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FEDERAL RESERVE ACT AMENDMENTS OF 1977 HEARING BEFORE T H E SUBCOMMITTEE O N D M S I MONETARY POLICY O E TC OF T H E COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS HOUSE OF REPRESENTATIVES N I N E T Y - F I F T H CONGRESS FIRST SESSION ON H.R. 6273 A B I L L TO A M E N D T H E F E D E R A L RESERVE ACT TO PROVIDE FOR SENATE CONFIRMATION OF CERTAIN APPOINTMENTS, A N D FOR OTHER PURPOSES J U N E 23, 1977 Printed for the use of the Committee on Banking, Finance and Urban Affairs U.S. GOVERNMENT PRINTING OFFICE 0-10 20 0 WASHINGTON : 1077 HOUSE COMMITTEE ON BANKING, H E N R Y S. R E U S S , T H O M A S L . A S H L E Y , Ohio W I L L I A M S. M O O R H E A D , Pennsylvania F E R N A N D J. ST G E R M A I N , Rhode Island H E N R Y B. G O N Z A L E Z , Texas J O S E P H G. M I N I S H , New Jersey F R A N K A N N U N Z I O , Illinois J A M E S M. H A N L E Y , New York P A R R E N J . M I T C H E L L , Maryland W A L T E R E. F A U N T R O Y , District of Columbia S T E P H E N L . N E A L , N o r t h Carolina J E R R Y M. P A T T E R S O N , California J A M E S J. B L A N C H A R D , Michigan C A R R O L L H U B B A R D , Jr., Kentucky J O H N J . L a F A L C E , New York G L A D Y S N O O N S P E L L M A N , Maryland L E S A u C O I N , Oregon P A U L E . T S O N G A S , Massachusetts B U T L E R D E R R I C K , South Carolina M A R K W . H A N N A F O R D , California D A V I D W. E V A N S , Indiana C L I F F O R D A L L E N , Tennessee N O R M A N E . D ' A M O U R S , New Hampshire S T A N L E Y N. L U N D I N E , New Y o r k H E R M A N B A D I L L O , New York E D W A R D W. P A T T I S O N , New York J O H N J . C A V A N A U G H , Nebraska M A R Y R O S E O A K A R , Ohio J I M M A T T O X , Texas B R U C E F . V E N T O , Minnesota D O U G B A R N A R D , Georgia W E S W A T K I N S , Oklahoma FINANCE AND URBAN AFFAIRS Wisconsin, Chairman J . W I L L I A M S T A N T O N , Ohio G A R R Y B R O W N , Michigan C H A L M E R S P. W Y L I E , Ohio J O H N H . R O U S S E L O T , California S T E W A R T B. M c K I N N E Y , Connecticut G E O R G E H A N S E N , Idaho H E N R Y J . - H Y D E , Illinois R I C H A R D K E L L Y , Florida C H A R L E S E. G R A S S L E Y , Iowa M I L L I C E N T F E N W I C K , New Jersey J I M L E A C H , Iowa N E W T O N I. S T E E R S , Jr., Maryland T H O M A S B. E V A N S , Jr., Delaware B R U C E F . C A P U T O , New York H A R O L D C. H O L L E N B E C K , New Jersey P a u l N e l s o n , Clerk and Staff Director W i l l i a m P . Dixon, General Counsel M i c h a e l P . F l a h e r t y , Counsel G r a s t y C r e w s II, Counsel M e r c e r L . J a c k s o n , Minority Staff Director G r a h a m T. N o r t h u p , Deputy Minority Staff Director SUBCOMMITTEE ON DOMESTIC M O N E T A R Y POLICY P A R R E N J. M I T C H E L L , Maryland, Chairman S T E P H E N L . N E A L , North Carolina G E O R G E H A N S E N , Idaho N O R M A N E. D ' A M O U R S , New Hampshire D O U G B A R N A R D , Georgia W E S W A T K I N S , Oklahoma B U T L E R D E R R I C K , South Carolina M A R K O. H A N N A F O R D , California H A R O L D C. H O L L E N B E C K , New Jersey B R U C E F . C A P U T O , New York (II) CONTENTS Page Text of H . R . 6273 3 STATEMENT BY Burns, Hon. Arthur F., chairman, Board of Governors of the Federal Reserve System ADDITIONAL MATERIAL SUBMITTED FOR T H E RECORD Burns, Hon. Arthur F.: Historical information submitted re the filling of vacancies of the Board of Governors of the Federal Reserve System Letter, dated July 19, 1977, to Chairman Mitchell, with attached responses to questions submitted Mitchell, Chairman Parren J. opening statement t 11 27 5 APPENDIX 'Considerations Relevant to Provisions of H . R . 6273: A n Analysis Based On a Survey of Selected Economists and Others With Central Banking Experience, by Roger S. White, Analyst in Money and Banking, Economics Division, Library of Congress, Congressional Research Service, dated June 20, 1977 (revised June 28, 1977) 7 (Hi) 35 FEDERAL RESERVE ACT AMENDMENTS OF 1977 T H U R S D A Y , J U N E 23,1977 H O U S E OF R E P R E S E N T A T I V E S , S U B C O M M I T T E E O N D O M E S T I C M O N E T A R Y P O L I C Y OF T H E COMMITTEE ON B A N K I N G , F I N A N C E A N D U R B A N AFFAIRS, Washington, D.C. The subcommittee met, pursuant to notice, at 10:20 a.m., in room 2128, Rayburn House Office Building, Hon. Parren J. Mitchell (chairman of the subcommittee) presiding. Present: Representatives Mitchell, Neal, D'Amours, Barnard, Watkins, Derrick, Hannaford, Hansen, and Caputo. Mr. M I T C H E L L . The hearing will please come to order. Dr. Burns, it is always good to have you appear before this subcommittee or any of the subcommittees of the Committee on Banking, Finance and Urban Affairs. We are delighted you could take time from your busy schedule to be with us, and we welcome you. I have an opening statement which is in rather great detail. Recognizing the time constraints on the members and on the chairman, I will simply make one or two observations from that opening statement and ask unanimous consent that it become a part of the record. This hearing has been called to consider H.R. 6273. The main provisions of the bill are, as you know: First, that appointments of the Chairman and Vice Chairman of the Board of Governors of the Federal Reserve System be made at regular 4-year intervals beginning February 1, 1982; Second, that unexpired portions of the Chairman's or Vice Chairman's terms be filled only for the unexpired portions; and Third, that the Senate confirm the President's designees for the positions of Chairman and Vice Chairman. H.R. 6273 makes no change in the appointment of the members of the Board of Governors of the Federal Reserve System. The scope of the bill is limited to the Federal Reserve Board Chairman and Vice Chairman only. The Senate confirmation has been discussed time and time again. As you read the statement in the record, I think we make a strong point for confirmation by the Senate. Let me take a moment to stress that this legislation seeks only to achieve what President Carter said in a position paper on the (i) 2 economy, which was released in April 1976. To-wit—and I am quoting from his position paper: It is important that throughout a President's term he have a Chairman of the Federal Reserve whose economic views are compatible with his own. Currently the Chairman is appointed for a 4-year term, but not necessarily coterminus with the President's term. To insure greater compatibility between the President and the Federal Reserve Chairman, I propose that subject to Senate confirmation the President be given the power to appoint his own Chairman of the Federal Reserve who would serve a term coterminous with the President. Obviously President Carter has not formally commented on my bill. I am just indicating what his position was in April of 1976. [The text of H.R. 6273 follows:] 3 9 -n C N R S f f 5r O G E S 1tSesson H /tAMft r L K. bZ7o I N T H E H O U S E OE REPRESENTATIVES APRIL 18,1977 Mr. MITCHELL of Maryland introduced the following bill; which was referred to the Committee on Banking, Finance and Urban Affairs A BILL To amend the Federal Reserve Act to provide for Senate con* firmation of certain appointments, and for other purposes. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 That this A c t may he cited as the "Federal Reserve Act 4 Amendments of 1977". 5 SEC. 2. The third sentence of the second paragraph 6 of section 10 of the Federal Reserve Act (12 U.S.C. 242) is 7 amended to read as follows: "Of the persons thus appointed, 8 beginning on February 1, 1982, and at four-year intervals 9 thereafter, one shall be designated by the President, by and 10 with the advice and consent of the Senate, to serve as Chair- 11 man of the Board for a term of four years, and one shall be I 4 2 1 designated by the President, by and with the advice and 2 consent of the Senate, to serve as Vice Chairman of the 3 Board for a term of four years." 4 SEC. 3. The second paragraph of section 10 of the Fcd- 5 eral Reserve Act (12 TJ.S.C. 242) is amended further by 6 inserting after the third sentence stated above the following 7 new sentence. "Whenever a vacancy shall occur, other than 8 by expiration of term, among the Chairman or Vice Chair9 man of the Board of Governors of the Federal Reserve Sys10 tem appointed by the President as above provided, a suc11 cessor shall be appointed by the President, by and with the 12 advice and consent of the Senate, to fill such vacancy, and 13 when appointed he shall hold office for the unexpired term of 14 his predecessor.". 5 Mr. M I T C H E L L . Let me stress also that the bill would in no way affect the tenure of the present Chairman. It is clearly designed not to become involved in that at all. I think we have drafted a good bill. If you will read the entire statement as it appears in the record later, I hope you will agree with me. [The opening statement of Chairman Mitchell follows:] O P E N I N G S T A T E M E N T BY C H A I R M A N P A R R E N J . MITCHELL This hearing has been called to consider H.R. 6273. The provisions of the bill will assure that the existing authority of the President to designate the Chairman and Vice Chairman of the Board of Governors of the Federal Reserve System will be exercised at a reasonable time in relation to each Presidential term of office and in such manner as to allow the President to select a Chairman of his (or her) own choosing. In addition, H.R. 6273 will assure that appointments to these two extremely influential positions will be subject to the advice and consent of the Senate. To accomplish these modest but significant goals, the bill specifically provides for the following: 1. That appointments of the Chairman and Vice Chairman of the Federal Reserve be made at regular four-year intervals beginning February 1, 1982; 2. That unexpired portions of the Chairman's or Vice Chairman's terms be filled only for the unexpired portions; and 3. That the Senate confirm the President's designees for the positions of Chairman and Vice Chairman. H.R. 6273 makes no change in the appointment of the members of the Board of Governors of the Federal Reserve System. As now, the Board will continue to be composed of seven members. As now, these seven persons will be appointed by the President with the advice and consent of the Senate. As now, a full term as Governor will be for 14 years and the terms of the seven Governors will be staggered so that one expires every even-numbered year on January 31. As now, appointments to fill unexpired portions of Governors' terms will be for only the unexpired portions. As now, one of the Governors will serve as Chairman of the Federal Reserve Board and one as Vice Chairman. SCOPE OF T H E BILL H.R. 6273 is limited in scope to appointment of the Federal Reserve Chairman and Vice Chairman. Even in regard to these appointments, the bill is limited. It does not change the President's power or responsibility vis-a-vis appointment of the Chairman and Vice Chairman. As now, each President must appoint a Federal Reserve Chairman and Vice Chairman at least once during each Presidential term. As now, a full term for both the Chairman and Vice Chairman will be four years, and reappointment will be permitted. But whereas now appointment to these positions is always for a full term, which begins the date of the appointment, my bill provides for filling unexpired terms for only unexpired portions and regularizes full terms to begin coincident with the first scheduled vacancy on the Board of Governors after the President is inaugurated. This vacancy occurs one year and 11 days after inauguration. By providing for appointment of the Chairman and Vice Chairman the next day, H.R. 6273 removes the chance which now exists that the President would have to pick the Chairman from among the incumbent Governors. It is important to stress, moreover, that since only one vacancy occurs on the Board every two years, there will be only one vacancy when the President appoints the Chairman and Vice Chairman. Thus, either the Chairman or Vice Chairman will have to be appointed from among current Board members. In fact, the President could appoint both the Chairman and Vice Chairman from among current Board members if he desired to do so. SENATE CONFIRMATION The provision in H.R. 6273 for Senate confirmation distinguishes the Chairman and Vice Chairman from other members of the Federal Reserve's Board of Governors. This is important. Persons capable of serving as members of the Board of Governors do not necessarily have the qualities required to lead the Federal Reserve and serve as its Chairman or Vice Chairman. Yet persons already serving as Governors can be appointed Chairman or Vice Chairman. Senate confirmation will assure that their qualifications to carry out their new responsibilities will be publicly 92-910 O - 77 - 2 6 and formally evaluated as a requisite to assuming the new responsibilities. Confirmation also will provide a useful review of the stewardships of Chairman and Vice Chairman appointed to second and further terms. CONSONANCE W I T H T H E S T A T E D AIMS OF PRESIDENT C A R T E R Let me stress that what my legislation seeks to achieve is only what President Carter said, in a position paper on the economy which was released in April 1976, that he wanted to achieve: "3. Better Coordination Between Fiscal and Monetary Policy—I propose the following steps: While the Federal Reserve Board should maintain its independence from the Executive Branch, it is important that throughout a President's term he have a Chairman of the Federal Reserve whose economic views are compatible with his own. Currently the Chairman is appointed for a four year term, but not necessarily coterminous with the President's term. To insure greater compatibility between the President and the Federal Reserve Chairman, I propose that, subject to Senate confirmation, the President be given the power to appoint his own Chairman of the Federal Reserve who would serve a term coterminous with the President's." The President has not formally commented on my bill. But it is fair to say that H.R. 6273 provides the essentials of what he asked for. It provides, as he asked, that subject to Senate confirmation, the President appoint his (or her) own Chairman, and applies the same procedure to appointment of the Vice Chairman. However, H.R. 6273 does not provide that these officials serve terms coterminous with the President's. It delays the appointments one year. Let me explain why. Under current law, the terms of Board members expire on January 31 in evennumbered years while the President begins his term on January 20 of an oddnumbered year. If the President had to appoint the Chairman a few days after he was inaugurated, except by accident, he would be restricted to picking from among the seven persons already serving on the Board before he was inaugurated. By setting the terms of the Chairman and Vice Chairman to begin on February 1 of the year after inauguration of the President, H.R. 6273 assures with 100 percent certainty that there will be one vacancy on the Board of Governors when the President appoints the Chairman and Vice-Chairman. In this way H.R. 6273 allows the President to appoint his (or her) own Chairman to perve simultaneously for the major part of the President's term without disrupting existing tenure arrangements of the members of the Board of Governors. It is an efficient way of assuring both that the President will have meaningful freedom of choice in appointing the Federal Reserve Chairman or Vice-Chairman and that the term of the Chairman conforms reasonably closely to that of the President. A one year delay in Presidential appointment of the Chairman has the advantage, moreover, of providing for continuity in monetary policy when the Presidency changes hands without making the Federal Reserve a policy-making preserve, off-limits to new Presidents, conceivably for the bulk of their terms. SUMMARY Under current law, a new President might have to wait two or three years, or even longer, before appointing the Federal Reserve Chairman. This could deny the President meaningful access to the councils where monetary policy is made. The potential for conflict is huge. Lack of serious difficulty in the past does not mean there will be no problems in the future. Moreover, from my reading of history, there have been serious difficulties in the past. For example, in 1948 President Truman replaced Marriner Eccles for what Mr. Eccles thought were political reasons in an election year. In any case, if the Chairman's term is left to chance, the possibility of problems is definitely increased. Divisive conflict about Federal Reserve policy could ensue if the President were required to choose the Chairman in a Presidential election year or be restricted to selecting the Chairman from among just seven persons, as can occur under current law. Phasing of the appointment of the Chairman in relation to the term of the President is too important to be left to chance. H.R. 6273 removes the elements of chance that now exist in the appointment process. In regularizing full term appointments of the Chairman to begin one day after the first scheduled vacancy on the Board of Governors following inauguration of the President, H.R. 6273 does nothing more than allow the President meaningful access to the councils where monetary policy is made. Speculations about blatant political 7 behavior resulting from this procedure, for example during interim appointments which inescapably will have to be made, should not be taken seriously. The structure of the Federal Reserve is an obvious safeguard against such behavior. The Chairman, after all, is only one of seven members of the Federal Reserve's Board of Governors, and moreover, has only one vote of 12 on its Open Market Committee. The President might try to influence monetary policy by appointing a Chairman with compatible views, but there is no way that H.R. 6273 compels the Federal Reserve to pursue policies the majority of the Board and Open Market Committee deem unwise. This is as it should be—the President must have access to the Federal Reserve but not control. This is what H.R. 6273 provides. Before we hear from Dr. Burns, who is our witness today, I want to announce that we invited Budget Director Lance to testify before the Subcommittee on this legislation. Regretfully, he declined. However, I was pleased to note in a column by Marquis Childs in the June 21st Washington Post that Director Lance favors having the term of the Federal Reserve Chairman run coincidental with that of the President. According to Childs, "He told a group of reporters the other day that this arrangement would contribute to the coordination of fiscal policy and that a dialogue between the President and the Chairman would, in no way, affect the Fed's independence." I also want to note that we canvassed by mail a number of prominent academic and business economists and others with central banking experience as to the merits of the provisions of this bill. A n analysis of the responses has been prepared by the Congressional Research Service of the Library of Congress and will be made part of the hearing record. For now let it suffice that a preliminary count of the responses received to date shows 34 would generally favor the bill and 14 are opposed. Included among those for the bill are John Kenneth Galbraith, Milton Friedman and a number of ex-Federal Reserve officials. Mr. M I T C H E L L . I will turn to the ranking minority member, Mr. Hansen, for an opening statement. Mr. H A N S E N . Thank you, Mr. Chairman. Although there appears to be no critical need for the legislation we are considering today, I am nonetheless pleased that we have the opportunity to hear the testimony of Dr. Arthur Burns regarding this operational aspect of the Federal Reserve Board. The scholarship and experience of Chairman Burns will no doubt be enlightening, as always, in such a discussion of this and related matters which are important to the level of money supply and stable prices. Since I understand his statement is brief, and you have made your statement brief, Mr. Chairman, I think the best thing for me to do is just say I look forward to this testimony and thank you. Mr. M I T C H E L L . Thank you very much. Mr. Chairman, we await your words of wisdom and your advice. Welcome to the subcommittee. S T A T E M E N T O F HON. A R T H U R F. BURNS, C H A I R M A N , B O A R D GOVERNORS OF THE FEDERAL RESERVE SYSTEM OF Dr. B U R N S . Thank you very much, Mr. Chairman. It is a pleasure to meet with this subcommittee and to testify on H.R. 6273. The bill provides that, beginning on February 1, 1982, and at 4-year intervals thereafter, the Chairman and Vice Chairman of the Board of Governors of the Federal Reserve System shall be appointed by the President with the advice and consent of the Senate. It further provides that if a vacancy occurs in either of these offices, any portion of the term remaining shall be filled only for that unexpired portion. 