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May 9,1975

T
in®
Federal Reserve Chairman Arthur
Burns appeared before the Senate
Banking Committee last week, to
announce that monetary policy is
now designed to promote an
increase of 5 to 7Vi percent in the
M t money supply (currency plus
bank demand deposits) over the
next twelve months. This historic
revelation of monetary plans was
the highlight of a report called for
under the terms of HConRes 133, a
joint resolution expressing in­
creased Congressional interest in
the Fed's role in fighting the
recession.
Congress in this resolution indicat­
ed its desire that the Federal
Reserve attempt to reduce long­
term interest rates and thereby
expedite recovery from the reces­
sion. At first glance H C R 133 seems
uninteresting, because these goals
are already Federal Reserve goals.
However, the subject is impor­
tant because it represents an ex­
plicit Congressional attempt to
become directly involved in Feder­
al Reserve decision-making.
The Federal Reserve has been a
creature of Congress since its
inception. It was created by act of
Congress in 1913. Furthermore,
Federal Reserve officials frequently
testify before Congressional com­
mittees on policy matters. How­
ever, until now Congress has done
little to advise the Federal Re­
serve on the conduct of current
monetary policy, in part because
of the clear intent of the Federal
Reserve Act to insulate monetary
policy decisions from political
1

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pressures. To insure this protection
the members of the Board of
Governors have overlapping 14year terms of office. In addition,
the budget of the Federal Reserve is
not part of the Federal Budget.
Clearly, the Federal Reserve thus
far has been remarkably free of
direct governmental influences.
Argument for guidance
Not all informed observers believe
that the Federal Reserve should be
free of Congressional guidance.
One basic argument, put forward by
the Congressmen favoring the
new resolution, is that guidance is
necessary to ensure a properly
expansionary policy in the current
recession. This argument gained
strong support last winter when it
appeared thatthe money supply was
not growing fast enough to curb
the recession. The
measure of
the money supply grew at only a
2-percent annual rate between July
and February, although the
growth rate then speeded up to 14
percent in March, helping to offset
somewhat the force of the
Congressional criticism.
Some economists have backed
the Congressional attack, on the
ground that low money-supply
growth is an indicator of the
(wrongful) thrust of current mone­
tary policy. However, there is a
question whether M-, is the right
measure of policy. Federal Re­
serve Chairman Arthur Burns has
suggested that other monetary
aggregates provide a better meas­
ure of the degree of ease in policy,
and for further evidence he has
(continued on page 2)

Opinions expressed in this newsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.

pointed to the rapid decline in U.S.
interest rates, to levels generally
below those prevailing elsewhere.
A second argument for Congres­
sional action to intervene in policy
centers around the view that
monetary policy should be regu­
lated by legislative rules, not by
the decisions of men. The argu­
ment is stated most succinctly in
Milton Friedman's 1962 article,
"Should There be an Independent
Monetary Authority?" Friedman
argues that with an independent
monetary authority, it is difficult
to determine who is accountable
for government policy. He sug­
gests that everyone accepts credit
when things go right, but that no
one accepts blame when they go
wrong. Secondly, because of the
dependence on human deci­
sions, policy is capricious because
policy makers change. Friedman
adds that these pitfalls could be
avoided through the use of a
legislative rule, such as one
ordaining a constant rate of in­
crease in M-|.

Nature of the resolution
The resolution can be examined in
the light of these two arguments for
a Congressional role in monetary
policy. The crucial part of the
resolution reads as follows:
"It is the sense of Congress that
the Board of Governors of the
Federal Reserve System and the
Federal Open Market Commit­
tee
(1) pursue policies in the first
half of 1975 so as to encour­
age lower long term interest
rates and expansion in the
monetary and credit aggre­
gates appropriate to facilitat­
ing prompt economic re­
covery; and
(2) maintain long run growth in
the monetary and credit
aggregates commensurate
with the economy's long run
potential to increase pro­
duction, so as to promote
effectively the goals of maxi­
mum employment, stable
prices, and moderate long
term interest rates."
Chairman Burns pointed out in a
recent Congressional appearance
that the Federal Reserve is already
required to pursue the goal of
"maximum employment, produc­
tion and purchasing power" as
stipulated by the Employment Act
of 1946. Thus, the two Congres­
sional recommendations seem to
follow from this earlier mandate.
However, the resolution goes on
to add "The Board of Governors
shall consult (our emphasis) with

