful debate and

d e lib e ra tio n on the issues becomes im possible; and d iscu ssion s tend to become
confused, em otionally-based, and unproductive.

Thus, i t is imperative that

th is committee be aware o f th is p o te n tia l communications problem; make appro­
p ria te inquiry o f those t e s t ify in g , or study th e ir testim ony, to assure that
you are aware o f the sense in which they are using these terms; and share a
common frame o f referen ce among yourselves in order that you might properly
discu ss the issu es and proposed le g is la t io n under consideration and reach
soundly based conclusion s regarding them.
“ Auditing" Defined
A contemporary d e fin it io n o f auditing was set fo rth recen tly by the Com­
m ittee on Basic Auditing Concepts o f the American Accounting A ssociation :
Auditing i s a system atic process o f o b je c t iv e ly
obtaining and evaluating evidence regarding
assertion s (.stated or im plied) about economic
action s and events to ascerta in the degree o f
correspondence between those assertion s and
establish ed c r it e r ia and communicating the
r e su lts to interested u s e r s .1
In se ttin g fo r th th is d e fin it io n , that committee noted that:
This d e fin it io n i s .intentionally qu ite broad.
While i t conveys the ba sic idea that an audit
i s an in v e stig a tiv e p rocess, i t i s s u ffic ie n t ly
comprehensive to encompass the many d iffe r e n t
purposes fo r vhich an audit might be conducted
and the variety o f su bject matter that might be
focused on in a s p e c if i c audit engagement. 2

50-365 0 - 75 - 17




252
T ra d ition a lly , auditing has been associated prim arily
with published fin a n c ia l statements. However, even
with audits that arc concern.:.! primarily with financial

reportin g, evidence must be gathered which is related
to the inform ation system, the accounting process, and
the underlying economic events and actions themselves.
Moreover, the auditing process has been and w ill con­
tinue to be applied d ir e c t ly to inform ation systems
and to the performance o f economic a c t iv it y rather
than to previously e x istin g reports on the s a m e . 3
This contemporary d e fin it io n o f auditing recognizes and emphasizes that
(1)

the audit fu nction should be user orien ted — there are, and should be, d i f ­

feren t types o f audits fo r d iffe r e n t purposes, (2) audits may concern any
a ss e rtio n s, stated or im plied, about economic action s or events— "economic"
r e fe rrin g to any situ a tio n in which a ch oice must be made involving scarce
resou rces, and (3) the c r it e r ia used in the examination and evaluation process
are not lim ited to fin a n c ia l accounting and reporting standards or to laws and
reg u la tion s, but may appropriately include other s p e c ifie d or implied tech n ical
or "reasonable man'5 standards o f evaluation.
Charact e r i s t i c s o f an Audit
A ll a u dits, regardless o f th e ir purpose or scope, share certa in common
c h a r a c te ris tic s (Figure 1 ).

Simply sta ted , auditing is an in v estig a tiv e-ev a lu a tiv e

CHARACTERISTICS OF A AUDIT
N

Figure 1

AUDIT REPORT RECIPIENT
(higher authority)

AUDITOR
(independent c l
a iid ite e )

SOURCE:

Peter L. McMickLe and Gone Elrod, AudUir»p
S o r ?
Future Potential (Montgomery,




I

i

ACCOUNTABILITY

f*

K
ducat ion:_Ci:rrcut
"The ~AIDE Sta f f 1974),

253
process designed to enhance management; control and accountability

where

(1) a higher au th ority, such as Congress, has delegated authority to a sub­
ordin ate, such as a Federal agency, which i t wishes to hold accountable, and
(2) the higher authority d e sires fo r an auditor independent of the subordinate
to examine certa in assertion s or actions o f the subordinate in order to (a) be
assured that the assertion s or action s are cre d ib le and appropriate, r e sp e ctiv e ly ,
or be advised otherw ise, (b) gain ad d ition a l inform ation relevant to auditee
a cco u n ta b ility , and/or (c ) perhaps as a by-product o f the examination, obtain
the independent a u d ito r 's observations and recommendations, for the b en efit of
both the auditee and the higher au th ority, with respect to enhancing the mana­
g e r ia l economy, e ff ic ie n c y , or e ffe ctiv e n e ss o f the auditee.
Thus the auditor serves as an agent or extension of the higher authority—
as i t s a d d ition a l eyes and ears, so to speak— and, in a s t a ff (advisory) cap acity ,
conducts examinations o f the type it. is instructed and/or authorized to perform,
prim arily fo r the b e n e fit o f the higher au th ority.

The type and scope o f a u d it(s)

the auditor is required or permitted to conduct should be con sisten t x^ith the
extent to which the higher au th ority wishes

to hold the subordinate auditee

accountable, (answerable or form ally resp onsible) fo r i t s a ction s.

The key to

determining the scope and type of audit that is appropriate th erefore li e s in
an alysis c f the term "a c c o u n ta b ility ."
Account,~>b1.1it y and Audit Scope
A ba sic tenent of management is that whereas r e s p o n s ib ility may be d e le ­
gated by a higher authority to a subordinate, the higher authority continues
to be resp onsible fo r the action s o f the subordinate.

Authority can be d ele­

gated, in other words, but r e s p o n s ib ility can not be delegated.

However, the

subordinate- is resp onsible t.o the higher authority fo r proper ex ercise o f tha




254
au th ority delegated to i t .

That portion o f the su bordin ate's resp o n sib ility

fo r which he is held answerable or form ally accountable is termed "a c co u n ta b ility ."
The re la tio n sh ip o f a u th ority, r e s p o n s ib ilit y , and accou n ta b ility are in d i­
cated grap h ically in Figure 2,
F ig u r e

2

AUTHORITY, RESPONSIBILITY, AN ACCOUNTABILITY
D

HIGHER AUTHORITY
( e . g . , Congress)

i

SUBOFDINATE
( e . g . , Federal Agency)

j

H

I

5

g

ACCOUNTABILITY

I a
!
'M ______l___ A
SUB-SUBORDINATE
( e . g . , Federal Subagency)

Legend:

----- Authority delegated downward equals r e s p o n s ib ility upward.
A ccou ntability i s that pot t.a an ot the r e s p o n s ib ilit y fo r
wbiih the subordinate i s held fc-rmaily answerable, or accountable.




255
Those portions of subcrdiante r e s p o n s ib ility for which the subordinate
might be held accountable are illu s tr a te d in Figure 3.

Figure 3
RELATIONSHIP OF ACCOUNTABILITY AND RESPONSIBILITY
ACCOUNTABILITY
’ OF '
SUBORDINATE

FESPONSIBII.TTY (IES) OF SUBORDINATE

r

(1) Financial resource inflows, outflow?,
balances«

AUDIT
ELEMENTS

o

Financial

Fiscal

(2) Compliance with lavs, regulations, e c
t.

Compliance

(3) Economy and efficiency of financial,
human, and other resource management.

Economy &
Efficiency

(A) Achievement of objectives, or progress
toward objectives, for which authority
was delegated

El fee tivenes s
{

> .

. .

Unaccountable .

©

Economy &
Ef ficienc

O

Program
Results

. . . «

These varying degrees to which a subordinate may be held accountable underlie the
evolution of the concept of accountability and

audit in the public sector.

Before governments v/ere involved In complex social and economic programs when government was relatively small and was assigned only the most fundamental
roles of protection of life and property, distributing the mail, etc.—

the

activities of the government were not subject to complcix legal and regulatory
requirements as they are today, the resources devoted to government programs were
relatively small absolutely and in comparison to the tot«.l

resources of the

economy, and subordinate performance (e.g., economy, efficiency, effectiveness)
was evaluated directly by the higher authority through observing activities of
the subordinate or through hearings on other feedback mechanisms.




Governmental

256
n^mgeri’ were held formally answerable only for their financial resource iniUvs,
outflows, and balances— and auditing wap accordingly limited to scrutinizing
that accountability.
As government programs and activities became more complex and far-reaching,
so did the laws and regulations enacted with respect to them.

Higher authorities

often were unable to personally monitor subordinate legal compliance, and instructed
auditors to enlarge the scope of their examinations to assure the higher authorities
that laws and regulations were being adhered to or inform them to the contrary.
Thus, subordinates became accountable for both financial and compliance aspects
of their total responsibility, and the scope of auditing was extended to include
both of these aspects of fiscal accountability.
In recent years, government programs have become even more complex and
diverse, affecting virtually every aspect of our economy and the lives of its
citizens.

At the same time, higher authorities in the public sector have been

able to directly observe less and less of the performance of their subordinates.
Hence, there has been a tendency to include more and more subordinate responsi­
bilities within the definition of accountability and, accordingly, the scope of
auditing has expanded to encompass these enlarged accountabilities.
Potential Scope of Audit
The expanded concept of accountability in the public sector caused gov­
ernmental auditors throughout the world to reassess their audit approaches and
standards.

As a result, the U. S. Comptroller General set forth Standards for

Audit, of Governmental Ch-ganizationr>, Programs, Activities & Functions, in which
the elements of this broad scope auditing are described as:
1.

Financial and compliance— determines (a) whether financial
operations are properly conducted, (b) whether the financial
reports of an audited entity ate presented fairly, and
(c) whether the entity has complied with applicable laws
and regulations.




257
2-

Er.onc-nv and eff.iciency-»-deterininos whether the entity is
managing ct utilising its lescurces (personnel, property,
space, and so f01 r h in an economical and efficient man­
.)
ner and the causes of any inefficiencies or uneconomical
practices, including inadequacies in management, informa­
tion systems, administrative procedures, or organizational structure.

3*

Program results— determines whether the desired results or
benefits are being achieved, whether the objectives established
by t e legislature or other authorizing body are being met, and
h.
whether the agency has considered alternatives which might
yield desired results at a lower cost.^

Comprehensive Scope Audit
The first general standard of governmental auditing set forth by the Comp­
troller General, in keeping with standards established by the International Congress
of Supreme Audit Organizations, states that:
The full scope of an audit of a governmental program,
function, activity, or organization should encompass:
a.

An examination of financial transactions, accounts,
and reports, including an evaluation of compliance
with applicable laws and regulations.

b.

A review of efficiency and economy in the use of
resources.

c.

A review to determine whether desired results are
effectively achieved.-*

The potential scope of a governmental audit is depicted graphically in
Figure 4,
Variable Scope Audit
There is no presumption that every audit need be, or even should be, of
such a comprehensive scope.
states explicitly that:

The last sentence of the first general standard

"In determining the scope for a particular audit,

responsible officials should give consideration to the needs of the potential
users of the results of that a u d i t M o r e o v e r ,




in the introduction to the

258

T H E POTENTIAL SCOPE OF A GOVERNMENTAL AUDIT
C O V P R C M EN S IV E A J D IT S

1

r ................ "....

1
1

FISCAL (Finonriol ervd Compl;iijtKe) Audit?

FIN AN C IAL

1

Yroditloncl

Firxinclol Sfctcmonti

1

PEPFOf.MANCE OR OPERATIONAL AUOITS

1 f

C O M F 1IANCE

I

1

MANAGERIAL
(EC O N O M Y AN D EFFICIENCY)

(

PROGRAM RESULTS
(EFFECTIVENESS)

rm
......... ............. \

I

Legollty
Comptioncc with
Rcgulofieo, fol!=>«*,
fVocedvc**, «tc.

Economic Acquisition
orvl Efficient Um
of Mc?cf lal cw f
w
Humon K* io^rc*i

M!oIon AeeomplMvncnf omf/tx
Pregrw toward Ob{*ctiv»«

External Coretrelnti
Internal Corat rclnti

Per»onne!, FoetttHw,
ond MoteriaU
• Acquisition
• Control
• Utilization

ftoqamn © ActlvitlM
«

I

_ _

J

Monoflement R? pieienfctiont
• mey b« moc‘« explicitly
• may b« linplied
OvimMtion
of Audit
EHortand
Kaport

j----------------------- PAST---------- -------------- 1 1
--------------------- ----------------------- PRESENT A N D fUTU*E------

Ptrfomvonc* Standard}:
• may exitf
• rocy ! • Inferred
• may b« unovnilabl*

L

...........................

JUDGMENTS, C O N C LU SIO N S, AN D RECOMMENDATIONS

Source: Edward S. Lynn and Robert J. Freeman, Fund Accounting: Theory and
Practice (Englewood Cliffs, New Jersey: Prentice-Kall, Inc., 1974), p. 773.




J

259
Standards it Js stated that:

...a concurrent, audit of all three parts would probably
be the roost economical manner cf audit, but this may not
be practical. Furthermore, it may not be practical or
necessary to perform all three elements of the audit in
particular circumstances,
...the audit standards have been structured so that each
of the three elements of audit can be performed separately
if this is deemed desirable.?
Thus, the elements of an audit may be visualized additively (Figure 5) or
separately, though

perhaps overlapping somewhat (Figure 6).

In prior testi­

mony before the House Committee on Banking and Currency, the Comptroller
General spoke of Type I, II, and III Audits.

These may be visualized in terms

of additive gradations of comprehensiveness as shewn in Figure 5.

Figure 5
ADDITIVE GRADATIONS OF AUDITING
Terminology used by the
Cocptroller Genera1*

Audit Elements
Program
Results
(Effectiveness)

Economy
&
Efficiency

Fiscal
(Financial &
Compliance)

Type II

Type I

*"To Provide for an Audit of the Federal Reserve System by the General
Accounting Office," Hearings before the Committee on Banking and Currency,
House of Representatives, 93r * Congress, 1st Sessipn, on H R. 10265..
c




260
Alternatively, these elements may be viewed as separate, though perhaps
overlapping, and a given audit may focus exclusively or primarily on one ele­
ment.

These may be referred to as types A, B, and C for ease of discussion.

(Figure 6,)
As indicated in Figure 6, a particular audit may focus on the financial
and compliance accountabilities of an organization or program, i.e., be a
Type A audit.

This type audit corresponds closely to the traditional financial

audit in the private sector in that (1) it usually includes the fiscal activi­
ties of the entire organization or program, (2) its purpose is to enable the
auditor to arrive at a relatively concrete opinion with respect to conformity




Figure 6
ALTERNATIVE SCOPES OF GOVERNMENTAL AUDITS

COMPREHENSIVE SCOPE AUDIT

_________ i __________
ALTERNATIVE AUDIT SCOPES

261
oi auditee ixr.anci.ai ^cateutuir..-» with tCvwur.t *ng and t<porting standards ^nd
coir.pl: anr.e o f the auditee with pertinent laws* and reg u la tion s, and, (3) i t is
i:-v.sily performed c-ti an ar.nu j 1 ot b i ar.nu ?1 r e p e titiv e c y c le .
.

While th;**e con­

ducting a Type A audit: would not be charged with the Type B or C audit elements,
I bsiin v e EC£t au th orities would agree that they should at lea st be se n sitiv e
to ani report (1) instances of obvious or blatant in e ffic ie n c y , ineeonomy, or
in e ffe c tiv e n e s s that came, to th e ir atten tion during the course of the Type A
au dit, and (2) cond ition s observed during the course o f the audit that appear
tc be conducive to future ineconomy, in e ffic ie n c y , or in e ffe c tiv e n e s s.
Where a Type B or Type C audit is undertaken (1) certain programs,
activitice, or fu nction s usually must be selected fo r au dit, as i t is un likely
that .* such aspects o f a size a b le organization would be audited simultaneously,
!i
and (2) audit inquiry w i l l be focused both cm forming judgments ard ccnclusionr
on

performance and on making recommendations d irected toward improving

future economy, e ff i c i e n c y , and e ffe ctiv e n e ss o f the programs, a c t i v i t ie s , or
functions audited.

The auditor i s not expected to measure the unmeasurable

or to a rrive at concrete
ar.d }'4% e ffe c t iv e *

opinions such as that the auditee is 61% e ff ic i e n t

Rather, the auditor i s expected to assess the economy,

e ffic ie n c y * and/or e ffe ctiv e n e ss of the programs, a c t i v i t i e s , cr functions
eica»rined according to the best av aila ble or derivable c r it e r ia and advise the
audit :.cpcr.t re cip ie n t ard auditee o f his fin d in gs, judgments, con clu sion s, and
reccm end* ..lows in

der to enhance the management co n tro l o f both and the

ac*ccnlability of tbe auditee (subordinate) to the audit report recip ien t
(h**gh<rr uvtherity) .

As might be expected, Type B and C audits often must be

conducted by an i.n tcid iscip lin a ry sudit. learn, perhaps assisted by outside
consultants with s p e cia l expertise on matters inder au dit.

Thev r y p ica ilv

ire ‘ ut 2<‘f;s routine than Type A au dits, e . g . , from planning, cenduot,




262
evaluation, reporting, and related standpoints; and they normally are not done
on an annual or biannual cycle basis» The selection of the attributes to be
audited, the timing of the audit, and similar considerations may be specified
by the audit report recipient or left to the discretion of the auditor.
This "variable scope" view of audit (Figure 6) is recognized by the
Comptroller General in the Standards, in Congressional testimony, and in
practice.

Further, this "variable scope" concept and approach highlights both

(1) the flexibility of contemporary auditing as a viable process to enhance
management control and accountability, and (2) the need to clearly define the
type and scope of audit authorized and/or of a particular audit.
The Audit Process
Having reviewed the definition, characteristics, and potential scope
elements of auditing, it may be observed that auditing is a process (Figure 7)
in which:
(1) the higher authority, the audit report recipient,
authorizes the auditor to examine certain account­
abilities of a subordinate, the auditee;
(2) the auditor performs an examination of the type
and scope authorized on behalf of the higher
authority;
(3) based on this examination, the auditor evaluates
the assertions and/or performance of the auditee
falling within the scope of the particular audit;
(4) the auditor communicates his opinions, findings,
conclusions, judgments, and/or recommendations,
as appropriate, to the audit report: recipient (and
usually to the auditee); and,
(5) the audit report recipient and auditee consider
the auditor's report in order to reconcile dif­
ferences of opinion, plan to implement, changes
suggested by the auditor or modifications thereof,
study questions or problems raised by the auditor,
and the like.




263

Figure 7
THE AUDIT PROCESS

Audit Report Recipient wf
I
(Higher Authority)
'-jjmwasLfc
b

E

?;
i

Reconciliation

O

gpMOBQsa

o

i it Authorization

, V
«

©

Accountability

©

u

iminati
Examination

Auditee

(Subordinate)

< r i3
------- >
I

Source: Adapted from Perer L. McMicltie and Gene Elrod, Auditing Public
Eudcation: Current. Status and Future Potential (Montgomery, Alabama:
The AIDE Staff, 1974), p. 80.

Note that this final stage
and the auditee.

(5) is conducted between the audit report recipient

The auditor has no authority to set cr change auditee policy

or procedures, but serves only in an investigative-evaluative-advisory capacity.
An overview of the stages of an audit from the auditor’s perspective is
reflected iu Figure 8.

These stages may be summarized as follows:

(1) The auditor is instructed to perform an audit or
decides to do so under authority previously granted;
(2) The ctganlzaticn(s), pregram(s), activity(ies), or
function(s) to be audited ore researched (as to nature;
pertinent laws, regulations, legislative intent; etc.),




AUDIT STAGES
Figure 8
(5)
Conduct
Audit
Financial
&
Compliance

(1)

•Authorization
{& ifecisica To
j
Audit

( 2)
'Background
! Research &
|Preliminary
— Decisions on
Audlc Scope,
Staffing, etc.

(4)
! Preli:ninary\
jS«rv<y - Tlcfi
:
j Audit Scope
Approach &
Staffing Plan

Pxogrsa
Results

Source:
Adapted fros John R. Killer and Harry Ostrov, "Road to Professionalizing a State
Audit Organization,” The F e d c n l Accountant, March, 1974, p. 14.




265
preliminary decisions are made as to the scope and
type of audit to be performed, and appiopiiate staff
members are assigned the task;
(3) Audi tee and auditor personnel confer with respect to
the audit; and some aspects of the audit plan may be
deleted or modified, and other aspects added, as the
auditor learns more about the auditee and/cr other
areas of concern are brought to the auditor's atten­
tion;
(4) Preliminary on-site study a i inquiry is undertaken
rd
by the auditor based on the audit plan as modified
to date; further modification of the audit plan may
occur as the auditor determines the extent to which
auditee management controls (including internal opera­
tional controls and audit) may be relied upon in his
examination and continues to learn more about the
entity's programs, activities, and functions during
the course of initial observation and survey;
(5) The appropriate elements of the audit are conducted;
the audit plan may be modified still further if warwanted by findings during the course of the examina­
tion;
(6) The auditor prepares a preliminary draft report;
(7) The preliminary report draft is discussed with auditee
personnel; auditee ccmraents are solicited for inclusion
in the final report and/or to resolve any misunder­
standings, areas of possible misinterpretations, or
ambiguities reflected in the draft report; and
(8) The final audit report is prepared and submitted to the
audit: report recipient, the auditee, and other parties
at interest.
Note again that the auditor participates in the reconciliation process between
the auditee (subordinate) and the audit report recipient (higher authority)
only if requested to do so— and then only in an advisory capacity.

Note also that

the audit report may be considered either as being confidential, if that is
deemed appropriate by the audit report recipient and/or tha auditor, or as
being a matter of public record.




266
Internal v. External Audits
The discussion to this point is applicable to public sector auditing
generally— whether performed by internal auditors, external government
auditors, or independent public auditors engaged by either the higher
authority or the subordinate.

Each type auditor might perform the types

of audits discussed, though for different purposes; and both internal and
external auditing are prerequisites to sound management control and account­
ability of larger organizations.

The appropriate role of each is depicted

in Figure 9.

Figure 9
ROLES OF INTERNAL AUDITOR, EXTERNAL
GOVERNMENT AUDITOR, AND INDEPENDENT
PUBLIC AUDITORS

Reports
External
Government
Auditor
(e.g., GAO)

-----i-ff.------

Reports




Public Auditor
(Engaged by higher
authority)

Accountability

Examines

Agency
Internal
Auditor

Higher
Reports
Authority
(e.g., Congress)

Subordinate
(e.g., Federal
Agency)

4
Accountabilxty

--------1
-----

Sub-Subordinate
(e.g., Federal
Subagency)

fiyamfnps

Reports
Public Auditor
(Engaged by
Subordinate)

267
The essential points of Figure 9 are that (1) the external government
auditor or independent public auditor engaged by and on behalf of the
higher authority is independent of the subordinate and sub-subordinate
agencies and acts to enhance the higher authority’s assurance that sub­
ordinate agency assertioxis and management controls are adequate or to
inform the higher authority otherwise; (2) the subordinate agency internal
auditor or an independent public auditor engaged by or on behalf of the
subordinate agency serves to give similar assurances or convey information
to the contrary to that agency’ management.
s

These latter types of auditors

are part of the subordinate’s management control system and, while these
audit activities are evaluated by the external government auditor or inde­
pendent public auditor engaged by the higher authority in the process of
evaluating the internal management controls of the subordinate agency, the
higher authority can not look to them to give it assurances or other infor­
mation independently of the subordinate agency management which they serve.
Such assurances

or added information can reliably be obtained by the higher

authority only from external governmental auditors or independent public
auditors engaged by it.
Limitations of Auditing
Many benefits of auditing have been noted in the course of this briefing
on the nature of and approaches to contemporary public sector auditing.

It

is equally important that you be aware of its limitations.
Auditing is a powerful tool of management control and accountability.
Indeed, an appropriate form of independent auditing or monitoring seems to
be essential wherever authority has been delegated and the delegator wishes
to hold the delegee accountable for the proper exercise of that authority;
auditing serves also to deter improper management actions and strengthen

50-365 0 - 75 - 18




268
both inter- and intra-entity management control

Auditing is, in short,

a vital component of our system of public rector checks and balances.
But, auditing is not a panacea

It is -*>£ten P3id that this world runs

on people— it always has, and it ?lvay.-. will.

Auditing is, like other human

endeavors, a "people process"— and people are neither omnipotent nor infal­
lible.

Further, auditors work under time and budget constraints that preclude

their auditing annually every transaction or event of every organization, pro­
gram, function, or activity that might be of concern to the audit report
recipient.
Certain inherent limitations of auditing should be recognized by all
concerned:
1.

While t i audit process can provide information through
le
which tc enhar.ce msnagc-r.ect control and accountability,
it should not be expected to perfect either. Since only
selected transactions snd events pertaining to selected
organisations, programs, activities or functions typically
are audited— and these are audited by mortals— some impro­
prieties or ineptnesses may not be detected. Furthermore,
since the auditor’s iole is to provide information, not to
act upon it, whether management control and accountability
are improved in fact depends on the extent to which the
audit report recipient and auditee use the information
provided.

2.

Although standards against which financial reports and
legal compliance are evaluated are normally available
and agreed upon— and either stated standards or implied
"reasonable man" criteria for evaluating managerial
economy and efficiency and/or program effectiveness are
available in many situations— evaluation standards are
difficult to determine m scire cases. There may be legi­
timate differences of opinion among apparently equally
competent persons as to the best program or activity
through which to attain an organization's goals or the
best way to carry out a given program or activity. In
such cases th . auditor serves primarily as an investigatore
reporter, though his judgments and conclusions may be
offered along with these of the auditee, and thus serves
primarily tc bring the issue to light.




269
Limitations such as these are recognized and addressed in

STJ.r.da:dfor

Audit of Governmental Organizations, Programs, Activities & Functions.
The second, third, and fourth General Standards address auditor competence,
independence, and exercise of due professional care, respectively; the
Examination and Evaluation Standards cover audit planning, supervision and
evidence gathering>and evaluation; and the Reporting Standards go to great
length to assure auditor objectivity, that issues and questions needing
further study are identified and explained, and that auditee views are pre­
sented where appropriate.
The professional auditor knows his limitations and those cf the audit
process.

Further, he will attempt to communicate them to audit report

recipients and others— for cverly high expectations of auditing resulting
from its being "oversold" can lead only to disappointment in the auditor
and disillusionment with the audit process.
Misconceptions of Auditing
Numerous misconceptions of auditing are apparent in Congressional
testimony and debate on the subject in recent years.

Several of these

have been discussed or alluded to already— e.g., that all audits are com­
prehensive in scope, that the only legitimate form of auditing is that
concerned with financial stewardship and legal compliance, and that the
auditor should be expected to determine that a given organization or pro­
gram is, say, 61% efficient and 74% effective.
Other misconceptions are at least equally detrimental to the prospects
of rational deliberation and legislation with respect to auditing.

One such

misconception is that subordinate agency internal audits, or audits by
public accountants engaged on behalf of the subordinate agency, are suf­
ficient— that audits Vr external governmental auditors or public auditors




270
engaged by the higher authority ? r ur.rec csrnnly duplicative and are not
.e
required.

Hopefully this erroneous notion— which is analogous to suggesting

that the plaintiff should rely o . the defense.
r
attorney for legal advise—
was dispelled in the preceding "Internal v* External Audits" section.

Both

types of auditing serve useful roles, b
ut. the former is not a substitute for
the latter.

Only the latter may be considered sufficient from the higher

authority’s standpointAnother popular misconception is that a Type III or Type C audit weakens
the independence of an agency by bringing undue political pressures to bear
upon it, presumably by "second-guessing" auditee decisions and/or by setting
auditee policy.

I have given this notion considerable thought in the course

of preparing this statement, as it appears to be widely held among some dis­
tinguished public servants whom I hold in high esteem.

Perhaps I am over­

looking something in their logic or am unaware of something in their
experiences, but I find no basis for assertions or convictions in this vein.
As to the specifics of this viewpoint:
1.

If independence is important to the proper functioning
of an agency, then the auditor will surely place high
priority on examining and evaluating its independence,
both in fact and in appearance, from all persons or
groups that might seek t o exert undue influence upou
.
it. This should serve to strengthen its independence,
not weaken it»

2.

Whenever a function r s vested an the public sector, the
.
presumption is t.har the indent i - sc assure— through the
s
political process— that the r e . v v l ts sought are achieved
or reasonable prorif-vt i'; *>c:ng made toward them. Fur­
ther, since the higher authority (e.g , Congress) is
responsible fcr--»?.i : . y be I.eld accountable tor— the
r3
performance o . the -uhotdini:e agency ’o which its
f
■
authority bris teen dtuegac< d, exercising oversight is
a matter of both duty and prtdence.




Since vhv. purpose c i deicrgar ion is .to achieve results,
the higbc; aot no: iny should everrise oversight primarily
at the b r c i u i p c X i y - r d results 1*' eJ . < d not interfere
.
i.
;r
in the d.-ly-rc-day Pianagement of the suborci iante agency.

271
Thus, the most appropriate and significant level of
accountability and audit is that of program results.
Indeed, if oversight priorities must be established
in terms or accountability and audit (see Figures 3
and 6), logic uxctar.es that they be set in a 3, 1, 2
order.
3.

The auditor's principal concerns in Type C audits
include surh things as whether auditee policies and
programs are consistent with the objectives of the
agency and within the authority delegated to it,
whether auditee management has established and is
pursuing reasonable approaches to the accomplishment
of its objectives, an . whether its purposes are
d
being achieved or progress is being made toward them.
His role is not ro "second guess" specific decisions
in the light of hindsight, but to assess the auditee*s
overall effectiveness and, if appropriate, offer
reconar.endat.ions for enhancing its effectiveness.

4.

As noted earlier, the auditor seivec only in an inves­
tigative-evaluative-advisory rcle and can not establish
or cbangc auditee policy. Those vho suggest that cer­
tain agencies must be "safe-guarded" from Type III or
Type C audits on the basis that the auditor might dictate
policy do not appear to appreciate this ultimate safe­
guard that is inherent in the audit process.

Summary and Conclusion
Public sector auditing has undergone far-reaching changes in recent
years.

While these changes have made auditing a cinch more flexible and viable

process by which to improve management control and accountability, they have
also resulted in some confusion and misconceptions with respect to what auditing
is and is not.

Hopefully, my remarks have served to clarify the nature and

scope of contemporary public sector auditing, its potential applications and
benefits, and its limitations.
In closing, let me te-emphasize that there is nothing mysterious or
mystical about the "variable sr.cpe" audit.

It is a common sense approach that

permits the auditor, acting on behalf of r - audit, report recipient, to examine
h:
any or all aspects cf auditee accountability.




if the auditcr is to make the

272
highest and best use of his time and talents— to perform his task as economi­
cally, efficiently, and effectively as practicable— he should not be pre­
cluded from adapting the scope and frequency of audit to the situation at
hand.

