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Statement by

Arthur F. Burns

Chairman, Board of Governors of the Federal Reserve System

before the

Subcommittee on Financial Institutions
Supervision, Regulation and Insurance
of the

Committee on Banking, Currency and Housing

House of Representatives

March 18, 1976

I am pleased to have the opportunity to present the
views of the Board of Governors on the proposed Financial
Reform Act of 1976.
The scope of the proposed Act is awesome, its provisions are complex, and its implications far-reaching.


members of the Board and our staff have already devoted manydays to the study of the proposed legislation, but I am bound to
say at the outset that we as yet have a very imperfect understanding of some parts of the Committee Print.

If our experience

is at all indicative, I would urge this Committee to proceed
cautiously, as it has been doing, and avoid the temptation of
legislating change for the sake of change.
I shall confine my testimony today to matters that relate
directly to the Federal Reserve System.

Other parts of the pro-

posed legislation are not escaping our attention, and I want to
assure you that we at the Federal Reserve shall render all the
help we can to this Committee in dealing with them.
The most dramatic change proposed by this legislation
is the creation of a Federal Banking Commission.

This proposal

would eradicate the Office of the Comptroller of the Currency,
and would divest from the Federal Reserve System the bank

regulatory functions it has performed for over 60 years.


the Board's judgment, such radical surgery would weaken bank
regulation at a time when the banking system needs firm, experienced, and responsible regulatory guidance.

Beyond that, it

would be a serious blow to the public interest if, in the name
of "reform" of the regulatory structure, the Congress were to
cripple the one agency of Government that has rather consistently
had the courage to resist the inflationary forces that have wrought
so much havoc and anguish in our country.
There is a need for some reform in Federal bank regulation, but it is not of the kind called for in the proposal before
the Committee.

Indeed, there is some danger that the excited

cry for "reform" of the regulatory structure may itself unjustifiably shake public confidence in the banking system, weaken
our Nation's economic prospects, and cast doubt on the future
of the dollar in both domestic and international markets.
The Board's position on the question of regulatory r e organization can be summarized briefly.
First, under the present regulatory structure, our banks
have met satisfactorily the critical test of adversity.

Despite some

isolated points of weakness, the banking system as a whole has

emerged from the severest business recession since the 1930's
in thoroughly good condition.

To scrap the present regulatory

structure now, in favor of a completely new and untried scheme,
would run the risk of weakening both bank regulation and the
banking system.
Second, the proposal to lop off the Board's bank regulatory role, would - - whether by intent or inadvertence - drastically diminish the ability of the Federal Reserve to
perform its monetary policy mission.
bank regulation

Monetary policy and

are organically intertwined.

Over the years,

Congress has consistently rejected attempts to diminish the
effectiveness of the Federal Reserve.

If there is to be any

move now to emasculate the Federal Reserve, the public
interest requires that this be argued explicitly rather than in
the name of "reform11 of the bank regulatory structure.
Third, not only have the proponents of ''reform" failed
to make a factual case for restructuring the agencies, but the
proposal before the Committee will not cure the defects with
which the present system is charged.

If the present system

cannot easily be understood, if it has overlapping authorities,
and if it promotes "competition in laxity, " the new system proposed in the Committee Print is subject to the same charges.


I would like now to expand on the Board's position that
the proposed Federal Banking Commission could, either deliberately or inadvertently, frustrate monetary policy and destroy
the effectiveness of the Federal Reserve in seeking to achieve
the economic goals set by the Congress.
At present, our national policy is to encourage economic
expansion even as we attempt to unwind the inflation, so that
more jobs may be created and the rolls of the unemployed be

This objective requires a moderately active lending

policy on the part of banks, including a willingness to take
reasonable risks.

But the banking community's willingness to

expand credit could easily be inhibited by a Federal Banking
Commission that had no responsibility for over-all economic
policy and that looked only to its own special concerns - - such
as loan quality standards, adequacy of bank capital, and the
state of bank liquidity.
This is not mere speculation.

The rigid bank examination

standards used by Federal regulators during the Great Depression
of the 19-30's -~ when the interdependence of monetary and supervisory policy was not well understood -~ unquestionably retarded
the process of economic recovery.

