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THE FEDERAL RESERVE SYSTEM - AN AMERICAN PRECEDENT? by M. S, Szymczak, Member, Board of Governors of the Federal Reserve System before THE FOURTEENTH ANNUAL MEETING of the CATHOLIC ECONOMIC ASSOCIATION A L I B R A R Y ^ttSERVE-S**^ The Small Ballroom, Hotel Roosevelt, New York, New York. Thursday, December 29, 19$$, For Release after 2:00 p.m. J Ml U THE FEDERAL RESERVE SYSTEM - AN AMERICAN PRECEDENT? Let me tell you, first, how pleased I am to be present and to on the program with such distinguished economists. However., let me a lso tell you that pluralism is not within my field of competence3 Permit me^ therefore, to speak on a subject on which I may have soma c °nipetence, namely, on the Federal Reserve System — I have been a member of the Board of Governors for more than twenty-two years* ^G3dleSs to say, within the time allotted to me I can not hope to give a complete picture of the purposes and functions of the Federal Reserve System; but I shall be glad to answer questions on that subject during the discussion. In any event, I shall feel satisfied with my efforts if the information I give helps in your discussion of pluralism. The Federal Reserve System has been related to pluralism by ishop Alter in an important paper published in the Review of Social ti ^ -onomy in September 193'2o Bishop Alter believes that certain aspects the Federal Reserve System might be considered as a possible model the organization of economic society; and I would not dare to pronoun oU( %nent on the question whether or not this belief is correct0 It is my understanding that the vocational groups which are to constitute the backbone of the pluralistic system should have the Allowing characteristics: 10 They should be based on a combination of voluntary a °*ion with power to impose restrainta 2c They should be autonomous in their field of action, ^ t only within the framework of the authority of the State, ^ 3, They should have statutory jurisdiction in their field® ko They should act not only in the interest of their members also in the interests of society as a whole0 « 2 - In this paper., I shall therefore review very briefly some as peots of the Federal Reserve System that might be considered to c °rrespond with these four points© I a Combination of Voluntary Action with Power to Impose ggstraint The policies of the Federal Reserve System are to a large extent based on the principle of providing a framework for proper functioning of the credit mechanism, rather than on the idea of directly controlling the ac; tivitiGs of the member banks. When the Federal Reserve System changes the discount rate, it not compel any member bank to increase or reduce its borrowing or lln iendj gj it only makes borrowing at the Federal Reserve Banks more or 1988 £ attractive, and leaves it to the member banks to adapt their business decisions to the new situation* Similarly, when the Federal Reserve System buys or sells Treasury ills or bankers1 acceptances in the open market, it does not compo.X an ybody to sell or buy such paper. The System loaves it to the decisions Q-p * Prospective buyers and sellers to adjust their position to the situation CrQ ated by the new buying or selling offers* And again, when the System's Pen market operations result in an increase or in a reduction of money in +1 hands of the public, or of the reserves at the disposal of the V anks, the System does not compel anybody to change his business decisions fcllf weaves it to the discretion of the individual bank or business man to Hjust his plans to the change in the available money supply0 It m The System, however, may use more direct methods of intervention. ^ay change the portion of their deposits that member banks are retired to hold as reserves with the Federal Reserve Banks$ and it may - 3 - cll ange the portion of the price of securities listed on an exchange that banks and brokers are permitted to lend for purchasing or carrying such securities. Therefore, while most of the time the credit policy of the federal Reserve System works through voluntary actions of the member banks and the public, the System has also the power of imposing direct r estraint in certain areas whenever it feels such action necessary,, • Autonomy within the Framework of State Authority The Federal Reserve System is an independent agency of the G °verrmient. It is true that the members of its Eoard of Governors are a Ppointed by the President of the United States, with the advice and c °nsent of the Senate, Once appointed, however, they cannot be dismissed Without cause during the period for which they have been appointed and th le y are not subject to any directives or orders. Moreover, the twelve ^ederal Reserve Banks, which serve as the operating arms of the System^ W e a high degree of autonomy even in relation to the Board of Governors $ Board appoints one-third of their directors — including the chairman anc * deputy chairman — while the member banks select the remaining ^o-thirds; and the President and First Vice-President are appointed by th j ae directors of each Federal Reserve Bank, although subject to approval y the Board of Governors® This autononry is also expressed in the rather complicated rules governing the most important fields in which the Federal Reserve System ^fluences the credit mechanism of the United States, r 'e have just Rationed that the Board has power, within statutory limits, to change reserve requirements of the member banks, i0emf the portion of their ^Posits that must be kept as reserves with the Federal Reserve Banks; arici that the Board has power to set margin requirements for credits for ^chasing or carrying securities listed on an exchange, iee., to determine 1? hat part of a transaction in such securities may "be financed by a credit fcr which these securitd.es are to serve as collateral,, However, discount rates are established by the Federal Reserve Banks, although subject to Review and determination" by the Board of Governors* Finally^ open market Orations, which have become the major instrument of monetary policy used the Federal