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The main argument in favor of taking over the Federal Reserve

System and setting up a central bank completely owned and operated as a
Governmental agency rests upon the desirability of having a centralized
control over monetary and credit policy•

It is felt that effective con-

trol would be much easier to adopt and to carry out if a single agency was
given complete authority and charged directly and solely with absolute
responsibility of maintaining sound credit conditions throughout the country.
One of the chief difficulties at present, in controlling the New York
mone.y market as well as the New York security market, is the inability of
the Federal Reserve authorities to agree upon what policy shall be followed at any particular time. Moreover, the weakness and lack of courage on
the part of the Federal Reserve Board to fully use the powers which it has
under the law further tends to make effective credit control impossible*
The essence of central bank: policy is to make quick decisions and to follow
these decisions with a rapid dispatch by whatever measures are deemed
essential. At the present time the Federal Reserve is so composed that
delay appears almost inevitable.

In order to reach a decision on any change

in policy there mast be a meeting of the governors of the Federal Reserve
Banks or the members of the Open Market Committee, which is appointed by
the local Reserve Bank boards of directors,and the members of the Federal
Reserve Board.

There is delay at arriving at a decision in this meeting of

minds and often a decision is in fact impossible. Then the results of the
meeting mast be taken back to the local boards of directors for approval.
Although in practice the decisions once agreed on are almost assured of
approval, the individual Reserve Banks still maintain a ^ood deal of

- 2 autonomy.

They may, as was pointed out earlier, refuse to abide by the

policies with regard to open-market operations when they involve a purchase of government securities in the open market.

This situation pre-

sents a striking contrast to that which exists in England, where there
is normally great cooperation.

The Governor of the Bank of England real-

that the bank although a privately o^ned and cornpletely independent

institution mast go along with the Government in times of stress* Hence,
if a change in policy seems imminent, the Governor of the Bank of England
meets with the Chancellor of the Exchequer together with the heads of the
5 large joint stock banks, which have branches throughout the country and
control the great majority of the total commercial banking business*


it is a small group which determines the policy that will be followed, and
this group once such a policy is adopted has powers in its hands to see that
the policy is carried out in a most efficient manner*

The English M Big

Five11 Banks are of such a size that they overshadow the Bank of England
and it is essential that close cooperation exists between the Bank of England
and the large branch banks, and this has been uniformly true throughout recent times. It is somewhat of a case of the tail wagging the dog, but the
bankers there realize that inasmuch as banking power is extremely concentrated there is a tremendous responsibility upon the English financial institutions and they have developed a much more social point of view than is
true among American bankers.
To obtain a comparable degree of unified policy in the United States,
it would be necessary to bring together the Governors of the Federal Reserve
Banks, the Federal Reserve Board, including the Secretary of the Treasury
and the Comptroller of the Currency,the heads of the 48 State banking departments and the presidents of some 14,000 banks in all parts of the country*

- 3 Obviously such unified policy as to credit conditions is impossible•

It is to be noticed that the Federal Beserve Board has been

receiving larger powers of control over both the Reserve Banks themselves
and also the member banks of the Federal Reserve System. Particularly was
this true in theprovisions of the Banking Act of 1933. However, although
the law has conferred greater powers, there is considerable question whether
these will actually be used effectively by the Board.

One of the major

criticisms that can be levied against the Federal Reserve Board in the past
has been the fact that they have been more or less out of touch with the
current problems which confront the banking system.

In the first place, the

Board is in Washington, whereas the open-market operations of the system are
carried on almost exclusively in the New York money market and by the officers of the New York bank. Also in the conferences between the Board and
the Governors of the Federal Reserve Banks the Board appears at somewhat
of a disadvantage.

The governors are much closer to the actual operation

of the Federal Reserve Banks, they are often higher paid men with more
practical experience in central banking operations and therefore it is
probably true that they exert an unwarranted influence over the Federal Reserve Board.

This Situation could only be changed by attracting better

type men to the Federal Reserve Board by giving them larger responsibilities,
larger powers and surrounding the board members with the prestige that
should accompany such power.

In other words, if vigorous action in control

of credit is desirable the central board mast actually dictate the policies
of the system and be composed of the type of men who are experts in the
technique of control and are thoroughly grounded in the operations of the
credit and banking system. Of course, this is a large order but only by
facing the responsibility directly can we hope to arrive at a workable solu-

- 4 tion to our monetary and credit difficulties.

To have continual repeti-

tions of the chaotic conditions of the past few years can only mean the
inevitable overthrow of the capitalistic system.

The question of political influence is indeed one of great

significance and it would be unfortunate to have a central control board
subject to party politics or under the domination of political interests.
However, I am inclined to think that the hue and cry which is continually
raised on this question considerably overstates the case. The answer in
my opinion is in creating the prestige which should automatically attach
to a board of this type and thereby raise it above the plane of petty politics. It is in a similar fashion that the Supreme Court has acquired its
position although its members are appointed by the President and in a
sense are thus political appointees.

Certainly a board with great powers

of credit control is entitled to as much respect as is given to the Supreme

By authorizing the creation of a special body which is given

board powers for monetary and credit control and upon which is placed the
responsibility of maintaining sound credit conditions in the United States,
Congress would be protected at least in part against public demands for
violent changes in monetary policy during both ordinary periods and periods
of emergency*

As a general rule, the public is not scientifically minded

and therefore can easily be swayed to demand ill-advised and untimely

In periods when prices are rising for example, it is difficult

for individual Congressmen to oppose the demand of their constituents for
more money and higher prices.

If, on the other hand, a Congressman can

simply point to a body which has complete control and definite responsibility, he is provided with a buffer against the unreasoning demands of the

- 5 general public*

The problem of the proper relationship of the Treasury to

the central bank is a knotty one*

It is true that there might be con-

flicts between Treasury policy and sound central bank policy which if the
Treasury dominated the situation might lead to unfortunate consequences
for the country as a whole. However, I do not believe that we should lean
backwards in order to avoid any Treasury influence. Public finance and
private finance are closely related and at times considerations of public
finance are of vital importance to business welfare and it seems to me
this will be more and more true in the future.

In times of war and extreme

economic emergency questions of governmental credit and public finance are
of paramount importance and must be so regarded by the central banking

In more normal periods fiscal needs should be placed on a

parity with other consideratioiBby the body entrusted with credit control.
In my opinion there is much less danger in having the Treasury represented
at the central bank than in having complete separation with possible conflicting programs being followed by the two organizations.
Perhaps I have given the impression in this memorandum that I think
all our difficulties could be solved by monetary and credit control measures.

Such an inference would be erroneous. However, I do think that the

operation of our banking system, with its capacity for rapid expansion and
contraction of credit in a large measure accentuates and intersifies the
difficulties, and that vigorous methods of monetary control are extremely
desirable. On the other hand, other steps mast be taken by the Government
in times of stress to support and make the monetary and credit control more
effective. Governmental spending, relief, and public works programs mast
be resorted to in periods of severe depression. Moreover a greater public

- 6 control over the direction and amount of new investment would help to
provide greater stability in our economic system. Also central bank
control can only be effective if there exists a sound banking system*
Certainly the record of the American banfcing system is disgraceful and
a drastic reform is essential*