Budget Reform Act. In addition, this suggestion runs the risk of diminishing the Board's independence by requiring the conditioning of its plans to the President's budget.

On the audit question, the Board remains opposed to an audit by the General Accounting Office for the reasons presented to the Banking Committee in earlier testimony.

In summary, we believe firmly that it is in the public interest to retain the concept of an independent monetary authority, and we oppose efforts to politicize the functioning of the Federal Reserve System. We also believe that the procedure established by House Concurrent Resolution 133 offers an excellent means for promoting a continuing discussion of monetary policy matters between Congress and the Federal Reserve. As I have noted, this procedure seems to be working well.

We see no compelling reasons to legislate fundamental changes in the Federal Reserve at this time because there is no evidence that the System has failed to function well with its present structure. However, the Board would have no objection to changing the method for selection of class A and class B directors and providing explicitly for a greater diversity of interests among directors. Nor would the Board object to charging the Federal Reserve with explicit responsibility to further the objectives of the Employment Act of 1946, or adjusting the term of the Chairman to conform roughly to that of the President, or requiring Senate confirmation of the Chairman.

Although the Board sees no difficulty with some of the recommendations in title V of the "Discussion Principles," we also see no clear or decisive need to adopt any of them. Indeed there are strong reasons, as I have indicated, for opposing the key premises of this title. The world's history is littered with the economic wreckage caused by political domination of the monetary function. Your predecessors in the Congress acted wisely in providing a design for the Federal Reserve that insulated it from politics. The Board urges you not to overturn a structure that has stood so well the test of time and experience.

I would again like to commend this subcommittee for the thoughtful and careful approach you are taking in your continuing study of financial institutions and the Nation's economy, and to indicate our desire to be as helpful as we possibly can in assisting you in your efforts. Mr. ST GERMAIN. Thank you, Chairman Burns.

Now, the Chair would like to state at this time that we obviously have unusual attendance this morning for Chairman Burns' testimony. We shall proceed to the questioning now, following the order of the subcommittee seniority, and we would thence go to the members of the full committee who are present.

The Chair, because of the participation this morning, is going to hold as rigidly as possible to the 5-minute rule, and therefore the gavel will be used. And I hope that the members will be cooperative.

Chairman Burns, as you know, this subcommittee began its inquiry into the need for possible regulatory reform back in the 93d Congress, with the failure of USNB of San Diego. There can be little doubt that the facts of the condition of USNB were well known to bank examiners and their supervisory officials for at least a 10-year period prior to its failure. Indeed, the warning signals were clear as long as 15 years. prior.

It has now been fully acknowledged by all regulatory agencies that the supervisory followup was woefully inadequate. Of interest, in view of the current controversy concerning leaks of bank examiner reports, is the fact that a most comprehensive Wall Street Journal article of 1969 laid out for all to see the modus operandi utilized by C. Arnoldt Smith.

The subsequent failure of Franklin National had its origins a full 10 years ago. It is not necessary for congressional reports to conclude these facts, inasmuch as the Comptroller of the Currency and the Board itself, in testimony before this committee, have acknowledged inherent difficulties in the existing regulatory structure that most assuredly did not provide the type of regulatory response that should have been made.

In view of this background, I find it impossible to understand Governor Holland's recent assertion before the committee that it is simply impossible to prevent and I am paraphrasing Governor Hollandthose bank failures by regulatory action. Although much has been made in recent days of newspaper articles quite obviously based upon bank examination reports, in some instances extending back over a 2year period, the real issue, it seems to me, is not who should have access to bank examination reports, or when, but when are the bank regulatory agencies going to take decisive steps to prevent certain bank practices in terms of portfolio investment that inevitably lead to a weakened condition of the bank, regardless of the economic conditions in existence at the time?

There is little new in the reports on the two large New York banks which have recently been widely circulated. As an example of this assertion on my part, I quote from a publication dated November 21, 1975, by Loeb, Rhoades & Co., concerning overseas loan activities of major U.S. banks:

A slow recovery in world trade, accompanied by large overseas loan losses, could be a more formidable hurdle for the stocks than any likely adverse REIT or New York City bond developments. The absence of the formerly strong evidence of overseas earnings growth potential introduces new evidence of vulnerability into the two-bank tier price market.

