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William McChesney Martin, Jr., Papers
Series V, Subseries A
Box 21/Folder 4
FRB Official memos, 1961-1964
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Federal Reserve Bank of St. Louis
BOARD DP GDVERNDRS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To_
Chairman Martin
From.
Mr. Sherman
Date
February 10, 1961,
Subjects
Attached is a copy of a memorandum that Lewis Dembitz
prepared for Governor Shepardson at the latter's request. This
memorandum was not circulated to the Board, but you may wish to
read it.
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Federal Reserve Bank of St. Louis
/}
January 23, l?6l
Governor Shepardson
lewis N. Bembitz
Designation of Reserve Cities
and Reserve City Banks
In accordance with your suggestion, T am setting forth below
a possible plan for disposing of the problem of classification of reserve
cities and reserve city banks* May I repeat that this represents only my
personal ideas, not cleared with other members of the staff.
While the Board has devoted time to this subject, more consideration would be needed to arrive at any new set of principles to govern
in this relatively unimportant field* Also, if the new principles called
for designation of new reserve cities, political problems would arise
(assuming that the cities don't want to be designated). In view of the
important fields that the Board has to deal with, and the importance of
obtaining maximum support for the Board's positions in these fields, we
should11 waste any of our ammunition or strategic position in arpoaents
over the designation of new reserve cities.
The suggested plan and further reasons for it, given below in
condensed form, could be elaborated in future discussion.
The plan is as follows:
1. Re designation of reserve cities:
Decide that the Board will continue the 19i*7 rule on this
subject! this would not call for any public announcement beyond a routine
note (li&e that which appeared in the February I960 Bulletin), discussed further in Appendix A to this note.
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Federal Reserve Bank of St. Louis
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2/L6/61
A *x» smmin so HELP HOLD LOBO-TIBM
RATES
AKD SHORT-TOM RATES UP
PBQPOSALt The Treasury would issue a long-tera or medium-term security
that would pay interest for each interest-payment period at a rate equal to the
average of the rates at which short-term Treasury bills had been auctioned
during the period*
A floor of sayl$ per annum, and a ceiling of say, 1% per annum,
might be provided.
M1GHAKICS A^P UKIffiELIII'IG PRINCIPLES t These are explained in a thesis entitled MSow Variable Interest Bonds Can Help to Solve the Problems of Liquidity,
Depression, and Defense** As shown there, the tying of the security's interest
payments to short-term rates could be expected to maintain its market price
approxiifiately at par (just as Treasury bills show only slight market fluctuations)*
The thesis was prepared for the Stonier Graduate School of Banking operated by
the American Bankers Association at Rutgers University, and is on file at the
Graduate School Library, 12 East 36th Street, lew tork City*
ADVANTAGES: The new security would have the market characteristics of a
short-term security* Hence, its issuance would have the effect of shifting the
given volume of securities froa the long-term to the short-term market, with a
resulting shift of downward pressures on interest rates from the short-term to
the long-term areas*
At the same time, the security would have the refinancing charac*
teri sties of a longer-tern security. Since it would not have to be frequently
refinanced, it would ease the problems of the Treasury and lessen interference
with Federal Reserve operations.
Since the security probably would maintain a relatively stable
market price approximately at par, it probably could be placed on continuous
("tap*) offer, or made available on frequent auctions (like Treasury bills),
with a minimum of market disturbance*
TO FACILITATE THE HEW SgQPBITY'S IMTBPDDCTIOlit
1* There should be thorough advance explanation of the security's
features and advantages*
2* the new security probably should be made available as an
alternative open to purchasers on some offering.
3» The first issues of the new security probably should have
a relatively early maturity, 0ayf 3 to 5 years. After the principle proved
itself in the market, it could be ^jplied to longer maturities.
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Federal Reserve Bank of St. Louis
April 10, 1961
To: Board of Governors
From:
Subject:
Reserve city classification
John Ft. Farrell
/I
Since the announcement on 1-larch 1, 19^1, of the proposed amendments to Regulation D, Reserves of Member Banks, a number of protests
have been received concerning various aspects of the proposed rules.
Copies of the material submitted by the protesting banks have already
been distributed to the Board.
The most serious protests received were from two banks in
Hartford, three banks in Albany and the Albany Clearing House Association,
three banks in Newark, and two banks in Phoenix arguing against the
classification of these cities as reserve cities. These protests are
commented on in the next section of this memorandum.
The protest received from one of the Newark banks (National
State Bank) contains the following request:
"No attempt has been made herein to present a formal brief but
for the reasons set forth in this letter, we feel that Newark
should not be classified as a Reserve City and we ask that the
Board of Governors give us an opportunity to discuss the matter
in more detail before the proposed amendments are adopted."
Protests have also been received from one bank in Charleston,
South Carolina, three banks in San Francisco, and two in Los Angeles
about the long-standing provision which includes deposits held by
out-of-town branches among the deposits of the bank subject to reserve
city requirements. These banks argue that it is inappropriate to subject
out-of-town branch deposits to reserve city requirements because these
branches are like country banks.
The Legal Division feels that it is extremely doubtful that
the Board has the power to prescribe differing reserve requirements for segments of a bank's demand deposits—-e.g., 16-1/2
per cent against demand deposits held by the head office and
12 per cent against demand deposits held by out-of-town branches.
In addition, the Federal Reserve Bank of New York and the
City National Bank and Trust Company of Columbus, Ohio, submitted suggested revisions of the paragraph in the proposed regulations concerning
permission to carry reduced reserves.
The New York Reserve Bank suggested that the phrase "the
amount and frequency of its borrowings from its Federal
Reserve Bank or other lenders" be eliminated from the list
of factors which the Board may take into account in considering requests for permission to carry reduced reserves.
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Federal Reserve Bank of St. Louis
Board of Governors
-2-
As the list in the proposed regulation is indicated as not
being all-inclusive and since there is no objection by the
Board's staff to the elimination of the phrase in question,
it is suggested that the recommendation of the New York Bank
be adopted.
The Columbus bank suggested—' that the paragraph in question
be completely rewritten to provide in effect that any member
bank located in a reserve city would have automatic permission
to carry reduced reserves in any case where the daily average
amount of total demand deposits of such a bank during the preceding calendar year was below a similar figure for any "country"
bank in the same Federal Reserve district. This proposal would
seem undesirable because its mandatory nature would ignore local
competitive factors. The Board should have the flexibility
necessary to consider each request for reduced reserves in the
light of all the relevant factors pertaining to the particular
case.
There is one other suggested change in the proposed revision
of Regulation D which the Board may want to consider,, It will be recalled
that, at a recent Board meeting when Chairman liartin reported his conversation with Lr. Biggers of the Toledo Trust Company, there was some sentiment
in favor of permitting banks in cities which were voluntarily retained as
reserve cities under the !lgrandfather clause" to have their status reviewed
more frequently than once every three years. In this connection the Legal
Division has suggested that this purpose could be accomplished by inserting
on page 6 of the March 1, 1961 mimeographed draft the following new
paragraph (d):
(d) In any case in which the reserve city classification
of any city is continued effective as of June 1, 1961, or as of
June 1 of any third year thereafter, solely by reason of the
provisions of subparagraph (5) of paragraph (a), the reserve
city classification of such city may be terminated at any time
after one year following the effective date of its continuance
as a reserve city if a written request for such termination is
I/ The Columbus bank also proposed that member banks located in reserve
cities in which there is no Federal reserve Bank or branch be given
permission to compute availability of credit for cash items from the
time such items are dispatched by the member bank rather than from
the time the items are received by a Federal Reserve Bank or branch.
The bank feels that such a change would minimize the discrimination
which it says now exists in favor of member banks in Federal Reserve
Bank or branch cities. This suggestion, which has nothing to do with
the proposed revision of Regulation D, would seem to be completely
undesirable because it could result in substantial operating difficulties and would significantly increase float.
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Federal Reserve Bank of St. Louis
Board of Governors
received by the Federal Reserve Bank cf the district in which the
city is located from one or more member banks with head offices
in such city and if such request is granted by the Board of
Governors.
New Reserve Cities
The banks in Hartford, Albany, Newark and Phoenix argue that
the cities in which they are located should not be made reserve cities
because—
1. Curtailment of lending power, due to higher reserves,
would have a detrimental effect on area economy.
(Albany, Hartford, and Phoenix)
2. Deposits held by branches outside of the head office
cities account for a large proportion of total demand
deposits. (Albany, Hartford, and Phoenix)
3. Fully secured public funds account for a large proportion of total demand deposits. (Albany)
4. The ruling is arbitrary, discriminatory, unreasonable,
and out of harmonj^ with the intent of Congress, (Newark)
The counter-arguments to those presented by the protesting
banks are:
1. The law requires that banks be divided into two groups
and the only question is whether banks with similar characteristics , from the standpoint of function of reserve
requirements, are treated alike. l-iany, perhaps most,
existing reserve cities might contend that their ability
to meet loan demands in their communities is being hampered
by the reserve requirements applicable to them. It may be
noted that in some cases this argument is used on the grounds
that the area is depressed, whereas in Phoenix lower requirements are said to be needed to meet the demands of a growing
community. Current Federal Reserve policies with respect
to the over-all availability of reserves are designed to
provide for the credit needs of the economy in general;
the distribution of these resources among areas and banks
is determined by the working of a variety of market and
other economic forces beyond the control of the Federal
Reserve.
2. It is true that a large portion of deposits in branches—
particularly those located in small communities—are more
nearly similar to country bank deposits than to reserve
city bank deposits, but large branch banks are in position
to, and in most cases do, engage in activities and hold
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Federal Reserve Bank of St. Louis
Board of Governors
substantial amounts of deposits of a nature similar to
those in large unit banks. Moreover, in branch banking,
the relationship between a head office and its own branches
serves as a substitute for correspondent banking and the
function of interbank deposits is effectively served, even
though there is no substantial volume of deposits carried
for other banks.
branch deposits are subject to the over-all lending and
investment policies of the head office management0 Furthermore, any attempt to separate branch deposits from those
attributed to the head office would involve administrative
and regulatory difficulties of an insurmountable nature.
3. From the standpoint of the function of reserve requirements,
namely limitation on credit expansion, there is no basis for
distinguishing between public funds and other deposits. They
are all a part of the process of multiple credit expansion.
Witn respect to their effect upon the volume of spending in
the economy, it has lon^ been recognized that public funds
have a higher rate of turnover than other demand deposits.
The material furnished by the Albany banks indicates the
velocity of public funds is double that of the other
deposits. Higher reserve requirements would tend to
minimize the erratic effect of these deposits on the
money market,
4. The present alignment is discriminatory and unreasonable
because it permits country bank status for some cities that
have significant characteristics essentially similar to
existing reserve cities. The .:-card's objective was to
remove as many of these inequities as was possible with
a minimum disturbance. Recent Congressional action would
seem to support criteria which take into account general
character of business. Tests of various possible criteria
indicate that total demand deposits provide a simple
standard that gives about the same results as other more
complex formulas. The cities that have been added to the
list of reserve cities have characteristics that are
similar to many cities now so classified. It would not be
feasible to evolve and apply equitably a standard that
would leave out these cities, without eliminating a number
of existing reserve cities.
Need for Guidance
Ordinarily in a project of this nature the relevant material
would be submitted to interested members of the Board's staff for consideration and suggestions concerning recommendations to be made to the Board.
In view of the time element in this case, however, we are taking the liberty
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Federal Reserve Bank of St. Louis
of submitting the following suggestions (which illustrate one position
the Board might take) without having had the usual benefit of full staff
consideration. While the uoard may wish to take some other position,
our thought was that whatever it decides with regard to these suggestions
will give the staff guidance in the preparation of such material as may
be appropriate for final action, for instance, the staff could begin
working on appropriate drafts if the Board should decide to inform the
Reserve Banks that—
1.
It has considered the protests to its proposed procedure
for classifying reserve cities and has adopted the
original proposal with the minor changes suggested herein.
2. It is sending a reply to each of the protesting banks
and copies of these replies to each of the Reserve Banks
concerned.
Other alternatives to the procedure proposed in Item 2 above
would be, in lieu of replies to the individual banks, to make only a
short announcement along the lines indicated in Item 1 above, or to
issue a general statement giving some of the reasons for the Board's
action. The suggestion for individual replies is based on a belief that
the protesting banks would feel better if they had some indication that
their points had been carefully considered rather than summarily dismissed,
Individual replies seem better suited for this purpose than a general
statement because of differing points raised by the various banks. For
instance, the question of public funds was raised only by the Albany
banks and the charge of capricious action was made only by the Newark
banks. Accordingly, it would seem undesirable to refer to these points
in a general statement.
Related Matters.
In addition to protesting against the proposals to designate
their cities as reserve cities, the following banks have requested permission to carry reduced reserves if the proposed reserve city classification standards are adopted:
National Commercial Bank and Trust Co., Albany, n. Y.
First Trust Company, Albany, N. Y.
Savannah Bank and Trust Co., Savannah, Ga.
Valley National Bank, Phoenix, Ariz.
Of these,four banks, the Savannah Bank and Trust Company is
clearly eligible,-' but the First Trust Company of Albany request would
T/Demand deposits of this bank total about ^27 million. Although the
bank indicated a strenuous objection to the designation of Savannah as
a reserve city, this protest appears to be based on a misunderstanding
of the Board's intention to permit it to carry reduced reserves. In
this light, the protest was not included among the earlier comments in
this memorandum concerning banks objecting to the designation of new
reserve cities.
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Federal Reserve Bank of St. Louis
seem to require more information regarding the character of its business
before further consideration0 There would appear to be no basis for granting the requests of the National Commercial Bank and Trust Company and the
Valley National Bank becuase they are the largest banks in their respective
cities.
Under the Board's proposed rule banks in present reserve cities
which would lose this status under the new plan have until Kay 15, 19&1, to
request continuation of their reserve city status. In this connection
requests have been received from the First National Bank of Pueblo, Colorado
(the only reserve city bank in Pueblo), and from two Toledo banks (The National Bank of Toledo and the Ohio Citizens Trust Company). It is understood that The Toledo Trust Company, which has about $200 million of
demand deposits and is the largest bank in the city, will submit a
similar request.
It is suggested that the Board will want to defer action on the
requests for permission to carry reduced reserves and for continuation of
reserve city classifications at least until it has taken final action on
the standards for classifying cities.
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Federal Reserve Bank of St. Louis
BOARD OF G O V E R N O R S
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Chairman Martin
prftni
Ralph A, Young
Date
August 2$, 1961
Subject:
Attached is the draft memorandum re Federal Reserve membership on the BIS directorate that we mentioned in conversation before
I went on vacation. After ruminating at length on this matter, I
think my view is positively in favor, whether or not as part of a
package involving Federal Reserve operations in and holdings of foreign currencies.
As pointed out in the memo, a special general meeting of
the BIS shareholders has been called on October 9 to consider changes
in the BIS statutes. It would be desirable to have a Board determination in sufficient time to enable a revision of Article £8, which
pertains to the definitation of central bank of the United States,
to be adopted at that meeting.
Attachment
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Federal Reserve Bank of St. Louis
revised DRAFT
" 8-2^-61
JHF/RAY:ajm
TO:
Board of Governors
FROM:
Ralph A. Young.
SUBJECT: Federal Reserve membership
on the board of directors of the
Bank for International Settlements
In view of the present stress on cooperation among the central
banks of Europe and North America, it appears appropriate to consider
again the problem of closer ties between the Federal Reserve and the
Bank for International Settlements, of which all major European central
banks are members.
Accordingly, this memorandum briefly reviews the development
of relations between the Federal Reserve and the BIS since 1929 and the
main legal questions that present themselves on the question of Federal
Reserve membership in the Bank's board of directors. It then considers
the advantages under present conditions to the Federal Reserve of such
membership, and in the light of these advantages recommends Board action
to authorize System membership.
Development of relations since 19^9
The Bank's statutes provide for the participation of U.S.
banks as shareholders (Articles 6, 9> 15) and state that the "Governor"
of the "central bank" of the United States is to be an ex-officio member
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Federal Reserve Bank of St. Louis
-2-
of the board of directors, with the right of appointing a second
member as well as substitute and alternate members (Article 28, paras. 1 and 2)
Nevertheless, on May 16, 1929* Secretary of State Stimson
declared that the U. S. Government would "not permit any official of
the Federal Reserve System either to themselves serve or to select
American representatives as members of the proposed International Bank."
He based this decision on the intimate relation between the proposed
bank and the problem of German reparations.
In 1933> Mr. Harrison, Governor of the Federal Reserve Bank
of New York, was offered an appointment as a director of the BIS.
On November 28, 1933 > the Board of Governors decided that he "should
not accept the appointment."
In 1936-37> "kke Board of Governors gave consideration to a
proposed amendment of the Federal Reserve Act, under which a member of
the Board of Governors, with the approval of the President of the
United States, might have served as a director of the BIS.
however, took no action recommending this amendment.
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Federal Reserve Bank of St. Louis
The Board,
-3Since the end of the second world war, the Bank has no longer
been concerned with the problem of German reparations.
Instead, it was
selected to function as the fiscal agent of the Organization for European
Economic Cooperation and later of the European Payments Union and its
successor, the European Monetary Agreement. This fiscal agency activity
has lost most of its importance since the re-establishment of convertibility by the major European countries.
In view of postwar changes in the international situation,
Mr. Thomas and Mr. Marget, on May 5, 1950> recommended that the Board
again consider the representation of the Federal Reserve on the board
of directors of the BIS.
Their tentative conclusion was as follows:
a. The Chairman of the Federal Reserve Board could be
the U.S. ex-officio director on the board of the BIS.
b. The Chairman of the Federal Reserve Board could appoint,
as the second permanent U.S» member of the Board of the BIS,
either the President or the Chairman of the Board of the
Federal Reserve Bank of New York.
c. The Chairman of the Federal Reserve Board could
designate as his substitute Nominee the member of the Board
who normally serves as his Alternate on the N.A.C.
d. The Alternate to the substitute Nominee, likewise to
be appointed by the Chairman of the Federal Reserve Board, could
be, not only a member of the Board of Governors, but also, with
the concurrence of the Board, any other person whom the Chairman
of the Board might designate.
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Federal Reserve Bank of St. Louis
-kThe matter was discussed with Mr. Sproul, President of the Federal
Reserve Bank of New York, as well as with Mr. Martin, then Assistant
Secretary of the Treasury, and Mr. Southard, U.S. Executive Director
of the International Monetary Fund. Neither Mr. Martin nor Mr. Southard
raised any objection on principle but Mr. Martin did raise the question
of timing and the matter was not pressed further.
On May 2, 1955 > Mr. Marget informed the Board of Governors that
Mr. Sproul, in a letter dated April 25, 1955> had once more raised the
question of Federal Reserve representation on the board of directors of
the BIS.
Chairman Martin, in a letter of May 9, 1955 > brought the matter
to the attention of Mr. Burgess, Under Secretary of the Treasury.
In his
answer, dated July 28, 1955> Mr- Burgess referred to the "informal arrangements" under which "personnel" of the Treasury and the Federal Reserve
"attend as observers at the meetings of the BIS" and commented on the
"European character of the Bank" and the continued membership "of some
of the Eastern European countries."
The concluding paragraph of the
letter read as follows:
"On the whole, there would appear to be some advantage at
the present time in the informal arrangement which facilitates
the participation as informal observers of representatives of
several U.S. agencies in the meetings of the BIS. It seems to
me that we might well carry on this arrangement for the time being
and defer consideration of formal membership until a later date."
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Since
Federal Reserve Bank of St. Louis
that time, the Board has given no further consideration to the matter
-5Present relations between Federal Reserve and BIS
The BIS has a dollar and a gold account with the Federal
Reserve Bank of New York and frequently draws from the FRBNY short-term
loans on gold collateral.
The Federal Reserve opened a dollar account with the BIS in
1931; this account was liquidated when the Federal Reserve credits to
foreign central banks were repaid in the middle 'thirties.
The BIS has repeatedly offered gold "swaps" to the Federal
Reserve but these offers have not been accepted.
Conforming to Article ^0 of the BIS statutes, the BIS informs
the Federal Reserve (through the FRBNY, which relays the information to
the staff of the Board of Governors) of all planned operations involving
U« S. dollars or operations in U. S. money, capital, or exchange markets,
In a few instances, the Federal Reserve has used its statutory right of
objecting to specific transactions or to certain types of transactions,
such as dollar loans to unfriendly countries or payment of interest on
dollar deposits in excess of the rates permitted under Regulation Q.
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Federal Reserve Bank of St. Louis
-6Members of the Board of Governors and senior officials of
the Board of Governors and of Federal Reserve Banks participate as
observers in directors1 meetings of the BIS from time to time, including
usually the annual general meeting and some of the monthly meetings.
Legal problems of formal representation
In the BIS statutes, the terms Hcentral bank" and "Governor"
are so defined that they apply, in the United States, to the Federal
Reserve Bank of New York and its President (Article £8, paras* 1 and 2)«
It has always been understood that the Board of Governors
would consider Federal Reserve representation on the board of directors
of the BIS only if Article £8 was changed so as to substitute the Board
of Governors and its Chairman for the FRBNY and its President and thus
to make the Board Chairman the U. S. ex-officio member of the BIS board.
Article £8 can be amended by simple majority of the general meeting of
the BIS, if proposed by a two-thirds majority of its board of directors,
so that no difficulties would be expected to arise on this score.
The BIS has called an extraordinary general meeting for
October 9, 1961, to consider some amendments of the statutes. It
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-7might be possible to have the amendment of Article 58 added to the
agenda of that meeting.
Some question has been raised as to the interpretation of
the provisions of the Federal Reserve Act (Section 10, paras. 1 and It),
according to which the members of the Board of Governors have to devote
"their entire time to the business of the Board" and must not be
directors of "any bank /or/ banking institution." In a memorandum of
February 2, 195>0, Mr. Hackley has expressed his opinion that neither of
these provisions would bar the appointment of a member of the Board
of Governors as a director of the BIS, since such service would help
the Board to discharge its responsibilities in the foreign field and
since the BIS should not be considered a "banking institution" as
defined in the Federal Reserve Act.
Advantages of Federal Reserve representation on the BIS board
Membership in the BIS board of directors would give the
Federal Reserve more influence over BIS operations than it can exert
by its veto power under Article 20 and its participation in informal
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-8discussion at occasional BIS meetings. These operations are substantial: BIS assets are at present in excess of $!•£ billion, as is shown
in the attached condensed balance sheet. However, the Federal Reserve
is presumably less concerned with these operations than with the wider
problem of central bank cooperation.
