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H.R. 7001

MAY 15, 1980

Serial No. 96-62
Printed for the use of the
Committee on Banking, Finance and Urban Affairs

63-4)71 O


HENRY S. REUSS, Wisconsin, Chairman
WILLIAM S. MOORflEAD, Pennsylvania
STEWART B. McKINNEY, Connecticut
HENRY J. HYDE, Illinois
THOMAS B. EVANS, J r., Delaware
District of Columbia
ED BETHUNE, Arkansas
STEPHEN L. NEAL, North Carolina
CARROLL HUBBARD, J r ., Kentucky
DON RITTER, Pennsylvania
JOHN J. La FALCE, New York
JON HINSON, Mississippi
LES AuCOIN, Oregon
NORMAN E. D’AMOURS, New Hampshire
BRUCE F. VENTO, Minnesota
DOUG BARNARD, J r., Georgia
MIKE LOWRY, Washington
P a u l N e ls o n , Clerk and S ta ff Director
M i c h a e l P. F l a h e r t y , General Counsel
Jam es C. S iv o n , M inority S ta ff Director

S u b c o m m it t e e


D o m e s t ic M


P o l ic y

PARREN J. MITCHELL, Maryland, Chairman
STEPHEN L. NEAL, North Carolina
NORMAN E. D’AMOURS, New Hampshire
DOUG BARNARD, J r., Georgia
DON RITTER, Pennsylvania


H.R. 7001:
Text of................................................................................................................
Section-by-section analysis...............................................................................



Statem ents

Reuss, Hon. Henry S., a Representative in Congress from the State of Wiscon­
sin, and Chairman of the House Banking, Finance and Urban Affairs
Volcker, Hon. Paul A., Chairman, Board of Governors of the Federal Reserve
A d d it io n a l In f o r m a t io n S u b m it t e d

for the


R ecord

American Bankers Association, letter dated May 8, 1980, from Gerald M.
Lowrie, executive director, government relations, commenting on H.R. 7001.
Gasper, Louis C., submission of Memorandum entitled “Brief History of the
Federal Open Market Committee” ......................................................................
Mitchell, Chairman Parren J.:
Excerpt of statement on growth of money supply..........................................
Opening statement on H.R. 7001......................................................................
Reuss, Hon. Henry S., prepared statement entitled “Modernizing the Federal
Reserve System ....................................................................................................
Volcker, Hon. Paul A.:
“Interim Report on Financial Aspects of the Silver Market Situation in
Early 1980” .....................................................................................................
List of members of the 1980 Consumer Advisory Council.............................




THURSDAY, MAY 15, 1980
H o u s e o f R e p r e s e n t a t iv e s ,
S u b c o m m it t e e o n D o m e s t ic M o n e t a r y P o l ic y ,
C o m m it t e e o n 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 ir s ,

Washington, D.C.
The subcommittee met at 10:10 a.m., in room 2128, Rayburn
House Office Building, Hon. Parren J. Mitchell (chairman of the
subcommittee) presiding.
Present: Representatives Mitchell, Neal, Barnard, Mattox,
Hansen, Paul, and Ritter.
Also present: Representative Henry S. Reuss, chairman of the
full committee.
Chairman M i t c h e l l . The subcommittee will come to order.
The Chair has two brief announcements to make. As the mem­
bers of the subcommittee know, the House went into session at 10
a.m. However, this is a hearing and we are not bound by the 5minute rule in any respect. So we can proceed and from time to
time, if votes are required, we will slip over to the floor and cast
our votes.
The second announcement is that Chairman Volcker of the Fed­
eral Reserve Board will testify at about 11 o’clock. In the event we
finish up the first part of the hearing before that, we will take a
brief recess and resume at 11 o'clock.
Today we begin hearings on H.R. 7001, a bill to modernize the
Federal Reserve System. This bill was introduced last month by
our esteemed full committee chairman, Congressman Henry S.
Reuss, for himself, our subcommittee colleague Congressman John
J. Cavanaugh, and myself.
[The text of H.R. 7001 and a section-by-section analysis follow:]


2 d S e s s io n


f|» K»

M /V /V


UU 1

To modernize the Federal Reserve System.

A p r i l 1,



(for himself, M M i t c h e l l of Maryland, and M C a v a n a u g h )
introduced the following bill; which was referred to the Committee on
Banking, Finance and Urban Affairs

R euss

To modernize the Federal Reserve System.

Be it enacted by the Senate and House of Representa-

2 tives of the United States of America in Congress assembled,


S e c tio n

1. This Act may be cited as the "Federal Re-

5 serve Modernization Act” .







Se c .

101. (a) The last sentence of the first paragraph of

10 section 2 of the Federal Reserve Act (12 U.S.C. 222) is


1 amended by striking out “ subscribing and paying for stock’’
2 and inserting in lieu thereof “ obtaining a certificate of
3 membership” .

(b) The second sentence of the third paragraph of sec­

5 tion 2 of such Act (12 U.S.C. 282) is amended by striking
6 out “ subscribe to the capital stock” and all that follows
7 through “ gold or gold certificates.” and inserting in lieu
8 thereof “ obtain a certificate of membership pursuant to the
9 provisions of this Act.” .

(c) The fourth paragraph of section 2 of such Act (12

11 U.S.C. 502) is amended—

(1) by striking out “ shareholders” and inserting in
lieu thereof “member banks” ; and


(2) by striking out “ the amount of their” and all


that follows through the end thereof and by inserting in


lieu thereof “ an amount equal to 6 per centum of the


paid-up capital stock and surplus of such member


bank.” .


(d) The eighth, ninth, tenth, and eleventh paragraphs of

20 section 2 of such Act (12 U.S.C. 283; 285) are hereby
21 repealed.

(e) The twelfth paragraph of section 2 of such Act (12

23 U.S.C. 286) is hereby repealed.

(f) The first sentence of the last paragraph of section 2

25 of such Act (12 U.S.C. 281) is hereby repealed.




S ec.

102. (a) The second sentence of the first paragraph

3 of section 4 of the Federal Reserve Act is amended by strik­
4 ing out “ a subscription to the capital stock of” and inserting
5 in lieu thereof “ an application for a certificate of membership
6 in” .


The second paragraph of section 4 of such Act is

8 amended—

(1) by striking out “ When the minimum amount


of capital stock prescribed by this Act for the organiza­


tion of any Federal Reserve bank shall have been sub­


scribed and allotted,” and inserting in lieu thereof


“When the organization committee shall deem that a


sufficient proportion of eligible banks have applied for


membership in a Federal Reserve bank in the process


of organization,” ;


(2) by striking out “ the amount of capital stock


and the number of shares into which the same is


divided,” ;


(3) by striking out “ subscribed to the capital stock


of” and inserting in lieu thereof “ applied for member­


ship in” ;


(4) by striking out “ and the number of shares sub­
scribed by each” ; and




by striking out “ subscribed or may thereafter


subscribe to the capital stock of” and inserting in lieu


thereof “ applied or may thereafter apply for member­


ship in” .


(c) The subparagraph numbered “Eighth” of section 4

6 of such Act (12 U.S.C. 341) is amended by striking out
7 “ stock” .

(d) The tenth paragraph of section 4 of such Act (12

9 U.S.C. 302) is amended by striking out “ stock-holding” and
10 inserting in lieu thereof “member” .

(e) The third sentence of the twelfth paragraph of sec­

12 tion 4 of such Act is amended by striking out “ subscriptions
13 to the capital stock” and inserting in lieu thereof “ applica­
14 tions for membership” .



Sec. 103. Section 5 of the Federal Reserve Act (12

17 U.S.C. 287) is amended to read as follows:


“ S e c.

a p p l ic a t io n

f o r m e m b e r s h ip

5. (a) The Federal Reserve banks shall have no

20 capital stock.

“ (b) A bank applying for membership in the Federal

22 Reserve System after the effective date of the Federal Re­
serve System Structural Reform Act of 1980 shall submit an
application for such membership, in accordance with regula-

1 tions of the Board of Governors of the Federal Reserve
2 System, to the Federal Reserve bank of its district.

"(c) Upon the approval of an application submitted pur­

4 suant to subsection (b), the Federal Reserve bank involved
5 shall issue to such bank a certificate attesting the member­
6 ship of such bank in such Federal Reserve bank and in the
7 Federal Reserve System.

"(d) With respect to any bank which has an application

9 for membership in the Federal Reserve System which is
10 pending on the date of the enactment of the Federal Reserve
11 System Structural Reform Act of 1980, upon the approval of
12 such application of such bank, such Federal Reserve bank
13 shall issue to such bank a certificate attesting the member­
14 ship of such bank in such Federal Reserve bank and in the
15 Federal Reserve System.

"(e) When a member bank voluntarily liquidates, it shall

17 surrender its certificate of membership and cease to be a
18 member of the Federal Reserve bank of its district and of the
19 Federal Reserve System.

"(f)(1) Any bank which is a member bank on the date of

21 the enactment of the Federal Reserve System Structural
22 Reform Act of 1980 shall be deemed to hold a certificate of
23 membership in the Federal Reserve System and in the Fed­
24 eral Reserve bank of which it is a member on such date.



"(2) The Federal Reserve bank involved shall issue a

2 certificate of membership to each such member bank as soon
3 as practicable after the date of the enactment of such Act.” .


Se c .

104. (a) The first paragraph of section 6 of the

6 Federal Reserve Act (12 U.S.C. 288, first paragraph) is
7 hereby repealed.


The second sentence of the paragraph which prior to

9 the amendment made by subsection (a) of this section was the
10 second paragraph of section 6 of such Act (12 U.S.C. 288,
11 second paragraph) is amended to read as follows: "The certif­
12 icate of membership held by such national bank shall be sur­
13 rendered to the Federal Reserve bank of its district, and such
14 national bank shall cease to be a member of such Federal
15 Reserve bank and of the Federal Reserve System.” .


Se c .

105. (a) The first paragraph of section 7 of the

18 Federal Reserve Act (12 U.S.C. 289) is amended by striking
19 out "the stockholders” and all that follows through "have
20 been fully met,” .


The second sentence of the second paragraph of sec­

22 tion 7 of such Act (12 U.S.C. 290) is amended by striking
23 out ", dividend requirements as hereinbefore provided, and
the par value of the stock,” .




The third paragraph of section 7 of such Act (12

2 U.S.C. 531) is amended by striking out ''capital stock and” .


106. (a) The first paragraph of section 9 of the

Se c .

5 Federal Reserve Act (12 U.S.C. 321, first paragraph) is
6 amended—

(1) in the first sentence, by striking out “ the right


to subscribe to the stock of” and inserting in lieu


thereof “membership in” ;
(2) by striking out the second and third sentences


thereof; and
(3) in the last sentence, by striking out “ stock­


holder” and inserting in lieu thereof “member” .


(b) The first sentence of the second paragraph of section

15 9 of such Act (12 U.S.C. 321, second paragraph) is amended
16 by striking out “Federal Reserve bank stock owned by the
17 national bank shall be canceled and paid for as provided in
18 section 5 of this Act.” and inserting in lieu thereof “ member­
19 ship of such national bank shall be terminated and the certifi­
20 cate of membership canceled by the Federal Reserve bank
21 involved.” .

(c) The first sentence of the third paragraph of section 9

23 of such Act (12 U.S.C. 321, third paragraph) is amended—


by striking out “ stockholder” and inserting in

lieu thereof “member” ; and


(2) by striking out “ stock’ ’ and inserting in lieu


thereof “membership” .


(d) The fifth paragraph of section 9 of such Act (12

4 U.S.C. 323) is hereby repealed.

(e) The first sentence of the paragraph which prior to

6 the amendment made by subsection (d) of this section was the
7 ninth paragraph of section 9 of such Act (12 U.S.C. 327) is
8 amended by striking out “ stock” and inserting in lieu thereof

9 “certificate of membership” .

(f) The paragraph which prior to the amendment made

11 by subsection (d) of this section was the tenth paragraph of
12 section 9 of such Act (12 U.S.C. 328) is amended—


(1) in the first sentence—


(A) by striking out “ all of its holdings of cap­


ital stock” and inserting in lieu thereof “its certif­


icate of membership” ; and


(B) by striking out “ : Provided, however,


That no” and all that follows through “withdraw­


als during that year” ; and


(2) in the third sentence—


(A) by striking out “ stock holdings” and in­


serting in lieu thereof “ certificate of membership” ;



(B) by striking out “ a refund of its cash” and
all that follows through “likewise be entitled to” .


(g) The paragraph which prior to the amendment made

2 by subsection (d) of this section was the sixteenth paragraph

3 of section 9 of such Act (12 U.S.C. 333) is amended—

(1) in the first sentence, by striking out ", except


that any” and all that follows through "admission to


membership” ;
(2) by striking out the second through the seventh


sentences thereof; and


(3) in the last sentence, by striking out ", except


as otherwise hereinbefore provided with respect to cap­


ital stock” .


(h) The last sentence of the last paragraph of section 9

13 of such Act (12 U.S.C. 338) is amended by striking out
14 "stock” and inserting in lieu thereof "certificates of
15 membership” .


Se c .

107. The first sentence of the third paragraph of

18 section 10 of the Federal Reserve Act (12 U.S.C. 243) is
19 amended by striking out "capital stock and surplus” and in­
20 serting in lieu thereof "net earnings for the immediately pre­

21 ceding six-month period” .





Se c .

108. Section 19(h) of the Federal Reserve Act (12

25 U.S.C. 466) is amended by striking out "take stock” and


1 inserting in lieu thereof “ apply for membership in the Federal

Reserve System” .




Se c .

109. The Federal Reserve Act is amended by in­

5 serting after section 5 of such Act the following new section:


r e t ir e m e n t

“ Sec.

of federal




5A. (a) Not later than five years after the date of

8 the enactment of the Federal Reserve System Structural

9 Reform Act of 1980, upon request of the Federal Reserve
10 bank involved, each holder of stock in such Federal Reserve

bank shall surrender such stock to such Federal Reserve

12 bank. During such five-year period, such Federal Reserve

13 bank shall cancel and retire such stock and pay to the former
14 holder of such stock the par value thereof, plus interest at the
15 rate of one-half of 1 per centum per month from the date of
16 the last dividend. The timing of such payments by such Fed­
17 eral Reserve bank during such five-year period shall be con­
18 sistent with the orderly operation of the Federal budget and
19 the monetary control policies of the Board of Governors of
20 the Federal Reserve System.


“ (b) In any case in which a member bank voluntarily


liquidates during such five-year period, upon surrendering its

23 stock and certificate of membership to the Federal Reserve
bank involved, such member bank shall promptly receive


1 payment for such stock as specified in subsection (a), less any
2 liability of such member bank to such Federal Reserve bank.

“(c) In any case in which a member bank shall be de­

4 clared insolvent during such five-year period and a receiver is
5 appointed for such member bank, or in any case in which a
6 receiver is appointed for a national bank during such five7 year period pursuant to the first paragraph of section 6 of
8 this Act, upon surrendering its stock and certificate of mem­
9 bership in the Federal Reserve bank involved, the receiver
10 shall promptly receive payment for such stock as specified in
11 subsection (a), less all debts of such member bank or such
12 national bank to the Federal Reserve bank involved.” .








Se c .

201. (a) Section 12A(a) of the Federal Reserve

17 Act (12 U.S.C. 263(a)) is amended to read as follows:

“ Se c .

12A. (a) No Federal Reserve bank shall engage

19 or decline to engage in open-market operations under section
20 14 of this Act except in accordance with the direction of and
21 regulations adopted by the Board of Governors of the Federal
22 Reserve System. The Board of Governors of the Federal Re­

23 serve System shall consider, adopt, and transmit regulations
24 to the several Federal Reserve banks relating to the open25 market transactions of such Federal Reserve banks.” .



(b) Section 12A of the Federal Reserve Act (12 U.S.C.

2 263) is amended by striking out subsection (b) and by
3 redesignating subsection (c) as subsection (b).

(c) Section 2A of the Federal Reserve Act (12 U.S.C.

5 225a) is amended by striking out "and the Federal Open
6 Market Committee” each place it appears therein.

(d) The tenth paragraph of section 10 of such Act is

8 amended—

(1) in the first sentence—


(A) by striking out "and by the Federal


Open Market Committee; and


(B) by striking out "and the Committee” ;




(2) in the second sentence—


(A) by inserting "other” after "record with


respect to all” ; and


(B) by inserting "other” after "and with re-


spect to the” .
(e) Section 14(b)(2) of the Federal Reserve Act (12

20 U.S.C. 355) as in effect on the date of the enactment of this
21 Act and as in effect on June 9, 1981 pursuant to section 3(a)
22 of the Act of June 8, 1979 (93 Stat. 35; Public Law 96-18)
23 is amended by striking out "Federal Open Market Commit24 tee” each place it appears therein and inserting in lieu there25 of "Board of Governors of the Federal Reserve System” .

6 3 - 9 7 1 0 - 8 0 - 2



(f) Section 14(h) of the Federal Reserve Act is amended

2 by striking out “Federal Open Market Committee” and in3 serting in lieu thereof “Board of Governors of the Federal
4 Reserve System” .


Se c . 202.

(a) The first paragraph of section 12 of the

7 Federal Reserve Act (12 U.S.C. 261) is amended to read as
8 follows:

“ Se c .

12. (a) There is hereby created a Federal Advi-

10 sory Council which shall consist of as many members as
11 there are Federal Reserve districts. The president of each
12 Federal Reserve district shall be the member for such district
13 on the Federal Advisory Council. Meetings of the Federal
14 Advisory Council shall be held in the District of Columbia at
15 least once each month, and additional meetings may be called
16 by the Board of Governors of the Federal Reserve System.
17 In addition to the meetings required in the previous sentence,
18 the Federal Advisory Council may hold such other meetings
19 in the District of Columbia or in any other location it deems
20 necessary. The Federal Advisory Council may select its own
21 officers and adopt its own methods of procedure. A majority
22 of the members of the Federal Advisory Council shall consti23 tute a quorum for the transaction of business. In any case in
24 which there is a vacancy in the position of president of a
25 Federal Reserve bank, the first vice president of such Feder-

1 al reserve bank shall serve as a member of the Federal Advi2 sory Council until the date on which such vacancy is filled.” .

(b) The paragraph which prior to the amendment made

4 by subsection (a) of this section was the second paragraph of
5 section 12 of such Act (12 U.S.C. 262) is amended by insert6 ing "(b)” before "The” .


S e c . 203. The paragraph numbered "Fifth” of the

9 fourth paragraph of section 4 of the Federal Reserve Act (12
10 U.S.C. 341) is amended—

(1) in the second sentence, by striking out ", with


the approval of the Board of Governors of the Federal


Reserve System,” ; and


(2) by inserting after the second sentence the fol-


lowing: "The president shall be a bona fide resident of


the district involved.” .








