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William McChesney Martin, Jr., Papers
Box 21/Folder 3
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Federal Reserve Bank of St. Louis
Series V, Subseries A
FRB Official memos, 1957-60
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Federal Reserve Bank of St. Louis
BOARD DP GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
ROUTE SLIP
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BOARD OF GOVERNORS
OF THE
FEDERAL R E S E R V E SYSTEM
Office Correspondence
To
Governor Mills
From
R. J. Collier and E. J» Swindler
u,
SubffrflQ reserves and Federal Open
Market Account, actual and
under three assumptions.
This refers to your request that consideration be given to
what might be the effect on the level of "free reserves" of conducting Federal open market operations by (1) ignoring fluctuations in
float or (2) basing them on changes in required reserves alone.
In order to compare actxial free reserves and the open market
account with hypothetical free reserves and open market account undercertain assumptions described belcw, weekly average figures of factors
affecting member bank reserves were compiled for the period August 29,
1956 through January 30, 19!?7. This period was chosen because the wide
fluctuations in reserves that normally occur during the period would
provide a good test of given alternatives. The weekly averages used
in these comparisons are the final reported figures, some of which did
not become available until two to four weeks after the end of the given
period; they were not available to the Federal open market account
manager, who had to make his decisions on the basis of forecasts and
day-to-day market developments. Use of the final actual figures in
these comparisons eliminates the adverse effect of poor forecasts; it
seeks to show how the open market account might have moved if the^related factors had been so well forecasted every day as to result in
a weekly average that coincided perfectly with the final reported
average.
Comparisons of actual free reserves and the Federal open
market account are made with hypothetical figures computed under the
following three assumptions:
(1) That all changes in factors affecting free reserves
except those due to float are offset by open market
transactions.
(2) That free reserves are held constant, i.e., that all
factors are offset by open market operations.
(3) That open market transactions are based on the movement of required reserves.
The results are reflected in the accompanying charts.
Situation under Assumption 1. Had open market transactions
offset all changes in all factors affecting free reserves except those
in float, the System account would have been about as stable during
September-November as it actually was. Thereafter, as Chart 1 shows,
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Federal Reserve Bank of St. Louis
To: Governor Mills
-2-
it would have risen to a high of over 4)25,800 million in the week of
December 26 and declined to $23,1*00 million in the week of January 30,
a range of $2,1±00 million. The actual range of movement in the open
market account during the same period was about $1,500 million, from
million to $23,1*80 million.
Increases in float which supplied reserves in December, and
decreases which drained reserves in January, tended to reduce the need
for open market operations. If movements in float had been ignored,
free reserves would have shown somewhat wider fluctuations in
September-November and very much wider fluctuations in December -January
than actually occurred, as Chart 2 shows.
Situation under Assumption 2. If free reserves could have
been held constant and the open market account had been adjusted to all
other factors, including float, the account would have fluctuated more
than it actually did during September-November. In December -January,
the account would have risen to a high of &2it,800 million in the week
of January 2, and declined to a low of $23,100 million in the week of
January 23, a range of $1,700 million. This range was similar to the
actual range of $1,600 million in January, from a high of $25,100 million on January 2 to a low of #23,500 million on January 30.
Situation under Assumption 3* For this assumption we first
adjusted the open market account average for each week by an amount
sufficient to bring free reserves to a constant level, and for this
purpose we chose the level (negative $j2? million) that existed in the
first week of the periodjV we then computed for each week the ratio
of required reserves to the adjusted open market account; and finally
we computed an average of this ratio for the four weeks ending
with each week in the test period. This moving average ratio was
used in deriving the open market account for the next week— simply by
applying the ratio to required reserves in the next week.
If open market transactions had been conducted in this manner,
the open market account would have varied more in the period
September-November than it actually did. The timing of changes prior
to December tended to be opposite to that of the actual account as
Chart 1 shows. Variation during December and January would have been
somewhat smaller than it actually was. The account would have risen
to a peak of $2U,?00 million in the week of January 2 and declined to
$23,300 in the week of January 30— a range of ^l,iiOO million. The
actual change in this period was from $25,100 million to ,£23,500 million—a range of $1,600 million.
I/ The percentage relationship between required reserves and open
market account as thus adjusted for a constant level of free reserves was used on the grounds that a relationship of this sort
would tend to reflect better the aims of the Federal Open Market
Committee.
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Federal Reserve Bank of St. Louis
To: Governor Mills
-3-
Under this assumption free reserves would have shown substantially larger week-to-week changes than actually occurred and
would have been negative almost throughout the period. In each month
September-November free reserves would have fluctuated very widely,
reaching high negative levels at mid-month and declining sharply in
w-eks ending the 19th-2i*th accompanying intramonthly increases in
float. Free reserves would have fallen during early December to a
negative level of nearly &900 million by mid-month, and then risen
sharply during the last ha3.f of the month. In Jammry free reserves
would have averaged higher, but would have shown about the same
range of movement as in the preceding months. Hence, throughout the
period a four-week moving average percentage relationship between required reserves and the open market account was not sufficiently
sensitive to prevent substantial seasonal changes in reserve balances
and free reserves resulting mainly from variations in float.
Since it has been the policy of the Open Market Committee to
maintain free reserves within a limited range in order to prevent wide
fluctuations in interest rates which would disrupt the money market,
it appears that actual open market operations during the period reviewed
were more conductive to effectuating its policy than would have been
operations under any of the three assumptions.
This does not preclude the possibility that generally satisfactory results could be achieved if the Open Market Committee ignored
float except when very wida changes therein were indicated — but it
would be very difficult, of course, to forecast when changes in float
would be so wide as to require compensating open market operations.
Although precise forecasts of changes in float cannot be made, the
direction of movement from week to week is generally predictable, and
some offsets by open market operations seem to be preferable to none
at all*
To conduct open market operations on the basis of estimated
changes in required reserves alone would not seem to be conducive to
ar. orderly market, partly because country bank required reserves can
net be estimated satisfactorily, but principally because changes in
frae reserves reflect changes in reserve balances much more than they
do changes in required reserves.
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Federal Reserve Bank of St. Louis
CHART 1
Behavior of Federal Open Market Account, Actual and Under Three Assumptions
AVer-apes for weeks ended Aug..29, 1956 to Jan. 30, 1957
Millions of dollars
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Federal Reserve Bank of St. Louis
Millions of dollars
CHART 2
Behavior of Free Reserves, Actual and Under Two Assumptions
Averages for weeks ended Aug. 29, 1956 to Jan. 30, 1957
Millions of dollars
1,000
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Federal Reserve Bank of St. Louis
Minions of dollars
1,000
CONFIDENTIAL
Memorandum on Problems Arising in Connection with
the Discount Rate Reduction of November 1A. 1957
The circumstances of the reduction in the discount rate of the
Federal Reserve Bank of New York and three other Reserve Banks on November
14- were disturbing to the directors of this Bank in two respects:
(l) the
part played by the Board of Governors in connection with the discount rate
change, and (2) the questions raised by the recent experience with respect
to the relations between the System and the Treasury.
For several months it had been the opinion of the directors of this
Bank that business prospects for the latter part of this year were not as
strong as commonly thought, and that a revival of inflationary boom conditions
was unlikely. In this appraisal the officers of the Bank concurred.
For
this reason the directors were reluctant to raise the discount rate in August —
an action which, however well justified by developments in market rates, including the advance in the commercial bank "prime loan" rate, could be interpreted
as a further step in the direction of intensification of credit restraint. Nevertheless, after several of the other Reserve Banks had acted to raise the discount
rate and there was evidence that distortions in the interdistrict flow of funds
were developing because of the rate differential between this and other districts,
the directors voted to raise this Bank's discount rate.
At the same time the directors expressed the view that seasonal needs
for reserve funds should be met promptly through open market operations, rather
than permitting such needs to cause further pressures on bank reserves and
possibly interfering with the financing of normal seasonal activities.
Again
the officers of the Bank concurred, and Mr. Treiber and Mr. Hayes presented this
view at meetings of the Federal Open Market Committee, beginning with the meeting
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Federal Reserve Bank of St. Louis
(2)
of August 20* Apparently the Committee was reluctant to take any action which
might be interpreted as indicating relaxation of the System* s policy of credit
restraint* As the fall season progressed, it became increasingly clear that
business activity, at best, was shoving no more than the usual seasonal revival
of activity and might be falling somewhat short* Business loans at reporting
member banks were clearly lagging, and in October showed a contra-seasonal
decline* In these circumstances, the officers and directors of the Bank felt
that the reduced loan demand should be permitted to be reflected in somewhat
easier member bank reserve positions and in money market conditions.
By early November it was clear that seasonally adjusted indexes of
production and trade had turned down and that indexes of wholesale and consumer
prices were leveling off, and a change in Federal Reserve policy appeared to be
called for. It was the view of the officers and directors of the Federal Reserve
Bank of New York that an appropriate way to effect such a change in policy would
be to use open market operations to ease member bank reserve positions and money
market conditions gradually, and to follow up with a discount rate reduction
after a few weeks if economic conditions and money market and credit developments
then made such a clear-cut confirmation of a change to a less restrictive policy
appropriate. This procedure, we believe, had considerable support throughout the
System, although an immediate discount rate reduction was favored by a few.
Presumably open msxket operations would have led the way in a change of policy
had it not been for the intervention of the Treasury, which was about to announce
the terms of its December refunding and new money borrowing operations.
The Secretary and Undersecretary of the Treasury, upon being informed
of the System's intention to effect a change to a somewhat less restrictive policy
over ensuing weeks, took the position that that information placed them in an
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Federal Reserve Bank of St. Louis
(3)
untenable position* They argued strongly that it would be improper for them
to announce financing terms in line with then prevailing market conditions, when
they knew that a change of Federal Reserve policy had been decided upon, and that
it would be impossible to conduct their financing operations successfully if the
terms of the offerings were adjusted to the market conditions that might be expected
to prevail after the change in System policy had become effective* The first
suggestion was that public announcement be made of the change in System policy,
but it was concluded that such an announcement was not feasible and would be
contrary to established Federal Reserve practice and policy*.
This left as the only available means of System action to make the
change of System policy promptly and widely understood either a reduction in
the reserve requirements of some or all member banks, or a discount rate reduction.
The Board of Governors did not favor the former at this time, and the Chairman of
the Board undertook to discuss with the Reserve Bank presidents the question of
an immediate reduction in the discount rate. Not only was consideration of a
discount rate reduction suggested, but the precise amount of reduction favored
by the Board was indicated. In fact, it was implied that no other discount rate
change would be approved, and the force of this implication was demonstrated when
the Board refused to approve a lesser reduction voted by the directors of the
Federal Reserve Bank of New York.
There are two aspects of this experience that are disturbing:
(1)
the steps taken by the Board, as a result of Treasury representations, to induce
hasty action by Reserve Banks contrary to that favored by a majority of Reserve
Bank presidents as the result of orderly procedures and consideration only a day
or two earlier; and (2) the action taken by the Board virtually to dictate the
amount of discount rate change to be made by the Reserve Banks. The latter was
of particular concern to the directors of the Federal Reserve Bank of New York*
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Federal Reserve Bank of St. Louis
U)
While, as indicated above, our directors were — and had been for
some time — in favor of a shift to a less restrictive credit policy in view of
their appraisal of the economic situation, they would have preferred that the
initial action take the form of open market operations to ease the pressure on
bank reserves* Nonetheless, when it became clear that one or more of the other
Reserve Banks would reduce the discount rate, they felt that it would be undesirable for the New York Reserve Bank to stand aloof, having in mind its location
in the principal financial center and its conviction that credit policy should
be eased. Having once reached this decision, they concluded, however, that a
reduction of 1/4 per cent would be most appropriate for this Bank, for a variety
of reasons* Even assuming that some overt signal of the change in Federal Reserve
policy was needed to meet the views of the Treasury, a 1/4 per cent reduction would
have served the purpose. It would also have run less risk of suggesting to the
public that the directors were alarmed over the business outlook, and would have
involved less dislocation in the financial markets. Even though our directors
were informed that the Board would prefer a reduction of 1/2 per cent, they were
shocked when their action in voting the smaller reduction was disapproved by the
Board, leaving them only the choice of "all or nothing".
There is always room for judgment as to how much of a rate change
is appropriate to the circumstances, and perhaps in the end we may conclude that
the larger reduction was desirable. But an important matter of principle was
involved — the statutory allocation of initiative and responsibility among
the component parts of the Federal Reserve System, with its " checks and balances*
which constitute <ane of the System's greatest elements of strength. Responsibility
for initiating discount rate action is placed upon the Reserve Bank boards of
directors, and should be permitted to function as far as possible if the recognized
advantages of a regional system are to be preserved.
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Federal Reserve Bank of St. Louis
It would be most unfortunate
(5)
if an impression should be created that, in this or other areas of responsibility of Reserve Bank boards of directors, the judgment of the directors was
likely to be overruled by the Board of Governors without giving full weight to
the directors1 judgment after a careful exchange of views.
Aside from the particular incidents that arose in connection with
the recent discount rate action, the experience raises important questions concerning the influence to be exerted on System policy decisions tgr Treasury
financing operations. Even though the System for several years has ceased
giving direct support to Treasury financing operations (except for one occasion
on which the Treasury had a serious problem and direct support could be given
without interfering with the System13 policy objectives), there has been general
agreement on a policy of maintaining a reasonably "even keel11 in the money market
during periods of Treasury financing. But it has not been felt that Treasury
operations should be permitted to interfere with the orderly determination and
execution of Federal Reserve policy. While the System has avoided action to
intensify pressures on bank reserves during the period from the first announcement
of a Treasury financing operation until the operation had been consummated, it has
not suspended at such times consideration of, or decisions concerning, any change
of Federal Reserve policy that appeared to be appropriate in the light of all the
circumstances then prevailing.
Unavoidably this has meant on several occasions, during the application
of a restrictive credit policy for the past two years and more, that System action
to resume pressures on bank reserves after a Treasury financing operation had been
consummated caused prices of the newly issued securities to fall below par. Similarly,
in the recent instance, if the policy agreed upon on November 12 had been carried out
without change, no action to reduce the pressure on bank reserves would have been
taken during the period in which the Treasury financing operations were being carried
out, but subsequent open market operations might have caused prices of the new
Treasury issue to rise well above par.
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Federal Reserve Bank of St. Louis
(6)
It can be argued that System action during a period of
increasing credit restriction, without prior notice to the public of ite
intentions in each instance of Treasury financing, was unfair to subscribers
to new Treasury issues; and that to have proceeded with the policy agreed upon
on November 12, without prior notice to the public, would have given the subscribers to the new Treasury issues a "windfall11 profit and would have been
unfair to the Treasury. But acceptance of this argument would mean that there
would have to be a hiatus in System policy decisions (unless accompanied by
an announcement or by some overt action) every time a Treasury financing operation
was in prospect, extending probably from two or three weeks prior to the first
announcement of each offering until some time after the operation had been
completed. $hen there were frequent Treasury operations, as there have been
in recent months, this would leave little time for the consideration and execution
of effective and timely Federal Reserve policies*
It seems to us, therefore, that a dangerous precedent has been set
if the System is to be precluded from adopting policy changes without immediate
public notice in some form if, at the time, the Treasury is approaching a refunding or cash financing operation. In any event, it seems clear that this is a
subject that should have careful and full consideration by the System before
another similar situation arises*
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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT
275
C. DISTRIBUTION WITHIN THE FEDERAL RESERVE SYSTEM OF AUTHORITY
ON CREDIT POLICIES
15. Trace the historical development of the process by which the discount rates of the Federal Reserve Banks are set and evaluate
the relative authority of the Board of Governors and of the
directors of the Federal Reserve Banks in setting discount rates
today.
