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serve relations in the Treasury's own open-market operations for the trust funds. When policy responsibility is shared, as it is now, there are bound to be strains whatever the cut-off point.

The interagency strain can be avoided in two ways: all policy responsibility can be lodged in one agency, or Congress can prohibit the exercise of discretion. I do not believe that the transfer of the Treasury's responsibilities to the Federal Reserve is either feasible or desirable; transfer in the other direction I shall discuss later. Prohibition of the exercise of discretion, as by making credit control the sole or absolutely paramount criterion of debt management, seems to me probably not feasible and certainly unwise. The Chairman of the Federal Reserve Board gives explicit recognition to the need for wide discretion on certain occasions, and the need for frequent discretionary actions of limited magnitude by both Treasury and Federal Reserve is apparent.

The particular issue that has led to the current investigation by the joint committee is the use of these governmental powers in restraining inflation-more particularly whether or not there should be general reliance on the money market itself to push down prices of Government securities, during boom periods, with a corresponding rise in yields. This effect is secured by minimizing Government intervention in the open market and by adjusting the terms of new Treasury offerings.

Both Treasury and Federal Reserve seem to agree fairly well in principle to this approach. However, as I read the record, I find the Treasury instinctively disposed toward low-interest rates and an extremely stable pattern of interest rates on new offerings; in consequence, the Treasury has been consistently hesitant about permitting the free movement of interest rates in the market-even a free movement modified by continuous or frequent stabilizing operations.

This attitude is not surprising. The words "caution" and "prudence" come easily enough to the lips of Secretary Snyder; and I speak with full respect for him. Actually, any Secretary of the Treasury is bound to be affected-and would be irresponsible if he were not-by the cost of servicing the Government's debt and by the crucial importance of floating new issues successfully every year and several times a year. It is this latter responsibility that weighs so heavily; annual offerings of the Treasury total some $50, or $60, or $70 billion. The thought that they will not be taken up is a nightmare; and the need for major adjustments in terms on every new offering would create a serious if not an impossible burden.

These are not light considerations. They are recognized by the Federal Reserve. The president of the Federal Reserve Bank of New York has said rather pointedly:

We can't treat the Government security market as we might a $50 million issue of the XYZ corporation.

Constant large-scale refinancing requires a high measure of cooperation, and precludes repeated resort to Mr. McCabe's shock-treatment technique. No statutory formula can insure this kind of result. We must seek more delicate adjustments.

Some of the principles suggested to this committee for solving this problem seem to me not helpful.

For example, the proposition about the Federal Reserve System; "as a creature of Congress, it is responsible to the Congress."" This is a ritualistic formula that makes commissions happy, and that is often solemnly blessed by Congress and the courts. Actually, a commission is no more a "creature" of Congress than the Treasury or, say, the Department of Agriculture. All were created by statutory enactment. More important, commissions in general, and particularly those with some prestige, are far less responsible to Congress than the executive departments. The fact that decisions are taken by vote insulates the commission-makes it independent, as we say; more precisely it makes the commission irresponsible in the technical sense; it acts, under its statute (like all Government agencies) but as its individual members vote, and they are remarkably well protected from congressional influence. No individual member can commit the agency even to a congressional committee. The Secretary of the Treasury by comparison with the Federal Reserve Board is a servant of Congress, and of its committees.

Another piece of folklore asserts "the historical independence of central banks." This would hardly be determinative in any event, but it is peculiarly irrelevant to the use of powers which central banks traditionally either did not exercise at all or exercised for entirely different purposes. The central bankers of the nineteenth century would have shuddered at the thought that they were responsible for carrying out the objectives of the Employment Act of 1946.

I omit any discussion of the Federal Reserve as a "supreme court of finance." That bit of rhetoric should be of interest only to students of congressional debates.

Finally, and this is critically important, let us consider the proposition that any commission, including the Federal Reserve, derives its strength from its independence. That may be more or less true of a commission deciding adversary proceedings or making general rules for a peculiarly isolated area of national interest. But it is untrue of a commission operating in an area in which other agencies have major responsibilities.