S e c . 204. The Federal Reserve Act is amended by

21 adding the following section 2B:

"S e c . 2B. The Federal Reserve System shall utilize its

23 resources, and generally conduct its affairs, to foster the poli24 cies and purposes of the Employment Act of 1946 and the
25 Full Employment and Balanced Growth Act of 1978, par-

1 ticularly the Nation's effort to achieve a stabler price level,
2 and an improved economic structure.” .





S e c . 301. The amendments made by this Act shall take

6 effect on the date of the enactment of this Act, except that
7 the amendments made by section 101(e) and section 105
8 shall take effect five years after such date.

Section 1.

Short title:

Federal Reserve Modernization Act.

Section 101.

Abolishes requirement that member banks subscribe to capital
stock in the Federal Reserve, and eliminates all such stock.

Section 102.

Provides for membership of banks in Federal Reserve System,
instead of subscription of capital.

Section 103.

Provides mechanisms for issuance of certificates of member­
ship in the Federal Reserve System.

Section 104.

Provides for cancellation of membership in the Federal Reserve
if a national bank discontinues operations and a receiver is
appointed for such bank by the Comptroller of the Currency.

Section 105.

Abolishes dividends payable on capital stock of the Federal
Reserve banks.

Section 106.

Eliminates capital stock subscription requirements for statechartered banks applying for Federal Reserve membership, or
national banks converting to state charters.

Section 107.

Provides for the Board of Governors to levy an assessment on
the several Federal Reserve banks for payment of the Board's
annual expenses, in proportion to earnings of such banks in­
stead of in proportion to capital stock subscribed.

Section 108.

Eliminates stock subscription requirements for banks in the
United States dependencies and possessions.

Section 109.

Provides for retirement of Federal Reserve stock over a fiveyear period, except in the event of liquidation or insolvency
of a member bank, in which case the stock shall be retired
immediately. Provides for %% interest per month at time of
retirement, from date of payment of last dividend, thus effect­
ively maintaining present statutory dividends until and as
the stock is retired.

Section 201.

Abolished the Federal Open Market Committee and transfers all
its functions to the Board of Governors of the Federal Reserve

Section 202.

Provides that the presidents of the several Federal Reserve
banks shall comprise the membership of the Federal Advisory
Council, instead of the present system of electing members
from each Federal Reserve district.

Section 203.

Eliminates the present statutory power of the Board of Gover­
nors to disapprove appointment of a president of a Federal
Reserve district bank, and provides that the president of such
a bank must be a bona fide resident of that Federal Reserve

Section 204.

Provides that the Federal Reserve System shall be generally
guided by the purposes of the Full Employment Act of 1946 and
the Humphrey-Hawkins Act, "particularly the Nation's effort to
achieve a stabler price level and an improved economic structure."

Section 205.

Provides for immediate effectiveness, except for dividends and
pertinent rule-making authority of the Board of Governors, which
continue until retirement of all Federal Reserve bank stock (5 yrs)


Chairman M itch ell . Title I of the bill would eliminate the re­
quirement that a bank subscribe to the stock of the Federal Re­
serve Bank in its district as a prerequisite for becoming a member
of the Federal Reserve System. I am certain that Congressman
Reuss will elaborate further on this and other points and I will
simply give the highlights of each of the titles.
Title II would eliminate the Federal Open Market Committee.
All authority for the conduct of open-market operations would be
vested in the Board of Governors.
Finally, the bill would direct the Federal Reserve to conduct is
affairs in accordance with the policies of the Employment Act of
1946 and the Full Employment and Balanced Growth Act of 1978.
Let me digress just briefly from my prepared statement to indi­
cate that I think it is contemptible that the policy has never been
set where we would not implement the Full Employment and
Balanced Growth Act, considering the desperate straits of many
people in our Nation who have always faced massive unemploy­
ment and now are facing increased rates of unemployment. I think
it is very foolish to divide the bill up and attempt to implement one
part of it, that is to use monetary policy to stop inflation but ignore
or put on the back burner the issue of full employment.
Having vented my spleen on that, I will continue with the rest of
my statement. In summary, title I of H.R. 7001 would broaden the
participation of commercial banks in the housekeeping and organi­
zational activities of the Federal Reserve. Title II would assure that
open-market policy, which is the most crucial of all economic poli­
cies, will be voted on by only 100 percent pure public officials,
while continuing to give the presidents of the regional Reserve
Banks on-the-spot opportunity to influence its formulation.
[Chairman Mitchell's opening statement appears along with a
memorandum “Brief History of the Federal Open Market Commit­
tee/’ by Louis C. Gasper, Ph. D. The material follows:]


hearings on
H.R. 7001:


Good morning. Today we begin hearings on H.R. 7001, a bill to modernize the
Federal Reserve System. The bill was introduced last month by our esteemed full
Committee Chairman, Congressman Reuss, for himself, our Subcommittee colleague
Congressman Cavanaugh and me. Title I of the bill would eliminate the requirement that
a bank subscribe to the stock of the Federal Reserve Bank in its district as a prerequisite
to becoming a member of the Federal Reserve System. Banks currently holding stock
subscriptions would have their stock retired over a five-year period. Henceforth,
Federal Reserve member banks would be given membership certificates that cost nothing
and pay neither dividends nor interest. This change is long overdue, and, in view of
the extension of reserve requirements to all banks under PL 96-221, now is essential.
Title II would eliminate the Federal Open Market Committee. All authority for
the conduct of open market operations would be vested in the Board of Governors. The
presidents of the Reserve Banks, who now serve on the FOMC on a rotating basis, would
serve instead on a new Federal Advisory Council. The requirement, under present law,
that appointments of new Reserve Bank presidents be approved by the Board of Governors
would be repealed. As members of the newly constituted Federal Advisory Council, the
Reserve Bank presidents would participate in FOMC meetings as advisers —fearlessly,
independently and vigorously. They could review the Board's open market policy and
air any differences both before the FOMC and publicly, and separately or collectively
as they choose.
Finally, the bill would direct the Federal Reserve to conduct its affairs in
accordance with the policies of the Employment Act of 1946 and full Employment and
Balanced Growth Act of 1978.
In summary, Title I of H.R. 7001 would broaden the participation of commercial banks
in the housekeeping and organizational activities of the Federal Reserve. Title II
would assure that open market policy, which is the most crucial of all economic policies,
will be voted on by only 100 percent pure public officials, while continuing to give
the presidents of the regional Reserve Banks on the spot opportunity to influence its
author of
will hear

witnesses today are Chairman Henry Reuss of the Banking Committee, the
H.R. 7001, and Paul A. Volcker, Chairman of the Federal Reserve Board. We
from Chairman Reuss first and then from Chairman Volcker, and I will have
further to say before I recognize Chairman Volcker.


Manbers of the Subcommittee on Domestic Monetary Policy


Louis C. Gasper, Ph.D.


Brief History of the Federal Open Market Ccnmittee


May 15, 1980

In late 1921 and early 1922, the individual Federal Reserve banks
had made independent and uncoordinated purchases of government secu­
rities. These disrupted the market, so in May, 1922, a ccnmittee of
the five eastern banks was formed to make transactions jointly. About
a year later, the Board formally established the Open Market Investment
Caimittee for the Federal Reserve System, which had the same five mem­
bers and the same functions as the less formal conmittee. The System
Open Market Account was established in Decenber, 1923.
In March, 1930, the rest of the banks succeeded in having the
Ccnmittee reorganized and renamed. There was a representative frcm
each and every bank, and the name was the Open Market Policy Confer­
The Banking Act of 1933 established the Federal Open Market Com­
mittee in statute. Other than the change of name, the organization of
the Ccnmittee rattained the same as the Conference, except that the Act
specified that open market operations could be undertaken only as recarmended and approved by the Conmittee. But any bank could decline to
participate in such operations. What was avoided was Carter Glass* orig­
inal suggestion that the Conmittee also include the Board as members,
which would have involved an unwieldy nunfcer of participants. There
was opposition to the Glass proposal on the grounds that it invested
too much power in a Washington-rooted central bank.
The Banking Act of 1935 reorganized the Federal Open Market Com­
mittee along its present lines, except that it was not required that
the members elected by the several banks be either the President or
First Vice President of the respective banks; that provision was added
in 1942. Also in 1935, it was provided that no bank could decline to
engage in operations under the direction of the Ccnmittee. Thus, Carter
Glass* insistence that the Board of Governors be included was finally
agreed to, and the Board in fact makes up a majority of t e Ccnmittee.
At the same time, t e unwieldy enlargement of the Conmittee was avoided
hby the device of regional representation, rotating the membership
among all t banks except New York.
The Ccnmittee now consists of th : Members of the Board of Governors
of the Federal Reserve System— seven in number, appointed by the Presi­
dent with the advice and consent of the Senate— and five representatives
(either the president or first vice president) frcm the several Reserve
banks, as follows: New York; one frcm Cleveland and Chicago, alternating
annually; and one frcm each of the following three groups, rotating annually
in each group: Boston, Philadelphia, and Richmond; Atlanta, Dallas, and
St. Louis; Minneapolis, Kansas City, and San Francisco. As a rule, though
only the enumerated twelve menbers will vote, all Reserve bank presidents
(or vice presidents as alternates) will attend every Ccnmittee meeting.
These regular meetings are generally held on the third Tuesday of each
calendar month. Telephone conference meetings may be held in case of
The Chairman of the Board of Governors serves as Chairman of the
Ccnmittee and calls its meetings. The President of the New York Federal
Reserve Bank serves as Vice Chairman.


Chairman M it c h e l l . We are just delighted that the chairman of
the full committee, Chairman Henry S. Reuss, the author of H.R.
7001, is with us this morning. We shall hear from Chairman Reuss
now. And then, when Mr. Volcker arrives at about 11 o’clock, we
shall hear from him.
Chairman Reuss, we are happy to have you.

The C h a i r m a n . Thank you very much.
Mr. Chairman and members of your subcommittee, I appreciate
this opportunity to appear on behalf of H.R. 7001. I have a pre­
pared statement which I would like to submit for inclusion in the
record. My thought would then be to summarize.
Chairman M it c h e l l . Without objection, the prepared statement
will be inserted in the record.
The C h a i r m a n . Since the Federal Reserve was set up in 1913, it
has played a vital role. But like every other institution in our
society, it can stand revisiting from time to time, particularly to
see if it is fully equipped to withstand the challenges of the 1980’s,
which have so inauspiciously begun with the dose of unemploy­
ment and inflation with which we are currently beset.
I suggest that a revisiting is timely, because there are four major
tides running in our national consciousness that have some rela­
tionship to the Federal Reserve.
The first tide was that set loose by the passage of the truly
landmark Depository Institutions Act of just a few weeks ago,
which changed and improved the relationship of the Federal Re­
serve to its members. It used to be that membership in the Federal
Reserve, held by owning stock of up to 6 percent of your bank
capital in the Fed, had certain benefits and certain burdens.
The burden, of course, was that you held reserves, if you were a
member, which paid no interest and were thus a great liability,
whereas if you were a nonmember State bank you did not have to
hold those reserves.
The benefits were, of course, that you got free check clearing and
other services, and you got free access, within limits, to the dis­
count window.
Now—and I think to the credit of this committee and the Con­
gress, that has been changed. Now banks, whether they are mem­
bers or not, have access to the discount window, have access for a
fee to the services, and are required to post reserves whether they
are members or not. So that raises the question of whether it is
necessary for the Federal Reserve to glom on to 6 percent of a
bank's stock in surplus and them an uneconomic 6 percent rate of
interest in order to signify membership.
A second tide that is flowing—and it is a good one—has to do
with decentralization, decentralization of activities out of Washing­
ton into the 50 States, and decentralization, where possible, from
the public to the private sector. With that in mind, we need to ask
whether it really makes sense for the Washington Federal Reserve
Board of Governors to have the veto power, as it does, over whom


the decentralized 12 Federal district banks shall elect as their
It also causes us to inquire whether the present carpetbagger
system, under which Fed career employees roam the 50 States
until they find a snug harbor and then get elected president of that
district’s Federal Reserve bank really lives up to the highest princi­
ples of decentralization.
A third tide has to do with what is called accountability, simpli­
fying Government, making sure that Government officials are re­
sponsible for governmental acts. And there we have a superb
anomaly, in that while the Presidentially appointed and Senate
confirmed seven-person Board of Governors of the Fed has, as it
should have, control over the two lesser instruments of monetary
policy—the discount window and reserve requirements—they don’t
have control over the major instrument of monetary policy, openmarket policy.
Our forefathers in Congress in 1935, in an absent-minded
moment, gave five rotating presidents of the banker-selected dis­
trict Reserve banks an equal vote in this massive area of govern­
mental policy with the public officials of the Federal Reserve
Board. Not only did we do that, but we perpetrated a grievous
disproportion and discrimination in favor of, would you believe it,
the Cold Belt, which I belong to, and against the Sun Belt, which
such fine colleagues of ours as Congressmen Paul and Barnard
belong to.
This was utterly unintentional, but utterly sloppy and unforgiveable, and utterly eligible for prompt rectification.
The fourth tide that is flowing is the feeling on the part of
sensible people in Government that the old economics, which relied
solely on macroeconomic fiscal and monetary policies, doesn’t seem
to do the job any more. Sure, you need sensible fiscal and monetary
policies. But exclusive reliance on them leaves us with unaccepta­
ble unemployment and unacceptable inflation.
Those are the four tides and H.R. 7001 attempts to harness them
in a constructive way, in the following way:
The first tide is toward a final resolution of the membership
problem. Why should you compel banks to practice this charade,
this Japanese Kabuki play, of behaving like junior achievement
stockholders? Why should we compel them to take 3 percent of
their stock, of their capital which is so essential to their safety and
soundness and immobilize it in Federal Reserve stock?
The answer is, there is no reason under the Sun why that should
be, except it is one of those fusty, dusty relics of the past. H.R. 7001
says do away with it. Do away with it as soon as possible, and in
any event under 5 years. Take the billion dollars in stock, repay it
to the member banks, and then tell the banks generally that they
are welcome to join the Fed if they will simply sign a piece of
paper saying, we’d like to be members of the Fed.
That is the way to get democracy and that is the way to remove
the dollar sign. I personally want banks to feel free to join the Fed,
vote for directors, take part in the decentralized organization.
Don’t make it an exclusive club of trumped-up stockholders.
So the first section of the bill would provide for the phasing out
of the stockownership provision and for making membership truly


voluntary. You would not have to join. There would be no disincen­
tive to join.
The second tide, as I said, is the tide toward decentralization.
The present law gives the Washington Federal Reserve a wholly
unnecessary veto over the person whom the directors of the 12
district banks elect as their would-be president.
Furthermore, there is no requirement that the presidents be
residents of their districts. These are big districts. They cover, each
one of them, one-twelfth of the country. And I can’t believe that
the great Midwest district or the Southwest district or the South­
east district doesn't contain within its corners somebody capable of
representing that district. And why you have to import a carpet­
bagger from outside, I wouldn’t really know.
So I would think that the removal of the veto and the imposition
of the requirement that the presidents of the district banks need to
be residents in good faith of their districts would provide a recogni­
tion of the need to decentralize.
The third tide that is flowing, also a good one, is the tide of
accountability. Responsibility in government should be fixed. Let’s
not have any more of the old Army game in which the exact
position of the pea under the walnut shell is kept secret, as it is
now. The most important element of monetary policy, open market
policy which fixes interest rates, the quantity of money, whether
businesses survive or fail, whether men and women get jobs or are
fired, that should be exercised under our Constitution by officers of
the United States. That is what article II, section 2, clause 2 of our
Constitution says. Officers of the United States should do the major
business of the United States.
We have seven officers of the United States on the Open Market
Committee. They are the seven members of the Board of Governors
of the Federal Reserve. They are appointed by the President, con­
firmed by the Senate. It is utterly proper that they should exercise
this power, as they exercise the power of reserve requirements and
the power of the discount window.
But when it comes to the most important element of monetary
policy, having strained at the gnat of the reserve requirements and
at the discount window and saying those have got to be exercised
by officers of the United States, we swallow the camel of open
market policy and say, let private citizens from the 12 reserve
districts exercise that governmental power.
So far, I have referred just to commonsense and one’s horseback
instinct for good political science. However, the Supreme Court has
spoken on this in the most unequivocal terms in the great case of
Buckley v. Valeo. That is our friend former Senator James Buckley
and Francis Valeo, the Secretary of the Senate.
In the case of Buckley against Valeo, 424 U.S. 1, (1976), the Court
had before it an institution we all know, the first incarnation of
the Federal Election Commission. And that Federal Election Com­
mission as set up by Congress in another abstracted moment had
six voting members, two appointed by the President and confirmed
by the Senate. But then there were four more appointed by very
respectable people, the Speaker of the House and the President Pro
Tempore of the Senate.


This was brought before the Court on the ground that these
latter people weren't officers of the United States under the Consti­
tution, and only officers of the United States can exercise govern­
mental powers. And in order to be an officer of the United States,
you have to be appointed by the President and confirmed by the
Senate. And the Court said on this point without dissent—here I
am quoting from page 126:
The fair import of that “officers of the United States” clause of the Constitution is
that any appointee exercising significant authority pursuant to the laws of the
United States is a “officer of the United States” and must therefore be appointed in
the manner prescribed by section 2, clause 2 of article II.”

