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Published online by Cambridge University Press: 01 August 2014
Public policy is not self-generating; it emerges from institutions. Foremost among the institutions charged with monetary and credit policy formation—an area, like fiscal policy, that has not received from political scientists the attention accorded to micro-economic regulation of particular firms or industries—is the Federal Reserve System. The purpose of this paper is to examine the “fit” of the System's formal structure to (1) the policy functions and the informal policy-forming mechanisms of the “Fed,” and (2) the pattern of interests and values affected by monetary policy. Its thesis is that a substantial gap has developed between these elements.
A brief sketch of the formal structure of authority and the historical development of System functions is needed to begin with; this is followed by analysis of the formal and the effective roles of each component of the System along with the internalized interest representation at each level. Then the linkage between the Federal Reserve System and general economic policy is explored. Finally, the conclusion summarizes the findings and suggests briefly how formal structure and policy functions might be brought into closer, more effective alignment.
1 For more detailed description of the formal organization, see Board of Governors, The Federal Reserve System (Washington, D. C., 1961)Google Scholar and Bach, G. L., Federal Reserve Policy-Making (New York, 1950)Google Scholar.
2 The original Federal Reserve Act imposed a 90 per cent “franchise tax” on Reserve Bank earnings after expenses, dividends and an allowance for surplus. In the mid-1920s earnings were still a major concern, and the principal reason for the Banks' holding government securities, against the opposition of Secretary Mellon. In 1933 half the Banks' accumulated surplus was appropriated to furnish the initial capital of the new Federal Deposit Insurance Corporation; to allow the replenishment of surplus the franchise tax was dropped. By 1946 the surplus reached proportions that led the Board to decide as a matter of policy to pay 90 per cent of earnings to the Treasury, under the label of “interest” on outstanding Federal Reserve notes; this policy continued from 1947 through 1958. In 1959 the surplus was cut back to an amount equal to the subscribed (i.e., twice the paid-in) capital, and the balance, together with all earnings after dividends, was paid over to the Treasury. Annual Report of the Board of Governors, 1959, pp. 96–99 Google Scholar.
3 Goldenweiser, E. A., American Monetary Policy (New York, 1951), p. 295 Google Scholar.
4 In the mid-1920s it dawned on the Reserve Banks—sooner than on the Treasury or the FRB—that open market purchases, first undertaken to improve Reserve Bank earnings, could be managed to offset declines in member banks' outstanding loans; see Chandler, L. V., Benjamin Strong, Central Banker (Washington, Brookings, 1958)Google Scholar. The Banking Act of 1935, reorganizing the FRB and the System, ratified emergency improvisations in 1932–33 to restore bank liquidity by enabling advances to be made to member banks on the security of any of their assets deemed acceptable, and not just on “eligible” commercial paper as before. Federal deposit insurance was introduced in 1934, in recognition of the fact that more public policy objectives than the rescue of depositors in failing banks were at stake in the maintenance of confidence in the safety of bank deposits The architects of the 1913 act supposed they had, by and large, provided for the safety of deposits by establishing the rediscount privilege and strengthening bank examination powers.
5 Joint (Patman) Committee on the Economic Report, Monetary Policy and the Management of the Public Debt, Replies to Questions, Sen. Doc. 123, 82d Cong. 2d sess., 1952, pp. 278–79Google Scholar. Cited hereafter as Sen. Doc. 123.
6 Bach, pp. 81–82.
7 See, for example, the Forty-Sixth Annual Report of the Board of Governors of the Federal Reserve System (Washington, 1960), pp. 134–48Google Scholar, for the list of names and affiliations as of December 31, 1959.
8 Bach, pp. 57–58.
9 Goldenweiser, p. 296.
10 Joint (Douglas) Committee on the Economic Report, Hearings, Monetary, Credit and Fiscal Policies, 81st Cong., 1st sess., 1949, p. 221 Google Scholar.
11 Chairman Martin in Senate Committee on Finance, Hearings, Investigation of the Financial Condition of the United States, 85th Cong., 1st sess., 1957, p. 1260 Google Scholar. Cited hereafter as Senate Finance Committee Hearings.
12 Bach, p. 119.
13 Sen. Doc. 123, p. 30.
14 Senate Finance Committee Hearings, 1959, p. 2180 Google Scholar.
15 Conversation with staff members, Council of Economic Advisers.
16 Bach, pp. 227–28.
17 See Chairman Martin's remarks, Sen. Doc. 123, p. 300, and Bach, p. 121.
18 Senate Finance Committee Hearings, p. 1262 Google Scholar.
19 Statement (mimeograph) of the AFL-CIO Executive Council on Monetary Policy San Juan, Puerto Rico, February 24, 1959. See also, New York Times, 02 26, 1959, p. 30 Google Scholar, and March 6, 1959, p. 24.
20 Administration of National Economic Control (New York, 1952), p. 270 Google Scholar; and see ch. 9 generally.
21 House Report No. 742, 74th Cong., 1st sess. (04 19, 1935), p. 6.Google Scholar
22 Eccles, Marriner S., Beckoning Frontiers (New York, 1951), pp. 167–71Google Scholar. These pages contain an excellent capsule summary of OMC development.
23 Commission on Organization of the Executive Branch of the Government, Task Force Report on Regulatory Commissions, Appendix N, 01, 1949, pp. 113–14Google Scholar; Eccles, pp. 224–26; Bach, pp. 234–35.
