View original document

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

Call Number of this document:


(A general report by
August, 1943 )


T:· w:


Sc hultz based on t he obse:cva t ions during


To the Chairman of the Board of Governors
Federal Reserve System
Hashington, i) . C.
You have felt the need for giving more attention to the development of r esearch Hithin the twelve di s trict ban~~s.

You have considered

appoi nti ng an Assi stant Resear c11 Director to your staff to help in develo~Ji ng this research.

Several questions arise:

\!hat should and can

Assistant Research Director, working Hit h the several banks , do?

Spec if-

ically_; what do you contemnlate his t ask to be ? Hhat is t!1e framework
within 1-1hich he would function?

Hou is r e search i n t he banks t o be re-

l ated to research by the Board? And, al so , wha t should be the nature of
your expectations?
These are some of the questi ons that I have had in mind as I
made my brief survey .

r·zy- visits to 8 of the

12 district banl~s end


other inquiries have given me , I trust, enough background about your
probl em and situation (and not to be rni ni rnzed are your research accomplishments; qua litativel y , they are among t he ve~y best in government ) to
give me a basis for suggesting what can and what needs to be done to bring
about an orderly development of competent, useful and integrated i'esearch
within t he several banks, r esearch that is appropriate to a central banking sys tem.
First, let me state ce~tain basic assumptions, matters that I
hav~ taken for granted i n this report .

They are:

(1) that fiscal and

-2monetary ?Olicies and J rograms should be vested in the federal gover nment; (2) that the Board of Governors of the Federal Reserve System should
be vested with the authority to perform the functions of a central bank;
(3) that the functions of a central bank are such that theJ require unified

action and not twelve autonomous regional policies and programs; and (4)
that it is not only appropriate but essential for a central bank to engage in researches related to -its functions.
I find it convenient from this point on to make my observations
in the form of answers to a series of questions.

These questions fall

under three ma j9r headings; namely, subject ms.tter~ personnel and organization.


Sub.iect Matter

rn1at is t he pu_rr:iose and merit of the research that the
banks are now doing?


The resources that are allocated to the research de-

part ments are used to do several thin1::;s, as follows ;

To collect data (e.g. , department store sales) for the Division of Researcl: and Statistics of the Board of Governors.
This job is a necessary one.

It usually becomes a routine

assignment and then it.. does not require the services of a
trained economist •.
This task, ho_,{ev:er ,. needs carefu], overhauling periodically.

Old series Qecome obsolete, but the collection

process goes on.

Hew m(;lthods a1~e not adopted .

I saw little

evidence,. fqr examp],e, that modern sample techniques were

-3being used.

The drift is toHard. census t aking of the items

for which data are collected .

Both t heory e.nd practice in

the field of small sam;-:iles have progressed to the point
where census taking is a waste of resources because adequate
data can be obtaiiled from small numbers of sampling tmits .
There is e. need for regional indices.

To ~.ake service studies of ·certain operatioLlal features of
the bank.

In the main, these assignments are ;-ardly Hi thin

the sphere of economics.

They might deal uith such questions

as the rate of personnel tt1rnover, cost of promotional schemes,
cost of power and heat for the bank, etc .

These s t udies in-

volve mer ely bringing together various cl.ata and arranging
them in a logical order so that the management can quickly
inter pret them.
much time .

These are little c hores.

Sor:1eone must do them.

They do not take

I see no reason why t he

research department should not serve in this way.

In fact,

the management in most banks 1-:ri.ght do well to turn small
as signments of this sort over to t heir research department
more frequently because, in a ost cases, there is no one in
t he bank who is as competent as those engaged in research to
.c arry through sl'lall -inquiries of this type.

To prepare the 11'.aterials to a ppear in the Honthly Business
Review of the bank.
the banks.

This is a major task in 11early all of

In some it absorbs virtually all of the time

and energies of the research dep1?-rtment.

In others, ,with a

well-rounded research staff a smaller frac~ion of the time

-4of the department is required for this pur:,ose.
All too little imagination has gone i nto the preparation of the Honthly Business Revieu .

In most bariks the thing

is s todgy, unreadable, a conglomeration of f igures , with interpretations so dehydrated and feeble that no one can possibly guess what i s meant.

