Regional President Speech

READING COPY THE FEDERAL RESERVE: THE ROLE OF RESERVE BANKS REMARKS OF JOHN J. BALLES, PRESIDENT FEDERAL RESERVE BANK OF SAN FRANCISCO JOURNAL OF MONEY, CREDIT AND BANKING LECTURE THE OHIO STATE UNIVERSITY COLUMBUS, OHIO MAY 10, 1983 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis NOT EDITED FOR PUBLICATION OR DISTRIBUTION THE FEDERAL RESERVE: THE ROLE OF RESERVE BANKS INTRODUCTION IT WAS A SIGNAL HONOR TO BE INVITED BY PROFESSOR DEWALD TO GIVE THIS JOURNAL OF MONEY, CREDIT AND BANKING LECTURE. I FELT ESPECIALLY HONORED TO BE THE FIRST PH.D. FROM OHIO STATE TO APPEAR HERE. IN A MEANINGFUL WAY, MY VISIT TO OHIO STATE TODAY REPRESENTS A RETURN TO MY ROOTS AS A PROFESSIONAL ECONOMIST AND CENTRAL BANKER. I WANT TO THANK BILL DEWALD, NOT ONLY FOR THAT FINE INTRODUCTION, BUT ALSO FOR HAVING BEEN A VISITING SCHOLAR AT THE FEDERAL RESERVE BANK OF SAN FRANCISCO IN THE SUMMER AND FALL OF 1981. DURING THAT PERIOD BILL TOOK ON WHAT I CONSIDER ONE OF THE MOST IMPORTANT AND MOST CHALLENGING ISSUES IN CURRENT POLICY DEBATE--THE INTERACTION BETWEEN FEDERAL DEFICITS AND MONETARY POLICY AND ITS IMPACT ON THE ECONOMY. HIS ANALYSIS OF THAT ISSUE, SUBSEQUENTLY PUBLISHED IN THE WINTER 198 2 ISSUE OF OUR QUARTERLY ECONOMIC REVIEW, WAS, IN MY OPINION, ONE OF THE MOST CAREFUL PIECES OF RESEARCH ON THAT SUBJECT THAT HAS APPEARED. WHILE I AM ON THAT SUBJECT, ANOTHER VISITING SCHOLAR FROM THIS GREAT UNIVERSITY WAS ED KANE IN 197 5 (JUNE TO SEPTEMBER 1975). ED WROTE A CRITIQUE DESCRIBING THE PROBLEMS OF THE FEDERAL RESERVE IN MAINTAINING INTEREST RATE CEILINGS ON BANK DEPOSITS, WHICH, IN MY OPINION, HELPED SET THE INTELLECTUAL CLIMATE FOR THE GRADUAL REDUCTION IN INTEREST RATE CEILINGS UNDER LEGISLATION ENACTED IN 1980. WITH REGARD TO MY TOPIC TODAY, IT WAS BILL DEWALD WHO Digitized for FRASER http://fraser.stlouiPsfeEdR.oSrgU/ ADED ME THAT SOME OBSERVATIONS ON THE ROLE OF RESERVE BANKS Federal Reserve Bank of St. Louis WITHIN THE FEDERAL RESERVE WOULD BE AN INTERESTING SUBJECT FOR THIS LECTURE, SINCE RELATIVELY LITTLE HAS BEEN PUBLISHED ON THE SUBJECT. THE CENTRAL BANK OF THE UNITED STATES HAS A UNIQUELY FEDERALIZED STRUCTURE. AT THE TOP THERE IS THE PRESIDENTIALLY- APPOINTED BOARD OF GOVERNORS, WITH SEVEN MEMBERS. IN ADDITION, THERE ARE TWELVE REGIONAL RESERVE BANKS WITH A TOTAL OF 48 OPERATING CENTERS OR BRANCHES. THESE REGIONAL BANKS ARE QUASI- PUBLIC ENTITIES IN THEIR STRUCTURE AND OPERATION. THEY PLAY AN IMPORTANT PART IN FORMULATING AND EXECUTING SYSTEM POLICY, ESPECIALLY MONETARY POLICY. AT THE SAME TIME, THEY HAVE THE RESPONSIBILITY FOR CONDUCTING THE SYSTEM'S OPERATIONAL ACTIVITIES, SUCH AS CHECK CLEARING, AND ACTING AS THE U.S. GOVERNMENT'S FISCAL AGENT. EACH BANK IS AN INCORPORATED INSTITUTION WITH ITS OWN BOARD OF DIRECTORS, CONSISTING OF NINE MEMBERS. THREE OF THE DIRECTORS ARE ELECTED BY MEMBER BANKS TO REPRESENT BANKING. THE OTHER SIX DIRECTORS REPRESENT THE PUBLIC, WITH DUE BUT NOT EXCLUSIVE REGARD TO THE INTERESTS OF AGRICULTURE, COMMERCE, INDUSTRY, SERVICES, LABOR AND CONSUMERS. THREE OF SUCH DIRECTORS ARE ELECTED BY MEMBER BANKS, AND THE OTHER THREE ARE APPOINTED BY THE BOARD OF GOVERNORS IN WASHINGTON, D.C. FINALLY, THE BOARD OF GOVERNORS APPOINTS, FROM AMONG THE DIRECTORS APPOINTED BY IT, THE CHAIRMAN AND DEPUTY CHAIRMAN OF A RESERVE BANK'S BOARD. THE RESERVE BANKS HAVE RELATIVE INDEPENDENCE OF FUNCTION THAT IS NOT DUPLICATED IN ANY OTHER CENTRAL BANKING SYSTEM. THE RESERVE BANKS OPERATE UNDER THE IMMEDIATE SUPERVISION OF THEIR BOARDS OF DIRECTORS, SUBJECT TO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis THE ULTIMATE AUTHORITY OF THE BOARD OF GOVERNORS. I BELIEVE THAT THIS FEDERALIZED, SEMI-PUBLIC, SEMI-PRIVATE STRUCTURE SERVES THE NATION WELL IN ALL OF THE AREAS IN WHICH A CENTRAL BANK HAS A RELEVANT ROLE: MONETARY POLICY, BANK REGULATORY AND SUPERVISORY AUTHORITY AND IN THE OPERATION OF THE NATION'S PAYMENTS MECHANISM. IN MY PRESENTATION TODAY, I WOULD LIKE TO ELABORATE ON THIS STRUCTURE, LOOKING AT THE ROLES OF THE REGIONAL BANKS IN THE FORMULATION AND EXECUTION OF POLICY IN EACH OF THE THREE AREAS. I ALSO WOULD LIKE TO PRESENT MY VIEWS