industry that dominates this should be independent from the whole society setting policy which governs it. you talk about setting interest rates, that's a governmental function. i didn't say they don't exist, to the extent they have some local academic function, they would still be there. i specifically say they shouldn't be voting to set interest rates to the federal open market committee and would be very surprised if someone thought that wasn't a governmental function. >> my time is up. thank you. >> i now recognize mr. ellison of minnesota for his five minutes. >> thank you, mr. chairman. congressman frank, could you describe -- you already have eluded to it a little bit, could you describe what benefit you see from greater representation from people of diverse experience and the federal reserve's open market committee? >> i have a fundamental belief in the all rigelectorate making

decisions. with there being open seats, half the vote is cast by people and we did a check, who are the members of the boards. it's a kind of closed system. the board members are selected with great input from the president. they in turn pick the regional president and it is private sector governance of an perhaps part of what we do. i am not talking about what they do in their regions and academic activity. the bill says they should not vote on monetary policy. i just don't understand what the rationale is for letting private sector people with the financial industry generally not in every case, be the predominant influence pick the people who come to washington and vote on one of the most important

governmental policies, the whole premise of what we talk about. >> congressman frank. >> yeah. >> i have information that suggests on the board, if i look by profession. >> the regional boards. >> one person from labor, you have four academic, 41 people from banks and 47 people from for profit corporations. do you see any -- >> i think that's a mistake and it's not that bankers are bad people or others, it is that we generally don't say, it's a corporatism, kind of let the profession govern itself. i think that is a mistake when you have a large number from the financial industry and they tend to be very influential in all this, there ought to be a broader representation, again, in voting on monetary policy, not what's done in terms of regional academic activity. these people come to washington -- i understand people want some geographic diversity, we should do that.

it's very surprising to me we don't do that for any other federal agency, we don't say the people in the energy industry or we don't say that votes on labor policy are set by boards where unions are the predominant influence. now, the president appoints people to the nlrb and a republican president will appoint people different than a democratic president but they're presidential appointees subject to senate confirmation. half the votes on the nlrb don't come from groups dominated by labor union, the analog to the fomc votes from regional presidents. >> mr. frank, still have a little time left, on this issue of more diversity on the board, we just talked about professional diversity, also, it seems like there's been a lack of ethnic and racial diversity, too. do you think that including more voices from consumers who are -- from urban areas, rural

areas, people who have dealt with hard hit neighborhoods with foreclosure, do you think these kind of experiences -- >> i think that would be good on the board. but even with that, even if i picked the boards personally, i wouldn't want them voting on federal government policy. i do not think that private citizens should pick other private citizens with novention from any electoral process no appointment by anyone elected and not approved by the senate. it's anonymous by democratic self-governance. yes, i would like to have better representation on these local boards. even with that, i would not want them -- by the way, they tend to be self-selected, i wouldn't want them again voting to set important national policy. everybody acknowledges the monetary policy is very important. some people think it's too loose. i don't understand the justification for that.

i would say and say again to the chairman, i know he wasn't here when we were voting on it, but you also have this situation about whether or not they should be subject to appropriation. i think if you had all presidential appointees and senate confirmation, that would be okay. i think others might say, gee, shouldn't they be subjected to the appropriationings process? in any case, as i said i cannot think of a comparable situation where the people in the industry most affected by public policy get to pick a significant number of the formal official policy make mak makers with no intervention by nobody elected to anything. >> thank you. now the gentleman from new jersey, mr. garrett. >> thank you. i will run down a serious question, start at the beginning, mr. brady, i'm not sure i heard the answer to my mind under your definition of the bill i co-sponsors of the

sound dollar. is that just the language saying if we hit our 2% inflationary opposed to anything else? >> it doesn't set an explicit target of 2%, it does not. >> is that something that should be looked at and try to clarify in the bill before it goes forward? >> i'm very open to that and like to see congress set that type of target in a rules-based system. >> does the ranking member have a comment on that point by any chance? >> no. define -- what is it -- i'd be concerned how you would do that statutorily. we're in a world where the dollar has several roles, a domestic role and international role. the international role of the dollar is very significant, especially since we are confronting competitors in the world, people's republic of china primarily, who use the curren currency. >> for other purposes. >> i would not want to disable ourselves from dealing with that