There is, however, some whol e-

some experimenting going on- the use of a better format,
feature articles, suppl ementary letters and pamphl ets,
cer t ainly should be encouraged.

It .

There is no 1~eason uhy the

Monthly Business Revie11 shouldn ' t become a publication of
value and influence, readable and sought after b~r business,
labor and farm leaders in the district.
Special attention shoulc1. be given to the improvements
that are being made at Atlanta and Chicago and to determine
their effectiveness and to ~!hat e1:tent simil ar methods can
be used by the other banks .

A small connittee representing

both the r esearch workers i n the ban.ks e nd the Board of
Governors should be assigned to study how to improve the
Monthly Busines s Revieu.

To do public relations work for the bank.
many variants .
miss basis.

This task has

In the main, it is decidedly on a hi t - and-

The banks do not have a well defined oublic re-

lation policy.

All too little thought has been given t o the

i mplicat:~ons and t he usefulness of what is being done .
lic relations uork needs to be overhauled.
it is dmm the Hrong groove.


In most banks

- 5In some banks the Chi ef Economist gives most of h5.s
time to educational uor k--a high type of I)Ublic relations.
Meeti ngs are hel d with bt1.siness men, bankers and others to
discuss broad fiscal and moneta:cy ~uestions (jv!.inneapolis) .
In other banks the task of co~lecting department store sales
and other statistics is used to establish better bank relationships (Chicago).

Research may also be used to aid the

community in examining its economic problems (Atlanta , iiinneapolis, Philadel phia ) .

In other banks, however, public

relations work is vested in an individua l who is not in the
research department, who makes a kind of social call- cigars,
golf, stories.
I am convinced that the most effective public relations
work for the banks l:i,es in their doing a first-class educat i onal job--disseminating to bankers, labor , business and
farm leaders the results of their research.

This job should

also bring the banks into close cooperative r el ationship uith
the schools--especially with the i..r1st i tutions of higher

The task, as herein visualized, is suff icie:.1tly

i mportant that it should be one of the principal responsibilities of the Chief Economist of the bank.

To prepare 2nd ~ake reports to the officers and directors on
current economic developments.

The more r.:iature banks use

their economists for t:1i s TJurpose constantly .
however, do not.

Other banks ,

In r.zy- judgment, one of the mor e significant

- 6contributions that a research c1en2.rtment can make is in t his
To prepare and make r epo:cts that are useful to the officers and directors the economists must know the main questions confronting the executives of the bank (uhich is possible
only when he is a major officer of the ban1c) and he must, of
course , commcmd their respect .

There must be freedom of

thought and e)._"Pression.
On the other side, it will still take a long time before

the officers and directors of sorae banks learn how "i:.o use
economic informa.tion .

Subst antial gains have been P.1ade in

thi s SJ_)here, however .

Hore can be done.

An Assistant Re-

search Director might well help bank officers 2nd directors
find out how to use the talents of their economic staff,
Even so, the Boa1·d of Governors will have to continue to use
the good influence of their officers to f2.cilitate t his end,


To prepare technical memora ndn for officers end directors.
Here is a most important task--one that may easily be underrated by the Board.

.1\gain, the banl;:s that have matured have

advanced most in this sphere.
most of the ban1cs.

i'-'fuch more needs to be done by

The l aggards again need help in hoH to

use technical economic studies of this t y pe.

In the banks in

which the officers and directors have learned how, there is a
danger of asking the research depar tment to use too much of
its tj_me in preparing t he s e memoranda.
I have one major adverse reaction:

It simply does not

-7make sense to mark all of these menoranda "confidentia.1'1
and thus bury them forever in the a1~chives of the bank.
Some of t hese studies embocly s i gnificant contributions that
shoul d be published either in the fllonthly Review or i n professional journals or as monogr aphs and used by the bank i n
i ts educational program.

To make basic studies of economic problems confr onting the

Since this task has been so much in t he forefront

in the recent r esearch discussions uithin the systei!l, I propose to give it separate treatment , as I do below.

Are there maier research fields appropriate and essent i~l to
the district banks?

Answer : Yes.

There are fields in which the banks will have to

make studies if they are to perforfil their functions effectively.
poi nt I have no doubt.

On this

The precise nature of these fielc.: s of research can-

not be formulated offhand.

