Full text of Congressional Oversight of the Federal Reserve System : Hearing Before the Subcommittee on Domestic Finance of the Committee on Banking and Currency, House of Representatives, Ninety-Second Congress, First Session, September 27, 1971

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CONGRESSIONAL OVERSIGHT OF THE
FEDERAL RESERVE SYSTEM

HEARING
BEFORE THE

SUBCOMMITTEE OK DOMESTIC FINANCE
OP THE

COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
NINETY-SECOND CONGKESS
FIRST SESSION
ON

REVIEW OF CURRENT OPERATIONS OF THE FEDERAL
RESERVE SYSTEM

SEPTEMBER 27, 1971

Printed for the use of the
Committee on Banking and Currency

U.S. GOVERNMENT PRINTING OFFICE
69-719

WASHINGTON s 1971

COMMITTEE ON BANKING AND CURRENCY
W R I G H T P A T M A N , T exa s, Chairman
W I L L I A M A . B A R R E T T , P e n n sy lv a n ia
L E O N O R K . (M R S . J O H N B .) S U L L IV A N ,
M issou ri
H E N R Y S. RETJSS, W is co n s in
T H O M A S L . A S H L E Y , O h io
W I L L I A M S. M O O R H E A D , P e n n sy lv a n ia
R O B E R T G. S T E P H E N S , J r ., G eorg ia
F E R N A N D J. S T G E R M A IN , R h o d e Isla n d
H E N R Y B . G O N Z A L E Z , T ex a s
J O S E P H G. M IN IS H , N ew J ersey
R I C H A R D T . H A N N A , C a lifo rn ia
T O M S. G E T T Y S , S ou th C a rolin a
F R A N K A N N U N Z IO , I llin o is
T H O M A S M . R E E S , C a lifo rn ia
T O M B E V I L L , A la b a m a
C H A R L E S H . G R IF F IN , M is siss ip p i
J A M E S M . H A N L E Y , N ew Y o r k
F R A N K J . B R A S C O , N ew Y o r k
B I L L C H A P P E L L , J r ., F lo r id a
E D W A R D I. K O C H , N ew Y o r k
W I L L I A M R . C O T T E R , C o n n e c ticu t
P A R R E N J . M IT C H E L L , M a ry la n d

W I L L I A M B . W I D N A L L , N ew J e rs e y
F L O R E N C E P . D W Y E R , N ew J e rse y
A L B E R T W . JO H N S O N , P e n n sy lv a n ia
J . W I L L I A M S T A N T O N , O h io
B E N J A M IN B . B L A C K B U R N , G e o rg ia
G A R R Y B R O W N , M ich ig a n
L A W R E N C E G. W I L L I A M S , P e n n sy lv a n ia
C H A L M E R S P . W Y L I E , O h io
M A R G A R E T M . H E C K L E R , M a ssa ch u se tts
P H I L I P M . C R A N E , I llin o is
J O H N H . R O U S S E L O T , C a lifo r n ia
S T E W A R T B . M c K IN N E Y , C o n n e c ticu t
N O R M A N F . L E N T , N e w Y o rk
B IL L A R C H E R , T exas
B I L L F R E N Z E L , M in n e so ta

P a u l N e l so n , Clerk and Staff Director
C u r t is A . P r in s , Chief Investigator
B e n e t D . G e l l m a n , Counsel
J o se p h C. L e w i s , Professional Staff Member
O rm an S. F i n k , Minority Staff Member

S u b c o m m itte e

D o m e s tic

F in a n c e

W R I G H T P A T M A N , T e x a s , Chairman
J O S E P H G. M IN IS H , N ew J e rs e y
R I C H A R D T . H A N N A , C a lifo r n ia
T O M S. G E T T Y S , S ou th C a rolin a
F R A N K A N N U N Z IO , I llin o is
T H O M A S M . R E E S , C a lifo r n ia
J A M E S M . H A N L E Y , N ew Y o r k
F R A N K J . B R A S C O , N ew Y o r k
P A R R E N J. M I T C H E L L , M a ry la n d

W I L L I A M B . W I D N A L L , N ew J e rs e y
B E N J A M IN B . B L A C K B U R N , G e o rg ia
P H I L I P M. C R A N E , I llin o is
G A R R Y B R O W N , M ich ig a n
L A W R E N C E G. W I L L I A M S , P e n n sy lv a n ia
B I L L F R E N Z E L , M in n e so ta

(II)

CONTENTS
Statem en t
P age

Burns, Hon. Arthur F., Chairman, Board of Governors, Federal Reserve
System ----------------------------------------------------------------------------------------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

ecord

Burns, Hon. Arthur F .:
“Issues Eligible for System Transactions Under Initial Guidelines”
(table) ___ __________________________________________________
Prepared statement with attached announcement of Federal Reserve
Open Market Committee, dated September 16, 1971-------------------Response to statements, questions, and material o f :
Chairman Wright Patman on oversight of Federal Reserve:
Employee clubs_________________________________________
Membership in American Dietetic Association, American
Institute of Banking, and National Rifle Association_____
Open Market Committee:
Guidelines No. 2 and No. 5, clarification on purchase
of Government agency issues---------------------------------List of Federal agencies eligible to sell agency paper----Purchase of agency paper---------------------------------------------Questionable expenditures for year ending December 31,1969Thrigt plan-------------------------------------------------------------------Hon. Lawrence G. Williams_________________________________
Patman, Hon. Wright:
Excerpts of testimony of William McChesney Martin on :
S. 1451 and H.R. 7026, July 16, 1957_________________________
H.R. 7601, July 7, 1965_____________________________________
Letter from Hon. Paul G. Dembling, Acting Comptroller General of
the United States, dated September 24, 1971, regarding the Federal
Reserve employee thrift plan-----------------------------------------------Statements, questions, and material on oversight of Federal Reserve:
Employee clubs_____________________________________________
Membership in American Dietetic Association, American Insti
tute of Banking, and National Rifle Association_____________
Open Market Committee:
Guidelines No. 2 and No. 5, clarification on purchase of Gov
ernment agency issues________________________________
List of Federal agencies eligible to sell agency paper_______
Portfolio of Government bonds______________________________
Purchase of agency paper___________________________________
Questionable expenditures for year ending December 31,1969___
Thrift plan_________________________________________________
Submission of tables:
Interest Payments on Public and Private Debt (1953-70)_____
Yields on long-term Government bonds (1989-52)_____________

(IIT)

5
5
30
29
27
26
41
58
38
15
35
36
28
30
29
27
26
60
39
42
37
33
33

CONGRESSIONAL OVERSIGHT OF THE FEDERAL
RESERVE SYSTEM

M ONDAY, SEPTEMBER 27, 1971
H ou se
S u b c o m m it t e e o n D
C o m m it t e e

R e p r e s e n t a t iv e s ,
F in a n c e of t h e
B a n k in g a n d C u r r e n c y ,

o m e s t ic
on

Washington, D.C.

The committee met, pursuant to notice, at 10:05 a.m., in room 2128,
Rayburn House Office Building, Hon. Wright Patman (chairman)
presiding.
Present: Representatives Patman, Gettys, Rees, Mitchell, Widnall,
Williams, and Frenzel.
The C h a i r m a n . The committee will please come to order.
Today, the Domestic Finance Subcommittee begins general over
sight hearings of the Federal Reserve System, including the opera
tions of the Board of Governors, the Federal Open Market Com
mittee, and the Federal Reserve regional banks.
Although we have inquired into various operations of the Federal
Reserve System when legislation involving the Federal Reserve was
before us, not since the 1964 hearings entitled “Fifty Years of the
Federal Reserve System” were conducted, have we exclusively de
voted ourselves to oversight hearings involving our central banking
system.
For the benefit of the members, it is my intention to continue these
hearings for some time with Dr. Burns as spokesman for the System.
Of course, we may not be able to meet continuously on this subject, due
to the press of other legislative business, but it is my hope that by the
time these hearings are finished the members of the subcommittee and
the public at large will have gained a better understanding as to how
the Federal Reserve System works and we may, if necessary, be in a
position to offer legislation to make the System work more efficiently
and more directly in the public interest.
Among the subjects which I think we should concentrate on ini
tially would include such matters as the following:
( 1 ) The new authorization recently announced by the Federal Re
serve Board under which the open market committee will buy and
sell Federal agency securities.
(2) The so-called thrift plan for employees of the Federal Reserve
System, whereby funds which would otherwise go into the general
fund of the U.S. Treasury are used to subsidize Federal Reserve em
ployees who participate in what, in effect, is a form of mutual fund. It
is my understanding that for each dollar invested in the thrift plan
by an employee, the Federal Reserve contributes 25 cents. It is my un

(1 )

2
derstanding that as far as the executive branch of our Government is
concerned any program of this nature would be illegal unless specifi
cally sanctioned by law and I know of no law on the statute oooks
which allows of any of our agencies to undertake such a program.
(3) The expenses of the Federal Reserve Board and Federal Reserve
Banks for activities which could not be justified under the rules and
regulations of other Government agencies; and
( 4 ) The all-important matter of the Federal Open Market Com
mittee’s portfolio of Government securities now amounting to some
$ 6 6 billion, which I contend has been acquired exclusively through
the use of the Federal Government’s creidt. The former Chairman
of the Federal Reserve Board, Mr. William McChesney Martin, has
admitted that these securities have been paid for once and, therefore,
should be canceled.
Dr. Burns, the Chairman of the Federal Reserve Board, has a
formal statement which he may present at this time. Following Dr.
Burns’ statement, we will proceed under the 5-minute rule for the
initial go-round. We will then proceed with unlimited time for each
member, but I want to assure all members that if they remain in
the hearing room, they will be given full consideration and have an
opportunity to ask all the questions they so desire.
Dr. Burns, we are glad to have you, sir, and you may proceed as
you desire.
Mr. W i d n a l l . Mr. Chairman.
The C h a i r m a n . I yield to Mr. Widnall first.
Mr. W i d n a l l . I would like to join you in welcoming Dr. Burns
before the committee. We always appreciate your presence and the
fine testimony that you give us.
Mr. Chairman, I would just like to comment on your statement in
point number 4. You state:
“The former Chairman of the Federal Reserve Board, Mr. William
McChesney Martin, has admitted that these securities have been paid
for once and, therefore, should be canceled.”
I don’t ever recall such an admission having been made by former
Chairman Martin.
The C h a i r m a n . That testimony will be presented in the course of
the hearings. He admitted it several times. The part “ therefore, should
be canceled,” is my language, not his.
Mr. W i d n a l l . That doesn’t show in the statement.
The C h a i r m a n . Anyway, that is not only connected with his reply.
Mr. W i d n a l l . That is all.
The C h a i r m a n . Dr. Burns, you may proceed.
STATEMENT OF HON. ARTHUR P. BURNS, CHAIRMAN, BOARD
OP GOVERNORS, FEDERAL RESERVE SYSTEM
Dr. B u r n s . Mr. Chairman, I am here in response to your invitation
to discuss Federal Reserve transactions in obligations issued by Fed
eral agencies, and particularly the decision announced September 16
by the Federal Open Market Committee—to broaden such transactions
to include outright purchases and sales as well as repurchase agree
ments. For your convenience, a copy of the announcement that was

3
issued by the Federal Open Market Committee is attached to my
prepared statement which I trust will be placed in the record.
Mr. W id n a l l. Mr. Chairman.
The C h a irm a n . The whole statement will be placed in the record,
Dr. Burns. There will be no objection to that, I am sure. I f you have
additional views that you would like to express after you conclude
your testimony today, when you look over your transcript you may
insert anything that is germane to the hearing.
Dr. B u r n s . I appreciate that.
This committee will recall that the System’s authority to purchase
agency issues was broadened in 1966. Up to that time we were author
ized to purchase obligations “which are direct obligations of the
United States or which are fully guaranteed by the United States.”
This authority covered some, but not all, agency issues. The principal
issues in terms of aggregate size and market activity were ineligible
for purchase by the System. These ineligible issues included Federal
intermediate credit bank debentures. Federal Home Loan Bank notes
and bonds, Federal land bank bonds, bank for cooperatives debentures,
and Federal National Mortgage Association debentures and certifi
cates of participation.
In 1966, the Board recommended that the authority for System
transactions in agency issues be amended to make all issues eligible.
In support of this recommendation, Vice Chairman Robertson testi
fied that it “would increase the potential flexibility of open market
transactions and could also serve to make these securities somewhat
more attractive to investors.” He also pointed out that “it might prove
desirable to conduct such operations in the form of repurchase agree
ments” in order “to reduce the risk of undesired System market domi
nance associated with sizable outright transactions by the System.”
Accordingly, the Congress added to section 14(b) of the Federal
Reserve Act authority for the System to buy and sell in the open
market, under the direction and regulations of the Federal Open
Market Committee, any obligation which is a direct obligation of, or
fully guaranteed as to principal and interest by, any agency of the
United States.
In commenting on this amendment, the Senate Banking and Cur
rency Committee report included the following statement, reflecting
similar comments in Vice Chairman Robertson’s testimony:
By authorizing System transactions in agency issues, the bill would place them
on the same footing as direct obligations of the U.S. Government so far as System
Open Market operations are concerned. As with direct Treasury debt, System de
cisions as to whether, when, and how much to buy or sell of agency issues would
have to be made with a view to the need for supplying or absorbing reserves as
indicated by the stance of monetary policy and in light of developments in the
markets, including the need to cope with disorderly market conditions, should
they emerge. In any event, it would be important, as at present, to avoid any
semblance of rigging the markets or pegging the interest rates for any particular
issues, for such actions would give rise to official dominance of the markets that
would run counter to many of the broader objectives of Federal financial policies
and might in fact harm rather than aid the propitious functioning of the market
for such securities.

As you know, System open market operations are conducted to carry
out the objectives of monetary policy by affecting the volume of bank
reserves, money, bank credit, and conditions in credit markets. In

4
December 1966, the System started transactions in agency issues with
a view to fitting such transactions into its open market operations. In
line with the Board’s testimony on the 1966 amendment, it was then
decided to confine these new transactions to repurchase agreements.
From time to time, however, the Federal Open Market Committeejhas
considered broadening operations in agency issues to include outright
purchases and sales as well as repurchase agreements. After due delib
eration, the committee has now decided to take this step, as the an
nouncement of September 16 indicates, in order to widen the base of
System open market operations and at the same time to add breadth
to the market for agency securities.
The recent decision to begin outright transactions reflects the fact
that the market in agency issues, while less broad than that in Treas
ury issues, has grown substantially in recent years. The amount of
Federal agency issues outstanding in the hands of private investors
has risen from about $ 8 billion at tie end of 1960 to $14.1 billion at the
close of 1965 and to nearly $45 billion in early August of this year.
The $45 billion of agency issues amounted to 28 percent of the amount
of Treasury issues outstanding at the time; at the end of 1960 the
comparable figure was 5y2 percent. Thus there is less risk now that
System purchases or sales could dominate the market.
Since the hope is that System operations will help to improve the
market for these issues, we must be careful to avoid driving away
other investors, as might happen if the System acquired a dispro
portionately large share of an issue and depressed its yield relative
to other investment alternatives. To protect against this risk, the ini
tial guidelines for System purchases include a provision limiting our
holdings of any issue to 1 0 percent of the amount outstanding.
We expect our portfolio of agency issues to grow modestly in the
coming months, taking into account the amount of growth in bank
reserves, that is appropriate for monetary policy, the size of the mar
ket in agency issues, and the necessity of continuing operations in
Treasury obligations as well. Transactions will be made in the mar
ket, at prices set by the market. We will seek quotations from dealers
and buy or sell at the most favorable prices quoted. We will not buy
any new issue until at least 2 weeks after it is issued, so as to provide
an opportunity for establishing a fair price in the market for the
issue without interference by the Federal Eeserve.
You will notice that the initial guidelines at the end of my state
ment provide that our holdings of agency issues will be allowed to
run off at maturity. This reflects a technical problem, in that the pro
cedures by which agency issues are now marketed do not provide for
exchange of maturing issues on the basis that the System now ex
changes its holdings of maturing Treasury issues for new issues.
Presumably such arrangements could be worked out for agency issues.
This illustrates a point made in the announcement of September 16—
that the initial guidelines will be subject to review and revision as
operating experience is gained.
We plan to buy only taxable securities for which there is an active
secondary market. The requirement of an active secondary market
will help to insure that the System’s portfolio remain liquid; it will
also encourage issuing agencies and underwriters to develop sec
ondary markets in their securities.

5
Under the initial guidelines, an issue will be eligible for purchase
if at least $300 million is-outstanding;, for longer term issues (over
5 years) the cutoff will be $ 2 0 0 million. In early August, when there
were about $45 billion of agency issues outstanding, about $32 billion
of these met the size test. A breakdown of these eligible issues is shown
in the following table:
(The table referred to follows:)
ISSUES ELIGIBLE FOR SYSTEM TRANSACTIONS UNDER INITIAL GUIDELINES 1
Amount
(in billions)

Number
of issjues

By maturities:
0 to 5 years........................................................................................................................................
Over 5 years......................................................................................................................................

$25.3
6.8

61
21

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

32!

By agencies:
Farm credit agencies.......................................................................................................................
FHLB....................................................................................................................................................
FNMA..................................................................................................................................................
GNMA..................................................................................................................................................
Export-lmport Bank.........................................................................................................................

10.8
5.6
10.1
4.3
1.5

25
15
28
10
4

1 Minimum issue size is $300,000,000 for issues maturing in 5 years or less and $200,000,000 for issues maturing in
more than 5 years.

One cannot say with certainty what the results of our experimental
transactions in agency issues will be. We hope they will be beneficial
in terms of greater flexibility for System open market operations,
broader markets for agency securities, and a narrower spreaa between
such securities and Treasury obligations. I f the borrowing costs of
Federal agencies are reduced, however modestly, that result will be
most welcome to the Federal Reserve as well as the issuing agencies
and the public they serve.
Thank you, Mr. Chairman.
(Dr. Bums’ prepared statement with an attached announcement by
the Federal Open Market Committee of the Federal Reserve System
authorizing outright purchase and sale transactions in securities of
Federal agencies follows:)
P repared S t a t e m e n t o f H o n . A r t h u r F . B u r n s , C h a ir m a n , B
G overnors of t h e F ederal R eserve Sy s t e m

oard of

Mr. Chairman, I am here in response to your invitation to discuss Federal Re
serve transactions in obligations issued by Federal agencies, and particularly the
decision—announced September 16 by the Federal Open Market Committee—to
broaden such transactions to include outright purchases and sales as well as re
purchase agreements. For your convenience, a copy of the announcement is
attached to my statement.
This Committee wiU recall that the System’s authority to purchase agency
issues was broadened in 1966. Up to that time we were authorized to purchase
obligations “which are direct obligations of the United States or which are fully
guaranteed by the United States.” This authority covered some, but not all,
agency issues. The principal issues in terms of aggregate size and market activity
were ineligible for purchase by the System. These ineligible issues included Fed
eral Intermediate Credit Bank debentures, Federal Home Loan Bank notes and
bonds, Federal Land Bank bonds, Bank for Cooperatives debentures, and Federal
National Mortgage Asssociation debentures and certificates of participation.
In 1966, the Board recommended that the authority for System transactions in
agency issues be amended to make all issues eligible. In support of this recom
mendation, Vice Chairman Robertson testified that it “ would increase the poten6 9 -7 1 9 — 71--------2

6
tial flexibility of open market transactions and could also serve to make these
securities somewhat more attractive to investors.” He also pointed out that “it
might prove desirable to conduct such operations in the form of repurchase agree
ments” in order “to reduce the risk of undesired System market dominance asso
ciated with sizable outright transactions by the System.”
Accordingly, the Congress added to section 14(b) of the Federal Reserve Act
authority for the System “to buy and sell in the open market, under the direction
and regulations of the Federal Open Market Committee, any obligation which is
a direct obligation of, or fully guaranteed as to principal and interest by, any
agency of the United States.”
In commenting on this amendment, the Senate Banking and Currency Com
mittee report included the following statement, reflecting similar comments in
Vice Chairman Robertson’s testimony:
“By authorizing System transactions in agency issues, the bill would place
them on the same footing as direct obligations of the U.S. Government so far as
System open market operations are concerned. As with direct Treasury debt,
System decisions as to whether, when, and how much to buy or sell of agency
issues would have to be made with a view to the need for supplying or absorbing
reserves as indicated by the stance of monetary policy and in light of develop
ments in the markets, including the need to cope with disorderly market condi
tions, should they emerge. In any event, it would be important, as at present, to
avoid any semblance of ‘rigging’ the markets or ‘pegging’ the interest rates for
any particular issues, for such actions would give rise to official dominance of
the markets that would run counter to many of the broader objectives of Fed
eral financial policies and might in fact harm rather than aid in the propitious
functioning of the market for such securities.”
As you know, System open market operations are connected to carry out the
objectives of monetary policy by affecting the volume of bank reserves, money,
bank credit, and conditions in credit markets. In December 1966 the System
started transactions in agency issues with a view to fitting such transactions
into its open market operations. In line with the Board’s testimony on the 1966
amendment, it was then decided to confine these new transactions to repurchase
agreements. From time to time, however, the Federal Open Market Committee
has considered broadening operations in agency issues to include outright pur
chases and sales as well as repurchase agreements. After due deliberation, the
Committee has now decided to take this step, as the announcement of Septem
ber 16 indicates, in order to widen the base of System open market operations
and at the same time to add breadth to the market for agency securities.
The recent decision to begin outright transactions reflects the fact that the
market in agency issues, while less broad than that in Treasury issues, has grown
substantially in recent years. The amount of Federal agency issues outstanding
in the hands of private investors has risen from about $8 billion at the end of
1960 to $14.1 billion at the close of 1965 and to nearly $45 billion in early August
of this year. The $45 billion of agency issues amounted to 28 per cent of the
amount of Treasury issues outstanding at the time; at the end of 1960 the com
parable figure was 5% per cent. Thus there is less risk that System purchases or
sales could dominate the market.
Since the hope is that System operations will help to improve the market for
these issues, we must be careful to avoid driving away other investors, as might
happen if the System acquired a disproportionately large share of an issue and
depressed its yield relative to other investment alternatives. To protect against
this risk, the initial guidelines for System purchases include a provision limiting
our holdings of any issue to 10 percent of the amount outstanding.
We expect our portfolio of agency issues to grow modestly in the coming
months, taking into account the amount of growth in bank reserves that is
appropriate for monetary policy, the size of the market in agency issues, and
the necessity of continuing operations in Treasury obligations as well. Trans
actions will be made in the market, at prices set by the market. We will seek
ouotations from dealers and buy or sell at the most favorable prices quoted.
We will not buy any new issue until at least two weeks after it is issued, so
as to provide an opportunity for establishing a fair price in the market for the
issue without interference by the Federal Reserve.
You will notice that the initial guidelines at the end of my statement provide
that our holdings of agency issues will be allowed to run off at maturity. This
reflects a technical problem, in that the procedures by which agency issues are

7
now marketed do not provide for exchange of maturing issues on the basis that
the System now exchanges its holdings of maturing Treasury issues for new
issues. Presumably such arrangements could be worked out for agency issues.
This illustrates a point made in the announcement of September 16—that the
initial guidelines will be subject to review and revision as operating experience
is gained.
We plan to buy only taxable securities for which there is an active secondary
market. The requirement of an active secondary market will help to insure
that the System’s portfolio remains liquid; it will also encourage issuing agencies
and underwriters to develop secondary markets in their securities.
Under the initial guidelines, an issue will be eligible for purchase if at least
$300 million is outstanding; for longer-term issues (over 5 years) the cut-off
will be $200 million. In early August, when there were about $45 billion of
agency issues outstanding, about $32 billion of these met the size test. A break
down of these eligible issues is shown in the following table:
ISSUES ELIGIBLE FOR SYSTEM TRANSACTIONS UNDER INITIAL GUIDELINES*
Amounts
(in billions)
By maturities:
0 to 5 years..........*...........................................................................................................................
Over 5 years......................................................................................................................................
Total.........................................................................................................................................
By agencies:
Farm Credit Agencies.....................................................................................................................
FHLB........................................................................ .........................................................................
FNMA.......................... ............................................................... .............. .............. ................ ..
GNMA................................................. .............................................. ........................................
Export-1 mport Bank......................................................................................................... ..

