Home / Contact

REPORT DEAD LINKS --- we can't keep this site up-to-date without your help

CHAPTER X / continue to Chapter XI

WHAT IMPROVEMENTS ARE NEEDED IN THE MONEY SYSTEM?

As we have seen, the money system is man made. Invented by man, revised by man, and controlled by man; it is as Abraham Lincoln said, “the creature of law.” Therefore, there is no reason to conclude that the system is perfect. The process of improving the monetary system has not reached a final stopping place any more than has the process of improving the social and economic order.

Yet, while changes have been made, the money system has generally proved resistant to change. Some improvements have been accepted, but they have lagged behind progress in other areas of the economic system. And changes of any consequence have usually been adopted only as crisis measures, following large-scale panics or breakdowns in the economic system. Only at such times has the public focused its attention on money management and demanded reform strongly enough to overwhelm the bankers’ traditional resistance to change.

Between crises, money management becomes a mysterious art, incomprehensible and often uninteresting, to the public and to legislators; It is in these periods, all too often, that partial reversals of previous reforms are obtained.

The purpose of this chapter is to suggest specific reforms in our monetary system, the need for which, it is hoped, the preceding chapters have made evident. In only a few cases do these reforms require changes in law; for the most part they are permissive under present law. Indeed, they are implied responsibilities of the Federal agencies, which have been established in the monetary area in the public interest. The reforms are being presented when a crisis atmosphere is absent, in the hope that people will finally turn the rational, unfevered thought to the monetary system that its preeminence in the fabric of our daily lives requires. Most, though by no means all, of the reforms are aimed at the main problem raised by this book: how to bring monetary management under genuine public control in order to coordinate monetary with other public policies.

The original intent of the Federal Reserve Act was to create such control; that intent is still valid and more necessary than ever. Our Government must squarely face the challenge of recapturing the wheel of it! monetary system.

THE FEDERAL RESERVE AND “INDEPENDENCE”

The topic of Federal Reserve “independence” has been so befogged by a smokescreen of lofty rhetoric in these past years that it is necessary to nail down some fundamentals, even at the risk of repetition, before anything concrete can be said.

What does Federal Reserve independence mean in practical terms?

It means, first, that Federal Reserve policymakers produce their own separate diagnosis of the economy’s needs at any time, by examining the economy with the aid of the System’s large staff of economists. But diagnosis is only the beginning of policy. Frequently, the various coexisting needs of the economy call for monetary actions which contradict each other -- unemployment requires stimulation; an inflationary situation requires restraint. The policymakers, therefore, must compile a list of priorities, either implicit or explicit, to decide which need or needs will be met, and how fully, by their policy. The “independent” Federal Reserve managers rely on themselves, and themselves alone, to decide the priorities which guide their policy.

Completely autonomous policymaking, then, is one aspect of Federal Reserve independence. Still, a qualification should be inserted. The System’s managers do not live in a vacuum. They know what the President, the Congress, and the administration’s economic policy making branches are thinking and doing. But this knowledge is only grist for the System’s policy-making mill. The System is under no obligation, as it sees it, to support any of those policies or to defer to the conclusions of the other policymakers.

Clearly, independent economic policymaking, in this sense, invites clashes between the Federal Reserve and the other parts of the Government. First, thousands of economic facts are thrown up every day, week, and month. The trends one group distills from these facts are not necessarily identical to another group’s distillations. A great deal depends on the original viewpoint. Then, there is the all.important schedule of priorities. If the Federal Reserve’s schedule differs from, say, the President’s, it is sheer luck if the accelerator and brake pedals are not both pressed down at the same time. So, for the two reasons given, conflict and contradiction between the Federal Reserve and other policymaking bodies can easily occur. Sometimes the conflict is direct, as during the accord period.

There is still more to Federal Reserve independence. Consider the Congress. In many ways it qualifies, aside from the Presidential veto, as independent. It decides what bills to consider. It votes bills up or down, making up its own mind. If it feels strongly enough, it can force policies he dislikes on the President, etc. Yet every 2 years on election day, the House and one-third of the Senate lose their independence. The policies they have followed are approved or disaproved by the people, and if the policies are disapproved, the next independent” Congress will reflect the people’s disapproval. Some change will occur. Congress, however independent otherwise, is accountable to the people for its actions.

