View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

THE FEDERAL RESERVE 0
TABILITY ACT OF 1993

Un

~'

'

HEARING
BEFORE THE

COMMITTEE ON BANKING,
,u
H
v
Kt

v

FINANCE AND
**

URBAN AFFAIRS

HOUSE'OF REPRESENTATIVES
H
>

ONE HUNDRED THIRD CONGRESS
;%
FIRST SESSION ‘

OCTOBER 7, 1993
Printed for the use of the Committee on Banking, Finance and Urban Affairs

Serial No. 103-74

U.S. GOVERNMENT PRINTING OFFICE
72-851 CC

WASHINGTON : 1994

For sale by the U .S. Government Printing O ffice
Superintendent o f Documents, Congressional Sales O ffice, Washington, D C 20402




IS B N

0-1 6 -0 4 3 9 5 6 -6

HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
HENRY B. GONZALEZ, Texas, Chairman
STEPHEN L. NEAL, North Carolina
JAMES A. LEACH, Iowa
JOHN J. LaFALCE, New York
BILL MCCOLLUM, Florida
BRUCE F. VENTO, Minnesota
MARGE ROUKEMA, New Jersey
CHARLES E. SCHUMER, New York
DOUG BEREUTER, Nebraska
BARNEY FRANK, Massachusetts
THOMAS J. RIDGE, Pennsylvania
PAUL E. KANJORSKI, Pennsylvania
TOBY ROTH, Wisconsin
JOSEPH P. KENNEDY II, Massachusetts
ALFRED A. (AL) McCANDLESS, California
FLOYD H. FLAKE, New York
RICHARD H. BAKER, Louisiana
KWEISI MFUME, Maryland
JIM NUSSLE, Iowa
MAXINE WATERS, California
CRAIG THOMAS, Wyoming
LARRY LaROCCO, Idaho
SAM JOHNSON, Texas
BILL ORTON, Utah
DEBORAH PRYCE, Ohio
JIM BACCHUS, Florida
JOHN UNDER, Georgia
HERBERT C. KLEIN, New Jersey
JOE KNOLLENBERG, Michigan
CAROLYN B. MALONEY, New York
RICK LAZIO, New York
PETER DEUTSCH, Florida
ROD GRAMS, Minnesota
LUIS V. GUTIERREZ, Illinois
SPENCER BACHUS, Alabama
BOBBY L. RUSH, Illinois
MIKE HUFFINGTON, California
LUCILLE ROYBAL-ALLARD, California
MICHAEL CASTLE, Delaware
THOMAS M. BARRETT, Wisconsin
PETER KING, New York
ELIZABETH FURSE, Oregon
NYDIA M. VELAZQUEZ, New York
BERNARD SANDERS, Vermont
ALBERT R WYNN, Maryland
CLEO FIELDS, Louisiana
MELVIN WATT, North Carolina
MAURICE HINCHEY, New York
CALVIN M. DOOLEY, California
RON KLINK, Pennsylvania
ERIC FINGERHUT, Ohio




(II)

CONTENTS
Page

Hearing held on:
October 7, 1993 ..........................................................................................
Appendix:
October 7, 1993 ..........................................................................................

1
65

WITNESSES
Thursday, October 7, 1993

v

Mfume, Hon. Kweisi, a Representative in Congress from the State of Mary­
land ................................................................................................................
Dorgan, Hon. Byron L., a Senator in Congress from the State of North
Dakota...........................................................................................................
Crews, Grasty, It, former Counsel for the Committee on Banking, Finance
and Urban Affairs; former General Counsel for the Drug Policy Office
in the Executive Office of the President under Presidents Nixon and Ford;
former Member of the Legislative Counsel; U.S. House of Representatives;
former Advisor, Legal Advisor, Legal Division, Board of Governors of the
Federal Reserve System ................................................................................
Greider, William, Author, “Secrets of the Temple” ...........................................
Reuss, Henry, former Chairman, Committee on Banking, Finance and Urban
Affairs............................................................................................................
Sarbanes, Hon. Paul S., a Senator in Congress from the State of Maryland....

14
12

45
35
17
7

APPENDIX

r \

Prepared statements:
Gonzalez, Hon. Henry B..............................................................................
Leach, Hon. James A...................................................................................
Dorgan, Hon. Byron L.................................................................................
Gutierrez, Hon. Luis V................................................................................
Hamilton, Hon. Lee H.................................................................................
Mfume, Hon. Kweisi...................................................................................
Roybal-Allard, Hon. Lucille ......................................................................
Crews, Grasty, II .......................................................................................
Greider, William ........................................................................ ...............
Reuss, Henry..............................................................................................
Sarbanes, Hon. Paul S.................................................................................
Additional Material Submitted

for the

Record

Mfume, Hon. Kweisi, Federal Reserve Board charts.........................................
The Congressional Black Caucus, Position Paper, October 7, 1993 ..................
Master Brief, John Melcher v. Federal Open Market Committee in the U.S.
Court of Appeals for DC Circuit Court..........................................................
Federal Reserve Press Release, September 29, 1993 re appointment of Chair­
men and Deputy Chairmen of the 12 Federal Reserve Banks for 1994 ........




(HI)

66
72
94
77
79
98
74
150
139
134
88

108
159
161
238




THE FEDERAL RESERVE ACCOUNTABILITY
ACT OF 1993
THURSDAY, OCTOBER 7, 1993
H ouse of Representatives,
Committee on Banking , Finance and U rban Affairs,

Washington, DC.
The committee met, pursuant to notice, at 9:41 a.m., in room
2128, Rayburn House Office Building, Hon. Henry B. Gonzalez
[chairman of the committee] presiding.
Present: Chairman Gonzalez, Representatives Neal, Schumer,
Frank, Kennedy, Flake, Mfume, Klein, Gutierrez, Rush, Barrett,
Wynn, Watt, Dooley, Klink, Leach, McCollum, McCandless, Thom­
as, Johnson, Pryce, Knollenberg, and Huffington.
The Chairman . The committee will please come to order.
Today, after 80 years following the passage of the Federal Re­
serve Act, the committee begins the first of a series of hearings on
the Federal Reserve System reform. This is not a new subject. The
Congress reorganized the Federal Reserve in 1935 at the time the
fundamental 1935 Banking Act was approved. And, of course, the
Banking Committee has had important hearings on this subject in
the 1930’s and in 1964.
The 1935 reorganization occurred after the Federal Reserve mis­
erably failed to carry out its initial function of being the “lender of
last resort” to failing banks. In the early 1930’s, as one-third of the
commercial banks failed or were merged because of bank runs that
drained their cash reserves, the Federal Reserve stood idly by and
let the money supply collapse by one-third. The Federal Reserve’s
inaction turned a serious recession into our country’s worst depres­
sion.
Power to manage the money supply was put in the hands of the
Federal Open Market Committee, composed of about 12 members.
Five of the FOMC members are private citizens serving as presi­
dents of the Federal Reserve Banks. The presidents are selected by
their individual bank’s board of directors, two-thirds of whom are
voted into office by the member commercial banks in each district.
Testifying before the House Banking Committee on April 13,
1938, Federal Reserve Chairman Marriner S. Eccles was probably
the last truly uncompromised Federal Reserve Chairman, who
served as Chairman for over 13 years until 1948, the most critical
in our Nation’s histoiy, and he repeated his strong convictions.
He thought that the 1935 reorganization of the Federal Reserve
was seriously incomplete as long as private citizen Federal Reserve
Bank presidents voted on the Nation’s money supply.




(l)

He said, and I am going to quote—and I would suggest to my col­
leagues that they borrow from the Library of Congress Marriner
Eccles’ memoirs and see, if just given the dates change and the
penalty, if it is not the same thing all over again. And I am going
to quote now: “As I have said before, I am in favor of placing Open
Market Committee’s functions with the Board of Governors, which
is a public body appointed by the President and confirmed by the
Senate, to represent the public interest. I do not wish to imply that
the bank representatives are less conscientious than the Board
members or that they do not act in good faith with the best of in­
tentions. But since they are presidents of the Reserve banks and
are elected by the directors of those banks, two-thirds of whom are,
in turn, elected by the member banks, their viewpoint necessarily
is likely to reflect that of member banks. I feel that a committee
which is entrusted with the monetary policies as important as
those given to this committee should consist entirely of persons
representing the public interest,” end of quote.
To illustrate Federal Reserve Chairman Eccles’ point, that the
Federal Reserve Bank presidents represented banking interests
and not the public interest one has only to look at the pool of bank­
ers and their friends from which nearly all Federal Reserve Bank
presidents have been drawn. There has been only one woman and
no minority bank presidents in the Federal Reserve System’s 80year histoiy. I want to take the “bankers and their friends” sign
off the door to this exclusive club and open it up to all competent
Americans.
Since Federal Reserve Chairman Marriner Eccles spoke, the
FOMC, including these private citizen Federal Reserve presidents,
greatly expanded their authority.
For example, in 1962, the FOMC gave itself authority to inter­
vene in foreign exchange markets to manage the foreign value of
the U.S. dollar. At FOMC meetings in 1962, the Vice Chairman of
the Federal Reserve, J.L. Robertson, criticized the Federal Re­
serve’s actions, saying that its main advantage was to give the Fed­
eral Reserve an unlimited pocketbook.” Limited funds had been
appropriated by Congress for intervention purposes and placed
with the Exchange Stabilization Fund in the Treasury. FOMC min­
utes of February 13, 1962, page 62, reflect this transaction. Today
that so-called SWAP fund amounts to $30.1 billion.
And in the Treasury-Federal Reserve accord of March 3, 1951,
the U.S. Treasury relinquished its authority to manage the money
supply. The Federal Reserve was given complete and sole authority
to manage the Nation’s money supply.
Believe it or not, these 12 people on the FOMC Committee,
whom we entrust with these functions crucial to the economic
health of our Nation, decided in 1976 to stop taking minutes of
their meetings so the American public would not know what they
are discussing.
I want to tnank a substantial number of my colleagues that have
become cosponsors of my bill and also members of this committee.
My legislation, H.R. 28, will require the 12 Federal Reserve presi­
dents who serve, 5 at a time, on the FOMC, to be nominated by
the President and confirmed by the Senate. This will enable the




3

public to leam just who it is that is making decisions on monetary
policy.
H.R. 28 would also require a record to be kept of FOMC meetings
that would be made public within 60 days and release of informa­
tion on policy changes within 1 week.
H.R. 28 also allows the GAO to investigate the FED’s massive
interventions in foreign currency markets and daily open market
auctions to see if these operations are efficient and secure from
leaks of inside information.
The power of the Federal Reserve to operate without public scru­
tiny and accountability is evidenced in its expenditures. Because it
is not subject to the same scrutiny as those agencies that use budg­
eted funds, the Federal Reserve makes its own rules, some of which
involve expenditures that would be illegal for budgeted funds.
For example: One, the Federal Reserve spent $346,000 buying in­
dividual memberships in private organizations for many of its em­
ployees in 1990, expenditures that are illegal for budgeted funds.
Federal Reserve Chairman Alan Greenspan refused to comply with
my request for a listing of memberships for 1992 and 1993. Chairpan Greenspan wrote to me on September 15, 1993, that since he
is changing the policy, quote, “a new survey would not be useful
and would not justify the cost of collecting the information,” end of
quote.
Two, the Federal Reserve tells me that although it employs a
large army of 730 professionals (more than 450 economists alone,
statisticians, research assistants) in its research departments in
1993—it still needs to spend nearly $100,000 a month to pay for
outside economists mostly drawn from academia.
Sixty-seven economists received 82 contracts from the Federal
Reserve from 1991 to mid-1993 for more than $10,000 each for a
total of $2.3 million. This expense does not cover total research
costs, which I would like Chairman Greenspan to reveal to us when
he comes before the committee next week on Wednesday, October
13.
It is interesting to speculate why the Federal Reserve keeps
these outside economic consultants on its payroll. Nobel Laureate
Economist Milton Friedman, commenting on these practices, has
said that the Federal Reserve is trying to buy ofF, quote, “its most
likely critics” and that few among the academic community are pre­
pared to criticize the Federal Reserve.
H.R. 28 would require an independent audit of the FED’s budget
so that in the future the Federal Reserve could not refuse the Con­
gress’ request for information about its spending habits. With the
new administration calling for a streamlined, efficient government,
it is essential that all government agencies indicate where the fat
is and what part of that could be cut.
The changes I am proposing to the Federal Reserve System are
quite modest. There is nothing to fear. I am not seeking to politi­
cize the central bank nor take away its independence. I am not
calling for policies that would cause inflation or deflation. My legis­
lation does not require the Federal Reserve to set any particular
monetary targets, nor is Congress required to micromanage the
central bank. Rather, I am only asking that the central bank be ac­
countable to the American public and abide by the Constitution of




4

the United States by requiring those who manage our money sup­
ply to present their credentials in Senate confirmation hearings.
I look forward to the testimony of our esteemed panel of wit­
nesses on their ideas for making our central bank more accountable
to the Nation it serves. We are nonored to begin this series of hear­
ings on Federal Reserve reform with the distinguished panel that
we have here before us this morning.
The fact is that I must report that Congressman Lee Hamilton
has been called to the White House and, for that reason, is not
here at this time.
[The prepared statements of Mr. Hamilton, Ms. Roybal-Allard,
and Mr. Gutierrez can be found in the appendix.]
The Chairman . A s you can see, we nave a distinguished array
of Members, including our colleagues from the Senate here this
morning. I want to thank each and every one of you in advance.
Also, I am very happy to see the very smiling face of our former
chairman of this committee, Henry Reuss. He was aboard when I
first came to the Congress 32 years ago and was, at that time,
chairman of the Subcommittee on International Finance. And I re­
member, as if it were today, his expertise in that area.
With that, I recognize Mr. Leach.
[The prepared statement of Mr. Gonzalez can be found in the ap­
pendix.]
Mr. Leach . Thank you, Mr. Chairman. I apologize; but on behalf
of the minority, at risk of presumption, I do nave a statement that
I would like to read quickly.
Few institutional issues are more fraught with real and per­
ceived problems than those relating to the structure and account­
ability of the Federal Reserve System.
In the context of today's hearings, it should be clear that what
is at stake is change, not necessarily reform, modest tinkering, not
radical reorganization.
Since its inception, the Fed, in effect, has become a quasi-fourth
branch of government with authority largely delegated to it by the
first branch—the legislature—on the assumption that there are as­
pects of monetary policy and financial services regulation that de­
mand independent, consistent, and professional attention that a
legislative branch of political generalists is not, by nature,
equipped to provide.
At this time, the Federal Reserve System is well led and well re­
spected; its leadership as well as sheer existence has provided an
anchor of financial stability in a time of economic uncertainty and
worldwide disequilibrium.
When we look at things that might have gone disastrously askew
with the economy over the last several decades, it is apparent that
there are a lot of dogs that did not bite and lot of bites that did
not prove contagious, in part because of Fed leadership.
One can make a powerful case that a system that is not broken
should not be fixed. On the other hand, one can also credibly sug­
gest that the best time to make modest adjustments in policy and
structural arrangements is when crises are not at hand. My sense
is that Congress should be chary about pushing radical change at
the Fed at any time but should be open to periodically considering
modest changes.




5

Basically, the Federal Reserve has two responsibilities: One is
monetary policy, the other is bank regulation, with attendant safe- a
ty net concerns for individual institutions and the economy at
large.
Regarding monetary policy, there is an unseemly dimension to
the fact that open market decisions affecting interest rates are
made in part by individuals who are neither cnosen by the execu­
tive nor confirmed by the legislature. But like all circumstances,
there is an implicit counterbalancing positive: Regional Federal Re­
serve Bank presidents represent the best of decentralized public
leadership. While our regional Fed Reserve Bank presidents are
public employees, because of their manner of selection, they provide
the Federal Government at a very high level a unique private/pub­
lic partnership which in political science terms may be awkward
but which through experience has generally proven to be both ethi­
cal and effective.
There are two principal approaches on the table affecting open
market decisions—one involves senatorial confirmation, and the
other involves giving more authority to current members of the
Federal Reserve Board in Washington by simply withdrawing the
right to vote—although not necessarily participation in meetings—
or regional Fed presidents.
Of these two approaches, my instinctive preference is for the sec­
ond. But I am not convinced of the need in the first place to estab­
lish a new institutional arrangement.
On the issue of transparency, the case for modest increase in
openness appears reasonable, but care must be taken not to ham­
string the Fed in its traditional decisionmaking which demands co­
ordination with and cooperation from foreign governments and
which has significant effects on various financial markets, of which
the taxpayer—through the U.S. Treasury and Fed—may be a par­
ticipant.
Regarding regulation, the Federal Reserve System has major re­
sponsibilities, particularly in supervising larger banks, foreign fi­
nancial institutions operating in the United States, and sopnisticated bank holding company operations.
There are a number of approaches to the reform of the regulatory
structure that are being considered in Congress and by the Execu­
tive today. My preference, as reflected in legislation I introduced
last March (H.R. 1227), is not to move in the direction of a single
regulator but instead to consolidate regulators and the regulation
of institutions.
In particular, I advocate merging the OCC and the OTS and
keeping the Fed responsible for regulating all of the Nation’s larger
banks (those with assets over $25 billion) and their holding compa­
nies.
In addition, I believe the Fed’s authority to regulate foreign fi­
nancial institutions in the United States should be retained.
In conclusion, I would like to stress two circumstances. All of us
have individual assessments of whether the Fed, at various points,
has conducted too tight or too loose monetary policy. At this time,
however, it is impressive how stable the American currency is espe­
cially given the spectacularly loose fiscal policy conducted by Con­
gress.




It is hard not to sympathize with the dilemma of Fed policy­
makers given the constraints that fiscal policy has provided them;
and, based on the record, it is impossible not to be skeptical about
any approaches which would enhance Congress’ role in monetaiy
policy.
If Congress’ record in fiscal polity is a guide, the danger is very
real that any effort by the first estate to recapture powers reserved
by the Constitution to it could lead to a butchering of monetary pol­
icy.
In all institutional circumstances—governmental and nongovern­
mental—there is an element of tradition that goes beyond the
drawing of lines of authority relationships on charts.
In this context, it deserves to be noted that the American Federal
Reserve System at this moment has developed an expertise of sig­
nal dimension respect, particularly in the financial markets and
overseas, far higher than any other institution of the U.S. Govern­
ment.
Hence, any change diminishing Fed responsibilities, even of mod­
est dimension, demands a compelling burden of proof not imme­
diately self-evident to this Member.
The countiy will do just fine if none of the approaches pro­
pounded by any of us this morning is adopted. On the other hand,
this fact is not sufficient to rationalize a “never change” legislative
mantra. This noncrisis environment may be the most propitious
time to undertake small improvements in the system to help en­
sure that, at a time of greater crisis in the future, the Fed is not
susceptible to challenges of either Democratic legitimacy or institu­
tional arrogance or stultification.
Mr. Chairman, with this philosophical framework, I welcome the
thoughts and concerns of our distinguished panel of witnesses.
The Chairman. Thank you very much, Mr. Leach.
The Chair is going to recognize the ranking majority Member
and chairman of the Subcommittee on Financial Institutions for a
brief statement.
And then I am asking unanimous consent that all members be
permitted to provide, in writing, any opening remarks they may
wish to enter into the record.
Mr. Neal.
Mr. Neal . Thank you, Mr. Chairman. I will be brief. But this is
a subject that interests me greatly, and I want to join you in wel­
coming our very distinguished panel this morning. And I really
mean that sincerely.
We have among us some of our very finest Congressmen and one
of the most distinguished Members who ever served here, former
Chairman Reuss.
This subject of monetaiy policy has interested me for a long time.
For almost 20 years I have been on the subcommittee of this com­
mittee which has the responsibility for overseeing Fed policy. My
friend, Chairman Reuss, helped me Chair that subcommittee the
first time in my first term here. There were some unusual cir­
cumstances that led to that opportunity, and it was one that I wel­
comed greatly because inflation was the issue at that time in 1975.
It was the economic issue. And I didn’t understand being it and the
chairman gave me an opportunity, in fact a responsibility, to dig




7

in and try to understand it as well as I could. And as I say, I have
followed it carefully for all of these years.
I started out as a very harsh critic of the Fed and I must say
a fairly uninformed one. And over the years, as I say, I have stud­
ied and I have come to think that there is one proper goal for Fed
monetary policy. There is one polity that if we will pursue it, the
Fed will pursue it, will help our economy greatly. The Fed can’t do
it all but will help us achieve every other financial objective, every
economic objective that we want for our country. It will help us
achieve maximum sustained economic growth, maximum sustain­
able employment, the lowest possible interest rates, the highest
level of savings, and, therefore, the highest levels of investment
and economic opportunity for our people.
And that one policy is price stability or zero inflation. The lowest
possible inflation, if we will sustain it, will lead to all of these other
policies.
And so it is against this standard that I am inclined to measure
any other suggested changes in Fed policy. And so the question I
ask as we pursue these hearings is: Will the policies that are sug­
gested by this legislation, by our very fine chairman and the other
cosponsors, help promote Fed independence and, therefore, its abil­
ity to take the long-term view and help us achieve and maintain
zero inflation? Or will the changes tend to politicize the Fed and
force it into more short-term policies, which again sound good for
the short term but which will inevitably lead to more inflation,
higher interest rates, low growth, and so on.
So it is with that perspective that I come to these hearings and
welcome them. I think it gives us a great opportunity to discuss a
very important subject for our country. And I thank the distin­
guished chairman for giving us this opportunity. And I thank my
friends who are here to help us explore these subjects today. Ana
I look forward to the hearings.
Mr. Chairman, I thank you for that opportunity to say a few
words.
The Chairman . Thank you very much.
Since we have Members that have come across from the rotunda,
and I am sure they have pressing business and may even have rollcalls, we will proceed and recognize the first witness, our distin­
guished Senator from Maryland, and friend and great legislator,
and thank him again for accepting the invitation, Senator Sar­
banes.
STATEMENT OF HON. PAUL S. SARBANES, A SENATOR IN
CONGRESS FROM THE STATE OF MARYLAND

Senator Sarbanes. Thank you very much, Mr. Chairman, mem­
bers of the committee, I appreciate this opportunity to testify on
the issue of changes in the structure of the Federal Reserve Sys­
tem.
In this country and, indeed, around the world in the public sector
and in the private sector, we are living in an era of institutional
reform. Everywhere you turn, people are trying to restructure their
institutions to make them more effective and more accountable.
Of course, the Congress created the Federal Reserve System 80
years ago, and in the 1930’s the Congress created a structure for




8

monetary policy, the Federal Open Market Committee; although
the FOMC plays a role in today's economy, that could not have
been imagined in 1935, it is—Congress has left its structure un­
changed.
Mr. Chairman, I am going to submit my full statement for the
record and try to move through it.
The Chairman . Certainly, without objection, the statements that
you have given to us in writing will be submitted for the record.
Senator Sarbanes. Let me make an observation. I listened very

carefully to the opening statements, and I want to commend you
for what I perceive to Be a careful set of hearings on the subject.
Any time that you try to examine the structure, the role of the
Federal Reserve, you immediately have all these screams that
there is an effort to impingje upon its preponderance of the evi­
dence. If that is the case, it is worth examining. There is an argu­
ment to be made for a certain degree of independence for the Fed­
eral Reserve in making its decisions.
On the other hand, it seems to me a careful analysis of the exist­
ing arrangements would lead one to conclude that certain changes
would, in fact, enhance Hie legitimacy of the Federal Reserve and,
in effect, give them greater credibility rather than less.
And, in that regard, I do think it is important to address this
issue at a time when it is not perceived that there is a pressing
crisis. Because if it is addressed at a time when, indeed, there is
a pressing crisis, the heat of that moment may lead to decisions
that subsequently people would say, well, that wasn’t carefully
thought through. So I commend you for holding these hearings.
Now I have taken a somewhat different approach to this question
of accountability than you have in your legislation, Mr. Chair­
man—I think the goal is essentially the same—which would be to
make those who make monetary policy decisions rest solely with
those who have been nominated by the President and confirmed by
the Senate.
In other words, to remove the anomaly that individuals selected
by private interests cast almost half the votes on the body that sets
the Nation’s monetary policy.
Now the approach in your legislation is to require them to be
nominated ana confirmed. The approach in the legislation that I
and some of my colleagues, Senator Dorgan and Riegle and Sasser,
have introduced in the Senate would be to take them off the Open
Market Committee so the presidents would still be picked the way
”
""
11 onsult with the Open Market Committee,
The votes on monetary policy would be cast by the seven mem­
bers of the Board of Governors of the Federal Reserve. A change,
incidentally which I might note, would enhance—enhance rather
than diminish—the power of the Board of Governors of the Federal
Reserve System. I iust want to make that observation.
I, obviously, don t need to go into the structure of decisionmaking
at the Federal Reserve before this committee, which is the next
part of my statement.
I would note that the 12 Federal Reserve Bank presidents are se­
lected for 5-year terms by the board of directors of each regional
bank. By law, the commercial banks in each region directly selects




9

six of the nine members on the regional bank board of directors,
three from amongst bankers and three from amongst nonbankers
in the region. But those choices are made by the commercial banks.
They pick the six of the nine directors. The other three members
are chosen by the Federal Reserve Board of Governors.
Neither the President nor Congress has any role in selecting the
presidents of the Federal Reserve Banks. Nonetheless, they partici­
pate in monetary policy decisions through their membership on the
Federal Reserve Open Market Committee where they cast 5 of the
12 votes on a rotating basis.
An article in the Wall Street Journal a couple of years ago in Auist 1991, entitled “Fed Banks’ Presidents Hold Private Positions
gut Major Public Role.” A question of accountability. And it went
on to describe one Federal Reserve Bank president, regional presi­
dent in these terms: “He straddles an odd but awesome combina­
tion of public and private power. He is paid like a private banker,
$175,600 a year. His shareholders are private banks. His board
members are private citizens. His budget is free of congressional
scrutiny. He works in a spacious corner office atop a striking sky­
scraper with a fine view. Once every 6 weeks he abandoned that’s
conservatives and goes to Washington where he assumes the role
of powerful government official.”
And the article goes on to point out that there he sets interest
rate policies that profoundly affect the Nation’s economy.
Now while most government agencies, including the Fed make
extensive use of private citizens as advisors, in no other agency is
actual decisionmaking power vested in individuals who are for­
merly accountable to private parties instead of to the public.
Now, we have set out some of the legislative history of the Fed­
eral Reserve Act going back, of course, to Woodrow Wilson’s tenure
as President.
I just want to pull out a couple of quotes of Wilsons. At the time
when they were setting up the Board of Governors of the Federal
Reserve, there was an argument about instead of the government
appointing all of them that the banks should choose some of the
members of Federal Reserve Board.
Wilson rejected that. He took the view that the government
should control every member on the Board on the ground that it
was the function of the government to supervise the system and no
individual, however respectable, should be on the Board represent­
ing private interests.
In the end, that was what was done, as we know. In fact, Wilson
met with a group of bankers who were concerned about this; and,
apparently, he asked them which of these gentlemen thinks that
railroads should select members of the Interstate Commerce Com­
mission? Apparently, there was a dead silence in the room to that
question, and I think Wilson felt he had made his point.
What was not done at the time was the whole problem of the
Open Market Committee was left unsettled in that legislation.
That became more of a problem in the 1920’s. In fact, Secretary of
Treasury Mellon pressed hard to try to change the arrangements.
In the 1930’s, we gave the FOMC statutoiy recognition, the Con­
gress did, when the President appointed Marriner Eccles to head
the Federal Reserve. Eccles proposed to give the Board increased




10

control over monetaiy policy by making it, rather than the Open
Market Committee, responsible for open market operations.
As we know, in the end, there was a compromise and, in a sense,
a political compromise. And you have Hie seven members of the
Board of Governors and a rotating group of five of the Federal Re­
serve Banks.
Now, when we started looking at this, we said, what do they do
in other countries? I mean, obviously people are going to react, and
they are—there is a kind of mystique that is built up around the
Federal Reserve, a limited amount I think is probably useful; but
too much of which I think carries perhaps the seeds of its own de­
mise.
So we commissioned a study in the Joint Economic Committee to
look at the making of monetaiy policy in other countries. This ar­
rangement of giving formal power in the conduct of monetary policy
to individuals selected by private industry doesn’t find a parallel
among major central banks abroad.
The study on central bank government relations in the major in­
dustrialized countries found that central bank officials who make
monetary policy decisions in those countries are duly appointed
public officials who are accountable to the public and not to private
interests.
Where central bank officials that are not directly appointed by
the government have a role, as in Italy, it is usually advisory. Ulti­
mate policy control still rests with government appointees. Even in
Germany, which some believe to have the most independence of all
central banks, the 11 bank presidents who participate in monetaiy
policy decisions are all appointed by the upper House of the Ger­
man Parliament.
So in every instance, there is some source of public legitimacy for
these public officials making important economic decisions.
In other words, they can trace their presence as a decisionmaker
at table to some—they do it in different ways—but to some form
of public legitimacy and, therefore, accountability.
Now, this is not the case in our system with respect to the five
regional bank presidents who sit on the Federal Open Market Com­
mittee. And you could correct that in either one of the two ways
that have been put here before the committee.
The legislation I have introduced would dissolve the Open Mar­
ket Committee and give its responsibilities to the Board of Gov­
ernors. It would create an advisory council made up of the presi­
dents of the 12 Federal Reserve Banks so they would have an im­
portant consultative role, but monetary policy decisions would be
the responsibility of accountable public officials.
Now, Mr. Chairman, let me just turn to a few of the other items
veiry quickly that are contained in this legislation which you are
oing to address in these hearings. I wont touch on all of them,
ut there are three of them in particular that I want to touch on.
First, I think we need to look for better ways to coordinate mone­
tary and fiscal policy. At a minimum, this requires better commu­
nication of the Fed with the administration and the Congress.
There are some proposals for regularized consultation within the
executive branch with the Fed. It seems that those are worthy of
consideration.

f




11

I have also, on other occasions, indicated support for the view
that the 4-year term for the Chairman of the Federal Reserve
should begin 6 months to 1 year after a Presidential election, per­
haps at the end of that first year so that a new President has an
opportunity to select a Chairman fairly early into his term.
The current system gives a 4-year term; and it may have been
thought at the time it was established that you would get this kind
of spacing; but, of course, it is a 4-year term from the time the per­
son is named as a Chairman. It is not a 4-year fixed term on a
fixed schedule that clicked in after a reasonable period of time with
the election of a new President.
So in the current circumstances, the selection of the Chairman
of the Federal Reserve will not come up until March 1996, in other
words, 10 months at the end of this President’s term. And, of
course, that appointment, if made for 4 years would then give the
next President a Chairman for almost the full 4-year term. If this
particular President is reelected, that is fine; if you get a new one,
he is confronted with the same problem.
Second, communications between the Fed and the Congress also
has problems. The Humphrey-Hawkins Act of 19 years ago is based
on the assumption that twice a year the Fed would inform Con­
gress of the goals for monetary aggregates that would have clear
policy implications.
For several years now, the Fed has been playing down its mone­
tary targets. In July, the Fed reported to us that it has no con­
fidence in the meaning of monetary aggregates for policy. When
this issue was raised with Nobel Prize winning economist Jim
Tobin at a hearing earlier this year, he made the follows state­
ment:
" . . . it is more important to have the Federal Reserve
come to the Congress and express its goals for macroeconomic performance on things that really matter, and
that is growth of \}NP, what happens to employment and
unemployment, investment and foreign balance and infla­
tion and talk about their appreciation of the macroeconomic circumstances in which they are making policy
and the general directions in which they hope to move the
economy in the coming 6 months or the coming year. . . .
w . . those goals could be discussed between the Congress
.
and the administration and the Federal Reserve so there
is a coherent macroeconomic plan on fiscal and monetary
policy. . . .”
It seems to me that is a subject worth exploring.
And, finally, on the issue of transparency and openness, it seems
clear to me that some way must be found to provide more informa­
tion to the public about the activities and the decisions of the Fed­
eral Reserve.
The way the system now works, as a matter of fact, is members
of the Open Market Committee could make absolutely disastrous
judgments about what policy ought to be and you will never know
it. They no longer keep minutes. They don’t publish them. You
have no way of following in any careful way what their delibera­
tions are.




12

There has been some allegations that there are leaks about the
decisions reached by the Fed, which if, in fact, the case, would be
quite worrying and troublesome.
So I think tne proposals that have been put forth in the various
pieces of legislation addressing this question of transparency and
openness are well worth very careful exploration.
Mr. Chairman and members of the committee, let me conclude
by saying I believe this is a veiy important series of hearings that
you have launched today. I will follow them with close interest. I
think we will also benefit from a careful airing of the arguments
for and against each proposal. And it seems to me the effort to get
more openness and accountability done in a reasonable and respon­
sible way, as I think it essentially is in all of the proposals that
are before you, merits our very careful consideration.
Thank you.
The Chairman . Thank you, Mr. Chairman.
[The prepared statement of Mr. Sarbanes can be found in the ap­
pendix.]
Senator Dorgan.
STATEMENT OF HON. BYRON L. DORGAN, A SENATOR IN
CONGRESS FROM THE STATE OF NORTH DAKOTA

Senator D organ. Thank you.
As I was listening to Senator Sarbanes, I was recalling the many
times that I have testified before committees on Federal Reserve
Board issues over 13 years and wondering whether it is purely
therapy or whether it will ever lead to policy change. If you talk
about fixing the door jamb at a Fed, they accuse you of being part
of a demolition crew.
There is no thoughtful discussion about what exactly we are tiying to do. We are in an age when the lexicon is reinventing govern­
ment, openness, and public scrutiny. The last of the policy dino­
saurs that existed in this town is the Fed. It operates in the shad­
ow with great secrecy, but makes decisions that have enormous im­
pact on every single American.
I recall testifying about a year or two ago on legislation that Con­
gressman Hamilton and I introduced before Chairman Neal’s sub­
committee. It would be hard to understate the enthusiasm with
which the chairman greeted our suggestions.
I noticed in his opening statement today he too has not changed
his mind very much about these issues. But I think it is important
and helpful for us to discuss the proposal that Senator Sarbanes
has made, of which I am a cosponsor; the chairman’s proposal,
which I think is interesting, and the proposal that Congressman
Hamilton and I have introduced in this Congress, which, on the
Senate side, it is S. 212.
Let me briefly add a word to what Senator Sarbanes said about
the method by which people make decisions on the Federal Open
Market Committee.
It is, it seems to me totally indefensible to have folks who are
not accountable, who are not appointed, not elected, to be making
the kinds of decisions that are made down at the Fed about mone­
tary policy.




13

And it seems to me that we must change that, and we must do
it in a thoughtful way. We tend, it seems to me, to react only to
crises around here. When something explodes in our face, we run
around and say, yes, we need to fix this, this is wrong. But the
Fed’s Open Market Committee is set up wrong. Let’s fix it before
it explodes. This is a good time to fix it given our current monetary
and fiscal policy.
I won’t reiterate the good reasons that Senator Sarbanes has list­
ed, the compelling reasons to fix this problem. Let me mention the
legislation tnat Congressman Hamilton and I have introduced.
First the President’s top economic advisors would be required to
meet three times a year with the Federal Open Market Committee.
We are not suggesting that you force a marriage, but formalize
channels by which those who are involved in fiscal policy and those
who are involved in monetary policy are able to discuss where they
are heading. They are involved in tne economy of the same country,
and yet there is no formalized channels by which those discussions
take place.
Second, the President would be empowered to appoint a new
Chairman of the Federal Reserve near the beginning of his term
rather than toward the end.
And, third, the Fed would be required to disclose any changes in
targets for the money supply. Some of you may have read, as I did,
an article in the Wall Street Journal in which they were talking
about some people using voice stress analyzers on speech. In par­
ticular, they analyzed tne remarks of the Chairman of the Fed to
determine what kinds of decisions had been made earlier that day
in the Open Market Committee.
That is how bizarre monetary policy has become. It seems to me
that when the Open Market Committee makes a decision, the OMC
should disclose it to the world. We now allow the Fed to wait 6
weeks. By that time, the most sophisticated financiers in the coun­
try are able to figure out what has gone on and the little investors
are left to their own devices. When the Fed makes decision, an­
nounce it. Eliminate the shroud of secrecy.
And, fourth, the Comptroller General will be required to conduct
more thorough audits, including of policy procedures and processes.
And, fifth, the Fed would be required to publish its budget in the
budget of the U.S. Government. A small part is published, but the
rest is not. The information that is in limited distribution, is so
opaque as to be almost impossible to understand, and bears no re­
lationship to financial data published by any other Federal agency
that I am aware of.
These modest steps would provide a little fresh air and allow a
little light into the operations of the enterprise that essentially
makes monetary policy in our country.
It is sad that a century ago we used to debate these things in
barber shops all across America. This used to be a good public de­
bate: What should monetary policy be in this country? But it isn’t.
Yesterday, a basketball star retired, and it is front page. It will get
1 million times more press and analysis and more thought and dis­
cussion than that monetary policy in this country.
And yet what is more important to the lives of our children and
the rest of the American people?




14

And so I commend you, Mr. Chairman, for holding this hearing.
I hope it is not just therapy. I hope one day soon all of us will de­
cide we should reconstruct and reinvent the Fed so that it helps
all Americans.
Thank you very much.
The Chairman . Thank you, Senator. I can assure you that we
are dead earnest and wifi proceed as fast as our processes will
allow us.
[The prepared statement of Mr. Dorgan can be found in the ap­
pendix.]
With the indulgence of our former chairman, I will recognize the
sitting Member and a very distinguished member of this committee
from Maiyland, the distinguished Mr. Mfume.
STATEMENT OF HON. KWEISI MFUME, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MARYLAND

Mr. M fum e . Thank you very much, Mr. Chairman and fellow
members of the committee.
I am here, as we all are, to discuss concerns about the Federal
Reserve and issues involving H.R. 28, the Federal Reserve System
Accountability Act of 1993. As a cosponsor of the act and as a mem­
ber of this committee, I am honored to have the opportunity to
share specific concerns this morning with my colleagues.
The accountability of the Federal Reserve and the constitutional­
ity of allowing private citizens to vote on the Nation’s money sup­
ply, I think, are very, very important questions before us today.
H.R. 28 is designed to make the Federal Reserve, the Nation's
central bank, more accountable to the public it is there to serve.
The Federal Reserve exerts immense influence over the economy,
as was stated earlier, because of its ability to influence interest
rates, employment, inflation, and the international value of the
U.S. dollar.
As such, I think we all are in agreement that its role should not
be taken lightly.
H.R. 28 requires that members of the Federal Open Market Com­
mittee, the Federal Reserve’s decisionmaking committee, who vote
on our money supply, be appointed by the President and have their
views examined publicly during Senate confirmation hearings.
In addition, the President must include representatives of agri­
culture, small business, labor, consumer, ana community groups,
women and minorities among his nominees. Bringing more diverse
representation to the Federal Reserve decisionmaking roles is a
reasonable and a desirable objective for any policymaking entity.
Reforms that we will be discussing for most of the morning em­
bodied in H.R. 28, I think, are very modest and simple. I want to
focus specifically on the issue of diversity.
H.R. 28 contains language which will help the Federal Reserve’s
discrimination against minorities and women as we see it come to
an end. The legislation requires the Federal Reserve to abide by
the Civil Rights Act of 1964, which guarantees employees’s basic
civil rights, including the ability to pursue the Federal Reserve for
discrimination.
A quick review of the history of diversity issues with the Federal
Reserve will show that holding the central bank much more ac-




15

countable than has been in the past, legislatively, is perhaps the
only course of action left for us to take.
The record is clear, and it shows that women and minorities have
virtually little or no say in the conduct of our Nation’s monetary
policy or in bank regulation.
In 1977, this particular committee issued a report noting, quote,
“the virtual exclusion of women, minorities, and representatives of
labor unions, consumer interest organizations, nonmanagerial, and
nonproducer groups,” in policymaking positions regarding money
supply.
In response to this committee’s action, the Congress passed the
Federal Reserve Reform Act of 1977, which required that all Fed­
eral Reserve Bank directors be chosen, quote, “without discrimina­
tion on the basis of race, creed, color, sex, or national origin.”
Then at the beginning of 1978, it was thought by many that
served on this committee and in this Congress that there would
begin to occur a change when the 12 Federal Reserve Banks had
37 directorships vacant, 12 were in class A, 12 in class B, and 13
in class C.
Of the first 21 that were filled with new persons, 7 were in each
class. There was no increase in diversification at all in class A di­
rectors. There was one woman appointed to class B and one woman
appointed to class C.
In defense of that action, which many of us believe violated the
spirit of the 1977 act, the Federal Reserve pointed out that the
Federal Reserve Reform Act was not passed until November 1977;
and, therefore, there was no great deal of time to turn the situation
around.
Well, 13 years after that enactment, in 1990, an extensive study
entitled “Racial, Gender and Background Profiles of the Directors
of the Federal Reserve Banks and Branches” revealed that diver­
sity still had not occurred as specified in the law and went further
to show continuing indifference on the part of the Federal Reserve.
According to that report, 13 years later in 1990, among the 72
class A and B directors who were chosen by private member banks
in the 12 Federal Reserve districts, there was 1 African-American,
no Hispanic Americans, and only 3 women.
Of 36 class C directors chosen by the members of the Board of
Governors which are supposed to, quote, “represent the public,” 50
percent were former bank directors and none worked for consumer
or labor organizations.
And so the upper echelons of the Federal Reserve management
consisting of top staff of the Board of Governors, the 12 presidents
of the Reserve banks, and the 7 members of the Board of Gov­
ernors, continues to be practically devoid of women and minorities.
And since 1913 there has only been 1 woman and no minorities
serving as 1 of the 12 Federal Reserve Bank presidents.
Many of us believe that this lack of female and minority rep­
resentation essentially alienates millions of Americans of any sense
of representation; ana this, unfortunately, is true for all the bank
regulatory agencies in one way or another.
Chairman Gonzalez has allowed me to use some of the data from
his 1993 study of diversity in hiring in the Federal Reserve Sys­
tem. This study has not yet been made public.




16

I want to thank the chairman for undertaking the study and for
making part of it available to me today.
I would like, Mr. Chairman, to submit for the record 2 charts
from that study of each of the 12 Federal Reserve Banks and the
Board of Governors. One chart will show the distribution of jobs for
the highest paid 10 percent of the employees and the other for the
lowest paid 10 percent.
The Chairman . Without objection, so ordered.
Mr. M fum e . These charts clearly show that women and minori­
ties are significantly underrepresented at the highest paying posi­
tions in the Federal Reserve System. And at the lower levels, they
make up the majority.
This kind of blatant blueprint of discriminatory hiring practices
is shameful. The truth is that there are many qualified minorities
and women. Our country has a large pool of qualified persons and
they deserve, as most others would expect, an opportunity to par­
ticipate.
Regarding the issue of access to credit, since 1990, the Congress
has been requiring Federal bank regulators to track bank lending
according to race, gender, and income. The results have shown and
continue to show a disturbing pattern of discrimination in bank
lending. The Federal Reserve itself recently reported extensive bias
against minorities in bank lending—something that Community
Reinvestment Act supporters have fought hard to counter for years.
The fact that this lending discrimination reappears year after
year leads one to wonder whether bank regulators such as the Fed­
eral Reserve would move more vigorously to eradicate this discrimi­
nation if they, themselves, were composed of the personnel more
reflective of the country diversity and thus sensitive to the borrow­
ing needs of all Americans.
The central bank may be a starting point to remedy this prob­
lem. Banks cannot take seriously the Federal Government’s com­
mitment to eradicate discrimination as long as agencies like the
Federal Reserve remain as exclusive as ever.
The following changes, as recommended in the 1990 study, are
necessary to affect diversification within the Federal Reserve. We
recommend, one, that the Federal Reserve Boards’ and Federal Re­
serve Banks’ exemption from Title VII of the Civil Rights Act of
1964 should be repealed.
Two, nomination of the 12 Federal bank presidents should be by
the President of the United States with confirmation by the Senate.
Three, six of the nine directors of each board of directors should
be appointed by the Board of Governors in Washington instead of
the present three of nine; and these members should include a
wider representation of the U.S. citizens largely stipulated pre­
viously in the act of 1977.
Four, there should be authorization of an 18-month Federal Re­
serve Reform Commission to examine a number of areas, including
the affect of the regulations of the Board and of the operations of
the Board on low- and moderate-income families, including the
availability and the cost of financial services and credit.
Five, we believe the Federal Reserve Act should contain a defini­
tion of the term “public.” A comprehensive definition would make




17

it difficult for the Federal Reserve to abrogate the intent of Con­
gress regarding director diversity.
Six, an individual that has been an officer, director, or employee
of the bank within the preceding 3-year period should be ineligible
to hold a public director slot.
Seven, the qualifications of the branch directors should be de­
fined in legislation. At present, die Federal Reserve determines the
branch directors’ Qualifications.
And last, each district should be required to establish consumer,
labor, and small business advisory councils.
Further, in identifying eligible women and minority candidates,
we believe the Federal Reserve should also utilize the U.S. Treas­
ury’s nationwide list of minority-owned banks participating in the
Minority Bank Deposit Program and to work with trade organiza­
tions like the National Bankers Association which represents mi­
nority and women-owned banks and has been operating for over 65
years.
The Federal Reserve should also enter into an agreement to es­
tablish a plan involving historically black colleges and universities
in order to track eligible candidates for the pipeline that we all des­
perately want to increase.
And so I wanted to speak specifically about the issue of diversity,
Mr. Chairman, because it goes to the core of something that has
troubled many of us in this particular committee and many of us
in the Congress. Because, as has been said by both Senator Sarbanes and Senator Dorgan, this absolute belief that the slightest
tinkering is to do away with the principles, the precepts, and foun­
dation of the Reserve, we think, frankly, doesn’t hold a lot of water.
And so I want to thank you, Mr. Chairman and members of this
committee, for allowing me to add my testimony. And I, like Sen­
ator Dorgan, also hope that it is much more than therapeutic.
The Chairman. Thank you very much and for your support as a
member of this committee.
[The prepared statement of Mr. Mfume can be found in the ap­
pendix.]
Chairman Reuss.
STATEMENT OF HENRY REUSS, FORMER CHAIRMAN,
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS

Mr. Reuss . Thank you, Mr. Chairman. We are privileged to be
here for this opening session in what all agree is a worthy inquiry
by the Banking Committee into accountability by the Fed.
And this is part of a worldwide movement, not just reinventing
government here in Washington, but in Europe, home of die “demo­
cratic deficit” as it is called, people are concerned that the Euro­
pean Community’s Commission isn’t chosen by the people.
I agree with almost everything you said in your opening state­
ment, Mr. Chairman, and with what my colleague witnesses have
said and with a great deal of what Mr. Leach and Mr. Neal said
in their opening statements.
So I will be very brief about my fundamental point, which is that
really now in this noncrisis time is an excellent time to change, in
a minor way, the money-creating powers of the Federal Reserve so




18

that it is exercised as the Constitution requires, by public officials.
That, I believe, must be done.
I want to make a point that hasn’t been touched on yet. Under
a rather ludicrous 1935 law which sets up this system whereby pri­
vate commercial bankers select public officials, there is a nonsen­
sical disproportion between what different areas of the country
have to say. For instance, New York is on Open Market Committee
there all the time, but banks like Boston, Philadelphia, Richmond,
Atlanta Dallas, St. Louis, Kansas City, and San Francisco, are on
the Federal Open Market Committee just one-third of the time.
Now, without poor-mouthing New York, I would not think that it
is three times as brilliant as say Boston or say California. So any
change in the modalities of the Federal Reserve ought to do some­
thing about that disproportion.
Most important of all, perhaps, is this: Even if one said that it
doesn’t matter very much substantively whether you have a few
private bankers’ appointees making crucial governmental monetary
policy—even if one said that, the fact remains that it is unconstitu­
tional. Congress in acting to do what it did in 1935, didn’t have the
benefit of the very important unanimous decision of the U.S. Su­
preme Court in 1976 in Buckley v. Valeo, which said that public of­
ficials must be nominated by the President and confirmed by the
Senate. That decision was unanimous.
I am sure that the Attorney General, Ms. Reno, who is an excel­
lent lawyer, if this question were put to her, would pronounce the
present system totally unconstitutional. And the courts have told
us that it can only be changed by Congress, so to speak, cleaning
up its own mess and getting constitutional.
So Open Market Committee reform is the first order of business.
There are some other things that need to be done. There is another
fiction on the books stemming from the dream that the Federal Re­
serve is really just like other private commercial banks.
As you know, member banks now hold about $3 billion worth of
preferred stock in the Federal Reserve. They are not particularly
overjoyed about it, because they could be doing better things witn
that $3 billion, like for example lending money on housing, lending
money to small business. So why not end that rather silly fiction,
repay the $3 billion, add it to banks’ capital and they could then
do their bit on dealing with the credit crunch.
Another piece of Federal Reserve structure crying for attention,
in my view, is that of the seven Governors. Who in this room can
offhand name the seven Governors of the Fed however eminent and
worthy they may be? How can the public fix responsibility when it
is spread out among seven? Why not, therefore, reduce the number
of Governors to say five, like in the Federal Trade Commission or
in the Federal Communications Commission or even three, like in
the Council of Economic Advisors or the SEC?
Reducing the number of Governors, incidentally, would make it
fiscally and politically possible to pay the Federal Reserve Gov­
ernors a decent salary. Now they get $123,000 a year, less than the
$161,000 they pay their top staff, less than the $250,000 they pay
the President of the New York district Federal Reserve Bank, and
less than the $148,000 paid to cabinet officers.




19

And this might appeal, Mr. Leach, to your side of the aisle: Why
not put in a bill entitled—“bill to pay the Federal Reserve Gov­
ernors a decent and adequate salary, and for other purposes”? Then
we could get the whole reform through.
One final and perhaps heretical thought, not for today but for the
future as far as human eyes can see, maybe in the year 2000, what
is it that the Federal Reserve district banks really do? The thing
they really do is to clear checks. A worthy function. And they have
been doing it since 1914.
But we now live, I read, in an increasingly checkless society and
one wonders how we are adjusting to this. Now, has one ever made
a study of how much it costs the taxpayers to keep up with this
archaic system of check clearance to see whether it couldn’t be
done more effectively and cheaper privately?
So I would hope that maybe the General Accounting Office and
the Office of Technology Assessment could make a study of how
much all of this ultimately costs the taxpayers. And if it turns out
that it can be done more efficiently, the world is not going to come
to an end if in, say, the year 2000 when, one is told, the glut of
prime office space in our leading cities is finally going to disappear
and new office space will be needed, and when we are also told that
the Federal budget deficit, temporarily under control, is going to
burgeon once again, if there is nothing left for these district banks
to do to simply sell off the office space and concentrate monetary
power where it ought to be, in the very important Governors of the
Federal Reserve System.
So that is something to be thinking about in the future.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Reuss can be found in the appen­
dix.]
The Chairman. Well, thank you, Chairman Reuss. And you are
outlining something that I know you have been espousing and ad­
vocating since before you became chairman of the full Banking
Committee. And I recall vividly.
Let me say that I have nothing but gratitude to each and every
one of you because you have encompassed, in your presentation
and, in fact, forestalled any particular question I have as to struc­
tural or legislative changes. I think if we are lucky enough and we
have some form of House action, we will have plenty of time to
work out the Senate’s contribution in the regular course of events.
But I did have one particular question while I have Senator Sar­
banes, and it is something that is bothering me. I don’t have any
other specific questions that I should delay you because I think you
took care of them in your statement.
But in my opening statement I referred to the SWAP fund of
$30.1 billion for the purposes of intervening in foreign currency
markets. The claim that is made is that this process is independent
of politics.
I called a hearing 3 years ago this month on the specific issue
at that time involving Mexico. And the Deputy Secretary of the
Treasury for Monetary Affairs presented himself. I think we were
out of session, so we didn’t have many Members and it was kind
of overlooked. But I thought it was very significant.




20

In that particular case—and I am going to hotline it here to show
that despite the claims of political independence, these things do
have very serious, and in some ways ominous, undertones.
In April 1976, for instance, the first time I recall—but it was
done again in 1990—the Fed allowed Mexico to draw on its full $36
million SWAP line, didn’t require Mexico to pay back until after
the Mexican Presidential July election. This had the effect of prop­
ping up the value of the dollar—I mean of the peso, which, of
course, in 1982 collapsed and created a crisis then.
Now this had the effect of propping up the peso at that time and
it helped, immeasurably, the Mexican ruling party to win the elec­
tion. It was really the equivalent of a foreign loan or a loan to a
foreign entity.
But in 1990, through the so-called zero coupon, Mexico was a
beneficiary of about $280 million worth; and that simply was just
written off.
Our question at the time when we had the hearing, was the con­
stitutional issue of the Fed and Treasury avoiding the constitu­
tional mandate to have an appropriation process, an authorization
and appropriation on the authorization and that was obscured be­
cause of lack of interest.
Then, subsequent to that, we had the development of the Brady
Bonds which, in effect, permitted, through zero coupon, the Mexi­
can Government with the issuance of the zero coupon bonds by the
U.S. Treasury to go out and issue its bonds. There is an implication
there of U.S. support or guarantee.
About IV2 vears ago, the Japanese were able to buy about $8 bil­
lion worth of those Mexican bonds. Now, what I am saying is that
all of this is done in a way that ordinarily would be required by
our processes to call for an appropriation and translates as a for­
eign assistance-type of loan.
What I would like to know is if any one of you gentlemen, par­
ticularly Chairman Sarbanes and Chairman Reuss, who is very
knowledgeable in this area, if you have any opinions on this; or if,
on thinking it over, you would supply something for the record in
writing?
Senator Sarbanes. Mr. Chairman, I would like to think about it.
I do think that one of the difficulties we have is, of course, the as­
sertion is made, not without some merit, that first of all they have
to have some authorities to move quickly in some of these currency
issues.
But that does not counter the notion that somehow the param­
eters within which they were going to move should have been
thought through ahead of time and tnat they shouldn’t have, as it
were, total discretion to do whatever, whenever they may want.
You see, the argument that is constantly given to you is, look,
we have to operate—we are dealing in markets and, therefore, we
have to operate—we can’t lay everything out on the table ahead of
time because if we do that, then people play the market accord­
ingly; and, second, when we do act, we have to act very quickly.
My own view is that there is some merit to both of those argu­
ments but that they have both been carried much too far in terms
of appropriate review of Fed policy and that the issues you are
raising are very important issues and they need to be very care-




21

fully examined. I do not have a sort of definitive answer for you.
But I do think the question you have put is a very important ques­
tion.
The Chairman. Thank you, sir.
Chairman Reuss.
Mr. Reuss. Man is a political animal. And I think we have to set­
tle for Federal Reserve Governors—men, and I hope soon, women—
will be political. And I agree with Senator Sarbanes that our mone­
tary authorities do need an exchange intervention kitty to operate.
I think it isn’t a bad system whereby you, the energetic chairman
of the Banking Committee, informs himself of this and spreads it
on the record. It keeps the dabblers in exchange rate policy from
being too gross in their activities.
So I guess I don’t view this kitty as the kind of a problem that
really needs attention right now, other than the vigilant surveil­
lance which this committee should give.
The Chairman. It is a $30.1 billion kitty. It is substantial.
Senator Sarbanes. It is a big kitty, no question about it.
The Chairman. Mr. Leach.
Mr. Leach . Thank vou, Mr. Chairman. I just wanted to raise one
aspect that is veiy seldom talked about in terms of the appropriate­
ness of how public officials come to be selected at the regional bank
level.
And as we all have kind of come to understand, the Federal Re­
serve System has three broad areas of work. One is in the macroeconomic area of interest rates; one is in the microeconomic area
of bank regulation; and the final one in the commercial area where
it clears checks for the banks. Fortunately, if there is a profit, it
goes into the Treasury.
The macroeconomic policy is much talked about in terms of ap­
propriateness of regional bank presidents serving on the Open
Market Committee. But one aspect of regional bank authority that
is very seldom dwelled upon is that the regional banks have a
major role in bank regulation. And so to the degree that leadership
is chosen in partial measure by the banks themselves, it isn’t the
fox guarding the chicken coop; it is the fox guarding the fox. Grant­
ed, there is a relationship in which the larger policy on regulation
is reserved to some degree to the Fed here in Washington, but a
great deal of regulatory responsibility accrues to the regional banks
themselves.
Now, one of the things that has occurred in the last several dec­
ades is that, like all the 80 years of Fed policy, there has been a
lot of public discourse on whether the Fed’s monetary policy has
been too loose or too tight but, surprisingly, little attention and
public criticism given to whether or not their regulatory policies
have been inappropriate.
One of the interesting aspects of national banking policy today
that I, as a Midwesterner, feel very deeply about has been the
practice for much of the last several generations of subjecting larg­
er banks to less regulation than smaller banks under the assump­
tion that larger banks have larger deposit bases.
Experience in the last decade or so has indicated that this is not
necessarily a greater protection. It has also indicated that the Fed




22

has made some mistakes in terms of regulation for which the Fed
itself has received shockingly little criticism.
Although I think there are some things that the Fed has done
well. In tne last 7 or 8 years, certainly the Fed has moved in the direction of shoring up the large institutions.
The 10 years before that, however, Fed policy didn’t look very im­
pressive. But that raises this issue: Is there something about the
selection of regional bank presidents and directors in relationship
to the Fed’s duty to regulate banks that is troubling and deserves
public attention?
The Chairman . Will the gentleman yield to me at this point? I
have noticed that our colleague, Congressman Mfume, should have
been at the White House a lew minutes ago but has remained here
thinking that perhaps some of us will have a question for him.
Does any member have a question for Mr. Mfume?
Mr. F rank. Yes.
When are you going to talk about the weather?
Mr. Leach . Before Mr. Mfume leaves, I don’t have a question,
but his statement was one of the most thoughtful presentations
that has been given to this committee for a long time. The commit­
tee is going to have to take seriously a number of the concerns that
Mr. Mnzme has raised.
Mr. N eal . I don’t have a question, but I want to say that while
I disagree with a number of recommendations—and I will comment
on that when I have a chance—I want to say that I agree with my
friend that there should be no discrimination based on race or gen­
der at the Fed or anywhere else.
And I am surprised, frankly, that there hasn’t been more
progress in terms of getting more people, minority races, at the
Fed. So I want him to know that. I think it is an important subject
that he has brought to our attention.
Mr. M fume . Thank you, Mr. Chairman.

My thanks to the minority ranking Member as well.
The Chairman . Y ou can feel free to go; but if you have a chance,
put in a good word for our efforts to the President. He has commu­
nicated his skepticism about doing anything about an operation
that is working.
So with that, the gentleman is excused.
Mr. M fume . Thank you, Mr. Chairman.
And I have submitted my full statement for the record.
The Chairman . Thank you, and it will be in the record as you
submitted it.
Thank you, very much.
Thank you, gentlemen, for yielding to me there.
Senator Sarbanes. Could I say to Congressman Leach, first of
all, I think that is a very perceptive observation. If you follow it
out, it would probably argue for following Chairman Gonzalez’ ap­
proach toward picking the bank presidents so you get a public ac­
countability to them.
My approach was only to get them out of macroeconomic policy
because they had no legitimacy. It didn’t address the fact that they
would still continue as bank presidents, having been picked essen­
tially by the banking community whom they were called upon to
regulate to some extent in their capacities as the bank president.




23

I think it is another instance, though, of this system needing to
be examined. I mean, the very issue you put raises important ques­
tions. And there is—they are simply not being addressed. And
there is this resistance to addressing them. And my expectation is
that if they are not addressed in a rational way and fairly reason­
able circumstances, a crisis is going to come along and they will get
addressed then, but perhaps in a way that is not as constructive.
Mr. Leach. Well, I appreciate that.
I would like to raise the issue Chairman Reuss mentioned con­
cerning the preferential treatment of one regional bank over an­
other. We all recognize New York has more banking assets than
the other regions. Putting that aside, one of the issues of the S&L
situation—and it is one of the larger issues—is that when you give
an element of the financial industry weaker regulation than an­
other element you, in effect, skew asset growth in either the region
or the kind of institution that has the weaker regulation. You give
it more assets.
And so if you say a particular district shall have lower standards
than another district, by definition you have put more assets in
that region. Therefore, you skew economic growth toward that re­
gion.
That is one of the reasons why I object strenuously to discriminatory rules on capital ratios for one kind of institution versus an­
other. It comes back to who is doing the regulation and where the
authority is. If you have selection from the institutions in a par­
ticular region with regulatory accountability, you have a very awk­
ward circumstance that biases economic growth. I just think it is
something that deserves some attention. Now, what the conclusion
is I am not sure.
In the Department of Treasury the Secretary chooses, in effect,
the regional district officers of the Treasury. It is an odd relation­
ship because it is a step removed from the Executive, but it does
to some degree deal with that issue, although maybe not as appro­
priately in all circumstances.
But the only other issue I would raise is that sometimes institu­
tionally you have arrangements that seem to be conflicts of inter­
est, but sometimes they work. In my State, we have a tradition
that the Superintendent of Banking be an active banker in the
State. He usually serves for a 2- to 4-year period. I think that
structurally one might say that is a conflict of interest, but it has
worked astonishingly well, and the bank presidents that have been
made superintendents have gone out of their way to be tough.
So you have a tradition that kind of overrides some of the
unseemliness. Whether the unseemliness is overridden by tradi­
tion, in this instance, I don’t know. But I think it is worth very se­
rious thinking about by those who are advocating changes in the
system today.
Senator Sarbanes. I assume that superintendent is not picked
by the banking committees.
Mr. Leach . No, he is chosen by the Governor.
Mr. Reuss. Tradition is a great thing, and you use it well in
Iowa. But, as Senator Sarbanes has said, it is the Governor who
picks the Banking Commissioner. And that is as it should be. Then
if the Banking Commissioner doesn’t do his job, the Governor has




24

to explain his choice. The fact that he is a banker doesn’t bother
me in the least, nor does it bother me to have bankers on the Fed­
eral Reserve Board of Governors. They should not dominate it, as
no group should.
Mr. Leach . Thank you.
The Chairman . Mr. Neal.
Mr. N eal . Thanks.

Just on that point, I don’t think that any of the bank presidents
are bankers. There may be an exception to that, but I think most
of them came up through the ranks. They are sort of professional
Federal Reserve types. And the Board of Governors has veto power
over the bankers. So it is almost like they are appointing them. No
one gets appointed that they don’t agree with.
On a broader point that I think everyone is making here, Mr.
Chairman, that the Fed should be accountable. I couldn’t agree
more. They are a branch of our government and should certainly
be accountable. But I think the question is, accountable for what?
And, in my view, they should be accountable for pursuing the best
policy. Ana that policy—I think that we know what it is. And that,
I think, will be the subject of some discussion as we go through
these hearings.
I won’t go into all the details of it now. We don’t have time. But
I don’t disagree that the Fed should be accountable. They should
be. But they should be accountable for doing what should be done
by the Fed, which is to conduct the best monetary policy.
Now, I just want to offer a little different perspective on this
question of the desirability of letting a new President name a new
Fed Chairman. Of course, much of what we are trying to do histori­
cally and much of what I think makes sense and a lot of people
think makes sense is to keep monetary policy out of the political
process so that we can have a long-term monetary policy, not a
short-term monetary policy subject to political whim.
And I remember vividly the horrible damage that a horrible mon­
etary policy did to President Carter. In fact, it defeated him. And
I remember the people that ran the Fed for him just did a horrible
job. They ran the rate of inflation way up. Interest rates finally hit
almost 20 percent.
And I remember going down to the White House one day. And
toward the end of President Carter’s term he knew of my interest
in this, and I was a great admirer of his. And I went down there
for another purpose. And he said, we are going to announce some­
one tomorrow, a new person to head the Fed with the sole objective
of fighting this inflation and winning that war against inflation.
Of course, that was Chairman Volcker. And Chairman Volcker
went about that task avidly, and, of course, it always takes time,
and he just wasn’t able to make it clear in time to help save Presi­
dent Carter.
And I think the high inflation, high interest rates essentially
beat President Carter, not only—that is a minor political point in
the overall scheme of things, but it was a horrible policy for our
country and one that we are just now recovering from so it cer­
tainly ought to be the goal to keep political pressures off of the Fed.
So it is a good idea to not let maybe a new President that comes




25

in who is not so aware of this get in there and ruin things imme­
diately anyway.
President Clinton, interestingly, has been extremely sensible on
Federal Reserve policy at every turn. He has been asked about it
on several occasions and in every case has supported an independ­
ent Fed, low inflation. And most recently there was a newspaper
article which reported on his response to Chairman Gonzalez when
asked if he supported his legislation, and President Clinton said,
no, that he thought the Fed was doing a good job, and he would
not want to make a change as Chairman Gonzalez mentioned a few
months ago.
On another point, there is no reason to formalize relations be­
tween the Fed and the administration. They talk all the time. And
if you ask the Fed Chairman, Secretary of the Treasury, I think
you would find that they talk once a weelc.
And the idea of this desirability of so-called coordinating fiscal
and monetary policy, that is to say, to try to get the Fed to conduct
its monetary policy in harmony with a bad fiscal policy, I mean, I
can’t think of a worse possible idea. In fact, the Fed over recent
years has, in spite of a horrible fiscal policy all throughout the
1980’s, has been able to bring inflation under control. And if we
had this idea or something in place where the Fed would have had
to follow along and harmonize and coordinate and support this fis­
cal policy—which couldn’t have been worse—-just think of the addi­
tional damage that would have been done.
As it is, the Fed has been able to pursue an independent policy,
bring down inflation, bring down interest rates, even in the face of
this very destructive, short-sighted fiscal policy.
So, I—and there are several other issues raised by this, and I
know that we will have other chances to comment.
Just a couple of others, if I may.
This question that Senator Dorgan raised about the budget. We
now have annual hearings on the Fed budget. They come down
here once a year and present their budget in open session. I will
point out that it is very poorly attended—I used to chair these, and
almost no one shows up for it, and it has very little press interest.
But the fact is that the budget of the Fed is publicly discussed once
a year for anyone who is interested.
Well, there is much more that can be said, and I won’t have time
to say it, and I see the red light, but I want to make one other
point, if the chairman will permit me.
So far none of our witnesses, nor anyone else, has raised the
point of what the proper policy should be for the Fed. I mean, that
is the critical question it seems to me. What should the policy be?
This is like—I don’t have a good analogy for it now—but I hope
that we will turn more attention to that, because that is the key
subject. These details are interesting, and I am not certain if there
is some way to improve something.
But the most important question is what is the proper policy,
and, again, I am certainly convinced that that proper policy is the
lowest possible—to attain and sustain the lowest possible inflation,
which will give us everything else we want including low interest
rates, increased savings, increased investments, job growth, eco­
nomic growth, efficiency in the economy, and so on.




26

So I thank the Chairman.
Mr. Sarbanes. The bankers argue about it. The consumer groups
argue about it. There is no kind of magic answer written in stone.
And I am frank to tell you that I think a monetary policy which
would give you price stability but might plunge you into depression
is not adequate to the economic challenges confronting a nation.
On the other hand, a monetary policy that gave you a lot of
growth but gave you runaway inflation would also not be adequate.
And people differ about that, and I recognize that, and there may
be sharp differences. The question is, on what basis of legitimacy
are the people going to make those very important decisions to op­
erate?
And, in the current system, you have people making very impor­
tant public decision who have no claim to public legitimacy and no
accountability. I mean, they are picked by a particular limited seg­
ment of the economy.
Now they may make the right decision. I mean, you know, look,
you can pick them the way I want and put them to the Federal Re­
serve Board and then I may disagree sharply with the substance
of the decision they are making. And in the current circumstances,
from what I am able to glean out of the Open Market Committee’s
activities, which involves a little bit of what my colleague, Senator
Dorgan, was saying about using a voice-measuring instrument to
get the nuances of what people are saying—but in some of these
instances I think probably some of the regional bank presidents on
substance have been taking an approach toward monetary policy
that I am more sympathetic to than it is an approach taken by
some of the members of the Board of Governors.
So what we are talking about doesn’t define the substance of the
policy. But it does define the legitimacy of the people determining
the policy, and it does give the President a chance to have an input
when he nominates and, of course, the Congress a chance in the
course of confirmation, so I think that is very important. I mean,
you may think they are following a very good policy, and someone
else may think they are following a veiy bad policy. But, at a mini­
mum, someone ought to say, well, they are legitimately there mak­
ing this decision.
And the other point I wanted to make, I thought you were a little
too hard on the chairman with respect to the President’s letter,
which I have in front of me. The President says, your suggestion
has merit. There is no doubt about it.
He then goes on to indicate that he is not certain that this is the
right time to try to address these issues because he thinks it may
have an impact of making people uneasy, which is always the prob­
lem you have when you try to address these Fed questions. As soon
as you bring them up they come pouring out, saying you can’t do
that. You can’t look at this at all. Like my colleague, Senator Dor­
gan says, if you want to fix the dooijamb, they say you are trying
to wreck the building. That is not a rational way to discuss impor­
tant public issues.
Mr. Reuss . Briefly, this was a hearing on the structure of the
Fed and not on monetary policy. Had it been one on monetary pol­
icy I certainly would have been heard from.