Indeed, the issue became

so critical to the Federal Reserve, and so divisive within the

Government, that it was only after a Presidential initiative
that the regulators agreed with the Board that examination
standards were too exacting.

Finally, in 1938, an accord was

reached among the bank regulatory agencies that set forth new
examination standards to prevent further frustration of monetary
It must be clearly understood that even an aggressive
monetary policy would have difficulty in overcoming bank
supervisory standards of undue strictness.

The Federal

Reserve might indeed pump up bank reserves in an effort to
encourage credit expansion.

But in the face of an overly strict

regulator, banks may react by avoiding the risks of lending and
devote their resources largely to buying government securities;
in other words, banks might turn themselves into warehouses
of Treasury paper while businesses around the country languish.
In such circumstances, the Federal Reserve's plan to expand
credit would obviously be frustrated.

Businessmen, farmers,

homebuyers - - all those who rely on banks for credit -~ would
be pinched despite massive reserves supplied by the Federal
The same result could occur if a Federal Banking
Commission applied restrictive standards in an untimely

fashion to bank capital or bank liquidity.

Credit expansion

could be thwarted if an overly cautious supervisor insisted
that banks improve their capital or liquidity positions before
they used any increased liquidity provided by the Federal
Reserve for expanding loans.

In the real world, there must

be a balance between economic and regulatory concerns, so
that the one will not stifle the other.
In another area, as many of you know, it is possible
for one bank to lend its excess reserves to another bank through
the federal funds market.

At present, in order to implement

its monetary policy, the Federal Reserve is always involved
in increasing or decreasing the availability of funds in that market.
A Federal Banking Commission, however, would have the power
to set limits on the use of the federal funds market and thus
could frustrate any given monetary stance.

The same would

apply to bank borrowings from the Euro-dollar market which
has at times been an important source of funds to the American
banking system.
I have thus far suggested how inappropriate supervisory
policies of a Federal Banking Commission could thwart economic

Now, let us imagine a period during which the

economy has developed a strong momentum and the Federal

Reserve decides that monetary restraint is needed.

This could

be accomplished only if the Federal Banking Commission had
in preceding years paid adequate attention to commitments by
banks to make future loans*

If it had not done so, the Federal

Reserve's ability to take counter-inflationary steps would be
severely limited*

For, as a practical matter, unless the

Federal Reserve made sufficient funds available to enable the
banks to fulfill their commitments, a wave of bankruptcies
could be set off among businesses.

In effect, therefore, the

Banking Commission will have made the Nation's monetary
But that is by no means the whole of this sorry tale.
Apart from its open market operations, the Federal Reserve
has the responsibility - - and this is central to the stability of
our financial system - - o f providing temporary assistance
through the discount window to banks whose liquidity has been
reduced as a result of an unexpected outflow of deposits or an
unforeseen expansion in loan demand.
Our ability to carry out this function prudently depends
on the backlog of knowledge that we have built up about individual
banks as well as the entire banking system.

At present, we have

direct knowledge concerning the quality of management and
the problems faced by member banks and bank holding companies.
Under a Federal Banking Commission our direct contacts with
the institutions that may need to borrow from us would be lost.
We would then have to rely on reports from another government agency in assessing the need for borrowing and the
ability of the institution to repay.

These reports might be

furnished promptly upon request, or they may not be.
might be prepared with care, or they may not be.


Indeed, it

is conceivable that the information provided to us could be
slanted in order to induce the Federal Reserve to provide
liquidity for a purpose unrelated to the functions of the discount
Splitting off the Board's bank regulatory functions could
also have a profound effect on our ability to interpret the behavior
of the monetary aggregates that we are charged with controlling.
We live in a world of very rapid change in financial technology.
New financial practices have been spreading rapidly through our
markets for the past 20 to 30 years.

Of late, moreover, the

innovative process has been accelerating and it appears that
the amount of money needed during the past year or two to


finance a given dollar volume of economic activity has been
substantially smaller than would have been the case in earlier
One very recent development that has had a considerable
impact on the behavior of demand deposits was the regulation,
issued by the banking agencies last November, which enabled
partnerships and corporations to open savings accounts at
commercial banks in amounts up to $150, 000.

