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TO PROVIDE FOR AN AUDIT OF THE FEDERAL RESERVE
SYSTEM BY THE GENERAL ACCOUNTING OFFICE

HEARINGS
BEFORE THE

COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
NINETY-THIRD CONGRESS
FIRST SESSION
ON

H.R. 10265
A BILL TO PROVIDE FOR AN AUDIT BY THE GENERAL
ACCOUNTING OFFICE OF THE FEDERAL RESERVE
BOARD, BANKS, AND BRANCHES, TO EXTEND SECTION
14(B) OF THE FEDERAL RESERVE ACT, AND TO PROVIDE
AN ADDITIONAL $ 0 0 0 0 0 FOR THE CONSTRUCTION OF
6,0,0
FEDERAL RESERVE BANK BRANCH BUILDINGS
OCTOBER 2 AND 3, 1973
Printed for the use of the
Committee on Banking and Currency

U.S. GOVERNMENT PRINTING OFFICE
22-355 0




WASHINGTON : 1973

COMMITTEE ON BANKING AND CURRENCY
WRIGHT PATMAN, Texas, Chairman
WILLIAM A. B A R R E T T , Pennsylvania
WILLIAM B. WIDNALL, New Jersey
LEONOR K, (MRS. JOHN B.) SULLIVAN,
A L B E R T W. JOHNSON, Pennsylvania
J. WILLIAM STANTON, Ohio
Missouri
B E N B . B L A C K B U R N , Georgia
H E N R Y S. REUSS, Wisconsin
G A R R Y BROWN, Michigan
THOMAS L. ASHLEY, Ohio
LAWRENCE G. WILLIAMS, Pennsylvania
WILLIAM S. MOORHEAD, Pennsylvania
CHALMERS P . WYLIE, Ohio
R O B E R T G. STEPHENS, JR., Georgia
M A R G A R E T M. H E C K L E R , Massachusetts
F E R N AND J. ST GERMAIN, Rhode Island
P H I L I P M. C R A N E , Illinois
H E N R Y B. GONZALEZ, Texas
JOHN H . ROUSSELOT, California
JOSEPH G. MINISH, New Jersey
STEWART B . McKINNEY, Connecticut
R I C H A R D T . HANNA, California
BILL F R E N Z E L , Minnesota
TOM S. GETTYS, South Carolina
ANGELO D . RONCALLO, New York
F R A N K ANNUNZIO, Illinois
JOHN B . CONLAN, Arizona
THOMAS M. REES, California
CLAIR W. B U R G E N E R , California
JAMES M. HANLEY, New York
MATTHEW J. R I N A L D p , New Jersey
F R A N K J. BRASCO, New York
EDWARD I. KOCH, New York
WILLIAM R. COTTER, Connecticut
P A R R E N J. MITCHELL, Maryland
WALTER E. F AUNT ROY, District of Columbia
ANDREW YOUNG, Georgia
JOHN JOSEPH MOAKLEY, Massachusetts
F O R T N E Y H. (PETE) STARK, JR., California
L I N D Y (MRS. HALE) BOGGS, Louisiana




PAUL NELSON, Clerk and Staff Director
CURTIS A. PRINS, Chief Investigator
BENET D . GELLMAN, Counsel

JOSEPH C. LEWIS, Professional Staff Member
DAVIS COUCH, Counsel

ORMAN S. FINK, Minority Staff Director
(ID

CONTENTS
Page

Hearings held on—
October 2, 1973
October 3, 1973
Text of H.R. 10265

1
83
4
STATEMENTS

Carlock, John K., Fiscal Assistant Secretary, Department of the Treasury.
Mitchell, Governor George W., Vice Chairman, Board of Governors of
the Federal Reserve System; accompanied by Frederic Solomon, Director, Division of Supervision and Regulation, Board of Governors,
Federal Reserve System
Staats, Hon. Elmer B., Comptroller General of the United States

7

101
10

ADDITIONAL INFORMATION SUBMITTED FOR THE RECORD

Brown, Hon. Garry, requested budget information of the Federal Government for the years 1914-73
118
Carlock, John K., table entitled, " Direct Borrowing From Federal Reserve Banks, 1942 to Date"
9
Mitchell, Gov. George W.:
List of publications of the Federal Reserve Board, dated June 1973__
108
Response to questions of Chairman Patman:
Amount of convertible foreign currencies as of September 1973 __
123
Assets of the Federal Reserve Bank of New York with attached
" Statement of Condition of Each Federal Reserve Bank on
October 3, 1973"
119,120
Patman, Hon. Wright:
" Federal Reserve Expenditures of Taxpayers' Funds—Only a GAO
Audit Will Solve the Problem," submission of report
84
"Federal Reserve Portfolio Holdings of U.S. Government Securities,
December 31, 1914-July 31, 1973" (table)
117
Staats, Hon. Elmer B.:
Accountant's opinion page from t h e ' ' Annual Report of the Board of
Governors of the Federal Reserve System for 1972," by Touche,
Ross & Co., Certified Public Accountants, Washington, D.C., dated
January 29, 1973
22
" Improvements Needed in the Federal Reserve Reporting System
for Recognized Dealers in Government Securities," report to the
Vice Chairman of the Joint Economic Committee, Congress of the
United States, dated October 6, 1971
Response to questions of:
24
Hon. Garry Brown
68
Hon. James M. Hanley
76
Hon. Lawrence G. Williams
72
Suggested alternative language for H.R. 10265
14
(in)







TO PROVIDE FOR AN AUDIT OF THE FEDERAL RESERVE
SYSTEM BY THE GENERAL ACCOUNTING OFFICE
TUESDAY, OCTOBER 2, 1973
H O U S E OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room 2128
Rayburn House Office Building, Hon. Wright Patman [chairman]
presiding.
Present: Representatives Patman, Barrett, Sullivan, Reuss, Ashley,
Moorhead, Stephens, St Germain, Gonzalez, Minish, Gettys,
Annunzio, Hanley, Koch, Cotter, Mitchell, Moakley, Boggs, Widnall,
Johnson, Stanton, Blackburn, Brown, Williams, Heckler, Crane,
Rousselot, McKinney, and Burgener.
The CHAIRMAN. The committee will please come to order.
This morning the committee meets to consider H.R. 10265. The
legislation would, first, provide for an audit by the GAO of the Federal
Reserve Board, banks and branches; second, extend section 14(b) of the
Federal Reserve Act, that allows the U.S. Treasury to draw funds
from the Federal Reserve System; and third, to increase from $60
million to $120 million the amount of money that can be spent for the
construction of Federal Reserve bank branch buildings.
Perhaps the most important question that must be answered in connection with this legislation is whether or not an agency of the U.S.
Government—namely, the Federal Reserve System—can expend taxpayers' funds without accounting to anyone outside of the System for
the methods in which the funds were expended.
While it is true that the Federal Reserve System does not operate on
appropriated money, at the same time it must be realized that the
funds that the System uses to conduct its operation are just as much
taxpayers' funds as if they had been appropriated by the Congress.
The Federal Reserve System derives its income from interest on
Government securities that it holds in its portfolio. Each year interest
income which is not used for Federal Reserve expenditures is returned
to the Treasury.
Thus, the less money that the Federal Reserve System spends, the
greater amount it will return to the Treasury and thus reduce the taxpayers' burden of running our Government.
Since the Federal Reserve Act was signed on December 23, 1913,
there has been no audit of the entire Federal Reserve System which
was not controlled in some manner by the System itself.
And although the GAO was established in 1921, it has never had the
authority to audit the entire Federal Reserve System. Until 1933, the
GAO did audit the Board of Governors of the Federal Reserve System,
b u t was not allowed to audit the 12 Federal Reserve banks and their




(1)

2
branches. However, the Banking Act of 1933 removed even the GAO's
authority to audit the Board of Governors.
It is my belief that this lack of an outside audit is the main reason
why the Federal Reserve System spends money in such a manner that
if any other official in any other agency of the Government tried to
imitate, that official would wind up in jail.
For example, in 1972, the Federal Reserve System spent $129,727
in memberships, dues, and contributions to some 260 different organizations such as States and local chambers of commerce, Rotary
clubs, bar associations, restaurant associations, public relations groups,
press clubs, and even the Ambassador Club of TWA.
Although the Federal Reserve System has discontinued its practice
of paying dues to the American Bankers Association, it still spent
more than $80,000 last year for dues in various banking organizations
such as the Banking Administration Institute, American Institute
of Banking, and the Robert Morris Association.
The various Federal Reserve banks also appear to be indirectly
paying dues to some ABA-connected State banking associations. For
instance, the New York Federal Reserve Bank spent more than $8,000
on a luncheon that it hosted during an annual convention of the New
York and New Jersey Bankers Associations. The Philadelphia Federal
Reserve Bank spent more than $1,200 for its share of luncheon it
cohosted with the New York bank at the New Jersey Bankers Association's annual meeting at Atlantic City.
In.addition to the dues and contribution funds the Federal Reserve
System also is spending thousands of dollars in travel and moving
^expenses for employees and potential employees that are not allowed
for other Government employees.
| As an example, a Mr. M. C. Peterson was transferred from the
; Seattle branch to the Portland branch of the San Francisco Federal
Reserve Bank. The Portland branch paid out $7,884.90, spread out
over 16 occasions, in connection with this transfer. On each occasion
the only reason for the payment is a notation, transfer from Seattle
branch to Portland branch. It should be noted in connection with this
transfer that the Federal Reserve System spent nearly $8,000 in
a transfer of an individual when the distance was only 175 miles.
But perhaps the most extravagant expenditures in this area were
made in connection with the hiring of a Mr. Balles as president of the
San Francisco Federal Reserve Bank.
Mr. Balles moved from Pittsburgh, Pa., to San Francisco and in
connection with this move the Federal Reserve Bank of San Francisco
paid $19,249.18 in four payments over roughly a 3-month period.
More than $14,000 of the $19,000 total was paid in two payments 5
days apart in December of 1972. The only reason given for any of the
payments in connection with the move was Pittsburgh to San
Francisco.
Certainly an audit of even the most basic type would have required
more of an explanation for an expenditure of more than $19,000 of
the taxpayers7 funds than the barebones description provided by the
Federal Reserve Service.
The Federal Reserve System also spends the taxpayers' money
heavily in the area of athletic, social, and recreational activities. For
instance, the Dallas Federal Reserve Bank, during 1972, purchased



3
1,152 ping pong balls. Since the Dallas Federal Reserve Bank has only
895 employees it means that theoretically there was more than 1
ping pong ball purchased for every employee in the bank.
While Dallas may claim the ping pong expenditure championship,
the art award goes to the Federal Reserve Bank of Philadelphia.
During 1972, the bank spent $1,302 for an instructor for the Art
Club plus an additional $529 on art supplies including $154 for
flowers.
If Dallas claims the ping pong championship, and Philadelphia the
art award, then the music citation must surely go to the Richmond
bank. During 1972 the bank spent a total of $1,410.63 in connection
with the bank's choral group; $750 was in the form of salary to the
choral director, with $490 going to the choral group's accompanist.
There was also an expenditure of $170.63 for music for the choral
group. A survey of the bank's monthly expenses show that apparently
the bank was more vocal in some months than in others. For instance,
in June the choral director was paid only $15, and the accompanist
$10. During May the director was paid $150 and the accompanist $100.
These are only a few examples of hundreds of totally unnecessary
expenditures made by the Federal Reserve System. During the course
of the hearings I will bring out more such expenditures and ask that
they be explained by officials of the Federal Reserve System.
Before moving to our first witness, I would like to remind members
that these hearings were called pursuant to a vote of the committee
in August in which members expressed a desire to learn more about
the need for an audit of the Federal Reserve System.
As I recall, the vote to hold these hearings was unanimous, and I
am indeed pleased that there is so much interest in this vital subject.
Especially since expenses of the Federal Reserve banks and branches
have increased from more than $197 million in 1964 to nearly $414
million last year, an increase since 1964 of 210 percent.
Our first witness this morning is John K. Carlock, Fiscal Assistant
Secretary, Department of the Treasury, who will discuss the section
of the bill dealing with the Treasury Department draw on the Federal
Reserve System.
He will be followed this morning by the Honorable Elmer B.
Staats, Comptroller General of the United States and tomorrow we
will hear from Gov. George W. Mitchell, Vice Chairman of the
Federal Reserve System.
[The text of H.R. 10265 follows:!




4

•as- H. R. 10265
IN THE HOUSE OF REPRESENTATIVES
SEPTEMBER 13,1973

Mr. PATMAN introduced the following bill; which was referred to the Committee on Banking and Currency

A BILL
To provide for an audit by the General Accounting Office of the
Federal Reserve Board, banks, and branches, to extend section 14(b) of the Federal Reserve Act, and to provide an
additional $60,000,000 for the construction of Federal Reserve Bank branch buildings.
1

Be it enacted by the Senate and House of Representa-

2 tives of the United States of America in Congress assembled,
3

SECTION

1. (a) The Comptroller General shall make,

4 under such rules and regulations as he shall prescribe, an audit
5 for each fiscal year of the Federal Reserve Board and the
6 Federal Reserve banks and their branches.
7

(b) In making the audit required by subsection (a),

& representatives of the General Accounting Office shall have
I




5
2
1

access to books, accounts, records, reports, files, and all other

2 papers, things, or property belonging to or used by the entities
3 being audited, including reports of examinations of member
4 banks, and they shall be afforded full facilities for verifying
5 transactions with balances or securities held by depositaries,
6 fiscal agents, and custodians of such entities.
7

(c) The Comptroller General shall, at the end of six

8

months after the end of the year, or as soon thereafter as may

9

be practicable, make a report to the Congress on the results

10 of the audit required by subsection (a), and he shall make
11 any special or preliminary reports he deems desirable for
12

the information of the Congress. A copy of each report made

13 under this subsection shall be sent to the President of the
14 United States, the Federal Reserve Board, and the Federal
15

Reserve banks. In addition to other matters, the report shall

16 include sudh comments and recommendations as the Comp17 troller General may deem advisable, including recommenda18

tions for attaining a more economical and efficient admmistra-

19 tion of the entities audited, and the report shall specifically
20 show any program, financial transaction, or undertaking
21

observed in the course of the audit which in the opinion of

22

the Comptroller General has been carried on without author-

23 ity of law.
24

(d) The Comptroller General is authorized to employ

25

such personnel and to obtain such temporary and intermittent




6
1

3
1

services as may be necessary to carry out the audit required

2 by subsection (a), at such rates as he may determine, with3 out regard to the civil service and classification laws, and
4 without regard to section 15 of the Act of August 2, 1948,
5

6

as amended (5 U.S.C. 3109b).
SEC. 2. Section 14 (b) of the Federal Eeserve Act, as

7 amended (12 U.S.C. 355), is amended by striking out
8 November 1, 1973, and inserting in lieu thereof "July 1,
9

1974" and by striking out "October 31, 1973" and inserting

10 in lieu thereof "June 30, 1974".
H

SEC. 3. The ninth paragraph of section 10 of the Federal

12 Eeserve Act, as amended (12 U.S.C. 522), is amended by
13 striking out "$60,000,000" and inserting "$120,000,000".




7
The CHAIRMAN. Mr. Carlock, we are delighted to have you, sir,
and I believe that you have a prepared statement. You may present
it in your own way. You are recognized.
STATEMENT OF JOHN K. CARLOCK, FISCAL ASSISTANT SECRETARY,
DEPARTMENT OF THE TREASURY
Mr. CARLOCK. Thank you, Mr. Chairman, and members of the
committee.
I am happy to have the opportunity to appear in support of section
2 of H.R. 10265. That section would extend until June 30, 1974, the
existing authority of the Federal Reserve banks to purchase directly
from the Treasury public debt obligations up to a limit of $5 billion
outstanding at any one time. In the absence of action, this directpurchase authority will expire at the end of this month.
The purpose oi the direct-purchase authority is to assist in the
efficient management of the public finances. On the basis of the record,
I do not believe the legislation to extend the authority for a temporary
period is controversial. The authority was first granted in its present
form in 1942, for a temporary period, and it has been renewed for
temporary periods on 17 separate occasions.
Since 1942, the authority has been used prudently, on only a limited
number of occasions. Its value does not rest, however, on its frequent or
extensive use. It rests, rather, on the fact that, simply by being available, a backstop is provided for all our Treasury cash and debt operations, permitting more economical management of our cash position
and assuring our ability to provide needed funds almost instantaneously in the evei^ of any kind of emergency.
Several ppints/tnay be summarized to indicate why we feel that
maintenance of this authority is essential.
First, it provides us with the margin of safety, permitting us to let
our cash balance fall to otherwise unacceptably low levels preceding
periods of seasonally heavy revenues.
This, in turn, results in balances that are not as high as they otherwise would be during the periods of flush revenues that follow, allowing
the public debt to be kept to a minimum and thus saving interest
costs to the Government.
Our recent experience illustrates the benefit of being able to operate
in this way. In August, you will recall, the money and capital markets
were extremely sensitive to demands upon them. It was therefore
necessary to keep Treasury borrowing in those markets to a rockbottom minimum.
We were able to do this because, if cash requirements exceeded our
projections, we would have the direct-purchase authority to rely on.
As it turned out, our cash requirements did slightly exceed our projections, and we used the direct-purchase authority on one day,
August 15, in the amount of $351 million, and for 9 days between
September 7 and September 17 in a maximum amount of $485 million.
If we had not had the authority, we would have had to borrow considerably more than this amount in the market—probably as much as
$1.5 billion—in order to have a prudent margin, and we would be
carrying that amount now in our cash balances which are already
seasonally high because of the September cash collections.



8
In the second place, there is always the possibility that erratic
swings in money market conditions or international flow of funds
may produce changes of a character that rather suddenly reduce our
borrowings from other sources.
While we have never to my knowledge had to use the authority
for this reason, the availability of direct access to Federal Reserve
credit in such circumstances would permit us the flexibility required
to draw on our cash and to arrange alternative financing plans.
Finally, the direct-purchase authority is available to provide an
immediate source of funds for temporary financing should this be required by a national emergency on a broader scale. While it has never
happened, and we hope it never will, a situation could be possible in
which our financial markets would be disrupted at a time when large
amounts of cash had to be raised to maintain governmental functions
and meet the emergency.
Consequently, the direct-purchase authority has for many years
been a key element in all of Treasury's financial planning for a national
emergency or a nuclear attack. This is a major reason why the authority should be continued for at least $5 billion, even though little
more than a fifth of that amount has ever actually been used in the
past.
I want to emphasize, consistently with these three points, that the
direct-purchase authority is viewed by the Treasury as a temporary
accommodation to be used only under unusual circumstances.
The Treasury fully agrees with the general principle that its new
securities should meet the test of the market. Nor should the directpurchase authority be considered a means by which the Treasury
may independently attempt to influence credit conditions by circumventing the authority of the Federal Reserve to engage in open
market operations in Government securities.
I n that connection, it is important to emphasize that any direct
recourse by the Treasury to Federal Reserve credit under this authority is subject to the discretion and control of the Federal Reserve
itself.
This borrowing authority has never been abused. The accompanying
table providing details on the instances of actual use, shows that it
has been used infrequently and only for,limited periods. The borrowings are promptly shown on the daily Treasury statement and the
weekly Federal Reserve statement, assuring the widespread publicity
that is the best possible deterrent to abuse.
The Federal Reserve also includes the information in its annual
report to the Congress. And, of course, this borrowing, like any other
Treasury borrowing, is subject to the debt limit.
As an essential backstop to our cash management, and an insurance
policy against financial emergency, this authority should be kept
available in case of need.
[The table referred to by Mr. Carlock follows:]




9
DIRECT BORROWING FROM FEDERAL RESERVE BANKS, 1942 TO DATE

Calendar year
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
19731

Days used

_

,
T

T

19
48
None
9
None
None
None
2
2
4
30
29
15
None
None
None
2
None
None
None
None
None
None
None
3
7
8
21
None
9
1
10

Maximum
amount at
any time
(millions)

Number of
separate
times used

Maximum
number
of days
used at
any 1 time

$422
1,320

4
4

6
28

484

2

7

220
180
320
811
1,172
424

1
2
2
4
2
2

2
1
2
9
20
13

207

1

2

169
153
596
1,102

1
3
3
2

3
3
6
12

610
38
485

1
1
3

9
1
6

i Through Sept. 30,1973.

The CHAIRMAN. Thank you. Mr. Staats, we will ask you to come up
to the microphone, and have you as a witness now, and then after
you have concluded, members will probably w.ant to ask questions of
Mr. Carlock, although his subject has been pretty well covered over
previous years, and yours is more new. We are delighted to have you
on a subject that there is too little knowledge in the Nation. I t is a
matter of great importance, and we should have all the information
on it that we can.
We will recognize you, Mr. Staats, for presenting your statement,
and also, if you do not include your entire statement in the record in
your presentation, it may be inserted as it is. Also, each one of you
may extend your remarks if you desire to do so, and insert-any material that will support your side in any way. That is, either extraneous
matter, or basic material of your own, so we are glad to have you, Mr.
Staats.
You are Comptroller General of the United States; is that the right
title?
Mr. STAATS. T h a t is correct, Mr. Chairman.
The CHAIRMAN. And you are in your job for 15 years. I t is the only
job that is that way, and you are wholly divorced from the executive
branch, and you are only responsible to the legislative branch, is t h a t
correct?
Mr. STAATS. T h a t is correct.




10
The CHAIRMAN. I t is an unusual situation, in other words, the law
makes it very plain that you are independent. I congratulate you on
the fine work that you have done in the past. We are looking forward
to hearing your testimony, so you may proceed.
STATEMENT OF HON. ELMER B. STAATS, COMPTROLLER GENERAL
OF THE UNITED STATES
Mr. STAATS. Thank you very much, Mr. Chairman. I appreciate
your remarks.
We welcome the opportunity to testify before this committee concerning the proposal in H.R. 10265, to require our Office to make
annual audits of the Federal Reserve Board, banks, and branches.
We have no comments on the other provisions of the bill.
Before I comment on some of the specific points I would like to
make concerning the provisions of H.R. 10265, I believe it would be
advisable to briefly discuss some of the background on prior proposals
to require our Office to audit the Federal Reserve System.
Until 1933 GAO audited the expenditure vouchers of the Federal
Reserve Board but not of the banks. The audits were made because
of the ruling of the Attorney General in 1914 that the funds obtained
by assessment by the Board from the banks to meet the expenses were
public moneys.
The Banking Act of 1933, however, superseded this ruling by declaring that these funds were not to be construed as Government funds
or appropriated moneys. With this change, the GAO audit of the
Board's expenditure vouchers was discontinued.
As you are aware, Mr. Chairman, on occasion our Office has assisted
this committee in its work relating to the Federal Reserve System. In
1971, for example, we also completed at your request as chairman of
the Joint Economic Committee a study of the reporting system operated by the Federal Reserve Bank of New York for dealers in
Government securities.
With one exception, however, we do not have the authority to
initiate audits of the several entities of the Federal Reserve System.
The exception is the responsibility assigned to us by the act of M a y
20, 1966, to audit the cancellation and destruction of U.S. currency
unfit for circulation.
Specifically, this act provides that:
The Comptroller General of the United States shall audit the cancellation and
destruction, and the accounting with respect to such cancellation and destruction,
of any currency of the United States unfit for circulation, regardless of who is
responsible for, and regardless of who performs, such cancellation, destruction, or
accounting. The Comptroller General shall have access to any books, documents,
papers, and records which he deems necessary to facilitate an effective audit
pursuant to this section.

This audit authority was provided in connection with the change in
procedures to transfer authority to destroy unfit Federal Reserve
notes, previously vested by law in the Comptroller of the Currency, to
the Secretary of the Treasury.
The destruction of most unfit currency is carried out in Federal
Reserve banks. We have since reviewed these activities of the Federal
Reserve banks on a selected basis each year.



11
Three reports on this work have been submitted to this committee.
In addition, 20 reports have been submitted to the presidents of the
specific Reserve banks.
Generally, we have not found significant deficiencies in the administrative procedures and controls over these activities.
The question of whether there should be a GAO audit of the Federal
Reserve Board and the Reserve banks was discussed during consideration of the legislation which resulted in the Government Corporation Control Act of 1945. The primary purpose of this act was to
provide greater congressional control over wholly owned and partly
owned Federal corporations.
I t was determined that the Federal Reserve Board and banks
should be excluded from the audit provisions of that act. Apparently,
the main reasons for this determination was that the Board exercised
strong control over the Reserve banks and all of the stock of those
banks was owned by member banks rather than by the Government.
A bill introduced on July 20, 1959, in the 86th Congress, H.R. 8302,
would have directed the Comptroller General to conduct an audit of
the Federal Reserve System for the period commencing with the
enactment of the Federal Reserve Act, December 23, 1913, and ending
December 31, 1958.
We objected to this measure because it would have required an
audit for a 4 5 ^ e a r period which, as we then stated, constituted " a
tremendous task which would drain our audit manpower assigned to
defense and other important Government expenditures/'
I n subsequent years other bills have been introduced, but not
enacted, which would have required GAO to audit the Federal
Reserve System. I n commenting on such legislation we offered no
opinion on whether such an audit by our Office was advisable, but
stated that if the Congress wanted such an audit made, we would
carry out the congressional intent by making whatever audits the
Congress wished.
One of the primary purposes of the Federal Reserve System is the
control and regulation of the supply of money and credit. The Federal
Reserve System expands and contracts the supply of money and
credit primarily by purchasing and selling U.S. Government obligations.
As of June 30, 1973, the Federal Reserve System owned U.S.
securities totaling about $75 billion. The financial statements of the
Federal Reserve banks for calendar year 1972 show that total earnings
from operations amounted to about $3.8 billion
The CHAIRMAN. Would 3^ou repeat that please?
Mr. STAATS. Yes; the financial statements of the Federal Reserve
banks for calendar year 1972 show that total earnings from operations
amounted to about $3.8 billion of which about 99 percent was derived
from interest on U.S. Government securities. Total expenses of the
banks in 1972 amounted to about $442 million including about $35
million in assessments for the expenses, and other costs of the Board
of Governors; nonoperating losses amounted to about $49 million,
member banks were paid dividends of about $46 million; and about
$51 million was transferred to surplus.
The balance of net earnings, amounting to about $3.2 billion, was
transferred to the U.S. Treasury.



12
In view of the highly important part the Federal Keserve System
plays in the Nation's system of money and credit, we have concluded
that there should be a GAO audit of the Federal Reserve Board and
the Reserve banks.
However, there are three possible alternatives that may be considered in determining the scope of the audits in the event Congress
agrees with our view as to the need for a GAO audit.
One, the first alternative would be an audit of the accounts, financial
transactions, and financial reports of the Board, and the Reserve
banks. This kind of audit would be for the purpose of arriving at
opinions as to whether financial transactions are carried out in accordance with applicable legal requirements and are properly accounted for, and whether the financial reports present fairly the
financial position, changes in financial position, and results of operations of the various entities in the System.
As provided in H.R. 10265, our reports on such work would disclose
any program, financial transaction, or undertaking which in our
opinion was carried out without authority of law. In performing this
kind of an audit, we would first make a careful review of the nature
and adequacy of all audit work already being performed within the
Federal Reserve System under existing arrangements before determining how much additional auditing by us would be needed.
Two, the second alternative would embrace the audit work
included in the first alternative but would be extended to include
selected examination of the management of resources, such as computers and other equipment, buildings, and personnel, to evaluate
the efficiency and economy with which such resources are procured
and used. Such audit work would include determining the causes of
any inefficient or uneconomical practices found and proposing constructive recommendations for improvement for the consideration of
management officials.
H.R. 10265 specifically provides for audit work of this nature since
it requires that we include in our reports "recommendations for attaining a more economical and efficient administration of the entities
audited. ,,
Three, the third alternative would embrace the kind of audit work
described for the first two alternatives but would be further extended
to include reviews of the results of the programs and activities of the
System, including the extent to which its established objectives are
being achieved.
This extension of the scope of our auditing activities was specifically
directed in the Legislative Reorganization Act of 1970 with respect
to Federal departments and agencies. That act directs us to "review
and analyze the results of Government programs and activities carried
on under existing law."
As we interpret H.R. 10265, the language is broad enough to embrace this alternative.
The language in section 1 (a) of the bill refers to the Federal Reserve
Board and the Federal Reserve banks and their branches. The
Federal Advisory Council and the Federal Open Market Committee
are part of the Federal Reserve System but technically are not a part
of the Board of Governors or the Federal Reserve banks, and H.R.
10265 would authorize our office to audit only the Board of Governors



13
and the Federal Reserve banks and branches. If the Board of Governors and the Federal Reserve banks and branches are to be audited
by our office, we believe that the Federal Advisory Council and the
Federal Open Market Committee should also be subject to audit by
our office.
Section 1(b) of H.R. 10265 states that GAO shall have access to
reports of examinations of member banks. We have assumed that this
language would give us access to examination reports of member
banks in the custody of the Board or the Reserve banks prepared by
bank examiners of the Comptroller of the Currency, the F D I C , and
the various States, as well as those of the Federal Reserve banks.
We are not, therefore, suggesting any change in the language of H.R.
10265 in this regard. We do suggest, however, that the committee
report on the bill make it clear that GAO will be given access to all
examination reports, from whatever source, of member banks.
H.R. 10265 calls for an annual audit and also an annual report.
We do have reservations about this requirement.
The Federal Reserve System is a large organization and its operations are complex. The additional workload this requirement would
thrust on us would be heavy. We would much prefer that the annual
audit requirement be removed and that the activities of the Federal
Reserve System, if it is to be audited by GAO, be placed on the same
basis as those of the Federal departments and agencies so far as
frequency of audit is concerned.
Under the Budget and Accounting Act, 1921, and the Budget and
Accounting Procedures Act of 1950, the determination as to frequency
as well as scope of audit performed is left to our judgment.
These judgments are made in the light of congressional interest in
specific programs and problems and, as the 1950 act requires, after
giving "due regard to generally accepted principles of auditing, including the effectiveness of accounting organizations and systems, internal
audit and control, and related administrative practices."
The audit language in the bill provides that the GAO audit be made
under such rules and regulations as we prescribe. In accordance with
our regular audit policy, any rules or regulations that we would prescribe would specifically require our auditors to review and evaluate
the nature and effectiveness of any auditing already being done in the
System in determining the extent of GAO audit work to be performed.
This step is in conformity with generally accepted principles of
auditing and is also essential in avoiding unnecessary duplication and
expenditure of effort.
The reason for our mentioning this point is that we recognize that
a substantial amount of auditing is already being performed in the
System.
Under existing arrangements, a firm of independent CPA's makes
an annual audit of the accounts of the Board of Governor's, and their
opinion on the Board's financial statements is included in the Board's
annual report. We understand that copies are furnished to this committee and to the Senate Committee on Banking, Housing, and
Urban Affairs.
We also understand that each Federal Reserve bank and branch is
examined at least once each year by the Board's staff of field examiners,
who are directed by the Board to determine the financial condition of

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14

the bank and compliance by its management with applicable provisions of law and regulation.
The examination includes a comprehensive review of each bank's
expenditures to determine if they are properly controlled and of a
nature appropriate for a Reserve bank. A public accounting firm is
engaged to accompany the Board's examiners on their examination
of one Reserve bank each year, to provide an outside evaluation of
the adequacy and effectiveness of the examination procedures.
The operations of each bank are also audited by an internal auditing
staff on a year-round basis. This work is done under the direction of
a resident general auditor who is responsible to the bank's board of
directors through its chairman and its audit committee.
The board's examiners review the internal audit programs of each
bank each year to see whether the coverage is adequate and the procedures effective.
In view of the substantial amount of auditing already being performed in the System, we believe that a requirement for an annual
audit by our Office could result in an uneconomical use of our staff.
If the audit language could be written to give us more flexibility
as to the frequency of audit, I am sure that we could provide the
Congress with relatively frequent GAO reports on the financial operations of the System and on any problems of specific interest or concern to the Congress made known to us.
The audit language in H.R. 10265 is broad in that it would direct
us to make an audit of the board and the Reserve banks and their
branches for each fiscal year and no restriction of any kind is stated.
Coupled with the provision that the Comptroller General shall prescribe rules and regulations for the audits, the language of the bill as
drafted would give us the option of determining the nature and extent
of audit work to be done.
If it is intended that the GAO audit embrace all of the alternatives
I described earlier and that such audit include the Federal Advisory
Council and the Federal Open Market Committee, there is attached
draft language, as a substitute for H . R . 10265 which we believe more
specifically sets out the type of authority we need.
I do not need to read the suggested alternative language, Mr.
Chairman.
The CHAIRMAN. Without objection it will be inserted at the end of
your remarks.
[The suggested alternative language for H.R. 10265 referred to b y
Mr. Staats follows:]
SUGGESTED ALTERNATIVE LANGUAGE

SEC. 1. (a) The Comptroller General is authorized and directed to audit the
programs, activities, and financial operations of the Federal Reserve System
(including the Board of Governors of the Federal Reserve System, the Federal
Reserve banks, branch banks, the Federal Advisory Council, and the Federal
Open Market Committee) and to make recommendations for achieving greater
efficiency, economy, and effectiveness in the conduct of such programs, activities,
and financial operations. The audits shall be made under such rules and regulations as may be prescribed by the Comptroller General. A report of any such
audit shall be made by the Comptroller General to the Congress when he deems
it necessary to keep the Congress informed of the programs, activities, and financial
operations of the System, together with such recommendations with respect
thereto as the Comptroller General may deem advisable.



15
(b) In making the audit required by subsection (a), representatives of the
General Accounting Office shall have access to books, accounts, records, reports,
files, and all other papers, thing, or property belonging to or used by the entities
being audited, including reports of examinations of member banks, and they shall
be afforded full facilities for verifying transactions with balances or securities
held by depositaries, fiscal agents, and custodians of such entities.
(c) The Comptroller General is authorized to employ such personnel and to
obtain such temporary and intermittent services as may be necessary to carry
out the audit required by subsection (a), at such rates as he may determine,
without regard to the civil service and classification laws, and without regard to
section 15 of the Act of August 2, 1948, as amended (5 U.S.C. 3109b).

The CHAIRMAN. I would like to ask you something about the amount
of business done by this Federal Keserve. Do you examine the 20
agents of the Federal Reserve Open Market Committee and the
Federal Reserve System? The 20 agents all in New York or based in
New York are selected by the Federal Reserve System, and they are
the only ones that can buy or sell Government bonds for anyone who
desires to buy or sell direct from the System's Open Market Committee.
Is that a correct statement, Mr. Staats?
Mr. STAATS. T h a t is my understanding, sir.
The CHAIRMAN. In other words, if anyone, a person or an entity
like a corporation or a bank, wants to buy bonds, they would have
to buy them through one of the 20 agents; and if they want to sell
bonds, they would have to sell them through one of these 20 agents.
Now, about how much business a year is done through those 20
agents, Mr. Staats?
Mr. STAATS. I do not have any figures on that, Mr. Chairman.
The CHAIRMAN. Let us have order, please.
Mr. STAATS. I am afraid I do not have figures on that, other than
those which I have included in my statement.
The CHAIRMAN. The amount of business that is done through the
open market operations and through other market operations in the
New York Federal Reserve Bank would you say aggregated billions
of dollars a month?
Mr. STAATS. That would be in rough terms my understanding; but
again, I do not have the specific figures.
The CHAIRMAN. Well, of course it is enormous.
Mr. STAATS. Are you talking, Mr. Chairman, about the purchase of
Government securities?
The

CHAIRMAN. Yes,

sir.

