The soundness of the dollar during times of inflationary pressures are npopular; yet it is necessary that they have a strong advocate in order to avoid a built-in inflationary bias in the economy. This end s best served by endowing the Board of Governors with a consideraole degree of independence thereby enhancing its bargaining power on the determination of over-all policy. But, the Board of Governors, ike all other parts of Government, must play as part of a team, not as an outside umpire, and must ultimately abide by the decisions. which are made by Congress.

C. THE POSITION OF THE FEDERAL RESERVE BANKS AND THE FEDERAL OPEN MARKET COMMITTEE

The previous discussion of the independence of the Federal Reserve System has been principally in terms of the independence of the Board of Governors from the President. But, the Federal Reserve banks also have a considerable degree of independence from the Board of Governors. At one time this idependence was much greater. The original Federal Reserve Act appears to have conceived the individual Federal Reserve banks as important policy-making agencies and the Board of Governors (then the Federal Reserve Board) as principally a regulatory agency, like the Interstate Commerce Commission. The subsequent trend has been toward a somewhat greater degree of independence of the central board from the President but a much diminished autonomy for the individual banks. The most important changes in this direction were made by the Banking Act of 1935, but it has been the trend for the whole period since the adoption of the original Act and is, for the most part, merely a reflection of the growth in the importance of monetary policy and the recognition of the fact that this policy cannot be determined by regions but must apply over an entire currency area.

The directors of the individual Federal Reserve banks have a large degree of responsibility with respect to the business management of their institutions but relatively little authority in the determination of monetary policy. They are, for the most part, men with a large amount of business experience and a broad point of view with respect to the public interest. They are an invaluable link between the . Government and the business community. Because of them, the Government is better able to understand the point of view of business and business is better able to understand the point of view of Government. The Subcommittee believes that it is important that their responsibility, not merely in the business management of their banks but also in the formulation of monetary policy, should be kept sufficiently great to attract men of high caliber. In the absence of affirmative evidence to the contrary, it is inclined to believe that the present degree of responsibility is satisfactory.

Class A and B directors of the Federal Reserve banks are by law elected by, and members of, the financial and business communities. Class C directors, comprising a third of the whole, are appointed by by Board of Governors to represent the public interest. The Subcommittee commends the Board of Governors on the appointments which it has made to class C directorships of members of the academic community and others in an especially advantageous position to take a view detached from the particular interests of business and finance.

It expresses some concern, however, with respect to the compl absence of any representation of labor, despite the fact that labor so vitally affected by monetary policy. This lack is, in large per a remnant of the thinking of a generation or more ago, when t Federal Reserve System was conceived simply as an aid to commer and industry and not as an agency for formulating monetary poli for the benefit of the whole people. The Subcommittee suggest in this connection, that the Board of Governors give consideration including representatives of labor among those whom it conside eligible for appointment as Class C 'directors.

[COMMENT BY SENATOR FLANDERS: I believe that class directors should represent the broad public interest and to th end well-qualified representatives of labor should be eligibl However, I am opposed to any requirements which would ten to make these directorships partisan by parcelling them out members of special-interest groups, whether business, agriculture or labor.]

The influence of the directors of the Federal Reserve banks on the formulation of monetary policy is in large part intangible and is bot difficult and unrewarding to measure and to define. But, the mo: important single way in which the directors have an impact on centr policy decisions is through the participation of the presidents whe they have elected in the deliberations of the Federal Open Marke Committee. (This Committee, established by statute, consists of a members of the Board of Governors and the presidents of five of th twelve Federal Reserve banks serving, except for the president of the New York bank, in rotation. The presidents are elected by the directors of the respective banks subject to the approval of the Boar of Governors. The Committee has final authority over all purchase and sales of Government securities and acceptances by the Feder Reserve banks.)

The three principal instruments of Federal Reserve policy are the determination of rediscount rates, the variation of reserve require ments, and open-market operations. These three instruments mus be used in conjunction to serve a common end, and there is no rationa basis for the assignment of the most important of them, open-marke operations, to a body different from that controlling the other two (The Board of Governors has final authority over both variations in reserve requirements and the determination of discount rates. See Compendium, pp. 275-279.) The explanation of the present System therefore historical and not logical. Its justification is that it pro vides an important link between the directors and managements of the individual Federal Reserve banks and the formulation of monetar policy. Its danger is that it might result on some future occasion in the adoption of an open-market policy not compatible with the over-all economic policy of the United States as approved by Congress This would be more likely to happen during a period of deflation than during one of inflation, and need not occur at all if both Congress and the Open Market Committee are endeavoring to effectuate the objectives of the Employment Act. If the decisions of the Open Market Committee should ever serve as an obstacle to the imple| mentation of the economic policy of Congress, its separate existence should be reconsidered. Barring such an event, however, the present arrangement serves a useful purpose and the Subcommittee sees no reason to disturb it.