$25.3
6.8

Number
of issues

61
21

32.2

10.8
5.6
10.1
4.3
1.5

25
15
28
10
4

i Minimum issue size is $300,000,000 for issues maturing in 5 years or less and $200,000,000 for issues maturing in
more than 5 years.

nnouncem ent

eserve

Sy ste m

S e c u r it ie s

t h e F e d e r a l O p e n M a r k e t C o m m it t e e o f t h e F e d e r a l
A u t h o r iz in g O u t r ig h t P u r c h a s e a n d S a l e T r a n s a c t io n s
F e d e r a l A g e n c ie s
S e p t e m b e r 16, 1971.

The Federal Open Market Committee of the Federal Reserve System an
nounced today that it has authorized outright purchase and sale transactions
in securities of Federal agencies. At present, the System’s open market opera
tions involve mainly transactions in U.S. Treasury issues. The transactions in
Federal agency securities will be initiated in the near future.
The volume of securities issued by Federal agencies has been growing rapidly
in recent years. These securities are marketed to raise funds for a variety of
governmental lending activities in such fields as housing, agriculture, and ex
port financing.
System open market operations are conducted to carry out the objectives
of monetary policy by affecting the volume of bank reserves, money, bank
credit, and conditions in credit markets. The purpose of the new authorization
is to widen the base of System open market operations and at the same time
to add breadth to the market for agency securities. Up to now, open market
operations in Federal agency issues have been confined to repurchase agree
ments with securities dealers.
Purchases and sales of Federal agency issues will be conducted by the Fed
eral Reserve Bank of New York for the System Open Market Account. Along
with other System Account transactions, they will be reflected in the weekly
condition statement of the Federal Reserve Banks, which is issued every Thurs
day.

8
The Committee has approved the attached initial guidelines for operations in
agency issues. They are designed to assure that such operations will be con
sistent with other open market operations, to minimize technical operating
problems, and to avoid dominating the Federal agency market. The guidelines
will be subject to review and revision as operating experience is gained. Be
cause the outstanding volume of many agency issues is small relative to that
of U.S. Treasury obligations, Federal Reserve operations in such issues will be
on a limited scale. They will not be directed at supporting individual sectors
of the agency market or at channeling funds into issues of particular agencies.
I n it ia l G u id e l in e s

fob t h e

C onduct of Sy st e m
A gency I ssues'

O p e r a t io n s

ederal

1. System open market operations in Federal agency issues are an integral
part of total System open market operations designed to influence bank reserves,
money market conditions, and monetary aggregates.
2. System open market operations in Federal agency issues are not designed
to support individual sectors of the market or to channel funds into issues of
particular agencies.
3. As an initial objective, the System would aim at building up a modest port
folio of agency issues, with the amount and timing dependent on the ability to
make net acquisitions without undue market effects.
4. System holdings of maturing agency issues will be allowed to run off at
maturity, at least initially.
5. Purchases will be limited to fully taxable issues for which there is an active
secondary market. Purchases will also be limited to issues outstanding in amounts
o f $300 million or over in cases where the obligations have a maturity of live
years or less at the time of purchase, and to issues outstanding in amounts of
$200 million or over in cases where the securities have a maturity of more than
five years at the time of purchase.
6. System holdings of any one issue at any time will not exceed 10 per cent of
the amount of the issue outstanding. There will be no specific limit on aggregate
holdings of the issues of any one agency.
7. No new issue will be purchased in the secondary market until at least two
weeks after the issue date.
8. All outright purchases, sales and holdings of agency issues will be for the
System Open Market Account.

The C h a i r m a n . Thank you, sir. I would like to ask one or two brief
questions of you. What will be used for credit and money to purchase
tnese securities, Dr. Burns ?
Dr. B u r n s . Our procedure in buying agency issues on an outright
basis will be exactly the same as our procedure in buying Treasury
securities, a procedure that has been used from the inception of these
transactions.
The C h a i r m a n . In other words, you will use the credit of the
KTation for the purchase of these securities ?
Dr. B u r n s . In other words, we will give a credit on the books of
the Federal Reserve to----The C h a i r m a n . T o compensate them ?

Dr. B u r n s . Yes, sir.
The C h a i r m a n . And su p p o s e they want Federal Reserve notes,
could they get that instead ?
Dr. B u r n s . Anyone who has a deposit credit with the Federal
Reserve could exchange that deposit for Federal Reserve notes in
whatever amount he wishes and at any time he wishes.
The C h a i r m a n . These notes are obligations of the U.S. Government,
are they not?
Dr. B u r n s . These notes are in the first instance obligations of the
Federal Reserve System. The Federal Reserve System being an agency
of the U.S. Government, they, of course, can be interpreted-----

9
The C h a i r m a n . There is no question.
Dr. B u r n s . And I have no objection to your so interpreting it—as
obligations of the U.S. Government.
The C h a i r m a n . I think it has been so interpreted over the years.
Although there is no provision for the payment of interest, the fact
that they are obligations of the U.S. Government I think has been
undisputed over a long period of time.
Suppose these correctly state here——
Dr. B u r n s . I am sorry I didn’t hear you.
The C h a i r m a n . There is no way to turn over these agency obligations
like they do Treasury certificates and Government bonds. They will
have to be paid off. Now, then, suppose you buy some of these agency
>
obligations and then when they are due, say, in 90 days, or whenever
they are due, and they pay you the money and the interest, where does
that money and interest go, who does it belong to ?
Dr. B u r n s . The principal and the interest that the agency will turn
over to the Federal Reserve System will be money that the agency
has, this money having been made available to the agency in question
by the Congress.
The C h a i r m a n . What about the interest, where does it go, which
account does it go into ?
Dr. B u r n s . It will go into the same account as the principal. In due
course, as you well know, that interest, the great bulk of it, will be
turned back to the Treasury because this has been the practice of the
Federal Reserve, in accordance with section 16 of the Federal Reserve
Act.
The C h a i r m a n . T o compensate the Government for the use of its
credit.
Dr. B u r n s . No; the Federal Reserve System operates at a profit. It
has been set up as an independent agency, but the Congress very
properly limits the dividends that can be paid to the stockholders.
The Federal Reserve System conducts its operations economically, and
the great bulk of the income we receive is turned back to the Treasury.
Last year, if my memory is correct, out of a total income of something
like $3.9 billion, our expenses came merely to some $350 million, which
is a modest figure, Mr. Chairman. I know something about operations
of other central banks. The rest of the System earnings were turned
back to the Treasury in accordance with law. We have done our work—
a massive job for the U.S. Government and taxpayers—on an eco
nomical basis.
The C h a i r m a n . Another way of stating it is that you collect the
interest on these bonds— $6 6 billion now, which is a rather large
amount—and these bonds, according to the testimony, have been paid
for once. You are collecting interest on bonds that have been paid fory
and if I understand it correctly, you spend what you want to out of
that—the interest on those bonds, which was $3,771 million last fiscal
year—and then what you do not spend for expenses, you turn over
to the Treasury.
The point I want to make, Dr. Bums, is that these funds are derived
from interest on bonds that have already been paid for once.
I will not pursue that now because I have taken too much time, but
I will ask you one more question and return to that later on.

10
When you buy these agency issues, will you buy them directly from
the agency or in the market or will you buy them through a dealer
of the Federal Reserve System ?
Dr. B u r n s . We will buy them through a dealer. We will not buy
them from the agency any more than we buy Treasury securities from
the Treasury. We buy them in the market.
The C h a i r m a n . Yes; and that is one of my objections to it, becauso
it is just an added expense. These dealers, have a rather lucrative
franchise anyway, and given the fact that it is so much in the public
interest to provide money for housing, why should you have two toll
gates for each transaction—one toll gate when you purchase the issues
and the dealer gets a clip, and another when you sell the bonds through
the dealer and he also gets a percentage there.
Don’t you think it would be fairer in view of our emergency, par
ticularly in housing, that we should dispense with this dealer and in
this case buy them directly ?
Dr. B u r n s . Mr. Chairman, we intend to buy the agency issues in the
marketplace, not from the agency. We have already started transac
tions. We are operating that way first of all because that is the law.
We can’t operate any other way.
Second, Mr. Chairman, the law is a good law. It was designed to
limit what the Federal Reserve does and what the Treasury does and
what agencies might do. I f there was an open door to the Federal Re
serve System, if we had to buy directly what the Treasury wanted to
sell, or what agencies wanted to sell, our ability to protect the Nation’s
money might be destroyed. Congress, being aware of its responsibili
ties, has enacted certain safeguards, and I think the Congress has been
very wise.
In any case, at the present time we have no choice; we are simply
following the law as the Congress has written it.
The C h a i r m a n . We will try to amend the law, Dr. Bums.
Dr. B u r n s . I hope you do not succeed, though I wish you every good
luck in your many fruitful enterprises for this country.
The C h a i r m a n . Y o u see that $ 6 6 billion, if it were paid, would
reduce the public debt by that much. Under your system, you have
twice that much out. Isn’t it inflationary to have both outstanding—
both the bonds and the money that paid for the bonds? Shouldn’t one
of them be canceled ?
Dr. B u r n s . Mr. Chairman, we have about $65 billion in Treasury
securities; that is correct.
The C h a i r m a n . $65 billion ?
Dr. B u r n s . $65 billion approximately. I don’t know the exact figure.
I f the $65 billion were canceled, the public debt would be reduced
by this amount. I f Congress then proceeded to appropriate an addi
tional $65 billion, I think that the inflation that we have been having,
which has brought a domestic crisis in our country and has helped to
produce an international crisis, would be vastly intensified. I don’t like
to think of what the future of your children and mine would then be.
I am sure this is something you do not want, Mr. Chairman.
You have fought over the years to protect the poor people of the
country. You have made great contributions to the poor people of this
country. You surely do not want to inflate our currency and thereby
destroy the value of their money and in the process also destroy jobs.

11
The C h a i r m a n . With this comment I will yield to Mr. Widnall. I
think inflation has been due solely to the rise in interest rates. Every
time you increased the interest rate, prices would go up. Even the
goods on the shelves would go up and then wages would have to go up
to compensate for the increase in the cost of groceries and everything
else. Then prices go up again. First thing you know there is the danger
of prices going out the roof unless something is done to stabilize our
economy.
And interest rates, I think, caused it. But one of the contributing
causes was that the Government, through the Federal Reserve, paid
out $65 billion of Federal Eeserve notes over here—printed money
that you get to pay for these bonds—paid for the bonds and then left
both the bonds and the notes outstanding. That is 2 0 0 percent. And
that is bound to be inflationary.
Now I will yield to Mr. Widnall.
Mr. W i d n a l l . Thank you, Mr. Chairman. Dr. Burns, I think we
should make clear for the record the fact that what is now proposed
by the Federal Eeserve is the trading of agency issues providing a
secondary market; isn’t that correct, and not a primary market ?
Dr. B u r n s . That is our purpose, to strengthen the secondary market
for agency issues, not to provide a primary market.
Mr. W i d n a l l . I think there has been a misunderstanding by the
press, by some Members of Congress and by a lot of people who are
very much interested in the operations of the Federal Eeserve. There
has been a misunderstanding that you are going to provide a prime
market and not a secondary market. I think this should be emphasized.
And that you should repeat what you just said to me.
Dr. B u r n s . I am very glad that you have made the point so clearly.
The agencies will continue to market their issues as they have. We
will play no part in underwriting the issues. We will not buy any
issues from the agencies directly, any more than we underwrite
Treasury issues or buy directly from the Treasury except under very
special conditions.
Once an issue has been placed in the market, we will deal with the
market, like anybody else. We will not enter the market until the
new issue has been in the market for 2 weeks at least. By that time
something like a fair market price will have emerged.
As far as outstanding issues are concerned, we will feel free to deal
with them at any time that a good purpose, in our judgment, will be
served.
We will under no conditions buy any issue directly from an agency.
We cannot do so under the law. I think this law is wise and I hope it
will remain on the statute books, because when a central bank begins
rigging the market for Government paper, that is the high road to
destruction of the Nation’s finances and the Nation’s money.
The C h a i r m a n . Would the gentleman yield to me to finish out the
extension of remarks that I intended to ask ?
Mr. W i d n a l l . I don’t believe Dr. Burns had finished what he was
saying.
Dr. B u r n s . I a m f i n i s h e d .
The C h a i r m a n . I ask unanimous consent to extend my remarks by
inserting in the record discussion and information on each one of the
points that I brought out. Without objection, so ordered. (The ma
terial referred to may be found on page 37.)

12
Thank you, Mr. Widnall.
Mr. W i d n a l l . Mr. Chairman, I would just like to ask you a question
at this time. I had understood in coming here today that this was going
to be a 1 -day session, and in your preliminary statement you have
opened it up so it is clear you intend to have this possibly run on for
weeks.
When do you contemplate having the next session on this important
subject matter?
The C h a i r m a n . I have discussed this with Dr. Burns. He will prob
ably have to be the main witness and he has the International Mone
tary Fund this week and probably next week and he has the price and
wage control program which, of course, has taken the stage. It is occu
pying all of the time of people who are connected with it, and I am
sympathetic to the situation in which he is involved, and realize that
he is helpless in being able to report to us at any given time.
We will work out with him time that will be mutually convenient
and ask him to come back and in the meantime we will submit ques
tions in writing.
Mr. W i d n a l l . Mr. Chairman, just another thought in connection
with this. It seems to me the subject matter is of extreme importance.
I know that the Congress is going to be involved in some most critical
legislation within the next few weeks and that other committees will be
meeting and that there will be considerable conflicts. I haven’t talked
to anybody about what I am commenting on now, because your state
ment at the beginning of the committee session came as a total surprise
to me—the agencies that you referred to and the ideas that you want
to investigate.
I would think that such an investigation, such hearings, could be well
postponed for a matter of weeks until Congress gets its calendar clear
and we have the ability to go into it as thoroughly as we might. I don’t
think that this is the type of problem that we should answer by sub
mitting questions and submitting answers back and forth. The public
hasn’t the faintest idea what is going on. The Members of Congress
don’t know what is going on, and one has to wait for weeks in order
to get testimony up to date in order to see what the questions are and
what the answers are. I don’t think that is a right way to handle
something that is absolutely critical to the future of the country.
The C h a i r m a n . It is not intended to cover major questions. The de
tails can be worked out that way, at least. You can’t ask a witness
about details in legislation and always expect to get full and complete
answers on the spot. Submitting written questions is one good way of
doing it. It is a traditional way that has been done ever since I have
been here and I don’t know of any objection ta it really.
The gentleman may be assured that the minority will be thoroughly
advised at the time and consulted about any future hearings or any
thing that is done in submitting questions. Naturally we will consult
with Dr. Bums to make sure that the time that we are suggesting for
another hearing will be an appropriate time and mutually convenient
with us and I hope that will be satisfactory.
That will save everybody a lot of trouble, especially on detailed
questions.
Mr. W i d n a l l . I have no further questions.

13
The C h a i r m a n . Mr. Gettys.
Mr. G e t t y s . Dr. Burns, your announcement of September 16 in
volving outright purchase and sale transactions of Federal agencies,
is it related in any way to the emergency order of the President ter
minating on November 13; has it any relationship to the temporary
emergency matters ?
Dr. B u r n s . N o ; there is no relation between the two whatsoever.
The question of operations in agency issues is one that Members of
the Congress have raised with the Federal Eeserve from time to time.
Mr. G e t t y s . This is an on-going question ?
Dr. B u r n s . That is right. This is a question which we within the
System have considered and debated from time to time. We have
reached the decision which has been announced and which I have
elaborated upon this morning, but there is no connection whatever
between this action and anything that is being done in the sphere of
wage-price policy or, for that matter, in any other branch of economic
policy.
Mr. G e t t y s . I didn’t quite get the point that you made. I didn’t
quite understand it. You are not providing a prime market?
Dr. B u r n s . That is right.
Mr. G e t t y s . For the agencies outside of Treasury ?
Dr. B u r n s . That is right.
Mr. G e t t y s . Y o u are supplementing, is that the correct word, you
are supplementing the secondary mortgage market ?
Dr. B u r n s . Not a secondary mortgage market. We are aiming to
strengthen the secondary market for agency issues.
Mr. G e t t y s . Just where will you make your purchases ?
Dr. B u r n s . Well, we made some purchases the other day. On Sep
tember 23, we purchased $61 million of agency issues.
Mr. G e t t y s . What type would that be, sir.
Dr. B u r n s . Yes; we bought $ 1 million of issues of the Bank for
Cooperatives, a little over $ 1 2 million of issues of the Federal land
banks, $17 million of issues of the Federal intermediate credit banks,
about $1 2 y2 million of issues of the Federal home loan banks and
$18 million of issues of Fannie Mae—the Federal National Mortgage
Association.
Mr. G e t t y s . Would those purchases immediately give those agencies
additional funds with which to operate.
Dr. B

urns.

No.

Mr. G e t t y s . H o w does that work, sir, how does it help the money
supply ?
Dr.*B u r n s . No; those agencies have already placed the issues. They
have sold them. Now they are being traded in the market and----Mr. G e t t y s . They have got their money for them ?
Dr. B u r n s . That is right. We went into the market and we bought
issues in this amount, you see.
Mr. G e t t y s . From whomever they might have sold them to or in
the course of normal trading?
Dr. B urns . W ell, we bought them from the dealers and the dealers
either had these issues in their own portfolios or they bought them
from people in the market.

Mr. G e t t y s . But the agency cannot sell its issue with a conspira
torial understanding that you are going to buy them.
6 9 -7 1 9 — 71-------- 3

Dr. B u r n s . That i s correct.
Mr. G e t t y s . There will be safeguards ?
Dr. B u r n s . There will be no conspiratorial understanding or any
other understanding. We will deal with the agency----Mr. G e t t y s . Doesn’t that danger exist though that some of the
agencies will anticipate that their excess spending might be backed
up by the Federal Keserve and, therefore, will incline them toward
making unnecessary expenditures.
Dr. B u r n s . I am very glad you have asked that question. We have
tried to explain this to the agencies. The fact that you have asked the
question, and the fact that I am trying to make it entirely clear that
nothing of this sort will ever take place, I hope this will help improve
public understanding.
Mr. G e t t y s . I see. T h a n k y o u , sir.
What is your opinion, Dr. Burns, of the future of the interest
rates, say, in the next 3 or 4 years; have you formulated an opinion ?
Dr. B u r n s . I am convinced that the future of interest rates will
depend in very large part on the degree of success that we have in
curbing inflation.
A large inflation premium has been built into interest rates. You
may have noticed that when the President announced the price-wage
freeze one of the major and immediate responses in the marketplace
was a reduction of interest rates. What did that mean ? It meant that
now that expectations about inflation were in process of changing, this
inflation premium began to be squeezed out. Therefore, if we succeed
in the struggle that we are all engaged in—the Congress, the Presi
dent, the executive establishment, and we in the Federal Reserve—if
we succeed in the fight against inflation, the future of interest rates
will be very much better in the sense that interest rates will be lower.
That won’t be the case if inflation is allowed to rage in our country.
Mr. G e t t y s . One other question, Dr. Burns, the Chairman, whose
views I have a great regard for, and your views I have a great regard
for also, you seem to have a different philosophical approach to this
thing. The Chairman believes that high interest rates cause inflation;
you believe that inflation causes high interest rates.
Somewhere in between is the truth. Would you comment on that ?
In my own mind I don’t understand these matters too well, the differ
ence m the philosophy that you hold.
Dr. B u r n s . Well, the Chairman is a very eloquent exponent of his
views and I respect his thinking always. Let me give you a very brief
and simple statement of my----Mr. G e t t y s . Y o u do not believe that high interest rates cause
inflation ?
Dr. B u r n s . No, I do not.
Mr. G e t t y s . You think it is a result of ?
Dr. B u r n s . I think it is a result of inflation; yes.
The primary cause of inflation always is the creation of too much
money relative to the Nation’s output, and the running of govern
mental deficits. This is the primary cause throughout world history.
But, after a certain stage when prices rise, wages begin responding,
and a push then develops from the cost side. We have been in that
condition for some time now, certainly since 1970.

15
The wage push has become the basic immediate cause of inflation,
although not the sole immediate cause. We somehow have to break
this wage-price cycle, and the aim of the President’s move is to break
this cycle. I hope that this move by the President, which has been well
received within the Congress, and by the country, will succeed; but the
outcome is uncertain.
Mr. G e t t y s . Thank you, and I will not ask any question except that
I have been in my own district praising the President’s move but I
qualify my praise on the fact I think he acted too late, or let me say
that, he did not act soon enough. Would you comment on that?
Dr. B u r n s . I wish he had acted sooner.
Mr. G e t t y s . I thought that was your position.
Thank you, Mr. Chairman.
The C h a i r m a n . Mr. Williams
Mr. W i l l i a m s . Thank you, Mr. Chairman and thank you, Dr. Burns
for appearing here this morning.
I do want to say that I agree completely wtih j^our statement regard
ing inflation. Interest rates actually have no bearing on inflation. One
major cause of inflation is Federal deficit spending. We roll up huge
deficits every year to a point where our national debt exceeds $400
billion. This year we are taking out of our budget $27 billion just to
pay the interest on the money we owe.
The next fiscal year interest payment will be over $30 billion. And
this drastically devalues the dollar and causes inflation. And the other
major cause of inflation is constantly rising wages without any iiicre*t?o
in productivity. This results in higher prices, again resulting lit de
valuing of the dollar.
I do want to say that as far as anyone trying to blame big banks
or big bankers for high interest rates, the fact of the matter is that
our Federal Government and our governmental agencies have been
borrowing money at between 8 - and 9-percent interest and tae banks
have got to compete with the Federal agencies.
Things have gotten so bad that I think in the short term borrowing
at very high interest rates the Treasury issues the notes in sums of
not less than $1 0 ,0 0 0 ; is that correct ?
Dr. B u r n s . I a m sorry. I did not hear your question.
Mr. W i l l i a m s . I believe the Treasury Department has a minimum
note on short term high interest rate borrowing of $10 ,0 0 0 $
Dr. B u r n s . I am not entirely sure of that. I will have that veriiied
and plaee the exact facts in the record.
(In response to the request of Mr. Williams, the following informa
tion was submitted by Dr. Bums:)
In late February, 1070, the Federal Government raised the minimum denomina
tion of Treasury bills from $1,000 to $10,000. But the minimum denomination of
marketable U.S. Treasury notes and bonds has continued to be $1,000.

Mr. W i l l i a m s . N o w , as far as this bond market is concerned, I think
that the usual procedure that is followed is that an agency floats a
bond issue and that bond issue is actually purchased by an investment
banker; is that correct ?
Dr. B u r n s . It may be purchased by an investment banker, by a
dealer, or by a member of the public.

