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For r e l e a s e on delivery

Statement of
•

.J

William McChesney Martin, Jr.
Chairman, Board of Governors of the Federal Reserve System




before the
Subcommittee on Economic Stabilization
of the
Joint Committee on the Economic Report

June 12, 1956

Mr. Chairman:
Your letter of June 4, advising me of the time for this
public hearing, and the subcommittee's statement of June 7 for the
p r e s s , state that you are interested at this time in procedural
matters surrounding the recent i n c r e a s e s of the discount rate at
Federal Reserve Banks, and that you wish to leave for a later date
questions as to the merits and wisdom of the action itself.
Your decision not to go immediately into the m e r i t s or
demerits of this particular action s e e m s to me a wise one.

A s you

know, the Federal Reserve Act specifies a procedure for reporting
annually to the Congress, whose agent we are, on the policy actions
of the Reserve Board and of the Federal Open Market Committee.
A wider understanding of these procedures i s very
desirable.

Accordingly, this statement will set forth an elementary

outline of organization and procedure and will include a statement
relative to the 108 directors of the twelve Federal Reserve Banks,
who, under the Federal Reserve Act, have initial responsibility
for determining discount rates at their respective institutions.
Discussion and full disclosure of monetary policy and
action are, of c o u r s e , e s s e n t i a l .

The effects of a given step in the

development of monetary policy, however, are difficult, if not




impossible, to gauge in the short run.
not a static, p r o c e s s .

Monetary policy i s a fluid,

Each separate action is usually a supple-

mental or complementary step in development of an o v e r - a l l pattern,
of policy.

P o l i c i e s are shaped from day to day by a connected s e r i e s

of separate actions, with constant adaptations to the ever-changing
factors and forces in the vast economic fabric of the country.
Therefore, it would be illogical and misleading to lift
out of context a given step in the p r o c e s s .

Debate close to the time

of action does not afford a broad enough perspective, particularly
when judgments as to timing or as to the economic outlook

differ.

Under circumstances of diverse trends, hesitancy and
delay in taking monetary action might result if those responsible for
action were expected to explain publicly and defend any given step of
a continuing or changing pattern, before the economic indicators
were so unmistakably clear as to support a unanimity of judgment.
The annual reports to Congress

required by law are

sufficiently removed from the time the various actions are taken to
afford a broader perspective as to their wisdom or lack of it.

Thus,

a better, calmer appraisal is probable than is apt to be the c a s e if
judgments are made around the time action is taken.
A wider understanding of these procedural p r o c e s s e s
which you are studying today should lead to a better public understanding of policy actions, what they aim to accomplish, and what



-3-

they can and can not do.

There i s , of c o u r s e , no magic in Federal

Reserve monetary or other governmental m e a s u r e s that will a s s u r e
perpetual and evenly distributed economic health.

Maladjustments,

imbalances, e x c e s s e s in some sectors and shortages in others are
inevitable; but partial readjustments should not be postponed at the
risk of increasing the general ailments.
Monetary policy is a standard, though limited, remedy
for some i l l s .

The discount rate particularly can be greatly o v e r -

rated as a cause or cure.

Open market operations, discount rate

changes, and r e s e r v e requirement changes are the c l o s e l y interrelated parts of Federal Reserve monetary mechanism.

Confusion

often a r i s e s because we are apt to talk about the three parts of this
mechanism as if we were offered a choice among three separate
means of easing or tightening credit.

All three must operate

together--in a continuing pattern, the supply of r e s e r v e s always
being basic.

Open market operations and r e s e r v e requirements

affect that b a s e .

Discount rates do not affect the volume of that b a s e ,

but only the cost of r e s e r v e s .

It i s therefore misleading to think of

the three components as if they were alternatives to be used
independently of each other.

They must be used together.

The use of one component rather than another at a particular moment is explained by the fact that, by its nature, each has a
different impact.



Reserve requirements are the bluntest of the three,

-4-

having the heaviest impact because they directly affect all member
banks in varying degree and release or absorb very large s u m s .
Changes in r e s e r v e requirements are best suited to broad basic
adjustments, and the impact of such changes i s often modified by
subsequent Federal Open Market operations.
Open market operations are best suited to day to day
adjustments, for they can be used to release or impound small or
large sums of r e s e r v e s in accordance with current conditions.

In this

way, what have aptly been called "high powered dollars" are added to
or taken out of the r e s e r v e s of the banking s y s t e m .
It is most important to note here that contrary to a widespread

misunderstanding, the Federal Reserve System does not use

the r e s e r v e s deposited with it by the member banks to buy Government s e c u r i t i e s .

