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John J. Balles
Rotary Club of
San Francisco
San Francisco, California
July 27, 1976

The function of the Federal Reserve
is to keep the nation's econom ic
blood pressure under control, says
Mr. Balles. Past experience shows
that the central bank has a difficult
jo b in achieving the sometimes
conflicting goals of econom ic
growth, high employment, and a
strong dollar at home and abroad.
That task would be made even
more difficult if our nation fol­
lowed the example of others and
placed the Fed under direct Execu­
tive or Congressional control. It is
no accident that the two industrial
nations with the strongest central
banks— Germany and the United
States— are also the two with the
strongest records of curbing
price inflation.

John J. Balles
I'm glad to have the opportunity to drop in
on the Rotary Club today. It gives me the
chance to meet several hundred new faces
and (as your chairman requested) to tell
you what we've been doing lately at the
Fed— and why.
The Federal Reserve was organized over
sixty years ago as the nation's central bank.
It consists of twelve semi-autonomous Fed­
eral Reserve Banks, operating under the
general supervision of the Board of G over­
nors, a seven-man body appointed by the
President and confirmed by the Senate. The
West was the logical area for the location of
a new Reserve Bank, and that logic has
become more evident over the years with
the westward flow of population and trade.
When we got started in 1914, our nine-state
District accounted for 6 V2 percent of the
nation's com m ercial-bank deposits, but to­
day it has 141 percent of the total. In 1914,
the San Francisco Reserve Bank opened for
business with a staff of just 21 people—
officers, tellers, bookeepers, stenographers,

messengers, one guard and one janitor.
Today, our offices here and in four other
Western cities, with about 1,900 employees,
serve 33 million people and almost 6,500
banking offices in a vast area stretching
from the Arctic Circle to the Mexican bor­
der and from the Rockies to the m id-Pacific.
O u r operations affect the flows of money
and credit— which I don't have to remind
you, represent the very lifeblood of our
business economy. Indeed, you could say
that our job in the Federal Reserve is to
keep the nation's econom ic blood pressure
constantly under control. This covers a
great deal of ground, since we're involved
in “ wholesale" banking operations, in bank
supervision and regulation and, above all,
in m onetary-policy decisions.
Operations and Regulation
Like every other central bank, the Federal
Reserve is in most respects a wholesale
bank, dealing largely with the financial
community and the U.S. Treasury. Most
employees at the twelve Reserve Banks
throughout the country work at providing
central-banking services for their
communities— keeping the wheels of busi­
ness humming with coin, currency, checkprocessing services and the like. Last year,
the people at our five offices handled 732
million pieces of currency, 351 m illion food
stamps, almost V /2 billion coins, over 1
billion paper checks, and many other
chores besides. (The San Francisco office
was one of the busiest— for example, han­
dling 290 million checks during the year.)
However, our work load would have been
much, much heavier had we not benefited
from all the internal processing that goes on
inside the branch systems of the large West­
ern commercial banks.
M onitoring and supervising financial insti­
tutions is another major function. If you

didn't know it before, you've certainly read
in the papers recently that different agen­
cies supervise different segments of the
nation’s banking system. We at the Fed
supervise state-chartered banks which are
members of the Federal Reserve System,
along with bank holding companies and
various international activities— and the
Com ptroller of the Currency, the Federal
Deposit Insurance Corporation, and the
state banking authorities all have different
pieces of the pie. Naturally, improvements
can be made in this complex system. At the
San Francisco Fed, we have already set up a
special financial-m onitoring unit to ensure
that we don't run across any unwelcome
surprises in the banks that we supervise,
and at the national level, Chairm an Burns
has made a number of suggestions to C o n ­
gress regarding possible regulatory reforms.
That's not the same, however, as a whole­
sale overhaul of the entire system, as some
critics have proposed. This deadly dull sub­
ject of “ problem banks" and regulatory
reform ordinarily wouldn't be mentioned
except in specialized banking journals. But
as you'll remember, a lot of stories ap­
peared in the headlines early this year,
which seemed to say that the Fed and other
agencies permitted the era of go-go bank­
ing to get out of hand, and then locked up
all the evidence of poor lending practices.
Published lists of year-old problem -bank
situations misled many readers, at least
partly because of confusion about the m ean­
ing of the term “ problem bank.” The
institutions appearing on the regulators' list
were identified because of certain
problems— many of them m inor— as being
in need of extra supervisory m onitoring.
Most banks have now made substantial
progress in solving their problems, and thus
are in no danger of imminent failure— if
indeed they ever were. In January of this

