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Remarks of
John E. Sheehan
Board of Governors
Federal Reserve System
The Second National Governmental Affairs Conference
of fhe
American Bankers Association
July 19, 1972
Washington, D. C.


Some suggest that we live at an unusual time of involvement described
in various ways depending on the vantage point of the viewer. It is called
consumerism by some — a type of involvement that has already been em­
phasized here today. Some call it a time of relevance, when what we do and
say should increasingly relate to our problems and our opportunities. To
some, involvement means a participatory society, in which more of us should
take an active part in making and administering the laws, the regulations, the
institutions and the organizations of our society.
I agree that Americans are living at a time of involvement. And that
involvement began in the year 1619 when the Virginia House of Burgesses,
the first representative assembly in the New World, met at Jamestown,
Virginia. Ours has been a strongly involved, highly participatory, and
consumer conscious nation in the three and a half centuries since. There
have been many other landmarks along the way of which 1will take time to
cite only a few typical examples:

— in 1773, when there was a tea party in Boston;
— in 1776, when the involvement of the American people with the
idea of forming an independent union produced the Declaration
of independence;


— in 1787, when the American people produced a Constitution that
led the world in formalizing those still revolutionary aims of
establishing justicc and promoting the general welfare as the
basis of government, not only of, but — as President Lincoln
noted — for the people;

in 1791, when the Bill of Rights was added to the Constitution;


in 1875, date of the first Civil Rights Act;

— from 1890 to 1 1 which saw legislation to protect the consumer,
including the Sherman Anti-Trust Act, the Federal Trade Commission
Act and the Clayton Anti-Trust Act;

in 1946, when the Congress passed what Federal Reserve Board
Chairman Arthur F. Burns has called an American "economic
constitution” : the Employment Act of 1946, which pul the full
force of the Federal Government behind the aims of "maximum
employment, production and purchasing power" in the United

I need not bring the record into more recent years to make my point —
although the record of the last decades would make it even more sharply.
The point is that one comprehensive name for consumerism, participatory
government, relevance, and like forms of involvement is the American way
of life.


I do not suggest by the foregoing that we have solved all our problems
or that there is not much yet to do, or that we do not have need to reemphasize
what is best in the American tradition. My object is, rather, to bring out the
fact that the grappling with issues and the accelerating change we see going
on around us — that has been going on at a rapid pace for years — far from
being something new for Americans, is the current manifestation of one of
our oldest traditions. We have been making and we will continue making our
way toward what Americans have always had in mind since that first meeting
of Virginia burgesses in 16 9 the building, by peaceful, legislative means,
of a society of laws offering more and more of its people greater and greater
opportunity to make the fullest use of their abilities.
But there is another reason for citing examples of our long tradition
of concern for participation of Americans in our national life. The current
intensity of this concern is reflected in the activities of many new consumer
and environmentally oriented organizations. They speak for people and causes
that have been neglected and, for that reason, they should be heard. Nevertheless,
there is a strong tradition that American government is accessible and open to
persuasion. This has brought into being institutional means for expressing
private views about public policy and impressing those views on policymakers.


Nearly every American professional, business, political, occupational,
environmental, educational or other association has headquarters in Washington,
to be near the makers of public policy. One need only look in the yellow pages
of the Washington telephone directory to learn that it takes seven pages of
close-set type to list all the organizations in this city. In the regular pages,
there is nearly a column of commissions and committees, a clutch of
societies, leagues, institutions and conferences, plus uncounted scatterings
of organizations not alphabetically corralled.
This may seem like an excess of involvement. If you read through
the list of associations, you may be convinced that it is. But it does suggest
that the Congress, the regulatory agencies, the departments of the government,
and all concerned with making public policy, have available to them — or
thrust upon them — the knowledge, the opinions and the insight of specialists
in almost any field of knowledge or belief, reason or unreason, endeavor or
The mainstays of this list are the associations representing the principal
professions and fields of business, and featured among these is, of course,
the American Bankers Association (ABA).


