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F E D E R A L ADVISORY COUNCIL M I N U T E S A N D RECOMMENDATIONS 1936-1940 MINUTES OF MEETING of the FEDERAL ADVISORY COUNCIL February 11-12, 1936 OFFICERS AND MEMBERS OF THE FEDERAL ADVISORY COUNCIL For the Year 1936 OFFICERS: EXECUTIVE COMMITTEE: President, Walter W. Smith Vice President, Howard A. Loeb Secretary, Walter Lichtenstein Walter W. Smith Howard A. Loeb Thomas M. Steele James H. Perkins H. Lane Young W. T. Kemper MEMBERS: Federal Federal Federal Federal Federal Federal Federal Federal Federal Federal Federal Federal Thomas M. Steele James H. Perkins Howard A. Loeb Arthur E. Braun Charles M. Gohen H. Lane Young Edward E. Brown Walter W. Smith Theodore Wold W. T. Kemper Joseph H. Frost M. A. Arnold 1 Reserve District Reserve District Reserve District Reserve District Reserve District Reserve District Reserve District Reserve District Reserve District Reserve District Reserve District Reserve District No. No. No. No. No. No. No. No. No. No. No. No. 1 2 3 4 5 6 7 8 9 10 11 12 BY-LAWS OF THE FEDERAL ADVISORY COUNCIL ARTICLE I. OFFICERS Officers of this Council shall be a President, Vice-President, and Secretary. ARTICLE II. PRESIDENT AND VICE-PRESIDENT The duties of the President shall be such as usually pertain to the office; in his absence the Vice-President shall serve. ARTICLE III. SECRETARY The Secretary shall be a salaried officer of the Council and his duties and compen sation shall be fixed by the Executive Committee. ARTICLE IV. EXECUTIVE COMMITTEE There shall be an Executive Committee of six (6 ) members of the Council, of which the President and Vice-President of the Council shall be ex officio members. To fill a vacancy, the President, or in his absence, the Vice-President shall be authorized to designate as a member of the Executive Committee for a given meeting another member of the Council other than one elected to the Executive Committee. ARTICLE V. DUTIES OF THE EXECUTIVE COMMITTEE It shall be the duty of the Executive Committee to keep in close touch with the Federal Reserve Board and with their regulations and promulgations, and communicate the same to the members of the Council, and to suggest to the Council from time to time, special matters for consideration. The Executive Committee shall have power to fix the time and place of holding its regular and special meetings and methods of giving notice thereof. Minutes of all meetings of the Executive Committee shall be kept and such minutes or digest thereof shall be immediately forwarded to each member of the Council. A majority of the Executive Committee shall constitute a quorum and action of the Committee shall be by majority of those present at any meeting. ARTICLE VI. MEETINGS Regular meetings of the Federal Advisory Council shall be held in the City of Wash ington on the third Tuesday of the months of February, May, September, and November of each year, unless otherwise directed by the Executive Committee. A preliminary meeting of the Federal Advisory Council shall be called by the Secre tary in accordance with instructions to be given by the President of the Council. 2 Special meetings may be called at any time and place by the President or the Execu tive Committee, and shall be called by the President upon written request of any three members of the Council. ARTICLE VII. ALTERNATES In the absence of the regular representative of any Federal Reserve District, the Board of Directors of the Federal Reserve Bank of that District may appoint an alternate. The alternate so appointed shall have the right to be present at all the meetings of the Council for which he has been appointed. He shall have the right to take part in all dis cussions of the Council but shall not be entitled to vote. ARTICLE VIII. AMENDMENTS These by-laws may be changed or amended at any regular or special meeting by a vote of a majority of the members of the Federal Advisory Council. February 11, 1936. 3 MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL February 11, 1936. The first and organization meeting of the Federal Advisory Council for 1936 was convened in Room 836 of the Mayflower Hotel, Washington, D.C., on Tuesday, February 11, 1936, at 10:15 A. M. Present: Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. District No. District No. District No. District No. District No. District No. District No. District No. District No. District No. District No. Secretary Thomas M. Steele James H. Perkins Howard A. Loeb Arthur E. Braun Charles M. Gohen H. Lane Young Edward E. Brown Walter W. Smith Theodore Wold W. T. Kemper Joseph H. Frost Walter Lichtenstein 1 2 3 4 5 6 7 8 9 10 11 Absent: District No. 12 Mr. M. A. Arnold Mr. Walter W. Smith was elected Chairman pro tem and Mr. Walter Lichtenstein Secretary pro tem. The Secretary stated that communications had been received from all of the Federal Reserve banks certifying to the election of their representatives in accordance with the above list. Upon nominations for the office of President of the Council being called for, Mr. Walter W. Smith was nominated. On motion, duly made and seconded, the nominations were closed and the Secretary was instructed to cast a ballot for Mr. Smith, who was thereupon declared elected President of the Council for the year 1936. Upon nominations for Vice President being called for, Mr. Howard A. Loeb was nominated. On motion, duly made and seconded, the nominations were closed and the Secretary was instructed to cast a ballot for Mr. Loeb, who was thereupon declared elected Vice President of the Council for the year 1936. The President, Mr. Smith, thereupon called for nominations for the four appointive members of the Executive Committee. Messrs. Thomas M. Steele, James H. Perkins, H. Lane Young, and W. T. Kemper were nominated. On motion, duly made and seconded, these gentlemen were unanimously elected members of the Executive Committee for the year 1936, the President and Vice President being ex officio members. On motion, duly made and seconded, Mr. Walter Lichtenstein was elected Secretary of the Federal Advisory Council for the year 1936 at a salary of $2,500.00 per annum. On motion, duly made and seconded, the Council readopted for the year 1936 the existing by-laws which are attached hereto and made part of these minutes. On motion, duly made and seconded, the minutes of the Council meeting of November 20-21, 1935, copies of which had been previously sent to the members, were approved. 4 The Secretary presented his financial report for the year 1935, which had been audited by Mr. J. J. Buechner, Assistant Auditor of The First National Bank of Chicago, which on motion, duly made and seconded, was approved and ordered to be printed. The report is attached hereto and made a part of these minutes. On motion, duly made and seconded, the following resolution was unanimously adopted: “ Resolved, that the Secretary be and he is hereby authorized to ask each Federal Reserve Bank to contribute $350 toward the Secretarial and incidental expenses of the Federal Advisory Council for the year 1936 and to draw on it for that purpose.” It was voted that the Mayflower Hotel continue to be used as headquarters of the Council. President Smith made a statement regarding the unauthorized premature publication of the recommendations made by the Council at its November meeting. He pointed out that there was considerable evidence to indicate that the responsibility for this premature publication was that of the Board and not of the Council. It was voted that the resolution originally adopted by the Federal Advisory Council on M ay 20, 1926, be re-adopted with the necessary change in terminology to make it conform to the Banking Act of 1935, reading as follows: “ It was decided that in future the members of the Council should formulate topics concerning which they might wish information from the Board of Governors of the Federal Reserve System, or which they wished to have discussed with the Board. Such inquiries should be addressed to the Secretary of the Council, and the Secretary was directed to act as a clearing house for members of the Council and prepare material to be brought up at the joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System.” M r. Steele brought up the question of sub-section f of Regulation Q which has been suspended by the Board of Governors of the Federal Reserve System since the Federal Deposit Insurance Corporation issued a regulation which did not agree in all respects with the one of the Board. No definite action was taken, though the hope was expressed by several of the members that the clause in question be put into effect. M r. Frost read a lengthy statement dealing with the subject of excess reserves. This statement is included as a part of the official record of this meeting. At 11:00 A. M . Dr. Goldenweiser appeared before the Federal Advisory Council and until 12:50 P. M . discussed chiefly the problems connected with the Government financing. At 1:00 P. M . the Council adjourned to Room 883 for luncheon at which Chairman Eccles was present. The Chairman read a memorandum giving the historical, legal, and practical objec tions to having representatives of the Federal Reserve banks on the Open Market Com mittee other than presidents of Federal Reserve banks or full time executive officials of the System. The meeting adjourned at 3:00 P. M . W A LT E R LIC H T E N ST E IN , Secretary. 