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For Release on Delivery

Statement of Wm. McC. Martin, J r . ,


Board of Governors of the Federal Reserve System,
before the
Subcommittee on General Credit Control and Debt Management
of the Joint Committee on the Economic Report.

March 11, 1952.

Mr. Chairman and Members of the Committee:
In coming before you today I should like to express what I know
has been in the minds of all of us in the Federal Reserve System in preparing the answers to your questionnaire.

We have welcomed this opportunity

to put down on paper our concepts of what our function is in the Governmental
structure and in the economy.
we have all profited by it.

You gave us a heavy load of homework and

I know that for me it has been more than a

refresher course - - i t has been a liberal education in what I prefer to call
reserve banking, rather than central banking operations.

The task of pre-

paring answers to the comprehensive and searching questions has been
formidable and I will not pretend that I approached it without some reluctance,
Now that the task is done and the results are published I realize how worthwhile has been the time and effort expended not only by those of us in the
System but by the many others to whom you addressed questionnaires.
Irrespective of the conclusions you may reach as a Committee, you have
assembled a body of information that I think will prove to be invaluable for
a long time to all who are interested in the special problems of general
credit control and debt management.
Beyond that, however, we have all genuinely welcomed this

The Federal Reserve System is a servant of the Congress and,

through you, of the people of the United States.
abolish or change it.

You created it, you can

Our task is to carry out your will and it is our duty

-2to lay before you all the facts at cur command for which you ask and to give
you our best judgment on these important matters.
We are glad of the opportunity to make any contribution we can to the
improvement of this reserve banking mechanism,
it is not perfect or infallible.

In the nearly four decades of its existence,

the System has undoubtedly made mistakes.

Like all human institutions,

It has also learned from exper-

One of the fundamental purposes of the Federal Reserve Act is to

protect the value of the dollar.

Yet that value today in terms of purchasing

power is less than half of what it was when the System was founded.

In this

span of years the country has engaged in two world wars and is now in the
throes of what might be called an undeclared war. With the vast economic
changes brought about by military and security needs, monetary policy by
itself cannot maintain economic stability and preserve unchanged the purchasing power of the dollar.

Even aside from these disturbances, it is

probably fair to say that monetary policy has not always been as timely or
as effective as it could have been.
Your first concern, I take it, is to look at the record of the past
principally for the light it can throw on the road ahead. We are trying to
look forward, as you are.

In his first inaugural address as President,

Woodrow Wilson included a statement, part of which is inscribed in the
foyer of the Federal Reserve Building:


" We shall deal with our economic system, " he said, "as
it is and as it may be modified, not as it might be if we had
a clean sheet of paper to write upon; and step by step we
shall make it what it should be, in the spirit of those who
question their own wisdom and seek counsel and knowledge,
not shallow self-satisfaction or the excitement of excursions
wither they cannot tell. "
I am sure it is the purpose of this inquiry, as it is of all of us, to appraise
judicially this reserve banking mechanism and to do whatever appears wise
so that it may render the best possible public service.
The Federal Reserve System and the Federal Reserve Banks sometimes are referred to as bankers' banks, but that describes only a part of
their functions.

The various services which the Reserve Banks perform

for the banking community, such as supplying currency, transferring funds,
and collecting checks, have proved to be an essential element in keeping the
mechanics of modern-day commercial banking in step with the financial
needs of a growing and changing private enterprise economy.

The over-

riding purpose of this Reserve System is to serve the interests of the
general public in business, industry, labor, agriculture, and all walks
of life.

As I understand the intent of this inquiry and of these hearings,

it is to explore how that interest of the public can best be served in the
area of general credit control and debt management on which the activities
of the Federal Reserve System have so important a bearing.

The approach

to this broad subject by the members of this Committee and of the Banking
and Currency Committees and those of us to whom you entrust the duty of

-4carrying out your wishes must be in the spirit to which Wilson referred.
we must always question our own wisdom and seek counsel and knowledge.
Considering that money is one of the most controversial of all
subjects, it is rather remarkable that the replies elicited by your questionnaire reveal so little fundamental divergence.

Honest judgments may differ

as to whether the Reserve System, for example, has done its job well or

There are bound to be differences of opinion concerning the

structure and internal operations of the System but essentially I find
very little difference in all the replies on fundamentals.

There is a

general recognition of the need for a mechanism of this kind to perform
substantially the functions and to render the services that this System
now furnishes.

If the Congress were to do away with the present system

some other way would have to be found to perform its function and to
play its role in the economy.
Basically, the job of the Federal Reserve System is that of monetary
management - - to increase the money supply and make it more easily
available when there is evidence of weakness

in the economy and to

reduce the volume of money and make it less

easily available when

indications show that there is

excessive expansion.

In other words, it

is the business of monetary management to contribute to the broad objectives of steady economic progress which is the ultimate goal of all
national policy.

-5The instruments by which these broad purposes of monetary management are achieved are dealt with in detail in the answers to your questionnaire.
How and when and why these instruments have been used is likewise set
forth at some length.