Development of process by which discount rates are set.—When the
Federal Keserve Act was enacted in 1913, discount rates were regarded
as the principal instrument of credit policy. Since that time, discount
rates have come to be supplemented by other instruments of credit
policy, notably by open market operations and the authority to change
reserve requirements of member banks but also by regulation of stock
market credit and at special times by regulation of consumer and real
estate credit Today, it is recognized that the process of influencing
bank credit expansion is complex and that the instruments or
combination of instruments most appropriate to the task will vary at
different times according to the changing factors and forces affecting
the growth of bank and other credit. Moreover, since the establishment of the System, far-reaching changes in the character of the economy, deriving from two world wars and basic developments in communications, transportation, mass production, business organization,
and public policy, have worked to alter the fundamental structure 01
the credit market. Over this period the credit market has shifted
from a structure of interconnected local and regional markets into a
relatively well-integrated national market, with borrower rates of
interest for financing of a given amount and comparable risk in closer
alignment as between. various localities and regions. With these
changes, local and regional differences which might be reflected in
differences in discount rates have diminished in importance and the
rates have come to reflect more and more conditions in the nation as
a whole. These modifications in the role and interrelation of regional
discount rates have substantially affected the procedures by which the
rates are fixed.
The present statutory authority for the fixing of discount rates
is substantially the same as it was when the Federal Reserve System
was established. Section 14 (d) of the original Federal Reserve Act
provided that:
Every Federal Reserve Bank shall have power:
*
*
*
•
•
•
«
(d) To establish from time to time, subject to review and determination of
the Federal Reserve. Board, rates of discount to be charged by the Federal reserve
bank for each class of paper, which shall be fixed with a view of accommodating
commerce and business; • • *.
It seems clear that the framers of the Act contemplated that the
authority to establish discount rates would be vested primarily in the
directors of the several regional Federal Reserve Banks, but that the
final determination of the rates would be in the Federal Reserve
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276
MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT
Board. Thus, in explaining this provision of the Act on the floor of
the Senate, Senator Owen stated:
• • • This power primarily Is placed In the hands of the Federal reserve
bank directors; but the final determination of the rate is put in the hands of the
Federal reserve board, * • *.
*
•
•
•
•
•
•
The Federal reserve board has the right, finally, to fix the rate of interest, for
instance. The local board first fixes the rate of interest, and then it is subject to
review and order by the Federal reserve board. It would be an order within
which the board of directors or officers of such bank would act (Cong. Kec.,
Vol. 00, Nov. 24,1918, p. 0890, Vol. 51, Dec. 18,1918, p. 880)
Before the opening of the Federal Reserve Banks for business on
November 16, 1914, the Board requested the chairmen of the boards
of directors of the Federal Reserve Banks (who were also designated
by the law as Federal Reserve Agents) to indicate their views as to
what rate of discount it would be wise to establish at the beginning.
On the basis of reports received from the Reserve Banks, the Board
voted to fix the initial rates at from 5V£ percent to 6y2 percent. In
advising the Reserve Banks of this action, the Board stated that it
had "felt it incumbent to adopt a moderately conservative policy in
view of the fact that the exact conditions to which the banks will be
subjected in operation cannot be precisely foretold", but pointed put
that the initial rates were to be regarded "as provisional and subject
to revision" and that the Reserve Banks had the right, with the approval of the Board, to change the rates at any time.
In keeping with the importance initially attached to discount rates,
somewhat elaborate procedures were established in the early years for
the fixing of such rates. At the Federal Reserve Board, there was set
up a "discount committee" which met each Wednesday to consider
discount rates prior to a meeting of the full Board on Thursday.
Effective January 1, 1915, a procedure was established under which
the Reserve Banks were asked to submit their recommendations for
changes in discount rates in time to be considered by the Board's discount committee each Wednesday afternoon. A form was prescribed
by the Board for use by the Reserve Banks in submitting their weekly
reports, at first by mail and later by code telegrams. However, in
March 1920, after it had been found that the Board's discount committee was unnecessary, the practice of requiring weekly reports from
the Reserve Banks was discontinued and they were asked to advise
the Board only when changes in rates were being recommended.
At an early date, a practice developed under which the Board,
usually after discussion of the matter with the Federal Advisory
Council, suggested to the Federal Reserve Banks the desirability of
changes in discount rates; and ordinarily the Reserve Banks would
promptly establish the desired rate subject to the Board's approval.
Only rarely were rates fixed by the Reserve Banks later disapproved
by tne Board because of considerations of national policy. For example, in late 1919, when one of the Federal Reserve Banks voted to
increase discount rates, the Board withheld its approval because the
Treasury Department felt that such an increase in the discount rate
would adversely affect the Treasury's program for marketing Liberty
Bonds and Victory Notes. However, when the financing program of
the Treasury was completed, the increase in rates requested by the
Federal Reserve Bank was approved by the Board.
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MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT
277
It was in connection with this case that Carter Glass, then Secretary of the Treasury and ex-officio member of the Board, requested the opinion of the Attorney General of the United States
as to the authority of the Federal Reserve Board to initiate discount
rate changes if it so desired. In an opinion dated December 9,1919,
the Acting Attorney General of the United States ruled that the
Board—
has the right under the powers conferred by the Federal Reserve Act, to determine what rates of discount should be charged, from time to time by a Federal
Reserve Bank, and, under their powers of review and determination, to require such rates to be put into effect by such Bank. (32 Op. Atty. Gen. 81, 84)
During the period of and immediately following the First World
War, there was considerable use by member banks of the discount
facilities of Federal Reserve Banks and there were frequent changes
in discount rates. In an effort to curb credit and monetary expansion
during this period, the Board recommended and Congress enacted on
April 13,1920, an amendment to section 14(d) of the Federal Reserve
Act to authorize the establishment of graduated discount rates based
on the amount borrowed by a member bank. The graduated rates authorized by this amendment soon proved to be impracticable and by
an Act of March 4,1923, section 14(d) was again amended to restore
it to its original form.
Although the Board had requested the Federal Reserve Banks in
1914 not to announce any changes in discount rates until approved
by the Board, it appears that on several occasions some of the Reserve
Banks had publicized rate changes before the dates on which the
changes were to become effective. Consequently? the Board, on August 22, 1924, adopted regulations designed to insure the confidentiality of information relating to prospective changes in discount
rates. In brief, these regulations provided that all telegraphic commmentions regarding rate changes be in code; that no information
with respect to rate changes be published until the Federal Reserve
Bank in Question was advised that the change had been approved by
the Board; that announcements of rate changes be made simultaneously by the Federal Reserve Bank and the Federal Reserve Board immediately after the close of business on the dav on which the rate
was approved; and that the new rate be effective at the beginning
of the first business day following the day on which the announcement of the change was made.
During the early twenties open market operations of the Federal
Reserve Banks became increasingly important as an instrument of
credit and monetary policv and it was recognized that use of that instrument should be coordinated with the use of the power to fix discount rates. As evidence of this fact, the Federal Reserve Board, in
November 1925, requested the Federal Reserve Banks to report not
only changes in the regular discount rates, but also buying rates on
bankers' acceptances and on Government securities bought under resale agreement. The expanded reports were required to be made bv
telegraph following each meeting of the board of directors of each
Federal Reserve Bank, indicating the action taken by the directors,
either in approving continuance of the existing rates or in recommending any changes therein.
The principal procedural development during the thirties was
the amendment of section 14 (d) by the Banking Act of 1935 to re-
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Federal Reserve Bank of St. Louis
278
MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT
quire that discount rates be established "every fourteen days, or
oftener if deemed necessary by the Board".
As pointed out in the answer to Question A-l, one of the provisions of the Banking Act of 1935 required the Board to keep a complete record of all of its actions of policy and to include in its annual
report to Congress a full account or all such policy actions. In view
of this requirement, the Board requested the Federal Reserve Banks
to include in their telegrams recommending changes in discount rates
a definite statement in each case of the reasons underlying such
action. It was made clear, however, that such a statement of reasons
ordinarily would not be included in a telegram merely advising the
Board of establishment without change of pre-existing rates.
During recent years no important changes have been made in the
procedure for setting discount rates. However, as the result of the
growing national character of the credit market, the recognized close
interconnection between discount rates, open market operations, and
changes in reserve requirements, the supplementary though subordinate role in national credit policy of selective credit regulation, and the
significantly greater part which Government securities have come
to have in the asset structure of banks and other lenders, it has
become general practice for the Federal Reserve Banks to act uniformly in fixing discount rates and to give special consideration to
their relation to other instruments of credit and monetary policy and
to their effects upon the market for Government securities. For example, in October 1942, after considerable previous discussion with the
Presidents of the Federal Reserve Banks, the Board approved the
establishment at all Federal Reserve Banks of a uniform preferential
discount rate of one-half of 1 percent for advances to member banks
collateraled by Government securities having maturities of one year or
less. This action was taken in support of the Treasury's war financing
program and was designed to encourage banks to invest more of their
excess reserves in short-term Government obligations. Subsequently,
after the end of the war, the preferential rate on advances secured by
such short-term Government securities was eliminated by all of the
Federal Reserve Banks after considerable advance discussion within
the Conference of Presidents of the Federal Reserve Banks, as well as
by the Federal Open Market Committee, and with the Secretary of the
Treasury. These actions were approved by the Board.
At the present time, the procedure for the setting of discount rates,
as it has evolved over the years, is generally as follows:
Each Friday the Board considers all actions taken by the Federal
Reserve Banks during the preceding week to establish discount rates,
usually action to re-establish the existing rates. The possible desirability of any prospective change in discount rates is usually considered in advance bv the Board with the Presidents of the Federal
Reserve Banks and the Federal Open Market Committee in the light
of changing credit conditions, including the Government's financing
needs and current trends in the economy generally. Whenever it is
determined that as a matter of policy there should be a change in
rates, action to establish such a change usually is taken uniformly by
the boards of directors (or executive committees) of the several Federal Reserve Banks at their next meetings following such determination. Thus, in August 1950, after consultation between the Board
and the Federal Open Market Committee, as one measure for restrain-
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Federal Reserve Bank of St. Louis
MONETARY POLICY AND MANAGEMENT OF PUBLIC DEBT
279
ing credit and monetary expansion, a discount rate of 1% percent—initially proposed by the Federal Reserve Bank of New York—was established at all of the Federal Reserve Banks and that rate prevailed at
the end of 1951.
In accordance with the procedures established many years ago,
as previously indicated, whenever discount rates are changed, the
action is announced simultaneously by the Board and the Reserve
Bank at the end of the day on which the Board acts and the new rates
are made effective on the next business day following the day of the
announcement.
Relative authority of the Board and the Federal Reserve Bank*.—
The law clearly contemplates that the establishment of discount rates
shall involve joint action by the Federal Reserve Banks and the Board
of Governors of the Federal Reserve System. It is also clear that
rates established by the Reserve Banks shall not become effective until
approved by the Board of Governors. Since prospective changes in
rates are ordinarily discussed in advance between the Board and the
Reserve Banks, it is only rarely that action taken by a Federal Reserve Bank for the setting of discount rates is not promptly approved
by the Board. On occasion, however, the Board may fail to approve
or defer its approval pending discussions of System credit and monetary policies and Treasury financing policies with the Presidents of
all Federal Reserve Banks or with the Federal Open Market Committee. The matter is usually discussed also with the Secretary of the
Treasury.
Since the Board's authority is not limited to mere approval of rates
established by the Reserve Banks, but includes power to review and
determine such rates, the Board, as previously noted, has legal authority to initiate discount rates. However, metnods evolved through experience for the taking of action on discount rates are calculated to
avoid the development of procedural issues in this respect.
Discussion of the relationships of discount and other credit policy
is given in the answer to Question C-18.
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Federal Reserve Bank of St. Louis
(Treasury paper* February I960)
GO** I
Argument
i ••
*
The Federal Reserve "bills only'* policy should be abandoned.
Comment*
(1) The so-called bills only policy is essentially an operating
technique for creating or absorbing bank reserves with a minimum direct
effect on interest rates and prices of Government securities.
In view of the
fact that by far the greater portion of the System's operations are to meet
short-run changes in the reserve position of the banking system, it is clearly
desirable that most of the System's open market operations be confined to
short-term securities.
(2) Federal Reserve officials have stated that this operating procedure
is not an inviolable technique; that they stand ready to deal in longer-term
securities *- and, indeed, have done so -- when conditions are appropriate.
Four such instances included purchases in November 1955 and July 1958
in connection with Treasury financings, and in August 1959 and February I960,
in connection with Treasury refunding* in which the System elected to exchange
a portion of its holdings for the longer of two securities offered by the Treasury.
(3) To those who would argue that additional dealings in longer-term
securities would be desirable, one might appropriately inquire as to the
specific circumstances. There are some who would advocate that the System
should under current conditions purchase long-term Government bonds and sell
shorter-term issues, in order to promote lower long-term interest rates
without contributing to a net increase in bank reserves.
To these observers
I would point out that such operations would further distort the interest-rate
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Federal Reserve Bank of St. Louis
'
structure, which has already been distorted by heavy Treasury borrowing on
short term which has helped push most short-term iaterest rates higher than
long-terns rates, as a result of the interest rate ceiling. It would not seem
appropriate to me to attempt to ease long-term interest rates by increasing
the already heavy pressure on the short-term market, thereby favoring longterm borrowers and discriminating against borrowers in short-term markets.
Moreover, this technique could only serve to pull more lung-term investment
money into short-term securities, thereby impeding the liow of funds into
business expansion (which is so important to long-term economic growth),
State and local government projects, and into mortgages.
(4) i am informed that there is a sizable group of economists who
would advocate the reverse of this procedure; namely, that the Federal Reserve
should stand ready to sell long-term bonds in periods of strong business
activity, in order to dampen a capital spending boom. But surely, in view
of the pressing need for achieving some lengthening of the maturity of the
public debt, it would be preferable for the Treasury to engage in whatever
modest amount of cash sales of long-term bonds would be appropriate during
& period of strong business activity, rather than for the Federal Reserve to
saturate such market demand as may exist Cor long-term bonds.
($) There are some who would argue that the Federal Eeserve should
have purchased a sizable amount of long-term bonds during the recession of
1957-58. Admittedly, this was a close question of judgment at the time. But
hindsight seems clearly to have vindicated the decision of the Federal Reserve
not to purchase long-term securities. It is very doubtful that recovery would
have come any quicker than it did, or have been any stronger. And it seems
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Federal Reserve Bank of St. Louis
/
-sclear that System purchases of bonds under those conditions by pushing bond
prices even higher, would have engendered an even greater degree of
speculation in the Government bond market than actually developed and,
as we all know, such speculation was especially severe.
(6) Mr. Chairman, there is no doubt in my mind whatsoever that
the Federal Reserve Open Market Committee stands ready at all times to
deal in securities of any maturity, and that the so-called 'bills only '
policy has been misinterpreted as an ironclad rule prohibiting such
operations.
