Reserve has an equally important role to play in this strategy, and I have tried to explain the implications I see for current and future Federal Reserve interest rate and monetary targets.

The overriding point is the one with which I began. Fed policy should not be dictated by numerical money stock targets but geared both to current economic circumstances and to the overall objectives of policy over the next few years-the paths of output, employment, and prices. The Congress should insist on no less.

The CHAIRMAN. Thank you very much, Dr. Tobin.
Dr. Samuelson?

STATEMENT OF DR. PAUL SAMUELSON, INSTITUTE PROFESSOR, DEPARTMENT OF ECONOMICS, MASSACHUSETTS INSTITUTE OF TECHNOLOGY, NOBEL LAUREATE IN ECONOMIC SCIENCE

Dr. SAMUELSON. Mr. Chairman, possibly by failure of communications, I may have misunderstood the task of this morning.

The CHAIRMAN. Could I interrupt you? I have read your paper, and I don't think you did at all. You are a political scientist mostly this morning.

Dr. SAMUELSON. I was asked to comment on what is and ought to be the proper role of the Federal Reserve System and its decisionmaking in our pluralistic system of government; and my prepared remarks, which I would like to have included for the record in its entirety, deal with that problem.

The CHAIRMAN. It will be included, and they are very valuable. Dr. SAMUELSON. Let me then only sample a few of those remarks as they pertain most specifically to the problem of macroeconomic policy in the year ahead.

All modern nations now have a central bank that is an official bank for the banks and for the government. The Bank of England, the Bank of Japan, the Bundesbank, these are all obvious examples, and for the United States, the Federal Reserve System, the Federal Reserve Board, the 12 regional Federal reserve banks, constitute our central bank.

Most of the central banks began in history as profitmaking organizations. When the British Crown was in financial trouble, a group of London merchants gathered together and provided some substance for the Crown, and in return received special privileges. And for a long time the Bank of England operated on the assumption that it was a for-profit organization.

Gradually it came to realize, after it had been acting this way for more than a century, that it in fact was a public utility and not a for-profit organization. But it was not until the end of World War II that the unwritten British Constitution was formalized and became written on this matter.

Now the Bank of England, in the last analysis, is a subbranch of the executive branch of the British Government. The Governor of the Bank of England has a right to day-to-day autonomy. He has a right to disagree. But his most magnificient right is to resign with a blast if the Government in his judgment insists upon policies against the public weal. He must bow down and bow out in the last analysis. That

is the de facto way the railroad is run in Britain and actually in most of the mixed economies.

Within the United States the Federal Reserve System did not begin that way at all. Woodrow Wilson, it is said, would not even invite the Board's Governors to the White House for innocent merriment, lest he seem to be putting undue pressure on them.

And in the 1920's the center of gravity of the Federal Reserve System was in New York. The president of the New York Federal Reserve Bank, then called the Governor, Governor Benjamin Strong, was the central banker for the United States. He had all the power I believe that Montagu Norman had in Britain. And it was he who improvised what we now recognize to be open market operations. There are many people still alive who think the Great Depression might have been avoided if only Benjamin Strong's health had held out and if he had lived beyond the late 1920's.

Well, history evolves, and in the 1930's de facto the center of gravity moved to Washington, where it in fact has been ever since. So that 12 outposts of the Washington Federal Reserve Board represent the correct way to describe the regional Federal Reserve bank.

It was believed by most experts around 1940 and the beginning of World War II that de facto our unwritten constitution was such that the Federal Reserve had to bow down to the executive branch of the Government. I recall that the very long time adviser to the Federal Reserve Board and Director of Research, Emmanuel Goldenweiser, wrote that down specifically in print.

But after World War II, when President Truman wished the Federal Reserve to finance large deficits at very low interest rates, maintaining the World War II pattern, there was a bit of a confrontation, and finally on accord arrived at in a bipartisan way.

I recall that the late Senator Paul Douglas was one of the leaders in initiating that accord, which gave the Federal Reserve de facto the right to a certain amount of independence. So since those days the tradition that the Federal Reserve in the last analysis is part of the executive has, I think, become attenuated.

Now, I take it to be a fact of political life that we have a threebranch system of Government and not a four-branch system of Government.

