Speech

For release to afternoon newspapers Thursday, June 9, I960.. SOME OBSERVATIONS by M. S. Szymczak Member of the Board of Governors of the Federal Reserve System before the District of Columbia Bankers Association 42nd Annual Convention The Homestead, Hot Springs, Virginia Thursday, 10:00 a.m., Eastern Standard Time June 9, 1960. SOME OBSERVATIONS Outside observers sometimes have the impression that only on those comparatively infrequent occasions, when actions are announced and in the news, does anything happen in the Federal Reserve System, e.g. the recent change in the discount rate. The facts, as you and I know, are quite the contrary. Many different things are going on all the time, even though only occasionally are actions taken that call forth general public comment. Very many activities of the System have to do with the immediate problems of making day to day operating decisions. Some involve study of long-range problems on which action may be taken only once, or at least at long intervals. Others relate to inter- mediate matters on which decisions must be made from time to time to take account of gradual changes in the conditions with which the System must deal — banking, regulatory, supervisory, Governmental, economic, financial, monetary. The System's prime responsibility, as you know, is formu- lating and administering the Nation's monetary policy. Carrying out this responsibility requires constant observation and analysis of economic developments. We need this constant observation and analysis of the economy in order to decide what changes in the mone- tary and credit situation are occurring. But this is not enough; "C" - 2 - we also need it to make decisions about how to help achieve the appropriate financial developments. In other words, we have to decide how to use the monetary instruments available to us in or- der to contribute to sound economic growth. It is a matter of history, as you bankers know, that while open market operations are used practically every working day, discount rates and margin requirements are changed only from time to time; and reserve requirements as a rule are adjusted only infrequently. Note that I said that the responsibility for formulating and administering monetary policy is the System's, not the Board's. This is literally true, as you know, even though the public gener- ally does not always fully realize this. At the risk of repeating what is elementary to you, let me point out that, though the formal responsibility for administering each of the instruments of monetary policy is lodged in a different entity within the System, these entities work closely and continuously together. The Board, as you know, has the legal responsibility for setting reserve and margin requirements; the Board of Directors of each Federal Reserve Bank is required by law to consider and decide every two weeks what the Bank's discount rate shall be, subject to review and determination by the Board of Governors; and the Federal Open Market Committee, made up of the seven members of the Board of Governors and five - 3 - Reserve Bank Presidents, meets every three weeks to decide what open market policy shall be pursued. Although only five Presi- dents are members of the Open Market Committee at any one time, all twelve Presidents ordinarily participate in the deliberations of the Committee, and the day to day carrying out of the policy — the actual operation in the Government security market — is done by the New York Federal Reserve Bank, as agent, with constant contact of our Board and other Federal Reserve Banks. Thus monetary poli- cy, in all its aspects, is constantly being considered against a very broad background of knowledge and experience. While the System!s prime responsibility is the formula- tion and administration of monetaiy policy, strictly defined, it has other responsibilities as well. These are not all directly related to monetary policy, but they are related, in one way or another to keeping the financial system sound, flexible, and ef- ficient . The Federal Reserve Banks, as you well know, route and clear checks that transfer funds among customers of different banks. They also perform many service functions for member banks — one of which is the constant handling of large amounts of currency that they supply to and receive from the member banks. For the Federal Government, and particularly the Treasury, the Federal Reserve Banks continuously perform many Fiscal Agency functions. They act as agents of the Treasury in issuing and re- -h ~ deeming Government securities, in issuing and withdrawing Treasury- currency, and in conducting international transactions. They also hold Treasury deposit balances and transfer them from and to commer- cial banks as the Treasury directs. The Board of Governors also performs many functions other than those directly connected with monetary policy. It operates the Interdistrict Settlement Fund which each night settles all bal- ances arising among the twelve Federal Reserve Banks and twenty-four Federal Reserve Bank Branches. It has broad regulatory responsibili- ties in connection with all member banks — national and State — and carries on examination and supervisory activities with regard to State member banks of the Federal Reserve System in close cooperation with respective State bank supervisory authorities. The Board of Governors also has many administrative and regu- latory responsibilities under several statutes of long standing and some relatively new laws. It has supervisory responsibility over overseas branches of member banks and of their foreign banking and financing corporations, for example, and grants authority to national banks to exercise trust powers and issues regulations relating to that authority. Under the Bank Holding Company Act of 1956 the Board regulates bank holding companies, and last month the Congress gave the