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Compiled in
Division of Research and Statistics,
Board of Governors of the Federal Reserve System
Part 1
Mandates Actual and Proposed
I. Mandates proposed for Federal Reserve System


II. Objectives of foreign central banks prescribed by statute


Part 2
Discussion of Objectives
I. Official policy declarations by the Federal Reserve Board
and the Federal Reserve Bank of New York
II. Public but not official statements by officials of the
Federal Reserve System
III. Statements by other U. S. Government officials

V. Discussion of objectives in the writings of economists

Sources of quotations


IV. Discussion of objectives of Bank of England and Swedish Riksbank




April 19, 1939.





The following collection of quotations is designed to present a survey
of legislation and discussion on the objectives of central bank policy.
The quotations fall into two parts.

The first part consists of legisla­

tive mandates proposed for the Federal!. Reserve System, ■whether incorporated
into actual legislation, contained in bills introduced in Congress but not
passed, or merely suggested, and of the mandate clauses in foreign central
bank statutes.

The second part is divided into the following groups:
Official statements by the Federal Reserve Board and the

Federal Reserve Bank of New York on the objectives that should guide their

The opinions of individual Federal Reserve officials, taken

largely from testimony before Congressional committees.

Statements representing (a) the views of the present Adminis~

tration, one made by President Roosevelt in 1933, the other by Secretary
Morgenthau in 1937, and (b) the views of three men who were instrumental
in drafting the Federal Reserve Act.

Discussions in the Macmillan Report of monetary objectives for

England, and by various writers of Swedish monetary policy in recent years.

5 . Discussions in the writings of economists on monetary policy
or on business cycles.


Mandates proposed for Federal Reserve System
A. In drafts of Federal Reserve Act

As introduced in House by Representative Glass
The rate of discount shall be established "with a view to
accommodating the commerce of the country and promoting
a stable price level...."
As passed by House
"...with a view of accommodating the commerce of the
As amended by Senate and as enacted
"..•with a view of accommodating commerce and business...."


In proposed stabilization bills

First Strong price stabilization bill (1926)
(a) Strong bill as introduced
"...with a view to accommodating commerce and promoting
a stable price level for commodities in general. All
of the powers of the Federal reserve system shall be
used for promoting stability in the price level . 11
(b) Strong's first revision after the hearings

Title: "An act to provide for the establishment of Federal
reserve banks, to furnish an elastic currency, to maintain
the gold standard and the value of gold, to avoid infla­
tion and deflation, to provide business and economic
stability, to afford means for rediscounting commercial
paper, to establish a more effective supervision of bank­
ing in the United States, and for other purposes."
"All the powers of the Federal Reserve Board as granted by
this act and of all Federal reserve banks.... shall be
directed to the purpose of preventing inflation and defla­
tion and stabilizing the purchasing power of the dollar,

so far as may be: Provided, That such powers shall be
used to control the total volume of credit and currency
in circulation and use, rather than the uses made of
such credit...."
"It is hereby declared to be the intention of Congress
that the primary function of the Federal reserve system
shall be to stabilize the general price level by stabiliz­
ing the purchasing power of the dollar, so far as may be
possible, consistent with sound economic principles."
(c) Strong's third revision
Title: "AN ACT To....maintain the gold standard, to prevent
inflation and contraction, to promote the stability of
commerce, business, and agriculture, to promote economic
justice between creditors and debtors, between bondholders
and stockholders, and between the parties to all contracts
into which time and money enter by providing a more stable
money, and for other purposes."
Discount rates "shall be fixed with a view to accommo­
dating and stabilizing commerce, business, and agriculture
The Federal reserve system shall use its powers,
" so far as they have any effect thereon, with a view
to regulating the volume of credit, currency, and money in
circulation so as to prevent inflation and contraction
and thereby to stabilize, so far as may be, the purchasing
power of the dollar in terms of commodities in general*
but nothing herein shall be construed as enlarging or
extending any of the existing powers of the Federal Re­
serve Board in this respect or as authorizing any inter­
ference with the natural tendency of prices of specific
commodities or groups of commodities to vaiy among them­
selves under the influence of demand and supply."
(,d) Mandate proposed at hearings by Irving Fisher, quoting wording
suggested by Rep. Goldsborough in 1922.
Discount rates "shall be fixed with a view of accommo­
dating and stabilizing agriculture, commerce, and business
and preventing deflation and inflation."
Second Strong bill (1926)
(a) As introduced

"The Federal reserve system shall use all the powers
and authority now or hereafter possessed by it to maintain
a stable gold standard; to promote the stability of com­
merce, industry, agriculture, and employment; and a more
stable purchasing power of the dollar, so far as such pur­
poses may be accomplished by monetary and credit policy."


u -

(b) Mandate suggested by Governor Hamlin at the hearings
"The Federal reserve system shall use all the powers
and authority now or hereafter possessed by it to maintain
a stable gold standard and shall furnish credit facilities
commensurate with the requirements of credit stability of
agriculture, industry, employment, and of the purchasing
power of the dollar, so far as such purposes can be ac­
complished by monetary and credit policy."
3* Goldsborough bill (1932)
(a) As introduced
"The Federal Reserve Board and the Federal reserve
banks are hereby authorized and directed to take all
available steps to raise the present deflated wholesale
commodity level of prices as speedily as possible to the
level existing before the present deflation, and after­
wards to use all available means to maintain such whole­
sale commodity level of prices."
(b) As passed by Hovise
"It is hereby declared to be the policy of the United
States that the average purchasing power of the dollar as
ascertained by the Department of Labor in the wholesale
commodity markets for the period covering the years 1921
to 1929, inclusive, shall be restored and maintained by
the control of the volume of credit and currency."
4. Federal Monetary Authority bill (1934)
"It is hereby declared to be the policy of the United
States to restore and maintain the normal purchasing power
of the dollar, which shall, for the purposes of this act,
be the average purchasing power of the dollar for all
commodities during the year 1926."
5. Thomas Monetary Authority bill (1937)

"A bill for the regulation and stabilization of agri­
cultural and commodity prices through the regulation and
stabilization of the value of the dollar..."
"The monetary policy of the United States shall embrace,
among others, the following principles:
"(a) To coin and keep constantly available an adequate
supply of sound moneyj
"(b) To regulate the value of the dollar so as to
best serve the domestic economy of the people...."

n .,.the regulation and stabilization of the value of the
dollar shall be a fixed policy of the Government of the
United States, and, in order to promote and give stability
to agriculture, industry, commerce, manufacturing, mining,
forestry, fisheries, employment, and other human activities,
the regional Federal Reserve banks and the member banks of
the Federal Reserve System, under the supervision and di­
rection of the Monetary Authority, shall cooperate in carry­
ing out the policy and principles herein set forth...,"
"...the constitutional clause, regulating the value of
money, shall be construed to mean adjusting the value of
the dollar to that point which will serve the best interests
and best promote the domestic economy of the people of the
United States...."
Thomas price stabilization resolution (S. Res. #216, 1938)
" is the sense of the Senate that the Federal Reserve
Board, the Treasury, and the executive agencies of the
Government should proceed forthwith to adjust the purchas­
ing power of the dollar by the necessary monetary policies
and measures to attain within the next twelve months the
1926 price level of wholesale commodities, including farm
Patman bill for Federal ownership of the Federal Reserve banks (1938)
(a) As introduced
"It is hereby declared to be the policy of Congress-...
to prevent injurious expansion and contraction of credit and
currency; to stabilize and maintain a dollar of uniform
purchasing power for the purpose of assuring the kind of
dollar which a generation hence m i l have the same purchas­
ing and debt-paying power...."
(b) Amendment proposed by Representative Patman

"It shall be the duty of the Federal Reserve Board to
raise the all-commodity index, or the so-called price level,
•until full employment of all persons able and vailing to
work shall have been achieved, and until the price level
shall at least reach the all-commodity index of 100 as estab­
lished by the Department of Labor for the year of 1926,
which is the same as the average for the years 1914-1930,

"Thenceforth such price level shall be standardized and
maintained at a variation not to exceed 2 percent above or
below the standard reached as aforesaid. It shall be the
duty of the Federal Reserve Board in accomplishing these
ends to expand demand bank deposits by the purchase of
United States bonds and notes, or bonds secured by the
United States, or bonds of States and subdivisions thereof,
or other sound bankable assets; and to contract demand bank
deposits by the sale of the securities aforesaid."

C. Enacted in Banking Act of 1933

Conditions governing the extension of loans to member banks
The words: "the maintenance of sound credit condi­
tions, and the accommodation of commerce, industry, and
agriculture" were added to the original act.
Objective of open-market operations
"The time, character, and. volume of
operations shall be governed with a view to accommodating
commerce and business and with regard to their bearing upon
the general credit situation of the country."

D. Enacted or proposed in connection with the
Banking Act of 1935
Objective of changes in reserve requirements, as enacted
"in order to prevent injurious credit expansion or con­
Mandate proposed by Chairman Eccles and adopted by House

"It shall be the duty of the Federal Reserve Board to
exercise such powers as it possesses in such manner as to
promote conditions conducive to business stability and to
mitigate by its influence unstabilizing fluctuations in the
general level of production, trade, prices, and employment,
so far as may be possible within the scope of monetary ac­
tion and credit administration."

- 7 -

3. Revision of Eccles mandate proposed by Senator Fletcher (words added or
altered by Senator Sletcher are underlines)
"It shall be the duty of the Federal Reserve Board to
exercise such powers as it possesses in such manner as to
promote conditions conducive to full employment and business
activity, and thereafter to mitigate by its influence unstabilising fluctuations in the general level of production,
trade, prices and employment, so far as may be possible
within the scope of monetary action and credit administra­
4-. Objective of open-market operations proposed by Adolph C. Miller
" order to aid in the establishment and maintenance
of sound banking, credit, financial, and economic conditions."
5. Mandate proposed by ex-Senator Robert L. Owen
"It is the purpose of the Federal Reserve Act as herein
amended, to regulate the value of money, to furnish the
people at all times with a supply of sound credit and cur­
rency, adequate for the achievement and maintenance of maximun business activity and employment; to create conditions
conducive to the restoration of the value of property,
labor and services and to the restoration to normal of
governmental revenues, thus enabling the Government, with­
out public distress, to establish and maintain a balanced
budget; thereafter to establish and maintain a dollar of
uniform, permanent debt-paying (and?) purchasing power by
regulating the supply of money and credit."

6 . Amendment proposed by Representative Poldsborough

"It is hereby declared to be the policy of the United
States that the average purchasing power of the dollar, as
ascertained by the Department of Labor in the wholesale
commodity markets for the period covering the years 1921
to 1929, inclusive, shall be promptly restored; and that
after such restoration shall been achieved the pur­
chasing power of the dollar shall be maintained substan­
tially stable in relation to a suitable index of basic
commodity prices which the Federal Reserve Board shall
cause to be compiled and published in complete detail at
weekly intervals."