From this more important point of view, membership in the
BIS board of directors would be a symbol of the cooperative relations
between the Federal Reserve and the major European central banks. It
would evidence Federal Reserve willingness to cooperate in solving
problems of international monetary policy, and thereby to contribute
to a greater degree of mutual financial confidence.
The importance of giving such evidence at this time is underscored by general U. S. foreign economic policy, which is to foster as
close a knitting together as possible of the economies within Europe
and of the European and North American economies. As regards the European
community, U. S. participation in OECD is one phase of this policy and
formal Federal Reserve membership on the BIS directorate might well be
another* In any case, foreign economic policy at this time provides
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-9a basis for fresh consideration of the role of the BIS as an instrument
of closer cooperation at the central banking level between the U. S.
and European countries.
Finally, assumption of formal membership would involve an
obligation to have a member of the Board of Governors or his alternate
and the President of the Federal Reserve Bank of New York or his
alternate attend every year the ten meetings of the BIS board. Assumption
of this obligation would strengthen the personal contacts of System
officials with officials of European central banks and thus help to make
for a firmer basis of cooperative activity and understanding.
Rec onmiendati on
The above reasons for Federal Reserve membership on the BIS
board of directors would appear to provide ample justification for
assumption now by the Board of Governors of such membership. Accordingly,
it is recommended that the Board, after consulting with the Secretary
of State and the Secretary of the Treasury, act to approve this membership as proposed by Messrs. Thomas and Mar get in their memorandum of
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-10-
May 5, 1950, quoted above, and to authorize the Secretary to undertake
the necessary negotiations to accomplish System representation on the
BIS board of directors.
Attachment
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Federal Reserve Bank of St. Louis
BANK FOR INTERNATIONAL SETTLEMENTS
Condensed Balance Sheet, June 30, 1961
(In millions of U. S. dollars V)
Assets
Cash
Liabilities
3U.7
Gold coins & bars
618*5
Time deposits, bills & advances}
Gold
37*3
Others
827.9
^^ers
Total 3/
Deposits:
Gold
Others
672.7
7U3.2
Others
1U.7
Capital, surplus,reserves ?j
88.2
OJt
1,^18.8
Total 3/
1,518.8
I/ Converted from gold francs at the rate of 32.67 cents per franc.
2/ Excludes that part of the bank's own funds which is invested in
frozen German assets in consequence of the Hague Agreement of 1930
on German reparations ($22.2 million).
3/ Excludes assets held by the bank as agent for the OEBG under the
European Monetary Agreement, as depositary for the European Coal and
Steel Community and as trustee for international loans, as well as
frozen assets and liabilities under the Hague Agreement of 1930
($97 million).
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BOARD OF G O V E R N O R S
or THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Chairman Martin
From
James L. Knipe
Date February 9 , 1962.
Subject:
Paper on public criticism of
the Federal Reserve System,
This is a re-do, amplification, and updating
of my earlier outlines of the Staff Report of the Joint
Economic Committee and the Monetary Commission's Report,
Very little analysis or rebuttal has been
attempted, and not much comment has been made on the
material reviewed. Essentially, it is just a job of codification and summary.
1 see no particular reason to distribute the
paper, because it is meant mainly to r e f r e s h your mind on
some of the problems. However, after you have had an
opportunity to read it, please let me know if you wish to
have it distributed.
Attachment
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Federal Reserve Bank of St. Louis
A SUMMARY OF THE PUBLIC CRITICISM
OF THE
FEDERAL RESERVE SYSTEM,
1959-1961.
February 9,
J,L»K«
1962
A SUMMARY OF THE PUBLIC CRITICISM
OF THE
FEDERAL RESERVE SYSTEM,
INDEX
INTRODUCTION
pp,
JoE.C. STAFF REPORT
pp. 2 - 6
MONETARY COMMISSION REPORT
pps
#1 - POLICY NOT EFFECTIVE
pp. 11 - 20
#2 - POLICY TOO EFFECTIVE
pp. 20 - 30
#3 - SYSTEM and the ADMINISTRATION
1 - 2
6-10
. . . . . . . pp, 30 - 37
#4 - SYSTEM NOT EFFICIENT
ppc 37 - 40
#5 - SYSTEM'S SLIPPAGES, etc
pp. 40 - 49
#6 - SYSTEM IS UNDULY INFLUENCED
pp» 49 - 61
#7 - PROMOTES HIGH INTEREST RATES
pp. 61 - 64
#8 - STUNTS ECONOMIC GROWTH
pp. 64-
FOOTNOTES
pp. 69 - 72
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68
CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959-'61
During the first forty years of the System's existence, from
1913 until 1953; it faced occasional outbursts of rather severe criticism
but came through them apparently unscathedc
During most of the later
years of the period, 1940-1951, it avoided larger-scale attacks by subordinating itself to Treasury dominance. During those forty years before
1953 the System had moved slowly, haltingly, toward the exercise of its
function as a principal credit and monetary controller of the commercial
banks of the United States. As it settled, after 1951* into this key
role, the chances that it would be the target for strongly-expressed
disparagement increased rapidly. An agency charged with recognizing the
cyclical facts of life, and with attempting to maintain the integrity of
the dollar, must be prepared to have its views and its actions challenged
by many people and on many grounds.
In the postwar period, the first organized outburst on Capitol
Hill was encountered in 1953, in connection with a small rise in Government
security yields from the artificial levels which had been maintained during
World War II and in the immediately following years.
Political leaders be-
longing to the Democratic Party led the chorus of disapproval.
In the next
big debate, which took place just three years afterwards, in the spring of
1956, the more vocal critics were mainly political and business leaders
belonging to the Republican Party.
Their difference of opinion with the
Federal Reserve revolved around the twin questions of whether or not the
economy was going to remain on its high plateau, and what financial
restraints, if any,, should be placed on financial institutions by the
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, _lg5?-!6l
monetary managers, as a part of their efforts to stop the continued
deterioration of the purchasing power of the dollar.
Bot,h of the forays., in 1953 and 1956, appeared to produce
important short-run reactions in System policy, although this cannot be
proven* The effects, if they really were effects, seemed to wear off
each time within about half a year,
As the System carae into the summer
of 1959, beginning of the latest series of turmoils, it showed no evidence
of having had either its courage or its self-confidence weakened by the
events of the preceding six yearsc
The most recent strife has covered a span of a little more
than two years, from the spring of 1959 through the summer of 1961.
First events of interest were the Hearings before the Joint Economic
Committee, March-October 1959j and the last was Senator Paul H. Douglas1
speech on the floor of the Senate, July 12, 1961.
In between were other
Hearings and other speeches. More important, two large books were produced, two books which will unquestionably stand as milestones of a sort
in Federal Reserve history—the Staff Report of the Joint Economic Committee, and the Report of the Commission on Money and Credit.
The two years in question embraced the last part of the thrust
and the entire plateau of the fourth postwar business cycle, the downswing
of that cycle, and the beginning of the thrust of the fifth postwar cycle.
THE STAFF REPORT—JOINT ECONOMIC COMMITTEE—DECEMBER 1959
In the last week of 1959* the Joint Economic Committee published
a document which received a great, deal of attention, and which will be
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-2—
CRITICISM OF THE l_EDERALr RESERVE SYSTEM, 19$9-!6l
referred to, favorably and unfavorably, for years to ccme. The Staff
Report of the Joint Economic Committee (Senator Douglas, Chairman|
Representative Pat man, Vice Chairman) >;as the outgrowth of Hearings
which began on March 20, 1959, and concluded October 30, 1959. During
the seven months of Hearings, one hundred witnesses were heard. Concurrently, more than twenty special study papers were written.
These,
added to the Ii83~page Staff Report, make an impressive shelf of evidence,
analysis, and opinion.
It was only natural that the minority members of the Committee
were something less than enthusiastic about the assemblage of material: I/
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Federal Reserve Bank of St. Louis
"In undertaking this study of employment,
growth, and price levels, the Joint Economic
Committee had a magnificent opportunity—a
$200,000 opportunity—to define the issues, tc
identify gaps in our knowledge, to recommend
agreed-on changes in public policy, to focus
attention on the sources of disagreement, and
to improve congressional and public understanding of the various goals of economic
policy.
"On the whole, the study itself was conducted in a competent and objective manner.
The hearings were well balanced and at a high
level. Many of the top economists of the
profession contributed freely of their time,
talents, and wisdom. A literature was assembled,
both in the hearings and in the special studies,
which reflects credit on the Committee, on its
special staff, and on the economics profession.
"These standards were not, unfortunately,
maintained in the Committee's staff report
.... We regret to say that, in our opinion,
this report does not meet high professional
-3-
CRITICISM OF THE FEDERAL RESERVE STSTM, 1959-'61
standards, While there is much valuable
material in it, it is marred by partisanship,
by opinions and assertions not supported by the
evidence, and by significant inconsistencies
and serious omissions. We know from working
with the special study staff that the report
does not do juatice to their individual snd
collective capacities. . . «
" . . . VJe deeply regret that the majority
are presenting a report that is partisan,
cavalier about simple rules of logic and evidence,
and disrespectful of legitimate differences of
values, opinions, and judgments. ...
"Why should the time periods and terminal
dates used in both staff and committee reports
be invariably and obviously juggled to put the
worst possible light on the record of the present
administration, and exalt the record of previous
Democratic administrations? . . *
"Hew can a whole new set of selective controls,
a theme which runs through the report, be reconciled
with recommendations to make the economy more flexible
and responsive to consumer demands? How can the
report find market power to be a cause of inflation,
requiring more vigorous antitrust enforcement for
business, and yet fail to meet squarely the question
of market power in the hands of unions?"
The tone for the Hearings, and for the Staff Report, was set
by Professor Gumner Slichter of Harvard, first witness on the first day.
He scoffed at the worries about the loss of the dollar's purchasing power
in the preceding years, and pointed out what seemed to him to be the
virtue of inflation: 2/
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"Creeping inflation is said to discourage
saving. The opposite is true—inflation
encourages saving. The reason is that the
volume of saving is in the main determined by
the volume of investment—not investment by the
volume of saving. . . .
CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1?$9-'6l
"I don't think that slow creeping inflation
is an encouragement to speculation so much as an
encouragement to enterprise. One good thing about
creeping inflation to be set over against the
problems it causes is that it is a tax, and it is
a tax that falls on everyone. It is not a bad
kind of tax in many respects. One thing I like
about it is that there are no exemptions, . . .
Fortunately under inflation they pay a little
tax on everything."
The third witness also assisted in setting a tone which was
scarcely reassuring for those who worried about such things as the
injustice already done by inflation, and the dangers of large Federal
deficits in the future. Mr. Leon H. Keyserling blasted at those who let
themselves be bothered in this fashion and then went on to give what was
probably the simplest answer in history to the question of how proposed
great public-benefit programs would be financed: 3/
"The Chairman: . . . How would you have the
expenditures met, by taxation or by
financing out of a deficit?
"Mr. Keyserling: Here I would distinguish
between short range and long range, In
the long range, the tableau of economic
growth which I have presented, and the
policies which I blend into it ...
point the answer to your question . . .
I finance it out of economic growth."
Representative Curtis, one of the members of the Committee,
was not impressed and had difficulty in following the reasoning: ii/
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"Representative Curtis: ... Your syllogisms
are advanced by so many begged questions
and. based upon the debris of so many strawmen you have created and then demolished
that it is hard to separate the ideas out."
GRITICISK OF THE FEuERAL RFSERVE SYSTEM, 1959-!61
VJhile the general tone of the Staff Report may not be conducive
to the development of great confidence in the financial wisdom of the
authors, arid many of the ideas put forward may seem unrealistic, naive,
and politically slanted, the fact remains that a great deal of the
writing is stimulative.
The massive book is a must for those who would
understand how some of the young economists were looking at the problems
of the day. The top man was Dr. Otto Eckstein, j/32$ of Princeton
(A.B., 1951] A.M., 1952) and Harvard (Ph.D., 1955). His doctoral
dissertation had been on "Benefits and costs: studies in economics of
public works evaluation," and his continuing research interest was
listed as "Investment criteria for economic development; economics of
water resource development."
Since the Report will be mentioned frequently in the pages
to follow, it will be referred to as the "J.E.C. Staff Report," or,
simply, "Staff Rsport."
Also mentioned often, and related to the J.B.C.
Staff Report, are the two reports published soon afterwards by the
Committee. The first one, ^/published on January 26, I960, will be
referred to as "Committee Report $1," and the second, 1/pubiished
February 29, I960, as "Committee Report #2,"
REPORT OF TIIE MONETARY COMMISSIOH—«TULY 1961
Second of the two books of criticism, albeit somewhat more
realistic and constructive criticism in this case, was the report
prepared by the Commission on Money and. Credit.
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-6-
I
CRITICISM OF THE FEDERAL RESEfrfa SYSTEM, 1959-!6l
The Commission was set up in 195>8, apparently as a voluntary
effort on the part of the Committee for Economic Development to compromise
a behind-scenes debate in Washington between the Administration (Republican)
and the Congress (Democratic) as to whether the financial system should
be investigated by a private group or by a Government group. The C.3.D.
separated the Gor.anission from the C.E.D. (1) by having an intervening
Selection Committee to choose the Commission, (2) by asking the Selection
Committee to see that the Commission contained representation of the
agricultural and labor viewpoints as well as of the business and. financial,
and (3) by using
foundations as the main source of funds.
Mr. Frazar B. Lilde, of the Connecticut General Life Insurance
Company, was Chairman of the twenty-seven man Commission, Every member
of the Commission was a distinguished man in his field. Included were
people like Marriner S, Eccles, Adolph A. Berle, Jr., Emil Rieve, David
Rockefeller, Charles B. Shuman, J. Cameron Thompson, and Theodore 0.
Yntema. First announcement of the appointment of the Commission was
dated May 1953, and the report was published in mid 1961. Three years
and, it is said, well over a million dollars went into the work. Although
the report itself contains less than three hundred pages, plans are said
to be on foot to publish supporting material—largely papers from academic
authors—which may run up to twenty or thirty volumes,
Professor Bertrand Fox, of Harvard's Graduate School of Business
Administration, was Research Director, and Professor Eli Shapiro, of
M.I.T.'s School of Industrial Management, was Deputy Research Director.
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-7-
.
CRITICISM OF TITS FSDERAL RESERVE SYSTEM, 19£9-y.6l
Both worked only part-time at the jobs, commuting between Boston and
New York. A small full-time staff was in the New York office.
Professors
Lester V0 Chandler, of Princeton University, Paul A. Samuelson, of M.I.T.,
and Sunnier H* Slichter, of Harvard, were three out of thirteen members
of an Advisory Board. This Advisory Board cooperated closely with the
Commission as a whole, as well as with the so-called Task Forces, six
in number, into which the Commission divided itself.
From the beginning, it seemed likely that the Commission's
contributions would be of a negative character, that is, agreement among
the members would be reached more easily in connection with refusals to
criticize than in connection with constructive proposals to change.
This
sort of thing is not to be despised, even though one would like to have
more positive contributions from such an array of talent.
Reasons behind
a forecast of limited accomplishment were (l) the Selection Committee had
leaned over so far in its anxiety to get a cross-section of viewpoints
that it had made agreement on many things quite impossible, and (2) the
top research people (part-time) and the advisers (part-time) would find
it very difficult to condense the vast paper flow from the universities
into constructive proposals which could be "sold" to the busy members
when they assembled from time to time for meetings. It was clear, then,
that the principal value of the final report might appear negatively,
in the form of failure to condemn.
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-8-
I
CRITICISM OF THE .FEDERAL RESERVE SYSTEM, 1959-!6l
Economists all over the United States were the beneficiaries
of the contracts given to them for papers. It is possible that some
of these papers may turn out to be useful, when and if they are published.
Undoubtedly some, or perhaps many, of the authors resisted the temptation
to polish up old papers and actually wrote new ones on their special
fields of interest.
It is also possible that some of the material
furnished by organizations like the Treasury, the Board of Governors,
the American Bankers Association, and the Life Insurance Association
of America, may be of interest and value when it is made available to
the public.
The report of the Commission will be cited often in the pages
ahead, and it will be referred to as the "Monetary Commission Report."
One should keep in mind that it was not published until a year and a
half after the J.E.C. Staff Report, although preparations were organized
nearly a year before the preparation began on the J.E.C. Staff Report.
The J.E.C. Staff Report was in process only about nine months (MarchDecember 1959), while the Monetary Commission Report was in process
more than three years (early 1956-mid 1961). The Monetary Commission,
therefore, had time to absorb everything that was in the J.E.C. Staff
Report, in Committee Reports #1 and #2, and in all the other material
of all kinds which appeared in 1958, 1959, I960, and the first half of
1961.
It was generally understood that the issuance of the Monetary
Commission Report was postponed until mid-1961 in order that it might
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-9-
CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959-'61
appear at a decent interval after the inauguration of a new President.
A careful reading of the book does nob reveal anything which might not
nave appeared at any time,, before or after an election, without creating
any ctir at all. Many hard,, basic questions are either ignored or
skimmed ever with platitudes or with unrealistic assumptions.
Recommen-
dations are, generally speaking, neither new nor exciting.
Depending upon the reader's personal eicpectations for such
studies, one might feel a sense of disappointment, and wonder how so
much time and luoney could have produced results so meager. On the other
hand, one can emphasize the usefulness of the negative accomplishment.
Perhaps the failure to condemn most aspects of recent monetary policy
is, in itself, a remarkable testimonial to the worthwhileness of the
efforts of all the people who direct the financial activities of the
country.
-*
The two years of criticism of the Federal Reserve System, or
rather of criticism related to the functioning of the System, may be
grouped under eight headings.
In every case, in the eight sections to
follow, an attempt is made to give the central portion of the argument,
along with some supporting references or quotations.
The J.E.C. Staff
Report and the Monetary Commission Report will, of course, be the most
frequently-cited
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sources.
-10-
CRITICISM OF THE FEDERAL RESSP^B SYSTEM, 1959-'6l
#1 - MONETARY POLICY^ JC3_ NOT VERY F^?ECTIVB III THREE AREAS
An allegation relative to the ineffectiveness of monetary policy
may be directed either toward monetary policy in general, any policy, or
toward monetary policy in particular, as administered by the Federal Reserve «
The group of allegations which are commented on just below are
mostly aimed at monetary policy in general; they do not seem to be aimed
directly at the Federal Reserve. However, they have to be examined, because they are nearly always encountered somewhere in every assault made
on the System9
First, there is the matter of business inventories. The upward
and downward movements in the levels of inventories are so large that they
exert a significant pro-cyclical influence, it is contended in the J.E.C.
Staff Report si/
"Changes in the rate of inventory accumulation and decumulation have been an important
factor in business fluctuations in the United
States during the postwar period«, Inventory
runups in boom times have set the stage for inventory disinvestment during periods of decline,
and rapid inventory disinvestment has been an
important factor in the recessions of 19h99 1953-5U*
and 1957-53, In the last recession, a decline in
nonfarm business inventory investment (seasonally
adjusted annual rate) from positive &1,7 billion
to negative $8.1 billion—a drop of $9«8 billion—
accounted for 58 per cent of the drop in gross
national product from the peak in the third quarter
of 1957 to the trough in the first quarter of 1958."
The statement is then flatly made that monetary policy does not,
and apparently could not in the view of the J.E.C. staff, offer much in
the way of a remedy \2/
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"In any case, there is certainly no evidence
that monetary policy has had any appreciable effect
-11-
CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959-'61
"on inventory investment and its fluctuations
in the last few years."
Some of the reasons mentioned^/ for the inadequacy of monetary
policy in this respect are that (1) interest is ordinarily not an important
element of cost in holding inventories, (2) since this is a favorite type
of lo^n in the eyes of most commercial bankers, it would be hard to restrain
them from granting such loans, and (3) even if the commercial banks were
restrained, the industrial companies could probably finance inventory investment by liquidating cash balances or by selling Government securities
or by borrowing elsewhere.
As to remedies outside of general monetary policy, the J.E.C.
staff reaches back,ii/half heartedly, for two old ideas. One is a variable
secondary reserve requirement, which would permit governmental locking up
or releasing of certain categories of banking assets. The other is the
basing of reserve requirements of commercial banks on different types of
assets, rather than on liabilities, thereby affording a new type of governmental control over the shifting of commercial banks' assets. Both
proposals are beset with practical problems of administration which are
great enough to give any practical banker the shakes.
It would seem that the Joint Economic Committee may have realized
that its staff had been spending some time in a rarified, Utopian atmosphere, because in Committee Reports #1 and #2 inventories are not even
mentioned.
When the Monetary Comjrdssion got around to contemplating the
inventory matter, it comriented on the nature of the problem for one-half
page and then skittered away withtiS/ "It may well be that more effective
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Federal Reserve Bank of St. Louis
•
-12-
CRITICISM OF THE FEiDERAL RESERVE SYSTEM, 1959-!6l
controls of such expenditures than general credit measures will be necessary to achieve our major economic objectives, and. the Commission suggests
that possible methods of influencing inventory and business equipment expondltures on a selective basis be investigated by the Government„" The
Commissicn evidently felt that the time, money, and talent at its disposal
were not adequate to tackle the subject of how to control business expenditures on inventory through the use of financial mechanisms.
*
A similar situation presents itself in the case of business
spending for plant and equipment. Businessmen and their bankers are
eternally surprised when they discover every three or four years that
there is a business cycle and that they have, by bunching their spending
at the top and by unduly reducing it at the bottom, been the principal
contributors to making the cycle. Sheep-like behavior of this sort is,
in part, an inevitable result of a system of highly-capitalized production.
If the country is to have the benefit of goods manufactured with complex
machinery, it would seem that it must put up with the consequences of the
guesswork involved in trying to estimate volumes in consumers' goods
markets several years in advance. Not all of the imitative behavior of
the industrial executives can be explained away in this fashion. Part
of it comes from close contacts through trade associations and other group
activities, plus their traditional competitive conformity. Whatever the
origins of the unfortunate habits, the habits seem to be inextricably
tied up with the magnificent dynamism of the American economy. Industrialists
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959- '61
would unquestionably be less happy in the aggressive management of their
plants if they were ever to lose the right to be wrong.
