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Remarks of Vice Chairman Robertson at Meeting of Chairmen and Deputy Chairmen of the Federal Reserve Banks at the Board on December 3, 19 70 Long ago I was the janitor of the Presbyterian Church in my home town, Broken Bow, Nebraska, the minister very well. a Consequently, I knew One Sunday he appeared in church with bandage on his face, which he explained to the congregation by saying he had concentrated so hard on his sermon that he cut himself shaving. After church, one parishioner went Up to him and said, "Reverend, the next time I hope you will c °ncentrate on your shaving and cut your sermon." arn Today I going to take his hint and be brief. Many experienced people in the Federal Reserve System have given a great deal of thought to the subject of the role directors. a It is certainly desirable that we take a hard nd realistic look at our institutions from time to time. One the obstacles to dramatic progress in any profession is what s °meone has called "trained incapacity". Experts become accus- tomed by training and habit to look at problems in their field specialization in a particular way. Consequently, they may ^svelop blind spots that keep them from spotting new ideas and approaches that might be perceived by a person with a dif^6rent background and an active imagination. None of us can overcome our 11 trained incapacity" com- pletely, but we can force ourselves to ask questions and try to come up with some new answers about how we can best accomplish our objectives. We may miss the obvious, but we Night just come up with some bright new ideas. In considering the design of any machinery or tool, the first question to be asked is: a ccomplish? What is it expected to If we have a clear view of what the tool is sup- Posed to do, we can then devote our imagination to devising the best design to do the job efficiently. t This would be the logical way to approach the design °f the machinery of the Federal Reserve System, but in the r ^ai world, and especially in the world of government, logic d °es not always govern. We are in the position of having Machinery that we know cannot be changed easily - thank the If we were able to start from scratch, we would no doubt do things rather differently today than they were done °ver a half century ago, and perhaps not so well. Neverthe- less, it might be useful and interesting to imagine that we in that position. Q Perhaps in doing so, we can overcome little of our "trained incapacity" and see how we might get ^ore out of the machinery we now have. - 3 - Let us suppose that we want to design machinery to a ccomplish the following things: (1) to determine and exe- cute the monetary policy of the United States, providing the necessary monetary•stimulus or restraint to keep the economy functioning at a high level without inflation or prolonged disequilibrium in our international accounts; and (2) to develop a sound and efficient banking system that would provide e ssential services such as credit accommodations, collection °f checks and currency distribution over the broad expanse of the entire country. * It is not hard to imagine the general outlines of streamlined machinery that would accomplish these tasks. But o a part from its technical structure, it would require thase characteristics: 1. Because of the strong impact of monetary policy on political developments, the machinery would have to be designed to prevent it from being manipulated for short-range political ends. 2. Because the decisions impinge so forcefully on the well-being of all the people, the machinery would have to be designed to give it maximum public confidence in its integrity and its technical competence. Assuming that our design called for a highly streamlined central banking structure, with branches rather than re gional banks, all responsible directly to Washington, how c ould it be structured to provide for the independence from Politics and the degree of public confidence that would be required to enable it to function effectively? We would need to devise some machinery that would conv ince the people (who at the moment are rightly suspicious of e *cessive centralization of power) that: 1st, the machinery would be in the hands of people who combined high technical competence with scrupulous honesty and dedication to the public interest; 2nd, that the machinery was designed in a way that would prevent its being used for the exclusive benefit of any region of the country or any single economic group; and 3rd, that built-jn checks would insure that misuse of the machinery would he exposed and corrected. The insulation from political influence could be accom- plished by localizing the decision-making power in a governing k °ard made up of members appointed for long terms. Se ec The repre- ntation of the views of all parts of the country and diverse onomic groups could be accomplished by requiring that men a Ppointed to the governing board come from different parts •I l the country and have different kinds of economic backgrounds. However, this does not really solve the problem. A man who has served for a long term on such a governing | b°ard may well lose touch with the local area from which he °riginally comes - unless, of course, he comes from a place U k e Broken Bow. If one lives and works in Washington for a Prolonged period of time, it is not really possible to mainI tain as close contact as one might like with the farmers r 9nd ranchers of Nebraska, the builders of California, or the ! IManufacturers v j-*. v in Ohio. « » t This would suggest the desirability of building into the | System some regional councils that could serve as the eyes and ears of the people of each region, as well as the spokesmen for *ocal interests. Such councils or boards would clearly have j t o be composed, at least in part, of people who were willing j a nd able to make some judgments about the technical compe- tence of those who were managing our monetary system. This deludes competence in the rather mundane task of managing a | la r rge enterprise with thousands of employees engaged in cur- ency distribution and check clearance, as well as competence in carrying out economic research and utilizing the results to make important policy decisions. It would be helpful to have on the boards men skilled in manage* znt who could give useful advice to the System on management problems and new methods for dealing with them. It woulc probably also be desirable to have on such boards men who were recognized in their region as being knowledgeable about monetary policy, whether they be bankers, businessmen, university professors, or writers. Such men would bring to the board not only a keen interest in the main business of che System, but the ability to scrutinize policy decisions carefully and critically, Finally, the boards should include men of recognized stature who are knowledgeable about the principal economic activities In the various areas, as well as representatives of trade unions, consumers, and retired people. These rep- resentatives would not have to be familiar with all the intricacies of monetary theory, but they could bring to the board precise knowledge of economic conditions in their particular areas. They could interpret the effects of broad economic policies on their area, and provide a valuable input of information and judgment. In designing these councils or boards, we would, of course, want people who commanded respect in their communities - 7 - Since one of their functions would be to indicate whether not the System was functioning well and in the best interests of all, they would have to be mer. and women