Mr. STAATS. I misunderstood you. We do have figures on that. In
1970 the total transactions reported by the dealers in Government
securities recognized by the Federal Reserve System was $738 billion.
The CHAIRMAN. $738 billion, or $2 billion a day.
Mr. STAATS. T h a t represents about three times the value of the
transactions on the New York Stock Exchange.
The CHAIRMAN. Three times the value of the transactions on the
New York Stock Exchange?
Mr.

STAATS.

Yes.

The CHAIRMAN. T h a t indicates the size of the business that we are
engaging in here, and about the tremendous importance to make sure
it is done properly. Although we are not charging anybody in the
Federal Reserve System of maladministration or wrongdoing, we are
not charging any persons, as a Member of Congress, House or Senate,
or anybody in the executive branch, or any other branches of Govern


16
ment of any wrongdoing; but we want to bring out the size of this
operation and show the need for some surveillance, more than we have
now, over its operations.
I will forgo asking any other questions at this time, and will yield
to Mr. Widnall.
Mr. WIDNALL. Thank you, Mr. Chairman.
Mr. Staats and Mr. Carlock, we certainly welcome you here before
the committee and appreciate very much the testimony that you have
given. I have a couple of questions for you, Mr. Staats.
You mentioned three degrees of audit which would be possible. The
first would seem to involve the so-called fiscal audit of the books and
accounts.
The CHAIRMAN. Let us have order, please. We must have attention
because this is a matter of great importance, and we hope that we can
have good order and attention in order to get all of these facts from
Mr. Staats. I t is unusual for him to devote so much time to an operation of this kind, but it is so necessary and in the public interest. So
let us have attention, please.
Go ahead, Mr. Widnall.
Mr. WIDNALL. I would certainly agree that your agency has the
expertise to do audits. However, the more extensive audits suggested
in alternatives 2 and 3, you would have to assess judgments of the
Board and its related bodies.
We just completed 2 weeks of hearings on such matters, during
which time we heard some very knowledgeable witnesses, many of
whom disagree. Even after years of dealing with these matters and
listening to all of these varying viewpoints, I would be hard pressed
to say, for example, whether I think the Board's recent actions on
setting interest rate ceilings under regulation were right or not.
How do you expect to approach this kind of examination?
Mr. STAATS. Mr. Widnall, let me say this generally. We felt it would
be helpful to this committee if we could suggest three alternative approaches that might be taken to an audit of the Board. We conduct
all three types of audits and sometimes in combination. Sometimes we
approach it only on one basis.
With respect to the first type of audit, the more traditional type of
audit, we believe that it would be of value to the Congress to have the
judgment of an independent agency as to the procedures which are
applied in selecting the external auditor, how thorough a job he does,
what happens to the results of that audit, whether or not there is, for
example, good specifications given to the external auditor as to areas
that the Board would like for him to cover—this type of thing we have
done many times and are, I think, pretty readily understood.
The second type of audit that is referred to here, where we go into
the economy and efficiency of the way the agency manages its resources, how it buys its property, and how it handles its inventories,
and how it handles its computer operations—these kinds of things are
more difficult, but we do this in almost every agency of the Government with the result that we are able to report very substantial savings
each year to the Congress as a result of the type of work we do.
I should think that both this first and second type of audit would be
relatively noncontroversial from the standpoint of its implications for
policy.



17
Now, when you get to the third type, we would readily agree that
this is a much more difficult kind of an audit for us to perform. We do
this with a great many Government programs—military weapons
systems; we do it with respect to social security programs, agriculture
programs, and so on. But I would be the first to agree that this third
type is much more difficult and much more sensitive from the point of
view of its policy implications for the Board.
Mr. W I D N A L L . Mr. Staats, how long do you think it would take and
what value would it have to us by the time that you delivered anything
to us?
Mr. STAATS. With respect to the first and second type, these can be
done fairly speedily. The first type is a matter of weeks or at the most,
months. The second type would depend really upon what areas we got
into. For example, one of the more complicated areas would be the
Board's interest in the use of computers.
Now, we have a sizable staff. We have experts in the utilization and
procurement of computers. This type of thing would take longer, b u t
it would all depend as to what type of review we decided to make.
But normally, a more complicated review of this type that we would
undertake with respect to other Government agencies might run from
a few months up to a year and a half.
Mr. W I D N A L L . I am curious to know, have you given any thought to
what kind of people you will need to make this examination, and
whether or not they would be available to you, and how much expense
you are talking about?
Mr. STAATS. With respect to the first two types of audits, we believe
that we have adequate staff already in the GAO to undertake these
types of reviews. As I have emphasized, they are not really different
from those which we conduct all the time.
The third type I would think we would need some additional
expertise, additional backgrounds, which we would propose that could
be obtained either on a full-time basis or as consultants. We would
assume that we would need some experts from the financial field, the
banking field.
I might say that we are using consultants very extensively in GAO
in other areas where we find the people with backgrounds in particular
fields very helpful to us in reviewing our plans and reviewing our draft
reports. We have, I believe, something like more than 100 individuals
now who serve in a consultant's role to the GAO in different fields
ranging all the way from weapons systems across the board to all the
other Government operations.
Mr. W I D N A L L . Well, I hope you will put into the record what your
reaction is to the amount of expense to be involved. And I would also
ask whether you charge the agency being audited for these expenses?
Mr. STAATS. N O , we do not, except for the Postal Service, for
example, we do charge for any audit work we do there because under
the law, any services of this type they are required to pay for. B u t
other than that these costs are generally paid for out of our regular
budget.
Mr. WIDNALL. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Barrett.
Mr. BARRETT. I would just like to ask Mr. Staats a short question.
On page 4 of your statement in the next to the last paragraph, you are



18
commenting on this legislation. You offer no opinion as to whether
such an audit by your office was advisable, but stated that "If the
Congress wanted such an audit made, we would carry out the congressional intent by making whatever audits the Congress wished.''
And on page 5 in the middle of your statement:
In view of the highly important part the Federal Reserve plays in the Nation's
system of money and credit, we have concluded that there should be a GAO
audit of the Federal Reserve Board and the Reserve banks. However, there are
three possible alternatives that may be considered in determining the scope of the
audits in the event Congress agrees with our view as to the need for a GAO audit.

Mr. Staats, we are informed of the extensive audits that are now
made by the Board of Governors of the Federal Reserve System by
outside CPA firms; and on each Federal Reserve bank and branch.
Are you familiar with these audits and the procedures for them?
And if so, what is your opinion of the audit thus made?
And let me conclude—and you can give me your answer—what has
occurred to cause the GAO to change its position regarding an audit
of the Federal Reserve System and banks?
Mr. STAATS. We have reached this conclusion for the reason that
we believe the Federal Reserve Board increasingly plays an important
role in our fiscal policy, and operations that relate to the stability
of our economy.
We believe that it is not healthy for an organization which is a
governmental entity, any organization, to be excluded from some
degree of external review so that that advice can be given to the
Congress of the United States. T h a t is point 1.
Point 2 is that these are basically Federal moneys that we are
talking about here—interest which is earned on securities, which is
paid for out of the interest on public debt. I t is just as much Federal
monev as if it were appropriated directly.
I fail to see the distinction of any great degree in moneys earned of
that type. From my own background, having served in the Budget
Bureau in the executive branch for many years, we considered these
earnings on the part of the Federal Reserve as a receipt to the Government, just as any other receipt that was earned from any other
source of the Government; and we always included that in the
calculations that we made for the President as to whether the budget
was going to be balanced or in surplus.
I t can be argued that the assessments on the member banks, which
are relatively small, are not Federal money. T h a t is not really too
serious a point. But the main operations which are involved here
involve Federal money.
Now, the reason that the GAO has not been auditing the Board is
that the Congress by legislative determination many years ago said
that these are not Federal moneys. Congress, by the same kind of
legislative action, could say that they are Federal moneys as they have
before. This is a matter the Congress really has to make a judgment on.
So for both of these reasons we have come to the conclusion that we
ought not to simply take a neutral position on this issue.
Now, I do not know what the Congress is going to do about this
matter, and I think obviously it is a matter for their determination;
but I would be doing less than my duty to the Congress if I did not
tell you personally and frankly how I felt about it.



ltf

Mr. BARRETT. Thank you.
The CHAIRMAN. Mr. Johnson.
Mr. JOHNSON. Thank you, Mr. Chairman.
I want to welcome both of you gentlemen here this morning. I
realize we are embarking on a new role here, which I personally at this
point do not approve. I am a strong believer in the independence of
the Federal Reserve System. I think our System established in 1913
has given us the strongest, the greatest banking system in the world.
There have been relatively few bank failures. And I think one of the
things about our success is the independence of the Federal Reserve
System.
What this bill wants to do is to turn the GAO into a gigantic fishing
expedition into examining this great, great banking system and I
think maybe for practical purposes might destroy the confidence that
it enjoys, not only in this country but throughout the world.
Now, Mr. Staats, even your substitute bill would, of course, give
you broad and vast powers. I suppose if you are going to audit the
Federal Reserve System, the first thing you would do is, let's say,
seize their minute books, would you not, and read the minutes of all
the corporate meetings in all their branches during the year, from the
Board, and just go right down through?
Or would you have an accountant sitting in every Board meeting?
Just what would you do with the minute books, let's say?
Mr. STAATS. Well, let me make several comments if I may, Congressman Johnson. One is, the language which we have suggested here
in our opinion is no broader than the language in the present bill. We
think it is an improvement in drafting, but as far as the substance is
concerned, we consider it to be the same.
With respect to the independence of the Federal Reserve System,
the Federal Reserve Board, I honestly do not believe that an audit as
such bears directly on the question of independence at all. The Congress at any time could alter the independence of the Board by legislative action, as you well know.
I am quite willing to agree that the type of audit that would be
provided for in these three different alternatives, the third is by far
the more sensitive from the standpoint of the concern which you
have expressed. B u t I cannot see how either of the first two types of
audits, which are concerned purely with the question of whether or
not the financial statements are adequate and whether the auditing
system of the Board itself is adequate, and second, whether or not
management improvements can be made, which all of us would like
to see made in any organization, including yours or mine or any others,
by the review of an outside group of experts.
With respect to the first two types of audit, I really have a great
deal of difficulty seeing any problems with respect to independence.
The third I would be willing to agree is more sensitive; but I did feel
that we ought to lay out all three approaches, because we do conduct
in our normal operations all three types of audits under present law.
Congress obviously has the option of selecting either one of these
three or none of them.
Mr. JOHNSON. Even if we take any one of these and you perform
this audit, actually will you not be just trodding the ground that a
public accounting firm has already traveled and the same ground that



20
the internal audits have traveled; if you are really going to do what
you call an audit, it would probably be one of the most gigantic
audits of all time, or just to audit the $738 billion on open market
transactions would be a prodigious job. And would you feel that in
auditing that you should report to the Congress as to the propriety
of the $738 billion worth of operations, or would you just add them up
and say they totaled $738 billion?
Mr. STAATS. N O . Let me, if I may, see if I can sort this out a little
bit. We would obviously utilize the work of the auditor that they
already have and their auditing system. We do this with all agencies.
Every agency of the Government has an internal auditing system. A
great many agencies hire external auditing agencies as well. Some
Federal corporations do that. So we start with their work. And one of
the things we are always interested in is whether or not the external
auditor has good guidelines from the agency as to what kind of audit
it wants to make; and we look at that.
We will look at their reports. If these reports seem to be adequate,
then that may be all there is to it. We will check their system, in
other words.
One of the questions we would be interested in is whether the Board
itself has an auditing committee. Most boards dealing with large
operations have an auditing committee. Most corporations have an
auditing committee. I t is my understanding that the Federal Reserve
Board does not.
We do not have to duplicate all of the work of the external audits.
If we were to take the position that agency auditing is adequate, we
would not be doing any auditing anywhere in the Government, you
see, because the same argument could be made about the Defense
Department or Agriculture or any other agency of the Government.
But we obviously would want to utilize their work.
Now, with respect to the cost of this, I would not want to be committed to a specific figure, b u t we have done some work on this;
because one of the members of this committee asked us this question,
what it would cost us to do this kind of work.
The first category of audit which we are talking about, this first
type we estimate would cost us not in excess of $125,000; and we
think we could do it without any addition to our staff.
The second type o f audit would be selective. We would be interested
*
in taking a look at some of their administrative operations to see
whether we could identify things that might stand some improvement.
But that would all depend on how much effort we were to put into it,
or indeed, if the Congress wanted us to look at some particular
administrative operation.
Now, so far as the third type of audit is concerned, it is more extensive, and I would not want to give you a particular figure.
But the first two types of audits would be relatively inexpensive
and could be done with our own staff.
Mr. JOHNSON. Thank you. M y time is up.
The CHAIRMAN. Mrs. Sullivan.

Mrs. SULLIVAN. Thank you, Mr. Chairman.
I welcome your testimony, Mr. Staats; and I want to say that I
am glad you support the idea of an audit of the Federal Reserve, and
I certainly agree any agency handling such funds as Federal funds to



21
the extent that the Federal Reserve bank does should definitely be
the subject of an independent audit by the U.S. General Accounting
Office.
I also support your recommendation that it not be done yearly,
but I wouldn't want to see it done too infrequently, at least a complete
audit such as you have proposed need not be done every year or every
other year, b u t as you say, you would like to have the judgment of
your Department or your Agency to make the audits when you think
they are necessary.
Now, I would like to ask you—you did answer part of it when Mr.
Johnson opposed such a proposal—but what damage could be done
to the Federal Reserve if Congress authorizes such an audit?
Mr. STAATS. Well, I have read Chairman Burns' testimony on this
point—and I have a high regard by the way for the Chairman; I have
known him many, many years and consider him a very good friend.
And I am aware of the sensitivities that he has with respect to certain
types of transactions, and it could well be that the Congress would
want to write in some safeguards on that point.
For example, the GAO about 2 years ago was given the responsibility
for the first time of auditing the administrative expenses of the exchange stabilization fund.
Now, the Treasury had always felt that there were sensitive operations involved here, and indeed there are, just as there are in the case
of the Federal Reserve Board; but adequate language can be written
to preserve to the Board, as it was in the case of the Treasury, to
prevent that kind of sensitive information from being made available.
Indeed, I would not think it would be necessary to have t h a t kind of
information to make an effective review of the System.
B u t I am quite familiar with the sensitivities, and I have some
sympathy with them.
Mrs. SULLIVAN. The Chairman brought out in his statement some
of what I would call the little piddling things that go on in the expenditures by the Board. And I do not think that that is all he means.
I believe you understand, because many a time in these past years our
chairman has discussed certain information that we should really have
as to how these funds are obtained, various activities of the open
market or how actions by the open market committee affect our
entire economy.
And I think that we need some more—just how do you say it—a
look-see into what is being accomplished, what is being done, and
perhaps some outside judgment of experts to look over all of the
operations of this tremendously powerful agency of our Government.
I think this has been needed for a long time. I hope it is done. I
think we can act with better judgment if we know that there is a
Government agency such as the General Accounting Office looking into
the details of an audit such as you mentioned.
And I think the amendments that you have offered could be considered very seriously when we take up this bill; and I appreciate your
testimony.
Mr. STAATS. Could I say this with respect to the audits made by
the CPA firms; and this is not intended to be critical at all of CPA
firms in general, because there are very fine firms involved. B u t I
frankly find some difficulty with the philosophy that the Congress



22
ought to be willing to accept without question the kind of review that
is made by a public accounting firm on an operation as important as
this one is, or any other Government operation for that matter.
All you have is a half a page here from—in this case, dated J a n uary 29, 1973, Touche Ross & Co., certified public accountants.
They say they have reviewed it, and that it is satisfactory; but t h a t
does not really communicate very much.
The CHAIRMAN. Would it be all right to p u t that in the record a t
this point?
Mr.

STAATS.

Yes.

The CHAIRMAN. Without objection, so ordered.
[The information referred to by Mr. Staats follows:]
The Annual Report of the Board of Governors of the Federal Reserve System
for 1972 included the following opinion of the certified public accountants on the
financial statements of the Board.
ACCOUNTANTS' OPINION

Board of Governors of the Federal Reserve System
We have examined the balance sheet of the Board of Governors of the Federal
Reserve System as of December 31, 1972, and the related statements of assessments and expenses, and changes in financial position for the year then ended.
Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such
other auditing procedures as we considered necessary in the circumstances. The
financial statements for the preceding year were examined by other independent
public accountants.
In our opinion, the aforementioned financial statements present fairly the financial position of the Board of Governors of the Federal Reserve System at December 31, 1972, and the results of its operations and the changes in its financial
position for the year then ended, in conformity with generally accepted accounting
principles applied on a basis consistent with that of the preceding year.
TOUCHE Ross & Co.,

Certified Public Accountants.
We were advised by an official of the Board that it also submitted to the Committee, in addition to the above opinion and the accompanying financial statements, information describing the scope of the CPA's audit.

Mrs. SULLIVAN. Thank you. M y time is up.
The CHAIRMAN. Mr. Stanton.
Mr. STANTON. Thank you very much, Mr. Chairman.
Mr. Carlock, we do not mean to ignore you. I am sure you understand.
Mr. Staats, I am delighted to have you come to the hearing this
morning. When I first read your statement last night, on the one hand
you make it clear that you present three alternatives, but you have
expounded a great deal more this morning than what I read into your
statement last night.
You are recommending all three steps. You point out the three
alternatives, but you did refer to Mrs. Sullivan about the Exchange
Stabilization Act. There were safeguards written into the legislation
which would protect secret and certain sensitive areas.
Would you agree with me that you could see the possibilities that
if we go ahead with parts of this, or some of your alternatives, you
would not object to this being done?
Mr. STAATS. I think to be very clear again about it, we believe
that any one of these three approaches would be a useful type of
audit for the Congress.



23
The kind of information that we are trying to shape up here is that
Congress has three options, three broad options, as we see it, with
respect to the type of audit which they would like the GAO to make,
if indeed any audit.
Mr. STANTON. One thing I read last night was that, for example,
alternative one, performing this kind of audit, you would first make
a careful review of the nature and adequacy of all audit work already
being performed within the Federal Reserve System under existing
arrangements.
Before determining how much additional auditing by us would be
needed, would it not be fair for this committee to ask you just to do
that; to take on the study of existing audits, and to see where there
were weaknesses?
Mr. STAATS. We would be very happy to respond to such a request.
I am not sure that we would get much information unless the Board
were agreeable to our doing so.
Now, the chairman referred to a study we made with respect to the
Federal Reserve reporting system for dealers in Government securities.
We had the cooperation of the Board in that study. And in all modesty,
I think we did a good job with it, and we were able to point up a very
large number of improvements, some of which I believe the Board has
accepted.
The CHAIRMAN. M a y I ask you, could you furnish us a copy of
that report that was made available 2 or 3 years ago, and if each
member had one, I think it would be well worthwhile.
Mr. STAATS. I t is dated October 6, 1971. We would be happy to,
Mr. Chairman.
The CHAIRMAN. Without objection, so ordered.
[The report referred to by Mr. Staats follows:]




24

REPORT TO THE VICE CHAIRMAN
OF THE JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES

Improvements Needed In The
Federal Reserve Reporting System
For Recognized Dealers In
Government Securities
B.769905

BY THE COMPTROLLER GENERAL
OF THE UNITED STATES




25

C O M P T R O L L E R GENERAL OF T H E U N I T E D STATES
WASHINGTON. D.C. 20548

B-169905

D e a r Mr. Vice C h a i r m a n :
This is our r e p o r t on the improvements needed in the F e d e r a l
R e s e r v e r e p o r t i n g s y s t e m for recognized d e a l e r s in Government
s e c u r i t i e s . Cur review was made pursuant to your r e q u e s t of May
1970.
As a g r e e d , we d i s c u s s e d our r e p o r t with officials of the F e d e r a l R e s e r v e Bank of New York. Although they agreed with our findings, they felt that f o r m a l comments should come from the Informal
T r e a s u r y - F e d e r a l R e s e r v e Steering Committee which has o v e r a l l
r e s p o n s i b i l i t y for the reporting s y s t e m .
We plan to make no further distribution of this r e p o r t u n l e s s
copies a r e specifically requested, and then we shall make d i s t r i b u tion only after your a g r e e m e n t has been obtained or public announcement has been made by you concerning the contents of the r e p o r t .
Sincerely y o u r s ,

Comptroller General
of the United States
The Honorable Wright P a t m a n
Vice C h a i r m a n , Joint Economic
Committee
C o n g r e s s of the United States




50TH-ANNIVERSARY

1921-1971

26
C o n t e n t s
Page
DIGEST

1

GLOSSARY
CHAPTER
1

INTRODUCTION
Background
Nature of GAO review

2

FINANCIAL REPORTS
Income
All gains and losses not reported
in the right reporting period
Different methods used to calculate
unrealized gains and losses
Expenses
Questionable allocations
Different methods of accounting
used in reporting
Other
Net worth allocation
Review of financial statements

11
12
12

3

DAILY STATISTICAL REPORTS

18

4

OTHER OBSERVATIONS
Problems in analyzing net income
Need for refining financial reports
Use made of reports
Financial reports
Daily reports

20
20
24
24
24
25

5

SUGGESTED CORRECTIVE MEASURES
Strengthening controls over preparation
of reports
Improving review function
Refine financial reports
Distribution of aggregate report data
Agency comments

26




3
3
7
9
10
10

13
13
15
16

26
27
28
28
28

z/
APPENDIX
I

II

Page
Letter dated May 1970 from the Honorable
Wright Patman, the then Chairman, Joint
Economic Committee, Congress of the
United States
List of financial report deficiencies by
type and primary cause




.31

28
GLOSSARY
Accrual accounting

recording of financial transactions
in the accounts as they actually take
place (that is, as goods and services
are purchased or used and as revenues
are earned) even though the cash involved in such transactions is paid or
received at other dates

Borrowings

funds borrowed to maintain positions

Cash accounting

recording of financial transactions
only at the time that cash is received
or paid for goods and services

Commitment basis

recording of securities transactions
in the accounts on the date agreement
to purchase or sell is made

Delivered basis

recording of securities transactions
in the accounts on the actual date the
securities are delivered

Margin requirements

difference between market value and
the maximum loan value of securities

Market value

estimated selling or purchase price of
security based on bid and ask quote of
dealer

Position

the total value of the securities that
a dealer holds for resale

Recognized dealers

Government security dealers w h o — t h e
Federal Reserve Bank of New York considers—have established a satisfactory financial credit standing and can
handle a large volume of trading and
accordingly are permitted to deal directly with the trading desk




29
Repurchase agreement

arrangement for borrowing money
whereby securities are "sold11 by the
dealer with a commitment to buy identical securities back at a specific
price

Settlement basis

recording securities transactions on
the date agreed upon for delivery of
the securities

System open market
account

the Government securities held by the
Federal Reserve System

Trading desk

the personnel who buy and sell securities for the Federal Reserve Bank of
New York

Transactions

purchase or sale of securities


http://fraser.stlouisfed.org/ 3
22-355 O - 73 Federal Reserve Bank of St. Louis

30
COMPTROLLER GENERAL'S REPORT TO
THE VICE CHAIRMAN OF THE
JOINT ECONOMIC COMMITTEE

IMPROVEMENTS NEEDED IN THE FEDERAL
RESERVE REPORTING SYSTEM FOR RECOGNIZED
DEALERS IN GOVERNMENT SECURITIES

CONGRESS OF THE UNITED STATES

B-169905

DIGEST
WHY THE REVIEW

WAS MADE

The Federal Reserve Bank of New York operates a voluntary reporting system to accumulate statistical and financial data on the activities of
private dealers in Government securities.
Participating dealers report statistical data daily and financial data
annually. In 1970 the total transactions reported were $738 billion,
or more than three times the value of transactions on the New York Stock
Exchange.
At the request of the then Chairman of the Joint Economic Committee, the
General Accounting Office (GAO) reviewed the reporting system to determine
whether
—good accounting practices were being followed in preparing the reports
and
—the reporting system afforded the Committee and the public with an
accurate picture of the operations and profits of the dealers as a
group.
GAO examined into the procedures and methods of report preparation employed
by six of the 20 dealers in Government securities recognized by the Federa,
Reserve System.
FINDINGS

AND

CONCLUSIONS

The daily statistical information furnished by the dealers was reasonably
reliable. This information is published regularly for the use of Government officials, financial analysts, and the public. (See p. 18.) GAO
does not believe, however, that financial data which is reported annually
can be relied upon because
—sound accounting methods were not followed consistently,
—numerous errors were made, and
—different accounting bases were used by the dealers in preparing the
reports.




1

31
The Federal Reserve Bank of New York made reviews of the reported data;
however, these reviews were not effective in ensuring that the information
was reliable. (See pp. 9 to 17.)
As a result of errors and inconsistencies, the annual financial data is
not published and little use is made of it. (See p. 24.)
RECOMMENDATIONS OR SUGGESTIONS

The reporting system functioning as it does on a voluntary basis is a
commendatory achievement. Substantial improvement in the accuracy of the
annual financial reports, however, could be made by correcting some of
the problems which GAO found. (See pp. 26 to 28.)
AGENCY ACTIONS AND UNRESOLVED ISSUES

Officials of the Federal Reserve Bank of New York told GAO that, although
they agreed with GAO's findings and conclusions, the Informal TreasuryFederal Reserve Steering Committee which has overall responsibility for the
reporting system would have to decide what corrective action would be taken.
(See p. 28.)
MATTERS FOR CONSIDERATION BY THE
VICE CHAIRMAN, JOINT ECONOMIC COMMITTEE

This report outlines some measures that the Federal Reserve System could
take to correct the inadequacies in the reporting systems. GAO is including these measures for such action as the Vice Chairman may deem appropriate.




2

32
CHAPTER 1
INTRODUCTION
In May 1970 the Chairman of the Joint Economic Committee requested that the Comptroller General look into the reporting system established by the Federal Reserve System
for dealers in Government securities and advise him as to
whether the reporting system was likely to afford the public
and the Joint Economic Committee an accurate picture of the
operations and profits of these dealers as a group and
whether the accounting practices used in reporting were in
accord with good accounting standards. A copy of the Chairman's request is included as appendix I.
BACKGROUND
The Federal Reserve System, among its other functions,
is responsible under the Federal Reserve Act for maintaining
a flow of credit and money that will foster orderly economic
growth and a stable dollar. This function is, in part, accomplished through the public sale and purchase of Government securities (U.S. Government and Federal agency securities).
To carry out this function, the Federal Open Market
Committee of the Federal Reserve System has the responsibility of determining the policy to be followed in the purchase
and sale of Government securities. The objective of the
Federal Open Market Committee is to protect the monetary
machinery from undue stress and to influence the economy by
affecting the cost and availability of credit.
The Federal Open Market Committee has delegated the
responsibility for executing its policy for all Reserve
banks to the Federal Reserve Bank of New York (Federal Reserve Bank). Each year the Federal Open Market Committee
appoints a senior officer of the Federal Reserve Bank to
manage the system open market account. The manager maintains a trading desk at the Federal Reserve Bank to handle
all purchases and sales of Government securities.




3

33
Marketable Government securities are traded daily in
an over-the-counter market by dealers in Government securities. Certain dealers, called recognized dealers, are permitted by the manager of the system open market account to
trade directly with the trading desk and are expected to
respond to the trading desk's needs for buying and selling
these securities. This procedure is designed to ensure that
dealers admitted to trading have the resources and ability
to undertake large volumes of trading.
The number of recognized dealers varies from year to
year. As of March 31, 1971, there were 20 recognized dealers, of which 11 were nonbank business enterprises and nine
were banks. They form a security market which is the largest
in the country in terms of dollar volume and which is heavily vested with the public interest. The market is not regulated by either the Government or a private association.
The volume of purchases and sales by recognized dealers
in Government securities increased steadily from $573 billion in 1966 to $738 billion in 1970. A comparison of the
1970 volume of Government securities traded with purchases
and sales of the New York Stock Exchange and the American
Stock Exchange is shown in the following chart.




4

34
TRANSACTIONS REPORTED BY GOVERNMENT SECURITIES DEALERS
COMPARED
WITH ACTIVITY ON RECOGNIZED EXCHANGES

$215

CALENDAR YEAR 1970

•

GOVERNMENT SECURITIES DEALERS REPORTING
TO THE FEDERAL RESERVE BANK

I NEW YORK STOCK EXCHANGE




5

i AMERICAN STOCK EXCHANGE

35
Because statistical and financial information about
the dealer market was scarce, a formal reporting system was
established in 1960. The reporting program w^as aimed at
providing current information on the functioning of the market in Government securities to the public, to students of
the market, and to market participants, including the Federal
Reserve System and the Treasury Department. Reports include, in addition to annual reporting of balance sheet and
income data, daily statistics covering securities positions
and borrowings and volumes of transactions. No legal or
regulatory requirements exist to enforce reporting; the
dealers have reported voluntarily.




6

36
NATURE OF GAP REVIEW
Our work was done at the Federal Reserve Bank and at
business offices of six dealers in Government securities located in New York. The dealers included in our review were
selected with a view toward obtaining representation from
each of the three types of dealers which are categorized as
specialist, bank, and multioperation.
In the case of financial reporting, we reviewed the
requirements imposed on dealers by the Federal Reserve Bank
instructions. At each dealer1s office we obtained reports
submitted to the Federal Reserve Bank for the year ended
December 31, 1969. We determined whether the figures on
these reports were taken from the dealers' books of account
or financial statements or whether the amounts in the accounts or statements had to be revised to satisfy Federal
Reserve Bank instructions.
In those instances in which revised figures had been
reported to the Federal Reserve Bank, we identified the
procedures and methods used to make the changes. We reviewed some of these adjustments, calculations, and other
transactions to determine whether sound accounting principles and practices were followed and whether the results
were reasonably accurate.
For the daily reports, we reviewed the detailed procedures followed by the six dealers to accumulate, record,
and report information required by the Federal Reserve Bank.
We selected a few transactions and traced them through the
dealers1 systems to determine whether the transactions had
been handled in accordance with dealer procedures, sound
trade practices, and Federal Reserve Bank instructions. We
observed the preparation of daily reports for one day at
each dealer1 s office and traced the information through the
Federal Reserve Bank processes into its computer file.
Our work was done principally through discussions with
the Federal Reserve Bank and dealer officials; onsite observations of operations; and reviews of a limited number




7

37
of transactions, accounting records, and other data. The
cooperation and courtesies extended to us by the Federal
Reserve Bank and dealers were excellent.
Our review did not cover the activities of the System
Open Market Account.
The confidential nature of the data relative to operations of individual dealers was maintained in accordance
with rule 23 of the Joint Economic Committee which places
limitations on the disclosure of data obtained from individual dealers.




8

38
CHAPTER 2
FINANCIAL REPORTS
We found that the financial reports submitted by the
dealers had not been prepared in accordance with sound accounting methods. Further, the dealers used different bases
in preparing the reports and made substantial errors in
compiling the information in the reports. Consequently we
have little confidence that these reports provide accurate
information on the operations and profits of the dealers as
a group. A list of the deficiencies in the reports we examined is included as appendix II.
The deficiencies in the reports we examined occurred
primarily because the dealers did not use sufficient care
in preparation of the reports and because the Federal Reserve Bank reviews failed to detect them. The inconsistencies in the data contained in reports prepared by the participating dealers are attributable to the wide latitude in
reporting practices permitted under the Federal Reserve
Bank instructions.
Before describing some of the major'deficiencies affecting the reliability of the reports, it is important to
mention the factors that complicate dealer reporting. The
Federal Reserve Bank instructions provide for submission of
reports on a calendar-year basis, whereas seven out of 20
dealers operate their accounting systems on a fiscal-year
basis. Their closing of accounts can be at different dates
during the calendar year. Thus their normal year-end adjustments are not made for the period covered by the Federal
Reserve Bank reports.
Also 14 are engaged in activities other than trading in
Government securities and their accounting systems and normal financial statements relate to the entire operations.
As a result of both these factors, many adjustments had to
be made to the information in their formal accounts to prepare the Federal Reserve Bank reports. It is in this conversion process that most of the problems existed.




9

39
INCOME
We found two major problems which affected income—
namely, all trading gains or losses were not reported in the
right reporting period, and dealers used different methods
to calculate unrealized gains or losses.
All gains and losses not reported
in the right reporting period
The dealers included in our review used three methods
of recording security transactions (1) the commitment basis,
recording transactions on the date that the purchase or sale
is made, (2) the settlement basis, recording transactions on
the agreed-upon date for delivery, and (3) the delivered basis, reporting transactions on the actual date that the securities are delivered. For 1969 the Federal Reserve Bank
required dealers to report on a commitment basis in their
income statements all unrealized gains or losses on positions as of December 31.
Included in our review were three dealers who were on
other than a commitment basis and who did not make the necessary adjustments for reporting. Thus one dealer reported
unrealized gains and losses on $649 million of securities
but did not report in that reporting period unrealized
gains and losses on an additional $330 million of securities
that should have been included in his computation if it were
made on a commitment basis.
The second dealer, with a position of $313 million,
omitted from his computation about $44 million of securities; the third omitted $6 million from his calculation on
$54 million of position. In addition, these same dealers
did not compute the realized gains or losses on securities
which were purchased and sold prior to January 1 but which
were not settled until after December 31.
Although the dealers knew that they were required to
report on the commitment basis, they did not do so because
they said that too much effort was required. The dealers
did not provide us with data on what the cost of reporting
on the commitment basis would be and we did not make our own
study of such costs; however, we believe, with proper planning, the report could be prepared on the commitment basis
without an unreasonable amount of effort.




10

40
Early in our study, we advised the Federal Reserve Bank
of our findings regarding the use of other than the commitment basis of reporting. On their own initiative, bank officials revised the instructions to permit dealers to compute profits on their own accounting bases. We doubt the
merits of this revision because it could have a material effect on the reported gains or losses. This would occur
when there are large variances in opening and closing positions on a commitment basis which would not be reflected by
the dealer's accounting basis.
Further, in the case of interdealer trading, there
could be significant transactions lost to the reporting system. For example, if a dealer reporting on the commitment
basis sold securities on December 31 to another dealer reporting on the settlement method, these securities would not
be reported in the positions of either dealer.
Different methods used to calculate
unrealized gains and losses
The Federal Reserve Bank also instructs the dealers to
compute their unrealized gains or losses on year-end positions at market value and allows the dealers to choose their
own methods of determining market values.
The dealers whose records we reviewed used four methods of determining market values for their positions. Three
dealers used their own judgment of prices. One used published composite prices; one used last sale; and one dealer
-used a combination of his own judgment and price quotes of
another dealer. Thus the same class of securities held by
each dealer may be valued at different prices for computing
unrealized gains or losses.
When we advised the Federal Reserve Bank of this problem, they again issued new instructions requesting dealers
to use the Federal Reserve Bank composite closing quotations. This, however, did not fully resolve the problem because closing quotations only include securities issued by
the Treasury and do not include securities issued by other
Government agencies. Agency securities can represent significant sums. For example, one dealer's position included
$121 million in Government agency securities.