It uould require a:nd it deserves nuch more care-

ful thought than I could possibly have given it during r:ry short survey.
One additional observation, however :

Research is the one tech-

nique that has the capacity to keep the officers and directors of a bank
from becoming s tagnant, f r om institutionalizing their functions to the
point t hat t hey become static and obsolete.

Organized research can be a

powerful leaven--the yeast y elereent which is indispensable to any institution if it is to survive i n a dynamic, changi ng world.




is the ournose and merit of the so- called regional studies?
The regi onal st1,1dies arE;l sti ll in a formative stage.


- 8the nain, very l i ttle progress has been made,

The research departments

i n most of the banks are somewhat distres sed because they don ' t understand
what is intended because they haven ' t don~ more and because they don ' t
know how to proceed.
There ha s been too much fumbling.

riot all of it could have been

Some of this milling around i s inb.erent in any new undertaking .

The main diffi culty, however, l ies deepe;r-.

I t is to be folmd in the fail-

ure to make explici t the function of this research within and to the bank.
In one sense the goals outlined have beei1 too broad , too comprehensive, too all- ipclusive.

To decide t hat the banks should become center s

of information, enlightenment and leader ship serves as a broad directive
and for this purpose is quite excel lent; but it i s whol l y inadequate as a
research obj ective .

Granted, of course , that that was not its purpose .


focus upon i mportant economic cq~nges occurring in the district or on postEar probl ems , uhile much more sp~ot:ffo, still is much too br oad.
This is about what has hap:!)eped in the banks :

Sone banks have

proceeded to bring together aii of the d~ta they could find about their
district- a colossal inventory , a kinq of Sears Roe'uuck ca talog uithout
dec i ding Hho would use the cata+og,

Other banks have net v-: :ntured forth

at all--some because they lack p~rsonn.el , others because t hey didn't know
what to do.

A few of the baT'ks h:we tackled the :-egional studies with

imagination, 4i3,kine -:!J~n:i.z.2:1ce r.otl-. of the :\ ~-:ti,ms .1 etti:.u.d.e,i 1.nd rn.achi ner y
within the banlc and of the realit:i~F? Qf t r.e economy of the district.


del phia is making an intensive, geoITT'~ppical , county- by~county study .
Chicago is ma king specific industrial studies,

Both of th-:)se have eno).lgh

- 9promise to uarr ant support; moreover, the results should be foll owed
closely as examples of what can and can't be done by these approaches .
The dichotomy of geographical versus industrial studies , however, is an unfortunate cl assification.

I t certainly is not a useful one .

The fundamental determinant should be the pr oblen to be analyzed and solved.
The analysis may entail both geographical and industrial considerations.
One certainly does not exclude the other .



Row cotJpetent is the research personnel of the banks?

specific tasks.

Competency has a meaning only when it is related t o
There are not many men in the research departments of the

banks who uould qualify as highly trained, competent economi sts.

There are

a few yowig men Hho give promise of developing as able ana l yst s.
Huch more emphasis needs to be placed upon professional qualifications in s el ecting and appointing research workers .

Most of the depart-

ments not onl y need but probably would welcome riore assistance .

The lJresi -

dent in most banks does not give much help as they need to induce
well qual ified individua ls to join the staff.
acute scar city of qualified economists.

Another obstacle isthe

Then j too_. not Ulc'ny adr.J.inistrators

recognize an outstanding candidate uhen he is available ,

Hou arle_~te is t he nUl!lber of research uorkers in t he banks?


The number of competent economists is uholly inadeouate.

The research departments without exception aTe understaffed ui t h men of
quality on the pr of essional level.

- 10On the other hand , most of the research departments have enough

individuals uho can do routine a~signments and perhaps prepare minor

Al ong with the paucity of professional Horkers who can under-

take an economic analysis on their 0\-m, nearly every department has "inherited" or acquired a few persons uho are deadwoo("i, who at best can do
routine jobs usually no better than an average clerk.

lfoH, uhen other jobs

are available, is the time to weed out such individuals .


Is there anv effort to aid research workers in the bariJ,;:s to
develop further in their profession?

stop growing.

In the main, the research workers of a bank are isolated
They are bound to become stagnant , to get into a rut , to

Unless there are plans and programs to a ctivate them and

keep them in touch with their discipline, they stop growinC,; .
things are needed.