Thus the pragmatic question is; When would such operations
be appropriate and desirable? Reviewing the history of the past few years,
it seems clear to me that when such operations were appropriate, the System
was quite willing to engage in them. S think the same will be true in the future.
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Federal Reserve Bank of St. Louis
For internal use only
A memorandum to the
roard of Governors
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Federal Reserve Bank of St. Louis
CONCERNING
UNDERSTANDING
Sept. 23, 1960
C. M.
Members of the Board
"Means by which the policies
and actions of the Board can be
made more widely understood. "
Charles Molony
The basic ingredients of any program for promoting understanding of
the Board's policies and actions would have to be:
1.
Immediate explanation of every action in the press
release announcing it.
2.
Follow-up explanation amplifying what has already
been said and enlarging on the perspective.
the best instrument for this as a rule.
3.
The
ulletin is
\9
"Position Paper" or ""White Paper" treatment of
matters of strategic importance:
i.e. , subjects or theories in
debate in parliamentary, academic and popular quarters that
have a vital bearing on the task of the Federal Reserve and its
ability to carry out that task.
Everything else would have to be built around this base.
Depending on
how intensively the Board wished to proceed, the effort could include anything
from private interviews to television appearances.
E ut these would need to
be timely and opportune rather than regular.
I
The Immediate Explanation
In monetary matters - - i n contrast to supervisory and regulatory
matters -- the ^oard already offers some explanation of action at the time
it is announced.
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Federal Reserve Bank of St. Louis
To show where problems do and don't exist on a consequential scale,
"immediate explanations" will be discussed here by type of action,
a.
Reserve Requirement Changes
Least problematical is the reserve requirement instrument.
Almost always since the Board has had authority to vary reserve
requirements, some degree of explanation has been offered in the press
release announcing an action.
That was true of the most recent action related to reserve requirements, the action announced August 8, I960.
The explanatory matter was
briefly but prominently stated in the second paragraph:
"The changes (being announced), made in further implementation of a 1959 Act of Congress relating to vault cash and
reserve requirements, will make available about $600 million
of additional reserves for expanding bank credit as the economy
/
<f i
n<CI^f'r*
enters the season of rising credit needs. "
Two further sentences of explanatory character were placed in the
fifth paragraph, relating them to the item of action for which explanation
was being offered.
This is what they said:
"This change (reduction in reserve requirements of
central reserve city banks to 17 1/2 per cent) is a first step
toward compliance (underscoring added) with a provision of
the 1959 Act that the differential between the requirements of
central reserve city and reserve city banks be eliminated by
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Federal Reserve Bank of St. Louis
•
July 28, 1962.
Since the requirement for banks in reserve
cities is now 16 1/2 per cent, the present action reduces the
differential from 1 1 / 2 percentage points to 1 point. "
Not a lengthy explanation, but it was sound in economic and parlia
mentary strategy and furthermore, to the best knowledge of the author of
this memorandum, it went as far as the Board was willing to go on the
occasion.
Would the Board have cared to comment on the principal questions
from the press:
Does this mean the Board is worried about the economy--
that it thinks the economy is going down?
Does this mean the Board is
moving to a policy of active ease ?
The "spokesman" who presented the action to the press didn't think-and doesn't think -- the Board wanted to comment on these questions except
by way of maintaining firmly that the Board's reasons had been stated in
the sentences quoted.
Of course the "spokesman" knew all along that the press would call
it an "easing" action -- no matter what was said officially -- and that the
result would be a favorable reception in most quarters, because it's always more
popular to "ease. "
But the strategy was to leave that responsibility to
the press and refuse to have it placed on the Board.
On the parliamentary front, there was a different problem.
Adver-
saries there could be counted on to renew their argument that reserves
should be supplied almost always by purchasing Government securities so that
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Federal Reserve Bank of St. Louis
-
4 -
the "benefits" would "go to the Government instead of the banks. "
Due notice was taken of that angle too in the press release, just about
as pointedly and strongly as the nature of a press release permits.
Note
that all of the actions were attributed to the inferable duty to "implement"
a law that logically must represent the v/ill of Congress since Congress had
adopted the law comparatively recently.
And one_ action was related to the
indisputable obligation to comply with law.
Of course neither the press release nor the "spokesman" volunteered
anything at all on the question posed in parliamentary circles.
would, in fact, be an appropriate instrument for that:
for this purpose is the "Position Paper. "
Neither
the right instrument
Naturally, the "spokesman" does
and must stand ready to cope with problems of this kind if in his spot
judgment they seem immediately serious,,
Ordinarily, however, the proper
course for him is to use every art first to prevent (i.e. , deflect or divert)
such a "digression" from interfering with the "message" he is trying to
get conveyed affirmatively.
Board press releases have, of course, carried far more explanatory
matter than did the one employed here to illustrate the press release operation (and the "spokesman" operation as well).
For example, here are some extracts from one (also on reserve
requirements) issued on June 21, 1954, when most of the present Governors
were serving on the Boardi
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Federal Reserve Bank of St. Louis
"The Board of Governors has reduced the reserves
"
.
- 5 -
required to be maintained by member banks of the Federal Reserve
System.
The reduction will become effective on a gradual basis
over the next six weeks.
"The action will release from reserves more than
$1.5 billion, which will then be available to the 6, 700 member
banks for expanding loans and investments as the economy
enters a season of rising credit needs.
"Each member bank is required to maintain in the
Reserve Bank of its district an amount of reserve funds equal
to a specified percentage of the demand deposits (checking
accounts) and time deposits (savings accounts) outstanding on
the member bank's books.
"When the reductions have been completed on August 1,
the percentages applicable will have been lowered as follows:
"The reductions will become effective according to the
following schedule:
"This action was taken in conformity with the Federal
Reserve System's policy of making available the reserve funds
required for the essential needs of the economy and of facilitating
economic growth.
The reduction will release a total of approx-
imately $1,555,000,000 of reserves.
It was made in anticipa-
tion of estimated demands on bank reserves during the summer
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Federal Reserve Bank of St. Louis
and fall, taking account of probable private financing requirements,
including the marketing of crops and replenishment of retail stocks
in advance of the Fall and Christmas sale seasons, as well as the
T r e a s u r y ' s financing needs.
"The Board is authorized by law to fix reserve requirements within the following limits:
- - - -
"The last previous reduction in reserve requirements
was announced on June 24, 1953.
Changes in reserve require-
ments supply or withdraw relatively large amounts of bank
reserves, even when effected on a gradual basis, as in the
present action.
infrequent.
Accordingly, such changes are comparatively
For more flexible and frequent adjustments to the
credit needs of the economy the System relies chiefly upon open
market operations to release or absorb reserve funds. "
Some incidental items about that one:
1.
It is an authentic press release in that it could be set in
newstype "as is. "
Reason: it incorporates all information essential to
the average reader who knows nothing about reserve requirements, or the
Federal Reserve either.
(Chances are you were bored stiff by the elementary
explanation of required reserves, demand and time deposits in paragraph
three, and like matters elsewhere.
But that's what made this release
intelligible beyond the circle of the learned and gave it intelligibility to newspaper editors and readers totally uninstructed in such matters.)
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Federal Reserve Bank of St. Louis
(.
«»
- 7 -
2.
It illustrates an advantage of the press release, in speed and
flexibility, over the explanatory booklet.
The author remembers being
accused in some quarters of proposing to violate theory, practice and
gospel (Purposes and Functions) by associating a reserve requirement
change with seasonal needs, as was done in the second and sixth paragraphs.
But the alternatives were to forego explanation, or to allow more stress on
"the Treasury's financing needs", or to relate the action to a weak state of
the economy -- something seldom acknowledged officially unless conditions
are obviously disastrous.
So reference to the state of the economy was
passed over except for the neutral, oblique and diplomatic reference in paragraph six, and Treasury needs were mentioned almost as in passing in the
same paragraph.
Today, one could regard that release as a sort of "re-write
of history, " and decide, according to taste, whether it was reprehensible or
not.
But one could also regard it as a proper or "new theory of usage. "
For lowering reserve requirements to meet seasonal needs was later sanctioned in the official annual report as a proper usage of the instrument. And
now the unorthodox has become accepted practice.
In the public announcement
of the most recent vault cash action, cited earlier in this paper, the only
explanation given on economic grounds was the need to meet seasonal credit
requirements.
To finish reserve requirement changes, extracts will be shown from
just one more press release to demonstrate the limits to which the Board
actually has gone -- and could of course go again.
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Federal Reserve Bank of St. Louis
>
- 8
-
These quotations are from a release issued July 14, 1936, a date
on which only one of the present Governors was serving on the Board.
Unlike the releases previously quoted, this one dealt with an increase
in reserve requirements.
Figures and other descriptive details will be
crnittedj wherever possible -- but note especially the parts that will be
underscored for emphasis:
" . o .This action eliminates as a basis of possible
injurious credit expansion a part of the (over $3 billion)
excess reserves (that) have resulted almost entirely from the
inflow of gold fro~n abroad and not from the System's policy
of encouraging full recovery through the creation of easy
money conditions.
This easy money policy remains uncharged
and will be continued.
"The part of the excess reserves thus eliminated is
superfluous for all present or prospective needs of commerce,
industry and agriculture and can be absorbed at this time
without affecting money rates and without restrictive influence
upon member banks, practically all of which now have far more
than sufficient, reserves and balances with other banks to meet
the increases.
"Furthermore, by this action the remaining volume of
excess reserves. ... is brought within the scope of control by the
Federal Open Market Committee
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Federal Reserve Bank of St. Louis
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9 -
"The portion of existing excess reserves, which will be
absorbed by the Board's action, if permitted to become the basis
of a tenfold or even larger expansion of credit, would create an
injurious credit expansion.
It is for this reason that the Board
decided to lock up this part of the present volume of member bank
reserves as a measure of prevention on one hand and of further
encouragement to sound business recovery and confidence in the
long-term investment market on the other hand.
"The present is an opportune time for the adoption of such
a measure. .. It is far better to sterilize a part of these superfluous reserves while they are still unused than to permit a
credit structure to be erected upon them and then to withdraw
the foundation . ..
"The Board is convinced that this action will not affect
easy money conditions now prevailing.
It does not constitute a
reversal of the easy money policy which has been pursued by
the System... Rather it is an adjustment to a changed reserve
situation.
"The prevailing level of long-term interest rates, which
has been an important factor in the revival of the capital market,
has been due principally to the large accumulations of idle
funds in the hands of individual and institutional investors. ..
The increase in reserve requirements . . .will not. . . diminish
the volume of funds available for investment. ...
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Federal Reserve Bank of St. Louis
- 10
-
"The reduction of excess reserves . .. brings them within
the scope of control through the System's open-market portfolio. ..
Frequent changes in reserve requirements. . . should be avoided
because they affect all banks regardless of their reserve
position.
At this time an increase can be made equitably. . .
Unless large additional increases in reserves occur through
gold imports or otherwise, no occasion for further adjustments
in reserve requirements is likely to arise in the near future. . .
"For current adjustments of the reserve position of member
banks to changes in the credit situation the Reserve oystem should
continue to rely on ...
operations.
discount policy and «. .. open market
By the present action excess reserves will be re-
duced to within the amount that could be absorbed through open
market operations... Conversely, should conditions develop
requiring expansion of reserves, they could be increased through
open market operations.....
"The Board of Governors believes that the action taken at
this time will give assurance for the continued encouragement of
' l
full recovery. . . "
It would .be hard to visualize a more strenuous effort at explanation
than that.
The effort at telling everything -- at least twice, in many instances
must have been a strain worthy of the Bastille Day on which it was announced
in the hot summer of 1936.
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Federal Reserve Bank of St. Louis
- 11 Yet seldom has belief been more misplaced than that publicly
asserted by the Board in the last paragraph quoted.
And seldom -- never,
in the term of most members of the p r e e n t Board -- has any Board action
been more widely "misunderstood. "
The moral, of course, is that there's a very definite limit to the
amount of "understanding" that can be achieved by any means, no matter
how intensive the effort.
The prospects are, in fact, that so-called
"understanding" will never seem attainable for the more unpopular actions
that duty frequently requires the Board to make.
Because, from time
immemorial, people -~ with the conviction shown by the Louisville banker
who, in August, drew a disapproval from the Board on his application for
approval of a merger -- have said "I can't understand it" when what they
really mean is "I don't like it. "
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Federal Reserve Bank of St. Louis
b.
Open Market Operations
On a Sunday in the spring of 1937, more than six months before the
Board moved into its new building, the Open Market Committee went into
session and a few hours later sent to the press, almost in verbatim form,
a sizeable section of the Directive it had adopted that day.
Here's the way it looked when it reached newspaper offices:
STATEMENT OF THE OPEN MARKET COMMITTEE
OF THE FEDERAL RESERVE SYSTEM
FOR THE PRESS
For release in morning newspapers of
Monday, April 5, 1937
"With a view (1) to exerting its influence toward orderly
conditions in the money market and (2) to facilitating the
orderly adjustment of member banks to the increased reserve
requirements effective May 1, 1937, the Open Market
Committee of the Federal Reserve System is prepared to
make open market purchases of United States Government
securities for the account of the Federal Reserve banks in
such amounts and at such times as may be desirable.
This
purpose is in conformity with the policy announced by the
Board of Governors of the Federal Reserve System in its
statement on January 30, 1937, which declared, with reference to the increase in reserve requirements, that by this
action the System would be placed in a position where such
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Federal Reserve Bank of St. Louis
- 13 -
reduction or expansion of member bank reserves as may be
deemed in the public interest may be effected through open
market operations. "
Cn the Committee were men smart and shrewd, and there is nothing
in the episode to suggest they had succumbed to "goldfish bowl" folly or a
simple-minded impulse to indiscreet
self-exposure.
What they were demonstrating was a fundamental principle of intelligent communication:
vVhen you have something to say and a good reason
for saying it, then say it -- and by the most effective means possible.
"Misunderstanding" (i.e. , opposition) was running high at the time,
for reasons suggested earlier in the account of the 1936 reserve requirements reduction.
The Committee looked squarely at its problems and
resolved to do something about them.
What do you do when you see the public -- agitated by some holders
of public office -- showing signs of unreasonable fears that a "tight money"
obsession on your part will wreak economic havoc?
What if similar appre-
hension is visible in the condition of the bond market?
And what if, at the same time, you see bankers showing anger over
another reserve requirements hike announced to take effect later -- and also
showing alarm that they've become the target of "bureaucratic persecution"?
The answer, correctly adduced by the Committee, is that you start
making every effort you can to spread some reassurance around - - o n the
double-quick -- for everybody who needs it.
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Federal Reserve Bank of St. Louis
So reassurance was provided
- 14 -
as swiftly and broadly as possible - to the public (and concerned politicians) that the
Committee planned to make ample provision for credit needs;
- to the financial markets (and some of the same
politicians) that the Committee planned to insure an orderly
market;
- and to the banking community that the Committee
was mindful and sympathetic about the problems facing the
banks and that it planned to "facilitate orderly adjustment"
by the banks to the forthcoming hike in reserve requirements.
From the standpoint of the art of communications, however, the
master stroke was in the strategy adopted to make the message of reassurance as convincing as it could be made -- and to induce the press to spread
it to the whole country.
