Regional President Speech

(c 7(:.-J • '--'t ,t e, ~/Q..J ~- / t:?. ~. - Not to be released before :30 p.m. REMARKS OF ALLAN SPROUL, PRESIDENT, FEDERAL RESERVE BANK OF NEW YORK, BEFORE THE FORTY-FIFTH ANNUAL MEETING OF THE LIFE INSURANCE ASSOCIATION OF AMERICA WALDORF-ASTORIA, NEW YORK CITY DECEMBER 12, 1951 CENTRAL BANKING AND THE PRIVATE ECONOMY Not many years ago a speaker at a meeting such as this, who chose to Gi- speak on some aspects of the operations of the Federal Reserve System, would · ~ have had to begin by telling you what the Federal Reserve System is, how it is illoc:.;;-r-organized, and how it performs the functions which have been delegated to it -~=-~l. ~ the Congress. I assume that i s no longer necessary. The circumstances of t.-- ___ the war and post-war years have brought the Federal Reserve System and the life insurance companies in close touch with one another, even if only indirectly. -~;:--J~u have been concerned particularly witb our open market operations in ---~--------Government securities, and with the generality of our credit policies. We have ___ -________ been concerned with your purchases and sales of Government securities, and with y9ur widespread activities in the field of term loans, direct purchases of ~e __________ Jpital issues, and mortgage financing. afte, : . If reply• indtc t routing and It remains true, of course, that our primary and direct concern is 5 nd f to J. H. al~ th the commercial banks of the country, most of which in terms of assets and 33 or r coruing. about half of which in terms of numbers are our member banks. This is so be- cause the principal function of the Federal Reserve System is to exercise an •' influence upon the availability and cost of bank credit, so that inflationary pressures may be restrained and deflationary pressures may be moderated. AnJL ,i t is only the coIIIlilercial banks of deposit which can increase or decrease the supply of bank credit, and of money in the form of bank deposits, based on :/ reserves provided by the Federal Reserve System. This simplified picture has been scrambled somewhat, however, by the fact that we have taken it upon our • r selves to maintain and preserve orderly conditions in the market for Government securities, extending this prescription, at times in the past, to the actual 'pegging of market prices. Right there we became pretty directly involved with the operations of life insurance companies and other institutional investors, who are among the largest holders of and traders in Government securities. The most critical aspect of this relationship in recent years has grown out of the fact that the market was not always able to come close to clear ing the amount of long t erm Government securities which you wished to sell, at prices and yields which would conform to our ideas of an orderly market, or our ideas of the lowest desirable price for the longest term issues. To make our policies effective meant purchasing, through the dealer machinery, the securities ·you could not sell in the market. This put reserve funds into the banking system almost as if we had made the purchases direct from the banks, and provided the basis for a possible multiple increase of bank loans and investments. And because inflationary tendencies have been present more often than not, during the post-war years, these support operations usually ran counter to our desire to restrain unnecessary expansion of bank credit. It is true that we were able, through sales and redemptions of short term or maturing securities, to offset a large part of the addition to bank re serves resulting from our bond support operations, and from gold inflows and a decline in currency circulation as well. Nevertheless, we did provide some net ); 'oJ"/ addition to bank reserves during the post-war period. ,~ I Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • 2 The Federal Reserve System has been severely criticized for ·assuming the secondary obligation of preserving order in the market for Government secu rities. The more severe and doctrinaire critics have challenged us to show any authority from the Congress for the performance of this function. It is my own opinion that the great growth of the Federal debt over the past ten or fifteen years, its dominant position in the whole debt structure of the country, both public .and private, and the importance which the instruments of Federal debt have assumed in the money and capital markets, are ample warrant for our concern and our action. The more moderate critics, including some from your own ranks, have criticized the way in which we have attempted to carry out the task of maintain ing orderly conditions in the Government security market, and more particularly the pegging of prices of the longest term securities which we engaged in from time to time. It is not my purpose here to rake over the embers of old contra= versy, nor to try to justify everything we did, the way we did it, and the timing of our actions. I do want to touch on one or two aspects of this expe rience, however, which perhaps contain a lesson for the life insurance companies as well as for the Federal Reserve System. The lesson for the life insurance companies migh~ be that you should not try to eat your cake and have it. During the war years the life insurance companies were among the largest purchasers of long term Government securities . . This was not wholly a patriotic demonstration of support of the war effort. The steadily increasing flow of funds into the life insurance companies and the war=time lack of other investment outlets, as well as the safety of the Government's obligations, made most of these purchases a pleasant necessity. At the end of the war the life insurance companies, on the basis of previous standards, had an overbalanced portfolio position in Government securities. And with the appearance of a strong private demand for capital funds in the post-war years, your companies proceeded to redress the balance. They did this by committing new