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Delivered by
Harry A. Shuford, President
Federal Reserve Bank of St. Louis
at the
Luncheon Meeting of the
Evansville Rotary Club
Hotel McCurdy
Evansville, Indiana
Tuesday noon, July lk, 196k

Checks and Balances

This is the Golden Anniversary of the Federal Reserve System.
The System is not identical with what it was originally. An important
ingredient of any viable, living institution is that it be flexible
enough to meet changing conditions. During the past 50 years the
System has undergone considerable change — both through an
evolutionary process from within and as a result of legislation.
Since early this year a congressional subcommittee has been
'examining the structure of the system and its conduct of monetary

This is not a new experience. Diiring recent times it seems

that similar reviews have been conducted every 2 to k years. Nor is
it inappropriate — because the System performs important public
functions and the people are entitled to know what its central bank
is doing.
On the other hand, it is not worthwhile to innovate simply
for the sake of innovation. Moreover, the structure of the Federal
Reserve System embodies principles which are rooted in American
concepts of checks and balances and which have been hammered out
through experience.
However, enactment of some bills now pending in Congress
would fundamentally change the structure of the System.
So today I would like to discuss some of the characteristics
of the System and, by way of background, to outline briefly the way
monetary policy is formulated and implemented.


The Federal Reserve Banks have been described as Bankers1
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 theirmember 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.
The System collectively is also known as a Central Bank.
This we certainly are because of our statutory authority over
monetary policy.
A few years ago in an informal conversation the Governor
of the Bank of England 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 complicated.

This is not a surprising view for a non-

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 p a r t s , each having c e r t a i n powers and r e s p o n s i b i l i t i e s .
(1) Board of Governors
(2) Twelve Federal Reserve Banks and twenty-four branches
(3) Open Market Committee

6,000 member banks

(5) Federal Advisory Committee
The Board of Governors in Washington is composed of seven
members, each of whom is appointed by the President

confirmed by the

Senate for 1^-year terms. This Board supervises and coordinates the
entire SystemTs 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. On the other hand, they have a
private nature as evidenced by the fact that the officers and employees
of the banks are not under Civil Service and the expenses of the
System are paid out of the operating revenues of the banks, with no
funds for System operations

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 recommendations.

•4There are a little better than 6,000 member banks. These,
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 ara sure you
are aware that the powers and responsibilities of the System are
decentralized by the mechanics of organization.
The System's 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. This we
attempt to do by providing reserves to the member banks. In less
technical terms, our actions can be described as increasing or
decreasing the supply of money.
The System, through monetary policy, cannot accomplish all
things. Other factors, such as fiscal policy and taxation, are equally
important. The System does, however, play an important role. During
periods of inflation the problem is excess demand in relation to the
supply of goods and services. This demand can be dampened by reducing
available credit and money.

In times of recession the need is for

greater demand or stimulation. This can be encouraged by increasing
the availability of credit and money.
The three principal tools used to stimulate or limit demand
(l) 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. By raising the

-5requirements, 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. 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 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 bonds
in the open market. On the other hand, if it would appear appropriate
to tighten policy, i.e., reduce reserves, bonds 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 k presidential positions are supplied on a rotating basis from
the other Federal Reserve Banks. Your Reserve Bank is grouped with that
of Dallas and Atlanta.

Currently, the President of the St. Louis Bank

-6is a member of the Committee.
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

The members of the Board of Governors and the presidents 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.

Each 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. 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

-7is 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
Borad of Governors of the Federal Reserve System.

.-8This 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 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.


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, Carter Glass, and Robert Owen, 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.

Pending Legislation
As I have indicated proposed legislation would fundamentally
change the structure of the System.
(1) One provision of a pending bill would increase the
membership of the Board of Governors to 12 and reduce the term of office
from I** to h years.
The purpose of the lU-year term was to remove the monetary
policy decision making process from the mercurial changes in day-today political pressures — which in my judgment is a desirable aim.
(2) Another provision would make the Secretary of the Treasury
a member and Chairman of the Board of Governors. At one time the


Secretary was a member of the Board. Along with other changes in our
banking laws in the 30fs, the Secretary was removed from the Board.
It was recognized at that time that his important position in the
administration interfered with the ability of the Central Bank to
make an independent judgment.
(3) Still another provision would require the System to
obtain annual appropriations from Congress to meet its expenses.

It is proposed that the Federal Reserve Banks and the

Board of Governors be audited by the General Accounting Office.
Prior to the 1930*s the Board of Governors was subject to
such an audit, though the banks never have been.

In the 1930*s,

Congress changed the law to remove the Board from this procedure.
This is not to say that the banks and the Board ought not
be subject to audit. On the contrary, the Banks are not only subject
to continuous internal audit but are also examined annually by the
staff of the Board of Governors. The Board is also audited annually
by an independent audit firm.
(5) Proposed legislation would abolish the Open Market
Committee and transfer its powers and duties to the Board.

As I have indicated, there have been changes in the System
during the past 50 years. But the changes which have been made have
preserved and strengthened the basic principles of the responsibility
of the System to formulate and implement monetary policy on the basis
of its own independent judgment and not on the basis of hopes or wishes,
pressures or politics.


No doubt there vill be changes in the future — for change
is life -- but in my judgment any changes should continue to be made
in the light of the high value of checks and balances and separation of