Found a good "BBS Text" link? Let Us Know!

This paper is presented in an historical context and is indicative of the various rants, raves, treatises, etc., that were prevalent in the old BBS (Bulletin Board Service) days. Content has not been changed, though formatting changes may have taken place to make it more presentable. (Spelling, sentence/paragraph structure, etc.) Wherever possible, credit is given to the originating source.

 Return to BBS Text Files

The SPOTLIGHT 
March 25, 1991

SPONSOR OF FED BILL EXPLAINS WHY BANKING MONOPOLY NEEDS AUDITING

The following speech was delivered by Rep. Lee Hamilton (D-Ind.) on February 27, upon the introduction of his bill, the Federal Reserve Reform Act of 1991 (H.R. 1130), cosponsored by Rep. Byron Dorgan (D-N.D.). The speech is excerpted from the Congressional Record of that date.

THE FEDERAL RESERVE REFORM ACT OF 1991

Hon. Lee H. Hamilton of Indiana
In the House of Representatives
Wednesday, February 27, 1991

MR. HAMILTON: Mr. Speaker, today Representative Byron Dorgan and I are introducing the Federal Reserve Reform Act of 1991. The bill would make some modest changes in the practice and procedures of the Federal Reserve to address two issues of great importance to the American economy and our system of democratic government-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.

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.

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 conducted 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 every American. It waits 6 weeks before releasing policy decisions. 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, raising the risk that the President and the Federal Reserve Board Chairman might be at odds. President Bush, for example, will not be able to appoint a Fed chairman until August 1991. The Fed's budget is not published in the U.S. Government budget for fiscal year 1992-the $115 million spent by the Board of Governors. Even though the Federal Reserve engages in more than $1 trillion in transactions in the money markets each ear, most of these activities are exempt form audit by the GAO or any other outside agency.

The bill that Representative Dorgan and I are introducing today aims to make the Federal Reserve more accountable to the American people, not by giving politician control but 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.

The bill has five major provisions:

First, it would require the Secretary of the Treasure, 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 nonvoting basis with the Federal Open Market Committee (FOMC), 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, the administration is reduced to carrying on policy disputes by publicly sniping at the Fed through the press. Under this bill, the administration will have a formal avenue to present its program for the economy to the FOMC and lay out its goals and targets for monetary policy. The members of the FOMC will also have an avenue to convey their concerns about fiscal policy to the administration. Communication will flow both ways.

Second, 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 of office coterminous with the office of the President of the United States.

The current Chairman of the Board of Governors, Alan Greenspan, was appointed by President Bush's predecessor and will hold that office until August 10, 1991, almost 3 years into President's Bush's term. Fortunately, Chairman Greenspan and President Bush have a cordial relationship. The fact that Mr. Greenspan was not appointed by President Bush has not caused any significant problems with monetary policy. But if they were unable to work together, the result could be 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 Chairman cannot work together.

Third, this bill would require the FOMC to disclose immediately any changes in the targets of monetary policy, including its targets of monetary aggregates, credit aggregates, prices, interest rates, or bank reserves.

The FOMC currently keeps major policy decisions secret for 6 weeks after they are made and carried out. Most other government agencies must not only publish decisions in the Federal Register before they can take effect, most in fact must publish proposed decisions for public comment before they can even be issued in final form.

While secrecy may help insulate the Federal Reserve from criticism, secrecy has two economic costs:

First, secrecy makes capital markets operate less efficiently. The Federal Reserve's position on this can be defended only if you believe that ignorance is better than knowledge. But one of the major conclusions of mircoeconomic theory is that thorough and complete information is a requirement for markets to work efficiently. This applies to financial markets as well as to markets for goods and services.

Second, secrecy is unfair to small investors. When the Federal Reserve makes a policy change, large investors and Wall Street firms can employ experts to monitor the Federal Reserve and decipher its activities in the financial markets. This gives them and advantage over small investors, borrowers, and other who don't have resources to employ Fed-watchers to interpret and anticipate Fed policy changes.

The solution is immediate release of Federal Reserve policy decisions, as the bill would require. This is a change that is widely supported by economists and participants in financial markets. 

Fourth, 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 its 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. Our bill would remove the last two restrictions while retaining the restriction against GAO access to transactions with foreign central banks for foreign governments.

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 without change.

The Federal Reserve's expenditures are not subject to approval by either the President or Congress, unlike budgets of other Government agencies. Despite the fact that the Federal Reserve takes in and spends billion 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 operation expenses is included in the U.S. Government budget for fiscal year 1992-just the $115 million of expenses incurred by the Board of Governors in Washington. The details on this par of the Fed's budget, only 7 percent of the Federal Reserve's total spending, appear in part 4 of the budget, at the very end of the section entitled, "Government Sponsored Enterprises."

During 1991, 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, and so forth. 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 would not subject the Federal Reserve to the congressional appropriations process, nor would 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 is already listed. This includes the Supreme Court, which has its budget published in the Government budget without any loss of independence.

Adopting this 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 Representative Dorgan and I are 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, our 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.

The Federal Reserve Reform Act will not cause revolutionary changes at the Federal Reserve. It is a very modest bill designed to improve some of the Federal Reserve's practices and procedures. In the 75 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 Representative Dorgan and I are introducing today continues this process by proposing a handful of evolutionary changes in the practices and structure of the Federal Reserve.

 

Please Read The Website Disclaimer!
Copyright 2006, The Survival & Self-Reliance Studies Institute (SSRsi), All Rights Reserved
Site conceptualized, designed, created & maintained by MEG Raven
Snail Mail: SSRsi, PO Box 2572 Dillon, CO. 80435-2572