ON THE IMPORTANCE OF MAINTAINING AN INDEPENDENT FEDERAL RESERVE WITHIN THE STRUCTURE OF U.S. GOVERNMENT, AS WELL AS MEANINGFUL RESERVE BANK PARTICIPATION IN POLICYMAKING WITHIN THE FEDERAL RESERVE. I. THE ROLE OF RESERVE BANKS IN MONETARY POLICY THE RESERVE BANKS HAVE IMPORTANT ROLES IN TWO MAJOR ELEMENTS OF MONETARY POLICY--DETERMINING THE ESTABLISHMENT AND ACHIEVEMENT OF THE SYSTEM'S OBJECTIVES AND PERFORMANCE FOR THE RESERVE AND MONETARY AGGREGATES, AND SETTING THE DISCOUNT RATE. AS ALL OF YOU KNOW, THE FIRST FUNCTION IS PERFORMED BY THE SYSTEM'S PRINCIPAL MONETARY POLICYMAKING BODY--THE FEDERAL OPEN MARKET COMMITTEE (FOMC). ALONG WITH THE SEVEN MEMBERS OF THE BOARD OF GOVERNORS, FIVE OF THE TWELVE RESERVE BANK PRESIDENTS SIT AS VOTING MEMBERS ON THE FOMC AT ANY GIVEN TIME. THE PRESIDENT OF THE NEW YORK BANK IS A PERMANENT VOTING MEMBER, AND THE OTHER ELEVEN PRESIDENTS ALTERNATE AS VOTING MEMBERS. (THE PRESIDENTS OF CHICAGO AND CLEVELAND ALTERNATE EVERY OTHER YEAR, AND THE REMAINING PRESIDENTS ALTERNATE EVERY THIRD YEAR). IN THEIR OFF- YEARS, PRESIDENTS PARTICIPATE IN THE POLICY DISCUSSIONS AND GIVE Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis THEIR RECOMMENDATIONS, ALTHOUGH THEY DO NOT HAVE A VOTE. DISCOUNT POLICY (SETTING THE RATE AND ADMINISTERING BORROWING BY DEPOSITORY INSTITUTIONS FROM THE RESERVE BANKS) IS THE SECOND MAJOR ELEMENT OF MONETARY POLICY. THE BOARDS OF DIRECTORS OF THE INDIVIDUAL RESERVE BANKS INITIATE CHANGES IN THE DISCOUNT RATE, SUBJECT TO THE APPROVAL OF THE BOARD OF GOVERNORS IN WASHINGTON. THESE DECISIONS ARE MADE BY RESERVE BANK DIRECTORS AFTER RECEIVING EXTENSIVE BRIEFING BY THE BANKS' RESEARCH STAFFS AND RECOMMENDATIONS BY THE RESERVE BANK PRESIDENTS, AND ARE BASED ON CONSIDERATIONS OF MONETARY POLICY AND THE SYSTEM'S FUNCTION AS THE LENDER OF LAST RESORT. DISCOUNT WINDOW CREDIT IS ADMINISTERED BY THE RESERVE BANKS IN ACCORDANCE WITH ESTABLISHED GUIDELINES AS TO FREQUENCY AND AMOUNT OF BORROWING BY ELIGIBLE INSTITUTIONS. DISCOUNT RATE POLICY IS AN IMPORTANT PART OF MONETARY POLICY. THE RELATIONSHIP OF THE DISCOUNT RATE TO OPEN-MARKET INTEREST RATES AFFECTS THE AMOUNT OF RESERVES DEPOSITORY INSTITUTIONS BORROW AND, IN THAT WAY, THE TOTAL RESERVES AVAILABLE TO SUPPORT THE MONETARY AND CREDIT AGGREGATES. ALTHOUGH BORROWED RESERVES ARE A SMALL PART OF THE LEVEL OF TOTAL RESERVES, OFTEN THE CHANGE IN BORROWINGS CONTRIBUTES SIGNIFICANTLY TO THE CHANGE IN TOTAL RESERVES AND HENCE TO CHANGES IN THE AGGREGATES. CHANGES IN THE DISCOUNT RATE SOMETIMES ALSO HAVE AN IMPORTANT "ANNOUNCEMENT EFFECT" WHEN MARKETS INTERPRET THE CHANGE AS SIGNALLING A SIGNIFICANT POLICY SHIFT AND INCORPORATE THESE EXPECTATIONS INTO MARKET RATES OF INTEREST. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis THE RESERVE BANKS PERFORM TWO UNIQUE FUNCTIONS WITHIN THE CONTEXT OF MONETARY POLICY. FIRST, EACH RESERVE BANK PRESIDENT DRAWS ON AN INDEPENDENT ANALYSIS TO FORM HIS OWN VIEW ON APPROPRIATE MONETARY POLICY. EACH PRESIDENT HAS A RESEARCH STAFF WITH WHICH TO APPRAISE NATIONAL POLICY AND REGIONAL ECONOMIC DEVELOPMENTS FROM A UNIQUE PERSPECTIVE. SECOND, RESERVE BANK DIRECTORS COMPRISE A REGIONAL INFORMATION NETWORK ON THE LATEST DEVELOPMENTS AND OUTLOOK IN KEY INDUSTRIES AND DIFFERENT REGIONS. THIS NETWORK PERFORMS TWO VITAL FUNCTIONS. FIRST, IT PROVIDES THE SYSTEM WITH TIMELY INFORMATION ABOUT THE ECONOMY IN ADVANCE OF PUBLISHED STATISTICS. THUS DIRECTORS OFTEN HELP US TO DETECT TRENDS BEFORE THEY SHOW UP IN THE FORMAL DATA. SECOND, IT KEEPS US APPRISED OF THE IMPACT OF POLICY ON DIFFERENT SECTORS AND REGIONS, INFORMATION THAT IS OFTEN DIFFICULT TO GET FROM AGGREGATE NUMBERS. INDEPENDENT ANALYSIS I SHALL DISCUSS THE RESERVE BANKS' INVOLVEMENT IN MONETARY POLICY IN TERMS OF THESE TWO IMPORTANT ASPECTS: INDEPENDENT ANALYSIS AND INFORMATION NETWORKS. THE FIRST ASPECT IS THAT RESERVE BANK PRESIDENTS DEVELOP INDEPENDENTLY A VIEW OF POLICY ON THE BASIS OF THEIR OWN EXPERIENCES AND KNOWLEDGE, THE INPUT THEY RECEIVE FROM THEIR DIRECTORS AND THE ADVICE OF THEIR RESEARCH STAFFS. ANY ORGANIZATION, WHETHER IT IS THE BOARD OF GOVERNORS OR A RESERVE BANK, TENDS TO DEVELOP BLIND