The MacNeil/Lehrer Report; Federal Reserve

ROBERT MacNEIL: Good evening. One of the great mysteries to most people in this country is an institution called the Federal Reserve. It probably affects all our lives as much .as the White House or the Congress. You hear it constantly mentioned in the news -- the Fed did this or that, raised the discount rate, increased the money supply; arcane mysteries that may set the pulse racing on Wall Street but don`t exactly send ordinary citizens shouting for their family to come in and hear the big news. Very few people know anything about the Fed, and yet it`s currently caught in as hot a political controversy as anything in Washington. The Federal Reserve System has recently been charged with excessive secrecy, conflict of interest, and high-handed disregard of economic policies set by President Carter and the Congress. Legislation will be introduced soon to reform the Fed and make it more accountable to Congress and the public. Tonight, a look at how the Federal Reserve works and what it`s determined chairman, Arthur Burns, is doing to the economy right now. Jim?

JIM LEHRER: Robin, criticizing the Fed is a time-honored custom here in Washington. The late Wright Patman, long-time chairman of the House Banking Committee, was probably its most consistent and toughest critic through the years; and his successor as committee chairman and as Federal Reserve`s leading critic is Congressman Henry Reuss, Democrat of Wisconsin, the sponsor of that reform legislation. Congressman Reuss has been in Congress for twenty-two years and is the author of two books on economic policy. Congressman, in practical. terms, why should the average American be concerned about the Federal Reserve and what it`s doing particularly right now?

Rep. HENRY REUSS: Because it`s vital to him. The amount of interest he has to pay on his home mortgage, the amount of interest he has to pay on a business loan or a farm loan or a student loan or a consumer loan are determined, directly or indirectly, by the Federal Reserve. And with this comes, of course, whether we have prosperity or unemployment in this country; with it comes whether we have inflation or a stable cost of living. So it`s vitally important, and it`s Congress` job; and all I want to do is to see that Congress rides herd on the Federal Reserve, which ought to be independent, sufficient to see that the American, people get what they pay for in their taxes.

LEHRER: In a broad brush, what is it doing right now that has upset you so much, sir?

REUSS: I think the Federal Reserve has improved a great deal in the last several years, but right now I have two specific complaints. One, there`s much too much secrecy, much too little accountability to the public; they use taxpayers` money to grant themselves and the Federal Reserve low- interest, three-percent loans. The directors vote themselves $600 going away presents. This may seem like chicken feed, but you really oughtn`t to do that with taxpayer-destined funds. And secondly and more importantly, right now the Federal Reserve, by squeezing the so-called federal funds rate and the money supply, is helping produce a good deal of economic discombobulation in this country; the stock market is down below 900 for the first time in eighteen months; businessmen are wondering whether now is the time really to expand, when what our economy needs, if we`re going to put people back to work and get inflation under control, is expansion. So I think the Fed needs some herd riding, and we`re going to do our best in Congress to do just that.

LEHRER: Thank you, Congressman. Robin?

MacNEIL: To the extent that it`s known at all in the country, the Fed is known by its seven-man board of governors and its chairman, currently Arthur Burns. The seven members are appointed by the President for terms of fourteen years. Every four years the President selects one of these governors as chairman. Arthur Burns was first appointed by President Nixon, and his second term expires next January. There`s considerable speculation as to whether President Carter will reappoint him. His tenure has been more controversial and more exposed politically than his predecessors` were. The Fed has been accused, for example, of deliberately increasing the money supply just before the 1972 election to create a climate of business confidence favorable to Mr. Nixon`s re-election. The Federal Reserve has denied that charge. More recently administration officials and fiscal liberals have grumbled that the conservative Dr. Burns has used his strong personality to swing the power of the Fed against inflation, raising interest rates and manipulating the money supply in a manner some Carter advisors feel may block economic uplift. Dr. Burns` opposition is credited with having killed Mr. Carter`s fifty-dollar tax rebate. Burns has been called the second most powerful man in the country next to the President. But the Federal Reserve System he heads is not a simple structure like the central banks of other countries.

In 1913, Congress established the Federal Reserve System to furnish an elastic currency that would expand as our economy and population grew. Before 1913 the money supply was relatively inflexible and helped to cause several financial panics and business slumps. Congress and the President set fiscal policy; that is, the use of the government spending programs, taxes and budgeting to achieve specific objectives. The Fed sets monetary policy; that is, the management of the nation`s money supply to ensure the availability of credit in quantities and at prices consistent with specific national objectives.