aspect. >> that goes to the next question for both of you. if you did pass legislation similar to this, how do you know if they are meeting the standard if we don't set a standard and secondly, are there consequences of not meeting the standard we haven't set? >> i think that's a very good question and proves why we shouldn't pass the bill. >> now for the rest of the story. >> the rest of the story. setting the clear mandate, whether we set the explicit target or not, certainly open to that and holding them accountable to that is key. mr. garrett, one point i would like to make, going forward, i think it's a terrible mistake to require all the federal reserve bank presidents to be appoint and confirmed by the senate. one, it will further politicize the federal reserve board including leading to vacancies, as we have today in it. it will concentrate more power on wall street and washington. i think it will be less

independent as a fed, because as san know, regional bank presidents have an independent staff and can actually not rely just on the chairman's staff but on their own to assess academec policy. the board of governors approves these regional board banks presidents and we kind of have accountability under this system. >> what our role is under either scenario. you're saying you don't have that appointment under the ranking member's position it would go through presidential appointment. i can see some benefit to that and see we in congress all over the senate as far as monetary policy we're sort of left out except to hear the chairman come and testify this is what they're doing and we have no standing. >> i understand that. i assume that's what you want when you voted not to subject them to the proechingss fund. may i respond? >> i'll claim my time. on that, i just wanted to delve

into it than the few minute we had. >> i did offer an amendment i wasn't for because i wasn't concerned but you voted against subjecting to appropriations process that would seem to me deal with the issue you just raised. >> i'm open to the idea? >> open to the idea the roof is off. open to the idea there will be much openness for a very long time. >> there is. we're trying to do things a little different than we did the last session where we moved hundreds of pages at a time of legislation- >> mr. chairman -- >> reclaiming my time, ranking member, you did raise one other question i thought the chairman would raise in here, you said with regard to the process, that is the constitutionality of it. you made, i think, a good point saying it would perhaps make it more constitutional if we had the presidential appointment here, not in a private sector but more public sector but raises the fundamental question i thought the chairman would raise, where is the constitutionality for either one of the proposals before here?

>> first, mr. garrett, the suggestion that we rushed things through two years ago, i think we had dozens of roll calls, a lot of meetings. i gather you have some concerns about your own vote but i don't think you should- >> never concerned about my own vote. never concerned about my own vote. concerned about legislation being dropped in at 3:00 in the morning at a conference committee we did not have any hearings on. >> we had vast hearings on. >> that's not the debate we're having here. >> i understand you don't want to talk about your vote against subjecting appropriations. let me say as to constitutionality. >> no. i only like to discuss what we're discussing here and not the way things were held in the past. >> that's part of it. i will answer your question. the constitutionality of my provision what it says in the constitution, important government offices should be appointed to the president subject to confirmation by the senate. i think voting on monetary policy is indisputably an important public policy and ought to be executed by public

offices in the constitutional manner. >> for the last word, do you care to chime in. >> congress holds constitutional responsibility for monetary policy. we have, through history, contracted that outside to the federal reserve bank with a clear mandate. now, lately, a more muddled mandate. to make the point, one, i don't think we want to envision a day where 535 members of congress are setting monetary policy in america. secondly, america is really an outlier here of the 47 central banks and monetary authorities around the world, only two give equal rate to unemployment. only two have in effect a muddled mandate. the others have set price stability as either the primary or higher arcally, single mandate. >> mr. chairman, may i have one sentence? i thought my republican colleagues were in favor of american exceptionalism. >> i wish we would have dealt with that on fannie and freddie

years ago, and i do thank chairman garrett for his efforts to actually resolve the problem. >> gentleman yield, the republicans have been in power -- >> well, if the gentleman would yield, the republicans have been in power since 2011 in january and have done zero on fannie and freddie. what's holding you back. >> i'd like to reclaim the chair's time. >> you've been in power. >> i wish you would. in this will conclude the first panel. i do want to thank our two colleagues for a lively discussion and appreciate you very much for being here. now, we will have the second panel be seated.

we'd like to introduce the witnesses on our second panel. dr. jeffgy herb benner. and the professor of social sciences and director of the mcquinn center for research at the university of missouri. dr. john taylor is the marion robert raymond professor of academics at stanford university and george p. schultz, senior fellow in academics at the hoover institute. dr. james galbraith is the lloyd and benson junior chair of government business relations and professor of government at the lyndon b. johnson school of public affairs at the university of texas at austin. dr. alice rivlin is a senior follow in academic studies at the brookings institution and former vice chair of the federal reserve board of governors. without objection, your written statements will be made part of the record. you will now be recognized for a

