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FEDERAL RESERVE REFORM ACT OF 1977
HEARINGS
BEFORE
THE
COMMITTEE ON
BANKING, FINANCE AND URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
NINETY-FIFTH
FIRST
CONGRESS
SESSION
ON
H.R. 8094
A B I L L TO P R O M O T E T H E A C C O U N T A B I L I T Y OF T H E F E D E R A L
RESERVE SYSTEM
J U L Y 18 A N D 26, 1977
Printed for the use of the
Committee on Banking, Finance and Urban Affairs
U.S. GOVERNMENT PRINTING OFFICE
93-444 o
WASHINGTON : 1977
H O U S E C O M M I T T E E ON B A N K I N G , F I N A N C E A N D U R B A N A F F A I R S
H E N R Y S. R E U S S , Wisconsin,
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. S T 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 Y o r k
P A R R E N J. M I T C H E L L , M a r y l a n d
W A L T E R E. FAUNTROY,
District of Columbia
S T E P H E N L . N E A L , North 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 L . L A F A D C E , New Y o r k
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 Y o r k
E D W A R D W. PATOTSON, N e w Y o r k
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
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 1. S T E E R S , JR., M a r y l a n d
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 Y o r k
H A R O L D C. H O L L E N B E C K , New Jersey
PAUL NELSON, Clerk and Staff Director
WILLIAM P . DIXON, General Counsel
MICHAEL P . FLAHERTY, Counsel
GRASTY CREWS N , Counsel
MERCER L . JACKSON, Minority Staff Director
GRAHAM T . NORTHUP, Deputy Minority Staff Director
(H)
CONTENTS
Page
Hearings held on—
July 18, 1977
July 26, 1977
Text of H.R. 8094
1
57
7
STATEMENTS
Biemiller, Andrew J., director, Department of Legislation, American Federation of Labor and Congress of Industrial Organizations ( A F L - C I O ) ;
accompanied by Dr. Rudolph Oswald, director, Department of Research.
Brown, Jon, Public Interest Research Group
Burns, Hon. Arthur F., Chairman, Board of Governors of the Federal
Reserve System
Cohen, David, Common Cause
Wright, Hon. Jim, majority leader, a Representative in Congress from the
State of Texas
ADDITIONAL
INFORMATION
SUBMITTED FOB T H E
57
119
10
RECOBD
Biemiller, Andrew J., statement of the executive council of the A F L - C I O
on the Federal Reserve and the Nation's monetary policy, presented Bal
Harbour, Fla., February 21,1975
Brown, Congressman Garry, table submitted from <a budget issue paper of
the Congressional Budget Office
Burns, Hon. Arthur F.:
Correspondence between Senator William Proximire and members of
the Federal Open Market Committee concerning the subject of monetary velocity
Response to questions of Congressman Chalmers P. Wylie
Cohen, David:
Legal memorandum submitted re whether "Section 4 of H.R. 8094 Is
in Violation of the First Amendment"
List of class C directors of Federal Reserve banks
Prepared statement
O'Reilly, Kathleen F., statement
Samuelson, Dr. Paul, statement
Stanton, Hon. J. William, article submitted from the W a l l Street Journal
of July 26, 1977, entitled "Off Target"
Wright, Hon. Jim, prepared statement
(in)
42
161
46
40
76
114
138
135
123
54
38
66
15
FEDERAL RESERVE REFORM ACT OF 1977
MONDAY, JULY 18, 1977
H O U S E OF REPRESENTATIVES,
C O M M I T T E E ON B A N K I N G , F I N A N C E , AND U R B A N AFFAIRS,
Washington, D.C.
The committee met at 10 a.m. in room 2128 of the Rayburn House
Office Building; Hon. Henry S. Reuss (chairman of the committee)
presiding.
Present: Representatives Reuss, Gonzalez, Annunzio, Hanley,
Mitchell, Neal, Blanchard, Spellman, Hannaford, Lundine, Pattison,
Cavanaugh, Oakar, Mattox, Vento, Barnard, Stanton, Brown, Rousselot, Hansen, Kelly, Grassley, Fenwick, Leach, and Caputo.
T h e CHAIRMAN. G o o d morning.
The House Committee on Banking, Finance, and Urban Affairs
will be in order for the commencement of hearings on H.R. 8094, a bill
to promote the accountability of the Federal Reserve System.
Congress, under article I, section 8 of the Constitution, has the power
"to coin money, regulate the value thereof."
After much experience with panic and depression, Congress under
the Federal Reserve Act of 1913 delegated to the Federal Reserve System the day-to-day operations of its monetary power, with particular
reference to the need for a "flexible currency."
When we speak of the independence of the Federal Reserve, we
speak of its independence from the executive branch and not from
the Congress. Congress could have delegated its monetary power to
the Executive. It chose instead to delegate it to the Federal Reserve,
whose Board members' 14-year terms effectively insulate them from
Executive manipulation. Though the Executive gained the ascendancy over the Federal Reserve during World War I I and for half a
decade thereafter, the 1951 accord between the Treasury and the Fed,
negotiated by the Congress, reaffirmed and reinforced the independence of the Federal Reserve from the Executive.
For the first half century or so of its existence, the Federal Reserve
can hardly be said to have been successful in its monetary policy.
Until the late 1920's, there was no monetary policy worthy of the
name. Thereafter, it was mostly wrong-headed. Excessively restrictive monetary policy helped bring on the depression of 1929 and snuff
out the beginnings of recovery in 1937.
During the war years, and right up until the accord of 1951, Federal Reserve monetary policy was excessively dominated by the Executive, and excessively loose. During most of the 1950's, monetary policy
was too restrictive, and contributed to the slow growth of the decade.
I n the last 15 years, monetary policy has been too frequently characterized by stops and starts. Too much new money was created in
(1)
2
the Vietnam years of 1967 and 1968, helping to cause inflation. Then
policy reversed and became too restrictive. Overease revived again in
1972 and 1973, to be followed by the excessive restrictiveness of late
1974 and early 1975.
Then, in March 1975, Congress enacted House Concurrent Resolution 133. This resolution set up quarterly dialogues between the Federal Reserve and the House and Senate Banking Committees, and
resulted i n the Federal Reserve's stating its targets for the following
12 months for the money supply, principally M i (the public's holdings
of cash and checking accounts). B y and large, this policy has worked
well in the ensuing 2 years.
There have been at least two exceptions, due to unfortunate relapses
into stop-start policies. I n June 1975, unnecessarily upset by the increase in the money supply caused by the Federal income tax rebate,
the Fed put on the monetary brakes, and contributed to the slowdown in recovery in the summer of 1975. Again, in A p r i l 1977, the
Fed created an exhorbitant amount of new money, at an annual rate
of almost 20 percent. Then, on some two-wrangs-can-make-a-right
basis, it lowered the creation of new money to zero in May 1977,
causing a wholly unnecessary increase in the bank prime rate.
But I hope these were monetary aberrations from a sensible new
trend. I hope the Federal Reserve will be able to resist the temptation
to join what Business Week calls the new Metternichs—the European
central bankers—some of whom want to go back to the discredited
operation of fighting inflation by so squeezing the money supply as to
cause increased unemployment.
So far I have been discussing the major activity of the Federal Reserve System—monetary policy. But the Fed has two other very
important functions—as principal regulatory agency for State member banks of the Federal Reserve System, and as servicer of the
banking system through check clearing operations and coin and
currency transfers.
As I have suggested, the Federal Reserve is a more serviceable
agency today than at any time in its history. Its Chairman, Dr. Arthur
Burns, is an able and respected leader.
A l l the more reason, then, that the accountability to the public of
the Fed needs to be sharpened. The five major provisions of H.R.
8094, now before us, would attempt to sharpen that accountability.
There follow the five provisions of H.R. 8094, and the reasons for
them :
(1) M A K E P E R M A N E N T T H E CONGRESSIONAL-FEDERAL RESERVE DIALOG O N
MONETARY POLICY
House Concurrent Resolution 133, which authorizes the quarterly
dialog, expired by its own terms at the end of 1976. Chairman Burns
continues to appear quarterly before the House and Senate Banking Committees. But these appearances should be regularized and made
businesslike by statute. A successor Chairman, for example, could refuse to enarage in the dialog, and Congress could point to no law
which was being flouted.
In the course of making the dialog an ongoing procedure, two improvements are needed. That Federal Reserve monetary policy is
3
meant to serve the Nation's goals contained in the Employment Act of
1946—for maximum employment, production, and price stability—
needs to be explicitly stated.
Second, the Federal Reserve should be required to testify not only
concerning its proposed monetary aggregates for the ensuing year,
as House Concurrent Resolution 133 requires, but on three related
matters—anticipated velocity, estimated interest rates, and portfolio
composition.
First, the velocity with which money changes hands has a profound
effect on the amount of new money that will be needed. The bill,
therefore, includes "anticipated monetary velocity," as a subject on
which the Fed should testify.
Second, as part of the overall annual economic program of both
the administration and the Federal Reserve, it is necessary at least
to make an estimate of the levels of interest rates—particularly on
business loans and on long-term mortgages. It is not suggested that a
target for interest rates be stated, but merely an estimate of expected
rates.
Coordination of fiscal and monetary policy would be greatly enhanced i f Government economists outside the Fed understood what
the Fed's interest rate anticipations were. A s the people's representatives, the Congress is also entitled to know the Fed's view of the
course of interest rates for the ensuing year.
What about the fear that public revelation of anticipated interest
rates would cause disruption i n financial markets? This is hard to
see. Making such information available to all simply removes the advantage that insiders in financial markets now enjoy, and reduces
speculation based on rumors and misinformation that do cause instability in the markets. It is worth noting that the Fed's often-stated
view that prompt disclosure of Federal Open Market Committee directives would cause disruption in the market has not proved true. The
reduction from 90 to 30 days in the time F O M C decisions are kept
secret has had no destabilizing effect, and in fact appears to have been
beneficial.
Finally, the Federal Reserve can affect the structure of interest
rates by the composition of its portfolio of securities, currently valued
at close to $100 billion, equal to one-fourth of the privately held
national debt. For example, by increasing its holdings of longer
term securities, the Fed can modestly bring down long term interest
rates relative to short term interest rates. Proposed portfolio policy
is, therefore, an important part of the Federal Reserve's quarterly
presentation.
These broadened guidelines would avoid the present total concentration on the monetary aggregates alone.
(2) BROADEN T H E ECONOMIC INTEREST OF FEDERAL RESERVE B A N K
DIRECTORS
Under present law, the nine Directors of each of the 12 Federal Reserve banks have unduly narrow backgrounds. Commercial banks elect
six of the nine—three class A Directors, always bankers, as their direct "representatives," and three class B Directors from "commerce,
agriculture, or some other industrial pursuit." The three class C Di
4
rectors are chosen by the Federal Reserve Board of Governors, with
nothing said as to who they may be.
As the Banking Committee staff study "Federal Reserve Directors:
A Study of Corporate and Banking Influence," August 1976—disclosed, this has produced a representation grossly banker-oriented at
the expense of other groups. Furthermore, it has resulted in the virtual exclusion of women, blacks, and representatives of labor unions
and consumer interest organizations.
H.R. 8094 would remedy the situation with respect to discrimination by requiring that all directors—A, B, and C—be chosen "without
discrimination on the basis of race, creed, color, sex, or national
origin."
As to economic representation, the three class A Directors would be
left as they are now—bankers.
Class B directors would be specifically designated "public" and
broadened from the present "commerce, agriculture, or some other industrial pursuit" to "with due but not exclusive consideration to the
interests of agriculture, commerce, industry, services, labor, and consumers." While class B directors are elected by the member banks, they
should be chosen from a broader category than the ambiguous existing "commerce, agriculture, or some other industrial pursuit." It is
archaic to concentrate, for example, on "industrial pursuit," when
service industries are steadily becoming more prominent than the
purely industrial pursuits which were in everyone's minds in 1913
when the Federal Reserve Act was written. "Services, labor, and consumers" are groups of our citizenry whose economic interests entitle
them to consideration for seats on the Federal Reserve bank boards.
Class C directors would be chosen, as now, by the Federal Reserve
Board of Governors. But instead of no language as to qualification,
they would have the same qualifications as class B directors: They must
represent the public, and "with due but not exclusive consideration to
the interests of agriculture, commerce, industry, services, labor, and
consumers."
These first two provisions of H.R. 8094—the permanent Congressional Federal Reserve dialog, and the broadening of the Federal
Reserve bank directors—are substantially similar to H.R. 12934, which
passed the House by a vote of 279 to 85 on May 10, 1976. Because of
the adjournment of the Senate in September 1976, the bill did not
reach action there.
(3) R E Q U I R E S E N A T E C O N F I R M A T I O N OF T H E C H A I R M A N OF T H E BOARD OF
GOVERNORS
Under existing la w, members of the Federal Reserve Board of Governors, who serve 14-year terms, are subject to Senate confirmation at
the time of their appointment: one of the Board Members is designated
by the President to serve as Chairman for a 4-vear term, but without
Senate confirmation. Thus, the President can designate as Chairman
someone who was confirmed by the Senate some 13 years previously,
yet the Senate be powerless to confirm the appointee to what was recently called the Nation's "No. 2 position." The bill would make the
President's choice of Chairman subject to the advice and consent of
the Senate. The Federal Reserve recently told this subcommittee that
it has no objection to this provision.
5
(4)
PREVENT
THE
FED'S U S I N G B A N K S
AS ITS
LOBBYISTS
The Federal Reserve System has been using bankers—who are
deeply beholden to the Fed because of the Fed's ability to give or withhold a discount window loan, or to give or withhold such privileges
as approval for a merger, holding company acquisition, or an Edge
Act office—to lobby on the Fed's behalf with legislators and other Government officials.
For example, as revealed by the minutes of the Board of Directors
of the Federal Reserve Bank of Chicago for May 23,1974, Vice Chairman George W . Mitchell of the Federal Reserve Board of Governors
commented on the lobbying efforts of the Fed to kill the bill requiring
a G A O audit(:
Governor Mitchell also noted that the GAO audit biU should come up for vote
next week on the floor of the House. Reserve bank directors have been helpful in
contacting- Congressmen and hopefully the bill can be at least amended to restrict
the type of audit if chances for outright elimination lessen.
Chicago Federal Reserve Bank President Robert P . Mayo at the
same meeting called for continuing lobbying efforts:
Mr. Mayo commented further on the GAO audit bill, noting that it is House
B i l l numbered 10265 and should be up for consideration on May 29. He then
requested each director to make whatever calls seem natural to him in order to
encourage support for the Federal Reserve position.
The Philadelphia Federal Reserve Bank, in its minutes for May 4
and May 18, 1972, described its use of private commercial banks and
the New Jersey Bankers Association against a New Jersey bill which
might have attracted independent banks away from the Fed:
President Eastburn said there was a bill in the New Jersey Assembly to permit nonmembers to keep up to 50 percent of their reserves in Government securities. He indicated that this Bank had been in touch with New Jersey bankers,
the New Jersey Bankers Association and key legislators to express the feeUng
that the bill would be divisive, inequitable, and disruptive, and would have an
adverse effect on membership. He reported that the bill had recently been sent
back to committee.
Again, the Richmond Federal Reserve Bank has also been adept at
using bankers as official unregistered lobbyists for the Fed. In October
1975, Richmond Federal Reserve Bank Chairman Robert W. Lawson,
in a speech to the American Bankers Association at Hot Springs, Va.,
congratulated the bankers for their great lobbying assist to the Fed.
Chairman Lawson's remarks were the subject of a colloquy between
myself and Chairman Arthur Burns of the Federal Reserve Board of
Governors at a hearing before the subcommittee on Financial Institutions Supervision, Regulation and Insurance of the Committee on
Banking, Currency and Housing on January 21, 1976:
Chairman REUSS. Let me now get into the area of poUtics, which you brought
up several times this morning in connection with the audit bill for the Fed. On
October 1,1975, the American Banker carried an interesting story on your Reserve
Bank chairman in Richmond, Robert L. Lawson.
The headUne was, "Federal Reserve Board Official Hails Bank Role in Killing
GAO Audit of the Fed." And then it went on to describe his speech to a bankers
group, in which he said:
"Banks played a key role in blocking a congressional audit of the Federal
Reserve Board. The bankers in our district and elsewhere did a tremendous job
in helping to defeat the GAO bill. It shows what can be done when the bankers
of the country get together."
6
My question is: I f you get the support of the banks on an issue which is of
great concern to you, whether Congress has the right to audit your books or not,
are they not likely to expect i n return kind treatment from you as a regulator?
They would not get it, of course, but are they not likely to expect it?
Dr. BURNS. AS for Mr. Lawson's statement, let me merely remind you that, as I
indicated i n my testimony, we have i n the System 269 directors, and neither I nor
the Board can be responsible for what individual directors may or may not say.
Chairman REUSS. D i d not the Federal Reserve people, to your knowledge, communicate with the banks about bank lobbying against the audit bill?
Dr. BURNS. I played no part i n this activity at all, not because I would consider
it wrong, but because I did not have the time.
Chairman REUSS. M y question was, with respect to people at the Fed, was there
not a little communication there?
Dr. BURNS. Yes. That is to say, there was some communication between our
various directors, not with bankers as such, but with bankers, journalists, business people. I do not know whom they contacted. And that, I think, is an entirely
legitimate activity. After all, do not Members of Congress want to hear from their
constituents?
It is just as improper for the Federal Reserve System to use a
regulated industry as its lobbyist as it would be for, say, the Federal
Power Commission to enlist executives of the oil and gas companies it
regulates to lobby Congress on matters of concern to the F P C . Such
activities by the Federal Power Commission, would, of course, be
clearly illegal under the overall act forbidding lobbying by administrative agencies with money appropriated by the Congress (18 U.S.
Code, 1913). The Fed is technically exempt from this statute because
its funds are not appropriated by Congress.
Such use of the banks for lobbying purposes should cease. Accordingly, section 4 of H.R. 8094 forbids directors or officers of the Federal
Reserve from getting banks or other institutions regulated by the Fed
to lobby for legislation at the Fed's behest.
(5) PROHIBIT FEDERAL RESERVE OFFICERS, EMPLOYEES, AND DIRECTORS
FROM ACTING WHERE T H E Y HAVE A CONFLICT OF INTEREST
Under existing law, employees and officers of the U.S. Government
may not participate in any matter before the Government in which
they or a member of their family or business have an interest, unless
there is first a full disclosure of this interest and an official written
determination by an official that this interest is not substantial. The
Fed is not covered. H.R. 8094 extends this prohibition to Federal
Reserve Bank officers, employees, and directors. The minutes of Federal
Reserve Bank meetings previously referred to contain instances of
Federal Reserve officials proceeding to exercise their authority despite^
a clear conflict of interest.
The proposal for an audit of the Federal Reserve System contained
in an earlier version of the Federal Reserve Reform Act of 1977 has
been dropped because the House Government Operations Cojnmittee
on June 28 reported a bill providing for such an audit, H.R. 2176. That
bill provides for an audit not only of the Fed but of the Comptroller
of the Currency and the Federal Deposit Insurance Corporation.
Taken altogether, this legislation will make the Federal Reserve
System more accountable. As Dean Jonathan Swift said: "Providence
never intended to make the management of public affairs a mystery,
to be comprehended only bv a few persons of sublime genius."
[A copy of H.R. 8094 follows
7
itses on
95THCONGRKSS I f
A A A
J
H. R. 8094
I N T H E H O U S E OF
REPRESENTATIVES
JUNE 29,1977
Mr. REUSS introduced the following bill; which was referred to the Committee on Banking, Finance and Urban Affairs
A BILL
To promote the accountability of the Federal Reserve System.
1
Be it enacted by the Senate and House of Representa-
2
tives of the United States of America
3
CONGRESSIONAL-FEI>EI?AL RESERVE DIALOG ON MONETARY
4
POLICY
5
in Congress assembled,
SECTION 1. Insert a new section 2A immediately after
6
section 2 of the Federal Reserve Act to read as follows:
7
^SECTION 2A. GENERAL TOLICY: CONGRESSIONAL REVIEW
8
" (a) The formulation and implementation of monetaiy
9
policy under this Act shall be governed by the national
10
policy to promote maximum employment, production, and
11
price stability.
12
" (b) A t quarterly hearings conducted alternately by the
I
8
2
1
Committee oil Banking, Housing, and Urban Affairs of the
2
Senate and the Committee on Banking, Finance and Urban
3
Affairs of the House, representatives of the Federal Reserve
4
System shall testify concerning the Board of Governors' and
5
the Federal Open Market Committee's proposed monetary
6
polic}^ for the next twelve months, including proposed mone-
7
tary aggregates, anticipated monetary velocity, estimated
8
levels of interest rates (particularly on business loans and on
9
long-term housing mortgages), and the proposed composi-
10
11
12
lion of the Federal Reserve's portfolio.".
BOARDS OF DIRECTORS OF FEDERAL RESERVE BANKS
SEC. 2. The following paragraphs of section 4 of the
13 Federal Reserve Act are amended:
14
(a)
the tenth paragraph by inserting after the
15
comma the following: "without discrimination on the
16
basis of race, creed, color, sex, or national origin,".
17
(b) the eleventh paragraph by striking all after
18
"members," and substituting "who shall represent the
19
public and shall be elected without discrimination on the
20
basis of race, creed, color, sex, or national origin, and
21
with due but not exclusive consideration to the inter-
22
ests of agriculture, commerce, industry, services, labor,
23
and consumers.".
24
(c) the twelfth paragraph by inserting immediately
25
after the first sentence thereof the following sentence:
9
3
1
"Tliey shall be selected to represent the public, without
2
discrimination on the basis of race, creed, color, sex, or
3
national origin, and with due but not exclusive considera-
4
tion to the interests of agriculture, commerce, industry,
5
services, labor, and consumers.".
6
SENATE CONFIRMATION OF CHAIRMAN OF BOARD OF
7
GOVERNORS
8
SEC. 3. The second paragraph of section 10 of the Fed-
9
eral Reserve Act is amended by striking out the third sen-
10 tence and inserting in lieu thereof the following: "Of the
11 persons thus appointed, the President shall appoint one, by
12
and with the advice and consent of the Senate, to serve as
13
Chairman of the Board for a term of four years and one shall
14
be designated by the President a Vice Chairman of the Board
15 for a term of ion,* years.".
16
LOBBYING COMMUNICATIONS WITH REGULATED
17
INSTITUTIONS
18
SEC. 4. Section 10 of the Federal Reserve Act is
19
amended by inserting immediately after the last sentence
20
thereof the following sentence: "No member of the Board
21
of Governors, director, officer, or employee of the Federal
22
Reserve system may communicate with any director, officer,
23
or employee of any institution subject to the regulatory au-
24
thority of the Federal Reserve System to influence legisla-
25
five actions affecting the Federal Reserve System.".
10
4
1
CONFLICTS OF
INTEREST
2
SEC. 5. Subsection 208 (a) of title 18, United States
3
Code, is amended by adding "a Federal Reserve bank direc-
4
tor, officer, or employee," immediately before "or of the
5
District of Columbia".
6
REFERENCES TO F E D E R A L RESERVE ACT
PARAGRAPHS
7
SEC. 6. References in this Act to paragraphs of the Fed-
8
eral Reserve Act refer to the paragraphs as designated in the
9
compilation of the Federal Reserve Act as amended through
10
1974, compiled under the direction of the Board of Governors
11 of the Federal Reserve System in its legal division.
12
13
SnORT
TITLE
SEC. 7. The short title of this Act shall be the "Federal
14 Reserve Reform Act of 1977".
The CHAIRMAN. W e are fortunate to have with us this morning
the majority leader of the House of Representatives, Hon. J i m Wright,
of Texas. M r . W r i g h t has a prepared statement which, under the
rule and without objection, w i l l be received in f u l l into the record.
Before calling on M r . Wright, I turn to our friend, the ranking
minority member, M r . Stanton, to inquire whether he has any opening
remarks.
Mr. STANTON. M r . Chairman, I have no opening remarks. I would
just take this opportunity to say I am glad the majority leader is with
us, and I would be glad to have him proceed.
The CHAIRMAN. Thank you verv much.
Mr. Wright?
STATEMENT OF HON". J I M WRIGHT, MAJORITY LEADER, A REPRESENTATIVE I N CONGRESS PROM THE STATE OP TEXAS
Mr. WRIGHT. M r . Chairman and members of the committee, for
many years, under the leadership of the late Wright Patman, of Texas,
and now under that of Chairman Reuss of Wisconsin, the House Banking Committee has taken the lead in stimulating public discussion on
the importance of monetary policy in the Nation's economy.
11
Today the public is more aware than ever of the impact of monetary
policy and interest rates on jobs, inflation, production, and economic
growth. The heightened awareness is due partly to the persistent efforts
of this committee, partly, also, to the wrenching experience of 1974
when interest rates climbed to levels we could not have imagined previously and wreaked havoc with the Nation's economy. The public
and Congress now recognize better than ever the importance of the
Federal Reserve's conduct of monetary policy and its regulation of the
banking system, the need for regular oversight by Congress, and
greater accountability to the public on the part of the Fed—in short
for the provisions embodied in this bill, H.R. 8094, the Federal Reserve
Reform Act of 1977.
This committee has done a thorough job of laying the groundwork
for this legislation. The F I N E study, "Financial Institutions and
the Nation's Economy," in the 94th Congress, heard from scores of
witnesses about the need for financial reform, many of them directing
their testimony to the need for changes in the Federal Reserve System. The landmark committee study, "The Federal Reserve Directors—A Study of Corporate and Banking Influence" of August 1976,
spelled out in great detail the way in which the Federal Reserve System has become dominated by a fairly narrow range of interests.
No more studies or hearings are needed. Every aspect of the issues
dealt with in this legislation has been well explored. What is needed
now is legislation addressing the problems that have been identified in
the Federal Reserve System, and enhancing the role of Congress in
oversight of monetary policy in the coming years.
This legislation goes directly to the chief concerns that have been
raised.
Y o u have done an excellent job, of course, Mr. Chairman, explaining the five fundamental provisions of the bill. Let me just touch on
each of them very briefly.
The first thing the bill would do would be to require a quarterly
dialog on monetary policy. It seems to me that the experience with
House Concurrent Resolution 133 in the last Congress would give us
every reason to make this practice of mandatory quarterly appearances
before the Banking Committees of the House and Senate a permanent
part of the statute.
The Federal Reserve is expected, after all, to be responsive to the
Congress. It was never intended to be entirely independent of Congress, as has been well recognized for some time.
F o r instance, in hearings on the President's economic report before
the J E C in 1960, Mr. Patman asked former Fed Chairman William
McCresney Martin: "Would you agree, Mr. Martin, that the only
authority for issuing money and regulating the value of money is the
constitutional authority of Congress?"
A n d Mr. Martin replied, " I have never questioned the authority of
Congress."
It is extremely important that the views of Congress be made
explicit to the Fed. The Fed is, after all, not infallible, and m fact
has had a rather spotty record over the years in management of the
money supply.
12
House Concurrent Resolution 133 required the Fed to testify only
on targets for monetary growth for the ensuing year. The requirement
in this bill that the Fed testify also on anticipated velocity, estimated
levels of interest rates, and the composition of the Fed's portfolio is a
worthy addition to House Concurrent Resolution 133. It will contribute greatly to the public's understanding of monetary issues, and will
help make the Fed more accountable to Congress in a completely
appropriate way.
A second basic provision of the bill would broaden the public representation on the boards of directors of the Federal Reserve banks.
The summary conclusion of your committee's staff study of Federal Reserve Directors was very well put, namely, that "the Federal
Reserve Directors are apparently representatives of a small elite group
which dominates much of the economic life of this Nation." I t has
been true, as the study noted, that the list of the Federal Reserve
Directors reads like a page out of "Who's Who in American
Corporations."
Mr. Chairman, the boards of directors have been too narrowly
dominated by bankers and big businessmen. There are many others
who have just as much expertise and certainly as great an interest in
the health of the Nation's economy as directly influenced by the policies of the Federal Reserve.
The third requirement of the bill would be that the Chairman of
the Board of Governors would have to be confirmed by the Senate.
Now, the Chairman of the Federal Reserve Board certainly occupies
one of the most powerful positions in the United States. It is almost
inconceivable to me that the person can be appointed to that position
for a period of 4 years without undergoing the same process of Senate
confirmation that governs far less important positions in the Federal
Establishment.
Now, for the position of Chairman, the Senate should have the
opportunity to explore the nominee's qualifications and views above
and beyond the examination customarily undertaken for a person
who would serve as only one of seven members of the Board of
Governors, and this bill would remedy that omission.
The fourth provision of the bill would restrict lobbying by the
Federal Reserve.
Mr. Chairman, one need not have been around Congress as long as
I have to be painfully aware of the intense lobbying activities that
seems to arise whenever a bill opposed by the Federal Reserve is
before the Congress. Members are swamped with calls and visits from
•bankers and businessmen. It has been evident that this intense lobbying activity is no spontaneous grassroots affair. Not until the minutes
of the boards of directors of the Federal Reserve banks became available to your committee, however, had it been documented how extensively this lobbying has been orchestrated by the Federal Reserve
Board itself.
Now, i f the Federal Reserve wishes to kill or modify a particular
piece of legislation, it has a powerful network of friends from the
biggest corporation board rooms to the smallest banks that it can call
upon. It seems highly improper to me for the Federal Reserve, an
13
agency of the U.S. Government, to urge bankers who it regulates to
lobby the Congress in support of specific legislation and get their
friends and associates in the banking communities to do the same.
A s you have observed, Mr. Chairman, the Federal Reserve has a
powerful hold on those bankers. I t makes critical decisions affecting
their businesses, and the bankers, naturally, are anxious to respond
to its plea for help.
Officials of other agencies of the Government, I might point out,
have been specifically forbidden by law from the kinds of lobbying
activities which have been disclosed by the Fed's own minutes. The
Federal Reserve is exempted only because of the technicality that its
funds are not appropriated by Congress. Well, that is a loophole that
I think should be closed. It is no more acceptable for the Federal
Reserve to use its officials or directors to lobby on behalf of its interests than it would be for members of any other regulatory commission to elicit industries they regulate in lobbying efforts. Nobody
wants to limit the rights of any citizen to petition his Congress, but
the limits to the propriety of such activity in the case of officials of the
Government are will recognized in law.
Finally, this bill would prevent conflicts of interest.
Public trust in Government is one of the fundamentals of success
of the democratic government. Unfortunately, public opinion polls
in recent years have shown a strong element of distrust in Government. One factor that feeds such distrust is the revelation from time
to time of conflict of interest situations on the part of Government
officials. Therefore, it seems quite essential to me that every effort be
made to prevent conflicts of interest.
While I have great confidence in the basic integrity of the Federal
Reserve and its officials, the minutes of the Federal Reserve Board of
Directors do reveal that conflict of interest situations may not always
have been satisfactorily resolved, so it is important, it seems to me,
that potential conflict of interest situations be explicitly dealt with
in the statute.
The Federal Reserve has not been covered by the same conflict of
interest statutes that govern employees of other official departments
and agencies, and this bill, H.R. 8094, would extend to Federal Reserve bank officials, employees, and directors the same restrictions
against conflicts of interest that apply elsewhere in government.
Mr. Chairman, it seems to me that the changes proposed in this
legislation are hardly revolutionary, but I believe they are very important. They would hold the Federal Reserve more accountable to
the Congress and to the public in the conduct of monetary policy without compromising the essential degree of independence of the Fed
originally intended by Congress. These changes would increase the
participation of a broader segment of the public in the operation of
this vital institution, and they would apply to the Fed the same strictures against lobbying and conflicts of interest that have applied for
a long time to other agencies of the Government.
A n d so, Mr. Chairman, I would like to commend you and this
committee for undertaking the important reforms that are embodied
in this legislation.
http://fraser.stlouisfed.org/
93-444 O - 77 - 2
Federal Reserve Bank of St. Louis
14
The CHAIRMAN. I want to commend you, Mr. Wright, for a very
able statement and in saying, as you do on page 3 of your statement—
and I quote: "The Fed is, after all, not infallible, and in fact has had
a rather spotty record over the years in management of the money
supply."
Y o u are carrying on in the tradition of Dean Swift, who I mentioned in my introductory remarks said that "Providence never intended to make the management of public affairs a mystery to be
comprehended only by a few persons of sublime genius."
I think it is a credit to your leadership and to the new look in Congress generally that the legislature has recently been better fulfilling
its constitutional mandate under article I, section 8, to supervise the
coinage of money and; the value thereof. A n d 1 think the Federal
Reserve has come a long way, too; and thus it is my hope and belief
that this rather modest bill will be taken in good spirit by all concerned and that it can be speedily enacted.
A n d I want to thank you so much for coming here.
[The prepared statement of Congressman Wright follows:]
15
S
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A
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E T
H
E H
O
U
S
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O
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I
T
T
E
E O
N B
A
N
K
I
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, FINANCE A
N
D U
R
B
A
N AFFAIRS,
O
N T
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E
D
E
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F
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F 1
9
7
7
For m
a
n
y years under the leadership of the late Wright
Patman of Texars and n
o
w Chairman Reuss of Wisconsin, the House
Banking Committee has taken the lead in stimulating public discussion on the importance of monetary policy in the nation's
economy.
Today the public is m
o
r
e aware than ever of the impact of
monetary policy and interest rates on jobs, inflation, production
and economic growth.
The heightened awareness is due partly to the
persistent efforts of this Committee, partly also to the wrenching
experience of 1
9
7
4w
h
e
n interest rates climbed to levels w
e could
not have imagined previously.
The public and Congress n
o
w recognize
better than ever the importance of the Federal Reserve's conduct
of monetary policy and regulation of the banking system, the need
for regular oversight by Congress, and greater accountability to
the public on the part of the Fed — in short, the provisions
embodied in H. R. 8094, the Federal Reserve Reform Act of 1977.
This Committee has done a thorough job of laying the groundwork
for this legislation.
The FINE Study (Financial Institutions and the
Nation's E
c
o
n
o
m
y
) in the 94th Congress heard from scores of witnesses
about the need for financial reform, m
a
n
y of them directing their
testimony to the need for changes in the' Federal Reserve S
y
s
t
e
m
»
The landmark Committee study, "The Federal Reserve Directors — A
Study of Corporate and Banking Influence" of August, 1976, spelled
out in great detail the w
a
y in which the Federal Reserve System has
b
e
c
o
m
e dominated by a fairly narrow range of interests.
16
N
o more studies or hearings are needed.
Every aspect of the
issues dealt with in this legislation has been well explored. Vfhat
is needed n
o
w is legislation addressing the problems that have been
identified in the Federal Reserve System/ and enhancing the role
of Congress in oversight of monetary policy in the coning years.
This legislation goes directly to the chief concerns that have
been raised.
A.
Requiring a quarterly dialogue on monetary policy.
The experience with H. Con. Res. 1
3
3 in the 94th Congress
gives us every reason to m
a
k
e the practice of mandatory quarterly
appearances before the Banking C
o
m
m
i
t
t
e
e
s of the House and Senate
a permanent part of the statute.
two-way affair.
The dialogue is a most constructive
It gives the Fed a forum for explaining its policies
to Congress, and gives Congress an institutionalized forum for
raising questions and expressing its o
w
n concerns.
The Fed is expected,, after all, to be responsive to Congress.
It was never intended- to be entirely independent, of Congress, as
has been well recognized for s
o
m
e time.
For instance, in hearings
on the President's economic report before the JEC in 1960, Mr.
Patman asked former Fed Chairman William HcChesney Martins "Would
you agree, Mr. Martin, that the only authority for issuing coney
and regulating the value of m
o
n
e
y is the Constitutional authority
of Congress?"
And Mr. Martin replied, "I have never questioned
the authority of Congress."
17
It is extremely important that the views of Congress be m
a
d
e
Explicit to the Fed.
The Fed is, after all, not infallible, and
in fact has had a rather spotty record over the years in m
a
n
a
g
e
m
e
n
t
of the m
o
n
e
y supply.
During 1
9
7
2 and 1973, for instance, the Federal
Reserve expanded the m
o
n
e
y supply by up to 9 percent annually.
a
s warned repeatedly by M
e
m
b
e
r
s of Congress, including
The Fed w
M
e
m
b
e
r
s of this Committee, that too rapid an expansion of the m
o
n
e
y
supply would be inflationary.
And w
es
a
w inflation grow from 3.3
percent in 1
9
7
2 to 6.2 percent in 1
9
7
3 and up to 11 percent in 1974.
Beginning in 1973, apparently recognizing that its m
o
n
e
y supply
policies were causing inflation, the Fed began to slow d
o
w
n the m
o
n
e
y
supply.
Then in mid-1974 the Fed abruptly put on the brakes,
dropping the m
o
n
e
y supply to an annual growth rate of just 1.5
percent between June, 1
9
7
4 and January, 1975.
Together with the on-
going inflation, the result w
a
s a prime rate at 12 percent and
Treasury bills at 9.6 percent, with disastrous effects on the economy.
Perhaps had H. Con. Res. 1
3
3 been in effect during that periodr
the worst excesses of that experience could have been avoided.
H. Con. Res. 1
3
3 required the Fed to testify only on targets
for monetary growth for the ensuing year.
The requirement in this
bill that the Fed testify also on anticipated velocity, estimated
levels of interest rates, and the composition of the Fed's portfolio is a worthy addition to H. Con. Res. 133.
It will contri-
bute greatly to the public's understanding of monetary issues, and
will help m
a
k
e the Fed m
o
r
e accountable to Congress in a completely
appropriate way.
18
B.
Broadening public representation on the boards of directors
of the Federal Reserve Banks.
The s
u
m
m
a
r
y conclusion of this Committee's staff study of
Federal Reserve Directors was very well put — namely, that "the
Federal Reserve Directors are
apparently representatives of a
small elite group which dominates m
u
c
h of the economic life of
this nation."
It has been true, as t.he study noted, that the list
of the Federal Reserve Directors reads like a page out of "Who's
V
7
h
o in American Corporations."
Mr. Chairman, the boards of directors have been too narrowly
dominated by bankers and businessmen.
There are m
a
n
y others w
h
o
have just as m
u
c
h expertise and certainly as great an interest in
the policies of the Federal Reserve.
The requirement that Class
B directors be considered "public" representatives, as well as Class
C directors, and that both groups represent consumers, labor, and
services as well as agriculture, commercer and industry is. well
conceived.
And while i t should not have- to be stated that directors be
chosen "v/ithout discrimination on the basis of race, creed, color,
sex, or national origin," the record of the Fed indicates that such
a statutory requirement is indeed advisable.
It is interesting that
until this Committee and its Chairman launched a campaign during the
94th Congress to end discrimination in the Fed, not a single w
o
m
a
n
and only five minority representatives had ever been counted a
m
o
n
g
the 1,042 persons w
h
o had served on the boards of directors during
19
the history of the Federal Reserve.
The Fed should be c
o
m
m
e
n
d
e
d
for its recent steps to end discrimination.
X believe reinforcement
of the Fed's effort with explicit statutory requirements would be
highly desirable.
C.
Requiring Senate Confirmation of the Chairman of the Board
of Governors,
The Chairman of the Federal Reserve Board is one of the most
powerful positions in the United States.
It is almost inconceivable
to m
e that a person can be appointed to that position for a period
of four years without undergoing the s
a
m
e process of Senate confirmation that governs far less important positions in the federal
establishment.
For the position of Chairman, the Senate should have
an opportunity to explore the nominee's qualifications and views
above and beyond the examination it would customarily undertake for
a person w
h
o would serve as only one of seven m
e
m
b
e
r
s of the Board
of Governors.
D.
It is time? to remedy this omission.
Restricting Lobbying by the Fed.
Mr. Chairman, one need not have been around Congress as long
as I have to be painfully aware of the intense lobbying activity that
s
e
e
m
s to arise whenever a bill opposed by the Federal Reserve is
before the Congress.
M
e
m
b
e
r
s are s
w
a
m
p
e
d with calls and visits fron
bankers and businessmen.
It has been evident that this intense
lobbying activity is no spontaneous grass roots affair.
20
Not until the minutes of the boards of directors of the Federal
Reserve Banks b
e
c
a
m
e available to this Committee recently, however,
has it been documented h
o
w extensively this lobbying has been
orchestrated by the Fed itself.
If the Fed wishes to kill or modify a particular piece of
legislation, i t has a powerful network of friends from the biggest
corporate board rooms to the smallest banks that it can call upon.
W
h
e
n M
e
m
b
e
r
s of the Board of Governors attend meetings of the regional Reserve Bank boards of directors to urge t
h
e
m to lobby
against a G
A
O audit of the Fed, and to encourage their friends
and associates to join the campaign, a powerful network of
influence is unleashed.
The problem is especially serious in the
case of directors w
h
o are bankers subject to the regulation of the
h
o are asked to join in the lobbying effort.
Fed, and w
has a powerful hold on these bankers.
The Fed
It can approve or disapprove
a bank merger or holding c
o
m
p
a
n
y acquisition.
It can approve or
disapprove a loan to a bank from the Federal Reserve discount
window.
The bankers are naturally anxious to respond to the Fed's
plea for help.
Officials of other agencies of the government have been
specifically forbidden by law (18 U. S. Code, 1913) from the kinds
of lobbying activities disclosed by the Fed's o
w
n minutes. The
Fed is exempt only because of the technicality that its funds are
not appropriated by Congress.
closed.
This is a loophole which should be
It is no more acceptable for the Federal Reserve to use
21
its officials or directors to lobby on behalf of the Fed's interest
than it would be for m
e
m
b
e
r
s of any other regulatory commission to
enlist the industries they regulate in lobbying efforts.
N
o one wishes to limit the rights of any citizen to petition
his Congressman.
But the limits to the propriety of such activity
in the case of officials of the government are well recognized in
law.
I strongly endorse the provisions of II. R. 8
0
9
4 which apply
to the Fed restrictions against lobbying similar to those that
apply to other agencies of the government.
E.
Preventing Conflicts of Interest.
Public trust in government is one of the fundamentals for the
success of democratic government.
Unfortunately, public opinion
polls in recent years have s
h
o
w
n a strong element of distrust
in government.
O
n
e factor that feeds such distrust is the revela-
tion from time to time of conflict of interest on the part of
government officials.
Therefore, it is essential that every effort
be m
a
d
e to prevent conflicts of interest.
While I have great confidence in the integrity of the Federal
Reserve and its officials, the minutes of the Federal Reserve
board of directors do reveal that conflict of interest situations
m
a
y not always be satisfactorily resolved.
So i t is important
that potential conflict of interest situations be explicitly dealt
with in the statutes.
22
The Federal Reserve has not been covered by the s
a
m
e conflict
of interest statutes that govern employees and officials of other
departments and agencies.
H. R. 8
0
9
4 would extend to Federal
Reserve Bank officials, employees, and directors the s
a
m
e prohibition against participation in possible conflict of interest
situations that apply elsewhere.
It should b
e
c
o
m
e a part of our
body of law.
* * * * * * *
The changes proposed in this legislation are hardly revolutionary, but they are important.
They hold the Fed m
o
r
e accountable
to Congress and to the public in the conduct of monetary policy
and regulation of banks, without compromising the essential independence of the Fed originally intended by Congress.
They increase the
participation of a broader segment of the public in the operations
of the Fed.
And they apply to the Fed the s
a
m
e strictures against
lobbying and conflicts- of interest that apply to other agencies
of the government.
Mr. Chairman, I would like to c
o
m
m
e
n
d you and this Coszmittee
for undertaking the important reforms embodied in this legislation.
23
T h e CHAIRMAN. M r . A n n u n z i o ?
Mr. ANNUNZIO. Thank you, Mr. Chairman, I join you in commending our distinguished majority leader for his very excellent statement
on H.R. 8094.
I have been on this committee for 13 years; and in all of the years
that I have been on the committee, we have been attempting to bring
a closer relationship between the Congress of the United States and
the Federal Reserve Board.
I have many times made the statement that I don't like the word
"independent" to begin with. Y o u know, this business of "independence"—it is dependent upon the Congress. W e are a Nation that has
been built upon a party system; and I think, in order to get wet, you
must jump into the pool.
A n d the fact that, on this committee we have had legislation to
audit the Federal Reserve Board, and then we had an amendment
to that legislation, and then the minutes of the Open Market Committee, where we said they would be made available a year later
and then that legislation was defeated—we have been toying with
the idea of a coterminous term for the Chairman of the Federal
Reserve, with the President of the United States. I have never really
seen anything wrong with that. I thought that was an excellent idea.
Now, to broaden the membership to include different segments of
our community seems a logical step; and I applaud you for taking
the time out this morning to give us your views on the legislation.
But, Mr. Wright, do you see anything in H.R. 8094 that in any
way would impede the Federal Reserve Board in doing its job of
regulating the monetary policy of our Government ?
Mr. WRIGHT. Mr. Annunzio, I don't see anything that would impede
it in doing its job. It would make it responsive to the Congress and
responsible to the people's elected representatives. I think that is
what was intended in the very beginning.
I don't think Congress intended, as you have suggested, to create
a completely autonomous group of people to make decisions of such
total magnitude and such great consequence to the whole economy
of the entire United States and to be unreportable to anybody.
Surely Congress did not intend to create a group of people not
answerable to Congress, not answerable to the President, not removable by the people nor by the Congress, not even identifiable by most
of the people, not answerable in the sense of the appointment of the
Chairman of that group being subject to confirmation by the U.S.
Senate.
I don't think that was really intended.
O f course, the decisions made by the Federal Reserve group, unelected people, have a profound effect. They can vitiate and set at
naught the clear, purposeful intent of the U.S. Congress. W e have
to go back only a couple of years to have a perfect and shocking
example.
Congress, in the early part of the last Congress, in 1975, intentionally
and purposefully voted a tax reduction act. The reason Congress did it
was to make more money flow and lubricate the machinery of prosperity so we could pull ourselves out of the recession.
24
The Federal Reserve, unelected, unanswerable, on its own, unilaterally decided that Congress was wrong, apparently, and set at
naught, vitiated the effects that we had intentionally set in motion.
I n late spring or early summer, the Federal Reserve practically
doubled the interest rates of short-term1 securities and halted the recovery in its tracks, stalling the revival of the economy and utterly
doing away with the congressional initiative.
Now, I just don't think that ought to be tolerated.
Mr. ANNTTNZIO. Mr. Wright, as you know, virtually every other
agency in our Government is controlled by provisions such as have
been outlined in H.R. 8094. Do you have any evidence to show that
these other agencies have been hampered in performing their job
because of these controls ?
Mr. WRIGHT. Well, Mr. Annunzio, quite frankly, I don't think anybody could make a showing that the modest controls, that are proposed
in this bill have hampered any other agency of Government in performing its functions.
I suppose we could find restrictive language that has at times been
placed around other agencies and departments and encumbered them
to some degree, but certainly nothing of the type that is encompassed
in this bill.
Every other agency that I know anything about is required by law
to comply with these fundamental guidelines; and I can't see any
reason on Earth why the Federal Reserve Board should be sancrosanct
and exempt.
Mr. ANNUNZIO. I thank you for your very constructive contribution.
M y time has expired. Thanks for being with us.
T h e CHAIRMAN. M r . Stanton.
Mr. STANTON. Thank you, Mr. Chairman.
Mr. Wright, we are always pleased to see you; and I don't know—
you could quickly correct me: either you used to be, or somehow a
long time ago, a bank director yourself. Is that true?
Mr. W R I G H T . N O . I never have been a bank director. I n the past I
was a bank depositor. [Laughter.] More recently, I have been a borrower. I have owned some stock which I inherited from my parents'
estate in a small bank. But that is the extent of my expertise in the
question of directing banks. I could not claim that I know much about
directing a bank.
