Full text of Committee on the History of the Federal Reserve System : Sproul, Allan (1945-1956), Entry 168, Box 14, Folder 2

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REMARKS OF ALLAN SPROUL, PRESIDENT,
FEDERAL RESERVE BANK OF NEW YORK,
AT THE MID-WINTER MEETING
NEW YORK STATE BANKERS ASSOCIATION,
JANUARY 25, 1954

Independence of the Federal Reserve System

I hope that you will not hold me too closely to the assigned topic
of my talk this evening. I intend to weave in and out around it, but I am
not going to try to give you an historical and philosophical dissertation on
the independence of central banks. Even if such a task were not beyond my
powers of exposition, it would probably be beyond your powers of endurance.
The subject is continuously interesting to central bankers, however,
and it may be that by relating it to banking discussions and credit policy in
recent years and months, I can make it of some interest to you. It is important, I think, that neither frozen attitudes of mind concerning the past independence of central banks, nor misconceptions of the present situation of
the Federal Reserve System, be allowed to jeopardize a position which, even
though it be confirmed from time to time, is never free from attack. The possibility that there might be a "money power" able and willing to flout the
economic policies of elected Government, or exposed to the coercion of special
private interests, disturbs many men and attracts demagogic assault«,
When your President asked me to speak tonight, I told him that I
thought the bankers of New York State, and of the Second Federal Reserve
District, have a special call upon my time and energies. This could be seized
upon by those who hold that the Federal Reserve System is banker-dominated,
and banker-oriented in its attitudes and actions, but it carries no such implication. Our relations with you are close to be sure, but this is necessary
both as a matter of law and as an aid to the proper functioning of our money
economy. In the performance of our primary duty of relating the supply of
money to the needs of agriculture, commerce, and industry, and of our secondary
duties such as supplying coin and currency, collecting checks, and supervising
member banks, we necessarily work with and through the private banking system.
Our objective in both areas, however, is to meet a public need. In
the first instance it is to provide, to the fullest extent permitted by actions
of Government and the private economy, over which we do not have control, a
money supply which has reasonably stable purchasing power and which will contribute to the steady growth of the economy. In the second instance, it is to
promote the improvement of our banking facilities for the benefit of every
citizen, whether or not he ever borrows from a bank or makes or withdraws a
deposit.
One line of criticism of the Federal Reserve System, which during
the past year has made ominous forays into the public prints, is that the
Federal Reserve Banks perform all sorts of free services for the commercial
banks of the country, while charging the Federal Government for many services




performed for it. We are accused of favoring private institutions as against
the Government and of using funds, which otherwise would revert to the
Government, to consummate this favoritism. As a consequence it is sometimes
suggested that the Federal Reserve System be brought within the budget-making
orbit of the Congress, and be subjected to the general accounting procedures
of the Government, presumably so that these twin "evils" may be curbed or
eliminated.
It is a narrow and myopic view, I think, to look upon the services
we perform for our member banks as subsidies to the banking business0 If
there are such subsidies, as distinguished from services that we can and should
perform at no cost or low cost, as part of our job of providing efficient monetary arrangements for the nation, they should be eliminated. But the real and
overriding purpose of these services, when wisely conceived and economically
performed, is the provision of that better banking system, which the original
Federal Reserve Act envisaged, and which is a necessary part of the proper
functioning of our economy. Banking in this country is a highly regulated
public utility. Individual banks are operated for the profit of their stockholders, but the banking system as a whole operates for the benefit of the
community. And it is the Federal Reserve System which, nationally and in
collaboration with the Comptroller of the Currency and the Federal Deposit
Insurance Corporation, draws all of these private units together, and with
them and through them tries to see to it that the public is provided with
efficient and effective banking facilities, in the form and at the place where
these facilities will be most useful,, The expenses which we absorb in pursuit
of this objective are not subsidies to the private banking system. They represent a service to everyone in the country who depends on the proper functioning of our monetary systemo And that means everyone.
Reasonable men and friendly critics are somewhat attracted, nevertheless, by the idea that these expenditures of the Federal Reserve Banks should
be brought under the budgetary control of the Congress, and the subsequent
review of the General Accounting Office. If thei*e were real abuses to be corrected, this might be one solution, albeit one which would introduce the
unfortunate but probably inescapable element of rigidity of "Big Government"
and bureaucracy into operations which, both on behalf of the Government, as
its fiscal agent, and on behalf of the public, through the member banks, require
a high degree of flexibility in the allocation and uses of funds0 For myself,
I do not believe there exists any possibility of abuse which cannot be detected
and eliminated under present procedures, or improvements in those procedures.
The facts as to the earnings and expenses of the Federal Reserve Banks are
readily available. The efficiency of operations of the Federal Reserve Banks
is open to the daily observation of all who have dealings with them. Their
operations are under the immediate scrutiny of boards of directors performing
a public service but, in most cases, used to the compulsions of operating a
private business for profit. And the banks are subject to the check and audit
of the Board of Governors of the Federal Reserve System at Washingtono There
is no lack of control of the financial affairs of the Federal Reserve Banks.
On the question of the services which, as fiscal agents, the Federal
Reserve Banks perform for the Government, and for some of which a charge is
made, I am inclined to believe that both the public and the Congress would
look with a jaundiced eye on a broad extension of the free list. The net cost
to the Government, in any case, is a small one, since the charges made for




fiscal agency operations prevent erosion of the net earnings of the Federal
Reserve Banks, approximately 90$ of which are now paid to the Treasury. And
there are dangers as well as costs to be considered9
The first danger here
is that extravagant Government departments and bureaus, or economy-minded
agencies, depending on which way the wind is blowing, would find this a convenient way to improve their own budgetary position, and to escape some of the
controls of the Congressional appropriation procedure. There must be literally
hundreds of financial housekeeping jobs, I suppose, which Government departments might seek to have performed free of charge by the Federal Reserve Banks,
as fiscal agents of the Government, if the doors were opened to this sort of
thingo The final danger would then be that the Federal Reserve Banks would
become swamped with these incidental, mechanical functions to the detriment
of the performance of their primary duties as central banks.
It is no help in the resolution of questions such as these, of course,
to find that there are many bankers who still think that the Federal Reserve
Banks are "making money" out of member bank reserves and who do not realize
that, on the contrary, the Reserve Banks have for a long time been creating
reserves to provide the basis for present day deposit banking. These bankers
are inclined to argue that the Federal Reserve Banks are making large profits
out of the use of the reserves deposited with them by their member banks,
and that these earnings should be used to provide more "free services" for the
member banks, instead of being paid over, in large part, to the Federal
Government. Such argument not only gives support to those who see in this
matter only a question of division of spoils between private banking institutions and the Government, it also indicates a tenacious misunderstanding of
how our reserve deposit banking system really works* The reserves originally
paid into the Reserve Banks by their member banks were not, of course, earning
assets and did not become such by this shift from one vault to another. And
over the years these reserves have long since been submerged under a thick
layer of reserves created by the Federal Reserve Banks, using the powers
granted to them by the Congress. The reserves which you paid into the Reserve
Banks could be put back into your own vaults, and they would be there just as
inert as they now lie in the vaults or, better, on the books of the Reserve
Banks. The reserves which we created, primarily by buying Government securities during the war, now find a reflection in the substantial earnings which
we report each year. And similarly created reserves will be a similar source
of earnings for the Federal Reserve Banks, if the reserve base needs of a
growing banking system in a growing economy continue to be met in this way.
We do not live on the reserves which you once placed with us.
This has nothing to do, of course, with the level of reserves which
different classes of banks are required to keep with the Federal Reserve Banks.
If the percentage amount of your required reserves is increased there will be,
in effect, a transfer of earning assets from the member banks to the Reserve
Banks„ And if the percentage amount of your required reserves is reduced,
there would be a reverse movement of such earning assets. Perhaps this has
helped to confuse the picture. The way to get at this situation, however, is
not to demand free services from the Federal Reserve Banks, but to examine the
history and effect of present reserve requirements, to see if some more up-todate and more equitable method of fixing reserve requirements cannot be devised.
The Federal Reserve System has made studies of this problem, and it is one which
will have to be solved at some time if our fractional reserve banking system




is to keep in step with changing conditionsn But so far the interest which
the "banking community has shown in the problem has been small, sporadic, and
perhaps, too much tinged with the particular interests of particular groups
of banks.
Well, you now have a right to ask, what has all this got to do with
the independence of the Federal Reserve System? Only this. If the charge
can be made to stick that the Federal Reserve Banks now serve primarily the
selfish and pecuniary interests of the private banks, the independence of the
Federal Reserve System will be in danger. Whether the attack be a frontal
one, involving so-called nationalization of the Federal Reserve Banks, or
whether it be an encircling movement putting the Federal Reserve System in
with sprawling Government departments, subject to stereotyped Governmental
budget and accounting procedures, the independence and the regional character
of the Federal Reserve System—and, I believe, its effectiveness—will be
undermined. It can happen here, particularly if bankers themselves do not
take the trouble to broaden public understanding of the basic principles and
the organizational advantages of the central banking system which have evolved
in this country.
In defending what we have, however, and in trying to improve it as
we go along, we may be in danger at the hands of friends as well as critics.
Here I have in mind some of the fiction which, it seems to me, is getting
mixed up with the facts about our experiences during the war and post-war
period, and some of the loose language which is being used to describe our.
recent adaptations of flexible credit policy.
I shall refer to the earlier period only briefly. It is becoming
part of the legend that during the war, and during the post-war years until
March 1951* the Federal Reserve System was the supine servant of the Treasury.
The demands of capsule treatment of a difficult period in credit policy and
debt management seem to make for such easy generalization. So far as the war
period is concerned, I think it is closer to the facts to say that the Treasury
and the Federal Reserve System reached an agreement, with some compromises
along the way, as to war financing and credit policy. It is quite true that
we lost our "independence", but we lost it to the inexorable demands of war.
It was not meekly handed over to the Treasury in abdication of our responsibilities.
The long post-war delay in dismantling war financing policies is
less defensible. Our problem was to recapture from the commercial banks of
the country, and other holders of Government securities, the initiative with
respect to the creation of reserve credit, and to restore the ability of the
Federal Reserve Banks to vary the availability and the price of such credit
to meet changing economic conditions. The problem was complicated by the fact
that the Treasury faced, during these years, an unprecedented job of funding
and refunding an enormous mass of public debt, and by the fact that large
segments of that debt had not yet settled into firm hands. The bases for
strong differences of opinion existed even though we and the Treasury professed
the same ultimate objectives. The result of our debates was a policy so
cautious, so hesitant, so distrustful of general credit measures, that credit
policy lost much of its effectiveness. It is worth remembering, though, that
during much of the early post-war period the Treasury was drawing in cash surpluses which were used, to a significant extent, to reduce bank reserves, and
thus to offset much of whatever harm was done by our release of reserves in
support of Government security prices.



