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Congressional supervision of monetary policy
Journal of Monetary Economics 4 (1978) 325-327. 10 North-Holland Publishing Company
CONGRESSIONAL
SUPERVISION
OF MONETARY
IPOLICY
A symposium
Customary arrangements and beliefs are not immutable, but neither do they change very easily. All changes are costly and changes in institutions and beliefs require substantial investments of resources, not the least involving time and efforts by men. Changes will emerge whenever the stakes rise sufficiently high and the costs, associated with inherited arrangements and beliefs, explode beyond an accepted level. The Bretton Woods System of fixed exchange rates suffered this experience. The consequences of inconsistent financial policies could not be covered up forever. Officials in national treasuries, Central Banks and international agencies were forced by circumstances tlo cope with a system of floeting exchange rates in spite of all their previous beliefs and earlier efforts to persist with the old pattern. The same experience, reinforced by the eruption of a worldwide inflation, induced Central Banks to re-examine accustomed conceptions bearing on monetary policy and th,eir inheritied procedures guiding implementation of policy. These changes in beliefs and procedures were hardly ‘caused’ by the development of monetary analysis over the past twenty years. The difficult reconsideration of familiar attitudes and functions essentially resulted under the pressure of circumstances confronting the authorities. The development of monetary analysis contributed to some extent, however, to the reconsideration unleashed by the avalanche of unmanageable circumstances. The readjustments in prodecures and conceptions occurring over the past five years at several European Central Banks are generally known. Similar reconsiderations appeared also beyond Europe. The situation of the Federal Reserve System presents some peculiar aspects in this context. Adjustments within the Federal Reserve System -as observed in recent years-form a natural segment of a continued and gradual change modifying the Federal Reserve Authorities’ conception, procedure, and rhetoric since the middle of the 1960s. Until around 1964/65 the Federal Reserve’s policy-ma.king was dominated by the free reserve doctrine yielding a strategy and interpretation centered on money market conditions. This doctrine rapidly vanished beyond the middle of the 1960s and was replaced by a view centered on the role of the public’s money demand. This view, supplemented by a thesis that money
326
K. Brutmr, htroductiort
demand is essentially volatile and basically unstable, still justifies traditional conceptions and procedures orgziiized around the strategic roIe of short-term interest rates. But money demand is unavoidably juxtaposed to a money stock. The erosion of the free reserve doctrine and the emergence of a (Walrasian) money market theory of the money supply process subtly and gradually directed increasing attention to the money stock, monetary aggregates, and the problems of monetary control. Congressional interest in these matters, expressed by the Joint Economic Committee, emerged already in 1968. But the role of monetary aggregates remained unclear and uncertain. The rhetoric had clearly abandoned the old tradition of a strategy based on free reserves. There remained, however, important strands of a strategy and interpretation based on short-term interest rates. A bland eclecticism potentially justified almost any possible stance of policy, credit market patterns, or monetary developments. In case of need, the policymakers could always find cover under the pretence of an erratic money demand. The rhetorical acknowledgement of monetary control, signaled by various devices in language and directives, evolved according to its own momentum. It invited, in particular, substantial criticism of the Federal Reserve Authorities for the untimely and persistent reversal of monetary policy in 1970 and 1972. The double-digit inflation of 1973/74 and the subsequent recession during the winter of 1974/75 encouraged questions about the Federal Reserve’s management of monetary policy. Lingering doubts were reinforced by the observation that inflation accelerated many months before OPEC initiated its new monopoly pricing in the fall of 1973. The political scene in early 1975 thus encouraged another move by Congress, House Concurrent Resolution 133 was passed in March 1977. This Resolution addressed the Federal Reserve Authorities and requested that policy be formulated in terms of monetary control and on the basis of longer-run considerations. It was also requested that the Federal Reserve report to Congress about its management in regular Hearings. The Congressional oversight of monetary policy, introduced by this Resolution, became public law in November 1977 as an integral part of the amended Federal Reserve Act. A closer examination reveals some remarkable contrasts between the United States and European developments. Recent European changes in approzck to monetary po!icy were initiated by Central Banks. European parliaments and govermnents showed little appreciation or interest in these matters. In the United States, on the other hand, the initiative appeared in Congress; and the Federal Reserve Authorities suffered more or less willingly Congressional oversight of monetary policy with its explicit emphasis on monetary control. The crucial &angec in apnroach were thus really imposed on the Central Bank bureaucracy from the outside. The Federal Reserve Authorities developed under the oversight procedure a set of targets limiting the desired growth path for selected monetary aggregates.
