Evening star. [volume] (Washington, D.C.) 1854-1972, 1935-05-26

can borrow from the banks. The i'm
portance of this power is apparent
BY lowering or increasing interest
rates it is possible to lower or in
crease the cost of doing business and,
therefore, to have an influence over
the contraction or expansion of busi-
ness. This power is now vested in
the Federal Reserve Board at WASH
ingtcn.
Reserve Requirement Explained.
The second means of control to
which I have referred is the power to
tn banks which are members of the
Federal Reserve System. This power
more directly influences the volume
of money, because under our law the
amount of deposits that banks can
create is limited in proportion to the
amount of reserves they possess.
Therefore, an increase or a decrease
in the volume of reserves tends to in
crease or decrease the volume of de-
positS which are our principal means
of payment, or money. At present,
although this power is vested in the
Federal Reserve Board, 1t can only be
exercised when the President declares
| that an emergency exists. The re-
sponSibility for declaring an emer-
gency should not be placed upon the
President. Even if an emergency did
not exist, the declaring of it would
almost certainly create one. The bill
proposes to give the Federal Reserve
Board the use of this most important
instrument of control without requir-
ing the President to declare an emer-
gency. which might involve insur-
mountable political obstacles. The
Federal Reserve Board should be in
position to exercise this power in the
normal course of events for the very
purpose of preventing an emergency.
! The third means of control Is what
is known, perhaps somewhat myster-
iously, as open-market operations.
/ Without going into the details of this
technical matter, open market opera
lions mean that the Federal Reserve
banks, when they wish to increase the
volume of money, can do so by buy
ing Government securities in the open
market The money they pay for these
purchases is added to the reserves Of
the member banks. Conversely when
the Reserve banks wish to diminish
the volume Of member bank reserves
they can sell securities and lock up
the money paid by the banks for the
securities. In this way they can di-
rectly influence the available volume
of money. At the present time the
control over this power Is distributed
between a committee of IL governors
of the II Federal Reserve banks, who
now have the responsibility for rec
ommending purchases or sales, the
! Federal Reserve Board, which has
authority to approve or disapprove
the recommendations of the governors,
and 10S directors of the II Reserve
banks, who in turn have the right to
determine whether or not they will
buy or sell in accordance with the
policy that has been recommended by
the governors and approved by the
| board. A more effective means of
diffusing responsibility and encourage
ing delay could not very well be de-
vised
Responsibility Emphasized.
On this point I have recommended
that the power over open market
operations be entrusted to the Fed
eral Reserve Board. which consists
of eight members. six of whom are
appointed by the President and con-
firmed by the Senate, and two ex-
officio members, the Secretary of the
Treasury and the controller Of the
currency. The board would be re-
quired, however, before taking action,
on open market operations as well as
on discount rates and reserve require
mentS, to consult with committee
of five governors selected by the Fed
eral Reserve banks. In this way the
responsibility for action win be I'M
escapably fixed.
To my mind, the all-important
thing is to place responsibility for the
exercise of these three means of con-
troll in clearly defined body and to
state the objective towards the attain