Speech

For release on delivery Statement of • .J William McChesney Martin, Jr. Chairman, Board of Governors of the Federal Reserve System before the Subcommittee on Economic Stabilization of the Joint Committee on the Economic Report June 12, 1956 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Mr. Chairman: Your letter of June 4, advising me of the time for this public hearing, and the subcommittee's statement of June 7 for the press, state that you are interested at this time in procedural matters surrounding the recent increases of the discount rate at Federal Reserve Banks, and that you wish to leave for a later date questions as to the merits and wisdom of the action itself. Your decision not to go immediately into the merits or demerits of this particular action seems to me a wise one. As you know, the Federal Reserve Act specifies a procedure for reporting annually to the Congress, whose agent we are, on the policy actions of the Reserve Board and of the Federal Open Market Committee. A wider understanding of these procedures is very desirable. Accordingly, this statement will set forth an elementary outline of organization and procedure and will include a statement relative to the 108 directors of the twelve Federal Reserve Banks, who, under the Federal Reserve Act, have initial responsibility for determining discount rates at their respective institutions. Discussion and full disclosure of monetary policy and action are, of course, essential. The effects of a given step in the development of monetary policy, however, are difficult, if not Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis impossible, to gauge in the short run. Monetary policy is a fluid, not a static, process. Each separate action is usually a supple mental or complementary step in development of an over-all pattern, of policy. Policies are shaped from day to day by a connected series of separate actions, with constant adaptations to the ever-changing factors and forces in the vast economic fabric of the country. Therefore, it would be illogical and misleading to lift out of context a given step in the process. Debate close to the time of action does not afford a broad enough perspective, particularly when judgments as to timing or as to the economic outlook differ. Under circumstances of diverse trends, hesitancy and delay in taking monetary action might result if those responsible for action were expected to explain publicly and defend any given step of a continuing or changing pattern, before the economic indicators were so unmistakably clear as to support a unanimity of judgment. The annual reports to Congress required by law are sufficiently removed from the time the various actions are taken to afford a broader perspective as to their wisdom or lack of it. Thus, a better, calmer appraisal is probable than is apt to be the case if judgments are made around the time action is taken. A wider understanding of these procedural processes which you are studying today should lead to a better public under standing of policy actions, what they aim to accomplish, and what Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -3- they can and can not do. There is, of course, no magic in Federal Reserve monetary or other governmental measures that will assure perpetual and evenly distributed economic health. Maladjustments, imbalances, excesses in some sectors and shortages in others are inevitable; but partial readjustments should not be postponed at the risk of increasing the general ailments. Monetary policy is a standard, though limited, remedy for some ills. The discount rate particularly can be greatly over rated as a cause or cure. Open market operations, discount rate changes, and reserve requirement changes are the closely inter related parts of Federal Reserve monetary mechanism. Confusion often arises because we are apt to talk about the three parts of this mechanism as if we were offered a choice among three separate means of easing or tightening credit. All three must operate together--in a continuing pattern, the supply of reserves always being basic. Open market operations and reserve requirements affect that base. Discount rates do not affect the volume of that base, but only the cost of reserves. It is therefore misleading to think of the three components as if they were alternatives to be used independently of each other. They must be used together. The use of one component rather than another at a particu lar moment is explained by the fact that, by its nature, each has a different impact. Reserve requirements are the bluntest of the three, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -4- having the