27

And in answer to your question of what is a good monetary policy
that you could put on a bumper sticker I would say, “Lean against
the wind.” If the danger is unemployment and stagnation, ease it
up. If the danger is a looming inflation, tighten it. Until a better
one comes along, that isn’t bad.
A word on the President’s letter to Chairman Gonzalez. I agree
with Senator Sarbanes. The President did say, you, Mr. Gonzalez,
“raised a valid point about legitimacy, and I shall keep it in mind”.
For a President who, when he wrote this letter, is beleaguered by
Somalia and the fall of the Kremlin as it seemed to be, not to take
the lead in a fight against the bankers is utterly understandable.
And I commend you, Mr. Chairman, for getting more out of a
President on this than any chairman has in history.
The CHAIRMAN. Well, thank you very much. I appreciate that.
Mr. N eal . I just want to say I apologize to the chairman if I have
mischaracterized. I don’t mean to be hard on him. He is my favor­
ite chairman. I don’t mean that. But I meant to say that the Presi­
dent didn’t support the legislation. Isn’t that a fair characteriza­
tion?
Senator Sarbanes. At this time, I think he said----Mr. N eal . And it is at this time that we are discussing it.
Senator Sarbanes. Chairman Reuss is right. Most other Presi­
dents would be a lot harder on this issue. I regard this as fairly
forthcoming, having seen how other Presidents have reacted.
Mr. N eal . The larger point it seems to me is that—I would say
to my distinguished mends, I think— and this is where I think we
could have a fruitful debate— I think there is a monetaiy policy
that will serve our interests the best under all circumstances. And
that I think is where we may differ and where there would be room
for lots of interesting discussion and fruitful debate. I am trying to
say that I hope we get to that point at some point because that is
the most important thing we can be discussing.
The Chairman. Let me say for the record that I count my bless­

ings. President Clinton is the first President that answers my let­
ters since Lyndon Johnson.
So, Mr. Knollenberg.
Mr. Knollenberg. Thank you, Mr. Chairman.
The Chairman. If you don’t mind, for what purpose does the
gentleman----Mr. Frank . I just wonder if we could get to the questioning. I
was afraid that we would lose our chance.
Mr. Leach . If the chairman would yield for 5 seconds, though.

While it is unfair to impute motivation, a possible motive for the
President’s nice comments was that he was tiying to say nice
things to our chairman because of his powerful role. But this letter
says he doesn’t favor legislation, and I don’t think it should be read
any other way.
I mean, the President isn’t going to write the distinguished chair­
man of the Banking Committee and say, you fool, you proposed an­
other foolish idea. So, I think this issue of forthcomingness ought
to be tempered a bit.
The Chairman . They may say it, but they haven’t written it thus
far. I have good reason to feel-----




28

Mr. Knollenberg . I, too, don't want to step on the chairman’s
toes, but I view that letter as some evidence that the President was
making a statement. And it is today—and, yes, he could change his
mind, but, yes, this is his attitude today.
If you look at the problems that face this country, most of them
can be traced right here to Congress. We spend too much money,
and we run up huge deficits. The Fed, on the other hand, has done
a pretty good job, I think, by ensuring a stable money supply. In
fact, I would say the Fed is the envy of most of the world in terms
of their success rate.
Now, furthermore, over half of the people that are appointed to
the Federal Open Market Committee are subject to Presidential ap­
pointment and Senate confirmation, and, Senator, obviously you
have something to say about that. But I would like a few more spe­
cifics on how the current Fed could do better, let's say.
And another thing that bothers me is that I have heard it said
that there is no accountability. Well, from a political perspective
perhaps there is not, but there is accountability because, in fact,
if it wasn’t working, we could fix it through legislation. But do we
have to go to the extent of politicizing it? I am concerned about
that side of it, that end of it, if that is the solution that is sought
here.
So I would like the comments from either the Senator or Chair­
man Reuss on that view.
Senator Sarbanes. Interestingly enough, I agree with Secretary
Brady and President Bush when they thought the Fed was not re­
sponsive enough in bringing down interest rates as we went into
the economic downturn in late 1990 and into 1991. The Fed has
been sharply criticized by economists, Samuelson and Tobin on one
side and Milton Friedman and Paul McCracken on the other, who
were critical of its policy.
I never understood why this side of the aisle didn’t focus on the
Fed and its monetary policy more sharply in the period 1990 to
1992. Actually, you had a Republican administration, and some of
the criticism—who was criticizing the Fed, I think with some legit­
imacy.
The criticism here in the Congress largely was from our side, not
entirely. And I think that the Fed’s failure to ease monetary policy
in the light of the economic downturn contributed further to the
downturn. It went deeper. And the consequence of the downturn
was that the deficit targets which had been established in the 1990
agreement were not reached.
The Congress, interestingly enough, stayed within all of the
spending limitations that were contained in the 1990 budget agree­
ment. We didn’t exceed any of those. But what did happen is that
you had—contrary to the predictions, the premises of the agree­
ment with respect to how the economy was going to go, the econ­
omy actually went down, in effect, out of fiscal policy that was con­
tracting because of the agreement. And the Fed did not ease the
monetary policy fast enough. They did ease it over time by little
steps. Finally, in December the Fed took a 1 percent drop in the
discount rate.




29

Mr. K nollenberg . Senator, if I might interrupt. My point,
though, to this, would it be any better if it were politicized? If, in
fact, the President made all of those appointments?
Senator Sarbanes . I don’t know whether it would be better or
worse. At least then you would say that the policy had been made
by people who were publicly accountable. We do know that at one
point in the late 1980’s that Greenspan had to fly to Chicago in
order to try to move the Fed Bank presidents to pursue an ease in
policy, that it was being very strongly resisted.
But I don’t premise this proposal on the substance of I want to
get legitimacy in the decisionmakings. They may make good deci­
sions or bad decisions, just like Members of the Congress. You get
elected. You make important decisions. You may make good ones
or bad ones. The same is true for me.
But I don’t know that anyone would suggest that the kind of
public decisions that you make ought to be made by, in effect, a
person selected by private interest, and that is my concern here
with respect to very personal macroeconomic decisions made by the
Federal Open Market Committee.
Mr. Knollenberg . Could I have Chairman Reuss’ comments on
that same point?
Mr. R euss . Yes, I would like to comment particularly, Mr.
Knollenberg, on the point you made that the legislature and the ex­
ecutive branch have produced in this country in recent years a very
irresponsible fiscal policy resulting in tremendous deficits so that
the Fed at various times has had to make interest rates much
higher than they would have otherwise been to palliate the sins of
the fiscal policy part of government. I believe that was your point.
And I completely agree with you and would make the related
point that the Fed cannot really wholly undo the harm that bad fis­
cal policy can cause because, to undo the harm, it has to bring in­
terest rates so high that you create a bad recession and much un­
employment to set matters straight again.
You had a beautiful example of this case in the German Federal
Republic in the last 2 or 3 years where, confronted with the task
of reuniting with East Germany, they decided, the Bundestag and
the government, to write every East German in effect a check for
$2,000 on that one-to-one currency exchange, but they didn’t do
anything about compensating for that enormous drain on the Ger­
man Treasury by either lowering spending or raising taxes, what­
ever combination you wanted. So the Bundestag, in order to com­
pensate for this, raised interest rates tremendously and has caused
havoc and a bad recession over all of Europe.
So I think your point is well taken. Both fiscal and monetary pol­
icy are essential, and he who disregards this is the prime cause of
the ensuing troubles.
Mr. K nollenberg . Thank you. I appreciate the comments of
both gentlemen.
Mr. Chairman, thank you for your indulgence.
Mr. Frank . Mr. Chairman.
I appreciated Senator Sarbanes’ statement that it was important
to focus in on the procedures, not the substance. And I am some­
what struck—I was struck with the previous questioner with the


72-851 0 - 9 4 - 2


30

use of his word politization. It seems that he used politization
interchangeably with democratization.
And I think that is a very important point that we have to stress
here. We have heard a great deal in this country in the last couple
of years about the need to democratize the procedures of Congress
ana government and openness, responsiveness.
And people who make those arguments about the importance of
more democracy and more procedural fairness and openness in ev­
erything but monetary policy and then defend very undemocratic
ways o f conducting monetary policy convince me that what they are
really talking about is substance and not procedure at all. That all
the talk about democratization is kind of a curtain behind which
they can make substantive arguments.
If people are legitimately concerned about these principles, I
don’t understand why they don’t apply to the Federal Reserve. Why
is monetary policy somehow one area of American Government
where all the reformers and the democratization doesn’t apply?
I think the gentleman from North Carolina was being very hon­
est when he said what he wanted is a policy where the Fed con­
centrates on zero inflation virtually to the exclusion of any other
policy. That is a legitimate position for one to take, although it is
one that I disagree with you about.
I don’t understand why anyone would argue that the public is
not to have any say about this. When you set up the Fed the way
we have, you Bias it toward this kina of circumstance. You take
people who are in the banking business, and it is no surprise that
they have some sort of a bias toward policies that would come out
that way, in which unemployment would be less of a concern, some
of the other social issues would be less of a concern.
So the point that the Senator made is a perfectly valid one. Argu­
ments that it is OK to ignore the democratic principles to which
people otherwise profess allegiance because they bring about a sub­
stantive result that we want here don’t seem to be good ways to
argue. I don’t see why the American people should be trusted to
have control over military or trade issues but monetary is so deli­
cate that they have to keep their grubby hands off of it. And that
is, essentially, what we are arguing.
As for the President, I think the President did show appropriate
respect for our outstanding chairman. But I have to say this. I am
not sure, because of what Senator Sarbanes pointed out—he has
Alan Greenspan for the next 3 years, and, clearly, it is in the Presi­
dent’s interest to reach accommodation with Alan Greenspan. And
it is my understanding that Greenspan has been reasonable, and
the President writes letters like this, and they are not wholly unre­
lated. We all know that the anklebone is connected to the snoulder
bone in government.
And I think the President’s position—if he had been able to apoint his own Chairman of the Federal Reserve and not have to
other about making sure that he palliated Mr. Greenspan who I
think substantivelv has been good.
But I was appalled a couple of weeks ago to see two Republican
rollovers on the Federal Reserve tiying to talk down the stock mar­
ket, Mr. Lindsey and Mr. Mullins, announcing that the stock mar­
ket was overvalued. When did it become the prerogative of the Fed-

E




31

eral Reserve to try to talk down the stock market? That doesn’t ap­
pear to me to be an appropriate thing for them to be doing and for
them to be insulated from the democratic process. So we disagree
with this.
But I wanted to say that people who defend the very undemo­
cratic institution of the Federal Open Market Committee and the
Presidential appointments and all the secrecy and then in another
context being great democratizers suggests to me that the principle
of democracy and open government is not really what they are talk­
ing about, but they are only looking for various convenient ways to
justify their substantive preferences.
And I don’t pretend that was a question, Mr. Chairman. I appre­
ciate the chance to say it.
It is nice to see Mr. Reuss in duplication there with Reuss the
younger and Reuss the elder seated out there.
Senator Sarbanes. Well, let me just say that I don’t expect the
President to sort of take on this issue, given all the other issues
he has at hand. I think Chairman Reuss was right.
But I don’t read the letter to mean that if the Congress worked
out a reasonable piece of legislation addressing some of these is­
sues which we talked about nere today which reflected careful and
perceptive thought that that might not be regarded as a construc­
tive contribution. Therefore, it would become law.
Mr. Frank . I think that is very appropriate. Certainly, the ad­
ministration has other ways of communicating to Members of Con­
gress its displeasure about legislation, and I haven’t gotten any of
those communications in this case.
Senator Sarbanes . Some of those Governors are desperate to get
the interest rates up. They tried to hook a couple of months of in­
terest rates. But the real problem is the lack of adequate economic
growth and the restoration of jobs. So now they are searching for
some other basis. So they say, the runup in the stock market is the
basis on which to do it. It is interesting. They keep trying to shift
the rationale to find something that they can advocate to get the
interest rates up.
Of course, if the interest rates go up, we are going to, in effect,
impede the resumption of economic activity, when we are looking
to the monetary policy to help on that score; since we finally tried
to tackle this deficit problem on the fiscal side and tried to bring
the deficit down. If the economy doesn’t pick up, the deficit is not
going to be solved.
That is what happened to Bush. The economy went down, and
the deficit went up.
Mr. Frank . I agree with the Senator, and I think these are valid
issues for people to pursue, but they shouldn’t be allowed to do it
in insulation from the normal democratic processes. I can’t think
of a comparable area of public polity where people are given that
degree of power and insulation from any kind of democracy. And
I don’t understand why people who are great defenders of democ­
racy—every day people are talking about: Listen to the people. You
are ignoring the people. But somewhere in John Locke or Rousseau
there is a footnote that says none of this applies to monetaiy pol­
icy. It wasn’t included. I must have read the pulverized edition.




32

Senator Sarbanes . Y ou talk about politicizing. The members of
the Board of Governors on confirmation get a 14-year term. Now,
a lot of them are not serving it out because, unfortunately, in my
opinion, the Board is now being used as a stepping stone toward
other positions, which I veiy much regret. That was not the case
for a long time in our histoiy.
But the Board is seen as a sort of pinnacle of your career. Now
people get on it, stay on it a few years, and then get off and parlay
that experience into a very large compensation out in the private
sector.
But the only people we are tTying to address is these people that
sit on the Federal Open Market Committee and get there com­
pletely through a private selection process.
Mr. F rank . But, by any definition, the Board is already politi­
cized in the sense that it is dealing with these public issues and
people having other legitimate interests to pursue. The question is
not whether it should be politicized but whether it should be politi­
cized without beingdemocratized.
The Chairman . The time of the gentleman has expired, and we
have to move on. Mr. Barrett.
Mr. Barrett. Thank you, Mr. Chairman.
I don’t have any questions, but I wanted to welcome Chairman
Reuss as a person who has the honor of filling the seat that he
filled for many, many years. I realize it is a tough act to follow,
and, as I mentioned to him before the hearing this morning, it was
only 3 days ago when I was back in the district and one of my con­
stituents was chastising me for the need to think more like Henry
Reuss. And what I was thinking was, the guy has been gone for
10 years. Give me a break. But there is still a lot of respect for Mr.
Reuss.
Mr. R euss . I wish I had heard from him when I was still in Con­
gress.
The Chairman . Thank you, Mr. Barrett.
Mr. K lein . Mr. Chairman, you seem to be doing so well without
me, I will let it continue on that basis.
The Chairm an . I appreciate that.

I want to ask unanimous consent to place in the record a news
item that was printed. The Fed names chairmen of 12 regional
banks. Every one of them with one exception, a woman from Dal­
las, are white males, not a minority. And I just want to put that
list here in view of the testimony we heard, particularly from our
colleague, Mr. Mfume.
[The information referred to can be found in the appendix.]
Senator Sarbanes . Mr. Chairman, I want to say that I thought
that was very powerful testimony that Congressman Mfume gave.
And clearly in an area that affects so much of our Nation’s eco­
nomic activity, the failure to draw in the broad sweep of American
society is a glaring omission.
The Chairm an . If you will allow me—Mr. Schumer, I thought he
had absented himself, but he is back, and we recognize Mr. Schu­
mer.
Mr. S chumer . Thank you, Mr. Chairman. I know you are con­
cluding, so I will be very brief.




33

You know, this is a fascinating proposal in the sense that I think
there is a thread of history that goes throughout all of this. I mean,
I just started thinking about it a few days ago. When you think
about the arguments back in the Federalist papers—and I have to
say to everybody that there is no clear-cut answer on, quote, how
much democracy should be in what parts of government. The Su­
preme Court is a lot less responsive to the people than the House
of Representatives.
And there is a continuum. I don’t agree with my friend from
Massachusetts. I think that the continuum of policy—or with the
good Senator from Maryland—I think that you cannot separate the
substance from the procedure. I think the two are inextricably
linked. And there is a good reason why the Supreme Court, which
is supposed to uphold things like the Bill of Eights, is less demo­
cratic than the House of Representatives which is supposed to deal
with spending the government’s money and all sorts of other
things. So I think you have to look at the two together.
It seems to me that in the area of a monetary policy there is a
need to insulate that policy from— and I say vicissitudes— but I
don’t mean to degrade them from the short-term zigs and zags that
our government goes through and should go through as a democ­
racy. That is point number one.

I really don’t know how the Senator’s bill would affect that issue.
I just don’t know how it would affect it because you take the five
people of the Open Market Committee off—I haven’t done a study,
and I am sure he knows more than me how those people vote dif­
ferently than the others. But that is my hunch.
One of the reasons that we do have the big budget deficit, which
President Clinton, I think, deserved a lot of credit for trying to
tackle, is that all of us in the legislature and the President, too—
one of the many reasons—wanted to respond to the short-term
needs as opposed to the long-term and less-direct needs. So, I think
that if there is a place in our government where there should be
some insulation, the Supreme Court is one, Bill of Rights, but prob­
ably monetary policy is another. Because we have elections and
there will be pressure to loosen up the money supply and that
makes a better result in 6 months but worse result in 1 year and
6 months, and that is natural in the push and pull of democracy.
Senator Sarbanes. If you have a 14—1 am sorry.
Mr. S chumer . Go ahead. I would like to get your answers.
Senator Sarbanes. If you had a 14-year term, wouldn’t you re­
gard that as a considerable degree of insulation from political pres­
sures? That is what the members of the Board of Governors of the
Federal Reserve have. In some respects, you know, I guess we
could get in an argument whether that is----Mr. S chumer. T oo much.
Senator Sarbanes. T oo much. But it is barely short of what the
judges get. It seems to me a tremendous amount of insulation. And
these are very important public decisions about which there is con­
siderable controversy.
Leave aside the 14-year term, you have then got people on the
Open Market Committee who get there because they are picked, es­
sentially, by the banking community.
Mr. S chumer . Right.




34

Senator Sarbanes. Why don’t we set up some other economic in­
terest in the country to pick the members of the Open Market
Committee? So you could say we don’t want five members on there
reflecting a particular economic group. Let’s get some other eco­
nomic groupings. I am not arguing tnat. I am just arguing pick
them out through the public sector.
Mr. Schumer. I guess the point I was going to make, and the
Senator really made the same point with a different emphasis, is
this isn’t that much an issue of democratization because there is
a great deal of insulation even on the Federal Reserve Board, as
you pointed out.
Then you run into the issue of public-private, but to me because
the issue is not one—no one here in this room is suggesting that
we have 2-year publicly elected terms for Federal Reserve officers,
maybe some people would, but no one here is saying we should
elect the Federal Reserve like we do the Congress, perhaps 8-year
terms, or 2-year terms and they run for office. But then you get to
the question of history, how well has it worked.
In my judgment it has worked pretty well and, therefore, at least
to this point, the burden of proof has not been established that we
ought to change it. That was ultimately—I don’t believe in chang­
ing it for a theoretical purpose. Really, in that way I agree with
my colleague from Massachusetts, but I don’t believe this is going
to be an area any of us are going to choose for the closest level or
highest level of democratization so, therefore, why do it? That is all
I have to say.
I would welcome comments of some of the most thoughtful people
I know in government who are sitting at that table.
Mr. Reuss. Does the distinguished gentleman from New York
disagree with the unanimous 9 to zero decision of the Supreme
Court in 1976 in Buckley v. VaUeol
Mr. S chumer . Yes.
Mr. Reuss . That it is unconstitutional?
Mr. S chumer. Yes, I do.
Mr. R euss . Y ou disagree that it is constitutional?
Mr. S chumer . I do disagree.
Mr. N eal . Would the gentleman yield?
Mr. S chumer . Yes.
Mr. N eal . I have an opinion by Judge Errol Green in 1986 in

which he says very clearly that the composition of the Federal
Open Market Committee may be unusual but it is not unconstitu­
tional, and before that he says, this has been a subject of consider­
able legislative discussion over- many years. So I honestly, Mr.
Chairman, I just cannot see how anyone could possibly claim that
this is an unconstitutional arrangement.
Mr. Reu ss . Errol Green versus the nine? I don’t know.
The Chairman . The Chair will state that we have gotten notice
that we have a rollcall vote and the gentleman from New York’s
time has expired.
We must move on.
I wanted to remind my colleagues that if you could, return to the
hearing room as soon as we cast our vote because we have two wit­
nesses remaining.




35

Mr. Frank . Given the volatility of the subject, could I designate
a respectable private citizen of mv district to come in my place per­
haps, to create a certain calm and lassitude to this proceeding?
Mr. S chumer . But with only five-twelfths of a vote.
The Chairman . Only if you allow us to set up a de facto screen­
ing.
Mr. Frank . Delighted to. You would probably need one in my
district.
The Chairman . Senator, and Mr. Chairman, thank you very
much. You have been most patient. We have gone right up to the
noon hour and you have been most helpful.
Senator Sarbanes. Thank you.
Mr. Reuss . Thank you.
The Chairman . We will be in communication with you as we go
along.
We have two gentlemen that I wanted to thank also for their co­
operation in accepting this invitation, and to urge my colleagues to
come back and let’s listen to them and expedite the hearing.
We have listed them as a panel 2 and panel 3, but because of
the time we will join them ana have them at the table at the same
time when we come back. They are Mr. William Greider and Mr.
Grasty Crews, II.
We will stand in recess for about 5 or 10 minutes to record our
vote.
[Brief recess.]
The Chairman . All right. The committee will resume. We will
hear from our two friends.
Some of the members are on their way back; others have indi­
cated that if they can, that they will be submitting some questions
in writing. So if there is no objection from Mr. Crews, we will rec­
ognize Mr. Greider first. And tnank you again for your appearance
today.
STATEMENT OF WILLIAM GREIDER, AUTHOR, “SECRETS OF
THE TEMPLE”

Mr. GREIDER. Thank you, Mr. Chairman. It looks like we are
down to the hard core on this subject now.
As you know, I have no professional credentials to testify before
this committee. I am not an economist, not a political scientist,
never worked for a bank, never worked for the government. I am
basically a reporter and have always declined requests from var­
ious congressional committees to appear because I think it just
complicates the life of a reporter to do that.
I said yes to your request because I think you put a really impor­
tant idea on the table that looks very simple and innocuous ana in
fact might actually improve things. I am talking now about your
proposal to get the Federal Reserve to produce a verbatim tran­
script of their Federal Open Market Committee hearings within a
reasonable period of time whether it is 2 months, 3 months after
their deliberations. I will get into why I think that is significant,
but first let me deal briefly with some of the other ideas.
The reason I am here is I spent a lot of years exploring the Fed
as a reporter and wrote a very long book about it. I came across
the history of virtually all of these ideas that are being discussed




36

and, as you know, the late Wright Patman, who looks down upon
us, offered all of these and many more over and over again over
more than 30 years. None of them were adopted.
I think most of them are wonderful ideas and some of them
sound kind of sexy, the notion that bank presidents get to vote on
government policy and yet they are not confirmed or appointed by
the President and the Congress. Frankly, I think they are diver­
sions in the sense that even if you were to get that idea through
Congress, it wouldn’t get at the heart of the problem.
The Fed, after all, is going to be close to bankers. They are going
to consult bankers. I mean, bankers in the broad sense, brokerages,
economists at banks, foreign and domestic banks, it would be odd
if the Fed didn’t consult bankers. So detaching them a bit from the
Federal Open Market Committee isn’t really going to change the
nature of now decisions are made.
Second, I think—this I am giving you from my book—it is a
slightly more complicated relationship than what has been de­
scribed here. My understanding is that all 12 bank presidents are
on the Federal Open Market Committee as members with the 7
Governors, with only 5, it is true, getting to vote, but all 12 at the
deliberations express opinions and they go around the table and
give their analysis.
Second, if you study how they vote, the bank presidents are
slightly more conservative than the Board, the Governors who have
served on the Board. That has been the finding of political sci­
entists that have researched that over the years. In fact, it is not
a large difference, however.
So the point raised by some of the Members—what is the effect
of this? I don’t agree with them that there is nothing that needs
fixing, but I do agree that change by itself, though it may sound
right for democracy, won’t really nave a deep impact on the behav­
ior of the Fed.
I do think your idea of simply requiring the Federal Reserve to
publish a transcript of those deliberations inside the Federal Open
Market Committee would have a therapeutic effect.
Let me talk a little bit about the institution as I learned it. I
spent several years both immersing myself in the economics and fi­
nancial details of the institution and also interviewing scores,
maybe hundreds, of people inside and outside the institution,
present and former Governors, bank presidents, senior officials, the
people who sit inside those meetings.
Basically, the question I asked them was why did you decide
this; what were you thinking in the autumn of 1979 when you de­
cided to shift to a monetarist way of operating; and what were you
thinking in the spring of 1982 when the countiy was in a deep re­
cession and you decided to hold firm for another month or so; and
what were you thinking in August 1982 when you decided to ease
and so forth and so on?
The one theme that came back from everybody repeatedly was to
emphasize: A, the difficulty of what they do; and, B, their own fal­
libility.
I say that with respect. These are smart, dedicated well-educated
people who are in fact arguing among themselves over what is the
right thing to do and they have, like the Congress, they have un­




37

certain assumptions, they have squishy numbers, they have really
difficult tradeoffs between competing objectives. So they make mis­
takes. Just like us other mortals.
The difference, of course, is that when the Fed makes a mistake
it can have a devastating impact on lots and lots of people. They
can turn viable businesses into bankruptcies, they can drive debt­
ors to the wall, they can put millions of people out of work, they
can turn losers into winners, punish some investors, reward others,
they can literally reverse the tide of economic growth, and they do
that obviously with reluctance and some misgiving but the Fed has
the power to do that.
Given these vast powers, it is fatuous to contend the Fed is non­
political. If I say one thing at all and it gets implanted in the
record, it is that the Federal Reserve is, of course, a political insti­
tution. I want to make it clear what I mean by that.
I do not mean, as some Fed critics have always said over the
years, that the Federal Reserve is made up of conservative bank­
ers, represents wealth, and so forth, takes care of the Republicans
and punishes the Democrats.
I think the history of the central bank pretty clearly refutes that.
As somebody mentioned, if the Fed were dedicated to taking care
of the Republicans, George Bush would be serving his second term
right now, and, without a doubt, Richard Nixon would have won
the 1960 election.
Nor do I suggest, as a lot of economists argue, that the Fed pri­
vately takes instruction from the White House. They don’t like to
do that in public but that is the way it works.
Yes, the Fed listens to the White House; no doubt about it. The
Fed listens to financial markets, to Wall Street, to commercial
banks, to a whole array of players all the time and it tries to steer
between those rocks as any political institution would.
But again, as somebody even mentioned, if the Fed simply fol­
lowed the wishes of the White House then probably Jimmy Carter
would have gotten a second term and maybe Gerald Ford would
have been elected. You could go through the history and see this
again and again.
What I am trying to describe is a political institution in the ge­
neric sense—making big public decisions with the force of govern­
ment and with an absence or at least a very weak connection of
accountability. We can all kind of see that that is wrong in our
sense of democracy, it doesn’t—in theory—fit.
Yet, we also have to concede it has been there 80 years. Both po­
litical parties have supported this arrangement. It is Woodrow Wil­
son’s grand compromise. It is not likely to be easily altered.
Well, what I see as the first problem is that this political dialog
that goes on all the time privately, semiprivately, is very distorted.
Some citizens have a very large voice in it and most citizens have
none.
The Fed, obviously, doesn’t have to face elections. That is the
way it was designed. But, frankly, to be blunt, the Fed really
doesn’t have to face intelligent scrutiny from those people elected
to represent them. That is the Congress.
I have been to a lot of hearings of this committee and the Senate
Banking Committee and I would say, candidly, oversight hearings



38

on the Federal Reserve, those semiannual Humphrey-Hawkins re­
ports, are generally not terribly edifying.
A lot of the questioning is posturing and sort of the bile of the
moment. Misinformed little traps are laid for the Fed Chairman,
and I have watched Fed chairmen step out of those traps quite eas­
ily because the questions are not all that profound or intelligent.
I think the truth is that most Members of Congress defer to the
Fed’s wisdom because they don’t understand it. They, like most
Americans, are spooked by the mystery and the power and it is
tough stuff, it is complex, it is daunting. So they may stand up and
rail at the Fed Chairman—why are you putting my people out of
work, and so forth—but in fact there is a kind o f willingness on the
part of Congress not to know and not to understand. I nave to add
that the news media enforces that. If you become a critic—and I
mean a serious, intelligent, ongoing critic of the Federal Reserve—
you can pretty much count on the press beating up on you and ac­
cusing you or, quote, political meddling with this supposedly non­
political institution.
I think this matters. Distorted politics matters to everybody in
pretty powerful ways, because the effect is a kind of institution
whicn given its own natural biases, takes a very narrow view of
economic reality, and tends to exclude those competing views of
economic reality.
I think if your proposal were to become law and the Fed were
to make public its internal debates, most everybody would agree
that that is the case. I base that on my own reporting and discus­
sions with Fed Governors, and some of them acknowledge that.
Others denied it, and some of them anguished over it, and some
of them dismissed it, but they all could talk about their fallibility.
Yes, of course, we are in this narrow trench trying to do the best
we can with the complexities of the economy.
Wall Street, as you know—I use that term broadly—spends a lot
of money hiring, quote, Fed watchers. And they need to do that.
They have to have some sense of where monetary policy, credit,
and interest rates are going because it will affect not just credit
markets but economic activity across every sector.
Meanwhile, the public is regularly blind sided because nobody in
government gave them an intelligent explanation, intelligible ex­
planation of what is coming and why.
Again, I don’t blame the Fed solely for that.
If you are talking about reforming the Federal Reserve, if you
are really serious about it, you are really talking about the behav­
ior of other institutions as well, including the Congress. If you
asked me in some sort of pie-in-the-sky manner to design a form
of the system, I undoubtedly would come up with ideas a good deal
more radical than anything that is on the table. But I thought
about this a long time, ana I came to the conclusion that while
those ideas in theory might be sound, as a practical matter they
don’t belong on the table yet because the level of ignorance is so
profound and it would be so difficult for the Federal Reserve to be
rearranged and to share power more openly with the rest of gov­
ernment. So that is why I settle on your idea.
I think it is a reasonable basis of accountability. You are not ask­
ing the Fed to do anything more than any other agency of govern-




39

ment perhaps excepting the Central Intelligence Agency is required
to do. A President, you know, proposes legislation, and you have
the power to demand exhaustive documentation from him or from
any executive agency: Why are you proposing this? Where are your
facts? What is your argument?
Everv Member of Congress is required to do the same. That is
what debate and argument and deliberations are about. Creating
a record for accountability. So I actually think if you could accom­
plish this, it would have some modest effect on the Fed’s behavior
perhaps but it might also have a larger effect on the general public
and on the Congress. I am talking about the beginning—it is only
a beginning—of a mature understanding of how monetary policy re­
lates to everything else.
You are simply asking them some simple questions: What hap­
pened at your meeting? Why did you decide these things? What did
the economic reality look like to you when you made these deci­
sions? What did you think your policy was going to accomplish?
That gives us all a baseline for beginning to judge their behavior.
One of the things it took me a while to grasp but as I spent
months and a number of years talking to Fed Governors and Fed
economists, they kept saying to me: Monetary policy is a contin­
uum; it is not one moment in time, it is not one decision.
I finally did grasp that that was not a cliche. It is quite true.
They are following a stream of interlocking forces in the economy
and they are making a judgment in March which they hope will
produce some results by June or maybe by September and they are
adjusting that decision constantly. That is what they argue about
in those meetings. And they have to take not 3 or 4 things but a
dozen or 20 things into account as they make those judgments.
So, of course, there are arguments about who is right and who
is wrong. I think until average citizens—not to mention Members
of Congress—begin to accept that reality and look at monetary pol­
icy in those terms, then it will always be a kind of game of catch
in which you try to nail them in saying something inappropriate
or getting them in some kind of a minor deception.
Now, what would we get if the Fed produced these documents?
Believe me, it would be a very hard slog through some very dense
reading. I base that on my reading of several years of the old
FOMC minutes which, as you know, were really just a secretary’s
rough minutes of the meeting. They were not a verbatim tran­
script, and Arthur Bums unilaterally abolished them in 1975 or
1976. But I read a lot of them. They are at the Fed library and,
believe me, you would not take this stuff to the beach for light
summer reading.
What you would get? You wouldn’t get name calling and you
wouldn’t get political plots and you wouldn’t get people making ac­
cusations and, you know, at the least this might lay to rest some
of the more lurid conspiracy theories that surround the Fed. What
you would get I think is a very earnest, dense discussion of eco­
nomics and an argument that once you got used to reading them
you could hear the argument but you would have to be pretty so­
phisticated even then to understand that Governor X is saying
Governor Y is wrong or that Governor Y said this back in January
and, look here, we are in June and it turns out to be the opposite.




40

But that is the grist of these discussions. They are competing
analyses of the economy, arguments over what is happening ana
what is likely to happen, ana over how monetary policy will affect
eveiything from bank lending to manufacturing, retail sales, unem­
ployment, global capital flows, and so forth.
You are not going to get any big headlines out of this. But what
you will get, I think, is the basis for serious people who are willing
to spend the time and energy to begin tracking monetary policy
over time to get a coherent understanding of wnat the debate is
about. Presumably, that starts with Congress, if Congress has the
energy for that; then I think, yes, there are a lot of interests that
don’t get to sit at that table and they feel excluded. I am talking
about the obvious ones, labor unions, homebuilders, farmers, oil
drillers, manufacturing. They understand they are not direct play­
ers in finance and they are really not experienced in doing this.
They are not so good at lobbying tne Fed and they will scream and
yell at the Fed, Dut they don’t nave a terribly sound grasp of the
subject either.
So I think this is a modest step toward public education and ac­
countability. Would it lead to more dramatic reforms, so-called
politicization of the Fed? Well, it might but, frankly, I think history
is against that. As I mentioned, Wnght Patman didn’t get far try­
ing to change the nature of the Fed. I think a lot of it would de­
pend on events. Are people shocked by what they read, or reas­
sured? I am not prepared to say which that would be.
Would it change the behavior of the Fed? Maybe a little bit. It
would certainly make them sensitive to the fact that their words
will be more widely distributed. I don’t think that is bad. Members
of Congress have to subject themselves to that. Yes, they might
even make some speeches in those meetings designed for public
consumption. I don’t think that is bad either.
I think that is what Members of Congress do in their debates.
They know they will not change votes but they are making a record
which other people can consume and learn from.
Now, why is doing this so important if it is only having these
slight effects? I actually, ironically, believe that this sunshine
would make the Fed a more effective institution of government.
The reason I think that is because. A, it would, at least a little bit,
raise the level of the economic debate in American politics which
is at a pretty low level now in terms of intelligence and serious­
ness. It would perhaps enhance the Fed’s credibility with the public
as people get at least a glimpse of what is being argued over here.
More importantly, ana I think you could talk to Fed Governors
and Fed chairmen about this, including the incumbent Chairman,
the Federal Reserve is often in the posture of trying to persuade
public behavior. Chairman Volcker was doing this all the time but
sort of warning, imploring, scolding either investors, consumers, or
businessmen, telling them to slow down, telling them to be more
prudent. Frankly, that message just falls on deaf ears partly be­
cause those people outside sophisticated circles don’t understand
what is being said to them.
So this reform would have the first effect of pushing the Federal
Reserve Governors to speak a little more plainly in terms that nor­
mal, ordinary, uneducated—that is noneconomists—could under­




41

stand; and, second, I think their ability to alter economic behavior
by persuasion would actually get stronger.
Now, the other major effect is I think really the most important
one and that is about, as was mentioned here, the coordination of
fiscal policy and monetaiy policy.
The late Mr. Patman called the Fed a car with two drivers; one
driver has his foot on the gas, the other has his foot on the brake.
He meant Congress controls the fiscal policy of taxes and spending
and the Fed does money supply, credit, access to credit, and inter­
est rates.
As we know, from recent history in fact, those two drivers are
sometimes going in opposite directions and the side effects of that
are horrendous and we have experienced some of them in just the
last 15 years. I am not, I emphasize, saying the Congress and the
executive branch were right in their fiscal policy and the Fed was
wrong. In fact, in some instances I think it was reversed. But what
I am saying is the refusal of these two power centers to deal with
each other in a rational, coherent way is itself veiy destructive and
we are paying for the misunderstandings and lack of communica­
tion right now.
Again, to be blunt, I think both sides like it like that. I don’t
think the President and the Congress want to consult with the
Federal Reserve in any serious way about fiscal policy. I think they
have seen the Fed as this spooky temple that will clean up the
mess if they are having excesses and they don’t want to be respon­
sible for that.
Likewise, the other side, for more obvious reasons, does not wish
to consult with the executive branch about how our monetary and
fiscal policy are going to fit, in any visible manner at least, because
that will somehow crimp their style. So both of them are free to
go their own way. And then we get the consequences.
Now, it is difficult to start from zero and say this is how they
ought to coordinate. It is true that they, the Fed Chairman meets
with the Treasury Secretary; in fact, there are not just formal
meetings, there are dozens and dozens of meetings and conversa­
tions. I think that is not what makes a process accountable and re­
liable. I think you have to formalize it. I don’t have any strong idea
about how you do that, but I think making the Fed’s arguments
more visible and the present situation of its policy will, first of all,
have some impact on the Congress.
I have been talking abstractly; let me be very tangible with my
examples. In 1981, when the Reagan economic policy was adopted,
huge tax cuts and a huge defense buildup, the effects of that were
highly stimulative to the economy. The Federal Reserve under
Chairman Volcker was already embarked in the opposite direction,
they had interest rates at 20 percent with a very obvious purpose
of wrenching the inflation out of this economy ana that means, yes,
probably a recession. It didn’t say that in public but anybody with
any sophistication understood that that is what was coming.
Nonetheless, Congress and the President went ahead with a pro­
gram in going in an opposite direction. The Federal Reserve, out
of its own lights, and I have some sympathy for the situation it
found itself in, said we have to counter that. So it held interest




42

rates high. We went into a deep recession and did not get any stim­
ulus effect from the deficits until after the recession.
This was the car with two drivers and the country wound up in
the ditch.
Would the Congress have pone forward anyway if it had under­
stood that it was going right into the wall of Federal Reserve mone­
tary policy? Maybe. I can’t claim that the Congress would have
been totally rational on this. I don’t think that events of 1981 were
totally rational but at least there would have been visible debate.
After the recession of 1982 was over, the Federal Reserve re­
solved in private—never announced this decision—that because the
huge stimulus from the deficits is pouring into the economy, we
have to keep interest rates at an extraordinarily high level to check
that stimulus. They did that.
Again, let’s not argue over whether that was the right decision
or wrong decision. The fact is the interest rates of the 1980’s in
real terms were the highest of this century and my authority for
that is the Chairman of the Federal Reserve Board, Mr. Green­
span.
Up to this point, we have an argument between these two power
centers and we have not chosen which is right.
Now let’s look at just some of the collateral consequences of this
collision, again, not blaming one or the other. One is that the sav­
ings and loan crisis was dramatically worsened by the level of in­
terest rates through the 1980’s. We all know the history of the sav­
ings and loan crisis, and we all know there were other causes along
the way including some political neglect, and so forth, but I have
talked to Fed economists who were inside the Fed at the time who
would put projections in front of the Federal Reserve Governors
saying if you keep this policy, you are going to lose 1,000 S&Ls or
2,000. I forget the numbers. Inside the Fed, the Vice Chairman of
the Federal Reserve, Preston Martin, because he came out of that
industry was pleading with his fellow Governors month after
month to ease that policy or do something to take care of the S&Ls
because he saw what was happening. His remark to me was, quote,
“We threw them to the wolves.”
Two, the trade deficit soared from 1980 to 1985 primarily be­
cause the Fed followed its high interest rate policy wnich sent the
dollar soaring against foreign currencies. Inside the Fed, Paul
Volcker and Anthony Solomon, who was president of New York
Fed, anguished about this all the time and in fact they wanted the
Treasury to get active in some kind of dollar policy that might have
lessened the damage. Believe me, this was not a public debate. It
was private conversations.
Lee Iacocca was complaining rather regularly that once these for­
eign producers get these market shares from U.S. companies, it is
going to be very hard to get them back. Turns out he was right.
Here we are, the dollar weakened, and a lot of history passed since
1985 but the market shares have not changed that much. That is
a permanent damage to the structure of American manufacturing.
Again, I am not blaming the Fed, but I am saying it was a result
of this collision between fiscal and monetary policy.
Third, the collapse of Third World debt was directly triggered by
the high-interest rates generated by the Fed.




43

I am not blaming the Fed for making all those loans. I am not
blaming the Fed for the dilemma it was faced with but nobody ever
acknowledged that in 1982 when the Fed suddenly reversed policy
and began easing. It was easing in July, August, 1982 partly be­
cause the whole economy was going through the floor but especially
because it was now confronted with a default from Mexico and it
knew Brazil and Argentina and a bunch of other countries were
right behind and that, in fact, imperiled the American banking sys­
tem at the very top.
You can take a line, and I will not bother you with this argu­
ment, but you can trace those events, those decisions to the debate
before you now with NAFTA and our trade relations with Mexico.
I am sure you have thought your way through this. Again, I am
just saying that there is a continuum of cause and effect here that
almost never surfaces in serious debates about the Federal Re­
serve.
Finally, I mentioned the farm crisis, not to blame the Fed for the
farmers taking on too much debt but to make a somewhat different
point. Neither the farmers nor other kinds of debtors were given
fair warning about what was about to happen to them. I docu­
mented this in case after case, literally. Your Federal agencies,
Small Business Administration, Farmers Home, and a whole bunch
of others were making loans and guaranteeing loans in 1980
through 1982 that were absolutely doomed to fail by the Federal
Reserve’s own policy.
So I complained in terms of democracy that the Fed or the Fed­
eral Government didn’t give those farmers fair warning of what
was going to happen to them, but they didn’t even tell other Fed­
eral agencies what was going to happen to them.
Let m ejum p to one other example which is tangible and more
current. That is about the present Fed and the present Chairman
and the present Congress.
In 1988, naturally enough, both candidates for President prom­
ised the voters that they would deliver economic growth and jobs,
and so forth, and at the very time they were doing that, the Fed­
eral Reserve was embarking on the opposite policy. In the summer
of 1988, the Fed started ratcheting up interest rates out of its own
perception of what needed to be done, and its goal was to suppress
consumption, slow down the economy, and presumably reduce the
inflation rate.
I am not arguing that that was the right goal or the wrong goal.
I am simply saying that here you have the American voters listen­
ing to one sermon while the government in fact was doing the op­
posite.
When the Fed pushed short-term interest rates up above long­
term interest rates, they were flirting with recession and that hap­
pened in 1989. The Chairman of the Fed said he didn’t want a re­
cession, and I am willing to take him at his word but that is what
the country got.
There is a pretty good rule which I discovered in my study of
monetary history; when short rates are above long rates and they
are held there, called an inverted yield curve in financial markets,
then a recession follows.




44

If you go back through history, back to World War II and before
that every recession has been preceded by that condition.
So, question: Did Congress know that the Fed’s monetary policy
was pushing the economy toward a contraction? Evidently, not be­
cause in the fall of 1990 the Congress adopts the famous budget
deal which raises taxes, cuts spending, and right in the teeth of a
recession adds pain and destruction.
My question is, would they have done that if they had under­
stood what the Fed was embarked on?
Now, maybe they would have. Maybe they would have gone
ahead anyway. Maybe they decided that that was the right thing.
But it seems to me in a country of this complexity, particularly
given our democratic values, that those questions ought to be some­
where visible to normal people. Whether they come from the Fed
or they are put in the face of Congress, these are pretty big deci­
sions on people’s lives and we are paying for them still.
At the time, as you may recall, the Chairman of the Fed was urg­
ing Congress to adopt that budget deal and he was assuring you
that there wasn’t a recession. As I said, the Fed is not infallible
on these matters.
To summarize, I see two goals that your limited proposal would
go toward and only really begin to produce change.
The two goals are: One, to force some kind of more accountability
not just on the Fed but on all of the levers of macroeconomic policy
so that they at least confront their own contradictions; and, two,
to open up this cloistered debate a little bit so that many more
voices could be heard. Thank you.
The Chairm an . Thank you very much, Mr. Greider. Your pre­
pared text of the remarks you submitted will be printed in the
record following your oral presentation.
[The prepared statement of Mr. Greider can be found in the ap­
pendix.]
Mr. Crews, let me say for the benefit of the new Members that
Mr. Crews has a veiy distinguished record of service to this com­
mittee. And my only regret is that when I did come aboard as
chairman I had some pretty anguishing discoveries, one, the deci­
sion was made informally in December 1988 that I would be chair­
man. It wasn’t official, but I was facing a deficiency, that our equiv­
alent of our auditor and treasurer explained to me that the Decem­
ber payroll would not be able to be met unless we did something
and they asked, well, we are not going to get any money; and I
said, well, no. This last October 1 the chairman had turned back
$300,000 to the House Administration Committee, and because of
some—maze and ledger domain of budgetary and accountability
that we have in the Congress affecting committee funding, we were
able to refigure it out and meet the payroll.
But what I wanted to say was that otherwise if Mr. Crews had
been willing he would probably have been aboard as once again
helping the committee. So thank you very much for responding to
our request, Mr. Crews. You are recognized.




45
STATEMENT OF GRASTY CREWS n , FORMER COUNSEL FOR
THE COMMITTEE ON BANKING, FINANCE AND URBAN AF­
FAIRS; FORMER GENERAL COUNSEL FOR DRUG POLICY OF­
FICE IN THE EXECUTIVE OFFICE OF THE PRESIDENT UNDER
PRESIDENTS NIXON AND FORD; FORMER MEMBER OF THE
LEGISLATIVE COUNSEL, UJS. HOUSE OF REPRESENTATIVES;
FORMER ADVISOR, LEGAL DIVISION, BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM

Mr. Crews. Thank you, Mr. Chairman.
It is a great pleasure for me to be here and I appreciate the op­
portunity. I remember very vividly when this committee met across
the street in what we then called the New House Office Building
and then the ranking, not yet chairman of the committee, Wright
Patman, introduced a young Congressman from Texas, and I have
long since forgotten what we discussed at that meeting but I will
never forget the shy smile with which vou acknowledged Mr. Patman’s introduction, you took your seat for the first time at an exec­
utive session of the committee. I never dreamed I would be in this
building at this time, but I am very happy to be here.
I am not going to try to repeat what is in the prepared state­
ment. A lot of it has tieen covered by other witnesses. There are
two things that were brought up in the informal discussion that I
would like to address briefly.
Mr. Neal quoted from Judge Green’s opinion and I think it is
very important to understand the status of that opinion. It was va­
cated. That means it no longer has any force or effectiveness for
any purpose, even as a precedent.
When a court of appeals considers a lower court opinion, it is
often confronted with two different kinds of questions, a procedural
or jurisdictional question—namely, do we have a right to even get
at this thing or not—and, second, the substantive question that the
party below tried to raise.
Now, if the court is in agreement with the lower court’s sub­
stantive determination, it will often say so, and a good example oc­
curred in this area because at the same time, just by coincidence,
that Federal Reserve Open Market Committee membership was
being challenged by one Member of Congress, Senator Melcher, an­
other Member of Congress was challenging the constitutionality of
the pay-setting mechanism for Congress. That went to a different
judge down below and they happened to be heard in the court of
appeals at about the same time.
You have three judges chosen by—at random for each of these
hearings, and again a coincidence, there was an overlapping on the
part of two judges. In other words, two judges heard both cases and
there was an additional judge in one and an additional judge in the
other.
In the pay-setting case, the court of appeals said Judge
Oberdorfer should not have considered this case at all. He didn’t
have standing. But in case it is held upstairs, that they did have
standing after all, we hold that the pay-setting system was per­
fectly constitutional. So even if they had had standing, they would
have still lost.
In Senator Melcher’s case, the court was very careful not to touch
the substantive question with a 10-foot pole. They said nothing fa­




46

vorable about Judge Green’s determination, that that setup was in­
stitutional. They simply vacated on the grounds that the plaintiff
in the case did not have standing to bring this issue to the courts.
You can draw your own conclusions from that but that is the way
it happened.
I don’t think this is the proper forum for me to get into a discus­
sion of standing, it would be more of interest to your colleagues on
the Judiciary Committee, I am sure.
The other thing I would like to comment on briefly is why we are
in this problem. Why we have this problem. I think that goes to
the essence of the institution of the constitutionality question.
We have it because the mechanism for regulating the value of
money contemplated by the Framers of the Constitution is no
longer workable. We simply can’t do it that way anymore. We have
not done it that way for about 60 or 70 years.
The relevant provisions of the Constitution are these: Section 8
confers on Congress, in so many words, the power to coin money,
regulate the value thereof, and of foreign coin.
Section 10 explicitly withdraws the coinage power from the
States, and implicitly mandates a precious metal standard as the
means by which Congress is to regulate the value of money.
In section 10, it specifically says: “No State shall coin Money,
emit Bills of Credit”—that is an 18th centuiy way of saying issue
paper money—“or make any Thing but gold and silver Coin a Ten­
der of debts.”
That means to regulate the value of coins under that system, you
change the weight of gold in the dollar or a silver dollar, whatever.
But that was the way it was done. And there is this clear separa­
tion between money, or what we in modem economic parlance call
the monetary base, and everything else which is credit.
When we instituted the modern Federal Reserve System with the
Banking Act of 1935, we literally didn’t know what we were doing.
In fact, we had not completely done it yet. We retained gold as the
monetary base, it was still used in international transactions and
would continue to be for many years but it was no longer
interconvertible with money as it had been at the founding.
So we sort of eased into, without real public debate, without a
real understanding of what we were doing, into this situation we
have now where the power that controls the Federal—controls the
monetary base is in exactly the same position that the Congress
was in 1789 when we began, and for many years thereafter, where
Congress specified that the dollar shall consist of so many grains
of gold and such and such fine.
The winds of change now blow not only too hard but too errati­
cally for the price or value of any commodity to be expected to stay
in step with the needs of a worldwide economy. So we cannot go
back to that system. But this leaves us in a place where the very
foundation of the system assumed to exist has been swept away.
It is hard for me to escape the conclusion that the accommoda­
tions that the FOMC made to first the needs of the Democratic and
then a Republican administration to simultaneously finance a war
in East Asia and urgently needed social programs here at home,
contributed to a subsequent acceleration in the rise of prices, espe­
cially in real estate.




47

I am just going to take 1 minute to repeat something of a
thought mat has already been expressed.
At the end of the 1970’s, efforts to counteract the effect of those
accommodations led to a rate of change in interest rates far in ex­
cess of anything that many depository institutions specializing in
long-term real estate loans, savings and loans, could reasonably be
expected to adjust to. As a result, they quite predictably went
broke in droves.
Although I think a strong case can be made for the proposition
that the Fed’s action was necessapr to brake an ingrained expecta­
tion that price rises would continually outpace interest rates, I
think the Fed had a responsibility to warn what else was going to
be broken in the process, especially when that something else was
something that the government itself was obligated to fix.
If we can’t go back to the method of regelating the value of
money that was contemplated by the Framers, I am convinced that
we can’t, then we must think anew of how to achieve the objective
they sought, but by means which are available in our time. In one
man’s working lifetime, which I hope hasn’t quite ended yet, we
have seen a devaluation of the dollar by more than 90 percent. My
first job was as a minimum-wage laborer at 40 cents an hour and
yet tnat 40 cents would by buy more than what the minimum wage
would buy today.
I think it is obvious that—I think there is no way that we as a
nation can feel satisfied with that record. And on that point, I
would respectfully disagree with some remarks Mr. Schumer made
earlier today. He said ne thought that on the whole the Fed had
done a good job.
I think—I would concur with my fellow witness, Mr. Greider,
that the individual members have tried to do a good job, and I am
not impugning their motives or integrity or anything about them.
The point is that in order to change the record, I think we need
institutional changes.
If we could do better with the existing institutions, we would
have done it already over a period that long. I don’t see that we
are doing it.
I would like to conclude by urging all three of my former employ­
ers, the Federal Reserve, the executive branch, and this committee,
to approach the issues raised by H.R. 28 as an opportunity for dia­
log with genuine communication and problem solving and not as an
invitation to a power struggle. It is my deep conviction the appoint­
ment of all members of the FOMC, in accordance with the Con­
stitution, would strengthen, not weaken, the legitimate independ­
ence of this vitally important arm of government.
In and of itself, such a change would certainly not solve the
central dilemma of monetaiy policy, which is how best to balance
short-term and long-term considerations in the context of an everchanging global economy.
It may be that until we can devise a true global currency, a func­
tion that gold once appeared to fulfill, we may simply have to mud­
dle through with substitutes that don’t work veiy well. Even so, I
think the muddling will be more successful and the discussion
more enlightening, if it is illuminated by a candid acknowledgment




48

by the FOMC of its function and by timely and candid disclosures
of the reasoning behind its decisions.
I think the essential thrust of H.R. 28 is an effort to foster those
objectives, and I hope it will be considered in that light.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Crews can be found in the ap­
pendix.]
The Chairm an . Thank you veiy much, Mr. Crews.

I, for one, am deeply grateful to both of you for what I consider
to be the proper interpretation as to the motivation and the intent
of this proposed legislation. As I said in my opening statement,
never even in the most ambitious thoughts could I conceive of hav­
ing the solution to what would be the ideal structure. I think that
in the human activity that is impossible and illusory to think you
could do it.
However, I am aware of the fact that the Congress has failed to
approach and even discuss the critical or basic issues which now,
and particularly just 5 years ago, were engulfing us in deep crisis,
which we have not fully emerged from, incidentally.
Mr. Greider . That is right.
The Chairman . And I nave watched this during the 33 years I
have had the honor of being a Member of the Congress. I did speak
out.
Of course, in August 1979 I didn’t expect any particular attention
but I became very concerned, because I took the annual Federal
Reserve report which I, for one, looked at and tried to analyze as
best as I could. And I came to the conclusion that the exponential
increase in IV2 years in our leading banks involving loans to na­
tions, mostly Latin America, that I knew could not pay at that
time. I also happened to be chairman of the Subcommittee on
International Finance, as we called it then, and having the rule of
thumb that the Bank for International Settlements—these are in­
stitutional bankers that have been in the business for several years
and have about what they called the 22 to 1 ratio.
When a financial institution reaches a point where it has a ratio
of 22 to 1, that is debit as compared to capitalization of assets—
it is gone. No return. But what these principal banks have done,
just in Latin America in what is known as “sovereign debtor loans,”
was to have increased in less than IV2 years from $3 billion to over
$47 billion.
I then made a speech on the House floor, and to my amazement,
the following day in the afternoon, I had a call from General Chair­
man Arthur Bums and he wanted to know if I would have break­
fast the following morning. I said, I would be honored. I was flab­
bergasted. I don’t know why I would be called.
So it turned out it was either somebody—or I guess they have
people looking over the record, and so on, and saw my reference to
the Federal Reserve Board. And he said, well, you know, I want to
tell you that your remarks were on point, and that I agree with
them, and I am very, very much disturbed. In fact, last month at
the convention of the bankers in Hawaii, they got quite angry with
me when I admonished them about this exposure. I said, well, Mr.
Chairman, what are you going to do about it?




49

And he said something that I had seen in the paper, that this
money was recycled Arab petrodollars. My contention was that
whether they were Arab or anybody else, they were deposits in
those banks and when the amount o f that exposure exceeded or
came near that capitalization structure, I thought the Fed had a
responsibility.
So the Chairman said, well, there is nothing I can do. And I
smiled and I said, you know, when I came here I didn’t know what
you wanted but when you first mentioned this I was kind of happy
that at least you were worried about it. But now that you tell me
that you don’t think there is anything you can do, I am really wor­
ried. Because if you, the Chairman of the Federal Reserve Board,
can’t utilize even section 14-B of the Federal Reserve Board Act,
then it is not that you can’t do it, it is that you don’t see your way
of doing it That is demanding some reserves for that exposure.
So anyway, the real issue was that soon came apparent a few
minutes later when he wanted to know—I guess he assumed I had
some connection with President Carter—and he wanted to know if
had heard what President Carter was thinking of in appointing the
Chairman. His term was up that month.
Mr. Greider. Nineteen hundred and seventy-eight, yes.
The Chairman . When I said no, I didn’t, he was shocked, and
that was the end of the visit. But I was telling him the truth.
President Carter was about as accessible—well, he was slightly
more accessible than President Reagan, whom I never met. So it
was hard for me to explain to them.
He said, aren’t you a Democrat?
I said, of course, I am, but that doesn’t mean anything. And I
said, you mean to tell me that you have not had any indication?
I said, then I would get worried if you are interested in being
reappointed. But let me make it short by telling you that there are
three things that I never have understood, don t intend to try, and
two of them I gave up a long time ago.
The first one is women.
The second one is the weather.
And the last one is President Carter.
He didn’t smile, so I figured I better get out of there.
The point I am trying to make is that the changes that I envi­
sioned should have been made when Chairman Eccles was rec­
ommending them, and that was 50 years ago.
Chairman Eccles, I consider to be, as I said earlier, the last that
I know of since that era, really uncompromised Chairman of the
Federal Reserve Board.
Mr. Greider . Could I speak to that because-----The Chairman Yes, sir.
Mr. Greider . Perhaps you, too, Mr. Chairman, but we have the
burden of having lived through at least mentally a lot of Fed his­
tory that is now totally lost and understandably so. But in the 1935
act, I tried to understand why they did it and what were the argu­
ments, and I like to think of Mariner Eccles as this sort of shy
giant in American history that nobody appreciates fully. He is for­
gotten now. So we talk about the Fed being independent or don’t
politicize the Fed, but the Treasuiy Secretary and the Comptroller
used to be on the Federal Reserve Board.




50

The Chairm an . That is right.
Mr. Greider . That is the way Wilson made it in 1913 and they
served there up until 1935.
The reason they dropped off was just the raw politics of it. Carter
Glass, then a Senator and chairman of the Senate Banking and au­
thor of the original legislation, resented their presence mere and
so he wanted to pull them off, and Mariner Eccles who was draftingthis reform legislation, let him have that.
The reason he let him have that is that Eccles was in the White
House every day of the week consulting with President Roosevelt
and the Treasury. If you had said political independence, they
would have said, what are you talking about, we are all one gov­
ernment here.
The Chairm an . That is right.
Mr. Greider . Indeed, they were. During the Eccles regime, he
was a close adviser to FDR and a principal architect of the New
Deal. A lot of what the New Deal did across the government came
out of his thinking, including the housing mortgages which allowed
Americans to own homes.
But my point is his argument then was the President is taking
too much direction from the Treasury, when it ought to be listening
to the Fed. I am just----The Chairman . You are right.
Mr. Greider . I go through that to suggest to you that there may
be some positive qualities to these different parts of government
collaborating more closely than they do. Obviously, I would like to
see them do it in daylight where we can all see the process, but
I think we get into one comer after another because of this pre­
tense that the Fed is somehow independent from the rest of us.
The C hairm an . I think that, in effect, they adopt the doctrine of
infallibility. If you have power and you have no accountability, it
is inevitable, things are going to happen and they may not be in
consonance with the greatest interest of the greatest number. That
is whether it is the Fed, or the Congress, or legislators, or a Presi­
dent or anybody, or the church.
Even the church recognizes that the Pope’s infallible power is re­
stricted in matters ex cathedra, he is not infallible, as the recent
pronunciomentos he made a few months ago. Whoever cares about
that.
But what I am saying is we are dealing with an institution that
whether it says that is what it wants or doesn’t, is really infallible.
That is once it makes a decision and we say, well, we hope that
they will make the right decision, it is the only decision around,
and whether it is right or wrong, and history will show one thing
or the other, it is immaterial.
The point is that in our processes we cannot be faithful to the
basic constitutional discharge of our responsibilities either in the
Congress or in the executive branch, and particularly with respect
to an entity that was created by the Congress. It didn’t come down
from heaven. Congress created it.
Therefore, minimal actions to bring about an accountability that
would result in one, in which you say in your written statement on
page 2, and I quote: “As more than one Federal Reserve Governor
confided to me it was very difficult, perhaps impossible for the Fed




51

to have an honest discussion of monetary policy with Congress or
the public because the level of ignorance and die potential for mis­
understanding is so profound.”
If we accept that, then we better give up on the whole system
because the people expect us, their agents, elected to act as agents,
to act also as educators.
How are they going to know and how is the press going to know
if you don’t have debate, if you don’t have discussion, if you have
no basis for evaluating an action taken?
Anyway, I have exceeded my time and I don’t have any specific
questions at this point. I may later.
But I wanted to thank both of you for your most enlightening
testimony and background information you have given us in your
statements.
Mr. Leach.
Mr. Leach . Mr. Chairman, let me just say I differ with one part
of your trilogy. From my perspective it should not be women,
weather, and Jimmy Carter; but women, weather, and Chairman
Gonzalez. You have raven us a macroview from history to theology,
and we will spend a lot of time trying to figure it out.
Let me repeat something that I am more concerned about than
others I would like to mention to Don Winn that this will be my
major question when your Chairman appears.
I am struck not by the separation but by the integration of the
Fed’s microresponsibilities for regulation in one sector of American
industry with the macroresponsibilities it has for the economy.
I am struck by an aspect of this that I consider to be very signifi­
cant. The old cliche in banking is “a bank is only as strong as its
customer base” which implied that a bank’s vested interest was the
general economic outlook for its region of the country.
Intriguingly, in the last couple decades there have been episodic
evidence, particularly in the last 4 or 5 years, that the banking in­
dustry has ups and downs not only unrelated to the economy in
general but that it has prospered when the economy has stagnated;
other times the economy has done well and banking has stagnated.
There are interesting aspects to that from a structural cir­
cumstance, and let me just explain.
If you take the last 4 or 5 years, we have operated a macroeconomic policy to shore up me financial intermediaries of the
country. We had to do that because there are institutions which
had they gone under—would have caused difficulties for the econ­
omy, and been expensive to the taxpayer. One of the reasons why
sucn a circumstance arose was the failure of regulation.
Mr. Greider. That is right
Mr. L each. The failure of regulation was one that the chairman
indicated in his history. I don’t want to go back into too much his­
torically, but I think ne is exactly right in expressing certain con­
cerns regarding LDC debt.
The first major bill I introduced in this Congress was one to
apply either a reserve requirement or capital ratios to international
lending. When you had discrimination in bank regulations that
were biased toward international lending, by definition you gave
incentives for the financial sector to lend internationally. So we
had a circumstance that regulation led not only to imprudent con-




52

cems being reflected through the institutions involved but actually
clear incentives for those institutions to make imprudent loans. In
making those imprudent loans, then, among other things,- policy­
makers, particularly at the Fed, had to recover and develop macroeconomic policies to cope with that circumstance.
Mr. Greider . That is right.
Mr. L each . Which had very little to do with the economy atlarge, although that was also a factor. Since the Fed is also par­
ticularly accountable for the health of the financial sector, and be­
cause of the political science oddity, by which an industry has a
particularly strong representative in the Fed’s policymaking func­
tion, you have potential conflicts between the good of the industry
and the good of the economy at-large. That is a very serious cir­
cumstance.
Mr. Greider . Yes.
Mr. Leach . Please.
Mr. G reider. Yes, it is a profound complication in this institu­
tion, which every Fed Governor would very quickly acknowledge to
you and undoubtedly have, but that came up again and again and
again in my trying to recount the history of the 1980’s. Charles
Partee, Henry Wallich, Paul Volcker, Lyle Gramley, all discussed
with me the complexity and contradictions which they are up
against.
Volcker is quoted in the book, said something to me like, you try
telling the banks to slow down in the middle of a boom, you know
the first thing you will hear from is their Senator.
Those are not his precise words but there is a political loop that
is not just partisan about surrounding that question. The other
thing that was explained to me by people like Partee and Wallich,
and it was Partee, I think, who said, bank regulation is procyclical.
And he meant by that that it is very difficult for a regulatory mech­
anism to get tough on the upside, because everybody is throwing
their hat in the air and feeling good and reassuring each other and
you don’t want to be the Scrooge at the party; and on the downside,
when the weaknesses are visible, the regulators overrun their man­
date and try to prove that they are vigilant, and meanwhile the
Board of Governors is trying to run a macroeconomic policy that
somehow accommodates that reality.
This may sound naive on my part, but one way to get out of that
rolling curve of mistakes is greater illumination and debate. I am
not saying you should make the regulatory issues of enforcement
public. Obviously, you can’t. But those questions will arise.
You were speaking through the early 1980’s, I remember that, to
an audience of fellow Members of Congress who didn’t have the
first idea what you were talking about.
Mr. Leach . But you were referencing things in the S&L indus­
try, but it was in the 1970’s-----Mr. Greider . Right, rate regulation. But the second half of what
I would say is I am not—this again is not a critic’s position, but
I think the Federal Reserve is right when it says don’t try to strip
away regulatory, bank regulatory powers because those two are so
intimately connected.




S3
Mr. LEACH. I hear you. I concur in that as well. But it has led
me just in general to have a series of biases about regulation that
I think have implications for monetary policy.
For example, I think that the country ought to move in the direc­
tion not only of high capital standards but also toward comparable
regulation between like kinds of institutions and locales of institu­
tions, and against making exceptions, whether it is one for inter­
national lending, or any other kinds of loans. In 1977,1 introduced
legislation which said the Fed ought to work with international
central banks to set comparable standards—the whole process by
which the Basel accords have arisen.
But those standards, I believe, are still too weak and they bias
institutions toward certain types ° f lending. For example, you can
leverage more if you make home loans, you can leverage more if
you buy government securities. The only reason I raise this is every
time we jiggle with these formulas, we end up skewing something
in the economy at large.
So regulation ends up having macroeconomic effects which end
up getting into Fed monetary policy functions and the two cannot
be separated. Mr. Greider, it is one of the reasons why just as you,
I have come down on the side of wanting to keep the Fed in the
regulatory realm—at least for the larger banks, bank-holding com­
panies, and foreign banks—because there is integration. But in
that integration, the Fed itself has to understand that every time
it caves in to a community, in this case a banking community, it
is going to have some counterbalancing effects on monetary policy
that may be displeasing to the public at large.
Mr. Greider. I think on this point, I do disagree with you that—
I mean, we are not into this subject today but I think the Federal
Government, including the Federal Reserve, does do things that
amount to credit allocation. That is, making some borrowers pref­
erable over other borrowers.
Mr. Leach . Through regulation.
Mr. Greider . Well, through regulation, through the-----Mr. Leach . The whole process.
Mr. Greider. I have had this discussion with many people who
were monetary economists and, of course, die Holy Grail of mone­
tary economics is that the government must not do that and espe­
cially the central bank must not do that.
I discussed this argument in the book, and then along comes the
Basel accords, and as you have observed, the Basel accords are
nothing if they are not credit allocation. Everybody in finance un­
derstands that. I don’t think the American public or the Congress
understands it, but that is what the meaning of those ratios is.
We prefer these loans over those loans. So I say to my friends
back at the Fed, hey, if you can do that in the interest or creating
a level playing field for global banking, you can do it for housing
in the United States.
Mr. Leach . This is no misunderstanding, we are doing that for
housing. My concern at this time, frankly, is that our bank regula­
tion is biased against entrepreneurial lending and widget makers
of America are those, more than any other group, that ought to be
complaining. But that is not a group, for whatever reason, that gets
the sympathetic ear.




54

Mr. Greider. And could be defined as a worthy user of credit
and given some sort of favorable preference. Obviously, you have
to weigh that with the fault risk and so on.
Mr. Leach . My time has expired. But I will only conclude, there
are other kinds of credit allocations that are not industrially spe­
cific. For example, if one region of a country has a weaker standard
versus another region, you end up with regional credit allocation.
That is what occurred in the S&L circumstance in States like
Texas. It also occurs in the banking field when one kind of bank
is given less rigorous examination than another kind of bank or
one region or State is given less rigorous examination than another
region or State
It is something that is never discussed in terms of credit alloca­
tion but that is precisely the way the circumstances are.

Thank you, sir.
Thank you, Mr. Chairman.
The Chairman . Mr. Neal.
Mr. N eal . Thank you, sir.
Mr. Crews, I appreciate your pointing out the error of my ways.
I asked for a little help from my staff for research on applica&le
court cases and that is what I was given. It was clear I owe an
apology to my good friend, Henry Reuss.
What would you say, may I ask you, is the appropriate court case
in this instance? I don’t believe you mentioned it.
Mr. Crew s. There is no case in which any plaintiff has ever suc­
ceeded in getting the courts to rule on the specifics of the Federal
Open Market Committee.
Now, the general rule of law was, the source of it was correctly
identified by Chairman Reuss in his testimony, and in my prepared
statement, I discussed it. There are two aspects of the Constitution
that are implicated, the appointments clause and various money
powers. I said the appointments clause is the easy one. In article
2, section 2----Mr. N eal . Excuse me, I have limited time, that is your interpre­
tation of that clause; is there—is it not? I was really asking, if you
don’t mind, to point me in the direction of a court case that would
resolve it.
Mr. Crew s. Sure. This is the case. Yes.

How do you determine who is an officer of the United States?
The Supreme Court has given us a very straightforward answer.
Now I will quote the Court’s exact----Mr. N eal . That is the Buckley case?
Mr. Crew s . That is the Buckley case. We think the term, quote
“officers of the United States” close quote, as used in article 2, is
a term intended to have substantive meaning. We think its fair im­
port is that any appointee exercising significant authority, pursu­
ant to the laws of the United States, is an officer of the United
States, and must therefore be appointed in the manner prescribed
by section 2, clause 2 of that article.
Mr. N eal . I appreciate that and I will go back and do a little
more research. I also think that leaves in doubt—I can see how
this might leave in doubt the situation as covered by the bill. The
clause may be clear to you that these are officers of the govern­
ment, others may have a different interpretation.




55

But anyway, I am glad that you have corrected my earlier asser­
tion.
I was going to say to my distinguished chairman, he said just
moments ago that ne wants some minimal control over our con­
stitutional responsibility in the area of Fed policy. I would like to
suggest to him that we should exercise maximum control and that
what we do is establish a veiy clear policy for the Fed. 1 think,
frankly, that is the responsibility of the Congress.
We nave chosen to delegate this to, this responsibility, a respon­
sibility that albeit imprecise, as Mr. Crews has pointed out, be­
cause things were different when the Constitution was written, but
in any case, it is fairly clear that the Framers wanted us to be re­
sponsible for the value of money, and so on, and that ultimately is
what the Fed is doing these days. We have consciously delegated
that to the Fed but we have not told them exactly what we wanted
them to do.
Now, in a similar situation, we delegated to the independent
Postal Service the delivery of mail. We took it out of the political
process, but in that case, we told them what to do. We told them
we wanted the mail delivered efficiently and on time, and so on.
Just that we didn’t take that other step with the Fed.
Personally, I think we should. Frankly, if we did and did it in
the direction, the proper one, we would solve all these problems
that both of you have pointed to this morning.
Just to comment on a couple of them, Mr. Crews, again you said
someone back in the late 1970’s, or early 1980’s, when the Fed was
engaged in this all-out assault on inflation, that somehow the pub­
lic should have been notified and the savings, and loan industry
should have been notified, and so on.
You know, frankly, there wasn’t any opportunity for that. The
public was saying: Fight inflation, inflation is out of hand. It is not
tolerable. We will not tolerate these levels of inflation, these levels
of interest rates. Our government is failing, and stop it. Make it
stop. Other consequences were not important.
That was the issue that the public wanted us to do. Then there
were side issues.
I would argue the real problem was letting inflation get out of
hand in the first place. If we had never had the high inflation, we
would never have had the savings and loan problem, never have
had the recession of early 1980, so on.
By the way, I don’t want to—I have argued and will continue to
argue over and over again for low inflation, the lowest possible,
zero, if I could have my way, in price stability, because I think that
does give us everything else that we want and that is not just my
opinion. Every single one of the Fed Governors will tell you exactly
tne same thing, that the proper policy for this country is the lowest
possible inflation because that gives you everything else that you
want.
It gives you a maximum sustainable economic growth, maximum
job creation, lowest possible interest rates, maximum savings, max­
imum investment, tne proper international relationship of our cur­
rency to other currencies. It is just that—it is the proper policy.
Interestingly, there is just no disagreement among those people
who have studied this subject the most.




