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Statement by
David M. Lilly
Member, Board of Governors of the Federal Reserve System
Before the
Subcommittee on Employee Ethics and Utilization
of the
Committee on Post Office and Civil Service
of the
United States House of Representatives
Wednesday, May 4, 1977

M adam Chairwoman, I appreciate the opportunity to appear
before this Subcommittee to express the Board's support of H.R.
2387--a bill that would raise to Level I of the Executive Schedule
the positions of the Chairman of the Board of Governors and of the
Director of the Office of Management and Budget, and to Level II
the positions of the Board Members and the Deputy Director of the
Office of Management and Budget.
Let me state at the outset my recognition that an appear­
ance before a Subcommittee by an individual who is a principal
beneficiary of proposed legislation could possibly raise a q u e s ­
tion of objectivity.

I am serving as a Member of the Board through

January 31, 1978, having commenced service on June 1, 1976, after
appointment to the unexpired portion of a 14-year term of office.
As a consequence I have little to gain from the proposed legisla­

However, my appearance before this Subcommittee can, I

believe, provide you with an informed viewpoint on issues related
to the legislation being considered, since my background includes
not only membership on the Board of Governors but also service as
a member of the Board of Directors of the Federal Reserve Bank of
M inneapolis.
During my five years on the Bank's Board--two years as
Deputy Chairman, three years as Chairman--! endeavored to

- 2 familiarize myself with System goals, responsibilities, and

At that time, my perspective was that of a system

director encountering the operating problems and responsibilities
of a Reserve Bank.

In my present capacity as a Member of the

Board of Governors, I am required, in association with my col­
leagues on the Board, to deal with issues in the field of monetary
policy, international finance, bank regulatory issues and consumer

This experience enables me, I believe, to appraise

the importance of the Board's responsibilities regarding the
stability of this Nation's economic and banking systems, and the
corresponding justification for moving the positions of the
Chairman and Board Members to higher levels within the Executive

The fact that I have recently transferred from a high

paying business career to an Executive Schedule, Level III posi­
tion as a Member of the Board of Governors, perhaps lends a degree
of emphasis to many of the comments I will make regarding the
proposed adjustment to the Executive Schedule.
Let me now address the issue under consideration by this
Committee; namely, the merits of the Executive Schedule levels
proposed by H.R. 2387, with emphasis on the positions of the
Chairman and Members of the Board of Governors.

A decision in

this regard requires an historical review of past actions

- 3 affecting Board Members' salaries, as well as a brief outline of
the nature and expanding scope of Board Member duties.
There is clear historical evidence that these considera­
tions have been uppermost in the mind of Congress when similar
legislation involving levels of Board Members'
been considered.

compensation has

For example, in the 1913 Federal Reserve Act

originally establishing the Board, Congress recognized the
importance of the new agency's responsibilities by providing
compensation for Board Members at a level equal to that of
Cabinet officers, which at that time was $12,000 per annum.
This equality prevailed until 1925, when the salaries of Cabinet
officers were increased to $15,000 without a similar increase
for Board Members.

However, in the Banking Act of 1935, compen­

sation of Board Members was increased to $15,000, thus reestab­
lishing the parity that was contemplated by the original Federal
Reserve Act.
In 1949, Cabinet officers' compensation was increased
from $15,000 to $22,500 per annum.

At the same time, compensa­

tion of Board Members, including the Chairman, was raised from
$15,000 to $16,000 per annum.
In 1950, a Subcommittee of the Joint Committee on the
Economic Report stated that "every effort should be made to

- 4 build up the quality and prestige of Federal Reserve officials,"
and recommended that the salary of the Chairman of the Board be
raised to Cabinet officer level (then $22,500) and that the
salaries of other Board Members be increased to $20,000 per

In 1952, this judgment of the importance of an appro­

priate salary base was reaffirmed by another Subcommittee of
the Joint Committee on the Economic Report.

