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Z-58

FEDERAL RESERVE RESPONSIBILITIES

ADDRESS BY
M. S. SZYMCZAK, MEMBER,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

AT MEETING OF
THE MUNICIPAL BOND CLUB OF NEW YORK
HELD AT THE
BANKERS CLUB - 120 BROADWAY
NEW' YORK, NEW YORK
WEDNESDAY, NOVEMBER 17, 1937.

(Not to be released u n t i l 1:00 P.M.
Wednesday, November 17, 1937)

Z-58

FEDERAL RESERVE RESPONSIBILITIES
As you know, there has long been a tendency to over-emphasize
the e f f e c t of monetary and c r e d i t f a c t o r s on business.

The more one

surveys monetary h i s t o r y the clearer i t becomes that what can be accomplished through monetary and c r e d i t measures by themselves i s
s t r i c t l y limited.
I n stressing t h i s p o i n t f however, I do not mean to minimize the
influence of such measures.

I n t h e i r way they are h i g h l y important

and by the same token the Federal Reserve System i s a h i g h l y important i n s t r u m e n t a l i t y .
What i s the Federal Reserve System?
The questicninfiy be answered from the l e g a l point of view by saying that i t i s a system comprising about 6,400 member banks i n a l l
parts of the country, twelve Federal Reserve banks so s i t u o t e d as to
serve the twelve regions i n t o which the country i s divided, the
Board of Governors, which i s the coordinating -body s i t u a t e d i n Washington, the Federal Advisory Council, which represents the bankers
of the twelve Federal Reserve d i s t r i c t s , and-the Federal Open Market
Committee, which comprises members of the Board i n Washington and
representatives of the twelve Federal Reserve Banks.
The same question - 'what i s the Federal Reserve System? - may be
answered from the f u n c t i o n a l point of view by saying that i t possesses
c e r t a i n supervisory powers and exercises regulatory influence over the
supply and cost of c r e d i t i n the United States.




I t i s an i n s t i t u t i o n

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created f o r public service, not f o r p r i v a t e p r o f i t .
I n i t s r e g i o n a l form of organization the Federal Reserve System
i s p e c u l i a r l y an American i n s t i t u t i o n , having c e n t r a l banking funct i o n s which i t performs s u b s t a n t i a l l y as do the c e n t r a l banks of
other countries.

The term c e n t r a l banking, as I use i t here, should

not be confused or misunderstood.

I am speaking of the functions of

c e n t r a l banking rather than the form of the organization which performs those f u n c t i o n s , however owned or c o n t r o l l e d .

Practically

every c i v i l i z e d country has a c e n t r a l banking i n s t i t u t i o n .

In

Canada, i t i s the Bank of Canada; i n England, the Bank of England;
i n France, the Bank of France; i n Germany, the Reichsbank.

The en-

t i r e l i s t would cover the American, European, A f r i c a n , and A s i a t i c
continents.

I n every case the c e n t r a l bank by i t s very nature stands

i n a unique r e l a t i o n s h i p both to the Government of i t s country and
to the other banks and f i n a n c i a l i n s t i t u t i o n s of i t s country.

Its

f u n c t i o n i n every case i s that of i n f l u e n c i n g c r e d i t conditions i n
the public i n t e r e s t by the exercise of i t s f i n a n c i a l ana administrat i v e powers.

The most prominent of these powers are:

To make loans

to banks and other f i n a n c i a l i n s t i t u t i o n s , to f i x the rediscount
r a t e , and to buy and s e l l securities i n the open market.

The exer-

cise of any one or a l l three of these powers has c e r t a i n d i r e c t and
t o a large extent predictable e f f e c t s upon the supply and cost of
credit.

I n a d d i t i o n the c e n t r a l bank i s u s u a l l y a bank o f ' i s s u e .

I t s notes c i r c u l a t e as money.

Formerly t h i s was one of the most im-

portant powers of a c e n t r a l bonk but now that deposit c r e d i t t r a n s ferable by check h&s become the p r i n c i p a l means of payment used i n




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c i v i l i z e d c o u n t r i e s , the power of i s s u i n g notes has come t o be i n c i dental rather than e s s e n t i a l t o c e n t r a l banking,

A more important

f u n c t i o n at present i s t h a t of holding the basic reserves of the banking system - a p r a c t i c e which nearly a l l c e n t r a l banks perform e i t h e r
as a matter of lav/ or of established custom.

