legislation overreacts to some very modest and what we think are thoughtful changes.

[Interruption of the hearing by a loudspeaker broadcasting a hearing being conducted by Chairman Gonzalez from another hearing room.]

Mr. BARNARD. This is a unique situation, Mr. Chairman.

Mr. DORGAN. It's a way for you not to miss anything.

Mr. BARNARD. See, we get the benefit of two committees at one time. [Laughter.]

With the size of the Banking Committee being what it is, and the many committees that we have, we have to have that so that we know what's going on all the time. [Laughter.]

Mr. DORGAN. Or the size of the problems, I might add. [Laughter.]

Mr. BARNARD. No, we've for a long time not been able to even think about the size of the problems. [Laughter.]

Mr. DORGAN. I again do not want to continue down the list except to say that the term of the Federal Reserve Board Chairman, in my judgment does not impede independence. The GAO audit and the publishing of the budget, none of these do what some have argued they would do that would impede the independence of the Fed. The response has almost been comically out of proportion to what we are proposing.

We would hope that this is a useful time to begin discussing these sorts of these things. The last thing you would want to do would be to find a time when the Fed is under siege for one reason or another and then be sitting around in a calm atmosphere discussing modest changes in procedure at the Fed.

The best time to do that, it seems to me, is in a period like this when the Fed is well thought of. There is not substantial controversy in the country about the operations of the Fed, and in that calm we would hope that you would consider what we've offered in this legislation as constructive and thoughtful recommended changes. Again, because Mr. Hamilton has covered so thoroughly all five points, I will not do that, and my testimony does it as well.

Mr. Chairman, thank you very much for being willing to held these hearings and being willing to engage in a discussion of Fed policy. We think it's very important and useful.

Chairman NEAL. Thank you, sir, very much, and we'll have a chance to explore this with you a little bit further in the question and answer period.

Mr. Evans, we would like to hear from you now.

STATEMENT OF THE HON. LANE EVANS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS

Mr. EVANS. Thank you, Mr. Chairman.

I want to thank you and the panel for holding this important hearing on broadening the debate over the Federal Reserve System and its monetary policies, and I also want to thank my colleagues for introducing the important legislation, Byron Dorgan and Lee Hamilton. I think it offers something that needs to be enacted by this Congress.

I speak to you today as chairman of the House Populist Caucus and also as a Member who represents a district across the river from the river from our colleague Jim Leach's in Illinois that was hard hit in 1982 when I believe the Chairman of the Federal Reserve slammed the brakes on the economy and threw many areas of our country into a recession which many of our areas, including my own are still struggling to recover from.

I think it's clear that the current structure of the Federal Reserve System allows it to operate contrary to accepted principles of public accountability. It has the power to determine who succeeds and who fails, and yet its decisions are insulated from Democratic control or even Democratic input.

Through its control of monetary supply the Fed can determine whether many will keep their jobs or become unemployed, and it can tighten up the money supply and put the squeeze on small businesses and agricultural producers who depend upon credit to survive. That's why I think it's time to democratize the monetary policies of this country and that's why I have introduced H.R. 3066, the Federal Reserve System's Accountability Act which requires a broader representation on the Board of Directors of all the Federal Reserve banks.

This bill would increase the number of class C directors at each Federal Reserve Bank from the present number of three to six, and would require that one of the directors have an agricultural background, one would have a small business background, one would have a background in labor and one would be a consumer advocate or have a background in consumer advocacy.

Presently the Federal Reserve Act requires "the selection with due regard to the plurality and diversity of the Nation's economy and society." But it's clear that big business and academia are over-represented and thus are over-represented at the expense of the interests of agriculture, small business and consumers. Some banks do have advisory committees representing these groups but representation on the advisory committee is not the same thing as representation on the board with an actual vote.

In addition, it's not uncommon for class B directors to be appointed class C directors. An example would be the former chairman of the IBM Board who served two terms as a class B director and then subsequently was appointed for an additional 2-year term as a class C director.

