Published December 1, 1995 | December 1995 issue
In the Federal Reserve's 82-year history, 74 people have had the privilege of serving on the Board of Governors. This group has played an important role in fostering the nation's economic growth. We invited former Board members to reflect on their experience and share their thoughts on current monetary policy direction as well as career highlights after leaving the Board. We published the responses of several former governors in the September issue of The Region and now continue that dialogue. We posed the following questions:
Daane spent several years with the Federal Reserve Bank of Richmond and taught economics at the University of Richmond. He joined the U.S. Treasury in 1960, serving in various capacities until his appointment to the Board of Governors in 1963.
When I left the Board, in my great unwisdom I took two virtually
full-time positions, the vice chairmanship of Commerce Union Bank, Nashville, Tenn. (now part of NationsBank) and the Frank K. Houston Chair of Banking at Vanderbilt University, the latter a post I continue to hold on an emeritus basis. In my banking experience I became chairman of the International Policy Committee of the bank, which was deriving more than 20 percent of its earnings from foreign lending, and this involved me in many experiences overseas. My international responsibilities at the bank dovetailed with my experience as more or less the international member of the Board.
As to my university experience, teaching and working with young people is a "constant highlight" and the most rewarding part of my post Federal Reserve Board years. I have helped in the development of an outstanding group of students and frequently assisted them in their job searches as well. I have consistently urged them to include public service at some point in their careers!
I have generally been regarded as a "hawk" on inflation and rightly so. My friend and successor at the board, Henry Wallich, used to say that on the Martin Board, the chairman and I both merited a 10 rating on an anti-inflation scale of 10-1. In my interview with President Kennedy prior to his appointing me to the Board, he began by saying, "Daane, I know where you stand on inflation, but where do you stand on growth?" I began my answer by saying inflation is the greatest enemy of sustainable growth, which I still sincerely believe. Therefore I applaud the Board's stance in recent years, beginning with Paul Volcker who led the System in breaking the back of the then-high inflation. My current concern is that the general acceptance of a 3 percent or 4 percent inflation rate as a "good result" will put us on the wrong path in terms of the objective of maximum growth with price stability.
Certainly one of the most memorable was the Dec. 4, 1965, action of the Board to raise the discount rate despite administration pressure opposing the move. It was the only occasion during my Board tenure that I was pressed directly by top administration officials--most notably Secretary of the Treasury Fowler, in his courtly Virginian manner, at breakfast in Florida the day of the Board meeting and by Undersecretary Deming in far-from-courtly fashion in his office later that day. They did not convince me because I was fearful of the inflationary potential of then-escalating federal spending, and in the end I was the swing vote in favor. The president immediately castigated Martin, but by February the administration by and large admitted that we had made the right move. Another "most memorable" was by belated participation in the second devaluation of the dollar engineered by Paul Volcker. At his request, I flew from Basle to join Volcker in Paris and we then flew to Bonn on Feb. 12, 1973, for the announcement at the U.S. ambassador's residence with two of our counterparts from Japan. The Japanese negotiators headed by Hosomi cut discussion off at midnight because they had been up for 24 hours. But Washington insisted we reach agreement because they had already laid on a press conference to announce it. So Volcker persisted by contacting Japan directly and reaching agreement involving a yen appreciation around 2 a.m. Bonn time, just in time to meet the press conference deadline in Washington!
When I was on the Board, as a courtesy I normally sent a draft of my speeches to Chairman Martin who would always send them back with a single comment, "Keep up the good work." That would be my advice to the present chairman, and I would respectfully suggest that any future chairman would do well to emulate some of his predecessors, most notably Bill Martin, Paul Volcker and Alan Greenspan!!
Brimmer spent much of his early career in academia, teaching at Michigan State University and the Wharton School at the University of Pennsylvania. He joined the Commerce Department in 1963 and was assistant secretary when appointed to the Federal Reserve Board. Brimmer was the first African American to serve on the Board of Governors.
Upon leaving the Federal Reserve Board in August 1974, I taught courses on capital markets and finance at the Harvard Business School for two years. I established my economic and financial consulting firm (Brimmer & Co. Inc.) in July 1976, and I continue to operate it. I also serve on several corporate boards--including Bank of America and DuPont. From June 1978 through November 1994, I was a public governor of the Commodity Exchange, Inc. In that role, I chaired the Special Silver Committee which resolved the "Hunt Silver Crises" in 1979-80. In 1991-93, I served as co-chairman of the National Commission on Financial Institution Reform, Recovery & Enforcement. Our report, entitled "Origins and Cases of the S&L Debacle: A Blueprint for Reform," was published in July 1993. On June 1, 1995, President Clinton appointed me chairman of the District of Columbia Financial Responsibility and Management Assistance Authority. This "financial control board" was appointed to oversee Washington, D.C.'s fiscal affairs and to help restore the city to financial health.
