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Speech delivered before
Associated Retail Credit Men of Washington,.D. C., Inc.
Mayflower Hotelj Washington, D, C.,
February, 13, 1939
' '\
Mr, Althaus tells me he thinks you would be interested in having me
give you a general idea of what the Federal :Reserve System is, as well as
a brief indication of business prospects.
, .
The Federal Reserve System is largely concerned with credit. So is
your organization. But when you and I use the word "credit", we use it
in quite different ways. To you credit means the reliability of your
customers. Can you trust them to pay on the first of the month for the
goods you let them have today? To u's in the Federal Reserve System, the
term credit applies to the funds which banks furnish the community either
by> direct loans or by the purchase of securities, Furthermore, v/e have a
distinction between what we call member bank credit and Federal Reserve
bank credit, Member bank credit consists of the funds that are furnished
to the community by banks that are members of the Federal Reserve Systemthat is., by such banks as you carry your accounts with. Federal Reaerve
Bank credit applies to the funds -which Federal Reserve banks supply eithei
by direct loans to member banks or by the purchase of securities. Anothei
distinction is that you are very largely interested in the cred? t of individuals
The Federal Reserve authorities, on the other hand are primarily
interested in the aggregate volume of bank credit being used and in the
uses to v/hich it is being put. In a broad sense, the credit that you are
interested in merges with the credit we are concerned'in, but from the
point of view of our day to day activities, the two present more differences than resemblances.
Before I tell you more about Federal Reserve functions, let me briefly describe the structure of the Federal Reserve System. The Federal Reserve System comprises both such banks as you and I keep our checking
accounts with and also the twelve Federal Reserve banks. About 6,300
banks throughout the United States are members of the Federal Reserve System. They are privately owned and privately managed corporations. Many
of them were in operation long before the Federal Reserve System was organized.
These banks that are members of the System are in competition not
only with one another but with other banks that do not belong to the System. There are, in fact, more banks outside the Federal Reserve System
than there are belonging to it, but the nonmembers, as we call them though
very numerous are relatively small. Around 80 or 85 per :cent of the banking business of the country is done within the Federal Reserve System.
The country is divided into Federal Reserve districts and each member
banjc deals with the Federal Reserve bank in its district. Banks here in
Washington are in the fifth Federal Reserve district and they deal with
the Federal Reserve Bank of Richmond. Each member bank owns stock in its
Federal, Reserve bank in proportion to its own capital and surplus and maintains its required reserves with its Federal Reserve bank. The tv/elve
Federal Reserve banks perform many services for their member banks and for
the public, particularly in providing currency for circulation and in

facilitating the clearance and collection of checks. The Federal Reserve
banks also act as fiscal agents of the United States Government. They
carry the checking accounts of the United States Government and do the servicing of the public debt. This includes handling subscriptions for issues
of Government securities, paying interest, redeeming matured issues, and
making conversions.
The twelve Federal Reserve banks are regional institutions. Each of
them has a board of directors, representing not only the banking interests
of the district but its agricultural, industrial and commercial interests
as well.
Coordination of the activities of the twelve Federal Reserve banks is
effected through the Board of Governors here in Washington. The Board consists of seven members appointed by the President of the United States with
the consent of the Senate. The Board, besides co-ordinating and supervising
the operation of the Federal Reserve banks, has important regulatory powers
as the administrative head of the whole System.
The members of the Board together with five representatives chosen by
the twelve Federal Reserve banks constitute the Federal Open Market Committee. This committee directs the open market operations of the Federal
Reserve Banks, which I shall e:xplain later.
In order that they may perform their duties properly, the Federal
Reserve authorities require all the accurate information they can procure
as to the state of banking and business not only in the United States but
in the v/orld at large. Such information as relates to banking is secured
from examination reports and from reports of condition which member banks
themselves submit to the Reserve authorities. Much of the essential financial information required is reflected in the operations of the Federal
Reserve banks, for no important monetary trend can fail to manifest itself
in one or more of the general accounts on the books of the Federal Reserve
From sources outside the Federal Reserve System, the Federal Reserve
authorities draw information as to production, prices, international trade
and exchange, domestic trade, pay rolls, and employment. Liost of this information as procured in cooperation with other agencies.
Although the Federal Reserve authorities make every reasonable effort
to procure such information as will guide them in determining monetary
policy, it goes without saying that there are many facts that are inaccessible. Nobody knows how much money is going to be spent by purchasers
this spring; nobody knows what the prices of commodities are going to be
six months from now; nobody knows exactly how many people are out of jobs
at this moment. With respect to all such conditions, approximate and
generalized information is the best that can be procured. Moreover, after
the information is procured, it is not always possible to determine readily
and exactly what course of action it calls for. The parts of our economic
life are so closely interrelated and the factors determining it are so
numerous that the unexpected is a quite frequent happening. Employment
influences production and production influences employment. Demand influences supply and supply influences demand. Political and international
conditions affect business and business affects political and international

