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WORKING AT THE BOARD

1930s-1970s

ANNIVERSARY
FEDERAL RESERVE SYSTEM




WORKING AT THE BOARD

1930s-1970s

Presented to the
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

Washington, D.C.
August 11, 1989

WORKING AT THE BOARD

We wish to dedicate this volume
to
MERRITT SHERMAN

a friend and mentor to many
of the Members of the Board
and its staff.
In his years of dedicated service
at the Board,
and his subsequent leadership
in Board retiree activities,
Merritt epitomized
much of what was best
in the Board staff.

Merritt joined the Division of Analysis and
Research at the Federal Reserve Bank of San
Francisco in September 1926; served as
department manager from 1930 to 1941; and
was an operating officer in various functions
of the Bank from 1941 until October 1946,
when he came to the Board of Governors as
Assistant Secretary. He was Secretary of the
Board from 1958 to 1968, and retired as
Assistant to the Board in 1969. For many
years thereafter he was a consultant to the
Board.




WORKING AT THE BOARD

Table of Contents

Introduction and Overview

Working at the Board in the 1930s

Working at the Board in the Wartime and Postwar 1940s

Reflections on Fed History in the 1950s

The Atmosphere of the 1960s at the Board

Working for the Fed in the 1970s




In Conclusion

WORKING AT THE BOARD

Acknowledgements

Chapters

Drafters

Commentators

Introduction
and Overview

Eleanor Stockwell

Bob Holland

The Thirties

Jerry Shay

Bob Holland
Ed Johnson
Bob Sammons
Fred Solomon
George Vest

The Forties

Eleanor Stockwell

Art Broida
Herbert Furth
Fred Solomon

The Fifties

Pete Keir

Art Broida
Ed Johnson

The Sixties

Bob Holland

George Mitchell
Bob Solomon
Fred Solomon

The Seventies

Frank O'Brien

Art Broida
Sam Chase
Griff Garwood

In Conclusion

Bob Holland

Eleanor Stockwell

We want to thank especially all the above-listed
contributors who gave their time and effort to
this endeavor to capture a special dimension of
Board history.
Eleanor J. Stockwell
Editor




Robert C. Holland
Publisher

WORKING AT THE BOARD

Introduction and Overview

T

he Federal Reserve Board is an outstanding public institution, the center of
a complex central banking system that on balance has served this nation
well for three-quarters of a century.
One important reason for its success has been the quality of the individuals who have
been drawn to serve on its Board and on its staff. As is proper in official documents,
relatively little is said of the personal side of the Board in the published minutes of
meetings, statements of policy, economic analyses, and annual reports. However, some
sense of the evolving personality of the Board and its staff, and of their spirit, challenges,
and contributions deserves to be preserved as a part of the Federal Reserve history.
Accordingly, the retired officers of the Board, drawing upon their personal recollections, contacts, and readings, have authored this informal summary of what it was like
to be "Working at the Board." They present it as a mark of respect for the institution
that they have served.
Each of the essays that follow was drafted by a retired officer and is based mainly
upon his or her recollections of what it was like to be part of the Board family during
a particular decade, plus the comments and suggestions of colleagues. The years prior
to the 1930s, as well as the decade of the 1980s, are not covered separately because
the retired officers as a group are too young to do justice to the early years and too
old to have a good feel for employee attitudes in the 1980s. A full list of all drafters
and commentators is included following the table of contents.
Some changes that have affected the Board's work environment over the five decades
occurred either gradually or off and on, and are difficult to handle meaningfully on
a decade-by-decade basis. A major change has been the multiple increase in the Board
staff, from three divisions and forty-five employees in its first year to eight divisions
and 378 employees in its twenty-fifth and nineteen divisions and more than 1,500 employees in its seventy-fifth. As is clear in several of the essays, growth in the Board's
staff reflected the increased responsibilities entrusted to the Board by the Congress.
But it also reflected the increased complexity of the economic and financial environment in which the Board operates and the increasingly sophisticated tools required to
monitor and influence that environment. What did this mean for working relationships
and the good fellowship within the staff that old-timers like to recall?
In the earliest decades, it should be noted, the Board's staff was housed in small groups
in several government and private buildings and had only limited interdivision contact,
at least at the staff level. It was not until 1937 that we all moved into our own building,
and began using the same elevators, eating in the same cafeteria, and seeing what the
Board Members looked like. We rattled around a bit in the beginning: Floor plans included in the program for the official opening of the new building show large areas
unassigned or allocated to "storage;" and the telephone directory remained a thin




WORKING AT THE BOARD

book despite its listing of employees, until after World War II, both alphabetically and
separately by division. The latter was a great help in identifying one another.
It is easy to remember working at the Board—when we were still relatively few in
number and fit comfortably into one building—as being part of a warm and congenial
family; to a considerable extent this is probably an accurate assessment, more so within
some divisions than across divisions.
But all was not sweetness and light in those days. The Employees Committee, born
in the early 1940s, ended its first year by sending the Board's Personnel Committee
a letter listing seven of "the factors that have contributed to employee dissatisfaction"
(for example, "secrecy and ineffectiveness of the so-called classification system" and
"lack of a uniform and systematic promotion plan"); and by the late 1940s the president
of the Reserve Board Club, in his annual report, was nostalgically deploring the neardisappearance of the former great interest of the staff in the club's activities ("Are we
growing older and lazier and more self-satisfied, or has the cold formality of our marble
halls impressed itself upon our personalities?").
In time the Board outgrew its single building, and the staff again was scattered, with
various units or entire divisions housed off the Board premises—primarily at the FDIC
in the mid-1960s and at the Watergate from the late 1960s through most of the 1970suntil completion of the Martin Building and the Board (now Eccles) Building's
renovation.
Over the decades covered here, the composition of the Board's staff also has changed
drastically. For at least the first third of the Board's existence, the professional staff
was exclusively white and male (as was true for much of Washington). Black women
were not hired for even the lowest-paying positions, black men (even with college
degrees) were hired only as messengers, and white women (again, even those with college degrees) were hired only as secretaries and statistical clerks; for the last group,
however, early promotion to a higher-grade position was possible.
As time went on, however, the Board, while maintaining its high standards for the
qualities that matter, enlarged the employment opportunities for women and other
minorities.
A third major change that developed over several decades has been in the way data
and other information are assembled, worked on, stored, and updated. For a large part
of the Board's history, these tasks were handled with what today many would consider
very primitive tools: the desk calculator that was used for all data manipulation and
ground out the results of simple operations; the manual typewriter that provided final
copy only after uncounted retypings of successive drafts; the fourteen-column card that
preserved statistical data (entered and updated by hand) and was stored in a clerk's private file case; the nonstatistical records usually kept on pieces of paper in someone's
desk drawer.
Nevertheless, a relatively large force of statistical clerks and other recordkeepers
turned out a lot of work with these tools, though it did not need to be, and was not,
the complex and sophisticated output demanded in recent years. With the gradual shift
through semiautomatic equipment to higher and higher levels of technology, employee
skills have needed to be upgraded as well, and employment qualifications have risen.



WORKING AT THE BOARD

All these changes chronicled in this and the other chapters of this volume inevitably
produced changes in what it was like to be working at the Board. The staff became
much larger and less homogeneous, and its duties became more demanding and more
visible. But an indicative thread seems to run through the recollections of all the retired
officers who contributed to this volume, whether they served in the thirties, the forties,
the fifties, the sixties or the seventies: they were proud to have spent time working
at the Board. •







WORKING AT THE BOARD

1930s

IN THE

T

he 1930s was a traumatic decade for most Americans. The aftermath of the
1929 stock market crash, the Great Depression, the drought and dust storms
' (for some, the New Deal), and the rising dictatorships in several major
countries—all of these created stresses and forced many changes in what many Americans did and how they thought.
As individuals, the employees of the Federal Reserve Board felt these stresses also,
although their paying jobs saved them from the hardships that unemployment imposed
on many other Americans. Professionally, however, the actual work at the Board in
the years 1930-32 was affected less than might have been expected by the momentous
events developing outside its walls. There was a sense that the Federal Reserve had
neither the powers nor the responsibilities to counter the depressing trends in the economy. The Board's regular business proceeded in an orderly and fairly routine way insofar
as the staff was concerned. It was tragic irony that the Federal Reserve, by following
the accepted tenets of central banking of that day, permitted a monetary shrinkage that
deepened the Great Depression.
The orderly routine within the Board staff was changed drastically in 1933, however,
and working at the Board was never the same thereafter. That year brought Franklin
D. Roosevelt to the Presidency, and in 1934 he appointed Utah banker Marriner Eccles
to the chairmanship of the Federal Reserve. Both were men of ideas and action. New
financial legislation changed the structure of both the banking system and the Federal
Reserve Board. The latter was symbolized by a change in title, to the Board of Governors of the Federal Reserve System, but the sum total of the changes was much more
important than that. The Board was given major new responsibilities and brand new
powers, some of a kind never before exercised by the federal government.

Landmark Legislation
From the beginning of the decade-following on the heels of the October 1929 stock
market crash-important problems relating to the structure and functions of the banking system were receiving consideration of congressional committees with a view, as
noted in the Board's Annual Report for 1930, to determining the need for "legislative
and administrative reforms." At the time, the Board refrained from making "specific
recommendations" to the Congress.
With bank consolidations, suspensions, and failures continuing to run at exceptionally high levels, and bank income ratios plummeting, the Reconstruction Finance Corporation was established in January 1932 to make loans to banks and other financial
institutions. The Glass-Steagall Act, enacted in February, authorized the Board, until
March 3, 1933, to engage in open market operations through the use of U.S. government obligations as collateral security for U.S. notes. And in July, the Emergency Relief



WORKING AT THE BOARD

and Reconstruction Act amended section 13 of the Federal Reserve Act to permit a
majority of the Board, in unusual and exigent circumstances, to authorize a Reserve
Bank to discount paper (if satisfactory to the Bank) for any individual or business unable to secure emergency credit elsewhere.
The change of Administration in March 1933 brought prompt and drastic financial
actions: the Banking Holiday and suspension of gold payments. These were followed
by the well-known enactment of legislated reforms and innovations in a wide range
of economic and financial areas. In the banking area, the Banking Act of 1933, the
Securities Exchange Act of 1934, and other legislation enacted early in the Roosevelt
Administration gave the Board and the Reserve Banks many new responsibilities and
powers, placed new restraints on the banking system, and involved the Board's officers
and staff in interpreting and administering the new laws as well as drafting (and later
updating) many new regulations.
The legislated changes included the following: power to raise or lower reserve
requirements in an emergency; authority to establish margin requirements on security
loans made by banks or brokers; permission for Reserve Banks to issue notes secured
by direct obligations of the United States; Board supervision over foreign relations of
the Reserve Banks; prohibition for commercial banks also to be securities dealers or
to have securities affiliates; prohibition of payment of interest on demand deposits;
subjection of interest payments on time deposits to Board limitation; and enactment
of federal insurance on bank deposits.
Also, the RFC's lending authority was broadened in mid-1934 to include loans to
business enterprises, and the same statute, by adding section 13b to the Federal Reserve Act, authorized Reserve Banks to enter into cooperative lending arrangements
with private financial institutions to make commercial and industrial loans. The purpose of this legislation was not so much to give relief to individual businesses or
individual banks, as to stimulate economic activity and increase employment.
The Banking Act of 1935 was the final major banking legislation of the 1930s. It was
characterized in the Board's Annual Report as
. . . a recognition of broader functions of the System as a factor in the country's economic
life and emphasizes and clarifies the distribution of responsibility between the component
parts of the System. It preserves the autonomy of the regional banks in matters of local
concern, but places responsibility for national monetary and credit policies on the Board
of Governors and the Federal Open Market Committee.