56

I just think that has great educational import, value.
I want to—may I just say, and then I will certainly yield—I don’t
mean to take all of this time. But I just want to go back to this
point of the bill about going to these public discussions within the
Fed. This is Mr. Greider’s main thrust of his testimony, that we
would benefit by making all of this public.
I just wonder—I don't mean to get personal or anything—but if
we were to listen in on your discussions with your family or close
friends or something, would they be the same discussions as if they
were kept private? And, of course, the answer is no.
And that is the problem with what you suggest about the Fed.
If you let—if you open that up so that the folks deliberating these
policies can’t speak freely and they can’t speak freely if they know
that we and the public are listening in.
Are we then going to blame them and hold them specifically ac­
countable for a thing they said on a particular day, a particular
twist they put on something, and then put pressure on them to
change their policy, because we didn’t like just the way something
was phrased?
We in elective office are subject to all of that. I can put just the
wrong twist on something that I say and get creamed for it. And
that is fine. That is part of our system. But to do that to these
kinds of deliberations would skew them in a way that we wouldn’t
get the kind of policy that we want, would be my response to what
you are saying; we don’t benefit from it. It sounds like we do, but
we just wouldn’t.
Mr. Greider . May I respond? If that is the case, why did not
Federal Reserve have such minutes for, I guess, 60 years? They
had that.
Mr. N eal . They had a 5-year delay.
Mr. G reider . That is correct. They had a delay.
Mr. N eal . Is that what you are asking for now, to go back and
have minutes and have a 5-year delay? Tnat is what you said they
had for 60 years.
Mr. Greider . No. I am suggesting to you that if you would read
through those minutes, you would find—and I did not read through
60 years but Milton Friedman and Ana Schwartz did—and there
is not the sensational content in those.
Mr. N eal . O f course, it is not that sensational.
Mr. G reider . But in terms of understanding the policy, you can’t
understand the policy if you don’t understand the arguments that
led up to it, and I mean argument in the general sense, not the
abusive sense.
And in that—I mean, as I said in my testimony, I have no doubt
that it would change some minor way the tone of conversation at
that table.
But, again, I am relying on what Governors and others told me.
The tone of conversation at that table is already quite decorous. I
have never been inside that room, so I can’t guarantee that. But
my strong impression is that it is a fairly formal, round-the-table
discussion, and then around again, and then the chairman and
some others propose various alternatives for policy. And then they
break for lunch, and there is a lot of conversation in the hall out­
side the formal meeting and so forth and so on.




57

My answer to your question is, I really do not believe, with two
exceptions, you would be compromising their ability to discuss
things honestly in any way. And the two exceptions which I men­
tioned are the mentioning of foreign governments; and they would,
of course, want the ability to excise mat. And I think this is prob­
ably quite rare. But in tine instance where a particular enterprise
or institution comes up in the discussion, they would want to excise
that.
Mr. N eal . If you want to know what the Fed does, right now it
is perfectly transparent because you can see what they do in the
marketplace. They are essentially using one tool.
And if you are interested or anyone else is interested, it doesn’t
take any genius; it doesn’t take any—you just look at exactly what
they are doing. And they—they change interest rates. That is what
they do. There is no huge secret. Nothing is being concealed from
you. I am just telling you. It is not.
If you are interested in what they do, look at what they do in
the marketplace evety day, any day.
Mr. Greider . Let’s take a very recent episode, which I wrote
about in the pages of Rolling Stone, and the New York Times had
a piece a bit later.
The Federal Reserve Chairman was up here in July before the
Senate committee, or both, talking vaguely about the possibility
that he was going to have to raise interest rates sometime soon.
And he talked all around it, and people asked him questions—these
are not his precise words—but basically about the threat of infla­
tion recurring and that the signal I am trying to send is that the
next move is an interest rate increase.
Now, I was told by a number of sources inside and outside the
Federal Reserve after that discussion that that is not really what
the Fed is worried about. What the Fed is worried about, as was
mentioned this morning, is the possibility of overheated financial
markets, particularly the stock market.
And if that turns something ugly, the Federal Reserve just, as
it did in 1987, will ultimately be responsible for cleaning up the
mess. And so they were trying to signal, albeit in an oblique way,
to financial markets to be a little more prudent and to slow down.
Now, I can’t prove to you that that was the case. But I was told
that by some pretty well informed people who heard it themselves
from Governors at dinner. And the story in the Times which Sen­
ator Sarbanes was complaining about, or Mr. Frank, where two of
the Governors said, yeah, there is some worry about that. Now,
that is not a change of policy, but it matters a lot to Americans
what is on their minds. And I grant their necessity to not come out
the door and reveal their discussions instantly. That would be dif­
ficult for them.
Mr. N eal . I am not following your point.
If they are trying to signal----Mr. Greider . Y ou said there is nothing we need to know, that
there is nothing being kept from us. Ana I am saying, yes, there
is something that we don’t understand that is going on there.
Mr. N eal . And you are saying that if the Fed is trying to accom­
plish something-----




58

Mr. Greider . I think actually if they were able to say clearly and
directly what they want to see change in the behavior of consumers
or investor or business managers or whatever, that would not dam­
age the Fed. In fact, it would enhance its ability to regulate the
economy.
And secondarily, I am saying----Mr. N eal . I am not following this point at all, I must tell you.
If you don’t trust what the Fed said publicly about maybe having
to raise interest rates a little bit, why would you trust what they
said in this other meeting?
Mr. G reider . It is not a question of trusting it or not trusting
it.
Mr. N eal . Or believe it. Whatever it is that you are trying to get
at. My point is—it is true, by the way, I think, that the Fed might
say something like that. Say, well, we may have to raise interest
rates in the future, and not wanting to raise them today, as if they
might have what they call an announcement effect.
But now, again, I don’t see the harm in that. They may not want
to change poncy today. They may want to see if this so-called an­
nouncement effect has some change. And if it does, they may have
to change policy.
In other words, it may be a minor thing they are trying to do.
Ultimately, there is no mystery about what they are trying to do.
What they are trying to do is keep inflation as low as they possibly
can, when it gets out of hand, bring it down and deep as low as
they possibly can. There is no mystery about that.
And if you doubt that they do what they say, look what they do
in the marketplace. These other things are so subtle that, I mean,
it doesn’t make any difference. And ir it does make a difference to
a scholar or Rolling Stone or something like that, then go after the
fact a few months and go study it ana do like you did and spend
all of this time studying it. My point is that the cost to that—I
mean, if you do something like is contemplated here it will greatly
inhibit this discussion that can be very useful in making policy, to
no avail. There is nothing gained by it.
Mr. Greider . Mr. Neal, if you feel, as you do that, the Federal
Reserve has only a single goal, which is price inflation.
Mr. N eal . Primarily, that is their goal.
Mr. Greider . If that is all they have to worry about. And it is
true, then, the debate becomes very narrow and straightforward.
But I disagree profoundly with you, A, that that is a correct goal;
but, B, that that is the Federal Reserve’s goal.
And I think if you go back over the history of the Federal Re­
serve, you will find some Governors at the table saying exactly
what you are saying, that that is what we ought to concentrate on
and we ought to forget all collateral effects, this is the best possible
outcome and let’s go for this.
And you will find other Governors and bank presidents and I
would say usually the majority saying, it ain’t that simple; there
are countereffects here that we have to take into account.
Mr. N eal . Y ou are correct if you go back over history.
Mr. Greider . I am not taking about past history. I am talking
about recent history.




59
Mr. Neal. History in the 1970’s, you are 100 percent correct; and
the result of that was absolute disaster.

What I was saying is today, if you would poll the Governors and
ask them what they think the priority of their policy ought to be,
I am quite certain they would tell you that it is price stability; and
that, yes, there are times when they do intervene in foreign ex­
change markets, for example, which I personally would rather they
didn’t, but they are not real believers in it. But they feel they have
to do a little of that from time to time. So that is a subsidiary.
But ultimately and for the long term—and there again what I
am arguing for honestly and most importantly, if I might say, is
trying to help us achieve a long-term policy objective. Political pres­
sure, the reason for objecting to political pressures is not that polit­
ical pressures are bad. We live with them every day, and they are
great.
But in the interest of achieving a long-term policy goal, they are
not useful, because the political pressures are always for a short­
term benefit And that is sort of our challenge, I think, is to try
ourselves to overcome that constant pressure to do something for
the short term and try to see the long term.
And so in the court system and in the Fed we have tried to do
something to help them achieve those long-term goals. And my ar­
gument is that the things we are talking about would tend to—they
wouldn’t be the end of the world—but would tend to force their at­
tention back to the shorter term and subject these conversations
which are now private and free flowing and subject them to the
same kind of pressures that the chairman and I have to live with.
That is, saying something just the wrong way or something like
that.
Now they are at least protected from that, and they can speak
freely and then hope, given the other things that we have done for
this effect, act in the long-term national interests. That is the argu­
ment.
Mr. Crews. Could I respond just very briefly to that, Mr. Chair­
man.
The Chairman. Certainly.
Mr. Crews. I think there is an aspect of this discussion which
has been lost. And that is that a full discussion within the Fed is
going to bring out the consequences of a given act.
And this 1970’s and 1980’s business with stopping inflation and
the savings and loan is an illustration of the kind of benefit which
I think Mr. Greider is trying to call your attention to.
If it had been brought to the attention of the public and this com­
mittee that, yes, we are going to follow this policy; and in our judg­
ment, we believe that that is to the greater good, even though it
is going to put this intense pressures causing the collapse of many
savings ana loans.
Congress would, at that point, have been able to say to the sav­
ings and loan regulators, you fellows are in for a terrible storm,
and we need tighter regulation than normal. And to say to the Ap­
propriations Committee, there is probably going to be some bank­
ruptcies out there, and we are committed to the FSLIC to back it
up, and we better get some money ready for it.




60

And instead of a multi-hundred-billion dollar fiasco, which it ulti­
mately turned out to be, I think the damage could have been much
more limited.
Mr. Greider . Let me add just a response to his example, that
if people like the chairman and Mr. Leach—and I don’t know, per­
haps yourself as well—who were warning the Congress, trying to
alert the Congress to the savings and loan dimensions Ions before
it exploded, had been backed up by the argumentation of the Fed­
eral Reserve, here are the implications—I’m not talking about them
revealing any secrets just sort of the same things they know about
the implications of their policy—you might very well have gotten
a different legislation than what got passed in 1982 and a much
more forthright response that Mr. Crews says we don’t know what
the size of the problem would have been, but we know it would
have been a small part of the $200 billion plus.
Mr. N eal . May I say what everyone knew was that the Fed,
after the disastrous high inflation of the late 1970’s, the appoint­
ment of Mr. Volcker to head the Fed was to fight inflation. Every­
one knew that the course had changed. Everyone knew that. All
the economists knew it. All the bank economists knew it. All the
savings and loan economists knew it. All the academic economists.
There was no secret about that. The consequences of that were
known by everyone. We all knew. We were driving those rates up
in order to control inflation.
Now, there was no secret, I mean, the world knew it, and the
world knew the implications of that for unemployment. It drove un­
employment up. It couldn’t help it. It drove prices of other things
up. It influenced energy. I mean there were incredible con­
sequences of fighting inflation. There were consequences for the
banking industry, for the savings and loan industry.
It didn’t take that little group of people talking about it to signal
that. That would have been irrelevant. Other people talked about
it. It wouldn’t have added anything. What you are essentially say­
ing is that there were millions of people discussing the huge
events; and yet, we didn’t make the right policy decision because
the comments of a few weren’t added to that debate.
It just doesn’t add up, I must tell you. Everyone knew what their
policy decision had been. Everyone.
Mr. Greider . Well, I would differ with you again. If you went
back to 1982 and 1984, and asked what did people generally under­
stand—I am not talking about people on the streets; I am talking
about people in the high offices of government—about the con­
sequences for, for instance, the trade deficit or the savings and loan
industry, I think you are mistaken, those were not widely under­
stood.
Mr. N eal . Well, it was widely understood. There were thousands
or millions of economists around the world that comment on such
things.
I must say, by the way, I didn’t know what the consequences of
all of this were. And I think there were differences of opinion on
it.
Mr. Greider . Right. Members of Congress agreed that they could




61

And I am telling you that there were economists inside the Fed­
eral Reserve advising the Chairman and the Board that that was
not the case.
And I don’t think they came up here and told you all that.
Mr. N eal . Well, you are saying that those voices, those few little
voices in that room would have been listened to more than thou­
sands of other economists, when their action, when the con­
sequence of what they said was well known. I just don’t buy it.
Mr. Leach . Would the gentleman yield on one small point?
Of all of the aspects orFederal Reserve policy that struck me as
an abdication of responsibility in the 1980’s was an answer to a
question I asked something in the neighborhood of 8 to 10 times
to various Fed Board members and Fed Chairmen: “What is the
cost of the S&L circumstance; and what are the ramifications for
policy?”
The response was obviously a very careful policy response consid­
ered by the Fed of what to reflect to Congress. Informally, you may
have gotten a very different response.
But the response was: “All we can tell you is that those charged
with responsibility make the following estimates.” In other words,
deferral to the old Federal Home Loan Bank.
That was a very honest response in the sense that they deferred
to other estimates, even though their own judgments were very dif­
ferent.
So what the Federal Reserve Board of the United States did was
take a hands off approach, abdication rather than serious inquiry,
even though one could argue that despite not being the primary
regulator they did have very substantial authority and responsibil­
ity over this matter.
And so it was abdication in the 1980’s by the Federal Reserve
Board. There was one like-minded abdication of accountability that
has never been very well presented but it is very comparable. The
Treasuiy of the United States of America in 1988 refused to take
responsibility for resolving thrifts in difficulty and, in effect, said
to the then Federal Home Loan Bank Board, you make certain de­
cisions, we don’t want to be held accountable; you go ahead and do
it, but don’t tell anyone we agreed.
And that is what led to the December 1988 deals which were, in
retrospect, a small billion dollar hit on the Treasury. Maybe $3 or
$4 or $5 or $6 billion.
But everyone was saying, we don’t want to take responsibility
but saying to these other people, go ahead and try this. And some­
times refusing to take responsibility is an act or responsibility of
rather substantial proportions.
But the only reason I raise this is, in my memory, I don’t think
the Fed ever presented a falsehood to this committee. By the same
token, the Fed held off taking accountability when they should
have.
Mr. Greider. And what I am adding to that is only that I know
from my reporting that they had their own hard estimates. And I
can understand how they would say, well, we are not the Home
Loan Bank Board; we can’t put this out; but they were guided by
that and their own numbers. And I am talking about the best
minds on the Federal Reserve Board who anguished over this re-


72-851 0 - 9 4 - 3


62

peatedly for 4 or 5 years and yet never found a way to go public
and say, you people better deal with this.
And Mr. Neal was right, that doesn’t guarantee that anything
would have changed, but I think the question of responsibility is
relevant.
I mean, the sympathetic way of describing the Fed’s position now
is that they are trapped in this sort of archaic style of operation
that doesn’t allow them to speak very candidly. That is just not the
way the institution functions. It doesn’t allow them to sound
warnings on what is happening on somebody else’s turf, and so
forth. And then when die things fall apart they have to hunker
down and say, it wasn’t us; it was somebody else; we knew about
that but, of course, it wasn’t our responsibility. That is not a very
sound way to run the government.
And I actually—I know people may find this hard to believe be­
cause I am a critic of the institution—but I actually believe if they
could get to the place where they communicate directly and consist­
ently with the public that it would enhance their ability to produce
good results.
And you saw this—we are going to disagree on this I think; but
if you go back through the history leading up to 1979 and in the
years after, there is just abundant evidence. I read through a stack
of speeches this high, and I asked Joe Coyne at the Fed, when we
started the book, one of the first things I said was, can you give
me the speeches of all the governance. To his astonishment, I real­
ly wanted to get them and read through them all and many of
them are quite brilliant diagnoses, and so forth.
But you have to be steeped in this stuff to understand what they
are saying. And so they were talking to financial groups or, you
know, conventions of this group or that group. But for the most
part, I have to tell you, it is pretty hard. It took me quite a lot of
study before I could understand this.
Mr. Neal. It is true that the economists have their own lan­
guage, just like newspaper people have their own language and so
on. But that is not to say that they are not saying it and that the
people to whom they are saying it do not understand it. They do
understand it, and they do go out and make these speeches on
international matters and domestic matters and Mr. Greenspan—
how many committees did he appear before this year? For a while
he was on the TV all the time. He appeared before the Joint Eco­
nomic Committee and the Ways and Means Committee and took all
of these questions from Members of Congress.
I mean I think they are quite open ana responsive. And the other
Governors talk and testify and so on. Again, I just don’t see that
they are inhibited in any way.
The Chairman. If the gentleman will yield to me at this point.
Just when this was getting nice and juicy, and I was turning
over in my mind at least 10 vital points that I was going to enlarge
on, I have just been notified that Chairman Barney Frank of the
International Subcommittee had reserved this hearing room for 2
p.m. So we have no alternative but to close the hearing and, once
again, thank the witnesses for their generous help to this commit­
tee. I can assure you it has been most helpful.




63

There will be some questions in writing, I understand, that will
be addressed to you and should be done expeditiously so that by
the time you get the transcript of the hearing, you will be able to
address it.
But thank you again very much.
[The information referred to can be found in the appendix.]
The Chairman . This hearing is adjourned.
[Whereupon, at 2 p.m., the hearing was adjourned.]










65

APPENDIX

October 7, 1993

66

Opening Statement of Chairman Henry B. Gonzalez
Committee on Banking, Finance and Urban Affairs
U.S. House of Representatives
Hearing on Issues Raised By HR 28,
the "Federal Reserve System Accountability Act of 1993"
October 7,1993
T oday, e ig h t y y e a r s a f t e r th e p a ssa ge o f th e F e d e ra l R eserve
A c t , t h e C om m ittee b e g i n s t h e f i r s t o f a s e r i e s o f h e a r in g s on
F e d e r a l R e s e r v e System r e fo r m . T h is i s n o t a n ev s u b l e c t . The
C o n g r e s s r e o r g a n i s e d t h e F e d e r a l R e s e r v e i n 1935 and t h e B anking
C o n n it t e e has had im p o r ta n t h e a r in g s on t h i s s u b j e c t i n t h e 1 9 3 0 's
and i n 19 64.
The 1935 r e o r g a n i s a t i o n o c c u r r e d a f t e r t h e F e d e r a l R e s e r v e
m is e r a b ly f a i l e d t o c a r r y o u t i t s i n i t i a l f u n c t i o n o f b e in g t h e
" l e n d e r o f l a s t r e s o r t " t o f a i l i n g b a n k s. I n t h e e a r l y 1 9 3 0 ' s a s
1 /3 o f t h e co m m e rcia l b a n k s f a i l e d o r w ere m erged b e c a u s e o f bank
run s t h a t d r a in e d t h e i r c a s h r e s e r v e s , t h e F e d e r a l R e s e r v e s t o o d
i d l y b y and l e t t h e money s u p p ly c o l l a p s e by 1 / 3 . The F e d e r a l
R e s e r v e 's i n a c t i o n t u r n e d a s e r i o u s r e c e s s i o n i n t o o u r c o u n t r y 's
w orst d e p r e s s io n .
Power t o manage t h e money s u p p ly was p u t in t h e hands o f th e
F e d e r a l Open K a r k e t C om m ittee, com p osed o f 12 m embers. F iv e o f t h e
FOMC members a r e p r i v a t e c i t i z e n s s e r v i n g a s p r e s id e n t s o f t h e
F e d e r a l R e s e r v e B anks. The p r e s i d e n t s a r e s e l e c t e d b y t h e i r
in d i v i d u a l B a n k 's b o a r d o f d i r e c t o r s , 2 /3 o f whom a r e v o t e d i n t o
o f f i c e b y t h e member c o m m e r cia l banks i n e a c h d i s t r i c t .
T e s t i f y i n g b e f o r e t h e H ouse Banking C om m ittee on A p r i l 13,
1938, F e d e r a l R e s e r v e Chairm an M a r rin e r S . E c c l e s — who s e r v e d as
ch airm an f o r o v e r 13 y e a r s u n t i l 1948 — r e p e a t e d h i s s t r o n g
c o n v i c t i o n . He t h o u g h t t h e 1935 r e o r g a n i z a t i o n o f t h e F e d e r a l
R e s e r v e was s e r i o u s l y i n c o m p le t e a s lo n g a s p r i v a t e c i t i z e n F e d e r a l
R e s e r v e Bank p r e s i d e n t s v o t e d on t h e n a t i o n 's money s u p p ly . He
s a id :




67
2
"A s I h a ve s a i d b e f o r e , I am in f a v o r o f p l a c i n g o p e n m arket c o m m i t t e e 's f u n c t i o n s w ith t h e Board o f G o v e r n o r s ,
w h ich i s a p u b l i c b o d y a p p o in t e d b y t h e P r e s id e n t and
c o n fir m e d by t h e S e n a te ,
to
r e p re s e n t th e p u b lic
in te r e s t.
I d o n o t w ish t o
im p ly t h a t t h e bank
r e p r e s e n t a t i v e s a r e l e s s c o n s c i e n t i o u s th a n th e B oard
members o r t h a t t h e y d o n o t a c t in g o o d f a i t h w ith t h e
b e s t o f i n t e n t i o n s . But s i n c e t h e y a r e p r e s id e n t s o f t h e
R e s e r v e banks and a r e e l e c t e d by t h e d i r e c t o r s o f t h o s e
b a n k s, t w o - t h i r d s o f whom a r e in t u r n e l e c t e d by t h e
member b a n k s, t ^ ie ir v i e w p o in t n e c e s s a r i l y i s l i k e l y t o
r e f l e c t t h a t o f member b a n k s. I f e e l t h a t a com m ittee
w h ich i s e n t r u s t e d w it h m on etary p o l i c i e s a s im p o r ta n t a s
t h o s e g i v e n t o t h i s co m m itte e s h o u ld c o n s i s t e n t i r e l y o f
p e rs o n s r e p r e s e n tin g th e p u b lic i n t e r e s t . "
To i l l u s t r a t e F e d e r a l R e s e r v e Chairm an E c c l e s 1 p o i n t , t h a t th e
F e d e r a l R e s e r v e Bank p r e s i d e n t s r e p r e s e n t e d b a n k in g i n t e r e s t s and
n o t t h e p u b l i c i n t e r e s t , o n e has o n l y t o l o o k a t t h e p o o l o f
b a n k e r s and t h e i r f r i e n d s from w h ich n e a r ly a l l F e d e r a l R e se rv e
Bank p r e s i d e n t s h a ve b e e n d r a m . T h ere h a s b een o n ly one woman and
n o m i n o r i t y Bank p r e s i d e n t s i n t h e F e d e r a l R e s e r v e S y s te m 's 8 0 -y e a r
h i s t o r y . I want t o t a k e t h e "b a n k e r s and t h e i r f r i e n d s 1 s ig n o f f
1
t h e d o o r t o t h i s e x c l u s i v e c l u b and o p e n i t up t o a l l com p eten t
A m e r ic a n s .
S in c e F e d e r a l R e s e r v e Chairman H a r r in e r E c c l e s s p o k e , t h e FOMC
in c lu d in g th e s e p r iv a t e
c itiz e n
F e d e r a l R e s e r v e p r e s id e n t s ,
g r e a t l y expa n d ed t h e i r a u t h o r i t y .
F o r e x a m p le , i n 1962 t h e FOMC g a v e i t s e l f a u t h o r i t y t o
in t e r v e n e i n f o r e i g n e x ch a n g e m a rk e ts t o manage t h e f o r e i g n v a lu e
o f t h e U .S . d o l l a r . A t FOMC m e e tin g s i n 1962 th e V ic e Chairman o f
th e F ed era l R eserv e, J .L .
R o b e r ts o n ,
c r itic iz e d
th e F ederal
R e s e r v e 's a c t i o n s , s a y in g i t s m ain a d v a n ta g e was t o g i v e t h e
F e d e r a l R e s e r v e an " u n l i m i t e d p o c k e t b o o k ." L im ite d fu n d s had been
a p p r o p r i a t e d by C o n g r e s s f o r i n t e r v e n t i o n p u r p o s e s and p la c e d w ith
t h e E xch an ge S t a b i l i z a t i o n Fund i n t h e T r e a s u r y . [FOMC m in u te s,
F e b ru a ry 1 3 , 19 6 2 , p . 6 2 } T oday t h a t s o - c a l l e d "SWAP" fu n d amounts
t o $ 3 0 .1 b i l l i o n .
And i n t h e T r e a s u r y -F e d e r a l R e s e r v e a c c o r d o f March 3 , 1951
t h e U .S . T r e a s u r y r e l i n q u i s h e d i t s a u t h o r i t y t o manage t h e money
s u p p l y . The F e d e r a l R e s e r v e was g i v e n c o m p le t e and s o l e a u t h o r it y
t o manage t h e n a t i o n 's r o n e y s u p p ly .
B e l i e v e I t o r n o t , t h e s e t w e lv e p e o p l e on t h e FOMC C om m ittee,
whom we e n t r u s t w it h t h e s e f u n c t i o n s c r u c i a l t o t h e e c o n o m ic h e a lt h
o f o u r n a t i o n , d e c i d e d i n 1976 t o s t o p t a k in g m in u tes o f t h e i r
m e e tin g s s o t h e A m erican p u b l i c w ou ld n o t know what t h e y a re
d is c u s s in g .




68
3
My
le g is la t io n ,
HR 2 8 ,
th e
"F e d e ra l
R eserve
System
A c c o u n t a b i l i t y A c t o f 1 9 9 3 ," w ou ld r e q u i r e t h e t v e l v e F e d e r a l
R e s e r v e p r e s i d e n t s who s e r v e , f i v e a t a t im e , on t h e FOMC t o b e
n om in a ted by t h e P r e s i d e n t and c o n fir m e d by t h e S e n a te . T h is w i l l
e n a b le t h e p u b l i c t o l e a r n j u s t who i t i s t h a t i s m aking d e c i s i o n s
on m on eta ry p o l i c y . HR 28 w o u ld a l s o r e q u i r e a r e c o r d t o b e made o f
FOMC m e e tin g s t h a t w o u ld b e made p u b l i c w it h in 60 d a y s and r e l e a s e
o f i n f o r m a t io n on p o l i c y ch a n g e s w i t h i n o n e w eek. HR 28 a l s o
a l l o w s t h e GAO t o i n v e s t i g a t e t h e FED's m a ssiv e i n t e r v e n t i o n s in
f o r e i g n c u r r e n c y m arkets and d a i l y o p en m arket a u c t i o n s t o s e e i f
t h e s e o p e r a t i o n s a r e e f f i c i e n t and s e c u r e from l e a k s o f i n s id e
in fo r m a tio n .
The p ow er o f t h e F e d e r a l R e s e r v e t o o p e r a t e w it h o u t p u b l i c
s c r u t i n y and a c c o u n t a b i l i t y i s e v id e n c e d i n i t s e x p e n d it u r e s .
B eca u se i t i s n o t s u b j e c t t o t h e same s c r u t i n y a s t h o s e a g e n c ie s
t h a t u s e b u d g e te d fu n d s , t h e F e d e r a l R e s e r v e makes i t s own r u l e s ,
some o f w h ich i n v o l v e e x p e n d it u r e s t h a t w ou ld b e i l l e g a l f o r
b u d g e te d fu n d s . F o r e x a m p le :
1) The F e d e r a l R e s e r v e s p e n t $ 3 4 6 ,0 0 0 b u y in g i n d i v i d u a l
m em bersh ips i n p r i v a t e o r g a n i z a t i o n s f o r many o f i t s
e m p lo y e e s i n 1 9 9 0 , e x p e n d it u r e s t h a t a r e i l l e g a l f o r
b u d g e te d fu n d s . F e d e r a l R e s e r v e Chairm an A la n G reenspan
r e fu s e d t o c o m p ly w it h my r e q u e s t f o r a l i s t i n g o f
m em bersh ips f o r 1992 and 1 9 9 3 . Chairm an G reen sp an w r o te
t o me on S e p te m b e r 1 5 , 1993 t h a t s i n c e h e i s c h a n g in g t h e
p o l i c y " a new s u r v e y w o u ld n o t b e u s e f u l and w ou ld n o t
j u s t i f y t h e c o s t o f c o l l e c t i n g th e i n f o r m a t io n . "
2) The F e d e r a l R e s e r v e t e l l s me t h a t a lt h o u g h i t em p loy s
a
la r g e
army
of
730
p ro fe s s io n a ls
( e c o n o m is t s ,
s t a t i s t i c i a n s , and r e s e a r c h a s s i s t a n t s ) i n i t s r e s e a r c h
d e p a rtm e n ts i n 1993 i t s t i l l n e e d s t o sp en d n e a r ly
$ 1 0 0 ,0 0 0 a month t o p a y f o r o u t s i d e e c o n o m is t s m o s t ly
d r a m from a c a d e m ia .
S i x t y - s e v e n e c o n o m is t s r e c e i v e d 82 c o n t r a c t s from t h e
F e d e r a l R e s e r v e fro m 1991 t o m id -1993 f o r m ore th a n
$ 1 0 ,0 0 0 e a c h f o r a t o t a l o f $ 2 .3 m i l l i o n . T h is e x p e n se
d o e s n o t c o v e r t o t a l r e s e a r c h c o s t s w h ich I want ch airm an
G reen sp an t o r e v e a l t o u s when he com es b e f o r e t h e
C om m ittee n e x t w eek o n W ednesday, O c to b e r 1 3 .
I t i s i n t e r e s t i n g t o s p e c u l a t e why t h e F e d e r a l
R e s e r v e k e e p s t h e s e o u t s i d e e c o n o m ic c o n s u l t a n t s on i t s
p a y r o ll.
N o b e l L a u r e a t e e c o n o m is t H i l t o n
F riedm an,
com m enting o n t h e s e p r a c t i c e s , h a s s a i d t h a t t h e F e d e r a l
R e s e r v e i s t r y i n g t o bu y o f f Ni t s m ost l i k e l y c r i t i c s "
and t h a t fe w among t h e a c a d e m ic com m unity a r e p r e p a r e d t o
c r i t i c i z e th e F ed eral R eserve.




69
4
HR 28 w o u ld r e q u i r e an in d e p e n d e n t a u d it o f th e FED's b u d g e t
s o t h a t i n t h e f u t u r e t h e F e d e r a l R e s e r v e c o u ld n o t r e f u s e t h e
C o n g r e s s ' r e q u e s t f o r i n f o r m a t io n a b o u t i t s s p e n d in g h a b i t s . W ith
a
new A d m in is t r a t io n
c a llin g
fo r
a
s t r e a m lin e d ,
e ffic ie n t
g o v e rn m e n t, i t i s e s s e n t i a l t h a t a l l govern m en t a g e n c ie s i n d i c a t e
w h ere t h e f a t i s and what c o u ld b e c u t .
The c h a n g e s I am p r o p o s in g t o t h e F e d e r a l R e se r v e System a r e
q u i t e m o d e st. T h ere i s n o t h in g t o f e a r . I am n o t s e e k in g t o
p o l i t i c i z e t h e c e n t r a l bank n o r ta k e away i t s in d e p e n d e n c e . I am
n o t c a l l i n g f o r p o l i c i e s t h a t w ou ld c a u s e i n f l a t i o n o r d e f l a t i o n .
My l e g i s l a t i o n d o e s n o t r e q u i r e t h e F e d e r a l R e s e r v e t o s e t any
p a r t i c u l a r m o n e ta ry t a r g e t s , n o r i s C o n g r e ss r e q u ir e d t o " m ic r o ­
manage " t h e c e n t r a l b a n k . R a th e r , I am o n l y a s k in g t h a t t h e c e n t r a l
bank b e a c c o u n t a b l e
to
t h e A m erican p u b l i c
and a b id e
th e
C o n s t i t u t i o n o f t h e U n ite d S t a t e s by r e q u i r i n g t h o s e who manage o u r
money s u p p ly t o p r e s e n t t h e i r c r e d e n t i a l s in S en a te c o n f ir m a t io n
h e a rin g s .
I l o o k fo r w a r d t o t h e t e s tim o n y o f o u r esteem ed p a n e l o f
w i t n e s s e s on t h e i r
id e a s
f o r m aking o u r c e n t r a l bank m ore
a c c o u n t a b l e t o t h e n a t i o n i t s e r v e s . We a r e h on ored t o b e g in t h i s
s e r ie s
of
h e a r in g s
on F e d e r a l
R eserve
re fo r m w it h
su ch a
d i s t i n g u i s h e d p a n e l.




70
5

R e p r e s e n t a t i v e L ee H a m ilton has r e p r e s e n t e d t h e n in th
D i s t r i c t o f I n d ia n a s i n c e 19 65. He i s ch airm an o f t h e
Com m ittee on F o r e ig n A f f a i r s , C o-C hairm an o f t h e J o i n t
Com m ittee on t h e O r g a n iz a t io n o f t h e C o n g r e s s , and a
member o f t h e J o i n t E con om ic C om m ittee. He h a s lo n g been
i n t e r e s t e d i n r e fo r m in g t h e F e d e r a l R e s e r v e and has
d e v e lo p e d and i n t r o d u c e d r e fo r m l e g i s l a t i o n .
M a r y la n d 's s e n i o r s e n a t o r P aul S a rb a n e s was e l e c t e d t o
t h e House o f R e p r e s e n t a t i v e s i n 1970 w here he s e r v e d f o r
s i x y e a r s b e f o r e g o i n g t o th e S e n a te i n 19 76. He i s V ic e
Chairman o f t h e J o i n t E con om ic C om m ittee and Chairm an o f
t h e H ou sin g S u b com m ittee o f t h e S e n a te B anking C om m ittee.
He has a l s o a l e a d i n g a d v o c a t e f o r r e fo r m o f t h e F e d e r a l
R e s e r v e and h a s i n t r o d u c e d r e fo r m l e g i s l a t i o n .
S e n a to r B yron D organ r e p r e s e n t e d N orth D akota i n t h e
House o f R e p r e s e n t a t i v e s from 1980 t o h i s e l e c t i o n i n t h e
S e n a te i n 1 9 9 2 . In F e b ru a ry he in t r o d u c e d S 2 1 2 , t h e
" F e d e r a l R e s e r v e R eform A c t o f 1 9 9 3 ." He h a s a l s o j o i n e d
S e n a to r S a rb a n e s i n in t r o d u c i n g t h e "M on eta ry P o l i c y
R eform A c t o f 1 9 9 3 ."
Henry R e u ss s e r v e d i n t h e House o f R e p r e s e n t a t iv e s from
1955 t o 1983 and was t h e chairm an, o f t h i s C om m ittee from
1975 t o 1 9 8 0 . Chairm an R euss d e v e lo p e d and p rom oted t h e
" F e d e r a l R e s e r v e R eform A c t o f 1977" w h ich was aim ed a t
o p e n in g t h e R e s e r v e Banks t o t h e em ploym ent o f women and
m i n o r i t i e s . T h at A c t a l s o made c o n f l i c t o f i n t e r e s t law s
t h a t a p p l i e d t o g ov e rn m e n t e m p lo y e e s a p p l i c a b l e t o t h e
b o a r d s o f d i r e c t o r s o f t h e F e d e r a l R e s e r v e Banks.
Chairman R e u s s 's s p e e c h in 1977 i n s u p p o r t o f r e fo r m
p r e s e n t e d a v i v i d a c c o u n t o f how o u r c e n t r a l bank u sed
i t s r e s o u r c e s t o l e a d a lo b b y in g e f f o r t h e r e in C o n g r e s s
t o p r e v e n t a GAO a u d i t o f a l l i t s o p e r a t i o n s . Chairman
R eu ss fo u g h t t h e i m p o s i t i o n o f an amendment t o t h e 1978
"G overnm ent i n t h e S u n sh in e A c t " t h a t s e v e r e l y l i m i t e d
t h e GAO's a u t h o r i t y t o a u d i t th e F e d e r a l R e s e r v e .
C ongressm an K w e isi Mfume o f M aryland, who i s s e r v i n g h i s
f o u r t h te rm , i s an a c t i v e and much a p p r e c i a t e d member o f
t h i s c o m m itt e e . He s e r v e s a s ch airm an o f C o n g r e s s io n a l
B la c k C au cu s f o r t h e 103 r d C o n g re ss and i s a member o f
t h e f e d e r a l g o v e rn m e n t S e r v i c e T ask F o r c e .




71
6

Our n e x t w i t n e s s i s W illia m G r e i d e r . He i s t h e a u th o r o f
s e c r e t s o f t h e T em p le. How t h e F e d e r a l R e s e r v e Runs t h e
C o u n tr y . a d e f i n i t i v e w ork w h ich was on The New Y ork
T im es b e s t s e l l e r
lis t.
B i l l G r e id e r w r i t e s a b o u t
n a t i o n a l a f f a i r s f o r R o l l i n g S t o n e . He was fo r m e r ly
a s s i s t a n t m anaging e d i t o r o f The W ash in g ton P o s t .
G r a s t y Crews I I i s o u r f i n a l w i t n e s s . From 1958 t o 1970
Mr. Crews w ork ed c l o s e l y w it h t h i s C om m ittee and i t s
s t a f f a s a member o f t h e O f f i c e o f t h e L e g i s l a t i v e
C o u n se l o f t h e House and l a t e r a s a c o u n s e l t o t h i s
C om m ittee. He h a s a l s o s e r v e d a s an o f f i c e r in t h e l e g a l
d i v i s i o n o f t h e F e d e r a l R e s e r v e B oard o f G o v e r n o r s , and
G e n e ra l C o u n se l f o r t h e d ru g p o l i c y o f f i c e
in t h e
E x e c u t iv e o f o f f i c e o f t h e p r e s i d e n t . He i s now en ga ged
i n t h e p r i v a t e p r a c t i c e o f la w i n V i r g i n i a and t h e
D i s t r i c t o f C o lu m b ia .




72
STATEMENT BY
REPRESENTATIVE JAMES A* LEACH
Before The Committee on Banking, Finance and Urban Affairs
Hearing on Reforming the Federal Reserve System
October 7, 1993
Few institutional issues are more fraught with real and perceived problems
than those relating to die structure and accountability o f the Federal Reserve Sys­
tem. In the context o f today's hearing, it should be clear that what is at stake is
change, not necessarily reform; modest tinkering, not radical reorganization.
Since its inception, the Fed, in effect, has become a quasi- fourth branch o f
government with authority largely delegated to it by the first branch - the legisla­
ture —on the assumption that there are aspects o f monetaiy policy and financial
services regulation that demand independent, consistent and professional attention
that a legislative branch o f political generalists is not by nature equipped to pro­
vide.
At this time, die Federal Reserve System is well-led and well-respected; its
leadership as well as sheer existence has provided an anchor o f financial stability
in a time o f economic uncertainty and world-wide disequilibrium. When we look
at things that might have gone disastrously askew with the economy over the last
several decades, it is apparent there are a lot o f dogs that did not bite and a lot o f
bites that did not prove contagious, in part because o f Fed leadership. One can
make a powerful case that a system that is not broken should not be fixed. On the
other hand, one can also credibly suggest that the best time to make modest adjust­
ments in policy and structural arrangements is when crises are not at hand.
My sense is that Congress should be chary about pushing radical change at
the Fed at any time, but should be open to periodically considering modest adjust­
ments.
Basically, the Federal Reserve has two responsibilities: one is monetary
policy; the other is bank regulation, with attendant safety net concerns for indi­
vidual institutions and die economy at large. Regarding monetary policy, there is
an unseemly dimension to the fact that open market decisions affecting interest
rates are made, in part, by individuals who are neither chosen by the Executive nor
confirmed by the legislature. But like all circumstances there is an implicit
counter balancing positive: regional Federal Reserve Bank presidents symbolize
the best o f decentralized public leadership. While regional Fed presidents are
public employees, because o f their manner o f selection they provide the federal
government at a very high level a unique private/public partnership which in po­
litical science terms may be awkward, but which through experience has generally
proven to be both ethical and effective.
There are two principal approaches on the table affecting open market deci­
sions —one involves senatorial confirmation o f regional Fed presidents; the other
involves implicitly giving more authority to current members o f the Federal Re­
serve Board in Washington by simply withdrawing the right to vote —although not
necessarily participation in meetings —o f regional Fed presidents. O f these two
approaches, my instinctive preference is for the second. But I am not necessarily
convinced o f the need, in the first place, to establish a new institutional arrange­
ment




73
On the issue o f transparency, the case for a modest increase in openness
appears reasonable, but care must be taken not to hamstring the Fed in its tradi­
tional decision-making, which demands coordination with and cooperation from
foreign governments, and which has significant effects on various financial mar­
kets, o f which the taxpayer —through the U.S. Treasury and the Fed —may be a
participant
Regarding regulation, the Federal Reserve System has major responsibilities,
particularly in supervising larger banks, foreign financial institutions operating in
the U.S., and sophisticated bank holding company operations.
There are a number o f approaches to the reform o f the regulatory structure
that are being considered in Congress and by the Executive today. My preference,
as reflected in legislation I introduced last March (H R. 1227), is not to move in
the direction o f a single regulator, but instead to consolidate regulators and the
regulation o f institutions. In particular, I advocate merging the OCC and the OTS,
but keeping the Fed responsible for regulating all o f the Nation’s larger banks
(those with assets over $25 billion) and their holding companies. In addition, I
believe the Fed’s authority to regulate foreign financial institutions in the U.S.
should be retained.
In conclusion, I would like to stress two circumstances. All o f us have
individual assessments o f whether the Fed at various points has conducted too
tight or too loose monetary policy. At this time, though, it is impressive how stable
the American currency is, especially given the spectacularly loose fiscal policy
conducted by Congress. It is hard not to sympathize with the dilemma o f Fed
policymakers given the constraints that fiscal policy has provided them; and, based
on the record, it is impossible not to be skeptical about any approaches which
would enhance Congress’s role in monetary policy. If Congress’s record in fiscal
policy is a guide, the danger is very real that any effort by the First Estate to recap­
ture powers reserved by the Constitution to it could lead to a butchering o f mon­
etary policy.
In all institutional circumstances, governmental and nongovernmental, there
is an element o f tradition that goes beyond the drawing o f lines o f authority rela­
tionships on charts. In this context, it deserves to be noted that the Federal Re­
serve System, at this moment, has developed an expertise o f signal dimension and
respect, particularly in the financial markets and overseas, far higher than any
other institution o f the U.S. government. Hence, any change diminishing Fed
responsibilities, even o f modest dimension, demands a compelling burden o f proof
not immediately self-evident to this Member.
The country will do just fine if none o f the approaches propounded by any o f
us this moming is adopted. On the other hand, this fact is not sufficient to ratio­
nalize a “ never change” legislative mantra.
This non-crisis environment may be the most propitious time to consider
undertaking small improvements in the system to help ensure that in a time o f
greater crisis in the future the Fed is not susceptible to challenges o f either demo­
cratic legitimacy or institutional arrogance or stultification.
Mr. Chairman, with this philosophical framework, I welcome the thoughts
and concerns o f our distinguished panel o f witnesses.




-30-

74
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
Hearing on The Federal Reserve Accountability Act o f 1993
STATEMENT BY CONGRESSWOMAN LUCILLE ROYBAL-ALLARD
October 7, 1993

MR. CHAIRMAN:

I AM LOOKING FORWARD TO TODAY’ S HEARING ON THE FEDERAL RESERVE
ACCOUNTABILITY ACT OF 1993.

IN MY SHORT TENURE IN THE CONGRESS AND AS A MEMBER OF THE HOUSE
BANKING COMMITTEE, I HAVE COME TO FULLY UNDERSTAND THE IMPORTANCE
AND THE IMMENSE INFLUENCE THAT THE FEDERAL RESERVE HAS OVER THE
ECONOMY, EMPLOYMENT RATES, INFLATION AND THE INTERNATIONAL VALUE
OF OUR U.S. DOLLAR. FOR THIS REASON, I WOULD LIKE TO COMMEND YOU MR.
CHAIRMAN FOR YOUR LEADERSHIP AND VISION DEMONSTRATED BY THIS
COMPREHENSIVE MEASURE WHICH GREATLY IMPROVES THE WAY THE FEDERAL
RESERVE DOES BUSINESS.

I AM AN ORIGINAL CO-SPONSOR OF CHAIRMAN GONZALEZ* HR 28 FOR A NUMBER
OF REASONS.

PLEASE LET ME HIGHLIGHT WHAT I CONSIDER THE MOST

IMPORTANT PROVISIONS OF THIS BILL:




75
FIRST, I WHOLEHEARTEDLY AGREE WITH THE CHAIRMAN THAT WE NEED TO
HOLD THE CENTRAL BANK MORE ACCOUNTABLE FOR CRUCIAL DECISIONS ON
MONETARY POLICY. RESTRUCTURING THE FEDERAL OPEN MARKET COMMITTEE
(FOMC) TO REQUIRE THAT THEY BE APPOINTED BY THE PRESIDENT WITH
SENATE CONFIRMATION WILL ALLOW THE GENERAL PUBLIC AND CONGRESS TO
BE AWARE OF THEIR POSITIONS ON ISSUES OF IMPORTANCE PRIOR TO BEING
APPOINTED.

SECOND, I BELIEVE THAT THE PUBLIC HAS THE RIGHT TO KNOW ABOUT THE
IMPORTANT DELIBERATIONS THAT AFFECT THE NATION’ S MONETARY POLICY.
THE CURRENT PRACTICE OF CLOSED MEETINGS AND NO MINUTES AVAILABLE
FOR PUBLIC SCRUTINY MAKE IT IMPOSSIBLE FOR THE PUBLIC TO HOLD THE
FEDERAL OPEN MARKET COMMITTEE ACCOUNTABLE FOR ITS DECISIONS AND
ACTIONS.

THIRD, THE PUBLIC HAS EVERY RIGHT TO REQUIRE COMPLETE AND THROUGH
AUDITS OF ALL OPERATIONS OF THE FEDERAL RESERVE. THIS BILL AUTHORIZES
THE GENERAL ACCOUNTING OFFICE TO AUDIT ANY PART OF THE FEDERAL

/

RESERVE.

HOWEVER, ONE OF THE MOST IMPORTANT SHORTCOMINGS THAT I HAVE SEEN
WITH THE CURRENT SYSTEM IS THE VIRTUAL LACK OF DIVERSITY IN
PERSONNEL. I FIND IT APPALLING THAT THE FEDERAL RESERVE CAN NOT FIND




76
QUALIFIED WOMEN AND MINORITIES TO FILL THEIR DECISION-MAKING
POSITIONS. I PREFER TO BELIEVE THAT THIS IS NOT BY DESIGN, AND FOR THAT
REASON, MY ONLY CONCLUSION IS THAT THE CURRENT SYSTEM FOR THE
SELECTION OF THESE INDIVIDUALS IS FLAWED. THIS ISSUE IS VERY IMPORTANT
TO ME BECAUSE I DO NOT UNDERSTAND HOW THE FEDERAL RESERVE CAN
MONITOR AND REGULATE BANK LENDING DISCRIMINATION BASED ON RACE,
GENDER AND INCOME, WHEN THEIR OWN STAFF IS NOT REFLECTIVE OF OUR
DIVERSE POPULATION. THE FEDERAL RESERVE MUST INCLUDE A STAFF THAT
IS REFLECTIVE OF ALL SEGMENTS OF OUR POPULATION. THE FACT THAT THERE
HAS BEEN ONLY ONE WOMAN SERVING AS ONE OF THE 12 FEDERAL RESERVE
BANK PRESIDENTS SINCE 1913, AND NO MINORITIES, IS TOTALLY UNACCEPTABLE
IN 1993. I COMMEND THE CHAIRMAN FOR HAVING THE FORESIGHT TO DEVELOP
AN ALTERNATIVE TO THE CURRENT FEDERAL RESERVE SYSTEM THAT PROVIDES
A PROCESS FOR A MORE REPRESENTATIVE POLICY MAKING BODY.

IN CLOSING, I WOULD LIKE TO OFFER MY ASSISTANCE TO YOU, CHAIRMAN
GONZALEZ. I LOOK FORWARD TO WORKING WITH YOU ON THIS ISSUE.




Congre** of tfie tttttteb ftta trt
ftottfe of &eprt«entatibt«

■ tttta ltm . 9BC 20915-1304
OPENING STATEMENT
CONGRESSMAN LUIS V. GUTIERREZ
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
OCTOBER 7,1993

MR. CHAIRMAN, AS YOU ALREADY KNOW, I AM VERY SUPPORTIVE OF RR. 28,
THE FEDERAL RESERVE ACCOUNTABILITY ACT. I WAS AN EARLY CO-SPONSOR
OF THIS LEGISLATION; NOT BECAUSE I AM A SCHOLAR OF THE FEDERAL
RESERVE, BUT RATHER BECAUSE I BELIEVE THIS COUNTRY WAS FOUNDED
AND OWES ITS SUCCESS TO A BASIC DEMOCRATIC PRINCIPLE - GOVERNMENT
OF THE PEOPLE AND FOR THE PEOPLE.

THE FEDERAL RESERVE AND THE FEDERAL OPEN MARKET COMMITTEE HAVE
ALWAYS PLAYED A CRITICAL ROLE IN OUR NATION YET, ACCORDING TO
MUCH OF THE TESTIMONY HERE TODAY, IT HAS NEVER BEEN HELD TO THE
SAME LEVEL OF ACCOUNTABILITY AS OTHER SEGMENTS OF OUR
GOVERNMENT. I AM INTERESTED TO LEARN MORE ABOUT THE CURRENT
SYSTEM AND IT’S PROBLEMS. BUT MORE IMPORTANTLY, I WANT TO ENSURE
THAT THE DEMOCRATIC PRINCIPLES FUNDAMENTAL TO OUR VERY EXISTENCE
ARE UPHELD AND BELIEVE DISCUSSIONS SUCH AS THE ONE TODAY ARE
CRITICAL IF WE ARE TO BE SUCCESSFUL.




78

THIS BILL DEALS NOT ONLY WITH THE QUESTION OF ACCESSIBILITY TO
INFORMATION, BUT QUESTIONS OF CONSTITUTIONALITY AS WELL. MR.
CREWS, IN HIS PREPARED STATEMENT, SERIOUSLY QUESTIONED THE
CONSTITUTIONALITY OF OUR PRESENT SYSTEM OF APPOINTING FEDERAL
RESERVE BANK PRESIDENTS. AS WE ALL KNOW, CHAIRMAN GONZALEZ HAS
ALWAYS WORKED EXTREMELY HARD AND BEEN PARTICULARLY
CONSCIENTIOUS ABOUT UPHOLDING AND GUARDING OUR CONSTITUTION.
THEREFORE, IT SEEMS ONLY FITTING THAT HE HAS INTRODUCED THIS
IMPORTANT PIECE OF LEGISLATION AND IS HOLDING HEARINGS ON H.R. 28 AT
THIS TIME.

I WANT TO WELCOME CHAIRMAN HAMILTON, SENATOR SARBANES,
CONGRESSMAN MFUME, AND OUR OTHER DISTINGUISHED WITNESSES. I
CERTAINLY LOOK FORWARD TO THE OPPORTUNITY TO HEAR MORE ABOUT
THE FEDERAL RESERVE AND THE OTHER LEGISLATIVE PROPOSALS
REGARDING THE FEDERAL RESERVE.

THANK YOU, MR. CHAIRMAN.




79
Embaigoed for Release
9:30 a.m., October 7,1993
STATEMENT
of
CONGRESSMAN LEE H. HAMILTON

before the
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
o f die
U.S. HOUSE OF REPRESENTATIVES

oo

October 7,1993
Mr. Chairman, I very much appreciate die opportunity to appear before the
Committee on Banking, Finance and Urban Affairs this morning to testify on the topic
of Federal Reserve accountability and Federal Reserve reform.
Mr. Chairman, this is a very important series of hearings on a very important
topic and I commend you for your efforts to make the Federal Reserve more
accountable and more open within the framework of our democratic system of
government. I have tried to contribute to this goal over the years and I hope these
hearings will mark the start of some tangible progress.
I want to begin with what I consider to be one of the most important points that
can be made about Federal Reserve reform. The bills being considered during this
hearing -- H.R. 28, which you introduced earlier this year; the two bills (H.R. 586 and
587) that Rep. David Obey and 1 introduced; and similar bills (S. 212 and 219)
introduced by Senators Paul Sarbanes and Byron Dorgan -- would go a long way
toward addressing the accountability issues that concern us in this hearing without

impairing, or imerfging with, the independent of the Fed to wndutt monetary reliw.
[ emphasize that point, because I have often been accused of trying to do just
that. Eight years ago, when ( introduced my first bill to bring the Federal Reserve's
budget into the sunlight, and four years ago, when 1 first introduced broader legislation
with Congressman Byron Dorgan to reform a number of the practices and procedures of
the Federal Reserve, these bQb were frequently characterized as efforts by Congress to
take over control of monetary policy from the Fed and pressure the Fed to reduce
interest rates.
[f that were true, then today's lower interest rates would give me little reason to
be here this morning or to continue my efforts to reform the practices and procedures
of the Federal Reserve.




1

80
Eight years ago, when I introduced my bill on the Federal Reserve’s budget,
interest rates were in the range of 8.5 to 10.5 percent. Four years ago, when I
introduced the broader Federal Reserve Reform bill, interest rates were in the range of
8.5 to 9.5 percent. Today, the Federal Funds rate is 3.0 percent, the lowest level in 30
years, and long-term rates are just over 6 percent, the lowest level in 20 years. The
problem of high interest rates is largely behind us. [f this were the motive for my bills,
there would be no reason for me to be here today.
But I am here, and the reason is that what is appropriate in terms of Federal
Reserve openness and accountability is completely independent of what is appropriate
in terms of interest rates and monetary policy. Interest rates may be down, but the
need for reform of the Federal Reserve System is just as imperative today as it was
when I first addressed this subject.
The Federal Reserve occupies an anomalous position within the government of
the United States. It is an enormously powerful institution, but it does not conform to
the normal standards of government accountability. Power without accountability
simply does not fit into the American system of democracy.
Through its control over monetary policy the Federal Reserve affects the lives
and wellbeing of all Americans. The path that the Federal Reserve sets for monetary
policy and interest rates affects every businessperson, worker, consumer, borrower and
lender in the United States. With fiscal policy constrained by the continuing need to
reduce the Federal deficit, the Federal Reserve by default must make the decisions by
which the government exercises its responsibility for the overall performance of the
economy.
The dilemma created by this concentration of power is that the independence
which the Federal Reserve must have in order to insulate monetary policy from political
pressures also serves to remove the Fed from the normal processes of accountability
that apply to every other agency of the federal government. Let me list some of the
ways in which the Federal Reserve fails to conform to the normal standards of
accountability in a democracy:
A. Monetary policy is decided in secret, behind closed doors.
B. The Federal Reserve is not required to consult with Congress or the
Administration before setting money or interest rate targets, even though its power
affects the financial well-being of every American.
C. It waits six weeks before releasing policy decisions.
D. It keeps no transcript or minutes of any of the meetings at which the Federal
Open Market Committee makes important monetary policy decisions.




2

81
E. The President, who is held responsible for the performance of the economy
and is blamed if things go wrong, often must wait until late in his term to appoint a
new Chairman of the Federal Reserve Board.
F. The Fed’s budget is not published in the U.S. Government Budget, even
though it spends over $1.7 billion per year.
G. The Federal Reserve engages in trillions of dollars in transactions in the
money markets each year, but most of these activities are exempt from audit by the
GAO or any other outside agency.
H. Of the twelve voting members of the FOMC, which makes among the most
important decisions of any government agency, only seven are public officials who are
appointed by the President and confirmed by the Senate. The rest are appointed
primarily by the commercial banking industry.
FEDERAL RESERVE REFORM ACT
I have introduced two bills that would address many of these problems by
making a number of modest changes in the practices and procedures of the Federal
Reserve. The first bill, the Federal Reserve Reform Act, has five major provisions.
Federal Reserve Chairman Alan Greenspan has made his views known on this bill and I
will address his objections where appropriate in my testimony.

[. Consultation with die Administration
The Federal Reserve Reform Act would require the Secretary of the Treasury, the
Chair of the Council of Economic Advisers, and the Director of the Office of
Management and Budget to meet three times a year on a non-voting basis with the
Federal Open Market Committee (FOMC), to consult on monetary and fiscal policy.
The purpose of the meetings is to improve the flow of information between the
Administration and the Federal Reserve. Currently, there is no formal channel of
communication. At times in the past, Administration officials have been reduced to
conveying their views on monetary policy by publidy sniping at the Fed through the
press. Under our bill, the Administration will have a formal avenue to convey its
policies to the FOMC and lay out its goals for monetary policy. The Members of the
FOMC will also have an avenue to express their concerns about policy to the
Administration. Communication will flow both ways.




3

82
Chairman Greenspan opposes this provision on the grounds that the Federal
Reserve and the Administration already communicate through informal rhannpls and
that the more formal arrangement proposed by my bill would result in political
manipulation of monetary policy.
Informal channels of communication do exist; for example, Chairman Greenspan
and Treasury Secretary Bentsen meet about once a week. Over the years, however, the
success of such informal meetings has varied, depending on the personalities involved.
This ad hoc approach to making decisions which affect the economic well-being of all
Americans is not the best way for a great economic power to conduct its business. It is
astonishing that the world’s greatest economic power does not have a formal channel of
communication between the key makers of economic policy. My bill would establish a
channel of communication that would not depend on personalities for success.
II. Teem of the Federal Reserve Chairman
The bill would allow the President to appoint a Chairman of the Federal Reserve
Board (with the advice and consent of the Senate) one year after taking office, which is
the time when the first regular opening would occur on the Federal Reserve Board.
This would make the Fed Chairman’s term roughly coterminous with the term of office
of the President of the United States.
The Chairman of the Board of Governors, Alan Greenspan, was appointed to his
current term by President Bush and will hold that office until March 2, 1996, more than
three years into President Clinton’s term. Fortunately, Chairman Greenspan and
President Clinton have a cordial relationship. The fact that Mr. Greenspan was not
appointed by President Clinton has not caused any significant problems with monetary
policy. But if they were unable to work together, the result could be serious damage to
the American economy and a paralysis of economic policy. Why take that risk?
My bill would address this by having the President appoint the Fed Chairman to
a four-year term beginning one year after taking office, when there would be a new
vacancy on the Board in any event. The Chairman would still be subject to Senate
confirmation, as under current law. Giving the President three years of a term with a
Federal Reserve Chairman of his own choosing is surely preferable to the possibility
under current law of a lengthy period where the President and Chairman cannot work
together.
The Federal Reserve’s position on this issue has varied over the years. Chairman
Greenspan opposes it, but former Chairmen William McChesney Martin and Paul
Volcker supported it, while Arthur Bums was on both sides at different times during his
chairmanship.




4

83
E 1966, Federal Reserve Chairman William McChesney Martin said the Board
n
believed that the terms of the Chairman and Vice Chairman should be related to the
President's term of office and that a new President should be able to appoint a
Chairman of his own choice. In a 1977 hearing before the House Banking Committee,
Chairman Arthur Bums said he was still making up his mind.
Last year in connection with a bill that the Congress was then considering,
I reported to the Congress that the Board had no objection to a roughly
coterminous term- Since then we have considered this issue again within
the Board. I have given it a good deal of thought, and I do not find it an
easy question. At present a clear majority of the Board favors the position
that I have taken.
Chairman Paul Volcker also supported the change in the Chairman’s term this bill
would make, [n testimony before the Domestic Monetary Policy Subcommittee on
October 18, 1983, he said:
The Board believes there is merit in providing for a consistent relationship
between the term of the Chairman of the Federal Reserve with the term of
the President.... there is a sound basis for making the four-year term of
the Chairman begin on February 1 of the year after the President’s term of
office commences. Such an alignment would permit a President to
nominate a Chairman relatively early in his term, but at a point in time
somewhat removed from the series of political appointments required at
the very start of a new Administration. Continuity at the central bank in
the midst of a transition of administrations would be especially desirable.
This is almost precisely what my bill would do.
HI. Disclosure of Monetary Policy Decisions
The bill would require the Federal Open Market Committee to disclose
immediately any changes in the targets of monetary policy, including its targets for
monetary aggregates, credit aggregates, prices, interest rates, or bank reserves.
The FOMC currently keeps major policy decisions secret for six weeks after they
are made and carried out. Most other government agencies must not only publish
decisions in the Federal Register before they can take effect, most in fact must publish
proposed decisions for public comment before they can even be issued in final form.
Such secrecy has two economic costs. First, secrecy makes capital markets
operate less efficiently because investors do not have the information they need to make
wise and informed decisions. Second, secrecy is unfair to small investors since they do




5

84

not have the money that large Wail Street firms have to hire full-time professional Fedwatchers. The solution - immediate release of Federal Reserve policy decisions -- is
widely supported by economists and participants in financial markets.
Chairman Greenspan argues that immediate release would impair the Federal
Reserve’s flexibility and could result in increased instability in financial markets. Our
bill does not require the Federal Reserve to announce every day-to-day move it makes
in conducting monetary policy. In practice, it would only require immediate release of
the general instructions which the FOMC issues at the end of each meeting to the New
York Federal Reserve Bank -- the "directive" - plus any other major policy changes that
the FOMC makes between formal meetings. The Fed would still be able to operate
under the same day-to-day rules it currently follows.
Mr. Chairman, your bill, H.R. 28, would supplement this by requiring the FOMC
to make a video transcript of each meeting and air it after 60 days. Years ago, the Fed
published minutes of its meetings, a practice that was discontinued during the 1970s.
Both Houses of Congress publish a full verbatim transcript of our deliberations, on the
floor and in committees, and there is no reason why the Fed should not do the same
thing.

IV. GAO Audits
The Federal Reserve Reform Act would permit the Comptroller General to
conduct more thorough reviews and studies of Federal Reserve operations, by removing
selected current restrictions on GAO audits.
The General Accounting Office is the watchdog of Congress. Its audits are of
tremendous value* Not only do they ferret out waste, fraud and abuse, they perform
the even more important function of telling Congress when programs are not working
and where programs can be improved.
Although the GAO is currently permitted to audit the Fed’s regulatory activities,
it is prohibited access to any Federal Reserve function involving (1) transactions with a
foreign central bank or foreign government, (2) any deliberations or actions on
monetary policy matters or (3) any transactions made under the direction of the FOMC.
My bill would remove the last two restrictions while retaining the first.
Chairman Greenspan opposes GAO audits on the grounds that they will duplicate
the Fed’s own efforts. But every government agency that takes in and spends billions of
dollars each year ought to be subject periodically to outside review. I am not accusing
the Federal Reserve of dishonesty, I just believe the GAO should have more complete
access to the Federal Reserve’s financial statements. Your bill would complement this
by requiring an annual GAO audit of the Fed’s open market operations.




6

85
V. Federal Reserve Budget
The bill would require that the Federal Reserve’s annual $1.7 billion budget be
published in the Budget of the U.S. Government The Fed would submit its budget for
the current year and the two following years to the President by October 16 of each
year, and the President would be required to print the Fed’s budget in the Government
Budget without change.
Despite the fact that the Federal Reserve takes in and spends billions of dollars
each year, the Federal Reserve's budget is not conveniently available to Congress or the
public. Only a small fraction of the Fed's $1.7 billion of operating expenses is included
in the U.S. Government Budget - just the $133 million of expenses incurred by the
Board of Governors in Washington. The details on this part of the Fed's budget, less
than 8 percent of the Federal Reserve’s total spending, appear on the next-to-last page
of the Budget, in a section entitled "Government-Sponsored Enterprises."
Chairman Greenspan opposes this provision on the grounds that the Federal
Reserve's functional independence is inseparable from its budgetary independence. My
bill will not reduce the Federal Reserve’s control over its own budget. All it does is
require that the data be published conveniently in the U.S. Government Budget, where
spending by every other government agency is already listed. This includes the
Supreme Court, which has its budget published in the Government Budget without any
loss of independence.

monetary POUCY re fo rm ACT
The second bill - the Monetary Policy Reform Act -- would make two changes in
the structure of the Federal Reserve. First, it would dissolve the Federal Open Market
Committee and assign sole responsibility for open market operations to the Board of
Governors. Second, it would establish a Federal Open Market Advisory Committee
through which the presidents of the 12 regional Federal Reserve Banks could advise the
Board of Governors on open market operations and monetary policy.
Currently, decisions on monetaiy policy are made by the Federal Open Market
Committee, which consists of the seven members of the Board of Governors plus five of
the twelve presidents of the regional Federal Reserve Banks, who serve on a rotating
basis. The Governors are appointed by the President and confirmed by the Senate to
14-year terms and are thus duly-appointed government officials who are accountable to
the President and Congress, and through them to the American people, for their conduct
in office.




7

86
By contrast, the Federal Reserve Bank presidents owe their jobs to the Boards of
Directors of the regional Banks, subject to the approval of the Board of Governors.
These regional Boards are dominated by local commercial banks, who appoint six of the
nine directors. Neither the President nor Congress has any role in selecting either the
directors or the presidents of the Federal Reserve Banks. Some of the Bank presidents
are career employees, others have backgrounds in banking, business and academics;
they are talented and respected individuals. But they are not properly-appointed
government officials, and they are not accountable to the American people for their
performance in office. Nonetheless, they participate in monetary policy decisions
through their membership on the FOMC, where they cast five of lie twelve votes that
determine monetary policy and interest rates.
This situation, in which private individuals participate in monetary policy
decisions, is an anomaly in our system of democratic government.
The Monetary Policy Reform Act would address this concern by assigning the
conduct of monetary policy and open market operations to the seven-member Board of
Governors of the Federal Reserve System, thus lodging this responsibility with properlyappointed public officials. It would also create a special new Federal Open Market
Advisory Committee through which the presidents of the regional Federal Reserve Banks
could continue to advise the Board on monetary policy. The Bank presidents would no
longer have a vote on monetary policy, but the Board of Governors would still have the
benefit of their advice.
Mr. Chairman, your bill would also address this problem by having the President
appoint and the Senate confirm the Federal Reserve Bank presidents, thus making them
government officials. Either way would put important monetary policy decisions solely
in the hands of responsible public officials, where they belong, rather than the hands of
individuals representing private interests.
Before concluding, Mr. Chairman, I would like to address a more general
argument that is frequently used to oppose efforts to reform the Federal Reserve.
The argument is that M it ain’t broke, don’t fix it." This objection assumes that
If
the effect of these bills will be to force the Federal Reserve to alter its conduct of
monetary policy, which would harm the economy of the United States. This is
essentially the position taken by President Clinton in his September 20 letter to you.
This fear is based on a misreading of these bills. Nothing in them would affect
the conduct of monetary policy. There is no provision in either bill that would give
Congress or the President any control over monetary policy. If someone wanted to
politicize monetary policy, these bills would not be the way to do it.




8

87
Nonetheless, my bills do address a problem that does need to be fixed, the
complex problem of Federal Reserve accountability in a democratic society. The bills
would do that without jeopardizing the Federal Reserve’s independence or injecting
politics into monetary policy. Congress should not wait until a monetary crisis to
reform the Federal Reserve. These bills take advantage of a period of high regard for
the Fed, and a moment of economic calm, to bring Fed procedures up to date. If we
wait to make the necessary adjustments until a time of economic turbulence and
controversy, the results may be for less measured.
Again, Mr. Chairman, I want to commend you for your efforts to make the
Federal Reserve a more accountable agency within our democratic system of
government and thank you for inviting me to testify during these important hearings. I
would like to submit two additional statements for the hearing record that explain the
bills in more detail.




88
STATEMENT OF

Senator PAUL S. SARBANES
V ice C hairman
J oint E conomic C ommtitee

on

FEDERAL RESERVE REFORM
BEFORE THE

COMMTITEE ON BANKING, FINANCE AND URBAN AFKURS
US. HOUSE OF REPRESENTATIVES
OCTOBER 7,1993

M r. Chairman and members of the Committee, thank you for this opportunity to
testify on the issue of reforming the structure of the Federal Reserve System. In this
country and around the world, in the public sector and in the private sector we are
living in an era of institutional reform. Everywhere you turn, people are trying to
restructure their institutions to make them more effective and more accountable.
Eighty years ago the Congress created the Federal Reserve System and in 1935 the
Congress created its structure for monetary policy, the Federal Open Market Committee
(FOMC). Although the FOMC plsys a role in todayfc economy that could not have
been imagined in 1935, the Congress has left its structure unchanged.
To address a major aspect of the current Fed structure, 1 have introduced the
Monetary Policy Reform Act. This act would make responsibility for monetary policy
decisions rest solely with those who have been nominated by the President and
confirmed by the Senate. It \rould end the anomaly that individuals selected by private
interests cast almost half of the votes on the body that sets the nation^ monetary policy.

BACKGROUND ON DECISION-MAKING AT THE FEDERAL RESERVE
The Federal Reserve System consists of the Board of Governors in Washington and
the twelve regional Federal Reserve Banks. The Board of Governors has seven
members, who are appointed by the President and confirmed by the Senate to 14-year
terms. The Governors of the Federal Reserve are thus duly-appointed public officials
who are responsible to the President and Congress, and through them to the American
people, for their conduct in office.




