Regional President Speech

Revised Version For release on delivery Statement by David P. Eastburn PRESIDENT, FEDERAL RESERVE BANK ·oF PHILADELPHIA before the Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. November 17, 1975 Federal Reserve Bank of Philadelphia LIBRARY Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis I am to be here to discuss the issues surrounding reform pl~ased of the Federal Reserve System. I would like to comment on the specifics of S.2285, S.2509, providing for ~n audit.of the Fed, and 8.2540, just intro- " duced by Senator Humphrey. First, however, I would like to make some remarks on what I believe to be the philosophy behind this legislation. Over the years . I have given considerable ·thought to the question of where the Federal Reserve fits into the political process. I have summarized these thoughts in a paper which was sent to the Committee in advance of these hearings. The paper is entitled, "The Fed in a Political World." ,If agreeable, I would like to have this paper incorporated in the record. If I read the motivation behind these three bills accurately, the sponsors have in mind two concerns: first, strengthening the role of Congress in overseeing monetary policy; second, strengthening decision-making within the Federal Reserve. These are both laudable objectives. They are so important that Congress and the Federal Reserve must work together to accomplish them. Relationship between Federal Reserve and Congress With respect to the first objective, I have the feeling that this kind of cooperation is in danger of not taking place. The danger I see is the development of an adversary relationship with the Fed believing that Congress is continually nibbling away its "independence" and the Congress believing that the Fed is building a stone wall against change. The way out of this, of course, is for both of us to consider what relationship between Congress and the Federal Reserve is in the best public interest. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- Central to this relationship is the "independence" of the Fed--a term used with considerable looseness. The Fed is independent from the Executive, not the Congress. The history of executive abuse of money was extensive even at the time of the Constitutional Convention. The power to create money was•made independent of the executive by placing it in the Constitutional domain of the Congress. As the nation evolved into a modern, industrial society, it became clear that Congress did not have the timely flexibility or technical knowhow to conduct monetary policy. Congress then delegated monetary policy to the Federal Reserve. However, Congress wisely saw the possibility that even the legislatu!e might be susceptible to short run partisan influences 'tvhere money is concerned. It sought, therefore, to insulate the Fed from its creat0r sufficiently so that the Fed could exercise independent judgment. Congress did this in the public interest, not the Fed's or anyone else's. Permitting independent judgment to be exercised through delegated authority, however, means that the Fed is still accountable to the Congress. The question we address here today is how Congress can oversee the Fed without damaging the insulati0n which protects the central bank's ability to make un popular decisions in the short-run that will prove·wise in the long-run. Two basic approaches have been proposed: one is through budgeting and auditing; the other is to set basic goals and then expect the Fed to meet the goals or explain why not. The second approach is that of the Concurrent Congressional Resolution requiring the Fed in consultation with the Congress to set monetary targets. I believe this is far preferable to the budgeting and auditing approach because it gets directly at the basic business of the Fed--monetary policy, allows a direct input by the Congress, and still keeps Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis intact the insulation that permits independent judgment. The other approach, in contrast, is indirect, may divert attention to a myriad of details and away from the basic issues, and allows too many people to get between the Fed and the Congress. In short, I believe you would be doing yourselves, the Fed, , and, most important, the public, a disservice by becoming involved in overseeing details of Federal Reserve activities. Federal Reserve Decision-Making One of the checks Congress placed on the independent judgment of the Fed is a decentralized structure--7 Governors, not and 12 semi- ~ne, autonomous regional banks. In recent years there has been a tendency toward more centralization of decision-making in the Fed. We are conscious of this and are studying ways to balance the gains of central coordination and the advantages of decentralized decision-making. The Conference of Reserve Bank Presidents is currently addressing itself to this question. As Chairman of the Conference, I intend to push hard to get this study completed and the findings implemented. John Gardner touched on the reason several years ago. "In an organization with many points of initiative and decision, an innovation stands a better chance of survival; it may be rejected by nine out of ten decision makers and accepted by the tenth. If it then proves its worth, the nine may adopt it later." With the Federal Reserve under such great pressure to perform in this fast-paced economy, it stands much more chance of coming up with a breakthrough idea under this arrangement than under one in which all authority is centralized. Specifics of Proposed Legislation With this as background, I weuld like to comment briefly on specifics of the proposed legislation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis f -4- I favor confirmation by the Senate of the Chairman of the Federal Reserve Board. The offiee of the Chairman has substantially more responsi- bility than those of other members_o£the Board of Governors~-- It is