(3) There was little cohesiveness and coordination to the banking system. (4) The check collection system was slow and awkward. (5) Monetary panics, with their scramble for liquidity, were difficult to avoid or mitigate. In its annual report concerning its first year of operation, the Federal Reserve Board reflected this view that its function was to provide a more flexible and elastic monetary environment. For example, it expressed satisfaction that the crop movements and seasonal demands for money had been accommodated without strain. It affirmed the principle that the Federal Reserve banks "should conserve their resources and hold themselves in readiness to meet any unexpected developments in the situation." 2 2. This somewhat circumscribed and limited concept of the Federal Reserve's functions gradually evolved into the view that monetary policy should be concerned with promoting economic stability generally. This broadening of the scope of monetary policy objectives began to be clearly apparent in the decade following World War I and in the early years of the depression. It was given implied statutory recognition with the 1933 amendments to the Federal Reserve Act, which, among other matters, describes the objectives of open-market policy as follows: "The time, character, and volume of all purchases and sales of paper described in section 14 of this act as eligible for open-market operation shall be governed with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country." 3 It is not without significance that the accommodation of commerce and industry precedes mention of the general credit situation in this 1933 amendment to the Federal Reserve Act outlining the desire of Congress with respect to the objectives of Federal Reserve open-market policy. This was confirmed in the 1935 amendment to the Federal Reserve Act (Banking Act of 1935) when the Board of Governors of the Federal Reserve System was granted authority to change reserve requirements (varying them between the levels then existing and twice those levels) in order to prevent injurious credit expansion or contraction. In the 1945 Annual Report of the Board of Governors of the Federal Reserve System the shift of emphasis toward maintaining economic stability received its most explicit formulation. "It is the Board's belief that the implicit, predominant purpose of Federal Reserve policy is to contribute, insofar as the limitations of monetary and credit policy permit, to an economic environment favorable to the highest possible degree of sustained production and employment." * 3. Although the System had coordinated open-market operations from 1922 to avoid disturbing the market, the next shift in emphasis came in 1937. Early in that year the Federal Reserve conducted open-market operations (purchases) for the first time in order to maintain orderly markets for Government bonds and not primarily to provide more bank reserves or to make the discount rate effective (the Federal Reserve had just raised reserve requirements to mop up some excess reserves). Again in the fall of 1939 open-market purchases were conducted not to relieve a tight reserve position (excess reserves were generally large), but to stabilize a weak bond market. With the outbreak of the war and the prospect of substantial Treasury financing, a major objective of monetary policy became a stable bond market maintaining rates on Government securities at about the then existing levels. This policy prevailed into the postwar years. Even though inflationary forces were dominant in the economy, the vast increase in Government debt, with the attendant constant refinancing problem, made monetary measures designed to check inflation appear open to serious question. Any major disturbance in the market for Government securities, it was felt, could have had damaging repercussions throughout our entire economy. The Federal Reserve was faced, on the one hand, with its responsibility for attempting to maintain economic stability within the prerogatives given it by Congress, and, on the other, of maintaining the market for Government securities. This problem continued unresolved until the "accord" of March 1951. To what extent the "accord" can be considered another shift of emphasisthis time back to more consideration for the effect of monetary policy on the Second Annual Report, Federal Reserve Board, 1915, p. 2. * Federal Reserve Act, sec. 12A, par. 3 (c). [Italics added.1 1945 Annual Report, Board of Governors of the Federal Reserve System, p. 1. general business situation-largely remains to be seen, but the intent of that action was to restore the freedom of the System to take such action as was required to restrict inflationary developments. In a sense, the shift in emphasis from monetary and credit considerations in the narrow sense to regard for the economic situation generally (the "highest possible degree of sustained production and employment") is quite a reasonable and understandable development. It reflects in part the generally greater emphasis accorded to such objectives. Moreover, there must be some guides as to how "elastic" the currency and credit situation should be and the general economic situation seems to be a very logical and important one. And it is in accord with an explicit expression of congressional policy as contained in the Employment Act of 