The act not only revised some earlier provisions (for example, it made continuously
available the authority to change reserve requirements) but also significantly altered
the structure of the Board, including its name. "The Federal Reserve Board" became
"The Board of Governors of the Federal Reserve System," with a Chairman and Vice
Chairman rather than a Governor and Vice Governor; Board members were given the
title of Governor; their term was lengthened to fourteen years; their number was increased to seven; and the ex officio members-the Secretary of the Treasury and the
Comptroller of the Currency-were removed. It also centralized open market operations under a new Federal Open Market Committee.



WORKING AT THE BOARD

Much was made of the Fed's "new independence." And some found satisfaction in
Chairman Eccles's recognition that, at least in some situations, a planned program of
government deficits—to stimulate private economic activities—was an indispensable
means to the revival of a badly deflated national economy.

Impact on the Staff
Adjusting to all these rapid changes was a problem for the staff and all of the Federal
Reserve Board members except one: Marriner Eccles was part and parcel of almost
all of the legal changes affecting the Federal Reserve. In fact, some were his ideas.
He was an active member of the Administration team that worked on many of these
changes, as an adviser to President Roosevelt even before he was made Chairman of
the new Board of Governors. He took over that chairmanship as a smart, experienced,
forward-looking, self-confident, action-minded leader who in turn had the confidence
of the President. Working at the Board changed accordingly.
New ideas were sweeping into the Federal Reserve from outside, brought not only
by the new legislation but also by Chairman Eccles and others added to the Board and
its staff. Eccles came in with his own agenda for the Board. Most of the staff was not
privy to this new thinking. The deliberations within the Boardroom were kept confidential with the Board members and a small group of senior staff. Within that senior
staff circle, two came to be particularly valued policy advisers. One was E.A. Goldenweiser, an economist who advised the Board on monetary policy and headed the research
department. He did both wisely and artfully. The monetary policy issues of the day
were often new, both in terms of the situations that were developing and the theories
and hypotheses about how to deal with them. In this environment, Goldy both learned
and taught well. He also began building a bright, well-trained research department that
made a point of being up to date on both facts and theories. It was a precedent that
was to serve the Board very well.
The second especially valued adviser was Floyd Harrison. He had a faculty for formulating and crystallizing ideas that was a great help to Eccles and the Board in these
critical years. He was well liked by Board Secretary Chester Morrill, and also by Chairman Eccles. Accordingly, Harrison was often allowed to take the lead in staff work
to flesh out Eccles's ideas, or to develop new ideas to put before Eccles and the Board.
In some respects, the atmosphere within the Board staff was rather autocratic. The
two traditional stalwarts of the Board staff, Secretary Morrill and General Counsel Walter
Wyatt, kept the Board's operating routine orderly and set high professional standards
in their respective fields. Sometimes there was tension between this orderly situation
and the pressing desire to consider, act on, and implement new ideas, but Morrill and
Wyatt dutifully adapted the Board's regimen to the new ideas that Chairman Eccles
and the Board decided upon.
Much of the legislative-oriented work at the Board during the 1930s benefited not
only from the inputs of its staff of lawyers but also from those of staff of other Board
divisions and the Reserve Banks. However, when an issue was to be brought to the



8

WORKING AT THE BOARD

Board, it could not be presented as separate and perhaps inconsistent recommendations
from a number of sources. Morrill, who served essentially as "Chief of Staff," was
generally the one who made sure the disparate views were molded into a single, internally consistent recommendation. This characteristic of the Morrill procedure became
clear as its implications trickled down through the various levels of involved staff.
And "trickling down" was typical of the ways the staff learned about what was going
on. While all the creative new activity at the top generated much work for the lowerlevel Board staff to do, only rarely were they informed of "the big picture." They frequently were called upon with short notice to work long hours against tight deadlines,
exploring various options or contingencies, analyzing proposed new legislation, and
working out the implementation of new laws, some of which had no precedent in U.S.
history. Their knowledge of what was happening, however, usually did not extend much
beyond their own assignments.
There were a few less senior employees whose expertise in a particular field usually
resulted in their being called in for consultation when something in their field was being discussed. Carl Parry and Fred Solomon, with their expertise in securities markets, were two examples.
For the most part, however, lower-level Board employees learned of major monetary, financial, and Board actions from the newspapers and press releases. They had
the satisfaction of knowing that their Chairman was much involved in the public
policymaking of the decade. But for a greater sense of involvement in "the big picture," the Board staff had to wait until the next decade and the impact of the new World
War. •




WORKING AT THE BOARD

IN THE WARTIME AND POSTWAR

1940s
At

the Board, as elsewhere, World War II and its aftermath dominated the decade
of the 1940s. "War Service of the Federal Reserve," a chapter of the (1947)
second edition of The Federal Reserve System, Its Purposes and Functions,
starts with the summary statement that "During the war the primary duty of the Federal
Reserve was to facilitate the financing of military requirements and of production for
war purposes."
The Fed carried out this duty by maintaining a stable securities market in which the
Treasury could borrow at low cost; supporting the government's efforts to encourage
the purchase of U.S. government bonds by nonbank investors; and arranging privatelender guarantees of loans for defense plant construction and for conversion of civilian
facilities to war production. The Board was prepared to raise margin requirements should
that appear necessary to prevent speculative purchases of securities. And it implemented
the power the President gave it to impose credit controls by issuing Regulation W, which
set minimum downpayments and maximum maturities for credit extended to purchase
autos and other durable goods; the purpose of the controls was to damp the inflationary
pressures exerted by increased consumer demand for scarce civilian goods.
At the same time, Federal Reserve support of the U.S government securities market
meant that the Fed had to make sure that the banks had the funds to absorb any securities that could not be sold without inflating the money supply. But as the 1947 edition
of Purposes and Functions also pointed out, "Prevention of inflation had to become
secondary to providing the sinews of war . . . . The inevitable heritage of war is an
enormous expansion of money and a grave threat of inflation."
Once the war had ended, the Federal Reserve faced the extremely difficult task of
unwinding the financial dislocation arising from the needs of the war effort. During
the war the Fed "had to suspend the use of general methods of restraining the growth
in the money supply." Now it needed to focus its attention again on regulating the money
supply, which had been swollen far beyond peacetime requirements by bank purchases
of U.S. government bonds. But it had to do so while at the same time continuing to
support the price of such securities in order to protect individual and other nonbank
holders from capital losses of the kind suffered after World War I.
In the face of this dilemma, continued reliance on selective controls, rather than
primary use of the general instruments, seemed the appropriate course. Margin requirements, which had remained at their prewar level of 40 percent through 1944 and were
raised to 50 percent only in early 1945, were increased further to 75 percent late that
year and to 100 percent in 1946 (that is, only cash purchases were allowed). The consumer credit controls were extended for two years although compliance began to
deteriorate long before Regulation W was suspended in late 1947. Reserve requirements,
on the other hand, which had remained unchanged throughout the war years, were not
increased until 1948.



10

WORKING AT THE BOARD

The postwar major depression that so many observers had expected never occurred
because pent-up consumer demand quickly began to fill the gap left by the decline in
military spending. In fact, the increases in installment credit and bank loans were already
causing inflation worries to mount at the time Reg W was suspended. In 1948, member
bank reserves were reduced early in the year, reserve requirements were increased on
three occasions, the discount rate was raised twice, and in September Regulation W
was reinstated. Hindsight suggests that the inflation fears that led to these restrictive
measures may have been exaggerated, given that the 1948-49 economic contraction
is now dated as having begun in October 1948; the contraction was short-lived, however, and it was a cyclical upswing in economic activity that ushered in the 1950s.

