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9 5 T H CONGRESS ) 1st Session HOUSE OF E E P E E S E N T A T I Y E S FEDERAL RESERVE REFORM ( REPORT ( J N o . 95-559 ACT AUGUST 2,19TT.—Committed to the Committee of the W h o l e House on the State of the U n i o n and ordered to be printed M r . REUSS, from the Committee on Banking, Finance and Urban Affairs, submitted the following REPORT together with SUPPLEMENTAL AND ADDITIONAL VIEWS [To accompany H . R . 8094] [Including cost estimate of the Congressional Budget Office] The Committee on Banking, Finance and U r b a n Affairs, to whom was referred the b i l l ( H . R . 8094) to promote the accountability of the Federal Reserve System, having considered the same, report favorably thereon with amendments and recommend that the b i l l as amended do pass. T h e amendments (stated i n terms of the page and line numbers of the introduced bill) are as follows: O n the first page, strike out line 8 and all that follows down through line 10 on page 2, and insert the following: The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates. T h e B o a r d of Governors shall consult with Conress at semiannual hearings before the Committee on anking, Housing and U r b a n Affairs of the Senate and the Committee on Banking, Finance and U r b a n Affairs of the House of Representatives about the Board of Governors' and the Federal Open Market Committee's objectives and plans w i t h respect to the ranges of growth or diminution of monetary and credit aggregates for the upcoming twelve months, taking account of past and prospective developments f 89-006 2 i n production, employment, and prices. Nothing i n this A c t shall be interpreted to require that such ranges of growth or diminution be achieved i f the Board of Governors and the Federal Open Market Committee determine that they cannot or should not be achieved because of changing conditions. Page 3, strike out lines 8 through 15 and insert i n lieu thereof the following: SEC. 3. T h e second paragraph of section 10 of the Federal Eeserve A c t (12 U.S.C. 242) is amended by inserting after the t h i r d sentence thereof the following: "Except that of the persons thus appointed, beginning on February 1,1982, and at four-year intervals thereafter one shall be designated by the President, by and w i t h the advice and consent of the Senate, to serve as Chairman of the Board for a term of four years, and one shall be designated by the President, by and with the advice and consent of the Senate, to serve as Vice Chairman of the Board for a term of four years. Whenever a vacancy shall occur, other than by expiration of term, among the Chairman or Vice Chairman of the Board of Governors of the Federal Eeserve System appointed by the President as above provided, a successor shall be appointed by the President, by and with the advice and consent of the Senate, to fill sunch vacancy, and when appointed he shall hold office for the unexpired term of his predecessor.". Page 3, strike out lines 16 through 25. Page 4, strike out lines 2 through 5 and insert i n lieu thereof the following: SEC. 4. (a) Subsection 208(a) of title 18, United States Code, is amended by adding "a Federal Eeserve bank director, officer, or employee," immediately before "or of the District of Columbia." (b) Subsection 208(b) of title 18, United States Code, is amended by adding the following new sentence at the end thereof " I n the case of class A and B directors of Federal Eeserve banks, the Board of Governors of the Federal Eeserve System shall be the Government official responsible for appointment." Page 4, line 7, strike out "6" and insert "5." Page 4, line 13, strike out "7" and insert "6." N E E D FOR T H E BILL The Federal Eeserve consists of three basic elements: its member commercial banks, the 12 regional Eeserve banks, and the Board of Governors. T h e Board and Eeserve banks exercise broad supervisory and regulatory powers over member banks. Y e t only three of the nine directors of each Eeserve bank now are elected as representatives of the public at large. Three of the remaining six represent the banks themselves and the other three "commerce, agriculture or some other industrial pursuit." 3 The Federal Reserve, acting primarily through the System's Federal Open Market Committee, determines the nation's monetary policy, which affects every aspect of American life. Y e t existing law fails to provide for regular congressional-Federal Reserve dialogues over monetary policy. Under existing law, the timing of the President's appointment to a 4-year term of Chairman of the Board of Governors of the Federal Reserve is left to chance, and this appointment is not subject to Senate confirmation. Finally, Federal Reserve officers and employees are not covered by current conflict of interest statutes which apply to nearly all other Government agencies. H . R . 8094 sets forth clear guidelines for monetary policy and establishes regular oversight hearings focused on the Federal Reserve's plans for the growth of the monetary and credit aggregates during the current, year and its expectations for the Nation's economic performance. I t doubles the number of Reserve bank directors who w i l l represent the public at large. I t regularizes the appointment of the Federal Reserve Board's Chairman and Vice Chairman i n relationship to the President's term of office, and requires Senate confirmation of these appointments. Finally, it extends current conflict of interest statutes ]to Federal Reserve officers and employees. I n these ways, H . R . 8094 w i l l improve the conduct of monetary policy, increase its coordination with fiscal policy, increase the accountability of the Federal Reserve officers and employees, and increase the public's representation i n the Councils of the Federal Reserve System and its understanding and trust of the System's operations. HISTORY The concerns about the Federal Reserve which H . R . 