conditions. Causes and effects are interwoven with one another so that
the effect produced by one cause becomes itself the cause of other effects.
. •
Bearing in mind these easily recognizable difficulties in the way
of interpreting current information so as to determine the proper policy,
you will be able to understand under what conditions the Federal Reserve
authorities exercise the powers that I now wish.briefly to describe.
The first of these is the power to conduct open market operations,
which I have already referred to.. These are purchases or sales by the
Federal Reserve banks of securities and other obligations. They are
made not for the purposes of investment or profit but to expand"or reduct
the volume of funds in the money market. For example, a purchase of
several million dollars worth of government obligations has the effect
of putting that much money into the market and enlarging the reserves of
banks. At times such operations may be called for in order to increase
the available supply of credit; at other times they may be called for
merely to maintain a stable condition. In a broad sense, the mechanism
of these actions is very simple, when you are long on inventory and
short on funds, you try to get the public to buy, and that turns your
goods into cash. When the banks are long on investments and short on
reserves, the Federal Reserve authorities buy securities and that turns
the banks' investments into cash reserves.
In recent years the effectiveness of open market operations has been
greatly circumscribed by the enormous accumulation of excess reserves
of member banks. These excess reserves in turn have resulted from the
movement of gold into the United States. Prior to the year 193b, the
stock of monetary gold in the United States had never amounted to much
more than four and one-half billion dollars. At the present time, it is
more than lb and one-half billion dollars.' Over 3 billions of this increase is accounted for by revaluation, but a large part - perhaps the
larger part - has come to the United States because of disturbed political and economic conditions elsewhere in the world. It has taken refuge
here. It did not come because it was needed and it so far exceeds the
requirements of the economic life of our people as to create a serious
problem. More than one half of the monetary gold in the world is now in
our possession. VJe have far more than w e need and other countries have
less than they need.
The effectiveness of any action that the Federal Reserve authorities
may take is conditioned ty the presence of.these enormous reserves. Member banks now have reserve balances with the Federal Reserve banks of
9 billion dollars. Of this .about £ and one-half billions represent required reserves and 3 and one-half represent excess reserves. Purchases
of securities by the Federal Reserve banks tend to maintain or increase
this excess. On the other hand, since the Federal Reserve banks own
only about 2 and one-half billion of securities, it is obvious that if
they sold the whole amount it would no where near absorb the excess.
Another important power of the Federal Reserve authorities is that
of discount. When a member bank needs additional reserve funds it may
borrow them from its Federal Reserve bank. There have been times in the
past when member banks borrowed very heavily from the Federal Reserve

bank. There have been times in the past when member banks borrowed very
heavily from the Federal Reserve banks, but under present conditions, as
1 have just described them, member banks in general have such a large
volume of excess reserves that there is little occasion for them to borrow.
At times when there is an active demand for credit, the power of the
Federal Reserve authorities to set the discount rate may be of considerable
importance; a higher or lower rate will, of course, tend to influence the
amount of borrowing. In recent years, the discount rates of the Federal
Reserve banks have been extremely low. At present they range from 1 to
2 per cent. These are the rates at which member banks may borrow from the
Federal Reserve banks; they are not, you understand, rates on borrowing in
The monetary policies of the Federal Reserve authorities are one of
many important factors which help to make any given business situation
what it is. Not one of these factors can be neglected; not one of them
can be depended upon to accomplish all that is desired. In recent years,
the Federal Reserve authorities have pursued what is called an easy money
policy. They have endeavored to maintain such credit conditions as would
be most favorable for active business and increased employment.
The economic prospects, so far as we can see them, are reasonably
encouraging at the present time. A year ago activity and prices had been
declining for several months, but we had not reached the end of the decline. Quite naturally, therefore, many people were v/ondering whether
the decline was to be another long depression like the one which began
in 1929. Nov/, however, we have seen not only a slowing down in the decline during the first half of 1936, but a sharp advance in business generally during the second half of the ^ear.
Total income payments are about the same now as they were at the
end of 1931i and only 6 per cent below the peak reached in the middle
of that year. Pay rolls have risen sharply since midsummer but are still
substantially below the 1937 peak, while payments for work relief are
In industrial concerns, volume of output has been at a fairly high
level for three months now. Since the beginning of the year there has
not been the usual seasonal increase and the Board's adjusted index has
declined somewhat but is still about 25 per cent higher than a year ago.
This, of course, is an encouraging sign. There was in 1937-1938 less
decline in nondurable manufactures such as textiles and shoes than in
durable goods, and their output in the past few months has been nearly
as great as the peak level reached in 1937. Output of durable goods
such as steel and automobiles has shown sharp recovery since midsummer
but is still considerably below the high level reached in 1937. Steel
output last week was 53 per cent of capacity and the average so far in
February is 53 per cent as compared with 31 per cent in the corresponding period of last year. Automobile assemblies are now around 8)1,500
a week and they were about 55>000 during the first part of Februaiy,
In building construction there has been a sharp reversal in movements during the'past year. Residential building was declining in the