- 8 -

7. Suggested in the course of discussion within the Federal Reserve Board

(a) "The Federal Reserve Board shall use such powers
as it possesses to maintain sound banking and credit
conditions and to exert such influence as lies within the
scope of monetary action and credit administration toward
the restoration of the largest volume of employment,
production, and national income that can be sustained and,
thereafter, toward the mitigation of such fluctuations
in the general level of production, trade, prices, and
employment as militate against stability of economic
(b) "The Federal Reserve Board shall use its powers
to maintain sound banking and credit conditions and, so
far E.s banking administration and monetary action may
contribute to this end, toward the restoration and main­
tenance of full and sustained employment of labor and of
the productive capacity of the nation."

II. Objectives of foreign central banks prescribed by statute
1. New Zealand
Reserve Bank of New Zealand Amendment Act, April 8, 1936.

Article 10,

Section 1:
Restatement of General Functions
of Reserve Bank
"It shall be the general function of the Reserve Bank,
within the limits of its powers, to give effect as far as
may be to the monetary policy of the Government, as communi­
cated. to it from time to time by the Minister of Finance.
For this purpose, and to the end that the economic and social
Yftslfare of Now Zealand may be promoted and maintained, the
Bonk shall regulate and control credit and currency in
New Zealand, the transfer of moneys to or from New Zealand,
and the disposal of moneys that are derived from the sale
of any New Zealand products and for the time being are held
2. Canada
Act of July 3, 1934Preamble - "Whereas it is desirable to establish a
central bank in Canada to regulate credit and currency in
the best interests of the economic life of the nation, to
control and protect the external value of the national
monetary unit and to mitigate by its influence fluctuations
in the general level of production, trade, prices and em­
ployment, so far as may be possible within the scope of
monetary action, and generally to promote the economic and
financial welfare of the Dominion:...."
3. India
Act of March 6, 1934*

The preamble states that pending such clarification of
the world financial situation as would permit establishment
on a permanent basis of the Indian monetary system, the pur­
pose of the new Reserve Bank of India shall be "to regulate
the issue of Bank notes and the keeping of reserves with a
view to securing monetary stability in British India and
generally to operate the currency and credit system of the
country to its advantage...."

Amendments to Statutes of National Bank of Hungary, adopted
June 23, 1933.

Article 1:
"Its duty in the public interest is to regulate the
circulation of money within the country; to facilitate the
settlement of payments; to regulate and control credit
amongst other methods by taking care of and directing the
money market and the capital market; to collect reserves
of gold and foreign exchange for the purpose of international
payments, and especially for settling any deficit which may
arise from time to time in the balance of payments; further
to put itself in a position to be able to deliver gold or
foreign exchange against the bank notes issued, on terms
to be fixed by law, after the restrictions on payments
•with foreign countries have ceased (Article 83)#
"In carrying out all these duties it must equally
take care, on the one hand, that the circulation of money
and credit shall always develop in a manner which is sound
and consistent with economic public interest and, on the
other hand, that the value of the bank notes in relation
to currencies whose value has shown stability, shall remain

5. Mexico
Organic Law of the Bank of Mexico, August 28, 1936.

Article 5:

The Purposes of the Bank Shall Be:
"1. To regulate the issue and circulation of currency,
the foreign exchanges, and the money market.
"2. To operate as a reserve bank for the member banks,
and to function as a clearing-house for them.
"3. To constitute and manage the reserves which are
required for the purposes stated above.
"4-. To direct the activities of the National Banking
Commission insofar as they affect these purposes or can
contribute to their realization.
"5* To act as fiscal agent and adviser of the Federal
Government in external and internal credit operations and
in the issue and servicing of public loans, and to take
charge of the treasury service for tho Government."

- 11 -

Law of March 23, 1935.
"Art. 3 - The objects of the Bank shall be:"(a) To concentrate sufficient reserves to moderate
the consequences of fluctuations in exports and investments
of foreign capital, on currency, credit and commercial
activity, in order to maintain the value of the currency;
"(b) To regulate the volume of credit and the means
of payment, adapting them to the real volume of trade;
"(c) To promote the liquidity and sound functioning
of bank credit; and to ap-oly the provisions of the banking
law for the inspection, examination, and regulation of

11(d) To act as financial agent and counsellor of the
Government in foreign or internal credit operations and
in the issue and service of public loans."
7. Turkey
Statutes of the Bank, September 20, 1931.

"Article 3»"The Bank is established in order to contribute to the
economic development of the country. Its principal functions
are as follows:
"(a) To fix the rate of discount;
"(b) To regulate the international value (cours) and
circulation of currency;
"(c) To act c.s fiscal agent for the Government;
"(d) To adopt, together with the Government, measures
designed to insure the future stabilization of the Turkish

- 12 -

8. Yugoslavia
Law of June 17, 1931.
"Art. 2. - The objects of the Bank are:
"(1) To regulate...the circulation of the currency
(according to the relevant laws) and to maintain its
stability and security...."
"(2) To provide and control the short-term credit
necessary for the economic life of the country;
”(3) To cooperate, in its capacity as cashier to
the State, with the Treasury and to make temporary advances
to the Treasury for its requirements at seasons of the year
when public receipts are less than expenditures."
9• U. S. S. R.
Statutes of the State 3ank of the U. S. S. R., June 12, 1929.
Article 1:
"The State Bank...has as its object to regulate the
monetary circulation and to supply short-term credits to
industry, agriculture, commerce, transportation, and other
branches of the economic system, on the basis of the present
statutes and in accordance with the plan of development
of the national economy of the U. 3. S. R."
10. Poland
Statutes of the Bank, November 1927.
Article 1 states that the Bank is established "in
order to insure the stability of the currency, to regulate
the monetary circulation and credit...."
11. Finland
Regulations for the Bank of Finland, 1925.

"Article 1. - The object of the Bank of Finland is to
maintain stability and security in the monetary system of
Finland and to assist and facilitate the circulation of
money in the country."

- 13 -

12. Danzig
Statutes of the Bank, 1924-.
"Article 2. - The puroose of the Bank shall be to
regulate the circulation of money..., to facilitate the
clearance of payments in Danzig and transactions in foreign
exchange, and, further, to carry on banking business on the
basis of the charter granted to it."
13. Lithuania
Law of August 1922.
in Lithuania
"Article 1 (paragraph 2). - The /Bank1s functions are
to regulate the circulation of mone^ to facilitate the
payment of money in the country and abroad; to realize a
stable and strong currency system.. and to encourage the
growth of agriculture, commerce, and industry."
14» Switzerland
Objective stated in Law of October 6, 1905? same statement in Law of
April 7, 1921.
Article 2 states that the principal task of the Bank
is "to regulate the money market and to facilitate payments."
The statutes of England, France, Italy, and Japan prescribe no objectives
for the central banks of those countries.

In the following countries chief

emphasis is placed, in the provision stating the purpose of the central
bank, on controlling the currency with a view to maintaining a fixed gold

Austria - Statutes of the Bank, 1932.
Bulgaria - Act of November, 1926.
Estonia - Statutes of Bank, 1927.
Greece - Statutes of Bank, October 1927.
Portugal - Constitution of Bank, revised by decree of June 1931.
Rumania ~ Statutes of Bank, i-arch 3, 1929•


I, Official policy declarations by the Federal Reserve Board
and the Federal Reserve Bank of New York
From the Annual Report of the Federal Reserve Board for 1923
After stating that the traditional guide to credit policy, the reserve
ratio, is no longer applicable, the report continues:
"The anomalous situation thus confronting central banking admin­
istration in all countries has led to much discussion in the United
States and elsewhere as to workable substitutes for reserve ratios
as guides to credit and currency administration. Particular prominence
has been given in discussions of new proposals to the suggestion fre­
quently made that the credit issuing from the Federal reserve banks
should be regulated with immediate reference to the price level,
particularly in such manner as to avoid fluctuations of general prices.
Entirely apart from the difficult administrative problems that would
arise in connection with the adoption of the price index as a guide
and entirely apart from the serious political difficulties which would
attend a system of credit administration based on prices, there is
no reason for believing that the results attained would be as satis­
factory ?s can be reached by other means economically valid and admin­
istratively practicable. ... it must not be overlooked that price
fluctuations proceed from a ;-;reat variety of causes, most of which lie
outside the range of influence of the credit system. No credit system
could undertake to perform the function of regulating credit by refer­
ence to prices without failing in the endeavor.
"The price situation and the credit situation are no doubt
frequently involved in one another, but the interrelationship of
prices and credit is too complex to admit of any simple statement,
still less of a formula of invariable application. An oversimplified
statement of complex problems contributes nothing toward the develop­
ment of an effective administrative procedure. It is the view of the
Federal Reserve Board that the price situation and the credit situa­
tion, while sometimes closely related, are nevertheless not related
to one another as simple cause and effect3 they are rather both to be
regarded as the outcome of common causes that work in the economic
and business situation. ....
"Credit administration must be cognizant of what is under way
or in process in the movement of business before it is registered in
the price index. The price index records an accomplished fact. Good
credit administration in times of active business expansion should not
encourage or assist the excessive accumulation of forward commitments
in business and banking which only later on will definitely reflect

- 15 -

the rate at which they have been taking place in resulting changes of
credit volume and changes of price levels; and in times of business
reaction should discourage enforced liquidation of past commitments
which also will only later on reflect the rate at which it has been
taking place in altered credit volume and price levels. The problem
of efficient credit administration is, therefore, largely a question
of timeliness of action. ...
"The Federal reserve act has laid down as the broad principle
for the guidance of the Federal reserve banks and of the Federal
Reserve Board in the discharge of their functions with respect to
the administration of the credit facilities of the Federal reserve
banks the principle of 'accommodating commerce and business.' (Sec.
14 of the P’
ederal reserve act, par. (d).) The act goes further. It
gives a further indication of the meaning of the broad principle of
accommodating commerce and business. These further guides are to be
found in section 13 of the Federal reserve act, where the purposes
for which Federal reserve credit may be provided are described as
'agricultural, industrial, or commercial purposes.' ... The Federal
reserve system is a system of productive credit. It is not a system
of credit for either investment or speculative purposes. Credit in
the service of agriculture, industry, and trade may be described com­
prehensively as credit for productive use. The exclusion of the use
of Federal reserve credit for speculative and investment purposes and
its limitation to agricultural, industrial, or commercial purposes thus
clearly indicates the nature of the tests which are appropriate as
guides in the extension of Federal reserve credit. ...
"But the problem of credit and currency administration implies
the use not only of qualitative tests but also of quantitative tests.
By what means may it be known whether the volume of credit provided
by the Federal reserve banks is in any given set of circumstances
adequate, excessive, or deficient? The problem in good administra­
tion under the Federal reserve system is not only that of limiting
the field of uses of Federal reserve credit to productive purposes,
but also of limiting the volume of credit within the field of its
appropriate uses to such amount as may be economically justified—
that is, justified by a commensurate increase in the Nation's aggre­
gate productivity. The Board is fully aware of the fact that the
problem of credit extension involves the question of amount or volume
as well as the question of kind or character; otherwise stated, in­
volves a quantitative as well as a qualitative determination. ... It
is the belief of the Board that there m i l be little danger that the
credit created and contributed by the Federal reserve banks will be in
excessive volume if restricted to productive uses.