SPOTS--TO EXCLUDE INADVERTENTLY FROM SERIOUS CONSIDERATION CERTAIN TYPES OF SOLUTIONS TO THE PROBLEMS THAT ARISE. THE DECENTRALIZED Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ORGANIZATION OF THE FEDERAL RESERVE SYSTEM IS IDEALLY DESIGNED TO AVOID THIS PROBLEM. EACH PARTICIPANT REPRESENTED ON THE FOMC COMES TO THE MEETING WITH ITS OWN INDEPENDENTLY-ARRIVED-AT VIEW OF THE PROBLEMS AND ISSUES FACING THE COMMITTEE, AND THE INTERACTION OF THESE APPROACHES ENSURES THAT ALL THE POSSIBLE SOLUTIONS ARE CONSIDERED. THERE ARE MANY EXAMPLES OF IMPORTANT CONTRIBUTIONS MADE BY RESERVE BANKS TO THE MONETARY DEBATES AT THE FOMC AND THE POLICIES ACTUALLY ADOPTED. THE EXAMPLES I WILL CITE ARE BY NO MEANS INTENDED TO BE COMPREHENSIVE, BUT ONLY TO ILLUSTRATE HOW VIEWS DEVELOPED AT RESERVE BANKS HAVE CONTRIBUTED TO THE POLICYMAKING PROCESS. A WELL-KNOWN EXAMPLE IS THE IMPORTANT ROLE OF THE FEDERAL RESERVE BANK OF ST. LOUIS IN THE LATE 1960’S AND EARLY 1970'S IN EVENTUALLY CONVINCING THE SYSTEM AS A WHOLE THAT MORE EMPHASIS SHOULD BE PLACED ON THE MONETARY AGGREGATES AS INTERMEDIATE TARGETS OF POLICY. ANOTHER EXAMPLE WAS THE ROLE PLAYED BY THE FEDERAL RESERVE BANK OF MINNEAPOLIS IN THE LATE 1970'S IN HIGHLIGHTING THE IMPORTANCE OF THE PUBLIC'S EXPECTATIONS ABOUT FUTURE ECONOMIC EVENTS ON THE APPROPRIATE CHOICE OF POLICIES BY THE FEDERAL RESERVE. A FINAL EXAMPLE OF INDEPENDENT INPUT TO MONETARY POLICY COMES OUT OF A MONEY MARKET MODEL DEVELOPED BY MY STAFF. THE STRUCTURE AND PERFORMANCE OF THE SAN FRANCISCO MODEL WERE REVIEWED LAST YEAR AT A CONFERENCE SPONSORED BY THE AMERICAN ENTERPRISE INSTITUTE, AND THE PROCEEDINGS OF THAT CONFERENCE WERE PUBLISHED BY THE JMCB. THE MODEL REPRESENTS A DIFFERENT APPROACH TO ANALYZING AND PREDICTING GROWTH IN Ml THAT FOCUSES ON THE WAYS Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis IN WHICH CREDIT-MARKET ACTIVITIES OF BANKS AND THE PUBLIC DOMINATE IN THE SHORT RUN IN DETERMINING THE QUANTITY OF MONEY. FOR EXAMPLE, IT SHOWS HOW CHANGES IN BANK CREDIT CAN INFLUENCE THE GROWTH IN Ml. IN THIS RESPECT, IT DIFFERS FROM CONVENTIONAL MODELS, WHICH FOCUS PRIMARILY ON THE DEMAND FOR MONEY TO PREDICT MONEY GROWTH. THIS WORK SUGGESTS THAT MANY SHORT-RUN MOVEMENTS IN Ml ARE CAUSED BY MONEY-SUPPLY INSTABILITY, AND NOT BY INSTABILITY IN THE DEMAND FOR MONEY. THE POLICY IMPLICATIONS OF THIS MONEY-SUPPLY INTERPRETATION ARE THAT SHORT-RUN DEVIATIONS OF Ml FROM TARGET SHOULD BE ACCOMMODATED LESS OFTEN THAN IS CURRENTLY THE PRACTICE. REGIONAL INFORMATION THE SECOND MAJOR ASPECT OF THE RESERVE BANKS' INVOLVEMENT IN MONETARY POLICY IS THE DIVERSE INFORMATION NETWORK THAT DEVELOPS FROM THE STRUCTURE OF THE SYSTEM. THE RESERVE BANKS PROVIDE A CHANNEL THROUGH WHICH THE PROBLEMS AND CONCERNS OF THE VARIOUS REGIONS OF THE COUNTRY CAN BE REFLECTED IN THE POLICYMAKING PROCESS. THE VOTING PARTICIPATION OF THE PRESIDENTS ON THE FOMC AND THE PARTICIPATION OF THE RESERVE BANK DIRECTORS IN SETTING THE DISCOUNT RATE REFLECTS THE ORIGINAL--AND I BELIEVE STILL VALID--PREMISE OF THE FEDERAL RESERVE ACT, THAT ADEQUATE GEOGRAPHICAL REPRESENTATION IN MONETARY POLICY AT THE KEY DECISION-MAKING LEVELS IS OF CRUCIAL IMPORTANCE. IT OBVIOUSLY MAY APPEAR SELF-SERVING FOR ME AS A PRESIDENT TO DEFEND THE PRESENT SYSTEM WHICH GIVES A VOTE ON THE FOMC TO FIVE PRESIDENTS, AT ANY ONE TIME. THUS, I WOULD LIKE TO QUOTE FROM A LETTER ON THIS SUBJECT FROM PAUL VOLCKER, CHAIRMAN OF THE Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis BOARD OF GOVERNORS, TO THE CHAIRMAN OF THE SUBCOMMITTEE ON DOMESTIC MONETARY POLICY OF THE HOUSE BANKING COMMITTEE, SEPTEMBER 8, 1980. AT THAT TIME, A BILL WAS BEING CONSIDERED TO REMOVE THE RESERVE BANK PRESIDENTS FROM A VOTING ROLE IN THE FOMC. IN EXPRESSING HIS STRONG OPPOSITION TO THE BILL, CHAIRMAN VOLCKER STATED: "FROM THE BEGINNING THE FEDERAL RESERVE SYSTEM HAS BEEN BASED ON A COMBINATION OF CENTRAL AND REGIONAL ELEMENTS. IT WAS CONGRESS' INTENTION THAT TWELVE FEDERAL RESERVE BANKS SHOULD BE ESTABLISHED AND GIVEN A SIGNIFICANT ROLE IN THE OPERATION OF THE SYSTEM IN ORDER TO ASSURE A PROPER CONSIDERATION OF VIEWPOINTS AND NEEDS FROM ALL SECTIONS OF THE COUNTRY. THE