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TH&jFEDERAL RESERVE
AeeouN TABILITY ACT OF 1993
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HEARING
BEFORE THE

COMMITTEE QN RANKING, flNANCE AND
URBAN AFFAIRS
M

$

HOUSE OF REPRESENTATIVES
t

ONE HUNDRED THIRD CONGRESS
i‘ !

FIRST SESSION

OCTOBER 13, 1993
Printed for the use of the Committee on Banking, Finance and Urban Affairs

S erial N o. 103-77

U.S. GOVERNMENT PRINTING OFFICE
73-115 CC

WASHINGTON : 1994
For sale by the U.S. Government Printing O ffice

Superintendent o f Documents, Congressional Sales O ffice , W ashington, DC 20402




ISBN 0-16-043992-2

HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
HENRY B. GONZALEZ. Texas. Chairman
JAMES A. LEACH, Iowa
STEPHEN L. NEAL, North Carolina
BILL MCCOLLUM, Florida
JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey
BRUCE F. VENTO, Minnesota
CHARLES E. SCHUMER, New York
DOUG BEREUTER, Nebraska
BARNEY FRANK, Massachusetts
THOMAS J. RIDGE, Pennsylvania
TOBY ROTH, Wisconsin
PAUL E. KANJORSKI, Pennsylvania
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 LINDER, Georgia
HERBERT C. KLEIN, New Jersey
JOE KNOLLENBERG, Michigan
RICK LAZIO, New York
CAROLYN B. MALONEY, 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 13, 1993 .........................................................................................
Appendix:
October 13, 1993 .........................................................................................

1
45

WITNESSES
W ed n esday, October

13, 1993

Greenspan, Alan, Chairman of the Board of Governors of the Federal Reserve
Board and the Federal Open Market Committee ...........................................
Hamilton, Hon. Lee, a Representative in Congress from the State of Montana,
and Chairman, Committee on Foreign Affairs ...............................................

15
1

APPENDIX
Prepared statements:
Gonzalez, Hon. Henry B............................................................................... .....46
Leach, Hon. James A.........................................................................................51
Hamilton, Hon. Lee ..........................................................................................52
Greenspan, Alan ......................................................................................... .....61
A d d it io n a l M a t e r ia l S u b m it t e d f o r t h e R e c o r d

Hamilton, Hon. Lee H.:
Statement before the Subcommittee on Domestic Monetary Policy on
The Federal Reserve Reform Act of 1989, November 9, 1989 .................
Statement before the Senate Committee on Banking, Housing and Urban
Affairs on the Monetary Policy Reform Act of 1991, November 13,
1991 ..........................................................................................................
Schumer, Hon. Charles E., question to Chairman Greenspan with response ....




(III)

81
90
94




THE FEDERAL RESERVE ACCOUNTABILITY
ACT OF 1993
WEDNESDAY, OCTOBER 13, 1993
H ouse of Representatives,
Committee on Banking , Finance and U rban Affairs,

Washington, DC.
The committee met, pursuant to notice, at 9:30 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, Waters, Klein, Maloney, Gutierrez, RoybalAllard, Barrett, Furse, Velazquez, Hinchey, Dooley, Fingerhut,
Leach, McCollum, Roukema, Roth, McCandless, Baker, Nussle,
Pryce, Linder, Knollenberg, Bachus, Huffington, and King.
The Chairman . The committee will please come to order.
We have a couple of members out in the wings, Mr. Chairman.
Welcome.
Mr. Hamilton . Good morning.
The Chairman . Today we resume our second in a series of four
hearings here at the outset on the issues involved in H.R. 28, the
Federal Reserve Accountability Act of 1993.
We are honored today to have as our first witness Hon. Lee
Hamilton, chairman of the Foreign Affairs Committee. If I am not
mistaken, you have also served as chairman of the Joint Economic
Committee, if you are not still chairman.
Mr. Hamilton . No.
The Chairman . Anyway, he has a considerable background of in­
terest and contribution to this question of Federal Reserve Board
restructuring or modernizing our accountability depending on the
point of view.
Welcome, Mr. Chairman. We know you are very busy. We know
that last week you had to go to the White House so thank you for
being with us this morning.
STATEMENT OF HON. LEE HAMILTON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF INDIANA, AND CHAIRMAN,
COMMITTEE ON FOREIGN AFFAIRS

Mr. Hamilton . Thank you very much, Mr. Chairman. I do apolo­
gize for not making your hearing last week, which I understand
was a very good one, and I appreciate the accommodations you
have made for me. Your staff has been extremely cooperative in
working out the schedule and I am grateful for that.
I just read in a press release that the Chairman of the Federal
Reserve and the chairman of the House Banking Committee are




(l)

2
going to square off in a financial High Noon this morning. I am
glad to slip in here before the shots begin to go back and forth with
a modest proposal or two with respect to the Federal Reserve.
The Chairman. Will you yield to me? Actually, I am hoping it
doesn’t become confrontational. I am trying to avoid it. Naturally,
sometimes stories have to have a little spin. We ought to be grate­
ful for the fact that Chairman Greenspan is going to be here today
and has brought the press out. That I think we ought to be grateful
for.

Mr. Hamilton . I don’t have any doubt that it will be a construc­
tive hearing.
Mr. Chairman, I appreciate the opportunity to appear before the
Committee on Banking, Finance and Urban Affairs this morning to
testify on Federal Reserve accountability and Federal Reserve re­
form. It is an important series of hearings that you are having and
I commend you for your efforts to make the Federal Reserve more
accountable and more open. I have tried to contribute modestly to
that goal over a period of years and I hope these hearings will
mark the start of some tangible progress.

I want to begin with one of the most important points that can
be made about Federal Reserve reform. The bills being considered
today will go a long way toward addressing the accountability is­
sues that concern us without impairing or interfering with the
independence of the Fed to conduct monetary policy.
I emphasize that point, because when I introduced my first bill
8 years ago to bring the Federal Reserve’s budget into the sunlight,
and broader legislation 4 years ago with then-Congressman Dorgan, now Senator Dorgan, to reform certain practices and proce­
dures of the Federal Reserve, these bills were frequently criticized
as efforts by Congress to control monetary policy and pressure the
Fed to reduce interest rates.

If 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.
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 ana
monetary policy. Interest rates may be down, but the need for re­
form of the Federal Reserve System is just as important 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 in­
stitution, but it does not conform to the normal standards of gov­
ernment accountability. Power without accountability simply does
not fit into the American system of democracy.
Through its control over monetary policy, the Federal Reserve af­
fects the lives and well-being of all Americans. The path that the
Federal Reserve sets for monetary policy and interest rates affects
every business person, worker, consumer, borrower, and lender in
the United States.
The dilemma created by this concentration of power is that the
independence which the Federal Reserve must have in order to in­
sulate monetary policy from political pressures also serves to re-




3

move the Fed from the normal processes of accountability that
apply to every other agency of government.
Monetary policy is decided in secret, behind closed doors. There
are no transcripts of meetings and the Fed waits 6 weeks before
releasing policy decisions to the Congress and the public. There are
no formal lines of communication between the Fed and the admin­
istration. The President must often wait until late in his term to
appoint a Chairman of the Board of Governors.
Of the 12 members of the Federal Open Market Committee who
vote on monetary policy, only 7 are duly appointed public officials.
The other five are representatives of the private interests of the
banking system.
Much of the Fed’s financial activities are off limits to General Ac­
counting Office auditors and the Fed’s budget is not published with
the budget for the rest of the government.
I have introduced two bills that address many of these problems.
The first bill, the Federal Reserve Reform Act, has five major provisions.
First, consultation with the administration. It would require the
Secretary of the Treasury, the Chair of the Council of Economic Ad­
visors, and the Director of the Office of Management and Budget
to meet three times a year on a nonvoting basis with the Federal
Open Market Committee to consult on monetary and fiscal policy.
Chairman Greenspan opposes this provision on the grounds that
the Federal Reserve and the administration already communicate
through informal channels. Informal channels of communication
certainly do exist. For example, Chairman Greenspan and Treasury
Secretary Bentsen, I am tola, 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 ap­
proach 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 simply astonishing that the world’s greatest economic power
does not have a formal channel of communication between key
makers of economic policy. My bill would establish a channel of
communication that would not depend on personalities for success.
Second, the term of the Federal Reserve Chairman. The bill
would make the Federal Reserve Chairman’s term roughly co­
terminus with the term of Office of the President of the United
States. Alan Greenspan was appointed to his current term as
Chairman by President Bush and will hold that office until March
2, 1996, more than 3 years into President Clinton’s term.
Fortunately, Chairman Greenspan and President Clinton have a
cordial relationship, but if they were unable to work together, the
result could be serious damage to the American economy and paral­
ysis of economic policymaking. Why take that risk?
My bill would address this by having the President appoint the
Fed Chairman to a 4-year term beginning 1 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.
The Federal Reserve’s position on this issue has varied over the
years. Chairman Greenspan opposes it, but former Chairmen Wil-




liam McChesney Martin and Paul Volcker supported it while
Arthur Burns took different sides at different times during his
chairmanship.
Third, disclosure of monetary policy decisions. The bill would re­
quire the Federal Open Market Committee to disclose immediately
any major monetaiy policy decisions. The Federal Open Market
Committee currently keeps major policy decisions secret for 6
weeks after they are made and carried out.
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, who do not have the
resources of large Wall Street firms to hire full-time professional
Fed watchers. The solution; immediate release of Federal Reserve
policy decisions, I think is widely supported by economists and par­
ticipants in financial markets.
Mr. Chairman, your bill, H.R. 28, would supplement this by re­
quiring the Federal Open Market Committee to make a video tran­
script 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 1970’s. Both Houses of Congress publish a full verbatim
transcript of our deliberations on the floor and in committees.
There is no reason why the Fed should not do the same thing.
The next part is the GAO audits. The Federal Reserve Reform
Act would permit the Comptroller General to conduct more thor­
ough reviews and studies of Federal Reserve operations by remov­
ing selected current restrictions on GAO audits. Every government
agency that takes in and spends billions of dollars a year each year
ought to be subject periodically to outside review.
My bill would give the GAO more complete access to the Federal
Reserve’s financial statements. Your bill, Mr. Chairman, would
complement this by requiring an annual GAO audit of the Fed’s
open market operations.
Finally, my bill would require the Federal Reserve’s annual $1.7
billion budget to be published in the budget of the U.S. Govern­
ment. 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 to the public. Only a
small fraction of the Fed’s $1.7 billion of operating expenses is in­
cluded in the U.S. Government budget, just the $133 million of ex­
penses incurred by the Board of Governors in Washington, about
8 percent of the total.
My bill would require that all the data be published conveniently
in the U.S. Government budget where spending by every other gov­
ernment agency is already listed. I might just point out here, Mr.
Chairman, that the Supreme Court—which, of course, values its
independence—has its budget published in the government budget
without any loss of independence and I don’t see why the Fed can­
not do the same.
The second bill, the Monetary Policy Reform Act, would assign
sole responsibility for open market operations to the Board of Gov­
ernors. Currently, the Federal Open Market Committee consists of
the 7 members of the Board of Governors plus 5 of the 12 presi­




5

dents of the regional Federal Reserve Banks who serve on a rotat­
ing basis.
The Governors are appointed by the President and confirmed by
the Senate to 14-year terms and are thus duly appointed govern­
ment officials. By contrast, the Federal Reserve Bank presidents
owe their jobs to the boards of directors of the regional banks. Nei­
ther the President nor the Congress has any role in selecting them.
Nonetheless, they participate in monetaiy policy decisions through
their membership on the Federal Open Market Committee where
they cast 5 of the 12 votes that determine monetary policy and in­
terest rates.
This situation in which private individuals participate in mone­
tary policy decisions of immense importance is an anomaly in a
system of democratic government. The Monetaiy Policy Reform Act
would assign the conduct of monetary policy to the seven-member
Board of Governors, thus lodging this responsibility with properly
appointed public officials.
It would also create a Federal Open Market Advisory Committee
through which the presidents of the regional Federal Reserve
Banks could continue to advise the Board on monetary policy.
Mr. Chairman, your bill would also address this problem by hav­
ing the President appoint and the Senate confirm the Federal Re­
serve Bank presidents, thus making them government officials. Ei­
ther way would put important monetary policy decisions solely in
the hands of responsible public officials where they belong, rather
than in the hands of individuals representing private interests.
Before concluding, Mr. Chairman, I want to address a more gen­
eral argument frequently used to oppose efforts to reform the Fed­
eral Reserve. The argument is that “if it ain’t broke you don’t fix
it.” People who raise this objection completely miss the point of my
proposals. They assume the purpose of my bills is to pressure the
Federal Reserve to alter its conduct of monetary policy, which could
harm the economy of the United States.
When they say “if it ain’t broke, don’t fix it,” they usually refer
to monetary policy, but such an objection I think is based on a
misreading of my bills. These bills are not directed at the Federal
Reserve’s conduct of monetary policy. There is no provision in ei­
ther one that would give Congress or the President any more influ­
ence over monetary policy than they have at this very moment.
If someone wanted to politicize monetary policy, and I do not,
these bills would not be the way to do it. Nonetheless, the system
is broken in a different way because many of the Federal Reserve’s
practices and procedures violate the normal standards of account­
ability in a democratic society. They are just not widely recognized
because they are not widely publicized.
How can someone argue that the system is not broken when the
Fed conducts its business in secret, refuses to keep minutes, and
fails to inform the Congress and the public of its decisions until
weeks after they are carried out?
How can someone argue that the system is not broken when no
formal communication channel exists between decisionmakers at
the Federal Reserve and the top economic policymakers in the
administration?




6

How can someone argue that the system is not broken when tril­
lions of dollars of transactions by the Fed are borrowed from out­
side review and most of the Federal Reserve’s $1.7 billion budget
does not even show up in the official budget documents of the U.S.
Government?
How can someone argue that the system is not broken when pri­
vate interests have a direct vote on monetary policy, in violation
of the most basic democratic principle that public decisions should
be made solely by properly appointed and elected and accountable
public officials?
The system is broken in these ways and it needs to be fixed. My
bills would do that without jeopardizing the Federal Reserve’s inde­
pendence 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 eco­
nomic turbulence and controversy, the results may be far less
measured.
Mr. Chairman, I commend you for your efforts to make the Fed­
eral Reserve a more accountable agency within our democratic sys­
tem of government and thank you for giving me the privilege of
testifying before your committee.
May I submit a longer statement for the record plus two addi­
tional statements that explain the bills in more detail? I ask they
be included in the record.
The Chairman . Without objection, so ordered. They will be in­
cluded in that manner.
[The prepared statement of Mr. Hamilton and his statements be­
fore two other committees can be found in the appendix.]
It is my chance to thank you, Mr. Chairman. You certainly have
been devoted to a cause even though you may not have been a
member of this committee, at least for years. And we have a debt
of gratitude to you actually and above all, thank you for taking
time from your present pressurized position to come here this
morning. If nothing is done now in what I consider to be a time
of relative calm, as you have said, and this consideration, will the
problems such as you have outlined, will they fade away or are
there fundamental issues of accountability which really pose ex­
tremely serious problems for the Federal Reserve especially in
times of national crisis?
In this sense, would you agree that the changes you and I are
suggesting will help the Federal Reserve stay independent of short­
term political pressures?
Mr. Hamilton . Mr. Chairman, I do feel that wav. I think you
have put your finger on the right problem, the funaamental prob­
lem of accountability. Let me observe that I am coming to the view
that more and more Americans are understanding the importance
of the Fed. Many years ago, when interest rates were very low and
didn’t fluctuate, nobody really had much of a concept of the influ­
ence of the Fed.
Many economists today believe, maybe even most believe, that
the most important economic policy actor is not the Congress and
not the President, but the Fed. Or to put it another way, what the




7

Fed does has a more profound impact on the economic lives of our
citizens than what we and the President do in fiscal policy. That
is a debatable point, but no one would dispute the view, I think,
that the Fed is a powerful economic actor.
I notice that Americans are beginning to understand that, and
they are beginning to understand that what these people do down
in the temple of the Fed is beyond their reach and beyond their un­
derstanding. I don’t think they like that. At some point, that is
going to bubble up and become a critical problem. It may not be
this year. It may not be next year, but I think it will at some point.
I think the Fed has to get much, much more serious about this
whole question of accountability.
I have not seen Chairman Greenspan’s testimony, but I am told
that he takes a strong position against every one of these propos­
als. That kind of a posture I think is not advisable given the under­
lying politics of the situation.
The Chairman . Thank you veiy much. I agree with you. I have
sat on this committee lone enough to have worked through about
eight or nine different ana diverse Federal Reserve Board Chair­
men. We had a period of time in which you had a relatively fast
turnover of Chairmen. And you are right; the people—who are the
people? What were we before we had political office responsibility?
Weren’t we part of the people?
The fact that we are invested with this office, does that make us
smarter? I never have thought so, but I do know that the people
may not be sophisticated enough to understand the fine points and
nuances and jargon involved, but they know who is deciding their
fate as to the American standard of living, their jobs, and every­
thing else.
Those who travel know that their dollar doesn’t carry one-fourth
as much as it did just 8 years ago in foreign countries. The fact
is that we are the ones that are supposed to be accounting and
leading and informing the people and that is why I have so much
respected you and honored you, because you have sensed the grave
importance of this matter, and have spoken out and have gone be­
yond your call of duty to record your voice.
So thank you again, Mr. Chairman.
Mr. Leach.
Mr. Leach . Thank you, Mr. Chairman. I also welcome you, Mr.
Hamilton. Your thougntfulness is widely respected in this body. I
would only say that I do think now is a reasonable time to make
some adjustments to the Federal Reserve System. As was men­
tioned at last week’s hearing as well as this week’s, it is better to
make modest adjustments when times are good than when times
are a little more tense.
I would only stress that there may be other approaches that
could be laid on the table as well. For example, we have two broad
approaches right now, one from the Senate that talks about taking
Reserve Bank presidents off the Federal Open Market Committee,
which has some advantages, also some disadvantages. And one
from the House that suggests that we require Senate confirmation
of Reserve bank presidents.
A third alternative would have the Federal Reserve Board in
Washington appoint the presidents of the Reserve banks. I think




8

that is one alternative that ought to be more seriously entertained.
But I would only stress that not only when times are good is it a
better time to make a4justments, but when times are bad, more
mistakes are made, so one could see much more onerous change ex­
acted upon the Fed that might be in the long term a disadvantage
to the public. Therefore, it is particularly appropriate that we re­
view some of these issues.
In political science terms you are right about some break in the
system existing. On effectiveness grounds, it is a little bit ironic I
think greater breaks in the system occurred a decade and a half
ago than are occurring today. I think the recent record of the Fed
is in policy terms more impressive than it was a decade and a half
ago, in the interest rate policy as well as on regulation of banks,
which is the part of the Fed that gets the least review.
But still I think when all is said and done that the Fed is best
protected by making some modest adjustments today and I hope
that we can look at this legislation and review it. I am not con­
vinced of all of its parts, but I think there are some things that can
be done.
I want to say your input in all this is most appreciated. Thank
you.
Mr. Hamilton . Thank you very much, Mr. Leach.
Let me observe that I appreciate your openness on these issues.
The bills I spoke about this morning were introduced years ago. I
wouldn’t for a moment pretend they are exactly the right formula.
There are plenty of variations of them. I appreciate the fact that
you are open to change here.
Second, let me reiterate that my appearance is in no way dic­
tated or governed here today by dissatisfaction with monetary pol­
icy. That is not what drives me or the reason behind these bills.
It has nothing to do with that.
I separate completely the question of monetaiy policy, the merits
or demerits of it, from the question of accountability of the Fed,
and I think they are separate questions.
The Chairman. I have been informed that Chairman Greenspan
has arrived and is waiting on the side here. I want to ask my col­
leagues, who feel impelled to ask Chairman Hamilton a question,
please make it brief.
I will recognize you for a minute if that is the case. If not, I
would suggest that we submit additional questions in writing to
the Chairman.
Mr. Roth.
Mr. Roth . Thank you, Mr. Chairman. I want to give our distin­
guished colleague a chance to rebut an argument that is going to
be made. I agree with you, Chairman Hamilton, on your legislation.
The arguments we will hear this morning is that the Fed is analo­
gous almost to the Supreme Court. They should have their own au­
tonomy. We don’t want too much political influence because politi­
cal influence is not good for the political or for the monetary sys­
tem. They will say, for example, look at Paul Volcker. He broke the
back of inflatiojx.inJ.980 because he took strong stands and if you
would have hafa all kinds” oFpoTitical pressures he couldn’t have
done that. H yrould you-respw^J^^rguments like that?
ow|




9

Mr. Hamilton . Mr. Roth, I appreciate that. I guess any of us
who recommend any change of any kind in the Fed are imme­
diately attacked on the basis that we are trying to undermine the
independence of the Fed. I tried very hard in this legislation to not
do that. I do not believe the Congress of the United States and the
President of the United States should set monetary policy, and the
proposals that I have made go to the question of accountability and
coordination. They are so simple to me.
Take the situation of not having any formal communication be­
tween the people who make fiscal policy and the people who make
monetary policy. Mr. Greenspan will tell you he and the Treasury
Secretary meet regularly on an informal basis. That is marvelous
and I commend him for that, but suppose you have a Fed Chair­
man who doesn’t like the Secretary of Treasury or the President.
We ought to try to build into the structure some coordination of
fiscal ana monetary policy. The other proposals are so modest, the
term of the Federal Reserve Chairman, I don't see that that has
any impact on Fed independence. Many Chairmen have approved
it.
For another example, the Federal Reserve budget being pub­
lished. My goodness, how can people object to having their budget
published in this day and age?
You mentioned the Supreme Court has its budget published and
yet we all recognize the independence of the Supreme Court. I just
don’t understand why you don’t publish the budget of the Fed. So
it goes down the line.
I think you are right in making the objection that you do, but
I want to point out tnat I don’t think the proposals I make under­
mine that independence in any way.
Mr. Roth . Thank you. I appreciate your explanation.
The Chairman . Mr. McCandless.
Mr. M cCandless . Thank you, Mr. Chairman. Mr. Hamilton,
there are many things that we need to correct and I appreciate
your proposal. I would like to focus on one aspect of what I under­
stood to be in your presentation, the video reporting of the Fed
meetings. Did I understand correctly that is a part of your
proposal?
Mr. Hamilton . That is not a part of my proposal, Mr. McCand­
less. It is a part, I think, of the chairman’s proposal. All I propose
with respect to that is the immediate release or disclosure of mone­
tary policy decisions, the major decisions. But the video release is
a proposal in the chairman’s bill, not in my bill.
Mr. M cCandless . Thank you.
The Chairman . Thank you, sir, and I thank my colleagues.
Mr. Bachus . I have one or two questions.
The Chairman . Could you submit them in writing, sir?
Mr. Bachus . I would prefer not to. I will be very brief.
The Chairman . We will give you half a minute.
Mr. Bachus . Representative Hamilton, whatever your purpose is,
are you not putting the conduct of monetary policy more closely
under the influence of politicians?
Mr. Hamilton . In what provision?
Mr. Bachus . With the provisions of more oversight, more
control?