1946 which states : "The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government to use all practicable means consistent with its needs and obligations and other essential considerations of national policy, with the assistance and cooperation of industry, agriculture, labor, and State and local governments, to coordinate and utilize all its plans, functions, and resources for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare, conditions under which there will be afforded useful employment opportunities, including self-employment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power." As an instrumentality of Congress, the Federal Reserve is presumably bound by this declaration of policy. Moreover, since monetary policy is an important means of achieving and maintaining a maximum level of business activity and employment, the Federal Reserve cannot evade or ignore this congressional declaration of policy. On the other hand, we should not be unmindful of the definitive directives to the Federal Reserve that its operations "shall be governed with a view to accommodating commerce and business," and that reserve requirements may be changed "in order to prevent injurious credit expansion or contraction" (Banking Act of 1935). These specific directives are obviously "essential considerations of national policy" which should guide the Federal Reserve in furthering the general objectives of the Employment Act of 1946. Suppose, however, that the Federal Reserve and the Executive disagree about what appropriate policies ought to be. The administration in office, with considerable logic, will consider its election a mandate from the people to carry out its policies. Furthermore, in a boom, subject and sensitive to immediate political pressures, the bias (traditional of all executive branches) will tend to be toward those policies whose net impact is inflationary, even though one of the Executive's official objectives may be to avoid inflation. The Federal Reserve, on the other hand, is less sensitive to these pressures. There is the problem. The Federal Reserve will be endeavoring to perform its delegated responsibilities. The administration will be endeavoring to fulfill its election mandate. They do not agree on what the policy ought to be. The administration may understandably think the will of the people is being thwarted by a group of appointed men on whose policies the electorate has no opportunity to pass. It cannot be denied that here are some real issues. The problem, in fact, may be rendered more acute because, on occasion, the Federal Reserve may seem to be out of step with the intent of some congressional thinking. What an “independent” Federal Reserve ought to mean We should recognize that occasional difference of views between the administration and the Federal Reserve (or even Congress and the Federal Reserve) is not evidence that something has gone wrong with our machinery. Streamlined consistency is not the primary objective. Occasional "incompatibility" is quite in line with the American tradition of checks and balances in Government. That Congress and the Executive are both to be responsive to the will of the people is a fundamental assumption of the American system of government. It is also fundamental to this system that there be varying degrees of exposure to popular pressures of the moment, e. g., the Senate with its 6-year terms. Through the long experience of history, we have learned that hastily considered monetary schemes, which might get momentary congressional support, do not necessarily serve the national interests well. Consequently, we delegate monetary responsibilities to an organization which has some degree of remoteness or insulation from the current political pressures to which individual Members of Congress are more immediately exposed, Congress deliberately built this remoteness into the Federal Reserve structure in various ways. For one thing the top policy authority is a Board of seven men in order that (among other reasons) immediate pressures of the moment which might be too strong for one man could be diffused among seven. Moreover, these men serve 14-year staggered terms. In this way personal insecurity, because of adverse political pressures, can be minimized. The regional nature of the System constitutes another significant safeguard. The existence of the 12 Federal Reserve banks does more than decentralize System operations. It also gives the Federal Reserve the advice and counsel of men close to the banking and business communities and it brings into the banking structure outstanding men from every section of the country. It constitutes a dispersion of authority and power which assures not only some stability amidst shifting political winds but also some measure of protection against the evils of bureaucracy as well. Our tradition has been against a single strong central bank. Decentralization in banking has been the accepted concept in this country since 1836, when the second bank of the United States was denied an extension of its charter. By and large, experience seems to suggest that the Federal Reserve has served the national interest least well in periods when it has endeavored to follow blindly political pressures. There is no evidence to suggest that this remoteness thwarts basically desirable policies, or that the Federal