8 Let me say at the outset that at various times I, as well as many other students, have been on different sides of the principal issue raised by this bill. I have always felt, however, that the present procedure of appointing the Federal Reserve Chairman has worked quite well for more than four decades, and that no clear need has been demonstrated for changing that procedure. I recognize that there is some force in the argument that the Chairman of the Board of Governors should be congenial to the President, and this is essentially the philosophy underlying H.R. 6273. The manner in which the bill proposes to advance that objective is thoroughly responsible. By providing that the terms of the Chairman and Vice Chairman shall begin 1 year after a President is inaugurated, H.R. 6273 would certainly reduce the extent to which these appointments might become enmeshed in the politics of Presidential elections. The bill would thus encourage the selection of persons to fill these important offices in a deliberative manner, free from the pressures that surround the appointment of Cabinet members by a new President. Moreover, by providing that the new procedure will not take effect until 1982, the proposal is clearly not motivated by any personalized political concerns. On the other hand, my earnest evaluation of this and other proposals that would directly link the term of the Chairman of the Federal Reserve to the term of the President has led me to conclude not only that such linkage is unnecessary, but that it would also be unwise—principally because it would amplify the political aspects of Federal Reserve appointments. Let me explain. The premise of the legislation is that every President should be assured of having his "own man" as Chairman within a relatively short time after his inauguration. In my judgment, this premise is out of harmony with the act's provision of a 14-year term for Board members. By providing for 14-year terms, staggered so that one expires every 2 years-—which this bill wisely would not change—Congress constructed a solid foundation for a monetary authority having both independence and continuity. The assumption underlying the 14-year term is that Board members will serve the public interest exclusively; and that even though they are appointed through the political process, as Federal judges indeed are, the assurance of a lengthy term will free them from political pressures that might affect officeholders with short terms. However, because H.R. 6273 would link the Chairmanship to the incumbency of a President, the likely result is that the person selected for that position would not serve his full term and would leave the Board only a year after the President who appointed him left his office. The consequence could be some politicizing of the Federal Reserve, and perhaps some erosion of the independence of the Nation's monetary authority. A corollary of the "linked" terms procedure, of course, is that vacancies in the offices of Chairman and Vice Chairman can be filled only for the unexpired portions of the terms. This aspect of the proposal is also quite troubling. Where only a relatively short portion of the 4-year term remains to be served, it may be quite difficult for a President to recruit a highly qualified individual in view of the need for an appointee to sever his prior relationship and 9 divest or put in trust his investments. Nor could the President give any assurance of reappointment to a full term—where, for example, he himself was not eligible for reelection. Even where it might be possible for the President to reappoint his nominee for a full term, the individual appointed to fill an unexpired term would in effect be on probation until the partial term expired. The implications of this for the independence of the Federal Reserve during that period—the possibility that the individual will be inclined to act in such a way as to promote his own reappointment—are obvious. Moreover, the procedure for filling unexpired terms might result in the office of Chairman being unfilled until the President was in a position to make an appointment for a full 4-year term, thus leaving the central bank handicapped for that period. To my mind, these are serious limitations. Finally, H.R. 6273 would require the appointment of the Chairman and Vice Chairman to be subject to Senate confirmation. While I see no compelling need for this procedure, since all nominees to the Board must be confirmed, I have no objection to it, as I informed Chairman Proxmire on June 3. Over the years, Presidents and Federal Reserve Chairmen have developed effective means of exchanging views and cooperating in the public interest without legislation identifying the Chairman as the selection of a particular President. I believe your predecessors in the Congress acted wisely in creating a design for the Federal Reserve that insulated it from politics. That design has stood the test of time and experience exceptionally well. I urge you not to risk introducing a political dimension into the Federal Reserve by adopting legislation for which no need has been demonstrated. That concludes my statement. I want to thank you for the opportunity, Mr. Chairman. Mr. M I T C H E L L . Thank you very much for your statement. A l l questioning will be done under the 5-minute rule. Dr. Burns, let me go back to 1968. During that year, responding to a question from Chairman Wright Patman, the Federal Reserve Board wrote, and I quote from the hearing record: In a letter dated October 6, 1966 to Representative Abraham Multer, Chairman of the Subcommittee on Bank Supervision and Insurance of the House Banking and Currency Committee, Chairman Martin stated that the Board believed that the terms of the Chairman and Vice Chairman of the Board 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 and should not be limited in his selection to incumbent Board members. Dr. Burns, I recognize the Board is composed of seven new persons, but this represents a 180-degree shift from the position taken in 1966 and reaffirmed in 1968. More specifically my question is, has the whole Board considered this proposed piece of legislation, and is it opposed to it; or are you speaking from your own personal point of view? Dr. B U R N S . Let me indicate once again, as I have in my statement, that I and many others who have looked into this question of coterminous terms—or roughly coterminous terms—have debated this among ourselves and have changed positions, moving one way 10 or the other. I will read the pertinent sentence in my statement once again, because I think it is important: Let me say at the outset that at various times I, as well as many other students, have been on different sides of the principal issue raised by this bill. I do not mind reporting to you that I 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. Mr. M I T C H E L L . A clear majority. Could you break it down just a little finer for me? Dr. B U R N S . I would rather not do that because I am not entirely sure of my recollection. But let me repeat that a clear majority favors the position taken in this statement. If we debated the issue longer, individuals might change their present opinion. I am capable of changing my own opinion in the course of this hearing, Mr. Chairman. It is not an easy question. Mr. M I T C H E L L . That makes me very optimistic. The Chair has just a second question and then I will turn to Mr. Hansen. Dr. Burns, in your testimony you argued that linking the Chairman to the incumbency of a President would likely result in the Chairman's not serving his full term as Governor and leaving the Board only a year after the President who appointed him left office. In this connection, it seems to me that many of your predecessors have served under a number of different Presidents. William McChesney Martin was first appointed by Mr. Truman, reappointed four and eight years later by President Eisenhower, 12 years later by President Kennedy, and 16 years later by President Johnson. Clearly Martin's term was linked to these Presidents. It seems to me, with all due respect, that your position confuses an appointment and reappointment of a particular Chairman with the appointment of chairmen in general, and I do not think this is true of H.R. 6273, the bill we suggest; and I do not think it has been true historically. Dr. B U R N S . On the historical point, I believe that at the times when Mr. Martin's term as Chairman expired, there were no vacancies on the Board. Therefore, the President, in choosing his Chairman, was restricted to the existing membership of the Board. I think that point is of some importance. I also believe that Chairman Martin's case is the only historical instance that is relevant to the point you have raised. I do not think there is another case. If I am wrong on that line Mr. M I T C H E L L . I think that you are. Dr. B U R N S . I do not think so, but if I am, I can assure you I will put a correction into the record. Mr. M I T C H E L L . I was considering when Mr. Eccles was Chairman. Dr. B U R N S . I am looking at that right now because I thought that was worth checking. He was appointed in — Mr. M I T C H E L L . He served under four Presidents. 11 Dr. B U R N S . He was appointed in 1934 when Franklin D. Roosevelt was President. He was reappointed as Chairman in 1936, 1940, and 1944 by President Roosevelt. He was not reappointed as Chairman in 1948, but he did stay on as a member of the Board. I believe that is the only instance historically of that sort. [Dr. Burns submitted the following statement for inclusion in the record at this point:] Contrary to my statement at the hearing, there were vacancies on the Board close to certain of the dates on which Mr. Martin was reappointed as Chairman. Specifically, a vacancy created by the death of Paul E. Miller on October 21, 1954, existed when Mr. Martin was reappointed as Chairman on March 11, 1955, and was filled when Charles N. Shepardson took the oath of office on March 17, 1955. Also, a vacancy created by the resignation of James K. Vardaman, Jr. on November 30, 1958, existed when Mr. Martin was reappointed as Chairman on March 12,1959, and was filled when G. H. King, Jr., took the oath of office on March 25, 1959. Mr. M I T C H E L L . Finally, let me just say in response to your last statement, that the bill that we are considering seeks to remedy the condition you spoke about, the condition of the President's being restricted in his choices. I think that is one of the more salutary effects of the present legislation before us because it would remove that restriction. Dr. B U R N S . Whether or not the bill has that merit is arguable. It does work in the direction of removing that restriction, but it does not remove it completely. Suppose that a Chairman decides to resign from that office but to continue serving as a member of the Board. In that case the President would have to choose as Chairman one of the other six Governors. Mr. M I T C H E L L . Thank you, Dr. Burns. I recognize the time constraints and I want to give an opportunity to the other members to raise questions, but I would like to come back to that very point after we have recognized the other members. Mr. Hansen, you are recognized for 5 minutes. Mr. H A N S E N . Thank you, Mr. Chairman. Dr. Burns, I thought your statement was a little like the Gettysburg Address—brief as it might be, it laid out the situation very well. I think you pointed out the weaknesses of the proposed legislation very appropriately. I am concerned about the mischief that can be wrought in this kind of legislation where maybe all we are playing is a bit of a numbers game in how we handle appointments. However, with a vehicle like this, it is a long way from subcommittee to the floor, and through the subcommittee and the floor of the other body, and a lot of attachments can be made. It is not just those direct things you have addressed yourself to, but other things that could be added in the process that concern me. I think Congress tried hard to make the budget process a congressional budget process. We have had more to say about general fiscal economic policy recently than before, and I think it is reasonable and proper to try to assert the fact that Congress should have a determination in monetary policy. After all, that is the way the Constitution structured it. It seems to me there may be some inconsistency here in attempting to structure the monetary policy system and the activities of the Fed too much along one line of government, the Presidential policies. 12 Do you have any comment to make in this regard? Dr. B U R N S . I think that there is real substance to your comment. I must say that much of the discussion of this question of the relationship between the President and the Chairman and of where monetary authority ought to be lodged is very academic. I know that many of my economist friends believe that the Federal Reserve's monetary policy should be substantially determined by the President. When I have talked this out with them, I have received the impression that they think of the President as having a great deal of time to devote to monetary policy issues, of his becoming a scholar in that field, of his seeking the advice of learned men entirely removed from the political arena—men of experience and wisdom and judgment—and, finally, of his arriving at a conclusion on monetary policy or a view concerning it. In practice, the President will not be a scholar in the monetary area. In practice, his thinking on the subject is likely to be determined by this or that political hack in the basement of the White House. I think I know whereof I speak. Mr. H A N S E N . Dr. Burns, I might inject here the chairman mentioned something about Director Lance advocating a coterminous situation with regard to appointment of the Federal Reserve Board Chairman. Is there not a possibility of too much arrangement of fiscal policy in Government by one group? For instance, the President already has the OMB, the Secretary of the Treasury, all of this, and it seems to me with Congress going one direction and the President going another direction, somewhere out there it is nice to have someone relatively neutral, politically, to kind of balance things. If this gets pushed into one orbit or another, maybe we lose that ability to balance the situation. Is there anything you have to say in this regard? Dr. B U R N S . I would agree with that. In fact, a very well known Senator—I am not going to name the man, but over the years he has been a critic of the Federal Reserve and has felt that monetary authority ought to be lodged in the White House or at least shared extensively by the White House—this Senator told me not so long ago that he has arrived at the conclusion that having a center of disinterested advice on economic issues and concern with economic issues is beneficial to our Government and to our country. I was very pleased by that. These are difficult questions. We have a government of separation of powers, and I believe that is a good thing. The main difficulty I find with this bill is that no clear need for such legislation has been demonstrated. I do not really see any clear advantage in it, and I see the disadvantage that the White House could have undue influence on independence of thought within the Federal Reserve. Mr. H A N S E N . Thank you, Dr. Burns. My time has expired. Mr. M I T C H E L L . Mr. Neal, you are recognized for 5 minutes. Mr. N E A L . Thank you, Mr. Chairman. I guess I do not know exactly how to approach this issue because frankly I just do not have very strong feelings about this bill one way or the other, although, as I listen this morning it does seem to 13 me we are entering into a general discussion of something that is very important, and that is the conduct of our monetary policy in this country. I would think that the problems we have had in recent years with inflation and recession and that portion of it caused by monetary policy have, if anything, come about because of a too close relationship between the administration and the Federal Reserve Board. I do not know how that relationship existed, but I think there was such a clear philosophical similarity between the Board, as measured by its policies, and a former President. I would certainly hate to see us balance the scales in favor of the administration's thinking about the conduct of monetary policy in future years, 10, 15, 20, 100 years down the road. I would also hate to see the Congress conducting monetary policy on a day-by-day or month-by-month or year-by-year basis, because I think the temptations would be too strong in election years to increase the supply of money and bring interest rates down. I think we would pay a horrible price for that unstable policy and we would pay horrible prices in terms of inflation and unemployment following such unwise activity. The more I study the subject, the less I think I really know about it. It is a very complex subject. If we can come up with a balance, I think it would be a great benefit to future generations. In my own thinking, I am leaning toward something as in a perfect world, if we could bring it about, some situation where the Federal Reserve Board would remain entirely independent and would set targets for growth in the money supply each year for the year coming, and would then set a band of these targets much as you do now, Dr. Burns, but make that somehow subject to congressional approval. Immediately I see the problem even with that. I do not really think I have come to a conclusion myself, although I would say this discussion is very valuable. I would think you would agree that you would not want monetary policy conducted by the administration or by the Congress, and I essentially agree with both of those things. What I am concerned about—I personally think you are right on target now with what you are doing with monetary policy—is for the future, that we could get another Board, another Chairman, and they would again try, by expanding the money supply wildly, to have what they might think would be a beneficial effect on the economy, and it certainly would not be beneficial. We know that now. What if another Chairman does not know that, or another Board does not know that? I guess you can see how my thinking is roaming on this subject. Maybe you have an answer, a proposal that would somehow build into the law some stability in monetary policy. First of all, I would have to ask if you think that is a desirable goal, and, if you do, how you might see that being mandated for future years? Dr. B U R N S . I appreciate your entire comment very much. We are dealing here with an age-old problem of government. When appointments are made to the Federal Reserve Board they may be good appointments or they may be bad appointments. The Federal Reserve may act wisely or it may act unwisely. The critical question is, how can we conduct ourselves as a government in the interest of having a thoroughly responsible and able Board? 