When this

regulatory change was made, the Federal Reserve was acutely
aware of its possible impact on the monetary aggregates. A
special survey was therefore immediately undertaken; and it
showed that within two months after the regulatory action, some
$2 billion had been placed in savings accounts of this type.


we not monitored bank activity in this area so promptly, misunderstandings could have resulted and we might have reacted
erroneously to the decline of demand deposit balances by increasing
bank reserves and thus rekindling inflationary pressures.
In short, there is no escape from the conclusion that the
proposed Federal Banking Commission would frequently be in
a position of making, diluting, or frustrating monetary policy.
The role of the Federal Reserve, its ability to promote the Nation's
industry and commerce, its ability to protect the domestic and


international value of the dollar, might well be weakened to a
point where continued discussion about the cherished independence
of the Federal Reserve System would be entirely pointless.


the Federal Reserve would be left with only a vestige of its
authority and power to carry out monetary policy.

Prompt and

bold action to prevent a crisis, such as the Federal Reserve took
in June 1970 when the Penn Central went into bankruptcy, would
then no longer be possible.
Even if conflicts with the Federal Banking Commission
were avoided, 1 doubt that we could discharge our obligations
in a manner that would be satisfactory to the Congress and the
American people.

Knowing less and less about banks, we at

the Board would end up living in an ivory tower.

As our under-

standing of the real relationship between the world of finance
and the world of business withered away, we would probably
concern ourselves increasingly with esoteric, theoretical

Life at the Federal Reserve might become more

pleasant for some of us, as we debated the merits of Mj as
over against Mg or My, or whether a new variant of M7 should
not be immediately constructed; but it is not clear that the stability
of our financial system, or international respect for the dollar,
would be enhanced thereby.
Since the proposal for restructuring the Federal bank
regulatory agencies would have such far-reaching effects upon


the Board's activities, there should be compelling reasons for
advancing it.

What good, one may ask, does this measure seek

to accomplish?

What advantage does it hold out to compensate

for the destructive thrust that I have delineated?

I submit that

when the case in favor of the proposal is analyzed, it simply
does not stand up.
One argument offered in support of the proposed r e structuring is that the present system is much too confusing.
I have no doubt that if we were setting out today to create a
system of bank regulation where none existed before, we would
arrive at something other than the present structure*


of our present regulatory framework can be understood only
by reference to historical developments in our country.


the system is complex, but we live in a complex world and the
bank regulatory system is part of it.

Simplification of govern-

mental structure is certainly a desirable objective, but the
simplification must be of a kind that serves the public interest.
Granted that the present system is in some respects
confusing, the proposal before the Committee would create a
regulatory scheme that may be no less confusing.


to the Committee Print, national banks would be regulated by
the Federal Banking Commission, while state banks would be


regulated by the Federal Deposit Insurance Corporation.


if a state bank happened to be a subsidiary of a bank holding
company, it would be removed from FDIC jurisdiction and
become subject to the Federal Banking Commission.

To be

more precise, if 24 per cent of the bank's stock were owned
by a corporation, the bank would be regulated by the FDIC; but
if 26 per cent were owned by the same corporation, the bank
would be regulated by the Federal Banking Commission.


regulatory jurisdiction could change at the whim of a minority

If our citizens have difficulty understanding the

present structure of regulation, they will not be significantly
enlightened by this new proposal.
It is also argued that the agencies perform overlapping

This, too, is true to a degree.

There are undoubtedly

some common functions that could be handled more efficiently.
But the new proposal does not eliminate overlaps.

Indeed, it

purposely continues two Federal agencies having many identical
In some respects, the Committee Print creates more
overlapping than exists in present law.

For example, Title I

empowers the Federal Banking Commission to enforce against
any insured bank the prohibitions of sections 22 and 23A of the


Federal Reserve Act, dealing with loans to affiliates and
executive officers.

Yet under Title III, identical authority

is vested in the Federal Deposit Insurance Corporation, again
with respect to any insured bank.