Reserve has demonstrated insensitivity to proper administration concerns, e.g., that the public credit be supported, etc. This is not to say that the Federal Reserve and Treasury ought not to collaborate closely. The Treasury has a heavy responsibility for management of the public debt, and the Federal Reserve needs to be cognizant of Treasury problems. Nor do we see evidence of any insensitivity to these matters. On the other hand, debt-management decisions have fundamental significance for monetary and banking policies. If these decisions are made to minimize the difficulties and costs of borrowing for the Treasury, the Federal Reserve cannot exercise its primary responsibility, for which it was created by Congressthe provision of a flexible and elastic monetary environment. The "needs of debt management" have probably been magnified out of all proportion to their actual importance in economic policy. It is hard not to conclude that a firmer policy of the Federal Reserve in the postwar years could have mitigated to a large extent the inflation that has occurred, without demoralizing the market for Government securities. Therefore, within the legal framework laid down by Congress, “independence" of the Federal Reserve must mean independence of judgment in carrying out its responsibilities. The important issue is that the status of the Federal Reserve be such that where necessary there can be a second point of view. The Federal Reserve System has ample legal power to carry out its directives. The problem has become acute in those cases where the Federal Reserve did not seem possessed of sufficient courage to exercise this independence of judgment. CONCLUSIONS We arrive at these conclusions on the question of Federal Reserve-Treasury relations. 1. Since the Federal Reserve is a creature of Congress, it obviously is not "independent" of Congress. Within the limits of the mandates of Congress the exercise of independent judgment by the Federal Reserve System is essential if there is to be any practicable and responsible exercise of monetary authority. We know of no compelling argument for altering this principle, and strongly urge its reaffirmation. 2. Obviously, courage and ability of the members of the Federal Reserve Board and the presidents of the Federal Reserve banks become of utmost importance in this connection. Additional legal power cannot make good deficiencies of monetary policy imposed on the country by men of insufficient experience and competence. With men possessing these qualities of competence, ability, and corage. present powers and directives should be quite adequate for the task. 3. Furthermore, since the exercise of sound independent judgment by the Federal Reserve System is essential to good monetary management, it is extremely important to have men of high ability, courage, and integrity on the Board of Governors of the Federal Reserve System and as presidents of the Federal Reserve banks. The reply of the Chairman of the Board of Governors of the Federal Reserve System to this subcommittee's questionnaire points out that "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 withi 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." 5 The point should be emphasized that these men should be chosen on the basis of their ability and understanding as individuals and not as representatives of any specific group or sector of the economy. The reference in section 10 of the Federal Reserve Act of 1913, as amended, to the selection of Board members with due regard to the representation of the financial, agricultural, industrial and commercial and geographical divisions of the country 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. One matter needs immediate congressional action-the present relatively low salaries for Board members. Although the Federal Reserve has had the benefit of able men who have served even in the face of these personal sacrifices, this tends to limit the selections to able men of independent means or to those with limited ability and experience still attracted to the post. We do not believe public policy is well served by tending to limit appointments to those from these two groups. 4. Congress deliberately recognized the appropriateness of some degree of Federal Reserve remoteness from momentary political pressures. The con siderations making this seem desirable when the Federal Reserve was created seem just as compelling today. We believe this principle is just as fundamenta as the first and ought also to be reaffirmed. The Executive and the Congress are in varying degrees more immediate'y responsive to political pressures. This is in accord with our structure of government. It is also in accord with this structure that some responsibilities met be carried out which require more remoteness and insulation from these pressures. We believe monetary policy is one of them. ADDENDUM PERTINENT STATEMENTS OF POLICY ADOPTED BY THE MEMBERSHIP OF THE CHAMBER OF COMMERCE OF THE UNITED STATES Domestic banking and monetary policy The chamber reiterates its support of the essential principles of the Federal Reserve System and of the dual plan of Federal and State chartered banking. Federal Reserve System. The Federal Reserve System was conceived as a vital part of the mechanism of commerce, industry, and agriculture and not as an agency for implementation