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The Relationship
of the
Federal Reserve
to the
Dual Banking System

Charlottesville, Virginia, September 8, 194-9
Board of Governors
of the Federal Reserve System
Washington, D. C.

It is an honor to address the Ninth Virginia Bankers Conference and a
pleasure to mingle with the members of your Association in such a delightful
and historic Virginia community.

Any member of the Federal Reserve Board is

constantly reminded of the very important impetus given by two distinguished
Virginians to the establishment of a central banking mechanism in our country.
In the entrance lobby of the beautiful Federal Reserve Building in Washington
are two bronze plaques.

One bears the likeness of Woodrow Wilson and hails

him as the founder of the Federal Reserve System.

On the wall opposite is a

likeness of Carter Glass as the defender of the Federal Reserve System.


think the texts chosen to illustrate the role each played are so excellent
that they can bear repeating before this audience.
In his first inaugural, President Wilson said:
"We shall deal with our economic system as it is and as it
may be modified, not as it might be if we had a clean sheet of
paper to vrite upon and step by step we shall make it what it
should be."
From Senator Glass' book "An Adventure in Constructive Finance", the
chosen text reads:
"In the Federal Reserve Act we instituted a great and vital
banking system, not merely to correct and cure periodical financial
debauches, not simply, indeed, to aid the banking community alone;
but to give vision and scope and security to commerce and amplify
the opportunities, as well as to increase the capabilities of our
industrial life at home and among foreign nations."
As we take note of these noble ideas so eloquently expressed, we may well
ask whether the System has justified the hopes of its founders and what further
might be done to advance their objectives.
From the standpoint of size and strength, the System has probably exceeded
any expectation of 19L+.

But the extent of membership among State banks is

somewhat disappointing.

While the nearly 7,000-odd member banks hold about


85 per cent of all deposits in commercial banks, there remain more than 7,000
State banks which, although they share some of the benefits, have none of the
responsibilities of this "great and vital banking system".
are these responsibilities and benefits?
Federal Reserve System?"

You may ask "What

Why should nonmember banks join the

A full answer to these questions would require a

different talk from the one that I wish to give here today, but let rue cite
the most important example.
As its name implies, the Federal Reserve System administers the bank re­
serves of the country.

In the beginning of the System, one of its stated

purposes was "to mobilize bank reserves".

This implies that the reserves

belonging to member banks were deposited in the Federal Reserve Banks.
Actually this was done, but as the currency and credit needs of the country
expanded, the Federal Reserve Banks have supplied additional reserves to the
banking system.

These reserves have gone indirectly to nonmember as well as

to member banks.

It is the basic task of the Federal Reserve authorities to

administer the supply of reserves available to banks in a manner that will
help to promote healthy growth of the economy without extreme fluctuations.
Nonmember banks, although indirectly affected by the credit policy
actions of the Federal Reserve, are not directly subject to the regulations
with respect to reserve requirements that the System authorities must impose in
the interest of national credit policies.

In a few States, very few in fact,

State banking laws have been enacted which approximate the Federal regulations
prescribing reserves against deposits.

In the vast majority of States, how­

ever, the reserve requirements are around 10 per cent, with no regulation
whatever in Illinois.

Nor are "reserves" defined in even substantial uni­

Deposits with other commercial banks, vault cash, U. S. securities,

and even municipal securities, are counted as reserves in many States.


-3it must be admitted in all fairness that the regulation of bank reserves
among the 48 States is a hodgepodge.

While it may be stoutly maintained by

some nonmember banks that such a meaningless pattern is the badge of State
sovereignty and individual initiative, it may well be asked whether the com­
munities served by relatively unregulated banking are blessed or threatened.
If there be no merit in the regulation of bank reserves in the interest
of sound national credit policy, then all commercial banks, national as well
as State, should be allowed to escape it.

If, as seems more reasonable, there

is merit in a national policy, all banks which share in the creation and
distribution of the country's money supply should be reasonably subject to

I say "reasonably" because it may not be essential that all nonmember

banks be subjected to identical requirements.