For one thing, the Committee recognized that, in a situation like
this, it's best to speak through actions.
Of course only the simplest
actions -- such as drawing back a clenched fist -- are self-explanatory. But
actions are more convincing than words in demonstrating sincerity.
They
show that you're not merely promising that you will do something but that
you already have committed yourself to do it.
Public revelation that a directive had actually been adopted would
give one evidence of sincerity, but could something else be done to
strengthen the evidence?
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Federal Reserve Bank of St. Louis
- 15 -
Years later, when President Eisenhower suffered a
heart attack and rumors spread over the country that he was
paralyzed and helpless, there was to be a fine demonstration of
the technique for quieting a fear that can lead to panic.
White House operatives wouldn't just say that the
President was not helpless -- they would try to show it by a
recital of details that included the fact that he had "shaved himself
this morning"; and then they would drive home the impression of
infinite frankness by putting among the details the attending
doctors' notations regarding the Presidential bowel movements.
Of course the Committee didn't have that model, but it used the best
means it had for conveying sincerity through frankness -- release of text
from a document normally held "secret" for many months.
The Committee did not in truth reveal everything about its meeting by
any means.
Presumably it also recognized that indiscriminate revelation
can equal indiscretion, cause distraction from
The Message, and be
pointless anyway.
Neither the public nor the press, therefore, was burdened by knowledge
that the Committee had split, 8 to 3, on whether the trading desk should be
ordered to hold to a "minimum" during the next week actual purchases of
securities the Committee had publicly declared itself "prepared to make. "
The majority voted to make it the minimum.
In narrating this precedent for giving out at least part of the text
of an Open Market Committee directive with no delay whatsoever, the writer
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Federal Reserve Bank of St. Louis
<
- 16 of this memorandum is not suggesting it as a practice.
because the need it met was extraordinary.
It was a fine performance
For meeting more ordinary needs,
it would be a foolish practice.
Ordinarily, in the opinion of the writer, there is no need for any
more "disclosure" of intimate material of the Open Market Committee than
the present practice provides.
^ Q/
As to faster disclosure, it is hard for the author to understand how
that would benefit the Federal Reserve, although he can see how (and why)
it would delight the press and also some
members of Congress to get policy
record entries no later than three months after the entry dates -- and earlier
than that, if possible.
From a Federal Reserve point of view, the chief use that members
of the press and of Congress make of the policy record entries when the
annual report finally gets out is entirely negative.
The entries often get used, in fact, as "admissions against interest"
are used in courtroom trial.
Dissents in the voting record can be (and
sometimes are) presented as showing "confusion" and "dissension" inside
the Federal Preserve over policy.
(Typical version:
"Even some of the
members of the Committee admit the policy is wrong. ")
Of course there is nothing that can be done about that sort of thing,
except to meet it by the only method available -- counter-presentation.
("Spokesman" version:
"The only thing that the dissents show is that all
points of view, including those of the most outspoken critics, are presented
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Federal Reserve Bank of St. Louis
<
- 17 -
ably before the Committee, and the only thing significant is that - - s o far -the Committee as a whole has not considered the arguments 'against 1 to
be persuasive. ")
Text of the Directive
If the directive were an instrument for internal communications
only, this paper would have no concern for it.
But since it reaches public gaze once a year, and there's always the
possibility that more frequent revelation might be forced, it would here seem
advisable to effect some change in the directive's form.
General rather than specific, abstract rather than concrete, the
present form would be unsuitable for the use to which a portion of text was
put in 1937 if ever the need of that time should recur.
Worse, it presently leads at times to embarrassment for the System
when portrayed in print as symbolic of "central bank mystique, " intended
more to confuse than inform.
The Hoard is surely aware that, even within the Federal Reserve,
association of the directive with utterances of the Delphic oracles is commonplace.
That association is not confined to jests about a common capacity to
confuse.
Unhappily, it extends also to suspicion that there is a common
strategy -- i.e. , to speak in a manner admitting of diverse or even contrary
interpretation, so that the "infallibility of the oracles may be maintained
whatever the event. "
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Federal Reserve Bank of St. Louis
.
'
- 18 -
Some writers go so far as to regard the directive as confirmation
that the Federal Reserve is either "unable or unwilling" to say what it is doing,
It may be possible to determine something about the feelings of
persons outside the System by running through a directive as a fairly typical
outsider himself might do.
The directive current at the time of this writing will be taken here as
a representative example of most directives adopted by the Open Market
Committee in recent years.
It contains about 270 w o r d s , in two paragraphs.
The indicated
purpose, the reader sees, is to give the Federal Reserve Bank of New York
instructions on security transactions pending the Committee's next meeting.
A straightaway run through the whole document leaves the reader
feeling somewhat dizzy from roller-coaster clauses and sentences.
As he recovers,
complicated.
he recalls the second paragraph looked the least
So he starts reading it again, to see if anything interesting is
revealed.
In paragraph two, he finds, the Eank is told to buy specified securities direct from the Treasury "as may be necessary . . .for the temporary
accommodation of the Treasury. "
Nothing is said, however, as to how
much that might be or how determined, except that the Bank is told it mustn't
run Federal Reserve holdings of these securities above a half billion dollars
at any time.
The reader feels stumped thus far, so he turns hopefully to paragraph
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Federal Reserve Bank of St. Louis
- 19 one.
There, he sees, the Bank is being told what to do about buying, selling
or exchanging securities -- especially in dealings where the Treasury is not
directly involved e
The Committee, he gathers, wants the Bank to engage in some transactions of this kind, but doesn't want the transactions to change the Federal
Reserve's total holdings -- either up or down - - b y more than a billion.
By now, the reader is into the middle part of paragraph one and on
the alert for anything he can pick up.
The Bank, he sees, is to buy, sell or exchange (no clue there) "as
may be necessary in the light of current and prospective economic conditions
and the general credit situation of the country. "
(No clue there either, so
far as the reader can see. )
Next, the reader finds that whatever the Bank is supposed to do in the
light of economic and credit conditions ( whatever that may be, he muses) is
supposed to be done "with a view to" three other things.
These three are set out in clauses designated alphabetically, so he
closes in on them for real last-chance effort, taking them in order.
In (a), he sees, the Bank, in doing whatever it is that it was supposed
to do, is supposed to do it "with a view. . .to relating the supply of funds in
the market to the needs of commerce and business. "
Sensible, he decides,
but not informative.
Moving to (b), he finds the Bank is further supposed to behave however
it behaves "with a view to. . . encouraging monetary expansion for the purpose
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- £rw
20 -
of fostering sustainable growth in economic activity and employment. "
Worthy aim, he agrees, but awfully vague for an "instruction."
Baffled,
he turns at last to (c), hoping weakly against fading hope,
There he finds that the Bank, in its doings, is also to proceed "with
a view. . .to the practical administration of the Account. "
Nothing in that
for him except wonderment that a Bank would need to be told to consider
that.
Good objectives are commendable, and properly stated as the
ultimate end toward which the Committee's work is directed.
But for reaching so far, the manager of the Account has a rather
short stick.
^
"'
If the Committee could instruct the manager of
respect to more attainable results -- desired levels of free 0r total reserves,
S-^,
f
I
for instance -- the purposeful competence of the Committee and the System
would be better reflected.
2' ^* Qp e rations:
The Running Account
In the weekly condition statement, in contrast to the directive, the
facts on Open Market operations are presented clearly.
A veritable marvel of compilation, the condition statement does not
stop with providing every Thursday the net figures on all operations of the
Open Market Committee, complete through the preceding day.
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Federal Reserve Bank of St. Louis
It also provides
- 21 -
the figures on just about every related item that persons interested in monetary
matters might want.
Still another service is furnished by the statement.
In three lead-in paragraphs of sturdy data-in-prose, it plucks
figures from the neat columns below and assembles them in meaningful form.
Quite an assist for the reader too unversed to do that for himself.
Without further work on his part, he can quickly find what happened during
the week to the reserves of member banks, and how it came to happen.
To cap the performance, the statement produces—in a single terse
sentence near the middle--the figures on which interest mostly centers today.
Those figures, showing the level and movement of free (or borrowed) reserves during the week, is widely considered the score for that week's game.
The only trouble is that this isn't enough for the really hot fans.
How can they tell, even from all this, whether the score resulted from hits
or errors ?
The answer is that they can't, so they must go beyond the statement.
And the place they have learned to go, at least those who are
members of the
press, is the Federal Reserve Bank of New York.
There, every Thursday afternoon, the figures of interest -- those that
appear on the front page of the condition statement -- are given to the press
somewhat earlier than they become available in Washington.
The New York Bank doesn't have time to get out a written text grouping the figures, as is done in Washington.
in that respect is provided orally.
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But whatever service is desired
*
t
- 22 -
At this point, a "spokesman" (the job is rotated among several
officers of the Bank) takes on questions.
The questions and answers center
on the hits or errors question.
Does the free (or borrowed) reserves figure show the Committee and
its trading desk hit the target? (Ey inference, what is the real target?)
Any freak effect he re--did float or money in circulation or gold or
something else go wide of expectations? (Still, by inference, what is the
real target?
What is the real trend of policy?)
It is, of course, bad form for any "spokesman" -- in New York or
Washington - - t o walk or slip into traps, for between his principals and the
press there is a conflict of aims of which he must be mindful.
The service he must try to perform for his principals is to keep the
"facts" -- e.g. , an erratic movement of the figures, when there is one -from speaking misleadingly about his principals' actions and aims.
The disservice he must try to avoid is the indiscreet revelation of
aims and objectives that he knows his principals do not want revealed.
The line he walks can be very fine, and it does not lead to popularity
with the press.
award possible:
Yet, if he walks it well, the press may give him the one
respect for him and his principals.
When retirement came in 1959's early spring to Harold V. Roelse,
a veteran among the New York Bank's "spokesmen," members of the press
went to the unprecedented length of giving him a testimonial dinner.
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Federal Reserve Bank of St. Louis
In
- 23 -7
accounts of his death an unhappily short time thereafter, there was no mention
of shock.
In Washington, each Thursday, the front page of the condition statement is moved in its entirety by the Associated Press onto one of the wires
that carry the A. ?. 's comprehensive news report.
Thence it is relayed
across the country.
That comes very, very close to taking care of the wants of every
newspaper anywhere with a regular interest.
Not many have that interest:
figures that change so modestly in most weeks have as a rule little value for
news and none for sensation.
Now and then news value picks up.
In times of TIGHT MONEY
TENSION, several of the figures are NEWS.
When an outflow of gold
signals DOLLAR CRISIS, the gold movement digits can be DRAMA.
But most Thursdays the A. P. man who must dictate the statement's
whole front page over a phone complains about routine that takes time from
NEWS.
Nor is his mood lightened by the competition's song,
to Eack-page again. "
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Federal Reserve Bank of St. Louis
"Front-page
r
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c.
Changes in Discount Rates
The "Discretionary" Adjustment
Asked to suggest the single deed that would do more than anything
else to foster "understanding" of the Federal Reserve, the author would
say:
end discretionary changes in the discount rate.
Told to forget it and to try again, he'd say:
"Do the best you
possibly can to explain discount rate adjustments -- and put something in
writing. "
In the writer's judgment, no Federal Reserve program to better
understanding can advance far under the discount rate burden.
It may be possible to induce extra millions to accept the logic of
high and rising interest rates as a counter to inflation.
It may even be possible to slow the pace at which economists and
public officeholders are proposing alternatives to and substitutes for the
"high interest method" of combatting inflation.
But nobody is ever going to make high interest rates - - o r those
suspect of fixing them -- beloved by the mass of the people.
In the author's opinion, people -- even the masses -- can be
persuaded to accept monetary restraints, and any level of interest rates that
may go with them.
But they will not be unless this case, at a minimum, is reasonably
made:
1.
That the monetary restraints applied are means to an
end the people want attained.
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-
2.
25
-
That the restraints are reasonably effective - - s o far as
circumstances permit - - i n attaining that end.
3.
That the restraints are not directed toward some other
end, and that the interest rate effects produced are incidental.
Time and again, with ant-like persistence,
Federal Reserve
representatives have striven to gain public understanding and acceptance
of that the si So
And time and again those efforts have been discredited and de
feated by discount rate actions, which almost invariably and universally
are regarded as proving the thesis is false.
No space need be devoted here to the point that the discount
rate adjustment is almost peculiar among monetary instruments in its
power to provoke political problems and threats to the System's independence.
In the author's opinion, that point was established fully by the
events of 1956.
A resume of those events was furnished members of the
Board August 25, in a paper titled:
"The Federal Reserve and the
Political Gantlet: 1956. "
Also, no space will be given to expansion upon the "leak" and
"conflict of interest" dangers inherent in the present discount rate procedure.
The potential for scandal has been evident for years.
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Federal Reserve Bank of St. Louis
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Discount Rate Actions
For discount rate actions, though for these actions only, the present
Board has gone beyond its precursors in "explanatory" effort, but not in
its written announcements.
The release that announced the latest discount rate change on
August 11 fully matched in terseness any of its predecessors since the
System's beginning.
In five lines, 51 words, two figures and one date, it gave just three
basic facts:
what, where, and when the change would be.
And that, as
always, was all.
In the next morning's newspapers, the story took more than a column,
over 1,000 words, for reporters who try to be thorough.
In early September, from three Congressional offices, came calls to
the Board requesting material on the discount rate change that had been made
nearly a month before.
Some oral explanation was offered and amiably received, but the
Congressmen's offices still wanted a copy of "the official announcement and
explanation. "
In the end, the callers got two things:
One was a reproduction of the clipping of one of the newspaper
stories mentioned.
It was the story adjudged best, in general, from a
Federal Reserve standpoint.
The other was a friendly (and truthful) tip that the newspaper
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Federal Reserve Bank of St. Louis
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story would give the caller what he wanted - - a thorough explanation in good,
plain language -- better than the official announcement could«
The incident illustrates why this paper suggests that some written
explanation is in order.
It may be a fair guess that the deficiencies of the announcements would
have become glaring long ago except for two circumstances:
1.
Most people, Congressmen included, are
accustomed to getting their information from the press, and
are satisfied to stop there, unless press coverage seems on
the surface too scant.
2.
The Board, through the "spokesman" medium,
has added some information and guidance to the press ( and
almost only the press) ever since discount rate activity
resumed in 1953, nearly two years after the "Accord. "
In this, however, as the press gradually but increasingly has become
aware, there has been more guidance than information.
A "spokesman" finds it mountingly difficult to obtain what he wants-to get the action "jumped off" in the "right" tone and direction -- with only
trifling trinkets to trade.
(New "spokesmen", however, may do better.
On tone and direction,
the August 11 discount action fared well, in the opinion of the writer, who was
NOT the "spokesman" involved.)
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If there be press complaint to the Board about discount announcement procedures, it is legitimate, and overdue in being registered.
Under present procedure, the press -- to put it bluntly -- has been
taken, and taken over and over again on the 21 occasions discount rates
have been changed in the last eight years.
The bits it has been given in supplement of bare-facts announcements
have been designed to produce stories reflecting -- in so far as that design
could be effected -- the viewpoint of the Board toward the action.
