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Collision among Chairmen BY JAMES MC CARTY YEAGER Washington, D.C. 5 AN ANTONIO Congressman Henry B. Gonzalez has again confirmed his status as, depending on who you talk to, either an irrelevant gadfly or an incorruptible populist. In leading his House Banking Committee up against the Federal Reserve System and its media-canonized Chairman, Alan Greenspan, Gonzalez would see to it that private bankers no longer be entitled to participate in making public policy on the Federal Reserve Board’s Open Market Committee, which effectively sets the nation’s interest rates. You wouldn’t think that repeal of an 80-yearold compromise would make so much noise. Except that its effect is at once to trim the power of private bankers and to increase the possibility for participation by women and minorities. No wonder the bankers and the Republican Street Journal are up in arms. It was their kind of compromise in the first place, whereby in return for submitting to federal regulation, the banking system made sure to populate the regulating body with its regulatees. Back when Woodrow Wilson was President, while we were fighting Pancho Villa with white officers and black troops as the pre-season tune-up game for World War I, Congress finally passed the Federal Reserve Act in order to prevent the Panic of 1897. Congress being as full of deliberation then as it always has been, they were a little late; but the sentiment was correct. Without a central banking system, the United States was doomed to repeat its seven-to-12 year cycle of financial panics that, throughout the 19th century, had periodically paralyzed agriculture, crippled manufacturing, and mined thousands with the dismal regularity of hurricanes hitting the Gulf Coast. This innovation had long been opposed \(in honor of the Bank populists, who feared further domination by Wall Street of the nation’s money supply, and by conservatives, who dimly remembered their ancestors opposing Andrew Jackson over the Bank of the United States in the 1820s. By 1917, the populists had agreed that some central control over the banks was necessary in order to control the wild fluctuations of interest rates. Meanwhile the conservatives were willing to permit a Federal Reserve System to operate as well. Their price, for going along was that, in addition to the pres James McCarty Yeager edits Minority Business Report in Washington, D.C. identially-appointed board members who had to undergo Senate confirmation and were therefore as much public servants as the Secretary of the Treasury, 12 Federal Reserve Bank regional chairmen were appointed by the bankers themselves. Five of these regional bank chairmen sit on the main policy-making committee of the Federal Reserve Board and vote eight times a year on adjusting the money supply to set interest rates. Gonzalez has already held three hearings, with a third planned for October 27. Testifying were such allies as Congressman Kweisi Mfume, Democrat from Baltimore who heads the Congressional Black Caucus, and Senator Paul Sarbanes, Democrat from Maryland, who will take over the Senate Banking Committee in 15 months when current Chairman Don Riegle, Michigan Democrat, retires. The proposed reforms would not affect the Fed’s policy as to inflating or deflating the money supply, Gonzalez noted. Instead, they would help rectify the omission of women and minority members, and provide greater public scrutiny of the Fed’s actions. Only one woman, and no minority members, have ever been elected chair of one of the 12 regional Federal Reserve Banks by the commercial bank presidents who, although private citizens, sit as regional board members. Gonzalez would require regional bank presidents be nominated by the president and confirmed by the Senate. Under the legislation \(H.R. 28, “The Federal the Federal Open Market Committee would have to announce any changes in interest rate policies within a week, instead of keeping them secret for six to eight weeks as at present. Rather than releasing mere summaries of the deliberations, as is currently done, the Fed would have to videotape the meetings and release both tape and transcripts within 60 days of the meeting. Gonzalez would also grant authority to Congress’ investigative arm, the General Accounting Office, to audit the Fed’s spending, which does not currently have to conform to standards to which the rest of federal spending must adhere. For instance, the Fed spent $346,000 buying memberships in private organizations for its employees in 1990, and refuses to reveal the amount spent in 1992 and 1993. The Fed also hires outside economists from academia as consultants at a rate of nearly $100,000 a month. Conservative Nobel Laureate economist Milton Friedman, Gonzalez noted, has said that the Federal Reserve is try ing to buy off “its most likely critics” and that few among the academic community are prepared to criticize the Federal Reserve. Finally, Gonzalez would allow GAO to investigate the Fed’s massive interventions in foreign currency markets and daily open market auctions, to see if these operations are efficient and secure from leaks of inside information. Gonzalez observed, “Because it is not subject to the same scrutiny as those agencies that use budgeted funds, the Federal Reserve makes its own rules, some of which involve expenditures that would be illegal for budgeted funds.” Amplified through a docile media, Greenspan’s response shows clear worry that some changes might be made to the -Federal Reserve Board’s cozy white male atmosphere. Greenspan’s early championing of President Clinton’s deficit-reduction plan in Congressional testimony was crucial to its passage, and Clinton has partially rewarded Greenspan for it with a letter telling Gonzalez the President is “disinclined” to support Fed reform at this time. Greenspan defends the abstract principle of the Federal Reserve’s independence from political control in order to shield the Fed’s arrogant and elitist policies from scrutiny. Despite Gonzalez’s care in crafting the legislation to prevent what he called “Congressional micromanagement of monetary policy,” Greenspan affects to recoil in horror from any changes whatsoever, no matter how egregious the omissions they are designed to remedy. “If it ain’t broke, don’t fix it,” is the motto under which fight the Fed and its defenders in most of the mainstream business press. As a prescription for managing the nation’s money, it assumes that a better job cannot be done, and that any attempts to do so are bound to fail. Despite vast, and deserved, national skepticism as to the effectiveness of government, one thing it has learned how to do \(and must do to the exclusion of private Gonzalez would ensure that it do so publically, and with a proper mix of ethnically and gender-diverse board members. For the sin of trying to bring the Fed into the latter half of the 20th century, he is sure to be ridiculed and excoriated by the thousand-dollar-suit crowd and their various media pipelines. Something as abstract as the money supply might, you would think, be safely left to the experts. The lesson from Henry B. is that democracy requires certain standards of accountability and participation, even from its experts. Or especially from its experts, if you are feeling cynical today or any other day. 14 OCTOBER 29, 1993