The proposal submitted to

Congress was only for supplemental reserves, in case of extreme need.

In any

event any requirement applicable to nonmember banks could contain suitable
modifications that would prevent undue interference with the practice of
correspondent banking.
This brings us face to face with the fundamental question whether the
System has achieved and maintained the effective use of the powers granted by
the original act to influence the cost, volume and availability of credit.


seems to me this effectiveness was achieved fairly early in the System's life,
but in recent years has been somewhat sacrificed to war and post-war considera­
tions of paramount importance.
a part of its lost ground.

Within recent weeks, the System has regained

But this fundamental authority over bank credit

is still less effective than when first granted.

The problem for the Congress

and the country's bankers is whether this effectiveness should



Here attitudes are mixed, with a predominant feeling among organized bankers
that no further legislation is desirable until and unless an emergency is

upon us, which may be too late.
Since this is an official gathering of the Virginia Bankers Association,
I take it that it would be appropriate to discuss the official attitude of
your Association and of most, if not all, of the State associations as well as
of the American Bankers Association regarding the Federal Reserve System.
During the current year, in particular, there has evolved a sort of party line
in the public addresses of A. B. A. and local association officials.

The line,

in general, is to the effect that the Federal Reserve must be contained to its
present area of authority in the banking fieldj also that within this area its
powers should not be enlarged.

It is conceived to be a threat to the dual

banking system if the Federal Reserve, and the Board of Governors in particular,
should be granted additional powers.

Indeed, the American Bankers Association

made a strong fight against the continuation by Congress of the very modest
temporary authority over bank reserves and instalment credit which expired on
June 30, last.

The fight was »successful although, as President Woolen has

since said, the victory was not a happy one, because of the implications in a
struggle between organized banking on the one side and the Federal Reserve on
the other.

Nor has it made any difference as yet, because in view of the

economic situation the reserve powers would not have been used and the con­
sumer credit controls would have been modified or perhaps removed.

The prob­

lem, however, is one of long-term powers to do a job.
In addition to this organizational attitude, there are a good many bankers
and bank supervisors who express the individual opinion that even the present
structure and powers of the Federal Reserve System are a threat to the dual
banking system.

I do not think such a proposition has any bas. s in fact.

Perhaps some confusion is due to a difference of understanding as to what the
dual banking system is.

Looking back to the days before the National Bank Act,

-5there was only a single banking system, namely, a system of State chartered
banks, most of which issued their own bank notes which circulated in various
degrees of parity as the country's currency.

History shows that this system

did not provide the country with an adequate and safe banking structure.
Following the National Bank Act, charters were issued not only by the
States but also by the Comptroller of the Currency, and thus there evolved a
system of national banks and State banks operating side by side throughout the

This was and is the dual banking system.

But as originally estab­

lished it did not have adequate flexibility to meet the needs of a growing
economy or to prevent monetary panics.
The Federal Reserve System was set up to correct these defects.


members constituted all national banks in the continental United States and
any State banks which desired to join the System and met the qualifications.
At that point in the development of the country's banking system, I would not
myself say that we had gone from a dual banking system into a triple banking

The existing banking structure was not changed by the Federal Reserve

The new System was fit into that dual structure.

Independent unit


continued to exist, there was no interference with State chartering of banks,
and the practice of correspondent banking continued.

Moreover, member banks

were given a voice in the management of the new system, a privilege not
accorded by the dual banking system theretofore.
In view of these facts, I can not accept the proposition that when a State
bank joins the Federal Reserve System there is a loss to the State chartered
banking system.

I wonder whether the Commissioner of Banks in your own State

of Virginia considers that he loses anything in the way of his .supervisory
authority if one of his State banks joins the Federal Reserve System.
I submit that there would be no sound basis for such a feeling.

If so,


-6any such bank is still subject to every State statute and every regulation of
the Commissioner to which it had been subject before.