I believe the Federal Reserve's responsibility is to promote both price stability and economic growth. However, when these two objectives conflict, I believe the achievement of price stability should be given priority. In that context, the restrictive monetary policy adopted by the Federal Reserve in February 1994 was appropriate.
My most memorable experiences were provided by the efforts of the Federal Reserve to protect the money and capital markets during the failure of the Penn Central Railroad in 1970 and of Franklin National Bank in 1974. When Penn Central failed, it defaulted on its outstanding commercial paper, and that event could have threatened the viability of the commercial paper market generally. To forestall that possibility, we told Federal Reserve banks to act as "lenders of last resort" to nonbank firms that had issued commercial paper, and the funds were channeled through commercial banks. In a similar way, the failure of Franklin National Bank exposed both the domestic CD market and Eurodollar market to disruption. To prevent this from happening, Franklin was allowed to borrow from the Federal Reserve Bank of New York to replace the outflow of deposits from its branches in New York and London. We permitted such borrowing, although we knew in advance that Franklin would fail. Our goal was to protect the domestic money market and the Eurodollar market as financial institutions.
I would advise the chairman to keep uppermost in his mind the fact that the Federal Reserve is an independent agency within the federal government, but also independent of the executive branch. He should do everything he can to safeguard that independence. The record shows that (with only a few exceptions) presidents or their aides--from President Wilson through President Bush--have tried to capture or greatly influence monetary policy. He should remain alert to defend against such intrusions.
Jackson came to the Board of Governors with an extensive background in housing and mortgage banking. He had been mortgage vice president and director with a family-owned mortgage banking company in Alabama as well as a past president of the Alabama Mortgage Bankers Association and the Mortgage Bankers Association of America.
Director of 10 public corporations. Vice chairman of Compass Bancshares Inc., a regional bank. A member of the Thrift Depositors Protection Oversight Board to clean up the savings and loan mess. Now a professor at Birmingham Southern College teaching finance courses.
Since the public and those leaders in the Congress and White House whom the public elect think that 2.5 percent to 5 percent inflation is now acceptable, the Fed has the primary role in price stability for our country. This is unpopular and misunderstood--but necessary.
Getting sworn in by Chairman Arthur Burns while President Gerald Ford and the Cabinet stood nearby in the Board Room. This was the first visit by a president to the Board since Roosevelt dedicated the building.
Continue the tradition of independent courage and fortitude to do the right thing. There is a wide, strong body of support for the Federal Reserve's role within government in all parts of our country and the world.
Miller began his professional career with a Wall Street law firm. He later joined Textron in Providence, R.I., rising to the position of chief executive officer. He was chairman of the Board of Governors.
My resignation as chairman of the Board of Governors in August 1979 was in order to accept my appointment by President Carter as secretary of the Treasury, a position I held from August 1979 until January 1981. Following my term at Treasury, I organized G. William Miller & Co. Inc. as a small private merchant banking company to help develop business enterprises. The company has had a wide range of activities, including restructuring of companies, managing private investments, serving as financial adviser and managing investments in such areas as real estate and agricultural projects.
During the period from January 1990 until February 1992, I also served as chairman and chief executive officer of Federated Stores Inc. to guide the company through the Chapter 11 process. The company's activities included major department stores, a regional supermarket business and substantial real estate holdings. The reorganization was successfully completed and my assignment ended in February 1992.
I support the Fed's emphasis on price stability. Experience tells us that once the specter of inflationary expectations is unleashed, it is very difficult to get the genie back into the bottle. In the United States, inflation is a very destructive process that slowly saps the vitality of our economy. Over time, real economic growth and job creation are fostered best in an economy with both a low rate of inflation and low inflationary expectations.
During my short tenure, the Fed was faced with challenges of stabilizing the dollar and coping with the huge inflationary forces unleashed by the 1979 oil price shock triggered by the upheaval in Iran. One of the consequences was a substantial outflow of funds from the banking system into market instruments. During this period the Fed took a lead in urging decontrol of natural gas prices and later decontrol of domestic oil prices, in order to allow the market system to operate in adjusting to the inflationary impact. The Federal Reserve also took the lead in revising banking laws to provide for more universal and uniform reserve requirements, eliminate Regulation Q, permit interest payments on checking accounts, deal with international banking issues, and so on.