The requisite "safe-guard” against potential misuse of the auditor's

authority is inherent in the audit process, i.e., the auditor acts only in
an investigative-evaluative-advisoiy capacity.

Thus, th . auditor should be
e

given unrestricted authority both as to scope and frequency of audit.




273
FOOTNOTES

Committee on Basic Auditing Concepts, American Accounting Association,
"Report of the Committee on Basic Auditing Concepts," Accounting
Review, Supplement to Vol. XLVII, 1972, p. 18.
Ibid.
Ibid., p. 21.
Comptroller General of the United States, Standards for Audit of
Governmental Organizations, Programs, Activities & Functions
(USGPO) ,1972, p. 2.
Ibid., p. 6.
Ibid.
Ibid., pp. 2-3.




274

Chairman P a tm a n . I f it is all right with you, we will let Mr. Bartell
take about 10 or 12 minutes, the same amount of time you did, and
then ask the members to question you gentlemen, if that will be
Would that be all right, Mr. Bartell *
Mr. B a r t e l l . That is all right with me.
Chairman P a tm a n . All right, we will now recognize Mr. Bartell.
STATEMENT OF ROBERT M. BARTELL, PUBLIC RELATIONS CON­
SULTANT AND TAX PROGRAM COORDINATOR, LIBERTY LOBBY

Mr. B a r t e l l . I am Robert M. Bartell, public relations consultant
and tax program coordinator for the Liberty Lobby.
Chairman P a t m a n . I did not get that. I was talking.
Mr. B a r t e l l . I am Robert M. Bartell, public relations consultant
and tax program coordinator for Liberty Lobby.
Chairman P a t m a n . All right, sir. You are recognized.
Mr. B a r t e l l . Thank you, sir. I appreciate the opportunity to pre­
sent our views. I understand our written testimony will be incor­
porated in toto. Let me just summarize very briefly, if I may.
I think a little economic verse that might be applicable as regards
Government operations and tax income is: “When your outgo ex­
ceeds your income, your upkeep leads to your downfall,” and if there
is to be a clarification of Federal Reserve policies, there must be a
thorough, complete and independent audit of the Fed by the GAO.
We feel that only then could the character and validity of Fed
policies be definitively judged, and it is encouraging to us that at
this state 108 Members of Congress have cosponsored legislation re­
quiring a full-scale investigation of the Fed.
As Mr. Nader pointed out, many Americans have a limited ability
to comprehend the complexities of economics in our highly indus­
trialized society, and, yet, millions of them do not need a university
education to understand that something is very, very wrong with
our economy. The price of food goes up astronomically; the tax rate
goes up even faster; mortgage money is hard to get, and it is prohibi­
tively expensive; still the Government continues its policy of give­
aways.
Now, the people look to the legislators in Washington for the an­
swers to these very real and disturbing problems, and, of course, the
Congress can do nothing until it has been empowered to identify the
powers of the Federal Reserve System and make proper
recommendations.
Insulated as they are from congressional influence (which we feel
is contrary to the requirements of the U.S. Constitution), the Fed
can make arbitrary, impractical, or even capricious decisions, affecting
the lives of all Americans. They can make decisions affecting credit,
employment, prices in general, economic growth, and the very people
who must live with those decisions do not even know about them until
long after they have been implemented.
Well, this is wrong. I am sure the Chairman of the Fed, Dr. Burns,
would be the first to protest that the Fed has nothing to hide, but
the argument that an audit might jeopardize relations with foreign
banks simply does not make sense, viewed in the context of con­
gressional responsibility and trust. It is, perhaps, ironic that during




275

good times the Fed would probably never be challenged to make
Congress a part of its decisionmaking apparatus. Because of the se­
crecy of the Fed and the high interest rates, it might be said these
are good times for the bankers, but bad times for the taxpayers. Some­
thing has gone wrong, and it goes without saying that Congress must
make every effort to set this Nation back on the road to economic
stability, and, if this effort breaches the sacrosanct private operation
of the Fed, so be it.
Obviously, something has gone wrong. We had better find out what
it is.
Liberty Lobby urges this subcommittee to approve H.R. 4316, the
measure to provide for an audit of the Federal Reserve, without delay
and without debilitating amendments. Even as the Congress, itself,
faces its inevitable day of accountability on election day, so should
the Federal Reserve System on accounting day. The sooner, the better.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Robert M. Bartell follows:]
P repared

Statem en t
and T

of
ax

R o b e r t M . B a r t e l l , P u b l ic R e l a t io n s
P r o g r a m C o o r d in a t o r , L i b e r t y L o b b y

Consu ltant

Mr. Chairman and Members of the Committee: I am Robert M. Bartell, public
relations consultant and tax program coordinator of Liberty Lobby. I appreciate
the opportunity to present the views of Liberty Lobby's 23,000-member Board of
Policy, and also to appear on behalf of the approximately quarter of a million
readers of our monthly legislative report, Liberty Letter.
The last time Congress examined the question of whether the Federal Reserve
■System should be audited, the question was begged by a mild, inoffensive and
virtually useless piece of legislation. The measure that finally passed the House
pleased no one but the FED itself, which was hardly the intent of the sponsors.
It should be rather obvious that if the books of any business, corporation, insti­
tution or government agency are to be examined, there must be full disclosure.
No books or records or documents pertaining to the organization or its trans­
actions can sacrosanct. Yet, this is precisely what the FED has been allowed to
do. After a vigorous Congressional brainwashing campaign, Dr. Arthur F. Burns,
the fatherly Chairman of the Federal Reserve System, was empowered by the
Congress to withhold any records the FED itself felt might be injurious to
their relations with foreign banks.
H.R. 10265, as amended, was a farce. We commend the Chairman of this Sub­
committee, Mr. Patman, for reinstituting the procedure by which the American
people can determine for themselves whether the Federal Reserve System has
been an asset or a detriment to the American economy.
In the view of Liberty Lobby, it has been a detriment. Probably our prime
objection to the system is the fact that the Constitution specifically states that
Congress shall have the the power to coin money, regulate the value thereof and
borrow money on the credit of the U.S.
So far they have done about as well in one area as the other. Congress abro­
gated its responsibility to coin and regulate money when the international
bankers sold it a bill of goods. Congress has devastated our economy by borrow­
ing nearly half a trillion dollars we don’t have. The American taxpayer is pay­
ing for those two mistakes, as they have been paying for more than half a
century.
It is past time for the American people to know just exactly what they are
paying for. An audit of the Federal Reserve System, with no strings attached, is
one way to do it. Another would be to limit the expenditures of government to the
income from taxes, but that is not the function of this commitee. However, because
the excesses of Congress are bankrolled, in large measure, by the Fed, it is diffi­
cult to ignore one in favor of the other.
H.
Con. Res. 133, which the Senate approved recently, has no legal force. Any
suggestion by the Congress cotild be legally ignored by the Fed. So there is no
point looking in that direction for a clarification of Fed policies.




276
No, the answer must be thorough, complete and independent audit by the Gen­
eral Accounting Office. Only then can the character and validity of Fed policies
be difinitively judged. It is encouraging that, at this date, 108 members of Con­
gress cosponsored legislation requiring a full-scale investigation of the Fed.
Many Americans have a limited ability to comprehend the complexities of
economics in our highly industrialized society. Yet, millions of them don’t need a
university education to understand that something is very, very wrong with our
economy. The price of food goes up astronomically, and the tax rate goes up even
faster. Mortgage money is hard to get, and prohibitively expensive, yet our
government continues its policy of massive giveaways.
The people look to their legislators in Washington for the answers to these
very real and disturbing problems. The Congress can do nothing until it is em­
powered to examine the policies of the Federal Reserve System, and make proper
legislative recommendations. Insulated, as they are, from Congressional influence
(contrary to the requirements of the U.S. Constitution), the Fed can make
arbitrary, impractical or even capricious decisions affecting the lives of all
Americans. They can make decisions affecting credit, employment, prices and
general economic growth and the very people who must live with those decisions
don’t even know about them until long after they have been implemented.
This is wrong. I’m sure the Chairman of the Fed, Dr. Bums, would be the
first to protest that the Fed has nothing to hide. The argument that an audit
might jeopardize relations with foreign banks simply doesn’t make sense viewed
in the context of congressional responsibility and trust.
It is perhaps ironic that during good times, the Fed would probably never be
challenged to make Congress a part of its decisionmaking apparatus. However,
these are not good times. They aren’t even mediocre times. Because of the secrecy
of the Fed and high interest rates, it might be said that these are good times for
the bankers but bad times for the taxpayers.
Something has gone wrong, terribly wrong. It goes without saying that Con­
gress must make every effort to set this Nation back on the road to economic
stability. If this effort breaches the sacrosanct, private operations of the Fed, so
be it. Obviously, something has gone wrong; and we had better find out what it is.
Liberty Lobby urges this committee to approve H.R. 4316, the measure to
provide for an audit of the Federal Reserve System, without delay and without
debilitating amendments. Even as the Congress itself faces its inevitable day of
accountability, so should the Federal Reserve System. The sooner the better.
Thank you again for the opportunity to appear today and to present our views.

Chairman P a t m a n . Did y o u finish, sir?
Mr. B a r t e l l . Yes, sir.
Chairman P a t m a n . Thank you very much.
Now, then, Mr. Neal, would you like to ask any questions?
Mr. N e a l . N o ; I really do not have a question. It seems that everyone
is in agreement. It is a very happy situation.
Chairman P a t m a n . That was a very interesting statement that the
gentleman had, and we will have access to it when the record comes out.
Mr. N e a l . I am sorry I have had to miss these other days because I
do not really understand the opposition. I will have to dig into the tes­
timony and try to understand it.
Chairman P a t m a n . Mr. Blanchard, would you like to comment?
Mr. B l a n c h a r d . I have one question. I would like to thank both wit­
nesses for coming and bearing with us, and since we really have not
gotten into what an audit is, I deeply appreciate your document, Mr.
Freeman, and I have one question for you, Mr. Bartell.
I take it you have spent, or the Liberty Lobby has spent, considera­
ble time looking into the question of an audit of the Fed. In so doing,
have you come up with any strong arguments as to why we should not
audit the Fed? As Mr. Neal said, virtually every witness who has ap­
peared before this subcommittee has recommended an audit. We have
not heard from the Fed yet, and I assume they will be opposed to the




277

bill, but from your experience and from your expertise, can you think
of any good reasons why we should not audit the Fed ?
Mr. B a r t e l l . Absolutely not.
Mr. B l a n c h a r d . Thank you.
Chairman P a t m a n . What is your idea, professor?
Mr. F r e e m a n . Thank you, Mr. Chairman, I did not get to that. I
do have this addressed at a couple of points in the paper. To say
that I do not want to be audited is not a very easy thing to say, be­
cause that is the same thing as saying I do not want to be held account­
able. So, typically, you do not answer that way. But a smokescreen
from a different direction might be put forth. In my view, much in
prior year’s testimony, as I analyze it, has been a smokescreen of emo­
tion or picking on one certain audit aspect. Two particular arguments
have been put in prior testimony that I have seen. One is that the in­
ternal audit or audits by C.P.A.’s engaged by the Fed were sufficient.
I address this in this paper, and in my view that is not sufficient. It
is analogous to saying that the plaintiff ought to rely upon the de­
fendant’s lawyer for legal advice—because you do not get adequate
assurance until an auditor who is responsible to you has given it, and
this has been covered here. And there is one other item, the inde­
pendence argument, that I have noted has been used. Just briefly, if I
were an auditor on the job, and if an agency’s independence was im­
portant, the first thing I would do is evaluate its independence from
all sources that might influence it, not merely its independence from
Congress. Again, I address that in this paper.
Chairman P a t m a n . Thank y o u .
Mr. N e a l . Mr. Chairman, would you yield ? I believe that you said
earlier that the interest income on the $80 billion or $85 billion in
portfolios that the Fed holds is paid to the Fed, and the Fed is unac­
countable for that interest payment at the rate of something like $6
billion or $7 billion a year.
Chairman P a t m a n . Yes.
M r. N

eal.

D

o

w e h a v e a n y i d e a o f h o w t h a t m o n e y is s p e n t n o w ?

Chairman P a t m a n . Not 100 percent, no.
Mr. N e a l . What percent of it do we know about ?
r
Chairman P a t m a n . It is only on the Fed’s reports, and you do not
always get exactly what the meaning is from reading the reports. I
have found it very difficult, and I have followed this for 30 years.
Mr. N e a l . But, they do report, they do account for that income ?
Chairman P a t m a n . Well, y o u take the year before last when the
Fed claimed it spent $495 million of the money.
Mr. N e a l . What did they do with the rest of the money ?
Chairman P a t m a n . The rest of the money that was not spent, the
Fed turns it over to the Treasury. There is no law requiring that at
all, but I guess maybe they have a little conscience problem there, and
so they just turn it over to the Treasury.
Mr. N eial . I have heard you speak on that point several times, and
I just have to admit my own ignorance.
Chairman P a t m a n . But, we have never gotten all the facts about it,
and we have asked them a number of times about where this money
goes, and we have never received it.




278

Mr. N e a l . Of course, that is what we would get in an audit, but the
other point, the matter of these bonds being paid for, is it not the na­
ture of bonds that they are a debt instrument ?
Chairman P a t m a n . No; that is in answer to what I said a while
ago, that nearly every professor teaching about credit instruments and
economic questions, almost invaribly say somewhere in their lectures
that whenever the obligor of an instrument and the obligee become the
same party or entity, the debt is canceled. Now, it is just like the Gov­
ernment issuing a debt, say, billions of dolors worth at a time. If the
Federal Government acquires those bonds, or uses money that it has
to pay the bonds, why the debt is canceled. Why should it not be can­
celed ? Nobody should be required to pay interest on an obligation that
has already been paid, and that is what we have, that is why the
obligor and obligee become the same party and the debt is paid. It has
always been that way.
Mr. N e a l . But the Federal Government purchases, or the Federal
Reserve purchases, debt obligations from other agencies of the Federal
Government all the time.
Chairman P a t m a n . I know, but it is the same thing. Federal Reserve
notes are Government obligations. That is the Government paying
itself. They become the same entity, the same person. The debt is
canceled. I do not say that anybody devised it that way on purpose but
that is the way it is.
Mr. N e a l . Well, I will have to admit that I do not understand it,
so I look forward to the audit.
Chairman P a t m a n . N o w , there is one book that I got up. I did not
do it all myself, but I had help on it. It is called a “Primer on Money”
and that book has been sold in millions of copies. I never fail to send
a copy to a person who writes to me for it, and right now millions of
copies have gone out, and it has been a very good book for people who
want to know more about the monetary system. And I think we will
put out more of them, as it has been very popular, and I think it is
helpful.
I am looking forward to the fact that you gentlemen will study this
with interest and appreciation and with the knowledge that you are
helping your country, or at least you believe you are, and see if we
can come up with something that would be real good in our report
Now, then, without objection, these gentlemen that testified will be
allowed to extend their remarks and insert any material that you
think is relevant to this discussion, and members may, of course,
submit questions to the Clerk, and he will submit them to the wit­
nesses. When they examine their transcript for approval or correc­
tion, they can answer the questions.
There may be some of us who did not ask the questions we wanted
to, they could submit them in writing.
Mr. N e a l . Let me just ask one more question, if I could. I believe
it might be helpful, Mr. Bartell if you could say why you think
there is opposition to this audit of the Federal Reserve? I am not
asking for an answer right now. If you wanted to give that some
thought and include it with your remarks, or if you would rather
answer now, it is immaterial.




279

Mr. B a r t e l l . Well, I think, obviously, any government organiza­
tion or bureaucratic function which can operate without overview
or without control is very happy to do so and will continue to per­
petuate itself in that capacity as long as it can.
Specifically, I think our objection as constitutionalists to the Federal
Reserve System lies in the fact that the Constitution says the Congress,
itself, shall be responsible for regulating and issuing coins, and we
feel Congress abrogated this responsibility back in 1913 when the
Federal Reserve System was brought into being. But, naturally, if
they can operate with their own auditing procedures, without con­
gressional overview, they are going to do it.
The reasoning behind the amendments that were put into H.R.
10265 in the 93d Congress indicating that they could not allow Con­
gress to control information, certain administrative functions and
decisions made by the Federal Reserve, simply because it might in­
fluence or adversely affect their relations with foreign banks, has no
real bearing, so far as we are concerned, because it is the responsibility
of Congress to determine whether they are functioning properly.
Chairman P a t m a n . The Communications Workers of America
submitted a letter for the hearing record in support of H.R. 4316,
as introduced. In addition, the Communications Workers are submit­
ting a statement by the AFL-CIO Executive Council, advocating
a full-scale audit of the Federal Reserve System, which will also be
made a part of the hearing record, and I ask unanimous consent to
insert these communications in the record at this point, and, without
objection, it is so ordered.
[The letter of the Communications Workers of America, and the
statement of the AFD-CIO Executive Council follow:]
C o m m u n ic a t io n s W

orkers

of

A

m e r ic a ,

Washington, D.C., April 25, 1975.
Hon.

W

r ig h t

Patm

an

,

Chairman, Subcommittee on Domestic Monetary Policy, U.S. House of Repre­
sentatives, Washington, D.C.
M y D e a r M r . C h a i r m a n : I noted with interest that your subcommittee has
begun hearings on legislation to provide for an audit of the Federal Reserve
System by the General Accounting Office (GAO). I commend you and your
subcommitee in this undertaking, and I assure you that you have the full support
of the Communications Workers of America.
We find it hard to believe that one of the most important agencies of the
Federal Government has not had a major audit since 1933. General Accounting
Office statistics indicate that the Federal Reserve System showed total earnings
of $6.3 billion in 1974, and total operating expenses of $548 million. Since the
majority of this income was derived from the interest paid on government
bonds— interest paid out of the pockets of the taxpayers— we feel the public and
Congress has the right to know if the Federal Reserve System is operating
in an efficient manner.
I have full faith in the ability of the General Accounting Office to conduct
a fair and impartial audit of the Federal Reserve System. Some critics of your
legislation have charged that the GAO will attempt to use the audit authority
to meddle in the monetary policy decisions of the Federal Reserve Board. I do
not believe this. As I see the work of the General Accounting Office, it is simply
to audit the System, and not to influence Board decisions.
There is the possibility that during the course of an audit some information
on monetary policy decisions could come to light. I am one who believes that
should this occur it will be good for the economic well-being of our country.
Congress, as the representative of the people, has the right to know what are
the monetary policy decisions of the Federal Reserve Board, since it is their




280
constituents and my Union members who have to bear the brunt of those
decisions.
I have attached to my letter a copy of a statement adopted by the AFL-CIO
Executive Council entitled “The Federal Reserve and the Nation’s Monetary
Policy.” As a member of the Executive Council, I supported this resolution. I
would appreciate it very much if you would see that it is made a part of your
hearing record.
Sincerely,
Glen n E. W

atts,

President.
Statem ent

by

th e

AFL-CIO
the

E x e c u t iv e C o u n c il o n t h e F e d e r a l R
N a t io n ’ s M o n e t a r y P o l ic y

eserve an d

For the second time since 1969, the Federal Reserve System under the chair­
manship of Dr. Arthur Burns has brought recession to the American economy
and unemployment to millions of workers.
The Federal Reserve’s arrogant brinkmanship with the American economy
in 1973 and 1974 has resulted in the worst downward spiral since the Great
Depression, with no end in sight.
In the name of combatting inflation, the Federal Reserve’s money-crunch
and even higher interest rates added to inflationary pressures, brought a de­
pression to the housing industry and mass unemployment.
The Federal Reserve System created by the Congress to be the nation’s central
bank:
— Has utterly failed to serve the needs of the American people for full em­
ployment, economic expansion and adequate public facilities and services,
while contributing to cycles of boom and bust.
— Has been an engine of inflation, with soaring interest costs imposed, directly
and indirectly, on consumers, home-buyers, small business, public utilities
and government itself.
— Has been a major cause of the recession of 1969-1970 and today’s dis­
astrous conditions— resulting in the highest unemployment rate in 34 years
and huge deficits in the federal budget.
— Has discriminated against the extension of needed credit for home-building,
small business, state and local governments and public utilities. At the same
time its discrminatory policies provided substantial amounts of credit for
commodity market and land speculation, inventory hoarding and foreign
lending.
— Has brought the economy to the brink of depression, with spreading bank­
ruptcies of businesses and banks.
This key government agency, whose decisions are a major factor in deter­
mining the economic welfare of the American people, continues to operate in
relative secrecy and with little accountability to the Congress, which created it.
The time is long overdue to overhaul the structure of the Federal Reserve and
its policies— to make them responsive to the needs of the American people.
Therefore, we call on the Congress t o :
1. Direct the Federal Reserve to reduce short and long-term interest rates and
to allocate available credit for high-priority economic activities. America needs
a sufficient expansion of money and credit, at reasonable interest rates, to
encourage balanced economic expansion. A substantial portion of available credit
should be allocated for such purposes as housing, community facilities and
essential capital investment, while the flow of credit should be curbed for such
activities as speculation, business takeovers and foreign lending.
2. Establish comprehensive oversight review of the entire Federal Reserve
System to bring America’s central bank fully into the government structure.
3. Require that the operations of the Federal Reserve System be subject to
a yearly audit by the General Accounting Office.
4. Fix the term of the chairman of the Federal Reserve at four years, coinci­
dent with that of the President who appoints him. The term of members of the
Board of Governors should be cut from 14 years to seven.
5. Abolish the Open Market Committee, the policy arm of the Federal Reserve
System— with five of its 12 members not government appointees. Its functions
should be absorbed by the Board of Governors whose members are appointed
by the President and confirmed by the Senate.




281
6.* Extend membership on the Board of Governors of the Federal Reserve and
on the governing and advisory committees of the entire Federal Reserve Sys­
tem, including its 12 district banks, to representation from major groups in
the economy, including consumers and organized labor.
7. Require all commercial banks to be participants in the Federal Reserve
System.
The Board of Governors should keep the Congress and the public informed
with reasonable promptness and with reasonable detail on its major policy
decisions and the reasons for arriving at them.

Chairman P a t m a n . Thank you, gentlemen, very much, and if we
need you, we will get in touch with you. If we can arrange a time that
is mutually satisfactory, we will ask you to come up here.
The subcommittee will stand in recess, subject to call of the Chair.
[Whereupon, at 11:50 a.m., the subcommittee recessed, subject to the
call of the Chair.]







282

AUDIT OF THE FEDERAL RESERVE
THURSDAY, M AY 8, 1975

of

H o u se of R e p r e s e n t a t iv e s ,
S u b c o m m it t e e o n D o m e s t ic M o n e t a r y P o l ic y
t h e C o m m it t e e o n B a n k i n g , C u r r e n c y a n d H o u s in g ,

Washington, D.C.
The subcommittee met, pursuant to notice, at 10:10 a.m., in room
2128, Rayburn House Office Building, Hon. Wright Patman [chair­
man of the subcommittee] presiding.
Present: Representatives Patman, Minish, Hannaford, Neal,
Blanchard, and Hansen.
Chairman P a t m a n . The subcommittee will please come to order.
I have a short statement, Governor Mitchell, and then, of course, I
will call on you. You have a very comprehensive statement which we
appreciate very much.
As the members of this subcommittee know, 109 Members of the
House of Representatives are cosponsoring legislation which would
require a full-scale audit of the Federal Reserve System. This is good
evidence of the desire of the House for prompt action on this bill,
and I am very hopeful that we can move it to final conclusion here in
this subcommittee within the week. And I have assurances that Chair­
man Reuss, of the full committee, will act quickly on our
recommendations.
To speed up the tsonsideration, we will hear this morning from
George Mitchell, Vice Chairman of the Federal Reserve Board, as our
last scheduled witness. We had originally planned to have Dr. Arthur
Burns, the Chairman of the Board, as the witness, but he has offered
various reasons and negotiations on his possible testimony which
would only serve to delay us, from our standpoint, to a final resolu­
tion of the bill.
In any event, we welcome Governor Mitchell as the Federal Re­
serve spokesman, and we take his testimony this morning on the basis
that he is the official spokesman for the Federal Reserve on this
subject.
And as customary in this subcommittee, we allow members of the
committee—in this case, the whole Banking and Currency Commit­
tee—to submit written questions to the witnesses appearing before our
subcommittee, with the obligation of the witnesses that they will, when
they examine their transcript for correction, answer the questions if
they are not answered here. You are used to that, I believe, Governor
Mitchell. We have had that before.
And as has been suggested in these hearings, there is not a Govern­
ment bureaucrat, or agency, that likes to have anyone look over their
shoulder. That is the nature of the Government bureaucracy and in
this respect, the Federal Reserve is no different than any other agency
(2 8 3 )

50-365 0 - 75 - 19




284

or department—all of which secretly believe that they should be the
sole judge of their own operations.
The Congress—and for that matter, the Constitution—does not
accept this concept of the infallibility of the bureaucracy, and I trust
that we will not continue to extend it to the mammoth Federal Re­
serve System.
The nature of the Federal Reserve, and its sheer size, makes an
audit all that much more compelling. It is the only major govern­
mental unit which does not come to Congress for appropriations, or
appropriations review, as required by the U.S. Constitution. And this
fact alone would call for the closest kind of audit.
The Federal Reserve, of course, finances its far-flung operations out
of a slush fund created by almost $6 billion in interest on a portfolio
of Government securities which now exceeds $93 billion—I did not
say millions; I said billions.
I want to ask you just one question, and that is all, during the time
I read this. Are you in accord with the statement that the Chairman
of the Board of Governors has made before this subcommittee and
others, when I asked him who owns these $93.9 billion in portfolio
bonds? Who would you say owns those bonds in that portfolio?
Governor M i t c h e l l . Well technically, the Federal Reserve banks
own the bonds, and the interest on the bonds. Most of it comes back to
the U.S. Treasury.
Chairman P a t m a n . These are bonds and other securities in the port­
folio of the Federal Open Market Committee in the New York Fed­
eral Reserve Bank. And they represent obligations which have been
paid for once, but which have not been canceled. Needless to say, I
would like to see this entire portfolio operation closely checked.
This is a time of great economic crisis in this Nation, and I do not
feel that this subcommittee, and the Congress as a whole, can afford
to continue to guess about what the most powerful economic agency is
doing in any respect, at any time. An audit would at least allow us
to tell our constituents that we are keeping a close watch on this
agency, and that we had the means to—at a minimum—investigate
its activities.
It is our opinion that the American people want the agencies which
are responsible for any part of economic policy to be accountable, and
this audit legislation is a giant step forward in accountability for the
Federal Reserve System.
Now, on that $6 billion a year that the Fed receives for bonds that
I said had been paid for once, that means that figure is out $500 mil­
lion in interest each month, or $16,438,000 in interest each day. So it
is a considerable sum of money, especially since the Constitution says
that no money shall be expended from the Treasury except as author­
ized by the Congress. And the Congress has not authorized this.
Therefore, we feel like we are asking people to pay $6 billion a year
interest. According to the Constitution, that is not due.
All right Governor Mitchell, we are glad to have you, sir. We have
had you before, and you are a good witness. You may proceed to pre­
sent your testimony. I believe you have it in writing, and you may
proceed to present it, either wholly, or we will put the whole statement
in the record, regardless of whether you use it. And you can take any
part of it or all of it, and present it asyou desire.
[Text of H.R. 4316 and list of cosponsors follows:]



285

94t h

"s H .R .4316
““
CONGRESS

V *

T 'fc

/«

IN THE H OU SE OF R E P R E SE N T A T IV E S
M a r c h 5 ,1 9 7 5
M r . P a t m a n ( f o r h im s e lf , M r s . S u l l i v a n , M r . R o e , M s . A b z u g , M r . V i g o r i t o ,
M r . E c k h a r d t , M r . F a s c e l l , M r . S o l a r z , M r . J o h n s o n o f C a lif o r n ia , M r .
E v a n s o f I n d ia n a , M r . A n n u n z i o , M r . M i l l e r o f C a lif o r n ia , M r . D i n g e l l ,

Ms.

C o llin s

o f I lli n o is , M r . Z e f e r e t t i , M r . B ia g g i , M r . C a r n e y , M r .

D o m in ic k V . D a n i e ls , M r . D a v is, M r . M o l l o h a n , M r . C h a r le s H . W i l s o n
o f C a li f o r n ia , M r . R e e s , M r . M e t c a l f e , M r . G i l m a n , an d M r . S a r a s i n )
in tro d u ce d th e fo llo w i n g b i l l ; w h ich w as r e fe rre d to th e C o m m itte e on
B a n k in g , C u r re n c y an d H o u s i n g

A BILL
To authorize and direct the General Accounting Office to audit
the Federal Reserve Board, the Federal Advisory Council,
the Federal Open Market Committee, and Federal Reserve
banks and their branches.
1

Be it enacted by the Senate and House of Representa-

2

tives of the United States of America in Congress assembled,

3 That (a) the Comptroller General of the United States shall
4 make, under such rules and regulations as he shall pre5 scribe, an audit for each fiscal year of the Federal Reserve
6 Board, the Federal Advisory Council, the Federal Open
I




286

2
1 Market Committee, and all Federal Reserve banks and
2 their branches, including transactions of the system open

3 market account conducted through recognized dealers.
4

(b) In making the audit required by subsection (a),

5 representatives of the General Accounting Office shall have
6 access to books, accounts, records, reports, files, and all

7 other papers, things, and property belonging to or in use
8 by the entities being audited, including reports of exami­

9 nations of member banks, from whatever source. They shall
10 be afforded full facilities for verifying transactions with

11 balances or securities held by depositaries, fiscal agents,
12 and custodians of such entities.

13

(c) The Comptroller General shall, within six months

14 after the end of each fiscal year, or as soon thereafter as may
15 be practicable, make a report to the Congress on the results
16 of the audit required by subsection (a), and he shall make
17 any special or preliminary report^ he deems desirable for the
18 information of the Congress. A copy of each report made
19 under this subsection shall be sent to the President of the
20 United States, the Federal Reserve Board, and the Federal
21

Reserve banks. In addition to other matters, the report shall

22

include such comments and recommendations as the Comp­

23 troller General may deem advisable, including recommenda­
24 tions for attaining a more economical and efficient administra­
25 tion of the entities audited, and the report shall specifically




287

3
1 show any program, financial transaction, or undertaking ob2 served in the course of the audit which in the opinion of the
3 Comptroller General has been carried on without authority
4 of law.
5

(d) The Comptroller General is authorized to employ

6 such personnel and to obtain such temporary and intermit7 tent services as may be necessary to carry out the audits re8 quired by subsection (a), without regard to the provisions
9 of title 5, United States Code, governing appointments in
10 the competitive service, and such individuals may be paid
11 without regard to the provisions of chapter 51 and subchapter
12 III of chapter 53 of such title relating to classification and
13 General Schedule pay rates.




