CHAPTER X

WHAT IMPROVEMENTS ARE NEEDED IN THE MONEY SYSTEM?

155. Isn’t the suggestion of improving the money system both impudent and a call for needless tinkering with the economy?
Not at all. The monetary system of today—improved as it has been over the past 200 or so years is still man made. There is no reason to conclude that the system is perfect. The process of improving the money system is not complete any more than is the process of improving our national life generally. Further, in every period of our history, people, especially bankers, have resisted any change in our money system with the cry, “leave well enough alone.” Then some disaster would strike and the monetary system would be changed in panic and haste. The system always looks solid, or, at least, adequate until the moment it becomes inadequate. The fact that the system is now functioning more or less satisfactorily is no reason to shun inspection. Economic health and progress is the result of continual care and attention.

156. What is the main problem of the Federal Reserve System today?
In a word, Federal Reserve independence. Congress and the people are faced with the issue: How can we bring money management under genuine public control in order to coordinate monetary with other public policies? The original intent of the Federal Reserve Act was to insure such control; that intent is still valid. Our Government must squarely face the challenge of recapturing the tiller of its money system.

157. In practical terms what is meant by Federal Reserve “Independence”?
There are two sides to independence—one is economic, the other political. On the economic side, independence means that the Federal Reserve formulates and executes economic policy, using its monetary controls, without any necessary reference or coordination with the policies being followed by the other branches of the Government. This, of course, invites clashes between the Federal Reserve and other parts of the Government. Clashes have occurred, with sad results for all. On the political side, independence means that the Federal Reserve is not accountable to anyone for its actions. As the situation now stands, there is no mechanism by which the Federal Reserve can be made to change a policy it has chosen to follow. The members of the Federal Reserve do not come up for election as do Members of Congress or the President. Though an arm of Congress, the Federal Reserve is not responsible to it. The Federal Reserve does not present an annual report to Congress nor does Congress review the system’s actions as a normal part of its business. The Congressional power of the purse—the historic source of the legislatures power—does not apply to the Federal Reserve, which provides its own revenue. The System is not even subject to audit control of the General Accounting Office. Finally, the President, though he may select one or two of the members of the Federal Reserve Board, appoints them for 14-year terms. In the normal course of events, these men cannot be removed from office and because of their long tenures they do not reflect any single President’s ideas.

158. How does the Federal Reserve justify its independence?
The argument the Federal Reserve offers runs as follows: The money side of economic policymaking is somehow unique. First: It affects everyone. Second: It involves “unpopular action”—following a tight money policy to prevent inflation. Many people only take a short run view of their welfare. These people may influence Congress or the President to favor inflationary views. There is great danger, they claim, that if the Federal Reserve were responsible to the President or Congress, the System would find it difficult to act against inflation. Therefore, the people must deed their control over their money to a group of men who would act like trustees and take the long-term view of the people’s welfare. They would do for the people what the people or the representatives would not do in their own best interest—control inflation.

159. Would inflation result if the Federal Reserve were made responsible to the President or Congress, or made subject to an annual audit by the General Accounting Office?
Not at all. The notion that the American people and their elected officials are inflation-minded runs contra to political realities. Inflation hurts not the wealthy but the low-and middle-income families who live on fixed incomes, the old with their modest pensions, all those who have set savings aside for their old and or their children’s education. These people make up a considerable part of our population. There is not a practicing politician today who does not know that inflationary policies lose more votes than they gain. Also, the evidence of the postwar period shows that our political leaders have been sensitive to the problem of inflation. Both Presidents Kennedy and Johnson and their staffs have worked long and hard to maintain price stability. Are these the “politicians” who would take a short-sighted view of the country’s need?

160. How can inflation be handled, if it threatens, without harming the economy?
This is a very deep economic issue, and economists themselves do not have all the answers. But what we do know is that monetary policy alone will not normally contain inflation except by doing considerable damage to full employment and maximum economic growth. What may conceivably work to achieve price stability and adequate economic performance is enlightened restraint on the part of business and labor in their wage-price policies. The job of promoting such restraint naturally falls to the President with all his power to cajole and persuade. Therefore, for all its jealously guarded independence, the Federal Reserve must ultimately rely on the active cooperation of the political leadership of the country for a sane approach to price stability. Thus the “politicians” the Federal Reserve wants to be free of are the very ones the Federal Reserve must depend on to make the System’s policy successful.