The Board Family
There was surprisingly little turnover at the top levels during the 1940s. Marriner
Eccles was Chairman until 1948 but a member of the Board throughout the decade,
as were two others; another three were members for more than half of that time. At
the division level, every division director in 1940 remained so for more than half the
decade, at the least.
As would be expected, particularly in the early 1940s, turnover at the staff level appears
to have been relatively very high. While only about seventy employees were on military leave, many others resigned to enter military service, some left the Board to take
jobs in war agencies, and a number of wives resigned to be with or near their militaryservice husbands. Only part of the resulting vacancies were filled.
And what of the people who, for one reason or another, remained at the Board and
continued to "do their thing"? Although several steps removed from direct participation in the war effort, they still did their thing in a war environment, during workweeks of six lengthened days.
Staff of the numerous new defense agencies, including former members of the Board's
staff, often called on economists and others who were still at the Board for assistance
in answering questions they faced. Because they did not have the libraries, the databanks, or for that matter the time needed for searching out the answers themselves,
they had little choice except to rely on what one Board economist called "research by
telephone;" the Board was then, as it is now, one of the very best resources for that—
and it was heavily used during the war years.
In addition, of course, members of the Board and the senior staff had to be kept
apprised of the usual and especially the unprecedented developments of the time and
of their effect on the consumer, business, and financial sectors of the economy. Even
with a reduced staff, studies continued to be needed on, for example, the impact of
existing or proposed taxes on incomes and output, thefinancialposition of the banking
system, changes in the labor force, the course of inflation, and so forth. And in order
to understand and monitor what was happening in the economy, data also had to be
compiled and analyzed on some (for the Board) unusual subjects such as the financing
of defense and war plant conversion and expansion, government contract renegotia


WORKING AT THE BOARD

11

tion, and, later, contract termination, and plant reconversion. In the mid-1940s, the
research staff also turned out Postwar Economic Studies, a set of eight forward-looking
pamphlets on various aspects of the nation's economy as well as on its domestic and
international monetary policies.
An important part of the work of the Board's international experts was designed for
use far beyond Washington. Early in 1943 the Board was asked to prepare Handbooks
on Money and Banking, dealing with the European and Far Eastern countries to be
liberated by the Allies, for the use of the future occupation forces. In order to do the
job, the Board greatly expanded the small international section in the research division, mainly by recruiting economists of European origin, most of them refugees from
Nazism—a somewhat different type than the average Board economist.
The Board was fortunate in having two eminent advisers at the time, professors
Howard Ellis and Alvin Hansen, who had spent some time in Europe, especially in
Vienna, and were able to assemble a group that included some scholars of remarkable
ability, such as Alexander Gerschenkron (born in Russia but, as a refugee from bolshevism, educated in Vienna), perhaps the only Board economist to go directly from the
Board to a Harvard professorship; Albert Hirschman (an excellent German-born economist), apart from Win Reifler and E.A. Goldenweiser, probably the only Board
economist to become a member of the Princeton Institute for Advanced Study; and
the Italian-born Frank Tamagna, the Belgian-born Bob Triffin, the U.S.-born Randall
Hinshaw and Lloyd Metzler, all of whom later enjoyed distinguished academic careers.
In addition, the successive heads of the section in the 1940s, Walter Gardner and Burke
Knapp (both U.S.-born), later played crucial roles at the IMF and World Bank. The
tradition of scholarship in the expanded international section was maintained when the
section became a separate division in 1950, under the leadership of Arthur Marget.
On a more homely level, some of the employees who remained at the Board during
the war years also took the time, under the auspices of the Reserve Board Club, to
compile a Federal Reserve News Letter (later called The Constitution) which was mailed
to all current or former Board employees in the military service for whom the editors
were able to get an address. The publication included letters from those employees,
reports of the military promotions, transfers, marriages, or other news the editors had
learned about, and answers to inquiries raised in the letters. It also included similar
news "from the home front"- marriages, babies, resignations, transfers, and other news
about employees or their children, as well as reports on the Board employees' superior
record as blood donors and War Bond subscribers.
It was quite a document and was very well received by those for whom it was prepared. Military personnel who could not tell their Board friends exactly where they
were or what they were doing could, and did, tell them how much the newsletter, plus
an RBC card and gift at Christmas, meant to them. The fact that they were not forgotten but were still considered an integral part of the Board family may have eased their
return to civilian life-in some cases back to life at the Board. •







WORKING AT THE BOARD

REFLECTIONS ON FED HISTORY
IN THE

1950s

M

emories of working at the Board during the 1950s contain several highlights:
the Korean War; the Treasury-Federal Reserve Accord; the return of a
flexible monetary policy; and, of course, the outstanding Board staff.

The Korean War
Looking back, one startling thing about the Korean War was the alacrity with which
the Congress acted to implement tighter economic policies, including some that directly
affected Board staff responsibilities. Within a few months after the war started, the Congress had authorized the Federal Reserve to impose direct controls on certain types
of consumer credit (Reg W) and real estate credit (Reg X) because the effectiveness
of general monetary policy was being emasculated by continuation of the World War
II commitment to peg prices of U.S. government securities. In early 1951, the Fed instituted a further special program of Voluntary Credit Restraint designed to discourage
the use of borrowed funds to finance "nonproductive" uses of scarce resources.
Staff members involved in the Reg W and Reg X efforts to control credit allocation
were generally frustrated by the results. Reg W had been relatively easy to enforce
during World War II because production controls on materials and the manufacture
offinaloutput had effectively diverted factory production away from consumer products
to war goods. During the Korean War, on the other hand, there were no production
controls. Industry could continue producing consumer products, and consumers were
actively interested in replenishing the consumer durables they had foregone during World
War II.
To facilitate continued creditfinancingof such transactions, industry lawyers proved
to be highly adept at developing arrangements that effectively circumvented the letter
of Reg W. Fed regulators found themselves lagging far behind industry lawyers, first
in ferreting out the loopholes, and then in devising measures to close them. Similar
enforcement problems developed in the administration of Regulation X.
This generally negative experience with mandatory credit allocation programs strongly
influenced Fed attitudes. Each time the Congress has subsequently proposed new programs for direct credit regulation, Fed officials have taken a negative view of their
feasibility.
Voluntary credit restraint. The 1951 program of voluntary credit restraint employed
"moral suasion" to implement general guidelines developed essentially by industry groups
themselves. Because industry leaders had major responsibility for developing this
program, it was harder for them to rationalize its circumvention through a search for
loopholes, which are harder to find anyway when the program rests on the spirit of
guidelines rather than on the letter of a regulation. Nevertheless, as pressures from
the Korean War moderated, this program too lost effectiveness.



14

WORKING AT THE BOARD

Treasury-Federal Reserve Accord
With the Korean War inducing strong general demands for credit, the Fed's continuing commitment to peg U.S. government security prices provided all holders of outstanding marketable Treasury debt with instant liquidity. This promoted very rapid
expansion of bank credit, and in the words of Marriner Eccles made the Federal Reserve
"an engine of inflation."
However, President Truman felt he had been cheated after World War I when Treasury bonds he purchased to support that war effort had gone to a deep discount. He
resolved he would not let holders of World War II bonds suffer a similar fate. Resolving these opposed views and conflicting priorities took several years of painstaking
negotiation. The famous "Accord" abandoning pegging was finally reached in early 1951
when a recently appointed young Assistant Secretary of the Treasury named William
McChesney Martin, Jr. used his special understanding of U.S. financial markets to
reach an agreement with Fed officials and his special gift of communication to persuade his colleagues in the Treasury and the Administration to go along.

Return to Flexible Monetary Policy
Before the Treasury and the Fed reached their 1951 Accord, open market operations
had been held hostage to the pegging of U.S. government security prices for more than
a decade. In addition, commercial bank use of the discount window had been largely
moribund since the early 1930s. Some relearning of the basic elements of flexible monetary policy was thus required as the Fed moved to reinvigorate all of its traditional
policy tools: open market operations, discount rate changes, and changes in reserve
requirements. Fortunately, Winfield Riefler and Woodlief Thomas, senior economic
advisers at the Board, had been actively involved in the original development of open
market policy during the 1920s. They, along with several others on the staffs of the
Board and the Reserve Banks, provided much of the expertise needed to guide the Federal Open Market Committee (FOMC) in the necessary transition back to a flexible
policy.
Free-reserve targeting. However, the transition to a flexible policy was not
problem-free. Operations of the FOMC Desk at the Federal Reserve Bank of New York
had to be reformed. Also, short-run operating targets had to be developed to guide
Desk operations between FOMC meetings.
As the decade progressed, net reserves became the preferred guide the FOMC used
to transmit its judgment to the Desk for such purposes. Unfortunately, as time passed
the FOMC became too rigid in its use of free-reserve targeting, without fully recognizing that the same numbers in the net reserves spectrum could mean different things
at different phases of the economic cycle. Critics of free-reserve targeting pointed out
that the degree of policy ease or tightening represented by a given net reserve number
depended importantly on the prevailing intensity of demands for bank credit at the time.



WORKING AT THE BOARD

15

Because the criticism of the FOMC's use of net reserves was valid, it led in time to
changes in targeting procedures that took account of the behavior of total reserves and
money.
Administration of the discount window. Renewed reliance on the discount window as a tool of monetary policy (after two decades of virtual disuse) left discount
window officials at Reserve Banks with major uncertainties as to how forthcoming they
should be in making loans. To try to achieve greater consistency across Fed districts
in allowing member banks access to the Fed window, the Board ordered a special study
of discount window operations in 1954. On the basis of this study, the Board then revised its Regulation A regarding discount window operations. In addition, to help promote uniformity in the ongoing administration of the window, the Board established
a special conference of Board staff and Reserve Bank discount officers to monitor and
coordinate operations of the window across the twelve Federal Reserve districts.
Other policy instruments. The Board of Governors also used other policy instruments actively during the 1950s. For example, to reinforce other Korean War measures, reserve requirements on member bank deposits and margin requirements on credit
to finance purchases of stock were both raised at the beginning of 1951. Thereafter,
although stock margin requirements were both lowered and raised (as credit developments dictated), most additional actions on reserve requirements were reductions. This
was partly a recognition by the Board that the high cost of reserve requirements was
placing member banks at a competitive disadvantage relative to nonmembers, resulting in an increasing number of defections from the System.
One other 1950s Board action bears mention, since it presaged a policy dilemma that
became much more acute in succeeding decades. At the end of 1956, the Board elected
to raise the maximum permissible rate on savings deposits and longer-maturity time
deposits at banks from21/2to 3 percent. In taking this action the Board said there was
"no reason to prevent banks (in their discretion) from competing actively for time and
savings balances by offering rates more nearly in line with other market rates." Even
then, however, savings and loan associations and smaller banks complained vociferously that the higher 3 percent ceiling rate made them unfairly vulnerable to the higher
costs of competition for savings from more diversified large banks.

Board Management Procedures
In 1953 the Board decided to increase the extent of its internal audit control and improve its budget procedures. Accordingly an Office of the Controller was created to
report directly to Chairman Martin, with Governor Robertson as adviser. Edwin J.
Johnson, a C.P.A. and long-time Federal Reserve employee, was appointed Controller.
The next step was to have the Board's accounting program reviewed by one of the
top public accounting firms in the country. A large percentage of this company's major
recommendations was immediately adopted by the Board, and most of the remainder



16

WORKING AT THE BOARD

became part of the Board's internal control and budget approach. The Board also set
a policy of having its accounts audited annually by the foremost accounting firms in
the country for periods of three years each and provided for the continuation of this
rotation in the future.
These actions improved the Board's image with the Congress, the country's banks,
and the general public, in that no longer could the Board be considered as its own critic
in the accounting and budget areas.