For this purpose the Reserve System c r e a t e s money,

and additional r e s e r v e s are thus put at the disposal of member banks
on which loans and investments can be pyramided at a ratio of about
six to one.

That is why the money created to make such purchases is

spoken of as "high powered dollars "
Discount rate changes, in respect to frequency of u s e , are
l e s s frequent than open market s a l e s and purchases, but more frequent
than r e s e r v e requirement changes.

For example, the rates of d i s -

count were revised downward twice in 1954, during a comparatively
short and mild business downturn, and have been revised upward five



-5-

times over the last 12 or 13 months as the economy rose toward its
production capacity, and demand for credit strained the l i m i t s of
supply.
The initiative as to discount rates r e s t s with the directors
at each of the twelve banks.

They meet regularly, different Reserve

Banks having different days, in some instances, for directors' m e e t ings; but each bank acts every fourteen days, either to r e - e s t a b l i s h or
change its existing discount rate.

The action taken, whether to con-

tinue the same or to change the rates, is immediately reported to the
Board of Governors, and acted upon at a regular or special Board
meeting.
Since System procedure is based on organization, it s e e m s
relevant and appropriate to outline briefly the way in which the Reserve
System i s organized.

It is essentially a regional s y s t e m , made up of

twelve Reserve Banks with 24 branches, and having a total of 260
directors.

The Board of Governors has responsibility for coordinating

policy of the twelve banks, and in some instances supervises operations
as well.
The Federal Reserve Act spells out, in detail, how the
directors of the banks and branches are to be chosen.

At the head

offices, there are nine directors, six elected by member banks.

Three

(Class A, in the law) are chosen from local member banks, so grouped
as to provide representation for the l a r g e r , m e d i u m - s i z e d , and



-6-

smaller banks in each district. And the bulk of the member banks a r e ,
in fact, small businesses, engaged in serving small businesses in their
communities.

Three (Class B) are required to "be actively engaged in

their district in commerce, agriculture, or some other industrial
pursuit. " The first three may be considered as lenders, the second
three may be looked upon as representative of borrowers.

The remain-

ing three (Class C) are chosen by the Board of Governors with a view
to providing a still broader representation, and they cannot be bankers.
Of the Class C directors, the Board of Governors designates one as the
Chairman and another as the Deputy Chairman for each Reserve Bank.
In this blending of public and private participation, the Act
vests the regional banks with as large a degree of autonomy as is
feasible in an organized System.

While each President and F i r s t Vice

President of a Reserve Bank is initially selected by the local directors
for a term of five y e a r s , the selections are subject to approval by the
Board of Governors, a procedure that, in my judgment, gives these
officers a very desirable freedom from domination by the Governors,
the directors, or by others.
Similarly, the functions of the System are distributed.
Thus reserve requirements are the sole responsibility of the Federal
Reserve Board.

Open market operations are the responsibility of the

Federal Open Market Committee, a statutory body consisting of the
seven members of the Reserve Board and five Reserve Bank



-7-

presidents.

And the law specifies that all the presidents shall serve on

the committee at intervals.

Discount rates are a joint responsibility of

the Reserve Board and the Reserve Bank directors.
These provisions have been carefully thought out in the
legislative p r o c e s s and have worked reasonably well in practice.

I do

not mean to say that the System i s p e r f e c t - - i t i s not--but I am confident
that the Congress would not wish to make important changes in it without thorough study and deliberation.
Although the discount rate is fixed periodically by each bank
subject to the Board of Governors 1 approval, in the actual granting of
discount accommodation to individual member banks, the Federal
Reserve Bank directors act on their own initiative and responsibility,
free from intervention or p r e s s u r e s by the Board of Governors or by
other Reserve Banks.

These directors are always in close touch with

conditions in their d i s t r i c t s , and the discount operations, including the
rates, take account of local economic needs and trends.

At the same

time, through the constant stream of intercommunication among
Governors, D i r e c t o r s , Presidents and their staffs, all who have
responsibilities in the System, are in touch with and advised of the
economic picture nationally and the needs of the o v e r - a l l economy.
Through the medium of frequent meetings of the Federal
Open Market C o m m i t t e e - - m e e t i n g s are held every three weeks or
oftener

circumstances require--there is an interchange of




-8-

economic information and operational experience that keeps Board
members and the Reserve Bank presidents and directors informed on
the course of the economy, both regional and national.
As discount policy is closely interwoven with open market
policy, it is among the important subjects discussed at the frequent
meetings of the Federal Open Market Committee, and the presidents
of the Reserve Banks generally e x p r e s s their individual views as to
whether they feel they should recommend to their boards of directors
changes in discount r a t e s .