In addition, the bill assigns

to both the Commission and the Corporation the power to issue
cease-and-desist orders against banks under their respective
jurisdictions to remedy any violation of law - - including presumably, sections 22 and 23A of the Federal Reserve Act.
The bill thus creates confusion and overlap in an area where
none existed before.
Another argument advanced in favor of regulatory
reform is that the present system inspires "competition in
laxity. n This criticism has been made for many years.
I have made the same point in public statements.


There is, of

course, a danger that our present tripartite system may encourage
banks to play one agency off against another.

But the proper

remedy for this consists, first, in a determination by the
agencies not to allow themselves to be so used, and, second, in
proper oversight by the Banking Committees of the Congress.
Absolute consistency in bank regulation is not necessarily
a virtue.

On the contrary, some diversity of viewpoint among


the banking agencies can be healthy for the banking system.
For example, I think that a good case can be made for the
proposition that banking has benefitted from some of the
provocative and innovative policies that were first advanced
during the tenure of Comptroller Saxon in the early 1960!s.
In any event, the Committee Print does little to eliminate
"competition in laxity. " It reduces the number of Federal
banking agencies from three to two, but it still offers ample
opportunity for the banks to play the agencies off against one

Banks will still have the opportunity to choose between

state and national charters, and by that choice may elect one of
two Federal regulators.

And even if a state charter is elected,

the bank will still be able to choose between two Federal regulators by deciding whether or not to do business as a holding
company subsidiary.

Thus, even under this "reformed"

structure, many of the old tensions will remain.
The Commiteee should also consider carefully what
may be lost with this restructuring.

The Federal Banking

Commission will be a brand new agency.

It will have no

tradition, no history, no body of precedent to bring to bear
upon its judgments.

How it will develop, whether or not it

will deal at arm's length with the banks being regulated, cannot


be predicted.

The Federal Reserve, on the other hand, is a known

quantity as a bank regulator.

It has a record of accomplishment, a

distinguished tradition, and a reputation for integrity and thoughtful

The fact that Congress has repeatedly seen fit to

assign the Board of Governors the task of developing industry-wide
regulations in the increasingly important consumer protection area
must mean that the Congress, if not also the country at large, has
confidence in the Board's objectivity and judgment.
Some have argued also that the condition of the banking system,
particularly the fact that the number of banks on the so-called problem
bank list has increased, constitutes proof that the present system has

The implicit assumption underlying such an argument is that

bank supervisors can practically assure that problems will not arise.
But this assumption is utterly unrealistic.

No matter how strict the

system of supervisions managerial rnisjudgments or outright fraud
will occur at times.

Supervisors cannot guarantee that bad loans will

never be made, or that banks will never fail*

Nor can they foresee with

any precision what effects a business recession may have on many
individual borrowers.

They can? however, identify weaknesses that

turn up, and they certainly can take steps to correct them and minimize
the chances of their repetition.

The problem bank list is thus simply a

tool to direct supervisory attention where it is most needed.

The very


existence of a problem bank list - - indeed, a list that keeps changing indicates tha,t the bank regulators are attending to their job.
The recent furor over the condition of banks and the so-called
problem bank list has been based on massive exaggeration and m i s understanding.

It is true, of course, that some of our banks - -

particularly the larger banks - - participated in the euphoria of the
early 1970* s.

But they have learned their lesson, and they are again

emphasizing careful appraisal of risk and the maintenance of adequate
return on assets.

Today1 s bankers are a chastened and prudent lot;

they reject the goal of growth for growth1 s sake.
One aspect of this change of attitude is the increased liquidity
of commercial banks.

Holdings of liquid assets at large banks rose

33 per cent during 1975. At the same time, these banks sharply
reduced their reliance on volatile sources of funds.
With greater attention to the precepts of sound financial
management, commercial banks improved their profits last year
despite the negative impact of increased loan loss provisions
and a reduction in the size of their loan portfolios.

The 50

largest bank holding companies, for example, reported a 7-1/2


per cent increase in net income during 1975; if loan loss
provisions had been the same as in 1974, the increase would
have amounted to 42 per cent.
A large share of these improved earnings was used to
build up the capital position of banks.