10

Mr. Ham ilton . I don’t think so, Mr. Bachus.
One provision is the coordination of monetary and fiscal policy;
that doesn’t bring about any more oversight. It brings about coordi­
nation. The disclosure of monetary policy decisions when they are
made, that doesn’t bring about more oversight. I guess you could
argue that the GAO audits would provide the possibility of more
oversight, but I don’t see it that way.
It just seems to me that an agency that spends billions of dollars
ought to have somebody other than themselves telling them that
they are doing it in a proper way. By saying that I doirt make any
charge of fraud or waste in the Fed. I aon t have any evidence of
that.
Let me just say that I tried very hard to draft this bill in such
a way as to avoia the charge of trying to control the Fed. I ask you
to go through the provisions of it if you would and see if in fact
they would Dring about more control. I know that is the charge
that is made against the bill again and again, but I don’t see very
many specifics to support it.
May I say to you that if I were persuaded that the bill would put
more control by the politicians on the Fed, I wouldn’t support it.
The Chairman . The time of the gentleman has expired.
Thank you again, Mr. Chairman, very much.
Mr. H am ilton . Thank you, Mr. Chairman.
The Chairman . I want to welcome at this time our Federal Re­
serve Board Chairman Alan Greenspan as the next witness in the
series of hearings.
Chairman Greenspan is Chairman of both the 7-member Board
of Governors and the 12-member Open Market Committee. These
Federal Reserve Committees have vast powers. Under the direction
of the FOMC, the Fed can order unlimited amounts of U.S. dollar
bills, labeled as Federal Reserve notes, from the Bureau of Engrav­
ing at the U.S. Treasury to be delivered to any of the 12 Federal
Reserve Banks. Through open market operations at its New York
Federal Reserve Bank, the Federal Reserve determines how much
of this money is put in circulation.
The FOMC members have authorized the holding of a portfolio
of over $300 billion in U.S. securities from which the Federal Re­
serve earned $17.3 billion in interest last year. After deducting its
expenses, additions to its surplus, and interest paid to member
banks for their stock, the balance at the Federal Reserve is re­
turned to the Treasury and helps to reduce the Federal Govern­
ment’s deficit.
Thus, every dollar used by the Federal Reserve for its expenses
increases the taxpayers’ liability for financing the Federal Govern­
ment.
It is important that taxpayers know exactly how their money is
being spent. That is why I have proposed in H.R. 28 to require
independent audits of all Federal Reserve operations and authority
for the General Accounting Office to examine all Federal Reserve
operations. At present, the GAO is prohibited from inspecting large
parts of the Federal Reserve operations.
Under this proposed legislation, the Federal Reserve would have
to provide a detailed account of its expenditures for dues for its em­
ployees’ memberships in private societies and clubs during the past




11

year. Those expenditures with budgeted funds are illegal for em­
ployees of the U.S. Government. Similarly, the Federal Reserve
would have to account for adding a $200,000 renovation to its gun
range at the Dallas Federal Reserve Bank shortly after the new
building was constructed.
We would also have a detailed account of the cost of land and
real estate the Federal Reserve owns all over the country. The
American public has a right to know exactly how the Federal Re­
serve is spending every dollar of its money.
There snould be no independence from accountability for expend­
iture of taxpayers' money. Why should the Federal Reserve spend
its resources—and that means taxpayers’ money—to send members
of the Board of Governors, as it did in 1977, to the Federal Reserve
Banks to organize a lobbying effort?
This was a proper time for the Congress to order the GAO to in­
vestigate what happened and to determine if any Federal Reserve
employee had made profits on inside information with respect to
the recent happening that we have anticipated because they have
happened before.
The episode of 1979 illustrates the phoniness of the argument of
independence when it comes to accountability. In 1979 the Federal
Reserve was called before the House Banking Committee because
the Federal Reserve had issued a grossly incorrect report on the
money supply. The report sent bond prices down and interest rates
up on the Friday after the announcement, even though at least one
senior official at the New York Federal Reserve Bank was reported
to have known the numbers were wrong.
This was a proper time for the Congress to order the GAO, and
I recall vividly at that period of time, and mostly just to determine
what happened and if any Federal Reserve employees had made
profits on inside information.
As a matter of fact, I persisted and finally at that time Chairman
Reuss in obedience to my repeated insistence prevailed and the
chairman said that we would have an internal investigation, they
would investigate themselves, and they did. The charges were then
circulating around, and these were rumors that two banks in New
York had profited unjustly through the leakage of this information.
So this internal investigation was conducted and the lawyer, the
very prominent attorney Jaworski, was hired, but he also happened
to be the attorney for one of the banks.
There were two banks in New York that were pointed out as hav­
ing been the recipients of unearned profits because of this pre­
mature information leakage. Anyway, finally, after 1 year’s time
and just after Chairman Reuss had left, we finally got a copy of
that report and I placed it in the Congressional Record and it is
in the record.
The investigation concluded that yes, somebody, some staffer,
had negligently caused this information, but it wasn’t anything in­
tended or deliberate. At least that was the conclusion.
Now, our Nation’s central bank proceeded to hire this private
firm and it invested it with these powers of investigation. Now, in
the footnote, which as I say and I repeat, to this report which I
placed in the record—it is in the record if anybody wants to look
it up—there was a little footnote buried in the final report that




12

said that a New York Federal Reserve official may have conducted
insider trading and the case was turned over to the Securities and
Exchange Commission.
If you overlooked the footnote, the report was a clean bill of
health for the Federal Reserve, which was billed $877,635.88 cents
by the law firm. That would be about $1.7 million in 1993 dollars.
Paying for a good conduct medal is not an ethical way to run a gov­
ernment agency. Why should taxpayers have to pay for that kind
of activity?
H.R. 28 requires the Federal Reserve to resume making a record
of their FOMC meetings. Official policy changes would have to be
made public within a week and a videotape of the meetings would
be made public in 60 days. It could even be accessible to cable and
even with musical background in moments of lull.
In 1977, the former Federal Reserve officials and scholars from
across the country sent their views to the House Banking Commit­
tee about the Federal Reserve’s decision to stop taking minutes at
FOMC meetings. The responses that year generally deplore the
Federal Reserve’s blatant action in dropping the curtain over their
operations by refusing to take detailed minutes of the committee
that manages the Nation’s money supply.
How would we know what the policy of the Federal Reserve real­
ly was before the 1972 reelection of President Richard Nixon, for
example, if it were not for the minutes? Federal Reserve Chairman
Arthur Burns was outwardly the government’s champion fighter
against inflation. Yet, at two secret FOMC meetings before the
Nixon election, August 15, 1972 and September 19, 1972, he ar­
gued forcefully for fast money growth.
The minutes reflect that even though Vice Chairman Robertson
warned that the projected fast money growth was “cause for real
concern,” in his words, Bums “saw no need to be afraid of prosper­
ity and to adopt restrictive monetary policy.”
Should the public and the financial markets have access to full
information and to full accountability? Do the financial markets
work best with full information, as the modem theories of finance
contend? Or should the Federal Reserve continue to nourish the
rumor mill industry and selectively leak the results of its FOMC
meetings?
H.R. 28 would require all individuals voting on the Nation’s
money supply to be constitutional officers. Five of the FOMC mem­
bers are private citizens serving as presidents of the Federal Re­
serve Banks. The presidents are selected by their individual bank’s
board of directors who, in turn, are drawn from the banking
industry.
Testifying before the House Banking Committee on April 13,
1938, the great Chairman of the Federal Reserve for 13 years until
1948, Marriner S. Eccles, repeated his strong conviction that the
1935 reorganization of the Federal Reserve was seriously incom­
plete.
He said, “Presidents of the Reserve banks are elected by the di­
rectors of these 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




13

with monetary policy as important as those given to this committee
should consist entirely of persons representing the public interest.”
There were suits against the Federal Reserve in the 1980’s to at­
tempt to remove the votes of the presidents of the Federal Reserve
Banks because the Constitution specifies that those who make
major decisions in the government must be constitutional officers
who have gone through the confirmation process.
Federal District Court Judge Greene in an opinion said it was all
right for private citizens to vote on the monev supply. It is impor­
tant to note that the court of appeals in Melcher v. Federal Open
Market Committee vacated Judge Greene’s opinion so that it has
absolutely no legal effect. This was all brought out in last week’s
hearing.
The court of appeals explicitly said that the matter should be set­
tled by the legislature. Now is the time to follow the Constitution
and correct an error.
Chairman Greenspan, you do head the most powerful institution
in our government that directly affects the economic health of our
citizens. The changes we propose in H.R. 28 are not damaging to
that independence nor do they attempt to micromanage monetary
policy. The Federal Reserve presidents would have increased inde­
pendence since they would be constitutional officers.
This is not radical reform and there is no cause for the Federal
Reserve to proceed as if barbarians are at the gate and it is the
end of Western civilization. Senator Byron Dorgan told us last
week, “If you talk about fixing the dooijamb at the Fed, they ac­
cuse you of being part of a building demolition crew.” We should
not pretend the Federal Reserve, of all institutions in government,
is infallible.
We must have openness and accountability from the government
bureaucracies that operate in our democracy. President Clinton
wants to reinvent government to make it more efficient, less waste­
ful, more representative of all Americans.
The provisions of H.R. 28 I have proposed are rational and useful
changes that will make the Federal Reserve a better and stronger
institution that will fulfill its functions as the central bank more
effectively.
Let’s not wave the flag of independence when it comes to the
ublic’s right for full accountability for the operation of its central
ank. The Federal Reserve is not and should not be infallible, unal­
terable, unapproachable, and unaccountable.
[The prepared statement of Chairman Gonzalez can be found in
the appendix.]
The Chairman. Mr. Leach.
Mr. Leach . Thank you, Mr. Chairman. I have a short statement.
Mr. Chairman, it is easy to defend the Fed when times are good
and/or when its policies are not perceived to be at the root of par­
ticular problems of the moment in the economy. Frankly, I think
times may not be perfectly good, but the Fed is deeply respected
and well led at this time. But when times are less good or mistakes
are made it is important that the Fed have in place structural ar­
rangements that are above reproach. Stability of the financial sys­
tem depends on confidence, and unfortunately it is difficult to have
confidence in the precept that individuals selected by private sector

E




14

boards of directors accountable in large part to one industrial sec­
tor, banking and finance, should have a significant if not deter­
minative role in interest rate decisions affecting the Nation’s
economy at large.
It is even more difficult to have confidence in a system where
regulation of an industry is partly in the hands of individuals ac­
countable to boards largely controlled by those being regulated.
Legislatively, two approaches to correcting this democratic insti­
tutional unseemliness have been presented: The House is suggest­
ing that Federal Reserve Bank presidents be appointed by the
President with the advice and consent of the Senate. The Senate,
on the other hand, takes the position that Reserve bank presidents
should be removed from voting in the Federal Open Market Com­
mittee. The common denominator shared by both is that only pub­
licly appointed individuals should be permitted to directly partici­
pate in the formulation and implementation of U.S. monetary
policy.
While I see certain merits and demerits to each approach, an al­
ternative which preserves more firmly the independence of the Fed
should be laid on the table. The alternative would maintain Re­
serve bank participation in the FOMC, but require that Reserve
bank presidents be appointed for precise terms by the Federal Re­
serve Board of Governors. Since the Board of Governors is com­
posed solely of publicly appointed individuals such an alternative
would solve the political science dilemma of having private citizens
directly participate in public decisions without direct accountability
and at the same time address the concerns of those, like myself,
who believe an independent Fed protects the public better than one
too tied to a fiscally wanton Congress.
The issues of greater transparency of the FOMC decisionmaking
as well as greater budgetary openness can no longer be ducked. A
reasonable case can, of course, be made that immediate revelation
of FOMC decisions could result in adverse market reactions both
domestically and internationally as market speculators use infor­
mation discussed at FOMC meetings to their advantage.
At last week’s hearing, for instance, William Greider, a noted
proponent of making the Federal Reserve System more publicly ac­
countable expressed concern with immediate disclosure of FOMC
decisions. Mr. Greider stated, “It makes no sense to compel the Fed
to reveal its trading strategy in advance so that other traders can
use information to adjust their portfolios.” The Fed is the public’s
trader and thus deserves public protection. Nonetheless, more in­
formation on a more timely basis makes democratic common sense.
Mr. Chairman, in conclusion let me stress the best way to protect
the independence of the Fed is to ensure that its indefensibly un­
democratic elements are rooted out. The issue isn’t populist, it is
prudential. In a democracy arrogance always gets its comeuppance.
For a citadel to maintain its holy aura it must be perceived to be
a bastion of service, not privilege. A reform in time saves nine.
Thank you, Mr. Chairman.
The Chairman . Thank you very much. I am going to ask unani­
mous consent that all members, both present and absent, who wish
to have for the record an opening statement be allowed to do so.




15

At this time, we will proceed. We are in session and we want to
avoid any unnecessaiy interruptions with votes that we may get
later and we want to hear from the Chairman in an uninterrupted
manner.
Chairman Greenspan, thank you for accepting our invitation.
Your written statement will be in the record exactly as you gave
it to us.
STATEMENT OF ALAN GREENSPAN, CHAIRMAN OF THE BOARD
OF GOVERNORS OF FEDERAL RESERVE BOARD AND THE
FEDERAL OPEN MARKET COMMITTEE

Mr. Greenspan. That statement is rather extended and I have
excerpted relevant parts and appreciate your placing the whole tes­
timony in the record.
I certainly appreciate this opportunity to discuss the important
issues raised by recent legislative initiatives to alter the structure
of the Federal Reserve System and the additional notion that Rep­
resentative Leach put on the table moments ago.
The appropriate role of the central bank in a democratic society
is an important and controversial issue. The performance of such
an institution has profound implications for the Nation’s economy
and the people’s standards of living. Americans have pondered the
question of the appropriate role and structure of the central bank
at length, beginning with the debate over the First Bank of the
United States, whicn George Washington signed into existence in
1791.
Echoing the earlier discussions surrounding the chartering of the
First ana Second Banks of the United States, extended debate and
compromise preceded the establishment of the Federal Reserve
System. Much of the focus of the debate was on the balance that
should be struck between public and private authorities in govern­
ing the central bank.
In 1908, in response to the periodic financial crises that had
plagued the country in the latter part of the 19th century and in
the early years of the 20th, a National Monetary Commission con­
sisting entirely of Members of Congress was established by legisla­
tion. Four years later, the Commission, in submitting its report to
Congress, called for the creation of a National Reserve Association
to provide stability to our financial system. Both the Commission’s
plan and an alternative proposed by President Woodrow Wilson en­
visioned the central bank as containing public and private
elements.
President Wilson’s plan won the approval of Congress and estab­
lished the Federal Reserve System as our Nations central bank.
Over the intervening years, Congress has initiated many reviews
of the System’s structure, but with rare exceptions has chosen to
leave the basic structure intact.
The major piece of legislation affecting the Federal Reserve’s or­
ganization since its inception in 1913 was the Banking Act of 1935,
which established the Federal Open Market Committee in its cur­
rent form as the central decisionmaking body for monetary policy.
When it was clear by the 1930’s that the buying and selling of se­
curities by the Federal Reserve was a crucial monetary policy in­
strument, there was again debate in Congress over whether it




16

should be carried out entirely by government appointees or wheth­
er the Reserve bank presidents who were not politically appointed
should share in that policymaking role.
In the 1935 act, Congress reaffirmed that the Reserve bank
presidents should have a substantive voice in policy. They were
granted 5 of the 12 positions on the FOMC while the 7 members
of the Board constituted the majority. The wisdom of Congress in
setting up the structure of the system has stood the test of time.
In that decision which you cited, Mr. Chairman, Federal District
Court Judge Harold Greene in commenting on the constitutionality
of the FOMC in 1986 noted, ‘The current system, the product of
an unusual degree of debate and reflection, represents an explicitly
balanced approach to an extremely difficult problem.”
It is true as you point out, Mr. Chairman, that on appeal, the
actual decision of Judge Greene was vacated on the ground that
the issue of the constitutionality of the FOMC was not needed or
relevant to the particular decision at hand. However, at no point
in that particular appeal decision was the issue of the point made
by Judge Greene contested.
I really choose to use this particular quote to indicate what a dis­
tinguished jurist’s view of the constitutionality issue was. The dif­
ficulty is that we have not yet, as you have pointed out, had an
issue brought fully to the Supreme Court on the question of the
FOMC.
The role of a central bank in a democratic society requires a very
subtle balancing of priorities between the need for sound farsighted
monetary policy and the imperative of effective accountability by
policymakers. Accountability and control by the electorate are vital.
The Nation cannot allow any instrument of government to oper­
ate unchecked. The central bank just like other governmental insti­
tutions in a democracy must ultimately be subject to the will of the
people.
In this regard, the Federal Reserve's activities are constantly
scrutinized by this committee and others in Congress. The Federal
Reserve Board reports semiannually both to the House of Rep­
resentatives and to the Senate pursuant to the Humphrey-Hawkins
Act and we regularly respond to other congressional requests for
testimony.
We recognize our obligation to do so and appreciate the impor­
tance of maintaining open communication with the Nation’s elected
representatives. We also provide a great deal of information about
our operations directly to the public, and we consult frequently
with those responsible for economic and financial policy in the
administration.
We have to be sensitive to the appropriate degree of accountabil­
ity accorded a central bank in a democratic society. If accountabil­
ity is achieved by putting the conduct of monetary policy under the
close influence of politicians subject to short-term election cycle
pressures, the resulting policy would likely prove disappointing
over time.
That is the conclusion of financial analysts, of economists, and
others who have studied the experiences of central banks around
the globe and of the legislators who built the Federal Reserve. The
lure of short-term gains from gunning the economy can loom large




17

in the context of an election cycle, but the process of reaching for
such gains can have costly consequences for the Nation’s economic
performance and the standards of living over the longer term.
The temptation is to step on the monetary accelerator or at least
avoid the monetary brake until after the next election. Giving in
to such temptations is likely to impart an inflationary bias to the
economy ana could lead to instability, recession, and economic stag­
nation. Interest rates would be higher and productivity and living
standards lower than if monetary policy were freer to approach the
Nation’s economic goals with a longer term perspective.
Several aspects of the current setup promote the central bank’s
distance from the political fray. The 14-year terms of the Governors
on the Federal Reserve Board are one of those elements with only
2 vacancies scheduled to occur during the 4 years of any single
Presidential term. Once in office, those Governors cannot be re­
moved by the President over a policy dispute.
In addition, regional Reserve bank presidents who are selected at
some remove from political channels are included on the FOMC. To
prevent political pressure from being applied on monetary policy­
makers via the power of the purse, the Federal Reserve is not re­
quired to depend on appropriated funds to meet its expenses.
H.R. 28, the Federal Reserve System Accountability Act of 1993,
would remove some of that insulation. I would view the enactment
of legislation of this type as a major mistake. Provisions that in ef­
fect increase political leverage on Federal Reserve decisionmaking
amount to assaults on the defenses that Congress has consciously
put in place to ensure the appropriate degree of central bank inde­
pendence. Weaken those defenses and I firmly believe the economy
is at risk.
The Federal Reserve must be free to focus on advancing the Na­
tion’s ultimate economic goals. In that vein, as I have indicated to
this committee on previous occasions, the determination of the ef­
fectiveness of the Federal agency has to be based in the end on
whether it has carried out the objectives Congress has set for it.
We have not always been entirely successful, but we have learned
from experience what monetary policy can do and what it cannot
do.
In my view, current Federal Reserve policy is promoting condi­
tions vital to maximizing the productive potential of the U.S. econ­
omy. Monetary policy is and will continue to be directed toward fos­
tering sustained growth in economic output and employment. Part
of our task is to minimize the risk of systemic crises wnile endeav­
oring to implement good macroeconomic policy. When, for example,
threats to the Nation’s financial system loomed large in the wake
of the 1987 stock market crash, the Federal Reserve effectively con­
tained the secondaxy consequences of the crash with prompt but
prudent injections of liquidity and with constant consultations with
depository institutions during the crisis.
The bulk of our efforts in this area, however, of necessity garners
less publicity, as it is directed at one going to efforts to fend off fi­
nancial sector problems before those problems emerge as full-blown
crises that could threaten American jobs and standards of living.
Much of our success over the years, therefore, reflects crises that
did not happen.




18

In practice, the central bank of the United States works and it
works well. On paper, however, its structure can appear unwieldy,
an amalgam of regional and centralized authority and of public and
private interests. If we were constructing a central bank for the
United States now, starting from scratch, would it be identical to
the Federal Reserve System described in current law? Perhaps not,
but the Federal Reserve has evolved to be well suited to today’s
policy tasks.
One of the reasons that the Federal Reserve is effective is that
its basic structure has been in place for a long time. The institution
has been able to take that framework as a given and to adapt and
build on it during decades of invaluable experience in the financial
and economic setting of this country. As the Federal Reserve has
evolved over the years, it has been permeated by a culture of com­
petence and dedication to public service. As a consequence, the
Federal Reserve has attracted highly skilled analysts, technicians,
and policymakers.
While we might imagine a different initial structure for our
central bank, implementing a major change at this stage could for
all intents and purposes destroy the exceptionally valuable culture
that has evolved over time and that continues to serve this Nation
well. And there is always the risk that changing a complex organi­
zation, even with the laudable goal of improving one or more parts
of it, may well have unforeseen and unfortunate consequences else­
where in the structure.
Nonetheless, the Federal Reserve recognizes that an organization
that does not appropriately respond to changes in the environment
in which it functions will soon become ineffectual. Accordingly, the
Federal Reserve has suggested, initiated, and instituted a number
of measured changes over the years. When confronted with a new
development requiring change, we advocate it.
For example, not long ago, as you remember, Mr. Chairman, we
recognized an apparent weakness in the way the discount window
could be used in the case of insured, failing institutions, a condition
which we had rarely before experienced. The committee was also
aware that this problem existed. We saw change as a constructive
response, and while we were prepared to implement it by adapting
our recollections, we cooperated with this committee, which chose
to amend our discount window procedures.
I hope and I expect the Federal Reserve will continue to change,
but always prudently in response to clearly identified problems and
only for the better. One area in which I see major need for change
is the inadequate pace at which women and minorities have moved
into the top echelons of the Federal Reserve.
We share your concerns in this regard and are working diligently
to improve opportunities for women and minorities throughout the
system.
In the remainder of my remarks this morning, I would like to ad­
dress one of the specific issues; that is, the status of the Reserve
bank presidents on the FOMC that has been raised under the more
general topic of Federal Reserve accountability. Two other issues
regarding the disclosure of FOMC deliberations and decisions and
the General Accounting Office’s purview in auditing the Federal




19

Reserve System are covered in my written statement and will be
addressed more fully in hearings scheduled for later this month.
The Federal Reserve Banks represent a unique blend of public
and private sectors. I believe that those who label the Reserve
bank presidents as representatives of the banking interests, as op­
posed to the public interest, misunderstand the position of the
presidents and the Reserve banks in the Federal Reserve System.
The Reserve banks are instrumentalities of the U.S. Govern­
ment, organized on a regional basis. They are in a tangible sense
owned by the Federal Government. The bulk of their net income is
handed over to the government each year. Their accumulated sur­
plus, were they to be liquidated, would revert to the U.S. Treasury
and while a portion of the capital of the Reserve banks represents
contributions by member commercial banks, those member banks
are not free to withdraw the capital, their dividends are fixed by
statute, and their capital stake in no way affords them the usual
attributes of control and financial interest. The member banks do
select the majority of the directors of their local Reserve bank, but
the Federal Reserve Board chooses the remaining directors and
among those designates a Chairman and a Deputy Chairman. The
directors in turn select the Reserve bank’s president. Their selec­
tion is subject to Board approval.
Those Reserve bank presidents then receive top secret clearances
from our government and are subject to the Federal conflict-of-in­
terest statute. They can be removed by the Federal Reserve Board,
and it is the Board that sets their pay.
Upon joining the FOMC, they take an oath of office to uphold the
Constitution of the United States, and uniformly in my experience
they are dedicated to the service of our country. However, regard­
less of whether the presidents of the Reserve banks are viewed as
more public than private or more private than public, the real
question remains, does their participation on the FOMC make for
better monetary policy?
I can assure you that it does. The input of Reserve bank presi­
dents who reside in and represent the various regions of the coun­
try has been an extremely crucial element in the deliberations of
the Federal Open Market Committee. By virtue of their day-to-day
location and their ongoing ties to regions and communities outside
of the Nation’s Capital, the presidents see and understand develop­
ments that we in Washington can overlook. They consult routinely
with a wide variety of sources within their districts, drawing infor­
mation from manufacturing concerns, retail establishments, agri­
cultural interests, financial institutions, consumer groups, labor
and community leaders, and others.
The public, private, and regional makeup of the Federal Reserve
System was chosen by Congress in preference to a unitary public
central bank only after long and careful debate. This blending of
public and quasi-public institutions has a long history in this coun­
try and has been reaffirmed repeatedly in Congress.
Some who agree that the Federal Reserve Bank presidents pro­
vide a unique perspective would nonetheless argue that such input
could still be obtained by reducing the Reserve bank presidents’
role to an advisory one. I doubt that for two reasons.




