View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

For release on delivery
Saturday, June 19, 1976
12:30 PM P. D.T.
(3:30 PM E.D.T.)

The Proper Limits of Openness in Government

Address by

Arthur F. Burns

Chairman, Board of Governors of the Federal Reserve System

at the

1976 International Monetary Conference

San Francisco, California

June 19, 1976

During the past decade we have witnessed profound
changes in the attitudes of Congress, the courts, and the public
generally toward "secrecy" in government.

Since the passage

of the Freedom of Information Act in 1966, the public has had
broad access to government documents, and almost daily one
reads of new legislative proposals or judicial decisions that would
require agencies of government to make public some aspects of
their business that previously had been kept confidential.


balance between the needs of government to carry on certain
aspects of its business in confidentiality and the right of the
public to know what is going on in government is nowadays more
frequently being struck on the side of disclosure.

At a time when

anti-establishment feeling is running high, there seems to be little
inclination to consider what limits the national interest should
impose upon openness in government.
The acceleration of the trend toward greater disclosure
is unquestionably part of our Nation's reaction to Vietnam and

By 1972, a large section of the American public,

including many members of the Congress, already felt that


information vital to understanding the Vietnam war and its
proper financing had been withheld or distorted by the Executive

The shocking revelations that soon followed of the

Watergate crimes and other excesses at the highest level of
government diminished still more the credibility of government.
The very fact that serious misconduct by high government officials
had been so recently concealed under spurious claims of national
interest has naturally resulted in widespread public skepticism
about the need for confidentiality in any phase of government
It has now become a popular saying among articulate
advocates of disclosure that the government's business is the
people's business, and that the people's business should be
carried on in public.

But this is a slogan, not a reasoned

Moreover, it is a dangerous slogan, because it

obscures the practical need to conduct some of the work of
government in private. The efforts to dispel mistrust in government by exposing more of the process to contemporaneous public
view are undoubtedly well-meaning, but they run a serious risk
of impairing the ability of government to carry out certain of its
necessary activities effectively.

The trend toward increased openness in government
should be of special significance to the banking industry.
Historically, banking and bank supervision have been subject
to a high degree of confidentiality.

The process of bank examin-

ation, in particular, has been surrounded with elaborate safeguards intended both to protect the privacy of bank customers
and to preserve public confidence in individual banks and the
banking system as a whole.

Yet during the past ten years a

number of laws have been enacted - - and a mass of regulations
promulgated under Congressional mandates - - requiring banks
to make greater disclosure to their customers and security
holders, and in recent months there have been several significant attempts in Congress to breach the confidentiality of the
supervisory process.

These events mark a serious departure

from tradition with respect to banking matters, and both bank
regulators and bankers must come to terms with these changing
At the Federal Reserve we have been deeply concerned
about two disclosure issues that have confronted us recently.
One of these involves the disclosure of examination reports in
connection with a Congressionally ordered study of the bank
supervisory process.

The other involves disclosure of certain


aspects of our decision-making process - - in particular, the
application to the Federal Reserve of one or another of the
"Government in the Sunshine" bills that may soon become law.
I would like to discuss each of these issues in some
detail, because I believe that the positions we have taken
indicate areas in which the public interest requires some
limits on openness in government.
To be fully effective, the process of bank supervision -and by this I mean the process by which the banking agencies
detect problems or potential problems in banks and attempt
to remedy or prevent them - - depends heavily upon an
atmosphere of free communication between bank officials and

While our laws have not yet recognized an enforce-

able privilege for such communications - - similar to that which
attaches to the relation between a lawyer and client or a doctor
and patient - - there are significant protections in this area.
For example, an examiner or some other agency employee
who makes an unauthorized disclosure of information obtained
in the examination process may be subject to criminal penalties.
Even the Freedom of Information Act expressly recognizes an
exemption for documents relating to the bank examination process.

The banking agencies traditionally have gone to great
lengths to protect the confidentiality of examination reports.
They have done so for three principal reasons: First, public
disclosure of problems surrounding a bank could threaten such
swift erosion of public confidence in the bank that the ability of
supervisors to remedy those problems might be destroyed.
Since the main purpose of bank supervision is to prevent bank
failures, public disclosure of the results of the examination
process could run directly counter to the very objective that
the supervisors are attempting to achieve.

Second, bank

examination reports typically will contain confidential information about bank customers that could damage the legitimate
interests of those customers if it were disclosed publicly.


feel a very deep obligation to maintain confidentiality in this
area c

Finally, we believe that if examination reports were

made public, bankers would be less candid in discussing their
problems with the examiners, who in turn would be less candid
in their appraisal of bank portfolios and bank managements.
The effectiveness of the examination process itself would thus
become impaired.
The Federal Reserve has recently had its commitment
to the principle of non-disclosure of examination reports tested.

