View original document

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

Statement of Frederick L.Deming, President, Federal Reserve
Bank of Minneapolis, before the Subcommittee on Domestic
Finance of the Committee on Banking and Currency, House of
_______________Representatives, February 4, 1964______________

Mr. Chairman and Members of the Committee:
It is a pleasure to appear before you this morning.

I want to

thank you for your invitation and for the opportunity to join with you in
your examination of the Federal Reserve System.

I hope that what I have to

say about the proposals contained in H.R. 9631, H.R. 9685, and H.R. 3783
will be of some small help to you in your deliberations.
I have been associated with the Federal Reserve System for almost
twenty-three years, first as an economist with the Federal Reserve Bank of
St. Louis, then, successively, as director of research and First Vice President
there, and, since April 1957, as President of the Federal Reserve Bank of

Twenty-three years is a long time, long enough, it seems to me,

so that I can claim a familiarity with the Federal Reserve as a working

I believe that the Federal Reserve System, as presently organized,

is an effective instrument of national economic policy.
I do not contend that the Federal Reserve System - although fashioned
by intelligent, dedicated men - is perfect.

But then neither am I sure that

"perfect1 is a word which can be meaningfully applied to institutions.


question is not whether a particular institution is perfect, organized in
the best possible way.

This is something no one can answer0 But whether a

particular institution works well enough, whether it discharges its responsi­
bilities adequately, this is something that can be determined.

And for the

Federal Reserve System, the answer must, I think, be that it has and does.
Nor would I claim that all decisions made by the Federal Reserve
System have been perfect.

Certainly reasonable men can differ about whether




monetary policy - of the last few years, the postwar years, or the 50 years
since 1913 - has always been the most desirable and effective.
this is not the question at issue here.

But again,

What is being considered here is

whether a differently organized or structured Federal Reserve System would
have turned out, or will turn out, a better monetary policy.
that I very much doubt.

It is this

If monetary policy has at times been inappropriate,

it is not, I submit, because of faulty organization or structure.
I want to address myself first to certain major aspects of the
institutional character of the Federal Reserve System.

When the System was

created 50 years ago it was a new kind of central banking institution, par­
ticularly adapted to the American political and economic scene and reflecting
the American genius to meet a need in a pragmatic way without being overly
concerned about what I might call "organization chart logic".

The Federal

Reserve System was designed to be a federal system - a unique blend of cen­
tralized and regional functions and responsibilities.

It was designed to

carry out a clearly public purpose but was organized so as to draw strength
from the private sector - a unique blend of public and private.

And it was

designed so as to be shielded from day-to-day political pressures but made
responsible to the legislative branch of Government through what Chairman
Martin has aptly called a "trust indenture".
It seems to me that two striking facts stand out when one studies
the history of the Federal Reserve System.
changing institution and it never has been.

First, it is not a static, u n ­
It has been changed by amendments

to the Federal Reserve Act and by other statutes, some of these changes being
of major proportion and some of minor scope.

Within the framework of the

laws it also has evolved over the years, changing as its environment has
changed, and it will undoubtedly change further as the years go by.





evolutionary changes have been both with respect to structure and to central
banking techniques.
Second, despite all of the changes, both statutory and evolution­
ary, the basic original concepts of federalism or regionality, of the blend
of public and private, and of the desirability of insulation from politics
have been preserved.

And I might comment that this reflects the American

genius for making institutions work.

Changes are sought for practical rea­

sons - usually when history has demonstrated a need for them but sometimes
it may be clearly seen that future developments will call for them.


are not made just to tidy up the organization chart.
In my judgment the reasons underlying the concepts of federalism,
of drawing strength from the private sector for a public institution, of
shielding the central bank from politics, are as valid today as they were
in 1913.

Therefore, I shall speak in opposition to most of the proposed

legislation contained in the bills I referred to earlier.
A Regional Federal Reserve System
It is fashionable to say nowadays that regionalism is less strong
in the United States than it was in 1913, that this is particularly true of
money and credit, and that monetary policy must be national in concept and

I agree in part with these points but not with the often asserted

conclusion that the regional nature of the System is outmoded.
As every member of the Congress knows full well, the United States
is composed of regions which have at least as many differences as similari­
ties in conditions and problems.

The Ninth Federal Reserve District with its

wide areas, its relatively small but very vigorous population, its heavy
dependence on farming, lumbering and mining, its hundreds of small banks, and




its many other distinctive characteristics, simply is not the same, nor
has it the same problems in degree or kind as the other areas of the
United States.