Personalities of the 1950s
Board members. The Board members best known to the general public in the 1950s
were Marriner Eccles and William McChesney Martin, Jr. In 1948, President Truman
elected not to renew Mr. Eccles's position as Chairman and instead appointed to the
chairmanship Mr. Thomas McCabe, Chairman of the Board of the Scott Paper Company, who had been serving also as the Chairman of the Federal Reserve Bank of
Philadelphia. While a highly respected member of the business community, Mr. McCabe
had little experience with the types of problems facing the Federal Reserve. He frankly
recognized this lack of knowledge, relied heavily on the staff for background material
and briefings, and in effect delegated much of the task of running the Fed to Mr. Eccles
(who had become Vice Chairman). Mr. Eccles continued in this role for a time. But
not long after the Treasury-Federal Reserve Accord, he resigned and returned to his
family banking business in Utah.
The Accord also was followed by the resignation of Chairman McCabe, who was
then succeeded by Mr. Martin. As the son of a former President of the Federal Reserve
Bank of St. Louis, Mr. Martin learned early about U.S. financial markets. He then
made a reputation as the "boy wonder" who took over the chairmanship of the New
York Stock Exchange in the 1930s and successfully refurbished the Exchange's image
following the 1929 debacle.
With the enactment of the U.S. draft law in 1940, Mr. Martin, who was then still
under thirty-five, received an early call and entered the U.S. Army as a private. After
the war, he served for several years at the Export-Import Bank and in 1949 was called
to the U.S. Treasury to serve as Assistant Secretary. In the latter position his understanding of U.S. financial markets led him to see the need for abandoning the Fed's
pegging policy. When the opportunity arose, he took responsibility for arranging the
1951 Accord.
At the time Mr. Martin took over as Board Chairman, the Executive Committee of
the FOMC consisted of the Chairman of the Board, the President of the Federal Reserve
Bank of New York, a second Board Governor, and one other Fed Bank President. This
rump group met frequently and tended to dominate the formulation of monetary policy.
The full Committee itself met only four times a year. Even then, only the Reserve Bank
Presidents who were voting members attended. Bank Presidents generally, therefore,
had little continuing contact with open market policy—the key exception being the President of the New York Bank.
After observing these power relationships for a few years, Chairman Martin per


WORKING AT THE BOARD

17

suaded the FOMC to abolish its Executive Committee and to upgrade the role of the
full Committee. After this change, the full Committee met roughly twice a month, and
all Fed Bank Presidents were invited to attend all meetings, whether or not they were
voting members. This change helped other Fed Bank Presidents to become more
knowledgeable about the full details of formulating monetary policy, and broadened
the base of Reserve Bank input into policy making.
Among other Governors on the Board during the 1950s, Jake Vardaman, Louis Robertson, and Canby Balderston are of particular interest. As a longtime friend of President
Truman's, Mr. Vardaman was strongly loyal to his mentor. During the height of the
controversy over pegging, he operated as a direct channel to the White House, reporting the specifics of Board discussions and actions as they were taken. His role as the
President's pipeline ended once General Eisenhower became President. Thereafter, Jake
tended to lose interest in the more general work of a Federal Reserve Governor. A
few years later he resigned.
Governor Robertson was appointed to the Board in February 1952 after serving as
a lawyer in the Office of the Comptroller of the Currency. While the special reason
for his appointment was to provide more expertise on bank regulation to the Board
itself, he became an active participant in the full range of Board policies, often staking
out positions in strong terms. In doing so, he seldom passed up the opportunity to slip
in a reference to his roots in Broken Bow, Nebraska. He was also an unfailing "tiger
at the net" in the famous Martin-Robertson duo on the Federal Reserve tennis court.
For staff members to be invited to play against this team was often a combination of
personal compliment and tennis humiliation.
Governor Balderston, former Dean of the Wharton School of the University of Pennsylvania and also former Chairman of the Board of Directors of the Federal Reserve
Bank of Philadelphia, is remembered for his contributions to the personnel programs
of both the Board and the Reserve Banks, which were far-reaching for that time. During the middle 1950s he was instrumental in an improvement in personnel procedures
at the Board that resulted in needed changes in employee benefits, classification of
positions, training, and employee relations. He was also primarily responsible for accomplishing a much-improved relationship between the Board and the Banks in the
area of officer salaries, and he directed a program that resulted in a mutually agreeable
method of setting salary structures for Bank employees.
Senior staff. In addition to Winfield Riefler (Adviser to the Chairman) and Woodlief Thomas (Adviser to the Board), top economic staff in this decade included Ralph
Young (Director of the Division of Research and Statistics) and Arthur Marget (Director of the Division of International Finance)—a group of extremely sharp and stimulating leaders of the research staffs. By the end of the decade, Mr. Riefler had retired,
at close to the (then) mandatory age of sixty-five, and Messrs. Marget and Thomas
were soon to retire. Mr. Young retired in 1966.
Mr. Thomas joined the Federal Reserve in 1920, when he began a two-year stint
at the Philadelphia Fed. He then spent the years 1922-28 as a member of the Board's
research staff. After two years in Berlin as an economist with the U.S. Office for



18

WORKING AT THE BOARD

Reparations Payments and several years at the Federal Reserve Bank of New York,
Woody returned to the Board in 1934 as Assistant Director of the Division of Research
and Statistics. He was appointed director of the division in 1945 and Adviser to the
Board in 1949.
Win Riefler was a colleague of Woody's in the 1920s, both at the former Brookings
Graduate School of Economics and Government (from which each received his Ph.D.)
and in the Board's research division which Mr. Riefler joined as an economist in 1923.
He left the Board's staff ten years later but returned in 1948 as Assistant to the Chairman. In the intervening years, he held a number of important positions in the U.S.
government, served as a director of the Federal Reserve Bank of Philadelphia, and
was Professor at the School of Economics and Politics of the Institute for Advanced
Study at Princeton.
Ralph Young had been on the staff at the National Bureau of Economic Research
prior to becoming Assistant Director of Research at the Board in 1946. He moved up
to Director in 1949. Given his National Bureau background, Ralph had a propensity
to launch the research division on exhaustive studies. Among those undertaken in the
1950s were a multiple-volume study of consumer credit developments in the United
States; the review of the Fed discount window (noted earlier); and a staff study of the
Effects of Credit and Monetary Policy, mid-1952 through 1954.
Arthur Marget had been a full professor at the University of Minnesota prior to World
War II, and while there authored a major book entitled the Theory of Price. After the
war, he was head of the U.S. delegation concerned with financial stabilization in Austria. He then joined the Board staff and became the first Director of the Division of
International Finance in 1950, expanding both its size and responsibilities as the decade
progressed.
Friday mornings during Marget's tenure as division director were typically devoted
to staff meetings that Arthur conducted much like an academic seminar. Even relatively
junior economists attended, and all were encouraged to offer their wisdom on whatever issues were under discussion (providing appropriate supporting facts and theory).
While this sometimes made achieving deadlines on other assignments difficult, members of the division benefited greatly from the practice.
More junior staff already at the Board during the early 1950s benefited from the varied work assignments and rigorous intellectual discussions of relevant economic issues
that their superiors encouraged. Several bright scholars among the junior staff later
took over from the retiring seniors. Among these members of the new generation were
Dan Brill, Bob Solomon, and Steve Axilrod. (One of Steve's corollary assignments
was frequently playing tennis against the Martin-Robertson doubles duo.)
Transfers to private sector. As the Federal Reserve returned to its traditional task
of implementing a flexible monetary policy, private institutions active in U.S. financial
markets discovered that the Board had developed an enviable but low-priced staff of
financial experts, some of whom could be persuaded to make promising career changes.
For example, Charlie Schmidt, Chief of the Business Finance and Capital Markets Section, left the Board to become portfolio manager at the National Bank of Detroit. He



WORKING AT THE BOARD

19

became very successful in this position before his life was cut short by an untimely
heart attack. Later, Richard Youngdahl, then an Assistant Director of the Division of
Research and Statistics, left to join Aubrey Lanston as a securities trader. When Aubrey
Lanston died, Dick replaced him as the chief executive officer.
In the early 1950s, while on a vacation in Arizona, Woody Thomas persuaded Ralph
Leach, then managing the securities portfolio of the Valley National Bank in Phoenix,
to come to the Board to join the Government Finance Section. Chairman Martin soon
began to rely heavily on Ralph (as one market man to another) for interpretations of
current and prospective financial developments. Ralph and Dick Youngdahl were also
largely responsible for the Fed study that preceded the 1953 changes in FOMC operating procedures. The hearings with market participants on which this 1953 study was
based brought Ralph into close contact with key people at leading financial institutions.
Later in 1953, Ralph was hired by the Morgan Guaranty Trust Company, where he
subsequently advanced to become treasurer.
Another alumnus of the Government Finance Section who moved to the banking
industry was Don Miller. He originally joined the Board on leave from the University
of Illinois as a visiting scholar doing research on fiscal policy. He was persuaded to
stay on as a regular, and then became head of the Government Finance Section when
Ralph Leach departed. In this position, Don had close contact with officials of the Treasury, including Dave Kennedy, who was then the Special Assistant for Debt Management. Later, when Dave Kennedy became the CEO at the Continental Bank in Chicago,
Don joined him as part of the Continental portfolio management team. Ultimately Don
became vice chairman.
Such staff moves were to continue throughout the ensuing decades, in evidence of
the external judgments of the quality and value of the Board staff relative to its compensation. It is a tribute to the standard of ethics adhered to by departing Board staff
members that no public scandal over the abuse of "insider" information has ever developed in the wake of these departures.
Transfers between Reserve Banks and the Board. While Board section chiefs were
sternly admonished not to lure promising talent away from Reserve Banks to the Board,
a few Bank staff members, nevertheless, arranged such transfers from time to time.
On occasion, the flow of talent went in the reverse direction. Thus, Homer Jones,
who had come to the Board staff from the FDIC (in the late 1940s) to head the Consumer Credit Section, moved (in the late 1950s) to the St. Louis Fed to become research
director. There, he received a much more sympathetic hearing for his views on the
importance of money supply in the targeting of Fed policy than he had at the Board.
The intra-System personnel movements were to grow in numbers in ensuing decades
and broaden in range, eventually coming to include Board members also. •