20

First, let us not delude ourselves. Anyone permanently denied a
vote sees his or her influence diminish markedly. Not only would
the presidents’ varied experiences and regional perspectives likely
become less well reflected in policy decisions, but their ability to so­
licit real-time information from their communities would be dimin­
ished as well.
Second, I believe that a fair number of my colleagues who serve
as presidents of the Reserve banks would have declined that office
had voting rights on the FOMC not attached to it. These are people
who do not lack for opportunities. If the Reserve bank presidents
were denied votes, we would not attract individuals of the same
caliber to these jobs that we do today. As a result, the advice re­
ceived would be adversely affected and FOMC deliberations would
be less productive.
A different proposal would retain the Reserve bank presidents on
the FOMC, but would have them appointed by the President of the
United States. Such a proposal is, of course, not new. It was consid­
ered and rejected by this committee as recently as 1976. The clear­
est drawback to this suggestion is one that I have already men­
tioned; that is, the potential for increased partisanship that would
erode the quality of policy as the central bank was drawn more
closely into the ambit of daily political concerns.
In addition, however, such an arrangement would create signifi­
cant managerial problems for the Federal Reserve System as an or­
ganization. Under current law, Reserve bank presidents are di­
rectly accountable to the Board of Governors for their performance
in carrying out systemwide policies in such areas as bank super­
vision, payment systems responsibilities, and discount window
administration.
The Board’s ultimate defense against a bank president who is ei­
ther incompetent or purposely obstructing the effect of implementa­
tion of system policy is our power to remove that person from of­
fice. If the heads of the Reserve banks are instead Presidentially
appointed, we presume that they could be removed constitutionally
only by the President of the United States. In that circumstance,
systemwide coordination of policies and interbank cooperation
could be seriously impaired.
Mr. Chairman, you have made it clear that in your view H.R. 28
does not represent an attempt to politicize the Federal Reserve or
to infringe on its independence. I feel I must respond that whatever
its intent, legislation of this type would have precisely that delete­
rious effect.
I take this legislative initiative seriously not only because it
would emanate from this committee, but also because of monetaiy
policy’s key position in the Nation’s overall economic policy. At the
flash point of financial crisis, monetary policy, if mishandled, can
pose a threat to our economic system; and in this century, we have
witnessed inflation, a monetary phenomenon, turned virulent in too
many nations around the world.
To a considerable degree, then, both the earnestness with which
we approach our task and the unique position accorded the Federal
Reserve in our governmental structure derive from the potential for
such dire consequences of monetary policy mismanagement. In im­
posing significant change on the Federal Reserve System, we would




21

run the risk of real damage to the institution’s effectiveness from
unintended adverse consequences.
The Federal Reserve is not a flawless institution. It is, however,
a very good one. In my view, it would be a mistake to legislate
structural reform when, as in this case, compelling evidence of the
need for change is, in my judgment, lacking.
Thank you very much, Mr. Chairman.
The Chairman. Thank you, Chairman Greenspan. I just have
one historical observation by way of correcting an impression you
give in your statement, that President Woodrow Wilson favored an
arrangement—actually, in reading Carter Glass’s book, “Adven­
tures in Constructive Finance,” he quotes President Wilson this
way in addressing a group of bankers. In fact, actually what was
happening there was a compromise, as all things are here.
I am going to quote Carter Glass in his quoting of the President.
He says, “m il one of you gentlemen tell me in what civilized coun­
try of the Earth there are important government boards of control
on which private interests are represented? Which one of you gen­
tlemen thinks that the railroads should select members of the
Interstate Commerce Commission?”
Of course, it is very interesting when you read the legislative his­
tory as a result of the financial crisis of 1908. The Congress—in
fact the House committee—formed what they call the PUJO Com­
mittee, P-U-J-O, named after the chairman.
It is interesting to read their years of endeavor which finally pro­
duced the House version of what turned out to be the Federal Re­
serve Board Act. There was compromise. When it got to the Senate,
you had quite a bit of change and give and take.
But I think that President Wilson in other accounts—not only his
own but in others at that time besides Carter Glass reflected great
concern at the direction, by 1916, that this newly formed boara was
taking. But I will leave that to history.
I didn’t want to leave an impression that President Wilson sup­
ported—the other observation has to do with your statement on
page 7, which you read here, pointing out an example of the flexi­
bility and willingness for change on the part of the Federal Re­
serve. It has to ao with the reform as to tne discount window, and
I think any impression here that that initiated, or that initiative
came from the Fed would be wrong historically. It resulted from
our hearings that we had with respect to the use of that window,
the Fed as the lender of last resort to some of the banks that were
obviously giving quite a bit of problem to the insurance funds.
But the most notable thing that I recall from that was the fact
that—only one instance that that discount window or that lender
of last resort was used in the case of an S&L, and that happened
to be Charles Keating’s Lincoln Savings and Loan in which in April
when it went into conservatorship. I think it was 1988—it supplied
better than $100 million worth, which we have reason to believe is
what Keating used to divert monies for his defense later on.
But why would the Federal Reserve Board—and in fact I don’t
know of any other case where it used that window for an S&L—
would do this at this time, keeping Lincoln with an infusion of
$100 million, which was used quite adroitly by Mr. Keating. We
never did resolve that. We raised inquiries, but we were satisfied




22

with having some time to include some—not really substantive, but
some better definition of the use of that window.
I have other questions I will submit in writing in case we don’t
have time later on.
I recognize Mr. Leach.
Mr. Greenspan . May I respond?
The Chairman . Certainly.
Mr. Greenspan . First, let me go backward. My recollection of

that particular episode which you refer to was when Lincoln was
in—already in conservatorship, in the hands of the government;
and unless my memory fails me, I think we were requested to as­
sist in a joint Federal Reserve-Federal Home Loan Bank Program
to facilitate the minimization of the losses that would be associated
with that.
But more importantly, the question that you raise relevant to the
discount window issue I substantially agree with, that you raised
this issue with respect to the discount window. We, however, were
obviously aware of it because this was something new.
We had a view that we perhaps would do it, we would make the
changes that we needed to do from a regulatory perspective; you
chose, as I indicated in mv prepared remarks, to make it a part of
FIDICIA, and we were willing to do that and cooperated as I recall
with your staff to craft that legislation in the appropriate manner.
The issue of Woodrow Wilson is a fascinating one. I have also
read the Carter Glass book, which was, I must say, an extraor­
dinarily interesting vehicle to somebody like myself. It is true that
the overall view, as I understood that President Wilson had was
that the government should exercise the regulatory—supervisory
control of the system, which the Federal Reserve Board had, but
he did support, and indeed it was part of his legislation, that there
would be Federal Reserve Banks out there who themselves would
manage the discount window for particular actions. And in that
sense, even though policy on discount rate issues was then, as now,
in the hands of the Federal Reserve Board, to what extent mone­
tary policy existed back then—and remember, it was not really an
issue that was fully understood in the modern sense until the early
1920’s—to the extent that such policies did exist, they were imple­
mented by the individual Federal Reserve Banks, banks which
were created in the legislation supported by President Wilson.
So I think that one cannot go back in retrospect and ask the
President, what would he do in the current environment? Frankly,
I couldn’t answer that question. I think that it was a far more com­
plex problem back there, and I am not sure that I would read
President Wilson’s conclusions the way they were stipulated in the
Carter Glass memoirs and interpreted by numbers of people.
Mr. Frank . Maybe the question is whether Carter Glass was
half-empty or half-full.
Mr. Greenspan . I assume, Mr. Chairman, that Mr. Frank has
now had his question and is no longer capable of asking another
question.
Mr. Frank . I haven’t had my answer, Mr. Greenspan.

The Chairman . Well, one could assume that it is a preliminary
question. Mr. Frank is very agile in being able to ask more than
one question at any time.




23

Mr. Leach.
Mr. Leach. Mr. Hamilton made the point, which I think is an
important one, that the motivation of his approach has nothing to
do with a complaint about monetary policy today. I think monetaiy
policy is very well led today. On the regulatory side, it is better led.

I don’t mean to be presumptuous. I don’t think it is extremely
well administered, but it is much better than it has been.
With regard to the Carter Glass circumstance we frequently for­
get the regulatory obligations of the Fed. This concern about hav­
ing people from the railroads running the Interstate Commerce
Commission, is analogous to having bankers regulating bankers—
to some extent that is one of the political science unseemlinesses
of the regional banks.
It also has an element of unseemliness to the degree that some
of the banks have different policies than others. It has been my
view over time that within the banking system, different regions
have had slightly different standards, which basically has the ef­
fect, among other things, of credit allocation in the final measure.
Having said all of that, it strikes me that there is a profound
case for having publicly designated people make public policy deci­
sions both for the protection of the public and also for the protec­
tion of the Fed.
I think the Fed is in an indefensible position. When times are
tough certain institutional aspects are pointed out. Therefore, it is
with loving kindness that I have come to the conclusion that the
Fed is in need of a dose of greater democratization.
Now we have two bills with approaches on the Federal Reserve
Bank presidencies that have been noted. I am kind of impressed
with an alternative of simply asking or requiring the Federal Re­
serve Board itself to designate the Federal Reserve Bank presi­
dents. Of those three approaches, which seems to be the more rea­
sonable to you, recognizing you prefer none of the above?
Mr. Greenspan. Before I answer that or get involved in the de­
tail of that and it is a very interesting proposal, but let me first
say that it is probably the case that there are different policies on
a regulatory basis implemented by all of the 12 Federal Reserve
Banks under the context of control of the Federal Reserve Board
because, of necessity, there are interpretive issues which relate to
different parts of the economy, because the economies are slightly
different. But my impression is that, considering the diversity that
we have, we have a remarkably homogeneous group of examiners
and supervisors who adhere to the letter of Federal Reserve Board
supervision.
But I will not deny that, obviously, as in all organizations of
this size, certain differences can occur. But my impression is that
they are quite small and perhaps really have not veiy major
implications.
It is true that there is potential conflict that exists between the
commercial bank members of the Federal Reserve System who vote
on the directors and the examiners who work under the presidents
examining those banks. It is important to emphasize that the pol­
icy questions on the question of how examinations are made and
what the principles are vested in the Federal Reserve Board and
not in the individual banks.




24

I must say that, having observed the process for a long period of
time—indeed it has been 80 years since this issue first surfaced—
I know of no indication of actual conflicts which have existed in
that particular concern. So while one may validly hold that concern
as a possibility, I think that 80 years of experience suggests that
it is not something which should very basically concern us.
With respect to your more fundamental question, you are quite
correct; my view about the nature of the Federal Reserve is one
which I hold with respect to all public institutions; namely, that
they develop, as do private institutions, a way of functioning, and
as you change them, no matter how you do that, there are always
unintended consequences. That is almost a managerial law which
one can postulate that would describe this among all various dif­
ferent forms of institutions.
I would therefore argue that unless the problems in an organiza­
tion—which I guess is true whether it is public or private—move
above a certain threshold, it is probably unwise to make changes.
While I don’t deny much of the discussion here and throughout
our history as being inappropriate, the experience that I have
had—and I have been at the Fed for more than 6 years—is that
the system works exceptionally well from an operational and mana­
gerial point of view; and the reason why I am reluctant to change
it is not because I believe that one should not change things. On
the contrary, institutions which don’t adjust eventually disappear.
It is that I cannot see in the current structure a particular problem
which requires being addressed.
Very specifically, your proposal actually would not make a major
change, because clearly we at the Federal Reserve Board already
have significant control over the presidents. What does happen on
the negative side is the fact that the directors of the Federal Re­
serve Banks have a diminished role as a consequence; and my con­
cern, as it is with the issue of removing the Reserve bank presi­
dents from the FOMC, is that, with that diminished role, we would
cease to get the quality----Mr. Leach . I apologize. That isn’t my proposal. My proposal is
to keep the Reserve bank presidents on the FOMC.
Mr. Greenspan . I understand, but you have removed in your
proposal the ability of the directors to effectively participate in the
choice of the presidents of the Reserve banks.
What I am saying is that removing that will significantly reduce
the role of those directors, which I must say I have found excep­
tionally useful for the System.
I just, for example, came back from a directors meeting at the
Federal Reserve Bank of Atlanta, in which not only were all the
directors of the main office there, but all of the branch directors
were there; and I learned a great deal about what is going on in
that district just listening to these individual people around the
table talk.
These are people of extraordinary capabilities and leaders in
their particular regions and communities; and I would be fearful
that by reducing their participation in the process, we would lose
what I perceive to be a significant positive element in the ability
of the central bank to function in an effective way.
The Chairman . Mr. Frank.




25

Mr. Frank . Thank you, Mr. Chairman. I just want to say that
I appreciate very much the tone that both you and Chairman
Greenspan have set. These are very important issues, not personal;
no one is accusing anyone of wrongdoing. I think it is to the credit
of both of you that you have set this tone that we can discuss fun­
damental issues in a very civil way. I hope to be able to continue
that.
Mr. Greenspan, you talk about the need for a long-range perspec­
tive. Obviously, there are technical aspects of what you do, but are
there not also some value questions that have to be resolved as to
how much you value unemployment over long-term inflation, or
would you argue that they are all technical?
Mr. Greenspan. On the contrary, I would say that economics at
its root is a set of principles that fundamentally rests on the values
of human beings. The whole question of price is derived from rel­
ative value preferences of people, and you cannot divorce-----Mr. Frank . In policymaking, inevitably at the level of policy­
making that you are engaged in, there is a value question.
Mr. Greenspan . Certainly there is.
Mr. Frank. I assume that is why you say at the top of page 2,
bottom of page 3, accountability and control by the electorate, of
the Federal Reserve I assume we are talking about, are vital. The
Nation cannot allow any instrument of government to operate un­
checked. The central bank, just like other governmental institu­
tions in a democracy, must ultimately be subject to the will of the
people. Now, that establishes a common philosophical framework.
The problem I and others have is that I don’t see how that hap­
pens in your case unless you choose it to. You are not by nature
an autocratic individual, but I don’t understand what in the system
effectuates what you are talking about.
You say the central bank just like other governmental institu­
tions in a democracy, must ultimately be subject to the will of the
people. I appreciate that phraseology. It strikes me that when you
and other opponents of the legislation use the phrase
“politicization,” you might with no loss in logic use the word “de­
mocratization.” I think they can be used interchangeably.
My question is, what makes you subject to the rule of the people?
You say of the 7 members of the Board this President will get to
appoint 2, under the law during his term, he will get to appoint
none of the 5 FOMC people, so of the 12 votes that set monetary
policy, by the end of his first term, Bill Clinton will have 2; by the
end of his second term, I hope, he will have 4 if everybody serves
it out. So after 8 years in office, he will have 4 out of 12.
Then you say, well, Congress can look into it. We can ask you
questions. Yes, we can ask you questions much of the day, but I
think you give a great refutation to that when you say on page 10
with regard to the FOMC presidents, “Let us not delude ourselves;
anyone permanently denied a vote sees his or her influence dimin­
ished markedly.”
I think that effectively describes where we are. We can ask ques­
tions, we can have Humphrey-Hawkins reports, but no one has in­
fluence over the decisions. So where does this popular control come
in? What if a substantial percentage of the voters decided that the




26

current direction of monetary policy, either now or at any other
time, was incorrect? How would they subject you to their will?
Mr. Greenspan . This, I think, is at the root of the question of
accountability and basically what a central bank should or should
not do under various different circumstances.
First, I think it is important to stipulate that indeed our longer
term goals are part of the statute. The Congress has created a set
of goals for us which we rest upon. The important issue with re­
spect to accountability is really a difficult one because it is not easy
to make the following judgment: Do you endeavor to reflect the will
of the people on what they say or what they do?
Now, the reason I raise this distinction—and it is a crucial one—
is that when you are dealing in the area of economic policymaking,
we are aware that if a poll is taken, we will very often find that
the poll will say that people want taxes reduced and benefits raised
and the budget deficit reduced. I mean, it is not inconceivable that
there are contradictory indications that occur.
There are no contradictory indications, however, on what the
people do in the marketplace. In other words, you either spend
your income or you save it. There is no hedging in that respect; the
balance sheet must balance. And what you infer from that is, in a
sense, what the time preference of the populous is from that; and
that is the reason why I say to you that the United States is essen­
tially a longer time preference type of society. In other words, we
produce goods which are 20 or 30 years old because that is what
people actually choose in our system.
Mr. Frank . I am struck by this as a kind of a Rousseauian ele­
ment. You talk about democracy in the sense that you will know
what they mean no matter what they say. When you say subject
to the will of the people, you divine that will by their behavior in
the marketplace, ana then that informs Federal Reserve policy.
That is a very different conception.
Mr. Greenspan . That is not the issue here. The issue basically
is the reason why we set out a long-term policy; our judgment is
that it is necessary for the long-term prosperity.
Mr. Frank . I understand that and realize that is a valid, sub­
stantive justification for what you do. My point is a more proce­
dural one.
You say on the top of page 3, the central bank just like other gov­
ernmental institutions in a democracy must ultimately be subject
to the will of the people. My question to you is, how does that hap­
pen? Because I don’t see any mechanism. If the people decide they
really don’t like what you are doing, other than changing their buy­
ing habits and waiting for you to figure that out, how do they indi­
cate to you that you are not complying with their will, that they
would make the tradeoffs differently than you would?
Mr. Greenspan . I think that ultimately what happens is that
the Congress changes the law.
Mr. Frank . So you are subject to the rule of the people because
we can change the statute, the statute which sets out your goals
at a very high level of generality. Congress would say we are going
to change the law to change monetary policy.
The Chairman . The time of the gentleman has expired.
Mr. Roth.




27

Mr. Roth . Thank you, Mr. Chairman.
Mr. Greenspan, Chairman Greenspan, we had Chairman Hamil­
ton appear before you, and I asked him a number of questions
about the Federal Reserve. Basically, I guess the question I have
is, why shouldn’t GAO audit the Federal Reserve?
Mr. Greenspan. I am sorry, why should it?
Mr. Roth. Why shouldn’t it? Is there any reason why the GAO
shouldn’t?
Mr. Greenspan . There will be another hearing on this in full de­
tail. In my prepared testimony, I point out that the key question
here rests on the issue of the maintenance of independence of the
Federal Reserve System. If, as the Congress indicated that the
GAO, in the 1978 act, could audit all aspects of the Federal Re­
serve System with the exclusion of those which refer to the ques­
tion of the deliberations related to monetary policy, the GAO does
audit us in very great detail with that very specific carve-out,
which was debated by the Congress and passed in the 1978 act.
The reason essentially is that if you get the GAO involved in essen­
tially auditing and evaluating tne elements involved in the delib­
erations of monetary policy—in our judgment and in the judgment
of the Congress and the act, is that that would impede the inde­
pendent activities of the determination of monetaiy policy.
Mr. Roth. Well, I wasn’t in Congress in 1978, but it seems to me
that we have to have public accountability, like you had mentioned
before, and GAO audits would give that public accountability.
Chairman Hamilton said earlier that a Federal Reserve budget
is not published. Is that true?
Mr. Greenspan. The Federal Reserve budget is published. It is
66 pages of data. All I can say is I have read many annual reports
of individual agencies in this government and this is as complete
a detailing as I know of what we do, what we spend it on, where
it goes.
I might say further that the major form of auditing of monetary
policy is this committee. You effectively request us to come before
you and explain what we are doing and why we are doing it. I will
tell you that when I come up here at the invitation of the chair­
man, I tiy to convey as best I can—sometimes it is not as good as
I would like—what it is we are doing and why we are doing it. And
on individual occasions when the data are not as fully detailed as
the chairman or other Members of the Congress might like, re­
quests are made of us and we make those data available. We go
into the files and dig them out.
So I am not certain at this particular stage what the problem is.
Mr. R oth. I think the problem is that we feel a lot of the things
oing on in the Federal Reserve should be open to public scrutiny
ecause the Federal Reserve has such a tremendous bearing on our
economy.
Mr. Greenspan. I, absolutely, agree with that. The only areas
where I think that we require an element of delayed disclosure is
in areas where our deliberations and activities affect the markets
and, by so doing, affect our capability of being efficient.
I agree. I say that absolutely central banks should be disclosing
everything they can up to the point where the disclosure affects
their effectiveness.

f




28

Mr. Roth. Let me see if I understand what you are saying.
You are saying that everything that the Fed does is open to pub­
lic scrutiny. It may be delayed at some point for cogent reasons,
but everything is made public in the final analysis; is that what
you are saying?
Mr. Greenspan . I would say, for example, 6 weeks after our
FOMC meeting, we publish very detailed minutes of what it is that
transpired, who voted for what, who voted against it, and what the
reasons were, involved in the various different discussions of the
particular policy. I must say, it is a fairly useful set of minutes. I
find them quite informative, and I hope that more people read
them.
Mr. Roth. My time is up.
Chairman Gonzalez . Mr. Fingerhut.
Mr. Fingerhut . Thank you, Mr. Chairman. As a new member of
this committee, part of your answer to Mr. Roth when you said
what is the problem, was my reaction too when I saw all the var­
ious legislative proposals by our distinguished chairman and by
others and the amount of time we have been devoting to it, because
from an outsider’s perspective prior to this year, it has been the
Fed’s conduct of monetary policy that seems to have saved us from
some rather dramatic swings in fiscal policy over the last decade
or so.
The area that Chairman Hamilton raised in his testimony that
was also on my mind during our recent meeting over the budget
was the area of consultation between the branches of government,
the agencies of government that deal with fiscal and monetary pol­
icy. I am on Mr. Kanjorski’s subcommittee to which you present
your semiannual reports on monetary policy. You were here before
that subcommittee barely days before the House voted on the Presi­
dent’s economic proposals. I remember you dancing very carefully
around the subject of what you thought would be good fiscal policy
to complement the monetary policy that the Fed nad engaged in.
Would you comment in general terms on what kinds of consulta­
tions go on, how you think those consultations currently serve our
national interest and in what ways perhaps we could improve the
coordination between fiscal and monetary policy which from this
outsider’s, now insider’s observations do not appear to have always
served our Nation as best they could?
Mr. Greenspan . Obviously, there is a great deal of consultation
going on. I, for example, have a scheduled weekly breakfast with
the Secretary of the Treasury. I see him quite often in addition and
we talk about various types of issues, including monetary and fiscal
policy questions. We have periodic meetings with the Council of
Economic Advisors, and I have numerous conversations with the
individual members from Chairperson Tyson on down several times
a week, because as many people know, it is the CEA which trans­
mits the important economic statistics to Treasury and to the Fed­
eral Reserve 2 hours in advance of their release in the event that
we need to know something and they invariably get involved in
considerable conversation.
I, periodically, meet with individuals in the White House, Bob
Rubin, whom I have known for many years, and others in the
White House on occasion, including the President. As best I can




29
judge, we have a fairly good set of discussions and transmissions
of various policies. They are frank with me and I am frank with
them, so it is not an issue of not conveying important information.
I think we do, and I think they have been quite useful both to the
Fed and I hope to the administration.
Mr. F ingerhut. Should there be, in your opinion, more direct in­
volvement from the fiscal side than the monetary policymaking
side? It is clear to me that the administration and its fiscal policy­
makers track very carefully what you do to try and make sure that
they are responding, but should it work the other way around? For
example, Chairman Hamilton and others have proposed that fiscal
policymakers ought to sit in an advisory role on the Open Market
Committee or other aspects of the Fed’s activities.
Mr. Greenspan. We did have the Secretary of the Treasury and
the Comptroller of the Currency as ex officio members of the Fed­
eral Reserve at the beginning. It was found to be inappropriate and
indeed it was Carter Glass who, as Secretary of the Treasury at
one point, considered that it was a politization of the Federal Re­
serve System which was inappropriate and in the 1930’s they were
removed from the Federal Reserve and have not had participation
directly since.
My concern is basically that the issues have not fundamentally
changed, and it would, I fear, create some difficulties in the delib­
erative process and the independence of the system. I don’t see any
need.
In other words, I don’t see any particular area where, for exam­
ple, the Secretary of the Treasury is uninformed about what is
going on that he needs to know. I make certain that he knows what
is relevant to his deliberations within the administration and spe­
cifically in areas of fiscal policy.
The Chairman. The time of the gentleman has expired.
Mr. McCandless.
Mr. M c Candless . Thank you, Mr. Chairman.