The total capital of all

insured commercial banks rose to $75 billion in June of 1975
from less than $72 billion at the end of 1974,


the ratio of capital to assets, which had declined steadily
during the early 1970's, rose appreciably during the first
half of 1975; and we can be quite sure that once data for the
second half of the year become available, they will reveal
additional improvement.
Further strengthening of the capital position of some
of our banks would undoubtedly be prudent and wise.


the stock and bond markets are more receptive to new bank issues
today than they were last year, and this has occurred despite the
adverse publicity regarding so-called "problem" banks and other
sensational stories in the press.

The fact is that bank stock

prices have risen significantly since late 1975.


the abler market analysts have read the dramatized reports
about banking difficulties as stale news that, taken as a whole,
had little relevance to the current situation.

In sum, our commercial banking system today is basically
sound, and is well prepared to provide the credit needed to support
the economic expansion that is again underway in our country.
Let me now turn to some alternative courses of action that
this Committee might wish to consider.

While the Board sees no

clear need for a major restructuring of bank supervision, it does
recognize that improvements in bank regulation can and should
be made.

To this end, the Board has recommended several

remedial measures to the Congress over the past year, which
we are glad to see incorporated in the Committee Print.


measures would bring U.S. offices of foreign banks under Federal
supervision, permit more expeditious handling of problem bank
cases, strengthen penalties for violation of cease and desist orders,
place limits on insider loans, permit easier removal of bank officers
for unsound practices, and enable the Board to require a bank
holding company to divest an unsound subsidiary.
In addition, over the past 18 months, the Board has conducted an intensive review of its regulatory and supervisory
function and has introduced a number of measures to improve
bank examination, supervision, and regulation.

These include

efforts to identify problems in their early stages through a


stronger computerized surveillance system.

The other bank

regulatory agencies have likewise been engaged in improving
their regulatory capability.
Several weeks ago, 1 proposed a program for Congressional oversight of the bank examination function, because
the Board believes that Congress should take a more active role
in the regulatory process.

The essence of this proposal is to

provide the Banking Committees with statistical information
and analyses that would relate to the conduct of the examination
process and the condition of the banks,
I have in mind that such data would include, for example,
information as to trends of capital, liquidity, earnings, classified
loans, and portfolio losses.

These data could be set forth in

appropriate categories relating to such factors as the size and
regional location of the banks.

In addition, information could

be provided on the examination process itself - - that is, on the
number and duration of examinations, the size of the examination
force, the costs incurred, and the nature and promptness of
remedial efforts,
The Board believes that data and analyses of this sort
would provide a meaningful factual basis for the Banking
Committees to evaluate the effectiveness of bank supervision.


Moreover, we would further propose that such data and analyses
be furnished to the Congress regularly, perhaps once or twice
a year, so as to enable the Banking Committees to carry out
their oversight responsibilities in this area on a continuing
The Board has also considered at great length over
the past year the additional steps that might be useful in helping
to achieve the goal of more efficient and uniform bank examination
and surveillance.

No one proposal for reform has developed the

support of a strong majority within the Board, but we believe
that two proposals have significant promise.
The first of these calls for the creation of a Federal
Bank Examination Council to focus on the most critical need - namely, modernized bank examinations and vigorous follow-up
procedures to cure weaknesses that are uncovered.


Examination Council would have authority to set standards
and procedures that would apply to all the Federal banking

It would also review significant problem cases,

when and as they develop.

All three agencies would be repre-

sented on the Council,
It is entirely possible that experience with such a Council
will in time support a conclusion that some further consolidation


of banking supervision and regulation would be desirable.


that turns out to be the case, the decision would be based on
actual experience and a greater practical awareness of the
difficulties to be overcome and the advantages to be reaped.
The second proposal is to consolidate the functions of
the office of the Comptroller of the Currency within the Federal

This change would accomplish in a constructive

manner what the draft legislation seeks to accomplish through
the Federal Banking Commission.
There is logic in this proposal since all national banks
are required by law to be members of the Federal Reserve
System and are thus already subject to many of our regulations.
At present, however, their primary examination and supervision rests with the Comptroller.

Also, the Board has super-

visory responsibility for all bank holding companies, yet many
of the major subsidiaries of these holding companies are national

In addition, the Board must approve the opening of foreign

branches of national banks, but the supervision of these branches
rests with the Comptroller.