There are approximately 14,000 commercial banks in the United States -- that`s banks that accept checking deposits -- and some 5,700 are members of the Federal Reserve System. All nationally chartered banks are automatically members, while state banks have the option. So forty percent of the nation`s banks belong to the Fed, and they hold seventy-five percent of the nation`s total bank deposits. A certain percentage of their cash is on reserve with the Fed. In return they have the privilege of borrowing from the Federal Reserve when in need.

The country is divided into twelve Federal Reserve Districts, each with its own Federal Reserve Bank. The Federal Reserve has three main tools to implement its monetary policy: it buys and sells government securities in the open market; it changes the required reserves that member banks must keep against their deposits; and it changes the discount, or interest, rate at which it lends money to member banks. That effectively sets interest rates for all banks in the country.

Robert C. Holland was a member of the board of governors from 1973 to `76, completing three years of a fourteen-year term. He spent twenty-four years inside the Federal Reserve System prior to becoming a governor, and was the first Fed staffer to become a member of the board. He`s now President of the Committee for Economic Development, a non-profit educational research organization. Mr. Holland, can you explain in simple terms as a former governor what the purpose of the Fed is the main purpose?

ROBERT HOLLAND: The main purpose of the Federal Reserve is to generate a flow-of money and credit that can do as much as money and credit can do to foster an atmosphere of economic prosperity.

MacNEIL: And it`s really on the Fed`s orders that more Treasury bank notes are printed for use in the country and more credit is created.

HOLLAND: Oh, yes; it`s even more dramatic than that. The Fed was given by the Congress the power literally to create money. If anybody pulls a bill out of their pocket they`ll see what`s printed on it is "Federal Reserve Note." That means a Federal Reserve IOU. Federal Reserve IOU`s perform the function of money in this country, and the Fed is charged with the idea of moving enough of those into circulation to generate as good a monetary climate as one can for the economic future of this country.

MacNEIL: Now, you`ve taken part in these meetings where it is decided to influence the progress of the economy through the money supply or the interest rates. How are those decisions made, and what factors are taken into consideration?

HOLLAND: I`d like to answer you with one phrase: very carefully. The Fed tries to pull to itself every bit of information it can assemble and absorb in terms of what`s going on in the economic situation currently and what the likely prospects are for economic and financial conditions out ahead -- weighs those, mulls them, analyzes them, argues back and forth among the members of the Federal Open Market Committee as to what they mean and what their prospects are, and tries in the end, perhaps after anywhere from two to six hours of deliberation, to judge what would be the right amount of money and credit to feed into the financial system in order to make that economic future improve -- move in a direction that seems to be more optimal for our country.

MacNEIL: And what do you as a former member think of its record in doing that? How right has it been, and how wrong has it been?

HOLLAND: It hasn`t batted a thousand; it`s made its mistakes, but I think on balance its record is rather good. I think its record is rather good judged in terms of the conventional wisdom of the time in which it was making its decisions. With twenty-twenty hindsight, I can improve on a number of the decisions I made during my years on the board. We have a growth over time of our ability to understand what`s going on in the economic system, what money and interest rates do to the economic system. We understand now much more than we did, say, in the 1930`s, and I think Fed policy now is much better than it was in the 1930`s. But what we did in the 1930`s was about as much, I think, as the economic savants of that day could perceive was wise.

MacNEIL: Does the Fed need basic reforms to make it more responsive to the public and to the elected leaders, Presidential or Congressional, of the day?

HOLLAND: It strikes me it`s about right. That is, if the Federal Reserve leaders are doing their business, and that is trying to stay in touch and be aware of what`s going on in the country, the change in mood and the set of mind toward national objective and goals that is developing in our very complex system. We don`t have any one place where national goals for this country, economic or otherwise, are nailed on a flagpole, saluted by everybody and followed by everybody. Ours is a more turgid kind of goal- setting operation. But insofar as they can be perceived, the members of the Federal Reserve System should -- and I think try -- to appreciate what they are and to conduct monetary policy and shape within the dimensions of those goals. And I think that`s about right.

MacNEIL: Could it operate with less secrecy?

HOLLAND: Could? Yes. Should? No. I think we`d lose more than we gained if we gave up more secrecy.

MacNEIL: What would you lose?