Although my legislation doesn't directly address this point, I would like to reiterate something that Chairman Gonzalez said at his October 28th hearing. Women and minorities are under-represented on the Federal Reserve Board of directors, and I believe that enlarging the number of lass C directors should mean more opportunities to appoint more women and minorities to these boards.

So I think, Mr. Chairman, I would urge your consideration of H.R. 3066, and appreciate the opportunity to testify today.

Chairman NEAL. Thank you, sir, very much.

First, let me apologize to you all for this room. We had originally scheduled these hearings and had our large Committee room, but the chairman scheduled a housing markup that sort of superseded us and we could not control that.

Let me make a couple of comments if I can and then ask a couple of questions. I was especially attracted to one of the comments that Congressman Hamilton made in his opening comments, and I think that comment goes to the core of the debate about the proper overall policy for the Fed.

Congressman Hamilton was commenting on the importance of low inflation and he was saying that the current rate of 4 or 4.5 or 5, whatever it is, is too high and thinks it's a good idea that we move away from that, but he want on to say that that's only one of our policy goals.

I couldn't disagree with that, except that I've come to the conclusion, and I may be wrong, and that's a part of what the hearing process is about, but I have certainly come to the conclusion that we can best achieve all of the other policy goals we want to achieve, that is consistently low interest rates, maximum sustainable economic growth, maximum sustainable employment and maximum savings, maximum competitiveness in the world economy if we will over time without creating a recession move to zero inflation, that that one condition, that one economic condition is the condition that leads to all the rest.

So again that's what my own legislation would do and that's the reason for it. It's not arbitrary. That's the reason behind it. There again, it seems to me in setting overall policy that we have a constitutional responsibility that we cannot escape. Even though think we wisely delegated the day-to-day operation of the Fed back in 1913, we are still charged with the overall responsibility.

It seems to me that what we've done here is very much like we've done with the Postal Service. We've said to the Postal Service, and I think wisely, that we wanted to take politics out of that, and we said that we would separate it and keep Congress out of the day-to-day operations, but we gave them a purpose and a goal, and that purpose and goal is to, I don't have it in front of me here, but it's surely something like deliver the mail efficiently, on time and

so on.

So that's what I'm suggesting for the Fed, that kind of overall policy, and my worry with this kind of legislation has to do with how well it would then move us toward those goals.

Now Mr. Evans' proposal is quite straightforward. He wants to, as he says, democratize the Fed, that is make it subject to democratic influences I guess on a day-to-day basis. Is that essentially right, Mr. Evans?

Mr. EVANS. Well, to include representation of those individuals who I think are under-represented at this time.

Chairman NEAL. But the purpose would be to give them a voice in the day-to-day decisionmaking over at the Fed.

Mr. EVANS. Exactly.

Chairman NEAL. There again I think, for instance, let's take the subject of interest rates. If we had a choice, all of us, say we were the ones voting and we were subject to political control, it seems to me we would always vote to have lower interest rates, and why right? That's always popular.

The problem is when the Fed brings down short-term interest rates, and that's the only one the Fed can correctly control. So the Fed brings down short-term rates and that has an inflationary

impact on the other end and the long rates go up. In fact, we just noticed it today in a minor way. The Fed announced, or it looks like, I didn't read it all that carefully, that the Fed may be easing a little bit, and sure enough the short rate comes down a little bit, but you notice the long rate edged up just a little because investors are worried about the future inflation, the inflation this would cause. So, anyway, that's the concern.

I know that Mr. Hamilton said especially clearly that that's not his intent to get more Democratic control over the short-term decisionmaking but, doggone it, I don't see how you avoid it. If you make the terms coterminous and you put the administration representatives in there with them, force them into the meetings and so on, I just don't see how that doesn't move us toward more political control. I mean I don't see how it would avoid it.

It's putting administration people in closer contract and it seems to me making Fed people more dependent upon the wishes, the will of the administration people in a number of ways.