WORKING AT THE BOARD
THE ATMOSPHERE

OF THE

T

1960s

AT THE BOARD

he decade of the 1960s soon brought a fresh breeze to both the nation and
the Federal Reserve. The election of 1960 put a young and vigorous President in the White House. He exuded confidence in rational thought. He
arrived with some fresh ideas, and he was in the market for more. Accordingly, in
a number of his early appointments he chose highly trained, intellectually curious
individuals with forward-looking attitudes. They brought new ideas of their own and
of other thinkers into policy circles.
One such appointment was the naming of George Mitchell to membership on the
Board. Mitchell was a blunt-spoken fiscal expert and research director at the Federal
Reserve Bank of Chicago. His style of probing inquiry into Federal Reserve issues
took some getting used to, but in time his colleagues on the Board and the staff came
to appreciate it.
In this atmosphere of intellectual challenge the Board staff responded vigorously.
Friendly debates on policy issues great and small were common in the Board offices
and over the cafeteria tables. The directors of the two research divisions, Arthur Marget
and later Ralph Young for the Division of International Finance and Jack Noyes and
later Dan Brill for the Division of Research and Statistics, were open to bringing in
outside experts to exchange ideas. Brill was particularly adept at drawing thoughtprovoking scholars of varied backgrounds into the Board's offices for occasional talks
or short stays.
A somewhat more collegial tone came to pervade the halls of the Board. The Board
even established a panel of outstanding academic consultants, who provided some very
stimulating exchanges in their periodic meetings around the Board table.
This atmosphere was enhanced by the next three appointments to the Board—Dewey
Daane in 1963, Sherm Maisel in 1965, and Andy Brimmer in 1966, all of whom were
well-trained professional economists. In fact, Maisel's appointment raised the number
of economists to a majority on the Board, a condition that was maintained throughout
the rest of the 1960s and the 1970s. Staff reaction to this situation met the classic definition of "mixed feelings," if one were to judge by the nature of comments exchanged
in jocular moments. Research division personnel seemed to relish the professional level
of many of their exchanges with the economist Board members, but often groaned under
the burden of a constant stream of special research requests from them. Staff in other
divisions occasionally felt left out of some of the economist-to-economist exchanges
but also felt relieved to receive a smaller share of the Board member requests for data
and analysis.
In the early years of the Kennedy Administration, the Board members and staff found
to their pleasant surprise that a number of the new Administration officials also relished
the kind of intellectual inquiry taking place within the Board building. Periodic meetings with one or more of the members and staff of the Council of Economic Advisers,



22

WORKING AT THE BOARD

for example, frequently became lively seminars on the economic issue of the day. While
differences of views were common, the exchanges were generally friendly and
constructive.
As these discussions continued, confidence in them increased, primarily because U.S.
economic progress was proceeding fairly well. In other fields, the nation received some
jolts—the Bay of Pigs disaster in 1961, the Cuban missile crisis in 1962, and the tragic
assassination of President Kennedy in 1963. In the economic sphere, however, whatever shortfalls and setbacks developed were mild enough not to discredit either the basic economic policy objectives or the means by which they were being pursued.
Monetary policy debates within the FOMC were vigorous, but the differences being
debated usually were relatively small. New tools were being put into place to produce
more sophisticated economic analyses. The painstaking conceptual and statistical work
launched under Ralph Young in the 1940s to develop the flow of funds accounts was
bearing fruit in more comprehensive analyses offinancialflowsin Board briefing documents. Dan Brill and Steve Taylor became increasingly adept at relating the flow of
funds statistics to one or another of the financial issues of interest to the Board.
In the back rooms of the research division, experimental work with the new science
of econometric modeling was going on. This was mind-stretching work for Frank
de Leeuw and the rest of the staff involved, and practical benefits did not come quickly.
It was not until the decade of the 1970s that the output from econometric models became
a really important part of the analytical material that the Board and the Federal Open
Market Committee weighed in their deliberations.
Such work involved more and more number crunching and was heavily dependent
upon the developing computer capability within the staff. The Board's pioneer in computer technology and its utilization was Herb Schwartz. Herb had all the main attributes of a pioneer—vision, know-how, enthusiasm, dedication, and persistence—and
he needed all these as he strove to push and pull the Board into the computer age.

The International Dimension
In the early years of the decade, the most portentous economic warning signal that
was flashing was the nagging balance of payments deficit. It was of small magnitude
compared with those that emerged in succeeding decades, however, and its implications were not well understood by many Americans. The United States saw itself as
strong and growing economically stronger, and at the same time carrying the burden
of free world military and economic leadership for which it deserved some gratitude
from its allies.
The proximate cause for the balance of payments deficits was a sizable capital outflow
from the United States, as owners and lenders of U.S. capital assets were increasingly
attracted to the higher interest rates and improving economic prospects available in
several other major countries. An appropriate short-term policy strategy for the United
States, therefore, seemed to be to develop and utilize various mechanisms to slow this
outflow of capital and to absorb much of the excess dollars accruing in the coffers of
European central banks by devices other than the outright sale of U.S. gold to them.



WORKING AT THE BOARD

23

One such mechanism was the "swap," an operational technique for purchases and
sale of foreign currencies, backed by a network of short-term mutual credit arrangements among the key central banks. A little later in the decade came "Operation Twist,"
a nickname for Federal Reserve open market purchases of longer-term Treasury securities intended to moderate upward pressures on long-term interest rates from Fed sales
of short-term Treasury securities for traditional reserve-absorbing purposes.
In addition, the Interest Equalization Tax was enacted in 1963 to help staunch the
private capital outflow from the United States by making U.S. private sector purchases
of foreign securities less attractive. And in early 1965 the Voluntary Foreign Credit
Restraint Program was instituted. The Board was given the power to run that program,
not only in its application to banks, as would be expected, but also in its application
to all types of nonbank financial institutions. Governor Robertson, later succeeded by
Governor Brimmer, was put in charge of the program. Their administrative talents,
and the day-to-day operating support provided by Bob Sammons (later, Bernie Norwood)
for banks and Eleanor Stockwell for nonbanks, gave the program as respectable a showing as could be expected.
Nonetheless, the Board as a group was uneasy about this program's interference with
private credit decisionmaking. That Board uneasiness also applied in varying degree
to each of the other mechanisms cited here for dealing with the U.S. capital outflow
by means beyond such traditional macroeconomic policies as further tightening of fiscal
and monetary policies.
Like a "good soldier," however, the Fed went along with the command decisions on
the final policy mix. In the area of international financial policy, by law and Presidential delegation of power, the Treasury was "top dog." The key person usually was the
Under Secretary of Treasury for Monetary Affairs. The Fed Board Chairman was always
an influential voice. Also, in this arcane field due weight was usually given to the technical expertise of the foreign exchange market staff at the Federal Reserve Bank of
New York and at the Board's Division of International Finance. On some aspects, the
views of the U.S. Executive Director at the International Monetary Fund also were
important.
The arguments within this group were frequent, earnest, and occasionally intense.
Who sided with whom could vary from issue to issue. Some of the territory covered
had no U.S. precedent to guide the participants, and factual evidence on what was the
right thing to do was often unobtainable. Nonetheless, when the operational decisions
were made in each case, the group faced up to the need to join ranks and pull together
in implementing them.

Dealing with Domestic Inflation
By the middle years of the 1960s, domestic economic expansion had proceeded far
enough to begin generating increasing signs of upward price pressures. Inflation concerned the Board, and the staffs economic analyses were attuned to detect and evaluate
the known contributors to current and prospective inflationary pressures. In late 1964



24

WORKING AT THE BOARD

and 1965, strengthening civilian demands were augmented by a surge of military orders
as the Administration moved to escalate U.S. military capability to wage the war in
Vietnam. For both strategic and political reasons, however, this escalation was kept
a closely held secret. Along with numerous other government offices, the Federal
Reserve was given no information on this buildup or its likely economic impact. Through
much of 1965 this lack of knowledge handicapped Fed policy making. The Federal
Reserve economic information gathering network began turning up surprisingly large
statistics for the rise in business loans, inventories, and capital equipment orders, as
defense contractors positioned themselves to produce under the new military contracts.
But without any factual evidence of stronger fiscal demand, those statistical bulges looked
more like aberrations than the start of a markedly stronger and potentially inflationary
uptrend in real demand (which, of course, is what they were).
For much of 1965, the Board and its staff strove to clarify these anomalies in its
information inflow, in order to be able to calibrate better its actions to restrain money
and credit expansion. Small precautionary restraining actions were approved by the
FOMC during the summer and early fall, but by November the Board members decided
they could wait no longer to take a decisive step. They approved a collection of Reserve
Bank requests to increase their discount rates. They did not expect the Administration
to like this action, for its representatives had been urging the Fed all year to go slow
in taking any monetary restraining action. Presidential response was quick: President
Johnson, on a brief vacation at his ranch, wanted to talk to Chairman Martin. Martin
dutifully flew to Texas, while his colleagues and staff waited, with memories of the
previous painful dispute between President Truman and the Federal Reserve very much
on their minds. But once again Bill Martin's market knowledge and communication
skills were up to the challenge. He and the Fed emerged unscathed.
Throughout the rest of 1965 and 1966, increasing monetary restraint was the rule
of the day. By 1967, this monetary drag and other forces of deceleration produced a
short and mild economic slowdown; accordingly, the Fed eased up somewhat, but not
for long. With still more "guns and butter" spending stoking the economic fires, consumption and investment turned up strongly. The resulting excess in total demand spilled
over into both domestic price increases and a renewed deterioration in the U.S. balance of international payments. Thereafter, throughout the rest of the decade, the Fed's
monetary policymaking was focused on fighting inflation. With Ralph Young's retirement, the staff leadership in this work rested with a new "troika" of Dan Brill and Bob
Solomon who headed up the domestic and international research divisions respectively
and Bob Holland as Secretary of the Federal Open Market Committee and subsequently
also Secretary of the Board.
The work that went into the Board's analysis of inflationary forces and how to deal
with them was intense. Frustratingly for both the Board and its advisory staff, however, its succession of traditional-sized monetary tightening actions plus its unconventional Voluntary Foreign Credit Restraint Program were not enough to offset the sustained inflationary push of public and private spending.