11

41
EXPENSES
The major problems in reporting expenses were the numerous errors made by dealers in allocating them and the different methods of accounting for them.
Questionable allocations
The Federal Reserve Bank instructs dealers to allocate
expenses between their Government operation and other operations. The five dealers who had to make allocations attempted to comply with instructions; however, they did not
follow sound accounting practices or were not careful in making distributions.
In pooling their expenses for allocation, some dealers
did not follow the accepted practice that there must be some
relationship between the expenses and the operation to which
they are allocated. For example, one dealer overstated his
reported expenses by about $900,000 because his pool included
commissions and dividends not related to Government operations and interest on partnership capital, which is not an
expense but a form of profit distribution. Another dealer
did not reduce his reported expenses by $84,000 because he
did not allocate to other operations the cost of services
performed for those other operations by his Government operations .
Also Government securities are used to borrow funds for
all of the dealers' operations. In allocating the related
interest expense, two dealers charged their Government operations with the total interest on borrowings made with Government securities without regard to how much was relatable
to non-Government operations. Since interest on borrowed
funds is the dealers' largest expense, this could have a
material impact on reported net income. To illustrate the
impact that this allocation can have when done properly, one
dealer who did allocate such interest costs, instead of reporting all of it under Government operations, showed only
$8.1 million out of a total of $10.3 million as relatable to
Government operations.
In addition, dealers used various bases for making allocations. One dealer arbitrarily allocated administrative




12

42
expenses on the basis of the number of people employed in
Government operations to the total number employed and did
not establish that this ratio was commensurate with the benefits obtained by the Government activities. Another dealer
merely had his staff estimate the amount of expenses to be
allocated to Government operations without any supportable
basis except judgment.
Different methods of accounting
used in reporting
The Federal Reserve Bank instructions are silent as to
whether reports should be prepared on an accrual or cash basis; this is one of the reasons for the lack of uniformity
in reporting. Three dealers prepared their statements on
an accrual basis and three dealers submitted their statements on a combination of accrual and cash basis. For example, one dealer reported interest earned, prepaid insurance, and interest on borrowed funds on an accrual basis but
reported general and administrative expenses on a cash basis.
We did not make a study to determine the difference in
profit and loss that would result from the use of the accrual basis for general and administrative expenses; however, in view of the size of such expenses, we believe the
difference could be substantial.
Other
The following paragraphs illustrate other questionable
methods employed by dealers in the preparation of financial
reports.
Some dealers' Government securities positions were financed with funds borrowed from their other operations. The
Federal Reserve Bank requires these dealers to apportion a
part of these funds as interest free because they represent
allocated capital. Interest is includable on the remaining
portion as part of reportable expenses.
One dealer has been using an estimated amount of
$7.5 million since 1965 to represent his allocated and therefore interest-free capital and has been reporting the interest on the remainder as expense. We were told that this
$7.5 million estimate was based on a comparison of the




13

43
relationship between capital and total Government positions
of several other New York City dealers. We believe that
more exact methods of determining allocated capital should
have been employed.
Another dealer made no allocation in 1969 and reported
interest expense on the total borrowings. He reported
interest-free borrowings in 1965 of $5 million. Assuming
the same apportionment for 1969, the reported interest costs
for borrowed funds would have been reduced by about $429,000.
The dealers told us that they could not make a realistic
apportionment unless the Federal Reserve Bank gave them more
guidance. These same dealers, in computing interest on
funds borrowed to finance Treasury bill positions, used par
value of the securities as a base rather than the amount
borrowed. In addition, one of these dealers used the wrong
interest rate to make the calculations. As a result, the
interest expense reported by one dealer was $175,000 too
high whereas the other reported a figure that should have
been $9,000 higher.
Also, the Federal Reserve Bank instructs dealers to
report profits both before and after income taxes and specifically states that income taxes are not to be included
as an expense. We found that three dealers reported correctly. One of the remaining three dealers included the
New York City income tax as an expense, and two dealers ignored the city tax altogether in preparing their reports.




14

44
NET WORTH ALLOCATION
The Federal Reserve Bank requires nonbank dealer? to
estimate net worth allocable to Government activities for
use in its profit studies on return on capital. The methods
used for allocation did not appear to provide reasonable results because the Federal Reserve Bank has not given dealers
suitable guidance.
A Federal Reserve 3ank study in 1967 indicated that it
was aware that dealers were having problems and were using
various methods to allocate net worth. The report also discusses various concepts of net worth allocation and the difficulties encountered in applying them. It was silent, however, as to which method would be preferable or what guidelines should be followed.
The dealers are apparently still having problems in
complying with this requirement and are still using various
methods in preparing the reports. In some instances the results appeared questionable. The following examples illustrate some of these conditions.
In determining the amount of net worth used for his
position in Government securities, one dealer included
$4 million of Government securities held for his own investment purposes plus $2 million of Government securities deposited with clearing corporations for handling other than
Government transactions. The $6 million should have been
treated as applying to his other operations since these
funds were not used in maintaining his position.
Another dealer using a ratio of positions to all company assets reported a net worth allocation to Government
operations of $2.4 million. This dealer did not retain the
details of his calculations. We used the method he described in his report to the Federal Reserve Bank to compute an allocation of $1.9 million as applicable to Government operations, or $500,000 less than reported. Although
the dealer agreed with our computation, he was unable to
determine what caused the difference.
In allocating net worth, a third dealer used a ratio
of Government securities to his total position. This method




15

45
appears inequitable because considerably less of the company's own capital is needed to maintain Government securities positions since
— l a r g e positions of Government securities need less
borrowings owing to their margin requirements which
range from less than 1 to less than 6 percent, whereas
25 percent margin is necessary on corporate bonds and
65 percent for stocks and
— t h e low amount of positions kept by the dealer's underwriting activities (which handles other than Government issues) required substantial resources to operate .
Under such circumstances, a disproportionate amount of net
worth can be allocated to the Government securities operation.
REVIEW OF FINANCIAL STATEMENTS
The
were not
data was
for such

Federal Reserve Bank reviews of dealer reports
effective in ensuring that the reported financial
reasonably reliable because the group responsible
reviews did not

—visit dealers to examine the supporting data and review report preparation practices,
— h a v e staff with professional accounting expertise,
and
— h a v e the authority required to obtain dealer cooperation.
Among its other duties, the Market Statistics Division
of the Federal Reserve Bank is responsible for processing,
reviewing, and distributing dealer reports. Its reviews
consisted essentially of checks for mathematical accuracy,
completeness, and consistency with other reports. They told
us that they also made certain analyses of the financial
data but did not rely too heavily on them because they felt
that the information was unreliable. These reviews were
done at the Federal Reserve Bank. According to the Market


22-355 O - 73
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Federal Reserve Bank of St. Louis

16

46
Statistics Division, visits were not made to the dealers'
offices to examine into the reports in more depth because
it did not have the authority to do so.
Another problem in making such reviews was that the
Market Statistics Division did not have any professional accounting expertise on its staff. The Market Statistics Division had about 32 individuals on its staff comprising
11 professional and junior economists, 16 statistical clerks,
and five typists and messengers. About eight of these staff
members were assigned to processing, reviewing, and distribuing the financial reports.
The Market Statistics Division had no authority to
correct errors found in dealer reports or to enforce improvements in dealers' reporting practices.
If the staff of the Market Statistics Division obtained
professional accounting expertise and were permitted to review dealers' accounting procedures at the site, they could
more effectively identify errors and inconsistencies in the
dealers' reports. They could also encourage dealers to
make changes and improvements in the data reported.




17

47
CHAPTER 3
DAILY STATISTICAL REPORTS
The Federal Reserve Bank requires the dealers to submit
daily the following statistical information.
Type of report

Description

Positions

The amount of securities held
for trading valued at par by
type of security

Borrowings

The amount borrowed to maintain
positions by source and type of
security

Volume

The amount of sales and purchases
at par value by source and type
of security

We found a marked contrast in the procedures and controls covering the processing and reporting of transaction
data when compared with those used for reporting financial
information. The transaction reports usually came directly
from the dealers1 day-to-day operating systems. The need
to have up-to-date and accurate data for trading operations
undoubtedly had an influence on the reliability of those
systems.
Although we found that two dealers had reported certain
repurchase agreements incorrectly, the Federal Reserve Bank
told us that in two instances the incorrect data had not
materially affected the data as a whole and in another the
Federal Reserve Bank had issued corrected instructions for
future reporting. On the basis of our observations, it
seems that the dealers have adequate internal control procedures for processing daily transactions. Accordingly we
believe that the information furnished to the Federal Reserve
Bank in the aggregate is reasonably reliable.
The following paragraphs illustrate the errors found.




18

48
The Federal Reserve Bank and the dealers regard repurchase agreements as loans secured with collateral. The thencurrent instructions required that repurchase agreements be
reported as borrowings at the actual amount borrowed. We
found that two dealers were valuing their outstanding repurchase agreements at par value of the securities pledged as
collateral instead of at the amount of funds borrowed. As
a result, these dealers were overstating from 3 to 4 percent
the amount borrowed in the daily transaction report. Although this practice was contrary to instructions, Federal
Reserve Bank officials said that they were aware that some
dealers were doing this but they believed that the aggregate
borrowing statistics were only slightly affected by it.
We found also that one of the dealers discussed in the
preceding paragraph had, in accordance with a 1966 instruction, reported a certain type of repurchase agreement as a
sale. Although the total amount was substantial, about
$148.6 million, the transactions occurred rather infrequently. After discussing this situation with Federal Reserve Bank officials, they rescinded the 1966 instruction
and advised the dealer to follow then-current instructions.




19

49
CHAPTER 4
OTHER OBSERVATIONS
During our review, we noticed conditions which we consider important to the subject of the review and which may
be of interest to the Committee. These conditions deal with
problems in analyzing net income, improved disclosure of
matters that would significantly affect the reports, and the
lack of use made of the financial reports.
PROBLEMS IN ANALYZING NET INCOME
Except for information relating to net profit and net
worth, data permitting analysis of the profitability of market operations in Government securities was limited. This
situation stemmed essentially from the Federal Reserve
Bank's inability to obtain information on certain sources of
income and factors affecting profits.
For the period 1966 through 1970, the aggregate of
earnings reported by all dealers, before taxes, ranged from
a loss of $8.6 million in 1968 to a net profit of $188.2 million in 1970. The chart on the following page shows the reported profits for each year and the 5-year average.
In discussing the difference in the 1969 and 1970 figures, a Federal Reserve Bank official told us:
The sharp swing in dealer earnings between 1969 and
1970 stemmed from the turnaround in interest rates. In 1969
interest rates were rising and they reached record levels.
Dealers maintained relatively small positions and had to
finance them at negative yields. In 1970 interest rates declined and dealers increased their positions in anticipation
of further reductions. Also the drop in short-term money
market rates outpaced declining yields on long-term securities and allowed dealers to finance their positions at favorable rates. The trend toward higher prices enabled the dealers to earn substantial trading profits.
A more detailed analysis of these factors was not possible because the net income information obtained by the




20

50
DEALERS IN GOVERNMENT SECURITIES REPORTING TO THE
FEDERAL RESERVE BANK OF NEW YORK
DEALER PROFITS (BEFORE TAXES)
MILLIONS OF DOLLARS
,120

MILLIONS OF DOLLARS
120f

NONBANKS
BANKS
TOTAL ALL DEALERS

8
0

$47.3

1£ZL
$5.4 m L/^1 $5.4
$8.6

1966

1967




1968

1969

21

1970

5-YEAR
AVERAGE

51
Federal Reserve Bank did not provide, in all cases, for
dealers to segregate trading profits from interest earned on
Treasury bills. Such information is furnished only if the
dealer normally makes such a breakdown. Although bills constitute the largest volume of securities sold, three of the
six dealers that we visited did not separate interest earned
from trading profits but lumped these factors together.
Thus the extent of trading profits in the aggregate was undeterminable.
An analyst of the Federal Reserve Bank stated that
another important factor influencing profits was the interest paid on funds borrowed by the dealers to finance their
positions. We noted that in 1970 the Federal Reserve Bank
entered into about $34 billion worth of repurchase agreements with nonbank dealers. The Federal Reserve Bank enters
into these transactions in performing its function of maintaining a flow of credit and money. The interest rate paid
by the dealers on these borrowings is almost always less
than if they obtained the funds from other sources.
For example, during July 1970, the Federal Reserve rate
was as much as 2 percent less than the New York City bank
loan rates for dealers. Thus these transactions enable
dealers to finance their securities at lower costs. Financial data that would readily allow assessment of these transactions on nonbank profits is unavailable.
The rate of return reported on net worth by the nonbank
dealers for the 5-year period is shown below.
Rate of Return on
Net Worth Allocated to
Government Securities Operations

Year

Net income
(millions)

Net worth
(millions)

Percentage
of return

$ 25

$ 76

25
-5
-5
116

97
101
104
129

33
26
-5
-5
90

31

102

31

1966
1967
1968
1969
1970
5-year
averagei




22

52
We obtained profit and net worth data on the profitability of other industries and operations. The First National
City Bank of New York monthly economic letter of July 1971
showed composite rates of return on net worth, after taxes,
for more than 3,700 leading corporations. These included
manufacturing, transportation, and financial institutions
(commercial banks, investment trusts, etc.). To put the
economic letter figures on the same basis as those of the
dealers, we adjusted the profits, after taxes, to arrive at
profits, before taxes, by assuming a tax rate of 50 percent.
The economic letter figures as adjusted are shown below.
Percent of return
on net worth
1969
1970
25
20
2
8
12
13
21
18

Manufacturing
Transportat i on
Financial
Composite

We also obtained from the New York Stock Exchange reported statistics covering the financial results of member
firms. This information showed that more than 300 firms
made a return on net worth, before taxes, of 16 percent in
1969 and 19 percent in 1970.
A General Accounting Office profit study showed that,
for 74 large defense contractors in 1969, the average return
on net worth, before taxes, was 17.4 percent on work for the
Department of Defense, 24.8 percent on work for other defense agencies and 20.4 percent on commercial work.l
These figures are shown not for the purpose of assessing the reasonableness of earnings by the dealers but merely
to provide some information on how they compare with other
business enterprises in the economy.

Defense Industry Profit Study, B-159896, March 17, 1971.




23

53
NEED FOR REFINING FINANCIAL REPORTS
In addition to the incomplete disclosure of income data,
we observed:
1. Federal Reserve Bank instructions did not require assertions to the effect that financial statements were or
were not prepared on a basis consistent with that of the preceding year. In our opinion, such an assertion should be
required to disclose any accounting procedural changes that
would produce results differing materially from past years.
2. Some dealers adjusted their security positions each
month to market values and record the unrealized gains or
losses in the income accounts. Under these circumstances,
the more acceptable method of financial data presentation
requires that disclosure be made of the amount of unrealized
profit which accumulated over the year and is still in the
position values at year-end. Such disclosure is not specifically required by the Federal Reserve Bank.
USE MADE OF REPORTS
The expressed doubts about the reliability of the financial reports have limited their usefulness. We understand
that the daily reports were meaningful to officials of the
Federal Reserve Bank.
Financial reports
We found practically no use made of the financial reports and therefore discussed this matter with officials of
the Federal Reserve Bank, the Federal Reserve Board, and
the Treasury Department. Some of their comments follow.
An official of the trading desk, Federal Reserve Bank,
told us that the financial reports were not necessary to
its operation. Such information, however, could be useful
to observe broad trends in the market if it were not for
the problems in allocating income, expense, and net worth.
A Federal Reserve Board staff member stated that the reports were used for (l) identifying changes in dealer operations, (2) evaluating dealer profits, and (3) determining




24
.

54
those dealers that may have financial difficulties. He
added that the reports would be more useful if the allocation methods for expenses and net worth were improved.
Treasury officials were concerned with whether there were
enough dealers to handle the volume of trading and were also
interested in such other matters as dealer profits. They
believed that the reports were necessary but that they could
be more useful if improved.
We also found that the financial data, in the aggregate,
was not regularly distributed to the Congress or to the public. An official of the Federal Reserve Bank told us that
this was not done because the reports were considered unreliable and therefore meaningless.
Daily reports
Each day the trading desk at the Federal Reserve Bank receives position data for each dealer and aggregate data on
positions, dealer borrowings, and volume of transactions to
assist it in its open market operations. In addition, selected data in the aggregate is sent daily to all the Federal Reserve Bank presidents, to the Federal Reserve Board,
and to the Treasury Department.
Only aggregate statistics are released to the public
through weekly press releases and the monthly Federal Reserve Bulletin. The volume of transactions is publicly released weekly and position and borrowings after a 4-week
time lag.
Federal Reserve Bank officials who operate the trading
desk have told us that the data is useful for several purposes. The data is used to determine the amount of securities available for purchase from dealers and to determine
the amount of money borrowed and the source of borrowings.




25

55
CHAPTER 5
SUGGESTED CORRECTIVE MEASURES
Considering the highly sensitive nature of the Government security market operation and how little was known
about it in 1960, we believe that the progress made toward
developing and operating a financial and transaction reporting system merits commendation. The fact that this
progress was made without regulations and achieved through
the Federal Reserve Bank and dealer cooperation also warrants recognition.
Even so, we believe that our findings show a need for
the Federal Reserve Bank and dealers to improve the reliability and usefulness of t\\e financial data accumulated
under the reporting system. This will require special effort by them if improvement is to be achieved. In the remainder of this chapter, we are suggesting some corrective
measures that we believe could be taken by the Federal Reserve System to achieve appropriate improvements.
STRENGTHENING CONTROLS OVER
PREPARATION OF REPORTS
In chapter 2 we pointed out major problems that were encountered: (1) all income was not being reported for the accounting period because some dealers were not on a commitment
basis and (2) some dealers reported some accounts on an accrual basis but reported others on a cash basis. It is generally recognized that the accrual method of accounting more
accurately shows the financial position of a concern and more
precisely measures the results of operations for specific
periods. Accordingly we believe that the financial reports
should be prepared on an accrual basis if a significant difference might result.
Another problem discussed in chapter 2 was the reasonableness of expenses allocated to the Government securities
operation. The inequities found were mostly attributable
to mistakes made by the dealers and the need for more specific guidance by the Federal Recurve Bank. We believe
that the following steps could be takc?n by the Federal




26

56
Reserve System to build a greater degree of assurance into
the reporting system.
--Develop criteria for the dealers to follow in allocating expenses with special emphasis on the suitability of the basis used to allocate costs and the
relationship of expenses to Government securities
operations.
--Require dealers to retain the working papers supporting such items as adjustments, allocations, and calculations in preparing reports so that questions involving the data submitted can be properly resolved.
--Establish methods for increasing awarenass on the
part of top management officials of the dealers that
complete and accurate data is to be provided.
—Establish and require dealers to use uniform quotations to determine market value of Government agency
securities.
Chapter 2 also covers the question of obtaining realistic allocations of net worth which has been a continuing
problem. Essentially there is a lack of guidance in this
area. We believe that problems in such allocations could
be overcome through the development of specific criteria on
the method to be used in allocating net worth.
IMPROVING REVIEW FUNCTION
To strengthen the Federal Reserve Bank review function
we believe that
— t h e Market Statistics Division should obtain professional accounting expertise,
— t h e review procedures of the Market Statistics Division should be modified to provide for examinations
of financial data and supporting workpapers at the
dealers' offices, and
— t h e authority of the Market Statistics Division could
be broadened to provide for visits to dealers' offices and enable it to make changes necessary




27

0/

to improve the accuracy and usefulness of financial
reports.
REFINE FINANCIAL REPORTS
In chapter 4, we show the advantages that can be gained
by refining the financial reports particularly with respect
to more complete disclosure of income data. The following
steps could be taken to provide for better reporting.
--Require dealers to segregate Treasury bill trading
profits from interest earned in the net income analysis.
--Require dealers to indicate whether reports were prepared on a basis consistent with that of the prior
year. If changes in accounting procedures were made,
the dealer should describe the nature of the change
and the effect on the data.
—Require dealers to disclose the unrealized gains and
losses for all Government securities using cost as a
base. The balance sheet should show the amount of
unrealized gain or loss included in reported positions.
DISTRIBUTION OF AGGREGATE REPORT DATA
To ensure distribution of financial data to the Congress and the public, we believe that consideration should
be given to inclusion of the dealers' aggregate data in the
annual report of the Federal Reserve Board. To accomplish
this, we suggest that the Federal Reserve Bank establish
reporting dates to coordinate with the date of the annual
report.
AGENCY COMMENTS
We discussed the report with officials of the Federal
Reserve Bank who gave us their informal comments. Although
they agreed with our findings and conclusions, they told us
that the Informal Treasury-Federal Reserve Steering Committee, which has overall responsibility for the reporting system would have to decide on what corrective action would be
taken.




28

58
APPENDIXES
APPENDIX I
W I L L I A M l » R O X M I » t : W I S . . VICE C H A I R M A N
J O H N S P A H K M A N A. A.
J . W . F U L B R K i H T ARK
H E R M A N E. TAI MABC'J. OA.

W R I G H T PATMAv.. T E X . , CHAIRMAN
R I C H A R D »Ol L I N G . M O .
H A L E BOGGS, LA.
MARTHA W. GRIFFITHS. MICH.
W I L L I A M S. M O O R H t A D . PA.
W I L L I A M B. W I D N A L L , N.J.
W . E. BRBCK JO, T E N N .
BARBER B. C . N A B L E , J R . N.Y.
C L A R E N C E J. BROWN, OHIO

ABRAHAM R I R . C . f * .

Congress of tfje ®ntteb Status

JOHN R. STARK,
EXBCUTIVE DIRECTOR

JOINT ECONOMIC COMMITTEE
( C R E A T E D P U R S U A N T T O SEC.

5 ( » ) O F PUBLIC L A W J04. 7»TH C O N G R E S S )

WASHINGTON, D.C. 20510

May

CNN.

<£H££.
CMARLES H. ITRCY, ILL.
J A M E S W . KNOWLELS.
D I R E C T O R OF R E S E A R C H

1970

The Honorable Elmer B. Staats
Comptroller General of the United States
Washington, D. C.
Dear Mr. Staats:
Eleven years ago, at my request, the staff of the Joint
Economic Committee developed a set of reporting forms and account-'
in;r standards to use in obtaining information on the operations of
the dealers who make a market in Government securities.
At that
time there were seventeen such dealers. The results were published
by the Committee in i960 in a pioneering staff study of this market.
Subsequently a system of regular reporting on this market was developed by the Federal Reserve System in cooperation with the dealers.
This system now produces a regular flow of data about transaction in
the market and on revenues, expenses, and profits of dealers, both
bank and nonbank.
Now that this system has been operating for several years,
it would seem appropriate to review the basic accounting standards
that are employed to make sure that these are in accord with the
best practices. This would insure that we could have confidence
in the data, particularly as to the profits of the dealers. With
this aim in view, I am attaching a set of the forms and instructions
used by the Federal Reserve Bank of New York in operating this system
of reporting and I request that your accounting experts go over this
system and advise me as to whether or not: (l) the accounting practices are in accord with the best accounting standard; and (2) such
a system is likely to afford the public and our Committee an accurate
picture of the operations and profits of these dealers as a group.
Mr. James W. Knowles, Director of Research for the Joint
Economib Committee, has been involved with this system from the
beginning in 1959* and is available to work with you
in ai
needed/in the course of your review.




Sincerely,

O/H/UfTv
vfeight Patman, Chairman
31

59
APPENDIX II

LIST OF FINANCIAL REPORT DEFICIENCIES
BY TYPE AND PRIMARY CAUSE
Statements of Financial Condition
Primary
cause
1. Adjustment of securities positions from the
dealer's basis of accounting to the commitment
basis was made incorrectly. (2)1

«
D

2. Various methods were employed for determining
the market value of securities positions. (6)

F

3. Net worth allocated to Government securities
activities was not adequately supported. (1)

D

4. Securities borrowed and the offsetting liability were not reported. (1)

F

5. Liability for outstanding repurchase agreements
reflected par value of the securities instead
of actual money borrowed. (1)

D

6. Securities purchased but not yet received understated due to a footing error. (1)

D

7. Accrued interest receivable and accrued interest payable were inaccurate. (2)

D

8. Nonreportable securities were included in financial statements. (2)

D

9. Securities sold but not yet delivered were improperly stated. (2)

D

10. Securities positions were overstated.

(2)

11. Repurchase agreements were improperly classified as to maturity and type of security. (2)

See page 34.
See page 35.




32

D
D

60
APPENDIX II

Primary
cause
All contingent liabilities were not reported. (1)

D

Required explanations of data were not submitted. (2)

D

Positions in agency securities were erroneously classified as "other securities." (1)

D

The reported increase in net worth was not
accurate. (1)

D

Related asset and liability accounts were offset even though the Federal Reserve Bank instructed otherwise. (1)

D

Net Income Analysis
Trading profits were not reported on the commitment basis, as required by Federal Reserve
Bank instructions. (3)

D

Unrealized gains or losses not reported in the
right reporting period. (1)

D

Unrealized gains on Government securities including Treasury bills were not properly classified. (1)

D

Unrealized loss was erroneously reported as
unrealized gain. (1)

D

Income was not reported on a calendar-year
basis as required by the Federal Reserve
Bank. (1)

D

Certain interest income was offset against interest expense. (3)

D

Expenses on certain transactions were offset
against interest income instead of being reported separately as required. (1)

D




33

61
APPENDIX II

Primary
cause
24. Required explanations of data were not submitted. (2)

D

25. Income on Treasury bills was overstated.

D

26. All income items were not reported.

(1)

(1)

D

27. Cost of borrowed funds was overstated because
interest was on the par value of Treasury
bills instead of the discounted value. (2)

D

28. Unrealistic interest rate used for calculating
the cost of own bank funds used. (1)

D

29. Miscellaneous income items were incorrectly
classified. (2)

D

30. Miscellaneous interest expense was inaccurately reported. (3)

D

31. Expenses included certain items not applicable
to Government securities activities. (2)

D

32. No schedule supporting expense allocations was
submitted. (1)

D

33. Interest-free dealer department capital estimate was unrealistic or not estimated. (2)

D

34. Local income taxes were treated inconsistently. (6)

F

35. Interest expense was overallocated as a result
of including costs incurred in financing other
than Government securities activities. (2)

D

36. Data submitted was not fully on an accrual basis. (3)

F

NOTE:

Figures in parentheses ( ) indicate the
number of dealer errors.


http://fraser.stlouisfed.org/ - 5
22-355 O - 73
Federal Reserve Bank of St. Louis

34

62
APPENDIX II

TABULATION OF DEFICIENCIES
Number of
deficiencies
Type
Instances
D = caused primarily by erroneous
dealer procedures.

32

51

F = caused primarily by weaknesses in
Federal Reserve Bank instructions,
guidelines, etc.

_4

Ik

36

67




35

63
Mr. STAATS. If Congress asked us to make such a review and we
could get the cooperation of the Board, we would be very happy to
undertake such a review.
Mr. STANTON. Mr. Staats, the last time this subject came up in any
depth was in 1967. Chairman Robertson at that time testified—and I
have his testimony—and this was in regard to an answer about outside firms selected by the Federal Reserve Board. They have included
Arthur Anderson & Co., Price Waterhouse & Co., and most recently,
Lybrand & Ross Bros, and Montgomery.
I am not familiar with all these auditors. Are you familiar with
these companies?
Mr. STAATS. We are familiar with all these organizations, Mr.
Stanton, and we work with them almost daily, and certainly we are in
touch with them on various matters all the time, and we are quite
familiar with them.
We are also, I think, quite familiar with some of the problems that
these firms have.
Mr. STANTON. They have problems in getting cooperation?
Mr. STAATS. They run into difficulties, too. There are two major
efforts going on with respect to the entire public accounting profession
because of some of the problems that they have had. They have
recently established a financial accounting standards board, because
they had not been able to make adequate progress in developing
accounting principles and standards.
The American Institute of CPA's has a committee that is about to
report on what should be the kind of audit reports made in the first
place. Some public accounting firms go well beyond our alternative 1
and make studies of the type that are embraced in alternative 2, and
they render what they call management letters, letters to management
suggesting improvements in the management of procedures, the
processes, of the corporation. More and more of the public accounting
firms are doing what is in both 1 and 2 of the type of audit that we
are suggesting as possibilities here to this committee.
Mr. STANTON. Your main concern is you do think on 1 and 2
alternatives, you can do a service to the Congress in perhaps pointing
out deficiencies and so forth? T h a t is your main emphasis?
Mr. STAATS. Yes, indeed.

Mr. STANTON. Thank you very much.
The CHAIRMAN. Mr. Reuss?
Mr. R E U S S . Thank you, Mr. Chairman, and thank you, Secretary
Carlock and Mr. Staats, for your excellent presentations.
Let me say you have both persuaded me. I think the Treasury
ought to be entitled to, and the GAO ought to get, the authority that
is believed needed. And if the Federal Reserve makes a strong case
tomorrow for the $60 million for additional buildings, I believe I
could support the whole bill, although I think Mr. Staats has some
excellent improvements in the GAO section.
Mr. Staats, I would like to ask you a bit about the Federal Reserve
Open Market Committee purchases. And here I am referring in large
part to your excellent report of October 6, 1971, to Chairman Patman.
Check me on the following arithmetic. I believe the Federal Reserve
System's holding of Federal securities is now on the order of $73
billion?



64
Mr. STAATS. $75 billion.
Mr. R E U S S . $75 billion.

And I think you also testified just now that the annual turnover
in sales and purchases by the Open Market Committee was something
like $730 billion, about 10 times the amount of the holdings. Is that
right?
Mr. STAATS. The figure I gave you was $738 billion. T h a t was in
1970.
Mr. R E U S S . Your 1971 report that I also referred to also indicated
that the profits of the dealers in U.S. securities over a 5-year period
prior to your report averaged $47 billion a year, and in 1 year, 1970,
it came to $188 billion. Is that correct?
Mr. STAATS. I believe that is correct.
Mr. R E U S S . Of course, that included transactions in addition to
Open Market Committee transactions, I assume?
Mr. STAATS. I believe that is correct.
Mr. R E U S S . YOU used that figure as showing that the banks and
nonbanks which trade in Government securities do rather well making,
for a 5-year period, a return on net worth of 31 percent, compared to
2 percent in 1970 for railroads, 20 percent for manufacturing, 13 percent for financial institutions. So they are doing rather well.
Mr. STAATS. I t was spotty from year to year, b u t that was the overall for the period we looked at.
Mr. R E U S S . I S there any way which this committee can now have
available to it, pursuant to its constitutional duty to coin money
and regulate the value thereof, information to determine whether
the Open Market Committee, is churning its portfolio, doing what
the SEC would stop an investment trust-affiliated broker from
doing, overbuying and overselling?
I do not have the slightest idea whether this is so or not, b u t it
does seem to me like a tremendous beehive of activity. After all,
the Joint Economic Committee's advice to the Fed is, create new
money at the average rate of 4 percent a year.
Well, if all they did was to follow the Joint Economic Committee,
that would be a 4-percent rurnover. You are actually getting a 1,000
percent turnover.
Is all this activity really necessary?
Mr. STAATS. I do not believe I have any definite views about that
point.
Mr. R E U S S . That is the sort of thing which an economy and efficiency audit of the third category in your statement might throw
some light on, is it not?
Mr. STAATS. The third type, yes, sir.
Mr. R E U S S . Thank you very much.
The CHAIRMAN. Mr. Blackburn?
Mr. BLACKBURN. Thank you, Mr. Chairman.
I, too, want to welcome Mr. Staats and Mr. Carlock to the committee. I t is always a pleasure.
Mr. Staats, as I interpret your three-tier audit, the first two go
more toward the mechanics of the operation under the Federal
Reserve System, the efficiency of its operation. The third proposal
would go to question the judgment decisions, perhaps, of the Board
of Governors.



65
Now, am I right?
Mr. STAATS. On an after-the-fact basis, not before the fact.
Mr. BLACKBURN. I find myself with some conflicting views in my
own mind about the proposed bill before us. I feel that any public
body should be answerable to the public, and since you are our
auditing firm for the Congress, we are the ones that have to respond
to the public ourselves. I feel: what is wrong with having our arm go
in and investigate an idependent agency of Government?
On the other hand, I find myself wondering, would we be infringing
on the independence of the Fed if we find that an arm of the Congress
could, after the fact, make justifiable criticisms about judgment
decisions which, at the time they were made, might have appeared
to be justified. This is one question that I have.
Mr. STAATS. Well, I do not really see how audits of the type 1 or 2
really would raise that issue. With respect to the third type, I would
be more willing to accept the argument that has been made. And it
is perfectly possible that Congress might not wish us go beyond
1 or 2. Or if it wanted to go beyond that, then safeguards could be
written in in whatever way was necessary to give the Board assurances on this point.
I certainly would not be one to want to challenge the kind of
independence that the Board has had. I certainly would not want to
question the need for preserving in a most careful way the sensitivity
of some of the information which is available. I am not implying by
that that you cannot trust the GAO; I think you can. We have
handled some of the most sensitive information that there is in the
Government, and so far, I do not think we have been the source of
any leaking.
Mr. BLACKBURN. Well, along the lines of the whole question of the
operation of a banking system, the question I have had in recent years
comes to my mind as to whether or not our commercial banks have a
vested interest in heavy Federal deficits, in light of the profits that
they make on their Treasury investments.
Mr. STAATS. I would not want to speculate on that.
Mr. BLACKBURN. Would that be the sort of thing we would find
out with a phase 3 audit?
Mr. STAATS. N O . I think we would be interested, though, for example,
in phase 3 as to the adequacy of a bank examination. That would be
the type of thing we would be interested in.
Mr. BLACKBURN. NOW, I am not talking about phase 3 of economic
stabilization.
Well, thank you, Mr. Staats. I appreciate your testimony.
I have no further questions, Mr. Chairman.
The CHAIRMAN. Mr. Ashley?
Mr. ASHLEY. Thank you, Mr. Chairman.
On page 7 of your statement, you indicate that H.R. 10265 would
authorize the General Accounting Office to audit only the Board of
Governors and the Federal Reserve banks and branches, not the
operations of the Federal Advisory Council and the Federal Open
Market Committee.
I would ask if this would reflect a change of view on your part,
Mr. Chairman, that, namely, the Advisory Council and the Open
Market Committee should not be subject to audit, or whether it
should be included?



