Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, October 13, 1993
I appreciate this opportunity to discuss the important issues raised by recent legislative initiatives to alter the structure of the Federal Reserve System. I will begin my remarks this morning by placing these issues in some historical perspective before commenting specifically on provisions that would change the status of Reserve Bank presidents, broaden the authority of the General Accounting Office (GAO) to audit the Federal Reserve, and mandate additional disclosure of monetary policy decisions and discussions.
The appropriate role of a central bank in a democratic society is an important and controversial issue. The performance of such an institution has profound implications for the nation's economy and the people's standard of living. Americans have pondered the question of the appropriate role and structure for the central bank at length, beginning with the debate over the First Bank of the United States, which George Washington signed into existence in 1791.
Echoing the earlier discussions surrounding the chartering of the First and Second Banks of the United States, extended debate and compromise preceded the establishment of the Federal Reserve System. Much of the focus of the debate was on the balance that should be struck between public and private authorities in governing the central bank.
In 1908, in response to the periodic financial crises that had plagued the country in the latter part of the nineteenth century and in the early years of the twentieth century, a National Monetary Commission, consisting entirely of members of the Congress, was established by legislation. Four years later, the commission, in submitting its report to the Congress, called for the creation of a National Reserve Association to provide stability to our financial system. Both the commission's plan and an alternative, proposed by President Woodrow Wilson, envisioned the central bank as containing public and private elements. President Wilson's plan won the approval of the Congress and established the Federal Reserve System as our nation's central bank. Over the intervening years, the Congress has initiated many reviews of the System's structure but with rare exceptions has chosen to leave the basic structure intact.
The major piece of legislation affecting the Federal Reserve's organization since its inception in 1913 was the Banking Act of 1935, which established the Federal Open Market Committee (FOMC) in its current form as the central decisionmaking body for monetary policy. When it was clear by the 1930s that the buying and selling of securities by the Federal Reserve was a crucial monetary policy instrument, there was again debate in the Congress over whether it should be carried out entirely by government appointees or whether the Reserve Bank presidents, who were not politically appointed, should share in that policymaking role. In the 1935 act, the Congress reaffirmed that the Reserve Bank presidents should have a substantive voice in policy. They were granted five of the twelve positions on the FOMC, while the seven members of the Board constituted the majority.
The wisdom of the Congress in setting up the structure of the System has stood the test of time. Federal District Court Judge Harold Greene, in commenting in 1986 on the constitutionality of the FOMC, noted, "The current system[,]... the product of an unusual degree of debate and reflection[,]... represents an exquisitely balanced approach to an extremely difficult problem."
The role of a central bank in a democratic society requires a very subtle balancing of priorities between the need for sound, farsighted monetary policy and the imperative of effective accountability by policymakers. Accountability and control by the electorate are vital; the nation cannot allow any instrument of government to operate unchecked. The central bank, just like other governmental institutions in a democracy, must ultimately be subject to the will of the people. …