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Private Interests Should Not Make Public Policy

EARLIER this year, reports surfaced about a disturbing split among policymakers at the Federal Reserve. With the economy deep in recession, important changes in monetary policy proposed by Federal Reserve Board Chairman Alan Greenspan were being resisted by the presidents of some of the regional Federal Reserve banks. This was not an ordinary split among government policymakers; rather, a handful of individuals representing private interests was impeding efforts by public officials to conduct monetary policy in the best interests of the nation. Slow money growth since 1988 has been cited as one reason that the economy was too weak to shrug off the shock of the Gulf war, causing a longer and deeper recession than necessary. And since the recession started, interest rates have fallen only half as much as in the three previous recessions, despite the need for greater monetary stimulus created by the credit crunch. What appears to be a revival of economic activity should not lead to acceptance of the practice of private bankers making government economic policy. The Federal Reserve System consists of a seven-member Board of Governors in Washington and 12 regional Federal Reserve banks. The governors are appointed by the president and confirmed by the Senate; the bank presidents are not. They owe their jobs to the boards of directors of the regional banks, boards dominated by local commercial banks. Some of the bank presidents are career employees, others have backgrounds in banking, business, and academics; none are public officials. Nonetheless, they participat e in monetary policy decisions through their membership on the Federal Reserve's Open Market Committee (FOMC), where they have five of the 12 votes that determine monetary policy. Although most government agencies make use of private citizens as advisers, in no other agency are major policy decisions made by individuals who are not publicly accountable. The legislative history of the Federal Reserve suggests that the bank presidents are on the FOMC because of political compromises. Neither Woodrow Wilson, who was president when the Fed was created, nor Franklin D. Roosevelt, president when the banking laws were rewritten during the 1930s, found any justification for having private interests represented on government bodies. Wilson contended that the function of the Federal Reserve Board in supervising the banking system is a governmental function in which private interests have no right to representation, except through the government itself. Nevertheless, the Federal Reserve Act left decisions about when to buy and sell Treasury securities up to the Federal Reserve banks. Many economists blame the depth of the Great Depression on inappropriate monetary policy during the early 1930s. Marriner Eccles, Roosevelt's choice to head the Federal Reserve Board, proposed to give the board control over monetary policy by making it responsible for open market operations. The House version of the Banking Act of 1935 limited membership in the Open Market Committee to board members. But to mollify the Federal Reserve banks, the final act created an FOMC that included the seven members of the Board of Governors and a rotating group of five bank presidents. This hybrid arrangement has no parallel in the practice of central banking abroad. A study for the congressional Joint Economic Committee on central bank-government relations in other major industrialized countries found that the central bank officials who make monetary policy decisions elsewhere are all public appointees accountable only to the people. Our bill, the Monetary Policy Reform Act, would make the Fed's Board of Governors solely responsible for the conduct of monetary policy. The bank presidents would still be able to bring their views to the table, through a new Federal Open Market Advisory Committee, but they would not have a vote. Monetary policy would be the responsibility solely of properly appointed public officials. Power without accountability does not fit into the American system of democracy.