A number of

Time off to do graduate work, encouragement to com-

plete Ph,D, theses, leave of absences to attend professional meetings and
do special studies for other federal agencies, Board of Governors, Hation~l
Bureau of Economic Research, etc .

More important still is a periodic leave

of three months or more at least once every second year for the purpose of
returning to a graduate center to refresh and refurbish intellectuall y .

4. Are research uorkers being moti vated to do their best work?

In the nain, no.

The chief stumbling block in motiva-

tion is not inadequate salary, insufficient promotion, or insecure tenure ,
but the lack of profes sional recognition--the inability of the research
worker to establish himself among his profes sional colleagues.
To join the research staff of the Federal Re serve System is like
entering a monastery .

The individual leaves all clai ms and all chances to

- 11-

advance in his professional wor l d behind.
and means f or bringing his
his peer s .


He no longer has at hand ways

professional tal ents t o the attention of

This might appear as an over~tatement , but it is not. Dvery-

thing tha t a research worker in the bank does usually fails to get beyond
the next man in the hierarchy and uhen i t goes further, in any case, i t
ends up in t he files of the bank.

The failure to have developed an ade-

quate publi ca tion policy means that the ba1ucs are dissipating the strongest
incentive ther e i s to moti vate research Hor kers t o do their best .

A very

dr astic reformulati on of the rights and privil eges of a research worker to
publish is over due .

Thi s incentive must be har nassed if the bank uants

efficient, effective and competent professional personnel .
You have much to gain from a pol i cy that succeeds in motivating
the best possi ble research.
have not realizec1 f ully .

Research i s the one big asset u~on whi ch you

The prestige of the Boarcl. does not rest upon l au,

that is merely the seat of its power, but upon i t s intellectual l eacl.ershi pthe under standing and the ability to chart a course through the r ough, bad
economic storms t hat are ahead.
I would urge that you appoi nt a special coillli.ittee to study the
whol e quest i on of motivati on of research workers with s pecic1.l emphasis upon
publication pol icy.

It occurs to me that this committe·e might consist of

Professor Joh.."1 Williams, Dr. E. A. Goldenweis~r, and a t hird per son a l so
of professiona l standing but outside of the Federal Reserve System.


Organization and Administration

Eow adequate are federal- distr,:ict research arrangements?

Answer : · There is room for much improvement .


prevail s .

Some of the research \!orkers of the banks are restive ,

feel they have been negl ect ed.


Others believe they a:ce likely to be sup-

There is enough to these nisapprehensions to make it necessary

t o clarify this situation.
The problem of f ederal-district r el ationshi ps in research ha s
three maj or facets:

(a) attitudes, (b ) persom1el, and (c) rules and Dro-

Before I touch briefly on each of these fa cets , two observati ons
are in order.

First , the mere fac t that these relationships require atten-

tion is evidence that the system :!as not been static.
advancing-- a healthy, vigorous development .
brings with it t hese new problems .

In research you are

I t is t his dynamic process that

You have ar r ived at the stage when some

of the r esearch departments in the banks are "going concerns".
turning in a good acco-unt of themselves.

They are

A few banks have individuals on

their staffs as competent as those engaged in research i n the Division of
Research and Statistics of the Board of Governors.

All of this is as it

should be for it reflects !)rogress in research in the banks , \lhich certainly
merits commendation.
The second thing that needs to be said is that feder al - district
relationships is not a new t ype of probl em.
eral Rs serve System.

Nor is it peculiar to the Fed-

He have it in every compartment of our national organ-

I t can be a source of great strength, as is evident i n agriculture

which is more mature a nd which has r eceived the benef i t of much constructive
imagination and leadership in the development of its federal-state relations,
Now l et me return and comment briefly on t he three f acets in this



Host of the apprehensions that I have found, both

among federal and bank personnel in research, are probably
1-1ithout foundation.
There a:te two kinds of musundersta;.1dings:
that the

(1) the belief

Board of Governors \-1ants all research activity to be

planned, projected ai1<:1 administered from Washington; ancJ. (2)
the belief that r esearch t-rorkers in the bank are JJrone to neglect, if not undermine, the natj_onal functions of the Federal
Re serve System uhich requil~e unity of action.
beliefs are distortions.
of focus.

Doth of these

They are views that are badly out

I should add , however, that these -,riews should not

di sturb you unduly because in a sense they are to be expected
from growth and change.

