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Yor release on delivery
Tuesday, March 11, 1969
Approximately 4 P.M. - E.S.T.
CONTROLLING MONETARY AGGREGATES
kemarks of
SUEKMAN J . liAISEL
Member
Board of Governors
of the
Federal Reserve System
At a Seminar
Sponsored by
The Department of Economics
of the
University of üichigan
Ann Arbor» '.debitan
»arch 11, 1969
CONTROLLING i\ONETAEY AGGREGATES
I a : often appalled, amazed, amused, or horrified at what broad
n
conclusions can be constructed upon narrow foundations, when I read news
accounts interpreting the monetary statistics that the Federal Reserve
publishes each week,
llany stories present divinations that seem somewhat
akin to the oracular portents produced by prior civilizations after a
careful analysis of entrails, auspices, or other odd indices.
This is
not because the data are unimportant, but because figures are used to
carry a superstructure of analysis anc prediction that goes far beyond any
relationship to their worth or meaning.
Let me today speak to three misunderstandings which seem to
underlie numerous stories and which I believe lead to many errors, un
warranted statements, and fault}7 analyses,
*** The first is a failure to recognize large random forces and
estimating errors present in rnost weekly adjusted data.
There are very few weeks— frequently even months— in which
much of the reported movement in monetary aggregates is not
primarily the result of statistical {noise9" by which I mean
,
something in the nature of static that I ’ll try to identify
more precisely later on.
*** The second, and more significant, are errors wnich attribute
the exact amount of the weeks1 or months' movements in the
monetary aggregates to a specific plan or action of the
Federal Reserve. Too many statements seem derived from an
incorrect interpretation of what the Federal Peserve does
based upon the highly oversimplified elementary textbook ex
planations of the procedure by wnich banking systems create
money and credit. Too few statements recognize that in any
period the anount of money or bank credit created is the
joint result of a complex interaction among households, com
mercial and industrial corporations, financial institutions,
the Treasury, and the Federal }eserve. When I point out that
in any one-month period, the Treasury, the ten largest banks,
and in a similar mAnner the ten largest corporations are likely
to have a greater impact on the narrowly defined money supply
-
2-
than the Federal Reserve System, most people seem Indignant
that their carefully learned lesson from Economics I is not
a true statement of the operational facts.
*** Finally, the terms, ’
'money supply," or “money stock,1 are
1
used very loosely in much of both academic and popular dis
cussions. There is often a failure to specify which monetary
aggregates are being discussed; which are considered signifi
cant; or the advantages of one or another ’money supply" con
’
cept as a basis of policy. This failure is important. The
differently constituted aggregates have significantly differ
ent movements over short periods up to and including a year,
and the costs of influencing each may differ x^idely.
The problem of cost-benefit analysis is a major one.
To control a part of a whole may be expensive. Such costs
should be engendered only if the policy cannot be achieved
in more efficient ways.
"Koise, in the Tlonetarv Aggregates
:
Tables 1 and 2 show how widely reported changes in the money
supply can vary from the basic underlying trend of monetary policy.
As
one would expect they show that the longer the period under consideration
the smaller the impact of the non-policy-determined movements.
Still,
even over a quarter these other movements are large.
The non-policy-determined movements are actually of two very
different types.
The first, which I have labeled "noise," consists of:
operating misses; errors in estimating the actual data at the time
that operations for a period end; shifting seasonals, and irregular
movements which are temporary and the product of special factors.
The operating misses arise either because of errors in report
ing, errors in sampling, or information not available when operations
must be ended.
steadily.
For some time, the size of misses has been decreasing
The misses are small compared to the totals, but large com
pared to weekly or monthly changes.
