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AUDIT OF THE FEDERAL RESERVE HEARINGS BEFORE TH E SUBCOMMITTEE ON DOMESTIC MONETARY POLICY OF TH E COMMITTEE ON BANKING, CURRENCY AND HOUSING HOUSE OE REPRESENTATIVES NINETY-FOURTH CONGRESS FIRST SESSION ON H .R . 4 3 1 6 A BILL TO AUTHORIZE AND DIRECT THE GENERAL AC COUNTING OFFICE TO AUDIT THE FEDERAL RESERVE BOARD, THE FEDERAL ADVISORY COUNCIL, THE FEDERAL OPEN MARKET COMMITTEE, AND FEDERAL RESERVE BANKS AND THEIR BRANCHES MARCH 18; APRIL 22, 23, 25, 29; AND MAY 8, 1975 Printed for the use of the Committee on Banking, Currency and Housing AUDIT OF THE FEDERAL RESERVE HEARINGS BEFORE THE SUBCOMMITTEE ON DOMESTIC MONETARY POLICY OF THE COMMITTEE ON BANKING, CURRENCY AND HOUSING HOUSE OF REPRESENTATIVES NINETY-FOURTH CONGRESS FIRST SESSION ON H.R. 4316 A BILL TO AUTHORIZE AND DIRECT THE GENERAL AC COUNTING OFFICE TO AUDIT THE FEDERAL RESERVE BOARD, THE FEDERAL ADVISORY COUNCIL, THE FEDERAL OPEN MARKET COMMITTEE, AND FEDERAL RESERVE BANKS AND THEIR BRANCHES MARCH 18; APRIL 22, 23, 25, 29; AND MAY 8, 1975 Printed for the use of the Committee on Banking, Currency and Housing U.S. GOVERNMENT PRINTING OFFICE 60-365 0 WASHINGTON : 1975 COM M ITTEE ON BANK ING , CURRENCY AND HOUSING HENRY S. REUSS, Wisconsin, Chairman WRIGHT PATMAN, Texas W ILLIAM A. BARRETT, Pennsylvania LEONOR K. (MRS. JOHN B.) SULLIVAN, Missouri THOMAS L. ASHLEY, Ohio WILLIAM S. MOORHEAD, Pennsylvania ROBERT G. STEPHENS, Jr., Georgia FERNAND J. ST GERMAIN, Rhode Island HENRY B. GONZALEZ, Texas JOSEPH G. MINISH, New Jersey FRANK ANNUNZIO, Illinois THOMAS M. REES, California JAMES M. HANLEY, New York PARREN J. MITCHELL, Maryland WALTER E. FAUNTROY, District of Columbia LINDY (MRS. HALE) BOGGS, Louisiana STEPHEN L. NEAL, North Carolina JERRY M. PATTERSON, California JAMES J. BLANCHARD, Michigan HAROLD E. FORD, Tennessee CARROLL HUBBARD, Jr., Kentucky JOHN J. L aFALCE, New York GLADYS NOON SPELLMAN, Maryland LES AuCOIN, Oregon PAUL E. TSONGAS, Massachusetts BUTLER DERRICK, South Carolina PHILIP H. HAYES, Indiana MARK W. HANNAFORD, California DAVID W. EVANS, Indiana ALBERT W. JOHNSON, Pennsylvania J. WILLIAM STANTON, Ohio GARRY BROWN, Michigan CHALMERS P. W YLIE, Ohio JOHN H. ROUSSELOT, California STEWART B. McKINNEY, Connecticut JOHN B. CONLAN, Arizona GEORGE HANSEN, Idaho RICHARD T. SCHULZE, Pennsylvania W ILLIS D. GRADISON, Jr., Ohio HENRY J. HYDE, Illinois RICHARD KELLY, Florida CHARLES E. GRASSLEY, Iowa MILLICENT FENWICK, New Jersey P a u l N e l s o n , Cleric and Staff Director W i l l i a m P . D i x o n , General Counsel M i c h a e l P . F l a h e r t y , Counsel O r m a n S. F i n k , Minority Staff Director G r a h a m T. N o r t h u p , Deputy Minority Staff Director S u b co m m ittee on D o m e s tic M o n e ta r y P o lic y WRIGHT PATMAN, Texas, Chairman JOSEPH G. MINISH, New Jersey HAROLD E. FORD, Tennessee MARK W. HANNAFORD, California STEPHEN L. NEAL, North Carolina JAMES J. BLANCHARD, Michigan W ILLIAM A. BARRETT, Pennsylvania JOHN B. CONLAN, Arizona GEORGE HANSEN, Idaho W ILLIS D. GRADISON, Jr., Ohio (II) CONTENTS Hearings held on— March 18, 1975__________________________________________________ April 22, 1975___________________________________________________ April 23, 1975___________________________________________________ April 25, 1975___________________________________________________ April 29, 1975___________________________________________________ May 8, 1975_____________________________________________________ Text of H.R. 4316___________________________________________________ Testimony Kl‘ 1 147 185 207 227 283 285 of Anderson, Jack; accompanied by Les Whitten--------------------------------------Irvine, Reed J., adviser, Division of International Finance, Chief of Inter national Development Section, Federlal Reserve Board----------------------- 3 70 Statements Bartell, Robert M., public relations consultant and tax program coordinator, Liberty Lobby_____________________________________________________ Freeman, Robert J., professor of accounting, University of Alabama-------Mitchell, Hon. George W., Vice Chairman, Board of Governors of the Fed eral Reserve System-----------------------------------------------------------------------Nader, Ralph, consumer advocate_____________________________________ O’Reilly, Kathleen F., legislative director, Consumer Federation of Amer ica _______________________________________________________________ Schuck, Peter H., director, Washington office, Consumers Union---------------Selden, Prof. Richard L., chairman, department of economics, University of Virginia__________________________________________________________ Staats, Hon. Elmer B., Comptroller General of the United States; accom panied by Ellsworth H. Morse, Jr., Assistant Comptroller General; John J. Higgins, associate general counsel; and Charles P. McAuley, assistant director__________________________________________________________ A dditional I nformation Submitted for the 288 228 186 187 207 148 Record American Federation of Labor and Congress of Industrial Organizations, (AFL-CIO), letter dated May 1, 1975______________________________ American Society of Travel Agents, Inc., letter from James A. Miller, vice president, dated May 13,1975_______________________________________ Anderson, Jack, exhibits related to testimony: 1. “Media Accused of News Bias,” article from the Washington Post, March 6, 1972_________________________________________________ 2. Letter signed by Hon. J. L. Robertson, Vice Chairman, Board of Gov ernors of the Federal Reserve System, dated April 5,1972_________ 3. Letter signed by Joseph R. Coyne, Assistant to the Board of Gov ernors of the Federal Reserve System, dated March 11,1975_______ 4. Letterhead dated July 20, 1973, listing J. L. Robertson as a board member of Accuracy in Media__________________________________ 5. Federal Reserve form “Report of Outside Business and Teaching Activities,” application of Reed J. Irvine, approved November 10, 1971 ________________________________________________ ^_______ 6. “ How U.S. Subverted Chilean Economy,” syndicated column, dated November 3, 1974______________________________________________ (in) 274 244 393 394 5 6 7 12 13 14 IV A d d it io n a l I n f o r m a t io n S u b m it t e d for t h e R ecord—Continued Anderson, Jack, exhibits related to testimony—Continued 7. Letter from Lester S. Jayson, Director, Congressional Research Serv ice with an attached memorandum from Charles R. Gellner, Chief, Foreign Affairs Division and Johnathan Sanford, an analyst in that division concerning dealings with Reed J. Irvine of the Federal Re- Page serve Board, dated March 14, 1975--------------------------------------------16 8. Letter from Accuracy in Media, Inc., signed by Reed J. Irvine, dated November 14, 1974--------------------------------------------------------------------22 9. Letter to Charles Gellner, Chief, Foreign Affairs Division, Library of Congress Congressional Research Service, from Reed J. Irvine, dated November 22, 1975, on official stationery of the “Board of Governors 24 of the Federal Reserve System, Office Correspondence” ----------------10. Advertisement of Accuracy in Media, Inc., from the Washington Post of February 18,1975-----------------------------------------------------------30 11. “ Soured on Red-Baiter Sourwine,” syndicated column of Febru ary 4, 1975------------------------------------------------------------------------------31 12. and 13. Letters from Accuracy in Medica, Inc., signed by Reed J. Irvine, regarding Jack Anderson column of February 4,1975, dated: February 4, 1975------------------------------------------------------------------34 March 1, 1975-----------------------------------------------------------------------35 14. “The Aims of AIM : A Critical Look at One of the Press Critics,” article by Daniel Epstein from the American Society of Newspaper Editors Bulletin, March 1974___________________________________ 36 15. Letter of Reed J. Irvine to the Washington Post, dated March 3, 1975 _________________________________________________________ 42 16. AIM report of November 1974 with an attached excerpt from the Congressional Record of February 24, 1975---------------------------------42 17. “Irvine’s AIM Is Way Off,” syndicated column, dated March 11, 47 1975 _________________________________________________________ 18. Western Union Mailgram dated March 9,1975, signed by Francis G. Wilson, president of Accuracy in Media, Inc---------------------------------48 19. Reprints of articles unfavorable about the oil industry sent to oil companies by Accuracy in Media (AIM), requesting contributions— 50 20. Accuracy in Media (AIM) publication containing article, “CBS gives bankers time to reply”___________________________________ 56 21. Memorandum from Bob Kasen, of the Institute for American De mocracy, reporting on Accuracy in Media (AIM), dated March 1974_ 58 21a. Letter of the U.S. Postal Service dated October 15, 1971, regard ing the mail application of Accuracy in Media (AIM) for eligibility of reduced postage rates_______________________________________ 65 22. Letters from L. S. Hembree, editor of the Anderson (S.C.) Inde pendent, dated November 13, 1974, and Tom E. Fallon, editor of the Bay City (Mich.) Times, dated February 13, 1975, regarding Ac curacy in Media, Inc. (AIM )___________________________________ 67 23. “Right-Wing Watchdog,” article by Juluis Duscha_______________ 68 Bartell, Robert M., prepared statement_______________________________ 275 Biemiller, Andrew J., director, department of legislation, AFL-CIO, letter dated May 1, 1975_________________________________________________ 393 Blanchard, Hon. James J., additional written questions submitted to Reed J. Irvine____________________________________________________ 142 Burns, Hon. Arthur F., Chairman, Board of Governors of the Federal Reserve System, letter to Hon. Wright Patman, dated March 13, 1975— 137 Communication Workers of America : Letter dated April 25, 1975, to Chairman Patman, re GAO audit of Federal Reserve System_______________________________________ 279 Statement by the AFL-CIO executive council on the Federal Reserve and the Nation’s Monetary Policy_______________________________ 280 Emry, Pastor Sheldon, Pheonix, Ariz., statement______________________ 396 Freeman, Robert J., prepared statement_______________________________ 249 Gradison, Hon. Willis D., Jr., information requested in regard to the mem bership of the Board of Governors of the Federal Reserve System, 1913-74 __________________________________________________________ 213 Holland, Hon. Robert C., member Board of Governors of the Federal Re serve System, letters to chairman Wright Patman dated: March 17, 1975________________________________________________ 138 March 19, 1975________________________________________________ 139 V Additional I nformation Submitted for the R ecord—Continued Irvine, Reed J .: “A Vindictive Muckraker at Work,” article from the Louisville Times, Pase March 20, 1975________________________________________________ 96 “Anderson Piece Struck a Low Journalism Blow,” article from the Nashville Tennessean, March 15, 1975___________________________ 94 Extension of remarks____________________________________________ 99 Positions held at Federal Reserve________________________________ 97 Response to questions o f : Chairman Wright Patman___________________________________ 144 145 Hon. James J. Blanchard____________________________________ Statement of expenses charged to AIM, 1973-74____________________ 80 Supplemental material submitted with attached exhibits___________ 137 “The Wayward Press,” article from Air Force magazine, March 1975_ 92 Kremer, Edward J., chairman, National Association of Insurance Agents, Inc., letter dated May 2,1975-----------------------------------------------------------394 Liberty Lobby, prepared statement of Robert M. Bartell, public relations consultant and tax program coordinator-----------------------------------------275 Membership of the Board of Governors of the Federal Reserve System, 1913-74, from the Federal Reserve Bulletin, November 1974_________ 213 Mitchell, Hon. George W., Vice Chairman, Board of Governors, Federal Reserve System: Earnings and Expenses of Federal Reserve Banks—1973-74________ 386 Response to questions o f : Chairman Wright Patman_________________________________ 370, 399 Hon. George Hansen________________________________________ 360 Touche Ross & Co., report dated February 4, 1975__________________ 299 Staff Memorandum — Securities Transactions — Federal Reserve Banks _______________________________________________________ 297 Nader, Ralph, submission of study entitled, “ Scenario for Federal Re serve System in the Year 2000” ____________________________________ 394 National Association of Insurance Agents, Inc., letter dated May 2, 1975_ Nicoll, John, letter dated April 16, 1975, to Peter H. Schuck, re Board’s special survey on credit card plans------------------------------------------------193 Patman, Hon. Wright: Bonds Held in Open Market Committee, Net Earnings on Bonds Be fore Payments to U.S. Treasury, Operating Expenses of all Federal Reserve Banks; Dollar and Percentage Comparisons of Expenses with Previous Years, 1914-74 (table)__________________________ 222 Comparison of Federal Reserve Board Expenditures in 1972, 1973 and 1974 _________________________________________________________ 373 Letters t o : Chairman Arthur F. Burns, dated: March 11, 1975__________________________________________ 137 March 13, 1975______________ ____________________________ 137 List of 109 Cosponsors of Bill Providing for GAO Audit of Federal Reserve System_______________________________________________ 288 Reed, J. Irvine, with attached questions, dated March 25,1975----142 Record, Robert Bruce, Los Angeles, Calif., statement__________________ 395 Schuck, Peter H .: Letter from the Board of Governors of the Federal Reserve System, dated April 16, 1975, regarding Board’s survey on interest rates charged by banks_____________________________________________ 193 Attached tables: Table 1—Rate Structure on Credit Card Plans____________ 193 Table 2—Basis for Rate Differentials in Multiple-Rate Credit Card Plans___________________________________________ 193 Table 3—Relation of Credit Card Rates to State Ceilings----193 Table 4—Confidentiality Status of Information Reported on Credit Card Plans_____________________________________ 194 Table 5—Confidentiality Status of Credit Card Plan In formation, by type_____________________________________ 194 VI Staats, Hon. Elmer B .: Attachment I—Background on Prior Proposals To Require a GAO Pa&€ Audit of the Federal Reserve System-----------------------------------------154 Attachment II—Examples of Functions and Activities of the Federal Reserve System Subject to Evaluation of Effectiveness of Results Achieved as Part of Independent Audit by the GAO_____________ 162 Attachment III—H.R. 4316______________________________________ 163 Audit costs incurred in auditing Federal Reserve System----------------170 List of agencies ordered for full-scale audits_____________________ 177 Watts, Glenn E., president, Communication Workers of America, letter dated April 25, 1975, with enclosure________________________________ 279 A ppend ixes Appendix A.—Correspondence Between Chairman Patman and Dr. Burns Concerning Federal Reserve Consumer Interest Rate Data__________ Appendix B.—Other correspondence submitted by Mr. Patman relating to Federal Reserve Bond Release of Consumer Loan Interest Rates Charged by Various Commercial Banks_____________________________________ Appendix C.—Four-Part Series on Banking Services Published by Con sumers Union in the “Consumer Reports” Magazines of January, Feb ruary, March, and May 1975_______________________________________ Appendix D.—“Business Week” of April 21, 1975, Article “Dissension at the Fed: A Staff Revolt” __________________________________________ Appendix E.—“ Scenario for Federal Reserves System in the Year 2000,” study of the Federal Reserve Bank of Cleveland_____________________ Appendix F.—Letter to Chairman Wright Patman From Hon. Elmer B. Staats, Comptroller General of the United States, dated May 27, 1975, reviewing the statement of Hon. George W. Mitchell, Vice Chairman of the Federal Reserve System presented on May 8, 1975________________ Appendix G.—Additional Information Submitted by Chairman Patman Concerning Salaries of Federal Reserve Personnel Earning $20,000 or More ------------------------------------------------------------------------------------------ 449 587 599 629 633 673 683 AUDIT OF THE FEDERAL RESERVE TUESDAY, M ARCH 18, 1975 or the H o u se of R e p r e s e n t a t iv e s , S u b c o m m i t t e e o n D o m e s t ic M o n e t a r y P o l i c y C o m m it t e e o n B a n k i n g , C u r r e n c y a n d H o u s in g , Washington, D.C. The subcommittee met, pursuant to notice, at 1 0 :05 a.m., in room 2128, Rayburn House Office Building, Hon. Wright Patman [chair man of the subcommittee] presiding. Present: Representatives Patman, Minish, Ford, Hannaford, Blanchard, Conlan, Hansen, and Gradison. Chairman P a t m a n . The committee will please come to order. Mr. Clerk, please call the roll. The C l e r k . Chairman Patman. Chairman P a t m a n . Here. The C l e r k . Mr. Minish. M r. M in is h . H ere. The C l e r k . Mr. Ford. Mr. F o r d . Here. The C l e r k . Mr. Hannaf ord. [No response.] The C l e r k . Mr. Neal. [No response.] The C l e r k . Mr. Blanchard. Mr. B l a n c h a r d . Here. The C l e r k . Mr. Barrett. [No response.] The C l e r k . Mr. C o n la n . [No response.] The C l e r k . Mr. Hansen. [No response.] The C l e r k . Mr. Gradison. Mr. G r a d i s o n . Here. The C l e r k . Five members present, Mr. Chairman. Chairman P a t m a n . For the purposes of a hearing we have a quorum and the subcommittee will please come to order. Last Tuesday, March 11, the Washington Post and other newspapers across the Nation carried a column by Jack Anderson and Les Whitten alleging that the facilities of a Federal agency—the Federal Reserve Board— were being used to promote the activities of a private organi zation called Accuracy in Media, Inc. The clear implication of the column was that Reed J . Irvine was using his dual capacity as a high official of the Federal Reserve and of Accuracy in Media, Inc., to attack the news media. (l) 2 These are serious allegations, and this subcommittee has primary jurisdiction over the Federal Reserve, and it is our responsibility to take a look at this situation. We have called Mr. Anderson, Mr. W hit ten, and Mr. Irvine for this morning’s hearing. Without an appropriation’s review and without an independent audit by the General Accounting Office, this subcommittee and the Congress have only limited means of determining what any employee within the Federal Reserve might be doing at any given moment. We have no audit which would tell us what Mr. Irvine might be doing or how any of the facilities or funds under the control of the Federal Reserve are being spent. Hopefully, this hearing will provide answers insofar as Mr. Irvine and Accuracy in Media are concerned. The charges contained in the Jack Anderson column take on added significance because of other recent revelations of attempts by the Fed eral Reserve to manipulate public opinion. This column appeared only days after it was learned that the Chairman of the Federal Reserve Board— Dr. Arthur Burns—had gone to great lengths to suppress interest rate data and to use the Federal Bureau of Investigation to investigate its possible leak to a respected news and consumer publi cation. It was only a few months ago that we learned that the big business and the big banking community had been enlisted to assist Dr. Burns in an attempt to mold public opinion and congressional action against legislation which would have required a full-scale audit of the Federal Reserve. A t that time, this effort was headed by the Business Round table, an organization of the business fat cats, who literally swamped Western Union with telegrams to sway opinion against the audit bill. Without question, Accuracy in Media, Inc., has every right to carry on its activities and its criticisms of the press. But it is a legitimate question for this subcommittee and the Congress to inquire as to whether there is a link—either directly or indirectly—between this or ganization and the Federal Reserve and the banking community. I am impressed by the fact that Accuracy in Media, Inc. has on other occa sions exhibited high interest in the media’s coverage of banking and Federal Reserve matters. It is also legitimate for the Congress to inquire as to whether facili ties of the Library of Congress have been misused by Mr. Irvine—if indeed he was operating as an official of the Federal Reserve. The sub ject matter of the Library of Congress research is not the issue before this subcommittee but rather whether Government facilities have been misused or used under false pretenses to help a private organization carry on its attacks on the news media. I have asked Chairman Arthur Burns to look into this matter at the Federal Reserve and to submit a report to the subcommittee. I have been informed that an “ internal inquiry” is underway and that this information will be available in the next few days. The questions which have been raised about the internal operations of the Federal Reserve concern me greatly—and I am sure this concern is shared by members of the subcommittee—but we should not be in a posture of prejudging the case. It is the job of the subcommittee to bring out the facts and we want to give all parties a proper opportunity to be heard. 3 Let us see if our witnesses are here. Mr. Jack Anderson and Mr. Whitten please be seated at the witness table. Also Mr. Irvine, please take a seat at one of the microphones at the table. Now then, I think we are ready to proceed. Mr. Anderson will be our leadoff witness. Is that satisfactory, Mr. Anderson ? Mr. A n d e r s o n . Yes, sir. C h a irm a n P atm an . D o y o u h a v e a p r e p a r e d sta tem en t? Mr. A n d e r s o n . Yes, sir. Chairman P a t m a n . And you may submit all or any part of it in the record at this point without objection, and if you desire to add addi tional extraneous matter to cover any point that comes up that you were unaware of, you may do so when you examine your transcript for correction. So we will start with Mr. Anderson at this time. Mr. A n d e r s o n . Well, Mr. Chairman, Les Whitten and I , because of the seriousness of these charges, and so that there can be no doubt about our testimony, would like to be sworn. Chairman P a t m a n . Yes, fine. Stand up, please. We will swear the other witnesses at the same time. Do you and each of you solemnly swear that the testimony you shall give before this Subcommittee on Domestic Monetary Policy of the Committee on Banking, Currency and Housing of the House of Rep resentatives will be the truth, the whole truth, and nothing but the truth, so help you God ? Mr. A n d e r s o n . I do. Mr. W h i t t e n . I do. Mr. I r v i n e . I d o . Chairman P a t m a n . A ll right, Mr. Anderson, you are recognized. TESTIMONY OF JACK ANDERSON; ACCOMPANIED BY LES WHITTEN Mr. A n d e r s o n . Thank you, Mr. Chairman. My name is Jack Ander son. I am here with my associate, Les Whitten. Our offices are located at 1401 16th Street NW., Washington, D.C. We are appearing at the request of the subcommittee to tell what we know about the curious rela tionship between Accuracy in Media and the Federal Reserve Board. We have conducted only a limited investigation of the Accuracy in Media-Federal Reserve Board connection. But we have uncovered a few facts and raised some more questions. We will be pleased to tell you what we have learned and to suggest possible lines of inquiry. I f you have questions, we will do our best to respond. The story of Accuracy in Media must be put in context. It goes back to 1969 after Richard Nixon had been triumphantly installed in the White House. Hie created an atmosphere, which is best described not by a Nixon critic but by a loyal, longtime aide and admirer, speechwriter William Safire. In his absorbing book Before the Fall, he portrays the pre-Watergate, Nixon White House. He finds much to praise in Nixon. But as Safire recalls those days, Nixon came to the White House flawed by a “ primal hatred” of the press that was rooted in the real and fancied grievances he had endured during a quarter century under its scrutiny. 4 “ The press is the enemy”—that was the constant watchword in the Oval Office. Under press criticism, Nixon “ seethed inside,” Safire reports. “ He took everything critical as a personal blast at him; when he read a byline, the writer came to life in his mind, grinning evilly at him.” Once Nixon had the power of the Presidency at last in his hands, he employed it in a multiple offensive that sought to cripple the elements of the press he saw as hostile. He personally directed the campaign to intimidate, malign, and discredit the press, according to Safire. The press became an enemy to be hated and beaten. In a memo to H. R. Haldeman, the President set the tone of his press policy. He declared: “ The basic need is not P.R. but P.O. That is, not public relations but Presidential offensive.” And to John Erlichman: “ I f we treat the press with a little more contempt, we will prob ably get better treatment.” Vice President Spiro Agnew was selected to be the spear thrower. His celebrated Des Moines speech of November 1969, accusing the media of an incestuous left-wing bias, was approved line by line by the President who, here and there, added a phrase to toughen it up. And the ,followup attack by Agnew on specific newspapers was also ordered by Nixon. Just as Agnew began his poisonous campaign against the press, Accuracy in Media suddenly appeared on the Washington scene. The founder was Reed Irvine, a sitting Federal bureaucrat, making $37,000 a year as an economist with the Federal Reserve Board. Irvine claims to give the Government a full working day, ostensibly carrying out his attacks upon the press by moonlight. On the contrary, we have proof that Irvine has used the Fed’s facilities and the tax payers’ time to conduct his antipress campaign. This raises an intriguing question. President Nixon established the notorious plumbers to conduct underground warfare against the press. Was Accuracy in Media, similarly, an instrument of the dignified, the prestigious Federal Reserve Board ? It would seem unlikely. Yet we have established this much: Irvine had the support at least of the Fed’s Vice Chairman J . L. Robertson, who remained a power at the Fed until 1973. Robertson has acknowledged to us that, while he was at the Fed, he discussed Accuracy in Media with Irvine. A t the same time, the Vice Chairman of the Federal Reserve Board began to imitate the Vice President of the United States. While the Vice President blasted the press from the peaks, the Vice Chairman echoed the same sentiments from the foothills. There was the occasion in 1972, for example, when Robertson ex coriated the press in a speech before the Independent Bankers Asso ciation of America at Bal Harbour, Fla. He charged that newspapers and the radio-television networks were undermining the credibility of everyone “ who represents authority.” The newspaper and broadcast people, he declared, were out of touch with “ the deeply held views o,f what I believe to be the great majority of American people.” Robertson’s speech was distributed by United Press International, which reported it “ was unusual for Federal Re serve Governors.” It recalled similar attacks, said U P I, by Vice Presi dent Agnew. I submit the U P I report, Mr. Chairman, as exhibit 1. 5 Chairman P a t m a n . Without objection, it will be inserted in the record at this point. [Exhibit 1 the U P I report, “ Media Accused of News Bias,” from the Washington Post of March 16 ,19 72 follows:] E x h ib it 1 [From the Washington Post, March 6, 1972] M edia . A ccused of N e w s B ia s (United Press International) B a l H arbour , F l a .—A governor of the Federal Reserve Board today accused the press of bias and inaccuracy in not reflecting the true feeling of most Americans. J. L. Robertson, Vice Chairman of the board, told a meeting of the Independent Bankers Association of America that newspapers, radio and television are “being used to undermine the credibility of everyone who represents authority.” He implied that network television coverage in at least one prominent case had been slanted to try and convince the public of the need for a smaller defense budget. Robertson’s attack was unusual for Federal Reserve Governors who normally confine their public remarks to financial and economic matters. The toughness of his comments recalled earlier attacks on the press by Vice President Spiro T. Agnew and Robertson used some of Agnew’s examples in making his point. He said a small group centered in New York City controls most of the nation’s news. “That explains, perhaps why we get the monotonous sameness of opinion from our national news media, much of it very much at odds with the deeply held views of what I believe to be the great majority of American people.” Without mentioning names, Robertson criticized “one of the best known TV commentators in the country,” for saying that two-thirds of the nation’s taxes were spent on the military when, according to Robertson, the figure was 40 per cent in the last fiscal year and was going down. He also accused the Columbia Broadcasting System of distortion in its 1971 documentary “The Selling of the Pentagon,” which criticized the Defense De partment for spending too much on public information programs. “If the government could be denied the right to finance an information pro gram to maintain public support for national defense, then those such as the commentator I discussed earlier would find it much easier to win public support for really huge cuts in our national defense.” Robertson, 64, is the senior member of the Federal Reserve’s seven governors in terms of service. A former FBI special agent, he was appointed by Presi dent Truman in 1952 to fill out an unexpired 12-year term and was reappointed to a full 14-year term in 1964 by President Johnson. Mr. A n d e r s o n . The ammunition which Robertson fired at the press, Mr. Chairman, came from Accuracy in Media. The proof is found in a letter written on the official stationery of the “ Board of Governors of the Federal Reserve System, Office of the Vice Chairman.” In this letter, Robertson discloses that he “ found”—the Accuracy in Media material— “ of value in preparing my Bal Harbour remarks.” Not only does he cite Accuracy in Media as the source of his attack upon the press, but his letter goes on to praise the Irvine operation. Let me quote from the letter: “ Since you are doing research on crit icism of the media,” writes Robertson, “ you are doubtless familiar with the publications of Accuracy in Media, Inc. I f not, look them up, and you will find a great deal of material that will be helpful to you in your research.” To protect our source, Mr. Chairman, it was necessary for us to blot out his name on the letter. But we submit the letter, with this small deletion, as exhibit 2. 6 Chairman P a tm a n . Without objection, it will be inserted in the record at this point. [The letter submitted for the record as exhibit 2 by Mr. Anderson follows:] E x h ib it 2 B oard op G overnors F ederal R eserve S y s t e m , O f f ic e o f t h e V i c e C h a i r m a n , of t h e Washington, D.G., April 5 1972. I do not know why you think it odd that a government official in a position such as mine should criticize the media. You have an inaccu rate notion of the interests of people in this field if you think that we wear blinders that prevent us from developing opinions on anything but monetary issues. I have given a number of speeches and have written a book on some of the broader questions facing our nation. The material I used in my speech is in the public domain. Since you are doing research on criticism of the media you are doubtless familiar with the publications of Accuracy in Media, Inc. If not, look them up, and you will find a great deal of material that will be helpful to you in your research. I found it of value in preparing my Bal Harbour remarks. I accepted the invitation to address the Independent Bankers Association many months ago on the condition that I be given complete freedom in the choice of my topic. General Walt happened to send me a copy of the manuscript of his forthcoming book while I was thinking of an appropriate subject for my talk. Knowing of my interest in this general area, he invited my comments on the manuscript. I was impressed by what he had to say on the defense issue. This combined with my own concern about the media to convince me that I should utilize the occasion of the Independent Bankers Association meeting to speak out on this subject. I hope this information will assist you in your research. Sincerely yours, J . L. R o b e r t s o n . D e a r --------- ------------— . Mr. A n d e rso n . S o here we have the Fed’s Vice Chairman not only using Accuracy in Media to help prepare his antipress speech, but also using official Fed stationery to promote Accuracy in Media. Even the Fed’s own spokesman, the capable Joseph R. Coyne, has conceded that Robertson was interested in Accuracy in Media while he served on the Board of Governors. I quote from Coyne’s written response to our questions: “ J . L. Robertson did show an interest in A IM while he was Vice Chairman of the Board of Governors.” And I offer this as exhibit No. 3. Chairman P a tm a n . Without objection, it will be inserted in the record at this point. [The letter from Joseph R. Coyne, Assistant to the Board of Gov ernors of the Federal Reserve System submitted by Mr. Anderson as exhibit 3 follows:] E x h ib it 3 BOARD DF GDVERNDRS □ F TH E FEDERAL RESERVE SYSTEM W A S H IN G T O N , D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD March 11, 1975 Mr. Les Whitten 1401-16th Street, N. W. Washington, D. C. 20036 Dear Les: I am responding to the questions you left with me recently concerning the outside activities of Reed J. Irvine, Advisor in the Board's Division of International Finance* Let me take each question in sequence: 1. You requested access to all documents in Mr, Irvine's files that are not exempt from disclosure under the Freedom of Information Act. Your request for access "to all documents in Mr. Irvine's files that are not exempt from disclosure under the Freedom of Information Act" is too broad and lacking in reasonable specificity to enable us to respond affirmatively. As I am sure you are aware, the Freedom of Information Act (5 U.S.C. 552(a)(3) (A) provides, in substance, that each agency, upon any request for records which "reasonably describes such records and (B) is made in accordance with published rules , . . and procedures . . . (shall) make the records promptly available to any person." The Board's rules regarding availability of information provide, in part, that with respect to requests for access to records of the Board, such requests shall "des cribe such records in a manner reasonably sufficient to permit their identification without undue difficulty." It is our judgment that the provisions of the Act and of the Board's regulations together are reasonably read as requiring far greater identification and specificity than your re quest for "all documents in Mr. Irvine's files." A request by you that adequately identifies a particular subject of inquiry with sufficient reference to the nature of documents sought, and dates thereof, if possible, will be given prompt action by our staff. I have not treated this as an official request under the Freedom of Information Act. If you wish to file an official request under the Act, it should be addressed to the Secretary of the Board. 8 2. You requested that a hold be placed on Mr. Irvine's files so that no evidence is destroyed. We believe it unnecessary to respond to your request that a hold be placed on Mr. Irvine's files. You may be assured that the Board is aware of its responsibility under the law to maintain agency records and that such actions as are appropriate to the full performance of this responsibility will be taken with respect to files in Mr. Irvine's office or any other records of the Board. 3. Who authorized the Chile probe that he undertook? Assuming that your reference to ,fthe Chile probe” is synonomous with comments prepared by Mr. Irvine on the Jonathan Sanford paper, such comments were provided by Mr. Irvine in his capacity as an Advisor in the Board's Division of International Finance and Chief of the International Development Section, He was not directed by his superior or by any member of the Board to delve specifically into the Sanford paper. At his level of responsibility, it is within his authority to submit comments of this nature to other agencies. 4. Did he file any AIM material or correspondence with the Federal Reserve? To the best of my knowledge, he did not file any AIM material or correspondence with the Federal Reserve. 5. Was he authorized to use Federal Reserve stationery for AIM purposes and by whom* Why does he use it and does the Federal Reserve approve? He had not been authorized to use Federal Reserve stationery for AIM purposes. Mr. Irvine states that no such improper use has been made. The Federal Reserve does not approve use of its stationery for outside purposes. 6. You requested to see personnel material that is available on Mr. Irvine that is not exempt from disclosure under the Freedom of Information Act. You may inspect this material in my office. Please advise in advance when you would like to see the material so that I may arrange to have it available for you. 7. Did the Federal Reserve authorize him to use Fed facilities for AIM purposes (telephone, office space)? Does the Fed approve? The Federal Reserve has not authorized nor does it approve use of its facilities for outside purposes. 9 8. What are the Federal Reserve's regulations for use of Fed facilities and time for outside purposes (including stationery)? A copy of the Board's rules regarding employee responsibilities and conduct, which includes a response to this question, is enclosed. 9. Did the Federal Reserve authorize secretarial help for Mr. Irvine for AIM purposes? Who typed the November 22nd memorandum? Was it sent in a franked envelope? The Federal Reserve did not authorize secretarial help for Mr. Irvine for AIM purposes. The content of the November 22nd memorandum fell within the ambit of Mr. Irvine's official responsibilities. It was typed by his secretary and transmitted to the Library of Congress in a Board envelope. 10. Did Mr. Irvine obtain the original Library of Congress Chilean study as a member of the Federal Reserve staff? Mr. Irvine advises that he obtained a copy of the study from the Congressional Research Service in his capacity as Advisor in the Board’s Division of International Finance. 11. Are Chairman Burns and Mr. Irvine friends? Chairman Burns and Mr. Irvine are working associates in the inter national finance field. It is my judgment that Chairman Burns and Mr. Irvine could not be considered ’'personal" friends. 12. Did the Governors sanction any of Mr. Irvine’s AIM activities? On Fed time? On non-Fed time? Did they encourage his AIM activities? As required of all employees, Mr. Irvine filed a statement re porting outside activities undertaken on his own time, including activities as Chairman, Board of Directors, AIM. This report was reviewed and ap proved by appropriate staff officials. I have no indication of any Board sanctioning of Mr. Irvine's reported activities, nor any evidence of Board action taken in opposition to such activities. To my knowledge, none of the present members of the Board has encouraged his AIM activities. J. L. Robertson did show an interest in AIM while he was Vice Chairman of the Board of Governors and since leaving the Federal Reserve has become a member of AIM’s National Advisory Board. 13. Were they aware of his AIM activities, particularly with relation to the Chilean case and including the Washington Post advertise ment of February 18? 10 To the best of my information and belief, several members of the Board have been and are aware of Mr* Irvine’s activities but only in a general way; none was aware of his specific activities in the Chilean case or in the Washington Post advertisement of February 18. 14. Did the Federal Reserve authorize him to discuss AIM activities with the present Chilean embassy? No. 15. What has Mr. Irvine done for the taxpayer? Mr. Irvine is an Advisor in the Board's Division of International Finance. He is the Chief of the International Development Section in the. Division. His assignment is to advise the Board on activities in the de veloping countries, including those in Latin America, Africa and the Far East, and to monitor and analyze operations of the international development financial institutions, which include organizations such as the InterAmerican Development Bank, Asian Development Bank and the World Bank. He is also Federal Reserve staff representative to the National Advisory Council on International Monetary and Financial Policies. 16. Has Mr. Irvine been given permission to provide material developed by the Federal Reserve to other right wing groups? Has there been any solicitation within the Federal Reserve on behalf of AIM? Has any Federal Reserve official or Governor endorsed AIM or encouraged the banks to assist AIM? Except as noted below, the Board has not given Mr. Irvine per mission to provide material developed by the Federal Reserve to any outside group. Mr. Irvine is authorized, as are all Board officials, to make available to any member of the public any materials authorized by the Board for public release. I am not aware of any solicitation within the Federal Reserve on behalf of AIM. Nor do I have any information that any present Governor or Federal Reserve official endorses AIM, except, of course, for Mr. Irvine. Nor do I have information that any bank has been encouraged to assist AIM. As I mentioned earlier, former Vice Chairman Robertson is now a member of AIM’s National Advisory Board. 17. Has Mr. Irvine made use of Federal Reserve duplication facilities for AIM? Mr. Irvine states that he has not made use of Federal Reserve duplication facilities for AIM. The Board has not authorized use of its facilities for any outside purposes. 11 18. Does the Federal Reserve have a list of contributors to AIM and are any of them banks under the Federal Reserve’s jurisdiction? The Federal Reserve does not have a list of AIM contributors 19. regarding AIM? Has the Federal Reserve investigated Mr. Irvine's activities What were the findings and was any action taken? In view of the questions you raised, an inquiry has been undertaken into Mr. Irvine's AIM activities. As yet, no findings have been made* We appreciate your bringing this matter to our attention. Very truly yours, Josepn k .. uoyne Assistant to the Board 50-365 O •• 75 •• 2 12 Mr. A n d e r so n . After Robertson left the Fed on April 30, 1973, he gave his name to the antipress cause. A letterhead, dated June 20, 1973, lists “ J. L. Robertson” as a board member of Accuracy in Media. And I offer this as exhibit No. 4. Chairman P a t m a n . It will be inserted in the record at this point. [The letterhead submitted for the record by Mr. Anderson as exhibit 4 follows: ] EXHIBIT 4 IN M S © I i n c : v 1232 PENNSYLVANIA 4 2 5 - 13th STREET, WASHCS’GTON.'D.C. ,}202) 783J0VI; 7J7-93S7 Ambassador Eluridgc Durbrow/Dr. William Yandell Eliiott Morris L. Ernst/Lawrcnce Fertig/Dr. Harry Gidconse Reed J. Irvine/Eugene Lyons/Dr. Charles Burton Marshall R. Adm. William C. Mott, USN (Rct.)/Edgar Ansel Mowrcr ‘ J. L. Robertson/Prof. Walter W. Scifcrt/Dr. Frederick Seitz John E. Tilton/Dr. Frank Trager/General Lewis W. Walt, USMC (Ret.) OF G. Wilson, President!Alphons J . Hack!, Vice President H. Kalish, Executive Secretary/John K. McLean, Treasurer A /" July 20, 1973 To the editor: In a recent column, Jack Anderson charged that the ITT> subsidiary, Scott Lawn Products Co., had provided free materials and gardening work for the construction of a golf course for President Nixon at his San Clemente home.' A week later, Hr. Anderson was forced to admit in his column that Scott Lawn Products Co. was not in fact owned by ITT at the time the golf course was built. However, Mr. Anderson tried to justify his initial charge that ITT was connected with the gift by saying that ITT was in the process of acquiring ownership of Scott and that they had pressured Scott into providing the materials and work. The fact is that the three-^ole golf course was begun by friends of the President in 1969. The request for materials from Scott Lawn Products Co. was made through the Golf Course Superintendents Association. ITT had no connection with Scott Lawn at that time and did not begin negotiations to acquire that company until November 1970. ITT acquired Scott in April 1971, long after the golf course project was begun. It is interesting to note that the value, at retail, of the products contributed to the small golf course by Scott comes to only $2672.50. Mr. A n d e r so n . It may be of incidental interest that this particular AIM message was written in behalf of International Telephone and Telegraph, a favorite Irvine pet. Robertson’s departure from the Fed in no way disrupted Irvine’s antipress campaign, which continued with more fury than ever. We can also show that he used his Fed position and Fed facilities to carry on the work of Accuracy in Media. The Fed has denied any link with AIM. Yet the Fed’s files show at least this much. On November 10, 1971, the Board formally approved an application by Irvine to carry on 13 his AIM work as an “outside business activity.” The application also indicated that he expected to direct Accuracy in Media on his Fed salary. For the application states that he expected “no compensation” from AIM. And I offer this document as exhibit 5. Chairman P a t m a n . That will be accepted and put into the record at this point. [The Federal Reserve form “Report of Outside Business and Teach ing Activities,” application of Reed J. Irvine, approved November 10, 1971, submitted by Mr. Anderson as exhibit 5 follows:] EXHIBIT 5 C O N F I D E N T I A L ( FR ) REPORT OF OUTSIDE BUSINESS AND TEACHING ACTIVITIES Please Check One □ I am not engaged in any out&ide business or teaching activity. j request permission to engage in the outside business or teaching octivity indicated below. OUTSIDE BUSINESS A C T IV ITY OR CONNECTION Nature of Activity TEACHING A C T IV ITY ---------------- Nature of Assignment---------------------------- 2. ehairman, Board of Directors, Accuracy i n Media _______________________ Name and Address of Employer— I k ? . . P 3 ^ y i : . 9 . a ^ ° ni! N c me of School . 2. Warner Building, Washington, D. C.____ 'About~$300^00 "per’year" Income or Rate of Pay 2 . No compensation_______ ____________ Days of Week and Time of Day Worked. Days and Hours of Classes .. Income or Salary__________ weekends (If additional space is needed, please use back of this page) Name Reed J. Irvjne Division_____ I F ( P le a s e type or p rin t) Title of Position Adviser___________ August h, 1971 Ql£ (Signature) / CO N CU RREN CES APPRO VED . . . (D ire c to r o f E m p lo y e e 's D iv is io n ) , iv i s io n o f P e rso n n e l A d m in istra tio n ) R . C . AND A PPR O V A LS (On B e h a lf of the B o ard ) H. November ( I n i t i a ls ) 10, 1971 (D o te ) Entered Minutes as of November 10, 1971 ( F o r U s e by O ffic e o f S e c re ta ry ) 14 Mr. A n d e r s o n . Irvine had been active in AIM for several months before he sought and obtained the Fed’s formal approval. During this period, AIM had established itself as a militant, right-wing critic of the press. It is unlikely that the Board gave its sanctions without knowing what Irvine was doing. The Fed still denies any responsibility for Irvine’s AIM activities. I f we are to accept the denial, then we must conclude that Irvine vio lated title 18 of the United States Criminal Code. This states, quite plainly, that it is a felony to use “Federal property of any kind for other than officially approved activities” or to use “official information not made available to the general public for furthering a private interest.” As evidence of the possible law violation, we can cite our own ex perience with Accuracy in Media. Irvine has been an outspoken champion of the Chilean military dictatorship. He took offense, there fore, over a column we wrote last November 3. We quoted from a Library of Congress study, then confidential, which alleged the InterAmerican Development Bank had contributed to the downfall of the Marxist Allende regime by withholding loans. I offer this document as exhibit No. 6. Chairman P a t m a n . Without objection, it will be inserted in the record at this point. [The Jack Anderson column of November 3, 1974, entitled, “How U.S. Subverted Chilean Economy,” submitted for the record as exhibit 6 follows:] E x h ib it 6 [From the column, “Washington Merry-Go-Round,” November '3, 1974] How U.S. S u b verted C h ile a n E con om y (By Jack Anderson) W a s h i n g t o n —The secret economic war against Chile’s late Salvadore Allende is described in some fascinating documents that we have obtained. They tell how the U.S. used economic subversion to undermine the Allende govern ment and set the stage for a military coup. The documents raise the question of whether the U.S. has been trying covertly to pauperize left-wing governments and replace them with military dictatorships around the world. The story began with the 1970 election of the leftist Allende. Although he was freely elected, his Marxist views were distasteful to Washington. They were even more distasteful to International Telephone and Telegraph, which correctly anticipated Allende would seize its Chilean holdings. The con glomerate, therefore, sought to enlist the Central Intelligence Agency in an undercover conspiracy against Allende. We reported in March of 1972 that ITT wanted to “promote economic collapse in Chile” and “force a military coup.” This is precisely what happened 18 months after we wrote it. The story of how it happened can now be told. At first, American Ambassador Nathaniel Davis cabled from Chile that the “prospects of military intervention for the foreseeable future are extremely small.” Public opposition would have to become “so overwhelming and discontent so great,” his secret cables stressed, “that military intervention is overwhelmingly invited. It is held that military will wait for this public repudiation to become more clear.” . The U.S. then began to create the “discontent” that Davis had advised would be necessary. Secretly and systematically, the U.S. sought to bankrupt the Al lende government by denying multi-national bank loans for Chile. 15 As the largest contributor, the U.S. virtually controls the Inter-American Development Bank. A secret congressional study now states that the bank, which is supposed to disregard the politics of borrowing nations, cut off loans to the Allende government for almost three years. As evidence that this was politically inspired, the bank quickly granted $97.3 million in loans to the new military leaders after they overthrew Allende last year. The World Bank, headed by former Defense Secretary Robert McNamara, also refused Allende loans. But the congressional study found this consistent with traditional World Bank policies against granting loans to nations with dubious credit ratings. However, we have obtained secret World Bank minutes, which apparently were not available to the congressional experts. These show that McNamara came under fire behind closed doors for withholding loans from the Allende government. The 54-page congressional study, prepared by the Library of Congress, charges that the Inter-American bank totally cut off new loans to the Allende regime. Since Chile had come to depend on these loans, the policy amounted to financial strangulation. “No new loans were proposed for Chile” states the secret study, “even though 1971 was a year during which the inflation rate was less than during the previous years.” In other words, Chile should have been a better financial risk but still got no loans. This drying up of dollars continued in 1972, as Allende began sinking deeper into the economic mire. In contrast, the bank granted Argentina $163 million and Uruguay $10 million, although their inflation rates were no better than Chile’s. Indeed, no other member nation “experienced as long a financial drought” as did Chile during the Allende years. As a case history, the study tells of an agricultural loan that Chile desperately needed. The loan was to come from “a fund over which the United States exer cises a veto.” Allende made an urgent appeal for the money but was turned down. A few months after he was shot to death, his military successors had no trouble arranging a $22 million agricultural loan. At the World Bank, meanwhile, the secret minutes show that McNamara came under attack on Feb. 5, 1974, over his failure to loan money to the Allende government. Delegates from Scandinavia, the Philippines, India and, more mildly, Italy criticized his policy toward Chile. During the Allende years, complained Denmark’s H.E. Kastoft, the board had “not even been formally informed. . . of the bank’s lending policy toward Chile. “Does the board have no role to play,” he demanded, “in case of termination of lending operations?” He grumbled that “with hindsight one might wonder” about the discrimination against Chile. McNamara retorted that the loan he was now seeking for the Chilean junta had been initiated by “the Allende government in April or May of 1973.” But the fiery Dane would not be put off. He asked McNamara point blank why “we have not been given timely opportunity to discuss and take a position on the bank’s policy toward Chile.” The Philippines’ Placido Mapa joined in the criticism. He said he “greatly lamented the lack of action by the bank vis-a-vis Chile in the last three or four years. India’s S.R. Sen said he was also “unhappy” over the way the Allende government had been treated. The economic strangulation left Chile gasping for money, its inflation gone wild and its production disrupted by strikes. Thus Allende became vulnerable to the military coup that the CIA and ITT had originally sought. Footnote: World Bank officials were furious over both the leak of the minutes and the charges against McNamara. One official said McNamara “had put his neck on the line by sending a $7 million loan to the board when Allende was in power.” He said the board had plenty of information on the bank’s policy toward Chile. At the Inter-American Development Bank, a spokesman pointed to early 1971 loans, to continuing payments under Allende on previous loans and to talks on new loans as evidence that Allende was not the victim of financial discrimination. Mr. A n d e rso n . N o more than 4 days later, the author of the con fidential Library of Congress study, Jonathan Sanford, happened to 16 approach Irvine on an unrelated matter. According to Sanford’s writ ten account of the meeting, Irvine changed the subject and asked who had written the report we had quoted. And I offer this as exhibit No. 7. Chairman P a t m a n . Without objection, it may be included. [A letter from Lester S. Jayson, Director, Congressional Research Service with an attached memorandum from Charles R. Gellner, Chief, Foreign Affairs Division and Jonathan Sanford, an analyst in that division concerning dealings with Reed J. Irvine of the Federal Reserve Board, dated March 14, 1975, submitted by Mr. Anderson as exhibit 7 follows:] 17 E x h ib it 7 , THE LIBRARY OF CONGRESS M ■-<///%z .I f # * WASHINGTON, D.C. * C o n g r e s s i o n a l R esearch Service 20540 March 14, 1975 The Honorable Wayne L. Hays, Chairman Committee on House Administration U.S. House of Representatives Washington, D. C. 20515 Dear Mr. Hays: The Acting Librarian, John G. Lorenz, has shown me your letter of March 11 concerning the Jack Anderson column of the same date. In that column reference was made to discussions between Mr. Reed Irvine, an official of the Federal Reserve Board, and two staff members of the Congressional Research Service, namely, Mr. Charles Gellner, Chief of our Foreign Affairs Division, and >Xr. Jonathan Sanford, an analyst in that division. You requested the full facts concerning Mr. Irvine’s dealings with our Foreign Affairs Division. I am enclosing a memorandum from Mr. Gellner and Mr. Sanford, addressed to me, in which they relate such facts. We know of no other dealings with Mr. Irvine or of any request of a similar nature which he may have made of any other Library of Congress staffers. The Library of Congress does receive copies of the AIM Report which is published by Accuracy In Media, Inc. Mr. Gellner and Mr. Sanford indicate they they were dealing with Mr. Irvine solely in his capacity as an official of the Federal Reserve Board. He never indicated his association with AIM. Had he done so, his comments would have been received and considered in a different light. As you know, Mr. Gellner and Mr. Sanford have been requested to appear at hearings on this matter to be held next week by the Domestic Monetary Policy Subcommittee of the House Banking and Currency Committee. With kind regards, Enelosure 18 UNITED STATES GOVERNM EN T Memorandum to L IB RA R Y OF CONGRESS Lsster S. Jayson, Director Congressional Research Service _^ (M from subject: f date: March 14 1975 9 <3^ Charles R„ Gellner,(QxLe?, Foreign Affairs Division Jonathan E. Sanford, Analyst in International Relations Foreign Affairs Division Our dealings with Reed J. Irvine of the Federal Reserve Board To the best of our recollection the following are the salient facts regarding our dealings with Reed J. Irvine, an official of the Federal Reserve Board (Division of International Finance). August 197£a A report on relations between the multilateral banks and Chile during the Allende period, written by Jonathan Sanford, an analyst in CRS * Foreign Affairs Division, was delivered to a Con gressional office which had requested its preparation, November 3. 197L. Jack Anderson ran a column commenting on U.S. policy toward Chile during the Allende period. discussed the CRS report noted, above. In that column he No copy of this report had been given to Jack Anderson, to any of his representatives or to any member of the press* Publication of the Anderson column resulted in requests to CRS for copies of the report. In consequence, the Foreign Affairs Division requested and received permission from the Congressional office for whom it had been prepared to provide copies of* the paper to those who might request it, provided that the identity of that Congressional office was not revealed. November 5 or 7. 1974„ At this time Sanford was on leave preparing his dissertation on U.S. policy towards the international 19 financial institutions. In that connection, he was interviewing all agency representatives on the National Advisory Council for Inter national Monetary and Financial Policy (NAC)— a body which coordinates U.S. foreign lending operations— to obtain first-hand material for use in his dissertation. A representative of another agency being inter viewed had identified Mr. Irvine as the Federal Reserve Board's representative on the NAC and Sanford interviewed him on this date concerning his participation on this body. At the outset of the inter view, Mr. Irvine called attention to the Anderson column and asked Sanford who the author of the "secret study" [Anderson !s term] was so he could find out more about it. Sanford indicated he was the author and, to forestall debate concerning its contents, suggested Irvine request a copy from CRS. In his conversations with Sanford and Gellner, Mr. Irvine identified himself solely as an official of the Federal Reserve Board and as the Board’s representative on the NAC. This established Mr. Irvine as an official in a position to be knowledgeable on the subject of multilateral development bank lending to Chile. Mr. Gellner considered Mr. Irvine to be a responsible U.S. Government official who was concerned about the subject treated in the CRS paper. In response to Mr. Irvinefs request the Foreign Affairs Division sent him a copy of the paper on November 12, 1974, addressed to him at his Federal Reserve Board office. Some days later, Mr. Irvine phoned Gellner and offered comments on the paper. Mr. Gellner suggested that he put his comments in writing 20 and send them to him. Mr. Irvine agreed. In this or a subsequent telephone conversation Gellner agreed to send Mr. Irvine a response to his comments. November 22. 1974.. A memorandum under this date was delivered addressed to Gellner from Mr. Irvine commenting on international lending to Chile and the CHS paper. stationery, The memorandum was on Federal Reserve Board A photocopy of the memorandum is attached. December 1974— Januarv . 1975. Partly as a result of Mr, Irvine’s memo, revisions were made in the paper so as to preclude certain misinterpretations of its contents. In the course of revising the paper in early December, Sanford called Mr. Irvine on the telephone at his Federal Reserve Board office and briefly discussed certain aspects of the paper with him, A revised version of the CRS paper dated December 13, 1974- was delivered to the House Foreign Affairs Committee on January_, 1975* The committee had requested a copy of the paper* The Committee had previously conducted hearings on Chile and had indicated that the CRS paper would .foe incorporated in the published record of these hearings* January 11. 1975. On this date the Washington Post published a letter by Reed J. Irvine, identifying him as Chairman of the Board of Accuracy in Media, inc„ A photocopy is attached. This was the first time that Gellner and Sanford learned of Mr. Irvine’s connection with that organization. This letter placed Mr, Irvine in a new light and aroused questions as to his purpose in making comments on the CRS paper. Gellner decided not to send a response to Mr* Irvine regarding his memo. 21 February IS. 1975. The Washington Post carried an advertise ment placed by Accuracy in Media, inc. and signed by Reed J. Irvine concerning the original Anderson column, A copy is attached, February 22-23. 1975. Beekman Winthrop, representing 11[MORE]11 magazine, a journalism review, requested and obtained telephone interviews with Sanford and Gellner concerning the Anderson column, the AIM advertisement, and our dealings with Mr* Irvine. V/inthrop was writing an article on the Anderson-AIM controversy for his magazine. February 25. 1975. A representative of Jack Anderson's office requested and received an interview with Gellner concerning our dealings with Irvine. He asked for and Gellner gave him a copy of Irvine's memorandum. March 3. 1975. A representative of Jack Anderson* s office telephoned Sanford to discuss this same e.ubject. March 11. 1975. Jack Anderson's column on Reed J. Irvine appeared. 22 Mr. A n d e r s o n . The surprised Sanford identified himself as the researcher writer. He was completely unaware that Irvine might be speaking in any other capacity than that of a Federal Reserve official. Irvine never mentioned that he was seeking information for Accuracy in Media. Sanford agreed, therefore, to furnish Irvine with a copy of the study. Thereafter, Irvine fired off one of his typical broadsides against us on November 14. The attack upon us, in the name of accuracy, was loaded with outrageous inaccuracies. And I offer this as exhibit No. 8. Chairman P a t m a n . Without objection, it will be included at this point in the record. [The letter from Accuracy in Media, Inc., signed by Reed J . Irvine, dated November 14, 1974, submitted by Mr. Anderson as exhibit 8 follows:] E x h ib it 8 A ccuracy in M e d i a , I n c ., Washington, B.C., November 14, 1974. To t h e e d i t o r : In a recent column (11/3/74), Jack Anderson charged that the U.S. sought to bankrupt the Allende government by denying multinational bank loans to Chile. He suggested that the U.S. had succeeded in this, bringing about Chile’s “financial strangulation.” This conclusion by Anderson was based on the assertion that Chile had come to depend on loans from the Inter-American Development Bank, and these were cut off. Anderson is in error. Disbursements of Inter-American Development Bank (IDB) loans to Chile were actually higher during the three years Allende was in office than in the three preceding years. The bank disbursed 79 million dollars in Chile in 1971-73, compared to $70 million in 1968-70. It is also incorrect that Chile was heavily dependent on these IDB loans. IDB loan disbursements have never financed more than a fraction of Chile’s imports. They were at their highest in 1972, when they amounted to $29 million. This was enough to pay for about 2.5 per cent of Chile’s import bill. These loans have also represented only a small part of Chile’s external borrowing. Those who exaggerate the importance of the IDB loans to Chile and who falsely state that denial of these loans to Chile was an important cause of Chile’s economic deterioration under Allende are usually trying to transfer the blame for Allende’s economic mismanagement to someone else. Allende confiscated large amounts of foreign property without paying for it, and he defaulted on most of Chile’s foreign debt. It is not surprising that many lenders and investors were not eager to make new loans to Chile. However, Allende did manage to finance a huge increase in Chile’s imports, partly by using the money that should have gone for the payment of interest and principal on the foreign debt. Imports rose from $1 billion in 1970 to $1.6 billion in 1973. But even this was not enough to offset the inflationary pressures generated by Allende’s fiscal and monetary policies and by the fall in domestic production. The multinational banks could not very well signal their support of these harm ful policies by authorizing new loans for Chile. In the Allende years they dis bursed against loans that had been authorized before Allende took office. The decline in new loan authorizations during the Allende regime will be reflected in a lower level of disbursements in the period after Allende’s fall. Sincerely yours, , . A , cc: Jack Anderson, papers carrying the Anderson column. R eed J . I r v in e . 23 Mr. A n d e r s o n . Irvine didn’t agree with the Sanford study, so he protested to the Library of Congress. He went over Sanford’s head to his boss, Charles Gellner, of the Library’s Congressional Research Section. Gellner was also unaware of Irvine’s A IM role and assumed Irvine was speaking as a Federal Eeserve official. Gellner, therefore, listened courteously to Irvine’s complaints and asked him to put his comments in writing. Irvine responded on November 22 with a letter on official stationery under this letterhead: “ Board of Governors of the Federal Reserve System, Office Correspondence.” And I offer this as exhibit No. 9. Chairman P a t m a n . Without objection, it may be inserted at this point. [Testimony resumes on p. 29.] [The letter submitted as exhibit 9 for the record by Mr. Anderson follows:] 24 E x h i b it 9 B O A R D O F G O V E i.N O R S o r THE FEDERAL RESERVE SYSTEM Office Correspondence Tn ______ Mr. Charles Ge From. Reed J . j)ate November 22, 1974 Subject: Comments on Jonathan Sanford's Irvin e: paper, "The Multilateral Development Banks and the Suspension of Lending to Allende's Chile" This paper purports to show (1) The failure of the IDB to make large new loan authori zations to Chile in 1971-73 was inconsistent with past lending policies of the IDB and could be explained only as a result of political pressure from the United States; (2) The drying up of credit from these institutions may have been a major factor in bringing about hyperinflation in Chile under Allende. (p. CRS-44) Let us consider the second point first. Mr. Sanford endeavors to show the importance of foreign capital inflows to the maintenance of some semblance of financial sta bility in Chile. He says: Because its balance of trade has usually been in deficit, with export earnings inadequate to pay for import costs, Chile has maintained stability in its balance of payments largely through foreign loans (mostly from the U.S. Government and the multilateral banks) and through foreign investment inflows. Foreign loans and investments brought international payments stability to Chile's accounts at the cost of an increasingly weighty obligation to repay debts and service foreign investments. I would note only in passing that for a developing country such as Chile foreign capital usually does not flow in to finance an autonomous current account deficit. The inflow of capital to finanee worthwhile ventures makes it possible for the country to run a current account deficit. There would be little point in such a country re ceiving a large capital inflows merely to augment its international reserves (unless it were rebuilding reserves from seriously depleted levels). To the extent that such a country acquires foreign capital for investment in sound economic projects, such as the large Chilean mining ventures, it cannot be said that the objective or the result 25 of such borrov.ing is financial stabilization. Nor is it true, as Mr. Sanford suggests, that the country's future is mortgaged by such borrowings. Presumably the increased productivity will easily permit servicing of the debt and investment as well as generating increased dcrr.es tic ir.come. There seerr.s to be an impression on the part of the author that Chile's borrowing had been primarily to finance consumption. This would have been true of some loans, such as PL 480 credits, but it would surely not be true of loans made by the IBPJ) and IDB, which are almost invariably associated with economic projects. However, let us assume that some of these credits were used to finance projects which the Chileans would have financed in any case and were therefore in part, at least, balance-of-payments loans. How important were these credits to Chile? The paper does not provide numbers that will give an answer to that query. The only figures mentioned for IBRD and IDB loans are authorizations. Authorizations do not enter into the balance of pay ments. A loan authorization will not offset a single escudo's worth of inflationary pressure unless and until it is translated into a dis bursement. Therefore, the paper should have examined the disburse ments against loans made by the IDB and IBRD to see how important these credits were in the context of Chile's balance of payments. The following table shows disbursements against these credits for the years 1961-74 (U.S. fiscal years). IDB and IBRD Loan Dlsbu rsements to Chile (millions of dollars) ID 3 IBRD Total 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 0.8 5.9 17.1 21.7 10.4 18.9 20.3 24.0 25.9 27.4 29.1 22.3 18.5 6.3 6.5 10.3 7.5 8.3 16.7 10.5 13.5 11.4 17.6 28.1 11.9 6.2 11.8 6.3 7.3 16.2 24.6 30.0 27.1 29.4 33.8 35.4 43.5 55.5 41.0 28.5 30.3 Total IDB-IBRD Disbursements .01 .01 .03 .04 .05 .03 .04 (FY)/Chilean Imports .04 .04 .04 .05 (C.Y.) .03 .02 .02(est.) 26 Vfuiie the comparison of disbursements of the IDC mid IBRD loans with Chilean ii:iports is not precise because the latter data are in calendar years while the disbursements are for fiscal years, the figures do she-.-; that at most, these disbursements have financed 5 per cent of Chile’s imports. The decline in the percentage in the later Allende years, after peaking at 5 per cent in FY1971, reflects more the sharp rise in imports than the decline in disbursements. Disbursements in 1971-73 were actually higher than in the three pre ceding years. Even the maintenance of disbursements at the record 1971 level of $55.5 million would have made almost no difference in the financing of Chile's record current account deficit in 1973. The difference between that figure and actual disbursements in FY 1973 would be equal to only 1.6 per cent of Chile's estimated imports for 1973. Clearly these figures provide no basis for the notion that the policies of the IDB and IBRD toward Chile were a significant factor in bringing about the hyperinflation of the Allende years. Since the paper largely exculpates the IBRD from any respon sibility, on the grounds that it was only following its normal reticence to lend to Chile, we might note briefly what difference it makes to our findings if we look only at IDB disbursements. We find that IDB disbursements peaked at $29.1 million in the Allende year of 1972. They were then 2.3 per cent of Chile's total imports. In 1970, they were equal to 2.6 per cent of Chile's imports. It would be rather dif ficult to make an argument that this difference had any significant impact on Chile's economy either way. Hr. Sanford states that conceivably international lending to Chile might have been increased enough to help the Allende government finance its programs without producing hyperinflatior. However, he does not point out that Chile did, in fact, succeed in financing record current account deficits under Allende. The balance of payments table on page 53 shows that the current account deficit reached the record level of $504 million in 1972. Data supplied by the Central Bank of Chile put the 1972 current account deficit at $615 million, followed by a $404 million deficit in 1973. These are huge deficits, and they obviously had to be financed from abroad, since Chile's international reserves were down to a mere $34 million at the end of 1971, according to Central Bank data. It is noteworthy that even these huge current account deficits were not enough to offset much of the inflationary pressure being generated by the Allende policies. The government's budget deficit rose from 13 per cent of expenditures and 3 per cent of GNP in 1970 to 27 53 per coi;o of expendituros and 21 per cent of CInP in 1973. The deficit was 2.9 billion e:;cudos in 1970, 26.6 billion in 1972 and 14i> billion in 1972. Translated into dollars at the most depreciated exchange rate, the 1972 deLicit amounted to $578 million. At the pre-coup exchange rate, the 1973 deficit amounted to $951 million. If one takes into account multiplier effects and the fact that important sectors of domestic production declined under Allende, one can appre ciate that massive foreign borrowing financing even larger current ac count deficits would have been required to enable Allende's Chile to avoid severe inflation. The IBRD and ID3 could never have provided the level of financing required to offset the Allende inflation, even had they been disposed to do so. It would have been irresponsible for them to have done so. Allende's policies were wrecking the Chilean economy, and the international development banks were never designed to underwrite economic wrecking operations. Sanford makes the point that loans had been made to Chile (pre-AIlende), Argentina and Uruguay when those countries were ex periencing high rates of inflation. But it is one thirtg to make loans to a country that is trying to bring an inflationary situation under control by improving its domestic policies and quite another thing to finance a country that simply intensifies its inflationary policies if it manages to get a foreign loan. An international lending institution would be open itself to the severest possible criticism if it were to use its scarce capital to provide unlimited financing for governments pursuing inflationist policies. It should have been noted that Allende refused to negotiate stand-by arrangements with the IMF, since the Fund would have required financial discipline as a condition for a stand-by. Such agreements were regularly negotiated in the preAllende years. This relates to the question of whether the IBRD and IDB policies toward loan authorizations to Chile under Allende v/ere the re sult of U.S. pressure. Both institutions had ample economic reason to refuse to finance Allende's programs. The purpose of their loans is to promote development. If a country’s policies more than nullify the developmental benefits that can be expected of a bank loan, it is rea sonable, and in my view necessary, for the bank to advise the borrower to alter the harmful policies. It is reasonable to refuse to make ad ditional loans if the lender has good cause to believe that the loans may be used to support policies that are counterproductive. Put in more colloquial language, the banks are justified in not throwing their money down rat holes. The lenders had good reason to look askance at loans to 5 0 -3 6 5 0 - 7 5 - 3 28 Alienee's Chile. While it is true that the confiscations and defaults did not begin the day Allende took office, the known philosophy and public statements of officials of the Allende government did not augur veil for the future of private investment in Chile, and this generated caution on the part of foreign lenders and investors. It did not take long for actions to follow the words and confirm their fears. One of the flaws in the Sanford paper that is particularly surprising, coming from the Congressional Research Service, is the very slight attention given to the legal requirement, embodied in the Gonzalez Amendment, that the U.S. oppose loans by the IBRD and IDB to countries that had confiscated U.S. property without arranging to pay adequate compensation. The discussion on pp. 2-6 goes into charges by Allende and various supporters that the U.S. was exercising improper influence on the banks, and that it was illegal for the banks to deny loans to Chile just because Chile had confiscated foreign property. Not until page 38 is the Gonzalez Amendment mentioned,, and even then the reader has to read to the end of a lengthy footnote to find out what the amendment was all about. The Gonzalez. Amendment made it crystal clear that the U.S. Congress did not look kindly on uncompensated confiscations of U.S. property. The officials of the international banks were certainly aware of this feeling on Capitol Hill. They are at all times aware of the fact that it is Congress that decides how much the U.S. will be able to make available to these institutions to keep their capital replenished. The reaction of Congress to large new loan authorizations by the IDB to a country that had both confiscated U.S. property without payment and had defaulted on debts to the U.S. would not be hard to imagine. Mr. Sanford might have considered the impact on IDB replenish ment bills of authorizations by the IDB of large new credits to Chile. He might have noted that in recent years Congress has been slow to appropriate funds authorized for the IDB and other multinational banks. The managements of these institutions are not so removed from reality that they would go out of their way to adopt policies that they knew would make it much more difficult to get Congressional approval of replenishment funds. No particular pressure is required to keep an institution from taking actions that it knows would endanger the supply of funds vital to its survival. This is especially true when the actions in question would be impossible to justify on financial, banking and economic grounds. To highlight the charges of Salvador Allende on the second page of the paper and to bury the Gonzalez Amendment in a footnote on page 37 hardly seems to be the best way to educate anyone to the realities of the situation surrounding loans to Ailende’s Chile. 29 Mr. A n d e r s o n . Not only was this A IM project presented as official Fed business—the letter contained no mention of Accuracy in Media— but the letter was also typed by a Fed secretary. Mr. Chairman, either Irvine was acting for the Federal Reserve Board or he was not. I f this letter was written with the Fed’s authorization, then the Fed supported Irvine’s antipress activities. I f the letter was not authorized, Irvine apparently misused his Fed position and Fed facilities in violation of the law. Meanwhile, Gellner still knew Irvine only as a Fed official and, therefore, began to prepare revisions in the confidential study along with a written response for Irvine. This would have provided Irvine, incidentally, with still more Government information. But Gellner, as he has recalled it, spotted an A IM letter in the paper and recognized that the signer was the same Reed Irvine who had been in touch with him. Gellner, therefore, immediately halted work on the material he had been preparing for Irvine. Once Gellner recognized that the material was intended not for official use but for A IM ’s use, he knewT it wTas improper and acted accordingly. Both Gellner and Sanford have given us statements, emphasizing that Irvine represented himself only as a Fed official and that they had dealt with him on this basis. The director of the Library’s Congressional Research Service, Lester Jayson, agrees with his subordinates that Irvine’s contacts with the Library of Congress were made under false colors. In a detailed letter to House Administration Chairman Wayne Hays, Democrat, Ohio, Jayson wrote: “ Mr. Gellner and Mr. Sanford indicate they were dealing with Mr. Irvine solely in his capacity as an official of the Federal Reserve Board. He never indicated his association with A IM . Had he done so, his comments would have been received and considered in a dif ferent light.” And you will find this information in exhibit 7. Irvine, meanwhile, used the material he had obtained both from the Fed and from the Library of Congress to attack the press. One of his A IM articles is based baldly on the Library of Congress report. When the 'Washington Post refused to publish one of his inaccurate attacks on us, Irvine took out an ad in the 'Washington Post on February 18 and, in the name of Accuracy in Media, published ma terial he had developed as a Fed employee. And I offer this as exhibit No. 10. Chairman P a t m a n . Without objection, it may be included. [The advertisement of Accuracy in Media, Inc., from the Wash ington Post of February 18, 1975, submitted by Mr. Anderson as exhibit 10, follows:] 30 EXHIBIT 10 From the Washington Post, February 18, 1975 A r t v w t l t w n a n t __________ Advertisement ___ _____ Advertisement Advertisement The Post-Anderson Cover-Up We nt Accuracy in Media believe that journolists and newspapers have on oWfjjption tocorrect their errors. The Code of Ethics of the Society of ProSessional Journalists says: "Mistakes should be corrected promptly and can. d id lyW e hereby charge Jack Anderson and The Washington Post with failure to observe this code. The Error and the Correction. The Jack Anderson column of November 3,1974, contained;serious errors of fqct about the Inter-American Development Bank arid Chile. AIM sent a let- ter correcting these errors to over 400 newspapers, including TheWashington Post. Here is the letter, as printed in The Miami Herald: Multinational Bank Didn’t Foil ABende In i recent column, Jack Anderson charged that the United States sought to bankrupt the Allende government by denying multinational bank loans to Chile. He suggested that the U.S. had succeeded in this, bringing about Chile’s '‘financial strangulation.” This conclusion by Anderson was based on the assertion that Chile had come to depend on loans from the Inter-Anurican Development Bank, and these were cut off, Anderson is in error. Disbursements of Inter-American Development Bank (IDB) loans to Chile were actually higher during the three years Allende was in office than in the three preceding years. The bank dis bursed $79 million in Chile in 1971-73, compared to $70 million in 1968-70. It is also incorrect that Chile was heavily dependent op theee IDB loans. IDB loan disbursements have never financed more than a frac tion of Chile’s imports. They were at their highest in 1972, when they amounted to $29 million. H us was enough to pay for about 2.5 per cent of Chile’s import bill. These loans have also represented only a small part of Chile s external borrowing. '-----Those who * ------------exaggerate the importance of the IDB loans to Chile and b that denial of these loans to Chile was an important economic deterioration under Allende are usually try- 'n£ *° transfer the blame for Allende’s economic mismanagement to someone else. Allende confiscated large amounts of forera property without paying for it, and he defaulted on most of Chile’s foreign debt. It is not surprising that many lenders and investors were not eager to make new loans to Chile. However, Allende did manage to finance a huge increase in Chile’s imports, partly by using the money that should have gone for the payment of interest and principal on the foreign debt. Imports rose from $1 billion in 1970 to $1.6 billion in 1973. * toatfset ’ • ated by AUende’s fiscal and monetarv policies and by I____________ tic production. The multinational banks could not very well signal their support of these harmful policies by authorizing new loans for Chile. In the Allende years they disbursed against loans that had been authorised before Allende took office. The decline in new loin authori sation during the Allende regime will be reflected in a lower level of dis bursements in the period after ADende’s fall. REED J . IRVINE, Accuracy in Media, Inc. Washington, D.C. No Correction in The Washington Post When The Washington Post failed to print the above letter or make any correction, AIM took the matter up with the Chairman of the Board, Mrs. Kotharine Graham. Mrs. Graham wrotei "The editors have received from Jack Anderson a point- by- point rebuttal of your charges that satisfies them that your charges are unfounded. It would therefore be unfair to Mr. Anderson to print your letter. For this reason they have decided, and I agree, not to print this particular letter." The Cover- Up We immediately asked The Post for a copy of Jack Anderson's "point- bypoint rebuttal." To our utter astonishment, The Post refused ta send us a copy or even let us see itl At most, they would give us only a general description of the contents orally. We told the responsible editor, Mr. Philip GeyeKn, that this was totally un acceptable. We could not respond to an attack on our credibility if we were not permitted to even see the letter. Mr. Geyelin would not budge, but he let two things slip: (1) He admitted that the Anderson reply had not satisfied him that our charges were unfounded; (2) The author of the letter had been asked if it could be sent to AIM, and he had refused to permit it. Th$ irony of this will not be lost on the readers of The Post. Jack Anderson had incessantly criticized government for using the label "Secret" to hide its L1 ^ 'is using the . . .label . . now. blunders. Look who The Washington Post has been a powerful advocate of "openness" and "freedom of information." It did not ask permission of the U. S. Government to print the Top Secret Pentagon Papers. It has attacked the President of the U. S. for claiming the right of "executive privilege" to cover- up matters that ought to be open. But ft asks Anderson for permission to show AIM a letter which obviously Anderson himself should have had the decency to send to us. It honors his refusal. Long live "journalistic privilege!" AIM's Charges Stand Although we have not seen a copy of the alleged rebuttal, we know more money to Chile under Allende than in any previous three- year period. enough about the contents to see that our charges have not been rebutted. Anderson cannot refute that. We showed that under Allende, Chile's im Mr. Geyelin admitted that he was not satisfied with the reply. He said it ports rose to record highs, while exports fell. We noted that the increased was a "close thing," and that he would not print the correspondence be imports were paid for by borrowing from abroad and by using money that cause it was not sufficient interest to the readers. normally would have been used to service Chile's debts and to pay divi And yet The fast did print a tetter from a Congressman which repeated the dends on foreign investments expropriated by Allende. Anderson cannot main error of the Andisrson column! rebut that. \ In a letter to Mrs. Graham protesting the cover- up of Anderson's errors by We hove reiterated to Mrs. Graham thot there is not the slightest evidence The Post, v e pointed out that this was a matter of considerable importance, that the refusal of the Inter-American Development Bank to make substan tial new loan commitments to Allende had anything to do with the short The charg< that the U. S. and the World Bank and the IBRD were largely responsible for Chile's economic difficulties during the ADende years has ages of goods and the severe inflation that characterized his administra been a dominant theme in leftwing propaganda. The Post has lent itself to tion. Anderson has failed to substantiate the charge that the I IDB was the spreading of misinformation. It has a moral obligation to its readers to largely to blame for Chile's "financial, strangulation." publish the facts. We have asked Mrs. Graham to give this information to the readers of The The fact is that Anderson did not refute our charges. (If he had done so, he -Post, os other papers have done. We have had no response. would no doubt havei been delighted for us and all the world to see his AIM thinks the matter is important. The principle of correcting errors is even refutation). We showed thot Chile never depended on the IDB loan dis more important. We are therefore paying The Washington Post to correct bursements to pay for more than a very small percentage of its import bill. Anderson's error and to uncover The Post- Anderson cover- up. Anderson cannot disprove that. We showed that the IDB actually disbursed Help Us Help You You want a paper that is accurate and thbt corrects its errors promptly and gracefully. We want to help you get what you want. Subscribe now to the AIM Report to keep informed pn the serious errors of the news media. If you Accuracy in Media, Inc. 777 14th St., N.W .,#427 Washington, D. C. 20005 ( ) Send me the AIM Report. I enclose $3 for 1 year. ,() Thanks for correcting Anderson. I want to snare ii that. My contribution of $ is enclosed. () I wont to know more about AIM. J. R. Van Evera, Executive Secretary like what we are doing, make a contribution to AIM to help us pay for this message. Contributions are tax- deductible. Name . . Address. zip . Accuracy in Media, Inc. Telephone: 202— 783- 4407 31 Mr. A n d e rso n . The Fed, apparently, keeps a sharp eye on its em ployees’ misbehavior. Not long ago, a Fed employee showed Consumer Reports magazine a Fed-compiled list of comparative interest rates charged to consumers by the Nation’s banks. Any persevering person could get the same information by calling on each bank. Having it published, however, is easier on consumers and harder on overcharging banks. The thought of a public document reaching the public, it seems, drove Federal Reserve Chairman Arthur Burns into a dudgeon. He called in the FBI to hunt down the traffickers in his interest rate list. Yet Burns has not called in the FBI, so far as we can determine, to investigate Irvine’s apparent criminal violations. Perhaps Burns is more sympathetic toward employees who assail the press than those who leak to the press. This may be a good place to pause to explain the kind of accuracy that Irvine peddles. His diatribes, issued in the name of accuracy, have no more to do with accuracy than the Communist people’s democracies have to do with democracy. We should caution the subcommittee that Irvine is a specialist at manipulating facts to form a false picture which, at quick glance, appears authentic. He will shave a fact here, twist a truth there, re move a statement ever so slightly from context. Then he will present the fabrication with such bold authority that the unsuspecting reader easily can be taken unaware. For the sake of brevity, we will cite only a few of his more obvious distortions from our own experience. On February 4, we wrote about the junketing, gambling, and money wasting of Jay Sourwine, chief counsel of the Senate Internal Secu rity Subcommittee. One sentence deep in the seventh paragraph states that the subcommittee’s only major achievement lately was “a crack pot report on marijuana prepared mainly by an outside consultant.” And I offer this as exhibit No. 11. Chairman P a tm a n . Without objection, it may be inserted. [The Jack Anderson Column of February 4,1975, entitled, “ Soured on Red-Baiter Sourwine,” submitted for the record as exhibit 11, follows:] E x h ib it 11 [From the column, Washington Merry-Go-Round, Feb. 4, 19715] S oured (B y on R ed-B a it e r S o u r w in e Jack Anderson with Les Whitten) W a s h i n g t o n —The Senate’s weary old Communist-chasers, the last survivors of the McCarthy era, are losing interest in the Red Menace. They would rather bask in the tropical sun or gamble at Reno’s roulette wheels. In pursuit of the pleasant life, the Senate Internal Security Committee’s top watchdogs have arranged lately to look for subversives in such vacation spots as Miami, San Juan, Mexico City and Reno. Their expenses, of course, have been charged to the taxpayers. Chief counsel Julian G. Sourwine, once a great grizzly bear of a man, is Capitol Hill’s most renowned Red-baiter. The years have whitened his hair. He has become rumpled and flabby. His fat fingers now tremble as he fidgets with his tape recorder. 32 Gone are the days when Sourwine struck terror in the hearts of witnesses who were hauled, willy-nilly, before the Senate Internal Security Committee. In the heyday of McCarthyism, he was so powerful that he sometimes was re ferred to as the 97th Senator. (There were only 96 elected Senators in those days). Today, Sourwine likes to putter in his yard and pamper the potted plants in his basement hideaway. He has always had a weakness for the gaming tables. So he also likes to slip away from Washington to play the roulette wheels in Reno, where his mother and son happen to live. Although Reno is not known as a center of Communist subversion, Sourwine has stuck the taxpayers for his trips. One recent trip, for example, cost the taxpayers $908.63 for air fare, car rental and per diem. He didn’t bill the tax payers for per diem during the days he actually spent in Reno, but he collected for his other expenses. Sourwine’s chief investigator, Alfonse Tarabochia, has also flown to Miami, San Juan and Mexico City at the taxpayers’ expense. He owns property in Miami, and relatives live in Mexico City. Between the two of them, Sourwine and Tarabochia have spent thousands on these junkets while their committee work has lapsed. Their most recent major report has nothing to do with Miami, San Juan, Mexico City or Reno. It is a crackpot report on marijuana, prepared mainly by an outside consultant. Other recent reports have been the work largely of the FBI, CIA and Library of Congress. The staff, nevertheless, has passed off these reports as their own research. They use code words to hide the identity of the agencies which actually pro duce the reports. In the routing slips and private references, the FBI is called the “ Shrine” or “ Shriners” and the CIA is referred to as the “Masons.” Sourwine, a tyrant in his small corner of the Senate basement, uses the committee staff to type his personal letters, including orders for bulbs for his home garden. The staff has also typed articles which he has written anonymously for conservative publications. One of his recent literary works, for example, was published in an anti-Communist journal called Twin Circle. Although Sourwine worked on the article and had it typed on government time, he pocketed the $100 fee he got for his efforts. We found Sourwine surrounded by his potted plants in his dreary basement domain. The walls were adorned with inscribed photographs of the great, all attesting to the excellence and importance of Julian G. Sourwine. He fixed our reporter, Rosanne Weissman, with his famous accusatory gaze. “I am not a chiseler,” he announced. When she asked how his wife happened to wind up on the congressional payroll, he replied icily: “I think you’re despicable.” But he conceded that he may have had his personal letters and articles typed by government clerical help. He also confessed that he played the roulette wheels both in Nevada and abroad. But he hotly insisted that he always paid off his gambling and other debts. Tarabochia said: “There was always a reason for me going on these trips. They all relate to hearings and the obtaining of information.” But he conceded he had visited his family and friends on the trips. Meanwhile, times have changed in the Senate Internal Security Committee. The white-maned old Sourwine increasingly spends more time with a little circle of trucking applauders. It isn’t like it used to be. Diplomatic bias: We have detected a double standard in the press treatment of left-wing and right-wing governments. Glowing reports have been published, for example, about life under Communist dictator Fidel Castro. Even North Korea’s Kim II Sung, one of the world’s most repressive rulers, has received candy-coated coverage. Yet the stories about South Korea have condemned President Park Chung Hee for abandoning democracy. When he called for a national referendum on the constitution and offered to step down if he loses the vote, the press immedi ately charged that the election would be “rigged.” We have written critical stories about South Korea, including a graphic ac count of the kidnapping of opposition leader Kim Dae Jung by the Korean Cen tral Intelligence Agency. But President Park has promised that members of both the government and opposition parties will act as ballot box observers. He has also offered to let foreign newsmen observe the referendum and report what they see. At least, this is more than Kim II Sung has offered in North Korea. 33 Mr. A n d e rso n . Irvine ignored our charges against Sourwine and issued two AIM letters attacking these 11 words. And I offer the letters as exhibits 12 and 13. Chairman P a tm a n . They will be inserted. [The two Accuracy in Media, Inc., letters of February 4, 1975, and March 1, 1975, submitted for the record by Mr. Anderson as exhibits 12 and 13, follow:] 34 E x h i b i t 12 Accuracy In Media, Inc. 777 14th Street, N.W. Washington, D.C. 20005 (202) 783-4407 fiaDd J. Irvine Crsjirrr.an of the Beard February 4, 1975 11:45 p. m. Mr. Jack Anderson 1401 16th St., N. W. Washington, D. C. 20036 Dear Mr. Anderson: In your column this morning you mentioned a report on marijuana issued by the Senate Internal Security Subcommittee. You stated that the report was prepared not by the subcommittee but by an outside consultant. You also indicated that the report was of poor quality. The subcommittee recently published a report of hearings on the subject of the "Marihuana-Hashish Epidemic and it Impact on United States Security." The hearings were held over five days and testimony was taken from 23 different individuals. Nearly all of them were medical doctors, Ph.D.s or professors with expert knowledge about marijuana. In addition to these statements, the report contains over 80 pages of articles reprinted from scientific journals. In view of the distinction of the experts assembled by the committee to provide this testimony it seems highly inaccurate to characterize the report as you did. Certainly it cannot be said that the report was the work of an outside consultant. It is clearly a report on hearings held by the subcommittee. It would seem that you must have had some other document in mind, but I understand that this is the only document that the Subcommittee has published on this subject. Could you tell us whether or not your reference was to this published volume of hearings? Jf so, we would be interested in knowing how committee hearings can be written by an outside consultant. We would also like to know what authority you relied upon to judge the quality of the statements made by the expert witnesses who either gave testimony or whose articles were reproduced in the appendix of the report. Sincerely cc: The Hon. James 0. Eastland Mrs. Katharine Graham Mr. Charles Seib 35 EXHIBIT 13 Accuracy In Media, Inc. 777 14th Street, N.W. Washington, D.C. 20005 (202) 7S3-4407 Reed J. Irvine Chairman of the Board March 1, 1975 To the Editor: In a recent column (February 4), Jack Anderson discussed a report on marijuana issued by the Senate Internal Security Sub committee. He said the report was poor in quality and had actually been prepared by an outside consultant. Mr. Anderson was apparently relying on inaccurate, hearsay information. The report on marijuana published by the Senate ‘Internal Security Subcommittee consists of extensive testimony taken by the Committee from 23 experts with specialized knowledge about marijuana and its effects on those who use it. They came from foreign countries as well as from different parts of the U. S. The hearings lasted five days, and the report is a highly useful compendium of information about marijuana. In addition to the expert testimony, it contains 80 pages of articles about marijuana reprinted from scientific journals. For those who wish to see for themselves how inaccurate Anderson's description was, copies of the report may be purchased from the Government Printing Office, Washington, D. C. 20401. (Editors can probably obtain free copies from the Senate Internal Security Subcommittee, Washington, D. C. 20510). We have asked Anderson for an explanation of his characteriza tion of this report. We also asked what authority he relied upon for the judgment that the quality of the report was poor. He has not responded. Sinp^relv yo^irs, /Reed J J Irvine Chairman of the Board Accuracy in Media, Inc. cc: Jack Anderson and papers carrying his column 36 Mr. A n d e rso n . The column was based, he charged, on “inaccurate, hearsay information.” In fact, the 11 words were based on our reading of the report. Irvine also neglected to mention that one of AIM’s board members is Lewis Walt, the very consultant who helped produce the crackpot report. Another board member is David Martin, who is a staff member of the subcommittee that we criticized and who also worked on the report. Irvine’s double-barreled attack constitutes a gross conflict of interest which he carefully concealed from the recipients of his letters. In his fund-raising literature, Accuracy in Media quotes Charles Seib, the Washington Postfs press critic, as saying “AIM keeps us on our toes.” Actually, Seib does not have a favorable opinion of AIM. In a reference to Irvine’s former partner at AIM, Abraham Kalish, Seib said: “Kalish is for accurac}- as long as it’s his kind of accuracy.” Seib added: “He obviously represents a right-wing point of view.” And I offer this as exhibit No. 14. Chairman P a tm a n . Without objection, it may be inserted. [The article, “The Aims of A IM : A Critical Look at One of the Press Critics,” submitted by Mr. Anderson as exhibit 14 follows:] E x h ib it 14 [F rom the American Society o f Newspaper E ditors Bulletin, March 19*74] T h e A im s of A IM : A Cr it ic a l L o ok at one of t h e P r e s s C r it ic s (By Daniel Epstein) Accuracy in Media (AIM), calling itself a nonprofit, nonpartisan educational organization, has set itself up as judge and jury of the nation’s press. Using letters, advertisements and publicized surveys, AIM is taking the media to task for imbalance, distortion and bias—although critics of AIM contend the group is more concerned with liberal bias than conservative bias. Citizen pressure groups have had a significant impact on the media in the United States, and this trend has shown signs of escalating. Consequently, it becomes increasingly important for journalists, as well as the general public, to familiarize themselves with various pressure groups, their' tactics, success and credibility. This is a report on one such pressure group. Though AIM is quick to point out the “liberals” in its organization, its origins are decidedly conservative. When the formation of AIM was announced, Group Research—an organization which keeps tab on right wing groups reported that Aim “comes out of an old study, luncheon and correspondence organization called the Council Against Communist Aggression and Alexis de Tocqueville Society. According to Group Research, this parent group included “a sampling of trade unionists, writers, academics and organized right-wingers—all interested in exposing the evils of communism/’ The man who does most of AIM’s work is its executive secretary, Abraham Kalish. A Harvard classics major, Kalish has served as a feature writer for the U.S. Information Agency; he is a retired professor of communications at the Defense Intelligence School, run by the U.S. Army. AIM’s president is Francis G. Wilson, a former professor of political science at the University of Illinois. Wilson is chairman of the Committee for Consti tutional Integrity (a group trying to dissuade state legislatures from lowering the voting age). His name appears on the letterhead of the American Conserva tive Union, and he’s 'a lecturer (in Group Research’s words) “on the right-wing circuit.” The chairman of AIM’s board of directors is Reed J. Irvine, a Federal Reserve Board economist and contributor to William Buckley’s conservative National Review. Vice president is Alphons J. Hackl, head of Acropolis Books publishing company. 37 In addition, AIM has a National Advisory Board studded with prestigious names from the ranks of diplomacy, academia and journalism. Those serving on AIM’s board include Elbridge Dubrow (ex ambassador to Vietnam), Dr. William Y. Elliott (served on the planning board of the National Security Council), Eugene Lyons (retired Reader’s Digest editor), Rear Adm. William C. Mott (ret., former assistant chairman of the Joint Chiefs of Staff), Frank N. Trager (director of studies for the National Strategy and Information Center), Morris L. Ernst (author, “The First Freedom” ), Edgar Ansel Mowrer (former foreign correspondent), Harry D. Gideonse (chairman of the board of directors, Freedom House) and, until his death, former Secretary of State Dean Acheson. A look at AIM’s sympathizers further indicates something of the group’s character. Congressmen friendly to AIM—those who have inserted AIM ma terial in the Congressional Record—include John Ashbrook (R-Ohio), Clarence Brown (R-Ohio), Joel Broyhill (R-Va.), Philip Crane (R-Ill.), F. Edward Hebert (D-La.), G. V. Montgomery (D-Miss.) and William Springer (R-Ill.). While all these members of Congress have different ratings from the “con servative” and “liberal” groups, they share one common denominator; each is rated as being 100 per cent consistent with the views of the American Security Council’s National Security Index. This indicates support for increased defense spending and aid to anticommunist countries around the world. In an interview, Kalish said, “Yes, we are against Communism” but denied that AIM operates on the basis of a conservative ideal. But in a discussion of alter native ideologies, Kalish added, that “the right wing corrects its errors, the left doesn’t” in justifying AIM’s aim. AIM’s way of looking at media performance has engendered some critics, who accuse AIM of bias. Richard Gottschald, news director of WDIO-TV in Duluth, Minnesota, wrote: “AIM should be exposed for what it is : essentially a conservative group es tablished to play judge and jury, and to imply to the public that the media are giving Americans an intentionally distorted view of our government’s acts and policies. Using its own one-sided evaluations of stories, innuendo and nitpicking critiques, AIM attempts to substitute its judgment for those of the media editors and reporters.” Charles Seib, managing editor of the Washington Star-News, said “Kalish is for accuracy as long as it’s his kind of accuracy. He obviously represents a rightwing point of view.” James Cary, White House correspondent for Copley News Service, wrote a long article about AIM in Seminar. He acknowledged that AIM has succeeded in making some news organizations admit their errors, qualifying “But since many of AIM’s complaints add up to value judgments, it in turn has been accused of having its own bias and ax to grind, far over on the right of the political spectrum.” Media critic Alfred Balk is skeptical about AIM’s brand of media criticism. He wrote in Columbia Journalism Review : “All that AIM has done is to strip away the irrelevancies that have made media criticism elsewhere such a fuzzy business—the stuff about freedom of the press, professional responsibilities, news enterprise. We can be pleased that more accurate days are just around the corner.” While maintaining that AIM is not a right-wing group, Kalish refuses to divulge the sources of their financial support. In 1972, AIM had an income of $50,000. Of that total, $11,000 came from seven foundations. In response to queries about AIM’s finances, Kalish hands out a letter with the salutation “Dear friend of AIM.” It begins, “The most frequent question we are asked is, Who supports Accuracy in Media ?” The rest of his letter avoids the answer. It says AIM received $50,000 in donations (noting that “ this is one fifth of the annual income of one, top newscaster” ), that 65 “trade associa tions, professional groups, labor unions, women’s clubs, business firms gave sums up to $100 each.” The rest, Kalish says, came from 700 individuals, in sums ranging up to $5,000. Leaving the question of who supports AIM totally unanswered, Kalish is adamant in his refusal to identify specifically his sources of income. Since AIM is chartered as a nonprofit, tax-exempt corporation, it is obliged to file with the Internal Revenue Service a return showing its gross income and its expenditures. An examination of AIM’s file at the IRS revealed little, it is filled with AIM’s own publications, reprints from the Congressional Record, a sworn statement that AIM is not a private foundation, and a Form 990 (for exempt organizations) tax return. 38 AIM’s tax return applies to the period from 6-17-71 to 4-30-72. It shows gross contributions, gifts and grants of $6,411.71. It indicates that AIM disbursed $5,047.14 in that period, leaving a balance of $1,364.57. An inquiry to the IRS about the sources of AIM’s contributions revealed nothing. A request made under the provisions of the Freedom of Information Act to release documents brought a reply. It said, in part “ Subsection 6104(b) of the Internal Revenue Code provides in pertinent part that the names or addresses of contributors are not authorized for public disclosure, and, we could not, therefore, make such in formation available to you.” Whoever belongs to AIM and however they’re financed, it is an extremely prolific and active organization. AIM is not the first group to challenge “ advocacy journalism”—their major target—and its charge that media introduce opinion as fact cannot be brushed aside. AIM communicates its findings and theories to the public via prolific letters to newspapers, advertisements, its own regular newsletter (AIM Report) and promotional pieces. These are financed by $10 annual subscriptions, plus dona tions averaging $15 each. (AIM officers and board serve without compensation— though Kalish, who works full-time for AIM, lists $100 yearly as pay—and parttime clerical help is hired on a contractual basis.) A fair idea of AIM’s major concerns can be seen in some of the comments of two issues of the AIM Report: Accuracy in Media sues to Compel FCC Action on Fairness Doctrine Com plaints; Public TV’s Image hurt by Unbalanced Treatment of Controversial Issues; What You Can Do (Listing and brief explanation of six recent AIM complaints filed. All are alleged Fairness Doctrine violations.) ; The FCC Can Act Quickly When It Wants T o ; The Press and the Panthers—Part I I ; FCC Acts on AIM Complaint Against NBC on Pension Program; Other FCC Actions Show No Enthusiasm for Battling Bias; Another Nail Driven in the Coffin of the Fairness Doctrine; FCC Ducks Enforcement of Strict Fairness Requirements of the Public Broadcasting Act; What You Can Do; What’s wrong with NBC? AIM found many things wrong with NBC—one of which may be considered typical of the day-to-day, unspectacular cases which AIM tackles. The target, a segment of NBC’s “ First Tuesday” program, presenting two young Chinese residents to tell the nation what San Francisco’s Chinatown com munity is really like. During the program the youths compared Chinatown to Buchenwald and Auschwitz, implied people were so hungry they ate cats, claimed that the government was proud of keeping elderly people in old buildings, thus keeping the TB rate high and praised a bookstore selling “books from Red China, books on revolution.” AIM pointed out that this was a one-sided portrayal of a diverse ethnic com munity. They protested the imbalance to NBC, wrote to 175 NBC affiliates and asked what NBC had done or intended to do to present a better-balanced picture. AIM reported to its members that NBC’s reply was “not at all responsive,” and noted that replies from the affiliates were still coming in. “They all complain that NBC has not provided them with any programming that wTould balance the one-sided picture on First Tuesday.” AIM explained: “most of them say that they are taking the matter up with NBC.” Also typically, AIM involved its members in the case, asking them to call “the manager of your local NBC affiliate and (ask) him if he has received and replied to the AIM letter. If he has not, urge him to do so.” Sometimes AIM will simply wTrite a letter correcting what they consider to be errors of fact. Some of these letters have only earned AIM a reputation for nitpicking. Here is an example, which appeared in Editor & Publisher. “In ‘Shop Talk at Thirty’ in E&P of September 16, you say that ‘the Ameri can people’s trust in their government dropped nearly 20 per cent from 1964 to 1970. 20 per cent of those polled in 1964 distrusted the government and 39 per cent in 1970.’ This suggests that 80 per cent trusted to government in 1964 compared with 39 per cent in 1970. This represents a decline of 24 per cent, not nearly 20 per cent. I presume that your figure of nearly 20 per cent was some how derived from the 19 percentage point differences in the figures you used for the two years. If you were going to use figures on the number of people who distrusted the government you should have said that the number who expressed distrust rose nearly 100 per cent between 1964 and 1970.” When AIM decides that its complaints aren’t being responded to or when they don’t think enough of their letters are being printed, they turn to one of their most potent weapons—the paid advertisement. 39 On March 7, 1973, a large AIM advertisement ran in The Washington Post, proclaiming in display type: Letters the Editor of the Washington Post Refused to Print. A blurb explained that the letters reproduced in the ad had been sub mitted to The Post by AIM members to correct “inaccuracies or misleading infor mation published in The Post and other papers. The editor has declined to publish these letters.” AIM said it believes that the readers “ really do have a right to know,” and was publishing them at their own expense—$1,800 in this case, according to The Wall Street Journal. The letters dealt with John Stewart Service (a recently-honored old China hand), amnesty, TV bias, and The Post’s coverage of election-law violations by Nixon. On March 11, The Post responded in an “ F.Y.I.” editorial, citing space limita tions and saying it felt no obligation to publish several letters from a single group in a short span of time. At one point in the editorial, The Post said that AIM was a lobby group with resources for getting their message across. The response didn’t address itself to the errors alleged in the letters. AIM shot back a letter saying the while diverse voices in a letters column was a good thing, high priority should be given to letters correcting errors of fact. Then AIM told The Post that the editorial had incorrectly identified AIM as a lobby, asking for a correction. The Post did not print this letter, but on March 16 ran an eight-line statement saying that AIM, which does not take positions on legislation, was not a lobby, as they’d incorrectly identified it. Finally, on April 5, AIM ran an ad including everything—their original ad with the unpublished letters, the editorial reply, the unpublished AIM letter and The Post’s correction. At the bottom of this super-ad, AIM asked the readers for their opinion of who was right—AIM or The Post—and included a ballot for return to AIM. As the basis for many of their letters and ads, AIM usually relies on its surveys, conducted largely utilizing “content analysis”—a process fraught with pitfalls for all but the most expert communications researchers. An example of such a survey was released in an AIM statement and entered in the Congressional Record by Rep. Clarence J. Brown (R-Ohio). The AIM charge was that the television networks heavily slanted coverage of the Ervin committee hearings on the media. The hearings themselves, AIM contended, were “heavily stacked” with pro-media witnesses while spokesmen for consumers of news media were “ sorely lacking.” AIM said the hearings, unbalanced to begin with, were further distorted as ample coverage was accorded to media defenders while media critics were largely ignored. Perhaps the least significant among AIM’s communiques are its promotional materials, the bulk of which go to people likely to be sympathetic to AIM. These materials do give some idea of the way AIM views itself and its causes and some light on the nature of the group—its educational and critical functions. One brochure offers seven suggestions: (1) Obtain a packet of AIM publica tions (including critiques of CBS programs “Castro’s Cuba,” “Hunger in America” and “ The Selling of the Pentagon” ; AIM bulletins and reports; AIM study of media coverage of the HISC hearings on antiwar demonstrations; critiques of OAS news story by A P ; and critique of a Washington Post column) ; (2) read Herman Dinsmore’s “ All the News that Fits,” Edith Efron’s “The News Twisters” and Joseph Keeley’s “The Left-Lelaning Antenna”—and ask: “Does your local library have these?” ; (3) spread the AIM message to friends, at parties, labor, business and fraternal meetings and on campus; showing by specific cases how AIM has “actively, vigorously been carrying on the fight against inaccurate slanted reporting” ; (4) “write letters to the Forums of your local newspaper about AIM. Send us copies” ; (5) show local newspaper colum nists and TV editors AIM publications, asking for their cooperation and support; (6) if an inaccurate or one-sided news report is observed, obtain all possible facts, send appropriate letters to sources of inaccuracies, and “ send copies of your letters to us” ; (7) organize informal luncheon and coffee groups to* discuss “problems relating to the public and the news media.” One promotional included a reprint (The Villager, New York, N.Y.) of a column by AIM board member Morris Ernst, “ I Have a Concern.” In the column, Ernst wonders: why none of our media are concerned with the collapse of our Noble Experiment, particularly in those increasing numbers of areas where a single financial group owns the only paper, the only radio and the only television. Why is that kind of monopoly of the mind of men unmentionable in our mass media?” 40 The American press is not known for its love of outside criticism—witness reactions to Agnew’s now-famous denunciations and the very mixed response to the Twentieth Century Fund’s National News Council. As might be expected AIM has come in for its share of scathing remarks. For example, Richard Gottschald, WDIO-TV, Duluth, denounces AIM as “another attempt at ‘Big Brotherism’ (and) a cleverly disguised extension of the Agnew attacks of two years ago.” Howard Simons, managing editor, The Washington Post, says: “They are biased and they’re trying to substitute their news judgment for ours. But I don’t really worry about them. They’re more of a pest than anything.” Bill Leonard, vice president, CBS News, charges: “They are specialists in tunnel vision. They’ve tried to look at life from their own point of view—rightwing.” Alfred Balk, Columbia Journalism Review, commented: “ From our deal ings with (Kalish) it appears that AIM has political or partisan motivations even though the organization denies it. They do not seem to be equipped to do a serious, professional job. Criticizing the media is a serious business and should not be played at. You can only be constructive if you are really serious.” Nevertheless, a large number of articles about AIM have been published which neither condemn nor praise but give AIM’s own objections an airing and provide Kalish with a forum from which to rebut his critics. A comprehensive piece was written by John Pierson in The Wall Street Journal in May 1973. The most comprehensive article thus far encountered on AIM appeared in Seminar Quarterly. The author, James Cary (White House correspondent for Copley News Service), explored AIM in some depth. “To a professional news man,” Cary said. “ . . Some of (AIM’s) criticisms do seem to come across as weak, overdrawn and perhaps even as protests against change and the intrusion of new ideas.” Cary summarized his opinion of the justifiability of AIM’s opinions: . there is ample evidence that the American press has long been too self-satisfied too ready to charge foul and violation of the First Amendment whenever anyone dares question its prerogatives there is more one-sided reporting today than ever before . . there is more arrogance in journalists and intrusion of a new philosophy; that the written and spoken word can and should be used to shape change that newsmen think is desirable.” In Cary’s opinion, there is a need for “a competent, highly informed, running critique of the media product,” but whether AIM “is adequate for that role is a question. Its own biases and less than worldly-wise approach to the news on occasion” would indicate that a better job could be done by journalists themselves. “But,” Cary concluded, “AIM does have a point.” Seminar Quarterly, in an afterword to Cary’s article, asked if it was preferable for journalism to undertake “systematic self-analysis” through “responsible” bodies such as an ASNE committee or the National Media Center in Aspen, at the risk of silencing “self-constituted arbiters” like AIM or the many local journalism reviews. It concluded: “ Is it really desirable, or even possible, to muzzle the watchdogs? Do not they, in their own way, provide a necessary afflic tion of the comfortable? . better the democratic way, with every man free to speak out, rather than an elite critical oligarchy or an autocratic government censor.” Both' the Nixon administration and Kalish have criticized what they see as liberal bias in the news media, but Kalish denies any ties with the administra tion. Nor does the White House send him complaints about the media, he said. The man who prepares Nixon’s daily news summary confirmed this: “ (AIM) has done some very good stuff, but we haven’t had any contact with them.” If Judge Learned Hand was right in believing that truth is most likely to emerge from a multitude of voices, groups such as AIM perform a valuable (and constitutionally protected) role in the democratic process. W h a t T h e y Say A bout A ccuracy m M e d ia , I n c . Accuracy in Media, Inc. (AIM) was founded to combat inaccuracies and distorted reporting of the news by the major media. It has gained national atten tion because of its highly professional approach and its fearlessness in tackling 41 such media giants as The New York Times, The Washington Post and CBS, NBC and ABC. We think AIM deserves your support, but don't take our word for it. Read these unsolicited comments about AIM and its work, then decide for yourself “Accuracy In Media Inc.” is one public interest group that is doing yeoman service as an ombudsman in policing radio, TV and the news media on inaccurate, misleading and distorted news reporting and commentary, Lending banking a hand is just one of AIM’s recent accomplishments. A TV network’s “documentary” series on banking last year provoked strong protests from individual bankers and the ABA over the distorted presentation. These protests were brushed off by the network and it refused to give the ABA network time to correct the errors. The network changed its tune after AIM entered the picture and charged it with violating FCC’s fairness doctrine with the network agreeing to give the ABA network time to correct the documentary’s errors. AIM is wholly supported by contributions from concerned citizens and, in our opinion, merits support. Reprinted with permission from Pratt’s Letter, the Washington Banking Authority. “What this country needs is not a good five cent cigar, but a coast-to-coast awareness that Accuracy in Media Inc. is the greatest thing to come along since the invention of the printing press.” Alan Courtney, in the Miami Journal. “Accuracy in Media is a non-profit, tax-exempt organization launched a few years ago by a group of concerned citizens who had become increasingly fearful that the content and presentation of the news by many sections of the media were undermining the democratic process and threatening our freedom AIM has not blinked at taking on some of the leading lights of the liberal establishment. Perhaps its chief claim to fame has been its confrontations with the Columbia Broadcasting System.”