M r . STANTON. I am glad you corrected me on that. I wasn't sure.
But I was getting at the point.
A s I said earlier, we are very pleased to see you; and I wonder, are
you appearing in your role as truly one of the most respected Members of Congress, most knowledgeable, and a man I follow more times
than I don't; or are you really in a capacity to lend this legislation
in your leadership role, the approval of the basic idea from the
leadership ?
M r . WRIGHT. Well, nobody ever can divorce himself completely
from his own convictions; and he should not try to. I believe in this
kind of reform. I believe in it as a Member of Congress.
I just happen to eel that the decisions of the Federal Reserve are
verv fateful. They profoundly affect the lives of every American;
and I thiilk those Americans are entitled, through their elected repre-
25
sentatives, to have some greater degree of influence and control over
the policies that are made.
I don't impugn any false motives or bad motives to anybody who
ever has served on the Federal Reserve Board. That is not my purpose. I think they are sincere people. I do think sometimes they are
out of touch with the average people in the country and out of touch
with what is necessary to make the economy grow.
A n d for that reason, it seems to me that, as I said, as a citizen and
as a Member of Congress and as a spokesman for the majority, in all
of those roles, I favor this basic legislation.
M r . STANTON. Last week I had an opportunity to speak to some of
the government people of France and some French bankers. I n listening to them talk, I could not draw the conclusion whether or not the
majority of the big industrial businesses owned more banks or the
banks owned more industrial businesses, it is so interrelated.
I don't know how you could ever separate the two in a country like
France.
A n d one of them made an interesting remark to me. H e said:
Y o u know, you people i n the United States of America are most fortunate i n
probably having the best fiscal system ever devised i n modern times.
Would you agree with that?
Mr. W R I G H T . I must confess to you, Mr. Stanton, I am not an authority on fiscal systems in vogue in other countries.
Mr. STANTON. But he was speaking about, you know, we have 14,000
banks and the separation of the banks and the investment business and
the security business and so forth.
Mr. WRIGHT. The conclusion does seem plausible to me. Yes; I would
have to say, on balance, that our banking system in the United States
is a good one. I don't disparage it at all. I just think it ought to be
strengthened. A n d I think that the Congress of the United States has
a rightful role to play in a dialog over far-reaching policies.
Mr. STANTON. In colloquy there with M r . Annunzio, in pointing out
one example that you felt was bad and the rising of the price of money
and so forth in 1972 and 1973 and you felt Congress should do something about that, and so forth and so on. Do you think Congress should
have full authority over both the monetary and fiscal policies of our
country ?
Mr. WRIGHT. When you ask the question, I think it is necessary for
us to understand what we mean when we say " f u l l authority." Obviously, it would not be well for us to require all 435 Members of the
House or all 535 Members of Congress everv time interest rates go up
or down to have a vote on the Hosue floor. That would be unwieldy. I
don't believe that it would produce a professional result.
Obviously, it is necessary for people with understanding and expertise to have enough flexibility to manage and control the Nation's
money supply, its growth and the velocity of its growth and the effect
that it has' on interest rates, because interest rates just deeply affect the
lives of all Americans.
Now, to the end that Congress should set broad policy, yes; I think
Congress should set broad policy.
Mr. STANTON. I n both the fiscal and monetary areas?
26
Mr. WRIGHT. Yes; I think so. I don't think Congress can administer
the specific day-to-day decisions any more than it could make the
day-to-day decisions about operating the Army or the Navy or any
other agency of the Federal Government.
But broad policy, yes; I think Congress should, indeed. A t least,
it ought to have views and a regular forum in which its views are
capable of being communicated to those people whose responsibility
it is to carry out policy.
M r . STANTON. Well, I would be glad to discuss my own thoughts
with you at a later time on that. We sure don't agree on that. But
my time has expired.
T h e CHAIRMAN. M r . H a n l e y ?
Mr. HANU3Y. Thank you very much, Mr. Chairman.
I, like all of us, am delighted that our esteemed majority leader
took the time and the initiative to be the first witness this morning.
I am further delighted with the content of your testimony and, in
particular, one sentence part, about the regulating the value of money
is the constitutional authority of the Congress. A n d I have been a
long, long-time critic of the virtual autonomy of the Fed.
I am delighted that we are dealing with the legislation that is in
front of us, and am delighted with your support in its behalf.
And, as you have essentially said, under the concept that has prevailed, in my judgment, for far too long, the Fed has virtually unlimited authority to make decisions, establish programs and policy
that have such a dramatic effect on the economy of this country.
A n d they are not—do not have to be responsive to the will of the
majority of the American people.
I f their judgment happens to be poor—and I am also delighted to
note the fact recognized that those who are associated with the Board
are representative of really only corporate America—but i f their
judgment falters, with a negative effect upon the economy of the
United States, the Congress has to respond and react—and defend,
for that matter—without really having had any input into a judgment
that resulted i n that subsequent economic defect.
A n d I, on a number of instances in this committee, would say to
Dr. Burns:
A t what point i n time are you going to change that policy, where you are
turning the tap off from the standpoint of money supply, i n an effort—supposedly i n an effort to get at inflation—when you are not accomplishing your
goal, and i n America that policy has produced a phenomena whereas we have
intolerable inflation along with recession?
But the plea that some of us made—the reaction was like the proverbial "water off the duck's back." So you can express yourself, but
that is as far as you sro.
So, in any event, I am delighted that I am in grood company with
you, Mr. Wright, and that apparently we are on the same freauency.
I want to commend, in particular, our chairman for the initiative
that he has taken and the determination and the persistence that he
has evidenced in an effort to get at the root of his problem.
I might ask you a question. I understand that next up we are going
to hear from representatives of the consumer groups and a recom-
27
mendation, as I understand it, is that three people, representative of
consumers, would be sitting on the Board. What would your opinion
of that be?
Mr. WRIGHT. Well, I think it is highly appropriate. Mr. Hanley, the
decisions that are made by the Federal Reserve Board affect consumers all over the land. There has persisted a somewhat outmoded
concept, in my judgment, among some of those serving on the Federal Reserve Board, to the effect that the only way successfully to fight
inflation is to raise interest rates.
Now, I just don't happen to believe that's true. A t one time, it might
have been true; but it certainly is not true today; and the evidence
of the last few years brings sharply into focus the fallacv of any such
doctrine as that—when a few people can sit down and unilaterally
make decisions which raise interest rates to the levels they reached in
1974.
They affect the lives and futures of consumers all over the United
States. It isn't just bankers who are involved in interest rates; and it
isn't only direct borrowers from banks who are involved in interest
rates.
The rise in interest rates is more inflationary and more depressive
to the economy simultaneously than almost any other action one can
imagine.
Dr. Leon Keyserling, who was the Chairman of the Council of
Economic Advisers under President Truman, put it rather well, I
think, once when he made this comparison. H e said:
When yon raise the price of steel, that is more inflationary than when yon
raise, for example, the price of artichokes, because steel is used i n the production
of more end commodities than artichokes.
Then, he asked the question, "What commodity is used in the production of more end commodities than anything else ?
A n d the answer, of course, is borrowed money. When you raise interest rates, you raise prices at every level of the economic structure;
and when you do that, you layer in an extra weight upon the back
of the final consumer, who, in his final purchase price, is paying those
increased interest rates that have been assumed by the manufacturer,
that have been assumed by the wholesaler, that have been assumed by
the retailer. And he gets a triple dose.
So, it seems only logical to me that decisions which so profoundly
and vitally affect his well-being as a consumer are decisions which
ought not to be made in a vacuum, absent his input or his opportunity
through some spokesman to have some say about what is happening.
Mr. HANLEY. I appreciate that response; and I think, again, evidence of the necessity for this legislation is vested in the fact that this
Congress this year has had to appropriate something like $15 billion in
"antirecession programs." A n d I believe that the reason for the necessity for that lies in defects in Fed policies.
Afifain, I appreciate your appearance.
A n d I thank you, Mr. Chairman.
T h e CHAIRMAN. M r . M i t c h e l l ?
Mr. MITCHELL. Mr. Chairman, because I was late getting in, I will
defer my questions.
28
I apologize to our distinguished majority leader. I have your testimony i n front of me; and I assure you, sir, that I shall read it, or I
shall scan it—and "scan" really means read word for word. But I
will defer the questions.
T h e CHAIRMAN*. M r . R o u s s e l o t ?
Mr. ROUSSELOT. Thank you, Mr. Chairman.
It is always a pleasure to have our distinguished majority leader
here.
M r . Wright, many of us have supported the Senate-passed version
of House Concurrent Resolution 133, which had the following statement in it—and as a matter of policy of this committee in our relation
with the Federal Reserve Board—and I notice it is absent in this resolution—and that was as follows:
The policy of maintaining the longrun growth of monetary and credit aggregates commensurate w i t h the economy's longrun potential to increase production so as to promote effectively the goals of maximum employment, stable prices,
and moderate long-term interest rates.
The thing that made that attractive to me, aside from the fact that
part of the language came from the F u l l Employment Act of 1946, was
the requirement that we were suggesting in policy to maintain a longrun growth of monetary and credit aggregates commensurate with the
economy's longrun potential to increase production.
I n other words, we tried to relate it to potential output increases.
Would you object to our including that kind of policy statement in
this language?
M r . WRIGHT. M r . Rousselot, I would not presume to suggest to the
committee what it should or should not include by way of specific
language. Everything I have said has been fundamentally conceptual.
Certainly the goals you have expressed and the language you have
just read are goals that most of us embrace, I should think. I think
most of us want to achieve the kind of steady and consistent and
orderly growth in the economy which will support maximum employment, minimum inflation, and moderate long-term rates.
I don't suppose there is a person here who would not endorse those
fundamental concepts. But as for the writing of specific language or a
statement of basic principles. I think I should leave that to the members of the committee.
M r . ROUSSELOT. Well, do you think there should be, in our policy
statements, some relation to potential output increases?
M r . WRIGHT. I don't think anything can be considered apart from
its rightful relation to productivity. I think that is one of the problems that has been encountered by those who truly believed in the
old laissez-faire manner that one way to curb inflation was to have
high unemployment. Well, you know, it iust hasn't worked that way.
I t doesn't work that way anvmore; and one of the reasons it doesn't
is because when you have a nlant operating and the Nation's economic
plant operating at 60- or 70-percent capacitv, you incur inordinately
hi<rh relative overhead costs which reduce individual worker
productivity.
I f that plant is operating at 95-percent capacitv, individual worker
productivity and unit costs are affected. Productivity goes up; unit
cost goes down.
29
A n d so, it seems to me that the question of worker productivity and
economic growth and f u l l utilization or somewhere near full utilization of the Nation's economic plant capacity are quite compatible
goals.
Mr. ROUSSELOT. SO, I assume your answer is "yes" ?
Mr. W R I G H T . I have forgotten what your question was.
Mr. ROUSSELOT. I f we might include in our statement of policy here
that there should be some relation to potential output increases.
Mr. WRIGHT. I have no objection to it, Mr. Rousselot.
A s I say, I am not trying to dictate the precise terms of the
legislation.
Mr. ROUSSELOT. Well, I just hope, in some of the mandates that we
have i n this bill, that we do better with this than we did with the Post
Office. That is all I have to say.
M r . W R I G H T . T O that, I would add, "amen."
T h e CHAIRMAN. M r . N e a l ?
Mr. NEAL. Thank you, M r . Chairman.
A n d M r . Wright, thank you for being here to express your opinions.
I personally think this is generally a good bill. It certainly addresses some problems that have gone unaddressed for some time.
I, though, have a problem with the emphasis on interest rates that
you addressed, Mr. Wright, and others have commented on, because
there seems to be an understanding that the Fed could reduce interest
rates at will and that that reduction would not have any impact on
some other aspects of the economy. That seems to be what I am hearing anyway; and I would like to explore that with you for a minute,
if I can.
I f we had absolute control over the Federal Reserve, which I know
is not suggested by this bill, it would seem to me—and knowing,
as you pointed out, the impact of interest rates on our economy and
how they affect everyone—that if we had the ability here, if we had the
control over the Fed, I would think that it would be our goal to bring
down interest rates, and I imagine you would share in that goal; would
you not?
Mr. W R I G H T . I would ardently hope for it.
Mr. NEAL. It is my further understanding that the only way that
the Fed can bring down interest rates is to increase the supply of
money; is that not correct ? Or is there some other way ?
Mr. W R I G H T . I am going to leave the answer to that question to some
of the rest of you on the committee. I am not at all sure that that is a
total and complete answer.
Certainly the supply of money has a profound effect upon the
proper interest rate. There is no question about that.
I t seems to me, though, that the idea of controlling inflation by
manipulative raising of interest rates and restriction of the amount
of monev flowing is fallacious. I don't think it works anymore.
I think any objective review of the last 20 vears would reveal that
it does not work. Hi<rh interest rates surelv have provided the primarv reason for the decline in housing and for the inordinate escalation of the price of housing. A younsr family today seeking to buy a
very modest home for, let us sav, $40,000, which certainly is not a
http://fraser.stlouisfed.org/
93-444 O - 77 - 3
Federal Reserve Bank of St. Louis
30
mansion, must pay in the normal amortization at prevailing interest
rates, more than twice that amount, almost three times that amount,
before he gets the home paid for.
It is paying much more for the mere privilege of borrowing the
money than it is for the land, the labor, the materials, the construction,
the house itself.
The major part of the cost of that house to that young couple is
interest. They can't afford it. We know they can't afford it; they know
they can't afford it.
A n d so, surely, it seems to me, that anything which produces more
acceptable interest rate ranges must be good for the whole economy.
I just think, if you look over the last two or three decades or more,
you can draw two parallel lines: one line being the economic level, the
health of the economy; the other line being the level of interest rates.
And I believe you will usually conclude that increases in interest rates
have preceded a reduction in economic activity and have preceded an
increase in unemployment. A n d I think those are things we can't
afford in this economy.
Mr. NEAL. Let me say I couldn't agree with you more. Y o u described
the problem quite correctly; and I think we are all trying to get at
the problem of high-interest rates. I think the question, the fundamental question, is how best to do that. A n d I think that is really
what we have to come to some mutual understanding of.
It is my understanding that i f we print a lot of money to bring
down interest rates in the short term, that, in fact, we can do that.
But the inevitable effect of that, in the long term, will be even higher
interest rates, because we will, by that action, increase inevitably the
rate of inflation. A n d it seems to me that that can be seen as a consistent trend whenever it has happened. A n d the question then becomes, " H o w do you deal with not only the short-term problem, but
the long-term problem?"
I guess the Fed could bring interest rates down tomorrow to a
considerable degree, just by beginning to print a lot of money. Money
would be more available and thus cheaper. But the inevitable result
of that, it seems to me, is inflation down the road, and it is because
of that time lag that we don't always see that relationship.
A n d even though the bill doesn't call for it, it does seem to me that
if we only focus on interest rates, that—and only focus on the short
term—that we are going to pay a very high price for it.
Mr. WRIGHT. Well, I think surely one would have to agree with
that; and I don't believe that the bill contemplates a focus only on
interest rates or focus only on the short term.
We have to look at these things on a long-term basis and understand
where we are going and where we intend to go and have some control
over it.
Mr. N E A L . I thank you. M y time has expired.
Mr. H A N L E Y [presiding]. Thank you, Mr. Neal.
Mr. Brown?
Mr. B R O W N . I was late; so I believe the other members should have
an opportunity to go first.
M r . HANLEY. M r . K e l l y ?
Mr. KELLY. Thank you, Mr. Chairman.
31
Mr. Wright, in your testimony, you said the supply of money has
an impact on interest rates. A n d also in your testimony it seemed as
though we in this country have just one problem, really, and that is
the Federal Reserve Board; and i f we can get a little more democracy
into the Federal Reserve Board, that is, have labor have a little
stronger voice in the operation of the Federal Reserve Board—and
I think you equate that with direct input by the people—that then
we won't have any more problems because interest rates are the predicate for all fiscal difficulty and all monetary difficulty, and the action
by the Fed in reducing the money supply has really caused all of our
difficulty.
Now, isn't this overlooking the proposition that when the Federal
Government moves into the money markets with huge deficits that
this Congress has piled up over recent years, doesn't that have an
adverse effect on the money supply, the same as activity by the Fed?
Mr. WRIGHT. Mr. Kelly, there is no question that it does. A n d I
think what you have said might be a rather gross oversimplification
of what I have been suggesting.
I don't suggest to you, by any manner of means, that a sole cause
of the problems of the country is the Federal Reserve Board, nor
would I presume to suggest that enactment of this bill will solve all
the problems of the country. There are other problems as well.
What I am saying, I think, is that it just makes sense to have a
broader view and a more general public view available in the discussion of something as profoundly fateful to the American public as
the determination of the monetary supply and interest rates.
The Federal Reserve Board regulates banks; and yet, its system is
so constructed that it is made up of bankers.
Now, let me just ask you: Do you think it would make sense if we
were to say that the Federal Power Commission should be made up
only of power producers? Do you think i f would make sense i f we
were to say that the Interstate Commerce Commission should be made
up only of those who are regulated—the truckers and the railroad
owners and so forth—and that nobody else would have any right to
have a say?
I don't believe you would embrace any such doctrine as that; and
therefore, I don't know any reason why you should embrace such a
doctrine with respect to the Federal Reserve Board.
Now, yes, with respect to your question about the effect of Federal
deficits upon money supply and the effect of Federal deficits upon
inflation, there can be no question—debt itself is inflationary, to the
end that it uses money—not only that which is in our pockets but
that which we don't yet have to bid up the price of goods.
Mr. KELLY. Let me ask you this: Aren't we really moving toward,
this legislation, a situation where the same forces that caused this
Nation to have a $700 billion debt to have all of these deficits each year,
and that being a minor part of it, that we have in excess of $3 trillion of
obligations that the people of this country have to pay, and this has all
been done by Congress, and that now we are going to let the Congress
get into the monetary system as well as the fiscal system, and that when
the forces can work on the monetary system the same way they have
worked on the fiscal system, we can follow New Y o r k right down the
32
tube at an accelerated rate ? Because there is nothing to indicate that
the Congress is going to exercise any reponsibility.
The $700-billion debt is really the good news. The $3 trillion that we
are in debt is probably the bigger lump. A n d what has Congress done
that would recommend to you that we ought to increase the control of
Congress over the Fed ?
Mr. WRIGHT. Mr. Kelly, an extension of your argument might conclude that Congress hasn't got sense enough to control fiscal policy and,
therefore, we ought to create some autonomous board out here and let
them set taxes and surrender and abrogate the responsibilities of the
Congress for doing that.
I don't happen to have that lack of faith in this system. I think the
people's elected representatives, by and large, are going to make right
decisions. I suppose if I did not believe that, I would not believe in
this thing we call democracy. I believe in the representative system,
and I think it is incumbent upon us, as elected representatives of the
people, to behave in a responsible fashion in the decisions that we
make.
Mr. KELLY. Just let me ask you this one question about the interest
rates and housing.
You seem to indicate that interest rates are what are responsible for
housing slowdowns.
Mr. W R I G H T . Y O U don't think they are ?
Mr. K E L L Y . N O ; I don't think they are. I think the fact that houses
now—the price of a house is up over 100 percent in recent years has
something- to do with it. I f you are suggesting that we don't care what
the price is, the American public—they just want to know what the
interest rate is—then I think that your suggestion is sound. But I think
the American public still wants to know how much something is going
to cost, and the price of everything in a house has gone up, and that
has to do with the amount of interest that has to be paid, and I just
ask you, isn't this suggestion that interest rates really are what caused
the slowdown may be an oversimplification ?
Mr. W R I G H T . 1 think it is one of the major contributing causes to
the economic slowdown. I really do. I think increased interest rates
always, or almost always, cause economic slowdown. I believe that is a
rupportable conclusion.
A n d with respect to the price of a house, I believe you will conclude
that the major part of what a young family would have to pay i f it
amortizes and pays off its house is interest rates. A n d I do believe that
the American public is intelligent enough that it wants to know what
it is going to be paying in interest.
I f we have concluded that debt is inflationary, I don't think it does
us any good just to make it easier to get into debt and harder ever to
get out of debt, and yet that is what happens when the interest rates
go to an inordinate level. It doesn't stop people from going into debt,
necessarily at least not until it gets to the point where nobody can
afford it. It does make it harder for people to get out of debt. It seems
to me that a better policy would be making it a little harder for people
to get into debt, maybe/ rather than making it harder for them to get
out of debt.
33
Now, we are talking about broad, philosophical terms here, but I certainly would not agree to what appears to be your fundamental conclusion, that the people's elected representatives in Congress lack the
intelligence to address themselves to monetary policy. I don't believe
that's true.
Mr. K E L L Y . Y O U don't have any examples to indicate that that is
not true, do you?
Mr. WRIGHT. Well, I think we, in general, with all of our faults and
all of our flaws and our mortal imperfections in the Congress of the
United States have done a fairly creditable job of running the country.
Perhaps democracy is not the most efficient form of government, but
I believe it is the safest and, in the long run, the best for people. A n d
if I didn't believe that, as I said a moment ago, I don't know that I
would want to be in the Congress of the United States. I don't suppose
I would believe in democracy and this representative system that we
have.
No, we are not all wise, those of us in the Congress. We are probably,
as the late Hale Boggs once described us, a collection of ordinary men
and women grappling with extraordinary problems. But I don't think
we solve those problems by abrogating our responsibilities and just
turning them over to somebody else and saying, you fellows take care
of that and we are going to look the other way; we don't think we are
smart enough.
I f we don't have that much confidence in our collective wisdom and
in our collective responsibility, then I don't think we have any business
being in Congress.
The C H A I R M A N [presiding]. The time of the gentleman has expired.
Mr. Blanchard?
Mr. BLANCHARD. Thank you, Mr. Chairman.
We seem to have strayed a little bit away from the bill.
I would like to ask you two quick questions—and I know you probably have other scheduling commitments this morning.
It is not in the bill, but it has been suggested that the Chairman of
the Board of Governors of the Fed should have a term that runs coterminus with that of the President.
Do you have any feelings on that either way ? That is something: that,
could be an amendment offered to this bill.
Mr. WRIGHT. Well, there might be some justification for it, yes.
A President of the United States finds himself to some degree hamstrung, I should think, i f he can appoint the Cabinet officials but must
necessarily be saddled with a holdover from a previous administration who directs anything so essential and so vital as monetary policy.
Now, if the President is entitled to have those people in policymaking positions and Cabinet secretaryships, i f he is to carry out
the purposes of his administration it seems equally important to me
that a new President should have the opportunity to have someone
harmonious with his economic aspirations and his economic goals serving as Chairman of the Federal Reserve Board.
M r . BLANCHARD. T h a n k you.
One other question: Have you discussed this legislation at all with
the President?
34
Mr. W R I G H T . N O , I haven't had that opportunity, Mr. Blanchard.
Mr. BLANCHARD. Thank you for your time.
Mr. MITCHELL. Would the gentleman yield ?
Mr. B L A N C H A R D . I would be happy to yield to my colleague from
Maryland.
Mr. MITCHELL. Mr. Wright, I just want to make sure I understood
your responses properly.
As you know, I have introduced a bill calling for Senate confirmation of the appointment of the Federal Reserve Board Chairman and
the Vice Chairman—that is, H.R. 6273—and also regularizing the
appointment to come 1 year and 12 days after the inauguration of the
President. Y o u responded in terms of the regularizing of it and responded in the affirmative.
Would you briefly respond to the matter of Senate confirmation of
the appointment of the Chairman of the Federal Reserve ?
Mr. WRIGHT. I would be happy to, Mr. Mitchell. I n fact, in my
initial testimony, I did so. I definitely believe that the Senate should
have the opportunity to confirm any appointee who would serve in
a position of this importance. I think I said that the Senate does
have the responsibility and the right to act in confirmation of officials
of much lesser and less-grave responsibilities, and that it seems only
proper that the Senate should have the opportunity to examine the
credentials and the views and the background and the qualifications of
a nominee for the position of Chairman of the Federal Reserve Board.
Mr. MITCHELL. Thank you very much.
A n d I thank the gentleman for yielding to me.
Mr. WRIGHT. A n d I commend you, Mr. Mitchell, very strongly for
the foresight which encouraged you to introduce that legislation. I
think you are on the right track. I am here in support of your initiative.
T h e CHAIRMAN. M r s . Spellman.
Mrs. S P E L L M A N . I want to thank the gentleman, the distinguished
majority leader, for his excellent statement delivered with his usual
eloquence. I always enjoy hearing you talk.
Mr. Annunzio said earlier that he had been here for 13 years and
that he felt that there ought to be a change, and I must say that I
have been here for less than 3 years and I found it was absolutely
shocking that the Fed is insulated from and impervious to the directions in which the Congress attempts to move and the fiscal policies
which it attempts to set. It just makes perfectly good sense to me that
monetary policy should complement and not thwart the fiscal directions set by the Congress.
I was interested that you used housing as an example, and it is very
timely that you do so, because it was just this weekend that I was
talking: with a group of builders who were lamenting the fact that
houses have gone so high, and someone who is not in the building
industry pointed a finger at labor and said, oh, yes, labor has reallv
sent the cost of housing UD, and the builders turned to him and said,
oh, no, it is interest rates that have sent housing costs so high, because
as they start on a development or on the building of a few homes, they
start with borrowed money, and all the way through the cost of monev
is so hi<rh. everv time they turn—and they need to borrow money constantly—that by the time that house is ready, the interest costs have
35
driven the cost up to the point where young people cannot afford to
buy those homes.
A n d so I don't intend to take a great deal of time because your
statement is so explicit in itself, but I do want to compliment you for
that statement, and for the comments that you have made since.
Mr. WRIGHT. Well, thank you very much, Mrs. Spellman. I fully
share the conclusions which you have expressed.
Mrs. Spellman. I yield back the balance of my time, Mr. Chairman.
T h e CHAIRMAN. M r s . F e n w i c k .
Mrs. FENWICK. Thank you, Mr. Chairman.
Mr. Wright, like my colleagues, I am always amazed and impressed
by the fact that every one of your sentences has a verb. [Laughter.]
Mrs. FENWICK. I wish I could say the same of my own testimony,
when I see it in the transcripts.
A n d I, too, am here only 3 years, but my reactions, I am afraid, are
quite different in this regard from my colleagues.
I wish that Mr. Stephens was still here to describe for us Mr. Carter
Glass' reasons for establishing the Federal Reserve as an independent
body and the difficulties that the enabling legislation was designed to
correct, by setting up an independent Federal Reserve. But I remember one occasion when he was still with us in which this was very
cogently and eloquently described.
As I understand it, as a member of the public, the purpose of the
Federal Reserve Board is to see that we have sound banks in this
country, and that we have a stable monetary situation. That is why
Congress delegated to them, according to the description that was
given us, the power to act in this field. It is absolutely essential to
the economy of the country and far more essential than quick responses
to political exigencies. W e have to have a sound banking system which
people can have confidence in, and it seems to me that to guarantee this,
it is essential to keep politics out of our monetary policy.
But speaking of housing, it is also interesting that I, too, have just
received a great deal of information concerning housing. This is contained in a study conducted for the Smith-Richardson Foundation by
Rutgers University, and most specifically, B y Dr. George Sternlieb,
who, as you know, is a great authority in housing.
Well, as a result of this study—and I have here a chart—what
affects the cost of housing in most cases is Government regulation
itself—specifically, 9 Federal Government regulations, 5 State government regulations, 14 local government regulations—and the cost
of financing only one.
Now, this is an in-depth study not just of one or two builders'
opinions but a very careful and scholarly research effort. It is going
to be published and it is going to be an enormous volume. It was
reported in a preliminary fashion in the W a l l Street Journal. The
study goes into the government regulations that affect housing costs:
environmental controls, zoning requirements, all kinds of building
codes, current building costs and subdivision costs and energy conservation requirements. Then the study goes on to say that a Federal Real
Estate Settlement Procedures Act is, as much as interest rates, a problem in the cost of buying a house.
A n d then, of course, he mentions, also, interest rates.
36
"It would be a welcome change i f more Congressmen would take a
look once in a while at information like this," writes the Journal
concerning the Sternlieb report. "One would think that a new consumer agency might take as its job to put this kind of consideration
before the rest of government. The spectacle might be worth the price
of admission."
Now, we have excellent suggestions concerning the consumer interest, but I think that the primary concern—it seems to me, as a member
of the public we must look to the Federal Reserve for something that
is indeed independent. Certainly, they must report to Congress. Certainly, I think that the House Concurrent Resolution 133 was in every
way a wise measure. Certainly, I see no reason why the Federal Reserve chairman shouldn't be confirmed by the Senate. A l l of these
seem to me to be without any danger to an independent body.
But the first duty of the F e d is sound banking. I would be uneasy i f
I thought that the Federal Reserve Board was indeed not concerned
with guaranteeing sound banks and not concerned with a stable economy and was bending to the whims of public members, such as myself,
who might or might not understand the whole theory of banking.
So perhaps you and I arrive at the same conclusion from slightly
different points of view.
Mr. WRIGHT. Mr. Chairman, before responding to the comments so
aptly made by Mrs. Fen wick, may I express a personal problem ?
On Friday when we adjourned, Speaker O'Neill expressed to me a
question as to whether he would be here for the opining of business on
Monday. I promised that I would* check in at his office at 11:30 on
Monday, and i f he is here, would be present at his daily press conference, and i f he is not here, would tend to those matters necessary prepatory to the convening of the House. A n d I am wondering, under those
circumstances, i f it would be possible for me to receive any other
questions that might be available and respond to them in writing.
I am loath to do it, because I enjoy the colloquy with my colleagues
and regret very deeply that some of them have not had the opportunity
yet to express their thoughts to me.
I would say to Mrs. Fen wick that I have listened very carefully to
the comments that she has made. Not only do all of her sentences have
verbs, her logic contains verve.
Mrs. F E N W I C K . Y O U are charming, as always.
The CHAIRMAN. M a y I ask those—I think starting with M r . Hannaford—who have not had an opportunity to interrogate our distinguished witness would be willing to submit their questions, any questions they have. I know the majority leaders would promptly answer
them for the record, thus enabling him to be dismissed.
Mr. BROWN. Well, M r . Chairman?
T h e CHAIRMAN. Yes.
Mr. B R O W N . I certainly
will not make it impossible for the majority
leader to take care of his obligations to the Speaker. However, I would
much prefer to have an opportunity to get into some of the things in
his statement with him present so we could have the kind of open discussion and colloquy that we should.
37
For instance, his statements regarding the cost of housing and so
on are just wrong. The facts prove otherwise. The cost of the median
price of a home has gone up 100 percent while interest rates have gone
up 30 percent. The cost of land has even exceeded the cost of a house
at a rate greatly in excess—two or three times the increase in interest
rates.
I think that maybe it might be edifying for him to have the opportunity maybe to participate personally in such a discussion.
The CHAIRMAN. I f the gentleman from Michigan had been here
during the hour and a half that Mr. Wright has been here, we could
have had the benefit of such a discussion. However, I would hope if
there are specific questions, they would be asked of the majority leader
in writing.
Mr. WRIGHT. Mr. Chairman, I am apologetic. I just got another
message asking that I come over there to the Speaker's office, and if it
is not satisfactory to the members that I would respond in writing, I
would be more than happy to come back at some other time, if that is
what is desired.
I have been too long winded, and it is probably my fault, that I
have taken too much time in answering various questions.
The C H A I R M A N . Y O U have been most cooperative, and I think that
members will take in good heart these constraints on your situation.
I want to express on behalf of all of us our gratitude to you for coming here this morning, and we appreciate it.
Mr. WRIGHT. Thank you for your tolerance and your patience, for
letting me be with you.
The C H A I R M A N . A statement by Dr. Paul Samuelson, institute professor, department of economics, Massachusetts Institute of Technology, has been submitted for the record, and that statement is in
everyone's portfolio. Under the rule and without objection, that will
be received into the record.
Is there objection ?
[No response.]
The CHAIRMAN. Hearing none, that page will be printed in the
record at this point.
[The statement referred to of Dr. Samuelson follows:]
38
Statement B
y
Dr. Paul Samuelson
Institute Professor, Department of Economics
Massachusetts Institute of Technology
Nobel Laureate in Economic Science
Since monetary policy affects incomes of different
citizens, e
m
p
l
o
y
m
e
n
t opportunities, and m
u
s
t compromise
between different macro-economic aggregates, no independent
body of appointed persons can be allowed responsibility for
monetary policy.
The Constitution gives to Congress ultimate
responsibility in this area.
The Board of Governors of the
Federal Reserve System must, therefore, in the last analysis
be responsible to Congress.
Along with most American economists, I approve of
explicit legislation requiring the Federal Reserve authorities
to report regularly and in detail to Congress, outlining the
major goals to be achieved in the year ahead with respect to the
overall level of income, production, employment, interest rates,
and place levels.
To insure responsible coordination of monetary
and fiscal policies, the Chairman of the Board of Governors
should be subject to approval by the Senate and should have a
term of office that runs contemporaneously with the election
of the n
e
w President.
As a responsible government agency, the
Board of Governors of the Federal Reserve System should be
subject to conflict-of-interest rules and procedures and should
be precluded from lobbying for Congressional legislation
or from bringing influence upon the banks and holding
companies that it regulates to engage in such lobbying.
39
The CHAIRMAN. We had expected at this moment to hear from
Ms. Kathleen O'Reilly of the Consumer Federation of America who
had to absent herself to testify before another committee.
Let us stay in session here for a few minutes. I will ask staff to
inform us precisely when she will get here. I want to apologize to
those members who did not have a chance to interrogate the witness.
Mr. BARNARD. Mr. Chairman, would it be possible to coordinate
with the majority leader so that he can return for questioning during
our hearings?
I personally feel it would be very helpful for us to have dialog
with him, because he brought out some very interesting aspects of this
legislation.
The CHAIRMAN. I hear what you and Mr. Brown have said, and I
will see the majority leader and see if we can't ask for his return. I
would say that we might be able to ask supplementary questions.
Mr. BROWN. Mr. Chairman, I would ask unanimous consent that
page 28 of the budget issue paper put out by the Congressional Budget
Office in January of this year be included in the record, since that
page shows that median-priced homes in the period 1970-75 went up
67.9 percent whereas interest rates went up 6.6 percent.
[The information referred to by Congressman Brown, page 28 of
the budget issue paper put out by the Congressional Budget Office
follows:]
40
TABLE 11a.
CHANGES IN COMPONENTS OF OVERALL HOMEOWNERSIIIP COSTS,
MEDIAN-PRICE NEW HOMES, 1970-1975
1total
Il o n t h l y
(:ost
$217
1970
Monthly
Mortgage
Payment
$141
1971
230
143
Mortgage
Payment
as a P e r cent of
T o t a l Hoiisi n g Cost
Sales
Price
Prop >Xrt t e r esJt
Ins»ur- e r t jiS
Rs
Taxc
an<:e
ite
62
25,200
8.
.45%
7. 74
65%
$23,400
$5,.65
M a i li ten:
and i n c e
Reps
iirs
$31..76 S12 .15
10.,09
37..89
He:it
anci
U t i LIi t jLes
$26..74
13..20
26..27
31..87
1972
256
154
60
27,600
7.,60
6,.50
47..45
15,.88
1973
305
187
61
32,500
7.,95
7,.84
50..63
20..82
38..54
1974
370
224
61
35,900
8..92
13,.12
62..80
24 .00
45..35
1975
396
248
63
39,300
9 .01
10..68
64..98
26,.45
46..21
Change
19701975
82.4%
75.9%
67.9%
6 .6%
89 .0%
. 6%117 .77c
72 .Src
SOURCE:
See T a b l e
TABLE l i b .
104
4.
CHANGES I N COMPONENTS OF OVERALL HOMEOWNERSHIP COSTS,
FIXED-QUALITY NEW HOMES, 1970-1975
rotal
iMonthly
<
:ost
Monthly
Mortgage
Payment
M o r t |?age
Paym<?nt
as a P e r cent of
T o t a l L Hous - S a l e s
i n g (2ost
Price
64,.6%
$28,900
Ir l t e r esst
Rsi t e
Pre >PIr l s u r - e r t
ati c e
Ta>ces
Hesi t
anc!
U t iL l i t i Les
$30..05
1970
$268
$173
$43. 25
S14..89
1971
282
172
61,.0
30,300
7..74
13.,06
50..25
15 .86
31..41
1972
299
180
60,.2
32,200
7..60
7,.79
56..42
IS, .64
36..28
1973
335
205
61,.2
35,600
7.,95
12..03
52..62
21..86
43. 72
1974
388
243
62 .6
38,900
8,.92
13..12
62..80
24 .00
45..35
1975
428
268
62,.6
42,900
9..01
11,.43
73..59
29..47
45..23
Change
19701975
59.8%
54.9%
48.4%
6 .6%
64 .2%
70 .27c
97 .9%
50 . 5^
SOURCE:
8..45% $6..90
M a i ll tens
and l a c e
Rep 2
iirs
CBO c o m p u t a t i o n b a s e d on d a t a as i n T a b l e s 5a and 5b.
28
The CHAIRMAN. While we are waiting, the Chair will point out
that we are going to hear this afternoon at 2 from Mr. Biemiller of
the A F I r - C I O , and we will know in a moment whether Ms. O'Reilly
will be with us now or sometime this afternoon.
M r . VENTO. M r . Chairman.
T h e CHAIRMAN. M r . Vento.
Mr. VENTO. Would the gentleman from Michigan yield ?
Does that also indicate the increase in the price of housing and the
increase in the price of loan costs in terms of housing in that article
that you quoted from the Congressional Budget Office in January ?
41
Mr. BROWN. I f the gentleman will yield—all I am submitting are
the tables from the CBO.
Mr. YENTO. That makes a significant difference, and I would like
it entered in the record at this time.
Mr. BROWN. What is your point?
Mr. VENTO. Well, I haven't seen the article, and the gentleman from
Michigan left the impression that income had gone up 68 percent.
Mr. BROWN. I f the gentleman would yield, to the contrary, I have
made no mention of income, rather the tables merely refect the increases from 1970-75 in all aspects of cost and maintenance of homes,
mortgage, utilities, et cetera, and the average figure for a median-cost
home.
For instance, as I indicated, it shows the median cost of homes
during the period 1970-75, went from $23,400 up to $39,300, which
is a 67.9-percent increase, whereas interest rates during the same period
went from 8.5 percent up to a 9.01 percent, which is a 6.6-percent
increase. These figures are from your Congressional Budget Office. I
don't think that office would put out figures that are tilted to the side
or toward the argument that many of us are making on this side of
the aisle.
Mr. YENTO. Mr. Chairman, my point is that the price of a home
has gone up, and that compounds the effect of the interest rate.
I n any case, I w i l l examine the article.
The CHAIRMAN. I am told, members of the committee, that Ms.
O'Reilly w i l l be detained before the Interstate and Foreign Commerce
Committee for another 20 minutes, and, accordingly, we will make
p,n effort to schedule her this afternoon. I n the light of that, we will
recess the committee until 2 o'clock this afternoon, at which time we
will hear from witness Biemiller and very likely also from Ms. O'Reilly
and, i f we can get him back, from the majority leader.
[Whereupon, the committee recessed for lunch.]
AFTERNOON SESSION
The CHAIRMAN. Good afternoon. The House Committee on Banking,
Finance and Urban Affairs will be in order for continuation of its
hearings on H.R. 8094.
Our first witness this afternoon will be a distinguished representative of the labor movement who is well and favorably known to this
committee for his frequent and very valuable testimony, Andrew J.
Biemiller.
Mr. Biemiller has a prepared statement on behalf of the A F L - C I O ;
and, without objection and under the rule, that will be admitted in
full.
We would* then like to ask you to proceed.
Ms. Kathleen O'Reilly, of the Consumer Federation of America,
will be available later on this afternoon; and Congressman J i m
Wright, the majority leader, will also be available for those who did
not have an opportunity to examine him this morning.
A l l right, Mr. Biemiller, would you proceed, sir.
42
STATEMENT OF ANDREW J. BIEMILLER, DIRECTOR, DEPARTMENT
OF LEGISLATION, AMERICAN FEDERATION OF LABOR AND
CONGRESS OF INDUSTRIAL ORGANIZATIONS (AFL-CIO); ACCOMPANIED BY DR. RUDOLPH OSWALD, DIRECTOR, DEPARTMENT OF
RESEARCH
Mr. BIEMILLER. Mr. Chairman, my name is Andrew J. Biemiller. I
am director of the department of legislation for the A F L - C I O .
I am accompanied by Dr. Rudolph Oswald, director of the department of research of the A F L - C I O .
We appreciate this opportunity to present the views of the A F L - C I O
on H.R. 8094, the Federal Reserve Reform Act of 1977, introduced
by the chairman of this committee.
H.R. 8094 was originally introduced as H.R. 7646, a version which
included provision for regular audits of the Federal Reserve System
by the Comptroller General of the United States.
We are pleased to note that audit legislation has been reported by
the House Committee on Government Operations. Audit provisions
do not, therefore, appear in H.R. 8094.
H.R. 8094 is a very modest bill in its remaining provisions. Of
course we support it and gladly. But we believe additional reforms
are needed to do the job in view of the magnitude of the problem being
addressed, namely that of rendering the Federal Reserve System more
accountable to the Congress and to the public.
It is a problem which the Congress, and particularly this committee, has struggled for years.
The Federal Reserve System is perhaps the most powerful of the
Government's economic agencies. Its policies and decisionmaking have
fateful consequences for the economy at large and for the lives of
every citizen of this country.
As regulator of the money supply, it can produce recessions almost
overnight by choking off funds to vulnerable segments of the economy,
such as housing, small business, and State and local governments. B y
inducing rises in interest rates, it can raise the cost of doing business
throughout the economy and generate price increases in everything
we buy. Its responsibilities and the impacts of its decisions are truly
awesome.
The System is a legal instrumentality of the Federal Government,
but essentially it now represents the interests of the banking community and its large corporate customers.
This bias is built into the basic structure of the System. Created as
an "independent" agency, it has become virtually immune to the requirements of national policy and the broader public welfare except
as they may accidentally coincide with the public interest as perceived by bankers.
Endowed with its own independent income from loans and investments, it is beyond the power of the purse exercised by the Congress
over its other more humble creations. Backed by its influential banking and business constituency, it can readily muster formidable clout
to frustrate any legislative threat to its policies and its preferred
methods of operation, including secrecy.
43
Quite logically, the bill leads off with a directive setting the broad
framework of national economic policy within which the Federal
Reserve Board should pursue its monetary policies. No such statement
now appears in the Federal Reserve Act, leaving the Board totally
at liberty to pursue its own version of national economic policy, with
near disastrous consequences over the past many years.
Essentially, the directive is an adaptation of the goals set forth in
the F u l l Employment Act of 1946, to promote "maximum employment,
production, and purchasing power."
However, the bill substitutes the words "price stability" for "purchasing power". We believe the broader concept should not be eliminated, and suggest that the bill be changed to include "purchasing
power" as well as "price stability."
The Federal Reserve System has in the past rather doggedly pursued "price stability" through economywide reductions in purchasing
power, output, and production, regardless of the real causes of inflation. We would prefer that its mandate be clear that this singleminded
course is not acceptable.
Second, the bill writes into permanent law the previous requirement
under House Concurrent Resolution 133 for quarterly reporting on
proposed monetary policy to the Banking Committees of the House
and the Senate.
This is potentially an important vehicle for Federal Reserve accountability, particularly since it specifies additional information beyond mere monetary aggregates. Under the now-expired resolution,
the Chairman of the Board, Dr. Burns, was successfully able to frustrate questions seeking to probe the underlying assumptions used in
arriving at the overall monetary policy.
A s noted by the late Nathaniel Goldfinger in testimony 2 years ago
before this committee: "Questioning Dr. Burns about monetary policy
and its related economic and social implications has been like pushing
on a string."
We fully support the effort to obtain more meaningful information
on the goals and assumptions underlying the goals on monetary
aggregates.
Section 2 of the bill concerns the composition of the boards of
directors of the regional banks. The amendments implement national
antidiscrimination policy on race, creed, color, sex, or national origin.
A n d they expand the economic interest groups from which class B
directors may be selected to include "services, labor, and consumers."
These directors are to be designated as representing the public. This
is a long overdue recognition of changes that have taken place in the
economy of our Nation since the year 1913, when the present language
was adopted.
Our question is why this logical updating does not extend to the
remaining structures of the System, including the Board of Governors
itself, the Open Market Committee, and the Federal Advisory Council.
Our position is that all of the governing and advisory committees
of the Federal Reserve System should be operated under the same
expanded representation format. Monetary policy should not remain
a preserve of the banking community.
44
Because of the extraordinary power of the Open Market Committee, we have further recommended that it be abolished and its
functions be undertaken by the Board itself, whose members are
appointed by the President and confirmed by the Senate.
Section 3 of the bill provides for Senate confirmation of the President's nomination for Chairman of the Board. This has been included
in view of the fact the President can choose a nominee for Chairman
whose original Senate confirmation is of some antiquity, owing to the
14-year terms which Board members serve.
We believe a more fundamental solution is to shorten the terms
of Board members to 7 years.
The CHAIRMAN. Mr. Biemiller, if you will excuse my interruption,
we unfortunately, as I indicated before, are now in the process of a
series of votes on suspensions of the rules, which will take us some 50
minutes. Accordingly—and I having discussed this with you, and
we greatly appreciate your cooperation—we will declare ourselves in
recess until 3 p.m. and ask that you return at that time to finish your
testimony and to respond to such questions as there may be.
The Chair will also state that, without objection, the testimony of
Ms. Kathleen O'Reilly w i l l be admitted into the record following
the testimony and any colloquies that may ensue with Mr. Biemiller.
We now stand in recess until 3.
TBrief recess is taken.]
Mr. C A V A N A T J G H [presiding]. M r . Biemiller, Chairman Reuss has
asked me to conevey his apologies to you, but he was called to a HouseSenate conference and is unable to return. But we will resume the
hearings with your testimony; and I would like to express my personal gratitude and the gratitude of the committee for your patience
in waiting for us during the course of this long vote.
So, you may continue; and thank you very much.
Mr. BIEMILLER. Thank you very much, Mr. Cavanaugh.
I will pick up where we were interrupted.
Section 3 of the bill provides for Senate confirmation of the President's nomination for Chairman of the Board. This has been included
in view of the fact that the President can choose a nominee for Chairman whose original Senate confirmation is of some antiquity, owing
to the 14-year terms which Board Members serve.
We believe a more fundamental solution is to shorten the terms
of Board Members to 7 years.
We support Senate confirmation of the designated Chairman and
ur*?e that the term of the Chairman coincide with that of the President.
These changes should help make the Board more responsive to overall national economic policy without impairing a necessary degree of
independence.
Section 4 of the bill deals with the problem of lobbying activities
generated bv 'the Federal Reserve System on behalf of its positions
with respect to pending legislation.
Almost all Government agencies generate a certain amount of support from among their various constituencies, but the crucial point
is one of the extent and the propriety of such activities.
45
The extensive report on "What the Secret Minutes of Federal Reserve Banks Meetings Disclose" recently presented by Chairman
Reuss not only documents extensive solicitation of powerful support
from the Fed's constituency but also the near identity of interest between the regulators and the regulated.
W e would anticipate that such enactment of section 4 would muffle
the Fed's direct leadership in such campaigns, but that the lobby
would continue nonetheless. Section 4 should really occasion no
opposition.
Finally, section 5 extends provisions on conflict of interest presently
applicable to Federal Government officers and employees to Federal
Reserve bank directors, officers, and employees. W e can see no possible
basis for objection to such requirements.