Table 1
MEASURES OF CHANGE AND DEVIATIONS OF THOSE CHANGES
FOR MAJOR MONETARY AGGREGATES AT MEMBER BANKS IN 1966-68
(In billions of dollars; not seasonally adjusted)
Money
Supply
_______
Operating
Misses*
Excess
Reserves*
Time
Deposits*
Government
Deposits
Total
Reserves*
Seasonal
Reserves*
Total
Deposits
Subject to
Reserves**
0
-3.6
to 2.6
1.1
1.3
.08
- .2
to .3
.
1
.
1
0
-2.5
to 4.3
1.1
1.4
.16
-5.3
to 5.0
1.6
2.0
0
-7.8
to 3.7
.9
1.2
.39
-1.9
to 3.2
.6
.8
1 Week:
Average change
per period
Range
Mean deviation
Standard "
.15
-4.4
to 5.2
1.6
1.9
0
-1.4
to .7
.3
-
4 Weeks:
Average change
per period
Range
Mean deviation
Standard "
.64
-6.3
to 4.6
2.0
2.5
0
-1.4
to .7
.3
0
- .7
to .7
.3
.4
.31
- .3
to .9
.2
.3
0
-2.6
to 2.5
1.0
1.2
.66
-2.1
to 5.6
2.0
2.3
0
-5.9
to 5.7
1.9
2.2
1.53
-1.0
to 4.1
1.1
1.3
2.17
- .8
to 6.5
2.3
2.5
0
-1.4
to .7
.3
0
- .3
to .3
.2
.2
.91
- .3
to 1.7
.5
.6
0
- .3
to 1.7
.6
.7
2.6
-2.6
to 5.9
2.0
2.5
0
-1.3
to 2.6
.9
1.0
4.9
-1 .4
to 8.9
2.5
3.0
-
13 Weeks:
Average change
per period
Range
Mean deviation
Standard "
—
* In order to make the orders of magnitude roughly comparable to demand deposits in terms of their reserve impacts
the reserve changes for operating misses, excess reserves, and total reserves have been multiplied by 6.6 while
time deposits have been multiplied by .28. Seasonal reserves are based on the credit proxy seasonal and auto
matically carry the reserve ratio for the entire proxy.
** Seasonally adjusted.
Table 2
MEAN DEVIATIONS OF VARIOUS FACTORS AS PERCENTAGE
OF AVERAGE CHANGE IN MONEY SUPPLY PER PERIOD
1966-68
(In per cent; not seasonally adjusted)
Seasonal
Reserves
Supplied
Total
Deposi ts
Subject to
Reserves*
1,030
610
400
150
320
300
170
27
93
42
115
Operati ng
Misses
Excess
Reserves
Time
Deposits
Government
Deposits
1,030
200
700
48
740
4 Weeks
310
40
46
32
13 Weeks
105
10
9
21
Money
Supply
1 Week
Source : Table 1.
* Seasonally adjusted.
Total
Reserves
-3-
The seasonal factors are large.
In addition, they are domi
nated by irregular factors, particularly over short periods.
In many
cases, it is hard to determine by analysis of historical data what is a
seasonal and what is an irregular factor.
The demand for money will
vary greatly depending on the day of the week in which a month, quarter,
or year ends.
The same is true of the day on which traditional dividend
and tax dates fall.
The change in tax collection dates and percentages
has been important in most recent years.
The day on which the Treasury
borrows and the form of its borrowings are critical.
Problems with
the debt ceiling and attempts to stay under it loom large.
While esti
mates are made currently as to the impacts of these factors, they still
confuse the judgment of seasonal variation, particularly as observed
at the time operations take place.
The irregular elements include seemingly minor factors such
as the financing of a corporate take-over bid, a breakdown of a bank
computer, or a snow storm.
Each of these may cause even weekly average
changes to vary by over 100 per cent or more.
As an example of such
movements, examine pages 29 and 30 of the February 1969 Economic Indica
tors and pages A17 and A18 of the January 1969 Federal Reserve Bulletin.
Each carries an estimate for the December 1963 change in the narrowly
defined money supply.
In one case the increase is reported as $1.2 bil
lion which translates to an annual rate of growth of 7.5 per cent.