288
L is t of 109 C osponsors of B il l P roviding for G A O A u d it of F ederal R eserve
Sy s t e m

Arizona: Morris Udall.
California: George Danielson, Harold Johnson, George Miller, Charles Wilson,
Tom Rees, Andrew Hinshaw, Edward Roybal, Leo Ryan, Fortney Stark, Yvonne
B. Burke, Ronald Dellums, John Moss, Glenn M. Anderson, Augustus Hawkins,
Lionel Van Deerlin, Mark Hannaford.
Colorado: Tim Wirth, Pat Schroeder.
Connecticut: Ron Sarasin, William Cotter, Anthony Moffett.
Florida: Dante Fascell, Bill Chappell.
Georgia: Dawson Mathis, Andrew Young, Larry McDonald.
Hawaii: Patsy Mink, Spark Matsunaga.
Illinois: Melvin Price, Frank Annunzio, Cardiss Collins, Ralph Metcalfe, Mor­
gan Murphy.
Indiana: Dave Evans.
Iow a: Berkley Bedell.
Kansas: Martha Keys.
Kentucky: John Breckinridge.
Louisiana: John Breaux.
Maryland: Gladys Spellman, Parren Mitchell.
Massachusetts: John J. Moakley, Michael Harrington, Gerry Studds, Robert
Drinan, Paul Tsongas.
Michigan: Robert Carr, James O’Hara, Bob Traxler, John Dingell, John
Conyers.
Minnesota: Joseph Karth, Donald Fraser, Bob Bergland, James Oberstar.
Missouri: Leonor K. Sullivan, William Randall, Richard Ichord.
New Jersey: Robert Roe, Dominick Daniels, Henry Helstoski, William Hughes,
Peter Rodino, Andrew Maguire, Joseph Minish.
New York: Frederick Richmond, Edward Pattison, Bella Abzug, Stephen
Solarz, Benjamin Gilman, Leo Zeferetti, Mario Biaggi, Charles Rangel, Richard
Ottinger, John LaFalce, Tom Downey, Benjamin Rosenthal, Elizabeth Holtzman,
Herman Badillo, Lester Wolff, John Murphy, Shirley Chisholm.
North Carolina: Walter Jones, Stephen Neal.
Ohio: Charles Carney, Wayne Hays, Louis Stokes, Ronald Mottl, John
Seiberling.
Oregon: Robert Duncan.
Pennsylvania: Joseph Yigorito, Joseph Gaydos, Robert Edgar, Robert Nix.
South Carolina: John Jenrette, Mendel Davis.
Tennessee: Marilyn Lloyd.
Texas: Bob Eckhardt, Henry Gonzalez, Robert Krueger, Jim Wright, Wright
Patman.
Virginia: Dan Daniel.
Washington: Mike McCormack.
West Virginia: Harley O. Staggers, Robert Mollohan, Ken Hechler.
Wisconsin: Clement Zablocki.
District of Columbia: Walter Fauntroy.

STATEMENT OF HON. GEORGE W. MITCHELL, VICE CHAIRMAN,
BOARD 0E GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Governor M i t c h e l l . Mr. Chairman and members of the subcom­
mittee, I welcome the opportunity you have afforded me to present the
views of the Board of Governors on H.R. 4316, a bill to authorize and
direct the General Accounting Office to audit the Federal Reserve
Board, the Federal Advisory Council, the Federal Open Market Com­
mittee, and Federal Reserve Banks and their branches.
The bill would authorize the General Accounting Office to conduct
an annual audit, and in so doing, the Comptroller General would be
accorded access to such records, including reports of examinations of
member banks, from whatever source, as he finds necessary for the
conduct of the audits. The Comptroller General would be required
to submit a report of each audit to Congress.




289

As we understand the bill, the Comptroller General would be granted
virtually unrestricted authority to look into the financial and opera­
tional aspects of the Federal Reserve System, and would thus have the
authority to review and evaluate all aspects of Federal Reserve activi­
ties, including formulation and implementation of monetary policy.
The Board of Governors over the years has consistently opposed
such proposals. Our objections stem not from any reservations about
the General Accounting Office, which enjoys a well-deserved reputation
for competence and integrity. Rather, our objections stem from a basic
concern about the optimal functioning of the Nation’s money and
credit system.
In summary, the Board believes:
1. An audit by GAO of the Federal Reserves’s accounts and expendi­
tures, compliance with applicable laws and regulations, and efficiency
and economy of operations would be a needless duplication of present
efforts and would result in unnecessary additional expenditures.
2. To go further, and authorize GAO to audit Federal Reserve poli­
cies, including the processes by which those policies are reached, would
unwisely inject a third party into the sensitive area of monetary policy.
This would run contrary to congressional decisions over the years based
on the view that noninterference with the internal management of the
Federal Reserve would, in the long run, provide better monetary and
credit policies. We believe Congress has acted prudently, and that the
system should not be inhibited, directly or indirectly, from exercising
its best professional—and entirely independent—judgment.
3. The recent passage of House Concurrent Resolution 133 by the
Congress has sharply altered the context in which the question of GAO
audit must be considered. As you know, this resolution provides for a
direct “audit” of Federal Reserve policy by the congressional prin­
cipals—the. Committee on Banking, Currency and Housing in the
House and its counterpart in the Senate. Thus, a policy audit by GAO
could not only fault public policy but it literally would be redundant
to the action taken by the Congress this year.
4. Certain functions and activities of extreme sensitivity having to
do with bank examinations and international monetary relations
would be or would need to be substantially modified, were a GAO review put into effect. The need for exclusion of these activities was
recognized to some degree in the bill (H.R. 10265) reported by the
full Committee on Banking and Currency in the 93d Congress, and to
a greater extent in the bill finally adopted by the House last year.
With your permission, I ’d now like to sketch briefly the background
on this subject.
(1) From its establishment in 1913 until 1921, the Board of Gov­
ernors was audited by the Treasury.
(2) Congress created the General Accounting Office in 1921. For
the next 12 years, the Board of Governors, but not the Federal Re­
serve banks and branches, came under the GAO’s scrutiny.
(3) The Banking Act of 1933 provided that the Board’s funds
should not be construed to be “Government funds or appropriated
moneys.” In this act, Congress deliberately voted to remove the Board
from the jurisdiction of the General Accounting Office. The purpose,
described in a committee report, was to “leave to the Board the deter­
mination of its own internal management policies.”




290

(4) In the years between 1933 and 1952, audit teams from Federal
Reserve Banks performed the audit of the Board’s books.
(5) Beginning in, 1952 and continuing up to this time, the Board,
using the discretion Congress provided, voted to employ nationally
recognized public accounting firms to perform this function in order
to assure an independent oversight of the Board’s administrative
activities. Each year the audit report is reproduced in the Board’s
annual report, and copies of the audit report are furnished to this com­
mittee and to the Senate Committee on Banking, Housing and Urban
Affairs.
(6) Meanwhile, year in and year out, the Board’s examiners have
examined the Reserve Banks. Since 1952, the procedures used by the
Board’s examination staff have been observed by the outside account­
ing firms employed to audit the Board’s books. This provides an ex­
ternal evaluation of the adequacy and effectiveness of the examina­
tion procedures. A copy of the latest such report, from Touche Ross &
Co., was recently transmitted to this committee and the Senate Com­
mittee on Banking, Housing and Urban Affairs, along with a response
to the report prepared by the Board’s staff.
(7) In 1945 during hearings on the Government Corporation Con­
trol Act, the General Accounting Office expressed the view that the
Reserve Banks should be excluded from the act because they are ex­
amined frequently and thoroughly by examiners under the direction
of the Board of Governors.
(8) In 1954 at hearings on bill H.R. 7602, the Bureau of the Budget
stated that the independence of the Federal Reserve System was “an
important cornerstone of the administration’s fiscal and monetary
policies.”
THE

IN T E G R IT Y OP T H E

CENTRAL B A N K

This brief chronology indicates, among other things, that both the
Board of Governors and the boards of directors of the Federal Reserve
Banks have traditionally been committed to thorough audits of System
activities. We are so committed because the Federal Reserve System has
the responsibility, above everything else, of maintaining the integrity
of its operations as the Nation’s central bank.
These audits not only serve to meet the responsibility Congress has
placed on the Federal Reserve, but they also serve to remove any doubt,
throughout a world which uses the dollar as a reserve and a vehicle
currency, as to the integrity of the System’s accounts. This involves
a full and prompt disclosure of Federal Reserve assets and liabilities
and the assurance, given the powers Congress has conferred upon it,
that the Federal Reserve stands ready and able to meet the commit­
ments on its balance sheet at home and abroad.
In 1974, the Reserve Banks handled 21.8 billion pieces of currency
and coin having a value of $63.9 billion. Of the 26 billion checks written
in 1974, 11.7 billion checks passed through the System in the amount
of $4.4 trillion. 14.5 million wire transfers were handled and they
moved $80 trillion, and 2.5 billion food coupons were redeemed and
destroyed, having a value of $5.6 billion. To perform these functions
along with the numerous transactions in securities,1 also involving
1 See a tta ch m e n t f o r in fo rm a tio n on v o lu m e o f s ecu ritie s tra n s a c tio n s , p. 299.




291

billions of dollars, with a minimum loss or defalcation, requires a
comprehensive control and audit program. If we have erred in the
extent of control, it has been toward over-control, and it has been
intentional. No system is perfect, and we have had our occasional
difficulties and problems which have not been hidden from public
view; but the record shows a high rate of success in preventing
irregularities.
We believe that a GAO audit would duplicate the audit costs and
resources the Federal Reserve must, by its nature, incur regardless of
any audit activity on the part of the GAO. The System spends $8.5
million annually for auditing the Reserve Banks and the Board. While
this is a large sum of money, it is less than iy2 percent of the total
expenses of the System and is miniscule in comparison with either the
assets or the transactions the audit program is designed to protect.
Congress originally established the Board of Governors, which is an
agency of the Government, as the organizational unit designated by
the Congress to review the operations of the Reserve Banks. The record
clearly shows the Board is continuing to fulfill this charter.
T H E FEDERAL SYSTE M A U D IT PROGRAM

Let me briefly summarize our audit program. First, we have audits
of financial operations and legal compliance. Audits of this type are
performed on an unannounced basis in the various departments of each
Bank and branch by the internal auditors on a frequency schedule
agreed to by the System’s Conference of General Auditors and ap­
proved by the Board’s staff. Also, once each year, the Board’s examiners
perform a financial examination, in each Bank and branch, which
includes a review of compliance with approved procedures, policies,
and regulations. Thus, at least twice each year the assets and liabilities
of each Bank and branch are verified or confirmed. Going beyond this,
policies, procedures, and transactions are reviewed at each location by
internal auditors to evaluate how well the organization carries out its
programs and activities and how well it uses its financial, property,
and personnel resources. There is latitude in the scope of these reviews
because it can always be expanded if conditions warrant a review in
greater depth. To provide further assurance, at least once in 3 years
the Board’s Operations Analysts review the operating functions of
each Bank and each branch. These reviews are more than a routine,
periodic check, for their scope and frequency reflect deficiencies ob­
served by the Board’s financial examiners, deficiencies or problems
reported by internal auditors, the occurrence of irregularities, the
conditions found at the previous review performed by the operations
analysts, requests from Bank management or Boards of Directors, and
other situations. In most cases, the reports comment on management
attention, planning, sufficiency and effectiveness of supervision, ade­
quacy of staff, staff knowledge, procedures employed, adequacy of
facilities, and operating problems. Also, recommendations are made to
improve procedures either to increase efficiency or to provide better
controls.
H.R. 4316 provides specific authority for GAO to audit both the
Federal Open Market Committee and the System Open Market Ac­
count. The committee by statute is exclusively a policymaking body.




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The committee has designated the Federal Reserve Bank of New York
to carry out transactions, including open market operations in domes­
tic securities markets and foreign currency transactions, for the twelve
Reserve Banks. The annual examination of the New York Bank in­
cludes a comprehensive examination of the accounts relating to these
transactions. The internal auditors in the New York Reserve Bank
also conduct a continuous audit of these transactions. Both the audits
and the examinations include procedures to determine that open mar­
ket operations are consistent with directives from the Federal Open
Market Committee.
In the last few years, with the advent of extensive use of computers,
the Board’s staff and the audit departments in the Reserve Banks have
developed a comprehensive electronic data processing review proce­
dure. In late 1974, the Board employed a nationally recognized con­
sulting firm to review our staff’s procedures and make recommenda­
tions for further improvements. The following statement was included
in the report prepared by the consultants:
I am very impressed with the quality of the staff you have organized. They
have a good appreciation of the balance needed between management concerns,
audit requirements, and complex technical analysis in the EDP area. We have
worked with many organizations on EDP audits in the past few years. Your
organization matches the very best that we have worked with in large commer­
cial banks, financial institutions, and multidivisional corporations. I am pleased
to see that the Federal Reserve System is in the forefront of this previously
neglected, but critical, area of EDP operational audit.

Another examination activity performed by the Board’s staff covers
the internal audit departments in the Reserve banks. Our staff not
only reviews the monthly reports of audit activities and findings pre­
pared by the bank’s general auditors, but onsite visits are made to
review and observe programs and practices. The competence and effec­
tiveness of the staff and supervisors are also appraised during these
visits and an evaluation is made concerning the independence of the
general auditor from bank management.
Organizationally, the audit function in a Reserve bank is inde­
pendent of the bank’s management as the general auditor is the only
individual in a bank, except for the president of the bank, who reports
directly to the chairman of the board of directors. In addition, each
bank’s board of directors has an audit committee which meets fre­
quently with the general auditor to discuss his reports. Well before it
was a general practice for directors of private enterprises to have an
audit committee, the Reserve banks had this feature in their organiza­
tion. The independence of the general auditor is further strengthened
by the fact that appointments to the position are made by each bank’s
board of directors, not bank management, and approved by the board
of governors. Likewise, salary adjustments for incumbents in the posi­
tion are recommended by the board of directors at each bank and
approved by the board of governors.
Thus, there are at least three lines of defense at the Reserve banks
against irregularities. The first is the operating management of the
bank; the second is the internal auditing staff directed by the bank’s
board of directors; and the third is the examination staff which works
under the direction of the board of governors. Each of these groups
are also committed to improving operating effectiveness.




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From time to time, board of directors of individual banks have also
had public accounting firms review their auditing departments for
further assurance that the programs and personnel are effective and
up-to-date. In these cases, the primary difference in the recommenda­
tions made by the outside firms and the board’s staff is that the board’s
staff has insisted on either more frequent or more in-depth audits than
have the outside firms.
E C O N O M Y A N D E F F IC IE N C Y OF OPERATIONS

Now, let me comment on the system’s commitment to economy and
efficiency of operations. While the integrity of Federal Reserve System
statements and accounts relating to assets, liabilities, and operations is
of paramount importance to the board of governors, the prospective
expenditures of the banks also receive continuous scrutiny and atten­
tion. Budgets are initially prepared by management in the banks under
general guidelines from the board of governors. The budgets are then
reviewed by each bank’s board of directors and adjusted if, in the judg­
ment of the directors, such adjustment is needed. The staff of the board
of governors also reviews the budgets and resolves issues related to
unusual requests and adherence to guidelines. This review incorporates
a detailed analysis of rates of expense growth in the banks arising from
new initiatives, volume increases, and increasing operating costs in
order to satisfy the board as to the reasonableness of the projected ex­
penditures. Final approval, in light of the foregoing review, is given
by the board of governors.
During recent years, the volume of operations in the Reserve banks
has grown significantly, and several new areas of responsibilities have
been added to our workload. As you know. Congress has given the
Federal Reserve increased, or new, responsibilities for supervision and
regulation of bank holding companies, truth in lending, fair credit
billing, equal credit opportunity, and “unfair or deceptive” practices.
We have also lived up to our assurances to Congress to reduce float in
the payments mechanism. Through changes in regulations, improve­
ments in the check transportation system, and establishment of re­
gional check processing centers and automated clearing houses, aver­
age daily payments mechanism float has been reduced from $3.5 bil­
lion in 1969 to $2.3 billion in 1974. Without the improvements initiated
by the Federal Reserve System, the float would now be in the range of
$5.6 billion.
Even with the added assignments, the budget discipline imposed
within the Federal Reserve System has held growth in its expenses to
reasonable dimensions. During the period 1970 through 1973, total
system expense growth averaged 15 percent per year. A report on
Reserve bank expenses for 1974, which represented further improve­
ment, was recently transmitted to this committee and the Senate Com­
mittee on Banking, Housing, and Urban Affairs. That report showed
an increase in expenses in 1974 of 12.1 percent over the expenses in
1973. We believe this is an excellent record in light of our expanding
responsibilities and the cost trends in the economy. Moreover, the
system’s approved total expense budget for 1975 represents a targeted
increase of only 10.3 percent above 1974 expenses.




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In addition to the programs carried on by internal auditing depart­
ments in the Reserve banks and by the board’s staff of operations
analysts for improving operating procedures and making them more
effective and efficient, the Conferences of Reserve Bank Presidents and
First Vice Presidents have developed an effective program which
focuses upon improving the efficiency of operations. Bank planning
departments, interbank operations research groups, and task forces
with board staff participation are working out most of the technologi­
cal adaptations needed in the system’s electronic accounting, automated
currency handling, and electronic fund transfer systems. Outside con­
sultants are employed on an ad hoc basis as needs develop.
C A P A C IT Y FOR IN D E P E N D E N T JU D G M E N T

Let me say a word now about the need to maintain the present ca­
pacity of the System to exercise, within the Government, its best judg­
ment regarding monetary policy without it being unduly affected by
external pressures. Even many who oppose this or that action of the
Federal Reserve willingly concede that the maintenance of independ­
ent judgment by the Nation’s central bank is essential if monetary
policy is to play its proper role in achieving economic stability ana
growth, a high level of employment, and stability in the purchasing
power of the dollar. This independence is not absolute, of course. Since
the System is a creation of the Congress, it is clearly accountable to it,
and we attempt to meet our responsibilities to the Congress and the
public fully and conscientiously.
Besides publishing more detailed information about its activities
than any other central bank in the world, the Federal Reserve fur­
nishes a steady flow of information to Congress. Our release of data
about Federal Reserve operations is continuous and wide-ranging, cov­
ering transactions on a daily, weekly, monthly, quarterly, annual, and
ad hoc basis. Members of the Board testify frequently at Congressional
hearings on the System’s policies and operations, and the Board re­
sponds promptly to the congressional inquiries that come to us every
working day. In the past, when requested, we have provided congres­
sional committees, on a confidential basis, with volumes of materials
pertaining to audit and examination procedures as well as reports of
examinations of Federal Reserve Banks.
It is clear that Congress and its committees have the right to in­
quire into the effectiveness with which the System is discharging its
responsibilities. And, as I have already noted, today’s discussion occurs
in a framework entirely different from that which prevailed in 1973
and 1974. By the adoption of House Concurrent Resolution 133, Con­
gress has established a systematic mechanism for the review of Fed­
eral Reserve monetary policy. Under the terms of the resolution, the
full Committee on Banking, Currency and Housing will hold semi­
annual hearings in conjunction with its Senate counterpart to hear the
Board of Governors’ and the Federal Open Market Committee’s objec­
tives and plans with respect to the ranges of growth or diminution of
the monetary and credit aggregates in the upcoming 12 months. In
short, the Congress has established a policy audit of monetary policy
in the most direct and responsible manner through the expedient of
the congressional oversight hearing. We have every confidence that the




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two Banking Committees will do an exemplary job in overseeing mone­
tary policy. I should note that the first of these hearings was held on
May 1.
ACCESS TO C E R TA IN IN F O R M A T IO N

My final point goes to the System’s concern about the access by any
outside organization to certain System records, operations and trans­
actions. These records include examination reports of commercial
banks, transactions conducted with and on behalf of foreign central
banks, and information about open market and lending operations.
The record of the Federal Reserve in making information relative
to its operations available should demonstrate that we do not begin
with any bias for secrecy per se. In fact, a great deal of effort is re­
quired to properly protect certain information. We recognize, too,
that GAO now is accorded access to highly sensitive information, in
the Department of Defense and in other departments and agencies,
and that no compromise of security results from these arrangements.
Nevertheless, we firmly believe that there are compelling reasons
which argue for the maintenance of certain information in the posses­
sion of the Federal Reserve from access by any outside organization.
Public knowledge that GAO—or anyone else—had review powers over
such information could have an adverse effect on the bank supervisory
process, would alter our relationships with foreign governments and
central banks, and might necessitate a change in our open market and
discount functions.
An audit by the General Accounting Office of foreign accounts held
by the Federal Reserve System, we believe, would jeopardize the exist­
ing relationships between foreign monetary institutions, the Federal
Reserve and the U.S. Treasury. It could, as a result, aggravate the
Nation’s international finance relationships.
Foreign monetary authorities channel a substantial proportion of
their dollar transfers and U.S. dollar reserve holdings through their
accounts with the Federal Reserve Banks. Nearly 130 foreign central
banks, foreign governments, and international financial institutions
have accounts with Federal Reserve Banks. These correspondents held
$60 billion of U.S. Treasury and Federal agency securities in their
accounts at the end of 1974. During 1974, transactions in these securi­
ties through their accounts totaled $85 billion. These transfers and
investments are often the counterpart of official foreign exchange
intervention or official reserve investment operations that reflect sov­
ereign actions and policies these authorities insist on keeping confi­
dential. It is their explicit understanding that use of an account with
Federal Reserve Banks maintains this confidentiality. Only those em­
ployees with a need to know have access to the information concern­
ing foreign transactions. Extreme care is taken in assigning either
internal auditors or examiners from the Board of Governors, although
no compromises in the sufficiency of the audits are tolerated.
Just what action the foreign central banks, foreign governments,
and international financial institutions might take if the confidential
status were not maintained cannot be predicted with certainty. It is
probable, however, that their use of accounts at the Federal Reserve
Banks would be considerably curtailed. They might even change the
composition of their reserve holdings so that the dollar assets would
be a smaller part.




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Action which resulted in transferring the investments of foreign
official institutions to non-Govemment financial institutions would
make it more difficult for the Federal Reserve System to conduct its
open market operations, since the Federal Reserve would no longer be
able to coordinate its own very large transactions with the comparably
large transactions that it conducts on behalf of foreign monetary au­
thorities. There would also be a reduced flow of financial information,
and the relationships maintained with foreign financial institutions
and governments could be harmed.
A similar issue was discussed when legislation—Public Law 91599—was being considered regarding audits of the Exchange Stabili­
zation Fund by the General Accounting Office. The following is quoted
from the hearings pertaining to that legislation:
The Exchange Stabilization Fund deals in extremely confidential and highly
sensitive monetary transactions with foreign governments. It is important not
only that such transactions and the arrangements underlying them remain con­
fidential but also that nothing be done which would in any way impair the
confidentiality of such transactions. The prospect of decisions of the Secretary
of the Treasury with respect to transactions through this Fund being subjected
to possible public question and debate would undoubtedly be disturbing to mar­
kets and to foreign government, and would therefore hamper the use of the Fund
by the Secretary of the Treasury for its intended purpose.

The Congress wisely recognized that foreign exchange operations
and other aspects of international financial policy must not be subject
to premature disclosure under any circumstances. The legislation ex­
empted “information determined by the Secretary to be of an inter­
nationally significant nature” from audit by the General Accounting
Office.
We believe providing the GAO access to “ reports of examination of
member banks, from whatever source,” as H.R. 4316 would do, could
reduce the flow and change the character of communications essential
to effective bank supervision. It should be emphasized that although
the Federal Deposit Insurance Corporation is audited by the GAO,
reports of examination of insured banks are properly exempt from the
scope of the audit authority. Neither does the GAO have access to re­
ports of examinations conducted by the Comptroller of the Currency.
Enactment of H.R. 4316, as it is presently worded, could give the
GAO access to reports of examination prepared not only by the Fed­
eral Reserve, but also by the other supervisory agencies. We strongly
oppose providing such access to the General Accounting Office. In this
connection, I might note that H.R. 10265, as reported by the full Com­
mittee in 1973, provided an explicit and complete exemption for both
transactions conducted on behalf of foreign central banks and ex­
amination reports of member banks.
We also believe it would be unwise to allow access to specific files
and memoranda containing information relating to Federal Reserve
Bank lending cases. It has long been an established practice in the
field of banking that private information relating to a borrower and
made available to the lending institution is held in strictest confidence.
This practice is founded on the very sound principle that the lender
should have access to all the information it needs to make a prudent
lending decision without exposing the borrowers’ private, internal
plans and operations to scrutiny by its competitors or the public. As
with other forms of banking, lending to a member bank requires the




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borrower to provide confidential information on its financial condi­
tion and internal operations as well as certain plans. Administration
of such credit requires very candid communications between the bor­
rowing bank and the Reserve Bank with respect to problems a bank
may be encountering in its day-to-day operations and specific strate­
gies which it plans to follow to remedy its difficulties. Because the in­
formation required from borrowing banks is sensitive, we strongly
oppose providing anyone access to these files except those charged
with the responsibility for the lending function.
At a time when financial markets are already nervous, when citizens
of this country are fearful of the inflationary impact of the growing
Federal deficit, and when foreign central banks are looking to the
Federal Reserve for leadership in international financial matters en­
actment of this legislation would be particularly unfortunate. We
see no need to risk damaging effects upon our efforts toward interna­
tional financial negotiations or reinforcing the financial uncertainties
at home.
[The attachment to Governor Mitchell’s statement on securities
transactions in Federal Reserve banks, follows:]
S t a f f M e m o r a n d u m , B oard of G o vern o rs o f t h e F ed e r a l R eserv e S y s t e m ,
S e c u r it ie s T r a n s a c t io n s — F e d e r a l R e se r v e B a n k s

In 1974, the Federal Reserve Banks issued, redeemed, and exchanged U.S. Gov­
ernment securities valued at $3.08 trillion.
The bulk of System open market operations are for the purpose of offsetting
the potentially destabilizing market impact of short-run variations in member
bank reserves arising from such technical factors as movements in bank float
and changes in the Treasury deposit balance at Federal Reserve Banks. To
achieve this purpose, the Federal Reserve makes extensive use of repurchase
agreements and matched sale-purchase transactions. The volume of such trans­
actions in 1974 amounted to somewhat more than $172 billion (or twice that if
both the sale and purchase are included), or about 88 per cent of the total of
system open market transactions of approximately $195 billion. When the System
uses repurchase agreements and matched sale-purchase transactions, market
participants immediately understand that the System is only temporarily sup­
plying (absorbing) reserves, and that this process will be reversed in a short
period. The knowledge that the process is self-reversing enables the market to
avoid possible misinterpretation of System activities.

Volume of System Open Market Operations Tranasactions in Government
Securities in 1974
[I n m illio n s ]

Repurchase agreements_________________________________________________ $108,147
Matched sale-purchase transactions_____________________________________
64,228
Outrights:
Treasury bills:
Purchases_____________________________________________________
11,659
Sales __________________________________________________________
5, 829
Treasury notes and bonds:
1, 746
Purchases_____________________________________________________
Sales ____________________________________________________________________
Redemptions --------------------------------------------------------------------------------------------Federal agencies:
Purchases__________________________________________________________
3,087
Sales -----------------------------------------------------------------------------------------------3
Total ____________________________________________________________
N o t e .— Data

194,699

for repurchase agreements and matched sale-purchase transac­
tions reflect the initial side of these transactions only. Thus, for example, the




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total for repurchase agreements is the sum of purchases made by the System
under such contracts, and does not include the subsequent resale of securities
back to their original owners.

Chairman P a t m a n . Thank you very much Governor Mitchell. I will
forgo the use of my time in the beginning. I am anxious for the mem­
bers who are here to participate first; then I will use my time to ask
you some questions.
At this time, I would like to ask unanimous consent that we place in
the record after my statement, before Governor Mitchell’s, a copy of
the bill, H.R. 4316, and after that bill I would like to place in the rec­
ord the number of Members of the House, by State, who are cospon­
soring the bill, and also to extend my remarks in any other respect in
connection with the hearing, that are relevant and material.
Without objection, so ordered.
Now, Mr. Minish, I call on you first.
Mr. M i n i s h . Thank you, Mr. Chairman.
Governor Mitchell, it is nice to have you before us again. Let me ask
you, do you feel that the GAO has the capability to audit the Federal
Reserve ?
Governor M i t c h e l l . Well, in Mr. Staats’ testimony, I think he indi­
cated that he would like to employ four or five experts. But apart from
that, I am sure he has the capability of doing the job.
Mr. M i n i s h . Then why do you prefer Touche Ross over the GAO ?
Governor M i t c h e l l . Well, there are some things that Touche Ross
does not audit They do not audit the System’s open market account,
for example. They do not audit the borrowing of the member banks.
There are quite a few features they do not cover. They do audit the
Board’s expenditures, but do not audit the Reserve bank’s operations,
except the way in which our examinations are being conducted.
M r . M i n i s h . T h e n i t is n o t r e a l l y a c o m p l e t e a u d i t i f t h e y a r e
r e s tr ic te d , is i t ?
Governor M i t c h e l l . They are auditing the Board, and the Board is

auditing the banks.
At one time the GAO, as you remember in my statement, audited the
Board.
M r . M i n i s h . Why can they not audit the banks ?
Governor M i t c h e l l . Well, there is not any reason why they could
not audit the banks, if that is the question you are asking. They have
the capability of auditing the banks, except with this one reservation.
Mr. M i n i s h . That is all, Mr. Chairman.
[Testimony resumes on p. 358.]
[At this point, Mr. Minish inserted in the record the Touche Ross
report on the examination of financial statements for years ended De­
cember 31,1974 and 1973:]




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TOUCHE ROSS & CO.
177 6 K S T R E E T

N. W.

W A S H I N G T O N , D C. 2 0 C 0 6

February 4, 1975

Board of Governors of the
Federal Reserve System
Washington, D. C.
Gent l e m e n :
We have examined the balance sheet of the Board of Governors
of the Federal Reserve System as of December 31, 1974, and the
related statements of assessments and expenses, and changes in
financial position for the year then ended, and have submitted
our report thereon under date of February 4, 1975,
The purpose
of our engagement was to examine the Board*s financial statements
for the year ended December 31, 1974, and evaluate the fairness of
presentation of the statements in conformity with generally accepted
accounting principles applied on a basis consistent with that of
the preceding year.
As is customary, our examination was made in accordance with
generally accepted auditing standards and accordingly included
such tests of the accounting records and such other auditing pro­
cedures as we considered necessary in the circumstances for the
purpose of expressing an opinion on the financial statements taken
as a whole.
Our examination included a review of the system of
internal control and tests of a sample Of transactions to the
extent we believed necessary.
However, in accordance with generally
accepted auditing standards, our examination did not include a
detailed audit of transactions to the extent which would be required
if intended to disclose defalcations or other irregularities,
although their discovery may result.
W e direct your attention to the fact that management has the
responsibility for the proper recording of transactions in the
books of account, for the safeguarding of assets, and for the sub­
stantial accuracy of the financial statements.
Such statements are
the representations of management.
There were no restrictions placed upon us by the Board or its
employees in connection with our examination.
The scope and nature of our examination are described in the
following paragraphs.
The descriptions constitute a general out­
line of our examination hut are not a detailed listing of ail tests
and procedures performed.

