Full text of Statements and Speeches of Eliot J. Swan : Statement before the Subcommittee on Domestic Finance of the Committee on Banking and Currency, House of Representatives

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Statement of
Eliot J. Swan, President, Federal Reserve Bank of San Francisco,
before the
Subcommittee on Domestic Finance of the
Committee on Banking and Currency, House of Representatives
_ _ _ _________________ February kf 196*1
_____

Mr* Chairman and Members of the Committee:
Several bills have been introduced to modify the present structure
and method of operation of the Federal Reserve System.

It would be very

misleading to examine these one by one in an isolated context, and I cannot
express too strongly my hope that this Committee will adopt the broad approach.
It is the only one that can be fruitful.
What is the proper framework for examining the proposals? 1 submit
that .it is "What kind of central banking system does the United States really
want, and do these proposed changes further this objective or hamper it?"
I am sure that we all want a central banking system which will assure
our nation a smoothly functioning payments mechanism, provide a flexible supply
of money and bank credit capable of accommodating the needs of economic growth
while at the same time preventing inflation, and, finally, support the prestige
and acceptability of the dollar throughout the world*

The question, then, is

how can these objectives be best achieved.
Being aware, on the one hand, of the fatal attraction to Government of
temporary gains from the debasement of the currency, and, on the other, of the
human distress in times of financial panic to which an inflexible monetary system
had contributed prior to 1913> the Congress recognized that these objectives
could best be achieved, in accordance with the basic philosophy of our form of
Government, by an ingenious system of checks and balances not unlike those
found in our Constitution.

Accordingly, the Federal Reserve System was designed

so that it would work, in the public interest, closely with the banking and
business community but not dominated by it, and closely with the Federal
 Government,


but one step removed from the daily pressures of political forces.

No central bank, however, has the right to be obdurately opposed to
its Government.
ones.

It can advise against bad fiscal policies and support sound

Moreover, it can try to educate the public on the importance of sound

policies and on the consequences of unsound ones.

But no central bank, in the

final analysis, can or should block the Government from a course of action which the
Government is firmly resolved to undertake notwithstanding advice to the contrary.
If a central bank is to be effective in carrying out the many delicate
domestic and international responsibilities entrusted to it, what does it need in
order to do the job?

Obviously, the first thing it needs is public confidence in its

integrity, its competence, and its objectivity.

It roust be the voice neither of

an incumbent Administration nor of private interests, but it must have trusted
access to the views of both, and there must be respect for its views on the part
of both.

It must be recognized by both as being more concerned with the basic

soundness of the nation's economy than with short-range political or private
objectives,
The two things I wish to emphasize are that the Federal Reserve not only
must have a well-informed and objective point of view; perhaps even more important,
it must be widely recognized as having such.

Anything that raises persistent

doubts in the mind of the public about this capability will impair the Federal
Reserve's effectiveness.
It is in this light that the proposals to appoint the Secretary of the
Treasury Chairman of the Board, to eliminate the Reserve Bank Presidents from the
Open Market Committee, to retire the capital stock held by the member banks, to
have the G.A.0. audit the Federal Reserve, and to subject the Federal Reserve to
Congressional appropriations procedures, must be examined.

Would they correct any

real shortcoming of the Federal Reserve System and would they increase confidence
in the System at home and abroad, or would they be regarded as an attempt to make
the System highly responsive to short-run political pressures?



Mr. Ewan's statement.

3•

You have heard opinions from

Board Members and other Presidents

of Reserve Banks on these proposals, and I shall not offer my comments on
all of them since the ground has largely been covered.

However, I should

like to comment specifically on the proposal to have the Federal Reserve Banks
audited by the G.A.O.

In my opinion, there are three issues involved.

First,

are the Federal Reserve Banks presently subjected to a close scrutiny of their
expenses, and are they compelled to cease any expenditures or practices deemed
inappropriate to the proper conduct of their responsibilities?

Second, are

the policy criteria established for judging the expenditures determined by
men whose judgment is competent and whose integrity and prudence are unquestioned?
Third, are the men who determine the policies accountable to any higher policy­
making body which has authority to review their performance?
I hope that no one disputes that the Federal Reserve Banks are closely
upervised and audited,

and are required to observe the criteria established by their

boards of directors and by the Board

of Governors.

This, then, takes us to the

second issue, namely, whether the judgment both of the boards of directors and
of the Board of Governors as to what constitutes a proper expenditure is sound.
But "sound" in relation to what?

Obviously, "sound" in relation to the particular

needs and responsibilities of a central bank, including the need for having close
and direct relationships with many groups at the grass-roots level. I am not
aware of significant evidence that either the

Board of Governors or the

directors of the Reserve Banks have permitted the Banks to be extravagant.

Finally,

the Board and the Reserve Banks certainly are accountable to a higher policy­
making body, Congress, which in hearings such as these has full

opportunity to

review the activities of the System.
Audit by another agency would add another layer of supervision and
cost.

Moreover, it would inevitably lead to conflicts as to what types of

activities and outlays are necessary to achieve the objectives of monetary policy



Mr.

Swan's statement.

and to perform the operating duties of the central bank.

The determination of

expenditure policy, as these hearings have indicated, should not be a function
of the G.A.0.

In this connection, it is relevant to note that, in the case of

Government agencies not having the degree of autonomy of the Federal Reserve
System, G.A.O. audits have reference points established by Congressional action
through the authorization and appropriations process to guide them.
the case with the Federal Reserve, nor should it be.

This is not

A central bank, to be

effective, must have a certain amount of independence and autonomy within the
Government, and, by its very nature, this will involve occasional, differences in
the criteria by which certain expenditures will be judged.
Some of the expenditures and some of the differences in practices of
the individual Federal Reserve Banks mentioned

in these hearings are a reflection

of the fact that the System does in fact have a certain degree of independence in
exercising its judgment.

In our operations, there is a real advantage in permitting

regional variations which reflect both differences in underlying circumstances and
the fact that twelve Reserve Banks are each trying continuously and competitively
to develop more efficient and less costly operating procedures.
important, they reflect the fact

But, even more

that the System is trying to keep in close touch

with people at the grass-roots level, so that it may be well informed on regional
as well as national problems and, at the same time, effectively inform the public
of the significance of a healthy dollar for a healthy economy.
As a consequence, it is most difficult to visualize the System being
placed under G.A.O. audit without the System's policy responsibilities being
seriously threatened. (In reaching this conclusion, I have no question whatever
about the integrity and technical competence of the G.A.O.) Thus, the proposal
that the G.A.O. audit the Federal Reserve System is very closely

linked with the

one to bring the Board and the Banks under Congressional appropriations




^ * Swan *s statement.

5•

procedures, because then Congress would establish the expenditures criteria
the G.A.0. would need.

This, I believe, would undermine the independence of

the Federal Reserve and its ability to formulate and execute monetary policy
one step removed from the political arena.

The prestige of the dollar and

confidence in our monetary policy would suffer a dangerous blow.
Over the past fifty years, we have developed a central banking structure
and a delicate but workable balance between independence and responsibility
to the Government that are highly respected at home and abroad.

This, in turn,

has been a source of great strength for the dollar and for our economy as a
whole.

In the absence of demonstrable and significant deficiencies, we should

not risk tampering with it.