The Subcommittee does not believe that the analogy between the contractual tax-exemption provisions of United States securities and the statutory tax exemption of dividends on stock of the Federal Reserve banks is well taken, and recommends that the appropriate legislative committees consider the subjection of all dividends on Federal Reserve bank stock to Federal income taxation, either by direct legislation or by provision for the recall and reissue of all outstanding stock of the Federal Reserve banks.

4. Budgetary and Auditing Procedures. The principle that the gross earnings of the Federal Reserve banks after the payment of necessary expenses and dividends are the property of the Federal Government implies the further principle that these funds should be prudently handled and that the expenses charged against them should be no greater than necessary to accomplish the public purposes of the System. This, in turn, leads to a consideration of budgetary and auditing procedure.

The Chairman of the Board of Governors urged very strongly in his testimony to the Subcommittee that the independence of the System depended on its right to use its earnings to pay its expenses as it saw fit, without appropriation from Congress. The Subcommittee is inclined to agree with this observation, noting that the independence in question is an independence from Congress, not from the Chief Executive. As previously indicated, such degree of independence from Congress as the Federal Reserve System enjoys is due to the judgment of Congress that its own long-run purposes-which are those of the United States as a whole-will be best served by such a temporary self-denial of a portion of its inherent prerogative. The Subcommittee believes that this policy of Congressional self-denial should be continued, as it is fearful that if the Federal Reserve System were subjected to standard appropriation procedure-with all the structural changes in the System which this would imply the role of monetary policy in the economic affairs of the Government would inevitably be curtailed and an important bulwark against inflation would be weakened. It does suggest, however, that the Board of Governors should each year submit its budget and the budgets of each of the twelve Federal Reserve banks, together with a statement of performance on the budgets for the previous year, to the Banking and Currency Committees of each House for their information and such action and consideration as they may consider suitable. (The effect of the procedure here recommended would be confined to improving the information of the legislative committees. In the absence of further legislation-which is not here recommended-the Board of Governors and the Federal Reserve banks would continue to conduct their finances without Congressional approval.)

[COMMENT BY SENATOR FLANDERS: I dissent from this recommendation. While the recommendation, if adopted, would, in itself, make no change in the present independence of the Federal Reserve System in the management of its finances, I believe that the necessity for this closer surveillance has not been demonstrated and that it might prove an entering wedge for a subsequent impairment of the System's independence.]

The Subcommittee's questionnaire asked the Chairman of the Board of Governors to describe the auditing procedures of the Federal Reserve System. This description appears on pp. 307-314 of the Com

pendium. It consists briefly of provision for internal audit in each of the twelve Federal Reserve banks, an annual audit of each bank by examiners from the staff of the Board of Governors, and a semiannual audit of the Board of Governors by examiners from the staff of one of the Federal Reserve banks designated for this purpose by the Board. The Subcommittee made no further examination of the details of this procedure, but is inclined to question the adequacy of what is essentially a self-audit. It, therefore, commends the action of the Board of Governors (taken before the submission of the answers to the questionnaire) in employing an outside firm of public accountants to audit the accounts of the Board. It does not consider this action sufficient, however, and recommends that the law be amended to provide that an annual audit of the accounts of the Board be made by the General Accounting Office. It recommends, however, that this should be a post-audit only and that the authority of the Comptroller General should be limited to reporting to Congress any expenditures or other actions of the Board which he considers to be improper and making such suggestions as he considers appropriate. It believes that a full copy of such audit, including all confidential sections, should be filed with the Committees on Banking and Currency of each House for consideration in executive session, directly or through subcommittees, and for such subsequent action as they consider appropriate. It does not see how such an audit could in any way impair the desirable degree of independence of the Board of Governors.

The audit of the individual Federal Reserve banks is more important and involves greater problems. The Chairman of the Board of Governors urged upon the Subcommittee (in executive session) that a mandatory audit of the individual banks by the Comptroller General would be an affront to the directors of the twelve banks and would alter essentially the present character of the System. The Subcommittee has given sympathetic consideration to this plea on the part of the Chairman, but is nevertheless not satisfied with the present procedure. It suggests as a possible compromise that the law be amended to require that each Federal Reserve bank be audited at least annually by an outside auditor nominated by its Board of Directors and approved by the Board of Governors, and that the law be further amended to authorize the General Accounting Office to perform such audits, if requested, charging therefor a fee equal to their actual cost including overhead expenses as (finally) determined by it. The report resulting from each audit of a Federal Reserve bank, by whomsoever performed, including all confidential sections, should be filed with the Banking and Currency Committees of each House in the same manner as previously suggested for audits of the Board.

[COMMENT BY SENATOR FLANDERS: I concur in this recommendation so far as it applies to the audit of the Federal Reserve banks. I believe, however, that the Board of Governors should have the same freedom as here proposed for the Federal Reserve banks in choosing its auditor.]