89
Stafnmir War Chairman Sbr+o w

2

m

The twelve Federal Reserve Bank presidents, in contrast, are selected for five year
terms fay the board of directors of each regional Bank. By law, the commercial banks
in each region directly select six of the nine members on the regional Bank board of
directors, three from among bankers and three from among non-bankers in the region.
The other three members of the board ate chosen by the Federal Reserve Board of
Governors.
Neither the President nor Congress has any role in selecting the presidents of the
Federal Reserve Banks. Some of the Bank presidents are career employees, others have
backgrounds in banking, business and academics; none are duly-appointed public
officials. Nonetheless, they participate in monetary policy decisions through their
membership on the Federal Reserved Open Market Committee (FOMQ, where they
cast five of the twelve votes that determine monetary policy and interest rates.
An artide in the W Street Journal "Fed Banks’ Presidents Hold Private Positions
aU
But Major Public Role" (August 1,1991) described the role of a regional Bank president
this way.
...he straddles an odd but awesome combination of public and private power. He
is paid like a private banker-$175,600 a year. His shareholders are private banks.
His board members are private citizens. His budget is free of congressional
scrutiny. He works in a spacious comer office atop a striking skyscraper with a fine
view. Once every six weeks, {he] abandons these comforts and goes to Washington,
where he assumes the role of powerful government official.
Although most government agencies — iivhirimg the Fed —make extensive use of
private citizens as advisers, in no other agency is actual decision-making power vested
in individuals who are formally accountable to private parties instead of to the public
LEGISLATIVE HtSTORf

1913 FWMl n a tirv Act
The legislative history of the Federal Reserve Act and later amendments suggest
that the Bank presidents are members of the FOMC because of political compromises
necessary to unify the nationfc monetary policy. There has never been a conscious
decision that the public is best served by having almost half the votes on monetary policy
cast by people not publidy accountable.
The role of the Bank presidents in the conduct of monetary policy has always been
a controversial issue. Neither Woodrow Wilson, who was President at the time the Fed
was created, nor Franklin Delano Roosevelt, who was President when the banking laws
were rewritten during the 1930b, found aiy justification for having private interests
controlling votes on government bodies.




90
9ta f»n*nt o f Vlor Chairnuut Sarbanm

3

In 1913, as Congress was drafting the Federal Reserve Act, Rep. Carter Glass, who
was then Chairman of the House Banking Committee, proposed in his draft of the
Federal Reserve Act to give the nation* banks significant representation on the Federal
Reserve Board. Senator Owen, Chairman of the Senate Banking Committee, strongly
opposed this and held instead that the government should appoint all the members of
the proposed Board. Glass* compromise position was to have four members chosen by
the government and three by the banks. Owen and Glass met with President Wilson on
this issue. According to Owen (see Congressional Record, VoL 50):
After a discussion of two hours, approximately, the President coincided with
ny contention that the Gwemment should control every member of the
Board on the ground that it was the function of the government to supervise
this system, and no individual, hwever respectable should be on the Board
representing private interests.
According to Glass' 1927 book, Adventures in Constructive Finance, when a group of
bankers went to the White House to protest Wilson* decision, the President turned to
the bankers and said:
Will one of you gentlemen tell me in what civilized country of the Earth
there are important government boards of control on which private interests
are represented?
After what Glass tells us was a "painful silence," President Wilson inquired:
Which of you gentlemen thinks that railroads should select members of the
Interstate Commerce Commission?
As a compromise, Wilson suggested that, while the banks should not be on the
Board, the bill should indude a Federal Advisory Council, which would let representa­
tives of the banks meet with the Federal Reserve Board periodically in an advisory
capacity. Since Glass decided there could have been no convincing reply to either of
Wilson* questions, be thereafter gave Wilson* approach "his very cordial support."
Wilson* views were reflected in the Report of the Senate Banking Committee on the
1913 act, which stated:
The function of the Federal Reserve Board in supervising the banking system
is a governmental function in which private persons or private interests have
no right to representation, except through the Government itself,




91
Statement of Vice Chairman Sarboam

4

m

Development of the Federal Open Market Committee
One of the most serious omissions from the Federal Reserve Act of 1913 was any
Federal Reserve oigan to guide open market operations. Instead, such decisions were
left up to the individual Federal Reserve Banks.
During the early years, the Banks, which received no appropriations from Congress
for operating expenses, frequently made open market purchases of Treasury bills and
other financial instruments in order to gain gaming assets to fimH caianVc anH other
Bank expenses. Since each Bank did this separately and at its own convenience, open
market operations occasionally had a disruptive influence on Treasury markets.
In 1922, under pressure from the Treasury, the Governors (as the Bank presidents
were called before 1935) of the Banks of New York, Boston, Chicago, Cleveland and
Philadelphia formed what came to be called the Open Market Investment Committee,
to work out an orderly method of buying and selling government securities. The
individual Federal Reserve Banks, hwcvw; were not required to obey this Committee;
each Bank decided on its cwn whether to follow the appiwed policy. The Federal
Reserve Board in these early cfeys had no statutory role in open market operations.
At the outset of the Great Depression in 1929, the nation^ monetary policy was
conducted by twelve separate regional banks with poor coordination and sometimes
severe undercapitalization. Economic historians still debate the importance of various
events that may have caused the econocty to contract by one third gm t the next four
c
years. But many hold the view that the lack of coordination of monetary policy among
the twelve separate Federal Reserve banks, combined with the undercapitalization of
some Reserve banks, was a contributing factor to its depth.
The Banking Ads of 1833 and 1035
The Banking Act of 1933 gave the Open Market Committee statutory recognition
and expanded it to indude one representative of each Federal Reserve District But it
did little to enhance the role of the Federal Reserve Board. The Board could not
initiate open market operations; it could only approve or disapprove decisions of the
Open Market Committee.
When President Roosevelt appointed Maniner Ecdes to head the Federal Reserve
Board in 1934, Ecdes proposed to give the Board increased control over monetary policy
by making it, rather than the FOMC, responsible for open market operations.
The House version of the Ranting Act of 1935 followed this plan fay limiting
membership in the Open Market Committee to Federal Reserve Board members. The
bill did indude a provision under which the Board would consult periodically with five
representatives of the Federal Reserve Banks. After consultation, however; the Board
would be free to follow its own judgement on monetary policy. Some Members of
Congress resisted this plan and insisted that the power be shared with the Federal




92

Statementof Vice Chairman Sarbane*

g

m

Reserve Banks. The final version of the Act compromised on this issue by creating an
FOMC which included as voting members the 7 Members of the Board of Governors
and a rotating group of 5 Federal Reserve Bank presidents. As part of the legislation,
the FOMCs policy on open market operations was made binding on the Federal
Reserve Banks. Authority and responsibility for monetary policy was thus centralized
in the FOMC, though not in the Federal Reserve Board.

MONETARY POLICY IN OTHER COUNTRIES
This arrangement of giving formal power in the conduct of monetary policy to
individuals selected by private industry does not find a parallel among major central
banks abroad. A study prepared for the Joint Economic Committee on central bankgovernment relations in the major industrialized countries found that central bank
officials who make monetary policy decisions elsewhere are duly-appointed public
officials who are accountable to the public and not to private interests.
Where central bank officials that are not directly appointed by the government have
a role, as in Italy, it is usually advisory; ultimate policy control still rests with government
appointees. Even in Germany, which some believe to have the most independence of
all central banks, the 11 Land Bank presidents who participate in monetary policy
decisions are all appointed by the upper house of the German parliament

THE MONETARY POLICY REFORM ACT OF 1993
The Monetary Policy Reform Act of 1993 would do two things. First, the FOMC
as presently constituted would be dissolved and its responsibilities would be taken over
by the Board of Governors. Second, a Federal Open Market Advisory Council would
be created, composed of the presidents of the 12 Federal Reserve Banks. Through this
Federal Open Market Advisory Council, the Bank presidents would have an important
consultative role on monetary policy, but would not have a vote. The Fed would still
have the benefit of the Bank presidents’ advice, but monetary policy decisions would be
the responsibility of accountable public officials.
Public power without public accountability does not fit the American system of
democracy. The Monetary Policy Reform Act of 1993 would apply this democratic
principle o f public accountability to the Federal Reserve.




93

Statement of V c Chairman Sarbanm
ie

e

m

OTHER REFORM PROPOSALS
You have convened this series of hearings to consider not just the composition of
the FOMC, but also a number of other proposals to reform the Federal Reserve system.
We need to look for better ways to coordinate monetary and fiscal policy. At
minimum, this requires better communication of the Fed with the Administration and
Congress. Obviously, the Federal Reserve chairman provides a key communications link.
Yet the four year term of the Federal Reserve chairman now comes up very late during
the President^ term. The proposal to make the term of the Federal Reserve chairman
coincide more closely with the term of the President is worth consideratioa
Communication between the Fed and the Congress also has problems. The
Humphrey Hawkins act of fifteen years ago is based on the assumption that twice a year
the Fed would inform Congress of goals for monetary aggregates that would have dear
policy implications. For several years the Fed has been downplaying its monetary
targets; in July the Fed reported that it has no confidence in the meaning of the
monetary aggregates for policy. When this issue was raised with Nobel prize-winning
economist James Tobin at a Joint Economic Committee hearing earlier this yeai; he
made the following statement:
... it is more important to have the Federal Reserve come to the Congress and
express its goals for macroeconomic performance on things that really matter, and
that is growth of GNP, what happens to employment and unemployment,
investment and foreign balance and inflation and talk about their appreciation of
the macroeconomic circumstances in which they are making policy and the general
directions in which they hope to move the econony in the coming six months or
the coming, year....
... those goals could be discussed between the Congress and the administration and
the Federal Reserve so there is [a] coherent macroeconomic plan on fiscal [and]
monetary policy ....
It seems to me that Professor Tobin% suggestion is worthy of consideration.

Mr. Chairman and Members of the committee, I believe that this is an important
series of hearings that you have launched today and I will follow them with interest
I understand that you plan to devote two hearings to witnesses from the Federal Reserve
itself. We will all benefit from a thorough airing of the arguments for and against each
proposal

72-851 0 - 9 4 - 4




94

TESTIMONY OF
SENATOR BYRON L . DORGAN
BEFORE THE HOUSE BANKING COMMITTEE
O cto b e r 7 ,

1993

M r. Chairm an and members o f t h e House B an king C o m m itte e , I
a p p r e c i a t e t h e o p p o r t u n i t y t o t a l k w it h y ou a b o u t t h e F e d e r a l
R e s e r v e B oard and t h e e x t r a o r d i n a r y p ow er i t has g iv e n t o p r i v a t e
b a n k e r s i n m anaging t h e econom y o f t h i s c o u n t r y .
T h e se p r i v a t e b a n k e r s , who a c t u a l l y s i t and v o t e on B oard
d e c i s i o n s r e g a r d i n g t h e n a t i o n 's money s u p p ly and i n t e r e s t r a t e s ,
a r e n o t a p p o in t e d b y t h e P r e s i d e n t o r c o n fir m e d b y C o n g r e s s .
T hey a r e n o t a c c o u n t a b l e t o a n y o n e b u t t h e i r own s h a r e h o l d e r s .
T h is i s n o t how a d e m o c r a c y i s su p p o s e d t o w ork and i t i s
n o t e v e n how t h e fr a m e r s o f t h e o r i g i n a l F e d e r a l R e s e r v e A c t
In ten d ed i t t o w ork .
T he r o l e o f p r i v a t e b a n k e r s i n t h e p o l i c y
d e c i s i o n s o f t h e B o a rd i s , b y c o n t r a s t , a f i n a n c i a l c o u p t h a t we
s h o u ld n o t t o l e r a t e j u s t b e c a u s e i t t o o k p l a c e i n t h e B o a r d 's
im p o s in g m a rb le s t r u c t u r e , r a t h e r th a n on t h e s t r e e t s .
T h is i s why I h a v e j o i n e d S e n a to r S a rb a n es and o t h e r s on
l e g i s l a t i o n t o c h a n g e a Fed sy s te m w h ich C o n g r e s s and t h e
P r e s i d e n t n e v e r a u t h o r i 2e d i n t h e f i r s t p l a c e .
T h is l e g i s l a t i o n
is n ot r a d ic a l,
z t w o u ld n o t c a u s e d i s r u p t i o n o f t h e B oard n o r
t u r m o i l i n t h e f i n a n c i a l m a r k e ts .
R a t h e r / t h e l e g i s l a t i o n w o u ld s im p ly r e s t o r e and l i m i t
c o n t r o l o f t h e n a t i o n 's m o n e ta ry p o l i c y t o t h e o f f i c i a l s o f t h e
F e d e r a l R e s e r v e B o a r d , a s t h e fo u n d e r s o f t h e F e d e r a l R e s e r v e
in te n d e d .
I t w o u ld g e t p r i v a t e b a n k e r s , who a r e a c c o u n t a b l e o n l y
t o t h e i r s h a r e h o l d e r s , o u t o f t h e i r c u r r e n t p o li c y - m a k in g r o l e .
We a l l know t h a t t h e F e d e r a l R e s e r v e B oard i s n o t e x a c t l y a
hot p o lit ic a l t o p ic .
I t c lo a k s i t s e l f in e c c l e s i a s t i c a l g r a v i t y ,
s p e a k s i n m in d -n u m b in g t e c h n i c a l i t y , and I s t r e a t e d I n t h e m edia
w it h g r e a t r e v e r e n c e and aw e.
Y e t t h i s B o a rd makes c r i t i c a l
d e c i s i o n s a b o u t m oney t h a t a r e c r u c i a l t o o u r econ om y , t o l a r g e
and s m a ll b u s i n e s s e s , t o fa r m e r s and u l t i m a t e l y t o e v e r y s i n g l e
A m e r ic a n .
How s u c h m oney w i l l c i r c u l a t e i n o u r econ om y ? What
w ill in te r e s t ra te s be?
T h a t 's p r e t t y b a s i c p o l i c y .
A r g u a b ly , i t i s t h e s i n g l e m ost
im p o r t a n t t h i n g t h e g o v e rn m e n t d o e s c o n c e r n i n g o u r e con om y .
Even
th o u g h t h e F ed c a n ' t c o n t r o l t h e money s u p p ly an d I n t e r e s t r a t e s
w i t h t h e p r e c i s i o n i t o n c e d i d — t h e w o r ld econ om y i s j u s t t o o
c o m p le x - - t h e F e d e r a l R e s e r v e s t i l l e x e r t s m ore d i r e c t c o n t r o l
o v e r e c o n o m ic p o l i c y t h a n n e a r l y an y o t h e r I n s t i t u t i o n i n t h i s
co u n try .




95
Page Two
October 7, 1993

T o d a y , t h e Fed e x e r c i s e s t h i s p ow er p r i m a r i l y th r o u g h i t s
s o - c a l l e d F e d e r a l Open M arket C om m ittee (FOMC), w h ic h c o n s i s t s o f
t h e s e v e n members o f t h e B oard o f G o v e r n o r s p lu s t h e t w e lv e
r e g i o n a l bank p r e s i d e n t s i n t h e F e d e r a l R e s e r v e S y stem .
T h ese
r e g io n a l p r e s id e n t s a re p r iv a t e b a n k e rs, n ot p u b lic o f f i c i a l s .
They s e r v e t h e i r own s h a r e h o l d e r s , n o t t h e i n t e r e s t o f t h e
g e n e r a l p u b l i c . Y e t t h e y g e t f i v e v o t e s , on a r o t a t i n g b a s i s , on
some o f t h e m ost im p o r ta n t e c o n o m ic p o l i c y d e c i s i o n s in t h i s
c o u n try .
S t r i p p e d o f t h e pomp and m a je s t y , t h i s i s a p r e t t y raw d e a l
f o r o u r fa r m e r s and s m a ll b u s i n e s s e s and f o r t h e A m erican p e o p le
g e n e r a lly .
B an kers a r e i n t h e b u s i n e s s o f l e n d in g m oney.
The
m oney s u p p ly i s t h e i r s t o c k i n t r a d e , t h e in v e n t o r y on t h e i r
s h e lv e s .
By c o n t r o l l i n g t h e c r e a t i o n o f t h i s m oney, th r o u g h t h e
F e d 's Open M arket C o m m itte e , t h e y g e t t o m a n ip u la te t h e i n v e n t o r y
t o t h e i r own a d v a n t a g e .
I f t h i s w e re any o t h e r p a r t o f t h e
econ om y , an a rra n g e m e n t l i k e t h i s w o u ld prom pt t h e i n t e r e s t o f
t h e A n t i t r u s t la w y e r s a t t h e J u s t i c e D ep artm en t.
I t w ou ld b e
s e e n a s a m oney c a r t e l .
But b e c a u s e i t i s t h e F e d e r a l R e s e r v e B o a rd , we a r e s u p p o s e d
t o k n e e l o n o u r p r a y e r b l a n k e t s and bow to w a r d s T w e n t ie th S t r e e t
and C o n s t i t u t i o n A venue i n s t e a d .
I f o r d i n a r y b u s i n e s s p e o p l e c a n ' t s i t on t h e Open M arket
C o m m itte e , t h e n t h e r e 's no r e a s o n t h a t p r i v a t e b a n k e r s s h o u ld s i t
th ere e it h e r .
T h a t 's w hat t h e S a rb a n e s b i l l w ou ld a c c o m p lis h .
I t w o u ld d o away w it h t h e Open M arket C om m ittee and r e p l a c e i t
w it h an Open M arket A d v i s o r y C o m m itte e .
The r e g i o n a l bank
p r e s i d e n t s c o u l d s i t on t h i s A d v i s o r y C om m ittee.
They c o u l d
a d v i s e u n t i l t h e y 'r e e x h a u s t e d .
B ut t h e y w ou ld no lo n g e r v o t e on
p o lic y .
The o n l y p e o p l e who w o u ld v o t e on p o l i c y w ou ld b e t h e
members o f t h e B oard o f G o v e r n o r s , whom t h e P r e s i d e n t n om in a te s
and t h e C o n g r e s s c o n f i r m s .
As I s a i d , t h i s i s h a r d l y a r a d i c a l s t e p .
Few i f an y o t h e r
c o u n t r i e s g i v e p r i v a t e b a n k e r s t h e k in d o f p ow er o v e r t h e
n a t i o n 's m o n e ta ry p o l i c y , t h a t t h e F e d e r a l R e s e r v e d o e s .
It
c a n ' t b e s t r e s s e d en ou gh t h a t t h e law m akers who c r a f t e d t h e
F e d e r a l R e s e r v e n e v e r In t e n d e d f o r p r i v a t e b a n k e r s t o h a ve t h i s
pow er in th e f i r s t p l a c e .
P r e s i d e n t Woodrow W ils o n s p o k e o v e r
and o v e r a g a in o f t h e n e e d t o k e e p t h e c o n d u c t o f m on eta ry p o l i c y
o p e n and p u b l i c .
T h a t 's a l l t h i s b i l l w o u ld d o .
I t w ou ld n o t ch an g e t h e
F e d e r a l R e s e r v e ; i t w o u ld s im p ly r e s t o r e t h e Fed t o t h e s t r u c t u r e
t h e fr a m e r s in t e n d e d .




96
Page Three
October 7, 1993

T h e r e 's a l s o a n e e d t o d im in is h t h e s e c r e c y i n w h ic h t h e Fed
now o p e r a t e s .
I f t h e F e d e r a l R e s e r v e B oard i s a p u b l i c a g e n c y —
i f i t b e lo n g s u lt im a t e ly t o th e p e o p le o f t h i s c o u n tr y — th en
t h e p e o p l e o u g h t t o b e a b l e t o know what i s g o i n g on t h e r e .
T h a t 's t h e p u r p o s e o f t h e " F e d e r a l R e s e r v e R eform A c t o f 1 9 9 3 "
w h ich I h a v e i n t r o d u c e d .
C on gressm an L ee H a m ilto n o f I n d ia n a h a s
in t r o d u c e d a co m p a n io n b i l l i n t h e H ou se.
C hairm an G o n z a le z has
in t r o d u c e d a m ore c o m p r e h e n s iv e Fed r e fo r m b i l l t o u c h i n g upon
many c r i t i c a l r e fo r m it e m s s u c h a s ex p a n d ed Fed a u d i t s and p u b l i c
in fo r m a tio n d i s c l o s u r e s .
T o d a y , d e s p i t e i t s c e n t r a l r o l e i n o u r e co n o m y , t h e F e d e r a l
R e s e r v e d w e l l s o n l y i n t h e shadow s o f p u b l i c d e b a t e .
I t does not
make i t s d e c i s i o n s p u b l i c i n a t i m e l y m anner.
I t r e le a s e s v e ry
l i t t l e in f o r m a t i o n on i t s b u d g e t .
T h e r e a r e n o t e v e n a n y fo r m a l
c h a n n e ls t h r o u g h w h ic h t h e Fed c a n c o o r d i n a t e i t s p o l i c y g o a l s
w it h t h e P r e s i d e n t and C o n g r e s s .
As a r e s u l t , t h e n a t i o n 's
e c o n o m ic p o l i c y i s l i k e an army w it h tw o g e n e r a l s .
The fr a m e r s
o f t h e C o n s t i t u t i o n n e v e r in t e n d e d t h e g o v e rn m e n t t o w ork t h i s
w ay.
E x p e r ie n c e d o e s n o t s u g g e s t t h a t i t w ork s v e r y w e l l .
My b i l l w o u ld a d d r e s s t h i s l a p s e .
I t ' s Im p o r ta n t t o b e
c l e a r up f r o n t o n w hat t h e b i l l w o u ld n o t d o .
I t w o u ld n o t
r e d u c e t h e in d e p e n d e n c e o f t h e Fed a s t h e a r c h i t e c t s o f t h e
in s t i t u t i o n c o n c e iv e d i t .
The b i l l w o u ld n o t e n a b l e C o n g r e s s t o
m edd le i n Fed d e c i s i o n s .
C e r t a i n l y , t h e b i l l w o u ld n o t g u a r a n t e e
an en d t o p o l i c y m i s t a k e s .
B ut my b i l l w o u ld r e d u c e t h e l i k e l i h o o d o f t h o s e m is t a k e s .
I t w o u ld e s t a b l i s h a fo r m a l c h a n n e l o f ca m o ra n ica tlo n b e tw e e n t h e
Fed and t h e e l e c t e d r e p r e s e n t a t i v e s o f t h e p e o p l e — t h e C o n g r e s s
and t h e P r e s i d e n t .
I t w o u ld a l s o g i v e t h e p u b l i c m ore
in f o r m a t i o n a b o u t t h e m o n e ta r y p o l i c i e s t h a t w e ig h s o h e a v i l y on
t h e i r e c o n o m ic p r o s p e c t s .
S p e c ific a lly *
F i r s t , t h e P r e s i d e n t 's t o p e c o n o m ic a d v i s e r s w o u ld b e
r e q u i r e d t o m eet t h r e e t im e s a y e a r w it h t h e F e d e r a l Open M ark et
C om m itte e .
T h is i n c l u d e s t h e S e c r e t a r y o f t h e T r e a s u r y , t h e
C hairm an o f t h e C o u n c i l o f E con om ic A d v i s o r s , and t h e D i r e c t o r o f
t h e O f f i c e o f M anagement and B u d g e t.
S e c o n d , t h e P r e s i d e n t w o u ld b e em powered t o a p p o in t a new
Chairm an o f t h e F e d e r a l R e s e r v e n e a r t h e b e g i n n i n g o f h i s te rm
r a t h e r th a n to w a r d t h e e n d .
The Fed i s c r u c i a l t o t h e s u c c e s s o f
an y e c o n o m ic p o l i c y an d t h e P r e s i d e n t s h o u ld h a v e t h e o p p o r t u n i t y
t o a p p o i n t a ch a irm a n o f t h e F ed n e a r t h e b e g i n n i n g o f t h e
P r e s i d e n t i a l te e m .




97
Page Four
October 7, 1993

T h i r d , t h e Fed w o u ld b e r e q u i r e d t o d i s c l o s e I m m e d ia te ly any
c h a n g e s In I t s t a r g e t s f o r t h e money s u p p l y .
T h is w ou ld p r o v i d e
a l l I n v e s t o r s , l a r g e and s m a l l , w it h e q u a l and t i m e l y I n f o r m a t io n
a b o u t m o n e ta ry p o l i c y d e c i s i o n s .
T oday o n l y t h e l a r g e r f i r m s ,
w h ic h h a v e t h e f i n a n c i a l a b i l i t y t o h i r e s o p h i s t i c a t e d "F ed
w a t c h e r s " , ca n g e t a jump on t h e f u t u r e d i r e c t i o n o f m on eta ry
p o lic y .
Such fir m s g e t an u n f a i r a d v a n ta g e o v e r s m a ll b u s i n e s s e s
and I n v e s t o r s who c a n ' t a f f o r d t o em p loy e x p e r t s t o m o n it o r Fed
a c tiv itie s .
F o u r t h , t h e C o m p t r o lle r G e n e ra l w ou ld b e p e r m it t e d t o
c o n d u c t m ore t h o r o u g h a u d i t s o f Fed o p e r a t i o n s , i n c l u d i n g p o l i c y
p r o c e d u r e s and p r o c e s s e s .
F o r many y e a r s t h e Fed was t o t a l l y
exem pt fr o m an y s u ch a u d i t s t o u n c o v e r m is d o in g o r w a s t e .
T oday
t h e G e n e r a l A c c o u n t in g O f f i c e (GAO) i s p r o h i b i t e d fro m a u d i t i n g
many o f t h e F e d ' o p e r a t i o n s i n c l u d i n g a c t i o n s on m on eta ry p o l i c y
and t r a n s a c t i o n s made u n d e r t h e d i r e c t i o n o f t h e F e d e r a l Open
M ark et C om m ittee (FOMC).
T h is b i l l w i l l rem ove many o f t h e s e
r e s tr ic tio n s .
F i f t h , t h e Fed w o u ld b e r e q u i r e d t o p u b l i s h i t s b u d g e t i n
t h e b u d g e t o f t h e U n it e d S t a t e s g o v e rn m e n t.
T oday t h e F e d e r a l
R e s e r v e b u d g e t i s s e c r e t ; i t r e v e a l s n o t h in g a b o u t i t s o p e r a t i o n s
t o what i t c o n s i d e r s t h e unwashed m a s s e s .
But no g o v e rn m e n ta l
a g e n c y s h o u ld t a k e i n and sp e n d b i l l i o n s o f d o l l a r s w it h o u t
m aking i t s b u d g e t op e n t o t h e p u b l i c .
T h e se m o d e st s t e p s W i l l i n j e c t f r e s h a i r and l i g h t i n t o t h e
m aking o f m o n e ta ry p o l i c y w it h o u t im p a ir in g t h e in d e p e n d e n c e o f
th e Fed.
The l e g i s l a t i o n w i l l r e q u i r e t h a t t h o s e who make
m o n e ta r y p o l i c y and t h o s e who make f i s c a l p o l i c y a t l e a s t
u n d e r s t a n d w h at e a c h i s d o in g
O nce a g a i n , I c n — nnd Chairm an G o n z a le z f o r h o ld i n g t h e s e
I m p o r ta n t h e a r i n g s ; and I u r g e t h e H ouse B an king C om m ittee t o
p a s s Fed R e s e r v e r e fo r m l e g i s l a t i o n i n t h e n e a r f u t u r e .




98
F or r e l e a s e on d e l i v e r y
9 :3 0 a .m ., EOT
o c t o b e r 7 , 1993

S ta te m e n t by

The H o n o ra b le K v e i s i Mfume
Member, C om m ittee o n B a n k in g , F in a n ce and Urban A f f a i r s

b e f o r e th e
C om m ittee o n B anking F in a n ce and U rban A f f a i r s




U .S . House o f R e p r e s e n t a t iv e s

O cto b e r 7,

1993

99
Mr. C hairm an, Z an h e r e t h i s m orn in g t o d i s c u s s c o n c e r n s
a b o u t t h e F e d e r a l R e s e r v e and i s s u e s i n v o l v i n g H .R . 28 ,
F e d e r a l R e s e r v e S ystem A c c o u n t a b i l i t y A c t o f 1 9 9 3 ."

"th e

As a c o ­

s p o n s o r o f t h i s a c t , and a s a Member o f t h i s C om m ittee, I am
h o n o r e d t o h a ve t h e o p p o r t u n i t y t o s h a r e my s p e c i f i c c o n c e r n s
w it h my c o l l e a g u e s .
T he a c c o u n t a b i l i t y o f t h e F e d e r a l R e s e r v e and t h e
c o n s t i t u t i o n a l i t y o f a l l o w i n g p r i v a t e c i t i z e n s t o v o t e on t h e
n a t i o n 's money s u p p ly a r e v e r y im p o r ta n t q u e s t io n s b e f o r e us
toda y.
H .R . 28 i s d e s ig n e d t o make t h e F e d e r a l R e s e r v e , t h e
n a t i o n 's c e n t r a l ba n k , m ore a c c o u n t a b l e t o t h e p u b l i c i t
to serve.

is th ere

The F e d e r a l R e s e r v e e x e r t s immense i n f l u e n c e o v e r t h e

econom y b e c a u s e o f i t s a b i l i t y t o i n f l u e n c e i n t e r e s t r a t e s ,
em ploy m en t, i n f l a t i o n and t h e i n t e r n a t i o n a l v a lu e o f t h e U .S .
D o lla r .

As s u c h ,

i t s r o l e i s n o t t o b e ta k e n l i g h t l y .

H .R . 28 r e q u i r e s t h a t members o f t h e F e d e r a l Open M arket
C om m ittee (FOMC), t h e F e d e r a l R e s e r v e 's d e c is io n -m a k in g
C o m m itte e , who v o t e o n o u r money s u p p ly , b e a p p o in t e d b y t h e
P r e s i d e n t and h a v e t h e i r v ie w s exam ined p u b l i c l y d u r in g S en a te
c o n fir m a t io n p r o c e e d in g s .

T h is way we c a n know e x a c t l y w here t h e

FOMC members s t a n d on i s s u e s o f im p o r ta n c e t o t h e p u b l i c .
I n a d d i t i o n , t h e P r e s i d e n t m ust i n c l u d e r e p r e s e n t a t i v e s o f
a g r i c u l t u r e , s m a ll b u s i n e s s ,

l a b o r , consu m er and comm unity

g r o u p s , women and m i n o r i t i e s , among h i s n om in ees.




2

B r in g in g m ore

100
d i v e r s e r e p r e s e n t a t i o n t o F e d e r a l R e s e r v e d e c is io n -m a k in g r o l e s
i s a r e a s o n a b le and d e s i r a b l e o b j e c t i v e f o r any p o l i c y m aking
e n tity .
The r e fo r m s em b o d ie d i n H .R . 28 a r e m od est and s i m p le .
D arin g t o d a y 's d i s c u s s i o n ,

I w is h t o f o c u s s p e c i f i c a l l y on t h e

is s u e o f d i v e r s i t y .
H .R . 28 c o n t a i n s la n g u a g e w h ich w i l l h e lp end t h e F e d e r a l
R e s e r v e 's d i s c r i m i n a t i o n a g a i n s t women and m i n o r i t i e s .

The

l e g i s l a t i o n r e q u i r e s t h a t t h e F e d e r a l R e s e r v e a b id e b y t h e C i v i l
R ig h t s A c t o f 1 9 6 4 , w h ic h g u a r a n t e e s e m p lo y e e s ' b a s i c c i v i l
r ig h ts ,

in c lu d in g th e a b i l i t y t o p u rsu e th e F e d e ra l R eserv e f o r

d is c r im in a t io n .

A q u i c k r e v ie w o f t h e h i s t o r y o f d i v e r s i t y

is s u e s w it h t h e F e d e r a l R e s e r v e w i l l show t h a t h o l d i n g t h e
c e n t r a l bank m ore a c c o u n t a b l e l e g i s l a t i v e l y
a c t io n l e f t

i s th e o n ly c o u r s e o f

fo r us t o ta k e.

The r e c o r d c l e a r l y show s t h a t women and m i n o r i t i e s h a v e
little

o r no s a y i n t h e c o n d u c t o f o u r n a t i o n 's m on eta ry p o l i c y

o r bank r e g u l a t i o n .

I n 1 9 7 7 , t h e House B anking C om m ittee i s s u e d

a r e p o r t n o t i n g " t h e v i r t u a l e x c l u s i o n o f women, b l a c k , and
r e p r e s e n t a t i v e s o f l a b o r u n io n s , con su m er i n t e r e s t o r g a n i z a t i o n s ,
n o n -m a n a g e ria l and n o n -p r o d u c e r i n t e r e s t g r o u p s ," i n p o l i c y
m aking p o s i t i o n s r e g a r d i n g o u r money s u p p ly .
I n r e s p o n s e , t h e C o n g r e s s p a s s e d t h e F e d e r a l R e s e r v e R eform .
A c t o f 1977 w h ich r e q u i r e d t h a t a l l F e d e r a l R e s e r v e bank
d i r e c t o r s b e c h o s e n " w i t h o u t d i s c r i m i n a t i o n on t h e b a s i s o f r a c e ,
creed , c o lo r ,

s e x , o r n a tio n a l o r i g i n ."




3

101
T hen , a t t h e b e g in n in g o f 19 78,

i t was th o u g h t t h a t

d i v e r s i t y w o u ld b e g in t o o c c u r when t h e 12 F e d e r a l R e se r v e banks
had 37 d i r e c t o r s h i p s v a c a n t — 12 w ere in c l a s s A, 12 in c l a s s B
and 13 i n c l a s s C.
p erson s,

Of t h e f i r s t 21 t h a t w ere f i l l e d

7 w e re in e a ch c l a s s .

d iv e r s ific a t io n at a ll

w ith new

T h e re was no i n c r e a s e in

in c l a s s A d i r e c t o r s ; t h e r e was on e n o n -

m i n o r i t y woman a p p o in t e d t o a c l a s s B d i r e c t o r s h i p ; an d, on e non­
m i n o r i t y woman was a p p o in t e d i n c l a s s C.
In d e f e n s e o f t h a t a c t i o n , w h ich v i o l a t e d t h e s p i r i t o f t h e
1977 A c t , t h e F e d e r a l R e s e r v e p o i n t e d o u t t h a t t h e F e d e r a l
R e s e r v e R eform A c t was n o t p a s s e d u n t i l November 1 9 7 7 , and
t h e r e f o r e t h e r e was n o t a g r e a t d e a l o f tim e t o t u r n aroun d t h e
s it u a t io n .
T h i r t e e n y e a r s a f t e r e n a ctm en t o f t h e 1977 a c t ,

in 1990, an

i n t e n s i v e s t u d y e n t i t l e d R a c i a l . G en d er, and B ackgrou nd P r o f i l e s
o f t h e D i r e c t o r s o f t h e F e d e r a l R e s e r v e .B a n k s ^and B ra n ch e s,
r e v e a l e d t h a t d i v e r s i t y had s t i l l n o t o c c u r r e d a s s p e c i f i e d in
t h e law and showed c o n t i n u i n g i n d i f f e r e n c e on t h e p a r t o f th e
F ederal R eserv e.
A c c o r d i n g t o t h e r e p o r t , among t h e 72 c l a s s A and B
d i r e c t o r s who a r e c h o s e n b y p r i v a t e member b a n k s i n t h e 12
F ederal R eserve d i s t r i c t s ,

t h e r e was o n e A fr ic a n -A m e r ic a n , no

H is p a n ic -A m e r ic a n s , and o n l y t h r e e women*

Of th e

36

c la s s

c

d i r e c t o r s c h o s e n b y t h e members o f t h e B oard o f G o v e r n o r s — w h ich
a r e s u p p o s e d t o " r e p r e s e n t t h e p u b l i c " — 50 p e r c e n t w ere fo r m e r
bank d i r e c t o r s and non e w orked f o r con su m er o r l a b o r




4

102
o r g a n iz a tio n s .
The u p p e r e c h e l o n s o f t h e F e d e r a l R e s e r v e 's m anagement—
c o n s i s t i n g o f t h e t o p s t a f f a t t h e B oard o f G o v e r n o r s , t h e 12
p r e s i d e n t s o f t h e R e s e r v e Banks and t h e 7 members o f t h e B oard o f
G o v e r n o r s — h a v e b e e n and c o n t i n u e t o b e p r a c t i c a l l y d e v o i d o f
women and m i n o r i t i e s .
S i n c e 1 9 1 3 , t h e r e h a s o n l y b e e n o n e woman and no m i n o r i t i e s
s e r v i n g a s o n e o f t h e 12 F e d e r a l R e s e r v e Bank P r e s i d e n t s .
In r e v ie w i n g F e d e r a l R e s e r v e s t a f f s a l a r y c o m p e n s a tio n , o f
t h e 34 s t a f f m embers o f t h e B oard o f G o v e r n o r s e a r n in g o v e r
$ 1 2 5 ,0 0 0 i n 1 9 9 3 , o n l y o n e i s a woman and o n e i s
w h it e ."

lis t e d as "n on -

The 12 F e d e r a l R e s e r v e Banks h a ve 82 s t a f f e m p lo y e e s

e a r n in g o v e r $ 1 2 5 ,0 0 0 p e r y e a r o f w h ich 14 a r e fe m a le and 3 a r e
l i s t e d a s " n o n - w h i t e ."
To r e i t e r a t e , women and m i n o r i t i e s h a v e l i t t l e

o r no s a y in

t h e c o n d u c t o f o u r n a t i o n 's m on eta ry p o l i c y and i n bank
r e g u la tio n .

T h is l a c k o f fe m a le and m i n o r i t y r e p r e s e n t a t i o n

a l i e n a t e s t e n s of Billions o f A m erican s from r e p r e s e n t a t i o n and
in flu e n c e .

And t h i s i s u n f o r t u n a t e l y t y p i c a l f o r a l l bank

r e g u la t o r y a g e n c ie s .
Chairm an G o n z a le s h a s a llo w e d me t o u s e som e o f t h e d a t a
from h i s 1993 s t u d y o f d i v e r s i t y
S y ste m .

in h ir in g in t h e F e d e ra l R eserv e

T h is s t u d y h a s n o t y e t b e e n made p u b l i c .

th a n k y o u . C hairm an G o n z a le z ,

I w an t t o

f o r u n d e r t a k in g t h i s s t u d y and f o r

m aking p a r t o f i t a v a i l a b l e t o me t o d a y .
L et us lo o k a t th e r e s u lt s o f th e stu d y .




5

The B oard o f

103
G o v e r n o r s e m p lo y s 1 ,6 8 3 p e o p l e w it h s a l a r i e s am oun tin g t o $88
m illio n .

The 12 F e d e r a l R e s e r v e Banks em p loy

t o t a l b a s i c s a l a r i e s o f $ 1 .1 4 b i l l i o n .
d is tr ib u tio n o f th is b i l l i o n

2 4 ,2 8 6

p e o p l e w it h

L e t u s exam ine t h e

d o lla r p a y r o ll.

I w o u ld l i k e t o su b m it f o r t h e r e c o r d tw o c h a r t s f o r e a c h o f
t h e 12 F e d e r a l R e s e r v e Banks and f o r t h e B oard o f G o v ern ors
(a tta c h e d ).

One c h a r t show s t h e d i s t r i b u t i o n o f j o b s f o r t h e

h i g h e s t p a i d t e n p e r c e n t o f e m p lo y e e s and t h e o t h e r c h a r t shows
th e d is t r ib u t io n

f o r t h e lo w e s t p a i d t e n p e r c e n t .

T h e se c h a r t s c l e a r l y show th a n women and m i n o r i t i e s a r e
s i g n i f i c a n t l y u n d e r r e p r e s e n t e d a t t h e h i g h e s t p a y in g p o s i t i o n s in
t h e F e d e r a l R e s e r v e S y stem .

A t t h e lo w e r l e v e l o f e m p lo y e e s , t h e

t e n p e r c e n t l o w e s t p a id e m p lo y e e s , m i n o r i t i e s and women, in m ost
c a s e s make up m ore th a n t h e m a j o r i t y .
T h is i s a b l a t a n t b l u e p r i n t o f d i s c r i m i n a t o r y h i r i n g
p r a c tic e s .

The t r u t h i s t h e r e a r e many q u a l i f i e d m in o r it y

p e r s o n s and women.

Our c o u n t r y h a s a l a r g e number o f q u a l i f i e d

m i n o r i t y and women la w y e r s , a c c o u n t a n t s , and a ca d e m ic s who a r e
w e ll q u a lif ie d
R eserve.

f o r em ploym ent i n u p p e r l e v e l j o b s a t t h e F e d e r a l

T h e se p e o p l e m ust f i g h t t h e b a t t l e a g a i n s t

d i s c r i m i n a t i o n i n em ploym ent in many p a r t s o f t h e p r i v a t e s e c t o r .
Why s h o u ld t h e y b e f i g h t i n g t h i s b a t t l e w it h o u r c e n t r a l ba n k,
w h ic h s h o u l d b e a r o l e m odel f o r t h e b a n k in g s y s te m .
A fr ic a n - A m e r ic a n s h a v e a p a r t i c u l a r l y h ig h s t a k e in how
m o n e ta ry p o l i c y e f f e c t s o u r econ om y.

A W a ll S t r e e t J o u r n a l

a n a l y s i s o f E qu al Employment O p p o r t u n it y C om m ission r e c o r d s




6

104
r t v t a lt d th a t th a l a s t r e c e s s io n s a r io u s ly erod ed aqual
o p p o r t u n i t y f o r A fr ic a n - A m e r ic a n w o r k e r s .

In f a c t ,

A fr ic a n -

A m erica n s w ere t h e o n l y r a c i a l g r o u p t o s u f f e r a n e t j o b l o s s
d u r in g t h e 1 9 9 0 -9 1 e c o n o m ic d o w n tu rn .

The co m p u te r a id e d s t u d y

show s t h a t some o f t h e n a t i o n 's l a r g e s t c o r p o r a t i o n s sh e d b l a c k
e m p lo y e e s a t t h e m ost d i s p r o p o r t i o n a t e r a t e .

O v e r a ll, A fr ic a n -

A m e r ic a n s ' s h a r e o f j o b s a t co m p a n ie s d r o p p e d — i n 36 s t a t e s and
in s i x o f n in e m a jo r i n d u s t r y g r o u p s — f o r t h e f i r s t tim e i n n in e
y e a r s , w ip in g o u t t h r e e y e a r s o f g a i n s .
R e g a r d in g t h e i s s u e o f a c c e s s t o c r e d i t ,

s in c e 1990, th e

C o n g r e s s h a s b e e n r e q u i r i n g t h e f e d e r a l bank r e g u l a t o r s t o t r a c k
bank l e n d i n g a c c o r d i n g t o r a c e , g e n d e r and in c o m e .

The r e s u l t s

ha v e shown a d i s t u r b i n g p a t t e r n o f d i s c r i m i n a t i o n i n bank
le n d in g .

The F e d e r a l R e s e r v e i t s e l f r e c e n t l y r e p o r t e d e x t e n s i v e

b i a s a g a i n s t m i n o r i t i e s i n bank l e n d i n g — s o m e th in g t h a t Community
R e in v e stm e n t A c t s u p p o r t e r s h a v e fo u g h t h a rd t o c o u n t e r f o r
years•
T he f a c t t h a t t h i s l e n d i n g d i s c r i m i n a t i o n r e a p p e a r s y e a r
a f t e r y e a r l e a d s o n e t o w on der w h e th e r bank r e g u l a t o r s su ch a s
t h e F e d e r a l R e s e r v e w o u ld move m ore v i g o r o u s l y t o e r a d i c a t e t h i s
d i s c r i m i n a t i o n i f t h e y , t h e m s e lv e s , w ere com p osed o f p e r s o n n e l
m ore r e f l e c t i v e o f t h e c o u n t r y 's d i v e r s i t y and t h u s s e n s i t i v e t o
t h e b o r r o w in g n e e d s o f a l l A m e r ic a n s.

The f a c t o f m a t t e r i s t h a t

m i n o r i t i e s a r e j u s t a s u n d e r -r e p r e s e n t e d o n t h e b o a r d s o f t h e
4 ,6 2 3 s t a t e an d n a t i o n a l l y c h a r t e r e d b a n k s t h a t a r e c u r r e n t l y
members o f t h e F e d e r a l R e s e r v e S y ste m , a s t h e y a r e u n d e r ­




7

105
r e p r e s e n t e d on t h e b o a r d s o f t h e F e d e r a l R e s e r v e Banks.
The c e n t r a l bank may b e a s t a r t i n g p o i n t t o rem edy t h i s
p r o b le m .

Banks c a n n o t t a k e s e r i o u s l y t h e f e d e r a l g o v e r n m e n t's

com m itm ent t o e r a d i c a t e d i s c r i m i n a t i o n a s lo n g a s a g e n c ie s l i k e
t h e F e d e r a l R e s e r v e rem ain a s e x c l u s i v e a s e v e r .
I n c r e a s i n g t h e number o f women and m i n o r i t i e s in d e c i s i o n ­
m aking p o s i t i o n s a t o u r n a t i o n 's ba n ks w i l l h a v e t h e p o s i t i v e
e f f e c t o f c r e a t i n g a l e n d in g a tm o sp h e re c o g n i z a n t o f t h e n e e d s o f
c r e d itw o r th y b o rro w e rs, r e g a r d le s s o f t h e ir r a c e o r sex o r p la c e
o f r e s id e n c e .

Such a c t i o n w ou ld h e l p a d d r e s s what some w ould

c a l l a " d i s c o n n e c t " b etw een F e d e r a l R e s e r v e p o l i c y m akers and
w hat o r d i n a r y A m erican s a r e f a c e d w it h i n t h e i r d a y t o day l i v e s .
I t is

i m p e r a t iv e , a l s o ,

t h a t t h e F e d e r a l R e s e r v e b e made t o

u n d e r s ta n d t h a t d i v e r s i t y and c o m p e te n c e c a n g o h a n d -in -h a n d .
F e d e r a l R e s e r v e Chairman A la n G reen sp an v i s i t e d w it h me e a r l i e r
t h i s y e a r r e g a r d in g d i v e r s i t y i s s u e s and e x p r e s s e d c o n c e r n a b o u t
q u a l i f i e d and c o m p e te n t c a n d i d a t e s .

I was in fo r m e d t h a t t h e

F e d e r a l R e s e r v e had b e e n h a v in g d i f f i c u l t y

in b u i l d i n g t h e

p i p e l i n e w h ic h w ou ld a l l o w f o r d i v e r s i t y i n p o lic y -m a k in g due
m a in ly t o t h e h i g h l y s p e c i a l i z e d n a tu r e o f t h e B o a r d 's work and
th e q u a l i f i c a t i o n s needed t o f i l l

p o s itio n s .

I n s u p p o r t i n g t h e n e e d f o r r e fo r m o f t h e F e d e r a l R e s e r v e , I
b e l i v e t h e f o l l o w i n g c h a n g e s , a s recom m ended i n t h e 1990 s tu d y
and a s i n c o r p o r a t e d i n t o H .R . 2 8 , a r e n e c e s s a r y t o e f f e c t
d iv e r s i f i c a t io n :




8

106
RECOMMENDATIONS
1 .)

The F e d e r a l R e s e r v e B o a r d 's and F e d e r a l R e s e r v e B an k s'
e x e m p tio n fr o m T i t l e VIZ o f t h e C i v i l R ig h t s A c t o f
1964 s h o u ld b e r e p e a l e d .

2 .)

N o m in a tio n o f t h e 12 F e d e r a l R e s e r v e Bank p r e s id e n t s
s h o u ld b e fey t h e P r e s i d e n t o f t h e U n ite d S t a t e s w it h
c o n f i r m a t i o n b y t h e S e n a te .

3 .)

S ix o f th e n in e d i r e c t o r s o f ea ch b oa rd o f d i r e c t o r s
s h o u ld b e a p p o in t e d b y t h e B oard o f G o v e r n o r s in
W a sh in g to n ( i n s t e a d o f t h e p r e s e n t t h r e e o f n in e )*

The

members s h o u ld i n c l u d e a w id e r r e p r e s e n t a t i o n o f U n ite d
S ta te s c it iz e n s

(la r g e ly s t ip u la t e d p r e v io u s ly in th e

F e d e r a l R e s e r v e R eform A c t o f 1 9 7 7 ).
4 .)

T h e r e s h o u ld b e a u t h o r i z a t i o n o f an 18 -m on th F e d e r a l
R e s e r v e R eform C om m ission t o exam in e a number o f a r e a s ,
i n c l u d i n g t h e e f f e c t o f t h e r e g u l a t i o n s o f t h e B oard
and t h e o p e r a t i o n s o f t h e B oard and t h e F e d e r a l r e s e r v e
b a n k s o n l o w - and m o d e r a te -in c o m e f a m i l i e s ,

in c lu d in g

t h e e f f e c t o n a v a i l a b i l i t y and c o s t o f f i n a n c i a l
s e r v i c e s and c r e d i t .
5 .)

T he F e d e r a l R e s e r v e A c t s h o u ld c o n t a i n a d e f i n i t i o n o f
t h e te r m " p u b l i c . "

A c o m p r e h e n s iv e d e f i n i t i o n w ou ld

make i t d i f f i c u l t f o r t h e F e d e r a l R e s e r v e t o a b r o g a t e
t h e i n t e n t o f C o n g r e s s r e g a r d in g D i r e c t o r d i v e r s i t y .
6 .)

An i n d i v i d u a l t h a t h a s b e e n an o f f i c e r ,

d ir e c to r or

e m p lo y e e o f a bank w it h in t h e p r e c e d i n g t h r e e y e a r




9

107
p e r i b d s h o u ld b e i n e l i g i b l e t o h o l d a " p u b l i c " D i r e c t o r
s lo t.
7 .)

The q u a l i f i c a t i o n s o f B ranch D i r e c t o r s s h o u ld b e
d e fin e d in l e g i s l a t i o n .

At p re s e n t th e F ed eral R eserve

d e t e r m in e s B ranch D i r e c t o r q u a l i f i c a t i o n s .

8. )

Each d i s t r i c t s h o u ld b e r e q u i r e d t o e s t a b l i s h con su m er,
l a b o r an d s m a ll b u s i n e s s a d v i s o r y c o u n c i l s .

F u rth e r,

i n i d e n t i f y i n g e l i g i b l e women and m in o r it y

c a n d i d a t e s , t h e F e d e r a l R e s e r v e s h o u ld u t i l i z e

t h e U .S .

T r e a s u r y 's n a t io n w id e l i s t o f m in o r ity -o w n e d b a n k s p a r t i c i p a t i n g
i n t h e m i n o r i t y ba n k d e p o s i t p rog ram and w ork w it h t r a d e
o r g a n i z a t i o n s l i k e t h e N a t io n a l B an kers A s s o c i a t i o n w h ich
r e p r e s e n t s m i n o r i t y - and wom en-owned b a n k s and h a s b e e n o p e r a t in g
f o r 65 y e a r s .

The F e d e r a l R e s e r v e s h o u ld a l s o e n t e r i n t o an

a g re e m e n t and e s t a b l i s h a p la n i n v o l v i n g H i s t o r i c a l l y B la c k
C o l l e g e s and U n i v e r s i t i e s , a s w e l l a s t h e U n it e d N eg ro C o l le g e
Fund, i n o r d e r t o s u p p o r t and t r a c k e l i g i b l e c a n d id a t e s f o r t h e
p ip e lin e .
A g a in , th a n k y o u f o r a l l o w i n g me t o s p e a k b e f o r e you t o d a y .




10

Federal Reserve Board

Number of Employees

Highest Ten Percent Paid Employees




Federal Reserve Board

Number of Employees

Lowest Ten Percent Paid Employees




110

Federal Reserve Bank of Minneapolis
Highest Ten Percent Paid Employees

j Minority Women m




Total Women

Minority Men

f

\

Total Men

111

Federal Reserve Bank of Minneapolis

1991
d

Minority Women m

—

- r * -------

O ' ------------------ ^
Total Women

■ H Minority Men

Prepmd fay the Home o f Repre>em«tvc* Commirr—f on Banking. Finance end Urban Atfaut




v

1992
I------I Total Men

112

Federal Reserve Bank of Dallas
Top Ten Percent Highest Paid Employees
140Y'

120
Number o Employees
f

- '

100-"'
8060-

| Minority Women

Total Women

|Minority Men

Prepared by the Hone of Repfwenuavej Comnuoeec an Banking, Finance and Uifem Affair*




g g ) Total Men

Number of Employees

Federal Reserve Bank of Dallas
Ten Percent Lowest Paid Employees

Prepared by (he House of Reprtaemauve*




on Benton*. Finance and Urban Affair*

114

Federal Reserve Bank of San Francisco

Number of Employees

Highest Ten Percent Paid Employees

Prepared by the House of Representative* Committee* on Banking, Finance and Urban A lton




115

Federal Reserve Bank of San Francisco
Lowest Ten Percent Paid Employees

160Y'

Number of Employees

140-'"
120-''
io o r
80
60
40

20
0
| Minority Women H

Total Women

Preptnd by ihe House of Represenuuvet CaramitMe




|Minority Men

4nd Urbtn Affairs

I Total Men

116

Federal Reserve Bank of Boston

Number o Employees
f

Ten Percent Highest Paid Employees

by th . H « * of R q » ~ » « iv e , Comma— « .




Frnnc.

U *-> " t o *

117

Federal Reserve Bank of Boston

Number o Employees
f

Ten Percent Lowest Paid Employees

I Total Men

I Total Women

|Total Minority

Prepared by the House of Representatives Committee* an Banking. Finance and Uiban Affairs




Number o Employees
f

Federal Reserve Bank of New York
Top Ten Percent Highest Paid Employees

| M&xxfty Women m




Totai Women

|Mnority Men

E1H Total Men

119

Federal Reserve Bank of New York
Ten Percent Lowest Paid Employees

Number of

300f1

Prepared fay the House of ftepmettuavet




Finance m i UHmb Affairs

120

Federal Reserve Bank of Philadelphia
Highest Ten Percent Paid Employees
140Y'-

Number of Employees

120-''"
100-""
8 0 -'"

eo-'"
4 0 -"''

20 '

'

11992
| Minority Women

Total Women

Pitpm d by the Houae at Rcpreacauiiva Comnuaee* an Banking,




| Minority Men

and Urban A/fan

f

)

Total Men

121

Federal Reserve Bank of Philadelphia

Number of E

Lowest Ten Percent Paid Employees

Picptmd by the Houie of Representatives




on Banking, Finance and Urban Attain

122

Federal Reserve Bank of Cleveland

Number o Employees
f

Highest Ten Percent Paid Employees

|Total Men

[

I Total Women

Total Minority h

Prepared by the House of Representatives Coramioeee on Sinking, Finance and Urban Affairs




123

Federal Reserve Bank of Cleveland
Lowest Ten Percent Paid Employees

Number of Employees

120f
10or
80
60
40'

20
0




j

Total Men

f

I Total Women

Total M in o rity

124

Federal Reserve Bank of Richmond
Ten Percent Highest Paid Employees
200ISO'
160140-

12010O-

SO
6040-

20
| N/finority Women f

~ \

Total Women

|Minority Men

Prepared by the House of Representatives Comimueec on Banking, Finance and Urban Affairs




I Total Men

125

Federal Reserve Bank of Richmond
Ten Percent Lowest Paid Employees
160140- ✓
120100- ✓
80- ✓
60- ✓
4020- ✓
0|Mnority Women F~1 Total Women

| Minority Men

Prepared by the House of Representatives Committee* on Banking. Finance and Urban Affain


72-851 0 - 9 4 - 5


I Total Men

126

F«:deral Reserve Bank of Chicago
Highest Ten Percent Paid Employees

Number of Employees

250f

| Minority Women BW I Total Women

Picptrad by the House of Representatives




Minority Men

Benlang. Finance and L'rbea Attain

(~

1Total Men

127

Federal Reserve Bank of Chicago

Number of Employees

Lowest Ten Percent Paid Employees

Minority Women 1




Total Women

| Minority Men

{

1 Total Men

128

Federalhest Ten Percent Paid EmployeesLouis
Reserve Bank of St.
Hig
Number of Employees

120t'

io o r
80
60
40
20
j

a
| Minority Woman ^




Total Women

^

j
11992 |

Minority Men

[— | Total Man

129

Federal Reserve Bank of St. Louis
Number of Employees

Lowest Ten Percent Paid Employees

I Minority Women

Total Women

| Minority Men

Prepared by the Home of Repmenuuve* Contnuneee an Banking. Finance and Uifean Affain




[ ^ j Total Men

130

Federal Reserve Bank of Kansas City

Number of £

Highest Ten Percent Paid Employees

I Total Men

t o p n d by tte Houm of R




| Total Women ■ ■ Total Minority

131

Number of Employees

Federal Reserve Bank of Kansas City

I Total Men

Pwpw rf by

Hoom of Raprm n n n v t C




|Total Women ^ 1 Total Minority

132

Federal Reserve Bank of Atlanta

Prepared by the House of Repraentauvet C




n Banking, Finance and Urban Affair*

133

I Total Men

Total Women

Prepared by the House of Repratoiudvet Cammiaeee on Banlanf, Finance and Urban Attain




Total Minority

134
R e - i n ve n ti n g

the Fed

Sta tem ent by Henr y S. Reuss to the House Co mmi t te e on Banking,
Finance* and Urb a n Affairs, 2128 R ay bur n HOB, 9:30 o'c loc k
T h ur sd a y morning, Oct obe r 7, 1993
The
time

Re ser ve
is

B a nk ing

for

its

System.

prope rly

serve

the

deficit"
cha rg e d
world,

Com m it te e

h e a r in g s

on

of

In

So u th

lost

all

to

So

must

mo n eta ry

coin money,
thro ugh

it

agent

be
of

wi t h

eyes

with

Japan,

South Korea to the M i dd le East,

open

buying

of

m a rk et

or

fro m

g ov e rn m en t

has

U.S.

great er

a

the

Federal

better
Federal

the focus
may

better

"demo cra tic

ins tit u ti o ns

citizen.

All

are

over

the

to Mexico,

from

is on the march.

Reserve.

is

the

res po n si b il i ty

c o n s ti t ut i on a l

g ov er nme nt

it

the

Hun ga r y

The

Fed

"to

Th is it does pr inc ipa lly

o p e r a t i o n s — cre at i ng

se l li ng

of

that
on

w h o se
the

r eg u la t e the va lu e thereof".

by

so
are

de m oc rac y

the

Con gre ss'

picked

E xe c ut i ve Branch,

Community,
tou ch

Af ri ca

the

hare

s tr u ct u re

government”

Europe,

Eu r op e an

h av ing

har dly

cu rre nt

and

"r e -i n v e n t i n g

the

from

the

In C o ng r es s

people.

wi t h

could

on

or

e x t i ng u is h in g

secu rit ies .

con se q ue n ce

for

the

No

weal

money

function

or

woe

of

its cit izens.
But
not

in

ironical ly,
of f ic e rs

F ed era l

O pe n

of

7

the

a p p oi n te d
five

by

boards

the

Banks,

of

great

the

Boar d

Pr es id e nt
(or

go ve r n m e n t a l

go ve rnm ent

Co mm itt ee.

of

and

but

The
of

w ho

citizens
are

in

FOMC 's

who

of
have

themseves

power

so m et hin g
12

Gov er no r s,

co nf ir m ed

v ic e -p r es i de n ts )

pr iva te

d i r e ct or s




this
the

Mar ke t

members

presidents

Dis tri ct

of

by

the

m e m b er s
who
the

12

is

vested

called

consist

are

indeed

Senate,

Fe der al

the

plus

Reserve

be en s el e ct e d by their
two -t h ir d s

com po se d

of

135
re p re s en t at i ve s of the
If
why

the

not

me mbe rs

have

Secretary

the

of

This
the
of

the

priv at e

FOMC

York

Chicago;

Dallas,

by

are

the

be

Council

in

of

w h ic h

on

one

the

bankers,

the

NAM,

the

Relations,

Foreign

and

Louis,

third

Boston,

all

other
year

remedy

in

pu blic

ad visory

is

from

Kansas

officers,

voice

through

a

require

their

cons oli dat e

re vi s io n

of
of

12

the

presenc e

by

members
from

the

Clev ela nd

"those

and

lesser

Richmond,
and

breeds
Atlanta,

San Francisco.

g ov e rnm ent al

open

market

of the Federal Reserve.

pre sid ent s

Federal

and

time,

from

City,

the

District

worse

di spr o po r ti o n?

the go ver nor s

the

made

private

the

year

Phi ladelphia,

Min nea pol is,

to

is

rot ati ng

member,

every

every

law",

The
power

by

by

power

five

How can any one defend this no nse nsi cal

The

se lected
named

public

the

s e l e c t e d — one

one

the
St.

may

Sec retary

ex erc ise

way

district;
and

w it hou t

FOMC

by the AFL-CI O?

ca p ri c io u s

New

the

Tre as ur y

State

the P re sid ent

co mme r ci a l banks in the district.

of

Ad vi sor y

their

v o i c e — but

can be obtained

Council
not

which

their

would

v ot e — at

open m ar ket meeti ngs .
M a n da t in g
of fic ers
by

that

ra ther

p rin cip les

the

than
of

by

Ar ti cle

"offi cer s

of

the

Pr esi d en t

by

In

Buckl ey

un a ni mou sly




v.

Valeo,

st ruc k

down

shall

person s

government.

II,

United
wit h

power

pr ivate

good

Const itu tio n.

and

money

the
424
a

Section

2,

States"

must

advice
U.S.
statute

X

It

and
1

be conducted by public
is
is

not

Claus e
be

2

(1976),

dictated
by

provides

appoi nte d

con sen t

p ro vid ing

only

required

of

the
that

by

the

Supreme

the
that
the

Senate.
Court

commis sio ner s

136
of

Che F ed era l

by

the

"officer",
sore

E l ec t io n

Bouse

an

and

within

the

is

shou ld

an

meaning
one

the

be appointed,

e l e ct io n

of

ch ar ged

FO M C

Constitution

order

If

the

in part,

com mis sio ner

Consti tut ion ,

wit h

co nd uct ing

is

how

an

much

the

natio n's

the

United

States",

the

Congress*

policy?

R es t ri c t in g
as

the

"o ffi cer "

sonet ary

Co m mi s s i o n

Senate.

of

bus ine ss*

Sarbanes(S.
Ham ilt on

219)

(H.R.

That

"of fi ce rs

P e n d in g

and

566,

done,

to

requires,

by

of

sho uld

be

le gi s la t io n

sponso red

Re p r e s e n t a t i v e s

first

by

Senator

(H.R.

Gon z al e s

26). and

567) w o ul d do jus t that.

th er e

a re

othe r

an o ma l ie s

law

pr ovi des

of

the

Fed

st ructure

d em and ing at ten tio n.
The
6

F e d fs

per cen t

$3

billion.

requir ing

The

banks

members,
stock

bas ic

preferred

made

s om eho w

the

of

is

by

exp an de d

in

me mbe r

Fed

The

banks

am o un tin g
reform

wh e th e r

or

they
The

that

crunch

is

by
Fed

preferred
the

Fed

still

cap ita l

end ow

them

with

some

requ iri ng

by

some

were

ad d it i on a l

that

the

prefer red

not

hold

to

legislation,

not

fiction,

credi t

must

today

irrelevant.

pleasan t

need

Why

c a p i t al

that
Fed,

Re ser ve

the

a

banks.

dea rl y

lending.

ad d it i o na l

the

res er ve s

thus

the

banks

in

Fe der al

post

me m b e r s h i p

owned

and

base

1980
to

a r r a ng e m en t

us,

sto c k

on

with

which
$3

is

to

billion
stock

be redeemed?
Anoth er
the
many.

pi ece

re qu ir e me n t
Vho

powerfu l

a m on g

of
us

po s it i on s ?




of

Fed

seve n

struct ure
Fed

tod ay
Ho w

can

can

the

3

c ryi ng

gov er n or s .
name
p ubl ic

for

Seven

the
fix

attent ion
is

incum ben ts

simply
of

res pon si bi l it y

is
too

these
when

137
it

is

div id e d

be

reduced

among

to

so

five,

many?

like

The

the

nu mber

FTC

or

of

go v er nor s

the

FCC,

or

could
even

well

three,

like the CEA or the SEC.
Re duc ing

the

and

po li ti c al l y

The

F e d ’s

$16 1 , 80 0
N.Y.

g o ve r no r s

paid

One
12

are

are

bank

final,

and

to

ought
of

be

to

the

has

wished,

than

the

paid

the

the

thought.

$148 ,00 0

paid

gov ernment

What

branc hes

Thei r

"c he ckl ess

find

out.

dis tr i ct

is

and

pri n ci p le

is

it

that

centers,
function,

st ead ily

society".

on




they
as

di min ishing

Could

not

these

of

"Money":

vo lum e

cannot

of

can,
set

the

forth

only
in

remaining

the

pamphlet

System of fi ci als with con sid e ra b le
business

classi c

the

great

If

Feds,

is "to pr ov i de

F o re c as t er s
our

salary.

--- less

im po rta nt

nume rou s

do ing?

ob s er ve d

1975

in Wa s hi n g t o n

in

heretical,
their

this

te l ep h on e se r v ic e excel len t,
if

than

fiscally

$250,00 0

the

are

cu rr e nc y- mov ing ,

r o o t s 1 i n fo rm a ti o n

Ga lb r ai t h
his

less

it

a deq uat e

be c a rr ie d out mo re ec on o mic all y by pri vat iz at io n ?

of one of them,

in

and

i n c r e a si n gl y

funct ion s

'grass

make

an

$1 23 ,10 0
than

go ver nor s

perhap s

and

Ve

paid
less

preside nt,

Feds,

s up p os e d

fu nc t io n

now

would

gov ern ors

and they should be c om pe nsa ted acc ordingly.

di st r ic t

our

gover nor s
pay

staff,

Fed

ch e c k - c l e a r i n g
in

of
to

Fed

off icers.

officers,

the

top

dis t ri c t

cabin et

number
e asi er

co nd i ti o ns . "

"function"
"The

of

roads

the

As Pr o fe sso r
Distric t

(being)

good,

Feds
the

and its new s pa p er s readi ly a va ila ble

such

in fo rma tio n

oth e rw i se

the

glut

un ava ila ble

be gre at. "

predi ct

A m er ic a n

that

cit ies

W

is

present
likely

to

end

of

office

toward

the

space
turn

138
of

the

century,

deficit,
again
space

tem po r ar il y

rear
at

just

its

head.

a fair

price

do w on der s

when
sol v ed

by

Se l li n g
wo uld

for the fiscal




the

p ro b le m
this
off

of

the

year's

the

Fed's

fe de ral

Budget

Act,

redu nda nt

budget
will
office

be a piece of d ow n -si rin g that would

2000 budget.

It's worth th ink ing

about.

139
e m b a r g o e d u n t il

W illia m G r e id e r
T e stim o n y , House B anking C om m ittee
O c to b e r 7 , 1993

9:30 A.M.

