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X-3535
FEDERAL RESERVE CREDIT POLICY.
Program:
1.
\IIJhat ob,ject should Federal Reserve credit policy seek to
~mplish and by what test ~ay we know that it is sound?
Discussion to be led by Messrs. ltorris and Wills.
2.
What relative importance should be given to the following
factors in determining,3uch policy?
a. Federal Reserve reserves.
b. Interest rates in the oper: market.
c. Interest charged by member banks.
d. ;J;nterest rates paid on time deposits.
e. Balance of trade and inward or outward movement of gold.
f. Credit conditions in, and exchanges with, leading foreign
countries.
g. Volume of bank loans and deposits.
h. Business and industrial activity, present or prospective.
i. Comrr~dity price levels.
j. Condition of security ~~rkets.
Discussion to be led by Messrs. Jay and Seay.
3.
17lhat light does. the experience of the Federal Reserve Banks
throw on the·value of different methods of ~~king their
credit and dis count policy et'fective?
a. Discount rates.
b. Open roarket operations.
c. Discretion in rediscounting.
d. Credit examination of member banks,
e. Credit ratings of commercial borrowers.
Discussion to be led by Messrs. Strong and Perrin.
4.
Vlliat is the most practicable method of bringing about timely
and competent cons ide rat ion of rr.at ters of creii t policy by
all of the Federal Reserve Banks and effective action to
obtain the results aimed at?
Discussion to be led by Messrs. McDougal and Curtiss.
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X-3535
- 2Summary of Selected Topics:
The following SU!Il!"'..ary is a selection and condensation of statements
ro.ade in the papers and memoranda prepared by Governors and Chairmen,
with special reference to those points on which opinion is apparently
divergent. The topics considered do not follow the orler of the
program.
1.
Relation of credit policy to corrmodity price levels.
"Federal Reserve credit policy should be directed to effectb.g
steadier credit and. price cond.itions". This object ;.;hould not be
confused
·~·ith
stabilization of prices at present lavels.
"No one
can nO''-' predict or control the level at which prices will ul tiro.ately
become stabilized.
·-·e should merely direct our policy (1) so as to
prevent any serious inflation, and (2) in times of deflation e:md
depression, so as not to impede tD.ose who wish to move forward by
using more credit".
~ffecting
·Credit volume, of course, is not the only fa<tor
price levels, but ,-rithcut :nore credit prices
~o
not rise
very far, and with less credit prices almost invariably fall.
agreement with this position is the statem<Snt:
11
In
Regulation of the
volurne of credit (which r<:>.ay 0reat1·· affect prices) therefore beco~es
our greatest responsibility".
Another paper states thc:,t "very little consiieration should be
given to comrr.odity price levels.
It is no :;;e..rt of tha business of
a Re;;;erve Bank to seet to advance or dopress the price of co::::r.odities 11 • Furthermore,
11 the
infh'.ence of changes in Federal Reserve
Bank rates has been greatly exaggerated, and their po·-,er ·to affect
the price-level or control the amount of credit is not only very
limited, but very slow in producing effects".
No policy, however,
should be adopted that is lil-ely to accentuate price fluctuations,
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and one· test of the :?.oundness of policy is whether it "tends. indirectly to stabilize prices by stabilizing credit conditions, and
stabilizes credit conditions by checking inflation and deflation
before disaster comes".
Another p2.per points to the limited con-
trol exercised by Federal Rese::-va policy over the moven:ents and
volume of credit and urges that
11
it is l!'.anifestly impossible in a
country so large and so governed as ours to assume that the Federal
Reserve Banks initiate or stop credit movements because of high or
low prices, active or inactive busines::o, etc.
11 •
The conclusion of
another writer is that "the inflation which started in 1919 and broke
in 1920 was not controll'ed, and in
rrw
opinion could not have been
controlled, by any policy which the Federal Reserve Banks could
have adopted 11 •
II.