That, of course, would still be fair enough, except for one vitally
important point:
the bits have been imparted mostly under an embargo
against attribution of the material to the Board or its representative
( i.e. , "This is for background-use only").
And what has happened, when the press has protested against being
embargoed and being saddled with the responsibility for making on its own
many "Board viewpoint" statements that the press feels should be
attributed to the Board ?
Why the press has been given, with occasional graciousness, the
privilege of directly quoting a still anonymous "representative of the Board"
on the one or two phrases he wants most to put over.
Understandably enough, this situation has become increasingly unstable.
More and more, the press is breaking
the embargo and - - i n its own form
of unfairness -- attributing to Board sources things that a reporter may
believe but could never make the "spokesman" willing to concede.
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-
Change seems in order, commencing immediately.
Making the change, if the Board wishes to say more than is said in
the time-weathered form for announcement of discount rate actions, would
present no problem at all.
An immediate announcement, as this paper indicated at its opening
and later amplified in descriptions of the "spokesman" function, can be
sufficient though short and, if need appears, followed up in greater perspective.
For demonstration, here, from an excellent source, are two
paragraphs that make almost the identical points that were made orally by
the Washington "spokesman" in connection with the discount rate action
last June 2, the first rate reduction in 26 months:
"The economy is operating at high levels on the basis
of historical comparisons.
At the same time, there appear
to be few, if any, bottlenecks of importance, and productive
capacity generally is sufficient to support an increase in output.
Increases in employment are particularly desirable.
Infla-
tionary psychology has abated since the turn of the year.
The
public and business have reacted calmly to the Summit crisis.
Prices have been relatively stable.
"The System has taken earlier actions in the open
market to ease credit.
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Federal Reserve Bank of St. Louis
The reduction in the rate at this time
- 30 -
can contribute to real growth in the economy with minimum
risk of renewed inflation. "
The excellent source is the President of the Federal Reserve Bank
of Philadelphia.
The words are what he wrote down, to prepare himself
against possible inquiries, while awaiting the hour when the announcement
would be released.
Next is an explanatory note the Deutsche Bundesbank provided
June 2 -- the same day as the Federal Reserve announcement above - - a t
the bottom of an announcement that it had, among other things, raised its
discount rate:
"These new credit policy measures, which are connected
with the raising of minimum reserves that became effective on
1 June 1960, have been adopted in order to counteract the continuing
considerable credit expansion, and thereby to check the monetary
strains resulting from the disparity between overall demand and the
possibilities of production.
The simultaneous renewal of the orders
forbidding the payment of interest on foreigners' balances and the
sale of money-market paper to foreigners is designed as far as
possible to prevent any interference with this policy through the
afflux of foreign money.
"The Bundesbank expects that the raising of its discount
rate will be reflected not only in the debit but also in the
creditor interest rates of credit institutions. ..."
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Federal Reserve Bank of St. Louis
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After a short interval, Germany's central bank followed through
in the next (June) issue of its monthly magazine with an eight and a half
page expansion, complete with illustrative charts.
A reprint of the article is available, if desired.
It's enough here
to note the forthright sentence that opened the article:
"On the ground of the increase of cyclical strains and
the hitherto inadequate limiting of credit expansion the Central
Bank Council of the Deutsche Bundesbank on 2 June this year
further stiffened the restrictive credit policy. . . . "
It takes no great search to find cases where central banks of other
countries have gone still further, at the time of initial announcement, in
the explanation of their actions.
One illustrative item, also available if desired, is a statement by
the Governor of the South African Reserve Bank in January 1959, that
runs to more than three pages of legal-sise paper.
Like its counterpart in Germany, the South African bank speaks
with an unvarnished candor that would startle an unaccustomed populace
in the United States.
Excerpts from the second and the entire third
paragraph of its statement follow:
"In arriving at this decision (a bank rate cut announced
in the opening paragraph), the Reserve Bank has been influenced by several circumstances.
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Federal Reserve Bank of St. Louis
In the first place, the
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available data indicate not only the existence of an appreciable
slackness in several of our primary and secondary industries
but also the continued slowing down in the tempo of general
economic activity in the Union.
This is indeed attributable
mainly to the impact of external factors , . . Account must, however, also be taken of the restrictive effect on the internal
economy of the more stringent monetary policy which had necessarily to be applied in order to improve the Union's balance of
payments position and to replenish its monetary reserves to a
more satisfactory level.
"While it is admitted that certain readjustments in the
internal economy have been necessitated by the substantial decline in export incomes, there is nevertheless a danger that the
process might be carried too far
"
The Bank of England, the institution which perhaps gave rise to the
idea that central banks never say much, recently made a debut in the cinema
in a film the Bank produced itself.
The cameras are said to penetrate "even the Thursday meeting of
the Court" and to show in action, and also full color, the Bank's Governor
(making a proposal) and the members of the Court (expressing approval
by a show of hands).
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33
-
Recently also, keen observers of news stories from Threadneedle
Street have detected signs of "a spokesman" in the woodpile, but he may
*
have arrived on the job a bit late.
For, on the really crucial questions,
the lank of England now gets outside help.
A note, helpfully supplied to
the author by the Division of International Finance, describes the arrange
ment.
"The Bank of England", the Division's note says,
"has
always avoided public explanation of any action it has taken.
Increasingly in recent years, however, major monetary actions
have been announced by the Chancellor of the Exchequer in
Parliament.
"In such cases, the Chancellor gives a full explanation
of the action, answers questions from opposition speakers and
may even be called upon to defend the action in a full-dress
party debate. "
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Federal Reserve Bank of St. Louis
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d.
Margin Requirement Changes
If the Board provides no more explanation for actions on margin require
ments than for actions on discount rates -- and it doesn't -- why is "public
understanding" of margin actions so much better, especially when an action
"tightens"?
The answers are three, and they may be illuminating:
1.
The application of the margin instrument is easier
to grasp because it is specific, narrow and direct.
2.
Approval -- a powerful promoter of understanding --
is automatically greater, because the effects of the action upon the populace and the economy as a whole are widely believed to be beneficial rather
than the reverse.
3.
By way of legal aid to explanation, the law itself supplies
a statement of purpose that seems to "explain" all actions changing margin
requirements -- up or down -- although it does not really show the reasoning behind any.
The Board's announcement procedures in all other respects are just
about the same for margin change announcements as for discount rate
changes.
A "spokesman" sees that interested financial writers (the rest of
press will take its cue from them) get an even breakon receiving a release
containing 50 words and four facts, one of them negative ("No other change
was made in the regulations").
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Federal Reserve Bank of St. Louis
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The "spokesman" adds some information on recent developments in
the stock me.rket credit from which, reporters can draw inferences about
the reasoning of the Board, but he insists that "you must make clear that
any conclusions drawn are yours, and not the Board's. "
(Readers of the preceding section on discount rates may recognize
this as the embargo.
This is the moment wlieii the press will complain
that it is being stuck with responsibility for whatever explanation it may
supply in support of action by the Board. )
The "spokesman" next denies, as he must for each margin requirement change, tliat the Board was more concerned aboi-.t prices than it was
about credit in the market.
(If he manages well and his luck is good, the
price-motivation angle may be downplayed in the stories. )
Beyond that, there isn't much to do.
If they want it, veteran
reporters are given assistance on technical questions, and strangers to
finance a carbon copy of a, short,
"unofficial" primer that says:
"Margin requirements, in non-technical language, set
the proportion of the purchase price of a stock that the buyer must
put up in cash.
For example, when the margin requirement
is
70 per cent, the buyer of a $100 stock must p;it up $70 (or more)
in cash*
"Margin requirements were established initially in
October, 1934, under authority Congress granted the Federal
Reserve Board in the Securities Exchange Act of 1934 'for the
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Federal Reserve Bank of St. Louis
- 36 purpose of preventing the excessive use of credit for the purchase
or carrying of securities' ".
"The initial margin requirements, in effect from
October 1, 1934 through January 31, 1936, ranged from 25 to
45 per cent.
Since then, margin requirements have been in
effect as follows:
( a table supplies the rest).
A day or so later, the Board's incoming mail will reflect a difficulty
of understanding on the part of some people who feel pinched by the action,
but they are few in a population of 180 million.
But others mailing comments to the Board will give no sign they
had the slightest trouble in understanding any part of it.
Some of this
group will applaud the Board as they would a dragon slayer.
II
The Follow-up Explanation
On what was set forth at the start of this paper as the second ingre-
dient for any program for promoting understanding of the Board's policies
and actions, no lengthy treatment seems necessary.
A follow-up explanation would simply have as its general purpose the
objective originally assigned it:
to amplify the explanation given for an
action in the release announcing it.
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Federal Reserve Bank of St. Louis
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Perspective, it is assumed, would be provided in the course of
amplification.
The follow-up could be provided in a speech or a statement to a
Congressional committee (a follow-up actually has been brought off at
a Committee hearing) if time and opportunity were ripe.
No iron-clad rule can be laid down about the means of follow-up,
but the general rule this paper has stated would apply:
the means would
i
have to be those deemed to be most effective for the purpose to be served
V"
and for conveyance of the message intended.
If the follow-up system were to be tried on a regular basis - - i n the
wake of each action announcement, say, or in a monthly tie-in of Federal
Reserve operations to economic developments -- the Bulletin, in the author's
opinion, would be the best instrument.
3ecause it comes out monthly, the Bulletin can roll off something of
the sort indicated without undue attention being drawn:
if splash be sought,
a special statement or speech would be better, but the assumption here is
that a quiet tone becomes the Federal Reserve, as a rule.
It is no disadvantage, on the other hand, that the Bulletin comes out
only once a month.
Any time the Board wants to make public any part of
the Bulletin in advance of the entire magazine, a pre-print will do the
trick.
And any time something that has already appeared in a Bulletin
is deemed worthy of preservation as a separate item, it can be so preserved
in a re-print. Pre-prints and re-prints are equally handy and attractive to
the eye.
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Federal Reserve Bank of St. Louis
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•
It was noted earlier in this paper that the Deutsche Bundesbank, on
the occasion of its June "stiffening of the restrictive credit policy", gave
a demonstration of a central bank providing explanatory matter in an
action announcement and following it up in its monthly magazine.
The re-prints of the German Bank's magazine piece, which are
available to any interested Board members, are in English.
It's the guess of the author that putting a review of economic and
financial developments in the Bulletin every month -- and using pre-prints
to beat the time lag at the printer's -- would be the most effective means
of explaining regularly anything the Board does in fact want to explain in
furtherance of public understanding of policies and actions.
Why most effective ?
The author's reasons are four:
1.
Because System actions and policies, if explained
in clear and meaningful reviews of economic and financial
developments as they unfold, would be set against the background of living events.
2.
Because if the explanations were thus set and so
given the quality of significance to the life of the times, the
press and other media of communication would relay them to
readers a thousand times as numerous as Bulletin subscribers,
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Federal Reserve Bank of St. Louis
3.
Because relayed in newspapers and newsmagazines
.
- 39 -
that at least purport to carry the stuff of life and of history on the
move, the material would be far more likely to catch the attention -- fleeting though it be -- of people who lack the time or interest to read anything else.
4.
And, finally, because this could happen over and
over -- thanks to the regularity of the Bulletin's publication -it could gain for the Federal Reserve an opportunity for a continuing presentation of its story, in context - - a result perhaps
unobtainable otherwise.
The minimum requirements to bring off the undertaking would be
effective presentation -- which means, most of all, direction to a purpose
and a point -- and willingness by the Board to take chances on errors
along with hits.
Neitfcer requirement can be met casually, and both may be hard
to sustain.
The pointed presentation will stick in the mind more than
any other, and the failures of policy in action -- even more surely than
successes -- will be made wider known and better remembered.
These possibilities are merely set out here for balance against
the F c a r d ' s apparent feeling:
1.
That, presently, a case against the Federal Reserve,
its policies and actions, gets made and goes largely uncontested.
2.
That there is need for more effective presentation of
the case for the Federal Reserve, its policies and actions.
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Federal Reserve Bank of St. Louis
. 40 -
3.
That such presentation, if made, will gain more supporters
for the Federal Reserve and equip and aid them to attract still
other supporters.
4.
That it can further produce a better public impression
("image") of the Federal Reserve and also better reception,
acceptance and support for its policies and actions.
In that feeling there are many things that are true, but some that may
only be hopeful.
The best-drawn presentations, like the best of intentions, can often
go astray, and for the same reason:
human nature, defiant of analysis, can
react in ruin of the one and abortion of the other.
Yet there is ground to be won, if the try be made, that extends beyond
the promotion of understanding to the prevention of misunderstanding.
For instance, every time callers brim with gloom about the economy
and its prospects -- and some callers mirror the widespread opinion of wellpositioned analysts -- the author of this memorandum asks:
"Tell me, do you think credit conditions are a cause of
any
of these troubles ? "
The answer, encountered repeatedly over a fairly considerable period,
has always been "No. "
What the author has in mind, therefore, is something on this order:
A Bulletin article that would seek to bring out the evidence for
that "No", as best it can be gotten together, and to show as objectively as
possible that, although the economy and its parts may be suffering somewhat
with cramps, they aren't being caused by credit conditions.
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Federal Reserve Bank of St. Louis
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Then, if the economy does decline and fall, the Federal Reserve will
at least have presented in advance a thesis that may help disqualify it for
scapegoat before its critics can pin it into that role, as they have tried to do
before and assuredly will try to do again.
In a pin-the- scapegoat exercise, it is foolish to present an unshielded
target to opponents.
The Federal Reserve, however, has done it in the past.
One can still see scars -- some of harpoon size -- left over from 1929.
Yet even if the anti-scapegoat consideration were dismissed and the
undertaking stripped of its more subtle potentials, a Bulletin article of the
sort indicated would be in order in any eventuality, including an economic rise.
At a minimum, it would spread understanding that - - i n the judgment
of the Board, at least -- credit conditions are good.
For some people,
that could be the only reasonable assessment of national credit conditions
that they have ever seen.
The author suggests, however, that the anti-scapegoat possibilities be
not lightly dismissed, for there is much work -- always -- to be done to
strengthen the System's armor.
As another spot for such labors on the current scene, the author
submits that the gold outflow would merit a first-rate Bulletin effort directed
toward bringing out, through review of developments, the various causes
involved.
Who knows but what a timely and effective treatment of the situation
might just possibly serve to keep the Board's own actions from being pinned
eventually as the cause of it all?
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Federal Reserve Bank of St. Louis
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In any event, the Board would not be setting any precedent if it
directed the running of monthly economic and financial reviews in the
Bulletin.
Long articles of the kind were standard in the Bulletin for many,
many years.
However, it would seem to the author futile to revive the practice
without gearing the product to a practical purpose -- assuming the product
is backed by the facts, of course, for no presentation can else be essayed.^
What stymies the Bulletin today is not really the complexity of
language that often is mentioned, nor lack of professional ability on the
part of its contributors, nor -- most emphatically -- an absence of
figures or facts.
It is instead, in the judgment of the author, the absence of a sense
of purpose.
The Board has dressed up the Bulletin in an attractive cover!
and style of type, but it has not as yet given it any particular place to go.
There are those who prefer the Bulletin as it is, and there are things
to be said for as well as against continuance of the magazine's present
form.
It is, in any view, a useful publication and it is used by its subscribers
fcr many different purposes.