We do not have an executive, a legislative branch, a judiciaryand the Federal Reserve-although at some of the good downtown clubs in New York, it is a matter of regret that this is a correct factual statement.

I think nature abhors a vacuum. And so, if the Federal Reserve is not to be in the last analysis-I'm not speaking of its day-to-day autonomy-the responsibility of the executive, I think it must be the responsibility of the Congress. It is committees like this committee which therefore have an increased importance.

Now, why is it that we cannot appoint people for 14-year terms and have them simply do the right thing, based on immutable and the usually recognizable principles of basic economics.

It's because there is no such thing as the simple, right thing; and the proper understanding of the principles of economics makes that very clear.

Very difficult judgments must be made in the realm of monetary policy which have political repercussions upon vast classes of people and upon the whole economy, and so there is no shirking of responsibility in a democracy, that these responsibilities cannot be delegated to a group of elderly-and I speak with the knowledge of what old age means-experts.

It must be a matter for the electorate in the last analysis, and its representatives, the President and the Congress.

I want to leave moot for the purpose of this morning's discussion, unless you press me, whether it is a good thing or bad thing that the Central Bank be under the legislative branch of Government rather than the executive branch.

I believe that the Central Bank, the Federal Reserve, has shown a slight preference in the history of the last few decades to be under the Congress rather than the executive. I don't believe this has been based upon a clear-sighted analysis of whether in the last analysis there would be greater independence and better monetary policy under Congress. Rather, I think it is based upon the very correct suspicion that the Congress will give the Federal Reserve looser string in the short run than the executive branch will.

In my written remarks, I suggested it may be a pyrrhic victory for the central banking fraternity because there may come a day when you will have a populist Congress and when what can be considered to be the old-fashioned sound principles of central banking will fare worse under the legislature than they will under the executive.

But, in any case, I think that we can leave the question moot. In fact, I don't believe anybody wants confrontations. Nobody wants to put a chip on his shoulder and have the President of the United States knock it off. There is an attempt to be accommodating, and I think that if the Federal Reserve was not brought by President Carter into the deliberations of the present fiscal package, that was a tactical error.

It would be better for everybody, including the congressional overseers, if there is coordination between the Federal Reserve and the Executive and the Congress.

I think that coordination is less perfect than it might be and less perfect than it ought to be, and I think the national welfare suffers. Generally speaking, recent Federal Reserve authorities have been more conscious of the problem of inflation and less responsive to the problems of slow growth and unemployment than have been the Presidents and the Congress. And that is true of both political parties.

The result is macroeconomic policy out of balance. We tend to get de facto loose fiscal budgets mopped up, as the Central Bank authorities see it, by tight and austere monetary policies.

Now, that is one way of running the system, but it is a way of running the system which is very hard on capital-formation. It tends to mean that we run a high-consumption economy and a low-investment economy. I think the decision as to how high the level of investment ought to be within a country should not be made absentmindedly and by accident, but ought to be made on its own merits.

Well, now, let me turn just to the immediate problem of your committee. If my analysis of American history and current practice is at all near the mark, you have an increasing responsibility, not for the

day-to-day supervision of the Federal Reserve, but for the 3-month and 6-month supervision of the Federal Reserve.

The Federal Reserve cannot be a self-responsible body. It must be responsible to the Congress.

Recently, President-elect Carter met with Governor Burns and announced that a 6 percent real growth target had been agreed upon by them as desirable and feasible.

That agreement, I think, is a very healthy thing, but I think we should look to below the rhetoric. What happens if the spontaneous forces in the American economy develop in such a way that the 6-percent target is not in the process of being realized? Will the executive branch, under Carter, and the Federal Reserve Board be equally concerned to do what is necessary to make up for the shortfall?

Those are the questions which a committee like yours should be asking at all times. Furthermore, what happens if what Professor Tobin has aptly called our good luck and bad luck on the inflation front turns in the bad luck direction? Will both parties to that agreement, that informal gentlepersons' agreement be equally persistent in cleaving to that target despite the fact that inflation is tending to be bigger than the greatest of us experts though it would be, and in consequence interest rates, which tend realistically to have some premium allowance, in my judgment, for inflation, tend to go up? I think the past pattern of experience of this Federal Reserve Board-and under our system of Government it will change very slowly, it will change most quickly under your pressures, not under the attrition of term-by-term bipartisan replacements-I think the pattern of experience with this Board is that when the chips are down and the real growth targets are not being realized and when the inflation situation is flaring up, that the Federal Reserve will show a distinct pattern of different behavior from that of Congress and from the Executive.

