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249
BOARD OF GOVERNORS
CF THE
FEDERAL RESERVE SYSTEM
R-113
WASHINGTON
ADDRESS OF'F'ICIAL CORRESPONDENCE
TO THE SOARD
November 1?, 193?.
..
Dear Sir:
There are being sent you under separate
cover today
copies of an address made by Mr.
Szymczak on this date at the meeting of the
Municipal Bond Club of New York on the subject:
"Federal Reserve Responsibilities".
Copies of the address are being forwarded
to you for the purpose of making them available to
the officers and directors of your bank and branches,
if any, and to any member banks vrhich may desire
them.
Additional copies will be furnished upon re-
quest.
Very truly yours,
L. P. Bethea,
Assistant Secretary.
TO THE PRESIDEN'l'S OF ALL FEDERAL RESERVE BANKS
1·
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FEDERAL RESERVE RESPONSIBILITIES
ADDRESS BY
.
M. S.
BOARD
S7.!1~CZAK,
MEMBER,
OF GOVERNORS OF '.r:HE FEDERAL RESERVE SYSTEM,
A'r :MEETING OF
r.ri!E MUNICIPAL
BOND CLUB OF NEW YORK
HELD AT THE
BANKERS CLUB - 120 BROADWAY
NEW YORK, Nl!,IN YORK
WED.t-lESDAY, NOVEMBER l? , 193?.
(Not to be released until 1.:00 P.M.
Wednesday, November 17, 193?)
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FEDERAL RESERVE RESPONSIBILITIES
As you know, there has long been a tendency to over-emphasize
the effect of monetary and credit factors on busl.ness.
The.more one
surveys monetary history the clearer H becomes that what can be accomplished through monetary and credit measures by themselves is
strictly limited.
.
In stressing this point, however, I do not'mean to minimize the
influence of such measures.
In their way they are highly important
and by the samo token the Federal Reserve System is a highly important instrumentality.
What is the Federal Reserve System?
'l'he question·meybe fl.llswered from the legal point of view by saying that it is e system comprising about 6,400 member banks in all
parts of the country, twelve Federal Reserve banks so situated as to
serve the twelve regions into which the country is divided, the
Bonrd of Governors, which is the coor·d.inating body si tuatod in Washington, the Federal Ad:visory Council, which represents the bankers
of the twelve li'ederal Reserve districts, and the Federal Open Market
Committee, which comprises members of the Board jn Washington and
representatlves of the twelve Federal Heserve Banks.
The same question - VJhat is the Federal Reser'Ve System? -·may be
answered from the funct'ional point of view by saying that it possesses
certain supervisory powers and exercises regulatory influence over the
supply and cost of credit in the United States.
It is an institution
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created for public service, not for private profit.
In its regional form of organization the Federal Reserve System
is peculiar·ly an American institution, having central ·banking functions which it performs substantially as do the central banl:s of
other countries.
not be confused
rrhe term central banking, as I use it
.
or misunderstood.
her~:1,
should
I am speaking of tho functions of
central banking rather than the form of the organization which performs those functions, however owned or controlled.
Practically
every civilized country has a central banking institution.
In
Canada, it is the Bank of Canada; in England, the Bank of England;
in France, the Bank of li'rance; in Germany, the Reichsbank.
The en-
tire list would cover the American, European, African, and Asiatic
continents.
In every case the central bank by its very nature stands
in a unique relatj,onship both to the Government of its country and
to the other be.nks and financial institutions of its country.
Its
function in every case is that of inf'luencing credit conditions in
the public interest by the exercise of' i.ts financial and admiuistrative powP-rs.
The most prominent of these powers are:
'l'o make loans
to banks and other financial institutions, to fix the rediscount
rate, and to buy and sell. securities in the open market.
.
The exer-
cise of nny one or all three of these powers has certain direct and
to a large extent predictable effects upon the supply and cost of
credit.
In addition the central bank is usually a bank of issue.
Its notes circulate as money.