Chairman Greenspan, in the legislation before us there are a
number of issues which I have cataloged into an area which I enti­
tle “policy determination, process and membership.” I will pick
some key elements of that.
For example, the public videotaping of your meetings. The Advi­
sory Council has recommended an expansion of the Federal Re­
serve Board membership to include various and sundry elements of
our social structure. I would appreciate it if you would comment on
some of those areas which I have labeled policy determination,
process, and membership.
Mr. Greenspan. I am not quite certain what the specific areas
you wish me to focus on are. Are you talking about—could you be
more specific, please?
Mr. M cCandless. We have before us a three-column outline of
the three, or actually two bills, and one area here is representa­
tives from agriculture, small business, labor, and consumer commu­
nity organizations: “Women and minorities shall be included when
filling vacancies of boards of Reserve Banks. Each Federal Reserve
Bank shall establish an Advisory Council consisting of representa­
tives of small business, agriculture, consumer and community orga­
nizations, women’s rights, and so forth.

73-115 0



-

94-2

30
A videotape and the minutes of each FOMC meeting shall be
made public within 60 days of the meeting, and so forth. With the
time I have, that would probably be more than you could comment
on, but I would appreciate it if you would.
Mr. Greenspan. First of all, we do have for each of the 12 Fed­
eral Reserve Banks, Advisory Councils for small business and agri­
culture. We have at the Federal Reserve Board innumerable advi­
sory groups who come in and give us their particular views. In
choosing the directors of the Federal Reserve Banks and the
branches of the Federal Reserve Banks, we have especially in re­
cent years given very considerable consideration to increasing the
number of labor and consumer interest people on those boards and
the numbers have gone up quite considerably.
We think that we should have representation of the community
on our Federal Reserve Boards, and we are working diligently at
the Board of Governors to make certain that that process contin­
ues, and I think we have made substantial progress not, frankly,
as much as I would like to see myself, but we are getting there and
I would hope that we can at some point come before this committee
and say that we are satisfied that we have full representation on
those boards which reflect all the crucial interests that those par­
ticular areas have.
Mr. M cCandless. Another section that I wanted to cover was
the financial auditing process that is proposed for members and the
boards and the General Accounting Office’s involvement. It would
appear that there is room for some movement in view of the fact
that such institutions as the Supreme Court that had been pointed
out earlier today has a certain financial obligation in that the mon­
ies involved are public, realizing where you get your money, but
still indirectly public.
What are your feelings on the financial review audit process that
is being proposed in the legislation?
Mr. Greenspan. This creates a significant dilemma for a central
bank. On the one hand, the chairman is quite correct—we are
using public monies in the sense that to the extent that we spend
$1,000, that does not get passed on to the Treasury and appear in
the budget receipts. This is the reason why we have been, in my
judgment, extraordinarily scrupulous in endeavoring to make cer­
tain that we keep our budgets under very considerable control, but
the data will show that the growth in expenditures and costs of the
Reserve banks has been a growth rate very significantly less than
general government, excluding the Defense Department.
Even though we nave had a major increase in the workload of
the Federal Reserve Banks as a consequence of increased super­
vision and regulation requirements resulting from FIRREA and
FIDICIA specifically, our growth in costs is very well contained. We
at the Federal Reserve Board spend an inordinate amount of time
auditing the individual banks and holding their cost structures at
bay and I think we have been quite successful at that.
The reason we do is precisely because if we are confronted with
the requirements of having congressional oversight of our budget,
that inevitably affects how monetary policy is controlled. It is,
therefore, incumbent upon us to make certain that we are extraor­
dinarily responsible in the expenditure of funds, and with the ex-




31
ception of the deliberations question which I was mentioning to Mr.
Roth, and certain relationships with foreign central banks and gov­
ernments which we are required to maintain confidentiality on, we
think that as much detail and as much auditing as the Congress,
the GAO, or anybody else wants to do is appropriate.
The only question I would raise is that there are cost elements
involved in doing this and many of the times my concern about var­
ious different types of audits which I perceive are duplicative is not
that that is a problem to be done but it is costly. I don’t like to
spend the money unless we think it is necessary to do so. But my
view is that there are very limited carve-outs o f where disclosures,
financial and otherwise, should not be made wholly because such
disclosures affect our ability to do the job which the Congress has
required us to do.
Aside from that, we are obligated to divulge everything and if in
the judgment of this committee any particular aspects of our oper­
ations should be made available to this committee, we have done
it.
There have been occasions where I have commented in letters
back to the chairman that certain types of things would be excep­
tionally difficult to do or exceptionally costlv and we have suc­
ceeded in discussing with the staff a means of getting the informa­
tion that this committee desired in a somewhat more cost-effective
manner, but we have no interest in not making ourselves as open
as possible to disclosure.
Mr. M cCandless . My time is up.
Thank you, Mr. Chairman.
The Chairman . Ms. Velazquez.
Ms. V elazquez. Thank you, Mr. Chairman.
You mention in your testimony that you recognized the inad­
equate pace at which women and minorities have moved up within
the Fed system. What do you believe is the cause for that?
Mr. Greenspan . I am sorry?
Ms. V elazquez. Y ou mentioned that you recognized the inad­
equate pace with which women and minorities have been moving
up within the Fed system. What is the cause for that?
Mr. Greenspan . I think the cause first of all is—the cause of
that problem which exists throughout our society, and I think if
you go back and look at the level of discrimination 20 years ago,
you see a reflection of that not only in our composition of employ­
ment, but you see it throughout the society. There has been a very
dramatic improvement in that direction and while, as I indicated
in my prepared remarks, I am not satisfied with the progress that
has been made, we have actually made quite substantial progress.
In fact, I just had somebody look up some of the data the other
day and, for example, I had them put together the total employ­
ment of the officer corps of the Federal Reserve System because
that is where most of the discrimination earlier, in my judgment,
took place. If you look at it in 1977, of all officers in the System,
5.3 percent were female, 2.3 percent were minorities. The data for
1993 shows 22 percent female officers and 9 percent minority
officers.
Now, that is still less than I would like to see, but there is very
substantial progress here. I mean, for example, from 1987 to 1993




32
the proportion of minority officers went up from 5.4 percent to 9
percent and women from 16.1 percent to 22.2 percent. And that
trend is continuous. We are keeping the pressure on, we are mak­
ing progress.
I find it frustrating in a lot of particular areas and if I were to
say we aTe doing as well as we should I think the answer is no,
we are not.
M s. V elazquez . Can you tell me how you are going to improve
that?
Mr. Greenspan . What we are doing at this stage is putting into

place a fairly significant program which— I don’t want to take the
time of this committee to list, but there is a very considerable num­
ber of actions which we are taking to tiy to attract minorities and
women to the Federal Reserve System and we are involved in a sig­
nificant number of programs for sponsoring scholarships and in­
ternships which brings minorities to the Federal Reserve System.
It is a recruitment procedure which has emphasized a dispropor­
tionate number of new add-ons coming from women and minorities
and that is the reason why the total numbers are going up. The
only way you can do that is have a disproportionate number of your
new applicants from those groups. And we are looking for ways to
improve on that, and as I have said before this committee, we nave
got a way to go, but it is not because we are not trying in a very
vigorous manner.
Ms. V elazquez . Thank you, Mr. Chairman.
The Chairman . Will the gentlelady yield?
I think it is very important to bring out that last week I submit­
ted for the record the announced appointments by the Board of
Governors of the 12 chairmen for the Regional Federal Reserve
Bank Boards where there is apparently only 1 woman in the group
and as far as we could tell no minorities.
Why has the Board of Governors failed to approve more than one
woman and no minorities as presidents of the Reserve banks?
Mr. Greenspan . My recollection is we had three women as chair­
men last year, and there are a number of— in fact I have a list here
of the deputy chairmen and chairmen of which there are, of course,
24, and of tne 24 chairmen and deputy chairmen, 4 are women, 3
are minorities with duplication, 2 are labor, and 1 consumer.

So I would say what that is, is that that is a problem of the fact
of who we have and how we are moving them. But we have moved
up to a fairly high proportion of minorities and women in the dep­
uty chairmanships and the deputies automatically become chair­
men. So there are aberrations where periodically the timing means
that you dip a little, but we are still moving up on the trend and
the total or the combination of the two which is crucial continues
to move up.
The Chairm an . But the announcement last week is substantially
that, it was one woman-----Mr. Greenspan . I think that is correct. I have it here and I can
double check it.
Yes, that is correct.
The Chairm an . Thank you very much for yielding to me, Ms.
Velazquez.

Mr. Bachus is next.




33
Mr. Bachus . Chairman Greenspan, are you aware of the Presi­
dent’s September 20 letter to Chairman Gonzalez when he stated
that the Fed is functioning well and does not need an overhaul?
Mr. Greenspan . Yes, I am, Congressman.
Mr. BACHUS. He also said in that letter—and this is my con­
cern—that we run the risk of undermining market confidence in
the Fed by making major structural change in the Federal Reserve.
First of all, and let me say, I agree that the Fed is working and
is working well. As you stated in your statement, basically, it has
worked this way since 1935. And I think you agree with the Presi­
dent that we don’t need any major structural changes. Has he
riven you any indication since September 20 that he now endorses
this legislation?
Mr. Greenspan . I have not spoken to the President on this issue
at all.
Mr. Bachus . Would you comment on his assertion that this type
of change at this time could undermine the market’s confidence in
the Fed?
Mr. Greenspan . My general concern is that change tends to cre­
ate the possibility or I should say, change invariably creates unin­
tended effects and they tend often to be adverse. That is the reason
why I said earlier that I think in order to advocate change you
have to reach a certain threshold of a problem before it is wise to
take the risk.
In that respect, I clearly subscribe to the President’s concern, be­
cause that is mine.
Mr. Bachus . D o you agree that we are taking a risk here by this
legislation of-----Mr. Greenspan . Y ou mean in this discussion?
Mr. Bachus . Not this discussion. If this legislation were to pass,

do you see it as creating a risk of undermining your ability to set
monetary policy at the Fed and therefore undermining the economy
of this country?
Mr. Greenspan . I said in my prepared testimony that I am con­
cerned that any significant change in the structure does risk prob­
lems for the economy and the management of monetary policy.
Mr. Bachus . Thank you.

One other question. You heard Chairman Hamilton when he was
here earlier state that if his legislation in any way attempted to
politicize the Federal Reserve he would not—he would back off his
support for that.
As I understand it from your testimony and from my understand­
ing of the Federal Reserve, the FOMC is the major policy mone­
tary, policymaking committee of the Federal Reserve. Is that right?
Mr. Greenspan . That is correct.
Mr. Bachus . And the FOMC—at the present time, the President
appoints seven members, the Governors, but not the other five?
Mr. Greenspan . That is correct.
Mr. Bachus . And with the changes that this bill would make,
the President would make all 12 appointments to the FOMC?
Mr. Greenspan . Yes.
Mr. Bachus . H ow is that not making the system more political?

Mr. Greenspan . As I have commented in my prepared text, in
my judgment it does. I know that is not the intent of the proposal




34
as the chairman indicated. We have a disagreement on this ques­
tion as to the effects. In my judgment I think it clearly would be
a mistake to pass this legislation.
Mr. Bachus . I agree any time you give the President the power
to appoint all 12 members of the major policy committee of the Fed,
I can’t understand how that is not making it more political. There
was something in the New York Times yesterday saying Mr. Gon­
zalez talks of the central bank as an elite, secretive club often un­
responsive to the public’s demand for faster growth.
Should the Federal Reserve be responsive to day-to-day public
demands and political demands for changes in monetary policy?
Mr. Greenspan . What we do is evaluate the economy as we see
it and try to make a judgment as to what the appropriate policy
is in the context of the statutes which regulate the Federal Reserve
generally and the Federal Open Market Committee in particular.
Mr. Bach us . So would-------

The Chairm an . The time of the gentleman has expired.
Mr. Hinchey.
Mr. H inchey . Thank you, Mr. Chairman.
Good morning, Mr. Chairman. I was fascinated by the discussion
you were having with Mr. Frank because in many ways I think
that that is the central question here, that being the accountability
of this agency to the public. We live in a government that is almost
unique in that regard and all of our activities are directly account­
able and overseen by the general public with the exception, the
large exception, of the Federal Reserve, which seems to be a very
anomalous situation.
That is the point that seems to be central to this discussion.
Even the President’s ability to remove the two appointments that
he is likely to get is taken from him. He doesn’t have the ability
to remove those people that he appoints.
Mr. Greenspan . I might add, for policy reasons. Obviously, indi­
viduals can be impeached or can be removed for purpose.
Mr. H inchey . If they can be shown to be mentally incompetent
or something of that nature, but that would be under the most ex­
traordinary of circumstances and I don’t know that that has ever
occurred. However, with regard to the Reserve bank presidents and
the way that they are appointed, and also removed, there is that
difference there.

You make the case that the way that you hold the Reserve bank
presidents accountable is by the threat of removal because the
Board has the power to remove them if they operate in a way that
is contrary to the will of the Board. Isn’t that a glaring discrepancy
there in reasoning?
Mr. Greenspan . N o. If I understand you, Congressman, I think
the question really gets down to the issue of how a central bank
functions in the type of society which we have. In other words, it
is not like any other institution. Of necessity, or I should say really
of—essentially the practice that has occurred from all central
banks in living memory is that there are certain things central
banks do that no other governmental agency does.
We, obviously, have a control over the currency and that is some­
thing which is a very important and very sensitive question.




35
Mr. HrNCHEY. But that could be said about any of the various
elements of the government.
Mr. Greenspan . There is one fundamental difference and the dif­
ference basically is that we have to act in the marketplace and as
a result our actions have effects on how people behave in a manner
which feeds back directly on the policy that we have. So that there
is an important distinction here between how the Federal Reserve
functions and other agencies. That is not true with the Federal
Trade Commission; it is not true of the SEC. It is not true of a se­
ries of independent agencies who are involved very specifically in
interfacing with the market, with market prices, and with the
whole structure of the way the system functions.
So what we have had as a problem, and I mentioned this in my
earlier testimony, is that this issue has basically been a dispute
within this country at a fairly high level of discussion—in fact I
think it may have been Judge Greene who said that the question
of monetary control and the central bank has taken up more debat­
ing time within the Congress since the beginning than most any
other issue. And it is a fascinating history, because I think if we
took the transcript of today’s hearing and matched it against the
discussion as to what went on in the debate that led up to the first
bank of the United States in 1791, aside from some peculiarity of
language, the concepts are remarkably the same.
It is a dilemma which confronts our society which has never been
unanimously resolved. The issue has come up repeatedly and there
are legitimate differences of opinion on the question. Ultimately, I
think the issue which must be resolved, indeed has to be, is the
balance between accountability, which is essential in a democratic
society, and effectiveness of monetary policy.
Anyone who thinks they have the unquestioned answer to that
balance has not dealt with this subject in any very great detail. I
agree, I think that the issues that Congressman Frank and your­
self are raising are crucial to this particular discussion, and I have
my own views, having been Chairman of the Federal Reserve for
6 years, and I hold them strongly because I have seen the way the
system works, and I must say it is a really impressive institution
and it is impressive because of the people who are there and it does
an important job for this country and I would be very much cha­
grined to see much of the independence peeled away.
I grant that all of these discussions that are occurring here,
whether or not it is one version of a bill or another, actually prob­
ably increases the power of the Federal Reserve Board one way or
the other. I know it is inappropriate for anyone in Washington to
say they don’t want more turf and more power, but having looked
at the system, I would say that to essentially give more control to
the central authority in tne system I don’t think is in the Nation’s
interest.
Mr. H inchey . Thank you.
The Chairman . Mr. Baker.
Mr. Baker . Thank you, Mr. Chairman.
Chairman Greenspan, earlier you commented what is the prob­
lem we are focusing on and trying to resolve. I have been equally
concerned about that question. Perhaps it is that interest rates
aren’t low enough, that there isn’t enough regulation in the mar­




36
ketplace or perhaps there is not enough politics in our financial
marketplace. That, obviously, not being the issues of concern, I
think the debate has to be cast around the issue of accountability,
who is doing what to whom and why, and how do we make sure
that the enormous authority of the Federal Reserve policymaking
is not somehow abused or perhaps worse in the eyes of some, ignor­
ing the will of the public.
I then went to your comments and found the statement, "W e
publish our balance sheet evei
alysts to review operations
records of the policy deliberat
meeting shortly after the next regular meeting has taken place.
Three, the vote of every FOMC member is recorded by name and
the reasons for that vote are also recorded.”
I found that to be of particular interest in light of the fact Con­
ference Committees of the Banking Committee on public policy
matters representing to finance are not open to the public. It is dif­
ficult to find out wno offers amendments and how the members
vote. I would find it refreshing to have the Federal Reserve’s poli­
cies applied to the Congress.
More importantly, I think the observation of concern you made
in your written remarks are that leaks of FOMC proceedings are
clearly unfair to the public, potentially disruptive, and undoubtedly
destructive of public confidence in the Federal Reserve. I think
from the tenor of my remarks you may determine that I feel the
current system to be one which has served us well, which would
not be enhanced by further political involvement, and for the life
of me I cannot understand why we would in the moment of this
current economic circumstance be debating this issue.
Suffice it to say, there are two areas raised for public debate; one
being greater participation for minorities and women, the fact that
there are now 22 percent of positions held by women in the organi­
zation seems to exceed once again the performance of the Congress.
Mr. Greenspan . That is officers.
Mr. Baker . There would not equally be 22 percent of House offi­
cers in leadership held by women. I would simply say that in look­
ing at positive direction and help from your perspective, assuming
there is validity in enhanced reporting and responsiveness, isn’t
there anything that you could suggest to us today that may or may
not be contained in any legislative proposal that would enhance
awareness and understanding of the role, mission, purpose, and de­
cisionmaking of the Fed that you do not today engage in; or do you
feel that any further disclosure not now already required would
perhaps only enhance the potential for unauthorized release of in­
formation, which to the dismay of some may in fact hurt the
consumer because volatility of the marketplace is extraordinarily
high and the only thing the consumers of credit at the working
man’s level today know is whether they can get access to credit ana
what does it cost them?
They may not know what the Fed or FOMC is about, and hope­
fully they don’t know what the Congress is about; but in any event
they certainly are affected by policies at the national level, and
don’t we do a better service by retaining stability in the market
rather than subjecting it to the volatility of political interference?




37
Mr. Greenspan . Congressman, we spend a great deal of time
trying to make judgments as to what changes, if any, we should be
making in our procedures and in the various different elements in­
volved in how we do our business. On occasion we have come before
the Congress making requests for certain changes in legislation
relevant to certain aspects of banking law and supervision and
regulation.
We have, as I have indicated in the past, discussed questions of
disclosure at great length internally within our committee, and
have raised questions as to what we should or could not do without
undercutting the deliberations; and it is not as though we have not
discussed these questions. Indeed, basically, at the request of the
chairman, I on many occasions raised questions within the FOMC
with respect to a number of these issues, and we debated them at
very considerable length. And the general conclusions of the com­
mittee are that the particular policy that we now have, in our judg­
ment, is the best way to balance our capability of doing what the
Congress requires that we do, with the issue of maximum disclo­
sure of the types of things that we do in the marketplace.
I am not going to say to you, because I don’t believe it, that what
we have now is exactly what should exist for all time and in all
places. I don’t think that is correct. As the system changes as, for
example, technology changes, we are consolidating a goodly part of
our automation systems, and we will continue to do that. So there
are going to be a lot of changes in the system, but hopefully, as I
indicated in my prepared remarks, they will be for the better and
not for the worse; and my main concern in changing the structure
of this system is that there is no way to do it without secondary
consequences, and unless I am fairly well convinced that those con­
sequences are benign, I would be quite reluctant to recommend to
this committee that we make changes of that nature.
The Chairman . The time of the gentleman has expired.