Value and meaning of "discretion in rediscounting 11 as a method
of making credit policy effective.
Two papers reach similar conclusions on this question.
One
concludes: "Based on the experien r.e of this ban?, and giving due
consideration to conditions prevailing, 'discretion' in rediscounting is more effective in controlling the credit ·situation than
changes in discount rates".
The otl1.er says that Federal Reserve
Bank "credit and dis count policy will be !T'.ade effective through the
exercise of discretion in granting rediscounts, and not through
regulation by the discount rate".
Among the considerations on
which discretion in granting or refu6ing rediscounts must be based
are: (1) occasion for redisco\unting, (2) soundness of member bank's
condition, (3) integrity and skill of its w.anagement, (4) its seasor~
X-3535
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al rediscount program,
(5)
general business, banking, and credit
outlook.
Another paper concludes that· 11 discretion 11 in granting discounts should be used merely to supplement regulation by rate,
and then chiefly in sections where interest rates· are high.
special cases and districts personal
1 discret:i.on 1
11
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will be in-
escapable, but its employment shouli be resisted and moderately
used".
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business.
'Discretion' implies J..rnowledge of details of member banks
Such discretion extended to all member banks would
necessitate passing upon every loan and investment of every member, causing annoyance, criticism of the system, and possibly
radical legislation. 'Discretion' when required should be exercised more as to the total borrowings of a
member, rather
than as to nny specific use of the proceeds. 'Discretionary' control over borrowings by members, except to a limited extent
when rate control is ineffective, will develop the desire to
exercise still :;reater power. 11
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X-3535
Effectiveness of rate policy in controlling flow of credit.
The op~osing points of view are indicated by the following
s ta terr.en ts :
(l)"The effective method of regulation demonstrated by long experience abroad is by the discount rate . 11
(2) "The discount rate cannot be the major influence making the
credit policy effective. 11
In support of the first statement:
"The rates established by the Federal Reserve Banks have been
maasurably effective in influencing the loaning policy of member banks. 11
And: "The rate of discount of a r3serve bank regulates in general how
much member banks borrow, and. consequently influences increases or decreases in tha totel volume of credit."
In agreement with the second. statement:
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The exparience of this bank
has demonstrated t.nat while incr;:;asing the ciiscount rate may have an indirect influence in developing an attitude of caution, it will not be
wholly effective in curbing a tendency tovvard excessive borrowing at
Ban~:s.
Federal Reserve
It is
reco~nized
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that the control exercised by regulation depends
partly upon the condition of member banks.
"It is only when the banks
generally are compelled to call upon Federal Reserve Banks that the power
of the Reserve
Banl'~s
to exercise any control over credit begins, and it
is at ·such times that the ratJs and the rate policy assume greatest importance . 11
And:
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Particularly is the influence of the discount rate slit:,ht
during a period of liquidation such as bagan in 1920."
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X-3)35
IV.
Relation of discount policy to re:erve position.
There is a marked diversity of opinion regarding the relative
i~
portance of Federal Reserve resarves in determining discount policy.
The extremes are indicated by two statements:
(1) "Too much emphasis cannot be placed upon the Federal Reserve
reserves in fixing discount rates.
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(2) "The reserve ratio of a bank or of tha system is a very easy but
a very bad guide to discount policy."
In accord with the first staterr.ent: "T11e rate to be charged. for this
assistance (to member banks and the opan market) shall be determined by
the percentage of gold reserve at the Federal Reserve Banks, as well as
its trend."
The paper most insistent upon establishing a close relation
between discount policy and reserves suggests a plan by mich a series
of rate advances are definitely related to declines in reserve ratios.
This paper says:
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!f, when their reserves were declining, it was the
plain duty of Federal Reserve Balli:s to protect them by raising discount
rates, which resulted in a curtailment of business, why then, when reserves
have become exceedingly large, is it not likewise their duty to lower
their rates and thus give a stimulus to business?"