- 16 -

"A characteristic of the good functioning of the economic system
is to be found in the smooth unobstructed movement of goods from the
producer through the channels of distribution to their several ulti­
mate uses. The characteristic of the good functioning of the credit
system is to be found in the promptness and in the degree with which the
flow of credit adapts itself to the orderly flow of goods in industry
and trade. So long as this flow is not interrupted lay speculative
interference there is little likelihood of the abuse of credit supplied
by the Federal reserve banks and consequently little danger of the
undue creation of new credit. The volume of credit will seldom be at
variance with the volume of credit needs as they are reflected in the
demands of productive industry as long as (l) the volume of trade,
production, and employment, and (2 ) the volume of consumption in
equilibrium. Credit for short-term operations in agriculture, industry,
and trade, when these operations are genuinely productive and nonspeculative in character, that is to say, credit provided for the
purpose of financing the movement of goods through any one of the
successive stages of production and distribution into consumption, is
a productive use of credit. But when the effect of the credit used
is to impede or delay the forward movement of goods from producer to
consumer, unless such delay is made necessary by some unavoidable cause,
e.g., the interruption of transportation facilities, credit is not
productively used. The withholding of goods from sale when there is
a market or the accumulation of goods for an anticipated rise of price
is not a productive use. It is the nonproductive use of credit that
breeds unwarranted increase in the volume of credits it also gives
rise to unnecessary maladjustment between the volume of production and
the volume of consumption, and is followed by price and other economic
disturbances. Administratively, therefore, the solution of the economic
problem of keeping the volume of credit issuing from the Federal re­
serve banks from becoming either excessive or deficient is found in
maintaining it in due relation to the volume of credit needs as these
needs are derived from the operating requirements of agriculture,
industry, and trade, and the prevention of the uses of Federal reserve
credit for purposes not warranted by the terms or spirit of the Federal
reserve act.”
From answer of New York Federal Reserve Bank to questionnaire of Senate
Banking and Currency Committee, 1931
"...whatever the cause of growth or expansion in the country's credit
structure, if the growth is at a rate greater than that at which ex­
perience has shown the country's business can grow on a sound and
secure basis, then Federal reserve authorities have the responsibility,
however unpopular, of lending their efforts, either through openmarket operations or discount rates or both, toward restraint. Con­
versely, in a period of credit contraction or of less than the normal
rate of growth, whether caused by business recession, declining prices,
wages and employment, or any other cause, Federal Reserve policy, in
our opinion, should be to lend its efforts toward making money and
credit plentiful and cheap.

- 17 -

"It is our belief that it is in this direction that the Federal
reserve system can most effectively exert an influence to prevent ex­
cessive speculation and to mollify business depression rather than in
any attempt to control directly the use to which Federal reserve credit
is put. Efforts by the reserve system to control the particular uses
of credit are, we believe, impracticable and ineffectual, whereas the
system does have a considerable influence over changes in the total
volume of credit and its cost.

"... Generally speakinr, purchases of Government securities since 1922
have been made at times of business depression or recession in the
United States accompanied by unemployment, declining foreign trade,
weak commodity orices, and reduced speculative activity. Broadly speak—
i n -, also sales of securities have taken place at times of large in­
dustrial activity, full employment, firm commodity prices, and ten­
dencies toward excessive speculation. ...
"Since the purchase of securities has a tendency to make money
easier and thus has an influence toward stimulating business activity,
and since the sale of securities tends to make money firmer and has an
influence toward checking excesses, it may be said that purchases and
sales of government securities since 1922 have been such as might
reasonably be expected to exercise some influence toward business
stability by aiding recovery at times of depression and retarding ex­
cesses at times of prosperity."
3. Conclusion of Board of Governors* statement of Aurrust 2, 1937i on
"Objectives of Monetary Policy"
"To sum up, the Board believes that economic stability rather
than price stability should be the general objective of public policy.
It is convinced that this objective cannot be achieved by monetary
policy alone, but that the goal should be sought through coordination
of monetary and other major policies of the Government which influence
business activity, including particularly policies with respect to
taxation, expenditures, lending, foreign trade, agriculture and labor.
"It should be the declared objective of the Government of the
United States to maintain economic stability, and it should be the recog­
nized duty of the Board of Governors of the Federal Reserve System to
use all its powers to contribute to a concerted effort by all agencies
of the Government toward the attainment of this objective."

Summary and Conclusion of Board’
s statement of March 13, 1939» on
"Proposals to Maintain Prices at Fixed Levels through Monetary Action."
"Summary.- To summarize, the Board of Governors is in complete
sympathy with the real purpose of the price-stabilizing bills, -which
is to prevent booms and depressions and have business always on an
even keel. But experience has shown that prices do not depend primar­
ily on the volume or the cost of money; that the Board's control over
the volume of money is not and cannot be made complete; and that
steady average prices, even if obtainable by official action, would
not assure lasting prosperity. The Board exerts all its powers to
provide a constant and ample flow of money at reasonable rates to meet
the needs of commerce, industry, and agriculture. In order to main­
tain a lasting prosperity many other agencies of the Government, as
well as many groups in the gener&l public, must cooperate, since
policies in respect to taxation, expenditures, lending, foreign trade,
agriculture, and labor all influence business conditions.
"The Board believes that an order by Congress to the Board or
to any other agency of Congress to bring about and maintain a given
average of prices would not assist but would hinder efforts to stabil­
ize business conditions. It would hinder, because the price average
frequently would indicate a policy that would work against rather than
for stability. Such an order would also raise in the public mind hopes
and expectations that could not be realized.
"Conclusion.- In view of all these considerations the Board
does not favor the enactment of any bill based on the assumption that
the Federal Reserve System or any other agency of the Government can
control the volume of money and credit and thereby raise the price
level to a prescribed point and maintain it there."

II. Public but not official statements by officials
of the Federal Reserve System
Benjamin Strong
Testimony on first Strong price stabilization bill
"..♦there is no msgic formula that can be introduced into the Federal
reserve act to control prices. You can not eliminate human judgment
in the administration of these matters. ...
"I am not differing with the purpose (of the bill) at all ...."
Mr. Williamsons "Do you think that the Federal Reserve Board
could, as a matter of fact, stabilize (the) price level to a greater
extent than they have in the past..,?"
Governor Strong: "I personally think that the administration
of the Federal reserve system since the reaction of 1921 has been just
as nearly directed as reasonably human wisdom could direct it toward
that very object,"

"Now, I believe there is a tendency, possibly a very natural
tendency, on account of the possibly exaggerated consideration of
the 'money* influence in everything that we do, to look at this price
level as though it operated up end down against a counterweight of
credit, and as though you could open a spigot when prices are declin­
ing and put a little more credit in the counterweight and raise prices,
and if prices are going up you could drain a little credit out of the
counterweight and let prices go down. But I am afraid the price
problem is much more complicated than that,"
-:h h :-ih k b :-

"...I believe that an administration of credit such as is afforded
by the Federal reserve system, is capable of exerting an influence
upon the volume of credit employed by the country and an influence upon
the cost of that credit, and, within the limitations which the volume
of credit and the cost of credit exert an influence upon the price
level and only within that limitation, can the operations of the
Federal reserve system influence prices, that is, the general price
levelj that there will be times when even the power to somewhat regu­
late the volume of credit and its cost will fail of complete or any­
thing like complete regulation of the price level, because there are
many other things far beyond the control of the influence of credit,
that is, the volume and cost of credit, such as the mood of the people.

- 20 -

"Therefore, if any expression is contained in the Federal reserve
act which appears to represent to the people that the Federal reserve
system can do more in stabilizing the price level than the limited
control of credit is capable of performing, I am afraid that disap­
pointment will come ’
Mien there are fluctuations of prices which can
not be controlled within the strict limitations I have described."
From a paper on "Prices and Price Control"
"So the. reserve percentage is a bad and dangerous guide to a
lending policy. But It will then be asked, 'What shall be the guide
if not the reserve percentage? 1 and a chorus of answers will come back—
•Prices, 1 or 'An index number,' and we again get around to the point
where, for the moment, some people think that prices should be the
guide, which comes close indeed to thinking that the Reserve System can
and should fix prices.
"Here is a way to distinguish. Just as credit is one of the
influences upon the price level, so the price level should be one of
the influences in guidin;: a credit policy. There are other influences
which affect prices, and so must there be other influences which af­
fect a credit policy. Here are a few briefly suggested:
Is labor fully employed?
Are stocks ox goods increasing or decreasing?
Is production up to the country's capacity?
Are transportation facilities fully taxed?
Is speculation creeping into the productive and
distributive processes?
Are orders and repeat orders being booked much
Are bills being promptly paid?
Are people spending wastefully?
Is credit expanding?
Are market rates above or below Reserve Bank
"vVhat this country and the world needs is stability— social,
political and economic; stable thoughts, habits and methods. The con­
tribution to be made by our banking system just now can be but a part,
though a helpful one, toward stability. Its best policy is to supply
enough credit and not too much— enough, for legitimate enterprise, but
not enough to satisfy those who want simply cheap and limitless sup­
plies of credit regardless of the consequences they are too blind to

- 21 -

"How much that supply should be 'will be -vastly difficult to
determine until the free play of international markets and exchanges
and credit and gold payment is restored. It is slowly but surely com­
ing and meantime it will be well for us to avoid those rushes to ex­
tremes— such as price control itself is— and, at least in our banking
policy, just do the best we can to avoid excesses."
From testimony before the Koyal Commission on Indian Currency
and Finance, 1926
"We shall all admit that the object of perfecting monetary
systems is the achievement of a stable domestic and international pur­
chasing power for the currency— a goal unattainable by any one party
acting alone, and only possible through cooperative effort. Because
a gold currency is that one -which has had in the past the most stable
buying power both at home and abroad, it is naturally the one we all
now seek to secure."
2. Adolph C. Miller
Testimony on first Strong price stabilization bill
"I take it that there would be no difference of opinion...that
economic stability is a highly desirable condition to constantly bear
in mind in the development of credit policies. I say economic stabil­
ity rather than price stability because my view is that price stability
is rather a resultant. It is an expression of economic stability.
It is, if you please, one term of a rather complex equation. It is
not itself a causal factor. It seems to me that it bears something
the same relation, if you please, to the fundamental economic factors
that control price movements...that a barometer docs to the weather.
The barometer does not make the weather, it simply indicates, as well
as a mechanical contrivance of that kind can, what the weather, so to
speak, is doing or is about to do.... So, while I personally regard
the price index as an indispensable item in the equipment of any cen­
tral banking system, I think it would involve any banking system that
undertook to take that as its exclusive guide, or even as its primary
guide, in all sorts of fatuous endeavors."

"The causes of (economic) instability, if all assembled, would
make a catalogue. Most of them lie entirely outside of the credit
system, and therefore lie beyond the range of action or influence of
a central banking system...."

"If you are to have competent control of credit you cannot wait
until inflationary developments register themselves in the price index.
By that time the thing will have already gotten considerable momentum...
the price index looks backward."