For many years, Treasury preoccupations have generally tended to be too dominant in our general credit control and debt-management policies. The cure for this is to find ways of reducing the independence of the Federal Reserve and thereby increasing its influence.

One feasible and very obvious move in this direction would be the transfer of the policy powers of Federal Reserve to the Treasury. That would be in line with the sound general principles of the Hoover Commission about centralizing responsibility and authority-even though they carefully forgot about those principles in this particular connection. It is quite possible that this is the right move. If the Treasury had full responsibility for general credit control, it would be much more likely to overcome its present excess prudence. Furthermore, if Federal Reserve were an agent, not a partner, in debt management, it could afford to be bolder, more independent in the best sense-and a more effective spokesman for the use of these powers for credit-control purposes. And certainly the whole problem would come up for more frequent consideration by Congress.

Somewhat hesitantly, I do not make this recommendation. I have three reasons: First, at heart, I suppose, I am in part a sort of Treasury man-I am cautious; I do not believe in disturbing working arrangements unless they are working noticeably badly and at the moment affairs are moving satisfactorily; second, I have some fear that the credit-control possibilities in this complex problem might be lost on occasion in the recesses of those long quiet corridors on Fifteenth Street and Pennsylvania Avenue; they could easily be found under Presidential or congressional stimulation, but time would be lost; third, the Federal Reserve Board does serve a valuable political function. Its decisions are accepted by banks and other investors more easily than the Treasury's are, and perhaps even should be. Transfer to Treasury might diminish the acceptability of sound decisions.

Hesitantly, therefore, I propose that we continue with the present allocation of powers, while striving to increase the Federal Reserve's influence.

Offhand, one would expect or hope that the Council of Economic Advisers might be of help, but I fear not. If the President had an economic adviser, he might well be enormously useful. But a council by its very nature can't negotiate, and because of its all-too-public statutory responsibilities this Council cannot serve as an effective intermediary.

A related solution has been put forward, not too vigorously by the Treasury, more vigorously by others: The creation of a monetary policy council. This seems to me unwise. Statutory interdepartmental committees almost always end by causing trouble or becoming a mere nuisance. Such a committee is particularly unsuitable when, as here, the vast bulk of the responsibility is shared by only two agencies. Finally, Treasury and Federal Reserve have built up a magnificent network of interrelationships, which would be hurt, not helped by a new body.

The most recent development in the Treasury-Federal Reserve relationship gives us the best lead. Mr. Martin is obviously respected and trusted by both the President and the Secretary of the Treasury. As long as he remains as Chairman, and retains their confidence, Federal Reserve will have great influence in the high councils. This is as it should be. The lesson is simple: The Chairman of the Federal Reserve Board should serve as Chairman at the pleasure of the President. This is the rule in most Federal commissions and it is peculiarly applicable here.

I would also shorten the present unrealistically long terms of the members of the Board. This change would also bring the Board and the President into closer relations.

Finally, I would abolish the Open Market Committee. There is no reason why the Board cannot and should not have full responsibility for the open-market part of the over-all credit control job. Openmarket policy is not a strange and different problem, unlike discount policy or reserve-requirement policy. I do not at all propose that consultation with the Reserve bank presidents be abandoned, but I do propose that responsibility be placed directly and fully on a group of officers appointed by the President, by and with the advice and consent of the Senate.

Two minor points deserve mention: (1) Open-market policy cannot be made in the void; it must be formed in consultation with the Treasury, and is in fact so formed. The Board may well find it desirable to leave the detailed policy questions to an executive committee which will work with the Treasury, but this question should be settled by the Board itself, not by Congress. (2) The particular need for

consultation with the president of the Federal Reserve Bank of New York is apparent; but this, too, should be left to the Board's discretion. Above and beyond these formal recommended changes (with the possibility of a larger change as an alternative, as I have suggested), I urge that the Congress welcome and support consultation between the Board, the Treasury, and the President. Among the ritualistic incantations in this field, I suggest that we include, "In union there is strength."

Let me close with hasty and therefore dogmatic comments on the particular topics suggested for discussion.