heaviest impact because they directly affect all member banks in varying degree and release or absorb very large sums. Changes in reserve requirements are best suited to broad basic adjustments, and the impact of such changes is often modified by subsequent Federal Open Market operations. Open market operations are best suited to day to day adjustments, for they can be used to release or impound small or large sums of reserves in accordance with current conditions. In this way, what have aptly been called "high powered dollars" are added to or taken out of the reserves of the banking system. It is most important to note here that contrary to a wide spread misunderstanding, the Federal Reserve System does not use the reserves deposited with it by the member banks to buy Govern ment securities. For this purpose the Reserve System creates money, and additional reserves are thus put at the disposal of member banks on which loans and investments can be pyramided at a ratio of about six to one. That is why the money created to make such purchases is spoken of as "high powered dollars " Discount rate changes, in respect to frequency of use, are less frequent than open market sales and purchases, but more frequent than reserve requirement changes. For example, the rates of dis count were revised downward twice in 1954, during a comparatively short and mild business downturn, and have been revised upward five Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -5- times over the last 12 or 13 months as the economy rose toward its production capacity, and demand for credit strained the limits of supply. The initiative as to discount rates rests with the directors at each of the twelve banks. They meet regularly, different Reserve Banks having different days, in some instances, for directors' meet ings; but each bank acts every fourteen days, either to re-establish or change its existing discount rate. The action taken, whether to con tinue the same or to change the rates, is immediately reported to the Board of Governors, and acted upon at a regular or special Board meeting. Since System procedure is based on organization, it seems relevant and appropriate to outline briefly the way in which the Reserve System is organized. It is essentially a regional system, made up of twelve Reserve Banks with 24 branches, and having a total of 260 directors. The Board of Governors has responsibility for coordinating policy of the twelve banks, and in some instances supervises operations as well. The Federal Reserve Act spells out, in detail, how the directors of the banks and branches are to be chosen. At the head offices, there are nine directors, six elected by member banks. Three (Class A, in the law) are chosen from local member banks, so grouped as to provide representation for the larger, medium-sized, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -6- smaller banks in each district. And the bulk of the member banks are, in fact, small businesses, engaged in serving small businesses in their communities. Three (Class B) are required to "be actively engaged in their district in commerce, agriculture, or some other industrial pursuit. " The first three may be considered as lenders, the second three may be looked upon as representative of borrowers. The remain ing three (Class C) are chosen by the Board of Governors with a view to providing a still broader representation, and they cannot be bankers. Of the Class C directors, the Board of Governors designates one as the Chairman and another as the Deputy Chairman for each Reserve Bank. In this blending of public and private participation, the Act vests the regional banks with as large a degree of autonomy as is feasible in an organized System. While each President and First Vice President of a Reserve Bank is initially selected by the local directors for a term of five years, the selections are subject to approval by the Board of Governors, a procedure that, in my judgment, gives these officers a very desirable freedom from domination by the Governors, the directors, or by others. Similarly, the functions of the System are distributed. Thus reserve requirements are the sole responsibility of the Federal Reserve Board. Open market operations are the responsibility of the Federal Open Market Committee, a statutory body consisting of the seven members of the Reserve Board and five Reserve Bank Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -7- presidents. And the law specifies that all the presidents shall serve on the committee at intervals. Discount rates are a joint responsibility of the Reserve Board and the Reserve Bank directors. These provisions have been