The J.^.C. staff finds, as it found in the matter of inventories,
that general monetary policy is not very effective in exercising influence
over the total volume of corporate expenditures for capital equipment :
"It seems fair to conclude that while changes
in interest rates and credit availability brought
about Toy monetary policy have some marginal influence over business investment expenditures, these
effects are so weak that they are commonly swamped
by the dynamic forces of innovation, surging business activity, and rising profits ... it is very
doubtful whether restrictive monetary policy did
more than touch the fringes of the private investment boom of
Evidenceid/ is marshalled by the staff to support the widelyrecognised fact that the spending on plant and equipment is either not influenced much by interest rates or is actually influenced perversely,
i.e.,
the spending increases as the cost of money goes up. Reasons are listed±2/
as follows:
(1) a large percentage of the funds spent for plant and equip-
ment are obtained internally, (2) the prospective returns from capital
profits are ordinarily so high, relative to returns on safe financial assets
that the comparison is practically meaningless, (3) management does not
have time, anyway, to familiarize itself with outside financial investments,
andi~/ (U) "The existence of unexploited monopolistic profit opportunities
permits such companies to raise prices to their customers in order to
pass along any increased interest costs they may incur."
As to additional steps which might be taken, beyond the usual
monetary actions, the staff does not come upil/with anything which seemed
even to be satisfying to itself. After mentioning briefly the possibilities
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, I959~t6l
of reducing the deductibility of interest under the corporate income tax
(to increase the influence of changes in the interest rate), and of reimposing the tax on undistributed profits, they proceed to the thought
that ths Federal Reserve rnight take a more positive attitude toward influencing the long-terra rate of interest through purchases and sales for
the System portfolio0
In view of the severe criticism of so-called high interest rates
throughout the entire Staff Report, the implications of this proposal would
appear to be inconsistent with the rest of the Report in that the Federal
Reserve would presumably be expected to try to run long-term interest rates
up considerably higher than they have been at the tops of recent cycles.
Evidently these considerations came to mind very quickly, because on the
next page the writers back away from the proposal—mentioning the effects
of such higher interest rates on State and local government financing, and
concluding "On the whole, the institutional changes required, together with
the problems which would arise and the fact it is by no means certain that
the controls, even under the best circumstances, would be effective, make
the feasibility of this approach seem rather doubtful,,"
Here is a classic example of the difficulty of finding soft
answers to hard problems, in the stafffs attempt to discover at least one
way to restrain excesses in expenditures on plant and equipment. Higher
interest rates, they point out, might help to restrain certain expenditures of which they (the writers) disapprove, but these rates might also
help to restrain certain other expenditures of which they approve. How
much simpler life would be for them if this great roaring beast of an
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CRITICISM OF THE FEDERAL RESSRYE SYSTEM, l959~*6l
economy would only lie -still so that some of them could give it a
stimulative hypodermic in one part of its body while colleagues simultaneously wrapped a tight elastic bandage around some other part,
18 /are a selective control
Other suggestions which are mentioned^-/
over investment holdings of all financial institutions, a selective
control over capital expenditures by a system of variable depreciation
allowances, and a selective control over corporations through adjustments
in their tax rates.
At the end of all of this meditation, the reader senses acute
unhappiness on the part of the staff. This is an area which plays a
vital role in the expanding American economy and it is an area in which
clearly, to analysts of the staff, there is too much exercise of the
prerogatives of freedom. And yet, they must admit that no centralized,
specific control appears practicable:
"We may conclude that, while the proposals
referred to above and others as well are worthy
of study, it is by no means clear that it would
be either desirable or feasible to apply selective controls on plant and equipment. Some
instability may be the price we have to pay for
a generally high rate of capital development;
moreover, it is by no means certain that controls
would be effective in preventing instability."
The Joint Economic Committee again, as in the case of inventories,
apparently came to the conclusion that its staff had been playing around
with ideas which may have looked fine on paper but which might do more
harm than good if tried out in the real world. Plant and equipment
expenditures were barely mentioned in Committee Report #1, and were
ignored completely in Committee Report #2*
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CRITICISM OF
It has already been noted above that the Monetary Commission
dismissed the whole subject with the suggestion that it ought to be
investigated bv the Government «>
Lasb of the three areas in which monetary policy is labelled
as ineffective is the field of consumer credit,, As the total outstanding credit to consumers has soared to previously unbelievable heights,
and as borrowing has become indispensable to so many millions of people
in maintaining what they believe to be their proper standard of expenditure , it has clearly become an economic phenomenon of great importance. Growth of this practice of "spend now, save later" has made it
possible for consumers to exercise some of the spending discretion formerly
reserved for business executives, and so to engage in similar herd behavior. Mob action of any kind is always disruptive^—whether it be on a
ship, or on a street, or in the economy of a powerful industrial nation.
197/
The staff of the J.E.C. speaks bluntly:^
"Consumer durable goods, par-
ticularly automobiles, have contributed significantly to economic instability during the postwar period.11
Two pages later: "Thus, it appears
that it is the instability—the rapid accelerations and decelerations—
in the growth of consumer credit rather than the high average rate of
growth per se that constitutes the problems. Consumer credit has contributed to most of the fluctuations in economic activity since 1929."
The bad effects of too-rapid movements in consumer credit are
emphasized with respect to the sequence of events in the years
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through 1957: "A boom in consumer durable goods, especially automobiles,
powered by a rapid growth of consumer credit, in 1955 seems clearly to
have been a factor in the inflationary expansion of 1956 and 1957 j, both
through its effect on profits and on the three-year wage settlement
negotiated on the basis of them, and through its effect on other industrieSo
Moreover, the excessive expansion in the automobile industry
in that year set the stage for the unemployment and stagnation in that
industry in the ensuing years . . , And, finally, the automobile expansion of 1955 undoubtedly helped to power the boom in plant and equipment in 1956 and 1957> which eventually resulted in overcapacity and
unemployment. "
As to the remedy, most economists in the United States are
aware of the disillusionment of the Federal Reserve people in connection with enforcement of retail-type Regulation "¥". They are also
aware that the Federal Reserve has chosen not to take any leadership
in working out plans for an entirely different, wholesale-type regulation. Very few economic thinkers would ever again advocate a retailtype regulation but probably a majority would go along with the J.E.C.
Staff Report in proposing that consideration be given to a new approach
to an important problem :^2/
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"For example, controls applied to the
supply of funds to sales finance companies
by limiting their borrowings might be more
satisfactory if combined with similar controls over the ability of commercial banks
to make consumer loans,"
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959-!6l
In sharp contrast to the reticence shown by the Joint Economic
Committee in following up its staff's ideas -with regard to business
inventories and capital expenditures, it spoke vigorously in Committee
o-t /
Report $1 on the subject of consumer credit:£±/
"We recomr.iend that legislation fcr
standby regulation of the downpaynent and
of the maturity terms of consumer loans be
enacted » • . sudden surges of consumer
credit have from time to time been an important source of instability • • • 0 Further^ the rapid rate of expansion of consumer loans in some periods has contributed
to inflation through its effect both on
prices and wages."
The Monetary Commission did not choose to take any stand on
this vital subject.
In its Report it was almost as casual and incon-
clusive as in the matter of business inventories and capital expend!op/
tures. After a rambling, one-page^7 discussion, the whole thing was
dismissed:
"The Commission is almost evenly divided
as to the desirability of granting standby
authority to the Federal Reserve Board for
consumer credit controls. In the absence of
a consensus, no recommendation is made except
to urge an investigation of better forms of
such controls which could be administered
more effectively if they should be needed."
A selective control over consumer credit, even if it were of a
wholesale-tj'-pe, and skillfully designed, is something which would likely
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959-!6l
be extremely unpopular unless the country were engaged in a major war.
Even a prestigious, self-confident group like the Monetary Coromission
shied away from making any recommendation.
On the Joint Economic
ComrrJLttee tnere were dissenting views expressed by Mr. Patman22/,
disagreeing with his own majority's recommendation. It would seem,
therefore, as though the Federal Reserve will not have to face up to
a strong demand for consumer credit controls within the very near
future. If the System does not take it on itself to design an improved set of controls, however, it will be just as unprepared as
everyone else when, and if, the controls become a necessity,
So far as the criticisras relative to business inventories
and capital expenditures are concerned, it also seams obvious that no
organised attack will develop within the predictable future.
So, again,
if the Federal Reserve wishes to procrastinate in its planning and testing until it faces an aroused public demand, or a national emergency,
it can do so without any imminent danger of public embarrassment.
If,
on the contrary, the System wants to anticipate the problems of the
coming years, it could assign some analysts1 time to a thorough study
of selective controls in the three areas where general monetary policy
is alleged to be ineffective*
#2 - MONETARY POLICY IS TOO EFFECTIVE IN THREE OTHER AREAS
Some critics of monetary policy find that it is not very
useful anywhere; they think it is always either too weak or too
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 193'9-16l
strong.
The staff of the Joint Economic Committee was of that school.
Apparently they felt that no matter how brilliantly raonetary and credit
controls might be managed, they are not up to the job in a modern
economy ;.£d/
"It is quite plain that if general
credit controls affected all sectors equally
(in some sense), they would still be quite
unsatisfactory as a stabilization device,
because we do not want equal effects everywhere at all times. If we want to improve
the performance of stabilization policy significantly, it is necessary to move in the
direction of greater selectivity. This has
been apparent for soiae time., but the other
findings of this study should increase our
awareness of it. General controls are a
mirage and a delusion. It is perhaps just
as well that monetary controls have not"~
been very effective; if they had been, they
might have been disastrous","'(underlining
supplied)
One of the fields in which the J.3.C, staff sees general
monetary policy as having been too effective around the top of the business cycle is residential housing.
They do not come by the opinion
easily, because a look at the evidence leads one to judge that monetary
policy has been successful in recent years in producing countercyclical
movements in housing volumes:^/ "The interesting thing about these
fluctuations is that they have been distinctly anticyclical, with
residential construction rising when the rest of the economy was declining and declining when the rest of the economy was rising . » •
residential construction has behaved in a contracyclical fashion and,
in the aggregate at least, has contributed to economic stability,"
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Raving said these good words about monetary policy, the J.E.C.
staff hastens to point out that this performance, satisfactory as it might
look; was not good enough*
Something nearer perfection might have been
attained, they think \&]
Ir
-lhat we know about the behavior of prices
and wages in the construction industry suggests,
however9 that the cutback in housing construction
in 195>6 and 195? way not have contributed much
directly to the prevention of inflation. And the
high level of unemployment in the construction
industry during this period seems to indicate
that much of the labor released from housing
construction failed to find employment in other
branches of the industry. These considerations
suggest that if mortgage credit had been more
liberally available, we might have been able to
have somewhat more residential construction without
very much more inflation. To be sure, there
would probably have been somewhat more pressure
on the prices of certain building materials that
were in short supply and there would have been
some additional inflationary pressure from the
respending of the additional income generated in
residential construction, but there is little
reason to suppose that these effects would have
been large."
Probably the main reason why housing volumes moved as they did
in those years-— a useful movement, it seemed to many analysts, but not
useful enough in the eyes of the J.E.C. staff—was that the Federal
Government sets interest rate ceilings on guaranteed loans :
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"The pronounced impact on housing since
is chiefly due to the existence of a rather
peculiar but very simple mechanism. Due to
ceilings on the interest rates that may be charged
on mortgages insured by the Federal Housing Administration and guaranteed by the Veterans1 Administration, a rise in yields on other competitive types
of investments, such as corporate and Government
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CRITICISM OF TTIE FEDERAL RESERVE SYSTEM, 19g9-!6l
securities, has tended to attract the supply of
investment funds away from these mortgages. On
the other hand, when credit conditions have eased
and yields on competitive investments have fallen,
the supply of investment funds has tended to flow
back into the Government-supported mortgage programs."
Having developed this point that residential construction had
responded satisfactorily, or perhaps too satisfactorily in the view of
the writers, to general monetary policy, they then start to theorize as
to what might happen (1) if the trend toward use of conventional mortgages
were to speed up, and (2) if the ceilings on interest rates charged under
Government-supported programs were to be removed. In such case, they
contend,!!;/ "It does appear ... residential construction would continue
to show significant fluctuations. But instead of behaving in a contracyclical fashion, as has been the case in the last few years, it seems
likely that the income effect would dominate and the fluctuations would
be procyclical, thus contributing to over-all instability."
Postulating these altered conditions, the writers move over to
the ether side of the debate and, instead of implying that monetary policy
has exercised too great a restraint on housing, they contend that a
selective control is needed because,29/ "... housing construction is
capable of powering an inflationary boom which would affect other sectors
of the economy, and there should be some way of preventing this." After
considering whether it would be better, if this situation were to be
encountered, to ". . , keep the present interest rate limitations,
recognizing them frankly as a selective credit control, and manipulating
them accordingly, or to adopt another kind of selective regulation . . .",
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they come to the conclusion that " s . * it would, probably be preferable
to eliminate the interest rate ceilings and adopt the other form of
controls. „ . *"
Perhaps the Joint Economic Committee was able to follow the
reasoning of its staff, -which may be summarized as follows:
(a) General monetary controls have worked quite
well,
(b) Really too well, but if interest rate ceilings
on mortgages were removed,
(c) Monetary controls would not work so well, so
(d) A new system of controls must be devised to
replace the "interest rate ceiling cum
monetary controls" of the present*
On the other hand, possibly the Committee was not able to follow the
reasoning* At any rate, the whole subject was accorded, only the briefest
mention in Committee Report #1:22/ "Present general tools primarily affect
residential construction, as well as small business and State and local
governments Credit for consumers and the supply of funds for most
business investment are very little affected by monetary policy. Tharefore,
the effect of the general policies has in fact been selective, penalizing
the investment for housing, for schools, and for small business. . . ."
The Committee's stance, therefore, is that monetary policy has been too
effective with respect to housing, whereas the staff had labored
principally to develop the thesis that it would not be effective enough
after certain institutional changes which might possibly take place
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1^9-r61
sometime in the future* The Committee does not mention the matter at all
5n Committee Report #2.
The Monetary Commission is equally brief and equally unclear in
its treatment of residential construction. There is a -weak statement on
page %99 and a vagne implication, on page 1%9 that the countercyclical
movements of housing volumes in the last few years have been deemed to be
satisfactory* There is another sentence on the same page which implies the
desirability of some new kind of a selective control if interest rate
ceilings are ever removed«
On page 208, the Commission recommends the
abolition of ceiling rates. However, on page 20U, the Commission
recommends "that the FHA. and VA underwriting programs be used to aid in
implementing the countercyclical and price-stabilizing policies of the
government by variations in the terms of the underwritten loans « „ <, ,"
It would appear as though the Federal Reserve will not be confronted by any well-organized, well-planned program of critical comment,
from any source, in support of an allegation that general credit and
monetary policy is too effective in the field of residential construction.
If the ceiling rates are removed, though, at some time in the future,
there would be need at that time for a Federal Reserve study of whether
or not it would be wise to supplement monetary policy with additional
control devices, in the field of housinge
#
Another place where the J.E»C. staff finds monetary policy too
effective in its restraint phase is with small business concerns.
Obviously, insofar as smallness is associated with marginality of credit
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CRITICISM 07 THEJ'SDjRAL RgSERVE SYSTEM, 195&-.161
risk, smaller businesses will find it is somewhat harder for them to
raise money at the top of the cycle than it is for their larger competitors,
The same thing is true at the bottom of the cycle9 Until the world is remade into one of perfect equality among all men and all corporations, this
is not a startling discovery,. Unless some great and manifest injustice
is done in the process, the phenomenon is not one which justifies criticism
of the central bank or of anyone elsefl
Even though one's common sense tells him that small businesses
must always find money a bit harder to raise than do their larger competitors, the remarkable dispersion and penetration of banking services
of the United States has gone a long way toward reducing the differential,
As a result, evidence to sustain the thesis of abused small business—
even if attention is directed only toward conventional banking facilities
and the Federal Government!s special programs are ignored—is not easy to
assemble. As stated in the Staff Reports*8/
"However, as to whether there has in fact
been such discrimination in the last few years,
the evidence is mixod, difficult to interpret,
and highly unsatisfactory.-'
An example of how hard the staff was straining to support its
thesis of economic injustice worked on small business is this quotation
from the Staff Report relative to interest rates%22/
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"It does appear that during this period interest
rates on loans to large businesses rose substantially
more than interest rates on loans to small businesses.
In a sense, this was favorable to small businesses,
but basically it probably hurt them by making loans
to small business less attractive than loans to
larger concerns."
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CRITICISE OF TH:^ FEDSRAL RESERVE SYSTEM, 19*9-'61
If the evidence had shown that the interest rates on loans to
small business had risen more, rather than less, it seems likely that the
same answer would have been found, i.e., that small business had been
injured unfairly*
r
hen a group of analysts has decided on the way
something should look, it is usually possible to move around until one
sees it that vay9
The conclusion drawn by the J.'E.C, staff was not justified by
the evidence adduced. It is simply an unsupported personal opinion:12/
"That is, if monetary policy works chiefly through availability and. if
availability is not a problem for large firms, it follows that when
monetary policy is effective in curtailing business spending, its impact
must fall mainly on small business."
The Joint Economic Committee itself made only the scantiest
reference to the matter, as quoted above in connection with residential
construction.
The Monetary Commission Report discusses the matter briefly
and on page £8 makes the fairly flat statement: "Bank credit rationing
did occur and was not uniform. But the criticism for rationing did not
appear to be size of fimun
The Federal Reserve should presumably always be alert to
"discrimination," using the word in a reasonable way and without any
suggestion of an attempt to impose an obligation for making noneconomic
judgments on the private loaning institutions, but there seems to be no
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CRITICISM OF THE FEDERAL R1SSSRVE SYSTEM,
justification for expecting the System to undertake vast new studies in
this area of the economy,
*
The third area which bothers the JJ3.C. staff is that of State
and local public projects, schools, hospitals, and other public buildings»
Here again, the staffS/seems to be struggling with facts which either
point in a direction which seems to them wrong, or else do not point at
all.
To cite one example: "Expenditures on new construction by State
and local governments increased steadily during the period of tight credit
in 195£-57—from $7.8 billion in I9$k to $9*7 billion in 1957." And
another: "A study by the Investment Bankers Association, covering the
9-month period July 1956 to March 1957, indicated that about $0.5 billion
of bonds were not sold as scheduled, but a substantial portion of these
were reoffered. and. sold at a later date during the period."
another:
And still
"There are signs that in some instances State and local
governments . « . are becoming more sensitive to interest costs, but
there are also a great many instances where interest rates do not influence
decisions at all.. In some cases, there are legal ceilings on interest
rates that can be paid by governmental units, but apparently these ceilings
are commonly set at ^ or 6 per cent and. are thus high enough so that
they do not interfere with the raising of funds,"
Faced with these stubborn facts, it is necessary for them to look
elsewhere to find some kind of backing for the thesis that general monetary
policy had been too restrictive.
An unfinished study is said to find
evidence ". . .of systematic contracyclical behavior on the part of
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CRITICISM OF THE FEDERAL.RESERVE. SYSTEM,
State and local government construction expenditures in recent years.
This study . . . concludes that monetary policy has a contracyclical
effect on State and local expenditures which is approximately one-third to
one-fourth as great as the effect on residential constructions"
Clearly
not satisfied with that scarcely damning indictment, a paragraph on
school needs was inserted^ concluding with this expression of opinion:
"Thus, in a period in which school facilities were generally recognized as
inadequate to begin with, in which there have been increasing increments
to the school-age population^ and in which construction costs have been
rising sharply, we find an apparent decline in expenditures on school construction. One might surmise that the tight money that has prevailed
during most of this period has had something to do with it,"
If monetary policy had been unduly restrictive on State and
local expenditures, the contention could not be proven by the evidence
cited. It was surely prudent for the writers to insert a hedge clause at
the end of their conclusion:
"Aside from this sector (residential con-
struction), the effects of monetary policy have probably been greatest on
State and local government expenditures ... although the evidence ...
is far from definitive."
It has already been mentioned that the Joint Economic Committee,
in its Report #1, referred to this class of expenditures in only one
sentence.
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The Monetary Commission Report does not treat the subject at all,
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CRITICISM OF THE FEDERAL RESERVE SYSTEM,. 1959-161
One must conclude that, on the basis of the evidence reviewed
by the J.E.C..staff, there is no reason for the Federal Reserve to feel
that general monetary policy has imposed, or is likely to impose, .any
unfair or unwarranted restrictions on State and local public projects*
#3 - THE FEDERAL RESERVE SYSTEM IS NOT EFFICIENTLY INTEGRATED INTO
THE ADMINISTRATION.
The J.E.G. Staff Report did not take up for consideration the
relationships between the Federal Reserve System and the Executive Branch
of the Government.
Neither did the Joint Economic Committee itself, in
its two Reports. Congressman Wright Patman, however, never seems to tire
of the theme and he periodically makes speeches, or issues statements,
with regard to the situation as he sees it, regardless of whether or not
the rest of the Committee majority expresses interest.
A typical comment
is contained in an appendix to Committee Report #l,.25/llThe Supplemental
Views of Representative Wright Patman":
"The Federal Reserve System should be brought
back into the Government from whence it has
seceded, so that its economic policies may be
coordinated with economic policies arrived at by
constitutional means and so, too, that some branch
of the Government—the executive or the Congress—
will have political responsibility for its
political decisions."
Mr. Patman touched on the same relationship when, on June 2, 1961, he was questioning^x/Mr. .Alfred Hayes, president of the Federal
Reserve Bank of New York:
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 19$9-!6l
Chairman Patman. » » e I think that the President
of the United States, under the Constitution,
is dutybound to take care that the laws are
faithfully executed. The Federal Reserve Act
is a law just like any other law, and since
the President of the United States has asked
you gentlemen, this is what I consider a
direct statement to the Federal Reserve System,
the Federal Reserve Board and the Open Market
Comrittee, in particular, to, "Not choke off
recovery . . •"
Mr* Hayes. Let me say this, Mr. Patman, I have
the utmost respect for the President and
the utmost respect for anything he says.
But I would also like to point out that in
the wisdom, of Congress they set up the
system in such a way that the system is not
under the instructions of the executive
branch of the Government.
Chairman Patman, Listen, you are seceding more
than you have ever seceded. I thought you
seceded pretty weH en March U, 195>1, but
you are going further, I think, than you did
then.