Formerly this was one of the most im-
portant powers of .a central bank but now that de-posit credit transforable by check hLs become the principal means of -payment used in
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civilized countries, the power of issuing notes has come to be incidental rather than essential to central banking.
A more im:portant
function at present is that of holding the basic reserves of the banking systAm - a practice which nearly all central banks perform ,Ji ther
as a matter of lav: or of established custom.
It is through the func-
tions of holdine reserves and issuing notes that central ban'ks ar·e
ena.bled to £jxercise control over the credit supply, because tho need
for currency or for additional reserve balances is wh3.t imp:clls commercial banks to borrow from the central bank.
A further incidental eharacteristic is that the central bank
usually acts as fiscal :::.gent of the Government.
In this capacity it
serves as a bridge between the financial o.ctivitles of the Government and the financial activities of private business.
Ordinarily
the Government's bank account is the largest single bank account in
the country.
The Government's receipts, its expenditures, and its
ba.lances are so large that they require specinl adjustment to the
credit activities of privc.te interests.
Otherwise ths accumulation,
transfer and disbursement of Government funds would seriously disturb
the money market, and hence business at large.
Since the central banking organization ordinarily carries the
reserves of commercial banking institutions as well as the checking
accounts of the Government, it is natural that it should play an important part in the collection and clenrance of chocks ond in the
transfer of bank i'unds.
In tM.s respec-t::, as in furnishing currr:mcy
for circulation, the monetary nature of central bank functions
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becomes most apparent.
From country to country the nature of central bank operations
and the character of central banking powers will vary :i 't'l accordance
with national institutions and business customs.
Fundcment~lly,
how-
ever, the processes of central banking are much thc; same in all
countries.
Perb.aps the most striking feature of the central brmU.ng organization of this country is that it comprises not a single institution
but 3everal regional institutions coordinated by a public
Wa2hington.
boc~y
:in
The Bank of Englqnd, for instance, is n single institu-
tton with about nine branches which are merely deto.ched offices of
one corporate entity.
'I'he central bcnks of mcst other coun t·~·ies like-
wise ere single instj_ tutions.
There are several reasons why the
central banking system of the United Stntes comprises
federated institutions instead of one.
thct the country is
ext:~·emr:;ly
l't
nuntb8r of
Perhaps the most ,)bviou.s is
large and the number of independent
local banks which cover it is also large.
Most other countries have
a relatively smaller area to serve and c. far smaller number of separe.te banks and financial i..nsti tutions.
The Federal Reserve System,
through the twelve regional Federal Reserve Banl-::s, effects a <lec(.ntralizatio::l of bs.nking reserves and gives to each region
degree of credit autono.!1JY.
3
large
As its name indi.cat0s, it is & federal
system, basod upon the federal pattern which is distinctive oi' our
American institutions.
The term "centrel bankinG" is not as familiar in the United States
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as it might be.
The conception of what central banking is and of
what e.re the essential functions of the FederCJ.l Reserve Banks is
not widely understood.
This is partly because the word "banl<ing"
suggests to most people the dealings they have with their
banks.
OIA'Tl
local
Consequently whon the Federal Reservn Banks are thought of,
the tendency is to consider their operations as merely differing in
magnitude or degree from those of commercial banks.
is apt to generate serious misconceptions.
Yet this view
'T.'he point of view of
central banking differs profoundly from the point of view of commercial banking.
It is the purpose of a Government to serve the
public interest and the purpose of a central tank as a quasi-governmental institution is the same.
Although the central banking
mechanism, as, for example, in the case of our Federal Reserve Banks,
has much the same form of corporate organization as a business Cf)rporation operated for profit and has a balance sheet showing assets
and liabilities, including the item of paid-up capital and the item
of gain or loss from operations, the purposes and objectives of its
operations differ essentially from those of private business corporations.
At the present time, for example, the twelve Federal Reserve
Banks have cash and reserves of nearly nina and a half billion and
earning assets of only two and a half billion.
Such a position,
which is quite different from what an enterprise operated for profit
would choose to maintain, is entirely normal for a cE•ntral banking
organization.