PREMISE WAS THAT ALL WISDOM DOES NOT RESIDE IN WASHINGTON AND THAT SOME FURTHER INSULATION FROM SHORT­ TERM AND PARTISAN POLITICAN PRESSURE WOULD COME FROM GIVING AN IMPORTANT ROLE TO THE RESERVE BANKS. "____THE RESERVE BANK PRESIDENTS AND THEIR RESEARCH STAFFS BRING TO THE FOMC KNOWLEDGE AND INFORMED OPINION ABOUT REGIONAL INTERESTS AND NEEDS. THEY ARE CLOSER TO THE NATION'S COMMERCE, INDUSTRY AND AGRICULTURE THAN ANY PURELY WASHINGTON-BASED ORGANIZATION CAN BE____" ALTHOUGH MONETARY POLICY MUST BE FORMULATED IN REFERENCE TO ITS NATIONAL IMPACT, INCLUDING ITS INFLUENCE UPON INCOME, OUTPUT, AND EMPLOYMENT, THIS CONSIDERATION IN NO WAY OBVIATES THE IMPORTANCE OF SIGNIFICANT DEVELOPMENTS, OR PROSPECTIVE DEVELOPMENTS, IN PARTICULAR REGIONS OR ECONOMIC SECTORS. BY DEFINITION, NATIONAL AGGREGATES REFLECT THE COMPOSITE OF DIFFERENTIAL DEVELOPMENTS IN PARTICULAR REGIONS AND SECTORS. EVEN IN AN ERA OF PROGRESSIVE HOMOGEN IZATION, SIGNIFICANT DIFFERENTIALS STILL EXIST IN THE STRUCTURE AND ORIENTATION OF REGIONAL ECONOMIES AND FINANCIAL INSTITUTIONS. IN SUCH Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis SITUATIONS, THERE IS NO SUBSTITUTE FOR HAVING FIRST-HAND KNOWLEDGE AND EXPERIENCE ABOUT REGIONAL NEEDS AND DEVELOPMENTS. DIRECTORS OF RESERVE BANKS PLAY A CRITICAL ROLE IN THIS PROCESS. THEY PROVIDE UP-TO-DATE, FIRST-HAND INFORMATION ON KEY DEVELOPMENTS IN VARIOUS GEOGRAPHIC REGIONS AND VARIOUS SECTORS OF THE ECONOMY. IN THIS WAY, THEY COMPLEMENT THE INTERNAL RESEARCH EFFORTS OF THE RESERVE BANKS AND THE BOARD OF GOVERNORS. DIRECTORS' INPUTS INTO THE INFORMATION-GATHERING PROCESS HELP THE FED ANTICIPATE CHANGING TRENDS IN THE ECONOMY AND PROVIDE CURRENT INSIGHT INTO CONSUMER AND BUSINESS PSYCHOLOGY THAT IS DIFFICULT TO GET FROM THE ANALYSIS OF STATISTICS ALONE. BOTH FORMER CHAIRMAN ARTHUR BURNS, AND P/VUL VOLCKER, OUR CURRENT CHAIRMAN, HAVE NOTED THAT DIRECTORS' OBSERVATIONS ON THE ECONOMY HAVE PARTICULAR VALUE PRECISELY BECAUSE THEY ARE DIRECT AND TIMELY. II. INDEPENDENCE OF THE FEDERAL RESERVE IT IS DIFFICULT TO DISCUSS THE IMPORTANCE OF INDEPENDENCE OF THOUGHT AND ACTION ON THE PART OF THE INDIVIDUAL RESERVE BANKS WITHOUT ADDRESSING THE BROADER ISSUE OF THE INDEPENDENCE OF THE FEDERAL RESERVE SYSTEM WITHIN GOVERNMENT. THE BANKING ACT OF 1935 CONSOLIDATED RESPONSIBILITY FOR MONETARY POLICY, BY REORGANIZING THE FEDERAL OPEN MARKET COMMITTEE TO INCLUDE THE SEVEN MEMBERS OF THE BOARD OF GOVERNORS, AND, /VT ANY ONE TIME, FIVE OF THE RESERVE BANK PRESIDENTS, THEREBY CREATING A MORE EFFICIENT, BUT CENTRALIZED, FOCUS OF POLICYMAKING. THAT ACT ALSO REMOVED THE TREASURY SECRETARY AND THE COMPTROLLER OF CURRENCY FROM EX OFFICIO MEMBERSHIP ON THE BOARD, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 10 - - IN RESPONSE TO GROWING CONGRESSIONAL CONCERN OVER THE EXCESSIVE INFLUENCE WHICH THEY WERE BELIEVED TO HAVE EXERTED AT VARIOUS TIMES ON BEHALF OF THE EXECUTIVE BRANCH. AS SENATOR CARTER GLASS, ONE OF THE AUTHORS OF THE FEDERAL RESERVE ACT AND HIMSELF A FORMER SECRETARY OF THE TREASURY, NOTED IN THE CONGRESSIONAL RECORD-^: "THE TREASURY SECRETARY EXERTED ENORMOUS INFLUENCE ON THE BOARD, OFTENTIMES TREATING IT AS A 'BUREAU OF THE TREASURY INSTEAD OF AS A BOARD INDEPENDENT OF THE GOVERNMENT', AND THAT ON OCCASION, 'THE FEDERAL RESERVE BANKING SYSTEM HAS BEEN MADE A DOORMAT OF THE UNITED STATES TREASURY'." THE DEBATE OVER WHAT CONSTITUTES THE APPROPRIATE DEGREE OF FED INDEPENDENCE WITHIN GOVERNMENT CONTINUES INTO THE PRESENT. RECENTLY THE ADMINISTRATION HAS CONSIDERED SEVERAL OPTIONS THAT WOULD MODIFY THE INDEPENDENCE OF THE BOARD OF GOVERNORS, INCLUDING PLACING THE TREASURY SECRETARY BACK ON THE BOARD, OR MAKING THE BOARD PART OF THE TREASURY. IN ADDITION, NUMEROUS PROPOSALS HAVE BEEN INTRODUCED IN CONGRESS, INCLUDING PROPOSALS THAT WOULD PLACE THE TREASURY SECRETARY BACK ON THE BOARD AND SUBJECT THE SYSTEM TO THE CONGRESSIONAL APPROPRIATIONS PROCESS. IN ASSESSING THE NATURE AND RATIONALE OF THE SYSTEM'S INDEPENDENCE, IT IS IMPORTANT TO NOTE THAT WHILE THE BOARD OF GOVERNORS IS APPOINTED BY THE PRESIDENT WITH THE ADVICE AND CONSENT OF THE SENATE, THE SYSTEM DERIVES ITS POWER FROM, AND