ARGUMENTS IN THE NEGATIVE
standing American economists has concluded that the Reserve Board has almost un-
imited powers over the reserve banks.
Central banks are now generally recognized as having two characteristic func-
dons, 1) the issue of their notes for currency purposes on a basis which at once main:
:ains the soundness of the currency and permits volume to expand and contract with the
needs of business and 2) influence for the same purposes on the credit available for
business. As to note issues the reserve banks do not have autonomous powers; for the
law prevents them from issuing notes except with the permission of the Reserve
Board, and puts into each reserve bank an agent of the Reserve Board. That the re
serve banks are not now autonomous in regard to the second function mentioned above
was the conclusion of the federal Court of Appeals last summer in the case of
Raichle v. Federal Reserve Bank of New York, from which quotation has been made
:arlier in this pamphlet. The court held that if suit were to be brought for injunction
against activities with respect to credit and its uses the suit would have to be brought
against the Federal Reserve Board as well as the federal reserve bank, saying the
Board “is specifically empowered to regulate open market transactions, to review and
determine rates of discount, and to make reports as to conditions in the federal reserve
system. In such circumstances, the bank is, as to the matters complained of here, a
governmental agency under the direction of the Federal Reserve Board. If the plain-
iff prevailed in his contention, the bank would be enjoined from fixing a discount rate
which the board had presumptively directed. Such a situation under familiar principles
renders the Federal Reserve Board an indispensable party to the suit.” Of course, the
decision of the Court of Appeals in the Raichle case may be later reviewed by the
United States Supreme Court, but there is no apparent reason for expecting the Su.
sreme Court to reach a contrary conclusion.
Relations to Credit
That the Reserve Board has substantial activities would seem to appear from its
=xpenditures. In 1928 its expenditures for its own purposes were $763,000—a figure
which has been fairly constant over the last seven or eight years, having earlier heer
lower.
Activities of Board
For illustration of the manner in which the reserve system is now operated
reference might be made to the manner in which the reserve banks engage in open-
market operations, the procedure they follow in buying and selling government se-
curities, and other devices which have been set up in order to maintain the semblance
of regional banks with autonomous powers. Space will permit, however, only ref-
erence to the facts set out in one of the auxiliary reports accompanying the report of
the Banking and Currency Committee. These facts raise a question whether or not
there is justification for continuance of some of the reserve banks. The facts to which
the auxiliary report draws attention are that in 1926 the average daily holdings of re
discounted bills at one reserve bank were but 26% of its total holdings of bills and
securities, at another were 25%, and at a third were 20%. This percentage may vary
widely in a central banking institution for which there is complete justification and
which is under active and wise management, but in the case of a considerable number
of the reserve banks it tends to be low, thus suggesting that after years of experience
there is not justification for these banks as they now exist. In 1928, when the average
{Continued on page 19)
Question as to
Usefulness of Some
Banks