5 REPORT OF TH E SECRE TAR Y OF THE FED ERAL AD VISORY COUNCIL For the Year Ending December 31, 1935. Balance on hand December 31,1934................................ $2,348.03 Assessment — Twelve Federal Reserve B anks..................... 4,200.00 Salary...................................... $2,000.00 Miscellaneous.......................... 57.87 Conference Expenses* (See N ote)........................... 2,103.07 Printing and Stationery......... 706.63 Postage, telegrams and tele phones .................................. 233.49 Balance on hand December 31,1935................................ 1,446.97 $6,548.03 $6,548.03 Note: *This item includes all the expenses connected with the work in relation to the Banking Act of 1935, as well as the expenses of a stenographer. These special expenses were all authorized by vote of the Federal Advisory Council on March 28, 1935. Chicago, Illinois. January 13, 1936. To the Federal Advisory Council: I have audited the books, vouchers and accounts of the Secretary of the Federal Advisory Council for the year ending December 31, 1935, and certify that the above statement agrees therewith. Respectfully, THE FIR ST N A T IO N A L B A N K OF CHICAGO, (Signed) J. J. B U E C H N ER , Asst. Auditor. 6 M IN U TES OF JOINT CONFERENCE OF TH E FEDERAL ADVISORY COUNCIL A N D TH E BOARD OF GOVERNORS OF TH E FED ERAL RESERVE SYSTEM February 11, 1936. At 3:50 P. M . a joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System was held in the Board Room, Washington Building, Washington, D. C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman M . S. Eccles; Governors Joseph A. Broderick, John McKee, Ralph W. Morrison, Ronald Ransom, and M . S. Szymczak; also Messrs. Lawrence Clayton, Assistant to the Chairman of the Board of Governors of the Federal Reserve System; Walter Wyatt, General Counsel for the Board; Chester Morrill, Secretary of the Board; L. P. Bethea and S. A. Carpenter, Assistant Secretaries of the Board; Dr. E. A. Goldenweiser, Director, Division of Research and Statistics, Board of Governors of the Federal Reserve System; Carl E. Parry, Chief of Division of Bank Loans, Board of Governors; E. L. Smead, Chief of Division of Bank Operations of the Board of Governors; Leo H. Paulger, Chief of Division of Examinations, Board of Governors; and Elliott Thurston, Special Assistant to the Chairman of the Board of Governors. Present: Members of the Federal Advisory Council: M r. Walter W. Smith, President; Mr. Howard A. Loeb, Vice President; Messrs. T. M . Steele, J. H. Perkins, A. E. Braun, C. M . Gohen, H. Lane Young, E. E. Brown, Theodore Wold, W. T. Kemper, J. H. Frost, and Walter Lichtenstein, Secretary. Chairman Eccles repeated his statement about the election of other than presidents of Federal Reserve banks as members of the Open Market Committee. In reference to sub-section f of Regulation Q, Chairman Eccles made the statement that the Board had issued this regulation under the impression that the Federal Deposit Insurance Corporation fully agreed and that there would be unanimity in the regulations of the two bodies. However, it developed that the regulation issued by the Federal Deposit Insurance Corporation did not prohibit the exaction of exchange charges by banks. Since then the Federal Deposit Insurance Corporation has reissued the regulation effective as of February 1, but the Board of Governors of the Federal Reserve System has not seen its way clear to concur in the regulation issued by the Federal Deposit Insurance Corpora tion and, therefore, it has not re-enacted sub-section f of Regulation Q nor has it issued any substitute in its place. The Secretary of the Council read Recommendation No. 2 adopted by the Federal Advisory Council at its November, 1935, meeting, dealing with margin requirements for collateral loans of banks. The meeting adjourned at 4:45 P. M . W A LT E R LIC H T E N S T E IN , Secretary. 7 M IN U TES OF M E ETIN G OF THE FED ERAL ADVISORY COUNCIL February 11, 1936. At 4:50 P. M. the Federal Advisory Council reconvened in the Board Room, Wash ington Building, Washington, D. C., the President, Mr. Smith, in the Chair. Present: Mr. Walter W. Smith, President; Mr. Howard A. Loeb, Vice President; Messrs. T. M. Steele, J. H. Perkins, A. E. Braun, C. M. Gohen, H. Lane Young, E. E. Brown, Theodore Wold, W. T. Kemper, J. H. Frost, and Walter Lichtenstein, Secretary. It was decided to notify the Board that the Council wished to meet with it tomorrow, Wednesday, February 12, at 10:30 A. M., and it was decided to have a meeting of the Council in Room 836 of the Mayflower Hotel today, Tuesday, February 11 at 7:15 P. M. The meeting adjourned at five o’clock. WALTER LICHTENSTEIN, Secretary. 8 M IN U TES OF M E ETIN G OF THE FED ERAL ADVISORY COUNCIL February 11, 1936. A t 7:30 P. M . the Federal Advisory Council reconvened in Room 836 of the May flower Hotel, Washington, D. C., the President, Mr. Smith, in the Chair. Present: Mr. Walter W. Smith, President; Mr. Howard A. Loeb, Vice President; Messrs. T. M . Steele, J. H. Perkins, A. E. Braun, C. M . Gohen, H. Lane Young, E. E. Brown, Theodore Wold, W. T. Kemper, J. H. Frost, and Walter Lichtenstein, Secretary. The Secretary read a letter from Chairman Eccles dated February 4, 1936, thanking the members of the Federal Advisory Council on behalf of himself and other members of the Board of Governors for the flowers which had been sent in the name of the Federal Advisory Council to the Board on the occasion of the installation in office of the new members of the Board of Governors of the Federal Reserve System. M r. Frost presented a resolution, embodying the ideas expressed in the statement made by him at the morning meeting and dealing with the problem of excess reserves. A copy of this resolution is made a part of the permanent record of the meeting. M r. Brown made some remarks in opposition to the resolution as presented by M r. Frost. It was voted to appoint a sub-committee to draft a resolution, the committee to consist of Messrs. Brown, Frost, Steele, and the Secretary of the Council. The sub-committee withdrew and presented a resolution which is made a part of the permanent record of this meeting. It was moved by Mr. Brown and seconded by Mr. Loeb that the statement of the sub-committee be adopted as a recommendation of the Council to the Board of Governors of the Federal Reserve System. The motion was unanimously adopted. It was unanimously voted that the Board be informed that the Council desires that the recommendation be given publicity within a week. The meeting adjourned at 10:10 P. M . W A LT E R LIC H T E N S T E IN , Secretary. 9 MINUTES OF MEETING OF THE FEDERAL ADVISORY COUNCIL February 12, 1936. At 9:40 A. M . the Federal Advisory Council reconvened in Room 836 of the May flower Hotel, Washington, D. C., the President, Mr. Smith, in the Chair. Present: Mr. Walter W. Smith, President; Mr. Howard A. Loeb, Vice President; Messrs. T. M . Steele, J. H. Perkins, A. E. Braun, C. M . Gohen, H. Lane Young, E. E. Brown, Theodore Wold, W. T. Kemper, J. H. Frost, and Walter Lichtenstein, Secretary. M r. Steele asked for reconsideration of the recommendation adopted the day previous and it was voted to reconsider. M r. Frost presented an amended resolution which is appended to these minutes as Recommendation No. 1. After some discussion it was adopted unanimously. A resolution was presented which is attached to these minutes as Recommendation No. 2 and deals with margin requirements for collateral loans of banks (Regulation U). This was adopted unanimously. The meeting adjourned at 11:10 A. M . W A LT E R LIC H T E N S T E IN , Secretary. 