Similarly, the Board authorizes Edge

Act corporations, but many of the banks that control them are
supervised by the Comptroller.


The examination and supervision of national and State
member banks could be integrated efficiently through this proposal.

At the same time, the continued existence of the FDIC - -

together with the additional Congressional oversight that I have
outlined - - would enable another Federal banking agency to
check or stimulate the supervisory and regulatory actions of
the Federal Reserve.
The Board firmly believes that alternatives such as
these should be explored thoroughly before the creation of an
entirely new agency is given serious consideration.
Let me now touch on some of the provisions of Title V
of the Financial Reform Act of 1976 that have a special
interest to the Board.

The attached Appendices spell out

the Board's views in some detail.
The Board believes that Congress should continue to
hold oversight hearings on monetary policy as provided by
House Concurrent Resolution 133 but we see no need to make
this a permanent part of the law.

Each Congress should have

an opportunity to decide for itself just how it wants to participate
in this essential interchange.


Because circumstances change and the thrust of policy
necessarily changes with them, the Board believes it would
be especially unwise to legislate in detail how monetary policy
objectives should be set forth and therefore, by implication,
the terms under which policy should be conducted.

One provision

of the Committee Print would require the Federal Reserve to
specify the interest rate levels that are intended or expected
over the succeeding 12 months.

But no one has yet developed

the expertise to predict the course of interest rates.

If the

central bank is forced to announce interest rate intentions or
expectations, the result could only be misleading.


rate movements depend basically on many factors outside the
control of the Federal Reserve, including the expectations of
borrowers and lenders about the future rate of inflation.
The Board also believes it would be a serious mistake
to require the Federal Reserve to describe monetary policy
in terms of its expected effects on statistical measures of
employment, production, and the price level.

There is a

looseness in the relationship between monetary policy and
economic developments that makes projections of this type
exceedingly imprecise.

Our experience has been that economic

projections require continuous updating.

Publication of one


projection, and then another two weeks or a month later,
would be highly confusing to the public and might well feed
back adversely on business and consumer attitudes.
On another provision, the Board opposes the proposal
that would require Presidential appointment and Senate confirmation of Federal Reserve Bank presidents.

Since the term

of office for a Reserve Bank president is only five years, these
positions could be turned into political plums to be dished out
by the party that happens to be in power at any given time.
The Federal Open Market Committee could then become a focal
point for partisan political activity since the Reserve Bank
presidents also serve on that body.

The position of Reserve

Bank president is a career post in the Federal Reserve System,
and we have been extremely fortunate in being able to attract
people of outstanding ability to these jobs.

These positions

should not be brought into the political arena.
In conclusion, we see no compelling need to legislate
fundamental changes in the structure of bank regulation at this

The fact that only a handful of banks failed during the

recent recession is a triumph for bank regulation in this country.
During the Great Depression, literally thousands of banks failed.
But Congress in its wisdom adopted several laws in the 1930's


that reshaped bank regulation and gave us the strongest banking
system in the world.

Congress can be proud that the measures

it adopted in the 1930!s - - including a strengthening of the Federal
Reserve and creation of the Federal Deposit Insurance Corporation
have worked so well and withstood the test of time.
The remedial legislation we have proposed to Congress
will provide the regulatory agencies with authority they need for
more effective supervision.

If some structural changes are also

believed to be necessary, the adoption of either of the two proposals that I have sketched - - moving the Comptroller's office
to the Federal Reserve or establishing a Federal Bank Examination Council - - deserves thoughtful consideration.
Because of the strong feelings among members of the
Board concerning Title I of this legislation, I have devoted
most of my testimony to that section of the Committee Print.
I should point out, however, that there are major principles
embodied in this legislation - - particularly those relating to
uniform reserve requirements, regulation of foreign banks,
and additional supervisory authority over domestic banks - that the Board warmly supports.

We will be glad to work with

the Committee on perfecting amendments to these important


I again urge the Committee to avoid precipitous action
on the complex and comprehensive piece of legislation that is
before you.

This Committee should not let itself be stampeded

by dramatic headlines to adopt legislation that will effect major
changes in Government.