year, when the newspaper stories broke,
less than one percent of the nation’s 15,000
banks— and none of its large banks—were
listed on the FD IC's checklist of serious
problem cases.
Some banks admittedly took too many risks
during the boom years of the 1960’s and
early 1970's, but the pendulum swung back
again during the mid-1970’s, as banks
adopted more cautious credit policies, and
thereby improved their own financial
health. The banks deserve credit for this
performance, and they also deserve credit
for what they did earlier in stabilizing the
economy during the credit crunch, at some
cost to themselves. At mid-1974, bank funds
were the only funds available to many
small- and medium-sized firms, as money
and capital markets tightened drastically in
the face of double-digit inflation. M ore­
over, public utilities had nowhere else to
turn for funds at that time, since they were
unable to obtain needed funding through
internal sources or through the capital mar­
ket. The resultant heavy loan demand
strained the liquidity of many banks— but it
helped to support the econom y at the time
it was most needed.
Scope of Policy
This brings up the Fed’s major task, which is
to help keep the econom y healthy, or as I
said at the outset, to keep the nation's
blood pressure under control. We get our
marching orders from the Federal Reserve
Act of 1913 as modified by additional legis­
lation in 1933 and 1935. As far as econom ic
policy is concerned, our basic goals are
defined by the Employment Act of 1946,
with its commitment to “ maximum em ploy­
ment, production and purchasing power.”
Those are all laudable objectives, and I
would add one more that should have been
made explicit in the Employment Act—
namely, price stability.

The Federal Reserve helps the nation
attain these econom ic goals through its
ability to influence the availability and the
cost of money and credit. As the nation's
central bank, it tries to ensure that money
and credit growth is sufficient over the long
run to provide a rising standard of living for
our growing population. In addition, it
works in the short run to counteract reces­
sionary and inflationary influences as they
arise. M oreover, as lender of last resort, it
utilizes all available policy instruments
when necessary in an attempt to forestall
national liquidity crises and financial panics.
The Fed achieves its ends by influencing the
reserves held against bank deposits, utiliz­
ing such tools as purchases and sales of
Governm ent securities in the open market,
as well as changes in reserve requirements
and discount rates.
But of course, monetary policy is only one
of the many factors affecting the health of
the economy. Government tax and expend­
iture policies bear critically on the econo­
my’s performance, and so too does the
governm ent’s international econom ic poli­
cy. Governm ent credit policies that affect
housing, small business and agriculture also
influence the broader economy. The wage
and price policies of business firms have
very important effects. And finally, there
are innum erable other private and public
decisions, many of which are independent
of monetary and fiscal policies, but related
rather to such crucial noneconom ic factors
as technological innovations, international
crises, population shifts and public confi­
Need for Independent Policy
Monetary policy, nonetheless, plays a cru­
cial role in helping the nation achieve its
goals of econom ic growth, high em ploy­
ment and relatively stable prices. In many
respects, it is far more effective than fiscal