R e fo r m in g t h e F e d e r a l R e se rv e
The F e d e r a l R e s e r v e and i t s co n d u ct o f m on etary p o l i c y
i n v o l v e d a u n tin g c o m p l e x i t i e s , b u t th e most im p o r ta n t t h i n g t o
u n d e r s ta n d i s r e a l l y q u i t e s im p le : th e F e d e r a l R e s e r v e i s a
p o lit ic a l in s titu tio n .
T hat i s n o t how th e Fed i s g e n e r a l l y p e r c e i v e d o r d e p i c t e d .
By t r a d i t i o n and d e s i g n , th e c o n v e n t io n a l wisdom d e s c r i b e s o u r
c e n t r a l bank a s a k in d o f c l o i s t e r e d s a n c tu a r y where
d i s i n t e r e s t e d e x p e r t s make a u t h o r i t a t i v e c a l c u l a t i o n s a b o u t th e
f u t u r e o f th e econ om y .
The g o v e r n o r s a r e s a i d t o b e " a b o v e "
p o l i t i c s — p r o t e c t e d from t h e m essy c la im s o f s p e c i a l i n t e r e s t s
th a t su rro u n d t h e C o n g re ss and th e P r e s id e n t .
The e x t r a o r d i n a r y
s e c r e c y s u r r o u n d in g th e F e d / s d e c is io n -m a k in g s u p p o s e d ly I n s u r e s
t h a t c r a s s p o l i t i c a l m o tiv e s w i l l n o t i n t r u d e on i t s d i f f i c u l t
d e lib e r a tio n s .
The v e i l o f s e c r e c y c e r t a i n l y d o e s enh an ce t h e m y s tiq u e
s u r r o u n d in g t h e F ed — and th e g e n e r a l ig n o r a n c e a b o u t i t .
O th e r w ise c o n f i d e n t and i n t e l l i g e n t p e o p le — i n c l u d i n g members
o f C o n g r e s s — d e f e r t o th e F e d 's wisdom m a in ly b e c a u s e t h e y d o
n o t u n d e r sta n d i t . They a r e u n d e r sta n d a b ly in t i m i d a t e d b y i t s
m y s te r y and p o w e r.
What I fo u n d b e h in d th e v e i l i s an a g e n cy o f m o r t a l men and
women — sm a rt, d e d i c a t e d and e x c e p t i o n a l l y w e l l- e d u c a t e d p e o p le
who a r e em powered t o d e c i d e some o f th e l a r g e s t q u e s t i o n s o f how
th e f e d e r a l govern m en t manages th e econom y.
I n my many
i n t e r v i e w s , t h e o n e theme t h a t g o v e r n o r s . F e d e r a l R e s e r v e Bank
p r e s i d e n t s and o t h e r s e n i o r o f f i c i a l s r e p e a t e d ly em p h a sized was
t h e i r own f a l l i b i l i t y .
M onetary p o l i c y i s f i l l e d w it h l a r g e
u n c e r t a i n t i e s , s q u is h y f a c t s and u n p le a sa n t t r a d e - o f f ' s b e tw e e n
c o m p e tin g g o a l s *
The Fed d e l i b e r a t e s a t l e n g t h , b u t i t m ust a l s o
d e c i d e t h i n g s o n t h e run — s i n c e n e i t h e r f i n a n c i a l m a rk ets n o r
th e b r o a d e r econ om y o f comm erce w i l l s t o p and w a it f o r i t s
ju d g m e n ts.
And, a s p v e r y g o v e r n o r f r e e l y a ck n ow led g ed t o me, t h e Fed
a l s o makes m is ta k e s — j u s t l i k e th e r e s t o f u s m o r t a ls .
The
d i f f e r e n c e i s t h a t th e F e d 's m is ta k e s ca n h a v e d e v a s t a t i n g im pact
o n t h e l i v e s an d f o r t u n e s o f m i l l i o n s ,
i t c a n s in k v i a b l e
b u s i n e s s e n t e r p r i s e s and f o r c e d e b t o r s t o t h e w a ll and p u t
m illio n s o f p e o p le out o f jo b s .
I t can rew ard some i n v e s t o r s and




1

140
punish, o t h e r s .
I t c a n l i t e r a l l y r e v e r s e th e t i d e o f e c o n o m ic
growth, o r , i n o t h e r c ir c u m s t a n c e s , i g n i t e th e e c o n o m ic e n e r g ie s
o f t h e n a t i o n , n o t t o m e n tio n th e w o r ld .
G iv e n t h e s e v a s t p o w e r s , i t i s fa t u o u s t o p r e t e n d t h a t th e
F e d e r a l R e s e r v e ca n somehow b e i n s u l a t e d from p o l i t i c s .
And,
in d e e d , i t i s n o t .
As any c a n d id g o v e r n o r w i l l t e l l y o u , th e
i n s t i t u t i o n i s bom barded c o n s t a n t l y w ith p l e a s and demands and
u n s o l i c i t e d a d v i c e from s e l e c t e d i n t e r e s t s .
As a m a tte r o f
s t y l e , lo b b y in g t h e Fed i s d on e more d e l i c a t e l y and d i s c r e e t l y
th a n , s a y , l o b b y i n g C o n g re ss o r t h e W hite H ouse, b u t t h e p r i v a t e
and s e m i - p r i v a t e d i a l o g u e s s u rr o u n d in g m on etary p o l i c y g o on
c o n t i n u o u s l y - - be tw e e n th e Fed and f i n a n c i a l m a rk e ts, b a n k s and
b r o k e r a g e s and o t h e r m a jor p l a y e r s , b o t h f o r e i g n and d o m e s t ic .
The o n l y p l a y e r s who a r e l e f t o u t o f t h i s c o n v e r s a t io n a r e
t h e A m erican p e o p l e and, t o a l a r g e e x t e n t , t h e i r e l e c t e d
r e p r e s e n ta tiv e s .
I n s t e a d , t h e y a r e p r o v id e d a f r u s t r a t i n g stream
o f e v a s i v e euphem ism s and o p a cq u e ja r g o n and p l a t i t u d i n o u s
g e n e r a l i t i e s a n d , so m e tim e s, ev en d o w n rig h t d e c e p t i o n .
As more
than o n e F e d e r a l R e s e r v e g o v e r n o r c o n f i d e d t o me, i t w ou ld b e
v e r y d i f f i c u l t — p e rh a p s i m p o s s ib l e — f o r t h e Fed t o h ave an
h o n e s t d i s c u s s i o n o f m on etary p o l i c y w it h C o n g ress o r t h e p u b l i c
b e c a u s e t h e l e v e l o f ig n o r a n c e {and th e p o t e n t i a l f o r
m is u n d e r s ta n d in g ) i s s o p r o fo u n d .
I n o t h e r w o rd s , i f y ou a r e s e r i o u s a b o u t r e fo r m in g t h e
F e d e r a l R e s e r v e , y o u w i l l n e c e s s a r i l y have t o t h in k a b ou t
c h a n g in g more th an t h e i n s t i t u t i o n a l b e h a v io r o f t h e F e d . The
l a c k o f a c c o u n t a b i l i t y i s n o t s im p ly a f u n c t i o n o f F ed m y s tiq u e .
Among e l e c t e d p o l i t i c i a n s , t h e r e i s a l s o a w id e sp re a d w i l l i n g n e s s
n o t t o know o r u n d e r s ta n d .
In f a i r n e s s t o C o n g r e s s , t h e news
m edia e n c o u r a g e s t h i s d e f e r e n c e b y p ro m o tin g th e c o n v e n t io n a l
wisdom a b o u t th e i n s t i t u t i o n .
A n y p o l i t i c i a n who d a r e s t o b e c o m e
a c r i t i c ca n c o u n t upon dam aging a t t a c k s from b o th e d i t o r i a l
w r i t e r s and news r e p o r t e r s , a c c u s in g him o r h e r o f " p o l i t i c a l
m e d d lin g " w ith th e n o n - p o l i t i c a l F e d e r a l R e s e r v e .
I want t o b e v e r y c l e a r a b o u t what I mean by " p o l i t i c a l
in s t it u t io n ."
I am n o t a r g u in g t h a t th e F e d e r a l R e s e r v e p la y s
p a r t i s a n f a v o r i t e s a t e l e c t i o n tim e o r t h a t i t s e c r e t l y o b e y s th e
incum ben t P r e s i d e n t 's w h is p e r e d commands. T hose a r e t h e sta n d a r d
c o m p la in t s o f Fed c r i t i c s , bu t I fo u n d them r e f u t e d a g a in and
a g a in b y t h e a c t u a l h i s t o r y o f th e c e n t r a l b a n k 's p e r fo r m a n c e .
I f t h e F ed was d e d i c a t e d t o p u n is h in g D em ocrats and r e w a r d in g
R e p u b lic a n s , th e n G eorg e Bush m igh t s t i l l b e P r e s id e n t and
R ic h a r d N ixon w ou ld c e r t a i n l y h a v e d e fe a t e d John F . Kennedy i n '
1960.
I f th e F ed f a i t h f u l l y t o o k i n s t r u c t i o n from t h e W hite
H ouse, Jimmy C a r te r m igh t have e n jo y e d a s e c o n d term .
I am u s in g " p o l i t i c s '* i n i t s g e n e r i c s e n s e :
th e F e d e ra l
R e s e r v e makes l a r g e and p o t e n t p u b l i c d e c i s i o n s b a ck e d b y th e




2

141
f o r c e o f governm ent pow er — y e t t h e r e a r e no r e l i a b l e 'm echanism s
f o r p o l i t i c a l a c c o u n t a b ilit y o r even f o r a c h ie v in g a d e ce n t
p u b l i c u n d e r sta n d in g o f what has b e e n d e c id e d I n t h e p e o p l e 's
name. The F e d 's pow er o v e r th e d a i l y l i v e s o f o r d i n a r y A m erican s
— n o t m ention th e l a r g e s t e n t e r p r i s e s o f comm erce an d f i n a n c e —
i s a t l e a s t a s g r e a t a s th e P r e s i d e n t 's o r C o n g r e ss a n d , i n m ost
i n s t a n c e s , more im m ed iate.
I t t a k e s many months o r y e a r s t o
e n a c t new l e g i s l a t i o n o r t o r e d i r e c t th e p r i o r i t i e s o f f i s c a l
p o lic y .
M onetary p o l i c y ca n t u r n w in n e rs i n t o l o s e r s o v e r n i g h t .
And v i c e v e r s a .
In t h e o p e n in g p a g e s o f my b o o k , I c a l l e d t h e F e d e r a l
R e se r v e a " c r u c i a l anom aly a t t h e c o r e o f r e p r e s e n t a t i v e
dem ocracy# an u n c o m fo r t a b le c o n t r a d i c t i o n . "
T hat w ord "a n om a ly 1
1
was s u g g e s t e d t o me b y th e fo rm e r p r e s id e n t o f a F e d e r a l R e s e r v e
Bank. I t i s a n i c e way o f s a y in g t h e F e d 's u n a c c o u n t a b le pow er
d o e s n 't f i t w it h o u r id e a o f s e l f- g o v e r n m e n t .
The Fed n e v e r h a s t o f a c e r e e l e c t i o n .
I t was d e s ig n e d t h a t
way, o f c o u r s e * in o r d e r t o r e s i s t t h e t r a n s ie n t sto rm s o f
p o p u la r o p i n i o n o r n a rrow p a r t i s a n a m b it io n s .
The a c t u a l r e s u l t ,
I t h in k , i s a v e r y skewed p o l i t i c a l p r o c e s s i n w h ich some
c i t i z e n s have a l a r g e v o i c e and m ost c i t i z e n s h ave n o n e .
B an kers
a r e c o n s u lt e d r e g u l a r l y and i n t i m a t e l y , b u t l a b o r u n io n s and
fa r m e r s , home b u i l d e r s and in d e p e n d e n t o i l d r i l l e r s a r e n o t .
The
b a n k e rs have t h e i r own p r i v a t e p o l i c y m e e tin g w it h t h e B oard o f
G o v e r n o r s fo u r tim e s a y e a r — t r y g e t t i n g a t r a n s c r i p t o f t h o s e
d is c u s s io n s .
My p o i n t i s n o t t h a t th e F ed i s " c a p t u r e d " b y t h e b a n k e r s
and b o n d h o ld e r s , as some c r i t i c s c l a i m .
The r e a l i t y i s more
c o m p lic a t e d . My c o m p la in t i s t h a t th e F e d e r a l R e s e r v e , g iv e n i t s
own i n s t i t u t i o n a l b i a s e s , i s p r e o c c u p i e d w ith a n a rrow v e r s i o n o f
e co n o m ic r e a l i t y w h ile o t h e r c o m p e tin g v e r s i o n s a r e e x c lu d e d from
th e I n s id e d e b a t e .
I f we c o u l d a c t u a l l y h ea r t h e i n s i d e d e b a t e
a t t h e F ed, I t h in k t h i s d i s t o r t i o n w ou ld becom e c l e a r t o m ost
everyon e.
F ra n k ly , th e Fed d o e s n o t e v e n have t o c o n f r o n t i n t e l l i g e n t
s c r u t i n y from t h o s e t h e p e o p le h a v e e l e c t e d t o r e p r e s e n t them .
T hat i s , th e C o n g r e s s ,
i n my e x p e r i e n c e , c o n g r e s s i o n a l o v e r s i g h t
h e a r in g s a r e u s u a l l y a d i s p i r i t i n g m ix tu r e o f p o s t u r in g and b i l e
and t r i c k q u e s t i o n s t h a t F e d e r a l R e s e r v e g o v e r n o r s f i n d q u i t e
e a s y t o fe n d o f f .
I t i s h a rd t o ta k e m ost o f t h e c o n g r e s s i o n a l
q u e s t i o n i n g s e r i o u s l y and n o t s u r p r i s i n g t h a t many a t t h e F e d e r a l
R eserve do n o t.
M eanw hile, im p o rta n t d e c i s i o n s a r e made i n p r i v a t e and o n ly
th e m ost s o p h i s t i c a t e d o b s e r v e r s cam re a d th e p o r t e n t s .
H a ll
S t r e e t sp en d s b i g money on i t s "F e d w a t c h e r s " b e c a u s e i t n e e d s t o
u n d e rsta n d what th e Fed w i l l b e d o in g t o i n t e r e s t r a t e s and t h e
s u p p ly o f c r e d i t and, t h e r e f o r e , t o e c o n o m ic a c t i v i t y a c r o s s




3

142
every s e c to r .
The p u b l i c , m ean w h ile, i s r e g u l a r l y b lir .d s id e d b y t h e s e
g overn m en t d e c i s i o n s b e c a u s e nobody w i l l g i v e them an
i n t e l l i g i b l e e x p l a n a t i o n o f w h a t's com ing and why.
in f a c t ,
n o b o d y l o o k s backw ard i n a p a t ie n t manner and a sk s t h e m ost
o b v io u s q u e s t i o n : was th e F e d e r a l R e se rv e r i g h t i n i t s d e c i s i o n ?
Or d i d t h e g o v e r n o r s mi su n d er stan d t h e e con om ic f o r c e s and c h o o s e
t h e w rong o b j e c t i v e ?
O ld i t make a n o th e r l a r g e m is ta k e ?
In f i n a n c i a l m a r k e ts, i n v e s t o r s speak o f " t r a n s p a r e n c y " and
t h e y i n s i s t upon i t b e f o r e t h e y w i l l bu y a com p an y's s t o c k .
T hey
n e e d t o b e a b l e t o s e e i n s i d e th e company — beyon d i t s
r h e t o r i c a l c la im s — i n o r d e r t o ju d g e th e l o g i c o f t h e c o m p a n y 's
b u s i n e s s s t r a t e g y and t h e r e a l i t y o f i t s p e rfo rm a n ce .
The
F e d e r a l R e s e r v e l a c k s " t r a n s p a r e n c y ." T here i s no e a r t h l y way
t h a t an a v e r a g e c i t i z e n can p a r s e m eaning o u t o f th e F e d 's d e n s e
p ro n o u n ce m e n ts.
A c t u a l l y , th e r e i s no p r a c t i c a l way f o r any
member o f C o n g r e ss t o b e g in t o e x e r c i z e a c c o u n t a b i l i t y .
To
u n d e r s ta n d t h e p o l i c y , we need t o b e a b le t o s e e the argum ents
th a t p rod u ced I t .
T h is i s n o t an u n r e a s o n a b le s ta n d a r d . E v ery o t h e r
i n s t i t u t i o n o f govern m en t — e x c e p t p erh ap s th e C e n t r a l
I n t e l l i g e n c e A gen cy — i s r e q u ir e d t o r e v e a l i t s e l f i n j u s t t h e s e
te r m s .
A P r e s id e n t o r any E x e c u tiv e Branch a gen cy must p r o v id e
e x h a u s t i v e d o c u m e n ta tio n and r a t i o n a l e f o r d e c i s i o n s .
E v ery
member o f C o n g r e ss must l i t e r a l l y c o n t r i b u t e t o a p u b l i c r e c o r d
o f argum ent and d e l i b e r a t i o n .
T h a t 's th e b a s i s o f how y o u a r e
h e ld a c c o u n ta b le .
T hat i s I why t h in k t h e c h a ir m a n 's p r o p o s a l i s s o I m p o r ta n t .
I t i s a n e c e s s a r y f i r s t s t e p — no m ore than t h a t — tow a rd
d e v e l o p i n g a m ore m atu re u n d e r sta n d in g o f m onetary p o l i c y an d,
t h e r e fo r e , a r e l i a b l e sen se o f a c c o u n ta b ility .
The c h a ir m a n 's
b i l l i s a c t u a l l y q u i t e m odest in s c o p e .
I t d o e s not com p rom ise
t h e F e d e r a l R e s e r v e 's e s t a b l i s h e d In d ep en d en ce i n any way.
It
d o e s n o t t r y t o ch a n g e t h e I n s t i t u t i o n a l s t r u c t u r e o f t h e F e d e r a l
R e s e r v e S ystem (a s S e n a to r S arban es and o t h e r s p r o p o s e ) I t s im p ly a s k s a v e r y b a s i c q u e s t io n o f a p o w e r fu l
g overn m en t a g e n c y ; t e l l us what happened a t y o u r m e e tin g .
L et us
h e a r what y o u s a i d i n p l a i n E n g lis h .
L e t us s e e why y o u made
t h e s e d e c i s i o n s , what you w ere t h in k in g you w ou ld a c h ie v e , what
t h e e c o n o m ic c o n d i t i o n s lo o k e d l i k e t o y ou a t th e t im e .
G iv en
t h a t i n f o r m a t i o n , t h e n we m ight be a b l e t o ju d g e more c o h e r e n t l y
w h e th e r y o u a r e d o in g a g o o d j o b o r n o t , w hether the t r a d e o f f ' s
y ou c h o s e seem ed r e a s o n a b le , g iv e n a l l th e i n t e r l o c k i n g
c o m p le x itie s .
Or w h e th e r t h e Fed has made a l a r g e m is ta k e and
ough t t o c o r r e c t i t .
L et me o f f e r tw o q u ic k r e a c t i o n s t o t h e o t h e r r e fo r m




4

143
p r o p o s a ls :
F i r s t , t h e m easure t o r e fo r m t h e s t a t u s o f t h e r e g i o n a l bank
p r e s i d e n t s i s a w orth y id e a b u t a v e r y o l d o n e .
The l a t e W righ t
Fatman, who was chairm an o f t h i s c o m m itte e , o n c e c a l l e d t h e
F e d e r a l R e s e r v e S ystem a " p r e t t y q u e e r d u ck 1 and h e in t r o d u c e d
'
t h a t same m easure and numerous o t h e r s y e a r a f t e r y e a r , t r y i n g t o
s t r a i g h t e n o u t t h e t a n g le d a n o m a lie s in. th e i n s t i t u t i o n ' s
stru ctu re .
C o n g re ss n e v e r g o t up t h e n e r v e t o e n a c t any o f
t h e s e . O f c o u r s e I a g r e e w it h t h e o b j e c t i v e , b u t I 'm n o t s u r e i t
w o u ld a c c o m p lis h a l l t h a t much i n te rm s o f a l t e r i n g t h e F e d 's
fu n d am en tal b e h a v i o r .
F ederal R eserve g o v e rn o rs, a f t e r a l l , are
s t i l l g o in g t o c o n s u l t c l o s e l y w it h b a n k ers o n m on eta ry p o l i c y .
I t w ou ld b e od d i f t h e y d i d n 't .
Seconds some have p r o p o s e d t h a t t h e F e d e r a l Open M arket
Com m ittee b e r e q u ir e d t o an nou nce i t s p o l i c y d e c i s i o n s on th e
same d ay t h e y a r e made r a t h e r th an r e l e a s i n g a summary s ta te m e n t
s i x weeks l a t e r .
The F e d e r a l R e s e r v e has a lw a y s a r g u e d a g a in s t
im m ediate r e l e a s e o n th e g r o u n d s t h a t i t w ou ld weaken i t s a b i l i t y
t o c o n d u c t m onetary p o l i c y .
I t h in k t h e Fed i s r i g h t a b o u t t h a t .
The F e d e r a l R e se r v e i s an a c t i v e d a i l y p a r t i c i p a n t i n t h e c r e d i t
m ark ets - - th e l a r g e s t p a r t i c i p a n t — an d, l i k e e v e r y o t h e r
p l a y e r , i t d e v e lo p s i t s own t r a d i n g s t r a t e g y f o r t h e w eeks o r
m onths a h e a d . That i s th e e s s e n c e o f t h e FOMC p o l i c y d i r e c t i v e s
t o t h e o p e n -m a rk e t d e s k i n New Y o r k .
I t makes no s e n s e t o com p el
t h e Fed t o r e v e a l i t s t r a d i n g s t r a t e g y i n a d v a n ce s o t h a t o t h e r
t r a d e r s c a n u s e th e i n f o r m a t io n t o a d ju s t t h e i r own p o r t f o l i o s .
The bon d t r a d e r s m igh t l i k e t h a t , b u t i t w o u ld n 't d o a t h in g f o r
t h e g e n e r a l p u b l i c o r f o r th e F e d 's e f f e c t i v e n e s s .
A r e a s o n a b le r e q u ir e m e n t , I b e l i e v e # i s t o t e l l t h e F e d e r a l
R e s e r v e t o p u b l i s h a t r a n s c r i p t o f FOMC d e l i b e r a t i o n s tw o o r
t h r e e months a f t e r t h e f a c t .
T hat i s a lo n g enou gh d e l a y t o
a v o i d any c o m p l i c a t i o n s f o r t h e F e d 's o p e n -m a rk et d e s k , bu t i t i s
s t i l l t im e ly enough s o th a t o u t s i d e r s ca n f i n d t h e in f o r m a t io n
r e l e v a n t t o t h e l a r g e r e c o n o m ic d e b a t e . D ie o l d r e p o r t i n g sy stem
— u n i l a t e r a l l y a b o l is h e d b y A rth u r Burns i n th e m id -1 9 7 0 's —
p r o v id e d o n l y a s e c r e t a r y 's ro u g h m in u te s o f th e FOKC d e b a t e and
i t w a s n 't made p u b l i c u n t i l f i v e y e a r s a f t e r th e f a c t — t o o l a t e
t o b e o f any u se t o a n y b u t t h e m ost a r c a n e s c h o l a r s .
I w ou ld
e v e n l e t t h e Fed d e l e t e any r e f e r e n c e s t o s p e c i f i c f o r e i g n
c o u n t r i e s o r p a r t i c u l a r f i n a n c i a l i n s t i t u t i o n s i f t h e y come up i n
t h e d e l i b e r a t i o n s — i n t h e i n t e r e s t o f s e c u r in g t h e F e d 's
c o o p e r a tio n .
I f C o n g re ss a d o p te d t h i s m odest r e fo r m , what w o u ld th e
p u b lic g e t?
A h a rd s l o g th ro u g h v e r y t u r g id s t u f f , b e l i e v e me.
B ased on my in t e r v i e w s w it h g o v e r n o r s r e c o u n t in g t h e i n t e r n a l
d e b a t e s and o n r e a d in g th ro u g h s e v e r a l y e a r s o f t h e o l d FOMC
m inutes# I d o n 't t h in k an yone w i l l b e t a k in g t h i s b o o k t o th e
bea ch .




5

144
He w ou ld b e r e q u ir e d t o re a d a lo n g , e a r n e s t , g e n t ^ d and
d e n s e argum ent o v e r e c o n o m ic s . No name c a l l i n g .
No s e c r e t
p o lit ic a l p lo ts .
No h ea vy o r a t o r y .
Once i n a w h ile , p e r h a p s , we
m ight f i n d a rem ark t h a t sounds l i k e one g o v e rn o r h e c k li n g
a n o th e r g o v e r n o r f o r some p r i o r m is judgm ent, but ev en th e
i n t e r n a l c r i t i c i s m s a r e u s u a lly q u i t e s u b t l e .
The F e d e r a l
R eserve i s a d e co ro u s in s t it u t io n
even be h in d c l o s e d d o o r s .
q u ite

The g r i s t o f t h e s e p r i v a t e d i s c u s s i o n s i s a b ou t t h e
c o m p e tin g a n a ly s e s o f th e econom y h e ld by th e p e o p le a t t h e t a b l e
— argu m en ts o v e r what i s ha pp en in g and how m on etary p o l i c y w i l l
a f f e c t e v e r y t h i n g from bank le n d in g and m a n u fa ctu rin g t o
unem ploym ent and r e t a i l s a l e s .
The m a t e r ia l, in o t h e r w ord s , i s
n o t n o t l i k e l y t o y i e l d s e n s a t i o n a l h e a d lin e s .
But i t w ou ld b e e x tr e m e ly u s e fu l t o s e r i o u s p e o p le who a r e
w i l l i n g t o sp en d some tim e and e f f o r t t r a c k in g th e m on eta ry
d e b a t e , month a f t e r m onth, and th en a sk in g some i n t e l l i g e n t
q u e s tio n s about i t .
T h is s t a r t s w ith C o n g r e ss t p re s u m a b ly , b u t
i t m igh t a l s o i n c l u d e t h e w id e a r r a y o f e co n o m ic s e c t o r s t h a t a r e
n o t i n b a n k in g o r f i n a n c e b u t who d o f e e l t h e im pact o f m on etary
p o l i c y , from fa r m e r s t o home b u i l d e r s .
In s h o r t , t h i s i s a m odest s t e p tow ard p u b l i c e d u c a t io n and
a c c o u n ta b ility .
M ight i t le a d e v e n t u a lly t o more s u b s t a n t i a l
r e fo r m s t h a t d e m o c r a t iz e th e F e d e r a l R eserv e and r e d u c e i t s
in d e p e n d e n c e ? Maybe.
But n o t n e c e s s a r i l y .
H is t o r y c e r t a i n l y
a r g u e s a g a i n s t t h e p r o s p e c t o f su ch r e fo r m s . I t d ep en d s on how
th e Fed b e h a v e s and w h eth er p e o p le a re sh ock ed o r r e a s s u r e d b y
what t h e y re a d i n t h e FOMC m in u te s.
W ould i t ch a n g e t h e FOMC c o n v e r s a t io n s aroun d t h e b i g l o n g
ta b le ?
S u re , a t l e a s t a l i t t l e .
Any p u b l i c o f f i c i a l who knows
h i s w o rd s a r e r e c o r d e d — n o t t o m ention v id e o t a p e d — i s l i k e l y
t o t a l k a b i t d i f f e r e n t l y th a t he m ight in p r i v a t e .
But s o w hat?
The c o n t e n t o f t h e d e b a t e i n s i d e th e F e d e ra l R e se r v e ca n b e i t s
own e d u c a t i o n a l t o o l , j u s t as members o f C on g ress u s e t h e f l o o r
d e b a t e f o r b r o a d e r p u r p o s e s than p e rs u a d in g c o l l e a g u e s .
T h a t 's
v a lu a b le in a d em ocracy.
W ould i t ch a n g e Fed d e c i s i o n s ? Maybe.
I f i t makes t h e
p e o p l e a t t h e t a b l e m ore s e n s i t i v e t o th e co m p e tin g t r a d e o f f ' s
and t o t h e w id e r v a r i e t y o f e co n o m ic i n t e r e s t s th a t w i l l b e
a f f e c t e d b y t h e i r d e c i s i o n s , th a t i s a v a lu a b le r e s u l t t o o .
But
i t w o n 't r e d u c e t h e d a u n tin g c o m p l e x i t i e s and u n c e r t a i n t i e s t h a t
Fed g o v e r n o r s m ust c o n f r o n t .
That i s th e n a tu re o f m onetary
p o l i c y and n o o n e can r e p e a l i t .
So why t h e n d o I t h in k t h i s m odest re fo rm w ou ld b e s o
s ig n ific a n t?
B e lie v e i t o r n o t,




I a c t u a l l y th in k th e s im p le s t e p o f
6

145
c a s t i n g some su n sh in e o n n o n e ta r y p o l i c y m igh t make th e f e d e r a l
R e s e r v e a m ore e f f e c t i v e i n s t i t u t i o n o f g o v e rn m en t.
I t w ou ld
c e r t a i n l y r a i s e t h e l e v e l o f t h e e c o n o m ic d e b a t e In t h i s c o u n t r y .
I t c o u l d a c t u a l l y enh an ce t h e F e d 's c r e d i b i l i t y w it h t h e g e n e r a l
p u b l i c , a s p e o p l e g e t a b e t t e r g r a s p o f t h e h a rd c h o i c e s , and a t
l e a s t p u t t o r e s t some o f t h e s p o o k i e r c o n s p i r a c y t h e o r i e s t h a t
a r e now s o p o p u la r .
I t w ou ld a l s o e n c o u ra g e F e d e r a l R e s e r v e g o v e r n o r s t o sh a r e
t h e p re m is e o f t h e i r d e c i s i o n s w ith t h e p e o p le a t l a r g e i n term s
t h a t o r d i n a r y p e o p le ca n u n d e r s ta n d .
The Fed i s o f t e n i n t h e
p o s t u r e o f w a rn in g f o l k s t o s lo w down, t e l l i n g b u s i n e s s o r
con su m ers o r i n v e s t o r s t o tem per t h e i r a p p e t i t e s and b e h a v e more
p r u d e n tly .
That m essage c a n b e com m unicated w it h m ore e f f e c t i v e
r e s u l t s i f p e o p l e know what t h e Fed know s, i f p e o p le c a n g r a s p
what th e Fed i s t r y i n g t o t e l l them .
The l a r g e r c o n se q u e n c e o f t h i s r e fo r m , h ow ev er, s h o u ld
a f f e c t o t h e r governm ent d e c i s i o n m akers f a r b ey on d t h e F e d e r a l
R e s e r v e — p e rh a p s e v e n i n c l u d i n g C o n g r e s s .
M aking m on etary
p o l i c y m ore v i s i b l e and l e g i b l e o u g h t t o im p rov e t h e g o v e r n m e n t's
o v e r a l l management o f th e econom y — n o t t o m en tion th e q u a l i t y
o f o u r d e m o cra cy — b e c a u s e i t w ou ld make v i s i b l e c o n t r a d i c t i o n s
t h a t a t p r e s e n t no o n e has t o fa c e *
W right Patman o n c e r e f e r r e d t o t h e e x i s t i n g arrangm ent a s " a
c a r w it h two d r i v e r s . " One d r i v e r h as a f o o t on th e g a s , th e
o t h e r on th e b r a k e . He meant t h a t t h e f i s c a l p o l i c y o f sp e n d in g
and t a x a t i o n i s c o n t r o l l e d b y C o n g re ss and th e E x e c u t iv e , w h ile
t h e money and c r e d i t p o l i c y i s c o n t r o l l e d b y th e c e n t r a l bank.
T h e se two l e v e r s i n t e r a c t p o w e r f u l l y w it h a n o th e r — som etim es
w it h c o n t r a d i c t o r y r e s u l t s .
Y e t, b e l i e v e i t o r n o t , t h e r e i s a b s o l u t e l y no r e q u ir e m e n t
i n t h e law t h a t th e two l e v e r s must b e c o o r d i n a t e d w it h o n e
a n o th e r.
T h ere i s n o t e v e n an i n t e l l i g e n t p r o c e s s b y w h ich
m on etary p o l i c y and f i s c a l p o l i c y ca n b e v ie w e d t o g e t h e r a s
p i e c e s o f an o v e r a l l e c o n o m ic s t r a t e g y .
We h op e t h a t t h e r e a r e
p r i v a t e c o n v e r s a t i o n s betw een t h e Fed an d th e w h it e H ouse and che
b u dget le a d e r s o f C on g ress,
They c e r t a i n l y d o n 't m atch n o t e s in
p u b l i c and t h e i r p la n s a r e o f t e n i n c o n f l i c t .
I n s t e a d , e a c h s i d e i s f r e e t o g o i t s own way, r e g a r d l e s s o f
th e o t h e r ,
I s u s p e c t t h a t , down d e e p , b o t h s i d e s l i k e i t l i k e
t h a t : n e i t h e r C o n g re ss n o r th e F e d e r a l R e s e r v e w is h e s t o
c o o r d i n a t e p o l i c y , ev e n i n t h e m ost l i m i t e d f a s h i o n , b e c a u s e th a t
m igh t crim p t h e a b i l i t y t o d o t h e i r own t h i n g .
F o r g e t t h e larger
fa llo u t .
I h ave b e e n t a l k i n g a b s t r a c t l y .
t a n g i b l e e x a m p les o f what I mean:




7

Now l e t me g i v e some

146
I n 1981, when c o n g r e s s p a sse d th e Reagan e c o n o m ic program ,
t h e m a s s iv e t a x c u t s and d e fe n s e b u i l d - u p w ere p o w e r f u ll y
s t i m u l a t i v e t o th e econom y.
But th e F e d e r a l R e se rv e was
s im u lt a n e o u s ly em barked on th e o p p o s i t e c o u r s e : s u p p r e s s in g
e c o n o m ic g row th w it h e x t r a o r d i n a r i l y h ig h i n t e r e s t r a t e s i n o r d e r
t o squ eeze out p r ic e i n f l a t i o n .
L e t 's le a v e a s i d e t h e argum ent
o v e r who was r i g h t and who was w rong. The s t a r k f a c t i s th a t th e
govern m en t was p u s h in g t h e n a t i o n a l economy in o p p o s i t e
d ir e c tio n s at on ce.
The c a r w ith two d r i v e r s wound up i n a d i t c h
— f i r s t d e e p r e c e s s i o n , th e n an awesome a ccu m u la tio n o f d e b t —
and we a r e e f f e c t i v e l y s t i l l i n i t .
A f t e r t h e 1 9 81-8 2 r e c e s s i o n , though i t n e v e r s a i d s o i n
p u b l i c , t h e F e d e r a l R e s e r v e p r i v a t e l y r e s o lv e d t h a t i t must
c o n t in u e t o c h e c k th e s t im u lu s p r o v id e d by th e Reagan program in
o r d e r t o p r e v e n t i n f l a t i o n from r e c u r r i n g ,
in o r d e r to d o th a t ,
th e Fed h e ld i n t e r e s t r a t e s v e r y h ig h th rou g h ou t th e 1 9 8 0 's —
th e h ig h e s t r a t e s o f t h i s c e n t u r y i n r e a l term s —
and th a t
p r o d u c e d many c o l l a t e r a l c o n s e q u e n c e s . Let me name some o f them:
1. The s a v in g s and lo a n c r i s i s was d r a m a t ic a lly w orsen ed by
th e F e d 's h ig h i n t e r e s t r a t e s .
Fed V ic e Chairman P r e s to n M a rtin ,
who a rg u e d r e p e a t e d l y and u n s u c c e s s f u l l y f o r an e a s i e r p o l i c y t o
h e lp s a lv a g e t h e SALs, t o l d me: H
We j u s t threw them t o th e
w o lv e s ."
2.
The U .S . t r a d e d e f i c i t b a llo o n e d from 1980 t o 1985
b e c a u s e t h e F e d 's to u g h m on etary p o l i c y se n t th e v a lu e o f th e
d o l l a r s o a r i n g a g a in s t f o r e i g n c u r r e n c i e s .
P r i v a t e l y , P au l
v o l c k e r a n g u is h e d o v e r t h i s , b u t he d i d n e t change t h e p o l i c y .
L ee I a c o c c a c o m p la in e d t h a t o n c e f o r e i g n p r o d u c e r s g ra b b ed m arket
s h a r e s , i t w o u ld b e v e r y d i f f i c u l t f o r A m erican m a n u fa c tu r e rs t o
g e t them b a c k .
He was r i g h t .
The tr a d e d e f i c i t i s w ith us
s t i l l , d e s p i t e a much w eaker d o l l a r .
3.
The c o l l a p s e o f T h ir d W orld d e b t i n August 1982 was
d i r e c t l y t r i g g e r e d by t h e p u n is h in g i n t e r e s t r a t e s — a
c o n n e c t i o n d e n ie d a t t h e tim e bu t now w id e ly a ck n ow ledged by
g lo b a l fin a n c ia l a u th o r it ie s .
Once th e d e b t c r i s i s p ut m a jor
A m erican bank s i n p e r i l , th e Fed had no c h o i c e b u t t o come t o
t h e i r r e s c u e . Our t r a d e r e l a t i o n s w ith M ex ico and th e c u r r e n t
d e b a t e o v e r NAFTA a r e d i r e c t l y t i e d t o what th e F e d e r a l R e s e r v e
d e c id e d ten y e a r s .
D oes an yone i n C on g ress exam ine th e
c o n n e c tio n ?
4.
The farm c r i s i s o f t h e m idd le 1980s — and th e d e b t
l i q u i d a t i o n o f t e n s o f th o u sa n d s o f fa m ily farm s — was a l s o
li n k e d t o th e Fed p o l i c y .
The F ed, o f c o u r s e , d i d n o t s e t o u t t o
a c h ie v e t h i s , b u t i t was an in e s c a p a b le s id e e f f e c t .
My p o i n t i s
t h a t , g iv e n th e F e d 's s e c r e c y , n e it h e r fa rm ers n or o t h e r d e b t o r s
w ere g i v e n f a i r w arn in g o f what th e governm ent was d o in g t o t h e i r
fin a n c ia l c o n d itio n .
In d e e d , lo n g a f t e r th e Fed had begun i t s




8

147
cam pa ig n , v a r io u s f e d e r a l a g e n c ie s w ere s t i l l making and
g u a r a n t e e in g s m a ll-b u s in e s s and farm lo a n s t h a t w ere l i t e r a l l y
doomed t o r a i l by th e F e d 's m onetary p o l i c y .
The c e n t r a l bank
d i d n 't g i v e t h e fa rm e rs a c l e a r w a rn in g , b u t i t d i d n 't t e l l th e
Departm ent o f A g r ic u lt u r e o r t h e Sm all B u s in e s s A d m in is t r a t io n
e ith e r .
I c o u ld g o on w ith a v a r i e t y o f o t h e r ex a m p le s.
My p o i n t i s
n o t t o blam e th e Fed f o r e v e r y bad t h in g th a t happened and
c e r t a i n l y n o t t o arg u e th a t R eaganom ics was r i g h t w h ile th e
m on eta ry p o l i c y was w rong. My p o i n t i s t h a t F e d e r a l R e se r v e
p o l i c y makers fa c e d e x c r u c i a t i n g t r a d e - o f f ' s and u s u a l l y had t o
c h o o s e betw een two bad o u tco m e s.
Y et th e s e s ta r k t r a d e - o f f 's
w ere n o t g e n e r a l l y known o r u n d e r s to o d , much l e s s o p e n ly d e b a t e d
by th e e le c t e d r e p r e s e n ta tiv e s .
T h is g r e a t c o l l i s i o n b etw een
m onetary p o l i c y and f i s c a l p o l i c y u n fo ld e d i n b r o a d d a y l i g h t , bu t
o n l y t h e most s o p h i s t i c a t e d c i t i z e n s e v e n u n d e r s t o o d t h a t i t was
h a p p e n in g .
An e c o n o m is t from th e M in n e a p o lis F e d e r a l R e s e r v e Bank w r o te
t h a t i t was l i k e a "game o f c h ic k e n " be tw e e n t h e tw o h a lv e s o f
g o v e rn m e n t, f i s c a l p o l i c y and m onetary p o l i c y .
I s t h a t anyway t o
manage t h e l a r g e s t econom y o n e a r t h ?
X w i l l o f f e r one o t h e r exam ple t h a t i s c l o s e r t o th e
p resen t.
In th e p r e s i d e n t i a l cam paign o f 1988, b o t h c a n d id a t e s
n a t u r a l l y p ro m ise d v o t e r s t h a t th e y w ou ld d e l i v e r e x p a n d in g
e c o n o m ic g row th and abundant j o b s .
M eanw hile, Chairman A lan
G reensp an and th e F e d e r a l Open M arket Com m ittee w ere p u r s u in g th e
o p p o s i t e o b j e c t i v e : s lo w in g down t h e econom y, s u p p r e s s in g
c o n su m p tio n and in c r e a s i n g unemployment*
R ig h t in t h e m id d le o f
t h e cam p a ig n , th e Fed s t a r t e d r a t c h e t i n g up i n t e r e s t r a t e s and
c o n t in u e d t o d o s o f o r th e n e x t y e a r o r s o .
when s h o r t -t e r m
r a t e s w ere p u sh ed h ig h e r than lo n g -t e r m r a t e s , t h e F ed was
f l i r t i n g w ith r e c e s s i o n .
£ d o n 't know i f t h a t i s what t h e Fed
in t e n d e d — maybe n o t — b u t t h a t i s what th e c o u n t r y g o t .
Q u e s t i o n : d i d C on g ress know t h e F e d 's t i g h t e n i n g m on eta ry
p o l i c y was p u sh in g th e econom y i n t o a f u l l - b l o w n c o n t r a c t i o n ?
E v id e n tly n o t .
J u st a s t h e r e c e s s i o n was t a k in g h o l d , C o n g r e s s
a d o p te d th e fam ous d e f i c i t - r e d u c t i o n d e a l o f 7990 - - r a i s i n g
t a x e s i n t h e f a c e o f r e c e s s i o n and t h e r e b y d e e p e n in g t h e p a in and
d e s tr u c tio n .

By th e way, t h i s i s n o t a judgm ent made in h i n d s i g h t .
I
w r o te a s much a t tha tim e i n t h e p a g e s o f R o l l i n g S t o n e : f i r s t ,
t h a t t h e F e d e r a l R e se rv e was in d u c in g a r e c e s s i o n and l a t e r th a t
t h e 1990 b u d g e t d e a l w ould th u s make t h in g s w orse — i n c l u d i n g
make t h e f e d e r a l d e f i c i t w o r s e . My a n a l y s i s was b a s e d o n what
f i n a n c i a l s o u r c e s i n w a ll S t r e e t t o l d me was h a p p en in g and on a
v e r y s t r a i g h t fo r w a r d o b s e r v a t i o n :
e v e r y r e c e s s i o n Bitice W orld
war I I h a s b e e n p r e c e d e d b y s i m i l a r b e h a v io r from t h e F ed. When




9

148
th e c e n t r a l bank p u sh es s h o r t -t e r m r a t e s ab ove lo n g -t e r m r a t e s
and h o ld s them t h e r e — th e s o - c a l l e d in v e r t e d y i e l d c u r v e - - a
r e c e s s io n fo llo w s .
Q u e s t io n : w ou ld C o n g r e ss have changed i t s b u d g e t d e c i s i o n s
i n 1 990 i f members had u n d e r s t o o d what th e Fed was d o in g ?
At th e
t im e , a s I r e c a l l , th e chairm an was u r g in g p a ssa g e o f th e b u d g et
a c c o r d and a s s u r i n g e v e r y o n e t h a t r e c e s s i o n was n o t a t hand.
As
I s a i d , t h e Ped I s n o t i n f a l l i b l e e i t h e r .
In summary, r e fo r m in g th e Fed sh o u ld have two g o a l s :
F i r s t : t o f o s t e r a more c o h e r e n t and r a t i o n a l c o o r d i n a t i o n
betw een m on etary and f i s c a l p o l i c y .
S e co n d : t o o p e n up th e c l o i s t e r e d d e b a te so th a t many more
v o i c e s ca n b e h e a r d .
I f I w ere a sk e d t o d e s ig n th e r e fo r m s , I w ould no d ou bt
p r o p o s e c h a n g e s much more r a d i c a l than th e m easures b e f o r e t h i s
c o m m itte e .
But t h e p o l i t i c a l r e a l i t i e s make i t p o i n t l e s s t o
d i s c u s s su ch i d e a s .
H aving th o u g h t about t h i s f o r many y e a r s , I
c o n c lu d e d t h a t th e f i r s t s t e p tow ard re fo rm r e q u i r e s p u b l i c
e d u c a t io n , n o t c h a n g in g th e i n s t i t u t i o n .
Over tim e , i f e l e c t e d
p o l i t i c a l l e a d e r s d e v e lo p a b e t t e r g ra sp o f th e s u b j e c t , t h e y
m igh t b e w i l l i n g t o exam ine th e d e e p e r power r e l a t i o n s and
c o n s i d e r c h a n g in g them.
The F e d e r a l R e s e r v e w i l l n a t u r a l l y o p p o se b o t h o f t h o s e
g o a ls .
As a p o l i t i c a l i n s t i t u t i o n , i t has been q u i t e s k i l l f u l
o v e r 80 y e a r s i n m o b i l i z i n g i t s c o n s t i t u e n c i e s t o o p p o s e any
i n t r u s i o n on th e m y s tiq u e .
R ig h t a t t h i s moment, b a n k ers a r e
b u sy h e c k l i n g members o f C o n g r e s s , w arning them a b o u t th e d i r e
i m p l i c a t i o n s o f t h e s e h e a r in g s .
Guess who ask ed them t o d o t h a t .
I know th e p o l i t i c a l r e s i s t a n c e t o even m odest r e fo r m i s
enorm ous and I am w e l l f a m i l i a r w ith a l l th e t r a d i t i o n a l
argum ents f o r k e e p in g t h e F e d e r a l R e se rv e a s s e c r e t i v e and
m y s t e r io u s a s p o s s i b l e , i t ta k e s co u ra g e f o r a con gressm an t o
s t a n d up t o f i n a n c i e r s and t e l l them t h a t A m erica n e e d s more
d em ocracy# n o t l e s s .
I n 19 13, t h e F e d e r a l R e se r v e seemed l i k e th e g ra n d
com p rom ise and b o t h p o l i t i c a l p a r t i e s su p p o rte d i t .
Both p a r t i e s
h a ve s t o o d b y i t e v e r s i n c e .
I n 1993, we a r e o n new g ro u n d .
The Fed i s b o t h more
i n f l u e n t i a l th a n i t p r e t e n d s b u t a l s o l e s s p o w e rfu l i n th e g l o b a l
econom y th a n i t o n c e was*
I f t h i s c o u n tr y i s e v e r g o in g t o come
t o g r i p s w ith t h e new g l o b a l e co n o m ic r e a l i t i e s t h r e a t e n in g o u r
lo n g -t e r m p r o s p e r i t y , we n eed t o h ea r a l o t o f h o n e s t argum ents
a b o u t how t h e govern m en t manages th e econom y. That i s im p o s s ib l e




10

149
s o lo n g a s h a l f th e s t o r y rem ains fo g g e d fro m v ie w .
i f c i t i z e n s o f th e U n ite d S t a t e s e v e r d e c i d e t h a t th e y must
le a d th e w o r ld in r e fo r m in g th e g l o b a l econ om y , th e y w i l l f i r s t
have t o e d u c a t e th e m se lv e s about th e r e a l te rm s o f d e b a t e .




11

150
e m b a r g o e d u n t il

9:30 A.M.

S ta te m e n t o f G r a sty C rew s, I I
P r e p a r e d f o r P r e s e n t a t i o n a t t h e H e a rin g s o f t h e
C om m ittee o n B a n k in g ,

F in a n ce ,

and Urban A f f a i r s ,

U n ite d S t a t e House o f R e p r e s e n t a t i v e s ,
on H .R. 28 ,
"T h e F e d e r a l R e s e r v e System A c c o u n t a b i l i t y A c t o f 1993"
O c to b e r 7 ,

1993

Mr, C hairm an , Members o f t h e C om m ittee,

I m ost s i n c e r e l y

a p p r e c i a t e t h i s o p p o r t u n i t y t o a p p ea r b e f o r e y o u .

It is

a very

s p e c i a l p l e a s u r e t o me, b e c a u s e I was h e r e and I remem ber v i v i d l y
when W rig h t Patman i n t r o d u c e d h i s c o l l e a g u e and f e l l o w

Texan

H enry G o n z a le z a s t h e n e w e st member o f th e B anking C om m ittee.

I

h a v e lo n g s i n c e f o r g o t t e n what t h a t m e e tin g was a b o u t , b u t I ' l l
n e v e r f o r g e t t h e sh y s m i l e o f t h e youn g co n g ressm a n a s h e a c ­
k n o w le d g e d t h e I n t r o d u c t i o n and t o o k h i s s e a t .
You h a v e a s k e d me t o t e s t i f y on t h e c o n s t i t u t i o n a l i t y o f
a l l o w i n g p r i v a t e c i t i z e n F e d e r a l R e s e r v e Bank p r e s i d e n t s t o v o t e
on t h e n a t i o n 's money s u p p l y ."

T here a r e tw o a r e a s o f t h e

c o n s t i t u t i o n w h ich a r e I m p l i c a t e d .
d e a l w it h .

I 'l l

One o f them i s v e r y e a s y t o

t a k e t h a t up f i r s t ,

b u t I w o n 't w a ste y o u r tim e

b e la b o r in g th e o b v io u s .
The e a s y o n e i s
S e c tio n 2,

t h e A p p o in tm e n ts C la u s e .

th e C o n s tit u t io n p ro v id e s :




-1 -

In A r t i c l e I I ,

151
The P r e s id e n t

. .

* s h a l l n o m in a te , and b y and w it h t h e

A d v ic e and C o n se n t o f t h e S e n a te , s h a l l a p p o i n t
O f f i c e r s o f t h e U n ite d S t a t e s

.

.

.

. . . .

Now, how d o you d e te r m in e who i s an " O f f i c e r o f t h e U n ite d
S ta te s "

?

a n sw e r .

The Supreme C o u r t has g i v e n u s a v e r y s t r a i g h t f o r w a r d
The C o u rt h a s s a i d :
We t h in k t h a t t h e term " O f f i c e r s o f t h e U n it e d •

S t a t e s ” a s u se d i n A r t i c l e I I

. . .

t o h a v e s u b s t a n t i v e m ean in g.

We t h i n k i t s

is

i s a te rm I n t e n d e d
fa ir

Im p o r t

t h a t any a p p o in t e e e x e r c i s i n g s i g n i f i c a n t a u t h o r i t y

p u r s u a n t t o t h e la w s o f t h e U n ite d S t a t e s i s an O f f i c e r
o f t h e U n ite d S t a t e s ,

and m u st, t h e r e f o r e ,

i n t h e manner p r e s c r i b e d by § 2 , c l .

b e a p p o in t e d

2 o f th a t A r t ic le .

I d o n o t s e e how an y on e ca n r e a s o n a b l y a r g u e t h a t t h e
members o f t h e F e d e r a l Open M arket C om m ittee d o n o t f a l l w it h in
th at d e fin it io n .

In a g u a rd e d u n d e r s t a t e m e n t,

th e F ederal

R e s e r v e B oard i t s e l f h a s s a i d —
The F e d e r a l Open M arket C om m ittee i s t h e m ost Im p o r ta n t
m o n e ta ry p o lic y -m a k in g b od y o f t h e F e d e r a l R e s e r v e
S y ste m .

It

.

.

. makes k ey d e c i s i o n s r e g a r d in g t h e

c o n d u c t o f o p e n m arket o p e r a t i o n s - p u r c h a s e s and s a l e s
o f U .S . Governm ent and F e d e r a l A g e n cy s e c u r i t i e s w h ic h a f f e c t t h e p r o v i s i o n o f r e s e r v e s to d e p o s i t o r y
i n s t i t u t i o n s and,

i n t u r n , t h e c o s t and a v a i l a b i l i t y o f

m oney and c r e d i t i n t h e U .S . e co n o m y .

The FOMC a l s o

d i r e c t s sy ste m o p e r a t i o n s i n f o r e i g n c u r r e n c i e s .
M r. C hairm an,
d e ta ile d ,

f o r t h e b e n e f i t o f t h o s e who may w is h a m ore

t e c h n ic a l e x p la n a t io n o f t h i s is s u e ,

th e r e le v a n t c a s e s ,

w it h c i t a t i o n s t o

s t a t u t e s , and c o n s t i t u t i o n a l p r o v i s i o n s ,

I

w ou ld l i k e p e r m is s io n t o p u t i n t o t h e r e c o r d a c o p y o f t h e b r i e f
f o r t h e a p p e l l a n t i n t h e U n ite d S t a t e s C o u r t o f A p p e a ls f o r t h e
D i s t r i c t o f C olu m bia C i r c u i t i n t h e c a s e o f Melcher v. Federal

Open Market Committee.

The d e c i s i o n o f t h e C o u r t o f A p p e a ls i n

t h a t c a s e was t o v a c a t e t h e ju d gm en t o f t h e D i s t r i c t C o u r t , w h ich
had r u l e d t h a t t h e members o f t h e FOMC a r e n o t o f f i c e r s o f t h e
U n ite d S t a t e s .




The C o u r t o f A p p e a ls t h e n d i s m i s s e d t h e c a s e on

-2-

152
t h e g r o u n d t h a t t h e p l a i n t i f f d i d n o t have " s t a n d i n g , H t h a t i s ,

a

l e g a l r i g h t t o r e q u i r e t h e F e d e r a l c o u r t s t o r u l e on t h e i s s u e ,
th u s l e a v i n g t h e e x i s t i n g s t r u c t u r e o f t h e FOMC n e i t h e r c o n s t i t u ­
t i o n a l l y v in d ic a te d n or,

in th e lig h t o f o th e r c a s e s ,

c h a lle n g e in j u d i c i a l p r o c e e d in g s .

s u b je c t t o

The Supreme C o u rt d e c l i n e d t o

hear th e c a s e .
Even w it h o u t t h e a u t h o r i t y o f a j u d i c i a l o p i n i o n ,
t h in k i t

h ow ever,

I

i s e a s y t o s e e t h a t t h e p r e s e n t s t r u c t u r e o f t h e FOMC

d i r e c t l y c o n f l i c t s w it h t h e A p p oin tm en ts C la u s e o f t h e C o n s t i t u ­
tio n .

S o why i s

t h e r e s u ch a c o n t r o v e r s y ?

The c o n t r o v e r s y g row s

o u t o f o t h e r c o n s t i t u t i o n a l p r o v i s i o n s w h ich , ta k e n t o g e t h e r and
in t h e ir h is t o r ic a l c o n te x t,
i n my ju d g m e n t,

c o n t e m p la t e a m on etary s y ste m w h ic h ,

s im p ly c a n n o t b e made t o work i n t h e w o r ld i n

w h ic h we now l i v e .
S e c t io n 8 c o n fe r s on C on gress,
"T o c o i n m oney,
.

."

i n s o many w o rd s , t h e pow er

r e g u l a t e t h e v a lu e t h e r e o f , and o f f o r e i g n c o i n

.

S e c t i o n 10 e x p l i c i t l y w ith d ra w s t h e c o i n a g e p ow er from t h e

S ta te s,

and i m p l i c i t l y m andates a p r e c i o u s m e ta l s t a n d a r d a s t h e

means b y w h ic h C o n g r e s s i s
S p e c ific a lly ,

t o r e g u l a t e t h e v a l u e o f m oney.

S e c t i o n 10 p r o v i d e s ,

"No S t a t e s h a l l

.

.

.

c o i n M oney; e m it B i l l s o f C r e d i t [ t h a t 's an e i g h t e e n t h c e n t u r y
way o f s a y i n g i s s u e p a p e r m o n e y ]; [ o r ] make any T h in g b u t g o l d
and s i l v e r C o in a T en d er i n payment o f d e b t s .

.

.

."

Why w o u ld s u ch a s y ste m b e p e r f e c t l y s e n s i b l e i n t h e 1 8 th
c e n t u r y , y e t p e r f e c t n o n s e n s e a s we a p p ro a ch t h e 2 1 s t c e n t u r y ?
The an sw er t o t h a t q u e s t i o n i s
F ried m a n .
is th is :

I f 1 may p u t i t

i m p l i c i t i n t h e work o f M ilt o n

i n t h e v e r n a c u la r , what h e t a u g h t u s

I n a s t a b l e e c o n o m ic system w ith a g i v e n t o t a l o u t p u t

o f g o o d s and s e r v i c e s ,

t h e v a l u e o f any g iv e n u n i t o f m oney w i l l

d ep en d o n how many s u ch u n i t s t h e r e a r e t o g o a r o u n d .
s t o p t o t h in k a b ou t i t ,

i t 's

o n l y common s e n s e .

When you

In w h a te v e r

e c o n o m ic u n i v e r s e y o u a r e c o n s i d e r i n g , you h a ve o n o n e s i d e a l l
t h e s h o e s and s h i p s and s e a l i n g wax, y e s and a l l t h e s e r v i c e s
t h a t p e o p l e p e r fo r m f o r o n e a n o th e r , and o n t h e o t h e r s i d e y ou
h a v e a l l t h e m oney t h a t t h e r e i s i n t h e s y ste m , and f o r w h ich t h e
v a r i o u s p a r t i c i p a n t s i n t h e sy ste m co m p e te .




-3-

In tu itiv e ly ,

one

158
s e n s e s t h a t t h e tw o s i d e s h a v e t o b a l a n c e o u t .

D r . F r ie d m a n 's

m ore p r e c i s e f o r m u la t io n and s c h o l a r l y v a l i d a t i o n o f t h i s id e a
made him o n e o f A m e r ic a 's N o b e l p r i z e w in n e r s .
T h is t e s t im o n y i s no p l a c e t o g e t i n t o t h e m e c h a n ic s o f t h e
o p e r a t i o n o f a p r e c i o u s - m e t a l b a se d m o n e ta ry s y s t e m , b u t t h e
e s s e n t i a l p r i n c i p l e o f s u ch a s y ste m i s v e r y s im p le and h i g h l y
r e le v a n t.

T h at p r i n c i p l e i s t h a t t h e m e ta l and t h e m oney a r e s o

f r e e l y I n t e r c o n v e r t i b l e t h a t t o a l l I n t e n t s and p u r p o s e s t h e
m e ta l is t h e o n l y t r u e m oney, a l l o t h e r i n s t r u m e n t s b e in g m ere
c r e d it,

o r o b l i g a t i o n s t o p a y m oney.

U nder s u ch a s y s te m , t h e c o n s t i t u t i o n a l p o w e r and d u t y t o
" r e g u l a t e t h e v a lu e " o f money i s d i s c h a r g e d s im p ly b y s p e c i f y i n g
t h e q u a n t i t y o f p r e c i o u s m e ta l w h ich i s t o b e c o n t a i n e d i n a c o i n
o f a g i v e n d e n o m in a t io n .
tin y ,

In a s e r i e s o f s t e p s ,

som e g i a n t ,

som e

t a k e n b y t h e w o r l d 's i n d u s t r i a l n a t i o n s i n t h e a f t e r m a t h o f

t h e f i r s t and s e c o n d W orld W ars, t h a t sy s te m was a b a n d on ed n o t
o n l y b y t h e U n ite d S t a t e s , b u t t h r o u g h o u t t h e w o r l d .
The w in d s o f ch a n g e now b lo w n o t o n l y t o o h a rd b u t t o o
e r r a tic a lly

f o r t h e p r i c e o r v a lu e o f any co m m od ity t o b e e x p e c t ­

e d t o s t a y i n s t e p w ith t h e n e e d s o f a w o r ld w id e e con om y .
a p a r t fro m t h e w axin g and waning o f s p e c u l a t i v e f e r v o r ,

Even

tech n o­

l o g i c a l c h a n g e s a f f e c t i n g t h e p r o d u c t i o n and c o n s u m p t io n o f
p r e c i o u s m e ta ls w ou ld s u r e l y d e s t r o y an y i l l u s i o n o f in h e r e n t and
im m u tab le s t a b i l i t y .
T h is l e a v e s u s i n a p l a c e w h ere t h e v e r y fo u n d a t i o n o f t h e
m o n e ta ry s y ste m assum ed and in t e n d e d b y t h e F ra m ers o f t h e C on ­
s t i t u t i o n h a s b e e n sw ep t aw ay.

G r a d u a lly a n d ,

I b e l i e v e , w it h o u t

a f u l l p u b l i c u n d e r s t a n d in g o f what we w e re d o i n g ,

we h a ve p u t in

i t s p l a c e t h e d i s c r e t i o n o f a F e d e r a l a g e n c y , an d t h a t a g e n c y i s
t h e F e d e r a l Open M arket C om m ittee.
re ce n t h is to r y .

As we know a l l t o o w e l l from

F e d e r a l a g e n c i e s i n g e n e r a l a r e n o t immune t o

e f f o r t s b y members o f C o n g r e s s t o i n f l u e n c e m anagement i n w ays
n o t n e c e s s a r i l y c o n s i s t e n t w it h t h e m i s s i o n o f t h e a g e n c y a s
d e f i n e d i n la w .
The F e d e r a l R e s e r v e S ystem , h o w e v e r , e n j o y s a s p e c i a l k in d
o f im m u nity from t h a t k in d o f p r e s s u r e .




-4-

I t s im m u n ity d e r i v e s

154
fro m i t s

e x e m p tio n from t h e a p p r o p r i a t i o n s p r o c e s s ,

w h ich e f f e c t i v e l y

an e x e m p tio n

p r o t e c t s i t s m is s io n and r e s p o n s i b i l i t i e s

from

b e c o m in g j u s t a n o t h e r b a r g a in in g c h i p i n t h e h a r d b a ll n e g o t i a ­
t i o n s w h ich i n e v i t a b l y t a k e p l a c e around t h e c o m p le x i s s u e s o f
t a x i n g and s p e n d in g .

Knowing how s e r i o u s l y t h e F e d e r a l Home Loan

Bank B oard was w eak en ed , n o t j u s t i n th e r e c e n t p a s t b u t d e c a d e s
ago,

b y s u ch p r e s s u r e s and t h e t h r e a t o f su ch p r e s s u r e s ,

I w ou ld

s a y t h a t t h e c o n t i n u a t i o n o f t h e F e d ’ s e x e m p tio n from t h e a p p r o ­
p ria tio n s p ro ce ss is
m o n e ta ry o p e r a t i o n s .

in th e in t e r e s t o f th e in t e g r it y o f i t s
T h e re i s n o d o u b t i n my mind t h a t much o f

t h e i n t e n s i t y o f t h e o p p o s i t i o n t o a c k n o w le d g in g t h a t a l l members
o f t h e FOMC s h o u ld b e s u b j e c t t o t h e A p p oin tm en ts C la u s e o f t h e
C o n s t i t u t i o n d e r i v e s from f e a r t h a t su ch a s t e p w ould l e a d t o t h e
l o s s o f t h a t e x e m p t io n .
I,
o f th e Fed.

m y s e lf,

am l i v i n g ,

b r e a t h in g e v id e n c e o f t h e in d e p e n d e n c e

W ith many m i s g iv i n g s , b e c a u s e I know how e a s i l y my

t e s t i m o n y c o u l d b e m is u n d e r s t o o d , q u o te d o u t o f c o n t e x t ,
o t h e r w i s e m is u s e d ,

or

I am n e v e r t h e l e s s g o in g t o l a y my e x p e r i e n c e

b e f o r e you as b r i e f l y as I ca n ,

b e c a u s e I t h in k i t

i s r e le v a n t to

som e o f t h e m ost I m p o r ta n t i s s u e s r a i s e d in t h e s e h e a r i n g s .
In t h e f a l l o f 1 9 6 9 ,

I becam e in v o l v e d i n a p r o j e c t f o r a

D e m o c r a t ic member o f t h i s C om m ittee, Tom R ees o f C a l i f o r n i a ,
w h ic h u l t i m a t e l y b r o u g h t me i n t o c o n f l i c t w it h a man who was
p r o b a b l y t h e m ost p o w e r f u l nonMember t h a t t h e House o f R e p r e s e n ­
t a t i v e s h a s e v e r h a d : L ew is D e s c h le r , who s e r v e d a s P a r lia m e n t a r ­
ia n f o r n e a r l y h a l f a c e n t u r y .

I want t o e m p h a siz e t h a t I d o n o t

q u e s t i o n h i s m o t iv e s o r t h e m o tiv e s o f any o f t h e p e o p l e i n v o l v e d
in th a t co n tro v e rsy ,

w h ich had n o t h in g t o d o w it h a n y th in g u n d er

t h e j u r i s d i c t i o n o f t h i s C om m ittee.
When, s e v e r a l m onths i n t o th e p r o j e c t ,

th e li k e l i h o o d o f

c o n f l i c t w it h Mr. D e s c h le r b e g a n t o em erge, I had t o d e a l n o t
o n l y w it h w hat c o u l d b e s e e n a s a c o n f l i c t o f i n s t i t u t i o n a l
lo y a lt ie s ,

b u t a l s o w it h my v e r y p r a c t i c a l r e s p o n s i b i l i t i e s a s

f a m i l y b r e a d w in n e r .

F or th a t re a son ,

L. R o b e r t s o n a t t h e F ed ,




I v i s i t e d V ic e Chairm an J .

and i n s u b s t a n c e , t h i s i s what I s a i d :

-5-

155
O ver t h e y e a r s t h a t I h a v e w orked w it h t h e Fed on
b e h a l f o f t h e L e g i s l a t i v e B ra n ch ,

i t 's

been su g g ested

t o me o n s e v e r a l o c c a s i o n s t h a t t h e r e m ig h t b e a j o b
f o r me h e r e .
At t h i s t im e ,

l*m w o rk in g o n s o m e th in g h a v in g

n o t h in g t o d o w it h b a n k in g o r t h e Fed w h ich may g e t me
fir e d

from C a p i t o l H i l l w it h s u ch e n th u s ia s m t h a t I

w o n 't e v e n s t o p s k id d in g u n t i l I g e t t o 2 0 th & C o n s t i ­
tu tio n .
I f t h a t h a p p en s, w ou ld I s t i l l h a v e a s h o t a t
em ploym ent h e r e ?
He s a i d t h a t I w o u ld , s o I w ent b a ck t o C a p i t o l H i l l and
resu m ed work o n Tom R e e s 's amendment t o a b i l l
t h e L e g i s l a t i o n R e o r g a n iz a t io n A c t o f 1 9 7 0 .
o f t h e H ouse t h a t summer.

t h a t was t o becom e

I t cam e t o t h e f l o o r

I w i l l n e v e r f o r g e t t h e d a y I h a pp en ed

t o b e i n t h e o f f i c e o f a R e p u b lic a n Member— a Member w hose
c o u n s e l had b e e n s o u g h t, and g i v e n , a s t h e R e e s Amendment was
b e in g d e v e lo p e d .
c la im e d ,
is

R e tu r n in g from t h e f l o o r ,

h e b u r s t i n and e x ­

"B o y , y ou b e t t e r b a ck o f f from t h a t am endm ent!

D e s c h le r

fu r io u s !"
When I r e p o r t e d t h i s t o R e e s, h e o f f e r e d t o w ith d ra w t h e

am endm ent.

I t o l d him n o ,

I d i d n ’ t t h i n k t h a t was an y way t o ru n

t h e l e g i s l a t i v e p r o c e s s , and h e s h o u ld s t i c k
P r e d ic ta b ly ,

t o h is gu n s.

t h e P r e s i d e n t 's s i g n a t u r e o n t h e f i n a l e n a ctm e n t was

s c a r c e l y d r y b e f o r e I was o u t .

W ith o u t a b r e a k i n s e r v i c e ,

I was

s i g n e d o n a t t h e F ed, f i r s t a s a c o n s u l t a n t and t h r e e m onths
l a t e r a s an o f f i c e r i n t h e l e g a l D i v i s i o n .
Now t h e p o i n t o f t h a t s t o r y i s

s im p ly t h i s :

C d o n 't b e l i e v e

t h e r e i s any o t h e r a g e n cy o f g o v ern m en t t h a t c o u l d o r w ou ld h a v e
k n o w in g ly r i s k e d h i r i n g me u n d e r t h o s e c i r c u m s t a n c e s .
ha pp y a t t h e F ed , and had e v e r y e x p e c t a t i o n o f s t a y i n g .

I was v e r y
The

m anner o f my l e a v i n g was y e t a n o t h e r d e m o n s t r a t io n o f t h e i n d e ­
p endence o f th a t in s t it u t io n .

The P r e s i d e n t 's S p e c i a l C o n s u lt a n t

f o r N a r c o t i c s and D an gerou s D ru gs, D r. J erom e H. J a f f e , w r o t e a
l e t t e r t o Chairm en Burns a s k in g t h a t I b e g r a n t e d a l e a v e o f
a b s e n c e t o e s s l s t i n t h e e s t a b lis h m e n t o f t h e S p e c i a l A c t i o n




-6-

156
O ffic e

f o r Drug A bu se P r e v e n t io n i n th e E x e c u t iv e O f f i c e o f t h e

P r e s id e n t.

R e a l i z a t i o n o f t h e s e r i o u s n e s s o f t h e d ru g p ro b le m

had h i t t h e W h ite H ouse r a t h e r h ard and s u d d e n ly ,
i n t e r e s t o f a q u ic k s t a r t ,

o f a b s e n c e b a s i s w ere made o f s e v e r a l a g e n c i e s .
any o t h e r s t h a t w e re t u r n e d down.
w it h a p o l i t e b u t fir m No.

and in t h e

su ch r e q u e s t s f o r p e r s o n n e l o n a le a v e
X do n o t know o f

D r. B urns, h o w e v e r, r e s p o n d e d

He s a i d t h e B oard n e e d e d me i n c o n ­

n e c t i o n w it h t h e im p le m e n t a t io n o f t h e new ly e n a c t e d Bank H o ld in g
Company A c t Amendments.

He added t h a t he a p p r e c i a t e d t h e im p o r ­

t a n c e t o t h e n a t i o n o f D r. J a f f e ’ s w ork, and t h a t s h o u ld I d e c i d e
t o make t h e c h a n g e ,

he w ou ld c e r t a i n l y f i n d t h a t u n d e r s t a n d a b le .

As t h i n g s w ork ed o u t ,
t o t h e en d o f i t s

b y t h e tim e t h e S p e c i a l A c t i o n O f f i c e came

sta tu tory l i f e

D e s c h le r had r e t i r e d ,

i n t h e summer o f 19 75, Mr.

and s o I was a b l e t o r e t u r n t o C a p i t o l

H ill.
I t h i n k X u n d e r s t a n d , p e rh a p s b e t t e r th an m o st, t h e i n t e n s i ­
ty o f fe e lin g

t h a t many p e o p l e have a b o u t t h e in d e p e n d e n c e o f t h e

F ederal R eserve.
w h ic h ,
fir s t

T hey t e n d t o v ie w any ch an g e as an e n c r o a c h m e n t

h o w e v e r h a r m le s s i n a p p e a r a n c e , may t u r n o u t t o b e t h e
s t e p down a s l i p p e r y s l o p e .

The i r o n y o f t h e s i t u a t i o n i s

t h a t a s I l o o k b a ck a c r o s s t h e panorama o f m o n e ta ry h i s t o r y s i n c e
t h e en a ctm e n t o f t h e B an k in g A c t o f 1935, i t

seem s t o me t h a t i n

an e f f o r t t o a v o i d m a jo r c o n t r o v e r s i e s w h ich m igh t le a d t o c a l l s
f o r c u r b s on i t s

in d e p e n d e n c e ,

t h e FOMC and i t s

in d iv id u a l

members h a v e so m e tim e s a b ju r e d t h a t in d e p e n d e n c e j u s t a s e f f e c ­
t iv e ly as i f

i t had b e e n rem oved b y s t a t u t e .