66
The CHAIRMAN. Yes. I t is all right, I think.
Mr. ASHLEY. I wonder if there was anything deliberate in the
exclusion in your bill of the authority of the General Accounting
Office to audit the operations of the Federal Advisory Council and the
Open Market Committee?
The CHAIRMAN. Well, I did not understand the bill excluded the
Open Market Committee. The Open Market Committee is the most
important thing about the Federal Reserve System.
Mr. ASHLEY. That seems to be the testimony of Mr. Staats in his
evaluation analysis of the bill.
Getting, Mr. Staats, to the judgmental factors that Congressman
Blackburn expressed interest in, I just wonder what would be involved
in an audit, say, of the Open Market Commiitee?
I t seems to me that the operations of the open market committees
can certainly, in large measure, on the phase of the business cycle, the
extent to which monetary policy, for example, is being relied upon to
curb inflation, perhaps because of failure of fiscal policy to act as an
antiinflationary brake—does this kind of judgment not get extremely
political, in your view?
Mr. STAATS. Well, I do not entirely separate politics from economics,
and it is a very difficult line.
Mr. ASHLEY. I am sorry. You say you try to separate economics
from politics?
Mr. STAATS. N O . I am agreeing with you that it is a difficult line to
draw. But I think it can be drawn; the economists attempt to draw
this line all the time.
And we would be concerned, I would think, more here with the
processes by which those judgments were made rather than whether
or not they made the right decision at the right time. This would seem
to me to be what we would be concerned about. We are making these
kinds of judgments in other cases. I believe we have been able to
separate out the politics from the program results that we think have
been achieved.
Mr. ASHLEY. SO what you are saying is that you would go to the
methodology of the decisionmaking. Well, you say that that is done in
other cases. I think that would be enormously difficult with respect to
the operations of the open market committee and the assessment as to
whether or not, in a given situation, the Federal Reserve is doing the
right thing in terms of monetary policy.
I do not quite see how you could develop a set of criteria or methodology in making your determinations and recommendations.
Mr. STAATS. Well, I am obviously not in the position to give you a
blueprint here today, because the law has not been enacted, and we
have not been in a position where we have the information to give us a
basis for really a full answer to your question. And I do not see how we
could, really, until we have more information available to us than we
have today, because that information just is not available.
Mr. ASHLEY. Well, we have to compare things a little bit. We know
that the Federal Reserve historically has felt it necessary to make use
of monetary policy as a last resort, a final weapon against inflation,
when, for example, there is an unwillingness on the part of the executive branch and Congress to consider in a timely fashion the increase of



67
taxation, which also tends to thwart demand pressures or to curtail
spending.
Would it be possible to develop criteria or methodology for assessing
the fiscal side as well as the monetary side?
I do not think it would. I think you would have a terrible time doing
that. So what I am saying is, I do not think it is a combination of, at the
present time and the past periods, demand pressures. I t has been a
judgmental evaluation on the part of the Fed as to what kind of combination of tight money, high interest rates, they feel in combination will
act as a brake on the economy. Is that not so?
Mr. STAATS. T h a t is true. B u t that is also true with respect to other
agencies of the Government who participate in economic programs or
loan programs, for example, Federal credit operations. All of these
represent programs which are affected by and affect the economic
cycle. We are talking here, I think, about something that is not completely unique to the Federal Reserve Board. But I grant you that it
is a very difficult area to draw a judgment.
Mr. ASHLEY. But you say out of this can come a judgment on the
part of the General Accounting Office that competes with that of the
Federal Reserve. Because it seems to me that what we did was to
establish in 1913 a Federal Reserve in a relatively independent capacity
so that it could arrive at decisions without being subject to pressures
of a political nature.
Mr. STAATS. I t seems to me, though, that this committee and—not
the GAO—but this committee has responsibility for making a judgment as to how well the Federal Reserve Board has carried out its
responsibilities. If this committee does not have that responsibility, I
do not know who does.
Mr. ASHLEY. Wei], I am not shirking responsibility. But I am
saying we decided, and it certainly is our responsibility to reassess
the delegation of authority to the Federal Reserve. But I do not find
very much in the way of sympathy with the idea of politicizing the
Federal Reserve. And to superimpose a congressional or other judgment during very difficult periods of the economic cycle, you know, that
do produce high interest rates, for example—to substitute our judgment with that of the administration for that of the Federal Reserve.
Mr. STAATS. Well, that is obviously a judgment that you have to
make here. B u t the idea would be, as to whether or not information
could not be developed which would enable Congress to make this
judgment more advantageously than it is today.
Mr. ASHLEY. Thank you, sir.
The CHAIRMAN. Mr. Brown.
Mr. BROWN. Thank you, Mr. Chairman.
Mr. Staats, I have many questions, so I hope that you will make
your answers as brief as possible and then expand upon them in the
record, if you would.
First of all, the Government Corporation Control Act of 1945 which
exempted the Federal Reserve System from audit was reported by
the Government Operations Committee. I am a member of that committee, and I wonder if you have talked with that committee with
respect to the removal of the exemption?
Mr. STAATS. I have not. No.




68
Mr. BROWN. Would that n o t possibly be the most direct way to
accomplish that which you are proposing? Shouldn't you just advocate
the removal of the exemption?
Mr. STAATS. I t would be one way to do it. I t had not occurred to
me.
Mr. BROWN. Let me be a deviFs advocate for a minute, Mr. Staats.
The chairman in his statement indicated that the expenses of the
Federal Keserve System have increased 210 percent from 1964 to 1972.
What was the budget of the General Accounting Office in 1964?
Mr. STAATS. 1964? I would have to check this, but it would be
Mr. BROWN. Well, supply this for the record. I would like to know
whether your budget has increased 210 percent between 1964 and 1972.
Mr. STAATS. N O , it has not increased that much, but it has increased
substantially.
In response to the request of Mr. Brown, the following information
was submitted for the record by Mr. Staats :
The obligations incurred to finance the activities of the General Accounting
Office amounted to about $44 million in fiscal year 1964 and about $88 million in
fiscal year 1972—an increase of 100 percent.

Mr. BROWN. Has the General Accounting Office purchased any ping
pong balls for its employees?
Mr. STAATS. I do not think so.
Mr. BROWN. Or music: Do you provide any of the recreational aids
for your employees similar to those the chairman has cited in his
statement?
Mr. STAATS. N O , sir.
Mr. BROWN. YOU have

suggested that every governmental entity
should be audited. I have two questions. First, who audits the GAO?
Mr. STAATS. Well, you fellows do a pretty good job of it here. We are
part of the legislative branch, as you know. We have an internal
auditor, and we get a good review each year by the Appropriations
Committee. But being a part of the legislative branch, I think we are
in the same kind of a position that you are here.
Mr. BROWN. That prompts my next question; who audits the
Congress?
Mr. STAATS. Well, we do, some of it. By law, we are required to do
some of it.
Mr. BROWN. With respect to internal and independent audits, do
you have any question about the integrity or the adequacy of these
audits expecially those done for agencies by outside auditors? I thought
you indicated that vou did.
Mr. STAATS. N O . I hoped I made my point very clear here. We have
no evidence to date to question the integrity of any of the external
audits made for the Board. From what information we do have, we do
have some question, quite honestly, as to the adequacy of the audit,
of at least the kind of audit that we would regard as deemed best.
Mr. BROWN. Mr. Staats, at your suggestion, the chairman put into
the record a one-paragraph report from the outside auditor of the
Federal Reserve Board. That was not the total audit report, was it?
Mr. STAATS. That is all that has been made available to the
Congress.




69
Mr. BROWN. Well, does not the Federal Reserve Board provide an
annu al report in which is indicated the transactions of the Board and
its activities?
Mr. STAATS. I could be wrong on this, but it is my understanding
that in this case not. Some accounting firms do provide more elaborate
reports, but in this case, to the best of my knowledge, not.
Mr. BROWN. In the course of your answering of questions for Mr.
Ashley, I think you said that this committee has the responsibility to
see that the system is functioning properly. Could not the objective
that is intended by this bill, as far as the audit provisions are concerned
be accomplished by this committee calling in on a regular basis the
officers, witnesses of the Federal Reserve and going over its annual
report, in effect, doing the very thing you are suggesting?
Mr. STAATS. With respect to the third type of audit which I referred
to, I would not say that this could not be done. That would be whatever the committee felt in its judgment was necessary.
I do have some doubts whether on the first two types that you are
getting, or could get, the kind of independent judgment which would
be needed.
Mr. BROWN. NOW, along the same line, Mr. Staats, I remember
your appearing before this committee sometime ago in connection
with uniform cost accounting practices legislation.
Could not the audit objective contemplated by the passage of this
bill be accomplished by your establishment of guidelines, data requirements, and informational minimums for all independent audits performed on the Board's operations, with the GAO acting only in an
audit oversight function?
Mr. STAATS. T h a t would be one possibility.
Mr. BROWN. And it would not involve the duplication of work,
would it? You have said that you are going to be reviewing the data
supplied by independent audits any way, right?
Mr. STAATS. I t would be one step short of No. 1.
Now, let me just add, if I could, one point here with respect to the
Inter-American Bank. The Congress did specify that we would prepare
advisory standards for the Treasury and the Inter-American Bank
Board of Directors, and that system has been in operation for about
3 or 4 years. And there is pending in the Congress now legislation in
the Foreign Aid Act which would extend that to other international
organizations. So you do have some precedent for the suggestions you
are making.
Mr. BROWN. NOW, is it a good decisionmaking practice of which
your agency would approve to authorize and order a course of action
when no estimate of its cost can be made?
Let me explain, again, being the deviPs advocate; Is that not what
you are recommending for this committee to do and the Congress to
do? You say you can determine and estimate the cost of the first two
types of audits, but you have no estimate of the cost of the third?
Mr. STAATS. Not until you get into it and get information on that.
T h a t is true with any agency. With respect to the first two audits, we
think we know enough about how to do this that is pretty clear.




70
Mr. BROWN. But would you not be critical of an agency that made a
decision without being able to estimate the cost of the action?
Mr. STAATS. We could not do more than what we have in our budget.
I t would have to take its place among the priorities in our budget.
And, of course, we would respond to the request of the committee if
the committee wanted us to look into some particular problem.
Mr. BROWN. Let me ask you another question that falls outside the
jurisdiction of this committee. Has any investigation, audit, or anything of this nature been performed on the data processsing sytern that
we presently have operating in the House and has there been a critique
of the effectiveness of the expenditures?
Mr. STAATS. Well, we are doing, as you know, a g r e a t deal of work
with the Congress in this area now, attempting to provide the systems
for better fiscal and program data for all the committees of Congress.
This grows out of the Legislative Reorganization Act of 1970.
The CHAIRMAN. The time of the gentleman has expired.
Mr. Moorhead?
Mr. MOORHEAD. Thank you, Mr. Chairman.
Thank both of you for your excellent statements.
Mr. Staats, I have no trouble with your first and second alternatives,
but it is the third alternative that I would like to discuss with you,
particularly when we think about the operations of the Open Market
Committee.
You would review the results and programs and activities of the
open market system, including the extent to which its established
objectives were being achieved. I am torn between two dilemmas here.
One, we established this system to remove, certainly, the political
pressures from the monetary decisions. So my first concern is, will
the fact that you are going to be looking over the shoulder of these
people make them more timorous and afraid to take decisive action?
The second one is that the Constitution does give the Congress
the power and the duty to coin the money and regulate the value
thereof. We delegated that almost entirely to the Federal Reserve
System, which has, to a large measure, redesignated that to the Open
Market Committee. I think that without some supervision by our
expert, the General Accounting Office, we cannot continue our constitutional duty of oversight of the body that we created to do our
job.
Can you help me out of that dilemma?
Mr. STAATS. I t is a dilemma, Congressman Moorhead, and I want
to make one point very clear. I think from the questioning here this
morning it might appear that we are advocating the third alternative.
We believe the bill as presently drawn contemplates all three, although
we think it can be improved with respect to the clarity of the drafting.
What we have said this morning is that we favor an audit of the
Board. Congress has to make the judgment as to which of these
three types.
Mr. MOORHEAD. I quite agree. B u t I am asking you for help and
guidance in making my judgment.
Mr. STAATS. I am afraid, from the questioning and the discussion
we have had here this morning, that the impression may be that we
are urging the Congress to adopt all three, and we are not. We are
saying there should be an audit. I think the committee and the Congress have to make the judgment as to how far that audit should go.




71
You can make the better judgment than we as to how you conceive
your relationship in the Congress to the delegation which has been
given to the Board. B u t what we have tried to do is frame three options, because all three options are in the language of the bill as we
see it today.
Mr. MOORHEAD. When you said that in other legislation, safeguards had been written in, I think maybe we should be thinking
about safeguards in this. And I am taking the typical example of the
alternative 3, the Open Market Committee. I do not think you should
be auditing them on the day-to-day decisions; that is too quick. But
maybe a year later, an audit would be proper, and the decisionmakers
would not feel your hot breath on their backs.
Mr. STAATS. And they should be included, even if you are only
going to do No. 1. T h a t is why we have made some references to it.
Even if you are only going to do No. 1, they should be included, because
they are part of the system.
Mr. MOORHEAD. I have no problem there. But it is only when you
get down to No. 3, are they going to be second-guessed in such a way
that it will inhibit correct decisionmaking by you?
Mr. STAATS. This is a dilemma, Congressman Moorhead. We are
doing the third type of audit very extensively in the Government now.
About one-third of the work that we do overall is in the nature of
looking at the effectiveness of ongoing programs, welfare, agriculture,
water resources, and so forth. The degree of sensitivity involved differs
in each case, and this is the dilemma that you refer to. I think this is
a problem that the committee has to address itself to.
Mr. MOORHEAD. I think there is a difference. We have talked a lot
about the independence of the Federal Reserve System. Of course, it
is an independent subject to Congress. But we have concluded at least
thus far, that we get better decisions if we maximize independence.
The ultimate question is, will we get worse decisions from the Open
Market Committee with you looking over their shoulder? That is the
question I have.
Mr. STAATS. Well, we would not be looking over their shoulder in
advance of any judgment made, in any event.
Mr. MOORHEAD. But a day or two afterward would almost be the
same.
Mr. STAATS. N O ; we would be interested in the longer term operation and the process by which they perform their responsibilities.
Mr. MOORHEAD. Thank you very much.
The CHAIRMAN. All right, Mr. Williams.
Mr. WILLIAMS. Thank you, Mr. Chairman, and Mr. Carlock and
Mr. Staats. I want to thank you for being here this morning. Mr.
Carlock, I trust that you recognize the fact that you have testified
on the noncontroversial parts of this bill, and that is why you are not
getting any questions.
We appreciate having you here.
Mr. Staats, how many people are employed by the GAO?
Mr. STAATS. I think the number of professional employees is, the
best indication for your purposes, we have 3,300 professional employees. We have a total staff of about 4,800, but about 3,300 of these are
professionals.
Mr. WILLIAMS. Fine.



72
Now in many of your answers to questions you used the word "we."
On page 5, in the second paragraph, you say "we have concluded
that there should be a GAO audit of the Federal Reserve Board and
the Federal Reserve banks."
Who do you mean when you say "we?"
Mr. STAATS. The General Accounting Office. T h a t means myself.
We use the word "we" when we were referring to the position of the
office. This is not a decision—this judgment was not made lightly.
I t involved consultation with my senior staff.
Mr. WILLIAMS. I think your alternative is probably correct. You
keep saying that 1 and 2 are virtually the same alternatives. Actually
this is not true. In addition to alternate 1, alternate 2 says such things
as:
Examination of the management of resources to evaluate the efficiency and
economy with which resources are procured and used, such audit work would
include determining the causes of any inefficient or uneconomical practices found
and proposing constructive recommendations for improvement for the consideration of management officials.

And then you go on to say that under this bill alternative 2 would
even include recommendations for attaining a more economical
and efficient administration of the entities audited.
In other words, to me it appears that all you would be doing would
be substituting your judgment against the judgment of the Board
of Governors of the Federal Reserve.
Isn't that correct?
Mr. STAATS. Yes, but we can point to dozens if not hundreds of
illustrations where we have made recommendations for improvements
which save money in other agencies.
Mr. WILLIAMS. That is quite correct for other agencies, but this
is entirely financial people.
Mr. STAATS. Last year about $300 million of savings were made which
could be directly attributable to our recommendations which the
agencies accepted before we even finished our report.
Mr. WILLIAMS. Let me repeat my statement. These other agencies
you are talking about are not agencies that consist entirely of financial
people. Now, let me go on to the next question about the amount of
business that the Fed has, a $738 billion turnover in 1970.
What percentage of that was due to deficit Federal spending as
well as paying off maturing Federal obligations with a low interest
rate, and paying them off by borrowing money at a much higher
interest rate?
Mr. STAATS. I cannot tell you. This is the total transactions figure
that I have. I might be able to get that for you for the record.
Mr. WILLIAMS. Please do, and I am certain that you will find t h a t
it is a very substantial portion of the $738 billion.
[In response to the request of Mr. Williams, the following information was submitted for the record by Mr. Staats:]
The $738 billion figure referred to was included in our report dated October 6,
1971, to the Vice Chairman of the Joint Economic Committee on the Federal
Reserve Reporting System for Recognized Dealers in Government Securities.
In 1970 the 20 recognized dealers in Government Securities purchased and sold
$738 billion in Government securities—this figure included all transactions not




73
just those with the Federal Open Market Committee. The Annual Report of the
Board of Governors for 1970 shows that the value of the Federal Open Market
Committee transactions for that year was $110 billion. We have no information
on the effect of deficit Federal spending or the redemption of maturing Federal
obligations on the transactions of either the recognized dealers or the Open
Market Committee.

Mr. WILLIAMS. Incidentally, you did mention a bill, from July 20,
1959, H.R. 8302, which called, in effect, for the GAO to audit the
Federal Reserve Board and the Federal banks for a period of 45
years.
Who introduced that bill, and were hearings ever held on it?
While you are getting the information to respond to that question,
let me add one other point.
You say that the GAO does an internal audit. T h a t is precisely
what the Federal Reserve Board is doing.
Mr. STAATS. N O , sir, you misunderstood me. We do not do internal
audits. We make an external audit as an independent agency of the
Congress of the agencies' own program.
Mr. WILLIAMS. Well, t h a t is precisely what the Federal Reserve
Board has, an internal audit as well as employing outside auditors.
Mr. STAATS. T h a t is true of every agency of the Government.
They all have internal audits, and we are for strengthening those
audits. We think that is a good thing to do.
And many of our reports that we make are designed to suggest
ways they can strengthen them.
Mr. WILLIAMS. YOU are suggesting that the Federal Reserve go
further than your own department is going.
Do ycu have the answer to my previous question yet?
My question was, who introduced this bill and were public hearings
ever held on it?
Mr. STAATS. The bill was H.R. 8302. I t was introduced by Chairman Patman, and to the best of my knowledge, our file here does not
show any—whether hearings were held or not.
The CHAIRMAN. What is the date of that bill?
Mr. STAATS. July 20, 1959.
Mr. WILLIAMS. Mr. Chairman, do you understand, and Mr. Staats,
that this bill pending before us does require an annual audit of the
Federal Reserve Board, and the other entities by your department?
Mr. STAATS. T h a t is the wording in the present bill. We have suggested that that annual requirement be changed.
Mr. WILLIAMS. Thank you.
The CHAIRMAN. I wonder if we should recess for noon or should we
proceed?
Mr. STEPHENS. Mr. Chairman, I have no questions that I wish to
ask. I want to thank the witnesses for the testimony they have given.
The CHAIRMAN. Without objection, we will recess until 2 o'clock
this afternoon, if that will be satisfactory with Mr. Staats and Mr.
Carlock.
[Whereupon, at 11:50 a.m., the committee was recessed, to reconvene at 2 p.m., the same day.]


http://fraser.stlouisfed.org/
22-355 0 7 - 6
Federal Reserve Bank- of3St. Louis

74
AFTERNOON SESSION

The CHAIRMAN. The committee will come to order.
Now, the second member is Mr. Stephens. Mr. Stephens said he
did not want to ask any questions, and so the next one is Mr. Wylie.
Mr. Wylie is not here.
Next is Mr. St Germain. He is not here. Next is Mrs. Heckler. She
is not here. Mr. Gonzales is not here, and Mr. Crane is not here. Mr.
Minish is not here. Mr. Rousselot is not here. Mr. Hanna is not here.
Mr. McKinney is not here. Mr. Gettys is not here. Mr. Frenzel is
not here.
Mr. Annunzio is here.
Mr. Annunzio, do you want to ask any questions?
Mr. ANNUNZIO. Thank you, Mr. Chairman.
I want to join my colleages in commending Mr. Staats for his very
constructive statement, and I for one want you to know that I take
the position that you are not on the spot here. Some of the questions
have been directed to you as though you were the proponent of this
legislation. And I would like the record to be clear on that point, that
you merely expressed your opinion that this legislation was written
and formulated by the Banking and Currency Committee; and that as
a witness, we are indeed grateful for your expertise.
I have a few short questions that I would like to have answered.
When Dr. Burns was here, one of the questions to Dr. Burns was:
Why do you object to an audit of the Federal Reserve System? And he
said, oh, we have all kinds of audits, and I don't object to an audit of
the Federal Reserve. We have no secrets, he said, but I do object to
the Comptroller General doing the audit because they would do more
than audit. They would set policy.
What is your reaction to the statement of Dr. Burns?
Mr. STAATS. Well, we do not set policy, and in fact, we avoid making
policy recommendations except insofar as they may relate to our own
jurisdiction, our own responsibility.
Now, we do attempt in other cases to review whether the programs
in our opinion are carrying out the intent of the Congress in legislation;
but we do not recommend policy of the type that the chairman referred to, and we would not intend to do so even if this legislation were
enacted, because we do not think this legislation calls upon us to do
that.
Mr. ANNUNZIO. General, one other question. In reading these reports I find, for example, that the Federal Reserve Board pays for
memberships in all types of professional organizations. I cannot refer
specifically to the page, but they had a meeting in New York; the
luncheon cost them $18,000; the cost of the printing was $50; the payment for the preacher was $15. They have their members, they pay
dues for belonging to bar associations. They go on and pay all sorts of
moving expenses for their employees who move across the country.
And some of those expenses are really astronomical.
What I am trying to find out from you, as the Comptroller General
of the United States, because you do do a tremendous job in auditing
the Department of Commerce, the Transportation, and the Defense
Department, is whether this practice is prevalent in these other departments in government?



75
Mr. STAATS. The type of expenditures that you refer to, specifically
memberships in organizations, the holding of luncheons, and the paying for the cost of that type of expenditure are generally not available
to other departments and agencies.
Now, the only exception relates to entertainment where those are
specifically provided for in the appropriation act, and principally they
are in connection with the State and Defense Department and other
agencies which have responsibility for official entertainment of foreign
visitors.
Now, with respect to membership in professional organizations and
other organizations, the law does not permit this for other agencies.
I t is possible for an agency to pay for the registration fee for an individual going to a conference if they regard it as being important for
training purposes; but they do not pay his membership fee in that
organization.
Mr. ANNUNZIO. I t is a very important point you made, that it goes
through the appropriation processes What the Federal Reserve Board
is doing, it is doing on its own.
And there is one other point I want to make that everybody is
losing sight of. In this day and age, we talk about full disclosure, we
talk about no secret meetings, we open up the doors and we are not
having any more executive sessions under closed doors, we let the
reporters in, let the TV people in, and let the public in when we mark
up a bill in executive session. Throughout the entire country, whether
you are a city councilman, an assemblyman, or a Congressman, full
disclosure is expected of your personal holdings, and we are keeping
no secrets from the public.
Why is the Federal Reserve Board so opposed to public policy?
This is public policy, full disclosure today; to have full disclosure and
to have a competent agency such as yours come in to make an audit.
I would like your comments on how you feel about full public
disclosure of all agencies. We can carry this business of independence
too far.
The CHAIRMAN. Let Mr. Staats answer this.
Mr. STAATS. I would say in answer to your question that one of the
functions of our office is not only to audit and to develop recommendations for improvement in management effectiveness of those agencies,
but to provide information to the Congress upon which it can exercise
its legislative oversight functions.
Mr. ANNUNZIO. This is information that the Congress needs badly.
Mr. STAATS. We have been testifying, along with many others,
before the Select Committee on Committees which Congressman
Boiling is chairing, and if I read their views correctly, based on our
testimony, they feel that if anything we are not providing enough
information to the Congress by way of information which they can use
to exercise oversight responsibilities.
Congressman Barrett questioned this morning as to why I have
taken the position that I favor some kind of audit of the Federal
Reserve Board. This was one of the reasons that I was responding to
you, Congressman Barrett, along the lines that I did—the importance
of disclosure and having better information.
Mr. ANNUNZIO. T h a n k you for your very excellent testimony.
The CHAIRMAN. Mr.



WYLIE.

76
Mr. W Y L I E . I will pass, Mr. Chairman.
The CHAIRMAN. Mr. Hanley.
Mr. HANLEY. Thank you very much, Mr. Chairman.
Mr. Staats, I commend you for your testimony. I do have one area
of concern, as one who has long been interested in the matter of
Federal employee benefits, and one who bears a direct responsibility
in this matter.
I t has been called to my attention that employees of the Federal
Keserve did not contribute to the retirement program. Is that right?
There is no contribution on the part of employees in the Federal
Reserve to the retirement program?
Mr. STAATS. If I understand correctly—and I would like to check
the record on this, Congressman Hanley, for sure—they have a
system which has been set up for employees who have worked only
in the Federal Reserve System. They have another fund which is for
individuals who transferred in, who have been under the civil service
retirement fund or some other Federal retirement fund, in which case
those are continued so as to not change its benefit structure.
But as to whether or not their own fund is contributory or not, I
will have to check that.
Mr. HANLEY. Well, the information I have is that they do not
contribute anything, yet enjoy the advantages identical to all others
in the Federal fraternity.
So if you would provide us with that information; and if that is the
case, it is purely discriminatory, as much as we expect from all other
Federal employees a contribution in the amount of 7 percent of the
gross salary.
So it would be quite unfair if those serving one entity of Government
enjoyed the accommodation that has been referred to by me.
Mr. STAATS. This is the kind of a matter that we would look at in
what I described this morning as the second type of audit. The management and economy and efficiency structure of benefits for employees,
the travel benefits, all of these kinds of things would be covered in the
second type of audit which I described as a management type or
economy-efficiency-type audit.
Mr. HANLEY. Fine. Well, if you will be good enough to provide the
committee with the answer to my question, yes or no, whether or not
they do contribute to the pension fund. And if the answer is in the
negative, then we would appreciate its rationale.
Mr. STAATS. We will do that.
[In response to the request of Mr. Hanley, the following information
was submitted for the record by Mr. Staats:]
We were advised by an official of the Federal Reserve Board that Federal
Reserve employees are covered by three different retirement plans, two of which
are contributory and one is not.
1. Civil Service Retirement Plan.—Employees of the Board who come directly
to the Board from covered Federal Government employment continue in this
system. The employees' contribution, currently 7 percent, is deducted from
their salary matched by a similar payment by the Board and paid to the U.S.
Treasury for deposit in the Civil Service Retirement Fund.
2. Federal Reserve Board Plan.—Board employees not covered by the Civil
Service Retirement Plan are covered by the Board Plan. The employees' contribution to this plan is the same as under the Civil Service Retirement Plan. The
contributions of the Board are actuarially determined each year. The benefits
are similar to those of the Civil Service Plan.



77
3. Reserve Bank Plan.—Employees of the Federal Reserve Banks and branches
are covered by this plan. Prior to January 1, 1970, this was a contributory plan
and deductions were made from employees' salaries. Since January 1, 1970, this
has been a non-contributory plan—the employees contribute nothing and all costs
all costs are borne by the banks.
The employees of the banks are covered by Social Security while the employees
of the Board are not. We were advised that the benefits of the Reserve Bank Plan
are not as good as those provided by the plans applicable to Board employees
and are intended to supplement Social Security benefits.
The CHAIRMAN. Mr. McKinney.

Mr. M C K I N N E Y . N O questions, Mr. Chairman.
The CHAIRMAN. Next is Mr. Cotter.
Mr. Cotter.
Mr. COTTER. Thank you, Mr. Chairman.
Welcome, Mr. Staats, and I want to commend you and the General
Accounting Office for the fine work you have been doing. I have just a
couple of brief questions.
How often are Federal agencies audited? Is it on a regular basis?
Mr. STAATS. Government corporations by law are to be audited
once a year. T h a t is a financial audit or a commercial-type fiscal audit
as we describe it.
With respect to other agencies, we go into them either as requested
by the Congress or by one of its committees, or where we on our own
believe that a matter needs to be looked at because of the size, the
amount of money that is involved, the indications of problems, or
where we know an authorization is going to expire and Congress would
be interested next year, matters of that type.
We very seldom will make a complete audit embracing all three
types of audits of a complete agency. We would not have the manpower, and we do not think it would be needed. And besides, that is
one of the functions of that internal auditor there, is to be on top of
these matters. And we rely to a considerable extent upon him, if he is
doing a good job.
Mr. COTTER. Well, very frankly, I am relatively new here, and I was
always under the impression that the Federal Reserve was audited.
Until the introduction of this bill, I had just assumed that they had
been.
There were some questions raised by Dr. Burns in some very sensitive areas which could jeopardize the whole system as a result of an
audit. You must run into situations like this at the Defense Department, the CIA, and other agencies.
Cannot this be handled by an agreement between the agency, or a
discussion, or some type of legislation to protect these areas?
Mr. STAATS. Yes; we have these problems in many areas, and we
have to exercise some judgment. And if there is need for confidentiality
of information in a report that we make, we can do that separately in a
classified document.
For example, many of the reports we deal with involve proprietary
information of a company which, if made available publicly, would
damage him in his competitive relationship in the industry in which he
is involved. So we have that kind of a situation.
We have another kind of a situation where there may be a claim
against the Government, where the claimant and the Government are
negotiating out the amount of the claim. We have to keep that kind of
information out of the public arena.



78
Security-type information—the Defense Department, the State
Department—we have had a lot of experience dealing with this kind of
problem; and I think we have been reasonably successful.
Mr. COTTER. YOU, as I recall, raised some objections to an annual
audit. Is that correct?
What you would like is flexibility to go in there wherever necessary?
Mr. STAATS. We do not think it would be necessary to do it on an
annual basis.
Mr. COTTER. Supposing that the bill were drafted in such form that
it must be done at least once during a 5-year preiod. Would that make
more sense?
Mr. STAATS. Or even a 3-year period. We have recommended to
Congress with respect to Government corporations that we be allowed
to exercise discretion so as to make it possible to audit within a 3-year
period; and that would be satisfactory here I am sure.
Mr. COTTER. I know insurance companies are audited on a 5-year
basis. This is why I raised that, because it is a large job and an expensive one.
Thank you very much.
The CHAIRMAN. All right.
Mr. Burgener.
Mr. BURGENER. Thank you very much, Mr. Chairman.
I missed the last portion just before lunch, so, Mr. Staats, if I am
repetitive, I apologize.
You suggest three alternatives as possible ways to go on an audit.
Well, the first two, I would agree, or most of us, would be relatively
noncontroversial. The third gets into sort of a gray area, so my question
is this. I n the third area would you be judging policy?
I will give you an example. On July 5 the Federal Reserve took an
action that some people applauded and others thought was disastrous.
You know, approval of the wild card certificate relating to banks.
I t resulted in the transfer of an immense amount of money around
to the financial institutions. Would your third alternative pass judgment on such an action if you happened to be auditing at that particular period of time?
Mr. STAATS. I t would not preclude it. I will put it that way. The
third alternative could include that type of analysis, again after the
fact. And as I indicated this morning, we would be probably more
concerned with the process by which a decision was reached, rather
than whether or not it was a good decision or a bad decision.
But it certainly would not rule out dealing with that type of action.
I would not want to mislead you.
Mr. BURGENER. Well, that is very clear, and I appreciate it.
A second question. You are in support of H.R. 10265, I take it,
although you recommend some changes in drafting.and so on? Is t h a t
correct?
Mr. STAATS. I want to be very precise about how I say this, because
I think we had some, maybe not misunderstaning but lack of clarity
on this point this morning.
I was faced with three alternatives. I could have said we are opposed
to the legislation. I could have said we are neutral about it, or that we
favor an audit. I concluded that our position should be that we should
support the idea of an audit of the Federal Reserve System.



79
I outlined three alternative ways in which legislation could be
written. The legislation as drafted today, at this point in time, includes
all three. I have attempted to formulate language which would be
more precise and improve the language; but the language that we
have suggested is no broader, as we interpret the language that is
before the committee today.
Is that clear?
Mr. BURGENER. Yes, indeed. Very good.
Finally, Mr. Chairman, if I may, does this represent a change in
position—I am new here—versus last }^ear or previous years on your
part?
Mr. STAATS. This is the first time I have testified on this subject
since I have been Comptroller General.
Mr. BURGENER. I should know, but when were you appointed?
Mr. STAATS. 1966.
Mr. B U R G E N E R . 1966.
Mr. STAATS. The General

Accounting Office prior to my appointment had taken a neutral position on the matter.
Mr. B U R G E N E R . In brief, what factors motivated you principally
to change your position from neutral to supportive?
Mr. STAATS. Well, I have not changed my position.
Mr. B U R G E N E R . I see. This is your first time in actually advancing
it in this form.
Well, I thank you, Mr. Chairman and Mr. Staats, for very illuminating testimony.
The CHAIRMAN. Mrs. Boggs.
Mrs. BOGGS. Thank you, Mr. Chairman.
I would like some language clarified, please, if you would. On page
7 of your statement when you say that "We have assumed that this
language would give the GAO access to examination reports of member banks in the custody of the Board or the Reserve banks prepared
by bank examiners of the Comptroller of the Currency, the F D I C ,
and the various States," does that mean that you already have jurisdiction over the examination of the bank examiners of these
institutions?
Mr. STAATS.
BOGGS.
Mr. STAATS.
Mrs. BOGGS.

Mrs.

NO.
YOU do
NO.
SO that

not?

this would not mean that this audit would
simply add the Federal Reserve banks?
Mr. STAATS. This suggests that we make it clear that those ought
to be included irrespective of what type of audit the Congress should
decide on.
Mrs. BOGGS. Thank you very much.
Mr. W Y L I E . Would the gentlewoman yield on that point?
Mrs.

BOGGS.

Yes.

Mr. W Y L I E . Would you support an amendment, Mr. Staats,
would remove such assumption and make it unmistakably clear
the GAO audit would not include member banks?
Mr. STAATS. I t does not include the member banks.
Mr. W Y L I E . B u t in your paper you say we have assumed that
would be in the bill and H.R. 10265 would include it and give
access to the reports of member banks.



that
that
this
you

80
Now, I think the confidentiality of our reporting system has to be
part of the whole banking system, and my question is, do you think
that we should add an amendment that would remove such assumptions so that the member banks would be examined by the comptroller
or the F D I C as they are at the present time?
Mr STAATS. Are you referring to the last paragraph on page 7?
Mrs. BOGGS.
Mr. STAATS.

Yes.

What we are doing here is simply stating our interpre-

tation.
Mr. W Y L I E . M y question is, would you support an amendment t h a t
would place a different interpretation or make it unmistakably clear
that the GAO would not conduct an audit for reports of member
banks?
Mr. STAATS. I think to review the adequacy of the bank examination we would probably need access to that type of information from
time to time, but we would not propose to audit the member banks, not
at all.
Mr. W Y L I E . So an amendment which would suggest that this assumption that you have access to the member banks would not bother
you. I t wouldn't do violence to the general purpose of this bill, which
is to audit the Federal Reserve Board.
Mr. STAATS. I t is just examination of reports that we are concerned
with and not audits of the banks themselves, examination of reports
based on the Federal Reserve's audit of those banks.
Mr. W Y L I E . Well, that's what I am concerned with, too. Is it
essential that you have access to reports of member banks in order
to make an audit of the Federal Reserve?
Mr. STAATS. Well, you can draw this line several different places
here, but our view, I think, would be that if we are going to make a
judgment on adequacy of the bank's supervisory functions that the
Federal Reserve Board exercises, we would need to have access to
the reports that they prepare in making those bank examinations.
That's all we are trying to suggest here. I do not quite see how we
can make a good judgment
Mr. W Y L I E . Well, has not the member bank audit been the real
hangup or source of most of the difficulty for the past 20 years on this
question of the Federal Reserve audit by GAO?
Mr. STAATS [continuing]. No, sir. T h a t may be part of it, but I do
not think that is the basic point.
Mr. W Y L I E . Wliat is the basic point?
Mr. STAATS. I think the basic point is they are concerned with
respect to, frankly, the third type of audit that we have described
in our presentation. That is my understanding. I do not propose to
speak for the Board. They can speak for themselves very well, b u t
that is my understanding.
Mr. W Y L I E . I wonder, Mr. Chairman, would it be appropriate to
call the Comptroller of the Currency and the Chairman of the F D I C
on this point?
The CHAIRMAN. Not today.
Mr. WYLIE. Not today, of course.




