generally speaking, if they are paying the maximum on their savings deposits will try to get as high a yield as they can, and they will be stretching for longer maturities-for instance, they hold municipals, and may have extended the maturity term somewhat of those municipals, of some of them, in order to get a higher return over the spread. I think there has been some of that going on. I do not believe that it has reached a serious proportion or anything of that sort.

Mr. HANNA. Would you be able to identify the banks in which that has actually happened?

Mr. IRONS. You mean here?

Mr. HANNA. No. I mean, I am not asking you what banks they are, but I am asking you could you identify the banks in which that was happening.

Mr. IRONS. Yes, I think we know what is going on with the banks and we have talked with some of them.

Mr. HANNA. What would your powers allow you to do about a thing like this, the present powers?

Mr. IRONS. Our powers are of an influencing type, persuasive type, moral suasion, and getting together with the bank. We cannot stop it and cannot tell the bank every loan it can make or every investment it can make, but we can point out if it is getting to a serious point and has to be checked.

We examine, we rate the banks, we watch their paper, we put them in different categories from the top-rated banks to what we call our problem banks down in group 4, the lower group, and we work with our problem banks more closely. We require that they give us a report every month, and we will make an extra examination now and then, and that sort of thing.

Mr. HANNA. Are you doing that in the cases

Mr. IRONS. Problem banks, yes.

Mr. HANNA. Is it having a salutary effect?

Mr. IRONS. Yes.

Mr. HANNA. Would you say whatever deterioration has been has been substantially improved since you have taken the steps?

Mr. IRONS. Speaking of problem banks now only, I would say that by a close followup, and so on, we have made some progress with some banks.

Now, there are some banks that you cannot make progress with, that the banks should not be there in the first place, there is no business. Mr. HANNA. Let me ask you this question. What would be the effect upon your function as a component of a Federal Reserve Svstem if a suggestion was followed that the stock, supposed stock holdings of your member banks were to be liquidated? Would this in any way affect your function?

Mr. IRONS. The Federal Reserve bank could operate, I think we would have to admit, without this stock type of ownership. I think it would be a great mistake to eliminate the stock. I think

Mr. HANNA. For what reason?

Mr. IRONS. Well, one reason is that it reflects and is characteristic of what I consider to be the basic character of the Federal Reserve System, a combination of a quasi-public, quasi-private group of institutions.

In my mind, there are three elements to the Federal Reserve System. The Board of Governors, the public element, fully public element; the Federal Reserve banks, the quasi-public, quasi-private element, and then I think we have to include the commercial banking system, which carries out the detail, which is the private element.

Now, in between the private and the public somewhere in between there, in my judgment, lie the Federal Reserve banks, and I would not like to see that relationship broken-I think it would be a mistake to break down that concept, that has prevailed throughout the life of the System.

I am willing to admit that we could operate without the stock. You may say the stock is only a symbol, but a symbol can be awfully important at times, like a flag is only a symbol. A country, I suppose, could get along without a flag, but we would not like to do it. We may have had an incident triggered by a flag not too long ago. So there is that symbolism there.

Then another factor that I think enters into the picture, I think is some degree, elimination of the stock would make membership in the Federal Reserve System less attractive to the small banks, and I think it would be one more factor to lessen the attractiveness of membership in the Federal Reserve System because of the stockownership, and so on. I would not say it is the only factor, but I think it is one. There are other factors that may be more important.

Mr. HANNA. You annually pay a dividend on that stock?

Mr. IRONS. Sir?

Mr. HANNA. Do you annually pay a dividend on that stock?

Mr. IRONS. A dividend of 6 percent fixed in the Federal Reserve Act, and we pay it annually, yes.

Mr. HANNA. And that is paid out of the income of the Federal Reserve System which is substantially income from the Government bills held by the System?

Mr. IRONS. They come out of the earnings of the system; yes, sir. Mr. HANNA. That is all.

The CHAIRMAN. Mr. Harvey?