I n short, Mr. Chairman, you have a good and useful bill. It makes
limited, but necessary, amendments in the Federal Reserve System.
We urge your serious consideration of the additional changes we have
suggested.
The A F L - C I O has long been a supporter of basic changes in the
structure of the Federal Reserve System, to make it more responsive
to the needs of the public. I am attaching a copy of the Executive
Council statement of February 21, 1975, which is the most recent
statement directly pertinent to the content of this legislation.
[The statement of the A F L - C I O executive council follows:]
http://fraser.stlouisfed.org/
93-444 O - 77 - 4
Federal Reserve Bank of St. Louis
46
Statement by the AFL CIO Executive Council
on
The F e d e r a l Reserve
And the Hat i o n ' s Monetary P o l i c y
Bal Harbour, F l o r i d a
February 2 1 , 1975
For the second time since 1969, the Federal Reserve System under the
chairmanship of Dr. A r t h u r Burns has brought recession t o the American
economy ami unemployment to m i l l i o n s of workers.
The Federal Reserve's a r r o g a n t brinkmanship w i t h the American economy
in 1973 and 1974 has r e s u l t e d i n the worst downward s p i r a l since the Great
Depression, w i t h no end i n s i g h t .
I n the name of combatting i n f l a t i o n , the Federal Reserve's money-crunch
and e v e r - h i g h e r i n t e r e s t r a t e s added t o i n f l a t i o n a r y p r e s s u r e s , brought a
depression t o the housing i n d u s t r y and mass unemployment.
The Federal Reserve System
c e n t r a l bank:
c r e a t e d by the Congress t o be the n a t i o n ' s
*Has u t t e r l y f a i l e d t o serve the needs of the American people f o r f u l l
employment, economic expansion and adequate p u b l i c f a c i l i t i e s and s e r v i c e s ,
w h i l e c o n t r i b u t i n g t o c y c l e s of boom and bust.
*Has been an engine of i n f l a t i o n , w i t h soaring i n t e r e s t costs imposed,
d i r e c t l y and i n d i r e c t l y , on consumers, home-buyers, small business, p u b l i c
u t i l i t i e s and government i t s e l f .
•Has been a major cause of the recession of 1969-1970 and t o d a y ' s
d i s a s t r o u s c o n d i t i o n s - - r e s u l t i n g i n the highest unemployment r a t e i n
34 years and huge d e f i c i t s i n the f e d e r a l budget.
*Has d i s c r i m i n a t e d a g a i n s t the extension of needed c r e d i t f o r homeb u i l d i n g , small business, s t a t e and l o c a l governments and p u b l i c u t i l i t i e s .
At the same time i t s d i s c r i m i n a t o r y p o l i c i e s provided s u b s t a n t i a l amounts
of c r e d i t f o r commodity market and land s p e c u l a t i o n , i n v e n t o r y hoarding and
f o r e i g n lending.
*Has brought the economy t o the b r i n k of d e p r e s s i o n , w i t h spreading
bankruptcies of businesses and banks.
This key government agency, whose d e c i s i o n s a r e a major f a c t o r i n
determining the economic w e l f a r e of the American p e o p l e , continues t o
operate i n r e l a t i v e secrecy and w i t h l i t t l e a c c o u n t a b i l i t y t o the Congress,
which c r e a t e d i t .
The time i s long overdue t o overhaul the s t r u c t u r e of the Federal
Reserve and i t s p o l i c i e s - - to make them responsive t o the needs of the
American people.
T h e r e f o r e , we c a l l on the Congress t o :
1. D i r e c t the Federal Reserve to reduce short and l o n g - t e r m i n t e r e s t
r a t e s and t o a l l o c a t e a v a i l a b l e c r e d i t f o r h i g h - p r i o r i t y economic a c t i v i t i e s .
America needs a s u f f i c i e n t expansion of money and c r e d i t , a t reasonable
i n t e r e s t r a t e s , to encourage balanced economic expansion.
A substantial
p o r t i o n of a v a i l a b l e c r e d i t should be a l l o c a t e d f o r such purposes as housing,
community f a c i l i t i e s and e s s e n t i a l c a p i t a l investment, w h i l e the f l o w of
c r e d i t should be curbed f o r such a c t i v i t i e s as s p e c u l a t i o n , business
takeovers and f o r e i g n l e n d i n g .
47
2.
E s t a b l i s h comprehensive o v e r s i g h t r e v i e w o f
Reserve System t o b r i n g A m e r i c a ' s c e n t r a l bank f u l l y
structure.
the e n t i r e Federal
i n t o t h e government
3.
R e q u i r e t h a t the o p e r a t i o n s of t h e F e d e r a l Reserve System be s u b j e c t
t o a y e a r l y a u d i t by the G e n e r a l Accounting O f f i c e .
4.
F i x the t e r m of the chairman of t h e F e d e r a l R e s e r v e a t f o u r y e a r s ,
c o i n c i d e n t w i t h t h a t of t h e P r e s i d e n t who a p p o i n t s h i m .
The t e r m o f members
of the Board of Governors should be c u t from 14 y e a r s t o s e v e n .
5.
A b o l i s h t h e Open Market Committee, t h e p o l i c y arm o f t h e F e d e r a l
Reserve System - - w i t h f i v e of i t s 12 members n o t government a p p o i n t e e s .
I t s f u n c t i o n s should be absorbed by t h e Board o f Governors whose members
are a p p o i n t e d by t h e P r e s i d e n t and c o n f i r m e d by t h e S e n a t e .
6.
Extend membership on the Board of Governors o f t h e F e d e r a l Reserve
and on t h e g o v e r n i n g and a d v i s o r y committees o f t h e e n t i r e F e d e r a l Reserve
System, i n c l u d i n g i t s 12 d i s t r i c t b a n k s , t o r e p r e s e n t a t i o n f r o m m a j o r
groups i n t h e economy, i n c l u d i n g consumers and o r g a n i z e d l a b o r .
7.
R e q u i r e a l l commercial banks t o be p a r t i c i p a n t s
Reserve System.
i n the
Federal
The Board of Governors should keep t h e Congress and t h e p u b l i c i n f o r m e d
w i t h r e a s o n a b l e promptness and w i t h r e a s o n a b l e . d e t a i l on i t s m a j o r p o l i c y
d e c i s i o n s and t h e reasons f o r a r r i v i n g a t them.
48
M r . CAVANAUGH. T h a n k you, M r . Biemiller.
A n d I ' m sure I express the chairman's sentiments for presenting
your outstanding testimony here this afternoon and following upon
the distinguished majority leader's testimony this morning i n support
of this legislation. I t adds considerable impetus, I am sure, to its
eventual success, I would hope.
M r . BIEMILLER. W e w o u l d , too.
M r . CAVANAUGH. I would have a couple of questions for you.
M r . Biemiller, i f the Chairman's term coincided with the President's,
unless there is a resignation from the Fed's Board of Governors, the
Chairman w i l l have to be designated from among the seven sitting
Governors, so wouldn't i t be better to put the appointment 1 year after
the inauguration of the President rather than to coincide directly ?
M r . BIEMILLER. I would refer that directly to D r . Oswald.
D r . OSWALD. T h e intent is to allow the new President to have some
ability to influence the Director, or the Chairman. A 1-year lag might
be too much of a time, maybe. A n appropriate timelag might be 3 or
6 months after the time that the new President takes office.
M r . CAVANAUGH. T h e problem i n that case is there might not be a
vacancy on the B o a r d 3 or 6 months after.
D r . OSWALD. I f at some point, and assuming that we start with the
ability of the Chairman i n 1981 to serve a 4-year term, thereafter he
would always have the ability to have a term that would be coincidental
w i t h that of the President.
T h e problem is that the term of the present Chairman expires next
January 31. T h e legislation—his term as Chairman expires January 31.
H i s term as a member continues until 1982. I would think that the
legislation should provide maybe a short interim period so that starti n g i n 1981 there would be the possibility of a 4-year term that would
be similar to that of the new President.
M r . BIEMILLER. I could just add to that, M r . Chairman, that, obviously, what we are talking about is the intent of legislation. The details, as D r . Oswald has suggested, can very easily be worked out, but
it is also tied i n part to our recommendation that the committee give
serious consideration to taking the 14-year term and reducing it to
7 years. T h i s has always been one of the things that has bothered us
very much, that 14-year term. I t is a long, long time to put somebody
into that k i n d of a powerful position.
I am talking now just about members, not only chairmen.
Y o u could always appoint somebody from the Board i f you did not
like the present chairman.
M r . CAVANAUGH. Well, I would agree with you that 14 years is a
long time, and we are not, apparently, prepared to confront that situation i n this legislation.
I would not have any further questions.
I see M r . Vento has joined us, and he may have questions.
M r . Vento?
M r . VENTO. M r . Chairman, it is a pleasure to welcome to the committee M r . Biemiller and his presentation on this issue.
I haven't read your statement, but I know that it addresses itself
to something about which we are all concerned, the Federal Reserve
B o a r d and its impact upon the economy.
49
This morning someone pointed out that the Federal Reserve Board's
actions are limited to monetary policy and to the stability of banks,
which I found rather interesting, and I am interested in your reaction
to that, Mr. Biemiller. I know your statement addresses specifically
that, but perhaps for the record we could establish some further dialog on that point.
Mr. B I E M I L L E R . I will let Dr. Oswald take that one.
Dr. OSWALD. Mr. Vento, the actions, while t/hey are monetary actions,
affect all Americans, not just the banks. It affects the interest rates
that people pay for the homes that they buy. I t affects the interest rates
that they pay on the consumer goods that they buy, whether it is from
department stores or from the gasoline stations with their charge accounts. It affects the small businessman when he goes to borrow money,
and it affects all businesses i n their own lending.
It affects the levels of employment and unemployment i n terms of
how tight or expansionary a monetary policy is followed by the Federal Reserve Board, and is part and parcel of the whole economic
policy activities which the Government i n the broad sense is able to
follow in terms of influencing the economy.
Mr. VENTO. Well, I am pleased to hear your observations are similar
to others toward what we think the impact of the Federal Reserve
System is. It was created by Congress to carry out something at arm's
length but not at such length that it differs from the policies established by this Congress nor in coordination with the policies that are
established or worked out between the Executive and this Congress,
which is in fact what has occurred in some instances in the past.
Stability, I suppose, is one thing, but to countermand the effects of
established policy and political policy, I think, is a grave error in
terms of what their general charge is.
We discussed to some extent the impact of interest rates again this
morning. The majority leader, as you know, testified before this committee. Consumer advocates have done so. A n d I must so that I am
very pleased that labor has sought to come forth and make a statement
on this concern.
There is an element with interest rates that, obviously, affects the
various aspects of the workability of the entire free enterprise system
and that addresses itself to what I would call, for lack of a better
word, creative entrepreneurism and a very marked effect on venture
capital, the willingness to take risks that occurs when you do have
high-interest rates. One of the reasons that I sponsored amendments
to the Council on Wage and Price Stability, was to have them focus
on that particular aspect so we could better understand the interrelationship of interest rates, foreign investment, extra capital in this
country, so we could determine what that impact is.
When I asked the current chairman of the Federal Reserve to
testify or to respond to questions, he of course agreed that high interest
rates did limit the ability of risktaking for an entrepreneur, but nonetheless he has commented that the need to fight inflationary forces
apparently countermands any decision by business to invest.
The problem with this is it gets back to what we have seen i n the
last couple of years. We have capital available to fund the national
debt. We have in this country a tremendous amount of investment by
50
foreign nations and so forth, which goes pretty much unnoticed but
nonetheless is very important. So we have these dollars available but,
nevertheless they are accruing 9 or 10 percent interest while small
business is trying to fund things through various Government-oriented
type of programs on the local community level with investor revenue
bonds or at some other level where we are providing some sort of tax
incentive or a limit to risks. So just as you limit risks in the past with
a certain type of security or an interest-bearing bond, you limit risks
in these ventures.
A n d this, I believe, is one of the direct outgrowths of a type of situation where we have an artificially controlled interest rate, and inappropriately controlled interest rate level.
A n d I feel that if we could move toward one that is more flexible
or toward one that would reflect what congressional policies are so
we would have them coordinated, we would be a long way toward obtaining the type of economic stimulation that we need without the
necessity of Government programs to accomplish that end. A n d 1
know that to some extent you share that goal.
This bill in and of itself addresses some points of this. B y itself,
however, it does not accomplish, for instance, that mandate of cooperation. It, in my judgment, specifies that a policy that is established by
a chief executive might be reflected in the Federal Reserve System and
the Federal Reserve Board by virtue of appointments of the Director.
It assures a wider participation by various groups or various members
of the public, but it does reframe some of the general responsibilities,
but nevertheless, I think, in rather general terms.
I n my judgment, there is not the guarantee to obtain the types of
goals that I may see or you may see. I hope that this committee, other
than the two freshmen who are sitting here right now, will eventually
come to grips with that and provide the proper assurance that is
necessary, whether it is somewhat of a different political persuasion
than I, but I think coordination should be the goal.
I think that what we have created with the Federal Reserve System
is something that is imperfect, and I think it does need to get back on
the track to provide more dynamic an instrument in terms of fiscal
regulation than currently exists in the present system. It is good. It
has provided some stability. But it also lends itself to some other
manifestations that I don't think are intended nor desirable, and I
think they are contradictory, to say the least.
So I guess that is kind of a long statement, but I do want to enlist
your responses, i f you have any. I will certainly consider your statement, and I hope that we can hammer our something here.
The audit aspects, of course, have been addressed by the Government
Operations Committee. We have a long way to go in order to accomplish the type of improvement in personnel within the Federal Reserve
System so that they can obtain the limitations on rates and other types
of limitations that our chairman has been advocating. One of the
things that did come up is the necessity for controlling lobbying. I
have read over the notes that our chairman presented on this, and what
is the essence of this bill—lobbying registration and so forth and prohibiting an official from recruiting the support for legislation or monitoring legislation which is supposed to regulate him.
51
It is a tough provision to enforce. We are going to find that there is
going to be some anguish over that particular language as we go
through this. I would anticipate that we would have that difficulty.
Any words of wisdom that you can offer for that ?
I n my judgment, banks have the right to be represented here, but it
is improper for the Fed to encourage lobbying as it has.
Maybe you would like to comment about some of my earlier remarks
and specifically the one about limiting the lobbying by the Fed.
Mr. BIEMILLER. Let me make a couple of general observations, and
then t>r. Oswald will probably want to add something.
First, on the question of lobbying, we comment on that in our statement. We think it is a very, very bad situation when the Fed does, in
effect, stimulate lobbying on the part of banks and gets them going.
Now, like you, we are not denying that banks have a perfect right
to lobby, but we don't know why the Federal Reserve does their lobbying for them, which is one of the things you are up against.
We particularly don't like this because, as President Meany has
observed repeatedly, we regard Dr. Burns as a national disaster. W e
think he has done more than anybody else to prolong unemployment
in this country in recent years, and he and Alan Greenspan combined
have been a real problem for the economy.
But, certainly, in terms of lobbying, we don't think that the Federal
Reserve Board should be allowed to stimulate and to lobby for banks.
They are pretty well able to take care of themselves, and they do a
pretty efficient job of lobbying. They don't need the Federal Reserve
Board to lobby for them.
What irks us is that here the Fed is supposed to be a creature of the
Congress, but you have to dig pretty deep to find that out because the
Fed has been off acting so independent for years and years that you
sometimes wonder if they know that Congress exists, and—for example, we have repeatedly said, if we are ever to get the HumphreyHawkins bill or any reasonable facsimile thereof, the Fed has got to
be pulled into the fight for full employment. The influence that the
Fed would have on any policy affecting f u l l employment is tremendous,
and this is the kind of thing that is concorning us as it is concerning
you.
I think we are in basic agreement with the statements you make.
Dr. Oswald can add to this.
Dr. OSWALD. I just wanted to add that each of the steps that are i n
the chairman's bill are very minimal steps. They are all steps in the
right direction.
For example, on the recommendation that the Federal Reserve,
pursuing its monetary policies, adopt the goals set forth in the F u l l
Employment Act of 1946, it seems we need to call this to the attention
of the Federal Reserve Board 31 years after enactment of the Employment Act of 1946. But it is clear that has not been a central concern
of the Federal Reserve Board in terms of its policies. A n d as M r .
Biemiller indicated, the provisions in the Humphrey-Hawkins bill
would go a step further in terms of requiring the Fed to indicate how
its actions would be consonant with such maximum employment, production, purchasing power, and price stability, which would be a step
further than is in the chairman's current bill.
52
We think it is also only a small step the chairman has in his bill that
provides for consumers and others to be represented on the boards of
the local Fed banks. We believe that that should be expanded to include all of the operations of the Board, including the Board of
Governors itself, the Open Market Committee, if that committee remains as a committee, and the Federal Advisory Council itself.
The actions of the Board, as you indicate, though, are such that they
affect people substantially more than bankers, and I think that needs
to be reflected in a substantial change in the makeup of the Board itself as well as the member banks and the various advisory committees.
Mr. V E N T O . Mr. Chairman, I know my time has expired, but one of
the provisions in the current act excludes anyone from being an officer
of a bank to be a class B or C director. I don't know what the provision is for class A . Maybe I could call on staff and they could tell me.
I assume it would be identical, that they would be excluded.
I would yield to the Representative from Georgia.
Mr. C A V A N A U G H . M r . Barnard.
M r . B A R N A R D . I believe class A directors come from banking classifications.
Mr, V E N T O . I S there any provision in current law, do you know, for
divestiture of interests, financial interests, at all?
Mr. B A R N A R D . Not for the class A directors.
Mr. V E N T O . Well, that would be semantically impossible, I suspect.
The others are divested of various financial holdings, is that right?
Mr. B A R N A R D . I am not sure, but do not think so.
I n other words, the Fed would not be lending any money itself to
those entities, so there would be no conflict of interest there.
M r . V E N T O . Well, thank you for your response to my questions. I
appreciate it.
Mr. C A V A N A U G H . M r . Barnard.
M r . B A R N A R D . Thank you.
M r . Biemiller, it is good to have you and Dr. Oswald here today to
comment on this legislation.
Let me ask you a question. How do you feel about the Federal Reserve bank and Federal Reserve System being a check-and-balance
program in our monetary makeup ?
Do you think it should be a check-and-balance process ?
Dr. O S W A L D . It should be a part and parcel of the overall policy of
the country in terms of the economic policy that it pursues. It should
not be one that runs contrary to the policy that is enunciated by people
who are elected to their positions to run the Government, and that is
how it has been acting recently. It has been running contrary to the
general policies often enunciated by the Congress and the elected
officials of the Government in terms of pursuing policies.
M r . B A R N A R D . Has there been an agency of the Government set up
to do that, to control monetary policy, other than the Fed ?
Dr. O S W A L D . Monetary policy—it was established by Congress in
1913 to handle basic monetary policy, and it should continue to be
subject to the Congress which established it.
Mr. B A R N A R D . What do you think would have happened in 1973 and
1974 i f there had not been some constraints put on the inflation in the
Federal spending? Where do you think we would be today?
53
Dr. OSWALD. Mr. Barnard, I think that the inflation which caused
serious problems in 1973 and 1974 came about as a result of two basic
increases in prices, for fuel and for food. Fuel as a result of the actions
of the O P E C countries, a fivefold increase between then and now, in
terms of the price of oil. A n d in terms of food prices, the results of
the large grain shipments to Russia and to China and some of the
shortages of grain.
The inflationary influence of these two items was not the result of
overall excess demand in the economy. The Federal Reserve Board
tried to meet those inflationary pressures as i f they were general demand-caused inflation. They restricted monetary policy very tightly,
and I think this became a factor leading toward the curtailment of
production that led to the 1975 recession—the 1974 and 1975 recession from which we still have not recovered.
I think one of the problems was the failure of the economic policy
to be in concert in terms of trying to meet the problem of inflation
from an overall policy point of view which would be pursued by the
country rather than one which depended almost entirely upon the very
tight monetary policies and brought about the type monetary policies
which were one of the influences which led to the 1974-75 recession.
Mr. BARNARD. On this point we obviously disagree. I personally feel
that at that time we needed some reining in of our resources i n order
take a more academic audit of where we were in the overall economy.
Does the Fed not serve as a check and balance on monetary policy ?
Dr. OSWALD. Mr. Barnard, I don't believe it operates as a check or
balance. I believe it currently operates as an independent operator in
terms of determining monetary policy, completely independent of any
check, and I think that is precisely part of the problem.
I see this current bill by the chairman as really only a minor step
that would continue the provisions of the earlier House concurrent
resolution that had the chairman even come before the Congress quarterly to report on the types of activities of the Fed. Prior to that he
Federal Reserve Board did not even speak to the Congress. W e felt
that this is a very sorry state of affairs. The inclusion by the chairman
in his bill of the kind of language that was in the Employment A c t of
1946 indicates, I think, part of the concern of many people that the
monetary policies that have been pursued by he Federal Reserve Board
have not taken into consideration the issues of full employment, full
production, and purchasing power—things that also lead to an expanding, healthy economy.
Mr. BARNARD. What do you think would be the results of the Fed
coming to Congress and making public statements on what it anticipates doing in the next quarter or the next fiscal year. What consequences do you think that would have on the money market and other
related activities ^
Dr. OSWALD. Mr. Barnard, for the last 2V2 years, I believe, the
chairman has been coming and has been giving some indication of what
he anticipates will be the likely growth in M i money and the money
supply, and it has had no deleterious effects at all in terms of the overall money markets.
What it does do is, in essence, allow the Congress an opportunity to
discuss with the chairman whether these types of policies are similar
54
and would lead to the same general overall economic developments
that the Congress is trying to achieve. They should not be going at
cross purposes.
Mr. BARNARD. On another aspect under discussion, what method
would you use in choosing members of the Board of Governors?
Dr. OSWALD. Well, currently, as I indicated earlier, the Board is
made up of both class A directors, who are bankers, class B directors,
who are representatives of industry—the industrial sector and commerce, I believe, is the current language for class B directors. We
would like to see that the Board be much more representative of the
community at large, so that there should be a provision, as the chairman suggests, for the inclusion of consumer representation on the
Board. I think that there should be labor representation on the Board.
There is provision also currently for agricultural interests already in
the 1913 act, and I think that the membership should be broadened
to include all segments of our society.
Mr. BARNARD. They are not separated from the law now, are they ?
Dr. OSWALD. But they are not required to be in the law, as are the
other classes now required to be accounted for in the membership of
the Board itself. A n d we just think that if there are certain groups
required by statute to be represented on the Board, then that representation included in the legislation should be broad enough to include
all segments of our society.
Mr. B A R N A R D . I have no further questions, Mr. Chairman.
Thank you, sir.
Mr. CAVANAUGH. M r . Vento, do you have any additional questions?
Mr. V E N T O . N O , Mr. Chairman.
Mr. C A V A N A U G I I . Mr. Biemiller, Dr. Oswald, we thank you on behalf
of the committee and behalf of the chairman for your outstanding
presentation here this afternoon. I am sure you would be willing to
submit to any additional questions that may be forthcoming from
members of the committee in writing.
Mr. BIEMILLER. W e certainly would.
Mr. CAVANAUGH. W i t h that, we appreciate your contribution to this
hearing this afternoon.
Now, without objection, I would like to enter into the record of this
hearing today the statement of Kathleen F . O'Reilly, the executive
director of the Consumer Federation of America, who was scheduled
to testily, but, due to scheduling conflicts, was unable to be present
this afternoon.
[The statement of Ms. O'Reilly follows:]
STATEMENT OF KATHLEEN F . O'REILLY, EXECUTIVE DIRECTOR,
CONSUMER FEDERATION OF AMERICA
Consumer Federation of America is a federation of 225 national, state and
local non-profit organizations that have joined together to espouse the consumer
viewpoint. CFiA and its member organizations represent more than 30 million
consumer throughout the United States. Among our members are: Consumers
Union, publisher of Consumer Reports; 17 cooperatives and credit union leagues;
45 state and local consumer organizations; 66 rural electric cooperatives; 27
national and regional organizations ranging from the National Board of the
Y W C A to the National Education Association: and 16 national labor
organizations.
55
C F A has long been on record i n support of significantly increasing the accountability of the F R S to the American consuming pubUc. H.R. 8094 takes some
significant steps i n the right direction. F o r example, we applaud the permanent
dialogue which would result between Congress and the F R B as to quarterly
testimony with respect to monetary policy including proposed monetary aggregates, anticipated velocity, estimated interest rates and portfolio composition.
Each reporting factor increases the accountability which the Congress can wield
over the Federal Reserve Board. Similarly we arc most enthusiastic abqKit the
requirement that the Senate confirm the Chairman of the Board of Governors.
This minimum accountability is likewise a must.
C F A , however, has several suggestions as to how the remainder of the
legislation must be strengthened so as to more truly achieve its intended goal.
(1) Broadening
the economic interest of Federal
Reserve Board
Directors
C F A feels it is insufficient to attach the language "without discrimination on
the basis of race, creed, color, sex or national origin" to the selection criteria of
Class A and B Directors. Why is not an affirmative action program being suggested? The present predominantly Caucasian male pool from which Class A and
B members are selected w i l l make the "without discrimination . .
language
meaningless.
As to Class "C" Directors, what good does i t do to say they must represent
the public, and "with due hut not exclusive consideration to the interests of agriculture, commerce, industry, services, labor and consumers ?" That is quite an
intriguing and less than rational mix of six segments of society. Certainly the
"consumer" viewpoint itself is worthy of at least 3 seats. Furthermore, as C F A
has consistenly testified, the "consumer" representative must be statutorily
defined so as to include only those who have a demonstrated expertise w i t h
respect to the issues and who receive neither a salary (directly or indirectly)
nor significant investment income from the regulated industry. Anything less
presents a conflict of interest. We are most disappointed that the simitar message
we brought to this Committee on this point i n 1976 seems to have fallen on deaf
ears.
(2) The Prevention of the Fed's from Using Banks as Lobbyists and the Prohibition of Federal Reserve officers, Employees and Directors from Acting Where
They Have a Conflict of Interest are not Accompanied by Sufficient Sanctions
C F A is sorely disappointed that the legislation doesn't include the necessary
teeth which would act as a sufficient deterrent w i t h respect to the Fed's using
Banks as lobbyists and with respect to conflicts of interest. It is relatively easy
to prohibit a certain practice. Yet i f one sincerely desires to prevent it, there
must be severe civil and criminal sanctions for a violation. Minimally there
should be the withholding of a federal employee's salary similar to the provisions
of the Freedom of Information Act. Similarly, i t is imperative that when a
federal employee has been engaged i n a conflict of interest situation, the action
which is relative to the conflict of interest should be deemed "not i n accordance
with the law" for judicial review purposes.
(S) Disclosures
C F A recommends that strong disclosure are provisions also be included i n any
Federal Reserve Board accountability package. The Federal Reserve Board should
be required to make quarterly reports on such factors as terms and conditions of
loans including the interest rates for each class of consumer loans. Dissemination of that information to consumer groups is also a must. It should be published
i n the Federal Register, and beyond that should be forwarded to consumers on
a regular basis; furnished on request at financial institutions and should be
conspicuously posted at these institutions.
Consumers should not have to rely on the whims of regulators such as A r t h u r
Burns who released basic information as to interest rates on various categories
of consumer loans in member banks only after Consumers Union was forced to
bring suit to obtain this information—information which the Federal Reserve
Board readily provides its customers. The b i l l should give assurances that tjiis
type of information w i l l be readily available and furnished before i t is out of
date and no longer usable to the consumer.
56
I n accordance w i t h C F A ' s policy resolution on Truth-In-Savings, consumers
should be assured of legislation which would:
1. Require f u l l disclosure to consumers of all types of savings contracts,
essential terms and conditions of the contract prior to and when they open
an account, before any changes are made i n the savings contract and when
earnings are paid;
2. Prohibit the proliferation of ambiguous words, and provide for mandatory use of simply defined words requisite for efficient communication about
savings;
3. Establish as a standard for regulations issued by regulatory agencies
that of intelligibility by the average savings consumer;
4. B e included as a central feature for financial institutions reform
legislation; and
5. Require that a l l financial institutions compute interest due on savings
accounts on the basis of the average daUy balance i n the account from the
date of deposit to the date of withdrawal.
Trust-in-savings could do for small savers what truth-in-lending has already
done to some extent for small borrowers. Studies by Professor Richard L . D.
Morse at Kansas State University have demonstrated in numerous ways the very
real impact of the varieties of terms and penalty features i n savings accounts
and other savings instruments. 6 percent is not 6 percent when the saver loses
90 days worth of interest on funds withdrawn before the rules of the institution
allow. 5 percent is not 5 percent i f that rate is only paid on minimum balances
during the interest payment period. Truth-in-savings w i l l be no panacea for small
savers unaware of the impacts of various clauses, rules, and penalties or accounts,
but combined w i t h the effects of competition that would likely cause institutions
to standardize their interest computations, the impact could be quite beneficial.
M r . CAVANAUGH. W i t h that, we are adjourned, subject to the call of
the Chair.
[Whereupon, at 4 p.m., the hearing was adjourned, subject to the
call of the Chair.]
FEDERAL RESERVE REFORM ACT OF 1977
TUESDAY, J U L Y 26, 1977
H O U S E OF R E P R E S E N T A T I V E S ,
COMMITTEE ON B A N K I N G , F I N A N C E
AND U R B A N AFFAIRS,
Washington,, D.C.
The committee met at 10 a.m. in room 2128 of the Rayburn House
Office Building; Hon. Henry S. Reuss (chairman of the committee)
presiding.
Present: Representatives Reuss, Ashley, Moorhead, St Germain,
Gonzalez, Annunzio, Hanley, Mitchell, Neal, Blanchard, LaFalce,
AuCoin, Derrick, Hannaford, Evans (Indiana), Lundine, Cavanaugh,
Oakar, Mattox, Vento, Barnard, Watkins, Stanton, Brown, Wylie,
Rousselot, Hansen, Hyde, Kelly, Grassley, Fenwick, Leach, Steers,
Evans (Delaware), and Caputo.
The CHAIRMAN. Good morning, and welcome, Chairman Burns. The
House Committee on Banking, Finance and Urban Affairs will be
in session for further hearings on H.R. 8094, a bill to promote the accountability of the Federal Reserve System.
We are most honored, as always, to have the distinguished and respected Chairman of the Federal Reserve Board before us. H e will
be with us again later this week, on Friday, i n another capacity—and
that is, sharer of our dialog on monetary policy.
Chairman Burns has told me that he is lunching with the President today, and that, therefore, he would need to leave here at the
latest by 12:30 or 12:40. I see no reason why we can't expeditiously
enable the chairman to meet that commitment. I am certainly going
to try to.
Chairman Burns, under the rule, and without objection, your statement is received in full into the record, and would you now proceed ?
STATEMENT 0E HON. ARTHUR P. BURNS, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
D r . BURNS. T h a n k you, M r . C h a i r m a n .
I am pleased to have the opportunity to present the views of the
Board of Governors on H.R. 8094, the Federal Reserve Reform A c t
of 1977. The stated purpose of this bill is to promote the accountability of the Federal Reserve System.
Let me say at the outset that the Board fully recognizes its accountability to Congress for its performance of the duties Congress has
given it. M y colleagues and I appear frequently before this committee
and other committees of the House and the Senate to report to you
(57)
58
and to answer for our actions. We have participated earnestly in the
quarterly dialog on monetary policy initiated under House Concurrent Resolution 133 of the 94th Congress. I am scheduled, as you know,
to appear before this committee on Friday to continue that dialog.
Last year the Board recommended that the House and Senate Banking
Committees evaluate our performance as bank supervisors through
periodic oversight hearings on the condition of the banking system,
and the first such hearing was held by the Senate Banking Committee
this March. I n A p r i l we advanced the dialog further by presenting
testimony on the budget of the Federal Reserve System before the
same committee. I believe that through proceedings such as these we
are evolving an effective means by which the Congress can fulfill its
oversight responsibilities with respect to the Federal Reserve while
respecting the basic principle of an independent central bank.
The most significant provision of H.R. 8094 is section 1 of the bill.
The objective of monetary policy set forth in this section—namely,
that it "shall be governed by the national policy to promote maximum
employment, production, and price stability"—is consistent with the
Board's understanding of the intent of Congress, and it also reflects
the actual practice of the Board and the Federal Open Market Committee. I n the Board's judgment this would be an appropriate addition to the Federal Reserve Act. It is a clearer statement of national
policy than is contained in the Employment Act of 1946. which uses
the term "purchasing power" rather than "price stability."
On the other hand, the Board is disturbed by the bill's language
relating to hearings on monetary policy, which differs in several major
respects from that of the concurrent resolution it would replace. The
concurrent resolution was the carefully framed product of extended
discussions between the Banking Committees and the Board. It has
been thoroughly tested i n the course of the nine hearings held under
its provisions over the past 2 years. We know of no good reason for
revising it; indeed, some of the proposed revisions, if enacted, would
be inimical to the orderly functioning of financial markets.
The provision calling for projections of interest rate levels for 12
months ahead is particularly i l l advised. Neither the Board nor the
F O M C makes such estimates. To be sure, some, if not all, members
have more or less well-defined expectations about the likely course of
rates in coming months, but members of the Board and of the F O M C
do not discuss such expectations in public. Federal Reserve officials are
extremely careful to avoid any public comment that might suggest or
imply some particular outlook for interest rates.
The reason for reticence on this subject should be obvious. While the
Federal Reserve cannot determine market interest rates, it certainly
can influence them—particularly in the short run. Participants in financial markets know this, and they have strong incentives to make
use of any clues they can get to the System's intentions. If, for example, bondholders conclude from a remark by a System official that
rates will be rising in the future, they may deem it advantageous to
sell their holdings immediately—and that may cause rates to rise prematurely. It may also cause rates to move up unnecessarily if the view
of the System official was not well founded but nevertheless was taken
seriously.
59
But if the casual comments of a Federal Reserve official can affect
market interest rates, public reports each quarter on the interest rate
expectations of the Board or the F O M C could rock financial markets.
The expectations voiced by the Board at a quarterly hearing might
change a week or a month later, and in any event might be mistaken.
I f we made specific pronouncements about the future of interest rates,
many traders would no doubt tend to respond promptly. Inappropriate as well as violent changes of interest rates could take place and
the economy suffer from the financial instability so generated. The
capacity for mischief inherent in the interest rate provision is so apparent that I find its inclusion in the bill inexplicable.
The provision calling for quarterly testimony on monetary velocity
12 months ahead is questionable for other reasons. Particular considerations—often of a sort that defy quantification—weigh heavily
in the thinking of most, if not all, members of the F O M C . In the nine
hearings held thus far under House Concurrent Resolution 133,1 have
tried to set forth the reasons underlying the Federal Reserve's policy
decisions. In fact, I have often commented in general terms on expectations for velocity, speaking for the F O M C or the Board when that
was appropriate and for myself wThen it was not. But in so doing, I
have consistently emphasized the sensitivity and flexibility of monetary policy, which can change by the month or even by the hour, and
which should never become the prisoner of some preconceived number.
Conceivably, in response to a congressional mandate, the F O M C
could vote on some numerical figure for monetary velocity. But any
such exercise is not necessary for effective policy formulation; if undertaken, it would divert members of the F O M C from basic analysis in
which they have some competence to a numerical guessing exercise; the
end result would be artifical at best, and would be grossly misleading
at worst.
Finally, I must advise this committee that the Board seriously
questions the provision calling for quarterly reports on the "proposed
composition of the Federal Reserve's portfolio" 12 months ahead. I n
the first place, such reports could influence current interest rates as
market participants drew inferences about Federal Reserve purchases
or sales in different sectors of the market. Second, such reports could
prove highly misleading. In view of the uncertainties about future
considerations in securities markets, numerical projections of likely
changes in the portfolio during the coming 12 months cannot be made
with much confidence.
O f course, the F O M C could always instruct the Manager of the
System Account to make its guesses come true, or perhaps to reduce
particularly large misses, whether or not the open market operations
required were consistent with the needs of the Nation. I very much
doubt that Congress will want to force the Federal Reserve into that
kind of predicament.
These observations on the deficiencies of section 1 of this bill suffice,
I hope, to show why the Board recommends that the language providing for quarterly hearings on the conduct of monetary policy follow
much more closely the carefully framed and thoroughly tested language of House Concurrent Resolution 133.
60
Section 2 of the present bill would prohibit discrimination and
broaden the list of interests to be considered in the selection of Reserve
bank directors. W e are in sympathy with the concerns underlying this
provision and we support it. A s I stated last year, the Federal Reserve
is fully committed to the principle of equal employment opportunity,
and we have made vigorous efforts over the years to employ and promote qualified women and minority group members to the staffs of
the Board and the Reserve banks. Moreover, we have recently increased our emphasis on the appointment of such persons to the Boards
of Directors of the Reserve banks. While we have achieved some success, we recognize that it has not been sufficient. Last year I advised
you that the System had 6 women serving as members of Reserve bank
branch boards. For 1977, this figure has increased to 17 women directors, 4 on head office boards and 13 on branch boards. This year our
minority directors have increased from 13 to 16, including 3 who serve
on the boards of head offices. We appreciate Chairman Reuss's continuing interest in this matter, and I assure the committee that we
intend to continue our efforts to enlarge the representation of women
and members of minority groups on the Reserve bank boards.
Another change in the provisions of section 2 relating to directors
would expand the categories of individuals to be considered in the
selection of class B and C directors. The Board endorses this proposed
broadening in the representation of the public on Reserve bank boards.
Indeed, in connection with the F I N E discussion principles we recomended that consideration be given to appointment of class B directors by the Board rather than their election by member banks.
We continue to hope that the committee will consider whether its
objectives in this section of the bill may not be better achieved by
providing for Board appointment of class B directors. A s the bill
stands, both class A and class B directors would still be elected by
member banks, in accordance with the nomination and balloting procedures set forth in section 4 of the Federal Reserve Act. Under these
procedures it is difficult to see how the bil's antidiscrimination provisions can be enforced in elections in which literally thousands of member banks will be voting on a large number of nominees. This difficulty
could be overcome by specifying that class B directors are to be selected
by the Board. Such an amendment would have the added benefit of
putting to rest the mischievous fiction that the member banks control
the Federal Reserve by virtue of their ability to elect six of the nine
directors of each Reserve bank.
Section 3 of the bill provides for Senate confirmation of the person
appointed by the President as chairman of the Board. A s I recently
testified before the Subcommittee on Domestic Monetary Affairs, we
have no objection to this provision.
The Board has serious problems with the provisions of section 4
relating to so-called lobbying communications with regulated institutions. Unlike the existing provisions of law relating to lobbying by
Government officials, which make it a crime to use appropriated funds
for such purposes, H.R. 8094 would enact a direct prohibition against
communication by any Federal Reserve official with any institution
regulated by the Federal Reserve "to influence legislative actions affecting the Federal Reserve System."
61
The Board seriously doubts whether such a prohibition is consistent
with the first amendment to the Constitution, which commands that
Congress shall make no law abridging freedom of speech. Moreover,
this provision of the bill is so broadly worded that it could have a
chilling effect on perfectly innocent communications that, besides being constitutionally protected, are not intended to be included within
the scope of this bill. Just what legislation, for example, would be
excluded from the bill's reference to "legislative actions affecting the
Federal Reserve System" ? How explicit must the intention be to "influence" such actions? Need the Federal Reserve official urge bankers
to write their Congressman in order to violate such a prohibition ?
Are we prevented from informing banks about changes that the Federal Reserve is proposing in the laws that govern banking? Would we
violate the law if a banker decided on his own to write his Congressman after listening to our description or analysis of a pending bill?
Indeed, may not this provision be violated whether or not the banker
who received a communication from the Federal Reserve subsequently
communicated with his congressional representative? With such uncertainties the inevitable effect would be to inhibit Federal Reserve
officials from discussing any proposed or pending legislation in a public forum—particularly if bankers were present. I cannot believe that
Congress would want to limit so severely the ability of Federal Re~
serve officials to discuss legislative ideas or that it would want to create
such impediments to the free flow of information or opinion to the
Congress itself.
Moreover, since three members of each Reserve Bank board of directors are bankers, as provided by law, the bill could even be construed to prevent nay discussion of pending legislation at Reserve
Bank board meetings. In fact, since Federal Reserve banks could themselves be considered institutions "subject to the regulatory authority"
of the Board of Governors, the bill might be read to prohibit communication between the Board and the Federal Reserve banks about such
proposed legislation. Similarly, the bill could be interpreted to prohibit the Board from discussing legislative matters with the Federal
Advisory Council, a body composed of bankers that was created by the
Federal Reserve Act for the express purpose of counseling with the
Board on matters affecting the System. Again, I cannot believe such
results could be intended.
The officers and directors of the Reserve banks, as well as members
of the Federal Advisory Council, are appointed under law. The Board
has a responsibility to keep them informed on legislative issues, and
they naturally share our concern for legislation that may have an impact upon the System. Their interest in these matters exists quite apart
from the positions that some of them hold in private business institutions. Neither Government service nor election to a Reserve bank directorate should require an individual to forefeit those rights of expression and petition that are generally guaranteed by the first
amendment.
We appreciate that section 4 of the bill is intended to protect against
the possibility that regulated institutions, hoping to curry favor with
their regulator, may be induced to promote the regulator's interest in
particular legislation. One who entertains such a fear must be assum-
93-444 O - 77 - 5
62
ing that men and women who work in regulated businesses would let
themselves be used by unscrupulous regulators to express views that
may not be their own. I see little basis for any such cynicism about
bankers or their regualtors, or—for that matter—about the ability of
Congressmen to protect themselves against misleading rhetoric of their
constituents.
W e live in disturbed times, and if Congress should consider section
4 a proper subject for new legislation, I still see no basis for singling
out for special treatment the Federal Reserve—an institution whose
integrity should not be lightly questioned. I cannot deny a theoretical
possibility of misconduct in the future; and i f Congress believes it appropriate to address the issue, it should do so in the broad context of
all Federal regulatory agencies—not excluding Cabinet departments.
Finally, section 5 of the bill would add "Federal Reserve bank director, officer, or employee" to the list of individuals covered bv the
conflict-of-interest prohibitions of section 208 of the Criminal Code.
This section of the code prohibits any covered employee or official
from participating personally and substantially in any matter in which
he, or certain persons or entities related to him, has a financial interest, unless he first makes a f u l l disclosure to the official who appointed
him and receives appropriate clearance in advance.
In principle we have no objection to this proposal. The Board of
Governors has, since the inception of the Federal Reserves System, recognized the need to assure that the highest standards of personal integrity are observed, not only bjr Board officials and employees, but
by all those associated with the System. A s early as 1919, the Board
stated that—
it has always entertained the view that no director or officer of a Federal Reserve bank should permit his connection with the bank to be used in furthering
his private business or the interest of any corporation with which he may be
associated.
The Board has requested the Reserve Banks to distribute to their directors, officers, and employees the Code of Ethics for Government
Service, and it has asked each Reserve bank to adopt rules on employee responsibilities and conduct comparable to those adopted by
the Board itself in furtherance of Executive Order 11222. These rules
constitute a broad prohibition of conflicts of interest.
While we thus concur with the principle underlying this proposal,
we are disturbed by its discriminatory nature. I believe that there are
many positions comparable to those of Reserve bank directors that are
not now covered by section 208 of the Criminal Code. The directorates
of the Federal home loan banks is the example that comes to mind
most readily. I f Congress is to consider extending the criminal penalties for conflicts of interest, it seems highly inappropriate to do so
by singling out one group as a special target and without benefit of
some deeper study of the proposal.
I f such a study were undertaken, consideration would need to be
given to the unique status of Reserve bank directors in the structure of
the Federal Reserve System. The Federal Reserve Act provides for a
balancing of economic interests on Reserve bank boards—lenders, borrowers, and public representatives. Directors are required by the act
and by their oath of office to administer the affairs of the bank "fairly
63
and impartially and without discrimination." The legislative history of
the act indicates clearly that Congress viewed class C directors as
having a responsibility, as "representatives of the United States," to
insure that this requirement of impartiality was carried out. The
Federal Reserve System has been untouched by conflict-of-interest
scandals in its 64 years of existence, and we certainly have the power
to deal effectively with misconduct—even to remove officers and directors—if any such thing should occur. I n light of this, and particularly
if the Board of Governors appointed three additional public representatives, it is very doubtful that section 5 of the present bill is at all
necessary. Not only that, there is at least the possibility that specific
reference to directors under the Criminal Code would diminish the
ability of the Federal Reserve banks to attract highly qualified citizens to their directorates.
We urge the committee to move very cautiously on section 5, not only
for the above reasons but also because" of what appears to be a technical
flaw in drafting. Subsection (b) (1) of section 208 of the Criminal
-Code provides that the Government official responsible for the appointment of another person covered by the code may permit that person
to participate in a particular matter where the person's interest in
the matter is not substantial. It so happens, however, that the Reserve
Bank directors in classes A and B are elected by member banks, so that
there is no appointing official in their case. The obvious, but perhaps
unintended, discrimination against those directors should be noted by
the committee.
I n summary, the Board supports enactment of several provisions of
this bill. We believe, however, that the objectives of the quarterly hearings on monetary policy can be best achieved by retaining the tested
language of House Concurrent Resolution 133. We urge the committee to drop the provision of the bill relating to "lobbying" because it
is unjustifiably broad and of doubtful constitutionality. A n d we also
urge the committee to study very carefully the implications of amending the Criminal Code before taking any serious legislative move in
such a direction.
The CHAIRMAN. Thank you very much, Mr. Chairman, for your
support of many of the provisions of the bill and for your suggestions
as to certain technical corrections which ought to be made. Incidentally, I have noted them and in at least two instances. I think you
are dead right. I intend to propose perfecting language. Third, in a
number of cases, you disagree wiith the bill. Naturally, that is what
I want to talk about, particularly the bill's provision for quarterly
dialog, where you say again and, by your conduct in office have demonstrated it, that you' agree with the principle of House Concurrent
Resolution 133, but that you think that House Concurrent Resolution
133 is about right when it requested of the Fed their quarterly prognosis on proposed monetary aggregates.
Now in the bill before us, H.R. 8094, the bill's author goes farther
and also asks the Fed in its quarterly dialogs to enlighten the banking
committees on, and I quote, "anticipated monetary velocity," and also
on "estimated levels of interest rates."
It is those two I want to talk about. On "anticipated monetary
velocity," it seems to me it really isn't very helpful to tell us what
64
your Mi, M 2 , and M-infinity projections are going to be, if you don't
tell us what your thinking is on velocity, M X V = G N P . So it seems
to me it does not do us much good to get an " M " i f the " V " is not disclosed to us.
Now I know that " V " is a matter of guesswork, but we would be
greatly helped next Friday, for instance, when you are before us,
by having your views on what is likely to happen to velocity.
I would think that you could give us a lot of material from the
Fed's staff about the future course of N O W accounts, economizing
on balances, and all of the things which make for velocity. That is
all the "anticipated monetary velocity" asks for. We aren't asking for
you to do a K i n g Canute, and ask that velocity go in a particular
direction. I n fact, you have given us your expectations many times,
to our great pleasure and profit. What is wrong with "anticipated
monetary velocity" ?
Dr. BURNS. I have commented generally on expectations for velocity
many times. I shall do that again, on Friday, when I am here. I shall
continue doing that and will respond to the committee's questions in
this area, to the best of my ability. But that is not the provision in the
bill before us.
The provision in the bill requires the F O M C to reach a decision on
velocity.
The CHAIRMAN. Let me make it clear that that is not the intention
of the bill, to require the F O M C to mandate a velocity. That would be
an absurdity.