Rapid transportation and communication, greater mobility

of people and the rise of non-resource based activity may have made it less
isolated but have not greatly lessened its individuality.
I do not state these points from a narrow sectional attitude.
I note them to underline the fact that national developments reflect the
sum (or sometimes the remainder) of regional developments and that national
averages can conceal wide regional variations.

Therefore, in my judgment,

it is important to recognize that regional variations exist and to take them
into consideration in formulating national policies so that such national
policies can serve most fully the purposes for which they are designed and
thus the true national interest.

This, I believe, is federalism in its

best form.
I should like to comment now on those proposals, contained in
H.R. 9631, which if enacted would in my judgment effectively destroy the
regional character of the System.

It is proposed in H.R. 9631 that the

Federal Open Market Committee be abolished and responsibility for the con­
duct of monetary policy, and in particular open market operations, be trans­
ferred to a newly constituted Federal Reserve Board.

It is proposed, in

other words, that Reserve Bank presidents be relegated to advisory roles.
Now, being a Reserve Bank president, I cannot address myself to these pro­
posals - and more specifically, oppose them - without running the risk of
appearing to be serving my own narrow interests and of being immodest as

Naturally, I should like to avoid appearing so, but the regional

character of the Federal Reserve System is, in my view, so important, so
worthy of being preserved, that I must risk appearing selfish and immodest.




I personally do not believe that my opposition to the proposals of H.R. 9631
is narrowly motivated.

I hope you will believe me in this.

May I begin by pointing out - although I am sure you are aware that Reserve Bank presidents, as members of the Federal Open Market Committee,
take the standard oath of office for public servants, swearing without
reservation to support and defend the Constitution of the United States.
Thus, Bank presidents are by virtue of the oath they take public servants.
So it matters little, at least insofar as the conduct of monetary policy is
concerned, how they are elected.
The proposals of H.R. 9631 to which I address myself here would,
as I have said, effectively destroy the regional character of the Federal
Reserve System.

They would, in effect, take from Bank presidents their voice

in monetary policy deliberations, and in so doing would make the continuing
regionalism of the System without meaning.

To be sure, Reserve Bank presi­

dents would still be available as advisers to the newly constituted Federal
Reserve Board.

But an adviser is not the same as a participating member of

the Federal Open Market Committee - either in the Committee room or back
in the District.
M y point is simply this:

Reserve Bank presidents, by virtue of

the positions they occupy and the talents they bring to their tasks, can
and do make significant contributions to the economic welfare of the country;
but they will be able to continue effectively doing so only if they remain
as they are, voting participants in monetary policy deliberations.
Reserve Bank presidents, spending most of their time in their
Districts, are able, collectively, to bring to monetary policy deliberations
a thorough knowledge of what is going on around the country.

They are able

to bring a detailed knowledge of regional economic developments.

This is




extremely important, for as I noted earlier and as you well know, aggregate
economic statistics do not always tell the whole story, and information
about regional developments is not so abundant that we can afford to dispense
with first-hand impressions.

Reserve Bank presidents also are able to bring

to monetary policy deliberations a knowledge of what I call "grass roots
thinking11, what all manner of individuals are thinking about current economic

In the course of their working days, Bank presidents talk, not

just as is sometimes supposed with commercial bankers, but with business and
labor leaders generally - and, I might add, with a good many less auspiciously
placed individuals.

And in so doing they get a feel for what is worrying

people around the country, and for how they view current economic problems
and policies; they get a feel, in short, that is extremely valuable in
deliberations about monetary policy.
Reserve Bank presidents also serve as educators.


as they do in all manner of discussions, formal and informal, in their districts,
they are able to explain System policies and in so doing gain increased accept­
ance for what has got to be done.

Bank presidents are, then, in a very real

sense two-way communication links between their Districts and Washington.
As indicated before, it can be argued that as consultants or
advisers Reserve Bank presidents could still perform as they do currently.

But less well, I think.

You simply cannot lessen their role in

monetary policy decisions - and this is what the proposals of H.R. 9631
would do - without making them less effective in their jobs.
One final point should be noted here.

The presidents have brought,

via their staff briefings, a variety of well-informed, indeed expert, opin­
ions about monetary policy to System deliberations.

In part they have been

able to do this because they have been able - as individuals and as participants




in the monetary policy process - to attract capable staffs of economic
experts, staffs which nicely complement the B o a r d 1s very able staff.


however, you cannot lessen the role of Reserve Bank presidents and still
expect to attract the same calibre of men as you are currently getting, nor
expect that Bank presidents will be able to gather around them men of the
quality as those who currently serve.
To sum up, I can only say that I believe a regional Federal Reserve
System - guided not only by Governors but by Bank presidents as well - is a
stronger System than a centralized System would be.