I t i s through the func-

t i o n s of holding reserves and i s s u i n g notes t h a t c e n t r a l banks are
enabled t o exercise c o n t r o l over the c r e d i t supply, because the need
f o r currency or f o r a d d i t i o n a l reserve balances i s what impels commercial banks to borrow from the c e n t r a l bank,
A f u r t h e r i n c i d e n t a l c h a r a c t e r i s t i c i s t h a t the c e n t r a l bank
u s u a l l y acts as f i s c a l agent of the Government,

I n t h i s capacity i t

serves as a bridge between the f i n a n c i a l a c t i v i t i e s of the Governmont and the f i n a n c i a l a c t i v i t i e s of p r i v a t e business.

Ordinarily

the Government's bank account i s the l a r g e s t single bank account i n
the country.

The Government1s r e c e i p t s , i t s expenditures, and i t s

balances are so large t h a t they require special adjustment to the
c r e d i t a c t i v i t i e s of p r i v a t e i n t e r e s t s .

Otherwise the accumulation,

t r a n s f e r and disbursement of Government funds would s e r i o u s l y d i s t u r b
the money market, and hence business at l a r g e .
Since the c e n t r a l banking organization o r d i n a r i l y c a r r i e s the
reserves of commercial banking i n s t i t u t i o n s as w e l l as the checking
accounts of the Government, i t i s n a t u r a l t h a t i t should play an important part i n the c o l l e c t i o n and clearance of checks and i n the
t r a n s f e r of bank funds.

I n this

respect, as i n f u r n i s h i n g currency

f o r c i r c u l a t i o n , the monetary nature o f c e n t r a l bank functions




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becomes most apparent.
From country t o country the nature of c e n t r a l bank operations
and the character of c e n t r a l banking powers w i l l vary i n accordance
w i t h n a t i o n a l i n s t i t u t i o n s and business customs.

Fundamentally, how-

ever, the processes of c e n t r a l banking are much the same i n a l l
countries•
Perhaps the most s t r i k i n g feature of the c e n t r a l .banking organization of t h i s country i s t h a t i t comprises not a single i n s t i t u t i o n
but several r e g i o n a l i n s t i t u t i o n s coordinated by a public body i n
Washington.

The Bank of England, f o r instance, i s a single i n s t i t u -

t i o n w i t h about nine branches which are merely detached o f f i c e s of
one corporate e n t i t y .

The c e n t r a l banks of most other countries l i k e -

wise are s i n g l e i n s t i t u t i o n s .

There are several reasons why the

c e n t r a l banking system of the United States comprises a number of
federated i n s t i t u t i o n s instead- of one.

Perhaps the most obvious i s

t h a t the country i s extremely large and the number of independent
l o c a l banks which cover i t i s also l a r g e .

Mos>t other countries have

a r e l a t i v e l y smaller area t o serve and a f a r smaller number of separate banks and f i n a n c i a l i n s t i t u t i o n s .

The Federal Reserve System,

through the twelve r e g i o n a l Federal Reserve Banks, e f f e c t s a decent r a l i z a t i o n of banking reserves and gives t o each region a large
degree of c r e d i t autonomy.

As i t s name i n d i c a t e s , i t i s a f e d e r a l

system, based upon the f e d e r a l p a t t e r n which, i s d i s t i n c t i v e of our
American i n s t i t u t i o n s .
The term " c e n t r a l banking" i s not as f a m i l i a r i n the United States




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as i t might be.

The conception of what central banking i s and of

what are the essential functions o f the Federal Reserve Banks i s
not widely understood.

This i s p a r t l y because the word "banking"

suggests to most people the dealings they have with t h e i r own l o c a l
banks.

Consequently when the Federal Reserve Banks are thought o f ,

the tendency i s to consider t h e i r operations as merely d i f f e r i n g i n
magnitude or degree from those of commercial banks.
i s apt to generate serious misconceptions.

Yet t h i s view

The point of view of

central banking d i f f e r s profoundly from the point of view of commercial banking.

I t i s the purpose of a (Jovernment to serve the

public i n t e r e s t and the purpose of a central bank as a quasi-governmental i n s t i t u t i o n i s the same.

Although the c e n t r a l banking

mechaniftm9 as, f o r example, i n the case of our Federal Reserve Banks,
has much the same form of corporate organization as a business corporation operated f o r p r o f i t and has a balance sheet showing assets
and l i a b i l i t i e s , including the item of paid-up c a p i t a l and the item
of gain or loss from operations, the purposes and objectives of i t s
operations d i f f e r e s s e n t i a l l y from those of p r i v a t e business corporations.