I think the present quite indirect relationship of the private financial community to public monetary policy satisfactory. I consider the stock ownership by member banks irrelevant and immaterial to this relationship.

I oppose the present division of powers between Board and Open Market Committee and recommend that these powers be vested in the Board.

My preferred recommendations is that monetary authority continue as at present divided between Board and Treasury (subject to the changes in the Board indicated above), and with full and overt recognition that this is a partnership job. I believe that debt-management and open-market operations should be jointly determined by the partners in the enterprise. I believe that the President and the Congress should continue to give broad policy direction as they do now. Representative PATMAN. Thank you, sir. Dr. E. A. Goldenweiser?

STATEMENT OF E. A. GOLDENWEISER, MEMBER, INSTITUTE FOR ADVANCED STUDY, PRINCETON UNIVERSITY

Mr. GOLDEN WEISER. Mr. Chairman and members of the committee, I have not prepared a statement. I have some notes, and I shall take the liberty of speaking about the four points that you raise more specifically rather than about general philosophies which have been effectively presented by some.

I want to make just one general remark to begin with, and that is that in human institutions the thing that matters is how they actually function, and that any institution that is established and has a history extending over a fairly long period of time develops interpretations of the original charter creating it, in response to economic conditions and changes, and any modification that is suggested must bear the burden of proof that it is necessary not only because of political science or economic theory but also because of its bearing on actual operations and results.

It is important for me to have this principle before us as I discuss the four particular propositions that have been put to this panel.

I believe in what practically everyone has said, that the private financial community has no occasion, authority, or opportunity to exert any more influence on the Federal Reserve than any other part of the public. The only extent to which it may be more influential is that it is likely to be more informed about the matters under discussion.

The technical fact that the banks are legally owned by member banks has been referred to by several of the speakers, and it seems to me very properly it has been indicated that that is a piece of atavistic remnant of the philosophy of the Federal Reserve Act when it was enacted and that it has lost any important significance. It is essentially a compulsory contribution to the capital of the Federal Reserve banks.

If in the course of time a thorough revision of our whole banking legislation were undertaken, I would think that this appendix might be removed, and it could be done simply by having the Federal Reserve banks repay to the member banks the capital which is no longer necessary and which constitutes a very small part of the resources of the System.

If that were done, it would be done both because of logic and because of the appearance of political implications that are often attached to this. Practical importance it does not have.

Secondly, about the division of powers between the Board and the Open Market Committee, I think that logically it is very clear that a division of power is not good organization. It is perfectly obvious that authority over open-market operations in a different body from that which determines reserve requirements and discount rates makes no particular sense because the two agencies, the two bodies, theoretically could work at cross purposes; but, referring to my original principle, there is not any occasion to modify that because it is operating very smoothly without any interference with the rights of the Board.

I think it is a correct statement that there has never been a decision of the Open Market Committee that was contrary to he wishes of he Board, and on very few occasions has it been contrary to the wishes of the Chairman of the Board.

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I think that it is body that operates effectively, and it has a certain merit on the human side. It contributes to the strength of the grass roots of the System. It makes the presidents of the banks feel more a part of the family and more involved in the policy of the System. It makes those presidents, in the first place, study monetary problems more carefully in the broader view than would be the case if their activities were confined to the district, and it contributes to the espirit de corps of the System.

I think, in my thinking about the Federal Reserve, the grass roots, the connection between the Federal Reserve and the districts, the directors that are elected, the advisory council that is appointed, the participation of the presidents in the councils of the Federal Reserve, are a large part of its strength. It also results in a mass of information about regional conditions and reactions regularly reaching the Board.

The Federal Reserve System, in order to perform its functions properly, has to have the support of the people, and I think that a very large part of its support is based on the fact that the various communities have a feeling of family relationship to the System, and while I agree with Professor Viner that regionalism, as such, in monetary decisions has no place in the modern world, connection with the currents of opinion and thought, and with the affections, if one might use that phrase in a financial connection, toward their Federal Reserve banks are a very important part of the machinery through which the Federal Reserve can resist criticism to which it is bound to be subjected because a part of the functions of the central banking organization is to do unpopular things. If those unpopular things are explained to

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