View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Confidential draft

March 7, 1938

The fundamental objective of H#R.7203 is to establish a mechanism
that would control the volume of money with a view to maintaining a fixed
price level.
Monetary objectives
The Board of Governors of the Federal Reserve System has given constant
study to the problem of objectives of monetary policy. Under date of July
30, 1937 the Board issued a statemont expressing the conclusion that economic
stability, rather than price stability should be the general objective of
public policy, because stability of the price level does not necessarily
prevent serious economic maladjustment.

It stated that in its judgment

the Reserve System1 s duty, in addition to working toward the maintenance
of sound banking conditions, is to exert its influence toward maintaining
a flow of funds conducive to as full a use of the country's productive
resources as can bo continuously sustained.

The Board also stated its belief

that efforts of all the departments of the Government should be directed
toward the achievement of this broader objective, and that neither objective
can be achieved by monetary moans alone.
Federal Reserve System operates in the public interest
In proposing a reorganization of the Federal Reserve System, the author
of the bill contends that it has not been operated in the public interest;
that it has been dominated by bankers; that it has been conducted in the
selfish interests of a small group, and that it has made largo profits at
the expense of the community. None cf these assertions can be sustained
by the record.

Page 2

Ownership of stock by member banks does not enable the bankers to
control the Federal Reserve System*

It is more nearly in the nature of

a compulsory capital contribution than stock ownership. Although the member
banks elect two-thirds of the directors of the Reserve banks, the large banks
elect only two out of nine directors• The small banks elect two, the
medium-sized banks elect two and the Board of Governors in Washington appoints

Only a third of the directors can be bankers and all directors and

officers are subject to removal by the Board of Governors. The appointment
of all Presidents and First Vice Presidents and the salaries of all officers
and employees are subject to approval by the Board in Washington.
Complete authority over all matters of major national policy, such as
the determination of discount rates, reserve requirements, margin requirements
on security loans, and maximum rates of interest to be paid on time deposits
is vested in the Board of Governors. Authority over open market operations
is vested in an open market committee consisting of seven members of the
Board of Governors and five members elected by the Reserve banks. Not only
has the Board a majority of the committee, but the other members are subject
to the Board's approval in their positions as presidents of the Reserve banks.
It is clear, therefore, that in matters with which the bill is primarily
concerned the System is dominated, not by banks, but by the Board of Governors,
a governmental body whose members are appointed by the President and confirmed by the Senate.
Earnings and expenses of the Federal Reserve banks.
During the twenty-three years of its existence the Federal Reserve System
has earned approximately one and a quarter billions of dollars, of which

Pago 3
one-half has been used for operating expenses incurred largely in performing public services, such as the cloaring and collection of checks, the
supplying of currency to the banks and to the public, the performance of
many duties for the United States Government, and in furnishing rediscount
facilities for the member banks.
Of the six hundred million dollars of earnings above expenses, approximately one-fourth has been paid to the Government as franchise tax, nearly
one-fourth has been turned over to the Federal Deposit Insurance Corporation
as capital, one-fourth has been paid as the statutory dividends to member
banks, and the remainder is held in a surplus account which in case of
liquidation becomes the property of the Government»
Member banks contribute 3 per cent of their capital and surplus to the
capital of the Reserve banks and receive not more than 6 per cent annually
on this amount* A member bank having a capital and surplus of $100,000
contributes $3,000 to the Reserve bank's capital and receives annual
dividends of $180, or at a rate of less than two-tenths of 1 per cent on
its own capital and surplus.
The System was established and is operated in the public interest and
dominated by public officials; it performs a service that saves the people
of the country far more than the cost of the System, and it makes no profits
for any private interest other than the amount paid annually to stockholders
at a fixed rate, which has been prescribed and can be changed by Congress*
The evils which the bill is designed to correct, therefore, do not exist
in reality.

Page 4
The proposals in the bill
Proposals in tho bill for reorganizing the Reserve System would transfer
ownership of tho stock in the Federal Reserve Banks to the

Government and

would have all the directors of the Reserve banks appointed by the President
and approved by the Senate. It would enlarge the membership of the Board of
Governors to fifteen, including three cx-officio members —

the Secretary

of the Treasury, the Comptroller of the Currency, and the Chairman of the
Federal Deposit Insurance Corporation.
A Board of Governors of fifteen members proposed in the bill would be too
unwieldy to function promptly and effectively. Appointment of Reserve bank
directors by the President would tend to introduce party politics into the
System, and would make it more difficult for it to work toward economic

Tho proposal in the bill to offer all the privileges of membership

to nonmembor banks so long as they choose to keep their reserves in a Federal
Reserve bank would enable all banks to profit by the services of the System
so long as it suited them and to withdraw from it whenever the maintenance
of reserves or compliance with any regulation by the Board appeared to them
to be burdensome*

It would make futile the proposed enlargement of the power

to increase reserve requirements•

It would remove all incentive to membership

and would make it impossible for the System to discharge its responsibility
for maintaining sound credit conditions.
Tho Board is convincod that improvement in our banking system is urgently
needed but sees nothing in the proposed bill that would tend in this direction.
Monetary authorities and fiscal authorities
The primary function of tho Treasury is to collect taxes, borrow money,
and provide funds for tho various agencies of the Government in accordance
with Congressional appropriations. Tho primary function of the Federal
Reserve System is to influence the flow of money and to contribute to the

Page 5

soundness of the banking situation.

The ultimate objectives of both agencies

are the same, namely, to serve the public interest, but their points of view
and experience, and their approach to current problems may at times be
different. The maintenance of an organization for the regulation of credit
separate from the fiscal arm of the Government has been found advantageous
in most countries of the world, and its abandonment, which is proposed in
the bill, would, in this Board1s opinion, be a backward step*
Local autonomy in local matters
Since its establishment in 1914, the Federal Reserve System has undergone many changes in the direction of increased control by the Board of
Governors. With the passage of the Banking Act of 1935 this control has
been made complete in so far as national policies are concerned.

In regard

to local matters, the maintenance of local autonomy under general supervision and close Government regulation is advantageous in a country like the
United States, consisting of various regions with diverse economic interests•
The maintenance of locally elected directors on Federal Reserve bank boards
is of great advantage in creating local pride and local interest in the System
and in inspiring the business community with confidence in its management.
This would be largely destroyed if the appointments of local directors were
handled entirely from Washington.

There would also bo the danger that

partisan political considerations would enter into the appointments and the
directors and through them the personnel of the banks might become subject to
political patronage*

There is nothing that would be more destructive than

this of the ability of the System to render a disinterested public service
to all classes of the community*