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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-




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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:




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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-




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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."




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