And I say this fully

aware of the dedication and knowledge which members of the Board of Governors
bring to their assignments.
talent it can get.
tial for such.

It is just that every organization needs all the

There is strength in diversity of opinion, or the poten^

And there is strength in a thorough knowledge of what is

going on and being thought f back home”
Public and Private Blend
I turn now to the second aspect of the S y s t e m ’ institutional
character - the unique blending of public and private strengths.


ally, I shall comment on H.R. 3783 in which it is proposed to retire Federal
Reserve Bank stock, but I want to range a bit more widely in my general
Part of the strength of the Federal Reserve Banks is derived from
the fact that they are structured in an understandable, a conventional,
manner with capital, with balance sheets, with boards of directors, and so

More of their strength comes from the clearly discernible interest and

cooperation of the member banks, which reflects their holdings of Federal
Reserve Bank stock and their participation in the selection of directors of
the Banks.

Still more of their strength comes from the intelligent, informed




and interested, and I might say almost dedicated, attention given their
assignments by these same directors.
From my point of view it would be a mistake to change the insti­
tutional characteristics of the System in an attempt to create a different
"image1 when the present " image1 is both comprehensible and acceptable and
when the institution seems to be working well.
Much has been made of the fact that the member banks elect six
directors and that the Board of Governors appoints only three for each
Reserve Bank.

From my personal observation of the directors at two Reserve

Banks, Minneapolis and St. Louis, I would say that all directors regard
their positions as public trusts and take their oaths of office with that
point of view.

None conceives of himself as representing a special group,

but as bringing to the Bank experienced management counsel and particular
knowledge of economic developments in his special geographic area or his
special fields of competence.

They take their positions seriously, they

bring their management experience to bear on Reserve Bank operations, which
is one reason we operate efficiently and economically, and they provide a
considerable body of economic intelligence.

In point of fact, we at

Minneapolis use the alumni from our bank and branch boards as one regular
source of economic information.

The alumni do not, of course, participate

in the regular work of the board of directors nor are they consulted on
credit policy matters that properly are the province of current directors.
But as a source of information on current and prospective developments they
are used extensively.

As Chairman Martin has observed many times, the

directors of the banks and branches constitute a network of experience and
intelligence that cannot be duplicated anywhere else in the world.




Against this background let me comment specifically on the
proposal to retire the Federal Reserve Bank stock.

Perhaps I should say

at once that I recognize that ownership of Federal Reserve stock does not
carry with it the ordinary rights of stock holders.

I think the member

banks thoroughly understand this point; I, at least, have never heard a
member banker assert that he had such rights by virtue of the stock owner­

I might say further that I recognize that the Federal Reserve Banks

do not need capital stock to operate.

And finally, I realize that retire­

ment of the stock probably would produce some additional income for the
Government since there would be no dividend payments to make on the stock.
After considering all of these points I conclude that there is no
pressing reason to retire Federal Reserve stock and that such a move might
result in real disadvantage.
public control of the System.

There is no real question as to the fact of
The presence of the stock, and of the surplus,

does not operate to inhibit the necessary actions of the central bank.


finally the out-of-pocket cost of member bank stock holdings in the Reserve
Banks is not great and probably is worth its cost.
Various assumptions and methods of estimate may be employed to
come to a figure on net Treasury gain in receipts if all present Federal
Reserve Bank stock were retired.
the vicinity of $8 million.

M y own estimate is that the figure is in

While this sum is far from insignificant (it

is somewhat larger than the total annual expenses of the Federal Reserve
Bank of Minneapolis) it seems to me to be well spent.

It certainly is no

deterrent to membership in the System; indeed in a way it helps to reduce
the inequities between reserve requirements of member and nonmember banks.
I think that the elimination of the stock might well be regarded
as a change far more radical in its implications than simple arithmetic


might make it seem.



W e presently do have good cooperation between member

banks and the Federal Reserve B a n k s „ And since in this country both
monetary policy and bank supervision depend for their effectiveness, at
least in part, on cooperation, this works to benefit society as a whole.
The System, I believe, enjoys a reputation for good work; its "image" is
a good one.

W h y should we jeopardize these things for what would seem to

be relatively little gain in revenue to the T r e a s u r y .
Insulation from Politics
I come now to the third aspect of the S y s t e m 1s structure that I
regard as important, one which also has been preserved through the years its separation from day-to-day political pressures.