10 M IN U TES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL A N D TH E BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM February 12, 1936. At 11:45 A. M . a joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System was held in the Board Room, Washington Building, Washington, D. C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman M . S. Eccles; Governors Joseph A. Broderick, Ralph W. Morrison, and Ronald Ransom; also Messrs. Lawrence Clayton, Assistant to the Chairman of the Board of Governors of the Federal Reserve System; Walter Wyatt, General Counsel for the Board; Chester Morrill, Secretary of the Board of Governors; L. P. Bethea and S. A. Carpenter, Assistant Secretaries of the Board; Dr. E. A. Goldenweiser, Director, Division of Research and Statistics, Board of Governors; Carl E. Parry, Chief of Division of Bank Loans, Board of Governors; E. L. Smead, Chief of Division of Bank Operations, Board of Governors; and Elliott Thurston, Special Assistant to the Chairman of the Board of Governors. Present: Members of the Federal Advisory Council: M r. Walter W. Smith, President; Mr. Howard A. Loeb, Vice President; Messrs. T. M . Steele, J. H. Perkins, A. E. Braun, C. M . Gohen, H. Lane Young, E. E. Brown, Theodore Wold, W. T. Kemper, J. H. Frost, and Walter Lichtenstein, Secretary. President Smith informed the Board that the Council expected to have its statutory meetings on the third Tuesday of the following months: February, May, September, and November. It was pointed out that as September 1 in this year falls on a Tuesday, it would make the September meeting unnecessarily early. It was thereupon agreed that the meeting in September with the Board should take place on September 22. The Secretary of the Council read Topic No. 1. Chairman Eccles asked whether the Council desired this recommendation to be given publicity. President Smith replied that the Council did desire the recommendation to be released, but was willing to have such release delayed for a week. The Secretary of the Council read Topic No. 2 and Chairman Eccles made the state ment that this would be given publicity at the, same time as Recommendation No. 1. The meeting adjourned at 12:15 P. M . W A LT E R LIC H T E N S T E IN , Secretary. 11 RECO M M EN D ATIO N S OF THE FED ERAL AD VISORY COUNCIL TO THE BO ARD OF GOVERNORS OF TH E FED ERAL RESERVE SYSTEM February 12,1936. T O P IC No. 1 . Excess Reserves. R E C O M M E N D A T IO N : The Federal Advisory Council wishes to direct the attention of the Board of Governors of the Federal Reserve System and, through it that of the Open Market Committee of the System, to the communication made by the Council to the Board at its meeting of September 24, 1935, concerning the amount of Government securities held by the System, and to its unanimous recommendation made to the Board at its meeting of November 21, 1935, referring to the same subject and further making recommendations with regard to the amount of excess reserves of member banks now carried with the System. The Council has taken cognizance of a joint statement issued by the Board of Gover nors and the Open Market Committee under date of December 18, 1935, which seemed to recognize fully that “the special problem created by the continuing excess of reserves” was of such importance as to justify a continuance of the “unremitting study and attention of those charged with the responsibility for credit policy in order that appropriate action may be taken as soon as it appears to be in the public interest.” In view of the fact that, since the above statement wras made, a great change has taken place in the membership of the Board of Governors and an entirely new arrangement of the composition of the Open Market Committee is about to be consummated, the Council feels that it would be in every way desirable and proper for it at this time to refer to the communications mentioned and to make known its present views. Of the slightly less than six billion dollars of reserves, approximately three bil lion dollars of which are required, no less than two billion four hundred million dollars were created by purchases of Government securities in the open market by the issuance of reserve bank credit. A very large percentage of the remainder of the reserve structure is the result of gold imports which have come into the country in the last two years, not as the result of a settlement of trade balances but largely for protection against unsettled conditions in other countries, and partly for speculative purposes. The gold holdings thus acquired may be largely transitory and temporary. The Council is of the opinion that it would be unwise and unsound to permit a credit structure to be built on the base of reserves so created. The Council recognizes and has taken into the most careful consideration the fact that there have been various groups representing very important elements in the business and financial structure of the country who have firmly expressed the opinion that the present huge volume of excess reserves is a most serious menace, but that the first step for the proper correction of the situation would be an increase of reserve requirements, control over which has been granted to the Board of Governors of the Federal Reserve System by the terms of the Banking Act of 1935. The Council is so deeply impressed with the necessity for prompt preventive action in order to avoid the possibility of the building of a credit structure on the reserves as at present constituted, that it recommends to the Board at this time a substantial increase in the reserve requirements for member banks. This increase should be at least large enough to prevent a credit structure being built on that part of the gold holdings which may be deemed to be transitory or temporary. 1 In making this recommendation in respect to the raising of reserve requirements, the Council wishes to make it clear that it does not believe that reserve requirements should be varied at frequent intervals or except for grave reasons. It is of the opinion that frequent changes in reserve requirements would destroy confidence both on the part of the borrower and the banker and restrict employment of bank credit needed for contin ued business recovery. T O P IC No. 2. Regulations in Respect to Margin Requirements on Collateral Loans of Banks (Regulation U). R E C O M M E N D A T IO N : The Federal Advisory Council is still strongly of the opin ion expressed in a recommendation made to the Board of Governors of the Federal Reserve System on November 21, 1935 that there is no need at this time to put into force regula tions affecting collateral loans made by banks. The Council believes that the nature of the lending operations carried on by banks is essentially different from that by brokers. Regulations governing collateral loans by banks may affect forms of credit which it is not at all intended to regulate, while the business of brokers is confined almost entirely to loans on registered securities made for the express purpose of purchasing and carry ing these. 