Thus, the issue for this subcommittee, Mr. Chairman, I think and hope you will agree, is: Does bank regulation, as presently structured today, constitute the most effective form of organization for dealing promptly and decisively when banks, particularly our largest banks, begin-and I emphasize begin-to evidence signs of weakness which, if not checked promptly, can lead to lack of public confidence both domestically and abroad?

For obvious reasons, Mr. Chairman, I think this question is very important this morning.

Dr. BURNS. Mr. Chairman, I think you have very properly and cogently pointed to an important problem facing the regulatory authorities and facing Congress. The heart of your question, as I understand it and please correct me if I am mistaken-is whether the present type of organization fosters prompt and decisive corrective action by the regulatory authorities.

In dealing with any problem of Government, you have to consider organizational structure and the character of the individuals who

function within that organizational structure. I am not wise enough to tell you what the ideal bank regulatory structure of this country may be. But I can say this to you: No matter what kind of structure may be devised, unless you have people of great integrity and of high competence, dedicated to the public service, functioning within these organizations, the objective that you very properly seek may not be achieved.

As for the present organizational structure. I have criticized it, just as Members of the Congress have, as members of your staffs have, and as others have. I can point to some defects in the present scheme. And certainly wish I could speak with authority and conviction as to the type of reform that would improve matters materially.

After pondering this subject, debating with others, debating with myself for a long period of time, the best recommendation that I can make to the Congress is that the Comptroller's Office be merged into the Federal Reserve and that the FDIC be left unchanged. The Comptroller would be added to the Federal Reserve Board, and at the time of the next vacancy on the Board-the Board temporarily having been increased in size to eight-the vacancy would be filled by the Comptroller. That is the best recommendation that I can make to you as of today.

My reasons-if I may describe them briefly-are first, all national banks are members of the Federal Reserve, and I think it would be more efficient to have one regulatory authority for them instead of two. Second, I would not want to centralize all regulatory authority in one body, because I fear excessive concentration of power, and because a little competition in ideas from others is often a great stimulus to constructive action-to being alert and doing your job a little better than you might otherwise do.

That is my thinking on this subject. I should add, Mr. Chairman, that I respect other views on organization. What I fail to understand, however, is the dogmatism with which so many people can speak on a subject that involves a leap into the future, on doing something untried. But I do respect other thinking on the subject; there is ample room for differences of view.

Mr. ST GERMAIN. My time has expired. We hopefully will get back to this on the next round.

Mr. Annunzio?

Mr. ANNUNZIO. Thank you, Mr. Chairman.

Dr. Burns, I read your statement at home last night, and I was pleasantly surprised at the conciliatory attitude that you presented in your statement. You have been before this committee on a number of occasions. I have been on the committee for 11 years. We have worked long and hard in presenting legislation to audit the Federal Reserve Board.

You have assured this subcommittee, on a number of occasions, that the Board is audited, that you have your own auditors. I thought that after the last hearings, we had reached some kind of agreement that the GAO would audit the Board. But there was a question about the Open Market Committee, and we felt that you probably were right; that in disclosing the operations of the Open Market Committee, that the disclosures of that particular audit could come a year later.

Now, it is a wonderful sound to say independence. But independency sometimes is a luxury that we cannot afford in a democratic society, because we have to be responsible to the people, and the people alone. And everybody is disclosing today, everybody is putting on a striptease act, and there is no reason why your Board should not disclose, just like all of us in the Congress and in other parts of our society have been asked to disclose.

So, I am delighted to know that you have an open mind on the subject, and I urge that you seriously consider disclosure. And, on the terms of the members of the Federal Reserve Board, all of us know how Wright Patman has fought over the years, and he is going to leave us after this election. And I was extremely pleased to note that you say that you have no objections to the term of the Chairman being coterminous with the President, something we have advocated for a long time.