carefully thought out in the legislative process and have worked reasonably well in practice. I do not mean to say that the System is perfect--it is not--but I am confident that the Congress would not wish to make important changes in it with out thorough study and deliberation. Although the discount rate is fixed periodically by each bank subject to the Board of Governors1 approval, in the actual granting of discount accommodation to individual member banks, the Federal Reserve Bank directors act on their own initiative and responsibility, free from intervention or pressures by the Board of Governors or by other Reserve Banks. These directors are always in close touch with conditions in their districts, and the discount operations, including the rates, take account of local economic needs and trends. At the same time, through the constant stream of intercommunication among Governors, Directors, Presidents and their staffs, all who have responsibilities in the System, are in touch with and advised of the economic picture nationally and the needs of the over-all economy. Through the medium of frequent meetings of the Federal Open Market Committee--meetings are held every three weeks or oftener circumstances require--there is an interchange of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -8- economic information and operational experience that keeps Board members and the Reserve Bank presidents and directors informed on the course of the economy, both regional and national. As discount policy is closely interwoven with open market policy, it is among the important subjects discussed at the frequent meetings of the Federal Open Market Committee, and the presidents of the Reserve Banks generally express their individual views as to whether they feel they should recommend to their boards of directors changes in discount rates. A consensus may emerge from the round table discussion, but--and this is important to bear in mind--there is no effort on the part of any member of the committee to dictate to any individual Reserve Bank, its president or directors what those rates should be. That there should be differences--as evidenced at the moment by different rates in two of the districts--reflects not only different judgments, but also the absence of dictation or undue influence. This, I believe, is the way in which this function was expected to be performed, based primarily on the judgments of directors familiar with local conditions, and with coordination effected through the Board of Governors. Finally, let me point out that discount rates are the interest rates paid by member banks, when they borrow from their district Federal Reserve Bank. It should be emphasized that such Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -9- borrowing is intended to meet only temporary needs of member banks for reserve funds, and not long term needs geared to the normal growth of the economy, or to the annually recurring seasonal require ments of commerce, industry and agriculture in the twelve districts. Reserves necessary for such general and repetitive purposes are pre determined as closely as possible by the Federal Open Market Committee and ordinarily supplied by Federal Open Market operations or occasionally by the Board of Governors through changes in reserve requirements. In arriving at policy decisions, great care is taken to obtain and evaluate all relevant views, including, of course, the views of officials of the Government who have responsibilities in the economic field. These consultations frequently develop differences of view. That is to be expected. Our final decision, however, under the law, must be our own and represent, as closely as human relations can, our judgment on the direction of action that will con tribute most to the public welfare. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis June 6, 1956 DIRECTORS OF FEDERAL RESERVE BANKS District 1 -• BOSTON Class A Lloyd D. Brace President, The First National Bank of Boston, Boston, Mass. Harold I. Chandler President, The Keene National Bank, Keene, N. H. Oliver B. Ellsworth President and Trust Officer, Riverside Trust Company, Hartford, Conn. Class B Milton P. Higgins President, Norton Company, Worcester, Mass. Frederick S. Blackall, jr. President and Treasurer, The Taft-Peirce Manufacturing Company, Woonsocket, R. I. Harry E. Uinphrey President, Aroostook Potato Growers, Inc., Presque Isle, Me. Class C James R. Killian, Jr. President, Massachusetts Institute of Technology, Cambridge, Mass. Robert C. Sprague Chairman and Treasurer, Sprague Electric Company, North Adams, Mass. Harvey P. Hood President, H. P. Hood & Sons, Inc., Boston, Mass. District 