16
Mr. W i l l i a m s . Fine; but then that person that buys them has the
responsibility of selling them to others at the interest rate and face
value that he has paid for notes or bonds.
Dr. B u r n s . Yes, sir.
Mr. W i l l i a m s . S o actually if the Federal Reserve is to start buying
directly from the Federal agency, what we would be doing is thwart
ing the effort of the Federal agency, and even the Treasury Depart
ment, to get more non-Federal money.
Dr. B u r n s . Yes.
Mr. W i l l i a m s . For the purposes that that agency is being operated
for ?
Dr. B u r n s . That is entirely correct and that is a very important
point because, as you suggest, if we started buying directly from
the agency on a significant scale we would certainly weaken the
private market for these agency issues. Yet this is something that
we want to strengthen because we are all interested in better housing
in this country. But, if that goal is to be achieved, money will have
to be forthcoming. It can do so in one of three ways. It can come
from private sources, or it can come from congressional appropria
tion, or it can come through the creation of money by the Federal
Reserve. Clearly the best way to achieve this result, to have the hous
ing issues that are necessary, the mortgages that are necessary, to
make possible more homes for more people, is to have the private
market supply the funds.
Here and there subsidies may become advisable. This has been the
judgment of the Congress, though I must say as a parenthesis that,
looking to the future, I sometimes get worried about the size o f the
subsidies that the Congress has been appropriating. But, whatever
we do, let us not use the printing press of the central bank to finance
mortgages or housing issues or Treasury issues.
Mr. W i l l i a m s . Doctor, do you agree that the high interest rates
being paid by the Federal Government and Federal agencies on their
borrowing has forced the banks to raise their interest rates because
they have got to pay their depositors a higher interest ?
Dr. B u r n s . Yes; there is a close connection between the two.
Mr. W i l l i a m s . N o w , in point 4 on page 2 of the Chairman’s opening
statement, it states this. “The all-important matter of the Federal
Open Market Committee’s portfolio, now amounting to some $66
billion, which I contend has been acquired exclusively through the
use of Federal Government credit and which the former Chairman
of the Federal Reserve Board, Mr. William McChesney Martin, has
admitted have been paid for once and, therefore, shoula be canceled,”
that second statement I have never heard Mr. Martin make, but just
because something has been acquired through credit does not mean
that whatever you have acquired through credit has been paid fo r;
does it?
Dr. B u r n s . These securities in the first instance have been acquired
by private investors and by the banks. When we in the Federal
Reserve enter the open market and buy Treasury securities, we have
to pay for them, and we do it just as a private citizen would. I f I buy
a Treasury security, I pay for it. I f you come along and you want
to buy it from me and we can arrange a deal, you have to pay for it.
Now, it is being paid for twice because you have had two transactions.

17
Mr. W i l l i a m s . But at the same time the $ 6 6 billion which you have
purchased belongs to the Federal Reserve and is there any more logic
to say to the Federal Reserve Board cancel your $ 6 6 billion than there
would be to say to a privately owned bank cancel your $ 1 0 million?
Dr. B u r n s . A s long as the Congress continues to regard the Federal
Reserve as an independent agency with its own set of books, there is no
logic at all.
Mr. W i l l i a m s . Thank you, Doctor.
The C h a i r m a n . Mr. Rees.
Mr. R e e s . Thank you, Mr. Chairman.
Dr. Bums, you made the statement that right after the August 15
wage-price freeze interest rates went down. I just saw in the paper
that Bank of America just raised its interest rate on housing up to a
little over 8 percent and that the consumer interest cost is just about
what it was on August 15, consumer interest rates don’t appear to
have gone down.
There is some upward pressure, it seems, on the long-term interest
rate, for mortgage lending.
Dr. B u r n s . Congressman, the interest rates on open market issues
are uniformly lower now than they were on August 13, the market
day preceding the President’s announcement. That is a fact.
Now, I think what you have reference to is not rates in the open
market but the rates that are charged by banks to their customers. The
best information that I have is that the interest rates charged by
banks to their own customers preponderantly have remained un
changed. There have been a few increases, but there have been more
decreases than increases.
As for the specific reference to the Bank of America, I am surprised
by your statement. I know nothing of it and I shall check it out.
Mr. R e e s . A s you know, Doctor, I am very much concerned with the
problem of the cyclical nature of housing finance. Right now we are
reaching a record in new home starts. Two years ago we were reaching
a record low in home starts. Part of the problem was that when you
have a tight money policy long-term money becomes short-term money
and there is not enough mortgage money available.
I understand that the Federal Reserve Board is preparing a housing
report. Will it deal with this problem of how to take care of the housing
cycle?
Dr. B u r n s . The Federal Reserve Board has been studying this prob
lem intensively. Whether we will be able to help the Congress and the
country significantly on this problem I cannot be sure, but we are
making every effort.
Mr. R e e s . Of course, you have given a great deal of support to hous
ing paper just in your initial purchase last week of something like
$30 minion worth of Federal Home Loan Bank and Fanny Mae paper
that you have purchased.
Dr. B u r n s . Yes; but I want to be sure that the importance of what
we did is not exaggerated. I would describe that action on our part as
having a marginal significance in the marketplace. The last thing that
I want to do is to mislead the Congress or the industry. We have de
cided to buy and sell agency issues, and we are doing it on an experi
mental basis since we are moving on untrodden ground. We do not
expect that this action of ours have more than a marginal significance

in the market. We do think it can and will have that effect and that is
something. We are glad to make this contribution, if it works out that
way.
Mr. R e e s . I>r. Bums, one last question, not really dealing with the
Open Market Committee activities.
You have been meeting with the finance ministers of the Group of
Ten the last few days. Could you give us some ideas as to where you
think we might be going this coming week at the IMF meetings ?
Dr. B u r n s . I will do what I can.
There are two sets of meetings involved. One is a meeting of the
Group of Ten. That meeting was held yesterday and that meeting is
concluded.
In addition, there is the annual meeting of the International Mone
tary Fund and the World Bank. These meetings have started this
morning and will continue most of the week.
As far as the meeting of the Group of Ten is concerned, a very
honest release has been issued. I have not had the opportunity to look
over the morning paper, but I would expect that the full release is
in the paper. What it conveys is that a cooperative spirit is emerging
among the countries represented in the Group of Ten, that a work
agenda—which could not be agreed upon in the London meeting held
2 weeks ago—has now been agreed upon, and that the deputies of the
Group of Ten will now be actively at work, along with the OECD,
in an effort to resolve the difficulties that exist among the various
countries.
The problems are many and they are difficult. The import surcharge,
as the President explained, is temporary. But, of course, in view of
the very serious condition of our balance of payments, we cannot give
up that import surcharge until there is some reasonable-realignment
of exchange rates and also until some trading arrangements of other
countries are modified so that American producers will not be at the
disadvantage that they now suffer in some markets in the world. We
also hope that in the course of these conversations we will succeed
in persuading our allies in different parts of the world to share the
defense burden on a somewhat more equitable basis.
All of these subjects will be discussed. In private conversations, I
have gathered the feeling that there is good will and a willingness to
get on with the problem, but, of course, we are dealing here with hu
man affairs. As you well know, and as the history of mankind teaches,
while reason should prevail in governing human conduct, there are
times, when emotion, prejudice, even madness, enter the human scene
and interfere with the outcome that we aspire to. I am, however,
optimistic about these conversations. I think we will move forward.
Mr. R e e s . Thank you, sir.
The C h a i r m a n . Mr. Frenzel.
Mr. F r e n z e l . Thank you, Mr. Chairman and Dr. Burns. As a new
member, some of these items confuse me a little. I guess the one that
confuses me most of all is the Chairman’s statement that the $65 bil
lion worth of bonds have already been paid for. Let me ask you in
your opinion, does that statement refer to the fact that they have been
traded rather than that they have already been paid off?

19
Dr. B u r n s . Chairman Patman is a student of this subject. He is e x
tremely eloquent, lucid, and I would not want to speak for him on this
subject.
Mr. F r e n z e l ,. Thank you very much. Dr. Bums, you made the state
ment, and I will paraphrase it, let us not use the printing press of the
Federal Reserve to finance housing or Treasury bonds.
Would we be doing this if we in fact canceled the $65 billion of in
debtedness that are held now ?
Dr. B u r n s . In and of itself, no. If you stopped there and did nothing
else, you would simply be declaring that the Federal Reserve System
is bankrupt, and that Federal Reserve notes which are now backed
by Treasury securities would no longer have any backing. So far that
would be the only effect. Whether that is good or bad, I leave to your
own judgment, Mr. Congressman. Of course, the matter could not stop
there. But to draw the scenario beyond this point would require an act
of the imagination. I am here to answer factual questions, not to specu
late too much.
Mr. F r e n z e l . Dr. Burns, to draw that scenario a little further, if
Congress then appropriated $65 billion to pay those debts, would that
be inflationary ?
Dr. B u r n s . Well, if the public debt were in the first instance re
duced by $65 billion and then as a second step the Congress decided
that it should use this leeway to finance an additional $65 billion of
expenditures then I say to you, to paraphrase a remark of my old
friend George M. Humphrey—I did not like the context in which he
made it, but he used a nice phrase—we would then have an inflation
of such magnitude that it would make your hair curl and mine.
Mr. F r e n z e l . Thank you very much, Doctor.
Mr. Chairman, based on my own ignorance here, I only hope that
you would amplify your statement that you are going to introduce as
part of your four points.
The C h a i r m a n . Thank you, sir. I shall be very glad to do so when
my time comes.
Mr. Mitchell.
Mr. M i t c h e l l . Thank you, Mr. Chairman.
Dr. Burns, it is delightful to see you again. We had quite a pleasant
time the last time we were together in such a setting.
Before asking one or two questions, I would simply like to indicate
to you that this troublesome $66 billion is beginning to plague me
also, and I hope we would get to a speedy resolution of the $6 6 billion
problem. I intend to become much more conversant with this area
of concern.
I just have a few brief questions. First of all, I am fully aware that
you will not be buying from the agencies directly, nevertheless, you
will be buying paper from Federal agencies and I am concerned about
the kind of coordination that was achieved prior to the announcement
of September 16.
What was done specifically in terms of coordinating with these
agencies? How will coordination be carried out in the future? I am
assuming this was not a unilateral move on the part of the System.
Could you enlighten me a little bit on that because I share your con

cern and Congressman Gettys concern about possible conspiratorial
actions on the part of agencies.
Dr. B u r n s . Let me go to the heart o f your question. This was a
unilateral action by the Federal Reserve.
Mr. M i t c h e l l . It was ?
Dr. B u r n s . Yes, because we are the only ones who can make this
decision as a matter of law. However, this is a subject that has been
.
discussed informally with Members of the Congress and other agencies
over several years. Before making the announcement, also, a meeting
was held with representatives of all the involved agencies. We
explained to the representatives of these agencies precisely how we
intended to operate in the market, so they were fully informed before
any public announcement was made.
Mr. M i t c h e l l . Thank you. Congressman Rees indicated in one of
his earlier questions to you his concern about housing.
This is a major area of concern for me also. Of course, we are
encouraged by the $430 million that was put in though it will have
only minimal effects according to your testimony. But what troubles
me the most in the whole housing sphere is that new housing starts
and mortgage moneys are not made available in cities. These are occur
ring primarily in suburbia. I think we can indicate very, very clearly
to you that in the large cities, with their heavy concentrations of black
populations, it is increasingly difficult for blacks to enter into home
purchasing. There are few, if any, new housing starts in cities. So,
unfortunately, in most large cities with heavy concentrations of black
populations you find a situation in which those persons can be bla
tantly and arrogantly exploited by unscrupulous people in the real
estate business.
Pushing a little further on this, it would seem to me then, by your
action in terms of the whole housing market, you might be wittingly
or unwittingly a partner to the further exploitation of these people.
Pushing it even a little bit further, given the posture of the President
vis-a-vis housing in suburbia, you kind of get a mosaic developing in
which those who are caught in a very, very difficult situation find their
difficulties increased by virtue of the actions taken by the Federal Re
serve System and the executive branch.
Would you comment on that please ?
Dr. B u r n s . Congressman Mitchells the question that you have just
raised is addressed to the housing legislation of the Congress and also
to the way in which that legislation is administered by agencies of the
executive branch. As a result of that legislation and of the administra
tion under that legislation, various debt issues are placed in the market
by these agencies. All that we at the Fed shall do is now and then trade
in these issues in the market. The end result, hopefully, will be to
broaden the market for these agency issues.
Now, if these agency issues, Congressman Mitchell, were being used
for an unsocial purpose, if that were true, then to the extent that we
broaden the market we would be contributing to an unsocial purpose.
There is no escape from your logic, you see. Whether or not that is
true or to what extent it is true is a matter on which I have no com
petence. I must say, speaking as a citizen. I would like to learn more
about it. And let me take this opportunity to say something else to

21
you. When I was here last I promised to visit with you, something^ I
wanted to do very much. I have not done it. And your raising this
question makes me all the more eager to arrange an appointment with
you in the very near future. My colleagues who are here, having heard
me, will make sure this is done. They run my business in large part.
Mr. M i t c h e l l . That is hard to believe.
Do I have time for two more questions, Mr. Chairman ?
The C h a i r m a n . Go ahead.
Mr. M i t c h e l l . In light of the statement that you just made, do
you feel that the Federal Reserve should attempt to coordinate with
the Secretary of Housing and Urban Development and direct pur
chase of housing paper in the open market in such a manner as to
support at least the enunciated national housing goals? I noticed
that in all of this there is no reference to HUD operations.
Dr. B u r n s . Well, if the Congress should give us this responsibility
we would do our very best to discharge it. I feel that if we, as an
agency, tried to do that now we would be going beyond the powers
granted us by the Congress. But certainly, as citizens—we are not
Government officials every hour, every minute of a 24-hour day—I
think we can interest ourselves in the broad question you have raised.
Mr. M i t c h e l l . I have one last question, then I am finished. In your
statement you indicate there is a 1 0 -percent ceiling put on holdings
of amounts outstanding, and that you have established a 2 -week period
during which a fair market price can be established. I am a little
curious about this because, despite the fact of some very eloquent
pronunciamentos coming from the executive branch of Government,
it is my overall impression that the market has continued to go through
some rather wild gyrations. I am just curious as to whether or not
you might want to reconsider the 1 0 -percent figure and the 2 -week
period given the sort of gyrations the market is going through despite
some moves made by the President?
Dr. B u r n s . The 1 0 -percent figure and also the 2-week limitation
are, as you suggest, arbitrary. They represent our best judgment at
the present time and we do not have too much to guide us. These are
not necessarily the rules that we will live with a year from now. This
is an experimental set of guidelines. We will keep studying them to
see how they work and we may then want to revise them.
Mr. M i t c h e l l . That is what I wanted to be reassured on. I have
no further questions. I look forward to our meeting.
Mr. W i d n a l l . Dr. Burns, you have been buying Fannie Mae paper,
I believe, and that involves mortgage paper.
Isn’t there a limitation of $2 2 ,0 0 0 a unit in the mortgages that are
involved so that actually the interest in buying that paper is a lowand middle-income housing; is that not correct ?
Dr. B u r n s . I think that is true. But, of course, we^would not be
buying mortgages. Under the program we are discussing, we would
be buying the agency issue which is----Mr. W i d n a l l . Fannie Mae paper.
Dr. B u r n s (continuing). Which is simply a debt obligation of the
agency rather than any mortgage.
Mr. M i t c h e l l . Mr. widnall, just in response to you, I think I would
like to share some material with you regarding how this whole busi6 9 -7 1 9 — 71--------4

ness of low- and moderate-income housing is working out. It isn't
It is not working out primarily because many of the counties regard
themselves as citadels. Given the limited amount of housing in cities,
and no new housing starts, the program is not working too well.
I will share some information with you on that.
The C h a i r m a n . Dr. Burns, I would like to resume questioning. I will
try to make it as short as possible. If we cannot get through by 12
o’clock, could you come back, say, at 2 o’clock or 2 :30, something"like
that?
Dr. B u r n s . I am a servant of the Congress, but i t has been very diffi
cult for me to get away today, Mr. Chairman. I have obligations in
connection with the meetings that are now going forward in the inter
national field. I have made arrangements for the afternoon to par
ticipate in some of these meetings, and they are of vital significance.
The C h a i r m a n . We c o n te m p la te d t a k in g th e w h o le d a y , b u t o f
co u rse, i f t h a t w a s n o t m a d e p la in t o y o u -------Dr. B u r n s . No; that was not made plain to me.

I was never informed
of that, but that may have been a slip, probably a slip in communica
tion. I regret that.
The C h a i r m a n . I can get through before 1 o’clock.
Dr. B u r n s . I do want you to know i was very d f i u t for me to
t
ifcl
come here this morning. There are representatives here from a l over
l
the world. I have important business with them. But since you wanted
me here, and recognized m y obligations to the Congress, I am here. If
you think i i urgent that t be here in the afternoon, I am going to put
ts
everything elseaside and be here.
The C h a i r m a n . I shall try to finish by reserving some of my re
marks for submission in the record. I do not want to impose upon you.
Of course, we offered to meet last week on Wednesday or Thursday,
but you preferred Monday.
Dr. B u r n s . Well, I p r e f e r r e d Monday, and in all candor, I would
have preferred a Monday a month from now because I am running a
large institution.
The C h a i r m a n . I am in sympathy with you.
Dr. B u r n s . In addition to that, there is this international problem
and I have to spend several hours a day on that and there is a wageprice freeze, and I am involved in that every day too.
The C h a i r m a n . I don’t know who isn’t.
Now, I will first take up the question of buying and selling Federal
agency securities.
Suppose that you were to buy securities for $12 million, like the
issue you bought, and for some reason, it is not only sour but is illegal
and cannot be paid. Who would lose that money ?
You know, you have taken $12 million of Federal credit to pay for
the bonds and find that it is not legally liable, that you do not have
a negotiable instrument that you can compel payment on. Who loses
the money?
Dr. B u r n s . We have authority under the law to buy agency issues.
In buying agency issues, we will be conforming to the law.
Now, if we have an agency capable of putting out an illegal issue,
we also have very good attorneys in the Federal Reserve System,
and I think they will spot that rather quickly. So I don’t think this

kind of a problem is going to arise. If it did arise, then Mr. Chairman,
we would have a problem at the Federal Reserve, but you Members
of the Congress would have a far more serious problem to deal with.
The C h a i r m a n . I brought that up in connection with what you
call printing press money. Now, when you buy these bonds, you give
Government credit for them—Federal Reserve notes, if the}' want the
Federal Reserve notes; if they don’t, you give them credit on the books.
Isn’t that printing press money ?
Dr. B u r n s . We are a bank----The C h a i r m a n . Y o u are what?
Dr. B u r n s . We run a bank created by the Congress. The bank that
we administer has the power, yes, to create money, but the Congress
in its wisdom has sought to limit that power in order to avoid abuse.
We have tried to live within the guidelines laid down repeatedly by
the Congress.
The C h a i r m a n . Who do you consider owns the $66 billion in bonds
for which vou paid Federal Reserve notes and other Government
obligations?
Dr. B u r n s . We are a separate entity established by the Congress.
We as an entity created by the Congress own those assets and we in
turn have certain liabilities, these liabilities being primarily the re
serves held with the Federal Reserve System by the member banks*
and also the Federal Reserve notes outstanding.
The C h a i r m a n . A separate entity? You mean by that that you are*
independent of the Government and independent of other agencies
of the Government, independent of the executive branch ?
Dr. B u r n s . N o ; all that I am referring to is a legal entity with its
own set of books. There are many such agencies within the Federal
Government. The question of independence, while in many ways a
very important question, is not germane to the issue before us right
now. We are an entity. We have a separate set of books; we have*
assets, and we have liabilities, like any other corporate entity.
The C h a i r m a n . Dr. Burns, you had nothing with which to p a y for
these bonds except other Government paper. Now, you are a fiscal
agent of the U.S. Government too ?
Dr. B u r n s . We are.
The C h a i r m a n . Don’t you think that it is your duty as an agent
to safeguard and protect your principal, that you should not let your
principal get in a position where it is necessary to have two obligations;
outstanding in order to pay for one, or to hold one ? Those bonds that
you claim belong to you, to the Federal Reserve, were paid for once*
with Government money. It occurs to me that you ought to do likechurches probably do when they pay off an obligation. They have a
bond burning, and it is a great event.
Don’t you think a bond burning would be a wonderful thing for the
United States since we paid for these bonds once with Government
money ?
Dr. B u r n s . I don’t think I would like to be alive, my good Chair
man, at a time when such a bond burning occurred.
The C h a i r m a n . Well, doesn’t it scare you to think about the Gov
ernment putting $2 in circulation for $1 ?
Here you have $66 billion of bonds and you have paid for -them onetime with Government obligations, but you have got both outstanding.

You have the money outstanding, you have the bonds outstanding, and
you are collecting over $3% billion a year interest on those bonds.
How do you justify not going through the Congress ?
You see, the Constitution says that money shall not be paid by the
Government ^
unless it is appropriated by Congress. You get around
that by holding these bonds that have been paid for once and collect
ing interest on them and using the money any way you want to.
For instance, I am going to bring out some of the expenses that
you incurred in 1969, the only full year that we have information for,
although you have been cooperative, Dr. Bums, in furnishing the
information we wanted.
It occurs to me that you can’t justify anything like that. Why
should people pay their debts more than*once, pay them twice? And
in the Open Market Committee, you are selling some of these bonds
that have been paid for once. You are selling them back into the
market, and when the bank that buys that bond holds it a while, and
maybe wants to sell it back to you, then you pay for it again. Later
on, the same bond is sold to somebody else, ana later on, if they want
to sell it back, it is paid for again. And this way the Government would
be in the business of selling bonds, buying them back, and paying for
them again. They have been paid for once or twice.
It occurs to me that is a most inflationary arrangement that any
government on earth could engage in. What is your answer to that
one?
Dr. B u r n s . Well, my answer, Congressman, is in brief as follows:
First, the Treasury sells securities in the market. A bank or private
investor buys these securities.
Second, as a separate entity established by the Congress, we may
enter the market. We may buy or sell. When we buy we pay for it.
The C h a i r m a n . Tell me the law that created that separate entity.
Dr. B u r n s . The law which created that separate entity is the Fed
eral Reserve Act.
The C h a i r m a n . The Constitution says that the Congress shall make
the laws and the executive shall enforce the law.
Now, I am fairly well acquainted with the Federal Reserve Act.
I wasn’t here when it was passed, but I was here not so long after
that, and I have kept up with it pretty well. And I have never been
able to find a sentence in the Federal Reserve Act that indicated that
the Federal Reserve should be independent of the Government.
Would you tell me where it is ?
Dr. B u r n s . I have not claimed that the Federal Reserve is independ
ent of the Government.
The C h a i r m a n . Y ou said separate entity, you know.
Dr. B u r n s . I have recognized not only m the past, but again this
very morning that the Federal Reserve is a creature of the Congress,
and that it is a servant of the Congress. I have put urgent considera
tions aside in being here this morning, and if you really feel it is
basically important to the purposes of the Congress to have me here
in the afternoon----The C h a i r m a n . I am trying to get through, but you are doing a lot
of talking to keep me from it. If you will not go on so long in your
answers----Mr. W i d n a l l . Mr. Chairman, I am very much interested in Dr.