92-910 O - 77 - 3 14 I think we are gradually evolving a system that is an improvement over what we have had. As you know, the Chairman of the Federal Reserve Board now appears before the House or Senate Banking Committee every 3 months and testifies on monetary policy at great length and is examined and cross-examined by Members of the Congress. That examination actually is continuous, because, in addition to the formal hearings every 3 months, there are numerous inquiries concerning monetary policy from individual Members of the Congress and, more particularly, from the chairmen of the two banking committees. Second, and I am glad to say this was done at my suggestion, the Senate has for the first time held a hearing on the condition of the banking system. I hope this will be repeated in the Senate, and I would like to see similar arrangements made in the House. I think this is a very useful new venture in the way of communicating to the Congress just what we at the Federal Reserve are doing in relation to the banking world. Also, as you know, there has been criticism of the Federal Reserve with regard to various of its activities. We recently had a hearing—and one that I was glad to have the Federal Reserve participate in—on the expenditures of the Federal Reserve and its operating procedures. I have suggested to Senator Proxmire still another type of hearing, dealing with the supervisory process. What I am trying to say is that the oversight by the Congress of the activities of the Federal Reserve has been extending, growing, improving, and I think this is a very constructive development. Let me say, finally, that I and my colleagues on the Board will be glad to respond at any time to questions concerning monetary policy or any aspect of our operations. So I think we are making some progress, Mr. Neal. I might say that we have made progress partly due to your prodding, Congressman Mitchell, and to that of Chairman Reuss and many Members of the Senate. Mr. M I T C H E L L . Mr. D'Amours, if you will permit me one statement. I think we need to stress the fact that this bill does not intend to give the President control over monetary policy. The wording of the bill makes clear that it does not. A l l that it does is give the President a meaningful input to the councils of monetary policy. It appears to me that if you have a seven-man Board and a 12man Open Market Committee, it is ridiculous to assume that the President, if he appoints the Chairman and Vice Chairman, could have control over those two entities. That is reading something into the legislation that just is not there and could not be done. Dr. B U R N S . I have not read that into the legislation. Mr. M I T C H E L L . This was more in response to Mr. Neal's statement. Dr. B U R N S . Historically, arrangements that are congenial to the incumbent President have been worked out. At the present time, at President Carter's suggestion, I meet with him and with his other economic advisers every few weeks on a regular basis. We have delightful conversations, and the President serves us a very good lunch. He has not tried even remotely to interfere in any way with 15 the Federal Reserve, first, because I am sure he would not want to—he respects our laws and our traditions—and second, because he probably knows there is no way of achieving any result by that route. Informal arrangements between the President and the Chairman of the Federal Reserve have been worked out over the years and things have worked pretty harmoniously. Although your bill has many virtues, its chief defect—I must come back to that—is that you have not demonstrated a need for this legislation. Mr. M I T C H E L L . I will certainly comment on that if I get another chance. Mr. D'Amours. Mr. D'AMOURS. Thank you, Mr. Chairman. You have addressed yourself precisely to the question I was going to get to. Given the nature of bureaucracy, Dr. Burns, such as I have observed it in my brief tenure here, I find that people who are members and in control of bureaucracy seldom yield very voluntarily to change. I was not a member of the committee when House Concurrent Resolution 133 was passed which gave us the oversight you are now saying is a very excellent tool, but did you not oppose it at that time? Dr. BURNS. I opposed certain features of the original draft, but the resolution, as finally passed, was entirely acceptable to me. The resolution, as passed, was very different from an earlier version to which I had expressed opposition in conversations that I had with Members of the Congress. Mr. D'AMOURS. Speaking about the politicization of the Fed, there are some in economics who think it ought to be. I think Dr. Friedman states quite bluntly, at least he did a year ago, that because the political system carried with it a degree of responsiveness, a degree of accountability to the people, and because the Federal Reserve, of course, totally independent, had as much effect upon our monetary and fiscal policies as Congress, that there ought to be some accountability, but that question aside, you yourself mention checks and balances and separations of powers. As I see this question, Dr. Burns—and I would like you to comment on it for me—the question reduces itself to giving the President some check and balance with the Federal Reserve System. You are one of seven members, seven Governors. There are 12 on the Open Market Committee. From listening to you speak here today, I am getting the impression that the Chairman is in fact the whole show. I do not think that is the case. I hope it is not. It ought not be if it is. A l l I am looking for—and the reason I tend to support this legislation, is to give the President some way of having an input into the decisions of the Fed. That is all I see it as being. With regard to the demonstrated need for the legislation, perhaps you will permit me to lump a whole series of questions together. I think there is a need for it. I wish you were more inclined to go with the administration than you are. I do not know whether you would be opposed by the other members of the Board of Governors or Open Market Committee, but I would like to think that the President had some better direction of the course of our monetary and fiscal policy than he has. 16 That is a whole series of questions. I suppose I perhaps should have asked them separately. That is my view, my overview of the bill at this time, and if I am incorrect I would appreciate your telling me where I am wrong. Dr. B U R N S . Let me say, first of all, that you are quite right in stating that there are economists who are very much in favor of this type of legislation. In fact, I would say on the basis of my knowledge—I may be wrong—that most economists would favor the legislation introduced by Congressman Mitchell. That does not make them right, however. Mr. D'AMOURS. It does not make them wrong either. Dr. B U R N S . N O . I have not said that—or not as yet. I have studied this subject, and I may possibly have arrived at wrong conclusions, but let me give you one result of my studies. Having the position that I do, I have great interest in the central banks of other countries around the world, and I have to meet with central bankers frequently. Taking the world as it is, I have found only three countries that have relatively strong independent central banks—the United States, West Germany, and Switzerland. I have also found that, while each of these countries has had its problems, the rate of inflation—which has been roaring all over the world—has been under better control in these three countries than in the rest of the world. I do think that their having independent central banks has something to do with this result. You speak of the desirability of the President having some input on monetary policy. I cannot be sure what you mean by that. If you mean that the President himself, or the Secretary of the Treasury or the Chairman of the Council of Economic Advisers or the Director of OMB or perhaps others, should in view of their great responsibilities, have the freedom to express their views on monetary policy and to communicate with the Federal Reserve, all I can say is that they obviously have that freedom and they exercise that freedom. I have a weekly meeting scheduled with the Secretary of the Treasury in which we go over financial questions of mutual interest. Any views that he may have on monetary policy, he is, of course, perfectly free to raise at any time. The President obviously is perfectly free to indicate his thinking. It so happens that Mr. Ford never raised any question about monetary policy, and Mr. Carter has as yet not raised any question about monetary policy. When I had luncheon with Mr. Carter this week I found myself wishing that a question about monetary policy and interest rates would be raised because I thought it would have served a constructive purpose to communicate some facts and make some observations on recent developments. There is, in short, ample opportunity for communication. Mr. D ' A M O U R S . Y O U did not mention Bert Lance. Have you spoken to him recently? Dr. B U R N S . Yes, of course. I speak with him directly with some frequency. He is coming over to the Federal Reserve tomorrow, and my wife has written a poem in his honor for the occasion. Director Lance and I are friends. 17 Mr. D ' A M O U R S . Mr. Chairman, I find it difficult to disagree with you when you say that you communicate with the administration, the communication is very fine and interesting, but does their message get carried back by a sympathetic or at least empathetic Board Chairman, if it gets carried back at all? I think that is an important question. The fact that where there are central banks the national economies are prospering is very interesting. But this bill does not eliminate our central bank. I am talking only about checks and balances. You raised that question. I should think that the President is at least entitled to this check, this balance. The President should not be faced with a totally independent Fed that can check him, but that he in turn might have some check upon, at least in the person of one of its seven members of the Board of Governors, the Chairman, who has an extra amount of clout, and who should be at least sympathetic and not diametrically opposed to his policies. That is the only check we are giving him. I do not think you have made a case that this is asking too much, or that there is no need for at least that simple check. Dr. B U R N S . Once again you have made comments that cover a broad range. Let me answer your specific question as to whether I communicate with my colleagues about my conversations with the President. Of course I do. I do not have a tape recorder with me, but I remember every detail of my conversations with our distinguished President. I do not report at great length on my conversations with anyone, but I give my colleagues the substance of my conversations; of course I do. You speak of strong opposition to the President's policy. I really do not know what you are talking about. Mr. D ' A M O U R S . I did not mean that to indicate in any way you were diametrically opposed to his policy. We are trying, as Mr. Neal said, to prevent the situation from occurring in the future. It is possible at least, is it not, that a Chairman could be diametrically opposed to the President's view? Mr. M I T C H E L L . Let the Chair interrupt and point out to the gentleman that his time has expired. Mr. D ' A M O U R S . I thank my chairman for his patience. Mr. M I T C H E L L . I would hope that Chairman Burns would respond to any other parts of the questions which you raised that he has not answered as yet. Mr. D ' A M O U R S . I thank you, Dr. Burns, for your replies. Dr. B U R N S . Thank you. Mr. M I T C H E L L . Were there any other responses to questions that he raised, or have you completed your responses thereto? Dr. B U R N S . It would take me a long time to complete my responses to the many questions raised by the Congressman, but I would be glad to sit down with him privately, to share some of my thoughts and to learn from him to the best of my ability. Mr. M I T C H E L L . Thank you. Mr. Barnard, you are recognized for 5 minutes. Mr. B A R N A R D . Thank you, Mr. Chairman. Dr. Burns, it is a pleasure to have you here today to discuss a subject that seems to be rather widespread in the Halls of the 18 Capitol. I think it is good that we have this opportunity to share our views. One reference has been made to the bureaucracy. My experience with the Fed has not necessarily caused me to identify it as a member of the bureaucracy. Do you think this is an accurate definition of the Fed? Dr. B U R N S . I do not think we would receive very high marks as a bureaucratic outfit; we try to do some fresh thinking every day. But I must say also that there is a bureaucratic element in the Federal Reserve. Now and then I hit the ceiling when I encounter it. Mr. B A R N A R D . I was speaking primarily of the makeup of the Fed, how it is composed from the smallest component from the standpoint of member banks who provide the capital, on up through the appointment by the President of the Board of Governors. Dr. B U R N S . We do have a unique structure. We have 12 Federal Reserve banks in the country, 25 bank branches, and well over 200 directors who come from small banks and large banks, small businesses and large businesses, farming enterprises, educational institutions, and so forth. We have developed a cooperative structure. Mr. D'Amours referred to the role of the Chairman. The Chairman does, of course, have a certain role, but hundreds of individuals participate in the activities of the Federal Reserve System. We communicate with our directors, and they with us, with great frequency. We have developed a system of intelligence that I think is unique. Decisions by the Federal Reserve are not reached lightly; they are reached by a very deliberative process. And they do not represent the thinking of any one man; they represent the distilled thinking of many individuals, individuals who are well informed and concerned about the welfare of this country. Mr. B A R N A R D . Dr. Burns, there is some concern about the same people or the same individual directing both monetary and fiscal policies. Could you just briefly again go over with us what you see as the dangers of fiscal and monetary policy being influenced by the same body, if any? Dr. B U R N S . I do think that it would be dangerous to our country's future. If control over monetary policy were to be lodged in the White House—and may I say, Mr. Mitchell, this comment has little bearing on your bill because you have not proposed that and it is not part of your intention; I am trying to answer Mr. Barnard's very broad question—if in addition to the powers the President already has over fiscal policy, control over monetary policy were to be lodged in the White House, I would have very dark views about our country's future. The difficulty is—I do not say this in a spirit of criticism, but I know the White House, I know its necessities, I know its pressures, and we might just as well recognize this—in the White House it is nearly impossible to deliberate sufficiently on any issue. The number of things that have to be considered is so large. Even if shortrun political considerations played no role, and that is a very extravagant assumption, you would not have the deliberative process that is required in handling monetary policy. You see, there is a profound difference between monetary policy and fiscal policy. On fiscal policy, Congress has the last word; 19 Congress has a check. But monetary policy can be changed from day to day; the 535 Members of Congress could not possibly conduct monetary policy. Therefore, you have to proceed by delegating authority—either to a Board, as in this country, or to a minister of finance, as in most other countries. When the authority is delegated to a minister of finance you do not have the deliberative process that we have in our country and that the Swiss and the Germans have in theirs. Mr. B A R N A R D . I have no further questions. Mr. M I T C H E L L . I recognize Mr. Caputo has returned and