At the present time, f o r example, the twelve Federal Reserve

Banks have cash and reserves of nearly nine and a h a l f b i l l i o n and
earning assets of only two and a h a l f b i l l i o n .

Such a position,

which i s quite d i f f e r e n t from what an enterprise operated f o r p r o f i t
would choose to maintain, i s e n t i r e l y normal f o r a central banking
organization.
When a Federal Reserve Bank makes a loan or purchases securities




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i t i s not doing so f o r the sake of p r o f i t as a commercial bank would
be doing.

The purpose of the loan o r of the purchase of s e c u r i t i e s

i s to supply the money market w i t h the a d d i t i o n a l funds which i t appears t o r e q u i r e .

I f the t r a n s a c t i o n i s an i n d i v i d u a l loan, the

a d d i t i o n a l funds are supplied by the t r a n s a c t i o n t o some one i n d i v i d u a l bank which may or may not be experiencing the same demand
that other banks are experiencing.

I f the t r a n s a c t i o n i s an open

market purchase of s e c u r i t i e s by the Federal Reserve Banks, the r e s u l t i s t h a t the market as a whole i s supplied w i t h funds and no
p a r t i c u l a r i n s t i t u t i o n i s singled out as experiencing the e f f e c t of
the t r a n s a c t i o n any more than another.
I n the same way, when, f o r example, the rediscount r a t e i s advanced, the Federal Reserve Bank i s not seeking an increase i n i t s
income as a commercial bank might under s i m i l a r circumstances.
purpose i n

raising

Its

the rediscount r a t e i s t o r a i s e the cost of bank

c r e d i t i n general and thereby discourage tendencies to excessive use
of c r e d i t .
I t i s s i g n i f i c a n t of the importance of c e n t r a l banking funct i o n s t h a t the Bank of England evolved i n t o i t s p o s i t i o n as a c e n t r a l
bank i n response to the requirements of the London money market w i t h out s p e c i f i c l e g i s l a t i v e a c t i o n t o t h a t end.

A few generations ago

the Bank of England was p r i m a r i l y a p r i v a t e i n s t i t u t i o n enjoying cert a i n p r i v i l e g e s but operated by i t s management as any other business
enterprise might be i n tho p u r s u i t of p r o f i t f o r i t s stockholders.
The process by which i t gradually changed i t s purpose, and subordinated the r o l e of p r o f i t s i n i t s operations t o t h a t of serving the




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broad public purpose of s t a b i l i z i n g the money market was a long and gradu a l one.

The assumption of i t s r e s p o n s i b i l i t i e s was not so much the r e -

s u l t of s p e c i f i c l e g i s l a t i o n as of voluntary a c t i o n .

The example I have

j u s t mentioned demonstrates how c e n t r a l banking functions came to be r e quired by a business community and accordingly came to be performed even
without p r o v i s i o n by the l e g i s l a t u r e .

S i m i l a r l y , the need arose f o r our

own Federal Reserve System and i t s f u n c t i o n s have undergone evolution i n
gradual adaptation to the changing requirements imposed upon them by the
economic world.
I n a d d i t i o n to the e s s e n t i a l c e n t r a l banking functions t h a t I have
been d e s c r i b i n g , the Federal Reserve System has a number of regulatory
powers entrusted t o i t by Congress which are of more or less special nature.

These include powers t o f i x reserve requirements w i t h i n c e r t a i n

s t a t u t o r y l i m i t s , to f i x margin requirements, and to examine banks and
require of t h e i r management an abandonment of unsound banking practices
on p a i n of dismissal.

These a d m i n i s t r a t i v e and regulatory powers of the

Federal Reserve Sjystem are f o r the most p a r t lodged i n the Board of Governors i n Washington.

I n performing them the Board i s c a l l e d upon to

issue r e g u l a t i o n s , a d m i n i s t r a t i v e r u l e s , and orders.
does not f u n c t i o n as a remote and detached body.

However, the Board

I n the case of open

market operations, which are. among the most important of Reserve Bank
a c t i v i t i e s , the law provides t h a t such operations must be Conducted according to a uniform p o l i c y by a l l twelve Federal Reserve Banks i n accordance w i t h the d i r e c t i o n s of the Federal Open Market Committee.