2 STAi’ M M OF J. E., FROST TO FEDERAL ADVISORY COUNCIL - FEBRUARY 1 1 t h , 1936 S in ce th e p u b l i c a t i o n o f the statement o f the F ederal A dvisory Council on t h e s u b j e c t o f e x c e s s r e s e r v e s , w h ic h was a d o p t e d at t h e i r meeting i n November o f l a s t year, t h e r e has be en w id e d i s c u s s i o n o f the s u b j e c t and t h e r e ha ve a p p e a r e d a c o n s i d e r a b l e number o f a r t i c l e s w i t h r ega rd t o i t in v a rio u s fin a n cia l p u blica tion s. The Open Market Com m it t e e met i n D e c e m b e r , ga ve c a r e f u l c o n s i d e r a t i o n t o t h e m a t t e r , an d, as a r e s u l t o f such c o n s id e r a t io n , j o i n e d t h e Board o f G o v e r n o r s o f the F e d e r a l R e s e r v e System i n a s t a t e m e n t e f f e c t i v e l y s a y i n g t h a t t h e r e was n o t h i n g looking t o in th e s i t u a t i o n th e n p r e v a i l i n g t o a redu ction o f excess reserves, mended by t h e C o u n c i l , t i o n s by t h e S y s t e m , prominent p e r s o n s reserves. namely, j u s t i f y any a c t i o n either by t h e method r e c o m r e d u c i n g h o l d i n g s o f Government o b l i g a o r b y t h e method recommended b y c e r t a i n o t h e r in c r e a s in g the percentage o f l e g a l l y required The s t a t e m e n t f u r t h e r a s s u r e d t h e c o u n t r y t h a t t h e m a t t e r would c o n t i n u e t o resp on sib ility r e c e i v e t h e c o n s i d e r a t i o n o f Trt h o s e charged w ith the f o r c r e d i t p o l i c y ” , t o t h e end t h a t c o n t r o l , if neces s ary o r d e s i r a b l e , w o u l d b e e x e r c i s e d i n p l e n t y o f time t o p r e v e n t harmful e f f e c t s It is f l o w i n g fr om any undue c r e d i t e x p a n s i o n . s a fe to sa y t h a t t he p r e p o n d e r a n c e o f o p i n i o n e x p r e s s e d in ; v e l l - r e c o g n i z e d f i n a n c i a l p u b l i c a t i o n s ment w i t h t h e s t a t e m e n t o f t h e C o u n c i l , , deeply i n t e r e s t e d 7/nile i t but su b sta n tia lly in agree However, in not o n ly the a t t i t u d e the F e d e r a l R e s e r v e S y s te m , o t h e r s not is I have b e e n more assumed by t h e o f f i c i a l s i n such e x p r e s s i o n s a s I ha v e s e e n o f in a g ree m en t v/ith t h e November s ta te m e n t is true that o f t h e C o u n c i l «, g r o u p s o f no i n c o n s i d e r a b l e i m p o r t a n c e i n t h e way or power and i n f l u e n c e do n o t a g r e e w i t h t h e t h o u g h t e x p r e s s e d by t h e Counci] w ith r e s p e c t t o t h e immediate da ng er s o f i n f l a t i o n a r y c r e d i t of expansion, i t has I have y e t to seemed t o me t o be o f v e r y g r e a t s ig n if i c a n c e that s e e any s t a t e m e n t o r argument i n o p p o s i t i o n t o t h a t p a r t o f the statem ent o f t h e C o u n c i l w h i c h i s t h e t r u e f o u n d a t i o n f o r the whole s t a t e m e n t , and w h i c h r e a d s a s f o l l o w s : for t h is is the in dispu table are h e l d u n d e r t h e fact th at, are d e p e n d e n t so l o n g a s Government bonds o w n e r s h i p o f the S ys te m , c o u n t r y o r t h e r e s e r v e s o f member h a n k s , "The c o n t r o l l i n g r e a s o n e i t h e r t h e c u r r e n c y o f the to a corresponding extent, e n t i r e l y u p on a Government o b l i g a t i o n . The w o r l d h i s t o r y o f c u r r e n c y and h a n k i n g h a s d e m o n s t r a t e d t h e d a n g e r s i n h e r e n t a system o r p o l i c y t o o many t i m e s t o make i t n e c e s s a r y ela bora ted upon in t h i s the dangers f o r them t o be c o m m u n i c a t i o n . TT In o t h e r w o r d s , t h e r e respect to i n such seem t o be d i f f e r e n c e s of cred it in o p i n io n with e x p a n s i o n a t t h i s tim e* and t h e r e seem t o be v a r y i n g v i e w s w i t h r e g a r d t o w h e t h e r e x c e s s r e s e r v e s s h o u l d be r edu ce d b y a n y m eth od w h a t e v e r f o r t he p u r p o s e o f a v o i d i n g c r e d i t f l a t i o n , but i t least t a c i t is evident that acceptance there Since th e c o r r e c t n e s s i n at l e a s t all, i s c o m p l e t e a g ree m en t i n t h e at o f the b a s i c p r i n c i p l e i n the a b o v e q u o t e d p o r t i o n o f i t s e x p r e s s e d by t h e C o u n c i l sta te m en t, , o r s o u n d n e s s o f t h e C o u n c i l rs s t a t e m e n t t h i s one p a r t i c u l a r seems t o be t h u s t a c i t l y approved by i t w i l l be u n i v e r s a l l y a g r e e d t h a t t h e e l i m i n a t i o n o f t h i s element s h o u l d p r o p e r l y b e a c c o m p l i s h e d at at 3ome t i m e shall i t in th e f u t u r e « be d o n e ? some d a t e , obvious - - when when e x c e s s re se rv e s are s u f f i c i e n t l y g r e a t t o permit t h e o p e r a t i o n w ithou t or to reduce loans fiat e i t h e r now or The o n l y r e m a i n i n g q u e s t i o n i s The answer i s p e r f e c t l y banks e i t h e r t o r e d i s c o u n t in forcin g or in vestm en ts. That q u e s t i o n i s n o t one o f w h e t h e r or no t we i n c r e a s e r e s e r v e requirements at t h i s t im e , or p o s s i b l y at a l l , no r i s it a question of s e l l i n g G ove r n m en t s h e l d by t he System f o r t h e p u r p o s e reserves. It sim ply is reserves are t o manency. It one o f w he ther o r no t t h e c u r r e n c y and "bank be p u r g e d s tru ctu re b u i l £ upon i t is o f the fiat el em en t "before a "bank d e p o s i t becomes a r e a l i t y , and t h u s i n s u r e s i t s p e r t h e q u e s t i o n o f w h e t h e r t h e c u r r e n c y and r e s e r v e s permanently c o n s i s t shall o f g o l d o r some commodity h a v i n g a v a l u e i n t h e markets o f t h e w o r l d i n d e p e n d e n t shall c o n s is t o f reducing o f Government f i a t , or whether th ey o f Government p r o m i s e s . I hope t h a t , i n a l l c o n s i d e r a t i o n o f what we a r e t o recommend, the members o f t h e C o u n c i l w i l l have i n mind t h e "basic t h o u g h t and p rin cip le here in v o lv e d . privately, H ow ev er , e v e n t h o u g h no one h a s p u b l i c l y or s o f a r as I knov/, a t t e m p t e d t o r e f u t e i n any manner t h a t p o r t i o n o f o u r November s t a t e m e n t , t h e r e a r e o t h e r p o i n t s ment, and, of disagree o f c o u r s e , we s h o u l d c a r e f u l l y w eig h and c o n s i d e r t h e s e opposing view s i n o r d e r t h a t we may recommend a sound and w i s e c o u r s e t o t h e F e d e r a l R e s e r v e Board* F irst, t h e r e i s t h e g r o u p who a r e s e e m i n g l y g r e a t l y distaaibecL over what t h e y seem t o r e g a r d a s a r e a l and p o s s i b l y imminent da ng er o f unsound c r e d i t e x p a n s i o n "based on p r e v a i l i n g r e s e r v e s , and who s t r o n g l y ur ge p r e v e n t i v e m ea s u r es i n l i e u o f d e p e n d i n g u p on c o r r e c t i v e measures a f t e r t h e e x p a n s i o n s h o u l d be f u r t h e r d e v e l o p e d t h a n i t has been up t o t h i s t i m e , in p r e f e r e n c e t o but who recommend i n c r e a s i n g r e s e r v e r e q u i r e m e n t s e l i m i n a t i o n o f the f i a t Second, th ere i s part o f the r e s e r v e b a s e . t h e o t h e r g r o u p , which r e a l l y c o n s i s t s o f t he Board o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e System, t h e Open Market Com m it te e and t h o s e e c o n o m i s t s , ba n k er s and o t h e r s who seem t o b e l i e v e th at any o f f i c i a l a c t i o n w h a t e v e r a t t h i s t im e l o o k i n g t o a r e d u c t i o n o f the r e s e r v e s t r u c t u r e w o u l d a d v e r s e l y a f f e c t p u b l i c c o n f i d e n c e by tightening c r e d i t , ficu lt raisin g the market p r i c e o f money, making more d i f t h e f i n a n c i n g o f Government d e f i c i t s a t general r e s u l t , i n t e r f e r e with I t h i n k I am c o r r e c t c lud e a l l who ha ve e x p r e s s e d low r a t e s , o r even p r e v e n t t h e p r o c e s s a n d, as a of recovery, i n s a y i n g t h a t t h e a b o v e two g r o u p s i n d i s a g r e e m e n t w i t h t h e r e c o m m e n d a ti o n s o f the C o u n c i l , and I su b m it t h a t n e i t h e r o f t h e s e g r o u p s have s a i d a n y thing at a l l i n c o n t r a v e n t i o n o f tlie p r o p r i e t y o r i m p o r t a n c e o f some day e l i m i n a t i n g t h e f i a t I submit t h a t t h e on the p a r t el em en t in the r eserv e structure. om ission o f r e fe r e n c e to that part Further, o f our st a te m en t o f a l l grou p s has not o c cu rr e d in a d v e r t e n t ly . You may be a s s u r e d t h a t t h e Bo ard o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e System