COMMITTEE ON BANKING, CURRENCY AND HOUSING HOUSE OF REPRESENTATIVES, 94th Congress. Second Session, August 1976”
http://adabyron.net/FederalReserveDirectors.pdfIMO reform of the FED will be a major issue in the next congress.
FOREWORD
AUGUST 6, 1976.
I transmit herewith a staff study of the corporate, banking and trade association relationships of the directors of the 12 Federal Reserve Banks.
This Committee has observed for many years the influence of private interests over the essentially public responsibilities of the Federal Reserve System.
As the study makes clear, it is difficult to imagine a more narrowly-based board of directors for a public agency than has been gathered together for the twelve banks of the Federal Reserve System.
Only two segments of American society – banking and big business-have any substantial representation on the boards, and often even these become merged through interlocking directorates.
The lack of diversity on the boards raises serious questions about the quality of economic intelligence and opinion which the district banks presumably feed into the Federal Reserve System and its monetary policy machinery. And the heavy links to the banking community raise doubts about the ability of the district boards to view bank and bank holding company regulatory issues with objectivity.
The Commission on Money and Credit raised some significant questions on these points in its 1961 report:
The agency-clientele relationship, between a Government agency and the business concerns it both serves and regulates, is almost always, almost inevitably, close; and the more 80 after it has matured for decades. There are public advantages in this: regulation can be knowledgeable, its inconveniences can be minimized, personal working relationships can be easy. But the hazards of too close a relationship are also well known; conflicts of interest tempt individuals on either side of the public-private line to consult private advantage too far; organized interests among the regulated may first infiltrate and then paralyze their public regulators; even legitimate transactions and contacts risk misconstruction; parties on both aides come to take too parochial a view of the national interest. (Pp. 91-92, emphasis added.)
The potential for conflict of interest has markedly increased since 1961, with the delegation of additional authority to the district Reserve Banks. The 1970 amendments to the Bank Holding Company Act, the Consumer Credit Protection Act, the Equal Credit Opportunity Act and similar consumer statutes, have given important new duties to the Federal Reserve System- responsibilities which serve to highlight the shortcomings of the make-up of the bank boards.
Despite these broadening roles, consumer and labor organizations have no apparent representation anywhere in the system. In fact, many directors of the Federal Reserve district banks are members of the United States Chamber of Commerce, the National Association of Manufacturers, and local "employers associations" – groups with long histories of opposition to organized labor.
Small farmers are absent. Small business is barely visible. No women appear on the district boards and only six among the branches Systemwide including district and branch boards—only thirteen members from minority groups appear.
The study raises a substantial question about the Federal Reserve's oft-repeated claim of "independence". One might ask, independent from what? Surely not banking or big business, if we are to judge from the massive inter-locks revealed by this analysis of the district boards.
The big business and banking dominance of the Federal Reserve System cited in this report can be traced, in part, to the original Federal Reserve Act, which gave member commercial banks the right to select two-thirds of the directors of each district bank But the Board of Governors in Washington must share the responsibility for this imbalance. They appoint the so-called "public" members of the boards of each district bank, appointments which have largely reflected the same narrow interests of the bank-elected members.
The parochial nature of the boards affects the public interest across a wide area, ranging from monetary policy to bank regulation These are the directors, for example, who initially select the presidents of the 12 district banks—officials who serve on the Federal Open Market Committee, determining the nation's money supply and the level of economic activity. The selection of these public officials, with such broad and essential policymaking powers, should not he in the hands of boards of directors selected and
• The nation would be better served by making the Federal Reserve System truly independent of big business and banking, freed of its built-in conflicts of interest, and more open in its activities For example.
• Voting membership, on the Federal Open Market Committee should be restricted to officers appointed by the President of the United States.
• The three Class A directors, who by law must be bankers, should be prohibited from participating in decisions bearing directly or indirectly on bank or bank holding company regulatory matters.
• The business/agriculture representation on the board, which the Federal Reserve Act assigns to the three Class B directors of each bank, should be broadened to include more small businessmen and family farmers, minority businesses, cooperative enterprises, and community development entities.
• As this Committee proposed in the Federal Reserve Reform Act, which pressed the House in May, 1976, the "public" category (Class C) should be expanded from three to six members and women, minorities, agriculture, conservation, labor, education and consumers should be given specific consideration thus preventing the present over-emphasis on representation by big business and banking.
• The process for nomination and election of the board members should be reformed to lessen domination by trade associations and other narrowly-based groups. Consideration should be given to limiting the role of the commercial banks to the nomination and election of Class A directors, \with all other board members selected by the Presidentially-appointed Board of Governors.
• More information should be made available 1° the Congress and public about the day-to-day activities and decisionmaking of the district banks, including the economic intelligence input to the Board of Governors and the Federal Open Market Committee.
Until we have basic reforms, the Federal Reserve System will be handicapped in carrying out its public responsibilities as an economic stabilization and bank regulatory agency. The System’s mandate is too essential to the nation’s welfare to leave so much of the machinery under the control of narrow private interests. Concentration of economic and financial power in the United States has gone too far. We should celebrate our Bicentennial by reversing the trend away from Thomas Jefferson.
HENRY S. REUSS, Chairman, { Democrat U.S. Representative from Wisconsin}
Banking, Currency and Housing Committee
Of the U.S. House of Representatives
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