Mr. HARVEY. Mr. Irons, I am interested in your opinion when you elaborate in your opinion about an audit by the Comptroller General. In your statement you say:

It would represent an encroachment upon the authority of the Board to determine and supervise the internal-management policies and practices of the Federal Reserve System.

Why do you feel that way since other Government agencies are audited by GAO?

Mr. IRONS Yes.

Mr. HARVEY. Why should the Federal Reserve System, in your opinion, differ?

Mr. IRONS. Because, whether specifically stated or implied, I feel that the Board of Governors is the top dominant agency in the Federal Reserve System that has and should have responsibility for the internal housekeeping and management of the Federal Reserve banks.

Now, we have our internal audit staff, a resident audit staff, at the bank which is performing the audit regularly, and then the Board of Governors has its examiners, and then policy with regard to examina

tion at the moment is centered in the Board of Governors, it seems to me. I think that is where it ought to be.

I would dislike seeing another agency brought in in a way whose operations might in a way lessen the authority and the responsibility of the Board of Governors to perform this function which, I agree with you, is tremendously important.

Mr. HARVEY. How would it though impede or impair the functions of the Board of Governors, for example, or you, for that matter, as an individual President?

Mr. IRONS. I think there is a difference, for instance, here in the kind of audit. An audit, if it were just merely a verification of items, and in no way, to no extent, a policy audit, would be one thing, and I would say that that audit group, if it came in, it would represent merely another audit group and would be somewhat repetitious and

unnecessary.

But if the audit goes beyond that and becomes a policy audit, in substance, then I think it would begin to encroach on the authority of the Board of Governors because I think that is where the policy comes in.

Even at the present time, under the present scheme of things, if auditors turn up items about which they want to raise questions, they raise the questions, and then it becomes a matter of determination, it seems to me, on the part of the Board of Governors whether the policy as it exists is right and good, and the policy determination comes from the Board-the banks are operating within that policy framework, and our auditors and examiners are working within that policy framework.

If we introduced another group of auditors in it, it would either be within that framework, the same as our own are, in which case it would be duplicative or they would get over into the policy determination which, I think, would encroach on the Board.

Mr. HARVEY. Mr. Chairman, I wonder if I coud direct a question to you for just a minute?

The CHAIRMAN. Certainly.

Mr. HARVEY. Inasmuch as we had a notice that a representative of GAO would appear tomorrow at 10 o'clock, and then I understood Mr. Albert, the majority leader, to say on the floor yesterday we were going into session tomorrow morning at 10 o'clock on the civil rights bill

The CHAIRMAN. After Mr. Irons gets through we will have the GAO man this morning, if it is all right. His testimony will not be long, and in that way it will solve that question.

Mr. HARVEY. I have no further questions.

The CHAIRMAN. Mr. Brock?

Mr. BROCK. In light of that I will defer questions.

The CHAIRMAN. Mr. Widnall?

Mr. WIDNALL. Could I ask one question? There has been quite a bit of questioning this morning with respect to the type of background of the Board of Directors of the Federal Reserve Board. Mr. IRONS. Yes, sir.

Mr. WIDNALL. Are you familiar with the selection of the people for those same positions in central banks overseas, the Bank of England, for example?

Mr. IRONS. Well, in the Bank of England, I have a vague recollection there that on their Board, the Court of the Bank of England, there are 16 members. Four of the members of the Courtwhich is their Board-are officials of the Bank of England, they are fulltime Directors-I believe it is four; and then others are outside of banking and include industrialists, and so on, but I cannot go beyond that with you. That is available as to how they are selected. I may have it among these various papers I have. I will look and see.

Mr. WIDNALL. Would you have any information that you could submit for the record in which you could show how those Boards are constituted in other countries? I think it would be very valuable in our study.

Mr. IRONS. We will be very glad to look into it and try to give you for the record whatever we can get, yes, sir; for the principal foreign

central banks.

Mr. WIDNALL. Mr. Chairman, Would this be all right?

The CHAIRMAN. Certainly, without objection it will be inserted at this point. I think it would be good information.