Now consider the Federal Reserve. True, the central bank is an arm of Congress, but it is not responsible to Congress, in any meaningful sense. The system does not present an annual report to Congress explaining or justifying its policies. It does not ask Congress’ approval of its actions, nor does Congress review them as a normal part of its business.

The greatest control Congress exercises over agencies, executive or legislatIve, derives from its power over the purse. But here again the Federal Reserve escapes legislative control. It provides its own revenues, from sources other than approriations. It spends as it wishes from income-mostly derived from interest on its huge Government bond holdings.

Nor is the system responsible to the executive branch. The 14-year berm of the Board of Governors makes the board only slightly accountable to any single President, though they are appointed by the Executive. (Under ordinary circumstances, a President can appoint four of the seven-man board by the end of his sixth year.) But the board is not the crucial policymaking body. The Open Market Committee is. And the other members of the Open Market Committee -- the regional bank presidents -- are responsible to their respective bank’s board of directors, if indeed they are responsible to anyone, for their policy decisions. In addition, since the system is granted immunity from the appropriations process, the Federal Reserve is not subject to any systematic Executive review arising from the budgetmaking process.

Finally, the system is not directly responsible to the people for its actions. Its members do not face elections.

Moreover, the system eludes even the audit control exercised by the General Accounting Office, whose function it is to make sure that other Federal agencies not only handle their financial affairs properly but also pursue policies and practices that are in accord with the law. The system provides for its own auditing; clutching its mantle of independence, it has stoutly resisted repeated congressional suggestions that the General Accounting Office perform an annual audit. (The theory seems to be that whoever holds responsibility for money, credit, and bank regulation is above the ordinary requirements of law.)

A slight acquaintance with American constitutional theory and practice demonstates that, constitutionally, the Federal Reserve is a pretty queer duck. It exercises wide power in the area of economic policy, both in formulation and execution -- a matter which intimately affects our everyday life. It would ordinarily be assumed where such power is present that democratic control was being exercised over the central bank, at least indirectly, through the ballot box. Yet this is not the case. In fact, the combination of economic power and freedom from control by either the other branches of Government or the electorate has led some people to label the Federal Reserve, with much truth, “a fourth branch of the Government.” And, indeed, some officials of the central bank are apt to use phrases such as “quasi-judicial” in describing the system’s functions, suggestive of a branch like the judiciary, independent yet unelected.
How does the Federal Reserve, fiercely jealous of its independence since the Accord, justify its admittedly unusual status? Here is a sample of the Federal Reserve’s position, taken from hearings held in early 1964 by a subcommittee of the House Banking and Currency Committee. The first statements are by Mr. William McChesney Martin, Chairman, Federal Reserve Board:
[The Federal Reserve Act created] 1 a structure that places trusteeship over the creation of money in a body that is insulated from shortsighted pressures for abuse of that money (‘’The Federal Reserve System After 50 Years,” p. 10)

1) Phrases within brackets are mine and ?????? the speakers.

Because money so vitally affects all people in all walks of life as well as the financing of Government, the task of credit and monetary management has unique characteristics. Policy decisions of an agency performing this task are often the subject of controversy and frequently of a restrictive nature; consequently. they are often unpopular, at least temporarily. with some groups. The general public in a democracy. however, is more apt to accept or tolerate restrictive monetary and credit policies if they are decided by public officials who, like the members of the judiciary, are removed from immediate pressures (“The Federal Reserve System After 50 Years,” p.28).
Mr. Alfred Hayes, president of the Federal Reserve Bank of New York said: The achievement of our long-term goals can, and frequently does, call for measures that are unpopular in the short run. I think it is of great importance that the persons charged with executing monetary policy, with making these decisions, retain freedom -- freedom in a practical sense -- to make unpopular decisions (“Tbe Federal Reserve System After 50 Years,” p. 531) . [The Federal Reserve should not be required to submit to the appropriations process] because it would break through the safeguards that the Congress has been careful to provide, against the possibility that partisan influences might be brought to bear on the System’s policy making processes (“Tbe Federal Reserve System After 50 Years,” p.530).
Boiled down to essentials, what Mr. Martin and Mr. Hayes are saying is the following: The monetary side of economic policymaking is somehow unique. It affects everyone. Frequently it Involves “unpopular action” (read “adopting a tight money policy”) which hurts many people. For what purpose? To prevent “abuse of that money” (read “to prevent inflation”). But the action is taken for the long run good of the country.