The volunteer, privately sponsored organization that concerns itself
with public policy, such as the ABA, performs a singular service in this
society. It does so by stimulating a dialogue between private citizens
and the institutions and government. The more thorough the dialogue be­
tween policymakers and the public, the better the resulting policy is likely
to be. One of the principal characteristics of American capitalism has been
a growth of associations, societies, committees, leagues, institutions and
the like, such as may be found in fullest flower in Washington. These private
organizations are watchdogs which set off a warning alarm when officialdom
is about to restrict or rechannel private decision-making. They bring down
on officialdom's head grievances that are real, or, as is too often the case,
imagined, or the consequence of misunderstanding or unwillingness to compre­
hend. It is officialdom's role to sort out public need from public clamor.
The net result is often better public policy, made in the light of all the genuine
objections that can be brought to bear. In this process, public policy will
assert the general well being in the face of particular complaints where that
is necessary and over-riding. But the proposed policy — which may be
pending law or regulation — will be modified where specialized advice


received from the public demonstrates sound reasons for admitting, however
painful it may be, that infinite wisdom does not in every case come with the
elective or appointive mantle.
I believe that the flow of opinion, information and insight provided by
private organizations interested in public policy is among the more valuable
of those assets that have made free enterprise capitalism the successful
instrument it is for producing and distributing wealth. In the case of the
private organization attempting to influence public policy, there are several
rides that suggest themselves. Three of the more important, and somewhat
general, rules are as follows:


It is proper and beneficial for the private organization
to retain its identity, as lawyers, doctors, farmers,
businessmen, bankers, manufacturers, or whatever.
This is entirely consistent with speaking in the general,
rather than the narrow, interest. Businessmen, as the
Committee for Economic Development has demonstrated
over the years, can keep their identity, make their ad­
vice all the more respected because it proceeds from a
base of practical information, while expressing their
policy views in the national, not only business, terms.


Private influence on public policy making should be
brought to bear where all can see it, with no reward
sought or expectcd other than better public policy. For
what is good for the nation will also be good for business,
banking, labor, agriculture or other parts of the nation.



Sufficient resources should be available and used by
the private organization in formulating testimony
given to the Congress, or in participating in the
hearings on policy matters held by regulatory and
administrative agencies, or in otherwise tendering
private advice to government, so as to insure that
the advice is as broadly based as the subject requires,
that it is up to date, that it correctly portrays the pro­
posed policy or regulatory stance, that — to state it in
general terms — the advice is careful, responsible and

These are margins within which private enterprise or other private
bodies can — and should — usefully carry on a continuing dialogue with
government. Of course, such a dialogue cannot be useful if it takes the form
of harassment, unfocused and highly particularized complaint, ill-prepared
or untimely assertions, or if it represents narrow professional, occupational
or business interests at the expense of the paramount public interest.

Against this background, and in the setting of this conference on national
governmental affairs, what can and should be said about the dialogue that some
of the nation's bankers maintain with the central bank, through the medium of
the ABA ?
Put differently, the question is: How can the ABA help the Federal
Reserve in carrying out its public responsibilities ?


Let me distinguish three areas of concern, because I think the kind
and scope of ABA involvement differs among them. They are:

The Federal Reserve's technical responsibility for providing
the nation with a well functioning and economical payments


The regulatory and supervisory responsibilities of the
Federal Reserve.


The Federal Reserve's responsibilities for monetary policy
and the domestic and international implications of that policy
generally for the economy of the United States.

Relative to the first point, the ABA has shown leadership, has expended
very considerable resources, and has exhibited a clear sense of responsibility
in helping us to discharge our technical responsibilities. Three decades ago,
the ABA helped the Federal Reserve develop the modern system of routing
symbols that began modernization of the check payment system. Through
special arrangements, ABA has made itself a convenient repository and source
for up to date information about the Federal Reserve routing symbols.
Later, ABA took the lead in securing universal bank usage of magnetic
ink — MICR — encoding of checks, to permit machine sorting of checks. Without
this advance, and without the considerable resources ABA poured into making
its use general, the check payments system would before now have foundered


in a sea of paper that would overwhelm any imaginable amount of manual
handling. ABA cannot be too roundly complimented for its crucial assist­
ance in the development and promotion of MICR check encoding.
During the last several years, the ABA has continued to make a
responsible record in this area. The studies done by, or financed by, ABA
through its Monetary and Payments System Planning Committee put in place
a statistical basis on check usage, and developed projections of future usage,
that have become benchmarks from which more comprehensive work by the
Federal Reserve has proceeded. I should add parenthetically that some con­
fusion has arisen from the handling of the report's conclusion that the
present check system would be viable throughout the 1970's because it was
not made sufficiently clear by ABA that this was so only if increasing costs
were ignored, in some cases, this has needlessly complicated Federal
Reserve efforts to move in a timely fashion toward, first, a modernized
system of check handling, and, subsequently, substitution for most checks of
an electronic transfer of funds.
At the same time, ABA has participated actively in preparing the way
for eventual large scale electronic handling of funds transfer through Special
Committees on Paperless Entry — SCOPE projects — with a newsletter on


