[Congressional Record Volume 141, Number 65 (Friday, April 7, 1995)]
[Extensions of Remarks]
[Pages E874-E876]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                   FEDERAL RESERVE REFORMS INTRODUCED

                                 ______


                          HON. LEE H. HAMILTON

                               of indiana

                    in the house of representatives

                         Friday, April 7, 1995
  Mr. HAMILTON. Mr. Speaker, today I am introducing important 
legislation that would make substantial improvements in the structure 
and practices of the Federal Reserve System--the Federal Reserve Reform 
Act of 1995. Senator Byron Dorgan is introducing similar legislation in 
the Senate.
  This bill addresses the three issues of great importance to the 
American economy and our system of democratic government--the public 
accountability of those who make important monetary policy decisions, 
the current absence of any channel of formal communication between the 
Federal Reserve and the administration, and the veil of secrecy 
surrounding policymaking at the Federal Reserve.
  During the past year, the Federal Reserve has demonstrated the power 
it exerts over the U.S. economy through its ability to influence the 
level of interest rates. Since February, 1994, the Federal Reserve has 
raised interest rates seven times for a cumulative increase of 3 full 
percentage points--from a target Federal Funds rate of 3 percent in 
early 1994 to 6 percent currently. The recent decline in the housing 
sector--both sales and starts of single-family homes have fallen 
significantly during recent months--indicates that the rise in interest 
rates is starting to slow economic growth and may slow job growth in 
the months ahead.
  The Federal Reserve occupies an anomalous position within the 
Government of the United States. It is an enormously powerful 
institution, but it does not conform to the normal standards of 
Government accountability. Power without proper accountability simply 
does not fit into the American system of democracy.
  Through its control over monetary policy the Federal Reserve affects 
the lives of all Americans. It has the power to decide who prospers and 
who fails. The path that the Federal Reserve sets for monetary policy 
and interest rates affects every businessperson, worker, consumer, 
borrower and lender in the United States and has a major impact on the 
overall performance of the economy, as we became painfully aware during 
the 1990-91 recession and the anemic recovery since.
  The independence that the Federal Reserve must have to insulate 
monetary policy from political pressures also removes the Fed from the 
normal processes of accountability that apply to every other agency of 
the Federal Government. We must address a very difficult and perplexing 
problem--how to make the Federal Reserve more accountable to the 
American people without jeopardizing its independence and its ability 
to conduct monetary policy free of political pressure.
  No other government agency enjoys the Fed's prerogatives.
  Monetary policy is decided in secret, behind closed doors.
  The Federal Reserve is not required to consult with Congress or the 
administration before setting money or interest rate targets, even 
though its power affects the financial well-being of every American.
  The President, who is responsible for the performance of the economy 
and is blamed if things go wrong, often must wait until late in his 
term to appoint a new Chairman of the Federal Reserve Board. President 
Clinton, for example, will not be able to appoint a new Fed Chairman 
until March 1996.
  The Fed's budget is not published in the U.S. Government Budget, even 
though it spends about $1.7 billion per year. Only 7 percent of Federal 
Reserve expenditures are detailed in the U.S. Government Budget for 
fiscal year 1996--the $177 million spent by the Board of Governors.
  The presidents of the 12 Federal Reserve Banks, who participate in 
monetary policy decisions on the Federal Open Market Committee [FOMC], 
are neither appointed by the President nor confirmed by the Senate.
  Even though the Federal Reserve engages in more than $1 trillion in 
transactions in the money markets each year, most of these activities 
are exempt from audit by the GAO or any other outside agency.
  The bill that I am introducing today aims to make the Federal Reserve 
more accountable to the American people, not by giving politicians 
control but by making duly appointed public officials solely 
responsible for the conduct of monetary policy, by creating a formal 
channel of communication between the President and the Federal Reserve, 
and by providing Congress and the American people with more and better 
information on the Federal Reserve's policies and procedures. This bill 
updates similar bills I introduced to previous Congresses.
  The Federal Reserve Reform Act has six major provisions:


                role of federal reserve bank presidents

  First, it would vest sole responsibility for the conduct of monetary 
policy and open market operations in the seven-member Board of 
Governors of the Federal Reserve System and would create a special new 
Federal Open Market Advisory Council through which the presidents of 
the regional Federal Reserve Banks could advise the Board on monetary 
policy.
  The Federal Reserve System consists of the Board of Governors in 
Washington and the 12 regional Federal Reserve Banks. The Board of 
Governors has seven members, who are appointed by the President and 
confirmed by the Senate to 14-year terms. The governors of the Federal 
Reserve are thus duly appointed Government officials who are 
responsible to the President and Congress, and through them to the 
American people, for their conduct in office.
  The Federal Reserve Bank presidents, in contrast, owe their jobs to 
the Boards of Directors of the regional banks--boards dominated by 
local commercial banks. Neither the President nor Congress has any role 
in selecting the presidents of the Federal Reserve Banks Some of the 
bank presidents are career employees, others have backgrounds in 
banking, business, and academics; none are duly appointed Government 
officials. Nonetheless, they participate in monetary policy decisions 
through their membership on the FOMC, where they cast 5 of the 12 votes 
that determine monetary policy and interest rates.
  The role of the Federal Reserve Bank presidents--and the broader 
issue of the influence of the Nation's banks and of private interests 
on the Federal Reserve--has been a source of concern ever since 
Congress decided to establish the Federal Reserve in 1913.
  In the initial draft of the Federal Reserve Act, there was a debate 
between some Members of Congress and President Wilson over whether the 
Nation's banks should be allowed to appoint members of the Federal 
Reserve Board, with the President arguing that there should be no 
individuals on the Board representing private interests. During the 
1920's, when uncoordinated open market operations by the Federal 
Reserve Banks were disrupting the markets for Treasury securities, 
Treasury Secretary Andrew Mellon argued that the properly appointed 
public officials on the Federal Reserve Board should have sole 
responsibility for regulating open market operations.
  And when Congress rewrote the banking laws during the 1930's, 
President Roosevelt, who proposed to vest sole responsibility for open 
market operations in the Board, ultimately compromised on a provision 
of the Banking Act of 1935 under which a rotating group of five Federal 
Reserve Bank presidents was allowed to share voting responsibility for 
open market operations with the seven members of the Federal Reserve 
Board.
  This situation, in which private individuals who are neither 
appointed by the President of the United States nor confirmed by the 
Senate nonetheless directly participate in monetary policy decisions, 
is an anomaly in our system of democratic government. It is true that 
almost all Government agencies make extensive use of private citizens 
in an advisory status. The Federal Reserve, for instance, has three 
major advisory panels which meet with the Board of Governors three to 
four times a year, including the Federal Advisory Council, a panel of 
12 bankers which advises the Board of Governors ``on all matters within 
the jurisdiction of the Board.''
  [[Page E875]] But nowhere other than the Federal Reserve are 
representatives of private interests permitted to have a vote on 
Government policy. This is the proper function of Government officials 
who have either been elected by the people or duly appointed and 
confirmed in the appropriate manner, and that is the way it should be 
at the Federal Reserve as well.
  The bill that I am introducing today would address this controversy 
by going back to the first principles laid out by Presidents Wilson and 
Roosevelt, that properly appointed Government officials should be 
responsible for the conduct of monetary policy at the Federal Reserve.
  First, the bill would dissolve the Federal Open Market Committee and 
make the Board of
 Governors of the Federal Reserve responsible for monetary policy and 
open market operations. Second, it would create a Federal Open Market 
Advisory Council, through which the presidents of the 12 Federal 
Reserve Banks could advise the Board of Governors on regional economic 
conditions and other factors affecting the conduct of monetary policy 
and open market operations. The Bank presidents would no longer have a 
vote on monetary policy, but the Board of Governors would still have 
the benefit of their advice.

  Power without accountability does not fit the American system of 
democracy. In no other government agency do private individuals make 
government policy. The Federal Reserve Reform Act 1995 will now apply 
this same principle of democracy to the Federal Reserve.