The Commissioner would

supervise and the State bank examiners would likewise continue to examine the
bank as before.

Assuming that the bank was an insured bank, the principal

difference would be that whereas, before, the bank would be examined jointly
by the State bank examiner and the FDIC examiner, it would henceforth be
examined jointly by the State bank examiner and the Federal Reserve examiner.
Thus, the only change from a supervisory standpoint would be a switch from one
Federal agency to another Federal agency in the joint examination.

Time, the

bank in question would now be subject to reserve requirements and other regula­
tions of the Federal Reserve Board, but it would not be relieved of any of its
obligations to the State banking authority.

Thus, it seems to me quite un­

tenable to maintain that an increase in membership of State banks in the Fed­
eral Reserve System holds any threat to the dual banking system.
Uith this clarification out of the way, let us now examine the more im­
portant proposition advanced by banking associations - both national and
State - that an enlargement of Federal Reserve authority along the lines sug­
gested by the Federal Reserve Board over the past several years would consti­
tute a threat to private banking generally in this country.
Here, again, it is necessary to define what we mean by enlargement of
Federal Reserve authority.

The legislation suggested by the Board would in

fora be an enlargement of authority, but in substance it would be rather a
restoration of authority which it was always intended from the very beginning
that the Federal Reserve System should have.

The fundamental power granted by

the Federal Reserve Act in the monetary field was the ability oi the System
to control the volume, availability, and cost of credit in the banking system.
In the early days of the System, additional reserves could be obtained only by

-7rediscounting at the Reserve Banks.
at times in very large volume.

Member bank borrowing was commonplace and

The discount rate was therefore a very potent

In the intervening years, there has been a great shift of emphasis

in the monetary powers of the System.

The great growth of the United States

debt, and therefore in the volume of marketable U. S. securities, has made the
open market operations of the System a much more powerful and more often-used
instrument than the rediscount rate.

Member banks make only occasional and

moderate use of their privilege of borrowing at Federal Reserve Banks; they
prefer to obtain funds through the sale of some of their large holdings of
TJ. S. Government securities, principally bills and certificates.

Thus, the

ability of member banks to expand their loans and investments depends only
slightly upon the discount policy of the Federal Reserve authorities.

This is

particularly true at a time when the Federal Open Market Committee feels it
necessary in the public interest to support the market for U. S. securities,
as was the situation during the recent war and post-war period.

Although the

Federal Open Market Committee recently discontinued the maintenance of a
relatively fixed pattern of yields and prices of U. S. securities, a degree
of support is still necessary to maintain orderly conditions in the market,
and no one can safely say that conditions may not recur when it will again be
deemed desirable in the broad public interest to resume more rigid supports.
In such a situation, it is apparent that the Federal Reserve authorities
do not have the degree of power to control the volume and cost of bank credit
which they had when the System was first established.

¥ith around $60 billions

of U. S. securities in the portfolios of the member banks, they have access to
a supported market for funds for reserve purposes or to expand loans or other
investments at times contrary to the national credit policy pursued by the
Federal Reserve.

At such times the imposition of higher reserve requirements

-8up to the maximum now permitted in the law would have only moderate restraint
upon the expansion of bank credit.

The 1947-194-8 situation was a perfect

illustration of this proposition.

The country was in a very pronounced in­

flationary upsurge, with prices advancing on all fronts.

The Federal Reserve

authorities were attempting by every means at their disposal to restrain bank
credit expansion in order to reduce the upward pressure on prices.


requirements were at the maximum and the rediscount rate had been increased,
but the expansion in bank lending was greater in 194-7 than at any period in
our history.

Bank leadership, spearheaded by the American Bankers Association,

recognized the dangers in the situation and endeavored to retard the over­
all growth in credit by urging individual bani;s to be more cautious and
selective in their lending.

This campaign was most laudable but it would have

been much more successful if the Federal Reserve had been in a position to
make its own anti-inflation policy more effective.