Now, if the work of the Federal Election Commission is govern­
mental in nature—and it is—how much more governmental in
nature is the life and death control of our money supply and the
monetary aggregates and interest rates exercised by open market
So while there are many ways of handling this problem, H.R.
7001 approaches it in what seems to me the crispest and simplest
way. It says that the actual voting and decisionmaking on open
market policy must be confined to officers of the United States,
namely the seven Governors of the Fed, the people who handle
discount policy and reserve requirement policy.
The presidents of the 12 regional banks, however, are urgently
desired by H.R. 7001 to be in there, and so it is provided that at
every Open Market Committee meeting not just 5, but all 12 of the
bank presidents be there, with a complete voice to give that region­
al input which is so essential to the formulation of a sensible
monetary policy.
In the course of divesting the Federal Reserve of this unconstitu­
tional feature, H.R. 7001 does another useful thing. For some
reason known but to God, Congress in 1935 said that the Open
Market Committee shall consist of, in addition to the seven Gover­
nors, five members at any one time from the district banks. And
who are the five? Well, the president of the New York bank, he is
on that committee year in and year out. Then there is an almost
equally favored status: The presidents of the Cleveland bank and
the Chicago bank are on that Open Market Committee every
second year. Andrthen the lesser breeds without the law: Boston,
Philadelphia, Richmond, Atlanta, Kansas City, St. Louis, Minne­
apolis, Dallas, and San Francisco, are allowed in under the tent
once every 3 years.
I defy anyone to justify that. Now, I happen to be a representa­
tive of a Cold Belt city. But I have not conducted a war between
the States because of that.
I think that all sections of the country need to participate on a
fair and even basis. And so I say to Philadelphia and Dallas and
the great districts which house Idaho and Richmond and Atlanta:
Be with me on this. I think we need equal treatment.
So, that is the third and greatest commandment; namely, put
governmental authority in the hands of governmental officers and,
in the process, remove the discrimination.
The fourth and last tide that I discern is the tide to do something
to get our economy out of this terrible slump. I will not for 1
minute agree that our friends the Germans and our friends the

Japanese are superpeople, that we can’t do what they have done in
keeping both unemployment and inflation under control; that we
can’t evolve what they have: a cooperative spirit between govern­
ment at all levels and business and industry and labor, who work
together for the common good.
And when I look at the Federal Reserve, composed of excellent
men and women, as it is, some 22,000 of them, including more than
500 economists, equipped with 70 jet planes and 60 prop planes,
and scores of marble halls, magnificent statuary, exquisite ameni­
ties, marvelous sophisticated machinery, the most stupendous eco­
nomic organization in the history of the world—when I look at the
way they are forced to spend their time, I say, let’s liberate them,
let’s put them to work on the real problems of the day.
Of course, they have got to attend to monetary policy. Of course,
they have got to do their check clearing. But don’t tell me that
those 500-plus economists and the thousands of trained economic
administrators don’t have a role to play in the productivity-enhanc­
ing, structure-reforming, reindustrializing, inflation-fighting mi­
croeconomic tasks that lie ahead.
A few exhibits: Exhibit C, a 17-page document showing the
number of publications produced by the Federal Reserve System in
just 1 year, last year—17 pages, just to list them. By the hundreds
of thousands and the millions they are distributed.
I am not against publications. They are fine. But I do suggest
that people in the Fed could, many of them, be used for better
purpose than the endless proliferation of articles about Mi, which
makes up so much of their daily grist. Not only do they fill the
journals of the 12 regional banks, as well as the Washington
bank—the Richmond Economic Review, the Philadelphia Business
Review, the New York Quarterly Review, the Dallas Review, the
St. Louis Review, the San Francisco Economic Review, the Minne­
apolis Quarterly Review, and so on with these endless duplicating
and overlapping articles; but then, having done this, they refry the
beans. They produce refritos. [Laughter.]
Take the case of exhibit A, for instance, concerning the vener­
able Federal Reserve Bank of New York. A few months ago they
produced a document entitled "Federal Reserve Readings on Infla­
tion.” Well, guess where the readings on inflation came from?
From the Federal Reserve publications that I have just referred to.
And then, as if that were not enough, the equally eminent Feder­
al Reserve Bank of Richmond, a few months later, it produces its
rump essays on inflation. Again, where do you suppose essays on
inflation appeared? In the Federal Reserve bulletin for the Federal
Reserve Bank of Richmond.
Now, whether this refrying of the beans is an effective use of the
taxpayer’s dollar, I leave to this subcommittee and to the General
Accounting Office. But I do know that the people who do this work
are admirable people, equipped with marvelous computers and
pleasant work places. And I really think they should assist the
governmental and private sector on an advisory basis in solving
some of the real economic problems.
Suppose, for example—and I could give endless examples—4
years ago, the Federal Reserve bank, particularly that of the Chica­

go district and the Detroit branch, had taken some of their top
economists and said:
Look. Stop writing that article on Mx for this month's bulletin. We have already
had 40 such articles. Go on up to Detroit, put yourself at the service of Father
Hesburgh or whoever has been sent up there to see what can be done about
automobiles, and come through with a report.

Well, those economists could have tabled before the Congress, I
am sure, a splendid report, showing that Detroit was on a collision
course, that the OPEC price increases had made compact auto­
mobiles a necessity, and that for us to sit by and let the Germans
and the Japanese, the French and the Italians make all the transverse-engine, front-wheel drive, 35-mile-per-gallon compacts was
madness. And they would have said so and recommended certain
things in the financial field, certain things in the labor field, cer­
tain things in the regulatory field, which would have given Con­
gress a coherent program. And then we would not have been in the
ghoulish role of trying to do something about the gasping Chrysler
Corp., because we could have been making good cars in our own
The same thing in steel and semiconductors and railroads and
consumer electronics and mass transit equipment, in textiles and
apparel and shoes, in so many areas of our American economic
society, where innovation, productivity, competitiveness, structural
reform is so desperately needed.
So, without changing the law in any way, this last mandate of
H.R. 7001 simply beseeches the Fed to get with it, to take some of
the people off of writing these learned disputations on how many
angels can dance on the head of a monetary pin, and instead get
with the real microeconomic problems of our day.
As Chairman Volcker, whose usual excellent testimony I have
had an opportunity to look at just now, and who will be with you
in a few minutes, will testify—well, I guess what his testimony
amounts to is: “that now is not the time.”
Well, I end with the thought that if you are going to say that,
you are never going to do anything.
I would say now is the time for hardheaded, introspective inquiry
by this great subcommittee. And I am very honored, Mr. Chair­
man, that you called this early session on this legislation and the
attendance record of your subcommittee does my heart proud.
Thank you very much.
[Chairman Reuss' prepared statement entitled “Modernizing the
Federal Reserve System” follows: the exhibits referred to at the
end of the statement A and B are retained in the subcommittee file;
exhibit C is attached to the statement.]

MAY 15, 1980

I deeply appreciate this opportunity to testify on
behalf of H.R. 7001, sponsored by the Gentleman from Maryland
(Mr. Mitchell), the Gentleman from Nebraska (Mr. Cavanaugh),
and myself.
H.R. 7001 provides for the modernization of the
Federal Reserve System.

Since its foundation in 1913, the

independent Federal Reserve System has played a vital role in
our democracy.

But like other institutions, it needs re­

examination to determine whether it is fully equipped to carry
out the tasks of t.he 1980s.
Revisiting the Federal Reserve is appropriate in the
light of four major tides that are now flowing in the affairs
of our nation.
The first tide was that set in motion by the enactment
into law on March 30, 1980, of the Depository Institutions
Deregulation and Monetary Control Act.

This law imposes

mandatory reserve requirements on all depository institutions,
charges fees for various Federal Reserve services, and makes
available the discount window, whether or not a given
institution is a member of the Federal Reserve.

The Act thus removes both the burdens and benefits
formerly imposed.

Accordingly, membership in the Fed should

be truly voluntary.
But present law still requires that each member bank
must hold stock in its district Reserve Bank of 3 percent of
its paid-in capital stock and surplus, for which it is entitled
to a 6 percent return.

By mandating an uneconomic return,

this now acts as an unnecessary disincentive to membership.
The second tide is the general trend toward greater
decentralization of functions out of Washington to the rest of
the country, and from the government to the non-governmental

Existing law gives the 7-person Washington Board of

Governors a veto over the choice of the 12 district Reserve
Bank Presidents.

The veto is anachronistic.

It should be

A third tide has to do with the fixing of clear
governmental responsibility for governmental acts.


present law, the Federal Open Market Committee functions of
the Federal Reserve System are carried out in part by non­
governmental banker-selected private citizens —

the district

bank presidents.
Monetary policy is a function of government.
be carried out by

"Officers of the United States” , as common

sense and the Constitution provide.

It should

The fourth tide is the increasing realization that
inflation and unemployment cannot be mastered by exclusive
reliance on fiscal and monetary macroeconomic policies,
important though those are.

Attention to structure, to

reindustrialization, to productivity, is urgently required.
That task must be carried out by every level of government
from the White House down, and by the private as well as the
public sector.

The Federal Reserve, with its nationwide

blend of public and private economic and administrative
expertness, should be encouraged to participate.
H. R. 7001 attempts to harness these four tides.
It restructures the Federal Reserve so as to facilitate
voluntary membership in the System without weakening the dual
federal-state banking system;

it decentralizes the 12 Federal

Reserve district banks by removing Washington's present veto
over their Presidents;

it places the governmental power over

monetary policy in government officers, appointed by the
President and confirmed by the Senate;

and it involves the

Federal Reserve System, on an advisory basis, with structural
reform, reindustrialization, and productivity.
H.R. 7001 has four main provisions:
It Removes the Disincentive to Federal Reserve Membership
by Eliminating the Stock Subscription Requirement
Under existing law, member banks are required to hold
3 percent of their surplus and capital in the stock of their
district Federal Reserve Bank.
this paid-in capital stock.

 63-971 0 - 8

0 - 3

Member banks earn 6 percent on

Now that the Depository Institutions Deregulation and
Monetary Control Act of 1980 in effect treats member and non­
member banks alike —

with respect to the holding of reserves,

with respect to availability of the discount window, and with
respect to obtaining Federal Reserve services for a compensatory
fee —

the stock subscription requirement is an anachronism.
Currently, the 12 Federal Reserve Banks have something

more than $1 billion in member bank capital stock.

In 1979,

this generated a return to member banks, at 6 percent, of
$67 million.
A 6 percent rate of return is clearly inadequate, and
thus constitutes a penalty.

Repayment of member banks’ capital

by the Fed would also improve their frequently inadequate
capital ratios.
H.R. 7001 provides for retiring the existing stock
subscription to all eligible institutions which wish to
participate in the important functions of the Federal Reserve

Membership should involve neither a premium nor a

Section 109 of H.R. 7001 provides for the retirement
of capital stock in no longer than 5 years "consistent with
the orderly operation of the Federal budget and the monetary
control policies of the Board of Governors".

With the capital

stock repaid, membership would be open to any eligible
institution which signifies its desire to remain a member.

I see no reason why the repayment of the capital stock could
not be accomplished in considerably under the 5-year proposed

Specifically, in September, 1981, banking institutions

must start paying for Federal Reserve services, under the
Depository Institutions Deregulation and Monetary Control Act
of 1980.

September, 1981, would thus be a good target date

for the repayment to the banks of their capital stock.
This provision of H.R. 7001 would have no effect on the
dual federal-state banking system.

Chartering and examination

of state banks, member and non-member alike, would reside in
the state regulatory agencies, with a back-up from the Federal
Deposit Insurance Corporation.

The Federal Reserve, to the

extent that it feels it needs to in order to inform its monetary
policies, can piggy-back on these primary examining authorities.

It Decentralizes the 12 Reserve District Banks by
Removing Washington*s Veto Over Their Presidents' Appointment
Under present law, the Washington Board of Governors
may veto the district-selected choice for district Bank

A decent respect for a decentralized system requires

the elimination of this veto.
To further bring about decentralization, H.R. 7001
requires that each President be a bona fide resident of the

This will prevent Washington's saddling the 12

district Banks with carpetbagger Presidents.

With their increased authority, the Presidents will
join together to form the reconstituted Federal Advisory Council.
The present membership of the Federal Advisory Council consists
of one representative from each Federal Reserve district, selected
annually by the Board of Directors of each bank, and is usually
a prominent banker in the district.
serve only for a brief period.

These bankers typically

The Council now meets quarterly.

Under H.R. 7001, the reconstituted Council, composed
of the Bank Presidents, will meet monthly, along with the Board,
in Washington.

The Presidents serve for at least 5 years, and

may be reappointed.

With this continuity, they could give to

the Board of Governors the regional information on monetary
credit and general economic conditions that is so urgently
needed on a continuing basis.
In all other respects, the Presidents will continue
their present status and duties, including their 5-year term.
Open Market Monetary Policy is a Governmental Function,
and Should be Exercised only by “Officers of the United States”
Presently, the Federal Open Market Committee is composed
of the 7 members of the Washington Board of Governors, appointed
by the President and confirmed by the Senate, and 5 rotating
Presidents, or first vice-presidents, of the 12 regional banks.
No power of government is more truly governmental than
the Open Market decisions of the Federal Reserve.
even five-twelfths of it —

This power —

should not be exercised by private

citizens appointed by their banker constituencies to the top
offices in the 12 Federal Reserve District Banks.

As pointed out above, the 7 "Officers of the United States",
who are Presidentially appointed and Senate confirmed —
Federal Reserve Board of Governors —


are responsible for the

two lesser elements of monetary policy, reserve requirements
and the discount window.
Should we legislators not take another look at what we
did back in 1935 when we set up the Open Market Committee?


have knocked ourselves out, and properly so, in seeing to it
that two relatively less important functions of monetary policy —
the discount window and reserve requirements —

are in the hands

of "Officers of the United States", Presidentially-appointed and
But having strained at these two gnats, we have swallowed
a monstrous camel.

We have permitted the carrying out of the

most important element of monetary policy —

Open Market operations

by a motley body of governmental and non-governmental persons.
Our 1935 sins are compounded by the ridiculous way in
which we set up the 5 rotating Federal Reserve Bank district
members on the Federal Open Market Committee.

Membership under

present law consists of one representative, all the time, of the
Federal Reserve Bank of New York;

one representative, every

second year, of the Federal Reserve Banks of Cleveland and
Chicago? and one representative every third year of the "lesser
breeds without the law" —

the Federal Reserve Banks of Boston,

Philadelphia, Richmond, Atlanta, Dallas, St. Louis, Minneapolis,
Kanasas City and San Francisco.

I happen to be a member of the Cold Belt NortheastMidwest Caucus, and I am mightily sympathetic to the needs of
New York, Cleveland

and Chicago.

But I cannot support a

discrimination which gives these three districts outsized
representation, and makes the nine other districts subsist on
crumbs from the table.

I await hearing anyone defend this

nonsensical disproportion.
H.R. 7001 gives the Washington Board of Governors
undiluted responsibility for the governmental act of Open
Market operations, just as it already has this responsibility
for reserve requirements and the discount window.

The Board

of Governors needs, to be sure, the advisory voice of the
District Bank Presidents.

This would be accomplished by the

provision of H.R. 7001 already referred to —

blanketing the

12 District Federal Reserve Bank Presidents into a reconstituted
Federal Advisory Council, which would sit with the Board of
Governors monthly.

These monthly meetings could be timed to

coincide with the monthly focusing of the Federal Reserve Board
on Open Market policy —

a monthly schedule which has been

observed for many years.
H.R. 7001, in consolidating responsibility for Open
Market policy in the Board of Governors, is not only in accord
with sensible governmental policy.

It is also, I believe, in

accord with the mandate of the United States Constitution,.
Article II, Section 2, Clause 2, of the Constitution provides
that "Officers of the United States" must be appointed by the
President, by and with the advice and consent of the Senate.

Clause 2 further provides that Congress may vest the appointment
of such inferior officers as it deems proper in the President
alone, in the courts, or in the heads of departments.
Those who make the monetary policy of the United States
are clearly "Officers of the United States".
governmental function is hard to imagine.

A more typical

They must thus be

appointed by the President and confirmed by the Senate, as is
the case with members of the Board of Governors.
This issue was fully considered by the Supreme Court
in the case of Buckley v. Valeo, 424 U.S. 1 (1975).

In that

case the six voting members of the Federal Elections Commission —
two members appointed by the President, two by the President
pro tempore of the Senate, two by the Speaker of the House —
were held by the Court to be "Officers of the United States",
and the Federal Elections Commission was thus held to violate
the "Officers of the United States" clause because all of them
were not Presidentially appointed.

The Court said:

"We think its fair import is that any
appointee exercising significant authority
pursuant to the laws of the United States
is an "Officer of the United States," and
must, therefore, be appointed in the manner
prescribed by Section 2, cl. 2, of that
424 U.S., at 126.
If the members of the Federal Elections Commission,
despite the laying on of hands by the Speaker of the House
and the President pro tempore of the Senate, are unconstitutional,
the privately selected 5 rotating members of the Open Market
Committee are even more unconstitutional.

We have made a mistake, practical and constitutional

We should set it right.

In so doing, incidentally, we

will be removing the present New York-Cleveland-Chicago
Involving the Federal Reserve System with StructureReforming, Productivity-Enhancing, R e mdu stnalizing, InflationFighting Microeconomics
The fourth major provision of H.R. 7001 is the direction
to the Federal Reserve System to "utilize its resources, and
generally conduct its affairs" to carry out the Employment Act
of 1946, and the Full Employment and Balanced Growth Act of
1978, "particularly the Nation's effort to achieve a stabler
price level, and an improved economic structure."
The Federal Reserve System is the most stupendous
economic organization in the history of mankind.
The economic centers of the Federal-Reserve are
strategically located throughout the country.

The 12 Federal

Reserve District Banks are situated in Boston, New York,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis,
Minneapolis, Kansas City, Dallas, and San Francisco.


25 branches are placed in Buffalo, Cincinnati, Pittsburgh,
Baltimore, Charlotte, Birmingham, Jacksonville, Nashville,
New Orleans, Miami, Detroit, Little Rock, Louisville, Memphis,
Helena, Denver, Oklahoma City, Omaha, Houston, San Antonio,
El Paso, Los Angeles, Portland, Salt Lake City, and Seattle.

The 11 regional check processing centers are situated
in Columbus, Ohio; Des Moines, Iowa; Indianapolis, Indiana;
Milwaukee, Wisconsin;

Utica, New York;

Cranford, New Jersey;

Jericho, New York; Charleston, West Virginia; Columbia,
South Carolina; Windsor Locks, Connecticut; and Lewiston,
In Washington and in these decentralized economic
centers, the Federal Reserve marshalls some 22,000 employees,
of whom at least 500 are economists, and many more are skilled
economic administrators.

They are supported by splendid

sophisticated machinery, succulent amenities.

These great physical and staff resources of the
Federal Reserve System should work cooperatively with the rest
of America —

the White House, the departments and independent

agencies, state and local governments, and preeminently with
the private sector —


the end that the structural, the

productivity, the industrial, the inflationary problems of
our economy may be alleviated.

What is needed is simply a

determination to pitch in and help with the expertness which
the Federal Reserve System disposes.
No doubt some will argue that the 22,000 employees of
the Federal Reserve are fully occupied, and cannot spare the
time to pitch in with the battle for economic improvement which
must become the major business of us all.
I have not made —

and doubt that anybody has made —

a time-motion study of the work product of these 2 2, 00 0 employees.
I do know that they are intelligent and dedicated men and women.

But I must say that an inordinate amount of their
time seems to be spent writing articles, often rethreshing
the same wheat.

They appear in the 12 periodical journals

of the 12 district banks —

The Richmond Economic Review,

The Philadelphia Business Review, The New York Quarterly Review,
The Dallas Review, The St. Louis Review, The San Francisco
Economic Review, The Minneapolis Quarterly Review, and so on.
Then, to make sure that the grist is ground once again, these
articles find themselves reprinted in still other Federal
Reserve publications.

For example, see Federal Reserve Bank

of New York, Readings on Inflation, (Ex. A) 1979, which
reprints a score or more of articles by Federal Reserve
economists in Federal Reserve publications.

Not to be outdone,

along comes the Federal Reserve Bank of Richmond a few


later, with Essays on Inflation, (Ex. B) 1980, reprinting another
pile of articles by Federal Reserve economists in Federal Reserve

Ex. C takes 17 pages just to list the Federal

Reserve output of publications for one year, 1979.
With our steel industry sinking, our automobile industry
in shambles, our railroads decaying, our hi*gh-technology from
consumer electronics to mass transit disappearing overseas,
surely the Fed can ease up on publishing, lest we all perish!
I commend H.R. 7001 to your sympathetic attention.