—Barron’s March 6,1972. “AIM keeps us on our toes.”—Charles Seib, former Managing Editor, Washing ton Star-News, now ombudsman for the Washington Post, quoted in Wall Street Journal, May 1, 1973. “NBC has refused to buckle under pressure from a small but very active group called Accuracy in Media AIM’s most famous complaint probably had to do with a 1972 NBC documentary called ‘Pensions: The Broken Promise.’ After a long series of letters back and forth between AIM, the Commission and the network, FCC’s staff decided that the program was biased . This was the first time the FCC had decided in favor of an AIM complaint, and the TV industry was shocked.” TV Guide, February 9, 1974. “I believe you must be the most thorough reader that The New York Times has. —Arthur Ochs Sulzberger, President and Publisher of The New York Times, in a letter to AIM, January 29,1973. “The aims of your organization are admirable and I appreciate them because they will result in fewer of these occurrences in the future.”—Arthur “Red” Motley, Chairman of the Board, Parade Magazine, commenting on error in Parade pointed out by AIM, May 30, 1972. 42 (C)itizen-viewers may wish to keep in touch with organizations whose purpose is to monitor the media. One such is Accuracy in Media, which publishes an informative newsletter dealing with current instances of TV violations of the Fairness Doctrine and other inaccuracies in the media.” Ernest W. Lefever in TV and National Defense. To those who see the menace in biased news, I suggest you subscribe to the AIM newsletter, which keeps close tabs of the media.—Morris Ryskind in his syndi cated column. Mr. A n d e rso n . Among the inaccuracies in Irvine’s Washington Post ad was a glaring $17 million error in Irvine’s figures. And I offer these as exhibits 15 and 16, and call attention to exhibit i°. Chairman P a tm a n . Without objection, they will be inserted. [Exhibit 15, the letter of Reed J. Irvine to the Washington Post, dated March 3,1975 and exhibit 16, the AIM report of November 1974, with an attached excerpt from the Congressional Record of Febru ary 24, was submitted by Mr. Anderson for inclusion in the record:] E x h ib it 15 A ccuracy in M e d ia , I n c ., Washington, B.C., March 8, 1975. E d it o r , T he W a s h in g t o n P ost, Washington, B.C. To t h e e d i t o r : In a statement published in the Washington Post on February 18, we reproduced a letter we had sent to a number of newspapers about the International Development Bank and Chile. The point of the letter was that the refusal of the IDB to approve substantial new loan commitments to Chile dur ing the Allende years did not account for the very serious financial problems Chile encountered in that period. In the letter we pointed out that the Bank had continued to disburse funds to Chile against loans previously committed. We said that the amount disbursed during the Allende years was actually higher than in the preceding three years—$79 million compared to $70 million. This was based on information we had obtained from the IDB over the telephone. We have since learned that there was an error in the total for the three pre-Allende years, and that the correct disbursement figure was $87.8 million. It was not true, therefore, that disbursements were higher in the Al lende period. However, the point we wished to make remains valid. Chile’s financial problems under Allende dwarfed the amount of credit obtainable from international financial institutions, and the difference in disbursements of IDB credits in the Allende years and the preceding Allende years could not have made any significant contribution to either causing or solving those problems. However, we regret the error, which is evidently the result of taking a series of numbers over the phone rather than getting them in writing. Sincerely yours, R ee d J. I r v i n e . E x h ib it 16 A im R eport, Washington, B.C., November 1974. A nderson E rr s A g a in Columnist Jack Anderson charged in his November 3 column that the U.S. had “sought to bankrupt the Allende government by denying multinational bank loans to Chile.” He suggested that the U.S. had succeeded in this, bringing about Chile’s “financial strangulation” while it was ruled by the Marxist, Sal vador Allende. This has been a popular theme on the left ever since the Chilean military overthrew the Allende government in September 1973. AIM has previously commented on such statements when published by The Washington Post and broadcast over CBS. Anderson clothed his statement with seeming authority 43 by relating it to what he inaccurately described as “a secret congressional study.” He wrote: “The 54-page congressional study, prepared by the Library of Congress, charges that the Inter-American Bank totally cut off new loans to the Allende regime. Since Chile had come to depend on these loans, the policy amounted to financial strangulation.” Contrary to Jack Anderson’s statement, this study does not demonstrate that the U.S. sought to bankrupt the Allende government or that it succeeded in bringing about “financial strangulation” of Chile. Nor does this study demon strate that Chile’s economic well-being was dependent on loans from the InterAmerican Development Bank and that the country suffered severely when this bank did not make new loan authorizations. The fact is that loan disbursements by this bank to Chile never financed more than a tiny fraction of Chile’s imports and they represented only a small part of Chile’s external borrowing. Note that we are talking about disburse ments, actual payment of funds, not authorizations, a commitment to pay out money at some future date. There is typically a lengthy lag between a loan authorization by the Inter-American Development Bank and the actual dis bursement of the money. But it is the disbursement that pays for the imports. What Jack Anderson failed to say was that loan disbursements by the InterAmerican Development Bank to Chile amounted to $79 million in 1971-73, the Allende years, compared to only $70 million in the three preceding years. It is quite true that loan authorizations fell off sharply during the Allende years, and this will no doubt be reflected in lower disbursements in the post-Allende years. W H A T THE STUDY SAID The study Anderson referred to is titled “The Multilateral Development Banks and the Suspension of Lending to Allende’s Chile.” It is by a young analyst named Jonathan E. Sanford of the Congressional Research Service of the Library of Congress. It was written at the request of a member of Congress, and there is nothing secret about it. Mr. Sanford examined the question of whether or not new loan authoriza tions to Allende’s Chile by the Inter-American Development Bank and the World Bank were curtailed because of U.S. pressure. He found that the World Bank had maintained a relatively consistent approach in its lending policy towards Chile during the entire 1961-74 timespan. He found that the IDB had become much more reluctant to authorize new loans to Chile under Allende than it had been previously, and he believed that this may have reflected U.S. hostility to Allende. Sanford’s study passes rather quickly over the important point that under U.S. laws, our representatives on the boards of these multinational de velopment banks must oppose loans to countries which have confiscated U.S. property without paying adequate compensation. Since Allende had carried out such confiscations, it is hardly news that the U.S. was not supporting new loan authorizations to Allende by these banks. Sanford’s lengthy paper ended up with the conclusion that it was clear by early 1972 that Chile was in serious economic trouble and that her “credit worthiness was debatable.” He made no effort to assess the economic impact of disbursements of World Bank and IDB loans to Chile, much less conclude that the policies of these institutions had resulted in Chile’s “financial strangulation.” Indeed, Sanford pointed out that during the period when the World Bank felt that Chile was not creditworthy, Allende succeeded in obtaining large new loan authorizations, including $103 million in short-term credits from the U.S.S.R. plus $446 million in long-term credits from communist countries. He notes that Chilean foreign debt grew by a very large amount under Allende. Statistics in his study show that Chile’s imports grew from $1 billion in 1970 to $1.6 billion in 1973. This hardly suggests strangulation. Sanford reached this conclusion: “ It is conceivable (though of course debatable) that a rapid and continued increase in international lending and investment would have enabled the Allende government to finance its policies of economic reorganization and social reform without the necessity of resorting to the printing press.” What this means is that if foreign lenders and investors had been willing to ignore Allende’s confiscations of private property and defaults on Chile’s for eign debt and had been willing to not only maintain, but increase rapidly, their loans and investments in Chile, they could have offset to a greater degree the damage being done to Chilean production by Allende’s policies. 5 0 -3 6 5 O • 7 5 - 4 44 It was the policies of Allende that created hyper-inflation and exhausted Chile’s foreign exchange reserves. It is false to suggest that these results were produced because a single lender, the Inter-American Development Bank, re duced its authorizations of new loans to Chile. Jack Anderson owes his readers a correction, but since we know from experience that he is slow to admit errors, AIM has written a letter laying out the facts to 400 papers that carry his syn dicated column. [F r o m th e C on g ression a l R e co rd , F e b ru a ry 24, 1 9 7 5 ] A M e d ia C o v e r -u p ? Mr. H e l m s . Mr. President, Accuracy in Media is an organization based in Washington, D.C., which came into existence a few years ago to satisfy a des perate need for a responsible, private organization which would serve as a watch dog over the major mass media of America. These media proclaim themselves constantly as “ watchdogs of government.” As one who has worked in the media in the past, I am fully aware of how badly our so-called watchdogs of govern ment need to be watched themselves. AIM has not confined itself to general grumbling about the sins of the media. Instead, on an exceedingly modest budget it has undertaken to pinpoint par ticular abuses, inaccuracies, and imbalances in media operations, bring them to public attention, and have them corrected—for AIM recognizes the crucial im portance of what could be called the “nervous system” of our society represented by the media. If the “nervous system” is malfunctioning, the body politic may make erroneous and damaging decisions. Recently Accuracy in Media has scored a number of notable victories. It has gotten the FCC finally to rule that an NBC documentary on private pension plans was biased, and is fighting that ruling through the courts—with no encouragement from the FCC, I might add—so that eventually the entire Fairness Doctrine may be litigated in the Supreme Court. It has gotten the National News Council to agree that a recent Jack Anderson column on the International Police Academy was biased and inaccurate. It has analyzed the failure of mass media reporting on the real issues at stake in the West Virginia textbook controversy. At the moment it is engaged in an admirable campaign to bring the three major tele vision networks to adopt a code of ethics binding them to fairness and balance in the reporting of news—against the most strenuous objections of the networks, incidentally. In short, AIM’s activities are an inspiring example of what can be done by individual citizens against such unresponsive corporate giants as CBS and NBC. Recently, Mr. President, AIM became concerned about another Jack Anderson column, this time one asserting that the United States has “strangled” the Al lende government in Chile by cutting off multinational loans to it through the Inter-American Development Bank, Reed J. Irvine, AIM’s board chairman, analyzed that column in a letter and demonstrated its inaccuracy. To his amaze ment, however, the Washington Post, in which the Anderson column had ap peared, refused to print the letter, claiming that Anderson had effectively re butted AIM’s refutation in another letter. Anderson, however, that gallant foe of secrecy and coverup, refused to permit AIM even to see his counterarguments, and the Post declined to do anything further on this important issue. AIM was therefore left with no recourse but to expend a substantial sum to purchase an advertisement in the Post to bring its case to the public. I believe that story, as set out in the advertisement of February 18, is worth bringing to the attention of an even wider audience. Mr. President, I ask unanimous consent that the advertisement entitled “The Post-Anderson Cover-Up” be printed in the Record. There being no objection, the material was ordered to be printed in the Record, as follows: [From the Washington Post, Feb. 18, 1975] THE POST-ANDERSON COVER-UP We at Accuracy in Media believe that journalists and newspapers have an obligation to correct their errors. The Code of Ethics of the Society of Profes sional Journalists savs: “Mistakes should be corrected promptly and candidly.” We hereby charge Jack Anderson and The Washington Post with failure to observe this code. 45 THE ERROR AND THE CORRECTION The Jack Anderson column of November 3, 1974, contained serious errors of fact about the Inter-American Development Bank and Chile. AIM sent a letter correcting these errors to over 400 newspapers, including The Washington Post. Here is the letter, as printed in The Miami Herald : MULTINATIONAL BAN K DIDN’T FOIL ALLENDE In a recent column, Jack Anderson charged that the United States sought to bankrupt the Allende government by denying multinational bank loans to Chile. He suggested that the U.S. had succeeded in this, bringing about Chile’s “financial strangulation.” This conclusion by Anderson was based on the assertion that Chile has come to depend on loans from the Inter-American Development Bank, and these were cut off. Anderson is in error. Disbursements of Inter-Amerrican Development Bank (IDB) loans to Chile were actually higher during the three years Allende was in office than in the three preceding years. The bank disbursed $79 million in Chile in 1971-73, compared to $70 million in 1968-70. It is also incorrect that Chile was heavily dependent on these IDB loans. IDB loan disbursements have never financed more than a fraction of Chile’s imports. They were at their highest in 1972, when they amounted to $29 million. This was enough to pay for about 2.5 per cent of Chile’s import bill. These loans have also represented only a small part of Chile’s external borrowing. Those who exaggerate the importance of the IDB loans to Chile and who falsely state that denial of these loans to Chile was an important cause of Chile’s eco nomic deterioration under Allende are usually trying to transfer the blame for Allende’s economic mismanagement to someone else. Allende confiscated large amounts of foreign property without paying for it, and he defaulted on most of Chile’s foreign debt. It is not surprising that many lenders and investors were not eager to make new loans to Chile. However, Al lende did manage to finance a huge increase in Chile’s imports, partly by using the money that should have gone for the payment of interest and principal on the foreign debt. Imports rose from $1 billion in 1970 to $1.6 billion in 1973. But even this was not enough to offset the inflationary pressures generated by Allende’s fiscal and monetary policies and by the fall in domestic production. The multinational banks could not very well signal their support of these harmful policies by authorizing newTloans for Chile. In the Allende years they disbursed against loans that had been authorized before Allende took office. The decline in new loan authorization during the Allende regime will be reflected in a lower level of disbursements in the period after Allende’s fall. R eed J . I r v in e , Accuracy in Media, Inc., Washington, D.C. NO CORRECTION IN THE WASHINGTON POST When The Washington Post failed to print the above letter or make any correc tion, AIM took the matter up with the Chairman of the Board, Mrs. Katharine Graham. Mrs. Graham wrote: “The editors have received from Jack Anderson a pointby-point rebuttal of your charges that satisfies them that your charges are un founded. It would therefore be unfair to Mr. Anderson to print your letter. For this reason they have decided, and I agree, not to print this particular letter. THE COVER-UP We immediately asked The Post for a copy of Jack Anderson’s “point-by-point rebuttal.” To our utter astonishment. The Post refused to send us a copy or even let us see i t ! At most, they would give us only a general description of the con tents orally. We told the responsible editor, Mr. Philip Geyelin, that this was totally un acceptable. We could not respond to an attack on our credibility if we were not permitted to even see the letter. Mr. Geyelin would not budge, but he let two things slit): (1) He admitted that the Anderson reply had not satisfied him that our charges were unfounded; 46 (2) The author of the letter had been asked if it could be sent to AIM, and he had refused to permit it. The irony of this will not be lost on the readers of The Post. Jack Anderson had incessantly criticized government for using the label “ Secret” to hide its blunders. Look who is using the label now. The Washington Post has been a powerful advocate of “openness” and “freedom of information.” It did not ask permission of the U.S. Government to print the Top Secret Pentagon Papers. It has attacked the President of the U.S. for claim ing the right of “executive privilege” to cover-up matters that ought to be open. But it asks Anderson for permission to showT AIM a letter which obviously Anderson himself should have had the decency to send to us. It honors his re fusal. Long live “journalistic privilege!” A IM ’ s CHARGES STAND Although we have not seen a copy of the alleged rebuttal, we know enough about the contents to see that our charges have not been rebutted. Mr. Geyelin admitted that he was not satisfied with the reply. He said it was a “close thing,” and that he would not print the correspondence because it was not sufficient in terest to the readers. And yet The Post did print a letter from a Congressman which repeated the main error of the Anderson column! In a letter to Mrs. Graham protesting the cover-up of Anderson’s errors by The Post, we pointed out that this was a matter of considerable importance. The charge that the U.S. and the Wolrd Bank and the IDB were largely respon sible for Chile’s economic difficulties during the Allende years has been a dominant theme in leftwing propaganda. The Post has lent itself to the spreading of misinformation. It has a moral obligatoin to its readers to publish the facts. The fact is that Anderson did not refute our charges. (If he had done so, he would no doubt have been delighted for us and all the world to see his refuta tion.) We showed that Chile never depended on the IDB loan disbursements to pay for more than a very small percentage of its import bill. Anderson cannot disprove that. We showed that the IDB actually disbursed more money to Chile under Allende than in any previous three-year period. Anderson cannot refute that. We showed that, under Allende, Chile’s imports rose to record highs, while exports fell. We noted that the increased imports were paid for by borrowing from abroad and by using money that normally would have been used to service Chile’s debts and to pay dividends on foreign investments expropriated by Allende. Anderson cannot rebut that. We have reiterated to Mrs. Graham that there is not the slightest evidence that the refusal of the Inter-American Development Bank to make substantial new loan commitments to Allende had anything to do with the shortages of goods and the severe inflation that characterized his administration. Anderson has failed to substantiate the charge that the IDB was largely to blame for Chile’s “financial strangulation.” We have asked Mrs. Graham to give this information to the readers of The Post, as other papers have done. We have had no response. AIM thinks the matter is important. The principle of correcting errors is even more important. We are therefore paying The Washington Post to correct Ander son’s error and to uncover The Post-Anderson cover-up. Mr. A n d e rso n . It is noteworthy that his enormous goof was in the field of economics; yet he is paid $37,000 a year by the taxpayers as an economics expert. On February 10, Irvine defended the Chilean torturers against charges published in our column. The Chileans had offered us “ docu mentation,” wrote Irvine, to dispute the torture story. The truth is that the Chileans refused to let us have documentation, which they claimed to possess. AIM’s response to our March 11 column, and I offer this as exhibit 17. Chairman P a tm a n . That will be received for the record. 47 [The Jack Anderson column of March 11, 1975, entitled, “Irvine’s AIM Is Way Off,” submitted for the record as exhibit 17, follows:] E x h ib it I r v in e ’s AIM Is 17 W ay O ff (By Jack Anderson with Les Whitten) W a s h i n g t o n — Behind the bulwarks of the Federal Reserve Board, a $37,000a-year government economist has been directing a Watergate-style assault on the press. He is Reed Irvine, a strident, right-wing propagandist, who has used his fed eral post to gather ammunition for his anti-press campaign from unsuspecting government researchers. He has also used Federal Reserve Board facilities, tele phones and stationery to prepare broadsides against the press. His operation has certain similarities to that of the notorious White House plumbers, whom former President Nixon assigned to hound the press. A spokes man denied, however, that the Federal Reserve Board had anything to do with Irvine’s anti-press activities. In this event, Irvine would appear to have violated the law. For the U.S. Criminal Code bans any federal employee from using “federal property of any kind for other than officially approved activities.’" It also bars the “use of . . official information not made available to the general public (for) furthering a private interest.” If his superiors didn’t authorize the attacks upon the press, Irvine could be in serious trouble on both counts. The statutory penalty for each is two years in prison and a $10,000 fine. The Federal Reserve official operates his anti-press campaign under the name Accuracy in Media. He has attacked the New York Times, Washington Post, and other assorted publications and TV documentaries. Ralph Nader and our selves are under fire from AIM. In turn, the Irvine unit has defended not only the Big Banking complex but also Big Oil, Brass Hats, right-wing dictatorships, ITT and the various govern ment agencies attendant upon them. While Richard Nixon lasted, AIM fre quently upheld his admiinstration against press criticism. But AIM labors under even greater burdens than ideological bias and reverence for sacred cows. The group has solicited and accepted financial contributions from the beneficiaries of its favorable verdicts. From its cluttered office, for example, AIM has sent appeals for funds to oil companies and has received back secret oil contributions. In turn, Irvine has blasted the New York Times, Newsweek and other publications for criticizing oil company profits. Irvine has also kept up a torrent of abuse against us, characterized by misstatements, distortions and out-of-context quotations. Normally, we don’t respond to irresponsible attacks, but Irvine’s charges reached such a volume that we began to do some checking. On Nov. 3, 1974, for instance, we quoted charges from a Library of Congress report that the Inter-American Development Bank had helped to destroy the Allende government in Chile by withholding loans. Irvine, misusing his role as a Federal Reserve Official, obtained a copy of the unpublished report from its author, Jonathan Sanford. Next, Irvine called Sanford’s boss, Charles Gellner, to complain about the report. Gellner also had no idea of Irvine’s AIM connection. “He said he was with the Federal Reserve Board,” Gellner told us. Accepting Irvine at his word, Gellner asked Irvine to reduce his objections to writing. Irvine did this on Federal Reserve Board stationery. We have a copy of the letter, clearly headed “Board of Governors of the Federal Reserve System Office Correspondence.” Gellner, still thinking he was dealing with a government official, assigned his staff to work on the Irvine letter. Not until Gellner belatedly discovered Irvine’s AIM role, did he end his cooperation. Thereafter, Gellner refused to furnish Irvine with more government information. 48 As Sanford recalls it, “We dealt with this guy as if it were official Fed policy. We were victims of this thing.” Agreed Gellner : “Irvine was at least wearing two hats.” Meanwhile, Irvine used the material he had gotten under false colors to attack our column. He took out a quarter-page ad in the Washington Post on Febru ary 18 to publicize the attack upon us. Irvine’s misuse of his federal post turned out to be a factual disaster as well as a possible criminal offense. The Inter-American Development Bank ran a brief audit for us and found that our figures were accurate but Irvine’s figures were off by $17 million. Irvine’s analysis of the Chilean situation was also so inept that Sanford reacted by “laughing” F o o t n o t e . We have found it impossible to deal with Irvine. During one phone conversation with our office, he asked no less than 10 times, with steadily height ening shrillness, whether we were tape-recording the phone conversation. We were not. He has now refused to comment on our charges, except through a laborious exchange of written interrogatories. Mr. A n d e r s o n . AIM’s response to our March 11 column exposing Irvine’s apparent law violations, was signed by Francis Wilson, the figurehead president: “Irvine does his work for AIM nights and weekends,” stated AIM. This is not true; he also works for AIM on the taxpayers’ time. AIM asserted, further, that Jonathan Sanford, the author of the Library of Congress report, “knew Mr. Irvine to be an expert in” the Chilean “ area and had previously sought and obtained an interview with him.” This is a distortion; the interview was sought not to dis cuss the Chilean story but Sanford’s unrelated Ph. T). work. And we offer this document as exhibit No. 18 and invite you to compare it with exhibit No. 7. Chairman P a t m a n . It will be inserted. [Exhibit 18, Western Union Mailgram dated March 9,1975, signed by Francis G. Wilson, president of Accuracy in Media, Inc., was submitted for the record by Mr. Anderson:] E x h ib it 18 [Western Union Mailgram] W Jack A a s h in g t o n , D.C., March 9, 1975. nderson, Washington, D.C.: We are informed that you plan to publish a column charging AIM’s chairman, Reed Irvine, with misuse of his Government position. If our understanding of what you plan to say is correct, I suggest that you evaluate your statements in the light of the following facts. Irvine is Chief of the Developing Countries Section of the Division of Inter national Finance of the Federal Reserve Board in Washington. His official responsibilities cover work on Latin America and the Inter-American Develop ment Bank. Acting in this capacity, on November 22, 1974, he submitted written comments to the Congressional Research Service of the Library of Congress on a study they had prepared dealing with loans to Chile by the Inter-American Development Bank (IDB). The author of the study knew Mr. Irvine to be an expert in this area and had previously sought and obtained an interview with him. His supervisor, Mr. Charles Gellner, had asked Mr. Irvine to send written comments on the paper. Mr. Gellner said this of Mr. Irvine’s memo: “We felt as though it was a comment by a Federal Reserve official who was responsible, and it seemed to be a comment by someone who was knowledgeable and should be given serious consideration.” 49 The ORS report was subsequently revised, taking into account the comments made by Irvine and others. It will soon be printed and it will carry this acknowl edgement : “The author wishes to thank several officials of the Treasury Department, the IDB, the IBRD, and the Federal Reserve Board for their helpful comments on earlier versions of this paper.” It was entirely appropriate for Irvine to assist the CRS in this way in his official capacity. His agency and the CRS recognize this. On his own time, Mr. Irvine wrote a letter for AIM, which he signed, pointing out errors in your column dealing with the CRS report. The report was not clas sified. None of the information in Irvine’s letter was classified. Irvine received no compensation for writing the letter for AIM. No Government materials or facili ties were used in writing it. There was no violation of law or ethics. Irvine does his work for AIM nights and weekends, which is his right. You were so informed by him in a letter dated December 11,1974. You were also informed by Mr. Van Evera on March 3, 1975, that Mr. Irvine would reply to questions that you might submit in writing. You have been told by letter and mailgram why Irvine does not wish to have any oral communica tion with you or your representatives. This relates to your propensity to take statements out of context and to our belief that you tape conversations without notifying other parties to the conversation. We have informed editors of 400 papers that carry your column of these facts, suggesting that they evaluate what you say in the light of this information. You may wish to make a similar evaluation, avoiding any charge that you might have acted maliciously or recklessly. You should also know that we are thinking of raising in public the question of whether or not it is a crime to point out errors made by Jack Anderson. How does the kind of harassment you have carried out against Mr. Irvine fit into the picture of Civil Liberties and the encouragement of free and robust debate? We feel that this is a question that Civil Libertarians must ponder. F r a n c i s G. W i l s o n , President, Accuracy in Media, Inc. Mr. A n d e rso n . Anyone who sets himself up as a press critic, Mr. Chairman, should have no reason to hide his financing. Yet Accuracy in Media carefully conceals the sources of its money, because the list of its contributors would betray a blatant conflict of interest. The Ir vine unit has solicited and accepted financial contributions from the beneficiaries of its attacks. It will take subpenas, Mr. Chairman, to get the full story. We can prove only that AIM has sent the oil companies reprints of its attacks upon those who write unfavorably about the oil industry and has received back oil contributions. And we offer a document showing this as exhibit No. 19. Chairman P a tm a n . Without objection, it may be inserted here. [Testimony resumes on page 56.] [The attached document was submitted for the record by Mr. An derson as exhibit 19:] 50 E xhibit 19 [Samples of material sent to oil companies and presumably other business soliciting funds.] ACCURACY IN MEDIA, Inc. ABRAHAM H. KALiSH Dear Friend: We would appreciate your examining the enclosed material, with the hope that you will then give your support to our efforts to help ensure the people’s right to know the truth. Sincerely. "For evil to triumph, it is only necessary that good me: do nothing". 425 - 13th Street, N. W. Washington, D. C. 20004 202-737-9357 Suite 1232 51 “IS T H E R E R E A L L Y A N E N E R G Y CRISIS?” That question was posed in the lead o f a front page article in on January 14 ,19 7 4 . The author, financial writer Edward Cowan, went on to ask: “ Or even a genuine shortage? Is it all a contrivance of the oil industry? Or just an honest but ghastly miscalculation by the Government? TheNewYorkTim es These questions are being asked, and there is confusion and doubt in the public mind. Why? The usual answer to a question o f this kind is that the public has not been given all the facts. In the case o f the energy crisis the news media in general appear to have done a poor job o f alerting the public to the oncoming crisis. Once the shortage became a matter o f concern to all, some elements o f the media have actively spread doubt and suspicion in the public mind, hinting or stating that the crisis was a phoney perpetrated by the big oil companies. Although discussions o f the coming energy crisis have appeared in specialized publications such as in recent years, relatively little o f this found its way into the mass media. Until very recently the idea that we might face a fuel shortage was generally poohpoohed. Journal Oil&Gas In 19 70, Lawrence Rocks and Richard Runyon, two scientists from Long Island University, thought it would be a good idea to alert the public to the problem by writing a book on the subject for the general reader. They tried to interest half a dozen o f the top publishers in the country in the idea without success. They were told that their fears could not be well-founded. One publisher said that if we were faced with an energy crisis the government would have told us. Lacking any word from on high, they simply were not interested in looking at the facts marshalled by Rocks and Runyon. Rocks and Runyon finally found a publisher. Their book, TheEnergyCrisis, (Crown, S2.95 in paperback) was finally published kite in 1972. It explained in simple, stark terms why an energy shortage was looming ahead, what it would mean for our economy and what we had to do to overcome it. TheTim eso f Wichita Falls, Texas gave* this book a review of 12C0 words, saying that it concerned the most profound problem facing our civilization today, “ one that will soon affect every man, woman and child in the United States.” TheTim es o f New York City also reviewed the book, saying that it was “ generally harrowingly convincing.” However, it devoted only 350 words to this book, and in the same review it devoted 630 words to a discussion o f a book by a young leftist who took the line that the laige oil companies were deliberately “ orchestrating” fuel shortages in order to raise prices. Few other newspapers called the attention o f their readers to It appears not to have been reviewed by the Washington, D.C. newspapers, and which would have been the best channels to bring it to the attention o f government officials and members o f Congress. TheEnergyCrisis. Star, ThePost The Nor were the authors in great demand to appear on television and radio talk shows. Only after the Arab oil embargo made “ energy crisis” a household phrase did such invitations begin to pour in. TheNewYorkTim es On December 23, 19 7 3 , said: “ Much o f the skepticism about the energy shortage seemed to come from the suddenness with which it began to dominate official pronouncements and the news.” The experience of Drs. Rocks and Runyon and the news media treatment o f their book shows that awareness of the energy shortage was not lacking among those who took the trouble to examine the facts. Its “ suddenness” was at least in part the result of the failure o f the news media to thrust these unpleasant facts upon the public often enough and prominently enough to bring about general awareness. 52 In addition to appearing in The New York Times Magazine, the Hume article was sent out to papers subscribing to The Times News Service-225 papers in the U.S. and 13 7 abroad. HOW H U M E A N D S H E A R E R M IS L E D The implication that the oil companies reaped exorbitant profits in 19 73 and that this is evidence that they rigged the oil shortage is common to both the Hume and Shearer articles. It is probably the argument most frequently used by the “ conspiracy theorists.” Brit Hume put it this way: Exxon, the nation’s leading energy company, has seen its profits rise more than 80 per cent in the third quarter o f this year over the same period a year ago. None o f the top five oil companies has reported third quarter profit increases o f less than 50 per cent over last year. Gulf, the third-leading oil producer, says its profits are up 91 per cent from the third quarter of last year. There are some who believe the major oil companies conspired to bring about these results. Hume did mention that oil company profits had been “ sagging” for several years. Shearer did not. The third quarter o f 19 7 2 was a very bad quarter for oil company profits. Tne third quarter o f 19 73 brought a sharp recovery, partly because o f a partial unfreezing o f prices in the spring. By comparing a poor quarter in a long string o f poor quarters with one in which there was some catching up with other industries, the critics gave the impression that the oil company profits were exorbitant. However, i f one looks at the rate o f return on equity, one finds that the big gains for the oil industry in 1973 at best brought the rate o f return up to the average for manufacturing industry. Moreover, the profit increases recorded by the oil companies were actually lower than increases recorded by some other corporations much in the public eye. For example, the following table compares the profits o f certain corporations in the first 9 months o f 19 73 with the same period the previous year. % increase The New York Times The Washington Post American Broadcasting Co. Top 1 1 Oil companies in 19 73 (9 mos) 98.3 59.4 42.3 43.0 % return on equity yr. ending 16.6 16 .5 17 .1 11 .9 It appears that investors in the oil companies could have found much easier ways o f increasing the return on their investment. For one thing, they could have bought up The New York Times, The Washington Post and A.B.C. It is clearly highly misleading to read anything sinister into the 19 73 rise in oil company profits. The energy companies are going to have to attract huge amounts of capital if they are to make the costly investments in new refineries, new mines, new wells, pipelines, coal gasification plants, etc. that will be needed if we are to have adequate energy in the years to come. The flow o f needed capital to finance these investments would be impeded if the profit prospects o f the industry were considered to be poor. Last year’s reversal of the downtrend in oil company profits is therefore favorable from the point o f view o f attracting the investment needed to Overcome the energy crisis, ^ j 1* *• ^DID THE OIL COMPANIES TURN OFF THE SPIGOT? ‘ T h e major oil companies were given a free hand. They have used that hand to turn the oil spigot off and on at will and manipulate and gouge the consumer.” That statement by the governor o f Massachusetts was published in The Times on January 1 7 ,19 7 4 . Thinking that the governor had discovered some evidence that no one else had spotted, AIM put in a call to him to learn the basis for his charge. We were put in touch with an aide to the governor, John Drew, who informed us that the statement was based on information obtained from Time, Newsweek, NBC News and figures published by the oil companies themselves. He could not refer us to any single source, but he promised to send a document that he had helped draft that would make it all crystal clear. AIM is looking forward to seeing the governor’s documentation. In the meantime the closest approach to documentation o f the charge that we have seen is The New York Times article by Brit Hume. It provides an excellent illustration o f the selective use o f data to support a case that would not have held water if additional information known to the author had been included or given greater weight. Let’s analyze Brit Hume’s case point by point. 1. Hume states corrcctly that in September 19 72 inventories o f home heating oil and crude oil were dangerously low and that a serious fuel shortage seemed inevitable as winter approached. He then said: “President Nixon authorized the petroleum industry to import more foreign crude ofl. It was the second time in five months he had increased the allowable imports o f foreign oil, which had been under tight government restriction since 1959. Hume did not point out that most o f the September increase was not an outright boost in import authorizations, but only permission to borrow against 19 73 import quotas. 53 report on the same subject by a reporter for the Washington CBS has revealed nothing whatsoever about its own coverage o f the Hue massacres, and neither Sevareid nor CBS has presented a single piece o f evidence to show that the reporting o f the massacres was anything but scanty. Indeed, Sevareid has said that it would require considerable research to check his impression that the coverage was heavy, and he has said that he is unwilling to undertake that research. This is tantamount to an admission that he criticized Solzhenitsyn on network television without having first checked the facts. Post. Fred Friendly, a former president o f CBS News, also discussed this case in a January 10 speech in Washington. Friendly, who has long been partial to one-sided TV documentaries, thinks the NBC program on pensions was great. He deplores the FCC decision, but he did say this: Sirictly on professional standards, one can regret that NBC News in its fairminded tradition did not choose to use its own air to ventilate the issue once the controversy arose. This is an issue o f continuing importance, especially on Capitol Hill. NBC had every justification to be proud o f its investigative journalism. My criticism is that it got on its high horse in its unwillingness, on its own terms, to devote any additional prime time exposure to this continuing controversy. The vent o f more air-time is the only escape valve for a pressurized situation. NBC News “ owned the story” of pensions. Pursuing it further instead o f smothering it might have kept the FCC out o f its newsroom, and NBC News out o f the courtroom. \\ A few weeks ago, we suddenly realized that we were in a very precarious financial condition. We had funds on hand to keep operating at current levels for only six more months! So we outlined the situation and appealed to our friends for funds. The returns have been much more generous than we had even dared to hope. Including some $8,000 we had been given previously in response to a special appeal for funds for legal expenses, we have received to date almost $50,000. What makes this especially appreciated is that the total additional expense involved in raising this sum was about one per cent o f the amount received. This may well have established a world’s record, and is especially welcome since it indicates to us the appreciation o f our friends for what we are doing. We know that we should send each donor a special letter indicating something o f our gratitude for this wonderful response, but we have a feeling that they would much prefer to have us spend this extra time and effort towards the achievement of our mutual goals. So we give you now our most heartfelt thanks and the very best wishes for the New Year. Mr. Friendly, we have news for you. That is exactly what AIM and the FCC tried to tell NBC News. SEVAREID vs. SOLZHENITSYN Many AIM supporters have written to CBS about Eric Sevareid’s inaccurate criticism o f Solzhenitsyn’s charge that the Hue massacres were but lightly noted and little protested in the West. We know o f only one person who got a reply from Sevareid himself. In response to Mr. Albert F. Gordon, Vice President o f Kidder, Peabody & Co. o f New York, Sevareid said: “ I thought the Hue massacre was heavily reported; you apparently thought not. This is a matter of differing impressions, hardly subject to precise measurement without plowing through the whole o f the U.S. press and radio and TV coverage in that period, which I do not propose to undertake.” Commenting on this in a letter published in Editor & Publisher o f Jan. 5, 19 74, Reed J. Irvine o f AIM said: We have presented to CBS and Eric Sevareid considerable additional evidence demonstrating that Solzhenitsyn was absolutely correct in his criticism o f the scanty attention paid to the Hue massacres by the news media in this country. We invited CBS to tell us how heavily they covered the massacres in their programs. THANK YOU, FRIENDS OF ACCURACY IN MEDIA YOU CAN HELP Become an AIM Monitor. If you hear an inaccurate statement, send us the exact time, station and wording. \ Also send complete clippings, as well as all the information and references supporting your view. % We have found that gift subscriptions are one o f the best methods for extending our influence. We offer a special rate o f $5 which is retroactive. If you have already made a donation to AIM, merely send us names and addresses o f your friends. ACCURACY IN MEDIA, INC. is a non-profit, educational organization. Gifts and contributions are tax deductible. Francis G. Wilson, Pres. Abraham H. Kalish, Exec. Sec. a sm {or Accuracy To err is *hould never do it. in the news of a WashingtonThis is the stern th based o rg a n a ^ n caAUd Accuracy w Media, and it is*ieiai » r thfi ad. ontochaHengeany ag0 JT°X Z tC — i 4 % ^ c y ,n C ^ $ „rtii«<nen«. Found'dI three V VnanonproSt^AWo^ ^ a votuntctr IS Qi contributions. It budget ot s i 5.000 «elc< ou. *rro" €( °/J( reporting and *« } '•* *C|«. Or'XXty) 5e^/- IOITOH A PUU1SHM BrinUey (o la * Washington “ \iliening the O S. Post™ because lt spent 10 , ‘,,h C" . T h W s of “ regular . a * _ l about two-t mi’.itary purposes W » come” f<pr . - f urc was mu.* I n c o m e !a x « > ,l n J « « V A,M mon> Ha,phong Hanoi tnat the u .j . . .... ,.vi»rktn& checking without harbor was place anothout the f a c t s - M . areino C o lu m n ist ^ci]c^ ns\0 €f ‘Uiw 'w n ^ it h V ^ a n e t y of m inorm - Tom V* n.W<-r fhe oast two years. accu racie s ovjer ih p u is prone to Crif.cs of v.ith cr,u* icVing nitpic' an d p r e o ^ P ^ j J ^ than e rc .n n g new s l ^ f ^ ebraharn K alish . 66. the' or g^ a^ r o r*th^VJ-S. Can ¥©y Trust The Hew ¥©rk Times? We rals* a question concerning th* report* of Anthony Lewis. on* of th* lop wrltsrs ot Th# New Vork Tima*. Mr. Lewis' words *p*ak tor th*ms*W**. 1. "Haiphong. May 17—The Norn Vietnam*** say lh*y ar* daaring American mines tram th* Haiphong harbor a* plan** drop tn*r-». and moving ships in and out. Indtpondmtn aovrees give tupport to fhaf slum " Lewi*. The Time* May 16. |Empr>s*i» added Thi* report a t * carried on th* tront p*ga ot Tha Tim** «Y»n though Admint*lral>on official* bad informed th* pspar that it wa* talM Their denial was included in th# i lc ' f j 2. ’’The only way to be certain (about the min*»we*ping) would b* atlandad inva*tigation or observation ot th# harbor, which th* North Vietnam*** would not allow. So th* clawn cottid b* m*r* bravado " t*wi». The Ma» 20 . 3. "Th* con**n»i/» ot tsrsign ob**rv*ra h*ra (Hanoi) now i» that American m iiM f ha« an*c tivsty cto**d North Vi*tnam port*." Lewi* Th» Tim**, May 23. Fiv* day* altar th# disputed report was tmnt pag* rvew* in The Time*. Lewi* reported the con s«n*u* that it was erroneous H* never identified the "independent source*' that were *upp«i«d to have given it support Why did this v*t*ran newsman report Hanoi a claim when Hanoi would not p*rnmt the inspec tion tnat he knew was essentia* to its verification’ A clue to the answ*r may b* found in thi* pas*ag* from Lewis' May 13 column: r obfcgalion*. before s professional association, schoat or In form ation p r ^ n . p rof w ' h' ute their stones » « *jU strive to accurate “ Mi,,..,. , " ’ •■“ . I f n i . . 11 V { r ) " I>.iw /u * '*/ r , ' ° t n I i os{ v • * , , H 'O o i > "f ll,v u Pnn'l'-‘ltn W" v/» ' ^ ' ' ,r .....•'■‘"■''•fd,,. Ar/,^r»c r. i „ V r& m - -J "jru,r-'t,n" Ot '•-"••••"w <»>?. . <ri. . r ACCURACY IN M E D IA , Inc. 5 - 13 :h Sirw t. N. W. Washington, D. C . 20004 2 0 2 -7 3 7 -9 3 5 7 th* cru*ad* comes before his obligation to report the new* accurately end objectively. This might esptain why L*wi« told th* readers of The Tim** on Aprif 19 that th* IM M Su ie * had never offered total withdrawal ot troops from Vietnam in return for tne POWa, ' even in th* secret talk*." The tact is that President Nixon revealed thu the United State* had oMervd to agree to a deadlin* for withdrawal ot all American forces in *schange to* th* relea** ot atl prisoners of war and a ceas*lir* in the secret talus in hi* te»evi**d address o» January 25. Th# preeident aald North Vietnam had refected th* offer, continuing to msi*t that we overthrow th* South Vietnam#** Government.'' Ardent advocacy which leads !o misleading repo-Mng should not be tolerated by any r*spon. sible newspaper. No responsible paper should refus* to corroct promptly and promln*ntty serious errors when they are pointed nut. T ie New Yori Tim** has refused to print our letten ---r* proteslinf e say are numerous serious errors, such a* ihos* cited above, which Accuracy in « Me4re has pointsd o ># lthi^i* n obi*cti»* o. ____ ___ _______________...» If you thlnh you see reporting in The Times h \ ii not Editor and tell him so. Send us a copy ot your 4M||^|jMbnvemenl. We w»M send you infsrmetten about serious errors in th* new* media V *# Suite 12 3 2 If your paper carrlea tt would do your readers a service in calling this mes sage to their attention This statement wes originally carried in The Afew York Timms of Jun* 30. 1372 and ha* b»»n checked by The Time* for accuracy. It Is brought to you a* a public service by Accuracy in Media. Inc.. Warner Bldg.. We*hington. 0 . C 20004. WHMT IMF/ SM¥ MBOMF a c c u r a c y in media , inc . A c c u r a c y in M e d ia , In c. (A I M ) w a s fo u n d e d to c o m b a t in a c c u ra c ie s an d d is to rte d re p o rtin g of th e n e w s b y the m a jo r m e d ia . It has g a in e d n a tion a l attention b e c a u s e of its h ig h ly p ro fe s s io n a l a p p r o a c h a n d Its fe a r le s s n es s in ta c k lin g s u c h m e d ia g ia n ts as T h e N e w Y o rk T im e s . T h e W a s h in g to n P o s t a nd C B S , N B C a n d A B C . W e think A IM d e s e rv e s y o u r s u p p o rt, but d o n ’t take o u r w o rd fo r it. R e a d th e s e u n s o lic ite d co m m e n ts a b o u t Al?rl a n d its w o rk , then d e c id e fo r yo u rse lf. . . . “ What this country needs is not a good five cent cigar, but a coast-to-coast awareness that Accuracy in Media, Inc. is the greatest thing to come along since the invention of the printing press.” Alan Courtney, in the M iami Journal. “Accuracy in Media is a non-profit, tax-exempt organization launched a few years ago by a group of con cerned citizens who had become increasingly fearful that the content and presentation of the new* by many sections of the media were undermining the democratic process and threatening our freedom. . . . AIM has not blinked at taking on some of the leading lights of the liberal establishment. Perhaps its chief claim to fame has been its confrontations with the Columbia Broadcasting System.”— B a rro n ’s, M arch 6, 1972. “AIM keeps us on our toes.”— Charles Seib, M anaging Editor, W ashington S ta r-N e w s, quotad in W all Street Journal, M ay 1,1973. “ Nice going!”— William F. B uckley, J r., com m enting on an A IM critique of an article in National Review. “ It gives me great pleasure and pride to know that an organization such as yours is keeping an eye on our national media and addressing those obvious problems which occur. Keep up the good work!”— Rear A dm iral Jerem iah A. Denton, Jr., U S N (re lu m e d P .O .W .). “ I believe you must be the most thorough reader that The Mew York Times has. . . — Arth u r O chs S ulz berger, President and Publisher ot The N e w York Tim es, in a letter to A iM , Ja n u a ry 29, 1S73 “The aims of your organization are admirable and I appreciate them because they will result in fewer of these occurrences in the future.”— Arthur “ R e d " M otley, Chairm an of the B oard, Parade M agazine, co m m enting on error in Parade pointed out b y AIM , M ay 30, 1972. “This is a singular, scholarly and valuable effort undertaken by private citizens to seek accurate, objective, Ron-biased news reporting and commentary.”— Rep. Ph ilip Crane, co m m en ting on an A IM Report, C o n gressional Record, A ugust 5, 1971, p. H 8099. To those who se« the menace in biased news, I suggest you subscribe to the AIM newsletter, which keeps close tabs on the; media.— M orrie Ryskind in his syndicated co lum n . g Why not take Morrie Ryskind’s advice? Send a contribution to AIM to enable it to continue the good a work it is doing. We will put you on the list for the AIM REPOST and the recording angel will put a gold star by your name, a ta a 5 5 S e n d y o u r c o n trib u tio n to A IM n o w 1232 Pennsylvania BIdg. ! 425 13th Street. N.W. Sut>scnb' to tchington. D.C. 20004 i aim . . . Accuracy in M*di», Inc. (AIM) i» a non-profM, nOfT p»rti»»n educational organization. Your support is invited. Contributions ars Ua-deduetibla. * Peport . J . { ! En clo sed ts S10 for a year's subscription to the AIM Report. ~ I also wish to support your efforts to improve- media accuracy. E n c lo se c is my contribution ol S (contributions are tai-deducti&le) . . . City '*BU>B3ffaB«aBSaa8aBBBa8UEB»a»BaXIflB0a>flflB»BR¥*«filKaKKV2*B8B&>B8CSUauaaiaa81VB0BVB8BBB*aSXBBBVU!tB>BJSSBBBil&UUflttfc;BttaBX;BaBOtti 55 56 Mr. A n d e rso n . AIM is also a staunch defender, not surprisingly, of the bankers. The love affair between the bankers and the Fed, of course, has been an open secret for years. In one of AIM’s publications, it quotes boastfully from an article which reports that “Accuracy in Media * * * intervened with CBS on behalf of the bankers.” And we offer this as exhibit No. 20. Chairman P a tm a n . Without objection, it will be inserted. [The AIM Report of January 1974, submitted by Mr. Anderson as exhibit 20, follows:] EXHIBIT 20 "W'Yi Published by jJ£ M d T i n r :ui ACCURACY IN MEDIA, INC. 425 1 3 f h Street, N.W., Suite 1 2 3 2 Washington, D.C. 20004 • Telephone: 202-737-9 357 pjy wunin o - days, inis is no doubt one reason the Council does not get many com plaints.) The NNC responded promptly to AIM on November 2, 1973. Your article was in accurate in saying that the decision came after three months of correspondence. The decision had two points: (1 ). Since Mr. Sevareid’s statement was labeled “ commentary” the NNC did not consider it as falling under its purview. (2 ). The Council thought that the pub lication by The New York Times of two stories on a cold-blooded massacre of over 5000 innocent civilians could be considered “ heavy” coverage. It thought that the con trast with the incomparably heavier cov erage of the My Lai massacre of 109 ci vilians was irrelevant since “ the My Lai massacre involved the killing of defense less civilians by American soldiers, an act unnrecedented in the history of our coun try.” question was. which was correct. Accuracy in Media informed Mr. Sevareid that we could find only two stories on this terrible massacre in the New York Times in 1968. There was no editorial com ment and no photos. By way of contrast, we noted that The Times index for 1969 had no less than 3% pages of entries on My Lai even though that story did not break until the 11th month of the year. We have presented to CBS and Eric Sevareid considerable additional evidence dem onstrating that Solzhenitsyn was absolutely correct in his criticism of the scanty at tention paid to the Hue massacres by the news media in this country. We invited CBS to tell us how heavily they covered the massacres in their news programs. CBS has revealed nothing whatsoever about its own coverage of the Hue mas sacres, and neither Sevareid nor CBS has presented a single piece of evidence to 2-A—THE DETROIT NEWS—Tuesday, Jan. 8, 1974 tionai iNews Council apparently thinks that reflects e;ood news judgment. Accuracy in Media does not. Nor do we think that the issue is “ petty,” the characterization ap plied to our complaint by Margaret Fisk. Incidentally, your article did not men tion that the complaint on Newsweek’s arti cle, “ Slaughterhouse in Santiago,” was also taken to the NNC by AIM. We have now filed a total of five complaints with the NNC to test them and to help them out by giving them something to work on. We could give them a lot more, since we have not found the same lack of specific, ac tionable complaints that the NNC has en countered. We have taken up over 130 complaints in 1973. Our budget is about one-tenth that of the NNC. R eed J. Irv in e (Irvine is chairman o f AIM, Washington, D.C.) January 5, 1974 . . . . CBS gives bankers time to reply By JOHN E. PETERSON Newt Washington Buraiit WASHINGTON — The CBS television network, in an unprecedented gesture, volun tarily has agreed to correct errors made in a 1973 documentary series on American banking. A CBS spokesman yesterday conceded the series contained a number of “ fairly serious factual errors” and said the network will allow the American Bankers Association adequate time on the CBS Morning News to “ set the record straight.” The five-part series, “ Report on Banking,” was televised as a week-long feature of that show last May. The spokesman said the network’s decision to correct the errors was the first time CBS had agreed to make time available for corrections without a specific order from a court or the Federal Communications Commission. The American Bankers Association had filed a complaint with CBS News shortly after the series was televised last spring. The bankers charged the documentary was distorted in such a way as to leave the public with the impression that the Federal Reserve Board allowed banks to lend money which they do not have at exorbitantly high interest rates. The bankers’ group specifically took excep tion to these “ glaring” errors: • A statement that the Federal Reserve “ allows banks to create money out of thin air.” • A statement that the Federal Reserve permits banks “ to lend out seven times the value of their checking account funds and 9% times the amount of money deposited in savings accounts.” • A statement that the bankers appoint members of the Federal Reserve Board, which has the power to regulate the banks, when in fact members of the board are appointed by the President. At first, CBS rejected the bankers’ request for time to correct the errors. CBS called the errors “ relatively minor” and maintained that efforts to correct them “ would be neither roductive, nor intelligible, nor essential to the asic understanding of the issues discussed.” At that point, Accuracy in Media, Inc. (AIM), a public interest group based in Washington, intervened with CBS on the behalf of the bankers. AIM pointed out that statements contained in the documentary impugning the integrity of the Federal Reserve Board were "clearly subject to the personal attack provisions of the FCC’s fairness doctrine.” Under the fairness doctrine, radio and television stations and networks are required to provide air time to individuals or organizations who are attacked on their programs. In agreeing to AIM’s demands that it provide the bankers free time for correction of errors, CBS insisted that the errors, while “ fairly serious, do not in anyway distort the overall picture of American banking contained in our report.” 57 Mr. A n d e rso n . We have been told, but we have no proof, that AIM has also received banking money. If this is true, the conflict would be compounded by the fact that Irvine is a high official of the Federal Reserve Board, which is supposed to regulate the banks. It is a pos sible issue that the subcommittee may wish to explore. Standing behind Irvine is a board of directors composed in the main of ex-military men, former ambassadors, rightest ideologues, retired Red hunters and subsiding cold warriors who, estimable though they may well be, are miscast as a press tribunal. Let me identify a few of them. David Martin, the Senate Internal Security staff member whom I mentioned earlier, is a former Communist who has become a profes sional anti-Communist. He served for a while on the staff of the late Senator Thomas Dodd, Democrat from Connecticut. Lewis W. Walt, whom I also previously mentioned, is a retired Marine Corps commandant and crony of Senator James Eastland, Democrat from Mississippi. Shelby Cullom Davis, the U.S. Ambassador to Switzerland, and a former rich investment banker. Elbridge Dubrow, a former Ambassador to Vietnam, and cochair man of the rightwing American Security Council’s Board of Strategy. Wilson Lucom, an apologist for the Chile dictatorship. Eugene Lyons, a Readers Digest editor who has been active in the American Conservative Union board. Murray Baron, a former AFL-CIO official, who worked with the rightwing Committee for One Million. Dr. Francis Wilson, AIM’s president, a rightwing academic, who fought against lowering the voting age. He has also been active in Young Americans for Freedom and the American Conservative Union. And I would like to submit a memorandum on this subject as exhibit 21. Chairman P a tm a n . Without objection, it will be inserted into the record at this point. [Testimony resumes on p. 65.] [The memorandum submitted by Mr. Anderson as exhibit 21, follows:] 58 E x h i b i t 21 /,r?t.\j‘3 fcr Arnsrizjn Democracy, inc. Z-jlii I • 1753 Ps.tr s/l-'srila A •/*., N. V/. . Wothinglon, D. C. 2 GC03 • A nn Coda 20 2 • March, 197b H E N O R A N D U H •10: SUSTAINING ASSOCIATES, IAD FROM: BOB KASEN SUBJECT: A Report of the INSTITUTE FOR AMERICAN DET-30CRAGY Concerning ACCURACY IN MEDIA (AIM) k25 - 13th St*, N. W, Washington, D, C* 20C0U (202) 783-9357 BACKGROUND Organized in 195?, and launched officially in June, 1971, Accuracy in Madia (AIM) is a non-profit., tax-exempt organization whose main purpose is to act as a watchdog of ’’Big1* Media, principally the three major networks and major newspapers like The Washington Post and The New York Tines» In the June 18, 1973 issue of the Right Report edited by conserva tive publicist Lee Edwards, executive secretary Abraham H. Kalish, says of AIM’s purpose: ,!The news media have taken on the task of watchdog of the government • But obviously, the news media also needs a watchdog over them. We have no doubt that in any contest where truth and falsehood grapple, truth will triumph; but especial ly in an electronic age, truth should be allowed to present its case." Kalish and AIM argue the media is biased toward the ’liberal-left" point of view, When charged with conservative bi*>s, he counters with: "I make a special effort to find conservative error, but we can’t make up cases if they don’t exist or if we don’t get any ccrrolaints," (From a Wall Street Journal front page stoiy* May 1, 1973). One of Kalish’s favorite examples of his fair mindedness in process ing complaints is to point out AIM has persuaded the National Review to correct four errors, including one against V/lllian R, Anderson, when the Institute for American Democracy’s new president was still a Tennessee Congressman in 1972, AIK is a voluntary citizens organization operating with a staff of 30 volunteers (TIME magazine, 1972) and a budget of more than $50, 000. -more- PROVIDING KN O W LED G E TO HELP SAFEGUARD DEMOCRACY 59 it was founded b 7 Reed J. Irvine, a former J^arine Corps Intelligence Officer ’and a long time ecor.onist with the Federal Reserve Board. Dr. Benjamin Ginsburg, a fjr*:sr government employee, also helped found the organisation, serving briefly as AIM *s first executive secretary. PERSONNEL In fact, AIM i3 a one-man organization, achieving attention based on the efforts of its executive secretary, Abraham H. Kalish, 6 8 , of Silver Spring, Md, Xalish, a Harvard Classics Major, was a feature writer for the U. S. Information Agency, 19U9-1958* From ’ £ 8 to 1971, when ha retired, Xalish was a professor of corrssonicatioira for the Defense Intelligence Agency (DIA). DIA has been thought of as tha Defense Department’s equivalent of the State Department’s Central Intelligence Agency. ■While at DIA, Xalish*s job was to teach selected Pentagon officers "to write clearly, concisely and accurately by making them prove or disprove various pub lished statements*" But the job was abolished, and Kali3 h challenged the deci sion, lost and decided to retire to live on his government pension while working for AIM at an annual salary of $100. Kalish has been active in Montgomery County politics, running and losing twice in 1968 and 1970 for a seat on the Montgomery County School Board, He was a candidate on the Conservative People’s Action Coraaittee ticket* Dr. Francis G. Vftlson, professor of Government emeritus at the University of Illinois, is AIM's president. Wilson, the author of several political science book 3 , taught at the University of Illinois from 1939 to 19o7 and has led a group called the Coranittee for Constitutional Integrity which is trying to per suade state legislatures not to lower the voting age. AIM’s Vice President is Alphons J. Hackl, president of a Washington printing company, Colortone Press,and Ox Acropolis Books* The latter, a publishing house, whose titles include I?To Build A Nation," by President Park Chung Kse of Korea, ’rv:'hat Generation Gap?" by J. L, Robertson, vice chairman of the Federal Reserve Board, and ’’The News Twisters," a study of the three major networks* treatment of the 1 9 6 8 presidential election over a 6 0 -day period. A Washington investment counselor, John K. McLean, serves AIM as Treasurer and David S* Lichtenstein is General Counsel* Lichtenstein retired as a senior attorney with the Federal Communications Commission and before that served with the Federal Power Cor-mi33ion and the Department of Labor* NATIONAL ADVISORY BOARD Hurray Baron, labor relations consultant in New York City and former AFL-CIO of ficial; associated with Freedom House, New York City. Elbridge Dubrow, former Ambassador to Vietnam* co-chairman, American Security Council Board of Strategy; full tirae employee American Security Council, Institute of American Strategy* Dr., Frank Trager, former professor of International Affairs, New York University; au^ror, "Perspective on Vietnam," "The Nixon Doctrine: Asia"; director of studies, National Strategy and Inforaation Center* Edgar Ansel Mowrer, former foreign correspondent, now news editor, American Security Council newsletter. 5 0 -3 6 5 0 - 7 5 - 5 60 Lyons3 retired editor, Reader'3 Digest’ author, "Assignment in Utopiaj n xrct.e biography of Herbert Hoover, and a book on the Soviet Union, "Worker's F3.r2.di3 2 Lcsb," Dr. William Yar.de11 Elliott, Williams professor of Government, e~eritu3} Harvard University, Elliott sailed on the National Planning Board of the National SeCLiritv Council front 1953 to 1957, and is the author of ^Television’s Impact on American Culture," Morris L* Ernst, New York attorney sir.ce 1915, worked in the field of civil liberties and labor relations. Author of T* ’Ths First Freedom," Hear Admiral William C» Mott, retired, former assistant chairr^n, Joint Chiefs of Staff and Judge Advocate General* Whan ha left the IIa~.r, Mott went to work as Executive Vica President of the Independent Telephone Association, General Lewis W« Walt» retired* f omer commandant, U. S* Marine Corpso Shelby Cullon Davis, U. &• Ambassador to Switzerland* Jr>~ L* Robertson, vice chairman, Federal Reserve Board* Harry B„ Gideonese, chairman, Board of Directors, Freedom House* Lawrence Fertig, founder, Lawrence Fertig & Co*, author, "Prosperity Through Freedom,” chairman, board of trustees, Foundation for Economic Education. John S. Tilton, former president Suburban Press Foun dation, author, "Blind Behemoth,11 critical study of Press, 1972* 195U-1968, owner, three weekly newspapers, suburbs, Twin Citis3, Minnesota. Now writes weekly column for that group. Walter V/* Seifert, professor, School of Journa lism, Ohio State University. Dr. Frederick Saits, president, Rockefeller University, New York City. ACTIVITIES The National Broadcasting Company is appealing a ruling by the Federal Ccrcmunications Commission last Fall requiring the network to 1’ balance” a 1972 documentary, "Pensions: The Broken Promise." The FCC ruled on a complaint filed by AIM's Kalish who said the program gave a "grotesquely distorted picture" of the nation’s private pension systems (TIMS magazine, Feb. U, 197U). Kalish contended that the alleged failure to balance the show violated the Fairness Doctrine by presenting only one side of a "controversial issue of public impor tance.1' (TIMS, Feb. li, 197U). The FCC ruling has prompted the network to seek a reversal, in effect focusing new light on the Fairness Doctrine, an important guarantor issues of public importance will receive fair treatment* NBC is arguing the documentary does not raise Fairness Doctrine questions, because the existence of some inadequate pensions - the program’s subject - is a fact, not a "controversial" issue. *** AIM helped persuade the American Broadcasting Co. to correct five factual errors in a 1972 documentary, "Arms and Security: How Much is Enough?" Kalish said he "welcomed" the corrections, but said that under the Fairness Doctrine ABC still had the obligation to present opposing viewpoints. An ABC official said of the errors: "There was one bad error, but the rest were trivial©" (Wall Street Journal, May 1, 1973.) Hr * * AIM iv’on a concession from the New York Times columnist, Anthony Lewis, in 1972, after AIM placed an advertisement in the Times criticising Lewis for reporting 61 that :he North Vietnamese night 03 clearing mines from Haiphong Harbor as quickly as U. 5. plants dropped them. Leuis said, “Some of the AIM criticLcr. was justified, indead I filed a corrected piece from Hanoi immediately ar.d 2 or*. c l it was Quits wrong,!l * -* -xAIM spent a reported $U,2CQ for a series of advertisements in Post. LY.cer the heading "AIM VS THE POST, Letters the Editor Print,!i The letters dealt with a variety of issues including tion Cca-^aign Law Violations ar.d Aianesty. The Post responded torial arguing it had no obligation to print the many letters during a three-week period* the Washington ••• Refused to TV bias, Elec with an edi AIM had submitted ##* When the Columbia Broadcasting System offered a series of programs, "Report on BarJdr.g,11 in Hay, 1973, AIM complained to CBS the program contained a series of errors, saying alleged false statements could lead to a charge the network had violated the Fairness Doctrine. At first, CBS rejected the complaint (AH 1 R2PQRT, Dec* 1973) but later offered the American Banking Association time on a C3o Homing News show to respond# *** AHi was turned down by the FCC in mid-173 in another complaint involving the Fairness Doctrine. AIM complained that a WIBC New York radio interview with Alger Hiss in Dec 0 13, 1972, dealt with a controversial issue of public impor tance in a ,rone-sided manner." * * *In the first half of 1973, AIM lodged (AIM REPORT, June, 1973) over 60 complaints. The New York Times led with 18 complaints filed against it, the Washington ?03t was ne:rt with nine. Four complaints of inaccuracy were filed against the Wash in gton Star-News3 and AH! said complaints were also filed against the New York Daily NewsV ‘ The Daily Oklahoman and the Orlando Sentinel Star. In ?rths world of TV," AIM filed four complaints against NBC, and one against V2JBC radio, New York, the Hiss interview. Also AIM questioned two CBS and one A3C program in the same period. Public television wa3 complained about four tiines and AIM appealed adverse FCC rulings on complaints filed earlier# In the magazine field, AIM in the first half of 1973, complained about TV Guide, Playboy, the Columbia and St. Louis Journalism Reviews. *** According to AIM REPORT (June 1973) AIM has compiled a list of the leading syn dicated columnists carried by some 1,000 daily newspapers in the United States. AIM says it has started writing to these columnists when it spots an error and goes on to urge its supporters to ‘'keep this capability in mind.” 62 brought a Rand Corporation consultant to V/ashington in 1973 to participate in a televised discussion of vhsthsr a blood babh would follow a Communist ti::20 V 3 r of V i e t nan, Kalish told Martin Agronsky, host of WETA~T7‘s “Evening Edition, "that tha consultant vas needed to present "anti-blocdbath” Tiows (W . d Street Jour-nall, May 1, r??3) of othsr participants*” Agronsky said la cer the consul cant, Mrs* Howard Nutt., was a welcome addition, but denied that without her the program would i'-ave been one-sided. *** FINANCES AIM started small. In the year ended April 30, 1972, the first year AIM had tax exempt status, contributions totaled $6 ,1412, expenses $5 ,0 k7 * It’s tough to find out about AIM despite its status and the requirement to file specifics with the IRS* A recent inquiry (Sept. 1973) found no precise infor mation on file* However* sores general figures are public* Of a reported $50,000 income in 1972, $11,000 cm e from foundations* Kalish in dicates that money comes from 6 5 trade associations, professional groups, labor unions, women's clubs, business firms which contributed up to $ 1 0 0 each* The rest, Kalish says, cones from up to 700 individuals, sums up to $5,000* when the University of Missouri School of Journalism tried to find out the source of AIM 1s support, the following response from the Government: "Under the In ternal Revenue Code subsection 6l0U, names and addresses of contributors are not authorized for public disclosure, and we could not therefore make the infor mation available to you*M The request was made under the Freedom of Information Act. Kalish has said he expected 1973 to produce $65,000 income and he was looking forward to $100,000 in 197U* AIN publishes a regular monthly newsletter, AIM REPORT, and promotional material financed by $10 annual subscriptions, plus donations averaging $15 each* Kalish works full time for AIM. His salary is $100 a year* Clerical work is handled on a contract basis, as needed. IN THE RECORD AIK’s activities have been entered in the Congressional Record by the following Representatives i John Ashbrook (R-Ohio), Clarence Brown (R-Ohio), Joel Broyhill (R-7a.), Philip Crane (R-Hl*), F. Edward Hebert (D-La*), G. V. Montgomery {R-Kiss.), William Springer (R-Ill*)* Each of these men have been rated 100 percent on the American Security Council*s National Security Index* 63 COISSJITS •J32--JS 3ary, a 'irnite House Correspondent for Coplay ifaws Service, writing in Se--ju-.ar Quarterly (Dec, 1972) said of AIM: ..."seme of criticisrj.3 do sssra to cc.na across as 'weak and perhaps eveji as -protests against change and the in trusion. of new ideas.,f Cary go53 on to argue^ "there is ample evidence the American press has long been too satisfied, too ready to charge foul and violation of the First Amendment whenever anyone dares question its perogativss,i.there is more one sided reporting than ever before...." Cary says there is need for "compotent, highly informed, running critique of the madia product." 3ut he questions whether AIM is "adequate for that role," Seminar» in an afterword to the Cary piece, questions if "it is really desir able to rsnzsle the watchdogs (like AIM)? Do not they, in their own way, pro vide a necessary affliction of the comfortable? ... better the democratic way, with every man free to speak out, rather than an elite critical oligarchy or an autocratic government censor." ** Responding to a complaint by Kalish, CBS commentator Eric Sevaraid said, Zalish was interested in challenging commentary he considered" ideologically •unsold*" (Wall Street Journal, May 1, 1973) * Kalish counters the bias argument by pointing to AIM’s success in getting the National Review to correct errors, once about William R* Anderson, now presi dent o f the Institute for American Democracy, then a Congressman from Tennessee. *#* Charles Seib, managing editor of the Washington Star-News says, "Kalish is for accuracy as long as it is his kind of accuracy. He obviously represents a right-wing point of view." * ■* * lee Edwards3 editor of the Right Report, and author of "Ronald Reagan: A Poli tical Biography" has said of Kalishj "rie is a bulldog," and '’worthy of support." Edwards made the coranent to a political action conference sponsored by the African Consevative Union and the Young Americans for Freedom in Washington in late January, 197k* ** * Richard Gottschald, news director of WDIO-TV in Duluth, Kirm., writing in RTNDA Cormrdcator a Jan. 1973, said: **A-I-M should be exposed for what it is i essential ly a conservative group established to play judge and jury, and to imply to the public that the media are giving Americans an intentionally distorted view.of or-r governments acto and policies." / 11 111 14th Street, N.VV. Chairman o f the Board Washington, D.C. 20005 (202) 783-4407 Dear Thank you for inquiring about Accuracy in Media. AIM was started in 1969 by a few public-spirited citizens in the Washington area who were deeply concerned by distorted and inaccurate reporting. After studying possible ways of dealing with this problem, they reached the conclusion that they could achieve the best results by simply demanding that the journalists honor their professed dedication to accuracy and objectivity. They saw, however, that this had to be done by exposing specific violations of these principles, not by generalized exhortation. Accordingly, AIM set out to investigate complaints of inaccurate and distorted reporting. It accepts complaints from anyone. If a complaint is valid, AIM seeks a correction. If those responsible refuse to make an appropriate correction, we try to publicize the complaint. There are several ways of doing this. We have been effective, and we have gotten the attention of the media. The editor of one Washington paper was quoted in a Wall Street Journal story about AIM as saying, "AIM keeps us on our toes." The editor of the Washington Post has said that our letters of complaint drive them up the walls. When the journalists know that they may be called to account for bad reporting, they try a little harder to avoid errors. An editor of one of the country's largest magazines has told us that this has been our greatest achievement. Who supports AIM? That is the question we are most frequently asked. The answer is that we are supported bv people like you who are deeply concerned about the influence of the news media and who- respect the effectiveness of the work AIM is doing to keep the media honest. No big foundations bankroll AIM. The only person who depends on AIM for a living is our steno, which means that we run a very lean operation. But we do need money for office space, printing, legal expenses, etc. We publish a fascinating monthly newsletter, the AIM Report, which goes to several thousand people throughout the country. If you send us a contribution of at least $10, tax-deductible, we will send you the AIM Report. But what is more, we will be able to work more effectively to give you accurate and objective reporting. Please help. Sincerely yours, J. R. Van Evera Executive Secretary 65 Mr. A n d e rso n . Believe it or not, Mr. Chairman, Accuracy in Media is recognized by the Internal Revenue Service as a nonprofit organiza tion. This enables contributors to deduct their donations to AIM from their taxes. To this extent, AIM is indirectly subsidized by the taxpayers. AIM’s nonprofit status is also recognized by the Post Office, which makes AIM eligible for reduced postage rates. Significantly, the Post Office turned down AIM’s application twice. Not until the IRS granted AIM its nonprofit status did the Post Office reluctantly go along. And I cite another exhibit and offer it as exhibt 21a. Chairman P a tm a n . Without objection, it may be inserted here. [The letter of the U.S. Postal Service dated Oct. 15, 1971, re garding the mail application of Accuracy in Media, Inc., submitted by Mr. Anderson as exhibit 21a, follows:] E x h i b i t 21 a U .S . P o s t a l S e r v i c e , Washington, D.G., October 15,1971. Our ref.: MCO :ie. Subject: Yours of September 13, I :AS :MR:JEC :w—appeal of denial to mail at special third-class rates—Accuracy in Media, Inc. T o : Postmaster, Washington, D.C. We have reviewed the application and related data submitted by Accuracy in Media, Inc., to support their appeal of your denial of their application to mail at the special bulk third-class rates. Based on the file submitted, wTe concur in your ruling that insufficient evidence has been submitted to establish that the organization qualifies within the mean ing of any of the eight categories or organizations named in Section 134.51, P.S.M. to mail at the special rates. Your file is returned. D a r w i n F. S h a r p , Manager, Mail Classification Division, Finance Department. Enclosure. O c t o b e r 22, 1971. I :AS :M R:JEC :if. Application Form 3624 (Appeal). Re Accuracy in Media, Inc., Warner Building, Washington, D.C. Enclosed are application and supporting papers to mail at the special bulk third-class rates, which was denied and then appealed by this organization. After a review of these files, the U.S. Postal Service is still of the opinion that this organization does not qualify and denies the application to mail at the special bulk third-class rates. O c t o b e r 26, 1976. A ccu racy in M e d ia , I n c ., Warner Building, Washington, D.C. G e n t l e m e n : Based on information supplied, and assuming your operations will be as stated in your application for recognition of exemption, we have determined you are exempt from Federal income tax under section 501(c) (3) of the Internal Revenue Code. We have further determined you can reasonably be expected to be an organiza tion of the type described in section 509(a) (2). Accordingly, for your first two tax years, you will be treated as an organization which is not a private foundation. At the end of your first two tax years, however, you must establish with the Internal Revenue Service that for such two years you were in fact an organization of the type described in section 509(a)(2). If you establish this fact with the Service, you will be classified as a section 509(a) (2) organization for all purposes beginning with the first day of your third tax year and you 66 must normally meet the requirements of section 509(a) (2) thereafter. If, how ever, you do not meet the requirements of section 509(a) (2) for your first two tax years, you will be classified as a private foundation as of the first day of your third tax year. Furthermore, you will be treated as a private foundation as of the first day of your first tax year for purposes of sections 507(a) and 4940. Grantors and donors may rely on the determination that you are not a private foundation for your first two tax years, unless notice that you will no longer be treated as a section 509(a) (2) organization is published in the Internal Revenue Bulletin. However, a grantor or donor may not rely on such determination if he was in part responsible for, or was aware of, the act or failure to act that resulted in your loss of section 509(a) (2) status, or acquired knowledge that the Internal Revenue Service had given notice that you would be removed from classification as a section 509(a) (2) organization. You are not liable for social security (FICA) taxes unless you file a waiver of exemption certifications as provided in the Federal Insurance Contributions Act. You are not liable for the taxes imposed under the Federal Unemployment Tax Act (FPTA). Organizations that are not private foundations are not subject to the excise taxes under Chapter 42 of the Code. However, you are not automatically exempt from other Federal excise taxes. Donors may deduct contributions to you as provided in section 170 of the Code. Bequests, legacies, devises, transfers, or gifts to you or for your use are deductible under sections 2055, 2106, and 2522 of the Code. If your sources of support, or your purposes, characters, or method of operation is changed, you must let us know so we can consider the effects of the change on your status. Also, you must inform us of all changes in your name or address. If your gross receipts each year are normally more than $5,000, you are required to file Form 990, Return of Organization Exempt From Income Tax, by the 15th day of the fifth month after the end of your annual accounting period. The law imposes a penalty of $10 a day, up to a maximum of $5,000, for failure to file a return on time. You are not required to file Federal income tax returns unless you are subject to the tax on unrelated business income under section 511 of the Code. If you are subject to this tax, you must file an income tax return on Form 990-T. In this letter we are not determining whether any of your present or proposed activities are unrelated trade or business as defined in section 513 of the Code. You need an employer identification number even if you have no employees. If an employer identification number was not entered on your application, a number will be assigned to you and you will be advised of it. Please use that number on all returns you file and in all correspondence with the Internal Revenue Service. (See paragraph below.) Please keep this determination letter in your permanent records. Sincerely yours, W i l l i a m D. W a t e r s , Acting District Director. This determination is also applicable to your unincorporated predecessor organization. Mr. A n d e rso n . Thus, AIM is permitted to solicit tax deductible dollars as an “ educational” enterprise and uses its special postal privi leges to attack the press. Many newspapers treat Accuracy in Media as if it were a legitimate press watchdog, rather than a propaganda operation for the special interests. Other newspapers, which have taken a closer look at AIM, have pegged it for what it is. L. S. Hembree, editor of the Anderson, S.C., Independent, has put it this way: “ Frankly, I don’t appreciate being lectured by any organization ap parently afflicted by paranoia symptoms usually associated with the Ku Klux Klan syndrome.” And I offer this as exhibit No. 22. Chairman P a tm a n . Without objection, it will be inserted. 67 [The following letters from the editors of the Anderson (S.C.) Independent and the Bay City (Mich.) Times were submitted for the record by Mr. Anderson as exhibit 22: J E x h ib it 22 The A nderson I ndependent, T h e D a il y M a il , Anderson, 8.C., November IS, 1914. M r . R eed J . I r v i n e , Accuracy In Media, Inc., Washington, D.C. D e a r S i r : My reaction to your letter and propaganda of Oct. 3 1 ,1 9 7 4 ( received Nov. 1 3 , 1 9 7 4 ) in regard to Mr. Marshall Field’s earth-shattering announcement his papers plan to do what an overwhelming number of newspapers—including these—already have been doing for years further undermines my trust in the credibility and motivations of Accuracy In Media, Inc. I read of Mr. Field’s great decision in E&P when it was published. You call it a “newsworthy move that has not been generally reported in the press.” Why should it be “newsworthy” when it has been generally policy of most of the press? In re Mr. Jack Anderson and your running controversy with him: You wrote Mr. Anderson: “As we have explained to you many times, we have no intention of publicizing the names of our contributors. An important reason for this is that there are unethical journalists who would not hesitate to harass sup porters of AIM in the hope that they might be intimidated and withdraw their support.” Frankly, I don’t appreciate being lectured by any organization apparently affiliated by paranoia symptoms usually associated with the Ku Klux Klan syndrome. L. S. H e m b r e e , Editor. T he B ay C it y T im e s , Bay City, Mich., February 18, 1975. Mr. J a c k A n d e r s o n , c/o United Features Syndicate, New York, N.Y. D e a r J a c k A n d e r s o n : Curiosity . . and little else leads me to seek an explanation from you on why Reed Irvine has made a campaign out of attack ing you through Accuracy in Media, Inc. The only mail I ever get from AIM is critical of you. Even a backwoodsy editor knows that a lot of other columnists write a lot of things open to accuracy chal lenges. And yet, the AIM bulletins against your column continue to bomb away. On an occasion or two I’ve used some of their charges in our Forum, right beside your column, but now I’m convinced Irvine has a vendetta going and I just wonder why. If you can enlighten me, I’d be appreciative. I have the greatest respect for your integrity and the job you have done and continue to do in the interest of an informed people. I look forward to meeting you when you appear before the Town Hall crowd here next fall. Warm regards, T o m E. F a l l o n . Mr. A n d e rso n . Julius Duscha, the impartial critic who heads the Washington Journalism Center, had this to say about the Irvine oper ation: “AIM is * * * a pressure group * * * the threat that AIM poses to freedom of the press will be diminished in direct proportion to the extent to which the media exposes its true aims.” And I offer that as exhibit No. 23. Chairman P a tm a n . Without objection, it may be inserted. 68 [The article, “Right-Wing Watchdog”, by Julius Duscha, submitted by Mr. Anderson for the record as exhibit 23, follows:] E x h ib it R ig h t -W in g A 23 W atchdog TAX-EXEMPT, CONSERVATIVE GROUP CALLED A IM MEDIA KEEPS NEEDLING THE NATION’ S (By Julius Duscha1) From a small office overlooking Pennsylvania Avenue three blocks east of the White House, Abraham H. Kalish, a sixty-eight-year-old retired Defense Intelligence School communications professor and former U.S. Information Agency writer, publishes a monthly newsletter criticizing the media and fires off letters to editors and broadcasters taking them to task for news coverage he deems “inaccurate.” Kalish is executive secretary of Accuracy in Media, a non-profit, tax-exempt organization formed in 1969, which calls itself “America’s Media Watchdog protecting the right of the people to accurate, unbiased news coverage.” Kalish and Reed J. Irvine, a Federal Reserve Board economist, who founded AIM and is chairman of its board, pepper The Washington Post, The New York Times, and the television networks as well as other newspapers and magazines and some broadcasting stations with complaints about their news coverage. When their letters to editors are not published, they buy advertising space to publish them. AIM’s most notable success has been a complaint to the Federal Communi cations Commission alleging bias and unfairness in an award-winning 1972 NBC documentary, “Pensions: The Broken Promise.” Last fall the FCC found that the program, which criticized the shortcomings of some pension systems, did not present a balanced view of pension plans. NBC has appealed the decision to the U.S. Court of Appeals in Washington. The decision marks the first time the FCC’s controversial “fairness doctrine” has been applied to documentaries. As media critic Ben H. Bagdikian has written in the Columbia Journalism Review: “. . the judgment threatens to force broadcast journalism to retreat even further from investigating the most urgent problems of society.” Other major victories claimed by AIM include correction of errors in an ABC documentary on defense spending; agreement by CBS to set the record straight on errors in some broadcasts on banking, and the exposure of, in AIM’s words, “misleading and biased media coverage of [the] December 1972 bombing of Hanoi,” and “how elements of the news media had assisted the Communists in using American POW’s for propaganda purposes during the war.” Headlines from the AIM Report, the group’s newsletter, indicate some of its other recent concerns: New York Times readers deceived on defoliation report; press ignores George Meany’s criticism of detente; Erik Severeid vs. Alexander Solzhenitsyn of news media coverage of the Hue massacres of 1968; press cover age of Solzhenitsyn’s letter to Aftenposten; U.S. media mum on Brezhnev visit with U.S. Communist Party bosses; Jane’s fighting ships declares Soviet Navy most powerful in world, but New York Times keeps this news from its readers. Although AIM devotes a considerable amount of attention to defense and foreign-policy issues, it has also given a good deal of space in its recent news letters to such other issues as coverage of the energy crisis (which it found biased against the oil companies) ; a Newsweek error grossly overstating the number of persons killed during the Chilean coup last fall and which was pointed out by both The New York Times and The Wall Street Journal before AIM’s critique appeared; and errors in the reporting on the scale of a massacre in Mozambique. Both Irvine and Kalish are avowed conservatives who see the American media as staffed w’ith liberal reporters and editors whose news judgment reflects their political views. 1 J u liu s D u sch a is d ir e c t o r o f th e W a s h in g to n J o u rn a lism C enter. H e is th e a u th o r o f t w o b ook s : “ A rm s, M on ey an d P o lit ic s ” and “ T a x p a y e r s ’ H a y r id e .” 69 Irvine is a fifty-one-year-old graduate of University of Utah who went to Ox ford as a Fulbright scholar and has worked for the last twenty-two years for the Federal Reserve in Washington where he is now an adviser to the Division of In ternational Finance. Kalish, who has been AIM’s executive secretary for three years, is a Harvard graduate who spent eighteen years as a foreign language book cataloger in the Boston Public Library before coming to Washington to work first for the US IA for ten years and then for the Defense Intelligence School for thirteen years. The two men met at a Washington luncheon group founded during the Korean War by the late Arthur G. McDowell, who was education director of the Up holsterers Union. The purpose J>f the group, called the Council against Com munist Aggression and Alexis de Tocqueville Society, was to provide support for the American effort in Korea. The group still meets monthly in the Empress restaurant in downtown Washington. The thirty to one hundred persons who show up for the luncheons include representatives from trade unions,- business groups, the Government, and universities. The common bond of the loosely organized group is a militant anti-Communism, and speakers at the luncheons have included Russian refugees and many persons who have spent their lives studying Communism or made anti-Communism almost a career. Kalish says that AIM grew out of the McDowell luncheon group, but Irvine contends that while he often discussed the idea with other members of the McDowell group he also talked about it at informal meetings with other groups. Whatever the precise origins of AIM, its primary interests have been foreignpolicy and defense issues, with emphasis on the need for continuing high defense expenditures and general opposition to efforts by the United States to reach agreements with either the Soviet Union or China. AIM’s other officers and the membership of its National Advisory Board further indicate its conservative, anti-Communist orientation. Francis G. Wil son, AIM’s president, is a retired University of Illinois professor of political science who has been active in Young Americans for Freedom and the American Conservative Union. Alphons J. Hackl, AIM’s vice president, is a Washington publisher who put out Edith Efron’s “The News Twisters” and South Korean President Park Chung Hee’s “To Build a Nation.” Members of AIM’s advisory board include General Lewis W. Walt, a retired Marine Corps commandant; William C. Mott, a retired Rear Admiral; Eugene Lyons, a Reader’s Digest editor who has been an adviser to both YAF and ACU; Elbridge Dubrow, a U.S. Ambassador to South Vietnam during the Eisen hower Administration and a member of the American Security Council’s Na tional Advisory Board; J. L. Robertson, retired vice chairman of the Federal Reserve; Morris Ernst, the civil-libertarian New York lawyer; and William Y. Elliott, Harvard professor. Both Kalish and Irvine refuse to discuss AIM’s financing except in the most general terms. They say that in the last year or two AIM has been spending about $3,000 a month. Kalish estimates, “We may have spent $35,000 to $40,000 last year.” Most of the money goes for printing and mailing AIM’s newsletter, which has a circulation of 5500, only half of which is paid. Kalish reported that an appeal for funds last fall brought in $60,000, which is being used to pay this year’s expenses. “I would doubt,” Irvine said, “that AIM’s total expenditures since it started have amounted to $100,000.” Both Kalish and Irvine give the usual explanation of keeping their funding secret: that people would not donate money if their names were made public. Kalish did mention that one donor gave AIM $15,000 last year, another donor $5,000, and that ten contributors gave $1,000 or more. An examination of AIM’s tax returns, part of which are public because it is a non-profit, tax-exempt organization, indicates, however, that both Kalish and Irvine may be under stating the amount of money AIM has been raising. AIM first obtained tax-exempt status in 1971, and in its initial report to the Internal Revenue Service for the year ending April 30, 1972, it showed contribu tions of only $6,412 and expenditures of $5,047. But for the year ending April 30, 1973, a total of $83,202 in contributions was reported, and expenses amounted to $52,730. The IRS does not make public the sources of the revenues involved with tax-exempt organizations. Neither Irvine nor Kalish takes a salary from AIM. Irvine works full time for the Federal Reserve, and confines his AIM activities to his off-hours. Kalish, 70 who gets a government pension, spends all of his time on AIM activities. He has an office in a three-room suite maintained by his wife, who has a secretarial and telephone-answering business. AIM pays a modest rent for the office and reimburses Mrs. Kalish for secretarial services. There seems to be no connection between AIM and such Nixon Administration critics of the media as White House aide Patrick J. Buchanan. Irvine organized AIM in September 1969, two months before the first attack on the media by former Vice President Spiro T. Agnew. AIM appears to make no systematic effort to read and watch the media. Irvine and Kalish read The Washington Post, The Neiv York Times, The Wall Street Journal, and some other publications fairly regularly, and watch television news programs sporadically. Others associated with AIM bring articles on television programs to the attention of Irvine or Kalish. Often they come upon matters of interest by pure chance. Irvine, for example, became concerned about the failure of the American press to give coverage to the “Jane’s Fighting Ships’* comparison of U.S. and Soviet naval strength only after he happened to notice a story about the “Jane's” survey in a Mexico City newspaper brought to Washington by a Fed eral Reserve colleague who had been in Mexico. AIM’s successes have not been overwhelming, but the organization is having an impact, in part because of the nervousness of many editors and broadcasters in the wake of the Nixon Administration’s attacks on the media in recent years. It is noteworthy that of the first three formal complaints taken by the new National News Council, one is from AIM. It concerns The New York Times’ cov erage of a scientific report on defoliation in Vietnam. Pressure groups representing political or economic points of view have long sought to influence the American media, and AIM is just such a pressure group representing a conservative, militantly anti-Communist ideology. Editors and broadcasters might well remember that as they weigh AIM’s complaints. Richard Gottschald, news director of WDIO-TV in Duluth, Minnesota, has written in the Radio and Television News Directors Association’s Communicator: “AIM should be exposed for what it is : essentially a conservative group estab lished to play judge and jury, and to imply to the public that the media are giving Americans an intentionally distorted view of our Government’s acts and policies. Using its own one-sided evaluations of stories, innuendo, and nitpicking critiques, AIM attempts to substitute its judgment for those of the media editors and reporters.” The threat that AIM poses to freedom of the press will be diminished in direct proportion to the extent to which the media expose its true aims. Mr. A n d e rso n . And that concludes my testimony, Mr. Chairman. We will be happy to respond to your questions. Chairman P a tm a n . Mr. Irvine will be next, and after Mr. Irvine concludes—I assume you speak for Mr. Whitten too. He is one of your associates, or do you want him to be heard ? Mr. A n d erson . He tells me he had just one quick paragraph that he would like to insert at this point, if that will be all right. Chairman P a tm a n . We will hear from Mr. Irvine first. You are recognized, sir. TESTIMONY OF REED J. IRVINE, ADVISER, DIVISION OF INTER NATIONAL FINANCE, CHIEF OF INTERNATIONAL DEVELOPMENT SECTION, FEDERAL RESERVE BOARD Mr. Ir v in e . Mr. Chairman, my name is Reed J. Irvine. I live at 11120 Nicholas Drive, Silver Spring, Md. I am an adviser in the Divi sion of International Finance and Chief of the International Develop ment Section at the Federal Reserve Board. I have responsibility for work on the Inter-American Development Bank and other similar in stitutions for work on the developing nations of the world. 71 I was under the impression that I was invited here today, not to talk about Accuracy in Media or to defend its work, but to respond to charges made in the Jack Anderson column of March 11,1975, where he accused me of using my Government job to attack the press. The only evidence presented by Mr. Anderson in his column, and the only evidence he has presented to date to substantiate that charge, is related to a memorandum that I wrote on November 22, 1974, to the Congressional Research Service. Now let me give the facts. Around November 3, 1974—Mr. Anderson has so said it was about 4 days later, I had forgotten exactly when it was—one Jonathan San ford came to my office at the Board, by appointment, to interview me in one of my fields of expertise—U.S. policy and the development banks. Mr. Anderson, I might note, had said this was to interview me as an expert on Chile; that was not the case. Mr. Sanford, as I recall, said that he was doing a dissertation—I think at American University—on the question of U.S. policy direction in this area of the development banks. During the course of our discus sion, since the Anderson column discussing the CRS report on IDB lending to Chile had come to my attention, I asked Mr. Sanford if he was familiar with that study, and he said that he was. Indeed, he was the author of the study. Since this is in the field of my interests, I asked him if it was possible to obtain a copy. Mr. Anderson had said in his column that it was secret. Mr. Sanford said that it was not secret, and that copies were cir culating on Capitol Hill and that I could obtain a copy simply by calling CRS. Since the report did deal with the matter of official inter est to me in my duties at the Federal Reserve Board, I asked my secre tary to call the CRS and obtain a copy—which she did. I studied the report, and in going over it, observed what appeared to me to be some serious errors of fact and instances of misplaced emphasis. At some point I called Mr. Charles Gellner of CRS to pass on my observations about the report. I called Mr. Gellner rather than Mr. Sanford because Mr. Sanford had told me that he was on leave of ab sence doing his work at American University. Mr. Gellner seemed to be impressed with what I said; he asked if I would put my comments in writing. I did so, and on November 22,1974, a memo covering these comments was sent to Mr. Gellner. This, Mr. Chairman, was an official document; it was strictly within the purview of my responsibilities as a Federal Reserve official. I sent copies to three of my superiors—the Director of my Division, the two Associate Directors of my Division. I also sent copies to two officials of the Treasury Department who were concerned with the Inter-American Development Bank and its activities. I also sent two copies to the office of the Executive Director at the Inter:American Development Bank—the office of Mr. John Porges, the Executive Director, and to his technical assistant. And since the report also was concerned with the World Bank, I sent a copy to the office of the Executive Director of the World Bank. Copies, of course, went into the Federal Reserve files. There was no further action necessary on my part. I had provided Mr. Gellner with my observations and comments as he requested, and 72 subsequently, after I heard that Mr. Anderson was looking into the matter and raising questions about this memorandum, I called Mr. Gellner to ask him what was going on. He told me, and I wrote down his words, that he considered this memorandum to be one from a responsible official of the Federal Reserve who was knowledgeable, and he said that it should be given serious consideration. He also informed me that as a result of my memo, certain revisions had been made in the Sanford study. He informed me that the report was being printed, and he said that when printed it would carry an acknowledgment from the author thanking officials of several depart ments for their helpful comments, and that included the Federal Reserve Board—the comments that I had submitted. Now Mr. Anderson has attempted to give the impression that I wrote the memorandum as a private attack on the press. Mr. Chairman, that is totally false. He failed to mention in his column that my work at the Federal Reserve Board is closely concerned with the InterAmerican Development Bank and with Latin America, as well as with other developing countries. I had a valid official interest in the study because of my position and responsibilities, and that, Mr. Chairman, has been fully recognized by my Agency in letters to both Mr. Ander son and to you. Now it happens that I also wrote, on behalf of Accuracy in Media, a letter commenting on his November 3 column which dealt with this report. My letter on behalf of AIM was done on my own time, in my own home; I did not do it for any compensation. It did not involve the use of any material not available to the public, and it, of course, was an official letter done for Accuracy in Media as part of my voluntary service to that organization. Mr. Chairman, I try very hard to draw a distinction between my Federal Reserve Board work and my private activities. My major out side interest is Accuracy in Media; it is a District of Columbia corpora tion and I am the Chairman of the Board. I might say, Mr. Chairman, I notice that the written statement that was prepared states that the corporation was not organized in 1969; the corporation was not orga nized until 1971.1 am sorry I had not noticed that; that is an error. I am chairman of the board. AIM is dedicated to correcting specific errors in the news media. It also investigates complaints made by the public against the media, and AIM has called attention to some of Mr. Anderson’s inaccuracies from time to time. I do AIM work on my own time, not using Government facilities or materials. I do it as a public service, and I work through AIM and not as an individual in most of these cases. AIM has its offices at 777 14th Street NW., in downtown Washing ton. That office is run by an executive secretary, Mr. John R. van Evera. The work I do for AIM is done at night and on weekends at the AIM office or at my home. The AIM office has instructions, Mr. Chairman, not to give my Federal Reserve Board number to telephone callers in order to insure that we do not intermix my work for the Federal Reserve Board and for AIM. Now, Mr. Chairman, I want to thank you for presenting me with this opportunity to respond to Mr. Anderson’s charges against me. This is especially appreciated since the Washington paper which 73 printed those charges has not seen fit to publish my denial, nor any of the many letters they have received protesting Mr. Anderson’s un warranted attack. This brings up one point that I want to make to put this matter into proper perspective. When we see that a journalist with an audience of millions can make false and misleading statements with impunity, and when we see how difficult it is to get such statements corrected, it is easy to understand why an organization such as Accuracy in Media is needed. Let me just say that AIM is not the vile, propagandist organization that Anderson has portrayed it to be. On the contrary, it is simply dedicated to trying to correct the serious errors that appear in the news media—errors of the type which Mr. Anderson has propagated in his column about me. It does so calmly and professionally, without rancor and without personal vilification. I thank you, Mr. Chairman. Chairman P a t m a n . Mr. Whitten, I believe you have a statement, however, I have a question for the last witness which I would like to ask now. You can make a brief reply if you will and then make any additional reply for the record. Regardless of how you may or may not have identified yourself on various occasions, Mr. Irvine, do you not think that there is a conflict of interest when you are working on bank ing and Federal Reserve issues for a private organization—Accuracy in Media—while remaining on the payroll as a high-level employee of the Federal Reserve? For example, Mr. Irvine, the December 1973 edition of the Accuracy in Media Report takes great pride in its claim that the efforts of Accuracy in Media had gained the American Bank ers Association time on the CBS Morning News. The American Bankers Association is a principal lobbying arm for the banking in dustry—an industry which your employer, The Federal Reserve, presumably regulates from day to day. Is this not a conflict of interest ? Mr. I r v i n e . Mr. Chairman, I see no conflict of interest. What I do for Accuracy in Media is, as I say, a private outside activity much as many people may be engaged in working for their church or civic associations or other public spirited organizations. Since I am not doing this work for private gain, there is nothing here that means that I am doing this work in order to put money in my pocket. Now it is true that Accuracy in Media has from time to time taken up questions of inaccurate reporting about banking as it has about many other things. I think it would be unfortunate if Accuracy in Media, as an organization, were to be expected to wipe out of concern the serious errors that may relate to banking or to economics or to any thing in which I, or which other officials of Accuracy in Media who also have Government jobs or other jobs, might have interest and knowledge. AIM is an organization that is careful in what it says; it is not try ing to propagandize, it is simply correcting errors. And I think any individual or any industry or any Member of Congress is entitled to make complaints to AIM and indicate that if there have been errors in the media, to ask that AIM to what it can do or may be able to do to get those errors corrected. Mr. Chairman, you raised this point of the CBS program on bank ing. There were, I think, many serious errors in that series of programs 74 on banking and CBS, as a result of the work of AIM, recognized that those errors existed. As a result, CBS decided itself, we did not suggest to CBS, that they have the American Bankers Association on. All we asked CBS to do was to correct the factual errors. It was CBS’s decision to ask the ABA, or to offer them time to appear on the pro gram. Mr. Chairman, that was not our suggestion. Chairman P a t m a n . N o w Mr. Whitten, do y o u have a prepared statement ? Mr. W e l i t t e n . N o ,Mr. Chairman, I iust had a very brief statement to make. Chairman P a t m a n . All right, you are recognized for that purpose; and after you conclude, I will yield to each member for 5 minutes to ask questions of the witness. Mr. W h i t t e n . Thank you, Chairman. As one of the many distortions of Mr. Irvine, he accused me per sonally of tape recording him on one occasion, and had made a big thing about that. Now that I am under oath, I would like to deny that. He accused me first in a very hysterical conversation over the tele phone, and then reduced it to writing and sent it around to a number of people. And I am grateful to have this opportunity to advise you and him that I was not tape recording him; I did not and do not do that sort of thing with people I talk to on the telephone. Thank you very much sir. Chairman P a t m a n . Mr. Minish, you are recognized for 5 minutes. Mr. M i n i s h . Thank you Mr Chairman. Mr. Irvine, you say that what you did you did on your own at nights, in the evening, and on weekends for Accuracy in Media. Is that correct, sir? Mr. I r v i n e . That is correct. Mr. M i n i s h . Can you tell me then if you were an economist for the Agriculture Department that you would have available to you the information that you have working with the Federal Reserve arid which information was used in some of your communications ? Mr. I r v i n e . I think that the information that I have used, Mr. Minish, is publicly available to anyone who knows where to go and knows who to ask for it or knows where to inquire for it. Mr. M i n i s h . In 1973, Accuracy in Media, and the American Bankers Association spent a great deal of time attempting to refute a program on banking and the Federal Reserve which appeared on the CBS Morning News in May of that year. What part did you play in this activity, and did you contact the news media in an effort to refute this program. ? Mr. I r v i n e . The banking program came to our attention, Mr. Minish, as I recall, through Mr. Abraham Kalish who was then executive secre tary of Accuracy in Media. As I recall, the ABA contacted Mr. Kalish and indicated to him that they had some problems with the program because there were errors in it. Mr. Kalish looked at the program—a copy of the transcript was obtained, and in looking it over I agreed that there were certainly a number of serious errors in the program. The ABA, as I recall the story at the time had indicated that they had made a detailed analysis of the program, and the errors in the program, and it turned out, Mr. Minish, surprisingly enough, that 75 they decided not to proceed and they decided not to make their analysis of the program available to AIM because it appeared that they did not want to pursue the matter. M r . M i n i s h . Well, let us get back to the question I asked. Mr. I r v i n e . I had read the transcript, and the errors, the types of errors that were made, were very obvious errors. I cannot recall pre cisely now, but such things as the statement Federal Reserve Board members are appointed by the bankers, or that type of thing. These are things that were common knowledge to me, and it was a very simple matter for me. It required no special Federal Reserve knowledge or anything on my part to point out to Mr. Kalish and others that there were several serious factual errors in the program. M r . M i n i s h . Did you contact CBS ? Mr. I r v i n e . An informational letter was drafted which Mr. Kalish, as executive secretary, sent to CBS, pointing out a number of factual errors in the program. Mr. M i n i s h . Mr. Irvine, did you contact CBS ? Mr. I r v i n e . Did I personally contact CBS? Mr. M i n i s h . Yes. >Mr. I r v i n e . Yes; I believe that I did have a telephone conversation. This went over for some period of time, Mr. Minish, and I recall one occasion when I was home sick. As a matter of fact, I believe it was after Mr. Alexander had appeared on the program. I recalled having heard the program at home. I was in bed with the flu at the time, and I called an official of CBS to make an inquiry because I was personally rather disappointed that the response given by Mr, Alexander on the program had not really been responsive to the factual errors that we had pointed out to CBS. Mr. M i n i s h . Were not documents and data used from the Federal Reserve in this effort by Accuracy in Media. Mr. I r v i n e . I do not recall any data being used. I think the errors were simple errors and general knowledge to anyone who knows the facts about the banking and general----M r . M i n i s h . Why did you contact CBS ? M r . I r v in e . Y ou m e a n w h e n I p e r s o n a lly c o n t a c t e d th e m ? M r . M i n i s h . Yes. Mr. I r v i n e . I indicated, Mr. Minish, I was at home with the flu when I heard the program. Mr. Alexander, when he appeared on the pro gram, did not address himself to the specific points that we had made, and I called up the gentleman at CBS to find out whether they had diverted him away from this. Mr. M i n i s h . Did you contact them as an officer of Accuracy in Media or as a representative of the Federal Reserve Board ? Mr. I r v i n e . I told him undoubtedly when I called him that I was Reed Irvine and I was calling on behalf of Accuracy in Media. As I said, I was at home in bed at the time. Mr. M i n i s h . That is all, Mr. Chairman. Chairman P a t m a n . Mr. Conlan ? Mr. C o n l a n . Thank you, Mr. Chairman. First, I note that we are not as heavily deluged by the press as we are on some of our activities, and I think maybe that is a compliment to the broadcast media for their good sense in deciding not to get 76 drawn into a private affair which is trying to get organized under the tent of domestic monetary policy. While my record makes it obvious that I am not an apologist for the Federal Reserve and, in fact, even go against my party’s leadership in attempting to get an audit of the Federal Reserve, I have to say that the connection between the Fed and the case before us is so tenuous in terms of domestic monetary policy that I would be hard pressed to understand the interest of the chairman in this matter if I were unaware of the history of the past, perhaps, 46 years. Two things strike me, even though I do not know Mr. Anderson or Mr. Irvine, and I am relatively new to the Congress here, this being just my third year. I see what appears to be a sense of umbrage by some members of the press that they be criticized by citizens for what some citizens feel to be inaccurate reporting. I do not know the merits of this case. I only know that I, along with many others in public life, feel that many times we have been both inaccurately quoted and issues have been inaccurately portrayed, because everyone in writing, no matter how objective he intends to be, does have certain preferences, certain biases, that they have come to over a period of time. Mr. Anderson and I would have, perhaps, different views on the Chilean situation. I went down to Chile as a member of this committee with the Secretary of the Treasury a year ago at this time, for the Inter-American Bank Board meeting. I was part of a congressional delegation that has oversight over that Bank. I came back from Chile with a different viewpoint than I took when I went. So having seen what I read in the press, and then having talked with people on the local scene in Chile who were totally unconnected with the State Department or with the local leadership there, I came back with a different impression than that which Mr. Anderson portrays. I am wondering that perhaps we are faced here with a basic situation where Mr. Irvine and his citizens group, called Accuracy in Media, have challenged some members of the press, and Mr. Anderson and those members of the press who have been criticized by Accuracy in Media do not care for that criticism. Now, the thing, of course, that I have observed is that the gentlemen of the press very seldom give rebuttal time in their columns for views other than their own. I do not know Mr. Anderson’s record in this line, because his columns are not carried in my Phoenix newspapers, so I do not see the column. But I do see that, in many instances, members of the press do not give rebuttal time in their own columns to questions that are raised by those who have a different viewpoint. I am not saying that they should, but if they do not give rebuttal time in their own columns, and if editors of papers do not give equal rebuttal time, then there must be, in the interest of honesty and decency in this country, some other alternative. And it appears that this Ac curacy in Media group has been forced by the local newspaper in Washington, in this particular instance, to even go so far as to buy an ad which, apparently, when the dollar came in, it was all right to pick up the rebuttal. So I just wonder if maybe we are getting into a private contest between some members of the press who have the capacity to share information and others who want to challenge them on facts. 77 I think it is quite clear in the testimony and reading Mr. Gellner’s memorandum to us that Mr. Irvine stumbled upon this area of inquiry in his capacity as a Federal Reserve official. He did what was clearly his duty—to try and correct with some factual information the memo randum that the Congressional Research Service had put out. And I think, in that case, all of us in the Congress would expect any member of the bureaucracy to try and work out among themselves what the factual situation is. And there may be some disputes about who comes up with what conclusion. But to that extent, I think Mr. Irvine was correct in doing his duty. Now, the question is, Does he have any rights as an individual citizen to share his viewpoint and to work in public service oriented organiza tions on the outside ? To that I can only say that I think I have ob served on some occasion—and I have seen columns in the Washington Post and elsewhere—that investigatory reporters such as Mr. Ander son are pleased when men like the gentleman in the Air Force come forth with information, and sometimes even classified information, as to what is going on inside the Department of Defense. They have no hesitancy bringing it forth to the American public. When Mr. Ellsberg and others took classified documents and brought those forth to the public, they had no hesitancy about sharing these with the public. Here I do not think there is any question of any classified documents or anything else. I think the question here is, Does Mr. Irvine, as any other Government official, have the opportunity to share and do outside creative writing, or, in his own responsibilities as a citizen, speak out or criticize matters in the press ? I do not think that we could arrive at a conclusion that the millions of faithful citizens working in public service should be denied the right to express their personal viewpoints publicly, and it appears to me that this is what we are coming down to. I think if we have followed that position as a committee we would be subject to an awful lot of shame from our own constituents. I am not going to get into the merits of the pros or cons of Mr. Ander son’s allegations of General Walt as a crony of Senator Stennis. I do not want to get into those areas and some of the high-powered terms that are used, or the arguments whether Mr. Anderson’s interpretation of international affairs is better than someone else’s. I think the basic question here is. Does an official, whether appointed or elected, as a citizen, have a right to express viewpoints criticizing the press, as well as anything else ? I do not think the press, let alone the Congress, should be immune from constructive criticism. Mr. A n d e rso n . Mr. Chairman, may I respond ? It was not exactly a question. Chairman P a tm a n . Would you mind waiting until we have con cluded on this go around, and then we will be glad to hear you, Mr. Anderson. All right, Mr. Ford. Mr. F ord. Thank you, Mr. Chairman. The first question is to Mr. Anderson. You mentioned you made an application for a reduced postal rate, and that application was turned down twice before it was granted. Do you know the reasons for the postal rate being rejected twice? 