Speech

THE SIGNIFICANCE OF MEMBERSHIP 3N THE FEDERAL RESERVE SYSTEM* Tliis annual meeting of the Stockholders of the citizens of Vermont to go to the United States Boston Federal Reserve Bank is a distinctly New Senate. Your latest president, Laurcnce Whitte- England custom. It is so favorably known through- more, has just been selected to run one of your great out the Federal Reserve System that I was very railroads. Two former governors of the Federal happy to accept the cordial invitation of your Chair- Reserve Board, W. P. G. Harding and Roy Young, man and my good friend, Albert Creighton, to who is now president of one of your leading banks, come here and participate in your discussions. also typify the high character and ability of your During the six months that I have been in my past presidents. It is a tribute to jour Board of present position I have visited and attended meet- Directors that these men were chosA for such posi- ings in seven of the twelve Federal Reserve districts. tions and is the finest indicator of the public's high I expect to visit three districts within the next regard for the Boston Bank. Although the loss of month. During most of my business career it was good men creates temporary difficulties of ^place- my practice to make frequent trips throughout the ment because it seems that in each instance they are country, for no man can follow the progress of his indispensable, yet broadly speaking, there is com- business except on the firing line. When I was pensation in the loss of some of our good men to Foreign Liquidation Commissioner in 1945 and the community because these ex-officers are helpful 1946, I traveled 56,000 miles during a period of six in giving the various segments of our economy a months in order to obtain firsthand information better understanding of the nation's monetary and about what was taking place in various countries credit policies, of which there is a grave lack of of the world. My associates say that whenever I understanding. receive a call to go to a Federal Reserve district When I implore you to value your stockholder's I am off on the run like an old firehorse who has responsibility highly and discharge it with all the heard the gong again. I have always relied to a ability at your command, I do so from experience great extent on personal contact with the people and deep conviction. As you know, I was on the who are in daily touch with operating problems Board of the Philadelphia Bank for more than ten before making decisions. years before taking this assignment. Our Phila- Of course it is no hardship for me to come to delphia directors were of invaluable aid not only in New England, because I truly love this country. executive personnel matters but in advising the My family goes to Maine for most of each summer Bank on policies and procedure and in keeping it and I generally find plenty of excuses to join them. close to current economic and banking problems. I want to commend you Stockholders for your The directors of the twelve Banks, with their record in exercising one of the most important re- branch directors, are a representative cross-section sponsibilities of the member banks to the System— of the leaders in finance, commerce, and agriculture the election of six of the nine directors of the re- of their respective regions. Since going to Wash- gional Federal Reserve Bank and, through them, ington, I have found the directors' advice and judg- the selection and guidance of its management. Each ment, expressed both directly and through their Board of Directors also elects a member of the various officers and members of the Advisory Coun- Federal Advisory Council, a most important body cil, of the greatest help. in the development of Federal Reserve policy. As a result of my experience, I cannot urge you The Boston Bank has been noted for its distin- too strongly to continue your vigilance in selecting guished presidents. One of them, Ralph Flanders, and electing the most outstanding leaders. Some your good friend and mine, was drafted by the of the Banks have followed the principle of rota- tion in order to acquaint more of their leaders with \Address3y Thomas B. McCabe, Chairman, Board of Gov- the problems of the System. ernors of the Federal Reserve System, at the annual meeting of the Stockholders of the Federal Reserve Bank of Boston, on This meeting affords an excellent opportunity to October 26, 1948. NOVEMBER 1948 1V>0 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis THE SIGNIFICANCE OF MEMBERSHIP IN THE FEDERAL RESERVE SYSTEM discuss the significance of membership in the Fed- institutions. These central banks are still organized, eral Reserve System. Two-thirds of all commercial however, as completely separate institutions. banks in New England, holding four-fifths of de- The truth is that central banks must function mand deposits, are members. Holders of 63 per cent solely in the public interest. In doing this effec- of the demand deposits of State banks have volun- tively they must of course maintain close contact tarily chosen to become members. Those percen- and cooperation both with the private financial tages speak for themselves and indicate pretty gen- community and with the Executive, including par- eral belief in the importance of membership. It is ticularly the Treasury. Whatever their form of especially noteworthy, I think, in this area of tradi- organization, they cannot escape this dual role. tional Yankee shrewdness. The financial history of the United States before As you men know, two of the earliest construc- the creation of the Federal Reserve System illus- tive plans to stabilize banking by cooperative effort trates repeatedly the difficulties of this problem. were made in New England. I refer to the Suffolk The First and Second Banks of the United States System and the Bank of Mutual Redemption. represented attempts to organize the central bank- These two were voluntary steps