- 22 3» !£•£.•£• Harding
Speech on "Price Levels and the Discount Rate" delivered at a
dinner of the Stable Money Association
"As to the effectiveness of falls in central-bank rates in pro­
moting a rise in prices and a recovery in trade, it must surely be
evident that in certain moods of the business world, v/hen everyone is
taking a gloomy view concerning the probable demand for goods, it
would be impossible to stimulate optimism even by bringing down the
money rate to nothing— in fact, such a movement would only be marked
as one more symptom of the hopelessness of the situation.
"The price of money is a factor undoubtedly, but it is not the
only factor in the trade position, as seems to be believed by those
enthusiasts who credit the central banks with overwhelming power over
"I appreciate the importance of avoiding sudden and violent
fluctuations in the price level and of promoting as far as possible
a stable price level for commodities in general, but I do not believe
that these results can be accomplished by legislation. We can not
ignore the world level of prices, and it seems to me that as a first
step toward stabilization our efforts should be directed toward pro­
moting the restoration of the gold standard in those countries which,
because of the war, were forced to abandon it. ...
"Do not understand me as being out of sympathy with the objects
of the bill which Representative Strong hcs introduced in the House.
I have merely attempted to give some of my reasons for believing that
the object desired can not be accomplished by the means proposed...
it would be better to amend the preamble or caption of the Federal re­
serve act by stating the purposes of the act to be, 'To furnish an
elastic currency, to afford means of rediscounting commercial paper,
to establish a more effective supervision of banking in the United
States, to maintain the gold standard, and to promote business and
monetary stability.'
"If those phrases were inserted in the preamble, they would be
a ratification of the reserve practice of the past few years and would
make it clear beyond dispute that the Federal Reserve Board and the
banks are authorized to use all of their powers, direct and indirect,
for the purposes outlined without being obliged by a mandate to employ
a single expedient which in the opinion of many authorities on economics
and banking would not be effective in bringing about the results de­
sired and which indeed would always be a very disturbing influence.
Being rege.rded as a price-fixing body, the Federal Reserve Board would
be confronted with an impossible task and would be continually dis­
tracted by the conflicting appeals and demands of the producers and
consumers of several hundred different commodities. In such circum­
stances the board would have little time to devote to the discharge
of its present important duties."

- 23 -

Walter W. Stewart
Testimony on first Strong bill
"I feel that any worth-while discussion of Federal reserve policy
that undertakes to be broad has to begin with recognizing that there
must be some goal or some general aim which the system has in mind to
accomplish. There seems to be in this proposal the suggestion that
the aim should be to stabilize the general level of commodity prices.
I would be inclined to state the aim and responsibility of the Federal
reserve system somewhat differently. I would say that the respons­
ibility that rests upon central banks abroad and the Federal reserve
system in this country is primarily one of maintenance of sound credit
conditions. I realize that the term ’
sound credit conditions' is a
vague one, and so I feel some necessity of defining what I mean and
of raising the question whether or not the movement of prices is a
satisfactory test in itself as to whether credit conditions are sound.
What is meant by sound credit conditions depends on what one regards
the sound functions of credit to be. The function of commercial uses
of credit is simply to facilitate the production and the marketing of
commodities with the maintenance of adequate stocks of commodities in
order that the marketing may be orderly."
5. President Harrison
Testimony on Goldsborough price stabilization bill of 1932
Mr. Goldsborough: "What is your objection, if you have one,
to a legislative direction to the Federal reserve system to raise
the price level as is contemplated by section 1 of this bill?
Mr. Harrison: "Well, I think my real objection to it is this:
That I am not at all certain that we could accomplish it, even if you
direct us to do it, firstj and, secondly, I do not know that it would
be wise for Congress to say to all of the people in the country: 'The .
commodity price level will be raised to the level of 1926,' unless it
is in the power of Congress, or the reserve system, or somebody, to
keep it there. What would happen? Supposing we announced a policy
like that and people had faith in it, both legitimate investors and the
speculators, and supposing they invest in some commodity which immedi­
ately has the effect of putting it up; the minute those commodities
get to or approach the limits which you have fixed, all of those
people, speculators and others, will say: 'Well, I guess now is the
time for me to get out,' and you immediately have a tremendous pres­
sure of selling on the price l-rvel, which will force us to begin all
over again with much smaller resources to work with."

- 24 -

6, Chairman Eccles
Testimony on 'Banking Act of 1935
"It seems to me that we are far more interested in full employ­
ment then we are in stable prices. If stable prices at some given
index figure would leave an army of unemployed, it does not seem to
me that this is the objective that would satisfy this country."
Testimony on Patman bill to nationalize the Federal Reserve banks
"...The Board is in full agreement with the u3.timate objective of
proposals to promote economic stability, which means the maintenance
of a volume of business activity and of national income adequate to
assure as full employment of labor and of the productive capacity of
the country as can be continuously sustained. The 'doard is aware
that commodity prices are an important element in the Nation's eco­
nomic life and that violent fluctuations of prices have disastrous
effects, • It believes, however, that price stability does not neces­
sarily lead to economic stability and, therefore, should not be the
principal objective of public policy. In its opinion the objective
of economic stability cannot be achieved by monetary means alone, but
rather should be sought through coordination of monetary and other
major policies of the Government which influence business activity."

- 25 -

III. Statements by other U, S, Government officials
1. President Roosevelt
From message to London Economic Conference of 1933
"... the United States seeks the kind of a dollar which a generation
hence will have the same purchasing and debt-paying power as the dollar
value we hope to attain in the near future."
2. Secretary Morgenthau
From statement presented in round table discussion at HarvardYale-Princeton conference on public affairs at Cambridge, February 27,
"lhat are the goals of monetary policy?
"A. In the domestic field our goals are:
"(1) To attain and, once attained, to maintain reasonably equit­
able and stable income relationships among the different groups: work­
ers, farmers, business men, investors, etc.
"(2) To prevent marked fluctuations or sharp trends in wholesale
price levels.
"(3) To maintain a moderately stable cost of living.
"(4) To foster steadily increasing" employment*, rising incomes,
and an orderly expansion of business activity.
"B. In the international field our goals are:
"(1) To maintain that position of the dollar with reference to
other currencies that will encourage an increasing domestic and foreign
trade, and thereby help raise the standard of living and promote peace.
"(2) To eliminate broad fluctuations in exchange rates without
sacrificing sovereignty over our monetary policy.
"(3) To facilitate the smooth and easy adjustment of international
payments and foster stability of foreign monetary systems.
"(4-) To avoid competitive depreciation of currencies."
3. Ex-Senator Robert L. Owen
Testimony on Goldsborough price stabilization bill
Nothing could be more destructive of the prosperity of the Nation,
or of the people, than a dollar fluctuating up and down, and down and
up, when that dollar, of necessity, measures the value of every contract
and the relationship between every debtor and creditor.
"Therefore, your objective of stabilizing the dollar and bringing
it back to what might be called the normal of 1926, is a step of supreme
importance, in which the country is deeply concerned."

- 26 -

Testimony on Banking Act of 1935
"The legislative mandate 7/ill remove the executive officers from
the danger of being diverted from their duty by selfish advice or by
political influence of any kind. The honesty of our officials can be
depended upon when they have a clear instruction as to what to do. If
they fail, the Congress would have the plainest evidence of it and
could correct it,"
4, Senator Carter Glass
From an article in American Review of Reviews, 1928, "The Federal
Reserve System Grossly Misused"
"If any one object could be said to have prevailed from first to
last in the shaping of that act it was to provide machinery through
which the country's capital could at all times be made quickly applic­
able to the fostering of its productive enterprise,"
5. Senator William G. McAdoo
From Hearings on Banking Act of 1935
"Ysfhat you are criticizing and what you are proposing should be
substituted for it is a futility, anyway, is it not? It is merely
declaratory. It has no binding effect. You cannot enforce it. It
is not legislation, It is a sort of a speech. I do not think that
the incorporation of such matter in legislative enactment is of any
value. It may show intent on the part of Congress, but its enforce­
ment rests within the judgment and discretion of the board. There is
no way that you can determine whether or not the accomplishment of
it has even been attempted by the administrative authority."

- 27 -

IV. Discussion of objectives of Bank of England and Swedish Riksbank
1. The Macmillan report
"Our view is, therefore, that the price level is the outcome of
interaction between monetary and non-monetary factors, and that the
recent fall of prices is best described as a monetary
phenomenon which has occurred as the result of the monetary system
failing to solve successfully a problem of unprecedented difficulty
and complexity set it by a conjunction of highly intractable non­
monetary phenomena. Whether the international monetary system could
have solved its problem is a matter on which we should hesitate to
express a dogmatic opinion. It is probable that the difficulty of our
national problem was much increased by the relative overvaluation of
many other currencies. But the satisfactory handling of the inter­
national problem, even if it was theoretically practicable, might have
required a degree of knowledge, experience and prescience which no one
in fact possessed or could have been expected to possess. ...
"The task of the monetary system, as we see it, is, therefore,
to balance, so far as it can, by changes in the quantity and terms of
credit, the effect on the price level of certain fluctuating factors,
which, whether we prefer to call them or their underlying causes monetary
or non-monotary, are largely outside the direct control of the monetary
system. The fluctuating factors in question are, principally, the
three following:
"(l) The proportion of bank credit which is employed for
financial purposes as distinct from the purposes of new current
"(2) The degree of preference felt by investors for the
employment of their funds in more liquid or in less liquid form;
"(3) The readiness of enterprise to embark on expansion of
one kind or another, given the financial terms on which the
necessary resources can be raised."

"Thus our objective should be, so far as it lies within the power
of this country to influence the international price level, first of
all to raise prices a long way above the present level and then to
maintain them at the level thus reached with as much stability as can
be managed.
"We recommend that this objective be accepted as the guiding aim
of the monetary policy of this country. The acceptance of such an ob­
jective will represent in itself a great and notable change. For before
the War scarcely anyone considered that the price level could or ought
to be the care and preoccupation, far less a main objective of policy,
on the part of the Bank of England or any other Central Bank."

- 28 -

"The endeavour of domestic management should be to promote the
stability of output and of employment at a high level by influencing
the regular flow of savings into investment at home and abroad so far
as is compatible with the international situation...,"

"This completes our outline of the main objectives of our monetary
system. If we have raised expectations that we shall be able to pro­
pose in our detailed recommendations a sure and certain means of attain­
ing these objectives, we fear that such expectations will be disappointed.
"There is nothing, we believe, intrinsically out of reach in any
of these objectives; but this does not mean that they are easy or im­
mediately practicable of achievement. In the first place, the most
important of thorn depend on international agreement and collective
action and cannot be reached by a single country, which belongs to an
international system, acting alone. In the second place, they cannot
be attained by Act of Parliament, but must result from the exercise of
a skilled discretion of a somewhat novel character for the full use of
which the necessary experience does not yet exist."