78 Mr. A n d e r s o n . Congressman, I am not certain of the reasons. I understand them to be that they did not consider AIM a legitimate nonprofit organization. If you do not mind, I would like Les Whitten to respond further. He has more information on that. Mr. W h i t t e n . Thank y o u , sir. The documents were put in as part of our exhibit 21a and the ruling, as the Post Office turned it down, said—it was turned down once, and then apparently they appealed, and it was turned down again, and it said, “ Based on the files submitted we concur in your ruling”—that is, the lower postal authorities—“that insufficient evidence has been sub mitted to establish that the organization qualifies within the meaning of any of the eight categories of organizations named in section 134.51, PSM to mail at the special rate.” That was on October 15,1971. On October 22 it went to appeal and the Post Office said, “After a review of these files the U.S. Postal Service is still of the opinion that this organization does not qualify and denies the application to mail at the special bulk third-class rate.” It was only after the Internal Revenue Service—this was in October or November 1971—at a time when there had been some charges of politicization of the IRS, it was only when the IRS granted the appli cation for Mr. Irvine’s group that the postal authorities reversed them selves and did, in fact, give the postal privileges subsidizing Mr. Ir vine’s operation. Mr. F ord . Mr. Irvine, AIM, just tell me what does that stand for? Mr. I r v i n e . Accuracy in Media, sir. Mr. F ord . On page i , paragraph 3 you refer to a memorandum you wrote on November 22, 1974, to the Congressional Reference Service. Were you referring to the Congressional Research Service ? Mr. I r v i n e . I understood the name was the Reference Service, but is it the Research Service ? Mr. F ord . Mr. Chairman, if I am not mistaken, the name is the Con gressional Research Service. Mr. I r v i n e . I had understood it to be the Reference Service, but I may be wrong. Mr. F ord . Let me ask you this, Mr. Irvine, have you received any sort of warning, now or in the past, from any Fed official concern ing----Mr. I r v i n e . Excuse me, Mr. Ford ? Mr. F ord . Have you received any sort of officiail warning, now or in the past, from any Fed official concerning AIM work? Mr. I r v i n e . Warning, no; sir. Well, let me say, Mr. Ford, that last night I was informed by Gov ernor Holland that, as the chairman had indicated, that an investiga tion as a result of the chairman’s letter had been made, and Mr. Hol land called me to tell me that the letter had been sent to the chairman on this matter—I believe that he has probably received it—which clears me of any wrongdoing in the matter of this Chile memo and makes it clear that what was done was perfectly proper. Mr. Holland did say, as he talked to me, that probably in the future it would be a good idea not to get involved in AIM activities that 79 might involve something that could be associated with my work. But that was the only thing. Up until that time no one had ever said anything, sir. Mr. F ord. Have you received any compliments? Mr. Ir v in e . Compliments? Well, as Mr. Anderson mentioned, we know that Vice Chairman Robertson has long been interested in the question of the media and accuracy in the medial, and I know that he has been personally, in his individual capacity, supportive of AIM. I do recall after one of my letters had appeared in the paper, somebody said a great letter, or something like that. I do not know, things of that sort, I am sure, have happened. Mr. F ord. Y o u indicated that you receive no salary from AIM. Is it also true that you received no compensation from any of the 2,000 con tributors to AIM ? Mr. Ir v in e . I received no contribution from any of the contributors. Let me clarify, Mr. Ford, what financial arrangements there do exist in AIM. I do not want to mislead anybody. I want to be perfectly accurate. It was decided by the board of directors, because I have given many many hours of time in writing for AIM and doing material on my own time for AIM, and it got to the point where this was becoming something of a problem in my domestic life. My wife was objecting to my spending so much time, and it made it difficult for me to do the chores that a man might be expected to do around the house, such as doing the painting and so on, and in 1973 the Board agreed that, the board of directors of AIM, voted to offer to pay $250 for writing the AIM report. This could be made available to whoever wrote the report. As it turned out, I checked my records last night, and in 1973 I did collect for my work in writing the certain issues of the AIM report none of them connected with any matters connected with banking or my official work, I collected $1,500. In 1974 I collected about $870 for writing activities for Accuracy in Media. And that is the only com pensation I received in connection with that work. [For further ex planation, see Mr. Irvine’s reply to Congressman Blanchard’s question No. 7 under the section entitled “Additional Information Submitted .for the Record.”] Mr. F ord. Thank you , Mr. Chairman. Chairman P a tm a n . Mr. Blanchard. Mr. B la n c h a r d . Yes; I have several questions, Mr. Chairman. I must also express my reluctance to see us get too far astray from the jurisdiction of our subcommittee, but I think the documents I have looked at thus far do indicate that there may be a couple of important issues our subcommittee should look into: One, the question of just who you represent when you are working at the Federal Reserve, and, two, whether information you obtain there is used for other purposes. Pursuing the question of compensation, have you been reimbursed at all for expenses? Mr. Ir v in e . Yes; I have been reimbursed for expenses. Mr. B la n c h a r d . That would be in addition to the amount you indi cated you received for the writing ? Mr. Ir v in e . Yes; indeed. Mr. B la n c h a r d . D o you have some figures you could give us on how much you were reimbursed. 80 Mr. I r v in e . I did not come prepared with those figures, but I have incurred expenses on behalf of AIM, for example, to buy office supplies. I have an office in my home, and if I buy paper, or if I lay out money, or things of that sort, I put in for reimbursement, naturally. Mr. B la n c h a r d . Would it be fair to say that you regularly file a statement for reimbursement, a monthly statement ? Mr. I r v in e . Yes; I do. Mr. B la n c h a r d . Could the subcommittee obtain copies of that ? Mr. I r v in e . Well, I would have to ask counsel. Counsel says he sees no reason why not. Chairman P a t m a n . Without objection, you may insert them at this point in the record. [The material referred to follows:] EXPENSES OF REED J. IRVINE CHARGED TO AIM Month Item Amount 1973 January............___ Long-distance phone calls, home phone1............................................................................ $11.58 February.............____ Long-distance phone calls, home phone........................................................................ 1 business luncheon.................................................................................................................. 9.50 11.50 Total.................................................................................................................................... 21.00 March................ ___ Long-distance calls, home phone.................... ............................. ........ ............................. April..................... ___ Parking fee..................................................................................................................................... 26.12 2.50 May...................... . . . 1 business luncheon.................................................................................................................. Long-distance calls, home phone............................................................................................. 5.00 3.40 Total.................................................................................................................................... 8.40 June..................... ___ Business luncheon......................................................................................................................... July...................... . . . Newspapers purchased............................................................................................................... 6.50 1.75 August................. . . . 6.75 3.35 September Long-distance calls, home phone........................................................................................... Parking fees................................................................................................................................... Total..................................................................................................................................... 10.10 ___ Long-distance calls, home phone........................................................................................... Business luncheons and a dinner.......................................................................................... .. 12.22 45.33 Total.................................................................................................................................... 57.55 October................ ____None........................................................................................................................................................... November........... . . . Luncheon for AIM directors..................................................................................................... December........... Total for 1973.................................................................................................................... 1974 January............... ................................................ February............. ................................................ 42. 50 188.00 Long-distance calls on home phone............................................ Taxi fares and parking fees............................................................. 7.21 8.00 March.................. ................................................ Long-distance phone calls, home phone.................................. Newspapers and magazines bought............................................ Business luncheon............................................................................. 16.88 3.65 15.25 Total.......................................................................................... 35.78 April..................... ................................................ Long-distance calls, home phone................................................ Newspapers and magazines bought............................................ Parking fees...................................................................................... Business luncheons........................................................................... Reception for AIM supporters...................................................... . Expenses on trip to Atlanta to attend CBS annual meeting.. Expenses on trip to New York to attend New York Times annual meeting............................................................................ .. 3.23 14.35 7.45 21.03 81.17 130.73 Total.......................................................................................... 285.46 See footnotes at end of tables. 27.50 81 EXPENSES OF REED. J IRVINE CHARGED TO AIM—Continued Month Amount Item 1974—Continued May.................................................... .................... Long-distance phone calls, home phone............................... Other phone calls.................... ................................................. Business lunch...................................................................... Newspapers and magazines.................................................. Expenses on New York trip.................................................... Taxi fares.............. .................................................................... _____ $11.71 4.00 10.50 9.65 10.50 14.75 Total.............................................................................. ......... 61.11 June.................................................. ...................... Long-distance phone calls, home phone. .............. .............. Parking fees......... ................................. .............. ................... Newspapers........................................... .................................. Taxi fare.................................................................................... .......... Total............................................................................... .......... July.................................................. ..................... Taxi fares.................................................................................... Parking fees............................ ............................. ................... Business luncheons.................... ........................................... Expenses on Schenectady trip (talk show)......................... Long-distance phone calls, home phone............................. ......... Total............................................................................... ......... August, September......... ............ . Taxi fare........................ ............ .............................................. ......... 24.40 236.00 1.20 2.00 63.60 7.50 230.65 23.25 122.38 13.56 197.34 217.60 3.50 Total................................................................ .............. ......... 21.10 October........................................... ......................Long-distance phone calls, home phone............................... Business lunch and dinner.................................................... ......... 2.64 15.46 Total................................................. ............................. .......... 18.10 Business luncheon................. ................................................ Parking fee................................................................................ ......... 21.65 5.65 .85 Total............................................................................... ......... 28.15 December........................................ ......................Long-distance calls, home phone.......................................... Parking....................................................................................... ......... 17.95 10.70 November...................................... Total................................................. ............................. .......... Total 1974..................................................................... 28.65 754.50 1 These are calls made on my home phone for AIM business only. 2 Level or parking expense explained by the fact that I used my annual leave during the summer to work at the AIM office. Mr. C o n l a n . Would t h e gentleman yield for just a second? Mr. B l a n c h a r d . Yes. Mr. C o n l a n . Could we make that request of Mr. Anderson too ? Do newspapermen ever get paid for information ? I think if we are going to be objective, we ought to look at the whole thing. I do not want to disturb any preconceived plans of the chairman. Mr. B l a n c h a r d . Would you be able to supply us with a list of contributors to AIM ? Mr. I r v i n e . Mr. Blanchard, Mr. Anderson has made much of this point that AIM does not make public its list of contributors and I would like to, if I may, explain to you why we have adopted that policy. AIM is a small organization; it is a poor organization. It does not have any big fat-cat foundations or others that are bankrolling it. AIM has to solicit its contributions from the public, and it is not an easy job to get people in all cases to expose themselves to the kind of 82 abuse that I have been exposed to at the hands of Mr. Anderson, for example. If it is known that they are supporting an organization such as Accuracy in Media they may be harassed. It has been our feeling at AIM that in order to be able to get contributions from people who may want to support AIM, that if they want their names not to be publicized, that we ought to honor that request. There is certainly a great danger of harassment and intimidation on the part of those who would like to injure AIM by trying to cut off the little financial support that it has had over the years. And for that reason, Mr. Blanchard, AIM has refused—as has Ralph Nader, as have many other organizations such as the NAACP, to publish its contributor list. Now this serves an additional purpose, of course. These lists are also in a sense, sucker lists; they can be used by people to go out and pump or milk the list for their own purposes, and it is also desirable to protect your contributors for that reason. And so we do not sell our list, we do not rent it, and we w^ould prefer to keep it private. Mr. B l a n c h a r d . But do you not agree that if we were to find that you received a large amount of money that is reimbursement for expenses incurred, and then added to money you received for writ ing, it would be a legitimate question for us to find out who is con tributing to AIM which reimburses you? You are a Federal employee. Mr. I r v i n e . Well if you were to find that out, let’s cross that bridge when we come to it. You are not going to find out that I have re ceived a large amount of money in reimbursement for AIM activities. Mr. B l a n c h a r d . Well let me ask this. Does AIM receive financial assistance from banks and banking industries ? Mr. I r v i n e . I am sure that among our contributors are a number of individuals in the banks and banking industry. It is not a large amount, I don’t believe. Mr. B l a n c h a r d . H o w about your colleagues? Are there other col leagues at the Federal Reserve who participate in the activities of AIM? Mr. I r v i n e . None of my colleagues at the Federal Reserve partici pate in the activities of AIM in any official capacity. That is, in any official connection with AIM. Mr. B l a n c h a r d . Have you discussed AIM with Dr. Arthur Burns ? Mr. I r v i n e . Dr. Burns is aware of the fact that I am interested in AIM. It is a matter of official record on my files at the Board, and I am sure that he is aware of it. Mr. B l a n c h a r d . Has he requested that you withdraw from par ticipation in AIM ? Mr. I r v i n e . I am very proud to say that he has not made any such request, and I think he respects my rights as ah individual and a citizens to do with my spare time whatever I want as long as I am engaging in activities that are legal and respectable and don’t bring discredit upon the Federal Reserve. Mr. B l a n c h a r d . Has he asked you which banks, if any, contribute to AIM? Mr. I r v i n e . He has never asked anything about anybody who has contributed to AIM. 83 Mr. B l a n c h a r d . Thank you very much. Chairman P a t m a n . I wanted to ask a question about your connec tion with the Federal Reserve. Have you been on the payroll for any length of time ? Mr. I r v i n e . I have been an official of the Federal Reserve—an em ployee of the Federal Reserve, Mr. Patman, since October 1951. Chairman P a t m a n . October 1951 ? Mr. I r v i n e . Right. Chairman P a t m a n . Did you talk to Dr. Arthur Burns, the chair man, yourself about your employment? Mr. I r v i n e . About my employment ? Chairman P a t m a n . About your employment with the Federal Reserve. Mr. I r v i n e . Well I antedate Dr. Bums at the Federal Reserve by several years Mr. Chairman. I was there in 1951; I believe Dr. Burns joined the Board in 1970. Chairman P a t m a n . And you have been on the payroll constantly since that time? Mr. I r v i n e . Since 1951, yes, sir. Chairman P a t m a n . Since 1951. So you are an old hand at the Federal Reserve? Mr. I r v i n e . Yes, sir, absolutely. Chairman P a t m a n . We have no record that the document mentioned was received. Mr. I r v i n e . Y o u mean the letter from Governor Holland? Chairman P a t m a n . Yes, Governor Holland indicated in some com munications to you, I believe, that you should limit your activities in some way. Do you remember that ? Mr. I r v i n e . As I say, he called me last night—just last night—to tell me that this letter had been sent, or would be sent. And in our conversation—I don’t know if it was an official admonition, but it was a suggestion on his part, that it would probably be wise to not, let’s say, evoke this kind of controversy. Chairman P a t m a n . Well tell us what the controversy is. Mr. I r v i n e . Well the controversy that is of the type that Mr. Ander son has raised. It is a confusion on Mr. Anderson’s part, of course, in that he was confused with what I did officially at the Federal Re serve in writing my memo to Mr. Gellner, with what I did for Accu racy in Media in writing a letter on his column. Now if all journalists were accurate and precise, the problems of this kind would not arise, of course. Chairman P a t m a n . Well let me suggest to you that there are other things that have been mentioned here. More than a year ago, we were going to try to get an audit of the Federal Reserve System since it has never been audited. We raised that question and were about to get a vote in the House of Representatives. Dr. Burns was very much ex cited over that and did not want the Fed audited at all. Some people would say, well what does he have to hide ? Well, of course, that is not for me to say and I am not begging the charge, but that was the usual reply when it was said that the Federal Reserve did not want an audit. As the measure calling for a GAO audit of the Federal Reserve was about to be voted on by the House, Dr. Burns contacted a lobbying 84 organization in New York which has considerable influence over the affluent people in the Nation, especially the bankers, and banks of all sizes. That organization is known as the Roundtable. People pay up to $85,000 a year for the privilege of being on the Roundtable. When they feel that the interests of the big banks are jeopardized, they go into action and inform the people in an effort to promote support for the banking industry. Do you know anything about the Roundtable in New York? Mr. I r v i n e . Mr. Chairman, I have heard of the organization, but I have no direct knowledge of it. Chairman P a t m a n . Y o u never conferred with them? Mr. I r v i n e . Have I conferred with the Roundtable ? Chairman P a t m a n . Yes. Mr. I r v i n e . I think that I may have met somebody who is associated with it at a lunch at which other people were present. Chairman P a t m a n . Who did you confer with ? Mr. I r v i n e . Well I don’t remember the name of the gentleman to tell you the truth. I did not confer with him on the audit or any other Federal Reserve business. Chairman P a t m a n . Well it is a generally known lobbying organiza tion, is it not? Mr. I r v i n e . Well they have a Washington representative who I have met, but I don’t remember his name. Chairman P a t m a n . Y o u do not remember any of them ? Mr. I r v i n e . Well, I have no connection with the organization, Mr. Chairman. To my knowledge they have never contributed any money to AIM. Chairman P a t m a n . Well, Dr. Arthur Burns was getting out of this business of being Chairman of the Federal Reserve Board and going into lobbying when he took it up with the Roundtable. That is a lobby ing activity. Mr. I r v i n e . Mr. Chairman, you understand that I am here in my capacity as Reed Irvine. I am not speaking here for the Federal Reserve Board or for Dr. Burns. Chairman P a t m a n . I know, but you are a representative of the Federal Reserve Board and we have a right to ask you these questions. Mr. I r v i n e . I don’t dispute your right to ask me. I want you to understand that I don’t know anything about that particular matter. This is the first time I ’ve heard of it, and I know nothing whatever about it. Chairman P a t m a n . Well you have been with the Board since 1951. That is quite a long time. And you have been actively interested in Federal Reserve Board affairs according to your own testimony, and it occurs to me that you would recognize that in some respects even your position is as a lobbyist working for Dr. Bums. He is a lobbyist, he contacts members, he goes to the Rules Committee, he sees members privately and asks them to vote against the audit bill. Of course, the Federal Reserve has been with us a long time—about 60 years. It has never been audited by the GAO, and a lot of members feel that it should be audited. And in 1914 when they wanted to organize the 12 Federal Reserve banks, President Wilson did not agree to a central bank, he was against it. 85 He induced the Congress that if they were going to have banks for the country to take care of different regions, that they should do it according to, say, 12 regions; each region organized like the other regions and for the purpose of giving everybody in that area an opportunity to use the Federal Reserve facilities. That was the object of it. Well, of course, they had no money to go into business. They orga nized the Richmond bank or the New York bank or the Boston bank— they had no money to do it, and so the bankers would not chip in and furnish the money because lots of bankers did not favor the Federal Reserve anyway. They had no money to start on. Congressional appro priations were out of the question because in the Constitution there is a little statement about this, that no money shall be expended—public money—unless it is appropriated by Congress. They did not want to go before Congress; that is the last place they wanted to go, since, they perhaps would be asked embarrassing questions. So then they devised another way. The Federal Reserve has the right to create money, to manufacture money. And so they decided, well, we will just manufacture money and buy Government bonds that are already outstanding that have been purchased by other people. We will buy those bonds and not cancel them and have money to operate in that way. During the first few years, they did not have much accumulation, but during the last few years, they have had tremendous accumulation. They have used a printing press free of charge, created the money, and bought U.S. Government bonds, and did not cancel them. They are in the portfolio of the Federal Reserve bank—in the New York Federal Reserve Bank now. Right now, they own 18 percent of the national debt in that portfolio—in the New York Federal Reserve Bank—and it has been paid for once. Mr. William McChesney Martin who was Chairman of the Federal Re serve Board longer than any other person, made that statement before our committee. Mr. Martin said that the bonds have been paid for once, but that they were not canceled. Of course, the Federal Reserve collects interest on them. When they are due, the Secretary of the Treasury pays the interest amounting to $6 billion a year, which is used to pay the Federal Reserve’s expenses, and they get that money without going through Congress. It is a pretty slick trick. It is almost as bad as counterfeiting. Mr. C o n l a n . Mr. Chairman, could I ask a question please ? Chairman P a t m a n . All right, my time has expired. I will have to recognize Mr. Minish, and then you are next. Mr. M i n i s h . Mr. Irvine, I have a copy—I finally had an oppor tunity to look through this Accuracy in Media, and there is no date on it, but it is titled “ Is There Really an Energy Crisis ?” Mr. I r v i n e . I believe that was the AIM report of January 1974. Mr. M i n i s h . Oh yes, I see it crossed out. And you take issue with some of the statements of one of the Governors who said that one of the major oil companies were given a free hand, and they have used that hand to turn the oil spigot off and on at will and manipulate and gouge the consumer. And then, of course, you defend their profits. In the first quarter of 1974, Exxon declared profits of $700 million and then in a further check they found out that $400 million was set 86 aside for contingencies or whatever. Did you take the trouble to correct that in your Accuracy in Media ? Mr. I r v i n e . Mr. Minish, I think I am aware of the case. The fact that there was a contingency element in the profits was in the press. That’s all I know about it, just what I read in the press about it. If the press reported it, there would be no point in AIM commenting on it. Mr. M i n i s h . Well I just thought that inasmuch as you defend the oil companies here that you would also like to show the other side of the coin in fairness. Mr. I r v i n e . Accuracy in Media, Mr. Minish, confines its activities to commenting on inaccuracies in the press. It does not comment on in accuracies made by Government agencies or private business or Mem bers of Congress or private individuals who may make misstatements. AIM has its hands full in dealing with the press. It can’t possibly branch out and try to cover the whole world. Mr. M i n i s h . Well you are commenting in behalf of the oil companies here. Mr. I r v i n e . N o . On the contrary, Mr. Minish, I would not consider that a comment on behalf of the oil companies. M r . M i n i s h . Well y o u d e f e n d t h e i r p o s i t i o n . Mr. I r v i n e . The article on the energy crisis, I think, was written in the public interest, Mr. Minish. There had been many things stated, and it was felt that it was important for the public to understand some of the facts about the energy crisis which was verv much in the printed press at that time. Certain articles that appeared in the press were in accurate in important respects. All ATM did was to try to correct those inaccuracies. M r . M i n i s h . Let me say, sir, that you could have confined your statement to some other things, because all you did was publish the same propaganda that the oil companies put out at the time. Mi. I r v i n e . With all resnect, sir, I can’t agree that we were just publishing propaganda. I think the analysis that we did was entirely original and did not come from any oil company. Tt was something that was done by AIM on the basis of analysis of what appeared in the press, articles that were available in the press, information that was available from congressional reprints, and so on. Mr. M i n i s h . Well I still think vou should have made the correction. When you saw they only made $700 million, out of courtesy to Ac curacy in Media, you should have said there was a mistake here; they really made $1.1 billion. Mr. I r v i n e . With respect to that. Mr. Minish, I can onlv tell you that AIM does not have the facilities of the Associated Press or the United Press or the New York Times. And the only way that people at AIM would have had to know such an error existed as a matter of fact would be that they read it in the press. Mr. M i n i s h . Where did you get all the information you put here about the oil shortage ? Mr. I r v i n e . Well I can’t tell you specifically, but my recollection is, as I said, that it came from various articles and congressional studies that were available to the public. 87 Mr. M i n i s h . Well I did not see any of these things in the congres sional studies, and I take my time to read them. Mr. I r v i n e . Well there was a huge volume o f them. M r. M in is h .D o y o u c h e c k th e m a ll f o r a c c u r a c y ? Mr. I r v i n e . The congressional studies ? Mr. M i n i s h . They make mistakes here too, you know. Mr. I r v i n e . You’ve got me there. I f our sources are inaccurate, we make mistakes. And we have made mistakes occasionally. M r . M i n i s h . Have you checked these out for accuracy ? Mr. I r v i n e . Checked the AIM report ? M r . M i n i s h . Yes. Mr. I r v i n e . Well let me say this, Mr. Minish. AIM has only one thing going for it, and that is its credibility. If it is consistently in accurate, as Mr. Anderson charges, then I have said that it will and it should die. M r. M in is h . O r c h a n g e th e n a m e. Mr. I r v i n e . N o . I would say that it should go out of existence if it is not accurate itself. If Mr. Anderson can demonstrate, as he charges, that AIM is a terribly inaccurate organization, he can destroy it much more easily than by making charges against me personally. Mr. M i n i s h . That is all, Mr. Chairman. Chairman P a t m a n . Mr. Conlan. Mr. C o n l a n . Thank you, Mr. Chairman. One thing has occurred to me here. I appreciate the chairman’s con cern about our domestic monetary policy, and I share some of his concerns. I think that perhaps, though, we have the wrong man to talk with about policy matters at the Federal Reserve, because I be lieve his work only deals with the Inter-American Development Bank and other similar institutions, and for work on developing countries. So I think when we finish here today, we might get into some of these broader policy matters as a whole. Chairman P a t m a n . This is a preliminary hearing; we will have other hearings. If you have any witnesses in mind, their names may be submitted. Mr. C o n l a n . Well, I think in the domestic monetary policy line, I certainly agree with you. We should look into some of those matters. As I have indicated, I have supported you in the past on the matter of an audit of the Federal Reserve. But passing that, I just have a couple of questions here. One, Mr. Irvine, I am a little intrigued with your publication. I have not seen it, and I know the members on the Republican side of the aisle knew nothing about this hearing or things that are going on until yesterday when we got some material. Could you send us a sample copy or two, and could you tell us, Mr. Irvine, how we can get a subscription to it ? How does one get it ? Mr. I r v i n e . Y o u are very kind, Mr. Conlan. Mr. C o n l a n . Let us put the address in the record for the people who might be interested in knowing more about it. Mr. I r v i n e . I d o h a v e s o m e s a m p l e c o p i e s w i t h m e . Mr. C o n l a n . What is the address and how do you subscribe to it ? 88 Mr. I r v i n e . The AIM report is published each month by Accuracy in Media, at 777 14th Street, NW., Washington, D.C. 20005. Recently, in line with the anti-inflationary program announced by President Ford, we lowered the subscription price from $10 to only $3.1 do not think there is any other publication that has made a comparable con tribution to the anti-inflationary program. If anybody wants to send $3 to AIM, he will find this a stimulating, provocative, and accurate report on what is going on in the news media. Mr. C o n l a n . I have just one or two further questions. Why do you suppose Mr. Anderson devoted an entire column and his testimony here today to leveling these charges against you personally ? Mr. I r v i n e . Well, Mr. Conlan, Accuracy in Media receives com plaints from the public about inaccuracies. Let me say, lest anyone think that I am carrying on a personal vendetta against Mr. Anderson, that that is not true. As a matter of fact, this will hurt his feelings, I know, but I do not even read his column, and that is the truth. Accuracy in Media has received more complaints about Jack Ander son’s inaccuracies and Jack Anderson’s column than about any other single journalist. We take complaints as they come in and we try to handle them, we trv to process them, we try to investigate them. On handling the complaints against Mr. Anderson, we have tried to be scrupulously fair and accurate because we know that we are treading in a very dangerous area when we tangle with Jack Anderson. There is no doubt about that. I have been warned many times that this is a very dangerous business. So wThat we have done, I think almost without exception although there may have been one or two, is if we get a complaint, and it looks like it is a valid complaint, we first send a letter to Mr. Anderson outlining the complaint and asking if he has any comment on it. Of all the complaints we have sent to Mr. Anderson, he has never once responded; he has never once said there is an inaccuracy in this, or this is wrong; and that being the case, we have given him a decent interval—sometimes as much as up to a month—to allow- him time to reply. I f he has not replied and we believe that the complaint is valid and accurate, we then send out letters to the newspapers that carry Mr. Anderson’s column. We have a list of 400 papers that publish the Anderson column regularly. The great advantage that a columnist such as Mr. Anderson has had in the past has been that he could attack someone like me or you or any member of this subcommittee. You would read about it in the Washington Post, and you mi^ht write a letter to the Washington Post. Maybe the Washington Post would publish it and maybe it would not. It has not published mine, in response to the Anderson column, and it might not publish vours. But there are several hundred other papers—I do not know quite how many Mr. Anderson has—but I know we have a list of 400 that carry his column. Even if you got your letter published in the Wash ington Post, there are all your constituents: there is everyone else out there who is still misinformed and misled by the charges that have been made. I think the thing that has probably stimulated Mr. Anderson is the fact that we are reaching his papers He knows because we have put 89 on the letters, we send him copies of the letters that go out, and they go out marked acc papers carrying the Jack Anderson column.” This means that for the first time, I think in his experience, something effective has been done to call attention to the errors in his column, to most of the papers that get his column. Chairman P a t m a n . The time of the gentlemen has expired. Mr. C o n l a n . Mr. Chairman, I have tentatively come to the conclu sion that maybe our subcommittee might be better to concentrate on domestic monetary policy rather than being a part of a debate over journalistic concerns between Mr. Anderson and Accuracy in Media. I have been prompted by people to get into asking Mr. Anderson questions: Does he know Jake Lewis, Mr. Patman’s press secretary, or Baron Shacklet-te, his administrative assistant? Has he been in volved with Mr. Lewis or Mr. Shacklette in setting up these meetings ? And is he involved in, and for how long and how far back, with all these kind of things ? I do not know anything about them because I am new in Congress, and I am not interested in these types of things. But I do think that if we would stay out of the personality field and con centrate on domestic monetary policy, our credibility as a subcom mittee would be better. Let these journalists do their own little thing with the public, and let the public judge w7ho is correct and who is incorrect. Chairman P a t m a n . Yes, sir. The $84 billion in that portfolio is very important, and that could be a reason why a lot of people do not want the audit of the Federal Reserve. Mr. Anderson, I promised to give you an opportunity to reply to a criticism. You may do so now. Mr. A n d e r s o n . Thank you, Mr. Chairman. I was a little surprised that Congressman Conlan would ask Reed Irvine why I wrote a column rather than ask me. It seems that I would be the most logical one to explain why I wrote a column. The Congress man has given the impression or tried to give the impression that there has been some kind of a feud going on between Accuracy in Media and my column, and that I have simply responded because of that. Now, Accuracy in Media has been in existence since 1969, contrary to what Mr. Irvine has just told you under oath. He said that it was not organized until 1971. That is a falsehood. It was actually formed in 1969. It was incorporated in 1971. This is typical of the distortions. Mr. C o n l a n . He said incorporated, Mr. Anderson. Mr. A n d e r s o n . He said organized. In any case, whatever words he may have used, the record will be the best indication of just the exact words that he used. He clearly— and this is typical of tlie way he counterfeits and twists the facts—he tried to give the impression that we were wrong when we said in our testimony that Accuracy in Media appeared on the scene in 1969. It did appear on the scene in 1969. Yet he tried to give the impression to this subcommittee and to the public that we had been inaccurate in so stating. Whatever language he used, it was clearly his intention to try to make it appear that we had somehow misrepresented or some how gotten our facts wrong. Now, since 1969, Accuracy in Media has been attacking me on a regular basis. I regret that you do not read the column. If you did, 90 you would know that at no time have I ever written about Accuracy in Media until just very recently. I have not responded to these attacks because I have known, as most of the press knows, that Accu racy in Media is not a legitimate press critic. It is not a legitimate press watchdog. As has been pointed out here, it defends the oil indus try and takes money from the oil industry. It defends the banks and it takes money from the banks. It is an advocate of the special inter ests. It is a defender of rightwing causes. It is, in short, a propaganda outfit, and I do not normally respond to attacks from the extreme left or the extreme right. I am constantly attacked by both, and I ignore those attacks. I am not engaged, Mr. Congressman, in any kind of a feud with Accuracy in Media. I wrote about it because I got informa tion which indicated that the Federal Reserve Board, which is an important institution, might be involved with Accuracy in Media. I have spelled out the information in a column. In response to the request of this subcommittee, I have given de tailed testimony complete with exhibits to back up what we wrote in the column. Mr. C o n l a n . What do you consider a legitimate press criticism, or who would be legitimate people? Are there some American citizens who are illegitimate people, who cannot criticize ? Mr. A n d e r s o n . Mr. Congressman, if I were to write a story about you, I would expect you to respond to it, not Accuracy in Media. If you have a complaint about something that I write, I would expect to hear from you; I would not expect to hear from some rightwing propaganda outfit. I am not going to respond to them over something that I wrote about you. I will respond to you. Mr. C o n l a n . Would you put a Congressman’s or someone else’s re sponse in your column ? Mr. A n d e r s o n . A s a matter of long time practice, we never write a story about anyone without contacting them and giving them an oppor tunity to respond. There have been occasions when they do not re spond. That will not stop us from goin.<r ahead with the story. If they subsequently send in a response, we will use it, even after it has been published. And, anytime that we have ever made a mistake, and any time that we have ever been guilty of an inaccuracy, and that happens to us, we always run a retraction. Mr. C o n l a n . In your column, do you ? Mr. A n d e r s o n . Absolutely. We have always done that. That is our policy. I tell my reporters I want the facts. Mr. C o n l a n . Could you give us some examples for the record of where you have done that ? I think it would help clarify a lot of things. Mr. A n d e r s o n . Well, I would have to go back into the record; but just off the top of my head I will cite a couple, just from memory. To the best of my recollection I wrote a story reporting that Senator James Buckley, when he first came to the Senate, had sought a posi tion on the Senate Interior Committee. That is unusual. Chairman P a t m a n . Mr. Anderson, if you will excuse me, I promised to recognize Mr. Ford and Mr. Blanchard. We will hear them, and then we expect to adjourn. Mr. F o r d . Thank y o u , Mr. Chairman. I have only two questions to Mr. Irvine. 91 Mr. Irvine, do you plan to continue your role with AIM, or do you yourself feel that because your integrity and credibility have been pub licly questioned, that you could not continue your Fed role in good faith ? Mr. Ir v in e . Mr. Ford, I do not think that my integrity has been publicly questioned by anyone that I need to be concerned about. I had prepared a longer statement that I was going to make. I was informed that the statements ought to be limited to 10 minutes. I noticed that Mr. Anderson took about 25 for his opening statement. But, I had said in the statement that I thought of giving to this subcommittee, that I would hope that the word would go out from this committee room, that no civil servant need be afraid to expose and correct errors that he knows are being disseminated by the news media. I had said: Let it not be said that we must allow error to triumph because combating it is not in our job description. Truth will not be free to combat error if many hun dreds of thousands of some of our most knowledgeable citizens, our civil servants, must tremble in fear before columnists such as Jack Anderson. Yes; I intend to continue, and I think that what I have done in my spare time devoting many hours of service to this cause is something that many people throughout this country appreciate. Many Members of Congress, I might say on both sides of the aisle—Congressman Henry Gonzalez, for example, a member of the Banking Committee have been very appreciative of some of the work that Accuracy in Media has done; Congressman Hebert has put material in the record from Accuracy in Media, recognizing the great value it has in correct ing the distortions of the media. I think it would be a grave disservice, simply because I had been subjected to personal abuse and harass ment with unfounded charges, if I should cringe and creep away into a corner and say I cannot take the heat. Mr. F ord . S o you do feel that your role with AIM will serve the best interest of the taxpayers. Mr. Ir v in e . Mr. Ford, my role with AIM has nothing to do with the taxpayers. It has to do with all of the citizens of this country who are dependent upon the news media for accurate and fair information. I do not work for AIM at the taxpayers’ expense. Mr. F ord. Does the Federal Reserve print a newsletter ? Mr. I r v in e . The Federal Reserve prints a monthly bulletin, the “ Federal Reserve Bulletin.” Mr. F ord. Could you extend some of your comments to that monthly bulletin; some of the articles you have been writing for AIM, could you extend them to that monthly bulletin also ? Mr. Ir v in e . “The Federal Reserve Bulletin,” Mr. Ford, deals with the economy. It carries articles about the economy and various aspects of the domestic economy. It has no connection with Accuracy in Media. Chairman P a tm a n . All right. Mr. Blanchard? Mr. B la n c h a r d . Yes; I again want to repeat my feeling that I do not believe our subcommittee should really get into the question of whether AIM has a right to exist—obviously it does—and whether Government employees have a right to engage in free speech. I think they do. I am still a little curious about the funding of AIM, though, as it relates to you personally, and whether or not you have used resources 50-365 O - 75 •• 7 92 of the Fed to advance the cause of AIM, and perhaps the cause of the private interests. Earlier, we were talking about compensation for your expenses. Are you deducting items like your office in your home, and things like that, as a charitable deduction ? Mr. I r v i n e . Not as a charitable deduction; as office expense. Mr. B l a n c h a r d . Are you considering a portion of that as expenses for AIM, or is it solely as an employee of the Fed. Mr. I r v i n e . No; I get no compensation from AIM for the use of my facilities at home. Mr. B l a n c h a r d . D o you have any relatives on the payroll of AIM, or who have been reimbursed by AIM ? Mr. I r v i n e . Yes; I have a son who has done work for AIM. He is a high school student and he does things like stuffing envelopes and that sort of work for AIM from time to time. Mr. B l a n c h a r d . D o you know what kind of compensation he has received ? Mr. I r v i n e . He receives the m i n i m u m wage. Mr. B l a n c h a r d . Getting back to the sources of contribution to AIM, have there been foreign sources of support to AIM ? Mr. I r v i n e . Not that I am aware of. Mr. B l a n c h a r d . H o w about participants in the Inter-American Development Bank? Mr. I r v i n e . What do you mean, sir—individual people who are em ployed by the Inter-American Development Bank ? Mr. B l a n c h a r d . Well, for one, yes. Mr. I r v i n e . I am not familiar with it at all. We have several thou sand contributors, and I could not tell you who these people are or where they work. I have not gone over it with that object in mind. Mr. B l a n c h a r d . I have no further questions. Chairman P a t m a n . Gentlemen, you have been very cooperative, and we appreciate your appearance and your forthrightness in answering questions. If some of the subcommittee members who are not present care to ask you any questions in writing, you may answer them when you have examined the transcript. Will that be satisfactory ? Mr. I r v i n e . Mr. Chairman, could I ask for your permission to insert in the record three articles. Since Mr. Anderson has introduced a great deal about Accuracy in Media, I would like to introduce an article from the Air Force Magazine, entitled, “The Wayward Press,” an article from the Nashville Tennessean, “Anderson Piece Struck a Low Journalism Blow,” and last, an article from the Louisville Times, “A Vindictive Muckraker at Work” : Chairman P a t m a n . Y ou may do that. You may have permission to do that. [The articles referred to follow:] [F r o m A ir F o r c e M a ga zin e, M a rch 1 9 7 5 ] T he W ayw ard P r ess Probably the most prevalent complaint about American newspapers and tele vision is their reluctance to correct errors. There is no tradition for it in the profession, if it is a profession. We hear a lot these days about doctors being sued for malpractice—it has become a new peril in the operating room—but the press, with few exceptions, remains stubbornly in favor of standing on its mis 93 takes. Of course, that is one of the things Freedom of the Press is all about. No body challenges the right of the publisher to print lies, except when they provide the basis for libel suits. At the same time, there is an increasingly vocal con tingent, in this era of consumer activism, demanding more responsibility in the practice of journalism. It is time to call attention to the Ralph Nader of this inky business. His name is Reed J. Irvine, and he is Chairman of the Board of Accuracy in Media, Inc. It is a little more than live years ago that Irvine, supported by a few friends, $200, and a post office box number, set out to organize the business of criticizing the press and television news organizations. The natural result has been a mini mum of attention for AIM in the public prints—it is not considered cricket to mention AIM in news columns or broadcasts—while this gadfly is becoming in creasingly potent. There no longer is any doubt: newspaper and television network proprietors now are aware of AIM. They have had thousands of letters; a few columnists and congressmen are publicizing the AIM effort; the Federal Communications Commission has been forced to rule on AIM complaints. And, in a few cases, AIM money has been used to buy advertising space, in which complaints against the newspaper are printed after the editors have refused to acknowledge error. Much of this action involves issues of concern to our national defense effort. Back in 1972, AIM bought a two-column ad in the New York Times to charge that Times correspondent Anthony Lewis had reported as fact from Hanoi that the US mining of Haiphong harbor was ineffective. The facts indicated other wise. To AIM, there was no reason to believe Anthony Lewis was anything but an advocate, and it was able to quote Lewis himself in the a d : “The issue [stopping the war] is now paramount. It comes before other obli gations, before personal ambition or comfort. For the ordinary citizen that means participation in some form of political expression, however inconvenient involving one’s professional association, school, or other activity in the attempt to stop the war.” AIM knew it had identified an openly advocate journalist. “We believe that Mr. Lewis has enlisted in a crusade. We believe that he feels his obligation to the crusade comes before his obligation to report the news ac curately and objectively. . . Ardent advocacy which leads to misleading report ing should not be tolerated by any responsible newspaper.” Mr. Lewis, of course, still works for the Times. Irvine, meanwhile, has acquired a bit of nonvoting stock in the Times company and last spring appeared at a stockholders’ meeting. He offered a resolution pro posing that the newspaper should adopt a code of professional ethics, including a clause to the effect that criticism of news coverage must be reported and heeded. He even quoted the Times Chairman and President, Arthur Ochs Sulz berger, who had said publicly that the press must earn respect. The Irvine resolu tion was ruled out of order. By Mr. Sulzberger. One major victory for AIM involved an ABC broadcast in September of 1972, in which the network admitted it made several mistakes in a documentary called “Arms and Security: How Much Is Enough?” Here is Irvine’s own account of what AIM achieved on the air : “It [ABC] admitted it had erred in saying that sixty percent of the American tax dollar goes for defense, amending the figure to forty percent. It admitted that it had been incorrect when it said that the President’s blue ribbon defense panel had characterized our defense policies as sufficient. It acknowledged that the panel had not made such a judgment and that seven of the sixteen members of the panel had signed a supplemental report which said that the strategic military balance was running against the United States. “ABC conceded that it had erred in saying that the American Security Council had criticized the blue ribbon defense panel, and informed its audience that the Council had circulated the supplemental statement to the panel’s report. ABC also conceded error in saying that the B-52 was a supersonic bomber.” Another AIM challenge to network television was made in 1971. The case was that of the CBS documentary, “The Selling of the Pentagon.” This was a TY show designed to expose the Defense Department’s public-relations activities, but was turned into a diatribe by skillful cutting and rearranging of the film. The result was both inaccurate and vicious. AIM challenged CBS to reply to the many questions raised about the accuracy and editing procedures used in “The Selling of the Pentagon.” CBS gave the same 94 reply to all critics, including the editors of Air Force Magazine. Answers would be prepared and sent to all critics. They never were, but AIM persisted in its de mand. About ten months after the initial broadcast the answers were quietly inserted in the Congressional Record, by Rep. Ogden R. Reid, who happens to be a former President and Editor of the New York Herald Tribune. As Irvine has pointed out, the lack of fanfare and publicity for this CBS document is due to the fact that CBS had to admit to the errors and questionable editing. AIM prepared an analysis of the CBS reply, and used the CBS method. It was inserted in the Congressional Record under the headline: “CBS Digs a Deeper Hole,” by Rep. F. Edward Hubert, then Armed Services chairman. NBC’s most prolific pontificator, David Brinkley, has felt the sting of AIM. Irvine says AIM caught Brinkley using false statistics to try to prove that the US today is more militaristic than Prussia was in its heyday. NBC refused to make a retraction. AIM bought advertising space again, this time in the Wash ington Post and exposed the Brinkley fraud. Most recently, AIM has challenged a New York Times account of the ecological impact of the use of herbicides in the Vietnam War. Again, persistence was necessary. It took two months, but the newspaper finally ran another article with accurate information. To experienced observers, it appears that the first account, called “incomplete, slanted, and erroneous,” was leaked to the paper by disgruntled and unidentified members of the National Academy of Science. Currently, AIM is involved in what has become a court battle with NBC over a television documentary called “Pensions: The Broken Promise.” The film was an expose of failings in privately administered pension plans. There was minimum suggestion of the fact that there are many successful private pension plans. AIM went to the Federal Communications Commission and filed a com plaint, charging this was not fair. The FCC ruled against NBC, saying it had not complied with the fairness doctrine. The network immediately went to the US Court of Appeals and won a ruling that the FCC had erred in this case. The vote in court was two to one. AIM has asked for a rehearing. For support, AIM depends on contributions from hundreds of supporters all across the country. The organization describes itself as nonpartisan, nonprofit, and educational. Gifts are tax-deductible. The small staff in Washington ana lyzes news coverage and follows up on complaints from friends and supporters. If the media do not correct errors spotted by AIM, the organization will publi cize the fact. A monthly newsletter, AIM Report, is available by subscription and sent to patrons. AIM is not a lobby. AIM’s leadership is diverse. The first advisory board included Dean Acheson. Today, Morris L. Ernest, the liberal attorney and author, is a member of the board, along with Dr. William Y. Elliott of Harvard, Dr. Harry Gideonse, Clare Boothe Luce, Eugene Lyons, and Walter W. Seifert, Professor of Journalism at Ohio State University. The President is Francis G. Wilson, of the University of Illinois. AIM is doing to advocacy journalism what Ralph Nader did to General Mo tors. It may also be true that AIM has a better case, with more public support, than Ralph Nader could achieve. On the basis of the record, it has better documenation. What it needs is greater public support for a more worthy cause. [F ro m th e N a sh v ille T en n essean , M ar. 15, 1 9 7 5 ] A nd erso n P ie c e Stru ck a Low J o u r n a l is m B low Editor's note: The following letter is a rebuttal to a column by Jack Anderson which appeared on this page in the March 11th issue of The Tennessean. (By Frances G. Wilson, President, Accuracy in Media) We believe you will soon receive (Editor’s note: we have and published) a Jack Anderson column devoted to an unfair and inaccurate attack on Reed J. Irvine, chairman of Accuracy in Media (AIM ). Indications are that Anderson will charge Irvine with misuse of his position as a government economist. Please evaluate Anderson’s charges in the light of the following facts. 95 Irvine is chief of the developing countries section of the Division of Interna tional Finance of the Federal Reserve Board in Washington. His official respon sibilities cover work on Latin America and the Inter-American Development Bank. Acting in this capacity on Nov. 22, 1974, he submitted written comments to the Congressional Research Service of the Library of Congress on a study they had prepared dealing with loans to Chile by the Inter-American Development Bank (IDB). The author of the study knew Mr. Irvine to be an expert in this area and had previously sought and obtained an interview with him. His supervisor, Mr. Charles Gellner, had asked Mr. Irvine to send written comments on the paper. Mr. Gellner said this of Mr. Irvine’s memo: “We felt as though it was a com ment by a Federal Reserve official who was responsible, and it seemed to be a comment by someone who wTas knowledgeable and should be given serious consideration.” The CRS report was subsequently revised, taking into account the comments made by Irvine and others. It will soon be printed and it will carry this ac knowledgement : “The author wishes to thank several officials of the Treasury Department, the IDB, the IDBD, and the Federal Reserve Board for their help ful comments on earlier versions of this paper.” It was entirely appropriate for Mr. Irvine to assist the CRS in this way in his official capacity. His agency and the CRS recognize this. On his own time, Mr. Irvine wrote a letter for AIM, which he signed, which criticized a Jack Anderson column dealing with the above CRS report. This report was not classified. None of the information used in Mr. Irvine’s letter was classified. Mr. Irvine received no compensation from AIM for writing or sending it. There was no violation of law or ethics. Mr. Irvine does his work for AIM (at) nights and on weekends, wThich he has every right to do. Mr. Anderson was informed of this in a letter dated Dec. 11, 1974. The Washington Post asked Mr. Anderson to comment on AIM’s criticism of his column on the IDB and Chile. Both he and the Post have refused to show his reply to AIM. AIM had to buy space in the Post to print our letter, and we criticized Mr. Anderson and the Post in the ad for refusing to show us his alleged rebuttal. However, we knowThe did not answer our specific criticisms. After our ad was printed, we learned of a minor error in the letter, which apparently resulted from mistranscription of a series of numbers taken over the phone. This in no way vitiated our statement that curtailment of IDB lending to Chile wras not a significant cause of the economic chaos in Chile under Allende’s rule. The error was that we had indicated that in the three years preceding Allende IDB disbursements to Chile averaged $23.3 million a year. The correct figure is $29 million, compared to the $26 million in the Allende years. None of these figures was used by Mr. Anderson. He did not mention disbursements. Mr. Anderson may charge that Mr. Irvine refused to discuss his charges. On Oct. 4, 1974, AIM informed Mr. Anderson by letter that he should communicate with AIM in writing only. Why? Because on that day Mr. Irvine had a phone conversation with Les Whitten of Mr. Anderson’s office, during which it became clear that Mr. Whitten planned to misquote him. When challenged, Mr. Whitten said: “The Q and A will show. . This in dicated that wTe was taping, and Mr. Irvine terminated the conversation and wrote to Mr. Anderson about it, demanding a copy of the tape. Mr. Anderson did not reply. AIM has received numerous complaints about inaccuracies in the Anderson column. Our practice is to give him a chance to comment on any complaint before we send out a letter to the press. He has never taken the opportunity to refute any of our complaints. Instead of devoting his time to improving the accuracy of his reporting, he has mounted an unfair, inaccurate attack on the man wTho has had the courage to confront him with his errors. This type of crude intimidation to stifle criticism is abhorrent to all good journalists. It is the kind of journalism AIM wTas founded to combat. 96 [F r o m the L o u is v ille T im es, M ar. 20, 1 9 7 5 ] A V in d ic t iv e M uckraker at W ork The nation’s most widely distributed muckraker columnist has shown himself to be a vindictive, self-serving operator who would be called to judgment by his professional peers if they had the guts to match their pretensions. Jack Anderson is the name. Heir to the error-soiled mantle of his mentor, Drew Pearson. Distributor of the 1972 “scoop” that—minus any proof—depicted Mis souri Sen. Tom Eagleton as a drunken driver. Producer through the years of other phony or misleading “revelations” syndicated to the readers of 900 news papers along with more valid disclosurers that have kept the column viable. Now what Anderson has done should make readers of the Louisville dailies grateful that the column is absent (the suburban Jefferson Reporter and The Frankfurt State Journal still run Anderson’s mixtures of gold and garbage). For Anderson and partner-in-rumor, Les Whitten used their column last week to get even with a nagging gadfly who had drawn blood. It was a cunningly un balanced misuse of reporter power—the kind that feeds public mistrust of all media. The victim w’as Reed J. Irvine, a senior economist for the Federal Reserve Board. Privately, he is a founder and chairman of Accuracy in Media, which bills itself as “ a non-partisan, non-profit citizens’ organization that protects the people’s right to accurate, unbiased news coverage.” With Whitten’s help, Anderson made Irvine the target of a vicious personal attack. “Fed aide uses job to attack press” was the headline used in The Wash ington Post. The column accused Irvine of having misused his government job to gather information for rebutting the press in ways that, if true, would make Irvine guilty of criminal acts. He was said to have misled other federal officials into supplying information they believed was intended for Federal Reserve use. Beyond that, Anderson portrayed Irvine and Accuracy in Media as oil-company hirelings. “ Secret contributions” from oil firms were described as a prelude to blasts by Irvine against press criticisms of oil profits. Irvine denies all the charges. Of the allegation that Big Oil, in effect, brought Accuracy in Media’s press criticisms, he says vehemently, “We have never asked for anything from anybody in the process of taking a position.” And any careful observer of Irvine and the generally conservative, proPentagon, pro-corporation zealots involved with him must tend to believe the man. As one Washington press observer says, “ In terms of what routinely goes on here, what Irvine may have done was a minor sin. The real question is : Would Anderson have jumped on him this way if Irvine had not successfully zapped him? What Anderson set out to do was destroy a man!” One of the “zaps” came last month. The National News Council upheld an Ac curacy in Media complaint that Anderson had misused quotes in a column last August. Under the title of “The Torture Graduates,” as the New York Post chose to call it, the columnist had reported “some chilling views about torture tactics” devel oped by foreign students at an International Police Academy run by the U.S. State Department. News council members agreed that Accuracy in Media was correct m saying Anderson had misrepresented the attitudes of students whose papers he quoted. Moreover, the council found that Anderson had misrepresented as contemporary the quoted student papers that, in fact, had been written between 1965 and 1967. Anderson’s immediate response was to belittle in his column the thoroughness of the associate director of the new council who had examined the documents. In last week’s column, designed to torpedo Irvine and Accuracy in Media, Anderson made no mention of the police academy case. That is not the way a journalistic scavenger works. Instead Anderson likened Irvine’s operation “to that of the notorious White House plumbers . assigned to hound the press.” Irvine, he wrote, “has . kept up a torrent of abuse against us characterized by misstatements, distortions and out-of-context quotations. Anderson, interviewed yesterday, said two press groups are reviewing the “ torture graduates” report and “ I’m willing to bet they’ll find in our favor, that we were fair and responsible.” 97 As for Irvine, Anderson insisted the column attack on him was justified because evidence of a former Federal Reserve Board vice-chairman’s interest in Accuracy in Media proved “an anti-press campaign conducted out of the Federal Reserve.,, Somehow it doesn’t wash. The Anderson who pounces upon an official for gathering information to rebut leaked material is the same Anderson who won a 1972 Pulitzer Prize as the pipeline through whom sources leaked secret papers showing a U.S. tilt toward Pakistan in the Pakistan-India war. It is the same Anderson who told an interviewer, “We don’t use the column to blackjack anybody.” Oh no? Up until Drew Pearson’s death occasioned Courier-Journal cancellation of the column, a thick file here reflected the protests of individual’s unfairly pilloried by Pearson and his legman Anderson through stories never properly checked (and sometimes rejected by The Courier-Journal). Now, as then, papers that carry the columns give as an excuse, “He does seem to get a lot of good stuff nobody else does.” The gains so made are not worth the price of vindictiveness and a double-standard rumor mill. Maybe that’s why The Washington Post sheepishly runs Anderson on the comics page. Chairman P a t m a n . On the CBS program, Mr. Irvine, you stated that you contacted CBS. Did you also contact any other media about this program ? Mr. I r v i n e . Another media? Chairman P a t m a n . Yes. Did you not go to media offices during your normal working hours at the Federal Reserve? Mr. I r v i n e . N o ; I did not go during my normal working hours. I think that the instance you are referring to was that I had lunch over at the Press Club one day, and I dropped down to the office of the “American Banker” and discussed with an individual, a girl there, something about the matter—I was accompanying, as I remember Mr. Kalish, who was the executive secretary of AIM. We had some question about their covering the story. Chairman P a t m a n . I will just ask you one other question. Mr. I r v i n e . Yes, sir. Chairman P a t m a n . Would you state each position you have held with the Federal Reserve, what the duties were, the term of each position, and the compensation received ? Mr. I r v i n e . I w i l l b e h a p p y t o d o t h a t . [In response to the request of Chairman Patman, the following information was submitted for the record by Mr. Irvine:] POSITIONS HELD BY REED J. IRVINE AT FEDERAL RESERVE Date Title and Responsibilities From— Economist, Division of International Finance, Far Eastern Oct. 9,1951 Section with responsibility for area from Japan to Indonesia. Chief, Far Eastern Section, Division of International Finance, Sept. 21,1958 with responsibility for work on area from Japan to Afghanistan. Chief, Asia, Africa and Latin America Section, Division of Jan. 1,1962 International Finance with responsibility for work on countries in those continents. Associate Adviser, Division of International Finance and June 8,1964 Chief of Asia, Africa and Latin America Section. Covered same area as above. Also responsible for staff work on National Advisory Council on International Monetary and Financial Policies, Development Loan Staff Committee and foreign missions. Adviser, Division of International Finance, with essentially Nov. 1,1965 the same responsibilities as above. The name of the section for which I have responsibility was changed to International Development Section. Salary To— Beginning Ending Sept. 21,1958 $4,200 $8, 570 Jan. 1,1962 9,890 13,730 June 8,1964 13,730 17,210 Nov. 1,1965 20,000 20,000 To date 21,000 37,000 98 Chairman P a t m a n . Mr. Anderson, do you have something? Mr. A n d e r s o n . Yes. I recognize that time is short. There are many things I would like to add. I will add them to the record later. But I think this much needs to be said now, because you may want to call additional witnesses. Mr. Irvine has committed perjury here today. He was sworn; he is under oath. He has stated under oath that he did not use any of his Fed facilities or Fed time to promote AIM’s activities. That is a lie; that is perjury. I am going to suggest to you, and will be glad to cooperate with titie subcommittee in supplying witnesses. One witness that I would suggest for example that you call is the former national editor of the Washington Post, Larry Stearn. Larry Stearn received a call from Mr. Irvine stridently criticizing the Washington Post coverage of the Chilean story. Mr. Stearn Avanted to call back and he called Mr. Irvine at his home and found him not there. His home advised him that he was at the office, and that indeed is where Mr. Stearn found him. Mr. C o n l a n . Y o u mean, when a newspaperman calls you, you are not supposed to reply to him ? Mr. A n d e r s o n . He called the newspaperman from his Fed office using Fed telephones to promote AIM activities, to criticize the Wash ington Post. He has just testified, Mr. Congressman, that he does not do that. Now I am to cite a witness and would be glad to have him called to have him tell you, under oath, whether or not he got a call from Mr. Irvine at the Fed office promoting AIM’s activities. Mr. I r v i n e . Mr. Chairman, if I could make a rejoinder that, I do not recall testifying or anybody asking me whether I ever made a tele phone call that might have concerned an AIM matter from my office phone. If anybody had asked me that, I would have said yes, I have on occasion done that. I have on occasion, and as a matter of fact, re ceived calls from Mr. Anderson’s office on AIM business. As a matter of fact, I have refused to accept them. Chairman P a t m a n . I will announce that hearings will continue on this subject of the Federal Reserve audit and matters relating to the operations of the Federal Reserve after the Easter recess. I think that it would be in order to allow each one of these witnesses an opportunity to extend their remarks to the extent of inserting additional material that is relevant to the discussion here this morning. Is there objection to that unanimous consent request? Hearing none, therefore, you may extend your remarks to bring up anything you desire in explanation or otherwise that you would like to place in the record. [Testimony resumes on p. 137.] [Under the unanimous-consent request granted above, the following extension of remarks was received from Mr. Irvine for inclusion in the record:] 99 EXTENSION OF REMARKS OF REED J. IRVINE Mr. Chairman, Mr. Anderson has made many statements here today that are in accurate and which should be corrected for the record. I am not sure that in the time available I can correct every single inaccuracy in his statement, but I shall try to cover the most important ones. Mr. Anderson began by saying that he had conducted "only a limited investigation of the Accuracy-in-Media-Federal-Reserve-Board connection." Since there is no connection, a very short investigation would be all that would be required to have established that fact. However, it is my information that Mr. Anderson has been laboring since at least early December 1974 to try to establish his claim that I have been doing AIM work on Board time. I understand that his associate, Mr. Whitten, has had numerous conversations with the Board's press officer about this matter. I would say that given the fact that Mr. Anderson had nothing to go on and still has nothing to go on, the time he has spent on this investigation is far out of proportion to its importance. It would appear to me that he has devoted all this time and energy to this relatively insignificant matter, not because he thought there was some great scandal involved, but because he was de termined to find something that he could use to intimidate me. Mr. Anderson tried to make it appear that the organization of Accuracy in Media was somehow related to the animosity of Richard Nixon toward the press. gation is totally inadequate. His investi Accuracy in Media was an idea that my friends and I had been working on long before 1969. We had been concerned for several years about the problem of distorted reporting and its consequences for our society. We had been particularly concerned about the role that TV reporting had played in fanning the flames of violent disturbances. One example of this that had been given wide attention was the coverage of the Democratic National Convention in 1968. This had been criticized by leading Democrats, by other newsmen, and it had been in- 100 vestigated by the FCC. One of our first overt moves was to suggest to the TV networks that they themselves establish an organization that could try to set and enforce standards to be followed by the TV newsmen and camera crews. This suggestion was made by me in letters to the networks, but it was rejected. tried to get a prominent newsman to start such an organization. We That failed. We finally decided to do it ourselves, with little more than a letterhead and postoffice box. 1969. The announcement of AIM’s organization was made in early September Mr. Anderson suggested that this was after Vice 'President Agnew "began his poisonous campaign against the press." The fact is that AIM's organization preceded the famous Agnew speech in DesMoines, Iowa. knowledge of the Vice President's plans or intentions. We, of course, had no It is ridiculous to suggest that there was any connection between our announcement, which the press completely ignored, and the actions taken by the Vice President of the United States. Mr. Anderson says that the founder of AIM was Reed Irvine, a bureaucrat making $37,000 a year. When AIM was organized, I was a bureaucrat making $22,500 a year. There were others involved in its organization, notably Dr. Benjamin Ginzburg, retired staff director of the Senate Subcommittee on Constitutional Rights, who was AIM's first Executive Secretary. I had no formal position in the organization at that time. Mr. Anderson refers several times to my "anti-press" campaign. Those who are familiar with the work of AIM know that AIM is dedicated to improving the press, not to tearing it down. AIM is not "anti-press." It deplores broadside attacks on the press which are based on generalized charges without evidence to back them up. The worst enemies of the press are those in the profession who through care lessness or deliberate distortion of news reporting bring discredit on the press and undermine its credibility. AIM is against those who do this, and we endeavor 101 to both correct the errors they have made and to show greater concern for accuracy in their future work. This is an activity that is applauded and encouraged by many responsible journalists. It is disliked primarily by those who are inclined to be inaccurate and who would prefer that their readers not know about their errors. In my opening statement, I discussed the case of the memorandum which I wrote as a Federal Reserve Board official to Mr. Charles Gellner of the Congressional Research Service. That statement makes it clear that this was a perfectly proper thing to do in my official capacity, and there is no need to go into it again, except that I would like the letter to you from Governor Holland dated March 17, 1975, inserted in the record. This makes it clear that the Board agrees that my action in writing to Mr. Gellner was fully within the sphere of my official responsibilities. [Letter referred to follows:] 102 B O A R D OF G O V E R N O R S OF TH E FEDERAL RESERVE 5Y5TEM W A S H IN G T O N . O. C. 2 0 5 5 1 R O B E R T C. H O L L A N D M EM BER O F TH E BOARO March 17, 1975 The Honorable Wright Patman, Chairman Subcommittee on Domestic Monetary P o lic y Committee on Banking, Currency and Housing House o f R epresentatives Washington, D.C. 20515 Dear Mr. Chairman: Chairman Burns has re fe rre d to me f o r fu rth er re p ly your l e t t e r o f March 11, 1975, regarding the a lle g a tio n s in a Jack Anderson/Les Whitten column that Reed J. Ir v in e , A dviser in the Board’ s D iv ision o f In tern a tion a l Finance, used h is o f f i c i a l p o s itio n to fu rth er the purposes o f an o u tsid e organ i za tion . As Chairman Burns advised in h is response o f March 13, in my cap acity as Board member resp on sib le fo r in te rn a l admin is t r a t io n , I am in charge o f the Board’ s in q u iry in to the charges in volvin g Mr. Irv in e*s a c t i v i t i e s . Certain o f the questions that you have asked must await the outcome o f th is in q u iry , which is. nearing com pletion. I w i ll advise you o f developments and o f the relevant re s u lts o f th is in q u iry. Turning to those o f your questions th at are su s ce p tib le to immediate response, Mr. I r v in e ’ s o f f i c i a l d u tie s are as fo llo w s : He i s an Adviser in the Board’ s D iv ision o f In te rn a tio n a l Finance and i s the Chief o f the In tern a tion a l Development S ection in that D iv ision . He has r e s p o n s ib ilit y fo r m onitoring and analyzing a c t i v it i e s in the developing cou n tries and op era tion s o f the in tern a tion a l development finance in s t it u t io n s . He a lso i s the Federal Reserve s t a f f rep resen ta tive to the N ational Advisory Council on In tern a tion a l Monetary and F in an cial P o lic ie s (NAC). Regarding the fo re g o in g , Mr. Irv in e has the r e s p o n s ib ilit y o f providing appropriate advice to the Board, p rim a rily through the D ivision o f In tern a tion a l Finance. Mr. Irv in e sta te s that in h is ca p a city as a Board o f f i c i a l , he obtained from the C ongressional Research Service 103 at the Library o f Congress a copy o f a Chilean study prepared by Mr. Jonathan Sanford. Mr. Irv in e submitted comments on th is study to the Library o f Congress in a memorandum dated November 22, 1974. The content o f th is memorandum was w ithin the sphere o f Mr. I r v in e ’ s o f f i c i a l r e s p o n s ib ilit ie s at the Board. You have inquired as to what value the in q u irie s made by Mr. Irv in e could serve in carrying out h is o f f i c i a l du ties as an employee o f the Federal Reserve. Mr. Irvin e*s d u tie s , set fo rth gen erally above, in clu d e— among oth ers—monitoring and analyzing the operations o f the Inter-American Development Bank and the In tern a tion a l Bank fo r R econstruction and Development (World Bank). In h is ca p a city as Federal Reserve s t a f f repre sen ta tiv e to the NAC, Mr. Irv in e provides a n a ly sis o f questions l i k e ly to come b e fo re the NAC and advises the Board on p o s itio n s to be taken by the Federal Reserve in NAC d iscu s sio n s. Matters concerning the Inter-American Development Bank and the World Bank, in cluding the loan p o li c ie s o f those in s titu tio n s v i s - a - v is p a rticu la r co u n trie s , freq u en tly are considered in the NAC. The C ongressional Research S ervice study prepared by Mr. Sanford d ea lt with the p o li c ie s o f the Inter-American Development Bank and the World Bank toward C h ile , and thus was relevan t to the an alysis and advice Mr. Irv in e gave in h is o f f i c i a l d u ties as an employee o f the F ederal'R eserve. As to your fi n a l q u estion , the Board has never condoned the use o f i t s f a c i l i t i e s fo r ou tsid e purposes and never authorized Mr. Irv in e to use Board f a c i l i t i e s to fu rth er h is work as an o f f i c i a l o f Accuracy in Media. As required o f a l l employees, Mr. Irv in e f i l e d a statement rep ortin g ou tsid e a c t i v i t i e s under taken on h is own tim e, in cluding a c t i v i t i e s as Chairman, Board o f D ire cto rs , AIM. This rep ort was reviewed and approved by appropriate s t a f f o f f i c i a l s , in d ica tin g that the Board ra ised no o b je c tio n s to such ou tsid e a c t i v i t i e s by Mr. Irv in e in h is personal ca p a city . The Board has n eith er endorsed nor opposed Mr. I r v in e ’ s ou tsid e a c t i v i t i e s . No present member o f the Board has authorized or sanctioned any use by Mr. Irv in e o f Board personnel o r f a c i l i t i e s in connection with any ou tsid e a c t i v i t i e s . I do understand that the former V ice Chairman o f the Board, J. L. Robertson, did evidence a personal in te r e s t in Accuracy in Media w hile at the Board and that subsequent to h is leaving the Federal Reserve in 1973, he became a member o f AIM’ s N ational Advisory Board. 104 As sta te d , I vri.ll respond to the remainder o f your qu istion a ur>on com pletion o f our in q u iry. I a n tic ip a te i t s etiot* y»:.\1tor to my nppaarance on b eh a lf o f the Board b e fo r e yx ir Subcov: la te r this week. I understand that you have "iO Hr. Irvine*u appearance b e fo re the Subcommittee, that Jn r-ap.ponse to n o tic e of the fa c t contained in your 2Hr.;h 13 jj iic r to Chairman Burno, you have been advised by CLairuan )>inx.; that tha Ecard has uo o b je c t io n tc Mr* Ir v in e ’ s end testimony ou h ie own b e h a lf. S in cerely youra, A/ R&bert C. Holland TJO1C: CP: RCH/1r> be: Mr. Irvins; 105 I would say that Mr. Anderson’s statement suggesting that Mr. Gellner thought I had obtained a copy of their report under false colors is not supported by Mr. Gellner’s statements to me. He informed me when I asked about this charge that that was not the way he had construed the matter. Mr. Anderson said that I used the report obtained from the Library of Congress to attack the press. That is false. official comments on it. I read the report and gave Mr. Gellner my Independently I wrote a letter for AIM which criticized the Anderson column which had been based on the CRS report. use of the report and did not even refer to it. The letter made no I would emphasize again that I was not paid for writing the letter for AIM, and I did it on my own time. It might be noted that Mr. Anderson, who presumably had no right to receive the CRS report if it was not being made available to the press and public, used it as material for his column for which he was paid very handsomely. Thus if anyone is to be criticized for using this report for private purposes it is Jack Anderson. Mr. Anderson has charged that I am expert at "manipulating facts to form a false picture." on. As I have said, Mr. Chairman, AIM has only its credibility to go If Mr. Anderson can show that AIM is inaccurate, he can destroy it very quickly. It is interesting that the example that he used in his statement to prove his point reflects only on his own credibility, not mine. We did indeed expose the fact that Mr. Anderson's description of the report on marihuana issued by the Senate Internal Security Subcommittee was inaccurate. The fact that the inaccuracy consisted of only one sentence certainly did not exculpate the author. It was a serious indictment of an important public document, but it was obviously written by someone who had not even seen the document. The report in question was obviously not prepared by an outside consultant, since it was a report on hearings that the Subcommittee had held. It covered testimony taken from 23 individuals who had expert knowledge about marihuana and its effects. It also included some 80 106 pages of articles on marihuana from scientific, journals. The work on the hearings and the report was done by a member of the staff of the subcommittee, Mr. David Martin, not by an outside consultant. Mr. Martin is also on the Board of AIM. Mr. Anderson seems to think that in pointing out that his reference to the sub committee report was totally inaccurate, AIM should have mentioned Mr. Martin's connection with AIM. I do not see that this is relevant. or not Anderson’s description was factually accurate. The question is whether We sent him a letter in which we indicated that he must have been talking about some other document, since it was obvious that the report we had in our possession did not fit the description he gave in his column. inserted in the record. I would like to have a copy of this letter Mr. Anderson never replied to it, and in his testimony he said nothing to indicate that our criticism of his statement had been inaccurate. I would also like to insert the letter we subsequently sent to newspapers on this matter [Letters referred to follows:] 107 Accuracy In Media, Inc. 777 14th Street, N.W. Washington, D.C. 20006 (202) 783-4407 Reed J. Irvine Chairman of the Board February 4, 1975 11:45 p. m. Mr. Jack Anderson 1401 16th St., N. W. Washington, D. C. 20036 Dear Mr. Anderson: In your column this morning you mentioned a report on marijuana issued by the Senate Internal Security Subcommittee. You stated that the report was prepared not by the subcommittee but by an outside consultant. You also indicated that the report was of poor quality. The subcommittee recently published a report of hearings on the subject of the "Marihuana-Hashish Epidemic and it Impact on United States Security." The hearings were held over five days and testimony was taken from 23 different individuals. Nearly all of them were medical doctors, Ph.D.s or professors with expert knowledge about marijuana. In addition to these statements, the report contains over 80 pages of articles reprinted from scientific journals. In view of the distinction of the experts assembled by the committee to provide this testimony it seems highly inaccurate to characterize the report as you did. Certainly it cannot be said that the report was the work of an outside consultant. It is clearly a report on hearings held by the subcommittee. It would seem that you must have had some other document in mind, but I understand that this is the only document that the Subcommittee has published on this subject. Could you tell us whether or not your reference was to this published volume of hearings? Jf so, we would be interested in knowing how committee hearings can be written by an outside consultant. We would also like to know what authority you relied upon to judge the quality of the statements made by the expert witnesses who either gave testimony or whose articles were reproduced in the appendix of the report. cc: The Hon. James 0. Eastland Mrs. Katharine Graham Mr. Charles Seib 50-365 0 - 75 - 8 108 Accuracy In Media, Inc. 777 14th Street, N.W. Washington, D.C. 20005 (202) 783-4407 Reed J. Irvine Chairmen of the Board March 1, 1975 To the E d ito r: In a recen t column (February 4 ) , Jack Anderson d iscu ssed a rep ort on marijuana issu ed by the Senate In te rn a l S e cu rity Sub committee. He s a id the re p o rt was poor in q u a lity and had a ctu a lly been prepared by an o u tsid e co n su lta n t. Mr. Anderson was apparently r e ly in g on in a ccu ra te , hearsay in form a tion . The re p o rt on marijuana p u blish ed by the Senate In te rn a l S e cu rity Subcommittee c o n s is ts o f ex ten siv e testim ony taken by the Committee from 23 exp erts w ith s p e c ia liz e d knowledge about marijuana and i t s e f f e c t s on those who use i t . They came from fo r e ig n co u n trie s as w e ll as from d if fe r e n t p a rts o f the U. S. The hearings la s te d f i v e days, and the re p o rt i s a h ig h ly u se fu l compendium o f in form a tion about marijuana. In a d d itio n to the exp ert testim on y, i t con tain s 80 pages o f a r t i c le s about marijuana r e p rin te d from s c i e n t i f i c jo u r n a ls . For those who wish to see fo r themselves how in a ccu ra te A nderson's d e s c r ip t io n was, co p ie s o f the re p o rt may be purchased from the Government P rin tin g O f f ic e , Washington, D. C. 20401 (E d itors can probably ob ta in fr e e co p ie s from the Senate In tern a l S ecu rity Subcommittee, Washington, D. C. 20510). We have asked Anderson fo r an explan ation o f h is c h a r a c te riz a t io n o f th is re p o r t. We a ls o asked what a u th ority he r e lie d upon f o r the judgment that the q u a lity o f the re p o rt was poor. He has n ot responded. cc: Jack Anderson and papers carrying his column Accuracy in Media, In c. 109 Mr. Anderson has mentioned in his column and in his testimony a statistical error that was found in our letter to the editors criticizing his column on Chile and the IDB. It is true that for some reason we obtained a figure for the total disbursements of loans by the IDB to Chile for the years 1968-70 that was incorrect. The figure we had was $70 million, and after our ad appeared in the Washington Post on February 18, 1975, we learned that the figure should have been $88 million. This did not in the least affect the thrust of our argument. ments in the Allende years were $3. It meant that disburse million a year less than in the three preceding years, not $3 million a year greater, as we had thought. Either way the difference is insignificant when one considers that Chile was spending over a billion dollars a year on imports. A decline in receipts from loan disbursements of that magnitude could not possibly explain the serious economic difficulties that befell the country, as Anderson had charged. I would like to point out that after the error was called to our attention, we wrote a letter to The Washington Post pointing it out. did not publish the letter. this error to be included in the record. [Letter to The Washington Post follows:] They I would like a copy of our letter to The Post correcting 110 Accuracy In Media, Inc. 777 14th Street, N.W. Washington. D.C. 20005 (202) 783-4407 Reed J. Irvine Chairman of tht Board March 3, 1975 Editor The Washington Post 115C)a5th S treet, N. W. Washnington, D. C. 20005 To the ed itor: In a statement published in the Washington Post on February 18, we reproduced a le t t e r we had sent to a number o f newspapers about the International Development Bank and Chile. The point o f the le t te r was £hat the refu sa l o f the IDB to approve substantial new loan commitments to Chile during the Allende years did not account far the very serious fin a n cia l problems Chile encountered in that period. In the le t te r we pointed out that the Bank had continued to disburse funds to Chile against loans previously committed. We said that the amount disbursed during the Allende years was actu ally higher than in the preceding three years—$79 .m illion compared to $70 m illion This was based on information we had obtained from the IDB over the telephone. We have since learned that there was an error in the to ta l fo r the three pre-Allende years, and that the*correct disburse ment figure was $87.8 m illio n . I t was not true, th erefore, that d is bursements were higher in the Allende period. However, the" point we wished to make remains v a lid . C h ile 's fin a n cia l problems under Allende dwarfed the amount o f cre d it obtainable from international fin an cial in stitu tio n s , and the d ifferen ce in disbursements o f IDB cred its in the Allende years•and the preceding Allende years could not have made any sig n ifica n t contribution to eith er causing or solving those problems. However, we regret the error, which is evidently the result of taking a series of numbers over the phone rather than getting them in writing. I ll Hr. Anderson asserts that we were wrong in saying that the Chileans had offered documentation of their side of the story about charges by one Amy Conger that she had been tortured in a Chilean jail. provide him with documentation. Mr. Anderson says the Chileans refused to AIM has a copy of a letter dated December 16, 1974 from Mr. Rafael Otero of the Chilean Embassy to Mr. Anderson in which he discusses this case in detail and encloses a copy of a report on the matter from the "Fiscalia Milltar" to the Government of Chile. documentation of this case. Other journalists were supplied with full There is no reason why Mr. Anderson could not have obtained them if he really wanted them. Mr. Anderson misquotes a letter from Dr. Francis G. Wilson, president of AIM, to editors. Dr. Wilson had said that Jonathan Sanford of the CRS had called on Mr. Irvine, knowing him to be an expert in the area of the subject that Sanford's report for the IDB had dealt with. Anderson distorts this to say that Wilson said Sanford ’’knew Mr. Irvine to be an expert in" the Chilean "area..." We have discussed the question of AIM's financing, and I would add only one thing. AIM has been financed very modestly. Its total budget in a year does not begin to compare with the budget of Mr. Anderson's office. AIM has been able to function because, like Ralph Nader, we have had the support of people who are willing to work for nothing or for very little. It is unfortunate that Mr. Anderson clouds this essential fact with his efforts to suggest that we are in the pay of the CIA or sinister groups out to get the press. These charges are baseless. Finally, Mr. Anderson went over the list of AIM's National Advisory Board very selectively in an effort to give a distorted picture of its composition. He did not mention that Murray Baron was one of the founders of Americans for Democratic Action, a leader of the Liberal Party in New York, and a member of the Board of Freedom House. He alluded only to his connection with the Committee of One Million, 112 suggesting that this was a conservative organization. Actually it was a broad-based organization which included both liberals and conservatives. He also skipped over Morris L. Ernst, one of the founders of the American Civil Liberties Union, and the grand old man of civil liberties in this country. He skipped Dr. Harry Gideonse, Chancellor of the New School of Social Research, another distinguished liberal. He skipped Marx Lewis, a veteran trade unionist, who early in his career served here on Capitol Hill as administrative assistant to one of the few congressmen ever elected by the Socialist Party. He skipped Professor Frank Trager, Professor of International Affairs at New York University and a distinguished liberal. He did not mention that the Hon. Dean Acheson proudly served on the AIM National Advisory Board until his death. I do not accept Mr. Anderson's characterizations of the the board members he did name, nor his characteri zation of my personal philosophy, but I do want to emphasize that AIM tries to maintain a balanced position that will appeal to both responsible liberals and conservatives. A recent article in the New York Times quoted me as saying that there was some truth in the statement that AIM was a "political propagandist group." This was a misunderstanding of my statement that we all have our political philosophies, I included, but that in AIM we try to keep our personal views from influencing the way in which we handle complaints of errors. I want to say a brief word about Mr. Anderson's charge that I once called a reporter for the Washington Post from my office phone. As I said, I would not deny that I sometimes use my office phone for personal calls, as do all officials in the government that I know. I have emphasized that I bend over backwards to try to avoid such calls that might involve AIM. I recall once talking to Mr. Laurence Sterne of the Washington Post to call to his personal attention an error he had made in an article about Chile. As I recall, this call was made after normal working hours, and I think that I simply identified myself as Reed Irvine, 113 Mr. Chairman, this concludes my response to Mr. Anderson. As you know, The Federal Reserve Board has made a thorough investigation of his charges and has found them to be groundless. I ask that the letter to you reporting on the outcome of this investigation be included in the record. 114 S u p p l e m e n t a l M a t e r ia l S u b m it t e d F or Th e Record B y R e e d J. I r v i n e What is Accuracy in Media? by Reed J . Irvine Jack Anderson's recent attack on Accuracy in Media gives a totally misleading impression of what this organization is and what it does. Let's set the record straight. AIM is a nonprofit, nonpartisan, educational organization. It was organized in September 1969 by a few public spirited citizens who were deeply concerned about their country's future. democratic society. They regarded the news media as the eyes and ears of our The media provide us with the vital information we need to make important decisions that affect our economy, our liberties and our security. If the media do a poor job and provide us with distorted or flawed information, we can very well end up making some very bad decisions. Contrary to what Jack Anderson has said, AIM is not "anti-press." Responsible veteran reporters have said that AIM is the best thing that ever happened to the press. If the AIM concept works, if the press can be made more accurate and more fair, public respect for the press will rise. That is one of AIM's major goals. AIM is dedicated to improving the news media by pressing for accurate, fair reporting. It does not issue broadsides criticizing the news media as an institution. What it does do is investigate complaints of specific instances of inaccurate or unfair reporting. In the past few years it has received hundreds of complaints, ranging from false charges that flouridation of water causes sickle cell anemia to a complaint that a major documentary by NBC on private pension plans was one-sided and therefore unfair. professional manner. These complaints are investigated and acted upon in a calm, If investigation indicates that an error has been made, AIM tries to get a correction. Sometimes it succeeds. Sometimes it is necessary for it to buy space in the newspaper to get a correction made. 115 AIM is not a large organization, and its work is dbne largely by volunteers who are dedicated to the cause of accuracy and fairness. Its only strength lies in its own credibility. If it were careless with the truth, as Anderson charges, it would not and should not survive. It would be laughed out of existence. The fact that it has survived and grown in influence even while critiquing the giants of the media is ample proof that its criticisms have been accurate. work A IM does. Let me cite just a few examples of the type of On February 4, the Anderson column carried an item about a document published by the Senate Internal Security Subcommittee on marijuana. Anderson said the report was poor in quality and had actually been prepared by an outside consultant. that night AIM wrote to Anderson (at 11:45 p . m . ) : pointing out that the document on marijuana that had actually been issued by the Subcommittee was really a report of hearings which included the testimony of 23 experts and 80 pages of articles reprinted from scientific journals. We asked Anderson whether he had some other document in mind and what was his authority for the judgment that the statements by the experts in the document as published were of poor quality. Not having received any reply to these questions from Anderson, we sent out a letter to the papers on March 1 in which we described the committee Report accurately and mentioned the fact that Anderson had not answered our questions.— ^ Another criticism that we made of Anderson related to a column he published on August 3, 1974, in which he used statements taken out of context to suggest that students at the International Police Academy had "developed some chilling views about torture tactics." l.See exhibit A 116 We wrote to Anderson about this on September 7, pointing out that in five out of six cases he had quoted the students out of context 2/ and had misrepresented what they had said— When no reply was received from Anderson, we sent a shorter letter on this subject to his papers 3/ on September 17r We also filed a complaint with the National News Council in New York. The National News Council made its own independent investigation. They reached exactly the same conclusion that we did, 4/ and they released that decision to the press on February 5, 1975 — Anderson subsequently published a bitter attack on the National News Council, but he has yet to demonstrate that the charge that he misrepresented the views of the students by taking their quotes out of context is u n f o u n d e d ^ Lest you think that AIM specializes in correcting Jack Anderson, let me point out that I personally do not read his column unless it becomes the subject of a complaint. It seems that we receive more complaints about him than any other single journalist, but T assure you that we have devoted the bulk of our energies to much more important matters. For example, AIM was very much involved in exposing the errors and unethical editing of the CBS documentary, "The Selling of the Pentagon," a few years ago. In a sense, AI M got in the last word in that famous controversy. It pressed CBS for its answers to the criticisms that had been made of the program by AIM and others. When those answers were quietly slipped into the Congressional Record in December 1971. AIM did an analysis of them which Congressman Hebert thought highly enough of to put into the record on February 16, 1972r^ 2. See Exhibit B 3. See Exhibit C 4. See Exhibit D 5. See Exhibit E 6. See Exhibit F 117 Another famously inaccurate CBS documentary, was aired before AIM was organized. "Hunger in America,” It was strongly criticized in Congress, notably by Congressman Gonzalez, and by Secretary of Agri culture Orville Freeman. The program contained some very serious errors, and when CBS planned to air it again last year, AIM took an interest in the matter. We suggested that it not be broadcast unless the admitted serious errors were either taken out or unless attention was called to them. The documentary was not broadcast. A IM probably achieved its greatest fame as a result of winning a landmark decision from the Federal Communications Commission against NBC. The FCC, for the first time in history, documentary, "Pensions: of the fairness doctrine. found that a network The Broken Promise," reflected a violation It was found that the program was one-sided and that no other programing to achieve balance had been presented by the network. This case was appealed to the courts. After one panel reversed the FCC, AIM applied for and obtained an unusual rehearing en banc in the Court of Appeals, only to see the FCC throw the case away Anderson said that AIM had criticized Ralph Nader, but he did not point out that we also defended Nader and obtained a correction of a serious charge that had been made against him in B a rron's . We were able to positively verify the fact that Nader had not told an Australian audience that he considered the solution to our problems to be some form of socialism or communism, as had been alleged. Our letter correcting this error was published in the May 27, 1974 issue of Barron* s ^ Speaking of Nader, I might point out that an article in the March 1975 issue of Air Force Magazine referred to me as the Ralph 7. See Exhibit G 118 Nader of journalism. Permit me to quote one paragraph from this article in order to put this public service into proper perspective. Probably the most prevalent complaint about American newspapers and television is their reluctance to correct errors. no tradition for it in the profession, There is if it is a profession. We hear a lot these days about doctors being sued for malpractice. but the p r e s s , with few exceptions, remains stubbornly in favor of standing on its mistakes. Of course, Freedom of the Press is all about. that is one of the things Nobody challenges the right of the publisher to print lies, except when they provide the basis for libel suits. vocal contingent, At the same time, there is an increasingly in this era of consumer activitism, demanding more responsibility in the practice of journalism. It is time to call attention to the Ralph Nader of this inky business. His name is Reed J. Irvine, and he is Chairman of the Board of Accuracy in Media, 8/ Inc.— That article was written by a veteran traditional journalist, Claude Witze. On the other side, appearing at about the same time, was an article by a very young journalist in Nicholas Johnson's new publication, A c c e s s . Allison Zippay wrote this: AIM's methods are strong and effective. Their proficient use of a variety of reform tactics has succeeded in penetrating a unsually unapproachable media. watchdog" of media giants, A self-proclaimed"fearless the organization has at least dared to put a crack in broadcasting's glass house. 8. See ^The Wayward Presa," Air Force M a g a z i n e , March 1975, p. 12 119 These two views, one from a veteran traditional journalist writing in an establishment publication and the other from a young girl writing for an anti-establishment publicationfboth reflect respect for what AIM has done in a short period of time with very limited resources. They also reflect a growing awareness of the need for responsible criticism of the news media. except themselves. The news media criticize everyone If no one is permitted to criticize them, under penalty of the type of harrassment that Jack Anderson specializes in, then we are lacking any check on one of the most powerful institutions in our society. Our political system is one of checks and balances, and the wisdom of that system has been proven over time. It is only proper that the news media be part of this system, both as one of the checks on government and as an institution to which some checks apply. Since the First Amendment has been increasingly interpreted in recent years as barring almost all governmental checks on the-news media, we are left with private action to provide this neeeded service. This is the role that organizations such as Accuracy in Media and the National News Council have been created to play. They are often called "self-appointed critics," but in our free society it is only proper that they should be self-appointed. Another way of putting it is to say that they are voluntary organizations started by citizens in response to a felt need. It has been said that they lack "legitimacy," but in this free country of ours free speech is legitimate, and one does not have to obtain a license from the-government or any organization in order to make legitimate criticisms of the press or any individual or institution. 120 One of the key principles of our society is that free and robust debate should be encouraged. The news media and journalists are not only instrumental in enabling the debate to take place, but their own performance is a legitimate topic for debate. No one has the right to rule out of order any individual or group who wishes to participate in that debate. judged on their merits. expressed? Contributions to the debate should be Are they factually correct? Are they well Are they fair? Those are the proper questions to be asked. The issue is not whether the participant is "legitimate" or "illegitimate," whether he is a pauper or a prince, whether he is a conservative or a liberal. The individuals who want to curb freedom of speech by drawing such distinctions as these are totally out of touch with the spirit of our Bill of Rights. It is an old but true principle that we must defend the First Amendment rights of those with whom we disagree if our own rights are to be secure. We know that it is not.proper for the government to snuff out those rights. for the press, or a powerful journalist, Is it any more proper to intimidate and silence those bold enough to criticize their errors and ask that they adopt and honor a code of ethical conduct similar to that recommended by the Society of Professional Journalists or the code of ethics of 9/ the American Society of Newspaper Editors?— If journalists can be persuaded to adopt and honor such a code of ethics, which is one of the objectives of Accuracy in Media, the country will be better served and the news media will be more highly respected. 9. See Exhibit H 121 E x h ib it A Accuracy In Medici, Inc. 777 14th Street, N.W. Washington, D.C. 20005 (202) 783-4407 Reed J. Irvine Chairman of the Board March 1, 1975 To the E d itor: In a recen t column (February 4 ). Jack Anderson discu ssed a rep ort on marijuana issu ed by the Senate In tern a l S ecu rity Sub committee. He sa id the re p o rt was poor in q u a lity and had a ctu a lly been prepared by an o u tsid e con su lta n t. Mr. Anderson was apparently r e ly in g on in a ccu ra te , hearsay in form ation . The re p o rt on marijuana pu blish ed by the Senate In te rn a l S ecu rity Subcommittee c o n s is ts o f exten siv e testimony taken by the Committee from 23 experts with s p e c ia liz e d knowledge about'm arijuana and i t s e f f e c t s on those who use i t They came from fo r e ig n co u n trie s as w e ll as from d if fe r e n t parts o f the U. S. The hearings la s te d f i v e d a ys, and the re p o rt i s a h ig h ly u se fu l compendium o f in form ation about marijuana. In a d d itio n to the exp ert testim ony, i t con tain s 80 pages p f a r t i c le s about marijuana re p rin te d from s c i e n t i f i c jo u rn a ls . For those who wish to see fo r themselves how in accu rate A nderson's d e s c r ip tio n was, co p ie s o f the re p o rt may be purchased from the Government P rin tin g O f fic e , Washington, D. C. 20401. (E d itors can p robably ob ta in fr e e co p ie s from the Senate In tern a l S e cu rity Subcommittee, Washington, D. C. 20510) We have asked Anderson fo r an explan ation o f h is c h a r a c te r iz a tio n o f th is re p o r t. We a ls o asked what a u th ority he r e lie d upon fo r the judgment that the q u a lity o f the re p o rt was poor. He has not responded. Accur'acy in Media, Inc. cc: Jack Anderson and papers ca rry in g h is column 122 E x h ib it B Accuracy In Media, Inc. 777 14th Street, N.W. Washington, D .C . 20005 (202) 783-4407 Reed J. Irvine Chairman of the Board September 7, 1974 Mr. Jack Anderson 1612 K S tr e e t, N. W. Washington, D. C. Dear Mr. Anderson: Our a tte n tio n has ju s t been called to serious Inaccuracies 1n your column of August 3 , 1974 about the In tern atio n al Police Academy. This column quoted from six papers prepared by train e e s a t the academy. The quotes you selected were employed to support your statem ent th a t "many students graduate w ithout showing much e ff e c t of th e ir 'hum anitarian' tra in in g ." We have examined the papers 1n questio n , and we find th a t 1n fiv e of the six cases the passage used 1n your column did not fu lly and accurately r e f le c t the views of the w rite r of the paper on the su b ject of the use of th re a ts and force in In terro g atio n . By taking statem ents out of co n tex t, 1 t appears to us th a t you have done an In ju s tic e both to the w rite rs of these papers and to the In tern atio n al Police Academy. We are c a llin g th is to the atte n tio n of the e d ito rs of the newspapers th a t reg u larly publish your column, but we believe th a t you y o u rself should run a c o rre c tiv e statem ent in your column. Let us compare the quotations you employed with oth er statem ents which are found in the papers in question. 1. You quoted Lam Van Huu of South Vietnam as saying: "What do we mean by 'fo rce and th r e a t? ' Physical fo rce--b eat1n g , slapping, e le c tro c u tin g . T hreats— p hysical, shaking a f i s t 1n the face of the subject; v erb al, saying, 'L iste n , I'm going to break your neck 1f you d o n 't confess." This 1s taken from page 7 of Lam Van Huu's paper. "What Do We Mean by Force and Threat" 1s the heading of a section of the paper. The heading 1s followed by th is sentence, which you omitted w ithout In d icatin g any omission: "There are two cases which the judges have very often considered as 'fo rce and th r e a t' or 't o r tu r e ' used 1n In te rro g a tio n ." There follows the quotation you used beginning with "Physical fo rce." I t 1s obvious th a t Lam Van Huu was merely providing a d e fin itio n and was not advocating or defending the use of force and th r e a ts . This would have been apparent to your readers had you not omitted the sentence quoted above. The omission was necessary 1n order to perm it you to make the quote serve your Intended purpose. 123 You did not make any reference to the next sectio n of Mr. lam Van Huu's paper in which he lis te d no fewer than nine reasons why force and th re a ts should not be used. You conspicuously omitted h is conclusion found on page 10, which reads: Thus the use of force and th re a ts 1s not only a method th a t 1s vicious and inhumane but also dangerous and u sele ss. Those th a t are fo r force would do b e tte r to q u it the police force and take up the c a re er of boxing. Is i t not c le a r th a t th is paper leads to a conclusion ju s t the opposite of the one^suggested 1n your column, i . e . , th a t Lam Van Huu graduated from the Intern atio n al Police Academy w ithout showing much e ff e c t of "humanitarian" tra in in g ? 2. You quoted Tdan D1nh Vol of South Vietnam as saying: "Based on experience, we are convinced th ere 1s ju s t one sure way to save time and suppress stubborn criminal su s p e c ts--th a t 1s the proper use of th re a ts and fo rce." You neglected to point out th a t th is student q u a lifie d th is statem ent 1n a very Important way. He thought the use of force and th re a ts could be ju s tif ie d when time was of the essence, fo r example, when information was needed quickly to prevent a serious tragedy or d is a s te r . He also lis te d a number of reasons why force and th re a ts should not be used, and you did not tro uble to point out th a t he said: "But 1n any case we can never fo rg et our maxim: ’L iberty, ju s tic e and hum anity.' I f we fo rg e t th is main maxim and abuse the use of th re a ts and force 1n In terro g atio n s we cannot, w ithout doubt, reach our aim and we w ill lose public confidence, and the policemen w ill become the te r r o r is ts of the people." The inclusion of th a t quotation would c le a rly have not supported your contention th a t Tdan D1nh Vol showed no sign of having benefited from humanitarian tra in in g . 3. You quoted Inspector Madhav Blckrum Rana of Nepal as saying: 'Wany times police o ffic e rs have gained valuable clues by the use o f (d ru g s ). . .The water to rtu re is a simple and an cien t method of le ttin g a tap to d rip on a man's head a t a c e rta in in te rv a l. This 1s very e ffe c tiv e 1n breaking a tough man and can make a raving lu n a tic of any human being a f te r an h o u r..." The Inspector was c le a rly giving a d escrip tio n of some of the methods used 1n Interrogatio n h is to r ic a lly and a t p resen t. The statem ent about drugs (sodium pentathol and alcohol) 1s found on page nine of his paper. The d escription of the Chinese water to rtu re 1s found on page eleven. In between, one finds a reference to Madame Tussaud's Horror Chamber 1n London, which the author says presents a fine example of the methods used 1n medieval tim es. He then discusses some more recent h is to ry , saying: In modern times sane of the methods used 1n Nazi Germany and Soviet Russia are whippings, use of thumb screws, removal of fin g er and toe n a ils without a n e sth e tic , breaking limbs and tig h ten in g metal bands by slow de grees around the su sp ect's head, and underfeeding and drugging to weaken a su sp ec t's re s ista n c e , coupled with long relays of Interro g atio n la stin g many hours w ithout a b re a k ... 50-365 0 - 7 5 - 9 124 The inspector then goes Into the descrip tio n of water to r tu re , which you c ite d , w ithout the s lig h te s t suggestion th a t he favors the use of the medieval rack, the methods of Nazi Germany and Soviet Russia or the water to rtu re . The he said: the th ird which the inspector lis te d the pros and cons of th ird degree methods, and then "As we see from the above discussion of the methods of In te rro g atio n , degree method 1s fa r outweighed by the method of Interro g atio n 1n th re a t and force 1s not used." The inspector did n o t, i t is tr u e , condemn the use of force and th re a ts u nqualifiedly, arguing th a t th ere were conditions in his country which would ju s tif y "the judicious use of o ff ic ia l se v e rity or the use of th re a ts and force to some ex ten t in the hands of scrupulous in te rro g a to rs as a la s t r e s o r t..." Obviously th is is a fa r cry from your im plication th a t the in spector was an advocate of the use of the Chinese water to rtu re and making "raving lu n atics" of suspects. I t is also q u ite d iffe re n t from your a sse rtio n th a t the inspector said "to rtu re" is p ra c tic a l and necessary as a la s t re s o rt. 4. You quote another student from Nepal, Kula Nand Thakur, as saying th a t "carelessness" by In terro g ato rs had caused death, thereby creatin g "another tro u b le." One 1s presumably supposed to In fe r from th is th a t Thakur was defending to rtu re while callo u sly suggesting th a t care ought to be taken to avoid k illin g the suspect. The statem ent you quoted 1s found on page 9 of Thakur's paper in a paragraph th a t reads as follows: The use of th re a ts and force during In terro g atio n cannot be s a i d . .. useful to e x to rt the rea l cause of the commission o f a crim e...Tim e and patience 1s needed and tru th 1s th ere . A m atter of fa c t, a p o lice o ffic e r has heavy works to perform and has no so much time to U nger on a case, so to get rid of i t he tr ie s to solve the problem immediately by”use of th r e a ts , force and physical coercion. Instead of d e te rio ra tin g (decreasing) the crime 1n th is way, he causes the number to in crease. Many c rim in als, 1 t has been observed, are so accustomed to r e s is t physical force th a t they die of beating and to ru tre ra th e r than speak the tr u th . In some cases, I have seen th a t due to the carelessness of the in te rro g a to r while using physical force h it some tender p a rt of the body o f the suspect and causes death, thereby cre a tes another tro u b le. These incid en ts cause very bad repercussions 1n the public...W e are p ro te c to r and not oppressor. Therefore we have to discard th is theory to ta lly to adapt ourselves according to the advancement of the so c iety . This statem ent would seem to in d icate th a t the humanitarian tra in in g a t the International Police Academy was having an e f f e c t, the precise opposite of what your o u t-of-co n tex t quotes were designed to demonstrate. 5. You quoted Gonzalo Wllches Sanchez of Colombia as saying: " It 1s understandable th a t 1n Innumerable cases, the In terro g a to r is forced to use systems of moral or physical coercion to obtain tru th th a t the person knows." You did not point out th a t th is w rite r made 1 t c le a r th a t he did not 125 mean " b ru ta lity or to rtu re" 1n re fe rrin g to "physical coercion." He also emphasized th a t he was not advocating the use of methods th a t were Ille g a l The only case 1n which you appear to have c o rre c tly represented the views expressed 1n the paper of the tra in e e 1s th a t o f the man from Z aire. We tr u s t th a t you were misled by incomplete Information supplied to you by your researchers and th a t you w ill want to a c t promptly to c o rre c t the misleading Impression th a t your colunn created concerning the work of the In tern ational Police Academy and the views o f the fiv e foreign train e e s on the subject of the use of force and th r e a ts . ccT: Mr. Ned Schnurman, National News Council 126 toe vashingtonvost s.tvrd*y,A<*.z.?*?4 cx5 QuestionableMeans ofInterrogation By Jack Anderson Students at the International Police Academy,sc'uo.il nm by the Stat*- l)epanrn-nt. to train jforei£U policemen, have devel oped some chilling views about torture tactics. Afit r a lenr.thy investigation, we Ua\c four.d no evidence that the academy actually advocates third-decree methods. But we have read several student pa pers which discuss the use of torture to break suspects. “As a last icsort. . . ” wrote a Nepalese inspector, tenure is 'practical and necessary.” A South Vietnamese police man wrote that ‘ threats and force can put out any truth in 2 luis'imuRitiKic.” A Zaire ofiicer agreed “force or threats*’ will expedite an investination but \v;.n.c*d: 'This trctie mu:>t not be known by the public.” Another student f*-om Nepal told bow “carelessness” by intorrcnators had caused death, thereby creating '‘another trou ble.” The State Department-run academy has been accused of teaching torture tactics. The movio “State of Siege,” for ex ample, showed the school’s graduates torturing political prisoners. An .investigator for Sen. James At'tnuvck (It S.D.) told us he had *eon a mur.Ver of theses v.vittcn by the ar.ite.iiy’s stu dents jn >.i t-rtvre tac tics. The papers were written in English, Spanish and French, he said, and were kept in locked, steel cabinets. My associate Joe Spear, aceompanicd by Spanish and French translators, paid a call upon the police academy, which is located in an old streetcar ga rage called the “Car Bam” in Georgetown. They were shown evidence, selected by the school’s admin istrators, which tended to prove the school dot.sn’t teach torture tactics. Their own documents, however, reveal an ambivalent attitude toward torture. For example, the lesson plan includes instruction in “Inter views and Interrogations.” This teaches foreign policemen to Question suspects in sound proof, windowless rooms with “bare walls.” They are instructed to use .such interrogation techniques as “emotional appeals,” “exag gerating fears," and psychologi cal,.'jolts.” They are taught to observe the “physical state of the subject” for “sweating,” “color changes" “dry' mouth” and rapid pulse and breathiug. The lesson plan also states, however, that “so-called third degree tactics” should not be used. It is argued that these techniques lower the interroga tor’;; ••self-respect,” impair “po lice efficiency," lower “the es teem of the police in the public eye,” and lettd to “false confes sions and miscarriages of jus tice.” The foreign policemon. who ; Gonzalo Wilches Sanchez, Co comc to the academy from such lombia—'it is undeniable that repressive governments as Bra in innumerable cases, the inter zil, Chile, Pakistan, South Viet rogator is forced to use systems nam and Uruguay, are told "a of moral or physical coercion to prisoner must be treated ac obtain truth that the person cording to legal and humanitar knows.” ian principles.” Bemonatu Mpanga, Zaire— But our examination of the “The use of force or threats dur student papers showed many ing an interrogation can be seen students graduate without as one of our police tactics to be showing much effect of their used for the expedition ol an in “humanitarian” training. Here vestigation ... Above all, the are a few excerpts: press ... should not liave the Tdan Dinh Vol. South Viet slightest information about our nam—“Based on experience, we methods of procedure.” are convinced there is just one Footnote: Abourezk has intro sure way to save time and sup* duced legislation that would press stubborn criminal sus- eliminate the State Depart pects—tlnt is the proper use of ment’s Office of Public Safety, threats and force." which runs the International Police Academy. •LamVan Huu, South Vietnam —“What do we mean by ‘force Washington Whirl—Army Sec and . threat?’ Physical force— retary Howard Callaway has fro beating, slapping, electrocut zen the reserve* promotion of ing. Threats—physical, shaking former Nixon campaign lawyer a fist in the face of the subject; Paul O’Brien, who was impli verbal, saying ‘Listen, I’mgoing cated in the Watergate hush to brenk your neck if you don’t money case. A Pentagon spokes man told us Callaway discov confess.’ ” ered O'Brien had been pro Inspector Madhav l’.iekrum moted to brigadier general, Rana, Nepal—“Many a times po froze him in his rank as colonel lice officers have gained valua and is now giving the case “fur ble clues by the use of (drugs)... ther evaluation” . . .Sen.Strom The water torture is a simple Thurmond (It-S.C.) and Rep. and ancient method of letting a Wayne Hays (D-Ohio) feel they tap to drip on a man’s head at a are too well-known to bother certain interval. This is very ef with name tags. At a recent tes fective in breaking a tough man timonial dinner, both men and can make a raving lunatic of scorned name tags claiming any human being after an hour that “everyone knows me.” cl«?4.t:r.i(*dFe»tur* Syndic*** 127 E x h i b it C Accuracy In Media, Inc. 777 14th Street, N.W. Washington. D .C . 20005 (202) 783-4407 Reed J. Irvine Chairman of the Board September 17, 1974 To the editor: In a recent column (8 /3 /7 4 ) columnist Jack Anderson attacked the Intern atio n al Police Academy, which 1s run by the U. S. government to tra in police o ff ic ia ls from developing co u n tries. Anderson said: A fter a lengthy in v estig atio n we have found no evidence th a t the academy actu a lly advocates third-degree methods. But we have read several student papers which discuss the use of to rtu re to break suspects. Anderson then quoted from six of these papers, suggesting th a t the quotes "showed many students graduate w ithout showing much e ff e c t of th e ir 'hum anitarian' tra in in g ." By taking statem ents out of context, Jack Anderson has m isrepresented the views of the authors of fiv e of the six papers he c ite d . For example: Anderson quoted Lam Van Huu of South Vietnam as saying: "What do we mean by'force and th re a t? ' Physical force—b eating, slapping, electro cu tin g . Threats— physical shaking a f i s t in the face of the subject; verbal, saying, ‘L isten, I'm going to break your neck 1f you d o n 't confess." Anderson implied th a t Lam Van Huu was advocating such measures. What Anderson concealed from his readers was th a t Lam Van Huu a f t e r defining what was meant by "force and th re a ts ," went on to give nine reasons why police In te rro gators should not use force and th r e a ts . He did not te l l his readers th a t Lam Van Huu concluded his discussion with th is strong denunciation of the use of force: Thus the use of force and threats is not only a method th at 1s vicious and Inhumane, but a lso dangerous and u s e le ss. Those th at are for -force would do b e tter to q u it the p o lice force and take up the career o f Foxfng. Another train e e gave a b rie f h is to ric a l review of the use of to rtu re , going back to medieval times. In the course of th is he b rie fly described the Chinese water to rtu re . Anderson quoted th is descrip tio n and implied th a t the train ee was advocating I ts use. The tra in e e c le a rly did not advocate th i s , nor did he advocate the other measures he described th a t were used 1n medieval Europe and in Nazi Germany and Soviet Russia. Mr. Anderson's in v estig ato rs examined 56 papers out of nearly 5000 prepared by train ees a t the In tern atio n al Police Academy. He quoted from six of the 56, and by taking the statem ents out of context he misrepresented the views of 5 of the 6 authors. He completely ignored a ll statem ents th a t did not support his exercise in advocacy journalism . cc: Jack Anderson and a ll papers carrying the Anderson column 128 E x h ib it D © )c toasjjington |tost FEBRUARY 6, 1975 ^ Jack A nderson Column Is Found ‘ Inaccurate’ NEW YORK, Feb. 5 (AP> — The National News Council said today a syndicated Jack Anderson column entitled “The Torture Graduates” made biased and inaccurate use of quotations from source letters. Accuracy in Media, a Wash ington-based group, had filed the complaint against the col umn with the National News Council, a private organizatori that investigates allegations against the national news me dia. The column, which appeared in The Washington Post Aug. 3, 1974, asserted that “ students at the International Police Academy, a school run by the State Department to train for eign policemen, have devel oped some chilling views about torture tactics.” Accuracy in Media charged that statements from papers written by five students at the acadcmy were taken out of context to support the asser tion Tho council said members of its staff examined the five papers and “ found that the quotations by Anderson do in fact misrepresent the attitude of the students toward torture as set forth in their papers.” The papers were written in 1965-67, a fact that was not mentioned in the column, the council findings said. Anderson said in a letter dated Dec. 30 that the state ments in the column were sup ported by sources whose iden tity he could not reveal. The council said that if support ex ists, it was Anderson’s respon sibility to develop and publish it Anderson could not be reached for comment on the council's findings. However, reporter Joseph Spear, who re searched the story, said, “ We think they are absolutely wrong. They have not yet done a thorough job. We feel justified in what we wrote.” 129 E x h i b it E Accuracy In Media, Inc. 777 14th Street, N.W. Washington, D.C. 20005 (202) 783-4407 Reed J. Irvine Chairman of the Board February 19, 1975 To the E d itor: The N ational News C ouncil r e c e n tly issu ed a fin d in g that colum nist Jack Anderson had been g u ilt y o f d is t o r t io n and inaccuracy in a column he had w ritte n la s t f a l l about the In te rn a tio n a l P o lic e Academy. The C ouncil was a ctin g on a com plaint f i l e d by Accuracy in Media. In a recen t column (2 /1 0 /7 5 ), Anderson attacked the Council and i t s fin d in g . He sa id : "We spent se v e ra l months in v e s tig a tin g the Academy, in clu d in g the tr a in e e s ' a ttitu d e s toward t o r t u r e ." He con tra ste d th is w ith the statement that the A sso cia te D ire cto r o f the N ational News C ouncil had spent the b e tt e r part o f a day going over the relev a n t documents at the Academy. A nderson's statement con fu ses the iss u e and Ls u n fa ir to the N ational News C oun cil. The C ouncil was not concerned with Anderson's in v e s tig a tio n o f the Academy. I t was concerned with statements he p u blish ed taken from s ix papers w ritte n by students at the Academy. Anyone w ith a command o f.E n g lis h , Spanish and French, or with the a ssista n ce o f a t r a n s la t o r , cou ld determine in a few hours whether or not the qu otation s Anderson l i f t e d from these s ix papers were tru ly re p re se n ta tiv e o f the views o f the authors or whether they were taken out o f con tex t and d is t o r te d . Accuracy in Media found that f i v e out o f the s ix were so d is t o r te d . The N ational News C ouncil made an independent in v e s tig a tio n and f u l l y confirm ed our fin d in g s. I t i s m isleading fo r Anderson to ta lk o f h is in v e s tig a tio n extend ing over many months. The fa c t is that h is peop le spent only fiv e hours at the Academy going over a t o t a l o f 55 papers. They took qu otation s from on ly s ix o f th e se , the same s ix that we and the N ational News C ouncil examined. I t i s apparent that they were able to make on ly a very s u p e r fic ia l examination o f 55 p a p e rs, many w ritte n in fo r e ig n languages and by hand, in the f i v e hours a v a ila b le to them. I f the N ational News C ouncil spent one hour per paper, they did a much more thorough jo b than Anderson cou ld p o s s ib ly have done. We fin d no m erit in the te stim o n ia l to Anderson’ s accuracy from Senator James Abourezk. This is roughly comparable to Anderson g iv in g a te stim o n ia l to Les_W hitten. Abourezk, at the time A nderson's column appeared, was try in g to e lim in a te the In te rn a tio n a l P o lic e Academy. Anderson’ s d is t o r te d column was a b ig a s s is t fo r him. Anderson was h elp in g him, and he would be u n gra tefu l not to come to Anderson's a id . A nderson's d is t o r t io n s helped k i l l - the In te rn a tio n a l P o lic e Academy. But at le a s t the p u b lic should take note o f the methods he used. c c : Jack Anderson and a l l papers carryin g h is column 130 E x h ib it F United States ofAmtnc* F o/. 118 Congressional 'Record » PROCEEDINGS AND DEBATES OF THE Q 2 a CONGRESS, SECOND SESSION W A SH IN G TO N , W EDN ESDAY, FEBR U A R Y 16, 1972 HON. F. EDWARD HUBERT XN THE HOUSE. OF B S ’SKSWTATTVBB Wednesday, February 16, 1972 Mr. HUBERT. Mr. Speaker, it has been nearly a year since the nostrils of Amer ica's* television audience were choked with the stinch of the irresponsible, poli tically carious presentation disguised by the title, “The Selling of the Pentagon." The odor has never faded, as is wit nessed by the most recent analysis pub lished by Accuracy in MmM*, an Inde pendent organization which will not let the truth die. And after 1 year of squeamish, pusil lanimous explanations by the Columbia Broadcasting System, the truth con tinues to emerge. The following speaks for itself: fFtaan ATM Bulletin, Feb. 1, U»72| OB8 K i p u b to C uries' Q r a m o m About February 23 will mark the anniversary of ttoB tin t A r a b g a t flu CBS controversial docomentary. T h e Selling o f the Pentagon." Claude Wltae o f tbe Air roree'TSaimaf, Cont w m i n F. Edward Hubert. Chairman of the Boom Armed Services Committee, and Ac curacy In Media were among Uxe severest crit ics of this program. On March 30. 1971. AIM a m a 7-page letter to Richard 8. Salant, President o f C88 News, asking for his com ment on many Inaccuracies a* questionable points In tbe documentary. In our letter to Mr. Salant, we said that we agreed with a statement made by Soger Modd In the broadest, which said: “Nothing la more es sential to a democracy than the tree flow o f Information. Misinformation, distortion, propaganda all interrupt that flow.” AIM said that “The 8elllng o f the Pentagon” con tained a great deal o f misinformation and distortion. We wanted CBS to clear up the disputed points as quickly as possible, cas rmoMxsn ooM f m in m w mtrt.r On March SB. 1971. Mr. Salant replied to AIM saying that be had decided to wait for the myriad of complaints and charges to ac cumulate and then prepare a comprehen sive analysis. He said: "When this analysis is completed and at such t in s as we deter mine its release is appropriate, I will inclnde you an our distribution list.’* Many months passed and no reply to the questions was forthcoming. AIM raised this with CBS from time to time. We urged our supporters to write to CBS to prod them Into releasing the promised analysis. Finally, in December 1971, CBS Informed us that we could find the long-awaited analysis in the Congressional Record for nmwmhet IB and and K 13007. There was no press release, no announcement that CBS bad met Its critics head-on and had shown them to be wrong. No oopy o f the reply was sent to the principal critics. We all had to look It up in tbe Con gressional Record, where tt bad been Inserted by Congressman Ogden Bald, who said he obtained It from the president o f the BadioTelevlslon News Directors Association. The press has completely overlooked this latest word In the greai controversy over the CBS documentary. I t appeared that that was pre cisely what CBS wanted. Tbe less publicity the better. cas « B U n a r w m o m CBS does not claim to be infallible, but AIM’s experience is that It will rarely admit an error. Mr. Salant appeared on TV on the nightjar March 38.1971. to reply to the critics of T h e Selling o f tbe Pentagon.” He said: "We are prood o f "The Railing o f the Ita ta gon* and CBS News stands behind it." Hs said they could refute every aharge o f the critics who had appeared on the air—Cong. Hubert, Secretary Laird and Vice PnaWont Agnew. Nine* months later. In the statement quietly slipped into the Congressional Peoord CBS admitted that not all at tbe criticisms could be refuted. For CBS that was quite an admission. That was why they sought no publicity foe their statement, we hpUeve. CBS now actually ooncedes that five points o f criticism wave to some extent justified. It admits that the editing o f one of the answers Assistant Secretary o f Defense Henfcln gave to a CBS question might not have caapeyed accurately what Mr. Henkln actually said. CBS also admits that It was wrong In saying of defoliated areas that “ nothing will grow there any moee." It agrees that it should have mentioned that one o f the Pentagon films it ortttctenrt was actually produced by CBS. CBS also concedea that tt greatly ex aggerated the number of offices In the Penta gon, and allows that It should not have used language that Implied that It had to track down the industrial War College team that was putting on a National Security «f« in » T In Peoria, Illinois. In addition to these admissions at error. CBS mafces de facto admissions o f error in two other oaess. In the broadcast, OBS had said that a still unpublished r e p o t o f .the prestigious 20th Century Fund bad estimated real total spending by the Defense Depart ment on public affairs at $190 million, com pared with the budget figure at $80 million. CBS now concedea that the report of tbe 20th Century it contained no such figure. CB8 tries to wrig gle out of this embarraaelng situation by showing that such a figure was used in some o f tbe research done for the study. However It was also clear that the figure was hot used in the published study precisely because it could not be verified and tbe 20th Oentury Fund quite properly would not accept it as valid. CBS was therefore both wrong and unethical in foisting off such a figure on its N o . 20 ' The second tfe facto admission o f error relatee to the CBS charge that Pentagon ex penditures on public affairs In 1971 were ten times the 1969 level. CBS now admits that the 1969 figure far public affairs expenditures was not comparable to the 1971 figure because different definitions for "public affairs ex penditures” were used in these two years. AJU THX ADMITTED EM OKS SWUOtTS? Tes. Three of them are quite serious. The Improper editing o f the Henkln Interview, which CBS now concedes, was one of the ob jects of the heaviest attacks of tbe critics of the documentary. For example, Martin Mayer In the December 1971 issue of Harpers maga zine said this about the editing of the Henkln interview: "This episode shows at least sub conscious malice, a desire by the producers o f the program that the man In charge of the Pentagon selling apparatus look bad on the home screen." Reed J. Irvine, writing in the August 10. 1971 issue of National Review, said that In editing the Henkln Interview, CBS dkl more than make Mr. Henkln look bad. He stated In his reply to one o f CBS's questions bis Justification for spending pub lic money to inform the public o f the reasons why we need national defense. Since CBS was clearly out to prove that such expenditures were wasteful, the mangling of the Henkln Interview was necessary to make sure the viewers were not provided with any effective counter-arguments to the point CBS wanted to make. CBS, o f course, does-no go very far In ad mitting that it might have done better by Mr. Henkln. Discussing the transposition of answers that Mr. Henkln gave to Incorpo rate them as parts of answers of different •questions, CB8 says: “ Upon revlew. one might Judge that a fuller answer could have been broadcast by including, in the compo site answer, the seoond sentence of the ‘orig inal’ answer . . CBS concedes that edit ing involves subjective judgments and that others may disagree with the judgments of CBS. It Insists, however, that in editing the Henkln interview Its intent was to condense clarify, not to deceive. The admission that it might have done better by Mr. Hen kln la limited and grudging, but it is a step forward from the previous insistence by CBS President Prank Stanton that the editing was completely fair. The two errors cited above relating to the amount of money the Department o f Defense spends on public affairs are serious because In the documentary CBS placed a great deal o f emphasis on the amount o f money being spent on these activities. It used the false $190 million figure In comparison with the, combined news budgets o f the three com mercial television networks, showing a graph on the TV screen that told the viewer that the Department of Defense spent more to tell Its story •to the people than all three net works spent to bring them the news. The exaggeration of the else of the Pentagon expenditures at the beginning o f the pro gram helped establish the Important nature o f th *;sobjeet o f tb* documentary. 131 E 1234 CONGRESSIONAL RECORD — Extensions of Remarks February 16, 1972 anything an employee of a company does. In the fact that the editing was clearly contrary cluding civic activities, can be attributed to to the rules later adopted. the firm that employs him. Theee are the most obvious criticisms to (8) CBS aocused the lecturers for the In be made of the CBS defense of its editing of dustrial College off the Armed Forces ot vio the MacNell speech and the Henkln inter lating military regulations in discussing for view. CBS is actually dishonest in suggesting eign policy Implications o f Vietnam. It was that there was no “Significance to tbe fact criticized for not pointing out that the talks that it took a sentence out o l proper chron given by these speakers had been cleared ological order to begin the synthetic state not only by Defense but by the State Depart ment it created for Col. MacNell. The sen ment. The Assistant Secretary o f Defense tence was: “Well, now we're coming to the says this Is all the regulations require. CBS heart of the problem, Vietnam." This was Insists that the talks violated regulations, no then followed by a statement the colonel had matter who cleared them. Since nation*! de made about Thailand and two sentences that fense and foreign p<dlcy are frequently inter be had quoted from the Premier of Laos con twined, It would seem clear that the Depart cerning Southeast Asia. The latter two sen THE UEOas CBS REFUSES TO ADMIT ments o f Defense and State are In a better The purpose of the CBS reply Is not to ad tences were taken ao completely out of con position than CBS to determine whether or m it and apologize for errors in The Selling of text that they were not shown as quotations not a speech runs oounter to government the Pentagon. although that Is grudgingly at all in the CBS synthetic statement. regulations and policy. Why waa It necessary to introduce state d ate In a few cu es Bather. CBS set out to (4) CBS was charged with having fa&ely ments about Thailand. Laos, Cambodia and dS*s»» t b t : tfce critics, not CBS. had erred. suggested that friendly Congressmen, spe other Southeast Aslan countries with the T h ai O k reply Is mainly an effort to rebut cifically Cong. P. Edward Hubert, had been the m m enxH criticisms made at the docu- statement on Vietnam which CBS took out “ used” by tfae Pentagon In broadcasting In of Ite proper order? CBS did this for the very mentary. In addition to the points already terviews that they had made with Ma J. James discussed. the CBS reply takes up the fol good reason that it wanted to lead into Col. Rowe. Tills was vigorously denied by Oong. MacNell's synthetic statement with this: lowing criticisms: Hubert, who denied that the Interview with <1) The editing of the remarks of Col. “The Army has a regulation stating: Per MaJ. Rowe, was produced at the suggestion sonnel should not speak on the foreign policy John MacNell. which Involved creating a syn implications Of the Pentagon or that th e broadcast to his o f U.S. involvement In Viet thetic statement from widely separated sen nam." It would home district lnvotvod the use of Pentagon appear that CBS wanted to tences in his speech; funds. This could easily have been the infer create tbe impression that Col. MacNell was (2) The circumstances surrounding the ence drawn by those who beard the CBS at that regulation. The speaking in violation appearance of the Industrial War College lec easiest way to do this was to lead off the statement. CBS says the program did not say ture team In Peoria. 111., especially whether that the Pentagon produced the H6bert-Rowe statement created for him with a or not the visit was arranged by Caterpillar synthetic Interview or that It was the Pentagon’s idea. sentence taken out o f order. CBS seems not Tractor Co.; However, It undermines this denial by to h i latnnH the mwming and ttopprtance (3) Whether or not the IWC lecturers vio of context. If It can still say that what tt d*d stressing that Oong. Hubert thanked the lated regulations In discussing foreign policy; to colonel wtio served as liaison with the Houae Ool. MacNell’s statement was fair editing (4) The accuracy of the statement that the then Armed Services Commltee for bringing MaJ. no one’s words are safe with CBS. Pentagon "used" sympathetic Congressmen (2) CBS described the National Security Rowe to him. *n»ey d o not seem to oonsider to Interview military heroes such as MaJ. that Cong. H6bert might have asked the Seminar given by tbe Industrial War College James Rowe to counter anti-war reporting. ooianel to bring MaJ. Rowe, who was famous tn Peoria, HI., this way: “ The Pentagon has (6) The charge that CBS used false pre for surviving five years o f captivity as a VC tenses to obtain a tape of the interview of a team ot colonels touring the country to prisoner and who successfully escaped, to see lecture on foreign policy. We found them In M&J. Rowe by Congressman Hubert; him While denying that tt meant to imply (6) The charge that CBS falsely suggested Peoria, 111., where they w en Invited to spealc what tt implied, CBS persists in conveying to a mixed audl&noe o f civilians military that the Pentagon spent about $12 million reservists. th» unfair implication. The invitation was arranged by a year on films to be shown to the public; (6) Cong. Hubert charged that CBS ob Peoria’s Caterpillar Tractor Co.. which did (7) The charge that CBS gave a mislead &39 tained Che tape o f his Interview with MaJ. million of business last year with the ing Impression about a film narrated by Rowe by telling ills office that It wanted lit Defense Department.” Robert Stack; In connection with a documentary It was Every one o f these sentences Was cjial(8) The charge that CBS Implied that an doing on prisoners ot war. CBS denies this, expensive war game was staged for the bene lenged by the critics. The team did not come saying that It was public knowledge that It from the Pentagon, but from the- Industrial fit of a few VIP civilians; was doing a documentary on public infor <0) Charges that CBS selectively edited ja War College. In addition to colonels. It in mation activities o f the Department o f De film of a press briefing by Jerry Prtedheim to cluded a Navy captain and a State Depart fense at the time It obtained the Hubert*tape. it appear that be was unresponsive to ment civilian. The seminars cover S3 topics,' CBS asserts that no one on Its staff ever including foreign policy, and they are given newsmen s questions: represented that the tape It wanted from each year in seven locations throughout tbe Cong Hubert was to be used for a POW <101 ditto Cor a Saigon news briefing; and country, primarily Tor the benefit o f military documentary. <111 Chsxpec that CBS gave a wrong lm- reservists. They were Invited to Peoria by the On the contrary, says CBS, they said they premOam to saving that the U-S had resumed Association at Commerce o f Peoria, which wanted the film In connection with a docu tonmiMag <£ Starth Vietnam. shared sponsorship with the 9th Naval Dis mentary on Pentagon public relations ac CBS n t m a so admit that there was merit trict. tivities. This is flatly contradicted by Oong. to any at these charges. but In every case its CBS, in a lame rejoinder, Justlflsa its Hubert's press secretary and by the Congress refutation la weak and unconvincing. phrase, "a team o f colonels,’’ by asserting man. Oongreaman Hubert has put Into the record letters or memos from the offices of (1) CBS Justifies creating a synthetic that the Navy captain is equivalent to a live other congressmen who assert that they statement and putting it the mouth of Col. colonel and the Btate Department civilian was a recurve It. colonel. It does not explain were approached by the same CBS staffers John MacNell on the ground that each of the who approached Congresman Hubert’s office sentences used was actually said by Col. Mac- why it called this a “Pentagon” team rather to obtain tapes of Interviews with MaJ. Rowe. Neil and their meaning was not altered. It than identifying the responsibility o f the Four o f them said they were told that OBS admits that one ot the sentences was taken Industrial War College (Industrial College wanted these tapes In connection with a out of chronological order, but It does not of the Armed Forces), but It Justifies the mis documentary tt was doing on POW*. CBS mention that this is contrary to the CB8 leading term by saying that the military makes no mention o f this evidence confirm Operating Standards for News and Public officers are all subject to the authority o f the ing Oong. Hebert’s charge that the CBS staff Affair*, which state that this kind of trans Pentagon. It admits that it should not have sought tapes ot interviews between congress position must not be done without Inform said it "found’’ them in Peoria. It admits that men and MaJ. Rowe under the protense that ing the audience. This rule was adopted In the team lectures on many subjects other they were working on a documentary on June 1*71, after the controversy about The than foreign policy, but It defends the mis POWs. in a delightful evasion. CBS says: SeElng ot the Pentagon. But If CBS says that leading statement by saying that the broad "Months after the Rowe-H6bert program there was nothing wrong with this kind of cast did not say the team lectured only on was delivered to Mf. Seabrooks, Mr. Branon transposition in The Selling of the Pentagon, foreign policy. Presumably if the listeners inferred that, that was their mistake. contacted Mr. Hubert’s offloe and the offices we wonder how seriously CBS intends to en o f other Representatives to obtain informa force its new regulation. CBS says it waa justified in saying that tion with respect to additional Congressional The same point can be made about the Caterpillar arranged the Invitation* 4>Scaus8 interviews with Major Rowe and other mili editing of the Henkln interview, which also an official o f Caterpillar was co-chairman o f tary personnel. Including other former pris Involved clear violations of the rules against the committee that arranged the seminar and oners o f war. I t In at this point, seemingly, the transparing of answers to questions with they were told that he and his associates were out giving an indication of this to tbe au very helpful “in heading up the committee dience. tn tta dteeo a w n o t the editing of the and m»iklng all the necessary arrangements." Henkln interview. CBS makew no mention of CBS would apparently have us believe that The other three admitted error* are sig nificant In that they cast light on the bias and carelessness of CBS. The bias Is clearly shown In the Incorrect description of the results of defoliation In Vietnam. The truth could easily have been ascertained by CBS. but It would not have been so dramatic. The exaggeration of the number of offices in the Pentagon by a factor of 6 shows the same kind o f bias, as does the implication that CBS bad to “ find" the Industrial War Col lege lecturers. The criticism o f the film. “Road to the Wall,” would have been blunted If CBS had correctly attributed Its produc tion to CBS rather than to the Pentagon. 132 February tOf 1972 CX>NGJRESSIONAL RECORD — Extensions of Remarks E 1235 anything an employee of a company does, in that the confusion b^gan. The focus on addi being asked, the first three of which Mr. cluding civic actlvitlco, can be attributed to tional Rowe Interviews and other POW inter Friedman declined to answer or oould not views may well have been the genesis of the answer. In the CBS portrayal, his response th f firm that -roploys him. rate was only 60 per cent compared with tbe (S ) CSS accused the lecturers for the InmlsuuSerstanding which arose.” We are expected to baileve that five Con actual 80 per cent which CBS says prevailed dustrial Ocllege oft tbe Armed Faroes off rk>Hf f m military n g u U tto u in discussing for- gressional offices all got the Impression that for the entire briefing. CBS aay*: “This Is a CBS wanted these tapes in connection with fair representation which does not reflect elgn pettier implication* o l Vietnam. It « m criticized to t not pointIn* o at that the talks a documentary on POW’s even though they adversely on Mr. Friedhelm." What CBS se given toy «**»• speakers bad been cleared were all presumably told that CBS wanted lected to show was dearly not typloal o f not only t*y Dsflnue bat by tbs State Depart- them in connection with a documentary on Mr. PriedJieim’* performance at tbe briefing. fjcktnt. The Assistant Secretary of Defense Defense Department public relations activi CBS appeared to be trying to make the point says this U »U tbe regulations require. CBS ties That is too strange a coincidence to be that the press briefings are an occasion when the press Is trying, without much suc lnsfists that the talks victatad regulations, no swallowed. (6) CBS devoted nearly one-fourth of “ The cess, to extract information from unwilling v**ttar who rteared «u?m. Since national detmtm *r*A faceit;** poiief are frequently inter Selling of the Pentagon" to films made by Defense Department spokesmen. twined. it w w M rc*m clear ttiat Uio Depart- the military and available to the public. It Ttx introducing Mr. Friedhelm, CBS de n\~rtta o f JtW«use and State sra In a better said that most of the films were made orig scribed him as an “ adversary" of the press. position than CBS to determine whether or inally for troop information but a large num *n*e briefing was described as a “confronta o o t a 8Brt«sH rnnfi counter to giiTecmuent ber was later released for public showing. It tion,” and CBS said off Mr. Friedhelm: “Ha said that the Pentagon spends over 913 mil does not, o f course, tell all he knows; he regulations wkI policy. (4) c m w»s d ittytd m th having falsely lion a year on films. Later, in criticizing anti wouldn't have his job long If he did." There flugpM**! ***** firWMlly Oocgreaomen, spo- communist films made by the Pentagon, CBS followed tbe carefully selected segment from (dfinOir Onwg. F. BSdward Hubert, had been said: “But to the filmmakers at the Penta the briefing showing Mr. Friedhelm avoiding ~u«wl~ I t h e Pentagon in broodoasting tn- gon, with at least 913 million a year to spend, answering reporters* questions. That is what tervkur* O u t they twvl made with MaJ. James 1M6 seems to have lasted a whole genera CBS calls a “ fair” representation. The same Bowes. TUia v u vigorously denied by Cong. tion.” One could easily infer from these kind of treatment was given tbe press brief XttiMTt. who denied that tbe Interview with statements that a very large part of the $12 ing in Saigon for exactly tbe same reason. lfbsj. Bowe was prodaceri at tba suggestion million goes for films that are Intended for CBS said the dally press briefing there waa o< tbs P«Jt*pon or that the broadcast to his public release. The Pentagon notes that the “ known among newsmen In Saigon as the b o m district tnvotvr*l the use o f Pentagon great bulk of th e films are made for troop Five O'clock Pollies.” It indicated that ttoa fruvts. ThUi/w ad ewrtly have »>*en the tnfer- training, research development, recruiting, most popular phrase at the briefing was <noe dr*wn by thane who heard the CBS medical and religious use. It charges that "n o comment." ■tafewow*. CPA says the program, did not say CBS was wrong in implying that the $12 It then Illustrated this by showing a film that tto# £toafa*£nn produced tbe H£bert-Bowe winimn m films was largely used to influence cUp o f the briefer declining to answer ques ftntarviow or that it was the Pentagon-8 Idea. the public. CBS responds that It had no in tions. The Defense Department that B o m r n , it undermines this denial by tention o f implying what most o f th e viewers this was not a typical scene. CBS does not ■IjuiMln.ij that Cong. Hubert thanked the probably Inferred from what was said. (7) It is charged that CBS showed Robert deny that the sequence It showed was not arional «4v> ewvwd m liaison with the House typical. Instead It argues that the briefer MxamA Services Coeamltee far bringing MaJ. Stack narrating a Defense Department film should have been authorized to answer the ' Homy t» JMro. Tfcry <fe> not aaeni to ooastder In a way that suggested that he was doing a particular queetlrihs that be was shown de Vr*& Cong. JFWbert might have asked the film on the use erf weapons In Vietnam when, clining to answer. Arguable n»«* m y In fact, the film was about unarmed recon flCfcsMl fe<» bring MaJ. Bowe, wtvo was famous be. It does not get CBS off the hook far pro* foer surviving Ads ye*rs of captivity as a VC naissance pilots. The brief film clip used by sentlng an atypical weqnenee and iissslnp tt prisoner and wtv> auocessfuUy escaped. to s*o CBS did give the Impression that Stack was off to the viewers as completely i q m a ntaWni. White denying that it meant to Imply going to Udk about guns In Vietnam. CBS tlve at tbe dally briefings. What it Implied. CBS pendstb* to oonveylng says they had no Intention o f implying (10) CBS was criticised tor saying that tha this and that "n o such implication was the H n u unfair Implication. phrase "protective reaction” means that the (8) Cone. Hubert charged that CBS ob created.” Nevertheless, the Inference was U.S. resumed the bombing at Worth Vietnam. tained tap* o ' bis fcdtanrtew with MaJ. (8) “The Selling at tbe Pentagon'* gaveThe Defense D epartm oil states that ’‘protec Bowe by tailing his office that it wanted % tive reaction” means a w r y limited kind a t In oounectlon with a documentary It waa many viewers (be Impression that a large doing o o prt»pners off war. C53S denies this, military training exercise called SMylp« thAt it was peddle knowledge that It Strike” was put on for the benefit o f a small emphasizes that this does no* mean the re « m doing a doiNDfntasr on puMlc lnfor- group o f civilian VIP's. Deecriblng this mili sumption of the widespread bnmWng off — w t M U w nf tho Department o f De- tary exercise, CBS said: “ An air and land North Vietnam carried out prior to Novem ( n w « t the time It obtained the Hubert tape. assault on enemy territory m simulated for ber 1968. CBS responds that ft only said the C3VI Mwrtn t£»at do one m iti staff ever the visitors.” 01m Defense Department points _ bombing had resumed, without saying that I ttmt'ttM tape It wanted from out that the training exercise would have large scale bombing had been resumed. They i be rand for a POW taken plaoe with or without the VIP visitors say that thaJMfense Department hM made and that many other observe!^ including it dear that "protective reaction**, bombing On tfee cnciPMy . myu CEH3. they said they military personnel saw It. The answer CBS is different ftw n the pre-NovtaHber 1068 w in tiii tba Mat in onno*et»on with a docu- gives Is that it did not say that the exercise bombing. CBS not the slightest dis ■wntiry an ftnfawn o public relations ac- would not have taken place in the absence tinction Off this Mni*i *n<i many in >*»* audi off the VTP visitors, that It was other than a tMHM. This *s flatly contradicted by Ooog. ence could well have been misled Into think Hubert's press secretary and by the Oangrassing that the pttrase. “ the XTJS. t ----------------n t n . Ctongpesman F f t « t has put Into the hftwihtng q£ —u rw om m ttsr or memos from the ofltaea at UA bad r---------------------five other oongresicnen who assart that they (9) It was charged that CBS showed As were approached tty the areas CBS staffers who approached Coneresman Hubert's office sistant Secretary o f Defense Jerry Friedhelm to nbtela tapM of interviews with MaJ. Bmra. declining to answer half of the questions he Although CBS once claimed to have a a Four of them said they ware told that CBS was asked at a press briefing when actually — witart ta*v«s In connection with a at that briefing he responded to 31 o f the 34 answer for every one o f the arttjrhans off '~Tbm #smitrrntnry It » m doing on POW a CBS questions ssked. Tbe complaint waa that CBS Selling o f the Pentagon,** its oompjrshsnsl* a t k s s do mca£lon of *■*»<« evidence oonflrm- deliberately focused on those questions that reply to the critics leaves many questions un fcag Gang. HAwrt's charge that the CBS staff Mr. Friedhelm declined to answer for se answered. AIM criticised S3 points tn the aoagbt tapes o f Interview* between congreea- curity reasons to create the Impression that CBS documentary, and CBS dealt with on ly xnen and MaJ. Bowe under the he did not provide the press with much in 18 o f thees in its "aomprehenalve'* reply. Tan they wwe wortting'cn a doc formation. It was charged that OBS used the points, with 30 questions attached, w r v com FORTs. In a delightful evaeten. CBS i same technique to Indicate that press brief- pletely Ignored. a tta r the B oss-ffib ert program Among the questions CBS avoided Were s iM lrered to l*r. Seahrooka, Mr. Branon comment” answers to iftswamens’ questions. theae: ( l ) was it not inaccurate and nrffatr CBS said that at the Frledhalxn brisling to suggaat that John Wayne narrated De rt*s dfflns and the offices mtaUvea to obtain at least 58 questions were asked and Mr. fense Department films In return for help in Frtcdhplm was unable to sn aw t I t o f theee making "The Orasn BaretsT" (3) Bow does oosopletely far varying reasons. This meant CBS define its phrase. “Pentagon propa 80psr «s*rt o f the questions ganda.** and wyuld any tactual description k. n t* at this point, a cbs stwm sis questions northVietnam" 133 £1236 CONGRESSIONAL RECORD— Extensions of Remaria beled "propagan da* toy CJB6? D oes C BS k n o w t*+± W alter C rook It* h a s ch a n g ed h is m in d abcm t th e a g g r a a tf* n a tu re o f w n a w a l M , •a d tf n o t w b f m It Im plied tfcs* fee h * 4 dkmgnlfalsrte*»f - --------- -— - — ---------■“ - m .W i t f M d C B S ata fa OmU tbn d e alt w ltl» o omimnrtwtt'T Bow 4 o m CBS r e e o n d l* tt» w e r t * * t b i t w » ad op ted • P * * * o f “ p e a ce fu l e o e s t t « K * ~ prior t o u * l wftJh t b « B « r < r f « « ■ ftrrartoa. «b»OBbui BteDt crtel*,OM tmfldlng fl(«• M i n WaH a n d tb e CHOf o f Ttonkln reeolxiUOB? Many o f th e qtmttona CBB d M n o * try to am nver pvobad t b » m e e t a v l a ^ B n r m ^ T l i e ftmdmmeotiaiy d te h w u t C M « y law wfta r t a * M e w a c t t y i t f » on* t3 md oe- umen tary. T ta t to p m te lT « k * t ABC OML T h a t til w h y C BS haa n o t answ ered AIM 's deep p ro b in g question*. M r. S p e a k e r, i f an yo n e La fu rth e r In te re ste d in th e typ e o f p ro p ag an d a, su ch a s w as evid enced b y th e "B e llin g o f th e Pen tag o n '* p ro g ram , I add th is b it o f In fo rm a tio n fro m C la u d e W ltze ’a colum n in A ir F o rc e m a g a zin e : I P rom M r F orce m agazin e, February 1072] I n ease an y on e Is still Interested. “ T h e Sam n g o f th e P e n ta g on " is available for rental. I t c a n be obtain ed fo r a fee o f $60 fro m A m erican D ocu m en tary Film s, a n o n papAt orga n isa tio n with, offices « t 330 W es t 44Ux 8 1 , Mew Y o r k . tf.Y . 10034. oe f n a S79 B ay £tk* S a n Fraixiagp, C a lif. February 16, 1972 A m erican D ocu m en tary F ilm s advertises th a t It circu lates “ F ilm s fo r A g ita tion .” I n a d d ition t o th e C B S m asterpiece, y ou c a n se le c t fro m a list th a t in clu d es, f o r exam ple, “ 79 Sp rin gtim es,’’ d escrib ed as “ a brillian t Im pressionist biog ra p h ica l trib u te t o H o C h i M ln h .” A n d th ere Is “ H anoi, M artes 18,” w h ich Is a "m o v in g salu te t o th e V ietn am ese.” p resu m a bly th ose in N orth V ietnam . T h en th ere Is available, “ Stagolee: B obby Seale In Prison .” a film in w h ich th e Pan th er leader speaks ou t, an d a n oth er p ictu re in w h ich A ngela Davis tells it lik e It J», fro m h er view p oin t In JaU. T h e A m erican D ocu m en tary F ilm catalog does n o t in c lu d e "R o a d t o th e Wall,** a d o c u m en ta r y p rod u ced b y CB S f o r th e D epart m e n t o f Dcftense t o 1962. 134 E x h ib it G BABBON’S NATIONAL BUSINESS AND FINANCIAL WEEKLY BARRON’ S M ore o n N MAILBAG ader— To the Editor: It would appear from the corres pondence you have published that Ralph Nader’9 denial that he told an Australian audience that the answer to the problems ho had criticized “ is socialism or communism of one sort or another” has not settled the ques tion in the minds of some of your readers. Accuracy in Media has made in quiries of two people who attended the dinner addressed by Mr. Nader in Australia at which the remark was allegedly made according to a report published in The Australian. One was Mr. J. A. Caro, Managing Director of Samuel Taylor Pty., Ltd., who asked the question that produced tho alleged response by Mr. Nader. Mr. Caro has informed us that Tho Australian carried a letter from an associate of Mr. Nader’s, Barry O. Jones, pointing out that The Aus tralian had erred in attributing this statement to Mr. Nader. Mr. Jones stated that Mr. Caro had asked if Mr. Nader was arguing that what was needed was socialism or com munism of one sort or another. Mr. Caro confirms this. In his let ter to AIM ho wrote: “ From mem ory again, Mr. Nader’s reply in gen eral terms refuted that some sort of socialistic system was tho inevitable conclusion from the tenor of hi9 argument. I must say that I found his answer to my question rather unsatisfactory, but nevertheless, I must agree with his refutation of the accuracy of the facts as outlined in the original ‘Australian’ account.*1 This was confirmed also by Dr. H. C. Coombs, who was master of ceremonies at the Nader dinner. Dr. Coombs has written to AIM sayinj, “ The reported response to the ques tion is quite contrary to the spirit of what Mr. Nader said as I recall it. Kis emphasis was on the need for a higher level of social responsibility in industry end commerce, and on the importance of governments exercising ef fectively and independently of business interest their function as protector of the community interest. Such a view of the relationship be tween government and indus try and commerce 13 not compatible with aa advocacy of socialism or communism.” We believe tkat you shoul4 print this letter to clear up any remaining doubts about the inaccuracy of the quote attributed to Mr. Nader by The Australian which appeared in the Bar ron’s article of September 24, 1973. R eed J. I r v i n e Chairman of the Board Accuracy In Media Inc. Washington MAY 27. 1974 135 E x h ib it H Editors may adopt new code of ethics A fter seven months of discussion and rewriting, the American Society of Newspaper Editors will consider the adoption of a “ Statement of Principles” to replace its 52-year-old “ Code of Eth ics or Canons of Journalism .” The new statement which will be considered at the A S N E convention in Washington on April 15 -18 was w rit ten by the specially-appointed A S N E Ethics subcommittee. The committee members were Mark Ethridge Jr ., Paul Poorman, John Sengstaeke, Ralph Otwell, Jim Powell, Norm Cherniss and Abe Rosenthal. According to Ethridge, chairman of the subcommittee, the original code was written in 11)23 and has stood v ir tually unchanged since. However, Ethics Committee chairman Bob Clark called for a revision on the belief that it may be dated. Although there are many changes, Ethridge said much of the code was preserved in spirit if not wording. Sec tion II of the old code dealing with Freedom of the Press “ had to go,” he said. Other sections, tlje committee found, were confusing or fuzzy, such as the section on ‘‘news communications from private sources.” The draft which will go before A S N E members was presented to Eth ics Committee members in Louisville and sent out to the board of directors as well in Jan u ary. A fte r suggestions and critiques were sent to the commit tee, the final d raft evolved. Following is the 1923 Code of Eth ics and the rewritten version which will be voted upon in A p ril: CODE OF ETHICS or Canons of Journalism AMERICAN SOCIETY OF NEWSPAPER EDITORS i. R E S P O N S IB IL IT Y — The right of a newspaper to attract and hold readers is restricted by nothing but considera tions of public welfare. The use a news paper makes of the share of public attention it gains serves to determine its sense of responsibility, which it shares with every member of its staff. A journalist who uses his power for any selfish or otherwise unworthy purpose is faithless to a high trust. II. FR EED O M OF T H E P R E S S —Free dom of the press is to be guarded as a vital right of mankind. It is the un questionable right to discuss w'hatever is not explicitly forbidden by law, in cluding the wisdom of any restrictive statute. h i. IN D E P E N D E N C E — Freedom from all obligations except that of fidelity to the public interest is vital. 1. Promotion of any private interest contrary to the general welfare, for whatever reason, is not compatible with honest journalism. So-called news com munications from private sources should not be published without public notice of their source or else substantia tion of their claims to value as news, both in form and substance. 2. Partisanship, in editorial com ment which knowingly departs from the truth, does violence to the best spirit of American journalism ; in the news columns it is subversive of a funda mental principle of the profession. IV. S IN C E R IT Y . T R U TH FU LN ESS. A C C U R A C Y — Good faith with the reader is the foundation of all journal ism worthy of the name. 1. By every consideration of good faith a newspaper is constrained to be truthful. It is not to be excused for lack of thoroughness or accuracy within its control, or failure to obtain command of these essential qualities. 2. Headlines should be fu lly w ar ranted by the contents of the articles which they surmount. V. I M P A R T I A L I T Y —Sound practice makes clear distinction between news reports and expressions of opinion. News reports should be free front opin ion or bias of any kind. 1. This rule does not apply to socallel special articles unmistakably de voted to advocacy or characterized by a signature authorizing the w riter’s own conclusions and interpretation. VI. F A IR P L A Y — A newspaper should not publish unofficial charges affecting reputation or moral character without opportunity given to the accused to be heard; right practice demands the giv ing of such opportunity in all cases of serious accusation outside judicial pro ceedings. 1. A newspaper should not involve private rights or feeling without sure w arrant of public right as distinguished from public curiosity. 2. It is the privilege, as it is the duty, of a newspaper to make prompt and complete correction of its own serious mistakes of fact or opinion, whatever their origin. D E C E N C Y — A newspaper cannot escape conviction of insincerity if while professing high moral purpose it supplies incentives to base conduct, such as are to be found in details of crime and vice, publication of which is not demonstrably for the general good. Lacking authority to enforce its canons the journalism here represented can but express the hope that deliberate pandering to vicious instincts will en counter effective public disapproval or yield to the influence of a preponderant professional condemnation. E D I T O R Bi P U B L I S H E R for March 15, 1975 Draft Statement o f Principles AMERICAN SOCIETY OF NEWSPAPER EDITORS ARTICLE I - RESPONSIBILITY The purpose of gathering and dis tributing news and opinion is to serve the w elfare of the people. Those who abuse this function and purpose abuse their public trust. ARTICLE II FREEDOM OF THE PRESS Freedom of the press is a vital right of the people in a free society. It must be defended against infringement or assault, from any source, public and private. Journalists must be con stantly alert to see that the public’s business is conducted in public, and must oppose those who would use the press as a servant of government or any special interest. ARTICLE III - INDEPENDENCE A newspaper must avoid both im propriety and the appearance of im propriety, conflict of interest and the appearance thereof. Promotion of any interest contrary to the general wel fare, for whatever reason, is not hon est journalism. Newspapers and news paper people should accept nothing or pursue activities which might compro mise or seem to compromise their in tegrity. ARTICLE IV.TRUTH AND ACCURACY Good faith with the reader is the foundation of good journalism. E very effort must be made to assure that the news and editorial content of the news paper is accurate and in context and that all sides of an issue are pre sented fairly. Editorials should be held to the same standards of accuracy and honesty as news reports. Correction of significant errors should be made promptly and appropriately. ARTICLE V - IMPARTIALITY (or IDENTIFICATION) Sound practice makes a distinction between news reports and expressions of opinion. Articles which express opin ion or offer personal interpretation should be clearly identified. ARTICLE VI - FAIR PLAY Journalists should show respect for the dignity and rights of people en countered in gathering the news and should be accountable to the public. A newspaper should not publish unoffi cial statements affecting reputation or moral character without opportunity given to the accused to be heard. With out clear and pressing reason, sources of information should be identified. These principles are intended to pre serve (or establish*), protect and en hance the (a*) bond of trust and re spect between American journalists and the American people. 136 National joimiaMst’s grouip adopts standard of conduct The following Code of' Ethics was adopted by the Society of Professional Journalists, Sigma Delta Chi at their na tional convention last month in Buffalo, N.Y.: “ Sigma Delta Chi, Professional Jour nalistic Society, believes the duty of jour nalists is to serve the truth. “ We believe the agencics of mass com munication arc carriers of public discus sion and information, acting on their Con stitutional mandate and freedom to learn and report the facts. “ We believe in public enlightenment as the forerunner of justice, and in our Con stitutional role to seek the truth as part of the public’s right to know the truth. “ We believe those responsibilities carry obligations that require journalists to per form with intelligence, objectivity, ac curacy, and fairness. “ To these ends, we declare acceptance of the standards of practice here set forth: “ I. RESPONSIBILITY: The public’s right to know of events of public impor tance and interest is the overriding mis sion of the mass media. The purpose of distributing news and enlightened opinion is to serve the general welfare. Journal ists who use their professional status as representatives of the public for selfish or other unworthy motives violate a high trust. “ II. FREEDOM OF* THE PRESS: Freedom of the press is to be guarded as an inalienable right of people in a free society. It carries with it the freedom and the responsibility to discuss, question, and challenge actions and utterances of our government and of our public and private institutions. Journalists uphold the right to speak unpopular opinions and the privi lege to agree with the majority. “ III. ETHICS: Journalists must be free of obligation to any interest other than the public’s right to know the truth. “ 1. Gifts, favors, free travel, special treatment or privileges can compromise the integrity of journalists and their em ployers. Nothing of value should be ac cepted. “ 2. Secondary employment, political in volvement, holding public office, and serv ice in community organizations should be avoided if it compromises the integrity of journalists and their employers. Journal ists and their employers should conduct their personal lives in a manner which protects them from conflict of interest, real or apparent. Their responsibilities to the public are paramount. That is the nature of their profession. “ 3. So-called news communications from private sources should not be published or broadcast without substantiation of their claims to news value. “ 4. Journalists will seek news that serves the public interest, despite the ob stacles. They will make constant efforts to assure that the public’s business is con ducted in public and that public records EDITOR 8C are open to public inspection. “ 5. Journalists acknowledge the news man’s ethic of protecting confidential sources of information. “ IV. ACCURACY AND OBJECTIVI TY : Good faith with the public is the foundation of all worthy journalism. “ 1. Truth is our ultimate goal. “ 2. Objectivity in reporting the news is another goal, which serves as the mark of an cxpericnccd professional. It is a stan dard of performance toward which we strive. We honor those who achieve it. “ 3. There is no excuse for inaccuracies or lack of thoroughness. “ 4. Newspaper headlines should be ful ly warranted by the contents of the arti cles they accompany. Photographs and telecasts should give an accurate picture of an event and not highlight a minor incident out of context. “ 5. Sound practice makes clear distinc tion between news reports and expressions of opinion. News reports should be free of opinion or bias and represent all sides o f an issue. “ G. Partisanship in editorial comment which knowingly departs from the truth violates the spirit of American journal ism. “ 7. Journalists recognize their responsi bility for offering informed analysis, com ment, and editorial opinion on public events and issues. They accept the obliga tion to present such material by individu als whose competence, experience, and judgment qualify them for it. “ 8. Special articles or presentations de voted to advocacy or the writer’s own conclusions and interpretations should be labeled as such. “ V. FAIR PLAY: Journalists at all times will show respect for the dignity, privacy, rights, and well-being or people encountered in the course of gathering and presenting the news. “ 1. The news media should not commu nicate unofficial charges affecting reputa tion or moral character without giving the accused a chance to roply. “ 2. The news media must guard against invading a person’s right to privacy. “ 3. The media should not pander to morbid curiosity about details of vice and crime. “ 4. It is the duty of news media to make prompt and c(Jmplete correction of their errors. “ 5. Journalists should be accountable to the public for their reports and the public should be oncouraged to voice its grievances against the media. Open dial ogue with our readers, viewers, and lis teners should be fostered. “ VI. PLEDGE: Journalists should ac tively censure and try to prevent viola tions of these standards, and they should encourage their observance by all news people. Adherence to this code of ethics is intended to preserve the bond of mutual trust and respect between American jour nalists and the American people. P U B L I S H E R for December 8, 19?3 137 Chairman P a tm a n . Without objection, the committee will stand in recess to reconvene at the call of the Chair. [The following information was submitted for inclusion in the record:] A d d it io n a l I n f o r m a t io n S u b m it t e d for the R ecord U.S. H o u s e o f R e p r e s e n t a t i v e s , Washington, B.C., March 11, 1975. H on. A rthur F. B u rns, Chairman, Federal Reserve Board of Governors, Federal Reserve System, Washington, D.C. D e a r M r . C h a i r m a n : According to the Jack Anderson column appearing in today’s Washington Post, a high-level employee of the Federal Reserve System (Reed J. Irvine) has been charged with using his position to gather information to further private interests which have nothing to do with his position with the Federal Reserve Board. Of even greater seriousness, howTever, is the use of this information, obtained under false pretenses, to attempt to harass the press and hamper their reporting of news of major public interest. In connection with this matter, I would like to have furnished to the Subcom mittee on Domestic Monetary Policy the following information: 1. A specific description of Mr. Irvine’s official duties as an employee of of the Federal Reserve. 2. What relationship the information sought by Mr. Irvine has to his responsibilities as an official of the Federal Reserve? 3. What value could the inquiries made by Mr. Irvine serve in carrying out his official duties as an employee of the Federal Reserve? 4. To what extent has Mr. Irvine been using the facilities of the Federal Reserve to carry on his duties as an official of Accuracy in Media, Inc. ? 5. To what extent has the Federal Reserve examined the use of Federal Reserve facilities to carry on the activities of Accuracy in Media, Inc. ? 6. When did Mr. Irvine’s superiors first become aware of the use of Federal Reserve facilities for Accuracy in Media, Inc. ? 7. What steps were taken when this information came to the attention of Mr. Irvine’s superiors 8. Have you or any other employees of the Federal Reserve either directly or indirectly authorized or condoned in any manner the actions of Mr. Irvine in connection with Accuracy in Media, Inc. ? Dr. Burns, these questions take on a special urgency in light of the recent revelations that you and your agency have been attempting to suppress the release of interest rate data to the new’s media. The actions of Mr. Irvine, as described in the Jack Anderson column, seem to me more of the same—additional evidence of what is apparently a deeply-held distrust of the press and the public’s right to know* within the Federal Reserve. As I have indicated to you, the Domestic Monetary Policy Subcommittee is very interested in looking at these questions—including both the suppression of the interest rate data and the Irvine case—and I trust that we will have prompt replies. Sincerely yours, W r i g h t P a t m a n , Chairman. C h a ir m a n of t h e F B oard of ederal R G o verno rs, eserve S y s t e m , Washington, B.C., March 13,1975. Hon. W r i g h t P a t m a n , Chairman, Subcommittee on Bomestic Monetary Policy, Committee on Banking, Currency and Housing, House of Representatives, Washington, B.C. D e a r M r . C h a i r m a n : I am pleased to respond to your letter of March 11 con cerning allegations printed in a Jack Anderson column that Reed J. Irvine, an Adviser in the Division of International Finance, used his official position to further the purposes of an outside organization. An internal inquiry into these charges is presently underway under the direc tion of Governor Robert C. Holland, the Governor in charge of the Board’s internal 138 administration. I have asked Governor Holland to advise you promptly regarding any aspect of your letter that he feels can appropriately be addressed at this time and to keep you advised of developments including any findings made as a result of the inquiry. Sincerely yours, A rthur F. B u rns. B oard of G o vern o rs, F ederal R eserve S y s t e m , Washington, D.C., March 17,1975. Hon. W r i g h t P a t m a n , Chairman, Subcommittee on Domestic Monetary Policy, Committee on Banking, Currency and Housing, House of Representatives, Washington, D.C. D e a r M r . C h a i r m a n : Chairman Burns has referred to me for further reply your letter of March U, 1975, regarding the allegations in a Jack Anderson/Les Whitten column that Reed J. Irvine, Adviser in the Board’s Division of Inter national Finance, used his official position to further the purposes of an out side organization. As Chairman Burns advised in his response of March 13, in my capacity as Board member responsible for internal administration, I am in charge of the Board’s inquiry into the charges involving Mr. Irvine’s activities. Certain of the questions that you have asked must await the outcome of this inquiry, which is nearing completion. I will advise you of developments and of the relevant results of this inquiry. Turning to those of your questions that are susceptible to immediate response, Mr. Irvine’s official duties are as follows: He is an Adviser in the Board’s Division of International Finance and is the Chief of the International Development Sec tion in that Division. He has responsibility for monitoring and analyzing activities in the developing countries and operations of the international development finance institutions. He also is the Federal Reserve staff representative to the National Advisory Council on International Monetary and Financial Policies (NAC). Regarding the foregoing, Mr. Irvine has the responsibility of providing appropriate advice to the Board, pritnarily through the Division of International Finance. Mr. Irvine states that in his capacity as a Board official, he obtained from the Congressional Research Service at the Library of Congress a copy of a Chilean study prepared by Mr. Jonathan Sanford. Mr. Irvine submitted comments on this study to the Library of Congress in a memorandum dated November 22, 1974. The content of this memorandum was within the sphere of Mr. Irvine’s official responsibilities at the Board. You have inquired as to what value the inquiries made by Mr. Irvine could serve in carrying out his official duties as an employee of the Federal Reserve. Mr. Irvine’s duties, set forth generally above, include—among others—monitoring and analyzing the operations of the Inter-American Development Bank and the International Bank for Reconstruction and Development (World Bank). In his capacity as Federal Reserve staff representative to the NAC, Mr. Irvine provides analysis of questions likely to come before the NAC and advises the Board on positions to be taken by the Federal Reserve in NAC discussions. Matters con cerning the Inter-American Development Bank and the World Bank, including the loan policies of those institutions vis-a-vis particular countries, frequently are considered in the NAC. The Congressional Research Service study prepared by Mr. Sanford dealt with the policies of the Inter-American Development Bank and the World Bank toward Chile, and thus was relevant to the analysis and advice Mr. Irvine gave in his official duties as an employee of the Federal Reserve. As to your final question, the Board has never condoned the use of its facilities for outside purposes and never authorized Mr. Irvine to use Board facilities to further his work as an official of Acccuracy in Media. As required of all em ployees, Mr. Irvine filed a statement reporting outside activities undertaken on his own time, including activities as Chairman, Board of Directors, AIM. This report was reviewed and approved by appropriate staff officials, indicating that the Board raised no objections to such outside activities by Mr. Irvine in his personal capacity. The Board has neither endorsed nor opposed Mr. Irvine’s out side activities. No present member of the Board has authorized or sanctioned any use by Mr. Irvine of Board personnel or facilities in connection with any outside activi ties. I do understand that the former Vice Chairman of the Board, J. L. Robert son, did evidence a personal interest in Accuracy in Media while at the Board and that subsequent to his leaving the Federal Reserve in 1973, he became a member of AIM’s National Advisory Board. 139 As stated, I will respond to the remainder of your questions upon com pletion of our inquiry. I anticipate its completion prior to my appearance on behalf of the Board before your Subcommittee later this week. I understand that you have also requested Mr. Irvine’s appearance before the Subcommittee, and that in response to notice of the fact contained in your March 13 letter to Chairman Burns, you have been advised by Chairman Burns that the Board has no objection to Mr. Irvine’s appearance and testimony on his own behalf. Sincerely yours, R o b e r t C. H o l l a n d . B oard of G o ver n o rs, F ederal R eserve S y s t e m , Washington, D.C., March 19,1975. Hon. W r i g h t P a t m a n , Chairman, Subcommittee on Domestic Monetary Policy, Committee on Banking, Currency and Housing, House of Representatives, Washington, D.C. Dear Mr. Chairman : I advised you on March 17 that the Board was conduct ing an inquiry into the allegations made in a Jack Anderson/Les Whitten column that Reed J. Irvine, Adviser in the Board’s Division of International Finance, had used his official Federal Reserve position in behalf of a private group, Accuracy in Media, Inc. Certain of the questions raised in your March 11 letter on this matter were answered in my letter of March 17. I am now in a position to answer the remaining questions in your letter and to advise you of the relevant results of our inquiry. You have asked about the extent to which the Federal Reserve has examined the possible use of its facilities by Mr. Irvine to carry on the activities of Ac curacy in Media, Inc., the extent of any such use by Mr. Irvine, and whether there has been any direct or indirect authorization or condonation of any actions of Mr. Irvine in connection with AIM. As a result of the allegations made in the Anderson column on March 11, an examination was made of Board records (including those in Mr. Irvine’s office) commencing with the date that Mr. Irvine became associated with AIM to deter mine if there were official Board letters or other material referring to AIM wrhich would substantiate the Anderson allegations concerning Mr. Irvine. In addition, interviews wTere conducted with employees, both secretarial and profes sional, in Mr. Irvine’s section to determine whether the allegation of use of Board facilities for AIM purposes was substantiated. Both the records search and interviews of employees wTere conducted in the presence of an employee rep resentative to assure fair treatment of Mr. Irvine’s interests in the matter. Our findings are as follows: 1. Our review of official Board files and the interviews conducted cause us to conclude that Mr. Irvine did not abuse his official position through use of Federal Reserve facilities on behalf of AIM. 2. Mr. Irvine’s identified contacts with the Library of Congress and his memorandum of November 22, 1974 to Mr. Charles Gellner, made with respect to the Chilean study, were within the purview of his official responsibilities as detailed in my letter of March 17. 3. The inquiry did bring forth two official letters signed by Mr. Irvine which touch on the subject of AIM. One wTas a letter written by Mr. Irvine to Mrs. Clare Boothe Luce dated November 3, 1972 concerning one of Mr. Irvine’s official trips which made a passing reference to AIM. The second was a letter dated July 24, 1973 to a Mr. Luis B. Mey from Mr. Irvine which likewise referred to AIM as an aside. Other than these letters, copies of which are attached, the files did not reveal correspondence from Mr. Irvine with references to Accuracy in Media, Inc. While the contents of these letters indicate carelessness on Mr. Irvine’s part, and Mr. Irvine has been instructed to avoid any such references in the future, in my judgment they are not of such nature to be inconsistent with our finding that Mr. Irvine did not abuse his official position through use of Federal Reserve facilities on behalf of AIM. In conclusion, I will state that the Federal Reserve Board has not endorsed the activities of AIM. As a matter of policy the Board requires all of officials of the Board to report outside business and teaching activities, and Mr. Irvine had formally notified the Board of his position as Chairman of AIM’s Board. The Board of Governors did not oppose Mr. Irvine’s private activities undertaken on his own time on behalf of AIM. Sincerely yours, R o b e r t C. H o l l a n d . 50-365 O •• 75 10 140 r o v c - b ir 3, 1972 Mi*3 . Cl;-,re Soothe Luca 4559 1c Avcr.ua Honolulu. 9u315 Eear Hrs, Luce: . , Ar U I apologise for not: havir.f- written to you sooner* Ambassador Durbrov senc he a copy of your_letter in i-.l.ici* you hir.dly indicated your villi^?;r.ecs Co see Dr. cr.d Ilrs. Durr.s ar.d ~a if v:e ccrr.o to ha v:aii. I vas very such that this vould be possible, but there vr.3 a good of uncertainty about tho trip and just vhen it ni^ht C.c*;e piace. Ko'w.* it he 2 been necessary to postpena in for at lec/sc a few months. It is possible that vs will make it in late Jar.tiai-y or xebruary of r*e:;t year. I hope that it rill be possible to rn-ke a rtop in. ihn.'aii at that tinu, I know the Lurr.3 v;ould like to toe. it s^ain, end I vould very rr.uch like to c.esi you. AIM is dolr.g quite nicely. 2 shall enclose a couple of clippings showing the'use that ia bainj trade of oc;r.e of the AIM reports, t.v.ich r_iy be of interest to you* Ycur support ie greatly r.ppr-ec.iated. Kith best uishas, I rer_ain, " *’\\{- Sincerely yours. Reed J, Irvino Advisor Division of International Pinance . j MT3 r, Enclosi:ra Ifcs-i i. “Y ‘ .SJI:bb rcr11 Uzzr: Lrir y y P Y 141 1973 Hr. Luic B. Msy A y - Ro que Stiznz Pe£a 760 Buenos Air as, Argentina £*ear Luic: I vao pleased to receive your letter and to l e e m nors about the cor.fercncs st the University of ik&ras&i. X shall be lonklt>3 forward to hearing frcn. Hr. Esquenazi-Kayo. I was interested in ycur ccnseenta about the recent political developments there. It is unfortunate uhct 1st so cany countries the institutions of higher learning ere so corrupted by the Marxists. Perhaps rr/ nest project, a 5 nr?, off shoot of Accuracy irx Kedie, will ha to orgnniza a group called Accuracy in Academia to focua cn thet prcb i:2c:. I gather froa your note that you definitely will plea to care to Washington. I do not heve nny suggestions for & title for tho Call; right at the ccscant, but I think that people barn vould be r.03t interested in aer-e kind of r-nalyeis of Percnist econnnic thinking. what do y e n think? • Also let es Icacs/ the data that vculd be best for you. I shell be looking iorvard to hearing frcn youour best re^erds to your vife. Sincerely your3, Reed J- Irvine Adviser Division of Intcmotianel Finance Give 142 H ou se op R e p r e s e n t a t iv e s , Washington, D.C., March 25,1975. M r. R eed J . I r v in e , Chief, Developing Countries Section, Division of International Finance, Federal Reserve System, Washington, D.C. D e a r Mr. I r v i n e : Thank you for appearing as a witness at the Domestic Mone tary Policy Subcommittee hearing on Tuesday, March 18, concerning the audit of the Federal Reserve System and related matters. In order to complete the hearing record, would you please answer the attached questions at your earliest convenience and return them by Friday, March 28. Sincerely yours, W r i g h t P a t m a n , Chairman. 1. Mr. Irvine, you are an employee of the Federal Reserve System, a primary responsibility of which is the regulation of banking organizations. Yet, as an official of Accuracy in Media, Incorporated, you have been involved in, and per haps have even led, efforts by that organization to defend the interests of the banking industry. The criticism levelled by AIM against CBS for its morning news series on banking in May 1973 is a case in point. To say the least, this situ ation gives rise to questions-of-confiict of interest. Under the circumstances, I ask that you supply the Subcommittee on Domestic Monetary Policy with a list of banking or banking-connected contributors to AIM for each year of AIM’s existence. 2. Mr. Irvine, does Accuracy in Media, Incorporated, receive any of its funds from any government agency? 3. Mr. Irvine, your name appears as the signatory of various letters to the editor in connection with Accuracy in Media’s efforts to answer a variety of news stories and columns. In many instances, you cite statistics, and I want to know whether these were gathered by you in your capacity as a Federal Reserve official or whether you obtained this from government sources as an employee of Accuracy in Media, Incorporated? For example, a letter to the editor, dated October 23, 1973, to the El Paso, Texas, Times takes issue with a column by Tom Wicker in which you include certain data which you say is “according to the Office of Management and Budget. How did you obtain this data—in what capacity? 4. When you sent your AIM letter out on November 14, did you have a copy of the Library of Congress report which was sent you as a Fed official on November 12? 5. What Fed governors or employees assisted you in any way with AIM? On Fed time? Not on Fed time? 6. Did you use Fed telephones in any wray for AIM purposes? Fed clerical help? Any Fed supplies? 7. Did you write or help write the mailgram for Mr. Francis Wilson responding to the Anderson column on your apparent Federal Reserve conflict? Did you do it on Fed time? 8. Did other government employees assist you in AIM work? David Martin? Ambassador Davis? Any federal employees as consultants? 9. What outside writers did you use for your AIM activities as suggested in your IRS filings? Did you use any government friends or acquaintances to assist you in getting your IRS non-profit status? Your postal status? 10. Have you discussed your AIM activities with any other Federal Reserve officials? If so, with whom and for what purpose? A Q u e s t io n s of C o n g r e s s m a n J a m e s J . B l a n c h a r d fo r R eed J . I r v in e , W it n e s s B e fo re t h e D o m e s t ic M o n e t a r y P o l ic y S u b c o m m it t e e of t h e H o u s e B a n k i n g , C u r r e n c y a n d H o u s i n g C o m m i t t e e o n M a r c h 18, 1975. d d it io n a l 1. During your testimony on March 18, 1975, and in response to the question, “Are there other colleagues at the Federal Reserve who participate in the activities of AIM?” You answered that none of your colleagues participate in any official capacity. Have any of your colleagues at the Fed participated in 143 AIM in any capacity whatsoever? If yes, who? If yes, when? If yes, what role did they play with AIM? 2. Are you aware of any bank officials in Latin American countries who con tributed money to AIM? If yes, who? If yes, how much? 3. Are you aware of any banks in Latin American countries that contributed to AIM? If yes, which banks? 4. Did you participate in any way with the activities of the committee to Reelect the President (Nixon, that is) ? If yes, what did you do? If yes, when? 5. Initially, in your appearance you testified “I do AIM work on my own time, not using government facilities or materials.” Later, you admitted that you have made telephone calls for AIM on Fed time. Now, it is clear you wrote letters about AIM and even some new group called “Accuracy in Academia” on Fed time. The initialling of the secretary indicates you also used a Fed secretary to write the letters. Therefore, could you tell m e: (а) Why you at first said you did no AIM work at the Fed? (б) How you explain the two letters in view of your denial? (The letters referred to may be found on pages 140-141.) (c) Based on your logs and recollection, who did you discuss AIM with at the Fed or on Fed time? By phone? By letter? I request all available documentation of these occurrences. (d) The number and amounts of time you discussed AIM on Fed time with J. L. Robertson and others? What Fed supplies did you use for AIM? (e ) The names of Fed personnel who were used in typing two letters that appear on pages 140-141. The names of other Fed personnel who did any kind of clerical, messenger or other work for AIM at any time? 6. When you wrote your attacks on Anderson’s column about the Chilean economy, was the Library of Congress report in your hand? When did you re ceive it? Did you identify yourself as an AIM person to its author? When did you reveal your AIM position to the Library? 7. You say you received only Fed compensation at the time you were writing the Chilean material for AIM. Could you detail the issues of AIM publications for which you received the $2370 mentioned in your testimony? Did this writing overlap with your Fed duties in any way ? 8. You have testified that you contacted the networks and the bankers on certain AIM projects. Please detail the hours when this occurred. Was this Fed time ? If not, please explain. 9. In view of the obvious ties between the bankers and the Fed, please pro vide the names of all contributors to your group associated with the banks? With the Fed? With other financial institutions? With bank-financed industries? 10. You say on page 42 you do not “work for private gain.” Please tell us whether you have ever been compensated by the Fed for your AIM work? Please explain if you do not work “for private gain,” how it is you told the committee you received $2370 from AIM as compensation. 11. On Page 60 you tell of your talks with Dr. Burns and of his awareness of your interest in AIM. The letter that appears on page 7, evidences a close relationship with Dr. Burns. Please amplify fully on your discussion with Dr. Burns on AIM. 12. Chairman Patman brought out your ties with the Roundtable. You say that were minimal. Please amplify fully. 13. Congressman Minish brought out your group’s defense of the oil industry on plage 68. Could you clarify any times with the oil industry and any contri butions made by them? Were they influenced in any way by your high position with the Fed, which controls much financial policy affecting the oil industry? What material was provided AIM by the oil companies or by the American Petro leum Institute. Did you meet recently with members of the American Petroleum Institute? Were contributions to AIM discussed? Did your Fed job figure in their contributions? What other oil people have you discussed AIM and con tributions with? 14. Did you ever use material developed by you in your Fed jobs for AIM? 15. On page 83 I asked you about your deductions of space in your home as office space. Your answer was rather vague. Please clarify, with full figures about your deductions for home office space. 16. Do you know, on a personal basis, G. Gordon Liddy? If yes, how do you know him? 144 [The response by Mr. Irvine to Chairman Patman’s and Congress man Blanchard’s questions follows:] S il v e r S p r in g , M d ., March 27,1975. Hon. W r i g h t P a t m a n , Chairman, Subcommitte on Domestic Monetary Policy, Committee on Banking, Currency and Housing, House of Representatives, Washington, D.C. D e a r C h a i r m a n P a t m a n : Attached are my responses to the additional ques tions asked by you and Congressman Blanchard. In going over my records, I find that I made an error in testifying as to the amount I received for writing the AIM Report in 1974. In the quick check I made the night before the hearing, I inadvertently missed a payment of $500. The total recived in 1974 was $1379.50, and I would like to have the record corrected to show that. I have mentioned this in my response to Congressman Blanchard’s question #7. Sincerely yours, R e e d J. I r v i n e , an sw ers to q u e s t io n s of c h a ir m a n patm an 1. With all due respect, AIM has not been engaged in defending the interests of the banking industry, and I do not feel that the case which you mention gives rise to any conflict of interest on my part. AIM is concerned with the correction of factual errors of all types in the news media. As I explained at the hearing, AIM has a policy of not disclosing the names of its contributors. AIM feels constrained to protect the confidentiality of its contributors because of the possibility of harassment by those in the media who may be the object of AIM criticism. This is a policy followed by many similar organizations, such as Ralph Nader’s group and the NAACP. 2. No. 3. By telephone inquiry as a private citizen. 4. I do not recall when I received the Library of Congress Report, but I do know that I had read it prior to the time that I wrote the letter on the Anderson column. However, I did not refer to the report in the letter, nor did I make any use of it in writing the letter. 5. None. 6. As I said at the hearing, I have from time to time made or taken personal calls on my office phone, as does every other government official that I know. Some of these calls have occasionally been related to AIM matters, but I have made every effort to minimize such instances. I do not use FRB clerical help or supplies in doing AIM work. 7. I drafted the mailgram for Dr. Wilson. This was done over the weekend at my home. 8. David Martin has assisted AIM in that he serves on the AIM board and tenders advice from time to time. This has been done on his own time. Ambas sador Davis is on the board, but his location has not made it possible for him to take an active part in AIM activites. AIM has not used federal employees as consultants or assistants, except for me and Mr. Martin, at noted above. 9. I did not use any outside writers for my AIM activities. As I have indicated, I received some compensation for writing AIM Reports. None of the other outside writers was employed by the government. I was not involved in getting AIM’s IRS non-profit status or postal status, and I did not call upon any friends to assist in that. 10. I notified the Division of Personnel of my intention to assume the position of Chairman of the Board of AIM in 1971. I believe that I also notified Governor Robertson, and I mentioned it to Chairman Burns some time later. I thought it was appropriate that they be informed of this outside activity. When AIM did something that attracted attention publicly, friends and associates who knew of my association with the organization sometimes made comments to me, and media criticism has sometimes been a subject of lunch table conversation with my friends. 145 ANSWERS TO QUESTIONS FROM CONGRESSMAN BLANCHARD 1. There are a few employees of the Federal Reserve who subscribe to the AIM Report or have made small contributions. None is under my supervision and none of them participates in AIM’s work. 2. No. 3. No. 4. No. 5. a. and b .: The letters in question were not in any sense work for AIM. They were written in connection with official business, and the references to AIM were nothing more than casual remarks intended to add a personal touch, much as I might refer to my family or my garden in an official letter to someone who might know members of my family or who might have visited my home. I do not consider an occasional telephone call as being inconsistent with what I said about doing AIM work on my own time, not using government facilitiies or materials. Any time that might have been taken by such occasional calls has been offset many times over by the uncompensated overtime that I have put in doing FRB work at the office and at home over the past 23 years. I know of no official who.never makes or takes a personal call on his office phone. c. See answer to Chairman Patman’s question #10. d. I do not recall any specific conversations with Governor Robertson about AIM on Fed time, but I am sure I informed him of my intention to assume the chairmanship of AIM in 1971. I do not use Fed supplies in my work for AIM. e. The initials on the letters indicate that they were typed by Bertha Brown and Theresa Newman. This was not clerical work for AIM, and I know of no Fed personnel who have done work for AIM. 6. I had read the Library of Congress report on IDB-IBRD loans to Chile before I wrote the critique of Anderson’s column. I do not recall the date that I received it. I did not mention AIM to Mr. Sanford or anyone else at the Library of Congress. It would have been inappropriate for me to have done so, since I was dealing with Mr. Sanford and Mr. Gellner in my official capacity. As I testified, I had a valid official interest in the report, and I used it for a proper official purpose. (See letter from Governor Holland to Chairman Patman of 3/17/75). 7. I was compensated for writing the following AIM Reports: 1973—May, June, July, August-September, November, December; 1974—January, February, March, April, September, October. This work did not involve any overlap with my duties at the Federal Reserve Board. In rechecking my records to reply to this question I discovered that I had overlooked the payment that I received for September and October 1974 when I made a quick check the night before the hearing. I will ask that the record be corrected to show that I received a total of $1379.50 for writing the AIM Report in 1974. 8. As I testified, the call to the CBS official was made from my home when I was in bed with the flu. The other incident mentioned was not a call on a banker, but a very brief visit to the office of the newspaper, the American Banker, during my lunch hour. I do not recall the date. 9. See reply to Chairman Patman’s question #1. 10. I have not been compensated by the Fed for my (AIM work. My work for AIM has been motivated solely by my interest in promoting a free, accurate and responsible press. I would do precisely as I have done working for AIM nights and weekends without the incentive of monetary compensation. The money I received in 1973 and 1974 was a token payment to help keep peace in my home and to cover expenditures for household maintenance that I was unable to do myself because of the amount of spare time, including my summer vacation, that I spent doing work for AIM. 11. I simply informed Chairman Burns of my outside activity which was on record with the Division of Personnel. 12. I have no ties with the Roundtable. 13. AIM has not defended the oil industry. We have merely corrected some inaccuracies published in the press concerning the energy crisis. AIM has no ties with the oil industry. It has received very modest contributions from a few oil companies. I am sure that my job had nothing to do with this. I presume that the contributions were motivated by the interest of the donors in encourag 146 ing greater accuracy in news reporting. In making a quick check of our files, I find only two documents received from persons connected with the oil industry. One is a transcript of a program on energy aired by ABC on which we took no action. The other relates to difficulties one of the oil companies had in getting commercials aired on TV. I do not recall that we did anything about that either. The only occasion on which I have met anyone connected with the API occurred several months ago quite by chance. I went to the Hilton Hotel one evening to meet a visitor from out of town. He invited me to join him at a reception in the hotel and later suggested that we dine together. He invited several other people at the reception to join us for dinner, and two of them were on the staff of the API, as I recall. We went to a nearby restaurant in which Jack Anderson has an interest. One of the API staffers recognized Jack Anderson at a nearby table, and introduced us. The attendance of the API staffers at this social dinner was coincidental. I talked about AIM and its work, but I do not recall any mention being made of possible contributions from API. See reply to Chairman Patman’s question #1. 14. The work I do for AIM depends on information available to the general public. In some cases such information may first come to my attention as a result of my professional interests. However, I have not provided AIM with information that I would not disclose to any member of the public, and I have not used my Fed position to develop material for the use of AIM. 15. In 1973, I took a deduction for the office in my home of $578. I have not yet filed a return for 1974. 16. No. [Whereupon, at 1 2 :05 p.m., the subcommittee recessed, to reconvene at the call of the Chair.] 147 AUDIT OF THE FEDERAL RESERVE TUESDAY, APRIL 22, 1975 H ouse of R epresentatives , S ubcommittee on D omestic M onetary P olicy of th e C om m ittee on B a n k in g , C urrency and H ousing , Washington, D.O. The subcommittee met, pursuant to notice, at 10 :15 a.m., in room 2128, Rayburn House Office Building, Hon. Wright Patman [chair man of the subcommittee] presiding. Present: Representatives Patman, Minish, Hannaford, Neal, Blanchard, and Gradison. Also present: Representative Johnson of Pennsylvania. Chairman P a tm a n . This morning the subcommittee meets to con sider H.R. 4316, a bill cosponsored by 109 Members of the House of Representatives. This legislation will allow the General Accounting Office to conduct full-scale audits of the entire Federal Reserve System for the first time in its 61-year history of this mammoth monetary and regulatory agency. 1 predict that this hearing will be one of the most important hear ings that has been held in the history of this country during the last 200 years because it reaches into the questions that concern us most today involving monetary matters, interest rates, and almost every thing else relating to money. I believe that any member who takes ad vantage of the opportunity to hear the witnesses we will have before this subcommittee and will keep up with the testimony will be amply well paid in the knowledge that he will obtain. Considering the importance of this agency to the Federal Govern ment and the day-to-day lives of every citizen, it is amazing that so much controversy, so much negative thinking, is still existing about this simple suggestion that Government auditors should be able to get inside the Federal Reserve. Judging from my mail, many citizens of this Nation do not understand Congress’ apparent timidity in this area. And I mean timidity in the monetary field. This is an agency which handles transactions in excess of $24 trillion annually and it will not be long until we will go beyond the trillions. In fact, the portfolio of the Federal Open Market Committee contains almost $87 billion of Government securities—and please notice this— which have been paid for once with the money and credit of the U .S. Government. Therefore, it really should be canceled. The Federal Reserve draws between $5 and $6 billion annually in interest on these bonds. It is out of this huge slush fund that the Federal Reserve finances its operations without coming to the Con gress for appropriations or appropriations review, despite the fact (1 4 7 ) 148 that the Constitution of the United States says, and I am quoting the Constitution of the United States: “ No money shall be drawn from the Treasury; but in consequence of appropriations made by law.” The expenditures of the Federal Reserve have been increasing dra matically in recent years, and we have only the most recent surface in formation about the causes. Since 1970, operating expenses of the Federal Reserve have increased 70 percent, and reports are that we can expect these expenses to continue to rise rapidly. In this day of open government, surely the Nation’s most important economic agency should be expected to let the Congress and the people know what it is doing. This is an agency whose policies can literally decide whether people have jobs or whether we shall have prosperity or depression. Its power is vast and its decisions on mone tary policy—whether effective or ineffective— are of serious conse quences to the state of the economy. It is inexcusable for the Congress not to insist on the maximum information about this agency and this can only be accomplished when we have full unhindered audits by the General Accounting Office. This legislation before us is not radical. It simply subiects the Federal Reserve to the same type of audits which are conducted in other major Government agencies including those with highly sensi tive subject areas such as the Defense Department and the various regulatory agencies. There is absolutely no reason to exempt the Fed eral Reserve from scrutiny by the Congress watchdog agency. For too long the Congress has been satisfied to accept the Federal Reserve’s own idea of what should be known about the Federal Re serve. This kind of self-serving secrecy which this policy has gener ated will be ended by the enactment of H.R. 4316 and I am hopeful that the subcommittee and the full committee will act swiftly on this legislation. This morning our witness is the Honorable Elmer B. Staats, the Comptroller General of the United States. Many of us have known General Staats for a long time and I personally have the utmost con fidence in him and the General Accounting Office. I am confident that the G AO can carry out these audits of the Federal Reserve in a highly competent and prudent manner. General Staats, do you have a prepared statement? You may pro ceed as you desire. STATEMENT OF HON. ELMER B. STAATS, COMPTROLLER GENERAL OP THE UNITED STATES: ACCOMPANIED BY ELLSWORTH H. MORSE, JR., ASSISTANT COMPTROLLER GENERAL: JOHN J. HIG GINS, ASSOCIATE GENERAL COUNSEL; AND CHARLES P. McAULEY, ASSISTANT DIRECTOR Mr. S ta a ts . I do have a prepared statement and with your per mission I will read it and will be prepared to respond to questions. Chairman P a tm a n . Yes, sir, and after you finish we will yield to each member 5 minutes to be<rin with to interrogate you. Mr. S ta a ts . We appear here today at your request to present our views on H.R. 4316, which authorizes and directs the General Account 149 ing Office to audit the Federal Reserve Board, the Federal Advisory Council, the Federal Open Market Committee, and the Federal Re serve banks and their branches. This bill is essentially the same bill that was originally considered by the House Committee on Banking and Currency in 1973. The principal changes are the addition of specific references to the Federal Advisory Council, the Federal Open Market Committee, and trans actions of the System Open Market Account as being subject to audit by the General Accounting Office. Proposals for a GAO audit of the Federal Reserve System have a long background. Appended to my statement is a brief resume of the extent of our existing audit authority over the Federal Reserve System and congressional consideration of prior efforts for a more extensive G AO audit. These are in attachment I. The Federal Reserve System has a number of important control and regulatory functions relating to the Nation’s system of money and credit. For example, it can expand or contract the supply of money and credit by purchasing and selling U.S. Government obligations. A s of December 31, 1974, the Federal Reserve System owned U.S. securities totaling nearly $86 billion. The financial statements of the 12 Federal Reserve banks for the calendar year 1974 showed total earnings from operations of $6.3 billion of which 96 percent was derived from interest on U.S. Govern ment securities. Total operating expenses of these banks in that year were $548 million including about $41 million in assessments for the expenses and other costs of the Board of Governors. Losses and other deductions amounted to about $78 million. Member banks were paid dividends of about $53 million and about $ 51 million was transferred to surplus. The remainder of the net earnings of about $5.5 billion was transferred to the U.S. Treasury. In view of the very important part that the Federal Reserve System plays in the Nation’s system of money and credit, we believe, as we testified in 1973, that the Congress should provide for a G AO audit of that system. H.R. 4316 provides for an annual audit of the several entities of the system together with an annual report to the Congress on the results. Special or preliminary reports are also expected when deemed desirable. Specific provision is made in the bill that such reports shall include any comments and recommendations that the Comptroller General considers advisable, including recommendations for more economical and efficient administration and disclosure of any activities observed during the audits which are carried on without authority of law. The bill also provides for access by the General Accounting Office to all records and properties of the entities subject to audit. The bill provides no restrictions of any kind on the scope of the G AO audit or on access to records for audit purposes. This is satis factory to us. In fact, if we are to be authorized and directed to audit the Federal Reserve System, we would recommend that the authoriz ing law contain no restrictions. Last year when legislation on this subject was being considered, charges were made that a G AO audit would undermine the independ ence of the Federal Reserve System with respect to its monetary and 150 credit operations and damage the Nation’s monetary policymaking system. Needless to say, we do not concur in this view. Should the Congress wish to restrict the audit to take into account this criticism, one restriction that could be written into the law would be to specifically provide that our audit reports to the Congress or its committees shall not contain conclusions or recommendations with re spect to the economic effects, as opposed to the efficiency and economy, of open market and discount operations. We understand also that there is concern about our examining trans actions conducted by Federal Reserve banks on behalf of foreign central banks which have a high degree of sensitivity from an inter national standpoint. A similar restriction on including information on such transactions in our reports could be provided in the law if Congress wishes to do so. However, we do not believe it would be desirable to provide any other restrictions on our auditing or reporting if the overall objective of the legislation, as we understand it, is to be achieved. The bill would require the G AO to make an annual audit. Instead of prescribing that we make an audit each fiscal year of the several entities of the System, we recommend that the requirement be changed to provide simply that the General Accounting Office be directed to audit the named entities of the Federal Reserve System. With this change, coupled with the provision that the audits be made under such rules and regulations as the Comptroller General shall prescribe, the bill would give us the needed flexibility to make selective reviews on a continuing basis of different aspects of the System without the con cern that the literal wording of the law requires a complete audit every year. This audit policy has evolved as a satisfactory way of providing useful information and needed assistance to the Congress with respect to other major agencies of the Government and we believe that it should also apply to the Federal Reserve System. Even if this suggested change is adopted, the bill could still, as it now does, require that we report to the Congress once a year on the results of the audit work performed during the year, in addition to in dividual reports that we would make during the year. Under the Budget and Accounting Act of 1921, and the Budget and Accounting Procedures Act of 1950, determination as to the frequency as well as the scope of the auditing performed in other Government agencies is left to our judgment. These judgments are made in the light of congressional interests in specific programs and problems as they become known to us and, as the 1950 act requires, after giving “ due re gard to generally accepted principles of auditing, including the effec tiveness of accounting organizations and systems, internal audit and control, and related administrative practices.” The bill provides that the G AO audit would be made under such rules and regulations as we would prescribe. In accordance with our regular policy, any rules or regulations that we would prescribe would specifically require our auditors to review and evaluate the nature and effectiveness of the organizations and systems of internal man agement control of the several entities of the Federal Reserve System in determining the nature and extent of G AO audit work to be per formed. In particular, we would want to make a comprehensive review of the internal and external auditing already being done. This step is 151 in conformity with generally accepted principles of auditing and is also essential in avoiding unnecessary duplication and expenditure of effort. The reason for our mentioning this point is in recognition that some auditing is now being done within the Federal Reserve System. It is our understanding that: —A firm of independent C P A ’s makes an annual audit of the ac counts of the Board of Governors and renders an opinion on the Board’s financial statements which is included in the Board’s annual report to the Congress. — The Board’s staff of field examiners examines each Federal Re serve bank and branch once each year. — The annual examination of the Federal Reserve Bank of New York includes an audit of the accounts and holdings relating to the System open market account and the foreign currency operations con ducted by the New York bank under policies of the Federal Open Market Committee. — Representatives of a firm of independent C P A ’s accompany the Board’s examiners on their examination of one Reserve bank each year, to evaluate the adequacy of the examination procedures. — Each Reserve bank has internal auditors who work on a yearround basis. Their work programs are reviewed by the Board’s examiners. Except for the opinion of the C P A firm on the financial statements of the Board of Governors which is included in the Board’s annual re port, no reports on the auditing being performed within the Federal Reserve System are submitted to the Congress, to our knowledge. Under our standards for audit of governmental activities we con sider that the full scope of an audit should include: First, an examination of financial transactions, accounts, and re ports, including an evaluation of compliance with applicable laws and regulations. Second, a review of efficiency and economy in the use of resources, and Third, a review to determine whether desired results are effectively achieved. Examinations of financial transactions, accounts, and reports and compliance with applicable laws and regulations include performing enough analysis and verification work to arrive at opinions as to whether financial transactions are carried out in accordance with ap plicable legal requirements and are properly accounted for, and wheth er the financial reports present fairly the financial positions, changes in financial position, and result of operations of the various entities being audited. Audit reports on such work would disclose any pro gram, financial transaction, or undertaking which, in our opinion, is carried on without authority of law. In performing this kind of an audit we would, as described earlier, first make a careful review of the nature and adequacy of the internal management control systems in cluding the audit work already being performed within the Federal Reserve System before determining how much additional auditing by us would be needed. In reviewing matters of efficiency and economy, our objective is to find out whether the entities being audited give due consideration 152 to conservation of resources and minimum expenditure of effort in carrying out their operations. We are interested in finding out whether there are unnecessary or inefficient or unjustifiably costly procedures, whether there is unnecessary duplication of effort, whether work is being performed which serves little or no useful purpose, whether equipment is being inefficiently used, whether there is overstaffing, and whether there are faulty buying practices which result in paying un necessarily high prices or just buying too much. In carrying out this kind of work we do not undertake to arrive at overall opinions as to whether an organization is operating efficiently and economically but we do try to identify problem areas and pro pose recommendations for greater efficiency and economy. This kind of audit work also includes determining the causes of any inefficient or uneconomical practices found as a basis for proposing constructive recommendations for improvement. H.R. 4316 specifically provides for audit work of this nature since it requires that we include in our re ports “ recommendations for attaining a more economical and efficient administration of the entities audited.” In reviewing the results of authorized programs or activities our primary purpose is to find out whether the objectives contemplated by the authorizing body or bodies are being achieved. In other agencies of the Federal Government, we have gained a great deal of experience in making such reviews, and the Congress has expressed a growing interest in obtaining reports from us on the results of this kind of audit work. The most recent general expression by the Congress on G AO auditing is in the Congressional Budget and Impoundment Con trol Act of 1974. This act provides that we shall review and evaluate the results of Government programs and activities carried on under existing law. These reviews may be made on our initiative, when ordered by either House of Congress, or when requested by any con gressional committee having jurisdiction over the programs or activities. Other than the discount and open market operations, there are numerous functions and activities of the Federal Reserve System on which evaluations of results achieved or effectiveness of operations could be made as a part of our audits. Some examples of these functions are listed in attachment I I to my statement. Section (d) of H.R. 4316 authorizes us to employ necessary person nel and obtain temporary and intermittent services to carry out the required audit of the Federal Reserve System without regard to the provisions of title 5. United States Code. We recommend that this proposed authority be modified in favor of providing that, in carrying out the responsibilities assigned by the bill, we be authorized to employ experts and consultants at rates not to exceed level V of the executive schedule under section 5316 of title 5, United States Code. A t this time we estimate that it would be desirable to have^ authority to employ five such individuals. This is similar to a provision included in the Congressional Budget and Im poundment Control Act of 1974 which placed additional responsibili ties on the GAO. Our specific suggestions for changes in H.R. 4316 that I have dis cussed together with some other minor word changes are shown in attachment I I I to my statement. 153 In summary, Mr. Chairman, we believe that H.R. 4316, with the changes suggested in this statement, would provide for an adequate audit of the various entities of the Federal Reserve System and enable us to provide substantial assistance to the Congress in carrying out its oversight responsibilities of the Federal Reserve System. Now if you just want to turn to attachment I, in the interest of saving time in our prepared statement we have included some back ground here on prior proposals for auditing by the General Account ing Office, tracing the history back to the time when initially we did have this authority. That authority was removed in 1933 and since then the G AO has had only very limited responsibility, namely authority to review the cancellation and destruction of currency unfit for circula tion. That is the only authority we have been given since that time. Attachment I I is placed here because of questions raised in our hear ing in 1973 as to what kinds of areas might we look at in reviewing the effectiveness of the Federal Reserve System’s operations. These are some examples. They are not all-inclusive but they are examples of the kinds of things that we might conceivably look at. Finally in attachment III , we have simply marked up the bill which is before the subcommittee to reflect the two changes which I have indicated that we would recommend. I f you look on page 4 of attach ment III , we have included language which would reflect the kind of restriction which is referred to should the subcommittee so decide but which we are not recommending. [Testimony resumes on p. 167.] [Attachments I, II, and I I I referred to by Mr. Staats, follow:] 154 A t ta c h m e n t 1 BACKGROUND ON PRIOR PROPOSALS TO REQUIRE A GAO AUDIT OF THE FEDERAL RESERVE SYSTEM Until 1933, GAO audited the expenditure vouchers of the Federal Reserve Board but not of the banks. The audits were made because of the ruling of the Attorney General in 1914 that the funds obtained by assessment by the Board from the banks to meet the expenses were public moneys. The Banking Act of 1933, however, superseded this ruling by declaring that these funds were not to be construed as Government funds or appropriated moneys. With this change, the GAO audit of the Board's expenditure vouchers was discontinued. On occasion, the General Accounting Office has assisted the House Committee on Banking and Currency in its work relating to the Federal Reserve System. In 1971, it also completed at the request of the Chairman of the Joint Economic Committee a study of the reporting system operated by the Federal Reserve Bank of New York for dealers in Government securities. With one exception, however, the GAO does not have the authority to make audits of the several entities of the Federal Reserve System. The exception is the responsibility assigned by the act of May 20, 1966, to audit the cancellation and destruction of United States currency unfit for circulation. Specifically, this act provides that: 155 A tta c h m e n t I - 2 - "The Comptroller General of the United States shall audit the cancellation and destruction, and the accounting with respect to such cancellation and destruction, of any currency of the United States unfit for circulation, regardless of who is responsible for, and regardless of who performs, such cancellation, destruction, or accounting. The Comptroller General shall have access to any books, documents, papers, and records which he deems necessary to facilitate an effective audit pursuant to this section." This audit authority was provided in connection with the change in procedures to transfer authority to destroy unfit Federal reserve notes, previously vested by law in the Comp troller of the Currency, to the Secretary of the Treasury. The destruction of most unfit currency is carried out in Federal Reserve banks. GAO has since reviewed these activities of the Federal Reserve banks on a selected basis each year. Three reports on this work have been submitted to the House Committee on Banking and Currency. In addition, 20 reports have been submitted to the presidents of the specific Reserve banks. Generally, GAO has not found major deficiencies in the administrative procedures and controls over these activities. 50-365 0 - 75 - 11 156 A tta c h m e n t I - 3 - The question of whether there should be a GAO audit of the Federal Reserve Board and the Reserve banks was discussed during consideration of the legislation vrtiich resulted in the Government Corporation Control Act of 1945. The primary pur pose of this act was to provide greater congressional control over wholly-owned and partly-owned Federal corporations. It was determined that the Federal Reserve Board and banks should be excluded from the audit provisions of that act. Apparently, the main reasons for this determination was that the Board exercised strong control over the Reserve banks and all of the stock of those banks was owned by member banks rather than by the Government. A bill introduced on July 20, 1959, in the 86th Congress, H.R. 8302, would have directed .the Comptroller General to conduct an audit of the Federal Reserve System for the period commencing with the enactment of the Federal Reserve Act, December 23, 1913, and ending December 31, 1958. The Comp troller General objected to this measure because it would have required an audit for a 45-year period which, as he then stated, constituted Ma tremendous task vrtiich would drain our audit manpower assigned to defense and other important Government expenditures.11 157 A tta c h m e n t I - 4 In subsequent years other bills were introduced, but not enacted, which would have required GAO to audit the Federal Reserve System. In commenting on such legislation, the Comp troller General offered no opinion on whether such an audit by the GAO was advisable, but stated that if the Congress wanted such an audit made, it would carry out the congressional intent by making whatever audits the Congress wished. 158 A tta c h m e n t I - 5 During the 93rd Congress, H.R. 10265 was considered which included provision for a GAO audit. In testifying on this bill before the House Committee on Banking and Currency, the Comptroller General, for the first time, took the position that, in view of the important part the Federal Reserve System plays in the Nation's system of money and credit, a GAO audit should be provided for. The Committee reported this bill with certain amendments on October 12, 1973. 1. The amended bill provided that: The Comptroller General make^ under such rules and regulations as he shall prescribe, an audit for at least one of each three fiscal years of the Federal Reserve Board and the Federal Reserve banks and their branches, the Federal Advisory Council, and Federal Open Market Committee, and all clearing facilities. However, the scope of the audit was specifically restricted to exclude— a. Examination reports of member banks b. Transactions conducted on behalf of foreign central banks. c. Operations concerning open market transactions and discount policy determined by the Federal Reserve Board to be sensitive until at least one year after the operations. 159 Attachment I - 2. 6 - Representatives of the GAO were to have access to records and properties necessary for making the audits and they were to be afforded full facilities for verifying transactions with balances or securi ties held by depositaries, fiscal agents, and custo dians of such entities. The bill provided for reports for each year for which audits were made plus special audit reports to the Congress, with copies to the President of the United States, the Federal Reserve Board, and the Federal Reserve banks. The reports were to include such comments and recommendations as the Comptroller General deemed advisable, including recommenda tions for obtaining a more economical and efficient administra tion of the entities audited and disclosure of any program, financial transaction, or undertaking observed in the course of the audits which, in the opinion of the Comptroller General, had been carried on without authority of law. The bill also provided authorization for employing addi tional personnel and obtaining other services necessary for carrying out the required audits without regard to civil service and classification laws and 5 U.S.C. 3109b. 160 Attachment I - 7 - H.R. 10265 was considered on the floor of the House of Representatives on May 30, 1974, and subsequently amended before it was passed. As amended, the bill provided only for an audit at least once every three years of the administrative expenses incurred on or after January 1, 1974, of the Federal Reserve Board and the Federal Reserve banks "for the purpose of ascertaining that administrative funds are properly accounted for and that fully adequate accounting procedures and systems for control of such funds have been established so as to assure efficiency and economy of operations." The amended bill defined the term "administrative expenses" as specifically excluding "any extension of credit, purchase or sale of securities in the open market, or transaction in foreign exchange pursuant to the Federal Reserve Act." In making provision for GAO access to necessary records for purpose of making the audit, the amended bill specifically excluded reports of examination of banks and "records, reports, files, or other papers, things, or property containing or revealing information publication of which in the judgment of the Board would have a seriously adverse effect on the conduct of monetary policy or on relations with a foreign government or foreign central bank". 161 Attachment I - 8 - The amendment to the bill which restricted the GAO audit to administrative funds was opposed by the Comptroller General as of marginal value to the Congress. The Senate did not act on the House-passed bill. 162 Attachment II EXAMP 1ES OF FUNCTIONS AND ACTIVITIES OF THE FEDERAL RESERVE SYSTEM SUBJECT TO EVALUATION OF EFFECTIVENESS OF RESULTS ACHIEVED AS PART OF INDEPENDENT AUDTT b y t h f r.An Board of Governors supervision of Federal Reserve Banks: Supervision of member banks of the Federal Reserve System Reserve bank advances to individuals, partnerships, and corporations. Issuance and retirement of Federal Reserve notes. Clearinghouse operations. Acting as depositaries and fiscal agents of the United States. Acting as fiscal agents of Government departments and agencies in guaranteeing loans made by banks and other private financ ing institutions to finance procurement of materials and services for national defense. Involvement in issue and redemption of U. S. Government securities• Regulating and supervising the foreign operations of U. S. commercial banks. (12 U.S.C. 601-631) Administration of the Bank Holding Act which is designed to control bank holding company expansion and prevent the expansion of bank holding companies into businesses not related to banking. (12 U.S,C. 1841-1850) Approval of bank mergers. The Board shares this responsibility with the FDIC and the Comptroller of the Currency. The Board is required to approve mergers in which the acquiring, assuming, or resulting bank is a State member bank. (12 U.S.C. 1828c) Establishing rules and regulations for carrying out the provisions of the Truth in Lending Act whose purpose is to assure meaningful disclosure of credit terms to consumers. Enforcement is shared with the other bank regulatory agencies and the Federal Trade Commission. (15 U.S.C. 1601) Establishing rates of interest which may be paid by member banks on time and savings deposits. (12 U.S.C. 371b) 163 A tta ch m en t I I I -JSSS- H. R. 4310 IN THE HOUSE OF REPRESENTATIVES Marcii 5,1975 Mr. (for himself, Mrs. S c lli v a n , Mr. R oe, M s. A bzuo, Mr. Vic.orito, Mr. E c k u a r d t, Mr. F a s c e ll, Mr. S o la rz , Air. J oh n so n of California, Mr. E va n s of Indiana, Mr. Anni nzio, Mr. M i l l e r of California, Mr. D in g e ll, Ms. C o lli n s of Illinois, M r. Zr.iERETrr, Mr. 1>ia«gi, Mr. C a rn e y , Mr. D om inick V. D a n ie ls , Mr. Davis, Mr. M o llo iia n , Mr. C h a r le s II. W ils o n of California, Mr. Rees, Mr. M e t c a lf e , Mr. G ilm a n , and Mr. S a ra sin ) introduced the following hill; which was referred to the Committee on Banking, Currency and Housing P atm an A B IL L To authorize and direct the General Accounting Office to audit the Federal Reserve Board, the Federal Advisory Council, the Federal Open Market Committee, and Federal Reserve banks and their branches. 1 B e il, enacted. bfl (he Senate rend House of Tlcprescnta- 2 tires of the l/iiitcd Stales of America in ( !on<fress assembled, 3 That (a) the Comptroller General of the United States shall^ 4 malt ft, under such rules and regulations as he shall prc5 scribe, *** audit fer each fiscal yenr of the Federal Reserve 6 Board, the Federal Advisory Council, the Federal Open I 164 Attachment III 2 1 Market Committee, and all Federal Eeserve banks and 2 their branches/ including transactions of the System Open and facilities, 3 /^arket ^c,countf r e m t l i timmgk- veoogniyrrl flonlore. 4 (b) In making the audit required by subsection ( a ) , 5 representatives of (he General Accounting Office shall have 6 access to books, accounts, records, reports, files, and all 7 other papers, things, and property belonging to or in use 8 by the entities being audited, including reports of exami9 nations of member banks, from whatever source. They shall 1° be afforded full facilities for verifying transactions with 11 balances or securities held by depositaries, fiscal agents, 12 and custodians of such entities. 13 ^ (c) The Comptroller General shall, within six months after the end of each fiscal year, or as soon thereafter as may be practicable, make a report to the Congress on the results work performed for such year, of the audit/required by jubs e e i i a n and he shall make ^ any spccial or preliminary reports he deems desirable for the information of the Congress. A copy of each report made 19 under this subsection shall be sent to the President of the United States, the Federal Eeserve Board, and the Federal 21 Eeserve banks. In addition to other matters, the report shall 22 include such comments and recommendations as the Comp- 23 trollcr General may deem advisable, including recomrnenda- 2* tions tor attaining a more economical and efficient administra- 2^ tion of the entities audited, and the report shall specifically 165 Attachment III 3 1 show any program, financial transaction, or undertaking ob- 2 served in the course of the audit which in the opinion of the 3 Comptroller General has been carried on without authority 4 of law. (d) The Comptroller General is authorized to emplj 6 suclsjjersonnel and to obtain such temporary and^kfllcrmit7 tent servicfosfis may he nccessary to carrvptffthe audits rc8 quired by subsectifca^fa), without^tfgard to the provisions 9 of title 5, United States^ft^T governing appointments in 10 the competitive sepfitie, and sucli^iijdividuals may be paid 11 without regfp*Tto the provisions of chapters5Jsand subchapter 12 Illpf'chaptcr 53 of such title relating to classification and General Schedule pay rates. (d) In carrying out his responsibilities under this Act, the Comptroller General is authorized to employ not to exceed five experts on a permanent, temporary, or intermittent basis at a rate (or the daily equivalent) for individuals not to exceed that prescribed, from time to time, for level V of the Executive Schedule under section 5316 of title 5, United States Code. 166 Attachment III - 4 If restriction on content of reports to be added: Provided, however, that the reports required by this sub section shall not contain any information concerning transactions conducted on behalf of foreign central banks or contain any conclusions or recommendations with respect to the economic effects (as opposed to the efficiency and economy) of open market and discount operations. 