In
the second case the increase is estimated at $8.4 billion, or at an
annual rate of 53 per cent.
Neither figure is in error.
The first
weights the extremely unusual end-of-year changes in one way, the second
-4-
in a different way.
Neither gives a very good sense of the underlying
trend because of the dominant influence of very special factors that
were rapidly reversed.
These irregular forces were large enough, how
ever, to bias strongly analysis of the two adjacent quarters in which
they occurred and for many purposes even the annual data for the two
years.
Data calculated at the time operations end are the significant
data for operational purposes, but theoretically not for any policy im
pact.
These estimates are subject to revisions as more information
becomes available, as full universe data replace samples, and as sea
sonal forces are re-estimated.
These revisions between the money supply
as first reported and as currently reported are not shown on the table.
However, they averaged $152 million per week over the past three years.
They had a range of from $-1.4 billion to $1.0 billion.
ation was over $490 million.
Their mean devi
Clearly, they make a significant amount of
noise which must be taken into consideration when one looks.at the re
ported weekly changes.
In a somewhat similar manner,, we might note
that one part of the money supply, namely, non-member bank demand deposits,
is not subject to reserve requirements of the Federal Reserve nor is
information on these movements readily available.
rather great.
Their variance is
Their share of total demand deposits has been growing.
The weekly and monthly data for this component are estimates from other
types of data.
Specific information on how this component has changed
is available only semi-annually with a lag of four to eight months.
-5-
Tlie tables call attention also to the second and third types
of problems I noted in my introduction.
Many unsophisticated comments
and theories speak as if the Federal Reserve purchases a given quantity
of securities, thereby creating a fixed amount of reserves, which through
a multiplier determines a particular expansion in the money supply.
Ijuch of modern monetary literature is actually spent trying
to dispel this naive elementary textbook view which leads people to talk
as if (and perhaps to believe) that the central bank determines the
money supply exactly or even closely— in the short run— through its open
market operations or reserve ratio.
hard to dislodge.
This incorrect view, however, seems
Almost daily I read that last week or last month the
Fed increased the money supply by 5 per cent.
Such statements are simply inaccurate.
The growth of the money
supply in any period is the result of actions taken by the Federal Re
serve, the Treasury, the commercial banks, and the public.
Over a long
period, the Fed may play a paramount role, but this is definitely not
the case in the short run.
To the best of my knowledge, the Fed has not
and probably would have great difficulties controlling within rather
wide limits the growth of the narrowly defined money supply in any week
or month.
I think control over a period such as a quarter might be
possible, but I know no estimates of what the cost of obtaining a tight
control would be in terms of destruction of our financial structure,
output, or employment.
-
6-
Tables 1 and 2 show movements in reserves absorbing or realizing
demands.
supply.
The first column shows changes in the narrowly defined money
The seventh column shows changes in the total reserves furnished
by the Fed.
The lines between indicate some of the factors which can
absorb or inject reserves to cause variations from the simplified text
book case.
To place the relationship between these two columns in a better
perspective, we can note that over the past 10 years the rate of growth
of the money supply has averaged about 80 per cent of the rate of growth
in total reserves.
On the other hand, the coefficient of determination
(r^) for quarterly changes in this period is only .27; or, on the average,
nearly three-fourths of the quarter-to-quarter movements in the two
totals are not statistically related.
For year-to-year changes the r^
is .73.
The tables serve only as general indicators of rough orders of
magnitudes.
They give no indication of causal relationships.
As dis
cussed later, required reserves of member banks are based on the deposits
created two weeks earlier.
Increased reserves equal to the requirements
added by the deposit creation are, with the exception of important
marginal differences, normally made available by the Federal Reserve
through purchases or sales of securities.
In addition, securities are
also purchased or sold to offset seasonal or other changes in the socalled technical factors which add or subtract from member bank reserves.