toward the estab- ing function in this country by chartering a lishment of more effective control over the issuance privately-managed single central bank. In both of money. So you might say that the seeds of the cases, this type t)f organization proved politically Federal Reserve System germinated right here. vulnerable. It was politically suspect because the This System is a unique creation in the history management was •entirely in private hands and of central banking. All economic societies, except because the central bank, due to its eastern location, the most primitive, have some form of money. In was felt to be out of touch with conditions nearer highly productive societies such as ours, organized the frontiers. Both banks were allowed to lapse around personal enterprise and initiative, money without regard to the effects such action would will not manage itself. A positive provision for the have on the financial stability of the country.. proper exercise of the central banking function is These attempts taught one lesson that has con- therefore inescapable. The problem of how to or- ditioned our banking and financial structure ever ganize central banking functions, however, has no since, namely, that the American people are de- easy solution. Many experiments have been tried. termined to avoid centralized financial power Although central banking is a public function just whether it is public or private. It is in response as the administration of justice is a public function, to this determination that our dual banking system experience has proved that central banks should be has evolved with its emphasis on individual unit organized independently of the Executive and of banks. It is also because of this inherent charac- the Treasury, just as Courts of Law are organized teristic of our people that the banks of this country independently of the Executive and of the Depart- operated for nearly three generations under the ment of Justice. constant overhanging threat of recurrent money In Europe the solution to this difficulty long panic. The passage of the Federal Reserve Act took the form of privately-owned central banks, put an end to this danger, and with its provisions operating under special charters from the sovereign. for decentralization of power, organized the func- This type of organization has tended to insure tion of central banking in an ingenious combina- relative freedom to central banks from political tion of public and private management. I am encroachment but it has left them vulnerable to thoroughly convinced that the authors of the Fed- accusations that they were operated for private eral Reserve Act gave us a monumental piece advantage, at the expense of the public interest. of legislation—a system tailor-made for the eco- Recently, the pendulum has swung away from nomic expansion of our country. The System this pattern in many countries. In order to accent might be compared to a great pyramid with its the public nature of the functions which central base in the grass roots of our economy, and its banks perform and the public responsibilities with apex in the Board of Governors. The breadth which they are entrusted, some governments have and strength of the pyramid is in its base, with purchased the privately-held shares of their central the member banks and the Reserve Banks as banks and have made them wholly publicly-owned elevations in the slope toward the top. 1340 FEDERAL RESERVE BULLETIN Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis THE SIGNIFICANCE OF MEMBERSHIP IN THE FEDERAL RESERVE SYSTEM The history of the Federal Reserve is singularly of the danger to the whole community. However, free of political bias. Although in the light of in the existence and majority support of the hindsight there may not be agreement that the organization there lies great security, System has always done the right thing at the I don't need to tell this audience of the day-to-day right time, there is general agreement that partisan- tangible advantages of Federal Reserve member- ship has had no place in its operations. For this, ship. These include the supplying of coin and again much credit must be given to the framers currency as needed, collection of checks, collection of the Federal Reserve Act, who were meticulous of noncash items, telegraphic transfers of funds, in their efforts to safeguard the System from the safekeeping of securities, purchase and sale of pressure of special interests or partisan groups. government securities, and examinations conducted The operation of the System is also free from in a helpful and practical spirit. It is the policy profit motivation. Whether the Federal Reserve of the System constantly to improve all of these earns income over and above expenses has no in- operations. Your suggestions as to improvement fluence on its policies. As you know, at present of any of these operations will J>e appreciated. our earnings are large. Last year 90 per cent One of the primary objectives of the Federal of the System's net earnings were turned over Reserve System when it was organized was to the Treasury. to improve methods of check clearing*and collection The System is thus free of the two influences in this country. A great effort has been made which might distract it from acting with impartial, to obtain this objective with the minimum studied judgment on matters of monetary and of disturbance to correspondent and interbank credit policy, solely in the public interest. relationships. In addition to this great continuing responsibil- I know you also value highly the research ity for nonpolitical, nonprofit administration of services of the Federal Reserve, not only the regu- money in the public interest, the System is the lar services, but special studies such as the lender of last resort, with vast powers to extend exhaustive one by Alfred Neal of the Boston Bank, credit in time of need. Its powers in this respect which points out