What we want to know is what is in your mind on velocity. For
instance, if you come in with a low projected monetary aggregate, but
say that you expect a continuation of a hyperthyroid increase in velocity, then all would be understood, or vice versa.
Dr. BURNS. Mr. Chairman, I have 110 objection to writing into the
bill that the chairman should testify at the quarterly oversight hear7 j
ings as to his views on monetary velocity—no objection whatsoever/
The CHAIRMAN. Fine, then it turns out that at legist your mind and
my mind are met on that. A n d I think, by appropriate language, we
can make that clearer.
Let me then turn—I hope with equally good results—to the next
one.
Mr. AUCOIN. Excuse me, Mr. Chairman, I can't hear the witness.
I wonder i f someone could turn up the power of the microphone ?
The CHAIRMAN. B y all means. Perhaps, Dr. Burns, you could speak
a little closer to the mike.
We now turn to estimated levels of interest rates. There, you say,
"Oh, no, we couldn't give you our informed judgment on that, because it would rock financial markets." Well, did it rock financial
markets last February 2 when Treasury Secretary Blumenthal testified that, and I quote, "any rise in interest rate for 1977 will be quite
modest"? .Or when Director Lance testified to substantially the same
effect on the same day?
Again, all we are asking is that the Fed get away from its exclusively monetary preoccupation, and think through the implications
of a particular monetary policy, and particular movements for interest rates.
65
The administration has to do it. How else can it determine what it
is going to have to pay on the national debt ?
Dr. BURNS. I can assure you that we devote an enormous amount of
attention to interest-rate behavior, actual and prospective. But that
isn't in question. The question is the propriety of having any member
of the Federal Reserve System, which has such a large role in this
area, speak out publicly on the issue.
I never have; and I hope you will not put the Federal Reserfe in
the position of my, or anyone else, having to do so. Because i f you
did that, you would be asking Federal Reserve officials to do something
that would at times mislead—and perhaps mislead seriously—the
financial and the general public.
I consider that immoral. I don't talk publicly about the stock
market. I don't talk about interest rates. A n d I don't think we at the
Federal Reserve should.
Now, if the Secretary of the Treasury, or the Director of O M B
wishes to do that, or i f any Member of the Congress wishes to do thatf
thank the L o r d we still have a free country. The Federal Reserve,
which has such a large responsibility in this area, should not be put
in the position of having to do that.
T h e CHAIRMAN. M y time is up.
Mr. Ashley?
Mr. A S H L E Y .
NO
questions, at this time, Mr. Chairman.
T h e CHAIRMAN. M r . Stanton?
Mr. STANTON. Mr. Chairman, I would like to make some general
comments concerning the Federal Reserve Reform Act H.R. 8094.
It seems to me, Mr. Chairman, that at this moment we have come
to far too fast on an accelerated track, that brings this legislation
before the full committee without the advantages of subcommittee
scrutiny.
It arrives at a time when the full committee is in session at 10 a.m.
in the morning, and Members' attention is directed toward the farm
bill, and black lung legislation, and the minimum wage, and the energy
bill.
Mr. Chairman, this reform bill—your bill—needs much improvement. I personally think that some of its sections can be refined, and
hopefully that most of the bill can be put into law. It is my personal
suggestion, Mr. Chairman, that thought be given to postponing the
markup of this legislation until perhaps next week, at the earliest,
or preferably until September.
A t the moment, it is my honest opinion that this bill reflects only
your personal view. I f you should insist upon a bill in the next 24 to
48 hours. Mr. Chairman, you would probably be forced to call a hurryup meeting of the Democratic caucus, of the members of our committee. I f you have the same luck that I do, about half the members
will show up. And, Mr. Chairman, they would be asked to act without
the full benefit of being able to reflect upon what the chairman has
just said, to act without the benefit of hearing—which I would like
to have heard from—the present Secretary of the Treasury on this
legislation; and last, I think they would be asked to act, regrettably,
in a partisan atmosphere without the input of members of the minority,
and some of whose views I think they respect.
66
Mr. Chairman, during the middle of the week, the minority was
asked if they wanted any witnesses for this legislation. I f they so
indicated, only Monday morning was available.
We appreciated this offer, Mr. Chairman, and regrettably none of
our witnesses could make it, on this tight time schedule. Some of those
who expressed an interest to be heard included two former Democratic
Secretaries of the Treasury, renowned economists, and a former Chairman of the Federal Reserve Board.
I personally think that all of the members would have enjoyed the
input from these particular witnesses. Mr. Chairman, this legislation
can be bipartisan. I would like to at least attempt to make it such. I
would respectfully suggest that perhaps instead of a bipartisan party
caucus, that we have later on this week open discussions on differences
in this legislation.
Perhaps in early September wTe can come up with a true bipartisan
bill. We can certainly only try—and I think, Mr. Chairman, that any
other approach is below the high standards which the public has a
right to expect from this excellent committee.
The CHAIRMAN. Would you yield, just briefly ?
Mr. STANTON. I would be happy to.
The CHAIRMAN. I respect very much the tone and the substance of
what you said, Mr. Stanton. Nothing would please me more than to
extend the time on this. But I must point out that this bill has been
before us for more than a month; that it has been the subject of hearings; and that we have, from the beginning, invited the minority to
bring in any witnesses it wants.
I also wrote the President more than a month ago inviting comment
from the administration on it. No comment, one way or the other, has
been forthcoming.
What sticks in my mind is the reason for our schedule, which includes an executive session tomorrow on the bill, is the simple fact that
Speaker O'Neill has laid it down that bills not ready for Rules Committee consideration prior to the August recess, by being reported out
of committee, can't be taken up this year. To let this whole matter go
over to another year seems to me a poor tradeoff.
Therefore, I renew my willingness to promptly hear witnesses, but
really I think we have to stick to our schedule. But I think the gentleman for his statement.
Mr. STANTON. Mr. Chairman, someone put here before me this morning an article in the W a l l Street Journal, and I assume it was this
morning, by Lindley H . Clark, Jr., which pertains to mostly title I of
this bill, and I wrouid ask unanimous consent to insert it in the record.
The CHAIRMAN. Without objection, it is so ordered to be inserted
right at this point in the record.
[The article from the W a l l Street Journal referred to by Congressman Stanton follows:]
[From the Wall Street Journal, July 26, 1977]
OFF TARGET
(By Lindley H . Clark, Jr.)
This week Henry Reuss's House Banking Committee w i l l be continuing hearings on the Wisconsin Democrat's latest legislative inspiration. I f by some
mischance the Congressman's notion should make its way through Congress its
capacity for mischief would be considerable.
67
Mr. Reuss's bill superflcally resembles the congressional resolution that, for
more than two years now, has induced the Federal Reserve System to announce
to Congress—and the rest of us—its target rates for the expansion of the money
supply. Actually, the bill and the resolution are totally different.
The Reuss bill carries a lot of extra baggage that may divert attention from its
real intent. One section of the bill, for instance, provides for Senate confirmation
of the Federal Reserve chairman. Many people, I suspect, will be surprised to
learn that the chairman is not now confirmed by the Senate, and it's hard to
imagine anyone getting very exercised over the point.
Another section provides that the directors of the various Reserve banks could
be just about anybody of good repute. Now the directors are supposed to "represent certain occupational groups. Once again, it's hard to imagine anyone getting
very worked up about that proposed change.
A couple of sections of the bill, however, may be what one congressional staff
member calls "flak-catchers." They deal with lobbying and conflict-of-interest
matters. In those areas everyone is foursquare for virtue, but he may differ from
his neighbor on where virtue lies.
It's the heart of the bill that sounds so much like the 1975 concurrent resolution.
To start with, it requires the Fed to conduct monetary policy to promote maximum employment, production and price stability. It also calls for the Fed to
report on its progress at quarterly hearings alternated between House Banking
and Senate Banking. Who could argue?
Then Mr. Reuss really gets into his can of worms. At these quarterly hearings
the Fed would be expected to report on its proposed monetary aggregates. Not
the rate of growth, mind you, just the actual size. This could be an improvement,
since the Fed now keeps shifting the base as it sets percentage targets.
Next the Fed would be expected to report the "anticipated monetary velocity."
It's hard to imagine what would be gained by writing such a requirement into
law. Velocity determines the impact of a given growth rate of the money supply,
and any talk of a monetary target has to deal with the subject.
Third, the Fed would, in effect, have to announce interest rate targets. A great
many people in Congress mistakenly believe the Fed can set interest rates just
about where it pleases. This provision would set the stage for the sort of unedifying arguments we've lately heard from Budget Director Bert Lance. High interest
rates are largely a function of high inflation; the Fed has problems enough without giving it this type of help.
Finally, and most mysteriously, the Reuss bill would require the Fed to tip
off the lawmakers on the proposed composition of its portfolio.
It would be easy to write off all of this as an exercise i n futility, which I hope
it is. But the Reuss-Lance assault on the Fed lias plenty of support. The current
business recovery is well into its third year, an awkward age for business
recoveries.
Continuation of anything like the strong growth rates of the past 6 months
would quickly push the economy into a new inflationary explosion—and a subsequent recession. Fortunately, the economy already is slowing down. A year or
so of relatively modest growth rates could be a good investment in prolonging this
recovery. Current congressional critics of the Fed might recall that many of
them face an election next year.
Economic conditions can cause Congress to do unusual things, some wise and
some otherwise. When the monetary-target resolution went through Congress,
the country was just beginning to emerge from a deep recession with a still
frightening inflation rate. The resolution's supporters told the lawmakers that
monetary targets would help to reduce the inflation, as indeed they have.
It was an unusual parliamentary exercise. Concurrent resolutions have no
legal force; they merely express the views of Congress. Some observers wondered
whether the Fed would simply choose to ignore the resolution.
In the event, of course, the Fed has gone along with the resolution—quitely,
if not cheerfully. Chairman Arthur Burns still harbors doubts about the signifiance of all the M's, but he is also sensitive to the pressure. This time some of
the pressure was from inside the Reserve System and not merely from the
monetarist-oriented Reserve Bank of St. Louis.
There is some uncertainty as to whether the resolution is still in force—to the
extent that a nonbinding resolution ever can have any force. Since the resolution
was approved we have in effect elected a new House of Representatives; is the
new one bound by the views of its predecessor?
None of the questions about the resolution's status have been raised—publicly at least—by the Fed, the agency chiefly involved. Chairman Burns is sched-
68
uled to appear before Mr. Reuss's committee today with his views on the bill. I f
Congress does nothing. M r . Burns and his successors, i f any, presumably would
go on reporting well into the 21st Century and even beyond.
So why do anything? M r . Reuss, like the rest of us, knows that the economy
could use lower interest rates—to encourage business investment and to stimulate
homebuilding and buying. So he wants the Fed to play tooth fairy and put the
lower rates under our piUows.
It isn't that easy. W e are stuck with an economy that is hypersensative to
inflation. The Fed could lower short-term interest rates for a while by pouring
more money into the economy. B u t that "while" wouldn't last very long. Soon
the increasing fears of inflation would be driving up both short and long rates.
M r Reuss and his committee are scheduled to get together tomorrow to mark
up some sort of a bill. I f they insist on doing something they might substitute
the wording of the existing resolution for the chairman's mishmash. Monetary
targets are a fine idea, but M r . Reuss's proposal misses the mark.
T h e CHAIRMAN. M r . M o o r h e a d ?
Mr. MOORHEAD. Thank you, Mr. Chairman.
Chairman Burns, at page 5 of your testimony, you say that on occasion it is appropriate that you speak for the F O M C , or for the
Board, and sometimes just for yourself. Do I understand, from the
first sentence in your testimony, that the testimony today is not just
that of Chairman Burns' but also the testimony of the Federal Reserve Board ?
Mr. BURNS. That is correct.
Mr. M O O R H E A D . Y O U , and the chairman of the committee, seem to
have—and I have listened to your exchange—agreed on how the matter of velocity can be handled.
Are you speaking for the Board in this instance?
Dr. B U R N S . N O ; I am speaking for myself.
Mr. MOORHEAD. There seems to be no form of agreement on even
general discussions about interest rates. Is that correct, sir?
Dr. BURNS. We can have very extensive discussions about past interest rates, very extensive discussions about current interest rates
and very extensive philosophical discussions about interest rates. But
you will never get a forecast concerning interest rates out of me, under
any circumstances, unless you require it by law—and that would pose
a very difficult moral question for me.
Mr. M O O R H E A D . Y O U have testified—or you have said that mortgage
interest rates were generally declining. That is as a factual statement
as opposed to a prediction; is that correct ?
Dr. BURNS. I am open to questioning—unlimited questioning—
about interest rate behavior in current markets, or in the more recent
past, or in the more distant past, or to philosophical questions about
interest rates and their role in the economy or about the behavior of
interest rates abroad. I n fact, I wish you would ask me questions
about interest rates abroad, particularly in Latin America, in Argentina, and Chile.
Mr. MOORHEAD. Very well, let's start with your observation about
interest rates in Europe, and what effect you would think that might
have on interest rates in the United States.
Dr. BURNS. Interest rates in Europe have been declining generally
recently—not rapidly, but they have been declining. A s to the effect
upon interest rates in the United States, our interest rates also have
been declining generally in the long-term market. Our interest rates
in our short-term market are higher now than they were several
months ago.
69
I wouldn't expect interest-rate movements abroad to have any material influence on interest rates here, in view of the modest interestrate movements that have occurred internationally in recent months.
Dr. MOORHEAD. On page 3 of your testimony, you say that: "participants in financial markets * * * make use of * * * clues," whatever
clues they can get. A n d it seems to me that the basic philosophical difference might be that those in the know can read the clues, but the
general public can't.
Dr. BURNS. I don't know what to do about that. It's just a fact of
life that some people know more than others. Some people are more
intelligent than others. Some people are able to act quickly on the basis of what they know or think, and others are slow in responding. I
don't know what we can do about those differences, and I am not sure
one ought to try very hard—at least in this area.
Mr. STANTON. W i l l the gentleman yield ?
Mr. MOORHEAD. I would yield.
Mr. STANTON. Yes; I just wronder i f we could get unanimous consent to go over and come back. I t that O K ?
Mr. MOORHEAD. The chairman, I believe, wrent over to vote.
Mr. STANTON. Well, let us all go, so we can get back to hear the
testimony.
Mr. MOORHEAD. A l l right, the committee will stand in recess, as
briefly as possible.
[Brief recess.]
The CHAIRMAN. The committee will be in session, and the Chair
recognizes the gentleman from Texas.
Mr. GONZALEZ. Thank you, Mr. Chairman, and also, thank you,
Chairman Burns, for once again taking time and sharing with us the
benefit of your vast experience and great wisdom which I have always
felt personally very grateful for and wish to compliment you on.
I did not know what the time schedule would be on this bill until this
morning, so it looks as though it will be accelerated; and therefore, I
would like to ask a question.
On page 3 of the bill, section 4, the lobbying communications with
regulated institutions, as I understand it—and I did not know this
when we had preliminary discussions—but as I understand it, the internal regulations of the Board provide for employee responsibilities and conduct and I think the specific matter is covered by your
regulations and contains a prohibition against lobbying with appropriated funds.
Now, how are these regulations enforced, and do you feel that we
should extend this particular section statutorily in order to cover
what it seems to me you may have already provided for in your regulations?
Dr. BURNS. I must say I think we have strict regulations. These
regulations do not address the question of what our Directors say to
Congressmen. There is nothing that I know of in the guidelines we
have laid down that directs our directors not to talk to their Congressmen about banking legislation in which we have an interest.
We have taken the view all along that our directors are part of the
System, that our directors are also citizens, that Congressmen are interested in learning the thinking of their constitutents, and that it is
up to our directors to communicate their views or not, depending upon
70
what they want to do. W e see no reason for limiting them in this area,
as section 4 would do.
. .
Mr. GONZALEZ. I had misgivings. I n fact, the original phraseology
was a little different, because I agree with you; I think there is no way
we can, by legislative fiat, suspend the constitutional privilege of a
citizen to petition for a redress of grievances and make his views
known.
But I was thinking in terms of what, in the discussion it seemed as
though the thrust of the intent was to try and limit any longtime
activity of an employee, not necessarily a director, even though the
language of section 4 does include directors. A n d I was interested to
discover that you have a regulation in your own Federal Reserve regulatory system.
Dr. BURNS. Yes; we do have such regulations, and, to the best of my
knowledge, they are observed scrupulously. A n d I think it is an impressive fact that the Federal Reserve System has been in existence
since 1913, yet there has never been any scandal involving the Federal
Reserve, any of our directors, any of our bank presidents, any member
of the Board, or any of our officers.
I see no need for singling out the Federal Reserve for special treatment. There seems to be an implication in this bill that we have been
wrongdoers.
M r . GONZALEZ. Well, I, of course, am not familiar with all of the
record, but I don't reeal 1 tiny instance where you have it.
Another matter in all of this, though, it looks as i f we are acting i n
determining fiscal and monetary policy—a country individually is its
own master; whereas, from what has happened and the other discussions that you had, it seems as i f we are, in a way, subject to forces outside of our territorial limits in other countries. A n d I don't see that we
are taking into consideration here.
I think that when we kind of talk about how we can determine
velocity, interest rates, and all, we forget about the interrelation that
we have now in the world, where the impact of what is happening in
Europe w i l l impinge upon us.
A t this moment, the dollar has been recorded as being under very
severe pressure; and I can't see how, i f conditions go a certain way, we
wouldn't be confronting a repetition of what we were troubled with
about 7 years ago.
A n d I notice that there was a policy pronouncement by Secretary
Blumenthal to the effect that, regardless of those pressures, the Government was not thinking of intervening in the foreign exchange markets to bolster up the dollar.
Now, isn't that an integral part of what would impact our discussion
here; and do you have any comments about the wisdom or lack of wisdom about this expressed intent ?
•DR. BURNS. I can only speak for myself and, I think, for the Board.
W e are deeply concerned about the dollar. I f the dollar depreciates in
foreign exchange markets, that releases forces that tend to raise our
price level. There are also serious international implications of a depreciation of the dollar.
When the dollar depreciates in foreign exchange markets, millions
of individuals around the world and banks around the world—includ-
71
ino- central banks which treat the dollar as a basic store valued-all of
these people around the world either are embnrrassed or have difficulties. A n d we have, as a nation, a great responsibility to protect the
integrity of our money, not only domestically, but also internationally.
We carry a burden; we may not like it, l>ut we must discharge our
responsibility to the best of our ability.
Let me say this: To the best of my knowledge, Secretary Blumenthal's thinking on this subject has been misinterpreted by the press,
but he will have to speak for himself.
.
M r . GONZALEZ. M y time is up. But thank you very much, Mr. Chairman.
The CHAIRMAN. The gentleman from Michigan.
Mr. BROWN. Thank you, Mr. Chairman.
Mr. Chairman, standing out, because of its absence, with respect to
this legislation is the testimony of the present administration. Neither
Secretary Blumenthal, Mr. Lance, Director of O M B , nor Dr. Schultze,
Chairman of the Council of Economic Advisers has apparently seen fit
to appear and testify or to come out strongly in support of this legislation.
In fact, do you know of anyone of prominence, who is versed in the
theory and purpose of the Federal Reserve System, who has come out
four-square for this legislation ?
Dr. BURNS. I find it difficult to answer the question. I have been concentrating on problems of our economy and our financial system and
on certain legislation, and I have not followed the thinking of otjier
people at all systematically. Therefore, my testimony with regard to
your question would not be of much value to you.
Mr. BROWN. Well, one of the reasons I ask is, the chairman of this
committee, earlier in his remarks, talked about Secretary Blumenthal
and Mr. Lance and others who have made statements, and expressed
opinions with respect to interest rates and other things; but still have
not commented upon the value or the desirability, and so forth, of this
legislation.
I was interested in his suggestion that, because these people—Secretary Blumenthal and Mr. Lance and Mr. Schultze and others have
testified about G N P , economic growth, interest rates, and so forth—
that because they have issued such statements and rendered such opinions that therefore, almost axiomatically, it is perfectly all right for
the Chairman of the Federal Reserve Board and members of the Board
of Governors to make such statements and express such opinions.
Apparently, he makes no distinction between the substantial difference, in fact, absolute distinction between the direct impact that the
statements of those gentlemen or any one of them can have on interest
rates vis- a-vis statements by members of the Board.
Not one of those gentlemen can affect interest rates; nor does anyone
expect them to be able to affect interest rates in the direct way that the
Board of Governors can.
So, to suggest that, because they have spoken out in these areas, that
therefore it is entirely appropriate for you to speak out in these areas,
I think just oversimplifies, i f not suggests ignorance of, the differences
between the two.
72
Mr. Chairman, you have not, in commenting upon the first section of
this bill, you have not really addressed a point that I think is significant. It may be a matter of semanties, but a difference, I believe. House
Congressional Resolution 133 talked about the Chairman, the Board,
the System "consulting" with the Congress. This legislation says that
you shall "testify" with respect to these different areas.
It seems to me that the obvious import of the change in that language is to require you to be much more specific, direct, and so forth
in these areas than House Concurrent Resolution 133 contemplated.
And so it is not only that the area of, and the things that you would
express opinion about, are expanded, but really, the nature, it sems to
me, of what you are expected to do has been tightened.
Maybe you might care to comment. I don't mean to ask questions
that primarily make a statement, but I would appreciate your comments with respect to that.
Dr. B U R N S . I think your observation is a fair one. Also, House Concurrent Resolution 133 contained a very important sentence reading:
Nothing in this resolution shall be interpreted to require that such ranges of
growth or diminution be achieved i f the Board of Governors and Open Market
Committee determine that they cannot or should not be achieved because of
changing conditions.
I think that is a critically important part of that resolution and
that it helped to define the nature of the dialog between he Federal
Reserve and the two banking committees. The present bill does not
contain any such sentence or safeguard.
Mr. BROWN. Mr. Chairman, I would like to pursue this with you,
but time has expired. I would just like to say I appreciate your appearing before us this morning.
T h e CHAIRMAN. M r . H a n l e y .
Mr. HANLEY. Thank you, Mr. Chairman.
Dr. Burns, as always, it is a pleasure to have you with us. I am
deeply appreciative.
To go back for a moment to the colloquy between you and my friend
Congressman Gonzalez, as it related to section 4, and your apprehension about the provisions of that section, certainly you do make a number of points that are salient and certainly deserving of consideration
by this committee. A n d in an effort to sharpen the section, perhaps it
might be useful for you to explain to the committee exactly what
types of communications have existed between the Federal Reserve
Board, the Federal Reserve banks, the commercial banks, and business interest regarding the legislation.
For example, would you provide us with the specific information on
the communications, both oral and in writing, which occurred on the
efforts in 1974 and 1975 to provide for an audit of the Federal Reserve
System? Would you provide us with the same information on the
"Sunshine" bill which passed in 1976, and exactly what steps did you
and other personnel in the Federal Reserve System take to influence
these two pieces of legislation; and as you can surmise, the concern of
the committee relates to whether or not the Fed is really acting in conformance with the overall act which forbids lobbying by the administrative agencies with money appropriated by the Congress.
73
I f I could go just one bit further, prior to your response, of particular interest are the minutes of the Chicago Fed which show that
President Mays requested each director to make whatever calls seemed
natural in order to increase support for the Federal Reserve position.
When the "Sunshine" bill was up, the bank's executive secretary was
told to follow up with each director the following day to see what
contacts had been made.
Well, as I see it, certainly all of us would abhor, for instance, any
action taken by the Federal Power Commission, were it to enlist the
assistance of utilities or the oil industry to influence a piece of legislation under consideration by the Congress.
Dr. Burns?
Dr. BURNS. Let me be as factual as I can. I know that you function
under a 5-minute rule, but I would love nothing better than to have
you ask me questions in this area for an hour, or 2, or 3, or for a full
day, because by that time, I think you would have a thorough and
dependable answer to your questions ?
Now you want to know about the contacts that we have with those
whom we regulate. We have no contacts with bankers, as bankers,
to the best of my knowledge. We do have some contact with our own
directors, some of whom happen to be bankers, as specified by lawT,
and who naturally have an interest in the institutions which they
serve. That is point 1.
Point 2 is that meetings of directors are held by the New York and
San Francisco Banks about every 2 weeks and by the other banks once
a month. Now that would mean 26 meetings a year for each of 2
banks—that's 52—plus 120 meetings of the other banks makes a total
of 172 meetings a year for the 12 Reserve banks.
Next, another factual point. Mr. Reuss was given the minutes of
Reserve bank Board meetings for 3 years, so that he had the materials before him covering 172 meetings times—that is 516 occasions
for reports in our Boards of Directors minutes. Now, what did he
locate?
He located one item in the minutes of the Boston Reserve Bank.
He located three items—you referred to one of them, Mr. Hanley—no,
four items in the Chicago Bank, and one item in the Philadelphia
Bank.
So out of the 516 possibilities, 5 items turned up. There was no
item whatever for 9 of our 12 banks.
On the basis of this evidence one would have great difficulty in sustaining the charge that our banks boards involved themselves "intensively" in communicating with Members of the Congress.
Actually, let me say this: I wish they would involve themselves
more. What is wrong with people who are knowledgable, who have an
interest, talking to their Congressmen ? Doesn't every one of you talk
to bankers, to industrialists, to labor leaders ?
Mr. HANLEY. Dr. Burns. I f I may, that really isn't the point, and
certainly we don't want to deny any individual his or her constitutional
right.
I think what we are trying to determine here is whether or not
there has been a deliberate and orchestrated effort to influence
legislation.
74
Now going back to the several instances that you mentioned, I think
you will agree that the minutes were indeed very sketchy and
incomplete.
Dr. BURNS. Now just a minute. Y o u say they were "incomplete;"
you don't know that.
Mr. HAX LEY. Well, I beg to differ with you.
Dr. BURNS. What is the basis for that judgment concerning the
minutes?
Mr. H A N L E Y . Y O U have made references to but three or four instances
Dr. B U R N S . N O ; these are M r . Reuss's references, not mine.
Mr. HANLEY. Would you not agree—as I rekindle my observation of
this report, they weren't detailed at all. They were very sketchy. But
the fact that there are three or four very conclusive parts here in this
testimony that there was really an orchestration on the part of authorities of the Fed leads us to believe that possibly this has been a procedure. A n d of course if it has, then the intent of this legislation is to get
at that, and certainly to make it clear that the law has been violated
in the past.
Dr. B U R N S . Y O U ought to know, Mr. Hanley, that no such law
has been violated, for two obvious reasons. First, the law refers to the
use of appropriated funds; the Federal Reserve does not rely on "appropriated funds."
The second point is that Federal Reserve funds, unappropriated
funds, were not used—not even 1 penny. What are we talking about
here?
Mr. HANLEY. Well, then, that being the case, that perhaps opens up
another area that the committee should get involved in: That i f the
intent of Congress is circumvented by the use of the Fed's own
funds
Dr. BURNS. But I have just indicated that we have not used any of
our funds in such communications.
The CHAIRMAN. The gentleman's time has expired.
Mr. Neal?
Mr. NEAL. Thank you, Mr. Chairman.
Dr. BURNS. May I have one word ? Mr. Hanley, you and I have to sit
down for an extra hour, or 2, or 3, because I would like to pursue
your questions. I appreciate your interest, but you are up the wrong
alley.
Mr. HANLEY. Dr. Burns, I appreciate your invitation, and I look
forward to getting together with you, and we will take that hour
or 2.
Dr. BURNS. Thank you very much.
Mr. HANLEY. Thank you, and thank you, Mr. Chairman.
T h e CHAIRMAN. M r . N e a l ?
Mr. NEAL. Thank you, Mr. Chairman.
Mr. Chairman, I think you have provided us with an important
opportunity for exploring a number of very important questions.
I am personally a little troubled by the concern in section 1 for
interest rates and velocity. A n d my concern is that we would, through
this legislation, focus the Federal Reserve's attention on interest rates
instead of the monetary aggregates.
75
I would think that if the Federal Reserve were forced to predict
interest rates, then they—the members of the Board, like probably all
of us—would be inclined to make whatever prophesy were indicated
self-fulfilling. It just seems to me that that focus would not serve our
economy very well. But I guess we will have an opportunity to discuss
that in greater detail during markup.
There is one other question I have, and that is: I would like to ask
Dr. Burns that if, in fact, the Board deals with velocity, considers
velocity during its decisionmaking process on monetary policy ?
Dr. B U R N S . The answer is that we do talk about and give our views
on velocity. A s a matter of fact, you might be interested in correspondence between members of the System and Senator Proxmire. He addressed a series of questions on monetary velocity to each member of
the Board, and to each of the Reserve bank presidents who serve 011
the Federal Open Market Committee.
I answered for the Board, and the bank presidents answered for
themselves, individually. The range of views expressed is, I think, very
instructive. I think it fully supports the testimony that I have given
on that subject.
I would like to send your copies of that correspondence. I think it
would be instructive. I f the chairman would agree, it might be helpful
to put those statements into the record of these hearings.
The C H A I R M A N . What were they ?
Dr. B U R N S . This is correspondence between Senator Proxmire and
members of the Federal Open Market Committee concerning the subject of monetary velocity.
The C H A I R M A N . Without objection, those letters will be included at
this point in the record.
[The correspondence referred to and submitted for the record by
Chairman Burns follows:]
76
CHAIRMAN O F T H E BOARD O F GOVERNORS
FEDERAL R E S E R V E S Y S T E M
WASHINGTON, O. C. 20551
June 6,
1
9
7
7
The Honorable William Proxmire
Chairman
Committee on Banking, Housing
and
Urban Affairs
United States Senate
Washington, D. C. 2
0
5
1
0
Dear Bill:
All m
e
m
b
e
r
s of the Board have given careful thought to the
questions regarding monetary velocity raised in the letter that you
addressed on May
2
5 to each of t
h
e
m and
to the Reserve Bank Presidents
currently serving on the Federal O
p
e
n Market Committee* The Board
m
e
m
b
e
r
s have recently considered this subject not only during the
deliberations of the F
O
M
C but also in developing the testimony that
I presented on the Board's behalf at hearings before the Senate Banking Committee and
other Congressional Committees. Accordingly, the
Board has decided to m
a
k
e this joint response, supplemented by c
o
m
ments of two individual m
e
m
b
e
r
s
. We understand that the five Reserve
B
a
n
k Presidents on the F
O
M
C are responding individually.
The Board's views on velocity have been set forth at a
n
u
m
b
e
r of recent Congressional hearings, including the May
3 hearing
before the Senate Banking Committee on the Conduct of Monetary Policy.
In the statement presented at that hearing, we noted that, in considering growth ranges for the monetary aggregates for the year ahead, the
F
O
M
C had taken account—among other things—of "the usual uncertainties
about the relationship between m
o
n
e
y and
economic activity." I also
m
a
d
e the following observation on behalf of the Board:
"During the past two years, the increases that have
occurred in the stock of m
o
n
e
y have proved adequate to
finance substantial gains in the physical volume of output
and employment. This experience has demonstrated once
again that consideration of the stock of m
o
n
e
y alone is
not sufficient for assessment of the adequacy of the
economy's liquidity. M
o
n
e
y has a second dimension,
77
namely, velocity, or—in c
o
m
m
o
n parlance—the intensity
with which it is being used. Over short periods of time
the truly dynamic factor is not so m
u
c
h th$ stock of m
o
n
e
y
as the willingness of the public to use their m
o
n
e
y
balances. Upswings in business and c
o
n
s
u
m
e
r confidence
are c
o
m
m
o
n
y
l reflected in substantial increases of m
o
n
e
tary velocity. Moreover, in the case of the narrowly
defined m
o
n
e
y supply, intensity of use has been increasing with special rapidity since 1975, reflecting n
u
m
e
r
o
u
s
innovations in financial technology that serve to reduce
reliance on d
e
m
a
n
d deposits for handling monetary
transactions."
T
h
e Board generally expects that over the coming year the
increase in the velocity of M-l will be quite high by historical
standards, partly because w
e believe confidence will continue to
improve as the expansion progresses and partly because w
e anticipate
a continuation of the process of financial innovation that has so
markedly reduced over-all needs for transactions balances in the past
few years. Specifically, w
e expect that the rise in velocity—coupled
with growth in M-l at rates within the ranges projected by the F
O
M
C
in April—will be associated with satisfactory expansion in real GNP.
W
e also expect the velocity of M-2 to increase, although
not so fast as that of M-l. While the velocity of M-2 has been relatively stable over the last ten or fifteen years, it has s
h
o
w
n s
o
m
e
cyclical fluctuation—perhaps mainly because of changing relationships
between market and institutional interest rates. It might be noted in
this connection that Governor Partee dissented from the April decision
of the F
O
M
C to reduce the upper limit of the range for M-2 (and M-3)
by 1/2 of a percentage point, primarily because he believed that financial conditions might permit these broader aggregates to expand strongly
for s
o
m
e time to c
o
m
e
.
There are, of course, significant uncertainties surrounding
the Board's expectations for velocity, as there arie with all forecasts
of the future, economic or otherwise. The magnitude of the velocity
increases associated with continuation of the recovery at a satisfactory pace will d
e
p
e
n
d on the state of confidence, on the rate of increase
in prices, o
n the speed of financial innovations, and on other factors.
Since such uncertainties are inevitable, the Board considers
it essential that the F
O
M
C
, in its continuing close surveillance of the
behavior of the e
c
o
n
o
m
y and its financial parameters, retain flexibility
to adapt monetary policy to evolving circumstances. O
n
e source of
93-444 O - 77 - 6
78
flexibility is the wise provision of H
o
u
s
e Concurrent Resolution 1
3
3
that the Committee project longer-run ranges of growth rates for the
aggregates, rather than specific rates; such ranges allow for a reasonable degree of adaptation of actual growth rates within the framework of a general policy stance. More importantly, the Board is fully
prepared to reconsider the longer-run ranges if developments—with
respect to velocity or other relevant factors—differ from expectations
or if other events appear to require such reconsideration.
W
e must, of course, take account of prices as well as real
activity—since inflation not only works great hardships but, by its
very nature, poses a fundamental threat to sustained economic growth.
As the current expansion gathers m
o
m
e
n
t
u
m
, it m
a
y be that interest
rates will rise as part of the process of limiting credit demands-and hence real market d
e
m
a
n
d
s
—
t
o manageable dimensions. Interest
rates have, of course, usually risen—although with varying timing
and force—during economic expansions. W
e
, like you, earnestly hope
that significant increases in interest rates will b
e avoided in this
expansion, but no one can be certain of that.
The m
e
m
b
e
r
s of the Board—and, w
e are sure, also our B
a
n
k
President colleagues on the FOMC--will continue to seek policies consistent with maintenance of a satisfactory and sustainable economic
expansion that will provide increasing e
m
p
o
l
y
m
e
n
t opportunities for
our rapidly growing labor force.
Additional c
o
m
m
e
n
t
s by Governors Coldwell and Wallich are
given below.
Sincerely yours,
Arthur F, Burns
Supplement by Governor Coldwell
While I subscribe to the Board's letter, I would like to
m
a
k
e the following additional observations.
First, I do not accept monetary aggregates and their velocities
as the sole guides to, or measures of, monetary policy. In m
y opinion
the trend and level of bank reserves, b
a
n
k credit d
e
m
a
n
d
, and interest
rates as well as the state of market, business, and c
o
n
s
u
m
e
r confidence
and expectations are of significant importance to the formulation of
monetary policy.
79
Second, I h
a
v
e a relatively low level of confidence in the
predictability of the aggregates and velocity because of our experience
with their high volatility and
shifting character. T
h
ec
h
a
n
g
e in transactions balances is creating even greater uncertainty in the definition
and m
e
a
s
u
r
e
m
e
n
t of aggregates thus reducing further their reliability
as policy targets.
Finally, in pragmatic terms monetary policy, in my opinion,
has its primary impact within a 6
m
o
n
t
h period and
should be principally
concerned with the d
e
m
a
n
d elements of instability. This position m
a
k
e
s
me unwilling to assign greater importance to long-range mechanical
targets and leads me toward increased emphasis u
p
o
n b
a
n
k credit,
reserves, and interest rates.
S u p p l e m e n t by G o v e r n o r
Wallich
I support the views put forward in the foregoing letter.
Nevertheless, I would like to add
s
o
m
e views of my own.
In doing so,
I would like to note that the velocity approach is only o
n
e of several
w
a
y
s of looking at m
o
n
e
t
a
r
y theory and policy. While currently I pay
close attention to it and in fact e
x
a
m
i
n
e very carefully the points
raised in your letter, I would by no m
e
a
n
s rely entirely on this type
of analysis.
The n
e
e
d to look at velocity arises principally from the fact
that today we are using the m
o
n
e
y supply as a major guide to monetary
policy. U
n
d
e
r ordinary, i.e., noninflationary conditions, interest
rates would be a better guide. Interest rates in the broadest sense,
including equity yields, are the channel through which monetary policy
and m
o
n
e
y supply variations transmit their effect to the real sector
of the e
c
o
n
o
m
y
. U
n
d
e
r noninflationary conditions, I would normally
favor as low a level of rates as possible consistent with continued
price stability.
U
n
d
e
r conditions of inflation, however, market interest rates
cease to h
a
v
e a clear meaning. The real interest rate is the rate after
deducting the rate of inflation. In recent years, the real short-term
rate has b
e
e
n negative m
u
c
h of the time. T
h
e real long-term rate,
depending as it does on subjective expectations of inflation over the
life of the asset, is hard to discern. But taking into account that
the inflation p
r
e
m
u
i m contained in an 8-9 per cent rate, of perhaps
5-6 per cent, is taxable to the creditor and
tax deductible to the
debtor, long-term rates probably have been negative for m
a
n
y taxable
lenders and borrowers. I believe that this condition in the long run
is incompatible with the survival of a market e
c
o
n
o
m
y
.
80
Under inflationary conditions, interest rates b
e
c
o
m
e a poor
guide to monetary policy because (1) their economic meaning is distorted, and (2) the central bank n
o longer can, except quite temporarily,
control short-term rates, let alone long-term rates. Inflation thus
causes central banks to shift to m
o
n
e
y supply targets, which convey at
least a rough idea of h
o
w expansionary a given policy is.
The proper measure of such a policy, as you point out in your
letter, is the growth of m
o
n
e
y plus the growth of velocity. Velocity
changes in response to n
u
m
e
r
o
u
s factors, one of which is interest rates.
In order to obtain a measure of the appropriate growth of the m
o
n
e
y
supply that is independent of interest rates, I view as the growth of
the effective m
o
n
e
y supply the growth of M-l and M-2 plus that growth
of their respective velocities that would occur if interest rates were
constant. In assessing the growth of the effective m
o
n
e
y supply, I
take into account, as I believe do m
y colleagues on the F
O
M
C
, (1) the
gross overprediction, by mathematical models, of the d
e
m
a
n
d for M-l and
M-2, i.e., their underestimate of the growth of velocity, (2) the reduction in liquidity preference (increase in confidence) that a dampening
of inflationary expectations can be p
r
e
s
u
m
e
d to induce, and (3) the
progress in p
a
y
m
e
n
t techniques, the effect of regulatory changes, and
the increase in international liquidity through the Euro-dollar market.
At the s
a
m
e time, I a
m aware of the evidence that the market
anticipates an increase in interest rates, as indicated by the configuration of the yield curve which permits calculation of expected future
interest rates, by the prices quoted in the Treasury bill option market,
and by the evidence of surveys of n
u
m
e
r
o
u
s interest rate forecasts. I
a
m aware that an effort to control rates contrary to market forces,
especially during inflation, is b
o
u
n
d to be counterproductive within a
short period of time. I a
m aware that the market, during inflation,
seeks to re-establish positive real interest rates. Under these conditions, I believe that the only w
a
y to achieve the low interest rates I
would like to see is to bring d
o
w
n inflation. I believe that the m
o
n
e
tary growth ranges established by the F
O
M
C will, over time, work in
that direction, but I would, of course, be prepared to change m
y view
if there is evidence that these ranges are inappropriate.
ALB:kak
cc:
Catherine Mallardi (2)
Arthur L. Broida
81
FEDERAL
OF
FRANK
RESERVE
BANK
BOSTON
E.MORRIS
BOSTON, MASSACHUSETTS O2IO0
TELEPHONE (817) 426>7lOO
PRESIDENT
June 7, 1977
T
h
e Honorable William Proxmire
Chairman, C
o
m
m
i
t
t
e
e on Banking,
Housing and Urban Affairs
United States Senate
Washington, D.C. 2
0
5
1
0
Dear Senator Proxmire:
This is in response to your letter of May 2
5 concerning
monetary velocity. Before answering the questions posed in
your letter, I would like to offer three preliminary observations.
First, the income velocity of m
o
n
e
y is a convenient
shorthand description of the relationship between m
o
n
e
y and
nominal GNP, but this shorthand description m
u
s
t be used
cautiously. On the o
n
e hand, for a given level of the m
o
n
e
y
stock, the level of G
N
P m
a
y fluctuate for a variety of reasons.
On the other hand, because changes in the m
o
n
e
y stock affect
G
N
P with a lag, short-run fluctuations in the m
o
n
e
y stock will
ordinarily have little initial, impact on G
N
P and so the ratio
of G
N
P to money--velocity—will change. For these reasons,
only about 50 percent of the short-run variation in nominal
o
n
e
y stock.
G
N
P is associated with fluctuations in the m
This conclusion holds for both the Mj and M2 definitions
of m
o
n
e
y
.
A second important aspect of interpreting velocity changes
and velocity forecasts is that nominal G
N
P itself is not of
primary interest.. Monetary policy m
u
s
t be concerned \*ith real
G
N
P and the rate of inflation. Nominal G
N
P is, of course,
equal to real G
N
P times the G
N
P price deflator, but the
relationship between real G
N
P and changes in the deflator
is complex and not well understood. Excessive concentration
on velocity can, therefore, be misleading. For example, a
prediction of declining velocity would not be cause for concern if the prediction were accompanied by predictions of a
healthy expansion of real G
N
P and a decline in the inflation
rate.
Third, because of the lags in the effects; of monetary
changes on the e
c
o
n
o
m
y
, it is unwise to concentrate attention
excessively on the.coming.year. While monetary policy changes
82
h a v e some s h o r t - r u n e f f e c t s on t h e economy, t o d a y ' s p o l i c y
changes w i l l a l s o h a v e s i g n i f i c a n t e f f e c t s on t h e economy
n e x t y e a r and t h e y e a r a f t e r .
T h e r e i s ample e v i d e n c e
t h a t the u n d e s i r a b l e e f f e c t s of today*s p o l i c y i n i t i a t i v e s
on n e x t y e a r ' s economy c a n n o t be e x p e c t e d t o be c o m p l e t e l y
n e u t r a l i z e d b y new p o l i c y i n i t i a t i v e s n e x t y e a r .
This
p r o b l e m i s made p a r t i c u l a r l y d i f f i c u l t by t h e f a c t t h a t t h e
e f f e c t s o f m o n e t a r y p o l i c y changes a p p e a r f i r s t i n r e a l GNP
and o n l y l a t e r i n t h e r a t e o f i n f l a t i o n .
W i t h t h e above comments i n m i n d , l e t me now a d d r e s s
s p e c i f i c comments i n y o u r l e t t e r .
the
1*
I w o u l d j u d g e t h a t t h e niost p r o b a b l e e x p e c t a t i o n f o r
ML v e l o c i t y o v e r t h e n e x t 12 months w o u l d be i n t h e
5h t o 6% r a n g e and f o r M 2 v e l o c i t y i n t h e 2% to
3% r a n g e .
2.
T h e s e j u d g m e n t s r e f l e c t my i n t e r p r e t a t i o n o f t h e
evidence from previous business cycle recovery
p e r i o d s , my o p t i m i s t i c i n t e r p r e t a t i o n o f t h e r e c e n t
p e r f o r m a n c e o f t h e economy, and my b e l i e f t h a t
c o n t i n u i n g i m p r o v e m e n t s i n payments t e c h n o l o g y a n d
i n s t i t u t i o n a l changes a r e l i k e l y t o l e a d t o h i g h e r
v e l o c i t y g r o i v t h t h a n m i g h t o t h e r w i s e be e x p e c t e d .
I n t h i s r e s p e c t , my v i e w s a r e s i m i l a r t o t h o s e o f
C h a i r m a n B u r n s as s e t f o r t h d u r i n g t h e May 3 h e a r i n g
b e f o r e t h e Senate Banking Committee.
3.
M o n e t a r y p o l i c y must a l w a y s be f o r w a r d l o o k i n g a n d
flexible.
Consequently, i f our v e l o c i t y e x p e c t a t i o n s
a r e n o t f u l f i l l e d , i t w i l l be n e c e s s a r y t o make a
j u d g m e n t as t o w h e t h e r t h e f u t u r e i s l i k e l y t o b r i n g
a s i m i l a r p a t t e r n or a r e v e r s a l .
For example, i f
v e l o c i t y g r o w t h s h o u l d be l o w e r t h a n e x p e c t e d b e c a u s e
a m a j o r s t r i k e d i s r u p t s t h e economy, t h e n I p r o b a b l y
w o u l d a n t i c i p a t e a v e l o c i t y r e b o u n d when t h e s t r i k e
is settled.
I n t h i s s i t u a t i o n , lower v e l o c i t y growth
w o u l d n o t w a r r a n t a more e x p a n s i o n a r y m o n e t a r y p o l i c y .
A n o t h e r c i r c u m s t a n c e c l e a r l y n o t c a l l i n g f o r a more
expansionary p o l i c y would a r i s e i f i n f l a t i o n were t o
be l e s s t h a n e x p e c t e d a t t h e same t i m e t h a t r e a l GNP
g r o w t h w e r e a b o u t as e x p e c t e d .
The o b j e c t o f t h e s e
e x a m p l e s i s t o i l l u s t r a t e t h a t changes i n v e l o c i t y
do n o t i n a n d o f t h e m s e l v e s p r o v i d e a c l e a r g u i d e as
t o how m o n e t a r y p o l i c y s h o u l d be a d j u s t e d ;
A shortfall
i n v e l o c i t y f r o m t h e e x p e c t e d l e v e l s must be a p p r a i s e d
i n t h e l i g h t o f t h e t o t a l c o n t e x t o f economic d e v e l o p m e n t s a n d o u r o b j e c t i v e s f o r t h e economy b o t h
s h o r t - r u n and l o n g - r u n .
Sincerely
F r a n k E.
yours,
Morris
83
Federal Reserve Bank of Chicago
OFFICE o r TMC PRESIDENT
June 7, 1977
The Honorable W i l l i a m Proxmire
Chairman
Committee on Banking, Housing
and Urban A f f a i r s
United States Senate
Washington, D. C. 20510
Dear Senator Proxmire:
As one o f those charged w i t h f o r m u l a t i n g monetary p o l i c y
w i t h i n the framework o f i n s t i t u t i o n s and goals e s t a b l i s h e d by
Congress, I obviously share the i n t e r e s t you expressed i n your
May 25 l e t t e r i n achieving our common economic o b j e c t i v e s .
Therefore, I am pleased t o respond t o your i n q u i r y about
u n c e r t a i n t i e s i n the growth o f v e l o c i t y .