To do otherwise would be out of line

with the careful procedures that have been so wisely observed
by this Committee over the years.

Appendix 1

Supplemental Statement of the Board of Governors
on Section 503 of Title V of Committee Print

The Board believes that Section 503 of the proposed bill,
which legislates oversight hearings on monetary policy and specifies
the topics to be covered in such hearings, is unnecessary and does
not serve a constructive purpose.

During the past year, the Federal

Reserve Board has regularly accounted to Congress for its conduct
of monetary policy through the quarterly hearings resulting from
House Concurrent Resolution 133. These procedures have worked
reasonably well.

It is the Board1 s expectation that oversight hearings

would be continued, whether or not a new Resolution is passed by the
next Congress.

The Board therefore believes that the provision of

Section 503 concerning quarterly hearings is not needed and also,
for reasons to be given below, is unwise in its particulars.
It would be especially unwise to legislate in detail how monetary
policy should be described and therefore, by implication, the terms
under which it should be conducted.

Circumstances change, and the

thrust of policy necessarily changes with them.

In that respect, the

provisions of the Concurrent Resolution are reasonably flexible—and
therefore more realistic than those of Section 503. First of all, the
Resolution refers to the specification of policy aims in terms of
credit flows as well as monetary aggregates.

Second, it notes that


account may need to be taken of international flows of funds and
conditions in international money and credit markets.

Third, and

most important the Resolution explicitly recognizes the great merit
of flexibility by indicating that the ranges of growth or diminution
in the monetary and credit aggregates specified in advance in the
oversight Hearings are not required to be achieved


if the Board

of Governors and Open Market Committee determine that they
cannot or should not be achieved because of changing conditions, l!
Section 503 carries the process of advance specification of
unknown factors a giant step further by requiring the Federal Reserve
to announce n ranges within which the levels or rates of change" not
only of monetary aggregates, but also of interest rates, are intended
or expected to vary over the next twelve months.

However, if the

central bank is forced to announce interest rate intentions or
expectations — imprecise as these guesses must be —it would be
misleading to the public and the effectiveness of monetary policy
would be impaired, with harmful consequences for the economy and
the nation.
The announcement of interest rate intentions or expectations
by the Federal Reserve would lead many borrowers and lenders to
believe that the System could--and in practice would--guarantee
particular interest rate levels.

But the Federal Reserve does not

have the power to do this, because interest rates depend basically

on many factors outside the control of the central bank.


interest rate movements reflect the interaction of changing demands
for credit with the available supply of funds from a wide variety of
institutional and other lenders.

Interest rates are influenced not

only by the strength of the economy and by the public1 s willingness
to defer current consumption and save for the future, but also--and
this has been especially important in recent years--by the expectations
of borrowers and lenders about the rate of inflation.
If the Federal Reserve nevertheless attempted to keep
particular interest rates at some specified level, this might well
lead to inappropriate rates of growth in bank reserves and money.
If, for example, interest rates came under upward pressure because
of rising demands for funds, System efforts to prevent, or limit,
interest rate increases could result in unduly rapid monetary expansion, thereby feeding inflationary pressures.

If, on the other hand,

interest rates came under downward pressure because of slackening
business activity and declining demands for funds, System efforts to
prevent, or slow down the declines could result in monetary growth
rates below those needed to reinvigorate the economy.
Thus, the announced interest rate intentions or expectations
may well prove to be inconsistent with stated objectives in terms of


monetary growth rate ranges.

Efforts to maintain interest rate

levels would have harmful effects on the economy and would in the
end fail.
The Board also strongly believes that it would be a mistake
for the Congress to require the Federal Reserve to describe monetary policy nin terms of its expected effects on statistical measures
of employment, production, and purchasing power (price stability),
as contrasted with the effects which could be expected from alternative

Economic activity, prices, and employment depend on

many powerful influences apart from instruments under the control
of the Federal Reserve.
is another.

Fiscal policy is one.