These are mainly float, gold, currency, and Treasury balances, and other
accounts at the Federal Reserve.
In effect, the Federal Reserve creates or depletes reserves
to offset technical and seasonal changes in supplies or requirements.
However, as indicated by the second column of the table, in many weeks
shifts in reserves do take place simply as a result of misses in esti
mating what technical as well as seasonal movements are occurring.
This
column is an indication of the difference between the final reported
net movements in reserves and those expected when open market opera
tions ended for the week.
The figure for all three periods is the same
on the assumption that only the increases in the final week of a period
will influence that period’s results.
Host of the changes in the technical factors and for the
Treasury’s balances at the Federal Reserve can be considered as exoge
nous, i.e., determined outside the system.
VJhile some movements might
be controlled, it is normally considered more efficient to offset them.
As an example, and as noted, the size of Treasury balances at member
banks varies widely from week to week.
While efforts are made to mini
mize certain types of reserve impacts of these r;:ovemeiits, the totals
still remain large.
They are a major cause of week-to-week variations
in the money supply as funds move back and forth from private deposits
to the Treasury.
The utilization of the remaining reserves to meet the require
ments for newly expanded time deposits, against currency, against demand
deposits, or held as excesses depends primarily upon portfolio balancing
decisions of the banks and the public.
The equilibrium from these
decisions is clearly influenced by the Federal Reserve.
Equilibrium,
-3-
however, may never be exactly reached and it may take a considerable
time before changes in demand schedules work themselves out.
On any given day, banks stay almost completely loaned up.
The individual bank, particularly the large money market banks, can
vary their loans and investments rapidly, with small costs and within
wide limits.
Thus, day-to-day changes in bank reserves tend to show up
almost immediately as changes in demand deposits and the narrowly de
fined money supply.
We note from Table 1 that on the average in this three-year
period, the money supply increased by $150 million a week.
of weekly changes was, however, nearly $10 billion.
The range
If we look at the
mean or average deviations over the period, we note that the movement
in any given week was likely to vary from the average by $1.6 billion,
or by more than one thousand per cent.
As we move to the 4-week (month)
and 13-week (quarter) figures, we see that the amount of deviations
around the average change do not alter greatly.
On the other hand, the
longer the period, the larger the growth in the money supply.
As a re
sult, the relative deviations decrease steadily.
When we look across the table, we see that in a single week
it xrould be difficult to predict what factors would accompany a change
in the money supply.
While they do not vary quite as much as the money
supply, the weekly movements of all of these factors except for time
deposits tend to be several hundred per cent as large as the average
change in the money supply
fall randomly around zero.
In i.'any weeks, of course, these other forces
Thus, their impact on changes in the money
supply in some weeks will net out.
-9-
Uhen we look at the data for a month, we' see the effect of the
fact that insofar as these movements are random the average of their
deviations does not increase.
though.
Some of the factors are not random
An obvious example is excess reserves.
These may be relatively
large in a one-week period, but banks are able to bring them closer to
zero as they have time to average several weeks.
On the other hand,
seasonal forces and government deposits at member banks seem to vary as
much or more by months as by weeks.
Finally, over a quarter most of the noise has worked itself
out of the system.
The average change in the money supply, since it has
a positive weekly growth, is comparatively larger.
In this longer period,
the change in government deposits has, with the exception of demand
deposits, the largest relative fluctuations.
Time deposits have a some
what greater absolute movement, but related to their size they move far
less.
Their total reserve impact is considerably smaller.
Finally, let us look at the last two columns.
The first shows
movements in the amount of reserves furnished to take care of seasonal
demands for credit.
deposits.
These seasonal movements exist strongly in private
They are even greater in the government deposits.
There is
also a minor seasonal in time deposits.
The final column shows the changes in the seasonally adjusted
bank credit proxy.
U
While the growth in deposits subject to reserves
1/ The bank credit proxy is the sum of the deposit liabilities of
member banks subject to reserve requirements. Changes in it for short
periods are highly correlated with changes in bank assets. Its values
and those for changes in required reserves are developed simultaneously.