81
The CHAIRMAN. Of course we could do that.
Mrs. BOGGS. M y time is up, Mr. Chairman.
The CHAIRMAN. Let's consider it.
[Discussion off the record.]
The CHAIRMAN. Without objection, we will recess until tomorrow
morning at 10 a.m.
Will that be imposing upon you gentlemen too much?
Mr. STAATS. We are at your disposal.
The CHAIRMAN. We will stand in recess until 10 a.m. tomorrow
morning.
[Whereupon, at 2:30 p.m. the committee was recessed to reconvene
at 10 a.m. Wednesday, October 3, 1973.]







TO PROVIDE FOR AN AUDIT OF THE FEDERAL RESERVE
SYSTEM BY THE GENERAL ACCOUNTING OFFICE
WEDNESDAY, OCTOBER 3, 1973
H O U S E OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.
The committee met, pursuant to recess, at 10 a.m., in room 2128,
Rayburn House Office Building, Hon. Wright Patman [chairman]
presiding.
Present: Representatives Patman, Barrett, Reuss, Ashley, Moorhead, Cotter, Boggs, Widnall, Johnson, Stanton, Blackburn, Brown,
Williams, Heckler, Rousselot, and Roncallo.
The CHAIRMAN. The meeting will please come to order.
This morning the committee meets to continue hearings on H . R .
10265. Yesterday we heard from a representative of the Treasury
Department concerning the Federal Reserve draw section of the
legislation and also from Comptroller General Elmer B. Staats,
concerning the GAO audit of the Federal Reserve System provisions
of the bill.
General Staats testified yesterday that the expenditures of the
Federal Reserve System are no different from taxpayers' funds and,
thus, there is no reason why the Federal Reserve System should not
be audited by the GAO.
He also said that the GAO, as opposed to previous years when it
simply said it would conduct an audit of the Federal Reserve System
if so mandated by the Congress, is now calling directly for such an
audit. This is indeed an important statement for the head of the
General Accounting Office, the so called congresstoaal watchdog
agency and one which should be given great weight by members of the
committee.
General Staats also said that he did not feel that the operations of
the Federal Reserve System would in any way be adversely affected
as a result of an audit.
Based on this, unless the Federal Reserve Board today can, Basjie a
strong case to show this committee how its operations would be
hampered by an audit, I see no reason why this committee should not
vote to extend a GAO audit to the Federal Reserve System.
I n preparation for these hearings I have had the staff of the Banking
and Currency Committee review the expenditures of the Federal
Reserve System for the calendar year 1972.
The staff has prepared a report which outlines a number of areas in
which the Federal Reserve System is spending taxpayers' money in
what I believe is a highly questionable manner.



(83)

84
Every member of the committee has been furnished a copy of that
report and I am asking at this point that the report be made a part of
the hearing record.
There being no objection, this report will be made a part of the
hearing record.
[The report referred to by Chairman Patman follows:]
FEDERAL RESERVE EXPENDITURES OF TAXPAYERS' FUNDS—ONLY A GAO
WILL SOLVE THE PROBLEM

AUDIT

SUMMARY

Despite assurances from the Federal Reserve Board Chairman Arthur Burns
that there would be a careful review of all expenditures within the Federal Reserve
System to make certain that unnecessary expenditures were eliminated, there appears to have been no appreciable change in the System's method of spending the
taxpayers' funds.
• It is imperative that the System be held accountable for its method of expending
funds, particularly in light of the tremendous increase in the budget of the twelve
Federal Reserve banks and their branches. For intance in 1964 when the Domestic
Finance Subcommittee conducted a thorough review of the Federal Reserve expenditures, the total expenses for the year was slightly more than $197 million.
However, in 1972 the total expenditures for the year had increased to more than
$414 million, an increase of 210 percent over the 1964 level.
Banking Organizations Continue to Receive Fed Money
In two particular areas the Federal Reserve Banks continued to spend funds in a
highly questionable manner. These involved contributions and dues to various
agencies, including a large number of banking organizations and the expenditure
of funds of the transfer of employees from one bank to another or the movement
of a new employee from one city to another. It appears that these payments are
made for virtually every expense that the employee incurs regardless of its relationship to his job. For instance, Mr. J. J. Balle was given more than $19,000 in
connection with his move from Pittsburgh, Pennsylvania, to San Francisco, California. There was virtually no documentation for these expenditures.
In the area of dues and contributions the staff has noted that while there may
be some changes in the payment to various organizations, the figure is still abnormally high and some contributions are being made in a highly questionable manner. Although Dr. Burns has told the Domestic Finance Subcommittee that dues
would no longer be paid to the American Bankers' Association and related state
banking agencies, banking organizations either directly or indirectly related to the
American Bankers' Association still receive large membership dues from the
Federal Reserve banks and their branches. In 1972 three banking organizations,
Bank Administration Institute, American Institute of Banking, and Robert
Morris Associates, received more than $80,000 in dues from the Federal Reserve
banks and branches. In addition, several state banking associations were beneficiaries of the Federal Reserve Banks' generosity, although in some cases these
payments were virtually disguised. The chief payment in this category was an
$8,000 expense of a New York Federal Reserve Bank for a luncheon for the New
York and, New Jersey Bankers' Associations.
Fed Payments Go to Large Number of Unnecessary Groups
The staff also found that the Federal Reserve Banks and branches held memberships in more than 260 organizations including state and local Chambers of Commerce, bar associations, restaurant associations, nurses associations, and a large
variety of such groups that have virtually no compatibility with the function of
the Federal Reserve Banks.
The Federal Reserve Banks and branches also spent quite heavily in the area of
social, athletic and recreational activities.
A payment of more than $85,000 was made to various Federal Reserve clubs
operating throughout the System. These clubs are social and recreational organizations for bank employees. The Federal Reserve System has refused to allow the
staff of the Banking Committee to review the expenditures of these clubs contending that once the banks turned the money over to the clubs that it is theirs to spend
as they desire.



85
In addition to the money spent in the Federal Reserve Club, most banks provide
funds for a large variety of other athletic activities. For instance the Federal
Reserve Bank of Dallas bought 1,152 ping pong balls during 1972 at a cost of
$155.74. Since the Dallas Federal Reserve Bank has only 895 employees it means
that theoretically there was more than one ping pong ball purchased for every
employee of the bank. Other banks spent large sums of money for purposes such as
art club instructors, bingo parties, and a choral director and accompanist that cost
the Richmond Bank more than $1,400.
The method in which the Federal Reserve Bank spends taxpayers' money
clearly indicates that it is necessary that the banks be audited by the General
Accounting Office. Dr. Burns feels that the only test that should be placed on the
Federal Reserve expenditures is whether or not the banks are getting value for
their money. This logic is totally unanswered in the question of whether or not such
expenses are necessary and only an audit will determine whether or not the taxpayers are being protected against abuses such as those uncovered by the staff
study.
INTRODUCTION

In 1964 the Domestic Finance Subcommittee of the House Banking and Currency Committee conducted an extensive review of the operations of the Federal
Reserve System. The twelve Federal Reserve banks and their branches had total
expenditures for the year of $197,395,889.
Those funds were expended without any outside review including an audit of
the General Accounting Office.
The Domestic Finance Subcommittee in 1964 questioned thousands of dollars
of expenses of the banks and their branches as being unrelated to the function of
the Federal Reserve System.
At that time Chairman Patman introduced legislation that among other things
would have required an annual audit of the entire Federal Reserve System by the
General Accounting Office. Such an audit would have precluded the waste of
taxpayers' money * that was uncovered in the 1964 study by the Subcommittee.
No change in spending pattern
Since 1964 the staff of the Banking Committee has periodically reviewed the
expenditures of the Federal Reserve banks and their branches, and while there
have been some curtailment of certain expenditures, for the most part, the twelve
banks and their branches continue to spend money in a virtually unrestrained,
unsupervised and unaudited manner.
In 1972 the Federal Reserve Banks and their branches had increased their total
expenses to $414,608,417. This represents a 210 percent increase over the 1964
expenditures. (See Table I) Included in these increases is a 201 percent increase
in the salaries of officers, a 185 percent increase in the salaries of employees, and
an increase of 612 percent in fees paid to directors and others. Although these
expenses have increased at an alarming rate, there still remains no outside audit
of how the Federal Reserve System spends its funds.
TABLE I.—EXPENSE TOTALS OF THE FEDERAL RESERVE BANKS AND BRANCHES
Salaries
Total expenses
Year:
1964....
1965
1966
1967
1968
1969
1970
1971
1972
Percent

Officers

Employees

$197,395,889
204,290,188
207,434,049
220,120,843
242,350,223
274,973,608
321,373,389
377,184,871
414,608,417

$7, 741, 458
8, 052, 238
8, 536,990
9,123, 383
9, 970, 371
11,631,736
13, 009, 547
14, 802, 506
15, 594, 013

$100,462,115
99, 963, 787
103,121, 306
110,081,297
119,111,047
134, 469,129
154, 715,609
171, 901, 452
186, 281, 389

210

201

185

Fees, directors,
and others

$537,
632,
653,
973,
1, 239,
2, 368,
2,940,
3, 594,
3, 290,

418
265
959
730
482
806
279
878
901
612

1
The Federal Reserve System derives its income from interest received from its government bond portfolio. Monies not spent from this income are returned to the Treasury. Thus, the less money the Federal
Reserve spends, the more it returns to the Treasury which reduces the taxpayers' burden of paying for the
cost of government.




86
In order to ascertain whether or not the Federal Reserve System had, on an inhouse basis, curtailed certain unwarranted expenses as officials of the System have
continually promised the Banking Committee, the Committee staff reviewed
selected expenses of the System for 1972. The two areas in which the Committee
staff checked were expenses for travel and a general category listed as "all other".
Included in the "all other" category are such items as membership dues and
contributions, athletic activities, social activities and bank relations.
In 1964 travel expenses amounted to $2.2 million. In 1972, however, these expenses had increased to $4.8 million.
Insufficient information supplied staff
The staff has found it consistently difficult to monitor the travel expenses of
the Federal Reserve banks because of the lack of detailed information provided
by the banks to justify these expenses. For instance, an accounting in connection
with a travel voucher will simply state the individual's name, the amount of
money spent on the trip and will list as the description and reason for the trip,
for example, as "travel from New York to Philadelphia and return." No other
explanation is given for a majority of the travel expenditures.
Perhaps one of the most interesting areas of the travel section involves the
transfer of Federal Reserve employees from one bank to another or expenses paid
in connection with the hiring of a new employee to relocate that employee from
one location to the city in which the bank that hires the person is located.
In connection with such moves, the Federal Reserve Banks pay virtually all
the expenses including visits to the new city by the employee and members of
the employee's family to house hunt, as well as providing funds for such items as
closing costs on the sale of a house and on the purchase of a new house, utility
deposits and funds for temporary living quarters. Although the Federal Reserve
reimburses its employees for all such moving expenses it should be noted that
these expenses are not authorized for employees of other government agencies.
An employee of the Federal Government being permanently transferred to a
new duty station is permitted under Public Law 89-516 to make only one trip
visit with his spouse to his new duty station at the government's expense for the
purpose of house hunting, etc.
It should also be noted that the tax laws provide equitable treatment for
individuals who move in connection with a change of jobs or a transfer within
the same type of job.
Federal Reserve gives lavish treatment
Despite the restriction on other Federal employees and the provisions of the
tax laws, the Federal Reserve is quite lavish in its treatment of expenses in connection with moves.
The following examples illustrate this point quite clearly.
In connection with the expenses of Arthur H. Kanter it should be noted that
the Federal Reserve Bank provided funds on several occasions for Mr. Kanter
to travel from Atlanta to New Orleans to visit his family. In addition there are
other trips from Atlanta to New Orleans for which the bank paid that may
possibly have been used for family visits, but this information was not made
available in the expense vouchers.
The transfer of M. C. Petersen from the Seattle branch to the Portland branch
of the San Francisco Federal Reserve Bank also makes a strong case for a GAO
audit of the Federal Reserve System. A Federal Reserve Bank paid $7,884.90
spread out over sixteen occasions in connection with this transfer. On each
occasion the only reason for the payment is listed as "transfer from Seattle branch
to Portland branch." It should be noted in connection with this transfer that the
Federal Reserve System spent rearly $8,000 on a transfer of an individual when a
distance involved was only 175 miles.
But perhaps the most extravagant expenditures in this area were made in
connection with the hiring of Mr. J. J. Balles as President of the San Francisco
Federal Reserve Bank. Mr. Balles moved from Pittsburgh, Pennsylvania, to San
Francisco, and in connection with this move the Federal Reserve Bank of San
Francisco paid $19,249.18 in four payments over roughly a three-month period.
As can be seen from the table, it is virtually impossible to ascertain the reason
for all of these expenses except perhaps the payment to the moving company.
More than $14,000 of the $19,000 total was paid in two payments five days apart
in December of 1972. The reason for the payments was listed by the Federal
Reserve System as only "Pittsburgh to San Francisco." Certainly an audit of
even the most basic type would have required more of an explanation for an
expenditure of more than $19,000 of taxpayers' funds than the barebone descripDigitized for tions provided by the Federal Reserve System.
FRASER


»Y
EXPENSES IN CONNECTION OF MOVE OF PIERRE VIGUERIE, BANK VICE PRESIDENT, FROM NEW ORLEANS TO
ATLANTA
Date

Amount

Sept. 11

$169.87

Do.._.

311.74

Do....
Do....
Sept. 12

290.25
256.15
625.00

Sept. 15

1,210.53

Do

1,560.50

Oct. 25
Oct. 27

3,358.50
56.80

Nov. 29

156.19

Total.

Payee

Reason

Description

Mrs. P. M. Viguerie.. House hunting in connection with relocation Trip from New Orleans to
of her husband, P. M. Viguerie.
Atlanta and return.
Mr. and Mrs. P. M.
Househunting
Do.
Viguerie.
do
do
Do.
do
...do
Do.
P. M. Viguerie
Cost incidental to purchase of new home.. Moving expenses for transferred officer.
do
Reimbursement for tax liability as per Relocation expenses.
advisory letter No. 407.
Security Van Lines
For household goods and furniture of P. M. Moving expenses.
Inc.
Viguerie from New Orleans.
P. M. Viguerie
Closing costs for residence in New Orleans Relocation expense.
Security Van Lines... Covering supplemental moving expense on
Do.
household goods for Pierre Viguerie from
New Orleans.
P. M. Viguerie..
Cost of maintenance of home in New Relocation expense.
Orleans from Oct. 1 to the sale of home on
Oct. 17,1972.

7,955.53

EXPENSES IN CONNECTION WITH MOVE OF ARTHUR H. KANTER, SENIOR VICE PRESIDENT, ATLANTA FEDERAL
RESERVE BANK, FROM NEW ORLEANS
Jan.

3

$240.00

Jan. 12i

74.22

Feb.

249. 48 Peachtree Towers

2

Do....
Mar.

1

302.90
242.77

Do.

250.85

Mar. 20

298.88

Apr.

3

253.68

Apr.

7

127.82

Apr. 12

458.66

April 28

110.08

May 11

252.35

May 26

125.28

June 2
June 7

351.00
247.20

June 22

121.49

Do....

206.73

July

Peachtree Towers
Inc.
Arthur H. Kanter

3

21.26

July 12
Do....

163.50
2,129.70

July 18

1,115.74

Total..

Temporary living expenses, transferred
officer dislocated from family.
Visit New Orleans Federal Reserve Bank

Temporary living expenses.
Trip from Atlanta to New
Orleans and return.
Temporary living expenses.

Rent on apartment for A. H. Kanter for
month of February 1972, transferred officer dislocated from family.
Arthur H. Kanter
For A. H. Kanter from New Orleans, Jan. 2Do.
31, 1972, transferred officer dislocated
from family.
do
For the month of February 1972 transferred
Do.
officer dislocated from family.
Peachtree Towers
Rent on apartment for the month of March
Do.
1972.
Arthur H. Kanter
Visiting family and attending board of direc- Trip from Atlanta to New
tors meeting.
Orleans to Lake Charles,
La., and return.
Peachtree Towers
Rent on apartment for A. H. Kanter for Temporary living expenses.
April 1972.
. ,
Arthur H. Kanter
Visit family in New Orleans and visit Jack- Trip from Atlanta to New
sonville branch.
Orleans to Jacksonville
and return.
do
Visitfamily in New Orleans, Mar. 3-6,1972, Trip from Atlanta to New
and attend Birmingham branch board of
Orleans to Birmingham
directors meeting.
and return.
do
Visit to the New Orleans branch
Trip from Atlanta to New
Orleans and return.
Peachtree Towers
Rent for apartment for A. H. Kanter for Temporary living expenses.
May 1972.
Arthur H. Kanter
Moving expense on personal items ($21.28); Relocation from New Orleans
airline ticket to visit family on weekend
to Atlanta,
of Jan. 21-23.
do.
For month of May 1972
Temporary living expenses.
Peachtree Towers
Rent on apartment for A. H. Kanter for
Do.
June 1972.
Arthur H. Kanter
Visitfamily in New Orleans, June 9-11
Trip from Atlanta to New
Orleans and return.
do
Move family to Atlanta June 18-20; reDo.
location.
Peachtree Towers
Additional cost to Peachtree Towers for Temporary living expenses.
June for A. H. Kanter; additional costs
were incurred because of a visit from
his wife and daughters June 20-29,1972.
Arthur H. Kanter
For the month of June
Do.
do
Cost incident to selling home in New Orleans Relocation expense.
and buying home in Atlanta.
Security Van Lines... For household goods and furniture of A. H. Moving expenses.
Kanter from New Orleans.

7,343.95..

See footnote at end of table.




88
EXPENSES IN CONNECTION WITH TRANSFER OF J. GUYNN, VICE PRESIDENT NEW ORLEANS BRANCH—FROM MIAMI
TO NEW ORLEANS
Date

Amount

Payee

Aug. 17

Reason

$271.73 J. Guynn

Description

Moving expenses

Aug. 23

125.79

do

do

Sept. 11

265.41

do

do

Do....
Do

349.18
305.84

do
do

do
do

Sept. 22
Oct. 26

150.00
1,137.00

do
do

do
do

250.00

do

.do

Do
Do
Nov. 3
Dec. 29

Total..

4,240.43
1,951.47

do
Allied Van Lines

do
.do

986.81 J. Guynn

do

10,033.66

_

Househunting prior to relocation.
Househunting and temporary living expenses.
Temporary living expenses
in New Orleans prior to
family relocation.
Do.
Temporary living expenses
prior to family relocation.
Appraisal of Miami house.
Partial reimbursement for
tax liability on moving
expenses.
Moving allowance for misc.
expenses.
Selling costs on Miami home.
_. J. Guynn's transfer from
Miami.
Closing costs on purchase of
New Orleans home $712.
75. Carrying costs on
Miami house to Sept. 15,
$13.06. Final reimbursement for tax liability incurred on moving expenses.

MOVING EXPENSES FOR ALAN DAVIS, JACKSONVILLE BRANCH
June 2

$277.55 Alan Davis

June 22

520.49

do

Do
Do

80.00
60.00

Relocation from Atlanta, period May 21-29,
per diem and accommodations.

do
do

July

5

131.63

do

July 18

85.83

do

July 24

193.30

do

Do

373.93

do

Aug. 2

136.72

do

Aug. 3

70.00

do

Aug. 9
Aug. 10

250.00
118.90

do
do...

Do.

156.13

do

Sept. 8

700.06

do..

Sept.18

939.88

do

Oct.

3

109.65

do

Nov. 1

131.40

do

Do.

123.66

do

362.00

do

Nov. 15

Total..

4,821.14




_

Temporary living expenses
including 2 trips to Jacksonville.
Relocation from Atlanta office for period Temporary living expenses
May 30, 1972, to June 12, 1972, less 3}4
including trip to Atlanta,
days in Atlanta per diem and accommodations.
Relocation from Atlanta..
Appraisal of house.
Relocation from Atlanta, period June 13, Temporary living expense.
1972, through June 18,1972.
Relocation from Atlanta office, period June Temporary living expenses
6, 1972 through June 25,1972, per diem.
including trip to Atlanta.
Relocation from Atlanta office, period June Temporary living expenses.
26, 1972 through July 2, 1972, per diem.
Relocation from Atlanta
House hunting trip wife and
daughter.
Relocation from Atlanta, period July 3,1972 Temporary living expenses
through July 9, 1972, per diem and
including trip to Atlanta,
accommodations.
Relocation from Atlanta, period July 10,
Do.
1972 through July 16, 1972, per diem.
Relocation from Atlanta, period July 17, Temporary living expenses.
1972 through July 23, 1972.
Relocation from Atlanta
Miscellaneous expenses.
Relocation from Atlanta, Aug. 1, 1972 Temporary living expenses.
through Aug. 15, 1972 apartment and
furniture rent.
Relocation from Atlanta, period July 24, Temporary living expenses
1972 through July 30,1972 per diem and
including trip to Atlanta,
accommodations.
Relocation from Atlanta
_ Closing costs of Jax house;
taxes, interest, insurance
on Atlanta house.
do
Movement of household
goods.
do
Trip to Atlanta and miscellaneous expenss to finalize
sale of home.
do
Transfer fee and interest on
home in Atlanta.
do
Electric service for apartment and interest in connection with purchase of
home.
do
_. Reimbursement for taxes on
moving expenses.

»y
EXPENSES IN CONNECTION WITH MOVE OF J. J. BALLES FROM PITTSBURGH, PA., TO
SAN FRANCISCO
Date

Amount

Sept. 8
Nov.

Payee

$883.90

J. J. Balles

6

4,349.62

Dec. 22
Dec. 27

8,188.66
5,827.00

Total..
1

Reason

Description

From Pittsburgh to (San Francisco) and Relocation expenses account
return.
transfer to San Francisco.
Aero Mayflower Tran- Pittsburgh to San Francisco a/c J. J. Balles_
Do.
sit Co.
J. J. Balles
Pittsburgh to San Francisco
Do.
do
do
Do.

19,249.18

Possible visit to family in addition to bank business.

It should be noted that on September 27, 1971, the Domestic Finance Subcommittee held a congressional oversight hearing on the Federal Reserve System and
on that occasion Chairman Patman pointed out that there were abuses of expenditure of funds in connection with moving expenses. At that time he placed in the
hearings a breakdown of funds paid in connection with a transfer of an employee to
the Helena, Montana, branch, of the Minneapolis Federal Reserve Bank. Apparently the Federal Reserve System has paid little attention to correcting the
payment of such expenses and in fact has increased such payments as noted by the
above examples.
Fed officials deny audit need
In arguing against the need for an audit of the Federal Reserve System by the
General Accounting Office, both former Federal Reserve Board Chairmen William
McChesney Martin and the current Chairman Dr. Arthur Burns have repeatedly
stated that the System has its own adequate audits. For instance, in 1964 Federal
Reserve Board Chairman Martin in defending the audit procedures of the Federal
Reserve System told the Domestic Finance Subcommittee, "It is difficult to perceive how the GAO or any other audit group could achieve a more effective result.' ' Dr. Burns in an appearance before the Domestic Finance Subcommittee in
1971 pointed out, "The Board has utilized this review period to consider in detail
the existing procedures governing expenditures. It has discussed these questions
with the President of each Federal Reserve Bank. We have sought to make certain
all types of expenditures are carefully reexamined to insure that they can be
justified on a cost-benefit basis as contributing to an efficient performance of the
reserve bank's functions. The operations of the Reserve banks change constantly
over time. We strive to make certain that each expenditure is justified in relation
to the existing situation and that no expenditure occurs simply because it may
have occurred in the past. . ." Later in the hearing Dr. Burns said:
"As I made clear at the start we recognize that the Federal Reserve System
must always be able to justify any expenditure in terms of its benefits in
relation to its cost. We feel certain that with the exception of some obvious
cases of human error, the Federal Reserve System does this. I can assure the
Congress that along with the Presidents of the Reserve banks and other members of the Board I am personally taking all necessary steps to insure that we
get our money's worth on every dollar spent."
Banking dues are still paid
Shortly after the 1971 hearings, Dr. Burns informed Chairman Patman that the
Federal Reserve Board was clamping down strongly on any unnecessary expenses
and that many of the expenses with which the Committee staff had categorized as
unnecessary in earlier years would no longer be allowed. Among these were contributions and membership dues to organizations such as the American Bankers'
Association and related state banking associations.
Despite the loftly pronouncements by former Chairman Martin and Dr. Burns
there is little to indicate that adequate audit procedures can be performed by the
Federal Reserve System or that there have been substantial curtailment of
Federal Reserve expenditures. This is quite clearly shown by looking at the
expenditures in the "all other" category. In 1964 the "all other" category accounted for $3,291,617. However, in 1972, only eight years later, the "all other"
category has reached $7,178,125. Included in that figure for 1972 is an expenditure
of $129,727 in the form of Federal Reserve membership dues and contributions.
While this represents only a slight increase from the 1964 figure it should be

22-355 0 - 7
http://fraser.stlouisfed.org/ 3 - 7
Federal Reserve Bank of St. Louis

90
pointed out that while the Federal Reserve banks and branches no longer paymembership dues directly to the American Bankers' Association and related state
banking associations, a substantial expenditure from previous years, the banks
still pay membership dues in a number of banking organizations.
In addition the staff has found that although the Federal Reserve Board lists
only $115,917 in dues and contributions in 1972 this figure does not correspond
with actual expenditures which more probably should have been charged to the
membership dues and contribution account rather than to other accounts. By
charging all expenses that should properly belong to the membership dues and contributions account, the staff feels that the total expenditures for 1972 in that
category would equal the $129,727 mentioned above. Of the total figure for
membership dues and contributions in 1972, banking organizations accounted
for $80,474.58 of the total with three banking organizations, Bank Administration
Institute, American Institute of Banking and Robert Morris Associates, accounting for most of these dues. The American Institute of Banking was the largest
single recipient of the Federal Reserve Bank's generosity with taxpayers' funds.
The AIB was paid more than $55,000 in membership dues during 1972. On an
individual bank basis the dues ranged from a low of $280.90 paid by the Houston
branch to a high of $5,984.00 paid by the New York Bank.
The staff study also shows that while Dr. Burns had told Chairman Patman
that the banks would no longer pay dues or make contributions to the American
Bankers' Association or related state banking associations the practice appears
to continue although it apparently has been disguised. For instance, the Dallas
Bank shows a $100 expenditure with the accompanying explanation of "Texas
Bankers' Association fee for services performed for Federal Reserve Bank of
Dallas and its branches." A $400 expenditure in the Richmond bank listings is
itemized as "North Carolina Bankers' Association 1972 participation fee." However, these two items are pale in comparison to major expenses by the New York
and Philadelphia Banks. The New York Bank, for instance, shows an expenditure
of $8,405.39 with the explanation that the money is for "luncheon for New York
and New Jersey Bankers' Associations, February 15 and June 9." The Philadelphia Bank lists an expense of $1,211 with the explanation of "New Jersey Bankers'
Association pro rata share, annual luncheon."
Bankers eat well at Fed expense
This expenditure was broken down in the following manner. $5,211.60 was
spent on luncheon served at the annual meeting of the New York State Bankers'
Association at the Waldorf Astoria, February 15, 1972. On March 20 and November 28, $50.00 was spent on each occasion for the printing of tickets for the
luncheons in connection with the annual meetings of the New York State Bankers'
Association and the New Jersey Bankers' Association. On May 22, 1972, $25
was paid as "reimbursement to a staff member for an honorarium to a guest
clergyman who delivered the invocation at the annual meeting of the New Jersey
Bankers' Association." On June 9, $3,051.59 was paid to the Chalfonte-Haddon
Hall in Atlantic City, New Jersey, as "the bank's share of the cost of the luncheons
sponsored by this bank and the Federal Reserve Bank of Philadelphia in connection with the annual meeting of the New Jersey Bankers' Association." As
pointed out earlier, the Philadelphia Bank's pro rata share of the luncheon was
$1,211. There was an additional expenditure in connection with the New York
State and New Jersey Bankers' Association meeting of $153.35 for the rental of
ten tuxedos for various officers and staff members who attended the meetings.
While this expenditure, of course, did not benefit directly the banking associations
it does represent an extremely questionable expense on the part of the Federal
Reserve bank and is only one instance in which hundreds of dollars were spent
throughout the Federal Reserve banking system for the rental of tuxedos. It
should also be noted that the expenditures in connection with the bankers'
luncheon were posted to the research, public information and bank relations
category, although it would appear that this money was spent for the benefit
of the bankers' association, which would thus be quite properly categorized as
dues or contributions.
In addition to the dues paid to various banking organizations the Federal
Reserve banks and their branches spent thousands of dollars for membership
dues in a variety of organizations and associations. For example, a partial list of
the organizations to which the banks pay dues include:
Central Atlanta Progress.
Atlanta Chamber of Commerce.



91
Rotary Club of Atlanta.
Special Libraries Association.
State Bar of Georgia.
Georgia Association Business Community.
Atlanta Employment Association.
Institute of Internal Auditors.
Association for Systems Management.
Georgia Association of Credit Management.
Georgia Society of Professional Engineers.
Atlanta Society of Financial Analysts.
American Institute of Industrial Engineers.
Data Processing Management.
American Management Association.
American Nurses Association.
American Society of Personnel Administration.
Birmingham Chamber of Commerce.
Personnel Association of Birmingham.
National Association of Power Engineers.
Bank Security Association of Northeast Florida.
Jacksonville Personnel Women.
Miami Association of Industrial Nurses.
Miami Chamber of Commerce.
Coral Gables Chamber of Commerce.
Nashville Civitan Club.
Nashville Chamber of Commerce.
New Orleans Chamber of Commerce.
American Statistical Association.
American Economic Association.
American Society for Industrial Security.
American Finance Association.
Chicago Agricultural Economist Club.
Operations Research Society of America.
Northern Illinois Association of Industrial Nurses.
Association for Computing Machinery.
Illinois State Bar Association.
Administrative Management Society.
Illinois Training Directors' Association.
Building Managers Association of Chicago.
International Association of Business Communicators.
National Industrial Conference Board.
International Trade Club of Chicago.
The Chicago Farmers.
Illinois State Chamber of Commerce.
American Bar Association.
Illinois State Bar Association.
Chicago Association of Commerce and Industry.
National Association of Business Economists.
The Institute of Management Sciences.
Operations Research Society of America.
Midwest College Placement Association.
The Institute of Chartered Financial Analysts.
The Illinois Society of Certified Public Accountants.
Financial Executive Institute.
National Tax Association.
Women in Personnel of Chicago.
Society of Typographic Arts.
Illinois Regional Library Council.
Western Agricultural Economics Association.
Chicago Industrial Communications Association.
The Executives Club of Chicago.
Chicago Guidance and Personnel Associations, Inc.
The Society for Management Information Systems.
The Bankers' Club of Chicago.
Office of Education Advisory Council.
American Society for Training and Development.
Purchasing Management Association of Chicago.



92
Regional Science Association.
Special Libraries Association.
Industrial Relations Association of Chicago.
The Federal Bar Association.
The Employers Association of Detroit.
Detroit Area Economic Forum.
Building Owners and Management Association.
Michigan State Chamber of Commerce.
Personnel Women of Detroit.
Greater Detroit Chamber of Commerce.
Detroit Industrial Nurses Association.
Detroit Building Superintendent Association.
Purchasing Management Association of Detroit.
Michigan Restaurant Association.
American Risk and Insurance Association.
New England Telecommunications Association.
Tax Institute of America.
American Industrial Development Council.
In-Plant Printing Management Association.
Public Relations Society of America.
Boston Survey Group.
The International Center of New England.
Better Business Bureau of Eastern Massachusetts.
New England Police Revolver League Incorporated.
The Women's Personnel Club of Eastern Massachusetts.
Insurance Company and Bank Purchasing Agents Association.
Social Law Library.
American Records Management Association.
Greater Boston Association of Industrial Nurses.
The Urban Land Institute.
Greater Boston Chamber of Commerce.
Purchasing Management Association of Dallas.
Southwest Placement Association.
Dallas Chamber of Commerce.
New Mexico Mining Association.
American Management Association.
Better Business Bureau of Dallas, Texas.
National Bureau of Economic Research.
Dallas Personnel Association.
Committee for Economic Development.
Marine Technology Society.
El Paso Chamber of Commerce.
San Antonio Chamber of Commerce.
San Antonio Personnel and Management Association.
Econometric Society.
Adult Education Council of Greater St. Louis.
Regional Science Association.
Southern Agricultural Economics Association.
Better Business Bureau of Greater St. Louis.
Western Economic Association.
Junior Achievement of Mississippi Valley Incorporated.
St. Louis Regional Commerce and Growth Association.
Southern Economic Association.
St. Louis Association of Industrial Nurses.
Law Library Association of St. Louis.
Sophia Incorporated.
Missouri Society of Farm Managers and Rural Appraisers.
Junior Chamber of Commerce of St. Louis.
St. Louis Mercantile Association.
National Bureau of Economic Research Incorporated.
Richmond Chamber of Commerce.
Richmond Personnel Executives Association.
American Dietetic Association.
Richmond Public Relations Association.
Richmond Society of Financial Analysts.
Business Forms Management Association.



93
Society of American Archivists.
Virginia Association for Building Management.
Richmond Personnel and Guidance Association.
Academy of Political Science.
Virginia College Placement Association.
Southeastern Library Association.
Pennsylvania Bar Association.
Philadelphia Bar Association.
Better Business Bureau of Philadelphia.
National Planning Association.
Police Chiefs Association of Southern Pennsylvania.
Chestnut Street Association.
Pennsylvania Chamber of Commerce.
Delaware Valley Chapter of American Records Management.
Philadelphia Committee on City Policy.
Crime Commission of Philadelphia.
National Service of Regional Councils.
Greater Philadelphia Chamber of Commerce.
Free Library of Philadelphia.
National Association of Accountants.
Philadelphia Survey Group.
Council for Urban Economic Development.
Credit Management Association of Delaware Valley.
Philadelphia Book Clinic.
Philadelphia Association of Industrial Nurses.
Pennsylvania Institute of Certified Public Accountants.
Association of Records, Executives and Administrators.
Population Association of America.
National Association of Credit Management, Northern and Central California.
San Francisco Junior Chamber of Commerce.
Bay Area Personnel of Women.
San Francisco Chamber of Commerce.
Real Estate Research Council of Northern California.
Salt Lake Area Chamber of Commerce.
Salt Lake Jaycees.
Portland Chamber of Commerce.
Portland Junior Chamber of Commerce.
Portland Chapter, Pacific Northwest Personnel Management Association.
Southern California Industrial Nurses Association.
Residential Research Committee.
Seattle Chamber of Commerce.
Greater Cleveland Growth Association.
The Journal of Economic History, New York University.
The Cleveland Law Library.
Cleveland Compensation Association.
Ohio State Bar Association.
Purchasing Management Association of Cleveland.
Greater Cincinnati Chamber of Commerce.
Cincinnati Better Business Bureau Inc.
Chamber of Commerce of Greater Pittsburgh.
The Bankers' Club of Pittsburgh.
Pittsburgh Personnel Association.
Kansas City Stewards, Chefs, Caterers Association.
Bankers Consumer Credit Association.
Lawyers Association of Kansas City.
Associated Industries of Missouri.
Mid-Continent Research.
Kansas City Press Club.
Kansas City In-Plant Printing Club.
Rocky Mountain College Placement Association.
Citizens Environmental Council.
Personnel Research Forums.
Greater Kansas City Association of Nurses.
Bank Security Officers Association.
Women's Chamber of Commerce.
Regional Science Association.