2 - NEW YORK Class A John R. Evans President, The First National Bank of Poughkeepsie, Poughkeepsie, N. Y. Ferd 1, Collins President and Trust Officer, Bound Brook Trust Company, Bound Brook, N. J. Howard C. Sheperd Chairman of the Board, The First National City Bank of New York, New York, N. Y. Class B Lansing P. Shield President, The Grand Union Company, East Paterson, K. J. John E. Baerwirth President, National Distillers Products Corporation, New York, N. Y. Clarence Francis Director, General Foods Corporation, New York, N. Y. Class C Jay E. Crane Vice President, Standard Oil Company (New Jersey), New York, N. Y. Forrest F. Hill Vice President, The Ford Foundation, New York, N. Y. Franz Schneider Consultant to Newmont Mining Corporation, New York, N. Y. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- District 3 - PHILADELPHIA Class A Wm, Fulton Kurtz Chairman of the Executive Committee, The First Pennsylvania Banking and Trust Company, Philadelphia, Pa. W. Elbridge Brown President and Trust Officer, Clearfield Trust Company, Clearfield, Pa. Lindley S. Hurff President and Trust Officer, The First National Bank of Milton, Milton, Pa. Class B a Warren C. Newton President, 0. A. Newton and Son Company, Bridgeville, Del. Bayard L. England President, Atlantic City Electric Company, Atlantic City, N. J. Charles E. Oakes President, Pennsylvania Power and Light Company, Allentown, Pa. Class C Lester V, Chandler Professor of Economics, Princeton University, Princeton, N. J. William J, Meinel Chairman of the Board, Heintz Manu facturing Company, Philadelphia, Pa. Henderson Supplee, Jr, President, The Atlantic Refining Company, Philadelphia, Pa. District 4 - CLEVELAND Class A J. Brenner Root President, The Harter Bank & Trust Company, Canton, Ohio. Edison Hobstetter President and Chairman of the Board, The Pomeroy National Bank, Pomeroy, Ohio. King E. Fauver Director, The Savings Deposit Bank and Trust Company, Elyria, Ohio. Class B Alexander E. Walker Chairman of the Board, The National Supply Company, Pittsburgh, Pa. Joseph B. Hall President, The Kroger Company, Cincinnati, Ohio. Charles Z. Hardwick Executive Vice President, The Ohio Oil Company, Findlay, Ohio. Class C John C. Virden Chairman of the Board, John C. Virden Company, Cleveland, Ohio. Dean and Director, College of Agriculture Frank J. Welch and Home Economics, University of Kentucky, Lexington, Ky. Vice President and Governor, T. Mellon Arthur B. Van Buskirk & Sons, Pittsburgh, Pa. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -3- District 5 - RICHMOND Class A J. K. Palmer Executive Vice President and Cashier, Greenbrier Valley Bank, Lewisburg, W. Va. Daniel W. Bell President and Chairman of the Board, American Security and Trust Company, Washington, D. C. Joseph E. Healy President, The Citizens National Bank of Hampton, Hampton, Va. Class B W. A, L. Sibley Vice President and Treasurer, Monarch Mills, Union, S. C. Robert 0. Huffman President, Drexel Furniture Company, Drexel, N. C. L. Vinton Hershey President, Hagerstown Shoe Company, Haterstown, Md. Class C Alonzo G. Decker, Jr, Executive Vice President, The Black & Decker Manufacturing Company, Towson, Md, D. W. Colvard Dean of Agriculture, North Carolina State College of Agriculture and Engineering, Raleigh, H. C. John B. Woodward, Jr, Chairman of the Board, Newport News Shipbuilding & Dry Dock Company, Newport News, Va. District 6 - ATLANTA Class A Roland L. Adams President, Bank of York, York, Ala. W. C. Bowman Chairman of the Board, The First National Bank of Montgomery, Montgomery, Ala. William C. Carter Chairman and President, Gulf National Bank, Gulfport, Miss. Class B A. B. Freeman Chairman of the Board, Louisiana Coca-Cola Bottling Company, Ltd., New Orleans, La. Pollard Turman President, J. M. Tull Metal & Supply Company, Inc., Atlanta, Ga. Donald Comer Chairman of the Board, Avondale Mills, Birmingham, Ala. Class C Harllee Branch, Jr. President, Georgia Power Company, Atlanta, Ga. Henry G. Chalkley, Jr. President, The Sweet Lake Land & Oil Company, Lake Charles, La. Walter M, Mitchell Vice President, The Draper Corporation, Atlanta, Ga. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -4- District 7 - CHICAGO Class A Vivian 17. Johnson President, First National Bank, Cedar Falls, Iowa. Walter J. Cummings Chairman, Continental Illinois National Bank and Trust Company of Chicago, Chicago, 111. Nugent R. Oberwortmann President, The North Shore National Bank of Chicago, Chicago, 111. Class B William A. Kanley Director, Eli Lilly and Company, Indianapolis, Ind. Walter E. Hawkinson Vice President in Charge of Finance, and Secretary, Allis-Chalmers Manu facturing Company, Milwaukee, Wis. William J. Grede President, Grede Foundries, Inc., Milwaukee Class C- J, Stuart Russell Farm Editor, The Des Moines Register & Tribune, Des Moines, Iowa. Bert R. Prall 558 Ridge Road, Winnetka, 111. Carl E. Allen, Jr. President, Campbell, Wyant and Cannon Foundry Company, Muskegon, Mich. District 8- ST. LOUIS Class A William A. McDonnell President, First National Bank in St. Louis, St. Louis, Mo. Phil E. Chappell President, Planters Bank & Trust Company, Hopkinsville, Ky. J. E. Etherton President, The Carbondale National Bank, Carbondale, 111. Class B Louis Ruthenburg Chairman of the Board, Servel, Inc., Evansville, Ind. Leo J. Wieck Vjce Fresident and Treasurer, The May Department Stores Company, St. Louis, Mo. S. J. Beauchamp, Jr. President, Terminal Warehouse Company, Little Rock, Ark. Class C M. Moss Alexander President, Missouri Portland Cement Company, St. Louis, Mo. Joseph H. Moore Farmer, Charleston, Mo. Caffey Robertson President, Caffey Robertson Company, Memphis, Term. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -5- District 9 - MINNEAPOLIS Class A Harold N. Thomson Vice President, Farmers & Merchants Bank, Presho, S. D. Harold C. Refling Cashier, First National Bank in Bottineau, Bottineau, N. D. Joseph F. Ringland President and Chairman of the Board, Northwestern National Bank of Minneapolis, Minneapolis, Minn. Class B John E. Corette President and General Manager, Montana Power Company, Butte, Mont. Ray C. Lange President, Chippewa Company, Inc., Chippewa Falls, Wis. Thomas G. Harrison President, Super Valu Stores, Inc., Hopkins, Minn. Class,C Leslie N. Perrin Director, General Mills, Inc., Minneapolis, Minn. 0. B. Jesness Head, Department of Agricultural Economics, University of Minnesota Institute of Agriculture, St. Paul, Minn. F. Albee Flodin President and General Manager, Lake Shore, Inc., Iron Mountain, Mich. District 10 - KANSAS CITY Class A W. L. Bunten President, Goodland State Bank, Goodland, Kansas. Harold Kountze Chairman of the Board, The Colorado National Bank of Denver, Denver, Colo. W. S. Kennedy President and Chairman of the Board, The First National Bank of Junction City, Junction City, Kansas. Class B K. S. Adams Chairman of the Board, Phillips Petroleum Company, Bartlesville, Okla. Max A. Miller Livestock rancher, Omaha, Neb. E. M. Dodds Chairman of the Board, United States Cold Storage Corporation, Kansas City, Mo. Class C Oliver S. Willham President, Oklahoma A. & M. College, Stillwater, Okla. Joe W. Seacrest President, State Journal Company, Lincoln, Neb. Raymond W. Hall Vice President and Director, Hallmark Cards, Inc., Kansas City, Mo. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -6- District 11 - DALLAS Class A W. L. Peterson President, The State National Bank of Denison, Denison, Tex. Sam D. Young President, El Paso National Bank, El Paso, Tex. J. Edd McLaughlin President, Security State Bank & Trust Company, Ralls, Tex. Class B John R. Alford Industrialist and farmer, Henderson, Tex. D. A. Hulcy Chairman of the Board and President, e Star Gas Company, Dallas, Tex. J. B. Thomas President and General Manager and Director, Texas Electric Service Company, Fort Worth, Tex. Class C Hal Bogle Rancher and feeder, Dexter, N. Mex. Robert J. Smith Chairman of the Board and President, Pioneer Aeronautical Services, Inc., Dallas, Tex. Henry P. Drought Attorney at Law, San Antonio, Tex. District 12 - SAM FRANCISCO Class A M. Vilas Hubbard President and Chairman of the Board, Citizens Commercial Trust and Savings Bank of Pasadena, Pasadena, Calif. Carroll F. Byrd President, The First National Bank of Willows, Willows, Calif. John A. Schoonover President, The Idaho First National Bank, Eoise, Idaho. Class B Alden G. Roach President, Columbia-Geneva Steel Division, United States Steel Corporation, San Francisco, Calif. Reese H. Taylor President, Union Oil Company of California, Los Angeles, Calif. Walter S. Johnson Chairman of the Board, American Forest Products Corporation, San Francisco, Calif. Class C A. H. Brawner Chairman of the Board, W. P. Fuller & Company, San Francisco, Calif. Philip I. Welk Present, Preston-Shaffer Milling Company, Walla Walla, Wash. Y. Frank Freeman Vice President, Paramount Pictures Corporation, Hollywood, Calif. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

William McChesney Martin, Jr. (1956, June 11). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19560612_jr.

@misc{wtfs_speech_19560612_jr.,
  author = {William McChesney Martin, Jr.},
  title = {Speech},
  year = {1956},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19560612_jr.},
  note = {Retrieved via When the Fed Speaks corpus}
}