expressed this duty of the President very clearly when he said, in his answer to an inquiry in the questionnaire concerning the settlement of policy 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 settling such disputes would be a public, and a congressional, recognition of the fact that it is natural, proper, and desirable for the President to seek to settle them by having all the interested parties sit around a table to discuss their differences with him. That would seem to be an almost axiomatic method of solution of a dispute. Yet, in some quarters, if the President should ask the Chairman or any other member of the Board of Governors to come to the White House to discuss differences of policy which were having some effect on Government objectives, there would be loud objections and charges of attempted domination or dictation. I do not think that any President, in the present state of the law, I would seek to dictate to or interfere with the Federal Reserve. But since the two-the President and the Board-are assumed to be independent of each other, the very essence of that independence should be recognized that they should each have the right-and the duty-to discuss the problem freely around a table together. This should be encouraged by the Congress and the public, rather than discouraged. Discouragement comes from charges or insinuations that such conferences amount to attempted dictation. It would encourage such discussions and conferences if this committee of the Congress would publicly recommend them.

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

The creation of a small consultative and discussion group within the Government, 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 Commission. I would have this group meet informally but regularly and frequently for the purpose of discussing domestic monetary and fiscal matters with each 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 works 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 said 1 (Report of the Subcommittee on Monetary, Credit, and Fiscal Policies, p. 4):

1

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 periodicreports should be made to Congress by the Council."

Much discussion of this recommendation of the Secretary of the Treasury was had during the course of the hearings. It was strongly supported by some witnesses and strongly opposed by others. The opposition was based principally on the ground that it might be used as an instrument for bringing undue pressure on the Federal Reserve. Chairman Martin took no position on the recommendation in his statement to the Subcommittee. In the subsequent questioning he indicated a marked lack of enthusiasm for it, but expressed no active opposition. Mr. Beardsley Ruml made the support of such a council the principal point in his statement to the Subcommittee, but went further than Secretary Snyder by insisting that such a council, if it were to be effective, must be established by statute and must have at least a small staff of its own rather than depending exclusively on the staffs of the member agencies.

The Subcommittee is impressed with Secretary Snyder's recommendation. It notes that the council which he proposes would be consultative and advisory only and would have no directive powers over its members. It would consist of a small number of persons, each with a program to administer (sometimes on his own responsibility and sometimes in conjunction with colleagues) and each with the righ and duty of advising the President. The increased understanding of each other's problems which participation in such a council would bring to each of its members might make an important contribution to the practical administration of the several programs and might also improve the quality of the advice given to the President by each of its members individually. The functions of such a council would not overlap those of the Council of Economic Advisers-the primary responsibility of which is to advise the President of its first choice on each of the economic issues with which he is confronted, unfettered by any implied commitments arising from attempted mediation between operating agencies.

While the Subcommittee sees merit in Mr. Ruml's proposal that the proposed council should be established by legislation and should have a small staff of its own, it believes that such action would be premature. It would prefer that the council be established on an experimental basis by executive order and demonstrate its usefulness in actual operation before Congress is called upon to legislate with respect to its permanence and future status.

The problems of coordination of fiscal and monetary policy are not entirely those of the executive agencies and the Federal Reserve. They are also the problems of Congress. The Employment Act of 1946 set up a coordinating agency on the Congressional side in the Joint Committee on the Economic Report. Like the proposed consultative council and the Council of Economic Advisers, its powers are consultative and advisory only, but it is the only committee of Congress whose mandate extends to the entire field of fiscal and monetary policy and its relationship to economic policy generally. The Subcommittee believes that the Joint Committee on the Economic Report, either through frequent meetings of the full Committee or through the appointment of a standing subcommittee, as the Chairman may see fit, should maintain more active liaison at the top level with the Federal Reserve and the executive agencies, including the proposed consultative council. It commends the liaison now existing at the staff level.