HOLLAND: I think there is, in the kind of long. and lengthy deliberations as to what proper monetary policy should be, some gain that comes from talking between technicians in technical terms, talking about "what if we did this," "what if we did that," the problems that they would create, short-range and long-range. To do all that in an open forum on Main Street I think makes the decision-making process harder. I`m all for being accountable after the fact, in terms of what the Fed said, what it did and why it did it, and I think those periods of accountability are very wise. I`d like to bow in the direction of Congressman Reuss, who contributed what I think is the last really valuable addition to accountability on the part of the Federal Reserve, and that`s the concurrent Congressional resolution that calls the chairman of the Federal Reserve before the appropriate House or Senate committee every three months to talk about what monetary policy has been, to explain the targets for the future that the Fed has set, and to defend his record. I think that every-three-month accountability is a good thing.

Jim?

MacNEIL: Okay. Let`s bow in the direction of Congressman Reuss.

LEHRER: Congressman, first of all, Mr. Holland says that in his opinion, at least, the Fed has a good record. Would you use the word "good?"

REUSS: Well, I think former governor Holland said that it has improved since 1930; I would agree. It was an absolute disaster in 1930 and extended the Depression by years. It is not a disaster today, but

I for one believe that the Federal Reserve can do better, and I think Mr. Holland was very generous just a moment ago in saying that this quarterly Congressional dialogue can help in that direction. I think it can, too. That`s why I`m a dialogues.

LEHRER: Right. Well, in addition to being a dialogues, you`re also a reformer. How would you change the basic Federal Reserve System and how it operates?

REUSS: Yes; as Mr. Holland just said, Federal Reserve monetary policy -- how much interest you pay, whether money is tight or easy -is made by the Open Market Committee. Twelve estimable gentlemen -- I say "gentlemen" because until I quarreled about it, for the first fifty years the Fed didn`t have a single woman as a director out of the more than thousand directors that it has -- the Open Market Committee, twelve estimable gentlemen, meets every three weeks in Washington to determine monetary policy. Seven of those people are true governmental officials, and that`s fine. They should be making...

LEHRER: That`s Federal Reserve governors.

REUSS: Right, right. But five of them are the presidents of the regional Federal Reserve banks and they`re elected by boards of directors which are by statute banker-dominated. Now, I believe that`s unconstitutional. I think that only officers of the United States -- not people selected by the bankers or any other group -- ought to make vital policy, policy which determines whether Americans can have the future they want or not. Therefore, I think that we ought to change that situation, either by a decision of a court of law or by a statute, so that only public officials make monetary policy. If the bankers` representatives want to get into the walnut-paneled chambers so that they may give their advice, that`s fine with me, but I don`t think they should be voting.

LEHRER: All right. Now, what about a couple of the other things that you and others have raised; the question of secrecy, for instance that Mr. Holland just spoke to. What`s your feeling on that -- what`s your position on that?

REUSS:I think you have to look at the whole six-billion-dollar annual operation of the Fed for certain things: when they deal with foreign central banks; when there`s a question of a bank failure around the corner that might percolate throughout the economy; when there`s a question of the civil liberties of an individual human being -- somebody is suspected of embezzlement, let`s say. I`d want the veil of secrecy to remain over that; I wouldn`t blow the cover on that. But heavens, much of the work of the Federal Reserve is just like any other bank, clearing checks.... They own sixty jet planes which cart their checks around the country, and real estate in tremendous numbers. They have got 28,000 employees, yet the General Accounting Office, which audits every governmental agency, isn`t allowed in there at all. I want to change that.

LEHRER: But I think Mr. Holland was referring to the basic decision-making process in terms of monetary policy.

REUSS:I don`t disagree with him. I think that the decision ought to be made in secret. I might disagree as to how soon the minutes ought to be released; I favor quite prompt release. But let the decision be made in secret. I think there`s something to be said for that.

LEHRER: All right. Now, on the question of accountability, Mr. Holland just mentioned -- and this is also part of your new legislation -- the three- month thing, where the chairman must come before Congress - I think you have it on an alternating basis, right, between the House and the Senate -- and explain his thing. What else would you do for accountability purposes besides that?

REUSS: Besides that, I would permit the General Accounting Office to audit the Fed, just as it audits every other governmental agency. I don`t think it`s right that Fed officers vote themselves and other employees cut-rate three-percent loans, as we found recently when we got hold of their minutes they`d been doing. I don`t think it`s right that Fed directors vote themselves going away presents of $600; the taxpayers have to pay for that. I think Congress ought to know about it and ratify it. I don`t think it`s right that there be the repeated conflict of interest situations in which the Fed directors have the gall to vote on matters in which they or members of their families or their law firms are personally involved. That should not be. So my notion of reform is nothing radical, nothing revolutionary; it simply would let the sunshine and the General Accounting Office in and see that we know at least as much about the Federal Reserve as we do about our other governmental agencies.