I would emphasize a t the o u t s e t t h a t I do not view v e l o c i t y
as an independent f o r c e . I t cannot and need not be p r e d i c t e d
w i t h p r e c i s i o n . I t i s , r a t h e r , a d e r i v a t i v e which i s u s e f u l
o n l y as a rough i n d i c a t o r o f reasonableness o f more s u b s t a n t i v e
economic f a c t o r s . Neither a p a r t i c u l a r l e v e l o f v e l o c i t y nor a
given r a t e o f monetary growth--nor even a c e r t a i n l e v e l o f
nominal GNP--is the u l t i m a t e g o a l o f p o l i c y . What we are concerned w i t h i s assuring the h i g h e s t l e v e l o f r e a l growth and
the greatest r e d u c t i o n o f unemployment compatible w i t h continued
progress i n reducing i n f l a t i o n t o more t o l e r a b l e r a t e s w i t h i n
the next few years. I n my c o n s i d e r a t i o n o f a l t e r n a t i v e p o l i c y
courses t h a t may appear to achieve these g o a l s , t h e r e f o r e , I do
not forecast v e l o c i t y independently. I review the r e s u l t i n g
v e l o c i t y f i g u r e s f o r consistency w i t h h i s t o r i c a l experience,
f o r reasonableness i n the l i g h t o f ongoing f i n a n c i a l i n n o v a t i o n s ,
and f o r whatever i m p l i c a t i o n s i t may have f o r i n t e r e s t r a t e movements. Thus, stated somewhat d i f f e r e n t l y , my judgments on
v e l o c i t y are derived from my views o f what p o l i c i e s are r e q u i r e d
t o achieve r e a l growth and p r i c e performance o b j e c t i v e s over the
next feto years*.
84
The Hon. W i l l i a m P r o x m i r e
Chairman
Committee on B a n k i n g , H o u s i n g
and Urban A f f a i r s
June 7 , 1977
G i v e n t h e p r e s e n t s t a g e o f t h e b u s i n e s s c y c l e , t h e degree
o f u t i l i z a t i o n o f r e s o u r c e s , t h e p r e s e n t momentum o f t h e economy—and assuming t h e moderate s t i m u l u s c a l l e d f o r i n t h e
announced g r o w t h p a t h s o f t h e monetary a g g r e g a t e s — I e x p e c t a
c o n t i n u e d i n c r e a s e i n r e a l GNP a t r a t e s c o n s i s t e n t w i t h f u r t h e r
e f f o r t s t o r e d u c e unemployment and t o achieve some f u r t h e r
I
s l o w i n g i n t h e GNP p r i c e d e f l a t o r o v e r t h e year ahead.
p e r s o n a l l y f e e l t h a t something l e s s t h a n t h e c u r r e n t p u b l i s h e d
f o r e c a s t v i e w s o f a 6 p e r c e n t r i s e i n t h e GNP d e f l a t o r i s
a p p r o p r i a t e and a t t a i n a b l e and s h o u l d be a c t i v e l y p u r s u e d .
Assuming, t h e r e f o r e , a somewhat l e s s expansive monetary
g r o w t h p a t h i n 1977 t h a n o c c u r r e d i n 1976, the i m p l i e d r i s e i n
M - l v e l o c i t y t o a t t a i n t h e s e r e s u l t s would be perhaps a b i t above
t h e average b e h a v i o r o f v e l o c i t y i n t h e t h i r d y e a r o f e a r l i e r
post-war recoveries, but that i s l a r g e l y a t t r i b u t a b l e to the
c o n t i n u i n g i n n o v a t i o n s i n f i n a n c i a l management w h i c h w i l l t e n d
t o s h r i n k the r e l a t i v e importance o f M - l .
The i m p l i e d r i s e i n M-2 v e l o c i t y w o u l d n o t , o f c o u r s e , be
r i s i n g as r a p i d l y .
As suggested e a r l i e r , these v i e w s a r e cons i s t e n t w i t h f a v o r a b l e t a r g e t s f o r the p r i c e performance.
I t i s d i f f i c u l t t o a s s i g n a s p e c i f i c degree o f c o n f i d e n c e
t o these v e l o c i t y expectations given the usual u n c e r t a i n t i e s t h a t
s u r r o u n d t h e e n t i r e f o r e c a s t i n g p r o c e s s . But on t h e t e s t s o f
r e a s o n a b l e n e s s , I am s u f f i c i e n t l y c o n f i d e n t o f t h e v e l o c i t y i m p l i c a t i o n s t o a c c e p t t h e announced aggregate g r o w t h r a t e ranges f o r
t h e m o n e t a r y a g g r e g a t e s as b e i n g c o n s i s t e n t w i t h a t t a i n i n g sound
o b j e c t i v e s o f r e a l g r o w t h and r e s t r a i n t o f p r i c e i n c r e a s e s .
I c e r t a i n l y w o u l d n o t h e s i t a t e t o r e v i s e o u r money s t o c k
g r o w t h p a t h i f movements i n t h e economy d e p a r t e d s u b s t a n t i a l l y
from the expectations noted e a r l i e r .
Indeed, I v i e w t h i s p o s s i b i l i t y as t h e b a s i c r e a s o n f o r t h e Committee's f r e q u e n t r e v i e w s
o f i t s 12-month m o n e t a r y aggregates r a n g e s . However, t h e money
s t o c k g r o w t h p a t h s h o u l d n o t be changed s i m p l y because v e l o c i t y
f a i l s t o match e x p e c t a t i o n s .
To t h e e x t e n t t h a t monetary p o l i c y
85
The Hon, W i l l i a m P r o x m i r e
Chairman
Committee on B a n k i n g , Housing
and Urban A f f a i r s
June 7 , 1977
a c t i o n s o f t h e p a s t two y e a r s have made s u c c e s s f u l i n r o a d s
on i n f l a t i o n a r y e x p e c t a t i o n s , l o w e r - t h a n - e x p e c t e d l e v e l s o f
(1) n o m i n a l income, ( 2 ) p r i c e i n c r e a s e s , and ( 3 ) i n t e r e s t
r a t e s (and t h e r e f o r e o f v e l o c i t y , as w e l l ) s h o u l d be f u l l y
c o m p a t i b l e w i t h an a p p r o p r i a t e r a t e o f r e a l g r o w t h .
I f , to the contrary, t h i s optimism regarding progress
on t h e p r i c e f r o n t i s n o t j u s t i f i e d , t h e r e seems t o me even
more reason t o c o n t i n u e on t h e moderate c o u r s e t h a t we s e t
more t h a n two y e a r s ago. I n d e e d , i f some semblance o f p r i c e
s t a b i l i t y i s e v e r t o be r e s t o r e d , we must e v e n t u a l l y r e d u c e
monetary g r o w t h t o a r a t e b e l o w t h a t o f t h e p a s t s e v e r a l y e a r s .
C o n s e q u e n t l y , a l t h o u g h I w i l l be t a k i n g n o t e o f t h e v e l o c i t y
f i g u r e s as t h e y come i n o v e r t h e n e x t s e v e r a l Q u a r t e r s , I w i l l
be w a t c h i n g much more c l o s e l y t h e breakdown o f i n c r e a s e s i n
n o m i n a l GNP between r e a l g r o w t h and p r i c e changes. I n my
judgment, o n l y evidence o f a s e r i o u s s l o w i n g o f r e a l growth
w o u l d j u s t i f y any a c c e l e r a t i o n o f monetary g r o w t h a t t h i s p o i n t
i n the cycle.
X hope t h a t you f i n d t h e s e t h o u g h t s r e s p o n s i v e t o y o u r
c o n c e r n s . I n t h e event t h a t f u r t h e r c l a r i f i c a t i o n w o u l d be o f
v a l u e , y o u may be assured o f my f u l l c o o p e r a t i o n .
Sincerely
86
June 8, 1977
The Honorable W i l l i a m P r o x m i r e
Chairman
Committer on Banking, Housing
and Urban A f f a i r s
United States Senate
Washington, D . C . 20510
Dear Senator P r o x m i r e :
T h i s i s i n response to your letter of . .ay .dS, i9»?.
M y policy recommendations at meetings of the f e d e r a l G >en
M a r k e t Committee a r e based p r i m a r i l y on formal and informal models
developed at the F e d e r a l .Reserve bank of St, L o u i s . In these models
the dominant determinant of nominal G N P is the money stock appropriate Iy
lagged. The extent by which changes i n the. growth rate of money stock
affect the growth of nominal G N P depends upon society's demand for
money balances. The r e c i p r o c a l of this demand for money balanc es is
frequently r e f e r r e d to as income velocity.
T h i s velocity in turn; i s determined by a whole host of other
factors such as interest rates wealth, current price levels and expectations of future p r i c e levels. Thus, while velocity is implicit in our models
we have-not found it necessary to measure i t ex >lic t l y as a unique variable,
or to r e l y on its projections. Since I do not rely on explicit velocity projections i n my policy recommendations at FOMC, 1 find i t impossible to answer
your specific questions.
A s to our expectations f o r the remainder of this year, oui
r e s e a r c h indicates that the M j growth range of 4. 5 to 6. 5%, given our
expected growth i n wealth, projected credit demands and expectations of
inflation, should be sufficient to produce a sustainable growth i n output
without accelerating inflationary pressures this year.
I appreciate your interest i n this important subject and hope that
my response i s c l e a r .
Sincerely,
Lawrence K . iloos
AB£/LKR:ml
87
FEDERAL RESERVE BANK O F KANSAS CITY
FEDERAL HESKRVE STATION
KANSAS
CITY.
June 8 ,
MISSOURI
($4198
1977
T h e Honorable W i l l i a m P r o x m i r e
C h a i r m a n , C o m m i t t e e on Banking,
Housing and U r b a n A f f a i r s
United S t a t e s Senate
Washington, D . C .
20510
Dear Senator P r o x m i r e :
T h i s i s i n response to y o u r l e t t e r of M a y 2 5 , 1 9 7 7 , i n w h i c h you
e x p r e s s e d your concern r e g a r d i n g the g r o w t h of m o n e y v e l o c i t y and
i t s i m p a c t on m o n e t a r y policy o b j e c t i v e s f o r the p e r i o d a h e a d . S p e c i f i c a l l y , you requested m y v i e w s a s a m e m b e r of the F e d e r a l Open
M a r k e t C o m m i t t e e as to the expected p e r f o r m a n c e of v e l o c i t y f o r the
M 1 and M 2 money m e a s u r e s ,
I would agree that m o n e t a r y v e l o c i t y p l a y s a n i m p o r t a n t r o l e i n
d e t e r m i n i n g the a p p r o p r i a t e l e v e l of m o n e y stock needed to f o s t e r a
s a t i s f a c t o r y l e v e l of economic a c t i v i t y . I w o u l d n o t e , h o w e v e r , that
v e l o c i t y i s but one of s e v e r a l i n t e r r e l a t e d v a r i a b l e s t o w h i c h I give
consideration at the t i m e the Open M a r k e t C o m m i t t e e s e t s i t s long-run
g r o w t h ranges f o r the m o n e t a r y a g g r e g a t e s .
In assessing the outlook f o r M 1 v e l o c i t y , I have t a k e n into c o n s i d e r a t i o n
s e v e r a l f a c t o r s w h i c h suggest that v e l o c i t y w i l l g r o w a t a r a t e above i t s
h i s t o r i c a l t r e n d of about 3 p e r c e n t . One of these f a c t o r s i s t h e s t r u c t u r a l
change taking place i n c e r t a i n deposit-type accounts, such a s N O W accounts
and business savings accounts, w h i c h w i l l tend t o s t i m u l a t e v e l o c i t y g r o w t h .
A n o t h e r factor i s m y expectation that o v e r a l l e c o n o m i c a c t i v i t y , a s m e a s u r e d by r e a l G N P , w i l l grow at a r a t e i n e x c e s s of i t s l o n g - t e r m t r e n d i n
the p e r i o d ahead. P a s t e x p e r i e n c e suggests that t h i s e x p e c t e d g r o w t h i n
r e a l G N P i s l i k e l y to be associated w i t h a g r o w t h i n v e l o c i t y above i t s
h i s t o r i c a l t r e n d . A l s o , as e c o n o m i c a c t i v i t y a c c e l e r a t e s t h r o u g h the
r e m a i n d e r of 1977 into 1978, i t i s r e a s o n a b l e t o e x p e c t s o m e c y c l i c a l
i n c r e a s e i n i n t e r e s t r a t e s that w i l l f u r t h e r boost v e l o c i t y g r o w t h . B a s e d
on these f a c t o r s , i t i s m y expectation that the g r o w t h of M 1 v e l o c i t y w i l l
i n c r e a s e at a r a t e w e l l above i t s h i s t o r i c a l t r e n d and w i t h i n a r a n g e t h a t
w i l l be consistent w i t h the expected s t r o n g g r o w t h i n the e c o n o m y .
88
FEDERAL RESERVE BANK OF KANSAS CITY
The Honorable W i l l i a m Proxmire
page 2
June 8, 1977
The rationale underlying the outlook for M2 velocity incorporates
s i m i l a r considerations. In brief, the trend growth rate in M2 velocity,
which is about zero, is expected to continue. Also, the growth rate of M2
velocity has tended to be above its trend rate when the growth of real
GNP exceeds its trend r a t e . And, finally, while financial innovations
have tended to have a smaller impact on M2 than on M1 velocity, the
velocity of M2— as for M1—is expected to be stimulated by the cyclical
rise in market interest rates. For these reasons, I would expect M2
velocity to increase w e l l above its historical trend in the period ahead.
Important ingredients for any economic forecast are the anticipated
level of consumer and business confidence and the expectation for price
inflation. Since these factors as well as velocity are subject to a large
number of uncertainties, there is a need for continual reassessment of
our economic performance in order to make appropriate changes in the
growth of the money stock. Therefore, I am quite prepared to alter my
views in light of changing economic conditions, including any significant
change in the outlook for the velocity of money.
Sincere*
President
89
MISC. 140C.1-8/74
FEDERAL RESERVT
BANK OF N E W
YORK
June 9, 1977
The Honorable W i l l i a m Proxmlra, Chairman
Committee on Banking, Housing and Urban A f f a i r s
United States Senate
52*41 Dirksen Senate O f f i c e B u i l d i n g
Washington, D. C. 20510
Dear Senator Proxtalre:
In r e p l y i n g to your l e t t e r o f May 25 regarding u n c e r t a i n t i e s i n
fehe prospects f o r monetary v e l o c i t y , some p r e l i m i n a r y comments on these
t m c e r t a i n t i e s and t h e i r i m p l i c a t i o n s f o r s e t t i n g monetary p o l i c y o b j e c t i v e s
fifeera necessary to put them i n c o n t e x t .
As most commonly d e f i n e d , the v e l o c i t y o f money i s merely the
l e v e l of current d o l l a r GNP d i v i d e d by the current l e v e l of one o r another
measure of the money stock.
U n c e r t a i n t y about the f u t u r e course o f v e l o c i t y
i s therefore nothing more or l e s s than u n c e r t a i n t y about the r e l a t i o n s h i p
between prospective money growth and the p r o s p e c t i v e path o f nominal GNP.
The v a r i a b i l i t y of v e l o c i t y i s not something new t h i s y e a r , but
i s rather a w e l l e s t a b l i s h e d phenomenon w i t h a l o n g h i s t o r y .
The d i f f i c u l t y of f o r e c a s t i n g v e l o c i t y ' s f u t u r e behavior w i t h any great p r e c i s i o n
rer the short run i s , i n my view, a l s o w e l l e s t a b l i s h e d .
There i s no
mechanically p r e c i s e r e l a t i o n s h i p between the behavior of money and nominal
GNP. Chairman Bums noted i n h i s testimony t o your Committee that over
short periods of time the w i l l i n g n e s s o f the p u b l i c to use t h e i r money
b a l a n c e s — i . e . , to change the v e l o c i t y of these money balances—can be
the dynamic f a c t o r .
I b e l i e v e that i t i s not always appropriate t o t h i n k
of v e l o c i t y as a v a r i a b l e independent of what i s happening i n the short
run e i t h e r to money or to GNP. In other words, w i t h a given money supply,
a more or l e s s rapid growth i n GNP may occur f o r other reasons and t h i s
w i l l be r e f l e c t e d a f t e r the f a c t i n a more or l e s s r a p i d monetary v e l o c i t y .
S i m i l a r l y , i n the short run a monetary a c c e l e r a t i o n o r d e c e l e r a t i o n may
have l i t t l e a f f e c t on GNP and may t h e r e f o r e be l a r g e l y r e f l e c t e d i n movements i n v e l o c i t y .
The u n c e r t a i n t i e s become even more apparent when
a t t e n t i o n i s turned t o the s h o r t - to i n t e r m e d i a t e - r u n r e l a t i o n s h i p s
between money growth and growth i n the r e a l and p r i c e compont^+t^ o f
nominal GNP taken separately.
90
M I S C . 140A.2-4/74
2
FEDERAL RESERVE BANK O F N E W YORK
NEW YORK. N E W YORK
None o f these problems are new and they are not at a l l l i k e l y
t o l e s s e n In the f o r e s e e a b l e f u t u r e .
Indeed, as the Business Week a r t i c l e suggests, recent changes i n r e g u l a t i o n and technology w i t h regard
t o c e r t a i n k i n d s o f accounts at commercial banks and t h r i f t i n s t i t u t i o n s
nay have complicated f u r t h e r the problem o f p r e d i c t i n g the r e l a t i o n s h i p
between the narrower d e f i n i t i o n s o f money and nominal GNP and t h e r e f o r e
the f u t u r e behavior o f v e l o c i t y f o r these d e f i n i t i o n s o f money.
I t i s j u s t because o f these u n c e r t a i n t i e s r e l a t i n g t o the
behavior o f money and the major economic o b j e c t i v e s that monetary p o l i c y
m&k£ng cannot be reduced t o a mechanical process o f s e t t i n g p r e c i s e monet a r y t a r g e t s t o achieve predetermined economic goals. Given the uncert a i n t i e s t I b e l i e v e i t has been h i g h l y appropriate f o r the FOMC (1) t o
p r o j e c t monetary growth r a t e ranges rather than precise s i n g l e - v a l u e d
monetary t a r g e t s , (2) to l o o k at several monetary aggregates r a t h e r than
c o v e n t r a t e e x c l u s i v e a t t e n t i o n on a s i n g l e concept, and (3) t o r e - e v a l u "fte longer term monetary o b j e c t i v e s at frequent i n t e r v a l s i n l i g h t of
-ongoing developments i n the economy.
\
Having s t r e s s e d the u n c e r t a i n t i e s that always e x i s t about
p r o s p e c t i v e movements i n v e l o c i t y and the consequent need f o r f l e x i b i l i t y 4ti s e t t i n g monetary o b j e c t i v e s , I nevertheless would l i k e a l s o t o
s t r e s s the Importance I a t t a c h , i n the context of greater economic unsetting
B £ p f t a l n t y and greater i n f l a t i o n i n recent years, t o the process o f
monetary growth r a t e o b j e c t i v e s f o r a p e r i o d ahead—a process t h a t you
encouraged and indeed pioneered.
In that connection, the longer term
s t r a t e g y o f g r a d u a l l y slowing monetary expansion to rates compatible w i t h
•Aftffroximate long-run p r i c e s t a b i l i t y i s a l s o important t o my t h i n k i n g .
Whatever the s h o r t - r u n u n c e r t a i n t i e s , there seems l i t t l e doubt
t h a t over time there i s a s i g n i f i c a n t and s u b s t a n t i a l r e l a t i o n s h i p between
the growth o f money and the growth of nominal GNP. Perhaps more t o the
poiiU/S' t h e r e J,s l i t t l e doubt i n my mind that over time there i s a substant i a l r e l a t i o n s h i p between the rate o f monetary expansion and the behavior
or p r i c e s .
These fundamentals were, I t h i n k , mtrch i n your t h i n k i n g , and
(that o f your Committee, i n encouraging the use o f monetary " t a r g e t s . "
IMoreover, there i s ample evidence that the rates of monetary growth we
have experienced over recent years are too h i g h t o be c o n s i s t e n t w i t h
I r e s t o r i n g p r i c e s t a b i l i t y over time.
I do not want t o suggest or c l a i m other f a c t o r s are not r e l e v a n t
i n the i n f l a t i o n a r y process, but I do b e l i e v e that moderation I n monetary
growth i s a necessary c o n d i t i o n f o r the r e s t o r a t i o n of reasonable p r i c e
s t a b i l i t y , and that progress i n that d i r e c t i o n , f a r from c o n f l i c t i n g w i t h
growth and employment g o a l s , w i l l over time prove a p r e r e q u i s i t e t o cont i n u e d and o r d e r l y growth. Put another way, I think the experience o f
recent years s t r o n g l y suggests that a resurgence of i n f l a t i o n a r y pressures
would be damaging to our employment goals and t o the purpose o f s u s t a i n i n g
the expansion.
10045
91
tyllSC. 1 4 0 A .22--44//7 4
J
F E D E R A L RESERVE B A N K O F N E W Y O R K
N E W YORK. N E W YORK
On this view, I believe that the Federal Reserve's strategy of
moderation in monetary growth, and very gradually seeking to reduce monetary growth over time, is consistent with our goals not just for this year,
but for the longer run. I also believe that this Federal Reserve strategy
has substantial importance as a public symbol of our national commitment
to do something about inflation. Inflationary expectations are, unfortunately, deeply Imbedded, and these expectations help account for the inflationary momentum we observe. While Z cannot quantify the Impact, I do
believe the progress we have been able to achieve in dampening I n f l a t i o n ,
and the prospects for further progress on that front and in sustaining
eitj^nsion are in part dependent on the success of our efforts to contain
monetary growth.
Consequently, while the uncertainty attached to the short- to
intermediate-run behavior of velocity certainly counsels f l e x i b i l i t y in
epsfcrlng an adequate rate of monetary expansion to support the economic
recovery, I would be very reluctant to see a serious breach in our longer
«mi strategy of gradually reducing monetary growth rates without clear
justification.
j
I think i t is also useful to note that the pursuit of objectives
for ihe monetary aggregates does not i n i t s e l f imply any particular objectives for interest rates. This i s not to say of course that Federal
£raerve actions w i l l have no influence on Interest rates—though even here,
£hort- and long-run influences should be carefully distinguished. But i t
dofes mean that whatever interest rates eventuate do so as a by-product- of
the/interaction of the economy with monetary behavior and not as an expll•eit objective of the central bank. Over time, I would certainly l i k e to
see lower Interest rates. But that must be achieved consistent with
other goals and specifically that objective can be achieved and sustained.
I believe, only in a context in which inflation is also brought under
control. In that case, gradual reduction in monetary growth rates also
seeprf to me consistent with important and lasting reductions in the average
lprel of interest rates.
To turn to your specific questions, In my own thinking, I do
not start with an explicit forecast for velocity for the coming 12 months.
However, the current longer term Federal Reserve target ranges for the
monetary aggregates, when set against the commonly cited forecasts for
GNP, seem to me to imply growth rates for velocity that are attainable
I n terms of historical behavior and in l i g h t of some special circumstances
ve are currently experiencing. For example, the current consensus e s t i mate of GNP for 1977 suggests about an 11 percent Increase i n current
dollar terms for 1977 over 1976, and a slightly higher figure from yearend to year-end. Given such a r i s e , the 5 1/2 percent midpoint cf the
FOMC's current 4 1/2 to 6 1/2 percent Ml range implies a velocity increase of from 5 to 6 percent. (Actually the time horizons covered by
the GNP projections and the monetary ranges are not Identical, so the
10045
92
MISC. 140A.2-4/74
4
F E D E R A L RESERVE BANK OF N E W YORK
NEW YORK. NEW YORK
v e l o c i t y i m p l i c a t i o n s should be taken only as suggestive.) While t h i s
i s higher than the long-run trend growth rate of Ml v e l o c i t y , v e l o c i t y
growth g e n e r a l l y has been higher during expansion periods.
For i n s t a n c e ,
the average r a t e o f increase during the l a s t four economic expansions
f o l l o w i n g the f i r s t years o f these expansions has been 4.2 percent and
during the f i r s t years of expansion has averaged over 5 percent.
In f a c t , III v e l o c i t y growth has averaged a 5.6 percent annual
r a t e o f Increase over the f i r s t two years of the current economic expans i o n and growth i n the most recent quarter was 7.0 percent.
The r e l a t i v e l y r a p i d expansion of Ml v e l o c i t y i n the current recovery appears to
have been r e l a t e d i n part to various regulatory and t e c h n i c a l innovations
that have caused some s h i f t out of commercial bank demand d e p o s i t s .
Under
current c o n d i t i o n s , these s h i f t s seem l i k e l y to continue.
Given t h i s
s i t u a t i o n and recent p a t t e r n s , a v e l o c i t y r i s e i n 1977 somewhat In excess
o£/average h i s t o r i c a l experience f o r t h i s stage of the c y c l e seems a reasonable e x p e c t a t i o n .
>>
Applying s i m i l a r computations f o r M2 to the 11 percent r i s e i n
nominal GNP i m p l i e s a v e l o c i t y growth f o r M2 not much above the 2 1/2
percent average r a t e of M2 expansion i n the four previous economic expansion^ f o l l o w i n g t h e i r f i r s t years.
I should note e x p l i c i t l y that the
s u b s t a n t i a l l y lower v e l o c i t y growth implied f o r M2 r e l a t i v e to Ml seems
j A a s o n a b l e both i n terms of the h i s t o r i c a l l y more rapid r i s e i n Ml v e l o c i t y and the s p e c i a l f a c t o r s noted above that are c u r r e n t l y a c t i n g to
ro&ice the demand f o r Ml-type balances.
—•'
i do not i n any way o f f e r these v e l o c i t y numbers as f i r m proj e c t i o n s , but o n l y as I n d i c a t i o n s that the monetary ranges c u r r e n t l y i n
use by the FOMC coupled w i t h the current consensus GNP p r o j e c t i o n s seem
to Imply v e l o c i t y behavior not out of l i n e w i t h h i s t o r i c a l experience
and current circumstances.
/
In s p e c i f i c response t o your f i n a l question, I would of course
jfe prepared to adjust monetary o b j e c t i v e s i f circumstances so warranted,
but I do not b e l i e v e the performance of v e l o c i t y by i t s e l f would be the
o n l y relevant f a c t o r i n that judgment. Obviously, such f a c t o r s as the
performance of p r i c e s and r e a l GNP, the composition of GNP, movements i n
i n t e r e s t r a t e s and other elements i n money and c a p i t a l market c o n d i t i o n s
would a l s o be r e l e v a n t .
As noted e a r l i e r , the use of ranges f o r the
aggregates permits some adjustments of t h i s kind i n any event.
But i n
a r r i v i n g at any judgment about p o s s i b l e changes i n the Federal Reserve's
monetary o b j e c t i v e s , as I suggested e a r l i e r , I think we should a l l f e e l
s e n s i t i v e to the danger o f the c e n t r a l bank r e i n f o r c i n g i n f l a t i o n and
10045
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MISC. 140A.2-4/74
5
FEDERAL RESERVE B A N K OF N E W
YORK
NEW YORK. NEW YORK 10045
i n f l a t i o n a r y e x p e c t a t i o n s by a c c e l e r a t i n g i t s o b j e c t i v e s f o r monetary
growth w i t h o u t persuasive reasons.
I hope these comments are r e s p o n s i v e t o your
Sincerely yours,
P a u l A. V o l c k e r
President
RCD:PAV/op
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concerns.
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c o m m i t t e e o n b a n k i n g . h o u s i n g a n d UROANT a f f a i r s
Washington. o.C.
205to
May 25, 1977
The Honorable Arthur F. Burns
Chairman of the Board of Governors
Federal Reserve System
20th & Constitution Avenue, NW
Washington, D. C. 20551
Dear Arthur:
I am greatly concerned by the attached a r t i c l e from the
May 30, 1977 issue of Business Week e n t i t l e d "How Velocity
Can Fool the Money Watchers."
It indicates that economists
are not in agreement as to the l i k e l y course of v e l o c i t y and
that differences of opinion may also exist among members of
the Federa.1 Open Market Committee.
If v e l o c i t y growth slows down, the monetary aggregate
targets that were voted by the Federal Open Market Committee
In A p r i l , and conveyed to the Senate Committee on Banking,
Housing and Urban A f f a i r s on May 3, 1977, may not be s u f f i c i e n t
to insure that the recovery w i l l continue at a pace consistent
with the growth of real GNP and employment expected by the
Administration and the Congress and.may result in s i g n i f i c a n t
Increases in interest rates.
As you know, the Committee on Banking, Housing and
Urban A f f a i r s is responsible for oversight and review of
monetary policy decisions of the Federal Open Market Committee
and for reporting i t s findings to the Senate. Our oversight
and review is made more d i f f i c u l t at a time l i k e this when
great uncertainty exists about the growth of v e l o c i t y .
Velocity is an important l i n k between the FOMC's monetary
objectives and the ultimate objectives of growth in real
GNP, f u l l employment and stable prices.
Evidently no consensus
on the l i k e l y growth of v e l o c i t y exists among economists.
In order for the Committee to exercise i t s oversight
r e s p o n s i b i l i t i e s , we need to know what assumptions the
members of the FOMC made about v e l o c i t y when i t approved the
monetary targets and to what extent there may be divergent
viewpoints on the committee. Accordingly, I am asking each
member of the Open Market Committee to respond d i r e c t l y to
the following questions:
95
1) What are your expectations for the growth of
v e l o c i t y of M-l for the next twelve months?
2) Nhat degree of confidence do you attach to those
expectations?
3) What is the rationale for those expectations, and on
what evidence do you base your judgment?
4) What are your expectations for the growth of
v e l o c i t y of M-2 over the next twelve months?
5) What degree of confidence do you attach to those
expectations?
6) What Is the rationale for those expectations and on
what evidence do you base your judgment? ( I f your expectations for the behavior of M-l and M-2 d i f f e r s i g n i f i c a n t l y ,
please explain why.)
7) Are you prepared to adjust your goals for money
stock growth i f v e l o c i t y growth does not proceed to meet
your expectations?
These are important questions that I am sure you must
have considered in your preparation for not only the April
meeting of the Federal Open Market Committee, but also for
the more recent meeting in May. Therefore, I would hope
that you can reply without delay.
A l l best wishes.
Sincerely;
Chairman
WP:srt
96
E
C
O
N
O
M
I
C
S
How velocity can fool the money watchers
The money supply now commands
greater attention than any other economic statistic Congressmen, businessmen, and money managers eye the money
numbers as they do no other figures
coming out of Washington, some lining
up at the Dow-Jones ticker on Thursday
at 4:00 p.m. to get the weekly moneysupply numbers, much like horseplayers
trying to get the latest race results. The
implication is that control of the money
supply leads to stabilization of the economy. And tracing the growth of money
yields good forecasts of output, prices,
and interest rates
Yet just as the money supply achieves
superstar status, serious questions are
being raised about whether moneywatching works, either for forecasters or
policymakers
For money to tell the whole story, or
even a good part of it, the rate at which
money turns over—its velocity—must be
reasonably stable or predictable. If
velocity is stable, controlling the money
supply is an effective tool for influencing
the growth of the gross national product,
at least in the long run. But if velocity
rises, a given amount of money will
support a larger volume of economic
activity, so there is no longer a simple
relationship between money growth and
GNP.
Velocity is a concept that economists
have used since Irving Fisher (1867 to
1947), probably America's greatest mon-
etary economist, developed the theory at
the turn of the century that the supply
of money determined the level of national income. Fisher assumed that velocity
was reasonably constant Today's economists know that velocity is in an upward
trend For example, in the first quarter
of 1968 GNP reached $837.3 billion and
the narrowly defined money supply, M u
averaged $1891 billion So velocity, or
the turnover rate, came to 4.42 But by
1973 velocity had risen to 5 04 (chart)
Its instability means that
monoy is a poor guide
to economic performance
Indeed, since World War II velocity
has looked predictable, increasing at
about 3% a year. But suddenly in the
past two years it has risen at almost
twice that rate, and the GN*P increased at
24% over that period, double the rate of
increase in the money supply Arthur F.
Burns, chairman of the Federal Reserve,
expects yet another sharp spurt in velocity, and he is basing Fed money policy on
that assumption.
Disagreement^ However, few- economists
agree on just where velocity will end up.
The critical issue, therefore, is whether
the Federal Reserve can make sound
decisions on how much money is
adequate to support economic growth
without either sending interest rates
soaring or reigniting inflation.
Says J. Charles Partee, a governor of
the Federal Reserve Board: "Velocity is
another element of uncertainty in setting money growth targets There never
was all that much certainty between
money and GNP, and now there is less."
'Deterioration.' Another way to look at
velocity is to examine its converse—the
demand for holding money. And this,
too, has bccome unstable Economists
say that the amount of currency and
checking deposits that individuals and
companies want to hold depends primarily on two factors—the level of GXP and
interest rates Rising GNP, say economists, means that individuals and companies will want larger money balances
to finance greater purchases of goods
and services On the other hand, rising
interest rates make people reluctant to
hold money that could be put into interest-bearing accounts or securities These
basic tendencies still hold, but their
precise relationship has changed drastically. "We have seen a progressive deterioration of the money demand function," says Partee.
Most economists would agree with
Partee, though the exact magnitude of
the deterioration is unclear In the latest
issue of the Brookings Papers on
Economic Activity, Princeton University's Stephen M Goldfeld finds that the
demand for money in the second quarter
of 1976 was $224 billion less than was
predicted by an equation that success-
97
The Fed's Partee: "There never was that
much certainty between money and GNP."
fully forecast money demand for the
period from 1952 to 1972. Another simulation, by Allen Sinai of Data Resources
Inc., yielded substantially better results,
but it still had an overprediction of $6
billion for 1976.
Other economists, particularly, monetarists, argue that the events of the past
few years do not signal a permanent
shift in money demand, but rather
resulted from a business cycle marked
by very sharp swings. "The demand
function tends to be stable over the long
term," says Anna J. Schwartz of the
National Bureau of Economic Research
Inc. and co-author, with Milton Friedman, of A Monetary History of the
U.S.
But even .economists who believe there
has been no permanent change in the
demand function agree that the relationship between money and national income
is less stable than it used to be. Monetarist Michael J. Hamburger, for example, a researcher for the New York
Federal Reserve, challenges Goldfeld's
figure of $22.4 billion. But he still finds
his model overpredicting the actual
money supply by $9 billion in 1976.
Banking changes. The narrowly defined
money supply, Mi, consists only of
currency in circulation and demand, or
checking, deposits at commercial banks.
The Fed also keeps statistics on a series
of progressively more comprehensive
money aggregates. M i consists of Mj plus
savings, or time, deposits at commercial
banks. Mj is M 2 plus deposits at savings
and loan associations, mutual savings
banks, and credit unions.
In the original design of these categories, Mj consisted of all money that could
be used in transactions, while the higher
aggregates represented assets that first
must be converted into transaction money. But this distinction is breaking down
under the pressure of institutional and
fconoMICR
technological changes in banking, and
this is accelerating the increase in velocity.
Thrift institutions in many states
offer negotiable order of withdrawal
(NOW) accounts, which are, for all practical purposes, interest-bearing checking
accounts. Deposits in such accounts
behave like M t , but they are not countcd
as such.
Similarly, many S&LS will arrange to
pay depositors' bills directly out of a
savings account, or they will transfer
money from savings to checking with
only a telephoned request. Many banks
allow automatic overdraft provisions on
checking accounts, permitting depositors
to maintain smaller balances safely. A l l
of these factors reduce the amount of M i
individuals must hold to pay for ordinary financial needs. Fed economists
estimate that these factors added between one and two percentage points to
velocity last year.
Other changes have allowed businesses to reduce their cash balances. Com-
Princeton's Goldfeld: He finds that
money demand has dropped by $22 billion.
panies are now permitted to keep money
in interest-earning savings accounts.
Some banks offer plans by which
demand deposits above a specified level
are automatically.transferred to savings
or other short-term investments at the
end of each business day. Companies
also have greatly increased their use of
nonmoney assets, such as Treasury bills,
as a source of interest-earning liquidity.
In addition, the combination of high
interest and inflation rates has led businesses and individuals to hold as little
money as possible in nonintcrest-bcaring
forms. "It is now easier to move back
and forth between Ms and other forms of
money or near-money," says Goldfeld.
"People used not to consider the cost and
inconvenience of moving between these
forms worthwhile. But when short-term
interest rates topped 12%, it became
attractive, and they discovered that it
was not as inconvenient as thought"
Pending changes in regulation and
technology are likely to accelerate the
move out of Mi and further cloud both
the meaning of the monetary aggregates
and their relationship to national
income. Congress is now considering
legislation that would permit commercial banks in all 50 states to offer *OW
accounts, allowing interest to be paid on
checking deposits.
Redefining. Because of these developments, both monetarists and nonmonetarists think that the time has come for
the creation of new classifications for
money that will more accurately reflect
reality. And the Fed agrees. "We are
considering redefining the aggregates,"
says Partee. 'The only thing that has
been holding us up is the uncertainty
over congressional action on NOW accounts."
For the time being, however, the Fed
is stuck with what it has. And to the
extent that the monetary aggregates no
longer mean what they used to, it is
difficult for the agency to determine ho\v
much money growth is
needed—or, indeed, how
much is occurring. "This
is worrisome," says Partee. And while the Fed
continues to rely OR
above-trend growth in
velocity to make its money targets work, there is
sonic foreboding that this
may not continue forever.
" V e l o c i t y has led a
charmed life," says Partee. "But we have to be
prepared for this to come
to an end."
Many economists believe that, by relying on
velocity to continue to
grow well above trend,
the Fed is running a
serious risk of underestimating money needs, which could send
interest rates soaring. Jerry L. Jordan,
vice-president of Pittsburgh National
Bank and former research director of
the S t Louis Fed,- believes that the
recent surge in velocity is largely a
catch-up from a drop in the growth of
velocity during the recession. "I expect
the growth to slow down in coming
months," he says. "This raises a lot of
uncertainty about Fed policy."
For its part, the Eed is likely to
muddle through by continuing to watch
and control the growth of both M i and
Mt, while taking its best guess about the
impact of changes in the link between
money and the level of economic activity.
'There is a certain amounts! trial and
error involved," says Partee. But there
are many who worry that a Fed policy
that relics on accelerating velocity for
another year may dump the economy
into a recession in 1978.
•
98
M r . NEAL. M r . Chairman, I have been told by economists, and apparently it is a widely held view among economists, that velocity is a
relatively random occurrence; that it is essentially unpredictable.
W o u l d you agree with that?
Dr. BURNS. NO; I would not agree with that. I would rather say
that while velocity has an erratic component, it moves i n general with
the business cycle. I have preached that lesson repeatedly. A n d , i f I
may say so, the reason I have had somewhat better luck than many
ot!hers i n predicting velocity is that I know that velocity tends to reproduce the movement of aggregate economic activity. Therefore, velocity is not a random variable, although it does have a heavy random
component.
M r . NEAL. Well, i f it is predictable, then
Dr. BURNS. NO, there are two difficulties. First, the difficulty i n predicting the business cycle ; second, the difficulty i n predicting the random component of velocity that is superimposed upon the cyclical
movement i n velocity.
I t is not a variable that can be predicted by many individuals. Some
of us, I think, have been quite lucky in predicting it.
M r . NEAL. DO you have any objection to trying to predict it, as
this b i l l requires, then?
Dr. BURNS. There is a difference, you see, between predicting the direction of velocity and predicting its actual magnitude. T h i s is a
subject I have studied for 50 years.
I have no difficulty i n giving you my views as to the general direction that I expect velocity to take, or indicating the margins of error
arising from the erratic component in that variable. B u t I don't know
how to predict actual magnitudes, and I don't know of anyone else
that does. A n d certainly the members of the Federal Open Market
Committee make no effort to do that.
Y o u see, the Federal Open Market Committee, i n the last analysis,
deliberates as does a legislative body i n the area of monetary policy.
There is a range of competence within that committee, and we attempt
to quantify only the monetary aggregates.
The CHAIRMAN. T h e gentleman's time has expired.
M r . Rousselot?
M r . ROUSSELOT. T h a n k you, M r . Chairman.
Dr. Burns, I am pleased that in your continuing efforts to carry
on a continuing of dialog between ourselves and your Board that you
are here today.
O n page 5 of your testimony you state as follows:
Conceivably, i n response to a congressional mandate, the F O M C could vote on
some numerical figure for monetary velocity. B u t any such exercise is not necessary for effective policy formulation.
Now there are many who have suggested that i f one had a fair idea
of what nominal G N P growth would be i n a given period—say it were
12 percent—and i f he could estimate the velocity at, say 4 percent, he
could subtract the two and come up with an 8 percent target for M i
growth.
O n June 9, P a u l Volcker, president of the Federal Reserve Bank of
New Y o r k responded to a request from Senator Proxmire for the views
of the Federal Reserve Board and voting members of the Federal Open
99
Market Committee, concerning monetary velocity. Y o u have just asked
that this letter he placed i n the record, and I would like to briefly
quote from it: "There is no mechanically precise relationship between
the behavior of money and nominal G N P . "
Now, my question is twofold: T o what extent do members of the
Federal Open Market Committee take velocity into account i n setting
policy? T h a t is one question.
A n d , two: W o u l d this b i l l reduce their ability to use their best judgment i n this regard ?
D r . BURNS. A t our meetings, we discuss two subjects very extensively : first the condition of the economy; second, economic prospects
as we see them.
Our staff makes a very detailed presentation. A f t e r that, individual
members of the committee express their views, particularly i f their
views diverge from opinions expressed by the staff.
A little later, we discuss what we think monetary policy ought to
be, and we try to set objectives for ourselves i n terms of the growth of
the money supply, and i n terms of the one interest rate over which
we have substantial control—that is, the Federal funds rate, which is
essentially the interbank lending rate.
Now monetary velocity, as such, is not a formal subject for discussion, but I can't recall a meeting when some view on velocity has not
been discussed by some members of the Federal Open Market
Committee.
M r . ROUSSELOT. YOU think it's a factor, then, i n setting policy ?
D r . BURNS. I think it plays some role i n the thinking of individuals,
we give more attention to the money supply, because historically we
know that when the money supply stops growing, an economy is likely
to falter; and we also know that when the money supply grows excessively, inflation w i l l be generated.
So we pay more attention to the money supply. I t is more basic and
more predictable a factor than velocity.
M r . ROUSSELOT. Well, would this b i l l i n any way inhibit the use of
the best judgment of members of the F O M C with respect to velocity?
D r . BURNS. I don't think this b i l l would inhibit us. It really wouldn't
inhibit me; you can't change my economic thinking just because you
ask me to do something that I don't see any way of doing at a l l well.
I do think that i f such a law were passed, we would perhaps spend
a great deal of time talking about things some of us on the Committee know very little about. I happen to be a student of this subject;
without i n any way reflecting on my colleagues—that's not my intention—I would have to say that because of different professional
backgrounds some know less about this subject. There are other areas
where they know vastly more than I do. So you see, we would be spending a great deal o f time on a subject that few people really understand and then coming up with a guess. W h a t good would that do
anvone? Please don't ask us to do that; we would be chasing ghosts.
M r . ROUSSELOT. Well, we never chase ghosts here. Y o u understand
that.
The CHAIRMAN. T h e time of the gentleman has expired.
M r . Blanchard?
M r . BLANCHARD. Thank you, M r . Chairman.
100
D r . BURNS, two items—two amendments are likely to arise before
this committee i f and when we mark up this bill. I would like your
reaction to them.
T h e first is the idea of making the term of the Chairman of the
Board of the Federal Reserve System coterminus with that of the
President.
The second item is one which would shorten the term of members of
the Board of Governors from 14 to 8 years.
W h a t is your reaction to those two ideas and the reasoning behind
your reaction?
Dr. BURNS. W h e n I testified at length on the first question recently
before Congressman Mitchell's subcommittee, I testified against a coterminous term.
I n a sentence: T h i s would introduce a political dimension into the
Federal Reserve which might prove injurious, and the need for any
such change i n the law has not been even remotely demonstrated. W h y
write a law when there is no problem? Nobody has defined a problem
i n this area.
A s to the second question, about shortening the term of the Federal
Reserve B o a r d members, I can't honestly say that 14 years is right
and that 16 or 12 or 10 years would be wrong. But, again, I do think
that a relatively long term for members of the Federal Reserve B o a r d
gives some assurance that they w i l l not be swayed by short-run political
considerations. That is what Congress had i n mind i n setting long
terms: T o insulate the Federal Reserve from day-to-day, month-tomonth political pressures. Therefore I am i n favor of a long term
for members of the Board; but I am not going to argue that 14 years
is right and some other number is necessarily wrong.
M r . BLANCHARD. I guess those two items get into the whole historic
debate that has been going on for the 3 years I have been here on the
relation of the F e d to Congress or to the Executive. A n d it is quite
obvious to me that this b i l l is a product of that debate.
B u t it would seem to me that there are really two ways to go. I f you
buy the assumption—and I don't know that you do—that there ought
to be some greater coordination of monetary policy with fiscal policy,
then there are two ways to go. One is to have greater accountability of
the F e d with Congress; and the other, which does not exclude the first,
would be to the President.
D o you accept the assumption that there ought to be better coordination of fiscal policy with monetary policy; and how do you perceive
the role of Congress i n this whole area ?
Dr. BURNS. I f you mean by "coordination" the interchange of ideas—
communication—then I can say to you that there is very effective coordination with the Executive. I meet with the Secretary of the Treasury every week; we had a lengthy breakfast meeting morning. A n d ,
my colleagues and I meet with the Council of Economic Advisers, I
meet with the President once every few weeks. So there is ample opportunity for exchanging ideas and impressions and knowledge.
A s far as communications with Congress is concerned, I commented
at some length at the beginning of my formal testimony on the dialog
that has been developing between the Federal Reserve and the Con-
101
gress. That dialog—and I don't say this i n any mood of criticism,
I am just reporting a fact—has gone further with the Senate committee than it has w i t h this committee.
I n addition to having a dialog on monetary policy under the concurrent resolution, we have had with the Senate committee—and I
have invited i t — a dialog on the condition of the banking system and
a dialog on the Federal Reserve budget. I n fact, I suggested a dialog
upon supervisory policy as well. W e are thus learning from each
other.
I just invited M r . Hanley to meet with me. T h a t invitation goes to
every member of the committee; I would like to meet with each of you
individually or i n small groups frequently between oversight meetings. I wish we would find a way of doing this more effectively. F o r
that matter, I am sure my colleagues on the Board would want to do
the same. A n d perhaps we would learn to understand one another
better, and by working together we could in time do what after all,
each of us is seeking to do: to help this country have a better future
for ourselves and for our children.
So, I am open to any new ideas i n this area, and I appreciate your
raising the question.
M r . BLANCHARD. I guess my time is expired. Thank you, Dr. Burns.
T h e CHAIRMAN. M r . L u n d i n e ?
M r . LUNDINE. Chairman Burns, I am somewhat concerned with the
fourth provision i n this b i l l regarding lobbying. Under your interpretation of this provision, what would the Federal Reserve Board be
permitted to do with respect to legislation ? I n other words, do you
interpret this to mean that you could never pass a resolution regarding any legislation on banking or finance issues?
D r . BURNS. I can't answer that; I would have to consult our attorneys. I have to say that that particular paragraph, or set of
paragraphs, i n the testimony was written sentence-by-sentence and
word-by-word on the advice of our legal staff.
These are not just my views; they are the views of a highly trained
professional legal staff.
M r . LUNDINE. Well, I understand your objections; and I think I
understand some of the reasons behind them. What I am also trying
to come to an understanding of, is, as a practical matter, the extent of
the inhibition that this would put upon the F e d and members of the
Board.
D r . BURNS. I think I can only answer that by saying that on the
basis of my reading of the bill, and on the basis of the advice that I
have received from our legal staff, the inhibition would be very great
indeed. I n the last analysis, while we at the Federal Reserve may or
may not like what Congress does, we do live by the law very strictly.
M r . LUNDINE. Thank you, M r . Chairman.
I n the interest of time, I won't ask any further questions.
The CHAIRMAN. I thank the gentleman; and I point out to the members that we are doing fine; and I think every member w i l l get a
chance to inquire of Chairman Burns.