(Exhibits "A" and "B" are retained in the subommittee file;
exhibit "C" follows:)





Monthly Federal Reserve Bulletin
24,004 @ $20. per year
Quarterly Federal Reserve Chartbook
4,188 (varies w/each
Anually - Historical Chart Book
Z.ll Special Studies
K.9.1. Bulletin reprints
K.7 IFDP (International Finance Discussion Papers)
K.15 Staff Economic Studies
2,640 @ $2. annually
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Improving the Monetary Aggregates: Staff Papers
1,088 @ $4. annually
425 @ $12.
Annual Statistical Digest 1974-78
1979 Annual Report
Federal Reserve Glossary
Structure Pamphlets - #1
Public Information Materials of the Federal
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title, with description of audience and charge
The Federal Reserve System — Purposes and Functions
Annual Report
Federal Reserve Bulletin
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Federal Reserve Chart Book
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Capital Market Developments
Selected Interest and Exchange Rates - Weekly
Series of Charts
The Federal Reserve Act
Regulations of the Board of Governors of
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Published Interpretations of the Board of Governors
Industrial Production: 1976 Edition
Bank Credit-Card and Check-Credit Plans
Survey of Changes in Family Finances
Report of the Joint Treasury-Federal Reserve Study of
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Joint Treasury-Federal Reserve Study of the Government
Securities Market - Staff Studies
Open Market Policies and Operating Procedures — Staff Studies
Reappraisal of the Federal Discount Mechanism
The Econometrics of Price Determination Conference
Federal Reserve Staff Study: Ways to Moderate Fluctuations in Housing
Lending Functions of the Federal Reserve Banks
Improving the Monetary Aggregates: Report of the Advisory Committee
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Selected Interest Rates
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Federal Reserve System Memorandum on Exchange Charges
Finance Companies
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Loan Commitments at Selected Large Commercial Banks
Loans and Investments at all Commercial Banks
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Major Nondeposit Funds of Commercial Banks
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of Deposit
Monthly Report of Condition for U.S. Agencies, Branches, and Domestic
Branching Subsidiaries of Foreign Banks.
Selected Interest Rates
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Quarterly Releases
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Finance Rates and Other Terms on Selected Types of Consumer Installment
Credit Extended by Major Finance Companies
Flow of Funds: Seasonally adjusted and unadjusted
Geographical Distribution of Assets and Liabilities of Major Foreign
Branches of U.S. Banks.
Interest Rates on Selected Consumer Installment Loans at Reporting
Commercial Banks
Survey of Terms of Bank Lending
Semiannual Releases
Assets and Liabilities of Commercial Banks, by Class of Bank
Check Collection Services — Federal Reserve System
List of OTC Margin Stocks
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Mutual Savings Banks— Reports of Call (Joint Release of
The Federal Deposit Insurance Corporation, the Board of Governors
of the Federal Reserve System, and Office of the Comptroller of
the Currency.
Annual Releases
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that Maintain Clearing Accounts with Federal Reserve Banks
(Supplements Issued Monthly)


Economic Review
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Annual Statement
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260,000 annually
440 (monthly)
2.300 Each issue
2.300 "

Economic Review
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Functional Directory
Year-end Bank Conditions
Consumer Installment Credit at Commercial Banks
10th District Member Bank & Weekly Report of
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and Challenges
Farm Real Estate Values: What's Happening and Why
Energy and American Agriculture
Unemployment Insurance: Programs, Procedures, & Problems
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Issues in Monetary Policy
Water Resources - Development and Use
Western Water Resources: Coming Problems and the Policy Alternatives



The Rule of 78's
How the new Equal Credit Opportunity Act Affects You
The Fair Debt Collection Practices Act
Your Credit Rating
How to Establish and Use Credit
Option for Savers
How to file a Consumer Credit Complaint
If you use a Credit Card
Fair Credit Billing
The Equal Credit Opportunity Act and Women
The Dollar of the Future
The Equal Credit Opportunity Act and ...
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Truth in Leasing
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Consumer Handbook to Credit Protection Laws
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The Mystery of Economic. Growth
Economic Man Vs Social Man and Other Talks




1979 Annual Report


Business Review
May/June 1979
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September/ October 1979
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January/February 1980
March/April 1980
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No. 37
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No. 46
Fed Forums

25 Qfl0
fr i l :
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5 , 000


Consumer Education Catalog
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Prison Art Project: Recent Works
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17 0


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63-971 0 - 8 0 - 4






Automated Clearing House Services
1979 Annual Report
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Functional Cost Analysis 1978 Average Banks
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4 3 ,9 1 8
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2 9 ,2 1 6
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Economic Review
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1,845 - District



Chairman M i t c h e l l . Thank you very much for your testimony,
Chairman Reuss.
As usual, you are very informative and enlightening. And as
usual, your discussion is threaded throughout with these captivat­
ing words and phrases that you use so well, “carpetbaggers,” “the
pea under the walnut shell,” and then to move into Kipling, “lesser
breeds without the law,” was a true delight. [Laughter.]
We thank you for enhancing your testimony with those charm­
ing and delightful words and phrases.
As a person who was honored to introduce this bill along with
the chairman and Mr. Cavanaugh, I will forego questioning. I think
you know where my heart is on this issue. However, there is one
minor thing. You refer to several documents, and I assume you
would want those submitted for the record.
The C h a ir m a n . Yes. I would appreciate that, Mr. Chairman,
though I specifically ask that they not be printed, because I think
the Government Printing Office has already suffered enough
through having printed them the first time in the magazines, for
the second time in the New York publication, for the third time in
the Richmond publication. But I think they should remain in the
Chairman M i t c h e l l . The Chair was going to recommend that
the slimmer document, exhibit C, might be printed in the record,
but those two other tomes could simply be referred to by title.
[The document referred to by Chairman Mitchell, exhibit C, is
attached to Chairman Reuss’ prepared statement.]
Chairman M i t c h e l l . Congressman Neal.
Mr. N e a l . Thank y ou , Mr. Chairman.
Thank you, Mr. Chairman, for advising us on these problems in
your usual eloquent way. I have not had a chance to see your
testimony in advance, but I am sure I will find it interesting and
I was just wondering though if we might not be able to solve the
problem you describe concerning the selection of this “motley
body” by requiring that they individually be confirmed by the
Senate, thus making them officers of the Government officially?
The C h a ir m a n . May I say to the gentleman from North Caro­
lina, there is nothing wrong constitutionally with his idea. Indeed,


in earlier years, I had the same thought. It does accomplish my
central purpose of having governmental policies decided by govern­
mental people.
The only things to be said against it are, however, these: One, a
19-person board is pretty big, pretty big. That diffuses things quite
a bit.
Second, if one believes in the decentralization of the Federal
Reserve banks, I would have doubts about subjecting their presi­
dents to Senate confirmation.
But let me be very clear: As opposed to the present situation, I
would enthusiastically support the gentleman's suggestion. If that
is what the subcommittee in its wisdom determines to do, I will
fully support it.
I would have to point out, however, that if it is thought—and I
am sure you don't—that you are going to get Mr. Volcker's vote by
this variation, no, you won't, because he was asked about this in
the Senate, back in 1975. When asked, “Why don't we make this
legal by having the President appoint and the Senate confirm the
district bank presidents," he said, “I am not prepared to support
that provision. It runs at cross-purposes to other procedures speci­
fied in the present law and thus could imply a desire for other
structural changes."
Also, I know of no precedent for senatorial confirmation of such
So, you wouldn't get Mr. Paul's vote, but that would not mean
that maybe you would not want to go that way.
Mr. N e a l . A s I understand, the purpose of all of this, it is to
improve the nature of our economy, to get a broader perspective on
questions before the Federal Reserve, with the ultimate goal in
mind of making this a more productive, innovative, vital, and
dynamic economy.
The C h a ir m a n . Precisely.
M r . N e a l . I w ou ld a ssu m e th a t is th e rea l pu rpose for our
distin gu ish ed ch a irm a n in tro d u cin g th is leg isla tio n .

I wonder if the chairman would agree with me that we could
achieve much of what he seeks by passing legislation which would
require that the Federal Reserve, in an orderly fashion, bring down
the rate of growth in the money supply over a period of years until
it approached the normal or potential rate of growth of our econo­
my, and then essentially leave it there so that we would have a
stable, vital economy from now on, instead of us constantly going
through these wild swings that we have become so addicted to over
the last several years and through which we are going again right
now, it looks like, unless the Fed adjusts to a more stable sort of
Then, it seems to me, Mr. Chairman, if we were to adopt the
kind of policy I have suggested—which I believe, strongly, would go
a long way toward guaranteeing a very vital, healthy economy for
many, many years to come—we would not have to worry so much
about the personalities of the Open Market Committee. Its job
would essentially be to follow the mandate of Congress.
The C h a ir m a n . The gentleman has been a real leader, and I
have followed his leadership on the notion, that he has just so well
expressed, that our country's monetary policy will be best served if


we bring it down into a range roughly corresponding to the in­
creases in productivity of the economy and then keep it there.
Such a monetary policy, which Mr. Neal and I espouse, could in
all frankness be carried out by an educated horse. If we had that, I
suppose it would not matter very much who was doing it as long as
he had to do it—or she had to do it.
However, I would add this. You can have a monetary policy in
this country administered, according to your rule, by an Albert
Schweitzer. You can have a fiscal policy of a truly balanced budget
administered by an Albert Einstein. And you still are going to have
an economy which does not deliver the goods because of structural
defects, because of lack of productivity and investment, because of
lack of competitiveness.
I am sure, Mr. Neal, that you do not disagree with what I am
In addition to fiscal and monetary policies, you have got to have
microeconomic policies that make sense. And whether or not the
day of grace has come for the Fed and they are going to follow the
Neal secular monetary policy that you have just described, we need
all the help we can get from the public sector and the private
sector and from independent agencies like the Federal Reserve to
see that we have microeconomic policies that are well thought out,
sensible, and will conduce toward to just the economic goal with
which you started your statement.
Mr. N e a l . Thank you, Mr. Chairman.
Chairman M i t c h e l l . Before recognizing the distinguished minor­
ity leader on the subcommittee, I want to point out that with
reference to Congressman Neal's statement and your response—we
have an absolutely appalling situation in the first 4 months of
1980, where year over year, Mib growth rose to the height of
approximately 9 percent, well above the target that the Fed had
established, and then plummeted down below 5 percent, with nega­
tive growth in recent months. It is that kind of gyration that you
were referring to, Mr. Neal, and you referred Chairman Reuss to,
which I find inexcusable.
I don’t want to stay on my soapbox too long this morning, but
Congress legislated that the Federal Reserve set monetary growth
targets and announce them to us. Year after year they have done
that, and year after year they have violated their own targets.
Now, this development in the first 4 months of 1980, portends a
significant new danger for our economy.
Now, having finished my little sermonette, I recognize Mr.
Hansen for 5 minutes.
Mr. H a n s e n . Thank you, Mr. Chairman.
And, Mr. Chairman, it is good to have you in the hot seat. I have
been very interested in your proposed legislation, Mr. Chairman,
because I think it addresses something that we need to sink our
teeth into—modernization of the Fed—whatever the word is, I
think that it needs to be more responsive. And I think, if I inter­
pret it right, that is what you are trying to accomplish.
I sent a couple of people to New York not long ago, when we
were having these high interest rate problems, to see if the New
York Fed, as well as some of the other Fed districts, really under­


stood what the plight of the more rural areas were since New York
has such huge influence in the Federal Reserve system.
I found that they are so preoccupied apparently with internation­
al situations and loans and concerns that they have put on the
back burner, almost to a point of nonrecognition, the concerns that
were expressed to them, but really not taken up, of upstate New
York, which is more rural than, of course, Manhattan Island.
I think that there is a real problem. I would like to ask you if
your legislation would maybe address itself to such things as break­
ing up this sheltered bureaucracy that seems to be building, where
no difference of opinion is tolerated?
Such a thing happened recently in Atlanta, where the Fed decid­
ed, because a person had a different economic philosophy, that
apparently they would not take him as the president of that bank.
I am wondering if your legislation would address itself to this
type of thing?
The C h a ir m a n . That is precisely what it does, Congressman
I believe in decentralization. I think that the original concept of
the Fed as a federation representing these various great regions of
the country was a good one. But as it is now, with the veto power
existing in the Fed, and with the power of the Washington Fed to
cut out the salary of some fellow out in Idaho or down in Texas
that rubs against the grain, you have a serious impairment of that
local control.
I have nothing but praise for the civil service bureaucracy of the
Fed. They are fine, devoted men and women. But we should not
allow that to interfere with the principal of decentralization. The
Fed likes to put one of its own bureaucrats in charge of what is
essentially a regional bank, and they do that by their veto power.
And they should not do that.
We should have, in all of the 12 great regions of the country, a
native son or daughter, elected by the community out there. And if
he or she makes a mistake, well, that is fine, let them make a
mistake. Washington should not try to second-guess them.
I completely agree vith you. I think you are on sound ground.
Mr. H a n s e n . I think we have made certain strides in our sub­
committee and in the full committee in making changes, trying to
alter the term of the Fed Chairman, the securities draw certain
things that have helped streamline and upgrade the Fed.
I do think that we need to address this, but I have a concern on
the other side for what you are attempting to accomplish, Mr.
Chairman. And that is whether any effort is being directed here to
make the Fed more responsive to political pressure—I don't mean
Democrat or Republican—but political pressure in the country. Are
you heading toward some kind of a national economic plan or
planning type program or credit allocation type operation or any­
thing like this? Is this envisioned in your legislation?
The C h a ir m a n . N o ; it is not. That is not to say that there might
not be other bills with other purposes. But that is not the purpose
of this bill.
Mr. H a n s e n . My time is up. Thank you very much, Mr. Chair­
Chairman M i t c h e l l . Mr. Barnard is recognized for 5 minutes.


Mr. B a r n a r d . Thank you, Mr. Chairman. I certainly commend
you for bringing this very important subject up at this time. I
think it is something that does need consideration, and I am
pleased it has been brought up at this particular time.
Like other members of the committee, I believe there is a lot
about this bill that we really need to study. I see that you have
given it deep thought and consideration, and I would certainly
respect that.
Mr. Chairman, would you say that eliminating the stockownership in the Fed is going to encourage more membership in the Fed?
The C h a ir m a n . I believe so. I believe so because right now stockownership requires any bank to take 6 percent of its capital stock
and surplus—3 percent actually paid in—and segregate that as
Federal Reserve stock on which it gets 6-percent interest. Well,
banks quite reasonably like to get the prime rate or something like
it, so this is a real economic disincentive to membership.
Furthermore, setting aside this much of their capital—and bank
capital is hard to get—means that their capital/loan ratio looks
worse and worse, and when they appear before our friends at the
regulatory agencies, they get criticized for that ratio.
So, it is a disincentive, and I would say let there be neither an
incentive nor a disincentive. Let’s make membership entirely a
voluntary thing.
Mr. B a r n a r d . How do you think that will affect the dual bank­
ing system?
The C h a ir m a n . Not in any way—though this is a very important
point. And I subscribe to the dual banking system.
Incidentally, on just this point I have been in touch with the
Association of State Bank Supervisors. Though a bank would elect
to become a member of the Fed by signing a membership card, as
today a bank can elect membership by buying the stock, in my
judgment the State regulatory agency should have the exclusive
jurisdiction to charter and also to examine.
Mr. B a r n a r d . It does not have that now.
The C h a ir m a n . That is—what you say is correct. I want to go on
to finish my statement.
There needs to be, of course, a backup by the Federal Deposit
Insurance Corporation which, after all, wants to make sure that a
State banking agency has done a thorough job. And that dual
feature is not touched by this bill.
However, as far as I am concerned, I would like to see the
Federal Reserve get out of the examining business. It is on its way
out, and I would like to see it complete that exit.
Now, the Federal Reserve argues—and you will hear Chairman
Volcker argue this morning—that it needs this examining power,
this second- and third-guessing power, after the State examiner has
been there and the FDIC has been there. The Fed would like to go
there too, because in some mysterious way it gives it the flavor of
banking so that it can carry on a better monetary policy.
Well, I am always disposed to give the Federal Reserve the
benefit of the doubt. But what I say is: if they need the flavor, let
them piggyback on the FDIC and send a flavor gatherer around—
no harm in that—if they think they need it. But let us not have a


messy system whereby the Fed in effect duplicates what the State
Mr. Barnard. I hate to jump from one subject to the next, but
this time does flee so fast. I certainly appreciate what you had to
say about regional representation in this very august body, and I
feel that the input of the various presidents would have some
impact. Of course, we don't have a regional representation on the
Board of Governors, do we?
The Chairman. No. The law, as you know, simply provides that
of the seven, no two can be from the same district, and sometimes
that is observed in a Pickwickian sense. There have been quick
moves around in hotel rooms in order to qualify somebody.
Mr. Barnard. One further question. How do you feel that this
legislation affects the independence of the Fed, which we have
debated in the past—I am not going to say we have agreed on. How
do you relate this bill to the independence of the Fed? Would it
affect the Fed's independence?
The Chairman. I believe in the independence of the Federal
Reserve, and this bill confirms and ratifies that independence. It
doesn't affect it in any way, and I would not want to. As I say,
other bills may want to do something about that. Not this bill.
Mr. Barnard. And with the terms of office of the members, I
would guess that that would transcend any loyalty to any adminis­
tration wouldn't you say?
The Chairman. The 14-year term is a good thing. I have not
wanted to change that.
Mr. Barnard. Is my time expired? Let me do this before I sign
I want to take this opportunity to congratulate you and to con­
gratulate the distinguished chairman of our subcommittee on an
outstanding victory at the polls yesterday, which further identifies
him as our stalwart leader. I understand he got 80 percent of the
Chairman M itchell. I thank the gentleman for his congratula­
tions; however, I would caution members not to make any quotes
from P. T. Barnum or other persons about the number of people,
nonthinking people, who exist in the world.
Thank you, Mr. Reuss. We would be delighted if you could join
the subcommittee for the balance of the hearing. I will at this
point, with the cooperation of the members of the subcommittee,
hold up on further questions to the Chairman and ask Mr. Volcker
if he could come and give his testimony at this time.
We welcome you, Mr. Volcker. Thank you for taking the time to
be here. In all fairness, I have made some statements before you
arrived which were not related directly to the bill. I will take just a
moment before you make your statement, to indicate some of my
As you know, last fall I wrote to you and expressed my unquali­
fied support for your announcement that the Federal Reserve
Board was going to concentrate on hitting its money supply tar­
gets. Now, I must confess, IV2 months later, I am somewhat bewil­
dered by the present course of monetary policy, simply because the
Board is not hitting its own targets.