LEHRER: All right. Robin?

MacNEIL: Mr. Holland, what do you think about some of these things -- for instance, having only public officials making policy?

HOLLAND: You know, that originally was provided for by a Congress that was very concerned about this power to create money -- so concerned about it that it didn`t want to give any one power center in this country exclusive control over money. It didn`t want to give Wall Street exclusive control over it, and therefore it cut down on banker influence in the Federal Reserve; and it didn`t want to give Washington exclusive control over it because it thought the government too was one of those who could be tempted to borrow too much money and use too much money. Therefore it constructed a kind of elaborate check-and-balance system that provided for some public officials -- the seven governors who are nominated by the President and approved by the Senate -- and it said that those seven public officials in turn should have the right to approve who are going to be the twelve presidents of the Federal Reserve Bank. And we get a kind of a hierarchy, then, of officials with different experiences, presidents of Federal Reserve Banks; many I think are men of the highest quality -- I think they all are men of the highest quality, many with records of deep background in finance: And I think you find them bringing to the deliberations about money a kind of a sense of the problems of the different regions of the country, different expertise that gives us a kind of a check-and-balance collective wisdom that`s better than if it was built exclusively on the shores of the Potomac.

MacNEIL: Do you agree with any of Congressman Reuss` proposals?

HOLLAND: Well, I like the idea, as I said, of the Fed coming up every three months and being reviewed.

MacNEIL: What about the GAO audit?

HOLLAND: The GAO audit I don`t think is aimed -- I don`t think there are serious abuses that the GAO audit needs to ventilate. The Federal Reserve as a part of its check-and-balance system runs excruciatingly close internal audits and checks on funds, and I`ve been a part of some of that review process myself over the years and I don`t find great waste within a seven-billion-dollar budget. I find really quite little of any problems to criticize. But I must say, if somebody says, "We want to be sure the money`s there, we want to check the books of the Federal Reserve," I wouldn`t insist it was a matter of great moment whether that be allowed or not allowed. I don`t think that`s a key part to the major questions of monetary policy -- its operation in this country.

MacNEIL: Congressman, are you fighting a rather lonely battle on this? Why does Congress itself appear generally unwilling to scrutinize the Fed more closely?

REUSS: Well, for one thing, the Fed are masterly politicians and so far they`ve been able to clobber in the Congress any efforts to compel this audit. The word goes forth to the regional banks and from them to the banker, and the small-time banker always has considerable toehold on his congressman; and they come in in droves to Washington. And as I say, so far they`ve been able to put aside what seems to me a very reasonable piece of legislation, to compel an audit of the non-sensitive things that the Fed does. My answer to Governor Holland is, if there`s nothing wrong, why object to an audit? It would seem to me that it could put this matter to rest and keep the bankers back home; might hurt the airlines, but... (laughing).

MacNEIL: All right. Let`s get another view of this. Gordon Williams is Senior Editor of Business Week magazine and Business Editor of WCBS Radio here in New York. He`s been an ardent Fed watcher for over a decade and considers himself an informed critic of the Fed. Mr. Williams, you`ve been reporting on the Fed for a long time; how do you evaluate its effectiveness as a journalist?

GORDON WILLIAMS: Oh, I think there`s no question about its effectiveness. It`s a very powerful organization; all it has to do is snap its fingers and stock markets tumble and interest rates go through the ceiling. I don`t think that anyone, including the Congressman, would question its effectiveness--whether it`s being effective in the right direction. Certainly these issues about secrecy and government audits are all important. I would certainly support, I suspect, the government audit, if only because it would get one issue out of the way and get us on to a discussion of the more important question, which is, is the Federal Reserve effective in ways which benefit the United States, which further the various social and economic goals that we have?

MacNEIL: And what do you think its record has been in that?

WILLIAMS: Very mixed. I would agree with Bob that it`s better than it was. It`s better than it was when I was down in Washington ten years ago, when it let the Vietnam War economy get completely out of hand, didn`t know how to bring it back under control, and certainly has to bear at least some of the blame for the rate of inflation that we`ve had since. I think it`s done a much more effective job since then, but far from a perfect job.

MacNEIL: Is this present controversy now unique in its intensity, or has the Fed weathered worse storms before?