I t i s h a rd f o r me t o e s c a p e t h e c o n c l u s i o n t h a t t h e accom m o­
d a t io n s w h ic h t h e FOMC made t o t h e n e e d s o f f i r s t a D e m o c r a t ic
and th e n a R e p u b lic a n a d m in i s t r a t i o n t o s im u lt a n e o u s ly f i n a n c e a
war i n E a s t A s ia and u r g e n t l y n eed ed s o c i a l p rogram s h e r e a t home
c o n t r ib u t e d t o a su bsequ en t a c c e le r a t io n in th e r i s e o f p r i c e s ,
e s p e c ia l l y in r e a l e s t a t e .
A t t h e en d o f t h e s e v e n t i e s , e f f o r t s t o c o u n t e r a c t t h e
e f f e c t o f t h o s e a cco m m o d a tio n s l e d t o a r a t e o f ch a n g e i n

in te r ­

e s t r a t e s f a r i n e x c e s s o f a n y th in g t h a t many d e p o s i t o r y i n s t i t u ­
t io n s s p e c ia liz in g

i n lo n g t e r m r e a l e s t a t e l o a n s c o u l d r e a s o n a b ly




-7 -

157
be

ex p e cted

w ent broke
fo r
an

th e

to
in

ad ju st

p ro p o sitio n

in g ra in ed

o u tp a ce

in te re st

If

our

B anking

to

In

an hour,

th e

1935,

90% .
but

T here

th a t
have

to

So

far

is

Fram ers

is

I

as

tu n ity

in

jo b

to

e sp e c ia lly
itse lf

we a s

if

to

th e

lik e

to

approach

d ia lo g u e ,
as

for

w ith

c le a rly

th e

th e

72—
851 0 - 9 4 - 6


feel

th e
it.

th e

o ffic e rs,

to

C o n stitu tio n

-

8-

seen

a c o n ti­

day.
a ll

b y H .R .

a ll

w o u ld

not
th e

by th e

th re e

28

as

o f my f o r m e r
and

th is

an oppor­

and p ro b le m ­

a pow er s t r u g g l e .

ap p o in tm e n t o f

all

They had

Issu ed

F ed eral R eserve,

raised

is

th a t

"N ot w o rth

th is

of

im m u n ity t o

s ta b ility

in te n d e d .

e x istin g

p o in t

sense of

by u r g in g

th e

w ith

changes

w ith

phrase
to

satisfied

have done

g e n u in e co m m u n icatio n

a ch a lle n g e

th a t

th e

400

can

paper currency

issu e s

e sse n tia lly

th e

in stitu tio n a l

p ric e

c o n c lu d e

in

th e

m inim um w a g e w i l l

concerned,

lin g e rs

of

th e

do b e t t e r

in

th e

B ranch,

th e

FOMC i n

th e

us

at

th a t

is

to

en actm en t

of

of

of

a n a tio n

The d e r i s i v e

E x e cu tiv e

c o n v ictio n

th e

v alu e

a c h ie v e

a v a ila b le

th e

o r ex e cu tiv e

so

unbacked

th e

an con vinced

d o lla r

we c o u l d

ac h iev e

I

a m inim um -w age l a b o r e r

was a s

le g isla tiv e

C ongress.

and n o t

sin ce

we w o u l d a l r e a d y

a monum ent t h a t

accordance

break

G overnm ent

reg u la tin g

a d e v a lu a tio n

in d ep en d en ce,

us

w o u ld

for

th e

ane w how we s h a l l

60 y e a rs

seen

C o n stitu tio n

em p lo y e rs--th e

so lv in g ,

to

re sp o n sib ility
process,

F ram ers— and

th in k

C o n stitu tio n

th a t

to

m etho d o f

i t ’s o b v io u s

because

th e

th e

C o m m ittee--to

th a t

w h ich e s t a b l i s h e d

th in k

e n a b le

C o n tin en ta l

th e

40C w o u ld buy m ore t h a n

by e i t h e r

of

n en tal"

th e

by th e

q u ite

stru c tu re ,

sim p ly

w hat happened

so m eth in g

c a n b e made

w ould c o n t i n u a l l y

Fed h a d a
in

p re d ic ta b ly

case

was n e c e s s a r y

by m eans w h ic h a r e

n o way t h a t
I

be m ade,

enough to

to

but

My f i r s t

is

in stitu tio n a l

m e d d lin g

was

we h a v e

th a t

record.

th e

q u ite

stro n g

rise s

be broken

we m u s t

not

form ,

now.

deep

go back

so u g h t,

A ct o f

present

th is

else

a

actio n

p ric e

th in k
to

th e y

th in k

fix .

th e y

m ore th a n

I

I

F e d 's

th a t

w as c o n te m p la te d

tim e .

its

rates,

we c a n n o t - - t h e n

o b je c tiv e

th e

w as g o in g

we c a n ' t

money t h a t
th a t

th a t

so m eth in g

w as p l e d g e d

As a r e s u l t ,

A lth o u g h

ex p e ctatio n

w arn w hat e l s e
w hen t h a t

to .

droves.

m em bers o f

stren g th en ,

It

is

th e

my
FOMC

n o t w eaken,

158
th e

le g itim a te

in d ep en d en ce o f

th is

v ita lly

im p o rta n t

arm o f

g o v ern m en t.
In

and o f

th e c e n tr a l
b alan ce

itse lf,

sh o rt-term

an e v e r-c h an g in g
d ev ise
to

a

s u c h a c h a n g e w ould c e r t a i n l y

d ilem m a o f m o n e ta ry p o l i c y ,

tru e

and

lo n g -term

g lo b a l

g lo b a l

currency—a

th a t

d o n ’t

w ork v e r y

m ore s u c c e s s f u l
illu m in ate d
tio n ,
b eh in d

and

its

an e f f o r t
c o n sid e re d

in

fo ste r
th a t




I

th in k

th in k

e sse n tia l

th o se o b je c tiv e s,
lig h t.

of

and

I

th e

to
of

we c a n

once appeared
su b stitu te s

m u d d lin g w i l l
if

FOMC o f

it

its

be

is
func­

reaso n in g

th ru st
hope

so lv e

co n tex t

u n til

m ore e n l i g h t e n i n g

d isc lo su re s
th e

th e

g o ld

th e

acknow ledgm ent by t h e

I

in

th a t

th a t

not

how b e s t

m uddle th r o u g h w ith

Even s o ,

and c a n d id

d e c isio n s.
to

may b e

fu n ctio n

th e d iscu ssio n

by a ca n d id

and by tim e ly

It

have to

w e ll.

is

c o n sid e ratio n s

economy.

f u l f i l l — we may s i m p l y

w h ich

it

of

H .R .

w ill

be

28

is

159

PO SITIO N

PAIM.R

Kkiiiii 1 I M 4 1
I t o u s r O i l i n ' U t iiM in ^

\imi\ :2
‘
\\

.i n lii ii- ^l tin . I M

255
01

.

FOR IMMEDIATE RELEASE

The
Congressional
Black
Caucus
CONTACT: AMELIA PARKER (202) 226-7790
TAMMY HAWLEY (202) 225-4741

MFUME RELEASES NEW FEDERAL
RESERVE HIRING DATA
DIVERSITY AT ISSUE FOR CBC
(Washington, D.C., October 7, 1993) Congressman Kweisi Mfume (D-MD), Chairman of
the Congressional Black Caucus (CBC) and a member of the House Banking Committee, testified today
at a Congressional hearing reviewing proposed reforms ofthe Federal Reserve System. Today's hearing
marked the first of a planned series of four hearings to be held by Henry B. Gonzalez, Chairman of the
House Banking, Finance and Urban Affairs Committee to review the Federal Reserve's accountability
to the public.
Congressman Mfume released new data, from a 1993 study about to be made public, detailing the
status of women and minorities within the Federal Reserve System. The data suggests that the two
groups have little or no say in the conduct of our nation's monetary policy or bank regulation. Noting
that the Federal Reserve Reform Act of 1977 attempted to address the issue of diversity by addressing
discrimination on the basis of race, creed, color, sex, or national origin, Mfume stated, "the continued
lack offemaie and minority representation ui poucy-rnakuigposmons wTihui the Federal Reserve System
alienates tens of millions of Americans from representation and influence. And this is unfortunately
typical for all bank regulatory agencies." (See Charts On Reverse)
The CBC has a keen interest in reforming the Federal Reserve because African-Americans have
a particularly high stake in how monetary policy affects our economy. A recent Wall Street Journal
analysis of Equal Employment Opportunity Commission records revealed that the last recession
seriously eroded equal opportunity for African-American workers. In fact, African-Americans were
the only racial group to suffer a net job loss during the 1990-91 economic downturn. Overall, AfricanAmericans' share of jobs at companies dropped— 36 states and in six of nine major industry groupsin
-for the first time in nine years, wiping out three years of gains. Also, regarding the issue of access to
credit, the Federal Reserve has reported extensive bias against minorities in bank lending. The CBC
feels that bank regulators such as the Federal Reserve would move more vigorously to eradicate this
discrimination if they, themselves, were composed of decision-making personnel more reflective ofthe
country's diversity.
Chairman Mfume delivered eight recommendations on behalf ofthe Congressional Black Caucus
for reforming the Federal Reserve. Major recommendations include:
The Federal Reserve Board's and Federal Reserve Banks' exemptionfrom Title Vll
of the Civil Rights Act o f 1964 should be repealed
Nomination o f the 12 Federal Reserve Bank presidents should be by the President
o f the United States with confirmation by the Senate.
Six o f the nine directors o f each board of directors should be appointed by the
Board o f Governors in Washington and the members should include a wider representation o f the
United States citizens.
A Federal Reserve Reform Commission should be authorized to examine a number
o f areas including the effect o f the regulations of the Board and the operations o f the Board and
the Federal reserve banks on low- and moderate-incomefamilies, including the effect on
availability and costs o f financial services and credit.




160

Federal Reserve Board
Highest Ten Percent Paid Employees

140^

Minority Woman

ToW Women

Minority M«n

Total Mtn

Federal Reserve Board
Lowest Ten Percent Paid Employees

Number of Employees

120f




(Charts were also released for the 12 Federal Reserve Banks)




161
Set

for

A rgum ent O c to b e r

5,

1987

IN THE UNITED STATES COURT OF APPEALS
for the
DISTRICT OF COLUMBIA CIRCUIT

f

RECEIVED
JU L 3 0 1987

No. 86-5692

L- STAl1-^

TH UNITES
E
OF APPFarc

JOHN MELCHER, Member, United States Senate,
Appellant,
v.

FEDERAL OPEN MARKET COMMITTEE, et at.,
Appellees.

On Appeal from the United States District Court
For the District of Columbia

BRIEF FOR APPELLANT

Grasty Crews, II
450 West Broad Street
Suite 303
Falls Church, VA 22046
Tel. (703) 241-5597

162
I N THE UNITED S TA TES COURT OF APPEALS
FOR THE
D I S T R I C T OF COLUMBIA C I R C U I T

JOHN MELCHER,
A p p e lla n t,
No.
FEDERAL OPEN MARKET COMMITTEE e t
A p p e lle e s.

C e rtific a te
of th e

in g

M em ber,

listed

Hon.

D efen d an ts:
T h o m a s M.
H orn,

F ederal

These
C o u rt,

M elc h er,

E.

for

appeared

M em ber,

th e

Boehne,

G erald

th a t

th e

fo llo w ­

b elow :

U n ite d

R obert

C o rrig a n ,

H o n o ra b le Jo h n

c e rtifie s

S ta te s

S en ate.

A n t h o n y M.
P.

John

B la ck ,

J.

S olom on,

K aren

B a lle s,

N.

R obert

H.

F o rre sta l.

re p re se n ta tio n s

in te r

record

S en ate,

Open M a r k e t C o m m itte e ,

E dw ard G.

K eehn,

R obert P.

of

S ta te s

and no a m ic i,

John

T im le n ,

S ila s

B o y k in ,

counsel

U n ite d

p a rtie s,

P la in tiff:

al.

R e q u ire d by R u le 8 ( c ) o f th e G e n e ra l R u le s
U n ite d S t a t e s C o u rt o f A p p eals f o r th e
D i s t r i c t o f C o lu m b ia C i r c u i t

The u n d e r s ig n e d ,
M elc h er,

86-5692

a lia ,

are

may e v a l u a t e

re c u sa l.




/s

made

in

order

p o ssib le

th a t

ju d g es

d isq u a lific a tio n

of
or

th is

163
TABLE OP CONTENTS
C e rtific a te

R eq u ired

by G e n e r a l

R ule

8(c )

..................................................................

T a b le

of

T a b le

i

o f A u t h o r i t i e s ....................................................................................................................................i v

C o n t e n t s ..........................................................................................................................................i i

S tatem e n t of th e Is su e P re s e n te d fo r
S ta t e m e n t P u r s u a n t t o G e n e ra l R u le
R eferences

to

S tatem e n t o f
Sum m ary o f

P arties
th e

and

R u lin g s

R eview and
8 ( b ) ............................................................v i i

...............................................................................

v iii

C a s e ................................................................................................................................... 1

A r g u m e n t ..........................................................................................................................................7
ARGUMENT

I.

The B u c k le y
A.

R u le

In tro d u c tio n

B.

O ath

of

...................................................................................................................................

9

O f f i c e .............................................................................................................................1 2

C.

T reasu ry

B ills

D.

R eg u latio n s

P o lic y

R e la tin g

O pen M a r k e t O p e r a t i o n s

14

The P o s i t i o n

C o n c l u s i o n ..........................................................................................................................................1 9
O w nership o f

A.

R eserve

G e n e r a l .....................................................1 5

Banks

I n t r o d u c t i o n ................................................................................................................................... 2 0

B.

F ederal

C.
III.

F ederal

A tto rn e y

. . . .

E.

The

th e

to

F.
II.

of

................................................................................................... 1 3

R eserve

D is trib u tio n

The S o v e re ig n
A.
B.

Bank

of

"S to ck "

...............................................................................

21

E a r n i n g s ............................................................................................ 2 4

F u n ctio n

of F ederal

R eserve

Banks

I n t r o d u c t i o n ................................................................................................................................... 3 3
"M oney" v s .

"money s u p p ly "

......................................................................................

35

C.

L e g a l T e n d e r ................................................................................................................................... 3 6

D.

B an k n o tes v s .

E.
IV .
V.

The

S o vereig n

" M o n e y " ...................................................................................................3 8
P o w e r o f M oney C r e a t i o n

..............................................

40

J u s t i c i a b i l i t y ..........................................................................................................................................4 7
C o n c lu s io n — The P r e c i s e




R e lie f

-ii-

Sought

..................................................................

49

164
TABLE OF CONTENTS (continued)

A PP EN D IX 1 —
S m ith so n ian
i s s u e d by

MISCELLANEOUS MATERIALS

I n s t i t u t i o n p h o to g ra p h s of
th e f i r s t and seco n d Banks

c i r c u la t in g bank notes
o f th e U n ite d S ta t e s .

E x c e rp t from m in u te s o f f i r s t m e e tin g o f F e d e r a l
C om m ittee a s c o n s t i t u t e d by t h e B a n k in g A c t o f
A nnouncem ent o f f i r s t
F ed eral R eserve A ct

Open M a rk e t
1935 . . . .

use o f a u th o r ity in s e c tio n
to tr a n s f e r e a rn in g s to th e

16 of th e
T reasury

1A1

1A2

.

1A3

Pages 6 e -3 2 and 6 e - 3 3 o f th e B udget of th e U n ite d S ta te s
G o v ern m en t, F i s c a l Y ear 1 9 8 7 , sh o w in g r e c e i p t s from th e
F e d e ra l R e se rv e in co m p ariso n w ith o th e r s o u rc e s of
F e d e r a l r e v e n u e ...........................................................................................................................................

1A5

A PP EN DI X 2 -

CO N S T I T U T I O N A L ,

STATUTORY,

AND REGULATORY P R O V I S I O N S

The C o n s t i t u t i o n - A r t . I , § 8 , c l . 2;
A rt. I , § 10;
A r t . I I , § 2 , c l . 2; A rt V I, c l . 3
.........................................................................2 A l
F ederal

R eserve

A ct,

§§ 4 a n d

12A

(12

U .S .C .

§§

341

and

263)

Code o f F e d e r a l R e g u l a t i o n s , T i t l e 1 2 , C h a p t e r I I ,
S u b c h a p t e r B — F e d e r a l Open M a r k e t C o m m ittee
( 1 2 CFR §§ 2 7 0 . 1 - 2 8 1 . 2 ) .................................................................................................................




-iii-

2A2

2A3

165
TABLE OF AUTHORITIES
The C o n s t i t u t i o n
A rtic le

I,

S ectio n

8,

A rtic le

I,

S ectio n

10,

A rtic le

II,

S ectio n

clau se

5

.........................................................................

35,

36,

43

clau se

1

............................................................................................3 6

2, C la u s e

2

.................................................................................................. 5

S tatu tes
A ct of

Feb.

A ct o f

A p ril

25,
10,

1791,

A ct o f

M arch

3,

A ct of

June

3 S ta t.

1919,

40

1933,

16,

A d m in istrativ e

1 S ta t.

1816,

48

P rocedure

S ta t.
S ta t.
A ct,

1 9 1 ..................................................................................... 4 5
266

........................................................................

45,

46

1 3 1 4 ...............................................................................2 5
1 6 3 ..................................................................................... 2 5
60

S ta t.

237

.............................................................. 1 4

F e d e ra l R eserve A ct
S e c tio n 4 ( f i r s t th r e e p a ra g ra p h s, 38 S t a t . 25 4;
n o t in U .S . C ode)
............................................................................................................................ 3
S e c t i o n 4 ( 1 2 U . S . C . § 3 0 2 ) ............................................................................................ 4 , 5
S e c t i o n 4 { 1 2 U . S . C . § 3 4 1 ) ......................................................................................5 , 1 8
S e c t i o n 5 ( 1 2 U .S .C . § 2 87 )
...................................................................................... 3 , 2 3
S e c t i o n 5 ( 1 2 U . S . C . § 3 0 5 ) .................................................................................................. 4
S e c t i o n 5 ( 1 2 U . S . C . § 3 0 7 ) .................................................................................................. 5
S e c t i o n 6 ( 1 2 U . S . C § 2 8 8 ) .................................................................................................. 2 3
S e c t i o n 7 ( 1 2 U . S . C . § 2 8 9 , 2 9 0 , 3 5 1 ) ........................................ 2 3 , 2 4 , 2 7
S e c t i o n 9 ( 1 2 U . S . C . § 3 2 1 e t s e q . ) ........................................................................ 2 3
S e c t i o n 1 0 ( 1 2 U . S . C . § 2 4 1 ) .................................................................................................. 2
* S e c t i o n 1 2 A ( 1 2 U . S . C . § 2 6 3 ) ............................................................ 2 , 7 , 9 , 1 4
S e c t i o n 1 6 ( 1 2 U . S . C . 4 1 1 e t s e q . ) ............................................... 2 5 , 2 7 , 4 2
T itle

T itle

5, U n ite d S t a t e s Code,
§§ 5 5 1 e t s e q . a n d 7 0 1 e t s e q ............................................................................................... 1 4
§ 3 1 0 6 .................................................................................................................................................................... 1 8
18,

U n ite d

S tates

Code,

§ 474

...............................................................................

42

T itle

2 8 , U n ite d S t a t e s Code,
§ 5 1 9 .......................................................................................................................................................................... 1 8
§ 2403
.................................................................................................................................................................... 1 7

C ases
B ow sher v .

Synar

(see

Synar v .

U n ite d

S ta te s)

B ry a n v . F e d e r a l Open M a r k e t C o m m itte e , 2 35 F . S u p p . 8 7 7
( D . M o n t . 1 9 6 4 ) ..........................................................................................................................................




-iv-

15

166
* B u c k l e y v. Valeo,

7, 8,

9,

10,

C om m ittee f o r M o n e ta ry R eform v . B o ard o f G o v e rn o rs
F e d e r a l R e s e r v e S y s te m , 2 4 7 U .S . A p p . D .C . 4 8 ,
7 6 6 F . 2 d 5 3 8 ( 1 9 8 5 ) ................................................................................ 6 ,

of

th e

9,

10,

C ro w ell v .
J u illia rd

424 U.S.

B enson,
v.

285

G reenm an,

1 ( 1 9 7 6 ) ..........

U .S .

22

110

U .S .

41

11,

15

............................................................

50

( 1 8 8 4 ) ............................................................

36

(1932)
421

11,

.

-

M e lc h e r v . F e d e r a l Open M a rk e t C o m m itte e , 6 4 4 F .2 d 5 1 0
( o n a p p e a l h e r e i n ) .............................................................................................9 ,

15,

19

M e t c a l f v . N a t i o n a l P e tr o l e u m C o u n c i l , 1 8 0 U .S . A pp. D .C . 3 1 ,
5 5 3 F . 2 d 1 7 6 ( 1 9 7 8 ) ..............................................................................................................................

49

Reuss v .
ce rt,

17,

47

17,

47

S y n ar v . U n ite d S t a t e s , 6 2 6 F . Supp. 1 3 74 (t h r e e - ju d g e c o u r t ,
D . D . C . ) , a f f i r m e d s u b n o m . B o w s h e r v . S y n a r , ___ U . S . ____ ,
1 0 6 S . C t . 3 1 8 1 , 9 2 L . E d . 2 d 5 8 3 ( 1 9 8 6 ) ............................................... 4 7 ,

48

Y oungstow n S h e e t

31

B a l l e s , 1 8 9 U .S . A p p . D .C . 3 0 3 , 5 8 4 F . 2 d 4 6 1 ,
d e n i e d 4 3 9 U . S . 9 9 7 ( 1 9 7 8 ) ............................................................

R i e g l e v . F e d e r a l Open M a r k e t C o m m itte e , 2 1 1 U .S . A pp.
2 8 4 , 656 F . 2d 8 7 3 , c e r t , d e n ie d ,
4 5 4 U . S . 1 0 8 2 ( 1 9 8 1 ) ................................................................... 5 , 1 5 ,

& Tube Co.

v.

S aw yer,

343

U .S .

579

11,

8,
D .C .
16,

(1952)

.

.

R eg u latio n s
F ederal

R eg ister,

Ju ly

F ederal

R eg ister,

January

12

10,

1947
30,

.............................................................................................

1973

................................................................................

13
14

CFR P a r t 2 7 0
S 2 7 0 . 1 ...................................................................................................................................................................... 1 4
§ 2 7 0 . 4 ..................................................................................................................................................................... 1 5

1 2 CF R
S 2 8 2 .1

...........................................................................................................................................

2 8 CF R §S 5 0 . 1 5

and

B an k in g and M o n etary S t a t i s t i c s ,

1941-70

Open M a rk e t C o m m ittee"




13,

14

5 0 . 1 6 .......................................................................................................... . 1 8

P u b lic a ti o n s o f th e B oard o f G o v ern o rs o f
F e d e ra l R eserv e S ystem

"T he F e d e r a l

2,

-v-

th e

...................................................................

(P a m p h le t)

...............................................

25
1

167
F e d e ra l R eserve B u ll e ti n
(in g e n e ra l)
................................................................................................................................................ 2 6
May 1 9 4 7
................................................................................................................................................. 2 7 , 2 8
January 1960
...................................................................................................................................................2 9
January 1965
................................................................................................................................................ 3 0
M arch 1 9 8 7
.......................................................................................................................................................3 3
The F e d e r a l
(7 th Ed.
M in u te s
R u les

of

of

R e se rv e S ystem : P u rp o s e s and F u n c tio n s
1984)
................................................................................................................
th e

F ederal

O rg an iza tio n

O pen M a r k e t C o m m i t t e e ,
of

th e

F ederal

V o l.

O pen M a r k e t

1

22,

39,

43

..........................

12

.

13

G overnors
....................................................

33

th e U n ite d S t a t e s G overnm ent, F i s c a l Y ear 1 9 8 7 ,
o f M a n a g e m e n t a n d B u d g e t .....................................................................................

32

S e v e n ty - T h ir d A nnual R e p o rt of th e B oard o f
o f th e F e d e r a l R e se rv e S ystem ( f o r 1 9 8 6 )

C om m ittee

.

M isc e lla n e o u s
Budget of
O ffice

......................................................................................................................

18

th e F e d e r a l C o n v e n tio n o f 1 7 8 7 (Y ale
1911)
................................................................................................................

37

A M o n etary H is to r y o f th e U n ite d S t a t e s , 1 8 6 7 - 1 9 6 0 ,
M ilt o n F rie d m a n an d Anna S c h w a r tz , P r i n c e t o n U n i v e r s i t y
P r e s s , 1 9 6 3 .......................................................................................................................................................

21

H o n . R u t h B a d e r G i n s b u r g , "Som e T h o u g h t s o n J u d i c i a l
A u th o rity to R e p a ir U n c o n s titu tio n a l L e g i s l a t i o n ,"
28 C le v e la n d S t a t e L. Rev. 30 1 (1 9 7 9 )
..................................................................

50

W orks o f

37

57

Comp.

Gen.

444

( 1978)

F a rra n d , R ecords of
U n iv e rsity P ress

A lex a n d e r

H am ilto n

(H .

K ro o s s , D o cu m e n tary H i s t o r y o f
U n ite d S t a t e s (M c G ra w -H ill,

Lodge,

E d .,

1 9 0 3 ) .................................

B an k in g and C u rren cy in th e
1 9 6 9 ) ...............................................................................

37

H o n . C a r l M c G o w a n , " C o n g r e s s m e n i n C o u r t : T h e New P l a i n t i f f s , "
1 5 G a . L . R e v . 2 4 1 ( 1 9 8 1 ) .........................................................................................................

47

"M onetary P o l i c y 's P a y o ff to th e T r e a s u r y ," by P r o f e s s o r
R i c h a r d H. T i m b e r l a k e o f t h e U n i v e r s i t y o f G e o r g i a ,
W a l l S t r e e t J o u r n a l , p a g e 1 8 , D e c e m b e r 2 2 , 1 9 8 6 .................................

34

* C ases or
a ste risk .




a u th o ritie s

ch ie fly

re lie d

-vi-

upon

are

m arked w ith

an

168
STATEMENT OF THE ISSUE PRESENTED FOR REVIEW

W h eth er s e c t i o n
263)

confers

on t h e

such a u t h o r ity
V ale o ,

424

th a t

as

U .S .
any

12A o f

th e

m em bers o f

to

b rin g

1 at

125

a p p o in tee

F ederal
th e

R eserve A ct

F ederal

th e m w i t h i n

(1 2

U .S .C .

Open M a rk e t C o m m ittee

th e

h o ld in g

of

B uckley

sig n ific a n t a u th o rity

pur­

is an O ffic e r of
be a p p o in te d in

th e
th e

[A rtic le

m anner p r e s c r ib e d
C o n stitu tio n ].

by S 2 ,

S tatem e n t P u rsu a n t

T h is
In

case

re:

By o r d e r
request
tio n

v.

<1976) —
e x e rc isin g

s u a n t to th e law s o f th e U n ite d S t a t e s
th e U n ite d S ta t e s and m u st, th e r e f o r e ,

of

§

for

file d
for

June

a w rit

Counsel
in

for
is

th is

2 of

G eneral

b efore

24,

of

or




th is

as

aw are

C ourt under
et

den ied

a l .,

and d is m iss e d

th e
th e

II

of

6(b )

C ourt g ra n te d

co n sid e ra tio n ,

m andam us,

sta y
not

1986,

R u le

th is

Open M a r k e t C o m m itte e ,

ex p e d ite d

gency m o tio n

pending

was p r e v i o u s l y

F ederal

to

c l.

th e

title

No.

86-5374.

th e

d e fe n d a n ts'

d efen d a n ts*
d efen d an ts*

p e ti­
em er­

m oot.
of

any o th e r

any o th e r
co u rt.

-vii-

re la te d

cases

p resen tly

169

I

R eferen ces

S e n a to r M elch er
tric t

C ourt

file d

tif f 's

m o tio n

m o tio n

for

th e

order

d en ied

th e

en tered

th e

made r e f e r e n c e
den y in g

su p p o rtin g

to

th a t

of

th e

w as

in

file d

th e

in

th e

th e

1984,

and

C o rrig a n ,
th e
M.

S olo m o n ,
and

F ederal
T im le n ,

R obert

P.

R obert

F o rre sta l,




th e

C ourt

file d

of

th e

th e

D is­

p la in ­

d efen d a n ts'
ac tio n ;

N ovember

D istric t

o p in io n

is

m o tio n

relev an t

18,

am end

and

1986,

th e

(2)

w h ich

ju dgm ent

of

th e se

orders

510.
are

th e

N ovem ber

b eg in n in g

J .A .

Boehne,

B o y k in ,

B la ck ,

id e n tify in g

and

o p in io n

sh eets.

and
9,

served

lists

K aren N.

lists

K eehn,
them a s

-viii-

June

ap p e aled

B eg in n in g

id e n tify in g

S ila s

1986,
5,

from
at

644

on p ag e
as

20

th ey

No o p i n i o n

18 o r d e r .

file d

at

25

25,

The o p in io n

rep ro d u ced

S u p p lem en t ad v a n ce

E d w ard G.
H.

th e

on p a g e

file d

d ism iss.

S ep te m b er

o p in io n s

co m p lain t,

S ep tem b er

and o rd e r
to

to

th e

Open M a rk e t C o m m itte e ,
R obert P.

th e

or

b eg in n in g

F ederal

reproduced

o rder

d en ied

a lte r

e a rlie r

S e n a to r M elc h er* s

A n t h o n y M.

w h ich

g ran ted

file d

to g e th e r w ith

support

th e

to

d efen d a n ts'

S u p p lem en t,

(1)

and d ism isse d

C ourt

m o tio n

J o i n t A p p en d ix ,

appeared

1986,

R u lin g s

1986.

ru lin g

an d w as p u b l i s h e d
F ederal

25,
of

th e

25,

and

from

ju d g m e n t,

ju d g m en t,

p la in tiff* s

The o p in io n

1986,

sum m ary

D istric t

S ep te m b er

P a rtie s

a p p e aled

S ep tem b er

for

sum m ary
of

has

to

as

on A p r il

d efen d a n ts

H orn,

th em
as

John J .

30,

E.

G erald

a s M em bers o f
d e fe n d a n ts
B a lle s,

a lte rn a te

Thomas

and

m em bers.

170
In view
520,

J .A .

sele cted
th e m a s
tio n
to r

30,
by

th a t

th e

not

D is tr ic t C o u rt's
th e

to

th is

seem

it

id e n tity

p re v a il,
w ill

to

w ill
or

th e

If
R u le

a

of

th e

be

of

n e ith e r

an

o p eratio n
p arties

of

to

(Ju ly

If
p u b lic

th e

never

p u b lic

of A p p ellate
nor an

§ 2,

c l.

ru le s

th e

litig a tio n :
H.

he

some o f
th e

F ederal

seeks

ques­
If

Sena­

Open M a rk e t

reg ard less

if

FOMC)

th e

of

d e fe n d a n ts

appeared

S tern ,

"in fe rio r

2 of

th e

G erald

1987)

nam ed

w ith in
s till

th e

th e
in

m o tio n s

in

th e

R obert

and

how

to

-ix-

by

are

E dw ard G.

B o y k in

now

as

R obert T.

th e

as

is

at

c ite d ,
and

to

th e

P arry,
th is

m em bers.

d efen d a n ts

th e ir

moot o r

m em bers o f

a lte rn a te

ru le s

th e

Boehne,

B la ck ,

d e fe n d a n ts,

tim e

th e

then

P.

am ong t h e

as

w ith in

T here

4 3(c)

sam e

H.

litig a tio n ,

d ism iss

th e

o ffic e rs

m em bers.

m e an in g o f

successors.




p u b lic

m ean in g o f

an d R u le

at

O fficer"

co m p lain t as

in d iv id u a l
th is

but

C o rrig a n ,

and R obert

a lte rn a te

th e

C o n stitu tio n ,

fo llo w in g
E.

w ith in

P rocedure

P rocedure,

one vacancy

any

th e

th e

C iv il

24,

persons

d efe n d a n ts,

file d

but

at

in d iv id u a ls

of

sig n ifican ce .

o ffic er"

R u le s o f

as

o ffic e rs

Supp.

"p riv a te

d e fen d a n ts;

th a n

F o rre sta l

p resu m a b ly

d iv id u al

"a

F ederal

II,

G ary

P.

re lie f

(o th er

a n d T h o m a s M. T i m l e n ,

and R obert
w ritin g

can be

th o se

K eehn,

FOMC,

th e

o th e r

F.

sta tu s

not c le a r,

a g a in st

th e

o f who

"O ffic er"

th is

is

him

of

are

present

any p r a c t i c a l

in ju n c tio n

afford

R u les

A rt.

th e

644

m oot.

th e

F ederal

m e an in g o f

S ila s

be

person

2 5 (d )

an

h o ld in g ,

in d iv id u a ls

litig a tio n

have

sta tu s

issu e

lik e w ise

nam ed

R eserve b a n k s ,"

M elc h er o b t a i n s

th e

are

th e

p a rtie s

does

C om m ittee,

th e

of

are

th e n
o n ly

atto rn e y s
su b stitu te

not
th ey
in ­
have

171
STATEMENT OF THE CASE
T h e F e d e r a l O p e n M a r k e t C o m m i t t e e (FO MC) i s t h e m o s t
im p o rta n t m o n e tary p o lic y -m a k in g body o f th e F e d e ra l
R eserv e S ystem .
I t is re s p o n s ib le fo r th e fo rm u latio n
o f a p o l i c y d e s ig n e d t o p ro m o te eco n o m ic g ro w th , f u l l
em p lo y m en t, s t a b l e p r i c e s , an d a s u s t a i n a b l e p a t t e r n of
i n t e r n a t i o n a l tr a d e and p a y m en ts.
T h e FOMC m a k e s k e y
d e c is io n s r e g a rd in g th e co n d u ct o f open m ark et o p e ra ­
t i o n s - p u r c h a s e s an d s a l e s o f U .S . G o v ern m en t and
F e d e r a l A gency s e c u r i t i e s - w h ich a f f e c t t h e p r o v is io n
of re s e rv e s to d e p o s ito ry in s t i t u t i o n s and, in tu rn ,
th e c o s t an d a v a i l a b i l i t y o f money an d c r e d i t in th e
U .S . econom y.
T h e FOMC a l s o d i r e c t s S y s t e m o p e r a t i o n s
in fo re ig n c u rre n c ie s
Thus does
S ystem

th e

ac know ledge

B oard of

and d e s c rib e

Open M a r k e t C o m m itte e
fo rm u la tin g

th e

G overnors

in

m o n e tary

th e

th e

of

dom inant

c ritic a lly

p o lic y

of

th e

th e

F ederal

R eserve

ro le

th e

im p o rtan t
U n ite d

of

F ederal

fu n c tio n

S ta te s

of

G overnm ent.

1.
T h i s i s t h e o p e n i n g p a r a g r a p h , s e t i n b o l d f a c e t y p e , o f a pam­
p h l e t e n t i t l e d "T h e F e d e r a l Open M a r k e t C o m m itt e e ," w h ic h i s t h e
se c o n d in a s e r i e s on th e s t r u c t u r e o f th e F e d e r a l R e s e rv e S y s t ­
em .
As an o f f i c i a l p u b l i c a t i o n o f th e B oard o f G o v e rn o rs, i t h as
b een re v ie w e d an d a p p ro v e d by th e P u b l i c a t i o n s C o m m ittee, c o n s i s t ­
in g o f th e s e n i o r A s s i s t a n t to th e B oard in th e O f f ic e o f B oard
M e m b e rs, t h e G e n e r a l C o u n s e l (w ho i s a l s o G e n e r a l C o u n s e l t o t h e
FOMC a n d a p p e a r e d o f c o u n s e l f o r t h e d e f e n d a n t s i n t h e c o u r t b e ­
lo w ) , t h e S t a f f D i r e c t o r f o r M an ag em en t, t h e D i r e c t o r o f t h e D i v i ­
s i o n o f C o n s u m e r a n d C om m unity A f f a i r s , t h e D i r e c t o r o f t h e D i v i s ­
i o n o f R e s e a r c h a n d S t a t i s t i c s (w ho i s a l s o l i s t e d a s " E c o n o m i s t "
o n t h e s t a f f o f t h e FOM C), a n d t h e D i r e c t o r o f t h e D i v i s i o n o f I n ­
t e r n a t i o n a l F i n a n c e (w ho i s a l s o l i s t e d a s " E c o n o m i s t ( I n t e r n a ­
t i o n a l ) " o n t h e s t a f f o f t h e FOM C).
The nam es o f t h e m em bers o f
th e P u b l i c a t i o n s C o m m ittee a r e l i s t e d on t h e t i t l e p a g e o f th e
m o n th ly F e d e r a l R e s e rv e B u l l e t i n .
T h e i r o f f i c i a l p o s i t i o n s on
th e s t a f f o f th e B oard o f G overnors and t h e i r p o s i t i o n s , i f any,
on t h e s e p a r a t e s t a f f o f t h e F e d e r a l Open M a rk e t c o m m itte e a r e
show n a t t h e e n d o f t h e s t a t i s t i c a l s e c t i o n (w h o se p a g e n u m b e rs
a r e p r e f i x e d w ith th e l e t t e r "A ") a t th e end o f th e B u l l e t i n .




1

172
T h e FOMC h a s
of

G overnors

as

The

itse lf

fo llo w s:

F ederal

sep arate

and

d escrib ed

its

in d e p e n d e n c e

of

th e

B oard

2

Open M a rk e t C o m m ittee

in d ep en d en t

sta tu to ry

("FO M C ")

body w ith in

is

a

th e

F e d e ra l R eserv e S y stem .
In no r e s p e c t i s i t an a g e n t
o r " s u b d iv is io n " o f th e B oard o f G overnors of th e
F e d e ra l R eserv e S ystem . . . .
Of

its

tw elv e

G o v e rn o rs,3 a l l
a p p o in ted

by

accordance

m em bers,

th e

w ith

seven

whom a r e

of

o ffic e rs

P re sid e n t,
se c tio n

10

are

su b je c t
of

th e

th e
of

to

m em bers o f

th e

U n ite d

S enate

F ederal

th e

B oard of

S ta te s

who a r e

c o n firm a tio n ,

R eserve A ct

(12

in

U .S .C .

§ 241).
The
th e

o th e r

boards

Banks

from

p re sid e n ts
pow er
cer
w ill

2.

in

of
be

of

m em bers

d ire c to rs

of

am ong t h e

24

and

v ic e

th e

th e

fiv e

firs t

th e

B oard

U n ite d

e le c te d

to

th e

of

e le c te d
tw e lv e

persons

S ta te s
th e

are

for

a

reg io n al

who,

at

any

p re sid e n ts

of

such

G overnors
to

or

d eterm in e

FOMC.

te rm

For each

of

one y e a r

F ederal

g iv e n

R eserve

tim e,

banks.

A

are

T here

any

o th e r

agency

who,

am ong

th o se

e le c tiv e

by

m em ber,

or

th e
is

no

o ffi­

e lig ib le ,
an

a lte r­

1 2 CFR § 2 8 2 . 1

3.
S ectio n
s e c t i o n 12A
co m p o sitio n
C o d ified a t
o n ly once,
tio n to th e
th e F e d e ra l

2 0 5 o f th e B an k in g A ct o f 1 9 3 5 , 49 S t a t . 7 0 5 , am ended
of th e F e d e ra l R eserve A ct to p ro v id e f o r th e p re s e n t
a n d p o w e rs o f t h e F e d e r a l Open M a r k e t C o m m itte e .
12 U .S .C . S 2 6 3 , th e s e c t i o n h a s s i n c e b e e n am ended
in 1 9 4 2 , 56 S t a t . 6 4 7 , to li m it e l i g i b i l i t y f o r e l e c ­
FOMC t o t h e p r e s i d e n t s a n d f i r s t v i c e p r e s i d e n t s o f
R eserve B anks.

4.
As p r o v i d e d i n s e c t i o n 1 2 A ( a ) o f t h e F e d e r a l R e s e r v e A c t ( 1 2
U .S .C . § 2 6 3 ( a ) ) , o n e m em ber i s e l e c t e d b y t h e b o a r d o f d i r e c t o r s
o f t h e F e d e r a l R e s e r v e B a n k o f New Y o r k ; o n e b y t h e b o a r d s o f t h e
B o s to n , P h i l a d e l p h i a , a n d R ichm o nd b a n k s ; o n e b y t h e b o a r d s o f
th e C le v e la n d and C h ic ag o b a n k s ; one by th e b o a rd s o f th e A tla n ­
t a , D a l l a s , a n d S t . L o u i s b a n k s ; a n d o n e b y t h e b o a r d s o f t h e M in­
n e a p o lis , K ansas C ity , and San F ra n c is c o b a n k s.




2

173
n ate

serve

in

h is

sam e p o o l

th e

to

of

elig ib le

The F e d e r a l
ch artered

by

th e

firs t

th re e

A ct

(38

how ever,
issu e d

has

by

ent

from

but

one

be

in g

no e x a c t

of

fra c tio n

rig h ts

not

purchased

S ystem ,

for

s ta te
tim e
th e

is

m ust b e a r

th e

of

fix e d

sam e way

from

to
be

Its

sto ck

and
or

ra tio

or

fo r

n a tio n a l

th e

case

of

very

h av in g

a n a lo g u e
an

w o u ld

extrem ely

lim ited

of

th e

v o t­

is s u in g
It

in

R eserve

th e

F ederal

(co m m e rc ia l

g o v ern m en t),
under

am ount h e ld

th e

d iffe r­

h y p o th e cate d .

ch artered
th e

3% t o

se c u ritie s

is

carry in g

banks

F ederal

" s to c k ,"

co rp o ratio n

co n tro l

of

R eserve

of

It

clo se st

m e m b ersh ip

e ith e r

ty p e s

c o n stitu tin g

tra n sferre d

of

F ederal

so -called

secto r.

o w n ersh ip

of

th e

c o rp o ra tio n s

under a u th o rity

th e

an o r d in a r y

(co m m erc ial b an k s
In

th e

bank ing

T h e ir

ca p ita liz a tio n

co m p u lso ry

a

4 of

p riv a te

p referred

a u th o rity

banks

form ,

C ode).

a c o n d itio n

under

sta te

sectio n

o u tsta n d in g .

cannot

in

C urrency

of

sto c k "

to ta l

g o v ern m en ts).

ca p ita l

m ust

banks

and o p tio n ­
au th o rity

at

and

any

of

g iv e n

su rp lu s

of

m em ber b a n k .'*
It

back

It
as

th e

in

U .S .

in

a m o u n tin g

w h ich

ch artered

Banks a r e ,

in

sto ck

of

e le c te d

c o u n t e r p a r t am ong

"c a p ita l

c o rp o ra tio n .

al

not

c o rp o ra tio n s
th e

also

C o m p tro lle r of

254;

class

is

bank o f f i c e r s .

paragraphs

a n o n p articip atin g

sm all

be

R eserve

th e

S tat.

absence

its

conveys
cost

if

no f i n a n c i a l
a n d w hen

it

in te re st
is

beyond

surren d ered

th e
to

rig h t

th e

to

F ederal

re c e iv e
Re­

5.
S e c t io n 5 o f th e F e d e r a l R e se rv e A c t ( 1 2 U .S .C . § 2 8 7 ) r e ­
q u i r e s m ember b a n k s t o " s u b s c r i b e " f o r s t o c k i n t h e F e d e r a l R e­
s e r v e Bank in w hose d i s t r i c t t h e y a r e l o c a t e d in a n am o u n t e q u a l
t o 6% o f t h e m e m b e r b a n k ' s c a p i t a l a n d s u r p l u s , b u t a s t h e A c t
has been a d m in is te re d e v e r s in c e i t s e n a c tm e n t in 1 9 1 3 , o n ly o n e h a lf of th e s u b sc rip tio n is a c tu a lly p u rch ased .




3

174
serve

B ank w h ic h

issu e d

d iv id e n d

of

6% p e r

am o u n ted

to

le ss

B anks,

m ore

th a n

re c tly

in to

th e

of

percent

one

Banks be
ury

at

v o te

any

of
on

a c tio n s
w o u ld

fo r

w h ich

th e
in

sto c k h o ld e rs
The

a p p o in ted

are

by

a p p o in tees

by

its

be

board

th e

case

ta k en

of

a

te rm

6.

th e

d iscu ssio n
4 and

of




th e
th e

in

or

su b jec t

to

th e

by

sta tu te

or

by

by

th e

one as
th a t

ex e c u tiv e
w ith

in fra
th e

o ffic e r,

y ears.

at

pages

F ederal

4

have

th e

T reas­

th e

no r i g h t

The k i n d s

th e

p riv a te

approval
th e

to
of

secto r

of

B oard o f

th e
G over­

sto c k h o ld e rs

firs t

25

of

one

a F ederal

and s h a ll

approval
The

of
R eserve

are
of

its

c h a irm a n .7

p re sid e n t

th e

to

w h ich d e s i g n a t e s

v ic e

th e

a ll
th e

m em bers o f

R eserve B anks.

c o rp o ra tio n s

and d i ­

fractio n

B o a rd o f G o v e rn o rs .* *
n in e

sto ck h o ld ers

G overnors,

fiv e

5 of

th e

of
of

sh o u ld

tra n sfe r

not e lecte d

and

ch ief

for

See

of

d ire c to rs,

ernors,

7.
S e c tio n s
and 3 0 5 ) .

of

by

p ro v id e s

its
of

so -c a lle d

affairs

ch a irm an

six

su rp lu s,

have

R eserve

im m e d ia te ly

to

for

fix e d

d iv id en d s

F ederal

The r e m a in in g

T reasury

d ire c tio n
of

th e se
th e

p aid

added

th e

a v a ila b le

e le c tio n

B oard

The s t a t u t e
B ank s h a l l

by

been

in to

is

d ire c to rs

th e

as

has

p aid

a sta tu to rily

of

T reasury.

co n tro lle d

th re e

earn in g s

have been

and

th e
be

to

recen t y ears,

th e

w h ich

tim e

th e

rig h t

S ta te s

be

d ire c to rs,
any o f

In

earn in g s

e a rlie r

ty p ic a lly

nors.

98% o f

also

and a

1% o f

U n ite d

liq u id a te d ,

Except
board

annum .

th a n

of

w h ic h w o u ld b e

it,

of

th e

v ic e

th ro ugh

R eserve A ct

be

R eserve

a p p o in ted

B oard

of

p re sid e n t

Gov­
is

to

32.
(12

U .S .C .

SS

302

175

be a p p o in te d
sa la rie s
su b jec t

in

w ith in
to

th e

On A p r i l
a c tio n
the

in

fiv e

of

th e

or

v ic e

are

of

fact

ap p o in tm e n t
in

th e

co n tin u e

a u th o rity .

454

G overnors.

from v o t i n g

C o m m itte e ,^
ro le

in

th e

§ 2,
by

cl.

th e

w ith o u t

th e

2 of

be
to

and

th a t

of
th e

fiv e

1984,
F .2 d

of

eq u ita b le

th a t

th e

R eserve

A ct

9.

F ederal

R eserve

A ct

th e

10.

C o m p lain t,

P rayer

for

R e lie f,

J .A .

11.

C o m p lain t,

% 26,
%

27,

J .A .

9.




being

th e y

do,

f o r w hose

its

th e

6,

FOMC

ju risd ic tio n

fiv e

R eserve

Bank

sta tu s.

alte rn a te s.
arg u in g

th a t

ce rt,

th e
They

R ie g le

d en ied ,

be d ism isse d

in

(12

U .S .C .

§ 341,

(12

U .S .C .

§ 307).

9.

as

th e y

m ust be o b ta in e d

d isc re tio n .

F ederal

5 of

is

C o n stitu tio n .

873,

case

8.
S e c tio n 4 of th e
p aragraph " F if th ." )
S e c tio n

he

Open M a r k e t C o m m itte e ,

th e ir

656

req u ires

ch airm an

w o u ld p e r m it

n o n v o tin g

F ederal

w hen

S ta te s

th e

29,

e x e rc ise

d ism iss

(1 9 8 1)

an

d ire c to rs

as

th a t

S enate

d im in u tio n

reduced

m em bers,

th e

on J u n e

1082

file d

a p p o in tm e n t p ro c e s s

p la in tiff

c h a n g e w o u ld

are

th e

because
U n ite d

and c o n se n t o f
II,

se rv in g

co n ten d in g

fu n c tio n s^
of

boards

or

F e d e r a l Open M a rk e t C o m m itte e ,
U .S .

q

of

w o u ld be

to

The

d ire c to rs,

th e

fu n ctio n

a m o tio n

of

of

by

sought

p riv a te -c itiz e n

file d
v.

B oard

as o ffic e rs

The d e fe n d a n ts
fiv e

board

FOMC e l e c t e d

th e se

The o n ly

its

p

p ro h ib itin g

Banks

ad v ice

re p re se n ta tiv e s

by

te rm .

in ju n ctio n

w ith A r t.

to

th e

sam e

an

th e

in ju n c tio n

th e

set

c o n stitu tio n a l

ac tin g

for

S e n a t o r J o h n M e lc h e r o f M o n tan a

th e

perform

accordance
The

to

h is

and

C ourt seek in g

R eserve
of

are

of

1984,

m em bers o f

th ey

bank

D istric t

ch a irm an

as
in

each

30,

th e

sam e m a n n e r,

approval

F ederal

d ep riv ed
long

th e

th e

or

176
On J u l y
ju d g m e n t,

30,

but

1984,

S e n a to r M elch er

on S e p te m b e r

sp o n te,

file d

an

order

of

C ourt

in

28,

C o m m ittee

th is

G overnors

of

th e

1984,

stay in g

F ederal

th e

file d

th e

a m o tio n

D istric t

a c tio n

pending

f o r M o n eta ry R eform v .

R eserve

S ystem ,

D istric t

766

C o u rt's

F .2 d

June

5,

for

C o u rt,
th e

sum m ary
sua

d e c isio n

B oard o f
538

(D .C .

C ir.

1 985).
In
th e ir

response

d ism iss,

of

ju stic ia b ility

th a t

was d e n i e d ,

mus s e e k i n g

(1)

fo r

a c tio n

an d on

th e

The
an ts,

and

ju d g m en t,

th e

th e

be

86-5374

3,

1986,

sum m ary

th e

gro u n d

after

th a t

th e

d en ial




p la in tiff

of

re

to

in

of

F ederal

lacked

m o tio n

th is

a m o tio n
th e

sta te

sum m ary

h is

6

a p p e a l.

a p e titio n
d en ial

file d

(2 )

fa ilu re

file d

In

1986

When

for
th e ir

m anda­
m o tio n

Open M a r k e t

1 986).

d efen d a n ts

g ran ted

S e n a to r M elc h er

file d

w as d e n ie d ,

for

of

C o u rt's

ju d g m e n t and

C ourt

th e

th e n

24,

of

in te rlo c u to ry

D istric t

(Ju n e

d ism isse d

D istric t

for

d en ial

sought c e r tif ic a tio n

d efen d a n ts

d efen d a n ts

of

The p e t i t i o n
No.

On J u l y
asked

th e

review

d ism iss.

C o m m ittee,

th e

th e

to

q u estio n

th e

to

to

m o tio n

a cause

to

w h ich

of

th e y

th a t

a c tio n

sta n d in g .

ju d g m e n t

a p p e a l.

in

a lte rn a tiv e

a lte r

to

th e

defend­

o r am end t h e

177
SUMMARY OF ARGUMENT
E m p lo y in g
sec tio n
to

th e

12A o f
F ederal

th e

tra d itio n a l

th e

F ederal

is

under

on

it

is

th e

of

co n tro l

n e c e ssa rily
V ale o ,

e x e rc isin g

sig n ific a n t

424

of

an

O fficer

in

th e

C la u s e ],"

th e re fo re

P art

I of

case.

The

th e

ex p e cted

shown t o

have been

its

ta k e n

firs t

of

1935,

it

is

shown

a governm ent

any o t h e r
arg u m en ts
The

of

th e

th e o ry .
advanced
D istric t

U n ite d

a p p e lla n t's

to

flo w

fu lly

after
to

from

its

by

th e

conferred

of

and

m em bers o f

m a tte r

la n g u ag e
in

of
of

th e

th is
le g a l

th e

th e refo re

FOMC.

a n a ly sis

sta tu te

p ra c tic e .

b eg in n in g
th e

as

tru e

such,
of

D ep artm en t o f

as

its

FOMC c a n b e v i e w e d

not

for

"b a la n c e "

w ith

but

w ith

B an k in g A c t

th e

th eo ry

a c tio n s

th a t

ta k e n

and

Ju stic e .
on

th e

a governm ent ag e n cy ,

7

ac­

in c o n s is te n t w ith

sp e c ific

d ec isio n

of

are

S p e c ific

under

c o n siste n t

of

th eo ry ,

FOMC,

is

U n it­

A p p o in tm en ts

[th e

m u st,

th e

S ta te s,

a

in

any a p p o in te e
la w s

th e

th e

a

th e

agen­

e n u n c ia te d

"th at

to

th e

th e

by

made b y

actin g

same

ru le

g ran ts

e sta b lish m e n t

C ourt based

e ffe c tu a tin g

as

th e

n o t o n ly

agency

125,

th e

e x e m p lifie d

be

The

to

au th o rity

The

law ,

over

S in c e

A rgum ent p r e s e n t s

w h ich ,

cle




at

§ 263)

a u th o rity

B anks.

pursuant

ap p lic a b le

U .S .C .

th e

th e m .

(1976)

and announcem ents

m e etin g
are

1

(12

R eserve

on

ad m in istra tiv e

p le n a ry

m anner p r e s c r ib e d

in fe ren ces

w ould be

tio n s

A ct

of

m em bers,

a u th o rity

is

th e

its

U .S .

be a p p o in te d
is

F ederal

conferred

B uckley v .

ed S ta te s

R eserve

Open M a r k e t C o m m itt e e

open m a rk et o p e r a tio n s
cy

la n g u a g e

co n tro l

as

p rem ise
but as

th a t
a v e h i­

betw een p u b li c

and

178
p riv a te

elem en ts.

C ongress

could

le y

ru le

s till

th e

s o -c a lle d

escape

from

resen t

an

of

U n ite d

th e

Even

a p p lie s
balan ce

th e

e x e rc ise

m old
show n

elem en t

in

th e

al

is

shown

w h ich

is

reig n ty

P art
of

th e

th e

th e

IV o f

w h ich
upon

he

th a t

th e

and

b o th

of

th e

F ederal

C o u rt's

a n a ly sis)

s o -c a lle d

are

fu n ctio n
by

com m ercial

th e se

in

c o n tra sts
Reuss

a ttrib u ta b le

in

th e

th e

co m p lain s,

of

th e

at

and w ill
of

may s e e

and

th e

II

of

(th e

and

banks,

rep­

th e

law s

th e

th e

A rgu­

"p riv ate "
th e

in

F eder­

P art

and

th e

f it

to

III,

th e
of

one

sove­

ap p lic a tio n s

and a r g u e s

th a t

u n d ersta n d in g
stro n g ly

of

in

th e

favor

b ar.
a d em o n stratio n

fu lly

rem edy

so w ith o u t

such
make.

8

d iffe rin g

m ilita te s

le g isla tu re

p en d in g

an e x e r c i s e

a ch an g in g
th a t

w ill

do

is

S ynar,

A rgum ent w ith

p la in tiff

fu n c tio n




to

pow ers

case

FOMC,

to

no

ac tiv ity .

A rgum ent

th e

of

C o m m ittee

owned by

sto c k h o ld e rs ,

of

FOMC f i t s

P art

Banks

th a t

Buck­

th e re fo re

pursuant

In

R eserve

is

th e

th e

th e

elem en ts

th e re

a c tio n s

governm ent agen cy.

p rim a ry

p re ro g a tiv e s

FOMC t o

because

c o n tro lle d

th e

by

case,

g o v e rn m e n ta l,

how ever,

a b alan ce,

au th o rity

th e ir

V co n c lu d es

le g isla tu re

th is

a c c e p te d ,

of w h eth e r

d o c trin e
is

is

such

reg ard less

sep aratio n

sought

th e

th e

of

a

th e

a

p la in tiff

P art

th e

not

d iffe re n c e

re lie f

of

th a t

p rem ise

co n stru c t

"sig n ific a n t

th a t

not

rip e n e ss

d o c trin e
of

of

d ire c tly
and

of

D istric t

g o v ern m en t,

it

in
are

S ta te s ,"

tra d itio n a l
is

th e

co n c lu sio n

m e n t,

it

if

th e o re tic a lly

in

or

fu rth e r

th e

a n y way

im p a irin g
changes,

th a t

in ju ry

th e
of

tre n c h in g
th e
if

a b ility
any,

as

179
A R G U M E N T
I.

THE BUCKLEY RULE
A.

The Suprem e
m ine w h e th e r
th e

U n ite d

relev an t
B uckley

h o ld e r

th e

p re sc rib e d
any

S tates

of

g iv e n

a

V ale o ,

424

We t h i n k

procedure.

U .S .

th a t

1

th e

The

(1976)
te rm

fu n c tio n a l

p o sitio n

who m u s t b e a p p o i n t e d

c o n stitu tio n a l
v.

In tro d u c tio n

C ourt has

at

in

is

te st

an

125

w ith

of
th e

was e x p l i c i t ,

and

"O ffic e rs

d eter­

o ffic e r

accordance

court

to

of

126:
th e

U n ite d

S ta te s " a s used in A r t. I I , d e fin e d to in c lu d e " a l l p e r ­
s o n s who c a n b e s a i d t o h o l d a n o f f i c e u n d e r t h e g o v e r n ­
m en t" in U n ite d S t a t e s v . G e rm a in e , s u p r a , i s a te r m
in te n d e d to have s u b s t a n ti v e m e an in g .
We t h i n k i t s
f a i r im p o rt i s t h a t any a p p o in te e e x e r c i s i n g s i g n i f i ­
c a n t a u t h o r i t y p u r s u a n t t o th e la w s o f t h e U n ite d
S t a t e s i s an O f f ic e r of th e U n ite d S t a t e s , and m u st,
th e r e f o r e , be a p p o in te d in th e m anner p r e s c r ib e d by S
2, c l. 2 of th a t A rtic le .
The

sta tu te

a u th o rity

w h ich

at
is

issu e

open m arket o p e ra tio n s
of

th e

F ederal

in

th is

n o t m e rely
of

F ederal

R eserve A ct

litig a tio n

sig n ific a n t,

(12

R eserve

U .S .C .

S

v e sts

but

in

to ta l,

banks.

26 3(b ))

th e

FOMC

over

S ectio n
p ro v id e s

th e
12A (b )

as

fo llo w s:

c lin e
14
of

(b )
to

of t h i s A ct e x c e p t in a c c o rd a n c e w ith th e d ir e c t i o n
a n d r e g u l a t i o n s a d o p t e d b y t h e C o m m i t t e e ...........................

D e sp ite
d e c lin e d
C o m m ittee
w ill

No F e d e r a l R e s e r v e b a n k s h a l l e n g a g e o r d e ­
engage in o p en -m a rk e t o p e r a t io n s u n d e r s e c t io n

to

th is
app ly

th e

d isc u ss

in

sta tu to ry

B uckley

f o r M o n eta ry

ru le ,

re ly in g

R eform a n d B u c k le y

C ourt

sta te d

in

33)—




sta te m e n t,

th e

D is tr ic t. C ourt

on q u o t a t i o n s

itse lf,

from

w h i c h we

th a t o rd er.

The D i s t r i c t
(J .A .

p la in

9

n o te

26,

644

F.

Supp.

at

523

180

I

M oreover, as th e C o u rt
" i n no way e x e r c i s e [ s ]
[c i ta t io n o m itte d ]
W ith
C o u rt's

all

does

B uckley

before

C ourt

resp ect,

q u o ta tio n

d iscu ssin g
issu e

due

sa id ,

th is
766

as

F .2 d

we d o n o t b e l i e v e

ju stic e
it

C ourt

C o n seq u en tly ,

o f A p p e a l s h a s s a i d , t h e FOMC
d i r e c t g o v ern m en tal a u t h o r i t y ."

in

at

to

th is

p ertain s

to

C o m m ittee

th a t

C o u rt's

stan d in g

th e

D istric t

o p in io n .
to

sue,

A fte r
o n ly

R eform ,

f o r M o n eta ry

th e

th is

543-44--

we c o n c l u d e

th a t

litig a n ts

have

stan d in g

t o c h a l l e n g e th e a u t h o r i t y o f an ag en cy on s e p a r a t i o n o f-p o w e rs g ro u n d s o n ly w here th e y a re d i r e c t l y s u b je c t
to th e a u t h o r i t y of th e ag en cy , w h eth e r such a u t h o r ity
i s r e g u l a t o r y , a d m i n i s t r a t i v e , o r a d j u d i c a t i v e in n a t ­
u re .[ fo o tn o te o m itte d ]
In th e p re s e n t c a se , i t is
c l e a r t h a t t h e FOMC a n d t h e F e d e r a l R e s e r v e S y s t e m
n o way e x e r c i s e d i r e c t g o v e r n m e n t a l a u t h o r i t y o v e r

in
th e

a p p e lla n ts.
We t h e r e f o r e c o n c l u d e t h a t t h e B u c k l e y
p r in c ip le f a i l s to su p p o rt th e a p p e lla n ts ' s ta n d in g
th e p re s e n t c a s e .
It

is

o b v io u s

from

row b u t v i t a l l y
ex e rc ise s
banks,

th e

th e
to

it

is

in

law s

D istric t
th e

of

C ourt

not

U n ite d

rise

to

sta n d in g

to

C la u se
or




its
over

th a t

th is

w ith in

th e

own j u r i s d i c t i o n ,
th e

F ederal

from a f a i r

th a t

of

th e

"ex ercisin g
S ta te s ,"

agree,
to

th a t

th o se

a d ju d ic a tiv e "

to

sta tu te

sa id

th e

FOMC

R eserve

q u o ta tio n

C ourt

nar­

from

n o th in g

to

case.

th e

A p p o in tm en ts

of

o b v io u s

R eform

are

a d m in istra tiv e ,

th e

fie ld

reco g n itio n

seem s

of

au th o rity

eq u a lly

th a t

ap p aren t

d e fe n d a n ts
th e

im p o rtan t

f o r M o n e ta ry

co n trary
In

w ords

a d m in istra tiv e

and

C o m m ittee

th e

in

sue

on

th e

of

sig n ific a n t
th e

B uckley

au th o rity
of

th e

lim its

w hose
is

persons

argum ent

a u th o rity

d efen d a n ts

o ffic e rs

part

10

w eakness

argue,
th e

pursuant
and

in

as

th e

am b it of

"re g u lato ry ,

such

th a t

to

g iv e

th e p r iv a te

181
secto r

who a r e

644

Supp.

F.

d ire ctly

at

H ow ever,

520,

in

a ffe c te d

J .A .

30,

B u ck ley v .

by

th e

its

ex e rc ise .

D istric t

V ale o ,

supra,

C ourt
424

In

n o te

10,

sa id —

U .S .

at

139,

96 S .C t . 6 9 1 , th e Suprem e C o u rt n o te d t h a t when a f u n c ­
t i o n i s " s u f f i c i e n t l y rem oved" fro m th e a d m i n i s t r a t i o n
and e n fo rce m en t of th e p u b lic
in g i t need n o t be an o f f i c e r
L ike

th e

excerpt

R eform o p in io n
tio n
in

th e

al

Suprem e

E lectio n s

C ongress.
be

n o te d

from B u ck ley

from
supra,

is

C o u rt's

lim its

of

th e

th e

case.

th e

b rin g

The

first
in

eig h teen th
h is

d u tie s

req u irem en ts

w o u ld b e u n u s u a l
in

of

C la u se

th e

w ith in

th e

C la u se

is

th e

C o n stitu tio n a l

To j u s t i f y
C o u rt's

in h e re n tly
m arket
ues.

or

its

is

th e

th a t

th e
could

o u te r

th is

is

not
It

and p ro b ab ly

th e

N eith er

to

T h e re w as no

do a n y th in g

w h ich

to

ap p ly

th e

a sse rts

g o v ern m en tal

th is

th e

to

F eder­

"A m b a ssa d o rs."

are

n o r anyw here

re p e a te d ly

but

w h eth e r




class

to

th e

C la u se .

clear

c e n tu ry

of

fu n c tio n s

FEC d e f i n e d

m e n tio n s

appears

in fo rm atio n

th o se

" O ffic e rs ."

m akes

q u o ta ­

im p o ssib le

w h ic h w o u ld

d e fe n d a n ts

in

th e

else

is

co n ten d

d e b a te s
th e re

of

th e

p o sitio n .

refu sal

ex c lu siv ely

o p eratio n s,
One

th a t

o p in io n

it

th a t

th e

It

fu n c tio n s

p ro v id e

lim ite d .

C o n v en tio n
for

f o r M o n eta ry

rem o v ed "

A p p o in tm en ts

am bassador

o ffic e

support

th e

tw e n tie th

f o r an

A pp o in tm en ts

tric t

th o se

not
of

itse lf

o ffic e rs

the

slig h te st

of

sim p ly

who w e r e

o th e r

The A p p o in tm e n ts
th e

"su ffic ie n tly

c o u r t w as m a k in g c l e a r

th a t

C o m m ittee

and o u t- o f - c o n t e x t.

d iscu ssio n

C om m issio n w h ic h

The

C o u rt's

th e

tru n c a te d

perform ed by p erso n s

su g g estio n

th is

la w , th e p e rs o n p e rfo rm ­
o f th e U n ite d S t a t e s .

asse rtio n

conduct

1
1

of

a

B u ck ley
th a t

about

th e re
th e

confuses
g iv e n

ru le ,
is

th e

n o th in g

conduct of

tw o d i s t i n c t

fu n ctio n

is

D is­

openiss­

c o n sti­

182
tu tio n a lly
th e

co m m itted

reg u la tio n

fic a n t

is

th a t

g o v ern m en tal

o p eratio n s
p urely

of

of

th e

F ederal

rem ain d er of
th a t

th o rity ,
been

very

th e
but

th e

fu n c tio n

R eserve

P art

I

th a t

much aw a re

th is

th e y

th a t

th e

have

are

an

of

th e ir

th e

a u th o rity

e ffe c tiv e

when
of

co n scio u sn e ss

th e y

th e

w ere

of

m ost

3.

of

th e
have

made

we w i l l

p art

of

a

o p e ra tio n s
it

so.

In

d em o n strate

not
au­

Ju stic e

have

so.

th e

"sig n i­
m arket

g o v ern m en tal

D ep artm en t o f
done

w h eth e r

open

th o se

e x e rc ise d

m em bers o f

O ath
th e

at

th e ir

aw are

u n an im o u sly

of

th e

of

O ffice

FOMC o f

very

B anking A ct of

fre sh ly

th e y

S e c tio n

th e

of

th e

C ongress has

arg u m en t,

and

was e v i d e n t

d ate

C ongress,

of

is

in se p a ra b le

B.
The

o th e r

ex e rc ise

th e

re g u latio n

a c tu a lly

th ey

th e

W h e th er o r n o t

because

of

d e fe n d a n ts

and

in v o lv es

banks

fu n c tio n ,

fu n ctio n

also

g o v ern m en t,

a u th o rity ."

g o v ern m en tal

a g o v ern m en tal

o n ly

to

firs t

1935.

12

th e

m e etin g
At

th e

u n d ersta n d in g

ad o p ted

th e

O a th — E a ch m ember o f

th e

n atu re
after

tim e

and

in te n t

fo llo w in g b y -law :
F ederal

Open

M a r k e t C o m m itte e a n d e a c h a l t e r n a t e s h a l l t a k e t h e same
o a t h o f o f f i c e a s t h a t r e q u i r e d by th e C o n s t i t u t i o n f o r
o f f i c e r s of th e U n ite d S ta t e s .
The m in u te s

of

th a t

m e etin g

fu rth e r

sta te 1^

th a t b efore

th e

day

w as o u t —
The form o f o a t h o f o f f i c e as r e q u i r e d by S e c tio n
3 o f A r t i c l e I o f t h e b y - l a w s w a s e x e c u t e d b y e a c h mem­
b e r o f t h e F e d e r a l Open M a r k e t C o m m ittee p r e s e n t a n d
f i l e d w ith th e S e c r e ta ry .

12.
The
duced a t
13.

relev an t p o rtio n
1A2 i n f r a .

of

th e

Id.




12

m in u tes

of

th a t

m e etin g

is

repro­

183
The

sam e

R u les o f

req u irem en t

is

O rg an iza tio n :
(c)

now e m b o d i e d

O ath o f

O ffic e .—

and each a l te r n a t e ta k e th e
p r e s c r i b e d by s t a t u t e t o be
U n ite d

in

se c tio n

In

E a ch member o f

req u ired

ad o p ted as

cy o r

in te rp re ta tio n s

g u id a n c e

T reasury

C ongress e n a c te d
w h ich

ru le s

th e

of

a u th o riz e d

th e

th e

by

law

fo rm u lated

p u b lic ."

to

and

and

th e

FOMC p u b l i s h e d

at

10,

1947,

w h ich

a n o tic e

p u b lish

C o m m ittee

238.

page

by

P rocedure A ct,

of

th e

gen eral
agency

In o bedience

454 3 of

in

P o lic y

"su b stan tiv e

statem e n ts

adopted

€0 S t a t .

te r

Ju ly

th e

B ills

A d m in istrativ e

ag e n c ie s

req u irem en t,
for

FOMC’ S

S ta te s.

1946,
3 of

th e

sam e o a t h o f o f f i c e a s t h a t
ta k e n by o f f i c e r s o f th e

C.

se c tio n

3 of

14

its

th e

to

F ederal

e n tire ty

read

p o li­

for
th is
R eg is­
as

fo llo w s:

th e

T I T L E 1 2 — BANKS AND BANKING
C h ap ter I I — F e d e ra l R eserv e S ystem
S u b c h a p t e r B— F e d e r a l O pen M a rk e t C o m m ittee
P a rt 2 8 1 — S tatem e n ts of P o lic y
P urchase of T re asu ry B ills
The f o l l o w i n g s t a t e m e n t o f p o l i c y w as i s s u e d b y
F e d e r a l O p e n M a r k e t C o m m i t t e e o n J u l y 2, 1 9 4 7 :
§ 2 8 1 .1

P urchase

of

T reasury

b ills .

The F e d e r a l

Open M a rk e t C o m m itte e o f t h e F e d e r a l R e s e r v e S y s te m h a s
d ir e c te d th e F e d e ra l R eserve Banks to te r m in a te th e p o l­
ic y o f b u y in g a l l T r e a s u r y b i l l s o f f e r e d t o th em a t a
f i x e d r a t e o f 3 /8 p e r c e n t p e r annum a n d t o t e r m i n a t e
th e re p u rc h a s e o p ti o n p r i v i l e g e on T re a s u r y b i l l s .
The
new p o l i c y w i l l a p p l y t o b i l l s i s s u e d o n o r a f t e r J u l y
10, 1947.
E x istin g p o lic y w ill c o n tin u e to ap p ly to
b i l l s issu e d p r io r to th a t d a t e .
(S e c . 2 0 5 , 49 S t a t .
7 0 5 , a s am ended by s e c . 1 , 56 S t a t . 6 4 7 ; 12 U .S .C . an d
Sup. 2 6 3 ).
FEDERAL OPEN MARKET COMMITTEE,
S . R. C a r p e n te r ,
A ssista n t S ecretary .

14.

Not p u b lis h e d




in

th e

Code o f

13

F ederal

R e g u la tio n s.

184
The

fo reg o in g

p o licy

under

a u th o rity

U .S .C .