The Federal Reserve chairman should continue to focus the Fed's efforts on maintaining price stability. The prospects for economic growth and job creation will be enhanced by the Fed pursuing a consistent policy of keeping inflation at a very low level. Another area where the chairman must be concerned relates to the accelerating trend of consolidation within the banking industry. This will require the Fed to be alert to the prospect of potential dislocations from excessive concentrations, anti-competitive combinations and service changes. The Fed's task will be all the more challenging because of the need for reduction of federal deficits, the enormous expansion of global currency and other transactions, and the technological revolution in communications and data processing.
Gramley began his career at the Kansas City Federal Reserve. He left the Fed to join the faculty at the University of Maryland, later returning to a staff position at the Board of Governors. He was a member of President Carter's Council of Economic Advisers from 1977 to 1980.
Since I left the Board in 1985, I have been employed as an economist by a trade association and have had my own consulting business. My career has been interesting, fun and financially profitable, but devoid of notable highlights. I have enjoyed observing the monetary policy process from the outside and keeping in contact with many friends at the Fed.
I wholly approve. The performance of the economy since the early 1980s has been remarkably good; restoration of price stability has been an important contributing factor. What is quite remarkable is that monetary policy has been conducted so effectively despite tremendous obstaclessuch as the loss of the monetary aggregates as a policy guide, the explosion of the budget deficit in the first half of the 1980s, the credit crunch of a few years ago and the recurring instabilities of international financial markets.
It will always be gratifying to have been a member of the Federal Open Market Committee during a period when inflation was reduced from double-digit figures to 4 percent. I also value greatly the kind remarks that have been made to me by a number of Reserve bank presidents regarding my role as chairman of the Reserve Bank Activities Committee.
If it is Greenspan, he doesn't need my advicehe has done a superb job. Obviously, the Fed needs to keep its focus on maintaining price stability. The greater openness of the Fed, particularly as regards immediate disclosure of policy actions, should be continued. I'm not sure that lots of public chatter by Federal Reserve officials is all that helpful, though it certainly confuses financial markets.
Heller spent his early career in academia and at the International Monetary Fund. He was senior vice president and director of international research for the Bank of America at the time of his Board appointment.
I joined VISA International in 1989 as executive vice president with responsibility for finance, risk management, security and audit. In 1991, I became president and CEO of VISA U.S.A. I left VISA in 1993 and formed my own consulting company, Heller International, as well as the International Payments Institute. The International Payments Institute has been working exclusively for VISA, while Heller International has had engagements with some of the largest banks and central banks in the world.
In all these endeavors, my service on the Board has been most valuable in giving me not only the central banker's perspective on the entire economic and financial system, but in providing unique insights into the functioning of the banking sector and the payments system.
I believe that much of the increased policy focus on price stability came about during my time on the Board, which spanned both the Volcker and Greenspan years. There was a general consensus that the traumatic experience with double-digit inflation in the late '70s and early '80s was the key cause of the deep recession of the early '80s and should never be repeated. If I was able to contribute in a small way to the increased policy focus on price stability as a precondition for sustained growth, my years on the Board were well spent.
Undoubtedly the most memorable experience was the stock market crash of October 1987. Everybody's attention was tightly focused on containing the damage and preventing a spread of the financial disruptions throughout the financial system. Do not forget that at that time we were also dealing with a severe S&L crisis and almost 200 bank failures per year. Without swift supportive action on behalf of the Fed, the stock market crash could well have been the straw that broke the back of an already weak camel.
Probably my most enduring achievement was much more mundane. During my service as administrative governor I designedwith the help of my childrena flag for the Federal Reserve which will probably outlive all of us. That certainly was something that will be remembered.
Speak more clearly. The Fed used to be afraid of announcing its own policy actiononly to find out that clear policy statements after FOMC meetings actually eliminated guessing and confusion in the markets. The same probably holds true for the words of the chairman between FOMC meetings.
Johnson was assistant secretary of the U.S. Department of the Treasury prior to his nomination to the Board. Six months after he became governor, Johnson was named vice chairman of the board.
Developing a private company with a partner and learning to manage business risk in the marketplace. Also, service on the boards of directors of several interesting companies and organizations such as Intercapital Mutual Funds Group managed by Dean Witter; Greenwich Capital Markets Inc.; NVR Inc.; and NASDQ stock market.