50-365 0 - 75 - 20




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TOUCHE ROSS & CO.
-

2

-

Our examination was conducted in two segments:
review, and 2) year-end audit.

1) preliminary

The preliminary review is designed to familiarize ourselves
with the accounting system in use, evaluate the internal controls
and establish the scope of our year-end audit. As part of our
preliminary review, we made a careful review of the Board's system
of internal control. This review included a study and evaluation
of internal accounting controls which are designed to assure the
accurate recording and summarization of authorized financial trans­
actions and to provide for the safeguarding of the Board's assets
against defalcations or other irregularities.
The preliminary review also included specific tests of a
sample of transactions as outlined below:
Purchasing, accounts payable and cash disbursements:
Detail tests were made of the propriety of the authorization
for and recording of selected purchase orders, vouchers and cash
disbursements selected from throughout 1974. The mathematical
accuracy of the check register and voucher register were tested for
the month of May, 1974. The cash disbursements for the month of
May, 1974, were reconciled from the bank statements to the cash
disbursements book and to the general ledger.
Cash receipts, assessments and accounts receivable:
The mathematical accuracy of the cash receipts journal was
tested for the month of May, 1974. Detail tests were made to deter­
mine the accuracy of the recording of Bulletin and publication sales,
and cafeteria and other transactions for the months of January,
April, July and September, 1974. The accuracy of the amounts assessed
to the Federal Reserve Banks for both Board expenses and property
additions for 1974 and for expenditures made by the Board during
1974 for printing, issue and redemption of Federal Reserve Notes was
tested and agreed to payments made by the Banks on a test basis.
The amounts assessed for Board expenses and property additions
were in accordance with rates approved by the Board. The paid-in
capital and surplus of the Banks as of the assessment dates, which
were used as their assessment bases, were confirmed directly with
the Federal Reserve Banks. Invoices from the Bureau of Engraving
and Printing supporting the expenditure by the Board during 1974
on behalf of the Federal Reserve Banks for the printing, issue and
redemption of Federal Reserve Notes were examined. The cash receipts
for the month of May, 1974, were reconciled from the bank statements
to the cash receipts book and to the general ledger.
Payroll:
The mathematical accuracy of the payroll register for bi-weekly
and semi-monthly payrolls in May, 1974, was tested, with totals




301
TOUCHE ROSS & CO.

- 3 agreed to postings in the general ledger. The accuracy of, and
documentation for the rate of pay and withholdings were tested for
several employees selected from pay periods during the first nine
months of 1974. Personnel and accounting records were examined
for these employees to determine their accuracy and agreement. The
transactions in.the payroll bank account were reconciled to the
general ledger for the month of May, 1974. The accuracy of the
payroll accruals at April 30, 1974 and May 31, 1974 were reviewed.
General:
All journal entries for the month of August, 1974, were reviewed
for propriety and agreed to their posting in the general ledger. The
general ledger was reviewed for other possible transactions not tested
elsewhere.
Based upon the results of our preliminary review, our year-end
audit procedures were established to effectively perform our audit
through tests in lieu of a detailed examination. The basic audit
procedures performed are as follows:
Cash:
Bank reconciliations for the regular and payroll bank accounts
as of December 31, 1974, prepared by the accounting department
personnel, were reviewed, with the cash balance per books agreed
to the general ledger accounts. The bank balances at December 31,
1974, were confirmed directly to us by the Federal Reserve Bank
of Richmond. Bank statements and paid checks received directly by
us subsequent to December 31, 1974, were used to account for the
principal reconciling items. Petty cash funds on hand were counted
by us in January, 1975. Interbank cash transfers and other cash
transactions immediately prior to and after December 31, 1974, were
reviewed to determine that a proper cash cut-off was made at Decem­
ber 31, 1974.
Accounts receivable:
The principal items in receivables as of December 31, 1974,
were amounts due from Federal Reserve Banks and governmental agencies
which were traced to supporting documents on a test basis. Selected
items receivable as of December 31, 1974, were either confirmed
directly to us or agreed to subsequent cash receipts on a test basis.
Inventory:
The inventories at December 31, 1974, consisted of office and
data processing supplies and a lesser amount of cafeteria supplies.
The detailed records supporting the inventory were tested for
mathematical accuracy including footings and extensions. Unit
prices were tested by reference to recent vendor invoices.




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TOUCHE ROSS & CO.

- 4Property;
The changes in the property accounts for the year ended
December 31, 1974, were reviewed. Supporting documents, primarily
vendors* invoices and purchase orders, were examined on a test
basis in connection with property acquisitions. Transactions
related to the sale of property were agreed to underlying docu­
ments on a test basis.
Accounts payable and accrued expenses:
Vendors* invoices, or other available documents, were examined
in support of major accounts payable and accrued expenses at
December 31, 1974. Invoices received or processed in January, 1975,
were reviewed to ascertain that no material liability had been
omitted at December 31, 1974. Our review for unrecorded liabilities
also included a review of all major contracts and of the minutes of
the meetings of the Board of Governors and summary of actions taken
under delegated authority. In addition, the Controller and other
responsible accounting personnel were asked if all significant
liabilities of the Board, to the best of their knowledge, were
recorded in the books of account at December 31, 1974. The Board’s
general counsel was also asked of any pending or contemplated
litigation which might affect the Board's financial position at
December 31, 1974.
Accrued payroll and income taxes withheld:
Accrued payroll was tested to the payroll register. Income
taxes withheld were tested based upon the applicable payroll regis­
ters and tax payments -made in January, 1975.
Operations:
Direct confirmations were received from the Federal Reserve
Banks covering the amounts, dates remitted, and bases of the semi­
annual assessments for Board expenses and property additions for
1974 and the amounts of the assessments for the printing, issue and
redemption of Federal Reserve Notes.
Expenses by natural classification, as reported in the financial
statements, were compared with corresponding amounts in the 1974
budget and in the prior year financial statements. Explanations were
obtained for all significant fluctuations by inquiry and examination
of vendors' invoices.
Total salary expense and total retirement contributions
reported for the year were reconciled to payroll records.
Miscellaneous income and expense and other selected expense
accounts, legal and consulting fees and rent, were reviewed for
propriety as of December 31, 1974.




303
TOUCHE ROSS & CO.

5
General
Minutes of meetings of the Board of Governors and summary of
actions taken under delegated authority were reviewed for the year.
Tests were performed to ascertain that matters of accounting signif­
icance, such as the approval of assessments and contract commitments,
were properly reflected in the books of account.
The Board's management provided representations to us as to
the substantial accuracy of the 1974 financial statements and the
adequacy of the disclosure therein.
Our examination indicated that the accounting records of the
Board were maintained in accordance with prescribed policies and
procedures. We would like to express our thanks to Mr. John Kakalec,
Controller, and his staff for the excellent cooperation given to
our staff assigned to this engagement.




Very truly yours,

304

BOARD OP GOVERNORS OF TKE
FEDERAL RESERVE SYSTEM

REPORT ON EXAMINATION O P FINANCIAL STATEMENTS




YEARS ENDED DECEMBER 31, 19'74 AND 19/3

T O U C H E R O S S & CO.

305

TOUCHE RO SS & CO
17 7 6 K S T R E E T

N. W.

W A S H I N G T O N . 0. C. 2 0 0 0 6

February 4, 1975

Board of Governors of the
Federal Reserve System
Washington, D.C.
We have examined the balance sheet of the Board of Governors
of the Federal Reserve System as of December 31, 1974 and 197 3,
and the related statements of assessments and expenses, and
changes in financial position for the years then ended. Our
examination was made in accordance with generally accepted
auditing standards, and accordingly included such tests of the
accounting records and such other auditing procedures as we con­
sidered necessary in the circumstances.
In our opinion, the aforementioned financial statements
present fairly the financial position of the Board of Governors
of the Federal Reserve System at December 31, 1974 and 1973, and
the results of its operations and the changes in its financial
position for the years then ended, in conformity with generally
accepted accounting principles applied on a consistent basis.




Certified Public Accountants

306
TOUCHE ROSS & CO.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
B A L A N C E

S H E E T

ASSETS
OPERATING FUND:
Cash
Miscellaneous receivables and advances
StocXroom and cafeteria inventories - at
cost (first-in, first-out method)

1974

197 3

$ 5,111,271
211,915

$ 8,513,248
73,705

166,299

88,605

Total operating fund

5,489,485

8,675,558

PROPERTY FUND:
Land and improvements
Building
Furniture and equipment
Cons truetion-in-progre ss
Computer

781,913
4,452,156
2,129,054
45,964,619
3,971,412

792,852
4,396,950
2,126,172
35,602,065

Total property fund

57,299,154

42,918,039

&2JJ § ^ 6 3 9

£5^593.597

$ 2,733,445
89,339
698,040
850,181

$ 2,127,548
231,867
505,801
1,662,319

4,371,005

4,527,535

4,148,023
(3,029,543)

662,492
3,485# 531

LIABILITIES AND FUND BALANCES
OPERATING FUND:
Accounts payable and accrued expenses
Income taxes withheld
Accrued payroll
Retention on construction-in-progress

Fund balance:
Balance, beginning of year
Assessments over (under) esqpenses
Balance, end of year
Total operating fund
PROPERTY FUND:
Fund balance:
Balance, beginning of year
Additions - at cost
Disposals - at cost

4,148,023

5,489,485

8,675,558

42,918,039

29,138,534

14,549,577
(168,462)

13,829,796
(50,291)

14,381,115

Net increase
Total property fund, end of year




1,118,480

13,779,505

57,299,154

42,918,039

S62.788.63S,
See notes to financial statements.

307
TOUCHE ROSS & CO.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF ASSESSMENTS AND EXPENSES
Year ended December 31f
1974
197 3
ASSESSMENTS LEVIED ON FEDERAL RESERVE BANKS:
For Board expenses and additions to
property
For expenditures made on behalf of
the Federal Reserve Banks

For additions to property - net of
recovery on disposals of $13,656 in
1974 and $5,340 in 197 3

$44,411,700

27.052.554

31,658,174

68,169,154

76,069.874

21,552,324
1,825,870
694,699
482,420
285,870
742,874
1,988,364
460,866
315,941
310,251
414,736
184,241
146,401
85,675

18,882,255
1,738,253
782,253
469,217
258,951
736,876
2,720,257
396,612
331,094
183,807
106,745
165,938
83,778
60,183

44,807
74,883

43,872
141,617

29,610,222

Total assessments
EXPENSES:
For the Board:
Salaries
Retirement and insurance contributions
Travel expenses
Legal, consultant and audit fees
Contractual services
Printing and binding - net
Equipment, office space and other rentals
Telephone and telegraph
Postage and expressage
Stationery, office and other supplies
Heat, light and power
Operation of cafeteria - net
Repairs, maintenance and alterations
Books and subscriptions
System membership, Center for Latin
America Monetary Studies
Miscellaneous - net

$41,116,600

27,101,713

Expenditures for printing, issue and
redemption of Federal Reserve Notes,
paid on behalf of the Federal Reserve
Banks
Total expenses

14.535.921

13.824,456

44,146,143

40,926,169

27.052.554

31,658.174

71.198,697

72.584,34 3

ASSESSMENTS OVER (UNDER) EXPENSES




See notes to financial statements.

308
TOUCHE ROSS & CO.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF CHANGES IN FINANCIAL POSITION

1974

SOURCE OF FUNDS:
Assessments over (under) expenses
Net increase in property fund
Increase in accounts payable and
accrued expenses
Increase in accrued payroll
Increase in income taxes withheld
Decrease in miscellaneous
receivables and advances

197 3

$ (3 ,0 2 9 ,5 4 3 )
1 4 ,3 8 1 ,1 1 5

$ 3 ,4 8 5 ,5 3 1
1 3 ,7 7 9 ,5 0 5

6 0 5 ,8 9 7
1 9 2 ,2 3 9

1 3 7,268
4 4 ,8 1 3
1 8 .3 7 1

1 2 ,1 4 9 ,7 0 8

Decrease in retention on
construction-in-progress
Decrease in income taxes withheld
Increase in miscellaneous
receivables and advances
Increase in stockroom and
cafeteria inventories
Decrease in accounts payable and
accrued expenses

1 0 ,3 6 2 ,5 5 4
3 ,9 7 1 ,4 1 2
5 5 ,2 0 6
2 ,8 8 2
(1 0 ,9 3 9 )

1 3 ,5 7 0 ,5 5 6

1 4 ,3 8 1 ,1 1 5

APPLICATION OF FUNDS:
Additions to property - net:
Construction-in-progress
Computer
Building
Furniture and equipment
Land and improvements

1 7 ,4 6 5 ,4 8 8

1 3 ,7 7 9 ,5 0 5

8 1 2 ,1 3 8
14 2 ,5 2 8

-

1 3 8 ,2 1 0

-

7 7 ,6 9 4

3 6 ,6 5 5
7 0 0 ,3 8 1

1 5 ,5 5 1 ,6 8 5

INCREASE (DECREASE) IN CASH




9 8 ,6 3 5
110,3 1 4

See notes to financial statements.

1 4 ,5 1 6 ,5 4 1
S 2.948.947

309
TOUCHE ROSS & CO.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1974 AND 1973
Significant Accounting Policies
Assessments made by the Board on the Federal Reserve Banks
for Board expenses and additions to property are calculated based
upon expected cash needs and are accrued when assessed. Board
expenses and property additions are recorded on the accrual basis
of accounting.
Assessments and expenditures made on behalf of the Federal
Reserve Banks for the printing, issue and redemption of Federal
Reserve Notes are recorded on the cash basis and produce results
which are not materially different from those which would have
been produced on the accrual basis of accounting.
The Board does not charge depreciation as an operating
expense. Property additions are charged to expense in the
Operating Fund in the year of acquisition; recoveries on the
disposal of property are recorded as a reduction in expense in
the Operating Fund in the year of disposal. When property is
acquired or sold, the property accounts in the Property Fund are
increased or reduced at full cost, with a corresponding increase
or decrease in the property fund balance. Because of the short
duration and temporary nature of the Board's leases, leasehold
improvements have not been capitalized in the Property Fund.
The Board is self-insured against loss of its building and
furniture and equipment from fire or other casualty. The
construetion-in-progress is covered by builder's risk insurance
for work to December 31, 1974. Coverage for other customarily
insured risks, such as workmen's compensation insurance and
comprehensive general liability insurance, is carried by the
Board.
Construction-in-Procyress
The construction-in-progress represents the cost as of
December 31, 1974, for the construction, furnishing and land­
scaping of the Martin Building, which first became occupied
during 1974. The cost includes both building costs and
costs relating to furniture, equipment and landscaping. When
the construction and furnishing are completed in 1975, the final
costs will be allocated to the appropriate property fund accounts.




310
TOUCHE ROSS & CO.

Also included in the construction-in-progress is approxi­
mately $6,500,000 of cost that relates to the North Garage. Over
the. next 40 years the Board will receive approximately $4,300,000
from the Department of Interior for the use of parking spaces in
the garage (subject to adjustment for both reduction of the number
of spaces used by Interior and the final actual cost of the
garage). Actual use of these spaces started in August, 1974 and
miscellaneous expense l*as been offset for the $9,000 monthly
payment received from Interior since that time.
The retention on construction-in-progress represents amounts
withheld on contracts for the construction, furnishing and land­
scaping and is to be paid at the satisfactory completion of the
contracts.
Long-Term Leases
The Board leases outside office and parking space under
leases expiring from February 28, 1975 to December 31, 1©77.
Because the leases may be terminated with six months notice
commencing in 1975, at December 31, 1974, the only fixed future
rental commitment is $265,000 for 1975. Rent expense for out­
side office, storage and parking space for the years ended
December 31, 1974 and 1973 was approximately $990,000 and
$1,064,000, respectively.
Retirement Plans
There are two contributory retirement programs for employees
of the Board. About 85% of the employees are covered by the
Federal Reserve Board Plan. All new members of the staff who do
not come directly from a position in the Government are covered
by this plan. The second, the Civil Service Retirement Plan,
covers all new employees Who come directly from Government ser­
vice. Employee contributions are the same under both plans, and
benefits are similar, being based upon the Civil Service Plan.
Under the Civil Service Plan, Board contributions match
employee payroll deductions while under the Federal Reserve Plan?
Board contributions are actuarially determined annually.
Additionally, employees of the Board participate in the
Federal Reserve System's Thrift Plan. Under this plan, the Board
adds a fixed percentage to allowable employee savings.
Board contributions to these plans totaled $1,509,054 in
1974 and $1,494,707 in 1973.




311
TOUCHE ROSS & CO.

Contingent Liabilities
Litigation involving the Board generally arises from
challenges to, or appeals from actions or proposed actions of
the Board pursuant to statutory or regulatory requirement or
authorization. In essence, such law suits seek injunctive or
declaratory relief against the Board rather than monetary awards.
At December 31, 1974, there are no claims or litigation
outstanding involving monetary awards that would have a material
impact on the financial statements of the Board.




312

A*+-+•**_ k

rvv^t

BOARD O F GO V ERN O RS
o r TM
C

FEDERAL R ESERVE S Y STEM

Office Correspondence

Dt®
a—

l95
-7

Tf
t

Board of Governors___________

Snhject;

1974 Reserve Bank Expenses^

| rAp<
?

Division of Federal Reserve__
Bank Operations (William H. Wallace)

___________________________________

FOR INFORMATION ONLY

Total expenses of the Federal Reserve'Banks increased $63.6
million in 1974, 12.1 percent over 1973 expenses. This represents the
lovest percentage increase since 1968, except for 1972 when the Board
imposed a manpower control program. The table below shows that as a
result of higher reimbursements, net expenses increased by only 10.6
percent.
RESERVE BANK EXPENSES
(thousands of dollars)
1973

1974

Percent Change

12.1%

Total Expenses
Reimbursements

$526,686
31,567

$590,288
42,747

35.4

Net Expenses

$495,119

$547,541

10.6

Total expenses of the System were $13.6 million (2.3 percent)
below the budgeted 1974 level. Individual District budget performance
is best analyzed in terms of controllable expenses which exclude such
expenses as the cost of Federal Reserve Currency and the Board Assess­
ment, the estimates of which were both sharply reduced during the year.
Total controllable expenses were $6.9 million (1.4 percent) below budget.
The attached Table 1 indicates that all Districts were under controllable
budgets except New York. The overrun in New York is primarily attrib­
utable to the costs of the Puerto Rico currency and food stamp opera­
tions which were not budgeted and unusually heavy demands in the fiscal
agency area.
Table 2 compares noncontrollable expenses in 1974 with the Bank
budgets and shows the variations in.the principal components of these
costs. Table 3 shows the budget performance of the twelve Districts in
terms of. total expenses.




Federal Reserve Bank
Controllable Expenses
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total Controllable Expenses

Budget

Actual
Expenses

Actual less Budge
Amount
7
,

$ 33,760
108,015
25,587
32,330
42,974
48,861
64,463
31,842
19,908
31,183
25,621
42.922
$507,466

$ 33,375
109,556
25,106
31,803
42,089
47,473
63,209
31,538
19,374
29,225
24,935
42,865
$500,546

$ -385
1,541
-481
-527
-885
-1,388
-1,254
-304
-534
-1,958
-686
- 57
-$6,920

-1.1
1.4
-1.9
-1.6
-2.1
-2.8
-1.9
-1.0
-2.7
-6.3
-2.7
- .1
-1.4

96.459

89,743

-6,716

-7.0

Total Expenses

$603,925

$590,288

-$13,637

-2.3

Reimbursements

35.390

7.357

20.8

-$20,994

-3.7

Non-Controllable

Net Expenses

Note:

$568,535

42,747—7
$547,541

Amounts may not add due to rounding.

1 Reimbursements exceed budget due to the institution of full cost recovery in the food stamp
/
program after most Bank budgets were prepared, and greater than anticipated fiscal agency
activity.

313




Table 1
Federal Reserve Banks
Comparison of Expenses to Budget
1974
(thousands of dollars)

Table 2
Federal Reserve Banks
i
f
Comparison of Noncontrol lable Expenses- to Budget
*
1974
(thousands of dollars)
Component s of Deviation
Federal Reserve
Bank

Board
Assessment

$ 6,180.9

$ -394.6

130.1

$ -289.3

-$235.4

19,301.9

New York

Actual

$ 6,575.5

Boston

Budget

17,695.0

-1,606.9

-46.2

-981.8

-578.9

Actual less Budget

F. R. Currency
$

Other

Philadelphia

4,768.2

4,791.5

23.3

349.7

-323.4

-3.0

Cleveland

8,144.7

7,681.3

-463.4

112.5

-259.5

-316.4

5,993.0

6,624.6

631.6

452.9

-68.0

246.7

7,902.5

7,315.1

-587.4

-461.3

-86.4

-39.7

Chicago

13,928.7

11,738.0

-2,190.7

-1,197.3

-950.4

-43.1

St. Louis

4,366.6

3,866.3

-500.3

-332.7

-123.7

-44.0

Minneapolis

4,603.6

5,248.7

645.1

-5.2

252.2

398.2

Kansas City

5,605.5

4,431.7

-1,173.8

-757.6

-268.0

-148.2

Dallas

4,763.2

4,614.8

-148.4

-81.2

-89.7

San Francisco
Total
Note:

22.5.

11.487.3

9,553.2

-1,934.1

-1.284.3

-673.3

23.5

$97,440.7

$89,742.7

-$7,698.0

-$3,120.6

-$3,861.3

-$717.8

Amounts may not add due to rounding.

1 Noncontrollable expenses consist of costs of Federal Reserve Currency, Board Assessment, Taxes on Real Estate,
/
Depreciation and Interoffice Expenses.




314

Richmond
Atlanta




Table 3
Federal Reserve Banks
Comparison of Total Expenses to Budget
1974
(thousands of dollars)

Boston
New York

Budget

Actual

$ 40,335

Federal Reserve Bank

$ 39,556

126,335

127,251

Actual less Budget
Amount
7.
$

-779

-1 .9

916

0 .7

Philadelphia

30,355

29,898

-457

-1 .5

Cleveland

40,475

39,484

-991

-2 .4

Richmond

48,967

48,713

-254

-0 .5

Atlanta

56,763

54,788

-1,975

-3 .5

Chicago

78,392

74,947

-3,445

-4 .4

St. Louis

36,209

35,404

-805

-2 .2

Minneapolis

24,512

24,623

111

0 .5

Kansas City

36,789

33,656

-3 ,1 3 3

-8 .5

Dallas

30,385

29,550

-835

-2 .7

San Francisco

54,409

52,418

-1,991

-3 .7

$603,926

$590,288

-$13,638

-2.3

System

Note:

Amounts may not add due to rounding.

316
GO A H D

o r GOVERNORS

W **

&

o r THE

FEDERAL RESERVE SYSTEM

Office Correspondence

Date

______ Board of Governors_________

tfron

Office of the Controller

C
r

Mareh 20» 1?7S-

1974 Budget Performance
_________ Report

jc

The 1974 Budget Performance Report is presented herewith •
for your consideration. This memorandum highlights the more detailed
information provided in that report (attached).
Operating Budget
Original Budget
Savings Target
Retroactive Pay Added
Adjusted Budget
Expenses
Operating Underexpenditure

$30,850,000
(
350,000)
230.000
30,730,000
30.030,463
$(699,537) (2.3%)

Capital Budgets
Computer Acquisition Budget
Computer Acquisition Expenses
Computer Underexpenditure

$ 4,083,861
3.971.412

Construction & Rehabilitation Budget
Construction & Rehabilitation Expenses
Capital Budget Overexpenditure

$10,345,497
10.381.945

(112,449)

Combined Operating & Capital Underexpenditure

(2.7%)

36.448

(0.4%)

($775,535)

(2.57.)

The 1974 Operating Budget was originally approved for $30,850,000
contingent upon a commitment by Governor Holland to the Board to bring
operating expenses down to $30,500,000. A Senior Staff Group (SSG) was
established to meet that $350,000 savings commitment. The Board later
approved a $230,000 addendum to the budget as authorisation to retroactively
compensate employees for that portion of the 1972 General Pay Increase
which was delayed by Presidential action. The operating underexpenditure
reflects delays associated with Martin Building occupancy and the efforts
of the staff in maintaining the sense of fiscal constraint set by the
Senior Staff Group. Total savings identified at year end was $1,234,000
from which the Board funded over $274,000 in new initiatives and a $260,000
pay increase. Final underexpenditures were almost $700,000.
There were three major factors contributing to the ur.derexpenditure
in the computer acquisition budget: The required period of overlap of the
computer with rental equipment was less than anticipated thereby saving
capitalized computer equipment rental; the crecl cs received toward purchase




317
Board of Governors

- 2 -

of previously rented components were greater than budgeted; and, freight
expenses were less than budgeted because the outgoing equipment was
transferred to another government agency.
The $36,000 Construction Program overexpenditure is the net
of a $281,000 overexpenditure in the Martin Building Account and a
$244,000 underexpenditure in the Board Rehabilitation Account. The
Martin Building overexpsnditure resulted from "catch-up" expenses
from previous year undcrexpenditures in the multiyear contract (strictly
a timing problem). The Board Building Rehabilitation underexpenditure
resulted from a change in conccpt and direction and accompanying delays.
Tha terrace level (cafeteria), and space for health services,
Administrative Services shops, graphics, the Credit Union, the Reserve
Board Club Library, and employee's lounge, and some recreational
facilities remain to be completed in the Martin Building. There are
also a number of items such as door handles, locks, and other hardware
that have not been delivered. The Board Building renovation awaits
concept approval. Tha Martin Building housed 660 office and support
personnel and the Board Building housed 307 personnel at year-end.
Achievements and Trends
The year was characterized by some change in the Board's
organization, dedication and occupancy of the Martin Building, manage­
ment acceptance of a new computer system, a number of priority new
initiatives and accomplishment of both continuing and new objectives.
Key aspects include:

!•
Senior Staff Group. As indicated above, a Senior Staff
Group (SSG) was designated to help the Board meet 1974 Budget
constraints. The immediate objective of finding $350,000 in savings
was met early in the year and the sense of fiscal constraint set by the
SSG continued throughout the year to allow the Board to also meet
the spirit of the President's 2% budget cut for the year. The SSG and
staff identified $1,233,705 in gross savings during the year from which
funded $260,000 for a general pay increase and $274,000 in high
priority new initiatives. These new initiatives included approved
financing for the new Office of Saver and Consumer Affairs ($46,000),
and the new Bank Holding Company Analysis Program ($52,000); new
positions in the Office of Board Mercbers, Le^al Division, Bnnk Operations,
and Office of the Managing Director for Research and J c
E ono.-nic Policy
($80,325); new consultants and contracts largely in the Division of Bank
Operations ($42,000) 9 the Office of the Managing Director for reratioii3
($10,000), and Office of Board Members ($10,000); and travel ($17,000).
In addition, it reviewed a number of management options and recommended
courses of action which led to undcrexpenditures in both building
services and personnel areas but which were not formally identified as




318
Board of Governors

• 3 -

savings. The Divisions actively participated In the SSG sense of
fiscal constraint and were largely responsible for the success of the
progran.
2.

Organizational Chanr.es

Creation of the Office of Saver and Consumer Affairs
from two existing sections in the Division of Supervision and Regulation
and a new Equal Credit Opportunity Program and support functions for
the new office.
Revision of the structure of the Offices of the
Managing Directors and appointment of a new Managing Director for
Operations.
Creation of the Bank Holding Company Analysis and
Banking Supervision Programs in the Office of the Managing Director
for Operations. Creation of a new Counsel to the Chairman.
Dissolution of the Conrnittee on Interest and Dividends
*nd the Voluntary Foreign Credit Restraint Program (Division of
International Finance).
New directorship appointments in the Divisions of
Research and Statistics, Banking Supervision and Regulation (along with
a title change) and Data Processing as well as the Office of Saver and
Consumer Affairs and appointment of a new Secretary of the Board.
Organizational improvements in the Office of the
Secretary, Division of Personnel and Division of Federal Reserve Bank
Operations.
3.
Martin Building Occupancy. Initial plans for occupancy of
the Martin Building were delayed and the newly purchased computer system
was not installed until April. Staff member moves to the new building
occurred in shifts from August 10 through September 28. Occupancy of
the building has evidenced significant positive changes in scaff morale
while encouraging efficiency in operations through more effective intraand inter-office communications. Initial estimates on maintenance costs
were revised downward with management decisions to employ contract
labor. Initial utility costs were high, but actions were taken to
reduce these expenditures and lower costs were noted for November and
December.
4.
Employment. There were 94 more employees at year-end 1974
than year-end 1973, a 7.4% increase— the largest since the 10.6%
increase in 1970. The occupancy of the Martin Building, the creation
of the Office of Saver and Consumer Affairs, and the Bank Holding Company
Analysis Program along with new positions and the filling of vacancies
in the office of Board Mambers and the Divisions of Data Processing and
Federal Reserve Bank Operations account for this increase. There were 49




319
Board of Governors

- 4 -

positions originally authorized for Martin Building related tasks that
were deleted during the year. The Board had 154 vacancies at year-end
of which 116 were vacancies in full-time permanent positions.
5. * New Legislation. As in the past, the Board's operations
have been affccted by new legislation passed by Congress and signed
into law by the President. This report contains descriptions of various
pieces of new legislation that have impinged directly on the Board's
workload through their effect on the Board's operations and responsibilities.
The most significant piece of legislation, in terms of Board responsibilities,
was the Depository Institutions Amendments of 1974 (P.L. 93-495) which
included, among other provisions, the Equal Credit Opportunity Act and
the Fair Credit Blllins Act and amendments to the Truth-in-Lending
Act. The Office of Saver and Consumer Affairs is directly responsible
for carrying out the mandates under this legislation.
6.
Constraints imposed on 1974 spending challenged Division
managers to meet their objectives within limited resources. Consequences
associated with these constraints have been voiced by the Divisions.