94
Chamber of Commerce of Greater Kansas City.
Kansas City Wholesale Credit Association.
Kansas City Bar Association.
Missouri Restaurant Association.
Missouri Bar Association.
Kansas City Business Communicators.
Colorado Society for Personnel Administration.
Denver Chamber of Commerce.
Colorado Personnel Women.
Colorado Association of Industrial Nurses.
Oklahoma City Personnel Association.
Better Business Bureau of Oklahoma City.
Personnel Association of Omaha.
Omaha Chamber of Commerce.
National Industrial Cafeteria Managers' Association.
Government Bond Luncheon Group.
American Academy of Occupational Medicine.
Money Market Luncheon Group.
New York Personnel Management Association.
Forex Club of America.
Institute of Sanitation Management.
Chamber of Commerce of the State of New York.
Industrial Medicine Association.
New York Law Institute.
American Foreign Law Association.
Treasury Security Luncheon Club.
Financial Purchasing Agents Conference (Greater).
Building Owners and Managers Association of New York.
The Association of the Bar of the City of New York.
Federal Statistics Users Conference.
New York Association of Compensation Administrators.
New York Financial Writers Association.
Beekman Downtown Alumni Hospital Association.
The Money Marketeers.
National Secretaries Association.
Metropolitan Economic Association.
Industrial Recreation Directors' Association.
Downtown Economists Luncheon Group.
Bank Credit Associates of New York.
Dental Hygienists Association.
College Relations Council of New York.
Bank Operations Conference of New York City.
Greater New York Association of Industrial Nurses.
Ambassadors Club of Trans World Airlines.
Buffalo Chamber of Commerce.
Industrial Relations Association of Buffalo.
Building Owners and Managers Association of Buffalo.
Western New York Association of Industrial Nurses.
Minneapolis Association of Building Owners and Managers.
Minnesota State Association of Industrial Nurses.
Associated Industries of Minneapolis.
American Agricultural Economics Association.
Minneapolis Chamber of Commerce.
Upper Midwest Chapter of the Institute of Management Sciences.
Minnesota State Bar Association.
Credit Bureau of Minneapolis.
St. Paul Chamber of Commerce.
North Central Credit and Financial Management Association.
Minnesota Association of Industrial Nurses.
Twin City Personnel Association.
Montana Stock Growers Association.
Helena Chamber of Commerce.
It is difficult to justify these expenditures or dues particularly when a majority
of the dues are for individual bank officers and employees. It would appear that




95
the payment of dues is more of a fringe benefit for the employees than a direct
benefit to the operations of the Federal Reserve banks. It should also be noted
that other government agencies are prohibited from paying employees' dues to
any type of organization.
Table II is a breakdown of the dues paid by each bank and branch during 1972.
TABLE 11—1972 DUES AND CONTRIBUTIONS OF THE FEDERAL RESERVE BANKS AND BRANCHES
BAI
San Francisco._
Salt Lake.__
Los Angeles
Portland
Seattle
St Louis...
Little Rock.
Memphis
Louisville
Atlanta
Bi rmingham. _
Jacksonville
Miami
Nashville
New Orleans
Cleveland.
Cincinnati
Pittsburgh
Dallas
El Paso
Houston...
San Antonio
Chicago
Detroit
Boston
New York
Buffalo..
Kansas City
Oklahoma City
Omaha
Denver
Minneapolis
Helena
Richmond
Charlotte
Baltimore
Philadelphia

_.
_

Total
Total, all banking dues

$550.00
60.00
65.00
45.00
45.00
525.00
60.00
60.00
85.00
500. 00
145.00
70.00
45.00
60.00
80.00
530.00
35.00
52.00
670.00
43.75
35.00
43.75
525.00
60.00
520.00
560.00
50.00
515.00
45.00
45.00
50.00
680.00
42.00
520.00
38.50
105.00
540.00
8,100.00

RMA

AIBL
$2,905.00
120.00
1, 556.60
762.91
362. 28
2,441. 25
356.04
..
4,086.33
828.71 ...

Other

Total

$415.00
40.00
30.00
30.00
30.00
400.00
22.50
15.00
22.50
460.00

$175.00
90.00

$4,970.00
495.00
1, 773.60
1,012.91
537. 28
8,256. 25
437. 50
781.04
384. 50
7,369.83
1,307.46
147.00
951.00
1,350.44
1, 422.00
4,392.34
703.30
536.00
6, 255. 41
218. 75
335.90
393.16
12,119.00
6,145.09
6,060.00
16,187. 75
2, 222. 84
6, 799. 21
195.00
1,105. 40
1,835.59
10,539.63
117.00
6, 296.82
558. 50
1,876. 50
4,043.00

25.00
65.00
60.00
25.00

..
612.00
992.38
1,050.00
2 147. 34
289.00
..
2,994.61"
280.90
393.16
4,622.00
1,963.19
2,972. 50
5,984.00
1, 599. 34
3,800. 71
..
598. 40
1, 452. 59
5,943.63

.
...
...

35.00
409.00

...
10.00
430.00
20.00
20.00
20.00
525.00
61.00
470.00
552. 50
30.00
400.00
15.00
15.00
23.00
550.00

175.00
i 100.00

85.00
2 8,405.39
10.00

25.00

..

..

2,872. 82
254.00
1, 206.00

475.00
30.00
25.00
490.00

5.00
U.211.00

55, 447.69

6,035. 50

10,891.39

3 400.00

129,727. 39
80, 474. 58

Symbols denote: BAI—Bank Administration Institute; AIB—American Institute of Banking; RMA—Robert Morris Associates,
i Texas Bankers Association fee for services performed for Federal Reserve Bank of Dallas and its branches.
2
$8,389.39 luncheon for New York and New Jersey Association, Feb. 15 and June 9.
3
North Carolina Bankers' Association 1972 participation fee.
4
$1,206 New Jersey Bankers' Association pro rata share annual luncheon.

TABLE II-B.—Membership dues and contributions by years
Membership dues and contributions:
1964
1965
1966
1967
1968
1969
1970
1971
1972
i F R B lists only $115,917.




Amount
$129,380
131,232
128,135
134,168
140,636
156,675
166,273
119,112
i 129,727

96
Athletic, social and recreational activities
In 1972 the Federal Reserve Banks and their branches spent nearly a quarter
of a million dollars on athletic, social and recreational activities. The largest
expense, $113,658 was for social and recreational activities while $17,761 was
spent on athletic activities. In addition to these amounts $85,032 was spent in a
form of contributions to various Federal Reserve Clubs throughout the Federal
Reserve Bank and Branch System. The Federal Reserve Clubs are operated for
the employees of most of the banks with the bank providing a percentage of the
funds to operate the clubs. For the most part the clubs' chief expenditure appears
to be for various social activities. It is difficult, however, to determine how these
clubs spend their money, since the Federal Reserve System has refused to allow
the staff of the Banking Committee to look at the expenditures of the clubs. The
Federal Reserve takes the position that once the money is turned over to the
clubs it is theirs to spend and these expenses should not be reviewed by the
Committee staff. Not all of the Federal Reserve banks and branches have Federal
Reserve clubs, but among those banks that do have such clubs the amounts
contributed to these organizations range from as little as $33 paid by the Seattle
branch of the San Francisco Bank to $15,000 given to the Federal Reserve Club
of Boston. Table III indicates the amount of money spent in the way of contributions to both the Federal Reserve Club and in the area of Athletic and Social
and Recreational Activities.
TABLE III
Federal Reserve
club
1964
1965
1966
1967...
1968
1969
1970
1971
1972

Athletic
activities

Social and recreational activities

$47,550

$14,937

$85,676
"
70,482
"

45, 725
41,322
43,697
43,429
48,690
58,704 .
78, 833
85,032

12, 259
13,831
12,890
24,105
15,079
15,166
18, 816
17, 761

66, 518
76,603
77, 714
98,090
98,942
94,690
113,658

Fed clubs lend country club atmosphere
When Dr. Burns appeared before the Domestic Finance Subcommittee in 1971,
he defended money being spent on the Federal Reserve Club by telling the Subcommittee, "Employee clubs are an effective employee relations tool in common
use in and out of government."
While the use of such clubs may be commonplace in private industry and while
employee clubs do function in government, there is quite a major difference when
contrasted to the Federal Reserve Club. Athletic and social clubs in the Federal
Government are funded entirely by employee contributions and no taxpayers'
money is used in these clubs as is used in the Federal Reserve Clubs.
A review of the expenses in the Social, Recreational and Athletic categories appears to paint the Federal Reserve System with virtually a country club atmosphere as these samples of expenditures reveal: The Chicago Federal Reserve Bank
spent $4,600 with the Shubert Theatre for tickets for the Women's Employees
Annual outing. That same bank also spent $3,256.36 for the purchase of supplies
and food for the employees annual card party. The San Francisco Federal Reserve
Bank spent $4,400.00 for the Christmas dinner party; $300 as partial payment for
tickets to baseball games; and $900 for part payment for the spring dance party.
The Salt Lake City Bank spent $145.78 for bowling shirts and $2,047.95 for
social events, the nature of which is unspecified in the bank's expense vouchers.
The Portland Federal Reserve Bank lists an expenditure of $250 for beach cabin
rental and $1.39 for flash bulbs for the Women's Banquet.
The Seattle bank lists expenditures of $424.05 for underground tour for 24
employees and 13 guests; $37 for partial payment for boat cruises for 23 employees
and 46 guests; $333.05 partial payment for ski outing attended by 16 employees
and 20 guests. It should be noted that in two of the three expenditures there were
more guests than there were employees. The Seattle bank also spent $231.68 for
women's softball equipment including $18 for tournament fees.




97
A ping pong ball in every pocket
The Dallas Federal Reserve Bank might not have the best ping pong players
in the Federal Reserve System but it spent the most money in that area. During
1972 the Federal Reserve Bank of Dallas bought 1,152 ping pong balls costing
$155.74. Since the Dallas Federal Reserve Bank has only 895 employees it means
that theoretically there was more than one ping pong ball purchased for every
employee in the bank. The bank also purchased during the year 29 ping pong
paddles.
While Dallas may claim the ping pong expenditure championship, the art
award goes to the Philadelphia Bank. During 1972 the bank spent $1,302 for an
instructor for the Art Club plus an additional $529 on art supplies including $154
for flowers for the art show. An additional $81 was spent for luncheons for the
Art club while $25 was spent for subscriptions to the publications " Art in America"
and " American Artist." The Philadelphia Bank also snowed its interest in art by
spending $23 to observe sculptors in connection with art purchases for the new
building. And Philadelphia did not overlook the golfers of the banking staff. The
bank spent $1,478 on golf tees during 1972.
If Dallas claims the ping pong championship and Philadelphia the art award,
then the music citation must surely go to the Richmond bank. During 1972 the
bank spent a total of $1,410.63 in connection with the bank's Choral group; $750
was in the form of salary to the choral director with $490 going to the choral
group's accompanist. There was also an expenditure of $170.63 for music for the
choral group. A survey of the bank's monthly expenses shows that apparently
the bank was more vocal in some months than in others. For instance, in June
the choral director was paid only $15 and the accompanist $10. However, during
May the director was paid $150 and the accompanist earned $100. The Richmond bank also spent $680.27 for sports equipment, uniforms, and league entry
fees.
Baltimore wins the bingo 'prize. That bank spent $160.39 on prizes and supplies for the annual employees council bingo party. In addition the bank spent
$50 for a fashion show sponsored by the employees council.
The New York Federal Reserve* Bank spent $2,168.46 for maintenance of its
bowling alleys and $598.06 for a golf tournament. The Buffalo Federal Reserve
Bank spent $270.42 for the visit of the President and Vice President of the Federal
Reserve Club of Buffalo to the head office to confer with officers of the Federal
Reserve Club of New York and with head office staff members regarding employee
relations activities.
Kansas City spent $225.45 as 10% of the ticket costs to Starlight Theatre
productions and $152.63 for miscellaneous camera equipment and supplies of the
bank's camera club.
Flowers not unnoticed by Federal Reserve Banks
While some banks seem to steer the taxpayers money towards art training,
musical appreciation, and ping pong events, all of the banks are united in their
fondness for flowers. During 1972 the Federal Reserve banks and their branches
spent $10,672.33 on plants and flowers. This total does not include Christmas or
other holiday special decorations. The New York Federal Reserve Bank spent
the most money on flowers, $1,708.65, while Oklahoma City spent only $10 in this
area.
If Christmas decorations were added to the flower total, then the expense would
increase by more than $3,500 since the New York Federal Reserve Bank spent
$3,563.88 on Christmas decorations. In the area of Christmas decorations, the
banks should perhaps exchange information so as to reduce their costs. For
instance the Richmond Federal Reserve bank purchased four Christmas trees
for a total of $110. However, the Louisville bank purchased only one Christmas
tree but spent only $12. Perhaps in the future Louisville could act as a purchasing
agent for all Christmas trees throughout the Federal Reserve System.
There are many other areas in which the Federal Reserve banks and their
branches are spending thousands of dollars on highly questionable expenses. The
following is a listing of expenses considered questionable by the Banking and
Currency Committee staff. This list by no means is intended to be all inclusive
but rather only highlights some of the questionable expenses. Because of limited
detail on other expenses it is impossible to ascertain their validity. In connection
with these expenses the staff is mindful of Dr. Burns' statement that along with




98
the Presidents of the Reserve banks he is taking "all necessary steps to insure
that we get our money's worth on every dollar spent." The purpose of these
expenditure listings was not to determine whether or not the Federal Reserve
obtained value for their dollars, but rather whether or not the money was a
legitimate expense. For instance, a $15 expense for a golf fee may have been
worth that amount of money to the person playing depending upon the condition
of the course, but at the same time, the staff questions whether that expenditure
regardless of the value received is a legitimate expense for an agency of the
government.
St. Louis
$12.22 paid to the Stadium Club for dinners for one officer and one eagle scout
guest in connection with the National Public Speaker's contest of the Boy Scouts
of America.
$50 paid to the Bel Air East Hotel for a luncheon meeting of the Eagle Scout
Free Enterprise Day attended by 9 Eagle Scouts and 1 employee.
The St. Louis Bank also lists $696.30 in 176 separate entries with the only
notation given "luncheon for bank guests." There is also a listing of $2,586.72
given as supplemental retirement allowance to Delos C. Johns. This amount is
broken down on a monthly payment basis. While this may be a bona fide expenditure the staff wonders why payments to this individual were not made out
of the Federal Reserve's pension plan.
Louisville
$13.86 to Kunz's Pipe Shoppe as miscellaneous expenses in connection with
payments mechanism luncheon.
$3.50 to Spalding College for United Nations Day Dinner attended by one
officer.
$13.13 luncheon for one officer and four guests incident to meeting related to
Scout Trust Fund Committee.
New York
$17.50 to Trans World Air Lines and $30 to Pan Am Air Lines with the explanation that these are services rendered to Alfred Hayes, President of New York
Bank in connection with his domestic and international travel for the bank
covering the period August 1, 1972 to July 31, 1973.
$28.70 for participation by an officer at the 51st Annual Convention of the
New York State Movers and Warehousing Association held in Cooperstown,
New York.
$128.75 for a course "Advance Topics in Numerical Analyses" at the University of California, Los Angeles.
$195.87 for a work shop entitled "The Role of Training Professionals as an
Internal Consultant."
$439.09 for six people to attend a National Exposition of Contractual Interior
Furnishings held in Chicago.
There was an additional expenditure of $608 for travel in connection with this
meeting. $94.35 for attendance by an officer at the Williamsburg Conference on
social structure, family life styles, and economic behavior sponsored by the
Institute of Life Insurance.
$20.39 entertainment by officers of a representative from Fortune Magazine.
$35 for a plant purchased to decorate an office of a Vice President.
$7,236 paid to a Gardner Cox as a fee for painting a portrait of the President of
the New York Federal Reserve Bank.
$19 as a reimbursement to a staff member covering the reported disappearance
of personal property check in the Bank Security Check room.
$55 as reimbursement to a member of the bank's art class covering the disappearance of art supplies while in the custody of the building services division
of the bank.
$275 for the rental of a Hammond Organ.
$2,897.32 for a kiddie's party.
$8,428.76 for a Christmas lunch
$30.51 for ten carat gold keys for three employees who graduated from the
American Institute of Banking.




99
Buffalo
$2,698.50 for a picnic.
$2,893.23 for a Christmas dinner plus an additional $75.40 spent for dinners
for those who missed the original Christmas dinner.
Chicago
$5 for speeches by a bank officer to the Jewell Tea Company Executives.
$5.52 for attendance of bank employee at the Harper College Seminar on
"Improving Coaching and Development."
$27.15 for cigars for the Board of Director's meeting.
$104 for registration fee for bank employee attending the Convention of the
Society of Automotive Engineers.
San Francisco
$16.85 attendance by staff members at the Annual Pacific Bankers' School
Alumni dinner.
$2 attendance at Radiological Defense officers' conference.
Salt Lake
$8.38 for Vice President and Assistant Vice President to attend Chamber of
Commerce luncheon meeting on crime prevention.
$51.50 paid on six different occasions for dues and membership meetings for
the Junior Chamber of Commerce in connection with the membership of D. S.
Hawkins, Supervisor of the High Speed Check Processing Department.
Los Angeles
$18.68 reimbursement for luncheon for Mrs. Balles and Mrs. Wilson, wives of
President Balles and Chairman Wilson.
$5 damage to purse by removal of visitation sticker.
It should be noted that while the staff considers the payment of damage caused
by Federal Reserve employees or property of the bank to be bona fide that this
type of expenditure has occurred in a number of occasions over the years and it
may well be that the Federal Reserve System should look into the use of some
other type of visitor sticker.
Houston
$3 cost of two certified copies of death certificates for retired employee.
Minneapolis
$100 registration fee to attend International Design Conference in Aspin,
Colorado.
$72.05 for the rental of formal attire for graduates of the American Institute of
Banking School in connection with the graduation dinner.
Kansas City
$2,805.11 for the Halloween-Thanksgiving-Christmas parties.
Boston
$8.30 paid in three installments for travel expenses of an officer for- work on
Saturday.
$5.65 for entertainment at the Quarter Century Club Annual Dinner.
$25.20 for one rosewood gavel with sterling silver band for Quarter Century
Club President.
$722.92 for the attendance of an employee at the IBM School on Selectric
typewriters.
$3 cost of cleaning chauffeur's uniform.
The staff reemphasizes that the above expenditures represent only a handful
of the questionable spending of taxpayers' money by the Federal Reserve banks.
In each bank and branch there were a large number of such expenses, but rather
than list all of these expenses the staff sought to pick out as many different types
of questionable expenditures rather than repeat the same type of expense for each
bank or branch.
Federal Reserve Thrift Plan
In addition to the miltitude of employee benefits available to those working for
the Federal Reserve banks and their branches, there is also a highly profitable
thrift plan to which employees may belong. The following memo about the plan
written to Chairman Patman outlines exactly how the plan operates and why so
many Federal Reserve employees have taken advantage of it.



100
U.S. HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C., August 23, 1973.
Memorandum to: Chairman Patman.
From: Curtis Prins.
Subject: Federal Reserve Thrift Plan.
1. The current Federal Reserve thrift plan was begun on January 1, 1970,
replacing an annuity account program that the Board had had under operation
since 1934.
2. At the time the thrift plan began, $45 million, the balance in the annuity
plan was transferred from that plan to the thrift plan account.
3. The entire amount in the transferred $45 million was all money contributed
to the annuity plan by the employees plus the interest that had been earned on
the funds by the investments. There were no funds from the Federal Reserve
System included in the $45 million transferred.
4. When the $45 million was transferred into the thrift plan, the Federal Reserve
did not provide any type of matching or additions to the thrift plan passed on the
$45 million.
5. There are now 17,700 Federal Reserve employees who are members of the
thrift plan out of a potential of about 20,000 employees.
6. The current assets of the plan are $79,819,000 (including the transfer of
$45 million from the former annuity account plan).
7. Of the total assets of $79,819,000, the Federal Reserve System has contributed $6,822,000, an increase of $1,595,000 over the December 1, 1972 figure.
8. For every dollar that an employee contributes to the thirft plan, the Federal
Reserve System puts $.25 into the plan.
9. There is a limit of $750 per year per employee that the Federal Reserve will
contribute to the plan.
10. In addition to the money that is eligible for the $.25 contribution by the
Federal Reserve, an employee can deposit an additional 10% of his salary in the
plan. The 10% is not in any way matched or contributed to by the Federal
Reserve System.
11. For example, if one of the Federal Reserve employees (such as a Federal
Reserve Bank president) makes $50,000 per year, he could deposit $3,000 in the
thrift plan which would have the added maximum contribution of $750 added by
the Federal Reserve System. In addition to that, this employee could place 10%
of his salary or $5,000 in the plan which would not receive any contribution from
the Federal Reserve System. In this example, the maximum amount that the
employee could place in the plan would be $8,000. But only $3,000 would be
subject to the $.25 per dollar Federal Reserve contribution.
12. The money in the thrift plan is invested in a variety of ways. Approximately
80% of the thrift plan assets are invested with the Equitable Life Assurance
Society which has a contract with the thrift plan providing for a guaranteed
annual return of 8% for the plan through December 31, 1974.
13. The remaining 20% of the fund's assets are invested with various mutual
funds, the Prudential Life Insurance Company and the Co-Mingled Pension Trust
Fund of the Morgan Guaranty Trust Company.
14. In addition to the thrift plan, the Federal Reserve System, including
employees of the Federal Reserve Board here in Washington, has a pension plan.
15. The pension plans are funded 100% by the Federal Reserve System, which
means that the employees do not have to make any contribution to their pension
plan.
ARMORED CAR AND CHECK COURIER SERVICE

One of the major expenses of the Federal Reserve System each year is the
service provided free of charge to member banks in connection with check courier
service and coin and currency distribution. In 1972, the Federal Reserve System
spent more than $36 million in this area. Most of this service should have been
paid for by the member banks rather than by the Federal Reserve System.
While some of the Federal Reserve Banks maintain their own armored cars,
normally these cars are not used to distribute coin and currency but for the most
part are used to pick up mail at a central post office due to the limited number of
mail deliveries in various cities which are not adequate enough to meet the needs
of the System.
Since only a few of the Federal Reserve Banks have their own armored cars
and these cars are not used for coin and currency shipments, the transportation
of currency and coin both to and from the Federal Reserve banks is accomplished




101
by using privately owned armored cars, couriers, or other transportation services.
Present policy of the Federal Reserve Bank is to pay the transportation expense
on all shipments of coin and currency between the reserve banks and member
banks outside of Federal Reserve cities. To accomplish this, the Reserve banks
use various armored car services and to an extremely limited extent the Post Office
Department. In the collection of checks the Federal Reserve Banks once again
use private carriers to a large extent and to a much smaller extent the Post Office
Department. The cost of transporting the checks for payment is borne entirely
by the Federal Reserve Banks. I t is interesting to note that not only does the
Federal Reserve System pay for the cost of shipping currency to and from member banks but in many cases the Federal Reserve System bears the cost of shipment of currency from one member bank to another member bank and even to
offices of the same bank. For instance, if the branch of Bank A wanted to ship
currency to another branch of the same bank this could be done with the Federal
Reserve System absorbing the cost. Table IV shows the amount of money spent
on armored car and check courier service by the Federal Reserve System for each
year from 1964 to 1972. The amount of money in this category has increased at
such a rapid rate that it is time that the Federal Reserve System reevaluate its
thinking of providing this service without charge to the member banks.
TABLE IV.—Expressage

Armored car and check courier service:
1964
1965
1966
1967
1968
1969
1970
1971
1972

Amount
$12, 999, 869
14,498,530
16, 712, 252
18, 724, 743
20, 824, 980
22,815,922
25,755,291
30, 653, 254
36, 537, 061

The CHAIRMAN. Before hearing from our witness, I would like to
make one final observation.
Last year, this committee passed a GAO audit bill, but the legislation was attached as an amendment to another bill which did not reach
the floor because we were unable to obtain a ruling due to the lateness
of the session.
Thus, H . R . 10265 is merely legislation to ratify the committee's
earlier action.
Our witness this morning is Gov. George W. Mitchell, Vice Chairman, Board of Governors of the Federal Reserve System.
Governor Mitchell is the only witness we have scheduled today, and
tomorrow we will meet in executive session as heretofore agreed upon,
at 10 o'clock tomorrow morning, to mark up the bill.
Governor Mitchell, we are delighted to have you, sir, and you have
a prepared statement, and you may proceed in your own way, and if
you do not deliver all your statement, the rest of it will be inserted in
the record.
STATEMENT OF GOV. GEORGE W. MITCHELL, VICE CHAIRMAN,
BOARD 0E GOVERNORS OF THE FEDERAL RESERVE SYSTEM,
ACCOMPANIED BY FREDERIC SOLOMON, DIRECTOR, DIVISION OF
SUPERVISION AND REGULATION, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. M I T C H E L L . Very well, Mr. Chairman.
Mr. Chairman and members of the committee, I welcome the opportunity you have afforded me to discuss H.R. 10265, a bill which
would amend the Federal Reserve Act in various respects.



102
Section 1 of the bill would authorize the General Accounting Office
to conduct an annual audit of the Board of Governors, the Federal
Reserve Banks, and their branches. In so doing, the Comptroller
General would be accorded access to such records, including reports of
examinations of member banks, as he finds necessary for the conduct
of the audits. The Comptroller General would be required to submit a
report of each audit to Congress.
Section 2 of the bill would extend the authority of the Reserve
Banks to purchase obligations of the United States directly from the
Treasury. The Banks are currently permitted to purchase up to $5
billion of U.S. Government obligations in this manner, but this authority expires on October 31.
Section 3 of the bill would raise by $60 million the ceiling on expenditures which the Federal Reserve System may undertake for the
construction and renovation of branch bank buildings.
The Board supports the objectives of sections 2 and 3; I shall comment on these provisions briefly at the end of my statement.
As we understand section 1, the Comptroller General would be
granted broad authority to look into the financial and operational
aspects of the Federal Reserve System. The GAO would be unrestricted in the conduct of the audit, and would thus have the authority
to review and evaluate all aspects of Federal Reserve activities.
The Board of Governors over the years has consistently opposed
such proposals. I t is understandable that some Members of Congress
and the public have wondered at this, since the General Accounting
Office enjoys a well-deserved reputation for competence and integrity.
I submit to you, today, however, that we perceive serious problems
with this proposal. Our objections stem from a basic concern about the
optimal functioning of the Nation's money and banking system. With
your permission, I'd like to briefly sketch in the background on this
subject.
Congress created the GAO in 1921—8 years after passing the
Federal Reserve Act—to provide the legislative branch with audit
authority over the receipt, disbursement, and application of public
funds. For the next 12 years, the Board of Governors, but not the
Federal Reserve banks and branches, came under the GAO's scrutiny.
During this time, the accounts of the Board were carefully checked by
GAO.
In 1933, however, Congress deliberately voted to remove the Board
from the jurisdiction of the GAO. The purpose, as described in the
report of the Senate Banking and Currency Committee, was to "leave
to the Board the determination of its own internal management
policies." This action, we believe, resulted from a judgment that noninterference with the internal management of the Federal Reserve
would in the long run provide better monetary and credit policies.
Naturally, the audit function did not cease with the termination of
the GAO's annual audits of the Board. For some years, audit teams
from nearby Federal Reserve banks performed the audit of the
Board's books, but in 1952, the Board, using the discretion Congress
provided, voted to hire nationally recognized public accounting firms
to perform this function in order to assure an independent oversight of
the Board's administrative activities. This arrangement has continued



103
to this day. Meanwhile, year in and year out, the Board's own examiners scrutinized the Federal Keserve banks. In recent years, their
techniques have been reviewed by outside accountants.
Before describing our present audit procedures in detail, I should
like to refer to the types of audit work which we understand GAO
conducts. I should add that, although the distinctions may seem to be
clear from a conceptual standpoint, they tend to overlap in practice.
The audit of narrowest scope is termed by the GAO as an audit of
financial operations and legal compliance. This is an audit of financial
transactions, accounts and reports and of compliance with applicable
laws and regulations.
A second category of audit relates to efficiency of operation. Policies,
procedures, and transactions are examined to evaluate how well the
agency carries out its programs and activities and how well it uses its
financial, property, and personnel resources.
The third category of audit deals broadly with program results—the
extent to which desired results or benefits are being achieved and
whether the objectives established by Congress are being met.
For its part, the Federal Reserve System has developed formal audit
and examination procedures which are extremely thorough. The accounts of the Board of Governors are audited each year by a competent outside accounting firm of certified public accountants. Each
accounting firm performs audits for 5 successive years, and is then
replaced by another top-fllight firm. Last year, the audit was conducted
by Touche Ross & Co.; the preceding year, it was conducted by Lybrand, Ross Bros. & Montgomery, which ended a 5-year cycle. Their
audit report is reproduced in the Board's annual report, and copies of
the report are furnished to this committee and to the Senate Committee on Banking, Housing and Urban Affairs.
Each Federal Reserve bank and branch is examined at least once
each year by the Board's staff of field examiners. The examination includes a comprehensive review of each bank's expenditures to determine if they are properly controlled and of a nature appropriate for a
Reserve bank. The outside accounting firm retained to audit the
Board is engaged to accompany the Board's examiners on their examination of one of the Reserve banks each year. This provides an external
evaluation of the adequacy and effectiveness of the examination
procedures.
In addition to the annual examination by the Board's examiners,
the operations of each Reserve bank are audited by the Bank's internal
auditing staff on a year-round basis under the direction of a resident
general auditor. He is responsible to the bank's board of directors,
through its chairman and its audit committee, and his selection is
approved by the Board of Governors. He is thus independent of the
bank's operating management. Each year, the Board's examiners review thoroughly the resident audit programs at all the Reserve banks
to see that the coverage is adequate and the procedures effective.
Thus the auditing controls set up by the Federal Reserve begin with
onsite auditors, independent of management, who review daily operations, security procedures, and conformance with System standards.
Their constant presence provides continuous auditing and timely
action.



104
The followup of the onsite activity is made by the Board's examiners in their examinations of the Reserve banks. These are backed up by
an over-the-shoulder inspection by the outside auditors of the work of
the Board's examiners in examining a typical Reserve bank. This is to
bring current expertise over a broad range of accounting problems and
auditing developments to that of the Board's examiners.
The System taken all together is thoroughly adequate and may even
seem redundant. If one were to review audit findings and recommendations over the years, I doubt if he could come to any other conclusion. Over the years, most of the potential problems have been dealt
with by resident auditors, and at no time in history has the internal
auditing program of the Reserve banks been stronger than it is today.
But thoroughness is necessary because the Federal Reserve banks
deal in the most fungible of all commodities—money—and in astronomical quantities. The Reserve banks handle an annual flow of coin
and currency of 27.8 billion pieces having a value of $53.2 billion. The
checks passing through the System each year on their way to becoming
someone else's money total 9.8 billion items and $3.7 trillion. The
wire transfers are limited in number only—only 11 million were
handled last year, but they moved $17 trillion. To perform these
functions with a minimum loss or defalcation requires a comprehensive control and audit system. No system is perfect, but ours has
worked well, as the record shows.
In recent years, the term "audit" has been broadened, as the GAO
concepts indicate, to include a variety of objectives and techniques.
I think it is clear from the description of Federal Reserve audit
activities that I have given thus far that I have focused on what is
generally called an audit of financial transactions. Such an audit of
the Federal Reserve banks covers:
(a) The system of recordkeeping and accounting control over
money, checks, and securities coming into and going out of the
Reserve banks, as well as their expenses, earnings, assets, and
liabilities;
(6) The compliance with basic standards—in this case Federal
law, and regulations and directives of the Board of Governors;
and
(c) The availability of periodic reports summarizing the financial data in a manner which reveals the volume of work, relevant
costs, and the net earnings (or losses) from operations.
I have spoken in detail about items (a) and (6) but have given little
attention to (c). The reason is that our release of data about Federal
Reserve operations on a daily, weekly, monthly, quarterly, annual,
and ad hoc basis is enormous. For your information, a copy of the
Board's publications list follows my statement.
Frequently, as you know, members of the Board testify fully at
congressional hearings on the policies and activities of the Federal
Reserve System. The Board reports promptly and fully to special
congressional inquiries, particularly inquiries by congressional committees involving the System's operations, policies, and expenditures.
Over the years, however, the System's audits have evolved considerably beyond the basic audit of financial transactions which I have
described. The System now has in place the capacity to conduct
reviews of management and operational efficiency. In some banks, the



105
independent auditor performs this function; in other cases, it is handled by a separate division under the Reserve bank president. In
either event, Reserve bank operations are exposed to a continuous
review and evaluation by an extradepartmental unit.
Again paralleling the external arrangements for audits of financial
transactions, the Board has a Division of Federal Reserve Bank
Operations which reviews the management and operational efficiency
of the various facets of Reserve bank operations. Many of these audits
are a vehicle for sharing valuable experience among Federal Reserve
banks on such matters as check or money handling equipment and
procedures. System committees of technicians provide still another
arrangement for reaching the results sought by an audit of operations.
These committees have provided much of the leadership and knowhow for developing many innovations in various operations pertaining
to securities handling (book entry), currency sorting, and check
and wire transfers.
Finally, some of the Reserve banks have used the services of private
consulting firms to review the adequacy and efficiency of their operations. Such external reviews have been productive in evaluating the
kinds of operations to which the consultant brings a special expertise.
However, we have not found them to be very helpful when addressed
to operations that are essentially unique to the Federal Reserve.
Stating our position at the cost-benefit level, the results from internal
audits of operations have been much more productive than external
audits. This seems to be due to the fact that a large sector of Federal
Reserve bank operations has a limited counterpart in public or private
institutions either in character or scale. As a result, "outside" experts
do not get much beyond the learning stage in their audits of these
operations.
If the audit proposed in section 1 were to be confined to an audit
of financial operations and legal compliance, some—but not all—of the
Board's traditional objections would be removed. However, the
Board is convinced that its present audit arrangements are more
than adequate. A GAO audit limited to financial transactions and
legal compliance would be a duplication of the audit now performed
by an outside public accounting firm for the Board and by the Board
itself for the Reserve banks.
In a sense, Congress has designated the Board of Governors as
its " G A O " for purposes of reviewing the operations of the Reserve
banks. The Board reports directly to Congress, and always stands
ready to provide any information Congress seeks about expenditures
by the System. If still another arm of Congress were directed to audit
the Reserve banks, this would, at a minimum, diffuse audit responsibility, and have a low benefit yield in relationship to the cost.
I n any event, there are some critical informational constraints
that should be imposed. They include exemption of examination
reports of member banks, certain transactions conducted with and
on behalf of foreign central banks, and sensitive information about
open market and discount operations. (Much of the information in
the latter two categories becomes available with a lag.) A high degree
of confidentiality in these areas is essential for the conduct of Federal
Reserve functions; granting GAO access to these records could pose
problems in assuring this confidentiality.