and the Open M arket C om m itte e i n a c t i n g a d v e r s e l y t o would n o t c a r e l e s s l y h a v e f a i l e d t o point our re co m m en da tio n s out a f a l l a c y i n our r e a s o n ing on su c h a b a s i c p r i n c i p l e . However, l e t us c o n s i d e r the r e s p e c t i v e p o s i t i o n s gro up s s e p a r a t e l y . The f i r s t g r o u p a r e i n c o m p l e t e ag re em ent w i t h us in that t h e y f e a r t h e p o s s i b i l i t y th at I w i l l defer d iscu ssio n tude o f t h e s e c o n d g r o u p . o f dangerous c r e d i t e x p a n s io n , so o f t h a t phas e u n t i l we c o n s i d e r t h e a t t i In f a c t , the first a c c o r d w i t h us i n one p a r t i c u l a r - t h e me thod. t o the t i m i n g o f a c t i o n , o f t h e two gr oup i s o n l y out o f They a g re e w i t h u s as and t h e y a g r e e w i t h us t h a t p r e v e n t i v e measures a r e p r e f e r a b l e t o c o r r e c t i v e , even i f i t b e assumed t h a t c o r r e c t i v e m e a s u r e s p o s s i b l y m ig ht be a p p l i e d e a r l y enough t o be e f fective. In s h o r t , we b o t h recommend r e d u c t i o n o f e x c e s s r e s e r v e s , but the p o i n t o f d i v e r g e n c e b e t w e e n u s i s where we recommend a c t u a l r e d u c tio n o f r e s e r v e s c o i n c i d e n t a l l y with e l i m i n a t i o n o f the f i a t elem ent, wh ile t h e y e f f e c t i v e l y recommend no r e d u c t i o n w h a t e v e r in a c t u a l r e s e r v e s , n o r any r e d u c t i o n (much l e s s e l i m i n a t i o n ) o f t he fiat element. 5. I*hey p r o p o s e t o remedy t h e t r o u b l e and by an e d i c t o f t h e Board p r a c t i c a l l y credit is th ere but it is "by a s im p le change i n n o m e n c la tu r e forbidden that saying: it TTY e s , t he b a s i s be e m p l o y e d , " for Personally, I am s u r f e i t e d w i t h b e i n g r u l e d by e d i c t s fro m any s o u r c e whatever*, G-ive u s a sound r e s e r v e structure f i r s t , t h e n l e t us a g r e e on a d e f i n i t e and f i x e d r e q u i r e d r e s e r v e p e r c e n t a g e , n o t t o be c h a n g e d by a n y b o d y 1s edict, and t h e n l e t u s e x t e n d c r e d i t w i t h o u t f e a r o f the s o u n d n e s s o f the c r e d i t b a s e and w i t h o u t f e a r o f what some t h e o r i s t may do by i s s u ing new e d i c t s time chan gin g l e g a l r e s e r v e requirem ents ~ from tim e t o thus making u t t e r l y on t h e p a r t im possible any s e m b la n c e o f i n t e l l i g e n t o f any i n d i v i d u a l b a n k e r i n t h e c o u n t r y . consume a g r e a t dea]* o f t im e i n d i s c u s s i n g t h e method recommended b y u s i n November t o t h a t go ve r nm ent al e d i c t s planning I c o u l d s o f course, su p erior m erit o f the o f f r e q u e n t changes by in r e serv e requirem ents, but i t v/ould be l a r g e l y a r e p e t i t i o n o f much o f what was c o n t a i n e d i n my sta te m en t t o t h e C o u n c i l in November, Let i t remind you t h a t , q u ir ed r e s e r v e s su ffice s ta te m e n t and t o c- s h o u l d b e p e r m a n e n t l y s e t b y law o r by e d i t it is inconsequential Now, a s t o t h e in c o m p a r i s o n with, the reference to i t s magnitude. s e c o n d gr ou p n o t i n a c c o r d w i t h our November T h i s g r o u p i n c l u d e s the B oar d o f G o v e r n o r s o f t he F e d e r a l Re serv e System and t h e Open Market Com m it te e, an d , that t he y j o i n t l y c o n s t i t u t e spon sibility for a ction the bo d y w h ic h i s or f a i l u r e to a c t , i n v i e w o f the f a c t charged with the fu.ll r e I f e e l that t h o i r i s v/orthy o f y o u r most c a r e f u l c o n s i d e r a t i o n and a n a l y s i s . not seen t o o f the o f m a i n t a i n i n g the s ou n dn es s o f t h e c u r r e n c y and r e s e r v e structure without the le a s t s ta te m e n t . that a s i m p o r t a n t a s may be t h e e x a c t p o i n t a t w h i c h r e - F e d e r a l R e s e r v e S y s te m , desirab ility f o r me t o r e f e r t o s ta tem en t T her e does be any i n d i c a t i o n c o n t a i n e d i n t he s t a t e m e n t as t o w h ic h method o f c o n t r o l may e v e n t u a l l y be e m p lo ye d , but the f i n a l p a r a g r a p h 6• r e i e r s to a s p e c i a l p r o b l e m c r e a t e d by tlie c o n t i n u i n g e x c e s s o f r e s e r v e s , ” and a s s u r e s th'^gt c o u n t r y t h a t t ake n as s o o n a s paragraph, one must possib le that priate", it fu tu re N atu rally, excess r e s e r v e s , " a p p r o p r i a t e a c t i o n " w i l l be a p p e a r s t o be i n t he p u b l i c in terest . i n f e r t h a t t h e B oard and Committee f e e l t h a t i t no one can im a gi n e any n e c e s s i t y f o r i n c r e a s i n g s o t h a t we a r e c o n s t r a i n e d t o assume t h a t "appropriate” excess reserves. It t h a t t h i s w i l l be by e i t h e r i n c r e a s i n g t h e l e g a l l y r e quired p e r c e n t a g e secu rities, is e v e n t s w i l l make some a c t i o n on t h e m a t t e r " a p p r o a c t i o n means an a c t i o n f o r t h e p u r p o s e o f r e d u c i n g fo llo w s, then, From t h i s o r by r e d u c i n g t he System h o l d i n g s s i n c e t h e s e a r e the o f Government o n l y two meth ods a v a i l a b l e . Since the state me nt g i v e s no i n d i c a t i o n as t o which method may b e a d o p t e d a t t h e time t h a t i t "appears t o be i n t h e p u b l i c t h a t i t may be t he c o r r e c t one. Nor i s the ground a g a i n a s t o vfc. i c h one t h a t we can o n l y hope i t n e c e s s a r y h e r e t o go o v e r is. have our r e c o m m e n d a t i o n on t h a t p o i n t , C o u n c i l know, I f u r n i s h e d - in terest", At any r a t e , t h e y a l r e a d y and, a s t h e members o f t h e i n a c c o r d w ith your p e r m is s io n - t o each member o f t h e B o a r d a c o p y o f my s t a t e m e n t t o t h e C o u n c i l on t h e s u b ject • The r e m a i n d e r o f t h e s ta tem en t o f t h e Board and Committee i n c l u d e s an o p i n i o n e x p r e s s e d i n f o u r p a r a g r a p h s , o f which t h e t h o u g h t i s in t h e f i r s t and t h i r d e x p r e s s e d t h a t , a l t h o u g h improvement i n b u s i ness and f i n a n c i a l c o n d i t i o n s ha s b een made, f u l l r e c o v e r y has n o t y e t been a c h i e v e d and t h a t t h e r e o f business a c t i v i t y i s as y e t no e v i d e n c e of" o v e r - e x p a n s i o n o r o f t h e use o f b u s i n e s s c r e d i t . The i n f e r e n c e frori t h i s can be n o t h i n g l e s s t h a n t h a t n o t h i n g w i l l j u s t i f y a c t i o n u n t i l f u l l r e c o v e r y has b e e n a c h i e v e d , and, furt her , u n t i l t h e r e be actual evidence o f o v e r-e x p a n s io n o f business a c t i v i t y business c r e d i t . Here i s where t h e r e i s appar ent or o f t h e use o f a sha rp d i v e r g e n c e ■ 7. oetween t h e v i e w s o f t h o s e p r e f e r r i n g p r e v e n t i v e a c t i o n and t h o s e p r e ferring c o r r e c t i v e which g r o u p Those p r e f e r r i n g p r e v e n t i v e a c t i o n , I am o n e , b e l i e v e are e n t i t l e d t o t io n o f the action . early, reserve be sound, a n d , if not that fu rth er, a c t i o n l o o k in g t o the red u c the p o in t t h a t i t s to the d e f in i t e what r e s e r v e p e r c e n t a g e a g a i n s t s i d e r e d t o be s a f e . t he 'banks and t h e p u b l i c g e n e r a l l y im m e d i a t e , structure to of settlem ent d e p o s i t s not We b e l i e v e t h a t it com position w i l l o f the qu estion o f o n l y i s , b u t w i l l "be c o n i s not o n ly u n f a i r , but b a s i c a l l y unsound and e x t r e m e l y d a n g e r o u s , t o e i t h e r e n c o u r a g e o r eve n pe r m it the b u i l d i n g o f ba nk c r e d i t may be u n s o u n d , up on a b a s e any a p p r e c i a b l e p a r t o f wh ich o r u p o n a b a s e w h i c h may n o t b e o f s u f f i c i e n t l y h i g h le g a l r a t i o t o d e p o s i t s