who themselves were trusted for their judgmert and honesty. I would think that another thing hat should be re- quired of them is that they be articulate. They should be able to communicate their ideas clearly and effectively to the people running the monetary system. And they should also be able and willing to report to their "constituents11, i.e., the people living in their District, on the policies and operations of the System. They would not be performing the functions expected of them if they confined themselves to making observations and never told others what they had observed. This brief sketch of the kind of machinery we might devise if we could start from scratch is rather different f^om what now exists. We have regional boards of directors, but they have not in the past been selected to play just the kind of role that I have described. They have not always been selected with regard to the amount of managerial or Monetary expertise they might bring to the System. Nor have they always looked upon themselves as the eyes, ears and - 8 - tongues of the entire people of their region insofar as the Federal Reserve System was concerned. On the other hand, the relationship of the directors °f the regional banks to the System as a whole is somewhat different than the relationship envisioned in the model I have sketched. If the objective is to give people active in busi- ness and public affairs throughout the country an input into the System and the opportunity to represent the System to the People of the various regions of the country, there should, Perhaps, be a closer tie between these boards and tfre Board °f Governors in Washington. It is, of course, practical and Proper that much of the contact should be through the regional ^ a nks. However, if the input of the regional boards has value f°r the banks, it should also have value for the Board in Washington. I am thinking here of not only tapping the members of the regional boards for technical advice on management problems, k^t also of providing greater contact and. communication between re s gional board directors and the Board of Governors and its taff. Such contact has tended to be too infrequent, and too formal, for us to obtain full benefit from the knowledge and information that can be obtained from the regional board members. They, in turn, are perhaps handicapped in judging the - 9 - Performance of the System as a whole when their contacts are the most part limited to one of the regional banks. Of course, we have a regionalized System rather than the highly centralized System presumed in my model. n I have ° doubt that this has been an important factor in maintain- ing public confidence in the System, even though there has keen a greater centralization of power in Washington than the founders of the Federal Reserve System intended. How- l e r , there is abroad in the land, a strong tendency to question established institutions, a reaction to excessive centralization of power, and an emphasis on the right of the Public to know and understand what is going on. o In harmony with the spirit of the times, I think we s hould recognize that the form of our System has remained relatively unchanged, but the way of doing business has changed. In actual practice, we are closer to the central- ized System with branches than any one of us likes to admit. Perhaps we should adjust to this change by doing what we can within existing law to have the regional boards of directors fulfill the kind of function that I have described in my model. This would mean two kinds of changes: ern (1) a change in phasis, at least with respect to the role that the directors - 10 - P l a y, and (2) a change in the selection criteria for membership on these boards. In this context, it seems to me that directors should not look upon their resp nsibility as merely the input of information into the vast Federal Reserve machine They should do that, to be sure, formally as well as through informal contacts. But I would suggest that a more important function is to ascertain whether or not the System is carrying out its responsibilities for the management of our monetary system in a satisfactory manner. As directors, they are J-n a good position to make this judgment, having access to a greater amount of information about operations and policies fc han the general public. If, in their view, the System is not Performing properly, they should say so. If it is, they should a lso say so. re They should come to regard the public in their gion as their constituency, and they should actively trans- mit their own knowledge and evaluation of the System to their constituents. The better the directors are at this, the better we Ca n make our System work in a democratic context. This under- lies the importance of getting individuals to serve as dire ctors who can articulate the views of a broad spectrum of community. We need individuals who are not hesitant to - 11 - speak up and speak out. It would be desirable, of course that they be the type of individual who is listened to when he speaks. We must admit that we have made our share of errors, 3 nd anyone who reads the papers knows that we do not lack for critics. c But what we need is informed criticism, espe- ially from within the System, when we seem to be following the wrong path. I began by speaking of "trained incapacity11. m From y point of view, one of the great potential but largely unrealized values of directors is their ability to help the experts in monetary policy avoid errors caused by their specialization and their tendency to focus their sight too narrowly. With the advantage of hindsight, I can think of several occasions in the past when more critical questioning by Federal Reserve directors of the virtue of policies m lght have had a healthful influence in correcting more Sickly a wrong course of action. r On the external side, ight now we are in a period when public understanding of the need to resist the forces that feed inflation and still av pid unduly high rates of unemployment and underutilization resources could be crucial. Directors can perform a very - 12 - important function in impressing this upon their "constituents". I would hope that the end result cc this would be to help us maintain a strong Federal Reserve System, with close ties to people in all parts of the count y. I would hope that we would demonstrate our responsiveness to constructive suggestions and informed criticism. I would hope that We would be aided in this by a body of regional directors capable of communicating both with those responsible for the day-to-day management of the affairs of the Federal Reserve System and with an enlightened public. Working to- gether, we can do our job better and earn the confidence a ^d the support of those we are dedicated to serve. With staff help, I have spent considerable time over the past few months reviewing the role of Federal Reserve directors and trying to pinpoint areas in which improvement is needed and obtainable. Perhaps I have been in the System too long and become too myopic, but, for whatever reason, ail the ideas generated thus far seem to me to be old ones some with their bones showing. a Many of them have been tried nd found wanting; others have been deemed impractical. e How ver, we intend to push on with the search, and consequently - 13 I appeal to you to give me the benefit of any ideas that may occur to you. I assure you we will explore them, and where possible, implement them, with the view to perfecting what all of us must believe to be the best central banking system thus far devised anywhere in the world. *
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