WORKING AT THE BOARD

25

Dealing with a Changing Banking Structure
The domestic and international financial developments during the 1960s helped to
increase the incentives for many banks to alter their basic structures. Some responded
by trying insofar as possible to expand and diversify the geographical scope of their
service markets. Others sought diversification by entering into new product markets.
Many banks sought added strength and economies of scale by endeavoring to grow
larger, partly by growth-oriented banking policies and partly by mergers or acquisitions when such opportunities could be found. Often these actions pressed the limits
of existing bank structure legislation. Occasionally this tendency led to court cases to
clarify the boundary lines of banking. More often it led to advocacy of new legislation
to give banks wider scope for their operations.
The Federal Reserve, as one of the three major federal bank supervisory agencies,
was drawn deeply into deliberations on how to deal with these developments. Much
of the existing laws and regulations had been created to prevent recurrence of the banking
problems of the 1920s and 1930s. Safer and sounder banking was their prime goal. But
many bankers and others now agreed that, with these lessons learned, such tight constraints could safely be relaxed. Moreover, there was pressing reason to do so because
in the post-World War II era more and more competition for customers was developing, much of it from institutions conveniently positioned just outside the restraints
applicable to banks.
Early in the 1960s, the Board moved to bolster its analytical foundations for deciding
issues of banking structure. It created a new Banking Markets Unit within its research
division to make appropriate use of the extensive theoretical and empirical work done
by academic economists over the years on the definition and functioning of competition in markets for goods of various kinds. This new Banking Markets group was quickly
staffed, in good part with industrial organization experts from university faculties, and
a mutual educational process was begun. The guiding principles, analytical techniques,
and rules of thumb that the economic analysts thought desirable to apply to banking
structure issues, with emphasis on competitive performance, needed to be blended with
the differing tools used by lawyers and bank examiners to judge issues of safety and
soundness as well as competitiveness. There were plenty of possibilities for misunderstandings, failures of communication, and"turf"battles. On the whole, relatively few
of these materialized. Partly this was a tribute to the personalities of the individuals
involved and their urge to get on with the Board's business. Partly it was a practical
reaction to the looming volume of issues and cases that needed to be dealt with. There
was more than enough work to go around. Three key staff members with a "let's get
the job done" attitude were particularly helpful in these endeavors: Brent Leavitt,
Assistant Director of the Division of Examinations; Tom O'Connell, Assistant General
Counsel in the Legal Division; and Tynan Smith, the in-house economist chosen to
head the Banking Markets Unit. The Board members soon came to appreciate the good
judgment of each of these men individually and the synergistic quality of the work of
their units collectively. Their superiors on the Board staff as well as the Board mem


26

WORKING AT THE BOARD

bers themselves learned how much they could rely on this trio in finding their way
through the jungle of entangled and often conflicting facts, rules, and allegations
applicable to banking structure.
In its decisions on the numerous banking structure cases, the Board tried valiantly
to build a logically related progression of case precedents. But that was often impossible to do because of the misfits between the pre-World War II and post-World War II
banking environments. Particularly mind-boggling were the implications of the potential structural innovations of which bank holding companies were capable. To try to
resolve these matters in what it regarded as reasonable fashion, the Board repeatedly
requested a number of changes in relevant federal legislation. But here it was not especially successful. That reflected a number of forces at work: The counterbalancing legislative influence of banks that wanted to expand, merge, and diversify and banks that
did not; the respective lobbying strength of banks that wanted more freedom and other
financial intermediaries ("near banks") that wanted banks to be kept within their existing confines; the varying intensity and effectiveness of the "turf defenses mounted by
the various regulatory authorities; and the particular preferences of the Administration
and especially the Congress of that time.

Patman and Proxmire and Their Consequences
No history of what it was like at the Board would be complete without some reference to the impact of two particular members of the Congress: Representative Wright
Patman and Senator William Proxmire. While their terms of congressional service
extended well beyond the 1960s, their impact on the Fed in this decade is typical.
They were key congressional leaders, Patman heading the House Banking Committee and Proxmire the Senate Banking Committee for much of this time, as well as serving on several other influential congressional committees and subcommittees. When
the Fed wanted a change in banking legislation, it was usually through these two chairmen that it had to proceed. In turn, when the Congress wanted to exercise its power
of oversight over the Federal Reserve System it had created, it was usually one of these
two chairmen who mounted the inquisition.
Both were canny and well informed. Patman was a populist, who regarded the Fed's
occasional tight money forays as an oppression of the common man. Proxmire was
a thrifty liberal, who advocated activist government but detested spendthrift bureaucrats
and inefficient programs. Each of them found plenty of opportunities to try to trim the
Fed's wings.
A hearing before either of these gentlemen was something of an ordeal. Word of
a new invitation to testify before either one was typically greeted around the Board
with the institutional equivalent of a sigh. Preparations for the appearance were strenuous. Often a very substantial support document was required. Weeks and sometimes
months of staff time were spent in its preparation.
The testimony itself often included a good deal of grilling of the Fed witness by the
committee chairman, rather in the style of a determined prosecuting attorney. It was



WORKING AT THE BOARD

27

a rare day when the Fed's representative could return from such a session and say "I
got what I wanted."
Sometimes Patman and Proxmire would turn the tables on the Board by introducing
some proposed new legislation that would take away some cherished Fed power or
privilege. Bringing budgets of the Board or the Federal Reserve Banks under congressional control was a favorite thrust, and one the Fed regularly resisted. To the Fed,
this breached the carefully crafted insulation from pressure politics that had been a key
part of the legislation that had created it. As a practical matter, the Fed was a "cash
cow" for the federal government, (a byproduct of its congressionally given power to
create money) rather than a net user of federal budgetary resources, and every Federal
Reserve spokesman knew that.
To help prove groundless the recurrent charge by Patman and Proxmire that the Fed
was a wasteful spender of resources, the Board often turned the budget screws as tight
on itself and the Federal Reserve Banks as the Administration and the Congress were
endeavoring to do to the rest of the federal government. Nobody on the Board staff
enjoyed these episodes. In fact, the Board was not a lavish spender to begin with, so
often what resulted were marginal spending curtailments that took nicks out of a sizable number of cherished projects, programs, and perquisites, of which the most important were undoubtedly staff salary increases.
Apart from these "P & P pinches," the Board recognized that its special budget position also carried the implicit responsibility to be more attentive than the average federal agency to the cost-effectiveness of its use of resources. Accordingly, over time
it evolved several techniques for discharging this special responsibility. In the 1960s,
it was delegating oversight of the Board's budget to one of its members (who was called
the Administrative Governor). Early in the decade that task was given to a Governor
with experience in managing either a government or university budget. Later on, this
power was vested in one after another of the Governors who came to the Board with
background as a corporate senior executive well versed in modern management techniques. The first of these was Bill Sherrill, who was appointed to the Board in 1967.
With the backing of the Board, Governor Sherrill presided over the development and
installation of a management-oriented planning and budgeting process. It was not exactly
an ideal fit with the existing Board staff culture. The typical officer of a Board staff
division felt that his people worked hard, they did not waste many resources, and almost
all of what his unit was doing were things the Board had asked for. By and large he
was probably right in these judgments. But the new management system had its benefits
nonetheless. It made all the managers more cost-conscious; it made the staff leaders
and the Board do more coordinated planning ahead; it imposed a certain degree of discipline on the Board members' requests for staff work; and it helped answer the budget
attacks by Chairmen Patman and Proxmire.
All told, by the end of the decade, the Board had equipped itself with a new generation of tools for economic analysis, a new managerial system, and a new generation
of staff leadership with which to respond to the challenges of the 1970s. •







WORKING AT THE BOARD
WORKING FOR THE FED
IN THE

1970s

As the century turned seventy the staff of the Federal Reserve Board bent to
two huge new tasks, under the new leadership of Arthur Burns: helping
the Board find its way in supervising all the nation's bank holding companies
newly endowed with authority to own nonbanking businesses, while adapting to the
strange (for a central bank) new role of consumer advocacy mandated by the Congress
in the Truth in Lending Act. As the decade ended, under the new leadership of Chairman Paul Volcker, the staff found itself transformed from the relatively obscure community of bank regulators and monetary policy experts, into advisers to the nation's
key economic policymaking body, hotly engaged in Volcker's take-no-prisoners fight
on inflation.
Between these bookends to the
decade there were volumes—more than
JOE COYNE
can be said here—of other changes,
many of them dynamic, that affected the
responsibilities, work load, exposure,
Consumer credit protection, the bank
and outlook of both the Board and its
holding company wave, interest rate
staff. A summary of these less dominant
deregulation, the growth of money
factors includes massive data gathering,
market mutual funds and of internanumbers crunching, and monitoring as
tional markets, and the fight on inflathe Fed did its part, however doubting,
tion greatly altered the staffs and the
in attempts by the White House to conBoard's work load. But the most importain inflation by freezes, controls,
tant thing that happened to the Fed and
voluntary restraints, and similar prothose who worked there during the
grams in 1971-74; adapting Board
1970s was that all these things together
procedures and rules to the invasive
pushed the Fed front and center as the
Freedom of Information and Governstrongest, sometimes the only visible,
ment in Sunshine legislation of 1974 and
national economic policymaker.
1976; overhauling all the Board's regulations to make them more readable, to
update them, to cut out deadwood, and to ease regulatory burdens; adapting to an
increasingly demanding series of new reporting and recordkeeping requirements by
the Congress; developing a national network of computerized regional centers for overnight check clearance; developing, together with other federal banking supervisors,
uniform examination procedures; and initiating a long-term squeeze on banks and bank
holding companies to improve capital ratios.
These changes, together with the heavier impact of consumer credit protection, bank
holding company supervision, and the fight against endemic inflation affected every
part of the Board, from the work of the Governors to the printshop. Here are some
snapshots of the work load in the 1970s:



30

WORKING AT THE BOARD

The Board held an average of 139 meetings yearly during the decade. The
Governors were required to prepare for discussion of each agenda item,
involving a heavy reading and study load. The Secretary's office had to prepare the Boardroom for meetings, prepare the agenda, and keep the official
record. The legal staff had to be prepared to discuss any agenda item with
legal complications (the majority). After enactment of the Government in
the Sunshine Act, the legal staff had to determine, in light of the requirements of the act, what meetings or what agenda items should be open to
the public. The public affairs office had to announce in advance what items
would be discussed in public. And someone had to stand by to elucidate
the Board's decisions, often blurred by Chairman Burns's pipe or Chairman
Volcker's cigar.
The Legal Division produced ninety-three proposed and final regulations,
interpretations, and policy statements in 1970; 102 in 1977, and 159 in 1978:
an average of 126 a year in the 1970s. The Board's legal submissions to the
Federal Register took up 346 pages in 1970 and 899 pages in 1979. The division counts twenty-five major pieces of legislation passed in the 1970s
affecting the Fed.
Production of news releases covering proposed andfinalregulations, policy
statements, and like substantive subjects rose from fifty-one in 1970, to
seventy-one in 1975 and to ninety-two in 1979.
Beginning with bids in 1970 the Board's administrative staff supervised building of the Board's annex on C Street, dedicated in 1974 as the William
McChesney Martin building.
The Chairman and other Board members testified before the Congress seven
times during 1970, an average of fifteen times a year in the first half of the
decade and an average of forty-two times a year in the last five years, including sixty appearances in 1979.
The Board established a Freedom of Information Office in 1974 under the
amended FOI Act. The FOI office answered 3,969 queries under the act
that year, 5,112 in 1979, and an average of 4,455 from 1974 to 1979, rejecting only 2.4 percent of requests received (under FOI Act exemptions).
While the Board's work grew manifold, its staff grew during the 1970s less
than two-thirds, from 902 to 1,451.