The Monetary Commission, in its long deliberations, devoted a
great deal of attention to the problem and brought forward some rather
drastic proposals for changes.
To say that the Monetary Commission had
accepted the Patman view of T>\faat ought to be done would be an exaggeration,
but to say that the Commission, apparently for quite different reasons,
produced some comparable recommendations, would seem to be a fair statement.
Certainly the Commission's recommendations, if followed, would move the relationships a long way toward making the System a directly-reporting department in the Presidential hierarchy.
A reader of the Monetary Commission Report gets the feeling
that the Commission did a lot of soul-searching before it came to such a
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CRITICISM^OF THE FEDERAL RE3MVE.SYSTEM, 19g9-!6l
decision. For example, it pointed2Z/out that:
"A strong advocate for
the claims of monetary stability is needed within the government, and
the central bank is the natural home of such advocacyc A measure of
independence from the Treasury with respect to support of the Treasury
securities market is a requisite too, if the central bank is to exercise
effectiva monetary control."
However, after looking at arguments on both sides of the question,
the Commission concludes:^/
"No doubt there are occasions and types of
pressure that need to be guarded against „ . •
The need for coordination, however, is very
important* Isolation may mean weakness, and
presidential support can be very helpful at
times. The real ability of the System to influence national economic policy might well be
increased rather than diminished if its ties
to the President were closer0 The Commission
believes that somewhat closer ties are advisable."
Recommendations made by the Commission to bring about "somewhat
closer ties" are six in number. It is impossible to know which, if any,
may turn out as most likely to receive serious consideration by Congress
or which would, if put into operation, bring about the most significant
alteration in System practices. The order and grouping, below, represent
the writer's effort to re-arrange the recommendations of the Commission
somewhat more meaningfully than the way they are presented in the Report.
First, it is recoriMended22/that ". . . the Employment Act be
amended to provide that whenever in the President's judgment the current
economic situation, as revealed over a span of time in the indicators
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CRITIGI^OF THE FEDERAL RESERVE SYSTEM, 1959-*6l
issued from his Executive Office or on the basis of ether information,
shows a tendency significantly counter to the objectives set forth in
the Employment Act as amended, and at least quarterly thereafter for so
long as the unfavorable tendency prevails, the President shall supplement
hir. annual Economic Report with a statement setting forth:
1«» His under-
standing and assessment of the factors in the economy contributing to the
unfavorable tendency*
2*
The steps being taken by him and by government
agencies, including the Federal Reserve System, to use existing instruments
and resources available for better achieving the goals of the Employment
Act as amended*
3»
Explanations for any seemingly inconsistent use being
made of any of these instruments
0
• •" This item $3, particularly, appears
to be aimed directly at the Federal Reserve in connection with the allegation that the System is sometimes out of step with the rest of the Government*
Second, the Commission proposesMi/that an Advisory Board be
created by the President, perhaps with the Chairman of the Council of
Economic Advisers as Chairman,
Included in the membership would be the
Chairman of the Board of Governors, and. the Secretary of the Treasury,
Since the meetings would be attended frequently by the President himself,
the heads of the various agencies would feel obligated to put in personal
appearances at each meeting. The Commission says:
ir
This would make the
CEA Chairman less than a cabinet r.embsr but more than an executive secretary • . ." Many people might feel that it would do even more toward enhancing the power and prestige of the CEA Chairman, largely at the expense
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CRITICISM OF THE FEDERAL RESERVE,SYSTEM, 195Qr»6l
of the power and prestige of the Secretary of the Treasury and the Chairman of the Board of Governors.
The third proposal£z/is regarded by some observers as the most
important of the six*
It is:
"The FRB Chairman and Vice-Chairman should
be designated, by the President from among the Board's membership, to serve
for four-year terns coterminous with the President's,"
Persons not
familiar with a board's (Federal Reserve or any other Government board)
functioning might doubt that this would be a vital change.
They could
cite the facts (1) that the Reserve Board Chairman's statutory powers are
not great now, (2) that he is slnply an equal among his peers in voting,
and (3) that a new President might ordinarily choose from among members already on the Board. All of these are valid points, but several other points
are missing,
A new chairman of any board can always, even if he is lacking
in ability and forcefulness, exercise a great deal of subtle control through
such devices as (1) preparation of the agenda of meetings, (2) timing and
duration of the meetings, (3) postponement or advancement of issues to be
considered, (Jj.) encouragement or discouragement of minority viewpoints,
( $ ) delivering of speeches, granting of interviews, and carrying on of
conversations outside, and (6) general supervision of staff material presented for consideration to his board.
Therefore, the appointment of a
chairman by an incoming President could conceivably, under circumstances
easily visualized, be an important factor in changing the philosophy,
policies, and practices of the Board of Governors of the Federal Reserve
System.
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CRITICISM OF TH5 FSD^RAL JESER;/K SYSTEM, .195ft-16.1
As a fourth recommendation, presumably related to the possibility
of the Board's becoming nore directly under the control of the President,
IP/
the Commission suggests::—/a large increase in the Board1 s powers: "Th6
determination of open market policies should bs vested in the Board. . .
The determination of the rediscount rate (the same for all Reserve banks)
should be vested with the Board," In cutting down the power (or perhaps
snuffing out the life) of the Open Market Committee, the Commission writes^'
with dogmatic confidence on a subject which is not that simple:
" . . . the
distinction between the Board and the Federal Open Market Committee has
outlived its usefulness.
The exercise of the System's three main powers
should be complementary and governed by the same considerations, that is,
by the same people in the same forum . . * the decisions of the Board are
exercises of public regulatory authority, and there should be no ambiguity
about itfbere the responsibility for them lies: it belongs exclusively in
the hands of public officials,"
The Report does not comment on the relative
economic competence likely to be expected of the men in the two groups,
Presidents and Board, or on whether or not there is an advantage in having
some votes cast by men whose base of operations is outside of Washington.
The fifth proposal!^' would, among other things, make it easier
for the President to name appointees to the Board as he pleased: "Occupational and geographical qualifications for Board members should be eliminated. Instead the statute should stipulate that members shall be positively
qualified by experience or education, competence, independence, and objectivity commensurate with the increased responsibilities recommended for
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CRITICISM OF THE FED^AL RESERVE SYSTEM, 1959-'6l
them in the achievement of low levels of unemployment, an adequate rate
of economic growth, and reasonable stability of price levels . . ."
As the sixth re commendation: Ik./ "The FRB should consist of five
members, with overlapping ten-year 'uFr.'iis, one expiring each odd-numbered
year5 meirfoars should be eligible for reappointment. This would assure
the President of one vacancy to be filled shortly after his inauguration
.
0
,M
There could not be much doubt that these six recommendations,
if accepted by Congress, would bring about "somewhat closer ties." It is
clear that, in the CommissionJs opinion, this is a good thing.
The Com-
mission rej ectedij£/some of the counter-arguments, with what reads like
scorn:
"Some arguments for independence are more or less frankly anti-
democratic in their premises. For example, it is said that anti-inflationary
measures are unpopular though necessary, and therefore the best assurance
of being taken is by 'endowing the Board of Governors with a considerable
degree of independence,1 or that 'hard1 decisions are more acceptable to
the public !if they are decided by public officials who, like the members
of the judiciary, are removed from immediate pressure,"f
Other students
of the art of practical politics may see more to such arguments than was
visible to the Commission.
The six recommendations put forward by the Monetary Commission
might be taken more lightly if they had come from a group within which
there was known to exist a pro-inflation, anti-sound-money bias. A group
of that sort would be expected to want to change the Federal Reserve
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CRITICISM OF THE^^FBDSRAL IffiSffiyE SYSTEM, I?g9-T6l
structure in drastic fashion*
Coning from a group which seems to have
approved, in general, the System's economic policies of recent years,
and which would appear to be anything but anti-sound-money, the suggestions
must be regarded as deserving of close study.
Surely it has to be assumed
that the Commission felt that the System could function more smoothly and
could continue to do its job with unimpaired efficiency only if it were
thus brought more closely under the immediate direction and "protection"
of the President of the United States.
flL-
THgJFSDERAL RFSIOT^ SYSO! IS MOT ORGAUr^D TO JUNCTION EFFICIENTLY,
As sketched in the preceding section, the criticisms and sug-
gestions as to the System1s place within the governmental scheme of things
have largely originated with the Monetary Commission and. with Mr. Patman,
rather than with the Joint Economic Committee or its staff.
As one moves
down into the internal organisation of the System, and into its day-to-day
operations, the ideas about weaknesses, and needed changes, are furnished
both by the staff of the Committee and by the Monetary Commission.
The distribution of powers within the System, as well as the
functioning of the Federal Open Market Comnittee, are not considered entirely satisfactory by the Joint Economic Comrd.tteers staff:M/ "The
present administrative arrangements within the Federal Reserve seem to be
unduly cumbersome0
Primary responsibility with respect to the discount
rate lies with the individual Federal Reserve banks; changes in reserve
requirements are made by the Board of Governors; and open market policy
is administered by the Federal Open Market Committee. . ."
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No words are
CRITICISM OF THS FEDERAL RESERVE SYSTEM, 1959-*6l
wasted in the Report's flat recommendation:
" . . . it would be desirable
to put the administration of all the credit control weapons in the hands
of the same agency„"
Another organizational feature which the staff does not like is
the way in which the Open Market Comnittee functions.
How a commentator
can write with such confidence about something with which he could have
had no direct experience is an interesting question.
"A body of 12 members is a rather cumbersome
administrative organ, and the clumsiness is
greatly increased by ths presence of numerous
other persons. Some streamlining of this complex
machinery would seem to be in order. It seems
possible that some of the self-imposed limitations
on the System's freedom of action, such as the
bi?^ls-only policy, are the result of arriving at
decisions on complex matters under such conditions*
Perhaps a reduction of the size of the Board of
Governors and the concentration of authority with
respect to all of the policy weapons in the hands of
this group, with representatives of the Reserve
banks serving only in an unofficial advisory
capacity (if at all) would be desirable. Some
reform along these lines is vitally necessary if a
more complex policy involving the use of selective
controls is to be put into operation,"
In item #u of the section just preceding this one, a quotationd£y
from the Monetary Commission Report showed that the Commission essentially
accepted the J.E.C. staff's viewpoint on the Federal Open Market Committee,
the distribution of powers, and what ought to be done about these things.
The Monetary Comi.iission, though, goes far beyond the area covered
by the J.E.C. staff, into the operations of the Board.
Here the Commission
speaks with the authority of men who are chief executive officers of large
h9/
and profitable business enterprises:-^-'
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CRITICISM OF THE FEDERAL RESERVE SYSTEM,
". , . the Board has suffered from a malady
that has plagued the other independent regulatory
commissions, a congestion of detailed business
at the top, to the detriment of the time and
energy Board members can devote to the broad issues
of monetary policy.
"The FRB Chairman should be the chief executive officer of the Board, empowered to handle
administrative matters. The law should be clarified to authorize the Board to delegate to Board
committees, or to Board members individually $ or
to senior staff officers of the Board, any of its
functions in the administration of its powers in
regard to the supervision of the banking structure,
such as the Bank Holding Company Act, the antitrust laws in regard to mergers, and applications
for charters and branches ..."
Another matter of operational efficiency is the reporting which
the Federal Open Market Committee and the Board do, to the Congress and
to the public. Although neither the J.B.C, staff nor the Committee dealt
with this subject, Mr. Patman has done so, as has the Monetary Commission,
In the Hearings'/before the Joint Economic Committee, June 1, l?6l, Mr.
Patman was questioning Mr. Martin:
Chairman Patman. . « • I do not see how the
ordinary, average person could possibly
interpret what the language means. It
is really, and I say this respectfully,
it is gobbledygook.
The Monetary Commission stresses the necessity for timeliness
and completeness, and by implication clarity, in the reports issued by
the System:!!/
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M
The case for more complete and timely
disclosure is partly that accurate information
would perhaps be less dangerous than the rumors
that are continuously circulating about what the
Federal Reserve policy is today or is likely to
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959- '61
be next week. In the absence of adequate, knowledge,
those interested in such matters have a tendency
to seize upon even the most outlandish rumors as
significant . c . Another argument for more complete disclosure is that monetary policy represents
one facet of national economic policy, and in a
democratic society public policies should be subect to current debate9
"Although there is no easy solution to this
issue, the Commission believes that the Federal
Reserve should follow the general rule that the
public should be kept informed with reasonable
promptness and with reasonable detail of the
reasons for its major policy decisions and
actions in order to avoid misunderstanding and
misinterpretati on, "
When it comes to consideration of the way in which the System
functions, it can be seen that there is a large amount of agreement between
the economists on the Joint Economic Committee's stafr and the business and
professional leaders on the Monetary Commission.
Both groups question cer-
tain organizational patterns and operating practices, although the Monetary
Commission probes much deeper. The Monetary Commission rlso takes a strong
stand with respect to the desirability of more and better reporting,
#5 - FEDERAL RESERVE OPERATIONAL RESULTS ARS HANDICAPPED BY SLIPPAGES,
TIME LAGS, INADEQUACIES, AND AMBIGUITIES.
_
The criticisms noted in this section under "slippages," "time
lags," and "ambiguities" are, generally speaking, ones which might apply
to any central bank's operations and so tend to be arguments either for
greater use of selective controls or for the wider use of automatic or
semi-automatic devices. Under "inadequacies," the Federal Reserve's socalled "Bills Only" policy is examined*
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CRITICISM OF THE FEDERAL RES3RVq SYSTEM, 1959-*6l
First, the matter of "slippages«"z2./ One line of thought which
intrigues some critics of the Federal Reserve is to tlie effect that the
financial community is so clever that it can often successfully nullify
or delay the effects of policy action taken by the Board or by the Federal
Open Market Committee. Sometimes the same commentators -will be heard five
minutes later declaiming on the unholy power of the Federal Reserve, T-dth
no apparent comprehension of their inconsistency*
In the Staff Report, these so-called "slippages" are commented
on at some length,, with understanding, and without any accompanying proposals to try to do away with them or to attempt anything impractical in
the way of counteracting theiru One gets the impression that the staff
is realistic in contemplating the "slippages"—aware that even so gentle
and general a control as that exercised through a gradually-tightened
reserve position would probably be disturbing if the financial community
were not able to counteract its application to some degree. The most
obvious of these actions which can be taken is the borrowing by member
banks from the Federal Reserve, thereby temporarily maintaining a level of
total reserves at a time when the System is lowering the level of nonborrowed reserves. This is not mentioned among the "slippages" in the
Report, because the writers are addressing themselves to the various ways
by which the business community itself steps up the efficiency with which
it employs its cash, i.e., increases the velocity of the available money
supply and thereby counterbalances the effect of a reduced or unchanged
supply of money. The principal actions which result in more efficient use
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959-*61
of money are shifts in portfolio composition between various investing
groups in such a way as to produce maximum turnover of cash balances. The
most meaningful of the shifts is probably that made by the commercial banks
when they sell large quantities of Government securities in order to add
to their loan totals*
The Staff Report concludes:^/
"There is not much that can be done about
this propensity of the financial system to be
ingenious. It is a matter of numerous small
adjustments, frequently quantitatively unimportant individually, but cumulatively constituting a significant 'slippage' in our
monetary controls. Moreover, it would probably
be unwise to interfere with these developments
even if it were possible to do so, since they
have served to increase the mobility of funds,
reduced interest rate differentials, and caused
the market mechanism to perform more efficiently
. . ."
The Monetary Commission Report does not give much space to this
matter,,
In the discussion of whether or not the Federal Reserve should
be given control over nonbank financial institutions, it is stated:5i/
"The evidence, for either the cyclical or the secular periods, does
not support a case for an extension of the direct monetary controls over
nonbank financial intermediaries.
Their contribution to cyclical changes
in velocity appears to be too small to warrant such an extension. Their
effect on velocity over the long run can easily be taken into account in
regulating the long-run monetary supply."
"Time lags" are, of course, related to "slippages," but a
number of other aspects of the problem also have to be pondered. The
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 19$9-'61
first, and perhaps the most important, time lag is that between the true
beginning of a new cyclical direction and the time whan the Federal Reserve System recognizes the new direction.
In the Report this is not
mentioned^, perhaps out of courteous sympathy for the extremely difficult
task which the Federal Reserve must constantly undertake in its effort to
keep abreast of economic direction changes in their earliest stages. The
time lags which are Iisted52/are those (1) between the action of the Federal Reserve and the action's influence on the effective money supply^
remembering the "slippages," and (2) in the various industries, between
the time when credit availability or interest rate changes occur and when
they finally begin to have a bearing on production and employment,
As in the case of "slippages," the Staff Report does not appear
to regard these phenomena as anything to criticize, but, rather, as facts
of life which must be taken into consideration in any evaluation of the
merits of general monetary policy. In view of the writers' dim view of
these merits, it may be assumed that, without specifically saying so,
they regard the slippages and time lags as just two more groups of operational shortcomings in a machine of doubtful utility,
In the Monetary Commission Report, a very brief passage§2' on
time lags serves as an introduction to what the Commission regards as an
inadequacy—the Federal Reserve's refusal (at least up until February
196l) to admit that it wished to influence the pattern of interest rates:
". • o a more direct and immediate pressure on long rates can be brought
to bear by both Treasury and Federal Reserve sales of the long-term
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CRITIGISIi OF THE FEDERAL RESERVE SYSTEM, 1959-f 61
securities . . . the effectiveness of monetary policy on the downswing
will be increased if the Treasury and the Federal Reserve take direct
action to reduce long-terra as well as short-term interest rates."
A specific recommendation is mads by the Commission: 2§/
"Instead of relying on a 'bills-only' policy, the Federal Reserve should
be willing, when domestic or international conditions warrant, to influence
directly the structure as well as the level of interest rates in pursuit
of countercyclical monetary policies and should deal in securities of
varied maturities. This recommendation does not mean a return to a pegged
structure of prices and yields for government securities. And the normal
use of open market operations in bills to carry out technical and seasonal
changes in bank reserves is appropriate."
In taking the stand, the Monetary Commission is in line with
others who have, over the years, suggested that the System modify its
so-called "bills only" or "bills preferably" philosophy.
The J.E.C. Staff
Report did not give much space to its analysis, but wound up with a firm
recommendation: 5Sy "The bills-only policy should be abandoned in the
interest of eliminating meaningless fluctuations of the prices of
Government securities, as well as to increase the effectiveness of
monetary policy."
The Joint Economic Committee, in its Report #1, went far beyond
anything which its staff had proposed. 22' "We are advocating that the
Federal Reserve System assume responsibility for the orderly behavior of
our credit markets."
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Moving still farther along the same path, and only
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CRITICISM OF TIB FEDERAL faSSERVE SYSTEM, 1959-f61
two paragraphs later: "In 1951* the Federal Reserve held almost
$5> billion in long-term bonds which was 21,5 percent of its total
portfolio holdings of $22.7 billion. As of the end of October 1959,
the Federal Reserve held only $1.5 billion in long-term bonds which
was only 5.7 percent of its total portfolio of $26.3 billion. There
is no reason why the present ratio should not be improved."
Apparently fascinated by the thought of all those prospective
billions of long-terra bonds vanishing from the market into the portfolio
of the Federal Reserve, the Committee made one more suggestion: 2i/
"Another concept is that of expanding the Federal Reserve System portfolio,
upon which the fractional reserve system operates, by 3 percent per year.
As the Federal Reserve now holds slightly more than $25 billion in
Government securities, such an expansion would require the purchase of
about $75>0 million of Government securities in the first year ... it
would appear that the purchase of long-term securities for this purpose
would be warranted.
This would help to lengthen the debt structure,
increase the price of bonds, and have the effect of lowering the longterm interest rate." Adding emphasis to this point, the Joint Economic
Committee, in its Report #2, listed as its first major recommendation: 62/
"The Federal Reserve should . . . abandon its discredited 'bills only1
policy."
The System may have taken the sting out of these attacks by
doing what the critics have been demanding for so long, i.e., dropping
the "bills only" policy.
Since February 1961, purchases for the portfolio
have included a substantial volume of short maturities other than bills,
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CRITICISM Off THE FEDERAL RESERVE SY3TEM3_1959-.'61
as well as some longer securities. However, no one outside the System
knows whether this is a permanent or a temporary practice. Neither does
anyone outside know whether or not the System plans to sell part or all
of these securities at some point in some cycle. For that matter, no one
on the outside knows whether the System has had, or now has, any specific
plan or philosophy of any kind for the whole operation.
-x-
As an ambiguity in Federal Reserve use of its tools, the J.E.C.
•' "3 '
Staff Report mentions the discount rate: 2i/
"Sometimes discount-rate
changes are apparently meant to serve as signals of the System1s intentions,
while at other times the rate is changed merely to keep it in alinement
with prior changes in market rates of interest. It is not always clear
when a change in the rate is meant to be a signal and when it merely
represents a passive adjustment to the market."
Two alternatives are proposed by the J.E.C. staff: °k/ "Since
1956 the Bank of Canada has kept its discount rate linked to open market
interest rates by setting the rate each week one-quarter percent above
the average issue rate at the most recent Treasury bill auction.
This
arrangement avoids the ambiguities that arise in connection with the
interpretation of the significance of discretionary changes in the discount
rate and automatically preserves a consistent relationship with other
interest rates. It appears to have much to recommend it in the United
States. An alternative that might be considered would be to get rid of
rediscounting altogether and rely on interbank borrowing to perform the
safety valve function now performed by borrowing from the Federal Reserve."
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CRITICISM Off TIE FEDERAL I&ESEIP/E SYSTEM, 1959-! 61
One more suggestion is broached, two pages later:
"» . . there
seems to be no sensible reason for leaving the initiative with respect to
the discount rate in the hands of the individual Reserve banks, assuming
that discretionary discount rate changes continue to be employed."
The Joint Economic Committee clearly approved of its staff1 s
work in this area, and spoke strongly on the matter in Committee Report
#1. £§' "Redis counting should be eliminated as a general practice ...
in the postwar period it has been demonstrated again that rediscount
arrangements are a source of trouble. They provide a way by which banks
can offset monetary restraint ... If rediscounting is not eliminated
entirely, at least the use of the rediscount rate as an influence on
interest rates should be. The rediscount rate should be made a penalty
rate, and only adjusted for the purpose of keeping it so."
