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Jacob Viner, professor of economics, Princeton University, formerly president of the American Economic Association, formerly consultant and Special Assistant to the Secretary of the Treasury, consultant to the Department of State.

Lucius Wilmerding, who is now engaged in completing various studies having to do with the system of controlling public expenditures in the Federal Government. These studies are complementary to his book The Spending Power published by the Yale University Press in 1943. He was formerly a member of the Treasury staff serving successively as assistant to the Administrative Assistant to the Secretary, and as assistant to the Commissioner of Accounts. He has also been a member of the Institute for Advanced Study at Princeton. He recently wrote, under his own name, three columns for Walter Lippmann on Treasury-Federal Reserve relationships.

Professors Bach, Goldenweiser, and Viner were participants in the Conference of Monetary Economists at Princeton, N. J., in October 1951. The statement resulting from this conference is reprinted as chapter 14 of our compendium, Monetary Policy and the Management of the Public Debt.

We have as topics for discussion this morning, first, What should be the role of the private financial community in the formulation of monetary policy? What are the implications in this respect of the private ownership of the stock of the Federal Reserve banks?

2. Is the division of authority over monetary policy between the Board of Governors and the open-market committee desirable? If not, how should it be resolved?

3. Should the monetary authority be vested in one man or a board? What is its proper relationship to the Treasury, the President, the Congress?

4. What should be the role of the monetary authority in the determination of debt-management policy?

It has been suggested that we call on Mr. G. L. Bach for comments first on these topics.

Mr. Bach?

STATEMENT OF G. L. BACH, PROFESSOR OF ECONOMICS, CARNEGIE INSTITUTE OF TECHNOLOGY

Mr. Bach. Mr. Chairman, in order to conserve time, I will limit my remarks to one particular aspect of the problem assigned, namely, the question of Federal Reserve independence and Federal Reserve participation in governmental economic-policy formation.

Much of the testimony presented to this committee has centered around the recent Federal Reserve-Treasury "accord" and the immediate problems of effective control over inflation. Some of it has implicity compared the abilities and wisdom of the individuals in the two agencies. This is proper. But there may also be some advantage in stepping back to take a longer look at the whole role of the Federal Reserve in the Government economic policy making. This approach seems to me to throw a somewhat different light on some of the proposals currently under consideration. To reach fundamental judgments, I think we need to look beyond both the current economic situation and the individuals now in office.

MONETARY POLICY INTERRELATIONS WITH ENTIRE EXECUTIVE BRANCH

Today's far-reaching governmental intervention in economic activity was unforeseen in 1913. The Federal Reserve Board and banks established then had relatively simple duties adhere to the gold standard, meet seasonal fluctuations in the country's need for currency, restrict bank lending to short-term, self-liquidating paper. It was easy to envisage the Federal Reserve as largely separate from the Government, though closely related to it.

Today, by contrast, monetary policy has become an integral part of the Government's entire economic policy, aimed at the objectives laid out in the Employment Act of 1946. Whether the Federal Reserve is called independent or considered to be part of the executive branch of the Government, there is no escape from the great impact of monetary policy on the level of income, employment, and prices; nor can monetary policy be neatly shut off from the Government's debt-management policies, its lending policies, its agricultural policies, its veterans' policies, its defense policies.

I see no way this committee can realistically avoid this fact: The fundamental issue before you is not merely the relationship of the Federal Reserve to the Treasury and debt-management policy but, instead, its relationship to the entire range of the economic policies of the Government, reaching into nearly all the executive departments. If we want a Federal Reserve truly "independent" to put up interest rates in inflation, against the Government as well as against private borrowers, we must recognize that not only direct governmental borrowing is involved but also the cost and availability of money for veterans' loans,, subsidized housing, rural electrification, and many other such Government-sponsored projects.