as t o tinuance o f such l e g a l r a t i o . be i n g i n d u c e d t o fiat, j u s t i f y c o m p l e t e r e l i a n c e upon a c o n extend c r e d it We a r e t o d a y o c c u p y i n g a p o s i t i o n of upon a r e s e r v e b a s e w i t h an u n s o u n d , o r elem ent a l m o s t as g r e a t a s p r e s e n t t o t a l r e s e r v e r e q u i r e m e n t s - which s t a t e m e n t has n o t b e e n d e n i e d b y any F e d e r a l R e s e r v e o f f i c i a l anyone e l s e , or so f a r a s I ha ve h e a r d o r r e a d - an d, f u r t h e r , upon a b a s e , in p e r c e n t a g e o f d e p o s i t s , a f t e r the c r e d i t w h ich p e r c e n t a g e can be i n c r e a s e d o v e r n i g h t h a s b e e n e x t e n d e d and t h e d e p o s i t In a d d i t i o n , t h e join t structure created . statement o f the Board o f Governors o f the F e d e r a l R e s e r v e System and t h e Open Market Committee c l e a r l y i n d i c a t e s t h a t w he nev er t h e r e may b e , i n t h e i r o p i n i o n , any " o v e r - e x pa nsi on o f b u s i n e s s a c t i v i t y o r o f t h e u s e o f b u s i n e s s c r e d i t , TI bank c r e d i t w i l l be r e s t r i c t e d o r r e d u c e d b y e i t h e r one method o r t h e o t h e r o f those a v a i l a b l e , o r even b y b o t h s i m u l t a n e o u s l y . seem t h a t su ch an a t t i t u d e on t h e p a r t o f t h e F e d e r a l R e s e r v e System would p r e c l u d e t h e p o s s i b i l i t y o f enough c o n f i d e n c e banker t o l e n d , I t wou ld a l m o s t o r any b u s i n e s s man t o b o r r o w . on the p a r t o f any U n f o r t u n a t e l y , however, s. human n a t u r e i s such, and t h e p r o f i t m otive i s sueh, t h a t existin g r e s e r v e s w i l l e v e n t u a l l y he e m pl oye d w i t h o u t r e g a r d t o t h e i r s ou n dn ess and w i t h o u t r e g a r d t o an y d a n g e r s w h a t e v e r o f t h e p r e s e n t r e s e r v e r a t i o being t o o l o w . Human n a t u r e has not y e t be en d i v e s t e d o f i t s nor t h e p r o f i t Justice, it motive of its potency, Why, i n t h e name o f r e a s o n and s h o u l d n o t t h e ba nks and b u s i n e s s men have some a s s u r a n c e t h a t i s p r o p e r and s a f e f o r them t o make u s e o f su c h r e s e r v e s as a r e in e x i s t e n c e and a b o v e l e g a l r e q u i r e m e n t s ? reserve fra ilti^ s structure is o f the present " v e r b o t e n " , why s h o u l d t h e y n o t be a p p r i z e d o f e x a c t l y how much, and why? In o t h e r w o r d s , why n o t r e d u c e r e s e r v e s b y e lim in a t in g the unsound p o r t i o n , safe r e s e r v e r a t i o , I f any p a r t if there is i f t h e r e i s an y, and d e f i n i t e l y s e t a o n e , and s a y t o banks and b u s i n e s s t h a t nv e r b o t e n TT s i g n s a r e r em ove d and t h a t b o t h may f u n c t i o n n o r m a l l y and w it ho u t f e a r of pu nitive ed and i n d u c e d t o Now, action f o r d o i n g what t h e y have b e e n e n c o u r a g do? in the paragraph o f the Joint s t a t e m e n t o f t h e B o a r d and the Open Market Committee numbered two t h e r e i n , t h e s i m p l e s ta te m e n t i s made t h a t the prim ary olbject to a fu rtheran ce o f recovery,, d i f f e r w ith the d e s i r a b i l i t y o f t h e System i s t o lend i t s efforts W e l l , no one can c o m p l a i n a t t h a t o f such an o b j e c t , , or T h e r e , h o w e v e r , may be some q u e s t i o n a s t o t h e d e s i r a b i l i t y and e f f e c t i v e n e s s o f t h e method t e s t c a l c u l a t e d t o a t t a i n the sought-for goa l. The o n l y o t h e r p a r a g r a p h o f t h e s t a t e m e n t i s t h a t , f o u r , whi ch b e l a b o u r e d l y s t a t e s t h a t t h e p r e s e n t volume numbered o f member Tbank r e s e r v e s has b e e n g r e a t l y i n c r e a s e d by i m p o r t s o f g o l d fro m a b r o a d , c o n t i n u e s t o be e x c e s s i v e ments o f c r e d i t I --'1 - f a r b ey on d t h e p r e s e n t o r p r o s p e c t i v e r e q u i r e - f o r sound b u s i n e s s e x p a n s i o n * t h i s s ta te m e n t and I c an imagine no p u r p o s e o t h e r t ha n t o c r e a t e t h e i n f e r e n c e t h a t t h e r e s p o n s i - ility and i t s fo r the p resen t com position, Reserve S ys te m . reserve structure, w ith r e s p e c t both t o i t s size d o e s n o t r e s t upon t h e management o f t h e F e d e r a l W h a te v e r t h e p u r p o s e , the t r u t h t h a n s u c h an i n f e r e n c e . n o t h i n g c o u l d be f a r t h e r from The p l a i n , u n d e n i a b l e t r u t h i s that § 2 , 4 0 0 , 0 0 0 , 0 0 0 * 0 0 o f t h i s huge mass o f r e s e r v e s was c r e a t e d p u r e l y by open market p u r c h a s e s no o c c a s i o n , o f Government bonds by t h e Sys tem , and t h e r e i n my o p i n i o n , f o r a p o l o g y on my p a r t is in the r e p e t i t i o n o f the s t a t e m e n t u n d i s p u t e d b y anyo ne — t h a t t h a t much o f t h e r e s e r v e structure i s n o t money a t a l l , b u t i s an u n s e c u r e d p r o m i s e o f the Government t o t h e i d e n t i c a l e x t e n t t h a t t h e U n i t e d S t a t e s n o t e s , or g r e e n b a c k s , w e r e when t h e y were i s s u e d d u r i n g t h e C i v i l War. I cannot con clu d e t h i s statement w ithou t asking your in d u lg ence f o r a f e w moments more i n o r d e r t h a t we may go b a ck and c o n s i d e r a few o f t h e p r i n c i p l e s up on w h i c h t h e F e d e r a l R e s e r v e A ct was o r i g i n a lly based, practices and d e t e r m i n e w h e t h e r o r n o t t h e y c o n f o r m t o p r e s e n t or t h e o r i e s 0 In t he f i r s t p l a c e , t h e r e was no s u g g e s t i o n on the p a r t o f a n y o n e t h a t Government o b l i g a t i o n s were t o proper or s a f e "base f o r e it h e r re s e r v e s or currency* p r o v i s i o n v/as made i n t h e law a s f i n a l l y at ion o f N a t i o n a l Bank c u r r e n c y , be c o n s i d e r e d a On t he c o n t r a r y , enacted f o r the gradual e li m in on t h e g r ou n d t h a t secured c u r r e n c y and c o n s e q u e n t l y u n s o u n d . i t was a b o n d - Even d u r i n g t h e p a s t y e a r , the p r e s e n t A d m i n i s t r a t i o n u s e d $ 6 5 0 , 0 0 0 , 0 0 0 . 0 0 o f t h e s o - c a l l e d "gold p r o fit " to f i n a l l y e l i m i n a t e t h i s a d m i t t e d l y unsound el em en t o f t h e currency s t r u c t u r e o f the co u n tr y . It i s true that t he o r i g i n a l Act a u t h o r i z e d open market t i o n s in Government s e c u r i t i e s , b u t be only f o r t h e p u r p o s e l i t i g a t i n g t he e f f e c t s opera such t r a n s a c t i o n s were assumed t o o f e a s in g temporary, s e a s o n a l s t r a i n s and o f u n s e a s o n a l and u n u s u a l l y l a r g e movements o f 10 0 .old. No one e v e r t h o u g h t approximately equ a l t o the o f a h o l d i n g o f Government bonds o f an amount e n t i r e r e q u i r e d r e s e r v e s o f a l l member "banks combined, and no one e v e r dreamed o f p u r c h a s i n g b i l l i o n s bonds w i t h t h e av owe d p u r p o s e o f i n d u c i n g an i n c r e a s e dependent u p on them a s a r e s e r v e b a s e , as t o p r o h i b i t o f Government o f "bank money" The o r i g i n a l Act went so f a r n o t o n l y Government b o n d s b e i n g h e l d as c o l l a t e r a l ag ai n st F e d e r a l R e s e r v e n o t e s , but even p r o h i b i t e d d i s c o u n t e d n o t e s o f member banks s e c u r e d b y Government b o n d s b e i n g h e l d a s such c o l l a t e r a l . When t h e F e d e r a l R e s e r v e Banks were o r i g i n a l l y a l l r e s e r v e s w er e r e q u i r e d t o >e p a i d i n g o l d i f a member w e r e u n a b l e t o a b s o l u t e l y n o way f o r discounting, Thus, it or i t s e q u i v a l e n t , an d , c o m p l y w i t h t h i s r e q u i r e m e n t , t h e r e was t o pay in i t s in the beginn ing, required reserve member b a n k s , and t h a t t h e y wo u ld c o n s i s t o f Government