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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 Z-75Q -2- 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 Z-75Q -3- 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 Z-75Q -4- 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 Z-75Q -5- 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 Z-75Q -6- 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 Z-75Q -7- 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 -8- Z-75Q 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 . -9- Z-75Q 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. Z-75Q -10- 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 -11- Z-75Q 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 -12- Z-75Q 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.* -50- Z-75Q 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 -14- Z-75Q 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 -15- 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 -16- 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 -17- 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 -19- Z-75Q 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.
@FedFRASER