Protecting the Consumer's Use of Credit
When the Congress handed the Fed the Truth in Lending Act for implementation
there were those at the Board, high, low, and in-between, who wondered whether this
was the right work for a central bank to be doing. They could have been reassured
by reference to the debates in the Congress that shaped the Federal Reserve's mission.
Presciently, on November 24, 1913, Senator Robert Latham Owen, Chairman of Senate Banking, told the Senate:



WORKING AT THE BOARD

31

" . . . This Federal Reserve Board will be a supreme court of American finance . . .
protecting our banking system, protecting our commercial system, protecting the
individual credit of the private citizen and giving him a fair deal . . . "
However, even far-seeing Senator Owen probably never envisioned the "cascade"
(as the Board's 1975 Annual Report described it) of consumer credit protection laws
that the Congress showered on the Board, with directions to write implementing regulations. By the end of the decade, the Board had nine such laws under its writ: Truth
in Lending, Fair Credit Billing, Flood Disaster Protection, Equal Credit Opportunity,
Federal Trade Commission Improvement (handling of consumer complaints), Home
Mortgage Disclosure, Consumer Leasing, Community Reinvestment, and Electronic
Fund Transfers.
The Board's consumer affairs staff
GRIFF GARWOOD
had to master the "ins" and "outs" of
each of this diverse collection of laws
and businesses covered if it was to be
The Board has always been ambivalent
able to write regulations that tried to
about its consumer credit protection
reconcile the goals of nondiscriminatory
task, a task no other central bank deals
and fair access to, and use of, credit by
with. And there is some haziness about
the consumer with the lender's right to
why the Board was chosen for the job.
distinguish among those who are, and
At first the Board didn't know what
those who are not, creditworthy.
to make of it, and some were against
Beginning with the Home Mortgage
it. But when Truth in Lending came to
Disclosure Act and the Community
the Board as issues to decide some
Reinvestment Act, the Congress has
Board members liked it. It was a switch
added a ticklish societal twist to the
to be dealing with rules for settling billBoard's responsibilities in implementing disputes and the like—the Govering consumer credit protection laws.
nors were consumers too, and had had
CRA, further, added a new dimentheir own arguments with department
sion not only to the work of the constore computers. Still, some uneasiness
sumer affairs staff but also to the work
lingered.
of the Board and the banking supervision staff. In an unprecedented reach
beyond consumer credit protection per
se CRA required all federal banking supervisors to "consider," when deciding on banking activity proposals needing federal consent, whether the proposer was measuring
up to the CRA directive to meet the credit needs of its community (consistent with
sound banking), including low income neighborhoods. In a response recognizing the
extraordinary demands of the CRA law the Board renamed its consumer affairs division the Division of Consumer and Community Affairs and authorized appointment
of community affairs officers at the Board and at all Federal Reserve Banks.
Each of the many proposed and final regulations, and related policy statements,
interpretations, and commentaries issued in response to the consumer credit protection
laws had behind it a mountain (sometimes large, never small) of staff studies and drafting. Each also required a summarizing release by the Board's public affairs office.



32

WORKING AT THE BOARD

Through 1974 attention was focused
on getting required Truth in Lending
COMMUNIQUE FROM
regulations in place. Beginning in 1975
A SMALL BANKER
and alerted by staff worries, the Board
intensified its emphasis on compliance
with its regulations, on simplification of
The president of a country bank on the
Reg Z, and on education of both borKansas prairie wrote to the Board that
rowers and lenders. The Board formalhe was faithfully stacking in a corner
ized its procedures for handling conof his office the "hail" (bad word in
sumer complaints against state banks in
wheat country) of new regulations
Reg AA and set up a compliance secturning up regularly in the mail. He
tion in the consumer affairs division.
added that he hoped "all your typeThe Board asked the Congress for and
writer ribbons dry up, and all your
got authority to establish a Consumer
pencils break."
Advisory Council, representative of
both borrower and creditor interests, to
advise the Board over the range of its consumer affairs responsibilities. The consumer
affairs division established a special corps of examiners, developed special consumer
credit examiner materials, and set up Systemwide procedures for examining state member
banks once yearly. Following up on a survey that found that the disclosure requirements under the act and Reg Z were providing more information than consumers could
easily use—and creditors could easily produce—the Board re-emphasized its efforts to
get the Congress to simplify the law.

Restructuring the Banking Community
If the Board had greatness thrust upon it in consumer credit protection, such was
not the case with the recasting of banking in the bank holding company format. The
Board, in its 1969 Statement of Principles, had asked to have the bank holding company law it administered amended to bring unregulated one-bank holding companies
under Board jurisdiction. On the last day of 1970 the Congress complied, making some
1,200 one-bank companies subject to Federal Reserve regulation and supervision.
More notable, in terms of impact on the Board's work load, the 1970 Amendments
to the Bank Holding Company Act of 1956 made it possible for bank holding companies to acquire nonbanking businesses, subject to afindingby the Board that the proposed nonbanking business was closely related to banking or bank management, would
not impair competition, and would benefit the public.
The bank functions of one-bank holding companies were brought under Board regulation without much trouble. But the amendment allowing acquisition of nonbanking
businesses involved the Board in literally thousands of judgmental decisions in the 1970s.
Each of these decisions was based on staff and Reserve Bank study— often extensive—
to assess each proposal under the terms of the revised bank holding company law. Many
of the decisions, particularly those made early on while policy lines were being laid



WORKING AT THE BOARD

33

down, were difficult, involving extended legal and supervisory staff presentations to
the Board, thick staff papers, appearances by Reserve Bank representatives, and long
Board debates. In each case, the Board's public affairs office released to the media statements announcing the Board's findings, and where indicated, giving in extenso factual
background and the Board's reasoning. The following illustrates briefly the dimensions
of the work load involved, and how it grew:
In 1969 the Board acted on 90 proposals from bank holding companies. By 1973, it was
1,599, of which 872 were decided in the Boardroom and 727 were approved under authority
delegated to the Reserve Banks to approve applications under certain conditions (but not
to deny) subject tofinalBoard review. The total was still over a thousand in 1978 and 1979.
For the decade, the Fed decided 9,280 proposals, 3,574 directly by the Board (with the
staff working under the gun of a Board directive to bring recommendations on 90 percent
of proposals eligible for action to the Board within 90 days of receipt from the proposer
of all necessary information). At the end of 1979 some 2,478 bank holding companies were
in operation and they held 70.6 percent of domestic assets.
In January 1971, less than a month after passage of the Bank Holding Company Act
Amendments, the supervisory and legal staffs had recommended, and the Board had
issued for public comment, amendments to Reg Y specifying ten nonbanking activities
the Board proposed to make permissible for bank holding companies. In May, after
an airing at a hearing of all issues raised following publication of its proposals, the
Board adopted a slightly revised version of its January proposals. With this, the Board
set its foot on a long road leading eventually to the incorporation of nearly all major
banks and also many smaller banks in the United States into bank holding companies,
linking them to thousands of nonbank subsidiaries of their holding companies. In this
process, U.S. banking was restructured.
The first half of the decade was focused mainly on feeling out the permissible boundaries for nonbank acquisitions by bank holding companies according to what the Board,
based on staff study and recommendations, decided was or was not closely enough related
to banking, what sorts of public benefits carried weight, and what would encourage—
or at least not impair—competition. As policy became clear, the Board was able to delegate an increasing share of the case load to the Reserve Banks for decisions on the
basis of settled Board policy.
By mid-decade, the staff discerned a trend among bank holding companies to put
cash into acquisitions without adequate balancing additions to hard capital. To signal
its preference for greater emphasis on building up capital, the Board in 1974 denied
two applications by large bank holding companies for small acquisitions on grounds
that the holding companies needed more capital. This "go slow" was effective, as
indicated by a sharp decline in proposals in 1975-77. Concerned also by staff findings
suggesting deteriorating compliance, the Board directed the staff to turn its focus to
surveillance and compliance. Board letters to the presidents of the Reserve Banks bid
them caution all bank holding companies that they would be held to strict compliance
with Reg Y and the bank holding company act. Letters to all bank holding company
CEOs warned against intramural dealings on terms better than would be realized in
arm's-length negotiations.



34

WORKING AT THE BOARD

In 1977, the Board asked the Congress to give it authority to regulate banking
institutions—banks, bank holding companies, agencies, and the like—owned abroad
but operating in the United States, in view of the "dramatic rate" of their growth. The
Congress eventually obliged with the International Banking Act of 1978, which had
an impact on the Board's regulatory responsibility comparable to that of the 1970 Bank
Holding Company Amendments. With this in hand, the international finance and the
legal staffs began a massive research and rule writing effort to devise the means for
supervising these institutions. The foreign banking institutions presented many new supervisory problems arising from their foreign ownership and their previous unregulated status. The philosophical ground had been prepared by a task force under Governor
Mitchell, which concluded that "national" treatment would be the fairest and most efficient
approach. Foreign-owned institutions in the United States should be subject to the same
restraints and requirements as U.S.-owned institutions, while U.S. banking companies
abroad would conform to the rules of their host governments. That is, "when in
Rome . . . " The end result was a large and complex new Reg K and a series of finetuning amendments of it extending over many years.