That Subcommittee's

report stated "it is of great importance that the Chairman and
Members of the Board of Governors should be persons of the
highest caliber."

The Subcommittee then repeated the 1950

salary recommendations for the Chairman and Board Members.
In 1956, the salaries of the Chairman and Board Members
were raised, respectively, to $20,500 and $20,000 per annum; but
in the same year, the pay level of Cabinet officers was raised
to $25,000 per annum.
In 1962, President John F. Kennedy recommended that "the
salary of the Chairman be fixed at $25,000, equal to that of
Department h e a d s , and that the salary of other Governors be
fixed at $22,000."

In a special message to Congress on April 17,

1962, President Kennedy said in support of his recommendation:

"The Board of Governors has immense responsi­
bilities for the health of the United States economy.
The performance of its tasks requires specialized

- 5 knowledge and good judgment in exceedingly complex
fields of domestic and international economics and
finance. The salaries of the Governors should be
commensurate with their grave responsibilities,
sufficient to attract outstanding men and to give
them the prestige and status necessary for effec­
tive performance of their duties. As I said in my
Economic Report, ’
The United States is behind other
countries in the status accorded, by this concrete
symbol, to the leadership of its "central bank,1'
and I urge that the Congress take corrective ac t i o n . 1"
In 1964 the Executive Pay Schedule was established, with
the Chairman of the Board placed in Level II and the Board Members
placed in Level III.

The positions currently remain at these

Levels, still below that of Cabinet officers.
I believe that the original concept of Executive Pay
Schedule parity between Board Members and Members of the Cabinet
was a sound one.

Over the years this equality of compensation

has been lost, although there have been frequent calls for c or­
rection of the discrepancy, particularly with respect to the
Chairman's salary.

The December 1976 Report of the Commission

on Executive, Legislative and Judicial Salaries, which was sub­
mitted to President Ford, concluded that "a significant number
of Federal Government jobs, both in the super grades and
Executive Levels, are evaluated erroneously," and cited as
examples of "the classification problems," the Level II classi­
fications of the Chairman of the Federal Reserve Board and the

- 6 Director of the Office of Management and Budget.

With respect

to the office of the Federal Reserve Board Chairman, the Commis­
sion's Report concluded:
"By any standard, the Chairman of the Federal
Reserve Board has responsibilities that one could
argue are roughly equivalent to the Secretary of
the Treasury. His position has many aspects of
a career job--given the fourteen year tenure.
Thus, it. does not offer the prospect of a short
government career."
I submit “hat the broad range of responsibilities faced by the
Board, particularly as those duties have increased in recent
years, offers ample justification for the Executive Schedule
adjustments contemplated for the Chairman and Board Members in
the bill before you.
The foremost responsibility of the Federal Reserve is the
formulation and implementation of monetary policy that will ensure
a sufficient availability of money and credit to facilitate the
achievement of a rising standard of living within the United States.
Toward that end, the Federal Reserve seeks to combat inflationary
pressures, which have plagued the country in past years, while
providing the financial basis for growing employment and output.
The Federal Reserve has the additional responsibility, as a lender
of last resort, to forestall national liquidity crises and finan­
cial panics.

General monetary policy is carried out through the

- 7 coordinated use of open market operations, the regulation of
member bank discounting with the Federal Reserve Banks, and
changes in member bank reserve requirements.

The latter two

activities are exercised pursuant to the direction or approval
of the Board.
System open market operations (with transactions in
Government securities last year averaging about $2.0 billion
per day, with a single day's high of $9.0 billion) are achieved
under the direction of the Federal Open Market Committee which
is composed of the seven Members of the Board and five Presidents
of Reserve Banks.

In addition, the Board determines the margin

requirements applicable to stock market credit transactions, and
sets the maximum interest rates member banks may pay on time and
savings deposits.

The foregoing responsibilities are of an

imperative and unique nature.
One indication of the weight of Board responsibilities is
the fact that as of year-end 1976, Federal Reserve System assets
totaled $133.4 billion.

