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Given t o P r e s i d e n t 8 / 2 3 / 3 5

A

.JbL/

August 1 5 , 1955

Memorandum f o r
the f r e s j d e n t

Enactment o f t h e Banking B i l l o f 1955 marks * g r e e t s t e p f o r w a r d i n
banking &ncl monetary a d m i n i s t r a t i o n .

Xt r e p r e s e n t s sn a u t h o r i t a t i v e

r e c o g n i t i o n o f t h e f a c t t h a t , whatever may have been s a i d i n t h e p a s t i n
f a v o r o f a u t o m a t i c r e g u l a t o r s o f money and p r i c e s , dependence on such
r e g u l a t o r s i s n o t f e a s i b l e i n the post-war w o r l d .

The p u b l i c has l o s t

f a i t h i n them because they have been proved t o be unequal t o t h e r e q u i r e ments o f modern l i f e , and a t t h e p r e s e n t t i m e t h e e n t i r e w o r l d i s on some
form o f managed c r e d i t and c u r r e n c y b a s i s .

The Banking A c t o f 1955 e n t r u s t s t h e management o f monetary and
c r e d i t p o l i c y i n t h i s c o u n t r y t o t h e g o v e r n i n g board o f t h e F e d e r a l Reserve
System.

While t h e System i s g i v e n no new f a r - r e a c h i n g powers, t h e powers

t h a t i t possesses, so f a r as t h e y concern n a t i o n a l monetary p o l i c i e s ,
c e n t r a l i s e d i n t h e Board, which w i l l now have an unescapabl®

are

responsibility

f o r the maimer i n which they a r e e x e r c i s e d .
R e c o g n i t i o n by Congress o f t h e i n c r e a s e i n t h e Board 1 s r e s p o n s i b i l i t i e s f i n d s e x p r e s s i o n i n t h e advance i n s a l a r i e s o f members, t h e l e n g t h e n i n g o f t h e i r t e r m o f o f f i c e , t h e e l i m i n a t i o n o f e x - o f f i c i o members, and
the p r o v i s i o n f o r the r e o r g a n i s a t i o n o f the Board.
The u n m i s t a k a b l e f e e l i n g o f t h e c o u n t r y i s t h a t t h e F e d e r a l lie serve
System has f a i l e d t o measure up t o i t s r e s p o n s i b i l i t i e s .

To a c e r t a i n e x -

t e n t t h i s a t t i t u d e i s en i n e v i t a b l e r e a c t i o n a g a i n s t 'bank f a i l u r e s and t h e




-

depression.

nevertheless,

2

-

share o f t h e r e s p o a s i b i l i t y r i g h t f u l l y be~

l o n g s t o t h e F e d e r a l Reserve System, because o f i t s adherence t o an
o b s o l e t e t r a d i t i o n u n d e r which t h e f e d e r a l Reserve System mm expected
t o be l a r g e l y a p a s s i v e agency f o r t h e a c c o m o d a t i o n o f cosnaeree and
business.

T h i s o b s o l e t e t r a d i t i o n , ' b o l s t e r e d up by a n t i q u a t e d , p r o v i s i o n s

i n t h e l a w , was a c c e n t u a t e d by a l a c k o f c o n s t r u c t i v e l e a d e r s h i p i n t h e
F e d e r a l Reserve System.
Changes in

t h e l a w t o bi g it
r
n

in

ln w
i e
i
t
h modern t h o u g h t and

r e c o n s t ! t u t i o n o f t h e Governing Board a f f o r d a g r e a t o p p o r t u n i t y f o r
h a b i l i t a t i n g t h e F e d e r a l Reserve System and r e g a i n i n g f o r it
o f p u b l i c c o n f i d e n c e w i t h o u t which i t

cannot p r o p e r l y

re-

t a degree
h t

function.

F u n c t i o n s o£ Board
An i m p o r t a n t phase o f t h i s r e h a b i l i t a t i o n w i l l be t h e g e l s e t i o n o f
a stron

Board t h a t w i l l commend t h e r e s p e c t and c o n f i d e n c e o f t h e p e o p l e

o f the c o u n t r y .
It

i s o f primary importance t h a t a l l te
h

members o f t e
h

Board s h o u l d

have an u n d e r s t a n d i n g o f n a t i o n a l economic problems and should he q u a l i f i e d t o a s s i s t i n t h e f o r m u l a t i o n o f monetary p o l i c i e s and t h e c o n t i n u o u s
s t u d y o f 'banking p r o b l e m s .

