When J. Charles Partee, a governor of the Federal Reserve Board, was asked last week to talk on the Fed's membership problem, he didn't take much time to draft a speech. He simply turned to his files. There he found a text he had delivered once before on the same toipc. It was dated 1967.
Partee and his colleagues on the nation's central bank have been giving speeches on the Fed's dwindling membership roster for more than a decade. The major difference between the past and the present is that now people are listening. As the 96th Congress convenes, the issue that promises to draw the most interest from the financial community is what to do about the Fed.
On the resolution of this complex issue ride a number of critical concerns. Chief among them is the Fed's effective control of the nation's money supply.
Since 1960, the portion of commercial bank deposits subject to direct Fed control has dwindled from 86 to about 75 percent. A primary reason for the decline in bank membership is the reserve requirement -- that is, the proportion of its deposits a member bank must store with the Fed.
The Fed pays no interest on these reserves. Instead, it provides a number of financial services free of charge to member banks. These services include check clearing, the distribution of coin and currency and foreign currency exchange transactions among others. But even so, many banks have decided the cost of Fed membership is too high and have chosen to invest their money elsewhere.
Whether this exodus really poses a threat to effective monetary control is subject to argument. The raising and lowering of reserve requirements is just one of a number of tools employed by the Fed to regulate the money supply -- and one that is used only rarely these days.
But those who serve on the Fed have been sounding an alarm. They note that if the current trend continues, the Fed could eventually become what would amount to a private club for the nation's largest banks that would find it still in their interest to belong. From the Fed's view, it is highly desirable -- both for the administrative effectiveness of monetary policy and for the political hegemony of the nation's central banks -- that as many banks as possible maintain reserves at the Fed.
There are others, too, with deeply vested interests in any change of the Federal Reserve system. The banking community, for one, would like to see a reduction in the cost of membership, either through a lowering of the reserve requirements or by receiving interest for reserves on deposit with the Fed.
The Treasury Department is worried that any reduction in reserves could result in a loss of millions in revenues. The Fed currently earns about $1.5 billion on its reserve holdings.
Thrift institutions, such as savings and loan associations, which traditionally have been exempt from reserve requirements, fret about being roped into the central bank system now that many of them are offering check-writing-like services.
And state banking commissioners are troubled by the possibility that an expansion of Fed control would choke state systems, depriving bankers of choice many of them would prefer to see remain available.
All this varied concern has generated a flurry of legislative proposals on Capitol Hill. The two most important bills are one introduced by Rep. Henry Reuss (D-Wis.), chairman of the House Banking Committee, and one drafted by Sen. William Proxmire (D-Wis.), chairman of the Senate Banking Committee.
The bills are similar in that they both would set uniform reserve requirements for check-like accounts in all financial institutions and would continue reserve requirements on savings accounts in commercial banks. Both also provide sizable exemptions to ease the banks' objection to locking reserves up in non-interest-bearing Fed accounts.
Where the bills differ is in the size of the exemptions. Reuss has proposed a $50 million level. Proxmire is sticking to $40 million. In addition, Reuss is seeking to index the exemption level to the growth of bank deposits. Proxmire doesn't want to index.
Fed board members, meantime, aren't particularly enthusiastic about either bill. They would like to see reserve requirements applied without large exemptions which they regard as compromising the improvement in monetary control this reform is supposed to help bring about.
Their alternate proposal provides for a minimal exemption of $10 million. However, while forcing member financial institutions to keep more funds on reserve, it also includes a provision for paying interest on a portion of those reserves.
Hearings began this week on the Reuss bill. First in line to testify was Robert Carswell, deputy secretary of the Treasury, who said the Carter administration would like to support the bill but was bothered by the potential loss in revenues that would result.
Carswell said that originally the administration, in a September 1977 letter to the committee, agreed to accept a revenue loss from $200 million to $300 million after taxes have been recovered by the federal government. But in the current push to trim the federal deficit, Carswell said the acceptable level has been revised downward to less than $200 million.
Reuss has estimated the revenue loss under his bill to be $172 million. Proxmire says his will cost about $60 million after taxes.
The American Bankers Association, which represents more than 90 percent of the nation's 14,000 banks, has yet to take a formal position on either bill. It is holding a series of preliminary conferences this month and next to hash out a policy by mid-February.