I think we are undershooting very badly right now. Based on
your own 1980 target range for M iB as presented to the Congress
in February, the number of M iB dollars should have averaged
between $392 and $396 billion in April. It did not. The weekly
numbers indicate an average of $388 billion for April, and the
latest reporting week, it averaged only $383 billion.
Mr. Volcker, I again commend you for many of your efforts
toward moving this Nation in the direction of economic stability.
But, in my humble opinion, I think the better course of monetary
policy would be to shoot for the upper ranges rather than where we
are at the present time: undershooting. I think we should shoot for
6 to 6 V percent growth for MiB this year. I know that you are
seeking economic stability, and I encourage you. But, as I said, this
is one Member's personal fear that we are not going to achieve
that if we undershoot our targets. The way to promote economic
stability is to get MiB back on track and reduce its growth slowly.
I thought, in all fairness to you, because I made statements along
those lines before you got here, that you should be made aware of
[Excerpt of statement of Chairman Mitchell follows:]


Since I became Chairman of the Subcommittee in January 1977, I have expressed
concern on several occasions because the growth of the money supply was too fast.
I did not define "too fast." I complained only when the Federal Reserve allowed
the nation's money supply, measured conventionally by the supply of coin, currency
and bank and other deposits subject to withdrawal by check, to grow for prolonged
periods above its own targets. I warned in 1977, again in 1978 and still again in
1979 that allowing the money supply to grow above target, as it did in 1977, 1978
and 1979, would cause inflation to accelerate and thereby lay the foundation for
another recession. As far back as 1978, I said that the recession would start late
in 1979 or early in 1980.
I have long recognized and continue to recognize the need to gradually reduce
money growth in order to reverse and stop inflation. Last fall, in a letter to the
Wall Street Journal (Oct. 11, 1979), I expressed my full and unqualified support for
your announcement, Chairman Volcker, that from October 6, 1979 on, the Federal Reserve
was going to concentrate on hitting its money supply targets. I said that this would
make possible the gradual slowing of money growth. I understood that, as money growth
slowly but surely tapered off, real growth would be sluggish and could even recede
for a time, that unemployment would rise for a time and that interest rates could be
very volatile until inflation was firmly in check. However, these risks are worth
the effort to stop inflation, as that is a prerequiste for achieving economic stability
and, in the final analysis, full employment.
Now 7h months later, I want to state w profound bewilderment about the present
course of monetary policy. You and your colleagues, Chairman Volcker, are not hitting
your own money supply targets. You are undershooting them badly. Based on your 1980
target range for M1B, as presented to the Congress in February, the number of M1B
dollars should have averaged between $392 and 396 billion in April. It didn't. The
weekly numbers indicate an average of $388 billion for April, and the latest reporting
week it averaged only $383 billion.
In my opinion, the prudent course for monetary policy to follow this year is
the top of your target range, 6H percent M1B growth. This is lh percentage points
below actual M1B growth in 1979, 1978 and 1977. It is low enough to start us on the
path to price level stability and yet high enough for the economy to proceed through
the year without dropping into another deep recession. Currently, M1B should be about
$396 billion. It is $13 billion below that prudent disinflationary level. If the
shortfall isn't made up, we will sustain an $80 billion loss of output above and
beyond what we have to suffer to win the fight against inflation.
Chairman Volcker, I am encouraged by your commitment to economic stability.
I believe you took the right risks to get money growth back on course when it accelerated
in late January and early February. By dramatically reducing money growth after early
February, you broke the back of the then emerging near hyper-inflationary psychology.
Now it is time to make up the shortfall in money supply that has developed in recent
We won't achieve economic stability and you won't promote it unless you get M1B
back on target. Getting back on target may require you and your Federal Reserve colleagues
to ignore developments in credit, capital and foreign exchange markets; to watch only
M1B and conduct open market operations so as to increase M1B when it is below the
level dictated by prudent 6h percent growth during 1980, and to decrease it when it is
above that level. That isn't hard to do. When M1B is below target, as now, you only
have to step-up open market purchases and persist until M1B rises back to target. When
M1B is too high, you only have to reduce purchases, and sell if necessary, until it falls
back to the target level.
For the record, so that everyone will know exactly where I am coming from and
want you to go, appropriate M1B levels for the near future are as follows:

$400 billion
$406 bi11ion
$413 billion

I strongly urge and advise that you and your colleagues hit these targets.


Mr. Volcker. I am glad to hear your comments, Mr. Chairman.
Let me just say briefly that I am very much aware that the April
figure, in particular—that is the one that is really at issue here—
fell rather sharply.
I think I have said before this subcommittee and before the full
committee, in all my statements, that these figures do move errati­
cally from month to month. Whatever technique we use there is a
lot of volatility in the short run. There is no question that the
April figure is low; April has been a difficult month—mostly high
in the past, but this particular year it came out low. There are a
lot of technical problems with April, because it is a big tax-collection month.
This year, it appears that the IRS was cashing tax checks much
more quickly than it has in the past, which appears to have had an
influence on that April figure. But I do not want to suggest that it
is all due to the change in the speed with which the checks were
collected. There is no question the figure has moved low. I would
expect to see it move higher, consistent with our targets over time.
I would expect to see some reversal of that April figure, but I
would want to say again that we just can't hit these things month
by month. Our techniques are just not that good. I am not sure it is
totally desirable to hit them every month, either. They were high
in January and February, as you remember. Markets were ex­
tremely tight at that time, and, consistent with our operating
techniques, we certainly resisted increases. But there were big
increases at that time. Now it is reversed itself, and we are, as you
say, below the target range, but I don't want to attach too much
significance to one month.
Chairman M itchell. Thank you. I certainly will not prolong this.
We want to hear your testimony. I just want to indicate that this is
one more fervent plea to the Federal Reserve to stay within its own
targets. That is the thrust of my comments.
Mr. Volcker. I understand.
Chairman M itchell. Thank you very much. We would be de­
lighted to hear your testimony.

Mr. Volcker. Mr. Chairman, I think you have received my pre­
pared statement. I will read most of it, if that is helpful.
The two points I would like to make at the outset: First, I do
want to thank Chairman Reuss, the committee as a whole, and
your subcommittee for the really enormous legislative achievement
that has already been enacted this year—the Monetary Control
Act. It gives us a lot of work to do—I think, constructive work—in
extending the range of our authority over additional institutions to
deal with the membership problem, as it was called in a shorthand
Flowing out of that, I also make the point in my testimony that
this is a time of both challenge and opportunity, as we adapt to
that new mass of legislation. And we have some concern, quite
frankly, about making other major changes in the structure and
the governance of the Federal Reserve at this particular time,
before we fully absorb those structural changes.


I do not want to argue that the structure of the Federal Reserve
is perfection in every respect or that it can't be changed, but I do
argue that I think it has served the country well over a long period
of time and reflects a fine balance of independence and regional
participation that the Congress has shepherded for the 60-some-odd
years that the Federal Reserve has been in existence. I think we
want to move in ways that preserve both the independence and the
regional nature of the system. We have a unique agency here, a
unique instrumentality of Government, and I think it is appropri­
ate that we move somewhat cautiously in changing it.
So, those two factors that we are adapting to, the changes flow­
ing out of a very major piece of legislation passed just a few
months ago, and the need for continuity—the need for preserving
what, by general consent, have been the healthy attributes of the
Federal Reserve—do instill a good deal of caution into our ap­
proach toward this legislation.
I do have some concern that when one looks at the proposed bill
as a whole—I am not thinking of the details or a section-by-section
analysis, but of net result—whether it is the intention or not, there
could be felt to be some dilution of both the independence of the
Federal Reserve and the regional attributes that have been charac­
teristic of the System.
So far as the specifics of the bill are concerned, I think the
easiest way to proceed would be for me to read the relevant por­
tions of the statement, Mr. Chairman.
The most significant proposals seem to me to begin with the
provisions of title II, dealing with structural changes in the Federal
Reserve System.
Sections 201 and 202 are interrelated. Section 201 would abolish
the Federal Open Market Committee and give sole authority for
the conduct of open market operations to the Federal Reserve
Board. It would remove the presidents of the Federal Reserve
banks from having any policy-deciding role in the formation of
monetary policy. Section 202 would revise the Federal Advisory
Council by changing the membership from each Federal Reserve
district from a representative of private industry selected by the
Board of Directors of the banks to the president of the Federal
Reserve bank for each district. This would place the presidents of
the Federal Reserve banks in an advisory role to the Board, so far
as open market policy questions are concerned.
The Board believes that both of these changes would detract
from the effective functioning of the Federal Reserve System. From
its inception, the Federal Reserve has been based upon a combina­
tion of central and regional elements. From a desire to insulate the
System from short-term and partisan political pressure, 12 Federal
Reserve banks were established and given a significant role in the
operation of the System in order to insure a proper consideration of
viewpoints and needs from all sections of the country. The premise
was that all wisdom does not reside in Washington and that a
degree of insulation from immediate political considerations would
be enhanced by an important role for the Reserve banks.
Removing the Reserve bank presidents from membership in the
Federal Open Market Committee inevitably erodes these objectives.
The Reserve bank presidents and their research staffs not only


bring to the Federal Open Market Committee an element of experi­
ence, continuity, and insight that might be lacking in a purely
Washington-based policymaking organization, but they are also an
important source of knowledge and informed opinion about region­
al interests and needs.
Inevitably, there would be a profound difference between an
advisory role and the role of a participant sharing responsibilty for
policymaking. Removal of the presidents from the Federal Open
Market Committee could only have the effect of making the Feder­
al Reserve more Washington-oriented, less sensitive to regional
concerns and potentially without the same professional career com­
mitment now characteristic of many of the bank presidents. I
should note, in this connection, that Members of Congress have
recently expressed the view that the composition of the Board itself
should be more representative of regional and sectoral interests.
The proposal in H.R. 7001 to reduce the role of the regional Re­
serve bank presidents in the conduct of monetary policy seems
quite contrary to meeting that overall concern.
The Federal Reserve System has also benefited from a unique
capacity within its structure to receive informed and constructive
criticism from those concerned with its operations and policies.
This capacity would be weakened, in effect, by abolishing the Fed­
eral Advisory Council as presently constituted. That Council, con­
sisting of leading commercial bankers from each Federal Reserve
district, provides an opportunity for the Board of Governors to
obtain a considered point of view of the economy and the credit
conditions of the country. It provides a channel for criticism and
suggestions ranging from broad policy to operational concerns. The
insights gained have helped the Board to implement policies and
operations with more knowledge of their implications than would
otherwise be possible.
We recognize the same purposes could be approached in other
ways. But, the question arises: Why change an arrangement that is
functioning well and which the participants understand? Is the
purpose to weaken the regional elements or the consultative proc­
esses of the system? If not, what is it?
Section 203 would revise the provisions for the appointment of
Federal Reserve bank presidents by removing the requirement of
approval by the Board of Governors of the Federal Reserve System
and by requiring that the presidents shall be bona fide residents of
the district involved.
The Board appreciates the importance of independent-minded
people serving as bank presidents, individuals able to participate in
policy and operations alongside Board members. We also believe
that while the initiative and choice lies with the regional boards,
some review of the appointment by public officials is an essential
part of the appointment process, given the nature of the duties. We
know of no better way to accomplish that result than the arrange­
ments embodied in the Federal Reserve Act for almost 70 years. In
that connection, we note the importance of mutual respect and an
ability to interact harmoniously between the Board and the presi­
dents of the Federal Reserve banks.
With respect to residency, the Board agrees that, and it has been
a practice for, the president of the Federal Reserve bank to be a


bona fide resident of the district. However, we would oppose a
requirement for residency prior to employment, because it would
detract from the ability to obtain individuals of the highest caliber
for the posts, including our ability to attract career people to the
Federal Reserve who might conceive of moving from one district to
another as an avenue for promotion and development.
Section 204 provides that the Federal Reserve System shall uti­
lize its resources and generally conduct its affairs to foster the
policies and purposes of the Employment Act of 1946 and the Full
Employment and Balanced Growth Act of 1978, particularly the
Nation's effort to achieve a stabler price level and an improved
economic structure.
The Board is unclear on the intent of this section. We are un­
clear because the Board now accepts the Employment Act and the
Full Employment and Balanced Growth Act as guiding principles.
We are, of course, concerned with price stability. In these respects,
the addition of this section would not appear to be necessary.
However, the section speaks specifically to the System using its
resources to improve the Nation's economic structure. We are un­
certain as to the meaning, and would desire further clarification, of
this proposed charge to the system.
I would now like to address the provisions of title I, which would
provide for the retirement of Federal Reserve stock and substitute
a certificate of membership for stock ownership. In connection with
previous proposals for retirement of Federal Reserve stock, the
Board has advised this subcommittee that on balance it believed
ownership of Federal Reserve bank stock is desirable because of
the tangible indication it provides of the interest of its members in
the operations and efficiency of the System.
Chairman Reuss has suggested that the provisions of the Mone­
tary Control Act of 1980 make the present stock requirements for
member banks anachronistic. While it is true that the rights at­
tached to ownership of stock in a Reserve bank are, in fact, ex­
tremely limited, that does not dispose of the question. Voluntary
membership still has an important role to play in the Federal
Reserve System. Members elect some of the directors of the Federal
Reserve banks, who in turn elect the bank presidents and maintain
surveillance over the efficiency and effectiveness of Reserve bank
management and operation. In those respects, the public and pri­
vate interest broadly coincide, and the participation of able men
and women as directors, including among them persons chosen by
stockholding members, I believe contribute importantly to our effi­
ciency and operational effectiveness. The Board would not wish to
see any changes made that would weaken either its ability to
attract outstanding individuals as directors of the Federal Reserve
banks and branches or their continuing dedication to their work.
However attenuated the rights of a stockholder may be compared
to a normal corporation, that tangible evidence of continued inter­
est, we believe, helps enhance our ability to obtain qualified, independent-minded directors concerned and interested in the effective­
ness of the System.
In this connection, the provisions of H.R. 3257, a bill you are
sponsoring, Mr. Chairman, will increase the number of class C
directors appointed by the Board and thus permit the Board to


increase the representation on the boards of directors of consum­
ers, labor, and service interests. We believe this approach is appro­
I recognize that some directors could continue to be elected by
members holding only a membership certificate. But the Federal
Reserve banks are corporations and do have capital. The alterna­
tive, presumably, would be in effect to transfer the stock evidence
of that capital to a Government agency. But what would be
achieved by such a change? Would it not, whatever is intended,
lead to an implication or allegation of Treasury control? Would it
not, again whatever is intended, weaken the healthy concerns of
banks with how the Fed is managed?
We do believe that consideration also needs to be given to the
participation of nonbank financial institutions on the boards of the
Federal Reserve banks; whether they should participate in the
election of directors and, if so, how this should be accomplished.
We also recognize that limiting payment of the dividends to 6
percent on Federal Reserve stock can be a small disincentive to
membership, and if it is concluded that membership should be
broadened and stock retained, consideration might also be given to
providing a rate of return on that stock more comparable to that
on Government securities. Considerations of this sort lead us to the
conclusion that elimination of Federal Reserve stock would be un­
desirable, but that consideration of which institutions might be
eligible for membership, the formula for acquiring such stock, and
the rate of dividends will be in order as we gain experience with
the Monetary Control Act of 1980, and its impact on the Federal
Reserve System.
The provisions of H.R. 7001 do not change the role of the Federal
Reserve System with respect to the supervision and examination of
member banks. However, in Chairman Reuss’ introductory state­
ment, he said, "Chartering and examination of State banks,
member and nonmember alike, would reside in the State regula­
tory agencies rather than in the Fed.” In view of that statement, I
would be remiss if I did not address the subject of the role of the
Federal Reserve in the supervision and examination of member
As Chairman Reuss just indicated, the Board has stated on a
number of occasions that it believes that the condition of the
banking system and information about individual banks is an im­
portant input for monetary policy formulation which would be lost
or substantially reduced if the Federal Reserve had no role in the
regulation or examination function. Our experience in recent years
has only served to strengthen the conviction that information
which the System obtains in the course of exercising its supervi­
sory functions provides key insights into such matters as the state
of liquidity and viability of the Nation’s banking institutions, indis­
pensable elements in the formulation and implementation of mone­
tary policy. The borderline between monetary, regulatory, and su­
pervisory powers is sometimes indistinguishable. We believe all
would be weakened by trying to enforce a strict separation. Obvi­
ously, there are a number of issues in the relationships among
supervisory agencies, some of which have been addressed in recent
legislation. As we gain experience under that legislation, we may


have further proposals. But the Board strongly recommends that it
continue to have a role in this area, and that the Board retain
responsibilities for supervision and examination.
In summary, Mr. Chairman, the Board is concerned that the
proposed structural revisions would weaken certain traditional ele­
ments in the Federal Reserve structure that significantly and sub­
stantively have contributed to the independence, the regional bal­
ance, and the efficiency, effectiveness, and integrity of our oper­
However, we do agree further consideration of the nature of
membership and the eligibility and terms of stockownership in the
Federal Reserve System will be needed in light of the enactment of
the Monetary Control Act. Attention should be given to the partici­
pation in the operations of the Federal Reserve banks by nonbank
financial institutions that will now maintain reserves with the
Federal Reserve, as well as their representation on the boards of
directors of those banks. And we continue to feel that those boards
should be expanded in size in order to accommodate a broader
representative segment of the public as a whole.
As experience is gained under the Monetary Control Act, we will
be happy to work with you and your committee and its staff in
evaluating and developing possible legislative proposals that might
accommodate these needs.
Chairman M itchell. Thank you very much, Mr. Volcker, for
your testimony. There is a wondrous phrase we use around Con­
gress when we hear testimony like that. Someone says: "I take it
the gentleman is opposed to the bilL,, [Laughter.]
I am sorry that you have not been able to find any redeeming
features in this democratizing piece of legislation. I do not know
how my colleagues feel, but we will start with Mr. Neal for ques­
tions. We will limit questioning to 5 minutes for each Member.
Mr. Volcker. I am not sure it is “democratizing,” if I may just
enter that caveat, Mr. Chairman.
Chairman M itchell. It is so entered.
Mr. Neal. Mr. Chairman, I would like to commend you, first of
all, for your leadership at the Fed. I think if you had not changed
the direction of the Federal Reserve policies when you did, we
would not have had interest rates in the 20-percent range, they
would now be approaching 30 percent. We would not have had
serious problems, we would have had chaos in this country. I would
just like to commend you for taking the action you have taken.
Mr. Chairman, it seems to me that if we can stick with a moder­
ate, consistent reduction in the rate of growth of the money supply,
the result will be a real and lasting reduction in the rate of
inflation and real and lasting reduction in interest rates. As I
understand it, this is the course that you are attempting to follow.
Again, I just want to commend you for taking the lead in this
effort. I think the country owes you a deep debt of gratitude.
But, Mr. Chairman, I am very concerned about the recent rapid
decline in the rate of growth in the money supply. I would like to
get a commitment from you that it is your intent to stay on a path
of moderate reductions, so that we do not, on the other hand in our
attempt to fight inflation, create chaos in the society by creating

63 9 7 1 0 - 8 0 - 5


Mr. Volcker. That is correct. As I indicated earlier, Mr. Neal,
we have a series of those aggregates to look at. They are all low;
some are lower than others; but we have to take a balanced look at
all of them. They have all taken a bit of a nosedive recently.
Mr. Neal. You are fully aware of that.
Mr. Volcker. I am indeed.
Mr. Neal. You are much more knowledgeable than I am but I
am going to be monitoring this situation carefully also. Following
balanced policies now can lead to a long period of stability and
prosperity for our country and it is critically important that we
take a balanced approach.
As to the bill before us, the purpose of the chairman, in introduc­
ing this bill, is to bring about a healthy economic climate in this
country. Frankly, it seems to me that if we were going to make any
change in the Federal Reserve System in the area of setting policy
for the system, that we could much better bring about the kind of
stable, noninflationary, full employment, low interest rate condi­
tions that the Chairman, and I think all of us, seek by staying on a
path of moderate reduction of the rate of growth of the money
supply until it approximates the rate of growth in our economy.
I personally think that we should make a change in the charter
of the Fed to require that it stay on such a course, because I know
that although you want to stay on that course, you may not be
with us forever. No telling how long any of us here will be in the
Congress. On looking at the history of Fed action over many, many
years it is clear that the Fed simply has not stayed on that kind of
course. And it seems to me that, having gone through the pain for
our country of bringing Fed policy into adjustment, that the very
best way to provide a stable economy, the kind of climate that will
encourage investment, productivity, full employment, low inflation
and low interest rates, would be to require that the Fed in fact stay
on such a course from now on.
I would just like for you to comment.
Mr. Volcker. I think you are really referring to legislating some­
thing different than what is incorporated in H.R. 7001.
Mr. Neal. But the purposes are the same. If you ask the authors
of both bills what the purposes are, they will tell you they are
precisely the same.
Mr. Volcker. That is not totally apparent to me, although, it
may be so.
We had some discussion last fall, as I recall, about the wisdom of
actually legislating a particular target for the money supply and
various monetary aggregates, and about legislating a particular
rate of deceleration. I don't know that I have much to add at this
The Board has had very great reservations that an attempt to
try to legislate in this area. At one extreme, even the technical
difficulties of defining the money supply and therefore incorporat­
ing it in a piece of legislation that would last over a period of time,
are of concern, to say the least; and at the other extreme, our
concern is whether legislation could be written in such a way as to
follow that goal—which I think, in general terms, we share—yet
still preserve what flexibility may be necessary in particular, un­
foreseen situations in the future.