Mrs. Fenwick is present with us, but I think in all fairness we should hear from some of the members who have been here throughout this subcommittee session. Mr. Watkins. Mr. W A T K I N S . I would like to express my thanks to Chairman Burns for being here. I have watched a lot of your actions and nonactions over the years and tried to interpret the different meanings and different directions of your actions. I appreciate the job you have done. I may not have agreed with your decisions all the time, but I know it is a big decision when you are discussing and trying to set the monetary policy. I have a long, hot summer on this particular bill because I am not exactly concreted in my own mind on whether it is necessary. My opinion right now would be that it is not necessary. I know that during the 1976 campaign, one of the papers stated that the President did make a comment that he felt he needed a Chairman who would be compatible with his views. I have been mainly in the business world before I came to Congress 6 months ago. I think I can speak in behalf of the business people of this country. We are probably more concerned, not with compatibility, but with stability and predictability or how and when we make investments. Would you like to elaborate on this as basically one of the big thoughts that you hear from the business community? Dr. B U R N S . I hear that all the time, and perhaps more often these days than at any earlier time I can remember. Businessmen talk to me about the great uncertainty with regard to what this country's energy policy will eventually be, the great uncertainty with regard to our antipollution laws—which way they will be going, how they are being administered, how they will be administred in the future—and the great uncertainty about the kind of tax system under which we will function; so many new tax proposals have come to their attention this year that they do not know quite where they are. Perhaps their greatest uncertainty is about the prospects for the general price level. Our businessmen are very fearful of inflation. They feel they are living in an environment that is less stable than it has been, and that is less stable than it should be. Undoubtedly this is one factor that has been holding back businessmen in their investment decisions. Of course—and you know this, Mr. Watkins—businessmen tend to complain, particularly when they are with a Government official. Watching them as I do, day by day, I believe they are actually more confident than their rhetoric would suggest. Confidence in our 20 country's economy is returning gradually. However, business investment is still not at the level it should be at this stage of an economic expansion. Mr. W A T K I N S . Some people have argued that if they had a little more control in monetary policy there would probably have to be less Government spending to stimulate the economy. What is your view on that? Dr. B U R N S . There is, first, the basic question about the use of monetary policy to stimulate the economy and second, the question about where we are at the present time. On the latter let me make a quick observation. Credit is growing very rapidly in our country. Not only are business loans at our commercial banks expanding rapidly, but lending through the commercial paper market is increasing by leaps and bounds and finance companies are also doing an extraordinarily large and rapidly increasing volume of lending to business firms. As to what might happen if we expanded the money supply more rapidly than we have been doing, my judgment is that we would undoubtedly succeed in bringing short-term market rates of interest down for a brief period. But this would be achieved at a price. Business and financial people have learned that when the money supply expands rapidly, fears of inflation multiply rapidly as well. They have also learned that market interest rates reflect not only the real rate of interest but also an inflation premium. A rapidly increasing money supply would lead businessmen and financial people to conclude that inflation would intensify; moreover, that the inflation premium built into interest rates would increase; and, therefore, that long-term interest rates—which are the most important interest rates as far as business activity is concerned—would rise rather than decline. So it would be a counterproductive activity. I will stop at this point, Mr. Watkins. But this is a very interesting and important question, and I would like the opportunity to expand on the issue. Mr. W A T K I N S . In analyzing the discussion on the Federal Reserve Board over in the Halls, as Congressman D'Amours stated, have there been any discussions about letting the Treasurer and also the Director of the Office of Management and Budget sit in with the Federal Reserve Board in an official or unofficial capacity? Dr. B U R N S . Under the original Federal Reserve Act, the Secretary of the Treasury served as ex-officio Chairman of the Federal Reserve Board, and the Comptroller of the Currency served as an exofficio member. The President designated one member of the Board, apart from these two ex-officio members, as Governor and another as Vice Governor. The present structure of the Federal Reserve was established by the Banking Act of 1935, when the Congress, after debating the issue very extensively, decided to remove the Comptroller and the Secretary of the Treasury from the Board. I think the Congress acted wisely, and I would not like to see a return to the older system. Mr. M I T C H E L L . The gentleman's time has indeed expired. Congressman Derrick. 21 Mr. D E R R I C K . Thank you, Mr. Chairman. Good morning, Dr. Burns. Would you measure your concern about this legislation? Are you concerned with the legislation itself or are you concerned more with the precedent that it might set over a long term? Let me just go one step further, if I might. I certainly did not presume to read something into your thoughts that was not there, but I gathered when we considered H. Con. Res. 133 that you probably were not so much concerned with the legislation itself being rather harmless as with the precedent it might set in the years to come. Dr. B U R N S . I think I have bared my thoughts as honestly as I know how in my statement. My main difficulty with this legislation is that, as I keep turning it over in my mind, I see no clear need for it. I see no difficulty, no problem that it would correct. As for setting a precedent, I do think that this piece of legislation would move away from the concept of the Federal Reserve that the Congress decided upon in 1935, after reviewing the functioning of the Federal Reserve Board, with the Secretary of the Treasury sitting on it. That played an important role in the thinking of the Congress. The Congress has sought over the years to insulate the Federal Reserve Board from political pressures. I cannot honestly argue that the proposal before us is a highly significant invasion, or that it involves a highly significant reduction of the independence of the Federal Reserve. I cannot argue that, and I am not going to argue that. But, it is a small move in that direction. I don't see why we ought to do it. If a need for this kind of legislation were demonstrated, I think I would support it. But, I don't see the need. Mr. D E R R I C K . In your thoughts on the matter, you made the statement that when you had lunch yesterday with the President, he had not brought up the matter of monetary policy with you. One of the two reasons that you suggested was that maybe the reason he had not was because he in fact could not do much about it as it is now. Do you see any vehicle of which the Congress might avail itself, that there might be a closer working of the fiscal and the monetary policy? You know, the Congress, I think, is trying its best to set fiscal policy. It is rather difficult. I go back to the summer of 1975, when in your judgment, or the judgment of the Board, the monetary supply was moving at too rapid a rate, and you kind of pulled the reins in on us. That was, I think, probably—whether it is advisable or not I would not argue the point with you—but it certainly was contrary to what the Congress was trying to accomplish. Do you see any way that we might work closer together in this area? Dr. B U R N S . I think that H . Con. Res. 133 has accomplished that; the machinery set up by that resolution has certainly helped matters greatly. That is one device. I would love to sit down from time to time with Congressman Mitchell and the members of this subcommittee, and with other members of the Banking Committee, to talk about monetary policy. 92-910 O - 77 - 4 22 In fact, we have done that once, Mr. Mitchell; we ought to do it more frequently. I think we ought to utilize such opportunities. I would welcome them. I learn a good deal in the process. Moreover, I have the opportunity to do a little modest teaching as well. Perhaps we could formalize that a bit more, perhaps we could work out a schedule of meetings with Congressmen. I can see only good coming from such an exercise. Mr. D E R R I C K . Thank you, Dr. Burns. I, for one, believe in the independence of the Fed, and certainly don't think that the Congress or the administration itself should be setting monetary policy. But, I believe I speak for my colleagues when I say what we would like to know is when you are down there deliberating, when you start deliberating and formulating this monetary policy, that there might be just one person down there to say, "Wait a minute, the Congress is trying to do this, and if we do this"—you know, a sympathetic voice in the midst of the setting of monetary policy. Dr. B U R N S . I can assure you that such voices exist within the Federal Reserve System. Mr. Derrick, earlier you referred to 1975. You and I have talked a little about that episode. I think we ought to talk more about it, because I believe there are still some vestiges of misunderstanding. The view got around in some congressional circles at that time that the Federal Reserve, through its monetary policy, was seeking to nullify a piece of fiscal legislation. Mr. D E R R I C K . There was no question about it. That was the distinct impression of Congress. Dr. B U R N S . That was not even remotely in my mind or—insofar as I could judge from the views they expressed—in the minds of any member of the Board or the Open Market Committee. In my own case, when I ran into that interpretation, I was startled. What we were doing at that time might have been right or wrong—one can argue that—but it was very simple. We were governing our monetary policy on the basis of an objective with regard to monetary growth, and we knew that the income tax rebate included in the fiscal legislation would inevitably increase the rate of growth of the money supply for a short period. The question was, by how much would the rebate increase money supply growth? Our staff made estimates of that to the best of their ability; they worked hard at it. Then, as the monetary figures came in, the actual increase in the money supply was found to be very much larger than the staffs estimates had indicated could be attributed to this fiscal legislation. It appeared, therefore, that something else was happening. We reacted by raising the Federal funds rate—I should say by releasing forces that had that effect, since we cannot raise the funds rate directly—with a view to bringing down monetary growth to a rate within the bounds that we had set, and which we still thought was right. That action was misinterpreted by some Members of the Congress. Within the business and financial community, on the other hand, it was interpreted as a constructive action; people felt the Federal Reserve was alert, and that the Federal Reserve was not 23 going to release a new wave of inflation on the country. So, it served a constructive purpose. But, I must repeat that the sentiment expressed by some Members of the Congress startled me. Not only did we not seek to nullify fiscal action at that time; we would never do that—not as long as I am there, and not as long as there is a responsible Federal Reserve Board. I think we have had a responsible Board over the years, and that we will continue to have one. We may disagree with Members of the Congress, and we will voice our opinions candidly. But the idea of nullifying the will of the Congress is something that I find entirely repugnant. Mr. D E R R I C K . I thank you, Dr. Burns. My time has expired? Mr. M I T C H E L L . The gentleman's time has expired. Dr. B U R N S . I am so sorry that I have used up your time, Mr. Derrick. Mr. D E R R I C K . It is always a pleasure, Dr. Burns. Thank you very much. Mr. M I T C H E L L . I recognize Congressman Hannaford. Will you yield for a unanimous consent request from Mr. Hansen? Mr. H A N N A F O R D . Delighted. Mr. H A N S E N . Mr. Chairman, I ask unanimous consent that members who have questions, who do not have the time today to pose those questions to Dr. Burns, be permitted to submit them for answer and for inclusion in the record. Mr. M I T C H E L L . Without objection. Mr. Hannaford, you are recognized for 5 minutes. Mr. H A N N A F O R D . Dr. Burns, thank you for being with us today. It is always a pleasure. Inasmuch as you have said this—previously you agreed with the intent of this bill; today you disagree with it. You came here today subject to changing your mind. I assume that your opposition is somewhat a marginal decision? Dr. B U R N S . Y O U know, life goes on; one keeps on thinking. No, the position I have taken in my testimony today is not marginal. You haven't asked me why I had expressed a different view than I did earlier. If you want an answer to that question, you will get it, to the best of my recollection. Mr. H A N N A F O R D . I thought I would ask that next. What I was going to say in that regard—you made a reference to monetary policy being made by political hacks in the basement of the White House. I thought perhaps a year ago you were in agreement with those who have been making the monetary policy, if they had the opportunity to do so, and now you might be in disagreement with them. Dr. B U R N S . If you mean by that that I supported the economic views of Mr. Nixon invariably, or that I supported the economic views of Mr. Ford invariably, all I can say is that the newspapers of an earlier year and month and day are available, and my record on that, good or bad, speaks for itself. I have at times disagreed with Presidents, even though it is painful to do that, and I have spoken my mind honestly. Mr. H A N N A F O R D . We respect you for that over the years, Dr. Burns, very much. 24 Dr. B U R N S . Thank you for that. When the question of coterminous terms was considered last time by the Board, one of the factors in my own thinking was that I was personally involved. M r . HANNAFORD. Yes. Dr. B U R N S . And being personally involved, I didn't want to put myself or my colleagues on the Board in a position that could possibly be interpreted as one of fighting for, arguing for, the office that I hold. I didn't want that interpretation to be placed on my conduct or on my views. I have no such problem with this legislation, as I stated in the formal part of my testimony. Therefore, I could think more objectively, speak more objectively. I have found over the years that when personal factors enter into one's thinking, one is not as clearheaded as one ought to be. That was my difficulty the last time, you see. It wasn't the only factor, but it was the main factor, in my earlier willingness to go along with the legislation. Now, Congressman Mitchell has purged the legislation of any such possible interpretation. There is no personal element in it. You and I can both think very objectively about this legislation. Mr. H A N N A F O R D . It must still be difficult for you to talk about surrendering the independence of the institution that you cherish deeply, and in whose service you have spent much of your life. Dr. B U R N S . That is certainly true, yes. That is something I tried to convey. You have detected an emotional element in it. Undoubtedly that is a factor. Mr. M I T C H E L L . May the Chair interrupt to point out that we have a quorum call, and we are shooting to try to wind up these hearings at about noon. If the Members want to make the quorum, obviously they are free to go. I would prefer to miss this particular quorum call and stay and finish up the discussion. It is up to you, Mr. Hannaford. Mr. H A N N A F O R D . I think the best thing for me to do would be to yield back the balance of my time, and I thank Chairman Burns for his testimony. I know how difficult it is for you to remove yourself from this. If I may, I would like to make another point. You spoke in terms of this bill interrupting or affecting the 14year term, and of the possibility that the President would not have a free range of choices if the Chairman chose to go and remain on the Board. Is it not true that the appointment would be made only at the time when there would be another vacancy on the Board, and therefore if the sitting Chairman moved to occupy that other position, the President still would have the full range of appointing someone of his own choice? Dr. B U R N S . Let me clarify my thinking on that point. First of all, the comment to which you refer was directed to a feature of Mr. Mitchell's bill. Second, my point was simply that an incumbent Chairman conceivably could decide to give up that position—perhaps to have a little time for his family once again— and might still want to remain a member of the Board. In that 25 event, the President's choice of a new Chairman might be confined to the existing members of the Board. Mr. H A N N A F O R D . Isn't the average service on the Board about 3 years? Is that figure correct? Dr. B U R N S . The average is longer than that. As a matter of fact, I thought of that question just before coming here today, and I asked a member of my staff for the tabulation. I hesitate to give it to you because I think, glancing at this, that I have detected a statistical flaw. But, the general answer to your question is that the average is definitely longer than 3 years, although it has come down in recent years. Mr. H A N N A F O R D . Thank you. Mr. Chairman, I will answer the quorum and return. Mr. M I T C H E L L . A l l right. Dr. Burns, let me just take this time to make one or two points. First of all, I want you and the other members of the subcommittee to know that we canvassed by mail a number of prominent academic and business economists on this bill. An analysis of the response was made by the Library of Congress. A preliminary count of the responses received to date shows 34 generally in favor of the bill, and only 14 opposed. Included