These targets were announced in regular Hearings held in appropriate Congressional Committees. There is no indication, however, that Congressional oversight and the official targeting of monetary growth influenced the traditional implementation procedure centered on the Federal funds rate and the money market view. Furthermore, there is no indication that the Federal Reserve Authorities re-examined prevailing arrangements obstructing an effective monetary control. Similarly, our Central Bank reveals no signs of interest to proceed with the useful suggestions and recommendations bearing on appropriate measurement of relevant monetary aggregates offered by a Committee of professionals appointed by the Federal Reserve Authorities. The evolution of monetary growth in 1977 enhances the uncertainty about the interpretation of the Federal Reserve’s behavior u ndcr Congressional oversight. An assessment of the state of monetary policy under Congressional supervision with the observations available from more than two and a half years should offer somt interesting information under the circumstances. Four gentlemen were invited to contribute to this symposium. Paui A. Volcker, President of the Federal Reserve Bank of New York, is, of course, well qualified to express the experiences and reflections gathered in the Federal Reserve’s rolicymnking. Robert E. Wcintraub, a member of the staff of the House C(b;nmittee in Banking, Housing and Urban AEairs, was involved with the staff work preparing the House Concurrent Resolution in early 1975. James L. Pierce, Professor of Economics at the University of California (Berkeley) worked on the staff of the Board of Governcrs of the Federal Reserve Systcill for many years and also served on the staff of the House Committee on BLinking, Housing and Urban Affairs. Allan H. Meltzcr, Professor of IEcononlics at Carnegie-F,Iellon University. and co-founder of the Shadow Open Market Committee and the Shadow European Economic Policy Committee, has closely followed Federal Rescrvc policymakin, * over fifteen years. The four authors represent a diversity of backgrounds and interests which should illuminate the current problems of monetary policymaking in the United States. Karl Brunner
CONGRESSIONAL
SUPERVISION
OF MONETARY
IPOLICY
A symposium
Customary arrangements and beliefs are not immutable, but neither do they change very easily. All changes are costly and changes in institutions and beliefs require substantial investments of resources, not the least involving time and efforts by men. Changes will emerge whenever the stakes rise sufficiently high and the costs, associated with inherited arrangements and beliefs, explode beyond an accepted level. The Bretton Woods System of fixed exchange rates suffered this experience. The consequences of inconsistent financial policies could not be covered up forever. Officials in national treasuries, Central Banks and international agencies were forced by circumstances tlo cope with a system of floeting exchange rates in spite of all their previous beliefs and earlier efforts to persist with the old pattern. The same experience, reinforced by the eruption of a worldwide inflation, induced Central Banks to re-examine accustomed conceptions bearing on monetary policy and th,eir inheritied procedures guiding implementation of policy. These changes in beliefs and procedures were hardly ‘caused’ by the development of monetary analysis over the past twenty years. The difficult reconsideration of familiar attitudes and functions essentially resulted under the pressure of circumstances confronting the authorities. The development of monetary analysis contributed to some extent, however, to the reconsideration unleashed by the avalanche of unmanageable circumstances. The readjustments in prodecures and conceptions occurring over the past five years at several European Central Banks are generally known. Similar reconsiderations appeared also beyond Europe. The situation of the Federal Reserve System presents some peculiar aspects in this context. Adjustments within the Federal Reserve System -as observed in recent years-form a natural segment of a continued and gradual change modifying the Federal Reserve Authorities’ conception, procedure, and rhetoric since the middle of the 1960s. Until around 1964/65 the Federal Reserve’s policy-ma.king was dominated by the free reserve doctrine yielding a strategy and interpretation centered on money market conditions. This doctrine rapidly vanished beyond the middle of the 1960s and was replaced by a view centered on the role of the public’s money demand. This view, supplemented by a thesis that money
326
K. Brutmr, htroductiort
