bility of permitting nonmember insured banks to hold the additional reserves in balances with their correspondents should be explored.

The task force on supplementary reserve requirements has considered various plans for reenforcing existing bank reserve requirements and has reported that two plans offer the greatest promise, namely: (1) The loan-expansion reserve plan and (2) the primary (securities feature) reserve plan, which provides for additional required reserves and gives a bank, under conditions to be prescribed. by regulation, the option of holding the additional reserves in the form of cash or Government securities.

The provisions of these plans may be summarized as follows:

Loan-expansion reserves.-Every insured bank receiving demand deposits, other than a mutual savings bank, would be required to maintain additional reserves equal to a percentage to be prescribed by the Board of Governors of the Federal Reserve System, of that part of its loans and investments in excess of a certain prescribed base.

In computing loans and investments, all assets of the bank would be included except (1) cash, (2) balances due from banks, (3) direct obligations of the United States, and (4) such special types of assets as the Board might prescribe from time to time.

Primary reserves and Government securities.-Either in substitution for or in addition to the requirement discussed above, an insured bank receiving demand deposits, other than a mutual savings bank, might be required to maintain additional reserves equal to a limited percentage of its demand deposits, in addition to the deposit balances now required.

Such percentages could be different with respect to banks in central reserve cities, reserve cities, or elsewhere.

In lieu of such a deposit balance, a bank under certain conditions, could count Government securities either at an amount equal to the dollar amount of the deposit balance which the securities replace or at some lesser figure. For example, the Board might prescribe that, for reserve purposes, $1.50, or $2 or $2.50 in securities might be equivalent to $1 of cash.

Within a few days the Board of Governors will ask the Congress to consider definitive legislation providing for supplementary requirements.

The request referred to in the last sentence of the quoted material was never made. When Mr. Martin was asked the reason for this at the hearings, he replied:

... the best made plans of mice and men "gang aft agley."

In the subsequent questioning by members of the Subcommittee, Mr. Martin indicated that the Board's change of heart had occurred partly because it had found that the more flexible open-market policy which it had adopted following its accord with the Treasury was adequate for its present purposes, partly because the inflationary situation was not then active, and partly because, with the public debt rising instead of falling, it was afraid that the imposition of additional reserve requirements expressed in terms of United States securities might be considered primarily a measure for the compulsory holding of such securities rather than for credit control.

The Subcommittee finds these reasons moderately persuasive with respect to the immediate future, but believes that the entire subject of reserve requirements needs much additional consideration from a long-term point of view. It has been our experience since the outbreak of the war in Europe in 1939 that each wave or incipient wave of inflationary pressure has caused the Administration to appear before Congress to ask for additional price control authority and the Federal Reserve System to appear to ask for additional authority over credit in order to combat existing or expected pressures. In order to obtain this authority from Congress, they have had to dramatize and emphasize the extent of the pressures. This process, necessary as it may have been under the circumstances, has contributed to inflationary

expectations and so made the situation worse. The repugnance of even stand-by price and wage controls to our fundamental economic system may make a repetition of this unavoidable if it is necessary to reimpose such controls in the future. But, as far as credit control measures are concerned, it might be avoided if the Reserve System were given the necessary powers in advance and had them ready to use when occasion warranted. With this in mind the Subcommittee, while it is unable to make a definite recommendation at the present time, suggests that further consideration be given to the adoption of legislation providing the Federal Reserve System with additional powers over bank reserve requirements for use at its discretion.

IV. THE MACHINERY FOR THE DETERMINATION OF MONETARY POLICY

A. LEGAL STATUS OF THE FEDERAL RESERVE SYSTEM

The United States Constitution gives Congress the power "to borrow money on the credit of the United States" (Art. I, sec. 8 (2) and "to coin money, regulate the value thereof, and of foreign coin. (Art. I, sec. 8 (5)). These and other provisions of the Constitution, as judicially interpreted and developed through years of precedent and adaptation to changing economic conditions, have vested in the Congress the power to determine what we now call the monetary policy of the United States. This does not mean that Congress itself can or should administer the monetary affairs of the Nation. Many powers are given to Congress by the Constitution. Congress determines the policies pursuant to which these powers shall be exercised, but relies upon the Executive to put them into actual effect. As Mr. Lucius Wilmerding said in his testimony to the Subcommittee (Hearings, p. 753):

The question of the status of the Federal Reserve Board is a difficult one to answer. It depends at bottom upon the view which one takes-or rather which the Supreme Court might take of the power of Congress, under the Constitution, to create agencies for the administration of its laws which are responsible directly to itself and not to the President.

The idea that Congress has such a power has frequently been entertained. Back in Jackson's administration, Henry Clay and many others contended that the Treasury Department was not an executive department but an administrative department an agent of Congress. They argued that, since the Constitution had given Congress the power to collect taxes not simply to provide for their collection-Congress could collect them through an agent of its own. In like manner, one might now contend that, since the Constitution has given Congress the power of regulating the value of money, Congress may carry that power into execution itself, either directly or through an agent responsible only to it. For my own part I should consider such a proposition absurd. Congress can ordain a rule; the Constitution has pointed out what branch of Government is to put into practical operation the rules which Congress has ordained and it has made that branch independent of Congress. When Congress created the Federal Reserve Board and assigned it its duties, it did all that it could do toward carrying into execution its power of regulating the value of money. It is neither called upon nor empowered to carry into effect the provisions of its own laws.

Acting on this sound principle of delegation, Congress has entrusted the power and duty of executing its monetary policy to a number of agencies. Important monetary powers have been delegated to the Secretary of the Treasury (see Compendium, pp. 35-47), while other powers of a monetary or quasi-monetary nature have been delegated to the Federal Deposit Insurance Corporation, the Reconstruction Finance Corporation, and possibly other agencies. The principal monetary powers, however, have been delegated to the Federal Reserve System.