-6You may recall that in January of this year two of the country1 s
largest newspapers published highly confidential information
from examination reports and internal supervisory memoranda
relating to so-called "problem11 banks - - that is, institutions
which had received or were receiving special supervisory

These disclosures set off a number of inquiries in


In January, the late Congressman Wright Patman

proposed that the General Accounting Office conduct a far-reaching
study of the bank supervisory process - - a request that was subsequently supported by Mr. Reuss, the Chairman of the House
Banking Committee, and by Mr. St Germain, an influential
subcommittee chairman.

At about the same time, Mr. Proxmire,

the Chairman of the Senate Banking Committee, proposed a
similar study by GAO, to be conducted under the general
direction of the Committee staff.

In each case the focal point of

the study was to be on the bank examination process, so that
disclosure of examination reports would be required,

A subcommittee

of the House Government Operations Committee similarly indicated
its intention to conduct such a study through its own staff, again
focusing on the examination process.

It sought authority in this

connection to subpoena the Comptroller of the Currency to produce
examination reports of more than 60 national banks.
In response to these Congressional initiatives, we at the
Federal Reserve informed the two Banking Committees that we

would welcome a meaningful inquiry into the performance of our
bank supervisory responsibilities, but that we strongly opposed
disclosure of bank examination reports.

In order to permit such

a study to go forward, we proposed a means by which GAO could
look into the performance of our bank supervisory functions
without the need for disclosure of the identities of individual banks
or bank customers.

We further offered to work with the Committees

in developing a procedure by which information on the bank supervisory process and the health of the banking system could be
supplied on a regular basis to assist the Committees in performing their oversight responsibilities.
Our staff negotiated at length with GAO, both on the issue
of disclosure of examination reports and on the scope of the
study itself.

We explored a number of possible ways of providing

information from examination reports without disclosing the
identities of banks or their customers, but GAO would not accept
any such limitations.

The negotiations finally resulted in an

agreement under which GAO will have access to examination
reports of a sampling of state member banks on a carefully
controlled basis.

The security of these materials will be

closely guarded.

GAO will not be permitted to remove

from our premises either the examination reports, copies
or extracts of reports, or notes or other work papers


generated by GAO itself during the study, and all such materials
will be kept under lock at the Board.

When GAO completes its

study it will prepare a report to the Congress, but that report
may not identify any bank, bank official, or customer, and it
may not be framed in such a way as to permit such identification.
Furthermore, GAO must give us an opportunity to review its
report in draft form, so that we will be able to insure that no
improper disclosure of examination report information is made.
I am pleased to say that both Mr. Reuss and Mr. St Germain
of the House Banking Committee have accepted our agreement
writh GAO.

More important, they have assured the Comptroller

General that no attempt will be made to compromise the agreement
by requiring disclosure of confidential information.

An important

precedent has been established, therefore, in support of our
position that bank examination reports should not be a subject
of Congressional staff study.

Indeed, the fact that the Comptroller

of the Currency and the FDIC had previously agreed to a GAO study,
and that we too were involved in negotiations with GAO, finally
persuaded the House Government Operations Committee not to
issue a subpoena to the Comptroller for the production of bank
examination reports in connection with the study being conducted
by its staff.


We have by no means satisfied all demands for access
to examination reports.

With increasing frequency other agencies

of government with investigative or law enforcement responsibilities are looking to the bank examination process as a means
of obtaining information to carry out their responsibilities.


has been our practice in the past, when access to examination
reports has been sought by other agencies in connection with
specific allegations of wrongdoing, to allow carefully limited
access under conditions intended to protect both banks and
their customers from unwarranted invasions of privacy*
Furthermore, when our examiners uncover evidence of crime
in the course of their examinations, they regularly refer such
matters to the proper authorities.

However, we do not

believe it appropriate for other agencies to use the examination
process as a means of prospecting for evidence of possible
wrongdoing in areas beyond our jurisdiction. I say this not because we
want to protect bankers or bank customers from lawful investigation
into possible misconduct, but because we firmly believe that the
principal objective of the examination process, namely, maintenance
of a safe and sound banking system, v/ould be injured by burdening
that process heavily with other tasks.


I would now like to turn to the question of disclosure of
the Federal Reserve's internal decision-making process.


question has received considerable public attention recently
because of a decision by a Federal district judge in Washington
ordering the Federal Open Market Committee to make available
to the public, immediately after each meeting of the FOMC, the
guidelines agreed upon at that meeting for market operations by
our New York bank during the succeeding month.