Mile

the Banking A c t o f 1935 has Improved t h e

F e d e r a l Reserve s t r u c t u r e and has h e l p e d t o p i s e e t h e F e d e r a l Reserve
System I n a more r a t i o n a l r e l a t i o n s h i p t o t e
h

c o u n t r y 1 © economic

life,

many problems r e l a t i n g t o o u r banking s t r u c t u r e remain t o be s o l v e d .

One

o f t h e t a s k s t h a t w i l l c o n f r o n t t h e new Board w i l l be a s t u d y o f t h e r e forms n e c e s s a r y t o b r i n g about, u n i f i e d b a n k i n g under F e d e r a l c o n t r o l , a




-

*

-

u n i f i c a t i o n o f banking s u p e r v i s i o n and a d m i n i s t r a t i o n i n Washington, t h e
problems o f b r a n c h , group and c h a i n b a n k i n g , and a p r a c t i c a l s o l u t i o n o f
the problem o f t h e proper r e l a t i o n s h i p between commercial b a n k i n g a i d
avestment banking.
For t h e purpose o f s e l e c t i n g i n d i v i d u a l Board members, i t may be
h e l p f u l t o c l a s s i f y t h e s p e c i f i c d u t i e s g i v e n the System i n accordance
f r i t h t h e d i f f e r e n t phases o f i t s broad r e s p o n s i b i l i t i e s f o r
over t h e banking and monetary system*

It

supervision

should be emphasised, however,

• t h a t such a grouping o f m a t t e r s f o r t h e p r i m a r y c o n s i d e r a t i o n o f p a r t i c u l a r Board members does n o t mean t h a t such m a t t e r s a r e n o t a l s o t o r e c e i v e
t h e a t t e n t i o n o f t h e o t h e r members o r t h a t t h e Board as a whole would be
r e l i e v e d o f r e s p o n s i b i l i t y f o r say phase o f i t s work.

I n a g e n e r a l way

the d u t i e s o f t h e Board may be c l a s s i f i e d as f o l l o w s I
(a)

Monetary p o l i c y m a t t e r s , l e g i s l a t i o n end p u b l i c

(b)
(c)
(d)
(e)

I n t e r n a t i o n a l banking and t h e c a p i t a l market}
Economic s e r v i c e j
Federal Reserve bank and member bank c r e d i t )
Admission t o membership and o p e r a t i o n s o f member
banks)
F e d e r a l Reserve bank o p e r a t i o n s )
S e c u r i t y l o a n s , and i n t e r l o c k i n g and o t h e r r e l a t i o n s h i p s o f d i r e c t o r s , o f f i c e r s and employees
o f member banks and F e d e r a l Reserve banks*

i

f)
g)

I n the l i g h t o f these d u t i e s , i t

^ o u l d appear t h a t t h e Board, i n

a d d i t i o n t o the chairman, who would n a t u r a l l y have p r i m a r y

responsibility

f o r monetary p o l i c i e s , as w e l l as gemmral e x e c u t i v e r e s p o n s i b i l i t y f o r

all

o f t h e Board*s a c t i v i t i e s , should i n c l u d e one person w i t h F e d e r a l Reserve
banking e x p e r i e n c e , one w i t h commercial banking e x p e r i e n c e , one who i s




f a m i l i a r w i t h t h e s e c u r i t y o r i n v e s t m e n t m a r k e t , one who i s a c q u a i n t e d
w i t h f o r e i g n exchange and f o r e i g n c o n d i t i o n s , one q u a l i f i e d t o

interpret

t h e economic s i g n i f i c a n c e o f business and f i n a n c i a l developments, and
one w i t h experience and t r a i n i n g i n bank c r e d i t *
T h i s arrangement o f d u t i e s i s n o t suggested as t h e o n l y one f e a s i b l e ,
and rearrangements may become necessary i n t h e l i ^ h t o f t h e p a r t i c u l a r
t a l e n t s o f a p p o i n t e e s a c t u a l l y s e l e c t e d f o r membership on the Board, Some
d i v i s i o n o f d u t i e s , however, w i t h s p e c i f i c primary r e s p o n s i b i l i t y o f each
i n d i v i d u a l member f o r c e r t a i n phases o f t h e work i s h i g h l y d e s i r a b l e , n o t
o n l y as an a i d i n s e l e c t i n g members w i t h the r i g h t q u a l i f i c a t i o n s ,

but

a l s o as an inducement f o r e n e r g e t i c ®en t o accept p o s i t i o n s on t h e Board
and t o f a c i l i t a t e t h e performance o f t h e a d m i n i s t r a t i v e f u n c t i o n s o f t h e
Board*