December 15, 1965

Federal Reserve Independence

The unique system of checks and balances - America’s outstanding contribution to civilized government - scored once again with increase of the bank interest rate by the Federal Reserve Board.

There are two remarkable things about this recent event:

• Some other expert’s judgment, other than that of the Great White Father, has prevailed in a period when dissent is near treason.
• President Lyndon B. Johnson is angry that someone has rescued him from that long economic limb he had climbed out on.

The Fed moved independently to apply the brakes to accelerating inflation. This apparently shocked President Johnson, Congressman Wright Patman (D-Texas) and the Great Society planners.

LBJ even tried his famous - or is it infamous? - arm twisting act on William McChesney Martin, chairman of the Federal Reserve, but to no avail.

Martin is a banker’s banker. He has seen presidents come and go. Politics, to him, is just one more hindrance to his job of expediting the flow of money for this nation’s financial institutions.

* * *

It was now-or-never for Martin. In January, the term of a “hard money” member of the board expires. Johnson has hinted broadly he will appoint a new “easy money” man to fill the vacancy.

This would turn the 4-3 majority now following rather orthodox financial policies to an equally slim leadership ready to play now, pay later.

The flow of gold out of this country has reached alarming proportions. A request to American businessmen to voluntarily reduce their spending abroad to help offset the decrease of investment in this country by foreign investors has been largely ignored.

The reason is simple. Money invested overseas brings a higher profit than that loaned out here for stocks, bonds and other securities.

In addition, inflation in the U.S. is starting to get out of hand. Wages have jumped sharply in the last three years. So have overall taxes, despite a show-window decrease in the personal and corporate income rate.

Prices have followed suit in retail goods and services. Only the basic industries of metals, autos and electrical equipment have been effectively intimidated from temporarily raising their prices too.

The Viet Nam war escalates daily. It has almost reached the Korea level, which set off a serious readjustment in our economy. Orders for military supplies - belt buckles to jet bombers - is bidding up the price of raw materials and labor.

All this spells inflation with a capital “I." Our bankers have long felt that a tightening of the inflation machinery is overdue.

* * *

What puzzles me is all the public breast-beating that President Johnson displays. Labor sold him down the river by thumbing their noses at his “guide lines” -- and squeezing out wage increases that are clearly inflationary.

The Great Society welfare programs - whether good, bad or indifferent - are costing much more than intended.

The Viet Nam war grows at a frightening pace in lives and treasure.

All in all, the economy is getting away from Johnson, and it is political suicide - or so it seems - to restrain the principal causes. Martin has taken the president off the hook and taken the blame for initiating an unpleasant necessity.

One begins to wonder whether Johnson is really as unhappy as he pretends. If he regrets this small tightening, his judgment to make the hard decisions that will come with a big Asian war is suspect.

* * *

The Federal Reserve Board was set up in 1913 to regulate the flow of credit and money. It does this by collecting and interpreting information bearing on economic conditions, examining state banks that are members of the System and furnishing currency for circulation.

In carrying out these duties the Reserve collects and clears checks, transfers funds, acts as banker to the U.S. government and maintains cash-balance reserves.

The System is divided into 12 districts, each with nine directors and a central Reserve bank serving member banks in the area.

The three Class A directors may be bankers. Three Class B directors must be actively engaged in the district in commerce, agriculture or some other industrial pursuit and must not be an officer, director or employee of any banks.

Class A and Class B directors are elected by member banks. Three Class C directors are designated by the Board of Governors of the System. They also must not be officers, directors, employees of any bank, and cannot be stockholders of any bank.

One of the Class A directors is designated by the Board of Governors as chairman of the Reserve district.

The Board of Governors at Washington, D.C., consists of seven members appointed by the President of the United States and confirmed by the Senate.

They are appointed for 14 years, and their terms are so staggered that one expires every two years. No two members of the Board may come from the same Reserve district.

The Board submits an annual report to Congress and publishes a weekly statement of the assets and liabilities of the Reserve banks.

Expenses incurred by the Board in carrying out its duties are paid out of assessments upon the Reserve Banks, and the Boards’ accounts are audited each year by certified public accountants.

* * *

If all this seems elaborate organization, rest assured it is intentional. The Reserve Bank Act of 1913 took great pains to free the System from dependence on Congress for operating funds.

The method of selecting directors insures that bank business and the public is equally represented. The long terms of the directors removes them from the field of partisan politics.

All of this independence irks folks like Congressman Patman. But too many of the checks -- that keep our government responsible while responsive -- have been removed already.

Our monetary system, geared as it is to the world money supply, is not something to be altered with each new administration. We should be grateful that this vital service is bigger than men.

By Lindsey Wilger Williams, retired newspaper publisher and syndicated columnist