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SATURDAY, MAY 25, 1935




I should like to talk to you as plainly as T can about the Banking
"ul which is pending before Congress. In the brief time at my disPosal I shall have to confine myself to the most controversial features
°f the bill and omit discussion of many other provisions of the bill
which would, in my judgment, contribute towards recovery, as well as
towards the better coordinated and more efficient administration of
the Federal Reserve System.
I shall assume that you believe that in order to have our money
y8tem controlled for the benefit of the nation as a whole, and not for
the benefit of special interests, this control must be in the hands of a
'•sponsible body. If after all that this nation has gone through during
"'i' past five years you still believe that we can leave our monetary
system to chance or to fate, then it would be futile for me to try to
Persuade you that our present system can and should be improved.
With the banking cataclysm so fresh in our memories, we would
be justified in saying that the Government had failed in its duty if
it neglected to correct at least some of those apparent defects in our
banking system which contributed to bringing untold distress to
millions of our people and threatened to plunge our entire economy
ito the abyss. We are told that there is no emergency at this time
*nich demands prompt action to correct these defects, but surely we
"hould not wait for another crisis before taking the steps necessary
to remedy obvious defects which painful experience has exposed.. Wc
should profit by the lessons wc have learned from the emergency.
The real problem is the control over the volume and cost of monev.
The defects which I have mentioned are not due to the absence of
Powers of control, but to the fact that the present responsibility for
the exercise of these powers is so diffused and divided as to hamper
^'Hously, if not to frustrate, their effective use.
We need also to state the objective towards which these powers
should be directed. At present there is no objective for monetary
Policy stated in the law. The Banking Bill as passed by the House
°f Representatives proposes a definite objective which is, in a word,
that monetary policy shall be directed towards the maintenance of
stable conditions of production, employment, and prices so far as this
&n be accomplished within the scope of monetary action.
I do not wish to be understood as believing that by monetary action
alone we can eliminate all booms and depressions and achieve a permanent and unvarying stability. I do believe firmly, however, that
by monetary means exercised promptly and courageously we can
greatly mitigate the worst evils of inflation and deflation.
SEP or




What are these powers of control to which I refer? There arc three
principal means of control which now exist./The first is the power to
raise and lower the discount rate, that is, to determine the cost at
which banks can borrow from the Federal Reserve banks and consequently to influence the cost at which the public can borrow from the
banks. The importance of this power is apparent. By lowering ° r
increasing interest rates it is possible to lower or increase the cost ot
doing business and, therefore, to have an influence over the contraction
or expansion of business. This power is now vested in the Federal
Reserve Board at Washington.
The second means of control to which I have referred is the power
to raise or lower reserve requirements of the banks which arc members
of the Federal Reserve System. "This power more directly influences
the volume of money because under our law the amount of deposits
that banks can create is limited in proportion to the amount of reserves they possess. Therefore, an increase or a decrease in the
volume of reserves tends to increase or decrease the volume of deposits
which are our principal means of payment, or money. Since
this power has been vested in the Federal Reserve Board, but it can
only be exercised when the President declares that an emergency
exists and gives his approval. The responsibility for declaring an
emergency should not be placed upon the President. Even if an
emergency did not exist, the declaring of it would almost certainly
create one. The bill proposes to give the Federal Reserve Board the
use of this most important instrument of control without requiring
the President to declare an emergency, which might involve insurmountable political obstacles. The Federal Reserve Board should be
in a position to exercise this power in the normal course of events fof
the very purpose of preventing an emergency.
The third means of control is what is known, perhaps somewhat
mysteriously, as open-market operations. Without going into the
details of this technical matter, open-market operations mean that
the Federal Reserve banks when they wish to increase the volume of
money can do so by buying Government securities in the open market.
The money they pay for these purchases is added to the reserves oi
the member banks. Conversely, when the Reserve banks wish to
diminish the volume of member bank reserves they can sell securities
and in effect lock up the money paid by the banks for the securities.
__In this way they can directly influence the available volume of money' At the present time the control over this power is distributed between
a committee of twelve governors of the twelve Federal Reserve banks (
who now have the responsibility for recommending purchases or sales,
the Federal Reserve Board, which has authority to approve or disapprove the recommendations of the governors, and 108 directors o(