Restructuring the Financial System
The rush to the bank holding company format transformed the structure of banking
as it had been known in this country. Almost simultaneously the financial system underwent changes that broke down the traditional U.S. financial institutional arrangements,
with substantial effects on working for the Fed.
The decade began with a first step towards a deregulated financial community in the
form of prearranged bill-paying by savings and loan associations out of savings accounts. In 1972, negotiable orders of withdrawal (NOWs) bowed in at state-chartered
mutual savings banks in two New England states. By mid-decade the explosive growth
of money market mutual funds (outside the banking system and free to pay any interest
rate they wished) showed that there was an enormous demand for a place to put funds
that would earn free market rates of interest. This signalled the final end of interest
rate controls under Reg Q. In 1977 NOWs were authorized nationwide, foreshadowing
the end to the traditional turf lines separating commercial and savings banking.
In August 1971 the Bretton Woods exchange rate system was brought to an end. The
U.S. gold window was closed. The IMF tried, but failed, to put together a new fixed
exchange rate system. The world went on floating exchange rates. Nineteen seventysix saw the first Mexican debt crisis ("Training for six years later"—Ted Truman).
This transformation of the financial system set off successive waves of staff work,
adapting Fed procedures and rules as each of the changes occurred.
These events also contributed to intensification of the ongoing erosion of Federal
Reserve membership. Deregulation of interest rates and authorization for savings
institutions to offer services that had been exclusive with commercial banks—such as
checking accounts —sharpened competition and affected profit margins at commercial
banks. Member banks feeling the pinch looked longingly at earnings foregone on their



WORKING AT THE BOARD

35

reserve deposits at the Reserve Banks.
In growing numbers they decided they
TED TRUMAN
could no longer afford this cost of membership, and withdrew. In 1969 member banks held 81 percent of commerIf I look back to my early days here,
cial bank deposits. By the end of the
the big difference is the change in the
decade member bank deposits were
Board's view of the rest of the world.
only 70 percent of the total. Alarmed
The rest of the world generally was
at this leaching away of the deposits on
regarded as an annoyance, and the
which the fractional reserve system
international division often was viewed
rested, the Board and its staff, particuas being engaged in ceremonial
larly the research division staff, began
affairs, fending off, really, the rest of
intensive studies to document it and to
the world. Dr. Burns's interest in infind a remedy.
ternational economy changed all that,
and now the Board is fascinated with
Armed with staff studies and analyses
the foreign economies.
the Board began in 1971 to lobby the
Congress to broaden Federal Reserve
authority to require reserves on deposits
beyond the deposits of member banks. New requests for legislative relief went up to
the Hill year after year, backed by Board testimony that the loss of member bank deposits
weakened monetary control. The chronic membership problem became the main focus
of the chairmanship of William Miller (1978-79), who enlarged and intensified all aspects
of the unceasing staff work dealing with it. In seeking a basis for agreement in the Congress, the Board's congressional liaison staff had to contend with stiff opposition from
the savings industry and others who would be required to put up reserves.
In 1980 the Congress finally acted. The Monetary Control Act of that year gave the
Board the remedy it sought: a broadened institutional base of required reserves for monetary policy to act upon, and a level regulatory playing field for member and nonmember banks offering banking services.
Meantime, in threeactions— in 1975 (H. Con. Res. 133), in 1977 (Federal Reserve
Reform Act), and in 1978 (Full Employment and Balanced Growth Act)—the Congress
had imposed steadily more demanding reporting requirements on the Board. These made
necessary increasingly detailed research to develop more detailed briefing books, formal reports, and testimony.

Battling the Rising Tide of Inflation
In the 1970s inflation—endemic since 1965—worsened in a series of episodes. For
most of the decade, each new inflationary outbreak was met with some combination
of policy actions intended to be counterinflationary, but in practice they all proved to
be inadequate to the task. Not until the decade's end was a decisive anti-inflationary
campaign mounted with the Fed at its head.



36

WORKING AT THE BOARD

After what the Board's Annual Report
for 1972 called an "unusually favorable"
MIKE PRELL
year, in 1973 the economy toppled into
the "worst inflation since World War II."
Wage and price control authority exThe world became more complicated
pired with a valedictory judgment by
in the 1970s. A series ofshocks created
Chairman Alan Greenspan of the Counenormous variability in economic concil of Economic Advisers that the theditions and increased the pace of
ory that controls may have held inflafinancial innovation. All of this had to
tion down somewhat was unacceptable.
be tracked, analyzed, and forecasted,
so our work became more difficult.
In mid-decade the economy slumped
More sophisticated use of computers
into the steepest and longest recession
helped us meet the needs of the Board,
since the 1930s. Despite a good recovbut it also created new demands. In the
ery the Annual Report for 1977 reported
early 1970s we would work out a thrift
"no progress on moderating the underindustry projection almost literally on
lying rate of inflation." In 1978 the
the back of an envelope; by the late
Board declared inflation "the nation's
1970s we were providing the Board
most urgent economic concern." In this
with forecasts of thrift earnings, by incontext the dollar began a decline in
stitutional size class, under alternative
1977 that accelerated in 1978 and beinterest rate assumptions. The characcame precipitous in October, bringing
ter of our work changed in other ways,
on a Treasury-Fed program in Novemtoo: briefings and Greenbooks, for
ber to stabilize it. This turned out to be
instance, became less anecdotal and
much work and little result. In its July
qualitative
and more macro-oriented
1979 report to the Congress, the Board
and quantitative. Our statistical prosaid that inflation had "disrupted" ecograms had to cope with increasingly
nomic activity.
complex markets and deteriorating
On October 6, with the money supoutside
data sources. The mounting
ply still rising "briskly," as the 1979 Anpressures
of required work squeezed
nual Report put it, despite restraining
the
time
available
for developmental
actions that had driven interest rates to
research
and
for
"thinking big
record levels (including 12 percent at
thoughts."
the Fed's discount window), Chairman
Volcker announced new open market
procedures putting the Board's main
emphasis on quantitative control of the money supply by means of undersupplying bank
reserves: An about-face from the policy of trying to control money by targeting interest
rates.
This sea change in the Fed's monetary policy put the research staff and the small
staff specialized in open market operations under great pressure for many months. It
required redoubled monitoring, data gathering, analysis, and memo writing to install
and learn to operate the new program, and educate others—including the media—in
it. This was an intensification of the pressure these staffs, especially, had been under
during the decade-long, losing battle against chronically racheting up inflation. The



WORKING AT THE BOARD

37

switch to quantitative control brought
a certain exhilaration, arising from a
BOB BLACK IN RICHMOND
hope that the new policy could succeed,
finally, in getting the best of inflation.
There are no convenient ways of
A major development in the early 1970s
measuring research output, such as may
was the introduction of the federal
be used for the staff effort in consumer
funds rate as our explicit policy instrucredit protection, regulation and superment. Ifelt we would have a lot better
vision, legal output, and production of
chance of hitting our targets if we used
the public affairs office (all, of course,
total bank reserves, and I haven't
at least peripherally involved in the fight
changed my mind. The major moneon inflation). It is sufficient to say that
tary policy development in the 1970s
this monetary challenge, too, was met
was the introduction of the money supin the Fed staff tradition of commitment
ply as an intermediate policy target.
to the task. And when there was time
to glance at the newspapers, it was plain
to see that the Board's staff was doing the work of the nation's premier economic
policymaker. Judging by the fact that throughout the 1970s the Congress continued to
heap added responsibilities on the Board, not only the quantity but also the quality of
the decade's work was of a high order—another Fed staff tradition.

Dr. Burns, doughty warrior, met his match in the form of a silvery water carafe
in the House Banking Committee's hearing room. Thirsty, he reached for the carafe
and tugged at the rubber stopper (never before a problem in his long experience in
congressional hearing rooms). But someone with a heavy hand had put this stopper
in place. The Chairman pulled and twisted at it. No result. From their perches above
him committee members watched fascinated. Likewise the staff and public behind him.
The Chairman turned the thing upside down and shook it. Deluge on the table. Unflapped, Dr. Burns mopped up what he could with the napkin from the carafe tray,
poured himself a drink from what remained in the carafe, drank and announced he
was ready to resume. (No water got on him—what water would have dared?)




38

WORKING AT THE BOARD

Staff Leadership and the Board [EJS]
Throughout the decade, the sheer volume and variety of Board work meant that many
members of the staff were important contributors. There were several "leaders of the
troops" in each of the major Board policy areas, however, who deserve special mention. In the bank holding company area it was Fred Solomon, Director of the Division
of Supervision and Regulation in the early 1970s; Brent Leavitt, Program Director for
Banking Structure; Tom O'Connell, General Counsel; and Tynan Smith, Secretary of
the Board. In the path-breaking implementation of the Truth in Lending Act, it was
Fred Solomon and Griff Garwood, Chief of the Truth in Lending Section of the Division of Supervision and Regulation. In directing research and analysis of economic developments at home and abroad, it was successively Chuck Partee, Lyle Gramley, and
Jim Kichline on the domestic side and Bob Solomon, Ralph Bryant, and Ted Truman
on the international side. All six of these research directors also were important staff
contributors to monetary policymaking, as were Bob Holland and Steve Axilrod on
the FOMC staff.
This was the time in which the Board's long reputation for staff quality led to three
different staff members being directly elevated to membership on the Board itself. First
was Bob Holland in 1973. Shortly before Holland left in 1976, Chuck Partee was named
to the Board, and shortly after the end of the decade Lyle Gramley was likewise named
to Board membership. All three of these individuals, it should be noted, also spent
the early years of their careers at a Federal Reserve Bank.
At various times during the decade three other economists with long Federal Reserve
Bank experience—George Mitchell, Dewey Daane, and Phil Coldwell—also served on
the Board, and three other Board members who served during the decade—Henry
Wallich, Andrew Brimmer, and Paul Volcker—had shorter spans of Reserve Bank
experience.
Furthermore, during these demanding years the Board also made increasing use of
talented Reserve Bank officers who would join the Board staff for a time in order to
help deal with the press of Board business. All told, Federal Reserve talent from throughout the System was marshalled in Washington as never before to carry out the Board's
expanded responsibilities. •




WORKING AT THE BOARD

In Conclusion

T

hroughout the decades, the succession of chairmen who have led the Federal
Reserve System has included such long-serving, strong-minded individuals
as Marriner Eccles, Bill Martin, Arthur Burns, and Paul Volcker. As is
usual and proper, they received the lion's share of the public's attention, acclaim, and
criticisms for what the Federal Reserve did or did not do. The staff work chronicled
on these pages, however, played an essential part in writing these chapters of Federal
Reserve history.

FRBM600-1289







WORKING AT THE BOARD