G. William Miller, chairman of the Federal Reserve, has been traveling about lately saying the nation's central bank is destined for trouble if it continues to lose members at the rate it has has been.
Now Miller, by nature, is not an alarmist. Central bankers generally are not. A cardinal rule in banking is never to appear worried or frantic about the condition of a bank and least of all about the strength of the whole system.
Much of the finesse of being a banker, especially a central banker, is portraying calm, confidence, a sense of control. After all, the exercise of monetary policy involves perhaps as much mystique as actual manipulation.
So why is chairman Miller acting so worried? Basically because he is. The exodus of banks from the Federal Reserve, first a trickle then a stream, is now rushing in his view toward floodwater levels, threatening to erode the Fed's control of the money supply and prompting public concerns about the financial buoyancy of the U.S. banking system.
At the moment, though, the powers that could reverse the flow -- manely, Congress, the banks and Fed officials -- are caught in a logjam over how best to proceed.
The reason so many banks have been leaving the Fed is that it has become too expensive for them to belong. Membership requires that a bank keep a certain percentage of its deposits in noninterest bearing accounts with the Fed. In return, the Fed provides certain services (check clearing, currency exchange, wire transfers) free of charge.
Once, this was an even trade.But lately, the costs of banking have risen. Moreover, competition in the industry has stiffened under the attack of thrift institutions, such as savings and loan associations, and the proliferation of such new kinds of services as NOW accounts (interest-yielding checking accounts).
In view of these pressures, a number of banks have chosen to quit the Fed. The withdrawals have been going on for several decades. As of 1970, the Fed still had control over about 80 percent of the nation's deposits. The real stampede, however, has come within the past few years.
In 1976, 46 banks left.In 1977, 69 quit. In 1978, 99 banks withdrew. The Fed now controls less than 70 pecent of the nation's deposits.
The chief sticking point to doing something about all this involves one of those matters of principle that make the chances of compromise appear dim. The question is whether to force banks back under Fed control by requiring them to keep reserves with the central bank, or preserve the current voluntary system and just sweeten the incentives.
The chairmen of both the House and Senate Banking Committees -- Rep. Henry Reuss (D-Wis.) and Sen. William Proxmire (D-Wis.) -- prefer to go the mandatory route. So do Fed officials, though they would sweeten things a bit by beginning to pay interest on a small portion of the reserves.
The bankers will have nothing to do with a mandated reserve system. They say the Fed should lower current reserve levels and pay interest on a sizable chunk of those reserves if the central bank wants to win back members.
What the bankers think, and what they want, happen to matter a great deal in this case because the Fed membership issue -- though it has important implications for the health and welfare of the nation's financial system -- hasn't been one of those stirring concerns that capture the general public's interest. Only the bankers, really, have paid much attention to it.
Reuss and Proxmire have been holding hearings recently on the matter. But Reuss, displeased last week by the testimony of the American Bankers Association and the Independent Bankers Association of America, abruptly decided to table markup of his bill.
In an interview this week, Reuss claimed to have votes enough to pass his bill, but he said he wants to avoid "a long and bloody fight" with the bankers. Such a scene, he said, simply wouldn't look good to the American public and to foreign powers.
"I don't think in view of the precarious state of the dollar at home and abroad that it would be edifying for the financial community to conduct this kind of fight in the public spotlight," Reuss remarked.
Even behind the scenes, though, there doesn't appear to be much room for give and take. "I won't bargain with the ABA," Reuss declared. Proxmire is equally adamant.
For its part, the ABA, which represents more than 12,000 of the nation's banks, says it won't compromise on voluntarism. The IBAA, which speaks for about 7,400 smaller banks, once endorsed a mandated reserves system, but its leadership was unwilling to affirm that endorsement at last week's hearings. The association is meeting next week in New Orleans to reconsider the matter.
One other key issue here is the potential cost to the Treasury of a change in Fed rules. The central bank currently earns millions of dollars in interest on reserves and transfers this to the Treasury. Every proposal put forward so far to correct the membership problem results in a reduction of these revenues.
Understandably, the White House would like to minimize this loss. Administration officials have set a figure of $200 million as the acceptable upper loss limit. Anything more invites a Carter veto.
The bankers' proposal would cut much more, though no one is sure how much more. The bankers say the loss shouldn't be a major consideration, since the Fed's reserve requirement was never designed to be a revenue-raiser for the government; it was intended simply to be another monetary tool. They also say their program could be phased in to lessen its impact on the Treasury.
But the notion of turning millions back to an industry that is showing record profits does not sit well with Reuss and Proxmire.
Just how urgent is it that something be done about the membership problem this year? Miller sees an imperative. A strong central bank, he says, is particularly needed now to fight inflation.
The bankers, however, are less convinced of a need to act soon. Economists differ on the importance Fed reserves play in the exercise of monetary policy. It certainly is a less significant policy tool than the Fed's open market operations -- the buying and selling of government securities.
Lacking a sense of urgency, the bankers opted for continuation of the voluntary system. "They couldn't see a national policy problem that should cause a change in a system that has served us well since 1913," said Gerald Lowrie, chief lobbyist for the ABA.
Some crities don't accept this as the true reason the ABA acted as it did. They charge the association was pressured into opposing mandated reserves by about 250 mid-sized banks that currently do not belong to the Fed and stand to suffer considerable earnings losses if forced to keep reserves.
About 20 of these banks have hired two lobbyists of their own -- veteran John Yingling and Robert Barnett, former chairman of the Federal Deposit Insurance Corp. Several, too, reportedly informed larger banks with which they have correspondent relationships that unless the larger banks also opposed mandated reserves, the mid-sized banks would take their business elsewhere.
ABA officials deny the association was pressured into a decision.
What's next? For the moment, all parties have retired to their corners to reassess. Miller has canceled speaking engagements before the IBAA and the Reserve City Bankers Association (though he's reconsidering talking to the IBAA). Reuss and Proxmire continue to issue statements critical of the bankers' position. Their latest: that every other industrialized nation in the world requires central bank reserves so why should the U.S. be different? The bankers are biding their time.