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CQIffftQL OVER CREDIT AMD D I I ! M POLICIES
la proposing the Banking Bill of 1955 the most important general
purpose was to establish unified responsibility in a public body for
national credit and monetary policies. The existing diffusion of
responsibility between the Federal Reserve Board, the Federal Open Market
Committee, and the 108 directors of the twelve iieserve banks was the
most serious defect in the structure of the federal Reserve System which
the Banking Bill was intended to correct.
Under the bill as reported by the Senate Banking and Currency
Committee, open-market operations of the Federal Reserve System would be
subject to control by an Open Market Committee consisting of the seven
members of the Board of Governors of the Federal Reserve System and five
representatives of the Federal Reserve banks elected with a view to
representation of the different regions of the country.
Recognition in the Senate bill of the importance of giving a national
body full responsibility for open-market operations is an important step
in the right direction.

In view, however, of the great importance of

this matter to the welfare of the nation, a close study of the proposal
Is necessary with a view to determining whether it falls short in any
important respect of accomplishing the desired purpose.
In the first place, let us consider the question whether representation of the Federal Reserve banks on the Open Market Committee is in the
best interests of the country. Two-thirds of the. directors of the Reserve
banks, who would elect the Reserve banks1 representatives on the Open
M&r&et Committee, are in turn elected by the member b&nks. These




members of the coauittee, therefore, would be definitely representative
of banking interests, the question, therefore, arises whether there is
any reason why all but equal power over ooen-aarket operations should be
given to representatives of the banks.
this is no new question. It was prominent at the time that the
Federal Reserve Act was proposed. At that tise there had been serious
agitation in favor of selection by the banks of souse of the aeafoere of
the Federal Reserve Board. This proposal, however, which was sponsored
by the chairsa&n of the Banking: and Currency Co&aitte© of the House of
Hepresent&tives, was not approved by President Wilson, who asked the
pertinent question whether anyone would advocate that the railroads should
select members of the Interstate Commerce Cosnaisnion, By raising t is
i
point President Wilson made it clear that it would not be good policy to
have the institutions that are to he supervised and controlled represented
on a board charged with the duty of controlling thea. In his address to
the Joint Session of Congress on June 25, 181t, President Wilson saicU
"The control of the system of banking and of issue must be vested in the
Government itself# so that the beaks m y be the instruments—not the
masters—of business and of individual enterprise and initiative* *
That this view expressed by President Wilson was accepted by Congress
is indicated by the following passage fro® the Statement of Views accompanying the Senate report on the original federal Reserve Act*

*Maay of the

big banks quite urgently insisted that the bankers should have representation upon the Federal Reserve Board. This w&a denied for the obvious




reason that the function ©f the federal Heserve Board la supervising the
banking system is & governmental fuactton in which private persons or
private interests h&ve no right to representation except through the
Government itself. Hie precedent of ill civilized governments- is against
such a contention.11
Eecogaitioa of the necessity of public control of monetary policy was,
therefore, in the mines of Congress as early as 191b. The need for
public control has become even more apparent during the twenty-odd year®
that the Federal Reserve System has been in operation.
The world has gone through a period of war* of Inflation, and of
deflation, of radical readjustments accompanied by the disappearance of the
more automatic controls over monetary conditions, which to so&e extent had
protected the countries of the world against excesses of inflation or
deflation. Such controls were reasonably effective when world trade was
sufficiently balanced to make it possible for an international gold
standard to function freely. Such a condition does not prevail at the
present time and n

one cen tell when if ever it will return again. One •

thing is clear, that it is not safe at this time to provide for a monetary
system that depends in an important degree on automatic controls. If,
however, controls are not to be automatic, then there has to be discretion,
and management, and if there is to be management, it &ust be in the interests
of the nation as a whole and not in the interests of any particular group
of people, be they bankers or politicians.




In these cirdaaataacee it is more imperative ih*m ever that the control
of monetary and credit policies be entrusted to a body tfeat has complete
and tmeseapabl© responsibility for the adoption of these policies. this body
aust be free fro® the inn.uence of kakare or other special interests and
must devote Itself exclusively to the public service*

Kepressntativss of

the Federal Reserve banks, however, do have banking const! tutenfea asc aight
be ewayed by considerations that are sore is the interests of these constituent© than of the cation as & whole.
Ihen the bill .as originally proposed, there was more reason for
giving cornsiteration to participation ly the Federal Reserve banks in,
the determination of open-aarkot policy. This wag because the Federal
He serve Board contained two er-officio aeabcrs, because there- was no requirement that two memimtB must be persons of tested banking experience-,
and that no more than 4 shall belong to one political party, the Senate
bill has eliminated the ex-of "ici© members from. the Federal Reserve
Board which wo Id conse usntly be ncre independent of the administration.
The bill also provide© -that two mambers of the Board shell be men of
tested banking experience. This would insure a proper understanding of
banking technique by the Board and also provide for representation of
the banking point of view. The bankers on the Board, however, vould
have ser^red their connection with the banks, and while they would understand the bankers, they would owe allegiance to no one but the country
as a whole. They would have no special const!tuscits. ^he Senate bill
also provide© that not more then four of the Board members shall belong
to one political party. It is a Board, therefore, that is not likely




-5-

to be swayed by partisan considerations and a Board that will have adequate
representation of banking knowledge and of the banking point of view. Whatever reason there m y have "been for direct bank representation on the policy
making body with the old Reserve Board, there would be no such reason with
the Board as it would b© reconstituted by the Senate bill.
It is clear, therefore, that the power over open-market operations
should be vested in the Board of Governors, and that the Reserve banks
should not be represented ©xc©pt by an advisory committee with which
the Board should consult before taking action on credit or monetary
policies.
It should also be pointed out thai to give authority over open-market
operations to any body other than the Board would perpetuate the diffusion
of authority that now prevails. The Eoard has now and would continue to
have under the bill, authority over the t ? other instruments of monetary
io
policy—changes in discount rates and in reserve requirements.
It would be possible, therefore, under the Senate proposal, to have
the different instruments of monetary policy used in opposite directions.
The Open Market Committee, for example, might decide by a vote of five
bank members and two Board members against the other five Board, members to
ease credit conditions through the purchase of Government securities, while
the Board might decide by a vote of five to two to tighten conditions through
raising discount rates or reserve requirements.

There ought not to be the

possibility of sueh a conflict in the administration of the nation's monetary
policy. All the three instruments of monetary policy should be lodged in




one public body with single unesc&pable responsibility. Ho other procedure
would insure the prompt and courageous action that is necessary

o protect

t i country fros inflation and deflation, and to qssure it that the influl©
ence of the monetary system will b© exerted toward sustaining continuous
employment of 'abor and of the productive capacity of the nation.