Reserve System, are decided by the Federal Open Market c °Cimittee, which consists of the seven members of the Board of Governors an <i five representatives of the Federal Reserve Banks9 However, the autonomy of the Federal Reserve System is not limited. The Federal Reserve System is subject to the constitutional au thority of the Congress: cu the Congress has created the System and it can time change the Federal Reserve Act and therefore modify, or CCl npletely eliminate, the powers of the System. From time to time the Ambers of the Board of Governors are requested to appear before Congressional ^ftmittees to explain and justify the policies of the System, Moreover, Board of Governors is required to make an annual report to the Congress, iri which all policy actions of the Board and of the Federal Open Market C0Icm • ittee must be recorded. There are thus powerful safeguards to prevent th ri Federal Reserve System from becoming a "State within the State", or fusing the powers which it has received from the Congress, or usurping ^ function not delegated to the System by statute. The System is dependent within the Government, not independent of it0 tin IIIft Statutory Jurisdiction Membership in the Federal Reserve System is voluntary. It is that all banks that engage in their business on the basis of a ec *eral charter must also be members of the Federal Reserve System. However, bank that does not wish to take on the responsibilities of membership give up its Federal charter and apply for a State charter instead. banks that engage in their business on the basis of a State charter are completely free to decide whether or not they wish to become members the System, Host of the large banks, and a considerable number of s mall banksj have become convinced that membership in the System is in "^eir best interest; but they no doubt would not hesitate to leave the Astern if that conviction disappeared,, As long as a bank is a member of the System, it must abide by System's rules. State member banks are subject to periodic examinaby the Federal Reserve Banks, If a member bank engages in unsafe unsound practices, or if it violates the Federal law, the System can ex PoI it from membership; the System also can remove the bank's directors ar 4 officers from their positions. The fact that the Federal Reserve Astern practically never has had to enforce such sanctions, and only rarely has had to threaten their use, is the best proof of the e *tent to which member banks have been willing to observe the System's ^ e s and regulations. It may be noted that the jurisdiction of the System extends in °0rile cases beyond its members. For instance, Federal Reserve regulations c °ncerning margin requirements are binding upon security dealers and banks though they are not members of the System© 17, Combination of the Interest of the Members with the ^Sggest of Society as a Whole The Federal Reserve System serves the interests of the banking by giving its members access to Federal Reserve credit and by ^ i n g available to its members a great number of important services Su °h as providing for check clearing facilities, furnishing currency for ^culation, and collecting and interpreting information on the economic financial situation of the United States and foreign countries. In a broader and more decisive sense, the System serves the banking coraiiunity lri that it helps to make banking practices in this country safe and sound0 Even more important, however, are the services rendered by the Astern to society as a whole. The main function of the Federal Reserve System is to provide the nation with a flow of money and credit that hel Ps to make possible the maintenance of economic stability and the ^ll use of the country1s resources of labor and capital. Moreover* the System serves the nation as a whole by acting as fiscal agent for the x e ' deral Government and its agencies. The Federal Reserve System cannot by ^self create prosperity and bring about economic progress; however, j t, Ca h aim at creating in the money and credit sectors of the economy Editions that are conducive to prosperity and progress. It does so by Ae stricting credit expansion whenever there is a danger of inflationary dev el0pments — even though some member banks might believe that further Cr edit expansion would be in their immediate interest, by increasing th • business volume and thus their profit opportunities. Similarly, System attempts to stimulate credit expansion whenever there is a Qan gor of deflationary developments — even though some member banks ^ght believe that a scarcity of credit would be in their immediate interest, by ^creasing their profit margin* ^ all Federal Reserve actions. The public interest must and does prevail There can be no other guide0 For this reason, those directors of the Federal Reserve Banks ^at are appointed by the Board of Governors, and half of the directors Elected by the member banks, are required by law to be taken from occupa- o n s other than the banking business, so as to represent the public and the e °°homy at large. And also for this reason, policy decisions of the Board - 7 - Governors as well as the operations of the Federal Reserve Bank's mist take into consideration not only the credit needs of potential borrowers, also the effect of Federal Reserve actions on the maintenance of sound credit conditions in the nation as a whole® Conclusion You may see from this brief review that the Federal Reserve System is indeed an institution founded on a combination of voluntary a °tion and restraint, enjoying autonomy vdthin the framework of the ^°vernraent of our country, exercising statutory jurisdiction over some actors of the banking community, and designed to promote the interests the society as a whole. I repeat, I do not know whether these characteristics are Gss entially sufficient to make the Federal Reserve System a precedent a pluralistic economy. This, however, I do Lxow: ilas that the System played an important part (though only a part) in keeping our economic Ostein healthy and well-balancedQ
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