V. THE GOLD STANDARD

Since the passage of the Gold Reserve Act of 1934, the international value of the United States dollar has been definitely tied to a fixed amount of gold. This amount of gold has been 1/35th of a fine ounce continuously since January 31, 1934. According to a legal opinion submitted to the Subcommittee by the counsel for the Board of Governors of the Federal Reserve System (Hearings, p. 139), it cannot be changed except by act of Congress, nor can the corresponding price of gold ($35 an ounce) be changed without act of Congress except for a narrow margin between the authorized buying and selling price set by the International Monetary Fund in accordance with the Articles of Agreement of that organization as approved by Congress in the Bretton Woods Agreements Act of 1945. This international value of the dollar is implemented by the willingness of the United States Treasury to sell gold to, and buy gold from, foreign governments and central banks in such amounts as may be necessary to maintain the international value of the dollar. As a consequence, the dollar is a "hard currency" acceptable throughout the world and is convertible into all other currencies at not less than its par value.1 There can be no question of the continuing ability of the United States to make good on its commitment to preserve this convertibility because of the strength of our export trade and because our official gold stock is much larger than our quick liabilities abroad plus any balance of payments deficits which we might incur and have to meet in gold.

United States currency, however, is not redeemable in gold coin or bullion, either for domestic holding or for private holding abroad (as far as the latter comes directly under the purview of the United States at the time of export). This matter was considered by the predecessor subcommittee under the chairmanship of Senator Douglas, which said (Report of the Subcommittee on Monetary, Credit, and Fiscal Policies, p. 3):

We believe that to restore the free domestic convertibility of money into gold coin or gold bullion at this time would militate against, rather than promote, the purposes of the Employment Act, and we recommend that no action in this direction be taken *

This Subcommittee has given further consideration to the advisability of restoring the free domestic convertibility of money into gold coin or gold bullion and concludes that such a policy would be unwise either at the present time or as an ideal for future action.

The Canadian dollar at the time of writing stands at a premium of over 2 cents relative to the United States dollar. This premium is, of course, much greater than the cost of shipping gold from New York to Montreal or from Washington to Ottawa (greater, that is, than the "gold export point" under the traditional gold standard) and it may, therefore, appear that the United States dollar is not convertible into the Canadian dollar at par. The diff culty, however, is that, while the United States has declared a legal par value for its dollar in terms of gold to the International Monetary Fund in accordance with the Articles of Agreement, and is willing to buy and sell gold in any amounts necessary to implement this par value, the Canadian government at the present time has no legal par value for its dollar in terms of gold and is not willing to buy or sell gold (in the present case buy gold) in order to implement the traditional par value of 100 Canadian cents equals 100 American cents.

The official gold stock of the United States amounted at the end of March 1952 to about $23.3 billion. This is less than 13 percent of the total privately-held money supply (deposits adjusted plus currency outside of banks) of $182.9 billion on the same date. This means that an undertaking to redeem money in gold would be one which the Government could meet only in fair weather when persons having the right to demand gold were not disposed to do so. As the ratio between gold and money supply is not likely to change radically in future years (the total gold stock of the world, including that in private hoards as well as in official reserves, is probably less than onethird of the present United States money supply 2), a return to the free domestic convertibility of money into gold would represent as much of a gamble at any future date as it would now.

The advantages of the United States continuing on an international gold standard are manifest. Gold is the most generally acceptable medium for the settlement of international balances that the world has yet been able to devise, and the certainty that the United States will always pay or accept any balances due on international account in gold makes the dollar a universally acceptable means of payment in world trade. It is a major aim of the international economic policy of the United States to promote the sound growth of multilateral trade and to discourage bilateral and discriminatory trade practices. These are fostered by non-convertible currencies, and one of the most important things which the United States can do to promote multilateral trade is to continue the international gold convertibility of its own currency and to encourage and assist other countries in making their currencies convertible. This is the effect of the present international gold standard of the dollar. The restoration of domestic convertibility-which would tend to draw additional gold stocks to the United States-would increase the difficulties in the way of other countries which are now striving to restore the external convertibility of their currencies and so would place further obstacles in the way of the healthy growth of multilateral world trade.

In the domestic field, however, the risks of gold convertibility are high and the advantages are questionable. It has already been pointed out that the present gold stocks of the United States are less than 13 percent of the privately-held money supply and that there is little prospect of this proportion increasing materially in the future. It is true that this proportion was often even smaller in past years. At the end of June 1929, for example, the monetary gold stock of the United States amounted to only 7.3 percent of the money supply on that date.

The limited stock of gold relative to the possible demands on it if we should return to domestic convertibility is in fact the heart of the argument in favor of such a return, as the case is often put. A return to domestic gold convertibility is meant as a means of disciplining the Government. As Professor Walter E. Spahr said in his answer to a question of the earlier subcommittee under the chairmanship of Senator Douglas.3

? The total world stock of refined gold is estimated at about $60 billion (at $35 a fine ounce) of which somewhat less than $40 billion is in official stocks and about $20 billion is in private hands. The gold in private hands includes that in the form of jewelry, etc., and other bona fide industrial and artistic forms, as well as that held in private hoards.

3 A Compendium of Materials on Monetary, Credit, and Fiscal Policies, pp. 361-362 (Senate Document No. 132, 81st Cong., 2d sess.); quoted in the Report of the Subcommittee on Monetary, Credit, and Fiscal Policies, p. 42.