7.

Overexpenditures

While the total operating budget was underexpended, three
Divisions exceeded their year-end financial operating plans without
prior approval. The Offices of Members of the Board were over by $20,000
(largely due to overexpenditure for travel and salaries); the Division
of Federal Reserve Bank Operations was over by $37,000 (largely from
overexpenditures for travel and contractual arrangements); the Division,
of Personnel was over by $24,000 (largely f o j overexpenditures for
r-i
salaries and greater tuition and registration fees than expected— the
Division of Personnel contributed a like amount to the Savings and
Reallocation Account earlier in the year). Some object classes of
expenditure (travel; employee insurance; rentals; heat, light, and
power; and books and subscriptions) were somewhat over earlier authorizations.
The specific reasons for these overages have been reviewed and we recommend
approval.
8.

General Conclusions

General conclusions drawn from this performance review are
that program objectives were generally met and that the spirit of co­
operation in constraining resources evident throughout the Board resulted
in better management of those resources and provided a means of
financing a number of high priority new initiatives. The overexpenditures
which occurred were more than offset by the underexpenditures and are
understandable and explainable. The staff's sense of fiscal
responsibility should be recognized and continue to be encouraged.







320
Summary by
Board Program Structure

321
Summary by Board Program Structure
The Board Program Structure categorization serves as a basic
framework for insuring that the Board’s program planning and budgeting
activities are integrated to support System objectives, for analyzing
alternative Board resource allocation strategies, and for preparing and
updating planning activities. It is structured into four major prograa
categories as outlined below:
Program Category I - Formulation of Monetary Policy. This program*en­
compasses the majority of the Divisions of Research and Statistics and
International Finance and the Office of the Managing Director for Re­
search and Economic Policy. The Board originally budgeted $7,776,267
for developing and disseminating economic intelligence, including the
continuous research and analysis of economic and financial fields, and
foreign economic and financial developments. The final operating plan
was $13,212 less or $7,773,479. The final overage of $10,424 (0.13%)
was largely caused by greater than anticipated piersonal services costs
in Program Direction. These costs are related to both pay
Increases and the addition of an unbudgeted staff member.
Program Category II - Supervision and Regulation of Financial Institutions.
This program encompasses the larger part of the Divisions of Bankih^
Supervision and Regulation, Federal Reserve Bank Operations, and ’
the
Office of Saver and Consumer Affairs and includes Bank Holding Company
related activities in the Division of Research and Statistics, the Legal
Division and the Office of the Mananging Director for Operations. The
purpose of the program is to identify costs associated with the Board's
responsibilities for the supervision of the Federal Reserve Banks, the
supervision and regulation of commercial bank operations as well as
banking structure changes and selective credit regulations. The proeran
was originally budgeted at $5,415,382, and expended $5,235,592, within a
final operating plan of $5,385,665 ($29,717 was transferred for savings
and reallocations). The $100,073 (1.9%) underage resulted mainly from
failure to fill vacancies and delays in both the new Office of Saver and
Consumer Affairs and the new Bank Holding Company Supervision Program in
the Office of the Managing Director for Operations.
Program Category III - Financial Services for the Svster, the Government,
and the Public. The Board originally budgeted $563,319 for Currency and
.
Coin Supply and Payments Mechanism operations (both of these are manatee
by the Division of Federal Reserve Bank Operations). The final operating
plan was $568,319, an increase of $5,000 for a new travel initiative.
Expenses for the year were $519,361 or $48,958 (3.6%) underexpended frcn
the final operating plan. The major cause of the underage was failure
to fill vacancies in the Payments Mechanism Program.
Program Category IV - System P o : * v Direction and Board Support. This
program contains two major subv." ,;:ans: System Policy Direction which
contains the Offices of the Board Members and Staff, the Managing Director
for Operations, and the Secretary of the Board; and Board Support which
contains the nonbanking-related staff element of the Office of the




322
Managing D irector fo r Operations, the s t a f f element o f the O ffic e o f the
Secretary, the D ivision o f Data P rocessin g, Administrative S ervices, and
Personnel, the Legal D iv isio n , and the O ffic e o f the C o n troller. The
f u l l c o s ts o f each o f the other three programs are d istorted to the ex­
tent support c o s ts are contained in th is program. . The program vas
I n i t i a l l y budgeted at $17,066,086 but transferred Funds id e n tifie d as
savings from delays in Martin Building occupancy, ren tal payments and
other lapses which resu lted in a fin a l operating plan o f $16,857,645.
Final expenditures were $16,452,030. This is $405,615 (2.4%) le s s than
the operating plan because o f further delays In Martin Building occupancy
and further management-induced b u ildin g se rv ice s lapses (night labor
fo r c e and c a fe t e r ia o p era tion s, e t c . ) , fewer p u blication s c o sts than
a n ticip a te d , and some other personal s e r v ice s lap ses.
Other C ategories, Computer A cq u isitio n , Martin Annex Construction, and
Board Building R e h a b ilita tio n are a ls o categorized in the Board Program
Structure format •







323

Summary by
O bject C lasses o f Expenditure

324
Summary by Object Class o f Expenditures
The p rin cip a l d iffe r e n c e s in expenditures at year end from
the operating plan by o b je ct c la s s o f expenditure are sunrarized be­
low and are follow ed by b r ie f explanations.
S ig n ifica n t F inancial Variances
Over(Under) Year-End Operating Plan

S a la rie s & Fringe B enefits
Fees
Traveling Expenses
Postage & Expressage
Telephone & Telegraph
P rin tin g & Binding
S tation ery & Supplies
Furniture & Equipment
Rentals
Books & Subscriptions
Heat, l i g h t , & power
Repairs & A lteration s-B u ild in g
Contractual P rofession a l Services
A ll Other
TOTAL U D OPERATING PLAN
N ER

($186,400)
( 64,918)
31,136
(
9,909)
( 52,448)
( 159,821)
( 40,646)
( 37,318)
79,376
16,975
139,736
( 51,911)
( ,53,685)
( 148,263)

( .8)
(1 9 .0 )
4 .7
( 3.0)
(1 0 . 2 )
(15.6)
(11.6)
(18.3)
4.2
24.7
50.8
(58.2)
( 9.8 )
(24.6)

($699,537)

( 2.3)

S alaries and Fringe B enefits
Expenditures Over (Under)
YE Operating P lan_____
Amount

%

Year-End Operating Plan
Actual Expenditures

$23,564,594
23,378,194

($186,400)

(.8)

The 1974 approved budget provided $21,828,835 fo r s a la rie s ,
$1,685,135 fo r retirement and $292,934 fo r insurance, fo r a tota l of
fo r personnel expenses. This fig u re was reduced by
$242,310 during the year by the Senior S ta ff Group to provide funds
as needed. There was an underexpenditure d espite a R etroactive Pay
Increase in June and a General Pay Increase in October which cost
the Board $260,000.
$ 2 3 ,8 0 6 ,9 0 4

Major underexpenditures o f sa la rie s and frin g es occurred in
the O ffice o f Saver ana Consumer A ffa ir s (OSCA) ($44,1 10), Division o f
A dm inistrative Services ($152,197) D ivision o f Supervision and Regu­
la tio n ($28,862) and the Legal D ivision ($19,231). Administrative
S e rv ice s’ underage was due to the turnover o f lower grade personnel
and subsequent hiring d elays. The rest o f the D ivision s experienced




325
h irin g d ela y s. These underages were o f f s e t by overexpenditures by
the follow in g D iv isio n s : Federal Reserve Bank Operations ($24,163)
Board Members ($22,821) and Data Processing ($19,072). A ll o f these
D ivisions wore overexpended because personnel lap se, which had been
budgeted, did not occur and the D iv ision s in te rn a lly funded the October
General Pay Increase.
Fees
Expenditures Over (Under)
YE Operating Plan_______
Amount

%

YE Operating Plan
Actual Expenditues

$341,110
276,192

($64,918)

(1 9 .0 )

The o r ig in a l approved budget o f $324,068 was increased by
$17,042 during the year r e fle c t in g , p rim arily, the a llo c a t io n by the
Senior S ta ff Group to FR Bank Operations o f $18,500 fo r the Richmond
A rch itect and the A rch itectu ral Advisory Panel. The t o ta l underage o f
$64,918 i s the net e f f e c t o f an underage o f $26^200 in th e -O ffic e o f
Saver and Consumer A ffa ir s (OSCA) to an overage
$12,$20 in the
D ivision o f Supervision and R egulation. The underage in OSCA was
caused by illn e s s o f one consultant and h irin g delays which meant
delays in assign ing work to con su lta n ts. The overage in Supervision
and Regulation was because the consultant in Trust A c t iv it ie s was
used more than o r ig in a lly planned. The r e st o f the d iffe r e n c e s are
minor across other d iv is io n s and e a s ily explainable.

of

Travel
Expenditures Over (Under)
YE Operating Plan______
Amount
%
YE Operating Plan
Actual Expenditure

$663,563
694,699

$31,136

4.7

The 1974 approved budget provided $626,436 fo r tra velin g
expenses. $37,127 in ad d ition a l funds was provided v ia PCRs. Most
o f the funds were a llo ca te d by the Senior S ta ff Group. Major re­
c ip ie n ts o f these funds were FR Bank Operations ($18,500), Research and
S ta tis t ic s ($ 9 ,0 0 0 ), and Legal ($ 2,50 0).
The overexpenditure o f $31,136 i s the net e ff e c t o f undetages
and overages o f a l l D iv isio n s, ranging from an underage o f $8,594 for
■OSCA to an overage o f $19,611 fo r FR Bank Operations. The underage in
OSCA was again caused by h irin g d elay s, whereas the FR Bank Operations




326
indicated that th e ir overage was caused by I n fla tio n , lack o f h is to r ic a l
data to make o r ig in a l estim ates and a d d itio n a l tra v el fo r the PACS pro­
j e c t . The O ffic e o f Board Members was overexpended by $12,436 due mainly
to more than a n ticip ated tra v e l by Members o f the Board and Board con­
su lta n ts . The other D ivision *s variances are r e la t iv e ly minor and are
e x p la in a b le .
Postage & Expressage
Expenditures Over (Under)
YE Operating Plan______
Amount
YE Operating Plan
Actual Expenditures

$325,850
315,941

($9,909)

(3 .0 )

The 1974 approved budget o f $382,675 was reduccd by $56,825
during th e 'y e a r because the computer shipping charge was overestimated
o r ig in a lly . This amount then was underexpended by $9,909. The cause
fo r th is underage was in m iscellaneous bulk shipments which were under­
expended by $10,735. This was o f f s e t by a $10,214 overage fo r trans­
p o rta tio n charges fo r the computer.
Telephone

6

Telegraph
Expenditures Over (Under)
YE Operating Plan_____
Amount

%

YE Operating Plan
Actual Expenditures

$513,314
460,866

($52,448)

(1 0.2)

No change was made to the o r ig in a l approved budget. The under­
expenditure o f $52,4AS was due la r g e ly to le s s than an ticip ated in s ta l­
la t io n charges. Lower than an ticip ated charges fo r FR Communication
Network and GSA Long Distance added to the underage but was o ff s e t by
overages in Commerical Long Distance and charges fo r the Data C ircu its.
P rin tin g & Binding
Expenditures Over (Under)
YE Operating Plan______
Amount
YE Operating Plan
Actual Expenditures

$1,024,600
864,779

X

($159,821)

(1 5.6)

The 1974 approved budget o f $1,074,600 was reduced by $50,000
by the Senior S ta ff Group a fte r c o s ts fo r Purposes and Functions were
revised downward. The underexpenditure by Adm inistrative Services was
caused by reduced co sts fo r FRB B u llotln and le s s demand fo r Supple­
mental Loose Leaf S ervice, R egulations, S pecial Outside Duplicating,




327
Mult 1.1ithing and Xeroxing thin o r ig in a lly estim ated. General P rinting
and Annual Report c o s ts were higher than o r ig in a lly estimated and they
served to o f f s e t the underages noted above.
Stationery & Supplies
Expenditures Over (Under)
YE Operating Plan
Amount
%
YE Operating Plan
Actual Expenditures

$350,897
310,251

($40,646)

(1 1 .6 )

The amount o f $48,192 was added during the year to the o r ig in a l
budget fo r sta tio n e ry and su p p lies. This consisted o f $42,000 fo r Data
Processing that was transferee! w ithin the D ivision and $10,000 provided
by the Senior S ta ff Group to FR Bank Operations to purchase confirm ation
forms. This account’ s underage was a ttrib u ta b le to Data P rocessin g 's
underexpenditure o f $43,000 re su ltin g from the annual inventory o f th eir
supplies and subsequent adjustments to determine cost o f su pplies used.
Furniture & Equipment
Expenditure Over (Under)
YE Operating Plan_____
Amount
%
YE Operating Plan
Actual Expenditures

$204,244
166,926

($37,318)

(1 8.3)

ws
a

The amount o f $72,258
added during the year to the approved
budget o f $131,986. These monies were accommodated via PCR and consisted
o f in t r v -d iv is io n a l tra n sfe rs. Ad*?fn 'o t r a tiv e S erv ices’ operating plan
fo r thl.
ccount was increased by ? i , 0 0 0 through th is method, however,
that di- iion was underexpended by $32,930 at year, resu ltin g in the
major r a tion o f the $37,318 undernge. This same underage occurred in
most l,:.v.‘ sions and was a ttribu ted to the fa c t that some items were ordered
la te in
f i s c a l year and were never received with the attendant resu lt
that these items could not be charged to 1974 expenses.
Rentals (Computer and O ffic e space)
Expenditure Over (Under)
YE Operating Plan_____
Amount

X

YE Operating Plan
Actual Expenditure

$1,908,988
$1,988,364

$79,376

4.2

The o r ig in a l 1974 budge*- o f $1,960,927 fo r ren tals was reduced
by $51,939 because o f savings generated by the purchase o f the computer.
Further savings developed re su ltin g from the purchase as evidenced by
Data P rocessin g’ s underage o f $10,471 fo r the year. The t o ta l overage




328
o f $79,376 was due almost e n tir e ly to the overexpenditure o f $90,458
by A dm inistrative Services fo r Watergate re n ta ls. This was necessitated
because o f the delay in the occupancy o f the Martin B uilding.
Book & Subscrip tio n s
Expenditures Over (Under)
YE Operating Plan______
Amount
__
%
YE Operating Plan
Actual Expenditure

$68,700
85,675

$16,975

24.7

There was no change to the approved budget during the year.
The overage o f $16,975 con sisted mainly o f a $9,032 overexpenditure by
Legal fo r law books in lie u o f a 1975 expenditure fo r these items. Re­
search and S t a t is t ic s a lso incurred an overage o f $5,503 resu ltin g from mult:
year su b scrip tio n s with th eir higher i n i t i a l c o st but lower long-term
co sts .
Heat, L igh t, & Power
Expenditures Over (Under)
YE Operating Plan______
Amount
%
YE Operating Plan
A ctual Expenditures

$275,000
414,736

$139,736

50.8%

No change was made to the approved budget o f $275,000. The
$139,736 overexpenditure was caused by an overexpenditure o f $184,040
fo r e l e c t r i c i t y with a $44,304 underage o f f s e t fo r steam. This over­
expenditure fo r e l e c t r i c i t y was due to r is in g u t i l i t y cost, and lack
o f h is t o r ic a l data from which to budget c o s ts fo r the Martin Building
which was occupied in the la t t e r part o f 1974.
Repairs & A lte ra tio n s - Building
Expenditures Over (Under)
YE Operating Plan
Amount
%
YE Operating Plan
Actual Expenditures

$89,250
37,339

($51,911)

(5 8.2)

The approved budget o f $106,450 was reduced by $17,200 as a
r e su lt o f in t r a -d iv is io n a l tra n sfers o f funds by A dm inistrative Service.
Even with th is redu ction, delay in acceptance o f major equipment in
the Martin Building p re cip ita te d delays in the need to purchase items
as o r ig in a lly planned, thus causing the fu rther underage o f $51,911
by A dm inistrative S ervices.




329
Contractual P rofession a l S ervices
Expenditures Over (Under)
YE Operating Plan______
Axnount

X

YE Operating Plan
Actual Expenditures

$545,783
492,098

($53,685)

(9 .8 )

The approved budget o f $539,473 was increased by $6,310 during
the year to cover m iscellaneous s e r v ice s needed. The underage o f $53,685
was the net e ff e c t o f underages and overages in several d iv is io n s ranging
from a $6,198 overexpenditure in Legal to a $21,561 underexpenditure in
Administrative S e rv ice s. A dm inistrative S ervices' underage
a ttr i­
butable to le s s expense that o r ig in a lly planned fo r the food services
consulting co n tra ct and la te occupancy o f the Martin Building causing
le ss than f u l l u t iliz a t io n o f the $46,000 a lloca ted fo r the night labor
co n tra ct. Data Processing had an underage o f $21,474 that was caused
by le ss usage o f ou tsid e computer se rv ice s and Legal had an overage o f
$6,198 that was a re su lt o f more lengthy p r e - t r ia l preparation by the
S pecial Counsel, in r e la tio n to the Roussel matter, than estim ated. The
fin a l major underage was $10,113 fo r stenographic s e r v ice s . Other
devia tion s wiere minor across the d iv is io n s .

ys
a

A ll Other
Expenditures Over (Under)
YE Operating Plan______
Amount
%
YE Operating Plan
Actual Expenditures

$602,178
453,915

($148,263)

(24.6)

The approved budget o f $615,428 was reduced by $13,250 as a
re su lt o f in t r a -d iv is io n a l transfer o f funds. This underexpenditure o f
$148,263 was the net e ff e c t o f overages and underages in most d iv is io n s
ranging from $18,000 overage fo r Personnel to a $156,663 underage in
Administrative S e rvice s. C onstruction delays and reductions in s ta ffin g
requirements fo r the c a fe te r ia were the main causes fo r the underage in
Administrative S e rvice s. The overage experienced by Personnel was
a ttrib u ta b le to overexpenditure in the Academic Assistance Program.







330

S ig n ifica n t A c t iv it ie s
in 1974

331
S ig n ifica n t A c t iv it ie s in 1974
There were a number o f developments that occurred in 1974
that had s ig n ific a n t resource im plication s and merit s p e c if ic d is ­
cu ssion .
Senior S ta ff Group
The Administrative Governor designated the Senior S ta ff
Group to id e n t ify $350,000 that could be applied against the 1974
budget as savin gs. In- a d d itio n , th is group was tasked with review­
ing new in i t i a t i v e s and means o f funding those high p r io r it y new
i n it ia t iv e s which were approved. The Senior S ta ff Group was chaired
by the Deputy Managing D irector fo r Operations, administered by the
C on troller and supported by O ffice o f the C on troller s t a f f . Members
represented several d iv is io n d ir e c t o r s , a deputy d iv is io n d ire c to r
and a sen ior o f f i c i a l *
I t s in flu en ce set a clim ate o f re stra in t fo r the year which
was p a rticip a te d in by a l l d iv is io n s and which enabled the Board to
r e a llo c a te $274,000 to fund new i n i t i a t i v e s , finance a $260,000 general
pay in cre a se , and meet the s p ir it o f a P resid en tial request to r e s t r ic t
budgets by 27. during the year— a l l th is was in ad d ition to the or ig in a l
$350,000 ta r g e t. The year-end underexpenditure o f $699,537 is a
residu al number from the $260,000 pay increase absorbed by the d iv ision s
and $274,168 in new in it ia t iv e s funded during the year. These new
in i t i a t i v e s included:
Board Member O ffice s

- Gov.. Daane Consultancy
- Counsel and S ta ff

$10,000
$36,251

O ffic e o f the Managing
D irector fo r Operations

- Bank Holding Company
Analysis Program
- Banking Structure
Program
- E ditor/W riter P osition

$10,400

Legal D iv ision

- Bank Merger P osition s
- Travel

$18,668
$ 2,500

D ivision o f Research and
S t a t is t ic s

- Bank Report Reform
Travel

$ 9,000

O ffic e o f Saver and Consumer
A ffa ir s

- New P osition s & Support
- Stocks L istin g Contract

$45,805
$ 1,610

O ffice o f the Managing D irector
fo r Research & Economic P o licy

50-365 0 - 75 - 22




$51,750

$ 7,856

332
D ivision o f Federal Reserve Bank Operations
-

Travel (Payments Mechanism
Program)
A rch itect fo r Richmond Bank
A rch itectu ra l Advisory Panel
A ssistan t D irector and
Secretary
- FAIM Training
- Tracer Forms

$ 5,000
$1 0 , 0 0 0
$15,000
$17,550
$ 7,100
$10,CO
O

New L e g isla tio n
There were a number o f p ie ce s o f le g is la t io n enacted in to
law in 1974. While each o f them had some impact on the use o f Board
resou rces, the m ajority o f them had l i t t l e more than r e a llo c a tiv e
e ff e c t s w ithin the same o rg an ization al stru ctu re. Those laws referred
to below had some resource im plication s in 1974, A fu l l report on a ll
le g is la t iv e matters has been prepared fo r a p resentation by the Legal
D iv ision ,
T it le I o f the D epository In s titu tion s
Amendments o f 1974 (P,L, 93-495) extends the Cease and Desist
au th ority o f the Board to bank holding companies (stronger emphasis
placed in the D ivision o f Banking Supervision and R egulation); T itle II
esta b lish e s a National Commission on E lectron ic Funds Transfers which
-caused approximately one man month in extra e ff o r t in the D ivision o f
Federal Reserve’ Bank Operations; T itle I I I (Hie Fair Credit B illin g A ct)
amended the Truth in I. ’ :ng Act by sp e cify in g how c re d ito rs should
handle b i l l i n g e rro r c :.p l a i n t s from consumers. Approximately two man
months o f e f f o r t was expended in 1974 in the O ffice o f Saver and
Consumer A ffn ir s in preparing fo r w ritin g the Regulation in 1975;
T itle IV amended the Truth in Lending Act by providing a "more-thanfour-instalm ent r u l e ," c i v i l l i a b i l i t y p ro v ision s, and d isclosu res o f
clo sin g c o sts and the fraudulent use o f c re d it cards. Approximately
one man month o f 1974 e f f o r t was expended in preparation fo r the p u b li­
cation o f an updated reg u lation . T it le V (The Equal Credit Opportunity
Act) amended the Consumer P rotection Act by making i t unlawful fo r any
cre d ito r to discrim inate against any applicant on the basis o f sex or
m arital status with resp ect to any c r e d it tra n saction . Five ad ditional
p o sitio n s were created in the O ffic e o f Saver and Consumer A ffa irs in
1974 to implement the e ff e c t s o f th is le g is la t io n .
The International Development A ssociation Act (P.L. 93-373
among other p ro v isio n s, provides perm ission io r U.S. c itiz e n s to pur­
chase, h old , s e l l or otherwise deal with gold in the U.S. or abroad.
Approximately one man month o f resources were devoted in 1974 for
studying the im plication s o f th is a c t .




333
The Real Estate Settlement Procedures Act (P .L . 93-533)
requires H D to develop a uniform rea l esta te settlem ent statement to
U
be used nationwide which would include Truth in Lending d isclos u res;
to develop an advance settlem ent c o st d isclo s u r e form to be used at
commitment, but not la t e r than 1 2 days p r io r to settlem ent; and to
provide a waiver fo r the advance d isclo su re p rov ision s in consultation
with the Board. One man month in resources in the O ffic e o f Saver
and Consumer A ffa irs were devoted to Board a c t iv it y under th is Act
during 1974.
Magnuson-Moss Warranty - Federal Trade Commission Improvement
Act (P.L. 93-637) T itle II o f which amends the Federal Trade Commission
Act au th orizing the Commission to p rescribe in te r p r e tiv e rules and
general statements o f p o lic y with respect to u n fair or deceptive acts
or p ra ctic e s in or a ffe c tin g corarncrce. The Act orders the Board to
e sta b lish a separate d iv is io n o f consumer a f fa ir s and to p rescribe
regu lation s to prevent un fair or deceptive acts or p ra ctic e s in or
a ffe c tin g commerce by banks. The Board responded by creatin g the
O ffice o f Saver and Consumer A ffa ir s and created new and expanded old
fu nction s - a l l at a marginal cost o f approximately $45,000 in 1974.
Amendments to the Freedom o f Information Act (P.L. 93-502)
requires government agencies to provide indexes o f agency matters, to
provide a uniform schedule o f fees and to respond to requests for
inform ation w ithin ten days. A dditional resources t o ta lin g approxi­
mately one man month were d irected to carrying out th is law’ s p rovision s
(O ificen ofi.th e S ecretary, the Legal D ivision and the Personnel Division
had the g re a te s t a c t iv it y in 1974).
Martin B uilding Occupancy
The Martin Building was made ready fo r p a r tia l occupancy
beginning in A p ril, 1974, and provided space fo r 660 Board personnel,
a computer f a c i l i t y and parking fo r the Board's employees and some
Department o f the In te rio r employees under a cost-sh a rin g agreement.
While some d i f f i c u l t i e s p e rs is t because o f a separation o f functions
between employees at the Board Building and in Watergate, occupancy
o f the Martin Building has served to con solid ate fu nction s o f various
o f f i c e s which were p h y sica lly separated in the three other buildings
and has resu lted in b e tte r communication, more e f f i c i e n t operation,
increased morale and some reduction in s t a f f . I n it ia l estimates in
s t a ffin g fo r bu ildin g serv ices proved high. Management studies and
d e cisio n s to contract the night labor fo r c e , economies in the employ­
ment o f the secu rity fo r c e , and restructured needs in other areas
reduced t o t a l budget expenditures. Tlie remainder o f the f a c i l i t y is
expected to be av aila ble fo r use in 1975.




334
Major Reorganizations and Program Changes
Hie O ffic c o f Board members was expanded to include Counsel
to the Chairman* A dditional s t a f f and Congressional lia is o n functions
were added. The O ffic e o f the Managing D irector fo r Operations and
Supervision was renamed the O ffice o f Managing D irector fo r Operations,
E a rlier (A p ril 1, 1974) the Board had created the Bank Holding
Company Analysis Program to explore a new regulatory approach to the
supervision o f bank holding companies and to design an on-going program
fo r su rv eilla n ce and an alysis o f the fin a n cia l cond ition and a c t iv it ie s
o f bank holding companies* It was org a n iza tio n a lly placed in the
O ffice o f the Managing D irector fo r Operations but receiv es general
regulatory p o lic y guidance from the O ffice o f the Managing D irector fo r
Research and Economic P o licy .
The Bank Supervision Program was formed in the O ffic e o f the
Managing D irector fo r Operations in Ju ly, 1974. to provide recommendations
fo r reform o f the bank regulatory stru ctu re in view o f the d iv is io n o f
supervisory au th ority among the Federal agencies and changing banking
stra te g ie s and p r a c t ic e s .
On A p ril 30, 1974, P resid en tia l authority fo r the Committee on
Interest and Dividends expired and was not renewed. This sp ecia l pro­
gram, ad m in istra tively housed at the Board, was organized by President
Nixon on October 12, 1971, to formulate and execute a program fo r
obtaining voluntary re stra in ts on in te r e s t and dividends (su bject to
review by the Cost o f Living C ou n cil). The Chairman o f the Federal
Reserve Board chaircd th is committee which also included the Secretaries
o f the Treasury, Commerce, Housing and Urban Development, the Chairmen
o f the Federal Deposit Insurance Corporation and the Federal Home Loan
Bank Board and the heads o f other fin a n c ia l regulatory agencies as
required.
The Board approved the cre a tio n o f the O ffice o f Saver and
Consumer A ffa ir s on July 16, 1974, from the S ecu rities Credit Regulation
and Truth-in-Lending Programs o f the D ivision o f Supervision and
Regulation. The Board la te r (October 16, 1974) approved the o f f i c i a l
formation o f the Equal Credit Opportunity A ct, the Program D irection ,
and the General Program Support Programs^ and the t i t l e "Truth-in-Lcnding"
was changed to "F air Credit P r a c t ic e s .” Concurrently, the name o f the
D ivision o f Supervision and Regulation was changed to the D ivision o f
Banking Supervision and Regulation.