Burns5 reply to your question about paying for these bonds twice.
In the middle of his answer, you cut him on, I would like to finish
his answer to your question.
The C h a i r m a n . Certainly; you maj have the privilebe, I am sorry,
Dr. Burns, I cut you off. I didn’t think it was at a time----Dr. B u r n s . N o ; not at all. I am here to answer your questions to
the best of my ability. Please feel free to interrupt me. If you really
feel my answers are too long—I may surprise you, and start giving
very brief answers. But I do think that you want clarifying answers
from me.
The C h a i r m a n . That is right. Let’s have it understood that if your
answer is not sufficient, you have permission to enlarge upon it like
a Member o f Congress, to extend your remarks.
Dr. B u r n s . Well, I appreciate that.
The C h a i r m a n . All right; now, then, the accepted procedure in the
banking system for the creation and manufacture of money is that
they make a loan to an individual, we will say John Doe, for a certain
amount----Mr. W i l l i a m s . Mr. Chairman.
The C h a i r m a n . Wait just a minute. Don’t interrupt me.
John Doe gives a promissory note for the amount and this is due
in 90 days. In 90 days, John Doe comes back and he pays the amount
that he borrowed. They cancel the note, thereby canceling the obliga
tion, thereby destroying the created money. That is the way to stop
inflation. That is the way to keep the books balanced. But in this case,
you buy the bonds with a Federal obligation. Federal Eeserve notes,
guaranteed bv the Government of the United States—legal tender,
good for all debts, public or private—and you keep the bonds that are
drawing interest and collect interest on those bonds that have been
paid for once. And then the notes continue in circulation indefinitely.
Isn’t that entirely different from the monetary system as it was
set up, that you create money, and then you destroy it through the
process that I mentioned ?
Dr. B u r n s . Mr. Chairman, Congress could have written the Federal
Eeserve Act in a very different way than it did. The Congress can
do that at any time in the future.
If the Congress had made the Federal Eeserve an office of the U.S.
Treasury, then the Federal Eeserve would have no assets, the Federal
Eeserve would have no liabilities, and perhaps the kind of world that
you have visualized might exist.
The C h a i r m a n . The Federal Eeserve has no assets now except what
it has created.
Mr. W i l l i a m s . I think that Dr. Burns is trying to explain some
thing that he started to explain twice.
The C h a i r m a n . He stopped. I can only tell by the movement of his
lips.
Mr. W i l l i a m s . He only stopped because you started to talk.
Let’s give him a chance to say it.
The C h a i r m a n . I won’t accept your complaints.
Mr. W i l l i a m s . He hasn’t had a chance to complete his answer.
Dr. B u r n s . I am not a complaining man. I enjoy my association
with this committee. Some questions that we have are by their very
nature a little difficult and controversial. And each of us-----

26
•M W i l l i a m s . Y o u started----r.
The C h a i r m a n . I a m t r y i n g to g e t t h r o u g h .
Mr. W i l l i a m s . Y o u started to reply on how the Treasury issues
obligations and how others purchase them. You have been talking
about assets and liabilities of the Federal Reserve. From that point,
would you please continue with your explanation.
The C h a i r m a n . I have the witness now.
Mr. W i l l i a m s . Will he please answer your question.
The C h a i r m a n . I am trying to shorten it for Dr. Bums. I know
what he is up against, I discussed this with him.
I will take up the question of Federal Reserve purchases of agency
paper. I will put this in the record. (See page 39.) I will ask you to go
over it, Dr. Burns, when you look over your transcript, and where
questions are asked, I wish you would consider answering them. I f
you can’t, of course, I can take them up at some subsequent hearing.
It has been rumored, Dr. Bums, that one of the reasons, if not the
reason, the Board took action on September 16 to allow the Federal
Reserve Open Market Committee to purchase and sell agency paper
was to temper congressional criticisms that might result when your
housing study is released.
Speaking for myself, Dr. Burns, I hope this is not so.
Further, I would hope that your study of the housing market, its
problems and prospects, would clearly indicate a definite commitment
by the Federal Reserve Board and the System to substantially involve
itself in meeting the financial needs of our housing industry and mort
gage market in a direct way through open market activities.
It is my honest belief, Dr. Burns, that you could furnish money for
the needed housing in this country at 5 percent interest without any
discounts or under-the-table payments or anything else, and I think
it is going to take some revolutionary action like this to furnish people
the needed housing. I hope the Federal Reserve will give consideration
to that. Since the money doesn’t cost you anything, and certainly you
could afford to make it available at 5 percent to people who need homes
or to furnish environmental quality to the families who are entitled
to a stable, strong, sanitary home. I hope that you will give it
consideration.
Could you supply us with a list of all of the Federal agencies,
including the wholly owned Government agencies and Governmentsponsored agencies, whose paper you consider either by law or by
interpretation by the Attorney General to be eligible for purchase
and sale through the Federal Reserve Open Market Committee?
You may answer that for the record when you get your transcript,
Dr. Burns.
(In response to the request of Chairman Patman, the following
information was submitted for the record by Dr. Bums:)
R

eply

rom

urns

Under section 14(b) of the Federal Reserve Act direct obligations of, and
^obligations fully guaranteed as to principal and interest by, any agency of the
United States are eligible for purchase by the Federal Reserve. These include
the following:
(1) Federal Intermediate Credit Bank debentures,
<2) Federal Home Loan Bank notes and bonds,
(3) Federal Land Bank bonds,

27
(4) Bank for Cooperatives debentures,
(5) Federal National Mortgage Association notes, debentures and guaranteed
certificates of participation,
(6) Obligations of or fully guaranteed by tlie Government National Mortgage
Association,
(7) Merchant Marine bonds,
(8) Export-Import Bank notes and guaranteed participation certificates,
(9) Farmers Home Administration insured notes,
(10) Notes fully guaranteed as to principal and interest by the Small Business
Administration,
(11) Federal Housing Administration debentures,
(12) District of Columbia Armory Board bonds,
(13) Tennessee Valley Authority bonds and notes,
(14) Bonds and notes of local urban renewal or public housing agencies fully
supported as to principal and interest by the full faith and credit of the United
States pursuant to section 302 of tlie Housing Act of 1961 (42 U.S.C. 1421a (c),
1452(c)),
(15) Commodity Credit Corporation certificates of interest in a price-support
loan pool,
(16) Federal Home Loan Mortgage Corporation notes, debentures, and guar
anteed certificates of participation,
(17) United States Postal Service obligations.
It should be noted, however, that under the operating guidelines now govern
ing Federal Reserve open market transactions in Federal agency debt, not ail
of the securities listed above are eligible for purchase. The nature of these
limitations and the reasons for them are discussed in my prepared statement.

The C h a irm a n . Guideline No, 2 indicates it would not be the func
tion of the Open Market Committee to support individual sectors of
the market or to channel funds into issues of particular agencies.
Isn’t this, in fact, a guideline without meaning since guideline No. 5
indicates that the Open Market Committee purchases of Government
agency issues will be limited only to issues outstanding in the amount
of $300 million or more ?
(In response to the request of Chairman Patman, the following in
formation was submitted for the record by Dr. Burns:)
R

eply

F rom

D r. B

urns

The objective of guideline 2—to avoid support of individual market sectors or
to channel funds into issues of particular agencies—represents a general operat
ing principle. Guideline 5 represents a practical application of this general
principle.
Guideline 5 limits System transactions to agency issues of a certain size. The
size limit is necessary to insure that System buying will not impede the develop
ment of an active secondary market for agency issues. As individual agencies are
able to increase the size of their issues to the point wihere they are actively
traded (as defined currently by the size test in guideline 5), they will become
eligible for System transactions.
The size limit would not in itself forestall support of individual market sectors,
however. This is accomplished in part through guideline 6.

The C h airm a n . I will ask you to take the other questions, Doctor,
and when you look at your transcript, answer them too..
Now, the next one is the one about the thrift plan.
Under this so-called thrift plan, Dr. Burns, if I understand it
correctly, you have 20,000 employees of the Federal Reserve System.
You are picking them out as a group of Federal employees and telling
them, “if you will contribute so much a month of your salary, the
Federal Reserve will put in 25 percent of that amount,” give it to them
free. Where do you get the money to supply that 25 percent, Dr.
Bums?

Dr. B u r n s . We get the money to provide that 25 percent in exactly
the same way that we get the money to buy stationery, to buy the
paper that I have used in my statement for this hearing, to pay sala
ries, et cetera.
The C h a i r m a n . In other words, by creating money ?
Dr. B u r n s . N o . We have an income from the securities which we
have purchased and which are in our portfolio. We use that income in
a thrifty way. We turn over the great bulk of it to the Treasury, but we
draw upon that income to meet our expenses. We are running our shop
as efficiently as we know how.
The C h a i r m a n . It was acquired through the use of created m o n e y ,
Dr. Burns?
Dr. B u r n s . We are a bank.
The C h a i r m a n . Y o u couldn’t have gotten it otherwise.
Dr. B u r n s . We are a bank. When we acquire securities, we give a
deposit credit.
The C h a i r m a n . I will attach some questions here that I will a sk
you to answer too.
Here is a letter from the Comptroller General of the United States.
I asked him about this matching of Federal Reserve funds. He said,
‘‘Thus, in the absence of specific legislative authority, agencies of the
Federal Government whose operations are financed with appropriated
funds would not be legally authorized to make contributions to a fund
of this type. In the limited time available to us for review of the mat
ter, we have not been able to make a full research, however, we are not
aware that such specific authority has been granted to any Federal
agency operating with appropriated funds. Also, we are not in a
position at this time to state a conclusion with regard to those few
Federal agencies which operate with other than appropriated funds.”
Without objection, I will insert the letter in the record.
(The letter referred to follows:)
C om ptroller G en eral

of t h e

U n it e d S t a t e s ,

Washington, D.C., September 24,1911.

B-174174.
Hon. W r i g h t P a t m a n ,
Chairman, Committee on Banking and Currency,
House of Representatives.
D e a r M r . C h a i r m a n : Your letter of September 21, 1971, requested that our
Office look over correspondence that you have had with the Chairman of the
Federal Reserve Board, which concerns a thrift plan which the Board has had
established for the employees of the Federal Reserve System. Under this plan
employees contributions to a fund are matched by the Federal Reserve. You
characterize -the Federal Reserve’s matching as contributions of the Federal
Government and ask that by Friday, September 24, you be advised as to whether
contributions to such a fund would be legal for any other agency of the United
States Government.
Section 3678 of the Revised Statutes of the United States, 31 U.S.C. 628, re
quires that sums appropriated to the various branches of expenditures in public
service shall be applied solely to the objects for which they are made and for no
others. Thus, in the absence of specific legislative authority, agencies of the
Federal Government whose operations are financed with appropriated funds
would not be legally authorized to make contributions to a fund of this type.
In the limited time available to us for review of the matter we have not been
able to make a full research, however, we are not aware that such specific
authority has been granted to any Federal agency operating with appropriated
funds. Also, we are not in a position at this time to state a conclusion with re
gard to those few Federal agencies which operate with other than appropriated
funds.
Sincerely yours,
P a u l G. D e m b l i n g ,
Acting Comptroller General of the United States.

The C h a irm a n . S o all the agencies are restricted on the use of funds,
like the Postmaster. If he were to use the stamp money, they would put
him in the penitentiary. In other agencies there are other restraints
and limitations and criminal penalties are handled in the same way.
There might be two or three agencies that do things differently.
Dr. B u rn s . I don’t think that on the basis of the actions carried out
by the Federal Reserve Board, any judge would send any Federal
Reserve official to jail, and I don’t think in the last analysis that you
would recommend it.
The C h a irm a n . I made it plain that we were not accusing you of
that, but I am stating that your results are different. In the Post Office
Department or other agencies of the Government you are accountable
and couldn’t get money except through appropriated funds.
Dr. B u rn s. Y o u are quite right.
The C h a irm a n . But you are getting it from bonds that have already
been paid for once, and you don’t have to have any funds appropriated,
and that way you avoid the surveillance of Congress. Also you are
avoiding an audit. You are against an audit, and mere has never been
a Federal audit of the Federal Reserve System, or any part of it, since
it was created. That puts us all in the dark, Dr. Burns, and I wish you
would relent and permit the General Accounting Office to audit your
books so we could find out.
Do you have an audit, even an office audit, of the Open Market Com
mittee for last year ?
Dr. B u rn s. We have. I think—and I am assured by counsel—that
our auditing system is one of the most exacting in the entire corpo
rate or governmental world.
The C h a irm a n . But they have been considered self-audits. You
don’t let any General Accounting Office man come into your agency
anywhere, because I at one time made arrangements to have the Gen
eral Accounting Office go to New York and count the bonds. You see,
they are all in the New York Federal Reserve Bank, and they refused
to let him come in or give him any information about that at all.
How do you justify the expenditure of Federal Reserve funds for
membership in the American Institute of Banking?
Why is it necessary for the Federal Reserve to pay for membership
in the National Rifle Association and the American Dietetic Asso
ciation ?
(In response to the questions of Chairman Patman, the following
information was submitted for the record by Dr. Burns:)
R

eply

F rom

De.

urns

The American Institute of Banking offers a variety of academic courses
directed toward the education and training of people in banking. Its educational
program is as relevant and important to the development and training of em
ployees of the Reserve Banks as to employees of commercial banks. The costs of
this program are only partially meet by tuition fees and membership dues. Par
ticipating banks assist this important source of banking education through
contributions in the form of assessments or dues. The various offices of the
Reserve Banks, which directly benefit from the Institute’s programs, have
assumed their fair share of the costs.
Membership in associations such as the National Rifle Association and the
American Dietetic Association is held by a few Reserve Banks as a professional
aid to employees with special responsibilities. Guards and cafeteria personnel,
for example, use the publications and announcements of these associations to
keep up with current developments affecting tlieir responsibilities.
09- 710— 71------ 5

The C h a i r m a n . In 1969, the Federal Reserve Bank of New York
spent nearly $1,500 on the annual kiddie party for children of the
members of the Federal Reserve Bank of New York.
What is the purpose of this expenditure? Is it a practice of the
Federal Reserve to pay for parking tickets for Federal employees
whether or not they are on official business and so forth ?
In 1969, more than $7,800 was paid by the Federal Reserve System
to the Federal Reserve clubs.
Would you please explain to the committee what these clubs are and
how they further the central banking activities of our country ?
In connection with these Federal Reserve clubs, has the Federal
Reserve System ever paid for Federal Reserve clubs to have parties in
Playboy Clubs, complete with accouterments, and can you give the
committee some example of the expenditures by Federal Reserve
banks which would not be appropriate for reimbursement by the Fed
eral Reserve System ?
How many expenditures have the in-house auditors of the Federal
Reserve System ever questioned as being unauthorized ?
Would you please provide the committee with a list of such expendi
tures which were listed as not allowable, and I have another one here.
Dr. B u r n s . May I just say one word ?
The C h a i r m a n . Yes, sir.
Dr. B u r n s . I shall answer the questions to the best of my ability. I
will look into each of your questions with very great thoroughness.
But as far as your reference to a Playboy Club is concerned, I didn’t
know there was that much imagination on the part of any of my
colleagues.
The C h a i r m a n . Well, if they used Federal money for it, don’t you
think it is worthy of consideration ? In other words, this is money that
you would create on Government credit and that you invest—I mean,
buy bonds with—and you keep these bonds and let the money go, and
collect the interest on the bonds which have already been paid for.
Since they don’t have an audit, and they have been unable to get a bill
through Congress to require an audit of the Federal Reserve banking
system, don’t you think that the Congress should pick out things like
this as an example of the unworthiness of certain expenditures and
bring it to the attention of the people responsible ?
The others I have put in the record, and the expenditures, I think,
are something that should receive a lot of consideration, of course.
(In response to the questions of Chairman Patman, the following
information was submitted for the record by Dr. Burns:)
R

eply

F rom D

urns

Federal Reserve clubs are organizations through which employees of the
Reserve Banks can engage in a variety of educational, social, or recreational
activities. By providing a means of association not strictly related to work, the
clubs contribute to the morale and loyalty of the employees of the Reserve Banks,
helping to achieve the employment stability essential to efficient and economical
operations. Employee clubs are an effective employee relations tool in common
use in and out of Government.
One of the Federal Reserve clubs gave a sports banquet in 1970 honoring 27
men and women employees who had participated in the club’s athletic program.
The location was the Playboy Club. It was chosen because it submitted the lowest
bid of several local restaurants contacted.

31
In its instructions to the Reserve Banks, the Board has set forth its views on
the kinds of expenditures which are appropriate for the Banks, and has given
concrete examples of expenditures which are not allowable, such as dues for
membership in private clubs or in the American Bankers Association and con
tributions to community welfare and charitable funds. These instructions guide
the officers of the Banks with responsibility for approving expense vouchers,
the internal auditors of the Banks, and the Board’s examiners. This review sys
tem assures that each expenditure receives careful scrutiny by at least three
persons. Questionable expenditures are handled by the Banks before the advent
of the Board’s annual examination. In the relatively rare cases where Board
examiners still find questionable expenditures which have not been resolved
within a Bank, the matter is settled in conferences with the Bank’s officers. No
record of such settlements is made or retained, because such work is a normal
part of the auditing function.

The C h a irm a n . N ow , on the statement that I have up here, by the
staff, there is the cost of a babysitter for an official and his wife to
attend two dinners, Federal Reserve Bank of New York, $20.90.
Then, of course, here is the American Institute of Banking $4,256,
in New Jersey, and so forth, and a lot of the other banking institu
tions.
I know that you stopped them from making contributions to the
American Bankers Association, Dr. Burns, and I congratulate and
commend you for it. But it occurs to me that all of these other ex
penses are just as far out in the field—like lunches for the new em
ployees in the Federal Reserve Bank of New York, $933—and $4,200
by the Federal Reserve Bank of Kansas City, 25-year activities, $3,279,
and certain watches and checks, and----Mr. W id n a l l. Mr. Chairman.
The C h airm a n . And fruit baskets. I am getting through. If you will
let me go a little bit, I will be through.
Would you want me to yield for a question ?
Mr. W id n a ll. Yes.
The C h airm a n . Go right ahead.
Mr. W id n a l l. What pertinence does this have, Mr. Chairman, to
the major questions involved in the operations of the Federal Reserve
System ?
We went into a lot of these things a couple of years ago and I can’t
see anything that this can do except create headlines and take the
minds of the public off the main thrust of our investigation.
The C h airm a n . Is the gentleman opposed to audits and investiga
tions of Government expenditures of money, especially when we are
spending $2 for every $1 of what you get? And that is what this is.
I have in here the description of an employee who was transferred
to Helena, Mont. He made a number of trips. They are all outlined
here. It was just for the purpose of getting a home. Usually one trip
is allowed. I am putting the other expenses in. Now, I believe I have
included everything that I mentioned in the beginning of my state
ment. Here is one attached to the thrift plan. Therefore, Dr. Burns, it
will be all right with me to release you when I get through with this
one other question.
You talked about interest rates.
During one period of time, 14 years ago, when everybody could see
we were going to get involved in a war in Europe, and the Federal

Reserve and President Roosevelt decided that even if we won the war
militarily, it would be lost if interest rates were not kept under control.
So they started a campaign in the Federal Reserve, and they said, you
name the place where you want the bonds to be maintained, and we
can keep it there at 1.99, or 4.01, or 5.27, or any point you want. We
have the power and we can keep the bonds at that interest rate.
Well, Mr. Roosevelt suggested that a good wholesale rate for money
would be a little less than 2% percent, and they agreed on that.
Now, Mr. Eccles didn’t like that, but he agreed. He was a good
patriotic person. He said we must keep interest rates down to keep
inflation down, and from 1939 to 1953, the interest rates were kept
by the Federal Reserve at less than 2.50, less than 2^, and anyone
who had those bonds could get his money at any time he wanted. That;
was one of the reasons it was done—to make it easy for people to get
their money back on the bonds when they needed it.
So for 14 years, those rates were maintained. Because of that, Mr.
Truman was able to pay $29 billion on the national debt before he went
out of office and we were able to pass the GI bill of rights to provide
for 15 million returning servicemen. We sent them to colleges and uni
versities and they received more degrees than had ever been received
before in the history of America, and there were more educated young
men, all because of low interest rates. And if they wanted to buy a
home, they could buy it and get the money from the Government on
reasonable terms; if they wanted to go into business, they could bor
row the money from the Government on reasonable terms, or they
could go to college, as most of them did. Thus we avoided a bad period
in making the transition from war to peace.
Now, in 1944—the darkest days of World War II—we commenced
working on something to bring these boys back without a depression.
Everybody was saying, name one major country in the civilized world
that had a major war and did not have a major depression after the
war was over. You couldn’t name one, because heretofore, they had
always had a major depression.
So by enacting the GI bill of rights and taking care of the return
ing servicemen, we avoided a depression. This was the first time in
the history of the world that a major country had a major war and
did not have a major depression.
Now, after those 14 years were over, Mr. Eisenhower came into
office, and Mr. Humphreys, whom you mentioned a while ago, who was
a very nice person. Of course, his views were antagonistic to mine. The
first bond issue he put out was for 3*4 percent and it almost caused a
depression. The percentage rate rose from 2y2 to 3%. Just before that,
when Mr. Eisenhower first came in and took the oath of office on
January 20, 1953, a bond issue was put out for 2%, oversold, and
after that, a bond issue for 2y2 was put out and oversold. As that indi
cates, for 14 years including those first 2 or 3 months of Mr. Eisen
hower’s administration, interest rates were maintained at 2y2 percent
and less, which, of course, saved our country in that time. That shows
they could do it. That is a demonstration. That is the proof. Nobody
can question it.

I will place the following tables in the record at this point showing
the interest payments on public and private debt for the years 1953 to
1970, and the yields on long-term Government bonds, 1939 to 1952:
TABLE 1—INTEREST PAYMENTS ON PUBLIC AND PRIVATE DEBT
{Dollar amounts in billions]

Year
1953............... .............................. ............ .................
1954.............................................. .............................
1955............................................ .............................
1956.............................................. .............................
1957.............................................. ....... ....................
1958.............................................. .............................
1959.............................................. .............................
1960.............................................. ............................
1961.............................................. ................. ..........
1962.............................................. ....................... .
1963............................................. .............................
1964.............................................. .............................
1965.............................................. .............................
1966............................... .............. .............................
1967......................................... . .............................
1968.......................................... . .............................
1969.............................................. ............................
1970.............................................. .............................

Public and
private
debt

Interest
paid

Interest
costs
figured at
1952 average

Excess
interest
paid

$581.6
605.9
664.9
698.3
728.3
769.1
831.4
872.4
929.8
997.1
1,071.7
1,153.7
1,245.6
1,340.8
1,436.4
1,513.6
1,653.6
1,781.2

$21.7
23.5
25.8
29.5
33.6
35.5
40.3
44.2
46.8
52.5
58.7
65.2
72.4
81.9
89.9
104.9
120.6
135.6

$20.5
21.4
23.5
24.7
25.8
27.2
29.4
30.9
32.9
35.3
37.9
39.8
44.1
47.5
50.8
53.9
58.5
63.0

$1.2
2.1
2.3
4.8
7.8
8.3
10.9
13.3
13.9
17.2
20.8
25.4
28.3
34.4
39.1
51.0
62.1
72.5

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

425.5

Note: National debt as of Sept. 22,1971, was $414,700,000,000.

Table 2.—Yields on long-term Government bonds (percent per annum)
1989 to 1952
Year:
Yield
193 9
2. 36
194 0
____________
2.21
194 1
_____________________________
1. 95
194 2
2. 46
194 3
2. 47
194 4
2. 48
194 5
2. 37
194 6
2.19
194 7
2. 25
194 8
2. 44
194 9
2. 31
195 0
2. 32
195 1
2. 57
195 2
2. 68
Average for 14-year period___________________________________________ 2.36

Now, in the years since then, from 1953 to 1970, we have had a public
and private debt in billions of dollars, and we have paid interest in
billions, that is, the interest on both public and private debt. You will
remember when the so-called accord came up in 1951. Mr. Martin, you
know, was taking control of the Federal Reserve System at that time,
as Chairman of the Board, and he promised Mr. Truman, I was told,
at that time—that was in the early part of 1951—that bonds would not
be allowed to go above 2% percent while Harry Truman was Presi
dent of the United States. He kept his word on that, although he
wanted to take the lid off and take the fixed price off.