When the inflation had

practically run its course, Congress belatedly gave the Federal Reserve Board
the temporary authority over supplemental reserves, a part of which was
immediately used.

Had such authority been granted a year or more earlier when

it was first requested by the Board, there would likely have been less infla­
tion in 194-7 and 1948 and, by the same token, less recession in 1949.
The present level of reserve requirements may appear high when we compare
percentages with those in effect 15 years ago.

But the structure of bank assets

and the country's gold supply have undergone profound changes during this period,
so that bank reserves are greatly higher.

The restraints imposed py the present

statutory maximums are in my opinion considerably less onerous and therefore
less effective than were the fixed requirements during the first 20 years 6f
the System, when the percentages were half of the present maximums.

Nor have

banks suffered; their earning assets have tripled on the basis of additional

-9reserves supplied by the gold inflow and Federal Reserve open market opera­
tions .
Reflection upon these matters indicates, it seems to me, that the Federal
Reserve authorities today have in fact less control over the volume and cost of
bank credit than they had a generation ago.

And so I say that the authority

suggested by the Board in recent years - either in the form of supplemental
reserve requirements or the so-called special or optional reserve plan, should
be regarded as a restoration rather than an enlargement of the traditional con­
trols in the credit field that were contemplated in the original Federal Re­
serve Act and reaffirmed by Congress in the Banking Act of 1935.
This brief recital of past history and analysis of monetary powers have
been given because it is useful to keep in mind the origins and course of
development of our institutions, so that we can have a better ■understanding of
why they are as they are.

It is more fruitful, however, and more important

to consider them in the light of existing and probable future needs.

At the

last session of the Graduate School of Banking at Rutgers, Dr. Randolph Burgess
gave a seminar lecture on the future of the Federal Reserve System.

There are

few people better qualified than Dr. Burgess to view this problem.

He has had

years of experience in the System and outside.

He has been a student of the

operations of the System and has written informative books on the subject.
views are accepted by bankers and others as authoritative.

Dr. Burgess makes

a strong plea for maintaining a strong Federal Reserve System but he begins
his speech with a note of alarm.

He says:

"....Today the System is in danger. It is being diverted from the
purposes and principles of its founding. It is being changed in
ways that have short term plausibility but may spell long term
"The Federal Reserve System was established after more than
a decade of public discussion of the principles of central


-10banking. On the whole, its structure, modified gradually over the
years by practice and legislation, has proved sound. But the
original act was passed a generation ago. The gravest threat is
that this generation is treating the Federal Reserve System as just
one more government agency, is losing sight of its major purposes,
and is neglecting the safeguards which are necessary to protect it
in the fulfilment of its great objectives."
This objective, he goes on to point out, is fundamentally to provide
stability and to moderate business fluctuations.

He is careful to indicate

that the Federal Reserve can not do this alone because there is no single con­
stant cause for depression.

Recognizing that Government has a great influence

on business fluctuations, he believes that the influence of Government can be
best exercised through monetary regulation, which affects the volume, avail­
ability, and cost of money, rather than through direct controls or fiscal

There is a school of thought, he says, which sponsors the view that

governmental stabilizing policies can best be exerted through more direct fis­
cal means, that is, by increasing or decreasing expenditures or by changes in

This concept considers Federal Reserve monetary policy as of sub­

sidiary importance to the Federal budget in lessening economic instability.
Dr. Burgess, however, is not too sanguine of success in the fiscal field.


believes there are great advantages in trying to moderate fluctuations through
the money supply because, he says, experience shows that it can be done and
because it is a method that is "consistent with democracy", that is, it "in­
volves the least interference with the freedom of the individual to make his
own choices in his economic life".

Dr. Burgess draws this conclusion:

"The point to note is that the control of money is a very
powerful influence, and is one of the few that can be consciously
directed to economic stability. The Reserve System is our agency
for that purpose. In the interest of sound banking and a sound
national economy, the Reserve System must be preserved and de­
fended; and bankers, who know it best, have that peculiar duty."
To this analysis and conclusion, I can say "Amen".