funds to other assets, and by large net sales of Government sec·uri ties. Taking all life insurance companies together, this seems to have been an almost continuous process. There were wide variations among you in the amount of Government securities sold and in the method of sale, but many of you gave the impression of feeling that you had the Federal Reserve System over a barrel and could whack it at will. Taking advantage of our market support~ Government bonds were treated as short term investments bearing long term rates of interest. They were treated as investments which could be held profitably and disposed of readily, in large amounts, when more attractive outlets for funds developed. They were even made the basis, in effect, for ·entering into future comnitments for large scale financing. You may say that this is a normal aspect of your investment opera= tions. You may say that this is an evidence of the free enterprise system at work. Or you may say that the blame, if any, was ours ~or supporting the market, and giving assurances of support even though these assurances were only applicable to "existing conditions" and for the "foreseeable future". That is all right as far as it goes, but I would introduce a note of caution. Many of you have become so big, and the operations of all of you are so charged with a public interest, as to inhibit your recourse to the market practices _of Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • 3 investors with smaller aggregates of capital funds and with no public responsi= bilities. A wise degree of business statesmanship is needed to chart a course between the Scylla of increased public regulation and the Charybdis of falling behind your competitors in the race for business and profits. It is true that you could not promise to hold forever the Government securities which you purchased during the war or after the war. No one, I believe, expected you to remain frozen into a disproportionate holding of Government securities. Looking at it from my side of the fence, however, you might have been expected not to use long term Government securities as if they were short term investments. You might have been expected not to try to un= load long term securities in chunks of five, ten, fifteen, twenty millions, or more, on short notice whenever you wished. Such shifts in holdings, as some of you recognized, require time and marketing. Reliance on such heavy liquida= tion of long term securities to meet immediate or near term cash needs, meant that the monetary authorities felt forced to intervene to preserve order in the market, or ·even to peg prices in order to avoid the risks of a possible temporary panic in capital values and a temporary cessation of capital financing. And it also suggests that some of you were probably relying on this action of the monetary authorities to enable you to continue, with safety, drawing long term rates of interest on what were being treated as short term investments. That is trying to eat your cake and have it, too. Some revision of ideas concerning the proportion of your assets which might be held in Government securities under present day conditions, a better marketing approach to the liquidation of Government securities when you felt you had to sell, and a little less haste in reaching for the higher returns of corporate obligations, direct placements, and mortgage financing during periods of strain upon our economic resources, might have bee'n becoming to your industry and good for the economy. And I say this recognizing that one of your aims was to reduce the premium cost to your policyholders. As you have so often and so well emphasized, no one has a greater stake in the pre vention of inflation than the holder of a life insurance policy. If practices which contribute to a reduction of premiums also contribute to inflation, the policyholder gains at the spigot but loses at the bung. As for the Federal Reserve System, during the post=war years, it had a harsh and thorough lesson in the difficulties of combining an effective credit policy with the maintenance of Government security prices, and a chastening ·experience with the problems of "letting go" once you have resorted to pegging a market. I do not mean by this to agree with those who argued then, and argue now with an "I told you so" inflection, that we should have addressed ourselves solely to reducing the money supply after the war, come what might in the Governmer,,.t security market, or ·elsewhere in the economy. ThE= financing of the war almost trebled the money supply of the country, and public holdings of liquid assets .increas-ed tremendously when incomes were high and civilian goods and services were lacking. These were the inevitable inflationary factors in war financing and in a war=time economy. The inflationary pressures thus generated were held in check but not removed by rationing, price and material controls, and other direct measures. When the war ended, and as direct con trols were removed, our job was not and could not be to try to reduce drastically Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • 4 the war-swollen money supply. The most that could be attempted, by way of credit policy, was to prevent increases in bank credit from adding unneces sarily to the money supply, and to avoid creating fears or expectations which would stimulate the increased use - or velocity - of the money which was already in existence. What this country chiefly had to do in those post-war years was to grow up to the increase in the money supply generated by the war, as quickJy and with as little dislocation as possible. I still do not believe that we could have or should have resorted to a drastic policy of deflation. We did try to follow, with disheartening delays in application, a modest policy of re straint on unnecessary credit expansion, while facilitating a rapid strengthen ing of our productive capacity to meet accUJilulated domestic demands, and the needs of reconstruction among our friends and allies