o b l i g a t i o n s t o temporary s t r a i n s a s m a ll amount or shocks, e x c e p t by r e i t was c o n t e m p l a t e d t h a t t h e Feder al R e s e r v e System w o u ld h o l d p r a c t i c a l l y percentage established* in t ru s t the rese r v e p r in cip a lly o f gold , of a small e n a b l e t h e System t o e as e a s m a l l amount o f b a n k e r s 1 a c c e p t a n c e s , and o f rediscoun ts o f member b a n k s 0 I t was not even c o n tem p la te d t h a t r e d i s c o u n t s wou ld be o f v e r y g r e a t p r o p o r t i o n s , e x c e p t in or de r t o meet p a n i c c o n d i t i o n s b r i n g i n g on h o a r d i n g on a l a r g e such a s o c c u r r e d i n 1 9 0 7 . scale, I t was e x p e c t e d t h a t r e d i s c o u n t s would norm ally i n c r e a s e d u r i n g c r o p - m o v i n g p e r i o d s or o t h e r p e r i o d s when t h e temporary demand f o r c u r r e n c y was more than no r m a l, but i t was v e r y d e f i n i t e l y t h e e x p e c t a t i o n t h a t t h e d i s c o u n t r a t e would be a p e n a l t y rate making i t u n p r o f i t a b l e to rediscount i n order to In s h o r t , t h e b a s i c t h e o r y u n d e r l y i n g t h e law was t h a t -e c o u n t r y w i t h an e l a s t i c i t w ou ld f u r n i s h c u r r e n c y which would a u t o m a t i c a l l y expand to meet t h e r e q u i r e m e n t s o f t r a d e , extend c r e d i t . o r even o f p a n i ? c o n d i t i o n s , but 11. which w ou ld j u s t a s a u t o m a t i c a l l y c o n t r a c t when t h e n e c e s s i t i e s o f the e x p a n s io n had p a s s e d . The t h e o r y was and s t i l l i s p e r f e c t l y would a u t o m a t i c a l l y i f u n c t i o n as i n t e n d e d i f had f o l l o w e d t h e in ten t sound, and t he System the management o f t h e System o f th ose r e s p o n s i b le f o r the legislation . The prin cip a l cause f o r the f a u l t y f u n c t i o n in g o f the automatic expansion and c o n t r a c t i o n f e a t u r e lies, to always m a i n t a i n a d i s c o u n t first, rate i n the f a i l u r e o f t h e management i n each D i s t r i c t h i g h enough t o make rediscounting d e f i n i t e l y u n p r o f it a b le ; and t h e n e x t important cause f o r such f a i l u r e was t h e p r e s u m p t i o n upon t h e p a r t o f the F e d e r a l Reserve System management t h a t t h e y c o u l d b y l a r g e open market opera t i o n s improve u p o n t h e a u t o m a t i c f u n c t i o n i n g i d e a s o f C o n g r e s s , sonally, I ha ve no d o u b t i n my mind t h a t , theories then p r e v a i l i n g , c o n s i d e r i n g the Per " s o u n d money" i f C o n g r e s s had r e a l i z e d t h a t t h e managers o f the System i n t e n d e d t o u^e t h e open market o p e r a t i o n p r i v i l e g e the law i n o r d e r t o fa c tio n p r o v id e d , been e l i m i n a t e d substitute th e ir judgment i n l i e u in o f t he a u t o m a t i c t h e open market o p e r a t i o n f e a t u r e would e i t h e r have or r i g i d l y lim itedo I t r e q u i r e s no g r e a t amount o f s t u d y o r minute kno wled ge t o p l a i n l y p e r c e i v e t h a t we have w an de r ed f a r from t h e i n t e n t i o n o f t h e Congress w h ic h b r o u g h t the F e d e r a l R e s e r v e System i n t o b e i n g . my f e a r t h a t f u r t h e r It is and c o n t i n u e d p e r v e r s i o n o f t h e o r i g i n a l p u r p o s e s o f the Act may u l t i m a t e l y p r o d u c e siich an unsound r e s e r v e s t r u c t u r e , both f o r the ba nk s and f o r the c u r r e n c y o f t he c o u n t r y , t h a t a f e a r o f the v a l u e o f money i t s e l f may a p p e a r and a t e r r i f y i n g p r i c e s u f f e r i n g and p r i v a t i o n might have to be p a i d by t h e p e o p l e . in In v ie w o f the importance t o ev e ry p e rs o n in the Unitec!. S t a t e s o f t h e m a t t e r c o n t a i n e d i n our November s t a t e m e n t , a ttitu d e w ith r e s p e c t Board and t h e fact that t h e r e t o a s an nou nce d "by the F e d e r a l R es er v e Open Market Committee - and e s p e c i a l l y a new Bo ard ha s r e c e n t l y t a k e n o f f i c e Committee w i l l and o f the s h o r t l y be c o n s t i t u t e d , the du ty and o b l i g a t i o n and a new Open Market it i s beyond q u e s t i o n o f t h e C o u n c i l , , as a r e s p o n s i b l e and l e g a l l y c r e a t e d b o d y , t o make a p u b l i c r ec om m en da tio n s on t h e I believe in view o f the e x p r e s s i o n o f t h e i r p r e s e n t v i e w s and su b ject. They s h o u l d e i t h e r r e i t e r a t e t h e p r i n c i p l e s and r e c o m m e n d a t i o n s made i n t h e November s t a t e m e n t , t r a c t them a l t o g e t h e r , which may have o c c u r r e d re o r m o d i f y them t o c o n f o r m w i t h any c h a n g e s in t h e i r opinions. STATivO^T OF Tab SUB-CQkOllTEE OF Th& 2WERAL AUViJOhX QOUiiCU, TO THE rm m ku advisory council febrrny 11, 1956 The Federal Advisory Council cieaires again to call the attention of tiie iioa d of Governors of the federal Reserve System to the problem of th© excess reserves of the System* T-hile these excess reserves are in part due to the large holdings of Government securities in the 3yatera, still a very substantial amount is the result of tiie Importation Into this country of foreign gold, which m m not in settlement o/ legitiimte trad© balances, but sought security here b cause of unsettled conditions elsewhere. This .Told i3 apt to go out vhenever conditions abroad becoue established* At the >rcseut time the gold thus imported haa not become a -art of the credit structure o f our American economic system, but, as stated, is a :jart of the excess reserves held by the Federal Reserve banks. I f this ix sorted ^jold should enter in to the American economic structure, its repatri ation t'oulu cause a severe d islo ca tio n o f the A; erican credit structure. Steps should be taken to prevent this gold froia being used as a basis for credit while th is can s t i l l be done without causing in, ury to our whole c re d it system and without impeding recovery* There are two ways to do this* The first et *>d is by the Federal Reserve banks allowing their lover a©nt holdings to "run off* or by selling a part of then} the second uetitod is to increase the reserve requirements of the member banks* The Federal Advisory Council in ita unanimous reco ~.±endation of Hove ber 2 1 , 1955, to the Board of Gev©mors of the Federal Reserve Syeten urged strongly that the first course be followed* The Couneil !ias not c nged its opinion, but in v ie w of the fact tiiat obj( ctions to tiJLs method iuive been raised in res xmsiblc quarters, the C o u n c i l , regarding it of paramount importance toat sotae action bo taken in ratMect to excess reserves at the earliest possible ruD^ent, Strongly taat if trie desirable urges Board and the Federal Open iarket Committee to not dee i it to meet tiie situation at this time by reducing the ays tem* s holdings of Government requirements of the obligatons, that the Board increase the reserve »eabar banks • While it is recognized that the Board ca .not divest itself of its authority to make future chacga* in reserve ret-uiremente, it is the belief of the Council that it would be highly desirable ta&t tiie Board when i creasing reserve requirements accompany such action by a statement tiat the Board does not intend to laake furt .er changes in reserve re olre. ents uk last conditions should ehaa ;e materially. Therefore, the Council recommends t at the reserve re uire- uents be raised sufficiently to absorb the excess created by that foreign gold in the country which is likely to be repatriated whenever settled conditions again prevail abroad. It has been estimated that this would re ,ire an increase of fift^r per cent over tha resent reserve requirements# ( STATEMENT OF FEDERAL ADVISORY COUNCIL TO BOARD OF GOVERNORS OF FEDERAL RESERVE SYSTEM FEBRUARY 12, 1936 The F e d e r a l A d v i s o r y C o u n c i l w i s h e s t o d i r e c t t he a t t e n t i o n o f the Board o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e System an d, t h r o u g h