I think all I can say is that I would greatly prefer to continue
within the present framework, where we have legislation that
forces us to set forth our goals in terms of the aggregates each
year, as you well know, and to review those goals with this commit­
tee and with your Senate counterparts.
I would continue to feel at this stage, certainly, that that is the
appropriate approach.
Mr. Neal. Thank you.
Chairman M itchell. The bills indicate that a vote is in progress.
It necessitates at least one member on this subcommittee going
over to cast his vote, since this is the food stamp authorization.
How are you for time; Mr. Volcker?
Mr. Volcker. I am fine.
Chairman M itchell. Then the subcommittee will take a 10minute recess to vote. We will come right back.
[Brief recess.]
Chairman M itchell. The hearing will resume. Mr. Paul is recog­
nized for 5 minutes.
Mr. Paul. Thank you, Mr. Chairman. Mr. Volcker, I find your
statement regarding H.R. 7001 very helpful. It helps me very much
to understand the bill. I think you make the points very clear, and
your position very clear.
In the first part of your testimony, you talked about the Mone­
tary Control Act recently passed. I would, if I could, like to ask you
a few questions regarding this bill. When H.R. 7 first came before
our Banking Committee, the first and second time, there was no
mention about collateral and changing the definition of collateral.
In the third version, the definition of collateral was changed. It
was given a very loose meaning, referring to any financial asset as
This was removed on the House floor. I understand that when it
went to the Senate and into conference committee, this was of
great importance to the Federal Reserve, to have this new defini­
tion put back in. I would like to get your comments on that, with
regard to the Monetary Control Act.
I would like to ask about the real thrust of the act, in terms of
monetary policy, as compared to monetary policy as we have seen
it under your leadership. For instance, the way I understand the
bill, the reserves, if anything, have been greatly reduced. I know
you have more institutions under your control now. But the per­
centages of reserves are greatly reduced, which to me means a
looser monetary policy, rather than a tighter one. If necessary, the
Fed can resort to having zero reserve requirements for a renewable
period of 180 days.
I would interpret this to mean that the Fed was actually looking
for authority or ability to have this in place, rather than having to
execute a tight monetary policy. And in the same light, the defini­
tion of collateral to me means that possibly this is a preparation
for more inflation, rather than a tighter, less inflationary policy.
Mr. Volcker. I am glad you raised the question, because I do not

think that interpretation is correct.
First of all, smaller reserves do not necessarily mean—and
should not have any implication of—easier monetary policy, be­
cause we control the amount of reserves, in the last analysis. But


we are interested in the relationship between reserves and depos­
its, and therefore the money supply; we are interested that that be
as predictible and as firm as possible. So far as the amount of
reserves are concerned, if we have a firm relationship between the
total reserves and the money supply; that is, not very relevant.
Now, I was concerned, frankly, that the total amount of reserves
be higher than it was in H.R. 7, not because that directly implies
firmer monetary policy, but because it implies a more stable rela­
tionship between the reserve base and the money supply, and I
wanted to make sure the reserve base was high enough to have a
stable relationship between reserves and deposits.
We will control the volume of reserves, whatever the require­
ment is, in line with our objectives with respect to the money
supply and credit and, in that respect, the amount of reserves,
whether high or low, does not in itself imply easy or tight policy.
Now, the problem that we ran into on the collateral was with the
existing collateral provisions. With a reduction in reserve require­
ments, the collateral provisions against currency created the possi­
bility, and even the probability, at some time, that we would not
have enough collateral to back the currency. The collateral consist­
ed of gold, valued at the official price, in the form of gold certifi­
cates and Government security holdings. Most of our liabilities are
Federal Reserve notes—in other words, currency. They tend to
follow the volume of economic activity. And we did not want to be
put in a position where we had to buy Government securities,
simply for the purpose of providing collateral. That would have
meant inadvertently easier money, forced upon us by the technical
requirement for collateral.
We did not want to be in the position of having to go out to the
market and buy Government securities to provide collateral.
The version of H.R. 7 you refer to—I was not here at the time; it
is my recollection the provision was taken out on the House floor—
would have allowed any asset of the Federal Reserve to be used as
collateral. My feeling was, given the congressional sentiment—and
I shared that feeling, a little bit—that any old asset may be too
loose that we would provide, instead, a listing of assets that were,
in effect, similar to our holdings of Government securities so that
we could use the securities of Government-sponsored agencies we
have in our portfolios and so that we could clearly use repurchas­
ing agreements. We also took the opportunity to fix up what I
think was a technical defect in the Federal Reserve Act about our
ability to hold foreign government securities. Now we can use any
of these as collateral, and—according to the bill as passed—we do
not have to hold collateral against Federal Reserve notes we hold
in our own vault. That did not seem to serve any purpose, since
they are not even in circulation. But with the provisions in the bill
as passed, we feel satisfied we will not be put in a bind where we
have to go out in the market and buy Government securities
simply for the purpose of providing collateral behind notes that are
already outstanding.
Mr. Paul. Back to the reserve requirement. I am still a little bit
confused on this, because it seems to me that if we have a 50percent reserve requirement versus a 10-percent reserve require


ment. There would be a big difference in the money supply. The
lower the reserve, the more inflation.
Mr. Volcker. All things equal, if we did nothing but impose a 50percent reserve requirement, instead of the current reserve re­
quirement, money would tighten enormously; the money supply
would decline. But if we did not desire that reduction in the money
supply, all other things equal—let us say we have not changed our
policies—we are not looking toward a big decline in the money
supply, then if reserve requirements were4ncreased—let us say, to
50 percent—we would simply engage in open market operations to
expand the volume of reserves to meet the requirements.
Mr. Paul. Haven't you emphasized more the reserve require­
ments for monetary control, rather than the Open Market Commit­
tee? I thought I had heard you make that statement.
Mr. Volcker. Here, the distinction is perhaps a subtle one. But
reserve requirements and open market operations serve two differ­
ent purposes. The reserve requirement fixes the relationship be­
tween reserves and the supply of money. I am overlooking a few
technical complications, but broadly, once we have set the reserve
requirements, we know the relationship between reserves and the
volume of money.
Then, to affect the volume of reserves, and therefore to affect the
money supply, we engage in open market operations. With rather
rare exceptions, we rely upon open market operations to affect the
volume of reserves.
Now, in concept and occasionally, we can achieve the effect on
the money supply that we want by changing the reserve require­
ment percentage rather than engaging in open market operations.
But 99 times out of 100, or 999 times out of 1,000, we will do that
by engaging in open market operations, rather than by changing
reserve requirements. I do not mean reserve requirements are not
important—they are important to fix the relationship, in a sense,
between open market operations and the money supply.
Mr. Paul. Thank you. My time has expired.
Chairman M itchell. Chairman Reuss, perhaps you can induce
some simpatico feelings on the part of the chairman of the Federal
The Chairman. Thank you very much, Mr. Chairman, and thank
you, Mr. Volcker.
On the basis of your testimony on my little bill, I will have to
put you down as doubtful for the moment. [Laughter.]
Mr. Volcker. You want to put me down as one of our loan
classifications. The worst one is lost, but you are not going to put
me down as that.
The Chairman. I would, however, like to have you explain to the
Representatives of—well, the Baltimore area and the Texas area,
to take two at random, whether it really is just that the New York
bank gets a vote every year, and the Chicago and Cleveland bank
every other year, but all the rest are heard from in the voting
department just once every 3 years.
I can't see the justice, though it happens that I come from a
favored area.


Mr. Volcker. It happens that I come from New York, which is
even more favored, so perhaps you won't get an unprejudiced
answer to that particular question.
As you know, that provision goes back to the revision of the
Federal Reserve in 1935, when the Open Market Committee was
given a statutory basis. I am sure the thinking at that time—and I
must say, I don't believe that thinking is entirely wrong today—
was that the New York bank, as the principal operating arm of the
system-----The Chairman. Leaving New York aside—let's talk about Cleve­
Mr. Volcker. If I may just complete the thought, the New York
bank is the principal operating arm and it is located in the finan­
cial center, and so that decision was made, I think, for obvious
reasons. The Chicago or Cleveland situation, I suppose, is slightly
different. We were left with 11 banks in a rotational scheme, and it
does not work out exactly the same for all'll banks.
I don't think that particular arrangement is sacrosanct in any
sense of the word.
The Chairman. Having failed to budge you on H.R. 7001, let me
turn to a more congenial area. I read in the papers what you said
yesterday in Florida about wanting to relax some of the aspects of
the credit control program. I would urge you to move immediately
on that part of the March 14 program which clamps down on
consumer credit and on credit cards in particular.
Credit cards are very largely used for meals in restaurants,
rooms in hotels and motels, for apparel. I know of no inflationary
undersupply of restaurant meals, hotel rooms, apparel—indeed, by
zapping them, you deprive a ghetto young man of the job as a
dishwasher, or a Latin American woman of a job as a chamber­
maid in a motel, or a central city person in the needle trades of
their chance to make a shirt for somebody.
Whatever it may have had in its favor on March 14, this aspect
of the credit control program is no longer needed now. With unem­
ployment increasing today, and with the fact that by a stroke of
the pen you could repeal it and it would not cost the taxpayers a
dime, can't we agree that it would be just fine for you to act, say,
Mr. Volcker. That is, of course, among the items that we have
under review. I am interested in your comments, because we get
mixed advice on this one, particularly, I think, from the Congress
and from members of this committee. I was surprised several
weeks ago when we had our Consumer Advisory Council meeting. I
don't want you to overinterpret what I am about to say; I was
talking to a very limited group of members, but the council hap­
pens to be a group that has both lenders and consumer groups. I
asked them precisely the question that you raised, and I was quite
surprised that from both points of view they wanted to keep the
controls on. You almost had the feeling of the longer the better.
That may be a bit of an exaggeration.
The Chairman. Would you file, for the record, later on, who the
members are of that group?
[Chairman Volcker subsequently submitted the following list of
members of the 1980 Consumer Advisory Council:]



William D. Warren
U.C.L.A. School of Law
Los Angeles, California
December 31, 1980
Vice Chairman
Marcia A. Hakala
Assistant to the Vice Chancellor
The University of Nebraska
Medical Center
Omaha, Nebraska
December 31, 1980
Julia H. Boyd
Director of Credit
Woodward & Lothrop, Inc.
Washington, D.C.
December 31, 1982
Roland E. Brandel, Partner
Morrison & Foerster
San Francisco, California
December 31, 1980
Ellen Broadman
Consumers Union
Washington, D.C.
December 31, 1982
James L. Brown, Director
Center for Consumer Affairs
University of Wisconsin Extension
Milwaukee, Wisconsin
December 31, 1981
Mark E. Budnitz
Associate Professor
Emory University School of Law
Atlanta, Georgia
December 31, 1981
Robert V. Bullock
Assistant Attorney General
Commonwealth of Kentucky
Frankfort, Kentucky
December 31, 1980

* Date indicates expiration of term.

Richard S. D'Agostino
Senior Vice President
Girard Bank
Philadelphia, Pennsylvania
December 31, 1982
Joanne S . Faulkner
New Haven Legal Assistance
Association, Inc.
New Haven, Connecticut
December 31, 1982
Vernard W. Henley
Consolidated Bank and
Trust Company
Richmond, Virginia
December 31, 1982
Juan Jesus Hinojosa
Hinojosa & Ortiz
McAllen, Texas
December 31, 1982
Shirley T. Hosoi
Assistant Vice President,
Western Bancorporation
Los Angeles, California
December 31, 1982
F. Thomas Juster
Institute for Social Research
Survey Research Center
University of Michigan
Ann Arbor, Michigan
December 31, 1982
Richard F. Kerr
Operating Vice President
Federated Department Stores
Cincinnati, Ohio
December 31, 1981
Robert J. Klein
Senior Editor
Money Magazine
New York, New York
December 31, 1980



Harvey M. Kuhnley
President and Chairman of
the Board
Twin City Federal Savings &
Loan Association
Minneapolis, Minnesota
December 31, 1981
Robert J. McEwen, S.J.
Professor of Economics
Boston College
Chestnut Hill, Massachusetts
December 31, 1982
R. C. Morgan, President
Government Employees Federal
Credit Union of El Paso
El Paso, Texas
December 31, 1980
Margaret Reilly-Petrone
Professor of Economics
Montclair College
Upper Montclair, New Jersey
December 31, 1982
Rene Reixach
Staff Attorney
Greater Upstate Law Project
Rochester, New York
December 31, 1982
Florence M. Rice, President
Harlem Consumer Education Council
New York, New York
December 31, 1981
Ralph Rohner, Professor
Catholic University Law School
Washington, D.C.
December 31, 1981

Henry B. Schechter, Director
Office of Housing and
Monetary Policy
Washington, D.C.
December 31, 1981
Peter D. Schellie, Partner
Baker & Daniels
Washington, D.C.
December 31, 1982
E. G. Schuhart
Farmer and Rancher
Dalhart, Texas
December 31, 1980
Charlotte H. Scott
Professor of Business
Administration and Commerce
University of Virginia
Charlottesville, Virginia
December 31, 1982
Richard A. Van Winkle, President
Lockhart Finance Company
Salt Lake City, Utah
December 31, 1981
Richard D. Wagner, President
Wagner Ford Sales, Inc.
Simsbury, Connecticut
December 31, 1980
Mary W. Walker, President
National Bank of Walton County
Monroe, Georgia
December 31, 1981
Chairman Emeritus
Leonor K. Sullivan
St. Louis, Missouri
December 31, 1980


The Chairman. I can offer a theory about the group.
Mr. Volcker. I have a theory, too. You offer your theory.
The Chairman. Let me offer mine. I will bet the lenders in that
group were banks and credit card issuers who were delighted to be
taken off the spot because they found that, owing to the usury
statutes and other things, they weren't making any money on their
credit cards. So they were just delighted to have Uncle Paul be the
fall guy.
And I will bet the consumer advocates were well-meaning people,
but hadn't really thought it through. They thought that credit
cards were of a class of vanities against which the monk Savonar­
ola inveighed 400 years ago.
Whereas, in fact, most credit card purchases help central city
black young people get jobs as dishwashers and Latin ladies make
beds in hotels, and Jewish couples make shirts—none of which
activities I find either reprehensible or inflationary.
Mr. Volcker. My surmises are very similar to yours. At the
same time, I don't think that those particular areas of the economy
are ones that have been most affected by recessionary tendencies
recently, and there has been an argument, which is repressed very
strongly by some people, that when one looks at all the competing
demands for credit in the economy, these are not of the greatest
priority even now. I don't fully share the feeling that I can make
that distinction as to which is of highest priority; I simply men­
tioned that that case is made by many people.
The Chairman. Well, I know. But you are in the driver's seat,
and since I, who have been known to flirt with credit allocation in
my day and generation, say “forget it" on this. I really wish you
I think you would be doing a lot of people a great favor. And
send the advisory committee over to see me.
Mr. Volcker. I shall only say-----The Chairman. I would be glad to talk to them.
Mr. Volcker. I am interested in your comments.
The Chairman. That would be my No. candidate for emancipa­
tion, in the March 14 program.
Mr. Volcker. I might say the indication is that that requirement
is not particularly binding in any real sense now. It may be bind­
ing psychologically but, in fact, the amounts of credit do not appear
to be rising to the point where any substantial number of people
have to put up these deposits.
The Chairman. Right, which is all the more reason for removing
the heavy hand of government. However, there is something that I
wish you would keep until the last of the credit program. That is
your excellent admonition first delivered last October to the banks
in general to cut down on loans for speculation in commodities.
You were dead right when you first said it, and every time you
have repeated it you have been dead right. And very frankly, I was
a little shocked to find that 10 very big banks—billion dollar banks,
every one of them, led by First National of Chicago, were grubstak­
ing the Hunt brothers in March, right when they were engaged in
their not very constructive activities. That is a different thing from
coming to the rescue later on.
Mr. Volcker. I understand.



