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Delivered byH a r r y A. Shuford, P r e s i d e n t
F e d e r a l R e s e r v e Bank of St. Louis
at the meeting of
the Sales and Marketing Executives A s s o c i a t i o n
Statler Hilton Hotel
St. L o u i s , M i s s o u r i
J a n u a r y 10, 1964

The Federal Reserve Banks have been described as Bankers
Banks and, in a sense, this is fair because we perform a number of
services for 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 been referred to as Government Banks and, in
a sense, this is accurate for we hold a large portion of Uncle Sam's
checking account and aid the United States Treasury in the issuance
and redemption of Government securities.
We are also known collectively as a Central Bank.


we certainly are because of our statutory authority over monetary

Our objective is to exercise this authority so as to con-

tribute to sustainable growth in the economy with reasonable stability
in prices and a workable balance in our international payments position.
A few years ago I was visiting with a Governor of the
Bank of England.

He made the observation that the Federal Reserve

System cannot work---but it does

and very well.

What he meant

was, from his point of view, our central banking organization was
cumbersome and unwieldy and did not facilitate immediate decision

This is not a surprising view for a non-American.

- 2 In all economically advanced countries the guiding power
over money is a Central Bank.

In most instances, including England,

Canada, Germany and France, this power is concentrated in a single
institution which is strictly a governmental agency and ordinarily
subordinate to the Treasury.
Our Central Bank, on the other hand, is a System of five
component parts, each having certain powers and responsibilities.

Board of Governors


Twelve Federal Reserve Banks and Twenty-four Branches.


Federal Advisory Committee


Open Market Committee


6,000 member banks

The Board of Governors in Washington is composed of


members, each of whom is appointed by the President, confirmed by the
Senate for 14-year terms.

This Board supervises and coordinates the

entire System's operations.
The twelve Federal Reserve Banks and twenty-four branches
reflect the regional flavor of the System.

They have more than 250 .

directors who come from many walks of life.

Each of the twelve head

offices has nine directors; three are appointed by the Board of
Governors and six are elected by the member banks.
The Reserve Banks function in the public interest and are
instrumentalities of the Government.

They conduct operations for the

System and participate in policy making.

On the other hand, they have

- 3 a private nature as evidence by the fact that the officers and employees of the banks are not under Civil Service and are paid out
of the operating revenues of the individual banks, and no funds
for System operations are appropriated by the Congress*
The Federal Advisory Council has twelve members, one
from each Reserve District and appointed by the Board of Directors
of the Reserve Bank*

The Council is simply what the name implies*

It confers with the Board of Governors and makes only advisory
There are a little better than 6,000 member banks.
too, are an important part of the System.


It is through these banks

that the Federal Reserve carries out many of its responsibilities
and implements its decisions regarding monetary policy.
The Open Market Committee is particularly significant and
I would like to refer to it later.

However, at this point I am sure

you are aware that the powers and responsibilities of the System
are decentralized by the mechanics of organization.
Earlier I mentioned that the Systemfs principal concerns
are to contribute to sustainable growth in our economy with reasonable stability in prices and a workable balance in our international payments position.
to the member banks.

This we attempt to do by providing reserves

- 4 In less technical terms our business can be described
as increasing or decreasing the supply of money, and in some respects
our business is not dissimilar from yours.
and we have ours.

You have your products

Ours is money.

Both of us watch closely the supply and demand for our

If there is an over production of your products for any

length cf time, this will tend to put downward pressure on your

On the other hand, if there is an under production, or

shortage relative to demand, there will tend to be upward pressures
on your prices.
So it is with money.

Congress has delegated to the Federal

Reserve System the responsibility for regulating the money supply,
and we must maintain an appropriate balance between the supply
and the demand for money.

If more money is supplied than is de-

manded, credit conditions would ease and total spending v/ould tend to

Should this increased spending result not in greater real

output, but in a higher price level we would take steps to dampen
excess expenditures.

That is, we would restrict the quantity of

our product

and permit interest rates

borrowed money


to rise.

economy needs a stimulus.

the price for

Conversely, in times of recession, the
This can be brought about in part by in-

creasing the supply of money; the price for borrowed money would fall,
total spending would tend to increase, and total production would rise.

- 5 The System, through monetary policy, can not accomplish
all things.

Other factors such as fiscal policy and taxation are

equally important.

The System, however, does play an important

role and can create an environment conducive to balanced growth.
It can not, however, make people produce or buy goods. This is
where the private sector of the economy plays an important, even
vital, role.
The three principal tools used to stimulate or limit
demand are:
(1) Reserve requirements.

The Board of Governors has

the power to raise and lower the proportion of their deposits that
member banks must keep on deposit with the Federal Reserve.


raising the requirements, funds are, in effect, taken from the market
and the availability of credit is reduced.