If you will notice, in all of the months of 1951 and 1952, none of the
bonds were sold at more than %y2 percent. So he did keep his promise
to Mr. Truman.
Of course, when Mr. Truman heard that the Board was going to take
the lid off the bonds, he called them into the White House. One news
paper reporter said he called them names and said, anv time you begin
to do that, you are going to ruin this country and your patriotism is
going to be questioned. You are going to have lots of trouble, and tlie
Board went back and decided not to pull out the peg. That was some
talk on the part of the President. It really got results, and it was
helpful.
Low interest rates have been very helpful to this country. If we had
maintained those rates as we did for 14 years, and paid interest costs
figured at the 1952 average, we would have saved $425.5 billion.
Now, that is quite a saving, that is more than the national debt is
now. The national debt is $414 billion. So we wouldn’t have a national
debt today had it not been for the high interest policies of William
McChesney Martin. These policies have caused a great deal of trouble
for our country. We should not undertake to throw this lesson aside
and pay no attention to it, and start on a binge of high interest again.
Mr. W i l l i a m s . Will the gentleman yield ?
The C h a i r m a n . Yes.
Mr. W i l l i a m s . Would you also please include in your comments
what experience the Treasury Department is having now in selling
their issues, and would you also please comment on the credit of this
country with the national debt standing at $416 billion, and it has
increased $100 billion just since I have been in Congress in 4*4 years,
or close to 5 years.
The C h a i r m a n . I am glad the gentleman is interested in that, be
cause I know he will want to cancel the $66 billion of bonds that have
been paid for once. I have Mr. Martin’s statement on that. Let me read
that. You questioned it this morning.
Mr. W i l l i a m s . What experience is the Treasury having today in
selling their issues ?
The C h a i r m a n . Well, they shouldn’t have any trouble.
Mr. W i l l i a m s . I a m t e l l i n g y o u t h e y a r e u n d e r s u b s c r i b e d , e v e r y
i s s u e t h e y s e ll .

They have been borrowing money for so long that our credit no
longer ranks the way it did when our national debt was just a few bil
lion dollars, which is the time that you are talking about, when
President Roosevelt was in.
The C h a i r m a n . The Government doesn’t have to pay interest at all
if it doesn’t want to. We are not advocating it, I am not. I believe it
should be done in the traditional way.
Mr. W i l l i a m s . I want the record to show that the Treasury De
partment today, and under the Johnson administration, was having
trouble selling their issues. There has not been an issue oversold in
years. We are forced into short-term borrowing at extremely high
interest rates and this is due to the deficit spending of this Govern
ment which we have been practicing for all too long.

The C h a irm a n . I assure you that for 14 years and during two
wars—World War II and the Korean war— and all kinds of inflation,
black markets, all the usual wartime problems, they kept interest
rates below 2 ^ percent. You couldn’t have a better case. That is a
perfect case.
Mr. W illia m s . Do you have any more questions for the record?
The C h a irm a n . I will decide that right now.
I am quoting from the testimony in which Mr. Martin admits that
the bonds in the Federal Reserve portfolio were paid for once by the
U.S. Government.
M r . P a t m a n . In other words, each note says on its face: “The United States
promises to pay to bearer on demand so many dollars.” That is just as much a
Government obligation as a U.S. bond maturing 10 years from now, isn’t it?
M r . M a r t i n . It is m o n e y .
Mr. P a t m a n . It is an obligation of the Government.
Of course it was.

And further on in the testimony—I will put in the record, I will
not read it all:
Mr. P a t m a n . I cannot get the reasoning there at all, Mr. Martin. If that makes
sense, I am unable to comprehend it. Of course, there may be something in my
background, lack of knowledge, that would account for it. But I do know this:
No one should be compelled to pay his debts more than once, but in this instance,
you would compel the Government to pay his debts more than once. You would
compel the Government to continue to pay interest on bonds that have already
been paid for. When you bought these bonds, you paid for them. You will admit
that, will you not, Mr. Martin?
M r . M a r t i n . The bonds were paid for in the normal course of business.
The C h a i r m a n . That is right.
Mr. M a r t i n . And that is the only time they were paid for.
The C h a i r m a n . Just like we pay debts with checks and credit.
Mr. M a r t i n . Exactly.
The C h a i r m a n . In the normal course, they were paid for once, you will a d m i t
that, will you not?
Mr. M a r t i n . They were paid for once, and that is all.

(The excerpts from testimony of William McChesney Martin re
ferred to by Chairman Patman from hearings on S. 1451 and H.R.
7026, July 16,1957; and H.R. 7601, July 7,1965 follow:)
Q u e s t io n s b y C h a ir m a n W r ig h t P a t m
M a r t in , C h a ir m a n o f t h e B oard
•Sy s t e m

A n s w e r s b y W i l l ia m M cC h e s n e y
G overnors of t h e F ed er al R eserve

an and
of

[Taken in Testimony on S. 1451 and H.R. 7026, the Financial Institutions Act
of 1957, Before the Committee on Banking and Currency, House of Represent
atives, on July 16, 1957, p. 74 of the Printed Hearings]
Mr. P a t m a n . N o w then, Mr. Martin, isn’t it a fact that these Federal Reserve
notes that you issue and exchange for these bonds are obligations of the United
Sta tes Government, just as are the bonds ?
M r . M a r t i n . T h a t is rig h t.
Mr,. P a t m a n . In other words,

each note says on its face: “The United States
promises to pay to bearer on demand so many dollars.”
That is just as much a Government obligation as a United States bond matur
ing 10 years from now, isn’t it?
M r . M a r t i n . It is m o n e y .
Mr. P a t m a n . It is an obligation of the Government.

36
Q u e s t io n s

C h a ir m a n W

Pa tm a n and A nsw ers
M a r t in , C h a ir m a n

r ig h t

il l ia m

cC h e s n e y

[Taken in testimony on H.R. 7601, a bill to provide for the retirement of $30
billion of interest-bearing obligations of the United States held by the 12
Federal Reserve banks, on July 7, 1965, pp. 78-80 of the transcript]
The C h a i r m a n (Mr. Patman). I want to clarify this for the record one more
time, Mr. Martin. How in the world can you insist that bonds that are paid
for once should continue in existence with the taxpayers having to pay in
terest on them after they have been paid for once? Now, of course, you claim
that these bonds have to be there to back up Federal Reserve notes. But that
does not conform with your reasoning in 1959 when you presented to Congress
a bill, and it was passed on by this committee, which said that you wanted the
power to lower reserve requirements and count vault cash as reserves; and
that, if you got that power, you would transfer $15 billion of the then portfolio
of $24 ibillion to the private banks. You further stated that the private banks
needed the income from these bonds, and that the Federal Reserve does not
need it. You do not need the $15 billion. The remaining $9 'billion in the port
folio, as you stated in a staff report, would provide enough flexibility for you to
operate. Now then, when the Open Market Committee owns $38.5 billion worth
of bonds—which of course is about $14.5 billion more than it was then, you
insist that it is impossible for those bonds to be canceled, although $15 billion
under the same circumstances could be given to the private banks, after giving
them (through reducing reserves) the reserves to buy the bonds.
The Fed pays nothing for them; it merely creates new reserves. Then it
continues to get interest on those bonds, and then when the bonds become due,
they can collect the principal again.
I cannot get the reasoning there at all, Mr. Martin. If that makes sense, I
am unable to comprehend it. Of course, there may be something in my back
ground—lack of knowledge—that would account for it, but I do know this: No
one should be compelled to pay his debts more than once, but in this instance you
would compel the Government to pay its debts more than once. You would com
pel the Government to continue to pay interest on bonds that have already been
paid for. When you bought these bonds, you paid for them. You will admit that,
will you not, Mr. Martin?
Mr. M a r t i n . The bonds were paid for in the normal course of business.
The C h a i r m a n . That is right.
Mr. M a r t i n . And that is the only time they were paid for.
The C h a i r m a n . Just like we pay debts with checks and credits.
M r . M a r t i n . Exactly.
The C h a i r m a n . In the normal course they were paid for once, you will admit
that, will you not?
M r . M a r t i n . They were paid f o r once, and that is all.
The C h a i r m a n . That i s r ig h t.

The C h a i r m a n . He has said that a number of times. I could get you
a dozen examples. But every informed person knows that they were
paid for once.
Mr. W i l l i a m s . And not twice.
The C h a i r m a n . I know, but they can be paid for twice, if they are
sold back into the markeit and bought back. ThaJt is paying for them
twice and inflating the currency too.
Dr. B u r n s . Mr. Chairman, if I buy a Government bond, and I sell
it to Mr. Gefctys and he sells it to you and you ssell it to Mr. Williams,
it will be paid for four times.
The C h a i r m a n . Well, that is the velocity of credit, the average ve
locity in the country is 60 times a year. That is the reason why this
trickle down theory fails because when money is put into circulation
at the top, it goes to a couple of rich people and goes back out of cir
culation in the bank and doesn’t amount to anything. If you pay at
the bottom to the poor people who put it into circulation through the

channels of trade and distribution, it will probably travel six or eight
times in the local community and then start around the country. In the
course of the year, it will go to about 60 people, each one paying an
income tax, and instead of the $1 costing the Government $1, when
it is paid down to the lower level, the Government actually makes
money out of it, it wouldn’t be carried extensively, but it happens.
Dr. B u r n s . T o continue my illustration, it has been paid for four
times, but three of the men have gotten their moncv back, sometimes
with a profit and sometimes at a loss; therefore, it has been paid for,
on balance, once.
The C h a i r m a n . Well, that is not an open market. Only the Federal
Eeserve Can have an open market.
Dr. Burns, thank you very much, and if you will answer those ques
tions when you look over your transcript, it will be appreciated very
much.
Dr. B u r n s . Thank you very much, Mr. Chairman.
The C h a irm a n . I had to forgo asking a lot of questions I would
like to have asked.
Dr. B u r n s . I w ill be back.
The C h a i r m a n . Glad to accommodate you.
(The following m'aterial submitted for inclusion in the record at
this point was referred to by Chairman Patman in the four points of
his opening statement and also on p. 11:)
F ederal R

eserve

h r if t

P jjlx

Dr. Burns, on July 2, 1971, I wrote you a letter asking that you inform us
concerning the operation of the Federal Reserve Board and System’s so-called
thrift plan. You responded to me in a letter dated July 30 and at some length
tried to rationalize the reasons why this plan has been instituted.
It is not pertinent, in my opinion, to discuss the Board’s reasons for instituting
the plan, but it is pertinent that the committee be told under what section of the
Federal Reserve law or other relevant statutes you felt you had the legal
authority to take this action.
Before answering this question, however, for the benefit of the Members, let’s
get a few basic questions answered first.
The so-called thrift plan, as I understand it, Dr. Burns, is a plan whereby
the 20,000 employees are allowed to place funds in a savings program which in
part has the basic features of a mutual fund. Under the program, Board em
ployees may contribute from 1 to 10 percent of their salary to the plan. The
Board will partially subsidize this contribution by adding 25 cents to each dollar
contributed. Further, once each year, a lump sum contribution not exceeding
10 percent of the employee’s past year’s salary may be made, up to the point where
contribution and payroll deductions do not exceed 16 percent of the employee’s
past 12-months’ aggregate salary.
Under this program, as your letter indicates, the Federal Reserve Board and
Reserve Banks contribute an amount just under $2 million. It should be of no
concern to anyone that, as you indicate, Dr. Burns, this is a good management
tool in keeping employees and reducing turnover.
What you are doing, in my opinion, is taking money which otherwise would
have gone back to the general funds of the U.S. Treasury and without any legal
authority whatsoever using these funds for the benefit of employees.
I know full well, Dr. Burns, that no executive agency of the Federal Govern
ment has such a program unless it has been specifically authorized by statute,
and that in no instance is there such a statute on the books.
Dr. Bums, I wish you would point out to the Committee the precise statute
that allows the Board and the Federal Reserve District Banks to participate
in this thrift plan by making contributions as I have indicated to the funds of
Federal Reserve Board and Bank employees.

38
Q u e s t io n s

S u b m it t e d
System T

C h a ir m a n P a t m a n on F ed eral R eserve B
P l a n , W it h R e ply F rom D r. B u r n s

oard

an d

h r if t

1. Mow many of the Federal Reserve Regional Banks have thrift programs
similar or identical to that which the Federal Reserve Board has for its
employees?
2. When did these so-called thrift programs "begin—by Regional bank?
S. How much has been contributed by the Regional Banks and the Board of
Governors to this program—by each Bank, and by the Board f
If. Was an opinion sought to determine the legality of this action before the
program was introduced, either by the Board or any of the Regional Banks?
5. What is the average contribution which the Board has made to its employees
under this program? What is the largest contribution that the Board has made
to an individual participating in this program?

eply

F rom

Dr. B

urns

At the outset, a word of clarification is in order. Chairman Patman’s opening
remarks on the thrift plan included the statement that “for each dollar invested
in the thrift plan by an employee, the Federal Reserve contributes 25 cents.”
This statement is subject to an important qualification : System contributions are
limited to 1V2 per cent of the employee’s salary (or $750. if less) in any year.
Turning now to the question of legal authority, quite a number of provisions
of the Federal Reserve Act could be cited as having a bearing on the authority
of the Federal Reserve Banks and the Board of Governors to determine their
internal management policies, including the approval of expenditures for pro
grams such as that embraced in the thrift plan. Perhaps those set forth below
are sufficient to show that there is ample authority for the directors of the Fed
eral Reserve Banks to authorize and for the Board of Governors to sanction the
establishment and operation of this program.
1. Section 4, paragraph 6: “ Every Federal reserve bank shall be conducted
under the supervision and control of a board of directors.”
2. Section 4, paragraph 7: “ The board of directors shall perform the duties
usually appertaining to the office of directors of banking associations and all
such duties as are prescribed by law.”
3. Section 4, clause “ Seventh” of paragraph 4: “. . . The Federal reserve
bank . . . shall have power . . . to exercise by its board of directors, or duly
authorized officers or agents, all powers specifically granted by the provisions
of this Act and such incidental powers as shall be necessary to carry on the
business of banking within the limitations prescribed by this Act.”
4. Section 4, paragraph 22:
. . Any compensation that may be provided by
boards of directors of Federal reserve banks for directors, officers or employees
shall be subject to the approval of the Board of Governors of the Federal Reserve
System.”
5. Section 10, paragraph 3: “ The Board of Governors of the Federal Reserve
System shall have power to levy semiannually upon the Federal reserve banks
. . . an assessment sufficient to pay its estimated expenses and the salaries of its
members and employees. . . .”
6. Section 10, paragraph 4: “ . . . The Board shall determine and prescribe
the manner in which its obligations shall be incurred and its disbursements and
expenses allowed and paid, and may leave on deposit in the Federal Reserve
banks the proceeds of assessments levied upon them to defray its estimated
expenses and the salaries of its members and employees, whose employment,
compensation, leave, and expenses shall be governed solely by the provisions of
this Act, specific amendments thereof and rules and regulations of the Board
not inconsistent therewith; and funds derived from such assessments shall not
be construed to be Government funds or appropriated moneys. . . .”
7. Section 11: “The Board of Governors of the Federal Reserve System shall
be authorized and empowered:
“. . . (j) to exercise general supervision over said Federal reserve banks. . . .
“ (1) To employ such attorneys, experts, assistants, clerks, or other employees
as may be deemed necessary to conduct the business of the board. All salaries
and fees shall be fixed in advance by said board and shall be paid in the same
manner as the salaries of the members of said board. All such attorneys, experts,

assistants, clerks, and other employees shall be appointed without regard to the
provisions of the Act of January 16, 1883 (volume twenty-two, United States
Statutes at Large, page 403), and amendments thereto, or any rule or regulation
made in pursuance thereof: Provided, That nothing herein shall prevent the
President from placing said employees in the classified service.”
These quotations from the Federal Reserve Act show clearly our legal author
ity to incur or approve expenditures of Federal Reserve funds for the Board or
the Reserve Banks for purposes we believe necessary or desirable for carrying
out the functions of the System, even though similar expenditures might not be
permissible for many Federal Government agencies, including those operating
on appropriated funds. The Board must of course be prepared to show that
expenditures are for the purpose of enabling the Federal Reserve to carry out
its responsibilities effectively and efficiently—a process that involves value
judgments on which reasonable persons could differ.
The thrift plan was judged by the directors and officers of the Reserve Banks
and by the Board of Governors to contribute to more effective employee per
formance and service. In fact, it seemed likely that it would result in an actual
reduction in the costs of recruitment and retention of desirable staff members.
The decision that the use of funds for the thrift plan was appropriate in nature
and reasonable in amount was reached only after careful study by those respon
sible, and with full consideration for the status of the Federal Reserve System
within the Government.
With respect to this question of status within the Government, my attention
has been called to the fact that, when the Banking Act of 1933 amended section
10 of the Federal Reserve Act to give the Board explicit authority to determine
its own obligations and expenses (including compensation of its employees) and
to provide that the Board’s funds should not be construed to be Government
funds or appropriated moneys, the reports of the Banking and Currency Com
mittees of both the House and the Senate stated that the change ‘leaves to the
Board the determination of its own internal management policies.” The change
clearly was in accord with one of the ba:sic purposes of the 1933 Act, i.e., the
“increase of independence of Federal Reserve Board.”
Chairman Patman has said that no executive agency of the Federal Govern
ment has any program like our thrift plan. Accepting this as correct does not
mean that the thrift plan flouts the law or that it is unwise, considering the re
sponsibilities that the Congress has placed on the Reserve Bank directors and
the Board of Governors for internal management of the Federal Reserve System.
Although Chairman Patman’s comments indicated that he is not concerned
with whether the benefits to the System from the thrift plan outweigh the one
per cent of payroll cost, it seems worth noting that this plan is highly regarded
as an employee benefit by members of the staff in all salary groups. So far as we
can judge up to the present time, it appears to have contributed to lower em
ployee turnover and ha® helped attract new quality personnel to the organization.
We sincerely believe that the adoption of this plan and its use within the System
is a wise exercise of the authority given to us by the Federal Reserve Act.
We wall continue to observe the impact of this and other parts of our employee
benefits program with a view to using such arrangements as are appropriate
under the law and which will assist in carrying out the primary functions that
the Congress has placed on us.
F ederal R

eserve

P urch ase

gency

P aper

( Statement and questions submitted by Chairman Patman)
Dr. Burns, as I understand it, as set forth in the Budget of the United States
for fiscal year 19T2, there currently is outstanding Government agency debt paper
which has been sold to the public estimated at the end of 1972 to amount to $8.1
billion and Government-sponsored agency borrowings from the public as of this
same time period amounting to $52.5 billion, for a total of approximately $60
billion worth of paper outstanding. This amount includes borrowings from the
public by such Federal agencies as the Farmers Home Administration, the Com
modity Credit Corporation, College Housing, the Export-Import Bank. Small
Business Administration, Tennessee Valley Authority, Federal National Mort
gage Association, the Farm Credit Administration, and the Federal Home Loan
Bank Board.

The legal authority behind this action of the Federal Reserve is contained in
Public Law 89-597, enacted in 1966, which amended Section 14(b)i of the Federal
Reserve Act to allow the Federal Reserve to buy and sell in the open market any
obligation which is a direct obligation of or fully guaranteed as to principal
and interest by any agency of the United States. It was before your time, Dr.
Burns, but I am sure you have been made awiare of the fact that this committee
initiated this legislation as a result of the fact that the former head of the
Federal Reserve Board refused to use the broad powers of the Open Market
Committee, among other things, in assisting the economy, especially the housing
sector, which at that time had been all but choked off from a source of funds.
William McChesney Martin^ refused to use the Federal Open Market Committee
to purchase this paper, basing his argument on the fact that the Federal Reserve
Act was not broad enough to allow the Open Market Committee to make purchases
of agency paper, including paper from the Federal National Mortgage Associa
tion, the Federal Home Loan Bank Board, and other Federal agencies, and this
is why this language was enacted into law. This authority was not used in a
substantive way by the Federal Reserve, under Mr. Martin’s Chairmanship. I
have said many times since that Mr. Martin violated his commitment to the
Congress in not using his authority for such purposes, for the record clearly
shows that Mr. Martin committed himself to use the authority if the Congress
enacted these changes into the law. The only use which the Federal Reserve
made of this authority was to purchase a piddling amount of Government agency
paper on a very short-term basis under the Open Market Committee’s so-called
repurchasing agreement procedure.
Dr. Burns, you and your Board are to be commended for taking this action,
feeble though it is. I shall in a moment justify my contention that this action,
while basically in the right direction and in accord with Congressional desire,
is feeble.
I would like initially, however, to make this observation. It is my understanding
that the Federal Reserve Board is about to conclude a study of the home financ
ing industry which has been in progress for several years, and that it will indi
cate that the Federal Reserve System has made little or no effort to assist our
country in meeting some of its goals—in this instance, housing—through the use
of its monetary powers to influence the allocation of credit.
It has been rumored, Dr. Burns, that one of the reasons—if not the reason—
the Board took action on September 16 to allow the Federal Open Market Com
mittee to purchase and sell agency paper was to temper congressional criticisms
that might follow from the release of your housing study. Speaking for myself,
Dr. Burns, I hope this is not so. Further, I would hope that your study of the
housing market, its problems and prospects, would clearly indicate a definite
commitment by the Federal Reserve Board and System to involve itself in meeting
the financial needs of our housing industry and mortgage market in a direct
way through open market operations. If the study does not indicate ways in which
the Federal Reserve can accomplish this directly at the lowest possible cost to
the country and the home buyer, you may rest assured that I will take the first
opportunity to criticize it. The view that the Federal Reserve System should
involve itself directly in meeting these social goals is one that is shared by a
number of Members of Congress.
Now, Dr. Burns, to get to the specifics of your newly announced Open Market
Committee activities concerning Federal agency paper. During the hearings, I
asked several questions on this subject and requested that you submit answers
in writing. However, I would like to ask several more to be included in your
reply.
1. Dr. Burns, the language in Guideline No. 3 is very similar to the general
language you always use in directives to the manager of the Open Market
Committee—so general in nature as to provide no insight as to the exact nature
of your intent. Guideline No. 3 says that the initial objective of the System would
be to build up a “modest portfolio of agency issues . . . without undue market
effects.” Would you please tell the Committee just how you define “modest” and
just what do you mean by “without undue market effects” ?
2. Guideline No. 4 states that your holdings of maturing agency issues will
be allowed to run off at maturity. Does this mean that upon maturity, the agency
in question would be obligated to pay to the Federal Reserve System the full
amount of principal, plus accrued interest, and that the System would have the
use of those funds for its expenses with any net going back to the Treasury?