Unfortunately, according to Fed spokesmen, many people only take a shortrun view of their welfare and must be protected against such a shortcoming. These people in a democracy, may have representation in Congress or the ear of the President. Either of these two could then be influenced by “shortsighted pressures” (read “inflationary views”). If the Federal Reserve were held accountable for its actions one of the two branches of Government might well bring “partisan influences to bear on the System” (read “would perpetually hamstring tight money policies”). Therefore, the people must cede their control over monetary policy to a group of men who, acting as trustees of monetary policy, would take the long-term view of the people’s welfare and do for the people what the people or their representatives, blinded and misguided by immediate pressures, would be unlikely to do in their own best interest.

A good deal has been invested in trying to sell these views to the public. The banking community has been an ardent champion of Federal Reserve independence. Could this possibly be because the managers of the Federal Reserve have shown that they are addicted to a view of the economy that is particularly to the liking of the bankers and other financial men? Naturally these groups would think it vitally important that the present arrangements continue undisturbed. Where profits are concerned, partisan views are not considered shortsighted.

This is not to say that the fervor which permeates the financial industry’s campaign for Federal Reserve independence is simply the result of self-seeking. Undoubtedly the bankers are convinced that economic wisdom is only the possession of a special few, and that they are acting in the best interests of the country by promoting independence. In the tradition of bankers, they deeply mistrust democratic governments in the management of money matters. They are haunted by the fear that, given control of its money system, the Government would hurtle pell-mell into inflation, thereby effectively canceling a great part of the debt and otherwise wrecking the established order. (In view of their record for the past 100 years, the bankers’ credentials for recognizing superior economic wisdom when it exists are certainly dubious.)

The financial institutions have picked up natural allies. The newspapers and most other organs of public enlightenment solemnly warn at every opportunity that the independence of the Federal Reserve must be “preserved”-- to prevent rampant inflation. The inference is clear, and sometimes even flatly stated, that the “politicians” must be kept from destroying the dollar. Even in the Halls of Congress, the self -- appointed guardians of the sound dollar argue that Congress set up the Federal Reserve as an independent agency and echo much of the Federal Reserve’s own position.

Just as an aside, the financial community’s deep concern about inflation has its curious side. The bankers advocate an independent Federal Reserve because, they say, they want a fearless application of tight money when inflation looms. But these very same men, who have been manifesting massive alarm at inflation for at least as long as the 35 years the writer has been in Congress, have never been alarmed enough -- even when inflation was rampant -- to launch a campaign for higher taxes to sop up excess purchasing power. And yet the only true inflations the dollar has undergone in the past 25 years from World War II through 1946 and the first part of the Korean war-could only have been avoided by increased taxes not by tight money. Nor was the financial commumty found manning the defenses against the premature removal of price and rationing controls at the end of World War II, when industry could not yet satisfy war-deprived consumer demand inflated by large wartime savings. And, of course, bankers have never suggested raising reserve requirements to counteract inflation.

But what of the Federal Reserve’s own case for a central bank, neither subordinate nor responsible to any branch of the Government or the people, operating monetary policy in splendid isolation from any democratic control processes.