http://fraser.stlouisfed.org/- 8
22-355 O - 73
Federal Reserve Bank of St. Louis

106
If the audit were to go beyond a basic financial audit, and GAO
typically does in the course of its ordinary audit activities, the injection
of management and policy critiques by GAO would be inconsistent
with the long-established congressional policy that has insulated the
Federal Reserve from such pressure. I n the sensitive area of monetary
policy, Congress has vested decisionmaking responsibility exclusively
in the Federal Reserve, and has established safeguards to insure t h a t
the System will exercise professional—and entirely independent—
judgment. We believe this arrangement should continue so long as it
serves the longrun interest of the public.
Also, as in the case of the audit of financial transactions, the broader
GAO audits would be duplicative of the kind of audit functions which
I have just described. Reviews of management and operational efficiency are now an integral part of the System's audit activities, both
at the Reserve banks and at the Board.
There is moreover the clear possibility, even probability, that an
audit by GAO would in time generate pressures for the Federal Reserve System to dilute or compromise its best monetary or credit
judgment to shortrun rather than longrun interests. The structure
created by the framers of the Federal Reserve Act over 60 years ago,
however unique and unconventional, has turned out to be remarkably
adaptable to the U.S. economy and remarkably responsive to its
longrun interests. This structure combines the advantages of regional
units—the 12 Federal Reserve banks—with the central oversight and
coordination of the Board.
Furthermore, it is obvious that the opponents of a monetary
authority with the independence the Congress has long given the
Federal Reserve would view this action as the opening wedge in a
series of legislative measures by which they would hope to make
monetary and credit policy responsive to shortrun political and
economic pressures. They would ask Congress to take further steps
to place the Board either directly under an executive branch agency
or perhaps under day-to-day congressional control, however that
might be accomplished. But Congress has, in our view, wisely avoided
this possible line of development by continuing to place responsibility
for internal management on the Board itself.
The unique character of the System, as conceived by the Congress,
lies in the engagement of both the public and private sector, in all its
regional variety, in the effort to serve the diverse economic interest
of production, trade, agriculture, finance, and consumption. The
Federal Reserve uses its regional links with the various sectors of the
economy as channels for activation and response to monetary and
credit measures. The arrangement has evolved into a sensing device of
considerable value.
The System's blending of public and private elements, and its
balance between central oversight and regional initiative, could be
endangered if audits were to be conducted by GAO. This is not said
in a spirit of criticism of the staff of GAO, but rather as a reflection of
our concern for the institutional diversity of the Federal Reserve.
Where differences were encountered between the way the Reserve
banks function and prevailing Federal Government practice, the Government auditors might well support the latter, whether or not the
end result would prove superior. For our part, it would be difficult for



107
the System to resist over the years a constant pressure to conform. A
gradual process of erosion could begin which might well spell the end
of the Reserve banks as we know them today. We have serious doubts,
moreover, whether the final outcome of such a process would yield
public benefits that could match those flowing from the present structure.
With regard to section 2, we support the amendment to section
14(b) of the Federal Reserve Act extending the authority of the Federal Reserve banks to purchase U.S. obligations directly from the
Treasury. Timely use of this authority—for example, during periods
immediately preceding taxpayment dates—can avoid the creation of
unnecessary financial strains that might occur if the Treasury were
required to draw heavily on its accounts at such times. There is no
doubt the existence of the authority permits more economical cash
management, and it also assures the immediate availability of funds
in the event of a national emergency.
Section 3 of H.R. 10265 would raise by $60 million the ceiling on
expenditures which the Federal Reserve System may undertake for
the construction and renovation of Reserve bank branch buildings.
This is the dollar figure contained in a bill which the Senate passed in
February 1972. In Frebruary of this year, Chairman Burns wrote to
the distinguished chairman of this committee outlining a program of
branch building expenditures totaling $71.45 million as the Board's
best estimate of its most pressing need sthrough 1977. This would
include funds for construction of new branch buildings in Baltimore,
Charlotte, Omaha, and Los Angeles.
Construction of these buildings is urgently needed. As our population grows and moves, it is necessary to increase the quantity of our
services. While technological improvements in the method of handling
many Federal Reserve operations have helped to stem the need for
additional space, increases in the volume of operations have more than
offset the savings. In the decade 1963-72, checks collected by the
Federal Reserve increased 117 percent, coin operations increased 93
percent, and currency operations 56 percent. Construction of the
branch buildings we are planning will help the System to continue to
cope with the needs of the public in our expanding economy. As of
today, due to cost increases, the construction program we outlined to
Chairman Patman in February will cost $76.2 million. We recommend
that the dollar limitation in section 10 be increased by that amount.
Mr. M I T C H E L L . T h a t is the end of my statement.
[The list of publications of the Federal Reserve Board referred to
by Governor Mitchell in his statement follows:]




108

FEDERAL RESERVE BOARD PUBLICATIONS
Available from Publications Services, Division of Administrative Services, Board of Governors of the Federal
Reserve System, Washington, D.C. 20551. Where a charge is indicated, remittance should accompany request
and be made payable to the order of the Board of Governors of the Federal Reserve System in a form collectible
at par in U.S. currency. (Stamps and coupons are not accepted.)
ANNUAL REPORT
FEDERAL RESERVE BULLETIN. Monthly. $6.00 per
annum or $.60 a copy in the United States and
its possessions, Bolivia, Canada, Chile, Colombia, Costa Rica, Cuba, Dominican Republic,
Ecuador, Guatemala, Haiti, Republic of Honduras, Mexico, Nicaragua, Panama, Paraguay,
Peru, El Salvador, Uruguay, and Venezuela; 10
or more of same issue sent to one address, $5.00
per annum or $.50 each. Elsewhere, $7.00 per
annum or $.70 a copy.
FEDERAL RESERVE CHART BOOK ON FINANCIAL
AND BUSINESS STATISTICS. Monthly. Annual
subscription includes one issue of Historical
Chart Book. $6.00 per annum or $.60 a copy
in the United States and the countries listed
above; 10 or more of same issue sent to one
address, $.50 each. Elsewhere, $7.00 per annum
or $.70 a copy.
HISTORICAL CHART BOOK. Issued annually in Sept.
Subscription to monthly chart book includes one
issue. $.60 a copy in the United States and
countries listed above; 10 or more sent to one
address, $.50 each. Elsewhere, $.70 a copy.
THE FEDERAL RESERVE ACT, as amended through
December 1971, with an appendix containing
provisions of certain other statutes affecting the
Federal Reserve System. 252 pp. $1.25.
REGULATIONS OF THE BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM.
PUBLISHED INTERPRETATIONS OF THE BOARD OF
GOVERNORS, as of December 31, 1972. $2.50.
FLOW OF FUNDS IN THE UNITED STATES, 1939-53.
1955. 390 pp..$2.75.
DEBITS AND CLEARING STATISTICS AND THEIR USE.
1959. 144 pp. $1.00 a copy; 10 or more sent
to one address, $.85 each.
SUPPLEMENT TO BANKING AND MONETARY STATISTICS. Sec. 1. Banks and the Monetary System. 1962. 35 pp. $.35. Sec. 2. Member Banks.
1967. 59 pp. $.50. Sec. 5. Bank Debits. 1966.
36 pp. $.35. Sec. 6. Bank Income. 1966. 29
pp. $.35. Sec. 9. Federal Reserve Banks. 1965.




36 pp. $.35. Sec. 10. Member Bank Reserves
and Related Items. 1962. 64 pp. $.50. Sec. 11.
Currency. 1963. 11 pp. $.35. Sec. 12. Money
Rates and Securities Markets. 1966. 182 pp.
$.65. Sec. 14. Gold. 1962. 24 pp. $.35. Sec.
15. International Finance. 1962. 92 pp. $.65.
Sec. 16 (New). Consumer Credit. 1965. 103 pp.
$.65.
INDUSTRIAL PRODUCTION—1971 edition. 383 pp.
$4.00 a copy; 10 or more sent to one address,
$3.50 each.
BANK MERGERS & THE REGULATORY AGENCIES:
APPLICATION OF THE BANK MERGER ACT OF
1960. 1964. 260 pp. $1.00 a copy; 10 or more
sent to one address, $.85 each.
BANKING MARKET STRUCTURE & PERFORMANCE IN
METROPOLITAN AREAS: A STATISTICAL STUDY OF
FACTORS AFFECTING RATES ON BANK LOANS.
1965. 73 pp. $.50 a copy; 10 or more sent to
one address, $.40 each.
THE PERFORMANCE OF BANK HOLDING COMPANIES. 1967. 29 pp. $.25 a copy; 10 or more sent
to one address, $.20 each.
THE FEDERAL FUNDS MARKET. 1959. I l l pp.
$1.00 a copy; 10 or more sent to one address,
$.85 each.
TRADING IN FEDERAL FUNDS. 1965. 116 pp. $1.00
a copy; 10 or more sent to one address, $.85
each.
U.S. TREASURY ADVANCE REFUNDING, JUNE
1960-JULY 1964. 1966. 65 pp. $.50 a copy; 10
or more sent to one address, $.40 each.
BANK CREDIT-CARD AND CHECK-CREDIT PLANS.
1968. 102 pp. $1.00 a copy; 10 or more sent
to one address, $.85"each.
INTEREST RATE EXPECTATIONS: TESTS ON YIELD
SPREADS AMONG SHORT-TERM GOVERNMENT
SECURITIES. 1968. 83 pp. $.50 a copy; 10 or
more sent to one address, $.40 each.
SURVEY OF FINANCIAL CHARACTERISTICS OF
CONSUMERS. 1966. 166 pp. $1.00 a copy; 10
or more sent to one address, $.85 each.

JUNE 1973

109
SURVEY OF CHANGES IN FAMILY FINANCES. 1968.
321 pp. $ 1 . 0 0 a c o p y ; 10 or more sent to one
address, $.85 each.
REPORT OF THE JOINT TREASURY-FEDERAL RESERVE STUDY OF THE U.S. GOVERNMENT SECURITIES MARKET. 1969. 48 pp. $.25 a c o p y ;
10 or more sent to one address, $ . 2 0 .
(Limited supplies, in mimeographed or similar form, of staff papers listed on p. 48 of
report above (other than those contained in
Parts 1 and 2) are available upon request
for single copies.)
JOINT TREASURY-FEDERAL RESERVE STUDY OF
THE GOVERNMENT SECURITIES MARKET: STAFF
STUDIES—PART 1 (papers by Cooper, Bernard,
and Scherer). 1970. 86 p p . $.50 a c o p y ; 10 or
more sent to one address, $.40 each. P A R T 2
(papers by E t t i n , Peskin, and Ahearn and Pesk i n ) . 1 9 7 1 . 153 p p . $ 1 . 0 0 a c o p y ; 10 or more
sent to one address, $.85 each.
OPEN MARKET POLICIES AND OPERATING PROCEDURES—STAFF STUDIES (papers by A x i l r o d ,
D a v i s , Andersen, K are ken et al., Pierce, Friedm a n , and Poole). 1971. 218 pp. $ 2 . 0 0 a copy;
10 or more sent to one address, $1.75 each.
REAPPRAISAL OF THE FEDERAL RESERVE DISCOUNT MECHANISM, Vol. 1 (papers by Steering
Committee, Shull, Anderson, and Garvy). 1971.
276 pp. Vol. 2 (papers by Boulding, Chandler,
Jones, Ormsby, Modigliani, Alperstein, Melichar, and Melichar and Doll). 1971. 173 pp.
Vol. 3 (papers by Staats, Willis, Minsky,
Stackhouse, Meek, Holland and Garvy, and
Lynn). 1972. 220 pp. Each volume $3.00 a
copy; 10 or more sent to one address, $2.50
each.
THE ECONOMETRICS OF PRICE DETERMINATION
CONFERENCE, October 3 0 - 3 1 , 1970, Washingt o n , D . C . O c t . 1972, 397 p p . C l o t h e d . $5.00
a c o p y ; 10 or more sent to one address, $4.50
each. Paper e d . $4.00 a c o p y ; 10 or more sent
to one address, $ 3 . 6 0 each.
FEDERAL RESERVE STAFF STUDY: WAYS TO MODERATE FLUCTUATIONS IN HOUSING CONSTRUCTION, Dec. 1972, 487 p p . $ 4 . 0 0 a c o p y ;
10 or more sent to one address, $ 3 . 6 0 each.

Summaries only printed in the BULLETIN.
(Limited supply of mimeographed copies of full
text available upon request for single copies)
CREDIT RATIONING: A REVIEW, by Benjamin M .
Friedman. June 1972. 26 pp.
REGULATION Q AND THE COMMERCIAL LOAN MARKET IN THE 1960s, by Benjamin M . Friedman.
June 1972. 38 pp.
THE REGULATION OF SHORT-TERM CAPITAL
MOVEMENTS IN MAJOR COUNTRIES, by Rodney
H . M i l l s , Jr. N o v . 1972. 53 pp.
FEDERAL RESERVE DEFENSIVE BEHAVIOR AND THE
REVERSE CAUSATION ARGUMENT, by Raymond
Lombra and Raymond Torto. N o v . 1972. 15 p p .
EXAMINATION OF THE MONEY STOCK CONTROL
APPROACH OF BURGER, KALISH, AND BABB, by
Fred J . L e v i n . March 1973.
OBTAINING THE YIELD ON A STANDARD BOND FROM
A SAMPLE OF BONDS WITH HETEROGENEOUS
CHARACTERISTICS, by James L. K i c h l i n e , P.
Michael Laub, and G u y V . G . Stevens. M a y
1973. 30 pp.
THE DETERMINANTS OF A DIRECT INVESTMENT
OUTFLOW WITH EMPHASIS ON THE SUPPLY OF
FUNDS, by Frederic B r i l l Ruckdeschel. June
1973. 171 pp.

Printed in full in the BULLETIN.
(Staff Economic Studies
reprints below.)

are included

in list of

REPRINTS
ADJUSTMENT FOR SEASONAL VARIATION. June
1941. 11 p p .
SEASONAL FACTORS AFFECTING BANK RESERVES.
Feb. 1958. 12 pp.
LIQUIDITY AND PUBLIC POLICY, Staff Paper by
Stephen H . A x i l r o d . O c t . 1961. 17 pp.
SEASONALLY ADJUSTED SERIES FOR BANK CREDIT.
July 1962. 6 pp.
INTEREST RATES AND MONETARY POLICY, Staff
Paper by Stephen A x i l r o d . Sept. 1962. 28 p p .

STAFF ECONOMIC STUDIES
Studies and papers on economic and financial
subjects that are of general interest in the field
of economic
research.




MEASURES OF MEMBER BANK RESERVES. July
1963. 14 pp.
REVISION OF BANK DEBITS AND DEPOSIT TURNOVER SERIES. Mar. 1965. 4 pp.

110
RESEARCH ON BANKING STRUCTURE AND PERFORMANCE, Staff E c o n o m i c Study by T y n a n
Smith. A p r . 1966. 11 pp.
A REVISED INDEX OF MANUFACTURING CAPACITY,
Staff E c o n o m i c Study by Frank de Leeuw w i t h
Frank E. Hopkins and fylichael D. Sherman.
N o v . 1966. 11 pp.

BANK RATES ON BUSINESS
SERIES. June 1971. 10 p p .

LOANS—REVISED

INDUSTRIAL PRODUCTION—REVISED
MEASURES. July 1 9 7 1 . 26 pp.

AND

NEW

REVISED MEASURES OF MANUFACTURING CAPACITY UTILIZATION. Oct. 1971. 3 pp.

REVISED SERIES ON COMMERCIAL AND INDUSTRIAL LOANS BY INDUSTRY. Feb. 1967. 2 pp.

REVISION OF BANK CREDIT SERIES. Dec. 1971. 5
pp.

THE PUBLIC INFORMATION ACT—ITS EFFECT ON
MEMBER BANKS. July 1967. 6 pp.

PLANNED AND ACTUAL LONG-TERM BORROWING
BY STATE & LOCAL GOVERNMENTS. Dec. 1971.
11 pp.

INTEREST COST EFFECTS OF COMMERCIAL BANK
UNDERWRITING OF MUNICIPAL REVENUE BONDS.
A u g . 1967. 16 pp.

ASSETS AND LIABILITIES OF FOREIGN BRANCHES
OF U.S. BANKS. Feb. 1972. 16 pp.

U.S. INTERNATIONAL TRANSACTIONS: TRENDS IN
1960-67. A p r . 1968. 23 pp.

WAYS TO MODERATE FLUCTUATIONS IN THE CONSTRUCTION OF HOUSING. M a r . 1972. 11 pp.

FEDERAL FISCAL POLICY IN THE 1960's. Sept. 1968.
18 pp.

CHANGES IN BANK LENDING PRACTICES, 1971. A p r .
1972. 5 pp.

BUSINESS FINANCING BY BUSINESS FINANCE COMPANIES. Oct. 1968. 13 pp.

CONSTRUCTION LOANS AT COMMERCIAL BANKS.
June 1972. 12 pp.

HOUSING PRODUCTION AND FINANCE. M a r . 1969.
7 pp.

SOME ESSENTIALS OF INTERNATIONAL MONETARY
REFORM. June 1972. 5 pp.

THE CHANNELS OF MONETARY POLICY, Staff Economic Study by Frank de Leeuw and Edward
G r a m l i c h . June 1969. 20 pp.

CHARACTERISTICS OF FEDERAL RESERVE BANK
DIRECTORS. June 1972. 10 pp.

REVISION OF WEEKLY SERIES FOR COMMERCIAL
BANKS. A u g . 1969. 5 pp.
EURO-DOLLARS: A CHANGING MARKET. Oct. 1969.
20 pp.
RECENT CHANGES IN STRUCTURE OF COMMERCIAL BANKING. M a r . 1970. 16 pp.
SDR's IN FEDERAL RESERVE OPERATIONS AND
STATISTICS. May 1970. 4 pp.
MEASURES OF SECURITY CREDIT. Dec. 1970. 11
pp.
MONETARY AGGREGATES AND MONEY MARKET
CONDITIONS IN OPEN MARKET POLICY. Feb.
1971. 26 pp.

BANK DEBITS. DEPOSITS, AND DEPOSIT TURNOVER—REVISED SERIES. July 1972. 5 pp.
RECENT REGULATORY CHANGES IN RESERVE REQUIREMENTS AND CHECK COLLECTION. July
1972. 5 p p .
BANKING AND MONETARY STATISTICS, 1971. Selected series of banking and monetary statistics
for 1971 o n l y . F e b . , M a r . , and July 1972. 20
pp.
YIELDS ON NEWLY ISSUED CORPORATE BONDS.
Sept. 1972. 2 pp.
RECENT ACTIVITIES OF FOREIGN BRANCHES OF
U.S. BANKS. Oct. 1972. 11 pp.
REVISION OF CONSUMER CREDIT STATISTICS. Oct.
1972. 21 pp.

BANK FINANCING OF MOBILE HOMES. Mar. 1971.
4 pp.

SURVEY OF FINANCE COMPANIES,
1972. 15 pp.

INTEREST RATES, CREDIT FLOWS, AND MONETARY
AGGREGATES SINCE 1964. June 1971. 16 pp.

ONE-BANK HOLDING COMPANIES BEFORE THE 1970
AMENDMENTS. Dec. 1972. 13 pp.

TWO KEY ISSUES OF MONETARY POLICY. June
1971. 4 pp.
SURVEY OF DEMAND DEPOSIT OWNERSHIP. June
1971. 12 pp.




1970.

Nov.

EVOLUTION OF THE PAYMENTS MECHANISM. Dec.

1972. 4 pp.
REVISION OF THE MONEY STOCK MEASURES AND
MEMBER BANK RESERVES AND DEPOSITS. Feb.

1973. 19 pp.

Ill
TREASURY AND FEDERAL RESERVE FOREIGN EXCHANGE OPERATIONS. Mar. 1973. 22 pp.
DEVELOPMENTS IN U.S. BALANCE OF PAYMENTS.
Apr. 1973. 13 pp.
CHANGES IN TIME AND SAVINGS DEPOSITS AT
COMMERCIAL BANKS. JULY 1972-JAN. 1973. Apr.
1973. 15 pp.
STATE AND LOCAL BORROWING ANTICIPATIONS
AND REALIZATIONS. Apr. 1973. 4 pp.

FINANCIAL DEVELOPMENTS IN THE FIRST QUARTER
OF 1973. May 1973. 10 pp.
YIELDS ON RECENTLY OFFERED CORPORATE
BONDS. May 1973. 2 pp.
FEDERAL FISCAL POLICY, 1965-72. June 1973. 20
pp.
SOME PROBLEMS OF CENTRAL BANKING. June
1973. 3 pp.
OPEN MARKET OPERATIONS IN 1972. June 1973. 12
pp.

ANTICIPATED SCHEDULE OF RELEASE DATES FOR PUBLIC PERIODIC RELEASES'—
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Weekly releases

Approximate
release day

Date or period to
which data refer

Aggregate Reserves and Member Bank Deposits (H.3)

Tuesday

Week ended previous
Wednesday

Applications and Reports Received, or Acted on, by the
Board (H.2)

Friday

Week ended previous
Saturday

Assets and Liabilities of AH Commercial Banks in the
United States (H.8)

Wednesday

Wednesday, 2 weeks
earlier

Capital Market Developments (H.16)

Monday

Week ended previous
Friday

Changes in State Member Banks (K.3)

Tuesday

Week ended previous
Saturday

Commercial and Industrial Loans Outstanding by Industry
(H.12)*

Wednesday

Wednesday, 1 week
earlier

Condition Report of Large Commercial Banks in New York
and Chicago (H.4.3)

Thursday

Previous Wednesday

Condition Report of Large Commercial Banks and Domestic Subsidiaries (H.4.2) 3

Wednesday

Wednesday, 1 week
earlier

Deposits, Reserves, and Borrowings of Member Banks
(H.7)

Wednesday

Week ended 3 Wednesdays earlier

Factors Affecting Bank Reserves and Condition Statement
of Federal Reserve Banks (H.4.1)

Thursday

Week ended previous
Wednesday

Money Stock Measures (H.6)

Thursday

Week ended Wednesday of previous
week

Reserve Positions of Major Reserve City Banks (H.5)

Friday

Week ended Wednesday of previous
week




112
Approximate
release day

Date or period to
which data refer

Selected Interest and Exchange Rates for Major Countries
and the United States (H.13)

Thursday

Week ended previous
Saturday

Weekly Foreign Exchange Rates (H.10)

Monday

Week ended previous
Friday

Weekly Summary of Banking and Credit Measures (H.9)

Thursday

Week ended previous
Wednesday; and
week ended Wednesday of previous
week

Weekly U.S. Government
(H.15)

Monday

Week ended previous
Saturday

Finance Rates and Other Terms on Selected Categories of
Consumer Instalment Credit Extended by Finance Companies (J.3)

20th of month

2nd month previous

Research Library—Recent Acquisitions (J.2)

1st and 16th
of month

Period since last release

14th of month

Last Wednesday of
previous month

Weekly releases (cont.)

Security Yields and Prices

Semimonthly and bimonthly releases

Monthly releases
Assets and Liabilities of All Member Banks by Districts
(G.7.1)
Automobile Loans by Major Finance Companies (G.25)

7th working day
2nd month previous
of month

Automobile Instalment Credit Developments (G.26)

6th working day
2nd month previous
of month
25th of month
2nd Wednesday of month

Previous month
Last Wednesday of
previous month

3rd working
day of month

2nd month previous

Consumer Credit (G.19)

4th working
day of month

2nd month previous

Consumer Instalment Credit at Commercial Banks (G.18)

5th working
day of month

2nd month previous

30th of month

Previous month

Bank Debits, Deposits, and Deposit Turnover (G.6)
Commercial and Industrial Term Loans Outstanding by
Industry (H.12b) Available only as attachment to
weekly H.12 release

Finance Companies (G.20)
Finance Rate and Other Terms on New and Used Car
Instalment Credit Contracts Purchased from Dealers by
Major Auto Finance Companies ( G . U )
Index Numbers of Wholesale Prices (G.8)

20th of month

Previous month

Industrial Production (G.12.2)

15th of month

Previous month

Industrial Production and Related Data (G.12.3)
(Similar data also available annually, see p. A - l 16)
Interdistrict Settlement Fund (G.15)

15th of month

Previous month

15th of month

Previous month

Interest Rates Charged on Selected Types of Bank Loans
(G.10)

15th of month

2nd month previous




113
Monthly releases (cont.)

Approximate
release day

Date or period to
which data refer

Maturity Distribution of Euro-Dollar Deposits in Foreign
Branches of U.S. Banks (G.17)

1st of month

Last day of 3rd month
previous

Maturity Distribution of Outstanding Negotiable Time
Certificates of Deposits (G.9)

24th of month

Last Wednesday of
previous month

Monthly Foreign Exchange Rates (G.5)

1st of month

Previous month

Open Market Money Rates and Bond Prices (G.13)

6th of month

Previous month

State Member Banks of Federal Reserve System and Nonmember Banks that Maintain Clearing Accounts with
Federal Reserve Banks (G.4)

1st week of
month

Previous month

1st week of
February

End of previous year

Last week of
month

Release date

4th of month

Previous month

Bank Rates on Short Term Business Loans (E.2)

18th of
March, June,
September,
December

1st 15 days of February, May, August,
November

Capacity Utilization in Manufacturing (E.5)

21st of January, April,
July, October

Previous quarter

15th of February, May,
August, and
November

Previous quarter

(Also annual)
Summary of Equity Security Transactions (G.16)
U.S. Government Security Yields and Prices (G.14)

Quarterly releases

Flow of Funds:
Seasonally adjusted and unadjusted (Z.l)
Seasonally adjusted only (Z. l a ;

Volume and Composition of Individuals' Saving
(Flow of funds series) (E.8)
Sales, Profits, and Dividends of Large Corporations (E.6) 4

2nd quarter previous
10th of April,
June, September, December

Semiannual releases
Assets and Liabilities of All Commercial Banks, by Class
of Bank (E.3.4)

May and November

End of previous December and June

List of OTC Margin Stocks (E.7)

June 30, December 31

Release date

Assets, Liabilities, and Capital Accounts of Commercial
and Mutuat Savings Banks—Reports of Call (Joint Release of Federal Deposit Insurance Corp., Board of
Governors of Federal Reserve System, and Office of
Comptroller of the Currency. Published and distributed
by FDIC.)

May and November

End of previous December and June




114
Approximate
release day

Annual releases

Date or period to
which data refer

Bank Debits to Demand Deposit Accounts Except Interbank
and U.S. Government Accounts (C.5)

March 25

Previous year

End of Month Demand Deposits Except Interbank and U.S.
Government Accounts (C.5a)

March 25

Previous year

Early November

Previous September
30

5th of month

Period since last release

Federal Reserve Par List (G.3)
(Also monthly supplements)
Industrial Production and Related Data
(Available upon request, after being
Member Bank Income (C.4)

November
announced)

End of May

Previous year
Previous year

'Release dates are those anticipated or usually met. However, it should be noted that for some releases there is normally
a certain variability because of reporting or processing procedures. Moreover, for all series unusual circumstances may, from
time to time, result in a release date being later than anticipated.
2
Contains monthly H.12b release on second Wednesday of month.
'Contains revised H.4.3 data.
4
Publication temporarily suspended.




115
The CHAIRMAN. Thank you very much, Governor Mitchell.
I heard through Federal Reserve people that the Federal Reserve
set up a network of regional check processing centers to computerize
and speed up the payment mechanism. I have heard that it will cost
as much as $500 million annually to run this system when it is fully
operational.
Is that information substantially correct, Mr. Mitchell?
Mr. M I T C H E L L . What was that figure you mentioned?
The CHAIRMAN. $500 million annually.
Mr. M I T C H E L L . N O . For many, many years we had 36 offices, and
we now have operational 43 offices. And we may add two or three
more in order to improve the service that we are rendering; and the
cost of the additional offices would be of the order of $20 million,

I think.
The CHAIRMAN. In other words, that is incorrect, is that right?
Mr. M I T C H E L L . Yes, it is incorrect by a substantial amount, Mr.
Chairman.
The CHAIRMAN. Well, how much is it then approximately?
Mr. M I T C H E L L . I would say approximately $20 to $25 million.
The CHAIRMAN. And not $500 million?
Mr. M I T C H E L L . Absolutely not. Our total expenditures are now
$400 million for the whole system.
The CHAIRMAN. YOU stated a while ago that you had always
responded promptly to congressional inquiries. I have not had that
experience all the way through. Generally I get replies fairly reasonably soon, but in some cases we have not.
For instance, in 1959 when we were considering a bill that if it
passed, it would give the Federal Reserve the power to keep about
$10 billion of the portfolio; but the remainder of about $15 billion,
you wanted the privilege to let the commercial banks have it, member
banks, on the theory that they needed the money, the income from
the bonds, and the Federal Reserve did not need the income from the
bonds.
And in t h a t colloquy with Mr. Martin I asked for specific information. I outlined the questions to him personally. And do you know,
it was 6 months before we got a reply to that.
Now, that is one of the worst cases I think that I have had, but I
have had some that were not as bad but were disturbing at least.
And recently I have written to the Chairman of the Federal Reserve
Board, asking him the salaries of all people—about 20,000 employees,
I believe you have—that had salaries of $20,000 or more. And I
wanted a comparison of 3 years ago and now as to what the salaries
were.
And I received what I considered to be almost a runaround on it.
The reply was by numbers, one employee getting so much salary,
not even mentioning his name or anything else. Several pages like
that—absolutely meaningless.
I cannot understand why the Fed would make such a reply as that.
I would not say it was trifling with the committee, but it was not far
from it.
Mr. M I T C H E L L . Were you interested in the names of the people or
the positions?
The CHAIRMAN. I specifically asked for names in the letters, and
that has been weeks ago, months ago; and I have just received them
in the last few days. Just these numbers; no names. And so, I would




116
really like to have a better reply to that, Governor Mitchell. Can you
help me on it?
Mr. MITCHELL. Well, Mr. Chairman, I am not advised as to what
our situation is with respect to that response. But I would only say
that the information is available.
The CHAIRMAN. Well, it is available, of course. I could not conceive
of the Federal Reserve not having it available.
Mr. MITCHELL. Yes. That is correct.
The CHAIRMAN. YOU could not conceive of it not being available.
Mr. MITCHELL. Well, the only thing that troubles me about the
request is the names of the people. Now, you know the names of the
presidents and their salaries are made public.
The CHAIRMAN. Well, anyway we will let that go if you state that
you are not in a position to answer the question.
Now then, let's discuss taxes. Of course, the Federal Reserve is
exempt from taxation, but how do you—suppose a bond comes due in
your portfolio. Do you collect that money at the time it matures and
the monev is due by the Treasury?
Do you collect it?
Mr. MITCHELL. Most of the bonds that we hold from the Treasury
are exchanged for another issue.
The CHAIRMAN. Are exchanged, in other words rolled over.
Mr. MITCHELL. Yes, sir.
The CHAIRMAN. Well, do

you not have some earnings like that
where they are paid in cash?
Mr. MITCHELL. We sell securities sometimes at a profit.
The CHAIRMAN. Where do you put that money?
Mr. M I T C H E L L . I t goes into our earnings.
The CHAIRMAN. I t goes into your earnings? In your report do you
enumerate the earnings, itemize them?
Mr. MITCHELL. Just from the capital gains from the change in the
value of the security. Mr. Chairman, I am sure that we have the information, but I do not know that it is published in our annual report.
The CHAIRMAN. Anyway, if we wanted it, you could get it?
Mr. MITCHELL. Yes.
The CHAIRMAN. D O you pay any taxes at all now?
Mr. MITCHELL. We pay State and local taxes on

all of our real

estate.
The

CHAIRMAN. That is all?
Mr. MITCHELL. Yes.
The CHAIRMAN. But you have lots of
Mr. MITCHELL. The Federal Reserve

transactions in a year?
banks pay State and local

taxes.
The CHAIRMAN. The Open Market Committee had transactions
last year, I believe it was, of $738 billion. In other words, it was
between $2 and $3 billion a day. Somebody made some money on that.
Mr. MITCHELL. YOU have been misinformed on that, I believe
Mr. Chairman.
The CHAIRMAN. I beg your pardon?
Mr. MITCHELL. I think you have been misinformed on that.
The CHAIRMAN. I did not understand you, Governor.
Mr. MITCHELL. I think you have been misinformed on that number.
The CHAIRMAN. Well, we have had an investigation. I asked Mr.
Staats to investigate it—I believe it was in 1970 or 1971—and he came
Digitized for back with a report, and it was $738 billion in transactions in a year.
FRASER


117
No one can dispute that. I t is recorded and itemized, documented,
everything.
Now, that is just part of the Federal Reserve. I would estimate the
Federal Reserve had at least a trillion dollars in transactions during
that year.
Mr. M I T C H E L L . Well, let me start from this proposition, Mr. Chairman. Our portfolio is $75 billion. That is what we own in Government
securities.
The CHAIRMAN. T h a t is now?
Mr. M I T C H E L L . T h a t is what it is about right now.
The CHAIRMAN. Yes. I think this would be a good place to put into
the record the size of your portfolio since 1914, the first year. I t was
just about a few million dollars at that time.
And without objection, I will place in the record the amount each
year since that time in your portfolio in, incidentally, the Federal
Reserve Bank of New York.
[The information referred to by Chairman Patman follows:]
Federal Reserve portfolio holdings of U.S. Government securities, Dec. 31, 1914—
July 31, 1973
Amount
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954



$16,000,000
55,000,000
122,000,000
239,000,000
300, 000, 000
287,000,000
234, 000, 000
436,000,000
134, 000, 000
540,000,000
375, 000, 000
315,000, 000
617,000,000
228, 000, 000
511,000,000
729,000,000
817,000,000
1, 855, 000, 000
2, 437, 000, 000
2,430,000,000
2, 431, 000, 000
2, 430, 000, 000
2,564,000,000
2, 564, 000, 000
2,510,000,000
2, 188,000,000
2,219,000, 000
5, 549, 000, 000
11, 166,000,000
18, 693, 000, 000
23, 708, 000, 000
23, 767, 000, 000
21,905,000,000
23, 002, 000, 000
18, 287, 000, 000
20, 345, 000, 000
23,409, 000, 000
24,400,000,000
25, 639, 000, 000
24,917,000,000
24, 917, 000, 000

1,18
Federal Reserve portfolio holdings of U.S. Government securities, Dec. 31, 1914—
July 31, 1973—Continued
Amount
1955
$24, 602, 000, 000
1956
24, 765, 000, 000
1957
23, 982, 000, 000
1958
26, 312, 000, 000
1959
27, 036, 000, 000
1960
27, 248, 000, 000
1961
29, 098, 000, 000
1962
30, 546, 000, 000
1963
33, 729, 000, 000
1964
37, 126, 000, 000
1965
40, 885, 000, 000
1966
43, 760, 000, 000
1967
48, 891, 000, 000
1968
52, 529, 000, 000
1969
57, 500, 000, 000
1970
61, 688, 000, 000
1971
69, 158, 000, 000
1972
71, 094, 000, 000
1973 (July 31)
76, 133, 000, 000
Source: 1914-38, Historical Statistics of the United States, U.S. Department
of Commerce, Bureau of Census; 1939-72, Economic Report of the President,
January 1973; Federal Reserve Bulletin, August 1973.