161. Are the effects of money policy so unique that the monetary policymakers need to be free from all accountability?
No. It is hard to see what is so mysterious about monetary policy. Everyone is affected by tax and expenditure and by foreign policy in both areas, the Government frequently must take “unpopular action.” Raising taxes is not popular. Sending men to fight in Korea is unpopular. No one suggests that we should have an independent “defense policy board” or an independent “tax policy board”. Why then an independent money policy board?

162. Should the President be permitted to pursue his economic program, if Congress approves?
Yes. The President is elected by the people. During his campaign for election the President normaly advocates some economic policy. The economic issues weigh heavily in the campaign. Why then should the President find himself faced with an independent Federal Reserve Board which may not agree or may even try to nullify the policies he wishes to pursue? The President should be able to fashion a total package of economic policies, including monetary ones, as he sees fit. The money authorities should have the right and duty to counsel and advise. But they should not have the power, as they do when they are independent, to nullify the intended effects of the President‘s programs.

163. Is Federal Reserve independence inefficient?
Absolutely. We now have two centers of economic policymaking. One in the President and Congress; the other is the Federal Reserve Board. Both these policymaking centers control powerful economic tools. Each can turn the economy in any direction it wishes. Yet neither has control. As things stand now, economic policymaking is run like a dual control car, driven by two drivers one of whom insists on his independent right to use his own brake and accelerates as he and he alone sees fit. It is pure luck if the motor is not constantly stalling. We have not always been lucky. This is no way to run economic policymaking. Both the speed and direction signals controlling the economy should come from one, and only one, source— which must be the President and Congress in our democracy.

164. Is the “trustee” notion of monetary policy alien to American democracy?
Of course. The claim that the people do not know what is good for them, and therefore a small group of men should be given the power to make decisions and then to take action without being held accountable to the people is 100 percent undemocratic. The essence of democracy is that the people decide for themselves, through their elected officials, what is good or bad for them. Further, to give monetary control to a group like the Federal Reserve is to hand over enormous power unfettered by responsibility to anyone. In a democracy, especially the American form, the holders of power, all most without exception, are responsible to the people, through elected officials in the use of this power. The Federal Reserve’s ideas that they should be considered trustees rather than stewards runs counter to anything that Americans have believed about power and responsibility since the founding of the Republic.

165. Who favors Federal Reserve independence?
The private banks who control the System, together with some allies—notably, Wall Street newspapers and other members of the financial community.

166. Has the Federal Reserve’s record since the accord demonstrated superiority in the management of our monetary system?
On the contrary, the Federal Reserve’s persistent fear of a bogeyman “inflation” had led it to slow our economy’s growth and cause periodic recessions, and moreover to maintain “tight money” even during periods of recession and economic slowdown.

167. What other reforms are needed In the Federal Reserve System in addition to the introduction of responsibility?

1. The reorganization of the membership of the Federal Reserve Board, toward greater responsibility.
2. Abolition of the Open Market Committee.
3. Coordination of monetary with other economic policy.
4. Financial accountability, via audits.
5. Congressional checks, through the normal appropriations processes.
6. A reappraisal of the “tight money” policies.
7. A lessening of private bank influence in the Federal Reserve System.

168. What reforms should be applied to the Federal Deposit Insurance Corporation?
The FDIC should be prohibited from substituting its own standards of management for those of private bankers. By confining itself to the insurance function, it would not be providing a monopoly profit position for existing banks and discouraging constructive loans to farmers and small businessmen.

169. Are reforms needed in the Treasury?
Yes. The system of selling U.S. Government securities through a small group of preferred dealers should be abolished. There is no reason to guarantee government bond dealers vast profits. In addition, the Treasury’s practice of leaving deposits of public funds with private banks at no interest should be stopped.