A consensus may emerge from the round

table discussion, but--and this is important to bear in mind--there is
no effort on the part of any member of the committee to dictate to any
individual Reserve Bank, its president or directors what those rates
should be.
That there should be d i f f e r e n c e s - - a s evidenced at the
moment by different rates in two of the d i s t r i c t s - - r e f l e c t s not only
different judgments, but also the absence of dictation or undue
influence.

This, I believe, is the way in which this function was

expected to be performed, based primarily on the judgments of
directors familiar with local conditions, and with coordination effected
through the Board of Governors.
Finally, let me point out that discount rates are the
interest rates paid by member banks, when they borrow from their
district Federal Reserve Bank.



It should be emphasized that such

-9-

borrowing is intended to meet only temporary needs of member banks
for reserve funds, and not long term needs geared to the normal
growth of the economy, or to the annually recurring seasonal requirements of c o m m e r c e , industry and agriculture in the twelve d i s t r i c t s .
R e s e r v e s n e c e s s a r y for such general and repetitive purposes are p r e determined as closely as possible by the Federal Open Market
Committee and ordinarily supplied by Federal Open Market operations
or occasionally by the Board of Governors through changes in r e s e r v e
requirements.
In arriving at policy d e c i s i o n s , great care is taken to
obtain and evaluate all relevant v i e w s , including, of c o u r s e , the
views of officials of the Government who have responsibilities in the
economic field.
of view.

These consultations frequently develop differences

That is to be expected.

Our final decision, however, under

the law, must be our own and represent, as c l o s e l y as human
relations can, our judgment on the direction of action that will contribute most to the public welfare.




June 6, 1956
DIRECTORS OF FEDERAL RESERVE BANKS
District 1 -• BOSTON
Class A
Lloyd D. Brace

President, The First National Bank of
Boston, Boston, Mass.
President, The Keene National Bank,
Keene, N. H.
President and Trust Officer, Riverside
Trust Company, Hartford, Conn.

Harold I. Chandler
Oliver B. Ellsworth
Class B
Milton P . Higgins
F r e d e r i c k S. B l a c k a l l ,
Harry E. Uinphrey
Class C
James R. Killian, Jr.
Robert C. Sprague
Harvey P. Hood

jr.

President, Norton Company, Worcester,
Mass.
President and Treasurer, The Taft-Peirce
Manufacturing Company, Woonsocket, R. I.
President, Aroostook Potato Growers,
Inc., Presque Isle, Me.
President, Massachusetts Institute of
Technology, Cambridge, Mass.
Chairman and Treasurer, Sprague Electric
Company, North Adams, Mass.
President, H. P. Hood & Sons, Inc.,
Boston, Mass.

District 2 - NEW YORK
Class A
John R. Evans
Ferd 1, Collins
Howard C. Sheperd
Class B
Lansing P. Shield
John E. Baerwirth
Clarence Francis
Class C
Jay E. Crane
Forrest F. Hill
Franz Schneider




President, The First National Bank of
Poughkeepsie, Poughkeepsie, N. Y.
President and Trust Officer, Bound Brook
Trust Company, Bound Brook, N. J.
Chairman of the Board, The First National
City Bank of New York, New York, N. Y.
President, The Grand Union Company,
East Paterson, K. J.
President, National Distillers Products
Corporation, New York, N. Y.
Director, General Foods Corporation,
New York, N. Y.
Vice President, Standard Oil Company
(New Jersey), New York, N. Y.
Vice President, The Ford Foundation,
New York, N. Y.
Consultant to Newmont Mining Corporation,
New York, N. Y.

-2District 3 - PHILADELPHIA
Class A
Wm, Fulton Kurtz
W. Elbridge Brown
Lindley S. Hurff
ClassaB
Warren C. Newton
Bayard L. England
Charles E. Oakes
Class C
Lester V, Chandler
William J, Meinel
Henderson Supplee, Jr,

Chairman of the Executive Committee,
The First Pennsylvania Banking and
Trust Company, Philadelphia, Pa.
President and Trust Officer, Clearfield
Trust Company, Clearfield, Pa.
President and Trust Officer, The First
National Bank of Milton, Milton, Pa.
President, 0. A. Newton and Son Company,
Bridgeville, Del.
President, Atlantic City Electric
Company, Atlantic City, N. J.
President, Pennsylvania Power and
Light Company, Allentown, Pa.
Professor of Economics, Princeton
University, Princeton, N. J.
Chairman of the Board, Heintz Manufacturing Company, Philadelphia, Pa.
President, The Atlantic Refining
Company, Philadelphia, Pa.
District 4 - CLEVELAND