5
Here again, however, there was no meek surrender of independence;
this time it was a running fight all the way. And we did accomplish something
as early as 1947 with the unfreezing of short-term interest rates, which enabled us to offset with one hand, by sales of short-term Government securities,
what we: were doing with the other, in support of the long-term market. But
despite such qualifications, those who hold that we should have acted sooner
than we did to restore our freedom of action probably express the majority
opinion. But to impute our failure to a lack of courage, in defense of our
independence, is like sitting in the bleachers and demanding more courage of
some young men who are having all they can do to stay in the game.
There is one prime fact to be remembered, also. A more independent,
more effective monetary policy could not have prevented the post-war inflation;
at best it could only have slowed it down. The big damage had already been
done. The money supply of the country had been increased from $36 billion tp
$102 billion during the war, without any similar increase in civilian goods
and services. The inflationary effects of this warborn development were suppressed but not eliminated by direct controls. They were bound to break out,
unless we were ready and able to embark on a drastic program of deflation
which would have resulted in a decline in production, a decline in employment,
a decline in income, and a decline in consumption. I did not then and I do
not now believe that this would have been the right prescription for the
troubled post-war world, when so much depended on this countryfs economic
strength. A credit policy so drastic as to erase the inflationary effects
of war financing was not the answer. We had to grow up to the wartime expansion of the money supply through an increase in production and prices, moderated by increases in productivity. Perhaps we could have prevented some of
the increase of $10 or $11 billion in the money supply which took place in
1946 and 1947^ but the money and credit requirements of a massive readjustment
from a war economy to a primarily civilian economy would have made even this
doubtful.
When our economy had pretty well grown up to the new monetary magnitudes decreed by war and when, after the mild recession of 1949, the outbreak
of hostilities in Korea set off a new spiral of inflation, we did act promptly
and vigorously. This involved us, in August 1950, in a public knockdown and
dragout fight with the Treasury, which we had been trying to avoid for so long,
in what we conceived to be the national interest. The independence we then
asserted was broadened and affirmed in the "accord" of March 1951 > with growing support of banking and public opinion.
That support has been evident ever since, and has found expression
in the findings of two Congressional committees charged with looking into our
actions and status. What we have to guard against now is renewed erosion of
our independence.
To illustrate this danger, I might quote from a weekly magazine of
enormous circulation. In a recent issue it published a picture of the Council
of Economic Advisers with the caption "President's Prophets" and then indulged
in some prophecy of its own about the anti-depression planning of the present
Administration. One section of this statement said that "the ftight moneyT
policy, which has already been liberalized, would quickly be switched to fast
expansion of credit by decreasing Federal Reserve margins, resuming the pricepegging of government bonds, and stimulating instalment buying." The implication was that this remarkable hodge-podge is part of the Administration's
anti-depression planning, and that the Federal Reserve System is in the
Administration^ pocket so far as the implementation of such a program is concerned .




Or take another example from a banking magazine published in London.
"The attempt of the Republicans to go back to Coolidge and !sound money1 has
failed before it started. At the first whiff of deflation Mr, Randolph Burgess
and Mr. Humphrey, the big battalions of the dear money and 'putting value into
the dollar1 school, broke and fled, leaving the rearguard action to the hastily
organized open market operations of the Federal Reserve." Here we are tied in
with the monetary ideas of President Coolidge, and charged with being used as
expendables by the present Administration, when all the time we thought we were
acting on our own non-political initiative to accommodate credit policy to the
needs of a, changing economic situation,,
An
again become
It all seems
was given up

erudite domestic critic puts it more subtly. He says we have
subordinated to the Treasury by a process of intellectual osmosis0
to add up to the charge that the independence we achieved in 1951
again in 1953.

Now what exactly have we done during the past year? I shall leave
out the way we have done it, which has caused some intra-mural debate, and
confine my discussion to broad policies and broad objectives. The story cannot
be definitive, of course, because to a certain extent we have been pioneering,
and we shall need later judgments properly to assess the results. If we had
only to work by the book, we should not have had to cope with, first, inflationary excesses and then with deflationary dangers, while the Treasury was
almost continuously a borrower or prospective borrower of new money to meet
cash deficits.
My outline, then, will be just a broad sketch of policies as they
appeared at the time. In January 1953; there was considerable general or nonstatistical evidence of some revival of boom psychology in business, supported
to some extent by the statistics of November and December 1952. On the other
hand, in the critical area of prices there was little confirmation and some
denial of the emergence of inflationary forces. We were concerned, however,
about consumer spending increasing faster than consumer income, the increasing
investment in inventories, and the possible consequences of the prospective
removal of remaining price and wage controls. The situation was characterized
as precarious balance at high levels. In such circumstances a continued policy
of mild restraint of credit expansion seemed indicated. In keeping with such
a policy and consistent with previous open market operations, the discount rate
was increased in January from 1 3/4$ to 2$>, and gains in banking reserves, resulting largely from the return flow of currency from hand to hand use, were
offset or slightly more than offset by reductions in our holdings of Government
securities. As an indication of the mildness of this holding action, the
member banks gained about $1,200 million in reserve funds from January 1, 1953
to mid-March, through the return flow of currency and a decline in required
reserves, and lost a little over $1,300 million through gold and foreign account
transactions and a reduction in the Government security holdings of the Federal
Reserve Banks.
As we came into the spring season, however, the need for alertness to
signs of possible declines in economic activity increased, highlighted by the
decline in farm prices and farm income and the then unpredictable economic consequences of the cessation of fighting in Korea. At the same time, the pressure
of an unusually sustained private demand for bank credit was augmented by the




7
emergence of Treasury needs for new money, some of which would have to come
from the banks. These cumulating pressures, operating against a policy of
mild restraint on the part of the Federal Reserve System, converted that policy
into one of more severe restraint than the economic situation seemed to justify.
The risk of giving a final fillip to unwholesome inflationary developments, of
creating a bubble on top of a boom, had receded.
Taking cognizance of this situation the Federal Reserve Banks began
buying Government securities in the open market during the week ending May 13
and, before the month was out, a total of $157 million of Treasury bills had
been purchased. In addition the amount of reserve credit in the market was
increased by $125 million through repurchase agreements made with non-bank
dealers in Government securities. A net increase of $282 million in reserve
funds available to the market is no small chunk. It might have been considered
as a significant sign of a change in policy and of a prospective easing of
credit availabilityo But markets are creatures of expectations as well as
events, and the money market and capital market had become disturbed and
jittery, in the face of what they thought would be normal increases in private
demands for funds during the second half of the year, accompanied by Treasury
demands which seemed to grow in size with each new estimate. There was no
immediate reaction to our relaxation of credit restraint during May. We were
up against the fact that, at best, central banking is an art, not an exact
science, that there are lags of unpredictable duration between action and
reaction, and that our problems are still quite largely problems of human
behavior0
The market had to be shaken out of the view that credit would not
be readily available during the second half of the year, if we were not to
run the risk of giving deflationary influences a hard shove into the foreground, by reason of faulty market assumptions concerning future credit
policy. The action the System then took was precipitated in timing and
form--but not in substance--by the needs of the Treasury. Our open market
operations were stepped up in June, and lower bank reserves were announced
to take effect early in July. The cynic or the skeptic can say that this
reduction in reserve requirements coincided too neatly, in timing and amount,
with the reserve needs of the banks, as related to Treasury borrowing, to
pass muster as an act of credit policyo The alternative, however, in the
face of the necessitous borrowing of the Treasury, was to allow that borrowing to press hard on bank reserves and on private financing, at a time when
the economy was no longer balanced between inflation and stability, but
between stability and deflation. It seemed to me then, and it seems to me
now, that it would have been economically unjustified to run the risk of
tipping the balance toward deflation.
From early July until early September, we followed pretty much a
hands-off policy while the economy moved sidewise at high levels and with
stability in the broader price indices. We had become convinced, however,
that it was safe to make our errors on the side of credit ease and, during
September, we began to anticipate the expected increase in demand for credit
during the last quarter of the year. The fact that private demands for
credit did not come up to seasonal expectations made it look as if we had
overshot the mark by our purchase of $359 million of Government securities
during September and the first week of October, and this exposed us again