In contrast to this is the staterr.ent that
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t seems probable that a
Federal Rasolrve Bank could render to its rr:ember banks substantially its
full rediscount service by establishing a moderate rate of say ) per cent
or
6 per cent, and maintaining such a rate without change" .
.Another paper states that "At the present tirr.e, when Federal Reserve
Bank reserves are at a high ratio, and the reserves of member banks of the
country are in excess of commercial deiTand and seeking investment in
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X-3535
securities, it is obvious that the protection of Federal Reserve Bank
reserves cannot be the priwary reason for fixing rates, and that other
reasons will and must naturally come to the fore.
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Yet, when other
factors "combine to effect a dra.in upon the reserves, present or prospective, then the protection of Reserve Bank reserves would become the
primary consideration."
V.• Relation of discount rates to rates charged by rrember banks.
Opposing statements:
(1)
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1 must express the conviction that no obJect can be accomplished,
and no po+icy can be effective, unless the discount rates of the Reserve
Banks are generally
rr~intained
at or above rates charged to the public,
particularly during periods of expansion."
{2) "Our experience thus far confirms the contention that Federal Reserve
discount rates w1ll normally not be above and usually below the lending
rates for the paper rediscounted."
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.Another paper supports the first statement:
"Federal Reserve Bank
rates to their members must as a governing principle be based upon and
bear a close relation to the prevailin5 rates for bank runds on line of
credit paper current in any particular part of the country".
In general accord with the second statement: "Discount rates have
ordinarily a very limited erfect upon the rate made by such members to
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their custon.ers and were not intanded to control the rate to tlle custorr.er,
and do not, in fact, exercise such an influence 11 •
11
.Another writer says:
1 believe member banks should get accommodation for the necessary re-
quirements of their custorr.ers at Reserve Banl: rates; and that the rates
they charge custorr.ers are of minor importance 11 •
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.,.sVI.
Timeliness of rate
X-3535
ch~nges,
and rrethod of consideration.
The opinion is expressed that "the real power of the Federal
Reserve Bank would seem to oe
tr~t
which results from the wisdom it
has exercised in taking the leadership of its members".
.An object
which credit polic;v should seek to accomplish is "to give timely no tic a
of any distinct c:hange which is anticipated in credit conditions''·
Changes in rat.:;s should be of a character which would indicate "what
way the current was running, how strongly it was running, and wnether
there was likely to be a change in its direction 11 •
In agreement with
this, another paper states that "an advance in the discount rate,
simply recording the accomplished fact of increased credit demand,
could serve no important purpose, but an advance made as a cautionary
warning of an expected trend of increased demand, should serve as
steadying
~nfluence
to those engaged in inuustry and commerce.
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If
it be urged that those guidin5 a Federal Reserve Bank's policies cannot
infallibly forecast the trend of credit
de~~1c,
it may be said, in the
first place, that rrathematical precision is not necessary, and further,
that the control of the ultimate bar..king reserves lays upon them
t~1e
responsibility to be informed of the real trend of bUsiness and inuustry.
Tb.e discount rata would be
t~1::J
natural meci.ium of expressing their
judegnent of the cradi t outlook".
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Two papers present plans for bringing about timely and competent
consideration of rratters of credit
~olicy:
(1) "Fr8quent conferences of the Governors and Chairmen of the
Federal Reserve Baru:.s with
t~1e
Federal Reserve Board, or a small
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X-3535
committee rapresentative of the Board and the Ba."lk:s, for the e.>..1?ress
purpose of considering credit conditions."
(2)
Local credit policies should be dictated, except so far as cer-
tain general principles of credit policy are concerned, by the Board
of Directors of each J.i'ederal Reserve Bs.rik.
should
b~
Open market operations
handled by one or possibly two committees of Governors of
certain of the Federal Reserve :SarJ:s within convenient reach.
Tr.,e gen-
eral principles of credit policy in both casas to be laid down by the
Federal Reserve Board."
@FedFRASER