The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
ADDRESS BY A . L . WILLS, J R . MEMBER, BOARD OF GOVERNORS OF THK FEDI2RAL RE3SRVE SY53TEM BSFORJB TTTK WEST V I R G I N I A BANKFJRS ASSOCIATION 'ITHTE SULPHUR S H U N T S F R I D A Y , JULY 2 3 , 1 9 & THE FEDERAL RESERVE SYSTEM Forty yoaro ago tho representatives of the people of the United States, i n Congress assembled, completed an examination of tho banking system as then organised and found i t wanting. The deliberations of the Congress thereupon resulted in tho passage of tho Federal Reserve Act and i t s signature by Prosidont Wilson into law on December 23* 1913* now concept of banking was then established — For the United States a "central banking", or perhaps more accuratcly, "reserve banking" — which drew for its origins on the First and Second Banks of the United States and on the long experience of European nations. With tho passage of forty years, the time i s appropriate to assess the value to the United States of the concept of banking that was thus formulated — the Federal Reserve System. Searching questions must be askedt 1. Has tho Federal Reserve System* a decentralized central banking system, served tho purposes for which i t was created? 2m Has the Federal Reserve System grown with tho times? 3. Has the Federal Fceserve System lived up to i t s responsibilities? Primarily, the answers to these question® lend themselves to general rather than specific answers. T)uring tho forty years of its existence tho Fed- oral Reservo Hystem has not only come through, but helped bring this country through, the ftro of two dovastating world wars, the battering storm of ranpant speculation, the corrosive calm of unparalleled depression, and tho social and economic turbulence of our present age. For any national institution to have act the problems with which i t was confronted in these four decades and in the process to have maintained public confidence — as I believe the Fedoral Reserve System ha3 - is a testimonial to the genius of its creators and to the dedicated men and women who have stood steadfast i n their resolve tliat this institution should unswervingly serve the public interest. First of a l l , survival unscathed over the past forty years is proof that the concept of a decentralised central banking system is in keeping with the American way of l i f e . The organization of twelve Federal Reserve Banks, each located in a distinct geographical district of the continental United States, and each operated by a board of directors and officers representative of the econossic interests of the district, has made possible the kind of interdistrict exchange of opinions and merging of judgments that has led to the development of truly national monetary and credit policies. The Federal Reserve System is deeply indebted to the private citizens who have given freely of their time and energy to serve on the boards of directors of the twelve Federal Reserve Banks and their branches. The Systora's contribution to the nation's overfall economic progress would have been far less in their absence. national institution that looks beyond its own official circle for guidance and the critical stimulus of outside opinion must, of course, possess the coordinating ties of a continuing expert personnel that keeps the purposes and functions of the institution clearly in the vision of those who are more temporarily recruited to its ranks, while at the same time drawing on the freshening outlook of their individual experiences. The Federal Reserve System has been fortunate i n having an official personnel devoted to the public service — one that, in association with the public-spirited citizens who have served on the boards of directors of the Federal Reserve Banks and on the Federal Advisory Council, has provided a blend of public and private direction that has been of immeasurable value. I t i s safe to say that there is general a*^ree- mont that the Federal Reserve System has satisfied the concept of a decentralized central banking system that was envisioned by its founders. If, then, i t can be agreed that the Federal Reserve System is structurally acceptable, has it t7rown and progressed with the times? The genius of the Founding Fathers of the Constitution of the United States of America supplied a document whose stated principles are unchallengeable i n their fairness to the lights of man. And yet that document lias of itself bocome a framework into which can be fitted a democratic peopled evolving theories of government without sacrifice of fundamental principles, but, rather, with those principles raore firmly established with the passage of time. m t h i n a lesser sphere and span of years, somewhat the same claim can be made for the Federal Reserve Act. The administration of the Federal Reserve Act has from the outset undertaken to serve the requirements of commerce, industry, and apiculture as expressed through the medium of the commercial banks i n meeting the credit needs of their customers. I t was originally planned that the Federal Reserve Danks would provide the national economy with an elastic currency whoso stabilising influence would greatly mitigate the wide economic fluctuations which had been experienced in the past. Although progress was made in this direction, the (experience of two wars, rampant speculation, splraling depression, and an armed and unstable peace showed that these expectations exceeded the power of attainment. There- fore, thore came to be a rradual awareness that the Federal Reserve Act should - I - be directed ra>r© toward preventing the kind of financial disturbances i t had been designed originally to cure. This led to amendments of the Act and to the adoption of administrative procedures, a l l within the spirit of the original legislation, that have kept Federal Reserve policies and practices closely attuned to the needs of the day. Throughout i t s history, experience has been the Federal R e s e r v e d best teacher, as, for example, when i t learned the practical lesson that the too rigid definition of eligible paper prevented fulfillment of it3 trio central bank mission of "banker of last r e s o r t . " from the lasaon of this experience camo the Banking Act of 193$ and i t s authority to the Foderal Reserve Banks to make loans to member banks "on notes socured to the satisfaction of such Federal Koserve Banks." This provided insurance against a contraction of bank credit feeding on i t s o l f as a consequence of bank liquidity problems. At the same tine, i t allowed the Federal Reserve Banks an area of discretion through adequate bank supervision