-11After making such a convincing case for the use of monetary powers as
against direct Government controls and for the preservation and defense of the
Reserve System as the agency to exercise the monetary powers, Dr. Burgess gives
himself over to fears and criticisms respecting the present and future of the

What is the source of these negative expressions?

must consider the human element.

In my opinion, one

Dr. Burgess is not only a distinguished and

experienced central banker and an able protagonist of the Federal Reserve, he
is also a recent president of the A. B. A. and the Reserve City Bankers Associa­
tion, as well as one of organized banking's chief spokesmen regarding Federal
Reserve problems.

Can it be that Dr. Burgess, finding himself making such a

convincing case for the Reserve System, felt obliged to even the score somewhat
by moving over toward the party line?

At least, it seems to me that his argu­

ments of opposition are labored and, happily, leave his affirmative case un­
It is not my purpose to discuss in detail the several points of criticism
in Dr. Burgess' able paper.
their purport.

A recital of their captions will, however, indicate

He raises three questions of Federal Reserve organization.

is the relation of the System to the President and the Treasury.


I doubt that it

can be successfully maintained that recent Federal Reserve actions or policies
have been dictated by the Executive.

In fact, financial writers during last

winter and spring frequently described our actions as being divergent from general
administration economic policy.

The fact is, however, that it was a period when

the Reserve System demonstrated a degree of detachment and independence which
Dr. Burgess so well advocates in his paper.

Yet he properly recognizes that

"the central banking system, in working for the public interest, must inevitably
consider the needs of the Treasury as a major factor in its decisions."


Dr. Burgess raises the question of the balance of power within the System.

-12Certainly no change has actually occurred since the Banking Act of 1935 in the
System's structure.

A task force report made for the Hoover Commission is given

considerable attention but the Commission did not approve it, so one can
scarcely call it a threat.

At this point, however, Dr. Burgess includes the

legislative suggestions of the Federal Reserve Board as a move to concentrate
more and more power in Washington.

Here, he calls for greater utilization of

the Federal Reserve Banks so as to avoid important decisions being made "in the
detached statistical and political atmosphere of Washington".

In answer to this,

I might say that there is currently the greatest degree of joint discussion of
policy between the Board and the Reserve Banks.

Not only is there close contact

with the Reserve Bank presidents, but with the Bank chairmen and the boards of
directors as well.

The latter have been asked for their opinion on many policy

problems and the Federal Advisory Council is not only regularly consulted, in
accordance with statutory provisions, but frequently more often.
The third question posed by Dr. Burgess relating to Federal Reserve organiza­
tion and operation is what he calls "the trend toward controls".

He recognizes

the propriety of margin controls permanently and of instalment credit control in
time of "war or serious inflation".

He then states that "one school of monetary

economists would project the Federal Reserve Board still further into what may
be called 'qualitative* credit controls by giving the power to make detailed
rules to. govern the making of real estate loans and other specific forms of loans."
Whoever may constitute this "school of monetary economists", I don't know, but
they carry no weight with the authorities in the Reserve System.

As a matter of

fact, the Board of Governors itself in recent years has resisted suggestions,
sometimes made from responsible sources, that other forms of credit, such as
real estate loans and capital issues, be subjected to its regulation.

So it

would appear that the threat of direct controls is more bogey-man than real.


-13Dr. Burgess goes on to say that "all of these suggestions have in common more than
a suggestion of the totalitarian principle that some one in a Government bureau
can make wiser decisions than management on the job."

He then mentions the

destructive effect of totalitarian controls in Europe today.

With these extreme

words as an introduction, he then makes the formidable charge that in two respects
the Federal Reserve tends toward these totalitarian controls.