"The main objective of Central Banks acting in co-operation in
the management of the international gold standard should be to maintain
the stability of international prices both over long periods and over
short periods— i.e., they should both keep the average steady over a
period of years and avoid fluctuations round this average from year to
year. Or alternatively— if this alternative were to receive superior
support— they should prevent prices from falling to a greater extent
than is justified by the increase in the efficiency of production.
Stability over long periods is largely a question of the adequacy of
the quantity of gold available for their reserves taken in conjunction
with the proportionate volume of credit created on this basis; stability
over short periods, or in other words the mitigation so far as possible
of the Credit Cycle, is, we believe, largely a question of co-operative
monetary management."
2. Swedish monetary policy
Since Swedish m policies sxnee 1931 he ve frequently been singled
out as a possible example for this country, it may be useful not only to
describe the objectives, but also to indicate the economic situation in which
the policy was formulated and to quote some comments on the results that were

- 29 -

a. The policy and its background
1. From Gustav Cassel, "Sweden's Monetary Policy," in Quarterly
Report of Skandinaviska Kreditaktiebolaget for July 1933
"When Sweden in September 1931 abandoned the gold standard,..,
the Swedish State Authorities clearly realized that a new standard,
for the management of the Swedish currency must be put in its stead.
In view of the universal dread of a coming inflation, it was above
all things necessary to make it clear to the public that the abandon­
ment of the gold standard by no means signified the relinquishment of
all control over the Swedish currency. It was therefore natural that
the maintenance of the existing level of commodity prices should be
set up as the immediate programme for Sweden's monetary policy. This
was in fact the decision taken by the Swedish Authorities, and the
Riksbank most conscientiously complied with these directions.
"It was evident, however, that Sweden, precisely in order to
maintain the gold standard, had followed too long the general process
of deflation which had been proceeding in the gold countries. The
low price level thus attained was decidedly detrimental to the indus­
try and commerce of the country, A moderate rise in this level of
prices therefore came to be regarded as desirable. Since it had been
shown in practice that the Riksbank still had the fate of the Swedish
krona under its control, the Authorities saw no objection to modify­
ing the directions previously given to the Riksbank and setting up a
moderate rise in the level of wholesale prices as a desideratum. It
was in fact on these lines that the Swedish programme of monetary
policy was drawn up in May 1932, the extent of the contemplated rise
in wholesale prices being limited by the requirement that there should
be no appreciable rise in the actual cost of living.
"This programme, however, was not effectuated. On the contrary,
the Swedish level of wholesale prices from the autumn of 1931 showed
a falling tendency, and the official index number for wholesale prices
sank from 110 in September 1932 to 105 in April 1933. .... In the
spring of 1933 the Government accordingly appointed a monetary council,
composed of representatives of industry, agriculture and banking, as
well as of experts on political economy. The remarkable thing occurred
that this committee actually succeeded in producing a unanimous report
with a truly positive content. ...
"A cardinal point in the committee report is that Sweden's
monetary policy, if pursued independently, should aim first and fore­
most at regulating the internal purchasing power of the currency.

- 30 -

"... it should be borne in mind that the Swedish Riksbank, though a
State bank, is nevertheless entirely independent of the Government.
It may be regarded as an institution which, so to speak, is owned by
the Riksdag. The latter, however, merely gives general instructions
for the management of the bank: in regard to credit policy and the
meeting of State financial demands the Riksbank has an independent
position even as against the Riksdag. The fact that the importance
of maintaining this independence has thus been strongly emphasized
must be regarded as an adequate guarantee against any inflation en­
tailed by fiscal requirements. The Riksbank, as the committee observe,
'should not be given any instructions in regard to monetary policy
beyond those which are involved in defining the aim of that policy'.
On the other hand, the Riksbank must be considered to be bound to
follow these directions and cannot contend that it has had no means
of bringing about the intended rise of prices if it has not availed
itself of the opportunity for active intervention by participating in
the financing of the expenditure on the relief of unemployment.
"The lines of monetary policy indicated above were embodied in
a bill submitted by the Government to the Riksdag on the 26th of
"The bank committee of the Riksdag entirely approved the pro­
gramme of monetary policy recommended by the Minister of Finance, ...
The Riksdag has now approved the recommendations of its bank committee."
2. Richard A, Lester, "Sweden's Experience with 'Managed Money,
Index, January 1937, Supplement.
"The Objectives.■On the day that Sweden gave up gold, the
Finance Minister made a brief address, in which he stated that hence­
forth the country's monetary policy should aim at maintaining the
internal purchasing power of the krona. As has been so frequently
observed, this was the first time in history that a country, upon
leaving gold, set up another definite standard. — a composite com­
modity standard — to replace the old gold standard,...
"Practical considerations accounted for the selection of this
objective. At the time there was, even amongst most Swedish economists,
a widespread fear of inflation. Of course such a fear was unfounded,
for all the world's well known inflations have occurred in connection
with wars and none of them have happened during a depression when
much industrial equipment is lying idle.,..
"However, as the fear of inflation began to subside, the pro­
nouncements on monetary policy became more and more reflationary. In
January 1932 the Finance Minister explained that the program for
stabilizing the purchasing power of the krona in the hands of consumers
did not preclude certain modifications in wholesale prices. In Febru­
ary the Board of the Riksbank explained that they would strive to keep

- 31 -

the price level for domestic goods and services unchanged, but that
they would allow such prices to rise in so far c-.s the rise was caused
by higher exchange rates or higher prices abroad. By April 1932 the
Board of the Bank declared that the program aimed to hinder price
declines abroad from depressing the Swedish price level. In May the
Banking Committee of Parliament (in Utlatande 40) emphasized the im­
portance of preventing any further fall in the price level and talked
vaguely of a restoration of wholesale prices 'so important to pro­
ducers', explaining that this did not contemplate a return to the price
level of any particular month in the past nor an appreciable rise in
living costs.
"Since the price level in Sweden had fallen about 5 per cent in
the 8 months prior to Kay 1933, the committee of experts appointed to
formulate principles for Sweden's monetary policy emphatically stated
in their report, made public and adopted by Parliament during that
month, that the objective of Swedish monetary policy 'should be to
bring about a moderate rise of the internal wholesale price level,'
"Not only was the Swedish monetary program changed from an antiinflationary to an anti-deflationary one, but, as time went on, it was
altered in other respects. To begin with, it had simply a price-level
objective, and a now retail price index for goods and services was
constructed by the Riksbank as evidence of that objective. As early
as February 1932, however, the Board of the Riksbank stated that they
were ’
taking into account other factors than mere changes in the price
level, especially conditions affecting productivity and stocks of
goods in various branches of industry'. The Banking Committee of
Parliament (in Utlatande 6) agreed to this broadening of the criteria
for monetary management.
"In April, the Board of the Bank added as another goal the main­
tenance of interest rates at as low a level as possible for the benefit
of industry. By May 1932, the Banking Committee of Parliament (in
Utlatande 40), after repeating that low interest rates were important,
'emphasized that the monetary policy should not be bound up schematic­
ally to any particular index figure' but should be based on 'the
internal price level and the needs of Swedish economic life' - ’
of course, could be used to justify almost any monetary policy..,.
With the fall in the price level, the objective of Sweden's
monetary policy again, as at the outset of the program, was confined
more closely to prices - this time to wholesale instead of retail
prices. The committee of experts, appointed in April 1933 to make a
more definite pronouncement on monetary policy, emphasized in their
report that ’
the first and foremost aim was to check and level up the
tendency to a fall in prices that has now been prevailing during the
past six months' and 'to bring about a moderate rise of the internal
wholesale price level.' The various non-price criteria that had gradu­
ally been substituted for the Riksbank’
s index were not mentioned in

- 32 -

the experts' report. In the Parliamentary discussion on the report,
however, the Finance Minister repeated that the monetary policy should
not be schematically bound to any special index and that the krona
should continue to be regulated according to its internal purchasing
power and the needs of Swedish industry.
"Swedish economists in general seem to agree with the Board of
the Riksbank that price-level stabilization may not be an adequate
criterion for monetary management. Until the Krona was pegged to the
£ in July 1933, the Board maintained that an index of various prices
could not be used as the norm for monetary policy since 'an unchanged
general index does not prevent serious changes from coming into the
s economic circumstances' and the effects of various factors
influencing industry appear only much later in such an index."
3. Extract from Riksbank's statement to Banking Committee of
Riksdag, February 1932
The Riksbank is not aiming at
"...maintaining unchanged the average retail price level for all con­
sumers' goods. Through the rise in the prices of certain import and
export goods, which may be expected gradually to be more and more
strongly reflected in the retail market, such a monetary policy would
necessitate a corresponding forcing down of the prices of home-market
goods— a development that would intensify the crisis in Sweden. The
aforesaid pronouncement should rather be taken to imply that the
Riksbank's intention is to endeavour to maintain more or less unaltered
the average level of prices of home-market goods and of the most im­
portant services that form an integral part of consumption, A monetary
policy along these lines is compatible with a certain rise in the
Riksbank's index, viz. insofar as it might be caused by & rise in
import, and export prices (and prices directly dependent thereon)
brought about by a rise in exchange rates and in commodity prices
abroad.... It follows that when forming its policy in view of fluctua­
tions in the price level the Riksbank cannot but take into account the
causes of such changes in prices. For it is essential to determine
whether price movements are caused, e.g., by increased tariffs, altered
exchange rates or a tendency to inflation on the domestic market which
may be looked upon as primary in relation to exchange rates. In any
such analysis of price conditions, naturally other price indices besides
the Riksbank's own index of consumers' prices will also be taken into
consideration. Obviously, in their endeavour to create as stable
economic conditions as possible, the Governors are also taking into
account other factors than mere changes in the price level, particu­
larly conditions affecting productivity and stocks in various industries."

- 33 -

A. Memorandum on the present Swedish Monetary Policy, issued by
the Swedish Riksbank, June 1937.
"In 1931 j after abandoning the gold standard, it was stated that
the monetary policy of Sweden should aim at the maintenance of the
purchasing power of the Krona in the hands of the consumers. In 1932
and again in 1933 the principles of policy were partly reconsidered.
As a further object it was added that the economic policy should aim
at bringing about an increase of domestic wholesale prices without
allowing this increase appreciably to affect the cost of living.
"In view of' the economic development since the middle of 1936
with its strong upward tendency of prices the need of a modification
of the monetary program of 1933 was generally recognized in the spring
of 1937. In a document addressed to the Government the Riksbank sug­
gested that the policy of the Riksbank as well as the general econom­
ic policy should aim at counteracting the tendency towards rising
prices and in any case prevent an inflationary price development. As
had been stated by Parliament in 1933 the principles to be followed
ought to be fixed by the Government and Parliament, whereas the choice
of the means for fulfilling the policy must be in the hands of the
Riksbank, which in this respect has to bear the full responsibility.
"In the recent Government Bill on the monetary policy the prin­
ciples laid down by the Riksbank were on the whole confirmed. The
Minister of Finance stressed the advantage of stable foreign exchanges.
He found, however, that the reflation of wholesale prices had gone
further than was aimed at in 1933. In view of the importance of
checking a too strong price rise and in accordance with his opinion
about the most desirable aim of the monetary policy for the near
future, the Minister considered it necessary to regard the stabilizing
of the external value of the Krona as a secondary consideration. A
policy under till circumstances aiming at holding the present rate for
sterling might not .be consistent with a policy trying to prevent infla­
tionary price rises. According to the Minister, formulations referring
to certain index numbers should be avoided, because they might limit
the choice of measures to be taken by the Riksbank,
"The Minister of Finance considered it likely that prices would
still to a certain extent move upwards. If prices in England and
America should pass the usual limits for good times and taken an
inflationary character, an increase of the value of the Krona in rela­
tion to Sterling would have to be considered. An appreciation of the
Krona and a strong tightening of the money market were both of such a
character that they ought to be used only if there were very good
reasons for applying them.