appro- priate, therefore, that the Senate should have the opportunity to evalu, ate nominees for each office separately. I also favor making the Chairman's term approximately coterminous with that of the President of the United States. The Fed is accountable to Congress, but it must also coordinate with the President. Combination of these two previsions would give proper balance to the respective responsi- bilities of the President and Congress. I accept the proposal to give "due regard11 to consumers and labor in selecting members of the Board. I would be opposed, however, to providing mandatory representation for specific interest groups. Ideally, Board members should have a broad view of the public interest with a knowledge of economics and financial institutions. A Beard composed of repTesentatives of various interest. groups in adversary· roles would not be in the public interest. For this reason, I would be opposed to the provision in Senator Humphrey's bill, S.2540. In providing specifically for individual appointees in the areas of labor, agriculture, consumer affairs and small this bill goes much ~usiness, further than S.2285 in an undesirable direction. I caution against providing staff assistance·to members of the Board through legislation. Staff assistance should be an internal management decision based on need and not made inflexible by· amending the Federal Reserve Act. From my vantage point, Governors now have wide latitude in determining their own staff needs. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -5- I am opposed to Senate confirmation of Presidents of Reserve Banks. TI1e apparent advantages of this proposal are strengthening the position of the Presidents within the System and making them more accountable to Congress. Although I am sympathetic to the m0tivation behind this proposal, I frankly don't see how Senate confirmation.would contribute much to either. As for strengthening the Presidents, there may be some small psychological gain from Senate confirmation, but it is dwarfed by the supervisory authority of the Board over budgets, salary, and performance evaluations. More seriously, I see potential harm coming from confirmation. The men who serve as Presidents of Reserve Ban~s are capable and perform well. They have been chosen because of their competence and dedication. To subject them to confirmation runs the risk of politicizing their appointments in the way local postmasterships used.to be. I believe the kind of "political clearance" that could easily become part of the Senate confirmation process risks lowering the quality of the Presidents by reducing the number eligible and willing to serve. may ask, with some reason, why the Senate should not confirm Yo~ appointments of Bank Presidents since it confirms appointments of Governors • . It is true that both carry a common responsibility: service on the office~, Open Market Committee. Nevertheless, these are two different kinds of jobs and it would be a mistake to· treat them alike. The difference between the two reflects the pUblic-private mix which the Federal Reserve Act builds into the System. Governors are appointed by the President~ of the United States; Reserve Bank Presidents are appointed. by the local Boards of Directors. Senate confirmation would weaken a key function of these important local Boards. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -6- The job of Governor seems likely to take on the complexion of many other top government jobs with individuals coming to the power base of the System for relatively short periods and then moving on to other opportunities outside of government. For this reason, I would not oppose , shortening the terms of Governors, I would be inclined to settle alth~ugh for 10 years rather than the 7 provided by Senator Humphrey. Reserve Bank Presidents, Unlike the Governors, tend to view their jobs as permanent careers. It is important, of course, to attract the best people to both jobs. My point is that motivations of potential Governors and potential Presidents are apt to be different and that the process of confirmation could be detrimental to the quality of Presidents. In any case, you have two safeguards. First, appointments of Presidents must be approved by the Governors who must be confirmed by you. And second, you can assure yourself of the quality of the Presidents, among other ways, by asking. them questions as you are doing today. The provision in Senator Humphrey's bill, S.2540, which would remove Reserve Bank Presidents from the Federal Open Market Committee, runs the danger of seriously weakening monetary policy. It is difficult for me to be objective about this, of course, Nevertheless, I firmly believe that one great strength of the Federal Reserve System derives from.the fact that all truth does not emanate from Washington. Under the present System structure, the preponderance of power is there, but it is tempered by participation of regional Reserve Bank Presidents on the FOMC. I have observed or participated in enough decision- · making over a decade and a half to be convinced of the wisdom of this balancing of power. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -7- As for placing the Secretary of the Treasury on the FOMC, this would be a most unwise and backward step. The Secretary was removed from the Reserve Board in the thirties because this duty presented him with a conflict of interest. As the nation's largest borrower, it would be impos- , sible for him to be objective about monetary policy. The Federal Reserve must continue to be independent of the Executive Branch. For similar reasons, it would be a mistake to require, as Senator Humphrey's bill does, that the actions of the Federal Reserve be in accordance with the progr?IDs and policies· of the President. Coordination is necessary the great majority of the time, but there must be leeway for monetary policy to differ in rare and exceptional cases. Congress should think very hard before yielding its responsibility over monetary policy to the President. I most strongly oppose placing a Congressional ceiling on Federal Reserve expenditures or requiring the Federal Reserve to come to Congress annually for its funds. Both would come dangerously close to Congress running the Federal-Reserve System.in such detail that our flexibility would be impaired and our operations opened to partisan and short-run political pressures. There is no prudent, practical way I know of for setting a budget total without a line-by-line review of what's in the t6tal. I can think of a no more devas- tating blow to the nonpartisan functioning of the Federal Reserve than to subject it to the Congressional appropriations process. Managerial efficiency has not suffered from exemption from the appro- priations process. At the Philadelphia Bank we have made a special study of productivity of System operations. We have computed a unique index of operational output and productivity. This index shows that productivity in ·the Federal Reserve has increased continuously in recent years, and at a rate of improvement twice that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -8- of the private economy. While employment in the System has grown over the last several years, output of the System--including services related to issuance of Treasury debt, distribution of new currency and coin, and services to the rapidly growing mechanism of the nation--has grown more rapidly • paymen~s • Output growth has slowed somewhat in the last year as a result of the nation's recession. That, combined with special programs of the System to accelerate . improvements in efficiency, are currently leading to declines in System employ- ment, a trend that we expect to continue through at least 1976. A more complete version of our analysis is available to the Committee and if agreeable I should like to introduce it for the record. Let me now turn to a related proposal, 8.2509, having to do with GAO aYditing of the Federal Reserve. I can understand why Congress, in a post-Watergate world, would want a financial audit. The real issue is how auditing would relate to monetary policy.. Even if an audit.were to exempt monetary policy, I see a practical problem: how does one draw the line in an organization so thoroughly··involved in money management between a purely financial audit and one·that includes monetary policy. Suppose the GAO were auditing the Trading Desk at the New York·Reserve Bank. How can the GAO effectively separate simply audi·ting the "books" from saying something about the implementation of monetary policy? Almost any comment dealing with which security is bought or sold, ·when or with whom stands a good chance of tres- passing on policy. Or, suppose the GAO is auditing the Credit Discount department of a Reserve Bank. Almost any statement about amounts lent, to whom, at what rate, whether for seasonal needs, pdjustment needs, emergency needs, etc., gets into the area of monetary policy. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -9- Mr. Staats indicated.in his testimony that one of the areas the GAO would explore is the effectiveness of Regulation Q which establishes interest rate ceilings on time and savings accounts. It seems inconceivable to me that the GAO could explore the effectiveness of interest rate ceilirigs without getting intimately .involved with monetary policy. I have had a fair amount of exposure to disputes between line man agers and auditors of what constitutes a pure audit recommendation and a managerial recommendation. These disputes.are minuscule compared to the dis agreements that would surround what a GAO auditor should see and recommend. So, while in theory a·financial audit of the Federal Reserve may be appealing to you, in practice I don't see how a line of separation can be drawn excluding monetary policy. Therefore, I do not favor the·GAO audit proposal. Some Positive Proposals I have tried first to state some general principles and then to apply them to the specifics of the proposed legislation. Some of the provisions are acceptable to me; others are not. In order to be as constructive as possible, I'd like to sum up by suggesting some positive steps. 1. I suggest that Congress concentrate on making Concurrent Resolution 133 the vehicle for overseeing Federal Reserve policy. Experience so far has been good; a cooperative spirit has been established and the future seems promising. 2. Congress should further encourage the Fed to make as much information as possible available as promptly as possible. We have been making more information available sooner, and additional steps can be taken. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -10- 3. As i indicated, I recommend against detailed involvement of Congress in Federal Reserve budgets. However, if you feel compelled to be more fully apprised of activities outside of the area of monetary policy, let's explore other ways ~o do , that. For example, I can envisage a session annually at which the Fed would present the overall dimensions of expenses ana operations. 4. Finally, the Federal Reserve is one of the most, if not the most, open central bank in the world. The numerous appearances before Congressional Committees by Fed officials, notably Chairman Burns, attests to that. It's your job to ask questions and the public has a right to expect that we'll continue to provide answers. David P. Eastburn, President Federal Reserve Bank of Philadelphia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

David P. Eastburn (1975, November 16). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19751117_david_p_eastburn

@misc{wtfs_regional_speeche_19751117_david_p_eastburn,
  author = {David P. Eastburn},
  title = {Regional President Speech},
  year = {1975},
  month = {Nov},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19751117_david_p_eastburn},
  note = {Retrieved via When the Fed Speaks corpus}
}