The C h a ir m a n . Those banks actually took as collateral, as I read
it, bars of silver. Now, do they have the unparalleled gall to tell
you that they did not know that their little loan was being used for
silver speculation?
Mr. V o l c k e r . I, of course, was not aware of those activities at
the time they were undertaken. I have, I think I can say, been
surprised and even shocked by the amount of that lending activity.
I am not thinking entirely of that particular loan that you men­
tioned, which, I understand, is part of the picture. But it also was
my understanding that it was part of a credit line from two banks
that had been arranged some time earlier, for presumably general
purposes. It turned out it was secured by silver, as you point out,
which should have raised some suspicions.
The C h a ir m a n . It is like finding a trout in the milk.
Mr. V o l c k e r . I understand that. I don't know what can be said.
The C h a ir m a n . I think it would be useful, Mr. Volcker, if you
could file for this subcommittee a complete account of it, including
what the banks have to say about it. If they clean house, fine, let
us hear about it; if they were innocent victims, and the bars were
candy, all right, let us hear it. [Laughter.]
Mr. V o l c k e r . We are preparing a full report about this whole
period. We would be glad to make it available to this subcommitee
or to the full committee.
The C h a ir m a n . I think Mr. Mitchell's subcommittee is the
proper place, because they are tigers on this.
Mr. V o l c k e r . That should be completed within a few days.
The C h a ir m a n . That would be fine.
[Mr. Volcker submitted the following report "Interim Report on
Financial Aspects of the Silver Market Situation in Early 1980" for
inclusion in the record:]


The purpose of this report is to set forth the facts and information
currently available to the Federal Reserve in connection with the financial aspects of
the sharp fall in silver prices that occurred in the late winter and early spring of 1980.
Of particular concern in connection with this Interim Report are the questions
pertaining to the extent and nature of the use of bank credit in connection with the
overall episode, especially in the context of the Federal Reserve's credit restraint

It appears clear that a combination of events — including the general

unsettled and speculative atmosphere surrounding severe inflation — did produce a
situation which had the potential for creating serious problems for individual financial
institutions and for the financial markets generally.

Many of the larger questions,

including the underlying issues of the nature and extent of regulatory or legislative
actions that might prevent a similar occurrence in the future, will be answered more
fully in a further report.
The episode as a whole, and specifically the involvement of the Hunt and
Hunt-related entities, is extremely complex, involving a large number of institutions,
some with broad public ownership, others closely held; some domestic, others foreign
or foreign-related; some financial, others nonfinancial.

Also, the credit and credit

exposures that ultimately emerged in the wake of the sharp drop in silver prices took a
number of forms.

There were direct "conventional" bank loans by both U.S. and

foreign based banks to the Hunt and Hunt-related interests — most of which were
collateralized by silver.

There were bank loans — both domestic and foreign-

related — to brokers and commodity dealers and there were broker loans, financed by


internal sources of funds, to the Hunts. There was also credit extended by brokers and
other corporate entities in the form of unmet margin calls on Hunt forward and future
contracts in silver.

Finally, there were bank loans, broker loans and unmet margin

calls associated with the International Metals Investment Co., Ltd. (IMIC).


obligations in the United States of that venture in which the Hunts own a substantial
interest are, as we understand it, guaranteed by the Hunts.

Because of the many

involved — including foreign entities — and the complexity of the

transactions, all of the facts of the case may never be known with precision.
In light of the dimensions of the case, this report traces developments and
events in chronological order and provides specific information regarding creditrelated aspects of the episode.

Events prior to March 26
In the late summer and early fall of 1979, the Federal Reserve had been

concerned about developments in commodity markets and particularly the apparent
speculative attitudes that had driven commodity prices, and particularly precious
metals prices, markedly higher. This concern was reflected in the Federal Reserve's
October 6 policy changes, the announcement of which called specific attention to
speculative tendencies in commodities markets.

At that time, the Federal Reserve

requested banks to avoid making speculative loans. The request at that time was in
the form of "moral suasion" and did not have the backing of either regulation or
specific reporting requirements.

The message was contained in a letter which was

sent to all U.S. banks, branches and agencies of foreign banks operating in the U.S.,
and to foreign central banks. In the ensuing several weeks, the prices of commodities
in general eased. The price of silver stabilized at about $16 to $17 per ounce — up
from the level of $10 to $10.50 that had prevailed at the end of August.


In late November and early December, the silver price again rose sharply,
as did some other commodity prices.

That renewed outburst of price increases

seemed, at the time, to be related to unsettled conditions growing in part out of
heightened concern about oil prices and supplies and international political events. In
this time frame, however, there were press reports and market rumors of irregularities
in the silver market. Because of this, and because of the damaging impact on inflation
and inflationary expectations of a renewed outburst of speculatively driven price
increases in precious metals, the Federal Reserve made inquiries about the silver
situation to the Commodity Futures Trading Commission. While we did not obtain any
significant information beyond that generally available in the press, we were left with
the impression that initiatives of the CFTC and the exchanges had the situation under
close review.

The price of silver continued to climb sharply, reaching an intra-day

high of $50.36 on January 18. In retrospect, it is clear from published reports of the
CFTC, that by this time the Hunts had and apparently were continuing to acquire
massive positions in physical silver, silver futures and silver forwards.
During late 1979, and particularly in January 1980, the exchanges took a
number of steps in the silver market, including imposing higher and graduated margin
requirements, position limits, and limits on trading.
Throughout this period, the evidence available to us suggests that bank
credit was not a major factor in connection with the acquisition or maintenance of
silver positions by Hunt and Hunt-related interests. Indeed, the Hunts had apparently
acquired a large amount of silver and silver positions prior to the sharp rise in prices
and, to an unknown extent, may have pyramided those positions by using daily cash
payouts on existing positions to acquire still larger positions when the silver price was
rising. At this point, we have no evidence as to whether individuals and institutions on


the other side of the market were forced to finance their margin calls (which were
paid out to the Hunts) via bank borrowing.

However, it seems fair to assume that

industrial firms that were short sellers of silver may have used existing bank lines to
help meet the cash flow needed to make such payments. For such market participants,
such bank loans, to the extent they occurred, would seem wholly appropriate. And, in
those circumstances a refusal to lend to the shorts in the market by banks would have
added still further upward pressures on the price of silver. In any event, the pattern of
behavior on the upside of the episode is an area of continuing investigation.
The price of silver broke sharply lower in late January, but then stabilized
in the $30 to $36 range until early to mid-March when the price again broke sharply,
falling to a low of $11.10 at the close of business on March 27. Since that time, the
price has fluctuated in the $12 to $16 range, even though it appears that a substantial
volume of silver was sold into the market in late March and April. There remains, of
course, the question of who acquired the silver that has been liquidated and for what
From the information we have been able to compile, it appears that
substantially all of the bank and other credit accumulated by the Hunt interests
related to silver was incurred in the first quarter of 1980 and most of that was
incurred beginning in early February through the end of March.

This would suggest

that such funds may have initially been used in some limited way to meet higher initial
margin requirements and, to a much larger extent, to meet maintenance margin calls
as the price of silver dropped.

At the time the Federal Reserve had no direct

knowledge of the size of the Hunt positions or of the fact that they were financing
margin calls by borrowings of any kind.


Beginning at mid-day March 26, when Chairman Volcker was first notified
of the failure of the Hunts to meet margin calls, the Federal Reserve, in cooperation
with the O ffice of the Comptroller of the Currency, undertook a series of special
initiatives aimed at fact finding and analysis of the situation.

Extensive discussions

were held with other government agencies and officials aimed in part at initiating
special inspections of involved brokers by the appropriate government agencies and the
various exchanges. Special examinations of a number of banks were undertaken by the
Federal Reserve and the Comptroller of the Currency which included sample
verifications of silver warehouse receipts and silver.

All involved banks were

contacted to obtain information regarding loans to the Hunts; and ail involved banks
have been asked to provide written explanations of why such loans were made in the
presence of the Federal Reserve request to avoid speculative lending; and, for the first
time, under residual power contained in the International Banking Act, special
examinations of branches and agencies of foreign banks were undertaken by the
Federal Reserve.
Despite the scope and intensity of those efforts — which are continuing —
there are many aspects of the case, particularly those related to overseas activities
and those relating to the circumstances that permitted the situation to develop in the
first instance, that are still unanswered.

However, from those investigations, it


quickly became apparent that during February and March, the break in the price of
silver gave rise to a substantial amount of borrowing by the Hunts.

Credit to the

Hunts, as it developed, took several forms which are described below. In looking at
these data, it should be emphasized that in many instances, the data supplied is based
on information gathered from a variety of sources and is therefore subject to some
margin of error.



Direct Loans of U.S. Banks to the Hunts ($195 Million)
We have been able to account for about $150 million in direct silver-

related loans to the Hunts by U.S. banks.

These loans were secured largely by

silver and to a much lesser extent by Hunt properties. An additional $45 million
in borrowings secured by assets other than silver were taken down in March and
early April. We do not know to what extent these funds were or were not used to
meet silver-related obligations but the timing of the loans suggests that they may
have been used for that purpose. Of the overall total $5 million was outstanding
as of August 1979; $50 million was taken down in the first half of February; $95
million in the first half of March; and $45 million in the second half of March and
the first week in April. The rates of interest on the loans ranged from prime plus
1/4% to prime plus 1%. Of the $195 million, $15 million was repaid on April 1;
and $100 million was repaid on April 8, from funds advanced by banks that will be
part of the $1.1 billion syndicated loan to Placid Oil.

Thus, $80 million is still

outstanding and of that total, we now expect that $35 million will be rolled into
the $1.1 billion credit line.

Loans by U.S. Banks through Placid Oil Company ($115 Million)
Between mid-March and early April, we have reason to believe Placid Oil

loaned or advanced at least $110 million to the Hunt brothers. While we do not
have full details on these loans, it does appear that most of these advances may
have been funded by loans from U.S. banks to Placid. For example, $50 million in
bank loans were extended to Placid in mid-March and another $65 million on
April 1.

These loans were at rates of prime plus 1/2% to prime plus 1%.


banks loans have since been reduced to $80 million which presumably will be
repaid or rolled into the new syndicated loan to Placid.



Direct Loans by U.S. Branches and Agencies of Foreign Banks to the Hunts
($230" M illi o n ) ----------------------------------------------------------------------------------As we now understand it, direct loans by foreign banks to the Hunts

secured by silver peaked at about $230 million in mid-March. These loans appear
to have been funded out of the U.S. branches of the foreign banks and thus would
seem to qualify as "domestic" credit. Of the total, $65 million was taken down in
1979; $50 million in the first half of February; $68 million in the second half of
February; and $47 million in the first half of March. The rates of interest were
3/4 of 1% to 1% above prime. The loans have been reduced by about $65 million
from their peak level, in part by advances to Placid Oil by U.S. banks in
anticipation of the large syndicated loan to Placid/Hunt.

The balance due now

totals approximately $175 million and presumably will be repaid by the proceeds
of the new syndicated loan to Placid.

Indirect Loans by U.S. Banks ($260 Million)
There were also about $260 million in silver-related loans by U.S. banks to

a brokerage house, the proceeds of which were then made availabe to the Hunts
by the brokerage house — presumably to meet margin calls. Some of these loans
were advanced under existing lines of credit and were secured by silver.
interest rates to the brokerage house were generally at prime.


From our

discussions with the lending banks, it appears that most of the banks had the
impression that they were providing funds to the broker against fully hedged
positions and certain banks indicated that initially they were not even aware that
funds advanced were used to support Hunt silver positions.
holds both silver and gold bullion as collateral.

One of these banks

Of the total, $33 million was

advanced in 1979; $26 million in January of 19S0; $143 in early February; and $60
million during the last week of February. Most of these loans were substantially

63-971 0 - 8 0 - 6


reduced or liquidated in early April by the proceeds from the sale of collateral.
Of the indebtedness remaining after the silver liquidations, about $34 million of
the balance will be reduced from the settlement of silver already sold for future
delivery, which will leave approximately $10 million outstanding.

Indirect Loans and Credits by Foreign Banks and U.S. Branches and Agencies
of Foreign Banks ($215 Million?
It now appears that about $215 million was indirectly supplied to the Hunts

by foreign banks and their branches and agencies in the U.S. About $115 million
of this was in the form of silver backed loans to brokers (the proceeds of which
were advanced to the Hunts). These loans (a small part of which were actually
funded by a U.S. bank) appear to have been funded out of the U.S. agencies and
branches of the foreign banks and thus are "domestic credit." And, up to another
$100 million in obligations was in the form of margin calls on silver forwards at
the overseas offices of foreign banks.

At this time we do not have detailed

information on the terms and timing of these obligations. Of this overall total,
about $100 million remains outstanding and the remainder was paid off by funds
advanced by U.S. banks in anticipation of the Placid syndicated loan.

Direct Broker Loans ($100 Million)
We understand that brokers also supplied the Hunts with silver backed loans

in excess of $100 million from their own funds. We believe about $75 million of
such loans are still outstanding and will be repaid from the proceeds of the
Placid/Hunt syndicated loan.

Obligations of
($200 Million?



Metals Investment




As noted earlier, the Hunts own a substantial interest in IMIC and fully
guarantee certain of that company's obligations in the United States.

As we


understand it, IMIC obligations in the U.S. secured largely by silver include: (a) a
$25 million bank loan made on October 10, 1979; (b) a broker loan of about $25
million that was reportedly made sometime in early 1980; and (c) as of early May
about $150 million in various broker-related obligations.

The latter obligation

may have been considerably larger early in April and is being reduced by
liquidations of silver futures and forwards. (We do not know the nature and extent
of IMIC obligations or positions abroad.) All of these U.S. obligations are secured
largely by silver but we do not have details on the precise time when such
obligations were incurred. The broker loan and the other U.S. obligations of IMIC
to brokers presumably will be paid off by the proceeds of the syndicated loan to
Placid Oil.

Obligations to Nonfinancial Concerns ($450 Million)
We know of one major Hunt obligation to a nonfinancial concern (The

Engelhard Mineral and Chemicals Corp.) that arose out of Hunt forward contracts
to buy silver at prices well in excess of the price of silver at the time of delivery.
We understand that those contracts entailed a gross obligation of about $700
million which was only partially secured by silver and/or other collateral held by

Because of these circumstances, settlement of the contracts on

March 31 would have required the Hunts to make a cash payment to Engelhard
that is estimated to have been in the range of $400 to $450 million.


obligation, as noted below, was settled by an exchange of assets.
To summarize, on or about March 31, we have been able to identify Hunt
and Hunt-related obligations associated with silver as follows:


Direct Loans by U.S. Banks to the Hunts



Loans by U.S. Banks through Placid Oil


Direct Loans by U.S. Branches and
Agencies of Foreign Banks to the


Indirect Loans by U.S. Banks


Indirect Loans and Credits by Foreign Banks
and U.S. Branches and Agencies of
Foreign Banks


Direct Broker Loans


Obligations of the International Metals
Investment Co., Ltd. (IMIC)


Obligations to Nonfinancial Concerns




In a number of instances, particularly in respect to obligations of IMIC and
the obligations to foreign banks, we do not know, with precision, the timing and other
details as to when the obligations were incurred.

However, by making some

assumptions about timing in these areas, we have pieced together a week by week
estimate of debts incurred by various classes of institutions. These estimates suggest
that the level of total obligations increased sharply first in late January and early
February. This surge in borrowing broadly coincides with the initial drop in the price
of silver for its high of about $50 per ounce to a price in the area of $35 per ounce.
The Hunt borrowings trended higher during February but then moved sharply higher in
mid to late March when the price of silver declined to the $12 range.
Looking just at bank credit, it appears that total bank credit associated
with the episode probably peaked at $1.0 to $1.1 billion level in late March or early
April. Of that total, it appears that $100 million was funded from abroad so that at


the peak, $900 million to $1 billion of domestic bank credit was involved.

Of that

total, about $125 million dates back to 1979. The major increases in domestic bank
credit occurred in early February when such loans rose by $350 million and between
March 6 and April 1 when the aggregate domestic loans rose by more than $250
million. For the months of February and March combined, the use of domestic bank
credit in connection with this situation increased by $800 million. By contrast, total
business loans and total bank loans rose by $6.2 billion and $9.3 billion on a
nonseasonally adjusted basis, respectively during this two month period.
There were a total of 12 U.S. banks, 4 branches and agencies of foreign
banks and 1 foreign bank that, as of early April, were significant silver-related
creditors of the Hunts. In eight out of 12 cases involving U.S. banks, the amounts of
loans outstanding were relatively modest and were, in most cases, in the form of loans
to brokers. Five of the eight banks with such loans used the discount window on at
least one day during February/March. However, the patterns of discount window use
by all of these institutions are not unusual during the period particularly in the light of
overall money market conditions and the modest size of the Hunt loans.
The four banks that were somewhat larger creditors to the Hunts all used
the discount window during February/March; one bank on one occasion; one bank on
two occasions; and two banks on four occasions.

Most of these borrowings were on

Tuesday or Wednesday, and therefore were associated with ends of statement weeks.
In the case of two of the four banks, the timing of the use of the window relative to
the timing of the Hunt loans makes it clear that there is no — or at the very worst a
very indirect — relationship between the two. In the case of one of the remaining two
banks that were larger creditors to the Hunts, the institution did borrow several times
during a statement week in early March.

At that time, the institution was not


increasing its loans to the Hunts. Thus, while those borrowings were relatively large,
amounting to $80 million on average for the statement week, they do not appear to be
directly related to Hunt lending. Finally, in the case of the remaining bank, there is
an approximate coincidence of timing in two statement weeks between discount
window borrowings and Hunt loans in the second half of March.

In both cases the

borrowings were for one day only on a Wednesday (the end of the statement week) and
the amounts were not unusual.

On a daily average basis, for the three weeks in

question, the borrowings amounted to about $25 million which, as a matter of pure
arithmetic, may be said to have funded part of a Hunt-related loan at the institution in

However, neither the Hunt loan nor the timing or amount of the discount

window borrowings were not out of keeping with the size o f the bank.

In summary,

therefore, we can find no evidence of unusual activity at the discount window during
this period that can be related to the silver market situation or to the Hunts.
As the amount of Hunt obligations became apparent to the Federal Reserve
in late March, the immediate concern of the Federal Reserve and that of other
government agencies related to the potential implications of the situation for the
financial markets generally.

Those concerns reflected not only the situation in the

silver market but the uneasiness that characterized markets in general at that time.
While all of these obligations were secured, the collateral in most cases was silver.
And, as the price of silver declined, the margin on such loans became very thin and in
some cases the value of the collateral actually fell below the amount of the loans.
Thus, in the extreme, the creditors were faced with the prospect of recouping their
funds by forced liquidation of silver that could, from their viewpoint, further
undermine the value of the collateral and accentuate their risk.

And, in these

circumstances, there was always the threat that a localized problem could quickly spill
over to affect other institutions and markets.


As Chairman Volcker has indicated in his Congressional testimony, during
the period immediately after the sharp break in the silver price, the Federal Reserve,
the Treasury, the SEC and the CFTC spent considerable time and effort trying to
ascertain the facts of the case — which while reasonably clear now — were far from
evident at that time. Subsequently, the price of silver — which is a world price — did
stabilize on Friday, March 28, thereby halting the erosion of the value of the collateral
being used to secure most of the obligations referred to above.

The March 28 - April 5 Interval
In the days immediately following March 28, some of the edge was taken

off the situation by two developments: first, agreement was reached for a settlement
of the Hunt indebtedness to the Engelhard firm referred' to above; and second, the
continued stability of the silver price at $12 to $14 per ounce permitted other
creditors to begin to liquidate silver in an orderly fashion and thereby eliminate their
exposure. For example, one brokerage firm was apparently able to sell a significant
amount of the silver it held against its own bank loans and thereby repay most of that
bank credit in early April. It appears that such silver sales were undertaken both in
the U.S. and abroad.
The Hunt/Engelhard transactions which were negotiated on Monday,
March 31, have been the subject of much confusion.