8094 deals with have been publicly discussed i n a variety of forums for many years. The Hoover Commission Report of 1949 dealt with them. So d i d the Report of the Commission on Money and Credit i n 1961. I n addition, these concerns have been aired during numerous hearings before this and other committees of the Congress i n past years. I n M a r c h 1975, Congress passed House Concurrent Resolution 133 expressing the sense of the Congress that monetary policy be conducted so as to "maintain long run growth of the monetary and credit aggregates commensurate with the economy's long rim potential to increase production so as to promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates." I n addition, the resolution called for regular hearings, alternating between the House and Senate Banking Committees, at which spokesmen of the Federal Reserve would disclose the System's "objectives and plans w i t h respect to the ranges of growth or diminution of monetary and credit aggregates i n the upcoming 12 months." I n the second session of the 94th Congress, the House passed by a vote of 279-85. H . R . 12934, which would have made permanent the regular oversight hearings on the conduct of monetary policy first established pursuant to the resolution. Because of time pressures, the Senate adjourned before taking action on this bill. O n June 6, 1977, 4 Congressman H e n r y S. Reuss introduced H . R . 8094 providing for this and other purposes. Meanwhile, on A p r i l 18,1977, Congressman Parren J . Mitchell introduced H . R . 6273 to provide for Senate confirmation of the appointments of the Federal Reserve B o a r d Chairman and Vice Chairman and to relate their terms to that of the President. Hearings were held on H . R . 6273 on June 23, 1977 and on H . R . 8094 on J u l y 18 and 26,1977. H . R . 8094 was marked up by the Committee on Banking, Finance, and U r b a n Affairs on J u l y 27 and 28, 1977. The provisions i n H . R . 6273 i n regard to appointment and confirmation of the Federal Reserve Board Chairman and Vice Chairman were incorporated into H . R . 8094 by amendment. T h e amended bill, H . R . 8094, was reported by your committee by a vote of 40-0. WHAT THE BILL WOULD Do 1. E S T A B L I S H CLEAR GUIDELINES FOR T H E CONDUCT OF M O N E T A R Y POLI C Y A N D M A K E P E R M A N E N T A N D E X P A N D T H E CONGRESSIONAL-FEDE R A L RESERVE Q U A R T E R L Y DIALOGUE O N M O N E T A R Y P O L I C Y Under House Concurrent Resolution 133, Federal Reserve Chairman A r t h u r Burns has testified quarterly before the House and Senate Banking Committees to discuss "objectives and plans with respect to ranges of growth or diminution of the monetary and credit aggregates i n the upcoming 12 months." Dr. Burns has spoken of the value of these quarterly dialogues.. I n testimony on this b i l l on J u l y 26, i n response to a question, he said: Now you ask what has it accomplished. W e l l , I think i t has accomplished two things. A t least two things that I believe have been beneficial. W e in the Federal Reserve, because of that resolution, are perhaps a little more systematic i n our monetary discussion than we previously were, or might, otherwise have been. A n d I learned from members of the committee, and I would like to think that now and then, one or another member of the committee may learn something from me or from my Colleagues. So, I think it has been useful, yes. I n testifying on proposed legislation, D r . Burns said the Board of Governors recommends that the language providing for quarterly hearings follow closely the "carefully framed" and "thoroughly tested" language of House Concurrent Resolution 133. House Concurrent Resolution 133 expressed the sense of Congress that the Board of Governors and the Federal Open Market Committee "maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates." T h a t language is repeated i n the bill. I n your committee's judgment, these goals are mutually compatible. H . R . 8094 also repeats the language of the resolution which calls for routine quarterly testimony by the Federal Reserve of "objectives and plans w i t h respect to ranges of growth or diminution of the monetary and credit aggregates i n the upcoming 12 months." Experience with this language leads us now to enlarge modestly the areas of dis- 5 cussion at these oversight hearings. House Concurrent Resolution 133 does not require the Federal Reserve to assess the impact of its monetary targets on specific elements of the economy such as production, employment or prices. I n fact, Chairman Burns under questioning has often supplied evaluation of these elements. Such information should be made a regular part of future discussions. I n addition to requiring the B o a r d of Governors to consult with the Congress on "objectives and plans with respect to the ranges of growth or diminution 01 monetary and credit aggregates i n the upcoming 12 months," as is required i n House Concurrent Resolution 133, this b i l l adds: t a k i n g into account past and prospective developments with respect to production, employment and prices." T o take into account these ultimate goals of economic policy—jobs and prices—requires discussion of such matters as fiscal policy, monetary velocity, and interest rates, but the b i l l does not require the Federal Reserve to make explicit projection w i t h respect to these matters. I n the hearings. D r . Burns stated that while he would object to being required to "quantify" velocity i n specific numbers, he has often testified on expectations for velocity " i n general terms" and would not object to being required to give his views on monetary velocity, as he d i d i n the latest quarterly hearings on the conduct of monetary policy, J u l y 29 of this year. I n the committee's markup session a discussion ensued which makes it clear that interest rates also w i l l inevitably be part of the discussion. Chairman Reuss