B u t the Chair w i l l keep a close timing, under the 5-minute rule.
M r . Hyde?
M r . HYDE. Thank you, M r . Chairman.
102
Dr. Burns, I, too, am intrigued by this section 4; and i f I could just
read it again:
No member of the Board of Governors, director, officer, or employee of the
Federal Reserve system may communicate with any director, officer, or employee
of any institution subject to the regulatory authority of the Federal Reserve
system to influence legislative actions affecting the Federal Reserve System.
Now, i n light of that language, we have a law we are living with
called the Rehabilitation A c t of 1973. Section 504 of that act defines
handicapped people, and Griffin B e l l has just given it as his formal
opinion, that the term "handicapped people" includes alcoholics and
drug abusers. A n d Secretary C a l i f ano has issued regulations now that
there must be affirmative action to seek out drug abusers and alcoholics
in employment with governmental agencies; and you may not give
them a physical examination and you may not inquire about their
disability, but you may ask them questions that w i l l relate to whether
they can perform the job.
Now, how you can do the one with the other, I don't know. A n d
I won't burden us with that speculation. But, as I interpret this language, i f some bank director or employe were to ask you whether that
meant that you had to go out and affirmatively seek drug abusers,
unrehabilitated drug abusers, to work for the Federal Reserve System
and what you thought of that idea, you could not answer; could you ?
Dr. BURNS. I would need the benefit of counsel to speak responsibly.
M y own view is that I probably couldn't; but my counsel might say it
is possible for me to speak.
M r . HYDE. I f that should ever occur, Dr. Burns, you would—and you
refer your interrogator to me, I w i l l answer for you as to what my
opinion is on that regulation.
W o u l d you explain to us how the Boards of Directors of the various
Federal Reserve banks are selected now ? Could you tell us something
about their general makeup and what proportion of the directors are,
themselves, bankers?
Dr. BURNS. W e have three classes of directors. Class A directors are
bankers. There are three of them on each reserve bank, and they are
elected by our member banks.
Class B directors are businessmen. Again, they are elected by the
member banks, and there are three i n each of our reserve banks.
Class C directors are representatives of the public at large.
Y o u see, what the authors of the Federal Reserve A c t tried to do was
to get a balance on these reserve bank boards. The bankers represent
the lenders, and the lenders may possibly have an interest i n higher
interest rates. Some do and some don't—this varies, as you know.
Borrowers, on the other hand, rather consistently have an interest
in low interest rates. These are the business people; they would like to
borrow cheaply.
Now, public representatives presumably have no such bias one way
or another. The thought was that they would focus on the national
interest.
So, one-third of the directors of our Reserve banks are bankers; the
others represent a wide range of businesses and professions.
M r . HYDE. A n d how are they selected, D r . Burns?
103
D r . BURNS. The class A and class B directors are elected by the
member banks. The class C directors, the public representatives, are appointed by the Board; the chairman and the deputy chairman are always class C directors, appointed by the Federal Reserve Board.
M r . HYDE. DO you make an effort to see that the Board is not dominated by bankers?
D r . BURNS. O h ,
yes.
M r . HYDE. DO you think that House Concurrent Resolution 133 is
i n force today ? D o you have an opinion on that ?
D r . BURNS. Even though that resolution has lapsed and even though
that resolution—being a concurrent resolution—never had the force
of law, it has been treated as i f it were a part of the Bible by us at the
Federal Reserve Board.
M r . HYDE. Thank you.
I yield back my time.
T h e CHAIRMAN. M r .
Cavanaugh?
M r . CAVANAUGH. Thank you, M r . Chairman.
Chairman Burns, I have long been an admirer of yours; and I think
that your concerns about integrity and your representations of your
own personal standards are well-taken here today. B u t I must say that
I am surprised that you seem to convey the feeling that although you
impose extremely high standards upon yourself that you don't feel that
i n the case of the Federal Reserve those standards of conduct and
ethics should be set out i n law i n order to be imposed uniformly
throughout the entire Federal Reserve System.
I f I am wrong about that, i f I am wrong about my reading of your
testimony, I would like you to comment on that.
B u t when you say, on page 14, that your objection to inclusion i n
section 208 is that you feel it would be discriminatory because some
other agencies of Government may have been inadvertently overlooked,
I find that incomprehensible and somewhat shocking, because i f you
don't disagree with the standards set out i n section 208,1 can't frankly
understand the fact that some other agencies may have been overlooked
as a justification for excluding the Federal Reserve from those
standards.
I n addition, your argument on page 15, that the imposition of these
standards upon Boards of Directors of the Federal Reserve would result i n the reluctance of people w i l l i n g to serve. I t seems to me that i f
we are soliciting and receiving men and women of the highest standards, they would have no objection to serving on the Board under this
standard.
I wonder i f you would comment on that interpretation.
Dr. BURNS. I want to thank you, first of all, for the very kind remarks that you made about me personally.
Second, let me say that I have no objections whatsoever to writing
into law standards of integrity. B u t let us not do that i n a hurry, and
let us be sure that we know what we are doing.
I am sorry that I shocked you by being sensitive on this subject;
perhaps I am unduly sensitive on this. B u t i n spite of your being
shocked, I can only repeat that in my judgment—and I may be mistaken, but I am here to tell you what I think, right or wrong—in my
104
judgment, it is inappropriate to single out one group i n the Federal
Government as a special target when there isn't one item of evidence
that there has been misconduct.
M r . CAVANAUGH. Excuse me, D r . Burns, but section 208 does not
single out the Federal Reserve—it adds the Federal Reserve to those
other agencies of government that are already expected to serve under
that standard.
Dr. BURNS. YOU are quite right, it adds the Federal Reserve. But
amending the criminal code is a very serious matter, and, i f you're
going to do that there might be a dozen or a score of other agencies
that you might want to add with equal propriety. Possibly, a need
has actually been demonstrated in some.
B u t I submit no need has been demonstrated i n the case of the Federal Reserve.
M r . CAVANAUGH. Excuse me, Doctor, but that is the essence of your
argument that eludes me. The establishment of a standard is not the
same as an accusation of impropriety existent; and clearly, when 208
was established as the standard for executive offices, that was not an
indictment of everyone who serves i n the executive offices or independent agencies of government. That was the establishment of a proper
standard of conduct for all who served there.
Dr. BURNS. I have no question of that.
M r . CAVANAUGH. I f you are going to object to section 208, I think
that you can only object to it on the basis of the standard; and I am
surprised that you are not w i l l i n g to confront that issue. A n d that is
where I am shocked—not in your sensitivity but i n your apparent insensitivity to that standard, Doctor.
Dr. BURNS. I don't know how to answer that comment, and I am not
going to try.
M r . CAVANAUGH. I would have a further question with regard to my
colleague from New York's questions regarding the Boards of Directors' minutes.
I have reviewed much of that material that was provided by the
chairman, and I also found the minutes extremely sketchy and incomplete, and really little more than subject head notes.
I would wonder how you would feel about a standard for verbatim
minutes for Boards of Directors' meetings and for some mechanism
by which they could be made public after an appropriate period of
time?
Dr. BURNS. I must say to you i n all honesty that i f such a requirement were established by law, I would have some fear that, here and
there, discussion which should be candid and exploratory would become inhibited; and that would be very unfortunate.
So, I would think very carefully about that k i n d of a requirement.
I t might prove counterproductive.
The CHAIRMAN. T h e time of the gentleman has expired.
M r . CAVANAUGH. Thank you, M r . Chairman.
T h e CHAIRMAN. M r . M a t t o x ?
M r . MATTOX. I have no questions, M r , Chairman.
T h e CHAIRMAN. M r . K e l l y ?
M r . KELLY. Thank you, M r . Chairman.
105
M r . Chairman, I would like to inquire of you i f i t is inaccurate or
emotional to be concerned that House Concurrent Resolution 133 and
the present b i l l are really just advancing steps toward an encroachment
on the independence of the F e d ?
I can see this to be the real concern and the thing we ought to be
talking about, about the idea of whether the banks are controlling and
whether or not everybody down there is a bunch of crooks and you
should all go to jail—is very interesting. B u t the evidence is pretty
clear that that is not the issue.
T h e real thing is, are the same people that are controlling the fiscal
policy now going to also control the monetary policy ?
D r . BURNS. Let me say this: I do think that there are people i n our
country—some are Members of the Congress—who would like to see
the Federal Reserve Board open up the tap, become more expansionist,
and join the inflationists. Some individuals thinking along those terms
w i l l seek out and perhaps devise ways of harassing the Federal Reserve—that goes on.
But, as to basic motivation, as far as this b i l l is concerned, I don't
think that I know enough to express a responsible opinion.
M r . KELLY. AS I recall, House Concurrent Resolution 133 was passed
i n an atmosphere of—well, my colleague suggested compromise, but
that wasn't the- atmosphere I was thinking of. I was thinking that
there was an awful lot of conversation about there had been a recession,
exclusively caused by the Federal Reserve B o a r d policies and that we
had had soaring interest rates which had been created exclusively by
the Federal Reserve Board policies and the chairman and that labor,
industry, the consumer, the Congress, had nothing whatever to do with
that, that we had all just been standing there innocent as babes and
up galloped the Federal Reserve Board trying to wreck the whole
country.
Now, that is the atmosphere that I remember; and what we were
trying to do is let Congress manage the Federal Reserve Board and the
moneary policy so that we would not have a recurrence of that tragedy.
I know that you have done this several times, but I think this is &
good point to do i t again: W h y is the independence of the Federal
Reserve Board probably a good counterbalance, based on recent
history ?
Dr. BURNS. Let me say only that I hope to address that subject very
thoroughly on August 13, and that I w i l l be glad to send you a copy
of my speech at that time.
M r . KELLY. A l l right. I thank the Chairman for that. I have no
further questions and yield back the balance of my time.
T h e CHAIRMAN. M r . Yento?
M r . VENTO. Thank you, M r . Chairman.
D r . Burns, I have looked over your testimony as carefully as I could
and I think what it boils down to is that you are suggesting that there
is a theoretical possibility of some misconduct on the part of members
of the Federal Reserve System in terms of this lobbying activity.
Let's get some dates straightened out here with regard to some of
the comments you made. Y o u suggested that the Federal Reserve
Board adopted a code of ethics under a certain executive order and
106
then suggested to member units that they adopt rules and regulations implementing that. W h e n d i d that happen ? When did you submit the code of ethics or adopt it at the Federal Reserve System; and
when did you send it to the Board members ?
Dr. BURNS. I cannot give you those dates.
M r . VENTO. Well, did it happen recently; or is this something that
has been around ?
Dr. BURNS. I t has been i n force for years.
M r . VENTO. I think for the record, M r . Chairman, that D r . Burns
ought to also provide the committee with some of the rules and regulations implementing this i n the various member banks of the Federal
Reserve System. D o you think it is important for our record to understand what types of rules and regulations exist to guide the conduct
of these different members?
A n d then second, you suggested that over the course of time there
have been no violations of it? H o w do you generally enforce it; and
again I guess we are going to have to talk i n terms of generalities,
unless you are adequately prepared to talk about specifics.
F o r instance, I think that M r . Hanley's comments with regard to
the comments was improper. I don't think the Federal Reserve System
should be involved i n terms of lobbying. I think that is an improper
activity.
Was there any judgment rendered ? Were any activities stimulated
by that i n terms of the thoughts and views of Members of Congress,
who express concern such as myself regarding that activity? W h a t
did you do?
Dr. BURNS. I n preparing for this testimony, I put the question to
my legal staff as to what conflict of interest cases have come to the
attention of the staff over the past few years. A n d the response I got
is that apart from the concerns expressed by M r . Reuss regarding
M r . Gilpatrick, a director of the Federal Reserve Bank of New Y o r k ,
no serious questions concerning conflicts of interest have been raised.
From time to time the financial disclosure statements of individuals
indicate holdings of stocks or other investments not deemed suitable
for Board employees. These investments usually have been acquired
by inheritance, or were held by individuals before their employment
by the Federal Reserve System. I f these canot be disposed of immediately without hardship, a more gradual disposal of these assets
is arranged.
That is the answer I got from my staff. B u t I want to amplify that
answer, i f I may, because the answer as it was prepared by my staff
says that apart from M r . Gilpatrick, no serious questions concerning
conflicts of interest have been raised.
A s for M r . Gilpatrick, let me only say this. W h e n I read the report
by Chairman Reuss, my heart was filled with sorrow. M r . Gilpatrick
served with honor and distinction as Deputy Secretary of Defense
under President Kennedy; he is a distinguished member of the New
Y o r k B a r ; he served on the board of the Federal Reserve Bank of
New Y o r k for 6 years, part of that time as chairman. Nothing that
he has done is even remotely questionable.
When I read M r . Reuss' statement I picked up the telephone and
called M r . Gilpatrick to tell him that my heart was filled with sorrow
and that I wanted to apologize to him. H e asked me why, and I told
him that somebody should apologize to him, and that I i n the absence of anyone else was doing it.
107
M r . VENTO. Well, my time is expired. B u t I have other questions
which I w i l l put i n writing to you, Dr. Burns. A n d I w i l l look forward
to your response.
T h e CHAIRMAN. M r . Grassley.
M r . GRASSLEY. T h a n k you, M r . Chairman.
I n answer to Congressman Hyde's question, you stated that you
consider House Concurrent Resolution 133 a bible. I would think that,
as a committee, we could not ask for a better response from any governmental agency than to have that sort of respect accorded our resolutions by that agency.
B u t as a followup on that—and let me say parenthetically so you
don't look at my questions as being unfriendly—because I basically
appreciate the job that you are trying to do i n controling the money
supply and interest rates, but when House Concurrent Resolution 133
was passed, d i d you support it?
L e t me pose tne question i n another way: d i d you want Congress to
pass it? A n d then as a followup on that, what has been accomplished
m your judgment by House Concurrent Resolution 133 ?
D r . BURNS. Yes ; I w i l l be very happy to answer your questions.
W h e n the resolution was first proposed, I objected to it; and objected
to it with some eloquence. B u t the resolution as finally adopted is
vastly different from the resolution as originally drafted. A great deal
of discussion with Members of the Congress and the House and the
Senate took place i n working out the resolution. A s finally drafted,
I was quite pleased with it and d i d support it—and have supported
it ever since.
Y o u ask what it has accomplished. I think it has accomplished two
things—at least two things that I believe have been beneficial. Because
of that resolution, we i n the Federal Reserve are perhaps a little more
systematic i n our discussion of monetary policy than we previously
were, or might otherwise have been. I think that is one beneficial
result.
Another is that we do have these dialogues with the Congress. I
look forward to F r i d a y when we w i l l be discussing monetary policy.
I have learned from members of this committee, and I would like to
think that now and then, one or another member of the committee
may have learned something from me or from my colleagues.
So I think it has been useful, yes.
M r . GRASSLEY. D r . Burns, from your judgment of 2 years experience, has it had any bad effects?
D r . BURNS. I would say not.
M r . GRASSLEY. Then additionally, on another point, and I don't
know whether I would ask this question just because you now appear
before Congress because of House Concurrent Resolution 133, or
whether it would be just to solicit a general impression from you—
and I might be begging for an answer here—but do you see that the
Congress, on the one hand, generally wants instant solutions, instant
success, and instant responses whereas the Federal Reserve is looking
more long-term; and I quote as a basic difference one instance wherein
there is reference to a longer-run strategy of gradually reducing
monetary growth rates. W i l l any effects of a resolution, or the enactment of a law force upon the Federal Reserve a greater emphasis upon
short-range outlook than on long-range outlook?
108
Dr. BURNS. I think there is a danger i n that direction, yes. B u t I
am not sure whether the basic concern of the Federal Reserve is so
very different from the basic concern of the Members of the Congress.
I t is true that many Members of the Congress do want instant solutions. Well, that only means they are human. Some of us i n the
Federal Reserve System also would like instant solutions. B u t as we
ponder the problems that concern us, we often find that instant solutions are illusory. A n d I think what is true for us is true for Members
of the Congress.
There is little difference. Y o u Members o f the Congress have—and I
have the greatest sympathy for you—you have to know so many different things; you jump from one thing to another, and you have to
legislate on all kinds of issues. H o w you can master all the issues on
which you have to legislate, I don't begin to understand. The scope
of our activity is much narrower. Therefore, we can take long-term
interests into account to a larger degree than Members of the Congress
can. There is that difference.
The CHAIRMAN. The time of the gentleman has expired.
M r . Barnard ?
M r . BARNARD. Thank you, M r . Chairman.
D r . Burns, it's always a pleasure to have you before the Banking
Committee. I respect your candid, forthright and honest responses to
the questions.
I am concerned about a previous question that was asked. I n my
mind it left dangling the proposition that you were insensitive to this
section 5 and its application to members of the Board and officers and
employees of the Federal Reserve System. W o u l d you want to respond briefly—and of course the time is getting on—about the difference now between a regular department of Government and the Federal Reserve System i n this regard ?
Dr. BURNS. I n the first place, our Federal Reserve banks are quasipublic and quasi-private institutions but the public interest dominates.
Certainly, the amount of time and energy that our directors devote to
the Federal Reserve, virtually without compensation, and all the benefits they have brought to the System—for example, the increases i n
productivity of the Federal Reserve System—are extraordinarily impressive. I would like to have the opportunity sometime to present the
facts on that subject to you.
I'm not saying you shouldn't subject these conscientious directors to
the criminal code. B u t I am saying you should think very carefully
about doing that and make sure you know precisely what you are
doing before you take a step i n that direction. Otherwise it may discourage too many highly qualified, honorable, conscientious men from
serving their country.
M r . BARNARD. Thank you, sir. D r . Burns, on another subject, you
mentioned that class B directors—the appointment of class B directors by the Board could very possibly correct the influence of bankers
on the various banks
Dr. BURNS. M a y I interrupt ? That is not quite the point. I t could
correct the mischievous interpretation concerning the influence of
bankers.
M r . BARNARD. Thank you for that correction.
109
H o w do you foresee that class B directors would be appointed?
W h a t system would you envision i f i t was changed to go to the B o a r d ?
D r . BURNS. Instead of the class B directors being elected by member
banks of the System, they could be appointed by the Federal Reserve
Board, just as are class C directors.
M r . BARNARD. W h a t steps would you take i f this b i l l was passed to
see that all segments of the public were represented ?
D r . BTTRNS. W e have a committee of the B o a r d which devotes itself
to this subject. They make an effort to learn about individuals i n different parts of the country who can serve i n this capacity. I don't know
that we would be doing anything more than what we do now i n making
an intensive search. T w o or three of our B o a r d members devote a great
deal of time to that.
I do want to take this opportunity once again to thank Chairman
Reuss for prodding us in certain directions. W e have more minority
members on our Boards now and more women than we might have
had i n the absence of his continual interest i n the subject.
M r . BARNARD. Can a member of the B o a r d serve more than one
term ? W h a t is the law on that ?
Dr. BURNS. Our attorney would have to answer that. I believe that
many of them serve two terms. W e have also had instances i n which a
director who had served two terms served an extra year or two. Moreover, I seem to recall that one director from St. L o u i s served a very
long term. So I believe that there is no legal restriction, although by
custom we do have the restriction of two terms.
The CHAIRMAN. The time of the gentleman has expired.
M r . Watkins.
M r . WATKINS. M r . Chairman, colleagues of the committee, and D r .
Burns, I appreciate your being here.
I would like to return our thinking a little bit to section 1 where I
have a bit of a problem. I n the past before I came to Congress, I was i n
the homebuilding business for a decade or so. Probably the homebuilding business—and this should be very much i n the knowledge of
this committee since we deal a great deal w i t h homebuilding—is one of
the most sensitive industries to the monetary policy of this country.
I am having some difficulty with the fact that having a group estimate and project, i n my opinion, might have a reverse effect on the
investment nature of business and private industry i n this country. W e
have a little bit of it to a small degree now because sometimes they
wait to see what is going to happen.
B u t I think it would have a tremendous wait-and-see attitude by a
lot of people on how they are going to invest their capital i f this is injected into the monetary flow, et cetera.
I have two questions. D o you feel that to some degree there would
be what I call a Y o - Y o effect on investment by business people having
more of an up-and-down situation ? A n d second, i f this is true, I think
we're probably on the threshold of opening up to some degree some
manipulation of the monetary investments of this country.
So this is something that i n my judgment, I have some degree of
question about, but I would like f o r you to elaborate upon those two
particular questions that I have in my own mind.
93-444 O - 77 - 8
110
Dr. BURNS. I think I can give you an informed answer to your question, at least i n part.
W e at the Board and the F O M C don't forecast interest rates. W e
don't vote on interest rates. There is nothing like that. O u r staff, however, does make systematic projections continuously—for a month
ahead, a year ahead, a year and a half ahead.
W e have i n the Federal Reserve, I think, an extraordinarily able
group of professional economists, well-trained and highly skilled people. Their forecasts of interest rates at times have been miserable, just
as the forecasts of private bankers and private economists i n this area
have often been way off.
I f we had adopted the projection of our staff and publicized it, we
might at certain times have discouraged investment i n the country
extensively, and we would have been mistaken i n our judgments. W e
haven't done that, fortunately. So there is a very real danger of the
sort that you have just defined.
The CHAIRMAN. T h e time of the gentleman has expired.
Mrs. Fenwick.
I would remind members that we do want to allow the chairman to
go at 12:45, i f at all possible.
Mrs. FENWICK. T h a n k you, M r . Chairman. I w i l l be brief.
I am startled that we passed so lightly over what I should think
would be the governing policy of the Federal Reserve Board. The
b i l l speaks of promoting maximum employment, production, and price
stability. B u t I am puzzled that there is no mention of what I would
think is the Federal Reserve's prime responsibility, to promote a sound
banking system, and a stable monetary situation so that people can
live and invest i n this country.
Is there nowhere i n the mandate to the Federal Reserve that this
should be what they are supposed to do ?
D r . BURNS. YOU have asked a very good question. A n d I must say
that I d i d not think of our responsibility i n this area i n the context
of section 1. I was thinking of section 1 as an improvement over the
language of the Employment Act. A s a general statement concerning
broad, economic objectives, it is an improvement on the language of
the Employment A c t .
I didn't mean to go beyond that. A member of my staff has just
handed me a copy of the Federal Reserve Act. T h e purpose as stated
at the beginning is "to provide for the establishment of Federal
Reserve banks, to furnish an elastic currency, to furnish means of
rediscounting commercial paper, and to establish a more effective
supervision of banking i n the United States, and for other purposes."
So we are governed by law i n this area.
B u t I think that i f the Congress is going to rephrase objectives, it
might be very useful to cover—as one of our responsibilities and one
of the objectives of the Congress—the maintenance of a sound banking
system.
M r s . FENWICK. I should think the promotion of employment should
be the business of Congress. B u t the Federal Reserve, I am glad to
see, has concern about it. Thank you.
I wondered what is the erratic component in velocity that you referred to several times.
Ill
D r . BURNS. One falls into technical language. I f you were to plot
velocity on a chart, quarter by quarter, you would find that i t exhibits
an underlying, upward trend. Y o u would find also a cyclical movement which reproduces more or less faithfully the business cycle i n
the country. Y o u would also find a jagged contour i n the curve quarter
by quarter; I was referring to these jagged contours quarter by quarter
when I spoke of an erratic component i n velocity.
Mrs. FENWICK. I d i d want to ask a couple of other questions concerned with this lobbying. F o r example, we are often telephoned by
members of the executive and I have never considered that improper,
because it never occurred to me that any member o f an executive department or the Cabinet would profit by the measures that they were
either proposing or protesting. T h e only way i t would seem to me to be
true of the Federal Reserve bank Boards would be that there are three
members that are bankers, and conceivably the assets or the profits
of those institutions might rise or fall, depending upon some legislative
action.
There are three bankers on each board, but what proportion of the
boards are they?
T h e CHAIRMAN. T h e time of the gentlewoman has expired.
I am anxious to enable the Chairman to depart so he w i l l make his
date. I f he wants to answer this for the record, rather than now he is
certainly welcome to.
D r . BURNS. M y answer is short. Bankers constitute one-third of each
board, as defined by law.
Mrs. FENWICK. Thank you.
T h e CHAIRMAN. NOW, M r . Steers, M r . Evans and M r . Caputo, I am
going to recognize you, and I am sorry that the time has run as it has.
Therefore, to the extent that you can, put your question to D r . Burns
to be answered for the record. T h a t would be helpful. W e w i l l call
D r . Burns back this afternoon i f you desire.
M r . Steers.
M r . STEERS. Well, very quickly, I would start by saying I'm glad
to hear your favorable attitude toward House Concurrent Resolution
133, and I would like to dissociate myself from an earlier comment
when one gentleman said he was shocked at your insensitivity. A n d
I find that something that I don't want to allow to be passed without
comment. I simply am not at all shocked. I approve of your attitude.
However, on page 4, where you allude to section 1, you say that the
expectations voiced by the Board at a quarterly hearing might change
a week or a month later. A n d i n any event they might even be mistaken.
I certainly believe that is true.
B u t don't you think that those who listen might know that the
opinions expressed might be wrong, and might be changed ? A n d don't
you think that this committee in listening to such views might learn
to be at least almost as smart as the people who listen to these opinions
already?
D r . BURNS. YOU know, I have lived many years. There are all kinds
of people i n this world, and that is what makes life so interesting and
so worthwhile. I have had men who run large enterprises i n this country come to my office and look me straight i n the eye and say, i n effect,
i f you would only share with me your vision o f the future; i f you
112
would only do that, what a bright future I as the head of my company
would have then; that is nonsense. B u t people—some people—believe
all sorts of things, and we at the Federal Reserve must not mislead
members of the public. T h a t we must not do, since some people do take
our w o r d so seriously, they could make fortunes or lose fortunes.
I f you say that they shouldn't take our word so seriously, I would
say that sometimes they w i l l and sometimes they won't. B u t we could
do a lot of damage to individuals and we ought not to do that.
M r . STEERS. Well, would it be fair to say that although your desire
not to mislead the public is commendable, the public's desire to know,
and this Congress' desire to know—to learn what your opinions are—
is also important? A n d wouldn't people rather quickly learn how
fallible even the Federal Open Market Committee or the Federal
Reserve B o a r d is?
D r . BURNS. Perhaps, but I would not like to undertake that experiment. I t might be very costly to our country.
M r . STEERS. One last question then, on velocity. Y o u particularly
singled it out as being very hard to predict. I am sure it is. O n the
other hand, you have certain economic objectives. Certainly the administration has an objective with regard to the G N P , and you already
make known your views on various monetary aggregates.
Is it really going to be damaging to have the expertise of your
organization merely carry out the calculation of velocity—even i f it
is to some degree a guess. Could you not carry out the division of the
G N P by the monetary aggregate that you are projecting i n order
to come up w i t h your estimate of velocity?
D r . BURNS. I do not think that the Federal Open Market Committee
as a group has the expertise. I n a better world, perhaps i n a perfect
world, we might.
M r . STEERS. M r . Chairman, I would love to pursue it, but I imagine
my time is up.
The CHAIRMAN. L e t me now converse with our witness.
I t is now 12 minutes of 1. The witness would like to be on time for
his luncheon date. I hear no dissent.
M r . Evans, M r . Caputo, and M r . W y l i e have not had an opportunity—let me ask what their wish is. W e can ask Chairman Burns to
come back later this afternoon.
M r . EVANS of Delaware. M r . Chairman, I don't expect D r . Burns
to come back this afternoon. I had some questions, but I w i l l ask them
of D r . Burns, personally.
B u t I would like to make one comment relating to integrity and
relating to legislation. I think there's a great deal of a lack of confidence i n Government today, generally speaking, and you can't
legislate integrity. A n d what vou have been able to do to improve the
integrity and the credibility of Government, I think has been magnificent. A n d i f we had more like you, we would be a lot better off i n
this country.
D r . BURNS. Thank you very much, M r . Evans.
T h e CHAIRMAN. M r . Caputo?
113
M r . CAPUTO. M r . Chairman, I would not presume to think any question I might ask would be more important than D r . Burns's time. A n d
so, of course, I would agree w i t h your suggestion that we let h i m go,
and not come back. B u t I would like to indicate that this is about the
fourth time it has happened to me, and i t sort of discourages me
from attending meetings, and preparing for meetings. I f there were
some way to divide the time more equitably, I sure would appreciate it.
The CHAIRMAN. Well, I am entirely sympathetic to the gentleman.
I have tried to move things along so we could do that, and have been
unsuccessful, but I shall try to make i t up to the lower row, who have
been very faithful.
M r . Wylie?
M r . WYLIE. M r . Chairman, I might say I slipped out to answer the
phone for a minute and missed my turn. I would like to submit four
questions for the record, and I would not ask that D r . Burns come
back this afternoon, either.
D o you plan to wait for the record to come back for responses to
his questions before markup?
The CHAIRMAN. W e have scheduled markup for tomorrow, so the
answer would be "no."
M r . WYLIE. SO it doesn't matter whether we put the questions i n
the record or not, as far as this b i l l is concerned.
The CHAIRMAN. Well, it is very important that they be i n the record,
for the Rules Committee and for the floor.
[Chairman Burns submitted the following responses to written
questions submitted by Congressman W y l i e : ]
114
Question 1
Dr. Burns, t
w
o provisions of H.R. 8
0
9
4 are bothersome to
m
e
,a
n
dI w
o
n
d
e
r if you share m
y concern. T
h
e first refers to the
language on p
a
g
e 21, line 9, where public notice is to be given to
this C
o
m
m
i
t
t
e
e of the proposed composition of the Federal Reserve
portfolio for the next 1
2 months. I note in your latest bulletin that
w
e are talking in terms of 9
1 to 1
0
0 million dollars worth of investm
e
n
t
s.
A, D
o you think the advance notice of purchases by the
n Market C
o
m
m
i
t
t
e
e would h
a
v
e an affect on public reaction
Federal O
p
e
to the investments in government obligations as well as private investm
e
n
t
?
Answer: As I indicated in m
y formal testimony, advance notice
of the intended composition of Federal Reserve securities acquisitions
would have an impact on the maturity structure of interest rates.
Investors learning of these plans might attempt to b
u
y securities in
those maturity areas in which the S
y
s
t
e
m indicated it intended to
concentrate its purchases.
As a result, the structure of current interest
rates on both public and private securities would shift in a w
a
y that
would reflect the market's anticipation of future Federal Reserve open
market operations.
Thus, the structure of rates might be less reflective
of the underlying conditions of supply a
n
d d
e
m
a
n
d actually prevailing.
Such discounting of future Federal Reserve operations, moreover, m
a
y
prove invalid.
Projections of the course of the e
c
o
n
o
m
y are subject
to a great deal of uncertainty, and, as events unfold, the Federal
Reserve could well find that a responsible m
o
n
e
t
a
r
y policy would
require revision of its planned pattern of security acquisitions.
Thus, the Federal Reserve might be faced with the d
i
l
e
m
m
a of either
having to carry out a plan of security acquisition that is n
o longer
appropriate, or of adopting a n
e
w plan at variance with market expectations derived from previous Federal Reserve announcements.
115
B. Are treasury rates of security investments a
n
d others
related to portfolio composition?
Answer:
It is generally agreed in the financial c
o
m
m
u
n
i
t
y
that the composition of Federal Reserve purchases of Treasury securities
can influence the maturity structure of interest rates on both Treasury
and private securities.
However, very large changes in composition
of the System's portfolio probably would be necessary to bring about
a substantial shift in the relative levels of yields on securities
with different terms to maturity.
116
Question
1
O
n p
a
g
e 3 in the second full paragraph of your statement
you say that the F
E
D can influence interest rates.
A.
W
h
a
t are the mechanics of this "influence?"
Answer: T
h
e Federal Reserve is able to exert an influence
on interest rates, particularly in the very short run.
This influence
flows primarily from the System's ability to control the v
o
l
u
m
e of
the reserves available to the banking system. For example, w
h
e
n the
S
y
s
t
e
m cuts back on its provision of reserves through o
p
e
n market
operations, this tends to put u
p
w
a
r
d pressures on short term interest
rates in the m
o
n
e
y market.
These pressures then tend to spread into
other sectors of the credit markets.
B. Are the interest rates influenced the ones in the bond
market, m
o
n
e
y market, stock market or for private transactions?
Answer:
Ordinarily, the impact of the System's actions is
m
o
s
t pronounced on short term interest rates.
B
o
n
d and stock market
yields, often—but by no m
e
a
n
s always—tend to m
o
v
e together with
short-term yields; but in a
n
y event, the m
o
v
e
m
e
n
t
s in longer-term
yields are generally of m
u
c
h smaller magnitude.
Although the Federal Reserve is able to influence interest
rates in the very short run, it is unable to control either the level
or the structure of interest rates over the long run.
O
v
e
rm
o
r
e or
less extended time periods, interest rates are determined by fundamental
factors such as the productivity of capital, the willingness of people
to save out of income, and expectations on the likely course of inflation.
117
Question
1
Another part of the bill which especially bothers m
e is
Section 4. Innocent communications could be in technical violation
of the law. It s
e
e
m
s to m
e that the actions of the Federal Reserve
Board a
n
d discussions of a
n
y legislation that affects the Federal
Reserve Board and our banking system, are widely reported by the
various n
e
w
s media throughout this country.
A. Isn't it possible for bankers as well as the public
to learn by reading the n
e
w
s
p
a
p
e
r or listening to the radio or
watching television of pending legislation a
n
y
h
o
w
? M
y point is
that w
e are attempting to place an unconscionable burden on M
e
m
b
e
r
s
of the Board of Governors, Directors, or employees to divulge information which would otherwise be known.
Answer: It is, of course, entirely possible that bankers
or others might learn through the press of a Federal Reserve position
on pending legislation and then independently communicate their o
w
n
views to m
e
m
b
e
r
s of Congress.
In such a case it could be argued that
the very expression of Federal Reserve views constituted a communication
to bankers "to influence legislative actions".
S
u
c
h an a
r
g
u
m
e
n
t would
obviously be strained and unrealistic, but it indicates the potential
mischief of the proposed prohibition on "lobbying" communications.
It
also suggests that perfectly legitimate and important communications
might be inhibited in order to avoid such a charge.
118
Question
1
You have c
o
m
m
e
n
t
e
d on this before in these hearings but would
you object to having a neutral Congressional observer, or t
w
o at the
Federal O
p
e
n Market Committee Meetings?
Answer: As I have previously told the H
o
u
s
e Banking Committee,
I would w
e
l
c
o
m
e an informal meeting of m
e
m
b
e
r
s of the Congress with
m
e
m
b
e
r
s of the Board and Reserve B
a
n
k presidents.
However, the presence
of outside observers at F
O
M
C meetings could h
a
v
e an adverse impact on
what is a truly deliberative process, w
h
e
r
e views a
n
d opinions prior
to formulation of a final C
o
m
m
i
t
t
e
e position are exchanged freely and
with the understanding that such views a
n
d opinions are subject to
reversal or modification.
T
h
e presence of an outside observer would
tend to inhibit this free exchange, so that a representative meeting
would not in fact be observed.
As you know, I have frequently explained the process of the
O
p
e
n Market Committee's deliberations.
O
u
r record of policy actions at
a meeting is n
o
w released a few days after the next regularly scheduled
meeting of the Committee, and thus keeps the Congress and the public
fully informed about monetary policy decisions.
Finally, the presence of a Congressional observer at F
O
M
C
meetings would, I fear, offer a potential for converting w
h
a
t is
presently Congressional oversight of monetary policy formulation into
Congressional participation in that process.
119
M r . STANTON. M r . Chairman, do I understand this is the last bill,
then, out of our committee this year?
The CHAIRMAN. This, and another b i l l scheduled for markup session
tomorrow, a b i l l sponsored by M r . Lundine.
M r . STANTON. I just wanted to make sure, because the chairman of
the subcommittee is here, M r . St Germain and M r . Rousselot. I f I
could have their attention?
The CHAIRMAN. W i t h the exception of the regulation Q legislation.
M r . STANTON. Well, we can't do the international banking, then. I t
was said earlier that we had to meet before the August recess i n order
to get a b i l l on the House floor. Speaker O ' N e i l l has said we have to
have the b i l l out of committee.
The CHAIRMAN. Thank you very much, D r . Burns. W e appreciate
your attendance.
N o w i f we can continue our colloquy, would the gentleman yield
to me?
M r . STANTON. Surely.
The CHAIRMAN. A n exception from the August 6 date has been
obtained from the leadership w i t h respect to the regulation Q b i l l and
the international banking bill.
M r . STANTON. YOU could not get i t f o r this bill, though? Y o u tried,
and you just couldn't get it through?
I mean, somebody asked down below. I was asking a couple of
members on our side: Is this the last b i l l out of our committee, this
bill, because you made the statement that legislation, according to the
Speaker, had to be passed out of committee.
The CHAIRMAN. W i t h the exceptions I have just enumerated.
M r . STANTON. B u t you did not name any exceptions before, so I do
not know what the answers to the people on our side would be.
The CHAIRMAN. Well, those are the exceptions, and that is not a
firm commitment. I t is just that they are not automatic.
I f there is no further business, we w i l l stand i n recess until 2 o'clock.
[Whereupon, at 12:50 p.m., the hearing was recessed, to reconvene
at 2 p.m., this same day.]
A F T E R N O O N SESSION
The CHAIRMAN. Good afternoon. T h e House Committee on Banking,
Finance and Urban Affairs w i l l be i n order f o r a continuation of its
hearings on H . R . 8094.
W e are happy to have with us this afternoon J o n B r o w n of the
Public Interest Research Group, and D a v i d Cohen, president of Common Cause. Both of you have prepared very helpful written statements which, under the rule and without objection, w i l l be received
i n f u l l into the record.
A n d now we would like to ask you to proceed i n your own way,
M r . Cohen.
STATEMENT OP DAVID COHEN, PRESIDENT, COMMON CAUSE,
WASHINGTON, D.C.
M r . COHEN. Thank you, M r . Chairman.
W h a t I w i l l try and do is summarize my statement so that we can
have more time for discussion. I have some additional items that I
would like to insert in the record at the appropriate time.
120
A t the heart of our position in support of various sections that we
have commented on H . R . 8094 is the recognition that the Federal Reserve System and the Federal Reserve Bank plays a powerful role
that is currently largely unrestrained by the political process.
A n d while we understand fully the need for insulation from politics
is considered by some to be necessary i n order to insure sound monetary
policy, whatever one's view is on that question, the Federal Reserve
Bank and the Federal Reserve System should not be excused from the
principles of accountability which the political process requires of
Government.
N o agency or institution should be exempt from such accountability,
and currently the Federal Reserve System and its boards are not part
of a serious accountability system.
W e believe that H . R . 8094 w i l l help clarify the Fed's duty to serve
the public interest. W h a t I want to deal with, Mr. Chairman, is some
of the discussion that exists over the various directors that appear
under the Federal Reserve System. A n d I particularly want to talk
about the class A , class B, and class C directors, with a focus on the
class C directors, and a comment on the class B directors.
I noted today, in reading Chairman Burns' testimony, that he
thought the Federal Reserve Board ought to appoint the class B
directors. A n d that, theoretically, makes sense only i f the Federal Reserve Board w i l l follow a system of really seeking out people, and
having a f u l l and open appointments process in making such
appointments.
So far, the record of the Fed—where it has been responsible for
appointments—has been a shabby and a shoddy one. So, while we
agree that the Federal Reserve should be sensitive to the concerns of
business, we believe it must also consider the points of view of labor
and consumer groups.
The domination of class C directors by business and banking interests is particularly disturbing in light of the membership of the
Federal Advisory Council, which by statute has the power to confer
directly with the Board of Governors on general business conditions.
A n d although this statute is silent as to qualifications for appointment to the Advisory Council, in practice membership on the Council
seems to be limited to individuals from banking or big business.
O f the 9 individuals on the 12-member council whose backgrounds
we could identify, all but one is the chairman or chief executive officer
of a bank. The ninth individual is vice president of an oil company.
The Federal Reserve A c t contemplates a balanced representation of
interests concerned with monetary policy. Implementation of the act,
however, has ignored that balanced approach. I n effect, the Federal
Reserve System has all the earmarks of a kept agency. Banks under
the Fed's regulation have become part of the Fed's regulatory
structure.
So, we support the various appropriate sections of the bill, and I
would like to insert in the record—and I have copies for the committee—a list of members who are class C directors whose companies have
admitted to the fact that they made questionable foreign payments,
and yet these people serve as directors of class C directorates.
Our source for these are the 8(k) reports filed with the Securities
and Exchange Commission. A t the minimum, it raises serious questions as to whether such directors who have directorial responsibility
121
i n the businesses that they are involved i n should even serve as class C
directors, but I think it also makes the point quite clearly—to me, at
least—that the F e d does not engage i n a serious deliberative openappointment system to its class C directors.
I would like to comment on the lobbying activities of the Federal
Reserve, because I think here we have the sharpest disagreement w i t h
Chairman Burns' statement this morning.
I t seems almost as i f Chairman Burns is seeking a preferred position for the Federal Reserve System, as i t applies to lobbying and
other matters of accountability. N o one here is questioning the integrity of Chairman Burns or the other members, but he constantly
talks about why the F e d ought to be exempted from basic accountability systems.
A n d those of you who remember the battle on the "Sunshine" law
just last year when Congress finally enacted the Government i n Sunshine Act, which became effective upon M a r c h 12th, the most persistent
opponent was not anyone on the H i l l , it was not anyone i n the W h i t e
House, but it was Chairman Burns.
H e constantly sought extra exemptions. A n d some of his exemptions
may have been legitimate, but every time the Congress or the committee responded to one of his concerns, he had another set o f demands.
T h e F e d ought to be covered by lobbying disclosure and lobbying
regulations. Excerpts from the minutes of various meetings of the
Board of Directors that Chairman Reuss read into the Congressional
Record on M a y 24th, raise important questions about the way i n which
the F e d wields its power.
The minutes document extensive manipulation of the boards by the
Governors to generate grassroot opinion on legislation before Congress. They did that i n the Government i n Sunshine law, where we
have direct experience. The Senators and their staffs told us about i t ;
House Members and their staffs told us about it.
Because of a quirk i n the law, the F e d is not covered by existing
statutes which prohibit Federal agencies from engaging i n lobbying
activities. Since the F e d is not appropriated funds by the Congress,
but supports itself by assessments from member banks, it is technically
exempted from the lobbying prohibition.
N o w the F e d used this loophole to mount a massive grassroots lobbyi n g campaign in opposition to legislation which would have subjected
the F e d to a greater degree of outside scrutiny by authorizing G A O
audits of its activities.
T h e minutes—record of Governor Mitchell's remarks to the Chicago
Federal Reserve Board about the possible amendments to the b i l l
which would make it more palatable to the Fed, and his commendation of the directors for their help i n contacting Members of Congress,
is one evidence of such activity.
F o l l o w i n g his—Governor Mitchell's—remarks, Robert Mays, the
president of the Chicago Reserve Bank, called on the directors to make
telephone calls to encourage support f o r the Federal Reserve position.
Although the F e d is technically exempted, the spirit of the law
prohibiting lobbying is clear. W e agree that the Fed's loophole must
be closed. A n d I think there is a clear difference between lobbying,
and the normal kinds of communications that ought to go on between
an agency and the Congress. I n no way would we inhibit that.
122
A s a regulatory agency, any communication from the F e d to those
it regulates about legislative or executive lobbying has implicit i n i t
the fact that the F e d can grant or withhold favors. These communications do more than merely disseminate information.
W h a t is particularly misleading about the Fed's activities i n this
area is the resulting appearance of grass-roots support for a particular
legislative position.
There is no way for a Representative or a Senator to know whether
the bankers i n his or her district or State oppose a particular b i l l on
its merits, or because they are afraid they w i l l be turned down at the
discount window.
Therefore, we would strongly support section 4 of H . R . 8094, and
we recommend that a similar prohibition be placed on other agencies
for whom Congress does not appropriate funds, and which are within
this committee's jurisdiction such as the Federal Home L o a n B a n k
Board, the F D I C , the Comptroller of the Currency, and the National
Credit U n i o n Administration.
I n addition, we urge that the committee include both civil and
criminal penalties for violations. A mere "prohibition" is just hortatory language, and it has just not worked.
I want to stress the need for civil penalties, because that, I think,
makes matters enforceable. I n addition, Common Cause strongly supports section 5 of the bill, which would resolve existing ambiguities
i n the law, as to whether Federal Reserve Bank directors, officers, and
employees are within the scope of 18 U.S.C. 208, the criminal statute
on official acts, which affect a personal financial interest.
Not only should class A directors be covered by the law, but we
believe the directors who should not be permitted to make any decision which would specifically affect only their banks.
W e believe that, as the law presently operates, it subjects these officials to the criminal law. That is not sufficient. Such officials should
be required to make public financial disclosure statements. They
should be prohibited from contacts with the reserve banks and the
board of governors for at least 1 year after leaving their positions,
and should be subject to 18 U.S.C. 207, the criminal post-employment
statute.
A n d we urge that, during the consideration of the ethics and financial disclosure legislation that is currently moving through the Preyer
committee, this committee make every effort to insure that reserve
bank directors and officials, and employees, are included within the
scope of that legislation.
F i n a l l y , of course we support the notion of Senate confirmation for
the Chairman of the B o a r d of Directors of the B o a r d of Governors.
I am glad that Chairman Burns supports this, but the only cautionary point I want to make is that changing the ground rules to require
Senate confirmation doesn't really get you very far down the road to
the heart of the problem.
T h e heart of the problem is: W h o serves as class C directors? W h a t
the appointment process is on class B directors, i f the F e d is to do i t ;
and to begin to put the Federal Reserve System under an accountability system as it applies to lobbying activities and conflict of interest.
Thank you.
[ M r . Cohen's prepared statement on behalf of Common Cause
follows:]
123
TESTIMONY
DAVID
PRESIDENT,
OF
COHEN
COMMON CAUSE
on
H.R,
8094
before
HOUSE COMMITTEE ON B A N K I N G ,
Tuesday,
F I N A N C I N G AND URBAN
July
26,
1977
AFFAIRS
124
Mr. Chairman, I appreciate this opportunity to testify
on behalf of C
o
m
m
o
n Cause on H.R. 8094, a bill which would
m
a
k
e the Federal Reserve System m
o
r
e accountable to Congress
and the public.
I want to c
o
m
m
e
n
d this Committee for its
continuing efforts in this direction.
The Federal Reserve System occupies a unique position
in our government's structure.
Unlike virtually every other
agency, the Fed's operations are subject to little Congressional
and Executive Branch control.
For example, it is not dependent
on appropriations from Congress, nor is it subject to G
A
O
audits.
The extent of its "independence" is brought h
o
m
e by
the fact that even Presidents hesitate to publicly criticize
its actions.
The Fed's peculiar status, coupled with its enormous
authority over the nation's economy, gives the Federal Reserve
a powerful role largely unrestrained by the political process.
While insulation from politics is considered necessary by
s
o
m
e in order to assure sound monetary policy, the Fed should
not be excused from the principles of accountability which
the political process requires of government.
N
o agency or
institution should be exempt from such accountability.
Currently
the Federal Reserve System and its Boards are not part of a
serious accountability system.
W
e believe that H.R. 8
0
9
4 will bring accountability to
the Federal Reserve System, and will help clarify the Fed's
125
duty to serve the public interest.
The public's interest
cannot be served by looking solely to corporate board r
o
o
m
s
for information and advice.
I.
Structure of the Federal Reserve System
The Federal Reserve System has three components: the
Board of Governors, the Federal O
p
e
n Market Committee, and the
1
2 Federal Reserve Banks and their branches.
The Board of
Governors influences credit conditions and supervises the Federal
Reserve Banks and the m
e
m
b
e
r banks.