One is the Board's

recent request for more power over reserve requirements (which I have endeavored
to show is a restoration, not an enlargement) and the other is "the present de­
tailed control by the Reserve System of prices and trading in the Government
securities market".
Dr. Burgess’paper was delivered on June 24 > a week before the announcement
of the Federal Open Market Committee to the effect that it was discontinuing the
maintenance of a relatively fixed pattern of prices and yields.

Consequently, it

may well be that Dr. Burgess would have modified his criticism somewhat a week
In any event, I wish that he had discussed these subjects more fully because
they go to the heart of the problem which was the theme of his speech, namely,
The Future of the Federal Reserve System.

Instead he concludes his remarks with

a paragraph that I would like to quote in full and take as a basis for my further
"It would be easy to leave this statement as a negative plea,
opposing all controls. The positive side of it is a reaffirmation of
the need for vigorous monetary management as the most powerful and
best instrument government possesses for moderating business fluctua­
tions. Its effective use depends on the time-honored powers to in­
fluence the cost and volume of credit rather than on detailed control.
The use of these powers in turn depends on a revitalized Federal Re­
serve System with growing independence of Treasury policies as the
war recedes into the past. The effectiveness of credit policies also
will be greatly enhanced as they become cooperative national policies
rather than surprise moves imposed by a Washington agency. In bring­
ing this about, bankers have themselves an equal responsibility with
the Reserve System."

-H -

This paragraph expresses generally desirable aims but it raises fundamental
questions about the future of the Federal Reserve System that need to be answered.
What is meant by "vigorous monetary management" and by "time-honored powers to
influence the cost and volume of credit?"

The question must be answered, not

against the background of the conditions of the past, but in the sort of monetary
and credit situation that exists today.

One of the important characteristics of

the Federal Reserve System has been its ability to adjust its policies to chang­
ing situations.

The financial situation in this country today is different in

many important respects from what it has ever been before.
The principal new characteristic is the tremendous volume of the Federal
debt, which now amounts to about 255 billion dollars, or six to ten times what
it was when Dr. Burgess participated in the task of managing the open market
operations of the System.

It is now more than one-half of the total public

and private debt of the country, whereas before the war it was less than a
fourth of the total.

Of this public debt, 75 billion is owned by banks and

115 billions of marketable securities are owned by individuals, insurance com­
panies and other corporations and associations.

These holdings are viewed by

the owners as liquid investments which can be converted into cash at will.


suggested heretofore, they provide to the banking system the liquidity that was
formerly obtained largely through the New York money market, and the banks are
constantly shifting their holdings to balance the flow of funds.
It would not be possible, in any short period of time at least, to develop
a broad enough market in this country which could take care of all the buying and
selling of Government securities that may occur day by day.

The Federal Reserve

System must therefore act to absorb securities offered or to supplv those demanded
in a magnitude that might otherwise create disorderly market conditions.


System's operations amount to millions and frequently hundreds of millions of

-15dollars a day.

They must be conducted at some price or rate.

To leave the de­

termination of this price wholly to the play of market forces would inevitably
mean extremely wide fluctuations from day to day and perhaps even from hour to

Many of you will recall the fluctuations that used to occur in the New York

call money market when it served as the source of liquidity for the banking- system.
The fluctuations that could occur in Treasury bill and certificate rates if left
entirely to market forces night easily be as great as those in call money rates in
the past.
At the end of June and in early July we had a little indication of what might
happen in a market completely free from Federal Reserve influence.

Congress per­

mitted the temporary reserve requirements to expire and at the same time the Sys­
tem for a short period refrained from selling Government securities.


rates dropped sharply as banks endeavored to invest their released funds.


short-term rate might well have gone down close to zero had not the System stepped
in to supply the demand.

After the additional reserves had been absorbed, the

rate would no doubt have shot back up very rapidly if the System had continued
to stay out of the market.

It is simply not realistic under existing conditions,

as I am sure Dr. Burgess well knows, to suggest that the Federal Reserve should
not engage in constant and detailed operations in the Government securities market.
This does not mean that there should not be a greater degree of flexibility
in this market than was possible during the war and early post-war period.


has been the System policy to move toward the attainment of greater flexibility
and a freer expression of market forces.

