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For r e l e a s e at 10 00 a,ni Central Standard Time December 15, 1962 CHORES AND CHOICES Remarks o f Harold King Member o f the Board of Governors o f the F ederal Reserve System before the 19th Annual Convention o f the N ation al A s so c ia tio n o f Home B u ild e rs Ch ic a g o , 111ino i s December 15, 1962 CHORES AND CHOICES When I learned that your convention was entitled "Prophets and Profits,11 I wondered if I had been invited to speak in error# I am no "prophet.11 They are nonexistent in the Federal Reserve as far as I know. Any theorem which claims inherent powers of prophecy for any central bank has at least one serious flaw. Such a theorem at tempts to clothe a real myth in the cloak of science. It is common place to witness a compatible marriage of myth and art; but the nature of science ipso facto bars the entry of mythology much in the same manner that solid rock does not absorb air. The ravages of time may wear a rock thin, or force may pulverize it, but it is still rock -just smaller pieces -- with the air of mythology still surrounding each particle but unable to get in. The bane of all mythology is the light of day, which simply dissolves fantasy, leaving only empty space -- with perhaps a residue of haze. I am afraid I have dignified the concept of prophecy beyond its importance. Certainly a few words on a more substantive subject p-r-o-f-i-t-s would be in order. We of the Federal Reserve realize that the margin of profits must be adequate for optimum performance of a free market society; but we simply do not possess the power to assure adequate profit margins for your industry — or for any industry. I hope I have not disappointed you too greatly here at the start because I do intend to talk of a few things which I believe you will find interesting, if not helpful. I am happy that I was not given an exact time limit for my presentation. And while we both hope my remarks will not be too lengthy, I will make no such promise. - 2 - My subject today will be "Chores and Choices." Specifically, I will first describe a few of the routine procedures of the Board of Governors. With that as a background, I will then make an effort to give you a closer look into our method of policy formulation. This latter effort, I hope, will validate my use of the word "choices" as descriptive of this process. First, I would like to give you a few simple facts which, even though they are simple, I doubt are widely known. The Board of Governors of the Federal Reserve System is composed of seven members appointed by the President and confirmed by the Senate. of a full term is 14 years. The length On occasion, an appointee fills an un expired term and then under law may be reappointed to a full term. However, once an appointee has been appointed to a full term, he is ineligible under the law to be reappointed to another term. The Chairman of the Board is designated by the President and his term as Chairman runs for a period of four years, even though the term as Chairman is not concurrent with his appointment as a Board Member. Generally, there has been rather wide diversity of backgrounds and geographic roots among Board Members. While a Board Member does not represent any certain Federal Reserve district, of which there are 12, the law does prescribe that no two Board Members may serve at the same time from the same district. This assures wide geographical spread, and the responsibility for providing diversity of background is one that the President exercises. - 3 “ Our main chore, which i s a d a il y one, i s the chore o f d ig e s t in g as much economic inform ation as we can. Some o f our inform ation comes to us in the form of memoranda from our s t a f f , which as you probably know i s widely recognized as the b e s t gath erer o f economic information in the IJpiivd S t a t e s -- p o s s ib ly in the world. a l l of the news media, as do a l l o f you. Then we have a c c e ss to Another type of inform ation which we endeavor to secure i s what we c a l l "stra w s in the w ind.11 Each in d iv id u al Board Member n a t u r a lly has h is own sources for t h is type of inform ation. Undoubtedly t h is i s a fo rtu n ate th in g , because each o f us gath ers b i t s o f inform ation that might be u s e fu l in d i s c u s s io n . You can be sure we do not n e c e s s a r i l y b e lie v e everything we hear. Another d a il y chore which we have i s attendance a t Board m eetings. morning. O rd in arily we meet fiv e days a week a t 10 o 'c lo c k in the In the b e st t r a d i t i o n s o f c e n tr a l banking, the s t a r t of the meeting i s punctual. A ll items to be considered a t a. Board meet ing appear on the agenda for that d a y 's meeting. In