The Federal Open Market
Committee, on which five Reserve Bank presidents serve, directs
the purchases and sales of securities to regulate the m
o
n
e
y
supply, which in turn influences credit conditions.
The Reserve Banks have important responsibilities at
both Federal and State banking levels.
They help determine
discount rates, report on "problem" banks in their districts,
and
tee.
provide representatives to the Federal Open Market CommitFederal Reserve Chairman Arthur Burns has noted the
important contribution of the Reserve Banks to the Fed's
grass roots information
collection system.
For the Board
of Governors and the F
O
M
C
, the Reserve Banks are the first
line of contact with economic developments across the nation.
B
y statute, each Reserve Bank board is composed of three
classes of directors.
Class A directors are elected by and
serve as representatives of the stockholding m
e
m
b
e
r banks.
Class
B directors have been the borrowers' representatives and must
be actively engaged in industry, c
o
m
m
e
r
c
e or agriculture.
93-444 O - 77 - 9
They,
126
too, are elected by the m
e
m
b
e
r banks.
Class C directors were
supposed to be the public's representatives, and are appointed
by the Board of Governors.
Class C directors, like Class B
directors, m
a
y not be officers, directors, employees or
stockholders of any bank.
Interlocks with Big Business
The study released by this Committee in August 1976 revealed
that, in practice, there is little difference between Class A,
Class B and Class C directors.
Of the 35 Class C positions
filled at the time of the study, 1
4 individuals had backgrounds
in banking, 15 in industry, and only 6 — less than 2
0
% —
could be said to represent another point of view.
S
o
m
e of
the corporations represented on the "public's" slate through
their officers, directors and law firms are Kennecott Copper
Corporation, Westinghouse Electric Corp., First National City
Corporation, General Mills, Inc., and Honeywell, Inc. The
list is a condensed version of Who's W
h
o in Big Corporate
America.
Agriculture is represented by a Kentucky farmer w
h
o
also happens to be president of a bank.
Labor and consumer
representatives are conspicuously absent.
While w
e agree that the Federal Reserve should be sensitive
to the concerns of business, w
e believe it must also consider
the points of view of labor and consumer groups.
The domination
of Class C directors by big business and banking is particularly
disturbing in light of the membership of the Federal Advisory
Council, which by statute has the power to confer directly with
the Board of Governors on general business conditions.
Although
the statute is silent as to qualifications for appointment to
127
the Advisory Council, in practice, membership on the Council
s
e
e
m
s to be limited to individuals from banking or big business.
Of the 9 individuals on the twelve-member Council whose backgrounds w
e could identify, all but one is the chairman or
chief executive officer of a bank.
The ninth individual is
vice president of an oil company.
The Federal Reserve Act contemplates a balanced representation of interests concerned with monetary policy.
Implemen-
tation of the Act, however, has ignored that balanced approach.
The Federal Reserve System has b
e
c
o
m
e a kept agency? banks under
the Fed's regulation have b
e
c
o
m
e part of the Fed's regulatory
structure.
As the Class B and Class C directors comprise a major link —
however indirect — that the public has to the nation's monetary
policymaker, it is imperative that it not be subverted.
Infla-
tion, unemployment, housing, credit — all of these are matters
of vital importance to consumers.
Decisions on these issues
must not be left solely to bankers and corporate executives.
C
o
m
m
o
n Cause strongly supports sections 2 (b) and (c) of
H.R. 8094, which would restore that balance by emphasizing
that Class B and Class C directors are to represent the public,
and not exclusively the lenders and borrowers.
Individuals
appointed to be Class B or Class C directors should be distinguishable from the persons appointed to be Class A directors.
W
e reject the idea that appropriate talent and expertise can
be found only in Standard & Poors or Martindale & Hubbell.
The August 1976 study also found that the Board of Governors
128
apparently does not include w
o
m
e
n or minorities in its definition of the public.
At the time the study was completed, no
w
o
m
e
n served on the boards of the Reserve Banks, and only six
on the boards of the branch banks.
Minorities had only token
representatation.
As of June 1977, a greater n
u
m
b
e
r of w
o
m
e
n and minorities
are serving on Reserve Bank boards.
W
e believe that this
improvement is largely due to this Committee's work in
revealing the Fed's poor record.
Nevertheless, additional
steps can be taken.
Section 2 of H.R. 8
0
9
4 would a
m
e
n
d the Federal Reserve
Act to prohibit discrimination in the appointment of persons
to serve on the boards of directors of the Reserve Banks. W
e
fully support this provision.
W
e recognize, however, that such prohibitions are not
self-executing.
It will be the obligation of this Committee
to continue to monitor appointments, a process in which w
e
would be happy to assist.
II.
Lobbying Activities of the Federal Reserve
Excerpts from the minutes of various meetings of the
Boards of Directors which Chairman Reuss read into the Congressional Record on M
a
y2
4 raise important questions about the w
a
y
in which the Fed wields its power.
The minutes document exten-
sive manipulation of the boards by the Governors to generate
"grass roots" opinion on legislation before Congress.
Because of a quirk in the law, the Fed is not covered by
129
existing statutes which prohibit Federal agencies from engaging in lobbying activities.
1
8 U.S.C. 1913 prohibits the use
of appropriated funds for lobbying activities.
Since the Fed
is not appropriated funds by Congress, but supports itself by
e
m
b
e
r banks, it is technically exempted
assessments against m
from the lobbying prohibition.
The Fed used this loophole to mount a massive grassroots lobbying campaign in opposition to legislation which
would have subjected the Fed to a greater degree of outside
scrutiny by authorizing G
A
O audits of its activities.
The
minutes record Governor Mitchell's remarks to the Chicago
Federal Reserve board about possible a
m
e
n
d
m
e
n
t
s to the bill
which would m
a
k
e it more palatable to the Fed, and his c
o
m
m
e
n
dation of the directors for their help in contacting M
e
m
b
e
r
s
of Congress.
Following his comments, Robert Mays, President of
the Chicago Reserve Bank, called on the directors to m
a
k
e telephone calls to encourage support for the "Federal Reserve position ."
A similar lobbying effort to exempt the Board of Governors
and the F
O
M
C from the Government in the Sunshine Act also
took place.
According to the minutes of the December 11,
1975
meeting of the Chicago Reserve Bank Board, President M
a
y
o asked
"each director to think about possible contacts to explain
Federal Reserve concern and indicated that Mr. Larson (senior
vice president, general counsel, and secretary to the board of
the Chicago Fed) would be in touch with each director tomorrow
as a follow-up."
130
Although the Fed is technically exempted, the spirit of
the law prohibiting lobbying is clear.
W
e agree that the Fed's
loophole must be closed.
As a regulatory agency, any communication from the Fed
to those it regulates about legislative or executive lobbying
has implicit in it the fact that the Fed can grant or withhold
favors.
These communications do more than merely disseminate
information.
W
h
a
t is particularly misleading about the Fed's activities
in this area is the resulting appearance of grass roots support
for a particular legislative position.
There is no w
a
y for
a Representative to k
n
o
w whether*the bankers in his or her
District oppose a particular bill on its merits, or because
they are afraid they will be turned d
o
w
n at the discount window.
C
o
m
m
o
n Cause strongly supports section 4 of H.R. 8094,
which would prohibit officials and employees of the Federal
Reserve System from communicating with any director, officer
or employee of any institution subject to the regulatory authority
of the Fed in order to influence legislation affecting the
Federal Reserve System.
W
e r
e
c
o
m
m
e
n
d that a similar prohibition be placed on
other agencies for w
h
o
m Congress does not appropriate funds
and which are within this Committee's jurisdiction, such as
the Federal H
o
m
e Loan Bank Board, the Federal Deposit Insurance
Corporation, the Comptroller of the Currency, and the National
Credit Union Administration.
In addition, w
e urge that the Committee include both civil
131
and criminal penalties for violations.
A mere prohibition is
not enough; the prohibition must be enforceable.
III.
Conflicts of Interest
C
o
m
m
o
n Cause strongly supports section 5 of the bill,
which would resolve existing ambiguities in the law as to whether
Federal Reserve Bank directors, officers, and employees are
within the scope of 1
8 U.S.C. 208, the criminal statute on
official acts which affect a personal financial interest. W
e
fully agree that these individuals should be covered by the
law, particularly Class A directors, w
h
o by statute must be
bankers.
These directors should not be permitted to m
a
k
e any
decisions which would specifically affect 6nly their banks.
The potential for the unsatisfactory resolution of conflicts
of interest is demonstrated by the minutes of the meeting of
the N
e
w York Reserve Bank directors on October 7, 1974, in
which a director is recorded as voting on a resolution affecting one of his law firm's clients.
In our view, subjecting these officials to the criminal
laws is not enough.
They should be required to m
a
k
e public
financial disclosure statements, should be prohibited from
contacts with Reserve Banks and the Board of Governors for
at least one year after leaving thiair positions, and should
be subject to 1
8 U.S.C. 207, the criminal post-employment
statute.
W
e urge that during consideration of President
Carter's ethics and financial disclosure legislation, this
Committee
m
a
k
e every effort to insure that Reserve Bank
132
directors, officials and employees are included within the
scope of that legislation.
IV.
Senate Confirmation of the Chairman of the Board of Governors
Finally, C
o
m
m
o
n Cause supports section 3 of H.R. 8094,
which would require that the Chairman of the Board of Governors
be confirmed by the Senate to serve as Chairman. Although
each Governor is n
o
w confirmed by the Senate, the Chairman of
the Board m
a
y have been confirmed to serve only as a Governor
and subsequently be appointed Chairman.
The position of Chairman
deserves particular attention as the highest official of the
Federal Reserve System.
A recent report by the Senate Governmental Affairs
Committee, "The Regulatory Appointments Process," r
e
c
o
m
m
e
n
d
s that
"when a chairman is selected from within
the commission's
membership, the designation be subject to advice and consent
of the Senate."
at 175)
("The Regulatory Appointments Process,"
W
e support that recommendation.
W
e agree with the report's conclusion that permitting
this designation to be m
a
d
e solely by the President is an
"unusual and unwise exception" to the general rule that high
officials of the government be subject to the advice and consent
of the Senate.
W
e believe this is particularly true for the
Chairman of the Federal Reserve System, whose responsibilities,
duties, and powers affect every facet of the economy.
Subjecting the designee to the confirmation process would
give the Senate the opportunity to examine the individual's
133
record, and to get answers and pledges from the person w
h
o
will head the Federal Reserve.
It would give the public an
opportunity to express its views on the directions in which
it believes the Federal Reserve should move.
W
e strongly
believe that such an opportunity ought to be provided.
o
m
m
o
n Cause's
I appreciated this opportunity to present C
views on H.R. 8094, and look forward to working for its early
enactment with this Committee.
134
M r . COHEN. I f I may, M r . Chairman, I would just like to add the
names to the record, and send this up for the staff and the members
to have.
M r . HANLEY [presiding]. Without objection, so ordered.
[ A list of class C directors of Federal Reserve banks submitted for
the record by M r . Cohen follows:]
135
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136
M r . HANLEY. I understand that M r . Brown is required to be on the
Senate side reasonably soon. Is that correct ?
M r . BROWN. Y e s , sir.
M r . HANLEY. Well, that being the case, i f you so desire, without
objection your statement can be entered into the minutes of this hearing, and we would do that prior to asking M r . Cohen his questions.
M r . BROWN. W e l l , that's fine.
Should I briefly summarize it?
M r . HANLEY. W e are attempting to accommodate you. I guess my
question is: H o w much time do you have prior to your commitment
for the Senate ?
M r . BROWN. I have ample time.
M r . HANLEY. Well, we w i l l go back to M r . Cohen.
The list of directors that you alluded to, could you describe them
for us? W e have already agreed that that w i l l be i n the record.
M r . COHEN. W h a t the chart shows is the names of class C directors,
their functions—their corporate functions.—and the companies they
are part of, which Federal Reserve bank they serve as a class C director
of, what years their companies were investigated, and disclosed their
questionable foreign payments; and what the amount was i n each instance except i n the case of J o h n Eckman, because that was unstated.
T h e point being that I think, in this instance, when companies
disclose such questionable foreign payments, and when each of these
directors of these companies have a responsible position i n their company, and i n addition just as directors that carry the responsibility for
knowing what is going on, I think this is really a black mark on the
appointment process of how the class C directors are appointed.
There is no indication that questions were asked. There is no indication that any effort was made to find out what these people knew about
it, or what their responsibility ought to be. Even i f they knew nothing
about it, they certainly have some responsibilities as directors.
I point this out because I think a careful system would have raised
questions, at the minimum.
I think there is no deliberative, open appointment system to the
class C directors. I think part- of the mission of this committee is to
try to set up some ground rules in legislation on the appointment of
class C directors. A n d i f you choose to let the Federal Reserve Board
do i t for class B directors, to do it for them as well.
M r . HANLEY. YOU especially cover section 4 quite well i n your testimony, and I assume that your position is that the committee hold that
language intact ?
M r . COHEN. Y e s , sir.
M r . HANLEY. IS that a correct assumption ?
M r . COHEN. Yes.
M r . HANLEY. Well, it was rather interesting to note Chairman
Burns' response to my question this morning—when admittedly the
fact that the overhead of the F e d is sustained by non-appropriated
moneys—that the F e d isn't required to adhere to legality. I t certainly
was not the intention of Congress when Congress vested that agency
with its authority, that because it would be a self-funding entity it
would not be subject to the law.
137
So you cover that very well i n your testimony, and I think that the
colloquy we had here this morning suggests the essentiality of the
committees moving i n the direction to close that loophole.
M r . Mitchell?
M r . MITCHELL. Thank you, M r . Chairman.
It's good to see you again, M r . Cohen. I just have two brief questions.
Although I was not here this morning, i understand that Chairman
Burns—and I have a copy of his testimony—raises some issues with
reference to the provision of the proposed law which would prohibit
the Federal Reserve Board and/or its individual members from doing
lobbying to influence legislative actions.
O n page 9 i n his testimony he says, and I quote, "The Board seriously doubts whether such a provision is consistent with the first
amendment to the Constitution, which commands that Congress shall
make no law abridging freedom of speech."
M y own reaction is that the language of the law—the bill that we
have before us—in no way is violative of the first amendment.
I would like to get your reaction to Chairman Burns' position on
this.
M r . COHEN. I disagree with Chairman Burns. A s I have read the bill,
I don't think it prohibits free speech at all. I think it is an effort at
recognizing that the function of the F e d is not to engage i n what is
a new growth industry i n this country, artificial and indirect lobbying,
particularly indirect lobbying.
I think it goes to overt action, rather than to speech. A n d I think
that it is such a fundamental point, and we have done some of our own
groundwork on this, that I would like i f we may, Congressman Mitchell—and with the permission of Congressman H a n l e y — i f we could
submit a brief legal memorandum on this very point ?
M r . MITCHELL. I think it would be helpful, not only to me but to
all the members of the committee.
M r . HANLEY. Without objection, so ordered.
[The legal memorandum submitted for the record by M r . Cohen
regarding whether "Section 4 of H . R . 8094 is i n violation of the First
Amendment" follows:]
93-444 O - 77 - 10
138
common cause
2 0 3 0 M STREET. N.W., WASHINGTON, D. C. 2 0 0 3 6
NAN F WATERMAN
Chairwoman
DAVID COHEN
President
(202) 8 3 3 - 1 2 0 0
JOHN W. GARDNER
Founding Chairman
M
E
M
O
R
A
N
D
U
M
July 27, 1977
TO:
David Cohen
President
F
R
O
M
:
Kenneth J. Guido, Jr.
General.Counsel
RE:
Whether Section 4 of H,R. 8094 Is in Violation of
the First Amendment.
Arthur F. Burns, Chairman of the Board of Governors of
the Federal Reserve System, questioned the constitutionality of
Section 4 of H.R. 8094.
Section 4 would prohibit officials and
employees of the Federal Reserve System from seeking the assistance
of those subject to its regulatory authority in lobbying on
legislation affecting the Federal Reserve System.
Specifically,
he argued that the prohibition is. so broadly worded as to
have a chilling effect on innocent communication
and, therefore, is
inconsistent with the First Amendment.
At your Request I have examined the pertinent case law
on the subject, and i t
is my
view Mr. Burns is incorrect.
Congress
m
a
y constitutionally prohibit officials and employees of the
Federal Reserve System from seeking assistance in lobbying Congress
from those subject to its regulatory authority.
139
In Civil Service Commission v. Letter Carriers/ 413 U.S.
5
4
8 (1973), the U.S. S
u
p
r
e
m
e Court upheld the Hatch Act provision
forbidding federal employees from taking "an active part in political
m
a
n
a
g
e
m
e
n
t or in political campaigns."
S 7324(a)(2).
Hatch Act § 9(A), 5 U.S.C.
In holding that the impairment of federal employee's
First A
m
e
n
d
m
e
n
t rights was justified by a substantial governmental
interest, the S
u
p
r
e
m
e Court observed:
It s
e
e
m
s fundamental in the first place that
employees in the Executive Branch of the
Government, or those working for any of its
agencies, should administer the law in accordance
with the will of Congress, rather than in
accordance with their o
w
n or the will or a
political party.
Supra at 564-65.
The purposes of restricting the partisan political activities of federal employees are s
o
m
e
w
h
a
t different than the purposes
underlying Section 4 of H.R. 8094, but they are sufficiently
similar to be controlled by the s
a
m
e precedent.
Any communication
from employees or officials of the Federal Reserve System to
those it regulates urging legislative or executive branch lobbying
carries with it the implicit threat of the granting or withholding
of favors depending upon the recipient's response.
Moreover,
it places the employees or the officials of the Federal Reserve
System in a position of not only administering the statutes under
which the Federal Reserve System operates, but providing them
with a tool to exert substantial influence over congressional
140
policy.
In upholding the Hatch Act prohibition against partisan
political activity by federal employees, the U.S. S
u
p
r
e
m
e Court
stressed the need to keep those w
h
o administer the law from
exerting undue influence over the processes which establish the
laws they are to administer.
The s
a
m
e reasoning applies to
Section 4 of H.R. 8094.
Mr. Burns m
a
k
e
s two arguments to support his contention
that Section 4 of H.R. 8
0
9
4 is unconstitutionally overbroad.
First, he contends that limiting the bill's scope to legislation
"affecting the Federal Reserve System" is insufficiently precise.
Second, he argues it is impossible to determine which communications are m
a
d
e with the "intention to influence" the actions of
those regulated by the Federal Reserve System.
Both of his contentions are without merit.
In Broadrick
v. Oklahoma, 4
1
3 U.S. 601 (1973), the Court observed that application of the overbreadth doctrine is "manifestly strong medicine
.
. . . [I]t has been employed by the Court sparingly and only
as a last resort."
Supra at 613.
Accordingly, the Supreme Court
held that for a statute to be invalidated on this basis, "overbreadth of a statute must not only be real, but substantial as
well, judged in relation to the statute's plainly legitimate
scope."
Supra at 615.
141
Mr. Burns' first overbreadth contention — that limiting
the prohibition to legislative actions "affecting" the Federal
Reserve System is constitutionally overbroad — is without merit.
The Board of Governors of the Federal Reserve System periodically
publishes a document entitled Federal Reserve Act.
The document
is described as a compilation of the Federal Reserve Act and
1/
"other acts of Congress that affect the Federal Reserve System."
If the staff of the Federal Reserve System is capable of identifying
legislation which will affect the Federal Reserve System for purposes
of producing the document, it surely is able to do so in order to
ascertain whether the prohibitions of Section 4 are applicable.
Mr. Burns' second contention — that i t is difficult to
ascertain whether a communication is m
a
d
e with the "intention of
influencing" legislative action — is also without merit.
Section
4 is drafted to prevent employees and officials of the Federal
Reserve System from seeking the assistance of those it regulates
in lobbying on legislation affecting the Federal Reserve System.
The central thrust of Section 4 is to prohibit communications m
a
d
e with the intention of enlisting support in a lobbying
campaign.
facts.
In any given case this m
a
y depend on the specific
However, it is not impossible for an official or an
employee to k
n
o
w his o
w
n intentions.
This is w
h
y Mr. Burns'
second overbreadth assertion is without merit.
1/
A copy of the title page, preface, and tables of contents and
statutes are attached to this m
e
m
o
r
a
n
d
u
m
.
142
FEDERAL RESERVE
ACT
(APPROVED DECEMBER 23, 1913)
AS A M E N D E D
THROUGH
1971
WITH A N APPENDIX
Containing provisions of certain other
Acts of Congress that affect
the Federal Reserve System
COMPILED UNDER THE
DIRECTION OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
IN ITS LEGAL DIVISION
143
PREFACE
' Ins edition of the Federal Reserve Act incorporates
amendments thereto through 1971. It includes in
Appendix provisions of other laws affecting the
icr.il Reset w S\stein, also current through 1971.
paragraphs ol each section of the Act arc numd consecutively to facilitate easy reference. I-ach
igraph is preceded hy a catch line indicative of its
:eci matter and is followed by an editorial note
it.lining the staimoiy history of the paragraph, cross
uiic«.s to the United States Code, and other ex. itoi> comments that may he pertinent. A similar
<iij>emc;it is followed with respcct to the laws pub.1 in Lite Appendix. In this connection, it should be
d that paragraph numbers, catch lines, and notes
are not a part of the law and should not be regarded
as affecting the construction of the law. Also, the captions to sections I, 6. 8, 10(a), 10(b), II, I2A, 13a.
17, 20, 22. 23A, 24A, 25(b), 26, 27, 2H. 29. and 30
of the Act were added editorially and likewise should
• not be regarded as a part of the law.
For convenient reference, there are inserted immediately after the Table of Contents three Tables of
Statutes listing respectively (1) statutes amending the
Federal Reserve Act, (2) other statutory provisions published in the Appendix, and (3) sections of the United
States Code containing provisions of the I'cdcial Reserve Act.
December 1971
144
T A B U : OF CONTENTS
N;M;U.\L UR.si.RVI: ACT
/Y
Sec. 14.
Sew
1.
S h o r t title and definitions
1
Sec.
2.
Federal
1
Sec. 15.
4
4
Sec. I
Sec.
See.
See.
3.
4.
5.
See.
6.
Sec.
See.
7.
8,
See.
Sec.
Reserve districts
B r a n c h ollices
F e d e r a l Reserve banks
Stock issues: increase and decrease
capital
I n s o l v e n c y o f m e m b e r banks
9.
9A.
Houid
of
Governors
of
the
Sec. 1 0 ( a ) .
Reserve S w c m
F m c i e e n c y advances to groups of
ber'banks
Government
I4>.
Sec.
8
9
10
II
17
j
Federal
17
mem;
Ailvarki'jS to i n d i v i d u a l m e m b e r b a n k s i ,
j
Svc. II
|Wns 1<I Mould ol Goveinois'ol Ilk-
21
Sec. 12.
Sec.- 1 2 A .
U d c i u l Keseixo Svstcui
Federal Advisoiy C ouncil
Federal Open Market Committee
21
23
24
Sec. 13.
Sec. 13a.
P o w e r s of F e d e r a l Reserve banks
Discount of a g r i c u l t u r a l paper
24
2S
Note
operations
32
32
Deposit of bonds by n a t i o n a l b a n k s . . . .
R e f u n d i n g bonds
3ft
3fi
Mank
38
reserves
N a t i o n a l bank
as reserve
Sec. 21.
Sec. 22.
Sec. 2 3 A .
Sec. 24.
Mank e x a m i n a t i o n s
Ollenscs of e x a m i n e r s ,
officers, and d i r e c t o r s
R e l a t i o n s w i t h alliliales
1 oans on t . u m lands
Sec
Investments
2I V
See. 25.
Sec. 2 5 ( a ) .
30
deposits
issues
Sec. 20.
9
20
See. 1 0 ( b ) .
Open-market
ft.
Sec. 17.
Sec. IK.
of
D i v i s i o n of earnings
C o n v e r s i o n o f State b a n k s into n a t i o n a l
banks
Stale b a n k s as m e m b e r s
P a r t i c i p a t i o n in lotteries p r o h i b i t e d
S e t . 10.
.
in
notes
redemption
fund
41
bank
41
member
banks.
4*
45
47
piemises
.
I oicign blanches
Hanking coiporations authorized
I'oieign b a n k i n g business
...
4">
49
to
do
51
luiisvliclion of suits
57
Sec. 2<>.
R e p e a l of c o n f l i c t i n g laws . .
5*>
Sec. 27.
Sec. 2S.
Sec. 2 9 .
T a x o n n a t i o n a l b a n k notes
- R e d u c t i o n of c a p i t a l o f n a t i o n a l b a n k s . .
Saving clause
59
60
60
See. 25(b).
Sec. 30.
R e s e r v a t i o n o f right to a m e n d
........
60
AITKNIHX
. PROVISIONS
AFTF.CTING
FF.DFRAL
RFSFRVF.
A.
HANKS
Depositaries
i! . n v n t s and depositaries
I m u t t o n s of f o i m e r subtreasuries
Receipt of taxes
Redemption
of
I iubililv
I'mlcd
lor
States
savings
bonds—
losses
Issuance of duplicates of G o v e r n m e n t checks . .
C h e c k i n g accounts o f G o v e r n m e n t - o w n e d corD e p o s i i a i i e s f o r F e d e r a l Deposit I n s u r a n c e Co,rporation
i .
Depositaries for
Federal
Home
Depositaries
ledeial
Savir
surance
for
C o r p o r a l ion
..
D e p o s i i a i i e s for Public
I lousing
Deposiiaiies
Musmess
lor
Deposiiaiies
Companies
Deposiiaiies
Association
Small
l oan
Manks';:
Manks
A d mlinistiali^u
inislia
In
. .
Fedeial
National
and G o v e r n m e n t
Mortgage
National
Mort-
gage A s s o c i a t i o n
C.
tor
Fedeial
Crop
for
International
Coipoia'.ion
Insuiance
Cor-
poiation
Depositaries
for
Wont.)
In:er-American
Development
Hank
D e p o s i t a r i e s l o r I n t e r n a t i o n a l D e v e l o p m e n t Association
ft
F x f v i w s incident to Posi O l l i c e D c p . n t m e n t operations
D e p o s i t a r i e s f o r A s i a n D e v e l o p m e n t Mank . . . .
D e p o s i t a r i e s for I n t e r n a t i o n a l Finance C o r p o r a lion
Deposits of conservators
Fiscal agents in c o n n e c t i o n w i t h guarantees o f
defense p r o d u c t i o n loans
Fiscal agents in c o n n e c t i o n w i t h guarantees of
Hood loans
A v a i l a b i l i t y of r e c o u l s to G o v e r n m e n t agencies
l o l e d e i a l H o m e l oan Manks
l o 1 aim Ciedit Adminisiialion
T o F e d e i a l Deposit I n s u i a n c e C o i p o i u t i o n . ,
T o Securities and F x c h u u j v C o m m i s s i o n
for
D e p o s i i a i i e s toi C o m m o d i t y C i e d i l
Deposilaiies
H.
A d i nlinislialiOn
inisli:
S m a l l • .Musincss
for
f iscal agents and depositaries
Fund
and
Hank
D.
ftfi
6
ftf>
<>7
67
67
67
ftS
ftK
'•'>
<•'>
. . .
r«'>
T o I e d e i a l N a t i o n a l M o r t g a g e Association
l o Compiroller General
,
Discounts and purchases
Purchase and sale of l a i m l o a n bonds . . . .
Paper of r e g i o n a l a u i i c u l i u i a l credit c o r p o r a t i o n s
Special D r a w i n g Right certificates
l»»>
70
F . x e m p t i o n f r o m l abor M a n a g e m e n t Relations A c t
70
70
70
70
145
T A B U , 01; CONTLiNTS
' V
II. G E N E R A L
A.
PROVISIONS
AFFECTING
HANKS
national
71
71
banks
D . C a p i t a l structure
M i n i m u m capital of n a t i o n a l b a n k s
D i v i d e n d s ; a c c u m u l a t i o n of surplus
W i t h d r a w a l of c a p i t a l — u n e a r n e d d i v i d e n d s . . . .
I m p a i r m e n t of c a p i t a l
F.
G.
II,
Affiliates
D e f i n i t i o n of terms
.
Examination
restrictions on business
75
75
75
77
78
Definition
Insurance
F a c t o r s to
Reports of
!
C h a n g e in c o n t r o l of banks
T e r m i n a t i o n of insurance
Cease-and-desist proceedings
T e m p o r a r y cease-and-desist orders
I n j u n c t i o n t o enforce i c r u p o i a r y cease-and-desist o r d e r
R e m o v a l o f director o r olliccr
.
S t a y - o f suspension or p r o h i b i t i o n f r o m participationin b a n k all airs
Felonv charge as cause f o r r e m o v a l
H e a r i n g and judicial review
member
banks;
appointment
97
and
97
98
D e p o s i t s w i t h F e d e r a l Reserve Banks
98
M e r g e r s and consolidations
Interest
98
on deposits
100
C o n v c i s i o n to a n insured State b a n k
101
A l l i l i a t e s of n o n m e m b e r
102
IV.
80
80
insured banks
A N I ITRUST
LAWS
A . S h c m i a n Antitrust Act
Restraint of trade
103
B. C l a y t o n A n t i t r u s t A c t
A c q u i s i t i o n s o f slock
I n t e r l o c k i n g directorates
103
104
Enforcement
Powers of Attorney General
81
105
107
82
V.
A.
llOl DING.
COMPANIFS
Delinitions
'
|
I
,
|
87
BANK
Bank H o l d i n g C o m p a n y A c t o f t'JMi
85
INSURANCE
of "appropriate Federal banking agency"
o f m e m b e r banks
be considered
c o n d i t i o n : access to e x a m i n a t i o n reports
97
of
A u t h o r i t y to a d m i n i s t e r oaths a n d issue subpenas
80.
85
defined
97
duties of e x a m i n e r s
74
84
DEPOSIT
96
authorities
T e r m i n a t i o n o f m e m b e r s h i p in F e d e r a l Reserve System
73
Exemptions from Federal Reports Act
III.
96
96
N o t i c e t o State
82 •
81
81
8.V
|
84
J. B a n k Service C o r p o r a t i o n s
96
Finality of orders and meaning of "violation"
Subpena power
D e p o s i t a r i e s o f public m o n e y s
I n s u r e d batiks as depositaries
D e p o s i t a r i e s of proceeds o f sale of G o v e r n m e n t
obligations . . .
N a t i o n a l banks as dcpositaiies
D e p o s i t a r i e s of f u n d s of f e d e r a l land banks . . .
Deposits of b a n k r u p t estates
D e p o s i t s of I n d i a n f u n d s
Deposits
Wont.)
Penalties
78
78
79
79
R e l a t i o n s w i t h securities c o m p a n i e s
I n t e r l o c k i n g directorates
- A f f i l i a t i o n w i t h o r g a n i z a t i o n s d e a l i n g in Securities
Receipt o f deposits by securities c o m p a n i e s a m i
o t h e r institutions
I. Emergency
INSURANCE
N o t i c e o f service
71
C . L o a n s a n d investments
I n v e s t m e n t sccuiities a m i c o r p o r a t e slocks . . . .
C a p i t a l c o n t r i b u t i o n s to F e d e r a l N a t i o n a l M o r t gage Association
S h a r e s of stock in S m a l l Business I n v e s t m e n t
Companies
O b l i g a t i o n s issued u n d e r F a r m C r e d i t A c t . . . .
L i m i t a t i o n o n loans to one person
I bans, o n purchase o f o w n slock
Purchase of f a r m l o a n bonds
E.
111. D E P O S I T
Enforcement of orders
D i r e c t o r s a m i ollicers
N u m b e r of diiectors
False certification o f chocks
11. B r a n c h e s of
Page
I
MEMBER
I
B.
I
89
90
91
02
''2
''2
I
Ill
Interests in n o n b a n k i n g organizations
Administration
113
115
R e s e r v a t i o n of rights to Stales
Penalties
:
Judicial r e v i e w
•....,...
A m e n d m e n t s to I n t e r n a l Revenue C o d e of 1954
S a v i n g provision
S e p a r a b i l i t y o f provisions
116
116
llfi
117
122
123
Bank H o l d i n g C o m p a n y A c t A m e n d m e n t s o f
;
87
87
88
SS
Party
lie-in
!
123
CONDI I IONAL
I UANSAC I ION
Delinitions
12<
arrangements
Judicial
proceedings
12^
..
..
..
Subp.-nas in actions by U n i t e d Stales
Civil
actions
..
Injunctions
94
"4
95
vi
1970
in interest
VI.
.
IU9
A c q u i s i t i o n o f b a n k shares or assets
125
..
126
I . i m i t a t i o n of actions
126
A c t i o n s u n d e r o t h e r F e d e r a l or State laws
126
146
T A B L E OF CONTENTS
I'anc
/'r/.iv
VII.
MONUY
AND
X. C R I M I S
CULDIT
A . Legal tender
1-7
15.
C.
D.
I-.
127
127
130
Discontinuance of gold p a \ m e n t s
Use of monetarv gold stock of U n i t e d States
Purchase of U n i t e d Slates obligations
.Redemption of euricncy not identifiable as to
bank of issue
F. Redemption of old series curiency
G . Conversion of foreign currency into U.S. currency
H. T r a d i n g with the l - n c m y Act
..
:
A . C r i m i n a l Code
131
131
132
133
VIII. OHI.ICiATIONS OF UNI I i n S I A l l s
AND CiOYl l\N MI N I' AliFNV IFS
A . Certificates of indebtedness and Treasury bills as
"bonds ;md notes"
n. Deposit of U.S. bonds and notes in lieu of surety
C . Obligations giiai antced as to principal and or inteiest by I 'mli'jl Sl.ucs
. . .•... . . . ! ' .
135
135
AND
H.
1
PROIICUON
tconO
(com.):
Lmbe/zlcments
If,2
lalse ad\eitising
Financial transactions w i t h foreign governments
FaKe statements
False certification of checks
I63
163
164
164
False entries
False statements to inlluence action
Participation in lotlciies
..
Disclosine ol i n f o n n a i i o n by bank examiner
F x a m i n e r p e r f o r m i n g other services
Hank robbery and theft
164
Hank
XI.
HANK
..
Protection Act
HRFTfON
Ihi.
WOODS AC.RFHMFNT
ACT
....
A.
It.
C.
D.
FFDF'RAL
S F C U R I I II S
F.xcmption of banks f r o m Securities Act of l ) 3 3
V a n i t i e s F w h . i n g c Act of I'>34
Hank acting as liusiee under tiusi indenluie . . . .
I'xcinption of banks f r o m definitions of ••invest-
137
I3X
15V
ment c o m p a n y " ;uul " i n \ e s t m e n i adviser" . . . .
F.. I n t e r k v k i r . . : "directorates between banks and in\estment companies
160
160
HANK
PROIFCIION
A . C r i m i n a l Code
Ollenses classified
Dcpai tinent and agency defined
Oiler of loan o r gratuity to bank examiner . . . .
Acceptance of loan or g i a t u i i v by bank examiner
Fees for proem ing loans
Receipt of commissions or gifts for procuring
loans
j.
W r o n g f u l issuance of currency
T h e f l by bank examiner
j.
1M
161
161
161
161
162
162
162
F C O N O M I C POLICY. A S S K i N M F N T OF CLAIMS,
A N D C R F D I T C O N I ROI.S
!
i
XIII.
|
A . Policy declaration in F m p l o y i n e i i l Act ol I'M*.
IK|
'
H.
181
;.
C. N a t i o n a l V o l u n t a r y
Committee
I
!
AND
173
I
LAWS
l
X. C R I M I - S
If>7
136
X I I . A D M I N I S 1 R A I I V l i PROCT'lDURK
IX.
165
IM
I6<
Assignment 'of
Claims
Act
of
Mortgage
l"40
Credit
Fxtension
IS2
|
D . A u t h o r i t y for selective credit control
Defense Pioduclion Act of I'i.M)
Credit C o n t r o l Act
Fconomic Stabilization Act A m e n d m e n t s of 1V7I
|S2
1ST
1M5
,
F.
1K5
I
I
I
Lmereency
Loan
Guarantee
XIV. CONSUMI R CRFDIT
Act
P R O I F.C I I O N
LAWS
!
A . T r u t h in Lending
H.
I "air
1NDF.X
Credit
Reporting
200
20')
147
TABIDS o r S-TATUTKS
^
M i
TAIILE I
AC jb VUiLlMM*
** AWL MUX
i tii'Rtnniiix Pa^'C
i /1 \
fin 41 h
•May 29. 1020. (Subtre«sur-ti*K abolished)
Jr06ti.y^U)-(o),;'10(l>) and (c/. I•'<>),:J>nd
M a y 12. 1 9 3 3 , Hcdton 4 3 4 3 ( a ) ( j ' u i t ! ^
.AetjV
.
, • • • • 1187. .
... 130.'
obllgrtticWis). . . . . . . . . . ...ft:, i .!.•'. . v . . .
-i
64
Atl
"
-
nhljdtftal Deposit
Insurance,Act;'
{
'
f ; 1 Section
13(b).''v. . ' ^ V . : . . . . . . . . .
J line 5. 1933 ( P u b
Res)
( G o l d n n n i t n t s divV. "
/J*ftlci3tf ; l \ u r m ' . 1 .oan A d :
continued)
127
jV^.V'V,
June' 13. 1933 l R e d e m p t i o n ! p f e u r r e n c v ) . . . . . .
I.U ; .. < 4 $ & * l i o n s 5 a m i .13 . ^
S o d ion 27 •
'^'-I M a r c h 8.- 1938: section 4 ( C o m m o d i t y
C r e d1i t / ;
M!
Coiporation oblit mons)
<136
Se^njn 2 0 M i )
t
W June 2 4 . 1938: sections ,1
(Deposits, of •
H o o d Insurance, A d v i d f ll>S(»
' '
mli.in
}
^^n;;'.':
•'''•'
...
1
I
funds) ,
June I I . 1942:
moneys)
k^U^ '
section
10 t.Depositaries t ^ r f m f ^ V ' 5 !
.
^
> l ^ ' v K M c f n l H o m e L o a n liank A c t : (
15
Section
22(a)
F ^ d t r u l Reports A c t : section 3 ( e )
r
K7
91
97
'90
July 30. 19-17: section 15 ( H o m l s ' i n lieu of s u r e t y )
L 3 ^ d M o ! i f l « ! i : i l Institutions Supervisory Act of 1966
M
ma ...
y 2->n
0 . i1966
« / . a . s e d i o n 5 ( A u d i t of
W i . . « » ""(it j .Scufyon 2 0 2
currcncy)
iH^tUion
203
Asi.iri D e v e l o p m e n t H a n k . Ad;i;Sccu<Srt 6
y
S c d i o n 204
Assignment o f C l a i m s A d 1 of 1940
j ^ t f v U RliV
Hank M o l d i n g ( o m p m y A d of I 9 S 6
,
ft
109
W r v e A d of 1934: sections,-2-11. 13.
•iJiViu
Hank I l o k m t u C o m p a n y A c H / W t l c r t d m c n t s
Section 105
t
,
Section 106
,'„
If.ink Protection A d
Hank Scrviee C o r p o r a t i o n A c t
.. B a n k i n g A c t o f 1933: ?
i Section 2 . . . . . . . . . . . . . ..•.
Sections ,20
2 1 , irtd
.
Section ,31
^ H a n k i n g Act of 1935: s e d i o n 345
l l . m k n i p t c y A c t : scctltnis 4 7 a n d 61
Hretton W o o d s A c r e e n m n t s A c t :
^ v
Sections 1 - 5 7 ( b )
8
h
'
Section
6
. .
. . .
.
of
1970:
' All
a .,.
64
G o v e r n m e n t ^ o r p o r a t i o n C o n t r o l A c t : section 302' >•.
*
. , 16%
£ *
Oieatu/aiion
Wdions
and ; hniployecs
(
1954: section 6 0 3
i : :ljtlotfrAnuM ican
D e v e l o p m e n t !. H;ink . A d .
Vdions
t ode;
701-706
S'••/•.Mousing Act, ol
^'•'hoit o
Infcju.il, Ke\e.nue l ode o l
i^V^ions 1101 1103
• ^ i l i p w
ii
14(e),
|h
t ^
C l a y t o n 'Antitrust A d : sections 7. .8.
' C o i n a g e Act o f 1965: .scctiyn \W2. f
Credit Control A d
C r i m i n a l Ct)dc sections I 6 2 1 2 - 3 1 *
7 0 9 V55* 1001 1004 i o n s 1 0 U h 0 6
78
vtion
July 16. 1943: section 3 (Depositaries fv'i^pOf^^i^
modity Credit C oipor.ition)
M Vifcfovr.K;
••
. X3
4 1 70
S7<»1
|->.S.i;
;
|9V);
^2
sec-
\
mil ( M)2
International' Development
Association v-A^l-
I*><»(>:
««•...'). m ' t ion 6 .
^ ' i t ^ t e l n a t i o n a l I-uv.\ncc C o r p o r a t i o n A c t : section 6
» F
Invcstmcjfyl Advisors A c t : section 2 0 2 ( a ) M I )
....
;l)Hv6>Vi11ent C o m p a n y A c t . of 1 9 4 0 : •
,ia?1iW
Sedion
26(0
„
% rp , r ic
ScLlipi
(
W
A ,
M
u n c c m u i t Kcl itions A d
stdi
1906 1 ^ 9
' m ^ ,Ns | ( | 0 , n l , i l U , s i n L A u
1
1
-113
i
r f y f t ^ M ,(>U
Si, ii lions
Defense P l o d u d i O n A d of I 9 M )
<f
Lj'j'StftMon
Soelioii-,301
.
* C
,
,r
Kidion
Section 70S
*
S ^ r t
I ' c o n o m i c S l i i b i l i / a l i o n A d . A m c n d l t i c n t s o^ 1971 : .
1X5
l ' m e r e e n c y H. nkmt.
of M i r t l i 9 I 9 U
, ,
i ^ T 1 " OKI S s i a s
Sect,on 4
I
\
.
, tv
}
• ^ 7 > / }
i
Section 20l>
(»7
fc'/
* i < i
t * y r l
l'nuMi;enc\ l o a n ( t u a i a^itiH: Act .•:
.^^rlS:
l : m e r c e n c v R e b e l aitvh t onsti iiclion A d
^
section 201 i e )
: i-VVt.
204(1)
207(ii
uu^6()J(d)
i
oMl)
^
1
K>9(d)
p ^ )
,
^
4()2(d)
.. . i
.
..
( i n f i l l ) AdjUsiiiKiit A
|9()|^
,„
r
i
i »
<
i«
1 7 )f
11
6*
66
67
160
4
](.()
/O
I »(,
. :. 74
sections
vO
' ftd ,1 ilvitv Itond Act, I'M 7:
Section 5(c), .
I ' m p l o v ment Act ot
l air
I aim
t 1 edit
Credit
• .j*cd'««n
I
Reporting
Act of
Act
2 ....
....
.
6t
A c l , ot
1933:
section 3 ( a ) ( 2 )
and ( 3 ) ' f . .
,
. y ^ e y m t A ' V I \ c h a n e e Act of l ' 3 4 : . , x e d i o n s J. 6 ( b ) and
1971: .section 4.7
F e d e r a l C r o p Insurance A c t : \ s e d i o n
^Securities
510
' i ^ ^ V r i ^ ^ '
7
'
8
"
I I ( d )
-
J2-N."I5(c)'(4).
16-21,
23-30.
137
'
1
148
TAHLl-:S Ol*' S T A T U T E S
TAHLK
I
(cont.)
lit•ic/wif/ii» I'aae
Itrfiinninv I'avc
S h e r m a n A n t i t r u s t A c t . 1X90: section
S m a l l HusinesN A c t . )'>5X: section 6
S m a l l lUisiness I n v e s t m e n t A c t . I 9 5 X :
1
Section 302 ( M
Section 3 0 S ( b )
Special D r a w i n g Rights A c t : section 4
T a r i l f A c t o f 1 9 3 0 : T i t l e I V . section 5 2 2
T r a i l i n g w i t h the I ' n e m v A c t . I ' M " ' : section 5 ( b ) . .
1'ieasuiy. 1'osi O t l i c e . aiul l : . \ e c u t i \ e Otlice A p p i o p i i a tion A c t . 1971
Tru-t InJentnre Act:
Section 3 1 0 ( a )
Section 3 2 K b )
T r u t h in l e n d i n g Act
U n i t e d States H o u s i n g A c t : section 2 1 ( a )
KM
65
.
i
j
75
65
!
70
132
133
66
and ( h )
..
159
69
IS'/
65
!
|
!
|
,
j
j
i
I ' n i t e d Stales Revised Statutes:
Section
Section
3646(h)
3699
64
129
Section
3700
12*)
Section
5I3<> Seventh
73
Section
513S
7X
Section
5153
XJ
Section
5155
71
Section
5I«>«>
78
Section
5200
Section
5201
77
Section
5204
7'»
Section
5205
79
Section
5208
71
75
149
I Alll.l .N Ol- SIAUJTLiS
WUUi
11
ACTS AMENDING IKDKKAL UluSKRVE ACT
(By dale)
A mt luting .»</»
A i i f i M -I.
Aiijjum
I"M
Amending
Sections Amended
( 3 8 Slat. 6 8 2 )
27
19
6"l)
15. I'M-I ( 3 8 Slal.
M a u l i 3. 1915 ( 3 8 Slal. 95}<>
September 7. | 9 | 6 ( \>) Slal. 752 ) . .
June 21. 1917 (4(1 Slal. 2 3 2 )
13
1 1 . 1 3 . 1-1. I ft, 24. 25
3. 4. 9 , 13. 14.
I n . 17. | 9 . 22
A p i i l 5, 19IK ( 4 0 Slat. 5 0 6 )
13 1 * 5 2 0 2 . K.S.J
September 26. 1918 ( 4 0 Stat. 9 6 7 ) . . . .
4 . I I , 16, 19. 22
M a r c h 3. I 9 | 9 ( 4 0 Slat. 1 3 1 4 )
7. 10. I I
September 17.' 1919 t 4 1 Stat. 285 )
is
October 22. 1919 t 4 | Stat. 2 9 6 )
13 ( S 5 2 0 2 . R.S.|
D e c e m b e r 24. 1919 ( 4 1 Stat. 3 7 8 )
.