ULTIMATELY IS RESPONSIBLE TO, CONGRESS. MOREOVER, WHEN CONGRESS 1 / CONGRESSIONAL RECORD, VOL 76, 1932 (PP 1938, 2264); VOL 79, 1935 (PP 11776-77) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 11 - - ACCORDED THE SYSTEM A VERY SUBSTANTIAL -- BUT BY NO MEANS TOTAL-- DEGREE OF INDEPENDENCE WITHIN, BUT NOT OF THE GOVERNMENT, IN ITS DAY-TO-DAY CONDUCT OF MONETARY POLICY, IT DID SO IN RESPONSE TO A CONSCIOUS DECISION. THIS DECISION REFLECTED A TACIT RECOGNITION, UNDERSCORED BY ABUNDANT HISTORICAL EXPERIENCE, THAT CONTROL OVER THE POWER TO CREATE MONEY SHOULD BE KEPT OUT OF THE HANDS OF THOSE CHARGED WITH THE RESPONSIBILITY OF FASHIONING SPENDING PROGRAMS AND PAYING THE NATION'S BILLS. IT WAS EXPECTED THAT IF SUFFICIENTLY INSULATED FROM THE SOMETIMES FIERCE POLITICAL PRESSURES TO WHICH THE CONGRESS ITSELF IS SUBJECT, THOSE CHARGED WITH MANAGING THE NATION'S MONEY AND CREDIT WOULD FRAME THEIR POLICIES IN RELATION TO WHAT THEY PERCEIVE AS THE NATION'S BEST LONG-TERM INTERESTS. BY THE SAME TOKEN, IN DELEGATING AUTHORITY OVER THE DAY-TO- DAY CONDUCT OF MONETARY POLICY TO THE FED, THE CONGRESS RECOGNIZED THAT A VERY LARGE DELIBERATIVE BODY SUCH AS ITSELF SIMPLY WAS NOT WELL EQUIPPED TO DEAL WITH THE TECHNICAL COMPLEXITIES OF THE NATION'S MONETARY AND CREDIT NEEDS, A PRACTICAL CONSIDERATION WHICH DERIVES ADDED IMPORTANCE IN TODAY'S RAPIDLY CHANGING ECONOMIC AND FINANCIAL ENVIRONMENT. HAVING SAID THIS, I WOULD ALSO NOTE THAT IN THE LAST ANALYSIS NO CENTRAL BANK HAS THE AUTHORITY -- NOR SHOULD IT HAVE THAT AUTHORITY IN A DEMOCRATIC SOCIETY -- TO NULLIFY OVER AN EXTENDED PERIOD THE PROGRAMS AND POLICIES OF THE NATION'S ELECTED REPRESENTATIVES. AND THAT IS TRUE NO MATTER HOW SHORT-SIGHTED OR UNWISE GOVERNMENT POLICIES MAY APPEAR TO CENTRAL BANKERS. THUS, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 12 - - IN MY VIEW, WHAT "INDEPENDENCE" MEANS IN PRACTICE IS THAT THE CENTRAL BANK SHOULD SPEAK OUT FORCEFULLY AND PUBLICLY ON ITS PERCEPTIONS OF SOUND ECONOMIC AND FINANCIAL POLICY, AND THAT IT SHOULD ACT DECISIVELY WITHIN THE LIMITS OF ITS AUTHORITY TO FOLLOW APPROPRIATE POLICIES TO ACHIEVE DESIRED RESULTS. FOREIGN EXPERIENCE THE IMPORTANCE OF INSULATING THOSE RESPONSIBLE FOR CREATING A COUNTRY'S MONEY FROM THOSE RESPONSIBLE FOR PAYING THE GOVERNMENT'S BILLS IS SOMETIMES DIFFICULT TO APPRECIATE LOOKING AT OUR OWN MONETARY HISTORY. HOWEVER, IF WE COMPARE THE PERFORMANCE OF CENTRAL BANKS IN AN INTERNATIONAL CONTEXT, THE RELATIONSHIP IS QUITE CLEAR. THE WILSON REPORT ON FINANCIAL INSTITUTIONS—^ PRESENTED TO THE BRITISH PARLIAMENT IN 1980 ATTEMPTED TO MEASURE THE DEGREE OF CENTRAL BANK INDEPENDENCE WITHIN VARIOUS DEVELOPED WESTERN ECONOMIES. THE REPORT CONCLUDED THAT SWITZERLAND AND WEST GERMANY WERE THE ONLY TWO NATIONS SURVEYED THAT COULD BE CHARACTERIZED AS HAVING "LARGELY INDEPENDENT"-^ CENTRAL BANKS. ASSOCIATED WITH CENTRAL BANK INDEPENDENCE IN SWITZERLAND AND WEST GERMANY ARE VERY IMPRESSIVE RECORDS OF LOW INFLATION -- MUCH BETTER THAN THE OTHER COUNTRIES SURVEYED. PERHAPS MORE STRIKING 2/ REPORT OF THE UNITED KINGDOM COMMITTEE TO REVIEW THE FUNCTIONING OF FINANCIAL INSTITUTIONS, SIR HAROLD WILSON, CHAIRMAN, HMSO, LONDON, 1980. 3/ REPORT, VOL.II, APPENDIX 2.1, P. 37. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 13 - - HOWEVER, ARE THE POOR INFLATION RECORDS OF THOSE COUNTRIES WHOSE CENTRAL BANKS ARE, IN THE WORDS OF THE WILSON REPORT, "SUBJECT TO 11.- 1 GENERAL DIRECTIONS OF GOVERNMENT THE LEGAL, INSTITUTIONAL AND OPERATIONAL FACTORS AFFECTING A CENTRAL BANK'S RELATIONSHIP WITH ITS NATIONAL GOVERNMENT VARY FROM COUNTRY TO COUNTRY AND THE ABOVE CHARACTERIZATION IS ADMITTEDLY A ROUGH ONE. CENTRAL BANK INDEPENDENCE ALONE WILL NOT GUARANTEE GENERAL PRICE STABILITY; NATIONAL RESOLVE TO PROMOTE NONINFLATIONARY ECONOMIC POLICIES IS ALSO NECESSARY. NEVERTHELESS, THE EXAMPLES FROM AMONG INDUSTRIAL COUNTRIES DO SUGGEST THAT THE GREATER THE DEGREE OF CENTRAL BANK INDEPENDENCE WITHIN GOVERNMENT, THE GREATER SUCCESS A COUNTRY WILL HAVE IN MAINTAINING PRICE STABILITY. REPRESENTATION OF THE RESERVE BANKS ON THE FOMC IS, I BELIEVE, AN ESSENTIAL ELEMENT IN THIS DEFENSE OF OUR NATION'S CURRENCY. THE PARTICIPATION OF THE DISTRICT BOARDS OF DIRECTORS IN DETERMINING THE DISCOUNT RATE AND THE VOTING PARTICIPATION OF THE PRESIDENTS OF THE RESERVE BANKS ON THE FEDERAL OPEN MARKET COMMITTEE REFLECTS THE ORIGINAL PREMISE OF THE FEDERAL RESERVE ACT OF 1913 THAT REGIONAL DISPERSION OF POLICY INPUT WOULD PROMOTE A MORE EFFECTIVE AND INDEPENDENT MONETARY POLICY. IN MY VIEW, THEREFORE, THE NATION IS WELL SERVED BY A CENTRAL BANK THAT IS INDEPENDENT WITHIN GOVERNMENT AND BUILT UPON A STRONG REGIONAL BASE. 4/ Report, Vol. II, Appendix 2.1, p. 36. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 14 - - III. BANK REGULATORY AND SUPERVISORY POLICY THE REGULATION AND SUPERVISION OF BANKS AND OTHER DEPOSITORY INSTITUTIONS OFTEN IS THOUGHT OF AS DISTINCT FROM MONETARY POLICY. IN MANY WAYS THIS IS TRUE. BUT AT A FUNDAMENTAL LEVEL THESE TWO AREAS OF POLICY ARE ALSO INTERDEPENDENT. I WOULD LIKE FIRST TO DESCRIBE THE ROLE OF THE RESERVE BANKS IN REGULATION AND SUPERVISION, AND THEN RELATE THESE FUNCTIONS TO MONETARY POLICY. RESERVE BANK INVOLVEMENT LET ME DEFINE FIRST WHAT I MEAN BY REGULATORY AND SUPERVISORY POLICIES. BY REGULATORY POLICY, I REFER TO THE SETTING OF FORMAL RULES. IN CONTRAST, BY SUPERVISORY POLICY, I MEAN THE INTERPRETATION AND ENFORCEMENT OF THESE RULES. THESE DEFINITIONS IMPLY A NECESSARY INTERACTION BETWEEN REGULATION AND SUPERVISION, BUT THEY DO NOT IMPLY THAT THE TWO FUNCTIONS NEED BE CARRIED OUT BY A SINGLE GOVERNMENTAL AGENCY OR BY A PARTICULAR ENTITY WITHIN AN AGENCY. WITHIN THE FEDERAL RESERVE SYSTEM, REGULATORY POLICY IS THE RESPONSIBILITY OF THE SEVEN-MEMBER BOARD OF GOVERNORS. UNLIKE MONETARY POLICY, THE RESERVE BANK PRESIDENTS DO NOT HAVE A DIRECT VOTE ON REGULATORY MATTERS. WE DO HAVE AN OPPORTUNITY, HOWEVER, TO SHARE IN THE MAKING OF REGULATORY POLICY THROUGH OUR ABILITY TO MAKE FORMAL, AND IN SOME INSTANCES INFORMAL, RECOMMENDATIONS. QUESTIONS ON SUCH MATTERS FROM THE BOARD COME DIRECTLY TO ME, AND I DRAW ON MY STAFF TO PROVIDE ME WITH THEIR DETAILED ANALYSES OF PROPOSED REGULATORY CHANGES. THROUGH THIS PROCESS, THE DIVERSE Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 15 - - VIEWPOINTS OF THE RESERVE BANK PRESIDENTS AND THEIR STAFFS ENTER INTO THE FORMULATION OF THE FEDERAL RESERVE'S REGULATORY POLICY. WITHIN THIS BROAD CONTEXT OF REGULATORY POLICY MAKING, MANY SPECIFIC REGULATORY DECISIONS ARE "DELEGATED" TO THE RESERVE BANKS. FOR EXAMPLE, IN THE CASE OF BANK AND BANK HOLDING COMPANY APPLICATIONS FOR MERGERS, ACQUISITIONS, CORPORATE FORMATIONS, AND NEW ACTIVITIES, ROUTINE CASES ARE EXPEDITED BY HANDLING THE ENTIRE PROCESS AT THE RESERVE BANK LEVEL. NON-ROUTINE CASES ARE FIRST ANALYZED AT THE RESERVE BANK LEVEL AND THEN FORWARDED WITH OUR RECOMMENDATIONS TO THE BOARD OF GOVERNORS FOR REVIEW AND FINAL DECISION. IN THIS MANNER, EFFICIENCY AND CLOSE INSTITUTIONAL CONTACTS ARE MAINTAINED ON ROUTINE CASES, WHILE THE NECESSARY ADVANTAGES OF UNIFORM NATIONAL POLICY ARE GUARANTEED AS WELL. ALTHOUGH DETERMINATION OF THE FEDERAL RESERVE'S REGULATORY POLICY IS LARGELY CENTRALIZED, ITS SUPERVISORY FUNCTION IS CARRIED OUT ALMOST WHOLLY BY THE TWELVE RESERVE BANKS. THE SYSTEM HAS SUPERVISORY RESPONSIBILITY FOR BANK HOLDING COMPANIES AND THEIR NON-BANK SUBSIDIARIES, STATE MEMBER BANKS AND EDGE CORPORATIONS, AS WELL AS RESIDUAL EXAMINATION AUTHORITY FOR U.S. BRANCHES AND AGENCIES OF FOREIGN BANKS. THESE RESPONSIBILITIES ARE CARRIED OUT THROUGH THE OFFICES OF THE RESERVE BANKS AND THEIR BRANCHES. FINANCIAL STABILITY HOW DOES ALL OF THIS TIE INTO MONETARY POLICY? THE KEY HERE, I THINK, IS TO REMEMBER THE INTIMATE CONNECTION BETWEEN THE MONETARY AGGREGATES AND THE INSTITUTIONS THAT CREATE THE BULK OF Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 16 - - THESE AGGREGATES. IN THE CASE OF Ml, FOR EXAMPLE, 72 PERCENT OF THIS AGGREGATE REPRESENTS TRANSACTIONS DEPOSITS OF DEPOSITORY INSTITUTIONS. THESE DEPOSITS ARE CREATED IN THE PROCESS OF THESE INSTITUTIONS' CREDIT-GRANTING ACTIVITIES AS THEY MAKE LOANS AND PURCHASE INVESTMENTS. IT IS DIFFICULT THEREFORE TO SEPARATE COMPLETELY THE ROLE OF BANKS AND OTHER DEPOSITORY INSTITUTIONS AS PROVIDERS OF MONETARY