advance o f the appearance o f a given item on the agenda, our s t a f f w il l have fu rnished each Board Member with the papers and inform ation that are n e c e ssa ry for adequate c o n sid e ra tio n o f the m atter. Perhaps i t would be i n t e r e s t in g for you i f I would mention a few o f the d i f f e r e n t types o f items which we consider in Board meet in g s. Bank merger a p p lic a t io n s in which the r e s u l t i n g bank i s a S ta te bank and a member o f the F ederal Reserve System are a ssig n e d by law to our Board fo r determ ination. Other bank merger d e c is io n s are rendered by other bank su p erv iso ry a g e n cie s. A ll a p p l i c a t i o n s for the formation - 4 - or the expansion o f bank holding companies are assig n ed to our Board for d e c is io n . Many o f these d e c is io n s are very d i f f i c u l t ones. These d e c is io n s form a framework into which the future development o f our banking str u c tu r e i s channeled. m atter. Obviously, t h i s i s a very important Other items th at appear on our agenda r e l a t e to our r e s p o n s i b i l i t y to e x e r c is e general su p e rv isio n over the 12 F ederal Reserve Banks, t h e ir 24 branch banks, and the more than 20,000 employees of the System. The devotion to s e rv ic e th at these personnel d is p la y and the almost complete lack o f dishon esty in the handling o f v a s t amounts o f money i s a sto r y that should be t o ld . Another r e s p o n s i b i l i t y of the Board i s to render re p o rts on proposed l e g i s l a t i o n th at would a f f e c t the banking system. One chore th at we have as Board Members, but which i s not a d a i l y chore, i s the attendance a t frequent meetings o f the F ederal Open Market Committee. This Committee i s composed o f the seven members o f the Board p lu s fiv e o f the twelve F ed eral Reserve Bank P r e s id e n ts . The members who are P re sid e n ts o f the F ed eral Reserve Banks r o t a t e as members under the law. Because there are seven Board Members and fiv e Bank P re sid e n ts does not mean th at the Board dominates the d e c is io n s o f t h i s Committee. As f a r as I can t e l l , there tends to be j u s t as much o b je c t iv e d iffe r e n c e o f opinion among Board Members as there i s among people in g e n e ra l. The e xact f i e l d o f r e s p o n s i b i l i t y th a t Congress a ssig n e d to t h i s Committee i s th at o f engagirtg in open market op era tio n s as one means o f in flu en cin g bank re se rv e p o s i t i o n s . The Congress allowed the Federal Open Market Committee g re a t l a t i t u d e in the e x e r c is e - 5 - o f i t s judgment in the d isch arge o f t h i s fu n ctio n . There are some who think we do not do enough in t h i s f i e l d , and there are o th ers who think we do too much. The one tru th th at I b e lie v e can be s t a t e d about these o p eratio n s i s th at we do the b e s t we know how. The meetings o f t h i s Committee provide an o ccasio n for each member o f the Board and the in d iv id u a l P re sid e n ts o f the F ed eral Reserve Banks to make p o lic y recommendations for the next few days ahead. Fre quently i t i s s u r p r i s i n g to find with whom we are in agreement on a p a r t i c u l a r day, o c c a s io n a lly having d i f f e r e d in judgment with some o f the same members o f the Committee on previous days. Our minutes are not kept verbatim but are w ritte n in con s id e r a b le d e t a i l . Even though these minutes are not p u blish ed, they do a f f o r d each member o f the F ederal Open Market Committee an oppor tu n ity to record h is p o s it i o n on every m atter considered. Before these minutes are f i l e d , each member has an opportunity to examine them and make su g g e stio n s fo r g r e a te r accuracy as he deems a p p ro p ria te . The minutes o f our Board meetings are kept under the same general procedure. A f i n a l type o f chore th at I w i l l mention i s what I r e f e r to as o u tsid e c o n t a c t s . We have many o f t h i s type, one example o f which would be l i a i s o n with other Government ag en cie s and the Treasury. An o u tsid e co n tact which I have found q u ite enjoyable i s the one o f speak ing engagements. Board Members re c e iv e t h e i t i n v i t a t i o n s to speak in t h e ir in d iv id u a l c a p a c i t i e s , and we are never a ssig n e d the ta sk o f speaking anywhere. - 6 - Now for a few words about the framework within which we make our choices. The Congress, in what I believe to be its wisdom, granted the Federal Reserve a wide degree of latitude within which it might conduct its affairs. The System is not part of the Civil Service, although terms of employment correspond. Because