Indeed, there are those who hold for it an affection of sorts, finding it
mindful of the holiday season fruitcake: not too easy to digest, although well
bak*d, but it can yield fine bits of fruit for those who know how to pick them.
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***
Strategic Matters:
Men, Ideas and Materials
All critics of the Federal Reserve who are worth notice here may be
divided into four classes.
1.
Those who share your concepts and aims.
economic freedom.
They, too, value
They, too, want a stable dollar along with high level
business and employment and all the economic growth that can be sustained.
They tend to criticize a single action or series of actions for being too much
or too little, too early or too late, and sometimes they suggest action you
are not ready to take.
But because their concepts and aims are the same
as yours, their occasional differences with you relate mainly to judgment
and matters of degree, and they are reasonable enor.gh to recognize it.
Hie members of this group are as diverse as life itself: among them are
doctors, lawyers, business and college economists, holders of public office,
rich men, poor men, perhaps some Indian chiefs -- and who knows who
else?
In the main, they are men of good will, and never a menace.
2.
exercise.
Those to whom monetary policy is largely an intellectual
To many of them, monetary policy operations resemble a
financial or economic game of chess.
Some are virtuosos in the recondite,
and perfectionists in other people's affairs.
character, bent upon public service:
3ut others are men of high
they believe honestly, and endeavor
to demonstrate by the massive array of present logic and past data, that
pre-set formulas will produce better monetary results than administrative
judgments.
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Federal Reserve Bank of St. Louis
Most members of this class are college professors seldom
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encountered outside the pages of text-books or professional journals.
Occasionally, a Congressional committee will give one of them a forum and,
if he is of the lesser sort, he will seize the rare opportunity to tell exactly
:
how monetary policy (and perhap-S world affairs) should be run.
Mostly,
'
the men in this class are harmless.
3.
Then there are men of substance who nurture a feeling,
though it may only be subconscious, that they are possessed of superior
wisdom, and therefore can perform your duties better than you.
What they
really want, but do not always tell even themselves, is to ordain the affairs
of. the world, for they are sure they can arrange things (interest levels
included) better than the free market system, for is not the mind of a superior
man mistress of the world?
They believe themselves to be essentially on
your
side, and think they are showing it when they applaud an action you take
^^—^^
that happens to coincide with one of their notions.
But in the next breath
they criticize your failure to put into effect another of their notions.
In
contrast to members of the preceding class, they have no difficulty in getting
their remarks into newspapers and magazines, most prominently in publications they control.
Because of their position and power, they are heard,
s.ad given some attention -- even, at times, in very important quarters,
T&eoe men bear watching.
4.
Finally, there are critics who are fundamentally opposed to
your basic objectives -- particularly stability of the dollar -- because they are
guided by concepts and beliefs that conflict with yours 0
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Federal Reserve Bank of St. Louis
There is no possibility
- 45 -
that anything you do can meet with their approval, except by momentary
coincidence, as when you ease credit during economic decline.
However,
they are not all inflationists and certainly not villains, for many are true
men of good will and great heart who oppose you only because they feel your
policies -- however well intentioned -- impede progress to a better life for
all mankind.
Mostly, critics in this fourth class fall into two groups.
The first group is made up by professional economists in university
or consultant positions who count because they provide the rationale for
opposition, and because they are almost awesomely articulate.
One has
achieved the feat of fashioning a best seller from material drawn from the
dismal science.
Another, of different stripe, ranges far on the speaking
circuit, getting businessmen's ears at civic club meetings and, by report,
converting a number to his gospel of "All This, and Heaven Too. "
A con-
fident man, he sometimes engineers his host clubs into requesting that the
Federal Reserve provide a debating opponent for him to work over.
The second group in this class is made up, chiefly, by holders of
public office, backed in some instances by aggressive leaders of powerful
special-interest organizations.
Some oppose you only on an off-and-on basis,
for they are concerned more with the requirements of political than of
economic or financial strategy, and take their cue accordingly.
Others have
more deeply rooted reasons for opposing you, whether it be that they regard
inflation as a panacea or the "money-changer" class as the scourge of man.
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In none of these critical groups is there any important lack of under•*
standing of either the machinery or the aims of the Federal Reserve System.
The really dangerous adversaries of the System oppose it because
they do understand it:
oppose it because they know exactly what it is trying
to do and how it is trying to do it, and are opposed to it for precisely that
reason.
It is an ironic fact that -Ignorance, of the structure of the System in
particular, and
Fear, of meddling with a mechanism so "mysterious
and complicated" in its workings and its economic
effects -a r e regarded by the most relentless critic of the System as the most frustrating obstacles to refashioning the System to his heart's desire.
One can have the confirmation for himself, in pages of the Congressional
Record that would extend from the Potomac to the Pecos and suffice to clog, if
not dam, both of those streams.
There is time and space here for no more than hastily chosen Sc.mples.
Here is "Mr. Critic" himself on 23 May 1955, Congressional Record
page 5824, less than a month before obtaining a vote in the House of
Representatives on a resolution in which he proposes a "study and investigat:ori" of the Federal Open Market Committee.
He is trying to lead his colleagues in the Congress out of the darkness
of erroneous belief that ownership of the Federal Reserve is more private
than governmental in nature - - a mistake he fears may lead some of them to
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vote "wrong".
He speaks, with feeling:
"Contrary to the beliefs of many people, the 12 Federal
Reserve Banks are not owned by the bankers.
the Government of the United States,
They are owned by
The money that is issued by
these 12 banks is issued upon the credit of the Nation and the stockpile of gold.
Government.
All of the gold also belongs to the United States
The gold is useful in international transactions but
serves no useful purpose in our domestic economy.
The 12
Federal Reserve Eanks do not use anything for money except
created money or manufactured money.
"The small amount of so-called stock owned by the private
banks in the Federal Reserve System is not stock at all.
It is a
token investment upon which the banks receive 6 per cent interest
only for the psychological reason of making the banks feel they are
a part of the Federal Reserve System.
Insofar as ownership or
part ownership is concerned, the investment is 'phoney 1
I he so-called stock cannot be voted; cannot be sold, cannot be
hypothecated. It has no relationship to ownership
"
But sometimes attention is hard to hold, and understanding hard to
win.
Three weeks later, on 15 June 1955, the House voted "wrong",
214 to 178, and the resolution was rejected.
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Here is Mr. Critic again, 19 September 1957, Congressional
Record page A7524.
It is two and a quarter years after his 1955 defeat*
It is also six months since he has gotten the House to vote on another of
his investigation proposals, this one dealing with the whole subject of
national monetary and credit policies and the financial structure of the
United States.
On this latter occasion, 27 March 1957, the House has
again voted "wrong", 225 to 174.
Mr. Critic, a persistent if not always a patient man, is reviewing the
causes of his two defeats.
At the moment, he is still analyzing his loss in
1955. He is blaming arguments "varied and complex" for his defeat.
Mr. Critic speaks:
" In 1955, the principal arguments made against House
Resolution 210 were (a) that the proposed investigation was not
needed and (b) that such an investigation would be dangerous, in
that it might upset the Nation's prosperity.
For example, the
gentleman from Illinois (Mr. Leo E. Allen), who led the opposition's
debate, likened the proposed investigation to our boyhood inclinations toward 'meddling' with watches. He said: 'When the watch
was running well, we probably meddled with it, experimented and
pulled it apart, and then it did not run.
analogy here. '
I think we have the same
In a similar vein, the gentleman from Michigan,
Mr. Wolcott . . . too, saw, somehow, a danger that a study of
money and credit matters might dampen the prosperity
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Federal Reserve Bank of St. Louis
"
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. . .The bear-baiting colleagues, however, have lost interest in the
sport and no longer listen. ....
The press gallery, above the speaker's
head, has largely emptied too when, in welling bitterness, Mr. Critic
turns his ire upon the press for "confusing the issues" . . . »
^t $ jft $ $ % $
It is not the author's purpose to speak in praise of ignorance and
fear, for they are shaky allies at best and there is always the peril that
they will be turned back against you.
Yet understanding, too, has its dangers.
It isn't necessarily true that understanding in the sense of comprel.fciision of the Federal Reserve System -- whether of its structure,
functions, actions, policies,, operations or purposes -- will bring understanding in the sense of empathy, and support.
Understanding lies behind the proverbial inability of valets to regard
their masters as heroes.
And it's almost at the forefront of Alice
Roosevelt's remark about a former presidential condidate: "You have to
really know him to dislike him, "
In educational and e:r.plan?>tory material of general nature concerning
i\s work a.id related matters, the Federal Reserve is richly equipped, and
steadily becoming more so.
It is, in fact, doubtful that there is in all the world a single institution,
organization or even an association of organizations -- public or private -that matches the Federal Reserve in this respect.
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In a "List of Free Materials Available to p rofessors" that is compiled annually by the Educational Service Bureau of the Wall Street Journal,
5-1/2 of the 1959-60 edition's 28 pages are devoted to Federal Reserve
offerings of booidets, pamphlets and films.
The nearest rivals in a field of 65 listees, ranging from the Advertising Federation of America to "Western Union Telegraph and Arthur
Wiesenberger & Company, are the American Bankers Association, the
American Petroleum Institute, the Chamber of Commerce, Dun & liradstreet,
and the U. S. Small Business Administration.
proximately one page each.
Their offerings take up ap-
The System takes almost that much space just
to offer materials newly made available since the 1958-59 edition.
In addition to being numerous, the System's educational materials
are good in quality and wide in the range of their potential readership, both
as to subject matter and susceptibility to comprehension, as gauged by the
levels of educational attainment of prospective readers.
Federal Reserve Operations in the Money and Government Securities
Market?
There is available a 105-page book with that title.
The book
contains, among other things, "sections on the role of the national money
market, Government securities market, what the Trading Desk does, the
use of projections and the 'feel 1 of the market, and operating liaison with
the Federal Open Market Committee. "
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Federal Reserve Bank of St. Louis
-Slit is a first-rate book for anyone interested in its very specialized
subject matter, and it can be helpful to employees of the System and of the
17 or so firms in which people make a living from dealing in Government
securities, as well as to anyone else who may be interested.
It is
"intended primarily for students of money and banking," more particularly
graduate students.
For those who might regard the going a bit hard in that book but who
are nevertheless interested in the same specialty, the New York Bank also
makes available a "layman's account of the workings of the New York
Money market, " entitled The Money Side of "The Street".
This one is
intended for "bank-management trainees, for businessmen with an interest
in the money market, and for college students. "
To meet a more basic requirement, to provide information on the
System's origin, development, structure, instruments, operations and so
on and to relate the System to the money and banking system and the
economy, the Federal Reserve has several offerings.
The two perhaps most widely known and used are the Board's
The Federal Reserve System;
Bank's
Money:
Purposes and Functions and the New York
Master or Servant?
They are intended for complementary
reading, and are designed accordingly.
The Board's 224-booklet is described as "intended primarily for
students of money and banking, but suitable for bankers and businessmen. "
The New York Eank's 48-page offering provides "nontechnical explanation.. .
written for high school teachers at their request, but suitable for college
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students and interested adults. "
Still, pupils lower on the educational ladder have not been overlooked,
The New York Bank also has a 20-page booklet, Ihe Story of Checks , that
not only tells about the check-clearing process but also essays a capsuled
account of monetary instruments and their use.
(The Story of Checks is done in color and contains the drawings that
prompted the press to call it, in friendly fashion, a "comic book, "
and a
member of the press, also in friendly fashion, to inquire of the author if
he would be "putting out anything soon on cereal boxtops. ")
This great body of educational material has many values for the
System, and work on additions and improvements deserves continuance.
The material fulfills the obligation of the System to meet requests
of various kinds for general information about the System.
knowledge of and about the System to all who read it.
It will impart
It serves not only for
reading, but also for reference.
As a prosaic but nevertheless practical service, it saves enormous
amounts of time that might otherwise have to be put into correspondence
furnishing general information in response to inquiries.
Possibly, it may also serve a purpose deemed very important in
this paper: to leave a favorable impression of the Federal Reserve System
with readers, even after all memory of monetary details has faded from
their minds.
Conceivably, this literature in its entirety might even furnish all the
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"how-to-do-it" information needed to set up a central bank in some far-away
clime, or to reconstruct the Federal Reserve System itself in the unhappy
event of a nuclear catastrophe on a national scale.
But there is one thing it can never do.
And that is to respond to the
question foremost in the minds of the people who count most -- especially after
some action has been announced:
Why is the Federal Reserve doing what it is now doing or what has
just been announced, and why isn't it doing (a) more, (b) less, or (c)
something altogether different?
Of course, like the law authorizing margin requirements, Federal
Reserve educational material does suggest purposes that might seem to explain
any action, in either direction.
But nobody among those who matter most
considers it a substitute for an explanation of the reasoning behind any
particular action.
For dealing with the really dangerous men, and the others who bear
watching, this literature is -- if possible -- even more inadequate.
Hence, there is need for what was set out at the start of this paper as the
third ingredient of any program for promoting understanding of the Board's
policies and actions:
The "Position Paper" or "White Paper" treatment of matters of strategic
importance: i.e. , subjects or theories in debate in parliamentary, academic and
popular quarters that have a vital bearing on the task of the Federal Reserve and
its ability to carry out that task.
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Now the long march has brought us at last to the point of decision,
the area where outcomes will be finally determined, at some unknown point
in time.
In this area, the issue is how -- airf to what ends -- monetary powers
should be used and, consequently, who should control their use.
The battle
here is for the public mind, and the victory will go to the side that captures it.
This is a battle that is not going to be won on the playing fields of
the school system, for what is involved is not schoolroom but public_ education, mostly of adults, many of them already learned.
And compared with what is involved here, almost all that has gone
before in this paper -- perhaps all of it, in fact - - i s kindergarten stuff.
In fine, we are past the point where the problem was merely to show
reasons why particular monetary actions were taken, and we are arrived at
the point where the problem is to show why such actions should ever be taken
at all.
For a better look at the problem at this point, let us cross the lines
into the camp of the opposition -- which holds the initiative and has launched
the assault -- and try the view from that angle.
Two things will need to be borne in mind:
1. The scope of the subject dwarfs that of this paper,
and we will do well to catch even the edges of its profile.
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2.
System.
The issue is NOT one of "life or death" for the
Everybody in the opposition wants banks supervised,
checks cleared, and money created, so there's no melodrama
of survival here.
The Federal Reserve may be altered, but
it will live.
A single glance shows the opposition to be a coalition, divergent
in aims and linked only by the necessity to do something about monetary policy
to accomplish any of those aims.
Both the weaknesses and the strengths of
a loose confederation are present.
One faction is made up by the heirs of Bryan and the Populist movement, in public office and across the countryside.
It has a deceptive air of
always being about to wane, but its leader is aggressive and death and
seniority are moving him toward a position that carries much power.
The principal aim of this faction is simple:
forever and always, in all times and circumstances.
lower interest rates,
It is not the desire of
this faction to destroy the Federal Reserve, but to convert it into an engine
/ /\^Lwu
of inflation to keep rates- down. / /*•
^^~—-"*^
7
< believes
r
Qshsi*^
/
The second faction is not so old-fashioned f and not so unsubtle.
It
a little inflation is necessary for full employment of men and machines,
and hence for the general welfare.