41
3.
Guideline No. 5 states further ground rules under which you will allow
the Open Market Committee to purchase Federal agency issues. I would like to
know the reasoning behind some of these limitations. Why are purchases limited
to issues of over $36o million where the maturity of the issue is five years or
less, or $200 million or more in cases where the maturity of the issue is five years
or more? Under Guideline No. 6, purchases are further limited to a maximum
of 10 percent of the outstanding issue even where these qualifications are met.
It would seem to me that by these limitations you severely restrict the number
of issues in which the Open Market Committee can participate and, perhaps not
purchase the paper of some agencies at all, you would because it might not meet
these requirements. Depending on the maturities and amounts of issues by agen
cies, this guideline could conflict with guideline No. 2, in which you state that it
is not the function of the Open Market Committee in this instance to support
individual sectors of the market.
I know the law states, Mr. Chairman, that you can only purchase agency paper
“in the open market.” it would seem to me that by buying these agency issues
directly from the agency, the cost to the Government would be reduced by the
amount of the commission involved. I see no reason why the law should not be
amended so that the Open Market Committee could purchase directly from the
agency. I would appreciate your comments on this.
In general, Dr. Burns, you are to be commended for taking action to implement
the 1966 provisions. It is of vital importance that the Federal Reserve Board act
to assist the Federal Government in providing for the social and economic needs
of our people. The only argument we could have at this time is that Federal
Reserve participation in this program is not as great as some of us had hoped it
would be. It is my personal feeling that your guidelines are too restrictive and
that the degree to which you will participate in the purchase of agency paper
will be something less than adequate to help meet our social and economic ob
jectives. In my opinion a sizeable involvement by our central bank in allocating
funds will be necessary to accomplish the task of meeting our goals, both do
mestically and internationally. Again, I commend you in this instance for your
action and look forward to further involvement by our central bank in the
purchase of Federal agency issues. I also look forward to the time when we can
change the law so that you may deal directly in the purchase of agency issues,
rather than going through the existing market tollgates.

eply

F rom D

urns

The questions referred to, and the answers submitted by Mr. Burns, follow:
Question 1. Dr. Burns, the language in Guideline No. 8 is very similar to the
general language you always use in directives to the manager of the Open Mar
ket Committee—so general m nature as to provide no insight as to the exact
nature of your intent. Guideline No. 8 says that the initial objective of the Sys
tem would "be to build up a “modest portfolio of agency issues . . . without
undue market effects” Would you please tell the Committee just how you define
“modest” and just what do yon mean by “without undue market effects?”
Answer. The size of the portfolio of agency issues at any given point in time
cannot be foreseen. It will depend in part on the need to supply or absorb
reserves in response to factors that are unpredictable. Also, we need more
experience with purchases of agency issues to determine how far we can go
without undue market effects. The outside limit on the portfolio under our initial
guidelines is now about $3 billion. Clearly, it will be a long time before the port
folio approaches that size. In the few weeks since our September announcement,
we have purchased agency issues on three occasions, and we now hold $179 mil
lion of these securities.
Question 2. Your Guideline No. 4 states that your holdings of maturing agency
issues will be allowed to run off at maturity. Does this mean that upon maturity,
the agency in question tcould be obligated to pay to the Federal Reserve System
the full amount of principal, plus accrued interest, and that the System would
have the use of those funds for its expenses with any net going back to the
Treasury?

42
Answer. The Federal Reserve System, by purchasing an agency issue, becomes
entitled to payment of principal and interest, just as any other purchaser. Under
the Federal Reserve Act and other statutes the Reserve Banks are authorized
to perform certain functions, and to make such expenditures as may be reason
ably necessary and appropriate for the performance of those functions. These
expenses are met out of the Banks’ earnings, including earnings on agency issues.
To characterize this arrangement as giving the System “the use of those funds
for any expenses whatsoever” gives less recognition than I think should be given
to the responsibilities of the Reserve Banks and the Board of Governors to make
sure that the System is run economically and efficiently.
Question S. Guideline No. 5 states further ground rules under which you will
allow the Open Market Committee to purchase agency issues. I would like to
know the reasoning behind some of these limitations. Why are purchases limited
to issues of over $300 million where the maturity of the issue is 5 years or less,
or $200 million or more in cases where the maturity of the issue is 5 years or
moret
Answer. Dr. Burns’ answer to question # 3 may be found on page 27.

Q u e s t io n a b l e E x p e n d it u r e s o f t h e F e d e r a l R
E n d i n g D e c e m b e r 31,

eserve

a n k s for t h e

Y ear

1969

(Statement and material submitted by Chairman Patman)
in t r o d u c t io n

Since the Federal Reserve Act was signed on December 23, 1913, there has
been no audit of the Federal Reserve System as a whole which was not con
trolled in some manner by the System itself. Although the General Accounting
Office was established in 1921, it has never had the authority to audit the entire
Federal Reserve System. Until 1933, the GAO did audit the Board of Governors
but was not allowed to audit the twelve Federal Reserve banks and their
branches. However, the Banking Act of 1933 removed the GAO’s authority to
audit the Board. The Board does maintain a staff of examiners who audit the
twelve Federal Reserve banks and branches and, since 1952, the Board has been
audited annually by independent certified public accounting firms.
In testifying before the Domestic Finance Subcommittee in 1964 during hear
ings reviewing the operations of the Federal Reserve System, then Board Chair
man William McChesney Martin explained that the Board had instructed its
examiners to fulfill three requirements when auditing the banks and branches of
the System. Chairman Martin told the Subcommittee that the examinations are
to determine “ (a) each bank’s financial condition through appraisal of its assets
and verification of its assets and liabilities ; (b) its proper discharge of all of
its responsibilities ; and (c) its compliance with all applicable provisions of iaw
and regulations.”
Chairman Martin added that, “ Each year, an outside commercial auditor, cur
rently Haskins & Sells, accompanies the Board’s examiners on their examina
tions of one of the banks to review and observe the examination procedures.
Also, each bank has a resident auditor, responsible directly to the bank’s Board
of Directors, and not dependent on any of the bank’s officers for security of posi
tion. Throughout the year, he and his staff make comprehensive audits of all
phases of the banks’ operations, reporting directly to the Board of Directors of
the banks. Copies of these reports are reviewed by the Board of Governors of the
Federal Reserve System.”
The internal auditing procedures of the Federal Reserve System have been
cited in arguments against allowing the General Accounting Office to audit the
Federal Reserve System and its banks and branches. It is contended that the
GAO audit could not perform the function any better than the present auditing
arrangement.
“It is difficult to perceive how the GAO or any other audit group could achieve
a more effective result,” Chairman Martin told the Subcommittee in 1964 in
defense of the status quo.
Despite the assurances that the present audit structure of the Federal Reserve
is adequate, various items among the System's expenditures raise serious ques
tions as to the thoroughness of the audit and its scope and as to whether any
action is taken to correct deficiencies uncovered by the audits.

43
During the 1964 hearings before the Domestic Finance Subcommittee, hundreds
of expenses were uncovered 'by the Committee staff which should have been
questioned in the course of even the most elementary audit. However, these ex
penses were not questioned by the Federal Reserve Board, and are still being
made by the 36 banks and branches of the Federal Reserve System. The Board
of Governors does not take action to correct even the most obvious abuses.
The Federal Reserve System is one of seven agencies of the Government which
is not subject to complete GAO audits. The other agencies are the Central In
telligence Agency, Internal Revenue Service, the Comptroller of the Currency,
the Office of Alien Property, the Trust Funds of the Smithsonian Institute, and
the U.S. Soldiers’ Home, Washington. D.C. It should be noted, however, that
many of the other agencies which are not subject to full GAO audits have been
audited by the GAO on a partial basis. During 1969, for instance, the GAO con
ducted a review! of resources utilization at selected IRS service centers, as well
as the activities of the Data Center, Detroit, Michigan. The GAO has also con
ducted limited audits of the Central Intelligence Agency. However, the Federal
Reserve System has not been audited in any manner by the General Accounting
Office.
It should also be noted that the Federal Reserve System has the secondhighest yearly expenditures among those agencies not subject to total GAO
audits. This does not include the Central Intelligence Agency, however, which
does not make public its expenditures. The System had total expenses of $300,238,841 for 1969. This total was exceeded only by the Internal Revenue Service,
which had expenditures of $945,902,000. The expenses of the other non-audited
agencies are much smaller. For instance, the Comptroller of the Currency had
expenses of $26.6 million, the Smithsonian Institute’s expenses were $51.4 million,
those of the U.S. Soldiers’ Home were $10.3 million, and those of the Office of
Alien Property in the Justice Department were $3.5 million.
PURPOSE OF EXAMINATION

An examination has been made of the expenditures of the Federal Reserve
Banks and their branches for the year 1969 which are listed in the categories of
miscellaneous travel, or “all other” expenses. The purpose of the examination was
to determine the extent to which Federal Reserve funds are expended by the
Federal Reserve Banks for purposes or reasons hot considered allowable under
Federal laws and regulations applicable to other Federal agencies.
The examination involved only a review of the descriptions of arid reasons
for expenditures as supplied by the Federal Reserve Banks but did not involve
a review of travel vouchers or other such documents. Therefore, the questionable
expenditures discussed in this report, especially those relating to travel, do not
include those payments by the Federal Reserve Banks in excess of amounts al
lowed under Government regulations. For example, with certain exceptions, the
maximum amount authorized Government employees in a travel status is $25 per
day covering the costs of food, lodging and other travel expenses. The examina
tion did not include a comparison of this amount with the daily amounts paid to
Federal Reserve employees in a travel status.
“ ALL OTHER EXPENSES”

The examination of the 1969 expenditures in the “all other” category showed
that, out of the total amount examined (approximately $932,600), about $588,200
was expended by the Federal Reserve Banks for purposes which were either
questionable or not considered allowable under Government regulations. In
cluded in the balance of $932,600 was $132,100 of expenditures for which no
explanation as to their nature was given. The questionable expenditures which
were found in the examination of the “all other” category fell into the following
Federal Reserve classifications: (1) meetings, conferences and miscellaneous,
(2) membership dues and contributions, (3) employee relations, (4) research
and (5) bank relations. The following is an explanation of the various types of
questionable expenditures in each classification with appropriate examples.
MEETINGS, CONFERENCES AND MISCELLANEOUS EXPENSES

Questionable expenditures of about $103,900 were incurred by the Federal
Reserve Banks for various meetings, conferences, etc., and certain miscellaneous
expenses. Included in the above figure are costs for (1) dinners and luncheons

44
for directors, officers, employees of the bank, their wives, and official and visiting/
touring guests, (2) flowers for decoration at meetings and corsages for wives of
directors, officers and guests, (3) cigars for directors, officers and guests, (4)
miscellaneous expenses, such as gifts to retiring directors (usually a $200 to $300
engraved silver tray).
In a decision of January 22, 1970 (B-168774), the Comptroller General noted
that, “It is established that the Government may not pay the subsistence ex
penses of or furnish free food to civilian employees at headquarters in addition
to their regular compensation without specific authority of law even though
they may be working under unusual conditions.” In addition, the Comptroller
General stated in 43 Comp. Gen. 305 that “it is a general rule of longstanding
that funds appropriated for Government departments and agencies may not be
used for entertaining individuals by giving luncheons, etc., except when specifi
cally authorized by statute . . . ”
The following are examples of Federal Reserve expenditures in this
classification:
(1) Dinner meeting for bankers, businessmen and their wives in connection
with Joint Directors meeting of the Federal Reserve Bank of Minneapolis—
$584.63.
(2) Luncheon for wives of officers and directors of the Memphis Branch of
the Federal Reserve Bank of St. Louis—$97.99.
(3) Flowers for Joint Board of Directors Dinner in the Federal Reserve Bank
of Dallas—'$337.50.
(4) Flowers for wives of directors and officers of the Federal Reserve Bank
of St. Louis, incident to a dinner meeting—$88.50.
(5) Silver trays presented to the Deputy Chairman of the Board of the Fed
eral Reserve Bank of New York—$320.00.
(6) Parking violation due to a delay in the arrival of a plane (Federal Re
serve Bank of Minneapolis)—$5.00.
(7) Towing charge and parking fine violation of officer on official duty (Fed
eral Reserve Bank of New York)—$50.00.
(8) Cost of babysitter for official and his wife to attend two dinners (Federal
Reserve Bank of New York)—$20.90.
MEMBERSHIP DUES AND CONTRIBUTIONS

The Federal Reserve Banks paid dues and contributions in 1969 to various
banking, commercial, professional, civic and other organizations and associations.
Total payments of dues and contributions to such groups by the Federal Reserve
Banks and branches amounted to approximately $146,500 for 1969. The majority
of the payments were made to banking and bank-related associations but some
were made to non-bank-related associations, i.e., the National Rifle Association
and the American Dietetic Association.
Section 5948 under Title 5 of the United States Code states that, except under
specific authorization, appropriated funds may not be used for payment of mem
bership fees or dues of an employee. The only other exception noted is in Section
4109 which states that authorized expenses for training do not include member
ship fees except to the extent that the fee is a necessary cost directly related to
the training itself, or that payment of the fee is a condition precedent to under
going the training.
As an example of such expenditures, the Head Office of the Federal Reserve
Bank of New York paid a total of about $22,000 to various organizations for
dues and contributions which include, in part, the following:
American Institute of Banking------------------------------------------------------$4,256. 25
New Jersey chapter---------------------------------------- ---------------------60. 00
New York chapter___________________________________________
460.00
New Jersey Bankers Association_________________________________
1,440. 00
N}ew York State Bankers Association_____________________________
3,300. 00
American Bankers Association___________________________________
2,200.00
Connecticut Bankers Association--------------------------------------------------375. 00
American Bar Association-----------------------------------------------------------100. 00
American Institute of Industrial Engineers-----------------------------------105. 00
American Management Association_______________________________
325. 00
Real Estate Board of Niew York, Inc---------------------------------------------220. 00
Building Owners and Managers Association__________ _____________
300.00
Tax Institute of America_________________________________________
30. 00
Chamber of Commerce, New York________________________________
150. 00

45
EMPLOYEE RELATIONS

It is the policy of the Federal Reserve Banks to provide their employees with
a multitude of benefits over and above those authorized for other Government
employees. These additional benefits amounted to $219,600 in 1969 and include
the following types of employee benefits: employee recognition, athletic activi
ties, and social-recreational activities.
Under Title V of the United States Code, Government employees are forbidden
to receive pay or allowances in addition to those fixed by statute or regulation
for any services or duties they may perform outside their regular duties. In 5 Op.
A tty. Gen. 439, the Attorney General states that “No officer whose pay is fixed by
law or regulation is lawfully entitled to any additional pay, extra allowances, or
compensation in any form whatever, for any other duty or service, unless the
same shall be authorized by law .. .”. In addition, the Comptroller General noted
that Section 5535 of Title Y “provides that no civil officer of the Government
shall receive any compensation or perquisites, directly or indirectly from the
Treasury of the United States beyond his compensation allowed by law.”
As previously noted, civilian employees cannot be provided free lunches or din
ners or any other “entertainment” at their headquarters without specific au
thorization. The Comptroller General (43 Comp. Gen. 305) explains further that
“providing a dinner, luncheon or refreshments in conjunction with the annual
recognition ceremony would constitute [entertainment] ” and therefore, could
not be paid out of appropriated funds.
The Federal Reserve expenses for employee recognition involve (1) free
lunches to employees on their first day of employment, on their birthdays and
on their anniversaries with the banks, (2) retirement parties for employees,
(3> banquets for senior employees, (4) flowers and various gifts to employees on
special anniversaries with the banks or during periods of extended illness, (5)
gifts or checks sent to employees in the armed forces, and (6) flowers to officers
and employees on deaths in their families.
For example:
(1) Lunches to new employees in the Federal Reserve Bank of New York—
$933.55.
(2) Retirement parties at the Federal Reserve Bank of Kansas City—$4,297.09.
(3) Federal Reserve Bank of Kansas City—contribution to “25-Year Club”
activities—$3,278.59.
(4) Sterling tray and watch to 25-year employees by the Birmingham Branch
of the Federal Reserve Bank of Atlanta—$124.90 and $111.25.
(5) Fourteen $25 checks sent to employees in the armed forces at Christmas
time by the Federal Reserve Bank of Cleveland—$350.00.
(6) Sympathy flowers and fruit baskets to employees of the Federal Reserve
Bank of Cleveland—$850.06.
Athletic activities expenditures include the purchase of supplies and equipment
for softball, bowling, and table tennis, and all or a portion of the costs for em
ployee participation in various athletic events, i.e., line fees for bowling, entry
fees for softball and golf, etc.
(1) Yearly cost of athletic activities at the Federal Reserve Bank of San
Francisco—$1,550.43 (nature of activities not explained).
(2) One-half cost of line fees in American Institute of Banking bowling
league and Bank’s own league (Denver Branch of Federal Reserve Bank of
Kansas City)—$1,080.98.
(3) Golf outing at the Federal Reserve Bank of Philadelphia—$176.00.
(4) Bowling shirts with lettering for Bank’s team (Federal Reserve Bank of
St. Louis)—$171.90.
Other social and recreational activities include the costs of (1) tickets to vari
ous sporting and amusement activities, (2) gifts and prizes for employees or
employee parties and picnics, (3) special employee activities such as choral
groups and art instruction groups, and (4) special holiday luncheons and dinners
for employees.
For example:
(1) Tickets for hockey game for Jacksonville Branch of the Federal Reserve
Bank of Atlanta—$135.25.
(2) Gift certificates at department store for Jacksonville Branch of the Fed
eral Reserve Bank of Atlanta—$150.00.
(3) Prizes for Bingo night for employees of the Jacksonville Branch of the
Federal Reserve Bank of Atlanta—$309.99.

46
(4) Tickets to livestock show for employees of the Federal Reserve Bank of
Kansas City—$171.50.
_
_
(5) Turkeys for employees at Federal Reserve Bank of Kansas City—$9 <4.87.
(6) Expenses of a ski trip by Seattle Branch of the Federal Reserve Bank of
San Francisco—$43.00.
(7) Annual Kiddie Party for children of employees of the Federal Reserve
Bank of New York—$1,472.78.
(8) Annual picnic—dinners, pony rides, movies, prizes and favors at Buffalo
Branch of the Federal Reserve Bank of New York—$2,514.11.
RESEARCH

Certain Government agencies can make payments of Government funds to
graduate students, professors, and educational institutions in the form of research grants and fellowships, but only under specific legislative authorization.
Most agencies, including the Federal Reserve Banks, have not been given this
specific authorization.
The Federal Reserve Banks of Chicago, Cleveland and Boston made payments
in the form of research grants and fellowships in 1969 of about $41,700. This
money was awarded to doctoral candidates to promote research in money and
banking and related fields.
The Federal Reserve Bank of Chicago, for example, granted research awards
for a 12-month period and expended $12,000 in research funds in 1969. The indi
vidual awards granted by this Bank include $500 per month ($6,000 annually)
plus the costs of tuition and fees at the university, travel expenses between the
university and Chicago, clerical assistance, $500 at the completion of disserta
tion, and assistance in publishing the research results.
BAN K RELATIONS

Each Federal Reserve Bank expends funds for the costs of dinners, luncheons,
etc., to entertain various guests of the Bank in its dining room, cafeteria or
local restaurants. Bank guests include officials from other Federal Reserve
Banks or from their own member banks, local businessmen, educators and
students. Federal Reserve Banks expended a total of $76,500 in questionable
expenditures for 1969 in the classification of “bank relations.”
The sizes of groups being entertained range from individual guests to large
committee-type meetings. In addition, certain Banks have held major banquet
meetings, inviting a large number of bankers and businessmen. For example,
the Federal Reserve Bank of New York held two banquet-type luncheons, one
for New York State Bank representatives and the other for New Jersey State
Bank representatives. These two luncheons, addressed by the President of the
Bank, were held at local hotels and cost the Bank approximately $8,150.
In addition, meals are served to Directors of the Banks and retired Federal
Reserve Bank officials visiting the Banks. Also, officials of the Bank attending
banking conventions, visiting member banks or other Federal Reserve Banks,
or otherwise traveling away from their main office on official business are au
thorized to entertain various bankers and other guests at the expense of the
Federal Reserve Banks.
For example:
(>1) Luncheon meetings for representatives of area banks by the Federal
Reserve Bank of Minneapolis—$448.63.
(2) Meals and refreshments for meetings, seminars and tour groups at the
Federal Reserve Bank of Dallas—$1,503.48.
(3) Luncheon expense for tour group of college students at the Federal
Reserve Bank of Richmond—$25.62.
(4) Luncheon expenses of area bank conferences with officials of the Federal
Reserve Bank of Boston and member banks—$2,581.52.
(5) Cost of entertaining officers of four member banks during the New York
State Bankers meeting—$26.00.
(6) Cost of caddy and locker fees in entertaining four bank officials by
officer of the Federal Reserve Bank of New York—$12.50.
TRAVEL EXPENSES

Of the total amount of Federal Reserve travel expenses ($1.6 million) re
viewed, questionable expenditures amounted to about $46*200, primarily involving
the cost of traveling to various lectures or speaking engagements by various bank

47
officials. It must be noted, however, that about $150,700 of the travel expenses
were not explained by certain Federal Reserve Banks.
Although bank officials traveled to numerous meetings of various associations
in connection with speaking engagements, only those travel costs connected
with addresses to civic and other non-bank-reiated organizations (i.e., Cattle
Kaisers Association) were considered questionable when no explanations were
offered as to the topics of the addresses. Employees of the Federal Government
are authorized to travel at the Government’s expense to various organization and
association meetings if the employee’s participation can be related to the func
tions or activities of the agency. Under Section 4110 of Title V of the United
States Code, appropriations which are available to any agency for travel ex
penses are only available for the expenses of attending those meetings which
are concerned with the functions or activities for which the appropriation is
made or which will contribute to improved conduct, supervision or manage
ment of the functions or activities. Therefore, expenditures for travel to various
association meetings that could be related to the functions or activities of the
Banks were not included in the $46,200 figure.
In addition to the above speeches before non-bank-related organizations,
travel expenditures were considered questionable when related to lectures to
graduate seminars, graduating classes, etc., at various colleges and universities
when it appears that the costs of such travel should be assumed by the colleges
or universities involved.
Further, it was noted that an official of the Federal Reserve Bank of Min
neapolis was allowed to make a number of trips at the Bank’s expense for the
purpose of locating a new residence in connection with his transfer to the
Helena Branch. An employee of the Federal Government being permanently
transferred to a new duty station is permitted under Public Law 89-510, ap
proved July 21, 1966, to make only one round trip visit with his spouse to his
new duty station at the Government’s expense for this purpose.
Those travel expenditures which appear to relate to the transfer of the official
are presented below. Due to the limited descriptions given for each visit to
Helena, no exact number of trips or related cost was determined.
FEDERAL RESERVE BANK OF MINNEAPOLIS—HOWARD KN0US—TRANSFER TO BRANCH AT HELENA, MONT.

Description

Date

Main office expenses:
Air fare: Feb. 13-19—Helena to select home prior to transfer.............................. Mar. 14,1969
Air fare: Feb. 25—Helena to select home prior to transfer.............................................. do..............
Visit FRB Helena in connection with transfer............................................................. Feb. 21,1969
Trip to Helena, Mont., to select home for family on transfer................................. Mar. 12,1969
Do— ............................................................................................................................ ......... do..............
Visit Helena branch Mar. 17-19....... .............................................................................. Mar. 20,1969
Air fare: Feb. 28-Mar. 2—Family fate to visit Helena in connection with Apr. 8,1969
transfer.
Air fare: Mar. 17-19—Visit Helena in connection with transfer______ _______ ..........do..............
Visit Helena in connection with transfer Apr. 8-11...... ............................................ Apr. 14,1969
Air fare: Apr. 8-11—Trip to Helena branch..................................... .......................... May 9,1969
Helena branch expenses:
Apr. 15—
25—Travel between Minneapolis and Helena and living expenses in Apr. 30,1969
Helena.
Apr. 28-May 2—Travel between Helena and Minneapolis and living expenses
in Helena.............. ............................................................... ...................................... May 6,1969
May 2-6—Round trip air fare to Minneapolis from Helena..................................... May 1,1969
May 23-27—Round trip air fare Helena to Minneapolis........................................... May 20,1969
May 29-June 2—Round trip air fare Helena to Minneapolis................................... May 27,1969
May 18-29—Living expense in Helena and travel between Helena and Minne
apolis.................................................................................................................... -.......... June 3,1969
Do.............. ..................................... .............................................................................. ......... do..............
1-way air fare from Helena to Minneapolis—Preparatory to move....................... June 9,1969
Living expenses in Helena June 2-4 and travel between Helena and Minne
apolis to attend meeting June 5,1969...................................................................... June 12,1969
Expense over travel advance for moving family June 12-16................................... June 17,1969
Living expenses in Helena and expense of moving family June 9-16.................. ......... do..............
Shipment of household goods_....................................................................................... July 14,1969
Expense of disconnecting appliances............................................................................ July 22,1969
Reimbursement for expenses incurred with transfer from Minneapolis to
Helena..................... ......................................................................................................... Aug. 19,1969
Total.