of a highly developed scheme of economic planning It is essential that its management be independent of domination by the Treasury Department. Inherent strength of the Federal Reserve structure was demonstrated in two world wars and a major depression. The experience of the years has provel the wisdom of the chamber in supporting the System during the period of its inception and development and in opposing hasty innovations. There should be continued opposition to any change which does not add to the strength and use fulness of the System. Dual system of banking. The dual system of banking provides checks and balances consistent with effective supervision in a private enterprise econom of a business with definite public responsibilities. Extension of credit powers of the Federal Reserve over nonmember banks would be an entering wedge toward destruction of this dual system. American banking as an essential segment of free enterprise requires the widest play of the initiative, resourcefulness, and intelligence of the managetreit of individual banks and freedom from excessive regimentation. Monetary panaccas,--In the light of problems created by war financing, when resulted in increased deposits, large bank holdings of Government securities and Monetary Policy and the Management of the Public Debt, pt. 1, Joint Committee on the Economic Report, 1952, p. 300, abnormal liquid assets in the hands of individuals and corporations, special vigilance is needed for the safeguarding of the banking system against monetary panaceas offered as cures for inflation or deflation. Tested devices for restraint of credit under existing permanent authority of the Federal Reserve System give greater promise of effectiveness than enlarged powers. Voluntary methods. Maximum reliance upon voluntary methods and minimum use of regulatory devices are desirable in dealing with inflationary influences or in providing a stimulus against deflation. Voluntary restraints upon the use of credit under the leadership of banking groups have played a conspicuous part in moderating inflation, while encouraging constructive employment of credit for needed production. Bond-price support. Monetary devices intended to act as a check upon inflation have been weakened by policies giving new impetus to inflation. Rigid support of the market for Government securities tends to impair the ability of the Federal Reserve authorities to maintain normal credit controls. There should be relaxation and eventual abandonment of the bond-price support policy. Cheap money. - Debt-management policies should be directed toward greater freedom of interest rates than permitted under excessively easy money policies of recent years. Flexibility in market movements of interest rates is desirable to permit voluntary adjustments of the volume of credit. Savings bonds.-Vigorous efforts should be continued to induce individuals to purchase and hold Government obligations, particularly of the savings-bond type, in order to tap on a voluntary basis the current income of the Nation available for savings and to effect a wider distribution of the Government debt. The Chamber of Commerce of the United States is a national federation of 3,151 trade associations and local chambers of commerce, which, in turn, represent 1,450,000 individual businessmen. Because the chamber in membership and direct interests embraces every important activity in our economy; and, through its membership small businesses as well as large-it presents the opinion of a cross section of our entire economy. Thus, it is that policies of the chamber do not represent the views of some special group or particular interest, but are drawn from the diverse interests of the country as a whole and are voted by its membership. This voting, incidentally, is so regulated that no geographic concentration of interests or economic concentration of power can override the broader interests of the entire membership. Since the chamber of commerce is a democratic organization, and since its membership encompasses the widest range of interests, the members retain every right to express themselves as individuals. Representative PATMAN. First, taking the panel members alphabetically, I will call on Mr. John A. Baker, legislative secretary of the National Farmers Union. Mr. Baker. STATEMENT OF JOHN A. BAKER, LEGISLATIVE SECRETARY, NATIONAL FARMERS UNION Mr. BAKER. Mr. Chairman, the National Farmers Union is concerned in the banking and monetary policy of the Nation from two standpoints: There is at the present time a growing severe scarcity of credit at reasonable rates of interest on terms adopted to family farm agriculture The other concern that we have is that the banking and monetary policies should contribute to and encourage a continually expanding economy, without the up and down spurts of wild inflation and of disastrous deflation and depression. This is not a new concern in our Nation. In the early days the argument waxed over the issue of whether the monetary and banking policies of the country would be determined by the National Bank of Philadelphia. Andrew Jackson and the people who had faith in an expanding America in the early days tried, finally successfully, to take the monetary and banking policies of the country away from the privately controlled bank and return it to the Government of the people. |