The Monetary Commission rejects the thought that rediscounting
should be eliminated: ~2/ "The argument for retaining the privilege is
that it provides a smoother means of adjustment to temporary and local
situations than would be available otherwise, and that any slippage in
the process of general monetary restraint can be easily offset by open
market operations."
Meditating on the use of the discount rate, and on the way in
which it is set, the Commission finds that: ~Z/ "... because market
rates move continuously whereas changes in the discount rate are made
infrequently, the relationship between the discount rate and market rates
varies.
Changes in this differential often have effects that tend to
counter those pursued by open market operations."
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(underlining supplied)
CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959-»6l
One would think that a comment to the effect that the discount
rate had been so used that it often opposed, rather than complemented,
open market policy, would lead the Monetary Commission to a strong conclusion, perhaps similar to that of the Joint Economic Committee. This
does not happen, though, and the Commission lamely concludes: ~2/
"If
the Federal Reserve chooses to do so, it can now change the rates weekly,
and it can inform the public directly whenever a given change represents
a basic shift in policy rather than a technical readjustment.
The Commission
favors the fully discretionary system and urges that it be administered to
avoid effects counter to those sought by open market operations." All that
is then added to this hopeful admonition is a suggestion that the discount
rate be nationally the same.
*
Out of this group of subjects for criticism, it is possible to
guess that the Federal Reserve will not experience any severe challenges
unless it fails to establish clearly that it has thrown overboard the
so-called "Bills Only" philosophy.
As to the use of the discount rate,
the System will not, it would seem, ever be forced by outside pressures
to institute a change—however badly the change might be needed. Political
leaders probably will not apply the pressure, because the issue is a "hard"
one, rather than an attractive "soft" one. Business, professional, and
labor groups, like the Monetary Commission, will not exert severe pressures
either, possibly for more or less similar reasons, or perhaps because they
hesitate to object to a practice so long sanctioned in the financial
folklore.
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959-*6l
#6 - THE FEDERAL RESERVE IS UNDULY, AND WRONGLY, INFLUENCED BY PRIVATE
BANKING INTERESTS
When an organization has gone through forty-eight years of financial leadership without a hint of scandal, it is surprising to find that
a thread of criticism based on suspicion or anticipation of skullduggery
should appear. Principal weaver of the thread is Congressman Wright Patman,
but he occasionally finds support among other figures on the Hill. The
place where the suspicions take their most definite form is in the matter
of the way the Board has made use of its power to alter reserve requirements
during the last eight years.
The tone which is encountered in this thread of criticism is
illustrated in a colloquy between Chairman Patman and a witness, Mr. Robert
G. Rouse, of the New York Reserve Bank, at the Hearings before the Joint
Economic Committee, June 1, 196l»—£' Mr* Patman is referring to the five
presidents of the Reserve Banks who serve as members of the Federal Open
Market Committee, as well as to the other seven presidents who sit in the
meetings as guests:
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Federal Reserve Bank of St. Louis
Chairman Patman. ... the five presidents have
more of a private, profitmaking, almost a
selfish interest, as compared to the public
members. The public is, therefore, required
to accept the judgment of people who have an
ax to grind ... I think Congress made a
terrible mistake when it allowed representatives of private banks to be on these policymaking boards that fix the interest rates
and the supply of money and things like
that ... it (the will of Congress) is disregarded when they bring in all 12 of the
presidents, each one of them having an ax to
grind . . .
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CRITICISM 01^ THE FEDERAL RESERVE SYSTEM, 1959-*6l
A year and a half earlier, in January I960, Mr* Patman had
introduced a bill (HCR« 95>11, January 11, I960) which showed how distrustful ha was of Federal Reserve motivations. The bill provided for
the transfer to the Secretary cf the Treasury of $15 billion of Government
securities held by the Federal Reserve Banks, in return for a nontransferable, non-interest-bearing deiaand note of the United States in the
same amount. After going over his reasons for introducing the bill, he
7^ /
said:-"'
tr
e
«, • the present Federal Reserve authorities have a way of
taking the bit into their own teeth and doing what they please to do, notwithstanding laws and expressions of congressional intent. They have
come to believe that the Federal Reserve System is a fourth branch of
the Government which stands over and above the three constitutional
branches of Government ... they feel that they are not subject to the
laws that govern mortal men. So, just in case the Federal Reserve authorities get it into their heads to reduce their holdings of Federal securities despite the recent and clear congressional mandate to the contrary,
having $1J> billion less of marketable Government debt obligations would
make such an idea much less tempting. At least there would be $15' billion
less of Government securities which could be given away."
The same attitude is displayed in the keen enjoyment he seems
to take in getting officials of the System to deny that the stock of
the Federal Reserve Banks is really a stock at all, and to affirm that
the Reserve Banks are not, therefore, really owned by their stockholders.
Mr. Patman had Mr. Carl Allen, president of the Federal Reserve Bank of
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CRITICISM OF THS FSPEPJIL RESERVE SYSTEM*, 195,9-'61
Chicago, on the stand on June 6, I960, and quoted to him a statement by
Mr. Fred Wilson, former assistant vice president of the Chicago Bank,
to the effect that Federal Reserve Banks are owned by the member banks:
Mi% Patman.. • • • So there is a newspaper quota-^
tion from your very first assistant, Mr,
Allen, saying that the Federal Reserve
Bank is owned lock, stock, and barrel by
the member banks. Now you don't agree
with thab, do you?
Mr, Allen.
I do not«
On June 10, Representative Oliver, of the same subcommittee,
embarked on a series of similar questions with Mr. Alfred Hayes, president
of the Federal Reserve Bank of New York* Oliver quotedZ^/ several standard
economics textbooks, one after another, all stating, of course, that the
Federal Reserve System is privately owned by the member banks. In each
case Hayes said that he did not agree with the quoted passage, or words
to that effect. The series of repudiations ended with:
Mr. Oliver. Another one « . * is entitled
"Money and Banking" by Weldom Wefling,
American Institute of Banking, American
Bankers Association, published in 1958,
and here the statement is categoric: The
member banks o\m the 12 Federal Reserve
banks.
Mr. Hayes.
That I would disagree with entirely.
It would appear that the general lack of confidence as to
motives, which Mr. Patman has expressed so frequently, and in so many
different ways, lies behind the criticism leveled at the System for the
manner in which it has employed the reserve-requirement tool in carrying
out monetary policy during the last eight years.
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CRITICISM OF THE FEDERAL RKSERVfe SYSTEM,. 19.59-'61
The Federal Reserve System always has a choice of two methods
when it wishes to ease or restrain the credit situation, i.e., it can
work the desired effects either through the use of open market transactions (ordered by the Open Market Committee) or through altering reserve
requirements (ordered by the Board of Governors)„ Essentially similar
end-results are brought about in either case, although endless debates
are carried on among economists as to speed of accomplishment, side effects, and so forth. When easing is done through reducing reserve requirements, the commercial banks do not initially sell any securities to the
Federal Reserve and so retain earning power from these securities, earning power which would otherwise go to the Federal Reserve and eventually
back to the Treasury. On the other hand, when restraint is imposed
through raising reserve requirements, the commercial banks do not initially
purchase any securities from the Federal Reserve and so do not benefit by
obtaining earning power from the securities.
Instead, the System con-
tinues to enjoy the earning power from the securities.
Obviously, the commercial banks would like for the System to
ease by reducing reserve requirements and to firm by engaging in open
market selling. Conversely, those who feel that the commercial banks need
no largesse of this sort would ordinarily prefer that the System ease by
engaging in open market purchasing and firm by raising reserve requirements. Arithmetical illustrations, simplified, will make clear the sort
of sums involved.
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CRITICISM OF TH1!) FEDERAL RgSIiSfe SYSTMr. 19^9-'6.1
Assume that it was decided to try to ease by expanding commercial banks' liabilities (deposits) by $6 billion, over a period of
several months.
If the Board were to order reserve requirements lowered
by $1 billion, the commercial banks would presumably then go out and add
loans and investments in the amount of about $6 billion, thereby also
increasing liabilities (almost entirely in deposits) by the same $6
billion* Assume that it was decided, a year later, to try to impose
restraint by contracting commercial banks' liabilities (deposits) by $6
billion, over a period of several months. If the Open Market Committee
were to order the sale of $1 billion of securities to the commercial
banks, their reserves would be reduced by $1 billion, and they would
presumably contract their total of loans and investments by a gross
amount of $6 billion, making a net reduction of $£ billion, considering
the purchases just made from the Federal Reserve,, Back at the same deposit level from which they had started, the commercial banks would have
gained by the substitution of ?1 billion of Government securities, purchased from the Federal Reserve, for an equal amount of non-interest-bearing reserve balances. This is an attractive sequence of events for
commercial bankers.
Reversing the order of use of the two monetary tools, assume
that the easing had been carried out through open market operations, the
purchase of $1 billion of securities by the Federal Reserve from the commercial banks. The earning power of the $1 billion of securities would,from then on, flow to the Federal Reserve, and thence on to the Treasury^
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•
CRITICISM OF THE FEDERAL RESERVE SYSTEM9 19.^9- '6l
instead of to the former owners, the commercial banks. The banks would
presumably go out and add loans and investments in the amount of $6 billior?» Deducting the TOL billion of securities pre\aously sold to the
Federal Reserve, their portfolio increase would amount to $5> billion,
but their total assets would be up $6 billion when their added reserves
were included. Their total liabilities (almost entirely in deposits)
would have grown by the same $6 billion. Assume that it was decided, a
year later, to try to impose restraint by contracting commercial banks'
liabilities (deposits) by $6 billion, over a period of several months.
If the Federal Reserve Board were to order reserve requirements increased
by $1 billion, the commercial banks would presumably contract their
total of loans and investments by about $6 billion. Back at the same
deposit level from which they had started, the commercial banks would
have lost earning assets in the amount of $1 billion of Government securities sold to the Federal Reserve. This reversed sequence of events would
not be one to gladden the hearts of commercial bankers.
If both easing and firming were carried on ^jith the same tool—
either open market operations or changed reserve requirements—the commercial banks would neither gain nor lose over the cycle in the manner
illustrated above.
Anyone who feels that the commercial banks are earning an
adequate return on their capital funds would tend, other things being
equal, to favor a practice of the Systemls using open market operations
to ease and reserve requirement increases to firm. This sequence brings
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CRITICISM OF THE FEDERAL RESERVE SYSTEM., 1959-/61
in some revenue to the Government and takes away some revenue from the
commercial banks«
Those who feel, on the contrary, that the commercial
banks are needful and deserving of special favors would tend, other
things being equal, to vote for the practice of using reserve requirement reductions to ease and open market operations to firm. This is what
the Federal Reserve has done in recent years., explaining its actions by
saying that, in its opinion, 12./ there are certain advantages of diffusion,
flexibility, effectiveness, etc. in following the course it has followed.
A skeptic who might question these unproven expressions of opinion would
find it equally impossible to support his argument with facts. He, too,
would have to rely on opinion, and his opinion might be founded on less
experience than that of the 83/3tern's executives.
As one more item of factual information to serve as background
for a brief sketch of the critical comments, member bank earning rates in
recent years are listed below:.Ui/
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CRITICISM OF THE MJSRAL RESERVE SYSTEM, 1959-»6l
MEMBER BANK EARNINGS
Net after taxes and
after all charges
As a percentage of average total capital accounts
and in millions of dollars
Percentage on
Capital
1M
1M
In millions
of dollars
636
19U9
1950
19^1
8*3£
781
756
1952
1953
1.9%
195U
1955
1956
1957
1958
1959
9.3^
829
865
1,096
I960
10C0£
7
/ •P*
«/o
7*9/0
7^7°^
8.3^
9.7^
7.9^
985
1,027
1,169
l,U57
1,257
1,689
One may start the sketch with the concluding portion of an extended colloquyLy between Chairman Douglas of the Joint Economic Committee
and Chairman Martin of the Board of Governors of the Federal Reserve System,
on July 30, 1959* at a hearing before the Joint Economic Committee. The
two distinguished gentlemen were not able to get together in the questioning and answering;76/
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The Chairman* Mr, Martin, to come back to
this original point, which I think is very
important, if the two methods give the
same ultimate result which you admit, but
one of them in the process yields a gain
to the Federal Reserve and to the Government of an average of $500,000 a year, and
added interest earnings which accumulate as
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CRITICISM OF THE FKDERAt fe&flVE SYSTEM, 1959-!6l
additional amounts, why not take the
method which, giving the same ultimate
res-alt, yields large capital gains and
large increases in net revenue to the
Government o
Mr. Martin. Bscause, Senator, we are not
dealing with ultimate results. We are
not dealing with a mathematical equation
that comes out at a certain point. We
are dealing with a flow of money of a
continuous nature. It just is not, in my
judgment, an easy matter, nor is it correct to say that you can regulate that
flow just as effectively by something that
will come cut with an end result in terms
of benefit to the Treasury or benefit to
the banks,
Six months later, on February 2, I960, before the same Committee, the same two had the same difficulty in making any progress
toward an area of mutual understanding :
The Chairman. Now, is it not true that you can
get the same result in expansion of the
monetary medium by open market operations
as you can by lowering reserve ratios?
Mr. Martin* At a time of recession; no, sir*
The Chairman. But I mean over the long run* In
normal periods.
Mr. Martin. Leaving out recession or boom—but
that is what we are usually dealing with, one
of the two. If you want to put it in longrun mathematical terms, I would say the answer
is "yes."
The Chairman. In a normal period?
Mr. Martin. In a normal period. But I merely
point out that we have had practically no
normal periods.
\
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CRITICISM OF THE FEDEItA^flDSERVE SYSTEM, 195?-!6l
The Chairman. Well, there must be some normal
period.
Mr. Martin. Well, I must say ray job would be a
lot easier if I could get a few*
The Chairman. It is either abnormal up or abnormal
down? There is no abnormal down?
Mr. Martin. That has been the experience. And I
think it would be a lot easier for me if we
had more normal periods.
The Chairman. Mr. Martin, I want to suggest that
I think you are obscuring fundamentally the
intellectual issue. Is it not true that you
can get substantially the same increase by
open market operations, which will increase
member bank reserves, as you can by lowering
reserve ratios . . . ?
In the J.E.C. Staff Report, it would seem as though the writers
had brushed aside the opinions expressed by Federal Reserve spokesmen
relative to the advantages of usjjig reduced reserve requirements for
easing.
The conclusion?,"/ is brusque:
"The use of open market purchases of Government
securities to supply reserves to the banking system
has an advantage, from the standpoint of the Treasury, over reductions in reserve requirements, since
open market purchases absorb securities in the Federal Reserve System!s portfolio and since most of the
interest on that portfolio is returned to the Treasury
at the end of the year. There are, of course, other
differences between open market purchases and lowering
of reserve requirements. Lower reserve requirements
clearly tend to result in larger profits for the
commercial banking system. ... Aside from these
factors, it is difficult to see that there are any
significant observable differences in the impact of
these two credit control weapons. . ."
The members of the Joint Economic Committee followed the lead of
their staff, and made this a major issue. In Committee Report #l!2/they said;
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CRITICISM OF THE FEDMAL ftESSRfrE SYSTEM, 1959"The ultimate effect of either weapon is the
same. There is very little to choose between them
on the final effect which will come about* Furthermore, at best, there are only very minor differences
in the effects of the process. . . the Federal Reserve
has not raised membar bank reserve requirements since
1951 and has lowered them several times, particularly
in the two periods of recession since 195>3» It appears
to be aiming at a general reserve requirement level of
about 10 per cent which, in the opinion of this committee,
is not necessary nor in the public interest.11
As might be expected, Mr. Patman goes far beyond his own majority
on this subject:52/
"It seems to me, however, that the Committee's
recommendation does not go far enough. It would not
restore to the public the Government securities which
the Federal Reserve has given away from the vaults of
the Federal Reserve Banks in the course of its successive reductions in reserve requirements since 195>1»
There should be a restoration of reserve requirements
and a return of these assets to the Federal Reserve
System."
The issue was kept alive by the Joint Economic Committee in Committee Report #2, in the form of a major recommendations/that "The Federal
Reserve should ... use open market operations rather than lowering
reserve requirements as the means of bringing about the secular expansion
of credit which the Federal Reserve and the banks desire."
The Monetary Commission Report is so brief and vague on this
controversial question that it is difficult to tell how deeply they considered the problem, or, for that matter, to what conclusion they came.
If one were to hazard a guess, based on their three short paragraphs of
treatment, it would be that the Monetary Commission was nearer to the
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959- *6l
Joint Economic Committee than to the Federal Reserve in its thinking.
The conclusion in the Monetary Commission Report:Qz/
"There is little clear evidence to indicate that
the effects of open market operations are slower than
those following reserve requirement changes. Nor is it
clear,, in view of the other lags involved in monetary
policy,, that any difference in timing is large enough
to be important,
"The Ccmmiss: on believes that the power to change
reserve requirements should be used only sparingly and
favors major reliance on tUe use of open market operations for counterc3rclical adjustments."
The use of reserve requirements could scarcely be envisioned as
a problem likely to be very annoying to the Federal Reserve System over
the next few years, on straight economic grounds. However, it has obvious
appeal for any political leader who wishes to challenge the motivations
of the Systemrs officials while, simultaneously, alleging that large sums
are being handed to commercial bankers instead of being returned to the
Treasury via the Federal Reserve. As the Joint Economic Committee
wrote£2/in Report #1:
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"In fact, if instead of the policy of lowering reserve
requirements, the expansion of credit which was created
by this means since 1953 had instead been created by
open-market operations, the net increase of revenue to
the Treasury at the bond rate would have amounted to a
total of almost &5>00 million and at a present annual
rate of some $112.7 million."
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959^.61
#7 - THE FEDERAL RESERVE FRCH)TE3 HIGH INTEREST RATES, TO 1-JAKE MORE
PROFITS FOR LENDERS
__
A contention of the kind described in the section heading above
is quite different from cne which says, for example, that the System has
been unwise with respect to the influence which it has exercised on interest
rates in some cycle0 This broad contention is often not based on economic
reasoning so much as on political or emotional considerations,. It frequently
involves, as in the debate on reserve requirements, at least an implied
mistrust of the motives of central bank authorities. In some cases, it
appears that the critics wish to asstime awry the free market mechanism and
to substitute some sort of Utopian magic for the hard rules of the real world.
There are, no doubt, many times when this essentially noneconomic
criticism becomes entangled with economic analysis. The same individual
who may be demanding, say, a permanently low, economically impossible interest
rate on home mortgages, might also deliver a carefully-reasoned critique
of the Federal Reserve's firming steps as taken during the thrust phase of the
most recent business cycle. However, the two lines of criticism are
ordinarily identifiable as quite different things, and deserve to be looked
at separately.
It is important to the Federal Reserve that the two lines be kept
separate, because the noneconomic attacks cannot be answered in economic
terms* They either must be ignored, or must be answered with arguments
which are not founded on the facts of life as known in the world around us.
Usually, if an answer were attempted, it would be necessary to try to talk
to the point of whet could or should be done in a controlled economy from
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CRITICISM OF THE. FEDERAL RgSEftVE SYSTEM, 3.959-^61
which the free practices of a free people had been removed.
This statement, though, may not be wholly_fair to some of the
critics in the school which is being labelled here as "noneconomic" or
"emotional" or ''nonfree enterprise*"
A critic belonging to the school
can insist that these rather disparaging names are not justified,
because he is actually trying to restore some freedom to financial
markets which he thinks have been twisted out of shape by a central
bank devoted to the profitmaking wishes of financial institutions.
Undoubtedly, scue of the critics truly believe that this is the situation to which they are addressing themselves.
Fortunately for the System, this form of criticism is not
encountered too often.
well-publicized.
Neither does it seem to be well-organized nor
Perhaps it is of no real significance, in that it
is probably overwhelmingly outweighed by a high public regard for the
integrity and patriotism of the men who have managed the Federal Reserve
over the years*
Quotations from two people, cited below, constitute a
warning, though, that it must not be completely neglected.
One of the strongest general statements was made by Congresses/
man Wright Patman, in an Appendix-^'to Committee Report #1, issued
January 26, I960:
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"On the facts, I cannot avoid the conclusion
that the tight-money and high-interest policies
have been a principal cause both of increasing
prices over the past 7 years as well as a cause
of the Nation 1 s substandard rate of economic growth
in those years. In other words, these policies do
not give us a choice between two evils but an
abundance of both evils . . ,
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CRITICISli OF TIIE FEDERAL RESERVE .£fetEM.. 1959~f6l
"This diversion of income through high
interest benefits the few at the expense of the
many . . .
11
. . e Federal Reserve spokesmen have been
less than candid with Congress and with the general public, disclaiming at times that they have
anything to do with matters about which they have
all to do , . .
u
.The persistent and. pronounced, bias of the
present Federal Reserve authorities has been in
favor of the financial elite, in favor of high
interest for the sake of high interest, in favor
of the banking business it is supposed to
regulate . . ,n
Professor James Tobin, Ster3.ing Professor of Economics in
85 / which was published in
Yale University, wrote a magazine article—^'
January 1961, just before he was appointed by President Kennedy to be
a member of the Council of Economic Advisers. In the article, he
roundlj- criticized the Federal Reserve on a number of grounds. Some
of his sharper remarks were:
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"The Federal Reserve has tended to take the
view . . . that there is a single correct
monetary policy—namely the course which, within
the limits of human error, the Fed pursues.
Federal Reserve spokesmen contend the inevitable
consequence of a deviation from their course of
monetary restraint would be an eventual collapse
which would more than offset temporary gains in
employment and output.
"The economic logic of this prediction is,
to say the least, obscure , . . Whatever its
logic, it is expounded and believed with
ideological fervor inside and outside the Federal
Reserve System.
"This conviction may lead the Board of Governors to resist and to frustrate any effort by
the Kennedy Administration to gear the federal
budget and other instruments of economic policy to
higher levels of employment and production."
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CRITICISE OF THE FEDERAL RLSEIfl/E STETEI-I. 1959-61
A few paragraphs further along:
"« . . I n the era of Eisenhower, Martin,
Humphrey, and Anderson, the operative belief
has been^ or often seemed to be, that monetary
control and debt management cannot be effective
unless they are expensive and the more costly
the more effective,"
It is obvious that spokesmen for the System cannot reply
in kind to attacks of this type, because whet would ensue would not be
a debate, it would be a name-calling contest.