Class A
J. Brenner Root
Edison Hobstetter
King E. Fauver
Class B
Alexander E. Walker
Joseph B. Hall
Charles Z. Hardwick
Class C
John C. Virden
Frank J. Welch
Arthur B. Van Buskirk




President, The Harter Bank & Trust
Company, Canton, Ohio.
President and Chairman of the Board,
The Pomeroy National Bank, Pomeroy,
Ohio.
Director, The Savings Deposit Bank and
Trust Company, Elyria, Ohio.
Chairman of the Board, The National
Supply Company, Pittsburgh, Pa.
President, The Kroger Company, Cincinnati,
Ohio.
Executive Vice President, The Ohio Oil
Company, Findlay, Ohio.
Chairman of the Board, John C. Virden
Company, Cleveland, Ohio.
Dean and Director, College of Agriculture
and Home Economics, University of
Kentucky, Lexington, Ky.
Vice President and Governor, T. Mellon
& Sons, Pittsburgh, Pa.

-3District 5 - RICHMOND
Class A
J. K. Palmer
Daniel W. Bell
Joseph E. Healy
Class B
W. A, L. Sibley
Robert 0. Huffman
L. Vinton Hershey
Class C
Alonzo G. Decker, Jr,
D. W. Colvard
John B. Woodward, Jr,

Executive Vice President and Cashier,
Greenbrier Valley Bank, Lewisburg, W. Va.
President and Chairman of the Board,
American Security and Trust Company,
Washington, D. C.
President, The Citizens National Bank
of Hampton, Hampton, Va.
Vice President and Treasurer, Monarch
Mills, Union, S. C.
President, Drexel Furniture Company,
Drexel, N. C.
President, Hagerstown Shoe Company,
Haterstown, Md.
Executive Vice President, The Black &
Decker Manufacturing Company, Towson, Md,
Dean of Agriculture, North Carolina State
College of Agriculture and Engineering,
Raleigh, H. C.
Chairman of the Board, Newport News
Shipbuilding & Dry Dock Company,
Newport News, Va.
District 6 - ATLANTA

Class A
Roland L. Adams
W. C. Bowman
William C. Carter
Class B
A. B. Freeman
Pollard Turman
Donald Comer
Class C
Harllee Branch, Jr.
Henry G. Chalkley, Jr.
Walter M, Mitchell




President, Bank of York, York, Ala.
Chairman of the Board, The First National
Bank of Montgomery, Montgomery, Ala.
Chairman and President, Gulf National
Bank, Gulfport, Miss.
Chairman of the Board, Louisiana Coca-Cola
Bottling Company, Ltd., New Orleans, La.
President, J. M. Tull Metal & Supply
Company, Inc., Atlanta, Ga.
Chairman of the Board, Avondale Mills,
Birmingham, Ala.
President, Georgia Power Company,
Atlanta, Ga.
President, The Sweet Lake Land & Oil
Company, Lake Charles, La.
Vice President, The Draper Corporation,
Atlanta, Ga.

-4District 7 - CHICAGO
Class A
Vivian 17. Johnson
Walter J. Cummings

Nugent R. Oberwortmann
Class B
William A. Kanley
Walter E. Hawkinson
William J. Grede
Class CJ, Stuart Russell
Bert R. Prall
Carl E. Allen, Jr.

President, First National Bank, Cedar
Falls, Iowa.
Chairman, Continental Illinois National
Bank and Trust Company of Chicago,
Chicago, 111.
President, The North Shore National
Bank of Chicago, Chicago, 111.
Director, Eli Lilly and Company,
Indianapolis, Ind.
Vice President in Charge of Finance,
and Secretary, Allis-Chalmers Manufacturing Company, Milwaukee, Wis.
President, Grede Foundries, Inc.,
Milwaukee
Farm Editor, The Des Moines Register
& Tribune, Des Moines, Iowa.
558 Ridge Road, Winnetka, 111.
President, Campbell, Wyant and Cannon
Foundry Company, Muskegon, Mich.
District

Class A
William A. McDonnell
Phil E. Chappell
J. E. Etherton
Class B
Louis Ruthenburg
Leo J. Wieck

S. J. Beauchamp, Jr.
Class C
M. Moss Alexander
Joseph H. Moore
Caffey Robertson




8- ST. LOUIS

President, First National Bank in
St. Louis, St. Louis, Mo.
President, Planters Bank & Trust
Company, Hopkinsville, Ky.
President, The Carbondale National
Bank, Carbondale, 111.
Chairman of the Board, Servel, Inc.,
Evansville, Ind.
Vjce Fresident and Treasurer, The May
Department Stores Company, St.
Louis, Mo.
President, Terminal Warehouse Company,
Little Rock, Ark.
President, Missouri Portland Cement
Company, St. Louis, Mo.
Farmer, Charleston, Mo.
President, Caffey Robertson Company,
Memphis, Term.