In addition,

the Court ordered that segregable factual portions of the minutes
of two FOMC meetings be made promptly available to the plaintiff
in that judicial proceeding.
We have appealed certain aspects of the Court's order,
and I am therefore limited in the extent to which I may comment
upon the case.

But I can say that even if the district court's

interpretation of the Freedom of Information Act is upheld, I
believe the public interest would not be served by immediate
disclosure of FOMC strategy.

Our open market activities are

watched closely by some of the sophisticated money market

Based upon their observations they make judgments

about the current direction of monetary policy, and they shape
their strategies in the securities market on the basis of these

While their guesses are often astute, there is sufficient

uncertainty to cause them to temper their aggressiveness.


If FOMC plans were disclosed immediately, however,
market professionals would know at once the key determinants
of our open market operations over the next four or five weeks.
Sophisticated and experienced market participants, equipped
with financial resources to act quickly, would be far better
situated to interpret and trade on this information than members
of the general public.

Needless to say, the Federal Reserve

has not the slightest interest in assuring profits for speculators
in stocks or bonds - - the ones who would inevitably be the chief
beneficiaries of immediate disclosure.

And there is still

another difficulty with premature publicity.

Not only would

the large speculators gain trading advantages, but - - being
armed with these new insights -~ they would be apt to engage in
more aggressive market behavior.

As the response of market

rates to Federal Reserve actions was accentuated by such
behavior, the result could well be greater short-run volatility
in interest rates.

Exaggerated shifts in market expectations

and interest rates caused by premature disclosure of FOMC
strategy may in turn require adjustments of policy simply to
maintain orderly conditions in financial markets.

Our ability

to control bank reserves and to make effective use of open
market operations might therefore be weakened.


While the case just discussed raises questions about the
timing of the release of FOMC market strategy, I am even more
deeply concerned about the prospect that Board deliberations prior
to decision may be opened to public scrutiny.

One of the

principal legacies of Watergate is a deep public cynicism about
the process of government decision-making.

Many people seem

willing to assume that confidentiality in the dec is ion-making
process promotes improperly motivated or even corrupt decisions.
The response to that attitude has been a drive to force government
agencies to conduct their deliberations in public sessions.


movement has rallied under the banner of "Government in the
Sunshine. n
There are several versions of "Sunshine" bills presently
pending in Congress, and I am continually amazed at how little
public attention these bills have received.

The basic structure

of these bills is similar: they would require multi-member
Federal agencies to conduct their deliberations concerning agency
business in an open forum, accessible to the public.

While the

bills all recognize certain exemptions from open meetings, they
require that if a meeting is to be closed pursuant to an exemption,
notice must be given of the subject matter of the meeting and a
verbatim transcript must be made and retained.

Following each

closed meeting, the agency would be required to release to the


public those portions of the transcript not covered by an exemption.
Any member of the public could bring a court challenge to the
validity of the agency's action in closing a meeting, and the
court could order the entire transcript to be disclosed.


provision alone offers frightening potential for innumerable
lawsuits, each of which would require individual defense.
The obstructionist dangers in this legislation do not stop

they extend to the greater part of the substantive business

of the Federal Reserve.

Our deliberations on monetary policy

issues involve highly sensitive questions of great national concern.
The close scrutiny that is given our statements and actions in
this area is itself an indication of the sensitivity of the matters
with which we deal.

We are keenly aware that financial markets

may react dramatically, based solely upon nuances or shades of
meaning in our decisions; and our public statements are drafted
with great care because of this.
Similar observations apply to our bank supervisory and
regulatory functions.

We very often have before us detailed

information about the financial and managerial condition of bank
holding companies or about individual banks and their customers.
Sometimes we must deal with crisis situations that may call for


emergency action.

It is unthinkable to me that the national interest

would be served by discussion of these issues in public.

Indeed, the

Congress has thus far concurred in this judgment by delineating
various exemptions from the requirement for open meetings.
But it is no answer that certain meetings may be closed, for as
long as we must keep a verbatim transcript of such meetings
the threat exists that the substance of these meetings may be
made public.
The underlying premise of the


Sunshine" legislation is

that if the public is permitted to observe the decision-making
process in action, the integrity of decision-making will be assured
and public confidence in government will be enhanced.


however, is a vastly oversimplified view of the manner in which
the government works, and I believe it is a simplistic view of the
way in which government should work.

The advocates of this

view ignore the fact that debate conducted on a stage is different
in tone and quality from debate conducted in private.