                    consultation on economic policy

  Second, it would require the Secretary of the Treasury, the Chairman 
of the Council of Economic Advisers, and the Director of the Office of 
Management and Budget to meet three times a year on a non-voting basis 
with the Board of Governors, to consult on monetary and fiscal policy.
  Two of the required meetings would take place just before the FOMC 
sets its annual money growth targets in February and July and reports 
to Congress, as required by the Full Employment and Balanced Growth Act 
of 1978. The third meeting would occur in the fall at the start of the 
administration's annual budget cycle. These meetings will bring 
together the key members of the fiscal and monetary policymaking teams.
  The purpose of the meetings is to improve the flow of information 
between the administration and the Federal Reserve. Currently, there is 
no formal channel of communication between the President and the Fed. 
At times, various Presidents and their economic advisers have been 
reduced to carrying on policy disputes by publicly sniping at the Fed 
through the press.
  In the past, the Fed Chairman and the Treasury Secretary have tried 
to maintain some communication through informal meetings, but this 
process depends too heavily on the personalities involved. While 
Nicholas Brady was Treasury Secretary, the process apparently broke 
down and the meetings became very sporadic, while I understand that 
Chairman Greenspan and former Treasury Secretary Lloyd Bentsen worked 
together very well. But with the appointment of a new Treasury 
Secretary, Robert Rubin, the process will have to be sorted out all 
over again.
  But informal meetings are not enough. These meetings do not involve 
all the major participants in monetary policy decisions and this 
process requires no formal presentation or discussion of economic goals 
or plans. Under the Federal Reserve Reform Act, the administration will 
have a formal avenue to present its program for the economy to the 
Federal Reserve Board and lay out its goals and targets for monetary 
policy. The members of the Board will also have an avenue to convey 
their concerns about fiscal policy to the administration. Communication 
will flow both ways.
              term of the chairman of the federal reserve

  Third, the bill would allow the President to appoint a Chairman of 
the Federal Reserve Board--with the advice and consent of the Senate--1 
year after taking office, at the time when the first regular opening 
would occur on the Federal Reserve Board. This would make the Fed 
Chairman's term basically coterminous with the term of office of the 
President of the United States.
  The current chairman of the Board of Governors, Alan Greenspan, was 
appointed by President George Bush and will hold that office until 
March 1996, more than 3 years into President Clinton's term. 
Fortunately, Chairman Greenspan and President Clinton appear to work 
well together. Even though Mr. Greenspan was not appointed by President 
Clinton, this does not appear to have caused any significant problems 
with monetary policy or the progress of the economy. But if they had 
not been able to work together, the result could have been serious 
damage to the American economy and a paralysis of economic policy. This 
is a risk the country should not take.
  The Federal Reserve Reform Act would address this by having the 
President appoint the Fed Chairman to a 4-year term beginning 1 year 
after taking office, when there will be a new vacancy on the Board in 
any event. Each appointee will still be subject to Senate confirmation, 
as under current law. Giving the President 3 years of a term with a 
Federal Reserve chairman of his own choosing is surely preferable to 
the possibility under current law of a lengthy period where the 
President and Fed chairman cannot work together.


           immediate disclosure of changes in monetary policy

  Fourth, this bill would require the FOMC to disclose immediately any 
changes in the targets of monetary policy, including its targets for 
monetary aggregates, credit aggregates, prices, interest rates, or bank 
reserves.
  This provision would codify the Fed's new practice of announcing 
policy decisions immediately, which it implemented with the first of 
its recent increases in interest rates on February 4, 1994. Prior to 
that time, the Fed would keep its policy decision secret. Any change in 
monetary policy or interest rate targets would have to be inferred by 
the financial markets and investors from the Fed's subsequent actions. 
This process was akin to reading tea leaves or gazing into crystal 
balls, and gave powerful financial institutions that could pay enormous 
salaries to professional Fed-watchers an advantage over small investors 
in Indiana and much of the rest of the Nation.
  I am very pleased by the Fed's decision to announce its policy 
decisions immediately. It was a change that I and other members of 
Congress had been recommending for some time and I think it was an 
excellent decision. Small investors now have the same information at 
the same time as the money-center banks and other financial 
institutions. While my bill would not make any changes in the Fed's new 
procedures, it would write them into law, confirming the approval of 
Congress for what the Fed has done.
                   GAO audits of the Federal Reserve

