America's Money Machine

216 PART III / DEBACLE OF AN IDEA
operations was the Second War Powers Act of March 27, 1942, which
authorized the Federal Reserve banks to purchase government securities
from the Treasury, not to exceed $5 billion, the power to extend until
December 3 1, 1944.
This authority has been repeatedly renewed, at short term, but so
faithfully by Congress that it may be assumed as a permanent feature of
Federal Reserve power.*
Like Goths crossing the Danube in the waning years of the Roman
Empire, Federal Reserve influence steadily infiltrated and became authority
in more and more provinces of the economy long considered the
domain of the free market. In 1934, the Securities and Exchange Act had
empowered the Federal Reserve to fix margin requirements "for purposes
ofpreventing the excessive use of credit for purchasing and carrying
securities." In 1941, under the 1917 Trading with the Enemy Act,
Roosevelt gave the Federal Reserve temporary authority to regulate the
terms ofinstalment sales. This authority lapsed, but was renewed in 1947
and, again, as a temporary measure, during the Korean War. Finally, by
the Credit Control Act of December 23, 1969, it was made permanent.
The Act of July 7, 1942, which permitted the Board to change the
reserve requirements of the various classes of banks also amended subsection
(a) of Section 12(a) of the Federal Reserve Act to provide a
regrouping of the representation on the Federal Open Market Committee.
Because of the importance of the New York Federal Reserve Bank
from its location in the principal capital market, and the fact that it acted
as agent ofthe Open Market Committee, the amendment gave it continuous
representation on the Committee. The Boston, Philadelphia, and
Richmond banks were to be represented by one member; one representative
each was allotted to Cleveland and Chicago;. to Atlanta, Dallas, and
St. Louis; and to Minneapolis, Kansas City and San Francisco.
As the war continued into 1943, the public debt increased by $57
billion, of which $25 billion was taken by the banking system; the commercial
banks taking 34 per cent of the increase as against 41 per cent
in 1942. Including the Federal Reserve banks the total purchases by the
banking system represented 43 per cent of the increase in the debt as
against 49 per cent in 1942. During the year, the rate on government
securities was maintained at rates corresponding to 3/8 per cent on
*Prior to the Banking Act of 1935, there was no question of the authority of the Federal
Reserve banks to deal directly with the Treasury. That act restricted such dealings to the
open market.