The question of independence from Congress is a very special one and discussion of it will be reserved for the section on "The Finances of the Federal Reserve System."

It has already been pointed out that, irrespective of whether the Board of Governors is or is not a part of the Executive branch, Congress can and has endowed it with a substantial degree of independence from the President. The President appoints the members of the Board of Governors, subject to the confirmation of the Senate, and designates the Board's Chairman. Pursuant to his inherent powers as Chief Executive, he may remove any member of the Board for malfeasance, incompetence, or neglect of duty. Some powers of the Board have been delegated to it by the President, pursuant to acts of Congress vesting the powers originally in him. The President can supervise the execution of these powers and can redelegate them if he sees fit. But, aside from this, the Board is formally independent in the exercise of its judgment and can made such decisions as it believes to be in the public interest. This was agreed by a great majority of the persons replying to the questionnaires or testifying at the hearings.

But, the formal independence of the Board of Governors from the President is inevitably limited by the hard fact that fiscal and monetary policy must be coordinated with each other and with the other policies and objectives of the Government if the Government is to be of the greatest service to the Nation. As the Council of Economic Advisers says (Compendium, p. 850):

A problem of greater practical importance, however, is presented by the fact that stability is only one of the objectives of the Government, and monetary policy is only one of the methods of achieving stability. When various objectives must be promoted simultaneously, a combination of policies needs to be chosen that will promote these different objectives without tearing down one to build up another.

This means that the Board of Governors must inevitably discuss and endeavor to reconcile its differences with the Executive agencies. What is needed is not the best monetary policy or the best fiscal policy, each as ends in themselves, but the best over-all economic policy. This is naturally most likely to be attained, from the point of view of the Federal Reserve System, when its influence in Government policy formation is at a maximum. A good case was made at the hearings that the over-all influence of the Federal Reserve System would be increased if it were less independent and more highly integrated with the Executive branch. (See especially the testimony of G. L. Bach, Hearings, pp. 748-752.) Dr. Goldenweiser had earlier supported this view in part in his book, American Monetary Policy, but modified his position materially in his testimony before the Subcommittee.

The final aim, of course, is not that the Federal Reserve System should be independent, but that the country should have a sound economic policy. The independence of the Federal Reserve System is a relative, not an absolute, concept. It is good insofar as it contributes to the formulation of sound policy, and bad insofar as it detracts from it. Measured by this standard, the Subcommittee is inclined to believe that a degree of independence of the Board of Governors about equal to that now enjoyed is desirable. Many of the policies which the Federal Reserve must advocate to maintain

the soundness of the dollar during times of inflationary pressures are unpopular; yet it is necessary that they have a strong advocate in order to avoid a built-in inflationary bias in the economy. This end is best served by endowing the Board of Governors with a considerable degree of independence thereby enhancing its bargaining power in the determination of over-all policy. But, the Board of Governors, like 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 complete absence of any representation of labor, despite the fact that labor is so vitally affected by monetary policy. This lack is, in large part, a remnant of the thinking of a generation or more ago, when the Federal Reserve System was conceived simply as an aid to commerce and industry and not as an agency for formulating monetary policy for the benefit of the whole people. The Subcommittee suggests, in this connection, that the Board of Governors give consideration to including representatives of labor among those whom it considers eligible for appointment as Class C directors.

[COMMENT BY SENATOR FLANDERS: I believe that class C directors should represent the broad public interest and to this end well-qualified representatives of labor should be eligible. However, I am opposed to any requirements which would tend to make these directorships partisan by parcelling them out to 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 both difficult and unrewarding to measure and to define. But, the most important single way in which the directors have an impact on central policy decisions is through the participation of the presidents whom they have elected in the deliberations of the Federal Open Market Committee. (This Committee, established by statute, consists of all members of the Board of Governors and the presidents of five of the 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 Board of Governors. The Committee has final authority over all purchases and sales of Government securities and acceptances by the Federal Reserve banks.)

The three principal instruments of Federal Reserve policy are the determination of rediscount rates, the variation of reserve requirements, and open-market operations. These three instruments must be used in conjunction to serve a common end, and there is no rational basis for the assignment of the most important of them, open-market 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 is therefore historical and not logical. Its justification is that it provides an important link between the directors and managements of the individual Federal Reserve banks and the formulation of monetary 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 implementation 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.

D. THE COMPOSITION OF THE BOARD OF GOVERNORS

1. Tenure of Members.-Members of the Board of Governors are appointed for fourteen-year terms of office and are not eligible for reappointment after they have served a complete term. This tenure and ineligibility for reappointment was originally provided for by the Banking Act of 1935, and was based in part upon a concept of the Board as the "Supreme Court of Finance." It was a natural corollary of this concept that the Board should be insulated from all outside influences likely to affect its impartiality. This was sought to be accomplished by long terms of office and ineligibility for reappoint

ment.

The Subcommittee does not believe that the analogy of the Board of Governors with the Supreme Court is valid. The Board of Governors is primarily a policy-making, not a judicial or quasi-judicial body; and, as the ends of economic policy are matters of judgment, it should have its mandate from the people (expressed through appointment and confirmation by the elected officers of the Government) periodically renewed. On the other hand, it is especially important that the Board of Governors maintain a continuity of policy and not be easily affected by passing currents of public opinion. The founding fathers recognized the necessity of a compromise between the objectives of responsiveness and of continuity in their provision for staggered terms for the members of the Senate, and it is upon this analogy rather than upon that of the Supreme Court that we should base our views with respect to the appropriate tenure for members of the Board of Governors.

Chairman Martin suggested (Compendium, pp. 301-302) that the 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 that it be given consideration by the appropriate legislative 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 attention of the appropriate legislative committees. We also recommend that any reduction in the number of members of the Board of Governors be accompanied by a pro rata reduction in the number of Federal Reserve bank president members of the Federal Open Market Committee so as to preserve, as far as possible, the present ratio between members of the Board of Governors and presidents of the Federal Reserve banks in the composition of the Committee.

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

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

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

The geographic portions of this provision have reduced the flexibility of the appointing authority in seeking the best possible membership for the Board, while its non-geographical portions reflect in part the older concept of the Federal Reserve System as simply an organization for the ""accommodation of commerce and industry" rather than one whose primary responsibility is the formulation of monetary policy in the public interest. It is, of course, important that the Board include in its membership persons understanding of and sympathetic to the various interests in the county, and the President and the Senate may be expected to insist upon this, but it is also important that men be appointed with a broad understanding of the economic bases of monetary policy. The Subcommittee believes that, in the long run, the quality of membership of the Board would 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 that 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 be coordinated so that they will make a meaningful whole, working in the direction of price stability, high-level employment, and a dynamic, free-enterprise economy. It is not merely the right but the duty of the President to seek to effect this coordination-by direction with respect to the agencies under his control and by persuasion with respect to the agencies which are not. The Secretary of the Treasury