LIABILITIES FROM THEIR ROLE IN CREDIT- GRANTING. THIS DUAL ROLE FOR BANKS SUGGESTS THAT MONETARY POLICY SHOULD BE VIEWED IN A BROAD CONTEXT: AS ONE IN WHICH THE NATION'S CENTRAL BANK CONDUCTS MONETARY POLICY IN A MANNER THAT PROMOTES THE STABILITY AND SOUNDNESS OF FINANCIAL INSTITUTIONS AND MARKETS. IN THIS CONTEXT, THE FEDERAL RESERVE’S MONETARY MANAGEMENT FUNCTION REQUIRES INTERACTION WITH BANKING REGULATION AND SUPERVISION AS SOURCES OF INFORMATION AND EXPERTISE. MOREOVER, REGULATION AND SUPERVISION CAN HAVE DIRECT IMPACTS ON THE CENTRAL BANK'S ABILITY TO CONDUCT MONETARY POLICY BECAUSE THEY INFLUENCE THE CHANNELS OF TRANSMISSION FOR MONETARY POLICY, THE MEANING OF THE MONETARY AGGREGATES, AND THE LIQUIDITY AND SOUNDNESS OF FINANCIAL INSTITUTIONS. THIS BROADER CONTEXT OF PROMOTING FINANCIAL STABILITY, IN WHICH MONETARY, REGULATORY, AND SUPERVISORY POLICIES COME TOGETHER, IS PERHAPS BEST EXEMPLIFIED BY THE SYSTEM'S ROLE AS LENDER OF LAST RESORT. THE LINKAGES BETWEEN THE THREE POLICIES ARE PARTICULARLY IMPORTANT DURING PERIODS OF FINANCIAL STRAIN WHEN THE CENTRAL BANK MAY NEED TO INFLUENCE THE DECISIONS OF KEY INSTITUTIONS OR ASSIST INSTITUTIONS THROUGH THE DISCOUNT WINDOW. IN SUCH CASES, THE RESERVE BANKS ARE IN AN IDEAL POSITION TO MOVE Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 17 - - QKICKLY IN THEIR CAPACITY AS LENDERS OF LAST RESORT TO ASSIST INDIVIDUAL INSTITUTIONS AND EXERT A STABILIZING INFLUENCE ON MARKETS. THERE ARE MANY EXAMPLES IN WHICH THE RESERVE BANKS HAVE HELPED TO AVERT, OR AT LEAST ISOLATE, FINANCIAL CRISES. SOME THAT COME TO MIND ARE THE FAILURE OF PENN CENTRAL CORPORATION IN 1970; THE FAILURES OF FRANKLIN NATIONAL BANK, HERSTATT BANK IN GERMANY, AND NUMEROUS DEFAULTS ON REAL ESTATE INVESTMENT TRUSTS IN THE MID-1970S MENTIONED EARLIER; THE FAILURE OF PENN SQUARE BANK LAST SUMMER; AND THE FAILURE OF THREE GOVERNMENT SECURITIES DEALERS LAST YEAR. IN EVERY INSTANCE, RESERVE BANK ASSISTANCE THROUGH THE DISCOUNT WINDOW FOR LIQUIDITY PURPOSES PLAYED A KEY ROLE IN CONTAINING THESE PROBLEMS. IV. FEDERAL RESERVE FINANCIAL SERVICES THERE IS A FOURTH AREA OF RESPONSIBILITY OF THE FEDERAL RESERVE SYSTEM IN WHICH THE RESERVE BANKS PLAY THE KEY ROLE: THE PROVISION OF FINANCIAL SERVICES TO DEPOSITORY INSTITUTIONS. UNTIL RECENTLY, THE RESERVE BANKS PROVIDED THESE SERVICES --E.G., CHECK PROCESSING, CASH AND SECURITIES SERVICES AND FUNDS TRANSFER WITHOUT CHARGING ANY EXPLICIT FEES. AS AN OFFSET, HOWEVER, MEMBER BANKS WERE REQUIRED TO MAINTAIN RESERVES IN THE FORM OF NON-INTEREST-BEARING DEPOSITS WITH THE FEDERAL RESERVE AND VAULT CASH THAT AVERAGED SUBSTANTIALLY MORE PER DOLLAR OF DEPOSITS THAN THOSE HELD BY NON-MEMBER BANKS. AS A RESULT, THERE OCCURRED A SIGNIFICANT DECLINE IN FEDERAL RESERVE MEMBERSHIP AND CONSEQUENTLY, IN DIRECT FEDERAL RESERVE CONTROL OF THE MONEY SUPPLY. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 18 - - THE DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT OF 1980 (POPULARLY KNOWN AS THE MCA) CHANGED ALL OF THIS. THE ACT MANDATED A SET OF STAGED REDUCTIONS IN RESERVE REQUIREMENTS FOR MEMBER BANKS SPREAD OVER FOUR YEARS, WHILE AT THE SAME TIME REQUIRING THAT THE FED CHARGE FOR THE SERVICES IT PROVIDED THESE INSTITUTIONS. THE ACT ALSO EXTENDED RESERVE REQUIREMENTS IN STAGES OVER EIGHT YEARS TO VIRTUALLY ALL DEPOSITORY INSTITUTIONS, BUT REQUIRED THAT THE FED GIVE THESE INSTITUTIONS ACCESS TO THE DISCOUNT WINDOW AND TO ITS PRICED SERVICES. FINALLY, THE CONGRESS INSISTED ON PROVIDING SOME OFFSET TO THE REVENUE LOSS THE TREASURY WOULD SUFFER BECAUSE OF THE LOWERING OF THE AVERAGE RESERVE RATIO. IT REQUIRED THAT OVER THE LONG RUN THE FEDERAL RESERVE COVER ALL DIRECT AND INDIRECT COSTS INCURRED IN PROVIDING ITS PRICED SERVICES, INCLUDING A MARK-UP TO TAKE ACCOUNT OF THE TAXES AND RETURN ON CAPITAL THAT WOULD HAVE TO BE COVERED IF THE SERVICES WERE PROVIDED BY THE PRIVATE SECTOR. THE AIMS OF THESE CHANGES WERE TO ENHANCE MONETARY CONTROL AND IMPROVE THE EFFICIENCY OF THE NATION'S PAYMENTS NETWORK BY SUBSTITUTING EXPLICIT PRICING OF SERVICES FOR THE OLD, INDIRECT METHOD IN WHICH BANKS IN EFFECT PAID FOR CENTRAL BANK SERVICES BY HOLDING