167 Chairman P a t m a n . What are the two changes of which you suggest consideration ? Mr. S t a a t s . Specifically, the two changes we suggest are to remove the requirement for an annual audit to give us authority to make re views throughout the course of the year, but to report once a year. With this change, the bill would not require us to make a complete audit once a year, but would allow that to take place over a longer period of time. The second change is to give us authority to hire five people who are ex perts in this area at rates of pay which do not exceed level V of the executive pay schedule. Those are the two changes that we recommend. Chairman P a t m a n . Have you finished, Mr. Staats? Mr. S t a a t s . Yes, I have finished. I will be very happy to respond to your questions. Chairman P a t m a n . In the beginning of your statement, you bring up one of the most important monetary problems that we have in our Government today, and that is in regard to what is known as the port folio of the Federal Reserve banking system. Now, the portfolio, as I understand it, is about $86 billion; and, of course, something that is hard to understand is where the Federal Reserve gets its money. Un der the Federal Reserve Act, it has the {>ower to create money. It has the power to manufacture money, and it has more power than any other Government financial agency. In calendar 1974, total earnings of the 12 Federal Reserve Banks snowed earnings from operations of $6.3 billion, of which 96 percent was derived from interest on U .S. Government securities. Now, that is the part to which I wanted to invite your attention. In that case, I think any audit should certainly cover this point thor oughly. You know, that is manufactured money, and I do not think anyone would want the Federal Reserve Board, or anybody else, to have unlimited power to issue money that is manufactured like a printing press would manufacture it. And that is what is contemplated here, and is actually happening. Now, that is $86 billion in Federal securities in the portfolio in the Federal Reserve Bank of New York. I succeeded, after about 30 years, in getting a copy of that portfolio. It had never been obtained before, and never published. It took me 30 years to get it, and I had to go through some embarrassing moments in order to persuade them to let me have it. That portfolio has $86 billion in Government bonds, principally. And those bonds are handled by the 20 dealers—the Fed eral Reserve has 20 dealers on Wall Street. Those 20 dealers are the only ones who can buy Government bonds for the Federal Reserve System. They buy these bonds and get credit for the purchase from tlie Federal Reserve Bank that they want to give the credit. Of course, they do not pay any money at that time. But when a person wants the money, just like when he files a promissory note with any bank, he gets a credit on the books for the money that he has borrowed, and he can draw that money out any time he wants to for the purpose that he wants to. That is the same way that these $86 billion of bonds were paid for, just on the credit in the Federal Reserve banking system. It is Government money and credit that is used to by those bonds, and I have always insisted that the professors teaching economics almost invariably say that when the obligor in the credit instrument and the 168 obligee become the same person or the same entity, the debt is paid. There is no question about that. Therefore, I think that particular attention should be given to that statement that you made, Mr. Staats, because it shows conclusively that the debt is paid, and there is no reason why it should be allowed to remain in the portfolio in the New York Federal Reserve Bank. The people have to continue to pay interest on those bonds. Anyone can now review that portfolio which I placed in the Congressional Record. Each bond or each security has an explanation as to the amount of in terest that it draws when it is due. Congress does not appropriate the money to pay the interest despite the fact that the Constitution says that no money should be paid out by the Government that is not ap propriated by the Congress. A t this time I will yield to you, Mr. Minish, so that you may ques tion Mr. Staats. Mr. Minish, you are recognized for 5 minutes. Mr. M i n i s h . Mr. Staats, the Federal Reserve Board maintains that noninterference with the internal management of the Federal Reserve will provide better monetary and credit policies. This really means no audit of the Federal Reserve by the GAO. Mr. S t a a t s . I am not sure that I can interpret very well what they have in mind, or anyone would have in mind, with that kind of a state ment, because we are in the business of reviewing operations through out the whole Federal Government. We do not run into this kind of concern that we are interfering with policy determinations, because in fact we would not be coming in prior to a decision with respect to monetary policy, but rather we would be looking at the overall financial condition of the system. We will be looking at their internal controls, their auditing practices. We would be looking at the way they carry on, you might say, the internal busi ness operations of the system. Their administrative costs are over a half billion dollars—$548 million in 1974. This is a big operation, even in Federal Government terms. We would also be looking at the ma chinery and the system by which they reach their determinations. Somehow, in 1973, when this matter was before the Congress, the statements were made to the effect that we would “ be looking over their shoulder” at the time they were making the decisions. This just is not true. It is not true anywhere else in the Government. I do not know why it would be true here. But those statements were made. They rep resent a misunderstanding of what the law would provide, and what our practice would be normally. M r. M in ish . M r. Staats, I suppose the difference would be that in using GAO, there would be a comprehensive audit over which they would have no control, but if there were independent C.P .A .’s, they would have some control over them. Would you agree ? Mr. S t a a t s . Well, one of the questions that obviously we would have— and I should think Congress would have—is what kind of guidelines do they give the C.P.A. firm ? While we have not had any authority to look in detail at their operations, we do have some concern as to whether or not even the system that they have is an adequate system. For example, the C.P.A. firm observes the audit of the Board’s field examiners for one bank each year. That means a 12-year cycle. There is a question of what happens to these audit reports—who re views them. It is our understanding that, for example, unlike other 169 large organizations such as the International Bank, there is no audit committee of the Board. We are not suggesting that we have concluded that there should be one. But at least, it seems to us to be a legitimate question. These are the kinds of concerns that we would be addressing. Mr. M i n i s h . Well, let me ask you this. You have no concern that you could adequately audit the Board to protect any necessary confidenti ality ? Mr. S t a a t s . N o , not at all. We are dealing with confidential material through the whole Government. This point was made previously that internal conversations, and things of this type, would be purveyed by our people to the press and to Members of Congress. We do not know on what basis that kind of statement was made, because it does not exist elsewhere. Mr. M i n i s h . Thank y o u , Mr. Staats. M y time has expired. Chairman P a t m a n . A ll right. Mr. Gradison ? Mr. G r a d i s o n . Thank you, Mr. Chairman. Mr. Chairman, first I would like to state that I think that the prob lem before us has been oversimplified by saying that the need for a policy audit of the Federal Reserve is kind of a self-evident truth. A t the time this matter was up for consideration by the House last year, all former Secretaries of the Treasury of both parties indicated their opposition to that kind of an audit. There must have been some reason for their concern. A number of former Secretaries of Commerce of both parties indicated their opposition to the policy audits. There must have been some reason for their concern; and a number of former members and chairmen, as a matter of fact, of the Council of Economic Advisers of both parties, indicated some reservations, and in fact ob jection, to the policy review. With regard to the General Accounting Office’s functions in looking over the financial affairs of the Fed, in a sense, they would be acting as auditors to review the work of other auditors. I do not know—and I hope we can find out at some stage—how much money is being spent by the Fed for audit work. I understand that it might be in excess of $7 million, including the costs of internal audit work being carried on today within the banks, the branches, and the Board itself. Now, how much more cost we want to pile on top of that is something I think we should consider. But with respect to the policy matters themselves, I am really troubled by the thought that we would seriously consider turning these policy judgments over to somebody else. We have recently passed a measure, Mr. Chairman, which began as House Concurrent Resolution 133, to deal with precisely this ques tion. And in it we say, in the conference report, that it is anticipated that hearings would be held soon after April 1 , and again after Ju ly 1, to inform the committees and the Congress of the policies pursued during the first half of 1975, and to consult about objectives and plans with respect to ranges of growth and so forth. In other words, this is our concern, and it is a proper concern. The Fed is our creation. But we have provided a mechanism, and we have done it in the last month or two, and I would certainly think that we should give that mechanism a chance to operate before we go about creating some new machinery as well. 170 In addition, Mr. Chairman, I would point out that there is no better way for us to get judgments as to the job, the policy review of how the Fed has gone about doing its work, than the hearing process which we have been using and will continue to use. We are able to call, at no cost, upon experts from throughout the United States to come before this subcommittee, and testify as to the job the Federal Reserve has done, and they do that. And it would seem to me that that kind of review is going to be not only more timely, but also less expensive, than paying the General Accounting Office to do— what? To go out and hire some experts, because that is what we were told is going to be done; five experts from outside to come in and advise with them on what kind of a job the Fed has been doing from a policy point of view ? We can get it free, without the necessity of turning to someone else. I then turn to my first question. What is the cost of doing the full job of carrying out the mission which would be done under your pro posal—not just the hiring of the outside people, but the proper alloca tion of the time of the people who are already on your staff that would be involved in this work ? Mr. S t a a t s . Well, let me answer your specific question first. We would not be able to give you a specific figure until we saw what kind of a bill you enacted. Mr. G r a d i s o n . I am asking what would it cost to carry out the bill which you are recommending, that specific bill? You made a recom mendation— what will it cost you to do that job ? Mr. S t a a t s . It would not be a large cost. We would be glad to fur nish for the record some range, based on similar-size operations. Mr. G r a d i s o n . Are you not prepared at this time to tell us the cost of carrying out your own recommendations ? Mr. S t a a t s . N o ; we do not have a specific figure, because we have suggested some changes here. But we can supply that. For example, we do audit other financial institutions. But it would not be a large cost. I would like to say that for the record. Mr. G r a d i s o n . Could you supply this at a later time for the record ? I think we really should have that when you come up here with a rec ommendation for doing a job. I think it should be expected we are going to ask what it is going to cost. Mr. S t a a t s . Well, we can supply that. There is no problem here. But I do not want to give you a figure without some basis for it. Mr. G r a d i s o n . Thank y o u . [In response to the request of Mr. Gradison, the following informa tion was submitted for the record by Mr. Staats:] R eply R e c e iv e d F rom M r. Staats As brought out in the prepared statement, if GAO is authorized and directed by law to audit the Federal Reserve System, the first step would be to make a careful review of the nature and adequacy of the internal management control systems including the audit work already being performed before determining what additional audit work would be required. Until such preliminary survey and review work is performed, it is not possible to make a precise estimate of the audit costs GAO would incur in carrying the required auditing. If H.R. 4316 were enacted to give the Comptroller General flexibility to make selective reviews each year, as suggested in the Comptroller General’s state ment, rather than a complete audit each year as provided in the bill, an alloca tion of audit staff resources to such work would be made giving due regard to all 171 other audit work throughout the Federal Government which GAO is required to perform. It is estimated at this time that the annual cost for such work would be approximately $750,000. Mr. S t a a t s . But let me, if I may, respond to the broader concern which you have expressed. You are quite correct in saying that the subcommittee can hold hearings with respect to the operations and policies of the Federal Reserve System, and of course, it has. But similar kinds of hearings are held by all the legislative committees with respect to the agencies over which they have oversight. Our role is one of assisting the Congress in providing an independent analysis of the financial operations, the economy and efficiency of the opera tions, and with respect to any observations we have on how they arrive at their program decisions. W e have no directive powers; you understand that, I am sure. A ll we can do is develop, with the help of trained professionals, the kind of suggestions for improvement that we think the Congress might consider. We do that in a variety of ways. We do it, in many cases, in the form of a statutory requirement for a particular study; and as I have indicated here, beginning in 1970, the Congress directed that we assist the committees of Congress having oversight in developing cost and benefit studies on programs. This part of our work has increased very substantially in response to requests that we have had from com mittees of the Congress. But overall, we feel that the concern which you have expressed here has been aired, and has been decided in the affirmative— that there is a value of having an independent arm of the Congress, one that is nonpartisan and certainly one that tries to secona-guess the policies of an agency—to come up with sug gestions on ways to improve the processes by which that agency under takes its work. The cost involved here seems to me very, very small in relation to the importance of the program that is involved. Mr. G rad ison . Mr. Chairman, my time has expired. I am the only member of the subcommittee on our side who is present today, and I ask unanimous consent for 1 additional minute. Chairman P a t m a n . Without objection, so ordered. Mr. G r a d iso n . Thank you. Mr. Chairman, there are two major elements in the development of Government policies that affect the economy of the United States. One has to do with monetary policy, and we are talking about review ing monetary policy and making sure it is doing the job. And the other has to do with fiscal policies. A s the members of the committee know, I am not tremendously impressed with the job, nor do I think is the American people tremendously impressed with the job, that has been done over the years in carrying out fiscal policies. Is there any way that we could, if we should decide as a Congress, involve the General Accounting Office in reviewing the way in which monetary policy is developed by the Federal Reserve Board, also find a way to ask the General Accounting Office to advise us on the way that fiscal policy is developed by the Congress? Mr. S t a a t s . Are you asking me that question ? Mr. G r a d iso n . Yes. You seem to be willing to take on this job of reviewing with the help of outside experts the way in which monetary policies are developed, and have been in the past by the Fed. I am 50-365 0 - 75 - 12 172 asking whether you would be willing to take on the same task with respect to the way that fiscal policies are developed by the Congress. Mr. S t a a t s . Yes, indeed. In fact, we have done just that in terms of the assistance we were asked to provide for the study committee, which resulted in the Congressional Budget Act. We appeared before the Ullman-Whitten committee, and helped them to a very great extent. I testified subsequently three different times with respect to the provisions of the statute, and we believe that an agency such as ours that is concerned particularly with fiscal affairs of the Gov ernment can provide a useful analysis of the way in which the budgetary-----Mr. G r a d iso n . But you are referring there to the procedures alone, with respect to the Fed. Are you just going to limit your review to the procedures which they follow once the policy is decided in implement ing it? Or rather to, as I understood it, to the policies themselves as they relate to their total impact on the objectives with regard to the needs of the economy. Mr. S t a a t s . Well, I testified before this committee in 1973— and I think the record will support me—that we would be primarily con cerned, with respect to monetary policy, with the processes by which the Board arrived at their conclusions. We do not see our role as being particularly useful in terms of coming up to a conclusion that the money supply, the M 1, should increase at, say, 6 percent or 8 per cent or 10 percent. You can get all sorts of economists to come before your subcommittee, and it is largely a subjective thing. I just attended an economic outlook conference here in the last week of all the lead ing monetarists in the country, and they are 180 degrees apart. That kind of a judgment is the judgment, I think, that you gentlemen have to make, based on that kind of testimony. But I do think that we could give this subcommittee and the Congress some useful judg ments with respect to the processes by which the Open Market Com mittee functions. That is a distinction that I tried to make then, and I would repeat it this morning. Now, I would like to go back—I think it bears on your immediate question—to the statement you made with respect to the letters that were obtained from former Cabinet officers and others, most of whom are personal friends of mine. I know them well, and I have worked with them over the years. But if the question were raised with me as to whether I believed in the independence of the Fed, I would write a letter supporting that too. I really do not think that is a relevant question to the one that is before tfie subcommittee, if I may say so. Mr. G r a d iso n . That was not the question to which the letters were directed, either. Mr. S t a a t s . I have read most of those letters, and they are con struing a G AO audit as synonymous with a challenge to the independ ence of the Fed. Mr. G rad ison . They were specifically referring to opposition to H.R. 10265; not to some general theory, but to a specific measure which was under consideration at that time. And this is true of each of the documents that I am referring to ; the one from the former Secre taries of the Treasury, Secretaries of Commerce, and members—I believe Chairmen—of the Council of Economic Advisers. 173 Mr. S t a a t s . Y e s ; I have read all those letters. But the context of those letters, I think, if you will examine them, is in terms of GAO audit coming in and monitoring the policies of the Fed. That is not what the bill provided. You cannot find anything that I have said, or that any language of the bill, I do not believe, which is written in such terms. Mr. G r a d iso n . Thank you, Mr. Chairman. Chairman P a t m a n . Mr. Hannaford. Mr. H a n n a f o r d . Y e s; thank y ou , Mr. Chairman. Mr. Gradison’s questions regarding the decisions relating to fiscal policy I think are quite significant. Fiscal policy and monetary policy decisions, both, I think should be sometimes subject to political con siderations. Historic evidence has made that apparent in the past. I welcome, therefore, an opportunity to see some other judgments about monetary policy decisions independent of the Federal Reserve Board itself. Mr. Staats, how many employees does the Federal Reserve System have? Do you know that figure ? Mr. S t a a t s . H o w m a n y em ployees? Mr. H a n n a f o r d . Overall nationally ? Mr. S t a a t s . I do not have the figure offhand. Mr. H a n n a f o r d . It is something on the order of 30,000; is it not ? Chairman P a t m a n . Recently I asked Chairman Burns that question and he said there are 28,000 employees. Mr. H a n n a f o r d . They have an income from their portfolios that the Chairman often refers to as $6.3 billion. Is that correct? Mr. S t a a t s . That is right. Total earnings, $6.3 billion. Mr. H a n n a f o r d . And I am told that they have an expenditure for their operations of some one-half billion dollars. Mr. S t a a t s . $548 million. Mr. H a n n a f o r d . I s there any discipline in the absence of an audit, an independent audit, to compel efficiency in the operation of that very large establishment? How do we know that without the discipline of any competition or audit independently, how do we know that five secretaries are not doing the work of three or two ? Mr. S t a a t s . Well, let me just say in general terms that with respect to any organization that spends $548 million in operating costs, I be lieve that with the kind of people we have got we can find ways to save a good deal of money. I can say that without having gone inside the building at all. I can say that with respect to any operation. I think our record demonstrates over the years that we have been able to come up with ways of making savings which the agencies themselves accept as real savings. For example, last year, in 1974, we were able to come up with recommendations that added up to $562 mil lion of savings that the agencies themselves accepted as being worthy of their putting into effect. There are many other recommendations we made that were not ac cepted and many others that could not be translated into dollar terms. But I would say without much fear of contradiction that we could find ways to save money that the Fed itself would accept. 174 H r . H a n n a f o r d . Y e s ; I w ou ld find it rem arkable i f there were n o t a great deal o f inefficiency under the circum stances w ith such a large institution w ith ou t surveillance or w ith ou t any com petition in the m arketplace or a n y th in g else to com pel discipline. You have, in fact, audited a goodly number of other agencies and made policy recommendations to them. Mr. S t a a t s . Yes, indeed. There are very few exceptions to our audit responsibility in the entire Federal Government. The Federal E e serve System is one of them. We have not audited the C IA . We have not audited the Defense Intelligence Agency to any extent. But these are the principal exceptions of any consequence. Mr. H a n n a f o r d . D o you know why the Congress in its wisdom in the act of 1933 declared that these funds which the Attorney General had previously said were public funds and which appear to me to be quite public funds, were, by that act, declared not to be public funds? Mr. S t a a t s . It was just a straight statutory declaration, I believe, that these were not Federal funds. Congress, by the same stroke of a pen, could declare that they are Federal funds. We think that they are. Mr. H a n n a f o r d . That is quite clear to me that they are public funds. Well, thank you, Mr. Staats. Chairman P a t m a n . Mr. Blanchard. Mr. B l a n c h a r d . Thank you , Mr. Chairman. I find it hard to believe that for all these years the Fed has not been audited when I hear so much talk about Congress attempting to know what is going on and oversee the operations of Government agencies. I notice that later in our hearings, I think next week, a representa tive of the Federal Reserve Board will testify. I myself would be in terested to see you and the representative testify at the same time. And at the risk of being unfair to the Fed, I would like to ask you a couple of questions. One, is without violating any confidentialities, I am curi ous if you have discussed the issue of the audit with Dr. Arthur Burns or principles at the Fed ? And again, without violating any confidences, what are the major objections raised—I hear the objection of the prob lems of secrecy and things like that—what are the popular objections raised against an audit of the Fed and what is your response ? And I want to make note-----Mr. S t a a t s . Well, I have discussed this question with Dr. Arthur Burns, whom I have known for many, many years, on a number of occasions and George Mitchell, who will be testifying before this sub committee, on a number of occasions, and they can state their own position, and I do not wish to put words in their mouths. But based on the testimony presented last time, this matter was before the sub committee, I believe it was the position that they had no quarrel with our looking at their financial system. They had really very little quar rel with our looking at the economy and efficiency of their operations. But they were worried about our going beyond that in terms of any other part of their operations. Now I must say, and this is my own personal interpretation, that part of this, I think, grows out of a natural reaction to people who have not been subject to a G AO audit and therefore are in unfamiliar 175 territory in the sense that they have not had first hand experience with our procedures and how we operate. For example, this concern is that we would have access to records, information on which decisions have not yet been made. That is not true at all, but this is one of the kinds of statements that has been made. The statement has been made that we would take individual positions of members of the Open Market Committee and make those available to different people, the press, or otherwise. Obviously, this is not the case. We would not do that. But these are, in our opinion, the kinds of concerns of an agency that has not had experience with our organization. I do not belittle them, but I just do not believe that they have a proper understanding of how we function. Mr. B l a n c h a r d . In your testimony you refer to the fact that there are parts of an audit conducted in-house at the Fed. You mentioned that with one exception those reports on the auditing being performed within the Fed are not submitted to the Congress, to your knowledge. I found that rather interesting. Do you have any reason to believe that parts of these audits are supplied to members and you might not know about them? Or is it simply that you are quite sure categorically that Members of Con gress would not have access to these reports ? Mr. S t a a t s . I think the best answer I could give to that is that if you look at the annual report there is one short paragraph there that states the result of the external audit. In no sense of the word would that satisfy me. I f I were responsible, I would personally be willing to take somebody else’s word for it but I would like to have a lot more information than that provides. Let me take this occasion, though, I think it is related to your point, to point out that the bill that passed the House previously was de signed to accomplish a financial audit and, you might say, an economy and efficiency audit, a management-type audit. But unfortunately, the language which was included in the bill which passed the House would not have done that. This was faulty draftsmanship. But Mr. Ashley, who sponsored the bill, is on record in the dissent on H.R. 10265, which was a bill before the committee at that time, in which he was joined by about 10 of his colleagues they made it very clear that it was their intention to provide for a financial audit and for an exam ination of the management of resources to evaluate the efficiency and economy with which they are procured and used. Now this statement was made on the floor also, but the reason I want to bring it up is to make it clear that in our opinion the language which was included to carry out that intent was faulty and would not have, in fact, allowed us to do it. The language, as we interpret it, would have simply enabled us to look at little more than the account ing system of the Fed and even then on a limited basis. Now they use the words “ economy” and “ efficiency” in the language but if you can only look at the accounting system, you cannot really do very much about anything beyond that. From the point of view of rendering an opinion on a financial state ment, which would do for a Government corporation, we could not have done it, nor could we have looked at ways that you could make savings in the operations of the Fed under that language. 176 A s I say, I think it was faulty language for carrying out the intent that those who entered the dissent to the full committee bill in 1973. Mr. B l a n c h a r d . Thank you. My time is expired. Chairman P a t m a n . Mr. Staats, I would like to ask you the follow ing questions. The first one is, Mr. Staats, for the sake of absolute clarity on this matter, it is my understanding that you would prefer a bill which does not restrict the General Accounting Office in any way in auditing the Federal Reserve System. Is that right ? Mr. S t a a t s . That is right. This would be the same position we would take on any other program. Chairman P a t m a n . Yes, sir. Another one, Mr. Staats, in the course of its work. G AO audits various entities of the Defense Department, does it not 2 M r . S t a a t s . That is correct. Chairman P a t m a n . Does this work entail examination of classified or sensitive material ? Mr. S t a a t s . Oh yes, yes. A great deal of it does. Many of our reports are classified. Chairman P a t m a n . Can you give us examples of G A O ’s access to sensitive or classified information in connection with G A O audits of other types of Government agencies ? Mr. S t a a t s . Yes; indeed. These involve military assistance, State Department operations, the Defense Department’s operations, and many operations of the Government. Chairman P a t m a n . Atomic Energy ? Mr. S t a a t s . Atomic Energy, yes; indeed. Chairman P a t m a n . And all the military affairs ? Mr. S t a a t s . Right. Chairman P a t m a n . Has access to this type of material ever resulted in undermining or in any way damaging the ability of Government agencies to function property ? Mr. S t a a t s . Not in our opinion, nor do we have any indications that the agencies feel that Avay about it. Chairman P a t m a n . Another one, please. Now this one you may answer more fully when you receive your transcript. Mr. Staats, on page 3 of your statement, you say, “ I f we are to be authorized and directed to audit the Federal Reserve System, we would recommend that the authorizing law contain no restrictions.” On page 11 of your statement you say, “ In summary, Mr. Chairman, we believe that H.R. 4316, with the changes suggested in this statement, would provide for an adequate audit of the various entities of the Fed eral Reserve System.” The changes you advocate do not in any way restrict the bill as it was introduced. Is that correct ? Mr. S t a a t s . That is correct. Chairman P a t m a n . Very well. Now I want to ask you one other question for the record. In fiscal year 1974, the Federal Reserve System had expenditures of $542 million, a 33-percent increase over fiscal year 1972. Do you con duct full-scale audits of agencies that are considerably smaller and 177 less important in terms o,f overall policy impact than the Federal Re serve System ? Mr. S t a a t s . Y e s; indeed. We are required by law to do so. Chairman P a t m a n . Has there been any question or criticism of your activities in relation to these agencies ? Mr. S t a a t s . Well, I do not think we could say in general that there has been. Many times our conclusions differ from those of the agency, and those differences set forth in our reports. But those are areas where we have legitimate reasons to differ. We think it is a service to Congress to have those differences placed before it. Chairman P a t m a n . Do you consider your work in auditing these agencies to have been valuable ? Mr. S t a a t s . Well, we think it has been. We trust it has been. Cer tainly the Congress has relied on us more and more over the years. Chairman P a t m a n . When you examine your transcript, would you mind submitting for the record a sample list of such agencies? Mr. S t a a t s . Yes; we will. Chairman P a t m a n . That w ill be fine. [In response to the request of Chairman Patman, the following in formation was submitted for the record by Mr. Staats:] R eply R e c e iv e d F rom Mb. Staats GAO audits many Federal agencies which are smaller than the Federal Re serve System and others which many people would consider as being less im portant in terms of the impact of their policies on the Nation. Some of these are: Export-Import Bank of the United States; Federal Home Loan Bank Board— Federal Home Loan Banks and Federal Savings and Loan Insurance Corpora tions ; Federal Deposit Insurance Corporation; Panama Canal Company; Na tional Credit Union Administration; Overseas Private Investment Corporation; Railroad Retirement Board; Renegotiation Board; Small Business Administra tion; Farmers Home Administration; Rural Electrification Administration; Rural Telephone Bank; Commodity Credit Corporation; Federal Crop Insur ance Corporation; Maritime Administration; Food and Drug Administration; Community Development Corporation; Government National Mortgage Associa tion; Bonneville Power Administration; Southwestern Power Administration; Southeastern Power Administration; Federal Prison Industries, Inc.; Bureau of Engraving and Printing; and Bureau of the Mint. Chairman P a t m a n . N o w , then, I want to go back to this main ques tion. I am afraid that the main question is not being seriously con sidered by many Members of Congress who have not studied the matter in depth. They are very sincere, I know, in their approach, and I am not accusing them of not being so, but I want to emphasize one thing that is very valuable in this hearing. The Federal Reserve is allowed to manufacture money. It does not cost them a penny. They use that money to buy Government bonds and the bonds are not canceled. Now then, when the bonds become due, the Treasury must pay those bonds, and the Government has not paid anything for them. They should have been canceled for that reason. That being true, I asked Dr. Burns a question in a hearing not so long ago before this subcommittee. I said, Mr. Chairman, who owns the title to the $70 billion of bonds in the open market portfolio that have been purchased on credit initiative? That is the same portfolio that you mentioned a while ago when you saM there is $86 billion in it now, which is correct. Dr. Burns said the $70 billion on the books of the Federal Reserve banks are owned by the Federal Reserve banks. 178 Now that looks to me like that is a complete departure from our monetary system, if we are going to let the Federal Reserve own those bonds. They collect interest on them after they have been paid, and then when they become due they collect the principal. That seems to me like there is something wrong with this system that we are using because the Federal Reserve would be allowed to own these $86 billion in bonds. I asked Dr. Burns, I said, who owns them, and he said the Federal Reserve banks own them, as distinguished from the Government. So I think it is a serious question here. I f we let the Federal Reserve con tinue to do that, they will not only have squatters’ rights, as we say in the West, on land titles, but a precedent set as to what they can do in the future. I f they can take the money that they create without any reserves of any kind behind that money and buy bonds that are interest bearing and do not cancel them when they are bought, why they have a privilege there that no other financial institution on Earth ever had, to my knowledge. A counterfeiter is fined heavily if he is caught doing what the Federal Reserve is doing. In addition the Federal Reserve is collecting $542 million a year for expenses. Who pays that $542 million ? That is what I want to impress upon everyone about this hearing. Well, that $542 million was paid by the taxpayers when they had to pay the coupons on these bonds to the Federal Reserve as they become due. But the Constitution says that no expenditure made by Congress of the Government’s money shall be made unless the Congress approves it. So many people believe, Mr. Staats, that this is a device for the Federal Reserve to make an end run around Congress’ jurisdiction and never have to come before a congressional committee and be required to an swer questions as to what they are going to do with the money that they want. I f this is carried to its logical end, the Federal Reserve will not quit with just $86 billion in its portfolio. It has been increasing the port folio by the billions every year in the last few years. They will go ahead and they will buy the entire national debt if they want to in exactly the same way. There would be no restriction against them doing it. And then, after they own the entire national debt and get about $35 billion a year interest on it, none of which cost them any thing, they will then commence to acquire private bonds or the bonds of States, counties, and cities and other political subdivisions. There will be nothing to stop them. It looks to me like if we do not settle this question and settle it now, we are in for a lot of questions involving the solvency and security of this Nation. Would you like to comment on that ? Mr. S t a a t s . Well, I do not believe I have any general comment to make, Mr. Chairman. One specific point that might be made here is that the $548 million is included in the interest account which is a budgetary item in the Federal budget. So, it is Federal money, and it derives from interest paid by the Treasury on bonds held by the Federal Reserve System. Chairman P a t m a n . I know. But those bonds are paid for and, there fore, they should have been canceled. They are keeping bonds that have been paid for and should have been canceled when they were paid for. But they were not. 179 Now then they are collecting interest on those bonds until maturity of the bonds, and then they will get the full amount. Mr. S t a a t s . Well, of course, any unused money reverts at the end of the year to the Treasury, and as I pointed out here in this last year it was $ 5 ^ billion. Chairman P a t m a n . Mr. Johnson is recognized. Mr. J o h n s o n . Thank y ou , Mr. Staats. I want to welcome you here today. We have been around this track before. I personally heartily approved last year the bill that would limit your audit to administrative functions. I cannot find any objec tions to your trying to reduce the number of employees they have and saving money and audit their internal accounting procedures and maybe change their way of handling computers. But when you start getting involved in the policy of the bank, that is where I draw the line. I cannot help but feel that this bill is a sinister attempt to destroy the independence of the Federal Reserve System. I cannot help but feel that those who want to destroy the System or limit it so that it is an ineffectual organization are using you as an innocent pawn in their drive to completely destroy our central banking system. Now that is the way I feel about it, and it is no reflection upon you because I think you do a highly capable, wonderful job as the head of our General Accounting Office, and I am proud of you. I want you to return to your attachment I I of your statement, and I will ask you some questions about it. I notice after you get down away from the accounting phase of your audits, you get into policy questions for instance, involvement in the issue of redemption of U.S. Government securities. Bill Simon has to sell some $60 billion worth of bonds to balance the Federal deficit, and of course he is going to need the cooperation of the Federal Reserve. Now if you are going to audit that, what will you do, wait until the end of the year and send us the statement, saying: Well, we see that Bill Simon sold $35 billion worth of bonds and Arthur Burns helped him unload $ 15 billion on member banks. Now just how would you audit that and how would you comment on that, and what service would you render by looking into that par ticular activity ? Mr. S t a a t s . Mr. Morse will respond. Mr. J o h n s o n . In other words, you would be auditing policy ques tions for what took place, and you would be giving us a history of what took place? Go ahead, I would like to hear what you have to say. Mr. M orse. Well, you are exactly right. We do our work on a post audit basis, not during the work but afterward. In this particular ex ample we would try to find out why they do what they do and how they do it; and if everything looks fine, we will say so. I f we think the procedures can be improved, we would say so, and we would make rec ommendations in that direction. But we would not try to assess the validity or the wisdom of the objectives themselves that they are try ing to carry out. Mr. S t a a t s . I f I may say so, I think we have something of an analogy here in terms of the policy operations of the State Depart ment or the Defense Department. You will not find in any of our re ports a conclusion that says we made a mistake in going to Vietnam, 180 or that we made a mistake in not intervening to prevent the Turks from going into Cyprus. This is not our concern. But I do think there is a parallel here in terms of the concern expressed by the Federal Re serve System that we would go in and try to do a second-guessing job on policy decisions. We are more concerned with the adequacy of the staffing, the adequacy of the procedures and the process by which those decisions were reached. You will not find in any of our reports in the most sensitive areas of that type the kind of conclusions which the Fed seems to be concerned about our reaching. Mr. J o h n s o n . N o w , as to your auditing their administration of the Bank Holding Company Act, they make a decision saying, let us say, that a bank holding company can buy an insurance agency. That is a big question. Now you would audit that, and what would you do at the end of the year? You would say, well, we notice the Fed said that their banks can operate insurance agencies. Well, so what. How would you com ment on that ? W hy would that be within the scope of an audit, let us say? Mr. S t a a t s . Well, obviously, we cannot tell you what we would say without having looked at it. I know you do not expect us to do that. But it seems to me that since they have a specific act to administer, we could advise the subcommittee and the Congress as to whether or not there were questions there. Mr. J o h n s o n . I have time for just one more question on another sub ject. Also, you would approve bank mergers. Now, a year later, say, you found they permitted the merger of the banks in Hackensack, N .J .; would you say that they went outside the scope of the law in permitting the merger of this bank, and would you say that it creates a monopoly, so you would challenge that policy decision ? How would that be the subject of an audit ? M r . M orse . We would start with the law itself. It gives them au thority to carry out that function. We would want to know what the Congress intended by giving that authority. We would then try to find out how they set up their procedures to do it. Then we would look at specific cases in an effort to evaluate what kind of a job they are doing, and thereby reach some judgment. Mr. J o h n s o n . Would you send a group of auditors to Hackensack, N .J., and have them go up and down the street and canvas businessmen like the Fed does before they permit the merger? Mr. S t a a t s . We would not do that, but we might be interested in knowing how careful a job they did. Mr. J o h n s o n . Then you would be auditing the policies? Mr. S t a a t s . We wouid be auditing their system by which they reach the policy decision, that is right. Mr. J o h n s o n . Thank you. M y time is up. Chairman P a t m a n . Mr. Blanchard? Mr. B l a n c h a r d . I have a couple of questions. I will try to make it brief. This whole debate of whether or not to audit the Fed really intrigues me. Those who want it claim the Fed is sinister—and I think they are sincere; and those who do not want it—and I think they are sincere—believe that those who want the audit are sinister. I do not think I am sinister, and I do not think you are, either, and I do not think the two gentlemen on my left are either. I just do not 181 know why there is all this fuss about it. So I am trying to educate my self before I make a decision. The question that I would like you to comment on is, I f your job were today to tell us why not to audit the Fed, what would be the best argu ment you could advance to me as to why not to audit the Fed ? That is, perhaps, unfair, but I would be interested. Mr. S t a a t s . N o ; that is a fair question. I f I were in a debating tour nament and had to pick one side, and then pick the other side, as I have in my years gone by, I think the main argument would be that this is an extremely sensitive area and therefore the Congress should, in effect, exercise less oversight with respect to how this job is done, than it does with respect to other parts of the Government. I think that would be the essential point I would make. Now, the de cision, it seems to me, that Congress has to make is whether or not the Fed is something so different from other parts of the Government, as to put them in a special category where they do not receive the same kind of oversight that the rest of the Government receives. I think this is the critical issue that you gentlemen have to reach. My own view is that independence is a relative thing. We have inde pendent regulatory commissions, also. But they are subject to the same kind of reviews on appropriations and audit that any other part of the Government is. They would stoutly maintain, also, that they are in an independent status, and some of them even argue that they are part of the legislative branch. I have even heard some people from the Federal Reserve Sys tem say that they are an agent of the Congress, and not a part of the executive branch. I do not really see quite where you draw the line on the basis of in dependence so that it enables an agency to escape the normal controls of oversight which are provided for the rest of Government. I had to think a long time, I might say, before I reached the conclusion that I did in 1973, because the G AO up until that time had taken a com pletely neutral position as to whether or not it should audit the Federal Reserve System. Mr. B l a n c h a r d . Let me pursue that argument you have advanced, which you have hashed out and resolved. Your office has audited a wide spectrum of Federal agencies. To what extent do you take into account their differences ? I know, for example, that a representative of the Fed has been wor ried that you will treat the Fed when you audit it like every other agency, and not understand its uniqueness. Do you have a standard method of auditing? Or do you take a sub stantial amount of time in deciding how you will audit an agency and allow for its diversities? Mr. S t a a t s . Every case is a case on its own, and has to be looked at separately. I think you will find in our statement here something to the effect that if this law were to be enacted, we would want to spend a good deal of time just acquainting our people with more detail than you can by just reading the literature, as to now this system functions. Now, this could be done through interviews, and through visitation in the banks, and in the offices of the System. Then we would make the judgment as to how we could relate our traditional audit techniques to make a contribution. 182 We go through what we call a survey process on any new program— a survey being for the purpose of becoming knowledgeable about an agency and how it operates and looking at issues, problems and condi tions which might warrant examination on our part. There are some general techniques that we follow, but I would be inclined to answer your question, more specifically, that we try to take every case by itself. Take the regulatory agencies like the IC C or the F C C or the S E C . You face many of the same questions there, from an audit standpoint, that you would face in looking at the Federal Re serve System, in my opinion. We are not concerned so much with whether S E C made the right or the wrong decision on a registration statement. We are not con cerned with whether the F C C made the right decisions concerning a rate increase for A .T. & T. These are matters of judgment which lie within the province of the agency that has that responsibility. We are interested in the processes and the procedures by which those decisions are reached. And, if we think we can find ways to improve them, then ultimately, hopefully, we will have improved the end product. Mr. B l a n c h a r d . One final question. In one of the attachments to your statement, attachment II, you list examples of functions and activities of the Fed that you would look into, or that should be examined. One of them is the function of regulating and supervising the for eign operations of the U.S. commercial banks. To your knowledge, has there been any investigation of, or audit of that function by any other agency or congressional committee ? Parenthetically, I find it incredible that we would not know, in this Congress, how the Fed relates to foreign operations of the U.S. banks. Mr. S t a a t s . Well, this is, of course, simply a listing of the various functions which would be subject to audit under the bill as we are rec ommending it. We would never contend that we would be the sole source of information to the subcommittee. We very seldom are on anything that we look at. But, I do think that we could take a look at how they administer that function. M r . B l a n c h a r d . D o you know o f any other grou p or agency th a t h as tried to do th at ? Mr. S t a a t s . Pardon ? Mr. B l a n c h a r d . Are you aware of any other Federal agency or body which has attempted to look into how the Fed supervises the foreign operation of U.S. banks ? Mr. S t a a t s . The only one that we would know of would be this subcommittee. Mr. B l a n c h a r d . Thank you very much. Chairman P a t m a n . N o w just one or two other things before we con clude this morning’s session. Now, if the bonds in the $86 billion portfolio were canceled when they become due and paid for, just like other deficits or debts are canceled when they are paid, that would reduce the national debt by $86 billion. Then we could use that $86 billion, if we decide to do so, or if we needed it, for priority items like housing. Our country is in terrible shape on housing. We all bought environ mental quality as a good slogan and something that is realistic and 183 should be carried out, but how can you have environmental quality without safe, adequate housing for people who need homes at reason able prices and at reasonable interest rates? This $86 billion could be allocated for housing construction. And that would come in mighty handy now and would be very helpful to the country. I think we should have allocation of credit in this country and make sure that the most deserving things for which credit is needed and wanted should be served first. Housing should be one of the priorities. However, $86 billion is being horded by the U.S. Government through the Federal Reserve banks. They are not using it for any purpose on Earth except to collect the interest on it. And the interest is not really due because the bonds have been paid for, and therefore, that cancels the interest on the bonds. It just does not make any kind of sense, in my book, to have it run that way. That is what we want to determine in these hearings. Tomorrow at 10 a.m., here in this room, we will have as our witness— Peter H. Schuck of the Consumers Union, and Kathleen F . O’Reilly, legislative director of the Consumer Federation of America. I am sure they will throw some light on these subjects, too. I want to thank you and your associates very much, Mr. Staats. Would you like to identify them, for the record ? Mr. S t a a t s . Ellsworth H. Morse, Jr., to my left here, is the Assist ant Comptroller General and has been working in this area a good deal. John J . Higgins, to my right, is associate general counsel. And Charles P. McAuley is one of our assistant directors who has followed the Treasury work closely. Chairman P a t m a n . Thank you very much, gentlemen, for your appearance and for your valuable testimony. Mr. S t a a t s . Thank you for having us, Mr. Chairman. We are de lighted to be here. Chairman P a t m a n . I know you gentlemen desire to work in the public interest. Thank you, sir. The subcommittee will stand in re cess until 10 a.m. tomorrow morning. [Whereupon, at 1 1 :45 a.m., the subcommittee recessed, to reconvene at 10 a.m., Wednesday, April 23,1975.] 184 185 AUDIT OF THE FEDERAL RESERVE WEDNESDAY, APRIL 23, 1975 of H ouse of R e p r e s e n t a t iv e s , S u b c o m m it t e e o n D o m e stic M o n e t a r y P o l ic y t h e C o m m it t e e o n B a n k i n g , C u r r e n c y a n d H o u s in g , Washington, D.C. The subcommittee met, pursuant to notice, at 10:10 a.m., in room 2128 Rayburn House Office Building, Hon. Wright Patman [chair man of the subcommittee] presiding. Present: Representatives Patman, Minish, Ford, Hannaford, Blanchard, and Gradison. Chairman P a t m a n . Call the roll, Mr. Clerk. The C l e r k . Chairman Patman. Chairman P a t m a n . Here. The C l e r k . Mr. Minish. [No response.] The C l e r k . Mr. Ford. Mr. F ord. Here. The C l e r k . Mr. Hannaford. Mr. H a n n a f o r d . Here. The C l e r k . Mr. Neal. [No response.] The C l e r k . Mr. Blanchard. [No response.] The C l e r k . Mr. Barrett. [No response.] The C l e r k . Mr. Conlan. [No response.] The C l e r k . Mr. Hansen. [No response.] The C l e r k . Mr. Gradison. Mr. G r a d iso n . Here. The C l e r k . Four Members present, Mr. Chairman. Chairman P a t m a n . A ll right. This morning we welcome representatives of two consumer organi zations. I am glad to see the consumer represented because after all, it is the consumer who bears the brunt of the Federal Reserve policies. In recent years, I have had a great deal of contact with the Consumer Federation of America, and I know this organization represents literally millions of consumers in every area of this Nation. In a rela tively short time, C F A has become a powerful public interest force— something the consumer has long needed. It is making a difference here on Capitol Hill, and I am delighted that C F A has taken such an interest in monetary affairs and the Federal Reserve. (1 8 5 ) 186 Consumers Union is an older consumer organization and, of course, we are acquainted with the “ Consumer Reports” which this organiza tion has published for so long. In trying to expand its coverage in the monetary areas, “ Consumer Reports” recently ran into the stone wall of secrecy at the Federal Reserve and Consumers Union learned first hand just how little regard Dr. Bums and the Federal Reserve Board has for the public’s right to know. I understand that the Consumer Union’s representative will have more to tell us this morning about the “ cops and robbers” games played at the Federal Reserve over public information. Let us welcome Kathleen O’Reilly of the Consumer Federation of America—We are glad to have you, Ms. O’Reilly—and Peter Schuck of Consumers Union. We are glad to have you, Mr. Schuck. Ms. O’Reilly, I would appreciate if you would proceed first and then we will hear from Mr. Schuck, and then we will interrogate you both. So, first we will hear from Ms. O’Reilly. You may proceed as you wish. You are recognized, Ms. O’Reilly. STATEMENT OF KATHLEEN P. O’REILLY, LEGISLATIVE DIRECTOR, CONSUMER FEDERATION OF AMERICA Ms. O ’R e i l l y . Thank you , Mr. Chairman. Good morning, gentlemen. M y name is Kathleen O’Reilly. I am an attorney and the legislative director of the Consumer Federation of America. Consumer Federation of America is the Nation’s largest con sumer organization. It is composed of over 200 national, State and lo cal nonprofit organizations that have joined together to espouse the consumer viewpoint. C P A and its member organizations represent over 30 million con sumers throughout the United States. Among our members are: Con sumers Union, publishers of “ Consumer Reports” ; 17 cooperatives and credit union leagues; 45 State and local consumer organizations; 66 rural electric cooperatives; 27 national and regional organizations ranging from Nationwide Insurance to the National Board of the Y.W .C .A . to the National Education Association; and 16 labor organi zations. Mr. Chairman, I appreciate having the opportunity to appear today in support of an audit of the Federal Reserve System by the General Accounting Office. Our country is experiencing the worst recession in recent memory. In the opinion of many it has already reached depres sion proportions. Every increase in the unemployment rate, every con sumer purchase in the marketplace and every consumer attempt to se cure a loan brings with it a continuing erosion of consumer confidence in the Federal Reserve System. Obviously the monetary policy of the Federal Reserve Board is one of the most critical factors determining the direction of our Nation’s economy. Accordingly, the present eco nomic crisis is viewed by many as evidence that the Federal Reserve structure is not adaptable to the U.S. economy and is unresponsive to its long-run interests. The Federal Reserve banks deal with the most basic of commodities, money, and it is public money. The sheer enormity of the billions of dollars passing through the System each year requires a thorough, competent control and audit scheme. Yet Congress, the only public 187 body directed to oversee the Federal Reserve System, has not been em powered to require that an external audit of the System be undertaken by its auditing arm, the General Accounting Office. Consumers earnestly hope that Congress is becoming more com mitted to its very serious oversight obligations. It follows, however, that Congress must have at its disposal the information this type of audit would elicit if Congress is to adequately determine whether the programs and financial transactions are being carried out in accord ance with applicable legal requirements and whether a more economi cal and efficient administration is feasible. Sensitive to the independent nature of the Federal Reserve System, C F A nonetheless feels that this independence would not be threatened by a G AO audit, especially because the G AO has a well-known reputa tion for both competency and integrity. It has been stated that the Federal Reserve banks and branches increased their expenses 210 per cent between 1964 and 1972. It is more the nature of these expenses which is even more appalling to the consumer than the amount. It is absolutely incredible that memberships, dues, or contributions were made to organizations such as the Miami Association of Indus trial Nurses, the National Association of Power Engineers, and the In stitute of Sanitation Management. Images of Federal Reserve Board elitism are not dispelled by re ports of expenditures for athletic equipment, the International De sign Conference in Aspen, Halloween parties, baseball games, boat cruises, and an annual card party. These and many more items of a similar nature are reminiscent of a fraternity club budget. They are outrageously inappropriate when subsidized by taxpayers who are struggling with an ever-decreasing budget just to make ends meet. It is clearly improper for any governmental entity to be isolated from external review. The shield of independence relied upon by the Fed eral Reserve System has been exploited for too long. It is time to pierce the secrecy which such independence has created. Thank you, Mr. Chairman. Chairman P a tm a n . Thank you , ma’am. We will take advantage of the opportunity to ask you questions later. A ll right. Mr. Schuck, we are glad to have you. You may proceed in your own way. STATEMENT OP PETER H. SCHUCK, ESQ., DIRECTOR, WASHINGTON OPPICE, CONSUMERS UNION Mr. S c h u c k . Thank you, Mr. Chairman, and members of the subcommittee. Consumers Union wishes to thank the subcommittee for its invita tion to testify at these hearings. We support this legislation, although we do believe that the bills should be modified in several respects, which I shall mention in a moment. Let me begin by stressing our recognition that monetary policy is an exceedingly arcane specialty and one fraught with numerous un certainties and policy dilemmas. While it is tempting to cast about for scapegoats for the economic difficulties which beset the American economy, we must constantly remind ourselves of a number of facts. 50-365 0 - 75 - 13 188 First, the stagflation which now afflicts us appears to be a rather widespread international phenomenon and not simply an American problem. Second, and related to this, domestic economic conditions are in creasingly shaped by international economic factors, many or most of which are largely outside the control of American policymakers. Third, any monetary policymaker, even making the rather absurd assumption that he or she had perfect information and control, would be confronted by agonizing choices—inflation versus recession, shortrun versus longrun, domestic versus international, one economic sector versus another economic sector, et cetera—and there is no obviously right way to resolve these value conflicts. Fourth, the Federal Reserve System’s ability to control this rapidly changing, complex economy through monetary policy appears to be diminishing, rather than increasing, as its control over the Nation’s monetary reserves continues to shrink. Chairman P a tm a n . N ow , just a moment. We are not hearing you distinctly. Suppose you pull the microphone up a lettle closer. That might be an improvement. Mr. S ch ttck . Finally, the kinds of decisions that the Fed is called upon to make are so uniquely sensitive and complex that we should think very seriously before taking action that might politicize such decisions, in the sense of subjecting them to the overwhelming pres sures of short term, partisan considerations. On the other hand, of course, we should not pretend that these decisions are purely technical matters either; clearly, they are not. This is not to say that the Federal Reserve Board has not erred in its monetary and regulatory roles. We prefer to leave those ultimate judgments to the economists and politicians, however, comforted in the knowledge that there is bound to be substantial, perhaps eternal, dis agreement among them about such matters. It is to say, however, that there is no simple solution to, or explanations of, our present travails, and that little is to be gained and much may be lost if, out of a wellintentioned effort to audit the Federal Reserve System, Congress im poses undue political pressures on that system to respond to the more short term concerns which necessarily and properly 'preoccupy Congress. In short, the relatively strained relations between Congress and the Fed evident in recent months are a manifestation of a creative, healthy tension, a tension which Congress wisely institutionalized in estab lishing an independent Federal Reserve System. We believe that on the whole, that tension and that independence have served the Nation and consumers well. It is clear that Congress and this subcommittee share that belief. Accordingly, we urge that the Board be required to identify without delay those areas which it regards as so sensitive or confidential that they should not be included in the GAO audit, and that the subcommittee modify the legislation to exempt from the audit such of those areas which it feels might, if investigated, result in undue politicization of the Federal Reserve System. A s I understand it, the Board’s opposition to a GAO audit has been so thoroughgoing and undiscriminating that it has never really indicated what those areas would be in the event that the audit were 189 in fact authorized by legislation. An additional modification that we would suggest is that the Federal Reserve System be required to pay the cost of the audit out of its surplus in the event, that the Con gress opts in favor of the third audit alternative discussed by Comp troller General Staats in his October 1973 testimony on this subject, thus insuring that the G A O ’s valuable work will not be jemsardized by the resource commitments necessary to an adequate performance audit of the Federal Reserve System. Consumers Union believes that for all of its earnest protestations of concern, the Federal Reserve System will survive, and indeed will almost certainly benefit from an outside audit at least once every 63 years, particularly an audit limited in scope as suggested above. While the Fed insists that it is already audited by outsiders, the assertion by Mr. Staats that there is “ some question as to the adequacy of the audit” is entitled to considerable respect by this subcommittee. And in at least one area of Fed policy, public disclosure of consumer informa tion, the Board both has conclusively demonstrated the need for an independent audit and has pinpointed a policy area on which the GAO might profitably focus some attention in me course of its audit of the Federal Reserve System. The Board, as you know, collects a great deal of information from commercial banks pursuant to its monetary and regulatory responsi bilities. Indeed, Board representatives inform me that the Fed con ducts upwards of 50 regular surveys in which statistical and other information is obtained on a systematic basis from individual banks. A t least some of that information is undeniably valuable to consumers shopping for the best terms on loans, savings accounts, and other bank ing services. Yet so far as we can tell, none of it is routinely dissemi nated to the public. Indeed, quite the contrary is the case. The Fed has bent its efforts— and, incredibly enough, those of the courts and the F B I as well—toward preventing the release of such information to the public. During the summer of 1973, San Francisco Consumer Action, a particularly effective and resourceful consumer group serving the bay area, sougfit our assistance. It seems that S F C A had launched an effort to publish a consumer’s guide to banking institutions, and as part of that effort, wished to list the interest rates charged on a variety of consumer installment loan categories by each of the major banks in the bay area. S F C A had learned that the Fed collects this data each and every month from some 370 banks across the country, including some in the bay area, and that the Fed in fact published the data in this G -10 survey, but only in aggregate form. S F C A asked the Wash ington office of Consumers Union to assist it in obtaining this informa tion from the Fed so that it could more easily and accurately compile the listings for the booklet. We requested the Fed to give us access to the interest rate data, but without success. In September 1973, we were obliged to file suit against the Board under the Freedom of Information Act. The Fed’s position was that this information was confidential because the Board had assured the banks that it would be treated as such. We argued that this information was not confidential, that the Board had not in fact as sured the banks of confidentiality with respect to this survey, and that under well established case law under the Freedom of Information 190 Act, such an assurance, even if given, would have no legal effect whatsoever. The Fed filed with the court a number of affidavits from bankers and Fed officials detailing the tragic and baleful consequences to the banks and to the Fed itself if the interest rate information were pub licly disclosed. The horribles that were predicted included: The de struction of the Fed’s data-gathering capabilities; the submission to the Fed of inaccurate data by banks; a refusal by the reporting banks to participate in the survey; competitive harm to reporting banks; impairment of relationships between the banks and their customers; and misleading of consumers by those who would publish the information. In making these blanket claims, predictions, and representations to the court, the Board apparently played rather fast and loose with the facts. First, the Board vigorously resisted our suit and made these claims without even bothering to find out whether or not the reporting banks did in fact consider this information confidential, and if so, whether that confidential status extended to all or only some of the information. Second, even if the Fed considered this information to be confi dential, and even if it was correct in that determination, the Board was obligated under the Freedom of Information Act to determine whether all or only some of the requested information was confidential, and whether all or only some of the banks considered it to be so, and to publicly disclose what was not confidential. The Board did none of this but simply made a blanket claim of confidentiality for all of it and for all banks. Third, the Fed never indicated whether the few banks whose affi davits were submitted were selected at random or not, but in view of the striking similarity in wording of the affidavits and in view of what subsequently transpired, I have the firm impression that the Board made no effort to determine how the reporting banks actually felt about disclosure, but instead tried to create the impression that the few banks submitting affidavits were representative of the 370 banks in the survey. Most shocking, however, is the fact that in December 1973, the Board conducted a special survey of banks participating in the G -10 survey, inquiring as to whether the banks considered the interest rate information with respect to credit card loans—one of the loan cate gories at issue in the lawsuit—to be confidential. Of the 17 1 banks responding to this special survey, 73.7 percent stated that the infor mation was not confidential, a statistic that made an utter mockery of the Board’s position in the lawsuit, at least with respect to the credit card loan category. Yet, the Board never even revealed to the court the existence of that special survey, much less its dramatic, and legally relevant, find ings, and to this day has never done so. I only learned of the existence of this survey in a discussion with Board officials on April 3, 1975, when I happened to ask if any such surveys had ever been conducted. In May 1974, the U .S. district court held that all of the information that we had requested was in fact in the public domain, was not confi dential, and must be made publicly available by the Fed under the Freedom of Information Act. The Board immediately obtained a stay 19*1 of that judgment pending appeal, and filed an appeal. In November 1974, the court of appeals remanded the case to the district court for further findings. In January 1975, after having been held up bv the Board for almost 1 y2 years, we offered to settle the case on the follow ing basis: We would agree to obtain the data on a prospective basis only, beginning with the February reports, thus enabling the Board to save face with the banks to whom it claimed, contrary to fact, to have assured confidentiality, and we would agree not to seek some of the data to which the district court had ruled the Freedom of Informa tion Act entitled us, but which was of less interest to consumers. On February 19, 1975, I was informed by a Board official that the Board had information that our magazine, Consumer Reports, was publishing some of the interest rate information in its March issue, that the Board viewed this matter with the gravest concern, that Chair man Burns was “ determined to get to the bottom of this,” and that the Board was requesting that Consumer Reports refrain from publish ing the information. I replied that it was too late to stop publication of the information and that even if it were not too late, that Consumer Reports would feel an obligation to its readers to publish it, particularly in a period of inflation, high interest rates, and high unemployment, a period in which consumers needed all of the help they could get. I subsequently was informed that in view of these developments, the Board was breaking off settlement negotiations. Several days later, the Washington Post brought to light the fact that Chairman Burns had requested the F B I to conduct a criminal investigation of the apparent theft of the information. This was fol lowed by congressional inquiries into the matter, including correspond ence from Chairman Patman to Chairman Burns. A s a result of these revelations, the Board informed me on March 3,19 75, that it had authorized its staff “to determine from the member banks of the Fed eral Reserve System voluntarily participating in this G -10 survey the extent to which the interest rate data they report on form 835 may be generally available to the public.” Note that the Board decided to take this elementary step not be fore it rejected our original request for information, not before it forced us to bring suit, not before it submitted affidavits to support its insistence that disclosure of this information would be calamitous for the industry and for the Board, not before it took an appeal, and not before it tried to pressure Consumer Reports to suppress the in formation—but only after the most intense public embarrassment and congressional pressure had been brought to bear, and after we had made it clear that we would go back to the district court to establish once again our legal right to the information. The results of the Board’s survey were given to me informally on April 3 , 1975, they have never been made public by the Board. And with good reason, for they could hardly be more damaging to the Board’s position in this whole sorry affair. O f those banks with a single interest rate for a particular consumer loan category, over 90 percent responded that none of the information reported to the Fed was con fidential. Even in the case of those banks which charged customers varying interest rates for consumers loans, more than 50 percent stated that none of the information was confidential. It also turned out 192 that despite all of the Board’s predictions that disclosure would cause large numbers of banks to drop out of the survey, only about 10 fewer banks had reported to the Fed after the public listings of banks and rates in “ Consumer Reports” than had reported before the listings were published. When the Board officials showed me the results of their own survey, I assumed that this now ancient controversy was finally at an end and that the Board would now comply with our original information re quest. I was buoyed in this conviction by the results of two small surveys which we conducted ourselves, in which every bank surveyed stated that the information was not confidential. I did not count on the Board’s tenacity, however, for their initial response was that they would continue to withhold any of the interest rate information which a bank deemed confidential—however unreasonable that bank might be in view of the results of the Board’s own survey. It was only after I threatened to go back to court to obtain all o f the information, ret rospective as well as prospective, that the Board backed down and agreed to make all of the data public beginning May 1 , 1975. This story, unfortunately, does not have a very happy ending. First, Consumers Union incurred enormous expense to fight this 20-month legal battle, expense which it can ill afford and which the Fed refuses to pay. Second, and most tragic, the Fed employee who gave “ Consumer Reports” the information that the court, the banks, and the Fed now concede is publicly available under the Freedom of Information Act, was forced to resign from the Fed in the face of a threat of criminal prosecution by the Justice Department. We hope that this costly battle for public disclosure of consumer information in the possession of the Fed will not have been waged in vain. We have made a formal request to the Fed for reports routinely submitted to it concerning interest rates paid by banks on time and savings deposits, and charged by finance companies for a variety of consumer loans. We shall soon have an opportunity to see whether the Fed has learned anything from this case about its legal obliga tions under the Freedom of Information Act. But quite apart from this narrow legal issue, we urge this sub committee, and the G AO in its audit, to devote considerable attention to the following questions: What kinds of information are gathered by the Fed? What kinds of information should be gathered by the Fed? How useful is information to consumers in the form in which it is collected? How could its usefulness to consumers be increased by collecting it in a different form or by processing it? What opportuni ties exist for requiring the Fed and other banking regulators to gather and disseminate useful consumer information from regulated financial institutions, and/or to require the regulated institutions themselves to disseminate such information ? Judging from our experience, the Fed needs a good deal of out side assistance both in asking the right questions and in answering them. The G AO audit and a vigilant Congress can provide that help. Thank you. Chairman P a tm a n . Thank you, sir. I want to ask you about that statement that you received on April 3, 1975. Do you have that; do you ? 193 Mr. S c h u c k . N o ; that was oral. Now, are you referring to the survey that they had conducted? Chairman P a tm a n . Yes. Mr. S c h u c k . Y e s ; I have that in writing. Chairman P a tm a n . Would you mind filing it for the record? Mr. S c h u c k . Not at all, I would be happy to. Chairman P a tm a n . Without objection, it w ill appear at this point in the record. [The material referred to follows:] B F oard o f ederal R G o v e r n o r s, Sy s t e m , eserve Washington, D.C., April 16, 1975. Consumers Union of the United States, Inc. et al. v. Board of Governors of the Federal Reserve System (U.S.D.C., D.C., Civil No. 1766-73). P e t e r H. S c h u c k , Esq., Consumers Union of the United States, Inc., Washington, B.C. D e a r M r . S c h u c k : Enclosed per your request are copies of tables reflecting the results of the Board’s special survey on the confidential status of the in terest rates charged by participating banks in the G-10 survey for credit card plans. At our meeting on April 3,1975, copies of the results of the Board’s special survey on the confidentiality of the interest rate data for the other four sub categories of consumer installment credit were furnished to you. Sincerely yours, R e: John N icjoll , Beputy General Counsel. Enclosures: TABLE 1 — RATE STRUCTURE ON CREDIT CARD PLANS Number of banks Total number of banks with credit card plans................................................ 171 Single rate plans................................................................................. ........... Multiple rate plans........................... ........... ........ ........................................... 37 134 Percent 100.0 21.6 78.4 TABLE 2.—B A SIS FOR RATE DIFFERENTIALS IN MULTIPLE-RATE CREDIT CARD PLANS Number of banks Basis for differential Total number of banks with multiple rates................................................... Rate differential related to: Amount of credit balance on consumer purchases............................................. Amount of credit balance on cash advances............................................... ...... Cash advances at different rate than consumer purchases irrespective of amount___ Class of customer........... .......................... ........ .......................... ............ Other........................... ................. ......................................................... Percent 1 134 1100.0 70 25 52.2 18.7 49.3 67.2 10.4 66 90 14 1 Figures do not add to totals because some plans include more than one type of rate differential. TABLE 3.— RELATION OF CREDIT CARD RATES TO STATE CEILINGS All banks ---------------------------------Number Percent Total, banks with credit card plans.................... Rates in all respects: At State ceilings.................... .......................... Not at State ceilings.......................................... No applicable statute...................................... ....... 6 171 100.0 Single rate plan Multiple rate plan 37 134 126 73.7 32 39 22.8 5 3 . 5 ...................................... 94 34 6 194 TABLE 4 — CO NFIDENTIALITY STATUS OF INFORMATION REPORTED ON CREDIT CARD PLANS All banks Number Percent Single rate plan Multiple rate plan Total, banks with credit card plans.................. ................ 171________ 100.0___________ 37___________ 134 Information considered confidential................... ........ Information considered not confidential....................... T a b l e 5 . —Confidentiality 45 126 26.3 73.7 7 30 38 96 status of credit card plan information, by type Type of information: Number of banks Range of rates__________________________________________________ 16 Most common rate-----------------------------------------------------------------------18 Number of loans_________________________________________________ 38 Chairman P a tm a n . I am very much concerned about that. I cannot understand why the Federal Reserve is so anxious to keep things like that private. It appears to me it would be in the public interest. Do you have that impression, too ? Mr. S c h u c k . Well, I quite agree. Chairman P a tm a n . The issue is that of keeping interest rates secret, like the Fed is always keeping its proceedings secret. I think it is harm ful to the general welfare of the public. Now, if you know where you can get the best price, I think it is helpful to you, and if the Fed had to disclose this information, I think it would be helpful to the people. One of the worst evils we have in this country is, of course, secrecy in public affairs on matters affecting all the people. Now, if a person wants to get the best price, and it is available to him, he would probably avail himself of that opportunity to save a lot of money. I have always heard that the four greatest evils we have in our Nation are poverty, ignorance, disease, and crime. Poverty is at the head of the list. I do not know of anything that creates and perpetuates poverty more than excessive interest rates. I do not think people object to paying rea sonable interest rates, and most lenders do not object to receiving reasonable interest rates. But exorbitant interest rates, I think, are just beyond what people should be required to pay. A t this point, I will yield to the other members for questioning. Mr. Hannaford is next. Mr. Hannaford, you have 5 minutes. Mr. H a n n a fo rd . Mr. Chairman, I thank you. I thought that these were very fine statements that the people presented us, and I appre ciate it very much. I really will not take 5 minutes. I thought it was quite an adventure that you, Mr. Schuck, went through with the Fed. Maybe you ought to sell it and then you could recoup some of your losses by selling it commercially. You seem to imply that you feel the Fed is appropriately insulated from political decisions, political interference for partisan purposes. Do you have that feeling ? Mr. S c h u c k . A t the present time ? Mr. H a n n a fo rd . Yes. Mr. S c h u c k . I think the Fed is subject to a fair amount of pressure, lust from the general temper of the times, and the statements of the Members of the Congress, and the Fed’s perceptions of the way in which the tide is turning, and so forth; pressures which are large 195 and generalized. It seems to me that that will continue, and that is a very, very healthy thing. Mr. H a n n a fo r d . This is not exactly within your field, but do you feel that there have been decisions made in the Fed that seem to re flect a partisan political interest? Mr. S c h u c k . I really am not prepared to comment on that. Mr. H a n n a fo r d . That, of course, is a concern that we have, and I think it is a concern that you expressed. Once we start having someone look over the Fed’s shoulder, and making subjective judgments about their policy decisions-----Mr. S c h u c k . Well, I take comfort in the knowledge that the GAO, as Ms. O’Reilly pointed out, is reputed to have the highest integrity and nonpartisan coloration; and I have great confidence that if the G AO conducted the audit, Mr. Staats would make very clear to th£ auditors that they were to be extremely careful in this regard. Mr. H a n n a fo r d . It seems to me that would be correct. I am not worried about the G A O ’s confidentiality. But as I understood your earlier remarks, there is a possible cleavage regarding those decisions that are purely related to an audit of the efficient operation of the Fed, and recommendations from the point of the efficient functioning of the Fed which is a very important part of it. And then, the other ques tion as to whether or not this subcommittee is going to use that precise information in making a subjective judgment about the efficacy of the decisions from a policy matter. That is the second part, and that is the part that I understand that you would take exception to. Is that cor rect ? Do I understand your remarks ? Mr. S c h u c k . Well, it is not clear exactly how the audit would work. It has never been done before, obviously, and it is not clear what use would be made of the information, what restrictions would be placed on its publication, and so forth. It seems to me that the Congress has a perfect right to be fully informed about what goes on at the Fed, and to express its opinions very forcefully about it. That is a very different kind of pressure than the kind of pressure we normally think of as partisan pressure, which involves controlling employment at the Fed, extensive ex parte contacts with Fed members, and that kind of pressure. I think the first type of pressure is entirely appropriate. I suppose that is what you have in mind, and it seems to me that the G AO audit is entirely consistent with that. Mr. H a n n a fo r d . Well, that is the point that I think we will be centering on, and it is one that gives us some problem. Thank you very much, Ms. O’Reilly and Mr. Schuck, for your very fine state ments. I yield back the balance of my time, Mr. Chairman. Chairman P a tm a n . Mr. Gradison ? Mr. G rad ison . Thank you, Mr. Chairman. Mr. Chairman, I have no questions about the desirability of an ap propriate audit of the efficiency of the Fed, in terms of fiancial manage ment and things of that kind; and I do not really think that is the issue we are facing in these hearings. It is a question of how much further we should go. I would first like to inquire of Ms. O’Reilly a little bit further what she had in mind when she uses the sentence, “ The sheer enormity of the billions of dollars passing through the System each year requires a thorough, competent control and audit scheme.” I 196 think it is this question of control that is really what some of us are very much concerned about, and I wonder what you had in mind. What are we going to control ? Ms. O ’R e i l l y . Right now, the Federal Reserve Board has the con trol of billions of dollars. Independence is healthy and laudatory. But if that control is not subject to a review by Congress, it can grow from independence into an autonomy which results in the formulation of polices which are not being scrutinized by anyone. Then, instead of a healthy independence, you have something that can easily get out of control. Mr. G r a d iso n . D o you believe we have that today ? Ms. O ’R e il l y . I think there is something drastically wrong with the financial structure of this country, that has led us to double-digit inflation, recession, and increasingly high unemployment rates. I think the consumer is frustrated that because as a result of the secrecy in the whole Fed System, consumers have not been able to have an effective input into the monetary policies of this country. Mr. G r a d iso n . D o you think the fiscal policies adopted by this Con gress have something to do with the double-digit inflation, the unem ployment, and the economic problems which we face, as well as what ever the Federal Reserve might be doing ? Ms. O ’R e i l l y . Obviously, that is also a very serious component. But the determination of the supply of money is also a very critical factor of this Nation’s economy. Mr. G radison. M y feeling is that the principal concern of the con sumers in my district is inflation, and I do not think they really care much about what happens with the Federal Reserve one way or an other. I do not think most of them know what the Federal Reserve is, and I do not think they should have to worry about that. That is our job. But I think there is a genuine concern that we have some kind of a balanced mechanism coming out of Washington as a totality, which has somewhere built into the structure an entity that is going to show great concern about the question of inflation itself, which has very direct impact upon consumers. And I think that is one of the concerns that I have about the question of the audit. I am concerned about our total relationship with the Federal Reserve and its ability to carry out an anti-inflationary program in an effective manner. Would you share my view that the main concern of consumers today is inflation ? Ms. O ’R e il l y . It is inflation. But I think the informed consumer realizes that the Federal Reserve Board determines policy that affects many consumer decisions. One of the most important areas is actual credit allocation, and its effect on the consumer’s ability to get a loan, so that they can acquire home ownership for example. There is a really distressing shrinking percentage of Americans who are able to achieve that American dream, and this is very distressing. Also, the existence of jobs is an outgrowth of the fiscal policies of the Federal Reserve Board, to the extent that if industry is able to maintain an economi cally healthy enough stature they can maintain full employment. So I think that unfortunately not enough consumers realize just how important Federal Reserve Board policy decisions are, and this is just indicative of consumer unawareness that stems from too much Fed secrecy. Mr. G r a d iso n . I want to point out to both of the witnesses that yesterday, the Comptroller General appeared before us; and at the 197 risk of putting words in his mouth, I would like to say that my inter pretation of what he said was that the General Accounting Office, as it is presently staffed, is not competent to carry out a policy audit ot the Federal Reserve. And the reason I say that is that the witness indicated that the first thing they would have to do is to hire five highpriced outside consultants in order to carry out that job. I wonder, therefore, why you look particularly to the General Accounting Office rather than, for example, to this subcommittee or a counterpart sub committee in the other body, to carry out this task of congressional oversight of the activities of the Fed. Mr. S c i i u c k . Well, we have taken no position on which of the three suggested audits ought to be conducted. That matter is obviously a very difficult one that depends on a great deal of accounting expertise that I certainly do not have. My understanding of Mr. Staats’ testi mony 2 years ago wTas that he felt that it was within the competence of the G AO to conduct it. But if it were not, then I think quite clearly that would be a very relevant consideration. But that would certainly not rule out the more limited types of audits that he also suggested. Mr. G rad iso n . I have one final question, Mr. Chairman. I happen to sit on the Government Operations Subcommittee, which went into the matter of the litigation. I have to say, in all frankness, that I think we got half the picture this morning. The other half is that there was, and there continues to be, a question of just what the application of the Freedom of Information Act should be under the laws which we passed in this Congress, as it applies to certain data collection by the Fed. Also, the survey which you are talking about was a sample sur vey. In our own district, I would assume that at the most, one or two banks would have supplied information to that survey; making that information public without requiring information to be made public by other banks in that market area might not give the consumer the kind of information that he would need in order to make an intelligent choice. Therefore, I have one final question I would like to ask both of our witnesses. Would you support, as I would, legislation to require the posting in a public place of the rates or range of rates being charged by each lender as a means of cutting through this problem? The reason I ask it that way is that there are something like 14,000 banks. The survey covered—what was it, 375 or in that order of mag nitude? So there are 13,000 and some-odd that were not covered at all. It would seem to me that the way to deal with this problem is not so much to get in a public fight, or even a legal fight, with the Fed, but to come to the Congress and say, the consumer is entitled to this information. Only the Congress can force that information to become available, and that we should mandate a posting of these rates so that the consumers in the market area will not have to have any problem of finding out where they can get the best deal. And I just wonder how you feel about that kind of disclosure and legislation, and whether you would support the concept. Mr. S c h u c k . Certainly, the concept is a very appealing one. It is one that I have suggested in my testimony, and I understand the subcommittee and other subcommittees may be looking into, and I think it is a very, very important one for precisely the reasons you have suggested. One question that the subcommittee might wish to 198 inquire into is whether the Fed has the authority already to require this disclosure. It seems to me that under the Federal Trade Com mission Improvements Act enacted last year; it went into effect this year—it may well be that the Fed has the authority to require this type of disclosure as part and parcel of its authority to prevent deceptive practices in the banking industry, just as the F T C would have the authority with respect to nonbanking institutions. Ms. O ’R e i l l y . We would likewise endorse the concept of such a regulation. But we do not feel that such a regulation would be any more than a starting point in providing Congress with the type of thorough information it needs to 1 * lj“\ oversight efficiently obligation to determine whether exercising its statutory obligation. Mr. G r ad iso n . Thank you, and thank you, Mr. Chairman. Chairman P a t m a n . Thank you. Mr. Ford? Mr. F ord. Thank you, Mr. Chairman. I have a question for Ms. O’Reilly. Yesterday Mr. Staats told the subcommittee that previous G AO audits of other agencies produced some $562 million in savings for the taxpayers last year. In your statement on page 3 you mention many examples of completely questionable expenditures on the part of the Fed. Can you think of any reason the Fed could justify membership dues and contributions to the Miami Association of Industrial Nurses, for example ? I am curious where you were able to locate information that the Fed spent money for these various dubious causes. Ms. O ’R e i l l y . The source of my information was the hearings con ducted on October 2 and 3, 1973, on H . R . 10265, involving this same issue. Chairman Patman submitted a Banking and Currency staff re port which listed even more flagrant examples of an apparent mis spending of Federal money. There were some 260 organizations at that time to which the Fed was paying dues and membership moneys. And I would be glad to supply you with a copy of that statement. In response to your question as to whether there is any apparent justification for such expenditures, I certainly cannot think of any. I do not think the average consumer would find it anything but out rageous that money was spent in such a fashion. Mr. S c h u c k . I have an additional comment. In my relationships, in my dealings with Fed officials over this issue I have noticed a curious thing. Whenever they have cdme to my office and we have talked and they have been ready to leave I have said to them, “ You know, you can get a cab at the corner. There is a very convenient place to get a cab.” And they say, “ No, let us call, and one of the Fed limousines will come and get us.” Now I cannot imagine any reason why the taxpayer should pay for that type of extravagance. We are not talking about a lot of money but I think symbolically it is very offensive and would be very offensive to the taxpayers of this country if they realized that Fed officials—and I am not talking about members of the Board, I am talking about middle and upper middle level officials at the Fed—are riding around in limou sines when they can take cabs at a very, very low cost. Mr. F ord . We are trying to cut that out. Mr. Schuck, in your statement you have told us the details of Con sumers Union v. Federal Reserve Board. We are seeking here to focus 199 on ways that Congress can make the Fed more responsive and responsi ble to the taxpayers without jeopardizing their independence from political pressure. In the meantime can you think of any voluntary services the Fed provides the consumers ? Mr. S c h u c k . There undoubtedly are some services. I do not know of any that are of any consequence other than educational services de signed to acquaint the public with the way in which the Fed operates. As Mr. Gradison pointed out, I doubt if there are many people that know what the Fed is or really care. They care about the results of the Fed policies. I do not know of any substantial consumer protection activities conducted by the Fed, though that may be more due to my own ignorance than anything else. Mr. F ord. Mr. Chairman, I yield the remainder o f my time back to the Chair. Chairman P a t m a n . Mr. Blanchard. Mr. B l a n c h a r d . Thank you, Mr. Chairman. I came in late and did not hear Ms. O’Reilly’s statement but I did read it and I got into the tail end of yours, Mr. Schuck, so I only have a couple of questions. I understand from your testimony, Mr. Schuck, that you support an audit with a few modifications. The major one is that you would per mit the Fed within reason to designate those areas that need to be con fidential or need to remain confidential, and then after that allow a full scale audit of the Fed. Is that correct ? Mr. S c h u c k . That is not quite correct. What I suggested was that the Fed be given an opportunity to desig nate for the subcommittee those areas which it considers to be highly sensitive, and then that this subcommittee look over that list and de termine for itself what it wishes to exempt from the audit. Obviously, given the story that I have told about the Fed’s claim of confidentiality, I do not think that any claim should be taken at face value without further investigation by the subcommittee, and the sub committee should make the final judgment. Mr. B l a n c h a r d . I take it from your testimony, Ms. O’Reilly, that you tend to feel that there ought to be a total and complete audit with out any restrictions placed upon it. Ms. O ’R e il l y . That is right. I feel that to have an audit without an examination of monetary policy would be utterly meaningless because it is monetary policy that is really at the heart of the Federal Reserve Board System. A thorough audit would be the appropriate starting point for Congress in evaluating the effectiveness of the System. Mr. B l a n c h a r d . A s you may know, this subcommittee eventually, and I think perhaps over a long period of time, is going to look into the possibility of completely rewriting the Federal laws on financial institutions with an eye to an overhaul of that system. I know you probably deal with a number of consumer areas and I do not know how much time you have spent in examining and evaluat ing the financial institutions of this country, but I do have one ques tion in case you have an opinion. Do you think that an audit of the Fed, would be a necessary part of any process in which we tried to rewrite and update our laws relating to financial institutions ? Mr. S c h u c k . Well, that, of course, depends on what the audit turns up, but my guess is that the audit will turn up some areas which will 200 recommend, and which will form the basis for recommendations for, legislative changes. We have testified on the Financial Institutions Act and we have views on a number of issues related to that, some of which involve the Fed and some of which do not. But I think that it is very likely that the audit will turn up a number of areas that will call for a change by Congress. Ms. O ’R e il l y . C F A has not yet released an analysis o f the Financial Institutions Act, although we are currently examining it. We will be more than willing to submit a Avritten answer to that question when that examinaion has been completed. Mr. B l a n c h a r d . I appreciate it, and one final question, which I think I will probably be asking everybody, which is the way I kind of view this issue. And that is, from your experience and your thinking on this whole matter, can you think of any really good reasons why Congress should not audit the Fed? Mr. S c h u c k . Well, I think I have set forth in my statement the con siderations that bear on this question. I think that on balance, Con gress clearly ought to require an audit of the Fed. Mr. B l a n c h a r d . Well, Ms. O’Reilly, if you were a lawyer for the Fed, not in the last case they had but in this one, what arguments would you make for us to refrain from having to have this audit? Ms. O ’R e il l y . I think I would fall back on the issue of “ independ ence.” That has surface appeal. But independence without account ability is a fraud on the American public. It is inconsistent with the principles which have always determined how various Government agencies were to be structured. Absent the argument of “ independence” I do not know how the Fed’s position can be justified. The confiden tiality issue can be adequately safeguarded by the GAO. They have a demonstrated ability to provide a very thorough, nonpartisan audit and to preserve the confidentiality of any information involved. Mr. S c h u c k . I suppose the only other argument is one that Mr. Gradison mentioned, which is the notion that the G AO lacks the tech nical competence to adequately audit a very complicated area. I suppose the response to that is that if the G AO has to go out and hire them, well it will go out and hire them, and indeed, it can hire the same people that the Fed has been hiring over the years, but can ask them to ask different questions. I think that would be very useful and it might cost the Government some money, but it will probably save more money in the long run. Mr. B l a n c h a r d . Thank you. Chairman P a t m a n . Thank y ou , sir. I would like to ask you if you know of any effort that is made by the Federal Reserve to acquaint consumers with their rights and to make sure that they are not discriminated against ? In other words, what is the Federal Revenue doing to protect the public in that respect ? Mr. S c h u c k . I know of nothing. They have issued regulations, but if you are asking if they have conducted a campaign to inform con sumers of their legal rights, I know of no such campaign. I notice that they proposed for public comment just yesterday regulations relating to sex discrimination in the extension of credit; and how widely they will publicize these proposed regulations and solicit comments from the public at large, I do not know. 201 Chairman P a tm a n . That was in the Federal Register? Mr. S c h u c k . Yes. Chairman P a tm a n . Would you comment on that, Ms. O’Reilly? Ms. O ’R e i l l y . I am not aware of any movement or effort on the part of the Federal Reserve Board to educate consumers as to their rights, or to educate them concerning the safeguards available which would insure that their rights are protected. Mr. G ra d ison . Mr. Chairman. Chairman P a tm a n . Yes, sir. Mr. G rad ison . Would you yield just briefly ? Chairman P a tm a n . Yes, sir. Mr. G rad ison . In the testimony that was given us yesterday by the Comptroller General, it included, and I am just going to quote this and stop, the following. In the list of functions and activities of the Federal Reserve: Establishing rules and regulations for carrying out the provisions of the Truth-in-Lending Act whose purpose is to assure meaningful disclosure of credit terms to consumers. Enforcement is shared with the other bank regulatory agencies and the Federal Trade Commission. Thank you, Mr. Chairman. Mr. S c h u c k . Well, the question, as I understood it, was whether the Fed conducted any campaign to educate consumers about their rights under the truth-in-lending law. They may. I am just ignorant of any. I know of none. But it may be that they do. Chairman P a tm a n . Y o u hear of many consumer horror stories in volving individuals in the banking business or the lending business and many other businesses, and you wonder why these situations have not been detected before the situation became so bad. I could name some of them, but I shall not. Have you heard of horror stories in regard to the violation of usury laws ? Mr. S c h u c k . Sure. Chairman P a tm a n . And what about you, Ms. O’Reilly ? Ms. O ’R e i l l y . That is right, Mr. Chairman. Chairman P a tm a n . D o you have any book or publication that con tains these horror stories that you uncover in the business that you are engaged in now ? Mr. S c h u c k . Well, we have a file of letters, but no; there is no compendium of horror stories. I would like to just follow up on your previous question. Consumer Reports published a four-part series on banking that has just been concluded containing a lot of very useful, I think, information on how consumers can shop for credit and shop for the best terms on savings deposits and so forth. There is no reason in the world why the Fed should not be publishing this type of information, should not be taking it as a major function of the Fed to disseminate this kind of information to consumers. For example, our survey, on the basis of data that we obtained from the Fed, as I described, show that there are very, very significant disparities in interest rates for a given consumer loan category between lending institutions in the same city. Well, many consumers do not know that. Many of them believe that there is just one single rate, and all banks charge it. The Fed ought to be telling them that they should shop for credit, that credit terms can be negotiated, that there is not 202 a fixed rate, and advice of a very practical nature that would, in the long run, assist consumers very greatly. Ms. O ’R e i l l y . On that same point, I would like to emphasize that what is being discussed is the relationship between a bank and a cus tomer. This is a very unique relationship because there is an inherent intimidating influence that often leads borrowers to conclude that they have no negotiating power. A consumer who is not informed of his options and who does not have easy access to the varying rates within his own locality, cannot effectively influence the terms of the mortgage or the loan. There is an awesome quality about sitting down opposite a banker who is completely in the driver’s seat as to all the terms of the loan agreement. This is quite different from the situation where a consumer can buy a refrigerator or a stereo based on aggressive, comparative shopping, by waiting for specials or have some input into negotiating with the salesmen. That quality is completely absent in the bank-customer relationship. Chairman P a tm a n . It really causes me some concern that people who have such a valuable franchise. I think the bankers in the United States have the most valuable franchise of the bankers of any country of the world that I have read about. They have so many privileges and opportunities to take advantage of the people, and so little is done to protect the people from these disadvantages and excessive interest rates and charges. It is really disturbing to anyone who gives it much thought and attention. What do you say about that, Mr. Schuck ? Mr. S c h u c k . Well, I think it is clearly true that most consumers, when faced with a banker, feel very, very disadvantaged. The fact, however, is that there are some options available to consumers, which they do not really know about. We get lots of letters from people who are under the impression that there is only a single rate paid on savings accounts and that there is only a single rate charged for cer tain categories of loans, and the fact is that it is not true. There are very, very substantial differences in the same city. There is a great deal of consumer ignorance in the banking area, and we try to dispel as much of it as we can, but it ought to be the Fed’s job to do so and not simply to regulate the banks, as they now are doing. Mr. P a t m a n . I assume that you believe that it is the duty of the bank or anyone who has a franchise from a State or the Federal Government to render service to the people as well as to the banks, that they should not be under obligation to protect the banks in all instances and at the same time never make any effort to protect consumers ? Do you keep up with what they call the loan-shark industry in this country ? Do you ever go into that ? Mr. S c h u c k . We have not really. One of the things we have sought from the Fed very recently is the interest rate data filed with them by finance companies which may give us an opportunity to inform consumers as to those who have to go to finance companies rather than banks. Chairman P a t m a n . Y o u acquaint the consumers with the informa tion you have ? Mr. S c h u c k . Well, we hope to get it from the Fed. We have asked the Fed for it, and we will see what happens. 203 Chairman P a tm a n . Well, I hope you get it. Mr. Hannaford, I believe you wanted to ask a question. Mr. H a n n a f o r d . No, Mr. Chairman. Thank you very much. Chairman P a t m a n . Mr. Blanchard, did you want to ask a question ? Mr. B la n c h a r d . Yes. There is one area I wanted to touch on with Ms. O’Reilly. You have kind of woven it into your answers, but would you care to tell us specifically what the Consumers Union thinks would be some of the specific needs that could be met for consumers, which could result from an audit of the Fed? You have touched on it piece meal in other answers. Mr. S c h u c k . Well, at the end of my testimony, I indicated----Mr. B la n c h a r d . I am sorry, Mr. Schuck. I was addressing my ques tion to Ms. O’Reilly. I see at the end of your statement what you have. Mr. S c h u c k . Y o u mentioned Consumers Union. That is why I answered. Ms. O ’R e i l l y . Virtually every customer decision is affected by the monetary policy of the Federal Reserve Board. If there were an evalu ation and thorough audit it could lead to an effective congressional oversight of the Federal Reserve and possibly a restructuring of some of that system. Consumers would hopefully have more input on mone tary decisions before the fact rather than after the fact. I think really the critical job shortage, credit allocation, and the high price of commodities in the market today are probably the three areas that are most directly affected by the present Fed policies. Mr. B la n c h a r d . And I have one final question for both of you. In the list of priorities, that is, measures Congress could take to aid consumers and promote the public interest, in your opinion, where do you rank an audit of the Fed ? How important is it to your groups, and in your opinion where on the hierarchy of important measures does an audit stand ? Ms. O ’R e i l l y . CFA’s number one priority is the creation of the Agency for Consumer Advocacy. This is the touchstone to effective consumer representation at all Grovemment levels. In addition, we feel that an audit that would lead us to a review of monetary policy, would rank very high on CFA’s list because ob viously the supply of money is directly related to such areas as the high cost of health care, the existence of variable rate mortgages, credit availability, and so forth. Virtually every consumer decision is affected by monetary policy. Mr. S c h u c k . I would agree that our top priority would be the estab lishment of an Agency for Consumer Advocacy, which would enable a more systematic representation of consumers before the Fed as well as other Government agencies. Mr. B la n c h a r d . Thank you. Chairman P a tm a n . Could each of you give us some samples of hor ror stories in the consumer lending business ? Do you have publications like that ? Mr. S c h u c k . We do not. We receive letters occasionally and usually, unless people authorize us to release their names, we do not release them. We do not publish information like that. Ms. O ’R e i l l y . I would be happy to review our records and supply you with any samples that we presently have. We do not have any publication that has documented these horror stories. 50-365 0 - 75 - 14 204 Chairman P a tm a n . Earlier you mentioned recent publications on consumer credit. Would you repeat that, please, sir ? Mr. S c h u c k . I am not sure. Oh, yes, we published a four-part—in “ Consumer Reports” we published a four-part series on banking and we would be happy to supply that for the record. Chairman P a tm a n . Well, would you please supply this subcom mittee, the staff, and the chairman of the committee, with that information ? Mr. S c h u c k . I would be delighted to. [The material referred to ap pears in appendix C.] Chairman P a tm a n . Mr. Gradison. Mr. G ra d iso n . Mr. Chairman, I would just like to request that we broaden that inquiry and ask, in addition to any horror stories, if your files include any indications of—and God knows there must be some in this great country—where consumers got a fair shake from a lend ing institution, that you include those as well. Ms. O ’R e i l l y . Surely. Chairman P a t m a n . The issue of usury laws, I think is a very serious one in this country. I was a district attorney for 5 years in Texas and I received knowl edge and information of what is going on there and it really surprised me. And I later found out that it was nothing compared to what goes on in some of the larger cities. Of course, in Texas we do not have any real large cities except maybe Houston and Dallas and Fort Worth and San Antonio. But even in a city like New York some of the worst crimes have been published along the lines of taking advantage of consumers on violations of usury laws. I read one here awhile back where a collector for a loan shark stopped a fellow driving a car and told him: Now you owe the concern I am collecting for, a certain high priced loan company, and you have not paid. And this is the second time I have asked you about it. And I want to know if you are going to pay it. And the fellow in the car did not seem to indicate that he was going to pay much attention to it. He had his arm on the window of the car. The collector broke the guy’s arm. That was a rather cruel way of col lecting bills. But that was in one of the largest newspapers in the country. In another case, the collector wrote a note to a fellow who was sup posed to pay on a high interest loan and told him. “ Now if you do not pay this in a certain number of days, you will find that your automo bile has been blown up.” There are other stories but I thought those were rather unusual. We should give some study and consideration to the apprehension of criminals in the lending business. Many years ago, I introduced a bill providing for a $25,000 reward for the arrest and apprehension of a public enemy. Do you have any suggestion ? Have you ever gone into that at all ? Mr. S c h u c k . Listening to your story, I was struck with the fact that in view of the inflation that has occurred, $25,000 would not get any body to do anything today. Chairman P a t m a n . Well, we were talking in the past on the $25,000. We would have to bring it up to date. 205 Mr. G r a d i s o n . Mr. Chairman, maybe we can get the General Ac counting Office in the act, too. Chairman P a t m a n . I do not know that an audit would affect it. Mr. H a n n a f o r d . Mr. Chairman, I think those who are robbing us today are doing it in such a subtle manner that the reward would not do any good in any event. Chairman P a t m a n . Well, anyway, it is worthy of consideration. At this time I would like to announce that the hearings on providing for GAO audit of the Federal Reserve will resume on Friday morning at 10 here in this room. At that time we will hear the testimony of Prof. Richard T. Selden of the Department of Economics of the Univer sity of Virginia, and I know we will all look forward to hearing the professor. I do desire to thank the witnesses for appearing here today and delivering their testimony. You have rendered a real public service and we certainly thank you. And if you have any additional information that you would like to include in your testimony, I am giving you permission to extend your remarks in the hearing records. Mr. S c h u c k . Thank you, Mr. Chairman. Ms. O ’ R e i l l y . Thank y o u , Mr. Chairman. Chairman P a t m a n . Thank you very much. [Whereupon, at 11:25 a.m., the subcommittee adjourned to recon vene on Friday, April 25,1975, at 10 a.m.] AUDIT OF THE FEDERAL RESERVE FRIDAY, APRIL 25, 1975 of H ouse of R e p r e s e n t a tiv e s , S u b c o m m it t e e o n D o m estic M o n e t a r y P o u c y t h e C o m m it t e e o n B a n k i n g , C u r r e n c y a n d H o u s in g , Washington, D.G. The subcommittee met, pursuant to notice, at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. Wright Patman [chair man of the subcommittee] presiding. Present: Representatives Patman, Hannaford, and Gradison. Chairman P a t m a n . The subcommittee will please come to order. We have Prof. Richard T. Selden this morning, chairman of the department of economics of the University of Virginia. Professor, we appreciate your presence this morning. You may proceed in your own way, sir. Mr. S e ld e n . My statement is not terribly long; I think maybe it would be most efficient if I just read it. Chairman P a t m a n . That will be fine. STATEMENT OF PROF. RICHARD T. SELDEN, CHAIRMAN, DEPART MENT OF ECONOMICS, UNIVERSITY OF VIRGINIA Mr. S e ld e n . I am certainly honored to have this opportunity to comment on H.R. 4316. The proposal to subject the Federal Reserve System to regular audits by the General Accounting Office has, of course, been made on a number of earlier occasions, and it has received careful study through lengthy hearings of the Banking, Currency and Housing Committee, and in the committee’s very important Com pendium on Monetary Policy Guidelines and Federal Reserve Struc ture, which was published in 1968. Perusal of a large fraction of this interesting and informative ma terial leads me to conclude that nearly everything worth saying on the subject has already been said by earlier witnesses. Perhaps the main contribution that can be made today is to provide an assessment of the various arguments that have been put forth, and to place the audit pro posal within the larger context of a comprehensive program of mone tary reform. Let me begin then by speaking about the audit proposal per se. I begin by posing a question: Is there a logical distinction between the Fed and other Federal agencies ? Proponents of a GAO audit of the Federal Reserve System have emphasized that every other branch of the Federal Government, re gardless of the nature of its function, is subject to regular audit by the GAO. Moreover, the Federal Reserve Board, but not the Federal (2 0 7 ) 208 Reserve banks, was audited by the GAO from its creation in 1921 until the Banking Act of 1933 exempted the Board from such audits. Proponents argue that there is no logical basis for distinguishing between the Fed and other units of Government. Opponents, on the other hand deny this, holding that audits by the GAO would seriously compromise the Fed’s traditional independence from both the legisla tive and executive branches. They also maintain that GAO audits would violate confidentiality requirements that other units of Govern ment do not face. Even if one believes that independence of the Fed in some sense is a good thing, and that it should be protected carefully against erosion through GAO audits, mandatory disclosure of policy plans, congres sional specification of policy guidelines, shortening of terms of mem bers of the Board of Governors, and like measures, it does not follow that audit by the GAO would undermine the Fed’s independence. During the October 1973 hearings of the House Banking and Cur rency Committee, Comptroller General Staats outlined three types of audits that the GAO might perform: First, a fiscal audit to determine the authenticity of reported data and the legality of activities; second, an efficiency audit to determine whether or not operations are being conducted in the most economical fashion; and third, a program audit to determine the extent to which legislative mandates are, in fact, being achieved. I do not see how any of these three types of audits would endanger Fed independence any more than such audits by Haskins & Sells or Touche Ross & Co. would. As I understand it, audit reports would be filed with appropriate committees of the Congress, including, I as sume, the House Committee on Banking, Currency and Housing. Where alleged irregularities were detected, these committees would schedule hearings at which Federal Reserve officials would present their views on the alleged problems, and would outline remedies in instances where problems were generally acknowledged to exist. The Fed would continue to formulate monetary policy independently of the legislative branch, as long as it complied with its legislative man dates. And independence from the executive branch would be wholly unaffected by the audits. The confidentiality argument against GAO audits of the Fed is not at all convincing to me. It takes various forms. One argument is that member bank examination reports contain highly sensitive informa tion that, if disclosed, might have adverse consequences for the banks. However, it is not clear that access to examination reports would be crucial to a GAO audit of the Fed; and in any event, the GAO cur rently has access to all sorts of confidential material from other agencies. A second confidentiality argument is that information leaks result ing from the audits might be useful to speculators. Since the audit reports would be filed many months after policy actions are taken, it is hard to take this argument seriously. Still another argument along these lines is that dissemination of the views of individual policy makers would inhibit free debate, leading implicitly to a danger that unwise policies would be adopted. My own view is that GAO could be expected to use discretion in safe guarding sensitive material. Moreover, while it is understandable that 209 policymakers would prefer to cast their votes anonymously, thus avoid ing the hazard of being secondguessed by Members of the Congress and by the public at large, I believe that policy performance is more likely* to be improved than worsened by closer public scrutiny. In answer, then, to the question posed at the outset, I am not per suaded that there is any thing special about the Federal Reserve that, in principle, argues for its exemption from the ordinary audit processes that apply to other units of the Federal Government. Next, I want to consider some practical matters. While I do not find a logical basis for distinguishing between the Federal Reserve and other Government agencies with respect to the appropriateness of audit by the GAO, neither would I expect important gains to flow from such audits. Let me state clearly that all of my contacts with the Fed have been as an outside observer who has visited the Board of Governors or the various Federal Reserve banks from time to time, and, on rare occasions, has served as a consultant to the Federal Reserve. From these contacts, I have gained a strong impression that the Fed eral Reserve is a highly efficient and conservatively managed organi zation, and I doubt that an audit by the GAO would uncover signifi cant irregularities. The examples cited in earlier committee documents of questionable expenditures by the Fed leave me unconvinced on this score. The preponderance of tnese questionable items appear to have been reasonable expenditures. GAO audits are not costless, of course. Before the Congress moves to establish a GAO audit of the Fed on a continuing basis, it should carefully consider whether the probable benefits of the audits would outweigh the costs. The Congress should also bear in mind the old adage that the best is the enemy of the good. It is often counterproductive to tinker with a generally smooth op eration in the hope of achieving perfection. The goal should be to strive for the best performance, rather than to seek logical consistency as an end in itself. In this particular instance, it is not clear to me that the benefits of regular audits by the GAO would be worth the costs. The above judgment is based on one person’s admittedly casual observations. I would not be surprised to learn that others have come to a contrary conclusion. In order to resolve such doubts, I would see considerable merit in a one-time audit of the Fed by the GAO, primarily for the purpose of evaluating the effectiveness of the Fed’s own auditing procedures. This sort of audit might, of course, be repeated in a few years if new doubts were to arise later on about the suitability of the Fed’s own audits. Whether we have in mind a regular annual audit, or the one-shot sort of audit mentioned above, I would strongly recommend that the GAO confine itself to the fiscal and efficiency audits delineated by Comptroller General Staats. At present, the GAO has no special competence to evaluate monetary policies, and I see no point in asking the GAO to develop such competence. Instead, the Congress might consider forming an independent mone tary policy review board, which would meet early each year for the purpose of appraising policy actions undertaken by the Fed in the preceding year. I have in mind a Board of about 11 members, 5 of whom would be appointed by the President, and 6 by the Joint Economic Committee, or perhaps the two banking committees. 