It is the most easily estimated of the monetary aggregates and has far
less 3noise” than most of the others.
-
10 -
is more than twice as large as is that for the money supply, it has a
good deal more stability.
For example, the standard deviations for
the weekly changes in the credit proxy (not seasonally adjusted) is
less than two-thirds that for the money supply.
Its relative average
weekly deviation is only about one-third as great.
For the seasonally adjusted series shown in the table its
deviations are still less.
Of course, somewhat similar relative improve
ments would also be shown if the seasonally adjusted money supply were
included in the table.
We see in Table 2 that its absolute deviations
are only about three-quarters of that for the money supply.
In terms of
its own relative size, the deviations are only about one-quarter as great.
It is probable that some trade-offs would be possible which
would reduce the present fluctuations in the narrowly defined money sup
ply at the expense of the more broadly defined money supply— which the
bank credit proxy is frequently considered to be.
It would, however, re
quire a new type of operations, and new markets and institutions.
or not such a trade-off would be worthwhile is not at all obvious.
Whether
On
the opposite side, the fact that the seasonal and irregular movements
in the money supply are so great does not, of course, mean that it is
either necessary or worthwhile for the Federal Reserve to offset them.
As pointed out initiallys both of these are problems for cost-benefit
analysis.
The data do, however, indicate that in any attempt to control
the money supply closely and directly through altering the rate of
reserve creation, a great deal of the effort would be spent in trying
-
11-
to offset noise or irregular movements.
At the same time, if reserves
were allowed to change only in accordance with the small changes re
quired for additions to the money supply, the financial markets would
have to absorb all of the other forces removing or releasing reserves.
This would cause interest rates to fluctuate widely.
I know of no
studies which attempt to measure the gains or losses from such a policy
probably because most monetary theorists agree it would not be a logical
or sound endeavor.
The Federal Reserve Money -larket Strategy
It is also clear that as a matter of fact the Federal Reserve
does not attempt to increase the money supply by a given amount in any
period through furnishing a fixed amount of reserves on the assumption
that they would be multiplied to result in a given increase in money.
(The multiplier it is recognized would not be a constant but would vary
from period to period depending on relative interest rates and the
actions of groups other than the monetary authorities.
Sophisticated
advocates of a policy based on highly controlled reserve generation
recognize that monetary action must also be taken either to anticipate
changes in the multiplier or to determine it.)
Instead, the Federal Reserve follows what has been termed a
money market strategy:— ^
2/ For those interested in more detailed statements of seme of the
concepts and problems, cf., J. I I . Guttentag, "The Strategy of Open
Karket Operations," Quarterly Journal of Economics, Vol. LXXX, No. 1
(February 1966), pp. 1-38; and P. H. iiendershott, The Neutralized Honey
Stock (Homewood, Illinois:Richard D. Irwin, Inc., 1968), 159 pp.
(Footnote 2 continued on next page.)
-
12 -
1.
The operational directives of the Open i'arket Committee
specify alterations in the margin between required re
serves and the amount of reserves furnished by the
System. These margins are considered significant in
their direct impact on bank operations, but probably more
important, they influence the interest rates on money
market instruments.
2.
The amount of marginal reserves to be furnished and
the money market rates sought are picked so as to
influence the direction and rate of change of a more
remote intermediate monetary variable.
3.
The desired rate of change in the intermediate mone
tary variable is that judged to be the most effective
in aiding the economy to move toward its ultimate
optimum goals.
A possible side advantage of this strategy is that it can be
followed even though it might be impossible to get agreement among the
members of the FOFC either as to ultimate goals, or to the form or level
of an intermediate monetary variable, or as to how to define what strategy
is being followed.