8
to the charge that we had become creatures of the Treasuryfs needs. I have
no hesitancy in saying, however, that our policies were dictated primarily by
economic factors, other than the Treasuryfs debt management problems, and
that whatever mistakes we made were not dictated mistakes.
It is an unfortunate fact that our estimates of what may happen to
bank reserves from day to day and even from week to week, as a result of
ordinary market factors, are not too accurate. Over a longer period they
come out pretty well, but the intervening swings may be wide. If we were
going to give the business community and the money market a lead as to credit
policy during the last quarter of the year, when it seemed necessary that
there be no question of the continued availability of reserve funds, we had
to run the risk of overshooting our immediate objective in order to achieve
the longer term result.
When the demand for reserve funds again began to catch up with the
supply at the end of October we resumed open market purchases of Government
securities and carried on through the year-end. And, as the special demands
of the year-end began to impinge on the central money markets, while the reserve position of the rest of the country remained easy, we gave special
relief to the money market by reducing from 2 to 1 3/4 per cent the rate
applying to repurchase agreements with non-bank dealers in Government securities. In this way the dealers were enabled to supply a temporary home for
short-term Treasury securities which corporations and others wished to convert into cash in connection with year-end adjustments, and the banks were
provided with additional reserves with which to meet seasonal demands.
There, in brief, is the story. We have been trying to do what it
is possible for monetary management to do in helping to maintain a high
level of production and employment without encouraging inflation or deflation. In the process we have moved from a policy of mild restraint, when
the business situation still had some aspects of a "boom", through a brief
period when market expectations induced more vigorous restraint than we had
contemplated, to a policy of increasing ease, as signs of a modest and
gradual downturn in the economy became more and more evident0 At no time
since last June has there been any real concern about the ready availability
of reserve funds needed to support the credit requirements of the economy.
On the record, therefore, and without claiming too much credit for
what has happened, because monetary policy, at best, is only one part of the
picture, I would say we have been reasonably successful* Up to the end of
1953 adjustments which were taking place in the economy proceeded gradually,
without setting off a chain reaction of downward movements. If this continues, present policies plus the normal forces of growth in our economy,
which are very strong, should be sufficient to reverse the movement before
it has gone too far, too fast. If a cumulative decline should appear to be
getting under way—if this second transition from "war11 to "peace" should
show signs of economic breakdown—it would be necessary to try to check the
movement with more positive measures,,
I now submit that the record of the Federal Reserve System during
the past year has been the record of an independent central banking system,
performing its functions within the framework of the American political




system, and in the light of the economic conditions with which it was confronted , It is less than accurate, and less' than fair, to try to shove it
back into a niche at the Treasury, To be sure our policies have been consistent with the over-all economic policies 'of the Government, and have
coordinated well with the debt .management policies of the Treasury. That is
what you would expect when reasonable men have the same objectives and are
working from the same set of facts in formulating their policies and programs.
We do not seek to use our independence to oppose Government, merely for the
sake of showing our independence. That would be intolerable and impossible.
As I have said before, our independence is within the Government of the day;
we cannot be independent of the Government„ But neither can we afford to
be--even be suspected of be ing--independent within the Government when it is
of one complexion, and subservient when it is of another. If that should
happen, our independence would be a sham, and would be destroyed with the
next turn of the political wheel of fortune.
That is why I have taken your time and tried your patience with
this review of our policies during the past year. It is important that they
be understood, if we are not to begin to slip again into a situation which,
eventually, would bring the independence of the Federal Reserve System into
jeopardy.




This document is protected by copyright and has been removed.

Author(s): Allan Sproul

Article Title: Monetary Management and Credit Control

Journal Title: American Economic Review

Volume Number: XXXVII
Date:

June 1947

Page Numbers: 339-350




Issue Number: 3

A Suggestion for

A Nation-Wide Study of Banking
\)

BY ALLAN SPROUL, president, Federal Reserve Bank of New York

Before the Twenty-Eighth Annual Mid-Winter Meeting of the New York State Bankers Association, January 23, 1956

I have used this occasion,
IsomeNat current
times, to make a few remarks on
banking problem. At other
THE PAST

times I have been more cautious, and
have merely expressed the pleasure of
the Federal Reserve Bank of New York
in having the members of the New York
State Bankers Association as its guests.
Today I am going to go somewhat beyond the formal and the safe, although
still expressing our pleasure in being
your host.
I am not joking about the safe part
of it. What I am going to do is to inject myself a little way into the fight
which has been going on for some time
between and among the commercial
banks and the thrift institutions, and
to essay the role of friend of all parties.
This is a dangerous role and, more often
than not, results in the combatants turning on the amateur peacemaker. And
since the peacemaker, as in my case,
usually doesn't know all there is to know
about what caused the fight, he is fairly
open to attack. Nevertheless, since I
speak with nothing in my mind and
heart but the best interests of our financial institutions, and the public which
they serve, I am ready to run the risk.
The fight I am referring to is the
battle which has been going on intermittently, but for some time, between
the commercial banks, the savings banks,
and the savings and loan associations,
with respect to their overlapping fields
of operation. It has seemed to me that,
perhaps, in the heat of combat over relative advantages, the common interests
of all parties, and of the public, have
tended to be submerged. And yet these
are the interests which should and, in
the long run, will determine the outcome.
I hope, therefore, that in the studies
which are now being made by the State,
by your Association, and by others, this
broad objective will be kept to the fore,
and that some of the narrower differ-




ences among you, which have generated
so much heat in the past, will occupy a
place of less importance. What should
be the goal of all parties to these disputes is a fair field in which to exercise
their appropriate and partly competitive
functions.
The question then becomes what is a
fair field for healthy competition in the
provision of complementary and sometimes overlapping services? To that
question there is no easy answer, given
the fact that we start out, not from

of this situation, and they are not the
kind of differences which can be resolved
solely by competitive forces, or by individual state action.
The commercial banks occupy a
unique position in this complex, because
they are the only institutions which, in
a sense, ''create" credit — not out of
nothing to be sure, but because of their
ability to create deposits in exchange for
other less liquid assets or the carefully
assessed ability of borrowers to create
such assets over time, all on the basis of

Open Range vs. Fenced P a s t u r e s ?
For the best interests of the community and of the nation, what is the proper
role of commercial banks, of mutual savings banks, and of savings and loan associations? The degree of feeling on this question varies in different communities and
regions, but as competition intensifies, it becomes very acute. We print Mr. Sproul's
speech because, first, it isolates the problem with cool detachment and, second,
because it suggests an objective approach that should appeal to fair-minded people.

scratch, but from the midst of a thicket
of inherited laws, rules, and practices.
In this thicket, some aspects of healthy
competition may have become qualified
and diluted so that one segment of the
public ends up paying for advantages
enjoyed by another segment, with no net
gain and, perhaps, some net loss to the
community as a whole. If there is to be
an answer to a hard question, therefore,
which will satisfy the reasonable requirements of reasonable men, I think it must
come from a complete re-examination of
our banking and thrift organizations at
the local level.
We shall have to start from the premise that these various institutions, by
and large, operate in the field of regulated business, and in a field in which
there is so high a degree of public interest as to require commensurate public
regulation. But the regulation has been
and is at two levels, national and state,
imposed by different hands in different
ways, and its incidence has not always
been equitable. Of the differences which
have aroused you, many have grown out

a fractional reserve system. If commercial banks confined themselves to commercial loans, short term liquid investments, and demand deposits, of course,
they would be much less involved in
current controversies than they are. It
is the present day department store commercial bank, with its mixture of demand and time deposits on the liability
side, and of various kinds of loans and
investments of various maturities on the
asset side, that brings the commercial
banks into the conflict. Because they
believe, and with some reason, that this
is the only kind of institution which can
provide a community with all the different kinds of banking and thrift
services which it needs, the commercial
bankers have tended to assert what
would seem to be a pre-emptive right to
operate in certain areas. They have
argued that the intrusion of thrift institutions, or their branches, into these
areas might make existing commercial
banking ventures unprofitable, and eventually result in a deterioration of the
rounded services the communities need.

And this kind of argument, in turn,
leads into the controversial question of
present laws and rules with respect to
unit and branch banking, because the
ability to survive under such conditions,
and to continue to provide complete
banking services to the community, may
depend in many instances on the institutional form of the commercial bank.
Without trying to develop that ticklish
theme further, I think it can be said that
the commercial banks and the thrift institutions have split largely on the question of whether commercial banks can
continue to exist, in some areas, if deprived by local competition of part of
their savings deposits, and whether this
would not mean that the communities
concerned would be deprived of complete and adequate banking service.
The mutual savings banks have also
come a long way since they were small
struggling institutions gathering together
the deposits of small savers in a more
or less single-handed battle to promote
thrift as well as to marshal community
funds for investment. The size and
variety of their operations have been expanded around this core of purpose and
being, so that they now seem to be trying to do many of the same things that
the commercial bankers do. And yet, it
is claimed, they still retain privileges
and exemptions which were appropriate
in their earlier status, but which tend to
weight the competitive balance in their
favor now. And so there is greater
opposition than there otherwise would
be, I assume, to the expansion of the
field of their operations, even where
movements of population are tending to
deprive them of potential depositors.
Finally, for the purposes of this brief




comment, there are the savings and loan
associations, those special purpose institutions which have been aggressively
successful in creating a widespread public belief that they accept savings deposits and operate pretty much as do
mutual savings banks or the savings
departments of commercial banks. In
their present form and importance, they
are largely the creatures of a revolution
in methods of financing home purchases
and home building which has taken place
during the past 20 or 25 years.
Short Term Money; Long Term Uses

I think that this was a necessary revolution but, in the process, the savings
and loan associations may have been
given certain privileges, and certain advantages over their competitors, which
are not consistent with the ideal of a
fair field and healthy competition. For
example, if their privileges are based on
their special character as thrift institutions, promoting the application of savings to the spread of home building and
home ownership, should they also have
such ready and almost assured access to
short term banking funds as they now
have? The process, in effect, involves
Joans or commitments by the associations
beyond the inflow of savings, discounts
of mortgage paper with the Home Loan
Banks, and the sale of short term paper,
with the flavor of Government backing,
by the Home Loan Banks to the commercial banks. In this way, short term
banking funds in excessive amounts may
be put to long term uses, with avoidance
of the discipline of thrift.
And then, of course, there are the
disparate branch privileges of the Federal and State chartered savings and loan

associations, which have created so much
controversy, and which again raise questions as to our whole tangle of laws and
regulations regarding the branches of
banking and thrift institutions.
Well, I have said enough, I think, to
indicate what I had in mind when I
suggested that there are fundamental
problems below the surface of those
issues which have tended to split apart
the financial community, and which will
have to be dealt with if we are to be
reasonably satisfied with our remedies.
What I wish to stress is that these problems will require attention at the national as well as at the state level. I
would hope, therefore, that the work
which is being done on these problems
by this Association, by other associations,
and by the State, will not only be first
class but that it will stimulate and provoke national consideration of the same
general problems. I would not be so
theoretical as to ask you to forego trying
to win a few local skirmishes, but I do
suggest that the real victory, which will
benefit all parties concerned, including
the public you serve, will come from a
fresh and thorough examination of our
whole national banking and thrift machinery. A national study of the present
character of our banking and thrift institutions, and of the laws and rules
under which they operate, is needed. It
is essential, I think, if we are seeking a
fair field where each of the players can
offer his special facilities, but where
none of the players will have special
privileges, not balanced by special responsibilities. It should not be too much
to expect that all factions can unite in
promoting such a national study, and I
recommend it to you.