demand is essentially volatile and basically unstable, still justifies traditional conceptions and procedures orgziiized around the strategic roIe of short-term interest rates. But money demand is unavoidably juxtaposed to a money stock. The erosion of the free reserve doctrine and the emergence of a (Walrasian) money market theory of the money supply process subtly and gradually directed increasing attention to the money stock, monetary aggregates, and the problems of monetary control. Congressional interest in these matters, expressed by the Joint Economic Committee, emerged already in 1968. But the role of monetary aggregates remained unclear and uncertain. The rhetoric had clearly abandoned the old tradition of a strategy based on free reserves. There remained, however, important strands of a strategy and interpretation based on short-term interest rates. A bland eclecticism potentially justified almost any possible stance of policy, credit market patterns, or monetary developments. In case of need, the policymakers could always find cover under the pretence of an erratic money demand. The rhetorical acknowledgement of monetary control, signaled by various devices in language and directives, evolved according to its own momentum. It invited, in particular, substantial criticism of the Federal Reserve Authorities for the untimely and persistent reversal of monetary policy in 1970 and 1972. The double-digit inflation of 1973/74 and the subsequent recession during the winter of 1974/75 encouraged questions about the Federal Reserve’s management of monetary policy. Lingering doubts were reinforced by the observation that inflation accelerated many months before OPEC initiated its new monopoly pricing in the fall of 1973. The political scene in early 1975 thus encouraged another move by Congress, House Concurrent Resolution 133 was passed in March 1977. This Resolution addressed the Federal Reserve Authorities and requested that policy be formulated in terms of monetary control and on the basis of longer-run considerations. It was also requested that the Federal Reserve report to Congress about its management in regular Hearings. The Congressional oversight of monetary policy, introduced by this Resolution, became public law in November 1977 as an integral part of the amended Federal Reserve Act. A closer examination reveals some remarkable contrasts between the United States and European developments. Recent European changes in approzck to monetary po!icy were initiated by Central Banks. European parliaments and govermnents showed little appreciation or interest in these matters. In the United States, on the other hand, the initiative appeared in Congress; and the Federal Reserve Authorities suffered more or less willingly Congressional oversight of monetary policy with its explicit emphasis on monetary control. The crucial &angec in apnroach were thus really imposed on the Central Bank bureaucracy from the outside. The Federal Reserve Authorities developed under the oversight procedure a set of targets limiting the desired growth path for selected monetary aggregates.
These targets were announced in regular Hearings held in appropriate Congressional Committees. There is no indication, however, that Congressional oversight and the official targeting of monetary growth influenced the traditional implementation procedure centered on the Federal funds rate and the money market view. Furthermore, there is no indication that the Federal Reserve Authorities re-examined prevailing arrangements obstructing an effective monetary control. Similarly, our Central Bank reveals no signs of interest to proceed with the useful suggestions and recommendations bearing on appropriate measurement of relevant monetary aggregates offered by a Committee of professionals appointed by the Federal Reserve Authorities. The evolution of monetary growth in 1977 enhances the uncertainty about the interpretation of the Federal Reserve’s behavior u ndcr Congressional oversight. An assessment of the state of monetary policy under Congressional supervision with the observations available from more than two and a half years should offer somt interesting information under the circumstances. Four gentlemen were invited to contribute to this symposium. Paui A. Volcker, President of the Federal Reserve Bank of New York, is, of course, well qualified to express the experiences and reflections gathered in the Federal Reserve’s rolicymnking. Robert E. Wcintraub, a member of the staff of the House C(b;nmittee in Banking, Housing and Urban AEairs, was involved with the staff work preparing the House Concurrent Resolution in early 1975. James L. Pierce, Professor of Economics at the University of California (Berkeley) worked on the staff of the Board of Governcrs of the Federal Reserve Systcill for many years and also served on the staff of the House Committee on BLinking, Housing and Urban Affairs. Allan H. Meltzcr, Professor of IEcononlics at Carnegie-F,Iellon University. and co-founder of the Shadow Open Market Committee and the Shadow European Economic Policy Committee, has closely followed Federal Rescrvc policymakin, * over fifteen years. The four authors represent a diversity of backgrounds and interests which should illuminate the current problems of monetary policymaking in the United States. Karl Brunner