five minute summary of your testimony and we'll begin with dr. herbener. >> chairman paul, ranking member clay -- >> keep the mike up close. >> and distinguish members of the committee, it is an honor to appear before you. left to the market the production of all goods including money, passes the profit and loss test to socially beneficial production. like all private enterprises a gold mining produces if the revenue from the sale of its output exceeds the cost of its inputs and beneficial because the value of inputs to satisfy its customers exceeds the value of those inputs in producing those goods to satisfy other customers. in the market money production is regulated by profit and loss. changes and demands bring forth more production. if the demand for money increases making the value of more gold coins rises, minting companies would increase production to capture the profit. as the supply of gold coins

increase, the value would decline and prices would rise as gold increases and production of money would be optimal for society at large. the production of fiat paper money and fiduciary media cannot be lost. larger denomination bills have larger production cost than 13458er denomination bills. it is always profitable for a commercial bank to register more fi dut fiduciary media. although the production of fiat money cannot be justified by passing the market test of optimal production it is claimed and elastic currency will render an outcome superior to that of monetary money and 100% reserve money substitutes. let me address three such claims for an elastic currency. first, it can keep the price

level stable. there is no social benefit from a stable price level. entrepreneurs avoid loss by anticipating changes in prices of all goods including money. elast elastic currency makes the entrepreneurial task more difficult by adding another dementia to uncertainty of purchasing power of money and second, elastic money can prevent price deflation. there is no social benefit from prevent i preventing price deflation. entrepreneurs reduce their demand for inputs and their prices fall also. this leaves profit production and real incomes intact. looking at the evidence across 17 countries over 100 years, andrew ed andrewed a kit son and patrick kehoe in a 2004 review article said there is no income with price deflation and academic downturns and second,

accelerating academic growth. there is no benefit to accelerating academic growth beyond the rate people refer. instead of building up the capital structure more fully, monetary inflation generates the boom-bust cycle. in research published by the fed in cato working papers, in 2010, george seldrin and others concluded the academic fed produced nor stability an not surpassed that of its predecessor, the national banking system. academic theory and historical evidence demonstrate an elastic currency system confers no benefit on society at large. instead, it causes financial instability and business cycles. the fed should be abolished and a market monetary system and money certificates should be established. a direct route to achieve this end is convert federal reserve

reserve notes into redemption claims for gold with 100% reserve of gold and redeem the portion of reserve deposits banks hold at the fed into cash so banks hold 100% cash reserves against their checkable deposits. at that point, production of money and money substitutes should be done by private enterprises under the general laws of commerce. thank you. >> i thank the gentleman. recognize dr. klein in his five minute opening statement. >> thank you, mr. chairman and members for the opportunity to discuss such and important topic. my testimony analyzes the fed and reforms considered today from the prif of organizational economist. how does the reserve system measure up as an organization? are objectives as mandated by currents law appropriate for a government agency? are these objectives consistent with a healthy and growing

economy? is the fed effectively structured managed and governed. do key decision-makers have the incentive to make good decisions? are they penalized for making mistakes? my answers to these questions are very strongly negative. the fed has been given a task managing and stabilizing the u.s. economy impossible for any government planning board. the fed has vast authority and very little accountability. the fed can take actions that do enormous harm to the u.s. economy. since 2008, the fed has done exactly that. it has pumped money into the financial system at unprecedented rates, it has kept interest rates near zero, thus discouraging prudent behavior among consumers, entrepreneurs and government actors, while encouraging reckless spending and accumulation of vast public and private debts. the fed has done everything it can can to prevent market adjustments needed for recovery

from the financial crisis. all this has happened without oversight, without external check and balance and without public discussion and debate. this kind of setup is a recipe for disaster. everything we know about organizations with vast authority and without external check and balance tells us they cannot possibly work well. industrial planning fails because planners cannot and should not pick winners and losers among firms and industries. likewise, monetary planners lack the incentive and information to make efficient decisions about open market operations, discount rate and reserve requirements. the fed simply does not know the optimal supply of money or intervention in the banking system. no one does. add the problems facing any public bureaucracy, efficiency, waste, mission creep, it's increasingly hard to justify giving so much discretion to a single unaccountable independent

entity. mismanagement of the money supply not only affects the general price level, it also dystowards the relative prices of goods and services. this makes it more difficult for entrepreneurs to weigh the costs and benefits off alternative actions encouraging them to invest in the wrong activity, make investments not consistent with what consumers are willing and able to buy. devaluing the currency and raising prices by injecting liquidity into the financial system rewards debtors while punishing savers. just as artificially low interest rates rewards some market participants at the expense of others. instead of winner picking, we should allow market forces to determine the value of money, the price of loans, prices of borrowing and saving and direction of investment. i do support eliminating the dual mandate, getting the fed out of the full employment business. i would drop the price stability requirement also. the belief that we need a