Government securities in the System's

portfolio at year-end 1976 totaled $105 billion, and produced
1976 total income of $6.5 billion.

Ninety-eight percent of the

net System earnings, or $5.9 billion, was turned over to the
Treasury by the System at year-end 1976.

- 8 A second responsibility of the Federal Reserve System is
that of banker for the Federal Government.

In this capacity,

the Federal Reserve issues, redeems, and exchanges Government
securities; handles a major portion of the Government's cash
balances; and, as fiscal agent of the Federal Government, p ro­
cesses and handles tax payments and food stamps.

More than two

billion food stamps were processed by the Federal Reserve System
in 1976--a 58.2 percent increase over the 1970 level.
The Federal Reserve, in close and continuous consultation
and cooperation with the United States Treasury, engages in
foreign currency operations, for the most part to counter d is­
orderly conditions in foreign exchange markets.

Such foreign

currency transactions are the responsibility of the Federal Open
Market Committee, acting through its Special Manager at the
Federal Reserve Bank of New York.
By statute, the Federal Reserve has a general regulatory
and supervisory responsibility over all member banks.

As of

June 30, 1976, there were approximately 5,800 member commercial
banks in the Federal Reserve System, holding $586 billion of

The Federal Reserve is responsible for examining

about 1,000 state member banks and, as to any unsatisfactory
conditions found to exist with respect to such banks, for

- 9 effecting appropriate corrective action.

In recent years,

correction of unsafe or unsound banking practices has involved
the Federal Reserve System, under the Board's direction, in an
increasing number of cease and desist proceedings under the
Financial Institutions Supervisory Act.
The Federal Reserve System is also responsible for
regulation of some 1,900 registered bank holding companies,
which control banks holding roughly two-thirds of the banking
deposits in the Nation.

In the 14-year period, 1956 through

1970, the System acted upon 470 bank holding company applica­

Between 1971 and 1976, the number of applications

increased to 5,079.
In the field of foreign activities of domestic banks,
the Federal Reserve is responsible for processing applications
by member banks to establish foreign branches and to make
investments in foreign subsidiaries.

We must also supervise

their activities on a continuing basis.

Assets of foreign

branches of United States banks at year-end 1976 totaled $180
billion, an increase of $52 billion over the 1970 level.


the operations of U.S. banks continue to expand abroad, regu­
latory and supervisory responsibilities of the Board will
increase correspondingly.

- 10 The Federal Reserve also provides services to the bank­
ing system and the general public through the issuance of cur­
rency and coin and the processing of checks.

Presently, 50

million checks are processed daily by the System, an increase
of 85 percent over the 1970 lev e l .

This has required the

establishment of II new regional check processing facilities
over the last six years.
With the enactment of the Truth in Lending Act in 1968,
the Federal Reserve System has been assigned a major new area
of responsibility in consumer credit protection.

In increasing

number and complexity, laws relating to some aspect of consumer
protection have been enacted requiring the Board's direct involve­
ment in the issuance of regulations and interpretations, consumer
education activities, and enforcement procedures.

In the past

three years alone, there have been enacted the Fair Credit Billing,
Equal Credit Opportunity, Consumer Leasing, Home Mortgage Dis­
closure, Real Estate Settlement Procedures, and the Federal
Trade Commission Improvement Acts.
I have taken the time to spell out the Board's major
functions in the belief that this Subcommittee, in considering
the proposed adjustments to the Executive Schedule, would wish
to take into account the quantity and nature of responsibilities

- 11 assigned to these positions; the extent of discretionary judg­
ment involved in the Board's decision-making authority; and
the overall significance and impact of decisions made by the
Board as a collegial body.
The Executive Schedule Level assigned to the Chairman
and Members of the Board, as is the case with all Government
officials, is indicative of the importance Congress places on
the responsibilities it has assigned to a particular office or

It is my belief that if the responsibilities of the

Chairman and Members of the Board were purely of a regulatory
or enforcement nature, their present Levels would be appro­

However, Board Members have been assigned primary

responsibility for the determination of national monetary and
credit policies.