Labor market policy

The state of public confidence--the willingness to spend

freely from income and accumulated savings--is still another.
Thus, there is a looseness in the relationship between monetary
policy and economic developments that makes projections of the
effects that different policy postures might produce exceedingly

The sorry track record of most projections during the

past year or two makes that clear.
Thrusting economic projections by the Federal Reserve into
the public arena would surely lead many to exaggerate the influence
that monetary policy has on the economy, and would not enhance
understanding of monetary policy, or of the objectives of policy-makers.


Moreover, our experience has been that economic projections
require continuous reevaluation and updating if they are to serve
a useful purpose in policy-making.

But publication of first one

projection, and then another two or four weeks later, soon followed
by yet a third, would be highly confusing to the public and might well
feed back on business and consumer attitudes.
Because the Federal Reserve is aware that the linkages
between monetary policy actions and the economy are extremely
loose, the Federal Open Market Committee has never officially
attempted to reach agreement on specific projections of economic

Our staff does present projections that aid in Committee
But staff projections do not necessarily represent

the expectations held by the policy-makers of the likely course of
economic activity.

Different individuals may well have different

evaluations of the economic outlook, and all have learned from
experience the necessity of remaining flexible in their views in
order to take account of the stream of incoming evidence.


we believe that a requirement calling for the adoption and publication
of specific economic projections by the Federal Reserve would
seriously mislead the public about the likelihood of a particular
economic outcome, would adversely affect policy discussions


within the Federal Open Market Committee by introducing concerns
of a public relations nature, and would inevitably politicize the
policy-making process*

Appendix 2

Supplemental Statement of the Board of Governors
on Sections 504 and 505 of Title V of Committee Print

I have indicated the Board1 s strong reservations about
the wisdom of the part of Title V dealing with the appointment
of presidents of Federal Reserve Banks,

In addition, however,

there are certain other provisions in Title V which are troublesome.

These provisions have to do, first, with the composition,

terms, methods of selection, and responsibilities of boards of
directors of Federal Reserve Banks; and secondly? with membership and holding of capital stock in Reserve banks.
Before any changes are enacted in the above areas, they
should be subjected to a fundamental test - - namely, will such
changes improve the effectiveness and efficiency of the Federal
Reserve System?

If not, no public advantage will be derived

from their enactment.
Let me state briefly some of the benefits the System
receives from Reserve bank directors.

First, they make an

important contribution to our economic intelligence system,
through a detailed knowledge of the state of business and consumer psychology and through a "feel" for prospective developments in their particular sphere of activity.



grass-roots tr

input from directors serves as an important complement to the


work of our economic research staffs.

Secondly, many of

our directors bring to us important management skills and
"know-how" in their oversight responsibilities for efficient
operation of Federal Reserve Banks* It is important, therefore,
to secure knowledgable, effective, and highly-motivated persons
to serve in such capacities.

With those thoughts in mind, I

submit the following comments•

Repeal of Section 4(6) of the Federal Reserve Act
which now provides that "every Federal Reserve
Bank shall be conducted under the supervision and
control of a board of directors" is undesirable.
This responsibility of Reserve bank directors is
discharged subject to the statutory provision for
general supervision by the Board of Governors,
which is a sound and sensible arrangement.


Removal from boards of directors the authority
to appoint Reserve bank presidents, subject to
approval of the Board of Governors, would undermine the role of the directors in overseeing the
efficient and effective performance of the Reserve



Limiting directors to a single three-year term
(as opposed to the present practice of two threeyear terms) would create more turnover, less
continuity, and perhaps lead to greater difficulty
in recruiting qualified directors.

In addition, a

single 3-year term would limit their effectiveness
because of the time necessary for a new director
to understand the range of activities and responsibilities.

Elimination of "membership" as such in the Federal
Reserve System and making the holdings of Federal
Reserve Bank stock optional could in time lead to the
disappearance of Reserve banks as a constructive
influence at the regional level.

In our judgment, all

financial institutions which hold their reserves with
the Reserve banks, and are thus entitled to use their
services, should be required to hold at least a nominal
amount of stock in Reserve banks.

Removal of the right of member institutions in the
Federal Reserve System to elect any directors of
Reserve banks is undesirable.

In order to maintain

a strong interest by member institutions in the effective
and efficient performance of central bank services by
the Reserve banks, the member institutions should
continue to elect some of the directors of Reserve banks<