When a Federal Reserve Bank makes n loan or nurchases securities
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it is not doing so for the sake of profit as a commercial bank would
be doing.
The purpose of the loan or of the purchase of securities
is to supply the money market with the additional funds which it appears to require.
If the transaction is an individual loan, tho
additional funds are supplied by the transaction to some one individual bank which may or may not be experiencing thEJ
that other banks are exgeriencing.
SF.1me
demand
If the transaction is an open
market purchast:l of securities by the Federal Reserve Banks, the result is that the market as a who.lo is supplied with funds and no
particular institution is singled out as experiencing the effect of
the transaction any more than e.nothsr.
In the same way, when, for example, the rediscount rate is advanced, the Federal Reservo Bank is not seeking an increase in its
income as a cozmnercial bank might under similar circumstances.
Its
purpose in raising the rediscount rate is to raise the cost of bank
credit in general and thereby dh;courage tendenci<>S to excessive usc
of' credit.
.
It is significant of the i.mnortance of central banking functions that the Bank of England evolved into its posHior. as a cer:trnl
bank in reRyonoe to the requiremE-mts of the London money :·1arket
out specific
ler;isl~tiTle
action to that end.
l;iri th-·
A f'ew generntions ago
the Bank of Encland was primarily a private institution cnjoytng certnin privileges but operated by its mann.gElment us e.ny other nusiness
enterprise might be in the pursuit o1' profit i'or its
stocl~holders.
The process by which it gradually changed i.ts purpose, end subord.i:anted the role of profits in its opGr!?ctions to th'?!.t of' serving the
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25?
broad public purpose of stabilizing the money market was a long and gradual one.
The assumption of its responsibilities was not so much the re-
sult of specific legislation as of voluntary action.
The exrunple I have
just mentioned demonstrates how central banking functions came to be required b,y a business community and accordingly came to be performed even
witho11t provision by the legislature.
Similarly, the need arose for our
own Federal Reserve System and its functions have undergone evolution in
gradual adaptation to the changing requirements imposed upon th.'3m by the
economic world.
In addition to the essential central banking functions that I have
been describing, the Federal Reserve System has a number of regulatory
powers entrusted to it by Congress which arc of more or less special nature.
These include powers to fix reserve requirements within certain
statutory limits, to fix margin requirements, and to examine banks and
require of their management an abandonment of unsound banking practices
on pain of dismissal.
These administrative and regulatory powers of the
Federal Reserve S,ystem are for the most part lodgea in the Board of Governors in Washington.
In performing them the Board is called upon to
issue .regulations, administrative rules, and orders.
does not function as a remote and detached body.
However,
the~
Board
In the case of open
market operations, which are among the most important of Reserve Bank
activities, the law provides that such operations must be
c~mducted
ac-
cording to a uniform policy by all twelve Federal Reserve Banks in accordance with the directions of tho
Fede~l
Open Market Committee.
The
Federal Open Market Committee comprises twelve members, seven of whom
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are the members of the Board of Governors, and five of whom are elected
by the twelve Federal Reserve Banks.
ipate
Thus the Federal Reserve Banks partie-
directly and responsibly in measures which are among the most im-
portant that can be taken qy the Federal Reserve System.
There is also
the example of discount rates, which, as you know, are established by the
Federal ReservG Banks subjGct to approval by the Board.
In connection
with various other matters also the Federal Reserve Bank·s are consulted.
Tho Presidents of thJ Reserve Banks meet frequently in Washington and confor with the Board on questions having to do with thG operation of the
Federal Reserve System.
When the Board is amGnding its regulations or
issuing new ones, the drafts it prepares are submitted to the Federal
Reserve Banks for their consideration, and their suggestions contribute
substanti&lly to the final form which the regulations take.
In addition,
drt.J.fts of rogulations are usually submitted to responsible groups through
the agency of banking or business associatlons.
For example, the drafts
of Regulations "T" and "U", which govern margin requirements, were submi tted to exchanges for their considerntion, tend the Board feels that the
many ver-J' practical comments roceived from the exchanges have been most
helpful.