noted that "moderate long term interest rates" is stated as a "goal" of monetary policy and said that "when the Federal Reserve focuses on prospective developments i n production, employment and prices, it has to look at interest rates. They are a price; they are a factor i n production; and they are eminently important i n employment." M r . Stanton, ranking minority member and author of the language adopted, stated: I f you're taking the past and the future the way we are doing now, (including) prices, you have got to take into consideration interest rates and everything else. W e are talki n g about the economy i n general. Again, M r . Stanton stated that i n his view, as i n that of Chairman Reuss, it is "implicit" that interest rates be taken into account i n the quarterly dialogue, when moderate long term interest rates are stated as a goal of monetary policy. T h e requirement that the consultation with Congress take into account developments i n production, employment and prices, he said, means that "certainly interest rates, every facet of the economy, has to be taken into consideration." W i t h all that is implicit i n a f u l l discussion of these broad measures of economic performance, Congress and the public are assured of a fuller understanding of the impact of the Fed's monetary decisions on the economy. The quarterly hearings also provide a forum for two-way discussion between Congress and the Federal Reserve on what monetary policies are needed to achieve national economic goals. The airing" of these issues should also lead to better coordination of fiscal and monetary policies. 6 2. BROADEN T H E ECONOMIC I N T E R E S T OF FEDERAL RESERVE B A N K DIRECTORS Under present law, the 9 directors of each of the 12 Federal Reserve Banks have unduly narrow backgrounds. Commercial banks elect six of the nine—three class A directors (always bankers) as their direct "representatives", and three class B directors from "commerce, agriculture or some other industrial pursuit". The three class C directors are chosen by the Federal Reserve Board of Governors, with nothing said as to who they may be. A s the Banking Committee staff study—"Federal Reserve Directors: A Study of Corporate and Banking Influence", August 1976—disclosed, this has produced a representation overly banker oriented at the expense of other groups. Furthermore, it has resulted i n the virtual exclusion of women, blacks, and representatives of labor unions, consumer interest organizations and nonmanagerial and nonproducer interest groups. Currently, for example, out of 108 Reserve Bank directors only 4 are women and only 3 are minority persons. T h e b i l l should help to remedy the situation with respect to exclusion of women and, blacks, by requiring that all directors—A, B , and C—be chosen "without discrimination on the basis of race, creed, color, sex, or national origin," and by broadening economic representation. A s to economic representation, the three class A directors would be left as they are now—bankers. Class B directors would be specifically designated "public" and be broadened from the present "commerce, agriculture or some other industrial pursuit" to " w i t h due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor and consumers." I t is archaic to concentrate on "commerce, agriculture or some other industrial pursuit" when service industries are steadily becoming more prominent than the purely industrial pursuits which were i n everyone's minds i n 1913 when the Federal Reserve A c t was written. I t also introduces labor and consumers as groups of our citizenry whose economic interests entitle them to seats on the Federal Reserve bank boards. The same language as to qualification w i l l apply to the class C Directors, who w i l l continue to be chosen by the Board of Governors. D r . Burns stated i n hearings J u l y 26 that the Board of Governors endorses this proposed broadening i n representation of the public on Reserve bank boards, and the administration has no objection. 3. REQUIRE S E N A T E C O N F I R M A T I O N OF T H E C H A I R M A N OF T H E BOARD OF GOVERNORS, A N D PROVIDE FOR COORDINATING T H E C H A I R M A N S H I P WITH T H E T E R M OF T H E PRESIDENT Under existing law, members of the Federal Reserve Board of Governors, who serve 14-year terms, are subject to Senate confirmation at the time of their appointment. One of the Board members is designated by the President to serve as Chairman for a 4-year term, but without Senate confirmation. Thus, the President can designate as Chairman someone who may have been confirmed by the Senate years earlier and is not questioned again, even though he or she is assuming a position far more important than the one to which he or she was confirmed. H . R . 8094 would make the President's choice of Chairman, and also of Vice Chairman, subject to the advice and consent of the Senate. T h i s 7 takes effect i n February 1982, and would not apply to the appointment of the Chairman now scheduled for February 1, 1978. The Board of Governors has no objection to Senate confirmation of the Board Chairman and Vice Chairman. Further, the b i l l provides that the terms of the Chairman and Vice Chairman shall always begin on a date certain—1 year and 12 days after inauguration of the President—and that vacancies which occur during a term w i l l be filled only for the unexpired portion of the term. Under present law the Chairman and Vice Chairman are appointed for 4-year terms beginning when they are appointed, regardless of whether their predecessor has served a f u l l 4-year term. Thus, the question of when a President is able to appoint a Chairman and Vice Chairman i n his term is completely haphazard. I f by chance the Chairmanship becomes open only shortly before a President's first term expires, a new President would not have a chance to appoint a Chairman of his choice until almost the end of his first term. T h i s could throw the appointment into election-year politics. Furthermore, i f by chance the Chairmanship becomes open i n an odd-numbered year when there is no automatic vacancy on the Board of Governors, the President could have to select the Chairman from among only the seven sitting Governors (including the Governor whose term as Chairman has just expired). B o t h election year appointments and appointments restricted to the seven sitting Governors have occurred i n the past. H . R . 