In its questionnaire the Subcommittee asked the Chairman of the Board of Governors and the presidents of the Federal Reserve banks whether they considered their respective organizations to be a part of

the Executive Branch of the Government (Compendium, pp. 239-248 and 648-653), and much discussion was had on this matter at the hearings.

As far as the Board of Governors is concerned, there seems to be no clearly adjudicated answer to this question. But, while the question itself is an open one, it appears that the practical issues usually debated under this head have been judicially determined, so that the question is not really an important one. The Subcommittee was much impressed in this connection by the testimony of Mr. Wilmerding, who, after stating that “* it is impossible to return a clear answer to the question about the Board's status," continued (Hearings, pp. 753-754):

* *
* *

*

Fortunately, from a practical standpoint it is not important that a clear answer be given. Let it be conceded for purposes of argument that the Federal Reserve Board, unlike the Federal Trade Commission, is a part of the executive branch. Would such a status alter in any practical way the relationship which has been established by statute between the Board and the President of the United States? In particular, would it give to the President, under the Constitution, a power to interfere with, set aside, correct, or revise, the decision of the Board in any matter which has been committed by Congress to the Board's exclusive jurisdiction? This question, I submit, can be answered with a categorical negative. A long line of opinions by the Attorneys General, acquiesced in by the Presidents, corroborated by the action of Congress, and the proposition that, when the execution of a law has been committed by Congress to the exclusive jurisdiction of a subordinate department or officer of the Executive, the interference of the President with such execution, either in the form of direction beforehand or revision and reversal afterward, so far from being permitted by the Constitution, would be a usurpation on the part of the President which the subordinate department or officer would not be bound to respect. In such cases the duty of the President to take care that the laws be faithfully executed extends no further than to see that the officers to whom Congress has given an exclusive jurisdiction perform their duties honestly and capably. If they do not, he must, under the Constitution, remove them and appoint others in their stead, but, in the words of one of the Presidents, "he cannot override their decisions and ought not to interfere in their deliberations."

In the light of these considerations it is evident that the question of the status of the Federal Reserve Board is purely academic. Congress has committed certain business to the exclusive jurisdiction of that Board, and this business it must perform under the responsibility of its trust and not by direction of the President. The case is the same whether the Board be considered in or out of the executive branch.

The case of the Federal Reserve banks is harder to define. The presidents of the Federal Reserve banks, in answer to a question whether they considered the banks to be part of the United States Government or part of the private economy, said (Compendium, p. 649):

In our opinion Federal Reserve banks are partially part of the private economy and are part of the functioning of the Government (although not technically a part of the Government).

Much evidence was introduced on this subject and appears in the Compendium and the Hearings. There are many things to be taken into consideration. The stock of the Federal Reserve banks is owned by their member banks. But the capital so contributed is a negligible proportion of the assets of the banks and is limited to a fixed return, however great may be the profits of the Reserve banks. The Reserve banks are given sweeping exemptions from taxation. But, Congress can and has given equally sweeping exemptions to private corporations. The majority of the directors of each Federal Reserve bank is elected by its member banks. But, the power of the directors to

direct is limited; the principal policy decisions are made or dominated by the Board of Governors, which is appointed by the President with the consent of the Senate. On the whole, the Subcommittee sees no objection to this hard-to-define position of the Federal Reserve banks. The Federal Reserve System has been a helpful institutional development. Its roots are sunk deeply in the American economy and it has borne good fruit. This is more important than that each portion of it be subject to classification by species and genus according to the rules of a textbook on public administration.

But, one fact with respect to the legal status of the Federal Reserve banks stands out, and it is the only fact of importance. Congrescreated the Federal Reserve banks and Congress can dissolve them or can change their constitution at will. On dissolution the entire surplus of the banks would become by law the property of the United States. Ultimately they are creatures of Congress.

B. INDEPENDENCE OF THE FEDERAL RESERVE SYSTEM

The first question which must be raised in any discussion of the independence of the Federal Reserve System is "independence from what?" It is sometimes contended that the Federal Reserve System, like a 19th Century central bank, should be, at least formally, independent of its government. It was possible to make a plausible case for this position when the principal trading nations of the world were on a gold standard and the "rules of the game" under this standard were conceived to be automatic-requiring much technical skill but no judgment concerning the ultimate ends of economic policy for their successful operation. It is not necessary to inquire whether this concept was ever valid. The United States is now the only large nation in the world on an international gold standard, and neither the United States nor any other country is going to allow its monetary policyi. e., its internal price level and its internal level of employment-to be determined by the "automatic" requirements of an international standard. To permit this would be tantamount to renouncing the responsibility of the Federal Government, recognized by it in the Employment Act of 1946, for maintaining conditions conducive to high-level employment.

The Subcommittee, therefore, rejects the idea that the Federal Reserve System should be independent of the Government. It agrees with Mr. Sproul, who said in a letter to the Subcommittee (Hearings, p. 983):

** * I think it should be continuously borne in mind that whenever stress is placed upon the need for the independence of the Federal Reserve System it does not mean independence from the Government but independence within the Government. (Emphasis supplied.)

The Federal Reserve System is, and should be, in close and continuous contact with the financial and business communities. The financial and business communities should participate to the fullest extent possible in the formulation of monetary policy. But, they must be junior partners. There can be no independence from the Government. The independence of the Federal Reserve System, which remains to be considered, is, therefore, to use Mr. Sproul's words "independence within the Government." This independence is of two kinds— independence from the President and independence from Congress.