Each decision-maker may believe one or the other of the follow
ing types of variables is most significant at a given time:
Intermediate Monetary Variables
(1) Ilonetary or credit aggregates such as: the money
supply narrowly or broadly defined; deposits of
financial institutions; member bank liabilities or
credit; broader concepts of credit flows, liquid
assets, wealth, and lending.
2/ (Continued) The present discussion is my personal construct. As
indicated in the text, many and even most members of the FOKC might dis
agree with my construct. They xrould build an entirely different one of
their own to express their view of what are obviously identical opera
tions.
-13-
(2) Relative and absolute real or nominal interest
rates.
(3) The general atmosphere of the credit markets and
banking as reflected in expectations; demand for
credit; the amount of credit being supplied;
rates of change.
Because significant relationships exist among all these vari
ables, influencing one will move others in the same direction although
not necessarily to the same degree.
As a result, if there is an agree
ment as to the operational variables the manager is directed to follow,
there need be no meeting of minds with respect to which intermediate
monetary variables should be controlled or as to the proper degree of
control.
The movements of these intermediate variables can be influ
enced by a change in the level of any of the policy instrument variables
within the power of the Fed.
These are primarily:
Policy Instrument Variables
(1) The purchase or sale of open market securities.
(2) Repurchase agreements on securities.
(3) The discount rate.
(4) Regulation Q ceilings.
(5) Required reserve ratios.
A change in an instrument variable reacts with other forces in
the credit markets and the economy to shift the demand and supply for
funds.
At each Open liarket meeting, estimates are made as to the effect
changes in particular instrument variables will have on those money mar
ket variables which respond most clearly to Federal Reserve policy, namely:
-14-
Honey larket Variables
(1) Borrowings of member banks from the Federal
Reserve.
(2) Net free reserves.
(3) The Federal funds rate.
(4) Call money rates to government bond dealers.
(5) The three-month bill rate.
The expectfed movements in the money market variables are
accompanied by estimates of growth in the intermediate monetary variables.
Each possible setting of the money market variables, given the projected
state of the economy, the banking system, Treasury operations, etc., is
expected to lead to a unique growth rate for an intermediate monetary
variable.
Debates may occur with respect to desired goals ; desired move
ments of the intermediate financial variables.: the importance of specific
instrument variables:, or as to the correctness or errors in the judgment
models— which are used to estimate changes in the economy, as well as
the changes in the intermediate variables, and the money market results
of shifting the instrument variables.
All these considerations are summed up when the manager of
the Open liarket Account is instructed to buy or sell securities in order
to achieve specific (within a range) values for the money market vari
ables.
The manager of the Account operates in the securities markets
accordingly.
At times, because of outside influences, the specified
relationships for all variables cannot be achieved simultaneously.
When
this occurs, the manager uses his discretion in an attempt to achieve
-15-
those settings which he believes are most consistent with the goals of
the Cominittee.
This intent to control intermediate monetary variables through
the money market variables is shown by the inclusion in most directives
of a proviso clause.
The manager is provided the growth rate for the
bank credit proxy (within a range) expected to result from the directed
settings of the money market variables.
If the proxy moves outside the
projected limits, he is instructed to operate in the open market so as
to alter the money market variables in order to influence the credit
proxy toward its projected path.
The proviso clause is an attempt to
correct for errors which may arise if the relationships among the money
market variables and the intermediate monetary variables have not been
projected correctly, or if errors were made in projecting the other
financial and economic variables which also influence the proxy's growth.
This picture of operations can be expressed symbolically:
Where:
Rf
Q
r^
rf
rc
GNP
L
=
=
=
=
=
=
=
=
T
rj
^
RR
S
Then:
IliV
=
=
=
=
A, IIIV
Intermediate monetary variable
Borrowed reserves
Free reserves
Q ceiling
Treasury bill rate
Federal funds rate
Call money rate to dealers
Economic activity
Liquidity preference of corporations»
banks, financial institutions, etc.