8094 would prevent any recurrence by setting the terms of the Chairman and Vice Chairman to begin 1 year and 12 davs after inauguration of the President. I n hearings held before the Domestic Monetary Policy Subcommitte, Chairman Burns, reversing a previous position, expressed his personal opposition to this provision, but not that of the Board. Under questioning he stated that at least some current Board members favored the provision. Furthermore, the subcommittee solicited views from many outside experts including former Federal Reserve officials. Overwhelmingly they supported regularizing appointment of the Chairman and V i c e Chairman of the Federal Reserve Board as soon after the President is inaugurated as a vacancy on the Board is scheduled to occur. Those i n support include former Vice Chairman of the Federal Reserve Board, J . Louis Robertson, former Governors Frederick L , Deming and Robert C. Holland, former Reserve bank presidents George H . Ellis, A l f r e d Hayes, Charles J . Scanlon and A l l a n Sproul, and economists George L . Bach and M i l t o n Friedman. Finally, it is noteworthy that i n the past former Federal Reserve Board Chairman W i l l i a m McChesney M a r t i n has supported coordinating the term of the President and Federal Reserve Chairman. This provision to coordinate the terms of the President and Federal Reserve Chairman with a 1-year lag, also takes effect i n February 1982. The administration has no objection to Senate confirmation and coordination of the chairmanship with the term of the President. 4. P R O H I B I T F E D E R A L RESERVE OFFICERS, E M P L O Y E E S , A N D DIRECTORS F R O M A C T I N G W H E R E T H E Y H A V E A C O N F L I C T OF I N T E R E S T Under existing law, employees and officers of the U.S. Government may not participate in any matter before the Government i n which 8 tliey or a member of their family or business have an interest, unless there is first a f u l l disclosure of this interest and an official written determination by an official that this interest is not substantial. T h e Federal Eeserve is not covered under existing law. H . E . 8094 extends this prohibition to Federal Eeserve bank officers, employees and directors. T h e administration has no objection to this provision. STATEMENTS EEQUIRED I N ACCORDANCE W I T H HOUSE EULES I n accordance w i t h clauses 2(1) (2) ( B ) , 2(1) (3), and 2(1) (4) of rule X I and clause 7(a) of rule X I I I of the Eules of the House of Eepresentatives, the following statements are made: COMMITTEE VOTE ( E U L E X I , CLAUSE 2 ( 1 ) (2) ( B ) ) A total of 40 votes was cast for reporting favorably H . E . 8094 and no votes were cast against reporting the bill. T h e following committee members cast votes for reporting the b i l l : Eepresentatives Eeuss, Ashley, St Germain, Annunzio, Hanley, Mitchell, Fauntroy, Neal, Blanchard, Hubbard, Spellman, A u C o i n , Tsongas, Derrick, Hannaford, Evans (Indiana), D'Amours, Lundine, Baddillo, Pattison (New Y o r k ) , Cavanaugh, Oakar, Mattox, Y e n to, Barnard, Watkins, Stanton, Brown, Wylie, Eousselot, Hansen, Hyde, Kelly, Grassley, Fenwick, Leach, Steers, Evans (Delaware), Caputo, Hollenbeck. The following committee members were absent: Eepresentatives Moorhead, Gonzales, Minish, Patterson (California), LeFalce, Allen, McKinney. OVERSIGHT FINDINGS (EULE XI, CLAUSE 2 ( 1 ) (3) ( A ) , ( D ) AND E U L E X , CLAUSES (2) ( b ) ( 1 ) AND (4) ( C ) ( 2 ) ) T h e committee held hearings on J u l y 18 and 26, 1977. Testimony was heard f r o m Eepresentative J i m W r i g h t ; the Chairman of the Federal Eeserve Board, A r t h u r Burns; and f r o m public witnesses. The committee finds that H . E . 8094 is necessary to ensure the accountability of the Federal Eeserve B o a r d System to the public and to Congress. E S T I M A T E OF COSTS TO B E I N C U R R E D ( E U L E X I I I , 7 ( A ) ( 1 ) , (2)) CLAUSE T h e committee estimates that no additional costs w i l l be incurred as a result of the enactment of this legislation. COST E S T I M A T E OF T H E CONGRESSIONAL B U D G E T O F F I C E P U R S U A N T S E C T I O N 4 0 3 OF T H E CONGRESSIONAL B U D G E T A C T OF 1 9 7 4 ( E U L E CLAUSE 2 ( 1 ) (3) ( C ) ) T h e Congressional Budget Office has submitted the report: TO XI, following 9 CONGRESSIONAL Washington, Hon. HENRY S. BUDGET OFFICE, D.C., August 1977. REUSS, Chairman, Committee on Banking, Finance and Urban Affairs, £7.$. House of Representatives, Bayburn House Office Building, Washington, D.C. DEAR MR. CHAIRMAN : Pursuant to section 403 of the Congressional Budget A c t of 1974, the Congressional Budget Office has reviewed H . R . 