You will have to judge how wisely or unwisely they

have been used in the revealing light of hindsight.

You will have to judge

whether these instruments can be improved, or others provided. We have
called attention to some of the various problems for which perhaps better
answers can be found but we are not, as you may have noted, recommending
any broad or sweeping changes.

The test that I have no doubt you will

apply is whether the public interest is well served.

I think that, generally

speaking, it has been well served by the System.
The System is a unique concept, an ingenious merging of public
and private interests in a characteristically democratic institution.


doctrine of the separation of powers, as Mr. Justice Brandeis once pointed
out, was adopted "not to promote efficiency but to preclude the exercise
of arbitrary power."

The purpose was "not to avoid friction, but by

means of the inevitable friction incident to the distribution of the Government powers among three departments, to save the people from autocracy."
Doubtless this reserve banking mechanism could be more efficienctly[ef icently]devised or differently organized in the Governmental structure but it would be
at the cost, I think, of something far more important.

In any case, such

an institution will in the last analysis render good or bad public service depending
upon the abilities of the human beings engaged in its operation rather thanuponits


organizational form and structure.

And by the same token, the resolution

of difficult problems and of conflicts of opinion must come out of the minds
of men and not from the forms in which they chance to be organized.
I have sought to indicate in a general way the attitude with
which we have approached this important inquiry into the public's business
as discharged by the Federal Reserve System. We have looked at this
System, not as if we had a clean sheet of paper to write upon, but in the
light of the concepts on which it was based and its performance over the

We have tried to be honest with you and ourselves.

we have nothing to withhold or conceal.


The record is an open book.

We have sought to make clear that monetary policy cannot,
by itself, achieve stable economic progress but that it is an indispensable
means to that end.

It must go hand in hand with fiscal policy and debt

We have tried also to spell out as plainly as we can the meaning of the accord which we reached with the Treasury last March, in
which you are naturally interested.

Its achievement illustrates the

point which I mentioned before that the solution of difficult problems and
the reconciliation of differing viewpoints depends upon the ability of men
to come to a meeting of minds in the best interest of the public rather
than upon the forms of institutional organization.

That accord was not

-7a transitory or empty gesture.

It is a reality under which debt management

and monetary policy are moving together toward the same objectives with
mutual understanding and meeting of minds.
May I add that I concur fully in your Chairman's confident prediction that the fundamental issues with which the Committee is concerned
"will be found vastly too complex to permit of facile generalization."
I think it may prove useful to the members of the Committee for
me to present a summary which I have prepared of our replies to your


Summary of Replies by the Chairman of the Board of Governors
of the Federal R e s e r v e System to the Questionnaire on
General Credit Control and Debt Management

This summary presents first the major points of r e s e r v e banking
philosophy developed in the a n s w e r s , second, same of the more important
positions taken on the i s s u e s raised, and, third, several general points as
to changes in banking structure and as to foreign monetary organization and

Each reply submitted undertakes to deal with the question

asked on its own merits

and to provide a direct, objective, and comprehens-

ive answer.
Reserve Banking Philosophy
The following views are expressed with respect to the role of credit
and monetary policy and the organization within the Government for such
1) Flexible credit and monetary policy, together with flexible debt
management policy and an adequate fiscal program, is essential to economic
2) The established relationship of the Federal R e s e r v e Board of Governors
to other branches of the Government is consistent with and adequate for the
function which the R e s e r v e System p e r f o r m s .
3) The status of the Board as an independent establishment of the Government is sound on the basis of accepted principles of democratic
governmental organization, regardless of any theoretical question as to
the branch of the Government in which it f a l l s .


4) Changes in money market conditions and in interest rates reflect
the interplay of basic forces of supply and demand for short- and long-term

Supply is made up of new individual and corporate savings, accumu-

lated cash balances offered for investment, repayments on past loans, and
credit expansion by the commercial banking system.

Demands from

business enterprises, farmers, consumers, State, local, and foreign
governments, and the Federal Government form the major components of
credit demand,
5) Credit and monetary policy operates primarily through its effects
on the availability and supply of credit; it cuts out of the market or brings
into it fringe credit demands.
6) In this process, credit and monetary policy affects, but does not
determine, interest rates in the market.

Interest rates are prices which

perform vital economic functions and they should be responsive to basic
supply and demand conditions.

In a rich, high savings economy with well

integrated financial markets, significant changes in the availability of
credit, and hence in the volume of spending, need be accompanied by
only small changes in the cost of money.
7) On balance the System, through its support of Government security
prices, accentuated postwar inflationary pressures.
8) In early postwar years, the System favored and defended a support
program as a part of transitional adjustment and sought other means of
restraining inflationary credit expansion.