Conversely by lowering

requirements, reserves are released to the member banks, thereby
making credit more readily available.
(2) Discount rate.

This is 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 Governors.


in the discount rate tend to restrict member bank borrowing and,
consequently, the availability of credit.
have the opposite effect.

Lower rates would tend to

-. 6 (3)

Open Market Operations.

This term refers to the

Systemfs purchases and sales of Government securities.

As I have

indicated, these purchases and sales are made for the purpose of
affecting the amount of bank reserves.

If, in the judgment of the

Open Market Committee, more funds should be supplied, the Committee
would buy securities in the open market.

On the other hand, if it

would appear appropriate to tighten policy, i.e., reduce reserves,
securities would be sold.
Again, I am sure that you have noted that the tools of
power are in separate hands.
The Committee, which is provided for by statute, is composed of 12 members, including the 7 members of the Board of Governors
and 5 Presidents of Federal Reserve Banks.

The President of the

Federal Reserve Bank of New York is a permanent member of the Committee
while the other 4 presidential positions are supplied on a rotating basis
from the other Federal Reserve Banks.
and Atlanta.

St. Louis is grouped with Dallas

Currently, the President of the Dallas Bank is a

member of the Committee, and I am the alternate member and,.in
ordinary circumstances and procedures, would be a member next year.
The formulation of policy by the Open Market Committee
is not done in a vacuum nor on the spur of the moment nor by any one or
two people.

The members of the Board of Governors and the presidents

- 7 of each of the 12 Federal Reserve Banks are continually studying
reports, statistics, and all available information in an effort to
keep up with developments nationally and internationally.


of the banks and the Board of Governors is supported in this undertaking by staffs who are specialists in their fields.

These staffs

are regularly engaged in gathering statistics, making surveys,
analyzing reports and formulating views and considerations for their
respective principals.
In addition, the Directors of the Reserve Banks also
are important sources, not only of current business and statistical
information, but also of grassroot, practical understanding and judgment .
The Open Market Committee meets at the offices of the
Board of Governors of the Federal Reserve System in Washington, D. C.
approximately each three weeks and more often when it is advisable.
These meetings are attended by the 7 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 Banks and the Board are
The Chairman of the Committee opens the meeting and calls
on members of the staff of the Board of Governors for reports.


include information on the general economic situation, the banking
and financial picture, and regarding our balance of payments.


- 8 is followed by a report made by the Manager of the Open Market
Account who is the staff member responsible for carrying out the
policies established by the Open Market Committee for the purchase
and sale of government securities.

Another report on international

activities and operations is submitted by the Special Manager for
foreign currency operations for the Account,
Following the staff reports, the President of the Federal
Reserve Bank of New 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 member of the
Board of Governors for his comments and statement.

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 he may choose, and also makes a statement as
to what, if any, changes should be made in monetary policy.

The last

observations are made by the Chairman .of the Committee.
If a consensus for monetary policy is apparent, this becomes the Committee policy.

If there is no consensus and a difference

of opinion exists, the Chairman calls for a vote and the majority view
is 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.

An 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 Reserve 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 bitter experience the Founders of our Republican
form of Government were suspicious of every form of all-powerful
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.
One-Hundred-Twenty-Four years following the ratification of our
Constitution these same fundamental concepts were in the mind of
the Congress when, under the leadership of Woodrow Wilson and Carter
Glass, it delegated responsibility for monetary policy to an independent Federal Reserve System.

Independent within the Government

and not independent of Government.

For Congress created the System

and can, of course, modify or change it.
While there have been changes in the System since the
original enactment of the Federal Reserve Act, these basic principles
of our Government have been adhered to.

- 10 The F e d e r a l R e s e r v e Act b e c a m e law on D e c e m b e r 24, 1913, and
the banks w e r e e s t a b l i s h e d the next y e a r .

The System will o b s e r v e its 50th

A n n i v e r s a r y in 1964*
I think we can all r e g a r d the past 50 y e a r s with s o m e satisfaction.
Economic growth, under competitive e n t e r p r i s e , has been r e m a r k a b l e and would
not have b e e n p o s s i b l e without the p a r t n e r s h i p of the banking s y s t e m and c o m p e t i tive e n t e r p r i s e .

Our r i s i n g s t a n d a r d of living would not have been p o s s i b l e without

the c r e a t i v e design and mechanizing of new and b e t t e r p r o d u c t s and s e r v i c e s .
T r u e , t h e r e have been s o m e rough s p o t s , but in the b r o a d view our System h a s

and worked w e l l .
No doubt t h e r e will be changes in the future, for change is life but,

in m y judgment, any changes should continue to be made in the light of the high
v a l u e s of checks and b a l a n c e s and s e p a r a t i o n of p o w e r .