>ect to the he fact t

D. THE COMPOSITION OF THE BOARD OF GOVERNORS

ick is 1. Tenure of Members.-Members of the Board of Governors are int nore appointed for fourteen-year terms of office and are not eligible for an aid eappointment after they have served a complete term. This tenure ng mond ineligibility for reappointment was originally provided for by the ommitteBanking Act of 1935, and was based in part upon a concept of the ve consiBoard as the "Supreme Court of Finance." It was a natural corollary whom if this concept that the Board should be insulated from all outside nfluences likely to affect its impartiality. This was sought to be ere the ccomplished by long terms of office and ineligibility for reappointterest&nent.

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The Subcommittee does not believe that the analogy of the Board of Governors with the Supreme Court is valid. The Board of Governors ling the primarily a policy-making, not a judicial or quasi-judicial body; and," is the ends of economic policy are matters of judgment, it should have ness, a ts mandate from the people (expressed through appointment and Te ben onfirmation by the elected officers of the Government) periodically enewed. On the other hand, it is especially important that the Board of Governors maintain a continuity of policy and not be easily affected Dacty passing currents of public opinion. The founding fathers recogized the necessity of a compromise between the objectives of responsiveness and of continuity in their provision for staggered terms for the Ope members of the Senate, and it is upon this analogy rather than upon COthat of the Supreme Court that we should base our views with respect to the appropriate tenure for members of the Board of Governors. reside Chairman Martin suggested (Compendium, pp. 301-302) that the lected term of members of the Board of Governors be reduced to six years and that the prohibition against reappointment be removed. The Subcommittee is impressed with this suggestion and recommends the that it be given consideration by the appropriate legislative

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committees.

[COMMENT BY SENATOR FLANDERS: I favor a reduction in the term of office of members of the Board of Governors from 14 to 10 years, a reduction in the number of members of the Board from 7 to 5, and the removal of the limitation on eligibility for reappointment. This would permit two appointments to the Board in each Presidential term but would not permit a President to appoint a majority of the Board in a single term (except through appointments due to deaths and resignations). This arrangement, it seems to me, would achieve the best balance between the objectives described in the text.]

2. Number and Compensation of Members. It is of great importance that the chairman and members of the Board of Governors should be persons of the highest possible caliber. In order to help achieve this end, the earlier subcommittee, under the chairmanship of Senator Douglas, recommended (Report of the Subcommittee on Monetary, Credit, and Fiscal Policies, p. 31):

** * (a) decreasing the number of members of the Board of Governors from seven to not more than five in order to make the position attractive to more capable men and to lessen the temptation to appoint men of lesser stature, and (b) raising the salary of the Chairman of the Board of Governors to the same level as the salaries of Cabinet members-namely, $22,500-and raising the salaries of other Board members to $20,000 a year.

We reaffirm this recommendation and commend it to the attent of the appropriate legislative committees. We also recommend t any reduction in the number of members of the Board of Gover be accompanied by a pro rata reduction in the number of Fede Reserve bank president members of the Federal Open Market C mittee so as to preserve, as far as possible, the present ratio betwe members of the Board of Governors and presidents of the Fede Reserve banks in the composition of the Committee.

3. Designation of chairman.-The President now has the power designate a member of the Board to be Chairman and one to be T Chairman, each to serve for a term of four years. This designati has not worked satisfactorily in practice, however, because the ter of designation does not at present coincide with the term of office of President but may end at any time during a presidential term. Th Committee is impressed, therefore, with Chairman Martin's sugge tion (Compendium, p. 302) that the law be amended so that th designations may run for terms beginning shortly after the commence ment of each presidential term.

4. Qualifications for membership.-The statute at present provid that

In selecting the members of the Board, not more than one of whom shall selected from any one Federal Reserve district, the President shall have d regard to a fair representation of the financial, agricultural, industrial and com mercial interests and geographical divisions of the country.