abroad. But the only final and constructive answer to the lack of balance between the supply of goods and services and the supply of money, inherited from the war, was an increased sup ply of goods and services growing out of increased production - out of increased efficiency of men and machines. That was the only way we could adjust to the increase in costs which had already taken place in our economy, without the hardships and suffering and the economic losses of widespread depression and unemployment. If the banks had been placed under severe pressure by a drastic credit policy, they would have had to follow a much more restrictive course in financing business and trade. If ~rices of Government securities had had a bad fall in the immediate post-war years, the supply of capital for business might have come forward hesitantly and in less than adequate amounts. It is extremely doubtful, in my opinion, that drastic action could have been taken to reduce the money supply in the years following the end of the war, without seriously hampering the necessary expansion of production. Where we fell short, in the modest program of credit restraint which we did attempt, was not in our arithmetic; it was not in our additions to and subtractions from the reserves available to the banking system, nor in holding down the money supply. Our failure, to the extent that we failed, was a failure to gain sufficient understanding and acceptance for our policies. The influence of a central bank depends a lot on tradition - on the belief that its actions will be wise and timely and effectiveG The Federal Reserve System has had little enough time to build up such a tradition, and you may question whether it has made the best use of the little time it has had. In any case, our policy of modest credit restraint, following the war, was tardy in application, due to differences with the Treasury, and seemed inconsistent and in~ffective to many bankers and businessmen and to the public, because of our involvement with the Government security market. We were not able, except occasionally, to create the atmosphere of credit restraint. We did not do the job we might have done. In 1950 and 1951, we have had to face a very different situation than that which we faced in the years following the warG By 1950 this nation had achieved a tremendous expansion of its productive facilities and of housing and had, in fact, gone a long way toward "growing up" to the war-generated money supply. So far as the Government security market was concerned, the longer term debt was better fitted into investor portfolios and better held than it had been earlier. Interest rates at short term had already moved upward, so that static Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • 5 rates and fixed prices were no longer the only features 6f the market landscape to which traders and investors were accustomed. It had become practicable to try to enforce more severe general credit restraints by a coordinated program of credit policy and debt management. The outbreak of the war in Korea made it imperative to put this pro= gram to the test. Strong inflationary forces had regained the ascendency. An insi stent large scale demand for bank credit reappeared. Consumers were led to believe that a period of scarcity of goods and increases in prices lay ahead and they acted accordingly. Business plans for improvement and expansion of plant and equipment were revised upward, and inventory accumulation proceeded rapidly. The residential bui ding boom, which had been deliberately encouraged by very liberal financing terms, was accentuated. Deficits in the Federal bud get were widely predicted. There was a rapid expansion of the money supply growing out of increased private financing = not out of defense financing - and, equally important, an increase in the willingness of the public to spend. It was certainly high time for the Federal Reserve System to get wholly out of the business of pegging market prices of Government securities, and to step up its program of restraint on the availability of credit. This was ult imately worked out with the Treasury; an accord was reached last March. A final atteapt was made to remove the supply of long term Government securities overhanging the market by means of a conversion offering, and by Federal Reserve and Treasury purchases of securities from those who still wanted cash. The Government security market was then set free except for the maintenance of orderly day-to=day conditions, and the Federal Reserve regained, more com pletely than for a decade past, the initiative with respect to the availability and cost of reserve funds. And this freedom has been buttressed by a Voluntary Credit Restraint program which enlisted the enthusiastic and effective support of all groups of principal lenders, including your own. On this occasion we have been operating in an atmosphere favorable to credit restraint and with wide spread understanding and approval of what we were trying to do. In reaching this happy if belated resolution of sane of our post-war difficulties - getting rid of our split personality - we incurred considerable displeasure in some quarters, however . . A study of the Federal Reserve System by a subcommittee ·of the Congress, which to a certain extent reflects this dis pleasure, is now under way. When we look at the men making up the subcommittee, however, we can feel reassured that its work will be thorough and objective. If so, we can look forward to its hearings and its findings. It will be good for the country and for the Federal Reserve System to have an intelligent airing of some of the ideas about money and credit, and its management, which are always latent in this country and sometimes come to the surface. If we can lay the ghost of a few of these ideas, even temporarily, we shall be bet ter able to do our jobs. Certainly you have a stake in this study which goes far beyond answer ing the questions which have been addressed to the executives of some of