25(a)
A p u l 13. 1920 141 Slat. 5 5 0 )
14
F e b r u a r y 27. 1921 ( 4 1 Stat. 1145 )
25(a)
•February 2 7 . 1921 ( 4 1 Stat. 1 1 4 6 )
II
June 14. 1921 ( 4 2 Stat. 2 8 )
25(a I
June 3. 1922 ( 4 2 Slal. 6 2 D )
10
July I . 1922 ( 4 2 Slat. 8 2 1 )
9
F e b r u a r y 6. 1923 ( 4 2 Stat. 1 2 2 3 )
10
M a r c h 4 , 1923 ( 4 2 Stat.. 1454 )
9. 13. 13a. 14. 15
F e b r u a r y 25. 1927 ( 4 4 Slat. 1 2 2 4 )
3. 4. 9. |3
ii
1*52112.' U.S.|. 22. 24
M a y 7. 1928 145 Stal. 4 " 2 )
9
M a y 2 9 . 1928 ( 4 5 Stat. " 7 5 )
13
A p r i l 12. 1 9 3 0 ( 4 6 Stat. 1 6 2 )
13
A p r i l 17. 1 9 3 0 <46 Slat. 1 7 0 )
9
A p r i l 23. 1930 ( 4 6 Stal. 2 5 0 )
6. 9
June 26. 1930 (46 Stat. 8 1 1 )
9. 21 1 * 5 2 4 0 . R.S.J
June 26. 1930 ( 4 6 Slal. 8 1 4 )
II
June 2 6 . I 9 3 M ( 4 6 Slat 8 1 5 )
4
January 22. 1932 ( 4 7 Stat. 5 )
• 13 1 * 5 2 0 2 . R.S.|
F e b r u a r y 27. 1932 ( 4 7 Slat. 5 6 )
| 0 < a ) . 1 0 ( b ) . 16
May
1 9 . . 1932 ( 4 7 Stat. 1 5 9 )
13. 13a
July 2. 1932 ( 4 7 Slat. 5 6 8 )
21 155240. R.S.|
July 2 1 . 1932 ( 4 7 Stat. 7 0 9 )
13
F e b r u a r y 3, 1933 ( 4 7 Stat. 7 9 4 )
l O l b l , 16
M a r c h 9. 1933 ( 4 8 Stat. I )
K X l O . I I . M . 18
M a y 12. 1933 ( 4 8 Stat. 31 )
. . 13. 19
13 1 * 5 2 0 2 . R.S |
M a y 2 0 . 1933 (4X Stat. 7 2 )
June 16. I " 3 3 ( 4 8 Stat. H>2)
4. 7. »». 10. | | . 1 2 \ .
12H. 13. 14. 19. 21 | S 5 2 4 0 . K.S.|.
22. 2 3 A . 2 4 A . 2 5 ( b )
January 30. 1934 (4X Slal. 3 3 7 )
January 31. I " 3 4 ( 4 8 Stat. U 4 )
13. 14
M a r c h 6. 1 9 U
Stat. 3">8l
'
16
A p r i l 27. | o ; . j ,JX Stat. 6 4 3 ) . ,
13. 14
June 16, I " 3 4 t-iS Slat. 9 6 9 )
o. i ; n
June 1". 1"34 (4S Stal. 1105 I
10. 13 U 5 2 0 2 . R.S.|.
June 2 7 .
1934
( 4 8 Stat.
1246)
I
j...
13b. 22
24
Ads
Sections
Amended
June 14. 1935 ( 4 " Slal. 375 )
22
June 28. 1935 ( 4 9 Slat. 4 3 5 )
I2I»
August 23. 1935 ( 4 " Slat. 6 8 4 )
4. 5. 6. 8 1 * 5 1 5 4 . R.S.I.
9 . 10. 1 0 ( b ) . I I . I 2 A . I 2 H . \ \ ,
13b. 14. 19. 21 155240. R.S.|.
2 2 , 2 3 A . 24. 25. 2 5 ( a ) .
28 | $ 5 1 4 3 , R.Jj.1
A p r i l 21. 1936 ( 4 9 Slat. 1 2 3 7 )
1211
M a r c h I . 1937 150 S l a l . 2 3 )
16
A p r i l 25. I " 3 8 ( 5 2 Slat. 223 )
22(g)
M a y 2 5 . 1938 ( 5 2 Slat. 4 4 2 )
I2U
June 16. I " 3 8 ( 5 2 Slat. 7 6 7 )
r
I2I»
June 2 0 . 1939 ( 5 3 Slat. 8 4 2 )
2 2 ( g ) . 1213
June 30. 1939 ( 5 3 Slal. 9 9 1 )
:..
16
M a r c h 2.8. 1941 ( 5 5 Slal. 5 5 )
24
A p r i l 7. I 9 . | | ( 5 5 Slal. 1 3 1 )
14(e), 25(b)
June 30. 1941 ( 5 5 Slat. 395 )
16
M a r c h 2 7 . . 1942 ( 5 6 Stat. 1 7 6 )
14(b)
M a r c h 28. 1942 ( 5 6 Stat. 1 8 9 )
7 ( i n elfect)
June 11. 1942 ( 5 6 Stal. 3 5 1 )
15 ( i n c l l e d )
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151
M r . MITCHELL. M y second question again deals with the position
that Chairman Burns has taken with regard to that section of the law
which calls for a forecasting of interest rates by the Federal Reserve
Board.
The essential problem, of course, is that the whole economic system
does swing back and forth, dependent upon where interest rates are
pegged. Chairman Burns takes the position that i f the Board should
forecast interest rates over a year's period, at the end of the year there
would be havoc i n the money market. T h i s is because persons, corporations, and businesses having knowledge of future interest rates would
be inclined to sell or buy i n unusual volume simply because they have
that knowledge.
W h a t is your position on this subject ? H o w do you react to Chairman Burns' position ?
M r . COHEN. L e t me say, straight off, Congressman Mitchell, I feel
distinctly unqualified to comment on the monetary aspects, and I do
not feel—nor does Common Cause know enough about the economics
of monetary policy, to be fully helpful.
One point I want to make is that I think there is a problem of
credibility i n some of Chairman Burns' assertions. T h e ones that go
to process. A n d this in part goes back to Congressman Hanley's point.
It is precisely when you have an independent system in which the
Governors are appointed for 14-year terms, that you have to have
greater accountability requirements.
T h a t means that you need—and this goes to a philosophic point of
view that I do feel comfortable about—it means that you need, you
constantly need, openness. Y o u constantly need discussion. Y o u need
information. A n d it means that matters should not be husbanded and
hoarded and kept i n the dark.
The Feds are trying to create their own mysterious tribal rites of
monetary policy, and that makes me, as a citizen who is not an expert
on this matter, very, very distrustful and skeptical. A n d I guess as a
lay person I would say I don't know why you can't forecast interest
rates. I don't know why you can't be i n a position of talking about
ranges, and alternatives, and consequences i f step A is taken this might
happen, or this might happen to the market i f step B is taken this
might happen to the market.
M r . MITCHELL. DO I have time for one other question, M r . Chairman ?
M r . HANLEY. The gentleman w i l l proceed.
M r . MITCHELL. I have introduced a b i l l upon which we have had
hearings in my subcommittee, which is designed to accomplish two
things. One, to make the term of the Chairman of the Federal Reserve
Board not coterminous, but consonant with an administration.
A n d , two, to require that the Chairman and V i c e Chairman of the
Federal Reserve Board be approved by the Senate.
Really, one of the intents behind my legislation is to try to bring
about a better degree of coordination between fiscal and monetary
policy without i n any way usurping the power of the Federal Reserve
B o a r d to make monetary policy. I t is just a better coordination between
the two.
I f you are generally familiar with that proposed legislation, would
you share your reaction with me and the members of the committee?
152
M r . COHEN. W e would support it. I think one of the things we have
certainly learned—particularly as a result of all of the efforts made
i n the 1960's on the part of economic policy questions—that things
interact, and intersect, and intertwine i n ways that no one could have
imagined some years back. A n d therefore I think it is appropriate to
make the Chairman of the Federal Reserve Board's appointment consonant with a President's term.
I think confirmation goes without saying. W e have worked hard at
trying to improve the Senate confirmation process. The Senate Banking Committee is one of the better committees, one of the few committees that at least probes—as we witnessed i n the recent M c K i n n e y
nomination for the Federal Home L o a n Bank Board.
A l l I can say is, i f the confirmation part is adopted, Congressman,
I think the work o f y o u r committee w i l l not end i n urging the Senate
side to do a more thorough job in the confirmation process, and needless
to say, the confirmation process is not a substitute for oversight.
M r . MITCHELL. Thank you very much. M y time has expired.
M r . HANLEY. M r . K e l l y ?
M r . KELLY. Thank you, M r . Chairman.
M r . Chairman, I want to, i f I may, be certain of the record. I believe
that I understood the chairman to attribute the comment to D r . Burns
in his testimony before this Committee this morning to the effect that
Dr. Burns said that the F e d and the directors don't have to comply with
the legality because they are not dealing with appropriated funds.
M r . HANLEY. I f I may respond, that is exactly what Chairman
Burns said, that, by virtue of the fact that the agency is self-funded
and doesn't use appropriated funds, that then it is not subject to the
provision i n the law; whereas, we say that any agency using appropriated funds cannot engage i n lobbying per se.
M r . KELLY. I understood the Chairman's exact language to be: " I t
doesn't have to comply with legality."
M r . H A N L E Y . I ' m sorry.
M r . KELLY. " I t doesn't have to comply with legality"—referring to
the comment by Chairman Burns.
M r . HANLEY. Well, what we are saying here is that an agency
M r . KELLY. M r . Chairman, I am just trying to understand what you
were saying, not what we were saying.
M r . HANLEY. Well, I think, very simply put, I have attempted to
explain it—that what Chairman Burns has said, that by virtue of the
fact that the F e d is a self-funded agency, it is not subject to the restriction ordinary to other agencies of Government who do use appropriated funds.
M r . KELLY. Was the chairman here i n this public meeting representing that the Chairman of the Federal Reserve Board was saying that
the Federal Reserve Board is free to operate outside the law and
illegally?
M r . HANLEY. Well, that would be my'interpretation of his response
to my question.
Let me qualify that by saying this: No, it is not illegal but it certainly is not within the spirit of the law; and obviously we have uncovered a loophole here that I believe the majority of the Congress
would be interested i n taking care of.
153
M r . KELLEY. Well, is the chairman suggesting that the Federal Reserve Board has been operating illegally ?
M r . HANLEY. I am not saying it was operating illegally. Apparently,
on the basis of this testimony, it has not 'been operating i n accord w i t h
the spirit of the law, though i t has not done something illegal.
M r . KELLEY. NOW, is that the law i n its broad spectrum, or some
specific provision?
M r . BLANCHARD. M r . Chairman, this dialog is interesting, but we
do have two witnesses here, and other members of the committee.
M r . KELLY. M r . Chairman, may we have regular order?
M r . HANLEY. W e are working on M r . Kelly's time, M r . Blanchard.
M r . KELLY. I thank the chairman. M a y I have credit on my time for
the interruption ?
M r . HANLEY. A l l right; you get 21 seconds i n addition.
M r . KELLY. I thank the chairman.
Now, M r . Cohen, do you have any information that would permit
you to testify here that the Federal Reserve B o a r d is operating
illegally ?
' M r . COHEN. I don't think the question, Congressman K e l l y , is as
to
M r . KELLY. That is the question. W h a t I want is the answer to that
question.
M r . COHEN. I think they are operating i n an unaccountable way,
that may be legal or illegal; but regardless of which it is, i t is unaccountable.
M r . KELLY. B u t you don't have any information about any illegal
operations of the Fed; do you ?
M r . COHEN. I don't claim to have any such information.
M r . KELLY. Fine. I thank you.
Now, you indicated that you wanted openness with regard to the
operations of the Federal Reserve Board. Is that your statement?
M r . COHEN. Yes.
M r . KELLY. NOW, would that include the Federal Reserve B o a r d
making judgments and then rendering those judgments public on a
periodic basis?
M r . COHEN. Well, that is only part of openness.
Mr.KELLY. B u t that is a part that you want ?
M r . COHEN. NO ; I think one wants more than that.
M r . KELLY. B u t you do want that much.
M r . COHEN. B u t I do want a lot more, too.
M r . KELLY. But you do want that much ?
M r . COHEN. Yes, but i f you stop with that, that is unacceptable.
M r . KELLY. Well, I don't know how much further I want to go. I
want to know, do you want to go that far ?
M r . COHEN. Y e s , a n d f u r t h e r .
M r . KELLY. M r . Chairman, I have been advised my time has expired ; so I would yield back the balance.
M r . HANLEY. Thank you, M r . K e l l y . Y o u are very generous.
M r . Blanchard.
M r . BLANCHARD. Thank you, M r . Chairman.
First, I want to commend Common Cause for its position on this
b i l l and most of the other previous legislation relating to lobbying and
opening up the process of government.
http://fraser.stlouisfed.org/
93-444 O - 77 - 11
Federal Reserve Bank of St. Louis
154
I have the same problems with the current practices of the F e d that
you do and that our chairman, Henry Reuss, does. Mechanically, I am
a little concerned as to how we approach it. I understand that accordi n g to law, Federal agencies aren't supposed to lobby, but I see no
evidence that that is really complied with.
I happen to be b i g on disclosure, and I hope we get our lobbying
b i l l through this session, as going a great distance toward making
everyone aware of lobbying and who is doing what and for what
reason.
D o you think, though, M r . Cohen, that it is realistic to expect Federal agencies to refrain from lobbying? I separate lobbying those they
regulate. B u t is it really realistic to expect the Secretary of State not
to want to advocate certain positions with Members of Congress?
M r . COHEN. O f course not. A n d I think when you deal with lobby-,
ing, the various lobbying disclosure bills that are before the Congress,
of course, don't deal w i t h the executive branch; and there is a problem
because of what the U n i t e d States Code says; and everyone knows that
that is not followed.
I think there needs to really be an overall look at that. Obviously,
lobbying or communications with House Members and Senators and
their offices goes beyond just formal testimony; and all of you know
that you probably often learn a lot more in informal settings than you
do i n formal settings and no one wants to cut that off, or no one
should want to cut that off.
I think there needs to be a certain amount—there clearly needs to be
disclosure on that end; and there also needs to be a look at what often
some of the relationships are of people who are in various offices which
are not limited to just the legislative liaison offices, as they drum up
the agencies' business and, i n effect, engage in all the indirect activities.
So, I think that is a problem that clearly needs to be addressed, and
there is no getting away from that.
M r . BLANCHARD. YOU responded to Congressman Mitchell's suggestion i n his bill, of making the Chairman—the term of the Chairman
of the B o a r d coterminus w i t h that the President.
M r . COHEN. I think he said "consonant with." Was it "coterminus" ?
M r . MITCHELL. Not "coterminus"—"consonant." I f the gentleman
would yield—we deliberatelv designed it so there would be a year's
difference between the confirmation of the Chairman of the Board
and the time that the President is sworn in.
M r . BLANCHARD. T h a t would seem to suggest the greater accountability that all of us desire. A n d I understand you support that.
I am wondering—there has also been a suggestion to shorten the
term of members of the B o a r d of Governors from what is currently 14
years to something less, perhaps 8.
H a s Common Cause, or have you, looked into this question? Again,
we are getting back at accountability and sensitivity to the public.
M r . COHEN. W e have not looked into that precise question. W e have
done a lot of work on other regulatory agencies which often have
7-vear appointments, and we have tried to address the problem of
having oeoDle serve out their terms and then not wander off into the
very industries they were regulating.
155
I think that is not only obviously important, I think there is something to be said for reduced terms. I think there is something to be
said for having some responsibility i n the executive, branch, and
particularly i n the White House, for much more deliberation and
openness i n the F e d appointments themselves as well as the other
regulatory appointments.
These are often—a lot of the action takes place before the appointment is sent up; and I think that has to be—that clearly has; to be
built into the process.
W e made some suggestions to the W h i t e House and before other
committees about logging the various efforts about lobbying these
appointments; and I think that would clearly be useful for all regulatory agencies and independent agencies such as the Fed.
M r . BLANCHARD. Thank you. M y time has expired.
M r . HANLEY. Thank you, M r . Blanchard.
M r . Derrick?
M r . DERRICK. Thank you, M r . Chairman.
M r . Cohen, I thank you for your testimony.
L e t me understand exactly what your limit would be for the lobbyi n g activities.
You, i n your statement to M r . Blanchard, used the term "learn." A r e
you going to prohibit a free flow of communication between the Federal Reserve and Members of Congress, either i n a private or a public
forum?
M r . COHEN. No.
M r . DERRICK. YOU would not?
M r . COHEN. NO.
M r . DERRICK. W h a t you are objecting to is—to them going back to
the grassroots route of the banks ?
M r . COHEN. That is right. The people that they are regulating.
M r . DERRICK. YOU would prohibit them f r o m having this foram
with their bankers back home, or, i f they did, then the bankers would
not be allowed to communicate that to their Congressmen?
M r . COHEN. Well, I don't think you can ever stop bankers or anybody else from wanting to communicate w i t h their legislators. I think
you have to start—the restraints have to be placed upon the Governors
themselves.
M r . DERRICK. Well, I know, i n the structure of the Federal Reserve
and i n the banking system, you know, we are approached by lobbyists
every day, and we are called upon every day to use our judgment i n
evaluating the information that they give us. So, I f a i l to see why the
F e d should not have that risrht also to communicate with the bankers
and say, "Listen, i f this legislation is going to affect you i n this manner . .
A n d why should I be limited from having a free flow of
information with mv constituents ? I think that I would have the judgment, as most Members of Congress would, to evaluate that information and say, " A l l right, it is coming from a bank, and the bank's
stockholders are not the least of their concern," and you evaluate i t
accordingly.
M r . COHEN. I think the problem, Congressman Derrick, goes with
the relationship that the banks have with the F e d itself, and it is
156
because of that relationship that it is the fact that they can be dependent upon actions taken by the Governors and that I think you
need to have that k i n d of restriction.
The banking interests and all other organized interests i n this country—and when I talk about "organized interests," I mean all of us—I
mean, people like what I represent are all pretty capable of knowing
when our interests are affected adversely or otherwise.
Therefore, the banks do not need to be dependent upon the F e d to
be told that. " Y o u ought to do this about Sunshine," or " Y o u ought
to do this about G A O audits," or " Y o u ought to do this about something else."
M r . DERRICK. Where are they going to get the information ?
M r . COHEN. W e l l , I think they are very well represented by the
American Bankers Association; and, indeed, many of the banks—
some of the banks, at least—have their own representatives here. They
monitor what is going on.
M r . DERRICK. Well, since I have been up here, I certainly have not
agreed with everything the F e d has done, but it appears to me that the
F e d over the years has probably been one of the most stable agencies
or institutions that we have.
I t seems to me that i f we are going to go jump on someone or try to
restructure some area, that there are a lot more that would have a
priority before we get to the Federal Reserve.
I just f a i l to see where there is any great damage. Now, I have heard
quite a bit of discussion here this afternoon, and innuendos about illegal acts and a l l of this; but I have never heard of any of this. There is
no scandal at the F e d ; though I realize you try not to wait until i t
happens.
M r . COHEN. That is clearly right. But. apart from that, I think one
of the things that goes w i t h stability, Congressman Derrick, is that
often institutions are relativelv unexamined; and I think that is one
of the things that has been missing. A n d we sometimes—you know,
the Federal Reserve A c t of 1914 was clearly one of the important reforms i n this country; and like many reforms, it can become rigidifiod
and stultified and perhaps no longer even serve the purpose it Avas
intended to, or even the purpose it was first intended to may no longer
be valid.
A n d I think it is healthy to put the F e d under the kind of scrutiny
it is being placed under now. But I also think that it is a public institution even as it is independent, and, therefore, some ground rules
need to be applied to it. A n d the very fact that you have on the 8(k)
reports filed with the Securities and Exchange Commission, by admission, these are questionable foreign payments by admission of the
filers, the fact that as far as we know— and perhaps it would be usef u l for the committee to pursue this with the Fed—when they learned
this, what steps were taken to find out what those directors knew, i f
anvthinsr, what should they have known ?
Something just like that doesn't suggest scandal; it doesn't suggest instability. B u t it suggests, especially i f the F e d did not do anything, it suggests carelessness.
M r . DERRICK. I n other words, you just want to know more?
157
M r . COHEN. I think it is more than knowing more. I think you are
asking for an exercise of responsibility that so f a r has not been forthcoming from the Fed, at least as we see it, i n the naming of the various class C directors.
M r . DERRICK. IS there any indication from the final results that
they have not taken care of their house i n proper order or kept it i n
proper order? I mean, is there anything you can point to, other than
a difference, possibly, i n monetary policy as you would have it?
M r . COHEN. Well, I was careful not to comment on monetary policy,
because we don't have a position on it.
M r . DERRICK. Well, I disagree with them on monetary policy f r o m
time to time.
M r . COHEN. Well, I think what we were saying here is, here is the
Federal Reserve System that intertwines with both the private and
public sectors. I t is clearly important. I t affects our governance; and
we learned something that we d i d not learn, that we d i d not know
back i n the 1950's and the 1960's and even i n the early 1970's—
that certain rules of accountability ought to apply to our various
institutions.
I think those rules of accountability, the thrust of them, certainly
ought to apply to this agency; and one of them would include the
limits on their ability to stimulate the k i n d of lobbying they do with
the regulated institution.
M r . DERRICK. I thank you, M r . Cohen. I yield back the balance of
my time.
M r . HANLEY. Thank you, M r . Derrick.
M r . EVANS (Indiana). M r . Chairman, I have no questions.
M r . HANLEY. M r . Lundine?
M r . LUNDINE. I would like to pursue this matter of lobbying a
little bit further, because of your strong advocacy for section 4 of the
b i l l and because I have some concern about it.
W o u l d you prevent the F e d from passing resolutions as to their
judgment on legislation, either affecting the Federal Reserve System
itself, or other financial questions?
M r . COHEN. I would not. I think I view a resolution as a formal
communication, much i n the same way as you would view testimony
or a report or something of that sort, and, therefore, to me, a resolution is an appropriate action.
M r . LUNDINE. A n d i f they passed resolutions, there would be no
prohibition on those resolutions being opened to public knowledge ?
M r . COHEN. I would hope not. Although, at least from our initial
looking at the Federal Register, since the Government i n Sunshine
A c t has been adopted, there doesn't seem to be an overeagerness to
welcome that law by the Fed. B u t obviously, i f they want to publicize
their resolutions, I would assume they would.
M r . LUNDINE. Therefore, the lobby groups such as the A B A and
others representing the banks would have an opportunity to know
what the Federal Reserve's position is on these matters and take any
action they thought was appropriate i n the interests of their members ?
M r . COHEN. That is right.
158
M r . LUNDINE. SO, your argument is, you are not really cutting down
on the freedom of expression of viewpoints to Members of Congress
or others wrho may set policies, but rather, you simply want to cut off
the direct contact between the officers and directors of the F e d and
the member banks.
M r . COHEN. T h a t is right. I think there is an unstated demand
placed on the member banks under the present ground rules and one
sees the evidence of it i n some of the minutes and certainly i n the
experience we had directly on the Sunshine legislation.
M r . LUNDINE. I was sorry I was late, and this may have already
been covered, but turning to another aspect of this bill, i n section 1,
the Chairman of the Federal Reserve Board expressed his grave reservations about the requirement that he be called to account or give
estimates of his opinion as to what interest rates w i l l do i n the future.
W h a t is your viewpoint on that?
M r . COHEN. Well, Congressman Mitchell posed that question to me,
and I indicated that I was a layperson, and we don't have a position
on that point. B u t I think it goes to what philosophy you want to
follow. Chairman Burns—this is not a new tack that he is taking.
A n d what I indicated to Congressman Mitchell was that I think it
is important for us to begin to strip away some of the tribal rites of
the Federal Reserve Board and the Federal Reserve System, and that
we work, and as a layperson, I could not understand why one could
not give forecasts with ranges and consequences and what alternatives might be. A n d I think that just comes as a layperson's opinion.
M r . LUNDINE. YOU wouldn't think that those would tend to become self-fulfilling prophecies?
M r . COHEN. I don't think they have to become self-fulfilling; and
that's why I talk about alternatives and consequences.
Self-fulfilling prophecies come about when people choose to do
nothing, and they just let it happen; and i f we talk about alternatives
and consequences, then you are talking about the steps that would
either hinder or speed up or change various aspects of economic policy. A n d I think it becomes important because there is much more
recognition of the intermeshing of fiscal policy and how it affects
monetary policy and vice versa.
M r . LUNDINE. DO I understand it is your basic position that you
don't question the integrity of the Federal Reserve?
M r . COHEN. Right.
M r . LUNDINE. B u t what you want is openness so that we can have
the facts upon which to assess that integrity?
M r . COHEN. That is right. Just as we worked at building an accountability system i n the Congress, as you recently did with your ethics
code, the ethics code that the House and Senate adopted and the various procedures that the majority party does in caucus, i n open meetings and open markups. Just as we are working at doing that i n the
executive branch, you have to do it in those agencies which are neither.
M r . LUNDINE. T h a n k you very much.
M r . HANLEY. T h a n k you, M r . Lundine.
M r . Vento?
M r . VENTO. T h a n k you, M r . Chairman.
159
I have looked at your statement, M r . Cohen, w i t h some interest;
and I would like to congratulate both of you on your statements. They
are excellent. They get to the key of the problem.
I n a number of instances here today, this committee has seen examples where it has tried to get you into the crossfire of different
philosophies with regard to the Federal Reserve System.
I t is imperative, as we address this particular problem, that we try
to disassociate our philosophies w i t h regard to monetary or fiscal
policy from the actions that we take i n terms of these reforms—these
much-needed reforms.
M r . Cohen, today I asked the Federal Reserve Board Chairman,
D r . Burns, to submit to us the rules and regulations that have been
adopted by the 12 member units, the boards of the banks, regarding
standards of ethics that they have set up. A n d he said that, i n a certain time—I don't know what year because he d i d not understand what
year, but he gave the impression that they have adopted codes of
ethics. A r e you aware of any of these codes of ethics? T h e reason
I ask is, I know you did not take this position without looking into
the background to see what standards they hold themselves accountable on and the basis of what standards they hold themselves accountable, so I am interested i n any research you might have done
i n order to pursue that.
M r . COHEN. I would be happy to share with you, and anyone else,
the working papers we have on this. I can tell you that the standards
we urge them to adopt in this testimony, such as the financial disclosure and the various conflict regulations, are not part of their existi n g regulations. A n d that is a serious omission in this day and age.
A n d you see the problem is, Congressman, that they are not even
serious debating this inside the F e d — a t least from what we have
learned. Now i f I am wrong, I would be glad to be corrected.
M r . VENTO. Well, I don't know i f you are wrong or i f you are right,
but I think i f they are doing it, they are keeping i t a good secret. U n t i l
this morning's testimony, I had heard nothing about these rules and
regulations that have been developed, or that guide them. A n d I think
at the very least that they ought to be overt, and they ought to be open
so that we can look at them and judge whether or not the conduct is
within those guidelines that they have set down.
Maybe they are there, but we don't know about them. A n d I was
interested in whether or not you did.
I n looking through the bill, there have been a number of references
to lobbying and trying to impose requirements i n terms of disclosure,
and proper conduct of individuals, i n terms of their official responsibilities as regulators. These are not unusual arguments, are they, i n
terms of what constitutes political influence ?
Isn't there a pretty good base for case law that exists now that we
could p l u g i n that would be workable? So that, for instance, these
Federal Reserve banks would not be paralyzed ?
M r . COHEN. I would think so.
M r . VENTO. I n other words, you are confident that many of the actions that your organization has initiated that we have not paralyzed
State officials i n the exercise of their responsibilties, have we ?
160
M r . COHEN. N O ; not at all.
M r . VENTO. A n d that some of the contentions that were raised,
this morning for instance, the Federal Reserve Board Chaimian Dr.
Burns, suggested that maybe we could solve the representation problem by further appointment of individuals, rather than by election of
individuals as class A and class B officers. D i d you observe that i n his
testimony, and what is your reaction ?
M r . COHEN. I did, and I indicated that I thought it theoretically
may make a lot of sense—the suggestion as it applies to the class B
directors—but only i f there is evidence that the Fed itself is undergoing an open and deliberative, and seeking out—reaching out appointment system. There is no indication that they are, as we point out
on our study of the class C directors who are supposed to represent
consumers and interests other than business and labor—or other than
business and banking. A n d from what we can tell it is not a very balanced group.
So they are doing a poor job.
M r . VENTO. Well, we have some real problems. Y o u know I am a
freshman Member of Congress, and I note that our chairman has been
working on this problem for some time, and asked for the minutes of
the meetings, and he received minutes from 3 years that had 900
deletions.
D o you think that Congress can properly exercise its role in terms of
oversight unless it, for instance, can actually have complete access to
that type of information ? Whether or not i t is made open to the public is another question that the chairman and Dr. Burns have been
discussing. B u t don't you think that Congress should at the very least
require that it have access ?
M r . COHEN. I do. L e t me go by an example which preceded your
entrance into the Congress, while you were in the State legislature.
When the Budget A c t was considered, and Congress adopted the
Budget which we see as an important and really a constructive and
helpful change, one of the things we urged was that a lot of the early
worlring papers be available to the various committees that have jurisdiction over the various programs and agencies.
A n d that way, you would begin to get a sense of how the executive
branch was sorting out its own priorities. I think the same kind of
principle can be applied in this instance.
M r . VENTO. Well, thank you. M y time has expired, M r . Chairman.
I appreciate the opportunity to question the witness.
M r . HANLEY. Thank you, M r . Vento.
There is a record vote on the floor, and therefore the hearing will
stand i n recess for 10 minutes.
[Brief recess.]
M r . VENTO [presiding]. The committee w i l l come to order. I understand both of our witnesses have a time problem. A n d because of that,
we w i l l ask that the statement of Jon Brown be submitted for the
record, and without objection it is so ordered.
[The statement of J o n Brown on behalf of the Public Interest Research Group follows:]
161
Statement
of
Jon
before
the
Brown
COMMITTEE ON BANKING, PANANCE AND URBAN AFFAIRS
U.S.
HOUSE OF
REPRESENTATIVES
July 26,
My name i s
Interest
assignment
H.R.
is
excessive
secrecy,
must b e
thrust
strengthened
policy
Is
to
stability."
control
of
and p r i c e
This
policies
would d e c l a r e
not
However,
that
that
to
PIRG
several
that
the
Federal
supports
sections
accountability
goal of
production,
an end I n i t s e l f ,
that
Section
the
implement
the
Federal
follow
Congress
a concept
1 c o u l d be
the F e d e r a l
e s t a b l i s h e d by
t h e money s u p p l y
e s t a b l i s h e d by t h e
is
designed to
policies
would insure
between the
b r i n g genuine
a s t r o n g economy -
amended t o d e c l a r e
Reserve
power,
System.
t h e money s u p p l y
forgotten.
monetary
to
Public
principal
Federal
regulates.
believes
Is
the
p r o v i s i o n would i n f o r m the F e d e r a l
t h e end o f
were
the b i l l
It
the
My
bureaucratic
relationship
" p r o m o t e maximum e m p l o y m e n t ,
This
at
times
809^, b u t
with
agencies.
in
from u n r e s t r a i n e d
the b i l l
means t o
of
if
banking
commercial banks
H.R.
the F e d e r a l Reserve
Attorney
organization.
remedy w e a k n e s s e s
and a s w e e t h e a r t
of
Section 1 of
am a S t a f f
the F e d e r a l
have r e s u l t e d
System a n d t h e
the b a s i c
to
to
I
a Ralph Nader
to monitor
809^ s e e k s
System t h a t
Reserve
J o n Brown.
Research Group,
1977
but
that
policies
President.
that
rather
the
"shall
the p r o d u c t i o n ,
Congress
price
Reserve
and the
a
Board
strengthened
Reserve would not
economic
and t h e
Reserve
and
monetary
has
If
it
pursue
employment,
President."
use I t s
different
control
from
those
162
Section
to
Congress
targets,
at
closure
is
quarterly
proposed
anticipated
it
1 would a l s o
money v e l o c i t y ,
essential
disclosure
end t o
of
provide
this
ment,
Reserve
and i n f l a t i o n
t h e money s u p p l y ,
of
Reserve*s
projections
an a n a l y s i s
supply
and changes
Rather
than hide
Reserve
in
analysts.
a hazardous
to
change,
task,
of
tendencies
197^.
estimate
comment
in
this
from s c h o l a r s
c r a t i c -pampering t h a t
alternative
The
dis-
important,
in
but
addition
of
the
gross
refusals
price
for
To a l l o w
economic
of
an
to
levels,
constructive
makes t h e
tendencies
the Federal
c r i t i c i s m by
and market
analysts
we c a n no l o n g e r
is
of
and p r o d u c t i o n
to
without
and
prices
policy
unfortunate
recessionary
continue
to
the benefit
an e x e r c i z e
afford.
scholars
uncer-
of monetary
1972-73 and
Reserve
relationship
rates.
Federal
environment
conduct
in
projections
i n t h e money
the
by t h e F e d e r a l R e s e r v e ' s
of
selection
these
and i n t e r e s t
scrutiny,
economic
unemploy-
growth
between changes
b e t w e e n money s u p p l y
and t h i s
rates
Arriving- at
from p u b l i c
present
product,
are used i n the
target.
available
In the
inflationary
complex
rates.
is
T h i s would b r i n g
national
relationship
as w i t n e s s e d
reinforcement
gross
projections
analysis
the r e l a t i o n s h i p
i s 'subject
the
supply
portfolio,
t w e l v e month e s t i m a t e s
for
production,
this
s h o u l d make i t
and market
tainty
of
disclose
Congress.
a t w e l v e m o n t h money s u p p l y
requires
rates
and i n f l a t i o n .
estimates
and t h e s e
interest
r e p e a t e d and u n f o r t u n a t e
to
to
Reserve's
1 b e amended t o r e q u i r e
Reserve's
information
The F e d e r a l
Reserve
t w e l v e month money
and i n t e r e s t
unemployment,
the Federal
its
the Federal
and e s t i m a t e d
Section
the Federal
product,
of
aggregates
that
the Federal
hearings
composition
o f monetary
national
require
in
of
bureau-
163
The d i s c l o s u r e
gross
national
to
insure
of
Economic
their
of
product,
unemployment,
co-ordination
Advisors
inflation.
fiscal
of
gross
at
by k e e p i n g s e c r e t
to
pursue
improperly
e s t a b l i s h e d by t h e
insure
national
its
and i n f l a t i o n , i t
to
and monetary
that
economic
Congress.
in
that
Thus,
the F e d e r a l Reserve
is
rates,
also
of
The
Congress
make
are
public
policy.
national
inconsistent
is
product,
Reserve
with
necessary
exceed i t s
and
disclosures
fiscal
the Federal
disclosure
does not
Council
unemployment,
gross
for
essential
policy.
t o make s i m i l a r
possible
goals
of
establishing
estimates
is
interest
product,
failure
a disadvantage
unemployment,
of
and i n f l a t i o n
committees
The F e d e r a l R e s e r v e d
Congress
Moreover,
of
and v a r i o u s
annual estimates
places
t w e l v e month e s t i m a t e s
those
in
order
statutory
authority.
Section
of
2 of
the b i l l
the F e d e r a l Reserve
selected
sex,
"without
or national
Although
difficult
to
change t h e
election
appear
the
the
goal
A and C l a s s
and Cla^s
of
of
race,
this
C
process,
since
discrimination
as employment
or
voting
s e c t i o n w e r e amended t o
B
directors
directors
creed,
color,
provision
is
significantly
these processes
do
tests
been
that
rights.
include
have
This
an
defect
"affirmative
obligation.
Section
Federal
selection
such areas
Class
elected
s e e how t h e p r o v i s i o n w o u l d
t o be a m e n a b l e t o t h e
in
c o u l d be c u r e d i f
action"
of
that
be
on t h e b a s i s
origin."
it
developed
shall
discrimination
lauditory,
not
is
provides
Banks
2(c)
of
R e s e r v e Banks
"represent
the b i l l
of
and c o n s u m e r s . "
that
s h a l l be s e l e c t e d
the p u b l i c . . . w i t h
the i n t e r e s t s
provides
agriculture,
The F e d e r a l
due b u t
not
commerce,
Reserve
Act
Class
by t h e
C directors
Board o f
exclusive
industry,
currently
of
the
Governors
consideration
services,
imposes
to
to
labor,
no
164
representational
qualifications
tion
representational
of
explicit
Board of
Governors
corporations
in
has
its
Committee
Staff
are
executives
or
Under
elect
as w e l l
as
the
industry.
shall
and t h i s
It
to
designate
of
the
Class
that
is
in
only
appointment
are
Yet
through
In the
of
the
Reform Act
The C o m m i t t e e
to
large.
labor,
that
and
the
Class
B
language
a legislative
elected,
to
as r e p r e s e n t a t i v e s
of
they w i l l
Is
essentially
Committee
s t a t e bankers
transform
public
Staff
Federal
Reserve
of
CH.R.
1976
to
is
its
extremely
designate
the
public,
continue
to
be
Congress
representative
what S e c t i o n
Report
for
of
both
Reserve
Banks
corporations
to provide
contained
earlier
into
for
Bank P r e s i d e n t s .
1293)
directors
2(b)
August
Class
1976,
A and
associations.
the Federal
and l a r g e
interest
as a
and
spectrin
r e a c t i o n were
Association
this
the
since
would
is
fraud
the p u b l i c
to
C directors
consumers"
commerce,
This
the
large
According
mostly
channel nominations
should return
of
Imagine
commercial banks
operate
Reserve
nature
Banks
way t o
of
m i t i g a t e d by b r o a d e n i n g t h e economic
according
B directors
declare
the p u b l i c . "
American Bankers
Reserve
favor
36 C l a s s
agriculture,
c o m m e r c i a l banks
not
interest.
since
for
the
in
29 o f
"services,
of
would a l s o
"represent
directors
the
Federal
The
2(b)
1976,
introduc-
R e s e r v e S y s t e m member b a n k s
represent
categories
the bankers.
public
persons
Federal
to
is
from w h i c h the
beholden to
five
corporations,
e l e c t e d by
fruad
would do,
of
Section
ill-advised.
directors
directors
2(b),
The
necessary because
C directors.
August,
present
be e l e c t e d
Class
of
B directors.to
is
a strong bias
Report
Section
Class
of
Cdirecotrs.
categories
demonstrated
selection
the
on C l a s s
spokes-
institutions
Presidential
The
such a
approach.
from
Federal
provision.
165
The p u b l i c
so g r e a t
that
facilities
mercial
responsibilities
it
banks.
Their
for
their
f r o m t h e Banks
mary r o l e
is
for
primary
to provide
For
Banks
of
regional
Merger
Permitting
and t h e r e b y
control
the
commercial
selection
completely
at
to
their
supervision
to
select
bank
the
odds w i t h
regulators
Presidential
Reserve
President,
will
Section
Presidents
This
would
who i s
3 of
in
13 U . S . C
employees.
the b i l l
for
the
provides
is
from p a r t i c i p a t i n g
the
to Federal
appropriate
in
to
1*1 y e a r
5 would extend
208(a)
to
market.
clearinghouses,
6 of
allowing
conflict
9
of
of
reference
regulatees
interest.
of
the
remedy t h i s
are
Presidents
In
the
Federal
unsatisfactory
c h o s e n by
Bank b o a r d s
boards
state
Bank
directors
Bank
duties.
Senate
of
the
of
of
the
directors
directors
confirmation
Federal
the record
of
Board
of
the
Board.
a B o a r d member
prove
members.
interest
Bank d i r e c t o r s ,
Federal
i n which, they
of
Reserve
of
a r e v i e w w h i c h may
to p r o h i b i t
decisions
pri-
Committees.
conflict
Reserve
support
disimilar
responsibilities,
Reserve
these
review
terms
self
supervision
elect
Reserve
for
Chairperson
com-
S y s t e m whose
confirmation
fact,
Advisory
as
credit
data,
way t o
Chairpersonship,
the
the
Bank P r e s i d e n t s
In
member
are very
public
Federal
Federal
Senate
the
view o f
It
banks
proper
serve
are
banking
B a n k H o l d i n g Company a n d
a gross
Reserve
glorified
appointee
enable
Section
of
the
significant.
elevated to
valuable
is
their
automated
responsibilities,
the composition o f
w o u l d become m e r e l y
to
economic
the
of
to
these broad p u b l i c
involves
Once F e d e r a l
become l e s s
access
n o m i n a t i o n and S e n a t e
Bank P r e s i d e n t s
situation.
of
by
they
Banks
regional
Farm C r e d i t
check-clearing,
and a d m i n i s t r a t i o n
is
not
have p e r v a s i v e
member b a n k s ,
Acts.
is
the
Reserve
them as
example,
members, w i t h
and a n a l y s i s
Federal
view
function
Co-operatives of
monetary p o l i c y ,
collection
the
to
owned a n d c o n t r o l l e d
members.
Federal Reserve
including
of
inappropriate
co-operatively
mechanisms
Rather,
is
have
provisions
officers,
Reserve
Bank
a personal
and
personnel
interest.
166
M r . VENTO. NOW we have just a couple of members that have not had
a chance to ask questions, so we w i l l try to move as quickly as we can.
The gentleman from Georgia, M r . Barnard.
M r . BARNARD. M r . Cohen, now do you settle the flagrancy of the lobbying efforts of the Fed, at this point ?
M r . COHEN. F i r s t let me thank both you, and Congressman Vento,
and Congressman Hanley for moving along. I appreciate that.
I think the examples we cited, particularly the one on the Sunshine
Act, was really quite intense. I was struck by the intensity of it,* and
the fact that it was not isolated, that legislators commented on i t and
noted it.
I think it is quite possible—I don't know i f anyone has done a study
of all of the Fed's minutes i n toto
M r . BARNARD. L e t me interrupt you, at that point. That is the point
I was making. I t was brought out this morning that i n examining all
of the minutes of the F e d which happen to be something like 388 meetings, there was only 6 instances where this was developed. A n d I am
interested to know whether or not you think this is sufficient to cast
guilt on the whole Federal Reserve System.
M r . COHEN. W e l l , I don't think we are trying to cast guilt on the
whole Federal Reserve System. A n d I don't think it's solely a numbers
situation, Congressman Barnard.
I t is interesting that the items that we know about from our own
readings of the minutes was the G A O audit question. Now, however
one comes out from a policy viewpoint on the G A O audit, the lobbying
was engaged in, and stimulated. A n d it is certainly true on the Sunshine issue.
T h e point is, it goes to the items that go to the procedures and ground
rules that the Federal Reserve Board, and the Governors, and the
entire system w i l l operate under. A n d that is what is disturbing.
A n d you combine that w i t h the fact that the member banks have a
direct relationship with what the decisions that the F e d makes, not
only i n general policy but i n specific matters as well, then I think that
is where you run into it.
A n d I think what we are trying to suggest are some cautionary,
preventive items that could be taken that would not i n any way hinder,
impede, or chill the free flow of communication.
I find i t hard to believe that Chairman Burns or anybody else who
is a Governor of the Federal Reserve Board would ever feel "chilled"
i n their communications.
M r . BARNARD. Well, the other aspect that I asked that question is
w i t h reference to section 5: Is Common Cause advocating a reorganization of the Federal Reserve System? A n d I say that, i n view of the
fact that i f you impose conflict-of-interest rules and regulations on
class A directors, then you are asking that bankers no longer become—
be eligible for membership on the board.
A n d I think that has to be considered i n the makeup, and this is
something that, so much of the time, escapes us. T h e bankers of this
country finance the Federal Reserve. They are the ones that buy stock.
A n d they are the ones that have put the capital up for the Federal Reserve. I t is not the Federal Government.
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A n d , on top of that, there's a lot of other things involved i n this
other than just monetary policy, I mean, have you studied the other
aspects of responsibilities of the Fed's boards ?
M r . COHEN. Well, we certainly are not unfamiliar with what the F e d
does, as our statement tries to make clear.
L e t me just make a point on the question of financial disclosure, and
various conflicts of interest. A n d I want to go back to a point that
Congressman Yento made—and I know he d i d it, i n part, out of his
experience as a State legislator.
There is nothing new i n the various aspects that is suggested here on
the financial disclosure and conflicts of interest. Numerous States—
well over half, as a matter of fact, when the ethics code was before the
Congress, we counted 38 States that have some f o r m of financial disclosure legislation that affects executive branch, and people who serve
on State boards, whether they are commissions of higher education, or
sanitation commissions, and so forth. T h i s is along those lines.
A n d I do not think that, one, we are not i n the business o f reorganizi n g the Federal Reserve System. W e don't know anything about that
part. A n d you don't reorganize the System through disclosure legislation.
A n d I don't think it would be reorganized through disclosure legislation. B u t you do run into various problems. T h e New Y o r k Times, and
other papers, commented on the Gilpatrick situation of some months
ago, and it is I think a matter of prudence that i t would not be a bad
thing to require these financial disclosures.
M r . BARNARD. I hate to interrupt you, but my time is about to expire.
T h e point I am trying to make, though, is that every decision that is
made i n these regional banks has to be concerned w i t h banks. I t may be
made with reference to Reserve requirements. I t has to be made w i t h
reference to margin on loans. There are so many technical things that
take place that it appears to me that bankers should be the ones making
those decisions. B u t every decision that is made does affect a bank.
So it looks like to me that i f you impose the stringency of your argument, that you are going to have to reorganize class A directors. A n d I
don't mean from the standpoint of disclosure. I am speaking from the
standpoint of the things that are passed that are regulating the banks.
M r . COHEN. I t is for precisely the duties that you describe what we
think these minimal conflict regulations ought to exist and people
ought not to decide questions about which their own bank is involved.
A n d I think those steps are steps of prudence, not steps of
reorganization.
M r . BARNARD. B u t you can't escape. T h e banks are set up so that
every decision it makes would affect your bank. I f it is a reserve requirement, i f it has to do with the reserves for losses on loans, i f i t
has to do with the makeup of how much you can invest i n banking
fixtures and buildings—it has to affect your bank. There is no decision
that can be made like it.
T h a t is why I think a lot of consideration must be given to section
5 as to how it could apply to the Federal Reserve. It is just unlike any
other branch of Government, as was brought out this morning. I t is a
quasi-branch of Government. A n d I don't think it applies.
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I think we might restructure it to apply; but I don't think we just
can throw it i n that gap.
M r . HANLEY [presiding]. Thank you, M r . Barnard.
D o any committee members have any further questions ?
M r . VENTO. M r . Chairman, just one comment, and that is that Dr.
Burns d i d point out this morning that there arc only six instances
where there apparently was some conflict of interest i n the 3 years
of minutes that were submitted to the chairman. B u t there were 900
deletions.
M r . BARNARD. W o u l d the gentleman yield ?
M r . VENTO. W i t h 900 deletions i n 3 years, plus the fact that I understand, i n talking with staff members, that they d i d not take every
instance; they just took some examples to share with us.
That's what he is referring to; but that is the point, that ought not
to be missed i n this whole discussion.
M r . BARNARD. D i d you mean conflicts of interest or lobbying efforts?
M r . VENTO. Well, lobbying efforts.
T h e point is, there are 900 delegations that affect those minutes,
plus the fact that the staff d i d not necessarily articulate each one that
they found. They just had so much time to go through there.
W e also have to think of the impact upon a particular State, for
instance, within that Federal Reserve System and how it is affected.
Not all of this was aimed at Congress. Some of it was aimed at State
legislatures. T h a t gives one great cause f o r pause i n terms of what
their activity is.
It would not be even as serious if, i n fact, it were reported and we
were aware of it. B u t the fact it is often covert—in fact, there's an
unwillingness to even make it public. There's a legitimate question
as to whether they should be involved i n this. There could be a difference of opinion on that.
B u t to keep these types of activities under cover just points up the
greater need, for instance, for some legislation along these lines;
and I don't think there should be any disagreement with regard to
that particular aspect.
Fiduciary institutions and banks have a right to be represented
before this Congress, and I think they have all the capabilities to do
it without necessarily the Federal Reserve System being the pointdog, for instance, i n a legislative proposal.
T h e Federal Reserve should function at arm's length i n terms of
the traditional relationships between regulatory agencies and the units
that they regulate.
I t is a serious problem. W e want to restore the credibility that this
organization needs and deserves i n order to function effectively i n our
economy. I don't think the attitude that we saw this morning is
necessarily going to restore that type of confidence.
M r . HANLEY. T h a n k you, M r . Vento.
M r . Cohen, on behalf of the committee, our deep appreciation for
your appearance and effort and your excellent testimony.
W i t h that, the hearing w i l l stand adjourned, pending call of the
Chair.
[Whereupon, at 3:25 p.m., the hearing was adjourned, subject to
the call of the Chair.]
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