Mr. Neal.
Mr. N eal . Thank you, Mr. Chairman. Mr. Hinchey and Mr.
Frank and you, Mr. Chairman, have raised this most important
question it seems to me of accountability. I think that is quite on
point. But I think the question is accountability to what? It seems
to me that we have reached a point in our understanding of mone­
tary policy—in fact, fairly recently in the overall scheme of things,
I noticed Chairman Greenspan said somewhere along the line this
morning that we didn’t understand monetary policy in a contem­
porary sense until the 1920’s, and it seems to me that we didn’t
even have a—well, I am not trying to say we have a complete un­
derstanding, I don’t feel that we do, but that we have a different
understanding now of the role of monetary policy in the economy
than we did during the 1970’s.
It seems to me, back during the 1970’s, that it was generally
thought that inflation was a function of budget deficits. That was
the popular understanding, and it was just generally agreed, I
think because of the work of a number of economists ana so on,
and then finally the implementation of monetary policy, even in the
light of a restrictive monetary policy, even in the light of high
budgetary deficits, it became clear that inflation was a monetary
phenomenon, one that the Fed can control independently of other




38
aspects of the economy, and a better understanding of what the
right monetary policy is, that gives us whatever else it is that we
want in the economy, which is maximum sustainable economic
growth, maximum employment levels for our people, the lowest
possible interest rates, the highest levels of savings, and therefore
the highest levels of investment and productivity, leading to the
best economic future for our people, the most competitiveness in
the international environment, ana so forth.
In other words, it seems to me—I will quit talking and ask the
chairman to comment—that we have a better understanding of
what the monetary policy is that will produce the best possible con­
ditions for our constituents.
I have worked with Chairman Gonzalez for almost 20 years. I
know him unfailingly to look out for the interests of the common
man, for the little guy. I know that without question. I know he
wants what is the right policy for the average American.
Again, I think that we know in terms of monetary policy—not ev­
erything, but generally speaking in terms of monetary polity—what
that is and that the Fed should be held accountable to that policy.
That is the key question. Anyway, I think that policy essentially
is, the lower inflation, the better; and that even over time, though
we may have to take little zigs and zags away from that—if we
were driving from here to California, we might nave to head north
for awhile and then south— it might not be a straight line, but we
head in generally one direction and that goes to our destination.
Anyway, I think that is ultimately the most important debate in
that we— sort of these other questions of how we get there are in­
teresting and, in some cases, important—especially when it comes
to the question of minority opportunity, and so on, vitally impor­
tant—but ultimately the most important question is the proper pol­
icy and how well the Fed is accomplishing that policy.
I just wondered if the Chairman might comment on that. And
may I ask one other thing before my time runs out?
Often there has been an almost constant claim that the Reserve
bank presidents represent private interests, and as I understand it,
the Board of Governors can veto the appointment of Reserve bank
presidents, the Board can fire Reserve Dank presidents, the Board
sets their salary or approves it, that they are paid out of public
funds, that they have to administer their banks in accordance with
the rules and policies of the Board of Governors, and that most, if
not all, are professionals; that is to say, they come up through the
ranks of the Fed, they are not bankers as some people claim. Is
that understanding generally correct?
Mr. Greenspan . I think tnat is generally the case. These are es­
sentially' public officials dedicated to the policy of this country.
Their ties to the banking community are nebulous at best. The only
relationship exists indirectly through those members of the Board
which are essentially elected by the commercial banks.
I would certainly agree with you in the sense that the control of
the presidents is not by the commercial banks, it is by the Board
of Governors. And fortunately, the issue doesn’t ever really come
up, because there is and has developed a collegiality within the
Federal Reserve System in which what happens in Federal Open
Market Committee meetings is an endeavor on the part of this




39
group of 19 people, including the voting members and the
nonvoting members, to try to understand what is going on in the
various areas of our country, and in the country as a whole, and
what alternate monetary policies are apt to do with respect to the
future of the country.
I recall no single instance in which the discussions that were in­
volved at the FOMC were other than directed at trying to find that
crucial answer. Just as importantly, I have also noticed that with
perhaps a few exceptions, most of the members of the FOMC come
into those meetings with their minds not fully made up and that
the interaction amongst the individuals on that committee clearly
changes people’s view as the meeting goes on, which to me is an
extraordinarily important and, I must say, very impressive sight.
The presumption that what we are seeing are individuals rep­
resenting bankers or anybody else other than the national interest
is, in my judgment, without any basis in fact, Mr. Neal.
The Chairman . The time of the gentleman has expired. Mr.
McCollum.
Mr. M c Collum . Thank you very much, Mr. Chairman. I come to
these hearings and this bill with the adage, “If it ain’t broke, don’t
fix it,” and that the burden is on the proponents in this case par­
ticularly with the reform of the Federal Reserve and its auditing
to prove there is something wrong.
I listened intently to some of my colleagues here, Mr. Chairman,
who are vepr fine people, whose judgment I often respect and ad­
mire, explain their rationale. But while they may have academi­
cally approached this, they have not given me so far any real con­
crete reasons why we should be making any of these significant
changes that have been proposed. I want to make sure that I am
not wrong about that.
One of the question areas I have has to do with the question Mr.
Neal just raised with you and you partially answered it. Does any­
thing in your experience at any time show any sign that a vote or
decision of any regional president who served on the Open Market
Committee has been influenced by the self-interest of a commercial
bank director of his regional bank?
Mr. Greenspan . No, Congressman.
Mr. M cC ollum . I wanted that answer because that is the only
rationale that I have heard anyone say that would be plausible for
saying we should tinker with the system as it presently exists of
choosing presidents to put on the Open Market Committee.
The second question has to do with the independence of the Fed­
eral Reserve as our central bank compared to the lack of independ­
ence of the central banks of other countries. You mentioned this in
your testimony, but I would like to comment that I have seen in
my observations serving on this Banking Committee that there are
a number of central banks in the world, in countries where infla­
tion has been running rampant over the years, that don’t have any­
where near the independence that we have.
You commented that some movement is being made that you
have observed toward a stronger, more independent central bank
in some locations. Could you give us one or two examples of cases
where you think—in countries— that the absence of an independent
bank has led to greater economic problems and inflation, and so




40
forth, than otherwise would be the case if they had an independent
bank; and could you give us an example of cases where there is a
movement toward a more independent bank?
Mr. Greenspan . Well, I hesitate to give you explicit examples,
but there is a relatively well-documented case that was analyzed
and evaluated by the current Under Secretary of the Treasury for
International Affairs; and what I would suggest is what the basic
study by Summers and Alcina shows is a very interesting correla­
tion between measures of the degree of independence of various
central banks and the rates of inflation over the post-World War
II period.
As we point out, Mr. McCollum, the correlation is surprisingly
tight. To my knowledge, there has not been any significant chal­
lenge to that conclusion. There have been a number of papers writ­
ten relevant to it, but the conclusion turns out to be, as statisti­
cians like to say, “relatively robust.”
Mr. M cCollum . At one time, we were the most independent
central bank in the world. There is a movement to make more
central banks independent, is there not, in many parts of Europe,
and in South America in particular? Is there not movement to
make central banks in Europe and South America more independ­
ent today?
We were once standing almost alone with the degree of independ­
ence that you have.
Mr. Greenspan . I think that is a very important point, Mr.
McCollum, that the change in central banks, to whatever extent it
is occurring, is all toward the direction of more independence rath­
er than less. In other words, that is true in France; it is true in
a number of Latin American countries. There is even a discussion
about making the Bank of England independent.
That has become a fairly significant trend of recent years, and
I believe it results from the destabilizing inflation that struck the
world, the industrial world especially, in the latter part of the
1970’s and the early part of the 1980’s; and the consequence of this
has been an acute awareness that doesn’t come from statistical
analysis, but experience, which has led to an awareness that inde­
pendence of the central bank is an element in keeping inflation
down, but just as importantly, increasing evidence that the lower
the rate of inflation, the higher the growth rate in productivity.
And putting those together—and there are some disputes in the ec­
onomics profession about whether it is true—below a 5-percent in­
flation rate, as well as above.
Everyone agrees that this relationship is a very important one.
Our evidence suggests that the lower the inflation rate, even under
5 percent, is consistent with higher growth rates and productivity.
Since it is productivity growth which ultimately determines stand­
ards of living, the issue of maintaining independent central banks
as a goal toward the highest standard of living for the society is,
in my judgment, becoming increasingly evident in the data, ana in­
creasingly the conviction of economists in the profession pretty
much around the world.
Mr. M cCollum . Thank you.

Thank you, Mr. Chairman.
The Chairman . Mr. Flake.




41

Mr. F lake . Thank you, Mr. Chairman. Mr. Greenspan, thank
you for your candor, your sincerity, as it relates to our discussions
relative to the improvement of the diversity in the Fed overall and
your desire to try to assure that there are levels of participation
for women and minorities throughout the Fed.
My question has more to do with monetary policy, particularly as
it relates to what I consider to be the third world nation that has
emerged within our borders represented by the conglomerate com­
munities, particularly urban communities, within this Nation.
On the FOMC, you have bank presidents that represent various
regions of the country. Many of those regions have within them
these urban communities that, in my opinion, represent in many
instances exorbitant costs of trying to solve many social problems
which, in fact, can be solved by an approach—I think from a mone­
tary policy perspective—that gives some attention to the needs of
those particular communities.
Obviously, in the banking world much of that has been assumed
to be able to be addressed by CRA. Obviously, that approach alone
has not been totally capable of resolving many of those problems,
which gives us a major cost in terms of social impact costs, hos­
pitals, jails, other kinds of social legislation that is necessary to try
to solve them.
My question has to do with whether or not it is within the pur­
view of the Fed to focus some attention on how monetary policy
might affect not only the creation, the development of those com­
munities, but in fact with an understanding that if we can find
ways to involve, build up, somehow create the economic vehicles
that lift those communities, we have in fact strengthened this Na­
tion. Because the cost of trying to solve those problems after the
fact has become so great.
I would want to tnink that a part of what the FOMC does is look
at monetary policy in an inclusive perspective that can speak to
those particular issues, understanding the devastating negative im­
pact it has if we don’t do something to really turn those commu­
nities around. I would like your comments in terms of how the Fed
might be involved in bringing attention, lifting to the concern of
this Nation, how we might be better able to impact—Governor
Lindsey has been at meetings I have been at, and I know there is
a concern.
I would hope that we can bring this to the forefront even as we
address community development legislation in the future.
Mr. Greenspan . I think you are raising a terribly important con­
cern that we all have. I think the way you put it, that there is a
third world economy problem within our cities, I think is regret­
tably too apt.
Monetary policy, as such, by its nature in an economy such as
the Unitea States, can only be uniform; there is only one policy.
Leaving aside the issue of the fact that there are problems within
individual cities—for example, when you get differences in the re­
gional area; for example, when California was extraordinarily
weak, and still is; or when New England was in very bad shape
economically—if they were separate countries, they would have had
different monetary policies than the Nation as a whole. But we
don’t have that capability.




42
In other words, if you have a single currency and it is a dollar,
you cannot have different monetaiy policies; only a single policy.
So even though I fully agree with you that the problems within
the urban areas are really sapping the strength of the system,
monetary policy as such is not and cannot be the vehicle which ad­
dresses that problem.
Mr. Flake. I agree with that. The underlying question becomes,
does the Chairman of the Federal Reserve from standing on a plat­
form that the whole world recognizes, making certain statements
in recognition of the fact that there exists such a problem, stand
in a position to be able to influence a change in attitude that gives
some focus to those particular areas, realizing that it is more costly
not to do it than it is to do it?
Mr. G reenspan . In fact, that is what I am doing right now.
Let me say very quickly, though, if monetary policy as such can­
not address that, that does not mean that the Federal Reserve Sys­
tem as such is wholly impotent in this area—or for that matter, my
colleagues at the Comptroller of the Currency, or FDIC and the
like.
For example, we do have, at all 12 of our Reserve banks, we have
community affairs officers, and also we have a significant division
within the Federal Reserve Board which is looking and trying to
address precisely this issue. It is our means of administering the
CRA. And it is in that area where we absorb what the nature of
the problems are; and you are quite correct that Governor Lindsey,
who was chairman of the Board subcommittee which is involved in
community affairs, is our lead vehicle for evaluating these proc­
esses. And I would agree with you that to say that this is an issue
independent of monetary policy is false.
I mean, it is not that monetaiy policy itself can change it, but
unless this other set of problems is changed, it affects the economy
overall and what it is that we have to do. And if you are saying
to me that we must basically resolve this corrosive force which is
involved in the urban areas if our economy is to function in an ef­
fective manner, absolutely.
I mean, it is potentially a very disturbing and dangerous trend
unless we can make certain that all of our citizens have access to
the economic expansion, the opportunities which exist within this
very broad economic system.
The CHAIRMAN. The time of the gentleman has expired.
We have notice of a required vote. We have three members who
still remain to be recognized. I am willing, if there is no objection,
to recognize Mrs. Roukema. We still have about 8 minutes.
Mrs. Roukema . Mr. Chairman, I will be brief because I am sim­
ply going to associate myself with the remarks of my colleagues
who strongly oppose any reforms that might potentially lead to
politicalization of the Fed. I think, Mr. Chairman, that you have
spoken very eloquently and precisely to that point, specifically in
your definition of the accountability of the Fed and alerting us to
the problems that could ensue if that accountability led to com­
promising the financial markets.
I
might also say that I appreciate your response to Mr. McCol­
lum’s question, because it was my question, as well; that is, the
precision with which you answered the allegations of conflicts of in­




43

terest with regard to the Fed Board presidents. Also the fact that
those countries that have the most stable economies and the most
stable monetaiy policies, as well as lower inflation rates and higher
productivity rates, are those that have clear separations between
the central banks and the political establishment; specifically the
European Community in the Maastricht Treaty is moving in that
direction because it is important for their economic viability.
So those countries that have had that overlap are now moving
away from it, recognizing that in a world economy it will not serve
their purposes. I appreciate greatly your responses to the ques­
tions.
The Chairm an . Mr. Schumer.
Mr. S chumer . Thank you. I appreciate your indulgence, Mr.
Chairman, as well as your efforts and sincerity on this bill. Before,
Mr. McCollum said he has a great deal of respect for you, but he
didn’t say he agrees with you most of the time. I so agree with you
most of the time and I share in his respect for you, but this is not
one of them.
Let me ask you to comment on this, Chairman Greenspan. I
come from two places on this that lead in the same direction. First,
basically, we do not—we have levels of democracy so to speak with­
in our government. Not everything—the most democratic, if you
will, would be the House of Representatives; we are elected every
2 years and are supposed to be very close to the people. On the
other hand, the Supreme Court has lifetime appointments and that
makes sense from a structural point of view because the Supreme
Court is supposed to guard the Bill of Rights which protect one per­
son speaking of something unpopular that 99 percent would dis­
agree with.
It seems to me that in monetary policy, where you really have
to escape the short-term vicissitudes of politics, the winds blowing,
and the whims, that it is a correct place to have some insulation.
There should be public pressure. Indeed, there is. We know and we
see before election time Presidents jawbone the Fed. But at the
same time, if a message were sent to the Fed that they ought to
respond to the short-term political and, often, electoral needs of the
Congress or the President, I think we could mess up monetary pol­
icy royally. Not so much that the changes would be that great, but
then the theory of the independence of the Fed would wash away.
So my view is—I know many have talked about accountability—
my view is, there is accountability but that ought not be the only
standard by which we judge the Fed; that second, there is a need
for some public-private interaction in a monetary policy area; and
third, that quite frankly, when you look at it, it could well be ar­
gued that the Fed has done a better job in monetaiy policy than
Congress has in fiscal policy. Look at our deficit.
So “If it ain’t broke, don’t fix it,” it is like saying from the folks
that brought you the budget deficit, let us deal with monetary pol­
icy or let us nave the appearance that we are dealing with mone­
tary policy; and I am worried about that. So I guess what I would
have to be shown is a practical conclusion that, not abstract opin­
ion that, we need more accountability—as I said, you could argue
the Supreme Court should be more accountable if the theory were
just accountability. It is less accountable than the Fed is structured




44
now. Many of my colleagues decry the Fed accountability would die
for the Supreme Court’s independence. I guess independence and
accountability are opposite sides of the same coin.
So the question to me is, if you are going to tamper, there ought
to be a good, practical reason that the lack of accountability or less
accountability that is in the Fed has resulted in some real prob­
lems in terms of monetary policy. Aa I say, in my view, it has
served pretty well as an insulation from the political vicissitudes.
I realize this is one of the few times I am just pitching a softball
at you. Can you give some—are there times when you think that
greater accountability in the history of the Fed which you are a
much greater expert at than I am—when greater accountability
would nave made better monetary policy?
The Chairman . If the gentleman would yield, we have 2 minutes.
Why don’t we accept Chairman Greenspan’s answering that in
writing for the record?
Mr. S chumer . That is fair. I have no objection.
[The information referred to can be found in the appendix.]
The Chairman . I want to thank you, Mr. Chairman, and there
is no use holding you over.
Mr. S chumer . I would like him to think long and hard about
those examples, so in writing would be just fine.
The Chairman . Y ou yourself said you were throwing him a soft­

ball. The committee stands adjourned until farther call of the
Chair.
[Whereupon, at 12:30 p.m., the hearing was adjourned, subject to
the call of the Chair.]







APPENDIX

October 13, 1993

(45)

46

Opening Statement
by
Henry B. Gonzalez
Chairman
Committee on Banking, Finance and Urban Affairs
Second Day of Hearings
on the Issues Involved in
the "Federal Reserve System Accountability Act of 1993," HR 28

I welcome Federal Reserve Chairman Alan Greenspan as the next
witness in this series o f hearings on the issues involved in the Federal Reserve
System Accountability Act of 1993 -- HR 28.
Chairman Greenspan is Chairman of both the seven-member Board of
Governors and the 12-member Federal Open Market Committee (FOMC).
These Federal Reserve committees have vast powers. Under the direction of
the FOMC, the Federal Reserve can order unlimited amounts of U.S. dollar
bills, labelled as Federal Reserve notes, from the Bureau o f Engraving at the
U.S. Treasury to be delivered to any of the 12 Federal Reserve Banks.
Through open market operations at its New York Federal Reserve Bank, the
Federal Reserve determines how much of this money is put in circulation.
The FOMC members have authorized the holding of a portfolio of over
$300 billion in U.S. securities from which the Federal Reserve earned $17.3
billion in interest last year. After deducting its expenses, additions to its
surplus, and interest paid to member banks for their stock, the balance at the
Federal Reserve is returned to the Treasury and helps to reduce the Federal
government deficit.
Thus, every dollar used by the Federal Reserve for its expenses increases
the taxpayers’ liability for financing the Federal government.
It is important that taxpayers know exactly how their money is being
spent. That is why I have proposed in H.R. 28 to require independent audits
o f all Federal Reserve operations and authority for the General Accounting
Office (GAO) to examine all Federal Reserve operations. At present, the
GAO is prohibited from inspecting large parts of the Federal Reserve
operations.




47

2
Under my legislation, the Federal Reserve would have to provide a
detailed account of its expenditures for dues for its employees’ memberships
in private societies and clubs during the past year. Those expenditures with
budgeted funds are illegal for employees of the United States government.
Similarly, the Federal Reserve would have to account for adding a $200,000
renovation to its gun range at the Dallas Federal Reserve Bank shortly after
the new building was constructed. We would also have a detailed account of
the cost o f land and real estate the Federal Reserve owns all over the country.
The American public has the right to know exactly how the Federal Reserve
is spending every dollar o f its money.
There should be no independence from accountability for expenditures
of taxpayers’ money. Why should the Federal Reserve spend its resources -and that means taxpayers' money -- to send members of the Board of
Governors, as it did in 1977, to the Federal Reserve Banks to organize a
lobbying effort? The Federal Reserve organized bankers that it regulates to
prevent the House Banking Committee from including a GAO audit
requirement in the Federal Reserve Reform Act of 1977.
Attempts by regulatory agencies to orchestrate lobbying campaigns
against bills affecting their agencies are illegal when Congressionally
appropriated funds are used. Does the Federal Reserve really want the
Banking Committee to maintain its exemption and will it stretch the meaning
of independence to rationalize this exemption?
An episode in 1979 illuminates how phony the argument o f independence
really is when it comes to accountability. In 1979 the Federal Reserve was
called before the House Banking Committee because the Federal Reserve had
issued a grossly incorrect report on the money supply. The report sent bond
prices down and interest rates up on the Friday after the announcement, even
though at least one senior official at the New York Federal Reserve Bank was
reported to have known the numbers were wrong.
This was a proper time for the Congress to order the GAO to investigate
what had happened and to determine if any Federal Reserve employees had
made profits on inside information. The Federal Reserve lobbying efforts had
helped close down that kind of rational inquiry. The Federal Reserve told the
Banking Committee it would investigate itself.




48

3
Our nation's central bank proceeded to hire a private law firm with no
official powers of investigation. There was a footnote buried in the final report
that a New York Federal Reserve official may have conducted insider trading
and the case was turned over to the Securities and Exchange Commission. If
you overlooked the footnote, the report was a clean bill of health for the
Federal Reserve, which was billed $877,675.88 by the law firm, $1.7 million in
1993 dollars. Paying for a good conduct medal is not an ethical way to run a
government agency. Why should taxpayers pay for those actions?
H.R. 28 requires the Federal Reserve to resume making a record of their
FOMC meetings. Official policy changes would have to be made public within
a week and a videotape of the meeting would be made public in 60 days.
In 1977, former Federal Reserve officials and scholars from across the
country sent their views to the House Banking Committee about the Federal
Reserve’s decision to stop taking minutes at FOMC meetings. The responses
that year generally deplore the Federal Reserve’s blatant action in dropping
the curtain over their operations by refusing to take detailed minutes o f the
committee that manages the nation’s money supply.
How would we know what the policy of the Federal Reserve really was
before the 1972 reelection of President Richard Nixon if it were not for the
minutes? Federal Reserve Chairman Arthur Bums was outwardly the
government’s champion fighter against inflation. Yet, at two secret FOMC
meetings before the Nixon election (August 15,1972 and September 19,1972)
he argued forcefully for fast money growth. The minutes reflect that even
though Vice Chairman Robertson warned that the projected fast money growth
was "cause for real concern" Bums "saw no need to be afraid of prosperity and
to adopt restrictive monetary policy."
Should the public and the financial markets have access to full
information and to full accountability? Do the financial markets work best with
full information, as the modern theories of finance contend? Or should the
Federal Reserve continue to nourish the rumor mill industry and selectively
leak the results of its FOMC meetings?
H.R. 28 would require all individuals voting on the nation’s money supply
to be constitutional officers. Five of the FOMC members are private citizens




49
4
serving as presidents of the Federal Reserve Banks. The Presidents are
selected by their individual Bank’s board of directors who in turn are drawn
from the banking industry. Testifying before the House Banking Committee
on April 13,1938, the great chairman of the Federal Reserve for 13 years until
1948, Marriner S. Eccles, repeated his strong conviction that the 1935
reorganization of the Federal Reserve was seriously incomplete. He said:
"presidents of the Reserve baqks 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 monetary
policies as important as those given to this committee should
consist entirely of persons representing the public interest.”
There were suits against the Federal Reserve in the 1980’s to attempt to
remove the votes of the presidents of the Federal Reserve Banks because the
Constitution specifies that those who make major decisions in the government
must be Constitutional officers who have gone through the confirmation
process. Federal District Court Judge Harold Greene did give an opinion in
1986 that it was all right for private citizens to vote on the money supply. It
is important to note that the Court of Appeals in Melcher v. Federal Open
Market Committee, 836 F 2d 561 (D.C. Cir. 1987) vacated Judge Green’s
opinion so that it has absolutely no legal effect. The Court of Appeals
explicitly said that the matter should be settled by the legislature. Now is the
time to follow the Constitution and correct an error.
Chairman Greenspan, you head the most powerful institution in our
government that directly affects the economic health o f our citizens. The
changes we propose in H.R. 28 are not damaging to the independence of the
Federal Reserve nor do they attempt to micro-manage monetary policy. The
Federal Reserve presidents would have increased independence since they
would be constitutional officers. This is not radical reform and there is no
cause for the Federal Reserve to proceed as if barbarians are at the gate and
it is the end of western civilization. Senator Byron Dorgan told us last week
that "If you talk about fixing the doorjamb at the Fed, they accuse you of being
part of a building demolition crew." We should not pretend the Federal
Reserve, o f all institutions in government, is infallible.