The

Federal Open Market Committee comprises twelve members, seven of whom




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are the members of the Board of Governors, and f i v e of whom are elected
by the twelve Federal Reserve Banks,
ipate

Thus the Federal Reserve Banks p a r t i o -

d i r e c t l y and responsibly i n measures which are among the most im-

p o r t a n t t h a t can be taken t y the Federal Reserve System.

There i s also

the example of discount r a t e s , which, as you know, are e s t a b l i s h e d by the
Federal Reserve Banks s u b j e c t t o approval by the Board.

I n connection

w i t h various other matters also the Federal Reserve Banks are consulted.
The Presidents o f the Reserve Banks meet f r e q u e n t l y i n Washington and conf e r w i t h the Board on questions having t o do w i t h the operation of the
Federal Reserve System,

When the Board i s amending i t s r e g u l a t i o n s or

i s s u i n g new ones, the d r a f t s i t prepares are submitted to the Federal
Reserve Banks f o r t h e i r c o n s i d e r a t i o n , and t h e i r suggestions c o n t r i b u t e
s u b s t a n t i a l l y to the f i n a l form which the r e g u l a t i o n s take.

In addition,

d r a f t s of r e g u l a t i o n s are u s u a l l y submitted to responsible groups through
the agency o f banking or business a s s o c i a t i o n s .
o f Regulations "T" and

ft

For example, the d r a f t s

U", which govern margin requirements, were sub-

m i t t e d t o exchanges f o r t h e i r c o n s i d e r a t i o n , and the Board f e e l s t h a t the
many very p r a c t i c a l comments received from the exchanges have been most
helpful.

The same holds t r u e of other r e g u l a t i o n s , i n the p r e p a r a t i o n

of which bankers 1 groups and organizations are consulted.

Furthermore,

the Board i s always accessible t o those who w i s h t o o f f e r t h e i r suggest i o n s , t o c r i t i c i z e c r e d i t measures, or t o ask f o r i n f o r m a t i o n .
The Board i t s e l f i s an o r g a n i z a t i o n whose decisions are formulated
by the vote o f i t s members.

I n the i n t e r e s t of good a d m i n i s t r a t i o n , and

as contemplated by the law, the Board i s a u n i t .




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I n order to a s s i s t i n the determination of i t s p o l i c i e s , the Board
maintains what i s probably the most comprehensive organization f o r the
compilation and analysis of economic and f i n a n c i a l information maintained
by any c e n t r a l banking organization i n the world.

The Board has t h i s i n -

formation and the expert opinion of a s t a f f of analysts constantly a t i t s
disposal.

The r e s u l t i s t h a t any decision o f the Board or of the Federal

Open Market Committee has behind i t not only the judgment of Board members and Federal Reserve Bank o f f i c e r s , but of an experienced s t a f f of
s p e c i a l i s t s i n economic and monetary f i e l d s who b r i n g a t r a i n e d c r i t i c a l
a b i l i t y to the consideration of proposed measures.
I n t h i s connection I wish also to remind you t h a t the Federal Reserve
System publishes more d e t a i l e d and important information about i t s condit i o n s and i t s a c t i o n than any other c e n t r a l banking organization i n the
world.

Much of t h i s i n f o r m a t i o n appears i n occasional and periodic press

releases, and i s contained i n the Federal Reserve B u l l e t i n and the annual
report of the Board of Governors.
Having reviewed w i t h you the general purposes and c h a r a c t e r i s t i c s
of c e n t r a l banking, or as some p r e f e r to c a l l i t , reserve banking, and
having also pointed out how i n t h i s country the c e n t r a l banking system
i s organized on d i s t i n c t l y American p r i n c i p l e s and formulates i t s p o l i c y
i n accordance w i t h those p r i n c i p l e s , I wish now t o review, as I d i d i n
Boston the other day before the Bankers1 Committee of the New England
Council i n t h e i r Executive Session, the course of p o l i c y followed by r e serve a u t h o r i t i e s during the past year or so.




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As you know t h a t p o l i c y has f o r several years been one of monetary
ease.

Statements to t h a t e f f e c t have been f r e q u e n t l y made by the Board,

and I need not go i n t o the considerations upon which the p o l i c y i s basod.
I wish instead t o p o i n t out b r i e f l y how the various measures which have
been taken f i t together as a p p l i c a t i o n s of c e n t r a l banking p o l i c y i n given
circumstances.