§ 263),

se n te d

an

one

does

b asis

and

have

for

purchase

th e

change,

al

The

at

a p ric e

F ederal

F ederal

R eserve

CFR § 2 8 1 . 1 .
in

F ederal

was
A ct

W h ile

to

an

reco g n ize
th e

th e m

banks

ch a n g e w as m a n d a to ry ,

as

a F ederal

co u ld
it

ex e rc ise

of

any h o ld e r

R eserve bank
A fte r

lo n g er o ffe r

was

rep re­

p o lic y ,

d e te rm in a b le .

no

{12

ec o n o m ic

c h a n g e was m ad e,
to

and

it

issu ed

it

m o n etary
th e

w h ic h was r e a d i l y

R eserve

own t e r m s

o r even u n d ersta n d

B efore

presen t

its

th a t

op­

im posed by g o v e rn m e n t­

a u th o rity .
D.
In

p ea led ,

R e g u latio n s

1966,
and

th e

et

seq.

R eg ister

la tio n s

th e

th e

th e n -n e w

551
al

co u ld

by

th e
12

change

change

a u th o rity .

b ills

at

ap p re c ia te
th a t

w h ich

12A o f

im p o rta n t

to

im p act o f

T reasury

tio n .

se c tio n

now c a r r i e d

ex trem ely
not

a d m in istra tiv e
of

of
is

statem e n t,

sub stan ce

of

p o sitiv e -la w
and
of

w h ich

R elatin g

A d m in istra tiv e

701

et

January

30,

as

in c o rp o ra te d

of

T itle

B eg in n in g
1973,

Open M a r k e t O p e r a t i o n s

p ro v isio n s

its

v ersio n

seq.

to

P ro ced u re A ct,

th e

at

w as
5,

U .S .

page

such,

was

Code,

2753

of

FOMC p u b l i s h e d

a

at

th e
set

re­
in to
§§

F eder­
of

regu­

began—
REGULATIONS RELATING TO OPEN MARKET
OPE RAT ION S OF FEDERAL RESERVE BANKS

S

2 7 0 .1

A u th o rity .

T h i s p a r t i s i s s u e d by t h e F e d e r a l Open M a r k e t
C o m m ittee ( t h e "C o m m itte e " ) p u r s u a n t t o a u t h o r i t y c o n ­
f e r r e d u p o n i t by s e c t i o n s 12A a n d 1 4 o f t h e F e d e r a l
R e s e rv e A c t (1 2 U .S .C . 2 6 3 , 3 5 5 ) .
The

re g u la tio n s

th e

gov ern in g

fo rm u late
to ta l,

go on

to

p rin c ip le s

sp e c ific

sta tu to ry

th e

u n d e r w h ich

d ire c tiv e s.

co n tro l




d efin e

over

te rm s
th e

used,

and

C o m m ittee

The C om m ittee

th en

to

fo rth
to

a sse rts

its

open m ark et o p e r a tio n s

14

set

in te n d s

as

fo llo w s:

165
S 2 7 0 .4

T r a n s a c t io n s in o b l i g a t i o n s .

ta)

Each F e d e ra l

m arket o p e ra tio n s
s e rv e A ct o n ly in

R eserve

bank

sh a ll

engage

in

open

u n d e r s e c t i o n 1 4 o f t h e F e d e r a l Re­
ac co rd an ce w ith t h i s p a r t and w ith

t h e a u t h o r i z a t i o n s a n d d i r e c t i v e s i s s u e d b y t h e Com­
m i t t e e from tim e t o ti m e , an d no R e s e r v e b a n k s h a l l d e ­
c l in e to engage in open m arket o p e r a tio n s a s d ir e c te d
b y th e C o m m ittee.

The

fu ll

p a tio n

te x t of

in

th e

m e ch an ism s
It

is

iz e s

th e

p a rt,"

ex e rc ise

T here

le v e rs

of

and r e g u l a t i o n . 15
argum ent th a t

th e

is

of

th e ir

is

reproduced

su b sta n tiv e

T here

th u s

is

th a t

in

no r a t i o n a l

FOM C's a u t h o r i t y

is

little

have

doubt

th a t

w h ich h av e b e e n
b e n e fite d

re p re se n ta tio n

in

m ounted

g re a tly

from

w h ich p u r p o r t s

15.
H o lla n d a f f i d a v i t ,
42-46.

J .A .

35-41;

to

and

re q u irin g
s e ttin g

in fra

at

of

its

hands

fo rth

2A3 e t

for

in

ru le m a k in g

by

th e

th e

seq.

u til­

sta tu te
d efen d an ts*

g o v ern m en tal.

th e

A tto rn e y

su c c e ssiv e

th e

p a rtic i­

FOMC c o n t i n u o u s l y

b a sis

not

th e

270,

a d m in istra tiv e

th e

p la c e d

The P o s i t i o n

au th o rity

d efen d a n ts
le g al

is

CFR P a r t

no q u e s t i o n

co n tro l

E.
T here

12

"S y s te m Open M a rk e t A c c o u n t"

f o r FOMC c o n t r o l ,

a classic

au th o rity .

"th is

ch a llen g e s

F ederal
p re stig e

su b o rd in a te

A uerbach

G eneral

c o u rts ,^

to
th e

atta c h in g
th e

to

p aro ch ial

d e c la ra tio n ,

J .A .

16.
B r y a n v . FOMC, 2 3 5 F . S u p p . 8 7 7 ( D . M o n t . 1 9 6 4 ) ; R e u s s v .
B a l l e s , 5 8 4 F .2 d 4 6 1 (D .C . C i r . ) , c e r t , d e n i e d , 4 3 9 U .S . 9 9 7
( 1 9 7 8 ) ; R i e g l e v . FOMC, 6 5 6 F . 2 d 8 7 3 ( D . C . C i r . ) , c e r t , d e n i e d
4 5 4 U .S . 1 0 8 2 ( 1 9 8 1 ) ; C o m m ittee f o r M o n e ta ry R efo rm v . B o a rd o f
G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y s te m , 7 6 6 F . 2 d 5 3 8 (D .C . C i r
1 9 8 5 ); and th e case a t b a r , 644 F. Supp. 5 1 0 , J .A . 2 0 .




15

186
interests of the particular agency or officer appearing in the
litigation to the interests of the government as a whole.17
At page 33 of their brief in this Court in Riegle v. FOMC,
656 F .2d 873 (D.C. Circ.), cert, denied, 454 U.S. 1082 (1981),
a case which the Department of Justice later asserted was identical to the case at bar,

1
8

the defendants, by their Department of

Justice counsel, "conceded that the members of the FOMC exercise
significant governmental authority," and at pages 37 and 38 of
the same brief, they reiterated this concession as follows:
As noted above, we have no quarrel with the Sena­
tor's contention that the members of the FOMC exercise
significant governmental authority. They are, there­
fore, "officers" whose appointments are subject to the
provisions of the Appointments Clause, [emphasis added]

17. In the case at bar, the position taken by the Department of
Justice is aligned with (1) the institutional interest which the
Federal Reserve has in strengthening its political position with
the regulated industry (a not uncommon interest of regulatory
agencies) and (2) the financial interest which privately-owned
commercial banks that are members of the Federal Reserve have in
by-passing the constitutionally-ordained political process to in­
fluence governmental policy directly in the critically important
areas of money and credit. Such banks are estimated to have over
60,000 directors, of a high average economic and social status,
strategically placed in virtually every Congressional district.
Their alignment with the Fed and the Department of Justice pro­
duces a kind of power for which, in the political arena, a mere
black-letter command in the Constitution is no match. That is
why we have judicial review.
18. At page 9 of the Defendants' Memorandum of Points and Author­
ities in Support of their Motion to Dismiss, filed June 29, 1984,
in the case at bar.




16

187
N or was R i e g l e
the

D ep artm en t of

m e rits
(D .C .

w ere

of

an ts

in

th a t

th a t

as

th e

to

of

a tte n tio n .
U .S .

28

fie d

A tto rn e y

of

not

th e
to

U .S .

th e

19

G eneral

le tte r

d ated

pursuant
d efen d a n ts

d evote

p a rtic u la rly

th e
in

13 days
G iv en

to

Levi

w ej r e p r i v a t e ,

reso u rces

to

of

th e ir

of

th e

if

by




th e ir

th e

H ousing of

C h air­

th e

re c e iv e d

h ig h -

th e

A tto rn e y

G eneral

and

in

accordance

p ro m p tly

pendency

of

G e n e ra l's
had

been

he was p r o b a b ly
D ep artm en t

to

se c tio n

h is

n o ti­

th e

ac­

on b e h a lf

clear

pow er

p o sitio n

u nder a d u ty
th e ir
4 of

19.
A copy o f th e R euss c o m p la in t a s o r i g i n a l l y f i l e d
c lu d e d in th e re c o rd o f th e c a se a t b a r a s an ap p e n d ix
p l a i n t i f f ' s r e p l y m em orandum f i l e d O c t o b e r 3 0 , 1 9 8 6 .
20.
A copy o f t h i s
ap p e n d ix to th e p l a
1986.
The D i s t r i c t
1976 as th e d a te of

defend­

Banks and

P arker

th e

pow er u n d er

made a

o n ly

any ap p e a ra n c e

it

very

have

D.

A tto rn e y

2403,

and

process,

to

th e

R eserve

n eith er

w ith

of

th e

461

th e

w as b r o u g h t

C urrency

p rio r

th e

sec tio n

v ie w o f

su it

at

and

A lth o u g h
F .2 d

n e c e ssa rily

c h a ra c te r

B a rrin g to n

E dw ard H.

584

(1978),

G eneral

an d w as b o u n d

Judge

d efen d a n ts

p o sitio n .

F ederal

in c ep tio n ,

th e

B alle s,

996

The

w as s e r v e d

§ 2403,

d e fe n d a n ts .^ 0

in terv en e
th a t

FOMC.

At i t s

A tto rn e y

U .S .C .

by

th e

th e

th is

A tto rn e y

w h ich w ere

w h ich

v.

g o v ern m en tal

R e p re se n ta tiv e s,

w ith

tio n ,

th e

ta k en

439

th e

in

Reuss

C om m ittee on B a n k in g ,

le v el

th e

d enied,
case,

on

H ouse

nor

in

case

had

case,

re p re se n ta tiv e s
man o f

Ju stic e

cert,

d e te rm in a tio n

firs t

reached

never

C ir,),

th re sh o ld

th e

defense,
th e

is
to

in ­
th e

l e t t e r d a te d J u n e 2 4 , 1 9 7 6 was f i l e d a s an
i n t i f f ' s r e p l y m em orandum f i l e d O c t o b e r 3 0 ,
C o u r t d o c k e t e n t r i e s i n R e u s s show J u l y 7 ,
th e d e fe n d a n ts ' f i r s t a p p e a ra n c e .

17

to

188
Federal Reserve Act (12 U.S.C. § 341) to appear in litigation
without the Attorney General's authority or representation. 21
Thus when the defendants filed their motion for summary judg­
ment on July 3, 1986, proclaiming themselves to be private citi­
zens whose oath of office was empty ceremony, that proclamation
was a radical repudiation of their own historical and repeatedly
reaffirmed position.

The District Court's briefing schedule 22 al­

lowed the plaintiff only eight calendar days, of which only four
were business days, in which to prepare and file an opposition to
the defendant's motion for summary judgment, even though the de­
fendants had been allowed, over the plaintiff's strenuous objec­
tions, more than 23 months before they were required to file any
response at all to the plaintiff's motion for summary judgment.

21. The authority of the Department of Justice to appear as
counsel would have been questionable unless the individual defend­
ants, in serving on the FOMC, were acting as officers of the Unit­
ed States, and unless the banks, in carrying out the directives
of the Committee, were acting as agencies of the United States,
because these were the only acts of which the plaintiff com­
plained. The basic principles governing the appearance in liti­
gation by the Attorney General and his subordinates in the
Department of Justice are well established. As indicated in the
marginal notes beside sections 359 and 361 of the Revised Stat­
utes, 18 Stat. 61, they have been in effect for more than a cen­
tury. Now embodied in 28 U.S.C. § 519 and 5 U.S.C. § 3106, they
authorize the Department of Justice to conduct all litigation on
behalf of the United States and its departments, agencies, offic­
ers, and employees, and prohibit other representation except in
narrowly defined classes of cases not relevant here. See also 28
CFR §§ 50.15 and 50.16 (Department of Justice policies limiting
representation of officers and employees to cases in which they
are sued in their capacity as such); and 57 Comp. Gen. 444 (1978)
(no authority to provide or pay for representation for persons
sued for acts outside scope of their official duties as officers
or employees of the United States Government).
22.

By order filed June 10, 1986.




18

189
F. Conclusion
The District Court's rationale for its acceptance of the de­
fendants' new position, and the theme underlying the whole of its
decision on the merits, was its stated belief that the present
structure of the FOMC represents a balance between "public" (i.
e., the Board of Governors) and "private1 (i.e., the Federal Re­
1
serve Banks) control of open market operations.

We believe that

what we have already presented demonstrates that whatever its mot­
ives may have been, Congress clearly exceeded its power when it
authorized what the District Court called "private individuals
selected by the Reserve banks"

23 to serve as members of the FOMC.

Appellant cannot, however, prudently rest his case with that
demonstration.

There is no assurance that the defendants will

not once again reverse their position, repudiate the rationale
they advanced in the District Court, and urge this Court to
validate the Reserve bank representatives as ''inferior Officers."
We think that an examination of the ownership of Federal Reserve
banks and the functions they perform that are relevant to this
litigation will demonstrate not only that they are so completely
governmental in nature that there is no validity to the "balance"
theory, but also that the functions in question are of such grav­
ity that under no reasonable construction of the Appointments
Clause can their control be entrusted to inferior officers.
23.
644 F. Supp. at 520, J.A. 30. The statute makes a distinc­
tion between the banks and their boards of directors, and author­
izes the latter, not the former, to make the selection. There is
no basis for the contention that this meets the formal require­
ments for the appointment of inferior officers.

19

72-851 0

-




94-7

190
II.

THE OWNERSHIP OF FEDERAL RESERVE BANKS
A.

Introduction

As we noted at the conclusion of Part I, supra, the Dis­
trict Court's decision is expressly predicated on the theory that
the Federal Open Market Committee represents a "balance" between
governmental and private components.

In Part I, we sought to dem­

onstrate that if it were the congressional purpose to structure
such a balance, that purpose was executed by means which are pro­
hibited under the Constitution.

In this Part II, we will examine

the question whether, quite apart from the design of the scales
in which this balancing is said to be done, there is really any­
thing of substance on the side which is labelled "private."
No principle of constitutional adjudication is more firmly
established than that it is the duty of the court to look beyond
superficial formalities to examine the underlying reality.

That

principle is especially important in the present context.
Corporations which are genuinely a part of the private sec­
tor are subject to important disciplines as a result of that sta­
tus.

In order to stay in business, they must produce a product

or service for which there is a real demand, they must produce it
at a price which is low enough to be competitive, and they must
charge a price which is high enough to cover their costs.

These

disciplines are not imposed simply by pasting private sector la­
bels like "stock" and "vice president" and "earnings" on compon­
ents of an institution which functions within the government.

To

do so may be to achieve the worst of both worlds: an institution




20

191
or officer functioning outside the disciplines of both our free
enterprise economic system and the control of the people as ex­
pressed through our system of constitutional government.

When

the individuals functioning in this way nevertheless retain ties
to profit oriented-enterprises in the same segment of the economy
to which their governmental powers and duties relate,
tial for irresponsible policymaking,
abuse,

24

the poten-

not to speak of outright

is as obvious as it is enormous.
B. Federal Reserve Bank "Stock”

The attributes of control and of financial interest— that is
to say, an interest or share in profits,

losses, and net worth,

as opposed to a mere creditor1s right to payments— are what dis­
tinguish stock from bonds, debentures, and other financial obli­
gations.

The possession of control and financial interest in an

enterprise by private persons, as opposed to a government,
what distinguishes such an enterprise as "private".
prise in question is a corporation,

is

If the enter­

the corporate stock is the

means by which control and financial interest are allocated among
the o w n e r s .
The Federal Reserve's own publications are candid in their
admission that the so-called "stock" of Federal Reserve Banks is

24.
One of America's, and indeed the world's, most respected au­
thorities on money and banking has long maintained that the poli­
cy blunders of the Federal Reserve were in large measure responsi­
ble for the depth, duration, and tragic human cost of the Great
Depression. See Chapter 7, "The Great Contraction, 1929-33," in
A Monetary History of the United States, 1867-196Q, by Milton
Friedman and Anna Schwartz (Princeton University Press, 1963).




2
1

192
at

varian ce

w ith

In The F e d e r a l
(1984),

th e

co m m o n ly u n d e r s t o o d

R eserve

p u b lish e d

by

S ystem :

th e

P urposes

B oard o f

d e fin itio n

of

& F u n c tio n s,

G overnors,

it

is

th a t

7th

te rm .

Ed.

sta te d

at

page

10:
H ow ever,

o w n ersh ip
w ith

fin a n c ia l

[F e d e ra l

in terest

is

These

of

th e

re ite ra te d
shares,

th e

usual

R eserve

key
in

u n lik e

a ttrib u te s

Bank]

a ttrib u te s

g reater

of

of

sto ck

co n tro l

does

in te re st.

The a b s e n c e

it

of

not carry

co n tro l

and

d eta il

at

page

sto c k

in

p riv a te

o rd in a ry

and

fin a n c ia l

50:
banks

or

c o r p o r a t i o n s , do n o t c a r r y v o ti n g pow er to c o n t r o l th e
p o li c ie s of th e R eserve B ank s.
M ember i n s t i t u t i o n s a r e
e n t i t l e d by s t a t u t e to a cu m u lativ e d iv id e n d o f 6 p e r ­
c e n t p e r annum o n t h e v a l u e o f t h e i r p a i d - i n s t o c k .
O w n e r s h i p o f R e s e r v e B a n k s t o c k ma y n o t b e t r a n s f e r r e d ,
n o r may t h e o w n in g i n s t i t u t i o n u s e i t s s h a r e s a s c o l l a t ­
e ra l fo r lo a n s.
L est
ca lle d
could

th e re

sto ck
be

be an y

m ight a t

re a liz e d
E a rn in g s

upon
of

m isap p reh en sio n
le a st

th a t

be a c q u irin g

liq u id a tio n ,
F ederal

it

R eserve

is

a h o ld e r

a h id d e n
sta te d

Banks

are

of

th e

e q u ity
at

page

w h ich
9:

a llo c a te d

f i r s t to th e paym ent of ex p e n ses (in c lu d in g a sse ssm e n ts
by t h e B o a rd o f G o v e rn o rs t o d e f r a y i t s e x p e n s e s ) , t h e
s t a t u t o r y 6 p e r c e n t d i v i d e n d on F e d e r a l R e s e r v e Bank
s t o c k t h a t member i n s t i t u t i o n s a r e l e g a l l y r e q u i r e d t o
p u rc h a se , and any a d d i tio n s to s u rp lu s n e c e s s a ry to
m a in ta in e a ch R eserv e B an k 's s u r p lu s e q u a l to i t s p a i d in c a p i t a l s to c k .
R em ain in g e a r n i n g s a r e th e n p a i d i n ­
to t h e U .S . T r e a s u r y .
About 95 p e rc e n t of th e R eserve
Banks' n e t e a rn in g s have been p a id in to th e T re a su ry
s in c e th e F e d e r a l R e se rv e S y stem was e s t a b l i s h e d .
...
S h o u ld a R e s e r v e Bank be l i q u i d a t e d , i t s s u r p l u s —
a f t e r a l l o b l i g a t i o n s h a d b e e n m e t— w ould becom e t h e
p r o p e r t y o f th e U .S . g o v e rn m e n t.
[em p h a sis a d d e d ]




22

so-

193
Similarly, if a member bank withdraws from membership, it
receives in redemption of its Federal Reserve Bank stock exactly
what it paid for it, "with interest at the rate of one-half of
one per cent per month [the same as the statutory "dividend"
rate] from the date of the last dividend...." (Federal Reserve
Act, section 9, 12 U.S.C. §328).

The tenor of this provision is

more consonant with a subordinated debt obligation than with any
kind of equity interest.
The statutory basis for the foregoing statements in respect
of financial interest is found in sections 5, 6, 7, and 9 of the
Federal Reserve Act (12 U.S.C. §§ 287, 288, 289, 290, 323, 327,
and 328); the statements in respect of control are derived from
the Act passim.

From them, it is clear that in any meaningful

usage of financial and legal terminology, the thin sliver of the
capitalization of Federal Reserve Banks represented by their socalled stock would have to be denominated as something like "qual­
ifying nonparticipating preferred stock."

The ownership of such

stock is one of the necessary qualifications for membership in
the Federal Reserve System, and entitles the holder to a fixed
return subject only to the availability of income, but it carries
no significant equity interest.
If the stockholders are not the owners, where does the owner­
ship interest lie?

As we noted in the Statement of the Case, it

is obvious that the United States Government, by legislation and
otherwise, exerts the kind of broad, ultimate control over these
institutions that stockholders have over private-sector enter­




23

194
p rise s.

From an e x a m i n a t i o n

R eserve A ct as
life

of

th e

th a t

th e

also

th a t

th ey

F ederal

fin a n cial
of

have

R eserve

sectio n s

S ystem ,

in terest

7 and

16

of

th e

am ended and a d m in is t e r e d

of

th e

it

w ill

U n ite d

sim ila rly

S tates

F ederal

over
be

th e

clear

governm ent

is

o w n ersh ip .
C.

As o r i g i n a l l y
F ederal

of

been

R eserve
Sec.

D istrib u tio n

en a cted ,

A ct read
7.

A fter

of

38 S t a t .

as

fo llo w s

all

E arn in g s
at

258,

(e m p h a sis

necessary

sectio n

th e

ad d ed ):

expenses

re s e rv e bank have been p a id o r p ro v id e d
h o ld e rs s h a ll be e n t i t l e d to re c e iv e an
o f s i x p e r ce n tu m on th e p a i d - i n c a p i t a l
d iv id en d s h a ll be c u m u lativ e.
A fte r th e
dend c la im s have b ee n f u l l y m et, a l l th e
s h a ll be p a id to th e U n ite d S ta t e s a s a
except th a t o n e-h alf of such n et earn in g

7 of

of

a F ederal

fo r, th e s to c k ­
annu al d iv id en d
s t o c k , w h ich
afo resaid d iv i­
n et earn in g s
fran ch ise ta x ,
s s h a ll be p a id

in to a s u r p lu s fu n d u n t i l i t s h a l l am ount to f o r t y p e r
cen tu m o f t h e p a i d - i n c a p i t a l s t o c k o f s u c h b a n k .
The n e t e a r n i n g s d e r i v e d by th e U n ite d S t a t e s from
F e d e ra l R eserv e Banks s h a l l , in th e d i s c r e t i o n o f th e
S e c r e t a r y , be u s e d to su p p lem en t th e g o ld r e s e r v e h e ld
a g a in s t o u ts ta n d in g U n ite d S ta te s n o te s , o r s h a l l be a p ­
p lie d to th e re d u c tio n o f th e o u ts ta n d in g bonded in d e b t­
e d n e ss o f th e U n ite d S ta t e s u n d er r e g u l a ti o n s to be
p r e s c r ib e d by th e S e c r e t a r y o f th e T re a s u ry .
S ho u ld a
F e d e r a l R e s e rv e b an k b e d i s s o l v e d o r go i n t o l i q u i d a ­
ti o n , any s u r p lu s re m a in in g a f t e r paym ent o f a l l d e b ts ,
d iv id en d req u irem en ts as h e re in b e fo re p ro v id e d , and th e
p a r v a lu e o f th e s t o c k , s h a l l be p a id t o and become th e
p r o p e r ty o f th e U n ite d S ta t e s and s h a ll be s i m i l a r l y
a p p lied .
F e d e ra l re s e rv e b an k s, in c lu d in g th e c a p ita l sto ck
a n d s u r p l u s t h e r e i n , a n d t h e in c o m e d e r i v e d t h e r e f r o m
s h a l l be exem pt from F e d e r a l , S t a t e , and l o c a l t a x a ­
tio n , e x c e p t ta x e s upon r e a l e s t a t e .
The
to

th e

lim ita tio n

am ount w h ich

of

th e

th ey




in te re s t

a c tu a lly

24

of

th e

so -c a lle d

p aid

for

th e ir

sto ck h o ld ers

sto ck ,

p lu s

th e

195
statutory 6% dividend, has never been changed.

Thus they are at

best, as we have noted supra, holders of an issue of preferred
stock constituting a minuscule fraction of the total equity capi­
tal of these institutions.
ments to section 7.

There have been only two direct amend­

In 1919, the franchise tax was reduced,25

and in 1933 it was removed altogether,26 but under neither amend­
ment were the holders of the so-called stock given any interest
in the surplus, either immediate or residual.
Federal Reserve Bank earnings vaulted upward after the close
of World War II.

In 1947, for the first time, they made payments

to the Treasury denominated as "Interest on Federal Reserve
27
Notes."
The statutory authority for such payments is contained
in section 16 of the Federal Reserve Act, and it is to that sec­
tion that we now turn our attention.

Its first paragraph (12

U.S.C. § 411) provides-The said notes shall be obligations of the United
States . . . .
and its fourth paragraph (12 U.S.C. § 414) provides that each
Federal Reserve Bank through which Federal Reserve notes are
issued-shall be charged with the amount of such notes issued
to it and shall pay such rate of interest as may be
25. Act of March 3, 1919, 40 Stat. 1314.
26. Act of June 16, 1933, 48 Stat. 163. The purpose behind the
1933 amendment was to increase the capital of the Federal Reserve
Banks to encourage them to expand their lending in an economy dev­
astated by the Great Depression.
27. Table 9.9, "Earnings and Expenses of Federal Reserve Banks A. Summary: Cumulative 1914-70, and Annually 1942-70" at page 501
of Banking and Monetary Statistics 1941-70, published by the
Board of Governors of the Federal Reserve System (1976).




25

196
established by the Board of Governors of the Federal
Reserve System on only that amount of such notes which
equals the amount of its Federal Reserve notes outstand­
ing less the amount of gold certificates held by the
Federal Reserve agent as collateral security. Federal
Reserve notes issued to any such bank shall, upon deliv­
ery, together with such notes of such Federal Reserve
Bank as may be issued under section 18 of this Act upon
security of United States 2 per centum Government
bonds, become a first and paramount lien on all the
assets of such bank.
At first blush, this seems very confusing.

Interest is ordi­

narily paid by, not t . an obligor, yet despite the declaration
o,
in the first paragraph of section 16 that Federal Reserve notes
are obligations of the United States, the fourth paragraph pro­
vides (by necessary implication) for the payment of interest to
the United States.

Moreover, such notes are not shown as any

part of the Federal debt (whether or not subject to the debt ceil­
ing) in the accounts of either the Treasury or the Federal Re­
serve.

They are, however, shown as liabilities of the Federal

Reserve Banks,

2 8 which is consistent with the provision in the

fourth paragraph making them "a first and paramount lien on all
the assets" of the bank through which they are issued, as well as
a necessary consequence of their convertibility to and from deposits held in Federal Reserve Banks.

29

The explanation for these apparent contradictions is that
the liability imposed on the United States by 12 U.S.C. § 411 is
28. See any statement of condition of Federal Reserve Banks.
Table 1.18 carried in the statistical section of the monthly
Federal Reserve Bulletin is one of many published sources.
29,

See the discussion infra at pages 43 and 44.




26

197
only a contingent liability,, and since Federal Reserve notes now
are m o n e y , r a t h e r than an obligation to pay money, the possi­
bility that the contingency will ever arise as a result of a hol­
der of the notes appearing and demanding payment has become
absolutely nonexistent.

Moreover, throughout the period when the

holder of such notes could actually do this, no interest was ever
charged.
Why? It is clear that even then, the government had the sole
residual proprietary interest in the earnings of the Federal Re­
serve Banks.

Under sections 7 and 16 as originally enacted, as

long as a Federal Reserve bank had earnings in excess of the mod­
est additions to surplus authorized by statute, it made absolute­
ly no difference whether the transfer of the remainder of those
earnings was labelled as payment of a "franchise tax" or as a pay­
ment of "interest," because all of that income would be trans­
ferred to the government in any event.^
Because of prevailing economic conditions and Federal policy
at the time of the repeal of the franchise tax, and for a number
of years thereafter, the issue of how to transfer the earnings to
the Treasury was moot.

When conditions changed, the policy

changed, and the "interest” provision of section . 6 (12 U.S.C. §
1
414) began to be used.

30. Auerbach declaration dated July 9, 1986, J.A. 47; see the
discussion infra at pages 40 and 41.
31. This point is made by the Federal Reserve Board itself in
its announcement of April 24, 1947, published in the May, 1947
Federal Reserve Bulletin at pages 518 and 519.




27

198
The s ta t e m e n t
serve

S ystem

p ro v isio n
charge
or

m akes

for

of

issu ed
it

B oard o f
th e

cry sta l

in te re st

fin a n c ia l

th e

upon

as

clear

th a t

ac co u n tin g .

te rm

32

T here

d ire c tio n

of

risk ,

m a tu rity ,

t o r w h ich

is

ta k e n

in to

bona

in te re st

th e
to
th e

fid e

tra n sfer
an o th er.
banks,

of

A fter
th e

from

It

is

of

th is

of

th e

firs t

F ederal
use

of

w as

in

la w ,

so much a s

c o n d itio n s,
in

w as p u r e l y

th e
and
th e

th e n -re cen t

in

o th e r

e sta b lish m e n t
sim p ly

a

ec o n o m ics,

a nod

o r any

Re­

th is

no s e n s e

in

was n o t

m arket

th e

th e

u n d ersto o d

one p o c k e t o f

review ing

B oard

th a t

co n sid e ratio n

rate.

money

G overnors

o ccasio n

of

a v eh icle

F ederal
earn in g s

th e
fac­
any
for

governm ent
h isto ry

of

s a i d : 33

U nder th e c irc u m s ta n c e s , th e B oard co n c lu d e d t h a t
i t w o u ld b e a p p r o p r i a t e f o r t h e F e d e r a l R e s e rv e B anks
to pay to th e T re a s u ry th e b u lk o f t h e i r n e t e a rn in g s
a f t e r p ro v id in g f o r n e c e ss a ry ex p e n ses and th e s t a t u t o ­
ry d iv id e n d .
In e f f e c t , t h i s w ill in v o lv e p ay in g c u r ­
r e n t l y t o th e T r e a s u r y fu n d s w h ic h , u n d e r e x i s t i n g law ,
w o u ld come t o i t o n l y i n t h e e v e n t o f t h e l i q u i d a t i o n
of th e F e d e ra l R eserve B anks.
The F e d e r a l R e s e r v e A c t
s t i l l p r o v id e s t h a t , in c a se of l i q u i d a t i o n o f a F e d e r­
a l R eserve Bank, any s u r p lu s rem a in in g a f t e r th e p a y ­
ment o f a l l c la im s s h a l l be p a id to th e T re a s u ry .
It
i s e x p e c t e d t h a t t h e p r e s e n t p a y m e n ts w i l l b e made a t
q u a rte rly in te rv a ls.
By i n v o k i n g i t s a u t h o r i t y u n d e r
S e c tio n 16 o f th e F e d e ra l R eserv e A c t, th e B oard is
a b l e t o a c c o m p l i s h t h e same r e s u l t s a s w e r e ac c o m p ­
li s h e d by th e paym ent o f a f r a n c h i s e ta x , i . e . , th e
t r a n s f e r o f e x c e s s e a rn in g s to th e G overnm ent.
The
p a y m en ts ca n th u s b e r e f l e c t e d in c u r r e n t r e v e n u e s and
ta k e n i n t o a c c o u n t in th e G o v e rn m e n t's b u d g e t w i th o u t
fu rth e r le g is la tio n .

32.
A n n o u n c e m e n t made by t h e B o a r d o f G o v e r n o r s o f t h e F e d e r a l
R eserv e S ystem u n d e r d a te o f A p r il 2 4 , 1 9 4 7 , a s p u b lis h e d in th e
M ay, 1 9 4 7 F e d e r a l R e s e r v e B u l l e t i n a t p a g e s 5 1 8 a n d 5 1 9 .
33.

Id.




28

199
From the first use of the section 16 authority announced in
the foregoing quotation down to the present day, the accounting
treatment accorded such payments by both the Board and the banks
has been inconsistent with their characterization as "interest,"
For any business enterprise, interest paid is a cost, and is de­
ducted from revenues before, not after, net earnings are deter­
mined.

It is only after all costs have been taken into account

that the resultant net earnings are distributed internally to
various accounts such as earned surplus, or externally by way of
dividends or similar payments to the owners of the enterprise.
The so-called interest charged under section 16 has never been
treated in this way: it has uniformly been accounted for not as
an element of costs, but as a distribution of earnings, and has
34
but

always been so labelled not only in the formal accounts

also in the Board's narrative explanations of how the system
35
operates.
Since issuing its initial statement in 1947, the Board has
twice revised its determination of what level of earnings would
be considered "excess" and thus transferable to the Treasury.
Prior to 1959, the Board had deemed that an appropriate level of
surplus for the Reserve Banks would be 100% of their "subscribed"
capital, plus whatever level would be achieved by adding approxi­
mately 10 percent of the annual net earnings.

At page 24 of the

January 1960 Federal Reserve Bulletin, the Board explained the
34.

E.g., note 27 supra.

35.

E.g., note 32 supra.




29

200

upw ard

leap

of

n early

$ 1 ,5 8 2 ,1 1 9 ,0 0 0

in

80%

1959)

(fro m

in

$ 8 7 9 ,6 8 5 ,0 0 0

in

" i n t e r e s t ” p ay m en ts

1958
to

to

th e

T reasury

as

fo llo w s:
The 1 9 5 9 p ay m en ts to th e T r e a s u r y r e f l e c t a c o n c lu ­
s io n r e a c h e d by th e B o a rd , a f t e r c o n s u l t a t i o n w i t h th e
F e d e ra l R eserv e B anks, t h a t th e m a in te n an ce o f a s u rp ­
lu s a t t h e l e v e l o f s u b s c r i b e d c a p i t a l w o u ld b e a p p r o ­
p r ia te in th e li g h t of p r e s e n t c irc u m s ta n c e s .
I t w as
th e r e f o r e d ec id ed to change th e re c e n t p r a c tic e of
a d d in g ap p ro x im a te ly 10 p e r c e n t of th e an n u a l n e t
e a rn in g s o f th e F e d e ra l R eserv e Banks to th e s u r p lu s
a c c o u n t s , an d t o p ay t o t h e T r e a s u r y th e a m o u n ts by
w h ich

th e

su rp lu s

In

o th e r w ords,

to

su rp lu s

sim p ly

p aid

over
th a t

im m ed iately

excess

of

In
te re st"

its

th a t

equal

to

fu tu re

any

over

to

to

a

and

such
th e

number of
of

th e

ac cu m u la tio n

th e

w as

B anks w ere

w as

to

e n tire

su rp lu s

a d d itio n s

earn in g s

R eserve

th e

c a p ita l.

y ears*

10% o f

T reasury

m a in ta in

an n o u n c em en t3 ^
R eserve

m a in ta in in g

p aid -in

earn in g s

to

th e

had th e

be re ta in e d

d o lla rs

th a n

at

be

avoid ed

earn in g s

th e

le v e l

of

by

banks

d ire c te d

in
of

to

th e

for

in

at

T reasury

h alf

tra n sfe r

in

1965

a

"in ­

le v el

th e
to

of

d eter­

c a p ita l,

a o n e-tim e

36.
Announcem ent p u b lis h e d in th e J a n u a ry
F e d e ra l R eserve B u lle tin a t page 1 1 3 .




G overnors

su rp lu s

cu ttin g

it

30

c o m p u tatio n

of

su b sc rib e d

effect
th e

th e

B oard

R eserve ban k s'
rath er

A cco rd in g ly ,

a b illio n

reg ard in g

n o te s,

th e

ca p ita l,

T h is

ac co u n t.

over h alf

of

re te n tio n

T reasury,

req u ired

next

be a d e q u a te .

p lu s

th e

th e

su b sc rib e d

c a p ita l.

on F e d e r a l

m ined

of

in

from

p aying

th o se

su b sc rib e d

to

exceeded

a c c u m u la tio n

re su ltin g

in stru c te d
by

th e

a c co u n ts

w o u ld
am ount

th e

sur­

paym ent o f

1965,

in

(V olum e

a d d itio n

51)

201

to

th e

in

th a t

above
ta l

and

le v e l

necessary

d ire c tly

th a t

re c e iv in g

a c tio n s

pay m en ts

rath er,

th e

te m p te d

to

tio n ,

a lly

ac tio n s

th e

th o se

lik e

nor even

u n n o ticed

37

As

save by th e

in

F ederal

w as no

su b sta n tia l
o r th e

b udg etary
p riv a te
banks

If

th e se

it

of

o w n ersh ip

32

of

a

th e

agency

ex e rc is­

They w e re ,
agency

in te re st

in

a t­

co rpora­

uproar of

passed

v irtu ­

p ro fe ssio n a lly

a ffa irs,

of

o r g u aran to r

any p r iv a te

w ere

F eder­

a y ear.

fo reg o in g

so v ereig n

a c tio n s

33

th e

th e

in te re st.

p eo p le

th e y

and

of

c re d ito r

c a p i­

have

im m ed iately

b illio n

co n stitu tio n a l
th e se

and m o n etary

in w h ich

a

earn in g s

p aid -in

a n y 'g o v e rn m e n ta l

and

handful

at

from

th ro u g h

ag a in st

w as,

$18

clear

paym ent of

an ow ner.

to

been p a id

changes

earn in g s
to

of

all

governm ent

th e
$17

g o v ern m en t,

w ould b e a p o l i t i c a l

p ro p o rtio n s.

q u estio n

som e

w ere n o t

equal

in fra

th e

98% o f

at

in te re st,

of

th a t

have

fu tu re ,

No f u r t h e r

o v erp o w erin g ly

pow er o v e r

v o lv e d

in

of

in

d o cu m en ted
is

th a n

by th e

Lake a c t i o n s

th e re

h isto ric

m ore

now r u n n i n g

G overnors,

re g u lato ry

as

o th e rw ise

su rp lu s

T reasury.

cited ,

ab u n d a n tly ,

th e se

B oard o f

in g

rece iv es

th a t

m a in ta in

th e

th e re in

Banks,
is

d ire c te d

to

to

w h ich w o u ld

The r e s u l t ,

sources

W hat
is

d ire c tly

announced.

R eserve

th e

one b i l l i o n

and f u r th e r

p aid

th e

and

th an

y ear,

a

be

been

al

m ore

because
e ith e r

in ­

th e re

th e

funds

g e n e ra te d .

37.
S e e , e . g . , t h e e x t e n s i v e m e d ia c o v e r a g e , s p e e c h e s in C ong­
r e s s , a n d th e h i s t o r i c d e c i s i o n o f t h e Suprem e C o u r t, Y oungstow n
S h e e t & Tube Co. v . S a w y e r, 3 4 3 U .S . 5 7 9 ( 1 9 5 2 ) , i n w h ich i t
g r a n t e d c e r t i o r a r i b e f o r e ju d g m en t i n t h i s C o u r t, a l l o f w h ich
e n s u e d fro m P r e s i d e n t T ru m a n 's a t t e m p t e d s e i z u r e o f t h e s t e e l
m i l l s d u r i n g th e K orean W ar.




31

202
This is no abstract, academic discussion.

The sums generat­

ed by the open market operations whose control is at stake in
this litigation are immense.

As indicated in Table 17 at pages

6e-32 and 6e-33 of the Budget of the United States Government,
Fiscal Year 1987, reproduced infra at 1A5, it is estimated
that in 1987 the deposit of earnings from the Federal Reserve
will exceed the grand total of all alcohol taxes, all tobacco
taxes, and all other non-trust fund excise taxes combined.
Perhaps an even better appreciation of what the government's
ownership of Federal Reserve banks means in financial terms can
be gained by comparing its receipts from them with items on the
expenditure side of the ledger.

Again referring to the Budget,

the discussion and tables at pages 5-139 through 5-148 show that
the total of all expenditures for the administration of justice,
that is, the entire outlays of the Judicial Branch of the govern­
ment, plus the entire outlays of the Department of Justice, plus
the outlays of all other law enforcement agencies such as Customs
and the Secret Service, were estimated for 1986 at $6,788 bil­
lion.

The entire outlays of the Legislative Branch of the govern­

ment ($1,522 billion), plus all other functions discussed in the
Budget under the heading of general government, were estimated
for 1986 at $6,270 billion.

If all of these expenditures, total­

ling $13,058 billion, had been funded exclusively from receipts
38
from the Federal Reserve System,
the government would still
have had $3,474 billion left over.
38. These receipts are virtually all generated by open market
operations; other sources of income to the Federal Reserve banks
are small by comparison, and largely offset by associated costs.




32

203

And th e
b arely

over

g overnm ent
Banks a r e

retu rn

to

th e

six -te n th s

of

"sto c k h o ld e rs"
one p e r

cannot se rio u sly
p riv a te

III.

ta b le
in g s
213

deriv es

as

to

of

in c o m e
$ 1 7 ,4 6 5

th e

of

sam e

$ 3 ,7 4 7

39.

w h ile
th e

currency,

Banks

M arch

E xpenses,
Banks,

The

F ederal

th e

w as o n ly

C om bined)
we f i n d

d eriv ed

to ta l
of

from a

of

th e

we f i n d

R eserve

a ll

of

1 at

of

w ere

th u s

at

R eserve B u l l e t i n ,

th e

of

in

N et E a rn ­
to p

of page

1986,

current

ap p ro x im ately

If

expenses,

we

222
of

of

and

th e

th a n

and

page

and

lo o k

at
A ll

223

10

of

p lu s
th e
th e
F ederal

of

F ederal

su rp lu s

m ore

c a p ita l

in ­

th e

C o n d itio n

and

gov­

to

G overnors

pages

ca p ital

F ederal

we e x a m i n e

If

current

b illio n .

tim es

33

th e

n a tu ra lly

th a t

w as

net earn in g s

to ta l

four

1986"

B oard

40.
S e v e n ty -T h ird A nnual R ep o rt o f
F e d e r a l R e se rv e S ystem , t r a n s m i t t e d
o f R e p r e s e n t a t i v e s May 1 8 , 1 9 8 7 .




and

(S ta tem en t

N et e a r n in g s

F ederal

40

$ 1 ,4 3 5

th e

w h ich
le ad s

g e n e ra te d .

expenses

in T a b le

th a t

a n d m ore t h a n

1987

for

banks

and D is tr ib u tio n

1985

R ep o rt,

support

b alance-sheet

b illio n .

expenses,

th e

revenues

R eserve

sums a r e

any d e d u c tio n

for

rep o rt,

enorm ous

huge

R eserve

b illio n ,

banks w ere

th e

c u r r e n t A nnual

before

c o n so lid a te d
R eserve

of

"Incom e,

F ederal

assessm en ts
cost

e a rn in g s.

39

In tro d u c tio n

from F e d e r a l

how t h e s e

e n title d
of

th a t

m illio n

THE SOVEREIGN FUNCTION OF FEDERAL RESERVE BANKS

C o n te m p la tio n

q u iry

contend

of

$110

co rp o ratio n s.

A.

ernm ent

cent

?

th e
R eserve

o n ly

tim e s

to ta l

su rp lu s.

209.

th e B oard o f G o v ern o rs of th e
t o t h e S p e a k e r o f t h e H ouse

204
Is it possible that private corporations have achieved these
fantastic financial ratios?
ment?

Is it by Miracles of Modern Manage­

Have the Gnomes of Zurich finally met their match?

Have

these banks discovered a latter-day Philosopher's Stone whereby
not lead but paper may be transmuted into gold?
Sad to relate, the answers to the above are No, No, No, and
No.

They are not private corporations.

Neither administrative

expertise nor market astuteness can account for these results.
The First Law of Economics41 has not been repealed.

As we shall

demonstrate in this part of our argument, the open market opera­
tions of Federal Reserve banks are an exercise of sovereignty,
conducted pursuant to law.

Because of this, the direction of

such operations is, clearly, an exercise of "significant author­
ity pursuant to the laws of the United States," regardless of
whether that exercise takes the form of rules and orders directed
to those who must ultimately bear the economic burdens thus
imposed.4 2

41.

"There is no free lunch.”

42. Some economists maintain that these profits are properly
identified as "seigniorage." While it is unnecessary for the
purposes of this case to take a position on the correct terminolo­
gy to be used, it is surely pertinent to observe that these prof­
its do represent a transfer of wealth from the private to the
public sector. That is not to say that this particular means of
transfer is unconstitutional or even unwise, but neither as a
government nor as a society can we rationally address the issue
unless we are willing to recognize it for what it is. See, e.g.,
"Monetary Policy's Payoff to the Treasury," by Professor Richard
H. Timberlake of the University of Georgia, which appeared on
page 18 of the December 22, 1986 Wall Street Journal.




34

205
B.
The
en

D istric t

re sts

on

th e

g o v ern m en tal

le a st

shared

by,

p ro p o sitio n
The f i r s t
enced th e

th a t

fu n ctio n ,

persons
re sts

"m oney s u p p l y ”

d e c isio n

p ro p o sitio n

iv e ly

T h is

1 M o ne y *1 v s .
1

C o u rt's

in

c o in in g

but

and

from w h ich

one

money

th a t

can

in stitu tio n s

tu rn

on

th e

th is

in

is

not

fo llo w in g

ta k ­

an e x c lu s ­

be v e s te d
th e

and se c o n d Banks o f th e U n ite d
money s u p p l y in t h e i r t i m e .

a p p e a l was

in ,

p riv a te

or

at

secto r.

sy llo g ism :

S ta te s

in flu ­

The f i r s t a n d s e c o n d B anks o f t h e U n i t e d S t a t e s , when
a c t i n g t o i n f l u e n c e t h e money s u p p l y , w e re u n d e r t h e
c o n t r o l o f b o a rd s o f d i r e c t o r s com posed o f p e r s o n s in
p r i v a t e l i f e , an d su c h c o n t r o l was c o n s t i t u t i o n a l .
The o pen m a rk e t o p e r a t i o n s o f F e d e r a l
f l u e n c e t h e money s u p p ly i n o u r t i m e .

R eserve

Banks

in ­

Such o p e ra tio n s a re u n d er th e c o n t r o l of a body, th e
FOMC, c o m p o s e d i n p a r t o f p e r s o n s i n p r i v a t e l i f e .
The p a r t i c i p a t i o n o f p r i v a t e p e r s o n s in th e
o f t h e FOMC i s t h e r e f o r e c o n s t i t u t i o n a l .
The

falla c y

C o n stitu tio n ,
su p p ly ,"

in

does

w h ich

th e
not

are

not

v ario u s

d e fin itio n s

th a t

in c lu d e
th e

tim e
In

concern

even under

checks
th e

have

te rm s

We n e e d

no te

sy llo g ism

and d r a f t s ,

p e rtin e n t

same m e a n in g a s
in

p art,

or

as

used

"m oney"

or

m odern m a cro e c o n o m ic

w ith

m ost

C o n stitu tio n

"M o n ey ,"

th e

"m oney"

th e

th a t

art

of

o u rse lv e s
of

is

d ec isio n s

th e

te c h n ic a l

"m oney

su p p ly ;"

re stric tiv e

in stru m en ts

it

w h ich w ere

is

of

5 of

S ectio n

8 of

A rtic le

I

p ro v id e s—
The C o n g ress

*

sh all

*

To c o i n M oney,
f o r e i g n C o in . . . .




*

have

*

reg u late

35

Power

*
th e

.

.

*
V alu e

.

*
th e re o f,

th e

and of

to

te rm s

known a t

was w r i t t e n .

C la u se

"m oney

enough

th o se

w ell

th e

an a ly sis.

asp ects

d e fin itio n ,

in

206
while Clause 1 of Section 10 of the very same Article
provides-No State shall . . . coin Money; emit Bills of
Credit; [or] make any Thing but gold and silver Coin a
Tender in Payment of Debts . . . .
If "Money" as used in Article I has a meaning broad enough to sup­
port the defendants' contention and the District Court's holding,
one is led to the result that the states are forbidden to issue
checks and drafts.

That is obviously absurd.

It is equally ab­

surd to think that the Framers had the slightest intention to
countenance the exercise by persons in private life of a power so
sensitive, so central to sovereignty, that it was unequivocally,
unconditionally forbidden to the states.

Since the gold and sil­

ver coinage of which the Constitution speaks no longer exists, we
are left with the problem how to apply the provisions of § 8 ,

cl.

5 in the context of the monetary system that we have today.
C.

Legal Tender

Whatever other attributes it may have, "Money" within the
meaning of that provision of the Constitution must have the quali­
ty of legal tender, and that is a quality which the sovereign,
and only the sovereign, can impress upon it.

This notion was

expressed forcefully and unambiguously by the Supreme Court in
Juilliard v. Greenman, 110 U.S. 421 at 447 (1884) as follows:
The power, as incident to the power of borrowing money
and issuing bills or notes of the government for money
borrowed, of impressing upon those bills or notes the
quality of being a legal tender for the payment of
private debts, was a power universally understood to
belong to sovereignty, in Europe and America, at the
time of the framing and adoption of the Constitution of
the United States, [emphasis added]




36

207
From t h e
tio n
th e

in

d isc u ssio n s

regard

fram ers

to

of

th e

"M oney"

issu ed

te n d e r,

C o n stitu tio n

w h eth e r o r

ment

The
ey

in

to

th e

a

ry

of

th e

cred it

co u ld
ness

so v ereig n

th a t

o n ly

th e

Bank o f

its

it"

as

co n ten t of

betw een

th e

q u a lity

le g a l

in

any

of

and o th e r pay­
g iv e n

th e

tra n sa c tio n

S ta te s.

f o r money

th e

p recio u s

che g o v e rn m e n t d o e s

can
in

S ta te s

in

su p p ly

to d ay

in

of

o r by

th ro ugh

S ecreta­

w hat becam e

he b e lie v e d

p riv a te

fa c ilita tin g

secto r
many b u s i ­

re lie v e

"M oney"

pressure

e ith e r

"e m ittin g
th e

mon­

report

H am ilto n u rg e d

because

th e

and th e re b y

m e tal,

44

is s u e
th e

as

esta b lish m e n t of

U n ite d

tra n sa c tio n s ,

in c re a se

so v ereig n

w as e x p r e s s e d

U n ite d

th e

su b stitu te

an d com m ercial
governm ent to

Conventh a t

d iffe re n c e

by A le x a n d e r H a m ilto n

recom m ending
Bank o f

th e

in g

no d o u b t

m e ta l,

th e

sense

e x te n d e d by an o r g a n i z a ti o n

th e

be

th e

and h av in g

R e p re se n ta tiv e s

a d e q u ately

C o n stitu tio n a l

can

u n d ersto o d

co n stitu tio n a l

first
of

th e

p a rtie s.

T reasury,
th e

in

th e re

w h ich m ig h t be em p lo y ed
th e

or

H ouse o f

on
43

n o t back ed by p r e c io u s

sam e u n d e r s t a n d i n g

cre a tio n

th a t

of

le g al

know n a s
th e

by th e

in stru m e n ts

by a g re e m e n t

carried

th a t p ro v isio n ,

by

B ills

F ederal

on

reduc­

of

C red­

R eserve

Banks.
The
S tates

as

cita tio n

of

th e

firs t

p rece d en ts

for

th e

and second

F ederal

Banks o f

R eserve

4 3 . I I F a rra n d , R ecords of th e F e d e ra l
3 0 8 - 3 1 0 (Y ale U n iv e rs ity P r e s s , 1 9 1 1 ) .

th e

S ystem

C o n v en tio n

of

U n ite d

th u s

sta n d s

1787,

at

44.
R e p r i n t e d i n 3 W orks o f A l e x a n d e r H a m i lto n 3 8 8 e t s e q . (H .
Lodge e d . 1 9 0 3 ) , an d in I K ro o ss, b o c u m e n ta ry H is to r y o f B an k in g
and C u rre n c y in th e U n ite d S t a t e s 2 3 0 e t s e q . (M cG raw -H ill,
1969).




37

208
history on its head and reflects a total misunderstanding of Ham­
ilton's position.

His report to the Congress recommending the

chartering of a bank is a veritable polemic against the system we
have today, under which the supply of "Money" is determined by
open market operations of the Federal Reserve Banks acting under
the direction of the Federal Open Market Committee.
D.

B an k n o tes

vs.

“M o n e y "

The first and second Banks of the United States had the pow­
er to issue circulating notes, but these notes were not ’Money” .
’
They were not legal tender.

They were not issued by, nor were

they obligations, whether contingent or direct, of the govern­
ment.

They were simply promises to pay, in "Money", the sums

stated.

The fact that a modern economist would consider them

part of the "money supply" is irrelevant to the question whether
the institutions which issued them can be considered as constitu­
tional precedents for the modern Federal Reserve Banks.

The fact

that the institutions which issued those notes could and did in­
fluence the "money supply" by demanding (or refraining from
demanding) payment of circulating notes issued by state-chartered
banks is equally irrelevant.

That part of the "money supply"

which they could control had no effect on the supply of "Money"
in the constitutional sense, of which the only equivalent in our
present-day system is the supply of reserves under the control of
the FOMC.

That control and that equivalence are documented in

the affidavit of Robert C. Holland, J.A. 35, and the declarations
of Robert D. Auerbach, J.A. 42 and 47.

In paragraph 2 of the

last of these, Auerbach states at J.A. 47 {emphasis added):




38

209
2.
The m o n e ta r y b a s e r e f e r r e d t o i n p a r a g r a p h 2
a n d s u b s e q u e n t p a r a g r a p h s o f my J u n e 1 9 f 1 9 8 6 d e c l a r a ­
t i o n i s t h e n e a r e s t p r e s e n t - d a y e q u i v a l e n t o f t h e "M on­
ey" th e C o n s titu tio n a u th o riz e d th e C ongress to coin
and re g u la te th e v a lu e o f .
F ed eral R eserve n o te s , to ­
g e t h e r w i t h a s m a l l v e s t i g i a l i s s u e o f c i r c u l a t i n g U .S .
n o te s and th e c o in s m in ted by th e T r e a s u r y , c o n s t i t u t e
th e c o i n and c u r r e n c y in c i r c u l a t i o n in t h e U n ite d
S ta t e s to d a y .
F e d e ra l R eserve n o te s and d e p o s it s in
F e d e r a l R e s e rv e B anks a r e e q u i v a l e n t fo rm s o f m oney in
te rm s o f t h e i r ec o n o m ic s i g n i f i c a n c e , and i n o u r
p r e s e n t - d a y m o n etary sy ste m , th e y c a n n o t b e " p a id " o r
" re d e e m e d " by e x c h a n g e f o r any m ore b ? s i c m edium .
Among p r o f e s s i o n a l e c o n o m i s t s , I k now o f n o r e s p o n s ­
i b l e d i s s e n t from th e s e p r o p o s i t i o n s .
The
R eserve
by

th e

sam e p o i n t
S ystem ;

B oard

is

made a t

P urposes

pages

& F u n ctio n s

33

and

(7th

34 o f

e d .,

The F e d e r a l

1984,

p u b lish e d

of G o v e rn o rs):

A F ederal

R eserve

secu rity

tra n sa c tio n

r e s e r v e base o f th e ban k in g o r d e p o s ito r y
c h a se adds to nonborrow ed r e s e r v e s , and a

changes

th e

sy stem : a p u r ­
s a le reduces

th e m .
In c o n t r a s t , t h e same t r a n s a c t i o n b e tw e e n f i n a n ­
c i a l in s ti tu ti o n s , b u sin ess firm s, o r in d iv id u a ls
sim p ly r e d i s t r i b u t e s re s e r v e s w ith in th e d e p o s it o r y
sy stem w ith o u t ch a n g in g th e re s e rv e b a s e .
W he n t h e F e d e r a l R e s e r v e p u r c h a s e s s e c u r i t i e s f r o m
a n y s e l l e r , i t p a y s , i n e f f e c t , b y i s s u i n g a c h e c k on
itse lf.
The s e l l e r ' s b a n k , on r e c e i p t o f t h e c h e c k ,
p r e s e n t s th e ch e c k t o th e F e d e r a l R e s e rv e f o r p ay m en t;
a n d t h e F e d e r a l R e s e r v e , in t u r n , h o n o r s t h e c h e c k by
in c re a s in g th e re s e rv e acco u n t a t th e F e d e ra l R eserve
Bank o f th e s e l l e r ' s b a n k .
The r e s e r v e s o f th e s e l l ­
e r ' s bank r i s e w ith no o f f s e t t i n g d e c l i n e in r e s e r v e s
e l s e w h e r e ; c o n s e q u e n t l y , th e t o t a l v o lu m e o f r e s e r v e s
in c reases.
J u s t t h e o p p o s i t e o c c u r s w hen t h e F e d e r a l
R eserv e s e l l s s e c u r i t i e s : th e paym ent r e s u l t s in a r e ­
d u c tio n of th e re s e rv e ac co u n t of th e s e l l e r ’ s bank a t
t h e F e d e r a l R e s e rv e Bank w ith no o f f s e t t i n g i n c r e a s e in
th e r e s e r v e s of any o th e r b an k .
The t o t a l r e s e r v e s o f
th e b an k in g sy stem d e c lin e in t h i s c a s e .




39

210
It is this characteristic of Federal Reserve pur­
chases and sales of assets - the dollar for dollar
change in the reserves of the banking system - that
makes open market operations so important. Through
these operations the Federal Reserve can change the
amount of reserves available to depositary institutions
and thus influence the rate of growth of money and, at
the margin, conditions in credit markets.
E.

The Sovereign Power of Money Creation

We are now at last in a position to understand how the im­
mense profits described in Part II, supra, are generated, and
why the government treats them as its own.

They result from the

critical difference between open-market purchases by Federal Re­
serve Banks, and such purchases by any other type of financial in­
stitution.

When a private institution makes a purchase, it must

either raise the money to do so by drawing down or selling exist­
ing assets, thereby reducing or eliminating its income from them,
or arrange for some other form of financing, financing which for
an organization in the private sector inevitably involves the as­
sumption of carrying costs of some kind, normally the payment of
interest or dividends.
By contrast, when a Federal Reserve bank makes a purchase,
it simply creates the money and incurs no carrying costs what­
ever, and thus the entire income generated by the asset so ac­
quired is added to the Reserve bank's earnings.

Moreover, unlike

a private enterprise, its power to acquire additional assets in
the same way remains undiminished.

By virtue of the sovereign

power of the United States government, and only by virtue of that
power, the payment it makes in the form of the reserve deposit




40

211

which it writes to the credit of the seller (or the seller's com­
mercial bank) Ls the ultimate monetary asset in our monetary
system, with neither the necessity nor the possibility that the
Reserve bank will ever be called upon to redeem it by the payment
of any more basic or fundamental unit of exchange.

That is the

reason, and the only reason, that Federal Reserve Banks can pro­
duce, at no cost to themselves, an asset which can be exchanged
for income producing securities. It is also why, in our presentday monetary system, the direction of Federal Reserve open-market
operations inherently involves the exercise of "significant gov­
ernmental authority," quite independently of our contention that
the regulatory authority conferred on the FOMC would come within
the rule of Buckley v. Valeo even if it were privately-owned
corporations rather than Federal Reserve Banks that were subject
to that authority.
F. The Contrast with the Bank of the United States
The first and second Banks of the United States had exactly
the same kind of influence over the credit component of the "mon­
ey supply" that large private-sector banking institutions have to­
day.

That influence is an important factor in the economy, but

it did not then and it does not now provide control of the coin­
age or supply of "Money" in a constitutional sense.

The only

"influence" it has in that regard depends entirely on how much
attention the FOMC chooses to pay to it.
The contrast between those early banks and the modern Feder­
al Reserve Banks is dramatically illustrated by comparing their
notes.

The notes issued by the first and second Banks of the




41

212
United States were nothing more than demand promissory notes of
privately-owned depository institutions.

The Smithsonian Insti­

tution photographs of these notes reproduced infra at 1A1 were
included in the record of the case below, together with a copy of
the letter of transmittal, as an exhibit with the plaintiff's
reply memorandum filed October 30, 1986.
The early banknotes can be reproduced in this brief, whereas
Federal Reserve notes cannot, because 18 U.S.C. § 474 prohibits
the reproduction of obligations of the United States, and the
banknotes issued by neither the first nor the second Bank of the
United States fall in that category.

On their face, as required

by 12 U.S.C. § 413, Federal Reserve notes identify the particular
Federal Reserve bank which put them into circulation and on whose
books they appear as a liability, but they also bear numerous and
conspicuous indicia of their governmental character: the legend
"The United States of America" across the top and "This note is
legal tender for all debts public and private" just beneath it to
the left; the seal of the Department of the Treasury on the
right; and the signatures of the Secretary of the Treasury and
the Treasurer of the United States along the bottom.
Under our monetary system as it existed throughout the peri­
ods of the existences of the first and second Banks of the United
States, the nominal supply of "Money," that is, the number of dol­
lars of constitutional "Money" available to the economy, depended
on two factors.

The directors of those banks had absolutely no

control over either factor.

One was the physical stock of preci­

ous metal, which was thought to change so slowly as to be a giv-




42

213
en,

and

A rt.

th e

I,

o th e r w as

S 8,

c l.

5.

posed d e c la ra tio n
cies

co n v ersio n

Today,

a tte sts,

are

p rin c ip a lly

Bank d e p o s it s

and F ederal

have

th a t

th e

w h ich

speaks.

correspond

They a r e ,

co n tro l

of

th e

Each o f
serve
in to
uance
th a n

th e se

of

d e liv e rs

R eserve

th e

form s

of

R eserve

th e

th e m .

R eserve

n o te s

The B o a rd 's
& F u n ctio n s,

iss u a n c e

am ong t h e

The e x t e n t

of

currency
of

p u b lic,
p u b lic

w h ich

and

th e

and

is
th e

p refers

R eserve

S ystem :

C h ap ter

7,

th e

o th e r
to

fo r

to tal

keep

is

under

A u e rb a c h 's

o n ly

th e

unop­
curren­

F ederal

R eserve

th in g s

we

C o n stitu tio n

su b je c t

P urposes

F ederal

P eo p le

th em o r

to

th e

th e

is

form

of

and F u n ctio n s

of

th e

in
th a t

th e

d riv e r

R eserve

is s ­

F ederal

who

Sys­
R eserve

B oard.

is

as

F ederal

sim p ly

fu n d s

as
on

product
hands

a

re ­

be­
th e

se c u rity ,

to tal

ex p la in s

th e

sig n ifican ce

th e ir

currency.

Bank S e r v ic e s :

in

in stitu tio n s

th u s

Re­

co n v e rtib le

tru c k

appears

econom y,

funds

fra c tio n

43

th e

Bank d e p o s i t s
allo c a te

F ederal

B oard

m e n tio n
of

-

read ily

The F e d e r a l

d e p o sitary

currency

th e

is

R eserve

n o m ore p o l i c y

co n v e n ien ce ,

th e

R eserve


72-851 0 - 9 4 - 8


in

-

cred it

Bank c r e d i t

am ount of

in

n o te s

n o t even

R eserve

d ep o sits
of

R eserve

fu n c tio n s

R eserve

dem and.

The dem and

one

are

F ederal

has

does

p o licy

co n sid e ratio n s

an o n y m ity .

D r.

C ongress

and v e s t i g i a l

ab so lu te ly

own b o o k ,

opposed to

p u b lic

tw ee n

facto rs:

to

as

b asis

th e

e n g r a v e r who m akes

P urposes

fle c tio n

by

in te re st,

n o te s

F ederal

of

te m :

n o te s

as

co in s

"M oney" o f w h ic h

a g g re g a te ,

n o te

R eserve

from

n u m ism atic

th e

The r o le

F ederal
of

of

and F e d e ra l

o th e r.

th a t

c o n tra st,

ap art

set

FOMC.

d e p o sits
th e

in

to

by

ra tio

and

of

tw o

of

th e

w h ich

th e

As The F e d e r a l
at

page

105

in

214
An i m p o r t a n t

fu n c tio n

of

th e

F ederal

R eserve

S ystem

is

to e n s u re t h a t th e econom y h a s enough c u rre n c y and co in
to m eet th e p u b l i c 's dem and.
C urrency and c o in a re p u t
in t o o r r e t i r e d from c i r c u l a t i o n by th e F e d e ra l R eserve
B an k s, w h ich u s e d e p o s i t o r y i n s t i t u t i o n s a s th e c h a n n e l
of d is trib u tio n .
When b a n k s a n d o t h e r d e p o s i t o r y i n s t i ­
t u t i o n s need to r e p l e n i s h t h e i r su p p ly of c u rre n c y and
c o in - f o r ex a m p le w hen th e p u b l i c ' s need f o r
e s aro u n d h o lid a y sh o p p in g p e r io d s - th e y o r d
from th e F e d e r a l R e s e rv e Bank o r B ranch in t h
and th e face v a lu e o f t h a t ca sh i s charged to
co u n ts
for

at

th e

currency

tio n s

retu rn

v alu e

is

F ederal
and

R eserve.

excess

When t h e

d e c lin e s,

co in

cre d ite d

and d e p o s ito ry

cash

to

cash r i s ­
e r cash
e ir area,
th e ir ac­

to

th e

a F ederal

account of

p u b lic 's

R eserve

th e

need

in s titu ­
Bank,

its

d e p o sito ry

in stitu tio n .
V irtu a lly
form

of

a ll

F ederal

currency

R eserve

in

circ u la tio n

n o te s,

w h ich a r e

is

in

th e

p rin te d

by

th e

B u re a u o f E n g r a v in g a n d P r i n t i n g o f t h e U .S . T r e a s u r y .
B efo re b ein g is s u e d to th e p u b lic , n o te s m ust be s e ­
c u r e d by l e g a l l y a u t h o r i z e d c o l l a t e r a l , m o st o f w h ich
i s in th e fo rm o f U .S . g o v ern m en t an d f e d e r a l ag en cy
s e c u r i t i e s h e ld by th e F e d e ra l R eserve B anks.
W hen t h e
secto r
al

F e d e ra l R eserve

d e p o sita ry

R eserve

Banks

c o rresp o n d in g ly
th e

R eserve

n o te
in

th is

in g ,

su p p ly
fo r.

B anks,

process,

is

th e
of

It

R eserve

th e

B oard,
of

and

th e

The

lik e

of

is

th a t

m in iste ria l
p h y sica lly

F ederal
th a t

th e

su p p ly

th e

C o n s titu tio n 's




n o te

n o te s

th e

bank

"M oney")

are

tu rn e d

lia b ilitie s

are

F ederal

th e

of

th e

B ureau

one o f

of

p o lic y

44

th e

R eserve

th a t

p u b lic

F eder­
are

in

in c reased ,

to

and
B oard

and P r in t­

an ad e q u ate
ac co u n ted

no t th e

F ederal

w h ich d e te rm in e

p resen t-d ay

th e

p riv a te -

back

and p ro p e rly

d e c isio n s

(th e

w h ich

of

E n g ra v in g

a ssu rin g

a v a ila b le

th e

fo r d ep o sits

ro le

cred it
of

to

lia b ilitie s

O pen M a rk e t C o m m ittee,

m akes

reserv e

d eliv e re d

lia b ilitie s

When t h e

d e p o sit

are

th e

th e ir

red u ced .

p u rely

n o te s
is

in stitu tio n s,
go up ,

reduced.

lia b ilitie s

n o te s

eq u iv a le n t

th e n w ith d ra w s

of
a

215
p o r tio n

i n t h e fo r m o f F e d e r a l R e s e r v e n o t e s ,

n o t th e B oard,

it

is

t h e FOMC,

t h a t c o n t r o l s th e R e s e r v e b a n k s 1 h o l d i n g s o f th e

" l e g a l l y a u th o r iz e d c o l l a t e r a l

. . .

in th e fo r m o f U .S . g o v e r n ­

m ent and f e d e r a l a g e n cy s e c u r i t i e s " r e f e r r e d

t o in th e p a ssa ge

q u o te d a b o v e .
The p o w e r t o d e te r m in e th e s i z e o f t h e m o n e ta ry b a s e was n e v ­
e r r e m o t e ly p o s s e s s e d b y t h e d i r e c t o r s o f e i t h e r t h e f i r s t
s e c o n d Bank o f

t h e U n ite d S t a t e s .

o r th e

W h ile a c o m p a r is o n o f t h e i r e n ­

a b l i n g l e g i s l a t i o n w it h t h a t o f th e F e d e r a l R e s e r v e b a n k s i s a
m ore t e d i o u s e x e r c i s e th a n c o m p a rin g t h e i r r e s p e c t i v e n o t e s ,
y i e l d s e x a c t l y t h e same c o n c l u s i o n .
F e d e r a l R e s e r v e b a n k s,

In c o n t r a s t t o

th a t o f

it
th e

th e s t o c k o f t h e f i r s t and s e c o n d Bank o f

t h e U n ite d S t a t e s r e p r e s e n t e d a g e n u in e e q u i t y
i n t h e c a s e o f an y p r i v a t e c o r p o r a t i o n t o d a y ,

in te r e s t.

Ju st as

th e s h a r e h o ld e r s r e ­

c e i v e d a r e t u r n on t h e i r in v e s tm e n t n o t a t some f i x e d s t a t u t o r y
rate,

b u t i n t h e form o f d i v i d e n d s d e te r m in e d in t h e d i s c r e t i o n

o f th e d i r e c t o r s and p a i d o u t o f a c t u a l e a r n i n g s ,

45

fo r m o f t h e i n c r e a s e in th e v a lu e o f t h e i r s h a r e s i f
grew and p r o s p e r e d .
r e c e iv e

t h e y w o u ld

The s h a r e o f th e F e d e r a l g o v e rn m en t in p r o f i t s ,

ex posu re t o r is k o f

h o ld e r ,

th e b u s in e s s

Upon th e l i q u i d a t i o n o f t h e b a n k ,

t h e i r p r o p o r t i o n a t e sh a r e o f w h a te v e r e q u i t y had b e e n

b u ilt up.
its

and in t h e

s tr ic tly

l o s s , w as,

lik e

and

t h a t o f an y o t h e r s h a r e ­

in p r o p o r t i o n t o i t s a c t u a l i n v e s t m e n t .