335
The Voluntary Foreign Credit Restraint (VFCR) Program in the
D ivision o f International Finance was discontinued follow in g a January,
1974, announcement by the Administration that a l l foreig n lending and
investment c o n tro ls were no longer in e f f e c t . The Program, formed in
1965 to help co n tro l and monitor ca p ita l outflow s from the U .S.,
continued in existence u n til June at the request o f the Administration,
to monitor a lim ited amount o f s t a t i s t i c a l reportin g .
On October 18, 1974, the O ffic e o f the Secretary made a minor
m od ification to i t s organizational structure through the creation o f a
fu l l Minutes S ection and the reassignment o f duties o f a number o f
personnel to accommodate the departure o f the O ffic e r in Charge o f
A dm inistration.
Th® D ivision o f Personnel m odified th eir October, 1973, major
reorganization in mid 1974 by redesignating a c t iv it i e s in to three areas:
Career Development, Personnel S e rv ice s, and System Personnel.
The D ivision o f Federal Reserve Bank Operations s lig h tly re­
structured i t s organization through the ad d ition o f two new assistant
d ir e c to r s fo r the Operations Review and Services and Financial Planning
and Control Programs end redesignation o f functions and t i t l e s in the
Financial Planning and Control Program.
Board Budget D ecisions
Computer A cq u isitio n . An IBM Model 168 computer mainframe
and components were purchased during 1974 a fte r a ca re fu l review o f
a lte rn a tiv e means o f acquiring the required computer support at the
c o s t. The computer was acquired at a co st o f $3.97 m illio n and was in ­
sta lle d In the Martin Annex in A p ril, 1974. The purchase obviated the
need to acquire additional back-up f a c i l i t i e s fo r the move to the new
f a c i l i t y and provided support that i s expected to meet Board require­
ments fo r at le a st fiv e years at a lower cost than would be required to
rent the equipment. A savings o f $112,449 resulted from le s s than an ti­
cipated overlap rental o f equipment to accommodate the purchased
computer’ s installm ent in the Martin B uilding, c re d it received by
purchasing a number o f components that had been p reviou sly rented, and
le s s than a n ticip ated fre ig h t charges as tra n sfer charges associated
with the outgoing rental computer were assumed by another government
agency which rented the same equipment from IBM.
General Pay Increases. During 1974 the Board continued it s
p o lic y o f authorizing a general pay increase (CPI) equal to the increase
awarded to C iv il Service employees. This year there were two such
payments. A one-time payment o f $227,810 was authorized tor lormer and
present employees fo r the portion o f the 1972 GPI which was delayed by




336
P residen tial action* The second in cre a se , which c o st an estimated
$261,000, increased FR s a la rie s >.5% beginning October 15, 1974*
The Board increased the authorized spending le v e l o f the 1974 budget
operating plan by $230,000 to o f f s e t the co st o f the " r e t r o a c tiv e "
payment. The 1974 GPI was in te r n a lly funded*
Program Change Requests and D ecisions
A t o t a l o f 85 program change requests (PCRs) were submitted
to r e a llo c a te budget funds, change operating plans or change organi­
zation al stru ctu re during 1974. Of these 9 concerned the establishment
o f now programs or the reorganization o f ex istin g programs; 2 0 were
associated with Senior S ta ff Group monitored savings and r e a llo c a tio n s
not d ir e c t ly related to the establishment o f new programs or
reorganization o f e x istin g programs. A t o ta l o f 8 were denied,
returned to or withdrawn by the origin a to r*
The d is tr ib u tio n o f the PCRs submitted by le v e l o f approval
authority was:




Board
A dm inistrative Governor
Managing D irector
C on troller
D iv ision D irector
Total

7
21
12
42
4
86

337
Appendix A - Schedules

A

1974 Budget, Operating Plan, and Expenditures
by Board Program Structure

A -2

B

1970-1974 Year End P o sition s

A- 3

C-1

1974 Budget, Operating Plan and Expenditure
by D iv ision

A -4

C-2

1974 Personal Services Budget, Operating Plan and
Expenditures by O ffic e and D ivisions

A -5

C-3

1974 Non-Personal S ervices Budget, Operating Plan
and Expenditures by O ffice and D iv ision

A- 6

C-4

1974 Non-Personal Services by Account

A -7

D-1

1970-1974 Total Expenses by O ffic e and D iv ision

A-

D-2

1970-1974 Personal and Non-Personal Services
Expenditure by Account

A-9




8

338
Schedule A
1974 Budget
Year End Operating Plan and
Expenditures by Program Structure

Original
Budget

Program
I.

Formulation of Monetary Policy
A.

Supervision & Regulation of
Financial Institutions
A.
B.
C.
D.
E.
F.

A.
B.
IV.

Cash and Accounting
Payments Mechanism

System Policy Direction and
Board Support
A.
B.
C.
D.
E.

System Policy Direction
Board Support
Other Support
Manpower Utilization Program
Retroactive Pay

TOTAL OPERATING PROGRAMS
Budget Reallocations & Savings
Adjusted Operating Programs

Over/l'nder Yr. O > Plan *
r.
Amount
Fercer.tase j
$ 1C,424

$ 7,7f.3,055

$ 7,773,479

5,135,160

5,091,809

5,053,055

0.1

2,647,107

2,671,246

2,720,424

49.178

$ 5,385,665

$ 5,285,592

$100,073

j

(0.8)

(38,754)

$ 5,415,382

|

i.$

!

(1.S6)

j
!

1,587,200

1,723,772

84,927

5.2

2,818,810

2,710,373

(108,437)

(3.9)

351,038
174,523
0
418,151
$

1,638,845

2,884,470

Federal Reserve Banks
and Branches
Commercial Bank Operations
and Banking Structure Changes
Selective Credit Regulation
Truth in Lending
Equal Credit Opportunity
Program Direction and Support

III. Financial Services for the System,
Government and Public

Expenditures

$ 7,776,267

Development & Dissemination of
Economic Intelligence
Program Direction & Support

B.
11.

I Yr. End
Op. Plan

279,301
145,059
41,120
462,530

263,268
130,270
15,357
442.552

(16,033)
(14,789)
(25.763)
(19.978)

(5.7)
(10.2)
(M.7)
(4.3)

519,361

$(48,958)

(8.6)

j

166,854
352,i 0
»7

2,831
(51,7S9)

1.7
(12.?)

j
!

$16,857,6'.5 $16,452,030

$(405,615)

(2.4)

|

563,319

$

164,023
399,296

568,319

164,023
404,296

$17,066,086

$

l,375,yt>9
15,572,935
117,182
0
0

1,402,569
15,103,069
104,407
17,600
230,000

1.L a ,802
14,6S0,228
84,503
14,688
227.810

42,233
(422,841)
(19,904)
(2,912)
(2,190)

^

!

(16.6>
a.o)

!
|
i

$30,821,054

$30,574,684

$30,030,463

$(544,211)

<1.8)

—-

(321,054]

155,316

$30,3C(J7<5iW

$30,730,000

$30,030,463

$(699,537)

Computer Purchase
Annex Building Construction
Board Building Construction

4,083,861
10,045,497
300,000

4,083,861
10,045,497
300.0001

3,971,412
10,326,742
55.206

(112,449)
281,245
(244.794)

(2.f>
2.3
(81.f)

GRAND TOTAL

$45,159,358| $44,383,822

$(775,535)

(1.7)




I
i
;

( 2 .3 )

(155,316)

—

i

Special Categories
A.
8.
C.

|

$44,929,358

A-2

i
i

i

339
Schedule B

1970-1974 Positions Filled at Year-End
And 1973 Authorized Positions Compared

with Positions Filled at Year-End

i

Employment at Year-End
1970

1971

1972

33

31
12

31

65
27
247
70
76

59
33
267
75
90

59
35
271
88

69
47
195

8
6

1973

1974
Employ VacaaPos.
cles
at
Position.?) Auth.
Wet
Budget
: Year-End Changes Yr.-End 12/31/7

Regular
Joard Members
)MD0 2/
»fl)REP
Secretary
-egal
Research & Stat.
International Fin*
Supervision & Reg.
)SCA
?R Bank Operations
Personnel
\dmln. Services
Controller
Data Processing
Construction
Total Regular

12

33-1
10

10

21

44

210

202

26
231

1,052

1,164

101
90
40
221
24
235
__ 4_

1,211

55
48
276
96
99

33
10

12
61
56
298
113

120

102
83
43
42
361
240
28
27
257
244
__ 4_ ____ 4_

38
17
14
62
58
297
108
98
32
105
42
312
26
257
____ 4_

1,498

1,471

0
7
1

1
7
1

30

2
28

42

1,267

41

1,540

1,512

5
7

2

1
2

(1)
(5)

( )
22
32
3

(1)
(49)

0
0
0

(27)

37
16
13
60
48
273
94
85
28
94
42
287
26
253

1
1
1
2
10

24
16
13
4

11

0

25
2

__2_
1,358

116

Summer
Secretary
Research & Scat.
International Fin.
?R Bank Operations

2

Personnel

1
1

\dntn* Services
Data Processing
Total Summer
GRAND TOTAL

1,052 | 1,164

1,213

1/Includes dual occupancy.
2/titled Executive Director until 1973.




1,269

1
1

1
7
1

1
0
0
0
( 2)
0
0
aY
(28)

2

25

1,363

154

340
Schedule C-1

1974 Budget, Year End
Operating Plan and Expenditures
by D iv ision and S p ecial P ro je ct

O ffic e s
and
D iv ision s

f l e e o f Board Members
f l e e o f the Managing
D irector fo r Operations
-Regular
-Banking
-S p e c ia l
f i c e o f the Managing
D irector fo r Research
and Economic P o licy
f l e e o f the Secretary
gal D ivision
v is io n o f Research
and S t a t is t ic s
v is io n o f In tern ation a l
Finance
v is io n o f Banking Super­
v is io n and Regulation
f l e e o f Saver and
Consumer A ffa ir s
v is io n o f Federal Re­
serve Bank Operations
v is io n o f Personnel
v is io n o f Adminis­
tra tio n S ervices
f i c e o f the C o n tro lle r
.v isio n o f Data
Processing
iployee and Ret.
B enefits
Retro Pay
ivings & R ea lloca tion

O riginal
Budget

Final
Operating
Plan

Expenditures
Over (Under)
OnprnHnf* PI.in
amount

1974
Exoenses

%

927,609

973,860

993*999

20,139

2.1

308,228

296,728
74,336
250

311,767
59,034

13,025

212

15,039
(15,302)
(38)

5.1
(2 0 . 6 )
(1 5.2)

359,971

375,721

356,769

(18,952)

( 5 .0 )

911,935
1,099,996
5,789,842

889,160
1,042,178
5,767,509

886,653
1 ,029,619
5 ,756,132

(2,507)
(12,559)
(11,377)

( 0 .3 )
( 1 .2)
( 0 .2)

2,194,900

2,155,300

2

,154,054

(1,246)

(

0

2,255,189

1,9^0,121

1

, 880,626

(19,495)

(

1 .0

204,680

(82,390)

(2 8 .7 )
1.6

------

. . .

287,070

.1)
)

2,299,840

2,365,040

2

,,402,517

37,477

948,512
7,053,322

872,574
6,780,852

6

896,860
,,367,406

24,286
(413,446)

525,562
6,073,466

508,262
5,996,066

504,107

(4,156)

5,,943,503

(52,563)

( 0 .9 )

59,657

59,657

54,715

(4,942)

( 8 .3 )

230,000
155,3]6

227,810

(2,190)
(155,316)

( 0 .9 )

(321,054: '

( 2.3 )

2.8

(

6

.1)

(0 . 8 )

Total Operating Program

30,500,000

30,730,000

30,,030,463

(699,537)

>rrfputer Purchase
ir*tin Annex Construction
ih a b ilita tio n o f the
Board Building

4,083,861
10,0^5,457
300,C O
O

4,083,861
10,045,497
300,000

3, 971,412
1 0 , 326,742jj
55,2CrJ!

(112,449)
( 2 .7 )
231,245
2.3
(744,794) i

44,929,353

4 5 ,1 5 9 ,35S

44, 383,823

(775,535) ! ( 1.7)

GRAN TOTAL
D




j




Schedule C2
1974 Personal Services Budget, Final Operating plan and Expenditures
by Offices and Division

Offices
and
Divisions

Office of Board Members
Office of the Managing Director
for Operations
-Regular
-Banking
-Special
Office of the Managing Director
for Research & Econocic Policy
Office of the Secretary
Legal Division
Division ot Research & Statistics
Division ot International Ffhance
Division of Banking Supervision &
Regulation
Office of Stiver 6 Consumer Affairs
.
Division of Federal Reserve Bank
Operations
Division of Personnel
Division oi Administrative Services
Office of the Controller
Retro Pay
Division of Data Processing
Employee Residtal & Retirenent
Hone fits
Savings (< Reallocations
Total Operating Prograa
Computer Purchases
Martin Annex Construction
Rehnb of the Hoard- Building
Grand Total

Original
Budget

Final
Operating
Budeet

1974
Expenditures

Expenditures
Over/Under
Oocratin*? Plan
Amount
%

858,276

903,527

907,937

276,428
0
2,000

276,428
67,836
—

289,903
50,847
—

332,371
862,303
937,232
5,517,144
2,070,300

348,121
848,803
926,914
5,495,811
2,043,900

339,221
859,949
904,993
5,485,499
2,037,960

(

2,213,531
—

1,839,114
261,426

1,822,421
191,116

( 16,693) ( 0.9)
( 70,310) (26.9)

1,935,274
685,290
3,105,774
516,744
—
4,710,248

1,964,324
623,852
2,865,304
497,439
230,000
4,654,848

1,971,255
629,426
2,714,434
495,922
227,810
4,672,845

6,931
0.4
5,574
0.9
(150,870) ( 5.3)
( 1,517) ( 0.3)
( 2,190) ( 1.0)
17,997
0.4

58,057
—

58,057
—

52,848
--

24,130,972

23,905,704

23,654,386

_

_

4,410

0.5

13,475
4.9
(16,989) (25.0)

__

8,900)
11,146
( 21,921)
( 10,312)
( 5,940)

(

( 2.6)
1.3
( 2.4)
( 0.2)
( 0.3)

5,209) ( 9.0)

(251,318) ( 1.1)

_

123,797
—

123,797

93,546
—

( 30,251) (24.4)

24,254,769

24,029,501

23,747,932

(281,569) ( 1.2)

Schedule C3

1974

Nonpersonal Services Budget, Final Operating Plan and Expenditures

Offices
and
Divisions




1974
Expenditures

69,333

70,333

86,062

31,800
0
11,025

20,300
6,500
250

21,864
8,187
212

27,600
49,632
112,764
272,698
124,600

27,600
40,357
115,264
271,69°
111,400

41,658
—
364,566
263,222
3,947,548
8,818

Expenditures
Over/Under
ODerating Plan

15,729

22.4

1,564
1,687
38)

7.7
26.0
(15.2)

17,543
26,704
124,626
270,634
116,095

< 10,052)
( 13,653)
9,362
( 1,064)
4,695

(36.4)
(33.8)
8.1
( 0.4)
4.2

61,007
25,644

58,205
13,564

( 2,802)
( 12,080)

( 4.6)
(47.1)

400,716
248,722
3,915,548
10,823

431,262
267,434
3,652,972
8,184

30,546
18,712
(262,576)
( 2,639)

7.6
7.5
( 6.7)
(24.4)

(

—

..

__

--

1,363,218

1,341,218

1,270,658

( 70,560)

( 5.3)

1,866
—

266
(155,316)

16.6
—

1,600
(321,054)

1,600
155.316

Total Operating Program

6,369,028

6,824,796

6,376,077

(448,219)

( 0.7)

Computer Purchases
Martin Annex Construction
Rehab of the Hiird fmilding

4,083,861
9,921,700
300,000

4,083,861
9,921,700
300,000

3,971,412
10,233,196
55,206

(112,449)
311,496
(244,794)

( 2.8)
3.1
(81.6)

20,674,589

21,129,857

20,635,891

(493,965)

( 2.3)

Grand Total

A-6

342

Office of Board Members
Office of the Managing Director
for Operations
-Regular
-Banking
-Special
Office of the Managing Director
for Restarch & Economic Policy
Office of the Secretary
Leya I Division
Division of Research & Statistics
Division of International Finance
Division of Hanking Supervision &
Regulation
Office of Saver & Consumer Affairs
Division of Federal Reserve Bank
Operations
Division ot Personnel
Division of Adsdnistration Services
Office of the Controller
Retro IVsy
Division of Data Processing
Employee Rc-sidual & Retirement
Benefits
Savings f Reallocations
<

Final
Operating
Budget

Original
Budget

343
Schedule C-4

1974
Budget, T otal Approved Expenditures, and Expenditures
Nonpe»sonal S ervices
by Account

Budget

Account

$
Traveling Expenses
Postage & Expressage
Telephone & Telegraph

626,436
382,675
513,314

TotalApproved
Expenditures

$

663,563
325,850
513,314

Expenditures
Over/Under
T otal Approved
Expenditures
Amount

Expenditures

$

694,699
315,941
460,866

$

%

31,136
( 9,909)
( 52,448)

4.7
( 3 .0 )
(1 0 . 2 )

(159,821)
( 40,646)
( 37,318)

(15.6)
(1 5.6)
(18.3)

79,376
16,975
139,736

4.2
24.7
50.8

P rin tin g & Binding
S tation ery & Supplies
Furniture & Equipment

1,074,600
302,705
131,986

1,024,000
350,897
204,244

864,779
310,251
166,926

Rentals
Bodies & Subscriptions
Hcali, L igh t, & Power
Repairs & A lteration s
(B uilding & Grounds)

1,960,927
68,700
275,000

1,908,988
68,700
275,000

1,988,364
85,675
414,736

106,450

89,250

37,339

( 51,911)

(4 1.8)

(

(

Repairs & Maintenance
(Furniture & Equip.)

92,388

92,388

90,488

Cont. P ro f. Services

539,473

545,783

492,098

( 53,685)

( 9 .8 )

A ll Other

615.428

602.178

453.915

(148.263)

(32.7)

$ 6,690,082

$ 6,664,755

$ 6,376,077

$(288,678)

( 4 .3 )

(159,541)

N/A

T otal Nonpersonal
S ervices
Budget R eallocation
& Savings

(

321,054)

159,541

N/A

1,900)

2

. 1)

T otal Personal
S ervices

$24,130,972

$23,905,704

$23,654,386

$(251,318)

(

T otal Operating
Budget

$30,500,000

$30,730,000

$30,030,463

$(699,537)

( 2 .3 )

4,083,861

4,083,861

3,971,412

(112,449)

(

10,045,497
300.000

10,045,497
300.000

10,326,742
55.206

281,245
(244.794)

( S I . 6)

$44,929,338

$45,159,358

$44,383,823

$(775,535)

( l.?:*

Computer A cqu isition
C onstruction
Annex Building
Board Building
GRAN TOTAL
D




A-7

1

2

. 1)

.8)

2.8

344
Schedule DX

1970 - 1974
Total Expenses
by Offices and Divisions
1974

1970

1972

916,202 $

978,571

$ 927,067 *

993,499

131,992

$

1971

738,798 $

O ffices and Divisions
Board Members

347,490
14,029

344,284
13,201

311,767

Managing Director-Operations 1/
Regular
Special
Banking

1973

212

59,034
36,204

Secretary
Regular
Special

754,146

961,037
11,593

824,036

356,769

893,254

Managing Director-Research 2/

886,653

484,749

639,378

660,304

858,600

1,029,619

Research and S ta tistics

3 ,600,768

4,765,016

5,050,064

5,426,398

5,756,132

International Finance
Regular

1

,173,229

1,478,861

1 , 648,896

1,925,417

2,154,054

Supervision and Regulation

1 , 289,200

1,590,890

1 , 711,506

1,900,287

1,880,626

FR Bank Operations

1 , 394,949

1,826,634

2 ,288,488

2,333,485

2,402,517

511,969

685,715

808,306

754,519

896,860

3,,079,487
111,305

4,150,961
23,540

4,598,451
311,286

5,331,074

6,367,406

305,970

419,027

460,986

456,572

504,107

----

--

--

----

204,680

Legal

Personnel Administration
Administrative Services
Regular
Special
O ffice o f the Controller
O ffice o f Saver & Consumer
A ffairs 4/
Data Processing
Regular
Retro-active pay
Employee Petirer»ev-t and
Insurance Benefits 3/
Total Operating Expenses

3,822,771

5,471,472

6,073,456

6,016,659

5,943,503

--

--

--

227,810

43,518

54,376

90,393

54,714

19,,269,843 } 23,115,836

25,,773,448

27,364,211

30,030,462

7,332,818

1 2 ,,273,928

13,669,191

10,381,943

---2,002,502

Computer Acquisition
Construction & Alterations
C A ’D TO
RN
TAL
1/
2/
3/
4/

3,971,412
694,525

$19. 964.363 ‘530,448,654 ?38, 047,376
7 ........

1

•'.1,033,402 $44,383,822
___ ____ i

Titled Executive Director's Office until November 1973.
Organized in November 1973 by transfers iron Research and Secretary *
Active employees' fringe benefit costs allocated to Divisions beginning in 1971.
Created in A u ^u m t 1974 l y tr.inr.fvr?* from Sujwrvififon and Krftulnt ion.
»




345
Schedult -2
1970-1?74
Personal and NonF-rsonal Services
Expenses by Account

T^rr

"TJ70

p e r s o n a l "services

17
9i

1972

1974

Salaries
Fees
Retirement Contributions
Kegular
Special
Ihrift Plan
Employee Insurance
Connecticut General
Federal Employees
Mimical & Hospitalization

17,167,836 $13,882,255 $21,552,323
$12,329,768 i*15,101,751 :
270,642
27<r, 192
258,336
325,535

Total <er?onal Services
’

$14.595.854 $17.433.572 ?19.061.926 S20.S91.155 |?23.f54.385

24 9
6 ,6 3

1,638,424
139,049
112,821
(1,949)
42,104
70.93?

1,679,334

1,166,159

1,304,839

1,317,274

129,934

152,097

167,901

171,679

817
50,14
145.759

746
54,4P3
172.269

1,827
57,107
206.584

2,471
64,278
270. V:S

NON PERSONAL SE SV!C .
FS
Traveling Expenses
Field Examiners
Other
Postage and Expressage
Telephone and Telegraph
Printing and Binding
FR Bulletin
Other
Stationery and Supplies
Furniture and Equipment
Rentals
B^oks and Subscriptions
Meat, Lights and Power
Repairs and Alterations
(Building and Grounds)
Repairs and Maintenance
(Furniture and Equipment)
Contractual Professional Svcs.
Outside Data Processing Svcs.
Truth-in« Lending
Auditing Books of Board
Review of Exam, Procedures
Consumer Finance Surveys
Legal & Consult. Fees & Exp.
Other Surveys
Linkages & F.mp, Research-SSRC
Security Clearance Inves.
Transcribing & Reporting
All Other
Tuition and Registration
Cafeteria (::ET)
Official Dinners, etc.
Meals for Official Ci.ests
Special Statistical Svcs.
CEMLA Membership Fee & Exp*
News Ticker Service
Miscellaneous

$

296,444
319,507
197,342
213,469

298,532
388.850
227,0S0
271,489

311,893 $
407,024
298,S55
304.183

320,379 $
461,874
331,095
396,612

179,015
515,685
315.941
460,806

286,767
288,991
158,520
180,483

312,547
381,393
194,305
All,441

345,695
385,614
217,391
555,594

344,781
470,582
183,807
167,217

343,706
521,073
310,251
166.926

1,626,396
48,243
73,389

2,189,655
52,856
93,779

2,658,376
56,4|2
103, 5 &

2,720,253
60,180
106,745

1,988,364

80,639

57,489

32,737

29,609

37,339

41,187

46,621

43,692

90,4SS

6 2 2 .5 6 9

38,014
_6674. 8 ,
j2

8 5 ,6 7 5

414,735

.
.$57*527.

115,794
97,466
4,000
18,408

133,006
2,000
4,000i
24,533j

121,370

95,220

98,405

4,500
17,855

5,000
22,196

6,500
18,163

136,070
117,537
11?,997
18,152
2,145

80,666 ;
143,943 j
41,141 ‘
14,850
7,7*6

220,734
141,593
124,751
13,000
3,679

154,340
140,302
21,905
1,525

134,323
190,755
36.117
4,275

240,033 1

303,747!

348,626

46,717
110,582
10,107
8,479
3.817
27,000
3,867
29.469

86,609 .
121,319
17,660j
10,583 !
5,448 !
28,338
3,9% j
27.789 j

109,761
134,438
9.800
11,073
11,30°
27,645
6,919
37. ( S
.I

i■ 5.682.264,$ 6.711.522

1 7 ,0 3 9

3 ,5 6 0

. 3Z8 l S 5? J . . . ^ 5 3 , 9 ! 5

97,990
165,933
10,738
11,316
3,564
4 3,372
8 ; 8 .'0

3lv
6 .O

144,357
184,2^*1
ll,S59
15,438
5,503
44,fj?
9.5?S
3« 172

Total Nonpersonal Services
Total Operating Expenses
Construction - Annex Building
Computer Acquisition

$ 4.673.
$19,2 0 V •* *23,115,83* $75,7 7 V ™
694.525 | 7.332,818jl2,273,928

GRAND TOTAL__________________

$19.964.I. l |$3Q.448.6V< $38.047.376 $ 4 1 .0 3 3 .4 0 2 ! :« 4 .3 P 3 .? 2 3
ff




6 . 4 7 3 . 0 ' * u> 6 . 3 7 '
■ 2 7, 3 6 4 , 2 1 1 : 30,0.'-' ’ *
13 ,b o9,1 9l J 10 ,3 » i.V .S
" ___________I 3 . 9 7 1 . 4 1 2

346

TOUCHE ROSS & CO.
1776

K S T R E E T

N. W.

W A S H I N G T O N . D C. 2 0 0 0 6

November 30, 1974
Board of Governors
Federal Reserve System
Washington, D.C. 20551
Dear Sirs:
In accordance with the provisions of our proposal letter
of August 22, 1972, we are reporting to you on the continuing phases
of our observations of the examination and auditing procedures
employed by the examiners, including an appraisal of their effec­
tiveness. We are also including our recommendations for improving
the organization and effectiveness of the examination.

PURPOSE OF OUR REVIEW
Our review procedures are designed to enable us to express
an opinion regarding the effectiveness of the examination of the
Federal Reserve Banks by the Board's examining staff and the ade­
quacy of the examination procedures employed with respect to gen­
erally accepted auditing standards that would be applicable in such
an examination. Our review approach includes a detailed review of
the examination procedures used in selected areas of a particular
Federal Reserve Bank and observing the overall procedures and con­
duct of the examination during the part of our review which is per­
formed in the field at the respective Federal Reserve Bank.
In future phases of our review we plan to review the ade­
quacy and effectiveness of the new examination approach resulting
from the recent reorganization. These phases will include a review
of the transition from the previous approach to the present one, the
overall scope of the present examination approach, a detailed review
of selected areas covered by the Protection and Audit Review section
and the Operations Review and Services section, asKfell as the Finan­
cial Examination section. Certain phases of the review of the new
examination approach have been started.




347
TOUCHE ROSS & CO.

Federal Reserve System - 2
SCOPE OF CURRENT PHASE OF REVIEW
On March 8, 1974, we joined the Financial Examination,
Protection and Audit Review, and Operations Review and Services
sections of the Division of Federal Reserve Operations at their
preopening meeting and accompanied them on their unannounced visit
to begin the examination of the Federal Reserve Bank of New York.
Previous to this date we spent a day in Washington, D. C., review­
ing the preparation and planning of the examination. The examina­
tion approach at the New York Reserve Bank, excluding the branches,
continues ds in previous years to be a joint effort of division
personnel and borrowed assistants from the New York Bank and other
Federal Reserve banks. All aspects of the examination were per­
formed during this visit by the examiners.
We observed the various examiners in the conduct of their
examination during the opening of assigned operational areas. We
also reviewed in detail the part of the examination related to the
following areas:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Systems open market account
Foreign department
Gold vault
Accounting
Apparent or possible*violations
Cafeteria
Employee conduct
Indebtedness
Insurance
Litigation
Personnel
Purchasing

Our detail review of the above areas included a review of revisions
made to the examiners' procedural manual, a review of the perform­
ance of the procedures and related preparation of working papers
and documentation, and attendance at examiners' meetings with
department heads of the Bank. We also reviewed the report on exami­
nation of the Federal Reserve Bank of Boston - 1974.

50-365 0 - 75 - 23




348
TOUCHE ROSS & CO.

Federal Reserve System - 3
CONCLUSIONS AND RECOMMENDATIONS
Based on our review, it is our opinion that the areas we
reviewed in detail are being examined in accordance with generally
accepted auditing standards in a professional and competent manner.
The following are comments and recommendations resulting from our
review which we feel would further improve the examiners' effec­
tiveness in performing their examination procedures;
DOCUMENTATION:
Systems Open Market (SOMA), Foreign Department#
and Gold Vault:
We noted a lack of adequate documentation and explana­
tions of items in certain of the working papers we reviewed. The
following is a list of specific deficiencies we noted:
1. Working paper referencing and cross-referencing was mini­
mal and could be significantly improved. The benefits
derived from proper referencing with respect to working
paper organization, and the helpfulness and efficiency
resulting to the working paper review, are well worth
the effort.
2. We noted numerous instances where legends for audit
"tick marks" used could not be found. As a result, a
reviewer cannot easily understand what examination pro­
cedures were performed and what the scope of the exami­
nation was. We recommend that sufficient legends be
utilized in the working papers in order that the work­
ing papers be able to stand on their own and commu­
nicate adequately what is necessary. In addition,
properly prepared working papers are of immense help
to new examiners preparing to examine a respective
area for the first time.
3. We noted that a signed-off program was not included in
the working papers. Subsequently, the signed-off pro­
gram was located and filed with the working papers.
Completion and filing of all working papers should be
accomplished on a timely basis to prevent loss of con­
trol and the loss of the respective working papers.
4. We noted certain miscellaneous working papers which did
not appear to be properly organized, complete, or prop­
erly filed. Such working papers should be completed
and filed in their proper location or, if they are no
longer useful, they should be destroyed.




349
TOUCHE ROSS & CO.

Federal Reserve System - 4
5.

1116 ex&niners use a code on their checklist question­
naire working papers indicating whether the question
was answered by inquiry, observation, or tested and
supported by a working paper. In cases where the sup­
port is a particular test performed, we recommend that
the questionnaire step be referenced to the appropri­
ate working paper file. In cases where the answer to
the questions is through inquiry or observation, the
questionnaire should be documented by noting with whom
the inquiry was made and who was observed, or how
often or how long the observation was made. The ques­
tionnaire can be designed in a way which would require
and facilitate this kind of documentation.

CONFIRMATIONS (TRACERS):
In our review of the foreign department, we noted that
the examiners rely very heavily on independent confirmation results.
However, the results of the confirmations in this area and other
areas are not summarized prior to issuance of the final report. We
recommend that a status report be prepared summarizing the results
of the confirmation procedures as a basis for the opinion and con­
clusions reached in the report.
SCOPE.OF TESTS:
SOMA:
In our review of the scope of the tests of transactions
made by the examiner in the SOMA area, we noted that only one type
of transaction in each SOMA function was selected for the test.
This resulted in a test of approximately 35 transactions for the
total period under examination. We feel that if such a limited
scope is to be used by the examiners, it should be a test of the
transactions previously supported by the Bank's internal audit
staff; otherwise, consideration should be given to expanding the
examiner's scope of these tests.
Expense review:
We understand that the present scope of examination of
Reserve branch expenses has been set by direction of the Board.
It is also our understanding that internal audit examines 100% of
the expense vouchers. Currently, the examiners are examining in
detail 100% of a selected month’s vouchers and expanding this
examination if discrepancies are noted. The extent of the current
scope of examining expense vouchers is time consuming and is not




350
TOUCHE ROSS & CO.

Federal Reserve System - 5
necessary for compliance with generally accepted auditing standards.
We do recognize the purpose for such extensive coverage; however,
we feel that the examiners can obtain the same assurance as to the
adequacy of internal audit coverage by a less extensive review of
their work in this area.
REPORTING:
SOMA:
Our review of the examiners' report relating to their
examination of SOMA disclosed that the report included many detail
schedules incorporating voluminous data. We question the neces­
sity for such detail data in the examiners' report. We feel that
if such data is meaningful and useful, it should be available on
a regular basis and tested by the examiners. The report detail,
which is time consuming to prepare, is currently being prepared
by the examiners with some assistance from internal audit. At a
minimum, we feel that such reports should be totally prepared by
bank personnel for review and checking by the examiners. This
would allow more time for the examiners to perform their examina­
tion procedures, such as the tests discussed above, in greater
depth and with lesser time pressures.
The SOMA report also briefly summarizes net operating
and security transaction results for the two most current years on
a comparative basis. We suggest that a brief analysis of the
results of the operations and reasons for change from the previous
year be included in the report to make the capsule amounts reported
more meaningful.
Federal Reserve Bank of Boston:
We reviewed the report on examination of the Federal
Reserve Bank of Boston - 1974 and have the following comments:
1. The reference in the report to the phrase "generally
accepted professional standards" is vague, since,
"professional standards" have not been identified,
codified, or authoritatively designated as such. If
the examiners feel they are applying examination
methods and scope in addition to what is required
under generally accepted auditing standards, then
such additional procedures to the scope of the exami­
nation should be specifically identified and described.
2. The reference to the earnings and expenses in the report
section, where the examiners express their opinion,
should specifically identify the period of earnings and
expenses covered by the examiners.




