Letter to the President of the Senate and to the Speaker of the House Concerning the Federal Reserve System.

Dear Mr.____________:

In my Economic Report to the Congress on January 20, I recommended two reforms affecting the Federal Reserve System: (1) revision of the terms of the Chairman and other members of the Board of Governors so that a new President will be able to nominate a Chairman of his own choice at the beginning of his term, and (2) giving adequate recognition to the important responsibilities of the Board of Governors by increasing their salaries.

Both of these reforms were proposed by the independent and nonpartisan Commission on Money and Credit in its Report last year. Both were endorsed in the Annual Report of the Joint Economic Committee of the Congress on my January 1962 Economic Report.

1. Revision of Terms

The Board consists of seven governors appointed by the President with the advice and consent of the Senate for terms of 14 years, staggered so that one term expires on January 31 every second year. The Board shares important responsibilities for the policies of the System with Presidents of the twelve Federal Reserve Banks. By these arrangements the Congress has assured the System both continuity and independence from political influence.

Federal Reserve monetary policies affect, and are affected by, the economic and financial measures of other Federal agencies. Federal Reserve actions are an important part, but not the whole, of Government policies for economic stabilization and growth at home and for the defense of the dollar abroad. Therefore, as has been recognized throughout the history of the Federal Reserve, the principal officer of the System must have the confidence of the President. This is essential for the effective coordination of the monetary, fiscal, and financial policies of the government. It is essential for the effective representation of the Federal Reserve System itself in the formulation of Executive policies affecting the System's responsibilities.

Prior to 1935 the Federal Reserve Act provided that one member of the Federal Reserve Board "be designated by the President as Governor and one as Vice Governor" and specified no definite terms for these officers. Until 1927 the President customarily designated the Governor for one year at a time. Thereafter, until the Banking Act of 1935, a Board member was designated as Governor "until otherwise directed." The Banking Act of 1935 amended the Act to provide that the President shall designate a Chairman and Vice-Chairman from the membership of the Board of Governors "to serve as such for a term of four years." Evidently the term was set at four years in order to relate it to the Presidential term. However, the timing was not specified, and in practice the terms of the officers of the Board have never coincided with the Presidential term. In fact the timing is a matter of chance, subject to change whenever the offices of Chairman and Vice-Chairman are vacated by death or resignation. From 1936 to 1948, each term of the Chairman expired on January 31 of the final year of the Presidential term. At present it expires on March 31, 1963.

The draft bill which I am transmitting with this letter embodies amendments to the Federal Reserve Act to revise the terms of office as follows:

(a) Beginning in 1965, the term 6f the Chairman and Vice-Chairman will be four years beginning each February I following the election of the President. Should either office be vacated by death or resignation, the President would designate a member of the Board of Governors to fill the vacancy, not for four years but for the unexpired term. As a transitional arrangement, the term of a Chairman or Vice-Chairman appointed prior to January 31, 1965, will expire on that date.

(b) In order that the President may be able to appoint a Chairman of his own choice shortly after his inauguration, he must have an opening on the Board of Governors to fill at the same time. The terms of members of the Board now expire on January 31 in even years. To make them expire in odd years instead, it is proposed that the terms of incumbent governors be extended by one year.

Chairman Martin of the Board of Governors concurs in these proposed changes.

2. Increase in Salary Status

The Board of Governors has immense responsibilities for the health of the United States economy. The performance of its tasks requires specialized knowledge and good judgment in exceedingly complex fields of domestic and international economics and finance. The salaries of the Governors should be commensurate with their grave responsibilities, sufficient to attract outstanding men and to give them the prestige and status necessary for effective performance of their duties. As I said in my Economic Report, "The United States is behind other countries in the status accorded, by this concrete symbol, to the leadership of its 'central bank,' and I urge that the Congress take corrective action."

from 1913, when the Federal Reserve System was established, until 1925, and from 1935 to 1949, the salaries of members of the Board were the same as those of Cabinet members. At present, under the Federal Executive Pay Act of 1956, the salary of the Chairman is $20,500 and the salary of other Governors is $20,000. I recommend that the salary of the Chairman be fixed at $25,000, equal to that of Department heads, and that the salary of other Governors be fixed at $22,0000 The Chairman and the other Governors should, of course, receive further salary increases in accordance with their new status whenever the general scale of salaries of Federal executives is revised upward to make it consistent with the increases in civil service salaries I recommended in my message of February 19 on Federal Pay Reform. The draft bill transmitted herewith provides for the necessary amendments of the Federal Pay Act of 1956.

Sincerely,

JOHN F. KENNEDY