Certainly, the degree of importance assigned

to this function has not diminished since 1913, when Board
Members were paid at Cabinet officer level.

Nor has there

been a diminution in the complex issues confronting Board

Rather, the increasing complexities of both domestic

monetary policy and international finance, and the leadership
role now performed by this Nation in international monetary
and economic m atters, has added to the importance of the role
played by the Chairman and Board Members as this Nation's

- 12 central banking authority.

Congress, itself, has evidenced its

increasing attention to monetary policy and other responsibili­
ties of the Board in its adoption of House Concurrent Resolution
133 and by its increasing requests for testimony of the Chairman
and other Board Members.

The Chairman testified before

Congressional Committees a total of 32 times in 1975 and 1976,
and the other Members of the Board appeared an additional 47
times during the same period.

Only yesterday, Chairman Burns

appeared before the Committee on Banking, Housing and Urban
Affairs of the Senate to report on the condition of the national
economy and the course of monetary policy.
To attract individuals of the highest qualification to
the Board and to permit the Chairman and other Members of the
Board to be accorded appropriate recognition status in inter­
national financial circles, it would appeer only logical to place
the positions of the Chairman and Board Members at the proposed
Executive Schedule Levels.

This is obviously the intent of

H.R. 2387 and a step which I believe is long overdue.
I might also point out a characteristic that distinguishes
Board Member positions from those of other Government officials.
First, Board Members are generally appointed for a term of 14
years--a period certainly constituting a major portion of an

- 13 individual's professional career.

To attract an individual to

Government service for this length of time, particularly an
individual with acknowledged expertise in one or more of the
areas of endeavor specified in the Federal Reserve Act, Congress
should compensate such individual at a realistic and equitable

I have reviewed the service records of Board appointees

for the 10-year period 1966-1976 and found that in that time,
of the 12 individuals appointed to the Board, five--all 50 years
of age or younger--resigned prior to completion of their term of

I am convinced that a primary factor contributing to

the early departure of these individuals, was the financial
strain they faced as Board Members.
I would make a final observation regarding the treatment
accorded the position of Chairman by this legislation.


Chairman's responsibilities as the Board's "active executive
officer" (Section 10 of the Federal Reserve Act), his role as
Alternate Governor to the International Monetary Fund, his
position as Chairman of the Federal Open Market Committee, and
other uniquely sensitive duties he performs, particularly w ar­
rant his classification at Level I of the Executive Schedule.
I wish to add, however, a word of qualification to this state­

While on each occasion that Chairman Burns has expressed

- 14 himself on this subject, he has strongly endorsed the principal
of increased salaries for the Chairman and Members of the Board,
he has also stated quite clearly that he did not wish to benefit
personally from a higher salary for the Office of Chairman.
Accordingly, he has requested that any new salary level estab­
lished for the Office of Chairman become effective with his

The Chairman has asked that this point of personal

reservation be placed on the record of this hearing.
My statement supporting favorable action on H.R. 2387 has
stressed the substantial character and scope of responsibilities
of the Chairman and Board Members and the increase in the volume
and complexity of these responsibilities in recent years.


same rationale would, in my judgment, appropriately apply to the
positions of Director and Deputy Director of the Office of
Management and Budget.

The responsibilities of these officials

relating to preparation and administration of the annual budget,
formulation of the Government's fiscal program, coordination of
Executive Department views and recommendations on legislati
matters, and development of improved coordinating and administra­
tive procedures within the Executive Department, are highly
significant in nature and greatly impact upon the performance
of the entire Executive Branch.

It would thus seem entirely

- I n ­
appropriate to compensate the Director at Level I of the
Executive Schedule, and his Deputy at Level II.