I applaud the Fed's strong emphasis on price stability and would like to think I played a part in promoting this objective. However, I have always been wary of very simplistic rules regarding the goals of price stability. There are obvious problems with measuring inflation accurately and in a timely fashion. Chairman Greenspan addressed some of these measurement problems in recent testimony. The Fed must base policy decisions on leading indicators of inflation in order to manage inflation expectations and maximize its credibility as a source of stability for the economy.
While I had many memorable experiences during my tenure at the Fed, there are two that were most memorable to me. First was the debate over monetary policy that led to a controversial 4 to 3 decision by the Board of Governors to cut the discount rate in February 1986. Second was the stock market crash in October 1987. This was the greatest one-day stock market collapse in U.S. history. The public had always associated the 1929 stock market crash with the beginning of the Great Depression of the 1930s. However, this time the Fed managed to instill confidence with its timely actions to maintain liquidity in the financial system without compromising its disinflation objectives.
I am reluctant to give advice to Chairman Greenspan or any future chairman. The only point I will make is that technological change has now made it possible for markets to obtain information instantaneously and move financial capital almost anywhere in the world very rapidly. Policymakers must be alert to this fact and always think ahead in preparation to act in a timely fashion.
Angell was a professor of economics at Ottawa University, Ottawa, Kan., for nearly 30 years. At the same time, he was actively involved in the operation of a large farm. He was a member of the Kansas House of Representatives in the 1960s and served as a director of the Kansas City Fed prior to his appointment to the Board of Governors.
The opportunity to participate with people in the private financial sector to assess monetary and fiscal policy. I was surprised that informed opinions about the Fed were so uniform among world capital players. For someone who had grown up in Plains, Kan., becoming an economist on Wall Street offered a significant contrast to previous experiences. I found that I could get as excited about my new opportunity on Wall Street as I had been enthused about farming, teaching, consulting and being a member of the state Legislature and the Board of Governors of the Federal Reserve System. What is not different is that I am still learning and teaching.
The benefit from our progress toward price stability has been even larger than I expected. I am not sure that any of us realized that the progress made toward price stability in the Volcker/Greenspan era would have produced such competitive gains for U.S. firms. We have seen a focus shift among U.S. corporate managers to minimize the number of labor hours going into a unit of output and thereby an enhancement of U.S. labor productivity. This managerial revolution has at least temporarily broken the link in the price-wage spiral. As a result, monetary accommodation no longer permanently locks us in a path of higher inflation. Inflation now may be more easily reversible.
It is disappointing that the foreign exchange value of the dollar has not paralleled the progress that has been made on price level stability. My guess is that foreign exchange markets are now more than ever focused on the persistent U.S. balance of trade deficit. I am confident that a renewed commitment to price level stability by the Fed along with a new focus on fiscal discipline will alter our long-term reliance on outside capital flows.
There really were two equally memorable experiences. First was a monetary policy action to derail the commodity price deflation in 1986 and thereby to avoid a worldwide recession which would have been abetted by significant bank failures. Unfortunately, our success in avoiding deflation set the stage for a more protracted battle to get inflation back down so low that it would not make a difference. I was very pleased that we were able to get the year-over-year Consumer Price Index inflation rate and the core inflation rate down to more satisfactory levels at the end of my term.
Of course, Alan Greenspan does not need any advice from me. He understands so well the importance of price level stability and stability in the exchange value of the dollar. So I would say to him or to any successor to keep the faith.
For me, I have little confidence that central bankers can add one whit to economic growth by accurate enough economic forecasts to stabilize our economic growth path. I am sure that real progress can be made, both for growth and price stability, by asking the one and only question: Does the current stance of monetary policy risk too fast a pace of disinflation or does it succeed in achieving a discernible and gradual disinflation? If the Fed is consistently working to gradually reduce inflation, then market forces will achieve a higher economic growth path and higher employment than can possibly be achieved by attempting to fine-tune economic activity.
LaWare brought 35 years of banking experience with him to the Board. After 25 years at Chemical Bank, he became chief executive officer at Shawmut Corp. in Boston and also served as a director of the Boston Fed.
Career highlights: Not too many since it has been only two months since I retired. I am doing some pro-bono work for Massachusetts and I have had two invitations to consider director appointments. I am also considering some part-time consulting work. Alas, in spite of hard work, not much improvement in my golf handicap.
Keep it up!!!
The battle to preserve an important role for the Fed in banking supervision and maintain the dual banking system.
The policies of the Greenspan era have been successfulthey should form a model upon which to base future policy.
The September 1995 issue of The Region includes comments from the governors listed below:
Sherman J. Maisel
Jeffrey M. Bucher
Robert C. Holland
David M. Lilly
Nancy H. Teeters
J. Charles Partee
Frederick H. Schultz