210 In order to assure fresh thinking, terms of Board members should be limited to 2 years. Ideally, the Board’s report would be published at about the same time as the Economic Report of the President, and, therefore, would be available as an input for the annual hearings of the Joint Economic Committee. In my judgment, this kind of policy audit would be considerably more illuminating then anything that the GAO would be likely to produce. Let me turn now to the broader issue of monetary policy oversight. The primary impetus for the GAO audit proposal, I suspect, is con gressional dissatisfaction with Federal Reserve policies in recent years. It is widely believed that the Fed has committed serious errors, and that many of these errors might have been avoided if there had been proper congressional oversight of monetary policy. The audit proposal is viewed as a necessary step toward this policy oversight objective. I strongly support the idea that Congress should play a greater role in the realm of monetary policy. However, I do not regard GAO audits of the Fed each year as either necessary or sufficient to ac complish this aim. I would like to complete these remarks by indi cating briefly why I believe that congressional oversight of monetary policy is in order. It is common knowledge that our Constitution has reserved to the Congress the power to coin money and to regulate the value thereof. In accordance with this basic power, the Congress created the Federal Reserve System in 1913, and over the years, it has dele gated most of its monetary functions to the Board of Governors. This does not mean, however, that Congress can avoid responsibility for monetary policy. If Congress is dissatisfied with the conduct of its monetary agents, it has the right—even the duty—to issue instruc tions that wul lead to more satisfactory results. The contrary view—that is, that Congress should stay clear of monetary policy—is deeply entrenched in American society. It is nurtured in part, one suspects, by Federal Reserve officials themselves, who have no wish to become subject to closer control by Congress, and by the financial community, which fears the proliferation of Govern ment regulations of its activities. But such vested interests aside, there is a widely held sincere dis trust of congressional competence in the monetary area. Elected officials, it is argued, will not take a sufficiently long-term view of the consequences of monetary policy actions, but will be biased instead toward dramatic steps that will win votes in the short run while ulti mately harming the country. As a specific example, consider the level of interest rates. The ex tremely high rates of recent years have given rise to great unrest. There have been calls in the Congress for Federal Reserve action to bring interest rates down. Presumably, the Congressmen who make these statements believe that it is a simple matter to reduce interest rates—all that is needed is to have the Federal Open Market Commit tee expand bank reserves by purchasing a few billions of Government securities. Yet, such analyses are highly simplistic; they ignore a basic propo sition that most economists now accept—that the reason for today’s high interest rates is the excessive monetary growth fostered by the Federal Reserve throughout most of the past decade. A policy of 211 accelerated monetary growth would indeed tend to lower interest rates during the next few weeks, but the longer run results would be just the opposite. Now many careful students of the subject are convinced that mone tary policy is too important to be left to the politicians; that it should be vested instead in an independent central bank. As a believer in democratic institutions, I cannot accept this. Nor, as an economist, can I accept the easy assumption that Congress is bound to do a worse job of guiding monetary policy than the Fed has done. The Fed’s record is hardly reassuring in this regard. I have long been struck by a curious asymmetry in our thinking about monetary policy and fiscal policy. Why do we never hear pro posals for an independent fiscal authority ? Surely the powers to tax and to appropriate funds are just as subject to political abuse as the power to determine the rate of monetary growth. And surely, a cor rect analysis of fiscal policy makes intellectual demands on our law makers as great as those that apply to monetary policy. Congress jealously guards its powers over the purse strings. It should do the same with regard to its monetary powers. This is not the place for a full discussion of ways of enhancing con gressional oversight of monetary policy. The recent adoption by H. Con. Res. 133 is a big step in the right direction. The semi-annual hear ings before the banking committees of both Houses should do much to remove the unnecessary mystique that has surrounded monetary policy, and should help bring this important policy area under democratic control. I sincerely hope that the Subcommittee on Domestic Monetary Policy will extend the scope of its current inquiries beyond the GAO audit issue to include the whole range of measures for improving con gressional oversight of monetary policy. Thank you very much. Chairman P a tm a n . Thank you , sir. Now this morning I think we should go into the question of the Open Market Committee. Specifically, the formation of the Open Mar ket Committee, its functions, and the amount of the transactions per year to show that it is a matter of such great importance. Another area of concern is the 14-year term of the Governors. I do not think it was ever intended that a Governor should, before his term expires, persuade the President to appoint him to the unexpired term of another Governor. By reappointing this person who has served, say, 13 years—that gives him the equivalent of about a double term, instead of one term of 14 years. # I want to ask some questions about that, and especially about the Open Market Committee. Now the transactions of the Open Market Committee, I have been told, aggregate about several trillion dollars a years. Is that correct, Professor ? Mr. S e ld e n . I am sorry; would you repeat that? Chairman P a t m a n . The total transactions of the Open Market Com mittee represent several trillion dollars a year. Mr. S e ld e n . I do not believe that is quite right. These figures are published in the annual report of the Federal Reserve Board and I do 212 not have it readily at hand. But I believe the number is less than a tril lion; but it is a big number; it is a very big number. Chairman P a t m a n . It is my understanding that the Open Market Committee handled about $25 trillion last year. We are approaching a time when we will have to adopt something else, I guess quadrillions would come next after trillions. Mr. S e ld e n . Quadrillions are next. Chairman P a tm a n . And my information is that we have about $2^2 trillion in debts in the United States. Mr. S e ld e n . Yes. Chairman P a tm a n . N o w other divisions of agencies of the Federal Reserve also handle large quantities of money. Which ones, would you say, in their order of importance, handle the largest amounts of money in finances and credit ? Mr. S e ld e n . Branches of the Government at large ? Chairman P a t m a n . Yes, sir. Mr. S e ld e n . Well, there are many. Of course, one thinks of the De fense Establishment, the Department of Defense. But if you are talk ing about credit activities of the Federal Government, of course HUD and the Department of Agriculture have extensive programs. There are a large number of them. Chairman P a t m a n . N o w then, the Board of Governors, of course, is comprised of seven members; and they are appointed by the Presi dent with the advice and consent of the Senate, for 14-year terms. Do you consider that the law gives the Federal Reserve Board the power or the agencies of the Government the power to permit a person to serve more than a 14-year term by being appointed, to say, another term? Mr. S e ld e n . I would not have an opinion as to exactly what the statute says. I am aware, of course, that many Governors have served for more than 14 years. Chairman P a t m a n . Well, Mr. Martin served about 27 years, did he not? Mr. S e ld e n . I think he was appointed in 1951, and I believe was succeeded in 1970. So that would be 19 years. Chairman P a tm a n . That is right. I believe that is correct—19 years. Mr. G ra d iso n . Mr. Chairman ? Chairman P a tm a n . Yes, sir? Mr. G ra d iso n . Mr. Chairman, I think it might be helpful if the staff could prepare for us—and it may be available from the Federal Reserve—the statistics on how long members have served, broken down by different periods of years. I think we will find that it has been an exception rather than the rule for members to serve as long as 14 years; and indeed there have been two members resigned before their terms have expired within the last year, one just the other day; and of course, Dr. Brimmer last year. I think these numbers might be instructive, and I think they will show that while the 14-year term is provided, it is very rarely used. [The information requested by Mr. Gradison in regard to the mem bership of the Board of Governors of the Federal Reserve System, 1913-74, follows:] 213 [From the Federal Reserve Bulletin (November 1974)] M EMBERSHIP OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, 1913-74 Name APPOINTIVE Federal Reserve district Date of initial oath of office Boston_________ Aug. 10,1914 Other dates and information relating to membership 2 MEMBERS 1 Charles S. Hamlin_______ Paul M. Warburg________ _New York____________ do______ Frederic A. Delano_______ Chicago_______________do______ W. P. G. Harding________ Atlanta_______________ do______ Adolph C. Miller_________San Francisco__________do______ Albert Strauss______ New York______ Oct. 26,1918 Chicago_________ Nov. 10,1919 Henry A. Moehlenpah Edmund Platt______ New York_______ June 8,1920 Cleveland_______ Sept. 29,1920 David C. Wills______ Minneapolis_____ May 12,1921 John R. Mitchell Milo D. Campbell________ Chicago__________ Mar. 14,1923 Daniel R. Crissinger______ Cleveland________ May 1,1923 George R. James________ St. Louis_________ May 14,1923 Edward H. Cunningham___ Chicago_______________do______ Roy A. Young___________ Minneapolis_____ Oct. 4,1927 Eugene Meyer___________ New York_______ Sept. 16,1930 Wayland W. Magee_______ Kansas City_____ May 18,1931 Eugene R. Black_________Atlanta__________ May 19,1933 M. S. Szymezak_________ Chicago_________June 14,1933 J. J. Thomas____________ Kansas City__________ do______ Marriner S. Eccles_______ San Francisco____ Nov. 15,1934 Joseph A. Broderick_______New York_______ Feb. 3,1936 John K. McKee__________ Cleveland_____________ do______ Ronald Ransom_________ _Atlanta______________ do______ Ralph W. Morrison_______ _Dallas__________ Feb. 10,1936 Chester C. Davis________ _Richmond_______ June 25,1936 Ernest G. Draper________ _New York_______ Mar. 30,1938 Rudolph M. Evans_______ _Richmond_______ Mar. 14,1942 James K. Vardaman, Jr___ St. Louis_________ Apr. 4,1946 Lawrence Clayton________ Boston_________ Feb. 14,1947 Thomas B. McCabe______ Philadelphia_____ Apr. 15,1948 Edward L. Norton________Atlanta__________ Sept. 1,1950 Oliver S. Powell_________ Minneapolis__________ do______ Wm. McC. Martin, Jr______ New York_______ Apr. 2,1951 A. L. Mills, Jr___________ San Francisco_____ Feb. 18,1952 J. L. Robertson__________ Kansas City___ ______ do_____ Paul E. Miller___________ Minneapolis_____ Aug. 13,1954 C. Canby Balderston_____ Philadelphia_____ Aug. 12,1954 Chas. N.Shepardson_____ Dallas___________ Mar. 17,1955 G. H. King, Jr___________ Atlanta_________ Mar. 25,1959 George W. Mitchell_______ Chicago_________ Aug. 31,1961 J. Dewey Daane_________ Richmond_______ Nov. 29,1963 Sherman J. Maisel_______ San Francisco____Apr. 30,1965 Andrew F. Brimmer______ Philadelphia_____ Mar. 9,1966 William W. Sherrill______ Dallas___ ______ May 1,1967 Arthur F. Burns_________ New York_______ Jan. 31,1970 John E. Sheehan________ St. Louis________ Jan. 4,1972 Jeffrey M. Bucher_______ San Francisco_____June 5,1972 Robert C. Holland_______ Kansas City_____ June 11,1973 Henry C. Wallich________ Boston_________ Mar. 8,1974 Philip E. Coldwell________ Dallas__________ Oct. 29,1974 See footnotes at end of tables. Reappointed in 1916 and 1926. Served until Feb. 3, 1936, when his successor took office. Term expired Aug. 9,1918. Resigned July 21, 1918. Term expired Aug. 9,1922. Reappointed in 1924. Reappointed in 1934 from the Richmond District. Served until Feb. 3, 1936, when his successor took office. Resigned Mar. 15,1920. Term expired Aug. 9, 1920. Reappointed in 1928. Resigned Sept. 14,1930. Term expired Mar. 4, 1921. Resigned May 12,1923. Died Mar. 22, 1923. Resigned Sept. 15,1927. Reappointed in 1931. Served until Feb. 3, 1936, when his successor took office. Died Nov. 28, 1930. Resigned Aug. 31, 1930. Resigned May 10, 1933. Term expired Jan. 24, 1933. Resigned Aug. 15, 1934. Reappointed in 1936 and 1948. Resigned May 31,1961. Served until Feb. 10, 1936, when his successor took office. Reappointed in 1936,1940, and 1944. Resigned July 14, 1951. Resigned Sept. 30,1937. Served until Apr. 4,1946, when his successor took office. Reappointed in 1942. Died Dec. 2,1947. Resigned July 9, 1936. Reappointed in 1940. Resigned Apr. 15,1941. Served until Sept. 1,1950, when his successor took office. Served until Aug. 13,1954, when his successor took of fice. Resigned Nov. 30,1958. Died Dec. 4, 1949. Resigned Mar. 31,1951. Resigned Jan. 31,1952. Resigned June 30,1952. Reappointed tor term beginning Feb. 1, 1956. Term expired Jan. 31,1970. Reappointed in 1958. Resigned Feb. 28, 1965. Reappointed for term beginning Feb. 1, 1964. Resigned Apr. 30,1973. Died Oct. 21,1954. Served through Feb. 28,1966. Retired Apr. 30,1967. Reappointed in 1960. Resigned Sept. 18, 1963. Reappointed for term beginning Feb. 1,1962. Served until Mar. 8,1974, when his successor took office. Served through May 31, 1972. Resigned Aug. 31,1974. Reappointed for term beginning Feb. 1, 1968. Resigned Nov. 15,1971. Term began Feb. 1, 1970. 214 [From the Federal Reserve Bulletin (November 1974)] MEMBERSHIP OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, 1913-74 Name Date CH A IR M E N 3 Charles S. H am lin...____ _____________________________________________ Aug. 10,1914 to Aug. 9,1916. W. P. G. Harding____ ___________________ ____ _________________________Aug. 10,1916 to Aug. 9,1922. Daniel R. Crissinger__________________________________________________ May 1,1923 to Sept. 15,1927. Roy A. Young________________________________________________________ Oct. 4,1927 to Aug. 31,1930. Eugene Meyer_______________________________________________________ Sept. 16,1930 to May 10,1933. Eugene R. Black_____________________________________________________ May 19,1933 to Aug. 15, 1934. Marriner S. Eccles____________________________________________________ Nov. 15,1934 to Jan. 31,1948. Thomas B. McCabe___________________________________________________ Apr. 15,1948 to Mar. 31,1951. Wm. McC. Martin, Jr__________________________________________________ Apr. 2,1951 to Jan. 31,1970. Arthur F. Burns______________________________________________________ Feb. 1,1970. VICE C H A IR M EN 3 Frederic A. Delano___________________________________________________ Aug. 10,1914 to Aug. 9,1916. Paul M. Warburg_____________________________________________________ Aug. 10,1916 to Aug. 9, 1918. Albert Strauss_______________________________________________________ Oct. 26,1918 to Mar. 15,1920. Edmund Platt________________________________________________________July 23,1920 to Sept. 14,1930. J. J. Thomas__________________________ ______________________________ Aug. 21,1934 to Feb. 10,1936. Ronald Ransom______________________________________________________ Aug. 6,1936 to Dec. 2,1947. C. Canby Balderston--------------------------------------------------------------------------------- Mar. 11,1955 to Feb. 28,1966. J. L. Robertson______________________________________________________ Mar. 1,1966 to Apr. 30,1973. George W. Mitchell___________________________________________________ May 1,1973. EX-OFFICIO M EMBERS i SECRETARIES OF THE TREASURY W. G. McAdoo_______________________________________________________ _Dec. 23,1913 to Dec. 15,1918. Carter Glass_________________________________________________________ _Dec. 16,1918 to Feb. 1,1920. David F. Houston______________________________________________________Feb. 2,1920 to Mar. 3,1921. Andrew W. Mellon_____________________________________________________Mar. 4, 1921 to Feb. 12, 1932. Ogden L. Mills_______________________________________________________ _Feb. 12, 1932 to Mar. 4,1933. William H. Woodin____ _________________________________ ____ _________ _Mar. 4,1933 to Dec. 31,1933. Henry Morgenthau, Jr_________________________________________________Jan. 1, 1934 to Feb. 1, 1936. COMPTROLLERS OF THE CURRENCY John Skelton Williams________________ ____ ___________________________ Daniel R. Crissinger__________________________________________________ Henry M. Dawes_____________________________________________________ Joseph W. McIntosh__________________________________________________ J. W. Pole___________________________________________________________ J. F. T. O'Connor_____________________________________________________ Feb. 2,1914 to Mar. 2,1921. Mar. 17, 1921 to Apr. 30, 1923. May 1,1923 to Dec. 17,1924. Dec. 20,1924 to Nov. 20,1928. Nov. 21, 1928 to Sept. 20,1932. May 11, 1933 to Feb. 1,1936. 1 Under the provisions of the original Federal Reserve Act the Federal Reserve Board was composed of 7 members, including 5 appointive members, the Secretary of the Treasury, who was ex-officio chairman of the Board, and the Comp troller of the Currency. The original term of office was 10 years and the 5 original appointive members had terms of 2, 4, 6, 8, and 10 years, respectively. In 1922 the number of appointive members was increased to 6, and in 1933 the term of office was increased to 12 years. The Banking Act of 1935, approved Aug. 23,1935, changed the name of the Federal Reserve Board to the Board of Governors of the Federal Reserve System and provided that the Board should be composed of 7 appointive members; that the Secretary of the Treasury and the Comptroller of the Currency should continue to serve as members until Feb. 1,1936; that the appointive members in office on the date of that Act should continue to serve until Feb. 1,1936, or until their successors were appointed and had qualified; and that thereafter the terms of members should be 14 years and that the designation of Chairman and Vice Chairman of the Board should be for a term of 4 years. 2 Date after words Resigned and Retired denotes final day of service. 3 Chairman and Vice Chairman were designated Governor and Vice Governor before Aug. 23,1935. Chairman P a t m a n . Thank y o u , sir. Now the dealers in Government securities, they are selected by the Federal Eeserve Board, are they not? There are about 20 of them normally ? Mr. S e l d e n . Yes. The ones that the Federal Reserve Bank of New York conducts its Open Market operations with are selected by the Federal Reserve Bank of New York, I believe. There are 20 of those recognized Government security dealers. Chairman P a t m a n . They are selected by the New York bank. Mr. S e l d e n . I b e l i e v e s o . Chairman P a t m a n . N o w , of course, the New York bank is like the other banks—two-thirds of the directors of that bank are appointed by member banks. Is that not right ? 215 Mr. S e l d e n . Yes, sir. Chairman P a t m a n . Nobody else has anything to do with the voting except the banks. Mr. S e l d e n . Yes, sir. Chairman P a t m a n . But the banks actually designate and appoint two-thirds of the nine members of the Board ? Mr. S e l d e n . That i s correct. Chairman P a t m a n . Is that not giving a lot of power to the banks in running a big agency like the Federal Reserve System? There are 12 Federal Reserve banks, and out of the 9 from each Board, twothirds of them in every case are selected by the banks by a vote. That is the way it is, is it not? Mr. S e l d e in . My own view is that—and I think this is a view which you have expressed on a number of occasions in the past, sir, is that the ownership of Federal Reserve Bank stock by the member banks is an anomaly which should be terminated; and I further would like to see Open Market operations conducted by the Federal Reserve Board rather than by a separate agency, the Federal Open Market Committee, which includes, as you know, the five members chosen from the presi dents of the Federal Reserve banks. Chairman P a t m a n . The Federal Reserve Board has a secret room. I do not suppose anybody is supposed to enter it except certain people, and that is under very unusual circumstances and conditions. The Open Market Committee is supposed to be composed o.f 12 members—that is, the 7 governors and 5 presidents. That makes up the 12. The law says, the Federal Open Market Committee, hereinafter referred to as the Committee, which shall consist of members of the Board of Governors of the Federal Reserve System and five representatives of the Federal Reserve banks, shall be selected and hereinafter provided. Now, you would think then that just 12 people would go in there. But the seven other Presidents who are not the members of the com mittee come right in with them. They cannot cast a vote, but they can use any method to make arguments that they want to, and they are recognized for that purpose. They have never had a transcript of the hearings of the Open Market Committee. Did you know that ? Mr. S e l d e n . I am a little shocked to hear that. I thought that a transcript was taken. Chairman P a t m a n . N o . Four people take notes on the proceedings and then each one summarizes from his notes his understanding of what happened. Then from that they will get up a report of the Open Market Committee that day. It is made public 5 years later. Now, one time we went into the question of how many people would know about the deliberations of the Federal Open Market Com mittee for the purpose of determining how many people would have an insight as to its policies. The determination was made that there are about 2,500 people, because so many of these people who are di rectors of the banks of the Federal Reserve that are also interested in other financial institutions and other banks and have considerable interest in maybe the stock exchange and everything else. They were about 2,500 of them that know what happened, but the rest of the public is in the dark. 216 It occurs to me that if everybody knew what was going on, the public interest would be better served. I have not gone into that as fully as I would like to. Are you concerned with this issue ? Mr. S e ld e n . Yes. As I said I am rather shocked that there is not an actual transcript taken. I had always assumed there was. Chairman P a t m a n . Instead of having just the 12 members of the Open Market Committee, they have all kinds of lawyers and account ants and statisticians—about 38 people altogether. Mr. S e ld e n . D o not forget economists. Chairman P a tm a n . Yes, sir, economists. But I am not so sure that they pay too much attention to all of their economists. Well, na turally they would not because they have views that the others do not have. But 38 people in that room, where the law says that 12 mem bers shall only be the Open Market Committee. Does that seem to you like it is a correct interpretation of the statute to let 38 come in ? Mr. S e ld e n . Well, I think it is normal for support people to come. That is, if a president from, let us say, the Federal Reserve Bank of Chicago happens to be a member of the Federal Open Market Com mittee in a given year, I think it is normal and natural and beneficial for him to have an economist or someone else sitting behind him who can help him with problems that come up. Chairman P a t m a n . I can see where that probably could be helpful. Mr. S e ld e n . I do think that it is a little curious to have the other seven Reserve bank presidents participating to the extent that they apparently are participating in everything except a vote. Chairman P a t m a n . It occurs to you that it is sort of a violation of the letter of the law ? Mr. S e ld e n . It seems peculiar to me. I am not a lawyer. Chairman P a tm a n . Well, there are several things in the statute that are not clear to me. Now you take the dealers. They have been selected by the Federal Reserve Board. Now they have lots of power. They are all domiciled in New York. Now those 20 dealers, they can be banks, they can be individuals, they can be organizations incorporated for that purpose only, or any other form of entity that the Federal Reserve Board will accept. They have what you might say are two tollgates on their offices. I f people have the bonds that they bought from the Government and they want to sell those bonds to the Open Market Committee so as to get the cash, they deliver the bonds to one of the dealers, the bonds go through the gate—I guess you would call it the input—and the people get their money for the bonds. Then they have another tollgate, we will say on the other side—that is where the bonds are sold out to the public and get cash for them for the Open Market Committee. Of course, there is nothing in the law that keeps them from selling those bonds and getting cash a number of times, not just one time but a number of times. I think Senator Root in his statement before the Congress before the law was passed brought that out. Are you acquainted with his statement ? Mr. S e ld e n . Only from your calling my attention to it earlier. Chairman P a tm a n . S o those things are very troublesome, in view 217 of the fact that there is no limit to the amount of money that the Federal Eeserve can create. You see, they manufacture money free of charge. They do not even pay for the money that is manufactured. They get that for nothing; and they create money in other ways on the books of the bank. That is a lot of power for a few fellows to have. If you have any questions I will yield to you, Mr. Gradison. Mr. G r a d i s o n . Thank y o u , Mr. Chairman. First, with regard to "the points which you have raised, Mr. Chair man, about the Federal Open Market Committee, it seems to me the central issue is who makes the decisions. I can understand how the Federal Reserve Board with seven members would not want to have more than seven additional votes cast by nonmembers; and therefore it would have devised a plan like this which would permit the Federal Reserve Board to retain control of the decisions of the Federal Open Market Committee, but also would make it possible for the presidents of all of the banks to have input. My own experience has not been with the Federal Reserve System but with the Federal Home Loan Bank System. I served for some years. I think for 5 years, as chairman of the board of one of those banks. My impression was that the Federal Home Loan Bank Board did its best work when it had the maximum opportunity for input from representatives of the regional banks, in that case also 12 from all over the country. This input is not so much a matter of who votes, but having a chance to be heard at the time that decisions are made. Now, economic conditions are not the same all over the United States at any one time. Even in this time of serious unemployment and recession, there are parts of the United States which are doing quite well. I think that this is the kind of factor which has to be taken into account. Even in the operations of this committee, which has 43 mem bers, it is not unusual to have some people in the room when we are making decisions who are not the elected members. They do not cast votes, but they serve a very useful purpose by making suggestions and assisting us in carrying out our work. We are still the ultimate deci sionmakers, and that is the point I am making—that when it is all said and done, there are only in that instance 12 people who can cast votes, and a majority of them are appointed by the President of the United States and serve by confirmation of the U.S. Senate. I want to get back to your testimony. My understanding is that you would support the idea of a fiscal management efficiency type of audit of the Federal Reserve, is that correct? Mr. S e l d e n . Yes, sir. Mr. G r a d i s o n . Y o u mentioned in your statement House Concurrent Resolution 133, which was recently passed, and which will go into effect around May 1, with the first hearing on the Senate side, as I understand it. Now, what I wanted to ask you as my first question is this. Do you feel that we should gain some experience under the operations of that resolution before we pass additional legislation that has to do with the way in which the Congress goes about supervising or reviewing the work of the Federal Reserve? 218 On page 5 of your statement, you indicated that—toward the bottom of the page—that Congress, instead of giving certain powers to the General Accounting Office, the Congress—and I quote—“might con sider forming an independent monetary policy review board.” In your judgment, does the review process embodied in House Con current Resolution 133, which is now law, go as far as you would like to see us go at this stage, along the lines of having some mechanism for congressional input and review of the decisions of the Federal Reserve ? Mr. S e ld e n . Well, as I indicated before, I certainly do applaud that resolution, and I think it is an important first step. I suspect that good legislation grows slowly rather than making big steps all at once. It does seem to me that this does not go far enough. I am particularly concerned that apparently there is not going to be a good mechanism, even now with the adoption of this resolution, for coordinating monetary policy with fiscal policy. We have got the new Committee on the Budget—I have forgotten the name of it exactly—which apparently is going to try to talk about fiscal policy, in a very broad way, for the Congress. And now we are going to have something for monetary policy. It seems to me that these ought to be coordinated through some mechanism. I am not at all convinced of the value of the suggestion that I make here on page 5, of a special board. I am convinced that the General Accounting Office is not the proper vehicle for doing this, and I think the whole thrust of what I am talking about here is that there is congressional responsibility which I feel has been shirked. And now this new Resolution 133,1 think, is a very important step toward asserting congressional responsibility, so I think that that is very good. Mr. G ra d iso n . I am delighted with your mention of the tying of fiscal and monetary policy more closely together. There is a real need for that in our economy today. Indeed, it seems to me perfectly reasonable that as the Congress involves itself more through one mechanism or an other in trying to help chart the way for monetary policy—and we are moving in that direction—that it might be very wise for the Federal Reserve to be encouraged, or perhaps “ asked” by the Congress, at least once a year, for its specific recommendations on fiscal policies. Now, this is something that I really do not fully understand. It would seem to me extremely important in the interest of coordination to have the views of the Board of Governors of the Federal Reserve System in terms of what would be an optimum level or range of ex penditures or income or deficits or surpluses, so that the Congress would have the best possible advice we can get from that arm which is carrying out monetary policy and so we can tie them more closely together. Does that make sense to you as a concept ? Mr. S e ld e n . Well, I think so. And certainly, that is not a new burden that is being imposed upon them, because they spend a great amount of time and energy analyzing fiscal policy, and all other aspects of policy, and so they are well informed. Mr. G ra d iso n . Of course they are. One final question. The Comptroller General, while he did not use these exact words, did indicate that as the General Accounting Office 219 is presently staffed, it does not have the competence to carry out a pro gram or a policy audit of the Federal Reserve. Indeed, he said that the first step they would have to take would be to go out and hire five outside experts, or consultants, in order to help carry out that task. In view of your own high level of professional competence and reputation, and your own experience in watching the operations of the Fed, I would like to ask you this question. If you were retained by the General Accounting Office as one of the five experts to assist them, what kind of things would you look into ? What would be the half-dozen major things that you, yourself, would like to examine if you were given free rein to dig into that sort of thing, from the point of view of an outside consultant ? Mr. S e ld e n . I would like to have more detailed information than you get through these published records of Open Market Committee meet ings, which are published now 45 days after the event, I think. That is fine that those are published, but they are very vague and general, really. One economist many years ago somewhat facetiously suggested that the open market account manager, the vice president of the Federal Reserve Bank of New York, should be prohibited from being in the room when the Federal Open Market Committee has its deliberations so that that would force the Federal Open Market Com mittee to have an explicit directive that could be—that there could then be some accountability as to whether or not the actual directive had been complied with. So I think if there is going to be a meaningful audit by the Con gress or by some creature of the Congress, it has to get into more de tail—not waiting for 5 years, but current information about what the intent was. For example, if we look at what happened in this country between, let us say, July 1974 and February 1975, we all know that the rate of monetary expansion in this period was slow. And apparently it was slow even by the standards that the members of the Federal Open Mar ket Committee themselves were holding to. One cannot be certain of this, but my discussions lead me to believe that even the Fed officials were surprised at the relative slowdown in the rate of monetary growth. How can this happen ? I think this is a policy mistake. I think that it probably reflects the adoption of improper operating proce dures, and I think somebody ought to call them to account for that so that we do not have repetitions again and again of this kind of mistake. Mr. G ra d iso n . I s it possible—is it just possible that the failure of monetary aggregates to grow as rapidly as the Fed might desire, or as you and I might desire, might be the result of circumstances com pletely beyond their control such as a lack of demand for loans ? Mr. S e ld e n . It is possible, but this is the kind of standard examina tion question that we give our students at the University of Virginia and elsewhere about whether monetary policy is like a string that you can pull with, but cannot push. It has been alleged that the situation of the last 6 or 8 months is, indeed, an illustration of the string that you cannot push. But I do not think that is right. I think, really, the problem is that the Fed has been dedicated to an interest rate target instead of a mone 50-365 0 - 75 - 15 220 tary aggregate target. Thjey were rather alarmed by the rate at which interest rates were falling in the latter half of 1974. They thought that, for balance of payments reasons, for example, and for other reasons, too, just maintaining orderly financial markets, that they should guide ancl moderate this decline so that it would not be too rapid and disorderly. Clearly they had the means to do that. But the consequences of do ing it were that the monetary growth did not go up as rapidly as it could. Specifically, sir, if there is not a demand for loans—and we do know that demand for loans has been weak in recent months because of the recession—if the Fed creates bank reserves, banks will still find it highly profitable to use these reserves to buy U.S. Government se curities, or other types of open market assets. There does not have to be a demand for loans in order for the banking system to create money. All there has to be is the wherewith al!, the reserves. Mr. G ra d iso n . What if the banks use those funds to reduce their own indebtedness and improve their own liquidity situation? Mr. S e ld e n . They have, of course, paid off indebtedness to the Fed itself, and probably their Eurodollar borrowings from Europe, and maybe borrowings in commercial paper markets, but I think it is simply a question of magnitudes. I f the Fed creates reserves and the banking system mainly uses those reserves to pay off debt, the Fed simply creates more reserves. There is some amount of reserve creation which will have the desired result. And I think the Fed knows that that is true. I think they have simply been guided by an interest rate objective, trying to keep the rates from falling too rapidly, and it has had this unfortunate consequence. Mr. G ra d iso n . Thank you. Thank you, Mr. Chairman. Chairman P a t m a n . With your permission, I will continue what 1 brought up awhile ago about the bonds in the Open Market Committee. The Federal Reserve Act was signed by Mr. Woodrow Wilson, 2 days before Christmas, in 191'3. And I have here the amount of bonds held by the Open Market Committee every year since that time. The first year, it was $16 million. The next year it was $55 million. The next year $122 million. And then, $300 million. And then in 1924 $540 million; 1929, $511 million, and it reached $1 billion in 1932. Many people believe—and I believe there is much justification for believing it—that this was created for the purpose of saving the banks, or the Federal Reserve, the trouble of going before a congressional committee. You know, the Constitution says that no expenditure shall be made of the public’s money unless it is appropriated by the Congress of two Houses, and signed by the President. Well, the Federal Reserve is getting around that through Open Market Committee transactions. Now they have bought, in all, up to date, in their 61 years of existence, $86 billion in Government bonds. The effect of this $86 billion is very inflationary. There is $86 billion in the pockets and tills of the people that would not be there were it not for the creation of this money. That is correct, is it not, Professor Selden ? Mr. S e ld e n . Yes, sir. 221 Chairman P a t m a n . N o w then, when these bonds are paid, we do not know what happens to the proceeds. Mr. G ra d iso n . Mr. Chairman? Chairman P a t m a n . Yes, sir. Mr. G ra d iso n . The witness mentioned a moment ago that he would like to see, or like to have seen perhaps, a more rapid increase in monetary growth in the last 6 months or a year than we have seen. You mentioned a moment ago that the ownership, or the holdings of those large amounts of securities by the Federal Reserve is infla tionary and under certain circumstances I am sure that is true. Chairman P a t m a n . Not the ownership of the bonds, but it is the money that is paid out for the bonds. Mr. G ra d iso n . Precisely. Now, if additional infusions of funds into the credit markets were done by the Federal Reserve, to meet Profes sor Selden’s stated objective, then this total amount of securities owned by the Federal Reserve today would be even larger. And the infla tionary potential would be even greater. So that I just simply want to be sure that we are talking about the same thing. Because the chairman has just indicated, and I think very appropriately, the inflation potential of this situation. And yet Dr. Selden has said that he does not think we have gone far enough along those lines. Or do I misunderstand you ? Chairman P a t m a n . When this $86 billion is paid out, the bonds received in the portfolio are not canceled. But they should be canceled because the debt is canceled. Is that not right, professor? Mr. S e ld e n . That sounds reasonable. Chairman P a tm a n . If the debt were canceled, the people would not have to pay interest on them. But the fact is that they are paying $6 billion a year in interest on those bonds. Now Mr. Martin said that when they are paid for once, that is all they should be paid for. Mr. S e ld e n . I wonder if I could have an opportunity to respond to Mr. Gradison’s comment of a moment ago ? Chairman P a t m a n . Certainly you may. Mr. S e ld e n . Of course the first half of 1974 was quite different from the second half of 1974, and we had excessive monetary expansion in the first half of 1974 and that is part of the reason why all those bonds came into the ownership of the Fed. But, we had a slowdown after that. I certainly agree with what was said about the inflationary potential of Government security purchases by the Fed. That is what has been wrong with our economic policy for several years. We have had excessive monetary growth, and I am very much afraid that the excessive monetary growth that took place during most of the period from 1970 up until the middle of 1974 is going to ensure inflation in the 6 to 8 percent per year range through the end of 1978. So I am very responsive to the idea that we have an inflation prob lem and that we have got to do something about it. But I do think in the second half of 1974 there was a lull which took place; and I think that was an unfortunate lull. 222 However, I do not think you can really atone for the earlier error of excessive money creation by having a period of no money creation lasting as long as 6 months. I think that is going too far. Mr. G ra d iso n . Mr. Chairman, may I pursue this line of inquiry ? Chairman P a tm a n . May I get this in the record, please ? Without objection, I would like to insert in the record at this point, a statement of the bonds held in the Open Market Committee, by years, from the time the bank was created on up to today. And also the net earnings before payments to the U.S. Treasury that indicates that the banks earn a lot of money. They earn only 3 percent of their income. The rest is interest paid on Federal securities. And their operating expenses have increased terrifically in the last very few years. [The following material was submitted for the record by Chairman Patman:] BO NDS HELD IN OPEN MARKET COMMITTEE, NET EARNINGS ON BO NDS BEFORE PAYMENTS TO U.S. TREAS URY, OPERATING EXPENSES OF ALL FEDERAL RESERVE BANKS; DOLLAR AND PERCENTAGE CO M PARISON S OF EXPENSES WITH PREVIOUS YEARS, 1914-74 Bonds held in open market committee Year 1914-15________ 191 6 191 7 191 8 191 9 192 0 192 1 192 2 192 3 192 4 192 5 192 6 192 7 192 8 192 9 193 0 193 1 193 2 193 3 193 4 _ 193 5 193 6 193 7 193 8 _______ 193 9 194 0 194 1 194 2 194 3 194 4 194 5 _______ 194 6 194____________ 7 194_____8 ___ 1949.................. 195 0 195 1 _______ 195 2 ______ 195 3 _______ 195 4 195 5 195 6 _______ _______ 195 7 195 8 195 9 196 0 196 1 196 2 196 3 196 4 ______ Net earnings before payments to U.S. Treasury $16,000,000 $-141,459 55,000,000 2,750,998 122,000,000 9,582,067 239,000,000 52,716,310 300,000,000 78,367,504 287,000,000 149,294,774 234,000,000 82,087,225 436,000,000 16,497,736 134,000,000 12,711,286 540,000,000 3,718,180 375,000,000 9,449,066 315,000,000 16,611,745 617,000,000 13,408,249 228,000,000 32,122,021 511,000,000 36,402,741 729,000,000 7,988,182 817,000,000 2,972,066 1,855,000,000 22,314,244 2,437,000,000 7,957,407 2,430,000,000 15,231,409 2,431,000,000 9,437,758 2,430,000,000 8,512,433 2,564,000,000 10,801,247 2,564,000,000 9,581,954 2,484,000,000 12,243,365 2,184,000,000 25,860,025 2,254,000,000 9,137,581 6,189,000,000 12,470,451 11,543,000,000 49,528,433 18,846,000,000 58,437.788 24,262,000,000 92,662,268 23,350,000,000 92, 523,935 22, 559,000,000 95,235,592 23,333,000,000 197, 132,683 18,855,000,000 226,936,980 20,778,000,000 231,561,340 23,801,000,000 297,059,097 24,697,000,000 352,950,157 25,916,000,000 398,463,224 24,932,000,000 328,619,468 24,785,000,000 302,162,452 24,915,000,000 474,443,160 24,238,000,000 624,392,613 26,347,000,000 604,470,670 26,648,000,000 839,770,663 27,384,000,000 963,377,684 28,881,000,000 783,855,223 30,820,000,000 872,316,422 33,593,000,000 964,461, 538 27,044,000,000 1,147,077,362 Operating expenses $2,320,586 . 2,273,999 5,159,727 10,959,533 19,339,633 28,258,030 34,463,845 29,559,049 29,764,173 28,431,126 27, 528,163 27,350,182 27,518,443 26,904,810 29,691,113 28,342,726 27,040,664 26,291,381 29,222,837 29,241,396 31,577,443 29,874,023 28,800,614 28,911,600 28,646,855 29,165,477 32,963,150 38,624,044 43,545,564 49,175,921 48,717,271 57,235,107 65,392,975 72,710,188 77,477,676 80,571,771 95,469,086 104,694,091 113,515,020 109,732,931 110,060,023 121,182,496 131,814,003 137,721,655 144,702,706 153,882,275 161,274,575 176,136,134 187,273, 357 197,395,889 Expenses— dollar comparison with previous year $-46,687 +2,885,728 +5,799,806 +8,380,100 +8,918,397 +6,205,815 -4,904,796 +205,124 -1,333,047 -902,963 -177, 981 +168,231 -613,633 +2,786, 303 -1,348,387 - 1 , 302,062 -749,283 + 2 , 931,456 +18, 559 +2,336,047 -1,703,420 -1,073, 409 +110, 986 -264,745 +518,622 +3,797,673 + 5 , 560,894 +4 , 921, 520 -5,630,357 -458,650 +8, 517,836 +8,157,868 +7 , 317,213 +4,767,488 +3,094,101 +14,897, 315 +9,225,005 +8,820,929 -3,782,089 +327,092 +11,122,473 +10,631, 507 +5,907,652 +6,981,051 +9,179, 569 +7,392, 300 +14, 861,559 +11,137, 223 +10,122, 532 Expenses— percentage comparison with previous year - 2.01 +126.9 +112.41 +76.46 +46.11 +21.96 -1 4 .2 3 + .6 9 + 4 .4 8 - 3 .1 8 -.6 5 + .6 2 - 2 . 23 +10. 36 - 4 . 54 - 4 . 59 -2 .7 7 +11.15 + .0 6 + 7 .9 9 -5 .3 9 -3 .5 9 + . 39 -.9 2 +1 .8 1 +13.02 + 1 7.14 +12. 77 +12.93 -.9 3 +17.48 +14.25 +11.19 +6 .5 6 +3 .9 9 +18.49 + 9 .6 6 + 8 .4 3 -3 .3 3 + .3 0 +10.11 + 8 .7 7 + 4 .4 8 + 5 .0 7 + 6 .3 4 + 4 .8 0 +9 .2 2 +6 .3 2 +5.41 223 BONDS HELD IN OPEN MARKET COMMITTEE, NET EARNINGS ON BONDS BEFORE PAYMENTS TO U.S. TREASURY, OPERATING EXPENSES OF ALL FEDERAL RESERVE BANKS; DOLLAR AND PERCENTAGE COM PARISONS OF EXPENSES WITH PREVIOUS YEARS, 1914-74— Continued Bonds held in open market committee Net earnings before payments to U.S. Treasury __ 40,768,000,000 __ 44,282,000,000 __ 49,112,000,000 __ 52,937,000,000 __ 57,154,000,000 __ 62,142,000,000 __ 70,000,000,000 __ 70,600,000,000 __ 76,000,000,000 __ 81,059,000,000 1,356,215,455 1,702,095,000 1,972,376,782 2,530,615,569 3,097,829,686 3,567,286,887 3,440,451,196 3,328,112,382 4,440,998,464 5,654,000,000 204,290,186 207,401,126 220,120,846 242,350,370 274,973,320 321,373,386 377,000,000 414,000,000 495,000,000 547,000,000 Total____ _________________ 41,757,146, 741 6,461, 414, 578 Year 196 196 196 196 196 197 197 197 197 197 5 6 7 8 9 0 1 2 3 4 Operating expenses Expenses— dollar comparison with previous year Expenses— percentage comparison with previous year +6,894,297 +3,110,940 +12,719,720 +22,229,524 +32,622,950 +46,000,000 +56,000,000 +37,000,000 +81,000,000 +52,000,000 + 3 .4 9 + 1 .5 2 + 6 .1 3 +10.10 +13.46 +1 7 +1 7 +10 +19.56 +10 Net earnings before payments to U.S. Treasury— total 1914-74— $41, 757,146, 741 1970-74 total net earnings before payments to U.S. Treasury— 20,430,848,929 49 percent of the net earnings before payments to U.S. Treasury since 1914 have occurred since 1970. Total operating expenses 1914-74_______________________________ 6,461,414,578 1970-74 total operating expenses-----------------------------------------------2,154,373,386 33 percent of all the operating expenses since 1914 have occurred since 1970. Chairman P a t m a n . Mr. Hannaford ? Mr. H a n n a f o r d . Thank you, Mr. Gradison. I am in no great hurry, but I got here so late that I guess I have first choice. I felt especially guilty about being late for this meeting, Mr. Chairman, since I was the one who suggested we have subcommittee hearings on Friday. But I was tied up in my office. I certainly found your statement most worthwhile, Dr. Selden, I thought you said some things that were quite constructive, and dif ferent from what we have heard before. I assume from your statement that your position would be some thing like this. That you would subscribe to what we are proposing in regard to a one-time-only audit, addressing itself to auditing the insti tution and its efficiency to be sure that the house is in order, but not to lock it into an annual audit? Mr. S e ld e n . I think that that is right. In fact, having read just last evening General Staats’ testimony of earlier this week, I gather that he is not too eager to be in a regular annual cycle either. Mr. H a n n a f o r d . And that you would not want to use that audit as a vehicle for making a subjective judgment about the efficacy of the monetary policy being pursued by the Fed? Mr. S e ld e n . I do not think that that is the best forum for that kind of discussion. Mr. H a n n a f o r d . And, that you approve House Concurrent Resolu tion 133? Mr. S e ld e n . Yes, sir. Mr. H a n n a f o r d . As a sort of stepping off place for Congress to exercise oversight upon its responsibilities in monetary policy? And, perhaps some relationship between that and fiscal policy? Mr. S e ld e n . Yes, sir, I think it should go further, probably. Mr. H a n n a f o r d . I agree with all of this. So, when somebody says something you agree with, you think they are awfully smart. I just 224 would say that your statement stops at the edge of my understanding. And that is, I do not know where we go from there. You implied .that there is another step that Congress ought to take. And, if you have that instruction in your catalog of lectures or any thing of that sort, I certainly would appreciate it, or if you could say anything on that subject now ? Chairman P a tm a n . And, if you desire when you receive your trans script, you may ^extend your remarks and include other information which is relevant. Mr. H a n n a f o r d . Yes; but I would appreciate it if you would just have a brief remark on that. Dr. Selden. Mr. S e ld e n . Well I really am not very familiar with the way in which the Congress organizes itself to do its business. It does seem to me that the Joint Economic Committee would be a good forum. It seems to me that it should involve both Houses of the Congress simultaneously. There may be some other reason why the Joint Eco nomic Committee is not the proper place, but it seems to me that that would not delimit it as to fiscal or to monetary, nor would it be limited as to House or Senate. The JEC would seem to me to be in a unique position to take an overview of the whole position. So, that would be my off-the-cuff kind of reaction to that. Of course, this undertaking would require staff support. You can not just do it on top of all the other duties that you have. I think that there would have to be adequate staff, and I am not sure what adequate staff is. Mr. H a n n a f o r d . Well, that is the kind of thing that I think needs to be done, and you are really going to have to hire when you talk about adequate staff, for such a judgment. You are going to be talking about staff that is competent enough in these subjects to sit in judgment on the judges. Not necessarily that they are wiser than the judges, but that the judges know there is some one there sitting in judgment on them. Mr. S e ld e n . We know that the staff of the Federal Reserve Board and the Federal Reserve Banks is highly competent. And I think if we are going to give a searching criticism of their actions, we are going to have people of comparable competence to do so. Mr. H a n n a f o r d . Yes; but people who might well be looking at it from a different point of view ? Mr. S e ld e n . Absolutely. Mr. H a n n a f o r d . Very good. Well I appreciate that. If I have any time left, I will yield it back to the chairman. Chairman P a t m a n . Thank you, Mr. Hannaford. If it meets with the approval of you gentlemen, we will stand in recess until Tuesday morning. Mr. H a n n a f o r d . Mr. Gradison had a statement to make. Chairman P a tm a n . Yes, sir, if you would like to, g o ahead. Mr. G ra d iso n . I thank the chairman. I think the witness today has been extremely helpful and I have no additional questions at this time. Chairman P a tm a n . And I want to express my appreciation to you. Your statement is excellent. It is thought-provoking, and it will help us greatly. Thank you very much for your contribution; and 225 if we desire to hear from you further, we will get in touch with you and arrange for some time that will be mutually satisfactory. Without objection we will stand in recess until 10 a.m., Tuesday, April 29,1975, at which time Dr. Arthur Burns has been notified that we want him as a witness. He has not exactly said that he is accept ing our invitation, but he has just used the argument that he is awfully busy and he just did not have time to do anything else at this time. The hearing is recessed until Tuesday, April 29,1975, at 10 a.m. [Whereupon, at 11:15 a.m., the subcommittee recessed to reconvene at 10 a.m., Tuesday, April 29,1975.] AUDIT OP THE FEDERAL RESERVE TUESDAY, APRIL 29, 1975 of H ouse of R e p r e s e n t a tiv e s , S u b c o m m it t e e o n D om estic M o n e t a r y P o l ic y t h e C o m m it t e e o n B a n k i n g , C u r r e n c y a n d H o u s in g , 'Washington, B.C. The subcommittee met, pursuant to notice, at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. Wright Patman [chair man of the subcommittee] presiding. Present: Representatives Patman, Minish, Ford, Hannaford, Neal, Blanchard, and Gradison. Chairman P a t m a n . The clerk will call the role. The C l e r k . Chairman Patman. Mr. P a t m a n . Here. The C l e r k . Mr. Minish. Mr. Minish . Here. The C l e r k . Mr. Ford. [No response.] The C l e r k . Mr. Hannaford. Mr. H a n n a f o r d . Here. The C l e r k . Mr. Neal. [No response.] The C le r k . Mr. Blanchard. [No response.] The C l e r k . Mr. Barrett. [No response.] The C l e r k . Mr. Conlan. [No response.] The C l e r k . Mr. Hansen. [No response.] The C l e r k . Mr. Gradison. [No response.] The C l e r k . Mr. Neal. Mr. N e a l . Here. The C le r k . There are four members present, Mr. Chairman. Chairman P a t m a n . The subcommittee will please come to order. The witnesses for this morning’s hearings on H.R. 4316, a bill to au thorize and direct the General Accounting Office to conduct a full scale audit of the Federal Reserve System, are: Ralph Nader, consumer ad vocate; Robert J. Freeman, professor of accounting at the University of Alabama, and Robert Bartell, public relations consultant and tax program coordinator of Liberty Lobby. Welcome to the hearings, gentlemen. I am sure that your testimony will be of the utmost interest to all members of the subcommittee. (2 2 7 ) 228 We will hear Mr. Nader first. We will ask you to present your state ment first and then yield to questions. Mr. Nader, you are recognized, sir. STATEMENT OF RALPH NADER, CONSUMER ADVOCATE Mr. N a d er. Thank you, Mr. Chairman, members of the subcommittee. The Federal Reserve System is the only domestic agency of any im portance in the Federal Government which has refused to consent to an examination and audit by the General Accounting Office, which is the arm of Congress. This has deprived Congress of the ability to evaluate both the efficiency of Federal Reserve operations and the ef fectiveness of Federal Reserve programs. As a result, Congress does not have the information necessary for informed legislative judgments. This is additionally true, because Con gress has no appropriations leverage over the Federal Reserve, which is not funded by appropriated funds. In a nutshell, this is precisely why this bill is important. Without this bill, the legislative branch of Government and our system of checks and balances has been removed from any role, herein. It is often stated by way of justification for the status quo that the Federal Reserve deals with highly delicate and highly complex mate rial relating to the Nation’s money supply, among other matters, and that it is an independent agency and must retain this independence from any accountability. It would call accountability, political interference. The premise that the Federal Reserve is independent has to be ques tioned. It is not independent of the banking industry. That alone, quite apart .from principles of checks and balances and accountability, would command support for the bill that you have before you. Any body who even tries to contend that the Federal Reserve retains an arms-length relationship and an independence with the banking in dustry, which is interlocked with personnel and other connections with the Federal Reserve tightly all over the country, is trying to support an insupportable assertion. Legislation authorizing a full-scale. General Accounting Office ex amination and audit of the Federal Reserve System on a recurring basis is needed. There is probably no human institution on earth that does not develop undesirable patterns of behavior, to say the least, if it is insulated from public scrutiny and examination, and, when that human institution is an institution that deals with money, big money, the likelihood of a deteriorating posture is even greater. But, to make that judgment requires more than an analysis of the end results of the Federal Reserve’s operations. It requires a penetrat ing analysis of how the Federal Reserve arrives at its decisions, who influences the decisions, and how it proceeds to expend its moneys in implementing these decisions. General Accounting Office examinations have never been accused of being politically tainted, as far as I know; in fact, the GAO’s verbal style is so severe that often, when it finds the most outrageous examples of waste in the Federal Government, its style precludes media cover age* Thus, this bill is not assigning a function to a congressional com mittee; it is assigning a function to a highly nonpartisan, technical 229 and verbally subdued investigative arm of the U.S. Congress. Finan cial audits of the Federal Reserve System’s operations will determine if expenditures are justified; for example, you have put in the record, Mr. Chairman, examples of large expenditures, relatively speaking, for banquets and for dues and for moving expenses, all of which, if they do not add up to the largest cost overruns that we are accustomed to observing in other Departments of Government, still add up to a state of mind that might demand greater efficiency, but also greater accountability. I believe that the entire Federal Reserve System spends almost onehalf billion dollars a year, and, even on today’s scale, that is not an insignificant figure. A cost analysis of the Federal Reserve clearing systems is essential for sound legislative judgment in choosing between alternative payment systems. Reports which evaluate Federal Reserve programs are required in order to determine whether the Fed is adequately handling problem banks or adequately protecting consumers. Finally, detailed informa tion on credit and monetary policy decisions is essential in* order to enable Congress to coordinate fiscal policy with the Federal Reserve’s monetary policy, and to insure that actions taken by the Federal Reserve are not arbitrary or capricious, but, rather, supported by solid economic data. After all, the Fed’s decisions are not exactly noncontroversial. They not only breed controversy in Congress, but they breed controversy throughout the country in public dialog, and it would help in develop ing a consensus about what should be done to have a more enlightened public, to understand why the Federal Reserve arrives at these deci sions. After all, a number of bankers know why the Federal Reserve arrives at these decisions. A number of their delegates know why they arrive at these decisions. Why should private bankers be put in such a preferred situation ? The Open Market Committee is a study all by itself in terms of how these members are chosen, but it is quite clear that the banking indus try has a very powerful role in that decision. There is presently no mechanism to police operational expendi tures of the Federal Reserve System. Given the natural tendency of Federal bureaucracies to generate wasteful expenditures, this is a serious defect. The Federal Reserve has unlimited access to the interest on the $80 billion or $85 billion of Government securities, which are held by the Federal Reserve System. As a result, the Federal Reserve has no need for appropriations from Congress and is never required to submit a budget to congressional scrutiny. Ideally, Congress should enact legislation that would credit all inter est on these Government securities to the U.S. Treasury and, thus, require the Federal Reserve, like any other Federal Agency, to seek appropriations from Congress. Until this basic reform is enacted, how ever, the Federal Reserve System’s operating budgets should be sub jected to this proposed GAO audit. Now, in the last session of Congress, Mr. Staats, in order to clarify the dialog, I assume, articulated three types of audits, which the GAO could do. One dealt with an audit: Both for the purpose of arriving at opinions as to whether financial transactions are carried out in accordance with applicable legal requirements and are properly 280 accounted for and whether the financial reports present fairly the financial posi tion and results of operations of the various entities in the system. Type 2 would include the first, which I just quoted, function, but in addition would include: Selected examination of the management of resources, such as computers and other equipment, buildings and per sonnel, to evaluate the efficiency and economy with which resources are procured and used.55And, type 3 would include type 1 and type 2, but would also include, “ reviews of the results of the programs and activi ties of the system, including the extent to which its established objec tives are being achieved.55 Now, type 3 would include a GAO study of the bank examination system by the Federal Reserve, which, I think, is something that is very much in need of analysis. There is probably no more secret and more murkier area in the area of Federal regulation broadly con ceived than bank examinations. I also assume that it would go into how the Federal Reserve handled the Franklin National Bank debacle. Now, the public deserves an explanation of not only what happened to Franklin National in detail, but how the Fed really bailed it out. After all, it lent to the Franklin National more than $1 billion, and the continuing argument that the public should not be told the truth because the public would be unduly alarmed, is one that is antithetical to any respect for an informed public or the operations of a democracy. Obviously, if you carry this unduly, alarm the public syndrome too far, the public will be given one major unduly alarmed experience, which could be the collapse of the banking system. There are, as T mentioned, indications that certain expenditures by the Federal Reserve System are wasteful or inappropriate. The ques tion is not merely the dollar level of these expenditures; the question is whether these expenditures are lubricating improperly fraternal re lationships between the Federal Reserve and private banking institu tions, and that is a sufficient reason, quite apart from the dollar level of the waste, to go into these matters. Some of these abuses involve activities of the various Federal Re serve banks. In the midst of the current economic crisis, while the entire Federal Reserve System had encountered serious difficulties in achiev ing its money supply targets, the Federal Reserve Bank of Cleveland diverted a substantial amount of the time and energy of its economic staff to a planning group study of the ways in which the bureaucratic power of the Federal Reserve System could be enhanced. This plan ning group has produced, at a cost of $100,000, a grandiose study en titled, “ Scenario for Federal Reserve System in the Year 2000.55The study concludes, and I quote: The Federal Reserve will thus accede to the duties of the Comptroller of the Currency, the Federal Home Loan Bank Board, and the supervisory authority for Federal credit unions, as well as the duties of parallel supervisory authori ties in the states. The Federal Reserve will also administer the Federal Deposit Insurance System for all banks, assuming the functions of the FDIC and the FSLIC. Questionable expenditures, Mr. Chairman, relating to this study which produced considerable irritation among some of the staff in the Cleveland bank. Perhaps, your committee could inquire further into the genesis of this eifort and why it was undertaken, and at what level was the go-ahead given. 231 Mr. P a t m a n . May I interrupt? Do you have a copy of that study for the record ? Mr. N a d e r . We w i l l try and produce a copy of that study. Mr. P a t m a n . Without objection, it may be inserted in the record. [The study referred to entitled, “ Scenario for Federal Reserve System in the Year 2000,” may be found in appendix E.] Mr. N a d e r . There is a tendency in evaluating the Federal Reserve, Mr. Chairman, to evaluate it in its past, and while that is necessary, I think, it is also very important to evaluate it and its projected future not only in terms of the kind of projected consolidation here under its aegis of other bank regulatory functions, which would give us, obvi ously, the most awesome power without consumer accountability, but also to see what kind of direct consumer impact that the reserve sys tem’s activities would have. For instance, is the check clearing system encouraging the develop ment of electronics funds transfer, with all its implications for further removing the consumer from a contractual feeling of paying his or her bills and further removing the control of the consumer over his or her money, quite apart from the privacy aspects of this system. Questionable expenditures have also been made by the Board of Governors of the Federal Reserve System. In 1974, the Chairman of the Board of Governors, Dr. Arthur F. Burns, conducted a lobbying campaign of dubious legality designed to block enactment of the very same legislation which the subcommittee is now considering, a GAO audit of the Fed, and I think there is little doubt that he was spending his time urging influential people in the financial community around the country to urge upon the Congress the defeat of the proposed legislation. And I think that that is contrary to a Federal statute which prohibits Federal officials from reaching out to the public in order to indirectly lobby the Congress. They can directly, in effect, lobby the Congress by their urgings but not by building up a constituency to lobby the Congress from the overwhelming vantage point of the execu tive branch of Government utilizing taxpayer funds. The Board of Governors has also recently expended a considerable sum of public money on legal expenses in order to prevent the disclosure of informa tion on interest rates on consumer loans. Disclosure of this information is clearly in the public interest. All of these expenditures have reduced the size of interest payments to the Treasury and this has come at the taxpayer’s expense. As everybody knows, the Federal Reserve System operates an elabo rate check clearing system. In 1974, the System handled 35 billion pieces of paper worth $24 trillion. The volume of checks processed is increasing almost geometrically and the clearinghouse may soon ex perience the same overload that is presently causing the deterioration of the Postal Service. Recently, several Federal Reserve banks, including the banks of Atlanta, San Francisco, and Minneapolis, have begun to operate auto mated clearinghouses which substitute electronic funds or magnetic tapes for paper entries. Both the traditional check clearing systems and the new automated clearinghouses are, in effect, public utilities and it is essential for Congress to determine how efficiently they are operated by the Federal Reserve System. The substitution of electronic 232 funds for checks and cash raises serious questions of public policy. It is not all one way. There are considerations for this and considerations against it. But unfortunately, the movement for EFTS is going for ward before the study of it is completed. That includes the Presidential Commission, whose directors have not yet been appointed, as well as congressional deliberations. In addition to the difficult task of providing for adequate consumer safeguards, a decision must be made as to whether these payment systems can be more efficiently operated by a public utility approach or by competition between private systems. The Congress and the National Commission on Electronics Funds Transfers simply cannot make this judgment without a detailed cost analysis of the clearinghouse operations of the Federal Reserve Sys tem. Consequently, I believe the GAO should be given authority to conduct such a cost analysis of the Federal Reserve’s clearing systems. Moving briefly to the subject of evaluation of Federal Reserve pro grams, the Federal Reserve System collects a massive amount of data on banking operations. We know, for example, that they have different banks typed in terms of their stability, in terms of whether they are in trouble or whether they are not in trouble, and this information is highly confidential. Unfortunately, information which would be of benefit is not always collected and disseminated by the Federal Re serve even though it could disseminate it publicly. The Federal Reserve has been unwilling, for example, to collect and make public for individual banks the following important informa tion : Interest rates on consumer loans; the mortgage lending pattern by geographic area; and the amount of small business loans. The GAO should evaluate the data collection and dissemination po tential, and actual by the Federal Reserve. No longer is the Federal Reserve, for example, in the situation of not having consumer protec tion responsibilities because we know it has. Congress has given it consumer protection responsibilities. This Federal Reserve, as the lender of last resort, plays a crucial role in handling problem banks and bank failures. These operations have been shrouded in secrecy and Congress has had only limited access to the information necessary for an. informed judgment on the need for new legislation that would pro vide for more efficient handling of problem banks and bank failures. The GAO should conduct an investigation of the Federal Reserve’s operations in this area. Suppose several major banks in this country collapse? Would not Congress then be given the burden to try to do something about it? And on what basis of information is it going to have to try to foresee and forestall such situations. Already some banks have collapsed and it could get worse. The Federal Reserve is also charged with enforcing consumer pro tection laws against system member banks other than national banks. The Fed and other banking agencies, however, have been slow to amend their banking procedures to encompass consumer protection as well as their traditional concern with bank solvency. Surveys by public in terest research groups in 11 States—that is Indiana, New York, Maine, Florida, New Jersey, Minnesota, California, Massachusetts, Iowa, Michigan, North Carolina—have documented that some banks have not been complying with the truth-in-lending laws. Banks have also failed to provide consumers with the name and address of credit bu 233 reaus when a loan has been denied on the basis of adverse credit information. I think the members of the subcommittee will recall that Congress passed a law once giving consumers the right to have that information based on a denial of credit. In December 1974, the U.S. Commission on Civil Rights found that the Federal Reserve had failed to enforce compliance with title VIII of the 1968 Civil Rights Act. The GAO should conduct an investiga tion of the examination procedures of the Federal Reserve to determine whether violations of consumer rights and civil rights are being detected. The Office of Saver and Consumer Affairs should be the focal point of this inquiry. The claim that examination reports and data on prob lem banks may contain data on individual banks which should not be publicly disclosed does not provide support for the withholding of this information from the GAO and Congress. The GAO receives in formation in confidence from many agencies, including the Defense Department, State Department, Federal Home Loan Bank Board, in fact. The GAO is permitted to examine the examination reports and the problem bank reports of the Federal Home Loan Bank Board, the very same reports denied by the Federal Reserve. Even when violations of consumer protection have been detected, the Federal Reserve has not provided remedies for the injured con sumers. The Federal Reserve has not used its cease-and-desist power to protect consumers, and even if it were used, it is doubtful that it would do more than enjoin future violations. Administrative fines that are returned to the consumer and notice of the right to bring suit will most likely be necessary to provide mean ingful remedies for consumers whose rights have been violated. The GAO should examine the Federal Reserve’s enforcement procedures and make recommendations to Congress for additional enforcement and remedial powers for the Fed. And finally, a review of the Federal Reserve’s monetary and credit policy, which is perhaps the most controversial area and the most im portant function of the Federal Reserve System. The Board of Gov ernors and the Federal Open Market Committee frequently review data on the state of the economy, choose economic objectives, and then select the targets for the money supply that will hopefully move the economy toward the chosen goal. The minutes of the meeting of the FOMC are not published until 5 years after the meeting. A cryptic summary of the meeting which fails to spell out the FOMC’s long.run objectives or monetary targets is published 45 days after the meeting. The GAO and Congress should be able to examine the transcript of all meetings of the FOMC without any timelag. Congress cannot co ordinate fiscal policy with monetary policy unless it is fully apprised of the data and projections used by the FOMC, the longrun economic projections chosen, and the money targets selected. The economy cannot be rationally managed until mutual under standing develops between fiscal and monetary authorities. Just some months ago, at the same time that Dr. Bums was vigor ously opposing any credit allocation suggestions, he was sending letters to the heads of the various branch banks urging them to urge the banks in the cattle areas to loan money to cattlemen rather than have these 234 banks take their money and send it to the profit centers of the larger Chicago and New York banks. Well, that is a kind of credit allocation, jawboning, and those let ters were not easily accessible. That is just an example of information which would put on the table whether Dr. Burns is really against credit allocation or whether he is against Congress developing criteria for credit allocation. That is just one example of how an understand ing of the Federal Reserve’s true intentions and true policies can be furthered by using your arm, the GAO, to find out what is going on. Congress should have immediate access to the data and projections that are used by the FOMC in selecting monetary targets. Chairman Burns has often argued that disclosure of the FOMC decisions and data would result in disruption in money markets. Yet even the con servative editors of Business Week have recently called for the dis closure of monetary targets to both Congress and the public. Full public disclosure of this data would work to stabilize financial markets and restore confidence in a better managed Federal Reserve. Most important, full GAO access to the FOMC operations would work to insure that monetary targets are not arbitrary or not sup ported by the economic facts. When the Federal Reserve conducts its money operations under a shroud of secrecy, there is no guarantee that its decisions will be related to the economic analysis provided by its own staff. We have learned in the study of the Cost of Living Council, which permitted a rise in the price of old oil in December 1973, from $4.25 to $5.25 per barrel, that it contradicted its own staff’s studies. Its own staff study said that there was no support for this data or for raising the price of old oil, and indeed, whatever evidence that could be com piled argued against it. A recent example of this problem occurred when Chairman Burns on April 18, 1975, refused to provide the Joint Economic Committee of the Congress with the Federal Reserve’s projections for the sup ply and demand for credit for the months ahead. The refusal to pro vide this data to Congress can only be explained by the recognition on the part of the Chairman that the economic data of the Federal Reserve’s staff does not support his public policy pronouncements, or that if he released this data, then Congress would develop an ap petite for the release of more data. The GAO should be given the authority to obtain data and pro jections which are providing the basis for monetary policy. I think a clear distinction, Mr. Chairman and members of the sub committee, should be made between disclosure of information and what use is made of it. And to confuse the two, as the opponents of this bill are doing, is to try to utilize speculative suggestions as a block for information flow. I noticed that in all the testimony opposing this bill, there has never been the suggestion that the GAO has in the past misused its authority and engaged in politicking. And I think that is important to keep in mind. There are other areas where the GAO could certainly provide Congress with a good look-see, the areas of the decisional processing and the bank holding company implementation by the Federal Re serve. Part of the insurance industry is very upset at the way the Federal Reserve is letting banks go into more and more not directly 235 bank-related businesses. There is, of course, the vast area of the Federal Reserve banks’ operations on an international scale in terms of its relationships with other central banks and its obvious role in the way large U.S. banks operate internationally. These are, again, areas that for too long have been too secret, and as a result power builds up in the hands of the few at the expense of the many. I think in conclusion, Mr. Chairman, it can be stated that this bill is long overdue. It has impressive support now in both the House and the Senate, and it deserves quick passage. For too long, while every American realizes the power of money in society in terms of economic and political power—for too long money has been obscured behind a monetary curtain called the Federal Reserve System. And whether you take the argument from constitutional principles or from consumer protection principles, or from legislative oversight principles, the case for GAO’s scrutiny on a recurring basis of the Federal Reserve System is overwhelming. Thank you. Chairman P a t m a n . N o w , Mr. Nader, I would like to read you two or three questions that I have, and if you would not like to expand on them at this time as fully as you would like to, you may do so when you examine your transcript. Will that be satisiactory ? Mr. N a d er. Yes. Chairman P a tm a n . First question, Mr. Nader, in my view, every consumer in the Nation ought to know what the Federal Reserve’s monetary policy is and how it intends to achieve it, because monetary policy decisions and the way in which they are implemented largely determine the level of employment, the cost of money, and all other goods and services in the marketplace. For this reason alone, I would assume that you and all other con sumer interest groups would favor a General Accounting Office audit of Federal Reserve monetary policy and the economic effects of that policy. Is that correct ? Mr. N a d er. Very much so. Chairman P a t m a n . N o w then, another question. We still have only the Fed’s word for what happened regarding the forced resignation of a Federal Reserve employee who was made the target of an FBI investigation at the request of the Board. Tlie employee disclosed to Consumer Reports magazine what cer tain commercial banks were charging for various types of consumer loans. After forcing the employee out, the Federal Reserve decided to make this information available on a continuing basis to consumers as long as the banks surveyed agreed to do so. What role could the GAO have played under authority granted by H.R. 4316 to prevent irrational conduct like this from occurring, Mr. Nader? Mr. N a d er. One, by itemizing the information which the Federal Reserve is withholding from the public without any legal justification. I think that would clearly be within a type 3 audit as conceived by Mr. Staats. The power of the Federal Reserve is illustrated in this case that you mentioned. This man was fired for releasing information which, first of all, is public, if someone had the resources to go around to hundreds 50-365 0 - 75 - 16 236 of banks and ask them what their interest rates were on loans. He was fired for releasing information which a court of law stated was prop erly public and its withholding was not in accordance with the Free dom of Information Act, and yet he has not been reinstated, and I think that in order to foster general justice it would certainly be worthwhile for the subcommittee to inquire into this particular case and ask of the chairman why that gentleman has not been reinstated for doing something which both the Fed now agrees should have been public and which a court of law said was unlawfully withheld from the public. Chairman P a t m a n . You stated the Federal Reserve initiated this. Who in the Federal Reserve initiated this case against this innocent person ? Mr. N a d e r . I do not know at what level the decision to remove him was made. Chairman P a t m a n . N o w then, we have several witnesses and we will yield for 5 minutes. If necessary would you be willing to come before the subcommittee again at a time that is mutually satisfactory? Is that OK? Mr. N a d e r . Yes; that is certainly fine. Chairman P a t m a n . All right, Mr. Minish. Mr. M i n i s h . Thank y o u , Mr. Chairman, Mr. Nader. Business Week of April 21, titled “Dissension at the Fed,” and I want to quote from the article: [The article quoted from appears in appendix D.] In contrast every indication is that Burns and the Board will be extremely cautious in feeding money into the recovery. The growth rate of the money supply has picked up in the past month but Burns and the staff agree so far all it amounts to is squiggles in the chart, just static. Burns, the staff believes, will hold fast to his belief that inflation is the enemy that must be beat, even at the cost of high unemployment for awhile. Do you have any comment on that ? Mr. N a d e r . Well, obviously, I could comment on the advisability of the policy but I think more to the point of this hearing, it indicates that Chairman Burns is dealing with very serious issues of public policy and not the arcane, specialized world of money manager con trols. He is dealing with a policy which is going to affect housing, a policy which is going to affect economic recovery, a policy that is going to affect fixed incomes, and I think that that example illustrates why it is absolutely insupportable for the Federal Reserve to be given this kind of Olympian privilege as if it is just making the kinds of calculus that only a few mathematical geniuses are entitled to make. It is making the same kinds of judgments as you would make in passing legislation in Congress only through a different way, and what we should always ask in any public policy formulation is what is the im pact of the policy on human beings, and if it is as serious as the Federal Reserve’s impact, this kind of immunity and nonaccountability simply cannot be tolerated. Mr. M i n i s h . Well, would you agree with me that maybe their priori ties are a little mixed up ? Mr. N a d e r . Well, I personally certainly do agree. I think that they tend to be very insensititive to unemployment, for one, and they also tend to be very insensitive to their consumer protection responsibilities and to the importance of the competitive banking system and a com petitive financial institution system. 237 Mr. M i n i s h . I told the former Secretary of the Treasury, who was here a couple of years ago, a story that happened in my district where one fellow came over to see me at a picnic and says, “ Congressman, the price of pork chops is $1.50 a pound, and that’s a lot of money.” And then he said to me that he remembered when it was 15 cents a pound, and I said, “ So do I, but I did not have the 15 cents to buy it.” Now the point of the story is that we have to have people and that while inflation is a problem, if the man is not working the pork chops can be 15 cents a pound or $1.50, there is no way that he can buy it. Mr. N a d e r . And what happens when you have both inflation and unemployment % M r . M i n is h . T h a t m a k e s it a ll th e w o r s e . Mr. N a d e r . That is the unique paradox of the current economic scene. If we had to just have one, that is bad enough. But when we have to have both, it indicates that the Federal Reserve needs to pulsate more with the broader value systems of this society and those value systems are percolating through the Congress, which is the reason for this bill. Mr. M i n i s h . I am quoting in the same article one of the Fed staffers: The Fed has the power to offset the entire tax increase and to hear the dis sidents tell it. Burns may very well use his power in exactly that way. Mr. N a d e r . Well, there again, power without accountability. Mr. M i n i s h . Thank you. That is all, Mr. Chairman. Chairman P a t m a n . Mr. Hannaford. Mr. H a n n a f o r d . Thank you, Mr. Chairman, and thank you, Mr. Nader, for an excellent statement. I agree with your analysis very much. When you take an institution that has an $86 billion bloated portfolio that nets $6.3 billion in its own revenues it can do whatever it wishes. The Federal Reserve System has 28,000 employees, and yet is never subjected to the disci pline of competition or surveillance of the Congress. A private institution under those circumstances for that many years would be quite remarkable if there were not some very serious in efficiencies at the very least. I assume, Mr. Nader, that you would subscribe to audits type 1, 2, and 3 of Mr. Staats and on an annual or at least prescribed periodic basis. Mr. N a d e r . Yes, I would. Mr. H a n n a f o r d . And that that would involve ultimately, though not precisely in this legislation, some mechanism for congressional re view of the basis for monetary policy so as to have some coordination of it with fiscal policy. Mr. N a d e r . That is right. Mr. H a n n a f o r d . I am interested in your suggestion that Congress enact legislation to appropriate all of the funds, that $6.3 billion that I just mentioned, and thereby, the Fed would be subject to the same appropriate constitutional requirements of other public institutions. I learned just the other day that Congress in 1933 declared those funds not public funds, and this is the reason that we are in the situa tion of having to enact this legislation. You mentioned that Dr. Burns had done some jawboning in the law of credit allocation. I do not know if you are aware that in his testi- 238 inony before this subcommittee on our bill for credit allocation, and this is one reason that that bill was put aside for sort of negotiation, Dr. Burns as a compromise in the direction of credit allocation indi cated that he would accept a jawboning kind of credit allocation, and that he would negotiate on that subject, but he could not accept any thing else. I think what he was saying was that he trusts his judgment and no one else’s. But that apparently is his basis for credit allocation. I have no further questions, Mr. Chairman. I thank you, Mr. Nader, for a fine statement. Chairman P a tm a n . Mr. Gradison, would you like to ask some ques tions now of Mr. Nader? Mr. G ra d iso n . N o ; I do not, Mr. Chairman. Not at this time. I do want to explain that we have just had a Republican conference. In fact, it is still going on, and this is the reason that Members on our side have been unable to be present. It began at 9:30 and is still underway. Chairman P a tm a n . Thank y ou , sir. Now Mr. Neal. Mr. N e a l . Thank you, Mr. Chairman. Mr. Nader, I, because of my own overriding concern with Vietnam and thinking that I ought to be thinking about that problem instead of this, I have had to miss a lot of the testimony, and I intend to read it very thoroughly before we go along much further, but at this point I am very curious as to your opinion as to why the opposition to this bill. What characterizes those that are opposed to the bill? Who benefits? Mr. N a d er. Well, I think the opposition to the bill comes from two sources. One is the natural desire by any Government agency to con trol its own shop without having to explain it to the Congress or be accountable to the Congress, and the interests of the bankers in deal ing in a fraternal context with the Federal Reserve with very little public scrutiny. I think there is nothing new about this. We see this tendency in Viet nam policy, for example, as well as many other Government-business interlocking type of situations. But it has been a very comfortable world for the banks and the Federal Reserve. They turned the debacle of the 1930’s into a generation or two of insularity from both congres sional scrutiny and the public. It is not only the Congress that is suf fering here; the public cannot get basic information. It has nothing to do even with more arcane areas of monetary policy decisionmaking. It is best illustrated by Consumer s Union’s attempt simply to get a list of bank interest rates which are public but just for their convenience the rates should be made available by the Federal Reserve. Mr. N e a l. Can you point to specific examples of members of the fraternity benefiting from the cozy arrangement or particular banks benefiting ? Mr. N a d er. Well, they benefit from an extraordinar ily powerful tilt toward banking desires on the part of the Federal Reserve. The Fed eral Reserve, for example, could be more of a consumer advocate, and that would upset the banks. Mr. N e a l. None of us really benefit from tough economic times. The banks are not benefiting from recession. Many banks are in trouble, 239 as a matter of fact, and especially those that have heavy real estate investments. So it would be very hard to make a case, I think, to say that banks in general benefit from policy, and I agree with you that Federal Reserve policy has, I think, very consciously encouraged unemployment. But who benefits ? Mr. N a d er. Yes. Now, you can make the argument, as you are, that in the long run this is not good for the economy, and anything that is not good for the economy is not good for the banks. But bankers are notoriously concerned with the shortrun. If you look at bank profits in this supposed time of recession, they are at really remarkable levels, and the best illustration I know of responding to your proposed dis tinction here is the redlining phenomenon. Now, one can say that the more banks that redline for short term objectives, the more insurance companies are going to redline and the more other businesses are going to redline a particular area in the city, and the more it is going to go downhill. As an area of the city goes downhill and deteriorates, and blight advances, there is less business for banks, there is less business for insurance companies. So in the longrun it is a self-defeating policy. But in the shortrun, it is preferred because like any financial institution creaming off the top, getting the more rewarding, immediate business tends to be come the first priority. Now, the Federal Reserve could provide data for the public indicat ing the geographical pattern of bank mortgage loans so that we could more readily see which areas of New York City or which areas of De troit are being in effect redlined. That is, refusal to sell, so that Con gress and consumer groups and local officials can proceed and urge the policy as they see fit on the basis of solid information. Now, one can say that is the best thing for the banks in the longrun, because as the blight is driven back, then there is more prosperity in more bank branches. But again, one has to view with wonderment how the short term interests of these bankers can lead to longer term harm to the economy as well as to the financial institutions, unless they simply want to develop a kind of expendable economy that they do not want to do business with and just work on the cream. Mr. N e a l . I think it is a very interesting question because I think, my own feeling is that I would just, and I would just like a response to this, if you can, is that there is certainly no benefit to the policy for anyone over the long haul that I can see. It seems to me that the policy of Dr. Burns and those that agree with him is more a philo sophic one quite honestly held, but that I think is wrong. And of course, I agree with you that this sort of policy ought to be made by the Con gress instead of the Federal Reserve, but it just seems to me that we might, move or we might make a more telling case for it if we rejectsome sort of conspiracy theory, which I am not indicating that you are advocating by the way. Mr. N a d er. It is a fraternity theory. Look at the paradox of our present economic situation. When in the past in our country’s history have we seen a period of several recession and substantial unemployment at the same time, when we have seen sharp increases in bank profits, apart from the few that failed, obvi 240 ously ? It is troubling when there is a divergence between the state of the economy and the state of bank profits or corporate profits. There is something new working here that economists are not ready to under stand and explain. Mr. N e a l . Where do you see the problem, that problem in the bank ing industry? Do you see it in terms of not adequate competition? Mr. N a d er. That is one, definitely. One is inadequate competition. Another is----Mr. N e a l . Let’s pursue that for a second. How might we encourage jthat, encourage more competition ? Mr. N a d er. Well, there are several ways. One is to lift the restric tions on savings and loans and others to compete with commercial banks more, provide more of an overlap. The second is to break up some of the big banks under the antitrust laws. The third is to severely restrict to the tentacle spread of the bank holding company situation. Mr. N e a l . I am sorry, I didn't hear that. Mr. N a d er. T o discourage the spread of the bank holding company acquisition of leasing companies and finance companies and insurance agencies and the like. And finally, a rather difficult judgment as to whether bank branch ing really does increase competition. In New York State, for example, the argument for branch banking was that there are too many banks upstate that really are local monopolies and it would be good if Citi bank and Chase can go in with their branches to stir up the system. But what is happening is that the little banks are being swallowed up, driven out, by the big city banks and eventually you will have state wide banks in New York, but you will not have any more competition; you will have less competition. The figures in New York are quite stunning. Here is the Empire State in the United States of America— this is not Appalachia—and 48 percent of the bank mortgages are going out of State. This is called the strip mining phenomenon. They are not only going out of the rural areas to the money centers but they are also going out of New York City to Switzerland and international financial transactions and the like. Well, there is a strong argument that bank deposits are other people’s money and the best and healthiest type of banking system is the one that can use other people’s money for improvement in credit, et cetera, in the community, recycle it. Now this is not to say that there should be a 100-percent recycle but it is to say that if a State like New York, which is not conceived of as a capital flight State—usually capital flies to New York, not out— we have almost half of the New York mortgages going out of the State. Mr. N e a l . What percent of that, do you know, that is going out of the country as opposed to out of the State ? Mr. N a d er. I do not have that figure in terms of numbers, but again, I think that is a difficult figure to get with any precision, just like it is a difficult figure to find out if a New York bank has 15 branches in the Bronx, how much money is it taking in from the Bronx and how’ much money is it loaning out to the Bronx ? Those require study. They are not available at the flick of a finger, in other words; you have to engage in a special study to get the data. And then you have the further problem of the deterioration of the 241 cities themselves, capital starved in a city where above the fifth floor of buildings there is plenty of capital, New York City being a classic example of that. There are areas of New York City where 500,000, 600,000 people live and there are no mortgage funds from the private sector. I think the biggest service that this subcommittee and the Congress can perform over time is to find ways by which people around the country can get educated about money, about banks. This has been decried repeatedly by some economists that students go through 16 years of school and they graduate with honors from college but they do not understand the elementary principles of money and banking unless they happen to specialize in it, which very few do. I think when the chairman put out his “ Primer on Money” that was just soaked up by people all over the country, not only because it was a good job, it was because there was nothing else comparable to it. And you can see how, although you are dealing with the most important subject economically in the land, I would assume—you see how many people from the media are here and how much coverage has this bill really gotten over the last few years, and how much coverage do the principles underlying this bill receive. It just reflects the fact that the public has been processed to be almost illiterate about money and banking functions and the jargon helps, you know. The more technical the jargon, the more frightened people are of understanding it. Lawyers perfected that technique years ago. Mr. N e a l . Thank you. Chairman P a t m a n . I just want to take the time that I have to men tion the points involving the country’s interests here and how serious they are. You take the Federal Reserve. It operates in secrecy, and the Federal Reserve on Constitution Avenue is the most secretive place in the country, I guess. The Open Market Committee goes in there about every second Tuesday to decide what monetary policies will be. They are so secretive that only 12 people can be on that committee. But in truth and in fact the 12 are 7 of the Board of Governors. They come in first. And then the 5 representatives of the 12 Federal Reserve banks come in, and then without authority of law 7 presidents of the other 7 Federal Reserve banks, they march in and become a party to this. There are 25 or -SOpeople around the committee, consultants and peo ple like that, all in secret. And when the day is over and the minutes are made, you could not tell from the minutes what they had done to save your life. And then for 5 years the records are held secret and nothing is said about it and only a summary is released in 45 days. Now during that time other people are getting this information direct from the secret group there and they know exactly what is going on and they make lots of money out of it. Mr. N e a l . Mr. Chairman, would you yield on that point ? Chairman P a t m a n . Yes. Mr. N e a l . The other central banks throughout the world, do they operate in secrecy ? Chairman P a t m a n . Not to my knowledge. This subcommittee is the only subcommittee that had a survey made of central banks. We have a report of that survey which shows they do not have secrecy. You take Mexico; you will find lots of houses for plain people for median- 242 income workers and poor people, lots of houses just beyond the Rio Grande that you do not have here. And the reason is that in Mexico the central bank requires the commercial banks to make a certain percentage of their loans to low and moderate people for housing. Lots of central banks do things like that, but our bank does not. In fact, when we were in a real depression on housing, and we are again right now, and when people were having to pay for three houses to get one house, the Federal Reserve, when asked if they would help on the housing financing, said no, it cannot do that. That is for the commercial banks. Of course that meant high interest rates. Now we are not living in a democracy if we uphold a policy like that 6f not allocating credit at all so that poor people have a chance. High interest rates are the worst enemy of poverty. High interest rates create poverty. There are millions of people today in the United States of America in poverty and their families will go to their graves in poverty because of excessive and high exorbitant interest rates. And that is what we are considering here today. Now the reason for that is there are 14,500 commercial banks in the United States and 50 of those banks have a majority of the deposits and assets of all the 14,500. Does that not indicate that there is some sort of a conspiracy or monopoly existing here? Why of course it does. And then there is something worse than that. There are 3,000 banks, trust company banks, that have less supervision over them than even the commercial banks in many respects. Now out of those 3,000 banks there is $4 billion in deposits and 25 of those banks have a majority of those deposits. Now if that is not enough to warn the American people that there is something radically wrong, I do not know what will. But we have some examples even worse than that. The Federal Reserve banks had an idea that they had to ac cumulate Government bonds. I placed in the record yesterday the amount purchased each year from the time this act was signed in 1913 by Woodrow Wilson on December 23. They had $16 million the first year. The next year more. The next year more. And it kept on climbing and climbing and climbing. They acquired these bonds by manufacturing money. The Federal Reserve does that without any re serve, without any excuse. Would you like me to yield, Mr. Blanchard, at this point? Mr. B l a n c h a r d . Yes; Mr. Chairman, I had a couple of questions, and please excuse me for being late but I was in another subcommittee which happens far too often here. Mr. Nader, as I understand it you referred in your opening state ment to the study called “The Scenario for the Federal Reserve System in the Year 2000.” I was curious about that. If you have a copy of it, could we have one inserted into the record and could we also know how that study arose. I would be very curious. Mr. N a d e r . Yes; we will try and obtain a copy for the record. I do not think we can explain how it arose. I think the inquiry has to be directed toward the people in the Cleveland branch. Chairman P a t m a n . The point I am trying to make is that this is a most dangerous thing that America has ever had facing it. You know we cannot survive too long this way if people just say it does not amount to anything, the only thing they know about money is that 243 they do not have enough of it and just laugh it off. But it is getting very serious. It is costing so much. It is destroying our country. In fact, the Federal Reserve has bought 18 percent of our entire national debt. It did not cost the Federal Re serve a penny. They took the Government’s money and bought that. Now then, they did not cancel the debt. The professors say in teach ing about credit instruments, they say that when the obligor and the obligee become the same person or entity, the debt is canceled. But they do not cancel the debt; they keep it there in that portfolio in the New York City bank. And one of these days I suggest that our subcommittee ought to go over there and see this portfolio. I have been over there twice—once in 1932 and once 20 years later. And it is real interesting. We are really facing the brink of disaster if we do not do something about it and do something about it now. They can buy 18 percent of the national debt without cost to themselves and collect the interest on it every year, although the debt has been paid once. Mr. William McChesney Martin testified to that in answer to my question, and others have, too. Now if they can take 18 percent and get $6 billion a year interest on it, why they can acquire the whole national debt of over $500 billion and get $35 billion a year interest on it. They can spend that any way they want to. These things must be gone into and the only way to do it is to do it by an audit. Now, Mr. Nader, we apologize to you. You wanted to leave about this time or before. Mr. N a d er. But you have encouraged me to make one more point, if I could. It is interesting how the public view of the Federal Reserve is shaped. I recall, for example, when I had economics No. 1 in college, we were studying the Federal Reserve with a 100-page paperback that was put out by the Federal Reserve, and thousands and tens of thou sands of students all over the country have learned about the Federal Reserve from the Federal Reserve. And I think it might be worth looking into the educational dissemi nation program by the Federal Reserve to see how extensive it is at the present time. Maybe they have gone into video since I was in college. But. it is interesting to note that many economic professors supinely accept this kind of material without any critical appraisal of it or with out any alternative information. In fact, when I was at the university it was considered that any criticism of the Federal Reserve was a kind of far out, kooky criticism shrouded with international banking conspiracy syndromes and the like. Well, the fact of the matter is that to whatever words you want to use, these gentlemen do get together, both private and public, both na tional and international, they do come to decisions and whether you choose to call it a conspiracy or a fraternity or just a common interest commonly arrived at, it all spells enormous power, secret and unaccountable. Mr. B la n c h a r d . Mr. Chairman, I have one quick question that I would like to ask Mr. Nader. 244 Given the fact that the seven Governors of the Board have 14-year terms, it seems to me that we might not even be debating the issue of an audit if the method and manner and length of terms of the Fed were different. Have you considered changing the way we appoint the Board and their length of term ? Mr. N a d er. Well, I think the length is inordinately long, the term of 14 years, first of all just in terms of personal drying up of imagina tion. I mean the people tell you very often anybody that has been in a job like that for more than 5 or 6 years pretty much dries up in terms of new ideas. Just on that basis alone, quite apart from the turnover of positions and policies, I would favor a shorter term. Mr. B la n c h a r d . Thank you, Mr. Chairman. Chairman P a t m a n . N o w then, Mr. Nader, I repeat I am awfully sorry we kept you so long. Now, I want to reiterate something I have said. The most lucrative franchise in the United States of x\merica is held by the chartered banks. The most lucrative franchise in the United States of America or in any country in the world is held by the chartered banks in this country. Nobody wants to do them an injustice. We want a good bank ing system and we support it, but we do not want one that does an in justice to everybody else and is refusing to do anything to correct the terrible mistakes that are being made now that are creating so much poverty and so many hardships and destroying our country. We are on the brink of a depression right now in housing and many other things, and we have got to do something to come out of it. Thank you very much, Mr. Nader, and we will keep in touch with you, and we will probably ask you to come back later. Mr. N a d er. Thank y ou , Mr. Chairman. Chairman P a t m a n . All right. Now we have the other witnesses here. Mr. Robert Freeman. Come around, Mr. Freeman. From the Univer sity of Alabama. And Robert Bartell of the Liberty Lobby. Are you ready to proceed, sir ? Mr. F r e e m a n . Yes, sir. Chairman P a t m a n . All right, proceed, sir. Now, Mr. Bartell, is he here ? Mr. B a r t e l l . Yes, sir. Chairman P a tm a n . All right, do you want to come around, Mr. Bartell, and we will hear you two gentlemen now. Mr. Freeman is first. You are recognized to present your testimony. STATEMENT OE ROBERT J. FREEMAN, PROFESSOR OF ACCOUNTING, UNIVERSITY OF ALABAMA Mr. F r e e m a n . Thank you, Mr. Chairman. I am Robert J. Freeman, professor of accounting at the University of Alabama. Chairman P a tm a n . We are glad to have you, sir, and you may proceed in your own way. You may have your testimony put in the record and elaborate on it, or you may use excerpts, any way you desire to do so. Or you may ad lib it. Mr. F r e e m a n . Thank you, Mr. Chairman. 245 I apologize that you did not receive my prepared statement before today. You were sent copies of this last Wednesday, and apparently I have another audit to do on why it did not get to you on time. But in view of the time limitations, I think I would, if it is acceptable to you, more or less just highlight this. You have it in front of you. Chairman P a t m a n . It will all be printed in whole, and it will be made available to people all over the Nation, especially to the libraries. Mr. F r e e m a n . Well, as I say here in the statement, and perhaps you would like to follow through as I highlight certain points, I am not appearing as a proponent or opponent, either one per se, of this legislation, but I have been requested to meet with you in an advisory capacity to discuss concisely and in nontechnical terms the nature and scope of contemporary public sector auditing, its potential applications and benefits, and its limitations. To this end I have pre pared this written statement which is rather concise, and I hope it would serve you now and in the future as a frame of reference in these deliberations. In studying prior testimony over the years, it seems that one of the biggest points of noncommunication has been the fact that the term “auditing” has been used in so many different ways. On the one hand, some people using the term “ auditing” visualize an accountant exam ining financial statements and that is the extent of it. Others view auditing as something that goes much beyond that, involving a much broader investigative process, perhaps conducted by an interdisciplinary team, which could go into almost any aspect of finances, legal compliance, efficiency, economy, and effectiveness. And this is indeed in keeping with the contemporary definition and auditing in the public sector. But the key point here is, I think, that the effect of such different uses of the same terms, even when people think they are using the same term, has, in the past at least, led to communications breakdowns between those testifying, between them and the congressional committee and among members of the commit tee itself. So I would hope that you would give careful attention to problems of terminology which may seem to be unimportant. It seems impera tive that members of this subcommittee be aware of this potential communication problem, that you make appropriate inquiry of wit nesses before you to make sure of the sense in which they are using the term “audit” or “auditing,” and that you yourselves share a common frame of reference among yourselves. As I begin, for example, on page 2, if you are following with me, I inserted a contemporary definition of auditing. I think even a cursory review of it would show that auditing is accepted as a much broader function than just accountants auditing financial statements. This contemporary definition recognizes and emphasizes that the audit function must be user oriented. The type of audit that is appro priate in the private sector for profit-seeking enterprises may not be the same type of audit, and is not the type of audit appropriate to the public sector. Further, audits concern any assertions, either stated or implied, about economic actions or events. The field is wide open, more or less, and the criteria that an auditor in the public sector uses go far beyond such things as generally accepted accounting principles, to in clude other reasonable or agreed upon standards of evaluation. 246 Figure 1 on page 3 is a very simple illustration. The key point here is where the audit fits in. Whenever you have a higher authority, such as Congress, which has delegated its authority to a subordinate, such as the Federal Reserve System or other Federal agencies, it frequently comes to a point where that higher authority cannot personally go down and audit its subordinate, the person to whom it has delegated its authority. This is where the auditor comes in, because auditing may be simply defined as a process designed to enhance management con trol and accountability wherever a higher authority such as Congress has delegated authority to a subordinate and it wishes to hold that subordinate accountable. And the higher authority, therefore, whenever it itself cannot go down, will engage an auditor—which should be independent of the subordinate, otherwise it is not really a credible audit, as you shall see—to be assured that the assertions or actions of the subordinate are indeed credible and appropriate, to gain additional information that they may wish, independently of the people at the subordinate agency, and, perhaps as a byproduct, obtain the independent auditor’s observa tions and recommendations as an independent observer. So the auditor in the public sector in modern terms serves, in effect, as an extension of the higher authority or an agent of the higher au thority, but—very importantly serves in a staff or advisory capacity as opposed to a line capacity. The next question becomes what should the auditor audit ? What is the appropriate scope of an audit ? This really boils down to the fact that the appropriate scope depends upon the level of accountability to which the higher authority seeks to hold the subordinate. And the proper scope of the audit then depends on one’s notion of account ability. A basic tenet of management in the public sector and private sector is that authority can be delegated dowmvard but responsibility cannot be delegated. This is pointed out in figure 2 on page 5. The higher authority may delegate to a subordinate, and that subordinate may delegate even to another subordinate. Theoretically, the responsibility upward would equal the authority delegated downward. In fact, wherever we find this in life, we find that accountability is only a part of the total responsibility because as human beings it is very difficult to hold one accountable for the full extent of his responsibility. In figure 3 on page 6 1 have blown up one of those boxes, for example, a subordinate agency or any Federal agency. The entire square there might indicate the total aspects of one’s responsibility. Notice if only financial resource inflows, outflows, and balances are considered within the framework of accountability, only a very small part of the total responsibility is subject to audit. Yet, this can expand, and has ex panded in the public sector, beyond just dollars-in and dollars-out ex penditures to compliance with the laws and regulations, and, more re cently, to economy and efficiency of management of financial, human and other resources; and, perhaps most important in the public sector, to achievement of objectives or progress toward objectives for which the authority has been delegated. Now the potential scope of an audit in the public sector in modern terms—this is all over the world, Mr. Chairman, not just the United 247 States; the Comptroller General’s standards are consistent with those that had been adopted worldwide for public sector auditing—leads us to a potential scope of audit that might be visualized as in figure 4 on page 6. I will not take the time to go over this in detail, but obviously it involves those same elements of the audit that Comptroller General Staats has previously inserted into the record. They include not only financial accountabilities we think of in the traditional sense—dollars in, dollars out, and did you comply with the law—but more im portantly, the efficiency and economy and effectiveness of the auditee organization, the subordinate organization. I might point out to you figure 5, in which I have tried to clarify audit terminology a bit. The Comptroller General referred to—and you referred to today—the type I, type II, and type III audits as a gradation or a cumulative process. I have attempted to illustrate how this ties in with accountability in figure 5. I might point out, though, that in fact—as contrasted with viewing this as an additive process always—any one element of this process might be attacked independently, as noted in figure 6. And I might have you turn here to page 11. This is extremely important because I think what we think of as the fiscal audit is what many view as the only legitimate audit. In fact, what I have called here type A, type B, and type C, to distinguish them, illustrates that an auditor, given proper authority, might take any one thrust. He need not try to audit the whole agency—or all aspects of effectiveness, economy, and efficiency, but in fact would take a commonsense approach trying to get to the major problems that have not been covered by other persons. Not very important, also, I think, is that when we think of a finan cial or fiscal audit, this is the type of audit where an auditor could audit an entire organization every year, or see that someone else did, and could render a rather concrete opinion in the sense that he knew he audited the entire universe and could say in his opinion that the financial statements, for example, were properly reflected. But when we get into type B or C audits—the efficiency, and economy, and ef fectiveness audit, or, as the Comptroller General talked about the type II and III audits—you must realize that only certain programs are selected for audit in each period according to congressional wishes or according to what appear to be the major problems, that the auditing queries focus both on forming judgments and conclusions on past per formance and on assisting the Congress or the audit report recipient and the agency being audited in doing a better job in the future. Again, the difference is not so much trying to get $12.15 that was misspent back, but trying to do a better job in the future. These bene fits are very hard to quantify, but in the public sector this is where the most benefits obviously are. I would point out again that the auditor is not expected to measure the unmeasurable or to arrive at a concrete opinion, like an agency was 61 percent efficient or 74 percent effective. He is expected to meas ure as best he can to assess the economy and efficiency and effectiveness of the programs or activities under audit and, independently to the higher authority, give his own findings, judgments, and conclusions. So this type of audit must be considered less routine, not necessarily 248 done every year. And it frequently must be done by an interdisciplin ary team. This is what I call the variable scope audit, if you please. Looking at this variable scope audit concept in this fashion both highlights the flexibility of this approach to auditing—to go where the action is, so to speak, and not waste a lot of time with trivia—and points up the need to clearly define the type of audit authorized or the type and scope of a particular audit. I keep looking at my watch, Mr. Chairman, because I do not want to take too much time. [Testimony resumes on p. 274.] [The prepared statement of Mr. Freeman follows:] 249 Statement of R cbett: J. Freem an Professor of Accounting, The University of Alabama Before the t>ubc oanr. i t cee on j)ca es t i c Monetar.y PoJ icy Corij'i. I:i.e.'