298 MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT on reserve requirements. Such operations, however, should not be interpreted as at cross purposes if they are designed to cushion or offset a part of the effect of the new requirement. The combined movement would have an additional restraining influence in that the liquidity of the banking system would be reduced and a larger volume of new reserves would be needed to support any subsequent expansion in bank deposits. Reductions, in contrast to increases, in reserve requirements can be very powerful in temporary easing of credit conditions. They can be regarded as substitutes for open market operations, although in practical operation they are not as flexible in their applicability. By the use of reserve requirement changes, an easing effect may be accomplished with no increase in Federal Reserve credit outstanding, and in some instances even with a decrease in such credit. Thus, in the absence of an immediate supply of other bankable earning assets, member banks might bid so aggressively for Government securities that the Federal Reserve System, in maintaining orderly conditions in the Government securities market, might find it desirable to reduce its own portfolio by sales of such securities. In this instance, again, the open market operations would be of a cushioning character. Reconciliation of differences in viewpoint.-As is indicated in answers to Questions B-9 and C-17, the Federal Reserve Act places ultimate determination of national credit policy in part in the Federal Reserve Board of Governors and in part in the Federal Open Market Committee whose membership includes all members of the Board and five representatives (in practice, presidents) of the Federal Reserve Banks. In the formulation of discount policy, Reserve Bank Boards of directors are authorized to establish discount rates subject to review and determination by the Board of Governors. In addition, Reserve Bank directorates perform consultative and advisory functions with respect to the nature of current economic and credit developments and appropriate System credit policy in the light of those developments. The mechanism for determination of System policy places particular emphasis on a balanced view of the over-all economic and credit situation. As to the general economic and credit situation and appropriate credit policy under particular circumstances, judgments among the individual participants in System policy formation may and do differ. There is no reason, however, for assuming that, among men selected for independence of thought and judgment, differences will generally crystallize by groups-the Board of Governors, the Reserve Bank Presidents, and the boards of directors of the Reserve Banks. Nor is there any reason for assuming that the resulting System attitude with respect to the current credit problem and needed policy must be in some sense a negotiated compromise among these groups. Since the statutory changes of the early thirties affecting System decision-making, experience in System policy formation indicates that policy positions reflect mainly the influence of individual leadership in reconciling different viewpoints and in pointing up current credit issues with the result that a consensus on policy action crystallizes. System policy experience shows, furthermore, that differences in judgment as to appropriate policies reflect primarily the special background and understanding of the policy problem on the part of individual participants in the policy formation process, and that the merging of differences of judgment into a common policy is necessarily a process of discussion and mutual understanding of the varying points of view. Differences of viewpoint among the individuals in responsible policy authority also arise sometimes as to the use, combination of use, and timing of use of the separate policy instruments. These differences again are subject to reconciliation through discussion and mutual understanding, with a decision representing the concensus of those having ultimate policy authority, but with the judgment of those in a consultative or advisory position being a factor taken into consideration in a final determination. The formulation of national credit policy is a complex process which needs as full an analysis as possible of all relevant facts as well as the benefit of viewpoints that represent differing economic backgrounds, contacts, and experience. D. ORGANIZATION OF BOARD OF GOVERNORS 19. What qualifications are required by statute for appointment to the Board of Governors? Would you suggest any changes in these statutory qualifications? 20. Would there be any advantage in removing the present requirement of law that not more than one member of the Board of Governors may be appointed from a single Federal Reserve district? Would it be desirable to replace it by any other type of geographical limitation? The subject matter of these two questions is closely related and, accordingly, the answers to them are consolidated. Section 10 of the Federal Reserve Act as originally enacted provided that not more than one member of the Board shall be selected from any one Federal Reserve district and that the President shall have due regard to a fair representation of the different commercial, industrial, and geographical divisions of the country. The law also required that at least two members be persons experienced in banking or finance. In discussing the proposed qualifications of Board members, the report of the House Banking and Currency Committee on the bill which became the original Federal Reserve Act stated that "in all probability they would be not only experienced in banking but men of broad business knowledge and culture. This, however, is a matter that must necessarily be left to the appointive power, which not only should but must, in order to give good results, be vested with discretionary authority sufficient to enable it to make careful choice from among all of the best material available for such a Board." In 1922 the requirement that at least two members be experienced in banking or finance was eliminated, and it was provided that agricultural interests, as well as the interests named in the original law, should be taken into consideration in making appointments to the Board. The requirements of the statute as it exists today are as follows: "In selecting the members of the Board, not more than one of whom shall be selected from any one Federal Reserve district, the President shall have due regard to a fair representation of the financial, agricultural, industrial and commercial interests and geographical divisions of the country." The most important consideration in connection with the appointment of members of the Board is that they be well qualified to pass upon the difficult and complex credit and monetary problems coming before the Board and to represent the broad interest of the entire country. There is merit in having the statute refer generally, as it now does, to a fair representation of various interests so that the President may be called upon to have in mind each of these interests when making his appointments. The reference in the statute to representation of the financial, agricultural, industrial and commercial interests has not, generally speaking, caused Board members to look upon themselves as representatives of particular groups or interests or prevented them from acting in the national interest. However, provision might be made in the law not only that the President in making appointments to the Board have a due regard to a fair representation of the various interests now mentioned in the statute but also that the members appointed be representative of the general interest of the nation as a whole. The functions of the Board require a familiarity with Government finance, money markets, banking operations, and the many and varied aspects of the nation's credit problems. Since the Board's problems thus fall chiefly within the financial field, it is essential that the members have a clear understanding of financial matters, including banking, and it is most desirable that at least some of the members of the