-5District 9 - MINNEAPOLIS
Class A
Harold N. Thomson
Harold C. Refling
Joseph F. Ringland

Class B
John E. Corette
Ray C. Lange
Thomas G. Harrison
Class,C
Leslie N. Perrin
0. B. Jesness

F. Albee Flodin

Vice President, Farmers & Merchants
Bank, Presho, S. D.
Cashier, First National Bank in
Bottineau, Bottineau, N. D.
President and Chairman of the Board,
Northwestern National Bank of
Minneapolis, Minneapolis, Minn.
President and General Manager, Montana
Power Company, Butte, Mont.
President,
Chippewa Company,
Inc., Chippewa Falls, Wis.
President, Super Valu Stores, Inc.,
Hopkins, Minn.
Director, General Mills, Inc.,
Minneapolis, Minn.
Head, Department of Agricultural
Economics, University of Minnesota
Institute of Agriculture, St. Paul,
Minn.
President and General Manager, Lake
Shore, Inc., Iron Mountain, Mich.
District 10 - KANSAS CITY

Class A
W. L. Bunten
Harold Kountze
W. S. Kennedy

Class B
K. S. Adams
Max A. Miller
E. M. Dodds
Class C
Oliver S. Willham
Joe W. Seacrest
Raymond W. Hall




President, Goodland State Bank,
Goodland, Kansas.
Chairman of the Board, The Colorado
National Bank of Denver, Denver, Colo.
President and Chairman of the Board,
The First National Bank of Junction
City, Junction City, Kansas.
Chairman of the Board, Phillips Petroleum
Company, Bartlesville, Okla.
Livestock rancher, Omaha, Neb.
Chairman of the Board, United States
Cold Storage Corporation, Kansas
City, Mo.
President, Oklahoma A. & M. College,
Stillwater, Okla.
President, State Journal Company,
Lincoln, Neb.
Vice President and Director, Hallmark
Cards, Inc., Kansas City, Mo.

-6District 11 - DALLAS
Class A
W. L. Peterson
Sam D. Young
J. Edd McLaughlin
Class B
John R. Alford
D. A. Hulcy
J. B. Thomas

Class C
Hal Bogle
Robert J. Smith

Henry P. Drought

President, The State National Bank
of Denison, Denison, Tex.
President, El Paso National Bank,
El Paso, Tex.
President, Security State Bank & Trust
Company, Ralls, Tex.
Industrialist and farmer, Henderson,
Tex.
Chairman of the Board and President,
e Star Gas Company, Dallas, Tex.
President and General Manager and
Director, Texas Electric Service
Company, Fort Worth, Tex.
Rancher and feeder, Dexter, N. Mex.
Chairman of the Board and President,
Pioneer Aeronautical Services, Inc.,
Dallas, Tex.
Attorney at Law, San Antonio, Tex.
District 12 - SAM FRANCISCO

Class A
M. Vilas Hubbard

Carroll F. Byrd
John A. Schoonover
Class B
Alden G. Roach

Reese H. Taylor
Walter S. Johnson

Class C
A. H. Brawner
Philip I. Welk
Y. Frank Freeman




President and Chairman of the Board,
Citizens Commercial Trust and Savings
Bank of Pasadena, Pasadena, Calif.
President, The First National Bank of
Willows, Willows, Calif.
President, The Idaho First National
Bank, Eoise, Idaho.
President, Columbia-Geneva Steel
Division, United States Steel
Corporation, San Francisco, Calif.
President, Union Oil Company of
California, Los Angeles, Calif.
Chairman of the Board, American Forest
Products Corporation, San Francisco,
Calif.
Chairman of the Board, W. P. Fuller
& Company, San Francisco, Calif.
P r e s e n t , Preston-Shaffer Milling
Company, Walla Walla, Wash.
Vice President, Paramount Pictures
Corporation, Hollywood, Calif.