The simple

fact is - - and I think that even the supporters of "Sunshine"
legislation ought to concede this - - that debate carried on before
a public audience tends to take on some characteristics of the
theater, rather than serve as a search for truth and wisdom, and
that the debaters themselves tend to become performers pronouncing


predetermined positions, rather than participants in a deliberative
process seeking to develop their own ideas and persuade their
The advocates of "Sunshine" also overlook the fact that
many actions of the Federal Reserve are quasi-judicial in nature.
At almost every meeting we are called upon to adjudicate the
rights of private parties seeking to engage in certain new activities
or to extend the scope of their existing authority.
we conduct ourselves much as judges would.

In such matters

It is a firm rule,

for example, that Board members will not discuss the merits of
an application with interested parties prior to Board action on
the application.

Historically, the deliberations of appellate courts

on cases comirig before them have not been conducted in open

I see no convincing rationale for treating our adjudicatory

deliberations differently.

Of course, once decisions on applications

before us have been reached, they are promptly announced and
reasons for approval or denial are set forth.
There is a serious danger, I believe, that a "Sunshine" law
may have the unintended effect of diminishing the quality of decisionmaking in an agency such as the Federal Reserve Board.
Board has a long tradition of free discussion.


We have important

decisions to make, and we have been extremely fortunate to have


Board members and staff of high intellectual competence.
Our deliberations are characterized by deep respect for one
another's opinions, and by an atmosphere that welcomes completely free expression by both Board members and staff* A
fundamental precondition to the free exchange of ideas is an
atmosphere in which new or unpopular ideas - - o r even wrong
ideas - - can be put forth for discussion without fear of embarrassment or recrimination.
As we attempt to decide difficult issues, many things
are said in our Board meetings that might well not be said if
we were in public session or if each word spoken were subject
to later public disclosure.

This is not to say that "evil11 views

are being expressed; it simply means that the goal of fully
informed decision-making can only be achieved if the participants
are free to bring to light all considerations that may bear upon
their actions.

Were we forced to conduct our deliberations

under circumstances where highly sensitive matters could not
be discussed in private, the quality of our decision-making would
unquestionably deteriorate and the public interest would ultimately
be disserved.
Although the Board has at times been accused of being
overly secretive in performing its responsibilities, I believe that


charge is not based upon fact.

We make far more information

available to the public about our activities than any other central

Very few of the world's central banks regularly inform

their national legislature of their plans for the future course of
monetary policy, and none does this as often as the Federal

Not only do we appear frequently before committees

of Congress - - Board members have testified 25 times already
during 1976 - - but we deal constantly with inquiries from
Congress and the public about the substance of our work.


our responses we strive to be as forthcoming and helpful as we

In the bank regulatory area, unlike many other agencies,

we have for many years published written decisions explaining
our actions in application proceedings, such as those involving
bank holding company and merger actions.
I believe we must face the problem presented by the
"Sunshine" legislation realistically.

Certain of the "Sunshine"

bills and associated Congressional reports define the term
"meeting" so broadly that a bare quorum of the Board - - four
members - - literally could not converse informally about any
aspect of the Board's business without being required first to
issue notice to the public and thereafter to conduct a public


discussion or hold a closed discussion with the tape recorder

In certain instances, these requirements would apply

even to discussions between only two Board members.
In conclusion, I fail to see how the national interest
would be served by circumscribing actions of the Board in an
endless array of recording requirements.

In such circumstances

we could not be expected to maintain the quality of thorough
analysis and thoughtful care that has marked our work over
the years.

If the Board were exempted from the verbatim

transcript requirement, our difficulties with the "Sunshine11
legislation would be substantially reduced.

However, if any

of the "Sunshine" bills as now written becomes law, an agency
such as ours would be in an almost impossible position.


the one hand, we could operate under the law as enacted with
the virtual certainty that some of the destructive consequences
I have indicated - - and I have not even mentioned international
complications - - will occur.

On the other hand, we could go

through the motions of adhering to the law's requirements but,
as a practical matter, resort to "underground" procedures that
would effectively circumvent the law.

That would be a cruel

dilemma, but I would have no hesitation about the choice.



must and do reject circumvention as a suitable course for the
Federal Reserve.

We will have no part in any such dubious

In sharing with you my views on some of the disclosure
issues that have come before the Board recently, it has been
my purpose to question the premise that disclosure is a desirable
end in and of itself.

I particularly question the premise that dis-

closure is the cure for bad government.

To be sure, it is more

difficult for corruption and malfeasance to occur when the public
has easier access to the inner workings of government.

But there

are legitimate and important reasons for permitting certain processes of government to operate in reasonable confidentiality.
In striving to renew the public's trust in government, we should
recognize that such trust ultimately will depend not upon the
public's observation of the process of government decisionmaking, but upon their perception that their government is
comprised of men and women of intelligence and integrity
making reasonable decisions in the public interest.