50

5
We must have openness and accountability from the government
bureaucracies that operate in our democracy. President Clinton wants to
reinvent government, to make it more efficient, less wasteful, and more
representative of all Americans. The provisions of H.R. 28 I have proposed,
are rational and useful changes that will make the Federal Reserve a better
and stronger institution that will fulfill its functions as a central bank more
effectively. Let us not wave the flag of independence when it comes to the
public’s right for full accountability for the operations of its central bank. The
Federal Reserve is not and should not be infallible,
unalterable,
unapproachable, and unaccountable.




51
STATEMENT BY
REPRESENTATIVE JAMES A. LEACH
Before the Committee on Banking, Finance and Urban Affairs
Hearing on Reforming the Federal Reserve System
October 13, 1993
It is easy to defend the Federal Reserve System when times are good and/or when its
policies are not perceived to be at the root o f particular problems o f the moment in the
economy. But when times are less good or mistakes are made (a la the roller coaster effect
o f loosening and then tightening money supply at the end o f the seventies and beginning o f
the eighties and the regulatory inattention given to capital ratios and prudential risk implicit
in LDC lending) it is important the Fed have in place structural arrangements that are above
reproach.
Stability o f the financial system depends on confidence and unfortunately it is diffi­
cult to have confidence in the precept that individuals selected by private sector boards o f
directors accountable in large part to one industrial sector —banking and finance — should
have a significant if not determinative role in interest rate decisions affecting the Nation’s
economy at large. It is even more difficult to have confidence in a system where regulation
o f an industry is partly m the hands o f individuals accountable to boards largely controlled
by those being regulated.
Legislatively, two approaches to correcting this democratic unseemliness have been
presented: the House is suggesting that Federal Reserve Bank presidents be appointed by
the President with the advice and consent o f the Senate. The Senate, on the other hand,
takes the position that Reserve Bank presidents be removed from voting on the Federal
Open Market Committee (FOMC). The common denominator shared by both is that only
publicly appointed individuals should be permitted to participate directly in the formulation
and implementation o f monetary policy.
While I see certain merits and demerits to each approach, an alternative which pre­
serves more firmly the independence o f the Fed should be laid on the table. The alternative
would maintain Reserve Bank president participation on the FOMC but require that the
Reserve Bank presidents be appointed for precise terms by the Federal Reserve Board o f
Governors. Since the Board o f Governors is composed solely o f publicly appointed indi­
viduals, such ^n alternative would solve the political science dilemma o f having private
citizens directly^articipate in public decisions without direct accountability and, at the same
time, address the concerns o f those, like myself, who believe an independent Fed protects
the public better than one too connected to a fiscally wanton Congress.
The issues o f greater transparency o f FOMC decision making as well as greater
budgetary openness can no longer be ducked. A reasonable case, o f course, can be made
that immediate revelation o f FOMC decisions could result in adverse market reactions, both
domestically and internationally, as market speculators use information discussed at FOMC
meetings to their advantage. At last week’ s hearing, for instance, William Greider, a noted
proponent o f making the Federal Reserve System more publicly accountable, expressed
concern with immediate disclosure o f FOMC decisions. Mr. Gieider stated: “ It makes no
sense to compel the Fed to reveal its trading strategy in advance so that other traders can use
the information to adjust their portfolios. ” The Fed is the public's trader and thus deserves
public protection. Nonetheless, more information on a more timely basis makes democratic
common sense.
In conclusion, let me stress that the best way to protect the independence o f the Fed
is to insure that its indefensibly undemocratic elements are rooted out. The issue isn’t popu­
list; it's prudential. In a democracy, arrogance always gets its comeuppance. For a citadel
to maintain its holy aura, it must be perceived to be a bastion o f service, not privilege. A
reform in time saves nine.




-30-

52
STATEMENT
of
CONGRESSMAN LEE H. HAMILTON
before the
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
of the
U.S. HOUSE OF REPRESENTATIVES
on
October 13,1993

Mr. Chairman, I very much appreciate the opportunity to appear before the
Committee on Banking, Finance and Urban Affairs this morning to testify on the topic
o f 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 I 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 interfering with, the independence of the Fed to conduct monetary policy.
I emphasize that point, because I have often been accused of trying to do just
that. Eight years ago, when I introduced my first bill to bring the Federal Reserve’s
budget into the sunlight, and four years ago, when I first introduced broader legislation
with Congressman Byron Dorgan to reform a number of the practices and procedures of
the Federal Reserve, these bills 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.
If 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.
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




1

53
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. If this were the motive for my bills,
there would be no reason for me to be here today.
But there is, 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 o f
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:
o

Monetary policy is decided in secret, behind closed doors.

o
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.
o

It waits six weeks before releasing policy decisions.

o
It keeps no transcript or minutes of any of the meetings at which the
Federal Open Market Committee makes important monetary policy decisions.




2

54

o
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.
o
The Fed's budget is not published in the U.S. Government Budget, even
though it spends over $1.7 billion per year.
o
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.
o
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 provision?.
Federal Reserve Chairman Alan Greenspan has made his views known on this bill and I
will address his objections where appropriate in my testimony.

I. Consultation with the 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 publicly 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

55
Chairman Greenspan opposes this provision on the grounds that the Federal
Reserve and the Administration already communicate through informal channels 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 o f 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 o f communication that would not depend on personalities for success.

n. Term o f 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

56
In 1966, Federal Reserve Chairman William McChesney Martin said the Board
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. In 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.

III. 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

57

not have the money that large Wall 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

58
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 o f 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 POLICY REFORM 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 monetary policy are made by the Federal Open Market
Committee, which consists of the seven members of the Board of Governors plus five o f
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

59
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 o f 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 the twelve votes that
determine monetaiy policy and interest rates.
This situation, in which private individuals participate in monetaiy 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 o f 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 o f Governors would still have the
benefit of their advice.
Mr. Chairman, your bill would 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 "If it ain’t broke, don’t fix it."
People who raise this objection completely miss the point o f my proposals. They
assume the purpose of my bills is to pressure the Federal Reserve to alter its conduct o f
monetary policy, which could harm the economy of the United States. When people say
"If it ain’t broke, don’t fix it," they mean monetary policy.
But such an objection is based on a misreading of my bills. These bills are not
directed at the Federal Reserve’s conduct o f monetary policy. There is no provision in
either one that would give Congress or the President any more influence over monetaiy
policy than they have at this very moment. If someone wanted to politicize monetaiy




8

60
policy, these bills would not be the way to do it.
Nonetheless, the system is broken in a different way, because many of the
Federal Reserve’s practices and procedures violate the normal standards of
accountability in a democratic society. These are just not widely recognized because
they are not widely publicized:
o
How can someone argue that the system is not broken when the Fed
conducts its business in secret, refuses to keep minutes, and fails to inform Congress
and the public of its decisions until weeks after they are carried out?
o
How can someone argue that the system is not broken when no formal
channel of communication exists between decisionmakers at the Federal Reserve and
the top economic policymakers in the Administration?
o
How can someone argue that the system is not broken when trillions of
dollars of transactions by the Fed are barred from outside review and most of the
Federal Reserve’s $1.7 billion budget does not even show up in the official budget
documents of the U.S. government?
o
How can someone argue that the system is not broken when private
interests have a direct vote on monetary policy, in violation of the most basic
democratic principle that public decisions should be made solely by properly-appointed
or elected public officials?
The system is broken in these ways, and it needs to be fixed. My 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 far 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 also like to submit two additional statements for the record that explain the bills
in more detail.




9

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For release on delivery
10:00 a . m . , EDT
October 13 . 1993

Testimony by
Alan Greenspan
Chairman
Board of Governors of the Federal Reserve System
before the
Committee on Banking, Finance and Urban Affairs
U.S. House of Representatives

73-115 0 - 9 4 - 3



October 13. 1993

62
I

appreciate this opportunity to discuss, the

important issues raised by recent legislative initiatives to
alter the structure of the Federal Reserve System.
I will
begin my remarks this morning by placing these issues in
some historical perspective, before commenting specifically
on provisions that would change the status of Reserve Bank
presidents, broaden the authority of the General Accounting
Office to audit the Federal Reserve, and mandate additional
disclosure of monetary policy decisions and discussions.
The appropriate role of a central bank in a
democratic society is an important and controversial issue.
The performance of such an institution has profound
implications for the n a t i o n ’ economy and the p e o p l e ’
s
s
standard of living.
Americans have pondered the question of
the appropriate role and structure for the central bank at
length, beginning with the debate over the First Bank of the
United States, which George Washington signed into existence
in 1791.
Echoing the earlier discussions ^surrounding the
chartering of the First and Second Banks of the United
States, extended debate and compromise preceded the
establishment of the Federal Reserve System. Much of the
focus of the debate was on the balance that should be struck
between public and private authorities in governing the
central bank.
In 1908,. in response to the periodic financial
crises that had plagued the country in the latter part of
the nineteenth century and in the early years of the
twentieth, a National Monetary Commission, consisting
entirely of members of Congress, was established by
legislation.
Four years later, the Commission, in
submitting its report to Congress, called for the creation
of a National Reserve Association to provide stability to
our financial system.
Both the Commission's plan and an
alternative, proposed by President Woodrow Wilson,




63
-2

envisioned the central bank as containing public and private
elements.
President W i l s o n ’ plan won the approval of
s
Congress and established the Federal Reserve System as our
nation's central bank.
Over the intervening years. Congress
has initiated many reviews of the System's structure, but
with rare exceptions has chosen to leave the basic structure
intact.
The major piece of legislation affecting the
Federal Reserve's organization since its inception in 1913
was the Banking Act of 1935, which established the Federal
Open Market Committee (FOMC) in its current f o r m as the
central decisionmaking body for monetary policy. When it
was clear by the 1930s that the buying and selling of
securities by the Federal Reserve was a crucial monetary
policy instrument, there was again debate in Congress over
whether it should be carried out entirely by government
appointees or whether the Reserve Bank presidents, who were
not politically appointed, should share in that policymaking
role.
In the 1935 act. Congress reaffirmed that the Reserve
Bank presidents should have a substantive voice in policy.
They were granted five of the twelve positions on the FOMC,
while the seven members of the Board constituted the
majority.
The wisdom of Congress in setting up the structure
of the System has stood the test of time.
Federal District
Court Judge Harold Greene, in commenting in 1986 on the
constitutionality of the FOMC, noted that, "The current
s y s t e m [ .]... the product of an unusual degree of debate and
r e f l e c t i o n . represents an exquisitely balanced approach
to an extremely difficult problem."
The role of a central bank in a democratic society
requires a very subtle balancing of priorities between the
need for sound, far-sighted monetary policy and the.
imperative of effective accountability by policymakers.
Accountability and control by the electorate are vital; the




64
-3-

nation cannot allow any instrument of government to operate
unchecked.
The central bank, just like other governmental
institutions in a democracy, must ultimately be subject to
the will of the people.
In this regard, the Federal R e s e r v e ’ activities
s
are constantly scrutinized by this Committee and others in
Congress.
The Federal Reserve Board reports semiannually
both to the House of Representatives and to the Senate
pursuant to the Humphrey -Hawkins Act, and we regularly
respond to other congressional requests for testimony.
We
recognize our obligation to do so and appreciate the
importance of maintaining open communication with the
n a t i o n ’ elected representatives. We also provide a great
s
deal of information about our operations directly to the
public.
And we consult frequently with those responsible
for economic and financial policy in the Administration.
We have to be sensitive to the appropriate degree
of accountability accorded a central bank in a democratic
society.
If accountability is .achieved by putting the
conduct of monetary policy under the close influence of
politicians subject to short-term election-cycle pressures,
the resulting policy would likely prove disappointing over
time.
That is the conclusion of financial analysts, of
economists and others who have studied the experiences of
central banks around the globe, and of the legislators who
built the Federal Reserve.
The lure of short-run gains from gunning the
economy can loom large in the context of an election cycle,
but the process of reaching for such gains can have costly
consequences for the nation's economic performance and
standards of living over the longer term. The temptation is
to step on the monetary a c c e l e r a t o r , or at least to avoid
the monetary brake, until after the next election. Giving
in to such temptations is likely to impart an inflationary
bias to the economy and could lead to instability.




65
-4r e c e s s i o n , and economic stagnation.
Interest rates would be
higher, and productivity and living standards lower, than if

monetary policy were freer to approach the n a t i o n ’ economic
s
goals with a longer-term perspective.
The recognition that monetary policies that are in
the best long-run interest of the nation may not always be
popular in the short run has led not only the United States
but also most other developed nations to limit the degree of
immediate control that legislatures and administrations have
over their central banks.
More and more countries have been
taking actions to increase the amount of separation between
monetary policy and the political s p h e r e .
In this nation, several aspects of the current s e t ­
up promote the central b a n k ’ distance from the political
s
fray. The fourteen-year terms of the governors on the
Federal Reserve Board are one of those elements, w i t h only
two vacancies scheduled to occur during the four years of
any single Presidential term. Once in office, those
governors cannot be removed by the President over a policy
dispute.
In addition, regional Reserve Bank presidents -who are selected at some remove from political channels -are included on the FOMC. To prevent political pressure
from being applied on monetary policymakers via the power of
the purse, the Federal Reserve is not required to depend
upon appropriated funds to meet its expenses.
H.R. 28, The Federal Reserve System Accountability
Act of 1993, would remove some of that insulation.
I would
v iew the enactment of legislation of this type as a major
mistake.
Provisions that, in effect, increase political
leverage on Federal Reserve decisionmaking amount to
assaults on the defenses that Congress has consciously put
in place to ensure the appropriate degree of central bank
independence. Weaken those defenses and, I firmly believe,
the economy is at risk. The Federal Reserve must be free to
focus on advancing the n a t i o n ’ ultimate economic goals.
s

73-115 0 - 9 4 - 4



66
-5In an amendment to the Federal Reserve Act*
Congress has charged the central bank wit h furthering the
goals of "maximum employment, stable prices, and moderate
long-term interest rates.” To promote those objectives, the
Federal Reserve .must take a long-run perspective.
In that vein, as I have indicated to this Committee
on previous occasions, the determination of the
effectiveness of a federal agency has to be based, in the
end. on whether it has carried out the objectives Congress
has set for it.
In discharging its tasks over the years,
the Federal Reserve has faced a variety of challenges; our
economy has been buffeted*by swings in fiscal policy and by
strong external forces, including oil price shocks and wars.
In often difficult economic circumstances, the Federal
Reserve has implemented policies aimed at promoting the
n a t i o n ’ economic health. We have not always been entirely
s
successful, but we have learned from experience what
m o netary policy can do and what it cannot do.
In my -view, current Federal Reserve policy is
promoting conditions vital to maximi z i n g the productive
potential of the U.S. economy.
Monetary policy is. and will
continue to be. directed toward fostering sustained growth
in economic output and employment.
As the nation's central bank, the Federal Reserve
stands at the nexus of monetary policy, supervisory policy,
and the payments system.
Part of our task is to minimize
the risk of systemic crises while endeavoring to implement a
m a croeconomic policy that supports m a x i m u m sustainable
economic growth. When, for example, threats to the nation's
financial s y stem loomed large in the w a k e of the 1987 stock
market crash, the Federal Reserve effectively contained the
secondary consequences of the crash w i t h prompt but prudent
injections of liquidity and with constant consultations w i t h
depository institutions during the crisis. The bulk of our
efforts in this area, however, of necessity garners




67

-

6-

considerably less publicity, as it is directed a t ongoing
>.
efforts to fend off financial-sector problems before those
problems emerge as full-blown crises that could threaten
American jobs and living standards. Much of our success
over the years, therefore, reflects crises that did not
happen.

In w orking with other regulatory agencies, the

Federal Reserve also has brought its broad perspective to
bear on supervisory actions that could have had
macroeconomic or monetary policy implications.
In practice, the central bank of the United States
works, and it works well.
On paper, however, its structure
can appear unwieldy - - an amalgam of regional and
centralized authority, and of public and private interests.
If we were co nstructing a central bank for the United States
now, starting from scratch, would it be identical to the
Federal Reserve Syst e m described in current law? Perhaps
not. But the Federal Reserve has evolved to be well suited
to today's policy tasks.
One of the reasons that the Federal Reserve is
effective is that its basic structure has been in place for
a long time. The institution has been able to take that
framework as a given and to adapt and build on it during
decades of invaluable experience in the financial and
economic setting of this country.
As the Federal Reserve has evolved over the years
it has been permeated by a culture of competence and
dedication to public service. As a consequence, the Federal
Reserve has attracted highly skilled analysts, technicians
and policymakers. While we might imagine a different
initial structure for our central bank, implementing a major
change at this stage could, for all intents and purposes,
destroy the exceptionally valuable culture that has evolved
over time and that continues to serve this nation well. And
there is always the risk that changing a c omplex
organization, even w i t h the laudable goal of improving one




68
-7or more parts of it, may well have unforeseen and
u nfortunate consequences elsewhere in the structure.
Nonetheless, the Federal Reserve recognizes that an
organization that does not appropriately respond to changes
in the environment in which it functions will soon become
ineffectual. Accordingly, the Federal Reserve has
suggested, initiated, and instituted a number of measured
changes over the years. When confronted with a new
development requiring change, we advocate change.

For

example, not long ago we recognized, as did this Committee,
an apparen-t weakness in the way the discount w i n d o w could be
used in the case of insured failing institutions, a
condition which we had rarely before experienced.
We saw
change as a constructive response, and. while we were
prepared to implement the change by adapting our
r e g u l a t i o n s . we cooperated with this Committee wh i c h chose
to amend our discount w i n d o w procedures as part of FDICIA.
I
hope, and I expect, the Federal Reserve will
continue to change, but always prudently
in response to
clearly identified problems -- and only for the better.
One
area in which I see major need for change i-s the inadequate
pace at which women and minorities have moved into the top
echelons of the Federal Reserve.
We share your concerns in
this regard and are wo r k i n g diligently to improve
opportunities for women and minorities throughout the
System.
In the remainder of my remarks this morning, I
would like to address three specific issues, under the more
general topic of Federal Reserve accountability.
These are,
first, the status of the Reserve Bank presidents on the
FOMC. then the General Accoun t i n g Office's purview in
auditing the Federal Reserve System, and finally the
disclosure of FOMC deliberations and decisions.




69

-

Tha

8-

Status of Reserve Bank Presidents

The Federal Reserve Banks represent a unique blend
of the public and private sectors.
I believe that those who
label the Reserve Bank presidents as representatives of the
banking interests, as opposed to the public interest,
misunderstand the position of the presidents -- and the
Reserve Banks -- in the Federal Reserve System.
The Federal Reserve Banks are instrumentalities of
the United States government organized on a regional basis.
They are in a tangible sense "owned”
;by the,federal
government.
The bulk of their net income is handed over to
the government each year.
Their accumulated surplus, were
they to be liquidated, would revert to the U.S. Treasury.
And while a portion of the capital of the Reserve Banks
represents contributions by member commercial banks, those
member banks are not free to withdraw the capital, their
dividends are fixed by statute, and their capital stake in
no way affords them the usual attributes ^of control and
financial interest.
The member commercial banks do select the majority
of the directors of their local Reserve Bank.
But the
Federal Reserve Board chooses the remaining directors, and.
among those, designates a chairman and a deputy chairman.
The directors, in turn, select the Reserve Bank's president,
but their selection is subject to the B o a r d ’ approval.
s
Those Reserve Bank presidents then receive topsecret clearances from our government and are subject to the
federal conflict-of-interest statute.
They can be removed
by the Federal Reserve Board* and it is the Board that sets
their pay. Upon joining the FOMC, they take an oath of
office to uphold the Constitution of the United States, and
-- uniformly in my experience -- they are dedicated to the
service of our country.

However, regardless of whether the presidents of
the Reserve Bank# are viewed as more public than private or




70
-9more private than public, the real question remains, does
their participation on the FOMC make for better monetary
policy?

I can assure you that it does.
The input of Reserve Bank presidents who reside in

and represent the various regions of the country has been an
extremely useful element in the deliberations of the FOMC.
By virtue of their day-to-day location and their ongoing
ties to regions and communities outside of the n a t i o n ’
s
capital, the presidents see and understand developments that
we in Washington can overlook.
They consult routinely with
a wide variety of sources within their districts, drawing
information from manufacturing concerns, retail
establishments, agricultural interests, financial
institutions, consumer groups, labor and community leaders,
and others. Moreover, because their selection is
apolitical, they tend to bring different skills and
perspectives to the policymaking process.
The public-private and regional makeup of the
Federal Reserve System was chosen by Congress, in preference
to a unitary public central bank, only after long and
careful debate.
The system was designed to avoid an
excessive concentration of authority in federal hands and to
ensure responsiveness to local needs. Nonetheless, then as
now. the operations of the Reserve Banks were placed under
the general supervision of the Board of Governors. When the
FOMC was given its current form in 1935. five Reserve Bank
presidents were placed on that Committee, but their presence
was outweighed by the seven Presidentially appointed members
of the Board.
This blending of public and quasi-public
institutions has a long history in this country and has been
reaffirmed repeatedly in Congress. Nonetheless, the
presence of Reserve Bank presidents on the FOMC periodically
resurfaces as an issue. This occurs despite the long and
successful history of the presidents' membership on the




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10-

FOMC, which counters a similarly lengthy history of claims
that their participation would be detrimental to our nation.
The involvement of quasi-government officials in monetary
policymaking has survived a series of challenges over the
years.
It has survived the test of time. One must wonder
why we would wish to tinker with a unique partnership of the
public and the private that has worked well for more than
half a century.
Some who agree that the Reserve Bank presidents
provide a unique perspective would nonetheless argue that
such input could still be obtained by reducing the Reserve
Bank presidents* role to an advisory one,
I doubt that, for
two reasons.
First, let us not delude ourselves: Anyone
permanently denied a vote sees his or her influence diminish
m a r k e d l y . Not only would the p r e s i d e n t s ’varied experiences
and regional perspectives likely become less well reflected
in policy decisions, but their ability to solicit real-time
information from their communities would be diminished as
well.
Second. I believe that a fair number of my colleagues
who serve as presidents of the Reserve Banks would have
declined that office had voting rights on the FOMC not
attached to it. These are people who do not lack for
opportunities.
If the Reserve Bank presidents were denied
votes, we could not attract individuals of the same caliber
to these jobs that we do today. As a result, the advice
received would be adversely affected, and FOMC deliberations
would be less productive.
A different proposal would retain the Reserve Bank
presidents on the FOMC. but would have them appointed by the
President of the United States.
Such a proposal is not new:
It was considered and rejected by this Committee as recently
as 1976. The clearest drawback to this suggestion is one
that I have already mentioned, that is, the potential for
increased partisanship that would erode the quality of
policy, as the central bank was drawn more closely into the




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11-

ambit of daily political concerns.
In a d d i t i o n ,.^however.
such an arrangement wo u l d create significant managerial
problems for the Federal Reserve System as an organization.
Under current law. Reserve Bank presidents are
directly accountable to the Board for their performance in
carrying out Systemwide policies in such areas as bank
s u p e r v i s i o n , payments systems responsibilities, and discount
window administration.
The B o a r d ’ ultimate defense against
s

a Bank president who. is either incompetent or purposely
obstructing the effective implementation of System policy is
our power to remove that person from office.
If the heads of the Reserve Banks were instead
Presidentially appointed, we presume that they could be
removed constitutionally only by the President.
In that
circumstance. Systemwide coordination of policies and i n t e r ­
bank cooperation could be seriously impaired.
In sum. if the sole duty of Reserve Bank presidents
were to vote on the FOMC. granting the President of the
United States the power to appoint and remove them would be
unwise on only one count -- that of adversely affecting the
conduct of the n a t i o n ’ monetary policy. However, Reserve
s
Bank presidents also run large organizations charged with
such tasks as collecting data, processing currency,
operating the book-entry system., and auctioning Treasury
bills. The twelve Banks must operate as one in these
various areas, and Congress has given the Board general
oversight of the Banks to ensure that they do. A proposal
that divested the Board of the power to remove a Reserve
Bank president from office wo u l d subtly but significantly
undermine the ability of the Board to manage the Federal
Reserve System.