the life insurance companies. As representatives of institutions holding a tremendous amount of the savings of the people, as large scale investors, and as citizens, you must necessarily be deeply concerned with some of the issues which are raised by this study. I shou~d like to touch on two or three of them briefly. First, there is the question of the independence of the Federal Reserve System. That word "independence" usually generates more heat than light. Let me make clear, therefore, what I mean by independence, and what I do not mean. I do not mean that an independent Federal Reserve System can have policies and a program Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • / 6 which run counter to the national economic policy. That has never been the case, is not now, and never should be . . An independent Federal Reserve System is one that is protected both fram narrow partisan influence and from selfish private interests. It is a system with special competence in a difficult technical ,,,..,- field, acting under a general directive of the Congress within the bounds of national economic policy as determined by the Congress. This is not a new question although it 1.1as brought sharply to the fore by the regrettable public dispute between the Treasury and the Federal Reserve System in late 1950 and early 1951 . .T he question was debated and decided first at the time the Federal Reserve System was established in 1913. Whenever there have been major amendments to the Federal Reserve Act the Congress has reaffirmed its original judgment on this important point. And when the Douglas subcommittee, which preceded the Patman subcommittee, gave its intelligent attention to this problem two years ago) it came out strongly on the side of the angels. The core of the ~roblem as it has recently presented itself is the necessity for coordinating debt management and credit policy. Debt management and credit policy cannot WiOrk separately, but they can work badly or well together. Putting the case from the standpoint of the Federal Reserve System, their coordina tion requires recognition of the fact that there cannot be a purposeful credit policy unless the Federal Reserve System is able to pursue alternating programs of restraint, 11neutrality", and ease as the business and credit situation may re quire, and to act promptly with each change in the general situation. It requires recognition of the fact tba.t such programs must, as they accomplish an increase or contraction in the volune of cre~it and a tightening or loosening in the avail ability of credit, affect interest rates not only for private lenders and borrowers, but for the Government. It does not require that the management of the public debt be made unnecessarily burdensome to the Treasury, nor that the cost of servicing the debt, over time, necessarily be increased. It does require that Government borrowing hold its place in the market instead of being floated on a stream of newly created money. Successful coordination of debt management and credit policy depends on the sensitivity of the money and capital markets, and the possibility of close and continuous contact with all areas of these markets, to make credit policy effective with relatively small changes in credit availability and interest rates. It depends on the great growth that has occurred in the Federal debt, its wide spread distribution, and its importance in the portfolios of the increasingly important institutional investor, to make this sensitivity real and this contact with the money and capital markets pervasive. In other words, it uses the facts as they exist to further the purposes of credit policy and to combine it with effective debt management; it does not try to alter the facts. This does not require nor suggest a subordination of the Treasury to the Federal Reserve System. What is needed i s to redress the balance in their coordinate spheres. The Treasury is one of the oldest branches of the Federal Government, and the Secretary of the Treasury is one of the highest executive officers of the Government and usually an intimate of the President. It has been natural for succeeding Secretaries to assume, since the relatively recent establishment of the Federal Reserve System, that their responsibility and authority is exclusive in cases where credit policy and debt management overlap. It should be possible, however, to separate the Federal Reserve System from a host of advisers to the Treasury, public and priv~te, so that the Treasury and Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • 7 the System could approach these overlapping problems as equals seeking solutions and, by mutual agreement, finding solutions which best fit the needs of the economy of the country at the time. Recognizing that there still could be differences of opinion, the situation suggests to some that the Federal Reserve System be brought within the executive branch of the Government, or that the Chairman of the Board of Governors be made a member of the Cabinet, so that as a last resort conflicts might be resolved by the President. This solution runs counter to the whole idea of separation of the central banking system from changing executive admin istrations, and compounds the mistake of burdening the President with too many responsibilities in fields where a tradition of technical competence is neces= sary. It would lead1either to bottlenecks in reaching decisions, or to decisions actually made by staff members having no direct responsibility to the Congress or to the public. Its practical effect would probably be to place the Federal Reserve System under the domination of the Treasury, or to place both the System and the Treasury under-the domination of something like the Council of Economic Advisers. A more hopeful avenue to follow is the suggestion of the Douglas Committee that Congress give a general mandate to the Treasury and the Federal Reserve System regarding the objectives of debt management and credit policy in the light of present