It is obvious that the ultimate control of note issue rests with the Federal Reserve Board, and, therefore, upon the personnel and policies of the board the possibility of inflation depends. If its members are conservative and conscious of their high public responsibility, the board will try to stifle anything in the nature of inflation. But for this it is necessary that the board have the support of the federal reserve banks and the member banks. Each of three parties concerned has a duty to perform in controlling expansion, and though the problems of the three are interrelated, they are nevertheless distinct.

The board has little direct contact with the member banks; it deals with general conditions and principles rather than with individual cases and details, whereas the reserve banks are in daily contact with the member banks and also with the board. The primary duty of the board is to see that the reserve banks function according to law, and its own regulations must, of course, also conform to the law.

The regulations laid down by the board and the definitions made for eligibility of paper for rediscount have to conform with Section 13 of the Federal Reserve Act. In that act no express condition is made regarding the essential or non-essential character of the transaction giving rise to a commercial paper which may be offered for discount, and the board is not required, and properly could not be expected, to adopt such a criterion of eligibility. That is a matter that should be determined locally by the member bank, which knows the conditions and purpose of the loan. No part of the Federal Reserve Act requires the reserve banks to discount any particular paper or class of paper; the law is simply and entirely permissive. Section 4 of the act requires the directors of the reserve bank to administer its affairs "fairly and impartially and without discrimination in favor of or against any member bank," and, subject to the provisions of the law and the orders of the Federal Reserve Board, to extend "to each member bank such discounts, advancements and accommodations as may be safely and reasonably made with due regard for the claims and demands of other member banks."

Thus, according to Section 4, the directors of the reserve banks have the power to limit the volume and character of loans which in their judgment may be safely and reasonably made to any member bank. Nevertheless the Federal Reserve Board has taken the position that, while the reserve banks may properly undertake in their transactions with the member banks to discriminate between essential and non-essential loans, such discrimination might much better be made at the source by the members themselves. In other words, the board does not assume the whole responsibility of stemming inflation, but relies upon the co-operation of the reserve and member banks.