Board and other supervisory agencies the responsibility for approving bank mergers. - 5 - ffroceedings under the Bank Holding Company Act of 1956 have, of course, been many in the course of the past four years and have required a great deal of time and attention on the part of the Board and its staff. I am sure you have seen the results in the orders published in the Federal Reserve Bulletin. Merger cases have begun to come to us and will also call for a great deal of time and attention, both in developing general criteria in ac- cordance with the new law regarding mergers and in applying those criteria in deciding individual cases. Last summer the Federal Reserve Act was amended to make three changes affecting administration of reserve requirements. The Board was authorized to permit member banks to count all or a part of vault cash as reserves. It was also authorized to clas- sify individual banks, for reserve purposes, according to the nature of their business rather than according to their location. These two grants of authority were effective immediately. The new law also provides for the elimination of the distinction be- tween Central Reserve City banks and Reserve City banks not later than July 28, 1962. Exhaustive studies have been under way to develop cri- teria for classifying banks according to the nature of their busi- ness. Some individual banks have been reclassified, but we are go- ing slowly here, preferring if possible, to develop general regu- lations rather than to settle each case on its own grounds. - 6 - Last winter, as you know, the Board, at the time of the pre-Christmas need for additional bank reserves, took initial ac- tion to implement the legislation permitting the counting of vault cash as reserves. Effective early in December, country banks were permitted to count as reserves all vault cash in excess of k per cent of their net demand deposits, and Central Reserve and Re- serve City banks, all vault cash in excess of 2 per cent. It is not only new laws, however, that give rise to con- tinuing study in the Federal Reserve System. Regulation Q, which implements certain provisions of the Banking Act of 1933, pro- hibits a commercial bank from paying interest, either directly or indirectly, on demand deposits, and authorizes the Board of Gov- ernors to establish the maximum rates that member banks may pay on time and savings deposits. In the Banking Act of 1935 the Fed- eral Deposit Insurance Corporation was authorized bo establish the maximum rates of interest that an insured nonmember bank might pay on time and savings deposits. Here again, the Board and the F.D.I.C. have worked together closely, and since 1936 the maximum rates have been the same for all insured banks. As you all know, there are many points of view on how this Regulation should be administered. It is a problem that in- volves the soundness and also, at many points, the structure of the banking system, so it is not appropriate to make changes fre- quently. This means, unfortunately, that the rate paid on time and savings accounts cannot always respond to developments as promptly or as flexibly as many other rates of interest. -7- As you can see, I have not gone into all our activities. I have mentioned only some, and I have not touched at all on the many studies and reports that are always being made in response to requests from Congress, the Administration, and others, for the views of the System on economic and monetary matters. Responses to questions from the Committees on Banking and Currency and from the Joint Committee on the Economic Report have been frequent in recent years. Currently, the System is responding to inquiries from the Credit and Monetary Commission established two years ago by the Committee for Economic Development. So you can see that absence of action by the System does not mean that nothing is happening; indeed you may depend on it that a great deal is happening. Similarly, actions taken usually reflect a great deal of work and energy already expended; they do not necessarily represent all the problems currently occupying the attention of the System. Since my report on the econony in my speech two weeks ago to the Illinois Bankers Association in Chicago, not enough change has taken place in our economy to report at this time. Economic activity is at a record level and, though we are in a period of relative stability rather than marked expansion, the economy generally has appeared to be soundly based. Inflationary pressures and expectations appear to have receded. There is considerable uncertainty about the outlook in many separate fields, but this is not at all unusual. For some time now, open market operations have been permitting the reserve positions of banks to ease somewhat, and last week the directors of the Philadelphia and San Francisco Federal Reserve Banks, with the approval of the Board of Governors, lowered their discount rates from 4 per cent to 3-1/2 per cent. Thus, things have been happening at the Federal Reserve, even though there has been little fanfare. Flexibility and timely action are always important parts of a sound monetary policy. We shall continue analyzing and assessing current economic developments, always conscious of the fact that most of our data necessarily relate to periods already past, and that very seldom does it all point in one way. We try to exercise constant vigilance and continually coordinate study and action to one end—that the public interest be served by fostering financial stability so that we may aid in promoting economic growth.

M.S. Szymczak (1960, June 8). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19600609_szymczak

@misc{wtfs_speech_19600609_szymczak,
  author = {M.S. Szymczak},
  title = {Speech},
  year = {1960},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19600609_szymczak},
  note = {Retrieved via When the Fed Speaks corpus}
}