What can be done is to
publish studies on such subjects as how the flows of funds in the
economy affsct interest rates, or coiapil?tions of interest rates in
other countries, or outlines of the history of interest rates in the
United States. Facts and figures will do something toward disproving
the hostile allegations,
#3 - TIE FEDERAL RESERVE SHORTENS ECOIOIILC UPSWINGS AMD STUNTS
NATIONAL ECONOMIC GROWTH
__
This is the wrap-up category of critical comment.
Those who
are sufficiently annoyed with the Federal Reserve System, on enough
counts, sum up by claiming that it has stunted cyclical and secular
economic growth in the United States.
The people who level these
grave charges range all the way from fully qualified to completely
unqualified.
Very often, their motives are showing, snd the motives
run the gamut from thoroughly patriotic to entirely selfish.
Despite the enormous complexity of the debates which have
taken place, and will continue to take place, probably on a much
larger scale, the basic issues can be described quite simply. The
question is:
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how should the nation's financial "managers" (insofar as
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CRITICISE OF THR: FEDERAL RESERVE SYSTEM,; 1959-*?61
••in pa>nin •»•! •!• •••••••••••^•^
•
•^•^•i^. JJ^PM^I
i
i a i i i
in
mi •
iwinin
---1
— _
\w\ it m
f
•-*- T f- , T.T^rj ir
_ir
management is possible in a relatively free economy) define the terms,
and rate the relative importance of (l) high-level production and
employment., (2) an adequate rate of economic growth, and (3) reasonable
price stability.
Anyone vho is familiar with the attacks of recent years must
realize, therefore, that these issues go straight to the heart of the
national philosophy.
No wonder the discussions sometimes sound as though
theological dogma were involved, because the matters being argued back and
forth are often just about that important„ If it is true, as frequently
contended, that decisions have to be made between millions of jobs, on
the one hand, and the continued destruction of the savings of millions of
savers, on the other hand, then it is hard to visualize a problem more
fundamental to the welfare of the American people.
In a debate of this sort, both sides may be expected to hesitate
about revealing admiration for eithor horn of a cruel dilemmac One way tc
weasel out of such a situation is to deny that there is a dilemma, and
perhaps that is true when the issues are phrased in certain ways and
definitions are expediently framed. The other way to weasel out is to ignore
the dilemma, sometimes even more effective and disarming than to deny its
existence. Part of the evasive strategy, in either case, is to shift the
attack, or the defense, to some specific practice of monetary management and
so focus attention on a detail instead of on the true, big issue.
The quotations to be cited below are not analysed*
They are meant
only to show something of the nature of this most comprehensive set of
criticisms.
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They suggest the necessity for a largely expanded, and improved
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CRITICISM OF THE FEDERAL RESERVE SYSTEM, 1959^61
program of expl.ana.ticn on the part of the Federal Reserve,
Aside from Representative Patman, the man who has spoken most
often against the Federal Reserve, to the most people, and at the greatest
length, must be Mr. Leon H» Keyserling, former Chairman (under President
Trumen) of the Council of Economic Advisers, His statement^-' to the Joint
Economic Committee, meeting in March 1959* reflects views which he has put
forward many times:
"Monetary policy, in recent years, has
been used contrary to all of the three great
purposes of our economic life ... an
excessively restrictive monetary policy
contributed to a severely contracting rate of
economic growth during the period 1955-57 . . •
the tight money policy in early 1957 based upon
a fundamental misreading of the economic
situation, repressed the kind of investment
which was already too low, repressed consumption
which was already too low, and did nothing to
restrain the boom in plant and equipment • . .
"... the Federal Reserve System is now
again tightening up on money further, when there
is still a tremendous slack in the economy;
when unemployment is actually rising » , .
". » , the blunderbuss methods of the
Federal Reserve System are again aggravating the
distortions in the credit and investment and
income structure , , . and again in the overall
are repressing production and employment ..."
The Joint Economic Committee, in its Report #2 (February I960),
said about the same thing, in fewer wordss—'
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11
, , , the monetary authorities have limited
their actions almost exclusively to only one
aspect of the problem, i.e», stabilizing the price
levels, while they have largely ignored the
problems of economic growth and excessive unemployment ,H
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CRITICISM OF HIS FEDERAL RESERVE SYSTEM, 1959-'61
Representative Henry S* Keuss, at a Hearing of the Joint
Economic Committee held on June 2, 1961, remarked:—'
". « . What I am suggesting, Governor, is that
the overtightening of credit by the Federal Reserve
has contributed to the fact that we have had two
recessions in the last 3 years , . ,
11
« . • Mr. Arthur Burns, who was Chairman of the
Council of Economic Advisers under the Eisenhower
Administration, in a statement put into the Record
. . * said thr.t many factors undoubtedly contributed
to the unsatisfactory character of the business
cycle expansion from 1958 to I960, but three of them
were preeminent and, as his second cause, he cites
the fact that the Federal Reserve pushed its credit
tightening with \mdue vigor,"
A little more than a month later, on July 12, 1961, on the floor
of the Senate, Senator Paul H. Douglas, former president of the American
89/
Economic Association, aired his views:—
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"The immediate danger is not demand and monetary
inflation, Any threatened price increase is more
likely to come from administered prices and wages,
The basic problem we face is that of idle men and
idle capital and a restricted output,
"The choice is therefore squarely up to the
Federal Reserve Boarda If, as output increases
slightly,, the Reserve Board again takes fright,
as it did in 1958-59, an(i %gain restricts the
credit supply so as to raise interest rates, it
will once more help to choke off a revival and keep
unemployment at an unduly high level, as it has
done before. I believe the conscience of the
country is aroused and cannot again permit the
Reserve Board and the financial world to use an
abnormally high ratio of unemployment and idle
capital as a built-in stabilizer • . .
"The issue is therefore directly up to the
Federal Reserve Board and the financial
authorities in Government and business. Let us
hope that they have the wisdom to act wisely and
effectively. May Congress and the public
encourage them to realize the gravity of the
situation in which we are placed and help them
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CRITICISM OF THE FEDERAL RESERVE
to cast aside their old errors which have already
cost us so much , . ,"
The institutional structure of the American economy in 1961 is
one in which, as a result of the increased strength of highly-organized
power blocs-—labor, industry, agriculture*—prices will have a tendency
to rise whenever men and machines are operating at anywhere near to
capacity,, The purchasing power of the dollar is, therefore, subject to
possible further deterioration within the next few years. As an important
agency especially interested in the integrity of the dollar, the Federal
Reserve will find itself again in the unenviable position of having to
decide whether or not to restrain what it looks on as "inflationary
excesses," at times when its critics may regard the economy's performance
as unsatisfactory, and not even near to "inflationary excesses."
If the System continues to act with courage, it will inevitably
face a continuing barrage of criticism. The criticisms will be, as in the
past, general and specific, fair and unfair, but they may become more
powerfully voiced as time goes on. In order to defend itself with sufficient skill and energy to maintain its effectiveness, the Federal Reserve
will need to put forth much greater efforts than in the past to gain public
support for the policy formulations which will come nearest to meeting all
the needs of all the people.
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CRITICISM OF THE FEDERAL RBflflfrVfr SYSTEM, 1959-**6l
FOOTNOTES
I/
Report of the Joint Economic Coirmiittee, 86th Congress, 2nd Session,
eititle.i "Efciplcyment, Growth, arid Price Levels," January 26, I960,
pp. 73-75• Referred to hereafter as "Ccinmittee Report #1,"
2/ Hearings before the Joint Economic Committee, 86th Congress, 2nd Session,
March 20, 23, 2ii, and 25, 1959.* Part 1- "The American Economy: Problems
aid. Prospects"! p. 12 and p, i|7. Referred to hereafter as "J.E.C. Hearings, 19^9, Pt. 1."
3/ Ibid, P. 165.
h/
Ibid, P, 166.
5/ American Economic Association Handbook, 1956, p. 80,
6/ See note $1, above.
7/ Report of the Joint Economic Committee, 86th Congress, 2nd Session,
entitled "Report on the January I960 Economic Report of the President,"
February 29, I960, No, 1152. Referred to hereafter as "Committee Report
#2."
8/ "Staff Report on Employment, Growth, and Price Levels," Joint Economic
Committee, 86th Congress, 1st Session, December 2li, 1959, p« 390.
Referred to as "J.E.C. Staff Report" or simply "Staff Report."
9/ Ibid, p. 392,
10/ Ibid, p. 391.
ll/ Ibid, pp. 399-iiOO.
12/ "Money and Credit," the Report of the Commission on Money and Credit,
1961, Prentice-Hall, Inc., pp. 75 and 76. Referred to hereafter as the
"Monetary Commission Report."
13/ J.E,C. Staff Report, p. 375.
Ill/ Ibid, p. 368 et seq*
15/ Ibid.
16/ Ibid, p. 372.
IT/ Ibid, pp. 396-398.
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-69-
IS/
Ibid, p. 398,
197 Ibid, pp. 38$, 387, 398-399.
20/
ibid, p., 399.
£y'
Coinniit'oes Report jfi.s p» 33-
22/
Monetary Cccnraission Report, pp. 73 and 7k 3 the quotation from p.
23/
Committee Report ^1, pp, 67-68.
2-V
J.E 0 C. Staff Report, p. 1|01.
£p/
Ibid, p. 365 and, after the three dots, p. 1|00,
26/
Ibid, p. 1;GO.
27/
Ibid, p. 36^.
23/
Ibid, p. 368.
29/
Ibid, pp, IiOO-ljOl.
3£/ Page 32.
31/
J.E.C. Staff Report, p. 378.
32/
Ibid, p. 380.
33/
Ibid, p, 381.
3b/
Ibid, pp. 381-383, and p. 393.
Page 65.
36/ Hearings before the Joint Economic Committee, 87th Congress, 1st Session,
June 1 and 2, 1961, pp. 82-83, Referred to hereafter as "J.E.C. Hearings,
June 1961."
377 Monetary Commission Report, p. 8£,
38/
Ibid, p» 86.
397 Ibid, pp. 272-273.
Ibid, pp. 276-277.
Ibid, p. 87.
Ij2/
Ibid, p. 90.
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Federal Reserve Bank of St. Louis
Ibid
Ibid, p. 88.
Ii|/' Ibid, p, 87.
h6/ Ibid, pp. 35-86.
hi/ J.E.C. Staff Report, p. 1*07.
U8/ See note #h3* Monetary Commission Report, p. 90.
h9/ Ibid, pp. 87-88.
|0/ J.E.C. Hearings, June 1961, p. 10£.
5>1/ Monetary Commission Report, pp. 92, 93.
|2/ J.E.C. Staff Report, pp. 3lUi-360.
|3/ Ibid, p. 3£9.
Monetary Commission Report, pp. 80-81.
J.E.C. Staff Report, pp. 392-393.
56/ Monetary Commission Report, pp.. 56-^7.
|7/ Ibid, p. 57*
|8/ Ibid, p. 61*.
|2/ J.E.C. Staff Report, p. 1*26.
60/ Committee Report ^1, p. 1*2.
61/ Ibid, p. i*6.
62/ Committee Report #2, p. 16.
63/ J.E.C. Staff Report, p. i|05.
6k/
Ibid.
6£/ Committee Report #1, p. 32.
66/ Monetary Commission Report, pp. 6L-65.
67/ Ibid, p. 65.
68/ Ibid.
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Federal Reserve Bank of St. Louis
-71-
69/ J.E.C. Hearings, June 1961, pp. 35-36.
TO/ Congressional Record, January 11, I960, p, 229.
jQ./ Hearings before subcommittee No. 3 of the Committee on Banking and
Currency, House of Representatives, 86th Congress, 2nd Session, June 6,
7, 10, 17 and 2$, I960, pp. 18-19.
1?J
loid^ pa 177 et seq,
73/ See the Systemls memorandum, Hearings before the Joint Economic Committee,
65th Congress, 1st Session, June 2b, 27? 28, 29, and 30, 1959, Part 6A,
pp, Iii62-lli65. Referred to hereafter as "J.E.C. Hearings, 1959, Pt, 6A.«
]h/ Federal Reserve Bulletin, May 1961, p. 521.
75/ J,E.C. Hearings, 1959, pt, 6A, p. llt55 et seq.
76/ Ibid, pp? li£9-li|60.
IT/ Hearings before the Joint Economic Committee, "January I960 Economic
Report of the President," 86th Congress, 2nd Session, February 1, 2, 3,
1$, 5, and 16, I960, pp. 172 and 1737£/ J.E.C. Staff Report, pp. Ii23-l*2lu
79/ Committee Report ^1, p. i^3.
80/ Ibid, p, 72.
8l/ Committee Report #2, p, 16.
82/ Monetary Commission Report, p. 67.
83/ Committee Report #1, p. kk. The supporting table is on p. ii5*
8U/ Ibid, pp. 63,6)4,65.
8g/ "Challenge," January 1961, p. 2k et seq.
86/ J.E.C. Hearings, 1959, Pt. 1, pp. 102 and 103.
87/ Committee Report #2, p. 3.
88/ J.E.C. Hearings, June 1961, p. 99.
89/ Congressional Record, July 12, 1961, p. 1519.
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-72-
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
OF THE
F E D E R A L R E S E R V E SYSTEM
WASHINGTON
October 15, 1962
TO:
Federal Open Market Committee
FROM:
Mr. Young
There is enclosed a copy of a memorandum written by
Mr. Koch on "Government Deposits Part of the Money Supply?"
This memorandum was written in response to Mr. Sternlight's
recent memorandum entitled "Comments on Recent Behavior of
Required Reserves in Relation to Growth Guidelines."
.
Ralph/A. Youngy Secretary)
Federal Open fc(apKet Committee.
Enclosure
MEMORANDUM
To:
October l£, 1962
Federal Open Market Committee
Subject: Government Deposits
From: Albert R. Koch
Part of the Money Supply?
Peter Sternlight has recently written a thought-provoking memorandum entitled "Comments on Recent Behavior of Required Reserves in Relation
to Growth Guidelines." In it he concludes that about half of the recent increase in Government deposits should, in effect, be considered as part of
the money supply5 and that the reserves made available to support such deposit expansion should be counted toward meeting a required or total reserve target.
Sternlight has made a helpful point when he suggests that we
should look at the source of the change in the Government balance rather
than just the end result. To put it somewhat differently, it is the effect
of the size of the Government balance on the liquidity and incomes of the
private economy that is important for monetary policy formulation.
Here
liquidity should be defined broadly, including not only liquid assets but
also short-term liabilities (which are a negative part of liquidity) and
the cost of borrowed funds. The relevance of this last point will appear
shortly.
One may agree with Sternlight when he suggests that, in periods
like the present at least, if the Government balance is increased by borrowing from the banks, generally speaking the reserves underlying such a
deposit increase should be supplied to the banking system to permit bank
acquisitions of Government securities without decreasing the ability of
banks to make loans and acquire other securities.
Private liquidity and
incomes would not be reduced in these circumstances.
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Federal Reserve Bank of St. Louis
Reserves are in fact supplied to support the bank acquisitions
of Government securities and the resulting Government deposits if the
guidelines to monetary policy are free reserves, money supply, the tone and
feel of the money market and/or interest rates. They are not likely to be
supplied if bank credit, total deposits, total reserves, or nonborrowed reserves are the dominant guides to policy.
Private liquidity and/or incomes are certainly reduced, however,
when the Treasury's cash balance is built up through tax collections or by
borrowing from nonbank sources.
In the tax collection case, private in-
comes and the money supply are reduced and Sternlight suggests (l) that the
income drain is largely planned for and therefore doesn't depress spending
significantly, and (2) that the reduction in the money supply overstates
the total effective drain in the nation's liquidity.
In the case in point, one may wonder if Sternlight doesn't overlook an important phase of the operation.
Doesn't one have to consider the
spending side as well as the receipt side? Thus, Government collects taxes
from some and dispenses funds to others. If it collects taxes normally but
doesn't dispense the funds normally, the accumulation of a larger balance
is surely a factor on the deflationary side. To some extent at least, this
certainly occurred in the second quarter of this year when the fiscal position of the cash budget, seasonally adjusted, shifted from a significant
deficit to near balance.
Another point of possible disagreement with the Sternlight memorandum stems from his discussion of the significance of a Government balance built up through borrowing from the private nonbank sectors of the
economy. Here he suggests that if this nonbank borrowing is done through
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Federal Reserve Bank of St. Louis
short-term securities, the deflationary effect on the economy is minimal.
But even here there is surely some dampening liquidity effect merely from
the fact that the public has traded very liquid cash for less liquid securities* unless one assumes that if the securities had not been purchased, ti:e
money would have been held as idle cash balances.
Moreover, one must be very careful here to avoid double counting.
If it is relevant to take into account the effects of the increase in
Government balances in building up the nonbank public's holdings of shortterm Government securities, should we at the same time add into the money
supply (or the reserves available to support it) any part of the idle
Treasury balances generated in the process of putting these securities in
the hands of the public?
It is generally accepted, moreover3 that in order to get the
community to hold more short-term Government securities rather than cash5
higher interest rates have to be paid. These higher rates on short-term
Government issues necessarily get reflected in higher short-term private
rates. In addition, they make lenders somewhat more willing to hold shortterm rather than longer term securities. As a result, longer term interest
rates and presumably capital investment are also affected adversely to some
extent.
As for the relevance of all this to the present situation, one
can only say that part of the Government's current large balance has been
built up as a result of borrowing from the nonbank public. The rest apparently came mainly from tax receipts in excess of expenditures, for bank
holdings of Government securities were virtually unchanged on balance over
the period of the buildup. From the end of April to the end of August
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Federal Reserve Bank of St. Louis
-k(latest data available for nonbank holdings of Governments), the Government's
cash balance rose almost $3 billion whereas nonbank holdings of Government
securities rose about $1-1/1; billion.
Nonbank holdings of Governments with
maturities of a year or less, however, rose about $2-1/2 billion, indicating
some shortening on balance of Government portfolios. In September, Government deposits rose another half billion or so, and nonbank holdings of
short-term Governments must have decreased appreciably as a result of the
advance refunding, even allowing for the fact that most of the longer issues
offered in the refunding were taken by commercial banks*
A fact not to be overlooked is that the current larger Government
balance was built up in order to maintain higher short-term interest rates,
at least at levels higher than market flows of funds would have produced
recently.
One danger in the attempt to maintain short rates through debt
management policy is that the effort will contribute to an undesirable circular process wherein a sluggish economy generates liquidity, which tends
to depress short rates, •which in turn requires more Government borrowing
and higher cash balances to offset.
If, under these circumstances, the
Federal Reserve authorities were to consider Government deposits as part
of the money supply, it would mean a further dampener to private deposit
expansion.
This is not to deny that a larger question is involved here,
namely, assuming the desirability of firm short-term interest rates, what
are the relative roles of debt management policy and monetary policy in
helping to achieve such an objective? What, for example, would have been
the posture of monetary policy in recdnt months if it had provided the
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Federal Reserve Bank of St. Louis
-5added firming influence
on short rates that was in fact provided by Treas-
ury advance borrowing and the resultant larger than normal cash balances?
My conclusion is that the recent buildup of the Government balances has been a deflationary influence.
At the same time I do not argue
that it has necessarily been a powerful one—judgments will differ on that.
If some part of the recent increase in Government deposits should be counted
as an effective increase in the money supply, Sternlight's estimate is probably too high. Itfhile it may be a mistake not to count some of it as money
supply, it would be a mistake to count that much. My own view is that no
adjustment gives a closer approximation than one as large, or nearly as
large, as £0 per cent, if one is trying to assess (l) the effect of the
increased Government balances on private liquidity and incomes, and (2)
the influence of recent monetary policy on total economic activity.
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Federal Reserve Bank of St. Louis
B O A R D OF G O V E R N O R S
or THE
FfEDERAL RESERVE SYSTEM
Date October 31, 1953
Chairman Martin
Subject:
^ • Young
The enclosed memorandum is intended to be along the
lines of your request.
time critical.
It tries to be fair and at the same
But you may want it retailored in some respects.
Since the "news" was in circulation via press sources yesterday,
Jack helped in its preparation.
He will be glad to take over
any redesigning that you might want.
The only copies in existence are the two enclosed.
I will call you on Monday or Tuesday following the
WP-3 discussion, or if anything of importance comes up which
should be passed along promptly.
Attachments 2
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Professor Harris is 66 years old.
City.
He was born in New York
He did both his undergraduate and graduate work at Harvard
University and has been connected with that institution with minor
interruptions all of his life.
He is retiring this year, after many
years of service, which include long terms as Professor of Economics
(since 1945, including several years as Chairman of the Economics Department), editor (since 1943) of the "Review of Economic and Statistics,"
and associate editor (since 1947) of the "Quarterly Journal of Economics."
Professor Harris has displayed a strong institutional loyalty to Harvard
and has worked energetically to maintain the distinction and quality
of its Economics Department--to hold good men in teaching, to improve
academic pay, and to promote opportunities
for publication of the
results of economic research.
He is generally regarded with affection and obligation by the
graduate students who have worked under his direction.
Despite his
varied outside and publication interests, he has always had the reputation of making time in his schedule to confer with graduate
students
assigned to him--reading the drafts of papers they submitted and giving
them the benefit of such criticisms and suggestions as he might have.
This high regard appears to extend to students who have not been generally in agreement with him, as well as those who have subscribed
to the lines of economic thinking he has advocated.
One would have
to be very biased indeed not to conclude that Harvard University has
benefited tremendously from his devotion, loyalty and energy over
the term of his service at that institution.
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-2-
Professor Harris's reputation as an original scholar is not
so clear.
He is not associated with any major advance in economic
thinking or analysis.
While he is a facile writer and has been a pro-
lific contributor to the literature, there is fro particular development
in professional thought that is identified with his name.
Despite the
impressive documentation and attention to detail, it is interesting
that his "Twenty Years of Federal Reserve Policy" did not add much either
to understanding of or subsequent restructuring of the Federal Reserve
System or its policy processes.
In many of his publication efforts he has served more as an
editor, collector and publicist of the ideas and contributions of other
economic writers, than an original author or contributor to books with
which his name is associated.
to current issues of
A number of his own books are directed
national economic policy and so are of transient
rather than lasting professional interest.
Throughout most of his career he has been outspoken on public
issues, and is an eager writer of "Letters to the Editor."
led him down some strange paths on occasion.