(The information referred to follows:)

EXECUTIVE MANAGEMENT AND POLICY STRUCTURE OF SELECTED FOREIGN CENTRAL

The Governor is appointed by the Crown for a 5-year term. One member of the Board of Directors (see below) is appointed as Deputy Governor, also by the Crown. The Governor presides over the two important organs of the Bankthe Board of Directors and the Council of Regency-as well as over the General Council and the general meeting of shareholders.

2. Policy organs

1. Board of Directors.-This body, responsible for management of the Bank, consists of the Governor and between three and six (at present there are four) Directors, appointed by the Crown for 6-year terms from among candidates proposed by the Council of Regency. (See below.) Members of the Board of Directors may not serve in the legislature, nor on the board of any commercial company with the exception of certain financial institutions which are subject to Government supervision or control.

2. Council of Regency.-The Council, which is the policymaking organ of the National Bank of Belgium, consists of the Governor, the Board of Directors, and 10 regents, elected for 3-year terms by the general meeting of shareholders. Regents are elected in the following manner:

(a) Two from among candidates named by labor organizations;

(b) Three from candidates proposed by organizations representing industry, trade, and agriculture;

(c) Two from managing bodies of public (official) financial institutions; and

(d) Three from candidates proposed by the Ministry of Finance.

1. Executive officers

CANADA

The Government and Deputy Governor are appointed, with approval of the Government, from among the Board of Directors (see below), for 7-year terms. The Governor and Deputy Governor must be men of "proven financial experience," but they may not be officers or employees or shareholders of any bank or financial institution.

2. Policy organs

BOARD OF DIRECTORS.-This body consists of the Governor, Deputy Governor, 11 Directors-as voting members-and the Deputy Minister of Finance as a nonvoting member. The Directors are nominated for 3-year terms by the Ministry of Finance, with the approval of the Governor General in Council of Canada. The Directors "shall be selected from diversified occupations," except that no officer or employee of a chartered bank shall be eligible. Directors who are shareholders of a chartered bank must divest themselves of holdings within 3 months of appointment.

1. Executive officers

FRANCE

The Governor and two Deputy Governors are appointed by Government decree for indefinite terms. The Governor holds very wide powers and the system of management of the Bank has been highly centralized since its foundation. The three Governors do not constitute a board; there is no board of directors standing between the General Council (see below) and the administration of the Bank. 2. Policy organs

GENERAL COUNCIL.-This body consists of 17 members: Governor (1), Deputy Governors (2), councilors (12), and censors (2); the censors are nonvoting members. The 12 councilors are chosen as follows:

(a) Four councilors, who are ex officio members, are the heads of the principal Government financial institutions;

(b) One councilor is elected by the Bank's staff;

(c) Seven councilors, appointed by the Minister of Finance on proposals by competent ministers, represent the following interests:

Two Industry and commerce in Metropolitan France;

Four Agriculture, labor, French oversea territories, French interests abroad (noncolonial);

One General economic interests.

The councilors, other than the four ex officio members, are appointed for 4year terms; they may be reappointed.

1. Executive officers

GERMANY

The President and Vice President are appointed by the Government. 2. Policy organs

1. Directorate.-This body consists of the President and Vice President and no more than eight additional members (appointed by the Government) who must possess "special professional qualifications." The Directorate is the main administrative organ of the Bank; it implements decisions taken by the Council. 2. Central Bank Council.-This body consists of the Directorate (as above), and the presidents of the landeszentralbanken (the regional or state central banks).

1. Executive officers

ITALY

The Governor is appointed and dismissed by the Superior Council of the Bank with the approval of the Government. He is assisted in the administration of the Bank by a General Manager and a Vice General Manager, similarly appointed.

2. Policy organs

Superior Council.-This body (referred to as the Board of Directors in some sources) consists of the Governor and 12 Directors elected by the shareholders (commercial and savings banks and certain other financial institutions) for renewable 3-year terms. No specific qualifications are mentioned, but the Directors may not belong to credit institutions, engage in trade, carry out stock exchange transactions and, in general, participate actively in business interests.