A major premise of that case is that if the System were in any way made accountable to the President or Congress, or even subjected to the routine of an annual audit by the United States General Accounting Office, an inflationary breakthrough would somehow follow. This notion, that America is inhabited by a populace which would clamor for inflationary monetary policies if theIr elected officials had some relation, however tenuous, to monetary policy, is considerably at odds with the political realities. The hardships which result from inflation fall not on the wealthy, whose family fortunes may undergo some reduction in purchasing power, but on the low-and middle-income families who live on fixed incomes, have pension credits or modest savings set aside for their children’s education: their old age, and so on. It would be hard to find a practicing politician today who does not know that inflationary policies lose more votes than they gain. Indeed, during the past 13 years there has been no public outcry against tight money, despite the economy’s evident misfires, because the press and trusted polItical figures have assured the public that tight money was necessary to avoid inflation.

There is something else to be said about inflation and the “politicians.” As the Federal Reserve well knows, a rising price level, when it does threaten, cannot normally be contained by monetary policy alone except at considerable damage to the other economic desirables, full employment and maximum economic growth. Even mild recessions will not turn the trick. What may conceivably work to achieve both price stability and adequate economic performance is enlightened restraint on the part of business and labor in their wage-price policies.

Now the job of promoting such restraint has naturally fallen to the President with all his powers to cajole and persuade. And both Presidents Kennedy and Johnson and their staffs have worked long and hard, sometimes at possible political cost, to maintain price stability. Are these the politicians who, as captives of partisan influences, are taking the shortsighted view of the country’s needs? Does the Federal Reserve think that appeals for price and wage restraint is the demagogs’ way to popularity with business and labor? Moreover, what those suspect politicians have realized is that monetary policy, far from needing to operate independently, must have the active cooperation of the political leadershIp of the country for a non-suicidal approach to price stability.

But there are many more issues raised by Federal Reserve independence than just the most efficient manner of organizing army headquarters in the anti-inflation campaign. First, there is the odd presumption that the monetary policymakers must be independent because their actions have widespread effects and are frequently unpopular. Well just how unique is this? Fiscal policy -- the imposition of taxes -- is certainly widespread in its effects, and paying taxes has never yet won a popularity contest. Yet Congress has raised taxes when necessary. (And took a long, hard look at President Kennedy’s $11 billion tax cut before passage -- an “unpopular” delay, certainly.) Still a straight application of the Federal Reserve’s logic would have Congress authorize an independent “fiscal policy board” to formulate fiscal policy.

What about foreign policy? It involves matters of war and peace, life and death. Nothing is more central to our daily lives. Frequently foreign policy involves “unpopular” actions -- sending men to fight in Korea or “advise” in South Vietnam. Should we then have an independent “foreign policy board” to make and execute foreign policy free from “partisan influences” and not responsible to the President, Congress, or public opinion?

Asking the question answers it.
We insist in our democracy -- it is almost the essence of the system that fiscal and foreign policymakers be held responsible, however indirectly, to the people for their policies.

Why should monetary policy be treated differently?

Second, the notion that the Federal Reserve should formulate the monetary side of the economic policy uncoordinated with the economic policy of the President is totally misguided. The President is elected by the people. He is normally elected after having articulated some views on economic policy during his campaign. President Kennedy, for example, heavily stressed the economic theme of “getting the country moving again” in his campaign. Should the President then find himself faced with an independent Federal Reserve Board which is, perhaps, less eager to get the country moving as fast as the President wants? Should not the President be able to fashion a total package of economic policies, including monetary ones, as he sees fit to carry out his program? Certainly the monetary authorities should have the right and duty to counsel and advise. But should the President have to ask the central bankers not to nullify the intended effects of his policy package, as President Johnson did m his 1964 Economic Report-referring to the tax cut program and some subsequent tighter money statements by prominent members of the Open :Market Committee?

It might be said that an independent Federal Reserve is necessary to temper any mistakes of the President. But the President is our Chief Executlve. Once Congress has accepted his program, the President is responsible for its successes or failures. If the President makes mistakes, there is an electorate ready to correct him and the pliant Congress.

Further, the Federal Reserve has more than its share of monetary blunders in the record book. Whv should the central bank become a supreme economic policy review board with the power to nullify the effects of the President’s policies? Are they the Ideal group for such a job, assuming the country wants the job done? They may be getting wiser, but the events of the past 13 years show that perfection is a long way off.