351
TOUCHE ROSS & CO.

Federal Reserve System - 6
EXAMINATION PROCEDURES MANUAL:
For the areas mentioned above, we reviewed the examina­
tion procedures manual in detail and determined that:
1. The description of the examination objectives for other
assets and other liabilities are somewhat vague and
should be more clearly stated.
2. The scope of the examination of selected areas is not
always readily determinable.
3. The examination procedures for bank premises should
include a physical inspection of major additions, and
a review and evaluation of the General Auditor's pro­
cedures and documentation relating to his audit of
major additions or construction programs.
4. The examination procedures in the area of insurance
should include an independent verification of insur­
ance coverage.
CLOSING MEETINGS:
Although we recognize some of the timing problems
involved in the examination of the Reserve Banks, we feel that
examiners should provide the Bank's departmental managers with an
outline of their exceptions and recommendations in advance of the
respective meetings to discuss them. Ideally, the bank personnel
should have sufficient time to review the exceptions and recommen­
dations before the meetings. Such an approach, we feel, would
result in much more meaningful meetings.
STAFFING:
In reviewing the personnel of the examiner's staff who
perform the examinations of the foreign department and SOMA, we
noted there is very little planning and provision being made for
possible key personnel turnover. Should either the examiner who
performs the examination of the foreign department or SOMA leave
the staff, there is only one other person who is adequately know­
ledgeable to perform a good examination. We recommend that in
future examinations of these areas, new examiners be introduced to
the area to provide assistance to the presently knowledgeable
examiners. This would result in personnel with valuable experience
and knowledge being available to be effectively utilized in case
of key personnel turnover.




352
TOUCHE ROSS & CO.

Federal Reserve System - 7
AUDITING DEPARTMENT:
It appears that the examiners can make better use of the
audit work performed by the auditing department of the Reserve
Bank. For example, we noted in our review in New York that proce­
dural write-ups and/or flow charts were not utilized. Examining
and verifying such flow charts and procedural descriptions would
be helpful to examiners in understanding the system being examined.
Such system descriptions should be maintained currently by the
Reserve Bank internal audit departments and available for use by
the examiners.

*

*

*

*

*

If you have any questions regarding the matters discussed
herein, we would be pleased to discuss them with you at your con­
venience.




Very truly yours,

353
BOA R D O F G O V E R N O R S
or THK

FEDERAL RESERVE SYSTEM

Office Correspondence

Date__January 2 7 ,_ 1 9 75----

«j>0_______ Board o f Governors___________

Subject;

Report from Touche____________

PfQIQ_____ E. Maurice HcWhlrter_________

___________Ross and Company______________

V*

Attached is the report from Touche Ross and Company
covering th e ir observations o f the examination and auditing
procedures employed in examining Reserve Banks by the D ivision
o f Federal Reserve Bank Operations.
Following are our comments responding to the conclu­
sions and recommendations provided on pages three through seven
o f the re p o rt.
D ivision management was pleased with the summary opinion
which sta tes that " i t i s our opinion that the areas we! reviewed in
d e ta il are being examined in accordance with generally accepted
auditing standards in a p rofession a l and competent manner."
D CUM
O
ENTATION
Touche Ross:
D ivision
Response:




A lack o f adequate documentation and explanation o f
items in certain o f the working papers was noted and
s p e c if ic d e fic ie n c ie s are lis t e d .
The c ritic is m s are fa ctu a l and the recommendations are
v a lid . While we continually stress the importance o f
documentation o f the work performed by examiners, we
never accomplish the degree o f excellen ce expected.
W are giving ever increasing atten tion to th is area
e
and the process o f reviewing documentation is bein';
enhanced. There is no reasonable excuse fo r in s u ffi­
cie n t. referencing, cro ss-re fe re n cin g , indexing, organi­
zation , and explanations in working papers. Touche
Ross made th eir comments on work performed at the
New York Bank which was the f i r s t examination a fte r the
reorganization o f the s t a f f . Supervisors have respon­
s i b i l i t y to approve completed work and a second review,
p rio r to f i l i n g , was added to the procedures in mid-1974.

354
To:

Board of Governors

-2-

CONFIRMATIONS
Touche Ross:
D ivision
Response:

Results o f confirm ations are not summarized p rio r to
issuance o f the fin a l report.
In the past, reports have been issued without
s u ffic ie n t evidence o f re su lts from confirm ation
requests. In a l l cases, r e p lie s to p o sitiv e con­
firm ations are obtained and a l l reports o f exceptions
on negative confirm ations are follow ed to an acceptable
conclusion . W are currently holding reports o f
e
examinations u n til we can reach conclusions from con­
firm ation responses. I f an adverse situ ation in th is
area had occurred in the past, the reports o f examina­
tio n would have been amended. A lso, we have always
considered the re su lts experienced with confirm ations
from recent internal audits in preparing our reports.
This minimizes the p o s s ib ilit y o f mistaken conclusion s.

SCOPE OF TESTS
Touche Ross:
D ivision
Response:

Touche Ross:
D ivision
Response:




The scope o f transaction te sts in the SO A area was
M
lim ited and should be expanded.
Our testin g o f transactions in the SO A area has
M
proved adequate in past examinations to determine
i f an expansion o f the review was necessary. The
internal auditing p ra ctice i s to prove every SO A
M
transaction but on a delayed b a sis. Until the
c l e r i c a l d i f f i c u l t i e s were experienced in SO A opera­
M
tions in 1973, the lag was approximately 60 days. This
lag has been reduced, because o f those d i f f i c u l t i e s ,
to le s s than fiv e days. W w i l l increase the sample
e
siz e in testin g transactions in future examinations.
Scope o f examination o f expenses exceeds that which
is necessary fo r compliance with generally accepted
auditing standards.
With the emphasis continually placed on System expenses,
we fe e l our current scope i s the minimum acceptable.
The D ivision w i l l not plan a reduction without s p e c ific
approval from the Board and i s not planning a request
to the Board fo r a change.

355
To:

Board of Governors

-3-

REPORTING
Touche Ross:

D ivision
Response:

The d e ta il in the SO A report should p o ssib ly be
M
reduced and i f i t i s retained, much o f the preparatory
work should be done by Bank personnel rather than
examiners.
Reductions in report d e ta il have been made a number
o f times, and we w i l l reevaluate that which remains.
To the extent that we reta in the d e ta il, we fe e l i t
should be prepared by examiners with assistance pro­
vided by internal au ditors. There are several reasons
fo r th is op inion; one i s that, at b e st, the examina­
tio n is somewhat d isru p tive to operations and we are
se n sitiv e to increasing the burden on the Bank. In
our opinion, the SO A operations personnel have been
M
working at capacity during the la s t three examinations
and requests by examiners would have eith er resulted
in overtime or increased i t .
W w i l l consider the suggestion fo r including an
e
analysis o f the re su lts o f operations and reasons
fo r change from the previous year during the next
examination.

Touche Ross:
D ivision
Response:

Touche Ross:
D ivision
Response:

The phrase, "gen erally accepted p rofession a l standards"
i s vague and the phrase, "gen erally accepted auditing
standards" i s p referred .
The use o f the term "p ro fe ssio n a l standards" was used
in only the one report as a re su lt o f the Touche Ross
recommendation. W changed the wording o r ig in a lly
e
because we f e l t our work exceeded the d e scrip tion ,
"auditing standards. "
The reference to the earnings and expenses should
s p e c if ic a lly id e n tify the period covered.
W have made the change.
e

EXAMINATION PROCEDURE MANUAL

Touche Ross:




D e ficie n cie s were noted in some procedure manuals.

356
To:

Board of Governors

D ivislon
Response:

-4-

Improvements were made in a number o f the manuals at
the beginning o f 1975* Others are now being updated
and improved. Some o f the d e fic ie n c ie s noted by
Touche Ross are in ten tion a l as the manuals are used
in conjunction with questionnaires which provide
ad d ition a l inform ation and parameters.

CLOSING MEETINGS
Touche Ross:
D ivision
Response:

Recommendation i s to provide Bank personnel with an
o u tlin e o f to p ics to be discussed in advance o f
c lo sin g meetings.
W see both advantages and disadvantages to the
e
recommendation; however, except in unusual situ a tion s,
such a procedure i s not fe a s ib le under our current
examination program. W b e lie v e personnel are generally
e
aware o f the to p ics to be discussed in formal meetings
because o f the inform al communications throughout the
examination. W w ill continue to improve communi­
e
cation s in every way p o ssib le .

STAFFING
Touche Ross:
D ivision
Response:

The number o f s t a f f members knowledgeable in the two
areas p ecu liar to the New York Bank, Foreign Opera­
tion s and SOM i s lim ited .
A,
This i s true, has been true tra d itio n a lly , and plans
have been prepared to remedy the situ a tio n . W do
e
not f e e l that these areas have been slig h ted in any
way, but we are not comfortable with the present
experience le v e l. A dditional training e ff o r t s are
planned both p rio r to and during the next examination
in New York. The situ a tio n is d i f f i c u l t to remedy
because the only opportunity fo r on -th e-job training
i s during the examination o f the New York Reserve Bank.

AUDIT D
EPARTM
ENT
Touche Ross:




The examination s t a ff should b e tter u t il iz e procedural
w rite-ups and/or flow charts maintained by Auditing
Departments.

357
To:

Board of Governors

D ivision
Response:

-5-

These are used in varying degrees in the individual
Banks. A v a ila b ility also varies from Bank to Bank.
The recommendation i s appropriate and we are now
bu ildin g f i l e s on such inform ation in our o f f i c e as
i t i s most b e n e fic ia l in planning the examinations.

CONCLUSION
I f you have questions or comments, we w ill be pleased to
address them or to arrange discu ssion s fo r you with personnel from
Touche Ross and Company.

cc:

Mr. Ronald G. Burke




358
Chairman P a t m a n . Mr. Hansen?
Mr. H a n s e n . Governor Mitchell, I appreciated your statement. I
thought it brought out a number of aspects that certainly we have to
consider when we are talking about involving ourselves in the money
business, the lending market. I felt that you exposed very well the
fact that the System is already very adequately audited in a fine-tuned
fashion, and it causes me some great concern in this period of time
when the confidentiality and the privacy of people is being assaulted,
that we continue to have efforts to further draw and quarter various
elements of our very successful free enterprise system by tinkering.
I feel that this bill that we have before us is dangerous in the respect
that it does expose many areas of operation to a breach of confidential­
ity that could, of course, interfere considerably with the fine tuning of
the System that we have accomplished to date.
I do not think I have any further comment, Mr. Chairman. Thank
you.
Chairman P a t m a n . All right, sir. Mr. Hannaford ?
Mr. H a n n a f o r d . Thank you, Mr. Chairman, and thank you, Gov­
ernor Mitchell, for a very fine and detailed statement.
I would like to question some of the historic perspectives that are
established in that statement, and rather take it through in order of
the numerical summary that you began by saying what we are re­
questing is simply a duplication of present efforts.
Now Mr. Staats here, a few days ago, referred to audit types I,
II, and III. Is that correct.
Are you familiar with that ?
Governor M i t c h e l l . Yes, sir.
Mr. H a n n a f o r d . Would you not say it is simply duplication of
audit type I that would be involved with present efforts? You do not
have any audit that would give any independent judgment of the
efficacy of the operations, nor the meaning of or the appropriateness
oi monetary policy. So, when you are talking about duplication, you
are really talking about audit type I. are you not. Governor?
Governor M i t c h e l l . Well, I think that in Mr. Staats’ statement, he
was distinguishing three kinds of audits. One was a financial audit,
another an efficiency of operations audit. Now, in the historical record
I referred to back in the 1950’s we began to get into the efficiency type
audit, and that has developed now to a point where I think it is func­
tioning very satisfactorily.
As for the policy type audit, which is the third type of audit that
he referred to, that is a kind of audit that I think the concurrent reso­
lution contemplates.
Mr. H a n n a f o r d . But the efficiency type audit is only efficiency within
the judgment of your own internal organization. There is no external
judgment of that efficiency ?
Governor M i t c h e l l . That i s right.
Mr. H a n n a f o r d . So it is not really a duplication in that sense, be­
cause it gives an independent judgment as to the efficiency of the
operation.
Governor M i t c h e l l . Well, we have had several efficiency audits by
outside firms that have come in and looked at the operations of a
particular Reserve Bank. I mention this in passing. There was one in
San Francisco we just recently completed, and one in Dallas about 4




359
or 5 years ago, and there was one in Philadelphia within the last 2 or
3 years. So, those do happen; but they are sporadic and not regular.
The rest of it is internal. You are correct.
Mr. H a n n a f o r d . Well, I interpret your answer, Governor, with due
respect, that we are pretty much in agreement that the duplication
involves the audit type I as far as an independence of judgment of the
operation of the Federal Reserve is concerned.
I would go from that to the second reference that you make in which
House Concurrent Resolution 133, in two areas you allude to the fact
that it provides an audit—House Concurrent Resolution 133 provides
an audit.
Do you think that is an accurate statement, that House Concurrent
Resolution 133 provides an audit of the Federal Reserve?
Governor M i t c h e l l . The issue here is that heretofore there was not
an examination of policy determination. This, I think, is what the
Comptroller General was talking about, and I take.it that now that
this semiannual appearance by the Board before the Banking Com­
mittees of the House and Senate provides an opportunity to examine
directly the Federal Reserve as to its policy objectives and how it is
achieving them. That is being done by these committees. I think that
is exactly the way it ought to be done.
Mr. H a n n a f o r d . It is a quite superficial opportunity for us to m a k e
that observation, is it not, Governor?
Governor M i t c h e l l . No, it does not need to be. I do not think it
needs to be at all. In fact, Mr. Staats said he was going to hire out­
side people to suggest to him how he might proceed. I think that is
what those five experts are for. But I think the committees are pos­
sessed with staffs that are perfectly capable of performing the same
service without the needless injection of a third party.
Mr. H a n n a f o r d . Thank you, Governor.
In 1933, the Congress in its wisdom, in the Banking Act of 1933,
provided that the Board’s funds should not be construed as “Government funds or appropriated moneys.”
Do you think this is an accurate statement, independent of the law
that made it such ? True enough, it is now an accurate statement be­
cause Congress made it an accurate statement.
Are not the funds of the Federal Reserve thus accrued by U.S. Gov­
ernment bonds, indeed, U.S. Government funds?
Governor M i t c h e l l . I do not think there is any issue as to whether
the Federal Reserve is a public body or not. It is a public body, and
no one in the Federal Reserve would deny that. The best evidence that
it is a public body is that all the earnings of the Federal Reserve revert
to the Treasury, and last year this was $5y2 billion----Mr. H a n n a f o r d . I suspect I have approximately taken my time.
Governor, I would like to commend you for your statement. If time
permits, I may ask to comment on some other things.
But, all the funds accrue to the Government of the $6.3 billion in
tax income, except those that the Federal Reserve in its operations ex­
pends, which is now some $548 million per year in operating funds?
Governor M i t c h e l l . That is correct, except for a dividend, and an
appropriation to surplus; otherwise the only deduction is the $550
million for our operations. That is correct.




360
Mr. H a n n a f o r d . The thins: that bothers me, Governor, is that we
have an institution with a budget of well over $0.5 billion, and over $6
billion in revenues without any third party to make a judgment as
to the efficiency of the expenditures of over $0.5 billion, independent
of the monetary decision, of course. Would you say that Congress al­
ready has the opportunity to audit in a somewhat indirect way through
House Concurrent Resolution 133 ?
Well, thank you very much, Governor, and thank you, Mr. Chairman.
Mr. H a n s e n . Would the gentleman yield briefly ?
Mr. H a n n a f o r d . Yes, sir.
Mr. H a n s e n . I would like to ask just one question, Mr. Chairman.
On page 6 of your testimony, Mr. Mitchell, you say, “The System
spends $8% million annually for auditing the Reserve Banks and the
Board.”
I would just like to ask you, what would be your estimation of the
possible costs in light of this of the duplication of audit that might
be incurred under the proposed legislation?
Governor M i t c h e l l . I do not think it would be equivalent to this
number; but it depends on how the audit were conducted. I f the audit
were an audit of procedures, it would be relatively inexpensive. But
if it were the kind of audit that we are performing on the Reserve
Banks, and if it duplicated that, it would be a very expensive opera­
tion, in my opinion.
Mr. H a n s e n . And how would you anticipate that the audit would
be conducted under the terminology of the legislation as proposed ?
Governor M i t c h e l l . Well, to tell the truth, Mr. Hansen, I cannot
remember what Mr. Staats said he intended to do. My recollection of
his testimony 2 years ago was that he could not afford to audit the
Federal Reserve every year, that he might do it once every 2 or 3
years. I would infer from that that the amount of money he would
devote to this probably would be rather substantial.
I am not in a position to be very helpful at this time. I might talk
to our people and see if they could provide you with some information
on this.
Mr. H a n s e n . Mr. Chairman, it might be well if we allowed Governor
Mitchell to clarify this and provide it for the record.
Chairman P a t m a n . Certainly. You may extend your remarks.
Without objection, it is so ordered.
[In response to the request of Mr. Hansen, the following informa­
tion was submitteed for the record by Governor Mitchell:]
R

eply

of

G o verno r M it c h e l l

At the time Comptroller General Staats appeared before the Subcommittee to
present the views of GAO on H.R. 4316, he agreed, in response to a request by
Representative Gradison, to supply cost estimates for the types of audits he en-'
visaged would be conducted. I assume such estimates were furnished the Sub­
committee for the record of this hearing.
Obviously, any cost estimate will depend on the scope, depth, and frequency
of the audits contemplated. These factors could, of course, change from year to
year. Our staff estimates that a thoroughgoing audit of all twelve of the Reserve
Banks could result in the expenditure of $1-1% million.

Chairman P a t m a n . N o w , Mr. Staats mentioned the fact that he
would not conduct an overall audit every year, but he would audit




361
various aspects of the Federal Reserve System every year. He made
that plain.
Governor M itch ell . Well, I was just trying to recall. It seemed to
me at one point that he had said that he would audit the procedures,
which is a relatively inexpensive operation.
Mr. H a n se n . Well, I think this should be clarified for the record,
Mr. Chairman.
Mr. N eal . Would the gentleman yield on that point ?
Mr. H a n s e n . H e h a s t h e t i m e .
I thank the gentleman for yielding.
Chairman P a t m a n . It is your time, Mr. Neal.
Mr. N eal . Just on that point, would there be the need for two audits ?
Governor M itch ell . We do not think so.
Mr. N eal . Well, that is my point.
Governor M itch ell . We would have to have our internal system;
we could not get along without that, because it is more or less continu­
ous. The general auditor in each bank is continuously auditing opera­
tions, and I do not think we would want to relinquish any of our
controls, no matter what the GAO would do.
Mr. N eal . Governor, on page 14 of your statement, the second sen­
tence, you say:
Even many who oppose this or that action of the Federal Reserve willingly
concede that the maintenance of independent judgment by the Nation’s central
bank is essential if monetary policy is to play its proper role in achieving eco­
nomic stability in growth, a high level of employment and stablity in the pur­
chasing power of the dollar.

Is not that really the question, do they “ willingly concede” ? I
think that is where I have a question, anyway.
Governor M itch ell . This does not say they all conceded, but many
conceded.
Mr. N eal . Beyond that I think the question arises, do we have a
high level of employment? Has the Federal Reserve done what it could
T
to promote a high level of employment stability in the purchasing
power of the dollar ?
I do not believe we have had either, have we ?
Governor M itch ell . Well, performance certainly could have been
better, but I believe that you have to look at the price performance
in terms of the oil cartel’s operations last year, and the reverberations
it caused, and the fact that we had poor crops around the world and
food prices rose very rapidly, and the fact that the world is suffering
from inflation. The United States is not the only place where inflation
takes place. This is a worldwide phenomenon. Our performance could
have been better and should have been better, I would certainly admit.
Mr. N eal . I think that is where my interest lies, anyway. I think
that the Congress is going to bear the blame, as I think it probably
should, for economic conditions as they develop from now on, and I
think it is blamed for the state of the economy; however, it is just my
observation that without control over the "various aspects of the
economy, then we are really operating on one cylinder—that is, fiscal
policy.
Is not that the real purpose for this—to enable us to get into the area
of policy ?
Is not that the real purpose for this, and so that we can possibly
get into the area of policy ?




362
Governor M itc h e ll . Well, I would say that part of my job, and I
assume part of yours, is taking the blame for things when they do not
go right. But I do think that the operation of monetary policy is a
very technical and highly complicated matter, and I think Congress
wisely delegated it to a monetary authority. That is what has been
done all over the world. It is true, Congress ought to be in a position
to evaluate the operations of the monetary authority. I would not
object to that. But I would not try to do the job. I think that would
be a mistake.
Mr. N eal . On that point, you say that it is delegated to a central
bank all over the world.
What percent of the central banks over the world act independently
of elected representatives ? Where are the systems that operate through
elected representatives ?
Governor M itch ell . I think that the link between the Government
and the central bank€
Varies all the way from complete control, usually
through what is the equivalent of our Secretary of the Treasury, to a
fair amount of independence. I think you would find a considerable
amount of independence in Germany, and in Great Britain, and in
Italy. There are very strong central banks in all of those countries.
In fact, I think it would be helpful to look, if you were interested
in this particular issue, just to see how those central banks mesh with
their governments.
Mr. N eal . I am very interested, and I do want to do that.
Governor M itch ell . Those would be the ones that I would say are
outstanding, and they are also very important central banks in their
own right. The Bank of Japan, perhaps, is a somewhat different
question.
Mr. N eal . The GAO audit, as I understand it, would evaluate the
effectiveness and results achieved under the various programs of the
Federal Reserve. That would be its top priority item, I believe.
Governor M itch ell . Well, I think that in the context of the pre­
vious discussion I was having with Mr. Hannaford, you are now talk­
ing about a policy audit. I continue to believe that the purpose of a
policy audit is pretty largely satisfied by the concurrent resolution,
because Congress through the resolution can examine into the effec­
tiveness of what the Federal Reserve intends to do and how effectively
it is doing it.
Mr. N eal . The joint resolution, though, just asks for a very super­
ficial analysis of what is going on. It asks for a judgmental report.
Governor M itch ell . No. It asks for what we are doing what we
have been doing, and what we intend to do. That is all contained in
the statement that Chairman Burns made on May 1. I do not
think any central bank could give you a more forthright statement
than that one.
Mr. N eal . Would that cover such things as issuance and retirement
of Federal Reserve notes, clearinghouse operations ?
Governor M itch ell . No. This deals only with policy, not with
operations. Those are operating questions.
Mr. N eal . So, i there were a question beyond what we are given,
f
we would have no way to find out the answer under the terms of that
resolution?




363
Governor M i t c h e l l . If there are questions relating to our opera­
tions, we would be glad to supply you with any information you want.
In fact, we are doing that constantly. We put out a quarterly report
of operations. This book I have in my hand comes out every quarter.
Another is published once a year in addition. They describe the cost
operations at every Federal Reserve office in the country. There are
36 of them. It gives complete details on all of our banks’ operations.
Mr. N e a l . But not policy.
Governor M i t c h e l l . N o . That has nothing to do with policy, that
is right.
Mr. N e a l . Y o u are saying, though, that we have all the access we
would need to policymaking decisions through our concurrent
resolution ?
Governor M i t c h e l l . That is my opinion, yes, sir.
Mr. N e a l . I would like to pursue this further at another time.
Mr. Chairman, I would yield.
Chairman P a t m a n . We will recognize Mr. Blanchard.
Mr. B la n c h a r d . Yes.
Governor Mitchell, I want to thank you for your presentation and
also for its format. Previous discussions on this issue with those who
oppose it almost always focus on criticism of Congress rather than try­
ing to deal with the subject of the audit on its merits. Throughout
your statement, I notice you used the words “sensitivity” and “sensitive” quite frequently. You discussed the extreme sensitivity of bank
examinations and international monetary situations. What makes
these areas so sensitive?
Governor M i t c h e l l . Well, I think it is inherent in the nature of
financial markets. Today, financial markets are upset because they do
not know for sure how much of the Treasury deficit they will be called
upon to finance. When revised figures on income tax revenues were
released 3 or 4 days ago, the markets did not know that this informa­
tion was going to become available, and they reacted favorably. It
lifted a little of the weight from their expectations. This example
shows that markets are extremely sensitive; their sensitivity communi­
cates itself to the kinds of instruments they will buy. And since the
Government is heavily involved in debt markets and it has to turn its
portfolio over continuously, it is drastically affected by this fact.
In addition, of course, banks and businesses are affected by the
willingness of investors to buy their securities. And financial markets
today are in a delicate condition, I think it is fair to say.
Mr. B la n c h a r d . Yes.
I notice in addition to what I referred to, you mentioned that you
feel that an audit would unwisely inject a third party into the sensitive
area of monetary policy.
I assume you are referring to the GAO when you say that third
party.
Governor M i t c h e l l . Any third party.
Mr. B la n c h a r d . But I know that early in your statement you ex­
pressed confidence in the integrity and the competence of the GAO.
And I am wondering, if everyone has been singing the accolades of the
GAO, why is it that with their integrity and competence we cannot
trust them to do an objective audit of these very sensitive matters?
50-365 0 - 75 - 24




364
Governor M i t c h e l l . Well, let us say that you are a foreign central
bank and you have a portfolio of $10 billion or $20 billion in U.S.
Government securities that happens to be at the New York Federal
Reserve Bank, let us say. And that central government or central bank
believes there is some possibility that those operations are going to be
audited by the GAO. They would immediately begin to worry about
the possibility that their operations were going to be disclosed—or at
least made available to a third party. They will probably decide to
move their account to a commercial bank or out of the country. That
would be the natural thing for them to do.
One might say that it does not make sense because we have absolute
confidence in the GAO and its operations. But that does not necessarily
make any difference to foreign governments.
Mr. B la n c h a r d . But that puts a person like me in a tough
position----Governor M i t c h e l l . It certainly does.
Mr. B la n c h a r d [continuing]. When I have to say that I am not
willing to see Congress exercise its oversight function because of
foreign reaction. I do not know how I explain that.
Governor M i t c h e l l . Foreign governments own $80 billion of the
U.S. debt. That is almost as much as the Federal Reserve owns. We
should keep that in mind.
Mr. B la n c h a r d . One final question, w hich does puzzle me.
And I believe you are sincere when you stated—and it is on page 5,
where you mention, speaking for the Fed—that you are committed to
your own internal financial audit because you are committed to the
idea that the Fed has the responsibility above everything else of main­
taining the integrity of its operations as the Nation’s central bank.
And I do believe you are sincere, unlike some critics of the Fed, in
saying that. But I am wondering how you can keep that integrity
intact, either before the opinions of Congress or the public, if you
continue to resist an audit by the GAO, an agency you claim has
integrity and competence. It seems to me that you undermine the
integrity of the Federal Reserve by so resisting and opposing this bill.
Governor M i t c h e l l . This is a System judgment of long standing
that I am expressing. It also happens to be my judgment. I can under­
stand that people would differ on this, and people do differ on it. But
I think in pointing to the need to maintain the integrity of the Sys­
tem’s accounts, what we are saying, not only to Congress and the
American public but to the world, is that the Federal Reserve has
established a reputation of making the facts known with respect to
its operations, facts that are material, so that people can tell what
the central bank is doing.
There are some countries where it is difficult to tell what the central
bank’s obligations are, what its commitments are. But I do not think
anyone would say that is true of the Federal Reserve System in the
United States. Therefore, I am thinking about integrity perhaps in
a somewhat different way than you are. I believe that the sensitivity
of financial markets and the American role throughout the world is a
growing and extremely important consideration. And I do not believe
the GAO audit would be in any way reassuring to those markets or
to foreign central banks.
Mr. B la n c h a r d . If I have any time, Mr. Chairman, I would like
to yield the balance to Mr. Neal.