45.
P a r a g r a p h XIV o f s e c t i o n 7 o f th e A c t o f F e b . 2 5 , 1 7 9 1 , 1
S t a t . 191 a t 1 9 5 ;
and p a r a g ra p h T h i r t e e n t h o f s e c t i o n 11 o f t h e
A c t o f A p r i l 1 0 , 18 1 6 , 3 S t a t . 266 a t 27 3.




45

216
Even t h e p r o v i s i o n
S e n a te c o n f i r m a t i o n , o f

f o r p r e s i d e n t i a l a p p o in tm e n t, s u b j e c t t o
fiv e o f

t h e d i r e c t o r s o f t h e s e c o n d bank

i s n o t th e e v id e n c e o f s o v e r e ig n
to be.

in v o lv e m e n t t h a t i t m ig h t a p p e a r

The t o t a l number o f d i r e c t o r s w as 2 5 , 46 and t h e g o v e r n ­

ment h e l d o n e - f i f t h o f

t h e t o t a l s t o c k o u t s t a n d i n g .47

th e v o t in g r ig h t s o th e r w is e s p e c i f i e d

t o i n d i v i d u a l r a t h e r th a n i n s t i t u t i o n a l o w n e r s h ip ,
s a r y t o make s p e c i a l p r o v i s i o n

B eca u se

f o r t h e s t o c k w ere g e a r e d
48

i t was n e c e s ­

f o r t h e g ov ern m en t in o r d e r t o a f ­

fo r d i t p r o p o r t io n a l r e p r e s e n t a t io n on th e b o a rd .
In s h o r t ,

t h e g o v e rn m e n t ha d a p r o p r i e t a r y i n t e r e s t in com­

m e r c i a l v e n t u r e s w h ose s u c c e s s C o n g r e s s th o u g h t w o u ld b e b e n e f i ­
c ia l

t o th e n a tio n a l econom y.

C ongress sought t o f o s t e r t h e ir

d e v e lo p m e n t b y g r a n t i n g them n a t i o n a l c h a r t e r s and im m unity from
m ost fo rm s o f s t a t e t a x a t i o n ,

a s w e l l a s b y m aking a m o d e st i n ­

v e s t m e n t in t h e i r c a p i t a l s t o c k .

C o n g r e s s a l s o g a v e them what we

w o u ld t o d a y c a l l a p r e f e r r e d p o s i t i o n
s e r v i c e s t o th e g o v e r n m e n t.
ever,

in m a r k e tin g f i n a n c i a l

The e x i s t e n c e o f t h e s e f a c t o r s ,

how­

in n o way c o n v e r t e d t h e o p e r a t i o n o f t h e s e b a n k s , c r e a t e d

t o a v o i d g o v e rn m e n t i n v o lv e m e n t in c r e d i t a s o p p o s e d t o m oney,
in t o e x e r c is e s o f s o v e r e ig n p ow er.
The f i r s t

and s e c o n d B anks o f t h e U n ite d S t a t e s p r o v id e d

im p o r ta n t p r e c e d e n t s f o r o u r p r e s e n t - d a y n a t i o n a l b a n k s . F e d e r a l
s a v in g s and lo a n a s s o c i a t i o n s ,

and o t h e r c o r p o r a t e e n t e r p r i s e s

o r g a n iz e d and o p e r a t i n g u n d e r F e d e r a l a s o p p o s e d t o s t a t e
T h e i r r e l e v a n c e t o t h e p r e s e n t c o n t r o v e r s y , h o w e v e r,
t h e o p p o s i t e o f w hat t h e d e f e n d a n t s c o n t e n d .
46.
47.
48.

A ct o f A p r il 10, 1816, S 8, 3 S t a t . 269.
Id ^ , S 6 .
I d . , p a r a g r a p h 1 o f S 11# 3 S t a t . 2 7 1 .




46

la w .

is e x a c tly

217
IV. JUSTICIABILITY
In v ie w o f o u r ag re e m e n t w it h t h e D i s t r i c t C o u r t * s a n a l y s i s
o f th e i s s u e o f

ju s t ic ia b ilit y ,

644 F . S up p .

and th e f a c t t h a t t h i s c a s e i s on a l l
i s s u e o f s t a n d i n g , we b e l i e v e
i s a p p r o p r ia te .

5 X 0 -1 7 , J .A .

t h a t a r a t h e r a b b r e v i a t e d tr e a tm e n t

A few o b s e r v a t i o n s , h o w e v e r , may b e in o r d e r .

A lm o s t t e n y e a r s have e l a p s e d s i n c e R e u ss v . B a l l e s
argued b e fo r e

2 0 -2 7 ,

f o u r s w it h R i e g l e on th e

t h is C ou rt.

49

was

The d o c t r i n a l d e v e lo p m e n t w h ic h h a s

ta k e n p l a c e s i n c e t h e n , and was e p it o m iz e d l a s t y e a r i n b o t h th e
d i s t r i c t c o u r t and Supreme C o u rt o p i n i o n s in S y n a r , s u g g e s t s
t h a t th e a n x i e t y a b o u t l e g i s l a t o r s '
R eu ss c o u r t ,

c la im s w h ic h a f f l i c t e d

th e

and was th e theme o f th e law r e v ie w a r t i c l e 5 ^ s o
"

h e a v i l y r e l i e d u p on in R i e g l e , may h ave b e e n e x a g g e r a t e d .
R e p r e s e n t a t i v e R euss c la im e d t h a t t h e p e c u l i a r m eth od o f a p p o i n t ­
ment a t i s s u e c a s t a c l o u d o v e r h i s p ow er o f
s p e c t t o t h e e l e c t e d members o f th e FOMC.

52

im peach m en t w it h r e A t l e a s t one F ed era l

ju d g e w o u ld now s a y t h a t t h a t was a g r o s s u n d e r s t a t e m e n t : u n d e r
t h e h o l d i n g o f th e D i s t r i c t C o u r t in th e c a s e a t b a r ,
o f im peachm ent a s i t r e l a t e s t o t h e s e d e fe n d a n t s i s
p a ir e d ,

i t has been d e s tr o y e d .

Y e t th e R eu ss c o u r t ,

t h e p ow er

n o t j u s t im­
r e fu s in g

t o r e c o g n i z e t h e o b v i o u s w eak en in g o f t h e im peach m en t p ow er p o s e d
49.

584 F . 2d 461 (D .C . C i r . ) ,

c e r t , d e n ie d 439 U .S .

997 ( 1 9 7 8 ) .

50.
S y n a r v . U n ite d S t a t e s , 626 F . Supp. 1374 ( t h r e e - j u d g e
c o u r t , D. D .C . ) , a f f i r m e d su b nom. B ow sher v . S y n a r , ____ U .S .
____, 106 S . C t . 3 1 8 1 , 92 L . E d .2d 583 ( 1 9 8 6 ) .
51.
Hon. C a r l McGowan, "C on gressm en in C o u r t : The New P l a i n ­
t i f f s , " 15 G a. L . R e v . 241 ( 1 9 8 1 ) .
52.

R eu ss v .




B a lle s ,

584 F .2 d .

47

461 a t 4 6 7 .

218
b y t h e p o t e n t i a l f o r a c l a i m b y t h e R e s e r v e Bank r e p r e s e n t a t i v e s
th a t th ey a re n o t " O f f i c e r s , "
i n j u r y was n o t r i p e

h e l d t h a t Henry R e u s s 's c l a im o f

f o r a d ju d ic a t io n ,

and w o u ld n o t b e , u n t i l a

R e s e r v e Bank r e p r e s e n t a t i v e o n t h e FOMC had s u c c e s s f u l l y u s e d in
an a c t u a l im peachm ent p r o c e e d i n g a g a i n s t him th e v e r y d e fe n s e
w h ich th e d e fe n d a n t s h a v e r a i s e d i n th e c a s e a t b a r . ^
The c o n t r a s t w it h S y n a r i s

g la r in g .

R e sp o n d in g t o a c la im

t h a t t h e mere e x i s t e n c e o f a n e v e r - u s e d p ow er o f rem ov a l c o n ­
f e r r e d by a 1921 A c t r e n d e r e d t h e C o m p t r o l l e r G e n e ra l im p e rm is s­
ib ly

s u b s e r v ie n t t o C o n g re ss,

th e c o u r t s d id n o t h e s it a t e t o

s t r i k e down t h e k ey m ech anism e m b o d ie d in G ram m -R u dm an -H ollin gs.
Had t h e R eu ss a p p r o a c h b e e n f a v o r e d ,

th e r ip e n e s s d o c t r in e

c o u l d h a ve b e e n u s e d in an y o f a num ber o f ways t o a v o i d a
d e c is io n on th e m e r it s .
The d i f f e r e n c e
u n d e r s t a n d in g o f ,

i s a g r e a t e r r e c e p t i v e n e s s t o , and a b e t t e r

th e d o c t r in e o f

i r o n i c t h a t in t h e i r c e a s e l e s s

s e p a r a t io n o f p ow ers.

I t is

in v o c a t io n o f th a t d o c t r in e ,

d e fe n d a n t s i g n o r e i t s m ost fu n d a m e n ta l a s p e c t , w h ich i s

th e

th e s e p a r ­

a t i o n o f p o w e rs a s b e tw e e n t h e g o v e rn m e n t and th e p e o p l e .

By

t h i s we mean th e i n t e g r i t y o f t h e p o l i t i c a l p r o c e s s by w h ich f r e e
c i t i z e n s m a in t a in t h e i r c o n t r o l o v e r t h e gov ern m en t w h ich must
u lt im a te ly be t h e ir s e r v a n t,

n o t t h e i r m a ster.

T h at p r o c e s s i s

o b v i o u s l y c o m p ro m ise d when p o w e rs o f g o v e rn m e n t, b e t h e y e x e c u ­
tiv e ,
of

le g is la t iv e ,

o r ju d ic ia l

i n n a t u r e , a r e p l a c e d in th e hands

t h o s e who a r e n e i t h e r e l e c t e d b y t h e p e o p l e ,

n or r e s p o n s ib le

w i t h i n t h e e x e c u t i v e h i e r a r c h y , n o r s e l e c t e d and s c r e e n e d a s th e
C o n s titu tio n r e q u ir e s .
53.

Id . a t 466.




48

219
V. CONCLUSION— THE PRECISE RELIEF SOUGHT
S in c e i t

i s n e i t h e r th e p ow ers o f th e i n d i v i d u a l d e fe n d a n t s

n o r t h e i r m eth od o f

s e l e c t i o n w h ic h , s t a n d i n g a l o n e ,

r a is e s a con­

s t i t u t i o n a l q u e s t i o n , b u t r a t h e r th e p r e s e n c e o f t h e tw o in c o m b i­
n a t i o n , S e n a t o r M e lc h e r has p r o p e r l y s o u g h t t h a t r e l i e f w h ic h i s
le a s t d is r u p tiv e

t o th e l e g i s l a t i v e

a b ou n d s w it h c o m m is s io n s , c o u n c i l s ,

sch e m e .

The g o v ern m en t

and c o m m itt e e s c o m p r is e d in

w h o le o r p a r t o f o f f i c i a l s who have n o t b e e n a p p o i n t e d a s o f f i ­
cers o f

t h e U n it e d S t a t e s .

N a t io n a l P e t r o le u m C o u n c il

T h is C o u r t has h e l d
54

in M e t c a l f v .

t h a t ev e n a b i a s e d s e l e c t i o n o f t h e

members o f su ch a b o d y d o e s n o t r e s u l t i n a l e g a l l y
in ju r y

c o g n iz a b le

t o th e l e g i s l a t u r e w here t h e i r d u t i e s a r e a d v i s o r y o n l y .

In a p p l y i n g t h e d o c t r i n e o f s e v e r a b i l i t y , w h e th e r a s an im­
p lic it

j u d i c i a l p ow er o r in im p le m e n ta tio n o f a s t a t u t o r y g r a n t

s u ch a s s e c t i o n

30 o f t h e F e d e r a l R e s e r v e A c t , 5 ^ th e c o u r t s a r e

c e r t a i n l y n o t l i m i t e d t o b l o c k i n g o u t p a r t i c u l a r w o rd s in t h e man­
n e r o f a m i l i t a r y c e n s ts r .
one, o f

V o t in g i s b u t o n e , a l b e i t an im p o r ta n t

t h e f u n c t i o n s o f th e R e se r v e bank r e p r e s e n t a t i v e s .

th e c h i e f e x e c u t iv e o f f i c e r s

o f th e r e g i o n a l b a n k s ,

As

t h e y may b e

i n a u n iq u e p o s i t i o n t o b r i n g t o th e C om m ittee f i r s t - h a n d know­
le d g e o f c o n d it io n s

in t h e i r r e s p e c t i v e d i s t r i c t s .

W ith a s t a t u ­

t o r y r i g h t t o p r e s e n t t h a t k n ow led g e t o t h e C om m ittee a t t h e v e r y
tim e t h a t d e c i s i o n - m a k i n g d e l i b e r a t i o n s a r e b e i n g c o n d u c t e d ,

th ey

are

th an

in a p o s i t i o n

t o d o s o w it h v a s t l y g r e a t e r e f f e c t i v e n e s s

54.

553 F . 2d 176 (D .C . C i r .

55.

38 S t a t .




1 9 7 8 ).

2 7 5 ; n o t in U .S . C o d e .

49

220

if

t h e i r p r e s e n c e a t t h e s e d e l i b e r a t i o n s w ere a m a tte r o f g r a c e .

W hether v ie w e d a s " i n t e r p r e t a t i o n "
fu lly

56

o r as " r e p a ir ,"

s u g g e s t t h a t t h e m o st a p p r o p r i a t e

e x i s t i n g s t a t u t o r y schem e i s

57

we r e s p e c t -

j u d i c i a l r e s p o n s e t o th e

t o e x c i s e o n l y t h o s e i m p l i c i t fu n c ­

t i o n s o f t h e R e s e r v e bank r e p r e s e n t a t i v e s t h a t e x c e e d c o n s t i t u ­
t io n a l

lim it a t io n s ,

and l e a v e t h e r e s t

in ta c t.

T hat i s e x a c t l y

th e r e s u l t w h ic h w o u ld b e a c h i e v e d b y t h e i n j u n c t i v e r e l i e f
p ra yed f o r

in th e c o m p la in t

A c c o r d in g ly ,

58

and h e r e b y s o u g h t in t h i s C o u r t .

S e n a t o r M e lc h e r r e s p e c t f u l l y

su b m its t h a t th e

d e c i s i o n an d o r d e r o f t h e D i s t r i c t C o u r t s h o u ld b e r e v e r s e d ,

and

t h e c a s e rem anded w it h i n s t r u c t i o n s t o e n t e r an o r d e r e n j o i n i n g
th e i n d i v i d u a l d e fe n d a n t s and t h e i r s u c c e s s o r s

in o f f i c e

from

v o t i n g a s members o f t h e F e d e r a l Open M arket C om m ittee o r s e r v i n g
as i t s

ch a irm a n o r v i c e

c h a ir m a n ,

and e n j o i n i n g th e F e d e r a l Open

M arket C om m ittee fr o m p e r m i t t i n g them s o t o v o t e o r s e r v e .

450 W e s t r o a d S t . - S u it e 303
F a l l s C h u rch , VA 22046
T e le p h o n e : (7 0 3 ) 2 4 1 -5 5 9 7

56.

C r o w e ll v . B e n so n ,

285 U .S .

22 a t 62 (1 9 3 2 ) .

57.
H on. R uth B a d e r G in s b u r g fI "Some T h o u g h ts on J u d i c i a l A u t h o r i ­
t y t o R e p a ir U n c o n s t i t u t i o n a l L e g i s l a t i o n , " 28 C le v e la n d S t a t e L .
R e v . 301 ( 1 9 7 9 ) .
58.

J .A .

17.




50

221

APPENDIX 1 — MISCELLANEOUS MATERIALS

S m ith s o n ia n I n s t i t u t i o n p h o t o g r a p h s o f c i r c u l a t i n g b a n k n o t e s
i s s u e d b y t h e f i r s t and s e c o n d Banks o f t h e U n ite d S t a t e s . 1A1
E x c e r p t fr o m m in u te s o f f i r s t m e e tin g o f F e d e r a l Open M arket
C om m ittee a s c o n s t i t u t e d by th e B an k in g A c t o f 1935 . . . .
Announcem ent o f f i r s t u s e o f a u t h o r i t y i n s e c t i o n 16 o f t h e
F e d e r a l R e s e r v e A c t t o t r a n s f e r e a r n in g s t o t h e T r e a s u r y

1A2
. 1A3

P a g e s 6 e -3 2 and 6 e -3 3 o f th e B ud get o f t h e U n ite d S t a t e s
G ov ern m en t, F i s c a l Y e a r 19 8 7 , sh o w in g r e c e i p t s fr o m th e
F e d e r a l R e s e r v e in c o m p a r is o n w it h o t h e r s o u r c e s o f
F e d e r a l r e v e n u e .....................................................................................................




1A5

222

CENTIMETERS
SMITHSONIAN INSTITUTION Photograph No. 86-12753

mm

n 6
JIWIIIUIIIUJJ) ll

S

'//„ B A N K ..rtlicTJKITXB STATE
&

s XKK n o i i m

,,A

"

oAcSy

CENTIMETERS
SMITHSONIAN INSTITUTION Photograph No. 88-12752

Smithsonian Institution photographs o f circulating banknotes issued
by the first (upper) and second {lower) Bank o f the United States.
These photographs, together w ith the le tter o f transm ittal from the
Smithsonian Institution, w ere included in the record o f the case
below as exhibits with the p la in tiffs reply memorandum filed
October 30, 1986.




-1A1-

223
EXCERP T FROM THE MINUTES OF THE F I R S T ME ET ING OF THE FEDERAL OPEN
MARKET COMMITTEE AS CONSTIT UT ED BY THE BANKING ACT OF 1 9 3 5
AS REPORTED I N THE F I R S T VOLUME OF THE S E R I E S E N T I T L E D
"MINUT ES OF THE FEDERAL OPEN MARKET COMMITTEE"
PUB L IS H ED BY THE COMMITTEE

C hairm an E c c le s s t a t e d t h a t t h i s m e e tin g o f th e
F e d e r a l Open M a r k e t C o m m itte e , w h ic h w as t h e f i r s t m e e t ­
in g o f t h e C o m m itte e a s c o n s t i t u t e d b y S e c t i o n 12A o f
th e F e d e r a l R eserv e A ct a s am ended by th e B an k in g A ct
o f 1 9 3 5 , had been c a lle d f o r th e a d o p tio n o f b y -la w s ,
t h e a d o p t i o n o f r e g u l a t i o n s r e q u i r e d b y S e c t i o n 12A o f
th e F e d e ra l R eserv e A ct to be is s u e d by th e C o m m ittee,
and su ch o th e r a c tio n as m ight be fo u n d t o be
d e sira b le .

*

*

*

*

*

*

*

T he C o m m ittee th e n t o o k u p f o r d i s c u s s i o n a t e n t a ­
t i v e d r a f t o f p ro p o s e d b y -la w s w h ic h w as r e a d an d d i s ­
c u s s e d p a ra g ra p h by p a r a g r a p h .
A t th e c o n c lu s io n o f th e d i s c u s s i o n , upon m o tio n
d u ly m ade and s e c o n d e d , an d by u n a n im o u s v o t e , th e b y ­
la w s w e re a d o p te d in th e f o l l o w i n g form :

*

*

"A R T I C L E

*

*

I.

MEMBERS

*

*

*

" S e c t i o n 3 . O a th — E a ch m em ber o f t h e F e d e r a l Open
M a r k e t C o m m ittee a n d e a c h a l t e r n a t e s h a l l t a k e t h e sam e
o a th o f o ffic e as th a t re q u ire d by th e C o n s titu tio n fo r
o f f i c e r s of th e U n ite d S t a t e s ."

*

*

*

*

*

*

*

The m e etin g th e n r e c e s s e d an d re c o n v e n e d a t
p .m . w i t h th e sam e a t t e n d a n c e a s a t t h e m o r n in g
sessio n .

2:40

The form o f o a t h o f o f f i c e a s r e q u i r e d b y S e c t i o n
3 o f A r t i c l e I o f t h e b y - l a w s w a s e x e c u t e d b y e a c h me m­
b e r o f t h e F e d e r a l O pen M a r k e t C o m m itte e p r e s e n t a n d
f i l e d w ith th e S e c re ta ry .

*

*

*

*

*

*
/s/

A pproved:




M .S . E c c l e s
C hairm an

-1A2-

*
C h e ste r M o rrill
S ecretary

224
FEDERAL RESERVE BULLETIN — M A Y 1947

TRANSFER TO TREASURY OF EXCESS EARNINGS OF
FEDERAL RESERVE BANKS
The Board of Governors of the Federal Reserve
System, under date of April 24, 1947, made the
following announcement:

As a result of operations essential to Government
financing during and since the war, and operations
required by the needs of business and the public
for credit and currency, earnings of the twelve
Federal Reserve Banks have been at relatively high
levels. On the basis of present estimates, it is ex­
pected that net earnings of the Federal Reserve
Banks for 1947, after payment of the statutory
dividends to member banks, will aggregate more
than 60 million dollars. In view of these facts, and
of the fact that at the end of 1946 the surplus of
each Federal Reserve Bank was equal to its sub­
scribed capital, the Board has decided to invoke
the authority, granted to it under Section 16 of
the Federal Reserve Act, to levy an interest charge
on Federal Reserve notes issued by the Federal
Reserve Banks. The purpose of this interest charge
is to pay into the Treasury approximately 90 per
cent of the net earnings of the Federal Reserve
Banks for 1947.
This action will add about 60 million dollars to
the receipts of the Government for this calendar
year. The initial payment covering the first quarter
of 1947 will be made on April 24, and will amount
to approximately $15,269,000.
Section 16, paragraph 4, of the Federal Reserve
Act provides that each Federal Reserve Bank shall
pay such rate of interest as may be established by
the Board of Governors of the Federal Reserve Sys­
tem on the amount of its outstanding notes less
the amount of gold certificates held by the Fed­
eral Reserve Agent as collateral security. The Board
has now decided to establish such rates of interest
as will make it possible to transmit to the Treasury
approximately 90 per cent of the net earnings after
dividends of each of the Federal Reserve Banks for
1947.
The authority to levy an interest charge on Fed­
eral Reserve notes not covered by gold certificates
has not been used previously, chiefly because of the
existence, prior to 1933, of so-called franchise tax
provisions of the law which had a similar effect;

58
1




that is, of transferring excess earnings of the Re­
serve Banks to the Treasury. Under these provi­
sions, which were repealed in 1933, each Federal
Reserve Bank was required to pay a franchise tax
to the Government equal to 90 per cent of its net
earnings after it had accumulated a surplus equal
to its subscribed capital. To the end of 1932, the
Federal Reserve Banks had paid franchise taxes
to the United States Treasury amounting to 149
million dollars, and at that time the Federal Reserve
Banks had accumulated surplus accounts of 278
million dollars, as compared with subscribed capital
aggregating 302 million. In the amendment of
the Federal Reserve Act, contained in the Banking
Act of 1933, providing for the establishment of the
Federal Deposit Insurance Corporation, Congress
required each Federal Reserve Bank to pay an
amount equal to one-half of its surplus on January
1, 1933, as a subscription to the capital stock of the
FDrC on which no dividends would be paid. These
stock subscriptions amounted to 139 million dollars
and reduced the surplus of the Federal Reserve
Banks to an equivalent figure, or considerably less
than one-half of their subscribed capital. Congress,
therefore, eliminated the franchise tax in order to '
permit the Federal Reserve Banks to restore their
surplus accounts from future earnings.
Net earnings for the next ten years were relatively
small, and at the end of 1944 the combined surplus
accounts of die Federal Reserve Banks were less
than 75 per cent of their subscribed capital. During
the next two years, however, net earnings increased
substantially, due primarily to large holdings of
Government securities accumulated through open
market operations. This made possible transfers
to surplus accounts which increased the combined
surplus of the Federal Reserve Banks to $439,823,000 at the end of 1946, as compared with subscribed
capital of $373,660,000.
Under the circumstances, the Board concluded
that it would be appropriate for the Federal Reserve
Banks to pay to the Treasury the bulk of their net
earnings after providing for necessary expenses and
the statutory dividend. In effect, this will involve
paying currently to the Treasury funds which,
F e d e r a l R eserve B u l l e t in

1A3

225
FEDERAL RESERVE BULLETIN — M A Y 1947

TR AN S FE R T O TR EASU RY O F EXCESS E AR N IN G S O F F E D E R A L RESERVE B AN K S

under existing law, would otherwise come to it only
in the event of liquidation of the Federal Reserve
Banks. The Federal Reserve Act still provides
that, in case of liquidation of a Federal Reserve
Bank, any surplus remaining after the payment
of all claims shall be paid to the Treasury. It is
expected that the present payments will be made
at quarterly intervals. By invoking its authority
under Section 16 of the Federal Reserve Act, the
Board is able to accomplish the same results as
were accomplished by the payment of a franchise
tax, i.e., the transfer of excess earnings to the Gov­
ernment. The payments can thus be reflected in
current revenues and taken into account in the Gov­
ernment’s budget without further legislation.
In the event of restoration of a franchise tax by
the Congress, the Board would, of course, withdraw
the requirement that Federal Reserve Banks pay
interest on Federal Reserve notes, as there would
be no justification for utilizing both means of
accomplishing the same purpose—namely, payment
of excess earnings of the Federal Reserve Banks to
the Treasury.
In his Budget Message for 1948 the President

recommended that Congress authorize the Federal
Deposit Insurance Corporation to repay the 139
million dollars of capital furnished by the Federal
Reserve Banks, and accepted the proposal of the
Board of Governors that Congress at the same time
authorize the payment of this sum to the Treasury
instead of to the Reserve Banks. Similarly, the
President in his Budget Message concurred in the
Board’s further recommendation that Congress re­
lease to the Treasury general fund approximately
139 million dollars earmarked for payments to the
Reserve Banks to enable them to make loans to
industry under Section 13b of the Federal Reserve
Act. Legislation has been introduced in Congress
to repeal Section 13b and to substitute therefor
authority for the Reserve Banks, upon request of
any commercial bank, to guarantee in part loans
made by such bank to business enterprises.1 If this
legislation be enacted, the Federal Reserve Banks
would rdy upon their own surplus funds for this
purpose, without resort to Government funds.
521

519

M a y 1947




tUtemeat br

>A
Cfcainnaa Eccles to tbe Senate Banking
and Currency Committee R f i r d i o f Utia legislation appears on
p.
o f this B m n i x ,

-1A4-

226

(hwt *«m
mK i
IM

-

|w
y—

IM
I

M
S

U
K

296.415
56393

334,531
(1331

353,736
70365

150312
15,763
40362
3321

169322
1(348
44371
3305

180,574 I 195,474
18,801
17364
55,737
50,641
3,729
3,535

180,(86

128372
18348
35341
230$
185,766

209,(58

234346

252,114

273,741

1(300

18,799

25,138

25,758

23,581

23,415

4,140
72

4351
78

4,494
16

4372
87

4.(53
90

5,532
116

4360

4,759

4,743

5,648

M
O
D

w

m

244,069
$4,(00

215317
61,137

297.7*4
49307

m.w

519$?

2173*1
($377

tt.032
*.786
11,474
tjM
M

73.141
12,250
16368
1322

63,410
14,564
19374
2,190

96,581
16,626
23,217
2323

117.757
12,418
30340
2,457

122340
20326
34301
2317

12,199

103311

120358

138,748

162373

11312

13350

15387

15336

15,763

MIS
59

3,174
62

3,428
66

3,(60
59

3308
76

H
n

m

5J2 8 3 8
Mid a •o et xs —......-... ....... 1TS6 1 0 8
r ut cm ae....
S M kuM t xs ad cnrctoe (In
h
nr o ae n otfu r ti
e
i
tab);
E iga ttxsw c Mui w
m r n ae d w bto :
(*H ads n nt t r c (oMu|t..~
*e n u ta num f > de)
*
Da it r n c (^ u g t).... ........ j
s b y a n e -b d e
H # * t a ne
o * o n c ....-........... -.......
Total «n«*vB«nt taxes ad o tr fo—
n c ir t» «

Other ftfwnent cortritwiiom:
Men) mi r e' retiwwnt—em
poas
ployee cm
btoitaH............................................
CrrbtoSfar non-Menl employees-------otiu R
c i

m
37322

mt
385,984
86,729

2374

3,237

3,494

3.719

3,984

4312

4,429

Total aocial insurance taxes and tORbtudns. 106,485

120,967

138.939

157303

182,720

201,498

208,994

239376

265,163

280,438

302,804

5.29S
2 3»

M92
2,444

5331
2,492

1360

2,116

1,785

5,601
2.443
6,934
585

5,606
23*1
23352
2389

$382
2337
16,407
2344

5.557
4,136
12,13!
2358

5315
4,660
8,906
3398

5,562
4,779
6348
2,406

5,88!
4,594
4,085
2.859

5301
4,600
2,761
2,971

Excise taxes
federal tafe
Alcohol..................................................

Ii ac............... -.................
tbco

Uin®!" IMA tM I •*'"
K
Wa4f*l1 Pfw
H
Otter.....-............................................. .

.

9,648

10,054

9308

15,S63

34,128

28,(70

24,086

22,279

19,097

17,426

16,233

6,709
1,191

6304
1326
92

7,189
1,526
222

(.620
1374
272

6305
21
385

6,744
133
765

8397
2,165
753

11,743
2.499
(27

13.01$
2351
1,027

13314
3,247
1,909

7300

8,937

8,7(6

6,711

7341

1)314

15,0(2

16394

17348

8323
18376

13,022
2,954
1327
17,202

18,745

24329

40,839

36,311

35300

37361

35,992

34,628

35,203

&Me and gift taxes----- ..
Mom duties..................................

7327
SvlSO

5385
6,753

M il
7,439

(389
7,174

6,787
6383

7,991
8354

6,053
8,655

6,010
11370

6,422
12.079

6,073
12,404

5,661
12,937

Macobneous racdpts:
deposit < earrings ty federal Reserve System—
4
Otter misoaleneout receipts...... „........„.....

$308
€23

6341
778

8327
925

11,767
981

12334
956

15,186
975

14,492
1,108

15,684
1347

17359
1.480

16,532
2,461

16,560
4,494

(331

7,420

9352

12,748

13,790

16,161

15,601

17331

18,539

18,993

21,054

T federal fund ante Uxes.................„
otal
Trwt funds:
W M ....................................... ..........
fh V
A
irport and anny......................................
Other— ................
Total trust fund excise taxes.......... ..........
Total noise taxes..................................

■ Total misee«eneousi*»pts*....................

18,970

m
m

OMndfet:
m tm m m
Maral fundi............................................. . 241312 270,490 316,366 350356 410,422 409353
7(373
(5383
Trust funds..
94379 106,037 122,111
70341
33,194 -37341 -41,632 -47362 -57,0(5
-32312 —
278.741 314,1(9 365309 403,903 469397 474399
Total oMwdf'
97394 113309 funds)...
.................................. 76317
Off-tudpt (trust 130,176 143,467
($391
T*d , .
355,559 399361 463302 517,112 599,272 (17,7(6

................ ....




1A5

ill

5
Total receipts................ ..... _ .... .......
X2
M S 7 4 5 777,139 • 0372
M7 137
8813(1 MHM (17,112 W372 07366 M l
On-Dwtgat................................... (278,741) (314.1(9) (365309) (403303) (489.097) (474399) (453342) (500,382) (547,886) (579,201) (636,097)
O
ff-budlcet.—........................ ........... (7(317) (85391) (97394) (113309) (130,176) (143,467) (147320) (166,075) (186,171) (197,938) (214,275)

453342
147320
(00,562

420370 459,488 485,155
533,293
216,(89
157,521
197,749 207,196
-77,509 -109332 -113,199 -113384
636,097
547386 579301
500382
186,171 197,938
214375
16637$
(66.457
734.057 777,139
850,372

APPENDIX 2 - CONSTITUTIONAL, STATUTORY, AND REGULATORY PROVISIONS

The C o n s t i t u t i o n - A r t . I , § 8 , c l .
A r t. I I , S 2, c l . 2;
A rt V I, c l .
F e d e ra l R eserve A ct,

2;
A rt. I , § 10;
3 ......................................................2A1

§ § 4 and 12A (1 2 U .S .C . § §

341 an d 2 6 3 )

C ode o f F e d e r a l R e g u l a t i o n s , T i t l e 1 2 , C h a p te r I I ,
S u b c h a p te r B — F e d e r a l Open M arket C om m ittee
(1 2 CFR §S 2 7 0 . 1 - 2 8 1 . 2 ) ..................................................................................




2A2

2A3

228
CONSTITUTION OF THE UNITED STATES
ARTICLE.

*
Section 8.

*

*

*

I.

*

The Congress shall have power . . . .

*

*

*

*

*

To coin Money, regulate the Value thereof, and of foreign coin

*

*

*

*

*

Section 10. No State shall enter into any Treaty, Alliance, or
Confederation; grant Letters of Marque and Reprisal; coin Money;
emit Bills of Credit; make any Thing but gold and silver Coin a
Tender in Payment of Debts; pass any Bill of Attainder, ex post
facto Law, or Law impairing the Obligation of Contracts, or grant
any Title of Nobility.

*

*

*

*

ARTICLE.

*

*

*

*

*

II.

*

Section 2.............
He [the President] . . . shall nominate, and by and with the
Advice and Consent of the Senate, shall appoint Ambassadors,
other public Ministers and Consuls, Judges of the supreme
Court, and all other Officers of the United States, whose
Appointments are not herein otherwise provided for, and which
shall be established by Law: but the Congress may by Law vest the
Appointment o f such infereior Officers, as they think proper, in the
Courts of Law, or in the Heads of Departments.

*

*

*

*

ARTICLE.

*

*

*

*

*
VI.

*

The Senators and Representatives before mentioned, and the
Members of the several State Legislatures, and all executive and
judicial Officers, both of the United States and of the several
States, shall be bound by Oath or Affirmation, to support this
Constitution; but no religious test shall ever be required as a
Qualification to any Office or public Trust under the United States.




2A1

229
THE FEDERAL RESERVE ACT

*

*

*

*

*

Federal Reserve Banks
Sec. 4. * * * *
The president shall be the chief executive officer of the bank and
shall be appointed by the board o f directors, with the approval of
the Board of Governors of the Federal Reserve System, for a term
of five years; and all other executive officers and all employees of
the bank shall be directly responsible to him. The first vice
president of the bank shall be appointed in the same manner and
for the same term as the president, and shall, in the absence or
disability of the president or during a vacancy in the office of the
president, serve as chief executive officer of the bank...............
(49 Stat. 703; 12 U.S.C. § 341.)

*

*

*

*

*

Federal Open Market Committee
Sec. 12A. (a) There is hereby created a Federal Open Market
Committee (hereinafter referred to as the "Committee"), which
shall consist of the members of the Board o f Governors of the
Federal Reserve System and five representatives of the Federal
Reserve banks to be selected as hereinafter provided.
Such
representatives shall be presidents or first vice presidents of
Federal Reserve banks and, beginning with the election for the
term commencing March 1, 1943, shall be elected annually as
follows: One by the board of directors of the Federal Reserve Bank
of New York, one by the boards o f directors o f the Federal
Reserve Banks of Boston, Philadelphia, and Richmond, one by the
boards of directors o f the Federal Reserve Banks of Cleveland and
Chicago, one by the boards of directors of the Federal Reserve
Banks of Atlanta, Dallas, and St. Louis, and one by the boards of
directors o f the Federal Reserve Banks of Minneapolis, Kansas
City, and San Francisco. In such elections each board of directors
shall have one vote; and the details of such elections may be
governed by regulations prescribed by the committee, which may
be amended from time to time. An alternate to serve in the
absence of each such representative shall likewise be a president or
first vice president of the Federal Reserve bank and shall be
elected annually in the same manner.
The meetings of said
committee shall be held at Washington, District of Columbia, at
least four times each year upon the call of the Chairman of the
Board of Governors of the Federal Reserve System or at the
request of any three members o f the'Committee.
(b) No Federal Reserve bank shall engage or decline to engage
in open-market operations under section 14 of this Act except in
accordance with the direction and regulations adopted by the
Committee. The Committee shall consider, adopt, and transmit to
the several Federal Reserve banks, regulations relating to the
open-market transactions of such banks.
(c) The time, character, and volume of all purchases and sales
of paper described in section 14 o f this Act as eligible for openmarket operations shall be governed with a view to accommodating
commerce and business and with regard to their bearing upon the
general credit situation of the country.
(49 Stat. 705, as amended, 56 Stat. 647; 12 U.S.C. § 263.)




2A2

230
TITLE 12, C O D E OF F E D E R A L REGULATIONS

I

Fadwal iM trv t System

§ 270.4

SUBCHAPTER B—
-FEDERAL OPEN MARKET COMMITTEE
1 270.3 Governing principles.

PART 270—OPEN MARKET OPER­
ATIONS OF FEDERAL RESERVE
RANKS
R b o u la tio k s R e la t u ig t o O m M a r k e t
O p b a t io m o r F ed eral R eserve B a k u

As required by section 12A of the
Federal Reserve Act. the time, character, and volume of all purchases and
sales of obligations in the open market
by Federal Reserve banks are gov­
erned with a view to accommodating
commerce and business and with
regard to their bearing upon the gen­
eral credit situation of the country.

•

S ec.

370.1 Authority.
370.2 Definitions.
370.3 Governing principles.
370.4 Transactions In obligations.
Authoutt: 8ec. 6, 48 Stat. 108. as amend­
ed (13 U.&C. 303).
Source: 38 FR 2753, Jan. 30. 1973, unless
otherwise noted.
R bgu latioh s
R ela tin g
to
O pe*
MaUKT OPERATIONS O FEDERAL R lT

■nvsBuiKs
1370.1

A athoritj.

This part is issued by the Federal
Open Market Committee (the "Com­
mittee**) pursuant to authority con­
ferred upon it by sections ISA and 14
of the Federal Reserve Act (12 UiS.C.
303.355).
• 270J Definitions.

(a) The term “obligations” means
Government securities. UJ8. agency se­
curities, bankers* acceptances, bills of
exchange, cable transfers, bonds,
notes, warrants, debentures, and other
obligations that Federal Reserve
banks are authorised by lav to pur­
chase and sell.
(b) The term “Government securi­
ties'* means direct obligations of the
United States (I.e., UJ3. bonds, notes,
certificates of indebtedness, and
Treasury bills) and obligations fully
guaranteed as to principal and Interest
by the United States.
(c) The term “tJJS. agency securi­
ties** means obligations that are direct
obligations of, or are fully guaranteed
as to principal and interest by, any
agency of the United States.
(d) The term “System Open Market
Account” means the obligations ac­
quired pursuant to authorizations and
directives Issued by the Committee
and held on behalf of all Federal Re­
serve banks.




f 270.4 Transactions In obligations.

(a) Each Federal Reserve bank shall
engage In open market operations
under section 14 of the Federal Re­
serve Act only In accordance with this
part and with the authorizations and
directives Issued by the Committee
from time to time, and no Reserve
bank shall decline to engage in open
market operations as directed by the
Committee.
(b) Transactions for the System
Open Market Account shall be execut­
ed by a Federal Reserve bank selected
by the Committee. The participations
of the several Federal Reserve banks
in such account and In the profits and
losses on transactions for the account
shall be allocated in accordance with
principles determined by the Commit­
tee from time to time.
(c) In accordance with such limita­
tions, terms, and conditions as are pre­
scribed by law and in authorizations
and directives Issued by the Commit­
tee, the Reserve bank selected by the
Committee Is authorized and direct­
ed—
(1) To buy and sell Government se­
curities and UJ3. agency securities in
the open market for the System Open
Market Account, and to exchange ma­
turing securities with the Issuer;
(2) To buy and sell banker’s accept­
ances in the open market for its own
account;
(3) To buy Government securities,
UJS. agency securities, and banker's
acceptances of the kinds described
above, under agreements for repur­
chase of such obligations, In the open
market for its own account; and
(4) To buy and sell foreign curren­
cies In the form of cable transfers in

917

2A3

231
TITLE 12, C O D E O F F E D E R A L REGULATIONS

12CHtCh.lt (1*1-97 Edition)

$271.1

the open market for the System Open Board, or any Federal Reserve bank,
Market Account and to maintain for in the performance of duties for, or
such account reciprocal currency ar­ pursuant to the direction of, the Com­
rangements with foreign banks among mittee.
(b) “Records o f the Committee". For
those designated by the Board of Gov­
ernors of the Federal Reserve System purposes of this part, the term
under { 214.5 of this chapter (Regula­ "records of the Committee” means
tion N).
rules, statements, opinions, orders,
(d) The Federal Reserve banks are memoranda, letters, reports, accounts,
authorized and directed to engage in and other papers containing Informa­
such other operations as the Commit* tion of the Committee that constitute
tee may from time to time determine a part of the Committee’s official files.
to be reasonably necessary to the ef­
fective conduct of open market oper­ 132 FR 9818, July 1,1987, as amended at 38
ations and the effectuation of open PR 2754. Jan. 30,1973)
market policies.
S 271.3 Published informmtton.
[38 PR 3753. Jan. 30.1973. as amended at 39
FR 11873. Apr. 1. 1974; 48 FR 323M. July
18. 1983]

PART
271__RULES
AVAILABILITY OP INFORMATION
271.1 Authority.
271.2 Definitions.
271.3 Published information.
271.4 Records available to the public on re­
quest.
271.5 Deferment of availability of certain
information.
271.8 Information not dlacloeed.
271.7 Subpoenas.
A u t h o r i t y : 5 U.S.C. 552.
8 271.1 Authority.

This part is issued by the Federal
Open Market Committee (the “Com­
mittee”) pursuant to the requirement
of section 552 of Title 5 of the United
States Code that every agency shall
publish in the F ederal R acism for
the guidance of the public descriptions
of the established places at which, the
officers from whom, and the methods
whereby, the public may obtain Infor­
mation, make submittals or requests,
or obtain decisions.

(а) Federal Register. To the extent
required by sections 552 and 553 of
Title 5 of the United States Code, and
subject to the provisions of ft 271.5
and 271.6, the Committee publishes In
the Federal Register. In addition to
this part,
(1) A description of its organisation:
(2) Statements of the general course
and method by which its functions are
channeled and determined:
(3) Rules of procedure:
(4) Substantive rules of general ap­
plicability, and statements of general
policy and interpretations of general
applicability formulated and adopted
by the Committee:
(5) Every amendment, revision, or
repeal of the foregoing: and
(б) General notices of proposed rule

<b) Policy record, in accordance with
section 10 of the Federal Reserve Act
(12 U.S.C. 247a), each annual report
made to Congress by the Board In­
cludes a complete record of the actions
taken by the Committee during the
preceding year upon all matters of
policy relating to open market oper­
ations, showing the votes taken and
[32 FR 9518, July 1. 1987, as amwdfd at 38 the reasons underlying such actions.
(c)
Other published information.
PR 2754. Jan. 30.1973]
From time to time, other information
9 8 7 U Definitions.
rela^ng to open market operations of
(a) "Information af the Committee" the Federal Reserve Banks is pub­
For purposes of this part, the term 'in­ lished In the Federal Reserve Bulletin,
formation of the Committee" means Issued monthly by the Board, in such
all information coming into the pos­ Board’s annual report to Congress,
session of the Committee or of any and In announcements and statements
member thereof or of any officer, em­ released to the press. Copies of Issues
ployee, or agent of the Committee, the of the Bulletin and of annual reports




918

*
2A4

232
TITLE 12, C O D E OF F E D E R A L REGULATIONS

T
M ira l

System

$271.4

of the Board may be obtained upon re­
quest.
[32 Fit 9518, July 1 .1M7, as amended at 38
FR 3754. Jan. 30.1*73]
#271.4 Records available to the public on
request.
(a) Records available. Records of the

Committee are made available to any
person, upon request, for Inspection or
copying In accordance with the provi­
sions of this section and subject to the
limitations stated in || 271.5 and 271.6.
Records falling within the exemptions
from disclosure set forth In section
552(b) of Title 5 of the United States
Code and In f 271.6 may nevertheless
be made available in accordance with
this section to the fullest extent con­
sistent, in the Committee's judgment,
with the effective performance of the
Committee's statutory responsibilities
and with the avoidance of injury to a
public or private interest intended to
be protected by such exemptions.
(b) Place and time. In general, the
records of the Committee are held in
the custody of the Board, but certain
of such records, or copies thereof, are
held in the custody of one or more of
the Federal Reserve Banks. Any such
records subject to this section will be
made available for Inspection or copy­
ing during regular business hours at
the offices of the Board In the Federal
Reserve Building, 20th and Constitu­
tion Avenue, Washington, D.C. 20551,
or, in certain instances as provided in
paragraph (c) of this section, at the of­
fices of one or more designated Feder­
al Reserve Banks.
<c) Obtaining access to records. Any
person requesting access to records of
the Committee shall submit such re­
quest in writing to the Secretary of
the Committee. In any case in which
the records requested, or copies there­
of, are available at a Federal Reserve
Bank, the Secretary of the Committee
may so advise the person requesting
access to the records. Every request
for access to records of the Committee
shall state the full name and address
of the person requesting them and
shall describe such records In a
manner reasonably sufficient to
permit their identification without
undue difficulty. The Secretary of the
Committee shall determine within ten




working days after receipt of a request
for access to records of the Committee
whether to comply with such request;
and he shall immediately notify the
requesting party of his decision, of the
reasons therefor, and of the right of
the requesting party to appeal to the
Committee any refusal to make avail­
able the requested records of the Com­
mittee.
(d) Appeal o f denial o f access to
records o f the Committee. Any person
who is denied access to the records of
the Committee, properly requested in
accordance with paragraph (c) of this
section, may file, with the Secretary of
the Committee, within ten days of no­
tification of such denial, a written re­
quest for review of such denial. The
Committee, or such member or mem­
bers of the Committee may designate
(pursuant to | 272.4(c) of its Rules of
Procedure) shall make a determina­
tion with respect to any such appeal
within 20 working days of its receipt,
and shall Immediately notify the ap­
pealing party of the decision on the
appeal and of the right to seek court
review of any decision which upholds,
in whole or in part, the refusal of the
Secretary of the Committee to make
available the requested records.
(e) Extension o f time requirements
in unusual circumstances. In unusual
circumstances as provided in 5 UJS.C.
552(aX6Xb), the time limitation Im­
posed upon the Secretary of the Com­
mittee or the Committee or its desig­
nated representative^) in paragraphs
(c) and (d) of this section may be ex­
tended by written notice to the re­
questing party for a period of time not
to exceed a total of ten working days.
(f) Fee schedule. A person requesting
access to or copies of particular
records shall pay the costs of search­
ing and copying such records at the
rate of $10 per hour for searching and
10 cents per standard page for copy­
ing. With respect to Information ob­
tainable only by processing through a
computer or other information sys­
tems program, a person requesting
such information shall pay a fee not to
exceed the direct and reasonable cost
of retrieval and production of the In­
formation requested. Detailed sched­
ules of such charges are available
upon request from the Secretary of

919

2A5

233
TITLE 12, C O D E O F F E D E R A L REGULATIONS

; vu

12 CM Ch. H (1-1 -i7 Edition)

Che Committee. Documents may be
furnished without charge or at a re­
duced charge where the Secretary of
the Committee or such person as lie
may designate determines that waiver
or reduction of the fee is in the public
interest because furnishing the infor­
mation can be considered as primarily
benefiting the general public, or where
total charges are less than *2.
,

!

(32 FR 9518. July 1. 1M7. as amended at 38
PR 2754. Jan. 30. 1973; 40 FR 7897. Feb. 24.
19751
6

j

{
\

'
1

■
i

I
j

*
{
i
j

*

j

271.9 Deferment of availability
tain information.
(a) Deferred availability o f information. In some instances, certain types

of information of the Committee are
not published in the Federal Register
or made available for public inspection
or copying until after such period of
time as the Committee may determine
to be reasonably necessary to avoid
the effects described in paragraph (b)
of this section or as may otherwise be
necessary to prevent impairment of
the effective discharge of the Commit'
tee's statutory responsibilities.
fb) Reason* for deferment o f availability. Publication of. or access to.
certain information of the Committee
may be deferred because earlier disclo­
sure of such information would:
(1) Interfere with the orderly execution of policies adopted by the Committee in the performance of its statutory functions;
(2) Permit speculators and others to
gain unfair profits or to obtain unfair
advantages by speculative trading in
securities, foreign exchange, or other­
wise;
(3) Result in unnecessary or unwar­
ranted disturbances in the securities
market;
(4) Make open market operations
more costly;
(5) Interfere with the orderly execution of the objectives or policies of
other Government agencies concerned
with domestic or foreign economic or
fiscal matters; or
(6) Interfere with, or impair the ef­
fectiveness of. financial transactions
with foreign banks, bankers, or coun­
tries that may influence the flow of
gold and of dollar balances to or from
foreign countries.




(32 F R 9518. July I. 1987. u amended at 40
FR 13204. Mar. 25. 1975: 41 FR 22261. June
2. 1978)
( 271.8 Information not disclosed.

Except as may be authorized by the
Committee, information of the Com­
mittee that is not available to the
public through other sources will not
be published or made available for in­
spection. examination, or copying by
any person if such information:
(a) Is specifically exempted from dis­
closure by statute (other than section
o f552b of Title S. United States Code),
cer*
provided that such statute (1) requires
that the matters be withheld from the
public in such a manner as to leave no
discretion on the issue, or (2) estab­
lishes particular criteria for withhold­
ing or refers to particular types of
matters to be withheld: or Is specifical­
ly authorised under criteria estab­
lished by an executive order to be kept
secret in the interests of national defense or foreign policy and is in fact
property classified pursuant to such
executive order;
(b) Relates solely to internal personnel rules or practices or other internal
practices of the Committee:
(c) Relates to trade secrets or commerdal or financial information obtained from any person and privileged
or confidential:
(d) Is contained in interagency or intraagency memoranda or letters, ineluding records of deliberations and
discussions at meetings of the Committee and reports and documents
filed by members or staff of the Committee that would not be routinely
available to a private party in litiga­
tion with the Committee;
<e> Is contained in personnel, medicaL or similar files (including financial
files) the disclosure of which would
constitute a clearly unwarranted inva­
sion of personal privacy; or
(f) Is contained in or related to ex­
amination, operating, or condition re­
ports prepared by. on behalf of, or for
the use of any agency responsible for
the regulation or supervision of finandal institutions.
Except as provided by or pursuant to
this part, no person shall disclose, or
permit the disclosure of. any informs-

.
I
I
,
I
|
j
|
j
I
!
j
)
■
;
>

}
-

!
i
1

920

-------— ■
2A6

234
TITLE 12, C O D E OF F E D E R A L REGULATIONS

Federal Reserv* System

§272.2

tion of the Committee to any person,
whether by giving out or furnishing
such information or copy thereof, by
allowing any person to inspect, exam­
ine, or reproduce such information or
copy thereof, or by any other means,
whether the information is located at
the offices of the Board, any Federal
Reserve bank, or elsewhere, unless
such disclosure is required in the per­
formance of duties for, or pursuant to
the direction of, the Committee.

ue to decline to disclose such informa­
tion and shall promptly report the
facts to the Committee for such action
as the Committee may deem appropri­
ate.
[32 FR 9518, July 1, 1987, as amended at 38
FR 2754, Jan. 30. 1973]
^

PART 272—RULES O f PROCEDURE
Sec.
272.1
272.2
272.3
272.4
272.5

Authority.
Functions of the Committee.
Meetings.
Committee actions.
Notice and public procedure.
A u t h o r i t y : 5 U.8.C. 552.
Source 38 FR 2754, Jan. 30. 1973, imle«
otherwise noted.

132 PR 9518, July l, 1967. as amended at 38
FR 2754, Jan. 30, 1973; 42 FR 13299, Mar.
10.1977]
6 271.7 Subpoenas.
(a) Advice by person served. If any

person, whether or not an officer or
employee of the Committee, of the
Board of Governors of the Federal Re­
serve System, or of a Federal Reserve
Bank, has information of the Commit­
tee that may not be disclosed by
reason of § 371.5 or { 271.6 and in con­
nection therewith is served with a sub­
poena, order, or other process requir­
ing his personal attendance as a wit­
ness or the production of documents
or information upon any proceeding,
he should promptly inform the Secre­
tary of the Committee of such service
and of all relevant facts, including the
documents and information requested
and any facts that may be of assist­
ance in determining whether such doc­
uments or information should be made
available; and he should take action at
the appropriate time to inform the
court or tribunal that issued the proc­
ess. and the attorney for the party at
whose Instance the process was issued,
if known, of the substance of this part.
(b) Appearance
person served.
Except as disclosure of the relevant in­
formation is authorized pursuant to
this part, any person who has informa­
tion of the Committee and is required
to respond to a subpoena or other
legal process shall attend at the time
and place therein mentioned and de­
cline to disclose such information or
give any testimony with respect there­
to, basing his refusal upon this part.
If, notwithstanding, the court or other
body orders the disclosure of such in­
formation, or the giving of such testi­
mony, the person having such infor­
mation of the Committee shall contin*

S272.1

8 272.2 Functions of the Committee.

The procedures followed by the
Committee are designed to facilitate
the effective performance bf the Com­
mittee's statutory functions with re­
spect to the regulation and direction
of open market operations conducted
by the Federal Reserve banks and
with respect to certain direct transac­
tions between the Reserve banks and
the United States. In determining the
policies to be followed in such oper­
ations, the Committee considers infor­
mation regarding business and credit
conditions and domestic and interna­
tional economic and financial develop­
ments, and other pertinent informa­
tion gathered and submitted by its
staff and the staffs of the Board of
Governors of the Federal Reserve
System (the Board) and the Federal
Reserve banks. Against the back­
ground of such information, the Com­
mittee takes actions from time-to-time
to regulate and direct the open market
operations of the Reserve banks. Such
policy actions ordinarily are taken
through the adoption and transmis­
sion to the Federal Reserve banks of

921
88-03) 0 - 8 7 -------SO




Authority.

This part is issued by the Federal
Open Market Committee (the Com­
mittee) pursuant to the requirement
of section 552 of title 5 of the United
States Code that every agency ahgll
publish In the F ederal R egister its
rules of procedure.

235
TITLE 12, C O D E O F F E D E R A L REGULATIONS

•

12 CF* Ch. II (1-1-S7 Edition)

§ 27X3
regulations, authorizations, and direc­
tives.

|

i
|

J

j
I
|
*
I
j,
i'

9 272.3 Meeting*.
(a) Place and frequency'. The Com­
mittee meets in Washington* D.C., at
least four times each year and oftener
if deemed necessary. Meetings are
held upon the call of the Chairman of
the Board or at the request of any
three members of the Committee. No­
tices of calls by the Chairman of the
Board to other members are given by
the Secretary of the Committee in
writing or by telegram. Requests of
any three members for the calling of a
meeting shall state the time therefor
and shall be filed in writing or by tele­
gram with the Secretary who shall
forthwith notify all members of the
Committee in writing or by telegram.
When the Secretary has sent notices
to all members of the Committee that
a meeting has been requested by three
members and of the time therefor, a
meeting is deemed to have been called.
If. in the judgment of the Chairman,
circumstances require that a meeting
be called at such short notice that one
or more members cannot be present in
Washington, such members may par­
ticipate in the meeting by telephone
conference arrangements.
(b) Alternates.
Whenever any
member of the Committee represent*
ing Federal Reserve banks shall find
that he will be unable to attend a
meeting of the Committee, he shall
promptly notify his alternate and the
Secretary of the Committee in writing
or by telegram, and upon receipt of
such notice the alternate shall advise
the Secretary whether he will attend
such meeting.
(c) Quorum. Seven members (includ­
ing alternates present and acting in
the absence of members) constitute a
quorum for the transaction of busi­
ness; but less than a quorum may ad­
journ from time to time until a
quorum is in attendance.
(d) Attendance at meeting*. Attend­
ance at Committee meetings is re­
stricted to members and alternate
members of the Committee, the Presi­
dents of Federal Reserve Banks who
are not at the time members or alter­
nates, staff officers of the Committee,
the Managers, and such other advisers




as the Committee may invite from
time to time.
(e) Meeting agendas. The Secretary,
in consultation with the Chairman,
prepares an agenda of matters to be
discussed at each meeting and the Sec­
retary transmits the agenda to the
members of the Committee within a
reasonable time in advance of such
meeting. In general, the agendas in­
clude approval of minutes of actions;
reports by the Managers on open
market operations since the previous
meeting, and ratification by the Com­
mittee of such operations; reports by
Economists on, and Committee discus­
sion of, the economic and financial sit­
uation and outlook; Committee discus­
sion of monetary policy and action
with respect thereto; and such other
matters as may be considered neces­
sary.

,

CM PR 3754. Jan. 30.1973. as amended at 44
PR 52823, Sept. 11.1979]

9 272.4 Committee actions.
(a) Actions at meetings. Actions are
taken at meetings of the Committee
except as described below.
<b) Actions between meetings. Spedal circumstances may make it desira­
ble in the public interest for Committee members to consider an action to
modify an outstanding Committee au­
thorization or directive at a time when
it is not feasible to call a meeting.
Whenever, in the judgment of the
Chairman, such circumstances have
arisen, the relevant information and
recommendations for action are trans­
mitted to the members by the Secre­
tary, and the members communicate
the!/ votes to the Secretary. If the
action is approved by a majority of the
members, advice to that effect is
promptly given by the Secretary to
the members of the Committee and to
the Reserve bank selected to execute
transactions for the System Open
Market Account All communications
of recommended actions and votes
under this paragraph shall be in writing or by telegram; provided that, in
exceptional cases when that is not fea­
sible, such communications may be
made orally, either in person or by
telephone, and the Secretary shall
cause a written record to be made

922

■
i
!
1
!
|
|
j
!
‘
I
!
j
I
j
I
!
I
j

*

A
2AB

236
TITLE 12, C O D E OF F E D E R A L REGULATIONS

§ 281.2

Ftdtral Rasarv* System
without delay. An action taken between meetings has the force and
effect of an action at a meeting: Pro­
vided, however, That if a meeting is
held before the execution of any oper­
ations pursuant to the action, the
action is null and void unless it is rati­
fied and confirmed by the Committee
at such meeting.
(c) Delegations o f authority. In spe­
cial circumstances, the Committee
may delegate authority to take an
action, subject to such instructions or
guidelines as the Committee deems
proper. Such delegations of authority
may be made to the Chairman; to a
subcommittee consisting of the Chair­
man and the Vice Chairman of the
Committee and the Vice Chairman bf
the Board (or in the absence of the
Chairman or of the Vice Chairman of
the Board the members of the Board
designated by the Chairman as alter­
nates. and in the absence of the Vice
Chairman of the Committee his alter­
nate); or to any other member or
members of the Committee. An action
taken pursuant to such a delegation of
authority has the force and effect of
an action taken by the Committee.
(d) Effective date. Committee action
ordinarily is made effective as of the
time It is taken because the nature of
the subject matter and the action
taken is such that the public interest
and the proper discharge of the Com­
mittee's responsibilities so require. Oc­
casionally, however, the Committee
may specify that an action is to be ef­
fective at some different time.

8 281.1

Purchase of Treasury bills.

The Federal Open Market Commit­
tee of the Federal Reserve System has
directed the Federal Reserve Banks to
terminate the policy of buying all
Treasury bills offered to them at a
fixed rate of % per cent per annum
and to terminate the repurchase
option privilege on Treasury bills. The
new policy will apply to bills issued on
or after July 10, 1947. Existing policy
will continue to apply to bills issued
prior to that date.
(Sec. 12A, 48 Stat. 168, u
XJJS.C. 283)
[12 FR 4543, July 10, 1947]

amended; 12

PART 281—STATEMENTS OF POLICY

6 281.2 Policy regarding the Government
in the Sunshine A ct
On September 13, 1976, there was enacted
Into law the Government in the Sunshine
Act, Pub. L. No. 94-409, 90 Stat. 1241 ("Sun­
shine Act”), established for the purpose of
providing the public with the “fullest practi­
cable information regarding the decision­
making processes of the Federal Govern­
ment * * * while protecting the rights of In­
dividuals and the ability of the Government
to carry out Its responsibilities.” ' The Sun­
shine Act applies only to those Federal
agencies that are defined in section 552(e)
of Title S of the United States Code and
"headed by a oollegial body composed of
two or more Individual members, a majority
of whom are appointed to such position by
the President with the advice and consent
of the Senate, and any subdivision thereof
authorized to act on behalf of the agency.”*
The Federal Open Market Committee
("FOMC") is a separate and independent
statutory body within the Federal Reserve
System. In no respect is it an agent or "sub­
division” of the Board of Governors of the
Federal Reserve System ("Board of Gover­
nors”). It was originally established by the
Act of 1933 and restructured in Its
present form by the Banking Act of 1935
and subsequent legislation in 1942 (general­
ly see 12 UJ3.C. 263(a)). The FOMC’* mem­
bership is composed of the seven members
of the Board of Governors and five repre­
sentatives of the Federal Reserve Banks
who are selected annually in accordance
with the procedures set forth In Section 12A
of the Federal Reserve Act, 12 UAC. 263(a).
Members of the Board of Governors serve in
an ex officio capacity on the FOMC by

Sec.
281.1 Purchase of Treasury bills.
281.2 Policy regarding the Government In
the Sunshine Act.

‘Government in the Sunshine Act, Pub. L.
94-409, sec. 2, 90 Stat. 1241 (1976).
■Government in the 8unshlne Act, Pub. L.
94-409, sec. 3(a). 90 Stat. 1241 (1976).

9 272.5 Notice and public procedure.

There ordinarily is no published
notice of proposed action by the Com­
mittee or public procedure thereon, as
described in section 553 of title 5 of
the United States Code, because such
notice and procedure are impractica­
ble. unnecessary, or contrary to the
public interest.




923

2A9

237
TITLE 12, C O D E O F F E D E R A L REGULATIONS

SM
I-2/

11 cm Ch. R (1-1-17 Edition)

reason of their appointment as Members of
the Board of Oovemors, not as a result of
an appointment "to such position” (the
POMCV by the President. Representatives
of the Reserve Banks serve cm the FOMC
not as a result of an appointment "to such
position” by the President, but rather by
virtue of their positions with the Reserve
Banks and their selection pursuant to Sec­
tion ISA of the Federal Reserve Act. It Is
clear therefore that the FOMC does not fall
within jthe scope of an "agency*' or “subdivi­
sion” as defined In the Sunshine Act and
consequently Is not subject to the provisions
of that Act.
As explained below, the Act would not re­
quire the FOMC to bold Its meetings In
open session even If the FOMC were cov­
ered by the Act. However, despite the con­
clusion reached that the Sunshine Act does
not apply to the FOMC, the FOMC has de­
termined that its procedures and timing of
public disclosure already are conducted in
accordance with the spirit of the Sunshine
Act, as that Act would apply to delibera­
tions of the nature engaged In by the
FOMC.
In the foregoing regard, the FOMC has
noted that while the Act calls generally for
open meetings of multi-member Federal
agencies. 10 specific exemptions from the
open meeting reqi. 'xement are provided to
assure the ability of the Government to
carry out its responsibilities. Among the ex­
emptions provided Is/ that which authorises
any agency operating under the Act to con­
duct closed meetings^where the subject of a
meeting involves information "the prema­
ture disclosure of which would—In the case
of an agency which regulates currencies, se­
curities, commodities, or financial institu­
tions, be likely to/lead to significant finan­
cial speculation In currencies, securities, or
commodities*’*1 I
As to meetings closed under such exemp­
tion, the Act requires the maintenance of
either a transcript, electronic recording or
minutes and seta forth specified, detailed re­
quirements as to the contents and timing of
’Government in the Sunshine Act, Pub. L.
94-409, sec. 3(a), 90 Stat. 1243 (1976).




disclosure of certain portions or all of such
minutes. The Act permits the withholding
from the public of the minutes where disclo­
sure would be likely to produce adverse consequences of the nature described In the rel­
evant exemptions.
The FOMC has reviewed the agenda of Its
monthly meetings for the past three years
and has determined that all such meetings
could have been closed pursuant to the ex­
emption dealing with flnanlcal speculation
or other exemptions set forth In the Simshine Act. The FOMC has further deter­
mined that virtually all of Its substantive
deliberations could have been preserved
pursuant to the Act's minutes requirements
and that such minutes could similarly have
been protected against premature disclosure
under the provisions of the A ct
The FOMC** deliberations are currently
reported by means of a document entitled
"Record of Policy Actions" which is released
to the public approximately one month
after the meeting to which it relates. The
Record of Policy Actions compiles with the
Act’s minutes requirements In that It con­
tains a full and accurate report of all mat­
ters of policy discussed and views presented,
clearly sets forth all policy actions taken by
the FOMC and the reasons therefor, and in­
cludes the votes by Individual members on
each policy action. The tim ing of release of
the Record of Policy Actions Is fully consist­
ent with the Act’s provisions assuring
against premature release of any Item of
discussion in an agency's minutes that con­
tains information of a sensitive financial
nature. In fact, by releasing the comprehen­
sive Record of Policy Actions to the public
approximately a month after each meeting.
the FOMC exceeds the publication requirements that would be mandated by the letter
of the Sunshine Act.
Recognising the Congressional purpose
underlying the enactment of the Sunshine
Act. the FOMC has determined to continue
Its current practice and timing of public dis­
closures In the conviction that its operations
thus conducted are consistent with the
intent &nd spirit of the Sunshine Act.
(Pub. Lu/94-409, 90 S ta t 1241-1242)
[42 PR 13300, Mar. 10,19771

;
*
j
.
!

j

j
I
j
,

i

|
I
I
’
,

(

924

*
2A10

238

FEDERAL RESERVE press release
For us* in Alto of Thursday
September 30, 1993

September 29, 1993

Tbs Fsdsral Reserve Board today announced ths
appointment of Chairman and Deputy Chairmen of ths 12 Fedsral
Reserve Banks for 1994.
Each Reserve Bank has a Board of Directors of nine
members.

The Board of Governors in Washington appoints three of

these directors and designates one of its appointees as Chairman
and a second as Deputy Chairman.
Following are the names of ths chairmen and Deputy
Chairmen appointed by the Board for next yearj
Boston — Jerome H. Grossman, Chairman of the Board
and Chief Executive Officer, New England
Medical Center, Inc., Boston, renamed
Chairman.
Warren B* Rudman, Esq., Sheehan, Phinney,
Bass, and Green, Manchester, N.H., renamed
Deputy Chairman.
New York — Maurice R» Greenberg, Chairman and Chief
Executive Officer, American International
Group, Inc., Mew York City, Chairman.
A Deputy Chairman will be selected later.
Philadelphia —
James M. Mead, President, Capital Blue
Cross, Harrisburg, Pa., chairman.
Donald J. Kennedy, Business Manager,
International Brotherhood of Electrical
Workers, Local Union Mo. 269, Trenton, N.J..
Deputy Chairman.
Cleveland — A. William Reynolde, Chairman and Chief
Executive Officer, GenCorp, Fairlawn, Ohio,
renamed chairman.







239
s. Nutts Humphrey, Jr., President, gwh
Holding*, Inc., Pittsburgh, Pa., renamed
Deputy Chairman.
Richmond — Henry J. Faison, President, raison
Associates, Charlotte, N.C., Chairman.
Claudlne B. Malone, President, F i n a n c ia l and
Management Consulting, McLean, Va., Deputy
Chairman.
Atlanta —

Lao Benatar, Chairaan of the Board and
President, Sngraph, Inc., Atlanta, Ga.,
Chairman*
Hugh M. Brown, Prasidant and chief Executive
Officer, RAMBI, Inc., Titusville, Fla.,
Deputy chairman*

Chicago —

Richard 0, Cline, Chairman, President and
Chief Executive Officer, m x c o r , inc.,
Naperville, 111*, renamed chairman.
Robert K* Healey, president, Chicago
Federation of Labor end Industrial union
Council, AFli'-CIO, Chicago, 111., renamed
Deputy Chairman*

St. Louis — Robert K. Quenon, Mining Consultant,
St* Louis, No*, renamed Chairman.
John P. McDonnell, Chairman and Chief
Executive Officer, McDonnell Douglas Corp.,
St. Louis, Mo., Deputy Chairman.
Minneapolis — Gerald A* Reuenhorst, Chairman of the
Board and Chief Executive Officer, opus
Corp., Minneapolis, Minn., chairman.
Jean D. Kinsey, Professor, Consumption andConsumer Eoononios, Department of
Agricultural and Applied Economics,
University of Minnesota, St. Paul, Minn.,
Deputy Chairman.
Kansas City — fturton A. Dole, Jr., Chairman of the
Board and President, Puritan-Bennett Corp.,
Overland Park, Kan., renamed Chairman.
Merman Cain, President and chief Executive
officer, Godfather's Plssa, inc., Omaha,
Neb., renamed Deputy Chairman.

240
Dallas —

Cece Smith, General Partner, Phillips-Smith
Specialty Retail Group, Dallas, Tax.,
Chairman.
Roger R. Heaminghaua, Chairman, President and
Chief Executive Officer, Diamond Shamrock,
inc., San Antonio, Tex., Deputy Chairman.

San Francisco — James A. Vohs, chairman and Chief
Executive Officer (Retired), Xaiser
Foundation Health Plan, Inc., and Xaiser
Foundation Hospitals, Oakland, Cal., renamed
Chairman.
Judith M. Runstad, Co. Managing Partner,
Foster Pepper and Shefelman, Seattle, Wash.,
renamed Deputy Chairman.

-0-

D e p u t y C h a i r m a n , Ne w Y o r k
D a v i d Ha m b u r g
Pr e s i d e n t
CARNE6IE Co r p o r a t i o n

437 M
adison A
venue
N w Y , N w Y rk
e ork e
o




10022

O

72-851 (24 8)













ISBN 0-16-043956-6

801 60

439568