December 7, 1954
AS
Comment on Answers of Chairman of Board of
Governors to Questionnaire of Flanders
Subcommittee
Your subcommittee had addressed five questions to the
Chairman at* the Board of Governors of the Federal Reserve System,
anu his answers have been made available to other participants in these
hearings, an well as to the public• With respect to the answers to
questions one, two, four and five I am in general agreement, even
though there might be some shades of difference of opinion or degrees
of emphasis in answers to the same questions which I might prepare*
This suggests the first point which I would like to make,
So far as general credit policy is concerned there has been a high degree
of unanimity within the Federal Reserve System throughout the period
coveredby your inquiry ~ that i s , since March tfSi» Our differences,
or my differences with other members of the Federal Open Market
Committee, have related to the techniques of open market operations,
not to general credit policies.
It is to these questions of techniques that your question
number three is directed* Here again I can express a good deal of agreement with much that is included in the answer of the Chairman* It is a
persuasive and stimulating discussion of the issues involved* Yet there
is also a good deal with which I disagree, and my conclusions as to the
most effective use of open market operations, to implement credit policy
and to promote economic growth and stability, diverge quite sharply
from those set forth in the answer of the Chairman «>



fits answer, of course, is responsive to the question ®f the
which askttd for affirmative support of the actions of the
Ftfteral Gp&n Market Committee, to which it ref#r§s &ot for the
arguments for and against such action* Obviously9 there is not time
here for a full clr«s*s presentation of the "negativeH sid$ of the question*
I should like to make certain points which I thin& are significant to an
understanding of the problem, hcmevar, and 1 shall b@ glad to submit
to the committee later f if it so aesires, a written statement o£ views
which might match the answer of the Chairman in. completeness and,
I would hope, in persuasiveness*
First # as a matter of background, I think I should say
that I am not for pegging Government security prices nor lor trying
continuously to determine the structure of interest rates by means of
market ora rattans* Aa ime d tha principals in the fight to free the
^ Iteeer^e Syttem from th# paj|j|tng of f ric## of
securities, throughout a difficult period of controversy an this point»
beginning in 1946, 1 think I hayg; tht right to make this clear o And as one who
ha« a jtrtrat deal of^ res|sect for the^ operations of the marketplace>nrIwonMi not
want to fee classed with those who believe that a ^ntlttuouaXy better residt cam
be obtained, so far as the structure of interest rates is concerned, by
eoxupl^tely substituting the^^ jmdgmeiitaf the Federal Open. Market ^ommittee
for that of the rr,arketplac^ *

If w# want to try to find out how th© patient

is ctoing, there must be some place where we can take the patient's pulse*




Now to take up the real issues. The least controversial
issue wae dropping from the directive ®f the Federal Open Market Coin*
mittee the clause authorising open market operations to maimtaia orderly
conditions in the market for Government securities, and substituting
for it a clause authorisdmg operations to correct disorderly situations'
in th# market* I voted in favor of this change, and thought it desirable
not just as a question of semantic•« But I would stress tha avoidance
of disorderly situations rather than their correction after they have
happened* One of the virtues of credit control is supposed to be its
ability to take proryipt action to head off financial disturbances, which
might otherwise have harmful repercussions throughout the economy*
tf open market operations in longer term Government securities can
be used to this end, I would use them rather than wait until a disorderly
situation or a crisis has developed and only then depart from operations
solely in Treasury bills*
The most controversial issue was the instruction by the
Federal Open Market Committee that open market operations must be
confined to the short end of the Government security market (except in
correcting disorderly situations) which, in practice, has come to mean
confined to operations in Treasury bills* 1 did not get the impression that
this action was merely am assertion ®£ the power of thm Federal Open
Market Committal to determine whether and when tli« System Open Market
iicccmnt should engage in transactions outside of the short end of the market*
There meed not h® any question of the pow«r of tit€ full Coauxuttee to




determine the conditions and general timing of operations in the longer
term areas of the market. 1 was concerned with the strong emphasis
which 1 thought was given to the permanence of the "bills only11 doctrine.
Suggestions for publishing a set of 'rules of the game' , references to a
"constitution" for open market operations, and the repeated argument
that Government security dealers could mot create a broad, continuous
market if we did not forego operations in long term securities (except to
correct disorderly conditions), gave me the disturbing impression
that we were in danger of placing ourselves in a straitjacket which
would mot permit us to accomplish what the Congress and the public
might expect us to accomplish in terms of monetary management.
I, therefore, welcome the statement te the answer of the
Chairman, to your question number three, that the door is being kept open
to a change in the ^trnmnt haste technique of open market operations, and
the recognition in his answer that the present approach to open market
operations is still experimental and that insufficient time has elapsed to
draw firm conclusions as to Its performance,

The publication of these

views should help to dispel the idea that present techniques have been
adopted for all time, and should help to avoid further hardening of the
dangerous opinion that any future operations by the System in the long
term market will be the signal of a critical situation*
I also welcome the repeated references» in the answer
of the Chairman, to the concern of credit policy with developments in the
long term sector of the market and the assertion of the particular concern




of the Federal Open Market Committee that its policies be reflected in
the cost and availability of credit in those markets*

It has been and

still is my contention that this concern earn find its best expression, at
times, in open market operations specifically directed mi these longer
term markets.
This i s , perhaps* the variant approach to open market
operation© briefly commented upon and summarily dismissed, beginning
0m page 20 of the answers of the Chairman to your question number
three * As set forth there, it is described as a method of operation in
which n the Federal Open Market Committee would normally permit
the interplay of market forces to register on prices and rates in all
the various maturity sectors of the market but would stand ready to
intervene with direct purchases, sales, or swaps in any sector where
market developments took a trend that the Committee considered was
adverse to high level economic stability. u
That seems to me to be an eminently reasonable approach
to our problem, but it has never realty been tried * not even In the period
1951-53 to which the Chairman refers* And now it has been dismissed
on what 1 believe is the shaky assumption that it "did not appear to offer
real promise of removing obstacles to improvement in the technical
behavior of the market*'
This probably brings u» down to the nub of our differences.
The Chairman's answer to your question number three embraces the
view, with which I agree, that the "depth, breadth and reailiency 1 of the
Government securities market, or its ncontinuity and responsiveness".



shoulct fee furthered by all means that are consistent with a credit policy
of maximum effectiveness and that* in general, the greater the "depth,
breadth and resiliency 11 of the market, the greater will be the scope and
opportunity for effective credit control through open market operations*
But the proof #1 this pudding must be found in the actual market, nmt in
theoretical discussion of a supposedly ideal market* The answer of the
Chairman assertstkat the market has become increasingly stronger,
broader and more resilient since the Committee adopted the "bills only n
technique. It suggests most persuasively why, theoretically, this should be
go. But this doesn't prove that it has actually happened. In fact, I wonder
whether we are talking about the same market, and what are the | definitions
of * strengthH and "breadth" that are being used» It is my information and
observation that the market for longer term securities has remained at least
as "thin", under existing open market procedures, as it was before these
procedures were adopted> 1 think it has lost in depth, breadth, and
resiliency, whether you view it in terms of dealer willingness to take
position risks, volume of trading, or erratic price movements.

We must

not be misled by the claims of one or two dealers, who urged the present
techniques, and now proclaim that they are helping to create a broader
market -for Government securities•
1 4o mot think we have helped to create such a market #
And, therefore, 1 &® not see tow the responsiveness of cost anil availability
of credit, in all sectors of the market since June 1953, can have been the
result #1 a progressive strengthening of the Government security




market growing out of the actions of the Open Market Committee with
respect to open market techniques* Much of the success of System
actions during this period has derived from the promptness of adaptation
of overall credit policy to changes in the economic situation, and to a
high degree of coordination of Federal fiscal policy and debt management
with credit policy* For the rest, it has sometimes taken massive releases
of reserves, under the techniques adopted or in support of those techniques,
to accomplish what might have been accomplished more economically
with the help of limited direct entry into the long term market*
I am hopeful, therefore, that the present period of
experimentation will not be too long extended, and that we shall soon
have am opportunity to experiment with the middle way * the variant
approach - which I mentioned earlier*
One final comment should he made, perhaps, on the
discontinuance by the Federal Open Market Committee of direct
supporting operations in the Government security market during
periods of Treasury financing* I would agree that the System Open
Market Account should not, as a matter of routine, provide such direct
support, but I would also say that we cannot, as a matter of routine,
turn our back on such supporto
The emphasis in the present approach to Treasury
financing is good* The Treasury should meet the test of the market,
in relation to other credit needs of the economy, to the fullest possible
extent, But too rigid application of this doctrine is questionable, as a
matter of market procedure and Treasury-Federal Reserve relationship**



In periods of credit ease, when policy considerations point to the meed
of keeping Treasury demands from draining credit away from desirable
private use, reliance on bill purchases alone may lead to unwanted
consequences.

The flo&ding of funds into the bill market, in order to

assure adequate credit in the areas being tapped by the Treasury, may
produce an undue enlargement of bank TmB®Tim&9 or an extreme distortion
in Treasury bill prices and yields, or both* There will also be times,
particularly in periods of credit restraint as distinguished from the recent
period of overall credt ease, when rigid application of the present rule
may result in serious collisions of debt management and credit policy,
which might have been avoided without jeopardising the overall public
interest.
Mow let me repeat that what I have been discussing are
disagreements over techniques of open market operations, not over general
credit policy* It is good to have these differences opened up, and 1 hope
that this hearing will result in more discussion of the problems involved
by an informed public* We in the Federal Reserve System cannot consider
m*rsalves to be the sole repositories of knowledge in these matters*
What I have been most afraid of is that we might come
to think that we can indulge in the luxury of a fixed idea* There is no
such easy escape from specific and empirical decisions in central
banking* We can't have a general formula, a kind of economic law,
which will B^rm the ends of credit policy under all sorts of economic
conditions*




REMARKS OF ALLAN SPROUL, PRESIDENT,
FEDERAL RESERVE BANK OF NEW YORK,
BEFORE THE FORTY-FIRST NATIONAL FOREIGN TRADE CONVENTION
WALDORF-ASTORIA, NEW YORK CITY
NOVEMBER 15, 1954