24 Joint Committee on the Economic Report, Monetary, Credit, and Fiscal Policies, A Collection of Statements, 81st Cong., 1st sess., 1949, pp. 68–69 Google Scholar.
25 Ibid., p. 162. By 1952, the Presidents were less enthusiastic for change (see Sen. Doc 123, p. 673). They perhaps feared that the unified control might go to the FRB rather than to the OMC if the subject were opened up at all.
26 New York Clearing House Association, The Federal Reserve Reexamined (New York, 1953), pp. 138–39Google Scholar.
27 Sen. Doc. 123, p. 294.
28 Subcommittee on General Credit Control and Debt Management, Joint Committee on the Economic Report, Monetary Policy and the Management of the Public Debt, Sen. Doc. 163, 82d Cong., 2d sess. (1952), p. 54 Google Scholar; H. R. 2790, 86th Cong., 1st sess. (1959).
29 Joint Committee on the Economic Report, Hearings, Monetary, Credit and Fiscal Policies, 81st Cong., 1st sess. (1949), p. 221 Google Scholar.
30 Bach, p. 234.
31 Subcommittee on General Credit Control and Debt Management, Joint Committee on the Economic Report, Hearings, Monetary Policy and the Management of the Public Debt, 82d Cong., 2d sess. (1952), p. 756 Google Scholar, cited hereafter as General Credit Control Subcommittee Hearings, 1952. Regionalism in the Federal Reserve—or at least its modern defense—perhaps owes more to an unexamined bias in favor of “federalism” as a matter of political ideology than to an empirical examination of the national economic structure.
32 Sen. Doc. 123, pp. 677–79.
33 Cushman, Robert E., The Independent Regulatory Commissions (New York, 1941), p. 160 Google Scholar.
34 Martin, , in Senate Finance Committee Hearings, 1957, p. 1261 Google Scholar.
35 Letter, Kenneth A. Kenyon, Assistant Secretary, Board of Governors, to the author, August 17, 1960.
36 Had Eccles been successful in writing his ideas into the 1935 amendments to the Federal Reserve Act, the Act would have anticipated by eleven years the declaration of national economic policy adopted in the Employment Act. The Eccles mandate would have directed the FRB “to exercise such powers as it possesses in such manner as to promote conditions conducive to business stability and to mitigate by its influence unstabilizing fluctuations in the general level of production, trade, prices, and employment so far as may be possible within the scope of monetary and credit administration.” H. Rept. No. 742, 74th Cong., 1st sess. (1935), p. 9.
37 An attempt to clarify the Federal Reserve's role by means of a clearer mandate has been urged by Senator Paul Douglas and by Jacob Viner, see Sen. Doc. 163, p. 74; General Credit Control Subcommittee Hearings, 1952, pp. 771–72Google Scholar. It has been opposed by Goldenweiser and the Reserve Bank Presidents: ibid., p. 765; Joint Committee on the Economic Report, Monetary, Credit, and Fiscal Policies, A Collection of Statements, 81st Cong., 1st sess. (1949), p. 101 Google Scholar. The absence of any mandate legislation since the Employment Act suggests insufficient Congressional consensus upon its substantive content. Organized labor has opposed amendments to add price stability to the goals of that Act, as intended to water down its emphasis on “maximum employment.”
38 Martin, in Sen. Doc. 123, p. 242.
39 See, for example, FRB Research Director Ralph A. Young's remarks, Antitrust Subcommittee, Senate Committee on the Judiciary, Hearings, Administered Prices, 86th Cong., 1st sess. (1959), Part 10, pp. 4887–91Google Scholar.
40 See H. Christian Sonne's comments, from which the quotation is taken, in General Credit Control Subcommittee Hearings, 1952, pp. 848–50Google Scholar.
41 For discussion of this and other pertinent administrative myths, see Harold Stein's remarks in General Credit Control Subcommittee Hearings, 1952, pp. 758–59Google Scholar.
42 Sen. Doc. 123, pp. 263–73.
43 See the remarks of Leon H. Keyserling and Roy Blough in Sen. Doc. 123, pp. 848–51.
44 Its most recent form, at the time of writing, was embodied in S. 2382, 86th Cong., 1st sess.
45 For extended discussion of the Clark-Reuss proposal, see: Executive and Legislative Reorganization Subcommittee, House Government Operations Committee, Hearings, Amending the Employment Act of 1946, 86th Cong., 1st sess., 1959 Google Scholar, and Subcommittee on Production and Stabilization, Senate Committee on Banking and Currency, Hearings, Employment Act Amendments, 86th Cong., 2d sess., 1960 Google Scholar.
46 E.g., in the spring of 1956; see discussion in Senate Finance Committee Hearings, 1957, pp. 1361–63Google Scholar.
47 See Redford, Emmette S., Potential Public Policies to Deal with Inflation Caused by Market Power, Joint Economic Committee, Study Paper No. 10 for Study of Employment, Growth and Price Levels, 1959 Google Scholar.
48 Antitrust Subcommittee, Senate Committee on the Judiciary, Hearings, Administered Prices, 86th Cong., 1st sess. (1959), Part 10, p. 4917 Google Scholar.
49 Bell, Elliott V., “Who Should Manage Our Managed Money?” An address before the American Bankers Association Convention, Los Angeles, California, 10 22, 1956 Google Scholar.
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