  Fifth, the bill would permit the Comptroller General to conduct more 
thorough audits of Federal Reserve operations, by removing selected 
current restrictions on GAO access to the Federal Reserve.
  The General Accounting Office is the watchdog of Congress. It carries 
out that responsibility through financial and program audits of 
government agencies. These audits are of tremendous value to Congress. 
Not only do they ferret out waste, fraud and abuse, they perform the 
even more important function of telling Congress when programs are not 
working and where programs can be improved.
  For many years, from the mid-1930's to the late 1970's, the Federal 
Reserve was exempt from GAO audits along with the other bank regulatory 
agencies, on the grounds that it funds were not appropriated by 
Congress. In 1978, the Federal Banking Agency Audit Act authorized the 
GAO to audit the bank regulatory agencies, allowing full audits of the 
Comptroller of the Currency and the Federal Deposit Insurance 
Corporation and limited audits of the Federal Reserve. Since then, the 
GAO has conducted numerous audits of the Fed's regulatory activities. 
These audits have provided useful suggestions for reducing costs at the 
Federal Reserve, improving regulatory programs, and strengthening the 
banking system with no noticeable harm to the Federal Reserve or its 
effectiveness in regulating member banks.
  Currently, the GAO is prohibited access to any Federal Reserve 
function involving, first, transactions with a foreign central bank or 
foreign government, second, any deliberations or actions on monetary 
policy matters or third, any transactions made under the direction of 
the FOMC. Thus, even though the Federal Reserve engages in more than $1 
trillion in transactions in the money markets each year, most of these 
activities are exempt from audit by the GAO or any other government 
agency.
  My bill would remove the last two restrictions, and thus provide for 
more thorough audits of the Fed, while retaining the restriction 
against GAO access to transactions with foreign central banks or 
foreign governments.


                 Publication of Federal Reserve budget

  The final provision of the bill would require that the Federal 
Reserve's annual budget be published in the Budget of the U.S. 
Government. The Fed would submit its budget for the current year and 
the two following years to the President by October 16 of each year, 
and the President would be required to print the Fed's budget in the 
Government Budget without change.
  [[Page E876]] The Federal Reserve's expenditures are not subject to 
approval by either the President or Congress, unlike the budgets of 
other government agencies.
  Despite the fact that the Federal Reserve takes in and spends 
billions of dollars each year, the Federal Reserve's budget is not 
conveniently available to Congress or the public. Only a
 small fraction of the Fed's $1.6 billion of operating expenses were 
included in the U.S. Government Budget for fiscal year 1996--just the 
$177 million of expenses incurred by the Board of Governors in 
Washington. The details on this part of the Fed's budget, only 7 
percent of the Federal Reserve's total spending, appeared in Appendix 
of the Budget, at the very end of the section entitled ``Government-
Sponsored Enterprises.''

  During 1996, the revenues of the Federal Reserve System will be about 
$20 billion. A small fraction of these revenues, less than $1 billion, 
will consist of payments by banks for services provided by the Fed. 
Most will consist of interest received from the Treasury on the Fed's 
holding of U.S. Government securities, which the Fed acquired during 
open market operations conducted for monetary policy purposes. Out of 
this $20 billion, paid mostly by taxpayers, the Federal Reserve will 
incur approximately $1.7 billion in operating expenses. About $1 
billion of this will be for personnel costs. The rest will be for 
supplies, travel expenses, telephone and postage, printing money, 
maintenance of equipment, amortization of buildings, etc. The remainder 
of the Fed's revenues will be returned to the Treasury, where it is 
listed in the Budget as an offsetting receipt.
  The Federal Reserve Reform Act will not reduce the Federal Reserve's 
control over its own budget. The bill will not subject the Federal 
Reserve to the Congressional appropriations process, nor will it give 
either Congress or the administration any control over the Federal 
Reserve's spending. All it does is require that the data be published 
conveniently in the U.S. Government Budget, where spending by every 
other government agency is already listed. This includes the Supreme 
Court, which has its budget published in the Government budget without 
any loss of independence.
  Adopting the bill would thus implement a basic principle of democracy 
that no Government agency should take in and spend billions of dollars 
without having its budget readily accessible to the public.
  In conclusion, in our Nation the Government must be accountable to 
the people. The Federal Reserve, with its enormous power over the 
economy and the well-being of the American people, does not meet the 
normal standards of accountability in a democracy. The bill that I am 
introducing today will make the Fed more accountable without impairing 
its ability to conduct monetary policy. The bill does not impose 
presidential or congressional or other outside controls on Fed policy. 
Instead, my bill addresses the complex problem of increasing Federal 
Reserve accountability in a democratic society without jeopardizing the 
Federal Reserve's independence or injecting politics into monetary 
policy.
  In the 80 years since the Federal Reserve System was created, 
Congress has made a number of changes in its structure and procedures, 
adding responsibilities and powers from time to time and periodically 
revising its relationship with Congress and the administration. The 
bill that I am introducing today continues this process by proposing a 
handful of evolutionary changes in the practices and structure of the 
Federal Reserve.


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