RELATIVELY LARGE RESERVE BALANCES. THROUGH EXPLICIT CHARGES, THE PRICE OF BANKING SERVICES THROUGHOUT THE ECONOMY WOULD MORE ACCURATELY REFLECT TRUE RESOURCE COSTS. WHILE AIMING FOR A MORE EFFICIENT, RATIONAL PAYMENTS MECHANISM, THE ACT ALSO RECOGNIZED THE INESCAPABLE RESPONSIBILITY THAT THE FEDERAL Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 19 - - RESERVE HAS FOR THE SOUNDNESS OF THE PAYMENTS MECHANISM AS WELL AS FOR ENSURING THE OVERALL ADEQUACY OF PAYMENTS SERVICES. THE DISTRICT BANKS OF THE FEDERAL RESERVE HAVE PERFORMED SEVERAL IMPORTANT FUNCTIONS IN SATISFYING THIS DUAL AGENDA OF EFFICIENCY ON THE ONE HAND, AND SAFETY AND ADEQUACY ON THE OTHER. TO BEGIN WITH, THE DECENTRALIZED ADMINISTRATION ALLOWED BY THE REGIONAL BANKS HAS PERMITTED REGIONAL COST AND MARKET DIFFERENCES TO BE APPROPRIATELY REFLECTED IN RESERVE BANK SERVICE PRICES. LESS FLEXIBLE PRICING WOULD HAVE RESULTED IN A SITUATION LIKE THAT FACED BY THE U. S. POSTAL SYSTEM, WITH MASSIVE INTERREGIONAL CROSS-SUBSIDIES. THIS WOULD HAVE MADE NO MORE SENSE FOR THE FEDERAL RESERVE THAN FOR ANY OTHER INSTITUTION PROVIDING PAYMENTS SERVICES IN A COMPETITIVE MARKET. THE ULTIMATE PRICES AND MARKET SHARES ARE FAR FROM CERTAIN, AS INSTITUTIONS ADJUST TO THE TRANSITION FROM "FREE" FED SERVICES TO PRICED SERVICES. BUT IT IS CLEAR THAT DEPOSITORY INSTITUTIONS WILL BE ABLE TO MAKE RATIONAL DECISIONS ABOUT PURCHASING SERVICES FROM RESERVE BANKS, OR CORRESPONDENTS, OR SERVICE BUREAUS, OR PRODUCING THE SERVICES THEMSELVES. AND WITHIN THE FEDERAL RESERVE SYSTEM ITSELF, THE AVAILABILITY OF SEPARATE COST DATA FROM TWELVE RESERVE BANKS ALLOWS US TO MONITOR INTERNAL EFFICIENCY AND KEEP COSTS APPROPRIATELY LOW. THERE ARE MANY CHALLENGES TO THE IMPLEMENTATION OF THE LETTER AND SPIRIT OF THE MCA. THE APPROPRIATE LONG-TERM ROLE OF THE FEDERAL RESERVE IN THE AUTOMATED CLEARINGHOUSE (ACH), FOR EXAMPLE, AND THE APPROPRIATE PRICES TO CHARGE FOR ITS SERVICES HAVE BEEN MAJOR SUBJECTS FOR DEBATE. IN ADDITION, THE PRIVATE Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 20 - - SECTOR MUST BE CONVINCED THAT THE FEDERAL RESERVE CAN SIMULTANEOUSLY SERVE ITS REGULATORY AND SUPERVISORY FUNCTIONS WITHOUT COMING INTO CONFLICT WITH ITS ROLE AS A PROVIDER OF FINANCIAL SERVICES. ON THIS LAST POINT, WE HAVE BEEN CAREFUL TO ERECT A "CHINESE WALL," AS IT WERE, BETWEEN THESE TWO SETS OF ACTIVITIES SO AS TO AVOID, FOR EXAMPLE, EVEN THE SLIGHTEST SUGGESTION THAT CUSTOMERS OF OUR FINANCIAL SERVICES WOULD RECEIVE BETTER TREATMENT AT THE DISCOUNT WINDOW, IN OUR EXAMINATIONS, OR IN OUR PROCESSING OF HOLDING COMPANY APPLICATIONS. CONCLUSION IN SUMMARY, THE FEDERAL RESERVE SYSTEM IS MUCH LIKE OUR NATION -- LARGE (IT HAS OVER 23,000 EMPLOYEES), GEOGRAPHICALLY DIVERSE, AND ENCOMPASSING MANY DIFFERENT ELEMENTS AND POINTS OF VIEW. AS SUCH, IT COMBINES THE BENEFITS OF CENTRALIZATION OF SOME FUNCTIONS AND DECENTRALIZATION OF OTHERS. THE FEDERAL RESERVE SERVES THE COUNTRY'S MONETARY AND FINANCIAL NETWORK IN WAYS THAT WOULD BE IMPOSSIBLE OR UNDESIRABLE TO CENTRALIZE COMPLETELY. IN TURN, THIS RESULTS IN IMPORTANT POLICY AND ADMINISTRATIVE ROLES FOR THE RESERVE BANKS. THE BENEFITS OF DIVERSE VIEWPOINTS AND THE NEED TO RECOGNIZE REGIONAL DIFFERENCES ARGUE FOR DECENTRALIZATION, BOTH FOR POLICY FORMULATION AND IMPLEMENTATION. MY INTENTION TODAY HAS BEEN TO SHARE WITH YOU SOME OF THE REASONING BEHIND OUR FEDERAL RESERVE STRUCTURE, AND TO ARGUE THAT THIS STRUCTURE, WHILE IT MAY APPEAR SOMEWHAT COMPLEX OR EVEN BEWILDERING TO THE OUTSIDER, IS WELL-SUITED TO MEET THE MANY RESPONSIBILITIES THAT OUR NATION'S CENTRAL BANK HAS Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis BEEN GIVEN AND TO REFLECT THE U.S. PHILOSOPHY OF FEDERALISM AND CHECKS AND BALANCES. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

John J. Balles (1983, May 9). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19830510_john_j_balles

@misc{wtfs_regional_speeche_19830510_john_j_balles,
  author = {John J. Balles},
  title = {Regional President Speech},
  year = {1983},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19830510_john_j_balles},
  note = {Retrieved via When the Fed Speaks corpus}
}