8094 a b i l l to promote the accountability of the Federal Reserve System; as reported by the Committee on Banking, Finance and U r ban Affairs. Based on this review, i t appears that no additional cost to the Government would be incurred as a result of enactment of this bill. Sincerely, ALICE M . INFLATIONARY IMPACT STATEMENT (RULE X I , RIVLIN, Director. CLAUSE 2(1) (4)) The committee believes that enactment of this legislation w i l l have no adverse effect on inflationary trends. SECTION-BY-SECTION SUMMARY Section 1. T h i s section requires the Board of Governors of the Federal Reserve System and the Federal Open Market Committee ( F O M C ) to maintain the long-run growth of the monetary and credit aggregates commensurate w i t h the economy's production potential to promote maximum employment, stable prices, and moderate longterm interest rates. The Board of Governors is required to consult with Congress at semiannual hearings before the House Committee on Banking, Finance and U r b a n Affairs and the Senate Committee on Banking, Housing, and U r b a n Affairs about the Board's and the F O M C ' s objectives and plans with respect to the ranges of growth or diminution of monetary and credit aggregates for the upcoming 12 months, taking into account past, and prospective developments i n production, employment and prices at the hearings. The b i l l does not require the Board and the F O M C to achieve projected rates of growth or diminution of the money supply i f they cannot or should not be achieved because of changing conditions. Section 2. T h i s section requires that all Federal Reserve bank Directors be chosen "without discrimination on the basis of race, creed, color, sex, or national origin." Class B and C Directors would be designated as "public" and be chosen " w i t h due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor and consumers." The b i l l would not change the economic representation for class A directors, now all bankers. Section 3. T h i s section requires Senate confirmation of the Chairman and Vice Chairman of the Board of Governors beginning i n February of 1982. The section also provides that the terms of the Chairman and Vice Chairman w i l l begin 1 year and 12 days after the President's inauguration. Vacancies which occur during a term w i l l be filled only for the unexpired portion of the term. H. Rept. 95-559—77 2 10 Section 4. T h i s section puts Federal Eeserve bank Directors, officers and employees under the conflict of interest provision, 18 U.S.C. 208, which applies to all other Federal employees. Section 208 already applies to the Board of Governors and its staff. Section 5. Eeferences to the Federal Eeserve A c t i n this b i l l are to the Federal Eeserve A c t as amended through 1974. Section 6. T h e short title of the b i l l is the "Federal Eeserve Eeform A c t of 1977." CHANGES I N EXISTING L A W MADE BY THE BILL, A S EEPORTED I n compliance with clause 3 of rule X I I I of the Eules of the House of Eepresentatives, changes i n existing law made by the bill, as reported, are shown as follows (existing law proposed to be omitted is enclosed i n black brackets, new matter is printed i n italic, existing law i n which no change is proposed is shown i n roman): FEDEEAL EESEEVE SECTION 2A. GENERAL POLICY: ACT CONGRESSIONAL REVIEW The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long rum, growth of the monetary and credit aggregates commensurate with the economy^s long run potential to increase production, so as to promote effectively the goals of maasim/um employment, stable prices, and moderate long term interest rates. The Board of Governors shall consult with Congress at semiannual hearings before the Committee on Banking, Housing and Urban Affairs of the Senate and the Committee on Banking, Finance and Urban Affairs of the Home of Representatives about the Board of Governors' and the Federal Open Market Committee's objectives and plans with respect to the ranges of growth or diminution of monetary and credit aggregates for the upcoming twelve months, taking account of past and prospective developments in production, employment, and prices. Nothing in this Act shall be interpreted to require that such ranges of growth or diminution be achieved if the Board of Governors and the Federal Open Market Committee determine that they cannot or should not be achieved became of changing conditions. F E D E R A L RESERVE BANKS SEC. 4. * * * * * * * * * je j Class A shall consist of three members, without discrimination on the basis of race, creed, color, sex, or natural origin, who shall be chosen by and be representative of the stock-holding banks. Class B shall consist of three members, [ w h o at the time of their election shall be actively engaged i n their district i n commerce, agricul- 11 ture or some other industrial pursuit.] who shall represent the public and shall be elected without discrimination on the basis of race, creed, color, sex, or national origin, <m<i witfA due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, amd consumers. Class C shall consist of three memibers who shall be designated by the Board of Governors of the Federal Reserve System. T ^ y sA&S selected to represent the public, without discrimination on the basis of race, cwed, tftffor, s^a?, 07* national origin, w&A mtf exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers. W h e n the necessary subscriptions to the capital stock have been obtained for the organization of any Federal reserve bank, the Board of Governors o f the Federal Reserve System shall appoint the class C directors and shall designate one of such directors as chairman of the board to be selected. Pending the designation of such chairman, the organization committee shall exercise 'the powers and duties appertaining to the office of chairman i n the organization of such Federal reserve bank. * * * * * * BOARD OF GOVERNORS OF T H E F E D E R A L RESERVE * SYSTEM SEC. 10. * * * T h e members of the board shall be ineligible during the time they are i n office and for two vears thereafter to hold any office, position, or employment i n any member bank, except that this restriction shall not apply to a member who has served the f u l l term f o r which he was appointed. U p o n the expiration of the term o f any appointive member of the Federal Reserve Board i n office on the date of enactment of the Banking A c t of 1935, the President shall fix the term of the successor to such member at not to exceed fourteen years, as designated by the President (at the time of nomination, but i n such manner as to provide for the expiration of the term of not more than one member i n any twoyear period, and thereafter each member shall hold office for a term of