This policy took account of the

need for time to develop a debt management program that would lodge a

-3greater proportion of the public debt permanently in the hands of nonbank

As time passed and the System's support policy led to i n c r e a s -

ing monetization of the public debt, the Federal R e s e r v e became more and
more concerned about the contribution of its operations to inflationary
9) More flexible credit and monetary p o l i c i e s , applied through the d i s count and open market mechanism within the framework of an orderly
Government securities market, have demonstrated their effectiveness
since they were undertaken in March of 1951.
10) In addition to m e a s u r e s affecting credit generally, flexible credit and
monetary policy includes the u s e , on occasion, of selective credit regulations (relating to stock market, consumer, and real estate credit) as well
as of voluntary m e a s u r e s ,
11) Credit and monetary policy cannot be fully effective without public
understanding and support.

The System strives to keep the public fully

informed on all credit and monetary developments.
Major Positions
Of the specific positions brought out in the answers to different
questions, the following are the more important.
1) The Federal R e s e r v e Board is subject to the Employment Act of
1946. Fairly interpreted, the Congressional directive stated in this Act
implies a goal of monetary stability and needs no modification .


2) Existing Congressional directives to the Federal Reserve System
afford a broad workable guide for policies and operations.
3) The status of the Board as an independent establishment of the
Government, subject to the direction and scrutiny of the Congress, should
be preserved.

Budgetary discretion is essential to maintain the basic

character of the Reserve System.
4) No legislation is required with respect to the organizational relationship between the Treasury and the Federal Reserve or the Executive and the
Federal Reserve.
5) Advantages of the existing

regional status and organization of the

twelve Federal Reserve Banks far outweigh disadvantages.
6) Considering the functions in Government of the Federal Reserve
Board, a board type of organization may be preferable to a single governor

The weight of advantage may lie, however, with a smaller-size

board - - say five men.
7) No substantial gain in efficiency of Federal Reserve decisionmaking would be likely from centralizing the authority for all credit
instruments in one body the Board or the Federal Open Market Committe [Committee].
8) Member bank borrowing at the Federal Reserve should be the
principal means of obtaining additional bank reserves.

Discount rate

changes and open market operations should be the main instruments
through which credit and monetary policies are adapted to changing conditions in the economy.

This means increased use of the discount

-5mechanism, increased importance of discount rates in comparison with
credit policy experience of the past decade, and reliance on open market
operations to reinforce discount policy.
9) The present organization for the execution of open market operations
is designed to protect the public interest.

The Federal Open Market Com-

mittee is constantly studying this organization with a view to making
adaptations which will improve it. (Open Market Committee questions.)
10) Open market operations should be conducted impersonally without
resort to moral suasion.

(Open Market Committee questions.)

11) Only in exceptional circumstances should use be made of authority
to change r e s e r v e requirements, which is a blunt and inflexible instrument.
12) The existing structure of r e s e r v e requirements could be modernized
in some respects for purposes of more efficient and equitable administration. A l s o , standard legal r e s e r v e requirements could be applied to all
banks without raising the question of the dual banking s y s t e m , the p r e s e r v a tion of which the Board favors.

This is not an urgent problem at the

present time, however.
13) Extension of selective credit regulation to areas other than stock
market, consumer, and real estate credit is not feasible.

Further exper-

ience with regulation in both the consumer and the real estate credit areas
is needed to determine their role on a long-run b a s i s .
14) With effectiveness of discount policy and open market operations
reestablished, disadvantages of supplementary r e s e r v e proposals outweight [outweigh]

15) Direct control or rationing of bank c r e d i t by the F e d e r a l R e s e r v e or
any Government agency should not be r e s o r t e d to except in an extreme
General Points
Several general points in the replies a r e of i n t e r e s t .

These include:

1) Generally speaking, the banking system has kept pace with both the
growing and changing credit needs of the different segments of the economy.
Today, b u s i n e s s , a g r i c u l t u r e , and c o n s u m e r s a r e m o r e adequately supplied
with banking s e r v i c e s of various kinds than they were 25 y e a r s ago.
2) Commercial banks a r e meeting s h o r t - and i n t e r m e d i a t e - t e r m c r e d i t
needs of small b u s i n e s s e s reasonably satisfactorily.

Provision of special

long-term credit a s s i s t a n c e in this a r e a , such as would be authorized by
bills introduced in recent y e a r s , namely, Government guarantee of loans
made by private financing institutions or the establishment of special
investment companies, would be untimely in an inflationary period.
3) Foreign experience with c e n t r a l banking and monetary policy does
not yield lessons that a r e directly applicable to the

United S t a t e s .

lowing foreign developments a r e n e v e r t h e l e s s suggestive:

The fol-

(a) It has been

widely recognized, at least in the countries of the free world, that the
central bank should have a l a r g e m e a s u r e of independence within the
Governmental s t r u c t u r e . (b) In a number of foreign c o u n t r i e s , postwar credit
policy was first operated mainly through selective regulations, but subsequently
such regulations have been supplemented or replaced by m e a s u r e s of general
credit policy, such as r e s e r v e r e q u i r e m e n t s and discount r a t e changes.