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office Correspondence



/ / / 7


Subject: Eurfch*
Banker Representation
Mr, ly»%»# General O w i i l t


I respectfully submit herewith two additional memoranda on
the above subject, which I believe deserve your most serious considerations (1) A memorandum based on the history of the creation of the
Federal Reserve Board and the denial of banker representation thereon
with quotations from Senator Glass1 book **An Adventure in Constructive
Finance191 and (2) another based on quotations from Senator Glass9 committee report on the original Federal Reserve Act*
The first, I believe, oould be used with telling effect*
I think the seoond would also be quite effective; but I
drafted it some time ago and submitted it to Dr. Goldenweiser with a
suggestion that it might be incorporated in our brief* He felt that
it would be unsafe to use quotations from Glass1 committee report on
the original Federal Reserve Act, because that report contains so many
arguments against other features of the bill, such as the abolition
of the eligibility requirement and the abolition of collateral for Federal reserve notes* Dr* Goldenweiser may be right about this; but we
can explain away those other arguments by showing that the theory
underlying the eligibility and collateral requirements are not in accordance with the facts and with the experience we have gained since
the Federal Reserve Act was passed*
I sincerely believe that you would make a fundamentally important mistake if you should yield an inch on the question of banker
representation on the body having final authority over the open market
policy •








/ (

To concentrate in the Federal Reserve Board the ultimate
authority over the open market policy of the Federal Reserve
System is in accordance with the purpose and intent of the
original Federal Reserve Act.

This is clearly shorn by the follow-

ing pages in the report on the original Federal Reserve Act submitted
to the House of Representatives by Mr. Glass, on behalf of the Banking
and Currency Committee, under date of September 9f 1913 (pp. 16, 18,
19, 42, 46 and 53):

* * * In order that the banks may be effectively
inspected, and in order that they may pursue a banking
policy which shall be uniform and harmonious for the country
as a whole, the committee proposes a general board of management intrusted with the power to overlook and direot the
general functions of the banks referred to. To this it assigns
the title of fThe Federal reserve board1• * * * n

" * * * The only factor of centralization which has been
provided in the committee's plan is found in the Federal reserve
board, which is to be a strictly Government organization created
for the purpose of inspecting existing banking institutions and
of regulating relationships between Federal reserve banks and
between them and the Government itself • Careful study of the
elements of the problem has convinced the coinmittee that every
element of advantage found to exist in cooperative or central
banks abroad can be realized by the degree of cooperation which
will be secured through the reserve-bank plan recommended, while
many dangers and possibilities of undue control of the resources
of one section by another will be avoided. Local control of
banking, local application of resources to necessities, combined
with Federal supervision, and limited by Federal authority to"
compel the joint application of bank resources to the relief of
dangerous or stringent conditions in any locality are the characteristic features of the plan as now put forward. The limitation of business which Is proposed in the sections governing
rediscounts, and the maintenance of all operations upon a footing


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of relatively short time will keep the assets of the proposed
institutions in a strictly fluid and available condition, and
will insure the presence of the means of accomodation when banks
apply for loans to enable them to extend to their clients larger
degrees of assistance in business• It is proposed that
the Government shall retain a sufficient power over the
reserve banks to enable it to exercise a directing authority when necessary to do so, but that it shall in no way
attempt to carry on through its own mechanism the routine
operations of banking which require detailed knowledge of
local and individual credits and "which determine the actual
use of the funds of the community in any given instance•
In other words, the reserve-bank plan retains to the Government power over the exercise of the broader banking functions,
while it leaves to individuals and privately owned institutions
the actual direction of routine*

"In this section provision has been made for the
creation of a general board of control aoting on behalf of
the National Government for the purpose of over-seeing the
reserve banks and of adjusting the banking transactions of one
portion of the country, as well as the Government deposits therein, to those of other portions. * * • ff


* * * T h e power granted in subsection (d) to fix
a rate of discount is an obvious incident to the existence
of the reserve banks, but the power has been vested in the
Federal reserve board to review this rate of discount when
fixed by the local reserve bank at itlTdiscretion* This is
intended to provide against the possibility that the local
bank might be establishing a dangerously low rate of interest,
which the reserve board, familiar as it would~be with credit
Conditions throughout the country, would deem best to raise«ft
The power of carrying on the regular routine every-day business
of the Federal reserve banks and of determining the local policies was
entrusted to their respective boards of directors, but the Federal Reserve
Board was created as "a general board of management11 entrusted with the


, ,

power to overlook and direct the general functions of the banks in order
that the Board, on behalf of the Government, might retain some power
over the exercise of the


broader banking functionstf affecting the

country as a whole*
The authors of the Federal Reserve Act apparently considered
the fixing of discount rates as one of the more important of the
"broader banking functions" affecting the country as a whole and,
therefore, in section 14(d) of the Federal Reserve Act, specifically
gave the Federal Reserve Board the p6wer of final determination of
the discount rates of the twelve Federal reserve banks.
Experience has demonstrated that at times the open market
policy of the Federal Reserve System has a more important effect
than the discount rates of the Federal reserve banks and it is clear
that the same authority which is given the final determination of
discount rates should be given the power to make final decisions regarding the open market policy of the Federal Reserve System.
The open market policy is a matter affecting the country as
a whole and is not a mere matter of local concern which should be
left to the determination of the local boards of directors of the
twelve regional banks.