Scape of SAQ Audita
As you know, the passage in 1978 of the Federal
Banking Agency Audit Act made most of the operations of both




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12-

the Federal Reserve Board and the Federal Reserve Banks
subject to review by the General Accounting Office.
Since
then, the GAO has completed more than 100 reports on various
aspects of System operations, as well as numerous others
that involved us less directly.
At present, the GAO has
roughly 25 audits of the Federal Reserve under way and
maintains several of its staff in residence at the Board and
at selected Reserve B a n k s .
The GAO has free rein to audit the System, with the
explicit exemption of only three functions:
Those are
deliberations, decisions, or actions on monetary policy
matters: transactions made under the direction of the FOMC:
and transactions with, or for. foreign official entities.
By excluding these areas, the 1978 Act represented another
effort to balance, on the one hand, the public
accountability of the Federal Reserve with, on the other,
its ability to perform its policy functions most
effectively.
The benefits, if any, of broadening the G A O ’
s
authority into the monetary policy and FOMC areas would be
small, in part because a GAO audit would tend to duplicate
functions that are already performed.
With regard to purely
financial audits, the Federal Reserve Act already requires
that the Soard conduct an annual financial examination of
each Reserve Bank, including open market and international
operations. And these exams are complemented by other Board
reviews of Reserve Bank effectiveness and efficiency, as
well as by comprehensive audits conducted by each Reserve
Bank's independent internal audit function.
In order to
provide the Board with additional assurance of the quality
and comprehensiveness of the B o a r d ’ audit process, complete
s
financial audits are currently being conducted by nationally
recognized independent accounting firms at Reserve Banks.
Two such audits were conducted this year. The results of
these audits to date have confirmed the integrity and




74
-13quality of the S y s t e m ’ audit process.
s

In addition, the

Board itself is audited annually by an independent public
accounting firm, and the results of those audits are
furnished regularly to Congress.
More broadly, Congress has. in effect, mandated its
own review of monetary policy by requiring semiannual
monetary policy reports and by holding hearings.
In
a d d i t i o n . a vast and continuously updated literature of
expert evaluations of U.S. monetary policy exists.
In this
environment, the contribution that a GAO audit would make to
the active public discussion of the conduct of monetary
policy is not likely to outweigh the negatives.
Those negatives would include a potential
compromising of Federal Reserve effectiveness, in part
because the change could peel away a layer of the central
b a n k ’ insulation from day-to-day political pressures.
s
Even
what appears to be a very limited audit of the e fficiency of
our operations could in fact turn into pressure for a change
in monetary policy itself as the 1978 Act understood.
For
example, the question being posed .to Comptroller Bowsher in
these hearings of whether the magnitude of our open market
operations reflects unnecessary buying and selling of
government securities is a monetary policy question, not an
efficiency question.
The volume of transactions that the
Open Market Desk completes in carrying out the F O M C ’
s
directive correlates directly w i t h the substance of the
policy in place.
GAO scrutiny of policy deliberations, discussions,
and actions also could impede the process of f o rmulating
policy. A free discussion of alternative policies and
possible outcomes is essential to minimize the chance of
policy errors. The prospect of GAO review of formative
discussions, background documents, and preliminary
conclusions could have an adverse effect on the free




75
-14interchange and consensus-building that leads to good
policy.
Transactions made under the direction of the FOMC
primarily involve domestic monetary policy operations, but
also include foreign exchange operations.
Expanding GAO
audit authority into this latter area would risk impairing
our sensitive working relations with foreign central banks
and governments.
Important daily contacts and exchanges of
information with foreign monetary authorities now take place
in a candid and constructive a t m o s p h e r e . The possibility of
a GAO audit of our foreign exchange operations would reduce
the willingness of foreign authorities to share information
with us and thereby would reduce the effectiveness and
efficiency of our o p e r a t i o n s . This caution also applies to
the third exempted area -- transactions with or for foreign
entities; however, there the principal issue is one of
sensitive proprietary information about foreign governments,
foreign central banks, and international organizations.
In sum, I believe that the current structure of
internal controls and audits, and congressional review
strikes the right balance between public accountability and
policy effectiveness.
FQtfC M

s c Iq s u e s

The issue of fuller or more immediate disclosure of
FOMC discussions and decisions has been a controversial one
historically.
In Congress, the financial markets, and
academia, this topic has been debated repeatedly over the
years.
The FOMC itself has reviewed policies and procedures
in this area frequently and has revised its practices
several times. At the heart of this issue is, again,
balance.
The appropriate degree of openness comes from
striking the right balance between the p u b l i c ’ right to
s
know and the need for effective policymaking and
implementation.




76
- 15-

In a democratic society, all public policymaking
should be in the open, except where such a f orum impedes the
primary function assigned to an institution by law.
Accordingly, the Federal Reserve makes its decisions public
immediately, except w h e n doing so could undercut the
efficacy of policy or compromise the integrity of the policy
process. When we change the discount rate or reserve
requirements, those decisions are announced at once. When
we establish new ranges for money and credit growth, those
ranges are set forth promptly in our reports to Congress.
And when Congress requests our views, we come before this
Committee and others to testify.
Moreover, we publish our
balance sheet every week with just a one-day lag, enabling
analysts to review our operations in considerable detail.
What we do not disclose immediately are the
implementing decisions with respect to our open market
operations.
However, any changes in our objectives in
reserve markets are quickly and publicly signalled by our
open market operations.
We publish a lengthy record of the
policy deliberations and decisions from each FOMC meeting
shortly after the next regular meeting has taken place.
Nevertheless, the Federal Reserve has a reputation,
along with other central banks, of being secretive.
I
suspect this is largely a result of the nature of a central
bank's mission. The operations of central banks have a
direct impact on financial and exchange markets; therefore,
these institutions often find themselves in the position
where premature openness and disclosure could inhibit or
even thwart the implementation of their public purpose.
Suppose, for example, a central bank that operated
by targeting the foreign exchange rate decided that it might
be appropriate to change the target rate at a given point in
the future.
Or. to bring the discussion closer to home, say
that the central bank phrased its policies in terms of
contingency plans -- that is, if a given economic or




77
- 1 6-

financial event occurs, a particular policy action would
ensue.
If those decisions were made public, markets would
tend to incorporate the changes immediately, preventing the
policies from being effectively carried out as planned.
More broadly, immediate- disclosure of these types
of contingencies would tend to produce increased volatility
in financial markets, as market participants reacted not
only to actual Federal Reserve actions but also to possible
Federal Reserve actions.
It is often the case that the FOMC
places a bias toward change into its directive to the Open
Market Desk, without any change in instrument settings in
fact resulting.
In such circumstances, the release of those
directives during the period they are in force would only
add to fluctuations in financial markets, moving rates when
no immediate change was intended.
As a consequence, a disclosure requirement would
impair the usefulness of the directives, as Committee
members, concerned about the announcement effect of a
directive biased either toward ease or tightening, would
tend to shy away from anything but a vote of immediate
change or of no change at the meeting.
An important element
of flexibility in the current procedures would be lost,
which can scarcely serve the public interest.
Immediate
disclosure of the directive would change the nature of
monetary policymaking, and it would not be a change for the
better.
Of course, our current policies on information
release are grounded on an assumption of confidentiality.
Any unauthorized, premature release of FOMC decisions is a
very serious matter, and it undermines our policies.
Such
leaks are abhorrent. As I noted in my recent letter to you,
Mr. Chairman, leaks of FOMC proceedings are clearly unfair
to the public, potentially disruptive of the policymaking
process, and undoubtedly destructive of public confidence in
the Federal Reserve. We have taken steps that we believe




78
-17will be effective to curb any further unauthorized release
of information.
To repeat, as a general matter, public institutions
are obliged to conduct their business in open forums. The
Federal Reserve endorses this principle and adheres to it.
except when doing so would prevent us from fulfilling our
fundamental mission of producing sound public policy.
Holding open meetings of the FOMC or releasing a
video tape, audio tape, or transcript of them would so
seriously constrain the process of formulating policy as to
render those meetings nearly unproductive.
The candid
airing of views, the forthright give and take, and the
tentative posing of new ideas likely would disappear.
Monetary policy would suffer, and the economy w i t h it.
In open forum, a number of important items
currently discussed at FOMC meetings simply could not be
mentioned.
We would no longer have the benefit of sensitive
information from foreign central banks and other official
institutions or of proprietary information from privatesector sources, as we could not risk the publication of
information given us in confidence.
Moreover, to avoid creating unnecessary volatility
in financial and exchange markets, the FOMC might have to
forgo explorations of the full range of policy options.
Our
discussions would, in effect, become self-censored to
prevent the voicing of any views that might prove unsettling
to the markets. Even a lag in releasing a v e r b a t i m record
of the meetings wo u l d not eliminate this problem, but only
attenuate it. Unconventional policy prescriptions and
ruminations about the longer-term outlook for economic and
financial market developments might never be surfaced at
meetings, for fear of igniting a speculative reaction w h e n
the discussion was disclosed.
It has been averred that, since the minutes we
release do not indicate which individuals voi c e d wh i c h views




79

-

18-

at the meetings, the FOMC members themselves escape
accountability for their actions. 'This is contrary to fact.
The vote of each FOMC member is recorded, by name, and the
reasons for that vote are also recorded.
In the case of a
dissent from the majority, the reasoning behind the vote is
generally explained separately.
In the case of a vote cast
with the majority, the members assure themselves that the
minutes accurately reflect their views and the reasons for
voting as they did.
In both the Freedom of Information Act (FOIA) and
the Government in the Sunshine Act. Congress explicitly
recognized that there were types of information and kinds of
meetings that should be protected from dissemination to the
public.
Certain exemptions have been provided in FOIA for
information that, for example, is of a confidential
financial nature and in the Sunshine Act for meetings that
would prompt speculation in financial markets.
In the
exempted areas, it was determined that information release
would not be in the p u b l i c ■ n t e r e s t . As I have indicated. I
i
believe that the consequences of requiring the prompt
release of a verbatim record of FOMC meetings would most
certainly not be in the n a t i o n ’ best interest.
s
Conclusion
Mr. Chairman, you have made it clear that, in your
view, this legislation does not represent an attempt to
politicize the Federal Reserve or to infringe on its
independence.
I feel I must respond that, whatever its
intent* legislation of this type would have precisely that
deleterious effect.
I
take this legislative initiative seriously not
only because it would emanate from this Committee, but also
because of monetary p o l i c y ’ key position in the n a t i o n ’
s
s
overall economic policy. At the flashpoint of financial
crisis, monetary policy, if mishandled, can pose a threat to




80
-19our economic system.

And in this century we have witnessed

inflation -- a monetary phenomenon -- turn v i r ulent in too
many nations around the world.

To a considerable degree,

then, both the earnestness with which we ap p roach our task
and the unique position accorded the Federal Reserve in our
governmental structure derive from the potential for just
such dire consequences of monetary policy mismanagement.
In imposing significant change on the Federal
Reserve System, we would run the risk of real damage to the
i n s t i t u t i o n ’ effectiveness from unintended, adverse
s
consequences.
The Federal Reserve is not a flawless
institution.
It is, however, a very good one.
In my view,
it would be a mistake to legislate structural reform when,
as in this case, compelling evidence of the need for change
is lacking.




81
STATEMENT OF
REP. LEE H. HAMILTON

before the
SUBCOMMITTEE ON DOMESTIC MONETARY POLICY

on
THE FEDERAL RESERVE REFORM ACT OF 1989
November 9, 1989

Mr. Chairman and Members of the
Subcommittee, I am very pleased to have this
opportunity to testily on H.R. 3512, the Federal
Reserve Reform Act of 1989.
Since Congressman Dorgan and I originally
introduced this legislation in June, our bill has
stimulated a thoughtful discussion among the
American people about the Federal Reserve and
its proper role in American society. In response
to die many very helpful comments we received,
Congressman Dorgan and I recently revised die
bill and reintroduced it.
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 of all
Americans. It has die power to decide who
prospers and who fails. 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 paralyzed by
the inability of the Congress and the
Administration to agree on ways 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
removes the Fed from the normal processes of
accountability that apply to every other agency




of the federal government. Our bill, H.R. 3512,
addresses a very difficult and perplexing
problem -- how to make the Federal Reserve
more accountable to the American people
without jeopardizing its independence and its
ability to conduct monetary policy free of
political pressure.
When Congress and the President make
policy, we do it in the open. The debates in
both the House of Representatives and the
Senate are televised live throughout the country.
The decisions we make are immediately
reported to the American people; every penny
the government spends shows up in the Budget
documents of the U.S. Government and this
information is readily available to any interested
Member of Congress or the public; and the
books and programs of every government
agency are subject to audit and review by the
General Accounting Office. These are the
accepted rules of accountability in a democracy.
If the citizens of the country are dissatisfied
with the results, either with the policies
themselves or the way they are carried out by
government agencies, they know to whom to
complain and how to register their preferences.
But these rules do not apply to the Federal
Reserve. The Fed is independent of the rest of
the government. It was purposely created that
way to insulate monetary policy from political
pressures. No other government agency enjoys
the Fed’s prerogatives. Monetary policy is
conducted in secret, behind closed doors. 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 every American. It waits six
weeks before releasing policy decisions. The
President, who is responsible for the
performance of the economy and is blamed if
things go wrong, often must wait until late in

82
his term to appoint a new Chairman of the
Federal Reserve Board, raising the risk that the
President and the Federal Reserve Board
Chairman might be at odds. President Bush, for
example, will not be able to appoint a Fed
Chairman until August 1991. The Fed’s budget
is not published in the U.S. Government Budget,
even though it spends over $1.5 billion per year.
Only o percent of Federal Reserve expenditures
are detailed in the U.S. Government Budget the $90 million spent by the Board of Governors
- and this appears only in the appendix and not
in standard government format. The Presidents
of the 12 Federal Reserve Banks, who
participate in monetary policy decisions on the
FOMC, are neither appointed by the President
nor confirmed by the Senate. Even though the
Federal Reserve engages in more than $1 trillion
in transactions in the money markets each year,
most of these activities are exempt from audit
by the GAO or any other outside agency.

Reserve System, we have made a number of
changes in its structure and procedures, adding
responsibilities and powers from time to time
and periodically revising its relationship with
Congress and the Administration. Our bill
continues this process by proposing a handful of
evolutionary changes in the practices and
structure of the Federal Reserve.
Second, our bill will not reduce the policy­
making independence of the Fed or inject
politics into monetary policy. The bill does not
impose Presidential or Congressional or other
outside controls on Fed policy.
Our bill, instead, aims to make the Federal
Reserve more accountable to the American
people, not by giving politicians control but by
creating a formal channel of communication
between the President and the Federal Reserve,
and by providing Congress and the American
people with more and better information on the
Federal Reserve’s policies and procedures.

My constituents in the Indiana district I
represent in Congress understand that the
Federal Reserve has a powerful impact on their
lives. But they express frustration over how the
Fed operates and how they can communicate
with it. I would like to quote from one letter I
recently received, which summarizes the
concern of many Americans:

The bill has five major provisions.

I. Consultation with the Administration

First, it would require the Secretary of the
Treasury, the Chairman 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, to consult on
monetary and fiscal policy.

As an ordinary citizen, I find it
outrageous that Volcker and now
Greenspan have such dictatorial power
over my life and those of other hard
working citizens. Where are the
checks and balances intended by our
Constitution?

Two of the required meetings would take
place just before the FOMC sets its annual
money growth targets in February and July and
reports to Congress, as required by the Full
Employment and Balanced Growth Act of 1978.
The third meeting would occur in the fall at the
start of the Administration’s annual budget
cycle. These meetings will bring together the
key members of the fiscal and monetary
policymaking teams.

As applied to the Fed, this is not an easy
question to answer. The bill that Congressman
Dorgan and I have introduced is an attempt to
address this very complex issue of Federal
Reserve accountability. Before describing what
the bill will do, let me briefly tell what it will
not do.
First, it will not cause revolutionary
changes at the Federal Reserve. It is a very
modest bill designed to improve some of the
Federal Reserve’s practices and procedures. In
the 75 years since Congress created the Federal




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

2

83
communication between the President and the
Fed. At times, the Administration is reduced to
carrying on policy disputes by publicly sniping
at the Fed through the press. Under our bill,
the Administration will have a formal avenue to
present its program for the economy to the
FOMC and lay out its goals and targets for
monetary policy. The Members of the FOMC
will also have an avenue to convey their
concerns about fiscal policy to die
Administration. Communication will flow both
ways.

and discussed the impact of current economic
policies on the U.S. trade balance.
Meetings also occur three times a year with
the Consumer Advisory Council, which focuses
on financial matters of importance to
consumers, and die Thrift Institutions Advisory
Council, which focuses on matters of interest to
thrifts. The Consumer Advisory Council, and
the requirement for periodic meetings with the
Federal Reserve, was established in 1976 by an
amendment to the Equal Credit Opportunity Act,
in the same kind of modest change in Federal
Reserve practices that would be made in our
bill.

In his testimony before this Subcommittee
on October 25, Federal Reserve Board Chairman
Alan Greenspan opposed this provision on the
grounds that the Federal Reserve and the
Administration already communicate through
informal channels and that the more formal
arrangement proposed by our bill would result
in political manipulation of monetaiy policy.

The Fed does not object to meeting
regularly with bank presidents, consumer
representatives and die thrift industry to discuss
issues of importance to these groups. Why not
accord representatives of the President of the
United States the same privilege to discuss
issues of importance to the whole nation?

Informal channels of communication do
exist; for example, the current Fed Chairman
and Treasury Secretary are reported to meet
about once a week. Over the years, however,
the success of informal methods has varied,
depending on die personalities involved. In
addition, the discussions are off the record and
views are conveyed second-hand to other
members of the FOMC. 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. Our bill would
establish a channel of communication that
would not depend on personalities for success.

Contrary to Chairman Greenspan’s fears,
three FOMC meetings a year with die
Administration’s top economic advisers will not
empower the President to meddle with
monetary policy. The required meetings would
occur before actual FOMC meetings. No
Member of the Administration would be present
when the FOMC makes monetary policy
decisions and none would have a vote on the
FOMC. The format of the meetings would be
solely under the control of the participants.
Furthermore, given the Federal Reserve’s current
concern for its independence, any attempt by
the Administration to meddle in monetary policy
would and should evoke a strong reaction from
the Members of die FOMC. If Chairman
Greenspan raised this issue because he fears
that the President, through his three
representatives, could successfully dictate
monetary policy, his words cast a dark cloud
over the independence of the members of the
FOMC.

It is interesting to note that the Fed is
already required to conduct formal advisory
meetings of the kind we propose with a number
of outside groups. One is the Federal Advisory
Council, which is composed of 12 major privatesector bank presidents (one from each Federal
Reserve district) and which meets four times a
year with the Board of Governors. At the latest
meeting, on September 8, 1989, the private
bank presidents presented their complaints
against current tax treatment of credit unions




The bill that Rep. Dorgan and I introduced
will not eliminate policy mistakes at the Federal
Reserve, or mistakes in fiscal policy. There will
invariably be successes and failures under any
set of structures or procedures. What it will do

3

84
President’s influence over the Federal Reserve.
A Fed Chairman who was appointed a year after
the President took office and knew he would
not come up for reappointment during the
President’s term would have much more
independence than one, such as Chairman
Greenspan, who must conduct policy to please
President Bush if he wants to be reappointed
Chairman when his term expires in 1991.
In addition, over the years, some Chairmen have
been appointed soon after the President took
office with no detrimental effects.

is reduce the risk of miscommunication and
public sniping by establishing a formal channel
by which the FOMC and the Administration can
discuss the needs of the economy and the
appropriate combination of monetary and fiscal
policy.

II. Term of the Federal Reserve Chairman

Second, our 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, at the time
when the first regular opening would occur on
the Federal Reserve Board. This would make
the Fed Chairman’s term basically coterminous
with the term of office of the President of the
United States.

Chairman Greenspan’s further objection
that it would be difficult to find a qualified
person to fill out the remaining term of a
Chairman who leaves office ignores that fact
that the Chairman of the Board of Governors is
a highly visible post with great power and
prestige. There would be no shortage of
qualified applicants. In addition, a "temporary"
Chairman would still have the rest of a 14*year
term to serve on the Board of Governors even if
he were not reappointed to the next full
Chairman’s term.

The current Chairman of the Board of
Governors, Alan Greenspan, was appointed by
President Bush’s predecessor and will hold that
office until August 10, 1991, almost three years
into President Bush’s term. Fortunately,
Chairman Greenspan and President Bush have a
cordial relationship. The fact that Mr.
Greenspan was not appointed by President Bush
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?

As Chairman Greenspan testified, the
Federal Reserve’s position on this issue has
varied over the years. In a letter dated October
6, 1966 to Congressman Abraham Multer, who
was then Chairman of the Banking Committee’s
Subcommittee on Bank Supervision and
Insurance, Federal Reserve Board Chairman
William McChesney Martin said the Board
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 response to a 1968
question from Banking Committee Chairman
Wright Patman, Chairman Martin reaffirmed the
Board’s position. Chairman Arthur Bums was of
two minds on the question of coterminous
terms. In a 1977 hearing before the House
Banking Committee, Chairman Bums opposed
legislation tying the Federal Reserve Board
Chairman’s term to the President’s. During the
hearing, however, he gave the following
response to a question from Congressman
Parren Mitchell:

Our bill would address this by having the
President appoint the Fed Chairman to a fouryear term beginning one year after taking office,
when there will be a new vacancy on the Board
in any event. Each appointee will 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.
Chairman Greenspan testified that linking
the Chairman’s term to the President’s could
result in less independence from the White
House than currently exists. To the contrary,
the provision in our bill would not increase the




1 do not mind reporting to you that I

4

85
Administration. Continuity at the
central bank in the midst of a
transition of administrations would be
especially desirable.

have changed my 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.