among those in favor of the bill are John Kenneth Galbraith and Milton Friedman, and a number of ex-Federal Reserve officials. So, there is indeed support for the bill from persons who are knowledgeable in this area. These letters are available for inspection from the subcommittee staff. The second observation I would like to make is that since I have been in Congress, and I am certain before I came into Congress, similar legislation has been advanced, and generally there has been no great criticism about the legislation itself. The feeling has been that this is good and desirable. But always since I have been here, and I have learned, in the past, everybody says, "But this is not the time to do it." Well, the question comes to my mind, when will be the proper time? Let me just speak to you on one or two other things. You have talked about the need for this legislation, that you would probably favor it if need could be established. I think that there are two major weaknesses in the present situation that show such a need. First, that the Chairman can be appointed in an oddnumbered year, when there is no vacancy on the Board, and this greatly restricts the President's choice. Obviously this bill would remedy that situation. Second, that the Chairman can be appointed in a Presidential election year under existing legislation. That creates, as I hope you would see, potential political battles. So, the bill we have before us does address at least those two basic needs. The second major point I want to clear up is that there is nothing in this legislation—and you have not raised the issue, but some of the members of the subcommittee have—that says that the President under this bill will have the power to direct monetary policy. Nowhere in it is that even mentioned. A l l the bill says is that the President, by making the appointment of his choice, will guarantee 26 that he has access to the economic councils where he does not now have that guarantee. The last point I wanted to make, or to try to clear up, is the matter of the politicization of the Board: even if the President appoints the Chairman, you have a structure that is almost impervious to politicization. There are the seven members on the Board, the 12 members of the Open Market Committee. These are strong, independent people, and I cannot see any danger of politicizing your operation simply because the President names one member, the Chairman. I will admit that perhaps the Chairman has more clout and more power than the other members of the Board. I am convinced that you do. I would raise some questions as to whether or not the Chairman has more power and more clout than 6 or 12. Those are the observations I wanted to make to you. Do you have any response? Dr. B U R N S . I could respond to each of those points, but I have already indicated my basic views. Mr. M I T C H E L L . A l l right. I merely wanted to seize this opportunity to indicate that you did have the opportunity in your testimony to do so. Are there other questions from members of the subcommittee? Mr. W A T K I N S . One thing I have been trying to evaluate in my own mind a little bit, is that Chairman Burns has tried to keep politics out of his own decisions. This is my observation, anyway. Even though the structure is there with a number of other members, it is hard to feature a Chairman of the Federal Reserve Board that might be very political. Because of the past history of your activities, I wonder if there couldn't be a backlash just a little bit; if a Chairman wanted to be really devious be on another administration, he could do it, in my thinking. You know, I am not looking at the present. I am looking at some possibilities we might get other than someone like Chairman Burns. Isn't that possibility fairly great? Dr. B U R N S . I think the possibility is very small. I cannot deny the possibility. A l l that I can say is we are dealing with a dimension of life from which I don't see any real chance of escaping. Exactly the same could be said of the Chairman of the Joint Chiefs of Staff, exactly the same could be said of a Supreme Court Justice, or of a Chief Justice. In the last analysis, much of life and much of government has to be based on experience and on trust. Let's say that Mr. Mitchell's bill becomes law. Then the President would have the opportunity, after serving for 1 year, to name a Chairman who is entirely congenial to him. Very well; he makes his decision. A year later or possibly a month later he may discover that the individual whom he appointed is not really as congenial to him or to his views as he thought. He might feel he had made a mistake. Many of us have had the opportunity to appoint people, and I think we have learned that now and then, and perhaps with some frequency, we make mistakes. I know I have. The chances are that most of you who have had similar opportunities also have not chosen wisely in each instance. 27 So, there is only one answer to your question: the possibility is there. In terms of history, I would not be concerned about it because, while the possibility is there, the chance is so remote, and is so indissolubly linked with the nature of life itself—that I myself would not give any heavy weight to it. Mr. WATKINS. Thank you. Mr. MITCHELL. Mr. Chairman, there are no further questions. We do thank you very much for taking the time out to come here. We will submit questions to you in writing for response. With a special note of thanks, the hearing is now adjourned. Thank you. Dr. BURNS. Thank you, Mr. Chairman. I will be glad to answer your questions. [The following are written questions submitted by Chairman Mitchell to Dr. Burns, along with Dr. Burns' replies:] CHAIRMAN O F THE BOARD O F GOVERNORS F E D E R A L R E S E R V E SYSTEM WASHINGTON, D. C . 20551 July 19, 1977 The Honorable Parren J. Mitchell Chairman Subcommittee on Domestic Monetary Policy Committee on Banking, Finance and Urban A f f a i r s House of Representatives Washington, D. C. 20515 Dear Mr. Chairman: In response to your letter of June 29, I am pleased to furnish the enclosed answers for inclusion i n the record of the hearing on H. R. 6273 held on June 23. I have also sent directly to Congressman Hansen a copy of my responses to his questions. I hope this information w i l l be useful to your Subcommittee. Please let m know i f I can be e of further assistance. Sincerely yours, Arthur F. Burns Enclosure 28 Questions from Parren J . M i t c h e l l , Chairman, Subcommittee on Domestic Monetary P o l i c y , June 23, 1977: (1) President Kennedy once stated that, "the p r i n c i p a l o f f i c e r of the (Federal Reserve) System must have the confidence of the President. This i s e s s e n t i a l f o r the e f f e c t i v e coordination of the monetary, f i s c a l and f i n a n c i a l p o l i c i e s of the Government. I t i s e s s e n t i a l f o r the e f f e c t i v e representation of the Federal Reserve System i t s e l f i n the formulation of Executive p o l i c i e s a f f e c t i n g the system's r e s p o n s i b i l i t i e s . " Would you comment on t h i s statement? ( l a ) President Kennedy made the statement quoted above i n a message to Congress on A p r i l 17, 1962, i n which he submitted a recommendation to amend the Federal Reserve Act to make the terms of the Chairman of the Federal Reserve Board and the Vice-Chairman generally coterminous with the term of the President. Apparently he thought that allowing the President to appoint h i s (or her) own Federal Reserve Chairman close to h i s (or her) inauguration would provide the confidence the President must have i n the Federal Reserve Chairman f o r e f f e c t i v e co-ordination of monetary and f i s c a l p o l i c i e s and f o r the Federal Reserve to be e f f e c t i v e l y represented i n the formulation of f i s c a l and other p o l i c i e s a f f e c t i n g the Federal Reserve's r e s p o n s i b i l i t i e s . Would you comment on t h i s ? Answers: that i t I c e r t a i n l y concur w i t h President Kennedy's judgment i s important f o r the President to have confidence i n the Chairman of the Board of Governors of the Federal Reserve System. That confidence must u l t i m a t e l y be based, however, on the p r o f e s s i o n a l a b i l i t y and character of the person who holds the o f f i c e of Chairman. I t i s not a p r e r e q u i s i t e f o r such confidence that the President appoint the Chairman w i t h i n a s p e c i f i e d time a f t e r h i s own inauguration, indeed, that he appoint the Chairman at a l l . by recent h i s t o r y . This i s demonstrated Presidents Eisenhower, Kennedy and Johnson had confidence i n Chairman Martin, and saw f i t to reappoint him to o f f i c e , even though none of them had been responsible f o r h i s i n i t i a l as Chairman. or, selection 29 (2) Back i n 1968 the F e d e r a l Reserve Board, speaking through then Chairman M a r t i n , i n responding to a q u e s t i o n from House Banking Committee Chairman Wright Patman, agreed t h a t : "A change i n the law e n a b l i n g the P r e s i d e n t to appoint a Chairman o f h i s own choice shortlya f t e r h i s i n a u g u r a t i o n would p r o v i d e a p r a c t i c a l b a s i s f o r e f f e c t i v e c o o r d i n a t i o n of F e d e r a l Reserve monetary p o l i c i e s w i t h the f i s c a l and f i n a n c i a l p o l i c i e s of the e x e c u t i v e branch of the Government without a f f e c t i n g the e x e r c i s e of independent judgment by the Board i n the d i s c h a r g e o f the r e s p o n s i b i l i t i e s imposed upon i t by Congress. Such an arrangement would, i n f a c t , a f f o r d a means by which the Federal Reserve, through the Chairman o f the Board, would be b e t t e r able to p a r t i c i p a t e , a t the h i g h e s t l e v e l o f the e x e c u t i v e branch, i n cont i n u i n g e f f o r t s t o promote the sound conduct of the Government's f i n a n c i a l a f f a i r s . " Would you comment on t h i s ? Answer: As I i n d i c a t e d i n my own d i r e c t testimony b e f o r e the Subcommittee on June 23, I have i n the past expressed some views similar to those that Chairman M a r t i n expressed i n 1968. c a r e f u l l y considered view, as I have i n d i c a t e d , is My present that on balance a law e x p l i c i t l y l i n k i n g the terms of the Chairman and the P r e s i d e n t would a m p l i f y the p o l i t i c a l aspects o f t h i s appointment and t h e r e f o r e would be u n d e s i r a b l e . The f a c t that I was not a p p o i n t e d by President F o r d nor by P r e s i d e n t C a r t e r d i d not i n the past d i m i n i s h , nor i s now d i m i n i s h i n g , my a b i l i t y to p a r t i c i p a t e very a c t i v e l y a t the highest l e v e l o f our government i n promoting sound f i n a n c i a l 92-910 o - 77 - 5 it policies. 30 (3) In l i g h t of your observation that "there i s some f o r c e i n the argument that the Chairman of the Board of Governors should be congenial to the P r e s i d e n t , " should we leave to chance the p o s s i b i l i t y that e x i s t s under current arrangements that a Chairman could be appointed by an outgoing President and serve f o r 3-1/2 years of a new P r e s i d e n t ' s term? Should we wait f o r s p e c i f i c developments such as t h i s to demonstrate the need f o r t h i s l e g i s l a t i o n ? Is i t not appropriate to a n t i c i p a t e such developments as H.R. 6273 does? Answer: I do not concur w i t h the suggestion that an amendment to the Federal Reserve. Act of t h i s magnitude should be based upon the hypothetical chance that a newly inaugurated President might have to wait as long as three and one-half years to make h i s own s e l e c t i o n of the Chairman of the Federal Reserve Board, On the contrary, since the present procedure has worked e f f e c t i v e l y f o r over 40 years, I think that Congress i t s e l f would want to i n s i s t that a strong showing of need, based upon a c t u a l experience, be made before i t enacted such an amendment. I do not b e l i e v e any such c&se has been made. I should a l s o point out that even though a President might have to wait over three years to designate a Chairman, he i s assured of having to f i l l at l e a s t two seats on the Board during h i s term i n o f f i c e . first A President e l e c t e d f o r a second term w i l l have the opportunity to s e l e c t a majority of the Board members, during h i s incumbency. 31 (4) S t a r t i n g from the premise that the President must designate a Federal Reserve Chairman at l e a s t once every P r e s i d e n t i a l term, which i s current law, are there any s p e c i a l advantages or d i s advantages to the appointment being made i n p a r t i c u l a r years? F i r s t , consider odd and even years. Wouldn't you agree that even-numbered years are b e t t e r i n view of the f a c t that under current law a vacancy on the Board of Governors occurs r o u t i n e l y on January 31 of every even-numbered year, and that without a vacancy-that i s , i n odd-numbered years--a President could have to pick the Chairman from among the seven s i t t i n g members of the Board? Second, consider the two even-numbered years i n the P r e s i d e n t i a l c y c l e . One i s a P r e s i d e n t i a l e l e c t i o n year. Surely appointment i n t h i s year should be avoided i f p o s s i b l e f o r several reasons, i n c l u d i n g that i t ' s three years i n t o the P r e s i d e n t ' s term, as w e l l as that he could be running f o r r e - e l e c t i o n . Don't you agree? Answer: I do not have a strong preference f o r having the Chairman designated i n an even-numbered year rather than an odd-numbered year. I do agree that i t would be undesirable to have the s e l e c t i o n of the Chairman become an issue i n an e l e c t i o n campaign*. However, since the vacancy would occur at the end of January i n an e l e c t i o n year, the appointment to f i l l that vacancy could obviously be made i n the preceding October or November—in other words, about a year before the e l e c t i o n . In that event, i t seems u n l i k e l y that the s e l e c t i o n of the Chairman would become an issue i n the e l e c t i o n campaign. 32 (5) You have indicated that you have frequent and r e g u l a r l y scheduled conferences w i t h the President and w i t h high l e v e l P r e s i d e n t i a l appointees. In working w i t h the current administration, which i s not only new but a l s o of a d i f f e r e n t p o l i t i c a l persuasion than the administrat i o n which appointed you to the Chairmanship, do you f e e l that you are given adequate opportunities f o r exchanging views about the n a t i o n ' s economy and f o r d i s c u s s i n g or debating a l t e r n a t i v e courses for economic policies? Are you confident that when President Carter f i l l s the next four year term of Chairman of the Board, he w i l l have had s u f f i c i e n t opportunity to observe and evaluate your performance? Because the terms of the President and the Chairman both are f o r four years and as a r e s u l t each President must at some t i n e during his (or her) own term appoint a Chairman, i t would appear on the basis of your own experience that the one year l a g i n making t h i s appointment, which i s assured by H.R. 6273 and which by happenstance i s the timing f o r your own term, provides s u f f i c i e n t time f o r Presidents to f u l l y and o b j e c t i v e l y evaluate the performance of incumbent chairmen i n deciding whether to reappoint. Because you have i n your testimony expressed concern about reappointment of incumbent chairmen, I would l i k e you to elaborate on t h i s point i n terms of your own timing of o f f i c e as Chairman and your experience under t h i s arrangement. Answer: As I have stated p u b l i c l y , I am extremely pleased with the opportunities f o r meaningful d i s c u s s i o n on issues of mutual concern that President Carter and h i s Administration have afforded the Federal Reserve. Whether President Carter has had s u f f i c i e n t opportunity to evaluate my performance as Chairman i s a question that, f o r obvious reasons, must be addressed to others. 33 Responses to Congressman Hansen's Questions (1) The F u l l Employment Act of 1946 e s t a b l i s h e s "maximum purchasing power" as a n a t i o n a l goal f o r economic p o l i c i e s . It is not at a l l c l e a r that t h i s must be i n t e r p r e t e d as meaning " s t a b l e prices". H. Con. Res. 133 does mention s t a b l e p r i c e s as a s p e c i f i c p o l i c y goal, and urges that monetary growth be commensurate w i t h our p o t e n t i a l to expand production to promote t h i s g o a l . Please e x p l a i n the p r a c t i c a l usefulness to the Federal Reserve of the commitment by Congress to s t a b l e prices and of urging that monetary growth be consistent w i t h p o t e n t i a l economic growth to promote t h i s g o a l . Would you view a f u l l e r , more formal commitment as d e s i r a b l e ? Answer: While p r i c e s t a b i l i t y has t r a d i t i o n a l l y been viewed as a major o b j e c t i v e of n a t i o n a l economic p o l i c y , the language of Employment Act of 1946 i s , as you note, unclear on the p o i n t . the On the other hand, H. Con. Res. 133 does set f o r t h the sense of Congress that the Federal Reserve should "maintain long run growth of the monetary and c r e d i t aggregates commensurate w i t h the economy's long run p o t e n t i a l to increase production, so as to promote e f f e c t i v e l y the goals of maximum employment, s t a b l e p r i c e s , and moderate long term i n t e r e s t r a t e s . " The three goals described are, of course, c l o s e l y r e l a t e d since p e r s i s t e n t i n f l a t i o n and i n f l a t i o n a r y expecta- tions are inconsistent w i t h e i t h e r c o n t i n u i n g high l e v e l s of employment or moderate long-term i n t e r e s t rates. This language i s valuable because i t makes c l e a r the i n t e n t of Congress that p r i c e s t a b i l i t y should be included among the objectives of monetary p o l i c y . No f u l l e r or more formal statement v/ould seem to be required f o r that purpose. I t might be u s e f u l , however, f o r Congress to make a s i m i l a r l y c l e a r statement w i t h respect to the goals of other types of economic p o l i c y , p a r t i c u l a r l y f i s c a l p o l i c y . This can be most r e a d i l y achieved by amending the Employment A c t - - a course I have long advocated. 