sufficient to forestall improvident banking practices that, i f not checked, would lead to the accumulation of paper that could not qualify as security for Federal Reserve Bank loans. In much the same way that these lessons of adversity strengthened the Federal Reserve system's capacity for public service, the accumulation of Federal debt i n depression and war has led to a more flexible and effective use of open markot operations as a means for fostering stable economic conditions. Changes i n tlio discount rate and i n reserve requirements were familiar instruments of Federal Reserve monetary and credit policy before the full import of the usefulness of open market operations came to be understood. As, however, the techniques of open market operations were mastered both i n the United States and abroad, there carae central bank appreciation that the ability to Increase or reduce the cash reserves of the commercial banking system i n this manner also - 5 - embodied the ability to encourage or discourage the use of bank credit. Given the enormous volume of a nation's business transactions that are carried on through the use of credit, i t follows that monetary policy, by fixing the boundaries wLthin which bank credit can expand or contract, exerts a powerful influence on businessmen's decisions and hence on business conditions. Tho Federal iieserve System's monetary and credit policy in recent tines has illustrated the uses to which open market policy can be put, first, in acting to restrain tho use of credit so as to damp down the threat of inflation and, then, in acting to ease credit so as to combat recession. The answer to tho question, "Has the Federal Reserve System jrrown with the times?", would assuredly seem to bo yes. Its crowth lias been by way of adaptation to champing econo.Tiic circumstances in ways that have put to constructive use tho lessons learned from experience, to the end that monetary policy can be used to anticipate and forestall the recurrence of conditions that are inherently destructive to the maintenance of a stable, yet progressive, economy. To be sure, the times- the Federal Reserve System has also grown physically with Considering the growth of the national economy, i t could not be otherwise, but this physical growth has been limited strictly to functional necessities and has not been the product of any ambitious desire for added power or authority. I t is in moral stature, rather than in physical siae, that the Federal Reserve System has really grown with the times, I f we may judfro from the apparent public acceptance that the performance of the Federal Reserve System over the years has met the standards and hopes of its creators. Most people appear to recognise that the Federal Roserve has, at the least, made a conscientious effort to discharge its duties impersonally and impartially and to work in the interest of the public as a whole.- Tho record, like that of other frunan institutions, i s by no means flawless. Hindsight delineates th© faults in oven sharper perspective. Certainly no friend of the System would like to claim that i t has been or can be i n f a l l i b l e . Tet it scons fair to appraise its record as one of use- ful, necessary, and valuable nubile service. That the Federal Reserve Systom has a good name redounds to tho lasting credit of tho men and women who are enlisted in its service. I f the Federal Reserve System has lived up to its responsibiltties, and I believe i t has, i t is because of the high morale of its personnel, which has meant the subordination of person to cause and a willingness to contribute as a group to objectives decided upon by debate, trial, error, and accomplishment. Over tho years a national institution develops a character of its own whose stren,<jth is the product of its accomplishments and the reflection of the individual personalities who go to make up its collective whole. Respect for character is in itself a reward and can be shown in diverse ways. I n my opinion, the Federal Reserve System*s reward for public service is to be fo-md in the willingness of the public to accept its independent judgments even though they may at times be vexatious to largo groups. This is not to say that Federal Reserve actions should not be challenged or to claim for its judgments more than a high average of correctness. I t is only to say tliat the public seems to have been convinced that these actions and jud<^menta were arrived at honestly and, when and where they have been found to be in error, corrective steps have been taken promptly. I f , however, the federal Reserve System i s to continue to merit public confidence, its independence of action must be preserved. Th© Federal Reserve - 7 - System is a governmental institution and as such must be attentive to the overall policies of the national government. !3ut, beinr delegated authority by the Congress in the specialized field of monetary policy, i t is essential for the Federal Reserve System to exercise that authority 30 as to discharge the responsibility it must bear alone. That means, anion? other thin. 3 , the System must be able to voice its professional views and opinions with such sound reasoning tliat they will be generally accepted as fitting and proper, and thus assure monetary policy a harmonious part in the composite of current governmental policy. The essence of effective Federal Reserve policy lies in this authority independently to decide and carry out policy judgments manifestly designed to servo the best Interests of the general public. In conclusion, i t must be said that the Federal Reserve System cannot continue to justify the public confidence i t now enjoys unless i t adheres firmly to certain cardinal principles that have characterized its past historys 1. Its actions must always be understandable• 2. Public scrutiny and criticism of its policies must always be invited. 3. Its policies must be based upon and justified by their lo$.cal reasonableness, and never by other considerations. I;. The kind of inst-i tutional conservatism that resists warranted change must be shunned at the same time that the influence of some caprice of the moment i s avoided. The Federal Reserve System must unremittingly discharge its duties solely in the general public interest. The Federal Reserve System has, I believe, net the test of publio service and responsibility for forty years by holding fast to the principles for which i t was created, while at the same time enlarging the horizon of its operations to meet the challen^re of changing conditions. past, i t will grow in the future. -0- On the roots of its
@FedFRASER