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Delivered by
Harry A. Shuford, President
Federal Reserve Bank ol St. Louis
at the
Downtown Dallas Kotary Club
Baker Hotel
Dallas # Texas
September 4« 1963

(1) Introduction.
(a) Better than FeUx - fumbled on 5-yard line firet down
goal to gc.
(b) Charles Baker - Br* Selectman
(c) Glad to be back - Su Louis excellent city * out the mo^e Bicentennial
(d) One good feature, they don't know and don't c a r e who
fumbled teat ball,
(e) Appreciate banker friends - barkers have problems MICK demonstration.

(2) Asked to talk about Federal Reserve

(a) Not about economies
(fa) Discuss in general way
(c) Clad to diecuse Fed; believe in soundae&e of its purpose
and sincerity of it# effort.
(d) In the ?nais*# tell you how the Opes* Market Committee work©
*> as preface, will comment on organisation and

The Federal Reserve Banks have been described as Bankers 1 Banks
and, in a sense, this is lair because we perform a number of services lor
commercial banks similar to those which the commercial banks perform for
you and me. Reserve Banks hold deposits of their member banks, collect checks*
supply currency and coin, and hold securities in safekeeping.
We have also bnmn referred to as Government Banks and, in a ^iense#
this is accurate lor we hold a large portion of Uncle Sam* a checking account and
aid the United States Treasury in the issuance and redemption of Government
We are also known collectively ae a Central Bank. This we certainly
are because of our statutory authority over monetary policy* Our objective is
to exercise this authority so as to contribute to sustainable growth in the economy
with reasonable stability in prices and a workable balance in our international
payments position.
A few years ago the Governor of the Bank of England was visiting
Mr. Irons. He made the observation that the Federal Keeerve System can not
work - but it does • and very well.

What he meant was, from his point of view,

our central banking organisation was cumbersome and unwieldy and did not
facilitate immediate decision making. Tale is not a surprising view for a non*
In all economically advanced countries the guiding power over money
iM a Central Bank. In most instances* including England, Canada, Germany
and France, this power is concentrated in a single institution which is strictly

«• 2


a governmental agency and ordinarily subordinate to the Treasury.
Our Central Bank* on Ilia other hand, is a System ol live component
parts, each having certain powers and responsibilities*
(1) Board of Governor*
(Z) Twelve Federal Reserve Banks and Twenty~lour Branches,
(3) Open Market Committee
(4) 6,000 member i»anks
(5) Federal Advisory Committee*
The Board o£ Governors in Washington is composed of seven members*
each ol whom is appointed by the President, confirmed by the Senate for
14-year terms* This Board supervises and coordinates the entire System*s
The twelve Federal Eeserve Bank© and twenty-four branches reflect
the regional flavor ol the System.
come Irom many walks ol life.

They have more than 250 directors who
Each ol the twelve head offices has nine directors;

three are appointed by the Board ol Governors and six are elected by the member
The Reserve Banks function in the public interest and are instrumentalities
ol the Government-

On the other hand, they have a private nature as evidenced

by the fact that the officers and employees ol the banks are not under Civil
Service and are paid out ol the operating revenues ol the individual banks, and
no funds lor System operations are appropriated by the Congress*

~3 The Federal Advisory Council has twelve members, one from each
Keserve District and appointed by the Board ol Directors ol the Reserve Bank.
The Council i s simply what the name implies.

It confers with the Board of

Governors and makes only advisory recommendations*
There are a little better than 6,000 member banks.
an important part of the System*

These* too, are

It i s through these banks that the Federal

Reserve c a r r i e s out many of its responsibilities and implements its decisions
regarding monetary policy*
The Open Market Committee i s particularly significant and 1 would
like to refer to it later*

However, at this point 1 am sure you are aware that

the powers and responsibilities of the System are decentralised by the
mechanic s of organisation.
Earlier I mentioned that the System* a principal concerns are to
contribute to sustainable growth in our economy with reasonable stability
in p r i c e s and a workable balance in our international payments position.
we attempt to do by providing r e s e r v e s to the member banks*


In l e s s technical

t e r m s , our actions can be described a s increasing or decreasing the supply of
The System, through monetary policy, can not accomplish all things.
Other factors* such a s fiscal policy and taxation* are equally important.
System does, however, play an important role.


During periods of inflation

the problem i s e x c e s s demand in relation to the supply of goods and s e r v i c e s ,
This demand can he dampened ay reducing available credit and money.
of r e c e s s i o n the need i s for greater demand or stimulation.

In times

This can be

encouraged by increasing the availability of credit and money*
The three principal tools used to stimulate or limit demand are:
(1) Reserve requirements*

The Board of Governors has the power

to r a i s e and lower the proportion o£ their deposits that member banks must keep
on deposit with the Federal Reserve*

By raising the requirements, funds are,

in effect, taken from the market and the availability of credit i s reduced.
Conversely by lowering requirements, r e s e r v e s are r e l e a s e d to the member
banks, thereby making credit more readily available,
(2) Discount rate.

Thin i s the rate of interest charged member

banks for loans made to them by the Federal Reserve Bank*

These rates

are established by the Board of Directors of the Reserve Banks subject to the
approval of the Board of C?overnors.