And I also like your other suggestion, because it is a step in the right direction. You say a year later the President should appoint the Chairman, and then go for confirmation before the Senate. So that I was delighted that you are here this morning in a spirit of compromise with the committee; and if I know Chairman Reuss, believe me, after Mr. Patman leaves, he will be just as effective to try to do what he can. I am going to help him to achieve what you have written in your own statement. Because it is conciliatory, and it is a step in the right direction, and we can remove the so-called independency feature by making this appointment a year later. At least then, the new President has the right to make an appointment, a man of his own choice to lead the Federal Reserve Board, and it will bring the Federal Reserve Board closer to the people.

And this is the only objective that some of us on this committee have been trying to reach. I want to extend my appreciation to you for being here this morning. I enjoyed reading your statement last night. Sometimes I do enjoy some of your statements. Other times, when I do not, you hear from me, and I want you to know that when you are right, I am going to say you are right. And when I think that you are wrong, and I disagree, I will say it.

And we have been communicating with each other. I have enjoyed the correspondence, and I think you have gone a long, long way, both in "Truth-in-Lending" and now, with the changes that you seem to want to suggest to the subcommittee, and I thank you very much.

Dr. BURNS. Let me in turn thank you, Mr. Annunzio. And if I may sav one further word, I like your style, and I hope you do not change. Mr. ST GERMAIN. Mr. Rousselot?

Mr. ROUSSELOT. Thank you, Chairman St Germain.

Chairman Burns, we do appreciate your willingness to speak in your testimony today very specifically about those areas of agreement relating to the FINE Study that your staff has done, and those areas where you disagree. To be specific if we can-and by the way, I also want to thank you for your willingness to meet with members of this committee on a regular basis upon request-and for your willingness to go on television programs such as "Issues and Answers" and discuss very openly, as you did Sunday, some of the issues publicly, so that other people have the chance to try to understand what the Federal Reserve Board is doing.

In your statement on page 11, you say, "Since the growth of loan commitments by banks has a significant bearing on the availability of bank credit to business firms, the Federal Reserve must watch closely the movements of these commitments."

Then you go on to say that you feel it is the responsibility of the Federal Reserve Board, both here in Washington and at the regional Federal Reserve banks to watch the development of those commitments. I wonder if you would be willing to comment. Your Federal Reserve Board Advisory Council on Bank and Lending Practices put out a statement in September 1974, which said loans for purely financing activities, such as acquistions or the purchase of the company's own shares, would normally not be appropriate use of limited bank funds.

Now, we have had a great deal of press coverage on a subject, a current illustration, where Irving Trust in New York has been accused by one of its clients of helping another firm take over in a so-called stock raid its stock, by putting together other banks to finance a higher price for the stock in a takeover. Could you comment on that case, and are you familiar with it? Is your Federal Reserve Board now watching that particular case as to determine whether that, in fact, is an unusual practice on the basis of what your own advisory committee has said? Dr. BURNS. I am not familiar with the case, and I cannot comment on it; nor can I even tell you now whether anyone at the Board

Mr. ROUSSELOT. Well, do you want to comment, then, on the general practice of banks participating and making loans for clients to take over other clients, especially when the claim is by microdot-that since Irving Trust was their lead bank, they had much confidential information that might not normally be available?

Dr. BURNS. This is a difficult question for me. Let me say, first of all, that the advisory council statement you quoted from-when was that, September 1974?

Mr. ROUSSELOT. Correct.

Dr. BURNS. As you will recall, that statement was issued at a time of great credit stringency.

Mr. ROUSSELOT. I do recall.

Dr. BURNS. The purpose of that statement was to encourage the banks to attend to the industrial needs of our society, rather than to financial manipulations. And, if I may say so, I commended the advisory council for that statement.

Mr. ROUSSELOT. You do agree with that statement, then, that they issued at that time?

Dr. BURNS. It was appropriate at that time. As to a general policy, I would want to be cautious. There are circumstances under which one or another of our corporations ought to have new management, ought to be taken over, and I would not want to make a blanket pronouncement on that issue.

Mr. ROUSSELOT. And that bank resources should be used to accelerate the price of the stock in order to do that; that that is a legitimate banking need?

Dr. BURNS. I would be very unhappy about that. But, you see

Mr. ROUSSELOT. You and I realize that that kind of a consortium of banks, of four banks, to guarantee-I think it is $75 million, which