NEW OPPORTUNITIES FOR A LIBERAL FOREIGN TRADE POLICY

I am sure that you are all aware that my role as Chairman of the National
Convention Committee of the Foreign Trade Council is tinged with fraud. I have
lent my name to the Committee, but my name is of little value except to me. I welcome you to this city and to these meetings, but your real welcome comes from your
directors and officers who have made all of the preparations for your comfort and
convenience and, perhaps, for your enlightenment. If I am to make amends for the
fraudulent quality of my role, it will have to be by honesty In speech.
Given the theme of this Forty-First Annual Foreign Trade Convention, I
could do no less in any case. If we are to address ourselves effectively to the
general proposition that "expansion of world trade depends on international goodwill and integrity", we must be temperate but honest in our assessment of our own
problems and those of our trading partners throughout the non-Communist world.
This is not always easy. The pressures of personal and group interests
tend to warp the views of all of us, no matter how hard we may try to be objective
in our approach to the complicated problems of international trade and finance.
And the temptation is always present to tell the other fellow - or the "foreigner" what he should do to conform to our ideas of what is just and treasonable.
I hope, therefore, that you have all been Inspired, as I have been, by
the truly tremendous developments in the international political sphere during the
past several weeks• In a brief space of time, and hoping and assuming as we must
that the various parliaments will approve what has been done, even though the debates may be gharp, we have seen what appeared to be a complete breakdown of all
or most of our plans and hopes for Western Europe and the North Atlantic Community
converted into a great forward step. Age-old enmities on the continent of Europe
appear to be on their way to amelioration or solution, commitments have been made
by Great Britain which reverse the policies of more than a century, our own nation
is widening and broadening its role of partner in world affairs in a way that must
help to bury whatever latent isolationism still exists, and Russian attempts to
promote division and suspicion among the Western powers have been checked.
These historic developments should put a new charge of enthusiasm and
courage into our attack on the economic problems which beset our world. What has
been achieved in the political sphere by goodwill and integrity, and by facing
the stubborn facts of a difficult situation, should make it less possible to continue to view our economic problems with such narrow perspective that caution is
always preferred to daring, and the tortoise is taken right out of Aesop as the
emblem of progress* I am neither proposing nor predicting a dash for free trade
by the United States, nor a dash for convertibility by the United Kingdom, nor a




dash by any country or group of countries away from the practical problems and
real risks of commercial and financial decisions. I am saying that, in the face
of this giant stride forward in our political affairs, we should proceed with
better heart and greater urgency to examine critically, and with awareness of
the need for mutual adjustments, the impediments and obstacles which have slowed
down progress in achieving our international economic objectives.
I hope I shall not be misunderstood if most of my remarks seem to have
reference to the United States, the United Kingdom and Western Europe. There
will be no disparagement of the importance of our neighbors in the American continents, nor of Asia and the Middle East in such a presentation. It will represent, merely, a personal belief that the fundamental problems of international
trade and finance, affecting all of the free nations, will respond most quickly
to treatment at the nerve centers of trade and finance.
What have been the basic objectives of our foreign economic policy
since the end of World War II? First we addressed ourselves to the relief of .
individuals and groups of people stricken by war - an outlet for our sound
humanitarian instincts. Then we embarked on a program of economic aid to
national units to help restore productive capacity and trading relationships
destroyed or distorted by war - an act of enlightened self-interest. More recently the emphasis has been on military aid to our friends abroad, with whatever economic benefits might accrue - a necessary response to the menace of a
totalitarian and apparently hostile force which is loose in the world. We also
participated in an attempt to set up an international trade organization - an
evidence of awareness that good international economic relations rest, at bottom,
on good trade relations. By trying to do too much, by trying to cover countries
in all stages of economic development with one set of rules, and by trying to
harmonize international equilibrium and domestic stability by international
agreement, this attempt courted and achieved failure. It did throw off, as a
by-product, the General Agreement on Tariffs and Trade, however, which may bear
the seed of greater international collaboration on trade matters and which already has some successes to its credit. As you know, an Important meeting of
GATT is now being held at Geneva, Switzerland, with United States representation. It is to be hoped that this meeting will have constructive results which
will recommend themselves to the United States, as well as to the other participants .
And almost throughout these postwar years there has been recognition
of the need to help the so-called underdeveloped countries improve their economic condition and performance - a recognition of the fact that multilateral
trade concepts which rest too largely on a species of specialization which tends
to freeze existing differences of skills and facilities, as between nations, are
no longer tolerable. The Ttunder deve loped" countries want to be and should be
something more than sources of raw materials for the "developed" countries.
The underlying economic goal of all of this effort has been the creation of the widest possible area of non-discriminatory trade relationships and
the widest possible return to freely convertible currencies. There has been
considerable progress. But I would hope that the pace of progress could now
be accelerated. Even without trying to read too much long term significance
into short term movements, there have been encouraging signs of the development
of the kind of a trading world we have sought to achieve. And recent international political developments seem to me to have given us a new frame of
reference.




3
Perhaps, first on the list of encouraging signs is the fact that
economic readjustment in this country, which began last year, has not degenerated into a depression and has not had the serious effects on our international
trade and on economic conditions abroad, which many feared and many expected.
For too long we were considered to be a race of economic barbarians, given to
wild and wide swings in economic activity which, because of our weight, and
height and reach, endangered every other trading nation. The recession in this
country which began in the summer of 1953 has been a moderate one, and already
it seems to have lost its force rather than feeding on itself. We may now be
regarded as a civilized economy.
Related to but also separate from this heartening display of stability
on our part, has been the growing economic strength of many foreign countries.
In the United Kingdom and Western Europe, in particular, economic progress has
continued while we were in recession, the first time this has happened in a great
many years. Production has increased, internal fiscal and monetary conditions
have improved, controls including some controls on dollar expenditures have been
relaxed, and a better competitive position has been attained. And despite a
rise of commercial exports of the United States, and some decline in our imports,
with a resultant increase in our surplus of exports, the gold and dollar reserves
of foreign countries have shown a substantial gain - from mid-1953 to mid-1954
approximately $2.3 billion or 10 per cent. To be sure, United States payments
for services and remittances, for military expenditures abroad, and for economic
aid, contributed to this result. But without the general improvement in international economic conditions, and the greatly reduced dependence of the rest of
the world on supplies from the United States over the last few years, this sharp
increase in gold and dollar reserves could not have taken place.
It is highly significant, I believe, that this record has been made
while discriminatory trade restrictions aimed against dollar imports were being
relaxed in many countries, while international commodity markets were being reopened in the United Kingdom, and while greater freedom of dealing in various
currencies was being permitted abroad. International trading has become more
competitive, has been less shielded from the tests of free competition, than at
any time since the end of World War II. And this testing of the economic
strength of our trading partners, prior to formal and final steps of whatever
character and degree Into the supposedly chill waters of non-discriminatory
trade and currency convertibility, reduces the risks of the final plunge and
makes it that much more likely that the final plunge will eventually be taken.
It is important to emphasize this demonstration of the ability of trade
and payments liberalization to go forward more or less hand in hand. We have
always coupled non-discriminatory trade with currency convertibility in our prescription for international economic health. We have held, rightly I think, that
currency convertibility with continued and widespread discrimination against dollar imports would be a largely sterile accomplishment, not only for us but for
those who might attempt to pursue two such mismatched policies. A phony equilibrium, involving formal convertibility but achieved or maintained by quantitative
controls, would be only a little more enduring than the present equilibrium of
quantitative controls plus exchange controls.




While there are encouraging signs and portents, however, we can "by no
means conclude that all of the conditions precedent to freer trade and payments
have been established. Thus far many countries, including our own, have made
their contributions, each one largely in its own interest, but nevertheless
contributing to the general forward movement. Yet I think there is some feeling among those of you who are interested in foreign trade and committed to a
more liberal foreign economic policy that, after a magnificent start, we are
now inclined to do less than our share.
Questions are raised on two main scores - our relative reluctance to
invest abroad, and our halting approach to a more liberal foreign trade policy.
The lesser problem of the two, in my opinion, is foreign investment. I say the
lesser of the two, not because I think it is of little importance, but because
I believe that questions relating to foreign investment are often based on a
false assumption, and because I believe the problem has a lesser psychological
impact than the problem of foreign trade policy.
The false assumption is that we are trying to recreate a past situation in which a good "creditor country" is a heavy exporter of capital to redress
its balance of payments. This was a part of the combination of factors which
made the mechanism of international trade and payments work comparatively well
during the 19th century when the United Kingdom was the hub of world commerce and
finance. It has less meaning and less force now when the United States occupies
or shares that position, and when political stability around the world is more
precarious. We have been described, and not wholly inaccurately, as the greatest
"underdeveloped" country in the world. So long as this is so, and so long as
this distinction is shared with our neighbor to the north, the competition of
domestic plus Canadian investment is going to inhibit the growth of "foreign"
investment. There are signs that the market for private foreign investment (I
do not refer here to so-called direct investment), which has been largely frozen
since the torrid twenties, is beginning to thaw a little. There is a' trickle^
and it should continue and grow, if the world climate gets warmer, but I would
doubt that it will quickly become a torrent. And I would not want to see it
forced by too much Government intervention. There are undoubtedly some things
which our Government can and should do to promote private foreign investment.
Perhaps the tax laws relating to such investment can be improved and perhaps
some guarantees against special risks can be provided. But by and large, private
foreign investment should be a matter of private risks and private rewards, with
fair and equitable treatment at home and abroad the fundamental prerequisite.
Psychologically, what happens in the field of foreign investment has
a lesser impact than what happens in the field of foreign trade, because the
former is less in the public eye, because nobody seems to be hurt directly by
its absence, and because in our thinking it is often considered to be a balancing
factor after the trade returns are in.
Not nearly so much heat is generated by the failure of figures of
foreign investment to come up to hopes or expectations, as is generated by trade
decisions such as, for example, an increase in the tariff on dried figs or Swiss
watches or the failure to award a generator contract to a low bidder from abroad.
The latter incidents are commented on all over the trading world and interpreted
as another sign of a return to stricter protectionism in this country.