* on Banking. Cui tc-.ivjy and Housing II. S. iJcur. -e o f R e p resentatives April 2 9 , 197 5 250 Mr. Chairman and Members of the Committee: I appreciate the invitation to meet with you today, and hope that I can assist you in your deliberations with respect to the proposed legislation you are considering. posed legislation. I am not appearing as a proponent or opponent of that pro Kather, I have been requested to meet with you in an advisory capacity to discuss concisely and in nontechnical terms the nature and scope of contemporary public sector auditing, its potential applications and benefits, and its limitations. To this end I have prepared a brief written statement for your considera tion and inclusion in the record of these hearings. Rather than read this statement, I would prefer to discuss it informally and respond to questions either during the course of my remarks or at their conclusion, as you may prefer. "Auditing j Auditing11 The terms "auditing” and "audit" are frequently used, but seldom defined. They are particularly troublesome when used in testimony before a committee such as this because those using these terms may appear to be talking about; the same thing, and may believe that they are, when in fact they are not. Analysis of recent congressional testimony indicates that some persons using t.he terms “auditing" and "audit" visualized an accountant examining financial statements for conformity with accepted or prescribed accounting and reporting standards, and perhaps to assess the legality of financial transactions occur ring during the period under audit. This image is consistent with traditional dictionary definitions of these terms and much of auditing practice, particu larly in the private sector. Others using the terms "auditing" and "audit1' visualized a xauch broader investigative process conducted by an interdisci plinary team that might focus on virtually any aspect of an entity’s finances, 251 le g a l compliance, managerial economy or e ff i c i e n c y , and program e ffe ctiv e n e ss. This image i s in keeping with contemporary auditing approaches and d e fin it io n s , p a r tic u la rly in the p ublic s e c to r . The obvious e ff e c t o f such d iffe r in g usage o f the satce terras is a communications breakdown between those t e s tify in g , between them and the congres s io n a l committee, and among members o f the committee. Meaningful debate and d e lib e ra tio n on the issues becomes im possible; and d iscu ssion s tend to become confused, em otionally-based, and unproductive. Thus, i t is imperative that th is committee be aware o f th is p o te n tia l communications problem; make appro p ria te inquiry o f those t e s t ify in g , or study th e ir testim ony, to assure that you are aware o f the sense in which they are using these terms; and share a common frame o f referen ce among yourselves in order that you might properly discu ss the issu es and proposed le g is la t io n under consideration and reach soundly based conclusion s regarding them. “ Auditing" Defined A contemporary d e fin it io n o f auditing was set fo rth recen tly by the Com m ittee on Basic Auditing Concepts o f the American Accounting A ssociation : Auditing i s a system atic process o f o b je c t iv e ly obtaining and evaluating evidence regarding assertion s (.stated or im plied) about economic action s and events to ascerta in the degree o f correspondence between those assertion s and establish ed c r it e r ia and communicating the r e su lts to interested u s e r s .1 In se ttin g fo r th th is d e fin it io n , that committee noted that: This d e fin it io n i s .intentionally qu ite broad. While i t conveys the ba sic idea that an audit i s an in v e stig a tiv e p rocess, i t i s s u ffic ie n t ly comprehensive to encompass the many d iffe r e n t purposes fo r vhich an audit might be conducted and the variety o f su bject matter that might be focused on in a s p e c if i c audit engagement. 2 50-365 0 - 75 - 17 252 T ra d ition a lly , auditing has been associated prim arily with published fin a n c ia l statements. However, even with audits that arc concern.:.! primarily with financial reportin g, evidence must be gathered which is related to the inform ation system, the accounting process, and the underlying economic events and actions themselves. Moreover, the auditing process has been and w ill con tinue to be applied d ir e c t ly to inform ation systems and to the performance o f economic a c t iv it y rather than to previously e x istin g reports on the s a m e . 3 This contemporary d e fin it io n o f auditing recognizes and emphasizes that (1) the audit fu nction should be user orien ted — there are, and should be, d i f feren t types o f audits fo r d iffe r e n t purposes, (2) audits may concern any a ss e rtio n s, stated or im plied, about economic action s or events— "economic" r e fe rrin g to any situ a tio n in which a ch oice must be made involving scarce resou rces, and (3) the c r it e r ia used in the examination and evaluation process are not lim ited to fin a n c ia l accounting and reporting standards or to laws and reg u la tion s, but may appropriately include other s p e c ifie d or implied tech n ical or "reasonable man'5 standards o f evaluation. Charact e r i s t i c s o f an Audit A ll a u dits, regardless o f th e ir purpose or scope, share certa in common c h a r a c te ris tic s (Figure 1 ). Simply sta ted , auditing is an in v estig a tiv e-ev a lu a tiv e CHARACTERISTICS OF AN AUDIT Figure 1 AUDIT REPORT RECIPIENT (higher authority) AUDITOR (independent c l a iid ite e ) SOURCE: Peter L. McMickLe and Gone Elrod, AudUir»p S o r ? Future Potential (Montgomery, I i ACCOUNTABILITY f* Kducat ion:_Ci:rrcut "The ~AIDE Sta f f 1974), 253 process designed to enhance management; control and accountability where (1) a higher au th ority, such as Congress, has delegated authority to a sub ordin ate, such as a Federal agency, which i t wishes to hold accountable, and (2) the higher authority d e sires fo r an auditor independent of the subordinate to examine certa in assertion s or actions o f the subordinate in order to (a) be assured that the assertion s or action s are cre d ib le and appropriate, r e sp e ctiv e ly , or be advised otherw ise, (b) gain ad d ition a l inform ation relevant to auditee a cco u n ta b ility , and/or (c ) perhaps as a by-product o f the examination, obtain the independent a u d ito r 's observations and recommendations, for the b en efit of both the auditee and the higher au th ority, with respect to enhancing the mana g e r ia l economy, e ff ic ie n c y , or e ffe ctiv e n e ss o f the auditee. Thus the auditor serves as an agent or extension of the higher authority— as i t s a d d ition a l eyes and ears, so to speak— and, in a s t a ff (advisory) cap acity , conducts examinations o f the type it. is instructed and/or authorized to perform, prim arily fo r the b e n e fit o f the higher au th ority. The type and scope o f a u d it(s) the auditor is required or permitted to conduct should be con sisten t x^ith the extent to which the higher au th ority wishes to hold the subordinate auditee accountable, (answerable or form ally resp onsible) fo r i t s a ction s. The key to determining the scope and type of audit that is appropriate th erefore li e s in an alysis c f the term "a c c o u n ta b ility ." Account,~>b1.1it y and Audit Scope A ba sic tenent of management is that whereas r e s p o n s ib ility may be d e le gated by a higher authority to a subordinate, the higher authority continues to be resp onsible fo r the action s o f the subordinate. Authority can be d ele gated, in other words, but r e s p o n s ib ility can not be delegated. However, the subordinate- is resp onsible t.o the higher authority fo r proper ex ercise o f tha 254 au th ority delegated to i t . That portion o f the su bordin ate's resp o n sib ility fo r which he is held answerable or form ally accountable is termed "a c co u n ta b ility ." The re la tio n sh ip o f a u th ority, r e s p o n s ib ilit y , and accou n ta b ility are in d i cated grap h ically in Figure 2, F ig u r e 2 AUTHORITY, RESPONSIBILITY, AND ACCOUNTABILITY HIGHER AUTHORITY ( e . g . , Congress) i SUBOFDINATE ( e . g . , Federal Agency) j H I 5 g ACCOUNTABILITY I a ! 'M ______l___ A SUB-SUBORDINATE ( e . g . , Federal Subagency) Legend: ----- Authority delegated downward equals r e s p o n s ib ility upward. A ccou ntability i s that pot t.a an ot the r e s p o n s ib ilit y fo r wbiih the subordinate i s held fc-rmaily answerable, or accountable. 255 Those portions of subcrdiante r e s p o n s ib ility for which the subordinate might be held accountable are illu s tr a te d in Figure 3. Figure 3 RELATIONSHIP OF ACCOUNTABILITY AND RESPONSIBILITY ACCOUNTABILITY ’ OF ' SUBORDINATE FESPONSIBII.TTY (IES) OF SUBORDINATE r (1) Financial resource inflows, outflow?, balances« Fiscal (2) Compliance with lavs, regulations, etc. Compliance Economy & Efficiency (A) Achievement of objectives, or progress toward objectives, for which authority was delegated El fee tivenes s{ . . Unaccountable . o Financial (3) Economy and efficiency of financial, human, and other resource management. > . AUDIT ELEMENTS © Economy & Ef ficienc O Program Results . . . « These varying degrees to which a subordinate may be held accountable underlie the evolution of the concept of accountability and audit in the public sector. Before governments v/ere involved In complex social and economic programs when government was relatively small and was assigned only the most fundamental roles of protection of life and property, distributing the mail, etc.— the activities of the government were not subject to complcix legal and regulatory requirements as they are today, the resources devoted to government programs were relatively small absolutely and in comparison to the tot«.l resources of the economy, and subordinate performance (e.g., economy, efficiency, effectiveness) was evaluated directly by the higher authority through observing activities of the subordinate or through hearings on other feedback mechanisms. Governmental 256 n^mgeri’ were held formally answerable only for their financial resource iniUvs, outflows, and balances— and auditing wap accordingly limited to scrutinizing that accountability. As government programs and activities became more complex and far-reaching, so did the laws and regulations enacted with respect to them. Higher authorities often were unable to personally monitor subordinate legal compliance, and instructed auditors to enlarge the scope of their examinations to assure the higher authorities that laws and regulations were being adhered to or inform them to the contrary. Thus, subordinates became accountable for both financial and compliance aspects of their total responsibility, and the scope of auditing was extended to include both of these aspects of fiscal accountability. In recent years, government programs have become even more complex and diverse, affecting virtually every aspect of our economy and the lives of its citizens. At the same time, higher authorities in the public sector have been able to directly observe less and less of the performance of their subordinates. Hence, there has been a tendency to include more and more subordinate responsi bilities within the definition of accountability and, accordingly, the scope of auditing has expanded to encompass these enlarged accountabilities. Potential Scope of Audit The expanded concept of accountability in the public sector caused gov ernmental auditors throughout the world to reassess their audit approaches and standards. As a result, the U. S. Comptroller General set forth Standards for Audit, of Governmental Ch-ganizationr>, Programs, Activities & Functions, in which the elements of this broad scope auditing are described as: 1. Financial and compliance— determines (a) whether financial operations are properly conducted, (b) whether the financial reports of an audited entity ate presented fairly, and (c) whether the entity has complied with applicable laws and regulations. 257 2- Er.onc-nv and eff.iciency-»-deterininos whether the entity is managing ct utilising its lescurces (personnel, property, space, and so f01 r.h) in an economical and efficient man ner and the causes of any inefficiencies or uneconomical practices, including inadequacies in management, informa tion systems, administrative procedures, or organizational structure. 3* Program results— determines whether the desired results or benefits are being achieved, whether the objectives established by the. legislature or other authorizing body are being met, and whether the agency has considered alternatives which might yield desired results at a lower cost.^ Comprehensive Scope Audit The first general standard of governmental auditing set forth by the Comp troller General, in keeping with standards established by the International Congress of Supreme Audit Organizations, states that: The full scope of an audit of a governmental program, function, activity, or organization should encompass: a. An examination of financial transactions, accounts, and reports, including an evaluation of compliance with applicable laws and regulations. b. A review of efficiency and economy in the use of resources. c. A review to determine whether desired results are effectively achieved.-* The potential scope of a governmental audit is depicted graphically in Figure 4, Variable Scope Audit There is no presumption that every audit need be, or even should be, of such a comprehensive scope. states explicitly that: The last sentence of the first general standard "In determining the scope for a particular audit, responsible officials should give consideration to the needs of the potential users of the results of that a u d i t M o r e o v e r , in the introduction to the 258 T H E POTENTIAL SCOPE OF A GOVERNMENTAL AUDIT C O V P R C M EN S IV E A J D IT S 1 r ................ ".... 1 1 FISCAL (Finonriol ervd Compl;iijtKe) Audit? FIN AN C IAL 1 Yroditloncl Firxinclol Sfctcmonti 1 PEPFOf.MANCE OR OPERATIONAL AUOITS 1 f C O M F 1IANCE I 1 MANAGERIAL (EC O N O M Y AN D EFFICIENCY) ( PROGRAM RESULTS (EFFECTIVENESS) rm ......... ............. \ I Legollty Comptioncc with Rcgulofieo, fol!=>«*, fVocedvc**, «tc. Economic Acquisition orvl Efficient Um of Mc?cf lal cwwf Humon K* io^rc*i M!oIon AeeomplMvncnf omf/tx Pregrw toward Ob{*ctiv»« External Coretrelnti Internal Corat rclnti Per»onne!, FoetttHw, ond MoteriaU • Acquisition • Control • Utilization ftoqamn ©« ActlvitlM I _ _ J Monoflement R? pieienfctiont • mey b« moc‘« explicitly • may b« linplied OvimMtion of Audit EHortand Kaport j----------------------- PAST---------- -------------- 1 1--------------------- ----------------------- PRESENT A N D fUTU*E------ Ptrfomvonc* Standard}: • may exitf • rocy ! • Inferred • may b« unovnilabl* L ........................... JUDGMENTS, C O N C LU SIO N S, AN D RECOMMENDATIONS Source: Edward S. Lynn and Robert J. Freeman, Fund Accounting: Theory and Practice (Englewood Cliffs, New Jersey: Prentice-Kall, Inc., 1974), p. 773. J 259 Standards it Js stated that: ...a concurrent, audit of all three parts would probably be the roost economical manner cf audit, but this may not be practical. Furthermore, it may not be practical or necessary to perform all three elements of the audit in particular circumstances, ...the audit standards have been structured so that each of the three elements of audit can be performed separately if this is deemed desirable.? Thus, the elements of an audit may be visualized additively (Figure 5) or separately, though perhaps overlapping somewhat (Figure 6). In prior testi mony before the House Committee on Banking and Currency, the Comptroller General spoke of Type I, II, and III Audits. These may be visualized in terms of additive gradations of comprehensiveness as shewn in Figure 5. Figure 5 ADDITIVE GRADATIONS OF AUDITING Terminology used by the Cocptroller Genera1* Audit Elements Program Results (Effectiveness) Economy & Efficiency Fiscal (Financial & Compliance) Type II Type I *"To Provide for an Audit of the Federal Reserve System by the General Accounting Office," Hearings before the Committee on Banking and Currency, House of Representatives, 93rc* Congress, 1st Sessipn, on H R. 10265.. 260 Alternatively, these elements may be viewed as separate, though perhaps overlapping, and a given audit may focus exclusively or primarily on one ele ment. These may be referred to as types A, B, and C for ease of discussion. (Figure 6,) As indicated in Figure 6, a particular audit may focus on the financial and compliance accountabilities of an organization or program, i.e., be a Type A audit. This type audit corresponds closely to the traditional financial audit in the private sector in that (1) it usually includes the fiscal activi ties of the entire organization or program, (2) its purpose is to enable the auditor to arrive at a relatively concrete opinion with respect to conformity Figure 6 ALTERNATIVE SCOPES OF GOVERNMENTAL AUDITS COMPREHENSIVE SCOPE AUDIT _________ i __________ ALTERNATIVE AUDIT SCOPES 261 oi auditee ixr.anci.ai ^cateutuir..-» with tCvwur.t *ng and t<porting standards ^nd coir.pl: anr.e o f the auditee with pertinent laws* and reg u la tion s, and, (3) i t is i:-v.sily performed c-ti an ar.nu j 1 ot b i ar.nu ?.1 r e p e titiv e c y c le . While th;**e con ducting a Type A audit: would not be charged with the Type B or C audit elements, I bsiin v e EC£t au th orities would agree that they should at lea st be se n sitiv e to ani report (1) instances of obvious or blatant in e ffic ie n c y , ineeonomy, or in e ffe c tiv e n e s s that came, to th e ir atten tion during the course of the Type A au dit, and (2) cond ition s observed during the course o f the audit that appear tc be conducive to future ineconomy, in e ffic ie n c y , or in e ffe c tiv e n e s s. Where a Type B or Type C audit is undertaken (1) certain programs, activitice, or fu nction s usually must be selected fo r au dit, as i t is un likely that .*!i such aspects o f a size a b le organization would be audited simultaneously, and (2) audit inquiry w i l l be focused both cm forming judgments ard ccnclusionr on performance and on making recommendations d irected toward improving future economy, e ff i c i e n c y , and e ffe ctiv e n e ss o f the programs, a c t i v i t ie s , or functions audited. The auditor i s not expected to measure the unmeasurable or to a rrive at concrete ar.d }'4% e ffe c t iv e * opinions such as that the auditee is 61% e ff ic i e n t Rather, the auditor i s expected to assess the economy, e ffic ie n c y * and/or e ffe ctiv e n e ss of the programs, a c t i v i t i e s , cr functions eica»rined according to the best av aila ble or derivable c r it e r ia and advise the audit :.cpcr.t re cip ie n t ard auditee o f his fin d in gs, judgments, con clu sion s, and reccm end* ..lows in der to enhance the management co n tro l o f both and the ac*ccnlability of tbe auditee (subordinate) to the audit report recip ien t (h**gh<rr uvtherity) . As might be expected, Type B and C audits often must be conducted by an i.n tcid iscip lin a ry sudit. learn, perhaps assisted by outside consultants with s p e cia l expertise on matters inder au dit. Thev r y p ica ilv ire ‘ ut 2<‘f;s routine than Type A au dits, e . g . , from planning, cenduot, 262 evaluation, reporting, and related standpoints; and they normally are not done on an annual or biannual cycle basis» The selection of the attributes to be audited, the timing of the audit, and similar considerations may be specified by the audit report recipient or left to the discretion of the auditor. This "variable scope" view of audit (Figure 6) is recognized by the Comptroller General in the Standards, in Congressional testimony, and in practice. Further, this "variable scope" concept and approach highlights both (1) the flexibility of contemporary auditing as a viable process to enhance management control and accountability, and (2) the need to clearly define the type and scope of audit authorized and/or of a particular audit. The Audit Process Having reviewed the definition, characteristics, and potential scope elements of auditing, it may be observed that auditing is a process (Figure 7) in which: (1) the higher authority, the audit report recipient, authorizes the auditor to examine certain account abilities of a subordinate, the auditee; (2) the auditor performs an examination of the type and scope authorized on behalf of the higher authority; (3) based on this examination, the auditor evaluates the assertions and/or performance of the auditee falling within the scope of the particular audit; (4) the auditor communicates his opinions, findings, conclusions, judgments, and/or recommendations, as appropriate, to the audit report: recipient (and usually to the auditee); and, (5) the audit report recipient and auditee consider the auditor's report in order to reconcile dif ferences of opinion, plan to implement, changes suggested by the auditor or modifications thereof, study questions or problems raised by the auditor, and the like. 263 Figure 7 THE AUDIT PROCESS Audit Report Recipient wf I (Higher Authority) '-jjmwasLfc b E ?i; Reconciliation O gpMOBQsa o i it Authorization ,« V © Accountability © u iminati Examination Auditee (Subordinate) < r i3 I------- > Source: Adapted from Perer L. McMicltie and Gene Elrod, Auditing Public Eudcation: Current. Status and Future Potential (Montgomery, Alabama: The AIDE Staff, 1974), p. 80. Note that this final stage and the auditee. (5) is conducted between the audit report recipient The auditor has no authority to set cr change auditee policy or procedures, but serves only in an investigative-evaluative-advisory capacity. An overview of the stages of an audit from the auditor’s perspective is reflected iu Figure 8. These stages may be summarized as follows: (1) The auditor is instructed to perform an audit or decides to do so under authority previously granted; (2) The ctganlzaticn(s), pregram(s), activity(ies), or function(s) to be audited ore researched (as to nature; pertinent laws, regulations, legislative intent; etc.), AUDIT STAGES Figure 8 (5) Conduct Audit Financial & Compliance (1) •Authorization {& ifecisica To j Audit ( 2) 'Background ! Research & |Preliminary — Decisions on Audlc Scope, Staffing, etc. (4) ! Preli:ninary\ jS«rv<y - Tlcfi: j Audit Scope Approach & Staffing Plan Pxogrsa Results Source: Adapted fros John R. Killer and Harry Ostrov, "Road to Professionalizing a State Audit Organization,” The F e d c n l Accountant, March, 1974, p. 14. 265 preliminary decisions are made as to the scope and type of audit to be performed, and appiopiiate staff members are assigned the task; (3) Audi tee and auditor personnel confer with respect to the audit; and some aspects of the audit plan may be deleted or modified, and other aspects added, as the auditor learns more about the auditee and/cr other areas of concern are brought to the auditor's atten tion; (4) Preliminary on-site study arid inquiry is undertaken by the auditor based on the audit plan as modified to date; further modification of the audit plan may occur as the auditor determines the extent to which auditee management controls (including internal opera tional controls and audit) may be relied upon in his examination and continues to learn more about the entity's programs, activities, and functions during the course of initial observation and survey; (5) The appropriate elements of the audit are conducted; the audit plan may be modified still further if warwanted by findings during the course of the examina tion; (6) The auditor prepares a preliminary draft report; (7) The preliminary report draft is discussed with auditee personnel; auditee ccmraents are solicited for inclusion in the final report and/or to resolve any misunder standings, areas of possible misinterpretations, or ambiguities reflected in the draft report; and (8) The final audit report is prepared and submitted to the audit: report recipient, the auditee, and other parties at interest. Note again that the auditor participates in the reconciliation process between the auditee (subordinate) and the audit report recipient (higher authority) only if requested to do so— and then only in an advisory capacity. Note also that the audit report may be considered either as being confidential, if that is deemed appropriate by the audit report recipient and/or tha auditor, or as being a matter of public record. 266 Internal v. External Audits The discussion to this point is applicable to public sector auditing generally— whether performed by internal auditors, external government auditors, or independent public auditors engaged by either the higher authority or the subordinate. Each type auditor might perform the types of audits discussed, though for different purposes; and both internal and external auditing are prerequisites to sound management control and account ability of larger organizations. The appropriate role of each is depicted in Figure 9. Figure 9 ROLES OF INTERNAL AUDITOR, EXTERNAL GOVERNMENT AUDITOR, AND INDEPENDENT PUBLIC AUDITORS Reports External Government Auditor (e.g., GAO) -----i-ff.------ Reports Public Auditor (Engaged by higher authority) Accountability Examines Agency Internal Auditor Higher Reports Authority (e.g., Congress) Subordinate (e.g., Federal Agency) 4 Accountabilxty --------1----- Sub-Subordinate (e.g., Federal Subagency) fiyamfnps Reports Public Auditor (Engaged by Subordinate) 267 The essential points of Figure 9 are that (1) the external government auditor or independent public auditor engaged by and on behalf of the higher authority is independent of the subordinate and sub-subordinate agencies and acts to enhance the higher authority’s assurance that sub ordinate agency assertioxis and management controls are adequate or to inform the higher authority otherwise; (2) the subordinate agency internal auditor or an independent public auditor engaged by or on behalf of the subordinate agency serves to give similar assurances or convey information to the contrary to that agency’s management. These latter types of auditors are part of the subordinate’s management control system and, while these audit activities are evaluated by the external government auditor or inde pendent public auditor engaged by the higher authority in the process of evaluating the internal management controls of the subordinate agency, the higher authority can not look to them to give it assurances or other infor mation independently of the subordinate agency management which they serve. Such assurances or added information can reliably be obtained by the higher authority only from external governmental auditors or independent public auditors engaged by it. Limitations of Auditing Many benefits of auditing have been noted in the course of this briefing on the nature of and approaches to contemporary public sector auditing. It is equally important that you be aware of its limitations. Auditing is a powerful tool of management control and accountability. Indeed, an appropriate form of independent auditing or monitoring seems to be essential wherever authority has been delegated and the delegator wishes to hold the delegee accountable for the proper exercise of that authority; auditing serves also to deter improper management actions and strengthen 50-365 0 - 75 - 18 268 both inter- and intra-entity management control Auditing is, in short, a vital component of our system of public rector checks and balances. But, auditing is not a panacea It is -*>£ten P3id that this world runs on people— it always has, and it ?lvay.-. will. Auditing is, like other human endeavors, a "people process"— and people are neither omnipotent nor infal lible. Further, auditors work under time and budget constraints that preclude their auditing annually every transaction or event of every organization, pro gram, function, or activity that might be of concern to the audit report recipient. Certain inherent limitations of auditing should be recognized by all concerned: 1. While tlie audit process can provide information through which tc enhar.ce msnagc-r.ect control and accountability, it should not be expected to perfect either. Since only selected transactions snd events pertaining to selected organisations, programs, activities or functions typically are audited— and these are audited by mortals— some impro prieties or ineptnesses may not be detected. Furthermore, since the auditor’s iole is to provide information, not to act upon it, whether management control and accountability are improved in fact depends on the extent to which the audit report recipient and auditee use the information provided. 2. Although standards against which financial reports and legal compliance are evaluated are normally available and agreed upon— and either stated standards or implied "reasonable man" criteria for evaluating managerial economy and efficiency and/or program effectiveness are available in many situations— evaluation standards are difficult to determine m scire cases. There may be legi timate differences of opinion among apparently equally competent persons as to the best program or activity through which to attain an organization's goals or the best way to carry out a given program or activity. In such cases the. auditor serves primarily as an investigatorreporter, though his judgments and conclusions may be offered along with these of the auditee, and thus serves primarily tc bring the issue to light. 269 Limitations such as these are recognized and addressed in STJ.r.da:dfor Audit of Governmental Organizations, Programs, Activities & Functions. The second, third, and fourth General Standards address auditor competence, independence, and exercise of due professional care, respectively; the Examination and Evaluation Standards cover audit planning, supervision and evidence gathering>and evaluation; and the Reporting Standards go to great length to assure auditor objectivity, that issues and questions needing further study are identified and explained, and that auditee views are pre sented where appropriate. The professional auditor knows his limitations and those cf the audit process. Further, he will attempt to communicate them to audit report recipients and others— for cverly high expectations of auditing resulting from its being "oversold" can lead only to disappointment in the auditor and disillusionment with the audit process. Misconceptions of Auditing Numerous misconceptions of auditing are apparent in Congressional testimony and debate on the subject in recent years. Several of these have been discussed or alluded to already— e.g., that all audits are com prehensive in scope, that the only legitimate form of auditing is that concerned with financial stewardship and legal compliance, and that the auditor should be expected to determine that a given organization or pro gram is, say, 61% efficient and 74% effective. Other misconceptions are at least equally detrimental to the prospects of rational deliberation and legislation with respect to auditing. One such misconception is that subordinate agency internal audits, or audits by public accountants engaged on behalf of the subordinate agency, are suf ficient— that audits Vr external governmental auditors or public auditors 270 engaged by the higher authority ?.re ur.rec csrnnly duplicative and are not required. Hopefully this erroneous notion— which is analogous to suggesting that the plaintiff should rely or. the defense.attorney for legal advise— was dispelled in the preceding "Internal v* External Audits" section. Both types of auditing serve useful roles, but. the former is not a substitute for the latter. Only the latter may be considered sufficient from the higher authority’s standpointAnother popular misconception is that a Type III or Type C audit weakens the independence of an agency by bringing undue political pressures to bear upon it, presumably by "second-guessing" auditee decisions and/or by setting auditee policy. I have given this notion considerable thought in the course of preparing this statement, as it appears to be widely held among some dis tinguished public servants whom I hold in high esteem. Perhaps I am over looking something in their logic or am unaware of something in their experiences, but I find no basis for assertions or convictions in this vein. As to the specifics of this viewpoint: 1. If independence is important to the proper functioning of an agency, then the auditor will surely place high priority on examining and evaluating its independence, both in fact and in appearance, from all persons or groups that might seek t.o exert undue influence upou it. This should serve to strengthen its independence, not weaken it» 2. Whenever a function r.s vested an the public sector, the presumption is t.har the indent is- sc assure— through the political process— that the r e . v v l ts sought are achieved or reasonable prorif-vt i'; *>c:ng made toward them. Fur ther, since the higher authority (e.g , Congress) is responsible fcr--»?.i :r.3y be I.eld accountable tor— the performance of. the -uhotdini:e agency ’ ■o which its authority bris teen dtuegac< d, exercising oversight is a matter of both duty and prtdence. Since vhv. purpose c i deicrgar ion is .to achieve results, the higbc; aot no: iny should everrise oversight primarily at. the b r c i u i p c X i y -ir.d results 1*' eJ .;<rd not interfere in the d.-ly-rc-day Pianagement of the suborci iante agency. 271 Thus, the most appropriate and significant level of accountability and audit is that of program results. Indeed, if oversight priorities must be established in terms or accountability and audit (see Figures 3 and 6), logic uxctar.es that they be set in a 3, 1, 2 order. 3. The auditor's principal concerns in Type C audits include surh things as whether auditee policies and programs are consistent with the objectives of the agency and within the authority delegated to it, whether auditee management has established and is pursuing reasonable approaches to the accomplishment of its objectives, and. whether its purposes are being achieved or progress is being made toward them. His role is not ro "second guess" specific decisions in the light of hindsight, but to assess the auditee*s overall effectiveness and, if appropriate, offer reconar.endat.ions for enhancing its effectiveness. 4. As noted earlier, the auditor seivec only in an inves tigative-evaluative-advisory rcle and can not establish or cbangc auditee policy. Those vho suggest that cer tain agencies must be "safe-guarded" from Type III or Type C audits on the basis that the auditor might dictate policy do not appear to appreciate this ultimate safe guard that is inherent in the audit process. Summary and Conclusion Public sector auditing has undergone far-reaching changes in recent years. While these changes have made auditing a cinch more flexible and viable process by which to improve management control and accountability, they have also resulted in some confusion and misconceptions with respect to what auditing is and is not. Hopefully, my remarks have served to clarify the nature and scope of contemporary public sector auditing, its potential applications and benefits, and its limitations. In closing, let me te-emphasize that there is nothing mysterious or mystical about the "variable sr.cpe" audit. It is a common sense approach that permits the auditor, acting on behalf of rh-: audit, report recipient, to examine any or all aspects cf auditee accountability. if the auditcr is to make the 272 highest and best use of his time and talents— to perform his task as economi cally, efficiently, and effectively as practicable— he should not be pre cluded from adapting the scope and frequency of audit to the situation at hand. The requisite "safe-guard” against potential misuse of the auditor's authority is inherent in the audit process, i.e., the auditor acts only in an investigative-evaluative-advisoiy capacity. Thus, the. auditor should be given unrestricted authority both as to scope and frequency of audit. 273 FOOTNOTES Committee on Basic Auditing Concepts, American Accounting Association, "Report of the Committee on Basic Auditing Concepts," Accounting Review, Supplement to Vol. XLVII, 1972, p. 18. Ibid. Ibid., p. 21. Comptroller General of the United States, Standards for Audit of Governmental Organizations, Programs, Activities & Functions (USGPO) ,1972, p. 2. Ibid., p. 6. Ibid. Ibid., pp. 2-3. 274 Chairman P a tm a n . I f it is all right with you, we will let Mr. Bartell take about 10 or 12 minutes, the same amount of time you did, and then ask the members to question you gentlemen, if that will be Would that be all right, Mr. Bartell * Mr. B a r t e l l . That is all right with me. Chairman P a tm a n . All right, we will now recognize Mr. Bartell. STATEMENT OF ROBERT M. BARTELL, PUBLIC RELATIONS CON SULTANT AND TAX PROGRAM COORDINATOR, LIBERTY LOBBY Mr. B a r t e l l . I am Robert M. Bartell, public relations consultant and tax program coordinator for the Liberty Lobby. Chairman P a t m a n . I did not get that. I was talking. Mr. B a r t e l l . I am Robert M. Bartell, public relations consultant and tax program coordinator for Liberty Lobby. Chairman P a t m a n . All right, sir. You are recognized. Mr. B a r t e l l . Thank you, sir. I appreciate the opportunity to pre sent our views. I understand our written testimony will be incor porated in toto. Let me just summarize very briefly, if I may. I think a little economic verse that might be applicable as regards Government operations and tax income is: “When your outgo ex ceeds your income, your upkeep leads to your downfall,” and if there is to be a clarification of Federal Reserve policies, there must be a thorough, complete and independent audit of the Fed by the GAO. We feel that only then could the character and validity of Fed policies be definitively judged, and it is encouraging to us that at this state 108 Members of Congress have cosponsored legislation re quiring a full-scale investigation of the Fed. As Mr. Nader pointed out, many Americans have a limited ability to comprehend the complexities of economics in our highly indus trialized society, and, yet, millions of them do not need a university education to understand that something is very, very wrong with our economy. The price of food goes up astronomically; the tax rate goes up even faster; mortgage money is hard to get, and it is prohibi tively expensive; still the Government continues its policy of give aways. Now, the people look to the legislators in Washington for the an swers to these very real and disturbing problems, and, of course, the Congress can do nothing until it has been empowered to identify the powers of the Federal Reserve System and make proper recommendations. Insulated as they are from congressional influence (which we feel is contrary to the requirements of the U.S. Constitution), the Fed can make arbitrary, impractical, or even capricious decisions, affecting the lives of all Americans. They can make decisions affecting credit, employment, prices in general, economic growth, and the very people who must live with those decisions do not even know about them until long after they have been implemented. Well, this is wrong. I am sure the Chairman of the Fed, Dr. Burns, would be the first to protest that the Fed has nothing to hide, but the argument that an audit might jeopardize relations with foreign banks simply does not make sense, viewed in the context of con gressional responsibility and trust. It is, perhaps, ironic that during 275 good times the Fed would probably never be challenged to make Congress a part of its decisionmaking apparatus. Because of the se crecy of the Fed and the high interest rates, it might be said these are good times for the bankers, but bad times for the taxpayers. Some thing has gone wrong, and it goes without saying that Congress must make every effort to set this Nation back on the road to economic stability, and, if this effort breaches the sacrosanct private operation of the Fed, so be it. Obviously, something has gone wrong. We had better find out what it is. Liberty Lobby urges this subcommittee to approve H.R. 4316, the measure to provide for an audit of the Federal Reserve, without delay and without debilitating amendments. Even as the Congress, itself, faces its inevitable day of accountability on election day, so should the Federal Reserve System on accounting day. The sooner, the better. Thank you, Mr. Chairman. [The prepared statement of Mr. Robert M. Bartell follows:] P repared Statem en t and T of ax R o b e r t M . B a r t e l l , P u b l ic R e l a t io n s P r o g r a m C o o r d in a t o r , L i b e r t y L o b b y Consu ltant Mr. Chairman and Members of the Committee: I am Robert M. Bartell, public relations consultant and tax program coordinator of Liberty Lobby. I appreciate the opportunity to present the views of Liberty Lobby's 23,000-member Board of Policy, and also to appear on behalf of the approximately quarter of a million readers of our monthly legislative report, Liberty Letter. The last time Congress examined the question of whether the Federal Reserve ■System should be audited, the question was begged by a mild, inoffensive and virtually useless piece of legislation. The measure that finally passed the House pleased no one but the FED itself, which was hardly the intent of the sponsors. It should be rather obvious that if the books of any business, corporation, insti tution or government agency are to be examined, there must be full disclosure. No books or records or documents pertaining to the organization or its trans actions can sacrosanct. Yet, this is precisely what the FED has been allowed to do. After a vigorous Congressional brainwashing campaign, Dr. Arthur F. Burns, the fatherly Chairman of the Federal Reserve System, was empowered by the Congress to withhold any records the FED itself felt might be injurious to their relations with foreign banks. H.R. 10265, as amended, was a farce. We commend the Chairman of this Sub committee, Mr. Patman, for reinstituting the procedure by which the American people can determine for themselves whether the Federal Reserve System has been an asset or a detriment to the American economy. In the view of Liberty Lobby, it has been a detriment. Probably our prime objection to the system is the fact that the Constitution specifically states that Congress shall have the the power to coin money, regulate the value thereof and borrow money on the credit of the U.S. So far they have done about as well in one area as the other. Congress abro gated its responsibility to coin and regulate money when the international bankers sold it a bill of goods. Congress has devastated our economy by borrow ing nearly half a trillion dollars we don’t have. The American taxpayer is pay ing for those two mistakes, as they have been paying for more than half a century. It is past time for the American people to know just exactly what they are paying for. An audit of the Federal Reserve System, with no strings attached, is one way to do it. Another would be to limit the expenditures of government to the income from taxes, but that is not the function of this commitee. However, because the excesses of Congress are bankrolled, in large measure, by the Fed, it is diffi cult to ignore one in favor of the other. H. Con. Res. 133, which the Senate approved recently, has no legal force. Any suggestion by the Congress cotild be legally ignored by the Fed. So there is no point looking in that direction for a clarification of Fed policies. 276 No, the answer must be thorough, complete and independent audit by the Gen eral Accounting Office. Only then can the character and validity of Fed policies be difinitively judged. It is encouraging that, at this date, 108 members of Con gress cosponsored legislation requiring a full-scale investigation of the Fed. Many Americans have a limited ability to comprehend the complexities of economics in our highly industrialized society. Yet, millions of them don’t need a university education to understand that something is very, very wrong with our economy. The price of food goes up astronomically, and the tax rate goes up even faster. Mortgage money is hard to get, and prohibitively expensive, yet our government continues its policy of massive giveaways. The people look to their legislators in Washington for the answers to these very real and disturbing problems. The Congress can do nothing until it is em powered to examine the policies of the Federal Reserve System, and make proper legislative recommendations. Insulated, as they are, from Congressional influence (contrary to the requirements of the U.S. Constitution), the Fed can make arbitrary, impractical or even capricious decisions affecting the lives of all Americans. They can make decisions affecting credit, employment, prices and general economic growth and the very people who must live with those decisions don’t even know about them until long after they have been implemented. This is wrong. I’m sure the Chairman of the Fed, Dr. Bums, would be the first to protest that the Fed has nothing to hide. The argument that an audit might jeopardize relations with foreign banks simply doesn’t make sense viewed in the context of congressional responsibility and trust. It is perhaps ironic that during good times, the Fed would probably never be challenged to make Congress a part of its decisionmaking apparatus. However, these are not good times. They aren’t even mediocre times. Because of the secrecy of the Fed and high interest rates, it might be said that these are good times for the bankers but bad times for the taxpayers. Something has gone wrong, terribly wrong. It goes without saying that Con gress must make every effort to set this Nation back on the road to economic stability. If this effort breaches the sacrosanct, private operations of the Fed, so be it. Obviously, something has gone wrong; and we had better find out what it is. Liberty Lobby urges this committee to approve H.R. 4316, the measure to provide for an audit of the Federal Reserve System, without delay and without debilitating amendments. Even as the Congress itself faces its inevitable day of accountability, so should the Federal Reserve System. The sooner the better. Thank you again for the opportunity to appear today and to present our views. Chairman P a t m a n . Did y o u finish, sir? Mr. B a r t e l l . Yes, sir. Chairman P a t m a n . Thank you very much. Now, then, Mr. Neal, would you like to ask any questions? Mr. N e a l . N o ; I really do not have a question. It seems that everyone is in agreement. It is a very happy situation. Chairman P a t m a n . That was a very interesting statement that the gentleman had, and we will have access to it when the record comes out. Mr. N e a l . I am sorry I have had to miss these other days because I do not really understand the opposition. I will have to dig into the tes timony and try to understand it. Chairman P a t m a n . Mr. Blanchard, would you like to comment? Mr. B l a n c h a r d . I have one question. I would like to thank both wit nesses for coming and bearing with us, and since we really have not gotten into what an audit is, I deeply appreciate your document, Mr. Freeman, and I have one question for you, Mr. Bartell. I take it you have spent, or the Liberty Lobby has spent, considera ble time looking into the question of an audit of the Fed. In so doing, have you come up with any strong arguments as to why we should not audit the Fed? As Mr. Neal said, virtually every witness who has ap peared before this subcommittee has recommended an audit. We have not heard from the Fed yet, and I assume they will be opposed to the 277 bill, but from your experience and from your expertise, can you think of any good reasons why we should not audit the Fed ? Mr. B a r t e l l . Absolutely not. Mr. B l a n c h a r d . Thank you. Chairman P a t m a n . What is your idea, professor? Mr. F r e e m a n . Thank you, Mr. Chairman, I did not get to that. I do have this addressed at a couple of points in the paper. To say that I do not want to be audited is not a very easy thing to say, be cause that is the same thing as saying I do not want to be held account able. So, typically, you do not answer that way. But a smokescreen from a different direction might be put forth. In my view, much in prior year’s testimony, as I analyze it, has been a smokescreen of emo tion or picking on one certain audit aspect. Two particular arguments have been put in prior testimony that I have seen. One is that the in ternal audit or audits by C.P.A.’s engaged by the Fed were sufficient. I address this in this paper, and in my view that is not sufficient. It is analogous to saying that the plaintiff ought to rely upon the de fendant’s lawyer for legal advice—because you do not get adequate assurance until an auditor who is responsible to you has given it, and this has been covered here. And there is one other item, the inde pendence argument, that I have noted has been used. Just briefly, if I were an auditor on the job, and if an agency’s independence was im portant, the first thing I would do is evaluate its independence from all sources that might influence it, not merely its independence from Congress. Again, I address that in this paper. Chairman P a t m a n . Thank y o u . Mr. N e a l . Mr. Chairman, would you yield ? I believe that you said earlier that the interest income on the $80 billion or $85 billion in portfolios that the Fed holds is paid to the Fed, and the Fed is unac countable for that interest payment at the rate of something like $6 billion or $7 billion a year. Chairman P a t m a n . Yes. M r. N eal. D o w e h a v e a n y i d e a o f h o w t h a t m o n e y is s p e n t n o w ? Chairman P a t m a n . Not 100 percent, no. Mr. N e a l . What percent of it do wre know about ? Chairman P a t m a n . It is only on the Fed’s reports, and you do not always get exactly what the meaning is from reading the reports. I have found it very difficult, and I have followed this for 30 years. Mr. N e a l . But, they do report, they do account for that income ? Chairman P a t m a n . Well, y o u take the year before last when the Fed claimed it spent $495 million of the money. Mr. N e a l . What did they do with the rest of the money ? Chairman P a t m a n . The rest of the money that was not spent, the Fed turns it over to the Treasury. There is no law requiring that at all, but I guess maybe they have a little conscience problem there, and so they just turn it over to the Treasury. Mr. N eial . I have heard you speak on that point several times, and I just have to admit my own ignorance. Chairman P a t m a n . But, we have never gotten all the facts about it, and we have asked them a number of times about where this money goes, and we have never received it. 278 Mr. N e a l . Of course, that is what we would get in an audit, but the other point, the matter of these bonds being paid for, is it not the na ture of bonds that they are a debt instrument ? Chairman P a t m a n . No; that is in answer to what I said a while ago, that nearly every professor teaching about credit instruments and economic questions, almost invaribly say somewhere in their lectures that whenever the obligor of an instrument and the obligee become the same party or entity, the debt is canceled. Now, it is just like the Gov ernment issuing a debt, say, billions of dolors worth at a time. If the Federal Government acquires those bonds, or uses money that it has to pay the bonds, why the debt is canceled. Why should it not be can celed ? Nobody should be required to pay interest on an obligation that has already been paid, and that is what we have, that is why the obligor and obligee become the same party and the debt is paid. It has always been that way. Mr. N e a l . But the Federal Government purchases, or the Federal Reserve purchases, debt obligations from other agencies of the Federal Government all the time. Chairman P a t m a n . I know, but it is the same thing. Federal Reserve notes are Government obligations. That is the Government paying itself. They become the same entity, the same person. The debt is canceled. I do not say that anybody devised it that way on purpose but that is the way it is. Mr. N e a l . Well, I will have to admit that I do not understand it, so I look forward to the audit. Chairman P a t m a n . N o w , there is one book that I got up. I did not do it all myself, but I had help on it. It is called a “Primer on Money” and that book has been sold in millions of copies. I never fail to send a copy to a person who writes to me for it, and right now millions of copies have gone out, and it has been a very good book for people who want to know more about the monetary system. And I think we will put out more of them, as it has been very popular, and I think it is helpful. I am looking forward to the fact that you gentlemen will study this with interest and appreciation and with the knowledge that you are helping your country, or at least you believe you are, and see if we can come up with something that would be real good in our report Now, then, without objection, these gentlemen that testified will be allowed to extend their remarks and insert any material that you think is relevant to this discussion, and members may, of course, submit questions to the Clerk, and he will submit them to the wit nesses. When they examine their transcript for approval or correc tion, they can answer the questions. There may be some of us who did not ask the questions we wanted to, they could submit them in writing. Mr. N e a l . Let me just ask one more question, if I could. I believe it might be helpful, Mr. Bartell if you could say why you think there is opposition to this audit of the Federal Reserve? I am not asking for an answer right now. If you wanted to give that some thought and include it with your remarks, or if you would rather answer now, it is immaterial. 279 Mr. B a r t e l l . Well, I think, obviously, any government organiza tion or bureaucratic function which can operate without overview or without control is very happy to do so and will continue to per petuate itself in that capacity as long as it can. Specifically, I think our objection as constitutionalists to the Federal Reserve System lies in the fact that the Constitution says the Congress, itself, shall be responsible for regulating and issuing coins, and we feel Congress abrogated this responsibility back in 1913 when the Federal Reserve System was brought into being. But, naturally, if they can operate with their own auditing procedures, without con gressional overview, they are going to do it. The reasoning behind the amendments that were put into H.R. 10265 in the 93d Congress indicating that they could not allow Con gress to control information, certain administrative functions and decisions made by the Federal Reserve, simply because it might in fluence or adversely affect their relations with foreign banks, has no real bearing, so far as we are concerned, because it is the responsibility of Congress to determine whether they are functioning properly. Chairman P a t m a n . The Communications Workers of America submitted a letter for the hearing record in support of H.R. 4316, as introduced. In addition, the Communications Workers are submit ting a statement by the AFL-CIO Executive Council, advocating a full-scale audit of the Federal Reserve System, which will also be made a part of the hearing record, and I ask unanimous consent to insert these communications in the record at this point, and, without objection, it is so ordered. [The letter of the Communications Workers of America, and the statement of the AFD-CIO Executive Council follow:] C o m m u n ic a t io n s W orkers of A m e r ic a , Washington, D.C., April 25, 1975. Hon. W r ig h t Patm an , Chairman, Subcommittee on Domestic Monetary Policy, U.S. House of Repre sentatives, Washington, D.C. M y D e a r M r . C h a i r m a n : I noted with interest that your subcommittee has begun hearings on legislation to provide for an audit of the Federal Reserve System by the General Accounting Office (GAO). I commend you and your subcommitee in this undertaking, and I assure you that you have the full support of the Communications Workers of America. We find it hard to believe that one of the most important agencies of the Federal Government has not had a major audit since 1933. General Accounting Office statistics indicate that the Federal Reserve System showed total earnings of $6.3 billion in 1974, and total operating expenses of $548 million. Since the majority of this income was derived from the interest paid on government bonds— interest paid out of the pockets of the taxpayers— we feel the public and Congress has the right to know if the Federal Reserve System is operating in an efficient manner. I have full faith in the ability of the General Accounting Office to conduct a fair and impartial audit of the Federal Reserve System. Some critics of your legislation have charged that the GAO will attempt to use the audit authority to meddle in the monetary policy decisions of the Federal Reserve Board. I do not believe this. As I see the work of the General Accounting Office, it is simply to audit the System, and not to influence Board decisions. There is the possibility that during the course of an audit some information on monetary policy decisions could come to light. I am one who believes that should this occur it will be good for the economic well-being of our country. Congress, as the representative of the people, has the right to know what are the monetary policy decisions of the Federal Reserve Board, since it is their 280 constituents and my Union members who have to bear the brunt of those decisions. I have attached to my letter a copy of a statement adopted by the AFL-CIO Executive Council entitled “The Federal Reserve and the Nation’s Monetary Policy.” As a member of the Executive Council, I supported this resolution. I would appreciate it very much if you would see that it is made a part of your hearing record. Sincerely, Glen n E. W atts, President. Statem ent by th e AFL-CIO the E x e c u t iv e C o u n c il o n t h e F e d e r a l R N a t io n ’ s M o n e t a r y P o l ic y eserve an d For the second time since 1969, the Federal Reserve System under the chair manship of Dr. Arthur Burns has brought recession to the American economy and unemployment to millions of workers. The Federal Reserve’s arrogant brinkmanship with the American economy in 1973 and 1974 has resulted in the worst downward spiral since the Great Depression, with no end in sight. In the name of combatting inflation, the Federal Reserve’s money-crunch and even higher interest rates added to inflationary pressures, brought a de pression to the housing industry and mass unemployment. The Federal Reserve System created by the Congress to be the nation’s central bank: — Has utterly failed to serve the needs of the American people for full em ployment, economic expansion and adequate public facilities and services, while contributing to cycles of boom and bust. — Has been an engine of inflation, with soaring interest costs imposed, directly and indirectly, on consumers, home-buyers, small business, public utilities and government itself. — Has been a major cause of the recession of 1969-1970 and today’s dis astrous conditions— resulting in the highest unemployment rate in 34 years and huge deficits in the federal budget. — Has discriminated against the extension of needed credit for home-building, small business, state and local governments and public utilities. At the same time its discrminatory policies provided substantial amounts of credit for commodity market and land speculation, inventory hoarding and foreign lending. — Has brought the economy to the brink of depression, with spreading bank ruptcies of businesses and banks. This key government agency, whose decisions are a major factor in deter mining the economic welfare of the American people, continues to operate in relative secrecy and with little accountability to the Congress, which created it. The time is long overdue to overhaul the structure of the Federal Reserve and its policies— to make them responsive to the needs of the American people. Therefore, we call on the Congress t o : 1. Direct the Federal Reserve to reduce short and long-term interest rates and to allocate available credit for high-priority economic activities. America needs a sufficient expansion of money and credit, at reasonable interest rates, to encourage balanced economic expansion. A substantial portion of available credit should be allocated for such purposes as housing, community facilities and essential capital investment, while the flow of credit should be curbed for such activities as speculation, business takeovers and foreign lending. 2. Establish comprehensive oversight review of the entire Federal Reserve System to bring America’s central bank fully into the government structure. 3. Require that the operations of the Federal Reserve System be subject to a yearly audit by the General Accounting Office. 4. Fix the term of the chairman of the Federal Reserve at four years, coinci dent with that of the President who appoints him. The term of members of the Board of Governors should be cut from 14 years to seven. 5. Abolish the Open Market Committee, the policy arm of the Federal Reserve System— with five of its 12 members not government appointees. Its functions should be absorbed by the Board of Governors whose members are appointed by the President and confirmed by the Senate. 281 6.* Extend membership on the Board of Governors of the Federal Reserve and on the governing and advisory committees of the entire Federal Reserve Sys tem, including its 12 district banks, to representation from major groups in the economy, including consumers and organized labor. 7. Require all commercial banks to be participants in the Federal Reserve System. The Board of Governors should keep the Congress and the public informed with reasonable promptness and with reasonable detail on its major policy decisions and the reasons for arriving at them. Chairman P a t m a n . Thank you, gentlemen, very much, and if we need you, we will get in touch with you. If we can arrange a time that is mutually satisfactory, we will ask you to come up here. The subcommittee will stand in recess, subject to call of the Chair. [Whereupon, at 11:50 a.m., the subcommittee recessed, subject to the call of the Chair.] 282 AUDIT OF THE FEDERAL RESERVE THURSDAY, M AY 8, 1975 of H o u se of R e p r e s e n t a t iv e s , S u b c o m m it t e e o n D o m e s t ic M o n e t a r y P o l ic y t h e C o m m it t e e o n B a n k i n g , C u r r e n c y a n d H o u s in g , Washington, D.C. The subcommittee met, pursuant to notice, at 10:10 a.m., in room 2128, Rayburn House Office Building, Hon. Wright Patman [chair man of the subcommittee] presiding. Present: Representatives Patman, Minish, Hannaford, Neal, Blanchard, and Hansen. Chairman P a t m a n . The subcommittee will please come to order. I have a short statement, Governor Mitchell, and then, of course, I will call on you. You have a very comprehensive statement which we appreciate very much. As the members of this subcommittee know, 109 Members of the House of Representatives are cosponsoring legislation which would require a full-scale audit of the Federal Reserve System. This is good evidence of the desire of the House for prompt action on this bill, and I am very hopeful that we can move it to final conclusion here in this subcommittee within the week. And I have assurances that Chair man Reuss, of the full committee, will act quickly on our recommendations. To speed up the tsonsideration, we will hear this morning from George Mitchell, Vice Chairman of the Federal Reserve Board, as our last scheduled witness. We had originally planned to have Dr. Arthur Burns, the Chairman of the Board, as the witness, but he has offered various reasons and negotiations on his possible testimony which would only serve to delay us, from our standpoint, to a final resolu tion of the bill. In any event, we welcome Governor Mitchell as the Federal Re serve spokesman, and we take his testimony this morning on the basis that he is the official spokesman for the Federal Reserve on this subject. And as customary in this subcommittee, we allow members of the committee—in this case, the whole Banking and Currency Commit tee—to submit written questions to the witnesses appearing before our subcommittee, with the obligation of the witnesses that they will, when they examine their transcript for correction, answer the questions if they are not answered here. You are used to that, I believe, Governor Mitchell. We have had that before. And as has been suggested in these hearings, there is not a Govern ment bureaucrat, or agency, that likes to have anyone look over their shoulder. That is the nature of the Government bureaucracy and in this respect, the Federal Reserve is no different than any other agency (2 8 3 ) 50-365 0 - 75 - 19 284 or department—all of which secretly believe that they should be the sole judge of their own operations. The Congress—and for that matter, the Constitution—does not accept this concept of the infallibility of the bureaucracy, and I trust that we will not continue to extend it to the mammoth Federal Re serve System. The nature of the Federal Reserve, and its sheer size, makes an audit all that much more compelling. It is the only major govern mental unit which does not come to Congress for appropriations, or appropriations review, as required by the U.S. Constitution. And this fact alone would call for the closest kind of audit. The Federal Reserve, of course, finances its far-flung operations out of a slush fund created by almost $6 billion in interest on a portfolio of Government securities which now exceeds $93 billion—I did not say millions; I said billions. I want to ask you just one question, and that is all, during the time I read this. Are you in accord with the statement that the Chairman of the Board of Governors has made before this subcommittee and others, when I asked him who owns these $93.9 billion in portfolio bonds? Who would you say owns those bonds in that portfolio? Governor M i t c h e l l . Well technically, the Federal Reserve banks own the bonds, and the interest on the bonds. Most of it comes back to the U.S. Treasury. Chairman P a t m a n . These are bonds and other securities in the port folio of the Federal Open Market Committee in the New York Fed eral Reserve Bank. And they represent obligations which have been paid for once, but which have not been canceled. Needless to say, I would like to see this entire portfolio operation closely checked. This is a time of great economic crisis in this Nation, and I do not feel that this subcommittee, and the Congress as a whole, can afford to continue to guess about what the most powerful economic agency is doing in any respect, at any time. An audit would at least allow us to tell our constituents that we are keeping a close watch on this agency, and that we had the means to—at a minimum—investigate its activities. It is our opinion that the American people want the agencies which are responsible for any part of economic policy to be accountable, and this audit legislation is a giant step forward in accountability for the Federal Reserve System. Now, on that $6 billion a year that the Fed receives for bonds that I said had been paid for once, that means that figure is out $500 mil lion in interest each month, or $16,438,000 in interest each day. So it is a considerable sum of money, especially since the Constitution says that no money shall be expended from the Treasury except as author ized by the Congress. And the Congress has not authorized this. Therefore, we feel like we are asking people to pay $6 billion a year interest. According to the Constitution, that is not due. All right Governor Mitchell, we are glad to have you, sir. We have had you before, and you are a good witness. You may proceed to pre sent your testimony. I believe you have it in writing, and you may proceed to present it, either wholly, or we will put the whole statement in the record, regardless of whether you use it. And you can take any part of it or all of it, and present it asyou desire. [Text of H.R. 4316 and list of cosponsors follows:] 285 94t h "s““ H .R .4316 CONGRESS V * T 'fc /« IN THE H OU SE OF R E P R E SE N T A T IV E S M a r c h 5 ,1 9 7 5 M r . P a t m a n ( f o r h im s e lf , M r s . S u l l i v a n , M r . R o e , M s . A b z u g , M r . V i g o r i t o , M r . E c k h a r d t , M r . F a s c e l l , M r . S o l a r z , M r . J o h n s o n o f C a lif o r n ia , M r . E v a n s o f I n d ia n a , M r . A n n u n z i o , M r . M i l l e r o f C a lif o r n ia , M r . D i n g e l l , Ms. C o llin s o f I lli n o is , M r . Z e f e r e t t i , M r . B ia g g i , M r . C a r n e y , M r . D o m in ic k V . D a n i e ls , M r . D a v is, M r . M o l l o h a n , M r . C h a r le s H . W i l s o n o f C a li f o r n ia , M r . R e e s , M r . M e t c a l f e , M r . G i l m a n , an d M r . S a r a s i n ) in tro d u ce d th e fo llo w i n g b i l l ; w h ich w as r e fe rre d to th e C o m m itte e on B a n k in g , C u r re n c y an d H o u s i n g A BILL To authorize and direct the General Accounting Office to audit the Federal Reserve Board, the Federal Advisory Council, the Federal Open Market Committee, and Federal Reserve banks and their branches. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 That (a) the Comptroller General of the United States shall 4 make, under such rules and regulations as he shall pre5 scribe, an audit for each fiscal year of the Federal Reserve 6 Board, the Federal Advisory Council, the Federal Open I 286 2 1 Market Committee, and all Federal Reserve banks and 2 their branches, including transactions of the system open 3 market account conducted through recognized dealers. 4 (b) In making the audit required by subsection (a), 5 representatives of the General Accounting Office shall have 6 access to books, accounts, records, reports, files, and all 7 other papers, things, and property belonging to or in use 8 by the entities being audited, including reports of exami 9 nations of member banks, from whatever source. They shall 10 be afforded full facilities for verifying transactions with 11 balances or securities held by depositaries, fiscal agents, 12 and custodians of such entities. 13 (c) The Comptroller General shall, within six months 14 after the end of each fiscal year, or as soon thereafter as may 15 be practicable, make a report to the Congress on the results 16 of the audit required by subsection (a), and he shall make 17 any special or preliminary report^ he deems desirable for the 18 information of the Congress. A copy of each report made 19 under this subsection shall be sent to the President of the 20 United States, the Federal Reserve Board, and the Federal 21 Reserve banks. In addition to other matters, the report shall 22 include such comments and recommendations as the Comp 23 troller General may deem advisable, including recommenda 24 tions for attaining a more economical and efficient administra 25 tion of the entities audited, and the report shall specifically 287 3 1 show any program, financial transaction, or undertaking ob2 served in the course of the audit which in the opinion of the 3 Comptroller General has been carried on without authority 4 of law. 5 (d) The Comptroller General is authorized to employ 6 such personnel and to obtain such temporary and intermit7 tent services as may be necessary to carry out the audits re8 quired by subsection (a), without regard to the provisions 9 of title 5, United States Code, governing appointments in 10 the competitive service, and such individuals may be paid 11 without regard to the provisions of chapter 51 and subchapter 12 III of chapter 53 of such title relating to classification and 13 General Schedule pay rates. 288 L is t of 109 C osponsors of B il l P roviding for G A O A u d it of F ederal R eserve Sy s t e m Arizona: Morris Udall. California: George Danielson, Harold Johnson, George Miller, Charles Wilson, Tom Rees, Andrew Hinshaw, Edward Roybal, Leo Ryan, Fortney Stark, Yvonne B. Burke, Ronald Dellums, John Moss, Glenn M. Anderson, Augustus Hawkins, Lionel Van Deerlin, Mark Hannaford. Colorado: Tim Wirth, Pat Schroeder. Connecticut: Ron Sarasin, William Cotter, Anthony Moffett. Florida: Dante Fascell, Bill Chappell. Georgia: Dawson Mathis, Andrew Young, Larry McDonald. Hawaii: Patsy Mink, Spark Matsunaga. Illinois: Melvin Price, Frank Annunzio, Cardiss Collins, Ralph Metcalfe, Mor gan Murphy. Indiana: Dave Evans. Iow a: Berkley Bedell. Kansas: Martha Keys. Kentucky: John Breckinridge. Louisiana: John Breaux. Maryland: Gladys Spellman, Parren Mitchell. Massachusetts: John J. Moakley, Michael Harrington, Gerry Studds, Robert Drinan, Paul Tsongas. Michigan: Robert Carr, James O’Hara, Bob Traxler, John Dingell, John Conyers. Minnesota: Joseph Karth, Donald Fraser, Bob Bergland, James Oberstar. Missouri: Leonor K. Sullivan, William Randall, Richard Ichord. New Jersey: Robert Roe, Dominick Daniels, Henry Helstoski, William Hughes, Peter Rodino, Andrew Maguire, Joseph Minish. New York: Frederick Richmond, Edward Pattison, Bella Abzug, Stephen Solarz, Benjamin Gilman, Leo Zeferetti, Mario Biaggi, Charles Rangel, Richard Ottinger, John LaFalce, Tom Downey, Benjamin Rosenthal, Elizabeth Holtzman, Herman Badillo, Lester Wolff, John Murphy, Shirley Chisholm. North Carolina: Walter Jones, Stephen Neal. Ohio: Charles Carney, Wayne Hays, Louis Stokes, Ronald Mottl, John Seiberling. Oregon: Robert Duncan. Pennsylvania: Joseph Yigorito, Joseph Gaydos, Robert Edgar, Robert Nix. South Carolina: John Jenrette, Mendel Davis. Tennessee: Marilyn Lloyd. Texas: Bob Eckhardt, Henry Gonzalez, Robert Krueger, Jim Wright, Wright Patman. Virginia: Dan Daniel. Washington: Mike McCormack. West Virginia: Harley O. Staggers, Robert Mollohan, Ken Hechler. Wisconsin: Clement Zablocki. District of Columbia: Walter Fauntroy. STATEMENT OF HON. GEORGE W. MITCHELL, VICE CHAIRMAN, BOARD 0E GOVERNORS OF THE FEDERAL RESERVE SYSTEM Governor M i t c h e l l . Mr. Chairman and members of the subcom mittee, I welcome the opportunity you have afforded me to present the views of the Board of Governors on H.R. 4316, a bill to authorize and direct the General Accounting Office to audit the Federal Reserve Board, the Federal Advisory Council, the Federal Open Market Com mittee, and Federal Reserve Banks and their branches. The bill would authorize the General Accounting Office to conduct an annual audit, and in so doing, the Comptroller General would be accorded access to such records, including reports of examinations of member banks, from whatever source, as he finds necessary for the conduct of the audits. The Comptroller General would be required to submit a report of each audit to Congress. 289 As we understand the bill, the Comptroller General would be granted virtually unrestricted authority to look into the financial and opera tional aspects of the Federal Reserve System, and would thus have the authority to review and evaluate all aspects of Federal Reserve activi ties, including formulation and implementation of monetary policy. The Board of Governors over the years has consistently opposed such proposals. Our objections stem not from any reservations about the General Accounting Office, which enjoys a well-deserved reputation for competence and integrity. Rather, our objections stem from a basic concern about the optimal functioning of the Nation’s money and credit system. In summary, the Board believes: 1. An audit by GAO of the Federal Reserves’s accounts and expendi tures, compliance with applicable laws and regulations, and efficiency and economy of operations would be a needless duplication of present efforts and would result in unnecessary additional expenditures. 2. To go further, and authorize GAO to audit Federal Reserve poli cies, including the processes by which those policies are reached, would unwisely inject a third party into the sensitive area of monetary policy. This would run contrary to congressional decisions over the years based on the view that noninterference with the internal management of the Federal Reserve would, in the long run, provide better monetary and credit policies. We believe Congress has acted prudently, and that the system should not be inhibited, directly or indirectly, from exercising its best professional—and entirely independent—judgment. 3. The recent passage of House Concurrent Resolution 133 by the Congress has sharply altered the context in which the question of GAO audit must be considered. As you know, this resolution provides for a direct “audit” of Federal Reserve policy by the congressional prin cipals—the. Committee on Banking, Currency and Housing in the House and its counterpart in the Senate. Thus, a policy audit by GAO could not only fault public policy but it literally would be redundant to the action taken by the Congress this year. 4. Certain functions and activities of extreme sensitivity having to do with bank examinations and international monetary relations would be or would need to be substantially modified, were a GAO review put into effect. The need for exclusion of these activities was recognized to some degree in the bill (H.R. 10265) reported by the full Committee on Banking and Currency in the 93d Congress, and to a greater extent in the bill finally adopted by the House last year. With your permission, I ’d now like to sketch briefly the background on this subject. (1) From its establishment in 1913 until 1921, the Board of Gov ernors was audited by the Treasury. (2) Congress created the General Accounting Office in 1921. For the next 12 years, the Board of Governors, but not the Federal Re serve banks and branches, came under the GAO’s scrutiny. (3) The Banking Act of 1933 provided that the Board’s funds should not be construed to be “Government funds or appropriated moneys.” In this act, Congress deliberately voted to remove the Board from the jurisdiction of the General Accounting Office. The purpose, described in a committee report, was to “leave to the Board the deter mination of its own internal management policies.” 290 (4) In the years between 1933 and 1952, audit teams from Federal Reserve Banks performed the audit of the Board’s books. (5) Beginning in, 1952 and continuing up to this time, the Board, using the discretion Congress provided, voted to employ nationally recognized public accounting firms to perform this function in order to assure an independent oversight of the Board’s administrative activities. Each year the audit report is reproduced in the Board’s annual report, and copies of the audit report are furnished to this com mittee and to the Senate Committee on Banking, Housing and Urban Affairs. (6) Meanwhile, year in and year out, the Board’s examiners have examined the Reserve Banks. Since 1952, the procedures used by the Board’s examination staff have been observed by the outside account ing firms employed to audit the Board’s books. This provides an ex ternal evaluation of the adequacy and effectiveness of the examina tion procedures. A copy of the latest such report, from Touche Ross & Co., was recently transmitted to this committee and the Senate Com mittee on Banking, Housing and Urban Affairs, along with a response to the report prepared by the Board’s staff. (7) In 1945 during hearings on the Government Corporation Con trol Act, the General Accounting Office expressed the view that the Reserve Banks should be excluded from the act because they are ex amined frequently and thoroughly by examiners under the direction of the Board of Governors. (8) In 1954 at hearings on bill H.R. 7602, the Bureau of the Budget stated that the independence of the Federal Reserve System was “an important cornerstone of the administration’s fiscal and monetary policies.” THE IN T E G R IT Y OP T H E CENTRAL B A N K This brief chronology indicates, among other things, that both the Board of Governors and the boards of directors of the Federal Reserve Banks have traditionally been committed to thorough audits of System activities. We are so committed because the Federal Reserve System has the responsibility, above everything else, of maintaining the integrity of its operations as the Nation’s central bank. These audits not only serve to meet the responsibility Congress has placed on the Federal Reserve, but they also serve to remove any doubt, throughout a world which uses the dollar as a reserve and a vehicle currency, as to the integrity of the System’s accounts. This involves a full and prompt disclosure of Federal Reserve assets and liabilities and the assurance, given the powers Congress has conferred upon it, that the Federal Reserve stands ready and able to meet the commit ments on its balance sheet at home and abroad. In 1974, the Reserve Banks handled 21.8 billion pieces of currency and coin having a value of $63.9 billion. Of the 26 billion checks written in 1974, 11.7 billion checks passed through the System in the amount of $4.4 trillion. 14.5 million wire transfers were handled and they moved $80 trillion, and 2.5 billion food coupons were redeemed and destroyed, having a value of $5.6 billion. To perform these functions along with the numerous transactions in securities,1 also involving 1 See a tta ch m e n t f o r in fo rm a tio n on v o lu m e o f s ecu ritie s tra n s a c tio n s , p. 299. 291 billions of dollars, with a minimum loss or defalcation, requires a comprehensive control and audit program. If we have erred in the extent of control, it has been toward over-control, and it has been intentional. No system is perfect, and we have had our occasional difficulties and problems which have not been hidden from public view; but the record shows a high rate of success in preventing irregularities. We believe that a GAO audit would duplicate the audit costs and resources the Federal Reserve must, by its nature, incur regardless of any audit activity on the part of the GAO. The System spends $8.5 million annually for auditing the Reserve Banks and the Board. While this is a large sum of money, it is less than iy2 percent of the total expenses of the System and is miniscule in comparison with either the assets or the transactions the audit program is designed to protect. Congress originally established the Board of Governors, which is an agency of the Government, as the organizational unit designated by the Congress to review the operations of the Reserve Banks. The record clearly shows the Board is continuing to fulfill this charter. T H E FEDERAL SYSTE M A U D IT PROGRAM Let me briefly summarize our audit program. First, we have audits of financial operations and legal compliance. Audits of this type are performed on an unannounced basis in the various departments of each Bank and branch by the internal auditors on a frequency schedule agreed to by the System’s Conference of General Auditors and ap proved by the Board’s staff. Also, once each year, the Board’s examiners perform a financial examination, in each Bank and branch, which includes a review of compliance with approved procedures, policies, and regulations. Thus, at least twice each year the assets and liabilities of each Bank and branch are verified or confirmed. Going beyond this, policies, procedures, and transactions are reviewed at each location by internal auditors to evaluate how well the organization carries out its programs and activities and how well it uses its financial, property, and personnel resources. There is latitude in the scope of these reviews because it can always be expanded if conditions warrant a review in greater depth. To provide further assurance, at least once in 3 years the Board’s Operations Analysts review the operating functions of each Bank and each branch. These reviews are more than a routine, periodic check, for their scope and frequency reflect deficiencies ob served by the Board’s financial examiners, deficiencies or problems reported by internal auditors, the occurrence of irregularities, the conditions found at the previous review performed by the operations analysts, requests from Bank management or Boards of Directors, and other situations. In most cases, the reports comment on management attention, planning, sufficiency and effectiveness of supervision, ade quacy of staff, staff knowledge, procedures employed, adequacy of facilities, and operating problems. Also, recommendations are made to improve procedures either to increase efficiency or to provide better controls. H.R. 4316 provides specific authority for GAO to audit both the Federal Open Market Committee and the System Open Market Ac count. The committee by statute is exclusively a policymaking body. 292 The committee has designated the Federal Reserve Bank of New York to carry out transactions, including open market operations in domes tic securities markets and foreign currency transactions, for the twelve Reserve Banks. The annual examination of the New York Bank in cludes a comprehensive examination of the accounts relating to these transactions. The internal auditors in the New York Reserve Bank also conduct a continuous audit of these transactions. Both the audits and the examinations include procedures to determine that open mar ket operations are consistent with directives from the Federal Open Market Committee. In the last few years, with the advent of extensive use of computers, the Board’s staff and the audit departments in the Reserve Banks have developed a comprehensive electronic data processing review proce dure. In late 1974, the Board employed a nationally recognized con sulting firm to review our staff’s procedures and make recommenda tions for further improvements. The following statement was included in the report prepared by the consultants: I am very impressed with the quality of the staff you have organized. They have a good appreciation of the balance needed between management concerns, audit requirements, and complex technical analysis in the EDP area. We have worked with many organizations on EDP audits in the past few years. Your organization matches the very best that we have worked with in large commer cial banks, financial institutions, and multidivisional corporations. I am pleased to see that the Federal Reserve System is in the forefront of this previously neglected, but critical, area of EDP operational audit. Another examination activity performed by the Board’s staff covers the internal audit departments in the Reserve banks. Our staff not only reviews the monthly reports of audit activities and findings pre pared by the bank’s general auditors, but onsite visits are made to review and observe programs and practices. The competence and effec tiveness of the staff and supervisors are also appraised during these visits and an evaluation is made concerning the independence of the general auditor from bank management. Organizationally, the audit function in a Reserve bank is inde pendent of the bank’s management as the general auditor is the only individual in a bank, except for the president of the bank, who reports directly to the chairman of the board of directors. In addition, each bank’s board of directors has an audit committee which meets fre quently with the general auditor to discuss his reports. Well before it was a general practice for directors of private enterprises to have an audit committee, the Reserve banks had this feature in their organiza tion. The independence of the general auditor is further strengthened by the fact that appointments to the position are made by each bank’s board of directors, not bank management, and approved by the board of governors. Likewise, salary adjustments for incumbents in the posi tion are recommended by the board of directors at each bank and approved by the board of governors. Thus, there are at least three lines of defense at the Reserve banks against irregularities. The first is the operating management of the bank; the second is the internal auditing staff directed by the bank’s board of directors; and the third is the examination staff which works under the direction of the board of governors. Each of these groups are also committed to improving operating effectiveness. 293 From time to time, board of directors of individual banks have also had public accounting firms review their auditing departments for further assurance that the programs and personnel are effective and up-to-date. In these cases, the primary difference in the recommenda tions made by the outside firms and the board’s staff is that the board’s staff has insisted on either more frequent or more in-depth audits than have the outside firms. E C O N O M Y A N D E F F IC IE N C Y OF OPERATIONS Now, let me comment on the system’s commitment to economy and efficiency of operations. While the integrity of Federal Reserve System statements and accounts relating to assets, liabilities, and operations is of paramount importance to the board of governors, the prospective expenditures of the banks also receive continuous scrutiny and atten tion. Budgets are initially prepared by management in the banks under general guidelines from the board of governors. The budgets are then reviewed by each bank’s board of directors and adjusted if, in the judg ment of the directors, such adjustment is needed. The staff of the board of governors also reviews the budgets and resolves issues related to unusual requests and adherence to guidelines. This review incorporates a detailed analysis of rates of expense growth in the banks arising from new initiatives, volume increases, and increasing operating costs in order to satisfy the board as to the reasonableness of the projected ex penditures. Final approval, in light of the foregoing review, is given by the board of governors. During recent years, the volume of operations in the Reserve banks has grown significantly, and several new areas of responsibilities have been added to our workload. As you know. Congress has given the Federal Reserve increased, or new, responsibilities for supervision and regulation of bank holding companies, truth in lending, fair credit billing, equal credit opportunity, and “unfair or deceptive” practices. We have also lived up to our assurances to Congress to reduce float in the payments mechanism. Through changes in regulations, improve ments in the check transportation system, and establishment of re gional check processing centers and automated clearing houses, aver age daily payments mechanism float has been reduced from $3.5 bil lion in 1969 to $2.3 billion in 1974. Without the improvements initiated by the Federal Reserve System, the float would now be in the range of $5.6 billion. Even with the added assignments, the budget discipline imposed within the Federal Reserve System has held growth in its expenses to reasonable dimensions. During the period 1970 through 1973, total system expense growth averaged 15 percent per year. A report on Reserve bank expenses for 1974, which represented further improve ment, was recently transmitted to this committee and the Senate Com mittee on Banking, Housing, and Urban Affairs. That report showed an increase in expenses in 1974 of 12.1 percent over the expenses in 1973. We believe this is an excellent record in light of our expanding responsibilities and the cost trends in the economy. Moreover, the system’s approved total expense budget for 1975 represents a targeted increase of only 10.3 percent above 1974 expenses. 294 In addition to the programs carried on by internal auditing depart ments in the Reserve banks and by the board’s staff of operations analysts for improving operating procedures and making them more effective and efficient, the Conferences of Reserve Bank Presidents and First Vice Presidents have developed an effective program which focuses upon improving the efficiency of operations. Bank planning departments, interbank operations research groups, and task forces with board staff participation are working out most of the technologi cal adaptations needed in the system’s electronic accounting, automated currency handling, and electronic fund transfer systems. Outside con sultants are employed on an ad hoc basis as needs develop. C A P A C IT Y FOR IN D E P E N D E N T JU D G M E N T Let me say a word now about the need to maintain the present ca pacity of the System to exercise, within the Government, its best judg ment regarding monetary policy without it being unduly affected by external pressures. Even many who oppose this or that action of the Federal Reserve willingly concede that the maintenance of independ ent judgment by the Nation’s central bank is essential if monetary policy is to play its proper role in achieving economic stability ana growth, a high level of employment, and stability in the purchasing power of the dollar. This independence is not absolute, of course. Since the System is a creation of the Congress, it is clearly accountable to it, and we attempt to meet our responsibilities to the Congress and the public fully and conscientiously. Besides publishing more detailed information about its activities than any other central bank in the world, the Federal Reserve fur nishes a steady flow of information to Congress. Our release of data about Federal Reserve operations is continuous and wide-ranging, cov ering transactions on a daily, weekly, monthly, quarterly, annual, and ad hoc basis. Members of the Board testify frequently at Congressional hearings on the System’s policies and operations, and the Board re sponds promptly to the congressional inquiries that come to us every working day. In the past, when requested, we have provided congres sional committees, on a confidential basis, with volumes of materials pertaining to audit and examination procedures as well as reports of examinations of Federal Reserve Banks. It is clear that Congress and its committees have the right to in quire into the effectiveness with which the System is discharging its responsibilities. And, as I have already noted, today’s discussion occurs in a framework entirely different from that which prevailed in 1973 and 1974. By the adoption of House Concurrent Resolution 133, Con gress has established a systematic mechanism for the review of Fed eral Reserve monetary policy. Under the terms of the resolution, the full Committee on Banking, Currency and Housing will hold semi annual hearings in conjunction with its Senate counterpart to hear the Board of Governors’ and the Federal Open Market Committee’s objec tives and plans with respect to the ranges of growth or diminution of the monetary and credit aggregates in the upcoming 12 months. In short, the Congress has established a policy audit of monetary policy in the most direct and responsible manner through the expedient of the congressional oversight hearing. We have every confidence that the 295 two Banking Committees will do an exemplary job in overseeing mone tary policy. I should note that the first of these hearings was held on May 1. ACCESS TO C E R TA IN IN F O R M A T IO N My final point goes to the System’s concern about the access by any outside organization to certain System records, operations and trans actions. These records include examination reports of commercial banks, transactions conducted with and on behalf of foreign central banks, and information about open market and lending operations. The record of the Federal Reserve in making information relative to its operations available should demonstrate that we do not begin with any bias for secrecy per se. In fact, a great deal of effort is re quired to properly protect certain information. We recognize, too, that GAO now is accorded access to highly sensitive information, in the Department of Defense and in other departments and agencies, and that no compromise of security results from these arrangements. Nevertheless, we firmly believe that there are compelling reasons which argue for the maintenance of certain information in the posses sion of the Federal Reserve from access by any outside organization. Public knowledge that GAO—or anyone else—had review powers over such information could have an adverse effect on the bank supervisory process, would alter our relationships with foreign governments and central banks, and might necessitate a change in our open market and discount functions. An audit by the General Accounting Office of foreign accounts held by the Federal Reserve System, we believe, would jeopardize the exist ing relationships between foreign monetary institutions, the Federal Reserve and the U.S. Treasury. It could, as a result, aggravate the Nation’s international finance relationships. Foreign monetary authorities channel a substantial proportion of their dollar transfers and U.S. dollar reserve holdings through their accounts with the Federal Reserve Banks. Nearly 130 foreign central banks, foreign governments, and international financial institutions have accounts with Federal Reserve Banks. These correspondents held $60 billion of U.S. Treasury and Federal agency securities in their accounts at the end of 1974. During 1974, transactions in these securi ties through their accounts totaled $85 billion. These transfers and investments are often the counterpart of official foreign exchange intervention or official reserve investment operations that reflect sov ereign actions and policies these authorities insist on keeping confi dential. It is their explicit understanding that use of an account with Federal Reserve Banks maintains this confidentiality. Only those em ployees with a need to know have access to the information concern ing foreign transactions. Extreme care is taken in assigning either internal auditors or examiners from the Board of Governors, although no compromises in the sufficiency of the audits are tolerated. Just what action the foreign central banks, foreign governments, and international financial institutions might take if the confidential status were not maintained cannot be predicted with certainty. It is probable, however, that their use of accounts at the Federal Reserve Banks would be considerably curtailed. They might even change the composition of their reserve holdings so that the dollar assets would be a smaller part. 296 Action which resulted in transferring the investments of foreign official institutions to non-Govemment financial institutions would make it more difficult for the Federal Reserve System to conduct its open market operations, since the Federal Reserve would no longer be able to coordinate its own very large transactions with the comparably large transactions that it conducts on behalf of foreign monetary au thorities. There would also be a reduced flow of financial information, and the relationships maintained with foreign financial institutions and governments could be harmed. A similar issue was discussed when legislation—Public Law 91599—was being considered regarding audits of the Exchange Stabili zation Fund by the General Accounting Office. The following is quoted from the hearings pertaining to that legislation: The Exchange Stabilization Fund deals in extremely confidential and highly sensitive monetary transactions with foreign governments. It is important not only that such transactions and the arrangements underlying them remain con fidential but also that nothing be done which would in any way impair the confidentiality of such transactions. The prospect of decisions of the Secretary of the Treasury with respect to transactions through this Fund being subjected to possible public question and debate would undoubtedly be disturbing to mar kets and to foreign government, and would therefore hamper the use of the Fund by the Secretary of the Treasury for its intended purpose. The Congress wisely recognized that foreign exchange operations and other aspects of international financial policy must not be subject to premature disclosure under any circumstances. The legislation ex empted “information determined by the Secretary to be of an inter nationally significant nature” from audit by the General Accounting Office. We believe providing the GAO access to “ reports of examination of member banks, from whatever source,” as H.R. 4316 would do, could reduce the flow and change the character of communications essential to effective bank supervision. It should be emphasized that although the Federal Deposit Insurance Corporation is audited by the GAO, reports of examination of insured banks are properly exempt from the scope of the audit authority. Neither does the GAO have access to re ports of examinations conducted by the Comptroller of the Currency. Enactment of H.R. 4316, as it is presently worded, could give the GAO access to reports of examination prepared not only by the Fed eral Reserve, but also by the other supervisory agencies. We strongly oppose providing such access to the General Accounting Office. In this connection, I might note that H.R. 10265, as reported by the full Com mittee in 1973, provided an explicit and complete exemption for both transactions conducted on behalf of foreign central banks and ex amination reports of member banks. We also believe it would be unwise to allow access to specific files and memoranda containing information relating to Federal Reserve Bank lending cases. It has long been an established practice in the field of banking that private information relating to a borrower and made available to the lending institution is held in strictest confidence. This practice is founded on the very sound principle that the lender should have access to all the information it needs to make a prudent lending decision without exposing the borrowers’ private, internal plans and operations to scrutiny by its competitors or the public. As with other forms of banking, lending to a member bank requires the 297 borrower to provide confidential information on its financial condi tion and internal operations as well as certain plans. Administration of such credit requires very candid communications between the bor rowing bank and the Reserve Bank with respect to problems a bank may be encountering in its day-to-day operations and specific strate gies which it plans to follow to remedy its difficulties. Because the in formation required from borrowing banks is sensitive, we strongly oppose providing anyone access to these files except those charged with the responsibility for the lending function. At a time when financial markets are already nervous, when citizens of this country are fearful of the inflationary impact of the growing Federal deficit, and when foreign central banks are looking to the Federal Reserve for leadership in international financial matters en actment of this legislation would be particularly unfortunate. We see no need to risk damaging effects upon our efforts toward interna tional financial negotiations or reinforcing the financial uncertainties at home. [The attachment to Governor Mitchell’s statement on securities transactions in Federal Reserve banks, follows:] S t a f f M e m o r a n d u m , B oard of G o vern o rs o f t h e F ed e r a l R eserv e S y s t e m , S e c u r it ie s T r a n s a c t io n s — F e d e r a l R e se r v e B a n k s In 1974, the Federal Reserve Banks issued, redeemed, and exchanged U.S. Gov ernment securities valued at $3.08 trillion. The bulk of System open market operations are for the purpose of offsetting the potentially destabilizing market impact of short-run variations in member bank reserves arising from such technical factors as movements in bank float and changes in the Treasury deposit balance at Federal Reserve Banks. To achieve this purpose, the Federal Reserve makes extensive use of repurchase agreements and matched sale-purchase transactions. The volume of such trans actions in 1974 amounted to somewhat more than $172 billion (or twice that if both the sale and purchase are included), or about 88 per cent of the total of system open market transactions of approximately $195 billion. When the System uses repurchase agreements and matched sale-purchase transactions, market participants immediately understand that the System is only temporarily sup plying (absorbing) reserves, and that this process will be reversed in a short period. The knowledge that the process is self-reversing enables the market to avoid possible misinterpretation of System activities. Volume of System Open Market Operations Tranasactions in Government Securities in 1974 [I n m illio n s ] Repurchase agreements_________________________________________________ $108,147 Matched sale-purchase transactions_____________________________________ 64,228 Outrights: Treasury bills: Purchases_____________________________________________________ 11,659 Sales __________________________________________________________ 5, 829 Treasury notes and bonds: 1, 746 Purchases_____________________________________________________ Sales ____________________________________________________________________ Redemptions --------------------------------------------------------------------------------------------Federal agencies: Purchases__________________________________________________________ 3,087 Sales -----------------------------------------------------------------------------------------------3 Total ____________________________________________________________ N o t e .— Data 194,699 for repurchase agreements and matched sale-purchase transac tions reflect the initial side of these transactions only. Thus, for example, the 298 total for repurchase agreements is the sum of purchases made by the System under such contracts, and does not include the subsequent resale of securities back to their original owners. Chairman P a t m a n . Thank you very much Governor Mitchell. I will forgo the use of my time in the beginning. I am anxious for the mem bers who are here to participate first; then I will use my time to ask you some questions. At this time, I would like to ask unanimous consent that we place in the record after my statement, before Governor Mitchell’s, a copy of the bill, H.R. 4316, and after that bill I would like to place in the rec ord the number of Members of the House, by State, who are cospon soring the bill, and also to extend my remarks in any other respect in connection with the hearing, that are relevant and material. Without objection, so ordered. Now, Mr. Minish, I call on you first. Mr. M i n i s h . Thank you, Mr. Chairman. Governor Mitchell, it is nice to have you before us again. Let me ask you, do you feel that the GAO has the capability to audit the Federal Reserve ? Governor M i t c h e l l . Well, in Mr. Staats’ testimony, I think he indi cated that he would like to employ four or five experts. But apart from that, I am sure he has the capability of doing the job. Mr. M i n i s h . Then why do you prefer Touche Ross over the GAO ? Governor M i t c h e l l . Well, there are some things that Touche Ross does not audit They do not audit the System’s open market account, for example. They do not audit the borrowing of the member banks. There are quite a few features they do not cover. They do audit the Board’s expenditures, but do not audit the Reserve bank’s operations, except the way in which our examinations are being conducted. M r . M i n i s h . T h e n i t is n o t r e a l l y a c o m p l e t e a u d i t i f t h e y a r e r e s tr ic te d , is i t ? Governor M i t c h e l l . They are auditing the Board, and the Board is auditing the banks. At one time the GAO, as you remember in my statement, audited the Board. M r . M i n i s h . Why can they not audit the banks ? Governor M i t c h e l l . Well, there is not any reason why they could not audit the banks, if that is the question you are asking. They have the capability of auditing the banks, except with this one reservation. Mr. M i n i s h . That is all, Mr. Chairman. [Testimony resumes on p. 358.] [At this point, Mr. Minish inserted in the record the Touche Ross report on the examination of financial statements for years ended De cember 31,1974 and 1973:] 299 TOUCHE ROSS & CO. 177 6 K S T R E E T N. W. W A S H I N G T O N , D C. 2 0 C 0 6 February 4, 1975 Board of Governors of the Federal Reserve System Washington, D. C. Gent l e m e n : We have examined the balance sheet of the Board of Governors of the Federal Reserve System as of December 31, 1974, and the related statements of assessments and expenses, and changes in financial position for the year then ended, and have submitted our report thereon under date of February 4, 1975, The purpose of our engagement was to examine the Board*s financial statements for the year ended December 31, 1974, and evaluate the fairness of presentation of the statements in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. As is customary, our examination was made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing pro cedures as we considered necessary in the circumstances for the purpose of expressing an opinion on the financial statements taken as a whole. Our examination included a review of the system of internal control and tests of a sample Of transactions to the extent we believed necessary. However, in accordance with generally accepted auditing standards, our examination did not include a detailed audit of transactions to the extent which would be required if intended to disclose defalcations or other irregularities, although their discovery may result. W e direct your attention to the fact that management has the responsibility for the proper recording of transactions in the books of account, for the safeguarding of assets, and for the sub stantial accuracy of the financial statements. Such statements are the representations of management. There were no restrictions placed upon us by the Board or its employees in connection with our examination. The scope and nature of our examination are described in the following paragraphs. The descriptions constitute a general out line of our examination hut are not a detailed listing of ail tests and procedures performed. 50-365 0 - 75 - 20 300 TOUCHE ROSS & CO. - 2 - Our examination was conducted in two segments: review, and 2) year-end audit. 1) preliminary The preliminary review is designed to familiarize ourselves with the accounting system in use, evaluate the internal controls and establish the scope of our year-end audit. As part of our preliminary review, we made a careful review of the Board's system of internal control. This review included a study and evaluation of internal accounting controls which are designed to assure the accurate recording and summarization of authorized financial trans actions and to provide for the safeguarding of the Board's assets against defalcations or other irregularities. The preliminary review also included specific tests of a sample of transactions as outlined below: Purchasing, accounts payable and cash disbursements: Detail tests were made of the propriety of the authorization for and recording of selected purchase orders, vouchers and cash disbursements selected from throughout 1974. The mathematical accuracy of the check register and voucher register were tested for the month of May, 1974. The cash disbursements for the month of May, 1974, were reconciled from the bank statements to the cash disbursements book and to the general ledger. Cash receipts, assessments and accounts receivable: The mathematical accuracy of the cash receipts journal was tested for the month of May, 1974. Detail tests were made to deter mine the accuracy of the recording of Bulletin and publication sales, and cafeteria and other transactions for the months of January, April, July and September, 1974. The accuracy of the amounts assessed to the Federal Reserve Banks for both Board expenses and property additions for 1974 and for expenditures made by the Board during 1974 for printing, issue and redemption of Federal Reserve Notes was tested and agreed to payments made by the Banks on a test basis. The amounts assessed for Board expenses and property additions were in accordance with rates approved by the Board. The paid-in capital and surplus of the Banks as of the assessment dates, which were used as their assessment bases, were confirmed directly with the Federal Reserve Banks. Invoices from the Bureau of Engraving and Printing supporting the expenditure by the Board during 1974 on behalf of the Federal Reserve Banks for the printing, issue and redemption of Federal Reserve Notes were examined. The cash receipts for the month of May, 1974, were reconciled from the bank statements to the cash receipts book and to the general ledger. Payroll: The mathematical accuracy of the payroll register for bi-weekly and semi-monthly payrolls in May, 1974, was tested, with totals 301 TOUCHE ROSS & CO. - 3 agreed to postings in the general ledger. The accuracy of, and documentation for the rate of pay and withholdings were tested for several employees selected from pay periods during the first nine months of 1974. Personnel and accounting records were examined for these employees to determine their accuracy and agreement. The transactions in.the payroll bank account were reconciled to the general ledger for the month of May, 1974. The accuracy of the payroll accruals at April 30, 1974 and May 31, 1974 were reviewed. General: All journal entries for the month of August, 1974, were reviewed for propriety and agreed to their posting in the general ledger. The general ledger was reviewed for other possible transactions not tested elsewhere. Based upon the results of our preliminary review, our year-end audit procedures were established to effectively perform our audit through tests in lieu of a detailed examination. The basic audit procedures performed are as follows: Cash: Bank reconciliations for the regular and payroll bank accounts as of December 31, 1974, prepared by the accounting department personnel, were reviewed, with the cash balance per books agreed to the general ledger accounts. The bank balances at December 31, 1974, were confirmed directly to us by the Federal Reserve Bank of Richmond. Bank statements and paid checks received directly by us subsequent to December 31, 1974, were used to account for the principal reconciling items. Petty cash funds on hand were counted by us in January, 1975. Interbank cash transfers and other cash transactions immediately prior to and after December 31, 1974, were reviewed to determine that a proper cash cut-off was made at Decem ber 31, 1974. Accounts receivable: The principal items in receivables as of December 31, 1974, were amounts due from Federal Reserve Banks and governmental agencies which were traced to supporting documents on a test basis. Selected items receivable as of December 31, 1974, were either confirmed directly to us or agreed to subsequent cash receipts on a test basis. Inventory: The inventories at December 31, 1974, consisted of office and data processing supplies and a lesser amount of cafeteria supplies. The detailed records supporting the inventory were tested for mathematical accuracy including footings and extensions. Unit prices were tested by reference to recent vendor invoices. 302 TOUCHE ROSS & CO. - 4Property; The changes in the property accounts for the year ended December 31, 1974, were reviewed. Supporting documents, primarily vendors* invoices and purchase orders, were examined on a test basis in connection with property acquisitions. Transactions related to the sale of property were agreed to underlying docu ments on a test basis. Accounts payable and accrued expenses: Vendors* invoices, or other available documents, were examined in support of major accounts payable and accrued expenses at December 31, 1974. Invoices received or processed in January, 1975, were reviewed to ascertain that no material liability had been omitted at December 31, 1974. Our review for unrecorded liabilities also included a review of all major contracts and of the minutes of the meetings of the Board of Governors and summary of actions taken under delegated authority. In addition, the Controller and other responsible accounting personnel were asked if all significant liabilities of the Board, to the best of their knowledge, were recorded in the books of account at December 31, 1974. The Board’s general counsel was also asked of any pending or contemplated litigation which might affect the Board's financial position at December 31, 1974. Accrued payroll and income taxes withheld: Accrued payroll was tested to the payroll register. Income taxes withheld were tested based upon the applicable payroll regis ters and tax payments -made in January, 1975. Operations: Direct confirmations were received from the Federal Reserve Banks covering the amounts, dates remitted, and bases of the semi annual assessments for Board expenses and property additions for 1974 and the amounts of the assessments for the printing, issue and redemption of Federal Reserve Notes. Expenses by natural classification, as reported in the financial statements, were compared with corresponding amounts in the 1974 budget and in the prior year financial statements. Explanations were obtained for all significant fluctuations by inquiry and examination of vendors' invoices. Total salary expense and total retirement contributions reported for the year were reconciled to payroll records. Miscellaneous income and expense and other selected expense accounts, legal and consulting fees and rent, were reviewed for propriety as of December 31, 1974. 303 TOUCHE ROSS & CO. 5 General Minutes of meetings of the Board of Governors and summary of actions taken under delegated authority were reviewed for the year. Tests were performed to ascertain that matters of accounting signif icance, such as the approval of assessments and contract commitments, were properly reflected in the books of account. The Board's management provided representations to us as to the substantial accuracy of the 1974 financial statements and the adequacy of the disclosure therein. Our examination indicated that the accounting records of the Board were maintained in accordance with prescribed policies and procedures. We would like to express our thanks to Mr. John Kakalec, Controller, and his staff for the excellent cooperation given to our staff assigned to this engagement. Very truly yours, 304 BOARD OP GOVERNORS OF TKE FEDERAL RESERVE SYSTEM REPORT ON EXAMINATION O P FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 19'74 AND 19/3 T O U C H E R O S S & CO. 305 TOUCHE RO SS & CO 17 7 6 K S T R E E T N. W. W A S H I N G T O N . 0. C. 2 0 0 0 6 February 4, 1975 Board of Governors of the Federal Reserve System Washington, D.C. We have examined the balance sheet of the Board of Governors of the Federal Reserve System as of December 31, 1974 and 197 3, and the related statements of assessments and expenses, and changes in financial position for the years then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we con sidered necessary in the circumstances. In our opinion, the aforementioned financial statements present fairly the financial position of the Board of Governors of the Federal Reserve System at December 31, 1974 and 1973, and the results of its operations and the changes in its financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. Certified Public Accountants 306 TOUCHE ROSS & CO. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM B A L A N C E S H E E T ASSETS OPERATING FUND: Cash Miscellaneous receivables and advances StocXroom and cafeteria inventories - at cost (first-in, first-out method) 1974 197 3 $ 5,111,271 211,915 $ 8,513,248 73,705 166,299 88,605 Total operating fund 5,489,485 8,675,558 PROPERTY FUND: Land and improvements Building Furniture and equipment Cons truetion-in-progre ss Computer 781,913 4,452,156 2,129,054 45,964,619 3,971,412 792,852 4,396,950 2,126,172 35,602,065 Total property fund 57,299,154 42,918,039 &2JJ § ^ 6 3 9 £5^593.597 $ 2,733,445 89,339 698,040 850,181 $ 2,127,548 231,867 505,801 1,662,319 4,371,005 4,527,535 4,148,023 (3,029,543) 662,492 3,485# 531 LIABILITIES AND FUND BALANCES OPERATING FUND: Accounts payable and accrued expenses Income taxes withheld Accrued payroll Retention on construction-in-progress Fund balance: Balance, beginning of year Assessments over (under) esqpenses Balance, end of year Total operating fund PROPERTY FUND: Fund balance: Balance, beginning of year Additions - at cost Disposals - at cost Net increase Total property fund, end of year 1,118,480 4,148,023 5,489,485 8,675,558 42,918,039 29,138,534 14,549,577 (168,462) 13,829,796 (50,291) 14,381,115 13,779,505 57,299,154 42,918,039 S62.788.63S, See notes to financial statements. 307 TOUCHE ROSS & CO. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF ASSESSMENTS AND EXPENSES Year ended December 31f 1974 197 3 ASSESSMENTS LEVIED ON FEDERAL RESERVE BANKS: For Board expenses and additions to property For expenditures made on behalf of the Federal Reserve Banks Total assessments EXPENSES: For the Board: Salaries Retirement and insurance contributions Travel expenses Legal, consultant and audit fees Contractual services Printing and binding - net Equipment, office space and other rentals Telephone and telegraph Postage and expressage Stationery, office and other supplies Heat, light and power Operation of cafeteria - net Repairs, maintenance and alterations Books and subscriptions System membership, Center for Latin America Monetary Studies Miscellaneous - net For additions to property - net of recovery on disposals of $13,656 in 1974 and $5,340 in 197 3 Expenditures for printing, issue and redemption of Federal Reserve Notes, paid on behalf of the Federal Reserve Banks Total expenses $41,116,600 $44,411,700 27.052.554 31,658,174 68,169,154 76,069.874 21,552,324 1,825,870 694,699 482,420 285,870 742,874 1,988,364 460,866 315,941 310,251 414,736 184,241 146,401 85,675 18,882,255 1,738,253 782,253 469,217 258,951 736,876 2,720,257 396,612 331,094 183,807 106,745 165,938 83,778 60,183 44,807 74,883 43,872 141,617 29,610,222 27,101,713 14.535.921 13.824,456 44,146,143 40,926,169 27.052.554 31,658.174 71.198,697 72.584,34 3 ASSESSMENTS OVER (UNDER) EXPENSES See notes to financial statements. 308 TOUCHE ROSS & CO. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF CHANGES IN FINANCIAL POSITION SOURCE OF FUNDS: Assessments over (under) expenses Net increase in property fund Increase in accounts payable and accrued expenses Increase in accrued payroll Increase in income taxes withheld Decrease in miscellaneous receivables and advances APPLICATION OF FUNDS: Additions to property - net: Construction-in-progress Computer Building Furniture and equipment Land and improvements Decrease in retention on construction-in-progress Decrease in income taxes withheld Increase in miscellaneous receivables and advances Increase in stockroom and cafeteria inventories Decrease in accounts payable and accrued expenses 1974 197 3 $ (3 ,0 2 9 ,5 4 3 ) 1 4 ,3 8 1 ,1 1 5 $ 3 ,4 8 5 ,5 3 1 1 3 ,7 7 9 ,5 0 5 6 0 5 ,8 9 7 1 9 2 ,2 3 9 1 8 .3 7 1 1 2 ,1 4 9 ,7 0 8 1 7 ,4 6 5 ,4 8 8 1 0 ,3 6 2 ,5 5 4 3 ,9 7 1 ,4 1 2 5 5 ,2 0 6 2 ,8 8 2 (1 0 ,9 3 9 ) 1 3 ,5 7 0 ,5 5 6 1 4 ,3 8 1 ,1 1 5 1 3 ,7 7 9 ,5 0 5 9 8 ,6 3 5 110,3 1 4 8 1 2 ,1 3 8 14 2 ,5 2 8 - 1 3 8 ,2 1 0 - 7 7 ,6 9 4 3 6 ,6 5 5 7 0 0 ,3 8 1 1 5 ,5 5 1 ,6 8 5 INCREASE (DECREASE) IN CASH 1 3 7,268 4 4 ,8 1 3 See notes to financial statements. 1 4 ,5 1 6 ,5 4 1 S 2.948.947 309 TOUCHE ROSS & CO. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1974 AND 1973 Significant Accounting Policies Assessments made by the Board on the Federal Reserve Banks for Board expenses and additions to property are calculated based upon expected cash needs and are accrued when assessed. Board expenses and property additions are recorded on the accrual basis of accounting. Assessments and expenditures made on behalf of the Federal Reserve Banks for the printing, issue and redemption of Federal Reserve Notes are recorded on the cash basis and produce results which are not materially different from those which would have been produced on the accrual basis of accounting. The Board does not charge depreciation as an operating expense. Property additions are charged to expense in the Operating Fund in the year of acquisition; recoveries on the disposal of property are recorded as a reduction in expense in the Operating Fund in the year of disposal. When property is acquired or sold, the property accounts in the Property Fund are increased or reduced at full cost, with a corresponding increase or decrease in the property fund balance. Because of the short duration and temporary nature of the Board's leases, leasehold improvements have not been capitalized in the Property Fund. The Board is self-insured against loss of its building and furniture and equipment from fire or other casualty. The construetion-in-progress is covered by builder's risk insurance for work to December 31, 1974. Coverage for other customarily insured risks, such as workmen's compensation insurance and comprehensive general liability insurance, is carried by the Board. Construction-in-Procyress The construction-in-progress represents the cost as of December 31, 1974, for the construction, furnishing and land scaping of the Martin Building, which first became occupied during 1974. The cost includes both building costs and costs relating to furniture, equipment and landscaping. When the construction and furnishing are completed in 1975, the final costs will be allocated to the appropriate property fund accounts. 