Voucher
No.

Amount

25116
25116
24707
25054
25055
25209
25461

$156.00
162.00
129.70
199.40
92.05
51.65
355.50

25461
25555
25999

162.00
71.95
162.00

43226

227,27

43269
43233
43311
43335

89.82
152.00
158.00
158.00

43369
43370
43394

14.73
150.00
81.00

43402
43425
43426
43518
43549

50.71
34.26
500.00
1,713.50
23.15

43660

3,771.38
8,675.07

48
QUESTIONABLE EXPENDITURES OF THE FEDERAL RESERVE BANKS AND BRANCHES IN THE CATEGORY OF “ ALL
OTHER" EXPENSES FOR THE YEAR ENDING DECEMBER 31, 1969

Federal Reserve Bank and branches

Meetings,
conferences
and miscellaneous

Atlanta......................................................
Birmingham.....................................
Jacksonville.....................................
Nashville..........................................
New Orleans....................................
Boston........................................................
Chicago......................................................
Detroit...............................................
Cleveland..................................................
Cincinnati.........................................
Pittsburgh........................................
Dallas........................................................
El Paso..............................................
Houston............................................
San Antonio.....................................
Kansas City..............................................
Denver..............................................
Oklahoma City.................................
Omaha___.........................................
Minneapolis................................. ............
Helena...............................................
New York..................................................
Buffalo..............................................
Philadelphia.............................................
Richmond...............................................
Baltimore..........................................
Charlotte..........................................
San Francisco...........................................
Los Angeles......................................
Portland............................................
Salt Lake City..................................
Seattle...................... .....................
St. Louis....................................................
Little Rock........................................
Louisville..........................................
Memphis...........................................

$3,690
528
854
291
322
6,291
4,978
547
8,229
1,110
909
1,928
1,873
329
739
6,711
3,575
1,770
1,606
10,682
2,451
3,915
2,644
5,659
8,474
1,137
1,420
3,374
2,617
685
304
280
8,133
1,002
1,931
2,926

Total of all other questionable
expenditures...........................

103,914

ALL OTHER

Memberand contributions
$9,436
1,732
1,610
1,058
1,500
10,530
15,501
2,342
5,146
858
1,412
8,378
495
649
685
3,193
1,352
335
824
12,481
350
21,893
2,012
7,867
9,235
1,681
1,389
7,346
544
865
390
1,429
8,471
1,598
958
913
146,456

ship dues
Employee
relations
Research

$5,263
1,795
3,185
1,100
3,217
15,419
17,239
6,356
10,293
6,600
6,048
6,463
1,000
1,979
1,935
13,052
4,457
3,888
1,357
8,948
1,644
23,849
8,723
16,284
7,870
1,123
2,155
7,542
6,595
2,692
2,654
3,053
9,586
1,266
2,507
2,467
219,604

0
0
0
0
0
21,000
12,029
0
8,640
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
41,669

Bank
relations
Total
$258
442
160
0
1,174
8,091
3,637
310
8,700
3,062
413
6,205
127
2,746
1,268
766
0
0
4
4,942
2
19,893
248
3,113
4,164
1,210
111
1,602
200
39
95
68
2,403
552
541
0
76,546

$18,647
4,497
5,809
2,447
6,213
61,331
53,384
9,555
41,008
11,630
8,782
22,974
3,495
5,703
4,627
23,722
9,384
5,993
3,791
37,053
4,447
69,550
13,627
32,923
29,743
5,151
5,075
19,864
9,956
4,281
3,443
4,830
28,593
4,418
5,937
6,306
588,189

a l l o t h e r — continued
Branches—Continued
Head offices:
$219, 067
Boston_______________
Birmingham --------------$22,483
New York____________ 1, 022, 855
Jacksonville _________
23,142
Philadelphia_________
179,669
Nashville____________
12, 442
New Orleans_________
21, 969
Cleveland____________
187,487
Richmond ___________
117, 550
D etroit__ ___________105,554
Atlanta______________
129, 549
Little Rock___________
14,103
Chicago _____________
783, 550
Louisville____________
16,978
St. Louis_________ ____
159, 902
Memphis------------- ------16, 546
189,042
Helena ______________
9,384
Minneapolis__________
Kansas City________ __
209,320
D en ver______________
37,274
D allas______ ________
277,194
Oklahoma City________
17,463
San Francisco------------93,445
25,011
Omaha ______________
El Paso______________
21,802
T o ta l___ __________ 3, 568,630
H ouston_____________
29,883
San Antonio__________
42,079
45,135
Branches:
Los Angeles_______ _—
B u ffalo______________
30,714
Portland_____________
11,998
Cincinnati ___________
168,920
Salt Lake City________
8, 829
Pittsburgh___________
56,011
Seattle ______________
16,351
36,537
Baltimore______ ______
T ota l______________
809,514
Charlotte____________
18,906

49
all

other—

c o n tin u e d

t r a v e l in g

expen ses

—continued

District offices:
District offices:
Culpeper ____________ __ $12,467
Culpeper ------------------$6,960
Boston ______________ __194,864
219,067
B o s to n ____ __________
New York____________ __541,863
New York___ ________ 1,053,569
Philadelphia_________ __ 129,579
Philadelphia_________
179,669
Cleveland --------------------- 227,656
Cleveland____________
412,418
Richmond ____ _______ __243, 801
Richmond____________
179,953
A tla n ta _ - _________ __ 377,361
_
Atlanta _____________
209,585
Chicago —
_ __373,065
_
Chicago______________
889,104
St. Louis_—__________ __ 233,400
207,529
St Louis_____________
Minneapolis _________ __240,732
Minneapolis__________
198,426
Kansas City_ ________ __213,986
_
Kansas City—_____ ;_
_
289,068
D allas_______________ __ 228,823
370,958
D allas_______________
San Francisco________
175,758
San Francisco------------- --- 330,512
System total_______ 4,385,104
TRAVELING EXPENSES

System total________ 3,335,642
em ployee

r e c o g n it io n

Head offices:
Head offices:
Boston ______________
Boston ______________ __ 194,864
New York_____________
New York____________ __525,118
Philadelphia__________
Philadelphia_________ __129, 579
Cleveland_____________
Cleveland ___________ __ 202,402
Richmond ____________
Richmond --------------------- 173,362
A tlanta___ - __________
Atlanta -------------------- --- 245,633
Chicago — ---------- ------Chicago ------------------------ 332,305
St. Louis______________
St. Louis_____________ __181,644
Minneapolis___________
Minneapolis ------------------ 207,535
Kansas City__ ___________161, 879
Kansas City___________
D allas________________
D allas--------------------------- 168,958
San Francisco_________
San Francisco________ __255, 737
T ota l---------------------- 2, 779,016

T ota l_______ ________

Branches:
Branches:
B u ffalo______________ ___ 16,745
B u ffalo_______________
Cincinnati___________ ___ 15,184
Cincinnati____________
Pittsburgh____________
Pittsburgh___________ ___ 10,070
Baltimore ___________ ___ 23,301
Baltimore _____ _______
Charlotte____________ ___ 34,671
C harlotte_____________
Birmingham-------------- -----26,273
Birmingham __________
Jacksonville_ ________
_
Jacksonville _________ ___ 30,610
N ashville____________ ___ 27,597
N ashville_____________
New Orleans_________ ___ 47,248
New Orleans__________
D etroit______________ ___ 40,760
D e tro it_______________
Little Rock___________ ___ 15,387
Little Rock____________
Louisville ___________ ___ 17,843
Louisville —__________
Memphis ____________ ___ 18, 526
Memphis _____________
Helena ---------------------- -----33,197
Helena _______________
D en ver______________ ___ 20, 716
D en ver____ - __________
Oklahoma City_______ ___ 16,601
Oklahoma City________
Omaha ---------------------- -----14,790
Omaha —-------------------El Paso______________ ___ 22, 705
El Paso_______________
H ouston_____________ ___ 20,598
H ouston____ _________
San Antonio__________ ___ 16,562
San Antonio___________
Los Angeles__________ ___ 26,305
Los Angeles-__________
Portland ____________ ___ 15, 852
Portland
___________
Salt Lake City_______ ___ 15,568
Salt Lake City________
Seattle ______________ ___ 17,050
Seattle ________________ _
T o ta l----------------------

544,159

3, 418
5,955
5,650
2,215
2,711
2,382
5, 013
4,668
1,840
4,297
2, 076
1,331
41, 556
370
1,498
891
619
1,649
831
1,431
515
1,395
630
697
853
1,307
188
1,295
831
1,304
74
229
369
577
277
240
403

T o ta l_______________
Culpeper______________

18,260
6

System total_________

59,822

50
FEDERAL RESERVE CLUB

SOCIAL

AND

RECREATIONAL

a c t i v i t i e s — continued
Head offices:
Boston _______________ $12,000 Branches:
$7,270
B uffalo______________
New York______________________
Cincinnati___________
Philadelphia-----------------------------Pittsburgh___________
8,329
Cleveland_____________
Baltimore ___________
300
Richmond _____________________
Charlotte_____ _______
259
Atlanta______ - ________
106
Birmingham_________
538
Chicago -----------------------------------Jacksonville _________
1,781
St. Louis----- ----------------------------579
Nashville____________
Minneapolis-----------------4,400
New Orleans_________
1,503
Kansas City-----------------75
5,740
D etroit______________
D allas________________
4,394
Little R o c k __________
568
San Francisco--------------344
Louisville ___________
1,472
Memphis ------------------1,307
T ota l_______________
29,648
Helena ______________
50
D en ver---------------------2,080
Branches:
Oklahoma C ity_______
2,748
B u ffalo_______________
1,110
O m aha___ ___________
53
Cincinnati____________
5,367
El Paso________________________
Pittsburgh------------------5,417
H ouston_______________________
Baltimore______________________
San Antonio____________________
Charlotte________________ ______
Los Angeles__________
4, 798
Birmingham__________
441
Portland ____________
1,390
Jacksonville____________________
Salt Lake C ity _______
1,498
N ashville_____________
6
Seattle ______________
1,517
239
New Orleans___________
D etroit_____ - _________________
Total _____________
35,451
Little Rock_____________________
Culpeper ____________
360
Louisville______________________
Memphis______________________
98,090
System to ta l_______
H elen a ___ — ------------1,468
D en ver___________ ____________
Oklahoma City---------------------------ATHLETIC ACTIVITIES
O m ah a------------------------------------El Paso_______________
997 Head offices:
H ouston______________
1, 751
Boston_________________________
San Antonio___ ________
1,500
New Y o r k ___________
2
Los Angeles____________
391
4,635
Philadelphia_________
Portland______________
38
Cleveland______________________
118
R ich m on d ___________
369
Salt Lake C ity.._______
A tlanta________________________
Seattle _______________
199
Chicago - _______________________
St. Louis-------------------925
T o ta l___ ____________
19,042
Minneapolis____________________
Culpeper —-----------------------------. --Kansas C it y _________
1,485
D allas_______________
10
System total________ 48,690
San Francisco_______
1,550

SOCIAL AND RECREATIONAL ACTIVITIES

Total _____________

8,976

Head offices:
Branches:
Boston ________________________
B u ffalo________________________
New Y o r k _____ ______
17,269
Cincinnati__ • _________________
,
_
Philadelphia_________
6,844
Pittsburgh_____________________
Cleveland______________________
Baltimore _________ ___
339
Richmond ___________
4,324
Charlotte____________
300
Atlanta _____________
2,891
Birmingham___________________
Chicago --------------------15,903
Jacksonville___ _______________
St L o u is ____________
3,990
N ashville______________________
Minneapolis __________
2, 708
New Orleans__________
80
Kansas C ity _________
3,766
D etroit________________________
D allas_______ — ! ___
_
62
Little Rock_____________________
San Francisco_______
4,522
Louisville ___________
152
Memphis ____________
156
Total -------------------62,279
Helena ________________________

51
a t h l e t ic a c t iv it ie s

—continued

a t h l e t ic a c t iv it ie s

—continued

Branches—Continued
Branches—Continued
Denver ______________
$1,081
Salt Lake City----------Oklahoma C ity _______
352
Seattle ______________
934
Omaha ________________________
El Paso________________________
Total _____________
6,103
H ouston______________________ _
Culpeper_______________________
San Antonio____________________
Los Angles____ _______
894
System total________
15,079
Portland--------------------987
Dues and contributions to banking organizations by Federal Reserve System
banks and branches
Dues and contributions:
American Bankers Association_______________________________ $27,460.64
American Bankers Association, State, city, and regional banking
associations_____________________________________________ 45,559.31
Total Dues and contributions: all banking operations_____________ 101,470.35
RICHMOND

Virginia Bankers Association____________________________________
West Virginia Bankers Association______________________________
Group 2 Virginia Bankers Association-----------------------------------------Robert Morris Associates-----------------------------------------------------------Group III Virginia Bankers Association_________________________
Bank Administration Institute__________________________________
American Bankers Association---------------------------------------------------North Carolina Bankers Association____________________________
American Institute of Banking___________________________________
Total:
American Bankers Association_______________________________
American Bankers Association and State and city___________
All -----------------------------------------------------------------------------------Total, Richmond and branches:
American Bankers Association---------------------------------------------ABA and State and city bank associations___________________
All ------------------------------------------------------------------------------------

750. 00
500.00
25.00
455.00
50. 00
420.00
2,200.00
100.00
100.00
2,200.00
3,625. 00
4,600. 00
2,229. 00
4, 725.00
6,954.50

BALTIMORE

Maryland Bankers Association.
$483. 00
American Institute of Banking.
595. 00
West Virginia Bankers Association.
75.00
Bank Personnel Association----------5.00
Robert Morris Associates.
20.00
Bank Administration Institute-------172. 50
Association of Agricultural Bankers.
5.00
Total:
American Bankers Association_________________________________________
ABA and State and city bank associations------------------------------563.00
All _______________________________________________________
1,355. 50
BOSTON (NO BRANCHES)

Robert Morris Associates.
Vermont Bankers Associations.
Massachusetts Bankers Association----------American Institute of Banking__________________________________
Bank Administration Institute-------- ------------------------------------------Connecticut Bankers Association------------------------------------------------Rhode Island Bankers Association-----------------------------------------------Maine Bankers Associations------------------------------------------------------New Hampshire Bankers Association-------------- . --------------------------American Bankers Association---------------------------------------- ----------Total:
American Bankers Association-------- ------------------------------------ABA and State and City Bank Associations---------------------------All _______________________________________________________

$500.00
150.00
1 000.00
2,495.00
420. 00
750. 00
5.00
200.00
200.00
2,200. 00

2,200.00
4,505.00
7,920.00

Dues and contributions to bemki/ng organizations by Federal Reserve System
banks and branches—Continued
NEW YORK

American Institute of Banking__________________________________
Robert Morris Associates-*_____________________________________
New Jersey Bankers Association________________________________
New York State Bankers Association___________________________
Bank Administration Institute---------------------------------------------------Connecticut Bankers Association________________________________
Bank Credit Associates_________________________________________
American Bankers Association_________________________________
National Association of Bank Women___________________________
New York total:
All Bank organization related dues--------------------------------------American Bankers Association______________________________
ABA and State and city bank associations___________________
Grand total, New York and Buffalo branch:
All bank organization related dues--------------------------------------American Bankers Association______________________________
ABA and State and city bank associations___________________

$4,271. 25
35. 00
1,440.00
3,300. 00
520. 00
375.00
18.00
2,200. 000
25.00
12,184.25
2,200. 00
7,315.00
13,479.25
2,235.00
7,475.00

BUFFALO

1,065. 70
American Institute of Banking---------------------------------------------------Robert Morris Associates-----------------------------------------------------------30.00
Bank Administration Institute---------------------------------------------------40. 00
Group I, New York State Bankers Association___________________
125.00
American Bankers Association__________ _______________________
35.00
Total:
1,295.00
All Bank organization related dues_________________________
160.00
ABA and State and city bank associations___________________
American Bankers Association---------------------- :----------------------35.00
CLEVELAND

Bank Public Relations & Marketing Association----------------- ------------100. 00
Cleveland Clearing House---------------------------------------------------------599.00
Robert Morris Associates_______________________________________
400.00
American Institute of Banking__________________________________
472. 94
Robert Morris Associates------------------------------------------------------------ ------- 6.00
Group 9 Ohio Bankers Association______________________________
150.00
Bank Administration Institute__________________________________
420.00
2,200.00
American Bankers Association__________________________________
American Institute of Banking---------------------------------------------------511.27
Cleveland total:
American Bankers Association---------------------------------------------2,200.00
All _______________________________________________________
4,266.20
ABA and State and city bank associations------------------------------ 2,350.00
Grand total, Cleveland and branches:
American Bankers Association--------------------------------------------2,275.00
All __________________________ - ___________________________
6,484.00
ABA and State and city bank associations------------------------------4,072.00
CINCIN NATI

Kentucky Bankers Association-----------------------------------------------------American Institute of Banking---------------------------------------------------Ohio Bankers Association______________________________________
Robert Morris Associates----------------------------------------------------------Bank Administration Institute---------------------------------------------------American Bankers Association---------------------------------------------------ABA and State and city bank associations-----------------------------------American Bankers Association total_____________________________
T o ta l___________________________________________________

500.00
384.80
2.00
30.00
30.00
35.00
537.00
35.00
981.80

Dues and contributions to banking organizations bp Federal Reserve
banks and branches—Continued

Bystem

PITTSBURGH

West Virginia Bankers Association—----------------------- *
----------- ------The Bankers Club of Pittsburgh--------------------------------------------------Group 8 Pittsburgh Bankers Association----------------------------- ---------Pittsburgh Bankers Association-------------------- ---------------------------Robert Morris Associates-----------------------------------------------------------Bank Administration Institute---------------------------------------------------American Bankers Association--------------------------------------------------ABA and State and city bank associations------------------------------- —
American Bankers Association total--------------------------------------------A l l ___________________________________________________________

$75.00
175.00
200. 00
700.00
10* 00
41.00
35.00
1,185.00
35.00
1,236.00

CHICAGO

American Institute of Banking---------------------------------------------------Wisconsin Bankers Association--------------------------------------------------Illinois Bankers Association---------------------- ------------------------------Robert Morris Associates---------------------------------------------------- -------Michigan Bankers Association---------------------------------------------------Indiana Bankers Association-----------------------------------------------------Bank Administration Institute--------------------------------------------------Association of Chicago Bank Women------------------------------------------Chicago District Illinois Bankers Association--------------------------------American Bankers Association------------------------------- -------------------Iowa Bankers Association---------------------------------------------------------Chicago total:
All bank organization related dues------------------------------------American Bankers Association--------------------------------------------ABA and State and city bank associations---------------------------Grand total, Chicago and branches:
All bank organization related dues---------------------------------------American Bankers Association--------------------------------------------ABA and State and city bank associations-------- ! ------------------

587.00
60.00
100.00
466.00
100.00
100.00
425.00
20.00
430.00
2,200.00
100.00
4,588.00
2,200.00
3,090.00
6,008.00
2,229.00
3,179.00

DETROIT

Group 10 Michigan Bankers Association---------------------------------------Bank Administration Institute--------------------------------------------------Robert Morris Associates-----------------------------------------------------------American Bankers Association---------------------------------------------------American Institute of Banking--------------------------------------------------Total
All _______________________________________________________
American Bankers Association______________________________
ABA and State and city bank associations___________________

60.00
45. 00
74. 00
29. 00
1,212.66
1,420.66
29. 00
89. 00

DALLAS

American Bankers Association---------------------------------------------------Arizona Bankers Association------------------- -----------------------------------Texas Bankers Association______________ _______________________
Louisiana Bankers Association__________________________________
New Mexico Bankers Association_______________________________
American Institute of Banking_________________________________
Oklahoma Bankers Association_________________________________
Robert Morris Associates_______________________________________
Bank Administration Institute_________________________________
Texas Robert Morris Associates--------------------------------------------------Bank association dues_________________________________________
American Bankers Association dues_____________________________
ABA and State and city bank associations_______________________
Grand total, Dallas and branches:
ABA and State and city bank associations______________ _____
American Bankers Association_____________________________
A l l _______________________________________________________

1, 566. 64
50. 00
1,000. 00
100. 00
50. 00
2,497. 00
100. 00
415. 00
610. 00
15.00
6,403. 64
1, 566. 64
1,300. 00
2,005. 00
1,671. 64
7, 875. 36

Dues and contributions to banking organizations by Federal Reserve Bystem
banks and branches—Continued
EL PASO

Arizona Bankers Association___________________________________
Texas Bankers Association_____________________________________
Robert Morris Associates_______________________________________
New Mexico Bankers Association_______________________________
Bank Administration Institute__________________________________
American Bankers Association__________________________________
ABA and State and city bank associations_______________________
American Bankers Association_________________________________
Total ------------------------------------------------------------------- -----------

$50.00
200. 00
15. 00
50. 00
37. 50
35. 00
335. 00
35. 00
422.50

HOUSTON

Texas Bankers Association______________________________________
Robert Morris Associates________________________________________
Bank Administration Institute_______ _____________________________
American Institute of Banking__________________________________
American Bankers Association___________________________________
ABA and State and city bank associations________________________
American Bankers Association___________________________________
T o t a l__________________________ __________________________

100.00
20.00
30. 00
348. 87
35.00
135.00
35.00
533.87

SAN ANTONIO

Texas Bankers Association______________________________________
Robert Morris Associates________________________________________
Bank Administration Institute___________________________________
American Institute of Banking___________________________________
American Bankers Association______________ _____________________
ABA and State and city bank associations_________________________
American Bankers Association___________________________________
T o t a l____________________________________________________

200.00
20. 00
37. 50
222. 85
35. 00
235.00
35. 00
515.35

Membership dues to bank-oriented organizations
PHILADELPHIA

New Jersey Bankers Association_________________________________
Robert Morris Associates------------------------------------------------------------Bank Administration Institute___________________________________
Pennsylvania Bankers Association________________________________
Robert Morris Associates------------------------------------------------------------Bank Method Discussion Group__________________________________
American Bankers Association___________________________________
American Bankers Association total______________________________
ABA and State and city bank associations--------------------------------------T o ta l____________________________________________________

560. 00
460. 00
435. 00
1,400. 00
30. 00
35. 00
2,200. 00
2, 200. 00
4,100. 00
5,120.00

MINNEAPOLIS

Independent Bankers Association________________________________
North Dakota Bankers Association---------------------------------------------South Dakota Bankers Association---------------------------------------------Wisconsin Bankers Association__________________________________
American Institute of Banking__________________________________
Bank Administration Institute__________________________________
Michigan Bankers Association___________________________________
Minnesota Bankers Association__________________________________
Robert Morris Associates-----------------------------------------------------------American Bankers Association---------------------------------------------------Minneapolis total:
All bank organization related dues---------------------------------------American Bankers Association______________________________
ABA and State and city bank associations------------------------------Grand total, Minneapolis and Helena branch:
All bank organization related dues-----------------------------------------American Bankers Association______________________________
ABA and State and city bank associations____________________

75. 00
75. 00
50. 00
60.00
5, 876. 40
550. 00
100.00
750. 00
430.00
2,200. 00
10,166.40
2,200, 00
3,310.00
10,915.48
2,235. 00
3,585. 31

Membership dues to bank-oriented organizations—Continued
HELENA
Montana Bankers Association__________________________________
Bank Administration Institute__________________________________
American Bankers Association__________ ______ ; _______________
_
Total:
All bank organization related dues___________________________
American Bankers Association______ ________________________
ABA and State and city bank associations— ------------------ --------SAN FRAN
CISCO
Arizona Bankers Association____________________________________
Nevada Bankers Association____________________________________
Washington Bankers Association________________________________
Bank Administration Institute__________________________________
Robert Morris Associates______________________________ _________
Oregon Bankers Association____________________________________
Utah Bankers Association---------------------------------- ----------------------American Institute of Banking__________________________________
California Bankers Association__________________________________
Group 6 California Bankers Association_____________________ - ___
American Bankers Association__ ,_______________________________
San Francisco Total:
All bank organization related dues-----------------------------------------American Bankers Association____ __________________________
ABA and State and city bank associations___________________
Grand total, San Francisco and branches:
All bank organization related dues___ - _____________________
American Bankers Association_______________ __________ _—
ABA and State and city bank associations____ - ____ _________
SALT LAKE
Nevada Bankers Association----------------------- -------------------------------American Institute of Banking__________________________________
Bank Administration Institute----------------------------- ----------------------Robert Morris Associates____ ____________________ ._____________
Utah Bankers Association______________________ ________________
Total:
All bank organization related dues__________________________
American Bankers Association________ _______________________
ABA and State and city bank association--------------------------------SEATTLE
Alaska Bankers Association_____________________________________
Robert Morris Associates_______________________________________
Bank Administartion Institute__________________________________
Washington Bankers Association_______________________________
American Institute of Banking__________________________________
American Institute of Banking__________________________________ _
Total:
All bank organization related dues__________________________
American Bankers Association_____________________________
ABA and State and city bank associations___________________
LO AN ELES
S
O
Arizona Bankers Association____________________________________
Nevada Bankers Association____________ ________________________
Robert Morris Associates__________________________ ____________
Bank Administration Institute________________________ __________
California Bankers Association Group 5________________ '_________
Los Angeles Bank Credit Men’s Association______________________
Total:
All bank organization related dues___________________________
American Bankers Association____________ ._________________
ABA and State and city bank associations—______ : _________
_
1Included in San Francisco total.
* Refurbishment of AIB classrooms.
8Included in San Francisc* total.
* Included in San Francisco total.