No retaliatory moves are threatened because we don't export more capital,
even though this is one of the factors "behind discrimination against dollar imports.
And no domestic groups or individuals identify themselves loudly and effectively as being hurt by the failure of private funds to seek foreign investment
opportunities. Apparently we can afford to get along with a gradual growth of
private foreign investment, if progress is being made on the more explosive front
of trade relations.
Since the end of World War II there has been no lack of organized study
of our foreign trade relations, under both private and Government sponsorship. The
Bell report, the Paley report, the report of the Randall Commission, and many
others, have all gone over the ground, have all studied much the same facts and
figures, and have mostly come up with the same general conclusions, pointing toward
the desirability of framing trade policy so as to permit foreign exporters reasonably competitive access to most American markets. The fire and emphasis with which
such recommendations have been made have diminished, perhaps, the closer the study
group has been to Congressional attitudes, and to business and labor pressures, but
whether the outcome has been a ringing affirmation of liberal trade policies, or an
attempt to devise a program which would seem to have a chance of adoption, practically all of these studies have pointed in the same direction.
The net result so far has been some progress, including, more recently,
holding the line against a revival of restrictionism, but now the need Is to push
forward with greater purpose. Now that we have pretty well accomplished the task
of aiding in the reconstruction of the trading world, by Governmental gifts and
loans of billions of dollars, we must overcome the difficulties of projecting a
trade policy which will help to sustain what we have so greatly helped to create.
I don r t believe that our national penchant for "giveaway programs" extends so
far as to make this our only solution of international trade problems. Surely
we do not prefer to give away to foreign countries the products of our farms and
factories and mines, rather than trade with them on some basis of equality? There
must be some deeper force at work. I suspect that it is easier to get this great
warm-hearted nation to adopt a program in which the burden is placed on all of
us - as it is in the case of a "giveaway program" - than to adopt policies of
trade liberalization which might, at least in the beginning, hurt some particular
groups of our citizens. And the fact that with few exceptions, our national
legislators are elected and re-elected on the basis, largely, of local Issues
rather than national or International issues, contributes to this seeming illogical result. Yet we all are aware that the "giveaway" policy is no longer generally
acceptable either to those who give or to those who receive.
If we are to move ahead, new measures must now be devised and adopted.
If we cannot or will not adopt policies which may temporarily hurt the few but
are for the benefit of the many, had we not better give more attention than has
been given to suggestions which would require the whole economy, and the whole
nation, to help bear the economic pressures which might be placed on some localities, on some industries, on some groups of individuals by a more liberal foreign
trade policy?
Of one thing I am pretty sure. We cannot afford to go back and we
cannot afford to stand still. The twin goals of currency convertibility and nondiscriminatory trade relations have been before the various trading communities
for a long time. These goals are still believed to be attainable and they still




work their magic. But who can say how much longer, and in a more competitive
world, the traders of other nations and the traders of this nation will submit to
discrimination against their products without seeking more restrictive retaliatory
action? Who can say how much longer so much of the trade of the world can be
carried on with inconvertible currencies, without those trade areas which revolve
around inconvertible currencies tending to fall apart? And, therefore, who can say
how much longer we can expect to see progress toward a world of freer international
trade and payments if these goals continue to elude us? The alternative of a
United States which might be trying to rebuild barriers to imports, and of other
principal trading nations of the world trying to build a permanent non-dollar bloc,
is not a pretty one, but not an impossible one in the short run. And in the short
run we can greatly jeopardize our chances for the long run.
As I said in a statement which your committee issued, in calling this
meeting,
"Freedom to trade and freedom to spend the earnings of trade
are measures of progress in goodwill and integrity. If we
and the other nations of the world reject this approach, we
may well be setting a course toward insularity in trade and
toward inconvertibility of currencies which it will be most
difficult to alter for many years to come."
We cannot let this happen. It is time to tackle our problems of international trade and finance with the same indefatigable, patient, high level attention that has been given to our international political and military problems, and
to our domestic economic program. In the present position of the United States in
the world, these things are intertwined, and if we neglect one we imperil the
others. It is time for a real effort on our part to make international trade something more than a step-child of domestic economic policy, and international finance
something more than a step-child of domestic financial policy.
I hope, therefore; that your convention will address itself to the problems of foreign trade which it has before it, with a new fervor. In the light of
recent historic accomplishments in the field of international political relations,
and in the light of recent national successes in dealing with domestic economic
readjustment, the impediments to a more liberal and a more stable foreign trade
policy should look less formidable than they have in the past. The way is open
to you to lead us in the path which we should follow.




Not to be released "before 5 Pom. (E.S.T.)
Thursday, April 7, 1955.

Remarks of Allan Sproul, President,
Federal Reserve Bank of New York,
at the Sixteenth Annual Pacific Northwest Conference on Banking,
Pullman, Washington,
April 7, 1955.

Monetary Policy in Periods of Transition

My being here this afternoon is a return of the native - a native of
the Twelfth Federal Reserve Districto I was born in San Francisco and educated
at a great sister institution of Washington State College, the University of
California at Berkeley. For ten years, from 1920 to 1930; I worked at the
Federal Reserve Bank of San Francisco with Cecil Earhart, Hermann Mangels,
Joe Leisner, Scott MacEachron, and others you know well. In those years, during which I labored on and finally edited the Monthly Review of the bank, I
came to think that I knew a good deal about the economy of this district - its
agriculture, its lumbering, its mining, its fishing, its manufacturing, its
transportation, and all of those diverse activities which show up in credit
needs and credit extensions. I never knew as much as I thought I did, of
course, because much of what I knew was second hand, but I did have a fairly
good grasp of your problems and your prospects. Now, I have been too long
away to try to discuss affairs which are peculiar to this western empire and
which, in any case, are familiar to you. I shall seek the protective coloration of a broader canvas.
First, let me say that I was appalled when Dean Lee said that I might
have an hour of your time for my talk. I realize that those who walk in
academic groves regularly discharge such assignments without fear or trembling.
But those of us who pound the pavements of commerce and finance are apt to find
that talking for an hour stretches our powers of speech to the breaking point.
We run the risk of losing both the thread of our discourse and the attention
of our audience. I hope that you will bear with me, therefore, if I extend my
remarks beyond the time I usually allot myself, even though I do not quite
come up to the mark which Dean Lee set for me.
This matter of time has automatically chosen the topic which I will
discuss. The only thing I know enough about to talk about, for the better
part of an hour, is monetary policy. I thought that you might be interested
in one man's view of the changes in monetary policy during the past two or
three years. And then, if we have time, I could try to look ahead, not in
terms of forecasting what monetary policy may be, but in terms of the factors
which will help to determine what monetary policy will be.
First, let me go back to the period at the beginning of 1953; when
the Federal Reserve System was following a policy of credit restraint. It has
become an article of faith, with some of those who are suspicious of monetary
policy, or of those who now administer it, that credit restriction at that
time was the cause of the recession of 1953-54, and that the recession was an




unnecessary consequence of an inflation complex on the part of the monetary
authorities. We are held to "be so fearful of inflation, that we forget or
ignore high levels of production and employment as goals of economic policy.
Let us see what there is of truth and what there is of falsehood in
these accusations. Superficially, the economic situation in the early months
of 1953 did present a bright picture. Employment had reached new high levels
and unemployment was at the lowest level, for that time of year, since the end
of World War II o Industrial output was crowding the limits imposed by the labor
force, capital equipment, and the available supplies of essential materials.
Commodity prices, according to the indexes of aggregates, were stable.
One does not have to dig far below the surface, however, to find soft
spots which detract seriously from this bright picture. Accumulation of business inventories was going forward at a rate which indicated that too large a
part ofcurrent production was going into stocks held by manufacturers, wholesalers, and retailers, rather than into current consumptiono In the second
quarter of 1953 > for example, such inventory accumulation was at the annual
rate of about $6 billion compared with less than $3 billion in the first quarter
of the year. This doubling of the rate of acciimulation of inventories, which
far exceeded the rate of increase in gross national product, was a measure of
"false" growth. Such an Imbalance between production and consumption could not
go on without a breakdown sooner or later.
At the same time that this accumulation of business inventories was
taking place, consumer spending was being supported by an increasing use of consumer credit which also presented elements of instability. During the year
ended April 1953 > the total volume of consumer instalment credit outstanding
increased by $5 billion or about one-third. But even with this extraordinary
addition to current income, consumer demand was not sufficient to come near to
clearing the market.
Finally, the apparent stability of commodity prices, in the aggregate,
was the net result of diverse movements in the prices of individual groups of
commodities. Prices of many industrial goods were rising, but prices of farm
products and foods were declining, a decline which reflected primarily a rate
of production in excess of current demand. There was stability in the price
indexes but instability in the price structure.
The choice before the monetary authorities was whether to supply the
reserves which would encourage further distortions in the economy, or to try to
slow down the rate of credit expansion so as to spread out the "good times" over
a longer period, and reduce the danger of a later economic collapse. In the
event, it was enough, and at the end more than enough, to let the pressure of
demand, and of anticipatory demand for credit, press against the available supply
so as to prevent the further blowing up of a "bubble on top of a boom". Of
course, there was no check plot to tell us what might have happened if we had
not pursued the policy we did in early 1953- But I find it beyond belief that
an easy money policy in the boom atmosphere of the period would have made it
possible for the country to avoid a recession in 1953-54, and to avoid even
mild adjustments of that magnitude for the indefinite future. Such a belief
would fly in the face of all that is known about the way changes occur in a
dynamic enterprise economy.