Board be well versed in finance and banking, both by training and experience. This has usually been true with respect to the past membership of the Board, but it is believed that it should be made a requirement of the statute, as it was from 1913 to 1922, that at least two members of the Board be experienced in banking or finance. While some geographical limitation on the selection of Board members is desirable in order to insure that various sections of the country will be represented on the Board, it is believed that the law is presently too restrictive in providing that not more than one member shall be selected from any one Federal Reserve district. In some cases this limitation may prevent the selection of a person who is otherwise well qualified for the position simply because he happens to live in a Federal Reserve district which is already represented on the Board. For example, under the present law, if there were a member of the Board, say, from Los Angeles, California, it would not be possible to appoint another member from Seattle, Washington, nearly 1,400 miles away. The removal of the limitation on the appointment of more than one member from any Federal Reserve district would permit more flexibility and make possible meritorious appointments in situations of this kind. It is desirable, however, to retain the provision of law which requires that the President in selecting members of the Board "have due regard" to a fair representation of the geographical divisions of the country in order to insure that various sections of the country will be represented. This would be consonant with the report of the House Banking and Currency Committee on the original Federal Reserve Act, in which it was stated that: The provision that the President in making his selections shall so far as possible select them in order to represent the different geographical regions of the country has been inserted in very general language in order that, while it might not be minutely mandatory, it should be the expressed wish of the Congress that no undue preponderance should be allowed to any one portion of the Nation at the expense of other portions. 21. What are the advantages and disadvantages of the present 14-year term of appointment for members of the Board of Governors, and the 4-year term of designation of the Chairman and Vice Chairman? Would you suggest that any changes be made in the tenure or manner of appointment of members or in the tenure or manner of designation of the Chairman and Vice Chairman? Terms of members.-The original Federal Reserve Act provided for five appointive members of the Board (in addition to the Secretary of the Treasury and Comptroller of the Currency as ex officio members), with a 10-year term for each appointive member, so arranged that the term of one such member would expire every 2 years. In 1922 the number of appointive members was increased to 6, and in 1933 the term of appointment was extended to 12 years. The Banking Act of 1935 eliminated the ex officio members, increased the number of appointive members to seven, and their term of office was fixed at 14 years, staggered in such a way that the term of one member would expire every 2 years. There is a prohibition against reappointment after a member has served a full term of 14 years. An advantage of a long term for any officer of the Government is that it may enable him to develop a special knowledge of the problems with which he has to deal. It has also been suggested that long terms tend to keep Government positions nonpolitical in character. On the other hand, a long term of appointment permits the theoretical possibility of the continuation in office of persons who may tend as the years go by to discharge their responsibilities with less enthusiasm or less effectiveness in the public interest. In considering the term of office of members of the Board, it should be borne in mind that the most important consideration is obtaining properly qualified men and that the period of the appointment is necessarily secondary to that consideration. Notwithstanding the theoretical advantages of long terms of appointment for Board members, it may be that the 14-year term now provided is much longer than is necessary or desirable. Although the provision for a 14-year term was placed in the statute more than 16 years ago, no member of the Board has served a full term of 14 years. A considerably shorter term, say a term of 6 years, without any prohibition against reappointment, might be sufficiently long and might be more practicable. The elimination of the prohibition of the law against reappointment of a member at the expiration of his term would permit the maintenance of a Board membership over the years having the requisite knowledge and experience regarding the Board's problems. The existing prohibition against reappointment is objectionable in that it may deprive 46 46 The service of one or two members has been more than 14 years in length, but this has come about from consecutive service for two or more partial terms. the Board of the benefit of experienced members and also may tend to make membership less desirable, since a qualified person might not be willing to be faced with the certainty of having to seek another connection at the expiration of his term. It would be desirable in any event to retain in the law a provision for the staggering of terms of Board members so that not more than one term would expire in any stated period. Terms of Chairman and Vice Chairman.-Prior to 1935 the law was silent as to the length of time that the Governor and Vice Governor (whose titles were in that year changed to Chairman and Vice Chairman) should serve in these capacities, it being merely required that one member of the Board should "be designated by the President as Governor and one as Vice Governor of the Federal Reserve Board.” The present law, in accordance with a change made in the Banking Act of 1935, requires that the President shall designate a Chairman and Vice Chairman from the membership of the Board "to serve as such for a term of four years." A possible purpose of this provision of the law was to afford a new President an opportunity to designate a Chairman and Vice Chairman of the Board. Assuming such a purpose, the provision has not worked out satisfactorily in practice because it has not been feasible to make appointments so that they would coincide with the term for which the President is elected. It might be preferable if the law were changed to provide that the President shall designate the Chairman and Vice Chairman for terms expiring on a selected date, say March 31, 1953, and on March 31 of every fourth year thereafter. 22. What would be the advantages and disadvantages of reducing the number of members of the Board of Governors or of replacing the Board by a single head? Since 1935, the law has provided for a Board of Governors consisting of seven members, all required to devote their entire time to the business of the Board. The law provides that the Chairman of the Board shall preside at meetings of the Board and, subject to its supervision, shall be its active executive officer. Along with 5 representatives of the Reserve Banks who must be presidents or first vice presidents of Reserve Banks, the 7 members of the Board make up the 12man Federal Open Market Committee, which chooses its own Chairman and Vice Chairman, of whom the former has always been the Chairman of the Board and the latter has always been the President of the Federal Reserve Bank of New York. The Chairman of the Board is also by law a member of the National Advisory Council on International Monetary and Financial Problems and a member of the Advisory Board of the Export-Import Bank and by executive order a member of the Defense Mobilization Board. Over a considerable period of time there have been proposals that the membership of the Board be reduced from seven to some lesser number, such as five or three. The reason most commonly advanced. for such proposals is that greater importance would be attached to individual membership and that the position would be more attractive to men of high caliber. Another reason is that Board decisions |