HI. Disclosure o f Monetary Policy Decisions
Third, our bill would require the FOMC 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.

Former Federal Reserve Board Chairman
Paul Volcker also supported the change in the
Chairman’s term that our bill would make, in
testimony before the Domestic Monetary Policy
Subcommittee on October 18, 1983. In his
prepared statement, Chairman Volcker said:

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.

The Board believes there is merit in
providing for a consistent relationship
between the term of die Chairman of
the Federal Reserve with the term of
the President. At present, the
beginning of a Chairman’s term is an
accident of history ~ a product of the
timing of previous appointments,
resignations, and expirations of the
term of a Chairman as a Member of
tile Board of Governors. The principal
problem with the present arrangement
is that a new four-year appointment
might be required late in a
Presidential term or in the midst of, or
shortly after, a contentious political
campaign, tending to bring the choice
into the heat of a political contest.

While secrecy may help insulate the
Federal Reserve from criticism, secrecy has two
economic costs.
First, secrecy makes capital markets
operate less efficiently. The Federal Reserve’s
position on this can be defended only if you
believe that ignorance is better than knowledge.
But one of the major conclusions of
microeconomic theory is that thorough and
complete information is a requirement for
markets to work efficiently. This applies to
financial markets as well as to markets for
goods and services.
Second, secrecy is unfair to small investors.
When the Federal Reserve makes a policy
change, large investors and Wall Street market
experts generally find out easily enough through
experts who monitor the Federal Reserve. This
gives them an advantage over small investors,
borrowers, and others who don’t have resources
to employ Ted-watchers" to interpret and
anticipate Fed policy changes.

It is difficult to argue that there is
a single optimal alignment of the two
terms, but among the possibilities
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




The solution is immediate release of
Federal Reserve policy decisions, as our bill
would require. This is a change that is widely
supported by economists and participants in

5

86

financial markets.

The General Accounting Office is the
watchdog of Congress. It carries out that
responsibility through financial and program
audits of government agencies. These audits
are of tremendous value to Congress. 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.

In his testimony, Chairman Greenspan
argued that immediate release would impair the
Federal Reserve’s flexibility to react quickly in
times of acute financial unrest and could result
in increased instability in financial markets if
investors overreact to particular announcements.
Our bill does not require the Federal
Reserve to announce every day-to-day move it
makes in conducting monetary policy. It
requires only that the Federal Reserve release
changes in intermediate targets - that is, the
targets set during the periodic meetings of the
FOMC. In practice, this would require
immediate release of the FOMC’s directive to the
open market desk of the New York Federal
Reserve Bank, plus any other major policy
changes that the FOMC agrees to between
formal meetings. The Fed would still be able to
operate day-to-day under the same rules it
currently follows and would still be able to react
quickly to market crises.

For many years, from the mid-1930’s to the
late 1970’s, the Federal Reserve was exempt
from GAO audits, along with the other bank
regulatory agencies, on the grounds that its
funds were not appropriated by Congress. In
1978, the Federal Banking Agency Audit Act
authorized the GAO to audit the bank
regulatory agencies, allowing full audits of the
Comptroller of the Currency and the Federal
Deposit Insurance Corporation and limited
audits of the Federal Reserve. Since then, the
GAO has conducted numerous audits of the
Fed’s regulatory activities, with no noticeable
harm to the Federal Reserve or its effectiveness
in regulating member banks.

The possibility raised by Chairman
Greenspan that immediate disclosure would
cause financial market instability ignores the
fact that it is ignorance, and not knowledge,
about Federal Reserve decisions which creates
the kinds of rumors that are unsettling to the
financial markets and cause wide gyrations in
bond and stock prices.

Currently, the GAO 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. H.R. 3512 would remove the last two
restrictions while retaining the restriction
against GAO access to transactions with foreign
central banks or foreign governments.

Rather than waiting six weeks before
disclosing its intermediate targets, as the Fed
now does, its decisions should be released
immediately. This would improve the efficiency
of financial markets, reduce instability, and
provide all investors, large and small, with equal
and timely information about monetary policy
decisions.

In his October 25 testimony, Chairman
Greenspan protested that GAO audits would
duplicate functions that are already performed,
including financial audits by the Federal Reserve
itself and Congressional oversight of monetary
policy, and would stifle free discussion of policy
alternatives by the members of the FOMC.

IV. GAO Audits
Although the Board of Governors does
currently conduct a thorough financial
examination of each of the Federal Reserve
Banks through its operations review program,
and the Board of Governors is audited by PriceWaterhouse, these examinations do not result in
certified financial statements of the kind

Fourth, our bill would permit the
Comptroller General to conduct more thorough
audits of Federal Reserve operations, by
removing selected current restrictions on GAO
access to the Federal Reserve.




6

87
confuses access to information with disclosure.
There are many instances'where GAO has access
to information that it cannot publicly disclose.
For example, in its audits of banks and other
financial institutions, the GAO is prohibited
from disclosing "information identifying an open
bank, an open bank holding company, or a
customer of an open or closed bank or bank
holding company." In carrying out these audits,
however, the GAO has access to "all records and
property of or used by an appropriate Federal
banking agency, including samples of reports of
examinations... and workpapers and
correspondence related to the reports." The
GAO also has access to the finances of the
President and Vice President of the United
States. When it audits any part of these
records, however, it is prohibited from
disclosing its findings, unless they involve
criminal activity. If needed, our bill could be
adjusted to include similar provisions.

auditors would prepare for a private bank or
corporation. While GAO audits of the Federal
Reserve’s financial condition might overlap the
Federal Reserve’s own efforts, every government
agency that takes in and spends billions of
dollars each year ought to be subject
periodically to outside review. We are not
accusing the Federal Reserve of dishonesty, we
just believe the GAO should have more complete
access to the Federal Reserve’s financial
statements.
What the Federal Reserve does not do
under current practice is subject its practices
and procedures to outside review, and this is
where GAO audits could be even more valuable.
Congressional oversight of complex issues
benefits greatly from the kind of in-depth
examination that can be conducted only by die
GAO. It is true that Congress holds frequent
hearings on monetary policy, and this
subcommittee holds valuable annual hearings
on the Federal Reserve’s budget. But complex
issues should not be left solely to hearings. The
Congressional oversight responsibility is better
carried out if it is better informed through
studies that are analytic, independent, and
based on full information.

V. Federal Reserve Budget

The final provision of our bill would
require that the Federal Reserve’s annual budget
be published in the Budget of the U.S.
Government. The Fed would submit its budget
for the current year and die 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.

By way of example, questions GAO could
address that would not be possible under
current restrictions include:
A. What economic information do the
members of the FOMC have available during
FOMC meetings? Is it presented in the most
usefiil format? What other kinds of information
should be available?

The Federal Reserve’s expenditures are not
subject to approval by either the President or
Congress, unlike the budgets of other
government agencies. While the Board of
Governors reviews and approves the annual
budgets of the 12 Federal Reserve Banks, the
Board determines its own budget.

B. What are the costs associated with the
Federal Reserve’s purchases and sales of
securities for open market operations? Is the
Fed doing this efficiently?

During 1989, the revenues of the Federal
Reserve System will be about $20 billion. A
small fraction of these revenues will consist of
payments by banks for services provided by the
Fed. Most will consist of interest received from
the Treasury on the Fed’s holding of U.S.
Government securities, which the Fed acquired
during open market operations conducted for
monetary policy purposes. Out of this $20
billion, paid mostly by taxpayers, the Federal

C. What are the details of Federal Reserve
operations through the discount window to
assist failing banks and thrifts? What kind of
collateral is being required, what are the terms
and agreements?
Chairman Greenspan’s concern that GAO
audits would inhibit FOMC deliberations




7

88
Reserve will incur approximately $1.6 billion in
operating expenses. Almost $1 billion of this
will be for personnel costs. The rest will be for
supplies, travel expenses, telephone and
postage, printing money, maintenance of
equipment, amortization of buildings, etc. The
remainder will be returned to the Treasury,
where it is listed in the Budget as an offsetting
receipt.

In his testimony, Chairman Greenspan
argued that the Federal Reserve’s functional
independence is inseparable from its budgetary
independence and that publishing its budget in
the Government budget would require the Fed
to keep two sets of books at the cost of millions
of dollars.

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 $1.6 billion of
operating expenses is included in the U.S.
Government Budget - just the $90 million of
expenses incurred by the Board of Governors in
Washington. The details on this part of the
Fed’s budget, only 6 percent of the Federal
Reserve’s total spending, appear in Part IV of
the Budget Appendix, in a section entitled
"Government-Sponsored Enterprises."

H.R. 3512 will not reduce the Federal
Reserve’s control over its own budget. The bill
would not subject the Federal Reserve to the
Congressional appropriations process, nor would
it give either Congress or the Administration
any control over the Federal Reserve’s spending.
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.

Under pressure from Congress, the Federal
Reserve began publishing budget data for the
entire System in 1986 in an annual document
entitled Annual Report: Budget Review. While
this report represented an improvement over
prior practice, the Federal Reserve’s annual
Budget Review still has three shortcomings:

The bill will not require the Federal
Reserve to maintain two sets of books.
Although the Fed does not use the Federal fiscal
year or government accounting principles for its
accounts, the Fed would not be required to
adopt them by our bill. It would be useful, but
not required. We just want the Fed’s data on its
budget to be published along with the rest of
government spending in the Budget of the U.S.
Government.

year or for future years.

-- It is not printed together with the rest of
the data on how the government takes in
and spends money and thus it does not get
the public scrutiny accorded other
government agencies.

Adopting the bill would thus implement a
basic principle of democracy that no
government agency should take in and spend
billions of dollars without having its budget
readily accessible to the public.

-- There are no estimates or projections of
future expenditures. The Budget Review
only presents actual or estimated
expenditures for the previous two calendar
years and the budget for the current
calendar year. By contrast, the
Government budget presents estimated
expenditures for government agencies not
only for the current fiscal year, but for the
next two fiscal years in the future.

These are the specific provisions of H.R.
3512.
Before concluding, I would like to address
two more general arguments used by the
Federal Reserve and others to oppose our bill.
One is, "If it ain’t broke, don’t fix it." This
objection assumes that the effect of H.R. 3512
will be to force the Federal Reserve to alter its
conduct of monetary policy, which would harm

—Data on Federal Reserve receipts are
presented only for prior years. There is no
estimate of receipts either for the current




8

89
In our nation, the government must be
accountable to the people. The Federal Reserve,
with its enormous power over the economy and
the well-being of the American people, does not
meet the normal standards of accountability in a
democracy. The bill that Rep. Dorgan and I
introduced will make the Fed more accountable
without impairing its ability to conduct
monetary policy, by establishing a formal
channel of communication between the FOMC
and the Administration and by shedding more
light on its practices and procedures.

the economy of the United States.
This fear is based on a misreading of H.R.
3512. Nothing in our bill would affect the
conduct of monetary policy. In fact, we revised
the original version of the bill to eliminate a
provision that many observers thought could
have forced a change in monetary policy.
Nonetheless, H.R. 3512 does address a
problem that does need to be fixed, the complex
problem of Federal Reserve accountability in a
democratic society. Congressman Dorgan and I
believe the five provisions of our bill would do
that in the most responsible way possible,
without jeopardizing the Federal Reserve’s
independence or injecting politics into monetary
policy. We do not think Congress should wait
until a monetary crisis to reform the Federal
Reserve. Our bill takes advantage of a period of
high regard for die 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 far less
measured.
The second objection is that Congress and
the President are not responsible enough to
have control over monetary policy, given the
mess we have made of the budget.
This objection also completely misreads
H.R. 3512. There is no provision in the bill that
would give Congress or the President any
control over monetary policy. If someone
wanted to politicize monetary policy, our bill
would not be the way to do it. This bill does
only two things: it removes some of the veil of
secrecy that surrounds the Federal Reserve by
shedding some light on its policies and
practices; and it establishes a formal channel of
communication between the President and the
FOMC.
Our bill, of course, is not the only way to
accomplish these goals, although we have taken
care to include only provisions that would not
interfere with the Fed’s independence. We
would be happy to have the Subcommittee’s
suggestions for improvements in our bill.




9

90
MONETARY POLICY REFORM ACT OF 1991
TESTIMONY OF REP. LEE H. HAMILTON
Before the
SENATE COMMITTEE ON BANKING, HOUSING,
AND URBAN AFFAIRS
an
Wednesday, November 13,1991
Mr. Chairman, I am very pleased to be here
this morning to testify on the Monetary Policy
Reform Act of 1991. Rep. Dorgan and I
introduced this measure in the House of
Representatives on August 1, 1991, where it has
been assigned the bill number H.R. 3176.
Simultaneously, Senator Sarbanes and Senator
Sasser - both Members of this Committee introduced it in the Senate, where it has been
assigned the number S. 1611.
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 of the Federal Reserve
System. Second, it would establish a new
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. Together, these changes
would make the Federal Reserve properly
accountable to the American people.
While the need for change has long been
recognized, the impetus for this legislation grew
out of reports earlier this year that proposals by
Federal Reserve Board Chairman Alan
Greenspan to lower interest rates were being
resisted by some of the regional Federal Reserve
Bank presidents serving on the Federal Open
Market Committee.
These were disturbing reports. The
nation’s economy was in a recession. Output
was falling and unemployment was rising.
There was widespread agreement that the
economy could be helped by lower interest rates
and that the Fed should reduce interest rates.
Yet, as a consequence of this split among the
policy-makers on the Federal Open Market
Committee, the Fed moved slowly -- some think




too slowly - to take the necessary steps to lower
interest rates and stimulate the economy.
In a democratic government, it is not
unusual for policy-makers to disagree. But this
was not simply a split among public officials.
Instead, a small handful of individuals presidents of the Federal Reserve Banks - who
essentially represent private interests was
impeding efforts by public officials to conduct
monetary policy in the way they thought was
best for the nation’s economy.
The status of the Federal Reserve Bank
presidents in the Federal Reserve System is an
anomaly in our system of government. It
requires some explanation. The Federal Reserve
System was created by Congress in 1913 to
manage the nation’s financial affairs. It consists
of the Board of Governors in Washington, which
oversees the system and sets most of the
policies, and the twelve regional Federal Reserve
Banks, which carry out the day-by-day functions
of the system. The Board of Governors has
seven members, who are appointed by the
President and confirmed by the Senate to 14year terms. The Governors of the Federal
Reserve 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.
At the Federal Reserve Banks, the top
officials, in contrast, do not go through the
normal appointment process. 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 of Directors
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

91
Western Reserve’s Law School:

presidents are career employees, others have
backgrounds in banking, business and
academics; they are talented and respected
individuals. But none are 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 the twelve votes that determine monetary
policy and interest rates.

As currently constituted, the
participation of private members on the
FOMC raises fundamental constitutional
concerns because the private individuals
are not accountable to the public for their
exercise of governmental authority.... The
participation of private members on the
FOMC cannot be easily reconciled with the
focus on accountability underlying our
system of separated powers.... The
proposed bills would rectify that
consitutional flaw by limiting the role of
the private bank presidents to advice, a
function fully compatible with the private
status of the bank presidents.

This situation, in which private individuals
participate in monetary policy decisions, is an
anomaly in our system of democratic
government. Nowhere else in the government
are private individuals similarly permitted to
participate in decisions which have such an
enormous influence over the prosperity and
well-being of millions of Americans.

The current structure of the Federal
Reserve, and the Federal Open Market
Committee in particular, is not locked in stone.
Over the years, there have been many changes.
In fact, between die founding of the Federal
Reserve System in 1913 and the enactment of
the major banking laws in 1935 and 1936, there
was no Federal Open Market Committee to
guide open market operations. The regional
Federal Reserve Banks bought and sold Treasury
securities on their own initiative, and the
process frequendy proved disruptive to Treasury
financing plans and to the economy. When
Marriner Eccles became Chairman of the Federal
Reserve Board under President Roosevelt, his list
of proposals to make the Federal Reserve more
accountable included giving the Board of
Governors full authority over open market
operations. The current structure is the result
of a compromise. In order to consolidate open
market operations under the newly-created
Federal Open Market Committee, Eccles and
Roosevelt had to compromise with supporters of
the Banks by giving die regional Federal
Reserve Banks five of the 12 votes on the
FOMC. It is now time to move further and take
the next step to make the Federal Reserve more
accountable.

Almost all government agencies make
extensive use of private citizens in an advisory
status. The Federal Reserve, itself, has three
major advisory panels which meet with the
Board of Governors three to four times a year die Federal Advisory Council, a panel of 12
bankers which advises the Board of Governors
"on all matters within the jurisdiction of die
Board;" the Consumer Advisory Council, which
advises the Board on consumer financial
services; and the Thrift Institutions Advisory
Council, which advises the Board on issues
pertaining to the thrift industry. Other
government agencies have similar advisory
panels. Private citizens serve on all these
panels, but all they do is advise. Nowhere other
than the Federal Reserve are representatives of
private interests permitted to have a vote on
government policy.
Among legal scholars, the present
composition of the FOMC raises grave
constitutional concerns. Those who have
examined the conditions under which Congress
has delegated powers to other branches and
agencies of government and to independent
commissions suggest that giving private
individuals on die FOMC the right to vote on
monetary policy is constitutionally flawed, if not
unconstitutional. I would like to quote from a
letter from Professor Harold Krent of Case




During the early decades of the Federal
Reserve, anomalies such as die role of the Bank
presidents on the FOMC did not cause the
concern they do today because die Federal
Reserve did not exercise die influence over our

2

92

o It waits six weeks before releasing policy
decisions.

economy that it does today. Not much was
known about the Fed years ago and people
didn’t feel it had much impact on their lives.

o The President, who is 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.

But times have changed. Today, it is well
known that the Federal Reserve is the chief way
the government influences the economy. When
I am in Indiana, people spontaneously ask me
about the Federal Reserve and Federal Reserve
policies. They recognize the power of the Fed
and the way it affects their own personal well­
being. It makes a lot of difference today how
the Federal Reserve is structured. Policy-making
is the proper function of public officials who
have either been elected by the people or
appointed in the appropriate manner, and that
is the way it should be at the Federal Reserve.

o The Fed’s budget is not published in the
U.S. Government Budget, even though it spends
over $1.5 billion per year.
o And, even though the Federal Reserve
engages in more than $1 trillion in transactions
in the money markets each year, most of these
activities are exempt from audit by the GAO or
any other outside agency.

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 properly-appointed public
officials. It would also create a special new
Federal Open Market Advisory Council through
which the presidents of the regional Federal
Reserve Banks could 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.

The Federal Reserve Reform Act would
address these problems by making the following
modest changes in the practices and procedures
of the Federal Reserve:
(1) It would require the Secretary of the
Treasury, the Chairman 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, to consult on
monetary and fiscal policy. This would open a
formal channel of communication between the
policy-makers in the White House and the
policy-makers at the Federal Reserve.

Before closing, I would like to point out,
Mr. Chairman, that the Monetary Policy Reform
Act is a companion measure to H,R. 1130, the
Federal Reserve Reform Act of 1991, which Rep.
Dorgan and I introduced earlier, this year.

(2) It 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, at the time when the first
regular opening would occur on the Federal
Reserve Board. This would make the Fed
Chairman’s term basically coterminous with the
term of office of the President of the United
States.

The Federal Reserve Reform Act would
address other anomalies by which the Federal
Reserve fails to conform to the normal standards
of accountability in a democracy:
o Monetary policy is decided in secret,
behind closed doors.

(3) It would require the FOMC to disclose
imm
ediately any changes in the targets of monetary
policy, including its targets for monetaiy
aggregates, credit aggregates, prices, interest
rates, or bank reserves.

o 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.




3

93
accountable to the American people for their
performance in office. The Monetary Policy
Reform Act of 1991 would apply this principle
of democracy to the Federal Reserve.

(4) It would permit the Comptroller
Genera] to conduct more thorough reviews and
studies of Federal Reserve operations, by
removing selected current restrictions on GAO
audits.
(5) It would require that the Federal
Reserve’s annual $1.5 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.
The Monetary Policy Reform Act would add
a sixth change to this list, by making the dulyappointed public officials on the Board of
Governors of the Federal Reserve solely
responsible for the conduct of monetary policy.
During the last Congress, the
Subcommittee on Domestic Monetaiy Policy of
the House Committee on Banking, Finance, and
Urban Affairs conducted a hearing on the
Federal Reserve Reform Act, and I would like to
submit my statement from that hearing for the
hearing record.
In summary, the status of the Federal
Reserve Bank presidents is an anomaly in our
system of government. They do not go through
the normal appointment process but,
nonetheless, they participate in monetary policy
decisions through their membership on the
FOMC, where they cast five of the twelve votes
that determine monetary policy and interest
rates. In earlier times, when the Fed was less
powerful, this was not a major concern. But
today, it is widely recognized that the Federal
Reserve is the chief way the government
influences the economy. Decisions made by
policy-makers at the Federal Reserve affect the
lives and well-being of all Americans. Power
without accountability does not fit the American
system of democracy. We have changed the
Federal Reserve in the past It is now time to
move further and take the next step to make the
Federal Reserve more accountable. Monetary
policy today must be the responsibility of
properly-appointed public officials, who are




4

94
Congressman Schumer's q u e s t i o n to Chairman Alan G r e e n s p a n at the
House Banking Commi t t e e ' s second hearing on the Federal Rese r v e
System on Oct o b e r 13, 1993:
Are there times w h e n y o u think that greater a c c o u n t a b i l i t y in
the his t o r y of the FED -- w h ich you are a m u c h g r e a t e r expert
at than I am -- w o u l d have made better m o n e t a r y policy?

Chairman Greenspan subsequently submitted the following response
for the record:
Looking back over the period after the Treasury-Federal
Reserve Accord in 1951, when the Federal Reserve regained the
discretion to conduct an independent monetary policy, does not
reveal instances when greater accountability and less
independence would have resulted in better economic outcomes.
Monetary policy has by no means been perfect over this period,
with the most significant mistake being its unwillingness to
resist adequately the pickup of inflation to the double-digit
area by the late 1970s. However, political pressures mostly were
for still more monetary accommodation, in hopes of propping up
economic activity, although Congressional initiatives dating from
1975 encouraging the use of announced ranges for money and credit
growth are perhaps a counter-example. But even the Full Employ­
ment and Balanced Growth Act of 1978, which codified into law the
setting of annual ranges for money and credit growth, thereby
strengthening the anti-inflationary discipline of Federal Reserve
practice, at the same time incorporated unrealistically optimis­
tic goals for employment and economic activity.
On balance, then, I would judge historical experience
with Federal Reserve independence as indicating a significant
advantage on balance in shielding monetary policy from the
vicissitudes of short-term political pressures that would add an
inflationary bias to our economic system. In particular, the
reform proposals currently under consideration, which are claimed
to provide greater accountability, would weaken the Federal
Reserve*s independence and hence tend to undercut sound monetary
policy over time.




O







ISBN 0-16 -04 39 92 -2

9 780160 439926!