Again, in terms of good Government, I mean tying up some loose ends and so on, I can see a reason for that, but in terms of meeting an overall goal, I mean if there were some agreement on the overall goal, it just seems to me that if that goal is not in place and it's low inflation and low interest rates and so on, it just seems to me that this would hinder our ability to get there, and that's the general worry.

My time is up, and I'm going to try to stick with a time limit so we'll all get a chance to say what we want, but I do want to make the point that regarding accountability we do have annual hearings on the Budget. The Budget is a public document. Most of the Fed is already audited, and it is the monetary policymaking aspect that is not. In other words, the finances are audited, as I understand it, completely. No one goes in behind and tries to follow up, in other words, audits the policy of the Fed and how well the Fed policymaking, how well it meets the Fed's stated policy objective, which is I take it is what the people want when they want an audit of the Open Market Committee operations.

of

Well, anyway, that's the general worry, and I don't know if any you have any comment about this political aspect especially.

Mr. HAMILTON. Well, Mr. Chairman, you've covered a number of things in your comments, and I'll try to respond to at least several of them briefly.

With respect to your bill on the inflation target, I hope you understand that I seriously do commend you for what you've done because there isn't any doubt that we've become too comfortable with too high a rate of inflation. The great merit of your bill is that it really focuses on that.

I guess what concerns me, and there are a lot of expert economists that can testify to this better than I can, is that but if we tell the Fed, for example, to hit a zero inflation rate, my understanding is that that is not all that tough a thing to do. You can hit a zero inflation rate if that is your sole economic target, and you can do it rather easily. You can do it in a very prompt time. You can do it in a very short time frame. But there are a lot of other consequences that will flow.

I do not think you can focus the economic policy of this country solely, exclusively on the question of getting inflation down to zero. You've got to pay some attention, as you yourself acknowledged in your comment, to employment and growth and competitiveness and all of these other things. The great difficulty in economic policy today, it seems to me, is not hitting any one target. It is hitting three or four targets simultaneously that is the tough part of it.

But having said that, the emphasis that you put in your resolution is good, and I think the Congress has not over a period of time even tried to give much direction to the Fed with regard to what monetary policy ought to be, and maybe we're deficient at that.

Secondly, in response to your concern about the politics of the bill, if I may say so with respect, I think there is a confusion between control and communication. We are not doing anything in this bill to permit the President's representatives to control policy. We are merely opening up channels of communication between the primary fiscal policy actors on the one hand and the primary monetary policy actors on the other by structuring these three meetings at critical points, one of which is when the President's budget is put together.

Communication here would not be one way between the President's advisers and the FOMC. It's a two-way communication. And I think if you did this sort of thing you would reduce, perhaps not eliminate, but you would reduce the kind of sniping that now goes on in the press from time to time between fiscal policymakers and the Fed. So all we are trying to do is enhance communication.

Now, I've been puzzled by this for a long, long time. We do not structure in any way communication between fiscal authorities and monetary authorities in a formal sense in this Government.

If you ask Mr. Greenspan today how do you communicate, he says I sit down and have breakfast with the Secretary of Treasury. Well, that's marvelous, and I'm all for that. I think that's a very good thing to do. But suppose those two didn't get along very well. That's not impossible to imagine in our structure.

Shouldn't we structure a formal communication between these two? Now will that automatically remove errors in monetary policy? Of course, it won't, but what it will do is reduce the risk and improve communication, and therefore it seems to me to be important.

Chairman NEAL. Let me clear that when I say I want to move us toward zero inflation, I'm not talking about doing it overnight, which would cause a recession, but I want to do it over a period of years so that it will not. In fact, I think we ought to insist that we do it in a way that will not cause unnecessary suffering and sap our will and so on. So I certainly want to make that clear. Mr. MCCOLLUM. Thank you, Mr. Chairman.

Lee, Byron and Lane, we really do appreciate what you're doing because I think what you have produced for us is a very constructive working base to analyze the status of the Fed now, and I don't think what you have proposed is radical in any way.

My impression is that Chairman Greenspan, much like Chairman Volker, senses the nose of the camel under the tent and is more concerned about what might flow from this in the future