central bank to fight inflation is based on a misunderstanding of the nature and causes of inflation. price levels rise because the central bank has created too much money, not because the economy has somehow overheating, needing the government to cool it off. central banks don't fight inflation, they create it. nor do we need a lender of last resort which protects not mom and pop savers and investors but incompetent bank executives and their financial partners. i agree with mr. brady a discretional bailout policy encourages moral hazard but explicit transparent and evenhanded last resort policy has the same result. if you know the government stands ready to bail you out, you'll take risks you should not take. instead, we should allow banks to compete with each other and succeed or fail, based on their ability to satisfy their customers. reforms such as increasing the number of fed governors, shortening their terms or

changing how they're selected are fine, but do not get at the root of the problem. instead, we should replace the old-fashioned central bank with a modern progressive market based alternative such as a commodity standard or competition among currencies. a market based system would free entrepreneurs from the unpredictable and seemingly arbitrary whims of government planners unleashing entrepreneurs to invest, innovate and grow the economy. not only in the long run but now when we so disappointly need it. thank you. -- so desperately need it. >> thank you. i recognize dr. taylor. five minutes. >> thank you, mr. chairman, for the opportunity. ranking member clay. thanks for bringing these brant issues for public discussion. in your opening remarks, mr. chairman, you mentioned we have nearly 100 years of federal reserve history to learn from. it seems to me the lesson is very clear.

highly discretionary policy leads to problems and poor performance. more systematic rules-based policy, steady as you go policy, leads to far superior performance. in the "great depression," the federal reserve cut the growth of the money supply. >> mike is on and close up. can't quite hear you. >> has been on the whole time but sounds better to me. okay. in the "great depression," the federal reserve cut the growth rate of the money supply. it raised unemployment to unprecedented levels. in the 1970s, a discretionary go-stop policy led to double digit and unemployment eventually, double digit inflation, low academic growth and double digit interest rates. in the '80s and '90s, a more focused policy, more systematic, more rules-based in my view, led to long expansions, low inflation, declining

unemployment and eventually higher academic growth. unfortunately, more recently, we moved back to a more interventionist discretionary policy, much less systematic, and the results have been a major financial crisis, major recession, and now an abysmally low growth recovery. you can look at the details. it seems to me the evidence is pretty clear we need to improve the degree to which monetary policy is rules-based rather than discretion. i think the legislation to change the dual mandate and focus on price stability, which is in congressman brady's bill and also in congressman pence's bill would help in this regard. so many of these interventions have been based on an effort to address unemployment and the result has been exactly the opposite.

they created these discretionary actions, which has been harmful. so for those who are worried removing the dual mandate will actually increase unemployment, i think the historical evidence is exactly the opposite. you can look at the '70s, this highly interventionist policy, very little systematic behavior led to very high unemployment. you looked at the period in the '80s and '90s, was less intervention, less focus and the chairman of the federal reserve at that point, paul volcker explicitly tried to interpret the dual mandate in a way that focused more on price stability and the results were dramatically better unemploym t unemployment. now you have the federal reserve citing the dual mandate more than it has ever had before to justify these interventions. i think the evidence is clear, and the idea is this unemployment rate is unacceptable. it's way too high. i think part of the reason for that is monetary policy. i agree, mr. chairman, the dual

mandate is not the whole answer. i would also encourage congress require the federal reserve do back to the reporting requirements that were removed in 2000. there were requirements the fed had to explicitly report its goals for money growth and credit growth and those were removed for whatever reason. things like that could be replaced, requirement the federal reserve explicitly report its strategy before setting instruments to policy whether money growth or interest rates, whatever they want to do. it's their job to determine that strategy, of course, not yours, and in fact, if there's an emergency and they want to deviate from it, that's their business, but they need to explain why. they need to come back here and say why we deviated from the strategy which we told you we would follow earlier. it seems to me, these kind of changes in addition to restrictions that the federal reserve not purchase vast quantities of private securities or the idea that we balance the voting responsibility among all the presidents, not just give

special voting responsibility to some of the presidents, i think those reforms in congressman brady's bill would also help a lot. in general, it seems to me these kinds of reforms go a long way to having the congress exercise its responsibility for oversight of an independent agency. and at the same time, not get involved in the day-to-day operations, micromanaging that agency. thank you very much, mr. chairma chairman. >> i thank you and i now recognize dr. galbraith for his opening statement. >> chairman paul, ranking member clay, it's an honor to be here, especially i am a former ranking member of the staff of this committee and i was part of those that balanced the growth act. the plural mandate and flexible and practical language of present law. that law was drafted at a time of acute theoretical