the twelve Reserve banks, who in turn have the right to determine
whether or not they will buy or sell in accordance with the policy that
has been recommended by the governors and approved by the Board.
A more effective means of diffusing responsibility and encouraging
delay could not very well be devised.
On this point I have recommended that the power over open-market
operations be entrusted to the Federal Reserve Board, which consists
°f eight members, six of whom are appointed by the President and
confirmed by the Senate, and two ex-officio members, the Secretary
"1 the Treasury and the Comptroller of the Currency. The Board
Would be required, however, before taking action on open-market
operations as well as on discount rates and reserve requirements, to
consult with a committee of five governors selected by the Federal
Reserve banks. In this way the responsibility for action will be
inescapably fixed.
To my mind, the all-important thing is to place responsibility for
the exercise of these three means of control in a clearly defined body
»d to state the objective towards the attainment of which that body
shall exercise these powers. I do not wish to be dogmatic about how
this body shall be constituted. I have recommended placing responsibility for the exercise of these powers in the Federal Reserve Board,
Which was established by law to serve the best interests of the nation
» banking and monetary matters. /However, there are powerful
groups which are irreconcilably opposed to this plan and wish to
Perpetuate the present unsatisfactory situation in which these powers
cannot be effectively exercised.
This attitude is by no means characteristic of all of the bankers
"I the country. In all fairness, I wish to emphasize that in discussing
'his issue most of the leaders of the American Bankers Association
have adopted a constructive and cooperative attitude. This is in
harp contrast with the attitude of a few bankers and business leaders,
Particularly in New York. Many of the bankers have frankly recognized the need and importance of the major changes proposed in the
banking Bill and have accepted them in principle.
With these bankers the issue over the Banking Bill narrows down
hugely to a question of the composition of the controlling body.
Thus, the American Bankers Association proposes that the exercise
"1 monetary powers shall be entrusted to a committee consisting of
'he Federal Reserve Board, which shall be reduced to five members,
and a committee of four governors selected by the governors of the
twelve Federal Reserve banks. This plan would give the governors
°f the Federal Reserve banks, who are selected by directors twothirds of whom are appointed by private bankers, four votes as against
five votes for members of the Federal Reserve Board.


There lias been considerable support for another propositi which
would entrust the powers of determining monetary policy to a committee consisting of the Federal Reserve Board of eight members, as
nowr constituted, together with five governors of the Federal Reserve
banks. These governors .would be selected with reference to a fail
representation of the different regions of the country, one member
to represent the Eastern Federal Reserve districts; one, the Middle
West; one, the South; one, the far West; and one to be selected at
It is not for me to determine in whom these powers shall be vested.
My recommendation was that they be vested in the Federal Reserve
Hoard, with a committee of five governors acting in an advisors
capacity. I have just mentioned two other proposals. It is for the
representatives of the people of the United States in Congress to
determine whether they want to give these powers to an independent
public body, to private interests, or to a combination of the two.
The one principle on which I feel there can be no reasonable ground
for disagreement is that the powers must be vested in a clearly
defined body which will have adequate authority and full and unescapable responsibility for the use of these important powers.
As I have said, the purpose of the bill is not to create new power!
but to place existing powers in a responsible body where they may
be effectively exercised. Against this proposal the cry of political
control has been raised. This is not a new cry. It was raised against
the original Federal Reserve Act more than twenty years ago. H
was raised by about the same interests which arc now resisting tb*J
passage of this bill—the same interests that have repeatedly been
against all progressive social and economic legislation, such as th('
income tax, even when it was proposed to make it as low as 2 percent;
against child labor legislation; against the Federal Trade Commission
and the Federal Power Commission; the Securities Exchange Com'
mission; against pensions of all kinds, both State and national; i"
short, against all that enlightened legislation which lias long since
been accepted and now forms the basis of such economic and social
advance as we have achieved.
If it is fair to charge that the Federal Reserve Board is political.
I hen the same accusation must be made against the Interstate Com"
merce Commission, against the Federal Trade Commission, and
against other governmental bodies the members of which are nomi"
nated by the President and confirmed by the Senate. Experience has
demonstrated that these bodies have consistently acted not for
political advantage but in the public interest.
Some of the opponents of the bill are raising all the familiar bugaboos that they have so often trotted out in the past whenever any