This has
For example, in his zeal
to be helpful to his adopted New England, he associated himself for a
time with a group which advocated higher protective tariffs—a position
that reflected very adversely for a time on his prestige among academic
economists.
He has also associated himself rather enthusiastically
with the group of economists sometimes called the neo-Keynesians,
who have argued that deficit spending by Government can be used to
correct almost any short-fall in aggregate demand and
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Federal Reserve Bank of St. Louis
-3-
that, therefore, unemployment and underutilization of resources can
always be corrected by "enlightened" fiscal policy.
Like many of his
colleagues in this camp, he has argued for some time that monetary policy
was relatively unimportant and impotent.
In more recent years he has shifted his position somewhat and
has emphasized the strong negative role that monetary policy can play
in holding the economy below optimum levels of output and employment.
Like most of his compatriots he has tended, over the years, to belittle the importance of inflation as a threat to the American economy
and has argued that "some" inflation is tolerable and perhaps even
necessary to achieve socially acceptable levels of employment.
Thus,
he has been critical of, at least unsympathetic to, Federal Reserve
policies that were directed toward
limittng inflationary pressures
and arresting the long-term inflationary trends.
This applies parti-
cularly to the policies pursued by the Federal Reserve in the latter
fifties.
While not closely identified with politics in the narrow
sense, Professor Harris has made no secret of his strong preference
for the Democratic Party and he was, and is, highly critical of the
Eisenhower administration and almost gushing in his praise of the
present administration.
In fact, both in his role as Chairman of
the Treasury consultants' group and In his writings and speeches,
he has often appeared to be a sort of "official" apologist to the
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Federal Reserve Bank of St. Louis
-4academic fraternity for the administration, undertaking to explain why
political obstacles have prevented the use of a more active fiscal
policy and even, on occasion, defending the moves toward lesser ease
taken by the Federal Reserve, with the approval of the administration.
On some occasions he has pressed his defense of administration policies
to such extremes that it would appear more of an embarrassment than
a help to policy objectives.
Certainly, one would
have to conclude that Professor Harris's
record of participation in public affairs does not match his really
distinguished career as an educator.
His positions on issues have
sometimes been contradictory, and sometimes doctrinaire.
His record
suggests strong loyalties to ideas, individuals and institutions with
which he regards himself as being associated.
There seems little
question but that these loyalties currently run to the group of public
policy advisers who would emphasize the role of stimulative fiscal
policy, and who are skeptical of flexible monetary policy, for stabilization objectives.
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•
PERIODICAL ARTICLES BY SEYMOUR HARRIS
The Federal Reserve Act and Federal Reserve policies.
Economics. v,45*371-408, May 1931.
Banking and Currency legislation, 1932.
5^-57, May 1932.
Quarterly Journal of
Huarterly Journal of Economics, v.46:
The gold standard o
The American Scholar* May 1933-
pp.301-311*
New gold policies.
Harvard^ Alumni Bulletin. November 10, 1933o
The economic legislation of the 73rd Congress (1st Session), 1933*
Journal. v. 43:618-51, December 1933.
A year of banking and monetary policy.
v. 16:72-79, April 1934.
Economic
Review of Economics and Statistics.
British and American exchange policies. Pt. I -IIC
Quart efclar Journal of
Economics . v. 48: 47 1-5 10 5 686-726, May, August 1934.
Commodity prices and public expenditures.
v. 17: 33-44, February 1935.
Review of Economic and Statistics.
Professor Pigoufs theory of unemploymente
^.49:286-324, February 1935.
Quarterly Jourrial of Economics.
and Smith, D.T. The balance of payments of 1934 and the international
economic position of the United States.
Review of Economics and
Statistics. v«17 (pt.2): 23-33i May 1935."
The commercial theory of credit,
94-105, February 19360
Gold and the American economy.
February 1940 »
!£. Journal of Political Economy* v.44s
Review of Ecor^omifiS a^o! Statistics, v. 22:1-12,
American gold policy and Allied war economics.
June-September, 1940.
Economic Journal, v. 50:224- 30,
The official and unofficial markets for sterling.
v.54:655-6^»
August 1940.
Quarterly Journal of Economic s .
External aspects of a war and a defense economy: the British and American cases.
Review of Economics and Statistics, v. 23: 8-24, February 1941.
The British "Whit? Paper on war finance and national income e and expenditure.
Journal of Political Economy, v. 50:27-44, February 1942.
Price control - hemisphere problem. U.S. Foreign and Domestic Commerce Bureau,
Commerce Weekly, v. 11: 12-13, May 15, 1943.
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- 2 Subsidies and inflation.
American. Economic Review. v. 33*557-72,
More about price control in the export field.
10-11, March 18, 1944.
Foreign Commerce Weekly. v.14;
The Broader issues of Bretton Woods t a plea for British-American cooperation.
The New Republic. July 31,19^, pp. 125-128.
The contributions of Bretton Woods and some unsolved problems.
Economics and Statistics. v.26:175-77, November 1944,
Some aspects of the Hirray Full Employment Bill.
Statistics, v. 27: 104-06, August 1945,
A one per cent war?
Review of
Review of Economics and
American Economic Review, v. 35*667 -71 »
September 1945*
Dollar scarcity: some remarks inspired by lord Keynes1 last article.
Journal, v .57s 165-78, June 1947.
Some aspects of the wage problem.
': 145-53, August 1947.
Economic
Review of Economics and Statistics, v.29:
(Symposium: wage policy) Introduction.
v. 29:137-39, August 1947.
Review of Economics and statistics.
(Appraisals of Russian economic statistics.) Introduction.
cs, v. 29 : 213- 14, November 1947.
New Englandfs decline in the American economy.
348-71, No. 3, 19*17.
Review of Economics
Harvard Business Review, v.25:
Cost of the Marshall plan to the United States. Journal of Finance. v. 3. No.l:
1-15, February 1948.
(Ten economists on the inflation) Introduction.
Statistics, v. 30:1-3, February 1948.
Review of Economics aad 2EKXX3K
(How to manage the national debt.) Introduction.
Statistics, v. 31: 15-17, February 1949.
Review of Economics and
The inflationary process in theory and recent history.
Statistics, v. 31:200-10, August. 1949.
Review of Scogomics and
The January 1949 Economic report of the President: introduction.
Economics and Statistics, v. 31:165-66,
August 1949.
Review of
Effectiveness and coordination of monetary,? credit, and fiscal policies.
Metroeconomica . v.l:90-104, October 1§49.
(Comments on the steel report.) Introductory remarks. Review of Economics and
Statistics, v. 31: 280-82, November 1949 /
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Devaluation of the pound sterling.
November 19^9.
(Productivity and wages)
v. 31: 292m November
Harvard Business Review, v. 27*781-90,
Introduction.
(How much employment?) Intorduction.
v.32:^9 February 1950.
Are we facing dollar devaluation?
Hay 1950.
Review of Economics and Statistics.
Review of Econodjcs and Statistics.
Pun's Review, v. 58:22-2^, 5?, 5^-56, 58,
Some aspects of foreign aid and development,,
669-89, August 1950.
Major economic problems of mobilization.
29-36, March 1951.
Be onomia Int e rna z± onale . v.3*
Harvard Business Review^ V029, no, 2:
(New directions for labor market research.) Comment. Industrial and Labor
Relations Review. v. 4:^12-13, April 1951.
The British health experiment: the first two years of the National Health
Service. American Economic Review. Supp. , v .41:652-66, May 1951*
(Professor Joseph A. Schumpeter.) Introductory remarks. Review of Economics
and Statistics, v. 33:91-97, May 1951.
(The controversy over monetary policy.) Introductory remarks. Summary and
comments. Review of Economic and Statistics, v. 33*179-8^-; 198-200,
August 1951.
Economics of higher education,
1953.
American Economic Review, v. ^3: 3^-57 » June
Fabianism revisited: appraisals of New Fabian essays, %? Introduction.
Review of Economics and Statistics, v.35 :199-200, August 1953o
Interregional competition: with particular reference to North^South competition.
American Economic Review. Srupp, v. ¥1:367 -90, May
(A symposium on the Economic report of the President and related documents.)
Introduction. Review of Ecorjom^cs aiyi .Statistics. v.36:249-51» August
(Some psychological aspects of mathematics and economies.3) A postscript by the
editor. Review of Economics^ and Statistics, v. 36: 382-36, November 195^ •
Economics of the guaranteed wage. (G.W. ) Industrial Relations Research
Association. Proceedings, v. 7:164-85, December 1954,
What every economist should know about health and medicine: comment.
Economic Review. v.44:922-28, December
American
The economics of Eisenhower: a symposium, I. Review of Economics and Statistics.
v. 38: 357-65, November 1956.
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The economies of Governor Stevenson's program paper: Where is the money coming
ffcom? Editor's note. Review of Economics and Statistics,, v.39:134-36,
May 1957.
The 195? investigation of the financial condition of the United States.
Economic Journal, v.68:60-73, March 1958.
(and others) Brief comments on the recession.
Statistics, v.40:309-18, November 19580
Review of Economics and
— (Further comments.) Review of Economics and Statistics. ve^l:190-91>
May 1959.
chairman* Round table on the organization and financing of economic research,
American Economic Reviaw. Supp« v.*f9:559-80, May 1959o
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PERIODICAL ARTICLES El SLIMOUR HARRIS
Addenda, for page 4
Wanted: an economic program: objective of economic life is not balancing
the budget. New Leader. v.43:9, May 30, 1960.
Economics of the Kennedy administration. IPA Review (institute of Public
Affairs, Melbourne), v.15:£7-52, January-March 1961.
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BOOKS Y< KITTEN mi) ^DITO) BY SEYMOUR E
American business creed.
(With Francis X. Sutton, Carl Kaysen
and James To bin)
Harvard University Press, 1S56.
414- p.
American economic history.
( Editor )
McGraw-Hill, 1961.
560 p.
The assigns ts.
Harvard University Press, 1930.
293 p.
The dollar in crisis.
(Editor)
Har court, Brace and World, 1961.
309 p.
KcQnomi c. planning; the plans of fourteen countries with analyses of the plans
Knopf, 1949.
577 p.
Economic problems of Latin America.
McGraw-Hill, 1944.
465 p.
Economic re_cpn_tr action.
McGraw-Hill, 1945.
(Editor)
(Editor)
4?4 p.
The economics of America at war.
(Contains ..aieterial originally
published in 1941 under title "Economics of American defense," revised
and with much new material added.)
Norton, 1943.
418 p.
Economics of mobilization and inflation.
Norton, 1951.
308 p.
The economics of New England: case study of an older area.
Harvard University Press, 1952.
317 p.
Economics of social security: the relation of the American program to
consumption, savings, output, and finance.
McGraw-Hill, 1941.
455 p.
The economics of the political Parties, with special attention to
Presidents Eisenhower and Kennedy.
Macraillan, 1962.
382 p.
European recovery program.
Harvard University Press, 1948.
309 p.
Exchange depreciation, its theory and its history, 1921-35, with seme
consideration of related domestic policies.
Harvard University Press, 1936.
516 p.
Foreign aid and our economy.
Public Affairs Institute, 1950.
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75 p.
Page 2
BuOKS WRITTEN AND EDITED BY SEYMOUR j , KARRIS
foreign economic policy for the United States.
Harvard University Press, 1948.
490 p.
(Editor)
Higher education, in. the United States; the economic problems.
Harvard University Press, 1960.
£52 p.
(Mi t or j
Higher education: resources and finance.
McGraw-Hill, 1362.
713 p.
Ho'" shall we pay for education? Approaches to the economics of education.
Harper, 1948.
214 p.
Inflation and anti-inflationary policies of American states.
(Point 1
of the Agenda of the Second Extraordinary Meeting of the Inter-American
Economic and Social Council.)
Pan American Union, 1951.
143 p. (mimeo.)
jnflation snd the American economy.
McGraw-Hill, 1945.
559 p.
International and interregional economics.
McGraw-Hill, 1957.
564 p.
John Meynard Keynes, economist and policy maker.
Scribner, 1955.
£34 p.
Monetary problems of the British Empire.
Macrnillan, 1931.
569 p.
More resources for education.
Harper, 1960.
86 p.
The national debt and the new economics.
McGraw-Hill, 1947.
£86 p.
The new economics; Keynes1 influence on theory and public policy.
Knopf, 1947.
686 p.
(Editor)
Postwar economic problems.
(Editor)
McGraw-Hill, 1943.
417 p.
Price and related controls in the United States.
McGraw-Hill, 1945.
392 p.
Public policy; 1956, 1958, and 1959-60.
(Yearbooks of the Graduate School
of Public Administration, Harvard University, edited by Carl J. Friedric h
and Seymour E. Harris.)
Harvard University Press.
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Federal Reserve Bank of St. Louis
Page 3,
BOOKS MITM AND hDITM) BY SiilMOUR E. HARRIS.
Saving American capitalism, a liberal economic program.
Knopf, 1948.
375.
(Editor)
Schumpeter. social scientist.
(Editor)
Harvard University Press, 1951.
142 p.
Problems in price control: stabilization subsidies. Part I. Stabilization
subsidies, 194£-46, by Seymour L. Harris.
Government Printing Office, 1948 (for the Office of Temporary Controls)
Twenty years of Federal Reserve policy, including sn extended discussion
of the monetary crisis, 19£7-1933.
Harvard University Press, 1933.
£ v.
To be published December 1963 by Macmillan:
Economics of American medicine.
Addendum:
New England textiles and the New England economy; report by the New
England Governors 1 Textile Committee to the Conference of New England
Governors, and detailed analysis, by Seymour E. Harris,
51 p.
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Federal Reserve Bank of St. Louis
Professor Harris is 66 years old. He was born In New York
City. He did both his undergraduate and graduate work at Harvard
University and has been connected with that institution with minor
interruptions all of his life. He is retiring this year, after many
years of service, which include long terms as Professor of Economics
(since 1945, including several years as Ch&irman of the Economics Department), editor (since 1943) of the "Review of Economic and Statistics,"
and associate editor (since 1947) of the "Quarterly Journal of Economics*"
Professor Harris has displayed a strong institutional loyalty to Harvard
and has worked energetically to maintain the distinction and quality
of its Economics Department*-to hold good men in teaching, to improve
academic pay, and to promote opportunities for publication of the
results of economic research.
He is generally regarded with affection and obligation by the
graduate students who have worked under his direction. Despite his
varied outside and publication interests, he has always had the reputation of making time in his schedule to confer with graduate students
assigned to him--reading the drafts of papers they submitted and giving
them the benefit of such criticisms and suggestions as he might have.
This high regard appears to extend to students who have not been generally in agreement with him, as well as those who have subscribed
to the lines of economic thinking he has advocated. One would have
to be very biased indeed not to conclude that Harvard University has
benefited tremendously from his devotion, loyalty and energy over
the term of his service at that institution.
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Federal Reserve Bank of St. Louis
-2-
Professor Harris's reputation as an original scholar is not
so clear. He is not associated with any major advance in economic
thinking or analysis* While he is a facile writer and has been a prolific contributor to the literature, there is no particular development
in professional thought that is identified with his name. Despite the
impressive documentation and attention to detail, it is interesting
that his "twenty Years of Federal Reserve Policy" did not add much either
to understanding of or subsequent restructuring of the Federal Reserve
System or its policy processes*
In many of his publication efforts he has served more as an
editor, collector and publicist of the ideas and contributions of other
economic writers, than an original author or contributor to books with
which his name is associated.
A number of his own books are directed
to current issues of national economic policy and so are of transient
rather than lasting professional interest*
Throughout most of his career he has been outspoken on public
issues, and is an eager writer of "Letters to the Editor." This has
led him down some strange paths on occasion*
For example, in his zeal
to be helpful to his adopted Mew England, he associated himself for a
time with a group which advocated higher protective tariffs—a position
that reflected very adversely for a time on his prestige among academic
economists. He has also associated himself rather enthusiastically
with the group of economists sometimes called the neo-Keynesians,
who have argued that deficit spending by Government can be used to
correct almost any short*fall in aggregate demand and
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Federal Reserve Bank of St. Louis
-3-
that, therefore, unemployment and underutilization of resources can
always be corrected by "enlightened" fiscal policy. Like many of his
colleagues in this carap, he has argued for some time that monetary policy
was relatively unimportant and impotent.
In more recent years he has shifted his position somewhat and
has emphasized the strong negative role that monetary policy can play
in holding the economy below optimum levels of output and employment.
Like most of his compatriots he has tended, over the years, to be*
little the importance of inflation as a threat to the American economy
and has argued that "some" inflation is tolerable and perhaps even
necessary to achieve socially acceptable levels of employment. Thus,
he has been critical of, at least unsympathetic to, federal Reserve
policies that were directed toward limiting inflationary pressures
and arresting the long-terra inflationary trends. This applies parti*
cularly to the policies pursued by the Federal Reserve in the latter
fifties.
While not closely identified with politics in the narrow
sense, Professor Harris has made no secret of his strong preference
for the Democratic Party and he was, and is, highly critical of the
Eisenhower administration and almost gushing in his praise of the
present administration. In fact, both in his role as Chairman of
the Treasury consultants* group and in his writings and speeches,
he has often appeared to be a sort of "official" apologist to the
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Federal Reserve Bank of St. Louis
-4-
academic fraternity for the administration* undertaking to explain why
political obstacles have prevented the use of a more active fiscal
policy and even, on occasion, defending the moves toward lesser ease
taken by the Federal Reserve, with the approval of the administration.
On some occasions he has pressed his defense of administration policies
to such extremes that it would appear more of an embarrassment than
a help to policy objectives.
Certainly, one would have to conclude that Professor Harris's
record of participation in public affairs does not match his really
distinguished career as an educator.
His positions on issues have
sometimes been contradictory, and sometimes doctrinaire.
His record
suggests strong loyalties to ideas, individuals and institutions with
which he regards himself as being associated. There seems little
question but that these loyalties currently run to the group of public
policy advisers who would emphasize the role of stimulative fiscal
policy, and who are skeptical of flexible monetary policy, for stabilization objectives*
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Federal Reserve Bank of St. Louis
BOOK6 V7KITTLB *&$ fcDIT&D BY SEYMOUR t. HARRIS
/•aericgn business creed .
(With Francis X. button, Carl Kay sen
End J«®es Tobin)
Harvard University Press, 1956.
414 p.
economic history.
(Editor)
3/!cGrsw-Hill, 1961.
560 p.
The as
Harvard University Press, 1930.
;.33 p.
The dollar in crisis.
(Editor)
Hnreourt, Brace and World, 1961.
309 p.
c planning t the plans oT fourteen countries with analyses of the oluis.
Knopf, 1949.
577 p.
iLCon.o.aic:_pJrpble.as of Latin America.
McGraw-Hill, 1944.
465 p.
Hoonomic r^contraction.
McGraw-Hill, 1945.
(/-ditor)
(Editor)
4J:4 p.
.
The economic;:- of America st w&r.
(Gontalns material originally
published in 1941 under title *&cono»ieb of American defense, f> revised
end aith much new material added.)
Norton, 1943.
418 p.
Lconoal,.c.s, ,o,f ^..inohili^atioB and inflation.
Norton, 13bl.
:^8 p.
^ of.....S^»..Hnglgndt cese study of an older area.
Harvard University Press, 13bi:.
317 p.
Lconomics pf social seouritvt the rt; let. Ion of the ^»erican prograa to
consumption, savings, output, and finance.
McGraw-Hill, 1341. ^
455 p.
The economics of the political parties, with epecial attention to
presidents Eisenhower and Kennedy.
fecmillen, 136^'.
^8£ ?.
i'.,uropeaB reoover:/ program.
Harvard University Press, 1348.
309 p.
£x change, depreciation, its theory and its history, 1931-55, with some
consideration of related domestic poiicieg.
Harvard University Press, 19,-'-6.
516 p.
Foreign feid and oar economy.
Public Affairs Institute, 1950,
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7i; p.
p
c:~e
I. .
BOOKS WRITTEN AND i,DITr£ BY SiilMOOR L. KARRIS.
orelgn economic pojLicy for .the United i'.tatep.
Harvard University Press, 1948.
490 p,
(Editor)
gher education, in. tfre. United _ State-as the economic pro), le^ff.
Harvard University Press, 1960, fcb£ p.
(Editor)
'. ;^r. ..aducat.ion.8 resources ind finance.
McGraw-Hill, 1961:.
715 p.
How shell vve pay for education? Approaches to the economics of education.
Her per, 1348.
> 14 p.
Inq&tlon &ad &tttlr>lnfl&-tionery. .policies of American states.
(Point 1
of the Agenda of the Cecond ax tr& ordinary Meeting of the InttT->/sericta
tconoBic and Social Council.)
Pan American Onion, 13f;l.
143 p.
the Aacrlcen feoonoaiv.
, 1945.
553 p.
International, .end interregional econe^icg.
, 1057.
564 p.
John llaynard Keynea. fcconcaist and policy Maker.
Ccribner, 1955.
1:34 p.
Monetary problsas of the British tiBoire.
MEcmillan, 19;.5l.
569 p.
%ore resources for educ&.tion.
Harper, 1960.
86 p.
The . lu'tipafcl debt, and the new econcaios.
IoQr*«-HlU, 1947.
£86 p.
The ne» economlc^s Keynes* influence on theory and put lie policy.
Knopf, 1947.
G86 p.
(Editor)
Postwar fceonomio problems.
(Lditor)
McGraw-Hill, 1343.
417 p,
Price and re litfedcontrols in the United l-tales.
McQraw-Hiil, 1945.
59£: p.
Public .polig.Yt 13f>6, 1958, and 1959-80.
(Yearbooks of the Graduate School
* Public /dainistretion, Harvard University, edited by Carl J. Friedric h
end Seymour i. Harris.)
Harvard University Press.
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Federal Reserve Bank of St. Louis
P a e ?.
BOOKS fEITTLH AKD r,DIThD BY StY^OUR b. HARRIS.
Saving .Affft^in/.n Qfiplic-lisa. & liberal economic program.
Knopf, 1948.
P73.
c
(Lditor)
;;hugoe j er. ^^-^isl scientist.
(hditor)
Harvard University Press, 1951.
14<: p.
rltrms in price controlt stabilization subsidies. Part I. 5t&Mlig&tlon
cu>sidj.es. j.9^r-46. by £eyiaour i., Harris.
Government Printing Office, 1948 (for the Office of Temporary Controls)
er?.:! HE? serve policy, including en extended discussion
5fl IE, 19k7-193?.