34 (2) One who was u n f a m i l i a r w i t h a f f a i r s i n the United States and looked s o l e l y to the l e t t e r of the Federal Reserve Act to discover the r o l e of the Chairman of the Board of Governors would conclude t h a t , w i t h respect to domestic monetary p o l i c y , that o f f i c e r i s p r i m a r i l y an a d m i n i s t r a t i v e t o o l of the Board. B a s i c a l l y , he i s "the a c t i v e executive o f f i c e r " of the Board, a c t i n g under the s u p e r v i s i o n of the Board* Would i t not be more i n keeping w i t h that idea i f , instead of P r e s i d e n t i a l appointment and confirmation, the Chairman were to be e l e c t e d by the members o f the Board from among t h e i r own number? Answer: I do not t h i n k that the Chairman of the Federal Reserve should be e l e c t e d by the members of the Board from among t h e i r own number. Board members are selected f o r a v a r i e t y of t a l e n t s and backgrounds that they may b r i n g to the d e l i b e r a t i o n s of the Board, and a P r e s i d e n t does not n e c e s s a r i l y choose h i s nominees because of t h e i r q u a l i f i c a t i o n to serve as Chairman. The s e l e c t i o n of the Chairman should be made from among the broadest p o s s i b l e range of candidates, and should not be l i m i t e d by s t a t u t e to those who happen to be Board members at any p a r t i c u l a r time. I n p r o v i d i n g f o r d e s i g n a t i o n of the Chairman by the P r e s i d e n t , the F e d e r a l Reserve Act i s c o n s i s t e n t w i t h the procedure a p p l i c a b l e to v i r t u a l l y a l l other major multi-member agencies of the Government. Dr. B U R N S . I want to thank you for your gracious chairmanship. Mr. M I T C H E L L . Thank you. [Whereupon, at 12 noon the subcommittee adjourned, subject to che call of the Chair.] APPENDIX The Following Analysis Relevant to the Provisions of H.R. 6273, Was Received From the Congressional Research Service of the Library of Congress for Inclusion in the Record (35) THE LIBRARY OF CONGRESS Congressional Research Service WASHINGTON, D.C. 20540 CONSIDERATIONS RELEVANT TO PROVISIONS OF H.R. 6273: AN ANALYSIS BASED ON A SURVEY OF SELECTED ECONOMISTS AND OTHERS WITH CENTRAL BANKING EXPERIENCE Prepared for the Subcommittee on Domestic Monetary Policy, Committee on Banking Finance and Urban A f f a i r s , United States House of Representatives by Roger S. White Analyst i n Money and Banking Economics D i v i s i o n June 20, 1977 (Revised, June 28, 1977) (37) 38 CONSIDERATIONS RELEVANT TO PROVISIONS OF H.R. 6273: AN ANALYSIS BASED ON A SURVEY OF SELECTED ECONOMISTS AND OTHERS WITH CENTRAL BANKING EXPERIENCE I. Introduction. The F e d e r a l Reserve A c t Amendments o f 1977, H.R. 6273, was duced on A p r i l 18, 1977 by R e p r e s e n t a t i v e P a r r e n J . M i t c h e l l , intro- Chairman o f the Subcommittee on Domestic Monetary P o l i c y o f the House Committee on Banking, F i n a n c e and Urban A f f a i r s . i o n s on H.R. 6273, M r . M i t c h e l l To s o l i c i t wide-ranging expert opin- sent a l e t t e r o f i n q u i r y on A p r i l 26, 1977 t o a c r o s s s e c t i o n o f b u s i n e s s and academic economists, former Governors o f the F e d e r a l Reserve Board, former and present F e d e r a l Reserve Bank P r e s i d e n t s and s e l e c t e d c l a s s C d i r e c t o r s o f the r e g i o n a l F e d e r a l Reserve Banks. Of those respondents t o t h i s l e t t e r from whom comments on p r o v i - s i o n s o f H.R. 6273 have been r e c e i v e d to date, 35 appear t o f a v o r the bill as a whole, 16 appear t o oppose i t and the p o s i t i o n o f one respondent w i t h r e s p e c t t o the b i l l i s not e a s i l y c l a s s e d (see accompanying table). In the f o l l o w i n g s e c t i o n s o f t h i s paper, c o n s i d e r a t i o n s r e l e v a n t to the p r o v i s i o n s o f H.R. 6273 are presented i n terms o f the views submitted response t o the survey i n i t i a t e d by Mr. M i t c h e l l . in S e l e c t e d e x c e r p t s from i n - d i v i d u a l responses appear throughout the f o l l o w i n g s e c t i o n s . I n each case, e x c e r p t s are f o l l o w e d by a p a r e n t h e t i c a l r e f e r e n c e t o the author o f the comment. A copy o f Mr. M i t c h e l l ' s copies of a l l l e t t e r appears i n an appendix t o g e t h e r w i t h responses which are arranged i n a l p h a b e t i c a l order by respondent. 39 1/ TABULATION OF RESPONDENTS* POSITIONS ON H.R. 6273 Those appearing t o favor Business Affiliation Name F e d e r a l Reserve Affiliation Academics: BACH, George L . Stanford U n i v e r s i t y Department o f Economics CHRIST, C a r l F . The Johns Hopkins U n i v e r s i t y Department o f P o l i t i c a l Economy DeWALD, W i l l i a m G. Ohio State U n i v e r s i t y Department o f Economics DUTT0N, Dean S. Brigham Young U n i v e r s i t y Department o f Economics FAND, David Wayne S t a t e U n i v e r s i t y Department o f Economics I. FRIEDMAN, M i l t o n Hoover I n s t i t u t i o n Stanford, C a l i f o r n i a GALBRAITH, John Kenneth Harvard U n i v e r s i t y Department o f Economics H0SEK, W i l l i a m R. U n i v e r s i t y o f New Hampshire The Whittemore School o f Business and Economics KAUFMAN, George G. U n i v e r s i t y o f Oregon C o l l e g e o f Business A d m i n i s t r a t i o n 40 TABULATION OF RESPONDENTS' POSITIONS ON H.R. 6273 (Continued) i/ Those a p p e a r i n g t o favor Business Affiliation Name Academicst F e d e r a l Reserve Affiliation (Continued) MAYER, Thomas MELTZER, A l l a n H. MODLIGIANI, Franco U n i v e r s i t y of C a l i f o r n i a - D a v i s Department of Economics Carnegie-Mellon University Graduate School o f I n d u s t r i a l Administration Massachusetts I n s t i t u t e o f Technology A l f r e d P . Sloan School o f Management SOLOW, Robert M. Massachusetts I n s t i t u t e o f Technology Department o f Economics C l a s s C D i r e c t o r and Deputy Chairman o f FRB o f Boston STROTZ, Robert H. President, University C l a s s C D i r e c t o r and Deputy Chairman o f FRB o f Chicago SYLLA, North C a r o l i n a State U n i v e r s i t y at R a l e i g h Department o f Economics Richard Northwestern TOBIN, James Yale University Department o f Economics YOHE, W i l l i a m P . Duke U n i v e r s i t y Department o f Economics 41 TABULATION OF RESPONDENTS' POSITIONS ON H.R. 6273 (Continued) i/ Those appearing to favor Name F e d e r a l Reserve Affiliation Business Affiliation Business and F i n a n c i a l Community: GIBSON, W i l l i a m E. V i c e - P r e s i d e n t , Manager Fixed-Income Research Department Smith Barney, H a r r i s Upham & Company, I n c . HOADLEY, WALTER E . 2/ Executive V i c e - P r e s i d e n t Bank o f American N a t i o n a l T r u s t & Savings A s s o c i a t i o n JORDAN, J e r r y L . Senior V i c e - P r e s i d e n t , Economist P i t t s b u r g h N a t i o n a l Bank KAUFMAN, Henry P a r t n e r and Member o f E x e c u t i v e Committee Salomon B r o t h e r s MOSKOWITZ, Arnold K. V i c e - P r e s i d e n t , Research C h i e f Economist Dean W i t t e r & Company, I n c . OLSEN, L e i f H. Senior V i c e - P r e s i d e n t Economist C i t i b a n k , N.A. PACKER, Stephen B. C h i e f Economist Mobil O i l Corporation the 42 TABULATION OF RESPONDENTS' POSITIONS ON H.R. 6273 (Continued) i/ Those a p p e a r i n g t o favor Business Affiliation Name Business and F i n a n c i a l Community: F e d e r a l Reserve Affiliation (Continued) SCH0TT, F r a n c i s H. V i c e - P r e s i d e n t , Economist The E q u i t a b l e L i f e Assurance S o c i e t y o f the U n i t e d States SIFF, President S i f f Oakley Marks, Jesse SPRINKEL, Beryl Inc. Executive Vice-President, Economist H a r r i s T r u s t & Savings Bank W0JNIL0WER, A l b e r t M. Senior V i c e - P r e s i d e n t , Director The F i r s t Boston C o r p o r a t i o n Former F e d e r a l Reserve Governors and Reserve Bank P r e s i d e n t s : President, National C i t y Bancorporation Former P r e s i d e n t o f FRB o f M i n n e a p o l i s ; former Governor E L L I S , George H. President, Chief Executive O f f i c e r Home Savings Bank Boston, Massachusetts Former P r e s i d e n t o f FRB o f Boston HAYES, Chairman, Morgan Stanley International Former P r e s i d e n t o f FRB o f New York DEMING, F r e d e r i c k Alfred L. 43 TABULATION OF RESPONDENTS' POSITIONS ON H.R. 6273 (Continued) i/ Those appearing t o favor F e d e r a l Reserve Affiliation Business Affiliation Name Former F e d e r a l Reserve Governors and Reserve Bank P r e s i d e n t s : (Continued) HOLLAND, Robert C. P r e s i d e n t , Committee f o r Economic Development Former Governor ROBERTSON, J . Of Counsel t o Bierbower & R o c k e f e l l e r Former Governor and V i c e Chairman o f the Board o f Governors Vice-President General Motors Former P r e s i d e n t FRB o f Chicago of retired Former P r e s i d e n t FRB o f New Y o r k of Business Affiliation F e d e r a l Reserve Affiliation L. SCANLON, Charles J. SPROUL, A l l a n Corporation Those appearing t o oppose Name Academics: ALCHIAN, Armin University of Los Angeles Department o f CaliforniaEconomics 44 TABULATION OF RESPONDENTS' POSITIONS ON H.R. 6273 (Continued) Those a p p e a r i n g oppose to Business Affiliation Name Academics: i/ F e d e r a l Reserve Affiliation (Continued) CARSON, Deane Columbia U n i v e r s i t y o f the C i t y o f New York Graduate School of Business HODGMAN, Donald R. University of I l l i n o i s a t Urbana-Champaign Department o f Economics KEMMERER, Donald L . U n i v e r s i t y of I l l i n o i s a t Urbana-Champaign Department o f Economics SAULNIER, Raymond J . Columbia U n i v e r s i t y Barnard C o l l e g e Department o f Economics (Former Chairman o f the C o u n c i l o f Economics A d v i s o r s , 1956-1961) SINGLETARY, O t i s A. President, University o f Kentucky Class C Director o f FRB o f C l e v e l a n d TIMBERLAKE, R i c h a r d H. Jr. U n i v e r s i t y o f Georgia Department o f Banking & Finance 45 TABULATION OF RESPONDENTS' POSITIONS ON H.R. 6273 (Continued) i/ Those appearing t o oppose F e d e r a l Reserve Affiliation Business Affiliation Name Business and F i n a n c i a l Community: ALIBRANDI, Joseph F . President, Officer ANDERSON, Harold W. President Omaha W o r l d - H e r a l d Co. FORD, Henry I I Jr. Executive Chairman o f the Board o f FRB o f San F r a n c i s c o Chairman o f the Board Ford Motor Company GERNERT, Herbert E . Chief Chairman o f the Board o f FRB o f Kansas C i t y Financial Consultant, Investment A d v i s o r Vilas-Fischer Associates, Ltd KELLNER, I r w i n L . Vice-Pres ident Manufacturers Hanover T r u s t Company MATHEWS, I r v i n g A. Chairman o f the Board, Chief Executive O f f i c e r Frost Brothers, Inc. McKINNEY, George W. J r . Senior V i c e - P r e s i d e n t I r v i n g T r u s t Company POWELL, E . Angus President C h e s t e r f i e l d Land & Timber Company Chairman o f the Board o f FRB o f Dallas Chairman o f the Board o f FRB o f Richmond 46 TABULATION OF RESPONDENTS' POSITIONS ON H.R. 6273 (Continued) Those a p p e a r i n g oppose i/ to Business Affiliation F e d e r a l Reserve Affiliation Former F e d e r a l Reserve Governors and Reserve Bank P r e s i d e n t s : CLAY, George H. Those d i f f i c u l t classify Kansas C i t y , M i s s o u r i Business Affiliation F e d e r a l Reserve Affiliation to Name Business and F i n a n c i a l STYERS, A l e t a D. Former P r e s i d e n t o f FRB o f Kansas C i t y Community: Manager, Economics A n a l y s i s Babcock & Wilcox Company 1/ C l a s s i f i c a t i o n and i d e n t i f i c a t i o n o f respondents, based on c o n s u l t a t i o n w i t h S t a f f o f the House Subcommittee on Domestic Monetary P o l i c y . In a d d i t i o n t o respondents c l a s s e d i n t h i s t a b u l a t i o n , t e n respondents dec l i n e d t o comment on the l e g i s l a t i o n . 2/ C l a s s i f i c a t i o n based on views o f a task f o r c e on f i n a n c i a l s t r u c t u r e which were forwarded by Mr. Hoadley. institutions 47 A. Issues a s s o c i a t e d w i t h H.R. 6273. A p r i n c i p a l f e a t u r e o f H.R. 6273 r e l a t e s t o the t i m i n g o f the terms of o f f i c e f o r the Chairman and V i c e Chairman o f the Board o f Governors the F e d e r a l Reserve System. I t would a s s u r e t h a t the f o u r - y e a r terms o f the chairman and the v i c e chairman would commence a t a f i x e d time i n l a t i o n t o each new P r e s i d e n t i a l a d m i n i s t r a t i o n , i n the l i f e of o f each P r e s i d e n t i a l re- such f i x e d time b e i n g e a r l y administration. T h i s f e a t u r e , as developed i n H.R. 6273, r e t a i n s s e v e r a l signifi- cant e x i s t i n g p r o v i s i o n s r e l a t i n g t o appointments t o the two F e d e r a l Reserve positions. The l e n g t h o f the terms o f o f f i c e would remain unchanged a t years and the P r e s i d e n t i a l a u t h o r i t y t o make appointments t o these four offices would not be a l t e r e d . The i n n o v a t i v e aspect o f H.R. 6273 i s plicit the i n t r o d u c t i o n o f an e x - and r e g u l a r i z e d c h r o n o l o g i c a l r e l a t i o n s h i p between the terms o f chairman and v i c e chairman and the terms o f the P r e s i d e n t . arrangements, there i s not such f i x e d r e l a t i o n s h i p . chairman and v i c e chairman are f i l l e d Under The p o s i t i o n s f o r f o u r - y e a r terms upon the the current of expira- t i o n o f the term o f o f f i c e f o r an incumbent or whenever a vacancy o c c u r s f o r any o t h e r reason. The i n t r o d u c t i o n o f r e g u l a r i z e d t i m i n g f o r terms o f o f f i c e for the chairman and v i c e chairman as p r o v i d e d f o r i n H.R. 6273 i n v o l v e s a combinat i o n o f s e v e r a l d i s t i n c t elements: a) an e x p l i c i t s h i p i n which the commencement o f terms o f o f f i c e chronological relation- f o r the two F e d e r a l 48 Reserve Board o f f i c i a l s o c c u r s e a r l y i n each P r e s i d e n t i a l administration; b) the d e s i g n a t i o n o f the exact t i m i n g , or l e n g t h o f l a g i n t h i s c h r o n o l o g i c a l o r d e r i n g ; and c) p r o v i s i o n s ed p o s i t i o n s , i z e d terms. f o r f i l l i n g the two a p p o i n t - s h o u l d v a c a n c i e s occur b e f o r e the e x p i r a t i o n o f the r e g u l a r The views on the t i m i n g o f the terms o f o f f i c e presented by those r e s p o n d i n g t o Mr. M i t c h e l l ' s l e t t e r c a l l i n g f o r expert o p i n i o n s on H.R. 6273 are d i s c u s s e d below i n s e c t i o n s these establishing I I through V i n terms o f each o f elements. Another f e a t u r e o f the b i l l i s a p r o v i s i o n f o r Senate c o n f i r m a t i o n o f P r e s i d e n t i a l a p p o i n t e e s t o the p o s i t i o n s o f Chairman and V i c e Chairman o f the Board o f Governors. This feature d i f f e r s o f the F e d e r a l Reserve A c t which c a l l tial from c u r r e n t requirements f o r Senate c o n f i r m a t i o n o f a l l ini- appointments t o the seven membership p o s i t i o n s on the Board o f Governors. initial A s p e c i a l c o n f i r m a t i o n proceeding i s not r e q u i r e d f o r the appointment o f a governor who i s being designated a chairman or v i c e chairman. Nor i s a second c o n f i r m a t i o n r e q u i r e d f o r the r e a p p o i n t - ment o f a chairman or v i c e chairman or f o r the d e s i g n a t i o n o f an e x i s t i n g governor t o the p o s i t i o n o f chairman or v i c e chairman. Senate has been informed about i n i t i a l In p r a c t i c e , appointments of governors who are b e i n g a p p o i n t e d t o one o f these p o s i t i o n s . Views o f respondents w i t h r e - spect t o the c o n f i r m a t i o n p r o v i s i o n o f H.R. 6273 are d i s c u s s e d i n the s e c t i o n of t h i s paper, s e c t i o n V I . the final 49 II. R e g u l a r i z e d appointments e a r l y i n P r e s i d e n t i a l terms: respondents' views concerning i m p l i c a t i o n s f o r degree o f P r e s i d e n t i a l i n f l u e n c e over monetary p o l i c y . Among the responses t o Mr. M i t c h e l l ' s comments concerning i m p l i c a t i o n s letter, t h e r e were a number o f f o r the degree o f P r e s i d e n t i a l influence over monetary p o l i c y which would d e r i v e from a s s u r i n g each P r e s i d e n t the o p p o r t u n i t y to appoint a chairman and a v i c e chairman e a r l y i n h i s own term of o f f i c e . V a r i a t i o n s i n respondents' views on t h i s p o i n t do not appear t o be s y s t e m a t i c a l l y r e l a t e d t o p o s i t i o n s taken by the respondents w i t h gard t o the d e s i r a b i l i t y o f r e g u l a r i z e d e a r l y A. No change i n extent o f P r e s i d e n t i a l re- appointments. influence. Most of the respondents i n d i c a t e t h a t t h e r e would be some i n c r e a s e i n P r e s i d e n t i a l i n f l u e n c e over monetary p o l i c y . An e x c e p t i o n appears to be found i n a comment based on the l i n e o f r e a s o n i n g t h a t the o n l y change would be the timing f o r e x e r c i s i n g i n f l u e n c e on the p a r t o f each President. . . . t h i s b i l l does not add to the P r e s i d e n t ' s power. Under the present system, j u s t as i n the b i l l , the P r e s i d e n t app o i n t s a chairman f o r a f o u r - y e a r term. The o n l y d i f f e r e n c e i s that the P r e s i d e n t ' s power i s s h i f t e d i n time t o c o r r e s pond much b e t t e r w i t h h i s own term o f o f f i c e . What he g a i n s i n power under the b i l l by h a v i n g h i s own Chairman w h i l e i n o f f i c e , he l o s e s by not b e i n g a b l e t o a p p o i n t a chairman who may serve d u r i n g much, or a l l , o f h i s s u c c e s s o r ' s f i r s t term. (Mayer) 50 B. Moderate i n c r e a s e i n P r e s i d e n t i a l influence. Those respondents who p r e s e n t arguments t o support the that P r e s i d e n t i a l conclusion i n f l u e n e would be moderately enhanced, g e n e r a l l y o t h e r safeguards a g a i n s t undue P r e s i d e n t i a l cite power. . . . i n o r d e r f o r monetary p o l i c y t o make i t s maximum c o n t r i b u t i o n t o the economic w e l f a r e o f the country i t i s d e s i r a b l e t h a t the F e d e r a l Reserve System Chairman have the ear of the P r e s i d e n t . I r e c o g n i z e t h a t t o a degree t h i s approach appears t o cont r a d i c t t h e o b j e c t i v e you are t r y i n g t o achieve [ " s h i e l d i n g monetary p o l i c y from sudden