The various steps which have been taken should be viewed

not as i s o l a t e d events, but as elements i n a connected s t o r y .
To begin w i t h , there was the increase i n reserve requirements a year
ago l a s t August.

I wish t o emphasize the f a c t t h a t the power to f i x r e -

serve requirements i s not a customary means by which the c e n t r a l banking
system e f f e c t s current adjustments of the supply of c r e d i t t o demand.

It

i s i n the f i r s t place a l i m i t e d power - the Board cannot r a i s e or lower
requirements a t w i l l , but only w i t h i n c e r t a i n l i m i t s .

Moreover i t has not

the f l e x i b l e a p p l i c a t i o n t h a t open market operations or discount powers
have.

I t was exercised by the Board f o r the f i r s t time l a s t August, and

again l a s t spring.

The occasion of the exercise of t h i s power was, as

you know, the f l o w of gold i n t o t h i s country from abroad, and the r e s u l t i n g expansion of bank reserves t o proportions q u i t e beyond the p o s s i b i l i t i e s of use as a basis f o r the l e g i t i m a t e expansion of c r e d i t .

The c i r -

cumstances were such t h a t i f the Federal Reserve System had desired to
have easy money conditions regardless of the consequences t h a t might
ensue i n case unsound and i n f l a t i o n a r y conditions developed, i t could
have adopted a p o l i c y of doing nothing a t a l l .

But i t sought instead

to r e e s t a b l i s h the p o s i t i o n i t was intended by law t o occupy - a p o s i t i o n
i n which i t could act promptly and e f f e c t i v e l y e i t h e r i n the d i r e c t i o n -of




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easing the c r e d i t s i t u a t i o n f u r t h e r , or i n the d i r e c t i o n of r e s t r a i n t whichever appeared to be i n the public i n t e r e s t .

Accordingly, when the

Board raised reserve requirements, i t s purpose was not to abandon i t s
policy of monetary ease but to continue that policy under conditions
amenable to control•
Theoretically and h i s t o r i c a l l y , the technique of credit regulation
has been considered most e f f i c i e n t when member banks have had a minimum
of excess reserves and could expand the amount of c r e d i t outstanding
when and as steps are taken t o increase t h e i r reserves.

This can be

most r e a d i l y effected by open market puchases, which have the e f f e c t
of making funds a v a i l a b l e to the money market and of making i t unnecessary
f o r member banks i n general to apply to the Federal Reserve Banks f o r advances.

However, should i n d i v i d u a l banks s t i l l require funds, they may

borrow from the Federal Reserve Bank and whentbey do so i t s discount
rates can be reduced i n conformity w i t h a policy of ease, or conversely
can be raised i f an opposite policy i s adopted.

But, of course, when

the banks are superabundantly supplied with :ceserve funds from an outside
source and therefore have l i t t l e , i f any, occasion to seek a d d i t i o n a l
funds from the Federal Reserve Banks, the discount rate and open market
operations, as means of credit regulation, cease to be e f f e c t i v e .

The

purpose of the increase i n reserve requirements was, therefore, to o f f set the e f f e c t of gold imports and restore the base upon which normal
measures of c r e d i t regulation would be e f f # e t £ v e .
S t e r i l i z a t i o n of incoming gold was a l o g i c a l accompaniment of the
increase i n reserve requirements.




As announced by the Secretary of the

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Treasury, a c c o r d i n g l y , i t became the Treasury 1 6 p o l i c y , "whenever i t

is

deemed advisable and i n the p u b l i c i n t e r e s t t o do so, t o take appropriate
a c t i o n w i t h respect t o net a d d i t i o n a l a c q u i s i t i o n s or releases o f gold by
the Treasury Department.

This w i l l be accomplished by the sale of a d d i -

t i o n a l p u b l i c - d e b t o b l i g a t i o n s , the proceeds of which w i l l be used f o r
the purchase of g o l d , and by the purchase or redemption of outstanding
o b l i g a t i o n s i n the case of movements i n the reverse d i r e c t i o n . "
The Treasury's purchases o f g o l d pursuant t o t h i s p o l i c y had the
e f f e c t of keeping the g o l d from g e t t i n g i n t o bank reserves and s w e l l i n g
them t o g r e a t e r volume.
These measures, I repeat - the increase i n reserve requirements by
the Federal Reserve System and the s t e r i l i z a t i o n o f gold by the Treasury
-4 were unusual measures taken t o o f f s e t an unusual c o n d i t i o n , namely, the
enormous i n f l o w of c a p i t a l and g o l d from abroad.