fourteen years from the expiration o f the term of his predecessor, unless sooner removed for cause 'by the President. O f the persons thus appointed, one shall be designated by the President as chairman and one as vice chairman of the Board, to serve as such for a term o f four years. Except thai of the persons thus appointed, beginning on February 1,1982, amd at four-year intervals thereafter, one shall be designated by the President, by and with the advice amd consent of the Senate, to serve as Chairman of the Board for a term of four years, and one shall be designated by the President, by and with the advice and consent of the Senate, to serve as Vice Chairman of the Board for a term of four years. Whenever a vacancy shall occur, other than by expiration of term, among the Chairman or Vice Chairman of the Board of Governors of the Federal Reserve System appointed by the President as above provided, a successor shall be appointed by the President, by and with the advice and consent of the Senate, to fill such vacancy, and when appointed he shall hold office for the unex- 12 fired term of his predecessor. T h e chairman of the Board, subject to its supervision, shall be its active executive officer. E a c h member of the B o a r d shall within fifteen days after notice of appointments make and subscribe to the oath of office. U p o n the expiration of their terms of office, members o f the B o a r d shall continue to serve until their successors are appointed and have qualified. A n y person appointed as a member of the B o a r d after the date of enactment of the B a n k i n g A c t of 1935 shall not be eligible for reappointment as such member after he shall have served a f u l l term of fourteen years. * * * * S E C T I O N 2 0 8 OF T I T L E * 18, U N I T E D * STATES * CODE § 208. Acts affecting a personal financial interest. (a) Except as permitted by subsection (b) hereof, whoever, being an officer or employee of the executive branch of the United States Government, of any independent agency of the United States, a Federal Reserve bank director, officer, or employee, or of the District of Columbia, including a special Government employee, participates personally and substantially as a Government officer or employee, through decision, approval, disapproval, recommendation, the renderi n g of advice, investigation, or otherwise, i n a judicial or other proceeding, application, request for a ruling or other determination, contract, claim, controversy, charge, accusation, arrest, or other particular matter i n which, to his knowledge, he, his spouse, minor child, partner, organization i n which he is serving as officer, director, trustee, partner or employee, or any person or organization with whom he is negotiating or has any arrangement concerning prospective employment, has a financial interest— Shall be fined not more than $10,000, or imprisoned not more than two years, or both. (b) Subsection (a) hereof shall not apply (1) i f the officer or employee first advises the Government official responsible for appointment to his position of the nature and circumstances of the judicial or other proceeding, application, request for a ruling or other determination, contract, claim, controversy, charge, accusation, arrest, or other particular matter and makes f u l l disclosure of the financial interest and receives i n advance a written determination made by such official that the interest is not so substantial as to be deemed likely to affect the integrity of the services which the Government may expect from such officer or employee, or (2) if, by general rule or regulation published i n the Federal Register, the financial interest has been exempted from the requirements of clause (1) hereof as being too remote or too inconsequential to affect the integrity of Government officers' or employees' services. In the case of class A and B directors of Federal Reserve banks, the Board of Governors of the Federal Reserve System shall be the Government official responsible for appointment. S U P P L E M E N T A L V I E W S O F MR. ST G E R M A I N T h i s legislation is a step forward. However, it is clear that the committee needs to take a longer and*, more detailed look at the complex issues involved i n Federal Reserve accountability and efficiency. W h i l e this b i l l attempts to deal w i t h conflicts of interest we are faced with the fact that the Federal Reserve operates under an act which mandates that commercial bankers control the selection of boards of directors of the regional Federal Reserve banks. H . R . 8001 does not alter this congressionally imposed conflict. F o r a number of years, questions have been raised about the functions of the regional banks and the need f o r the separate boards of directors for each of the 12 bants and each of the 25 branches. The committee needs to determine w i t h greater precision what public functions these boards perform and the degree to which their activities contribute to the efficiency of the Federal Reserve System. T h e F I N E discussion principles, which occupied much of the time of the committee i n the last Congress, recommended elimination of the regional boards of directors as part of a general restructuring of the Federal Reserve System. Similar suggestions were contained i n the Patman studies of the 1960's. These questions need to be addressed again. I f it is determined that the regional boards of directors do, indeed, perform an essential public function then clearly the directors need to be representatives of the public. T h i s public character is lacking, however, when two-thirds of the directors, by law, are placed on the boards by member banks of the Federal Reserve System. T h e selection process for members of the boards of directors of the Federal Reserve banks is, of course, tied to the fact that commercial banks have "membership" i n the System. T h e problems of Federal Reserve membership are a