[In response to the request of Mr. Brown on page 121, the comparable budget information of the Federal Government for the years
1914-73 follows:]
BUDGET RECEIPTS AND OUTLAYS, 1914-73
[In millions of dollars]

Fiscal year

Receipts

Administrative budget:
1914
725
1915
683
1916
761
1917
1,101
1918
3,645
1919
5,130
1920
6,649
1921
5, 571
1922
4,026
1923
3,853
1924
3,871
1925
3,641
1926
.
3,795
1927
4,013
1928
3,900
1929
.
3,862
1930
4,058
1931
.
3,116
1932
1,924
1933
.
1,997
1934
.
3,015
1935
.
3,706
1936
.
3,997
1937
.
4,956
1938
.
5,588
1939
.
4,979
Consolidated cash statement:
1940
.
6,879
1941
9,202
1942
. 15,104
1943
25,097

Surplus or
Outlays
deficit

726
746
713
1,954
12,677
18,493
6,358
5,062
3,289
3,140
2,908
2,924
2,830
2,857
2,961
3,127
3,320
3,577
4,659
4,598
6,645
6,497
8,422
7,733
6,765
8,841

-853
-9,032
-13,363
4-291
+509
+736
+713
+963
+717
+865
+1,155
+939
+734
+738
-462
-2,735
-2,602
-3,630
-2,791
-4,425
-2,777
-1,177
-3,862

9,589
13,980
34, 500
78,909

-2,710
- 4 , 778
-19,396
-53,812

-8
+48

Fiscal year

Receipts

Outlays

Consolidated cash statement—Continued
1944
. . 47,818
93,956
1945
. . 50,162
95,184
1946
. . 43,537
61, 738
1947
. . 43,431
36,931
1948
. . 45,357
36, 493
1949
. . 41,576
40, 570
1950
. . 40,940
43,147
1951
..
53,390
45,797
1952
..
58,011
67,962
1953
. . 71,495
76,769
Unified budget:
1954
. . 69,719
70,890
1955
. . 65,469
68, 509
1956....
. . 74,547
70, 460
1957...
. . 79,990
76,741
1958
. . 79,636
82,575
1959
..
79,249
92,104
1960
. . 92,492
92,223
1961
. . 94,389
97,795
1962
99,676 106,813
1963
. . 106,560 111,311
1964
. . 112,662 118, 584
1965
. . 116,833 118, 430
1966....
. . 130,856 134,652
1967
. . 149,552 158, 254
1968
. . 153,671 178,833
1969
. . 187,784 184, 548
1970
. . 193,743 196, 588
1971
. . 188,392 211,425
1972
. . 208,649 231,876
1973 estimate...
224,984 249,796

Surplus or
deficit

—46,138
—45,022
—18,210
+6, 600
+8, 864
+1,006
—2, 207
+7, 593
+49
- 5 , 274
-1,170
-3,041
+4,087
+3, 249
-2,939
-12, 855
+269
-3,406
-7,137
-4,751
—5,922
- 1 , 596
- 3 , 796
- 8 , 702
-25,161
+3,236
-2,845
-23,033
-23, 227
-24, 812

i Less than $500,000.
Notes. Certain interfund transactions are excluded from receipts and outlays starting in 1932. For years prior to 1932
the amounts of such transactions are not significant.
Refunds of receipts are excluded from receipts and outlays starting in 1913; comparable data are not available for
prior years.




119
The CHAIRMAN. I wonder how much in securities you have in the
Federal Reserve Bank in New York in addition to this $76,133
million that you had there on July 31 of this year.
Do you have gold in the Federal Reserve Bank in New York?
Mr. M I T C H E L L . Yes, we have gold that belongs to foreigners.
The CHAIRMAN. D O you have an itemized statement of that?
Mr.

The
Mr.
The
Mr.

M I T C H E L L . Yes, we do.
CHAIRMAN. Would you put it in the record at this point?
M I T C H E L L . I do not see any reason for not doing it, so
CHAIRMAN. And you would be glad to do that?
M I T C H E L L . Yes.
CHAIRMAN. That will be fine. Anything—securities, cash, gold,

The
or metals.
[The following information was supplied by Governor Mitchell for
the record:]
In addition to the assets shown on the H.4.1(b) release of October 3, the Federal Reserve Bank of New York holds assets in custody for foreign official and
international accounts. The assets it holds in such custody are: $15.5 billion in
earmarked gold and $55.9 billion in U.S. Treasury securities (as of the end of
August). In addition, at the end of August the New York Reserve Bank had
custody of foreign deposits of $259 million.




120
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121
The CHAIRMAN. NOW, at one time I was up there, and there was
about 200 or 300 people clipping coupons. And I was up there a few
years later and went in the same room, the same three fellows had the
key to the portfolio safe, One went up and unlocked his part, and the
other one his part, and the other one his part, and opened the safe, and
I did not see any bonds.
And he said reach up there and get one; there is a stack up there. So
I reached up and got one and there was about $1 billion, and the
coupon, of course, is in proportion. And there was just a small stack
of bonds
I presume that you still carry that policy of buying the bonds in
small amounts and shipping them to the Treasury and having big
bonds made, so as to eliminate the expense of coupon clipping.
Mr. M I T C H E L L . Yes. Mr. Chairman, I mentioned earlier the idea
of using a book entry system. Our dealings now in Government securities largely are on a book entry basis, and there is no coupon
clipping that is required.
The CHAIRMAN. They do not even have coupons?
Mr. M I T C H E L L . T h a t is right.
Mr. BROWN. Mr. Chairman, are you going to put that list in the
record?
The

CHAIRMAN. Yes,

sir.

Mr. BROWN. Well, reserving the right to object to its being admitted in the record, I would ask—and I will not object if the Chair
will comply with my request—that the budget of the Federal Government for each of those years be provided right beside the figures you
are presenting.
The CHAIRMAN. Well, mine is already
Mr. BROWN. The staff can do that. All they have got to do is insert
in the record the comparable figures of the budget for the same years;
or else I will object to the admission of your entry.
The CHAIRMAN. Well, of course mine has already been passed on.
Mr. BROWN. No, Mr. Chairman. I was reserving the right to object.
The CHAIRMAN. Well, I do not want any squabble about it.
Mr. BROWN. I see no reason to squabble about it. I think you would
agree that for comparison purposes budget information is relevant to
the information on the portfolio of the Federal Reserve Board.
The CHAIRMAN. In consideration of the subject matter today I do
not think it is as relevant.
Mr. BROWN. Then I do not think the information you are putting
in the record is relevant either, so I will object to it.
The CHAIRMAN. Why do you not ask consent to put it in? I do not
think there would be any objection to it. I just do not want to do it.
Mr. BROWN. N O ; I am not asking you to do it, Mr. Chairman. I am
asking the staff to do it.
Is my request granted?
The CHAIRMAN. Make the request.
Mr. BROWN. I request that the comparable budget information for
the Federal Government be put into the record along with the information with respect to the portfolio of the Federal Reserve Board
that you have requested.


http://fraser.stlouisfed.org/
22-355 0 7 3 - 9
Federal Reserve Bank- of St. Louis

122
The CHAIRMAN. For each year?
Mr. BROWN. For each year.
The CHAIRMAN. Well, I think we could get that all right from two
or three sources.
Mr. BROWN. If the chairman agrees to put that information in the
record, I withdraw my objection.
The CHAIRMAN. I do not object to it. I t is perfectly all right. I just
did not want to ask it myself, because it confuses the issue a little bit
on what I am dealing with right now.
[In response to the request of Mr. Brown, the comparable budget
information of the Federal Government for the years 1914-73, may
be found on page 118.]
The CHAIRMAN. NOW, in keeping your money for the Federal
Reserve, you keep it in the Federal Reserve banks, do you not?
Mr. MITCHELL. Yes,
CHAIRMAN. D O

The
banks?

sir.

you have any money in private commercial

Mr. MITCHELL. N O , sir.

The CHAIRMAN. D O you have any in foreign countries?
Mr. MITCHELL. We own some foreign currencies.
The CHAIRMAN. I am talking about do you have money
Mr. MITCHELL. We have deposits. On our balance sheet there is
The CHAIRMAN. I know, but I am not asking you about that now.
I am just asking you a direct question, a specific. Do you have any
accounts in any outside banks in foreign countries?
Mr. MITCHELL. Public or private?
The CHAIRMAN. Both.
Mr. MITCHELL. Well, we have some in public banks.
The CHAIRMAN. D O you have it in private banks, too?
Mr.

MITCHELL. N O .

The CHAIRMAN. In which public banks do you have accounts?
Mr. MITCHELL. Other central banks.
The CHAIRMAN. And you can check on it if you want to?
Mr. MITCHELL. I do not understand.
The CHAIRMAN. If you need the money do you check on it like you
do a commercial bank?
Mr. MITCHELL. I t is in the form of a credit that is extended.
The CHAIRMAN. I do not really understand why you do not just be
forthright and tell us about these accounts. You either have them or
you do not have them.
Now, you state that you have them in some central banks, and of
course, you would handle them just like you would a commercial
bank, a checking account.
Are they considerable, or small, or medium sized?
Mr. MITCHELL. Well, that is what I was going to see. I think at the
present time it is in the balance sheet. I was going to look it up. The
total is something like $4 million.
The CHAIRMAN. I do not want you to take too much time on that.
Mr. MITCHELL. Well, let me supply that for the record, would you,
Mr. Chairman?
The CHAIRMAN. All right. You just put it in the record.
[The following information was supplied by Governor Mitchell for
the record:]



123
As indicated in the table on page A l l of the September 1973 Federal Reserve
Bulletin, there is $4 million of convertible foreign currencies held by Federal
Reserve Banks, principally Japanese yen and Swiss francs.

The CHAIRMAN. NOW, you mentioned a while ago about $17 trillion
worth of transactions by wire. Was that last year or the last fiscal
year.
Mr. M I T C H E L L . T h a t was calendar 1972.
The CHAIRMAN. Well, that is in addition to the transactions by the
20 dealers?
Mr. M I T C H E L L . N O . These are transactions that use our wire
network, and they are internal transactions to the Federal Reserve
between Federal Reserve banks, and also include transactions between
commercial banks.
The CHAIRMAN. All right.
Mr. Widnall, would you like to interrogate the witness?
Mr. WIDNALL. Thank you, Mr. Chairman.
Mr. Mitchell, we appreciate your coming here before us today;
and your testimony is certainly going to be very valuable in consideration of the bill.
I regret very much that the chairman, Dr. Burns, cannot be here,
not that you are not an adequate witness.
Mr. M I T C H E L L . I regret it, too.
Mr. WIDNALL. I am deeply disturbed by the way the record is
colored by statements that have been made through the chairman on
things that to me are completely irrelevant in the consideration of
this bill, and that seek to draw attention to minor, minuscule things
that to me have absolutely no business in connection with this investigation.
For instance, on page 8 of the statement that we have before us,
an allegation is made that $25 was paid as reimbursement by a staff
member for an honorarium to a guest clergyman who delivered the
invocation at the annual meeting of the New Jersey Bankers Association.
I think it is just absolutely inappropriate, not pertinent to the
issues before us that are extremely important, and the sort of thing
that will be picked out by the press and played up in the headlines
without any mention of the major issues that are before the committee.
And I think it is extremely unfortunate that we get into those
things. I cannot conceive of any organization or groups meeting
anywhere at any time without having some kind of expenses that
would normally go with the operations of particular
The CHAIRMAN. Will the gentleman yield?
Mr. W I D N A L L [continuing]. Yes, I will yield.
The CHAIRMAN. T h a t information was furnished by the Federal
Reserve as unusual expenses. They gave us a listing of the unusual
expenses, and what they were for, and that was one of them. We would
have never known it otherwise.
Mr. WIDNALL. I do not have any particular questions to ask you in
connection with this. I think you have covered the subject matter very
well, and I certainly think you have justification for the construction
of additional Federal Reserve facilities. The volume of your operation
has expanded tremendously. And in keeping with changes in the
economy and changes in the operations and the handling of operations



124
you have to update your facilities and modernize the equipment that
you have. And naturally, that involves some major expense.
I certainly am mindful of the expenses right here on Capitol Hill and
what we do to take care of ourselves, with the lunches that we have,
with the cigarettes and cigars and other things. And it sometimes hurts
me to sit in judgment of others when we are some of the worst transgressors up here right on Capitol Hill.
Thank you very much.
The CHAIRMAN. Mr. Barrett.
Mr. BARRETT. Governor, I think you have made a very splendid
statement here. I doubt that anyone could pick out any reason to complain about it. However, I noticed on page 13 you indicate that in
February, Chairman Burns had written to the chairman of our committee indicating that he thought the expenses might total about
$71.45 million, and he considered that as a reasonable estimate
through 1977.
And, of course, down at the bottom on page 13, you indicate now
that as of February the cost would be increased to about $76.2 million.
I was wondering how much of the $60 million recently originally
authorized for construction of bank facilities would remain in the fund?
Mr. MITCHELL. Mr. Barrett, I think that that fund is down to a
million dollars or less. I t is down to a very low level, and in fact we are
in a position now where we cannot do anything until we get further
authorization. With regard to the buildings that we are talking about,
such as I recall, the building in Los Angeles where we badly need additional space, is projected to cost about $25 million; I think the one in
Baltimore will cost about the same; and those in Charlotte and Omaha,
about half that much.
But we do not have any significant funds remaining in the authorization at the present time. I t is a nominal amount. I think it is just
about $1 million or less.
Mr. BARRETT. Well, in our legislation we always hear the echoing
sounds from the administration that you cannot spend that kind of
money for higher minimum wage; you cannot spend that kind of
money for housing for the low- and moderate-income families because
of the impact that such moneys would have on the economy.
Would you not think this kind of money being spent for bank
structures would also have a deterimental impact on the economy?
Mr. MITCHELL. Well, the economy as it grows needs more money,
and it needs more checks. And they have to be supplied by someone,
and that is the Federal Reserve's function.
Mr. BARRETT. But the question I am asking you, would not this
kind of money expended for building construction have the same
detrimental effect on the economy equally the same as it would if it
were spent for building homes for the lower and moderate income?
Mr. MITCHELL. I think I am getting your drift now, sir. When we
had a problem like that in Minneapolis, several years ago, we just
held up construction on that building temporarily. Construction of
these buildings will not take place in this period of tight money because the plans are not ready. Construction is sometime in the future.
Mr. BARRETT. Well, do we have now in the record that you will
not spend this kind of money until after the economy has been brought
to a reasonable level?



125
Mr.

M I T C H E L L . Yes,

sir.

Mr. BARRETT. T h a t is in the record?
Mr. M I T C H E L L . T h a t is in the record.
Mr. BARRETT. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Brown.
Mr. BROWN. Thank you, Mr. Chairman.
Governor Mitchell, yesterday Mr. Staats of the GAO testified with
respect to the total transactions in 1970 of the Federal Reserve
System, and his testimony was, and I am quoting from the transcript,
"In 1970 the total transactions reported were $738 billion."
Now, the Chairman asked you about this earlier, and I thought you
said that that was not the correct figure.
Mr. M I T C H E L L . I do not know where that figure could have come
from. Let me give you the transactions numbers that I have.
Mr. BROWN. Well, Governor Mitchell, you have questions about
this statement, then?
Mr. M I T C H E L L . I think it is
Mr. BROWN. YOU can correct it for the record.
Mr. M I T C H E L L . I do not know where the numbers could have come
from.
Mr. BROWN. Then later on in his testimony in answer to questions,
I asked Mr. Staats about an exhibit that he had put in the record,
which was a one paragraph statement of your independent auditor,
and I asked him if that was the complete audit report.
In his response Mr. Staats said, "That is all that has been made
available to the Congress."
Now, that quite truly is wrong, is it not?
Mr. M I T C H E L L . Let Mr. Solomon comment on that.
Mr. SOLOMON. Mr. Brown, that is not correct. A more complete
report, of which I have a copy here and I would be glad to insert it in
the record, was made available to this committee and to the committee
of the Senate.
Mr. BROWN. And it has been since about 1952, has it not?
Mr. SOLOMON. T h a t is correct.
Mr. M I T C H E L L . Not only that, but my understanding, Mr. Brown,
is that the working papers of the auditing firm are available for
review and examination.
Mr. BROWN. Well, at least then, Mr. Staats appears to be rather
incorrect in his understanding on both of these points, is he not?
Mr. M I T C H E L L . Correct.
Mr. BROWN. Governor Mitchell, I do not know if you had an
opportunity to review Mr. Staats' testimony of yesterday.
Mr. M I T C H E L L . I read his statement, yes, sir.
Mr. BROWN. But let me ask you, under option No. 1, the
type of audit he explained, would you have objection to that type of
audit?
Mr. M I T C H E L L . Well, the Board's position on that, Mr. Brown, is
that we are doing that job; and we feel we are doing it in an excellent
way and in a satisfactory way; and in our judgment it would be an
opening wedge that will lead to review of policymaking.
Mr. BROWN. In other words, you are saying that if you open the
door with option No. 1, soon you have option No. 2, and eventually
you have option No. 3.
Mr. M I T C H E L L . T h a t is exactly it.



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Mr. BROWN. Yesterday in my questioning of Mr. Staats he agreed
that the objective of this bill as far as its audit provisions are concerned, H.R. 10265, he agreed that the objective could be accomplished if the GAO auditing requirements, guidelines, informational
and data minimums to be included in your audit report.
Does that sound to you as a better alternative than an actual audit
by GAO?
Mr. MITCHELL. Yes; it does. Yes.
Mr. BROWN. That would eliminate your concern about their getting
into an actual policy audit, plus it would eliminate the duplication if the
GAO ends up auditing the auditors who have audited the earlier
auditors. Right?
Mr. MITCHELL. Yes.
Mr. BROWN. I have no further questions,
The CHAIRMAN. Mr. Reuss.
Mr. R E U S S . Thank you, Mr. Chairman.

Mr. Chairman.

Welcome, gentlemen.
Governor Mitchell, you pointed out that between last February
when Chairman Burns wrote Chairman Patman about the building
fund and today, the cost of those four branches, has increased from
$71.45 million to $76.2 million.
Would it be satisfactory to you if this committee, assuming it views
favorably your general request, would put in an additional limitation
of, say, $80 million; because if costs have increased that much in the
last 7 months, it would seem to me that if we just put in the current
cost, we are going to find that you can only build half a building in
Omaha.
Mr. MITCHELL. I think that is more realistic than this number, yes.
Because of the way in which building costs are rising—in fact, the
plans have not been completed for any of these buildings—and so
there will be a period of time before construction begins.
Mr. R E U S S . I will ask the staff now to prepare such an amendment
for me, which I shall offer.
On another subject, Governor Mitchell, on page 9 you referred to,
and I quote, "critical informational constraints that should be imposed" in any GAO audit. You say they include:
Exemption of examination reports of member banks, certain transactions conducted with and on behalf of foreign central banks, and sensitive information
about open market and discount operations. Much of the information in the
latter two categories becomes available with a lag.

And you point out that "A high degree of confidentiality in these
areas is essential/'
I find what you say persuasive on that. Would you accordingly—
since we are in executive session tomorrow it would be well to have it
today—preprare for us some suggested language which, if in the wisdom of this committee we should authorize a general GAO audit,
would exempt the indicated confidentiality areas?
This committee has always tried in its relations with the Treasury,
for example, to cut out of what we ask those areas where there really
is a need for confidentiality. And I would be appreciative if you could
do that.
Mr. MITCHELL. We can do that.
Mr. R E U S S . Thank you.



127
Let me raise another question. The Open Market Committee is
authorized to buy securities in the open market and hold them for its
own account. T h a t is how you got the $75 billion you are talking about.
Dr. Burns recently testified with justifiable pride that the Open
Market Committee has been buying Fannie May bonds this summer
in order to help the housing market. I for one applaud such efforts.
There is another kind of Federal securities which I would like to see
the Open Market Committee buying, and those are that type of
Federal securities known as flower bonds. These are the long-term
bonds which can be redeemed at par value regardless of their market
value in order to pay the estate taxes. And this is how they work: A
rich man feeling the tap on his shoulder directs his attorney to buy
these flower bonds, and the attorney buys, let's say, $1 million worth
of them. Take the 1998 issue, currently selling at $740,000. Then
when the rich man dies the Treasury accepts the bonds at per value,
so he gets by with paying $1 million debt for $740,000 and saves
$260,000, which of course means that the other 80 million txapayers
have to make it up in the taxes they pay.
To its credit, Congress in 1971 plugged this loophole as to the future
and prevented future flower bonds, but there are still $32 billion of old
ones in existence, of which $22 billion are long-term, which are selling
at a discount and are profitable for estate tax purposes.
The Treasury estimate that the average annual loss in revenues to
the taxpayers through this loophole is $}i billion, which means t h a t
the average taxpayer has to make up the difference. The Open Market
Committee could strike a blow for the average taxpayer if it were
willing to purchase some of these bonds as they come on the market.
Moving prudently, of course, in that direction, the Open Market
Committee could even make some money on it, because, with the
current bond yields, these bonds are selling at a market discount,
and of course the Fed would hold them to maturity, and thus realize
not only a reasonable interest rate in the interim, but a capital gain
on maturity. The Fed, of course, is not a profitmaking body and this
should not be a primary concern anyway. And the Treasury and the
taxpayers would, as I say, save up to $250 million by doing this.
Is there any reason why the Federal Reserve cannot help out the
hard-pressed taxpayer by buying up some of the flower bonds? If
you haven't thought of the matter and are unable to answer fully now,
I would be glad to let you and your associates answer for the record.
Mr. M I T C H E L L . Well, I think it is something we might look into. I
suspect that there is enough of a preimum on those bonds so that the
funds that we turn over to the Treasury at the end of the year's
operations might reflect the fact that we had invested in a security
that was not as good from a yield standpoint as another security.
Mr. R E U S S . The Treasury does estimate, as I say, that the overall
loss to the taxpayers
Mr. M I T C H E L L . Well, as I say, it does need some looking into.
Mr. R E U S S continuing]. Is $250 million. But I'm delighted with
what you say, because you and your associates are not opposed to
giving a boost to the average taxpayer if you can conduct your open
market policy in a way that will help him.
Mr. M I T C H E L L . Certainly not. But the method that the manager
uses in deciding what to buy is to first ask the dealers at what price will
they sell securities? He gives them a long list of securities that he might



128
be interested in. The dealers make him an offer, and then he takes the
best yield.
Mr. R E U S S . The social security fund, you know, owns quite a lot of
these flower bonds, and they should be congratulated because that
means they take them off the market and prevent somebody from
using them as a loophole.
Mr. MITCHELL. Has the Treasury bought them?
Mr. R E U S S . I don't think the Treasury owns any, b u t the social
security fund does, and I would appreciate your views on this.
Mr. MITCHELL. We will look at this.
Mr. R E U S S . Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Williams.

Mr. WILLIAMS. I want to thank Mr. Mitchell and Mr. Solomon for
being here this morning.
From the testimony yesterday, which we received from Mr. Staats,
I understand that the GAO conducts an internal audit of its own
operation, and at the same time brings in outside auditors to do an
audit, and that the Federal Reserve Board is doing exactly the same
thing. Is this correct?
Mr. MITCHELL. I don't know about the GAO, but that is our
practice; yes, sir.
Mr. WILLIAMS. Well, Mr. Staats made the point yesterday that that
is what is happening. Do you see any reason for Mr. Staats to want to
get into an audit of the Federal Reserve Board any more than the
Federal Reserve Board might want to get into an audit of the GAO?
Mr. MITCHELL. Well, we do not want to get into the auditing
business, except internally, and I do not know that I can offer any
comment on that.
Mr. WILLIAMS. Yesterday, Mr. Staats made the statement that
there is a turnover in the Federal Reserve Board of $738 billion
annually. How much of this $738 billion turnover is due to borrowing
money to pay off maturing Federal obligations and printing money in
exchange for Government bonds in order to cover Federal deficit
spending?
Mr. MITCHELL. Well, I am having a little trouble with the $738
billion figure.
Mr. WILLIAMS. $738 was his exact figure. I think the record will
show that.
Mr. MITCHELL. I have some trouble with that, so just let me tell
you the numbers that I can identify. Last year we purchased $24.5
billion worth of securities, Treasury securities, and we sold $17.5 billion
in Treasury securities. We made repurchase agreements amounting
$33.9 billion. Now, out of that we netted an increase in our portfolio of
$5 billion.
Mr. WILLIAMS. What?
Mr. MITCHELL. $5 billion.
The CHAIRMAN. YOU mean $5 billion, don't you?
Mr. MITCHELL. $5 billion, that was the addition to our portfolio
last year. In other words, it went from $70 to $75 billion last year.
Mr. WILLIAMS. SO, in other words you have difficulty justifying the
$738 billion.
Mr. MITCHELL. Let me give you another figure here. We exchanged
securities with the Treasury of $64 billion. That might be another



129
number that was added into his total. But then, after that, the numbers
t h a t l can find do not start to amount to anything like $738 billion, so
I think it is a case where we probably should get in touch with the
Comptroller General, and see what he has got in his totals. I do not
know.
Mr. WILLIAMS. What you are really saying, I believe, is if we the
Congress could balance the budget and start to pay off some of the
money we owe, rather than borrowing money to pay off the money
we owe, and borrowing it at two and three times the interest rates
that the maturing obligations carry, then the turnover of the Federal
Reserve Board and the task of the Federal Reserve Board, would
be greatly reduced?
Mr. M I T C H E L L . Well, I'm not really saying that. Our activities are
based upon the forces that influence financial markets, and the
absence or the overabundance of bank reserves. We supply reserves
with our purchases, and we absorb them with our sales. And so in
order to even out the market, we have a large number of transactions.
Mr. WILLIAMS. What happens in the years when the Federal Government has a deficit of $30 billion?
Mr. M I T C H E L L . Well, under present operating conditions, the
market takes most of that deficit. I t buys those securities.
Mr. WILLIAMS. And that is why we are up to 9 percent for Treasury
bills?
Mr. M I T C H E L L . Yes, and 7% percent for bonds.
Mr. WILLIAMS. And 8.6 or 7 for a Treasury note.
Mr. M I T C H E L L . Our contribution to the Treasury financing is on
the order of the $5 billion that I mentioned, and that is determined by
what we think the economy's needs for moneys are.
Mr. W I L L I A M S . NOW, also in Mr. Staats' testimony yesterday, he
stated that the bill we have before us, H.R. 10265, provides that
" G A O shall have access to reports of examinations of member banks.
We have assumed that this language would give us access to any
number of reports, including the reports of the F D I C . "
We go through this about every 2 or 3 years, and the Chairman
of the F D I C , 3 years ago I believe, made the statement that he would
not turn his records over to the GAO because the Federal Deposit
Insurance Corporation does a regular audit of all banks. They find
some banks to be borderline cases, very close to failing, and they
force these banks to take remedial steps, so they can stay open. If
this were to leak out, and I know that we have had some leaks from
the GAO, then this would cause a run on the bank and cause it to close.
Do you really think that the F D I C records should be turned over
to the GAO?
Mr. M I T C H E L L . N O , our position is examination reports ought to
remain confidential in the examining agency.
Mr. WILLIAMS. I want to conclude by stating that of the three alternatives that were offered to us yesterday, the first one is doing little
more than reviewing what you have done. The second alternative not
only includes everything done by the first alternative, but also permits
the GAO to examine the management of resources to evaluate the
efficiencies and economy with which resources are used. Such audit work
would determine the causes of deficient or uneconomical practices
found, and propose constructive recommendations for improvement



130
for the consideration of management officials. I t also states that the
GAO would make recommendations for obtaining a more economical
and efficient administration of the entities audited.
Now, that is just the difference between one and two. If you wanted
to take three also, you will actually become a policymaking group.
I want to agree with Mr. Brown that if we get started on this road,
it could lead to a very dangerous precedent, where the GAO would
be setting the policies of the Federal Reserve.
The CHAIRMAN. The time of the gentleman has expired.
Mr. Ashley?
Mr. ASHLEY. Thank you, Mr. Chairman.
Governor Mitchell, needless to say, I welcome you as do the others,
and with enormous respect and admiration. I think you have made a
very persuasive statement, and I commend you for it. I do not think
there is any question but that any audit that this committee may be
considering may be duplicatory. I do not think that is really the issue
involved, to tell you the truth. I think that the Congress feels that it
does have its own independent responsibility, to which we must be
responsive, and frankly, I tend to be sympathetic to that.
The cost in terms of additional dollars does not appear to be very
much, on the basis of what General Staats testified yesterday, something in the neighborhood of $100,000.1 did indicate concern yesterday
with the kind of third alternative audit that he described for us,
because I very much agree with you that this encompasses some judgmental areas that, in my view at least, could produce very counterproductive results over the long term, and perhaps the short term.
I was interested, as was Congressman Reuss, in your handling of
the subject matter on page 9 of your statement, where you describe
some of the particularly sensitive areas where informational constraints in your view should be imposed, and I would simply ask you
whether you are familial with the same kinds of exemption that you
insist upon which were adopted when the Congress deemed it necessary
or appropriate to provide for a GAO audit of the exchange stabilization fund? I t is my understanding, and I have looked at the language
in the GAO audit authorization that was adopted, I believe, in the
late 1960's, that there was exemption for the types of transactions
that you describe as having peculiar sensitivity. Are you familiar
with that?
Mr. MITCHELL. I am not familiar with that language, Mr. Ashley.
I know just a little bit about the auditing of the exchange stabilization
fund, but I do not know anything about that language. B u t I think,
in light of another question that was asked, we should take a look at it
when we submit a statement. I guess Congressman Reuss asked for a
statement as to how we might word this exemption. We would then
be looking at that language.
Mr. ASHLEY. Well, I am sure that your legal people would look a t
that language with the view that Congress did give consideration to
the necessity for exempting peculiarly sensitive areas of subject
matter, so that there is precedent in this regard.
That is all I have, Mr. Chairman.
The CHAIRMAN. Thank you. Mr. Roncallo?
Mr. RONCALLO. Thank you, Mr. Chairman, and thank you, gentlemen, for your testimony today, and I have no questions. I yield back
the balance of my time.



131
The CHAIRMAN. Mr. Moorhead?

Mr. MOORHEAD. Thank you, Mr. Chairman.
Welcome, Governor Mitchell. I gather you are familiar with the
three alternatives that General Staats proposed to us?
Mr.

M I T C H E L L . Yes,

I

am.

Mr. MOORHEAD. Does your outside auditor carry out the functions
of the first alternative proposed by General Staats?
Mr.

MITCHELL.

Yes.

Mr. MOORHEAD. H O W about the second alternative?
Mr. M I T C H E L L . Well, our outside auditor, to the best of my
knowledge, has not done much on that, a very little bit. But we have
employed some outside consultants to look at particular situations,
say computer utilization, which was an efficiency review. We had our
computer installation examined by an outside firm this past year to
see if it conformed to the latest design and utilization practices.
Our outside auditor, I think, primarily is concerned with a financial
audit.
Mr. MOORHEAD. SO if we direct the GAO to do alternative 1 and
alternative 2, it is possible that the Board would be satisfied with the
work. I t could eliminate }^our private outside auditor and maybe
your computer consultants. Is that correct, sir?
Mr. M I T C H E L L . I t depends upon the quality of the work. Now, I
indicated earlier that the Federal Reserve has some unique operations,
both as to scale and to character, and our experience with outsiders
who come in to review and evaluate that has been quite disappointing.
We use them on a highly selective basis.
Mr. MOORHEAD. YOU mean your CPA's?
Mr. M I T C H E L L . Yes, that's right. Even the management consulting firms who have looked at some of these things, I think, have
not given us a very big yield on the amount of money we pay them for
looking into Federal Reserve operations with which they have had
no previous experience, either as to scale or character. And so I think
that I would not expect a large yield from that.
There were two things about the Comptroller's statement that
puzzled me a little bit, and maybe I ought to bring that up at this
point if it is agreeable to you. He specifically pointed to the Federal
Advisory Council and to the Federal Open Market Committee. The
Federal Open Market Committee, for example, does not have any
staff, it does not have any expenditures, it does not have any receipts,
it does not have any assets, it does not have any liabilities. What is
going to be audited?
Mr. MOORHEAD. Well, I think you would agree with me, Governor
Mitchell, that when you get down to the Open Market Committee,
you are down to the third alternative.
Mr. M I T C H E L L . Yes, you are in the third alternative.
Mr. MOORHEAD. I believe that so far as the first two are concerned,
the decision is a relatively simple one. Do we have some duplication
or not? Is this going to interfere in any way, with your policymaking?
I think that you could live with options 1 and 2. I think your major
objection is you think that if we adopt 1 and 2 down the road, we get
to 3. So this is the kind of
Mr. M I T C H E L L . That is the kind of problem, I think, that we face.
Mr. MOORHEAD. But it is No. 3 where we really get down to a very
difficult decision. I believe you agree with me when, on page 10 of



132
your statement, you say there would be pressures which would cause
the Federal Reserve to dilute or compromise its best monetary or
credit judgment to shortrun rather than longrun interests. I would
certainly concede that if the Congress set up some kind of day-by-day
mechanism to look over daily decisions of the Open Market Committee, clearly the independence and the whole idea of insulating the Federal Reserve monetary decisions from particularly political pressures
would be completely compromised.
Mr. MITCHELL. Yes, I think so.
Mr. MOORHEAD. B u t I wander could we not renew the public's
confidence in the Federal Reserve and all institutions of Government
if we had a type 3 audit by the General Accounting Office?
Mr. MITCHELL. Well, we are supplying a record of the policy
actions of the Federal Reserve to Congress every 3 months now, as
you know, and that essentially summarizes what happens, what the
environment was as the committee saw it, and what happened as a
result of that. The only thing that is not supplied is the detailed record,
what people said on one side or the other. B u t I think t h a t the policy
record, which becomes available 90 days after each meeting, permits
anyone to evaluate the committee's actions right then and there,
that is in the public record. If you were going to conduct an audit,
you could audit that kind of thing and you could do it right now.
Mr. MOORHEAD. Maybe that is coming down to it. What you do
not want, then, is to supply to anybody the fact that Jones voted to
buy and Smith voted to sell. Is that it, or am I oversimplifying it?
Mr. MITCHELL. YOU inhibit people's expression and their freedom
of action if they make a decision that in retrospect does not look very
good. The decision has to be made every day the committee meets. I t
must make a decision, and that decision has to last until the next
meeting of the committee. There is no way of ducking it. And so you
are exposed, because you can not always bat 1,000 in this game. You
are going to miss part of the time. And I think that the point about
disclosing the full gamut of discussion currently is that it would inhibit
the quality of expression and the kind of give and take that takes
place in formulating those judgments. I t is, in effect, an executive
decision, and has all the characteristics of an executive session.
Mr. MOORHEAD. Our committee has had open executive meetings,
so I know what you are talking about.
Thank you very much. Mr. Chairman, my time has expired.
Mr. CHAIRMAN. We have the mass transit bill on the floor immediately after 12. We will have to be there, and of course this committee
sponsors the bill.
I will ask Mrs. Boggs to preside, so that I can go ahead and get ready
for the bill to come up, and she can conclude the hearing this morning.
We will recess when we get through here with this witness, until
tomorrow morning at 10. We will start with the markup of the bill
tomorrow morning at 10. All right, Mrs. Boggs, if you will preside.
Mrs. BOGGS [presiding]. Mr. Johnson?
Mr. JOHNSON. I have no questions.
Mrs. BOGGS. Thank you so much, Governor Mitchell and Mr.
Solomon, for being here today. And the only question that I would
have to ask you, because you have answered all the questions t h a t



133
I took notes on as you went along in your responding to the members,
is this: I notice that you are not going to spend the money on construction until the credit crunch is eased?
Mr. M I T C H E L L . Yes, ma'am.
Mrs. BOGGS. Could you please, perhaps, forecast to us when you
expect to start spending that money?
Mr. M I T C H E L L . Well, we forecast internally but not externally.
Mrs. BOGGS. Thank you very much for your excellent testimony.
The hearing is adjourned.
[Whereupon, at 11:30 a.m., the hearing adjourned to reconvene at
10 a.m., Thursday, October 4, 1973, in executive session.]




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