They ar e a par t of the growing pains

of the System.
Neverthel ess , it 1.-1ill be necessary to take cognizance of
these misunderstandings and proceed to prepare the ground for
more realistic and constructive attitudes, attitudes that reflect and are consistent uith the fundamental circumstances
that do, in fact ~ prevail.

i·lhat i s needed is clarification.

Most of the misunderstandi ngs can be lifted and the air cleared
for better federal-district research relationships .


A second step in iaproving federal- district rela-

t i ons involves the addition of r.~aj or personnel to the \iashington research staff.

Two things are needed.

First, a com-

petent economist t-rho has considerable administrative a\1ility
and who understands the human equation in research.

This is

-14the kind of man you have in mind, I am sure, as you seek and
select an Assi 2tant Research Director.
But this is not all.

You will need to do a second thing.

It Hill be necessary to add to the Division of Research and
Statistics at least three, and perhaT,s as nany as five, topflight economists whose duty it will be to work (collaborate)
with the economists i n the banl-::s on joint studies.

These men

must have sufficient cap::icity and standing to obtain the professional respect and confidence of the most comoetent economists in the banks,

Until such personnel is available in the

research divisions , there i s little likelihood that joint work
will devel op.

To put it in a s:!_:.;iple term:

Hhat has the fed-

eral office to contribute to a cooperative study?
An Assistant Research Director is not ,

You will

need,in addition, a few outstanding economists whose task it
will be to col laborate with bank economists on studies of mutual interest.

Rules and nrocedures :

In the main, these wil l have to be

forged out of experience .

I1tr short inquiry has not given me

enough background to suggest to you ti.1e content of t he rules
and procedures that are required.

Out of


broader experi-

ence in agricultural economics, however, I may suggest t wo
illust rations of what I have in mind.

The experience ~f the

Office of Experiment Stations (USDA) and the state experiment
stations is that there is much wisdom in having each research
study involving federal- state cooperation outlined giving the

- 15aims, methods , literature, history and pr oposed budget .


would further suggest that ea ch pr oject obtain the appr oval
of the pr esident of the bank and the diTector of research of
the Board of Governors .


second suggestion gro\/ing out of

my agricultural exr,erience is that every research worker of
professional rank be encouraged to publish as an economist in
professional journals and in other outlets appr opriate for
professional Hor k and that his promotious be dependent in
large part u-pon the standing and 1·ating that his published
uork acquires amongst his colleagues.

HoH adequate t ~,e 1~e1ati011s~1ips between the research department and the bank?


In those banks where resea::::ch is headed by a vice presi-

dent and uhere the chairman and the pres ident understand the nature of economic anal ysis, the research departments are i ntegr ated excellentl y Hi th the

In t hose banks, however, where the above conditions do not prevail,

the r esearch department is less effective and in a few instances it is, for
a ll pr actical purposes , isolated.
There are several conditions t hat appear i m~ortant and necessary
in the organization and adr.rinistration of research wi thi n the bank:

(a) The

research uork should be headed by a competent economist who has the status
of a major executi ve officer in the bank.

To make the indivi dual in charge

of research a Consultinf LConomist or to appoint him on a part-time basis or
to exclude him from the executi ve process i s not satisfactory.


indicates that t hese arrangements Give poor r e sults because they fail to make
research func'-ional withi n the "bank.


A corolla!'"IJ to the above , the

- 16economist in charge of research should participate in meetings of officers
and directors of the bank in order .to stay abreast of the problems conf r onting the bank on the executive ,level.

(c) The officers and directors

of the bank should develop an appr eciation of the methods and procedures
employed in analytical work and of the functions and limitations of research.


Are the research departments in the banks adequatel y organized
and managed?


The type of organization differs widely and the Hay in

which the economist in c harge administers the department also differs greatl y
from bank to bank.

Horeover, there is


one unique pattern, either in or-

ganization or administration, that recommends itself.

A small bank ui th a

small research staff might uell proceed wi th a loose , highly informal type
of o~·ganizati on which certainly would pot be appropriate for a larger bank.
The important thing at this stage is to avoid any effort to force each department into a common mold.
There are several research depar tments that show signs of superior
organization and administration.

Some things might be learned from t heir

experience and some of their procedures might be applicable to other banks .