day conditions. These instructions, as the Douglas Committee said, need not and in fact should not be detailed. They would not challenge the primary responsibility of the Treasury for debt management. They should specify, however, as part of the legislative framework of debt manage ment., that the Treasury have regard for the structure of interest rates appro= priate to the economic situation. The implication of such a directive, to me, , wo~ld be that the Treasury could not, as a matter of right or of superior position, call upon the Federal Reserve System to "make a market fdr its secu r'i ties". I recognize' that there would continue to be differences of opinion about these matters, and I realize that you cannot legislate cooperation between people, but the Congress, as final judge, might be able to provide a mandate which would charge debt management as well as monetary management with some .responsibility for the general objectives of the Employment Act of 1946. There may be other ways to bring about a better coordination of debt management and credit policy, without sacrificing the independence of the Federal Reserve System or the Treasury. We should be ready to consider them. But they should not sacrifice credit policy on the altar of perpetually easy money. Th~ country cannot afford to keep money cheap at all times and in all circumstances, if the counterpart of that action is inflation, rising prices, and a progressive deterioration in the purchasing power of the dollar -- including the purchasing power of the dollars which the Government itself must spend and the purchasing power of dollars invested by the public in Government securities. Perhaps as a subsidiary of this first question, I should mention the interest displayed by the present Congressional study group in the earnings and expenses of the Federal Reserve Banks, and in whether money has been spent to influence public opinion on controversial questions. The facts as to the earn ings and expenses of the Banks are available to everyone, and are included in annual reports to the Congress. The efficiency of operations of the Banks is open to the daily observation of all who have dealings with them. Their opera tions are under the immediate scrutiny of ·boards of directors performing a Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • 8 public service but used to the compulsions of operating a private business for profit, and they are subject to check and audit by the Board of Governors of the Federal Reserve System at Washington. There is no lack of control of the financial affairs of the Federal Reserve Banks in the public interest. Whether expenditures have been made to influence public opinion on controversial questions, depends on what these words mean. If they mean that/ we have tried to create some public understanding of what we are doipg and ~hy we are doing it, even if the questions involved might be termed contro- versial, I think the System would have to plead guilty. Central bankers in other countries have preferred traditionally to let their actiom speak for themselves - some of the actions of a central bank are difficult to explain in terms which can be generally understood and which do not do violence to accuracy. In a country such as ours, however, you are likely to go out of business if you do not explain, from time to time, what you are doing in the public domain. As I see it, we have not only a right, but a duty and an obligation to let the Congress and the public know what our general policies are and why we have adopted them, even if at times we must touch on matters which some consider controversial. To try to correct some fancied abuses in this area by putting the Federal Reserve System in with the sprawling Government departments and bureaus administered by the civil service and the General Accounting Office would, in my opinion, destroy something fine which has been created in the public interest. And it would be one way to undermine the independence and the regional character of the Federal Reserve System. The second main question I want to touch on is the desirability and effectiveness of general credit controls in ~ombatting inflation and de flation~ Are they still useful or are they outmoded? All that should be claimed for general credit controls, in my opinion, is that combined with other measures working in the same direction, such as fiscal policy, debt management and, in extraordinary circumstances, direct controls, they can contribute to anti-inflationary or anti=deflationary forces. This, I think, they are peculiarly fitted to do in a country with our political_; social,and economic leanings and beliefs. There are those who deny this. They admit that a severe policy of credit restraint can be effective, but they say that the resultant declines in production, employment and incomes are no longer socially acceptable. A severe policy of credit restraint is also impossible, th~y say, in the face of a Federal debt of $250 billion and the needs and requirements of managing such a debt.. A mild credit policy, on the other hand, is said to be ineffective at best and may be harmful at worst~ at least in its anti-inflationary phase. Then, it is claimed, it may involve increasing the c·ost of servicing the public debt, disruption of the Government security market, and interference with an expanding economy, in order to get at a handful of private transactions. I am more hopeful than these critics as to the effectiveness of a modest credit policy and more concerned with the preservation of a control which does not do violence to our private economy. It seems to me that the same circumstances which are responsible for the pToblems of coordinating debt management and credit policy, contribute to the effectiveness of mild general credit policies, and that we can have an expanding economy without throwing too much of the gasoline of easy credit on the fires of active Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • 9 business. Becaus-e of the size