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Congress at semiannual hearings
before the Committee on Banking,
Housing and Urban Affairs of the
Senate and the Committee on
Banking, Currency and Housing of
the House of Representatives
about the Board of Governors' and
the Federal Open Market Com­
mittee's objectives and plans with
respect to the ranges of growth or
diminution of money and credit
aggregates in the upcoming twelve
months." This clause increases
the potential impact of the resolu­
tion considerably, since it gives
Congress scope to indicate ap­
proval or disapproval prior to the
implementation of monetary
policy. In this way the House and
Senate Banking Committees may
communicate their views of nation­
al needs to Federal Reserve offi­
cials, as they did at last week's
Senate hearings.
Effects of the resolution
Does the resolution satisfy the
two criteria for Congressional influ­
ence on monetary policy? First,
the resolution might have little
direct impact upon the course of
monetary policy through the first
half of 1975, apart from the influ­
ence already wielded by the
Federal Reserve.
The resolution would encourage
reduction of long-term interest
rates and (hence) rapid re­
covery, but this intent generally
parallels the Fed's desire to lower
long-term rates and facilitate
prompt economic recovery while
still maintaining stable prices.
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Although there is controversy
among economists about how
this may be done, the resolution
does not direct itself to this
matter. So the first argument for
Congressional intervention in
policy is not actually faced by the
resolution.
Second, the resolution appears to
frustrate Friedman's desire to
make monetary policy a matter
of rules rather than human deci­
sions. The current decision­
making process involving the
Federal Open Market Committee
would be replaced by a new
process involving both that com­
mittee and two Congressional
committees as well. This method
seems to capture the substance of
legislative involvement in the
monetary-policy process, but it
misses the spirit of policy through
legislative rules. From the critics'
standpoint, the responsibility for
the course of monetary policy
would not be made clearer, nor
would the caprice of personality
be removed.
Kurt Dew

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BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Amount
Outstanding
4/23/75

Change
from
4/16/75

Loans (gross, adjusted) and investments*
Loans (gross, adjusted)—total
Security loans
Commercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
O ther securities
Deposits (less cash items)—total*
Demand deposits (adjusted)
U.S. Governm ent deposits
Time deposits—total*
States and political subdivisions
Savings deposits
O ther time deposits!
Large negotiable CD's

84,801
64,913
1,174
24,057
19,562
9,799
7,519
12,369
83,873
23,040
271
59,441
7,402
19,408
29,091
15,814

_ 1,030
646
344
182
26
5
184
200
861
771
256
+ 306
+ 297
+
17
29
51
-

Weekly Averages
of Daily Figures

W eek ended
4/23/75

Selected Assets and Liabilities
Large Commercial Banks

Member Bank Reserve Position
Excess Reserves
Borrowings
Net free (+) / Net borrowed (-)
Federal Funds—Seven Large Banks
Interbank Federal fund transactions
Net purchases (+) / Net sales (-)
Transactions of U.S. security dealers
Net loans (+) / Net borrowings (-)

-

35
38
3

Change from
year ago
Dollar
Percent
+
+
+
+
+
+
+
-

+
+
-

+
-

+
+
+

W eek ended
4/16/75

+

+ 2.87
+ 2.14
+ 12.24
+ 4.58
+ 3.45
+ 6.21
+ 30.18
5.63
+ 6.97
+ 4.45
59.37
+ 9.00
0.51
+ 8.06
+ 10.16
+ 16.84

2,363
1,358
128
1,053
652
573
1,743
738
5,466
982
396
4,907
38
1,447
2,682
2,279

Comparable
year-ago period

23
1
22

-

45
379
334

+ 2,079

+ 2,583

+ 2,152

+

+ 1,303

+

659

125

*lncludes items not shown separately. ^Individuals, partnerships and corporations.

Information on this and other publications can be obtained by calling or writing the Public
Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco
94120. Phone (415) 397-1137.
Digitized for FRA SER
http://fraser.stlouisfed.org/

Federal Reserve Bank of St. Louis