latter part of 1937 and with incomes being reduced., many thought there
would be a .further reduction in 1938, but instead with prices of materials reduced and with down payments and current financing charges
materially lowered early in 1938 by amendments to the Federal Housing
Act, there was a more than seasonal' increase in the spring and currently
contracts for private work of this type are double those of a year ago*
Also, contracts on projects of the United States Housing Authority are
now being awarded in increasing volume.
Nonresidential construction shows a marked rise in public works contracts. By the end of 1936, when all projects had to be under way, work
had been started on PWA projects to cost 1 billion 600 million dollars
and to be substantially completed by July, 19i|0. A large part, but of
course not all o f this, represents an increase over a year ago when many
of the projects started under earlier programs were being completed.
There is, however, a continued low level of contracts for factories,
commercial building, and other private nonresidential building.
In domestic retail trade, there was little decline until the end of
1937y except for automobiles and house furnishings; since midsummer ther<
has been a sharp increase and the current level in most lines is about
the same as a year ago. Department stores' sales by dollar volume have
been about the same as a year ago with prices somewhat lower. Mail order
sales and sales at variety stores are about the same as at the end of
1937, but retail automobile sales in the month of January, 1939 were
above the sales of a year ago.
In foreign trade, during the month of December, the exports on a
value basis were lower than a year ago by about seventeen per cent and
imports were lower than a year ago by about eighteen per cent. Export
trade decline is less than anticipated in some quarters and import decline stopped soon after industrial recovery in this country began in
1938. Excess of exports is still unusually large and is around 100 million dollars per month.
Inventories of consumers' goods dropped considerably by the middle
of 1938? after a long period with trade reduced only moderately, while
production was sharply curtailed. Inventories in other lines are also
reduced and improvement in the inventory position generally contributed
much to the rise in orders and activity in the middle of 1938. Currently
stocks are substantially lower than at the end of 1937* but information
is not available to indicate just hew much lower. At department stores
dollar volume of stocks is about 8 per cent smaller than a year ago.
Commodity prices in general are moderately lower than a year ago and
the index is 77 per cent of the 1926 average as against 81 per cent in
January, 1938. There was a decline in commodity prices in the early part
of 1938 and since the end of September there has been some further decrease in the general index. Some industrial materials currently are
about the same as a year ago after a marked rise in the middle of 1938.
Agricultural products are lower than a year ago owing partly to increased
carryovers, ample crops and also owing to increased supplies of livestock
and dairy products.
Including Government payments, farm income is estimated at 7 billion
632 million dollars for the calendar year 1938. This is down by one

billion dollars from 1937, which was the highest since 1929.
On the vhole, therefore, there are signs of improvement. Of course,
I do not wish to darken the picture by going over the things which must
prevent us from being too optimistic. You know well enough just vhat they
are, but I should like to emphasize'the fact, that just as the Federal Reserve authorities cannot lay claim to having brought about the improvement
mentioned through their sole effort, so also they can give no assurance
that their policies only will make this improvement continue, Within the^
province of monetary matters, the Federal Reserve authorities have as their
objective to maintain as favorable conditions as they can and business need
feel no fear that sound and healthy activity will find any lack of the bank
credit necessary to support it.