3U -

"Finally, the Government, too, stressed the necessity of synchro­
nizing economic and monetary measures and agreed that the Riksbank had
to choose the monetary means to fulfill the policy, adding, however,
that the choice had to be made in cooperation i/vith the Government, as
measures wholly outside the sphere of the Riksbank were to be con­
sidered as alternatives to the- monetary means proper."
"The Sveriges Riksbank is the central bank of Sweden and is
owned and guaranteed by the State. The Bank is governed by a Board of
seven directors* one of whom, the Chairman, is appointed by the King,
while the remainder are elected by Parliament. The Board elect from
among the six members appointed by Parliament a Governor and two
Managers. In addition, a Deputy Governor is appointed by the Board.
The Board of Directors is allowed to take instructions only from
Parliament or, in certain cases, from the Banking Committee or Parlia­
ment. "

Comments on the results of the policy
1. Bertil Ohlin, article on "The Inadequacies of Price Stabili­
zation" in Index, November 1933
As regards the success of the Riksbankrs policy, Professor Ohlin

finds that:
(1) Wholesale prices were fairly stable, the indexes declining by
2-U per cent between September 1931 and March 1933. But goods pro­
duced in Sweden for export and home consumption dropped 7 per cent while
import prices rose 15 per cent.
(2) In the same period retail prices, as measured by the Riksbank’
s index number adjusted for seasonal variation end the effects
of increased indirect taxation, dropped 3^ per cent.

- 35 -

Between March and October 1933, when world prices were rising,
The Swedish wholesale price index regained its September 1931 level,
while retail prices showed no change.
(4.) Industrial production has varied far more widely than prices.
After a brief post-devaluation rally, production fell in 1932, averag­
ing only 85 in the last four months of the year against 94- in September
1933-. By October 1933 the index was back to 93.
Professor Ohlin concludes that in the period September 1931Karcli 1933, which was "characterized by increasing and stagnating de­
pression abroad, Swedish monetary and financial policy did not succeed
in preventing a certain reduction in wholesale and retail price levels,
still less in bringing about some rise in prices," and that "during 1932
Sweden was unable to avoid a very considerable intensification of the

Sweden made a very favorable showing, however, relative to

the countries that remained on gold.
2, Irving Fisher, Stable Money
"Whatever the future holds in store, this achievement of Sweden
m i l always be the most important landmark up to its time in the
history of stabilization; and the various efforts which have been
made to discredit the importance of Sweden's example can never erase
the simple fact that Sweden did stabilize the internal purchasing
power of her krona according to the official measure set up for that
purpose..... some of them (the opponents of stabilization) have sought
to argue that, while little Sweden could do so, big America could not.
But so fsr as size is concerned, the argument is obviously the other
way. Sweden is so small as to be largely at the mercy of conditions
in other countries. The United States is a world in itself. Sweden's
slowness in restoring wholesale prices was largely due to the diffi­
culty of stemming the downsweeping tide of wholesale prices in other
countries, Swedish foreign trade and the dependence of her exporters
on foreign prices are far more serious than in the case of America.
If little Sweden can become an oasis in the world-wide desert of de­
pression surrounding her, and despite the Kreuger disaster at home,
can maintain her chosen index number almost unchanged, the same
result is economically feasible almost anywhere.
"On the other hand, as mentioned before, Sweden was particularly
favored in her stabilisation experiment bccause of her inherent economic
stability, the comparative homogeneous and unified nature of her bank­
ing system, and her ability to use the foreign exchange for influenc­
ing her domestic situation,"

- 36 -

3. Brinley Thomas, Monetary Policy and Crises: A Study of Swedish
"....Professor Fisher has mistaken the shadow for the substance. He
attaches far too much importance to the stability of the Riksbank*s
index of the price level of consumption goods. The experience of
Sweden resembles that of England in this respect. The policy was
interesting merely because the Central Bank and the Treasury announced
officially that they would keep the internal purchasing power of the
krona constant. This declaration immediately after the break from gold
tended to establish confidence. But it did not prevent a fall in
production, real income, and employment. Our review of the monetary
measures showed that in 1932 and 1933 the policy was changing its char­
acter. The aim was to secure a revival of investment; and this pre­
supposed a rise in wholesale prices. ... The stability of the price
level of consumers' goods was not affected by the recovery measures.
The course of the index number was not a primary consideration influ­
encing the actions of the Central Bank,
"The monetary theory lying behind the so-called 'Swedish experi­
ment' gives no support to the naive gospel of price stabilization
preached by Professor Fisher. Nor is he justified in thinking that.a policy which suits a small country is necessarily applicable to the
United States. The theory of the international margin must be con­
siderably modified in the case of a large country,"
4. Erik T, H, Kjellstrom, Managed Money: The Experience of Sweden
"Because of the hampering influence of the Kreuger crisis, the
monetary policies of the Bank of Sweden encountered unusually unfavor­
able circumstances, which goes a long way towards exolaining the fail­
ure of the price raising program.....
"As e. whole the program failed to attain the desired results in
1932. Although the purchasing power of the currency in the hands of
the consumer was preserved, industrial production declined, and the
labor market was disrupted. That the general price level remained
relatively stable is no doubt largely to be explained by diverging
price movements counteracting one another."
5. Institute of International Finance, Managed Currency in
Great Britain and Sweden, Bulletin 104, March 6, 1939.
"The factors responsible for the business revival in the late
spring of 1933 are as follows (the order, however, does not indicate
the importance of the individual factors): (a) the easy-money market
policy of the Riksbank based on the expansion of the Bank's assets
through the purchases of foreign exchange, which resulted in the li­
quidation of the indebtedness of the commercial banks to the Riksbank
and in a sharp increase in the banks' balances with the Riksbank;
(b) the exchange policy of the Riksbank and specifically the stable
krona-sterling rate, facilitated by the export of foreign securities;

- 37 -

the sale abroad of foreign securities in turn was induced by the ex­
change profit accruing from the depreciation of the gold value of the
krona; (c) the reduction of the discount rate and of the deposit rates;
(d) the declaration of the Currency Commission that a in wholesale
prices was imperative; (e) the rise in prices in the non-gold countries,
including the United States, in the middle of 1933; (f) the increase
in Sweden’
s exports caused by rearmament in certain countries and the
building boom in Great Britain; (g) governmental subsidies to agri­
culture, which resulted in a demand for manufactured goods; (h) initia­
tion of the public-works program, which caused a demand for building
materials in anticipation of a price rise,"




V. Discussion of objectives in the writings of economists
A, Writers emphasizing the quality of bank assets

1 . H. Parker Willis
Testimony on Banking Act of 1935
"The fundamental idea of title II is that the supply of money
is regulated by banking, and that the total of it that is available
there affects business directly. That is, if you have more money
you have more and better business; if you have less, then you have
what is called deflation.
"The idea underlying the Federal Reserve Act is that money is
the product ol business, and that credit, which is a very different
thing from money, is used to supplement the supply of money and to
provide that elastic element that is necessary in order to permit a
3.arger volume of business to be transacted__ without the necessity of
enlarging the legal tender note issue,
"Those two ideas are as wide apart as the poles; and, of course,
when one starts with one of them to write a banking bill he gets to a
very different result from that which he gets if he starts with the

"Of course that last sentence (of the mandate proposed by
Eccles) is a very 'saving clause’— so far as it is.possible. But
one might add to that that it is never within the scope of monetary
action and credit administration, so that you would use a bank mechan­
ism for doing something for which it was never intended. The function
of the bank mechanism is that of keeping banking sound- and safe and
of keeping it at all times in position to perform its financial func­
tions. It is not its duty to unstabilize or to stabilize production,
trade, prices, and employment."
2. Benjamin M. Anderson, Jr.
Address on "Commodity Price Stabilization a False Goal of
Central Bank Policy" delivered at Rotterdam in 1929
"In opposition to this new doctrine (or price stabilization) I
offer the old-fashioned doctrine, rarely questioned in pre-war days,
well understood and tested in e:cperience, that central—bank policy
should be guided by the banking position of the country and the state
of the money market, with heavy emphasis placed on the domestic bank­
ing position and the domestic money market, but with occasional co­
operation with other central bank’
s in international emergencies.

- 39 -

"Y/hereas the new theory asks central banks to stabilize the
commodities market, I maintain that they have a great enough task in
steadying the money market.
"The traditional pre-war view of the duties of a central bank is
definite, clean-cut, and simple.
"(1 ) It is the business of a central bank to protect the paper
money of the country by converting it into gold on demand.
This is its first and most essential function, and every­
thing else must be subordinated to this.
"(2) It is the business of a central bank to ease off monetary
stringencies and to prevent business crises from degenerat­
ing into money panics. In a crisis, the central bank sup­
plies whatever money is necessary to a steep discount rate.
It enables solvent men to protect their solvency, but it
does not regard it as its duty to validate the unsound
assets of really insolvent men, or to help defer the
liquidation of stale positions.
"(3) In times of great speculative excesses, whether in commodi­
ties or in securities, central banks should act to prevent
the extension of unsound credits, to protect the liquidity
of the banks of the country, and to check speculative ex­
cesses, by tightening the money market.
"(/t.) It is not the business of a central bank to finance a boom least of all, a stock-market boom."
sh b h h h h *-


"My purpose is accomplished if I have shown you how fantastic it
is to expect ccntral bank policy, operating via the money market and
the capital market, to fix the level of commodity prices. The gravest
difficulties arise at evejy link in the chain. First, the central
bank cannot control even the money market and the capital market. It
can, at best, mitigate and moderate their movements. Second, the
money market and the capital m r k e t are 5 at best, only one of many
factors affecting the commodity markets. Third, the money and capital
markets a far more decisive influence on the markets for securi­
ties, real estate, and. foreign exchange than they have on commodities,
and their influence on commodities usually works through these channels."
Testimony on Banking Act of 1935
"This passage (the mandate proposed by Ecclos) says nothing about
the more fundamental function of the Federal Reserve System, which is to
protect the soundness of the currency and to protect the quality of
credit in the country, to provide additional currency for seasonal
needs and for emergencies, and to expand credit as needed for the ac­
commodation of commerce, industry, and agriculture. That is their first

- 40 B. Advocates of price stabilization
1. Krnt Wicksell
Interest and Prices
",..,So long as prices remain unaltered the banks’rate of interest
is to remain unaltered. If prices rise, the rate of interest is to
be raised; and if prices fall, the rate of interest is to be lowered;
and the rate of interest is henceforth to be maintained at its new
level until a further movement of prices calls for a further change in
one direction or the other.
"The more promptly those changes are undertaken the smaller is
the possibility of considerable fluctuations of the general level of
prices; and the smaller and less frequent will have to be the changes
in the rates of interest. If prices are kept fairly stable the rate
of interest will merely have to keep step with such rise or fall in
the natural rate as is inevitable,
"In my opinion, the main cause of the instability of prices
resides in the inability or failure of the banks to follow this rule,"

It would then be the simple duty of each credit institution to
regiilate its rate of interest, both relatively to, and in unison with,
other countries, so as both to maintain in equilibrium the international
balance of payments and to stabilize the general level of world prices.
In short, the regulation of prices would constitute the nrime purpose
of bank rate, which would no longer be subject to the caprices of the
production and consumption of gold or of the demand for the circula­
tion of coins. It would be perfectly free to move, governed only by
the deliberate aims of the banks."