of the public debt, and its relative impor tance in the whole structure o"f debt, public and private, the Federal Reserve System is now able to carry on its open market operations in a broa:.d homoge nous market, nationally integrated. The effects of its operations are more quickly felt in all parts of the country and in all areas of the private secto.r of the market than used to be the case. The sensi tiy i ty of the mar ket is greater than it used to be; and the leverage of credit policy has multiplied. It must be frankly admitted that there still are difficult problems to be worked out in providing the proper sphere of effectiveness of general credit po-licy under present conditions, and in perfecting the mechanics of making the policy work. But I would beware of tho?e who are trying to dis credit general credit controls, and who would place main reliance on selective credit controls., or on more direct means of rationing bank credit, in adapting credit policy to our .economic needs. We all recognize that one of the central problems in our country, and in all the western democratic countries, is how far Government guidance and control of economic affairs can go without destroying the effective functioning of· a private economy. In this country, with our traditions of individual enterprise, we have preferred to keep such control to a practical minimum, and to have it exercised in largely impersonal ways - by means of controls which affect the general environment, not the individual. One cornerstone of such a philosophy is an independent, competent, central banking system empowered to make general credit policy work to the limit of its usefulness and ef'-fecti v.eness. This is one of the best def~nses against Government intrusion in our individual and private affairs. As a subsidiary of this second question concerning general credit controls, I might pay my respects to the suggestion that credit policy should now be charged with perpetual par support of Government securities .. Some bankers and insurance people have succumbed to this idea_,. I am told, perhaps lured in that direction by earlier actions of the Federal Reserve System and statements of its representatives. I am very sorry if this is so. The idea baffles me., It is an excursion into the land of "hatchy malatchy", which I hear about once in awhile on the radio when I don't turn it off quickly enough in the morning after c-atc·hing the news. Approach it as you will, perpetual par support doesn't make sense .• 'Take it from the point of view of credit policy... Unless a work able way can be found to insulate the Government security market from all other markets, a project which I consider to be of dubious desirability and unlikely practicality, perpetual par support of Government securities by the Federal Reserve System would make any pretense of credit policy ridicu- lous. The essence of general credit control is the con:trol of reserve funds available to the banks, and that inevitably means fluctuating interest rates and fluctuating prices of securities .. The Federal Reserve System CO\lld not have a general credit policy, if at all times and und.er all circumstances it had to support Government securities at par. Or take it from the point of view of debt management. If Government securities had to be supported at par, present forms of debt I:Q.anagement would become obsolete. If all Government securities of all maturities can be Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • 10 liquidated at par at any time they become, in effect, demand obligations, and need only bear varying rates of interest if the Government wants to reward various kinds of holders in different ways .. I doubt if the life in surance bus ines.s would want to become a claimant for Government support on that basis. Or take it from the point of yiew of the frequently expressed de termination of the Congress to prevent unlimited direct borrowing by the Treasury from the central hanking systemo To fasten on the System the obligation to support Government securities at par, would mean that the Treasury could sell Government securities to the . Federal Reserve Banks., in almost any amount, in peace as well as in war, aft er only a hasty detour through the market.. ·The only check would be the flooding of the market with the reserve funds which we would use to buy the Government securities, and the resulting willingness of the market to purchase further issues of Government securities at almost any price and yield.. 1I'hat is not the kind of check or restraint the Congress has had in mind. Or take it from the viewpoint of the public; whose common sense ha.s always resisted.the view of a shouting minorit y that the Government should :p.rint the money to pay its expenses. Would the public not perceive that this idea of par support of Government securities is just the same old something for nothing dodge, with interest? I am sure it would •. The third and final question which I would call to your attention is the question or centralization of control of credit policy. So far as the Federal Reserve System is concerned this involves the locus of power and the structure of administ ration. The framers of the original Federal Reserve Act conceived a system at once national and regionaL Despite the vicissi tudes of the intervening thirty~seven years, that fundamental idea has retained its vitality.. It has done so, I believe, because it is in accord with our political heliefs a..nd the Federal structure of our Government. '1,1.h.is concept has its defects, of course, but they are principally the defec"ts of democracy itself, a..nd of a system which relies on checks and balanc"es to prevent the emergence of dictators. Plausible arguments can be assembled for abolishing the present organization of the Federal Reserve System. Action by boards or' committees, such as the Board of Governors or the Federal Open Market Committee, is apt to seem cumbersome, time-consuming, and sometimes productive of group decisions which may not reflect the wisdom of the best men in the group A distribution of powers between a board at o Washington a;nd twelve regional banks may seem to be an unnecessary obstacle to the prompt formation of national credit policies. We would all admit, I think, that a single administrator or execu tive, with deputies or assistants, is the be,st way to manage an operating organization. It is another matter, however, to create a single policy maker in the vital field of national credit policy, no matter how competent the man you might get, once in awhile, and no matter what rank you might give him in the Government hierarchy to emphasize the importance of his duties. It.