They were outside the

category o f normal measures of c r e d i t r e g u l a t i o n .

They were r e l a t e d to

normal measures o f c r e d i t r e g u l a t i o n i n somewhat the same way t h a t r e b a l l a s t i n g a ship i s r e l a t e d t o i t s r e g u l a r o p e r a t i o n .

They were measures

intended t o n e u t r a l i z e the e f f e c t of major f i n a n c i a l disturbances o r i g i n a t i n g abroad, and t o keep the domestic c r e d i t s i t u a t i o n amenable t o the
established technique of r e g u l a t i o n .
As the Board explained, when i t announced the f i n a l increases i n
reserve requirements, the System would be r e s t o r e d by t h i s a c t i o n t o "a
p o s i t i o n where such r e d u c t i o n or expansion o f member bank reserves as
may be deemed i n the p u b l i c i n t e r e s t may be e f f e c t e d through open-market
operations, a more f l e x i b l e i n s t r u m e n t , b e t t e r adapted f o r keeping the
reserve p o s i t i o n of member banks c u r r e n t l y i n close adjustment to c r e d i t
needs.*



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At t h i s p o i n t perhaps I should b r i e f l y restate the process ty which
open-market operations achieve t h e i r purpose.

I n the f i r s t place, as you

know, when a bank enlarges the amount of c r e d i t i t has outstanding, e i t h e r
t y a d d i t i o n a l loans t o i t s customers or by a d d i t i o n a l purchases of i n v e s t ment s e c u r i t i e s , i t s reserves tend t o be reduced.

Consequently i t cannot

enlarge the amount o f c r e d i t i t - h a s outstanding unless i t has reserves i n
excess of what i t i s required to have.

On t h e i r own i n i t i a t i v e banks may

procure a d d i t i o n a l reserve funds e i t h e r by borrowing or by s e l l i n g s e c u r i ties.

Or the Federal Reserve System on i t s i n i t i a t i v e may supply banks i n

general w i t h additional reserve funds by open-market purchases of i n v e s t ment s e c u r i t i e s ; f o r as the Federal Reserve Banks pay f o r the s e c u r i t i e s
they buy, e i t h e r by check or by c r e d i t , the reserves of member banks are
increased.

Contrariwise, i f the Federal Reserve System s e l l s s e c u r i t i e s ,

the process of paying f o r them, whether they are purchased by member banks
or by the customers of member banks, w i l l reduce the reserves of member
banks.

Purchases fcy the System tend, to ease tne money market, sales by

the Systeia tend t o t i g h t e n i t .
I n August and September of t h i s year a f u r t h e r step -in pursuance of
the System's established p o l i c y was taken wb.en the Federal Reserve Bank
rediscount rates were lowered.

I n approving the f i r s t of these changes

the Board stated t h a t i t s "approval was based upon the view t h a t the r e duction of discount r a t e s a t t h i s time would a s s i s t i n c a r r y i n g out the
System's p o l i c y of monetary ease and make Federal Reserve Bank c r e d i t
r e a d i l y available t o member banks f o r the accommodation of commerce,
business and a g r i c u l t u r e , without encouraging member banks t o borrow




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outside of t h e i r d i s t r i c t s o r to l i q u i d a t e t h e i r p o r t f o l i o s i n order t o
be i n a p o s i t i o n to meet the needs of present or prospective borrowers."
The Board went on t o say "The reduction i n discount r a t e s , which
have had l i t t l e or no p r a c t i c a l e f f e c t charing the period when excess r e serves were abnormally large and widely d i s t r i b u t e d throughout the System, brings the rates i n t o closer r e l a t i o n w i t h the i n t e r e s t r a t e s t r u c t u r e generally p r e v a i l i n g , and a f f o r d s t o member banks the b e n e f i t of
r a t e s , on advances made by the Federal Reserve Bank, which are i n l i n e
w i t h those a v a i l a b l e i n the money market.