Moreover, having an independently authored monetary policy is just a recipe for chaos. Monetary policy, as is known, is only one way to guide the economy. Fiscal policy is another. They are both powerful and they are both effective. But the managers of monetary policy insist on their right to turn the economy in any direction they wish regardless of the direction fiscal policy is takmg. As things stand now, economic policymaking is run like a dual control car dri”Ven by two drivers, one of whom inSIsts on his independent right to use his own brake and accelerator as he and he alone sees fit. It is pure luck, if the motor is not constantly stalling. To say the least, this is a most inefficient way to get anywhere.

We have not been that lucky. The Federal Reserve has, at times, deliberately pushed down on its brake at the very time the President and Congress were pressing their accelerator. A case in point is the early months of President Kennedy’s administration as the economy floundered in recession. Or at other times, the Federal Reserve had decided to press its brake when the administration was already lifting its foot from the accelerator. The result is an exaggerated deceleration, much greater than the independently acting Federal Reserve expected. An unhappy example, of this is the action taken in late 1959 which led to the 1960 recession. There are many other examples.
This is no way to run eoonomic polioymaking. Both the speed and direction signals controlling the economy should come from one, and only one, source. Just the plam common sense need for minimum efficiency calls for some degree of subordination of monetary policy to the fiscal policy programs of the President and Congress -- for It cannot be the other way round in our democracy.

Aside from the economic and social engineering questions involved in Federal Reserve independence, the System’s position on independence raises issues, as has been said, which go right to the heart of democratic theory and practice. Consider the trustee notion, i.e., the implied idea that since people do not know what is good for them or know that they need castor oil, but won’t swallow it -- a group of men should be given the right not only to decide what is good for the people and take action, but also to decide and act without being held accountable for their actions.

This kind of elite group, “papa knows best,” thinking both smacks of arrogance and is utterly alien to the principles of American democracy. The essence of democracy is that the people decide for themselves, through their elected officials, what is good or bad for them. Issues are presented to the people and the people decide every 2 years how they want them handled. This is what representative democracy is all about. If someone were to suggest that foreign or fiscal policy be placed in the hands of a totally independent, unaccountable body because those issues are too complicated to be understood correctly by the people, they would be laughed out of court.
Yet. this is what the Federal Reserve is implicitly suggesting about monetary policy. Are the issues dealt with by monetary policy so difficult that people cannot understand what is at stake? By no means. The fundamentals of money can be understood by anyone. Monetary economics is not nuclear physics.

There is another side to the trustee notion as welL What the Federal Reserve is asking for is power -- enormous economic power for good or ill. And they say, “Trust us. We need this power unfettered by any responsibility to anyone. You must allow us to do as we like though, of course, we always have your best interest at heart.” But, as every high school civics student knows, our Constitution provides for a system of checks and balances. Further, our society does not promiscuously hand out deeds to power without responsibility. All power derives from the people. And the holders of power, almost without exception, are either responsible to the people directly or indirectly through elected officials for their stewardship of this power. The Federal Reserve’s idea that, as a trustee, as opposed to a steward, it should be responsible to no one for anything -- extending down to the disposition of Federal Reserve funds -- simply runs counter to everything Americans have believed about power and responsibility since the founding of our democracy.

There can hardly be any doubt of this. In fact, at the early 1964 hearings, held by a subcommittee of the House Banking and Currency Committee, referred to previously, two leading American economists, identified with different sides of the political spectrum, vigorously agreed on this point. Prof. Milton Friedman, of the University of Chicago, who has counseled Senator Goldwater, stated at the hearings:
“Should there be a truly “independent” monetary authority? A fourth branch of the constitutional structure coordinate with the legislature, the executive, and the judiciary? That is the central issue involved in judging the present organizational structure of the Federal Reserve System.” (Is) it is most undesirable politically to give so much power in individuals not subject to close control by the electorate (“The Federal Reserve After 50 Years,” pp. 1133-1134).