that the New England economy is have been greatly liberalized, so that the Reserve far from static, as some sob-sisters would have you Banks may now lend on all sound assets of member believe. On the contrary, it is still growing and has banks. excellent opportunities for much further growth. Our banking and credit economy consists of My first over-all impression of the System gave an incredibly complex structure of interlocked me a wholesome respect for the highly professional- assets and liabilities. No bank can operate that ized work of the research organizations of the cannot convert its assets quickly into cash when banks and the Washington staff. Many of you depositors' use of funds results in a drain. Our have cooperated with the members of the research markets are so organized that in normal times group and I know you will agree with me that this conversion can take place in enormous magni- the end product has established a new level tude without resort to the Reserve Bank. In periods of professional competence in this field. We of financial strain, however, there is no alternative must strive to increase their effectiveness still but recourse to the Reserve System. This recourse further. They supply the yardsticks of the present to funds is always available to a member bank, and are our eyes for the future. with full assurance that the Federal Reserve Membership makes possible the performance will be in a position to meet its requirements, of these services. You and I know, however, whatever they may be. Membership from this that members are subject to certain limitations point of view may be thought of as that of a relative to nonmembers. Members are prohibited contributing member to a local volunteer fire from charging exchange on checks, are required company. So long as enough neighbors contribute, to have larger capital to maintain out-of-town the protection will be adequate. Of course, in case branches, are subject to greater restrictions on of a conflagration noncontributors can also receive investments and loans of member banks, and on service. This is somewhat inequitable but is holding companies and interlocking directorates; both humane and necessary to.prevent spreading are required to carry deposit insurance, and must NOVEMBER 1948 1341 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis THE SIGNIFICANCE OF MEMBERSHIP IN THE FEDERAL RESERVE SYSTEM carry large reserves with the Federal Reserve Banks. spite of it loans at commercial banks have increased These limitations have been developed out of over 6 billion dollars in the year ending June 1948. experience, especially in periods of banking diffi- In addition, commercial banks' holdings of securi- culty, and are in the interests of sound banking. ties, other than Governments, have increased over By far the most serious and burdensome to you 700 million dollars during this period. This expan- at this time is the requirement on reserves. sion of credit occurred at banks located in all sec- Because of the large gold inflow of the 1930's tions of the country and at banks of all sizes, but and the legacies of war finance in the 1940's, particularly in rural areas and small cities. reserves have had to be substantially increased. One of the principal reasons for the increase in It has been said that the recent increase of reserve requirements was to immobilize the reserves reserve requirements was politically inspired. That which have been created in the banking system allegation does not deserve the dignity of a denial. during very recent months as a result of sales of The increase was one of the moves that we, in our Government bonds to the Federal Reserve from best judgment, felt was necessary to restrain the nonbank portfolios. Since June these purchases growth of the money supply. have been far in excess of the recent increase in I fully realize that this instrument of monetary reserve requirements. In other words, this action management has definite shortcomings. It is has not reduced either the earning assets or the neither as flexible nor as selective as we would like. lending power of ^Jie member banks as a whole Especially, it is unfair under present conditions below what they were as late as midyear. In the because it restricts the commercial banking system meantime, the moves of Treasury and the Federal while leaving unfettered other segments of the Reserve to raise short-term interest rates have had credit structure which have access to the Federal the incidental effect of increasing the earning power Reserve System through sales of Government of bank assets. I fully appreciate, however, that securities. It is also unfair in that the increases in some individual cases the reserve increase has have not been made applicable to all nonmember worked a temporary hardship and it will take ex- banks. Some states, however, have been quick pert management to adjust to the situation. to respond to the action of the Federal Reserve As I see it, reserves are each bank's contribution by raising their requirements. to an effective national monetary policy. It is un- Quite naturally, a member banker may ask, fortunate that this contribution is not made equally "Why am I the goat when so many - of my com- by all, for the benefits are enjoyed by all. I do not petitors go Scot-free?" There is no question but see that any threat to our dual banking system is that many other agencies, public as well as private, involved in the request that reserve requirements are extending credit freely. But, gentlemen, we of apply equally to member and nonmember banks. the Federal Reserve have a grave responsibility to I am heartily in favor of the dual banking system, curb the rapid expansion of credit in the area in as I stated at the Louisville meeting of the National which we operate. As a member of the Board of Association of Supervisors of State Banks. But I do Governors I could not be true to myself or my think that in respect