developments in this fast moving area, establishment of an information center
to help groups trying to get SCOPE projects going, and organization of symposia
on paperless entry.
The Federal Reserve has long looked to ABA, and still does, for
valuable assistance in setting and coordinating standards in the banking in­
dustry, such as, for example, the standards developed by ABA and widely
used, for credit cards, and the formation this year of a Bank Data Communi­
cations Standards Coordinating Committee.
More recently, ABA has taken a constructive interest in, and has shown
leadership in gaining bank acceptance for, the Federal Reserve's plans to
speed check clearing through Regional Check Processing Centers, and through
revision of Regulation J to place all banks on an immediate payments basis.
ABA supported the Regulation J revision, although it would not be to the
immediate financial advantage of every bank, and ABA made constructive
suggestions for easing the transition to the new check collection procedures.
Although ABA's suggestions did not comprise the transition plan finally adopted
by the Board, those suggestions were valuable as indications of how this im­
portant reform could be carried out with the least impact on bank loans and
investment, but without sacrifice of the public's interest in being served by
a more efficient and economical check payments system.


I think it can be fairly said that ABA has, on the whole, been a positive
force for beneficial change in the technical area. It is to be congratulated
for leadership and for its characteristic attitude that the banking industry
should improve its productivity even though this has required almost continuous
and costly re-equipment of banks, and the acceptance of regulatory and operational
changes in the public interest that have not always been painless. This provides
a sharp and favorable contrast to the breakdowns that have occurred elsewhere,
where such leadership was lacking. So without going into other valuable ABA
efforts of a technical nature, I will turn to the ABA's role in helping the System
discharge its heavy regulatory and supervisory responsibilities.
It would seem to be the nature of a bankers' association to deal warily
with the bank supervision and regulatory agencies. It is probably sufficient,
so far as day-to-day work is concerned, that the association be an honest
broker between the Federal Reserve and the banks affected by Federal Reserve
regulation or supervision. It is of value to provide an informational tool,
such as ABA's newsletter, CAPITAL, which informs banks quickly and
accurately of developments in bank supervision and regulation as these take
place. At Federal Reserve hearings into bank holding company matters, ABA
has responded predictably and narrowly according to the interests of its
constituents. But it has responded expertly, as well, answering the questions


posed and providing, where it has suggested changes, draft texts for revised
regulations that show precisely what is intended. During periods for comment
on proposed regulatory changes, the AHA national office has handled many
questions from its members in a positive spirit, easing the Federal Reserve’s
workload and providing education to banks that might otherwise not have been
But, I think that there is a broader type of response that might have
been expected from an organization such as ABA, representing a community
so important as most of the nation's banks and bankers. It is a type of re­
sponse that would indeed be of benefit to the Federal Reserve Board and System,
as well as to the public at large. I have in mind, for instance, that we have
heard nothing from the ABA, in terms of a broad gauged study, focused on
the general, long term public interest, of the 1970 Amendments to the Bank
Holding Company Act. These amendments raise a great many questions,
reaching deep into such subjects — to name a few — as, how the public
benefit may be served, or damaged, by bank holding companies or their ac­
quisitions; what, in a broad sense, is a business so closely related to banking
as to be a proper incident thereto; how future as well as current competitive
or public benefit considerations can and should be weighed; and, perhaps most


important of all, what the bank holding company, as it may be envisaged
under the 1970 amendments, is likely to mean to banking, and to the
American economy in the future.
Let me now turn to the third field of our responsibilities — monetary
policy. I should say to you without disguise, and speaking quite personally,
that I have been disappointed in ABA comments in this critical field. I find a
disturbing lack of study and presentation anywhere near to being adequate to the
subject. Let me take as an example written and published comments submitted
by letter dated March 6, 1972 to the Joint Economic Committee of the Congress
"on the economic issues which concern the nation and our organization."
This letter betrayed a sang froid which would be admirable, were it
not damaging, by tackling so vast a subject in less than two single-spaced
typed pages.
The ABA found that the Federal Reserve had moved to ease monetary
conditions substantially, that interest rates had fallen dramatically and that
an effort to make credit conditions much easier as the economy moved upwards
has "certain disturbing implications." Farther on, this all too brief letter was
critical of the Federal Reserve for "failure to achieve a steadier pattern in
monetary policy."