The geographic portions of this provision have reduced the flex bility of the appointing authority in seeking the best possible member ship for the Board, while its non-geographical portions reflect in par the older concept of the Federal Reserve System as simply an organ zation for the "accommodation of commerce and industry" rathe than one whose primary responsibility is the formulation of monetar policy in the public interest. It is, of course, important that th Board include in its membership persons understanding of an sympathetic to the various interests in the county, and the Presiden and the Senate may be expected to insist upon this, but it is als important that men be appointed with a broad understanding the economic bases of monetary policy. The Subcommittee believe that, in the long run, the quality of membership of the Board woul be improved if the present qualifications were removed and the appointments left to the full discretion of the President and the Senate.

E. COORDINATION OF FISCAL AND MONETARY POLICY

As already stated, the Subcommittee believes on the one hand th the present degree of independence of the Federal Reserve System should be maintained and, on the other hand, that neither the Treasury nor the Board of Governors should be subordinated to the other It is vitally necessary, however, that monetary policy, fiscal policy and all of the other economic policies of the Government should coordinated so that they will make a meaningful whole, working the direction of price stability, high-level employment, and a dynami free-enterprise economy. It is not merely the right but the duty the President to seek to effect this coordination-by direction with respect to the agencies under his control and by persuasion with r spect to the agencies which are not. The Secretary of the Treasur

-xpressed this duty of the President very clearly when he said, in his nswer to an inquiry in the questionnaire concerning the settlement of olicy conflicts between the President and the Federal Reserve Compendium, p. 30):

I think one of the most important steps toward providing a quick means of ettling such disputes would be a public, and a congressional, recognition of the act that it is natural, proper, and desirable for the President to seek to settle hem by having all the interested parties sit around a table to discuss their differnces with him. That would seem to be an almost axiomatic method of solution f a dispute. Yet, in some quarters, if the President should ask the Chairman or ny other member of the Board of Governors to come to the White House to iscuss differences of policy which were having some effect on Government objecives, there would be loud objections and charges of attempted domination or lictation. I do not think that any President, in the present state of the law, Could seek to dictate to or interfere with the Federal Reserve. But since the ntialwo-the President and the Board-are assumed to be independent of each other, Marthe very essence of that independence should be recognized that they should led so. ach have the right-and the duty-to discuss the problem freely around a table ogether. This should be encouraged by the Congress and the public, rather theehan discouraged. Discouragement comes from charges or insinuations that such conferences amount to attempted dictation. It would encourage such discussions resent and conferences if this committee of the Congress would publicly recommend hem.

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The Secretary of the Treasury also suggested, in his reply to the sha Subcommittee's questionnaire and in his testimony before the Subustrial committee, that the coordination of fiscal and monetary policy would be further facilitated by the establishment of an interagency consultaditive committee. He said (Compendium, pp. 31-32):

sible

The creation of a small consultative and discussion group within the Governeffect ment, to consist of the Secretary of the Treasury, the Chairman of the Board of Governors, the Director of the Budget, the Chairman of the Council of Economic Advisers to the President, and the Chairman of the Securities and Exchange

s Commission. I would have this group meet informally but regularly and freofquently for the purpose of discussing domestic monetary and fiscal matters with nt teach other. Heads of the lending agencies would be called in for these meetings from time to time when the discussions involved their programs. This group would in a way be a kind of parallel to the National Advisory Council which eworks in the field of foreign financial matters. It would also be akin to the Council suggested by the Commission on Organization of the Executive Branch of the Government (the Hoover Commission) in its report on the Treasury Department. The Council there suggested (Recommendation No. 9) was to advise on policies and coordinate the operations of the domestic lending and Government financial guarantees.

This recommendation resembles in many respects the recommendation of the earlier subcommittee under the chairmanship of Senator Douglas, which said1 (Report of the Subcommittee on Monetary, Credit, and Fiscal Policies, p. 4):

We recommend the creation of a National Monetary and Credit Council which would include the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Chairman of the Federal Deposit Insurance Corporation, and the heads of the other principal Federal agencies that lend and guarantee loans. This Council should be established by legislative action, should be required to make periodic reports to Congress, and should be headed by the Chairman of the Council of Economic Advisers. Its purpose should be purely consultative and advisory, and it should not have directive power over its members.

1 Mr. Wolcott appended the following note to this recommendation: "Mr. Wolcott joins in recommending the creation of a National Monetary and Credit Council, but disagrees with the recommendation that it should be headed by the Chairman of the Council of Economic Advisers. In his opinion, this would concentrate too much power in the Executive over the volume and cost of credit. He recommends, instead, that the Chairman of the Credit Council be a person of neutral interests removed as much as possible from the direct influence of either the Executive or the Federal Reserve Board. He also agrees that periodic re ports should be made to Congress by the Council."