to a credit control instrument oath of office unless I fulfilled my responsibilities. as powerful as reserves and one so vitally affecting You as members of the System also have a responsi- the earning assets of banks, some degree of uni- bility. If we live in a community where there are formity of application is essential to the strength other citizens who do not accept their civic responsi- and soundness of banking in this country. I do not bilities, that does not excuse us from doing our feel that the need for preserving the respective au- duty. You who live in New England and carry the thorities and jurisdictions of the State and national burden of a New England conscience will under- authorities in this matter presents any great diffi- stand me, I am sure. culty. I am confident that it could be worked out I have frequently stressed that this inflation will satisfactorily in consultation with the State banking not be cured by the action of any one agency. The authorities. cooperative action of the American Bankers Asso- There are many in this audience, I know, who ciation to persuade their members to restrain un- would like me to say something about the support necessary lending has been very laudable, but in of Government bonds which made it possible for 1342 FEDERAL RESERVE BULLETIN Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis THE SIGNIFICANCE OF MEMBERSHIP IN THE FEDERAL RESERVE SYSTEM nonbank bond sales to swell commercial bank Never has it had the potential that it has today. reserves. Our external relations, however, our place in the I will here repeat what I told the Mouse Banking world environment that is emerging, indicate re- and Currency Committee on August second, and said sponsibilities beyond the power of man to evaluate. again in a talk just a month ago at Philadelphia: What will be the role of the Federal Reserve System, It is my view that the System is obligated to of the Board of Governors, of the twelve Federal maintain a market for Government securities Reserve Banks, and of the member banks in that and to assure orderly conditions in that market, future? not primarily because of an implied commitment This much we can surely say, at present. The to wartime investors that their savings would be Board of Governors in Washington will continue to protected, nor to aid the Treasury in refunding bear the major responsibility for the broad formula- maturing debt, but because of the widespread tion of monetary and credit policies, adapted to the repercussions that would ensue throughout the necessities of our domestic and foreign economic re- economy if the vast holdings of the public debt lations. The twelve Federal Reserve Banks, each were felt to be of unstable value. in its region, will continue to bear*the major oper- ating responsibilities. They are the eyes, the ears, When you consider that the public debt is one the hands of the System, adapting their operations and a half times all other debt in the country com- to the regional requirements of our economy. They bined, it seems obvious to me that the market for are also our principal advisers, providing wise coun- the Government debt securities must be one where sel for System policies. They are staffed by an investors can deal at all times with confidence. I exceptionally competent group of individuals of remain of the conviction that for the foreseeable the highest professional caliber. We must vigor- future the support program should be continued. ously strive to raise the caliber even higher. You, This conviction is shared by all the members of the who are in charge of the member banks, will con- Board of Governors, the members of the Federal tinue to be primarily responsible for the ultimate Open Market Committee, and by the Treasury. It decisions that make an enterprise system operate. is also supported by the weight of financial opinion Specifically, you determine who is financed and for in the country. how much. In the last twenty years monetary influences have assumed new prominence in the eyes of the people. The responsibilites of you, the Reserve Banks, Whether this is because such influences have indeed and the Board of Governors are inextricably bound become more prominent or because the public, made together. No one of them can be performed suc- more economically sophisticated by education, has cessfully without parallel performance by the come to realize the true significance, I will leave to other two. Personally, however, I feel that your the theorists. Suffice it to say that the boom of the role is the most indispensable of all. Not least late 20's, the disastrous collapse, war financing, the is your part in shaping the business leadership in huge public debt, and our present inflation have this country. When you exercise your individual all focused the attention of the public on the im- credit judgment, you really decide who, among all portance of money and credit. the applicants for credit, will be financed. In mak- So far I have dealt with the Federal Reserve Sys- ing that decision in the past you have played a tem in its relation with its members in the past. part in providing this country with the virile, enter- In conclusion, let us turn the telescope toward the prising, economic leadership for which it is famous. future. Admittedly, the horizon is low and the May you continue to play your role with wisdom, readings are very obscure. We can see, on the one for in the days to come the world will need that hand, great promise for the American economy. leadership as never before. NOVEMBER 1948 1341 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Thomas B. McCabe (1948, October 25). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19481026_mccabe

@misc{wtfs_speech_19481026_mccabe,
  author = {Thomas B. McCabe},
  title = {Speech},
  year = {1948},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19481026_mccabe},
  note = {Retrieved via When the Fed Speaks corpus}
}