M y comments here are

partly general, but also run specifically to part of H.R. 9631 and to
H.R. 9685.
As I see it, the framers of the Federal Reserve Act and subsequent
Congresses deliberately built into the System an insulation from the day-to-day
hurly burly of politics.

I believe they did this partly because they read the

record of history which indicates the wisdom of shielding the money power from
the sovereign*s untrammelled use.

But they did this also in order that mone­

tary and credit policy could be formulated and implemented flexibly in response
to changing conditions.

One of the great virtues of monetary policy is that

it can move quickly; the Congress recognized that legislative action on m o n e ­
tary policy normally could not be taken with necessary speed.

Therefore, it

used, as noted earlier, a form of "trust indenture" in delegating to the
System certain of the money powers the Congress constitutionally holds.
The Congress certainly did not expect the System to be so inde­
pendent as to destroy the unity of Government, and the System has never




regarded itself as independent in that sense.

I think it obvious that in

a democracy monetary policy cannot be made in disregard of the opinion of
a Government elected by the p eople« The System has reported regularly to
the Congress, has welcomed investigative studies such as this one and has
tried to pull its weight as a part of Government, as a public institution
with considerable responsibilities„
In providing this insulation, the Congress has written into the
statutes various safeguards»

Among them it established long terms for m em­

bers of the Board of G o v ernors„

Among them it gave the Board power to con­

trol its own budgets and those of the Reserve Banks and to examine and
supervise the Banks.

It did not make the System subject to appropriations

and after 1933 excluded the Board of Governors from audit by the General
Accounting Office.

The Reserve Banks have never been audited by the

Comptroller-General; the Board has always carried this responsibility.
The proposal in H.R. 9631 would provide for audit by the General
Accounting Office; the proposal in HoR. 9685 would provide for covering
most System income into the Treasury and for appropriations to meet Federal
Reserve Bank expenses not covered elsewhere.
I oppose the appropriations proposal on two primary grounds:
one, it would weaken the insulating features to which I referred earlier;
and two, it would more likely than not reduce Federal Reserve Bank efficiency
in operations.
M y reasoning on the second point is as follows.

Presently the

Reserve Banks are efficiently operating institutions with considerable
consciousness of costs and with sufficient flexibility in revenues so as
to provide no incentives to over-budget in order to have funds to meet
unforeseen increases in necessary expenditures„

Appropriations financing,




in contrast, by the very nature of the process tends to have built-in
rigidities which on the one hand almost require budgeting for contingencies
and on the other may lead to at least temporary curtailment of necessary
activity in case the contingency funds are inadequate to meet developing but
unforeseen needs.
The Reserve Banks operate in their local communities under condi­
tions which make them competitive, but no more than necessarily so, with
other enterprises for employees.

Their budgeting processes are tightly

controlled. There is no incentive to spend up to budgeted amounts; the
incentive, on the contrary, is to watch costs and produce savings.


Reserve Banks compete among each other to produce lower costs and improve

The record indicates that they have done so in general.


example, the Minneapolis Bank today has 6 per cent fewer employees than it
had three years ago despite a continuing rise in the volume of work done.
As another, more concrete, example, the cost of the Withheld Tax operation
at Minneapolis is today less than 1 cent per receipt greater than in 1957.
Postage costs alone have risen more than the total per receipt cost in­
crease; clerical salaries in the Twin Cities have increased almost 20 per
cent in that period.
I also oppose the audit proposal on two grounds: one, it too
would weaken the insulating features noted above; and two, it is unneces­
sary and duplicative and therefore would be unduly expensive.
I do not believe it necessary to state in detail the reasoning
underlying the above points.

Chairman Martin has already outlined to you

present Reserve Bank and System audit procedure.

The Board has the respon­

sibility for such audit and examination of the Reserve Banks as it needs to
carry out its supervisory responsibility, and it exercises that responsibility


thoroughly and completely.



The Congress deliberately removed the Board

itself from General Accounting Office audit some 30 years ago.
Concluding Comment
I am just a little older than the Federal Reserve System and I
have spent almost half of my life in it.

I have worked in research, in

operations, in credit policy and in management,

I have seen the System

change to meet changing conditions, through evolution and through change
in law.

I believe it is better fitted for its job today than it was when

it was createdo

But its creators were wise men who saw that this institu­

tion could derive basic and enduring strength from its federal structure,
from its ability to draw upon the private sector to aid its public purpose,
and from its insulation from political pressures.
the System will not suffer loss of that strength0

I hope sincerely that