I may say that there are plently of bankers in the country who will applaud that distinct pattern, but I don't think that Congress can abrogate its duty with respect to supervision and ultimate decisionmaking.

A final remark which we can elaborate on if you wish in the discussion is that if a congressional committee like this one and if similar Senate committees are to maintain supervision over the Federal Reserve, there are certain modes of operation which will be superficially easier to follow than others.

For example, even if a simple monetary target is not a good thing in terms of the basic economics of the problem, it still may be superficially tempting in terms of communication for a congressional committee which only periodically meets with the Federal Reserve authority.

A simple interest rate target, even if that were a bad thing in terms of economics, might also seem an easy way of administering your supervision.

I want to caution you against taking the easy way. Don't let the technology of how it is easiest to supervise a day-to-day decisionmaking body by a congressional body, pervert what is after all the main

goal, which is good, stabilizing growth for the macroeconomic

economy.

Since I'm an ancient professor and find myself everytime I meet a pigeon in the street giving a grade, A-plus or C-minus. I naturally behave in the same way with respect to congressional committees. Also, I would not, in the privacy of my own library, give this committee on its past performance an A-plus behavior.

I think that you have on many occasions fallen into the trap of the easy way of giving instructions with respect to macroeconomic policy, and the easy way, alas, I found in life is not always the good way. Thank you.

[Dr. Samuelson's prepared statement follows:]

PREPARED STATEMENT OF DR. PAUL SAMUELSON, INSTITUTE PROFESSOR, DEPARTMENT OF ECONOMICS, MASSACHUSETTS INSTITUTE OF TECHNOLOGY, NOBEL LAUREATE IN ECONOMIC SCIENCE

Every modern nation has a central bank, an official bank for banks and for the government: the Bank of England, the Bank of Japan, the Bundesbank, are obvious examples. For the United States the Federal Reserve System is our central bank.

Most central banks began in history as private ventures. Merchants in the seventeenth century lent to the crown and in return received certain privileges from the British government. Thus was the Bank of England born. And for more than a century those who ran the Bank of England conceived themselves as running a for-profit commercial venture. Only gradually did there evolve the notion that the Bank of England was really part of the unwritten constitution of England, not there primarily to earn a return on its "owners' " capital, but rather there to pursue the public interest.

Not until the World War II epoch was the ultimate power status of the Bank of England formalized. Before World War II its Director, Montagu Norman, and his various official boards and committees, could imagine themselves as being “independent" of the current ruling parliamentary party. After World War II, the Bank of England became officially responsible to the Executive branch of the British government, not directly responsible to the Legislature or to the Judiciary. Despite the original hopes of Alexander Hamilton to found an American central bank, for more than a century all attempts to create a central bank here were abortive or temporary. Thus, in the Crisis of the early 1890s it was the House of Morgan that floated a gold loan to save the credit of the U.S. government.

Just prior to World War I the Federal Reserve System was finally established. Originally, the twelve Regional Reserve Banks were thought of as “owned” by the commercial banks that had been called upon to provide the initial capital of the system. Dividends have continued to be earned by these paid-up shares. Enjoying the privileges inherent in a central bank, the Fed has been an enormously profitable enterprise. (Since it has both the power and the duty to print currency and to hold at zero interest rate the legally required reserve deposits of the member commercial banks, the Fed's profitability is that of the government itself with the inherent powers of money creation.)

There may still be some surviving bankers of great age who fancy that they are the "owners" of the Federal Reserve and that its officials are duty-bound to maximize their returns. Any who think this way have long been out of touch with reality.

To understand the actual reality of Federal Reserve operations, one must realize that constant change has characterized its history. That change is still going on. Woodrow Wilson refused to invite the original Governors of the Federal Reserve System to the White House for social occasions for fear that this might "jeopardize" what was conceived to be the "independence" of the Federal Reserve.

Indeed, prior to 1930 and in the period of the Great Depression, it was the New York Federal Reserve Bank that was far more important than the Washington Federal Reserve Board. "Governor" Benjamin Strong of the New York