The same holds true of othor regulations, in th.; preparation
of which bankers 1 groups and organizations nre consulted.
Furth:.::rmore,
the Board is always accessible to those who wish to offer their suggestions, to criticize credit measures, or to ask for information.
The Board itself is an organization whose decisions are formulated
by the vote of its members.
In the interest of good administration, and
as contemplated by the law, the Board is a unit.
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In order to assist i.n the determination of its policies, the Board
maintains what is
probab]~
the most comprehensive organization for the
compilation and analysis of economic and financial information maintained
by :::..ny central banking organization in the world.
The Board has this in-
formation and the export opinion of a staff of analysts
disposal.
constr-:.r~tly
at its
The result is that aey decision of' the Board or• of the Federal
Open Market Committee has behind it not only the judgment of Board members and Federal Reserve Bank officers, but of an e xpericmced staff o.f
specialists in economic and monetary fields who bring a trained critical
ability to the consideration of proposed measures.
In this c·Jnnectiori I wish also to remind you that the Federal Reserve
System publishes mora detailud and important info:rrnati,:m about its C:Jnditions and its action than any other central banking organization in the
world.
Much of this information appears in occasional and periodic press
releases, and is
c~nte.ined
in the Federal Reserve Bulletin and the annual
report of the Board of Governors.
Having reviewed with you the general
purpose~
and characteristics
of central banking, or as some prefer t') call it, reserve banking, and
having also pointed out how in this country the central banking system
is org'='!,nized on distinctly American principles and formulates its policy
in aCC)rd.n.nce with thc)Se principles, I wish now to review,
Boston
tht~
~~s
I did in
other day before the Bankers' Committee of the Now I:.:ngland
Council in their Executive Session, the C::Jurse o.f policy f.Jllowod by reGerve authorities during the past year or so.
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As you know that policy has for several years been one of monetary
ease.
Statements to that effect have been frequently made by the Board,
and I neod not go into the considerations upon whlch tho policy is basod.
I wish instead to point out briefly how the various measures which have
been taken fit together as applications of central banking policy in given
circumst[c:.nces.
The various steps which havo boen taken should be viewed
not as isolated events, but as elements in a connected story.
To begin with, there was the increase in reserve requiremEJnts a year
ago last August.
I wish to emphasize the fact that the pov:er to fix re-
serve requirements is not a customary means by which the centrGl banking
system effects current adjustments of the supply of credit to demand.
It
is in the first place a limited power - the Board cannot raise or lower
requirements at will, but only within certain limits.
Moreover it hus not
th.3 flexible applicDtion that. open market operations or discount powers
have.
It wo.s exercised by the Board for the first time last August, and
again last spring.
The occasion of the ex8rcise of this power was, as
you know, the flow of gold into this country from abroad, and the resulting expansion of bank reserves to proportions quite beyond the possibilities of use as a basis for the legitimate expansion of credit.
The cir-
cumstances were such that if the Federal Reserve System had desired to
have eG.sy money conditions regnrdless of the consequences that might
ensue in case unsound and inflationary conditions developed, it could
have adopted a policy of doing nothing at all.
But it sJught instead
to reestablish the position it was intended by law to occupy - a position
in which it could act promptly and effectively either in the direction of
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easing the credit situation further, or in the direction of restraint whichever appeared to be in the public interest.
Accordingly, when the
Board raised reserve requirements, its purpose was not to abandon its
policy of monetary ease but to continue that policy under conditions
amenable to control.
Theoretically and historically, the technique of credit regulation
has been considered most efficient when member banks have had a minimum
of excess reserves and could expand the amount of credit outstanding
when and as steps are taken to increasG their reserves.
This can be
most readily effected b,y open market puchases, which have the effect
of making funds available to the money market and of making it unnecessary
for member banks in general to apply to the Federal Reserve Banks for advances.
However, should individual banks still require funds, they may
borrow from the Federal Reserve Bank and when tbey do so its discount
ra to s can be reduced in conformity with '"- policy of ease, or conversely
can be raised if an opposite policy is adopted.