that o f t he Open Market Committee o f t h e System, t o t h e comm un ica ti on made by t h e C o u n c i l t o t h e B oar d at i t s m e e t i n g o f September 24, 1935, c o n c e r n in g t h e amount o f Government s e c u r i t i e s h e l d by t h e System, and to i t s s t a t e m e n t made t o t h e B o a r d a t i t s m e e t i n g o f November 21 , 19 35, re fe rrin g to the same s u b j e c t regard t o t h e amount and f u r t h e r making r ecom m en da tio n s w i t h o f e x c e s s r e s e r v e s o f member banks now c a r r i e d with t h e Sys tem . The C o u n c i l h a s t a k e n c o g n i z a n c e o f a. j o i n t the Board o f G o v e r n o r s and t h e st a te m en t i s s u e d by Open Market Committee under d a t e o f December 1 8 , 1 9 3 5 , w h ic h seemed problem c r e a t e d b y t h e c o n t i n u i n g e x c e s s o f r e s e r v e s " was o f such im po rt an ce as t o j u s t i f y a continuance o f the " u n r e m i t t i n g s t u d y and a t tention o f th ose ch arged w ith the r e s p o n s i b i l i t y f o r c r e d it order t h a t a p p r o p r i a t e a c t i o n may be t a k e n as s o o n as i t in the p u b l i c policy in a p p e a r s t o be in terest." In v i e w o f t h e f a c t t h a t , s i n c e the ab ove s t a t e m e n t was made, a ver y g r e a t change ha s t a k e n pla.ce i n the membership o f t h e Board o f Governors and an e n t i r e l y new arrangement o f t he c o m p o s i t i o n o f t h e yyis Open Market Committee i s ab o u t t o be c o n s u m a t e d , the C o u n c i l f e e l s t h a t i t would be i n e v e r y way d e s i r a b l e and p r o p e r f o r It at t h i s t im e t o r e f e r t o t he c o m m u n i c a t i o n s m e nt io ne d and t o make known t -hs ia* p r e s e n t views in the l i g h t In the f i r s t o f e v e n t s d u r i n g t h e p a s t months. p l a c e , the Council f u l l y a p p recia tes the c o r r e c t ness o f the i n t i m a t i o n i n t h e p u b l i s h e d j o i n t sta tem ent o f the Board o f Governors and t h e Open Market Committee t o t h e e f f e c t t h a t t h e y a r e 2. T'those c h a r g e d w i t h t h e r e s p o n s i b i l i t y however, t a k e s t h e Governors and t he Reserve A c t , liberty of ca llin g for cred it p o licy ." the a t t e n t i o n Open Market Committee t o The C o u n c i l , o f the Board o f S e c t i o n 12 o f t h e F e d e r a l wherein the F e d e ra l A d v is o r y C o u n c il i s empowered " t c c a l l f o r i n f o r m a t i o n and t o make r e c o m m e n d a t i o n s i n r e g a r d t o d i s c o u n t r e d is c o u n t b u s i n e s s , note is s u e s , t r i c t s , the purchase and s a l e open market o p e r a t i o n s reserve conditions o f gold or s e c u r i t i e s by s a i d b a n k s , rates in the v a r io u s dis by r e s e r v e b a n k s , and t he g e n e r a l a f f a i r s o f the reserv e b a n k i n g s y s t e m , " The C o u n c i l c o n s i d e r s t h a t t h i s t a i n powers c a r r i e s w i t h i t l e g a l and s p e c i f i c a very d e fin ite f u n c t i o n as c o n t e m p la t e d . i n making r e c o m m e n d a t i o n s t o t h e B o a r d o f Governors o f t h e F e d e r a l R e s e r v e System d e s i r e s t o make i t c l e a r t ha t i t en tirely d o e s so n o t g r a t u i t o u s l y but i n c o n f o r m i t y w i t h an o b l i g a t i o n imposed upon them b y lav;, a n d , fullest p o s s ib le a p p r e c ia t io n fu rth er, that o f the f a c t Governors r e s t s t h e r e s p o n s i b i l i t y f o r im plied l e g a l it does so w i t h t h e t h a t u p o n t h e Board o f the f i n a l d e c i s i o n . however, d e s i r e s t o g o one s t e p f u r t h e r and v o i c e i s as much the of cer o b l i g a t i o n , u p on t h e p a r t of those in v e s te d w it h th e powers g r a n t e d , t o The C o u n c i l , t h e r e f o r e , grant the The C o u n c i l , opinion that it o b l i g a t i o n o f t h e B oa r d t o t a k e c o g n i z a n c e c? and g i v e f u l l c o n s i d e r a t i o n t o t h e r e c o m m e n d a t i o n s o f t h e C o u n c i l , as i t i s f o r t h e C o u n c i l i t s e l f t o make them. Since th e p r e v i o u s increased a c t i v i t y al v / o l i c in t h e d isc u ssio n forms and d i r e c t i o n s , payments by c h e c k , communication o f the C o u n c i l , t h e r e has been s e c u r i t i e s m ar k et s a t r i s i n g p r i c e s , o f the p o s s i b i l i t i e s o f in fla tion ad d ition in v a r io u s i n c r e a s e d bank d e p o s i t s w i t h g r e a t e r v e l o c i t y and i n c r e a s e d volume o f b u s i n e s s g e n e r a l l y , a ll of of 3. which may i n d i c a t e Council wo u ld n o t bank c r e d i t a c o n d itio n ripe for rapid cred it e x p a n s io n * be p a r t i c u l a r l y d i s t u r b e d o v e r t h e p r o s p e c t expansion i f The of a i t w e r e n o t f o r t he c o m p o s i t i o n o f t h e r e s e r v e s t r u c t u r e > and w i s h e s t h e r e f o r e t o c a l l t h e a t t e n t i o n o f the Board o f Governors and t h e Open Market Committee t o t h e f a c t ly less than s i x b i l l i o n o f reserves, f o u r hundred m i l l i o n ar e s e c u r i t i e s p u r c h a s e d i n t h e open market by the issuance o f r e s e r v e bank c r e d i t * the rema inde r o f t h e r e s e r v e A tremendously la rge percentage structure i s the r e s u l t o f the d ollar, not as t h e r e s u l t reduction of o f a settlem ent trade b a l a n c e s b u t l a r g e l y f o r p r o t e c t i o n a g a i n s t p o s s i b l e in other c o u n t r i e s , of o f g o l d im p o r ts which have come i n t o t h e c o u n t r y i n t h e p e r i o d s i n c e the the g o l d c o n t e n t o f the s l i g h t approxim ately three b i l l i o n o f which a r e r e q u i r e d , n o l e s s th a n two b i l l i o n composed o f Government that, of devaluation and p a r t l y f o r s p e c u l a t i v e p u r p o s e s * The C o u n c i l I s o f t h e o p i n i o n t h a t sound t o p e r m i t a bank: d e p o s i t i t would be unwise and u n - s t r u c t u r e t o be b u i l t on t h e b a s e o f t h e Government s e c u r i t y h o l d i n g s o f t h e S ys te m , and, f u r t h e r , t h a t i t would be dangerous t o b u i l d by an abnormal g o l d a deposit s t r u c t u r e on a base o f r e s e r v e s c r e a t e d i n f l o w wh ich may be p a r t i a l l y or l a r g e l y t r a n s i t o r y or te m p ora ry . The C o u n c i l t h e r e f o r e d e s i r e s t o recommend t o t h e Board o f Governors o f t h e F e d e r a l R e s e r v e System and t h e Open Market Committee the e l i m i n a t i o n o r g r e a t Government s e c u r i t i e s r e d u c t i o n o f t h o s e r e s e r v e s dependen t upon and c r e a t e d b y t h e i r p u r c h a s e . ther recommends c o n s i d e r a t i o n requirements t o such a n e x t e n t the p re se n t amount of reserves The C o u n c i l fu r o f t he p r o p r i e t y o f i n c r e a s i n g r e s e r v e as w i l l prevent c r e a t e d b y t he the f u l l employment o f abnormal i n f l o w o f g o l d 4* during t h e p a s t two y e a r s . The i n c r e a s e of r e q u i r e d r e s e r v e s s hou ld te such a s t o p r e v e n t a d e p o s i t structure b e i n g b u i l t upon such p a r t of t h e p r e s e n t r e s e r v e s a s may be deemed te m p o r a r y o r l i k e l y t o be withdrawn u p o n t h e r e t u r n o f more no r m al c o n d i t i o n s i n im po rta nt foreign c o u n t r i e s . F a v o r a b l e a c t i o n by t h e System upon t h e s e t w o r ec om m end ati on s would e n a b l e t h e B oar d o f G o v e r n o r s o f the c ou nt r y c f t h e soundness o f th e r e s e r v e s a f e t y w i t h w h i c h bank c r e d i t t h e r e o n , and i t is create c o n f i d e n c e i n the c r e d i t s t r u c t u r e c o u l d be b u i l t su ch a program w ou ld u l t i m a t e l y and c u r r e n c y s t r u c t u r e to a g r e a t e r e x t e n t t h a n a t t a i n a b l e s t r u c t u r e and o f the a b s o l u t e or a deposit our o p i n i o n t h a t System t o a s s u r e t he of the country i n an y o t h e r manner.
@FedFRASER