This faction has adherents not only in
public office but also in business and labor quarters, where its deceased
leader once carried much weight.
Note, though, that while this faction feels it is necessary to have some
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«,
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inflation, it is equally insistent that the amount of that inflation can be -- and
must be -- held small,and restrained to a creeping pace.
In the plans of this second faction, it is necessary that the Federal
Reserve not only remain alive but also continue to fight valiantly against
inflation -- except that, most important of all, it must never quite succeed.
A third faction -- some non-members, but not all, consider it the
"left wing" of the opposition -- puts its faith in a more radical idea:
that
the way to overcome the inflation problem is to inflate.
This idea is expounded with astonishing earnestness, constancy and
force by the faction's leader, a man who already once has enjoyed - - i n every
sense of the word -- official access to the ears of a holder of the highest office
in the land.
On present holders of public office, business-civic club audiences and
the populace at large he pours an endless stream of oral and pamphlet argument,
well studded with statistics, that may perhaps be compressed to this:
1.
The best way to maximize growth and to overcome
inflation - - a t one and the same time - - i s not to restrict demand
by either monetary or fiscal restraint but to pump up that demand
by monetary and fiscal expansion.
2.
Phenomenal benefits will flow from the chain of events
thus set in motion: growth will increase at an unprecedented pace,
and productive capacity will go up with it; then full-blast use of
ever-expanding capacity will not only satisfy ever-expanding
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economic and social wants, but also do it at lower prices -because unit costs will be reduced.
In this scheme, the Federal Reserve would be needed badly, but its
behavior and bent would be changed.
The leader's scheme enchants many, but he and his philosophy evoke
suspicion among many others that, if the three shells ever stop moving, there
may not be any free lunch under any of them.
Occasionally, the leader en-
comters frustration, but that only spurs him to more earnest and intensive
effort.
He is blind to signs of boredom.
The fourth faction appeals to -- and is reaching -- the widest audience
of any;
it appears to be outdoing the rest in gaining adherents;
and it may
prove in the end to be the most effective of all.
It has a disadvantage that the Federal Reserve has itself: it poses a
threat to the dreams of all the other factions and those who go to make them
up, for the fourth faction opposes inflation as vigorously as the Federal Reserve
itself.
That is its strength as well as its weakness.
Thereby, it taps the
same body of support the Federal Reserve does among those opposed to inflation -- and there are indeed many so-minded -- just as surely as it, too, meets
resistance from the inflationists.
The fourth faction's quarrels with the Federal Reserve are few but they
are deadly.
It believes the System's actions neither reach nor can reach the real
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cause of inflation -- which it identifies as the monopoly power wielded by some
unions and industries, working in tandem, to push wages and prices even higher,
And it believes that the System, in endeavoring to do the right thing
in the wrong way, not only is doing no good but is doing positive harm,
manifested in many ways:
In unnecessary (and unnecessarily prolonged) unemployment of men
and machines; in unnecessary hardship for those who are economically weakest and therefore are hardest hit by either inflation or deflation; and in
unnecessary obstruction of economic and social growth and progress.
What the fourth faction wants is not to destroy the System but to
supplant it with some form of direct control over the wage and price spiral that
it believes would be more effective and more free from harmful side-effects.
Where the other three factions would be willing to allow the Federal
Reserve its same or an even bigger chair in their parlors, the fourth faction
would relegate it clear to the kitchen, and perhaps below stairs.'
The fourth faction, however, has one giant-size problem yet to solve:
what kind of wage- and price-control scheme to offer that will produce all
the envisioned benefits without producing as many harms, and perhaps the same
ones, that the faction now ascribes to the activities of the Federal Reserve.
Despite that enormous defect, the fourth faction's doctrine may prove
tougher to counter than the doctrines of all the rest.
The hopes it raises for more effective anti-inflation results, free from
harmful side-effects, may cause it to draw away from the System many who
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now support the System for its anti-inflation efforts.
Too, it appeals to many who genuinely fear, in their rninds or their
hearts, that the System is more concerned for the dollar than for the working
man or humanity itself.
This matter of feeling is not unimportant.
Most people who know of
Walter Bagehot seem to remember but one thing he ever said:
not manage itself. "
"Money will
But here is something else that Walter Bagehot said:
".. .So long as the human heart is strong and the human
reason weak, Royalty will be strong because it appeals to diffused
feeling, and Republics weak because they appeal to the understanding. .. "
The last part may not quite have captured what is happening on the
American scene today, but there is perception in it just the same.
Where is there a Federal Reserve study - - o r speech -- dealing with
the causes of unemployment that might not only serve anti-scapegoat purposes
but also indicate the Federal Reserve has interest in -- and perhaps compassion for -- human misery?
People to whom feeling matters, and there are many of them among
the Federal Reserve's friends as well as its critics, do not find these matters
neglected in the economic presentations of the fourth faction's leader.
If we are to compete with this man for the public mind, we had best not
waste time finding faults with his work or personality in the privacy of our halls.
He has been competing busily for some time in the free market in ideas,
The Affluent Society is no longer merely the title of his best selling book, it is
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a term -- and a concept as well -- that has passed into the language of contemporary speech.
The fourth faction's "message", furthermore, is being carried by
other economists into quarters remote from the popular front.
The American Scholar,
"a quarterly for the independent thinker
published for general circulation by Phi Beta Kappa," transmitted the message
to serious readers in its summer edition a few months ago.
The author of that piece was Abba P. Lerner, professor of economics
at Michigan State University, an institution whose president is chairman of the
board of a Federal Reserve Bank branch.
An excerpt follows:
"... A new element has entered the picture. . . the growth
of the power of large corporations and of powerful trade unions
to increase the prices of the product or of the labor that they sell,
even in times of considerable depression and incomplete utiliza tion of capacity.
Instead of inflation being caused only by pressure
of buyers trying to buy more goods and services than the economy
can produce, so that it is always a 'buyers' inflation', it is now
possible to have inflation even when this is not the case -- even
when the output of the economy is far below capacity and there is
substantial unemployment. We also can have 'sellers' inflation',
when prices are raised by the pressure of sellers.
"With this development, attempts to stop a sellers'
inflation by restrictive fiscal or monetary measures, which
would be the appropriate cure if it were a buyers' inflation,
only bring about depression. Attempts to cure this depression
by expansionary monetary or fiscal policies only restore the
sellers' inflation.
The resulting frustrations have induced a
regression to a pre-Keynesian worship of a balanced budget as
a charm against the be-devilment of inflation in the midst of
recession. Instead of the budget being used as an instrument
for balancing the other expenditures in the economy so as to
maintain prosperity, prosperity is sacrificed, as in ancient
(pre-Keynesian) times, to the fetish of a balanced budget, and
the economy continues to suffer from sellers' inflation
moderated by induced depression.. . "
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*••
•
- 61 In another quarter usually regarded as remote from both the popular
and the intellectual fronts -- a publication of the American Bankers Association
the same "message" reappears.
The transmitter in this case is John M. Clark, a former president of
the American Economic Association.
The publication, copyright 1960, The American Bankers Association,
is a 68-page booklet, The Wage-Price Problem, which presents results of a
study commissioned by the ABA's Committee for Economic Growth without
Inflation.
This is Mr. Clark speaking, pages 52 and 67:
".. .The tendency to undue reliance on (restrictive fiscal
and credit) policies stems partly from the default of other readily
available remedies, and is fortified to the extent that the belief
prevails that the real cause of any inflation is always excess demand,
to the exclusion of any independent role of price and wage policies.
An added factor in this line of thinking is the view that it is wrong
to 'accept 1 even the smallest degree of inflationary trend. This
view is commendable if it means that we should remain dissatisfied and should continue to seek further remedies consistent
with our general scale of economic values. It becomes dangerous
if it is construed to mean that we must insist on a quick stamping out of all traces of inflationary trend, using for the purpose the
most readily available methods: namely, fiscal and credit restrictions. The danger is that this would mean harmful restriction of production and employment, without eliminating the
inflationary trend that derives from price and wage policies.
The latter policy would mean that we should be so unwilling
to accept anything short of perfection in the elimination of
inflationary trends that we would accept instead something
seriously imperfect in the matter of production and employment. . .
"As regards policy toward the effect of price and wage
policies on inflation, the implications of the present study point
to avoidance of compulsory controls of prices and wages, and
avoidance of the more subtle temptation to rely on fiscal and
credit restrictions to do more in the way of restricting increases
in the price level than they can properly and safely be called on
to d o . , . "
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- 62 Against the older contentions that speeding or creeping inflation is
good, necessary or enduringly beneficial, the System is supplied with some
fine ammunition from the still-useful work of Winfield Riefler and others.
How well is it equipped to deal with the newer ideologies, if they
may be called that ?
Can the System make a good showing that monetary restraints do
get at the real causes of inflation, wage-spiral problems included?
Can it make a good showing that monetary restraint is not the cause
of unnecessary unemployment (and unnecessarily prolonged unemployment)
of men and machines?
Can it make a good showing that monetary restraints have no
distinctively discriminatory effect on various classes (and thereby support
the "spokesman's" contention these restraints bear not upon classes but
marginal cases within classes)?
Can it make a good showing that monetary policy is actually helping
rather than hindering economic growth and social progress?
If it can, it had better get busy at doing it, and keep busy at it, for
there are many more questions to tackle.
The purpose and need is clear, and possibly clamorous.
are instruments for effective presentation:
And there
the "Position Paper" or "White
Paper".
Nothing fancy is intended by the use of either of those names.
So
far as this memorandum is concerned, nothing more is meant by either than a
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t-
- 63 serious, affirmative, purposeful exploration of a subject -- more comprehensive
in scope than a Bulletin review or article would be normally -- that points unmistakably to, or states, a conclusion.
Once set, it can be released on its own and later incorporated in the
Bulletin
for further availability, if its length permits.
The conclusion and
the essential supporting material can be re-stated in speeches and in statements
to Congressional Committees, and they can be given new life in "visual" or
"illustrated shows".
Uses will not be lacking.
IV
They are not lacking now.
Some Program Notes
The idea that the Federal Reserve has a "tradition" of silence is
spurious.
The evidence of that is by no means confined to items already cited:
- Public release of a sizeable section of an Open
Market Committee directive, almost in precise verbatim
form, on the very day it was adopted.
- Public revelation of the future course of monetary
policy, as well as of the future course of the economy.
There is far more than that in the records covering nearly a half
century of Federal Reserve history:
A Chairman of the Board of Governors has engaged a
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Federal Reserve Bank of St. Louis
- 64member of the United States Senate in debate over a national radio
network.
Members of the House of Representatives and of the
Senate have been lectured in open correspondence.
The bank-
ing community has been given like treatment, along with
other individuals and groups.
Publications have been contradicted in print.
So have
a President of the United States and a Secretary of the
Treasury.
What has characterized Federal Reserve communications over the
long pull has not been Silence, but Shouts
and Murmurs - - i n cycles.
Well, there is a time and a place for all things, and many of the things
done in the past were made necessary by circumstances,
as they could be
made necessary again.
In the view of the author of this memorandum, however, the present
is no more a time for Shouts than for Murmurs, or for Silence either.
The focus of this paper has been on just three basic ingredients that
would seem to the author necessary in any program to promote a better understanding of the Board's policies and actions.
It would be, of course, an easy task to devise a more elaborate program, if that be the Board's desire.
Yet programs, like growth, need to be sustainable, and it might well
be strain enough for the Board's or the System's entire organization to make
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I
- 65 *
creditable progress in handling the problems covered herein.
And as for the formidable problem of taking positions and preparing
papers to present them in the future -- well, whatever became of yesteryear's
project for an index to make it possible to find with certainty and ease what
positions the Board has taken in the past?
Patience is as necessary as purposefulness to efforts to promote understanding, for the goal can never fully be achieved even where the pursuit of it
never ceases.
In the author's judgment, a "crisis" approach to the problem of understanding would, at this time, be very much mistaken.
If there truly is a crisis at hand today in Federal Reserve relations with
the general public or with either of the two institutions that lay most claim to
representing the public -- the Press or the Congress - - i t has escaped at least
one vigilant observer.
In the course of this paper, notation has been made of difficulties encountered at times by a Federal Reserve "spokesman", hence a word of
perspective might be proper.
Many times, between the "spokesman's" principals and the press, there
is a conflict of aim involving policy matters, and the only course for the "spokesman" then is to side with his principals, and give no worry to press friction.
Most of the time, however, between his principals and the press there is
nothing worse than a language barrier to understanding, and the "spokesman" is
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Federal Reserve Bank of St. Louis
- 66 free to work on the side of the press.
That is fortunate for his personal rela-
tions with the press, and perhaps for his disposition as well.
How would one measure the public's attitude toward the Federal
Reserve ?
The American Hankers Association some time ago commissioned a
private firm to survey public attitudes toward the Federal Reserve along with
attitudes toward certain other institutions.
The firm's subsequent report on
"in depth" interviews in several cities purported to show most persons who
professed to know of the Federal Reserve also professed to be well disposed
to it as an inflation fighter.
Probably a more solid clue is offered by a poll taken by the National
Federation of Independent Business of its "100,000-man nationwide independent
(i.e., small) business- and professional-man membership" in 1957.
The question the Federation put into its poll was so stern a test for
the Federal Reserve that it drew a protest to the organization from the everperceptive Elliott Thurston, when he saw a copy of the questionnaire before
the results were in.
This was the question:
"Are you for or against the Government's 'tight money 1 policy
which restricts bank loans and increases interest rates?"
Amazingly enough, when the results were unveiled by the Federation
on 6 December 1957, the answer was as follows:
"47 per cent of our members
who used their ballots favor 'tight money 1 , 41 per cent oppose it, while
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- 67 -
12 per cent indicated no preference. "
(Mr. Ihurston could, and did, relax,)
A year later, then-Chairman Wright Patman announced results of a
canvass by the Joint Economic Committee of "professional opinion (1,500
economists in 150 universities) concerning economic stabilization and related
banking policies. "
Some results follow:
"In its anti-inflationary actions of recent years, how would
you characterize the Federal Government's use of the following basic policies?
Too little?
Enough?
Too much?"
The number of respondents to this and most other questions was 615.
Cf them, with regard to monetary policy, 50.4% checked enough, 25.7%
too little, 19. 0% too much.
"In its anti-recessionary actions during recent years, how
would you characterize the Federal Government's use of these policies?"
On monetary policy:
69.8% enough,
20. 3% too little, 6.7% too much.
"In the control of inflation, a combination of policies may be
called for and varying emphasis may be appropriate under difficult circumstances.
If you believe, however, that as a general proposition reliance or
preference should be placed more heavily on one type of policy than another,
please indicate. "
Of the 209 respondents who indicated at all, 56. 5% indicated monetary
policy, compared with 26. 3% for tax policy, 11.0 % for "expenditure policy, "
and 6. 2% for direct controls.
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-68"Do you believe:
"A.
That 'tight money 1 served to dampen inflation
during 1955-57?"
Yes
"B.
74.6%, no 21. 1%, no response 4. Z%.
That, by adding to costs, or otherwise, 'tight
money' may have contributed to rising prices?"
Yes 17.6%, no 69.9%, no response 12.5%.
The rest of the questions had to do mostly with opinions regarding
the over-use, under-use or appropriate-use of the Federal Reserve's policy
instruments, and the results -- too detailed for further showing here -- can be
seen in a Committee print.