Finally, if correct decisions on problems of economic policy are to be reached at the highest levels, it is essential that the groundwork be well laid and that the implications, advantages, and disadvantages of each proposed avenue of policy be thoroughly explored. The special structure of the Federal Reserve System insures that the claims and advantages of monetary policy will always secure proper attention at the staff level. The funds for this purpose are independent of Congressional appropriation, and the Subcommittee is recommending that this independence be continued. This presents the danger, unless provision is made for adequate staff work in other agencies, that the advantages of monetary policy, especially restrictive monetary policy, may be overemphasized due to an unconscious "institutional bias" on the part of the Federal Reserve staff. This danger can best be avoided if adequate provision for staff work is also made in the Council of Economic Advisers, the Treasury Department, and the Department of Commerce-which have different and partially offsetting institutional preconceptions. The staffs of these agencies are dependent on appropriation procedure and the Subcommittee urges that they should be provided with funds sufficient to insure, as far as possible, that a well-rounded view of the implications, advantages, and disadvantages of fiscal, monetary, and other economic policies will always be available at the top-policy level.

F. FINANCES OF THE FEDERAL RESERVE SYSTEM

The independence of the Federal Reserve System from the President has been discussed earlier. But, the concern of the Subcommittee with the detailed finances of the System derives principally from the significance of these finances in giving it a substantial degree of independence from Congress itself. This independence has an impact on the formulation of monetary policy and hence is of direct interest to the Subcommittee.

1. Private Ownership of the Stock of the Federal Reserve Banks.The stock of the Federal Reserve banks is owned by the member banks. The total amount of capital so supplied to the Federal Reserve banks amounted at the end of March 1952 to $242 million, or about 1⁄2 of 1 percent of their total resources of $48.6 billion. (The surplus of the Reserve banks on the same date amounted to $565 million, but the shareholders have no ownership interest in this surplus, which would revert to the United States if the banks were dissolved, see below, p. 61.) It is clear, therefore, that the capital provided by the private shareholders of the Reserve banks is not a substantial factor either in assisting in their operations or in insuring their solvency. If the Federal Reserve banks depended upon their capital for their solvency, we would be confronted with the paradox that the institutions upon which the solvency of the entire financial structure of the country rests would be themselves the most narrowly and precariously financed institutions in the whole structure. In fact, this is not the case and we are confronted with no such paradox. The solvency of the Federal Reserve banks depends, not upon their capital structure, but upon their legal status, upon the lucrative (and exclusive) functions which have been entrusted to them, and, above all, upon the fact that they may issue money which is a liability of the United States.

What, then, is the significance of the private ownership of the stock of the Federal Reserve banks? This question is answered in part in the following colloquy between Senator Flanders and Dr. Goldenweiser (Hearings, pp. 774-775):

Senator FLANDERS. I would like to ask some questions of Dr. Goldenweiser. You addressed yourself to the question, “What should be the role of the private financial community in the formulation of monetary policy," and in that connection I was interested in the implications of the stock ownership feature of the Federal Reserve System and the independence of its supply of funds. At least ownership has some significance, it seems to me, in the independence of the Federal Reserve System of the Federal budget.

Do you think that is a fortunate or unfortunate feature?

Mr. GOLDENWEISER. I think its independence of the budget is vital, vitally important to the Federal Reserve because the sort of functions it performs it could not perform effectively if it had to have appropriations.

I think that if it had to have appropriations its organization would be subject to a great deal more political pressures than it has been.

You have here an organization that over the years has built up the best economic staff in the world. You have the kind of service that arises from the possibility of cutting red tape, of complete freedom from pressure for political appointments, and it would be highly undesirable and destructive of the public interest to interfere with the functioning of the Federal Reserve in that way.

Now, the ownership of the stock, as everyone here seems to agree, has become a very minor matter. It is not a source of funds. I do not remember what the capital is now, but it is in the minor hundreds of millions, whereas the resources of the Federal Reserve are in the tens of billions, so that you can see that the ratio is negligible.

I think that it is of no particular consequence in that respect, and I think that if one were revising the banking system, that stock ought to be abolished, because I think it stands for a wrong principle, but, as I said at some length, I think it has lost all practical importance, and I think this is

Senator FLANDERS. You do not believe in changing things simply because they are illogical as long as they are working all right?