It is also held against us, however, that other forces were already
in motion, early in 1953> which would achieve what we sought to achieve.
Specifically, it is said that it was obvious at the beginning of 1953 that there
was going to be a substantial decline in defense spending later in the year
which, unless offset by an increase in private spending, would seriously and
adversely affect the whole economic situation and that, therefore, a restrictive credit policy in early 1953 was untimely.
Now there may have been some knowledge and, as I recall, there was
some guessing in the latter part of 1952 that the peak level of defense spending
would be reached sometime around the middle of 1953. But later official statements and budget forecasts or projections moved the peak of defense expenditures
out beyond 1953. The budget which was prepared by the outgoing administration,
and sent to Congress early in January 1953; called for a further increase in
Government expenditures, and indicated a budgetary deficit of $10 billion and a
cash deficit of $6.6 billion, during the fiscal year 1954, the largest such
deficits since World War II. Even though some economies were begun in early
1953; and even though greater economies were achieved than was then estimated,
actual defense expenditures continued to increase through the second quarter of
1953 and, even in the fourth quarter of that year, were only slightly less than
in the first quarter. There was no clear and definite projection of defense
expenditures which might have guided monetary policy along another path than
the one it took.
It is probably not necessary to argue, however, what could be seen in
the crystal ball, in early 1953> so fax as future defense expenditures were concerned. The prospects for a truce in Korea improved as the spring advanced, and
it became reasonably certain that, in the absence of major fighting elsewhere,
the longer run level of defense spending would be below the high levels of the
first half of 1953. But the likelihood of a decline in defense spending by the
Government, at some future time, was not a good reason for abandoning credit
restraint in early 1953- Rather it counseled against letting unrestrained
private spending compete with defense spending under the conditions then prevailing. If business inventories and consumer credit had been encouraged to
expand without restraint at the same time that defense expenditures were rising
to a peak, and private capital formation was proceeding at record levels, the
dangers of the prospective decline in defense spending would have been increased.
The economy could have gotten way off balance, and really reacted dangerously
when defense spending did decline. This was a threat which a policy of credit
restraint in early 1953 helped to banisho
That policy may not have been perfect in its timing and its execution,
and it was not popularo A policy of credit restraint seldom is popular, and
unpopularity breeds misinterpretation and attack. I have mentioned the assertion
or claim of our critics that the economic situation in the spring of 1953 was
close to ideal, in terms of production, employment, and prices, and that our
unnecessary intervention was the result of an inbred fear of inflation. I
suppose we central bankers are partially responsible for this sort of opinion.
We have long been distrustful of our own ability to help check a decline in
economic activity, once underway, and have frequently argued that monetary
policy could be most useful in checking the excesses of the later stages of a
boom, thus helping to prevent or diminish the agonies of the "morning after".
This may be twisted into an inflation complex. Is it not clear, however, that




our -underlying concern, in such circumstances, is actually with, deflation not
inflation? We fear deflation more than inflation, just as do most people who
are aware of the human aspects of economic forces, and the human suffering which
is involved in "both of these deviations from economic well "being. If, at times,
we apply measures of restraint to a bubbling economic situation, it is because
that is one of the reasons for our being - to try, during periods of high prosperity, to help prevent the excesses which will bring such periods to a
destructive end.
I might even go beyond that position, and say that there is another
reason, in our present state of economic development, for a body which has a
sound and healthy concern about inflation. That is the strong pull in the other
direction, which gains power from a host of politicians and large groups of our
population, and which does not lack economists and pseudo-economists to bring
it intellectual support. The Employment Act of 1946 is now the main guide of
public economic policy* The danger is that this call for Government action to
promote maximum - not full - employment, production, and purchasing power will
be interpreted to mean that monetary policy should embrace creeping inflation,
so as to create conditions which are said to be necessary to the promotion of
"full employment", no matter what happens to the purchasing power of the dollar.
Recently, before a Congressional committee, I said that those who would seek to
promote "full employment" by creeping inflation, induced by credit policy, are
trying to correct structural maladjustments, which are inevitable in a highly
dynamic economy, by debasing the savings of the people. If their advocacy of
this course is motivated by concern for the "little fellow", they should explain
to the holders of savings bonds, savings deposits, building and loan shares,
life insurance policies and pension rights, just how and why a rise in prices
of, say, 3 percent a year is a small price to pay for achieving "full employment". They should also explain to all of us - little, big, and just plain
ordinary Americans - what becomes of our whole system of long term contracts,
on which so much of our economic activity depends, if it is to be accepted in
advance that repayment of long term debt will surely be in badly depreciated

No, I say it is necessary and wise that the monetary authorities not
accept the questionable dictum that high level employment and price stability
are necessarily incompatible. It is probably true that full employment, in
the sense of there always being "more jobs than men" may not be possible without creeping inflation,, Such a condition implies sellers' markets, not only
for labor but also for raw materials and finished goods. It implies a situation in which efficiency incentives are reduced and there is weak resistance
to increased costs, since such increases can usually be passed on in higher
selling prices. These conditions are not likely to be conducive to maximum
economic progress. Laxity of effort and speculative sprees develop in such
an atmosphere and lead to distortions and instability, rather than to sustained accomplishment. But a condition of high employment, high efficiency,
high production and stable values seems to me to be a feasible and desirable
objective.
Such an objective suggests that we need to give more attention than
we have done to the division of the rewards of increased productivity^ In
recent years, loud shouting has made it seem as if the only question was
whether "big labor" or "big business" was to reap the lionfs share. It is




clear, I think, that we are going to have to get along with "big labor" and ""big
business". One is the product of the other, and both have had a part in the
tremendous increase in our productivity as a nation. It is a cliche, a truth
worn bare by constant repetition, that our American system of production has
brought greater material well being to more people than any other economic
system yet devised. But that system may not maintain its place indefinitely,
if there is persistent inequity in the distribution of its rewards. If owners
and managers or organized labor, or both of these groups, take unto themselves
too large a share of the rewards of increased productivity, the economy may
eventually be retarded. One danger is that, if all the gains of increased
productivity go to raise profits and wages in the particular industries in
which the increase occurs, a wave may be set in motion which will spread to
all industries, including many where there has been no gain in productivity.
That throws the economy out of kilter, and is one of the sources of the demand
for continuous "gentle inflation".
There is the even greater danger that the consumer, the fellow on
whom we all depend to keep our economy going, will be squeezed or forgotten by
the power blocs. He needs to be considered, along with the more privileged
groups, because he is all of us. He should get his share of the dividends of
increased production and improved methods, in the form of lower real prices.
If he doesn't get his share, the end result, despite his capacity for long
suffering, is likely to be political action to restrain "bigness" in industry
and in labor. And such action may be blundering and punitive. The tendency
toward an absence of price competition in large segments of our economy, suggests that we need to review a good deal of our thinking regarding the competitive free enterprise system whose benefits we all enjoy.
This is a concern of monetary policy, because lower real prices, in
an economy of increasing productivity such as ours, are a function of stability
of the dollar. And stability of the dollar, along with maximum, production and
employment, is a primary objective of monetary policyQ We need the best fusion
of these objectives which we can get. Then if, from time to time, our dynamic
growing economy throws so many people out of work as to be socially intolerable,
we should seek further means resting on the whole economy to take care of the
situation. But we should not debauch monetary policy trying to make it do the
whole job, by way of creeping inflation. We shouldn't steal the savings of the
people with one hand, while we promise them steady work and a comfortable old
age with the other.
Now to return from that partial digression. When we come to the
change in monetary policy in May-June 1953> from restraint to ease, and later
to "active ease", we come into a period when monetary policy could bask in the
approval of almost everyone. It was said that we were prompt in action and
vigorous in execution and, as a result, we have been given some credit for the
mildness of the recession which began in the third quarter of 1953 and which
has now been largely corrected. Modestly, or as modestly as we can, we accept
this praise while, at the same time, we carefully point out that monetary
policy, as always, was only one factor in a complex situation, and while we
privately admit that luck was on our side, too. We need to avoid being asked
to carry burdens which we cannot bear, and we need a little luck if we are
successfully to carry the burdens which we should bear.




6
In any event, we were doing the popular thing when we created and
maintained easy money during the last half of 1953 and all of 1954O We even
surprised ourselves a little, "because monetary policy was not so helpless as
a good deal of theory had suggested in checking recession and providing a
positive stimulus to recovery.
As was stated in the recent annual report of the Federal Reserve Bank
of New York for 1954, the buildup of business inventories of 1952 and the first
half of 1953; gave way to inventory liquidation in the latter part of 1953 and
most of 1954, and the end of the war in Korea in July 1953 was followed by cutbacks in defense expenditures. Industrial production and employment declined,
and demand for raw materials and finished goods, both domestic and imported,
decreased. In this situation, the principal objective of economic policy was
to prevent the unavoidable corrective adjustments from feeding on themselves
and cumulating until recession became depression, and to give encouragement to
the forces of recovery, Prompt response to the evidence of slackening output
did not require extreme intervention by Government, however, since the natural
forces of recovery within the private economy were strong. The role of monetary
policy, along with fiscal policy, was one of softening the impact of the adjustments which were taking place, and exerting an overall influence which would
encourage the flow of resources, manpower, and credit into areas where the
potentiality for expansion was real.
A recovery so induced was likely to be more lasting than one too
heavily dependent on artifical stimulants, such as more direct Government intervention. The easy money policy of the Federal Reserve System made its contribution to recovery by relieving pressures for forced liquidation, facilitating
an orderly readjustment of surplus stocks, and in general making sure that ample
funds were available for both short term credit and long term capital needs.
The principal burden of sustaining this policy was borne by open
market operations, the name given to purchases and sales of Government securities
by the Federal Reserve Banks, which put reserve funds into the banking system or
take them out as the needs of the economy seem to require. Throughout this
period, we exerted pressure on the banking system to find outlets for excess
funds, by maintaining a substantial volume of free reserves, that is, excess reserves less borrowings from the Federal Reserve Banks, in the hands of member
banks. As a consequence, total bank credit expanded more rapidly than in any
year since World War II, despite some repayment of business borrowings as a
result of inventory liquidation and the end of "tax borrowing" with the expiration of the excess profits tax. Other types of loans increased, and there was
a large increase in bank investments, which either financed public and private
expenditures directly or provided funds for investment by others.
There was, of course, considerable interplay between open market operations, a mid-1954 reduction in reserve requirements, and discount rates. The
discount rate was reduced twice, from 2 to 1 3/4 percent in February 1954 and
from 1 3/4 to 1 l/2 percent in April 0 The discount mechanism, however, was
largely put out of commission by the general policy of maintaining a considerable
aggregate of "free reserves" in the banking system at all times. Relatively few
banks found it necessary to borrow from the Reserve Banks, and then only for
short periods for temporary reserve adjustment purposes. Reserves were obtained
more cheaply and in more permanent form by the reduction in reserve requirements