$240.81
473. 77
35.00
749. 08
35. 00
275.31
50. 00
25.00
20.00
435.00
415.00
50.00
25. 00
2,384. 83
500.00
235.00
2,340.00
6,479. 83
2,340.00
3,245.00
9,162.17
2,340. 00
3,828.00
25.00
70,00
40. 00
30. 00
25.00
190. 00
(x)
50. 00
50. 00
30. 00
35. 00
50. 00
2265.48
913. 86
1,344.34
(3)
100. 00
50. 00
25. 00
30. 00
60. 00
250. 00
8.00
423. 00
(*)
333. 00

56
Membership dues to bank-orimted organizations—Continued
PO
RTLAN
D
American Institute of Banking_________________________________
Robert Morris Associates________________________________________
Oregon Bankers Association______________________________________
Bank Administration Institute___________________________________
Total:
All bank organization related dues____________________________
American Bankers Association________________________________
ABA and State and city bank associates------------------------------------

$555.35
30.00
100. 00
40.00
725. 00
(5)
100.00

ATLANTA
90.00
National Association of Bank Women________________________ ____
Robert Morris Associates--------------------------------------------------------------492.50
Georgia Bankers Association_____________________________________
500. 00
400.00
Bank Administration Institute____________________________________
American Bankers Association___________________________________
2,340. 00
3,301.20
American Institute of Banking___________________________________
Atlanta total:
American Bankers Association------------------------------------------------ 2,340. 00
ABA and State and city bank associations--------------------------------- 2,930.00
All ________________________________________________________ 7,123.70.
Grand total, Atlanta and branches:
American Bankers Association------------------------------------------------ 2,340. 00
ABA and State and city bank associations--------------------------------- 4,190.00
All ____________________________________________________ ____ 10,335.99
JACKSONVILLE
Florida Bankers Association------------------------------------------------------Bank Administration Institute----- ----------------------------------------------American Institute of Banking--------------------------------------------------Total ____________________________________________________

915.00
55.00
327.29
1,297.29

NASHVILLE
Tennessee Bankers Association__________________________________
American Institute of Banking----------------- ;---------------------------------Bank Administration Institute---------------------------------------------------T o t a l___________________________________________________

220.00
500. 00
40.00
760.00

NEW O
RLEAN
S
Louisiana Bankers Association---------------------------------------------------Bank Administration Institute---------------------------------------------------American Institute of Banking__________________________________
National Association of Bank Women------------------------------------------T o t a l___________________________________________________

100. 00
100.00
930.00
25.00
1,155.00

KANSAS CITY
Missouri Bankers Association-----------------------------------------------------Colorado Bankers Association---------------------------------------------------Bankers Consumer Credit Association-----------------------------------------Wyoming Bankers Association___________________________________
Oklahoma Bankers Association--------------------------------------------------Robert Morris Associates-----------------------------------------------------------Bank Administration Institute---------------------------------------------------New Mexico Bankers Association------------------------------------------------Nebraska Bankers Association---------------------------------------------------American Bankers Association---------------------------------------------------Kansas Bankers Association------------------------------------------------------American Institute of Banking__________________________________
Total:
American Bankers Association______________________________
American Bankers Association and State and city____________
All -----------------------------------------------------------------------------------Grand total, Kansas City and branches:
All _______________________________________________________
American Bankers Association---------------------------------------------ABA and State and city bank associations____________________
5Included in San Francisco total.

500.00
50.00
10.00
50.00
100.00
400.00
415.00
50.00
25.00
2,200.00
375. 00
3,193.00
2,200.00
3,350. 00
7,368.00
9,182.13
2,305.00
3,835.00

57
Membership dues to bank-oriented organizations—Continued
DENVER

American Institute of Banking__________________________________
Robert Morris Associates---------------------------------------------- -------------New Mexico Bankers Association------------------------------------------------Bank Administration Institute____________________ _____________
American Bankers Association_______________________________ _
Total:
A l l ______________________________________________ ________
American Bankers Association-------------- ------------------------------ABA and State and city bank associations,-----------------------------

$832.13
15. 00
50.00
45.00
35. 00
977.13
35.00
85. 00

OKLAHOM A CITY

Robert Morris Associates________________________________________
Oklahoma Bankers Association___ - ____________________________
Bank Administration Institute___________ i______________________
American Bankers Association__________________________________
Total:
A l l _______________________________________________________
American Bankers Association______________________________
ABA and State and city bank associations------------------------------

15.00
100. 00
40. 00
35. 00
190.00
35. 00
135. 00

OM AH A

Nebraska Bankers Association___________________________________
Wyoming Bankers Association-------------- ------------------------------------Robert Morris Associates_______________________________________
Bank Administration Institute__________ : ______________________
_
American Institute of Banking---------------------------------------------------American Bankers Association__________________________________
Total:
A l l _______________________________________________________
American Bankers Association______________________________
ABA and State and city bank associations------------------------------

180.00
50. 00
15.00
40.00
327.00
35. 00
647.00
35. 00
205.00

CHARLOTTE

South Carolina Bankers Association_____________________________
Association of Agricultural Bankers.____________________________
Group 9 North Carolina Bankers Association_____________________
Robert Morris Associates_____________ _________________________
Bank Administration Institute__________________________________
American Bankers Association__________________________________
American Institute of Banking__________________________________
Total:
American Bankers Association______________________________
ABA and State and city bank associations___________________
All _______________________________________ - ______________

625. 00
5. 00
12.00
30.00
48.00
29. 00
250.00
29.00
671. 00
999. 00

ST. LOUIS

Missouri Bankers Association-----------------------------------------------------Mortgage Bankers Association_________________________________
Illinois Bankers Association_____________________________________
Bank Administration Institute_________________________________
Indiana Bankers Association____________________________________
National Association of Bank Women-----------------------------------------American Bankers Association__________________________________
American Institute of Banking-------------------------------------------------ABA and State and city bank associations-----------------------------------American Bankers Association total_____________________________
All ___________________________________________________________
Grand total, St. Louis and branches:
ABA State and city bank associations------------------------------------American Bankers Association---------------------------------------------All _______________________________________________________

500. 00
40. 00
100.00
410.00
100.00
25.00
2,200. 00
2,005.50
2,940.00
2,200.00
5,380. 50
4,335.00
2,305.00
8,033.95

Membership dues to bank-oriented organizations—Continued
M E M PH IS

National Association of Bank Women____________________________
Tennessee Bankers Association_________________________________
Tennessee Bankers Association__________________________________
Robert Morris Associates_______________________________________
Bank Administration Institute__________________________________
Robert Morris Associates_______________________________________
American Institute of Banking__________________________________
American Bankers Association__________________________________
ABA and State and city bank associations________________________
American Bankers Association total_____________________________
A l l _______________________________________ ; __________________
_

$25.00
87.50
87.50
15.00
55.00
7.50
292.95
35.00
210.00
35.00
605. 45

LOUISVILLE

National Association of Bank Women____________________________
Bankers Transit Club___________________________________________
Robert Morris Associates_______________________________________
Bank Administration Institute___________________________________
Indiana Bankers Association____________________________________
Robert Morris Associates_______________________________________
Kentucky Bankers Association__________________________________
American Bankers Association__________________________________
ABA and State and city bank associations________________________
American Bankers Association total_____________________________
All ___________________________________________________________

28. 00
60. 00
15.00
80. 00
100. 00
7. 50
500.00
35.00
635. 00
35.00
825.00

LITTLE BOCK

American Institute of Banking__________________________________
Junior Banker Section of Arkansas Bankers Association__________
Robert Morris Associates_______________________________________
Arkansas Bankers Association__________________________________
Bank Administration Institute__________________________________
Robert Morris Associates_______________________________________
American Bankers Association__________________________________
ABA and State and city bank associations_______________________
American Bankers Association total_____________________________
All ___________________________________________________________

Statem ent

S u b m it t e d

fo b

the

R ecord

575.00
10. 00
15. 00
500. 00
45. 00
7. 50
35. 00
550.00
35. 00
1,222.50

D r. B u r n s

The Board has reviewed carefully the statement issued by Chairman Patman
on expenditures by the Federal Reserve Banks. The review found that the great
bulk of the payments listed were proper and justified in enabling the Reserve
Banks to perform their functions. This review found no illegal payments. It did
find, however, that a few expenditures were not appropriate and should not have
been made.
The Board has utilized this review period to consider in detail the existing
procedures governing expenditures. It has discussed these questions with the
president of each Federal Reserve Bank. We have sought to make certain that
all types of expenditures are carefully re-examined to insure that they can be
justified on a cost-benefit basis, as contributing to efficient performance of the
Reserve Banks’ functions. The operations of the Reserve Banks change constantly
over time. We strive to make certain that each expenditure is justified in rela
tionship to the existing situation and that no expenditure occurs simply because
it may have occurred in the past. As an example, the Reserve Banks recently
discontinued payment of dues to the American Bankers Association.
When we examined the items listed by Chairman Patman, we found that they
could be separated into three groups:
1. Those items which exist because the Reserve Banks have been established
as regional-community institutions with personnel policies adapted to each lo
cality in which they operate. This means, for one thing, that the Reserve Banks

59
do not follow the somewhat higher scales o f salaries established fo r the Civil
Service in Washington.

2. Items for which specific statutory authorization is required in the case of
agencies that use appropriated funds, but which are authorized under general
provisions of the Federal Reserve Act for Reserve Banks, who expenses are met
from earnings, not appropriations.
3. A handful of items, involving small amounts, where expenditures were ap
proved on the basis of special circumstances even though they were of a type
not ordinarily authorized. Expenditures for baby sitting services and parking
fines fall in this category. Such expenditures are not appropriate for Reserve
Banks under any circumstances and they will not be repeated.
Chairman Patman has listed as “questionable” all expenditures made by the
Reserve Banks in 1969 for “employee relations,” a category that includes contri
butions to employees* associations, flowers to employees in the hospital, or annual
parties for employees, although practices vary among the Reserve Banks. The
expenditures in this category amounted to $220,000, over one-third of the total
expenditures listed. They averaged about ten dollars per employee.
Modest expenditures of this kind have helped the Reserve Banks in attracting
and keeping good personnel. The same is true of employee benefits in the sphere
of pensions, survivor benefits, and the thrift plan. As noted in an answer to a
separate question, the legal justification of the thrift plan is clear; the justifica
tion based on efficiency and productivity is equally clear. We have found the
one per cent of salary spent on the thrift plan to be a most efficient fringe benefit.
My impression is that even a considerably larger increase in salaries would not
serve to raise the morale and efficiency of the staff as much.
The personnel policies of the Reserve Banks have followed the pattern of the
Federal Reserve Act. The actual salary scales and benefits are not established
on a uniform base throughout the country, since a scale adequate in Washington
could be overbountiful in cities of 150 or 200 thousand and inadequate in New
York. Rather, they try to be competitive with the private firms in each specific
locality, although at times they lag behind that competition. Experience has
shown that this policy saves money, reduces employment turnover, and attracts
competent personnel.
The Federal Reserve System thus benefits from a regional structure—one
which, incidentally, seems to be the trend of the future. Salaries and benefits
are structured to each local situation; this means not only a considerable sav
ing of money, but also that total satisfaction is greater.
Also included on Chairman Patman’s list are expenditures for research, meet
ings, conferences, and contributions to educational endeavors such as the American
Institute of Banking. These are expenditures of a type specifically authorized and
conducted by many government agencies.
In the early sixties, several Members of Congress were, I believe, properly
critical of the failure of the Federal Reserve to develop fully its monetary views,
theories, and policies. Monetary policy was pictured as excessively mysterious
even to informed individuals. I believe that money carefully spent by the Reserve
Banks to improve the System’s actions in these spheres is well spent. We must
constantly upgrade our knowledge of monetary matters. In some cases the most
efficient way to gain this knowledge is to make research grants to outside ex
perts and to subscribe to various publications and services.
At the same time, we must keep the public informed about our actions and the
reasons for them. We want monetary policy not only to be based on an accurate
understanding of what is happening in the economy, but to be made clear to a
wide audience. Conferences and meetings serve this purpose.
With respect to the American Institute of Banking it should be clear that this
is an educational institution and the payments noted are directly related to edu
cational services. The Reserve Banks strive to open to all their personnel possi
bilities for growth in service and promotions to higher positions. Many of their
most promising people come from families too poor to afford higher education.
Through in-service training provided by organizations such as the AIB, they are
able eventually to make outstanding contributions to themselves, the Reserve
Banks, and our nation. This upward mobility should be encouraged. National
policy is placing more stress than ever in this sphere. Lines of promotion must
be kept open to those without formal education, to minority groups, to women.
The specialized courses given by the AIB are a major aid in this endeavor.

60
As I made clear at the start, we recognize that the Federal Reserve System
must always be able to justify any expenditure in terms of its benefits in rela
tion to its costs. We feel certain that, with the exception of some obvious cases
o f human error, the Federal Reserve System does this. I can assure the Con
gress that, along with the presidents of the Reserve Banks and the other mem
bers of the Board, I am personally taking all necessary steps to insure th&t we
get our money’s worth on every dollar spent.

T h e F e d e r a l R eserv e P o r tfo lio o f G ov ern m en t B on d s

(Statement submitted by Chairman Patman)
As you know, questions concerning the Federal Reserve’s portfolio o f Gov
ernment bonds have been of concern to me over the years. With all due respect
Dr. Burns, I do not believe that your answer to my questions on this subject
last spring dealt fully with the substantive issues involved. Currently there are
$65 billion of Government securities in that portfolio and your predecessor,
William McChesney Martin, and many others have agreed with me that it is
an excessive amount and that the amount has no real bearing on the conduct of
monetary policy. When in 1965 I proposed that a majority of the bonds held by
the Federal Reserve be cancelled, leaving only the amount of negotiable bonds
required for the conduct of open market operations, Mr. Martin admitted that
cancellation would be “just a bookkeeping entry.” But, like you, he argued that
the current arrangement which permits the System to hold the bonds and collect
some $4 billion annually in interest on bonds which have already been paid for
by the Treasury does no harm.
In fact, you argue, Dr. Burns, that it does good because it gives the Federal
Reserve System an independent income and thus protects its independence.
But you do not deny that there really is no reason to keep those bonds in the
Federal Open Market Committee portfolio other than that they serve as a source
of income for the System and thus allow it to by-pass the appropriational process.
It does not, in my opinion, alleviate the situation to point out that the Federal
Reserve pays the unused portion of the interest over to the Treasury. Before
making such payments, the System uses as much as in its judgment it needs for
expenses without the benefit to the public of the appropriational process, Con
gressional sanction or executive department approval. This procedure, as we
all know, is normally required of the other agencies of the Government.
Perhaps it would be useful to review the question of Federal Reserve inde
pendence and Federal Reserve income. When the System was first established in
1913, the Federal Reserve banks were capitalized with funds paid in by the
member banks, bank reserves were actually paid in by the member banks, and
the Federal Reserve banks got their income from rediscounting commercial
paper for the member banks. Purchases in the open market were not a primary
source of income until 1922, when an open market committee was formed and
open market operations came to play a significant part in the conduct of mone
tary policy.
This development could not have been-foreseen in 1913 because there was
hardly any market for bankers’ acceptances, there was only a limited amount of
municipal warrants, and there were no more than $2 billion of Government bonds
outstanding, most of which were securing the national bank currency. World
War I and the rise of the Federal debt to $25 billion made the development
of open market operations possible, created a new source of bank reserves and
shifted the source of income to cover the expenses of the System and build its
surplus accounts.
The main argument for Federal Reserve independence in 1913 had been that
the System was to be created and sustained with funds supplied by the member
banks. During the 1920’s this had ceased to be the case. The original $1.5 billion
of reserves paid in by the member banks in 1914 has remained approximately
the same to date. The immense increase in the volume of reserves since 1914
has been created by the Government by virtue of the fact that it has given mone
tary status to the obligations—Federal Reserve notes and deposits—of the Fed
eral Reserve banks.
It is also relevant to point out that commercial banks can operate as thev do
now only because the Federal Government permits their demand deposits to
circulate as money. By permitting demand deposits of commercial banks to be

61
used as money and by the Government itself accepting demand deposits in pay
ment, commercial banks have conferred upon, them a status shared by no other
financial institution in this country.
I know that you nor any other member of the Federal Reserve Board would
argue that the Federal Reserve System ought to remain independent because
of its obligations to the private banking system. A lot of people still think that,
but it is no longer respectable to say it. Still, it is possible that some member
of the Federal Reserve Board might come before this Committee a.nd suggest—
as Mr. Martin did in 1959—that since all those bonds in the Federal Open
Market Committee portfolio serve no purpose, and since they constitute the
basis on which member bank reserves are calculated, why not just give some of
them to the member banks to hold as reserves? That’s what I’m afraid of, be
cause I think it would be a catastrophe. The interest on those bonds would then
go to the commercial banks. The loss to the Treasury would be staggering. It
would represent the biggest subsidy to private enterprise that the American tax
payers have ever been called on to pay. I’d like to prevent it, if I can, and I
think we should prevent it by law with the active help and encouragement of the
Federal Reserve Board. We can’t depend on the present views and good inten
tions of men currently in office.
I am asking you to cooperate on this issue, Dr. Burns, and I’d like to point
out another reason why you should. Since it was Mr. Martin’s policy for so Ions
not to buy long-term Government issues, a substantial amount of the Federal
Open Market Committee portfolio is in short-term maturities averaging about five
years. This means that a substantial volume of refunding operations are in
volved and that the manager of the open market account must necessarily be in
the market any number of times for reasons which have nothing to do with the
objectives of monetary policy. Payments to dealers in these operations represent
a loss to the Treasury of some of the funds which the Federal Reserve System
repays the Treasury from its earnings on Government securities and thus a
needless subsidy to the dealers from the American taxpayer.
One reason that the portfolio continues to grow and that refunding operations
are necessary is to prevent a double payment for the bonds by the United States
Government. When the bonds are bought by the Federal Open Market Committee,
they are paid for once, as I have so often noted, either with Federal Reserve
notes which are issued by the United States Treasury and for which the Federal
Government is responsible, or with Federal Reserve credit which is given mone
tary status by the Government and for which the Government is responsible. If
the bonds in the Federal Reserve portfolio were not exchanged for other Govern
ment securities when they mature—if they were paid—then the Government
would be in the absurd position of paying for its own securities twice.
These refunding operations cannot fail to be destabilizing. On the other hand,
it would be highly destabilizing to attempt to solve the problem by lengthening
the overall maturity of the portfolio. Cancellation of the amount not needed in
the conduct of monetary policy is a far more rational approach. Then shifts in
the maturity of a smaller portfolio would contribute to achieving the objectives
of monetary policy rather than represent attempts to minimize the effects of
needless and destabilizing refunding operations.
Meanwhile, there is another and more significant way in which the present
T
monetary system involves Government subsidies. In 1917, at the beginning of
World War I, the Federal Reserve Board suggested an arrangement whereby
member banks could purchase Government bonds by merely creating a deposit for
the Government. The banks were permitted to borrow from the Federal Reserve
banks using the bond as collateral. They paid a lower rate on the loan than they
got from the Government on the bond, and could use the money, without paying
interest to the Government to lend to customers at an additional profit until
such time as the Government deposit was finally withdrawn. This arrangement
has been in effect ever since. It is one of the ways new money is created, the
other being the Federal Reserve's purchases of securities.
There is some misconception to the effect that the Federal deficit is largely
borrowed from private citizens out of their savings. Actually a major portion
of the interest paid for Government borrowing goes to commercial banks be
cause they, unlike private citizens, are permitted to create the money to pay
for Government obligations. I pointed out to Marriner Eccles that this consti
tuted a subsidy and he agreed. However, he argued that if this were not the
case, banks would have to increase their charges to customers. I happen tc

62
think that an increase in bank charges would be preferable to a subsidy provided
by the taxpayer. Banks might be induced to lower their charges to compete for
customers.
All these issues are related, Dr. Burns. They all stem from the fact that our
collateral requirements require the Government to assume a needless double
liability—to be liable both for Federal Reserve notes and for the Government
obligations which back those notes. They all result in the fact that the taxpayer
pays an exorbitant amount of interest on the money that he uses and that the
issuance of money is inextricably tied to the marketing of the public debt.
These are serious matters and should be considered as such. It is unfortunate
that our monetary system is tied up also with the question of Federal Reserve
income. It has tended, I think, to make the System somewhat myopic and to
discourage rational examination of the monetary process. This is one reason
why I advocate Congressional appropriations to cover the expenses of the Sys
tem. The System might well take a more disinterested view of the problem if
it were not for the fact that this particular process guarantees so much income
that System expenses seem miniscule as a percentage of the whole.

(Whereupon, at 12:15 p.m., the committee adjourned subject to the
call of the Chair.)

Full text of Congressional Oversight of the Federal Reserve System : Hearing Before the Subcommittee on Domestic Finance of the Committee on Banking and Currency, House of Representatives, Ninety-Second Congress, First Session, September 27, 1971

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