Prof. Paul Samuelson, of the Massachusetts Institute of Technology, an economic adviser to President Kennedy during the 1960 presidential campaign said:
“A central bank that is not responsible is irresponsible rather than independent. To be responsible means to be responsive. It need not mean being responsible to each month’s 50.001 percent of Democratic opinion, or being responsive to the articulate minority which, at the moment, seems stronger than any other minority.

But it does mean being responsive to the changing values, views, moods, and even fads of the American citizenry. “
It occurs to me to quote E. B. White’s definition of “democracy.” As I remember it, he said: “Democracy is the recurring suspicion that more than half the people are right more than half the time.”

But the central bank should never be thought of as an island of isolated power, as a St. George defending the economy against the “dragon” of inflation and frenzied finance. As Edmund Burke said nearly two centuries ago: “The age of chivalry is dead-that of responsible, democratic government has succeeded” (“The Federal Reserve After 50 Years,” pp. 1107-1110).

Finally, we might consider what may be regarded in some quarters as a minor detail: Congress has never given authority for determining monetary policy to the Federal Reserve System -- and certainly not to a committee within the System containing members who owe their selection to private bank interests.

As has been previously pointed out, the Federal Reserve Act was designed in 1913 on what is sometimes called the full convertibility theory. In that day it occurred to no one that America would try to produce too much. The difficulty which the framers of the Federal Reserve Act were trying to correct was not too much money, but a periodic shortage of currency which strained the banking system. In consequence, the Federal Reserve System was conceived-and designed -- as an agency that would automatically provide whatever increases in currency and the money supply where needed to accommodate business. It was not conceived, as is now the case, as an agency to restrict the money supply for the purpose of restricting the volume of business. The 1913 act gave the Federal Reserve banks the central task of discounting eligible paper in order to supply the member banks with the volume of credit needed to accommodate mdustry and trade. The Federal Reserve Board was ~iven authority only to review and determine the discount rates at which the Federal Reserve banks would stand ready to supply needed credit.

This basIc authorization has not been changed by any amendments to the Federal Reserve Act made to date. Yet two evolutions have taken place within the Federal Reserve System, in one instance, without authorization, and, in the other, directly contrary to the expressed intent of the Federal Reserve Act.

First, as has been indicated, the Federal Reserve was created to provide an automatic money supply’; this function has been replaced, In practice, by a conscious and deliberate effort to provide the quantity of money which the Federal Reserve authorities think appropriate for economic regulation. This effort was already in evidence before the general revisions made in the Federal Reserve Act in 1935. But after passage of the 1935 act, officials within the System began proclaiming that the Federal Reserve now had “responsibility’ for national monetary policies. The First Annual Report of the Board of Governors after passage of the 1935 act opened with a statement that the act “places responsibility for national monetary and credit policies on the Board of Governors and the Federal Open Market Committee”-- although the act contained no reference whatever to monetary policy nor any provision which indicated a change in the convertibility concept on which the 1913 act was drawn. In brief, the Federal Reserve’s “monetary policies,” as they are practiced today, were never authorized by law.

The monetary powers, as has frequently been pointed out, are reserved to the Congress by the Constitution. There is no doubt that it is within the prerogative of the Congress to delegate these powers either to the executive branch of the Government or to an independent agency. But it is not within Congress’ constitutional means to delegate these powers without prescribing policy objectives and clear guidelines detailing how the powers may be used. Inevitably, the Supreme Court has held unconstitutional those grants of powers made without any spelling out of the specific objectives and limitations placed on their use.

The Supreme Court held the National Industrial Recovery Act to be unconstitutional and put an end to the NRA’s e.conomic regulation, not because the Congress lacked powers which it might delegate under the commerce clause of the Constitution, but because Congress had attempted such delegation without an adequate law defining and limiting the purposes for which the powers were to be used. There is little doubt in the author’s mind that if any legal challenge were ever raised to the Federal Reserve’s monetary policies, the courts could hold them unconstitutional.