As noted earlier, this situation

grew out of several substantial forward contracts entered into by the Hunts and
Engelhard in mid-January 1980.

Under these contracts the Hunts were to take

delivery on physical silver over the period January 31 to July 1. The contract prices
generally reflected market prices in mid-January when the transitions were made and
some deliveries were made prior to the sharp drop in silver prices in late March.


Late on Friday, March 28, the Federal Reserve learned of these large
forward contracts. Settlement on most of them was due after the weekend, with no
apparent prospect for payment, and the collateral held by Engelhard was far short of
the total obligation. Engelhard, while itself in a strong profits and asset position, felt
they might be faced with a decision on Monday to sue the Hunts for payment, forcing
probable bankruptcy and possibly triggering massive liquidation of silver positions to
the peril of all creditor institutions (and indirectly placing in jeopardy the customers
and creditors of those institutions in a financial chain reaction). The alternative, as
the company saw it, was to negotiate with the help of some banks a credit to the
Hunts or intermediaries that could provide time for repayment and avoid forced
liquidation of silver in an already nervous, depressed market.

On March 29, the

Federal Reserve was informed in a very general way that the parties intended to
explore such an approach to resolving the Engelhard situation. In that time frame the
question immediately arose as to whether such a credit would be considered
"speculative" within the context of our credit restraint program.
After informing other government agencies of this development and
considering with them all the implications of the matter, Chairman Volcker interposed
no objection to Engelhard pursuing whatever negotiations the company felt essential to
protect its own position, but made it quite clear that the net result should not be to
free funds for renewed speculative activity by any of the parties. In view of the wider
implications, Chairman Volcker asked to be kept informed of the progress of any
negotiations and the nature of any implications of their negotiations for the market
and for speculative activity.
While fulfilling a speaking engagement before the Reserve City Bankers
Association meeting in Boca Raton, Florida, that weekend, Chairman Volcker learned


that the Engelhard and Hunt interests would together approach a group of banks with a
refinancing proposal late in the evening on March 30 in Boca Raton. While the nature
of that proposal was not known to Chairman Volcker, he again asked to be kept
informed because of the potential implications for the silver and financial markets.
Subsequent to the negotiation (and well after midnight), he again was informed that
the banks had, or planned to, reject the proposal by the Hunts and Engelhard on
business grounds. Neither Chairman Volcker, nor any other government official, either
instigated or guided those negotiations.
Following the rejection of the proposal to consolidate and restructure the
Hunt silver indebtedness, negotiations proceeded through much of the night directly
between the Hunts and Engelhard. The results of those negotiations, involving in part
the transfer of certain oil properties owned by the Hunts to Engelhard, became known
to Chairman Volcker in the morning of March 31, and were announced the same day.
This settlement which essentially involved an exchange of assets and involved no
credit, have the effect of fully clearing up all outstanding contracts and obligations of
the Hunts to Engelhard.

That transaction has not yet been consummated in part

because the exchange o f assets required the release of nonsilver assets that had been
securing bank loans and because of the need to obtain the approval of the Canadian
Government for the transfer of certain oil leases in Canada to Engelhard.
In the following days, the Federal Reserve and other agencies continued
efforts to develop more comprehensive information on the extent of Hunt and Huntrelated obligations and to appraise the potential vulnerability of banks and other

While very large amounts of credit remained outstanding, those

creditors who had appeared to be in the most vulnerable position appeared to have
extricated themselves, albeit with some losses (some of which, at least, have since


been recouped). Together with representatives of other agencies, the Federal Reserve
turned its attention to ways of developing means of avoiding extreme speculative
episodes of this kind in the future, with all their implications for the stability of
financial institutions and financial markets.

The Period from April 5 to the Present
The large syndicated bank loan to Placid Oil which has been the subject of

so much attention first came to the attention of the Federal Reserve on Saturday,
April 5, when the general thrust of the concept was relayed to Chairman Volcker in a
telephone call from a senior official of one of the lead banks. From that discussion,
the Federal Reserve concluded that the banks and other creditors had, by then, more
fully appraised their overall exposure to the Hunt interests in the context of the
nature and amount of collateral available in connection with those existing credits.
The concept, discussed in general terms at that time and elaborated in a
later call, entailed a method of restructuring the Hunt silver indebtedness in a manner
that would greatly strengthen the security position of creditors with outstanding silver
loans or contracts and facilitated the release of certain collateral by banks. In the
process, new creditors would in some instances replace existing creditors, while other
creditors would essentially exchange old loans with new. The new bank loans would be
to and secured by the assets and earning power of perhaps the strongest of the Huntrelated companies, the Placid Oil Company.

Control over the silver and silver

contracts, with appropriate safeguards, would pass into the hands of that same
company. Silver-related loans to the Hunts would be paid off. The immediate result
would be to protect more securely the interests of existing Hunt silver creditors, bank
and nonbank.

In doing so, the risk associated with such positions diminished with

obvious implications for the institutions and the markets generally.

That result, in


itself, was not, and is not, contrary to the broad public interest in the stability of
financial markets and institutions.
At that time, and in a general way, Chairman Volcker made it clear that
his primary concern about any such loan would be that it not free funds for renewed
speculation and that any such transaction would have to provide adequate safeguards
in that regard.

It was also indicated that such a loan would not receive special

consideration within the framework of the Federal Reserve's 6 to 9 per cent guideline
on loan growth. Chairman Volcker again asked to be kept informed of developments.
Other government officials were informed of their discussions.
On Thursday, April 10, at the request of the banks, a meeting was held at
the O ffice of the Comptroller of the Currency at which time further information
concerning the negotiations was made available to the staffs of the Federal Reserve,
the Federal Deposit Insurance Corporation and the Comptroller. At that time, it was
clear that the negotiations were proceeding along the general lines described above.
But it was also apparent that the transaction was far from complete. There was clear
evidence that the banks were seriously endeavoring to structure into the loan
agreement the kinds of restrictions on speculation that Chairman Volcker had
mentioned in his earlier conversation.

The Federal Reserve again asked to be kept

informed of the progress and status of the negotiations and subsequently suggested
that at the appropriate time information about the loan and the restrictions should be
provided to the Federal Reserve in writing.

In the ensuing week the negotiations

proceeded between the parties. At no point in the process was the Federal Reserve or
any government official a party to such negotiations.

Our only contact with the

negotiations was via the officials of the lead banks and was directed solely at securing
the appropriate restrictions on speculation.

The following week, the lead banks requested a meeting with the Federal
Reserve to discuss further the specifics of the restrictions and limitations on
speculation that would be part of the transaction partly so that those responsible for
drafting the agreement understood our concerns first hand. Officials of the lead banks
and attorneys representing the various parties met with Chairman Volcker and staff on
Friday, April 18, at which time specific language concerning such restrictions was
discussed. At that time, it was also made clear that the loan agreement would have to
provide language to ensure the orderly liquidation of the remaining Hunt silver.
During the following several weeks the parties to the prospective
transaction continued their private negotiations and the Federal Reserve staff was
kept generally apprised of the status of the matter. In those negotiations between the
banks and the Hunt interests, the nature and dimensions of the prospective transaction
evolved further. As we now understand it — and recognizing that the arrangement is
not yet complete — the essentials of the transactions are as follows:

A syndicate of 11 domestic banks and 2 foreign banks would establish a line
of credit to Placid Oil (which is owned by the Hunt family trusts but not by
the Hunt brothers) in the amount of $1.1 billion. The credit line would be
fully secured by substantially all of the oil and gas properties of the Placid
Oil Company thereby isolating the creditors from vulnerabilities associated
with a further fall in the price of silver.


The Hunt brothers and a newly formed wholly-owned subsidiary of Placid
would form a limited partnership. The Placid subsidiary would be the sole
general partner and the Hunts the limited partners.

The Hunts could

exercise no control or influence over the partnership. The proceeds of the
loan would fund Placid's contribution to the partnership.

The remaining


Hunt silver and certain of their other assets would be transferred to the
partnership, subject to existing Hunt silver loans. Thus, while the creditors
are protected from a fail in the price of silver, the Hunts and the
partnership are not.

Over time, and with the assistance of independent third party expertise,
the silver (and, if needed) other assets contributed to the partnership by
the Hunts will be liquidated and the proceeds of such liquidations would be
required to be distributed to the partners to pay the interest and principal
on the loan to Placid. The pressures associated with servicing this debt, to
say nothing of repaying its principal, should help ensure that such
liquidations will occur in a reasonable time frame.


The loan will be guaranteed by all material Placid subsidiaries and by the
Hunt brothers, and the Hunt guarantee will be secured by liens on
substantially all assets of the Hunt brothers.

The loan will be further

secured by the general partner’s right to receive distribution from the

The agreements relating to the partnership and the Hunt guarantee provide
that the Hunts and all related entities cannot make any new investments in
securities (except appropriate money market instruments) or take any
position in commodities or any other futures position for any speculative
purpose or otherwise while the Placid loan is outstanding or the partnership
is in existence except investments necessary for the prudent operation of
the farm, ranching and sugar businesses owned by the Hunts. Furthermore,
the Placid loan agreement prohibits Placid, while the loan is outstanding,
from engaging in any similar speculative activity including using the


proceeds of the loan to finance acquisitions that would be inconsistent with
the intent and purpose of the credit facility.

Special accounts, subject to

independent audits by a major public

accounting firm, will be established to control all such funds.

Records regarding the use of funds, the liquidation of assets, and other
relevant aspects of the transactions of the Hunts and the Partnership will
be available to the Federal bank regulatory agencies.
As noted above, the line of credit under the agreement will be $1.1 billion;

however, it is presently estimated that the amounts to be actually advanced will total
about $950 to $990 million.
In order to reconcile the prospective payments of $950 to $990 million with
the total obligations of $1,765 billion noted earlier, it must be kept in mind that the
estimate of $1,765 billion has been significantly reduced by (a) the Hunt/Engelhard
exchange of assets ($450 million) and (b) the liquidation of silver collateral and silver
positions by brokers which, in turn has permitted the repayment of bank loans and the
reduction of the brokers own direct exposure to the Hunts.

While we do not have

information on all of these latter transactions, the information which is available
suggests that such liquidations probably have reduced the total Hunt obligations by at
least $300 million and perhaps by as much as $400 million since late March. Other
things being equal, these developments would place the current level of the Hunt
obligations in a range of $900 million to $1 billion which is not out of line with the
payments we now expect will be made from the $1.1 billion credit facility to Placid
However, in looking at these prospective payments, it must also be kept in
mind that beginning on April 8, a group of the banks that comprise the syndicate that
will make available the $1.1 billion credit facility to Placid advanced about $300


million to Placid. In turn, Placid used those funds to pay off some of the then existing
creditors of the Hunts. Thus, these advances by U.S. banks to Placid have already had
the effect of restructuring some of the Hunt obligations as of March 31. After making
allowance for these developments, we anticipate — in very approximate terms — that
the loan takedowns under the $1.1 billion credit facility will be used in the following

Repayment of interim U.S. bank loans to Placid Oil made


in anticipation of the $1.1 billion credit facility which
in turn had been used to repay (1) $100 million in
direct U.S. bank loans to the Hunts; (2) $50 million
in indirect loans to Hunts (via brokers) made by
U.S. branches of foreign banks; (3) almost $100 million
in obligations to foreign banks; and (4) $50 million
in miscellaneous obligations to brokers and others.

Repayment of other advances by Placid Oil which should


permit Placid to repay $80 million in outstanding
silver secured loans to U.S. banks.

Repayment of direct Hunt loans by U.S. branches and


agencies of foreign banks.

Repayment of indirect loans to Hunts (via brokers) made


largely by U.S. branches of foreign banks.

Repayment of remaining Hunt and IMIC broker loans and



Repayment of direct loans by U.S. banks to Hunts

$ 35M


The difference between the anticipated takedown of $950 to $990 million
and the total credit facility of $1.1 billion reflect, in part, a cushion that will cover
any shortfall arising from liquidations of remaining forward or future positions and/or
the sale of assets.

That cushion may never be used and, to the extent it is, those

disbursements are subject to the same terms and conditions governing the overall
The amount of this credit is, of course, very large and the circumstances
under which it arose are clearly extraordinary. However, looked at in its totality, the
transaction may fairly be viewed as a complex debt restructuring in which current and
prospective creditors are seeking to strengthen th£ir positions and one in which the
debtors are seeking to consolidate obligations and insulate themselves from any of
several eventualities that could result in further needs for cash.

The credit is, and

always has been, a strictly private transaction in which business, credit and other
judgments have been made by the parties themselves with no guidance, suasion or
other efforts by the Federal Reserve to influence the nature and the terms of the
credit other than those related to the limitations on speculation. And, while it should
be clear that the credit, taken in its totality is, in fact, a restructuring of existing
obligations rather than the creation of new credit, total bank loans will increase
somewhat under the credit because they will be, in some instances, substituted for
existing credit supplied by brokers from their own funds. Finally, by virtue of the fact
that the debt restructuring strengthens the position of creditors, it is not contrary to
the broad public interest in the stability of financial markets and institutions.
The credit also has the result of stabilizing, to some unknown extent, the
financial position of the Hunts themselves. We do not know the financial position of
the Hunt brothers when allowance is made for the fact that the brothers do not have


access to the principal amount of the family trusts.

It is clear, however, that they

have assets and relationships that have permitted this transaction to be put together
to the satisfaction of the prospective creditors. In the absence of the Federal Reserve
Special Credit Restraint Program the credit may well have been arranged and put in
place without any prior knowledge of the Federal Reserve or other government

Looked at in that light, the fact of the Credit Restraint Program has

permitted the Federal Reserve to insist on the limitations on speculation which are a
part of the transaction and which are in the public interest.
In short, the $1.1 billion restructuring of debt is the result of an unhappy
chain of events that had occurred earlier and, in the extreme, posed a serious threat to
certain financial institutions and to the markets generally.

Thus, the focus of public

policy should be on the conditions and circumstances in the fall of 1979 and in early
1980 that permitted the situation to develop in the first instance. It is to that end the
Federal Reserve, in consultation with other government agencies and representatives
of the private sector, has now turned its attention.

The C h a i r m a n . I am sorry we are not closer together on H.R.
7001.1 will listen to you-----Chairman M i t c h e l l . If the Chair could interrupt this congenial
conversation, the House is now back on the business of building up
the military budget. I believe that we might have to get to the
I do thank you, Mr. Chairman and Chairman Volcker, for being
here. However, I am sorry that you, Chairman Volcker, did not
find any redeeming features in the bill. I have a vintage bottle of
Madeira that maybe we can share, and perhaps under that circum­
stance you might be able to see some redeeming features.
Mr. V o l c k e r . I would not want to be in the position of saying
“no redeeming features,” Mr. Chairman.
Chairman M i t c h e l l . Could I amend that to “few, if any”?
Mr. V o l c k e r . I have had to look pretty hard to find them, I must
say. [Laughter.]
But I do have the feeling, if I may just repeat the point I started
with, that we are in the midst of a rather massive structural
change, I suppose I can call it, a change in the structure of the
Federal Reserve System, with all these new institutions holding
reserves, and with other additional powers under the new bill. I
think this does raise questions in some of these areas of gover­
My answers would not necessarily be in the same direction as
Mr. Reuss; but I think, as things settle down a bit, there are


questions here that should be resolved—dealing with the stockhold­
ing issue and other aspects.
Chairman M i t c h e l l . Yours is a close call approach, rather than
do it immediately.
Mr. V o l c k e r . Right.
Chairman M i t c h e l l . All right. Before this hearing adjourns, I
just want to again take the opportunity to plead with you to watch
Mib closely. I think if the money supply does not grow in the next
couple of months, this country is in for serious difficulty. You have
already expressed your concern, but I want to reiterate my con­
cern. I do not think the recent undershooting spells disaster, but it
will cause something approaching a disaster if it is not corrected
Mr. V o l c k e r . I understand.
Chairman M i t c h e l l . Thank you very much.
[Whereupon, at 12:10 p.m., the hearing was adjourned.]
[The following letter was received from the American Bankers
Association for inclusion in the record:]



1120 Connecticut Avenue. N.W.
Washington, D.C.

Gerald M.Lowrie

Hay 8, 1980
Honorable Henry S. Reuss
Chairman, Committee on Banking,
Finance and Urban Affairs
United States House of Representatives
Washington, DC 20510
Dear M r . Chairman:
Thank you for your request for comments on HR 7001, a bill to alter the
structure of the Federal Reserve System. This bill was discussed at our
Banking Leadership Conference on April 28th and 29th. The Banking Leader­
ship Conference is composed of over 400 involved bankers from every size
and type of bank and every state in the nation. The Conference provides
a forum for developing a consensus on major issues affecting the entire
banking community. I would like to relay to you the results of the dis­
cussion of HR 7001 at our April Conference.
We believe that this legislation would not improve the structure of the
Federal Reserve System. We specifically object to eliminating the oppor­
tunity of Reserve Bank Presidents to vote on open market policy, the pri­
mary tool of monetary policy. A similar proposal was considered and re­
jected during the legislative process that led to the creation of the
Federal Open Market Committee in the Banking Act of 1935. Eliminating
the vote of Reserve Bank Presidents on open market policy would lead to
an unwarranted centralization of power within the Federal Reserve System.
Concern over excessive centralization within the Federal Reserve System
has always been an important factor in the evolution of its structure.
This concern dates back to politicization of financial management that
occurred under the First and Second Banks of the United States. We be­
lieve this concern is as important today as it has ever been.
HR 7001 would give Reserve Bank Presidents the responsibility to advise on
open market policy through the reconstituted Federal Advisory Council.
We do not believe this is sufficient. To have any real influence on open
market policy, the Reserve Bank Presidents must have some vote in that
policy. The influence of the Reserve Bank Presidents is important in t>he
formulation of open market policy, partly because they have access to
information about business and financial conditions in various regions' of
the country that may not be readily available to members of the Board of
Governors based in Washington. Through frequent contact with individuals
and institutions in their districts, the Reserve Bank Presidents gain an
understanding of regional business and financial conditions that may never
be captured in national data. This valuable information should be con­
sidered in making decisions on monetary policy. We do not believe it will
receive adequate consideration if Reserve Bank Presidents are denied a vote
on open market policy.


We view the proposed retirement of Federal Reserve stock more favorably.
The holding of Federal Reserve stock has less significance now that most
depository institutions are subject to reserve requirements set by the
Federal Reserve. We would be willing to explore with the Chairman the
conditions under which the Federal Reserve stock might be retired. Never­
theless, we are unwilling to do so in conjunction with the proposals
described above, which we feel would result in a less effective process
for determining open market policy.
We appreciate the opportunity to present our view on this issue.