This letter was a disappointment in many respects. It did not impart
an awareness of the fact that there are definite lags in the effects of monetary
policy, and that the Federal Open Market Committee must often be easing
or tightening well ahead — months ahead — of the expected effect. It did
not convey an understanding of the fact that there is a reciprocal effect upon
interest rates if the monetary authority acts to raise or lower the money
supply, and vico versa, and that it is not possible to have the one effect
without the other. It did not impart an awareness of the fact that many studies
have shown that variations in the rate of money supply, if temporary and
reversible within six months or so, do not have significant effccts upon the
economy but that short run changes of this kind may be necessary to counteract
other pressures making for unnecessary and counter-productive financial
market developments. It did not take account of the fact that the period of
rising money supply and falling interest rates balanced an earlier phase of
rising interest rates and little money supply growth. Nor did it note that
expansion in the money supply, although not a smooth curve over the past two
and one-half years, has on the average been a relatively moderate 6.5 per cent
a year. That is well below the average growth rate in the nominal gross
national product.


My effort, and my message here, is not to hark back in any petty
spirit of criticism to a particular instance. I would repeat that I find much
to praise, as I have done here, in the history of ABA cooperation with the
Federal Reserve in many aspects of our relationship. But I do find a void
that I believe can and should be filled. This is a lack of in-depth study and
research of a broad public-oriented character that should be typical of an
organization of ABA's breadth and resources, ft would be helpful — and in
the tradition of the great volunteer associations that have so long mediated
in free enterprise capitalism between government and the private world — if
ABA were to take a long hard look at the question whether it is doing as much
as it should, as well as it could, to fulfill its general as well as its industry
I do not have in mind here occasional pieces of research, magazine
articles, or testimony on isolated subjects before Committees of the Congress
or before hearings held by regulatory agencies, although expression of
opinion in these forms is necessary, valuable and would be given additional
depth and reliability by what I am suggesting.
I suggest that the ABA decide to contribute to knowledge in the field
of financc and financial institutions, as they relate, among other things,


to the economy at large and to such particular subjects as the need of the
public and of the business community for economical and reliable financial
In short, I am suggesting that ABA rise to the level of its resources,
and provide the nation with a responsible research organization, mingling
the practical expertise of the banker with the insight and theoretical wisdom
of the scholar. A number of excellent models of this type of amalgam, which
have contributed and continue to contribute genuinely to the well being of the
nation, are at hand. And their processes can be adapted to the particularities
of the research needs and potentials of the banking community as represented
by ABA. Such an institution is particularly needed at this time of search for
new international monetary mechanisms, at this time of transition from paper
to paperless accounting and funds transactions, at this time of change for
banking under the Bank Holding Company Act, at this time of re-emphasis of
the American tradition of public involvement, of consumer orientation, and
of increased need for relevance to our problems. ABA has the resources to
provide it.
This would be disinterested assistance, over the long-term, of the type
that would be particularly helpful to the Federal Reserve in the discharge of


its ever heavier responsibilities. A further highly beneficial result would be
the interest in the public's well being that banking would show in this way.
But, I suggest, the most enduring and perhaps the most useful result of all
should be what banking would learn about itself: its role, its potential and
its responsibilities to the American economy.
Certainly there would be forthcoming a self-disciplined answer to
fhe question — How can ABA help the central bank ? — an answer resting
on a realization that for the Federal Reserve, the public interest is paramount.
And it would rest as well on the view that the well being of private banking
lies in recognizing that the public interest is paramount.
As a leader in the continuous dialogue between government and the
people, and as a constituent part of the permanent American revolution that
began in 1619, the ABA has a growing responsibility to serve the nation.
I am confident that the ABA will respond to this challenge with the commit­
ment of time, talent and funds that are necessary if it is to fulfill its