RESPONSIBILITY TO THE ELECTORATE

Congress and the public by and large hold the President responsible for the execution of the legislation providing for these governmental programs and for the promotion of economic stability. Since this is so, it is hard for me to see how the conclusion can be escaped that the Federal Reserve must be intimately related to the executive branch of the Government, not only on debt-management policy but on a much broader scale. I doubt that the public, if money becomes tight and prices are turned downward, hold the Federal Reserve responsible. I suspect they think of the President and the Congress as responsible. And responsibility to the electorate is the cornerstone of our democratic system of government.

THE NEED FOR INCREASED FEDERAL RESERVE INFLUENCE RATHER THAN MORE INDEPENDENCE

In my judgment, therefore, the problem is not a simple one of being for or against the "independence" of the Federal Reserve. Rather, it is to how to obtain the most reasoned, deliberative, and responsible formulation of monetary policy as one part of the Government's whole economic program, as formulated by Congress and carried out by the executive branch.

Viewed in this light, the main case for a separate central banking agency is simply that it may contribute a special viewpoint in Government monetary-fiscal policy formation that is specifically oriented toward maintenance of high level economic activity and financial stability-and that this viewpoint will not be adequately represented by the other agencies of the Government. There are human beings in the Federal Reserve, just as in the Treasury, the White House, the Veterans' Administration, and the Congress. I see little reason to suppose that the occupants of the Federal Reserve building will be uniquely wise as individuals, and I believe that this assumption would be a dangerous cornerstone on which to rest our entire governmental

structure.

On the other hand, we do need some organization in the governmental structure that places primary emphasis on maintenance of economic and monetary stability, even though its individuals, man for man, may be no wiser than those in other agencies. To contribute this point of view is the main job of the central banking agency. If, for example, Federal Reserve Board members can press steadily for inflation control when the Treasury is impressed with refunding problems and the Congress wants low-cost mortgage money for veterans, the Federal Reserve's role in governmental policy making may be a most useful one. The Nation may not want the inflation-control arguments to dominate. I, as one private citizen, would not be happy to see a governmental arrangement under which my elected representatives in Congress and the White House were dominated very far by an "independent" central bank. But I am also very unhappy if I feel there is no agency in the Government continuously emphasizing the need for measures to maintain economic and monetary stability.

HOW CAN FEDERAL RESERVE INFLUENCE BE STRENGTHENED?

I am convinced that the Federal Reserve can play such a role effectively only if it works primarily as a part of the governmental process rather than by interposing objection and obstruction from outside. The Federal Reserve has not carried out a strong anti-inflation policy over the last decade of inflation, until the exceptional events of the "accord" of 1951. Monetary policy was subservient to, or at least in accord with, the Treasury's low interest debt management policy. Unlike most observers, I do not attribute this to the fact that the Federal Reserve's independence was not sufficient. On the contrary, I believe it may be attributed more to the very emphasis placed on the formal independence of the Federal Reserve from the executive branch of the Government.

The Federal Reserve and the Treasury will get together on opertional policies. Federal Reserve Board members are, and properly feel themselves to be, a part of the United States Government. A monetary policy and a debt-management policy at loggerheads more than temporarily would be intolerable. Spectacular outbreaks such as occurred about a year ago will surely be the exception. Most issues will be settled quietly in day-to-day negotiations.

In this day-to-day process I believe the Treasury has ordinarily been the stronger party, basically because it has been the major operating financial agency of the Government and because it is an integral part of the President's administrative family. It appears to me that Federal Reserve "independence" has, anomolously, done more to shut the Federal Reserve off from exercising real influence on the operating policies of the administartion than to protect the Board's freedom. I believe we need a mechanism that will increase the Federal Reserve's influence in making and carrying out the economic policies of the Government. But I believe this will come about more through making the Chairman of the Federal Reserve Board a more effective participant in the going organization of the executive branch than by making him more "independent" and hence more isolated. Ours is a government by negotiation and compromise. The participant who is shut out from the process is unlikely to exercise great influence ⚫ on the results. Unless we are willing for the Federal Reserve to come into closer working relations as part of the President's family of top financial advisers, I think it is unlikely that the Federal Reserve will be very effective over the years in doing its main job.