Increases in the discount rate tend to

restrict member bank borrowing and, consequently, the availability of credit.
Lower rates would tend to have the opposite effect.
(3) Open Market Operations,

This term refers to the System's

purchases and sales of Government securities.

As 1 have indicated, these

purchases and sales are made for the purpose of affecting the amount of bank

If, in the judgment of the Open Market Committee, more tunds should

be supplied, the Committee would buy bonds in the open market.

On the other

hand, if it would appear appropriate to tighten policy, i, a . , reduce r e s e r v e s ,
bonds would be sold.
Again, I am sure that you have noted that the tools of power axe
in separate hands.

- 5 The Committee, which in provided for fay statute, i t compoeed of
12 member®, including tibia ? member* ol the Board ol Governors mud 5 Presidents
of Federal Reserve Bank®, The President of the Federal Reserve Bank of New
York i» a permanent member of the Committee while the other 4 presidential
positions a r e supplied on a rotating baais from the other Federal Reserve Banks,
Your Eeeerve Bank it g r o p e d with that of St. Louis and Atlanta*


the President of the Dallas bank is a member of the Committee, and the
Preeideat of the St* Louis bank 1* the alternate mmmhrnr and, in ordinary
circumstance e and procedures, would be a member next year.
The formulation of policy by the Qpen Market Committee i t sot done
in a vacuum nor on the spur of the moment nor by any one or two people, Thm
tnembmrs of the Board of Governors and the presidents of each of the 12 Federal
Reserve Banks a r e continually studying report*®, statistics, and all available
information in an effort to keep up with developments nationally and internationally*
Each of the banks and the Board of Governors is supported in this undertaking
by ataffs who a r e specialists in their field*.

These staff * a r e regularly engaged

in gathering statistics, making surveys, analysing reports and formulating views
and considerations for their respective P- iiiCipaU.
In addition, the Directors of the Reserve Banks also a r e important
aourcee, not only of current business and statistical information, but also of
grass root, practical understanding and judgment*

• 6*
The Open Market Committee meet® at the office© of the Board of
Governors of the Federal Ileiarva System in Washington, XX C* approximately
each three weeks and mora often when it is advisable.

These meetings a r a

attended by the ? members of the Board of Governors and the 12 presidents of
the Federal Reserve Banks. In addition, selected and key members of the staffs
of the Bank* and the Board a r a present.
The Chairman of the Committee opens the meeting and calls on members
of the staff of the Board of Governors for reports*

These include information on

the general economic situation, the banking and financial picture* and regarding
our balance of payments* This is followed by a report made by the Manager of
the Open Market Account who is the staff member r e sponsible for carrying out the
policies established by the Open Market Committee tor the purchase and sale of
govermne&t securities. Another report on international activities and operations
ie submitted by the Special Manager for foreign currency operation* for the
AccountFollowing the staff reports, the President of the Federal JReserve Bank
of Maw York makes a report and concludes by making a statement with respect to
what he thinks monetary policy should be* The Chairman then calls on each
President and each mmmbmt of the Board of Governors for his comments and

The President of each Federal Reserve Bank comments specifically

on the economic and financial situation in his district in addition to making such
other observations as ha may choose* and also makes a statement a s to what,
if any, changes should be made in monetary policy* The last observations
a r e made by the Chairman of the Committee*

* 7 If a consensus for monetary policy is apparent* this becomes the
Committer policy* If there is no consensus and a difference of opinion exists,
the Chairman calls for a vote and the majority view ia established as the current
monetary policy.

The Committee then formulates a written directive addressed

to the Manager of the Open .Market Account which guides him in the administration
and operation of the Open Market Account until that policy is changed at a subsequent
meeting of the Committee,

Aft account of the deliberations of the Federal Open

Market Committee appears each year in the annual report of the Board of
Governors of the Federal ftesesve System*
This arrangement, which appeared complex, to the Governor of the
Bank of England, is typically American.

It is a unique blending of the public and

private participation* and of both local and central views in an important
Governmental function*
Out of hitter experience the Founders of our Republican form of
Government were suspicious of every form o£ all*powerfui central control*
They sought to guarantee that such a government would never exist in this
country by setting up a Federal System established with a separation of powers
and with checks and balances* On*~Hundred«Twenty*Four years following the
ratification of our Constitution these same fundamental concepts were in the
xr..ind of the Congress when, under the leadership of % oodrow v-ilson and Carter
Glass, it delegated responsibility for monetary policy to an independent "Federal
Reserve System* Independent within the Government and not independent of
change it*

For Congress created the System* and can* of course, modify or

labile there have been changes in the System since the original
eu&etment of the Federal K.eserve Act, these oasic principles of our Government
nave ueea adhered to.
The Federal Beserve Act became law on December 24, 1913, and
the &a&k* were established the next year.

The System will observe its 50th

.Anniversary in 1964,,
I think we can all regard tine past 50 years with some satisfaction,
Economic growth* under competitive enterprise* has been remarkable and
would not have been possible without the functioning of the banking system.
Trtie, there have been some rough spots, bat in the broad view our System has
worked - and worked well*
No doubt there will ue changes in the future, lor change is life bat,
in nr«y jndgrnentji any changes whould continue to be made in the li&ht of the high
values of checks and balances and separation oi power.