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For Release on Delivery

Statement of Wm. McC. Martin, Jr.
Chairman, Board of Governors of the Federal Reserve System
on H. R. 7602
before the
House Committee on Government Operations
June 2, 1954

I am here in response to a request from Chairman Hoffman to appear and testify on the bill H. R. 7602, which would direct the Comptroller
General to make an audit for the year ending December 31, 1953, of the
Board of Governors of the Federal Reserve System, the Federal Open Market
Committee, and the Federal Reserve Banks and their branches.
The Board of Governors recognizes the importance of budgetary
and accounting procedures that will make for effective and efficient operations throughout the Federal Reserve System and is entirely in sympathy
with the objectives sought in various proposals on the subject that have
been advanced in the Congress. Fully effective procedures are already
provided, however, and to superimpose a further budgetary and auditing
review upon the existing procedures is neither necessary nor advisable.
The functions and responsibilities of the Board of Governors
and the Federal Reserve Banks are such that Congress has provided that they
be carried out with independent discretion and judgment. Accordingly, the
expenses of the Board and of the Federal Reserve Banks are not subject to
the budgetary and auditing control of any other agency of Government. The
Board of Governors is the governmental supervisory agency of the reserve
banking system and as such has responsibility for general supervision over
expenditures at the Reserve Banks (which include the great bulk of System

It also has direct responsibility for expenditures at the

For many years the Board had its own accounts audited by representatives of the auditing departments of the seven nearest Federal Reserve
Banks on a rotating basis. However, in order to avoid any question as to
the impartiality of these audits, in 1952 the Board engaged the firm of

-2Arthur Andersen & Co. to audit its accounts. The certificate of the audit
for 1952 was included in the Board's Annual Report for that year. The
firm has completed an audit of the Board's records for the year 1953 and
a copy of its report has been sent to the Congressional Banking and Currency Committees.
Manifestly, Federal Reserve operations should be conducted with
maximum efficiency and economy.

To that end Congress placed upon the

Board of Governors, which is a part of the Government, direct responsibility
for general supervision and periodic examination of the Federal Reserve

The Federal Reserve Act also provides that each Federal Reserve

Bank should have a board of directors of nine men chosen from their respective districts. They are outstanding men in their communities, prominently
identified with industry, commerce, agriculture, banking, and professional
life, who bring to the Reserve Banks their personal experience in applying
high standards of efficiency in their fields of private enterprise. It
has thus been aptly said that the Federal Reserve combines advantages of
Governmental control with advantages of private business management.
The Board believes that the Congress has provided a sounds,
prudent, and adequate means of achieving efficiency and economy in Federal
Reserve operations by combining in one agency, which of necessity is thoroughly informed concerning Federal Reserve Bank operations, not only the
authority to examine and audit, but also the power to put into effect
through its supervisory authority any improvements the need for which is
thus disclosed.

Legislation to superimpose a further audit of these opera-

tions by another Government agency would make for duplication and needless
expense. Moreover, the audit might constitute an entering wedge in

-3encroaching upon that independence of judgment which Congress has sought
to safeguard. Such independence of judgment is indispensable in the determination and execution of impartial credit and monetary policy. If
through some measure of control over the finances of the reserve banking
system, another agency of Government could restrict operations which the
System deemed necessary in performing its statutory functions, the resulting substitution of judgment could only result in a growing loss of effectiveness of the Reserve System,
In meeting its statutory responsibility of exercising general
supervision over the Reserve Banks, the Board constantly strives through
budgetary measures, comparative cost studies, and similar methods to increase economy and efficiency of operations. In addition, its staff of
examiners conducts a thorough and effective annual examination of each
Federal Reserve Bank and branch.
In order to be assured that its examination procedures meet the
highest standards of commercial auditing procedures and techniques, the
Board has adopted the policy of engaging a nationally recognized public
accounting firm to accompany the examiners on one Federal Reserve Bank
examination each year for the purpose of reviewing and observing the procedures in actual use.
The Federal Open Market Committee by statute is exclusively a
policy making body and, therefore, does not handle any funds. However,
the annual examination of the Federal Reserve Bank of New York, which is
the bank designated to carry out System open market transactions for the
twelve Federal Reserve Banks, as. directed by the Federal Open Market Committee, includes a comprehensive examination of the accounts relating to
these transactions.

-4The Board believes enactment of the bill, H. R. 7602, would
conflict with the fundamental purposes which Congress has sought to achieve
in the Federal Reserve Act and, therefore, would be contrary to the public