policy, which has several important draw­
backs. For one reason, manipulating gov­
ernment spending tends to be a rather
clumsy way of dealing with rapidly chang­
ing econom ic developments. Secondly, the
process of reaching a consensus on needed
tax changes usually turns out to be complex
and time consuming. Indeed, history
teaches us that alterations of fiscal policy,
once undertaken, usually affect the econo­
my too late to be of much value in moderat­
ing fluctuations in business activity.
Fortunately, monetary policy is relatively
free of these shortcomings, because of its
great virtue of flexibility. Changes in the
course of monetary policy can be made
promptly and— if need be— frequently. Un­
der our scheme of things, the Federal Re­
serve can make the hard decisions that
might be avoided by decision-m akers sub­
ject to the day-to-day pressures of political
life. And experience shows us that the
effects of substantial changes in the supply
of money and credit are rather speedily
transmitted through financial markets to
the nation's factories, farms and com m er­
cial enterprises.
The founders of the Federal Reserve System
were well aware of the dangers that could
arise from the creation of a monetary au­
thority subservient to the Executive branch
of government, and thus subject to political
manipulation. Consequently, they took
several steps to ensure the independence
of the central bank within the structure of
our Federal Governm ent. First, the term of
office of Board members was made long
enough to m inim ize the threat of covert
political pressure, and appointees were
given staggered terms in order to avoid
Presidential “ packing” of the Board. Sec­
ond, the Federal Reserve was required to
account for its actions to Congress and not
to the Executive branch of government.

Third, the Fed's operations were to be
financed from its own internal sources, and
thus protected from the political pressures
that may be exercised through the C o n ­
gressional appropriations process. Fourth,
power was to be diffused within the Federal
Reserve System, so that the interests of
borrowers, lenders, and the general public
could all be recognized in the activities of
the regional Reserve Banks.
O ur system of monetary management, I
believe, has been working just the way the
founders of the Federal Reserve intended.
Certainly, policymakers have stumbled on
some occasions, but it's hard to imagine
that our problems would have been solved
if we'd followed the suggestion of the Fed's
critics and turned control of the monetary
authority over to the Executive branch or to
Congress. Specifically, if the spending pro­
pensities of Federal officials had been given
freer rein through easier access to the
“ printing press," the inflationary tendency
that has weakened our economy over much
of the past decade probably would have
been aggravated even more.
Every nation in the world has suffered
severely from inflation in recent years. But
as Chairman Arthur Burns recently noted,
the two industrial nations with the strongest
central banks— Germany and the United
States— are also the two with the strongest
records of curbing inflation. Great Britain,
whose central bank was taken over by the
Government several decades ago, has re­
cently been experiencing a chronic case of
double-digit inflation, rising at times last
year to an annual rate of 30 percent or
more. And in some other countries, in
Latin Am erica and elsewhere, where the
monetary authority has always been dom i­
nated by the executive or the legislature,
triple-digit inflation holds sway, bringing
econom ic and political chaos in its wake.

In our democratic society, of course, the
independence of a governmental agency
can never be absolute. The Federal Reserve
System is thus subject not only to the provi­
sions of the Federal Reserve Act, but also to
the Employment Act and numerous other
statutes. The founders of the System recog­
nized this duty by requiring the Fed to
account for its stewardship to the Congress.
This responsibility has recently been for­
malized in a new reporting system, with
Chairman Burns traveling up to Capitol Hill
every quarter to discuss the course of
monetary policy, and to provide growth
projections for the major monetary and
credit aggregates for the year ahead. The
present system is effective because it pro­
vides ample scope for the exercise of C o n ­
gressional oversight, yet keeps political
pressures away from day-to-day involve­
ment in the details of monetary policy.
Concluding Remarks
I hope that, from all I've said, you now have
a better feel for the scope of the Fed's
activities, ranging from the intricacies of
monetary policy to the mundane handling
of checks, coin and currency. As we've seen
in the past several years, the central bank
has a difficult job in achieving the some­
times conflicting goals of econom ic growth,
high employment, and a strong dollar at
home and abroad. That task would be made
even more difficult if our nation followed
the example of others and placed the Fed
under direct Executive or Congressional
control. Thus, I hope that you will agree
with me that the nation needs an independ­
ent monetary authority free of short-term
partisan political pressures, because if such
pressures should succeed, we would have
few defenses left against the type of de­
structive inflation that is now ravaging so
much of the rest of the world.