subject of increasing debate and they have been intertwined with the current discussions of N O W accounts and the payment of interest on commercial bank reserves held i n the Federal Reserve System. T h e committee needs, as part of a fundamental study of the Federal Reserve System, to determine whether the monitoring and control of bank reserves can be accomplished without membership by commercial banks. Elimination of "membership", as recommended i n earlier years, would end confusion over the selection process for the boards of directors of the Federal Reserve banks and would place the Federal Reserve System at a greater distance from the industry it supervises. T h e need for at least an arms length separation of the Federal Reserve and the banking industry is heightened by the enormous bank supervision and regulatory functions which the Congress has given the agency. Passage of the Bank H o l d i n g Company A c t amendments, the Truth-In-Lending Act, the E q u a l Credit Opportunity A c t r among: (13) 14 others, has increased the regulatory functions of the Federal Reserve System i n recent years and this fact raises serious questions about commercial bank intrusion i n the operation of the Federal Reserve banks. H . R . 8094 should be passed by the House, but its adoption should not l u l l the Congress or the American people into thinking the basic job of updating the Federal Reserve has been accomplished. That's a long l i a r d task that we must yet face. FERNAND J . ST GERMAIN. S U P P L E M E N T A L V I E W S T O H . R . 8094, F E D E R A L RES E R V E R E F O R M A C T B Y H O N . J O H N J. C A V A N A U G H , HON. M A R Y ROSE OAKAR, A N D HON. B R U C E V E N T O The version of H . R . 8094, the Federal Reserve R e f o r m Act, which has been reported to the f u l l House for consideration bears little relationship to the original bill that was introduced by the chairman of our committee last June. T h e drafting and introduction of that b i l l which carries as its title, " T o promote the accountability of the Federal Reserve System," was i n response to the revelations concerni n g the Fed's lobbying efforts i n both the Congress and State governments, the Fed's role i n encouraging private commercial bank loans to real estate investment trusts and public utilities, conflict of interest of Bank Board members, loans to Federal Reserve employees at below market interest rates and what some believe to be the bestowing of extravagant retirement gifts on departing F e d employees. Those are the broad categories of activities that have been regularly pursued within the Federal Reserve System and were still discernable from the minutes of the meetings of the Boards of Directors of the 12 Regional Banks that Chairman Reuss was able to obtain earlier this year. Heretofore the Congress was not aware of such practices. H a d it not been for Chairman Reuss' diligence over a period of almost a year i n negotiating with Chairman Burns for the acquisition of these minutes we would never have known what was happening within the Federal Reserve System. W e have two basic concerns about the legislation finally approved by the House Banking, Finance and U r b a n Affairs Committee. T h e first is that the b i l l no longer contains its once section 4 which sought to prevent the Federal Reserve System from using the banks of this nation as an integral part of its lobbying activities not only to the Congress but to State legislatures as well. T h e minutes which Chairman Reuss has obtained for the committee, although suffering from "904 deletions, clearly point out case after case where the F e d has communicated its lobbying objectives to its member banks i n an effort to add substantially to their own lobbying efforts. Chairman Reuss, i n liis opening statement on J u l y 18 when the f u l l committee first met to consider this bill, said, "The Federal Reserve System has been usi n g bankers—who are deeply beholden to the F e d because of the Fed's ability to give or withhold a discount window loan, or to give or withhold such privileges as approval for a merger, holding company acquisition, or an Ed^e A c t office—to lobby on the Fed's behalf w i t h legislators and other Government officials." T h e provisions of the original section 4 add the following language to section 10 of the Federal Reserve Act, " N o member of the B o a r d of Governors, director, officer, or employee of the Federal Reserve System may communicate w i t h any director, officer, or employee of any institution subject to the regu- (15) 16 latory authority of the Federal Reserve System to influence legislative actions affecting the Federal Reserve System." That is precisely the kind of language that is necessarry to put an end to such abuses of independence. T h e amendment to delete section 4 of the b i l l was narrowly agreed to by the committee on a vote of 19 to 17. The second objection to the legislation is that it does not contain, any mechanism or procedure for continuing to make available to the Congress and the general public copies of verbatim transcripts of the minutes of the meetings of the Boards of Directors of the 12 regional banks. A l t h o u g h the copies of the minutes that were provided by the Federal Reserve B o a r d were riddled with deletions, without the transcripts we never would have known about the possibility of and the potential for conflict of interest among board directors, questionable use of regulated institutions to accomplish specific lobbying goals on legislation w i t h which the Federal Reserve Board was concerned, etc. Therefore, it is only prudent that the Congress should seek to create a procedure which w i l l allow it to monitor the activities of the various Boards of Directors on a continuing basis. W i t h i n the correspondence between Chairman Reuss and A r t h u r Burns that preceded the transmittal of the minutes M r . Reuss stated: A s I have