Uttempt has been made in the interests of the country as a whole to
limit their influence in national affairs. I think that Mr. Walter
Lippmann well stated the tone and temper of these irreconcilable
opponents when, in a recent article, he referred to their hysterical
methods. He pointed out that they tell us in one breath that we are
threatened with a grave emergency because of the dangers of uncontrollable inflation while in the next breath they tell us that no
emergency exists which requires the enactment of this legislation,
designed as it is to enable us to deal effectively with just such an
emergency. As Mr. Lippmann says with reference to the inconsistency of these opponents, ''It does not make sense. If we are faced
with these hideous dangers, are we not criminally negligent if we fail
to fix clearly the responsibility for averting them?"
As I say, this cry of "wolf" is not new. I have had occasion to
delve into the history of banking legislation and I note with some
wegree of consolation that the Federal Reserve Act was denounced
"i language so nearly identical with that being used today by much
the same organized opposition, that unless you knew the dates you
could not distinguish between what they said more than twenty
years ago and what they are saying today.
Then, as now, the same interests were crying inflation and political
control. Then, as now, they demanded full control. Indeed, they
undertook to persuade President Wilson that they should have banker
'(presentation on the Federal Reserve Board. Senator Glass of Virginia in his authoritative and illuminating book on the Reserve
System entitled, "An Adventure in Constructive Finance," tells of
how these bankers made their arguments to Mr. Wilson, and according to Senator Glass, when they had finished, President Wilson said
"Will one of you gentlemen tell me in what civilized country of the
earth there are important government boards of control on which
private interests are represented?"
"There was," wrote Senator Glass, "painful silence for the longest
single moment I ever spent; and before it was broken, Mr. Wilson
further inquired,
" 'Which of you gentlemen thinks the railroads should select members of the Interstate Commerce Commission?'"
And Senator Glass adds in his book,
"There could be no convincing reply to either question * * *."
Let me quote another pertinent paragraph from this illuminating
"While the Federal Reserve bill was pending," wrote Senator Glass,
''it was mercilessly condemned in detail by certain interests. Where
there was any praise in these quarters, it was faint enough to damn.


This hostile criticism reflected not alone the attitude of bankers, a*
the class which imagined that it was chiefly affected by the proposed,
readjustment; but it voiced the disapprobation of those business
groups which are most readily impressed by banking thought. This
was not surprising, since the phenomenon was and is of frequent
Unfortunately this is all too true. You are witnessing the same
phenomenon again today. You are hearing the same cry that tWj
banking bill means reckless inflation—that the purpose of the bill >h
to obtain control of the banks so that the administration may be able
to finance an endless series of government deficits. The compl'1'''
answer to this bugaboo is that if the administration had such »
purpose it would not need this bill, for this or any other administration will always find means to raise the funds which the representatives of the people in Congress have appropriated.
As a matter of fact, the administration has at its command, in the
Stabilization Fund and under the so-called Thomas Amendment, more
than 5 billions of unexpended dollars. Demand for the purchase of
government bonds is so great that the average interest rate h*l
dropped by more than 25 percent since the administration took office.
In the face of these facts, do you believe the opponents of this bill
when they tell you that the administration wants the banking bill
enacted in order to enable it to finance governmental deficits?
The organized opposition to the banking bill wants to delay i'H
passage, to leave matters as they are. Our opponents profess I"
believe that the issue should be submitted to a commission for further
study. But manifestly this is not an issue which will be settled
by further study. It is not an issue as to facts which need 1"
be gathered together and pored over by another commission. Unless
your memories are shorter than I believe them to be, you know
the essential facts. The issue is plain. It is an issue of fundamental belief. It is whether such powers as we possess over monetary
policy, which affects the welfare of all of us, shall be definitely placed
in a body which shall have not only the necessary means of control
but the fixed responsibility for its exercise, or whether these powers
should be left as at present where they can neither be effectively
used nor the responsibility for their exercise definitely fixed. I*
calls for a decision by the people of the United States through their
representatives in Congress. It is my sincere conviction that this
bill is in the interest of the banking system as a whole because $
will enable it better to serve the public interest.