The Conference operated as if it had control of the Federal Reserve System and that the Board was in a position to only approve their actions. Among other instances, there were cases where the governors informed the Board that measures the Board wanted taken were 28 not appropriate and that they would not be implemented until a later time. In January 1916, the Board attempted to control the Governors Conference, saying that it would not authorize any additional meetings or approve any incurred expenses, a move resulting in the angry resignation of two bank governors. The Board’s action was enforced throughout the War. Later efforts to reform the Governors Conference in 1922 led to meetings that were of increasingly less importance.
�he �iscount �ate
Another major fight within the Federal Reserve focused on who controlled the discount rate, which was the System’s most important policy tool, and later, open market operations when they became a policy tool. Section 14 of the Federal Reserve Act granted the Reserve Banks the authority to set rates of discount, “subject to review and determination of the Federal Reserve Board.” Although it seems difficult to imagine today, under the original Act, rates were expected to vary throughout the country, with the idea that the Reserve Banks would best understand regional credit conditions. One of the most substantial criticisms of the Aldrich proposal, 29 in fact, had been that it set a single rate for the entire nation. Although the possibility of various rates among the Districts was clearly in the spirit of the decentralized system envisioned by the Federal Reserve’s creators, in practice it had an obvious weakness: Institutions seeking a more favorable rate would simply make a deal with an institution in the Fed District with the lowest rate. Eventually, the Board took control of the discount rate, telling the Banks they had to submit their rate target weekly. The Board could then reject the requests and force the Banks to resubmit, repeating the process until the rate was at the Board’s target. The regional Banks were outraged and prepared to fight the Board’s move, but the outbreak of the War put those efforts on hold. The Banks became particularly infuriated later in 1919 when the Board held the rate down despite the efforts of the Reserve Banks to raise rates amid inflationary fears. 28. Clifford, The Independence of the Federal Reserve Finally, Glass, who by this time was
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• Growing Pains
System. Philadelphia: University of Pennsylvania Press, 1965 p. 95. 29. West, Banking Reform and the Federal Reserve, 1863-1923. Ithaca, N.Y.: Cornell University Press, 1974, p. 220.