We must, nevertheless, be active buyers

and sellers and must recognize that our policies in effect largely determine the
general level of rates, even though short-term fluctuations are permitted.
It is questionable, however, to what extent the System can rely upon fluctua­
tions in short-term interest rates as an instrument for following a vigorous

-16mottetary policy.

While I would not want to take a position that fluctuations in

interest rates have no influence, I would point out that it has become increas­
ingly evident that changes in the availability of money are a more important in­
fluence than changes in the level of interest rates.

Interest rates should be

considered more as a result of changes in credit availability relative to demand
than as influences which in themselves limit or stimulate demands for credit.
The large volume of public debt outstanding and the necessity for the Fed­
eral Reserve System to participate actively in the market for Government securi­
ties provide a source for the creation of new money.

This situation makes it

difficult for tho Federal Reserve to limit the available supply of credit.

It is

different from that which existed before the Federal Reserve System, when there
was no source of new money available to banks, or even in the first two decades
of the System’ history, when new reserves could be obtained member bank
borrowing unless the System chose to supply them by open market purchases.


existing conditions new funds can be readily obtained at the initiative of the
holders of Government securities.

These new funds enter the banking system as

reserves and can be used as a basis for multiple expansion of credit.
The problem of the future of the Federal Reserve System, therefore, is how
can it follow a vigorous monetary policy in accordance with the objectives for
which it was established and at the same time meet its responsibility for main­
taining a relatively stable Government securities market, which is also an essen­
tial for economic stability.

It is to meet this problem that the System needs and

has requested the Congress for additional power to increase the reserve require­
ments of commercial banks.

We must recognize that careful management of the

public debt may inevitably result in the creation of new money and that powers
must exist to immobilize this money so as to prevent it from becoming the basis of
an excessive credit expansion.

This does not mean that the earning assets of

-17banks would be reduced, because on balance only newly created reserves would be
Operations of the Federal Reserve System in the Government security market
and the use of the power to increase reserve requirements, I submit, are in
accordance with the time-honored objectives and instruments used by the System
to influence the cost and volume of credit.

They do not represent a movement

toward totalitarianism or socialism, as is implied by Dr. Burgess.

In fact, they

exactly fit his prescription that fluctuations can and should be moderated through
variations in the money supply, a method which is "consistent with democracy".
These powers are and would be exercised through the mechanism of the Federal Re­
serve System, an agency founded for this very purpose, in the management of which
bankers and businessmen, as well as other private citizens, participate in a joint
effort to serve the public interest.
In regarding the Federal Reserve as a threat to the dual banking system and
in opposing the efforts of the Reserve authorities to maintain adequate powers
over bank reserves, the bankers make a great mistake, in my opinion.
seeing ghosts.

They are

The Federal Reserve is a part and parcel of the banking system.

In carrying out its duties, it is constantly sensitive to bankers’problems,
including bank earnings.

For many years, the Board in Washington has resisted,

sometimes single-handed, encroachments upon private banking, including those by
the Savings and Loan System and by Government credit agencies.
Rather, the bankers should join with the Federal Reserve in fighting off
threats which are not ghosts, but very live and formidable forces.

Among them are

rapidly multiplying agencies of the Federal Government to loan federal funds
directly to groups of citizens or to individuals, displacing billijns of dollars
of private credit.

Worse still, these mechanisms, started as emergency or tempo­

rary aids, become permanent and offer excuses for other groups to plead their

-18special cases before Congress.

Thus the area in which the Government competes

with the private banking system is constantly growing.

It would be wise for

organized banking to cease its resistance to adequate regulation and to stand
side by side with the Federal Reserve in the struggle to preserve the area of
private finance and private enterprise.

I am personally sure that the Federal

Reserve Board would welcome such an ally in that great enterprise.