This was one permutation the System has. completed -- a more or less passive supplier of money became an active regulator of economic activity. The second, is that referred to in an earlier chapter as the “power revolution” within the Federal Reserve System. That is, the shift toward open market operations for active regulation and the subsequent formation of the Open Market Committee -- with voting rights on monetary policy given to five regional bank presidents and persuasion rights to all 12 presidents.

This second change, whatever else it accomplished, did open the door to private banker influence in the formation of monetary policy. The regional bank presidents have become policymakers. At the very least, the type of man chosen to become the president of a regional bank affects the bent of Open Market Committee thinking. Now the private bankers have the dominant voice in choosing the regional bank presidents. They are hardly likely to choose and retain men as president whose approach to monetary matters does not in general conform to their taste.

Consider these two evolutions in the light of independence. By the 1930’s, the country found itself with monetary policy being decided by a group of men some of whom were selected for membership in the group by private interests. However far this may have been from the original intention of President Wilson, some consolation could be found in the fact that, after all, the President was still assumed to have the last word in overall economic policymaking. Then came the accord. And the country suddenly had the worst of both worlds -- monetary policy decided by a group accountable to no one for its actions, while, at the same time, the group did not even have the minimum virtue of being composed solely of public servants, in the full sense of that term. Independence, then, can be viewed as the capping of the “power revolution.” It has partially transferred immeasurable power into the hands of the regional bank presidents, who started their existence with no economic policy power at all. And through the bank presidents, an industry whose profits rise and fall with monetary policy, has been allowed to impinge on monetary policy making -- however remotely, however indirectly. Much of this has occurred, as stated earlier, without authorization by Congress.

What do these considerations add up to? Just the following: independence serves no useful purpose, is based on erroneous views of the maturity of the public, flies in the face of our democratic institutions, creates irrational and chaotic divisions of responsibility in economic policymaking, violates the spirit of our Constitution, represents a presumptous power grab by the central bank, and is unauthorized by law.
Central bank independence should be tolerated no longer.

The central bank must be brought back into the Government. The Federal Reserve must be made responsible, and responsive, to the economic policymaking decisions of the President. Money must be managed for one purpose or another. To repeat the ancient truism, “money does not manage itself.” Let it be managed, then, not in ways which counteract and conflict with the Government’s other, considered policies, but in ways calculated to supplement and help effectuate those policies.

NEEDED FEDERAL RESERVE REFORMS
What legislation is needed to bring about coordination and harmony among the Government’s policies with respect to monetary management, debt management, and fiscal and tax policies? In a sense, none. The authority is already provided in existing laws; not the Federal Reserve Act, but the Employment Act of 1946. Indeed, the Employment Act of 1946 not only authorizes coordination of the policies mentioned, it requires it. The act declares that it shall be the continuing policy and responsibility of the Federal Government “to coordinate and utilize all of its plans, functions, and resources” for the purposes stated in the act. The central purpose is “to promote maximum employment, production, and purchasing power,” and, it might be added, “in a manner calculated to foster and promote free competitive enterprise and the general welfare.”

But though the law exists and the duty is clear, the Federal Reserve has still managed to go its independent way. Therefore, it is the duty of Congress to assert its sovereignty over the monetary affairs of the country once again. The major thrust of the legislation, of course, should be to cut the ground out completely from all Federal Reserve claims to independence. The Federal Reserve must be made a clearlv defined arm of the Government. Yet there is more to be done. Changes in the Federal Reserve System since 1913 have distorted the public nature of the central bank. Some of these changes must be reversed, by legislation, to erase any doubt that monetary policymaking is in the hands of men who take the widest possible view of the public interest. Finally, some of the operations and procedures of the Federal Reserve, discussed in this book, should be changed. The purpose is to assure that the public interest is served. Some of the changed procedures require legislation, others do not. They all require a more consistent public-spirited attitude than the System has demonstrated to date.

The first 5 sets of reforms are contained in proposals submitted for discussion by all of the 8 Democratic members of the Subcommittee on Domestic Finance after hearing testimony on the Federal Reserve’s structure and policies in 1964.