During the extended poriod

when excess reserves o f the banking system w$re between two and three
b i l l i o n s of d o l l a r s , the occasion d i d not a r i s e except i n rare instances
f o r member banks t o borrow from the Federal Reserve Banks, and the d i s count r a t e s were accordingly inoperative as a p r a c t i c a l matter.
"As a r e s u l t of the continued progress of the recovery movement,
demands of a g r i c u l t u r e , i n d u s t r y and commerce f o r bank accommodation
have s t e a d i l y increased and a t the present time are augmented by seasonal requirements, p a r t i c u l a r l y w i t h r e l a t i o n to crop movements.
" I t i s the Board's view, t h e r e f o r e , t h a t a t t h i s time the Federal
Reserve System can best discharge i t s p u b l i c r e s p o n s i b i l i t y and promote
tho continuance of recovery by making i t possible f o r membor banks t o
obtain accommodation from Federal Reserve Banks a t rates which w i l l encourage them to employ t h e i r funds t o meet the needs of a g r i c u l t u r e ,
industry and commerce."
I^ater i n September, the Federal Open Market Committee announced
t h a t i t had authorized purchase i n the open market from time to time




Z-75Q

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of " s u f f i c i e n t amounts of short-term United States Government obligations to provide funds to meet seasonal withdrawals of currency from
the banks and other seasonal requirements."

I t said f u r t h e r :

"Reduction of the additional holdings i n the open market p o r t f o l i o
i s contemplated when the seasonal influences are reversed or other c i r cumstances make t h e i r retention unnecessary*
"The purpose of t h i s action i s to maintain at member banks an
aggregate volume of excess reserves adequate f o r the continuation of
the System's policy of monetary ease for the furtherance of economic
recovery."
At the same time, the Committee announced that at the request of
the Board of Governors the Secretary of the Treasury had egreed to
release - that i s , to d e s t e r i l i z e - approximately $300,000,000 of gold
from the Treasury's inactive account.

Accordingly, the Treasury was

credited with that amount on the books of the Federal Reserve Banks
which i n the course of regular Treasury disbursements found i t s way
into the reserve accounts of member banks and increased t h e i r available
funds correspondingly.

This was an e f f e c t i v e means of u t i l i z i n g our

monetary measures to maintain the policy of ease.

The Committee's

statement made at the time pointed out t h a t :
"This action i s i n conformity with the usual policy of the System to f a c i l i t a t e the financing of orderly marketing of crops and of
autumn trade.

Together with the recent reductions of discount rates

at the several Federal Reserve Banks, i t w i l l enable the banks to meet
r e a d i l y any increased seasonal demands f o r credit and currency and




Z-75Q

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contribute to the continuation of easy credit conditions
As stated i n the October Federal Reserve B u l l e t i n , t h i s action
toward augmentation of member bank reserves was taken i n order tp
anticipate the usual seasonal needs of member banks f o r currency and
credit.

The action of the System i n bringing about an increase of

available funds put banks i n a s t i l l easier position to meet seasonal
needs as w e l l as increasing demands f o r bank c r e d i t .

I t was an exer-

cise of credit technique under normal and t y p i c a l conditions.
Before passing on to the l a t e s t measure of credit technique
taken by the System, I want to mention a recent change i n the regulations governing discounts by the Federal Reserve Banks.

This change

was effected by the issuance of Regulation A i n revised form e f f e c t i v e October 1.

I t s significance l i e s in the f a c t that i n determin-

ing the e l i g i b i l i t y of paper f o r discount, the form of the obligations to be discounted i s considered of less importance than i t used
to be.

O r i g i n a l l y the p r i v i l e g e of rediscount at the Federal Re-

serve Barks had been r e s t r i c t e d to r e l a t i v e l y short-term paper a r i s ing from c e r t a i n commercial and a g r i c u l t u r a l a c t i v i t i e s .

As you know,

the amount of such paper has tended i n recent years to constitute a
smaller and smaller proportion of the t o t a l amount of paper available
t o banks.

To the extent that banks were dependent on such paper f o r

discounts, the decrease i n i t s amount meant i n e f f e c t a curtailment
of the power of the Federal Reserve Banks to extend c r e d i t .

The

Banking Act of 1933 and the Banking Act of 1935 both enlarged the
c l a s s i f i c a t i o n of paper upon which individual member banks might procure funds from the Federal Reserve Banks f o r the replenishment of




Z-75Q

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t h e i r reserves, and Regulation A as r e c e n t l y issued by the Board carr i e s out the purpose of these changes i n the law.
The new Regulation had been i n preparation f o r a long period and
the time of i t s issuance had no special bearing w i t h respect t o the
current s i t u a t i o n .

I t was rather a longer renge measure.