Treasury cash management
Discount rate
Required reserves
Open Market operations
=
rb ; rf ; rc
K (Rb , Rp, Q, rb , rf , rc , GNP, L, T)
=
r (rd , Rb , Rp , GNP, L, T)
(1.0)
(2.0)
-16-
The change in the intermediate monetary variable, however de
fined, is determined by the interaction of the Federal Reserve controlled
variables, certain money market rates strongly influenced by the Federal
Reserve, changes in output and pricesr movements in the financial sector
and liquidity functions; and the Treasury as in (1.0).
The Federal Reserve action may influence directly the IIIV•
It
also will influence money market rates as in (2.0).
a
RRt+2
Rb, Rf
-
■
- I1SV
(3.0)
R O' RR, S)
(4.0)
The change in the intermediate monetary variable approximately
determines the change in required reserves two weeks later (3.0).
Given
the change in required reserves, the manager of the Open liarket Account
can (within the limits of his operating misses) determine exactly the
level of net free reserves (4.0).
The banking system, given a level of
net free reserves, determines its own level of borrowings and excess re
serves simultaneously.
Uhen the manager is directed to influence the money market
variables and through them intermediate monetary variables, he cannot at
the same time control the changes in total reserves.
Most reserves
additions will follow directly from the previous changes in the IMV
(credit proxy).
The manager will operate so as to furnish slightly
more or less than the change in required reserves (4.0) so as to interact
with the market (2.0) to obtain the settings he is attempting to achieve.
This means in most cases, he will furnish most (say, SO per cent or more)
of the changes in required reserves which have been previously deter
mined by the various market interactions.
-17-
An Elastic Currency
It is now possible to restate one logical reason for follow
ing the money market strategy.
We saw liow great are the misses, the
random movements, and the influence of other forces on reserves when
compared to the changes required for growth in the narrouly defined money
supply.
If one attempted to increase reserves according to an exact
schedule, the market would have to shift rapidly in order to accommodate
seasonal forces, errors in operation, Treasury cash operations, and the
type of irregular movements which the Federal Reserve now accommodates.
An attempt to control growth in the money supply directly
through controlling the amount of reserves created runs into the diffi
culty that in any quantity-price relationship if one controls the quan
tity tightly the price must be allowed to move freely and through an
extremely wide range.
In addition to many other considerations, the
problem would have to be faced of uhat costs and what structural changes
the economy would experience if interest rates fluctuated widely as the
result of an attempt to control directly a single use of monetary re
serves.
Our financial structure and capital markets are extremely well
developed and efficient.
The amount of funds bought and sold in our
money markets averages well over 10 to 12 billion dollars per day.
The
amount of money raised on a gross basis by the economy totals over $600
billion for maturities of under one year and over $220 billion with
maturities of over a year each year.
In such a system, major advantages
result if the monetary aggregates react flexibly to absorb the daily,
weekly, and monthly seasonals, shock, and other irregular forces.
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13 *
This need for flexible reactifttts in the monetary aggregates
was a major factor in the formation of the Federal Reserve.
always been a central interest in its operations.
flexibility may be greater today than in the past.
It has
The need for such
Our capital markets
operate with an extremely low ratio of equity capital.
Ue have developed
highly specialized financing institutions and techniques.
The under
writing of our public debt is done at extremely low margins.
These are
possible because the market does not have to shoulder the risks of
widely fluctuating interest rates from irregular short-term movements.
The additional reserves created to satisfy the purely seasonal or
irregular demands for short-term funds disappear quite rapidly.
They
influence total demand or the supply and demand equilibrium for financial
funds only slightly.
It is not evident why one should want rates in
the money markets to fluctuate in response to their movements.
i!ost decision models and loss functions would, I believe,
show that beyond certain limits it is highly advantageous for the Govern
ment to assume the risks from irregular movements.
The position of
these limits will depend at any time on the ability of the private
sector to assume such risks, on the shape of loss functions, on the
variance of movements and similar matters.
@FedFRASER