But, of course, when
the banks are superabundantly supplied with reserve funds from an outside
source and therefore have little, if any, occasion to seek additional
funds from the Federal Reserve Banks, the discount rate and open market
operations, as moans of credit regulation, eease to be effective.
The
purpose of the increase in reserve requirements was, therefore, to offset the effect of gold imports and restore the base upon which normal
measures of credit regulation would be effective.
Sterilization of incoming gold was a logical accompaniment of the
increase in resorvc requirements.
As announced by the Secretary of the
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262
Treasury, accordingly, it became the Treasury's policy, "whenever it is
deemed advisable and in the public interest to d:"J so, to take appropriate
action with respect to net additional acquisitions or releases of gold by
the Treasury Department.
This will be accomplished b,y the sale of addi-
tional public-debt obligations, the proceeds of which will be used for
tho purchase of gold, and by the purchase or redemption of
outst~nding
obligations in the case of movements in the reverBe direction."
The Treasury's purchases of gold pursuant to this policy had the
effect of keeping the gold from getting into bnnk reserves and swelling
them to grsater volume.
These measures, I repeat - the increase in rescrv;;) requirOJnents by
tho Federo.l Reserve System and the sterilization of gold by the Treasury
... were unusual measures taken to offset an unusual condition, namely, the
enormous inflow of capital and gold from abroad.
They were outside the
category of normal measures of credit regulation.
They were related to
normal measures of credit regulation ].n somewh:tt the same way that reballasting a ship is related to its regular operation.
Thoy were measures
intended to neutralize the effect of major financial disturbances originating' abroad, and to keep the domestic credit situation G.mtnabJ.e to the
established technique of regulation.
As the Board explained, when it announced the final incree.s0s in
reserve rGquirements, the System would be restored by this action to "a
position where such reduction or e}:pansion of member bank rescrvGs as
may be deomed in the public inturest may be offectod through open-market
operations, a more flexible instrument, better adapted for
l~eeping
the
reserve position of member banks currently in clo:-Je adjustm<:Jnt to credit
needs .• •,
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At this point perhaps I should briefly restate the process qy which
open-market operations achieve thoir purpose.
In tho first place, as you
know, when a bank enlarges the amount of credit it has outstanding, either
b.Y additional loans to its customers or by additional purchas0s of invest-
mont securities, its res,3rves tend to be roduced.
Consequently it cannot
enlarge the amount of credit it has outstanding unless it has reserves in
excess of what it is required to have.
On their own initiative banks may
procure additional reserve funds either by borrowing or by selling sccurities.
Or the Federal Reserve System on its initiative may supply banks in
general withOOditional reserve funds by open-markut purchases of investment securities; for as the Federal Reserve Banks pay for the Gecurities
they buy, ei thor
increased.
~J
check or by crodi t, the reserves of member banks are
Contrariwise, if tho
Feder~:l
Reserve System sells sec1.1ri ties,
the process of paying for them, whether they are purchased by member banks
or by the customers of member banks, will reduce the reserves of member
banks.
Purchases by the System tend to oaso the money market, sales by
tho Syste1:1 tond to tighten it.
In August and September of t!1is year a further step in pursuance of
the System 1 s established policy was tuY..en when the Federo.l Reserve Bank
rediscount rates were lowGred.
In approving the first of these clk'lnges
tho Board stated that its "approval was basod upon tho view that the reduction of discount r01.tes at this time would assist in carrying out the
System 1 s policy of monetary case and rnako Fr;;deral Eeservo Bank credit
readily available to member btmks for the accommo<lation of commerce,
business and agriculture, without encouraging member banks to borrow
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264
outside of their districts or to liquidate their portfolios in order to
be in a position to meet tho needs of present or prJspective borrowers."
The Board went on to say "The reduction in discount rates, which
have had little or no practical effect during the period when excess reserves were abnormally large and widely distributed throughout the System, brings the rates into closer relation with the interest rate structure generally prevailing, and affords to member banks the benefit of
rates, on advances made by the Federul Reserve Bank, which are in line
with those available in the money market.
