Fight over the Federal Reserve

In a Washington hearing last week, the chairman of the House Banking Committee stared at one of the nation's top managers of money. Grumbled Texas Representative Wright Patman: "You can absolutely veto everything the President does. You have the power to veto what the Congress does, and the fact is that you have done it. You are going too far."

The object of Patman's wrath was ascetic-looking Alfred Hayes, president of the New York Federal Reserve Bank and a ranking member of the U.S.'s powerful central banking system. For three decades, Wright Patman has fumed and fussed that the Federal Reserve System is too secretive, too independent, too insensitive to the hopes of small borrowers. A sharecropper's son, he often charges that it is a tool of Wall Street bankers.

Immediately after moving up to the chairmanship of the Banking Committee last year, Patman started preparing what has become one of the farthest reaching investigations in the Federal Reserve's 50-year history. Patman has a team of economists and consultants studying the system with a critical eye, intends to call twelve top non-Government economists to the stand by month's end, and is pressing for new legislation to curb the central bank.

Expansion or Stability? The controversy comes at a pivotal time. Calmer critics than Patman accuse the Federal Reserve of starting, or at least contributing to, the recessions of 1958 and 1960 by hiking interest rates and reducing the credit supply in its zeal to head off inflation. Now that some prices are rising anew, the central bankers again must ponder the question of whether to battle inflation at the risk of nipping the economy's three-year-old expansion. In recent months Chairman

William McChesney Martin Jr.--who occupies what Patman somewhat extravagantly calls "the most powerful job in the civilized world"--successfully campaigned for a slight squeezing of credit and rise in interest rates. But his colleagues are sharply divided on the issue, and the Federal Reserve is being pelted with criticism from several sides.

Treasury Secretary Douglas Dillon, Presidential Economist Walter Heller and M.I.T. Economist Paul Samuelson lately have taken up the argument that Martin and his colleagues unwisely tightened money before the last recession. Attacking the system's penchant for secrecy, such Democrats as Wisconsin Senator William Proxmire complain that trying to find out why and how the Federal Reserve makes its decisions is like "trying to paste a custard pie on a wall." To make the Federal Reserve more dependent upon the President and upon Congress' easy-money advocates, Patman is sponsoring bills that would: >End its authority to set itsown budget (currently: $180 million a year) and oblige it to come to Congress for an annual appropriation. -- Empower the General Accounting Office to audit its books. -- Expand its board of governors from seven to twelve, with the chairman to be the Secretary of the Treasury.

>Eliminate its credit-regulating Open Market Committee and transfer the committee's powers to the expanded board. At least four members of this board would be new presidential appointees, and they presumably would be amenable to the wishes of Congress and the President.

What Will Johnson Do? Chairman Martin admits that the Reserve has made mistakes and could stand some reforms. But he champions its freedom to make unpopular decisions, and argues that its unique strength has been in keeping control of the money supply out of the hands of politicians. He fears that Congress would be tempted to tamper with policy if it had power over the system's purse, and that the Treasury Secretary would be subject to a conflict of interest if he also headed the Federal Reserve. Says Martin: "The question is whether the principal officer in charge of paying the Government's bills should be entrusted also with the power to create the money to pay them."

Many businessmen and bankers, who consider Martin the very symbol of sound money, will lobby against attempts to rob him of authority or to pack the board. But Patman senses a widespread feeling that the whole Federal Reserve needs an overhaul, and he is confident of bucking through at least a few of his proposals. Much will depend upon whether his fellow Texan in the White House decides to press hard for the changes. Lyndon Johnson shares Patman's Populist dislike of tight credit, and is not as close to Bill Martin as John Kennedy was. The tip-off as to where he stands in the fight may come when he selects a man to fill a current vacancy on the Federal Reserve Board. The President's decision is long overdue, and so far he has not told even Bill Martin what kind of a man he will pick.

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