ephemeral p o l i t i c a l i n f l u e n c e s " ] . I b e l i e v e what i s o v e r l o o k e d , however, i s the f a c t t h a t w h i l e the Chairman i s t h e spokesman f o r the Board o f Governors, he i s o n l y one o f seven v o t i n g Board members, a l b e i t an important one. While a p u r e l y p o l i t i c a l a p p o i n t ment would be u n f o r t u n a t e and unwelcome, i t i s d i f f i c u l t f o r me t o see how such a s i n g l e appointment c o u l d m a t e r i a l l y a l t e r monetary p o l i c y . (Scanlon) I s h o u l d l i k e t o note s p e c i f i c a l l y t h a t I am i n favor o f the c u r r e n t p r o v i s i o n s f o r t h e number and l e n g t h o f term o f the F e d e r a l Reserve g o v e r n o r s . I t would be t o t a l l y u n d e s i r a b l e t o c o n f e r upon any a d m i n i s t r a t i o n s u f f i c i e n t appointment power t o o b t a i n a m a j o r i t y o f governors w i t h i n a f o u r - y e a r p e r i o d . I a l s o f a v o r the p r e s e n t method o f choosing the members and terms o f o f f i c e o f the F e d e r a l Open Market Committee as w e l l as t h e e x i s t e n c e and powers o f the twelve r e g i o n a l F e d e r a l Reserve Banks. Your b i l l p r o v i d e s f o r a s e n s i b l e method o f e x e r c i s i n g more o r d e r l y and s y s t e m a t i c P r e s i d e n t i a l and Congressional i n f l u e n c e over the F e d e r a l Reserve. (Schott) 51 . . . i t a l s o i s not c l e a r t o me t h a t the v a r i o u s p r o v i s i o n s o f the B i l l n e c e s s a r i l y would " p r e v e n t development o f a l o n g , drawn-out c o n f l i c t between monetary and o t h e r economic p o l i c i e s " as you c l a i m . . . t h e r e i s n o t h i n g i n the B i l l t h a t would guarantee t h a t the Congress and t h e E x e c u t i v e Branch themselves might not be at odds on v a r i o u s matters o f economic p o l i c y — a s they o f t e n t i m e s have been. Secondly, the Chairman and the V i c e Chairman o f the Board a r e but two members ( w i t h one vote each) o f a seven-man board o f Governors, none o f whose terms would be changed by the p r o posed B i l l , and none o f whom would n e c e s s a r i l y c o n s i d e r themselves bound t o support any Chairman o r V i c e Chairman on a l l i s s u e s . ( A l i b r a n d i ) C. P r e s i d e n t i a l i n f l u e n c e s i g n i f i c a n t l y strengthened. A number o f respondents who i n d i c a t e t h a t P r e s i d e n t i a l influence over monetary p o l i c y would be i n c r e a s e d do not e x p l a i n the manner i n which that i n f l u e n c e would be i n c r e a s e d . Such views are sometimes s t r o n g l y im- p l i e d r a t h e r than e x p l i c i t l y s t a t e d by both those f a v o r i n g and opposing the prospect o f i n c r e a s e d P r e s i d e n t i a l influence. I b e l i e v e that H.R. 6273 would tend t o i n c r e a s e the chances o f p o l i t i c i z a t i o n o f the F e d e r a l Reserve system by g i v i n g the E x e c u t i v e Branch a d d i t i o n a l i n f l u e n c e over monetary policy. (Anderson) In my view, t h i s arrangement would tend t o i n c r e a s e the chances of p o l i t i c i z i n g the System by g r a n t i n g t o the E x e c u t i v e Branch a d d i t i o n a l i n f l u e n c e over monetary p o l i c y . (Clay) In some ways, g i v i n g every P r e s i d e n t the power t o a p p o i n t " h i s own" Chairman a f t e r one year i n o f f i c e c o u l d have the e f f e c t o f making such appointments more p o l i t i c a l than they are at p r e s e n t . T h i s may not be at a l l bad. (Sylla) 52 The p r o v i s i o n s a r e w e l l - c o n s i d e r e d and important and remove an anomaly from the law which among other t h i n g s , keeps a P r e s i d e n t , subject to appropriate Congressional r e s t r a i n t and o v e r s i g h t , from h a v i n g f u l l r e s p o n s i b i l i t y f o r h i s economic p o l i c y . (Galbraith) III. R e g u l a r i z e d appointments e a r l y i n P r e s i d e n t i a l terms: respondents' views c o n c e r n i n g consequences or nature o f r e s u l t i n g P r e s i d e n t i a l influence. The a b i l i t y o f the P r e s i d e n t t o appoint a chairman and v i c e man e a r l y i n h i s own term may have i m p l i c a t i o n s chair- f o r monetary p o l i c y . The p r i n c i p a l p o i n t addressed by the respondents i n t h i s regard p e r t a i n s t o the possibility t h a t the c a p a b i l i t y o f the P r e s i d e n t t o c o o r d i n a t e economic p o l i c i e s might be enhanced. national P e r c e p t i o n s o f the respondents con- c e r n i n g the s t r e n g t h o f t h i s c o o r d i n a t i v e c a p a b i l i t y tends t o be d i r e c t l y r e l a t e d w i t h t h e i r views r e g a r d i n g the degree t o which P r e s i d e n t i a l ence g e n e r a l l y would be enhanced. this coordinative implication, influ- Opinions concerning the d e s i r a b i l i t y i n most cases, appear t o form the b a s i s of for the p o s i t i o n taken by i n d i v i d u a l respondents on the b i l l as a whole. A. C o o r d i n a t i o n o f economic p o l i c i e s , not an i s s u e . Among those respondents who i n d i c a t e that P r e s i d e n t i a l would be a f f e c t e d o n l y s l i g h t l y , g i v e n much w e i g h t . if at a l l , influence the c o o r d i n a t i v e i s s u e i s not 53 I support the i n t e n t and the s p e c i f i c s o f H.R. 6273. Howe v e r , I d o n ' t expect that i t w i l l make any dramatic change i n the conduct o f monetary p o l i c y . * * * * * * * * * * * * * * * * * * * * N e v e r t h e l e s s , I t h i n k i t important t h a t the P r e s i d e n t app o i n t h i s own Chairman even i f the o n l y e f f e c t i s t o i n c r e a s e c o n f i d e n c e i n the p o t e n t i a l s u c c e s s o f h i s own economic program. (Hosek) . . . I b e l i e v e the change t h a t would be produced by your b i l l would be a modest improvement on b a l a n c e . I use the word "modest" a d v i s e d l y ; I b e l i e v e the improvement i n communicat i o n and c o o r d i n a t i o n o f views would p r o b a b l y be o f comp a r a t i v e l y small dimensions. To say the same t h i n g another way, I b e l i e v e that even i n the absence o f such l e g i s l a t i o n , the incoming P r e s i d e n t and the incumbent Chairman o f the F e d e r a l Reserve Board have o r d i n a r i l y over the decades found t h e i r own i n f o r m a l ways o f managing a s u i t a b l e degree o f communication and c o n s u l t a t i o n . (Holland) B. C o o r d i n a t i o n moderately enhanced ( b i l l proponents). Those respondents who i n d i c a t e t h a t P r e s i d e n t i a l i n f l u e n c e over mone- t a r y p o l i c y would be moderately enhanced g e n e r a l l y c o n c l u d e t h a t t i o n o f economic p o l i c i e s by the P r e s i d e n t would be improved. i n t h i s group who favor the b i l l coordina- Respondents t y p i c a l l y agree t h a t such c o o r d i n a t i o n p r o p e r l y the r e s p o n s i b i l i t y o f e l e c t e d officials. I support your b i l l . I have l o n g f e l t t h a t the p r e s e n t a r r a n g e ment o f the P r e s i d e n t d e s i g n a t i n g the Chairman a p p r o x i m a t e l y a year a f t e r he takes o f f i c e i s a good compromise between the need f o r some independence i n the conduct o f monetary p o l i c y on the one hand and the need f o r the P r e s i d e n t t o have c o n t r o l over the p o l i c i e s which i n f l u e n c e the economy on the other. The P r e s i d e n t has an o v e r a l l r e s p o n s i b i l i t y f o r the w e l l - b e i n g o f the economy, as does the Congress. (Gibson) is 54 . . . s i n c e the P r e s i d e n t i s h e l d accountable f o r economic c o n d i t i o n s t h a t p r e v a i l w h i l e he i s i n o f f i c e , r a t h e r than f o r those t h a t p r e v a i l a f t e r he has l e f t o f f i c e , h i s i n f l u e n c e over the F e d e r a l Reserve s h o u l d , to the extent p o s s i b l e , c o i n c i d e w i t h h i s own term o f o f f i c e . (Mayer) I t i s important t o a s s u r e c o n s i s t e n c y o f economic p o l i c y as among t h e A d m i n i s t r a t i o n , Congress, and the F e d e r a l Reserve. The l o n g terms o f F e d e r a l Reserve Governors are ample, I would say e x c e s s i v e s a f e g u a r d s , a g a i n s t " p o l i t i c i z i n g the F e d . " Monetary p o l i c y i s one o f the most important and dec i s i v e and p o w e r f u l instruments a v a i l a b l e to the f e d e r a l government. I t should not be d i v o r c e d from the economic p o l i c i e s made by e l e c t e d r e p r e s e n t a t i v e s o f the p e o p l e . (Tobin) C. C o o r d i n a t i o n moderately enhanced ( b i l l opponents) Among those respondents who b e l i e v e t h a t moderately i n c r e a s e d Presi- d e n t i a l i n f l u e n c e over monetary p o l i c y would r e s u l t and t h a t i t would be detrimental, t h e d e t r i m e n t a l aspect h i g h l i g h t e d appears t o be t h a t this b i l l may be one o f a s e r i e s o f a c t s which, c o n s i d e r e d t o g e t h e r , c o u l d n i f i c a n t l y erode the independence o f the F e d e r a l sig- Reserve. . . . H . R . 6273 c o u l d be but the f i r s t s t e p towards a p r o g r e s s i v e e r o s i o n o f procedures and s t r u c t u r a l arrangements which I b e l i e v e have s t o o d the t e s t o f time and experience p r e c i s e l y because they have served the n a t i o n a l i n t e r e s t . (Alibrandi) S i n c e 1913 Congress has made the Board somewhat more r a t h e r than l e s s dependent on the w i l l o f Congress and the P r e s i d e n t . Your H.R. 6273 would c a r r y t h a t a step or two f u r t h e r . (Kemmerer) One respondent who f a v o r s the b i l l set f o r t h comments r e l a t i n g t h i s argument i n a n t i c i p a t i o n t h a t i t would be r a i s e d by b i l l to opponents. 55 A second argument t h a t might be urged a g a i n s t the b i l l i s t h a t any tampering w i t h the F e d e r a l Reserve c o u l d open a Pandora's box, by making changes i n the F e d e r a l R e s e r v e ' s s t r u c t u r e more f a m i l i a r and hence a c c e p t a b l e , t o the publ i c . . . . I f a l l modest changes i n F e d e r a l Reserve s t r u c t u r e are b l o c k e d , then i t may w e l l happen t h a t s t r o n g support f o r r a d i c a l changes develops s i n c e the i s s u e then i s l i k e l y t o become, not the m e r i t s o f a p a r t i c u l a r change, but the q u e s t i o n o f whether any changes a t a l l i n F e d e r a l Reserve s t r u c t u r e are t o be p e r m i t t e d . T h i s would s h i f t the argument on to an i d e o l o g i c a l ground t h a t might make i t d i f f i c u l t t o b l o c k e x c e s s i v e changes when changes e v e n t u a l l y do come. (Mayer) D. C o o r d i n a t i o n s i g n i f i c a n t l y enhanced ( b i l l proponents). B i l l proponents who appear t o b e l i e v e t h a t P r e s i d e n t i a l a b i l i t y e x e r c i s e c o o r d i n a t i v e powers over monetary p o l i c y would be significantly enhanced, g e n e r a l l y b e l i e v e that major economic p o l i c y d e c i s i o n s emanate more d i r e c t l y from the democratic p r o c e s s . to interpret the i m p l i c a t i o n s o f the b i l l to should Such respondents i n terms o f i n c r e a s e d tend Presi- d e n t i a l c o n t r o l over monetary p o l i c y r a t h e r than a s s u r i n g a d i r e c t con- d u i t f o r conveying P r e s i d e n t i a l p o l i c y concerns t o those d e t e r m i n i n g the course o f monetary policy. The F e d e r a l Reserve Board o f Governors and Open Market Comm i t t e e should be somewhat p r o t e c t e d from d a y - t o - d a y p o l i t i c a l pressures w h i l e being b a s i c a l l y r e s p o n s i v e and r e s p o n s i b l e t o the American p u b l i c , represented by the Congress and the President. Thus, i n my judgment the F e d e r a l Reserve a u t h o r i t i e s , under the l e a d e r s h i p o f the Chairman, s h o u l d , b a r r i n g very e x c e p t i o n a l circumstances, f o l l o w p o l i c i e s consonant w i t h the broad economic goals o f the P r e s i d e n t and the Congress, 56 but they s h o u l d have c o n s i d e r a b l e freedom t o c a r r y out t h e i r o p e r a t i n g r e s p o n s i b i l i t i e s i n pursuing those g o a l s , r a t h e r than b e i n g s u b j e c t e d t o d e t a i l e d d i r e c t i v e s from e i t h e r the Congress or t h e A d m i n i s t r a t i o n on these m a t t e r s . I understand your b i l l (Bach) t o take s u b s t a n t i a l l y t h i s position... I l i k e the i d e a o f the b i l l f o r m a l l y r e c o g n i z i n g the p o s i t i o n o f Chairman o f the Board o f Governors as a p o l i t i c a l a p p o i n t ment and the o p e r a t i o n s o f the F e d e r a l Reserve as p o l i t i c a l l y i m p o r t a n t . . . . L o o k a t the evidence o f p o l i t i c a l r e s p o n s i b i l i t y i n economic p o l i c y making. The Congress has been at l e a s t as r e s p o n s i b l e as the P r e s i d e n t and s u r e l y f a r more r e s p o n s i b l e than the s e l f - s e r v i n g government bureaucracy i n i t s budgetary and monetary p o l i c y p r o p o s a l s , p a r t i c u l a r l y s i n c e the Congress began t o a s s e r t i t s c o l l e c t i v e views about f e d e r a l budgets and money growth r a t e s i n 1974 and 1975. (Dewald) E. C o o r d i n a t i o n s i g n i f i c a n t l y enhanced ( b i l l opponents). B i l l opponents who p e r c e i v e s t r o n g elements o f P r e s i d e n t i a l influ- ence over monetary p o l i c y from a s s u r i n g the P r e s i d e n t the a b i l i t y t o make appointments t o the two F e d e r a l Reserve p o s i t i o n s e a r l y i n h i s term, gene r a l l y express c o n c e r n about the nature of i n c r e a s e d P r e s i d e n t i a l The p r i n c i p a l argument appears t o be that e l e c t e d o f f i c i a l s influence. tend t o be more s e n s i t i v e t o s h o r t - t e r m economic developments and t h a t t h i s c o u l d d e t r a c t from monetary p o l i c y f o r m u l a t e d by a more independent F e d e r a l Reserve. Respondents i n t h i s group, as i s the case f o r proponents who i n d i c a t e Presidential i n f l u e n c e would be s i g n i f i c a n t l y enhanced, tend t o the i m p l i c a t i o n s o f the b i l l i n terms o f i n c r e a s e d P r e s i d e n t i a l that interpret control 57 over monetary p o l i c y r a t h e r than a s s u r i n g a d i r e c t c o n d u i t for conveying P r e s i d e n t i a l p o l i c y concerns t o those d e t e r m i n i n g the c o u r s e o f monetary policy. ...when there are d i f f e r e n c e s between the Board and the White House there i s more than an o f f - c h a n c e — c o n s i d e r i n g the longterm as w e l l as the immediate i m p l i c a t i o n s o f p o l i c y dec i s i o n s — t h a t the Board may be r i g h t and the White House may be wrong. O b v i o u s l y , there must be c a r e f u l s t u d y and r e s p e c t f u l c o n s i d e r a t i o n o f White House v i e w s — a n d t h e r e are ample o p p o r t u n i t i e s f o r the communication between Board and White House that t h i s r e q u i r e s — b u t i n the end the Board should be l e f t to e x e r c i s e i t s own judgment. Indeed, i f one d o e s n ' t want a Board that o p e r a t e s i n t h a t c o n t e x t , and i n t h a t manner, one d o e s n ' t want a Board a t a l l . (Saulnier) I b e l i e v e the present system o f a p p o i n t i n g the F e d e r a l Reserve Chairman works best from the p o i n t o f v i e w o f c o n f i d e n c e i n our monetary p o l i c y and i n the v a l u e o f the d o l l a r . Allowi n g each P r e s i d e n t o f the United S t a t e s t o a p p o i n t h i s own Fed Chairman c o u l d , i n my view, p o l i t i c i z e the o f f i c e , f o r c i n g the Fed t o c o n s i d e r o n l y s h o r t - r u n p o l i t i c a l o b j e c t i v e s , i n s t e a d of l o n g - r u n economic s t a b i l i t y . (Kellner) IV. Respondents' views concerning the t i m i n g o f r e g u l a r i z e d (one-year l a g ) . appointments R e g u l a r i z i n g the terms o f the Chairman and V i c e Chairman o f F e d e r a l Reserve w i t h r e s p e c t t o the P r e s i d e n t i a l a d m i n i s t r a t i o n s requires s p e c i f i c a t i o n o f the time at which new appointments t o the F e d e r a l p o s i t i o n s would be e f f e c t i v e . Since both the P r e s i d e n t i a l terms f o r the two F e d e r a l Reserve p o s i t i o n s a r e c u r r e n t l y no change i n the length o f terms would be r e q u i r e d . the Reserve terms and the four-year terms, H.R. 6273 would p r o - 58 v i d e f o r the terms o f the chairman and v i c e chairman t o commence on February 1 i n the year f o l l o w i n g each P r e s i d e n t i a l i n a u g u r a t i o n , a one-year l a g . roughly Debate over the t i m i n g o f r e g u l a r i z e d appointments neces- s a r i l y assumes acceptance o f the concept o f r e g u l a r i z e d appointments. C o n s e q u e n t l y , most o f the respondents who commented on t h i s p o i n t were f a v o r a b l y d i s p o s e d toward the b a s i c f e a t u r e s o f H.R. 6273. A. Arguments p r e s e n t e d f o r a one-year lag. Respondents e n d o r s i n g the one-year l a g provided f o r by H.R. 6273 i n c l u d e i n t h e i r assessments o f t h i s f e a t u r e two b a s i c arguments: this t i m i n g arrangement tends t o i n s u l a t e appointments from the p o l i t i c a l en- v i r o n m e n t , and the c o i n c i d e n c e o f a vacancy on the Board o f Governors at the e f f e c t i v e date f o r new terms o f o f f i c e f o r the chairman and v i c e chair- man would a s s u r e the P r e s i d e n t g r e a t e r c h o i c e i n s e l e c t i n g an appointee t o one o f these two p o s i t i o n s i n t h a t he would not be f o r c e d t o choose from among those a l r e a d y s e r v i n g on the Board. I b e l i e v e t h a t the proposed s t a r t i n g date o f the Chairman's term, F e b r u a r y 1 i n the year f o l l o w i n g the i n a u g u r a t i o n o f the P r e s i d e n t , s u f f i c i e n t l y i s o l a t e s the Chairman from s h o r t r u n p o l i t i c a l p r e s s u r e s and preserves the c u r r e n t s t a t u s o f F e d e