During the extended period
when excess reserves of the banking system were between two and three
billions of dollars, the occasion did not arise except in rare instances
for member banks to borrow from tho Federal Reserve Banks, and the discount rates were accordingly inoperative as a practical matter.
"As a rosult of the continued progress of the recovery
move~ent,
demands of agriculture, industry and commerce for baruc accommodation
have steadily increased and at the present time arc augmented by seasonal requirements, particularly with relation to crop movements.
"It is the Board's view, therefore, that at this time the Federal
Reserve System can best discharge its public responsibility and promote
the continuance of recovery by making it po8sible for member banlcs to
obtain accornmodation from Federal Reserve Banks at rates which will encourage them to employ their funds to meet the needs of agriculture,
industry and commerce."
Later in September, the Federal Open Market Committee announced
that it had authorized purchase in the open market from time t0 time
265
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of "sufficient amounts of short-term Ur:itcd States Government ol:,ligations to provide funds to meet seasonal wl thdra.,,:aL~ of currnncy from
the
banl~s
and other ser:tsonal requirements."
It said further:
"Reduction of the additionn) holdings in the oven market nortf'olio
is contemplated when the sca8onn.l influences aro rovcrsed or other clrcumst-:mces make their retention unnccess<n•y.
"The purpose of this action is to maintain at meT'l.ber banks an
aggrRg:1tE1 volume of oxccss re.'3erves adequ::tte for the continuation of
the System's policy of monetary
ear;(;
for the furtherance of economic
recovery."
At the same time, the Committee announced tha"!; at the request of
the Board of Governors the Secr<:;tary of the
'l'reasur~r
had ('greed to
relense - that is, to desterilize - approxim11tely ~~300,000,000 of gold
from the Treesury' s inactive occount.
AcclorC.ingly, the Treasury was
credited wi.th thn.t nmount on the books of the Federal Reservr: Bnnks
which j_n the course of regul'.lr Treasury disbursements found its way
into the reserve nccounts of member banks and incr<:,asod their .wailable
funds correspondingly.
monetary
ffi(~asures
This wns an e::ffccti vo
me~ms
to maintain the:: policy of ease.
of utilizi.n!; our
The Committ':le' s
statement made at the time pointod out that:
"This action is in conformity with the usual
~olicy
of the Sys-
tem to facilitate the nnanc:ing of orderly marketing of crous and of
autumn trade.
Together with the recent roductions of di3count rates
at the several Federal Reserve Banks, it will enable the b::mks to meet
readily any increasc.-ld seasonal
dom~',nds
for credit :md currency &nd
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contribute to th8 continuation
~f •3&1:.1:/
cr·?dit conditions."
As rtateii in the Oetober Federal Hesorve Bull8tin, this action
toward augmentation of member bank resurvos wa.<J taken in order to
anticipate the usual seasonal needs of mombor banks for currr:ncy and
credit.
The action of the System in bringing about an increase of
available funds put banl(S in a stDl easior position to meet sc•tsonal
noeds as woll as increasing dem:mds for bank credit.
It was an exer-
cise of credit techni.que under normal and typical conditions.
Before passing on to the latest m,;nsure of credit technique
taken by the System, I want to mention
r~
recent change in the r<:;gula-
t.i.ons governing discounts by the :B'oderal Reserve Bnnks.
'rhis change
was effected by the issuance of Hegulation A in r0vi.sed form effective Octob•3r l.
Its significance lies :Ln the fact that in determin-
ing the eligibility of' paper f'or discount, the form of the obligations to be discounted is considered of less importe.nce than it used
to be.
Originally the privilege of rediscount at the Federal Re-
serve Bar.ks had been restricteC. to r·:::lnti vcly short-terr.l paper arising from certain commercial and agricultural activities.
As you know,
the amount of such paper has tended :i.n :recent years to constitute a
smaller and sme.ller proportion of the tot'1l amount of paper available
to banks.
