America's Money Machine

56 PART I / THE ROOTS OF REFORM
Such was the admirable theory. The structure, however, had a fault that
did not become apparent until much later when the scheme was taken
over essentially in the Federal Reserve System. This was the provision
that would permit the National Reserve Association, of its own accord,
to purchase acceptances* from bankers or financial houses. This little
provision, inserted for use in emergencies, be.came the seed ofthe"open
market" operations of the Federal Reserve System, by which the central
authority took upon itself to determine the amount and flow of liquid
assets (money and credit) into the economy, and which eventually became
a major instrument by which the central authorities sought to manage
and control, not only the credit stream, hut the direction and pulse
of the entire productive activities of the country.
The administrative mechanism of the National Reserve Association
need not detain us. The Commission proposed that the Association function
through fifteen .branch banks which would become regional money
centers, and that the operating units of the systems be local associations
of banks. Such associations could be formed by any ten banks serving
contiguous territory. Such local associations would perform normal
clearing house functions. Government of the National Reserve Association
was to be through the member banks through a representative system
mo.ving upward through the local association to its corresponding
branch to a board ofdirectors, but the national interest was preserved by
the requirement that the top executive, the governor of the National
Reserve Association, be selected by the President of the U. S. from
nominees presented by the board, and by the requirement that the Secretary
ofthe Treasury and three other high officials serve ex offi(io on the
board of forty-six directors. Provision was also made that the board
membership reflect the principal economic interests of the country.
Finally, the Commission set forth the mechanism by which outstanding
national bank notes should be retired and replaced by notes of the National
Reserve Association-provisions that need not delay our story.
Senator Aldrich, in presenting the Commission's report, drew up a
seventeen-point criticism of the existing monetary-banking system. He
began by declaring that in examining the printed literature of banking,
the Commission was struck by the meagre information available on any
*Another form of commercial paper, being a "draft," that is, an order upon one person
to pay to a certain other person such and such sum ofmoney, which the drawee has agreed
to honor by "accepting" by writing his name, or "endorsement," upon the face ofthe draft
preceded by the word "Accepted."