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Recommendation
Recommendation
Functions of
Central Banking
Powers
Necessary
Reserve Credit
Proposals to
Restrict Powers
COMMITTEE REPORT
increase the Board’s influence. This again would tend to decrease the
exercise of reasonable regional authority. If it be required that the
cost to member banks of securing reserve credit be the same in all
districts, each district directorate is in the position where it may
have to subordinate local needs, even of an acute nature, to a more
or less artificial national requirement. We believe that a policy favor-
ing a single rate of rediscount as a principle of reserve system should
be disapproved.
The Committee recommends that:
(a) In maintenance of the principle of regional autonomy, the
Federal Reserve Board should avoid initiation of a change in a re-
discount rate without conference with the directorate of the regional
bank and full consideration of the resulting influence of its act upon
the commerce and industry of the district.
(b) A policy favoring a uniform rate of rediscount as a prin-
ciple of reserve-system operation should be disapproved.
Although the federal reserve system is not a central bank, its
fundamental operations are in the field of central and not of ordinary
banking. It is designed to supplement the credit distribution activi-
ties of ordinary banks that deal directly with the public and depend
upon profits. It is charged with the primary responsibility to which,
if necessary, every other consideration should be subordinate, viz.,
the maintenance of the currency and credit structure firmly upon an
adequate foundation of gold. In general, as a reserve or supplemen-
tary credit institution, it must seek to exert a steadying influence upon
the money market and upon the course of industry.
Such an agency must be endowed with ample powers of credit
and currency expansion and contraction. The successful discharge of
these powers requires not only an experienced and politically in-
dependent management but the absence of narrow, restrictive legal
limitations.
It is to be admitted that any over-use of the credit-granting and
currency-issuing powers of the reserve system might result in seri-
ous financial disturbance. A dollar of federal reserve credit estab-
lishes the basis upon which more dollars of member bank credit
may be built. An excessive expansion of reserve credit may have the
result, therefore, of exaggerating any rapid increase in the volume
of member bank credit and thus lead to inflationary conditions. Be-
cause of this it is sometimes argued that restrictions should be placed
in the Federal Reserve Act, beyond those now existing, to insure
that the reserve banks are not provided with unduly large powers
of credit and currency expansion at any given period of time.
Among the proposals designed to restrict further the lending
power of the reserve banks, are (a) permission to member banks to
ceep 40 percent of their legal reserve and cash in their own vaults
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