Moreover,

i t s issuance was not of course a measure of c r e d i t r e g u l a t i o n , l i k e
open market operations or changes i n the discount r a t e , but a l i b e r a l i z a t i o n of the conditions under which the regular means of c r e d i t
r e g u l a t i o n are exercised.
The l a t e s t measure of c r e d i t r e g u l a t i o n taken by the System was
the change i n margin requirements e f f e c t i v e the f i r s t of t h i s month.
The power to f i x margin requirements i s , as you know, a new and
special r e s p o n s i b i l i t y imposed upon the Board by the S e c u r i t i e s Exchange Act which Congress adopted i n 1934.
upon the whole f i e l d of c r e d i t .
other c e n t r a l banking powers.

I t s e f f e c t i s not general

I n t h i s respect, i t d i f f e r s from
I t i s d i r e c t e d e x c l u s i v e l y at the use

of c r e d i t advanced by brokers, dealers and by banks f o r the purpose
of purchasing or c a r r y i n g r e g i s t e r e d s e c u r i t i e s .

Theoretically,

margin requirements can be raised when i t appears advisable to r e s t r a i n speculative use of c r e d i t and they can be lowered when i t appears advisable t o r e l a x the r e s t r a i n t s .
Because of the special nature of t h i s p a r t i c u l a r power of c r e d i t
r e g u l a t i o n , i t can be exercised independently of other measures by
which the c r e d i t s i t u a t i o n i s influenced.

Thus i t i s possible t o pur-

sue a r e s t r a i n i n g p o l i c y w i t h respect to the use of c r e d i t f o r securi t i e s * speculation at the same time that an easy money p o l i c y i s being




Z-75Q

-18-

pursued w i t h respect to the use of c r e d i t f o r commerce, industry and
agriculture.

By i t s most recent a c t i o n the Board eased c r e d i t condi-

t i o n s so f a r as s e c u r i t i e s * t r a d i n g i s concerned.

I t happens that

t h i s p o l i c y of ease i n the special f i e l d of stock market t r a d i n g
coincided w i t h the p o l i c y of ease which the Board has a l l along pursued i n the general f i e l d of c r e d i t , but conditions do not always
c a l l f o r a p a r a l l e l p o l i c y by any means.

The peculiar character of

the power t o f i x margin requirements i s that i t makes i t possible to
influence c r e d i t conditions i n a p a r t i c u l a r f i e l d independently,

if

necessary, of what i s done i n other f i e l d s .
I t i s evident t h a t the exercise of Federal Reserve f u n c t i o n s ,
l i k e those of any other organization, involves sometimes merely the
use of c e r t a i n t o o l s according to accepted procedure, and sometimes
a change i n the t o o l s themselves or i n the conditions under which
they are to be used.

Open market operations and changes i n discount

rates are the customary t o o l s r e g u l a r l y employed i n performance of
Federal Reserve System f u n c t i o n s .

They a r e * p r a c t i c a b l e ,

flexible

and tested t o o l s , which can be used t o ease money conditions at one
time and t o t i g h t e n them at another.

They can be made to accomplish

t h e i r purposes without 3hock - without v i o l e n t and p a i n f u l a d j u s t ments.

They can be applied gradually so that t h e i r e f f e c t i s barely

perceptible.

I f necessary, they can be applied vigorously and

sweepingly.
I t almost goes without saying that the powers which I have been
describing can only be exercised w i t h the highest sense of public
responsibility.




The c e n t r a l banking a u t h o r i t i e s must formulate and

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execute t h e i r p o l i c i e s w i t h a well-informed sense of the e f f e c t upon
the country as a whole.
hand.

C o n f l i c t i n g i n t e r e s t s are present on every

Every a c t i o n taken i s c e r t a i n to be approved by some and d i s -

approved by others.

Every step taken i s sure t o be subjected t o the

s c r u t i n y of acute and well-informed c r i t i c s .

That i s a3 i t should be.

I t i s the normal c o n d i t i o n under which governmental i n s t i t u t i o n s
f u n c t i o n i n a democracy, and most of us believe i t i s on the whole
the best c o n d i t i o n .
N a t u r a l l y enough the b e t t e r you as s p e c i a l i s t s i n the f i e l d of
c r e d i t understand the r e s p o n s i b i l i t i e s of the Federal Reserve System
and the manner i n which we t r y t o meet them - and on the other hand,
the b e t t e r we of the f e d e r a l Reserve System understand your problems
and the conditions under which you t r y to meet them - the more e f f e c t i v e l y w i l l our c r e d i t machinery f u n c t i o n f o r the common welfare of
the country.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102