The disappointment of Chairman Patman with the results as a whole
is indicated by the opening sentence of a personal statement he released with
the announcement:
"While the large number of economists responding expressed sympathy
with the aims of the Federal Reserve's tight money policy, a considerable
minority indicated varying degrees of doubt as to the techniques employed. . . "
What weight these showings may deserve is anybody's guess.
They --
and they are the only things of the kind that the author of this paper has found,
though undoubtedly more such items exist -- are given here merely for perspective.
Maybe they are just a measure of luck - - i n the past.
If any generalization can be made about the "public understanding
problems" of the Federal Reserve, on the basis of experience over the System's
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Federal Reserve Bank of St. Louis
- 69 lifetime, it probably is this:
those problems wax and wane with the business
cycle.
The generalization may be bolstered by a concise account of the experiences the Board went through in just one short era.
First, Congressional critics attacked the Board in one
breath for not preventing inflation from raising the cost of living,
and in another breath assailed it for increasing interest rates to
stem the inflation and its price consequences.
Then, when the Board (and the upward movement in
interest rates) remained unresponsive to Congressional criticism
that was directed to the public, "pressure" was applied directly
to members of the Board. Next, by way of intimidation, a "full
report to Congress" was required.
The Board's policy nevertheless continued unchanged, so
Congressional opponents tried different tactics.
As step one, they introduced bills to enlarge or "pack"
membership on the Board, and also to revise System procedures in a manner
that would virtually assure policies directed toward lowering interest rates.
As step two, to win support for those bills, they launched
an assault on the Board's reputation:
- In administrative matters, the Board was charged
with reckless extravagance in expenditures, especially for
salaries and building programs.
- In policy matters, it was charged with "conspiring
with bankers" for the bankers' benefit, in discrimination
against certain other groups in particular, while making a
public pretense of administering "an impartial, general
control. "
- In personal matters, individual members of the
Board were accused of "making a killing" in the markets
by using "inside information" for speculative activity.
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Ihroughout, the Federal Reserve fought back at its
Congressional tormentors, sometimes openly. Eventually,
change came over the scene as the economy declined, and, with
it, the critical barrage.
The critical refrain, in fact, quieted
to a whisper as the economy slid into a recession and discount rates
went with it to low levels, but, after a while, it began again. The
rising new refrain told how the Federal Reserve had caused the
economic crack-up.
Finally, though, business and employment began to
pick up and an investigation of the whole cycle was launched by a
Congressional committee manned by some of those who had fought
most bitterly against the rise in interest rates in the beginning.
The Committee, in time, concluded that what
brought on the trouble in the first place was failure of the Federal
Reserve to move sooner and more strongly against inflation at
the outset.
The era profiled was that of Governor (i.e., chairman) W . P . G . Harding,
and the time was 1920-22.
The account itself is an abridgement from a book
Governor Harding wrote in 1925:
The Formative Period of the Federal
Reserve System.
The dangerous men, it seems, are always with us, and sometimes they
make some inroads.
Then, as now, they were pushing legislative proposals intended to insure
sympathetic attention for a particular occupational group the Board was accused
of overlooking and even discriminating against.
That time, despite opposition by the Board, they succeeded.
To their
success, we are indebted for the "fair representation" on the Board, ever
since, of "agricultural interests. "
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Federal Reserve Bank of St. Louis
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V
Some Reflections
In whatever it does or undertakes to do in the area under discussion
the Board must be mindful of the face it presents to the world and the impression it therefore will make.
Over the long haul, the impression one projects is bound to reflect
one's true self, with only such distortions as are inevitable from flaws in the
transmitter and the receiver.
That makes it necessary, if not always
pleasant, to be one's self.
Over shorter periods, other things are of course possible.
Madison
Avenue manipulators, playing variations on a Viennese theme, have been
making unlikely Cinderellas for so many years the process is familiar from
Peru, Indiana, to Dublin, Georgia.
The great fault in all this is that the initial stage, commonly called
The Euild-up, is always followed, in time, by the natural Fall- or the induced
Tear-down.
Publicity is the medium that leads to both.
The Board will do
well to avoid it.
Popularity, too, would be an elusive target for the Federal Reserve,
and unlikely of long retention.
The System all too often has a job to do that
precludes it.
But the System can , however, seek from the public one valuable thing
that the public does not lightly bestow for long, and that is respect.
There is no absolutely sure way of attaining or retaining respect, but
there is a definite rule governing the try:
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Federal Reserve Bank of St. Louis
to so conduct one's self as to earn
-72 -
it -- or, at least, to deserve it.
In observing this rule, the Board's record,
in general, is excellent.
Perhaps a fair and reasonable continuing target for the Board might
be projection of an image along these lines:
A body of reasonable and competent men, devoted to the interest of
the public as a whole, rather than to the particular interests of particular
economic, social, or political groups.
Men mindful of and favorably disposed toward desirable economic and
social objectives (i.e. , not just for "a stable dollar, " period, but for it
in the belief that it is a necessary means to achieve the social end of a higher
standard of living -- and maybe, even, a higher standard of life).
Men with some compassion for humanity and its aspirations, and constructive in their approach thereto.
setting audiences awash in tears.
illustration:
(It is not suggested that anyone try
What is suggested may be possible of
while it is and always will be necessary in commenting on pro-
posed legislation to give some negative reports -- impractical, overcostly,
financially unsound - - i t may be possible many times (a) to make some constructive suggestions on ways of accomplishing the legislative purpose, or
(b) to explain in more sympathetic terms why the proposal may hurt rather
than help in achieving desired goals).
Men endeavoring in reason and moderation to contribute to the achieve
ment of worthy objectives, but without final or absolute power to assure that
the outcome will be that universally desired, especially if others do not
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Federal Reserve Bank of St. Louis
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73
-
whole-heartedly contribute their efforts, too.
(Beware the blandishments of members of Congress and magazines
that Puild-up the Board or the Open Market Committee as "the most powerful little group of men in the world. "
They are only seeking to attract a
bigger audience for the "message" they will deliver against you. )
Perhaps the whole thing can be stated more tersely in simpler and
possibly more practical terms.
The ideal is to win public acceptance of the Federal Reserve's opera
tions as worthy in purpose, reasonable and effective in execution, and administered with justice and integrity.
The comments of the author in this section flow from a faith that
"imagery" is fundamentally important.
Fortunately, a more authoritative and better-stated comment has been
on the books for almost 60 years, put there by a blind Harvard historian in
his stirring recital of how a few squads of Spanish horsemen overcame the
Aztec empire's millions and conquered Mexico ^9 years before anyone landed
at Plymouth Rock.
It is not a pretty story, for it is the tale of a small band of very
dangerous men toppling a great but ponderous and vulnerable institution,
here is William H. Prescott, giving voice to his own moral:
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Federal Reserve Bank of St. Louis
Put
4
- 74 -
"The fate (of the Aztec monarchy) may serve as a striking
proof that a government which does not rest on the sympathies of
its subjects cannot long abide; that human institutions, when not
connected with human prosperity and p r o g r e s s , must fall - - i f
not before the increasing light of civilization, by the hand of
violence; by violence from within, if not from without.
And who
shall lament their f a l l ? "
VI
Disclosure
In one area that the subject of this paper traverses, the Board has
made far more progress in recent months than has been made elsewhere in
years, but there is still a distance to go.
This is the area of revelation -- or, more precisely,
disclosure
necessary to discharge the obligation incumbent on the Board to provide
readily, at any time, an accounting for its actions in the grant or denial to
applicants of privileges they seek.
In respect to bank merger and branch applications,
it appears
that -- until recently, at least -- the practice of the Board from the beginning
of the 3ystem has been to:
- Leave discretion over all questions of revelation
to the banks involved.
- Provide no information from the Board on either
applications or actions -- not even in response to requests.
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Federal Reserve Bank of St. Louis
1
.
- 75 - Give out nothing more than eventual confirmation
to the fact of a merger, well after it had been effected.
This "no revelation" practice has not been without advantages. It has,
in fact, tended to keep down controversy and thereby the interest of the press,
by delaying knowledge, until too late, that there was anything to be controversial about.
Thus, many small or modest-size headaches have been averted for
years.
^ut only at the risk of a monstrous headache that could blow the
reputation of the institution to the point of no-return.
It is a remarkable thing, in the eyes of the author, that there has not
already occurred a scandal-sized press explosion against the Board for
DENYING PUBLIC'S RIGHT TO KNOW or, more specifically, SECRETLY
GRANTING PRIVILEGES TO BANKERS .
A combination of circumstances has figured in the Board's escape
thus far, which seem to the author as follows:
First, the applicant banks, luckily enough, have supplied
just about enough information, on a sufficiently timely basis, to
keep explosive pressures from building up.
(That has been true, at least, of most of the big or big-city banks, on
which is centered the interest of the general press - - i n distinction to the trade
press, with its interest in even trivial trade matters.
And it is the general
press alone that is really dangerous on RIGHT TO KNOW issues.)
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Second, the ever-dangerous general press has been kept largely
in ignorance of the severity of Board rules by maneuvers designed to put
heavy stress, in diversion of questions that might arise about those rules,
on information mined from the voluntary announcements of the applicants
themselves.
Third, the Board has been alert to the necessity of "bending"
rules and practices when dangers of explosion have been vivid:
the "National
City case" got special handling in its day, and the Hoard authorized immediate
disclosure, by "spokesman" phone calls to the strategically situated press,
of the J. P. Morgan-Guaranty Trust merger approval.
But one's reputation for accounting responsibly and openly for the
discharge of quasi-judicial duties behind closed doors is best not left to such
chance factors, and the loard increasingly has so recognized.
In the classification of individual banks for reserve requirement purposes, the Board, since May 1960, has embarked on publication in routine
(i.e. , "quiet") manner on a regular basis of information sufficient to the need.
(A happy circumstance, too, for in this, as in many like matters, it
would take an extraordinarily fertile brain to think of a justification for a
"no revelation" policy that could pass the sort of tests that are given under
the pitiless probing of press spotlights. )
Similar progress to the same extent -- which is extent enough, for the
time being -- has been made regarding publication of the names of banks held
by bank holding companies and also regarding applications made by holding
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- 77 -
companies to acquire other banks.
The handling of bank holding company decisions, by steps taken
gradually over a fairly short period of years, has been carried possibly to
the point of perfection -- in respect, at least, to disclosure procedures.
For those procedures now provide not only the speedy disclosure of
decisions themselves but, of equal importance, simultaneously provide
the reasons for the decisions disclosed.
The Board must, of course, be ready always to account for and
explain, justify or defend every action of every kind it takes, and one suggestion
is offered here, accordingly:
That authorization be granted immediately, at least to the
Assistants to the Board, to provide, in response to requests, information on
(a) applications received and (b) decisions, plus a general statement of
reasons therefor, in bank merger and branch cases .
If that suggestion is not accepted, request is here made that the Board
furnish to its Assistants a short statement, for the benefit of those making
the requests, that will explain why the information cannot be granted.
(The author has tried hard but vainly to formulate an explanation of
the kind himself, resting refusal of this information on the only ground of
justification he has been able to conceive:
that disclosure would wreak such
mischief to business as to be against the public interest, and therefore would
be unjustifiable since the public interest is the overriding question.)
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Already, the Eoard has gone part way toward the point suggested.
It did so when it decided, very recently, to make known decisions -- and
applications also, in the author's understanding - - i n merger cases.
The decisions, in any event, are now listed in a release (identification
symbol K. 3) put out once each week covering all determinations (approvals
and disapprovals) accumulated during the week preceding the release.
A brief statement indicative of the reasons for approvals could easily
be furnished at the time of decision to the Board's Assistants, for use in
meeting any inquiries arising.
The Division of 3ank Examinations, which must prepare such statements for eventual publication in the annual report, in order to meet requirements of the recent merger law, would need merely to furnish the Board's
Assistants with timely copies.
(The law does not require the Eoard to state reasons for disapprovals
in merger cases, and no statements regarding disapprovals will be prepared
by the Division.
Disapprovals, however, present no problem:
they can be
explained sufficiently by the Board's Assistants, as a test incident has indicated,
without further ado -- and without breaching present rules. )
In making the request stated, the author of this memorandum is
prompted solely by belief that refusing to supply the information specified
respecting branch or merger cases entails unwarranted risks of a kind
already described.
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Federal Reserve Bank of St. Louis
- 79 It is not contended here that supplying the information holds other
values for the Board, for the author's opinion is that it does not.
In his view, decisions made in a quasi-judicial capacity seldom
bring anything except headaches, and sometimes carry a potential for
controversy that is appalling.
It would not be realistic to expect the winner of an approval to be
grateful, particularly in an "uncontested" matter:
it would always be hard
for him to "understand" any other outcome.
It would not be realistic, either, to expect the loser in a "contested"
matter -- whether the loser be the applicant or his opponents -- to understand.
Naturally, he will suffer the temptation to denounce your obviously (in his
eyes) erroneous and prejudiced decision.
And it would be wholly unrealistic to expect the loser in an "uncontested " case to understand anything, except perhaps what villians you are
(again, in his eyes).
He is the most likely of all to wrestle with temptation
to denounce you, and most likely to lose the match.
Chances are that any reasons the Board is willing to give for its
decisions in any of these cases -- except that of the winner in uncontested
matters -- will be better, from the Board's standpoint, than the reasons a
disappointed applicant or his opponent is likely to give.
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Federal Reserve Bank of St. Louis
f
80
VII
Postscript
There are many matters that are common to communications and
to monetary policy.
Both are arts, in the sense that they are concerned with ( and
dependent upon) ideas -- and people -- rather than things.
Put the same combination of chemical elements together in a
test tube and you will always get the same reaction.
You can never count
on that in monetary policy or in communications.
For that reason, no one can really lay out a schedule or
calendar for communications any more than for monetary policy itself.
Each move in communications, as in monetary policy, must
be determined by circumstances -- and needs - - a s they develop, and it
must be shaped accordingly.
That is what this paper has been trying
to say.
The requirements for good communications, however, are
easier to set out than those for good monetary policy, because they are
simpler, and there are just four of them:
Purpose, message, presentation, tone.
Tone is the only one that was not mentioned specifically in a
fundamental rule of communications that was set out in this paper far
back along the way, so a few words will be added in respect to it.
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- 81 -
In the King James version, there appears very early, in the Gospel
according to Matthew, a verse that reads:
" Elessed are the meek: for
they shall inherit the earth. "
To many readers, for semantic reasons, that seems so implausible
that it impairs the credibility of the entire Pook.
In the Eibles of the French, the same verse, translated literally,
begins another way:
"Happy those who are the debonair. . . "
It can give an American reader the pleasantly surprised feeling of
having come upon a memorable incidence of Gallic insouciance.
But the truth is, of course, that the persons with whose prospects
both versions are concerned are one and the same, the "gentle and
courteous. "
They may not be especially numerous, but the gentle and courteous
should be good people for the Federal Reserve to string along with, on
every possible occasion.
Of course these people may never get anywhere, despite the powerful forecast they have going for them, and certainly there is no convincing
evidence as yet that they will in fact inherit the earth.
Nevertheless, it will be better for the earth if they do.
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30 -
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Federal Reserve Bank of St. Louis
@FedFRASER