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YKY FINAL AUTHORITY OVER OPEN-MARKET OPERATIONS

'

SHOULD BE VESTED SOLELY IN THE FEDERAL RESERVE BOARD.

Both section 205 of the bill as introduced and the alternative suggested by the bankers (that final authority over open-market
operations be vested in an open-market committee consisting of the
Federal Reserve Board with its membership reduced to five members
and four governors of Federal reserve banks selected by the twelve
federal reserve banks) would, in substance, create a new board to
7/hich would be transferred the most important functions of the present Federal Reserve ^oard.

I moreover, under either proposal, only one

less than half of the members of the OpenfcarketCommittee would consist of representatives of the banks selected by the boards of directors cf the Federal reserve banks, two-thirds of whom are elected by
private bankers.
Such an arrangement is directly in conflict with one of the
fundamental principles of the federal Reserve Act - a principle contrituted to the Act by President vrilson hiirself - the principle that
the Federal Reserve Board should be independent of the bankers and
should not include representatives of the bankers.

The origin cf

and reasons for this principle are clearly shown in Senator Crlass1
book "An Adventure in Constructive Finance".
That the Federal Reserve Board, created "as a capstone" to
the federal Reserve System, was suggested by President Wilson in the




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first instance is shown by the following passage on pages 81 and 82:
"December 26, 1912, was a desperately cold day.
The snow at Princeton was two feet deep. Dr. Willis,
the committee expert, had accompanied the chairman,
prepared to answer or discuss any purely technical
question that might be projected. I had made a written
divisional memorandum of the bill I desired to outline
to Governor Wilson. The latter had a severe cold and
was propped up on pillows in bed. He had cancelled
every other engagement for the day, and at once it was
suggested that he let us come another time when he might
be in better trim; but he insisted on proceeding with
the business, so intent was he on a speedy and sweeping
currency reform* For two hours the situation was reviewed and the chairman's memorandum dissected. Toward
the end, Mr. Wilson announced it as his judgment that we
were ffar on the right track1; but offered quite a few
suggestions, the most notable being one that resulted in
the establishment of an altruistic Federal Reserve Board
at Yfeshington to supervise the proposed system. We had
committed this function to the Comptroller of the Currency,
already tsaristic head of the national banking system of
the country. Mr. Wilson laughingly said he was for *a
plenty of centralization, but not for too much1. Therefore,
he asked that a separate central board provision be drafted,
to be used or not, as might subsequently be determined, fas
a capstone* to the system which had been outlined to him."
As related in Senator Glass* book, the bankers made a desperate fight to have representatives selected or at least nominated
by them included in the membership of the Federal Reserve Board. How
this proposal was defeated by President Wilson and the conclusive
reasons for such action are shown in the following passage on pages
112 to 116t




19

It was at this point that the President had us come
to the Vfhite House for a conference concerning that feature
of the bill that gave the banks minority representation on
the Federal Reserve Board* I was vary definitely committed




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16/
to giving the banks some voice. Senator Owen, of the
Senate committee, had sided with Mr. Bryan in opposition. At the White House conference McAdoo agreed at
first with me; but later in the evening he proposed a
compromise. The President decided against banking
representation. This was one of the crucial questions
the President had to determine. It was evident it
might involve the failure of legislation by embittering
the bankers should they be entirely excluded. If they
should be included, Bryan and his following might revolt. I had urged the fessential injustice and political inexpediency1 of denying the banks minority representation. The President was not bothered about the
political phase; but he was willing to discuss the
justice of the thing. So convinced was I that the
President was wrong in his conclusion that I sent him
this note; which is reproduced here to indicate that
the President was not easily persuaded nor the chairman
of the committee entirely complaisanti
f

At the risk of being regarded pertinacious I am
going to ask if you will not consider the advisability
of modifying somewhat your view of bank representation
on the proposed Federal Reserve Board. The matter has
given me much concern, and more than ever I am convinced
that it will be a grave mistake to alter so radically
the feature of the bill indicated. Last ni$it, when I
came back to my hotel, I found Mr. Bulkley waiting, and
he sat with me until past one o'clock this morning.
Knowing that he was so earnestly for a government note
issue and for government control, I imagined he would
be delighted with the suggested alteration. I told him
of the change without first indicating my OTOI view; and,
much to my astonishment and gratification, he instantly
and vigorously protested, saying he had regarded the
extent to which we had already put the government in
control, together with the tremendous power of the Board,
as the real weakness of the bill. He also said we could
not excape the charge of exposing the banking business
of the country to political control. As indicated to you
last night, Mr. Bulkley is a strong man of the committee
with idiom we must reckon; hence his view of this proposed
alteration fhlly confirms my belief that it would prove
an almost irretrievable mistake to leave the banks without
representation on the central board* You will note that
the bill requires the three members selected by the banks
to sever all bank connections before qualifying. Might it

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not be well at least to take Mr. McAdoofs suggestion
and have the President select these men from a list
proposed by the banks? With high esteem, etc.1
The President was adamant; and, if there was ever
a lapse, I soon was to revive the conviction that Mr.
Wilson knew more about these matters than I did. As
anticipated, when the bill was introduced in Congress,
bankers raised an uproar about this provision. With
scarcely suppressed satisfaction, I headed a delegation
of them to the Tftiite House to convince the -^resident he
was wrong. Forgan and Wade, Sol Wexler and Perrin,
Howe and other members of the Currency Commission of the
American Bankers Association constituted the party. The
first two, peremptory and arbitrary, used to having their
own way, did not mince matters. They evidently were not
awed by ftitled consequence1, for they spoke with force
and even bitterness. Sol Wexter and Perrin were suave
and conciliatory. The President was courteous and contained. These great bankers, arbiters for years of the
country1s credits, were grouped about the President's
desk in the Executive office adjoining the Cabinet room.
I sat outside the circle, having already voiced my own
dissent from the Presidents attitude. President Til!son
faced the group across the desk; rnd as these men drove
home -what seemed to me good reason after good reason for
banker representation on the central board, I actually
experienced a sense of regret that I had a part in subjecting Hr# TTilson to such an ordeal. l V e they had
ihn
ended their arguments ? I . YJllson, turning more particu»r
larly to forgan and Vi'ade, said quietly: fYfill one of
you gentlemen tell me in what civilized country of the
earth there are important government boards of control
on which private interests are represented?1 There was
painful silence for the longest single moment I ever
spent; and before it was broken Mr. Wilson further inquired: fY«hich of you gentlemen thinks the railroads
should select members of the Interstate Commerce Commission?1 i'here could be no convincing reply to either
question, so the discussion turned to other points of
the currency bill; rjid, notwithstanding a desperate
effort was made in the Senate to give the banks minority
representation on the reserve board, the proposition did
not prevail."
The present proposal to have control over open-market
operations vested in a joint board consisting of members of the




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Federal Reserve Board and representatives of the Federal reserve banks
elected by directors two-thirds of whom are elected by the member banks
is merely an effort to revive the principle urged by bankers Forgan,
Wadef Wexler, Perrin, Howe and others, and vigorously and convincingly
denied and defeated by President Wilson.
The issue is* Will the money changers finally prevail after
twenty-three years or will the present Congress and another great
Democratic President keep the money changers out of the temple?