7
and through System open market operations. Under these conditions the discount
rate became primarily a symbol of the direction of System policy, and a pivot
for certain other short term money market rates, not a main determinant of
credit conditions.
To sum up, and again drawing on the recent annual report of the Federal
Reserve Bank of New York, flexible credit policy was employed in 1954 to provide
an abundant supply of cash and credit to the economy and, in coordination with
other instruments of economic policy, to help halt and then reverse the recession
which had gotten under way in mid-1953. The recession was halted and reversed
and, by the end of 1954, recovery was well under way. The available statistics
indicate that this recovery was based, in considerable measure, on extensive recourse to credit, but that is not to claim, of course, that easy money, by itself,
brought about the recovery. The underlying soundness and strength of the economy
was the necessary and vital ingredient.
Looking at both 1953 and 1954, I believe it is fair and reasonable to
conclude, on the basis of the evidence, that credit policy was effective and
contributed positvely to economic stability and long term growth, both when it
restrained the excessive use of credit and encouraged postponement of some
capital projects prior to mid-1953> and when it eased conditions in the credit
and capital markets in the last half of 1953 and in 1954.
All of this is economic history which will quickly become ancient,
however, and probably much of it is as well known to you as to me. All I have
tried to do is to bring into clearer focus a few main elements of the picture as
I have seen it develop, in the hope that it would be of some interest to you,
not only as an aid to understanding the past but also as a guide to the future.
As bankers, businessmen, and even as economists, I am sure that you find guessing
what the future may hold a more fascinating and, at times, a more profitable form
of mental exercise than dissecting the past.
Unfortunately, perhaps, that brings us into a time period in which I
can be less positive, less cock-sure, and certainly less authoritative than when
talking about what is past. And I have to warn you, at once, that nothing I now
say can be taken as an exact statement of present System views or policies, nor
as a forecast of what System views or policies may be in the future. I shall
be giving you my views and opinions, which may or may not be shared by my
associates in the System. The System is not a monolithic organization - we have
disagreements without purges. Fortunately there has most often been a clear
consensus as to what policy should be, even when we have disagreed sharply as
to operating techniqueso
Perhaps the best way to go about this excursion into the future is to
start from a known point. The policy record of the Federal Open Market Committee,
recently published in the Annual Report of the Board of Governors for 1954, confirms a shift in monetary policy which took place in December 1954. Whereas
during the previous year we had been conducting open market operations with a
view, among other things, to promoting growth and stability in the economy by
actively maintaining a condition of ease in the money market, we then decided
to take the "active" out of ease.




This shift in the degree of credit ease to be maintained seemed to be
in accord with the economic developments of the last quarter of 1.954 and the near
term prospects for 1955. With the recovery movement pretty firmly established,
although by no means complete, it seemed appropriate and desirable to take out
of the banking system the surplus funds which had been used to keep up the pressure on banks to loan and invest. As demand for credit grows, with reviving
business, the existing money supply will be used more actively - its velocity
will increase - and the need for pressure to bring it into use will decline.
Nevertheless, this shift in policy has been challenged, and again the criticism
has been made that our fears of inflation - which seems to be narrowly defined
by these critics in terms of the movement of prices - have led us into actions
which may jeopardize the present business recoveryo So far, I think you will
all agree, the recovery shows little or no sign of being "jeopardized". It is
a pretty vigorous affair. But if it does not come up to the mark of the builders
of statistical models of what a fine world this could be, I am sure we shall be
blamed.
What has been done, primarily, was to mop up an overhang of excess funds
in the banking system which needed to be removed, so that the relation between
business expansion and credit expansion would be better observed and better
coordinated as the recovery progressed. This was "taking up the slack". It
cleared the way for observation, analysis and interpretation of those broad
general trends in the economy which, I think, can give a lead to credit policy
in a recovery period.
What are some of these trends? First, there is the character of the
business recovery. Is it widespread or heavily concentrated in a few industries
or areas, balanced or distorted? Is it so rapid as to make it unlikely that its
pace can be sustained, thus raising the question of another setback? Is it so
slow that, even if continued, it will leave us with the problem of a labor force
which is growing more rapidly than the increase in jobs?
Second, there is the appearance or non-appearance of speculative
tendencies in business plans, in consumer buying, and in public or mass reactions
to the sweet music of recovery. How are prices behaving; are there sharp advances
in basic commodity prices which seem out of line with increases in production and
consumption? Is there evidence of inventory accumulation beyond the needs of a
prompt delivery economy? Is the economy on a prompt delivery basis or are bottlenecks appearing? Is there an absence of resistance to higher costs, on the assumption that they can readily be passed on to the consumer? Do business plans for
capital expenditures seem to be in reasonable relation to longer term growth?
Does the consumer seem to be showing signs of going on a spending spree, stimulated by increasing injections of instalment credit? Is the construction industry
wearing out the effects of very liberal mortgage terms, originally abetted by a
monetary policy dedicated to easy money? Is the stock market getting into the
taxicab, the elevator, the barber shop and the front pages of the newspapers, instead of staying where it belongs as a necessary adjunct of our financial and
investment machinery?
Last but not least in this brief catalogue, there is the rate of growth
and use of credit, and of the money supply. Does available bank credit appear to
be insufficient to nourish a vigorous recovery? Does it appear to be readily
available to facilitate sustainable economic growth? Does it look as if it might
be in excess supply, encouraging a speculative spirit,or, to change the metaphor,
sowing seeds of inflation which could lead to another economic downturn?



Obviously these are very general criteria. But they are the kind of
criteria which, along with the masses of statistics that underlie them, and all
the general information which defies statistical compilation, we have to try to
interpret and digest in reaching judgments as to monetary policyo There are no
specific criteria which can guide the policies of the Federal Reserve System at
all times. There are no clear and definite trigger points which will tell you
exactly when to shoot and when to hold your fire. We must rely on general
criteria and use many guides to judgment and action, and you will have to do the
same in guessing what our actions may be and judging them after the fact.
It may be possible to indicate some of the things which might conceivably come about in the monetary sphere, however, if economic recovery continues
along a healthy course, and if there are no international developments to upset,
seriously, our domestic tranquillity. I do not treat the latter hazard lightly.
It is the over-riding question of our time, no matter how small the sector of
the landscape we are surveying. But I do not have the means of assessing the
possibilities and probabilities of war.
If war is to be avoided and if economic recovery continues, these things
might occur. There should be some revival of discount operations at the Federal
Reserve Banks. The discount window was largely put out of commission during the
period when reserve funds were being pushed on the banking system by a combination
of open market operations and reductions in reserve requirements. Individual
banks in adjusting their reserve positions, and the whole banking system in meeting seasonal or other less than permanent needs for reserves, may now become more
dependent upon borrowing at the Reserve Banks. This will be healthy and usefulo
The volume and persistence of such borrowing could give some indication as to
whether credit policy is geared to a generally healthy recovery, or is too restrictive and thus checking recovery, or too liberal and thus endangering the
longevity of recovery by promoting speculative uses of credit. If the signal
seems to be that credit policy is becoming too restrictive, relief can be given
quickly by open market purchases of Government securities. If the signal seems
to be that credit policy is becoming too liberal, open market sales would have
the reverse effect.
Second, in such a period of recovery, and with even the mild shift in
credit policy which has taken place, it would be expected that some rise in interest rates would occur. In fact, as you know, there has already been a rise in
interest rates, proportionately greater at short term than at long term, but extending out through the whole range of debt maturities. Commercial banks, which
were active purchasers of marketable securities at short, and then at longer term,
during the period of very easy money, find their resources adequate to meet actual
or prospective increasing demands for loans, but not so large as to press continuously for investment outlets. A moderate firming of interest rates during a period
of economic recovery is to be expected and can be constructive rather than a
damaging influence.
The movement of interest rates during recovery will have to be watched
more closely, however, than in the preceding period of recession, when nearly all
of the emphasis was on the availability of reserves, and when what happened to interest rates was of relatively little concern to the monetary authorities. Interest
rates have now become one indicator of the degree of credit ease or tightness which
is being maintained by monetary policy. A rise in interest rates which went too
far too fast could be damaging, particularly in the capital markets where a continued flow of funds into capital expenditures is desirable.



10
Third, changes in the discount rates of the Federal Reserve Banks might
be made more frequently in such a period, as the discount window of the Banks
again "became busy, and as interest rates become more sensitive indicators of
market pressureso In such circumstances, the discount rate could assume the role
of an anchor for the whole structure of interest rates o And eventually it might
lose some of its ponderous significance as a symbol, while it gained in power as
a ready weapon of monetary policy.
I do not know quite what to say about the money supply, because it has
suffered at the hands of those who have mechanistic ideas about monetary policyo
Certainly the money supply - usually defined as currency outstanding plus adjusted
demand deposits - will bear watching, but it is difficult to establish it as a
gauge of monetary policy in a period of business recovery. Private demands for
credit are expected to grow, in such a period, at a more rapid pace than would result solely from seasonal or secular influences. But this might or might not be
reflected in a comparable increase in the money supply. During some of the stages
of recovery, the economy may not need an increase in the money supply, because of
more effective use of the supply already in existence. Over the recovery period
as a whole, however, there should be an increase in the money supplyo But I
don ! t think you can be precise about the amount or the percentage of increase 0
You can!t rely on the money supply figures automatically to tell you what to do
and when to do it.
As you can see from this hasty summary of some of the general criteria
of monetary policy, and of some of the things which might happen as a result of a
monetary policy geared to economic recovery, we central bankers are practicioners
of an art, not a scienceo In practicing that art we can never lose sight of the
broad purpose of our being - to help to maintain those conditions in the economy
which will promote high levels of production, employment, and consumption, and
stability of the purchasing power of the dollar. This demands flexibility. It
demands restraint upon the use of credit when the economy begins to stretch at
the seams, and credit is being called into use to support too many speculative
positions, as well as the production, distribution and consumption of goods and
the provision of needed services. It demands encouragement of the use of credit,
when our productive resources of men and machines are not being utilized as fully
as they should be. It demands that actions be taken with a view to accommodating
the needs of the whole economy, in the public interest, and not the needs of
special groups or interests, whether they be economic groups or political interests,
That is a large order. I cannot claim that we have either the technical
means or the ability to fill it to the satisfaction of everyone, including ourselves. We need all of the advice and counsel we can get, from bankers and
economists meeting in groups such as this, from farm groups, labor organizations
and business groups, and from those who occupy places of responsibility in the
apparatus of Government. In return we have a right to ask that the advice we
are given be as objective as possible, that criticism be as constructive as possible, and that our integrity and our honor not be impugned in the process. We
are not the vassals nor the pawns of any vested interest. We have taken a binding oath to serve the interests of all of the people of the United States to the
best of our ability. We have no other purpose.