310 TOUCHE ROSS & CO. Also included in the construction-in-progress is approxi mately $6,500,000 of cost that relates to the North Garage. Over the. next 40 years the Board will receive approximately $4,300,000 from the Department of Interior for the use of parking spaces in the garage (subject to adjustment for both reduction of the number of spaces used by Interior and the final actual cost of the garage). Actual use of these spaces started in August, 1974 and miscellaneous expense l*as been offset for the $9,000 monthly payment received from Interior since that time. The retention on construction-in-progress represents amounts withheld on contracts for the construction, furnishing and land scaping and is to be paid at the satisfactory completion of the contracts. Long-Term Leases The Board leases outside office and parking space under leases expiring from February 28, 1975 to December 31, 1©77. Because the leases may be terminated with six months notice commencing in 1975, at December 31, 1974, the only fixed future rental commitment is $265,000 for 1975. Rent expense for out side office, storage and parking space for the years ended December 31, 1974 and 1973 was approximately $990,000 and $1,064,000, respectively. Retirement Plans There are two contributory retirement programs for employees of the Board. About 85% of the employees are covered by the Federal Reserve Board Plan. All new members of the staff who do not come directly from a position in the Government are covered by this plan. The second, the Civil Service Retirement Plan, covers all new employees Who come directly from Government ser vice. Employee contributions are the same under both plans, and benefits are similar, being based upon the Civil Service Plan. Under the Civil Service Plan, Board contributions match employee payroll deductions while under the Federal Reserve Plan? Board contributions are actuarially determined annually. Additionally, employees of the Board participate in the Federal Reserve System's Thrift Plan. Under this plan, the Board adds a fixed percentage to allowable employee savings. Board contributions to these plans totaled $1,509,054 in 1974 and $1,494,707 in 1973. 311 TOUCHE ROSS & CO. Contingent Liabilities Litigation involving the Board generally arises from challenges to, or appeals from actions or proposed actions of the Board pursuant to statutory or regulatory requirement or authorization. In essence, such law suits seek injunctive or declaratory relief against the Board rather than monetary awards. At December 31, 1974, there are no claims or litigation outstanding involving monetary awards that would have a material impact on the financial statements of the Board. 312 A*+-+•**_ k rvv^t BOARD O F GO V ERN O RS o r TMC FEDERAL R ESERVE S Y STEM Office Correspondence Dat®— l9-75 T ft Board of Governors___________ Snhject; 1974 Reserve Bank Expenses^ |?rAp< Division of Federal Reserve__ Bank Operations (William H. Wallace) ___________________________________ FOR INFORMATION ONLY Total expenses of the Federal Reserve'Banks increased $63.6 million in 1974, 12.1 percent over 1973 expenses. This represents the lovest percentage increase since 1968, except for 1972 when the Board imposed a manpower control program. The table below shows that as a result of higher reimbursements, net expenses increased by only 10.6 percent. RESERVE BANK EXPENSES (thousands of dollars) 1973 1974 Percent Change 12.1% Total Expenses Reimbursements $526,686 31,567 $590,288 42,747 35.4 Net Expenses $495,119 $547,541 10.6 Total expenses of the System were $13.6 million (2.3 percent) below the budgeted 1974 level. Individual District budget performance is best analyzed in terms of controllable expenses which exclude such expenses as the cost of Federal Reserve Currency and the Board Assess ment, the estimates of which were both sharply reduced during the year. Total controllable expenses were $6.9 million (1.4 percent) below budget. The attached Table 1 indicates that all Districts were under controllable budgets except New York. The overrun in New York is primarily attrib utable to the costs of the Puerto Rico currency and food stamp opera tions which were not budgeted and unusually heavy demands in the fiscal agency area. Table 2 compares noncontrollable expenses in 1974 with the Bank budgets and shows the variations in.the principal components of these costs. Table 3 shows the budget performance of the twelve Districts in terms of. total expenses. Federal Reserve Bank Controllable Expenses Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Total Controllable Expenses Budget Actual Expenses Actual less Budge Amount 7, $ 33,760 108,015 25,587 32,330 42,974 48,861 64,463 31,842 19,908 31,183 25,621 42.922 $507,466 $ 33,375 109,556 25,106 31,803 42,089 47,473 63,209 31,538 19,374 29,225 24,935 42,865 $500,546 $ -385 1,541 -481 -527 -885 -1,388 -1,254 -304 -534 -1,958 -686 - 57 -$6,920 -1.1 1.4 -1.9 -1.6 -2.1 -2.8 -1.9 -1.0 -2.7 -6.3 -2.7 - .1 -1.4 96.459 89,743 -6,716 -7.0 Total Expenses $603,925 $590,288 -$13,637 -2.3 Reimbursements 35.390 7.357 20.8 -$20,994 -3.7 Non-Controllable Net Expenses Note: $568,535 42,747—7 $547,541 Amounts may not add due to rounding. 1/ Reimbursements exceed budget due to the institution of full cost recovery in the food stamp program after most Bank budgets were prepared, and greater than anticipated fiscal agency activity. 313 Table 1 Federal Reserve Banks Comparison of Expenses to Budget 1974 (thousands of dollars) Table 2 Federal Reserve Banks if Comparison of Noncontrol lable Expenses-* to Budget 1974 (thousands of dollars) Component s of Deviation Federal Reserve Bank Boston New York Board Assessment Budget Actual $ 6,575.5 $ 6,180.9 $ -394.6 130.1 $ -289.3 -$235.4 19,301.9 17,695.0 -1,606.9 -46.2 -981.8 -578.9 Actual less Budget F. R. Currency $ Other Philadelphia 4,768.2 4,791.5 23.3 349.7 -323.4 -3.0 Cleveland 8,144.7 7,681.3 -463.4 112.5 -259.5 -316.4 5,993.0 6,624.6 631.6 452.9 -68.0 246.7 7,902.5 7,315.1 -587.4 -461.3 -86.4 -39.7 Chicago 13,928.7 11,738.0 -2,190.7 -1,197.3 -950.4 -43.1 St. Louis 4,366.6 3,866.3 -500.3 -332.7 -123.7 -44.0 Minneapolis 4,603.6 5,248.7 645.1 -5.2 252.2 398.2 Kansas City 5,605.5 4,431.7 -1,173.8 -757.6 -268.0 -148.2 Dallas 4,763.2 4,614.8 -148.4 -81.2 -89.7 San Francisco Total Note: 22.5. 11.487.3 9,553.2 -1,934.1 -1.284.3 -673.3 23.5 $97,440.7 $89,742.7 -$7,698.0 -$3,120.6 -$3,861.3 -$717.8 Amounts may not add due to rounding. 1/ Noncontrollable expenses consist of costs of Federal Reserve Currency, Board Assessment, Taxes on Real Estate, Depreciation and Interoffice Expenses. 314 Richmond Atlanta Table 3 Federal Reserve Banks Comparison of Total Expenses to Budget 1974 (thousands of dollars) Federal Reserve Bank Boston New York Budget Actual $ 40,335 $ 39,556 126,335 127,251 Actual less Budget Amount 7. $ -779 -1 .9 916 0 .7 Philadelphia 30,355 29,898 -457 -1 .5 Cleveland 40,475 39,484 -991 -2 .4 Richmond 48,967 48,713 -254 -0 .5 Atlanta 56,763 54,788 -1,975 -3 .5 Chicago 78,392 74,947 -3,445 -4 .4 St. Louis 36,209 35,404 -805 -2 .2 Minneapolis 24,512 24,623 111 0 .5 Kansas City 36,789 33,656 -3 ,1 3 3 -8 .5 Dallas 30,385 29,550 -835 -2 .7 San Francisco 54,409 52,418 -1,991 -3 .7 $603,926 $590,288 -$13,638 -2.3 System Note: Amounts may not add due to rounding. 316 GO A H D o r GOVERNORS W ** & o r THE FEDERAL RESERVE SYSTEM Office Correspondence Date ______ Board of Governors_________ tfron Office of the Controller C r Mareh 20» 1?7S- 1974 Budget Performance _________ Report jc The 1974 Budget Performance Report is presented herewith • for your consideration. This memorandum highlights the more detailed information provided in that report (attached). Operating Budget Original Budget Savings Target Retroactive Pay Added Adjusted Budget Expenses Operating Underexpenditure $30,850,000 ( 350,000) 230.000 30,730,000 30.030,463 $(699,537) (2.3%) Capital Budgets Computer Acquisition Budget Computer Acquisition Expenses Computer Underexpenditure $ 4,083,861 3.971.412 Construction & Rehabilitation Budget Construction & Rehabilitation Expenses Capital Budget Overexpenditure $10,345,497 10.381.945 Combined Operating & Capital Underexpenditure (112,449) (2.7%) 36.448 (0.4%) ($775,535) (2.57.) The 1974 Operating Budget was originally approved for $30,850,000 contingent upon a commitment by Governor Holland to the Board to bring operating expenses down to $30,500,000. A Senior Staff Group (SSG) was established to meet that $350,000 savings commitment. The Board later approved a $230,000 addendum to the budget as authorisation to retroactively compensate employees for that portion of the 1972 General Pay Increase which was delayed by Presidential action. The operating underexpenditure reflects delays associated with Martin Building occupancy and the efforts of the staff in maintaining the sense of fiscal constraint set by the Senior Staff Group. Total savings identified at year end was $1,234,000 from which the Board funded over $274,000 in new initiatives and a $260,000 pay increase. Final underexpenditures were almost $700,000. There were three major factors contributing to the ur.derexpenditure in the computer acquisition budget: The required period of overlap of the computer with rental equipment was less than anticipated thereby saving capitalized computer equipment rental; the crecl cs received toward purchase 317 Board of Governors - 2 - of previously rented components were greater than budgeted; and, freight expenses were less than budgeted because the outgoing equipment was transferred to another government agency. The $36,000 Construction Program overexpenditure is the net of a $281,000 overexpenditure in the Martin Building Account and a $244,000 underexpenditure in the Board Rehabilitation Account. The Martin Building overexpsnditure resulted from "catch-up" expenses from previous year undcrexpenditures in the multiyear contract (strictly a timing problem). The Board Building Rehabilitation underexpenditure resulted from a change in conccpt and direction and accompanying delays. Tha terrace level (cafeteria), and space for health services, Administrative Services shops, graphics, the Credit Union, the Reserve Board Club Library, and employee's lounge, and some recreational facilities remain to be completed in the Martin Building. There are also a number of items such as door handles, locks, and other hardware that have not been delivered. The Board Building renovation awaits concept approval. Tha Martin Building housed 660 office and support personnel and the Board Building housed 307 personnel at year-end. Achievements and Trends The year was characterized by some change in the Board's organization, dedication and occupancy of the Martin Building, manage ment acceptance of a new computer system, a number of priority new initiatives and accomplishment of both continuing and new objectives. Key aspects include: !• Senior Staff Group. As indicated above, a Senior Staff Group (SSG) was designated to help the Board meet 1974 Budget constraints. The immediate objective of finding $350,000 in savings was met early in the year and the sense of fiscal constraint set by the SSG continued throughout the year to allow the Board to also meet the spirit of the President's 2% budget cut for the year. The SSG and staff identified $1,233,705 in gross savings during the year from which funded $260,000 for a general pay increase and $274,000 in high priority new initiatives. These new initiatives included approved financing for the new Office of Saver and Consumer Affairs ($46,000), and the new Bank Holding Company Analysis Program ($52,000); new positions in the Office of Board Mercbers, Le^al Division, Bnnk Operations, and Office of the Managing Director for Research and JEcono.-nic Policy ($80,325); new consultants and contracts largely in the Division of Bank Operations ($42,000) 9 the Office of the Managing Director for reratioii3 ($10,000), and Office of Board Members ($10,000); and travel ($17,000). In addition, it reviewed a number of management options and recommended courses of action which led to undcrexpenditures in both building services and personnel areas but which were not formally identified as 318 Board of Governors • 3 - savings. The Divisions actively participated In the SSG sense of fiscal constraint and were largely responsible for the success of the progran. 2. Organizational Chanr.es Creation of the Office of Saver and Consumer Affairs from two existing sections in the Division of Supervision and Regulation and a new Equal Credit Opportunity Program and support functions for the new office. Revision of the structure of the Offices of the Managing Directors and appointment of a new Managing Director for Operations. Creation of the Bank Holding Company Analysis and Banking Supervision Programs in the Office of the Managing Director for Operations. Creation of a new Counsel to the Chairman. Dissolution of the Conrnittee on Interest and Dividends *nd the Voluntary Foreign Credit Restraint Program (Division of International Finance). New directorship appointments in the Divisions of Research and Statistics, Banking Supervision and Regulation (along with a title change) and Data Processing as well as the Office of Saver and Consumer Affairs and appointment of a new Secretary of the Board. Organizational improvements in the Office of the Secretary, Division of Personnel and Division of Federal Reserve Bank Operations. 3. Martin Building Occupancy. Initial plans for occupancy of the Martin Building were delayed and the newly purchased computer system was not installed until April. Staff member moves to the new building occurred in shifts from August 10 through September 28. Occupancy of the building has evidenced significant positive changes in scaff morale while encouraging efficiency in operations through more effective intraand inter-office communications. Initial estimates on maintenance costs were revised downward with management decisions to employ contract labor. Initial utility costs were high, but actions were taken to reduce these expenditures and lower costs were noted for November and December. 4. Employment. There were 94 more employees at year-end 1974 than year-end 1973, a 7.4% increase— the largest since the 10.6% increase in 1970. The occupancy of the Martin Building, the creation of the Office of Saver and Consumer Affairs, and the Bank Holding Company Analysis Program along with new positions and the filling of vacancies in the office of Board Mambers and the Divisions of Data Processing and Federal Reserve Bank Operations account for this increase. There were 49 319 Board of Governors - 4 - positions originally authorized for Martin Building related tasks that were deleted during the year. The Board had 154 vacancies at year-end of which 116 were vacancies in full-time permanent positions. 5. * New Legislation. As in the past, the Board's operations have been affccted by new legislation passed by Congress and signed into law by the President. This report contains descriptions of various pieces of new legislation that have impinged directly on the Board's workload through their effect on the Board's operations and responsibilities. The most significant piece of legislation, in terms of Board responsibilities, was the Depository Institutions Amendments of 1974 (P.L. 93-495) which included, among other provisions, the Equal Credit Opportunity Act and the Fair Credit Blllins Act and amendments to the Truth-in-Lending Act. The Office of Saver and Consumer Affairs is directly responsible for carrying out the mandates under this legislation. 6. Constraints imposed on 1974 spending challenged Division managers to meet their objectives within limited resources. Consequences associated with these constraints have been voiced by the Divisions. 7. Overexpenditures While the total operating budget was underexpended, three Divisions exceeded their year-end financial operating plans without prior approval. The Offices of Members of the Board were over by $20,000 (largely due to overexpenditure for travel and salaries); the Division of Federal Reserve Bank Operations was over by $37,000 (largely from overexpenditures for travel and contractual arrangements); the Division, of Personnel was over by $24,000 (largely fro-ji overexpenditures for salaries and greater tuition and registration fees than expected— the Division of Personnel contributed a like amount to the Savings and Reallocation Account earlier in the year). Some object classes of expenditure (travel; employee insurance; rentals; heat, light, and power; and books and subscriptions) were somewhat over earlier authorizations. The specific reasons for these overages have been reviewed and we recommend approval. 8. General Conclusions General conclusions drawn from this performance review are that program objectives were generally met and that the spirit of co operation in constraining resources evident throughout the Board resulted in better management of those resources and provided a means of financing a number of high priority new initiatives. The overexpenditures which occurred were more than offset by the underexpenditures and are understandable and explainable. The staff's sense of fiscal responsibility should be recognized and continue to be encouraged. 320 Summary by Board Program Structure 321 Summary by Board Program Structure The Board Program Structure categorization serves as a basic framework for insuring that the Board’s program planning and budgeting activities are integrated to support System objectives, for analyzing alternative Board resource allocation strategies, and for preparing and updating planning activities. It is structured into four major prograa categories as outlined below: Program Category I - Formulation of Monetary Policy. This program*en compasses the majority of the Divisions of Research and Statistics and International Finance and the Office of the Managing Director for Re search and Economic Policy. The Board originally budgeted $7,776,267 for developing and disseminating economic intelligence, including the continuous research and analysis of economic and financial fields, and foreign economic and financial developments. The final operating plan was $13,212 less or $7,773,479. The final overage of $10,424 (0.13%) was largely caused by greater than anticipated piersonal services costs in Program Direction. These costs are related to both pay Increases and the addition of an unbudgeted staff member. Program Category II - Supervision and Regulation of Financial Institutions. This program encompasses the larger part of the Divisions of Bankih^ Supervision and Regulation, Federal Reserve Bank Operations, and ’the Office of Saver and Consumer Affairs and includes Bank Holding Company related activities in the Division of Research and Statistics, the Legal Division and the Office of the Mananging Director for Operations. The purpose of the program is to identify costs associated with the Board's responsibilities for the supervision of the Federal Reserve Banks, the supervision and regulation of commercial bank operations as well as banking structure changes and selective credit regulations. The proeran was originally budgeted at $5,415,382, and expended $5,235,592, within a final operating plan of $5,385,665 ($29,717 was transferred for savings and reallocations). The $100,073 (1.9%) underage resulted mainly from failure to fill vacancies and delays in both the new Office of Saver and Consumer Affairs and the new Bank Holding Company Supervision Program in the Office of the Managing Director for Operations. Program Category III - Financial Services for the Svster, the Government, and the Public.. The Board originally budgeted $563,319 for Currency and Coin Supply and Payments Mechanism operations (both of these are manatee by the Division of Federal Reserve Bank Operations). The final operating plan was $568,319, an increase of $5,000 for a new travel initiative. Expenses for the year were $519,361 or $48,958 (3.6%) underexpended frcn the final operating plan. The major cause of the underage was failure to fill vacancies in the Payments Mechanism Program. Program Category IV - System P o : * v Direction and Board Support. This program contains two major subv." ,;:ans: System Policy Direction which contains the Offices of the Board Members and Staff, the Managing Director for Operations, and the Secretary of the Board; and Board Support which contains the nonbanking-related staff element of the Office of the 322 Managing D irector fo r Operations, the s t a f f element o f the O ffic e o f the Secretary, the D ivision o f Data P rocessin g, Administrative S ervices, and Personnel, the Legal D iv isio n , and the O ffic e o f the C o n troller. The f u l l c o s ts o f each o f the other three programs are d istorted to the ex tent support c o s ts are contained in th is program. . The program vas I n i t i a l l y budgeted at $17,066,086 but transferred Funds id e n tifie d as savings from delays in Martin Building occupancy, ren tal payments and other lapses which resu lted in a fin a l operating plan o f $16,857,645. Final expenditures were $16,452,030. This is $405,615 (2.4%) le s s than the operating plan because o f further delays In Martin Building occupancy and further management-induced b u ildin g se rv ice s lapses (night labor fo r c e and c a fe t e r ia o p era tion s, e t c . ) , fewer p u blication s c o sts than a n ticip a te d , and some other personal s e r v ice s lap ses. Other C ategories, Computer A cq u isitio n , Martin Annex Construction, and Board Building R e h a b ilita tio n are a ls o categorized in the Board Program Structure format • 323 Summary by O bject C lasses o f Expenditure 324 Summary by Object Class o f Expenditures The p rin cip a l d iffe r e n c e s in expenditures at year end from the operating plan by o b je ct c la s s o f expenditure are sunrarized be low and are follow ed by b r ie f explanations. S ig n ifica n t F inancial Variances Over(Under) Year-End Operating Plan S a la rie s & Fringe B enefits Fees Traveling Expenses Postage & Expressage Telephone & Telegraph P rin tin g & Binding S tation ery & Supplies Furniture & Equipment Rentals Books & Subscriptions Heat, l i g h t , & power Repairs & A lteration s-B u ild in g Contractual P rofession a l Services A ll Other TOTAL UNDER OPERATING PLAN ($186,400) ( 64,918) 31,136 ( 9,909) ( 52,448) ( 159,821) ( 40,646) ( 37,318) 79,376 16,975 139,736 ( 51,911) ( ,53,685) ( 148,263) ( .8) (1 9 .0 ) 4 .7 ( 3.0) (1 0 . 2 ) (15.6) (11.6) (18.3) 4.2 24.7 50.8 (58.2) ( 9.8 ) (24.6) ($699,537) ( 2.3) S alaries and Fringe B enefits Expenditures Over (Under) YE Operating P lan_____ Amount % Year-End Operating Plan Actual Expenditures $23,564,594 23,378,194 ($186,400) (.8) The 1974 approved budget provided $21,828,835 fo r s a la rie s , $1,685,135 fo r retirement and $292,934 fo r insurance, fo r a tota l of fo r personnel expenses. This fig u re was reduced by $242,310 during the year by the Senior S ta ff Group to provide funds as needed. There was an underexpenditure d espite a R etroactive Pay Increase in June and a General Pay Increase in October which cost the Board $260,000. $ 2 3 ,8 0 6 ,9 0 4 Major underexpenditures o f sa la rie s and frin g es occurred in the O ffice o f Saver ana Consumer A ffa ir s (OSCA) ($44,1 10), Division o f A dm inistrative Services ($152,197) D ivision o f Supervision and Regu la tio n ($28,862) and the Legal D ivision ($19,231). Administrative S e rv ice s’ underage was due to the turnover o f lower grade personnel and subsequent hiring d elays. The rest o f the D ivision s experienced 325 h irin g d ela y s. These underages were o f f s e t by overexpenditures by the follow in g D iv isio n s : Federal Reserve Bank Operations ($24,163) Board Members ($22,821) and Data Processing ($19,072). A ll o f these D ivisions wore overexpended because personnel lap se, which had been budgeted, did not occur and the D iv ision s in te rn a lly funded the October General Pay Increase. Fees Expenditures Over (Under) YE Operating Plan_______ Amount % YE Operating Plan Actual Expenditues $341,110 276,192 ($64,918) (1 9 .0 ) The o r ig in a l approved budget o f $324,068 was increased by $17,042 during the year r e fle c t in g , p rim arily, the a llo c a t io n by the Senior S ta ff Group to FR Bank Operations o f $18,500 fo r the Richmond A rch itect and the A rch itectu ral Advisory Panel. The t o ta l underage o f $64,918 i s the net e f f e c t o f an underage o f $26^200 in th e -O ffic e o f Saver and Consumer A ffa ir s (OSCA) to an overage $12,$20 in the D ivision o f Supervision and R egulation. The underage in OSCA was caused by illn e s s o f one consultant and h irin g delays which meant delays in assign ing work to con su lta n ts. The overage in Supervision and Regulation was because the consultant in Trust A c t iv it ie s was used more than o r ig in a lly planned. The r e st o f the d iffe r e n c e s are minor across other d iv is io n s and e a s ily explainable. of Travel Expenditures Over (Under) YE Operating Plan______ Amount % YE Operating Plan Actual Expenditure $663,563 694,699 $31,136 4.7 The 1974 approved budget provided $626,436 fo r tra velin g expenses. $37,127 in ad d ition a l funds was provided v ia PCRs. Most o f the funds were a llo ca te d by the Senior S ta ff Group. Major re c ip ie n ts o f these funds were FR Bank Operations ($18,500), Research and S ta tis t ic s ($ 9 ,0 0 0 ), and Legal ($ 2,50 0). The overexpenditure o f $31,136 i s the net e ff e c t o f undetages and overages o f a l l D iv isio n s, ranging from an underage o f $8,594 for ■OSCA to an overage o f $19,611 fo r FR Bank Operations. The underage in OSCA was again caused by h irin g d elay s, whereas the FR Bank Operations 326 indicated that th e ir overage was caused by I n fla tio n , lack o f h is to r ic a l data to make o r ig in a l estim ates and a d d itio n a l tra v el fo r the PACS pro j e c t . The O ffic e o f Board Members was overexpended by $12,436 due mainly to more than a n ticip ated tra v e l by Members o f the Board and Board con su lta n ts . The other D ivision *s variances are r e la t iv e ly minor and are e x p la in a b le . Postage & Expressage Expenditures Over (Under) YE Operating Plan______ Amount YE Operating Plan Actual Expenditures $325,850 315,941 ($9,909) (3 .0 ) The 1974 approved budget o f $382,675 was reduccd by $56,825 during th e 'y e a r because the computer shipping charge was overestimated o r ig in a lly . This amount then was underexpended by $9,909. The cause fo r th is underage was in m iscellaneous bulk shipments which were under expended by $10,735. This was o f f s e t by a $10,214 overage fo r trans p o rta tio n charges fo r the computer. Telephone 6 Telegraph Expenditures Over (Under) YE Operating Plan_____ Amount % YE Operating Plan Actual Expenditures $513,314 460,866 ($52,448) (1 0.2) No change was made to the o r ig in a l approved budget. The under expenditure o f $52,4AS was due la r g e ly to le s s than an ticip ated in s ta l la t io n charges. Lower than an ticip ated charges fo r FR Communication Network and GSA Long Distance added to the underage but was o ff s e t by overages in Commerical Long Distance and charges fo r the Data C ircu its. P rin tin g & Binding Expenditures Over (Under) YE Operating Plan______ Amount YE Operating Plan Actual Expenditures $1,024,600 864,779 X ($159,821) (1 5.6) The 1974 approved budget o f $1,074,600 was reduced by $50,000 by the Senior S ta ff Group a fte r c o s ts fo r Purposes and Functions were revised downward. The underexpenditure by Adm inistrative Services was caused by reduced co sts fo r FRB B u llotln and le s s demand fo r Supple mental Loose Leaf S ervice, R egulations, S pecial Outside Duplicating, 327 Mult 1.1ithing and Xeroxing thin o r ig in a lly estim ated. General P rinting and Annual Report c o s ts were higher than o r ig in a lly estimated and they served to o f f s e t the underages noted above. Stationery & Supplies Expenditures Over (Under) YE Operating Plan Amount % YE Operating Plan Actual Expenditures $350,897 310,251 ($40,646) (1 1 .6 ) The amount o f $48,192 was added during the year to the o r ig in a l budget fo r sta tio n e ry and su p p lies. This consisted o f $42,000 fo r Data Processing that was transferee! w ithin the D ivision and $10,000 provided by the Senior S ta ff Group to FR Bank Operations to purchase confirm ation forms. This account’ s underage was a ttrib u ta b le to Data P rocessin g 's underexpenditure o f $43,000 re su ltin g from the annual inventory o f th eir supplies and subsequent adjustments to determine cost o f su pplies used. Furniture & Equipment Expenditure Over (Under) YE Operating Plan_____ Amount % YE Operating Plan Actual Expenditures $204,244 166,926 ($37,318) (1 8.3) was The amount o f $72,258 added during the year to the approved budget o f $131,986. These monies were accommodated via PCR and consisted o f in t r v -d iv is io n a l tra n sfe rs. Ad*?fn 'o t r a tiv e S erv ices’ operating plan fo r thl. ccount was increased by ? i , 0 0 0 through th is method, however, that di- iion was underexpended by $32,930 at year, resu ltin g in the major r a tion o f the $37,318 undernge. This same underage occurred in most l,:.v.‘ sions and was a ttribu ted to the fa c t that some items were ordered la te in f i s c a l year and were never received with the attendant resu lt that these items could not be charged to 1974 expenses. Rentals (Computer and O ffic e space) Expenditure Over (Under) YE Operating Plan_____ Amount X YE Operating Plan Actual Expenditure $1,908,988 $1,988,364 $79,376 4.2 The o r ig in a l 1974 budge*- o f $1,960,927 fo r ren tals was reduced by $51,939 because o f savings generated by the purchase o f the computer. Further savings developed re su ltin g from the purchase as evidenced by Data P rocessin g’ s underage o f $10,471 fo r the year. The t o ta l overage 328 o f $79,376 was due almost e n tir e ly to the overexpenditure o f $90,458 by A dm inistrative Services fo r Watergate re n ta ls. This was necessitated because o f the delay in the occupancy o f the Martin B uilding. Book & Subscrip tio n s Expenditures Over (Under) YE Operating Plan______ Amount __ % YE Operating Plan Actual Expenditure $68,700 85,675 $16,975 24.7 There was no change to the approved budget during the year. The overage o f $16,975 con sisted mainly o f a $9,032 overexpenditure by Legal fo r law books in lie u o f a 1975 expenditure fo r these items. Re search and S t a t is t ic s a lso incurred an overage o f $5,503 resu ltin g from mult: year su b scrip tio n s with th eir higher i n i t i a l c o st but lower long-term co sts . Heat, L igh t, & Power Expenditures Over (Under) YE Operating Plan______ Amount % YE Operating Plan A ctual Expenditures $275,000 414,736 $139,736 50.8% No change was made to the approved budget o f $275,000. The $139,736 overexpenditure was caused by an overexpenditure o f $184,040 fo r e l e c t r i c i t y with a $44,304 underage o f f s e t fo r steam. This over expenditure fo r e l e c t r i c i t y was due to r is in g u t i l i t y cost, and lack o f h is t o r ic a l data from which to budget c o s ts fo r the Martin Building which was occupied in the la t t e r part o f 1974. Repairs & A lte ra tio n s - Building Expenditures Over (Under) YE Operating Plan Amount % YE Operating Plan Actual Expenditures $89,250 37,339 ($51,911) (5 8.2) The approved budget o f $106,450 was reduced by $17,200 as a r e su lt o f in t r a -d iv is io n a l tra n sfers o f funds by A dm inistrative Service. Even with th is redu ction, delay in acceptance o f major equipment in the Martin Building p re cip ita te d delays in the need to purchase items as o r ig in a lly planned, thus causing the fu rther underage o f $51,911 by A dm inistrative S ervices. 329 Contractual P rofession a l S ervices Expenditures Over (Under) YE Operating Plan______ Axnount X YE Operating Plan Actual Expenditures $545,783 492,098 ($53,685) (9 .8 ) The approved budget o f $539,473 was increased by $6,310 during the year to cover m iscellaneous s e r v ice s needed. The underage o f $53,685 was the net e ff e c t o f underages and overages in several d iv is io n s ranging from a $6,198 overexpenditure in Legal to a $21,561 underexpenditure in Administrative S e rv ice s. A dm inistrative S ervices' underage a ttr i butable to le s s expense that o r ig in a lly planned fo r the food services consulting co n tra ct and la te occupancy o f the Martin Building causing le ss than f u l l u t iliz a t io n o f the $46,000 a lloca ted fo r the night labor co n tra ct. Data Processing had an underage o f $21,474 that was caused by le ss usage o f ou tsid e computer se rv ice s and Legal had an overage o f $6,198 that was a re su lt o f more lengthy p r e - t r ia l preparation by the S pecial Counsel, in r e la tio n to the Roussel matter, than estim ated. The fin a l major underage was $10,113 fo r stenographic s e r v ice s . Other devia tion s wiere minor across the d iv is io n s . yas A ll Other Expenditures Over (Under) YE Operating Plan______ Amount % YE Operating Plan Actual Expenditures $602,178 453,915 ($148,263) (24.6) The approved budget o f $615,428 was reduced by $13,250 as a re su lt o f in t r a -d iv is io n a l transfer o f funds. This underexpenditure o f $148,263 was the net e ff e c t o f overages and underages in most d iv is io n s ranging from $18,000 overage fo r Personnel to a $156,663 underage in Administrative S e rvice s. C onstruction delays and reductions in s ta ffin g requirements fo r the c a fe te r ia were the main causes fo r the underage in Administrative S e rvice s. The overage experienced by Personnel was a ttrib u ta b le to overexpenditure in the Academic Assistance Program. 330 S ig n ifica n t A c t iv it ie s in 1974 331 S ig n ifica n t A c t iv it ie s in 1974 There were a number o f developments that occurred in 1974 that had s ig n ific a n t resource im plication s and merit s p e c if ic d is cu ssion . Senior S ta ff Group The Administrative Governor designated the Senior S ta ff Group to id e n t ify $350,000 that could be applied against the 1974 budget as savin gs. In- a d d itio n , th is group was tasked with review ing new in i t i a t i v e s and means o f funding those high p r io r it y new i n it ia t iv e s which were approved. The Senior S ta ff Group was chaired by the Deputy Managing D irector fo r Operations, administered by the C on troller and supported by O ffice o f the C on troller s t a f f . Members represented several d iv is io n d ir e c t o r s , a deputy d iv is io n d ire c to r and a sen ior o f f i c i a l * I t s in flu en ce set a clim ate o f re stra in t fo r the year which was p a rticip a te d in by a l l d iv is io n s and which enabled the Board to r e a llo c a te $274,000 to fund new i n i t i a t i v e s , finance a $260,000 general pay in cre a se , and meet the s p ir it o f a P resid en tial request to r e s t r ic t budgets by 27. during the year— a l l th is was in ad d ition to the or ig in a l $350,000 ta r g e t. The year-end underexpenditure o f $699,537 is a residu al number from the $260,000 pay increase absorbed by the d iv ision s and $274,168 in new in it ia t iv e s funded during the year. These new in i t i a t i v e s included: Board Member O ffice s - Gov.. Daane Consultancy - Counsel and S ta ff $10,000 $36,251 O ffic e o f the Managing D irector fo r Operations - Bank Holding Company Analysis Program - Banking Structure Program - E ditor/W riter P osition $10,400 Legal D iv ision - Bank Merger P osition s - Travel $18,668 $ 2,500 D ivision o f Research and S t a t is t ic s - Bank Report Reform Travel $ 9,000 O ffic e o f Saver and Consumer A ffa ir s - New P osition s & Support - Stocks L istin g Contract $45,805 $ 1,610 O ffice o f the Managing D irector fo r Research & Economic P o licy 50-365 0 - 75 - 22 $51,750 $ 7,856 332 D ivision o f Federal Reserve Bank Operations - Travel (Payments Mechanism Program) A rch itect fo r Richmond Bank A rch itectu ra l Advisory Panel A ssistan t D irector and Secretary - FAIM Training - Tracer Forms $ 5,000 $1 0 , 0 0 0 $15,000 $17,550 $ 7,100 $10,COO New L e g isla tio n There were a number o f p ie ce s o f le g is la t io n enacted in to law in 1974. While each o f them had some impact on the use o f Board resou rces, the m ajority o f them had l i t t l e more than r e a llo c a tiv e e ff e c t s w ithin the same o rg an ization al stru ctu re. Those laws referred to below had some resource im plication s in 1974, A fu l l report on a ll le g is la t iv e matters has been prepared fo r a p resentation by the Legal D iv ision , T it le I o f the D epository In s titu tion s Amendments o f 1974 (P,L, 93-495) extends the Cease and Desist au th ority o f the Board to bank holding companies (stronger emphasis placed in the D ivision o f Banking Supervision and R egulation); T itle II esta b lish e s a National Commission on E lectron ic Funds Transfers which -caused approximately one man month in extra e ff o r t in the D ivision o f Federal Reserve’ Bank Operations; T itle I I I (Hie Fair Credit B illin g A ct) amended the Truth in I. ’ :ng Act by sp e cify in g how c re d ito rs should handle b i l l i n g e rro r c :.p l a i n t s from consumers. Approximately two man months o f e f f o r t was expended in 1974 in the O ffice o f Saver and Consumer A ffn ir s in preparing fo r w ritin g the Regulation in 1975; T itle IV amended the Truth in Lending Act by providing a "more-thanfour-instalm ent r u l e ," c i v i l l i a b i l i t y p ro v ision s, and d isclosu res o f clo sin g c o sts and the fraudulent use o f c re d it cards. Approximately one man month o f 1974 e f f o r t was expended in preparation fo r the p u b li cation o f an updated reg u lation . T it le V (The Equal Credit Opportunity Act) amended the Consumer P rotection Act by making i t unlawful fo r any cre d ito r to discrim inate against any applicant on the basis o f sex or m arital status with resp ect to any c r e d it tra n saction . Five ad ditional p o sitio n s were created in the O ffic e o f Saver and Consumer A ffa irs in 1974 to implement the e ff e c t s o f th is le g is la t io n . The International Development A ssociation Act (P.L. 93-373 among other p ro v isio n s, provides perm ission io r U.S. c itiz e n s to pur chase, h old , s e l l or otherwise deal with gold in the U.S. or abroad. Approximately one man month o f resources were devoted in 1974 for studying the im plication s o f th is a c t . 333 The Real Estate Settlement Procedures Act (P .L . 93-533) requires HUD to develop a uniform rea l esta te settlem ent statement to be used nationwide which would include Truth in Lending d isclos u res; to develop an advance settlem ent c o st d isclo s u r e form to be used at commitment, but not la t e r than 1 2 days p r io r to settlem ent; and to provide a waiver fo r the advance d isclo su re p rov ision s in consultation with the Board. One man month in resources in the O ffic e o f Saver and Consumer A ffa irs were devoted to Board a c t iv it y under th is Act during 1974. Magnuson-Moss Warranty - Federal Trade Commission Improvement Act (P.L. 93-637) T itle II o f which amends the Federal Trade Commission Act au th orizing the Commission to p rescribe in te r p r e tiv e rules and general statements o f p o lic y with respect to u n fair or deceptive acts or p ra ctic e s in or a ffe c tin g corarncrce. The Act orders the Board to e sta b lish a separate d iv is io n o f consumer a f fa ir s and to p rescribe regu lation s to prevent un fair or deceptive acts or p ra ctic e s in or a ffe c tin g commerce by banks. The Board responded by creatin g the O ffice o f Saver and Consumer A ffa ir s and created new and expanded old fu nction s - a l l at a marginal cost o f approximately $45,000 in 1974. Amendments to the Freedom o f Information Act (P.L. 93-502) requires government agencies to provide indexes o f agency matters, to provide a uniform schedule o f fees and to respond to requests for inform ation w ithin ten days. A dditional resources t o ta lin g approxi mately one man month were d irected to carrying out th is law’ s p rovision s (O ificen ofi.th e S ecretary, the Legal D ivision and the Personnel Division had the g re a te s t a c t iv it y in 1974). Martin B uilding Occupancy The Martin Building was made ready fo r p a r tia l occupancy beginning in A p ril, 1974, and provided space fo r 660 Board personnel, a computer f a c i l i t y and parking fo r the Board's employees and some Department o f the In te rio r employees under a cost-sh a rin g agreement. While some d i f f i c u l t i e s p e rs is t because o f a separation o f functions between employees at the Board Building and in Watergate, occupancy o f the Martin Building has served to con solid ate fu nction s o f various o f f i c e s which were p h y sica lly separated in the three other buildings and has resu lted in b e tte r communication, more e f f i c i e n t operation, increased morale and some reduction in s t a f f . I n it ia l estimates in s t a ffin g fo r bu ildin g serv ices proved high. Management studies and d e cisio n s to contract the night labor fo r c e , economies in the employ ment o f the secu rity fo r c e , and restructured needs in other areas reduced t o t a l budget expenditures. Tlie remainder o f the f a c i l i t y is expected to be av aila ble fo r use in 1975. 334 Major Reorganizations and Program Changes Hie O ffic c o f Board members was expanded to include Counsel to the Chairman* A dditional s t a f f and Congressional lia is o n functions were added. The O ffic e o f the Managing D irector fo r Operations and Supervision was renamed the O ffice o f Managing D irector fo r Operations, E a rlier (A p ril 1, 1974) the Board had created the Bank Holding Company Analysis Program to explore a new regulatory approach to the supervision o f bank holding companies and to design an on-going program fo r su rv eilla n ce and an alysis o f the fin a n cia l cond ition and a c t iv it ie s o f bank holding companies* It was org a n iza tio n a lly placed in the O ffice o f the Managing D irector fo r Operations but receiv es general regulatory p o lic y guidance from the O ffice o f the Managing D irector fo r Research and Economic P o licy . The Bank Supervision Program was formed in the O ffic e o f the Managing D irector fo r Operations in Ju ly, 1974. to provide recommendations fo r reform o f the bank regulatory stru ctu re in view o f the d iv is io n o f supervisory au th ority among the Federal agencies and changing banking stra te g ie s and p r a c t ic e s . On A p ril 30, 1974, P resid en tia l authority fo r the Committee on Interest and Dividends expired and was not renewed. This sp ecia l pro gram, ad m in istra tively housed at the Board, was organized by President Nixon on October 12, 1971, to formulate and execute a program fo r obtaining voluntary re stra in ts on in te r e s t and dividends (su bject to review by the Cost o f Living C ou n cil). The Chairman o f the Federal Reserve Board chaircd th is committee which also included the Secretaries o f the Treasury, Commerce, Housing and Urban Development, the Chairmen o f the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board and the heads o f other fin a n c ia l regulatory agencies as required. The Board approved the cre a tio n o f the O ffice o f Saver and Consumer A ffa ir s on July 16, 1974, from the S ecu rities Credit Regulation and Truth-in-Lending Programs o f the D ivision o f Supervision and Regulation. The Board la te r (October 16, 1974) approved the o f f i c i a l formation o f the Equal Credit Opportunity A ct, the Program D irection , and the General Program Support Programs^ and the t i t l e "Truth-in-Lcnding" was changed to "F air Credit P r a c t ic e s .” Concurrently, the name o f the D ivision o f Supervision and Regulation was changed to the D ivision o f Banking Supervision and Regulation. 335 The Voluntary Foreign Credit Restraint (VFCR) Program in the D ivision o f International Finance was discontinued follow in g a January, 1974, announcement by the Administration that a l l foreig n lending and investment c o n tro ls were no longer in e f f e c t . The Program, formed in 1965 to help co n tro l and monitor ca p ita l outflow s from the U .S., continued in existence u n til June at the request o f the Administration, to monitor a lim ited amount o f s t a t i s t i c a l reportin g . On October 18, 1974, the O ffic e o f the Secretary made a minor m od ification to i t s organizational structure through the creation o f a fu l l Minutes S ection and the reassignment o f duties o f a number o f personnel to accommodate the departure o f the O ffic e r in Charge o f A dm inistration. Th® D ivision o f Personnel m odified th eir October, 1973, major reorganization in mid 1974 by redesignating a c t iv it i e s in to three areas: Career Development, Personnel S e rv ice s, and System Personnel. The D ivision o f Federal Reserve Bank Operations s lig h tly re structured i t s organization through the ad d ition o f two new assistant d ir e c to r s fo r the Operations Review and Services and Financial Planning and Control Programs end redesignation o f functions and t i t l e s in the Financial Planning and Control Program. Board Budget D ecisions Computer A cq u isitio n . An IBM Model 168 computer mainframe and components were purchased during 1974 a fte r a ca re fu l review o f a lte rn a tiv e means o f acquiring the required computer support at the c o s t. The computer was acquired at a co st o f $3.97 m illio n and was in sta lle d In the Martin Annex in A p ril, 1974. The purchase obviated the need to acquire additional back-up f a c i l i t i e s fo r the move to the new f a c i l i t y and provided support that i s expected to meet Board require ments fo r at le a st fiv e years at a lower cost than would be required to rent the equipment. A savings o f $112,449 resulted from le s s than an ti cipated overlap rental o f equipment to accommodate the purchased computer’ s installm ent in the Martin B uilding, c re d it received by purchasing a number o f components that had been p reviou sly rented, and le s s than a n ticip ated fre ig h t charges as tra n sfer charges associated with the outgoing rental computer were assumed by another government agency which rented the same equipment from IBM. General Pay Increases. During 1974 the Board continued it s p o lic y o f authorizing a general pay increase (CPI) equal to the increase awarded to C iv il Service employees. This year there were two such payments. A one-time payment o f $227,810 was authorized tor lormer and present employees fo r the portion o f the 1972 GPI which was delayed by 336 P residen tial action* The second in cre a se , which c o st an estimated $261,000, increased FR s a la rie s >.5% beginning October 15, 1974* The Board increased the authorized spending le v e l o f the 1974 budget operating plan by $230,000 to o f f s e t the co st o f the " r e t r o a c tiv e " payment. The 1974 GPI was in te r n a lly funded* Program Change Requests and D ecisions A t o t a l o f 85 program change requests (PCRs) were submitted to r e a llo c a te budget funds, change operating plans or change organi zation al stru ctu re during 1974. Of these 9 concerned the establishment o f now programs or the reorganization o f ex istin g programs; 2 0 were associated with Senior S ta ff Group monitored savings and r e a llo c a tio n s not d ir e c t ly related to the establishment o f new programs or reorganization o f e x istin g programs. A t o ta l o f 8 were denied, returned to or withdrawn by the origin a to r* The d is tr ib u tio n o f the PCRs submitted by le v e l o f approval authority was: Board A dm inistrative Governor Managing D irector C on troller D iv ision D irector Total 7 21 12 42 4 86 337 Appendix A - Schedules A 1974 Budget, Operating Plan, and Expenditures by Board Program Structure A -2 B 1970-1974 Year End P o sition s A- 3 C-1 1974 Budget, Operating Plan and Expenditure by D iv ision A -4 C-2 1974 Personal Services Budget, Operating Plan and Expenditures by O ffic e and D ivisions A -5 C-3 1974 Non-Personal S ervices Budget, Operating Plan and Expenditures by O ffice and D iv ision A- 6 C-4 1974 Non-Personal Services by Account A -7 D-1 1970-1974 Total Expenses by O ffic e and D iv ision A- D-2 1970-1974 Personal and Non-Personal Services Expenditure by Account A-9 8 338 Schedule A 1974 Budget Year End Operating Plan and Expenditures by Program Structure Original Budget Program I. Formulation of Monetary Policy A. Supervision & Regulation of Financial Institutions A. B. C. D. E. F. A. B. IV. Cash and Accounting Payments Mechanism System Policy Direction and Board Support A. B. C. D. E. System Policy Direction Board Support Other Support Manpower Utilization Program Retroactive Pay TOTAL OPERATING PROGRAMS Budget Reallocations & Savings Adjusted Operating Programs Over/l'nder Yr. Or>. Plan * Amount Fercer.tase j $ 1C,424 $ 7,7f.3,055 $ 7,773,479 5,135,160 5,091,809 5,053,055 (38,754) 2,647,107 2,671,246 2,720,424 49.178 $ 5,415,382 $ 5,385,665 $ 5,285,592 $100,073 Federal Reserve Banks and Branches Commercial Bank Operations and Banking Structure Changes Selective Credit Regulation Truth in Lending Equal Credit Opportunity Program Direction and Support III. Financial Services for the System, Government and Public Expenditures $ 7,776,267 Development & Dissemination of Economic Intelligence Program Direction & Support B. 11. I Yr. End Op. Plan $ 0.1 j (0.8) | i.$ ! (1.S6) j ! 1,587,200 1,638,845 1,723,772 84,927 5.2 2,884,470 2,818,810 2,710,373 (108,437) (3.9) 351,038 174,523 0 418,151 279,301 145,059 41,120 462,530 263,268 130,270 15,357 442.552 (16,033) (14,789) (25.763) (19.978) (5.7) (10.2) (M.7) (4.3) 519,361 $(48,958) (8.6) j 166,854 352,i»07 2,831 (51,7S9) 1.7 (12.?) j ! $16,857,6'.5 $16,452,030 $(405,615) (2.4) | 563,319 $ 164,023 399,296 568,319 164,023 404,296 $17,066,086 $ l,375,yt>9 15,572,935 117,182 0 0 1,402,569 15,103,069 104,407 17,600 230,000 1.L a ,802 14,6S0,228 84,503 14,688 227.810 42,233 (422,841) (19,904) (2,912) (2,190) ^ ! (16.6> a.o) ! | i $30,821,054 $30,574,684 $30,030,463 $(544,211) <1.8) —- (321,054] 155,316 $30,3C(J7<5iW $30,730,000 $30,030,463 $(699,537) ( 2 .3 ) 4,083,861 10,045,497 300,000 4,083,861 10,045,497 300.0001 3,971,412 10,326,742 55.206 (112,449) 281,245 (244.794) (2.f> 2.3 (81.f) $45,159,358| $44,383,822 $(775,535) (1.7) (155,316) — Computer Purchase Annex Building Construction Board Building Construction GRAND TOTAL I i ; i Special Categories A. 8. C. | $44,929,358 A-2 i i i 339 Schedule B 1970-1974 Positions Filled at Year-End And 1973 Authorized Positions Compared with Positions Filled at Year-End i Employment at Year-End 1970 1971 1972 33 31 12 31 65 27 247 70 76 59 33 267 75 90 59 35 271 88 69 47 195 86 1973 1974 Employ VacaaPos. cles at Position.?) Auth. Wet Budget : Year-End Changes Yr.-End 12/31/7 Regular Joard Members )MD0 2/ »fl)REP Secretary -egal Research & Stat. International Fin* Supervision & Reg. )SCA ?R Bank Operations Personnel \dmln. Services Controller Data Processing Construction Total Regular 12 33-1 10 10 21 44 210 202 26 231 1,052 1,164 101 90 40 221 24 235 __ 4_ 1,211 55 48 276 96 99 33 10 12 61 56 298 113 120 102 83 43 42 361 240 28 27 257 244 __ 4_ ____ 4_ 1,267 38 17 14 62 58 297 108 98 32 105 42 312 26 257 ____ 4_ 1,498 1,471 0 7 1 1 7 1 30 2 28 42 41 1,540 1,512 5 7 2 1 2 (1) (5) (22) 32 3 (1) (49) 0 0 0 (27) 37 16 13 60 48 273 94 85 28 94 42 287 26 253 1 1 1 2 10 24 16 13 4 11 0 25 2 __2_ 1,358 116 Summer Secretary Research & Scat. International Fin. ?R Bank Operations 2 Personnel 1 1 \dntn* Services Data Processing Total Summer GRAND TOTAL 1,052 | 1,164 1,213 1/Includes dual occupancy. 2/titled Executive Director until 1973. 1,269 1 1 1 7 1 1 0 0 0 ( 2) 0 0 aY (28) 2 25 1,363 154 340 Schedule C-1 1974 Budget, Year End Operating Plan and Expenditures by D iv ision and S p ecial P ro je ct O ffic e s and D iv ision s f l e e o f Board Members f l e e o f the Managing D irector fo r Operations -Regular -Banking -S p e c ia l f i c e o f the Managing D irector fo r Research and Economic P o licy f l e e o f the Secretary gal D ivision v is io n o f Research and S t a t is t ic s v is io n o f In tern ation a l Finance v is io n o f Banking Super v is io n and Regulation f l e e o f Saver and Consumer A ffa ir s v is io n o f Federal Re serve Bank Operations v is io n o f Personnel v is io n o f Adminis tra tio n S ervices f i c e o f the C o n tro lle r .v isio n o f Data Processing iployee and Ret. B enefits Retro Pay ivings & R ea lloca tion O riginal Budget Final Operating Plan Expenditures Over (Under) OnprnHnf* PI.in amount 1974 Exoenses % 927,609 973,860 993*999 20,139 2.1 308,228 296,728 74,336 250 311,767 59,034 13,025 212 15,039 (15,302) (38) 5.1 (2 0 . 6 ) (1 5.2) 359,971 375,721 356,769 (18,952) ( 5 .0 ) 911,935 1,099,996 5,789,842 889,160 1,042,178 5,767,509 886,653 1 ,029,619 5 ,756,132 (2,507) (12,559) (11,377) ( 0 .3 ) ( 1 .2) ( 0 .2) 2,194,900 2,155,300 2 ,154,054 (1,246) ( 0 2,255,189 1,9^0,121 1 , 880,626 (19,495) ( 1 .0 204,680 (82,390) (2 8 .7 ) 1.6 ------ . . . 287,070 .1) ) 2,299,840 2,365,040 2 ,,402,517 37,477 948,512 7,053,322 872,574 6,780,852 6 896,860 ,,367,406 24,286 (413,446) 525,562 6,073,466 508,262 5,996,066 504,107 (4,156) 5,,943,503 (52,563) ( 0 .9 ) 59,657 59,657 54,715 (4,942) ( 8 .3 ) 230,000 155,3]6 227,810 (2,190) (155,316) ( 0 .9 ) (321,054: ' ( 2.3 ) 2.8 ( 6 .1) (0 . 8 ) Total Operating Program 30,500,000 30,730,000 30,,030,463 (699,537) >rrfputer Purchase ir*tin Annex Construction ih a b ilita tio n o f the Board Building 4,083,861 10,0^5,457 300,COO 4,083,861 10,045,497 300,000 3, 971,412 1 0 , 326,742jj 55,2CrJ! (112,449) ( 2 .7 ) 231,245 2.3 (744,794) i 44,929,353 4 5 ,1 5 9 ,35S 44, 383,823 (775,535) ! ( 1.7) GRAND TOTAL j Schedule C2 1974 Personal Services Budget, Final Operating plan and Expenditures by Offices and Division Offices and Divisions Office of Board Members Office of the Managing Director for Operations -Regular -Banking -Special Office of the Managing Director for Research & Econocic Policy Office of the Secretary Legal Division Division ot Research & Statistics Division ot International Ffhance Division of Banking Supervision & Regulation Office of Stiver 6. Consumer Affairs Division of Federal Reserve Bank Operations Division of Personnel Division oi Administrative Services Office of the Controller Retro Pay Division of Data Processing Employee Residtal & Retirenent Hone fits Savings (< Reallocations Total Operating Prograa Computer Purchases Martin Annex Construction Rehnb of the Hoard- Building Grand Total Original Budget Final Operating Budeet 1974 Expenditures Expenditures Over/Under Oocratin*? Plan Amount % 858,276 903,527 907,937 276,428 0 2,000 276,428 67,836 — 289,903 50,847 — 332,371 862,303 937,232 5,517,144 2,070,300 348,121 848,803 926,914 5,495,811 2,043,900 339,221 859,949 904,993 5,485,499 2,037,960 ( 2,213,531 — 1,839,114 261,426 1,822,421 191,116 ( 16,693) ( 0.9) ( 70,310) (26.9) 1,935,274 685,290 3,105,774 516,744 — 4,710,248 1,964,324 623,852 2,865,304 497,439 230,000 4,654,848 1,971,255 629,426 2,714,434 495,922 227,810 4,672,845 6,931 0.4 5,574 0.9 (150,870) ( 5.3) ( 1,517) ( 0.3) ( 2,190) ( 1.0) 17,997 0.4 58,057 — 58,057 — 52,848 -- 24,130,972 23,905,704 23,654,386 _ _ 4,410 0.5 13,475 4.9 (16,989) (25.0) __ 8,900) 11,146 ( 21,921) ( 10,312) ( 5,940) ( ( 2.6) 1.3 ( 2.4) ( 0.2) ( 0.3) 5,209) ( 9.0) (251,318) ( 1.1) _ 123,797 — 123,797 93,546 — ( 30,251) (24.4) 24,254,769 24,029,501 23,747,932 (281,569) ( 1.2) Schedule C3 1974 Nonpersonal Services Budget, Final Operating Plan and Expenditures Offices and Divisions 1974 Expenditures 69,333 70,333 86,062 31,800 0 11,025 20,300 6,500 250 21,864 8,187 212 27,600 49,632 112,764 272,698 124,600 27,600 40,357 115,264 271,69° 111,400 41,658 — 364,566 263,222 3,947,548 8,818 Expenditures Over/Under ODerating Plan 15,729 22.4 1,564 1,687 38) 7.7 26.0 (15.2) 17,543 26,704 124,626 270,634 116,095 < 10,052) ( 13,653) 9,362 ( 1,064) 4,695 (36.4) (33.8) 8.1 ( 0.4) 4.2 61,007 25,644 58,205 13,564 ( 2,802) ( 12,080) ( 4.6) (47.1) 400,716 248,722 3,915,548 10,823 431,262 267,434 3,652,972 8,184 30,546 18,712 (262,576) ( 2,639) 7.6 7.5 ( 6.7) (24.4) ( — .. __ -- 1,363,218 1,341,218 1,270,658 ( 70,560) ( 5.3) 1,866 — 266 (155,316) 16.6 — 1,600 (321,054) 1,600 155.316 Total Operating Program 6,369,028 6,824,796 6,376,077 (448,219) ( 0.7) Computer Purchases Martin Annex Construction Rehab of the Hiird fmilding 4,083,861 9,921,700 300,000 4,083,861 9,921,700 300,000 3,971,412 10,233,196 55,206 (112,449) 311,496 (244,794) ( 2.8) 3.1 (81.6) 20,674,589 21,129,857 20,635,891 (493,965) ( 2.3) Grand Total A-6 342 Office of Board Members Office of the Managing Director for Operations -Regular -Banking -Special Office of the Managing Director for Restarch & Economic Policy Office of the Secretary Leya I Division Division of Research & Statistics Division of International Finance Division of Hanking Supervision & Regulation Office of Saver & Consumer Affairs Division of Federal Reserve Bank Operations Division ot Personnel Division of Adsdnistration Services Office of the Controller Retro IVsy Division of Data Processing Employee Rc-sidual & Retirement Benefits Savings f< Reallocations Final Operating Budget Original Budget 343 Schedule C-4 1974 Budget, T otal Approved Expenditures, and Expenditures Nonpe»sonal S ervices by Account Budget Account $ Traveling Expenses Postage & Expressage Telephone & Telegraph 626,436 382,675 513,314 TotalApproved Expenditures $ 663,563 325,850 513,314 Expenditures Over/Under T otal Approved Expenditures Amount Expenditures $ 694,699 315,941 460,866 $ % 31,136 ( 9,909) ( 52,448) 4.7 ( 3 .0 ) (1 0 . 2 ) (159,821) ( 40,646) ( 37,318) (15.6) (1 5.6) (18.3) 79,376 16,975 139,736 4.2 24.7 50.8 P rin tin g & Binding S tation ery & Supplies Furniture & Equipment 1,074,600 302,705 131,986 1,024,000 350,897 204,244 864,779 310,251 166,926 Rentals Bodies & Subscriptions Hcali, L igh t, & Power Repairs & A lteration s (B uilding & Grounds) 1,960,927 68,700 275,000 1,908,988 68,700 275,000 1,988,364 85,675 414,736 106,450 89,250 37,339 ( 51,911) (4 1.8) ( ( Repairs & Maintenance (Furniture & Equip.) 92,388 92,388 90,488 Cont. P ro f. Services 539,473 545,783 492,098 ( 53,685) ( 9 .8 ) A ll Other 615.428 602.178 453.915 (148.263) (32.7) $ 6,690,082 $ 6,664,755 $ 6,376,077 $(288,678) ( 4 .3 ) (159,541) N/A T otal Nonpersonal S ervices Budget R eallocation & Savings ( 321,054) 159,541 N/A 1,900) 2 . 1) T otal Personal S ervices $24,130,972 $23,905,704 $23,654,386 $(251,318) ( T otal Operating Budget $30,500,000 $30,730,000 $30,030,463 $(699,537) ( 2 .3 ) 4,083,861 4,083,861 3,971,412 (112,449) ( 10,045,497 300.000 10,045,497 300.000 10,326,742 55.206 281,245 (244.794) ( S I . 6) $44,929,338 $45,159,358 $44,383,823 $(775,535) ( l.?:* Computer A cqu isition C onstruction Annex Building Board Building GRAND TOTAL A-7 1 2 . 1) .8) 2.8 344 Schedule DX 1970 - 1974 Total Expenses by Offices and Divisions O ffices and Divisions Board Members $ 1974 1970 1971 1972 738,798 $ 916,202 $ 978,571 $ 927,067 * 993,499 131,992 347,490 14,029 344,284 13,201 311,767 Managing Director-Operations 1/ Regular Special Banking 1973 212 59,034 Managing Director-Research 2/ Secretary Regular Special 754,146 961,037 11,593 824,036 36,204 356,769 893,254 886,653 484,749 639,378 660,304 858,600 1,029,619 Research and S ta tistics 3 ,600,768 4,765,016 5,050,064 5,426,398 5,756,132 International Finance Regular 1 ,173,229 1,478,861 1 , 648,896 1,925,417 2,154,054 Supervision and Regulation 1 , 289,200 1,590,890 1 , 711,506 1,900,287 1,880,626 FR Bank Operations 1 , 394,949 1,826,634 2 ,288,488 2,333,485 2,402,517 511,969 685,715 808,306 754,519 896,860 3,,079,487 111,305 4,150,961 23,540 4,598,451 311,286 5,331,074 6,367,406 305,970 419,027 460,986 456,572 504,107 ---- -- -- ---- 204,680 Legal Personnel Administration Administrative Services Regular Special O ffice o f the Controller O ffice o f Saver & Consumer A ffairs 4/ Data Processing Regular Retro-active pay Employee Petirer»ev-t and Insurance Benefits 3/ Total Operating Expenses 3,822,771 5,471,472 6,073,456 6,016,659 5,943,503 -- -- -- 227,810 43,518 54,376 90,393 54,714 19,,269,843 } 23,115,836 25,,773,448 27,364,211 30,030,462 7,332,818 1 2 ,,273,928 13,669,191 10,381,943 ---2,002,502 Computer Acquisition Construction & Alterations CRAN’D TOTAL 1/ 2/ 3/ 4/ 3,971,412 694,525 $19. 964.363 ‘530,448,654 ?38, 047,376 7 ........ 1 •'.1,033,402 $44,383,822 ___ ____ i Titled Executive Director's Office until November 1973. Organized in November 1973 by transfers iron Research and Secretary * Active employees' fringe benefit costs allocated to Divisions beginning in 1971. Created in A u ^u m t 1974 l»y tr.inr.fvr?* from Sujwrvififon and Krftulnt ion. 345 Schedult -2 1970-1?74 Personal and NonF-rsonal Services Expenses by Account T^rr "TJ70 p e r s o n a l "services 197i 1972 1974 Salaries Fees Retirement Contributions Kegular Special Ihrift Plan Employee Insurance Connecticut General Federal Employees Mimical & Hospitalization $12,329,768 i*15,101,751 :17,167,836 $13,882,255 $21,552,323 270,642 27<r, 192 258,336 325,535 Total <’er?onal Services $14.595.854 $17.433.572 ?19.061.926 S20.S91.155 |?23.f54.385 264,693 1,638,424 139,049 112,821 (1,949) 42,104 70.93? 1,679,334 1,166,159 1,304,839 1,317,274 129,934 152,097 167,901 171,679 817 50,14 145.759 746 54,4P3 172.269 1,827 57,107 206.584 2,471 64,278 270. V:S NON PERSONAL SE SV!CF.S Traveling Expenses Field Examiners Other Postage and Expressage Telephone and Telegraph Printing and Binding FR Bulletin Other Stationery and Supplies Furniture and Equipment Rentals B^oks and Subscriptions Meat, Lights and Power Repairs and Alterations (Building and Grounds) Repairs and Maintenance (Furniture and Equipment) Contractual Professional Svcs. Outside Data Processing Svcs. Truth-in« Lending Auditing Books of Board Review of Exam, Procedures Consumer Finance Surveys Legal & Consult. Fees & Exp. Other Surveys Linkages & F.mp, Research-SSRC Security Clearance Inves. Transcribing & Reporting All Other Tuition and Registration Cafeteria (::ET) Official Dinners, etc. Meals for Official Ci.ests Special Statistical Svcs. CEMLA Membership Fee & Exp* News Ticker Service Miscellaneous $ 296,444 319,507 197,342 213,469 298,532 388.850 227,0S0 271,489 311,893 $ 407,024 298,S55 304.183 320,379 $ 461,874 331,095 396,612 179,015 515,685 315.941 460,806 286,767 288,991 158,520 180,483 312,547 381,393 194,305 All,441 345,695 385,614 217,391 555,594 344,781 470,582 183,807 167,217 343,706 521,073 310,251 166.926 1,626,396 48,243 73,389 2,189,655 52,856 93,779 2,658,376 56,4|2 103, 5 & 2,720,253 60,180 106,745 1,988,364 80,639 57,489 32,737 29,609 37,339 41,187 46,621 43,692 90,4SS 6 2 2 .5 6 9 38,014 _6674.j82, 8 5 ,6 7 5 414,735 ..$57*527. 115,794 97,466 4,000 18,408 133,006 2,000 4,000i 24,533j 121,370 95,220 98,405 4,500 17,855 5,000 22,196 6,500 18,163 136,070 117,537 11?,997 18,152 2,145 80,666 ; 143,943 j 41,141 ‘ 14,850 7,7*6 220,734 141,593 124,751 13,000 3,679 154,340 140,302 21,905 1,525 134,323 190,755 36.117 4,275 240,033 1 303,747! 348,626 46,717 110,582 10,107 8,479 3.817 27,000 3,867 29.469 86,609 . 121,319 17,660j 10,583 ! 5,448 ! 28,338 3,9% j 27.789 j 109,761 134,438 9.800 11,073 11,30° 27,645 6,919 37. (.SI i■ 5.682.264,$ 6.711.522 1 7 ,0 3 9 3 ,5 6 0 . 3Z8 l S 5? J . . . ^ 5 3 , 9 ! 5 97,990 165,933 10,738 11,316 3,564 4 3,372 8 ; 8 .'0 36lv.O 144,357 184,2^*1 ll,S59 15,438 5,503 44,fj? 9.5?S 3« 172 Total Nonpersonal Services Total Operating Expenses Construction - Annex Building Computer Acquisition $ 4.673. $19,2 0 V •-* *23,115,83* $75,7 7 V ™ 694.525 | 7.332,818jl2,273,928 GRAND TOTAL__________________ $19.964.If.fl |$3Q.448.6V< $38.047.376 $ 4 1 .0 3 3 .4 0 2 ! :« 4 .3 P 3 .? 2 3 6 . 4 7 3 . 0 ' * u> 6 . 3 7 ' ■ 2 7, 3 6 4 , 2 1 1 : 30,0.'-' ’ * 13 ,b o9,1 9l J 10 ,3 » i.V .S " ___________I 3 . 9 7 1 . 4 1 2 346 TOUCHE ROSS & CO. 1776 K S T R E E T N. W. W A S H I N G T O N . D C. 2 0 0 0 6 November 30, 1974 Board of Governors Federal Reserve System Washington, D.C. 20551 Dear Sirs: In accordance with the provisions of our proposal letter of August 22, 1972, we are reporting to you on the continuing phases of our observations of the examination and auditing procedures employed by the examiners, including an appraisal of their effec tiveness. We are also including our recommendations for improving the organization and effectiveness of the examination. PURPOSE OF OUR REVIEW Our review procedures are designed to enable us to express an opinion regarding the effectiveness of the examination of the Federal Reserve Banks by the Board's examining staff and the ade quacy of the examination procedures employed with respect to gen erally accepted auditing standards that would be applicable in such an examination. Our review approach includes a detailed review of the examination procedures used in selected areas of a particular Federal Reserve Bank and observing the overall procedures and con duct of the examination during the part of our review which is per formed in the field at the respective Federal Reserve Bank. In future phases of our review we plan to review the ade quacy and effectiveness of the new examination approach resulting from the recent reorganization. These phases will include a review of the transition from the previous approach to the present one, the overall scope of the present examination approach, a detailed review of selected areas covered by the Protection and Audit Review section and the Operations Review and Services section, asKfell as the Finan cial Examination section. Certain phases of the review of the new examination approach have been started. 347 TOUCHE ROSS & CO. Federal Reserve System - 2 SCOPE OF CURRENT PHASE OF REVIEW On March 8, 1974, we joined the Financial Examination, Protection and Audit Review, and Operations Review and Services sections of the Division of Federal Reserve Operations at their preopening meeting and accompanied them on their unannounced visit to begin the examination of the Federal Reserve Bank of New York. Previous to this date we spent a day in Washington, D. C., review ing the preparation and planning of the examination. The examina tion approach at the New York Reserve Bank, excluding the branches, continues ds in previous years to be a joint effort of division personnel and borrowed assistants from the New York Bank and other Federal Reserve banks. All aspects of the examination were per formed during this visit by the examiners. We observed the various examiners in the conduct of their examination during the opening of assigned operational areas. We also reviewed in detail the part of the examination related to the following areas: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Systems open market account Foreign department Gold vault Accounting Apparent or possible*violations Cafeteria Employee conduct Indebtedness Insurance Litigation Personnel Purchasing Our detail review of the above areas included a review of revisions made to the examiners' procedural manual, a review of the perform ance of the procedures and related preparation of working papers and documentation, and attendance at examiners' meetings with department heads of the Bank. We also reviewed the report on exami nation of the Federal Reserve Bank of Boston - 1974. 50-365 0 - 75 - 23 348 TOUCHE ROSS & CO. Federal Reserve System - 3 CONCLUSIONS AND RECOMMENDATIONS Based on our review, it is our opinion that the areas we reviewed in detail are being examined in accordance with generally accepted auditing standards in a professional and competent manner. The following are comments and recommendations resulting from our review which we feel would further improve the examiners' effec tiveness in performing their examination procedures; DOCUMENTATION: Systems Open Market (SOMA), Foreign Department# and Gold Vault: We noted a lack of adequate documentation and explana tions of items in certain of the working papers we reviewed. The following is a list of specific deficiencies we noted: 1. Working paper referencing and cross-referencing was mini mal and could be significantly improved. The benefits derived from proper referencing with respect to working paper organization, and the helpfulness and efficiency resulting to the working paper review, are well worth the effort. 2. We noted numerous instances where legends for audit "tick marks" used could not be found. As a result, a reviewer cannot easily understand what examination pro cedures were performed and what the scope of the exami nation was. We recommend that sufficient legends be utilized in the working papers in order that the work ing papers be able to stand on their own and commu nicate adequately what is necessary. In addition, properly prepared working papers are of immense help to new examiners preparing to examine a respective area for the first time. 3. We noted that a signed-off program was not included in the working papers. Subsequently, the signed-off pro gram was located and filed with the working papers. Completion and filing of all working papers should be accomplished on a timely basis to prevent loss of con trol and the loss of the respective working papers. 4. We noted certain miscellaneous working papers which did not appear to be properly organized, complete, or prop erly filed. Such working papers should be completed and filed in their proper location or, if they are no longer useful, they should be destroyed. 349 TOUCHE ROSS & CO. Federal Reserve System - 4 5. 1116 ex&niners use a code on their checklist question naire working papers indicating whether the question was answered by inquiry, observation, or tested and supported by a working paper. In cases where the sup port is a particular test performed, we recommend that the questionnaire step be referenced to the appropri ate working paper file. In cases where the answer to the questions is through inquiry or observation, the questionnaire should be documented by noting with whom the inquiry was made and who was observed, or how often or how long the observation was made. The ques tionnaire can be designed in a way which would require and facilitate this kind of documentation. CONFIRMATIONS (TRACERS): In our review of the foreign department, we noted that the examiners rely very heavily on independent confirmation results. However, the results of the confirmations in this area and other areas are not summarized prior to issuance of the final report. We recommend that a status report be prepared summarizing the results of the confirmation procedures as a basis for the opinion and con clusions reached in the report. SCOPE.OF TESTS: SOMA: In our review of the scope of the tests of transactions made by the examiner in the SOMA area, we noted that only one type of transaction in each SOMA function was selected for the test. This resulted in a test of approximately 35 transactions for the total period under examination. We feel that if such a limited scope is to be used by the examiners, it should be a test of the transactions previously supported by the Bank's internal audit staff; otherwise, consideration should be given to expanding the examiner's scope of these tests. Expense review: We understand that the present scope of examination of Reserve branch expenses has been set by direction of the Board. It is also our understanding that internal audit examines 100% of the expense vouchers. Currently, the examiners are examining in detail 100% of a selected month’s vouchers and expanding this examination if discrepancies are noted. The extent of the current scope of examining expense vouchers is time consuming and is not 350 TOUCHE ROSS & CO. Federal Reserve System - 5 necessary for compliance with generally accepted auditing standards. We do recognize the purpose for such extensive coverage; however, we feel that the examiners can obtain the same assurance as to the adequacy of internal audit coverage by a less extensive review of their work in this area. REPORTING: SOMA: Our review of the examiners' report relating to their examination of SOMA disclosed that the report included many detail schedules incorporating voluminous data. We question the neces sity for such detail data in the examiners' report. We feel that if such data is meaningful and useful, it should be available on a regular basis and tested by the examiners. The report detail, which is time consuming to prepare, is currently being prepared by the examiners with some assistance from internal audit. At a minimum, we feel that such reports should be totally prepared by bank personnel for review and checking by the examiners. This would allow more time for the examiners to perform their examina tion procedures, such as the tests discussed above, in greater depth and with lesser time pressures. The SOMA report also briefly summarizes net operating and security transaction results for the two most current years on a comparative basis. We suggest that a brief analysis of the results of the operations and reasons for change from the previous year be included in the report to make the capsule amounts reported more meaningful. Federal Reserve Bank of Boston: We reviewed the report on examination of the Federal Reserve Bank of Boston - 1974 and have the following comments: 1. The reference in the report to the phrase "generally accepted professional standards" is vague, since, "professional standards" have not been identified, codified, or authoritatively designated as such. If the examiners feel they are applying examination methods and scope in addition to what is required under generally accepted auditing standards, then such additional procedures to the scope of the exami nation should be specifically identified and described. 2. The reference to the earnings and expenses in the report section, where the examiners express their opinion, should specifically identify the period of earnings and expenses covered by the examiners. 351 TOUCHE ROSS & CO. Federal Reserve System - 6 EXAMINATION PROCEDURES MANUAL: For the areas mentioned above, we reviewed the examina tion procedures manual in detail and determined that: 1. The description of the examination objectives for other assets and other liabilities are somewhat vague and should be more clearly stated. 2. The scope of the examination of selected areas is not always readily determinable. 3. The examination procedures for bank premises should include a physical inspection of major additions, and a review and evaluation of the General Auditor's pro cedures and documentation relating to his audit of major additions or construction programs. 4. The examination procedures in the area of insurance should include an independent verification of insur ance coverage. CLOSING MEETINGS: Although we recognize some of the timing problems involved in the examination of the Reserve Banks, we feel that examiners should provide the Bank's departmental managers with an outline of their exceptions and recommendations in advance of the respective meetings to discuss them. Ideally, the bank personnel should have sufficient time to review the exceptions and recommen dations before the meetings. Such an approach, we feel, would result in much more meaningful meetings. STAFFING: In reviewing the personnel of the examiner's staff who perform the examinations of the foreign department and SOMA, we noted there is very little planning and provision being made for possible key personnel turnover. Should either the examiner who performs the examination of the foreign department or SOMA leave the staff, there is only one other person who is adequately know ledgeable to perform a good examination. We recommend that in future examinations of these areas, new examiners be introduced to the area to provide assistance to the presently knowledgeable examiners. This would result in personnel with valuable experience and knowledge being available to be effectively utilized in case of key personnel turnover. 352 TOUCHE ROSS & CO. Federal Reserve System - 7 AUDITING DEPARTMENT: It appears that the examiners can make better use of the audit work performed by the auditing department of the Reserve Bank. For example, we noted in our review in New York that proce dural write-ups and/or flow charts were not utilized. Examining and verifying such flow charts and procedural descriptions would be helpful to examiners in understanding the system being examined. Such system descriptions should be maintained currently by the Reserve Bank internal audit departments and available for use by the examiners. * * * * * If you have any questions regarding the matters discussed herein, we would be pleased to discuss them with you at your con venience. Very truly yours, 353 BOA R D O F G O V E R N O R S or THK FEDERAL RESERVE SYSTEM Office Correspondence Date__January 2 7 ,_ 1 9 75---- «j>0_______ Board o f Governors___________ Subject; Report from Touche____________ PfQIQ_____ E. Maurice HcWhlrter_________ ___________Ross and Company______________ V* Attached is the report from Touche Ross and Company covering th e ir observations o f the examination and auditing procedures employed in examining Reserve Banks by the D ivision o f Federal Reserve Bank Operations. Following are our comments responding to the conclu sions and recommendations provided on pages three through seven o f the re p o rt. D ivision management was pleased with the summary opinion which sta tes that " i t i s our opinion that the areas we! reviewed in d e ta il are being examined in accordance with generally accepted auditing standards in a p rofession a l and competent manner." DOCUMENTATION Touche Ross: D ivision Response: A lack o f adequate documentation and explanation o f items in certain o f the working papers was noted and s p e c if ic d e fic ie n c ie s are lis t e d . The c ritic is m s are fa ctu a l and the recommendations are v a lid . While we continually stress the importance o f documentation o f the work performed by examiners, we never accomplish the degree o f excellen ce expected. We are giving ever increasing atten tion to th is area and the process o f reviewing documentation is bein'; enhanced. There is no reasonable excuse fo r in s u ffi cie n t. referencing, cro ss-re fe re n cin g , indexing, organi zation , and explanations in working papers. Touche Ross made th eir comments on work performed at the New York Bank which was the f i r s t examination a fte r the reorganization o f the s t a f f . Supervisors have respon s i b i l i t y to approve completed work and a second review, p rio r to f i l i n g , was added to the procedures in mid-1974. 354 To: Board of Governors -2- CONFIRMATIONS Touche Ross: D ivision Response: Results o f confirm ations are not summarized p rio r to issuance o f the fin a l report. In the past, reports have been issued without s u ffic ie n t evidence o f re su lts from confirm ation requests. In a l l cases, r e p lie s to p o sitiv e con firm ations are obtained and a l l reports o f exceptions on negative confirm ations are follow ed to an acceptable conclusion . We are currently holding reports o f examinations u n til we can reach conclusions from con firm ation responses. I f an adverse situ ation in th is area had occurred in the past, the reports o f examina tio n would have been amended. A lso, we have always considered the re su lts experienced with confirm ations from recent internal audits in preparing our reports. This minimizes the p o s s ib ilit y o f mistaken conclusion s. SCOPE OF TESTS Touche Ross: D ivision Response: Touche Ross: D ivision Response: The scope o f transaction te sts in the SOMA area was lim ited and should be expanded. Our testin g o f transactions in the SOMA area has proved adequate in past examinations to determine i f an expansion o f the review was necessary. The internal auditing p ra ctice i s to prove every SOMA transaction but on a delayed b a sis. Until the c l e r i c a l d i f f i c u l t i e s were experienced in SOMA opera tions in 1973, the lag was approximately 60 days. This lag has been reduced, because o f those d i f f i c u l t i e s , to le s s than fiv e days. We w i l l increase the sample siz e in testin g transactions in future examinations. Scope o f examination o f expenses exceeds that which is necessary fo r compliance with generally accepted auditing standards. With the emphasis continually placed on System expenses, we fe e l our current scope i s the minimum acceptable. The D ivision w i l l not plan a reduction without s p e c ific approval from the Board and i s not planning a request to the Board fo r a change. 355 To: Board of Governors -3- REPORTING Touche Ross: D ivision Response: The d e ta il in the SOMA report should p o ssib ly be reduced and i f i t i s retained, much o f the preparatory work should be done by Bank personnel rather than examiners. Reductions in report d e ta il have been made a number o f times, and we w i l l reevaluate that which remains. To the extent that we reta in the d e ta il, we fe e l i t should be prepared by examiners with assistance pro vided by internal au ditors. There are several reasons fo r th is op inion; one i s that, at b e st, the examina tio n is somewhat d isru p tive to operations and we are se n sitiv e to increasing the burden on the Bank. In our opinion, the SOMA operations personnel have been working at capacity during the la s t three examinations and requests by examiners would have eith er resulted in overtime or increased i t . We w i l l consider the suggestion fo r including an analysis o f the re su lts o f operations and reasons fo r change from the previous year during the next examination. Touche Ross: D ivision Response: Touche Ross: D ivision Response: The phrase, "gen erally accepted p rofession a l standards" i s vague and the phrase, "gen erally accepted auditing standards" i s p referred . The use o f the term "p ro fe ssio n a l standards" was used in only the one report as a re su lt o f the Touche Ross recommendation. We changed the wording o r ig in a lly because we f e l t our work exceeded the d e scrip tion , "auditing standards. " The reference to the earnings and expenses should s p e c if ic a lly id e n tify the period covered. We have made the change. EXAMINATION PROCEDURE MANUAL Touche Ross: D e ficie n cie s were noted in some procedure manuals. 356 To: Board of Governors D ivislon Response: -4- Improvements were made in a number o f the manuals at the beginning o f 1975* Others are now being updated and improved. Some o f the d e fic ie n c ie s noted by Touche Ross are in ten tion a l as the manuals are used in conjunction with questionnaires which provide ad d ition a l inform ation and parameters. CLOSING MEETINGS Touche Ross: D ivision Response: Recommendation i s to provide Bank personnel with an o u tlin e o f to p ics to be discussed in advance o f c lo sin g meetings. We see both advantages and disadvantages to the recommendation; however, except in unusual situ a tion s, such a procedure i s not fe a s ib le under our current examination program. We b e lie v e personnel are generally aware o f the to p ics to be discussed in formal meetings because o f the inform al communications throughout the examination. We w ill continue to improve communi cation s in every way p o ssib le . STAFFING Touche Ross: D ivision Response: The number o f s t a f f members knowledgeable in the two areas p ecu liar to the New York Bank, Foreign Opera tion s and SOMA, i s lim ited . This i s true, has been true tra d itio n a lly , and plans have been prepared to remedy the situ a tio n . We do not f e e l that these areas have been slig h ted in any way, but we are not comfortable with the present experience le v e l. A dditional training e ff o r t s are planned both p rio r to and during the next examination in New York. The situ a tio n is d i f f i c u l t to remedy because the only opportunity fo r on -th e-job training i s during the examination o f the New York Reserve Bank. AUDIT DEPARTMENT Touche Ross: The examination s t a ff should b e tter u t il iz e procedural w rite-ups and/or flow charts maintained by Auditing Departments. 357 To: Board of Governors D ivision Response: -5- These are used in varying degrees in the individual Banks. A v a ila b ility also varies from Bank to Bank. The recommendation i s appropriate and we are now bu ildin g f i l e s on such inform ation in our o f f i c e as i t i s most b e n e fic ia l in planning the examinations. CONCLUSION I f you have questions or comments, we w ill be pleased to address them or to arrange discu ssion s fo r you with personnel from Touche Ross and Company. cc: Mr. Ronald G. Burke 358 Chairman P a t m a n . Mr. Hansen? Mr. H a n s e n . Governor Mitchell, I appreciated your statement. I thought it brought out a number of aspects that certainly we have to consider when we are talking about involving ourselves in the money business, the lending market. I felt that you exposed very well the fact that the System is already very adequately audited in a fine-tuned fashion, and it causes me some great concern in this period of time when the confidentiality and the privacy of people is being assaulted, that we continue to have efforts to further draw and quarter various elements of our very successful free enterprise system by tinkering. I feel that this bill that we have before us is dangerous in the respect that it does expose many areas of operation to a breach of confidential ity that could, of course, interfere considerably with the fine tuning of the System that we have accomplished to date. I do not think I have any further comment, Mr. Chairman. Thank you. Chairman P a t m a n . All right, sir. Mr. Hannaford ? Mr. H a n n a f o r d . Thank you, Mr. Chairman, and thank you, Gov ernor Mitchell, for a very fine and detailed statement. I would like to question some of the historic perspectives that are established in that statement, and rather take it through in order of the numerical summary that you began by saying what we are re questing is simply a duplication of present efforts. Now Mr. Staats here, a few days ago, referred to audit types I, II, and III. Is that correct. Are you familiar with that ? Governor M i t c h e l l . Yes, sir. Mr. H a n n a f o r d . Would you not say it is simply duplication of audit type I that would be involved with present efforts? You do not have any audit that would give any independent judgment of the efficacy of the operations, nor the meaning of or the appropriateness oi monetary policy. So, when you are talking about duplication, you are really talking about audit type I. are you not. Governor? Governor M i t c h e l l . Well, I think that in Mr. Staats’ statement, he was distinguishing three kinds of audits. One was a financial audit, another an efficiency of operations audit. Now, in the historical record I referred to back in the 1950’s we began to get into the efficiency type audit, and that has developed now to a point where I think it is func tioning very satisfactorily. As for the policy type audit, which is the third type of audit that he referred to, that is a kind of audit that I think the concurrent reso lution contemplates. Mr. H a n n a f o r d . But the efficiency type audit is only efficiency within the judgment of your own internal organization. There is no external judgment of that efficiency ? Governor M i t c h e l l . That i s right. Mr. H a n n a f o r d . So it is not really a duplication in that sense, be cause it gives an independent judgment as to the efficiency of the operation. Governor M i t c h e l l . Well, we have had several efficiency audits by outside firms that have come in and looked at the operations of a particular Reserve Bank. I mention this in passing. There was one in San Francisco we just recently completed, and one in Dallas about 4 359 or 5 years ago, and there was one in Philadelphia within the last 2 or 3 years. So, those do happen; but they are sporadic and not regular. The rest of it is internal. You are correct. Mr. H a n n a f o r d . Well, I interpret your answer, Governor, with due respect, that we are pretty much in agreement that the duplication involves the audit type I as far as an independence of judgment of the operation of the Federal Reserve is concerned. I would go from that to the second reference that you make in which House Concurrent Resolution 133, in two areas you allude to the fact that it provides an audit—House Concurrent Resolution 133 provides an audit. Do you think that is an accurate statement, that House Concurrent Resolution 133 provides an audit of the Federal Reserve? Governor M i t c h e l l . The issue here is that heretofore there was not an examination of policy determination. This, I think, is what the Comptroller General was talking about, and I take.it that now that this semiannual appearance by the Board before the Banking Com mittees of the House and Senate provides an opportunity to examine directly the Federal Reserve as to its policy objectives and how it is achieving them. That is being done by these committees. I think that is exactly the way it ought to be done. Mr. H a n n a f o r d . It is a quite superficial opportunity for us to m a k e that observation, is it not, Governor? Governor M i t c h e l l . No, it does not need to be. I do not think it needs to be at all. In fact, Mr. Staats said he was going to hire out side people to suggest to him how he might proceed. I think that is what those five experts are for. But I think the committees are pos sessed with staffs that are perfectly capable of performing the same service without the needless injection of a third party. Mr. H a n n a f o r d . Thank you, Governor. In 1933, the Congress in its wisdom, in the Banking Act of 1933, provided that the Board’s funds should not be construed as “Government funds or appropriated moneys.” Do you think this is an accurate statement, independent of the law that made it such ? True enough, it is now an accurate statement be cause Congress made it an accurate statement. Are not the funds of the Federal Reserve thus accrued by U.S. Gov ernment bonds, indeed, U.S. Government funds? Governor M i t c h e l l . I do not think there is any issue as to whether the Federal Reserve is a public body or not. It is a public body, and no one in the Federal Reserve would deny that. The best evidence that it is a public body is that all the earnings of the Federal Reserve revert to the Treasury, and last year this was $5y2 billion----Mr. H a n n a f o r d . I suspect I have approximately taken my time. Governor, I would like to commend you for your statement. If time permits, I may ask to comment on some other things. But, all the funds accrue to the Government of the $6.3 billion in tax income, except those that the Federal Reserve in its operations ex pends, which is now some $548 million per year in operating funds? Governor M i t c h e l l . That is correct, except for a dividend, and an appropriation to surplus; otherwise the only deduction is the $550 million for our operations. That is correct. 360 Mr. H a n n a f o r d . The thins: that bothers me, Governor, is that we have an institution with a budget of well over $0.5 billion, and over $6 billion in revenues without any third party to make a judgment as to the efficiency of the expenditures of over $0.5 billion, independent of the monetary decision, of course. Would you say that Congress al ready has the opportunity to audit in a somewhat indirect way through House Concurrent Resolution 133 ? Well, thank you very much, Governor, and thank you, Mr. Chairman. Mr. H a n s e n . Would the gentleman yield briefly ? Mr. H a n n a f o r d . Yes, sir. Mr. H a n s e n . I would like to ask just one question, Mr. Chairman. On page 6 of your testimony, Mr. Mitchell, you say, “The System spends $8% million annually for auditing the Reserve Banks and the Board.” I would just like to ask you, what would be your estimation of the possible costs in light of this of the duplication of audit that might be incurred under the proposed legislation? Governor M i t c h e l l . I do not think it would be equivalent to this number; but it depends on how the audit were conducted. I f the audit were an audit of procedures, it would be relatively inexpensive. But if it were the kind of audit that we are performing on the Reserve Banks, and if it duplicated that, it would be a very expensive opera tion, in my opinion. Mr. H a n s e n . And how would you anticipate that the audit would be conducted under the terminology of the legislation as proposed ? Governor M i t c h e l l . Well, to tell the truth, Mr. Hansen, I cannot remember what Mr. Staats said he intended to do. My recollection of his testimony 2 years ago was that he could not afford to audit the Federal Reserve every year, that he might do it once every 2 or 3 years. I would infer from that that the amount of money he would devote to this probably would be rather substantial. I am not in a position to be very helpful at this time. I might talk to our people and see if they could provide you with some information on this. Mr. H a n s e n . Mr. Chairman, it might be well if we allowed Governor Mitchell to clarify this and provide it for the record. Chairman P a t m a n . Certainly. You may extend your remarks. Without objection, it is so ordered. [In response to the request of Mr. Hansen, the following informa tion was submitteed for the record by Governor Mitchell:] R eply of G o verno r M it c h e l l At the time Comptroller General Staats appeared before the Subcommittee to present the views of GAO on H.R. 4316, he agreed, in response to a request by Representative Gradison, to supply cost estimates for the types of audits he en-' visaged would be conducted. I assume such estimates were furnished the Sub committee for the record of this hearing. Obviously, any cost estimate will depend on the scope, depth, and frequency of the audits contemplated. These factors could, of course, change from year to year. Our staff estimates that a thoroughgoing audit of all twelve of the Reserve Banks could result in the expenditure of $1-1% million. Chairman P a t m a n . N o w , Mr. Staats mentioned the fact that he would not conduct an overall audit every year, but he would audit 361 various aspects of the Federal Reserve System every year. He made that plain. Governor M itch ell . Well, I was just trying to recall. It seemed to me at one point that he had said that he would audit the procedures, which is a relatively inexpensive operation. Mr. H a n se n . Well, I think this should be clarified for the record, Mr. Chairman. Mr. N eal . Would the gentleman yield on that point ? Mr. H a n s e n . H e h a s t h e t i m e . I thank the gentleman for yielding. Chairman P a t m a n . It is your time, Mr. Neal. Mr. N eal . Just on that point, would there be the need for two audits ? Governor M itch ell . We do not think so. Mr. N eal . Well, that is my point. Governor M itch ell . We would have to have our internal system; we could not get along without that, because it is more or less continu ous. The general auditor in each bank is continuously auditing opera tions, and I do not think we would want to relinquish any of our controls, no matter what the GAO would do. Mr. N eal . Governor, on page 14 of your statement, the second sen tence, you say: Even many who oppose this or that action of the Federal Reserve willingly concede that the maintenance of independent judgment by the Nation’s central bank is essential if monetary policy is to play its proper role in achieving eco nomic stability in growth, a high level of employment and stablity in the pur chasing power of the dollar. Is not that really the question, do they “ willingly concede” ? I think that is where I have a question, anyway. Governor M itch ell . This does not say they all conceded, but many conceded. Mr. N eal . Beyond that I think the question arises, do we have a high level of employment? Has the Federal Reserve done wThat it could to promote a high level of employment stability in the purchasing power of the dollar ? I do not believe we have had either, have we ? Governor M itch ell . Well, performance certainly could have been better, but I believe that you have to look at the price performance in terms of the oil cartel’s operations last year, and the reverberations it caused, and the fact that we had poor crops around the world and food prices rose very rapidly, and the fact that the world is suffering from inflation. The United States is not the only place where inflation takes place. This is a worldwide phenomenon. Our performance could have been better and should have been better, I would certainly admit. Mr. N eal . I think that is where my interest lies, anyway. I think that the Congress is going to bear the blame, as I think it probably should, for economic conditions as they develop from now on, and I think it is blamed for the state of the economy; however, it is just my observation that without control over the "various aspects of the economy, then we are really operating on one cylinder—that is, fiscal policy. Is not that the real purpose for this—to enable us to get into the area of policy ? Is not that the real purpose for this, and so that we can possibly get into the area of policy ? 362 Governor M itc h e ll . Well, I would say that part of my job, and I assume part of yours, is taking the blame for things when they do not go right. But I do think that the operation of monetary policy is a very technical and highly complicated matter, and I think Congress wisely delegated it to a monetary authority. That is what has been done all over the world. It is true, Congress ought to be in a position to evaluate the operations of the monetary authority. I would not object to that. But I would not try to do the job. I think that would be a mistake. Mr. N eal . On that point, you say that it is delegated to a central bank all over the world. What percent of the central banks over the world act independently of elected representatives ? Where are the systems that operate through elected representatives ? Governor M itch ell . I think that the link between the Government and the central bank€Varies all the way from complete control, usually through what is the equivalent of our Secretary of the Treasury, to a fair amount of independence. I think you would find a considerable amount of independence in Germany, and in Great Britain, and in Italy. There are very strong central banks in all of those countries. In fact, I think it would be helpful to look, if you were interested in this particular issue, just to see how those central banks mesh with their governments. Mr. N eal . I am very interested, and I do want to do that. Governor M itch ell . Those would be the ones that I would say are outstanding, and they are also very important central banks in their own right. The Bank of Japan, perhaps, is a somewhat different question. Mr. N eal . The GAO audit, as I understand it, would evaluate the effectiveness and results achieved under the various programs of the Federal Reserve. That would be its top priority item, I believe. Governor M itch ell . Well, I think that in the context of the pre vious discussion I was having with Mr. Hannaford, you are now talk ing about a policy audit. I continue to believe that the purpose of a policy audit is pretty largely satisfied by the concurrent resolution, because Congress through the resolution can examine into the effec tiveness of what the Federal Reserve intends to do and how effectively it is doing it. Mr. N eal . The joint resolution, though, just asks for a very super ficial analysis of what is going on. It asks for a judgmental report. Governor M itch ell . No. It asks for what we are doing what we have been doing, and what we intend to do. That is all contained in the statement that Chairman Burns made on May 1. I do not think any central bank could give you a more forthright statement than that one. Mr. N eal . Would that cover such things as issuance and retirement of Federal Reserve notes, clearinghouse operations ? Governor M itch ell . No. This deals only with policy, not with operations. Those are operating questions. Mr. N eal . So, if there were a question beyond what we are given, we would have no way to find out the answer under the terms of that resolution? 363 Governor M i t c h e l l . If there are questions relating to our opera tions, we would be glad to supply you with any information you want. In fact, we are doing that constantly. We put out a quarterly report of operations. This book I have in my hand comes out every quarter. Another is published once a year in addition. They describe the cost operations at every Federal Reserve office in the country. There are 36 of them. It gives complete details on all of our banks’ operations. Mr. N e a l . But not policy. Governor M i t c h e l l . N o . That has nothing to do with policy, that is right. Mr. N e a l . Y o u are saying, though, that we have all the access we would need to policymaking decisions through our concurrent resolution ? Governor M i t c h e l l . That is my opinion, yes, sir. Mr. N e a l . I would like to pursue this further at another time. Mr. Chairman, I would yield. Chairman P a t m a n . We will recognize Mr. Blanchard. Mr. B la n c h a r d . Yes. Governor Mitchell, I want to thank you for your presentation and also for its format. Previous discussions on this issue with those who oppose it almost always focus on criticism of Congress rather than try ing to deal with the subject of the audit on its merits. Throughout your statement, I notice you used the words “sensitivity” and “sensitive” quite frequently. You discussed the extreme sensitivity of bank examinations and international monetary situations. What makes these areas so sensitive? Governor M i t c h e l l . Well, I think it is inherent in the nature of financial markets. Today, financial markets are upset because they do not know for sure how much of the Treasury deficit they will be called upon to finance. When revised figures on income tax revenues were released 3 or 4 days ago, the markets did not know that this informa tion was going to become available, and they reacted favorably. It lifted a little of the weight from their expectations. This example shows that markets are extremely sensitive; their sensitivity communi cates itself to the kinds of instruments they will buy. And since the Government is heavily involved in debt markets and it has to turn its portfolio over continuously, it is drastically affected by this fact. In addition, of course, banks and businesses are affected by the willingness of investors to buy their securities. And financial markets today are in a delicate condition, I think it is fair to say. Mr. B la n c h a r d . Yes. I notice in addition to what I referred to, you mentioned that you feel that an audit would unwisely inject a third party into the sensitive area of monetary policy. I assume you are referring to the GAO when you say that third party. Governor M i t c h e l l . Any third party. Mr. B la n c h a r d . But I know that early in your statement you ex pressed confidence in the integrity and the competence of the GAO. And I am wondering, if everyone has been singing the accolades of the GAO, why is it that with their integrity and competence we cannot trust them to do an objective audit of these very sensitive matters? 50-365 0 - 75 - 24 364 Governor M i t c h e l l . Well, let us say that you are a foreign central bank and you have a portfolio of $10 billion or $20 billion in U.S. Government securities that happens to be at the New York Federal Reserve Bank, let us say. And that central government or central bank believes there is some possibility that those operations are going to be audited by the GAO. They would immediately begin to worry about the possibility that their operations were going to be disclosed—or at least made available to a third party. They will probably decide to move their account to a commercial bank or out of the country. That would be the natural thing for them to do. One might say that it does not make sense because we have absolute confidence in the GAO and its operations. But that does not necessarily make any difference to foreign governments. Mr. B la n c h a r d . But that puts a person like me in a tough position----Governor M i t c h e l l . It certainly does. Mr. B la n c h a r d [continuing]. When I have to say that I am not willing to see Congress exercise its oversight function because of foreign reaction. I do not know how I explain that. Governor M i t c h e l l . Foreign governments own $80 billion of the U.S. debt. That is almost as much as the Federal Reserve owns. We should keep that in mind. Mr. B la n c h a r d . One final question, w hich does puzzle me. And I believe you are sincere when you stated—and it is on page 5, where you mention, speaking for the Fed—that you are committed to your own internal financial audit because you are committed to the idea that the Fed has the responsibility above everything else of main taining the integrity of its operations as the Nation’s central bank. And I do believe you are sincere, unlike some critics of the Fed, in saying that. But I am wondering how you can keep that integrity intact, either before the opinions of Congress or the public, if you continue to resist an audit by the GAO, an agency you claim has integrity and competence. It seems to me that you undermine the integrity of the Federal Reserve by so resisting and opposing this bill. Governor M i t c h e l l . This is a System judgment of long standing that I am expressing. It also happens to be my judgment. I can under stand that people would differ on this, and people do differ on it. But I think in pointing to the need to maintain the integrity of the Sys tem’s accounts, what we are saying, not only to Congress and the American public but to the world, is that the Federal Reserve has established a reputation of making the facts known with respect to its operations, facts that are material, so that people can tell what the central bank is doing. There are some countries where it is difficult to tell what the central bank’s obligations are, what its commitments are. But I do not think anyone would say that is true of the Federal Reserve System in the United States. Therefore, I am thinking about integrity perhaps in a somewhat different way than you are. I believe that the sensitivity of financial markets and the American role throughout the world is a growing and extremely important consideration. And I do not believe the GAO audit would be in any way reassuring to those markets or to foreign central banks. Mr. B la n c h a r d . If I have any time, Mr. Chairman, I would like to yield the balance to Mr. Neal. 365 Chairman P a t m a n . Mr. Neal, you are recognized and then Mr. Hannaford will have 5 minutes, and then I am going to take a little time. All right, Mr. Neal. Mr. N e a l , I just had one question before we got too far from the point I mentioned earlier. Is it not true that most central banks of most industrial countries are held directly responsible to their governments for bank policy? That is, the Government tells the central bank what to do. And do we not have pretty much a reversed situation here, where the Federal Re serve says what it is going to do and we in government just sort of follow along? Governor M i t c h e l l . I do not think that is the latest view on this. President Ford, in a television interview just a few days ago—you probably heard it—indicated that the Federal Reserve has autonomy, but the Federal Reserve works within the framework of government; and I think that is a better way to look at our operations and the op erations of the major central banks of the world. Mr. N e a l . S o , in essence, the Federal Reserve is responsive to the administration ? Governor M i t c h e l l . It is a creature of Congress. Mr. N e a l . But it is not responsive to the will of Congress. I think it has been made quite clear that the will of Congress is that the Fed eral Reserve expand the money supply to help increase employment. Governor M i t c h e l l . The Federal Reserve is increasing the money supply. Mr. N e a l . Consistently over the period of the last year it has not. And my own view is that because of its policy, it has been largely re sponsible for the high unemployment that we have today. So I would say that it has not been responsive to the will of Congress and that we do not have a way of knowing, without an audit, what the policy is—if in fact the Federal Reserve is carrying out policy directives. Governor M i t c h e l l . At the May 1 hearing, Mr. Neal, Chairman Burns said that the Federal Reserve’s objective through March 1976 is to increase the narrowly defined money supply between 5 and 7.5 per cent. Now, at that hearing there were estimates all the way from 2 per cent to 12 percent as being a desirable goal. That intention, those facts, were completely revealed along with the reasons for them. And Con gress had an opportunity on that occasion to indicate whether they thought the Federal Reserve was pursuing a proper policy. Mr. N e a l . S o what you are saying now is that Congress has not been forthright enough in expressing its will. Governor M i t c h e l l . I f Congress wants to see something differently done, the Congress----Mr. N e a l . Should express that very clearly. Governor M i t c h e l l . It can express it in any form it deems desirable. Mr. N e a l . I agree with y o u ; I thank y o u . Governor M i t c h e l l . I do not think anyone in the Federal Reserve would contend that the Federal Reserve is independent of Congress, because the Congress created it and can take any action with respect to the Federal Reserve it believes is desirable. Mr. N e a l . It just has not. Governor M i t c h e l l . That is correct. 366 Mr. N e a l . One further point I would like to make is that it is my understanding that if we did, as the Congress, take a position that was clear, then wTe would have no way of knowing if that directive were being followed or not without an audit; would that not be a fair statement? Governor M i t c h e l l . Well, I would like to differ with you on that, because periodically, every week, every month, we reveal what we are doing as we go along—to everybody, not just to Congress; to every body. We issue a weekly financial statement, and we get many daily re leases out. So if anyone wants to know what the Federal Reserve is doing, he will not have any trouble finding out. Your staff could find out; you could see these releases for yourselx. Mr. N e a l . So it really, then, is up to the Congress to be clear in its directive to the Federal Reserve ? Governor M i t c h e l l . Yes. And that is why I think that the concur rent resolution may lead to a better understanding between Congress and the Federal Reserve. Mr. N e a l . Do you not think, though, that you and Dr. Burns would not appreciate the Congress being very specific in its desires ? Governor M i t c h e l l . Well, Mr. Neal, you know, we spend all of our time working on this problem. You have lots of other problems you are working on, and you cannot do everything. Something has to be delegated. Monetary policy is a complicated, technical matter. Over sight is one thing, but trying to run it on a day-to-day basis is some thing entirely different. Mr. N e a l . Well, that is not even m y point. Governor M i t c h e l l . I am sure it is not. All I am saying is I think that Congress appropriately can take a look at what is happening, and there ought to be an exchange of views to see if the differences can be ironed out or minimized. And that, I think, is what is intended with the resolution. Mr. N e a l . The resolution calls for the setting of long term interest rates in such a fashion that will reduce unemployment. Governor M i t c h e l l . And maintain price stability. Mr. N e a l . It is a very broad resolution. Governor M i t c h e l l . But I would like to commend to you—I know you are very busy—but I would like to commend to you Chairman Burns’ statement. While it is not very long, it is extremely lucid. Mr. N e a l . W h i c h s t a t e m e n t ? Governor M i t c h e l l . The one he gave to the Senate Banking Com mittee on May 1. Mr. N e a l . Fine; I will. Governor M i t c h e l l . It is a very lucid statement. I think you would find it a very useful statement. Mr. N e a l . Thank you very much, Governor. Chairman P a t m a n . Now, Mr. Hannaford. Mr. H a n n a f o r d . Thank you, Mr. Chairman. Governor Mitchell, you have mentioned a number of times House Concurrent Resolution 133, and a moment ago you said it may lead to the kind of communication that Mr. Neal was talking about. I think this is the problem that his line of questioning identified, and mine did, also, that it may lead to the kind of communication that we feel is 367 necessary to establish that we, as Members of the Congress, feel that there is appropriate oversight being taken. And I suppose the existence of House Concurrent Resolution 133 is one thing that might make me reluctant to support the direction this bill takes immediately; to wait and see what House Concurrent Resolution 133 might bring. The initial response on May 1 of Dr. Burns to the Senate was forthcoming and, I thought, quite encouraging. It still rests upon information that he chooses to give, and there is the possibility that that beginning might not continue to go in the same direction. But as I look at the historic perspective that you lay out in your document and testimony, and you say that this would be contrary to congressional decisions over the years, I would begin by saying that it is not necessarily a good maxim that what Congress has decided over the years is what we should do. And then, in reviewing your historic accounting, I would observe that there is very little that Congress has done since 1933, when it cut the tether and slapped the stallion in the flank and said, go your way. So that to say that we approve, by virtue of having not done anything, is somewhat like saying that the medical profession approves of cancer because they have not solved the problem. I do not think that there have been very many specific times in which Congress has addressed the question, but they have sort of not ad dressed it and hoped that thing's were going right. Are there very many historic examples where Congress has specifi cally stated that the Fed is doing all right and therefore we are not going to do anything with it ? Governor M itch ell . I think your chairman has raised this issue every year. There have been debates in Congress about the role of the Federal Reserve. I think you undoubtedly are right; the fact that Con gress has not acted does not necessarily mean that it should not have acted. We are an institution that pays a lot of attention to tradition, and I think in that respect we may be more conservative than many commercial banks. But I believe that conservatism is characteristic of financial institutions. So, we build our world around what has happened and what has been established as a precedent for present policy. Mr. H annaford . Governor Mitchell, I thank you for your very can did replies. We obviously do not agree on everything. I think that you can see the concern that we have had that there is no other institution that I know of in this world of competition that you and I both believe in that operates and enjoys this dispensation from review that the Federal Reserve, with 28,000 employees and a budget of $550 million a year, does enjoy. And the concern that Mr. Neal was just focusing in on, on the independent judgment as far as monetary policy was con cerned, when we see less than an encouraging record of what that mone tary policy is producing, albeit there are other forces—shortages, worldwide inflation, worldwide unemployment and so on—that would also be relevant. Thank you very much, Mr. Chairman. I yield back the balance of my time. Chairman P a t m a n . I yield to Mr. Hansen. Mr. H a n se n . Mr. Mitchell, a moment ago we were discussing how frequently the audit would be conducted, and I believe the bill did 368 stipulate annual audits. However, I think Mr. Staats, in his testimony, recommended that this be stricken and that instead of prescribing that, in his words, we make an audit each fiscal year of the several entities of the System, we recommend that the requirement be changed to provide simply that the General Accounting Office be directed to audit the named entities of the Federal Reserve System. So it was an ongoing type of thing, apparently, that he was allud ing to. Unless vou have clarification for that, I suspect that that would be type of information you would have to be using in bringing the information back to us that we talked about earlier. Governor M itch ell . I understand. Mr. H a n se n . I have two quick points, and one is that I think my colleague across the aisle a moment ago was alluding to the fact that you have probably one of those infrequent dispensations from audit that not very many institutions enjoy. I would say that this does create some problems, because I know there are suspicions, I suppose, on the political right and the political left about—and maybe a smat tering in the middle of some of us—that make us wonder how well the operation is being conducted under various circumstances. But I think that you have to balance the possibility of some privacy and the suspicions that derive from it with the problem of maybe becoming so public that you create problems so that you are not able to func tion. And I think that is probably the determination that we have to make. And it seems to me that some of the things that might be done, since you people appear here quite frequently before the Congress, is not so much worrying about an audit as to actually delve right into what your operation is doing in various respects—particularly with— maybe with international banking, where it is rather controversial, and take direct congressional action to give you the guidelines by which we expect you to operate. Would you care to address yourself to that ? Governor M itch ell . I believe that we are as fully responsive to re quests for information as we can be. On the international banking side, as you probably know, we have prepared a bill dealing with the activi ties of foreign banks in the United States, and it has been introduced in both Houses. And I understand hearings may soon beheld on that. The Federal Reserve intends to be completely outgoing as far as submitting information. Information other than that contained in our regular releases can be obtained by asking for it. Mr. H a n se n . Let me ask you in this respect, since the GAO is an arm of the Congress, an auditing arm of the Congress, would you say that it would make you nervous, as far as the fact that maybe—and it has been known on Capitol Hill that some people use their own discre tionary authority to reveal certain things that maybe normally would be confidential and should be confidential—that this would provide some kind of a toe in the door or a crack that would cause a breach of confidentiality ? Would this be one of the problems that you would be concerned about? Governor M itch ell . I think something of that sort would be an issue. It would not only be our concern, but it might well be the con cern of people who were in financial markets and who would view a development of this kind as being potentially prejudicial to their interests. 369 Mr. H a n se n . What we are really talking about, then, is just a differ ence between the stability that perhaps you can offer in your conserv ative policies that you are talking about and the blend of politics that you would get on Capitol Hill? And if Congress were to get too close into your operation, it becomes more politics than discretionary movement, based on studied evaluation by so-called experts? Governor M itch ell . I think that would be a real exposure. Mr. H a n se n . Thank you very much, Mr. Chairman. Chairman P a t m a n . May I comment on that first? You know, every important agency of the Government—there are a few tombstone commissions and things like that that have not been audited—but every important agency of the Government has been audited except the Federal Reserve. Now the Federal Reserve, of course, has been able to get around that. The Federal Reserve does not even have to obtain its funds through congressional appropriations. They thought about going to Congress for appropriations and they said, well, we do not want Congress to interrogate our people. We have to stay away from that. Then they thought they would get the banks to put up the money for the organization of the 12 Federal Reserve banks. But the banks would not do it because a large number of them were not for the Federal Reserve. And then they figured out a way—and I think it is very clever—to get around this provision in the Constitution. That is, to try to divert the money some way so it would not be in violation of the Constitution. So they devised this very clever way, by which they had the power to manufacture money, to create money, just like commercial banks have, except the commercial banks do it on a reserve basis. The Federal Re serve can create money on no basis at all—just create the money. Now they have created $93.4 billion to buy Government bonds. They could do the same thing and buy the entire national debt right now, and get $35 billion a year interest, instead of $6 billion a year interest they are now receiving. They could do that; there is no question about it. So we have to get to these things as we learn about them. I believe in answer to Mr. Minish you said, “ Governor, that the auditors do not audit the Federal Open Market Committee.” Governor M itch ell . External auditors. That is correct. The outside auditors do not. Chairman P a t m a n . You do not reexamine, the outside audits? Do you not have them audited by the General Auditor? Governor M itch ell . The New York operations of the desk are audited internally by the New York Bank, and they are also audited by Federal Reserve Board employees. But that is all. The private firm does not audit those accounts. Chairman P a t m a n . The private firm does not audit them. Well then, you mentioned the Commodities Stabilization Act. I happened to be here when that act was considered and adopted. This issue involved about $2 billion or $3 billion of the profits from the stockpile of gold. Do you remember that ? Governor M itch ell . Yes, that is right. 370 Chairman P a t m a n . We got between $2 billion and $3 billion, and instead of putting that in the Treasury, as it should have gone, it was held in a separate fund in the Treasury. Why was it not put in this general fund and spent like all other public moneys? The Federal Reserve did not want to do that. Now there are a few questions I just must ask you. One, you state that the proposed bill provides specific authority for GAO to audit both the Federal Open Market Committee and the System Open Market Account. How big is the System’s Open Market Account ? Governor M i t c h e l l . It must be about $ 8 5 or $ 9 0 billion. Chairman P a t m a n . $85 billion or $90 billion? That is nearly as much as the portfolio, is it not ? Governor M itch ell . Are you talking about what we own, or what our transactions are? Chairman P a t m a n . N ow , I am asking you this question. You testi fied about the System’s Open Market Account. I want to know how big that account is, how important it is. Governor M itch ell . The account consists of Government securities and agency issues. Chairman P a t m a n . Well, will you insert in the record, at this point, an answer to the question ? Governor M itch ell . Yes. It is on the order of $90 billion. [In response to the request of Chairman Patman, the following in formation was submitted for the record by Governor Mitchell:] R eply R e c e iv e d from G o vernor M it c h e l l Total holdings of the System Open Market Account (U.S. Government Securities, Federal Agency obligations and Bankers Acceptances) totaled $89.9 billion as of May 7,1975. This does not include $2.6 biUion in such securities that were held under repurchase agreement as of that date. Chairman P a t m a n . And how is that used? Is that used by the Sys tem, by the 12 banks? Governor M itch ell . Well it is owned by the 12 banks, and the in terest goes into our gross earnings. And, as I indicated $5.5 billion went back to the Treasury last year. Chairman P a t m a n . Yes; but the Federal Reserve does the taxpayers a gross injustice because that money is spent by the Federal Reserve without every really having to account for it to anyone. Furthermore, William McChesney Martin, who was Chairman of the Federal Reserve Board longer than anybody else, said that the bonds held in the Federal Reserve had been paid for once. Well, if they were canceled, as they should have been when you paid your debts, you would not have this portfolio. If you need money you can create it on the books of the Federal Reserve without reserves of any kind. That is what is done now. So you do not need this $93 billion portfolio from which you are receiving over $6 billion a year in interest. That is a terrible thing; to pay debts and then continue to make the tax payers pay $6 billion-a-year interest on those bonds after they have been paid for. That is awful. So when you talk about turnin