stated to you previously, these records are important to the oversight and legislative responsibilities of the committee and i t is my intention to pursue every proper and necessary means to obtain them. D u r i n g T h e f u l l committee mark-up we supported an amendment offered by M r . Cavanaugh that would have provided the committee w i t h an opportunity to have unexpurgated copies of the transcripts of the Boards of Directors meetings. The amendment would have provided for a 1-year delay between the date of the meeting and the transmittal to the Congress of complete transcripts. It would also have provided for release to the public, at the same time, keeping i n mind the sensitive nature of some of the discussions contained i n those minutes. The amendment provided that the transcripts to be released to the public would be complete except that items pertaining to (1) borrowi n g or perspective borrowing by individually named banks at the discount window, (2) transactions with foreign central banks, (3) Federal Reserve Board real estate plans or negotiations i n progress, (4) individual personnel matters and (5) security measures at banks could be deleted. A r t h u r Burns himself described those areas as "highly sensitive items" i n his letter to Chairman Reuss on Novembr 16, 1976, shortly before the Federal Reserve Board complied with our request for copies of the minutes. I n further recognizing Chairman Burns' difficulty over the sensitivity of some of the material that may be contained i n the transcripts, the amendment further provided that the appropriate committees of the Congress shall only make available that material which was deleted, i n compliance with the exception clause, from the transcripts made available to the general public by a majority vote of the committee. T h i s was included to insure that thorough consideration and debate preceded the release by the committee of any of the material contained i n the transcripts which it received but was deleted from the transcripts made available generally. After what can only be considered to have been a technically imprecise and unorthodox procedure 17 the Cavanaugh amendment was defeated i n the Committee on a vote of 12 to 19. Without these amendments the legislation w i l l not correct the abuses that our committee has uncovered. A s presently drafted this legislation w i l l not significantly promote the accountability of the Federal Reserve System, insure that the kinds of improper lobbying activities that have transpired w i l l not continue, preclude B o a r d Directors who have a conflict of interest i n a given situation from voting on that situation nor w i l l it provide the Congress w i t h a continuing monitoring procedure. T h i s is not reform. T h i s b i l l does not accomplish the worthy aim of accountability of public officials. I t does not further ;sunshine i n government. I n fact, it is little more than a shell with a glorified title. JOHN J. CAVANAUOH. M A R Y ROSE OAKAR. BRUCE VENTO. H. Rept. 95-559—77 3 ADDITIONAL VIEWS OF CONGRESSMAN B R U C E F. V E N T O I strongly disagree w i t h the decision to eliminate the provision barring lobbying by the Federal Reserve System. I recall vividly the disclosure of lobbying i n the partial release of Federal Reserve B o a r d minutes made by Chairman Reuss and the committee staff which revealed this regulatory authority orchestrating issues and applying intense pressure on the banking industry to affect political behavior. I do not find anywhere i n the enabling legislation authority for the Federal Reserve System to serve as a trade association or to impose its political viewpoints on fiduciary institutions which it regulates. T h e House Committee on Banking, Finance and Urban Affairs, by rejecting lobbying limitations, has given its approval to such activity i n section 4 of the initial proposal. I thoroughly disagree with that decision. However, given the reality of the committee's action, I think it behooves us then to provide for the f u l l disclosure of such covert lobbyi n g activities of the Fed. Our country must be made aware of the predominant political positions of the 12 Federal Reserve Boards of Directors, as well as the B o a r d of Governors. F o r m a l action and discussions of legislative goals of political motives must be at the very least be made public. Both opponents and proponents of lobbying by the F e d should be able to agree on f u l l disclosure of such activity. I intend to offer such a provision as an amendment on the floor of the House and look forward to enthusiastic support from my colleagues on the committee. I want to make it possible for the F e d to provide a complete record of its lobbying role, which would facilitate even better understanding of its political policies. The covert aspects of its lobbying to a significant extent has undercut the credibility of the Fed. Only complete public disclosure of such activities w i l l provide the restoration of that credibility. BRUCE F . VENTO. PROPOSED A M E N D M E N T B Y C O N G R E S S M A N B R U C E F . V E N T O TO H . R . 8094 REPORT O N L O B B Y I N G C O M M U N I C A T I O N W I T H REGULATED INSTITUTIONS Section 4. Section 10 of the Federal Reserve A c t is amended by inserting immediately after the last sentence thereof the following sentence: " A s part of its testimony during the quarterly hearings (Sec. 2 A of this A c t ) , the Chairman of the Board shall submit i n writing a report on each instance when the Board of Governors of the Federal Reserve System, its officers, or its employees, and the Boards of D i rectors of the various Federal Reserve Banks and their officers and employees have i n the previous quarter communicated with any director, officer, or any employee of any institution subject to the regulatory authority of the Federal Reserve System to influence legislative actions affecting the Federal Reserve System." (18) O