WILLIAMS: Well, the Fed has certainly weathered storms. Again, because it`s so effective, because it plays such a vital role -- as the Congressman says, it influences the rate you`re going to pay on a mortgage and the rate you`re going to pay the next time you buy a car -- it has always been at the center of controversy. It was freed in 1951 by President Truman to carry on monetary policy, and I would say that it`s been at the center of controversy almost every single day since then.

MacNEIL: Is that controversy, in your view, because a lot of people politically disagree with the Fed`s policies at the moment -- Dr. Burns` policies, for instance -- or is it more a structural reason, a general operational reason, or is it just that some of his things are unpopular with some people right now?

WILLIAMS: Again, the very independence of the Fed, which is probably its strongest feature, is going to make it very unpopular. It`s going to disagree with economic policies that elected officials want to carry out; it did to a certain extent, and probably should have done a great deal more, acted as the voice of economic reason, again with this overblown Vietnam inflation. It probably was a fairly good move on Chairman Burns` part to argue the President out of the fifty-dollar rebate. This analogy of taking the twelve billion dollars up in an airplane and dumping it out was probably a valid one. And with the rate of inflation that we have now, probably the worst thing that the economy could have had was this twelve billion dollars just simply poured on it.

MacNEIL: I see. Jim?

LEHRER: Gentlemen, some political questions here -- Congressman, let me ask you first: it`s been said that Chairman Burns has had a tremendous influence over the economic policies of President Carter. Do you agree with that assessment?

REUSS: Well, the one thing he did, quite clearly, was to participate in talking President Carter out of the fifty-dollar rebate. Let me be clear: I think that was a good thing. I think Arthur Burns did the nation a service then. The trouble is, scarce were the funeral bait meats of the fifty- dollar rebate cold than Mr. Burns, instead of lowering interest rates, which is what should have happened since you had just taken thirteen billion dollars off the deficit, proceeded to raise them. The federal funds rate in May, last month, went up by fifty-five basis points, and now the banks are raising the prime rate and long-term rates are going up; this is a very poor way to get the country moving forward. So I don`t know that the Fed was thinking of in either April or May.

LEHRER: Do you think he`s had a tremendous influence over Carter and the administration`s policies?

REUSS: No; I would say that Mr. Burns was quite as ready to make his peace with the Carter administration as the Carter administration was ready to make its peace with Mr. Burns.

LEHRER: What`s your reading of that, Mr. Williams?

WILLIAMS: Oh, I think that that`s probably true. I think that the idea of a showdown was considerably overdone, that Carter has proven himself to be a reasonably financially conservative man in office. I don`t think that he and Chairman Burns are terribly far apart, and weren`t from the very beginning.

LEHRER: What`s your reading of that, Mr. Holland, now from the outside? Do you agree with Mr. Williams that actually Carter and Burns were not that far apart in the first place?

HOLLAND: As nearly as I can tell from the outside looking back,. You know, there`s a great habit with respect to two powerful and wise people like the President and the chairman of the Federal Reserve Board for people occasionally to say the equivalent of "Let`s you and him fight." And I think there were a good many people trying to sort of stir up a little controversy, whereas in point of fact my experience is usually a chairman of the Federal Reserve Board and a United States President are very good at working out a way of understanding each other and communicating and working along toward their own views of the national interest.

WILLIAMS: Possibly what it really was, was that siding with Chairman Burns or agreeing with Chairman Burns happened at the time that the President found it necessary to begin making overtures to the business community, and that was certainly as good a way of doing it as any; that he killed two birds with one stone: make peace with the chairman and attempt to win over the business community.

LEHRER: Congressman, what about this question of whether or not President Carter is now going to reappoint him in January? Do you share House Speaker Tip O`Neill`s fear that that`s what is going to happen?

REUSS: Oh, I think that`s entirely iffy; that`s next year. I think Mr. Carter is going to make up his mind then. I don`t think he knows...

LEHRER: Nobody`s slipped you any word on that.

REUSS: No, no one has slipped me any word.

LEHRER: Have they slipped you any, Mr. Williams?

WILLIAMS: No. We`ve talked about this in our office a good many times. I wouldn`t be the slightest bit surprised to see Chairman Burns re-appointed. I can see a number of other potential candidates, but it wouldn`t surprise me at all. He plays the role, again, of the defender of the dollar, and of the voice of fiscal rectitude for the United States.

MacNEIL: We have to leave him there.. Thank you very much. Thank you, Congressman, and good night, Jim.`

LEHRER: Good night, Robin.

MacNEIL: Thank you, Mr. Holland and Mr. Williams. Jim Lehrer and

I will be back on Monday evening. I`m Robert MacNeil. Good night.