-would violate our national concept of the -way in which Government should exercise its powers in moulding or guiding our economic affairs, at least under any conditions short of total war. And I think it would do violence to the beliefs_, and harm to the interests, of all of you. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ., ·• • 11 Similarly, with the regional organization of the Federal Reserve System, ·and the partial distribution of powers as between the Board of Governors at Washington and the twelve Federal Reserve Banks. In ·the early years of the System this organization and this division of powers did lead to difficulties in formulating and administering a coordinated national credit policy . .A n assertion of power by the Federal Reserve Banks, and the emergence of dominant individual leadership at the Banks, reduced the Board of Governors to less than its statutory and necessary position, as the central coordinating body of the System. When major amendments to the Federal Reserve Act were adopted in 1935, in order to bring about a greater degree of central and co= ordinated control, the Congress was careful, nevertheless, to preserve the regional character of the System. It recognized that what was needed was not the destruction of the regional system, but to bring the Board of Governors and the Presidents of the Federal Reserve Banks together at a common council table having statutory sanction and responsibilities. That was achieved, so far as open market opera= tions are concerned, by the establishment of the Federal Open Market Committee in its present form. With it was achieved a body within the System which is at once regional and national, and which can act promptly on matters of credit policy with a minimum of internal friction. In this committee the Federal Reserve System has evolved a method of conducting policy deliberations and formulating policy actions that is uniquely in tune with our political and economic institutions. Government is directly represented through the presi dential appointees to the Board of Governors . . Regional interests which go to make up the national whole, and the lessons of experience "in the field", are represented through the rotating membership of the Federal Reserve Bank Presidents. National policies are established without complete centralization of authority in one man or a group of men at Washington. This is also a question of men as well as of mechanics. The struc= ture of and the distribution of power in the Federal Reserve System is closely related to the problem of recruiting men who will be equal to the tasks and responsibilities .of the System. We need men at the Federal Reserve Banks who are competent bo.th in administration and in the field of credit policy, who have qualities of leadership which will make them a force in their owh communi ties and, collectively, in the nation. That means that the rewards and satisfactions of service must be such as will attract and hold men of talent. That is partly a question of compensation, but even more important· is the opportunity for public service, with the power as well as the satisfactions which go with such service. If power and influence are wholly ripped away from the Federal Reserve Banks, if the banks become branches of a central authority, the men who run the banks will become branch managers, no matter what they are called. The satisfactions and powers of public service will then be minimized, and the prestige and efficiency of the System within the districts and in the nation will decline. We shall attract job holders when what we want and must have are men = able, competent, imaginative, progressive men. And we must give these men an opportunity to develop their powers in an atmosphere which is stimulating and satisfying, not stifling and frustrating. In what I have had to say about some of the questions which are now under study by-a Congressional committee~ I am not arguing that the Federal Reserve System, as it stands, is perfect in its personnel, its powers, its organization, or its functioning. It is not. I am arguing that it embodies certain basic concepts which have proved themselves over the years. I am Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • 12 arguing that these concepts will contribute to the further development of general credit policies which, aJ.ong with other measures, will be effective in promoting high levels of production and employment in this country and in preserving the integrity of the dollar. I am arguing for effectiv~ general credit policies, as contrasted with dictatorial direct controls of individual transactions which would destroy our economic freedom. I am suggesting that an independent region ally organized central ranking system can be a bulwark against the destruction of the kind of private economy which will enable this country to discharge its enormous economic responsibilities _in a troubled world. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Allan Sproul (1951, December 11). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19511212_allan_sproul

@misc{wtfs_regional_speeche_19511212_allan_sproul,
  author = {Allan Sproul},
  title = {Regional President Speech},
  year = {1951},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19511212_allan_sproul},
  note = {Retrieved via When the Fed Speaks corpus}
}