Today the Federal Reserve is riding high. But the events of a year ago were very special ones, and friends of monetary policy should not forget that seldom in the long history of central banks have they effectively stood out against the executive branches of their governments. As Mr. Wiggins aptly stated before this committee a few days ago, central banks may win battles against governments, but the governments win the wars.

SUMMARY-THE ORGANIZATIONAL PROBLEM

I have taken time for this broad look at the problem of Federal Reserve independence, rather than devoting my time to specific suggestions, because I believe much of the testimony to date may have had too little perspective-both over the history of central banks and over the broader relationships of central banking to the executive branch today. May I summarize briefly my analysis:

(1) Monetary policy is inseparably intertwined with many other major economic policies of the Government, as enacted by Congress and executed by the executive branch. Thus it is unrealistic to believe monetary policy can be separated from other Government policies merely by making the Federal Reserve formally "independent."

(2) A central banking agency can contribute a needed viewpoint in Government policy-making, by and large because it will resist many inflationary tendencies in the governmental process. We need to plan how to implement this viewpoint.

(3) The Federal Reserve can exert more influence by becoming part of the policy making and executing process than by insulating itself further from the process. Only in rare instances can the central bank expect to win out, from "outside," against the rest of executive branch and the pressures of congressional expansionary programs.

SOME IMPLICATIONS FOR CURRENT CHANGES

In my judgment, there are several steps that might improve the way in which our monetary and debt-management policies are determined, in the light of the above analysis.

I am sympathetic to the proposal for a small, informal top-level monetary-fiscal advisory council to the president, along the lines outlined by this subcommittee's predecessor under Senator Douglas and more recently by Secretary Snyder. I favor this step as a device for strengthening the voice of the Federal Reserve, not for subordinating it to the Treasury and the President, as several witnesses have suggested might be the case.

Conversely, I doubt the realism of the proposal that the Treasury be directed simply to make its debt management conform to the policies set by the Federal Reserve-unless Congress wishes to transfer outright the responsibility for debt management to the Federal Reserve.

If the Treasury's present responsibilities are to continue, what is needed, in my judgment, are roughly equal voices for the Federal Reserve and the Treasury in working out the best available solution to problems as they arise. More generally, the Chairman of the Federal Reserve Board, sitting in top governmental economic councils of the executive branch as an equal with others of the President's top advisers, seems to me the most promising solution to the problem of most effective utilization of potential central bank contributions. This arrangement need not, and should not, imply Presidential or Treasury dictation of Federal Reserve policy. But if the Federal Reserve is to have an effective voice in governmental policy formation and execution, in my judgment it must participate in the give and take of the Government's operations, reserving its right to appeal to the Congress and the public for support on major issues of disagreement with administration policies for a small number of matters of major importance.

This approach to Federal Reserve policy making implies a major role for the Federal Reserve Board Chairman, and emphasizes the need to elevate this post to first rank governmental importance and influence. It questions the need for a large Federal Reserve Board, and for the present elaborate division of responsibilities and administrative arrangements within the Federal Reserve System. It leaves no doubt as to the basic governmental nature of the Federal Reserve and its monetary policy operations. I hope these questions can be explored in the panel discussion which follows: Representative PATMAN. Thank you, sir.

Mr. Wilmerding, would you like to comment on these topics?

STATEMENT OF LUCIUS WILMERDING, JR.

Mr. WILMERDING. Yes, sir.

Mr. Chairman and members of the committee, let me say to begin with, that I have no proposals to make for improving the machinery of controlling the management of money and the public debt. I think that the existing machinery is, in the main, adequate to its purpose; and, while I have no doubt that improvements in detail might be made, I suggest that these might be left to the time when the banking laws are next subjected to a general revision.

I should like to confine my remarks, therefore, to questions having to do with the present status of the Federal Reserve Board-particularly with its relation to the President. The committee has inquired whether that Board is or is not a part of the executive branch of the United States Government, and if not, what its status is. It has also asked whether the President has, under the Constitution, any power to resolve policy conflicts between the Treasury,

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