Mr. GOLDENWEISER. That is right. I think that the most effective things in the world are illogical, and that logic can be one of the most destructive things in the world.

The private ownership of the stock of the Federal Reserve banks, then, is one of those anachronisms which, although it has lost its. original significance, lives on because it continues to be practically useful. One of its functions is to serve as a memo from Congress to itself that it has chosen to leave to the System a great deal of autonomy in its day-by-day and year-by-year operations. This is so because, as long as the private ownership continues, the System will not be amenable to the ordinary techniques of detailed Congressional control. The private ownership of the stock of the Federal Reserve banks also serves as a practical and well-understood link between the System and the private business community, and has been of great help in obtaining the services of able men as directors of the Federal Reserve banks. In theory, an equally effective link might be established by other means—as by the election of local advisory committees-but a newly-established link would not enjoy the sanction of tradition and it would be difficult to devise one which would conform so well to the mores of the business and financial communities. As Mr. A. L. M. Wiggins said so ably on this point (Hearings, pp. 220–221):

The question has been raised as to whether or not the stock of the Federal Reserve banks should be owned by the Government instead of by the member banks. In my opinion it should not be owned by the Government.

The Federal Reserve banks represent a combination of Government and private business under which the control is vested in the Government. But it is through the ownership of the stock by the banks that the Reserve System mobilizes the

services of able individuals as directors. These men represent private enterprise and represent the public, and while the control is vested in the Board of Governors almost entirely, at the same time these directors bring the viewpoint of business, industry, and agriculture and banking to the officers of their banks. I think that it is highly important for the Reserve banks to maintain close touch with conditions prevailing in their respective districts, and this is the only official relationship of the Federal Reserve System with business, agriculture, and industry.

The members elect, it is true, part of the board, the Board of Governors appoint part of the board, and if the Government owned the stock there would be no particular basis on which member banks would select men to serve on the boards of these respective banks. In fact, I think the relationship should be encouraged rather than discouraged, and I have been able to find no sound reason for the Government to acquire the stock in the Federal Reserve banks unless the ultimate objective is to destroy the independence of the System and make it merely a Government bureau.

The Subcommittee accordingly sees no reason why this memo and link should be disturbed as long as it continues to serve a useful purpose.

2. Disposition of the Earnings of the Federal Reserve Banks.-The gross earnings of the Federal Reserve banks are derived from the exercise, under exclusive privilege granted by Congress, of public functions (including the issuance of money) of an intrinsically lucrative character. After the payment of necessary expenses and of dividends on private capital, they are the property of the Federal Government, subject to the disposition of Congress. No stockholder of the Federal Reserve banks or any other person has any legal or moral interest in these earnings beyond his right to receive dividends in the amount determined by statute.

At the present time the Federal Reserve banks pay 90 percent of their net earnings after dividends to the Treasury in accordance with an order of the Board of Governors issued pursuant to an obscure and long-dormant provision of law (Sec. 16 of the Federal Reserve Act, 4th paragraph) authorizing the levy of interest on the amount of Federal Reserve notes not covered by gold. While the Subcommittee approves of the action of the Board of Governors by which this return of earnings to the Treasury is now being made, it believes that it would be better if provision for such return were made by straightforward legislative action. It recommends, therefore, that legislation be enacted providing that 90 percent of the earnings of the Federal Reserve banks after expenses and statutory dividends be paid to the Treasury as a franchise tax. It recommends that the remaining 10 percent of earnings be allowed, for the time being, to accumulate in the surpluses of the several banks in order to permit the capital funds of the System to increase with the economic growth of the country and to provide a buffer against possible losses in future open-market operations.

3. Tax Exemption of the Dividends on Federal Reserve Bank Stock.Dividends paid on the stock of the Federal Reserve banks are at the present time tax exempt, provided that the stock was issued on or before March 28, 1942. Otherwise, such dividends are taxable in the same manner as other income (Hearings, p. 911). This differentiation is presumably (the Committee Reports are not explicit) based on that in the Public Debt Act of 1941, which provided that the interest on United States securities issued after February 28, 1941, should be subject to Federal income taxation but did not disturb the exemption of securities outstanding on that date.