of the nature of the authority which Congress placed in the hands of the System, there is no need for the appropriation of Government funds for the operation of the System, In fact, the excess income of the System, which is largely derived from earnings on System holdings of United States Government securities, is transferred to the Treasury even though this is not required by law. Policy in this regard has been shaped by an awareness of a lack of need to accumulate funds ad infinitum. In its desire to assure the Board of Governors a maximum amount of freedom and independence within the Government, Congress exempted the Federal Reserve from supervision by the General Accounting Office. As a matter of fact, the auditing procedures that are used in the Federal Reserve are very extensive, even to the point of em ploying private auditing firms. Each board of directors of the 12 Federal Reserve Banks is free to select and, as a matter of fact, does select any auditing firm it believes desirable. At the Board level this has also been done for a number of years. All of this freedom within which we function places a strong accent on objective decisions -- or, to make my point clearer, I might say objective choice. One of the perpetual choices that face a central bank is the one that relates to publicity of actions and policies. The Federal ... 7 - Reserve Act r e q u ir e s a y e arly re p o rt o f p o lic y a c tio n s from the Federal R eserve, but Congress l e f t p u b lic a tio n o f any other inform ation to the Board o f Governors. Our re lu ctan ce a t times to give more d e t a i l e d in formation i s based on apprehension th a t m is in te r p r e t a t io n could m islead many people. A n ece ssary prelude to wider and more current dissem in a tio n o f our d e c is io n s and p o l i c i e s i s the need fo r a more general under stan din g -- among a l l Americans -- not only o f the powers but e s p e c i a l l y the li m i t a t io n s o f Federal Reserve a c tio n . Now th a t I have talk ed about the freedom a sp e c t s o f Federal Reserve c h o ic e s, i t seems in order to a ls o t a l k about a few things th at l i m i t our c h o ic e s. The most frequent c o n s t r a in t with which I tan gle i s the one o f circum stances. And here i s where our chore o f d i g e s t i n g a l l a v a il a b l e information becomes important, because i t puts a d d it io n a l l i g h t on the circum stances that surround our choice on each o ccasio n . We might be furth er lim ite d by our p erson al p h ilo s o p h ie s, but I am convinced that your se rv an ts in the Federal Reserve System make determined e f f o r t s to temper t h e ir p erson al p h ilo so p h ie s with the p erso n al p h ilo so p h ie s o f o th e rs. I t i s unavoidable, even d e s i r a b l e , th at we a tta c h g r e a te r s i g n i f ic a n c e to the d i f f e r e n t views o f o th ers which are rooted in p erson al experience than we do to views without t h i s type o f foundation. I hope I have given you a more illu m in ated view o f our i n s t i tu tio n . We make no claim o f p e r fe c t io n . recognize our s i n s . We t ry to be wise enough to And I hope you have gathered from my remarks that divergence o f opinion within our Board - - o r w ithin the e n t ir e F ederal - 8 - Reserve System -- i s wide. Perhaps our re lu ctan ce to p u b lic iz e our disagreem ents m isle ad s the p u b lic in to b e lie v in g th at we are a l l o f one mind; but to wash our lin en in p u b lic , we b e l i e v e , would tend to l i m i t our i n s t i t u t i o n ' s a b i l i t y to render maximum s e r v i c e . Could I ask you to r e t a i n j u s t one thought from what I have s a id today? I f I might, I ask you to remember: while we perform our chores and make our c h o ic e s , we s t r i v e to always be ready and w il l i n g to make our maximum c o n trib u tio n to the so lu tio n o f problems within our assig n e d sphere o f r e s p o n s i b i l i t y . as th at o f a l l humans: Ours i s the same en d le ss chore to seek the answer to the simple qu estio n : What i s p o s s i b l e ? Even though we must m aintain a constan t v i g i l as to the approach o f economic storm s, we should a l l keep our hopes high. Such an outldok encourages oth ers to find an understanding o f l i f e which o f f e r s them a f a i r chance to d isc o v e r for themselves th at be l i e f i s a power o f un believable fo rc e . Speaking o f b e l i e f , I b e lie v e I have given you l i t t l e or no evidence th a t I might be a prophet; and i t w i l l be a s a t i s f a c t o r y day fo r me i f I have encouraged your i n t e r e s t in p - r - o - f - i - t - s In ste ad .
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