To the extent the.t banks wer•e depe"!'ldent on such paper for
discounts, the decrease in its amount meant in effect r.: curt1.ilment
of tho povwr of the Federal Reserve Banks to extend credit.
'Iho
Bflnking Act of 1933 and tho Banking Act of 19:55 both enlarged the
classif:.cation of popor upon which individual membsr banks m:i.ght procure funds from the Fedr:.,ral Reserve Banks for the repleniahment of
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267
their reserves, and Regulation A as recently issued by the Board. carries out the ::mrrJose of these changes in the law.
The new Regulation had been in preparation for a long period and
the time of its issuance had n.o special bearing with respect to the
current situation.
It was rather a longer ro.nge measure.
Moroov·3l',
its issuance was not of course a measure of credit regulation, like
open market operations or chnngos in tho discount rate, but .a lib,::ralization of th8 conditions under which tho regulG.r means of credit
regulation are exercised.
The latest measure of credit regulation taken by the System was
the change in margin requirements effective the first of this month.
The power to fix margin requirements iE;, as you know, a new and
special responsibility im0osod upon the Board by the Securities Exchange Act wh:Lch Congress adopted in 1934.
upon the whol,;: field of crodi t.
other central banking powers.
Its effect is not general
In this respect, it differs from
It is directed exclusively at the use
of credit advanced by brokers, dealors and by banks for the purpose
of purchasing or carrying registsred s,-,cur:i.. ties.
Theoretically,
margin requirements can be raised when it eppears advisable) to restrain speculative use of credit and they can bo lowered when it appears advisable to relax the restraints.
Because of the special nature of this particular power of credit
regulation, it can be exercis8d independently of other measures by
which the c!·edi t situation is influenced.
Thus it i.s possible to :pur-
sue a restraining policy with rsspect to the use of credit for securities' speculation at the same tj_me that an easy money policy is being
268
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pursued with r8spect to the use of' credit for commerce, industry and
agriculture.
13y its most recent action the Board eased credit condi-
tions so far as securities' trading is concerned.
It hap-pens that
this policy of ease in the special field of stock market trading
coincided with tho policy of easG which the Board has all along pursued in the general field of credit, but conditions do not always
call for a parRllol policy by any means.
'l'he peculiar character of
the power to fix marein requirements is that it me.kes it possible to
influence credit conditions in a particular f1eld independently, if
necessary, of' what is done in other fields.
It is evident that the exercise of Federal Reserve functions,
like those of any other orgnniz.r:.rtion, invoJves
use of certain tools
ac~ording
sometim(~s
merely the
to acce:rn,ed procedure, and s.ometimes
a change in thu tools themselves or in tho conditions under which
they are to be used.
Open market operations and chenges :i.n discount
rates are the customary tools regularly employed i.n performance of
Federal Reserve System functions.
'rhey are practicable, flexible·
and tested tools, which can be used to ease money conditions at one
time and to tighten them at another.
They can be made to accomplish
their purposes without shock -without violent and painful adjustmer.ts.
'
Thoy can be appUed gradually so that 1hoir effect is barely
percentiblo.
If necessary, thoy can be applied vigorously and
sweepingly.
It almost goes without saying that the powe·rs which I have been
describing can only be exercised with the highest sense of public
responsibility.
The central banking aut:tDri tt6:J must formulate and
•
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269
execute their policies with a well-informed sense of the effect upon
the country as a whole.
hand.
Conflicting interests are present on every
Every action taken is certaj.n to be approved by some and dis-
approved by others.
Every step taken is sure to be subjectHd to the
scrutiny of acute and well-informed critics.
That is as it should be.
It is the normal condition under which governmental institutions
function in a democracy, and most of us believe it is on the whole
the best condition.
Naturally enough the better you as specialists in the field of
credit understand the responsibilities of the Federal Reserve System
and tho manner in which we try to meet them - and on the other hand,
the bette.t' we of the Federal Reserve System understand your problems
;· ...
and the conditions under which you try to meet them- the more effectively will our credit machinery function for the
the country.
conu~on
welfare of
@FedFRASER