365
Chairman P a t m a n . Mr. Neal, you are recognized and then Mr.
Hannaford will have 5 minutes, and then I am going to take a little
time.
All right, Mr. Neal.
Mr. N e a l , I just had one question before we got too far from the
point I mentioned earlier.
Is it not true that most central banks of most industrial countries
are held directly responsible to their governments for bank policy?
That is, the Government tells the central bank what to do. And do we
not have pretty much a reversed situation here, where the Federal Re­
serve says what it is going to do and we in government just sort of
follow along?
Governor M i t c h e l l . I do not think that is the latest view on this.
President Ford, in a television interview just a few days ago—you
probably heard it—indicated that the Federal Reserve has autonomy,
but the Federal Reserve works within the framework of government;
and I think that is a better way to look at our operations and the op­
erations of the major central banks of the world.
Mr. N e a l . S o , in essence, the Federal Reserve is responsive to the
administration ?
Governor M i t c h e l l . It is a creature of Congress.
Mr. N e a l . But it is not responsive to the will of Congress. I think
it has been made quite clear that the will of Congress is that the Fed­
eral Reserve expand the money supply to help increase employment.
Governor M i t c h e l l . The Federal Reserve is increasing the money
supply.
Mr. N e a l . Consistently over the period of the last year it has not.
And my own view is that because of its policy, it has been largely re­
sponsible for the high unemployment that we have today. So I would
say that it has not been responsive to the will of Congress and that we
do not have a way of knowing, without an audit, what the policy is—if
in fact the Federal Reserve is carrying out policy directives.
Governor M i t c h e l l . At the May 1 hearing, Mr. Neal, Chairman
Burns said that the Federal Reserve’s objective through March 1976 is
to increase the narrowly defined money supply between 5 and 7.5 per­
cent. Now, at that hearing there were estimates all the way from 2 per­
cent to 12 percent as being a desirable goal. That intention, those facts,
were completely revealed along with the reasons for them. And Con­
gress had an opportunity on that occasion to indicate whether they
thought the Federal Reserve was pursuing a proper policy.
Mr. N e a l . S o what you are saying now is that Congress has not been
forthright enough in expressing its will.
Governor M i t c h e l l . I f Congress wants to see something differently
done, the Congress----Mr. N e a l . Should express that very clearly.
Governor M i t c h e l l . It can express it in any form it deems desirable.
Mr. N e a l . I agree with y o u ; I thank y o u .
Governor M i t c h e l l . I do not think anyone in the Federal Reserve
would contend that the Federal Reserve is independent of Congress,
because the Congress created it and can take any action with respect
to the Federal Reserve it believes is desirable.
Mr. N e a l . It just has not.
Governor M i t c h e l l . That is correct.




366
Mr. N e a l . One further point I would like to make is that it is my
understanding that if we did, as the Congress, take a position that was
clear, then we would have no way of knowing if that directive were
T
being followed or not without an audit; would that not be a fair
statement?
Governor M i t c h e l l . Well, I would like to differ with you on that,
because periodically, every week, every month, we reveal what we are
doing as we go along—to everybody, not just to Congress; to every­
body.
We issue a weekly financial statement, and we get many daily re­
leases out. So if anyone wants to know what the Federal Reserve is
doing, he will not have any trouble finding out. Your staff could find
out; you could see these releases for yourselx.
Mr. N e a l . So it really, then, is up to the Congress to be clear in its
directive to the Federal Reserve ?
Governor M i t c h e l l . Yes. And that is why I think that the concur­
rent resolution may lead to a better understanding between Congress
and the Federal Reserve.
Mr. N e a l . Do you not think, though, that you and Dr. Burns would
not appreciate the Congress being very specific in its desires ?
Governor M i t c h e l l . Well, Mr. Neal, you know, we spend all of our
time working on this problem. You have lots of other problems you
are working on, and you cannot do everything. Something has to be
delegated. Monetary policy is a complicated, technical matter. Over­
sight is one thing, but trying to run it on a day-to-day basis is some­
thing entirely different.
Mr. N e a l . Well, that is not even m y point.
Governor M i t c h e l l . I am sure it is not. All I am saying is I think
that Congress appropriately can take a look at what is happening,
and there ought to be an exchange of views to see if the differences
can be ironed out or minimized. And that, I think, is what is intended
with the resolution.
Mr. N e a l . The resolution calls for the setting of long term interest
rates in such a fashion that will reduce unemployment.
Governor M i t c h e l l . And maintain price stability.
Mr. N e a l . It is a very broad resolution.
Governor M i t c h e l l . But I would like to commend to you—I know
you are very busy—but I would like to commend to you Chairman
Burns’ statement. While it is not very long, it is extremely lucid.
Mr. N e a l . W h i c h s t a t e m e n t ?
Governor M i t c h e l l . The one he gave to the Senate Banking Com­
mittee on May 1.
Mr. N e a l . Fine; I will.
Governor M i t c h e l l . It is a very lucid statement. I think you would
find it a very useful statement.
Mr. N e a l . Thank you very much, Governor.
Chairman P a t m a n . Now, Mr. Hannaford.
Mr. H a n n a f o r d . Thank you, Mr. Chairman.
Governor Mitchell, you have mentioned a number of times House
Concurrent Resolution 133, and a moment ago you said it may lead to
the kind of communication that Mr. Neal was talking about. I think
this is the problem that his line of questioning identified, and mine did,
also, that it may lead to the kind of communication that we feel is




367
necessary to establish that we, as Members of the Congress, feel that
there is appropriate oversight being taken. And I suppose the existence
of House Concurrent Resolution 133 is one thing that might make me
reluctant to support the direction this bill takes immediately; to wait
and see what House Concurrent Resolution 133 might bring.
The initial response on May 1 of Dr. Burns to the Senate was
forthcoming and, I thought, quite encouraging. It still rests upon
information that he chooses to give, and there is the possibility that
that beginning might not continue to go in the same direction.
But as I look at the historic perspective that you lay out in your
document and testimony, and you say that this would be contrary to
congressional decisions over the years, I would begin by saying that it
is not necessarily a good maxim that what Congress has decided over
the years is what we should do. And then, in reviewing your historic
accounting, I would observe that there is very little that Congress has
done since 1933, when it cut the tether and slapped the stallion in
the flank and said, go your way. So that to say that we approve, by
virtue of having not done anything, is somewhat like saying that the
medical profession approves of cancer because they have not solved
the problem.
I do not think that there have been very many specific times in which
Congress has addressed the question, but they have sort of not ad­
dressed it and hoped that thing's were going right.
Are there very many historic examples where Congress has specifi­
cally stated that the Fed is doing all right and therefore we are not
going to do anything with it ?
Governor M itch ell . I think your chairman has raised this issue
every year. There have been debates in Congress about the role of the
Federal Reserve. I think you undoubtedly are right; the fact that Con­
gress has not acted does not necessarily mean that it should not have
acted. We are an institution that pays a lot of attention to tradition,
and I think in that respect we may be more conservative than many
commercial banks. But I believe that conservatism is characteristic of
financial institutions.
So, we build our world around what has happened and what has been
established as a precedent for present policy.
Mr. H annaford . Governor Mitchell, I thank you for your very can­
did replies. We obviously do not agree on everything. I think that you
can see the concern that we have had that there is no other institution
that I know of in this world of competition that you and I both believe
in that operates and enjoys this dispensation from review that the
Federal Reserve, with 28,000 employees and a budget of $550 million
a year, does enjoy. And the concern that Mr. Neal was just focusing in
on, on the independent judgment as far as monetary policy was con­
cerned, when we see less than an encouraging record of what that mone­
tary policy is producing, albeit there are other forces—shortages,
worldwide inflation, worldwide unemployment and so on—that would
also be relevant.
Thank you very much, Mr. Chairman. I yield back the balance of
my time.
Chairman P a t m a n . I yield to Mr. Hansen.
Mr. H a n se n . Mr. Mitchell, a moment ago we were discussing how
frequently the audit would be conducted, and I believe the bill did




368
stipulate annual audits. However, I think Mr. Staats, in his testimony,
recommended that this be stricken and that instead of prescribing that,
in his words, we make an audit each fiscal year of the several entities of
the System, we recommend that the requirement be changed to provide
simply that the General Accounting Office be directed to audit the
named entities of the Federal Reserve System.
So it was an ongoing type of thing, apparently, that he was allud­
ing to. Unless vou have clarification for that, I suspect that that would
be type of information you would have to be using in bringing the
information back to us that we talked about earlier.
Governor M itch ell . I understand.
Mr. H a n se n . I have two quick points, and one is that I think my
colleague across the aisle a moment ago was alluding to the fact that
you have probably one of those infrequent dispensations from audit
that not very many institutions enjoy. I would say that this does
create some problems, because I know there are suspicions, I suppose,
on the political right and the political left about—and maybe a smat­
tering in the middle of some of us—that make us wonder how well the
operation is being conducted under various circumstances. But I think
that you have to balance the possibility of some privacy and the
suspicions that derive from it with the problem of maybe becoming
so public that you create problems so that you are not able to func­
tion. And I think that is probably the determination that we have to
make. And it seems to me that some of the things that might be done,
since you people appear here quite frequently before the Congress, is
not so much worrying about an audit as to actually delve right into
what your operation is doing in various respects—particularly with—
maybe with international banking, where it is rather controversial,
and take direct congressional action to give you the guidelines by
which we expect you to operate.
Would you care to address yourself to that ?
Governor M itch ell . I believe that we are as fully responsive to re­
quests for information as we can be. On the international banking side,
as you probably know, we have prepared a bill dealing with the activi­
ties of foreign banks in the United States, and it has been introduced
in both Houses. And I understand hearings may soon beheld on that.
The Federal Reserve intends to be completely outgoing as far as
submitting information. Information other than that contained in our
regular releases can be obtained by asking for it.
Mr. H a n se n . Let me ask you in this respect, since the GAO is an arm
of the Congress, an auditing arm of the Congress, would you say that
it would make you nervous, as far as the fact that maybe—and it has
been known on Capitol Hill that some people use their own discre­
tionary authority to reveal certain things that maybe normally would
be confidential and should be confidential—that this would provide
some kind of a toe in the door or a crack that would cause a breach of
confidentiality ? Would this be one of the problems that you would be
concerned about?
Governor M itch ell . I think something of that sort would be an
issue. It would not only be our concern, but it might well be the con­
cern of people who were in financial markets and who would view a
development of this kind as being potentially prejudicial to their
interests.




369
Mr. H a n se n . What we are really talking about, then, is just a differ­
ence between the stability that perhaps you can offer in your conserv­
ative policies that you are talking about and the blend of politics
that you would get on Capitol Hill? And if Congress were to get too
close into your operation, it becomes more politics than discretionary
movement, based on studied evaluation by so-called experts?
Governor M itch ell . I think that would be a real exposure.
Mr. H a n se n . Thank you very much, Mr. Chairman.
Chairman P a t m a n . May I comment on that first?
You know, every important agency of the Government—there are
a few tombstone commissions and things like that that have not been
audited—but every important agency of the Government has been
audited except the Federal Reserve.
Now the Federal Reserve, of course, has been able to get around
that. The Federal Reserve does not even have to obtain its funds
through congressional appropriations.
They thought about going to Congress for appropriations and they
said, well, we do not want Congress to interrogate our people. We have
to stay away from that. Then they thought they would get the banks
to put up the money for the organization of the 12 Federal Reserve
banks. But the banks would not do it because a large number of them
were not for the Federal Reserve.
And then they figured out a way—and I think it is very clever—to
get around this provision in the Constitution. That is, to try to divert
the money some way so it would not be in violation of the Constitution.
So they devised this very clever way, by which they had the power to
manufacture money, to create money, just like commercial banks have,
except the commercial banks do it on a reserve basis. The Federal Re­
serve can create money on no basis at all—just create the money.
Now they have created $93.4 billion to buy Government bonds. They
could do the same thing and buy the entire national debt right now,
and get $35 billion a year interest, instead of $6 billion a year interest
they are now receiving. They could do that; there is no question about
it.
So we have to get to these things as we learn about them. I believe
in answer to Mr. Minish you said, “ Governor, that the auditors do not
audit the Federal Open Market Committee.”
Governor M itch ell . External auditors. That is correct. The outside
auditors do not.
Chairman P a t m a n . You do not reexamine, the outside audits? Do
you not have them audited by the General Auditor?
Governor M itch ell . The New York operations of the desk are
audited internally by the New York Bank, and they are also audited
by Federal Reserve Board employees. But that is all. The private firm
does not audit those accounts.
Chairman P a t m a n . The private firm does not audit them.

Well then, you mentioned the Commodities Stabilization Act. I
happened to be here when that act was considered and adopted. This
issue involved about $2 billion or $3 billion of the profits from the
stockpile of gold.
Do you remember that ?
Governor M itch ell . Yes, that is right.




370
Chairman P a t m a n . We got between $2 billion and $3 billion, and
instead of putting that in the Treasury, as it should have gone, it was
held in a separate fund in the Treasury. Why was it not put in this
general fund and spent like all other public moneys?
The Federal Reserve did not want to do that.
Now there are a few questions I just must ask you. One, you state
that the proposed bill provides specific authority for GAO to audit
both the Federal Open Market Committee and the System Open
Market Account.
How big is the System’s Open Market Account ?
Governor M i t c h e l l . It must be about $ 8 5 or $ 9 0 billion.
Chairman P a t m a n . $85 billion or $90 billion? That is nearly as
much as the portfolio, is it not ?
Governor M itch ell . Are you talking about what we own, or what
our transactions are?

Chairman P a t m a n . N ow , I am asking you this question. You testi­
fied about the System’s Open Market Account. I want to know how
big that account is, how important it is.
Governor M itch ell . The account consists of Government securities
and agency issues.
Chairman P a t m a n . Well, will you insert in the record, at this point,
an answer to the question ?
Governor M itch ell . Yes.

It is on the order of $90 billion.
[In response to the request of Chairman Patman, the following in­
formation was submitted for the record by Governor Mitchell:]
R

eply

R

e c e iv e d

from

G o vernor M

it c h e l l

Total holdings of the System Open Market Account (U.S. Government
Securities, Federal Agency obligations and Bankers Acceptances) totaled $89.9
billion as of May 7,1975. This does not include $2.6 biUion in such securities that
were held under repurchase agreement as of that date.

Chairman P a t m a n . And how is that used? Is that used by the Sys­
tem, by the 12 banks?

Governor M itch ell . Well it is owned by the 12 banks, and the in­
terest goes into our gross earnings. And, as I indicated $5.5 billion went
back to the Treasury last year.
Chairman P a t m a n . Yes; but the Federal Reserve does the taxpayers
a gross injustice because that money is spent by the Federal Reserve
without every really having to account for it to anyone.
Furthermore, William McChesney Martin, who was Chairman of
the Federal Reserve Board longer than anybody else, said that the
bonds held in the Federal Reserve had been paid for once. Well, if they
were canceled, as they should have been when you paid your debts,
you would not have this portfolio. If you need money you can create
it on the books of the Federal Reserve without reserves of any kind.
That is what is done now. So you do not need this $93 billion portfolio
from which you are receiving over $6 billion a year in interest. That
is a terrible thing; to pay debts and then continue to make the tax­
payers pay $6 billion-a-year interest on those bonds after they have
been paid for. That is awful.
So when you talk about turning back into the Treasury, you are
turning back money that you took away from taxpayers that you
should not have taken in the first place.




371
Governor M itch ell . I think, Mr. Chairman, that I would describe
the operation this way. That when we buy a Government security, we
pay for it with a check.
Chairman P a t m a n . In other words, created money.
Governor M itch ell . That is right.
That check becomes a reserve that the member banks hold. That is
the basis upon which we conduct our operations.
Chairman P a t m a n . Y ou mean with those bonds ?
Governor M itch ell . I am talking about the check that was issued
in payment of the obligation.
When the process is reversed— as it often is— we sell our securities
and someone surrenders reserves to us. That is the way the operation
is conducted.
You could run a monetary system without an open-market opera­
tion; you could put all the banks in debt to the Federal Reserve, and
we would furnish reserves by loaning to member banks. But that is
not as efficient as the system we have.
Chairman P a t m a n . N ow I want you to place in the record, at this
point, a statement showing the revenues for 1974 and 1973 that were
earned by the Federal Reserve banks.
Governor M itch ell . It is in our most recent annual report, but I
will be glad to put it in the record.
Chairman P a t m a n . I do not mean just the lump sum. I want you to
break it down, to show where you got them.
Governor M itch ell . By type of security, Mr. Chairman?
Chairman P a t m a n . No, you do not have to do types of securities,
just so it is on securities. I am not trying to doubleup your work on
you, but I want to know where it came from by itemization. You can
do that, can you not ?
Governor M itc h e ll . Sure.
Chairman P a t m a n . In 1973, the Federal Reserve’s expenses totaled
$495 million. And how much were they in the last fiscal year? Do you
happen to know ?
Governor M itch ell . H ow m uch did we expend?
Chairman P a t m a n . Yes. How much did the Federal Reserve spend?
Governor M itch ell . $548 million.
Chairman P a t m a n . That is an increase of $ 5 3 million. Let us con­
sider the increase in salary levels also. The president of the Federal
Reserve Bank of New YorK, and some of the others, used to get $ 4 2 ,5 0 0
just like a Member of Congress receives now. But they have been raised
recently to $ 9 0 ,0 0 0 a year. That is a pretty high raise. And the Federal
Reserve is doing that without authority of Congress— going around
the end of the Constitution like I explained a while ago.
The Federal Reserve also organized a thrift fund. Last year $12
million was accumulated in that thrift plan for the Federal Reserve
employees. Where did they get that money?
Now, in the period 1972 to 1974— 2 years— the expenses of the Sys­
tem banks increased 33.4 percent, or $147,681,612. And 59.4 percent
of this increase was attributed to salary expenses for officers and em­
ployees— 59 percent of it. You have no authority from Congress to do
that. You just went off, down across the prairie, and said you would
do it, and did it.
The dollar figures amounted to well over $70 million. Can you justify
this large increase in salary expense ?




372
[Testimony resumes on p. 385J
[At this point in the record, Chairman Patman submitted detailed
information on Federal Reserve salary expenses and other expenses for
the period 1972-74 (see also appendix G for further information con­
cerning salaries of Federal Reserve personnel earning $20,000 or
more):]




COMPARISON OF FEDERAL RESERVE BOARD EXPENDITURES IN 1972, 1973 AND 1974

1973

1972
Total
Expenses

Total
Expenses

$ Change
from 1972

$38,047,376

$41,033,402

$2,986,026

Breakdown
of Total
Expenses

Breakdown
of Total
Expenses

$ Change
from 1972

S alaries:

$17,167,836

$18,882,255

$1,714,419

Fees:

288,336

270,642

(17,6 9 4 )

1,304,839

1972 - 19/4

1974
$ Change
from 1973

$44,383,823

$3,350,421

Breakdown
of Total
Expenses

$ Change
from 1973

% Change

from 1973

Breakdown of Total
$ Change
% Change
from 1972
from 1972
to 1974
to 1974

$21,552,323

$ 2 ,670,068

14.14

$4,384,487

25.54

(6 .1 4 )

276,192

5,550

(1 2 ,1 4 4)

(4 .2 1 )

138,680

11.89

1,3 17 ,2 7 4

12,435

151,115

12.96

167,901

15,804

10.39

171,679

3,778

2.25

19,582

12.87

1,827

1,081

144.91

2,471

644

35.25

1,725

231.23

57,107

2,624

64,278

7,171

12.56

9,795

17.93

206,584

34,315

270,168

63,584

30.78

97,899

56.83

from 1972
7.85

% Change

from 1972

% Change

from 1973
8.17

Category

Retirement
Contributions
Regular
1,166,159
Special
T h rift Plan 152,097
Employee
Insurance:
Connectic u tt
746
General
Federal
Employees 54,483
Medical &
Hospita­
liz a tio n 172,269




Total tx:penses___
|~Change~
f Change
from 19/2
from 1972
to 1974
to 1974

Total
Expenses

% Change

9 .9 9

4 .8 2
19.92

2.05

.95

$6,336,447

16.65

1973

1972

1974

1972 - 1974
Breakdown of Total

Breakdown
of Total
Category
Expenses
trav elin g :
Field
Examiners $311,893
407,024
Other

Breakdown
of Total
Expenses

$ Change
from 1972

% Change

$320,379
461,874

$ Change
from 1973

% Change

from 1973

$ Change
from 1972
to 1974

% Change

from 1972

Breakdown
of Total
Expenses

$8,486
54,850

2.72
13.48

$179,015
515,685

($ 1 41 ,3 6 4 )
53,811

(4 4 .1 2 )
11.65

(13 2,8 7 8 )
108,661

(4 2 .6 0 )
26.70

from 1972
to 1974

Postage &
Expressage:

298,855

331,095

32,240

10.79

315,941

(1 5 ,1 5 4 )

(4 .5 8 )

17,086

5.72

Telephone &
Telegraph:

304,183

396,612

92,429

30.39

460,866

64,254

16.20

156,683

51.51

P rinting &
Binding:
FR B ulletin 345,695
385,614
Other

344,781
470,582

(941)
84,968

(.2 6 )
22.03

343,706
521,073

(1 ,0 7 5 )
50,491

( .3 1 )
10.73

(1 ,9 8 9 )
135,459

(.5 8 )
35.13

S tationery &
217,391
Supplies:

183,807

(3 3 ,5 8 4 )

(1 5 .4 5 )

310,251

126,444

68.79

92,860

42.72

Furniture &
Equipment:

555,594

167,217

(388,377)

(6 9 .9 0 )

166,926

(2 9 1)

(.1 7 )

(388,668)

(6 9 .9 6 )

R entals:

2 ,658,376

2 ,720,258

61,882

2.33

1,988,364

(7 3 1 ,8 9 4 )

(2 6 .9 1 )

(67 1,0 1 2 )

(2 5 .2 3 )

Books &
Subscriptions 56,472

60,180

3,708

6.57

85,675

25,495

42.36

29,203

51.71

Heat, Light
& Power:

106,745

3,179

3.07

414,736

307,991

288.53

311,170

300.46

103,566




1972

1973

1972 - 1974

1974

Breakdown of Total

Category

Breakdown
o f Total
Expenses

Breakdown
of Total
Expenses

$ Change
from 1972

% Change

from 1972

Breakdown
of Total
Expenses

$ Change
from 1973

% Change

from 1973

$ Change
from 1972
to 1974

14.06

26.11

$4,602

14.06

52,474

138.04

% Change

from 1972
to 1974

Repairs &
A lteratio n s
(Bldg &
Grounds):

$32,737

$29,609

($3,128)

(9 .5 5 )

Repairs &
Maintenance
(F u rn itu re
& Equipmt):

38,014

43,692

5,678

14.94

90,488

46,796

107.10

CbntractuaT
Professional
Services:

647,482

457,527

(189,955)

(2 9 .3 4 )

492,098

34,571

7.56

(155,384)

(2 4 .0 0 )

Outside Data
Processing
Svcs:

121,370

95,220

(26,150)

(2 1 .5 5 )

98,405

3,185

3.34

(2 2 ,9 6 5 )

(1 8 .9 2 )

-

-

-

-

-

-

-

-

-

Truth-1nLending:

. $37,339

Auditing
Books o f
Board:

4,5 00

5,000

500

11.11

6500

1,500

30.00

2,000

Review of
Exam.
Procedures:

17,855

22,196

4,341

24.31

18,163

(4 ,0 3 3 )

(1 8 .1 7 )

308

Consumer
Finance
Surveys:




.

-

-

-

-

-

44.44

1.73

-

-

1972

Category
Legal &
Consult.
Fees & Exp:

Breakdown
of Total
Expenses

$220,734

1973

1974

Breakdown
o f Total
Expenses

$ Change
from 1972

% Change

from 1972

Breakdown
of Total
Expenses

1972 - 1974

$ Change
from 1973

from 1973

Breakdown of Total
$ Change
% Change
from 1972
from 1972
to 1974
to 1974

% Change

($66,394)

(3 0 .0 8 )

$134,232

($ 2 0 ,0 1 7 )

(1 2 .9 7 )

($ 8 6,4 1 1 )

(3 9 .1 5 )

140,302

(1 ,2 9 1 )

(.9 1 )

190,755

50,453

35.96

49,162

34.72

Linkages &
Emp. Research
-SSRC:
124,751

21,905

(102,846)

(8 2 .4 4 )

36,177

14,212

64.88

(8 8 ,6 3 4 )

(7 1 .0 5 )

Security
Clearance
Inves:

13,000

1,525

(1 1 ,4 7 5 )

(8 8 .2 7 )

4,275

2,750

180.33

(8 ,7 2 5 )

(6 7 .1 2 )

T ranscribing
& Reporting:

3,679

17*039

13,360

363.14

3,560

(1 3 ,4 7 9 )

(7 9 .1 1 )

(119)

(3 .2 3 )

All Other:

348,626

378,698

30,072

8.63

453,915

75,217

19.86

105,289

30.20

T uition &
R egistration: 109,761

97,990

0 1 ,7 7 1 )

(1 0 .7 2 )

144,357

46,367

47.32

34,596

31.52

C afeteria
(N et):

165,938

31,500

23.43

184,241

18,303

11.03

49,803

37.05

10,758

958

9.78

11,859

1,101

10.23

2,059

21.01

376

$154,340

Other Surveys 141,593

134,438

O fficial
Dinners, etc: 9,800




1972

1973
Breakdown
of Total
Expenses

Category

Breakdown
of Total
Expenses

Meals fo r
O fficial
Guests:

$11,073

$11,316

Special
S ta tis tic a l
Svcs:

11,309

3,564

C LA
EM
Membership
Fee & Exp:

27,645

News Ticker
Service:

$ Change
from 1972

% Change

from 1972

Breakdown
of Total
Expenses

1972 - 1974

$ Change
from 1973

Breakdown of Total
$ Change
% Change
from 1972
from 1972
to 1974
to 1974

% Change

from 1973

2.19

$15,438

$4,122

36.43

(7 ,7 4 5 )

(6 8 .4 9 )

5,503

1,939

54.41

43,872

16,227

58.70

44,807

935

6,919

8,820

1,901

27.48

9,538

M iscella­
neous :

37,681

36,440

(1*241)

(3 .2 9 )

Construction
—Annex
Building:

12,273,928

13,669,191

1,395,263

11.37

-

-

Computer
A cquisition:
TOTAL:
SOURCE:

-

38,047,367

-

41,033,402

$243

1974

2,986,026

7.85

$4,365

39.42

(5 ,8 0 6 )

(5 1 .3 4 )

2.13

17,162

62.08

718

8.1 4

2,619

37.85

38,172

1,732

4 .7 5

491

10,381,948

(3 ,2 8 7 ,2 4 3 )

(2 4 .0 5 )

-

-

-

44,383,823

3,350,421

8.17

1.3 0

(1 ,8 9 1 ,9 8 0 )
-

6,336,447

1974 Budget Performance Report to Board of Governors, Federal Reserve System, from O ffice of the C o n tro ller, FRS,
Appendix A, p. A-9.




(1 5 .4 1 )
-

16.65

COMPARISON OF SELECTED EXPENDITURES OF THE FEDERAL RESERVE SYSTEM BANKS IN 1972, 1973 AND 1974

1972
Total
Expenses

1974

1973
Total
Expenses

$ Change
from 1972

$442,423,178 $526,686,386 $84,263,208

1972 - 1974

$ Change
from 1973

from 1973

Total Ext)enses
% change
$ Change
from 1972
from 1972
to 1974
to 1974

% Change

% Change

from 1972

Total
Expenses

19.05

$590,284,790 $63,598,404

12.08

$147,681,612

$ Change
from 1973

% Change

Breakdown o f Total
$ Change
% Change
from 1972
from 1972
to 1974
to 1974

33.42

Breakdown
of Total
Expenses

Breakdown
of Total
Expanses

$ Change
from 1972

% Change

from 1972

Breakdown
of Total
Expenses

$15,594,013
186,281,389

$16,894,811
216,321,017

$1,300,798
30,039,628

8.34
16.13

$19,259,732
253,215,558

$2,364,921
36,894,541

14.00
17.06

$3,665,719
66,934,169

23.51
35.93

Retirement &
Other Benefits: $33,728,923

$40,570,701

$6,841,778

20.28

$45,644,453

$5,073,752

12.51

$11,915,530

35.33

Fees-D irectors
and Others:

$3,290,901

$ 4 ,608,280

$1,317,379

40.03

$4,292,336

($315,944)

(6 .8 6 )

$1,001,435

30.43

T ravel:

$4,872,790

$5,085,547

$212,757

4.37

$4,656,729

($428,818)

(8 .4 3 )

($216,061)

(4 .4 3 )

Postage &
Expressage:
Postage
Other

$9,511,406
36,537,061

$ 10,668,404
4 6 ,781,473

$1,156,998
10,244,412

12.16
28.04

$13,168,871
53,973,461

$2,500,467
7 ,191,988

23.44
15.37

$3,657,465
17,436,400

38.45
47.72

Telephone &
Telegraph:

$ 5,050,932

$5,588,047

$537,115

10.63

$7,617,233

$2,029,186

36.31

$2,566,301

50.81

P rinting &
Supplies:

$15,398,222

$19,408,845

$4,010,623

26.05

$24,547,614

$5,138,769

26.48

$9,149,392

59.42

Category
S alaries:
O fficers
Employees




from 1973

50-365
0 - 7 - 25
5

1972

1973

1972 - 1974

1974

Breakdown of Total
Breakdown
of Total
Expenses

$ Change
from 1972

% Change

$ Change
from 1973

% Change

from 1972

Breakdown
of Total
Expenses

from 1973

$ Change
from 1972
to 1974

% Change

Category

Breakdown
of Total
Expenses

Insurance:

$702,236

$804,113

$101,877

14.51

$951,343

$147,210

18.31

$249,107

35.47

Taxes on Real
E state:

$8,705,366

$11,171,874

$2,466,508

28.33

$11,644,307

$472,433

4.23

$2,938,941

33.76

D epredation:

$5,091,930

$6,591,257

$1,499,327

29.45

$6,791,509

$200,252

3.04

$1,699,579

33.38

L ight, Heat,
Power & Water:

$3,861,210

$4,595,245

$734,035

19.01

$6,153,771

$1,558,526

33.92

$2,292,561

59.37

Maintenance &
Repairs:

$2,761,018

$3,233,475

$472,457

17.11

$3,631,349

$397,874

12.30

$870,331

31.52

Rent:

$3,272,919

$5,264,163

$1,991,244

60.84

$6,726,122

$1,461,959

27.77

$3,453,203

105.51

Furniture &
Equipment:
Purchases
Rentals

$11,414,933
22,480,510

$10,488,255
31,175,921

($926,678)
8,695,411

(8 .1 2 )
38.68

$9,013,105
38,022,684

($ 1 ,4 7 5 ,1 5 0 )
6,846,763

(1 4 .0 6 )
21.96

($ 2 ,4 0 1,82 8) (2 1 .0 4 )
15,542,174
69.14

All Other:

$7,178,125

$9,196,949

$2,018,824

28.12

$9,667,700

$470,751

5.12

$2,489,575

$55

$15

($40)

$23

$8

53.33

($32)

SUBTOTAL:




$375,733,938 $488,488,394 $72,714,456

(7 2 .7 3 )
19.35

$518,977,906 $70,529,512

15.73

34.68
(5 8 .1 8 )

$143,243,968 38.12

379

In te ro ffic e
Expenses:

from 1972
to 1974

1972

1973

1974

1972 - 1974
Breakdown iof Yotal

Breakdown
o f Total
Expenses

Breakdown
of Total
Expenses

$ Change
from 1972

$28,641,272

$30,725,909

$2,084,637

2,0 90 ,6