"But it must not be supposed that stabilization of prices would
overcome the economic depression which for more than twenty years has
provided a constant source of complaint on the part of certain classes
of the community; nor would economic progress again resume that very
rapid pace to which we have become accustomed since the middle of the
century. This depression must be regarded as the cause rather than
the effect of the fall in prices."

-a -

2. Gustav Cassel
Articles in Quarterly Report of Skandinaviska Kreditaktiebolaget,
1930 and 1931
"Ihen a central bank regulates the internal supply of money, its
aim must be to maintain a certain stability in the internal purchas­
ing power of the currency. In regard to the measure of this stabili­
zation opinions may possibly differ, but there are good reasons for
taking the -wholesale prices on the goods market as a gauge of the
desired stability in the purchasing power of the currency."
-/ H w H n o H r

"....Whatever relative changes may take place between the prices of
different commodities, it must always be possible for the central bank
to prevent a fall in the general price level.....
"It is of paramount importance that the leading countries of the
world should emancipate themselves from the traditional over-estimation
of the weight to be attached to the gold reserves, and that they should
shape their monetary policy with the single aim of attaining the great­
est possible stability in the purchasing power of the currency.....
"In countries possessing a gold standard the central banks must,
of course, use their influence on the price-level to maintain the cur­
rency on a parity with gold, A small country has, obviously, no
appreciable influence on the value of gold. But in the big creditor
countries the position is quite different. They have a considerable
influence also on the value of gold and therefore can more actively
direct their monetary policy towards the maintenance of a constant
price-level. This is the case, in a supreme degree, in the United
States. That country is sufficiently powerful alone to maintain a
stable price-level and to compel the value of gold simply to adjust
itself to that of the dollar..... The realization that a properly
managed central bank policy has a decisive influence on the develop­
ment of the price-level is therefore of by far the greatest importance
in practice -with reference to the regulation of the United States
currency. Before the Federal Reserve system comes to a full realiza­
tion of its dominant influence on the purchasing power of the dollar
and, on this basis frankly recognizes its responsibility for the
development of the American price-level, it will not be possible to
gain any security for the monetary system of the world nor, of course,
for the world economy at large."

- 42 C. Advocates of stability of some other
economic variable than prices
1. E. F. M. Durbin
The Problem of Credit Policy
" has become possible in recent years for the economist to state
much more clearly than ever before what can and -what should be done
in the realm of credit policy to secure and maintain indefinitely full
employment and a maximum of productivity,"

"We start from the explicit assumption that full industrial
equilibrium exists in k period of technical and capital change,,..
It the only usable instrument of policy is an expansion or contraction
in the vo3.ume of producers' credits, and at the same time wages and.
other primary factor prices are slow to move relatively to prices,..
stable prices are quite impossible (because an attempt to carry out
a) ,,. policy of stabilizing prices m i l lead to a cumulative infla­
(Under those conditions) the only practicable policy is that
of stabilizing money incomes (per capita)."
2. Bertil Ohlin
Article on "The Inadequacy of Price Stabilization"
"...■when once a depression has set in, a reduction in the quantities
produced and marketed can very easily take place without being materi­
ally reflected in the index numbers representing the average wholesale
or retail price level. E.g., a fall in the prices of articles of
domestic manufacture may be counterbalanced by a rise in the price of
imported goods. But, even if the former price level is kept stable,
demand and production may decline.
"Does this imply that a price-stabilization policy like the
Swedish, initiated in the very middle of a depression, can serve no
purpose? Certainly not. As has already been pointed out, the economic
situation in Sweden would most undoubtedly have been still worse if
prices had been allowed to fall as they did in countries that kept to
the old gold parity. ... a Konjunkturpolitik that air.s at as full and
regular a utilization of the productive forces as possible, i.e., a
maximization of the real national income per head of the population
over a long period, is bound to take many other factors into account
besides the development of prices. That is to say, it cannot be based
on the idea of stabilizing any particular price level, especially if
the latter has been brought by an immediately preceding depression
out of equilibrium with other parts of the price systom.

- 43 -

"A long-term policy aiming at an adjustment of economic condi­
tions vail probably have to reckon with fluctuations in certain
kinds of prices and certain kinds of production as being natural and,
in the long run, useful changes in a progressive community. The
science of economics is still far from having found a solution to
these problems, which I shall not attempt to examine here. In the
present article the task has been the more modest one of discussing
the possibilities of an individual country's being able, by stabiliz­
ing the price level, to mitigate the reactions of a severe inter­
national depression. The course of events has shown that even here
the difficulties are greater than people who believed in simple formulae
for price stabilization ever foresaw. But it has also been demonstrated
that even a very incomplete surmounting of these difficulties may
yield results of practical importance."
3. F. A. von Hayek
Prices and Production
"....But by a curious irony of fate, Wicksell has become famous, not
for his real improvements on the old doctrine, but for the one point
in his exposition in which he definitely erred: namely, for his
attempt to establish a rigid connection between the rate of interest
and the changes in the general price level."

"But if we have to recognise that, on the one hand, under a
stable price level, relative prices may be changed by monetary influ­
ences, and, on the other that relative prices may remain undisturbed
only when the price level changes, we have to give up the generally
received opinion that if the general price level remains the same, the
tendencies towards economic equilibrium are not distrubed by monetary
influences, and that disturbing influences from the side of money can­
not make themselves felt otherwise than by causing a change of the
general price level,
"This doctrine, which has been accepted dogmatically by almost
all monetary theorists, seems to me to lie at the root of most of
the shortcomings of present-day monetary theory and to be a bar to al­
most all further progress. Its bearing on various proposals for stab­
ilization is obvious,"
4. 0. M. W. Sprague
Testimony on first Strong stabilization bill
"I am inclined to think that about as much weight is now or is
likely to be attached, to the matter of price movements as we are
warranted in attaching to that factor in the present state of our
knowledge and our experience, I believe that the movement of prices

means such >-afferent things in different situations that it would, be
unfortunate to adopt in legislation a provision which would seem to
compel action in a particular way because of any ';iven amount of change
in the level of prices."

"I think that if you were to adopt in legislation something like
the blanket list of factors for determination of valuation that the
Supreme Court laid down in the Smythe v. Ames many years ago, that it
would do no harmj that is, you might enumerate in the statute all of
the factors that you or any member of the reserve system could think
of as remotely bearing upon the determination of discount policy, and
put them all into the statute, saying that the reserve banks are
authorized, to consider all these factors; and it would do no harm,
"If, however, you concentrate upon a single one, you are doing
something more than saying that 'This is a factor which any reasonable
man might bear in mind and give varying degrees of importance to at
different times ' 5 you are saying th?t they are to direct their policies
so as to accomplish a certain result."
G. Hawtrey
Summary of Eawtrey's views in Gottfried Kaberler's Prosperity
and Depression
"The aim of banking policy should be to keep the consumer's out­
lay constant, including outlay for new investment. But account should
be taken of changes in the factors of production — not merely the
growth of population, but also the growth of capital.... In other words,
the aim should be to stabilize, not the price level of commodities, but
the price level of the factors of orodnction,"
Capital and Employment
"The fixation of the price level..,is no doubt a less perfect
policy than the stabilization of the consumers' income. Nevertheless
it is a reasonable approximation to a sound policy."

- 45 -

D, The limitation of monetary means of achieving stability
1. E. F. M. Durbin
The Problem of Credit Policy
"...this programme clearly abstracts from one essential aspect of the
real world. It does not attempt to analyze the problem of short run
policy or describe how an industrial equilibrium which does not exist
can be created by measures which do not prevent its indefinite con­
tinuation. These arguments have, that is to say, abstracted from the
existence of Trade Cycle fluctuations..... It is quite impossible
for example to stabilise money incomes at the height of the boom.__
On the other hand although it would be very possible to stabilise in­
comes during the period of depression it would be eminently absurd to
do so.....
"I have abstracted from these pr ob le m s . j u s t because I believe
that they are insoluble by these orthodox means and because I believe
that they will only yield to a programme of more radical reform than
has been suggested."
2. William T. Foster
Testimony on first Strong bill
"We conclude, therefore, first, that it is highly desirable that
the Government should have stability of the price level as an avowed
aim; second, that it is highly desirable that the Federal Reserve
Board should have that as an avowed aim; but, third, that it would be
unfortunate for business in general and for the future of the Federal
reserve system, if the idea became widespread that because such a bill
as this was passed, therefore the board actually did have the power,
under all conditions, to bring about stability in the price level;
because the time is sure to come when the board with its present powers
could not achieve the end; and if it were then blamed, it would be un­
justly blamed, and the result would be unfortunate,"
3, J. M. Keynes
Treatise on Money
"...when all is said and done, does it lie within the power of a
Central Bank in actual practice to pursue a policy which will have the
effect of fixing the value of money at any prescribed level? If, for
example, the duty of preserving the stability of the purchasing power
of money within narrow limits w ,re to be laid upon a Central Bank by
law, would it be possible for the Central Bank to fulfill this obliga­
tion in all circumstances?

- 46 -

"I have more sympathy to-day than I had a few years ago with some
of the doubts and hesitations such as were expressed in 1927 by
Governor Strong and other witnesses before the Committee of the United
States Congress on Stabilization...,"
After quoting from Governor Strong's and Mr. Stewart's testimony
in 1926, Keynes comments:
"These are reasonable doubts expressed by persons of great ex­
perience. They cannot be dispelled merely by pointing to the truism
of a Quantity Equation, In a sense they can only be dispelled by
the prolonged success of an actual attempt at scientific control.
But I should like to try to show that the prospects of such an attempt
are sufficiently promising for it to be worth a trial,"
To his original question Keynes supplies no more definite answer
than the following:
"...we cannot do more at present than marshal the various means at the
disposal of the Banking System. Only the future can show for certain
whether the conscious and well-directed use of all these means, con­
fidently employed in the right degree and at the right time, is capable
of solving the problem."
4. 0. M. W. Sprague
Testimony on first Strong bill
"...statements have been mace here to the effect that it is largely due
to the Federal reserve banks and their wise credit policies that we
have had such a degree of price stability as we have enjoyed during
the last four years, I do not believe that that degree of stability
is to be in the main attributed to the wisdom of the managers of the
Federal reserve banks. I consider it primarily due to the attitude of
the business community which continues to recall the losses which it
had experienced in 1920- 21."