r a l Reserve independence. (George Kaufman) . . . a f t e r one year i n o f f i c e a new P r e s i d e n t would have the o p p o r t u n i t y t o d e s i g n a t e a new Chairman o f the F e d e r a l Reserve Board. He c o u l d e i t h e r d e s i g n a t e an e x i s t i n g member o f the Board, or i n the a l t e r n a t i v e he c o u l d s e l e c t a new member t o 59 f i l l a vacancy r e s u l t i n g from t h e e x p i r a t i o n o f some g o v e r n o r ' s t e r m (which would have j u s t o c c u r r e d ) and t h e n d e s i g n a t e t h a t new governor as Chairman. Hence, t h e f i e l d o f q u a l i f i e d p e o p l e from among whom a c h o i c e c o u l d be made would be g r e a t l y enlarged. The p r e s i d e n t would n o t be c o n f i n e d , as he can be under p r e s e n t l a w , t o s e l e c t i n g one o f o n l y seven e x i s t i n g members of t h e Board t o s e r v e as Chairman. (Robertson) F i r s t , t h e r e i s much t o be s a i d f o r g i v i n g a new p r e s i d e n t t h e power t o a p p o i n t a chairman o f t h e F e d e r a l Reserve Board sooner than a y e a r and t w e l v e days a f t e r h i s i n a u g u r a t i o n — say s i x months t o e i g h t months a f t e r t h e p r e s i d e n t i a l i n a u g uration. However, such a p r o v i s i o n would r e q u i r e an e l a b o r a t e s h i f t i n g around o f o t h e r appointment a r r a n g e m e n t s f o r t h e F e d e r a l Reserve Board, and t h e c o s t o f e x t e n d i n g a s i t t i n g Chairman one y e a r a f t e r t h e p r e s i d e n t ' s i n a u g u r a t i o n does not seem l a r g e t o me. (Bach) B. Arguments p r e s e n t e d a g a i n s t a o n e - y e a r lag. Respondents who oppose t h e o n e - y e a r l a g f a l l Some f e e l t h a t a s h o r t e r l a g would be d e s i r a b l e , i n t o two o b v i o u s groups. p r i n c i p a l l y on t h e grounds t h a t e a r l y c o o r d i n a t i o n o f monetary and f i s c a l p o l i c y i n a new a d m i n i s t r a t i o n is important. Some f e e l t h a t a o n e - y e a r lag i s too short to t h a t t h e appointments would be a d e q u a t e l y removed from a p o l i t i c a l assure environ- ment . I do not see why a new P r e s i d e n t should have t o w a i t a y e a r b e f o r e a p p o i n t i n g a Chairman o f t h e F e d e r a l R e s e r v e B o a r d . I t would be b e t t e r i f t h a t appointment c o u l d be made a t f o u r year i n t e r v a l s beginning February 1, 1981. I take the point about t h e normal occurrence o f v a c a n c i e s i n t h e Board o f G o v e r n o r s , but I would r a t h e r r e p a i r t h a t by a l t e r i n g t h e t i m i n g o f Governors' t e r m s . H i s f i r s t y e a r o f o f f i c e i s when a new P r e s i d e n t most needs t o be a b l e t o work c o m f o r t a b l y w i t h t h e Fed. (Solow) 60 The o n l y p o i n t where I d i s a g r e e w i t h your f o r m u l a t i o n r e l a t e s t o the date a t which a new Chairman should be a p p o i n t e d . I n my v i e w , which I know i s shared w i t h many o t h e r s , the term o f the Chairman s h o u l d be coterminus w i t h that o f P r e s i d e n t . I am a f i r m b e l i e v e r i n the p r i n c i p l e t h a t monet a r y and f i s c a l p o l i c y s h o u l d be c o o r d i n a t e d r a t h e r than work a t c r o s s purposes as they have threatened t o do i n the e a r l y months o f the new a d m i n i s t r a t i o n . ( M o d i g l i a n i ) . . . i n s p i t e o f a s s e r t i o n s t h a t the B i l l ' s p r o v i s i o n s merely would a s s u r e " c o n g r u i t y — t h o u g h no s u b o r d i n a t i o n — o f monet a r y p o l i c y " w i t h the P r e s i d e n t ' s f i s c a l and other economic p r o g r e s s , the e x p l a n a t i o n o f " c o n g r u i t y " s t r o n g l y suggests t o me t h a t monetary p o l i c y would, i n f a c t , be c a s t i n a subordinate r o l e . T h i s i s suggested by your comment i n the C o n g r e s s i o n a l Record t h a t " c o n g r u i t y . . . r e q u i r e s a l l o w i n g new P r e s i d e n t s t o a p p o i n t those i n charge o f monetary p o l i c y a f t e r they ( t h e P r e s i d e n t s ) have had time to d e c i d e and put i n t o e f f e c t t h e i r f i s c a l and other economic p o l i c i e s " ( u n d e r s c o r i n g added). (Alibrandi) I would suggest a s l i g h t m o d i f i c a t i o n o f the p r o p o s a l , t o p r o v i d e f o r appointment o f Chairman and V i c e Chairman a t r e g u l a r f o u r - y e a r i n t e r v a l s b e g i n n i n g February 1, 1983. S e t t i n g the appointment date back one year would mean t h a t a two-term P r e s i d e n t would have h i s "team" Chairman f o r 6, r a t h e r than 7 years o f h i s 8-year A d m i n i s t r a t i o n though the P r e s i d e n t would s t i l l be a b l e t o make h i s f i r s t appointment t o the Board a f t e r one year i n o f f i c e . But the a l t e r n a t i v e p r o p o s a l would remedy the problem o f e l e c t i o n \ y e a r a p p o i n t ments and i n f a c t f u r t h e r remove the Chairmanship appointment from the scene o f e l e c t i o n - y e a r p o l i t i c s . The proposals would a l s o g i v e the P r e s i d e n t a year t o assess h i s a p p o i n t e e ' s performance and a p t i t u d e f o r the Chairman's j o b . (McKinney) F i r s t , I have f e l t t h a t t o o c l o s e a c o i n c i d e n c e between the terms o f the P r e s i d e n t and the Chairman r i s k s a degree o f e x e c u t i v e branch i n f l u e n c e over monetary p o l i c y g r e a t e r than t h a t i n t e n d e d by the framers o f the F e d e r a l Reserve A c t and by Second, i t seems t o me the C o n s t i t u t i o n o f the U n i t e d S t a t e s . t h a t t o o c l o s e a c o i n c i d e n c e between the two terms would add t o the d i f f i c u l t y o f a v o i d i n g sharp and u n d e s i r a b l e d i s c o n t i n u i t i e s i n the p o s t u r e o f monetary p o l i c y . (Powell) 61 V. Respondents' views c o n c e r n i n g the u n e x p i r e d term f e a t u r e o f f o r r e g u l a r i z e d appointments. providing A l o g i c a l consequence o f p r o v i d i n g f o r r e g u l a r i z e d terms f o r the chairman and v i c e chairman i s the p r o v i s i o n o f H . R . 6273 w h i c h s t a t e s v a c a n c i e s i n these two p o s i t i o n s o c c u r r i n g b e f o r e the c o m p l e t i o n o f that full f o u r - y e a r terms are t o be f i l l e d f o r the d u r a t i o n o f the u n e x p i r e d terms. Under c u r r e n t p r o v i s i o n s , when such v a c a n c i e s a r e f i l l e d , the appointee a u t o m a t i c a l l y commences a f o u r - y e a r term, s h i f t i n g the normal t i m i n g for appointments a c c o r d i n g l y u n t i l another vacancy a r i s i n g from an uncompleted term o c c u r s . A t t i t u d e s o f respondents toward t h e u n e x p i r e d term p r o v i s i o n a s s o c i a t e d w i t h r e g u l a r i z a t i o n , w i t h a few e x c e p t i o n s , are d i r e c t l y related t o views h e l d on the b i l l as a whole. A. Arguments f o r the unexpired term f e a t u r e o f r e g u l a r i z e d appointments. Proponents o f e a r l y r e g u l a r i z e d appointments g e n e r a l l y a c c e p t unexpired term f e a t u r e as a necessary p a r t o f r e g u l a r i z a t i o n . the I n a few c a s e s , such respondents e x p l i c i t l y c i t e the n e c e s s i t y o f the u n e x p i r e d term p r o v i s i o n f o r assuring regularized appointments. T h i s b i l l , i f enacted, would make o r d e r l y and t i m e l y t h e beg i n n i n g and ending dates o f the terms o f the Chairman and V i c e Chairman; they would always b e g i n one year a f t e r a p r e s i d e n t i a l e l e c t i o n . . . O f c o u r s e , t h e r e may be o c c a s i o n s when a Chairman or V i c e Chairman w i l l r e s i g n or d i e b e f o r e the e x p i r a t i o n o f h i s term as such, but you have p r o v i d e d t h a t a person s u c c e e d i n g him s h a l l h o l d o f f i c e f o r the u n e x p i r e d p o r t i o n o f h i s p r e d e c e s s o r ' s term—thus a v o i d i n g any impairment o f the p r i n c i p a l o f the p r o p o s a l . (Robertson) 62 I agree w i t h your o b j e c t i v e o f e l i m i n a t i n g the random e l e ment i n the t i m i n g o f the terms o f the Chairman and V i c e Chairman o f the F e d e r a l Reserve, and t h e r e f o r e w i t h the p r o v i s i o n o f f i x e d f o u r - y e a r terms w i t h vacancies f i l l e d only for unexpired p o r t i o n s . (Tobin) B. Arguments a g a i n s t the u n e x p i r e d term f e a t u r e o f r e g u l a r i z e d ments . appoint- Arguments a g a i n s t the u n e x p i r e d term p r o v i s i o n are g e n e r a l l y express- ed i n views which f o c u s on the immediate or s h o r t - t e r m i m p l i c a t i o n s associa- t e d w i t h t h i s manner o f f i l l i n g unexpired terms. Such arguments appear t o c o n s t i t u t e p a r t o f an o v e r a l l s e t o f arguments a g a i n s t usually regulari- zation. . . . i t i s i n h e r e n t i n H.R. 6273 t h a t appointments o f Chairman and V i c e Chairman would from time t o time be made f o r p e r i o d s o f l e s s than f o u r y e a r s , perhaps f o r o n l y a year, which a l s o seems t o me a s e r i o u s d e f e c t . For one t h i n g , s h o r t - t e r m appointments would j e o p a r d i z e the c o n t i n u i t y o f p o l i c y , a q u a l i t y o f p a r t i c u l a r importance i n monetary and f i n a n c i a l matters. I n a d d i t i o n , s h o r t - t e r m appointments would l e s s e n the chances o f h a v i n g monetary p o l i c y d e a l t w i t h o b j e c t i v e l y a n d — t o the e x t e n t humanly p o s s i b l e — f r e e o f e x t e r n a l p a r t i san i n f l u e n c e . Appointments o f s h o r t d u r a t i o n c o u l d even be an o b s t a c l e t o e n l i s t i n g l e a d e r s h i p o f the c h a r a c t e r and t e c h n i c a l ' s k i l l the management o f the c o u n t r y ' s money supply requires. A l l i n a l l , a s e r i o u s f l a w , and the more so because i t would be i n e s c a p a b l e under H.R. 6273. (Saulnier) The requirement t h a t the unexpired p o r t i o n s o f e i t h e r the Chairman's or V i c e Chairman's terms be f i l l e d only f o r t h e i r u n e x p i r e d p o r t i o n s may i n v o l v e a problem t h a t i s avoided i n the p r e s e n t p r o c e d u r e : I have i n mind t h a t appointment f o r an e x t r e m e l y s h o r t u n e x p i r e d p o r t i o n o f a term might have an 63 adverse i n f l u e n c e on the degree o f independence enjoyed by the designee d u r i n g t h i s p e r i o d . I n a sense he might be c o n s i d e r e d t o be "on t r i a l " i n t h a t h i s r e c o r d o f compliance w i t h the P r e s i d e n t ' s wishes might have an i m p o r t a n t b e a r i n g on the quest i o n o f h i s reappointment. (Hayes) VI. Respondents' Views on r e q u i r i n g a d v i c e and consent o f t h e U.S. Senate f o r appointments t o t h e - p o s i t i o n s o f Chairman and V i c e Chairman o f the Board o f Governors. H.R. 6273 provides f o r Senate c o n f i r m a t i o n o f appointments t o the Chairman and V i c e Chairman o f the Board o f G o v e r n o r s . The Senate c u r r e n t - l y c o n f i r m s appointments o f a l l Governors o f the F e d e r a l Reserve Board. Consequently, it i s i n a p o s i t i o n t o k n o w i n g l y c o n f i r m , as chairman o r v i c e chairman, a newly appointed governor who i s b e i n g d e s i g n a t e d as chairman or v i c e chairman by the P r e s i d e n t . S p e c i a l c o n f i r m a t i o n proceedings appointments t o the two F e d e r a l Reserve p o s i t i o n s are not h e l d , for however, f o r reappointments t o these p o s i t i o n s or f o r appointments made from among those a l r e a d y confirmed as governors. v i s i o n s o f H.R. 6273 i n c l u d e , provisions, Comments on the c o n f i r m a t i o n pro- i n a d d i t i o n t o arguments f o r and agaimst s e v e r a l suggestions f o r e x t e n d i n g c o n f i r m a t i o n t o the appointments t o the p o s i t i o n o f chairman o n l y . A. Arguments f o r c o n f i r m a t i o n o f chairman and v i c e chairman. Respondents f a v o r i n g Senate c o n f i r m a t i o n o f the chairman and v i c e chairman c i t e the degree o f i n f l u e n c e and r e s p o n s i b i l i t y a s s o c i a t e d w i t h these offices: 64 . . . I v i e w w i t h f a v o r your p r o p o s a l t h a t the Chairman and V i c e Chairman be c o n f i r m e d by the Senate. Over the years the Chairman ( i n p a r t i c u l a r ) has a c q u i r e d i n f l u e n c e and v i s i b i l i t y f a r i n excess o f t h a t possessed by the o t h e r G o v e r n o r s , and i n my v i e w the p o s i t i o n i s o f s u f f i c i e n t importance t o j u s t i f y r e v i e w and c o n f i r m a t i o n by the Senate. (Packer) The r e s p o n s i b i l i t i e s o f the F e d e r a l Reserve Board Chairman and V i c e Chairman a r e c l e a r l y o f such magnitude i n the n a t i o n ' s f i n a n c i a l f a b r i c and governmental s t r u c t u r e t h a t Senate c o n f i r m a t i o n i s warranted. (Ellis) B. Arguments f o r c o n f i r m a t i o n o f the chairman o n l y . Respondents f a v o r i n g c o n f i r m a t i o n o f the chairman o n l y argue t h a t the chairman has become c o n s i d e r a b l y important i n the sphere o f economic p o l i c y and has s u f f i c i e n t i n f l u e n c e r e l a t i v e t o other members o f Board o f Governors t o m e r i t s p e c i a l c o n f i r m a t i o n p r o c e e d i n g s . The Chairman has a g r e a t d e a l o f power. Former governor M a i s e l a t t r i b u t e s 45 percent o f the power and i n f l u e n c e w i t h i n t h e F e d e r a l Reserve t o the Chairman (Managing the D o l l a r , New Y o r k , W. W. Norton, p . 110). I n view o f the importance o f monetary p o l i c y I b e l i e v e the Chairman has a more important j o b t h a n does, say, the S e c r e t a r y o f the Treasury. T h i s suggests the need f o r Senate c o n f i r m a t i o n . A d m i t t e d l y , t h e r e i s the c o u n t e r v a i l i n g argument t h a t Senate c o n f i r m a t i o n might r e q u i r e a p r o s p e c t i v e Chairman t o make commitments about the p o l i c y he w i l l f o l l o w . But t h i s i s rather u n l i k e l y . The type o f person nominated as Chairman i s l i k e l y t o possess the p o l i t i c a l s k i l l s r e q u i r e d t o a v o i d b e i n g f o r c e d i n t o commitments. Moreover, he can always argue, q u i t e c o r r e c t l y , t h a t he has o n l y one out o f t w e l v e v o t e s on the FOMC. As M a i s e l p o i n t s o u t , much o f the Chairman's power comes from a t t r i - the 65 butes such as h i s power t o s e t the agenda, and t h i s type o f power does not r e a d i l y lend i t s e l f t o b e i n g f o r c e d i n t o commitments. I n a d d i t i o n , i t i s worth n o t i n g t h a t t h e f a c t t h a t the Fed should have s u b s t a n t i a l independence does not n e c e s s a r i l y c o n f l i c t w i t h the d e s i r a b i l i t y o f Senate c o n f i r m a t i o n ; the Senate does c o n f i r m j u d g e s . (Mayer) Because o f the important r o l e o f t h e Chairman o f t h e Board o f Governors, i t i s a p p r o p r i a t e t h a t h i s appointment be subj e c t t o Senate c o n f i r m a t i o n s i m i l a r t o the appointment o f o t h e r important o f f i c i a l P r e s i d e n t i a l a d v i s o r s . T h i s i s not w i t h s t a n d i n g the f a c t t h a t he o r she may have a l r e a d y been confirmed by the Senate as a r e g u l a r Board member. (George Kaufman) C. Arguments a g a i n s t s p e c i a l c o n f i r m a t i o n f o r e i t h e r chairman or chairman. vice O p p o s i t i o n among the respondents t o s p e c i a l Senate c o n f i r m a t i o n o f the chairman and v i c e chairman t y p i c a l l y i s based on two arguments. First, c o n f i r m a t i o n as. a Governor o f the Board s h o u l d be conducted i n such a manner t o a s s u r e that q u a l i t y standards a r e met f o r a l l governors t o the e v e n t u a l i t y o f t h e i r appointments t o chairman o r v i c e justify chairman. Secondly, because appointments o f a new chairman u s u a l l y i n v o l v e a s i m u l taneous appointment t o the Board, the Senate i s g e n e r a l l y i n a p o s i t i o n t o c o n f i r m a new chairman as such. On the matter o f Senate c o n f i r m a t i o n o f the appointments o f the Chairman and the V i c e Chairman, I do not e n t e r t a i n any s t r o n g c o n v i c t i o n s one way or the o t h e r . Constitutionally, t h e monetary a u t h o r i t y i s v e s t e d i n t h e l e g i s l a t i v e branch and t h i s suggests the need f o r s t r o n g C o n g r e s s i o n a l p a r t i c i p a t i o n i n the c h o i c e o f l e a d e r s h i p over monetary p o l i c y . On 66 t h e s e grounds i t may seem q u i t e i n o r d e r t o favor Senate confirmation. But i t s h o u l d be kept i n mind here that a l l Governors a r e s u b j e c t t o Senate c o n f i r m a t i o n . I f the Senate does i t s j o b , a l l w i l l be competent and r e s p o n s i b l e i n the p o l i c y a r e a , and I q u e s t i o n whether f u r t h e r Senate p a r t i c i p a t i o n would be n e c e s s a r y . I b e l i e v e i t i s a l s o the case t h a t t h e Senate, when a c t i n g on a new appointment t o the Board o f Governors, i s u s u a l l y aware i f the s u b j e c t appointee w i l l be d e s i g n a t e d Chairman o f V i c e Chairman. (Powell) I see no p a r t i c u l a r b e n e f i t i n having the chairman and v i c e chairman o f t h e Board s u b j e c t t o Senate c o n f i r m a t i o n . The statement from the C o n g r e s s i o n a l Record t h a t you were k i n d enough t o e n c l o s e does not make a s t r o n g case f o r Senate conf i r m a t i o n , and I am n o t aware o f any d e f e c t s i n the p r e s e n t arrangements. Members o f the Board o f Governors a r e confirmed by the Senate, so c o n f i r m a t i o n o f the chairman and v i c e c h a i r man i s a case o f second c o n f i r m a t i o n . I would p r e f e r t o see the a d d i t i o n a l e f f o r t r e q u i r e d by these h e a r i n g s go i n t o more d e t a i l e d d i s c u s s i o n o f the substance o f p o l i c y and the p r o cedures f o r making p o l i c y . (Meltzer) o