"I think they (the Federal reserve system) can prevent extreme
advances in prices, and thereby avoid sharp, sudden declines. I do
not think that they can serviceably attempt to meet sliding oscilla­
tions in credit, whether in an u p w a r d or downward direction; and I
am not certain as to just when they should endeavor to apply the
brakes. I do not think that the price index furnishes a definite
enough guide - it is one of the factors in the situation which may
lead to an endeavor to influence the situation a little by early
action, such as the sale of a certain amount of securities that they
may hold, or an advance in the discount rate."

- 47 -

5. D, H. Robertson
Essay on Theories of Banking Policy
"....The out-and-out price-stabiliser claims that he can always check
a fall in prices and cure unemployment by monetary means, and that
there is no need for such fancy palliatives of industrial depression
as the deliberate spacing through time of Governmental and other large
demands for constructional work, I think the difficulties experienced
by the Federal Reserve System even in times of raging prosperity should
make us pause before admitting such extreme claims."

The following passage by D. H, Robertson aptly sums up the

views expressed in groups (C) and (D),

After examining and rejecting the

claims of the gold standard, of the principle of productive credit, and of
price stabilization as objectives of credit policy, Robertson concludes:
"It has been my business to examine existing principles of
banking policy, and not to elaborate new ones. But to escape the
imputation of cowardice, let ms suggest in conclusion that the ideal
banking policy might be one which was founded on the principle of
price-stabilisation as a norm, but which was ready to see the fruits
of a prolonged and general increase in individual productivity shared
in the form of lower prices, and perhaps to acquiesce in moderate
price-rises in order that advantage might be taken of discontinuous
leaps in industrial technique. And it would be a policy that did not
claim omnipotence, or feel competent of its ability to cure the evils
of uncertainty except in alliance with a much more comprehensive
attempt to control and stabilise the desires and activities of the
community than most monetary reformers— even, I think, most thorough­
going Socialists— have yet visualised."

Sources of quotations in Legislative Mandates for
Central Banks and Objectives of Credit Policy
Part 1
Mandates Actual and Proposed
Mandates proposed for Federal Reserve System
A. In drafts of Federal Reserve Act. II. Parker Willis, The Federal
Reserve System, pp. 1605, 1626, 1655, 1684.
B. In proposed stabilization bills
1. First Strong bill (H.R.7895).
pp. 1 , 1042-3, 1066-74.

Hearings: Stabilization, 1926,

2. Second Strong bill,. Hearings: Stabilization, 1928, pp. 1, 393.
3. Goldsborough bill
(a) As introduced (H. R. 10517). Hearings: Stabilization of
Commodity Prices, 1932. Part I, page 1.
(b) As passed by House (H.R.11499), Hearings: "Restoring
and Maintaining the Purchasing Power of the Dollar,"
1932, p, 1.
4. Federal Monetary Authority Bill (H.R.7157 and 7216). "A Bill
to Establish the Federal Monetary Authority, and to Control
the Currency of the United States,"
5. Thomas Monetary Authority Bill (S, 1990).

6. Thomas Price Stabilization Resolution (S.Res.216).
7. Patman Bill (H.R.7230). Hearings: Government Ownership of the
Twelve Federal Reserve Banks, 1938, pp. 2, 168.
C. Enacted in Banking Act of June 16, 1933.
The Federal Reserve Act as amended to October 1, 1935, pp.10, 47.
D. Enacted or proposed in connection with the Banking Act of 1935.

1. Changes in reserve requirements.

The Federal Reserve Act, p.114.

2. Mandates proposed by Eccles, Hearings: Banking Act of 1935,
before a subcommittee of the Senate Committee on Banking
and Currency, p. 319.

- 49 -

3. Revision of Eccles mandate proposed by Senator Fletcher,
cf., Mr. Currie's files.
4. Adolph C. Miller's proposal.
of 1935, p. 759.

Senate Hearings;

Banking Act

5. Mandate proposed by ex-Senator Owen, Senate Hearings;
Banking Act of 1935» p. 902,

6. Amendment proposed by Representative GoIdsborough, cf.,
Mr, Currie's files.
of Act),

(Amendment to be added to Section 11

7. Suggested in discussion within the Federal Reserve Board,
cf,, file in Federal Reserve Board library on "Objectives
of Monetary Policy."
II. Objectives of foreign central banks proscribed by statute
For New Zealand, Hungary, Mexico, and the U.S.S.R.,
see files on central bank statutes of those countries in
the Federal Reserve Board libraiy. The remainder of
Scction II is taken from a memorandum of May 16, 1935,
on Legal Objectives of Foreign Central Banks as Stated
in Their Charters in the library file on "Objectives of
Monetary Policy."
Part 2
Discussion of Objectives

Official policy declarations by the Federal Reserve Board and the
Federal Reserve Bank of New York

1. Annual Report of Federal Reserve Board for 1923* pp.31-35.
2. Answer of New York Federal Reserve Bank to questionnaire
sent by Senate Banking and Currency Committee, 1931.
Hearings: Operation of the National and Federal Reserve
Banking Systems, 1931* pp. 762, 802.
3. Board of Governors' statement on Objectives of Monetary Policy.
Annual Report of the Board of Governors for 1937, p. 223.
4. Board of Governors' statement on Proposals to Maintain Prices
at Fixed Levels through Monetary Action." Federal Reserve
Bulletin, April 1939? PP. 258-259.

- 50 -

II. Public but not official statements by officials of the Federal Reserve

1 , Benjamin Strong
(a) Testimony on first Strong bill. Hearings: Stabilization,
1926, pp. 302, 306, 307, 359, 550.
(b) Paper on "Prices and Price Control." Interpretations of
Federal Reserve Policy -in the Speeches and Writings of
Benjamin Strong, ed. burgess, p. 233.
(c) Testimony before the Royal Commission on Indian Currency
and Finance. Interpretations of Federal Reserve Policy,
P. 295.
2, Adolph C. Miller. Testimony on First Strong bill.
Stabilization, 1926, pp. 791-792, 794, 838.


3. W* P. G. Harding. Address on "Price Levels and the Discount
Rate." Reprinted in Hearings: Stabilization, 1926, pp.10411042


4, Walter W, Stewart. Testimony on first Strong bill.
Stabilization, 1926, p. 763.
5. George L. Harrison. Testimony on Goldsborough bill.
Stabilization of Commodity Prices, 1932, p. 481.


6. Marriner S. Eccles
(a) Testimony on Banking Act of 1935.
Banking Act of 1935, p. 215.

Senate Hearings:

(b) Testimony on Patman bill. Hearings: Government Ownership
of the Twelve Federal Reserve Banks, 1938, p. 444.
III. Statements by other U. S. Government officials

1. President Roosevelt's message to International Monetary and
Economic Conference, London, 1933.
2. Secretary Korgenthau's statement presented in round table
discussion at Harvard-Iale-Princeton Conference on Public
Affairs at Cambridge, February 27, 1937. Cf., Mr. Currie's

- 51 -

3. Ex-Senator Robert L. Owen
(a) Testimony on Goldsborough bill. Hearings: Stabilization
of Commodity Prices, 1932, p, 123,
(b) Testimony on Banking Act of 1935.
Banking Act of 1935, p. 557.

House Hearings:

4. Senator Carter Glass. Article on "The Federal Reserve System
Grossly Misused," quoted in S. E. Harris, Twenty Years of
Federal Reserve Policy, p. 93, footnote 3.
5. Senator William G. LcAdoo.
1935, p. 433,

Senate Hearings:

Banking Act of

’IV, Discussion of objectives of Bank of England and Swedish Riksbank

1. Report of the Committee on Finance and Industry (Macmillan
Committee), 1931, pp. 93-94, 117-121.
2. Swedish monetary policy,
(a) Tlie policy and its background.
1. Gustav Cassel, "Sweden’
s Monetary Policy," Quarterly
Report of Skandinaviska Kreditaktiebolaget, July
1933, p p . 43-4-5.
2. Richard A, Lester, "Sweden's Experience with 'Managed
Money*". Index, (Svenska Kandelsbanken) January
1937, Supplement, pp, 1—5.
3. Extract from Riksbank's statement to Banking Com­
mittee of Riksdag, February 1932. Quoted in Index,
September 1932, p. 271.
4. Memorandum on the Present Swedish Monetary Policy,
issued by the Riksbank, June 1937,
(b) Comments on the results of the policy.
1. Bertil Ohlin, Article on "The Inadequacy of Price
Stabilization," in Index, November 1932, pp. 258262.
2. Irving Fisher, Stable Money, pp. 403-409.
3. Brinley Thomas, Monetary Policy and Crises, pp.232233.
4. Erik T. H, Kjellstrom, Managed Money, pp.77-79.
5. Institute of International Finance, Managed Currency
in Great Britain and Sweden, Bulletin 104, March 6,
1939, P, 28.

- 52 -

V, Discussion of objectives in the writings of economists
A. Writers emphasizing the quality of bank assets
1. H, Parker Willis. Senate Hearings: Banking Act of 1935«
pp. 864-865, 876-877.
2. Benjamin M. Anderson, Jr. Address on "Commodity Price
Stabilization a False Goal of Central Bank Policy,!',
reprinted in Senate Hearings: Banking Act of 1935» pp. 467-469.
3. Testimony on Banking Act of 1935. Senate Hearings, p. 436.
B. Advocates of price stabilization
1. Knut Wiclcsell.

Interest and Prices, pp. 189, 194.

2. Gustav Cassel. Articles in Quarterly .Report of Skandinaviska
(a) "'Internal' and 'External' Discount Policy," January 1930,
P. 1.
(b) "The Gold Standard in 1929," April 1930, p. 20.
(c) "The Influence of Bank Policy on the Level of Prices,"
April 1931, p. 30,
C. Advocates of stability of some other economic variable than prices

1. E. F. M. Durbin,
120, 128, 143.

The Problem of Credit Policy, pp, xix, 110,

2. Bertil Ohlin, "The Inadequacy of Price Stabilization,"
Index, December 1933, pp. 264-265.
3. F. A. von Hayek, Prices and Production, pp. 23, 28.
4. 0, M. W. Sprague. Testimony on first Strong bill.
Stabilization, 1926, pp. 411, 418.


5. Gottfried Haberler, Prosperity and Depression and R. G, Hawtrey,
Capital and Employment, p. 265,

- 53 -

D. The limitations of monetary means of achieving stability

1. E, F. M. Durbin.

The Problem of Credit Policyt pp. 214-215.

2. William T. Foster. Testimony on first Strong bill.
Hearings: Stabilization, 1926, p. 193,
3. J. K. Keynes,

A Treatise on Honey, II, pp. 339, 340, 345, 363.

4. 0. Ivl. W. Sprague. Testimony on first Strong bill.
Hearings: Stabilization, 1926, pp. 412, 415.
5. D, H. Robertson. "Theories of Banking Policy" in Pigou and
Robertson, Economic Essays and Addresses, p. 115.