Harvard Qnivereity Press, 1935.
f v.
To "be publifihed Deceaiber 19-3 by Macaillens
and textiles ^nd the Mew an^iand. ^oonoaivt report by the
England Governors1 Textile Committee to the Conference of Sew ragland
o7*no^s, and detailed analysis, by C$\-mour L. Harris.
51 p.
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The Federal Reserve Act and Federal Reserve policies*
May 1931.
Banking and Currency legislation, 1932.
5^6-57, Kay 1932.
Q\^arrterl:/ Journal
Barter fo Journal, 01 Bmjnuuftqq. v.46s
Th« gold standard.
Tt^ ^m$rfoan Scholar. Kay 1933.
pp. 30 1-311.
New gold policies.
Hayyarpla- Aluron^ Bullejfln. November ID, 1933.
The economic legislation of the 73rd Congress (1st Session), 1933.
.. v. 43:618-51, December 1933.
A year of banking and monetary policy.
v. 16 $72-79. April 1934.
5c gnomic
Review qf Bteon.on&os and
British and American eieshange policies. Pt. £ -II.
Bconondcs. v.48»471~510! 686-726, May, August
Quartefcfer Journa^
Commodity prices and public expenditure s.
v.l7«38-44, February 1935.
$eJvJQ1Tf of Scon.qnfcq ,and
Professor Pigou's theory of unemployment.
5286-^4, February 1935.
Qnayterl^ Jonrna^i .Q
and Smith, D.f . The balance of payments of 193^ and the international
economic position of ths United States. l|ev^Lew q$ Scqnpii^cs
. v.17 (pt.2)i 28-33, May 1935*
The commercial theory of credit. J$.
9^*105, February 1936.
Oold and the American economy.
February
Revie^f _<tf, EGor^oi^JQS, and States tic s . v.22sl»12,
American gold policy and Allied war economics.
June-September,
The official and unofficial markets for sterling.
August
quarter ^y Journal qf
Ibcteroal aspects of a war and a defense economy * the British and American cases.
Review of Economics .._qnd| Statistics, v. 23:8-2^, February 1941.
I
The British White Paper on war finance and national^lnoorace and expenditure.
Journal of Political Econ<^y. V.50J27-44, February 1942.
Price control - hemisphere problem. U.S. Foreign and Domestic Commerce Bureau,
Commerce Wgafo^y. v.ll;12-13, May 15,
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Federal Reserve Bank of St. Louis
- 2 -
Subsidies and inflation.
&s
az\ Beflgggft^ Review. v.33*557*72, Septenbe**
Kore about price control in the export field,
10-11, J&rch 18, 1944.
Forj^ipi Cofiparce Weekly. y.14?
The Broader issues of Bratton Woods* a plea for British-American cooperation.
July 31,1944, pp.l25-1280
The contributions of Btretton Woods and some unsolved problems*
c s, . a 04 3t a, tift \\fi& . v.26jl75«*?7§ Ifcvember 1944.
Some aspects of the Murray Full Employment Bill.
^i^t^^oq. v.2*/ 1 104-06, August
A one per cent wart
Review of
f^vj^w qf Bconon&qs
AiB^rl&a^ gjconomic R^y^^. v. 35*667-71* September
Dollar scarcity* soae remarks inspired by Kord Keynes* last article.
, v.57 '165-78, June
Some aSDacts of the wage problem.
145-53. August 1947.
Rev^e^ 9f iikionon^qq ^i>4 ^tatia^ics. v.29i
(Syj^>osiuM! i*age policy) Introduction. Ifeyiflgj^ gcpnoynics Tand ^
v.29sl37-39, 'August 1947.
(Appraisals of Russian economic statistics.) Introduction*
and Stat^s^s. y.^j21>l4f
November 1947.
Hew England's decline in the American economy.
346-71, So. 3.
1947.
^arvar4, ,£{usiness Reviey. v*25*
Cost of the Marshall plan to the United States. Jqurnal, o^ Finance. v. 3. Ho.l?
1-15, February 1948.
(fen economists on the inflation) Introduction.
.. v.30il*3f
February 1948.
Review p^ Ecpnoi^ics and
(How to manage the national debt.) Introduction. Review Q^ Sconon^cs
. y. 31 5 15-17, February 1949.
The inflationary process in theory and recent history.
Statistics. V.31«200-10, August 1949.
Review of Bqonoraics and
The January 1949 Eccaiondc report of the Presidents introduction, ftev^ew o^
^conoraics ai^ S^at^t^csf v. 31*165-66 »
August 1949.
Sffectiveness and coordination offt»onetarytaS^dit, and fiscal policies.
Mftr.Qeconoinioa. V.1J90-104, October 1949.
(Comments on the steel report.) Introductory remarks. Review of; Scoqoro^cs
. v.31s28a-82, Hoveraber 1949.
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Federal Reserve Bank of St. Louis
- 3 Devaluation of the pound sterling.
Kovercber
Harvard Busyieas Review. v.27t?81*-90»
(Productivity and wages)
Introduction.
v,31*292ci November 19'! 9.
(How much employroentt ) Intorciucti.cn. fifiv^;^ .q^J^cpq^cs. a.nd
v, 32 8^9 February 1950.
Are we facing dollar devaluation?
Kay 1950.
JPuife fl^vi^f.. v. 58s 22-24, 52 , $4~56, 56,
Some aspects of foreign aid and development,
669»S9t August 1950.
Major economic problems of mobilization.
29-36, March 1951.
tfeoijon^a I^er^a^-ona^e . v«3*
Harvard jkL^foe^S Reyfyaft. v.29» no, 2s
(Sew directions for labor market research.) Comment.
Review. v.4?412~13, April 1951.
Jfaflua^ri^l and
The British health experijnent: the first two years of the National Health
Service. A^ar^o^ ffgoflcff^o,. ,-Havi^ew. Supp, » v»^4 i652~66t Hay 1951o
(Professor Joseph A, Schuiapeter.) JntPOductory i^eiiiarks. J^V^.M, ,01 ,
and Statistics, v. 33591-97 t May 1951.
(fhe controversy over morse tary policy.) Introductory reraarka. Suranary and
coraments. ^ev^e^ tQf ^o^ojrn^c and _Staftitatiqg. v.33«l?9«*84i 198-200,
August 1951«
loonomics of higher education.
1953.
4W^an ,%Qr19fflic Review, v. ^3* 3^*^57.
Fabiani^n revisited? appraisals of Sew Fabian essays. £» Introduction.
oi; Sgonom^c s . and 3tat .4T3tic a . v. 35* 199-200, August 1953*
Interregional competitions with particular reference to Korth^South
.Sconoi^c Review. ^Upp. V.*& 1 367*^0 , May/
(A sympo-3iu?a on the Economic report of the President and related documents.)
Introduction. Review pf Bjcogorqic^ a^d St^^s^cs. V.36i2^49*51f Auguat
pgycholof^ioal aspects of Mathematics and econond«s.$ A postscript by the
editor. I^sica^vi .qff ^onqa^c^ :^nc^. yt^t^st^qs.^ v. 36s 382-86, Hoveiriber
Economics of the guaranteed wage. (G.W.) ,3jidugjjtr^^ 3Rf;3ll^L^ionia Rf seareh
Wliat every economist should know about health and medicine i comment.
December
$
African
The economics of Eisenhowers a symposium. I. !fevft.Qw 0^ J^c onomic.qt an4 3ta^ is tiQj3 .
v.38;35?-65t November 1956.
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Federal Reserve Bank of St. Louis
j
I
» * «
The economies of Governor Stevenson's program. paper t Where la the laoney cowing
ffccnt Editor's note. fi^f^^^ Econoii4c^ and 3tatl3tlQ5« v. 39 * 13^-36 »
Ha7 195?.
The 195? Investigation of the financial condition of th© United States.
Journal. v.68»6G~73t Harch 1953.
(and others) Brief comments on the recession,
. V.4C: 309-18, Uoveiuber 1958.
Hay^ew qf %onomlcs and
(Further co£inent3t} Eeiriew of .^.oqiiprii^qs^aixi S^Lt^qtlgs.. v.41s 190*91 •
May 1959.
table on the organisation and financing of economic research,
Aqpr&oan Sooqcydrp..BevlaM. Supp. v.^9*559-30» May 1959 •
Wanted: an economic program: objective of economic life is not balencing
the budget. New Leader. v.43:9, May 50, 1960.
Economics of the Kennedy administration. IPA Review (institute of Public
Affairs, Melbourne), v.l5:£7-2£, January-March 1961.
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Federal Reserve Bank of St. Louis
December 17, 1962
In the question and answer period following his speech to the Economic
Club of New York, on December 14, 1962, President Kennedy twice made
reference to the Federal Reserve.
The questions and answers in which these references occurred
appeared in text form as follows, in the Wall Street Journal of December 17:
Stimulate Economy Without Inflation
Q. Mr. President, in view of the prospect for a deficit in any event,
and a fairly large one if taxes are reduced, is it part of the Administration's
plan to finance a major part of that deficit outside the banking system in
order to reduce the threat of monetary inflation?
The President: That will be a judgment which is primarily that of
Mr. Martin (chairman of the Federal Reserve Board) and the Federal
Reserve.
He has commented on that to a degree before the Joint Committee
(House-Senate Joint Economic Committee) this year; he is concerned about
the prospect of inflation, because of course it affects us adversely, and also
because it affects the balance of payments. I would hope, however, and I
am sure that he will agree, that he will*-any deficit which has to be financed
will be financed in a way which will be the maximum degree possible to
stimulate the economy without increasing the prospect of another inflationary
or speculative spiral. So it is a fine adjustment which Mr. Martin will make,
but I'm sure he will be as concerned as all of us are to get the benefit such as
it may be out of the deficit, and also at the same time keep and use our monetary tools wisely enough to keep matters in control. His judgment will be,
because of the Federal Reserve law, final.
Easy Money Stimulation
Q. Mr. President, will it be possible and desirable to use a little easy
money stimulation as well as tax reduction?
The President: Well, I think there is a good supply of credit. I think
the Federal Reserve Board has attempted to keep credit as free as it could,
and the supply of money has been increased with the growth of the economy.
I think it would be very difficult to keep it easier than it now is, without having
the short-term funds pour out at a higher rate than they are.
After all, we
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Federal Reserve Bank of St. Louis
have seen when Canada put its interest rates up, I think as high as 7%, though
it has dropped tnem now, it affected the flow of capital here. In October, we
had several cases of major investments using our markets because of our
interest rates. The fact of the matter is that I am not sure that we would get
much stimulation out of the economy, but I don't see how we could possibly
afford easier money than we now have, and still not have a hemorrhage at
our balance of payments.
I think we have a major problem to balance off the use of monetary
policy here at home affecting our balance of payments abroad, and also that
is one of the good arguments, and as a matter of fact I think that we can make
the case which is almost unanimously made in Europe, that the United States
monetary policy in some ways is too loose, while our fiscal policy is too tight.
And it is for that reason that the international banks in Europe and others
have suggested that the reverse would be more appropriate.
I think we
should attempt to keep monetary policy about where it is, try to liberalize
fiscal policy, for the reasons that I have given tonight, but I don't see how
we could possibly go any further in the direction of easier credit, while we
have a balance of payments which is against us by over $2. 5 billion a year.
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Federal Reserve Bank of St. Louis
January 13, 1964
of a cr«jf»Bt
of
"
Ofi tbat €&&&; tfafi pnMNUlt %am MEp&PKi fOT JftfOeS It*
career Goveruaeat official, ajpolated from the Kansas 01% District.
tbe wsauey will l>e ffer a Ik-year term, as <me of swveu Governor a,
at am ancuel ©alary of 1^0,000. Ajg^atss^t* bars cuatcnarily
IMMNI aoti«partlsan rather than M-partlsan. tfe«3?e aa?e no «fecifle
identified vitfe a
There cannot
.is. A nap shoving the States in eachTlEstrlet, and t&e
of each District (e.g., Boston is also known
as the First Blstrietj Bav fork, as the Second Blstrietf aafi ao on)
is for a coapagfttively yomag aa» of broaa jnract 1 cal eaq?ericno«
a knowledge @f bank operation*!*
statute directs ttoe President to ' Isave di^ regard to a lair
*«lPS»«s£atioii of tfee financial, agricultural, iadustrial, and
raeas4>€rfi
tlnree
re £>> yeorg Q]
are
'108~«ii«V"5B~«sr^»"lwi^"1jf»^^
present Cowraor* is attache^, indicating the
ana ^ie year, ^e expiration date of tfce Goveruor^ tera, and. Ms a§»*
Bo^rtaos, an am attorney with loag previous
service is ba»lt aufvrvlaloxi^ bas ®et the practical need to have at
lemst om Board mesfiser fttlly ac^ualrfed with baaiklrtg operations ^ l?ank
aad uestions of
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Federal Reserve Bank of St. Louis
is these areas.
is
«. a -
Comparable special areas of ccaspeteace of the other Governors are:
Chainaan Martial securities markets, International finance
Vice Chainaan BaMerstoas business and industry
Governor ShepardBon: agricultural conditions
Governor Mills: coaaereial loans
Gcnmmor Hltchells fiscal policy, research and analysis
Governor Daanc: debt aanageaent; foreign exchange and gold.
3* The laest prcoising possibility tiiMit to
Mstxlct) aod fonaerly Vice IVesident of the federal ae0@rve Baxdc of
St. Louis (at. Louis District). 8ft is viSely known and hi^sly respected
throughout husinsss ftir^ financial circles ia the United States* A good
Brief blcgrmitoies sjfft attached of Up* Beating and ef three other men
fwa three other open Districts
George 1* Ulis, kk, Presldsat of «» JWtiml ftiMiffi Bank
Of Boston (Boston District)
57
BKM J» Morthland, Jfc, President of 1^e Baol: of Seliaa, Selaa,
Alabas» (Atlanta District}
l<er Lijigle, ^j, Def«*gr Associate AasBdaistrator for
Affsairs, MSA, now located in ^Sashington, but actually
Cincinaati, Olio (Clereland district).
Governor Bofeertsou wssiia also be eligible for reafiioiiatSBemt,
be was origiimLly ai^ein^d in 1952 to coeglete an uoexpired tera.
Be vewia ajpiiear to be tite best qualified candidate frcn the
District. Us biograil^r is also attached.
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Federal Reserve Bank of St. Louis
BOUNDARIES OF FEDERAL RESERVE DISTRICTS AND THEIR BRANCH TERRITORIES
Boundaries of Federal Reserve Districts
Boundaries of Federal Reserve Branch Territories
O Board of Governors of the Federal Reserve System
<§> Federal Reserve Bank Cities
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Federal Reserve Bank of St. Louis
• Federal Reserve Branch Cities
t BOARD or ooroaMDRS OF THE FEDERAL RESERVE sxaai
Gcrcmor
J. L. l^c^rtsc^
Age to
Heeriwrt
Birthday
Appointed trmt
Ajipointed
^Btate
.lastriet.,
5
Jtebraaka
Kansas City
68
Taxae
Dallas
57
How YorK
Tern
January 31 s
I¥»8i4eiit:
tnaaari
C. C
C. H. ^j«pR3e€»on
IfeC. HartiB
ffll9«iifeoiP®r
(1955)
1968
1970
JU I** Mlllis
65
Oregon
Saa Frenclsco
(195B)
r« D» |%nm«>
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Federal Reserve Bank of St. Louis
li
Virglaia
HtfllMaDd
JEesmed^r (1963)
1972
l^f%
L. PEKOKh
President of the iflsderal Reserve Bonk of Mtimeapolis, is 51 years
of age* Be is an economist mad banter.
It has had sone teaching experience at Washington University and
St. Louis University, mainly part-time, at intervals from 1935 to 19^9*
Sis college specialization IAS in history and economics; he received
the degrees of A.B., A.M., and Hi.B. from Washington University in St.
Louis over the years 193MH. Be also wised from 193& to 19^1 as a
Special Agent, Insurance Itedeneriter, and Safety a»gineer for the James
1* Bill Insurance Company in St. Louis. His principal ei^ploynent has
been in the federal Heserve System*
Beginning as Assistant Manager of the Research Department of the
Federal Reserve lank of St. Louis in 19^1, he had advanced through
various positions to that of Vice President by 1951 and Executive Vice
President in 1953- Be *&3 appointed President of the federal Beserve
ink of Hlnaeapolis in 195? and has been active in a vide range of
activities in the central, north central, and northiiestern regions of
the tWLted States.
firing his Federal Ifeserve ejtyerieuee lie has been active at oat
time &f another ia virtually every aspect of Federal Beserve activities
and operations, serving on interbank and interdistrict committees, and
also serving brief tours of temporary staff duty at the Federal Beserve
Board prior to becoming President of the federal »M«A"ve Bank of
In current regional activities, he is Vlee President of the United
Fund of Hennepln Couatyj is Vice President as veil as Chairman of the
Research Co«ittee for the tipper Midw»st Council; is President of the
Board of trustees of Jfewjolester College. He ie a Democrat and a
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Federal Reserve Bank of St. Louis
Presbyterian.
GEORGE HATHAWAY ELLIS:
President of the Federal Reserve Bask of Boston since 19&U BOY Miyears of age| aas been associated vith the Federal Reserve Bank of Boston
since 1951* B.A. degree in economics; University of Maine, 19^1$ graduate
study in economics at Harvard, M.A., 3.9^8* and Ph.D., 1950.
War service
19^1-^5 in the Ar^r, 2nd Lieutenant to Major.
As an industrial economist, Ellis has specialised in development
problems of the Siev England Begion. la 1950-51* vhen President Truaan's
Council of Economic Advisers set tip a special comittee on the Hev England
Economy, Mr. Ellis was one of the most active members. He also served as
Director of the Research Coamittee on Sew lfogl«n<l lor the national Planning
Association fro® 1953*551 fro» 1955-5T he was Economic Adviser to the
and since 195? has been Chairman of the Research Committee of the Greater
Boston Economic Study Ccossittee. Be is also a Director of the lev England
Council! a trustee of the Sew England Council for Economic Education! and
is active in the Cheaper of Coaraerce of Greater Boston as veil as in various
banfcisg associations and associations of professional economists.
He was born in Maine.; he is a Congregationalisti and has not been
identified vith either political party.
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Federal Reserve Bank of St. Louis
HEX J.
President of the Peoples Bank and Trust Company of Selma, Alabama,
is an economist and banker. A native of Ttopeka, Kansas, now 51 years
of age, he received an A.B. degree from U.C.L.A. in 19331 his M.A. from
U.C.L.A. in 193^ J end his Ph.D. froa the Ubiversity of Chicago in 19^6*
Be us* a Teaching Assistant at U.C.L.A. from 193^-35 and a Pre-Doctoral
Fellow of the Social Science Research Council from 1935*33. Be was a
Research Assistant at the Illinois State $ax Commission, 193&-J*0, working under George Mitchell (vhoa President Keaoedy appointed to the
Federal Beserve Board from Illinois in 19&). While in Illinois he
completed his preparatory work for a Doctor's degree in Government
finance, preparing a dissertation on "Municipal Debt in Illinois."
Before the degree was completed, he went to the University of Connecticut
as as Assistant Professor, 1^0*4lf and was then called to service in
Itoited States Army. Be continued in the Army until I&k6, rising to
of lafantry.
After completing his Doctor's degree at Chicago, he became Vice
President of the Peoples Bank and $rust Company, continuing until 1953*
at i&ieh time be ms promoted to the Presidency, le IMS an instructor
at the Selma Extension Center of the University of Alftframn 1950*52*
Since 19&1 he has served as section leader and lecturer at the School
of Banking of the South at Louisiana, State Ifaiversity. In the Alahumft
Bankers Association, he has been Chairman of the Committees on Bunking
Education, Executive Mmagssie&t, and Revision of the Banking Lavs* He
is a Methodist, mis raised in Glendale, California, and went to high
school there.
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WALTER LEE LIHaLE^ JR. I
MronauticB and Space Aitednietration, is now located in Washington
although a resident of Cincinnati,, Ohio. He is 5^ years of age, *&«
bora in Atlanta, Georgia, and received his Bachelor of Science
trm fcnridson College in 1928.
1931 until 1^1 he va* a«»ociated vita the Procter
in Cincinnati, l>eco«ing nee President in Charae of
Oimeai Operations in 19^1 ft mrector in l^Oj and Boseutiim Vice
President in 195**. ®e is a aaaber of the U. S. Cbaaiber of Cona»rce
wRMHMKp of OoBBBerce*
He is a versatilis ind abl@ "ousinesamn with vide experience in
^Ml^v
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Federal Reserve Bank of St. Louis
* i»»*wp»»^ajS^i^fc^(
«7«»%Mj^p
%p4*
VlAw«4^^W9 %Fjj|^»A ^w VA^W"*** *
LOUIS ROBSKTSOH;
Janes Louis Robertson uas bom and reared in Broken Bow,
Nebraska. Els birth date me October 31* 190?* After attending
Griraiell College, he studied at George Washington University,
from *hich he received both A.B. and U..B. degrees. It then did
graduate \iork at the Harvard law School, from which he received
his £L.M* in 1932. H* entered the Ooveraaent service in 192? in
the Itoited States Senate Post Office. later he nas a Bpocial Agent
of the Federal Bureau of Investigation. In 1933 he Joined the legal
staff of the Office of the Comptroller of the dmeney. Be served
ia the tfaited States Haval Reserve in 1^3~19*&. f!«reafter, he
served as Deputy Controller of the Cwrency until he took office as
a MsiOiiii of the Board of Governors of the Federal Beserve gyatem on
Pebmary 16, 1952, He ms aAsltted to the Bar of the Court of
for the District of OoluBbia in 1931« and to the Si^nfeae Court of
the Uhited States in 1935. Mr* Bobertson is aarried and has three
owiio •
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
or THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Chairman Martin
From
Guv E. Noves
Date A P rii 24, 1964.
Subject!
"Money to Grow On"
by Stuart Chase
It is hard to generalize about this book. In some ways and
at some points it veers sharply in the direction of oversimplification
and popularization. It makes many points by appeal to authority
rather than reason. If the New York Times and Mr. Chase agree on
something the reader is expected to accept it without question. Similarly, statements by the President's Council of Economic Advisers are
quoted as if they were the word of God.
On the other hand, the detailed process by which Mr. Chase
proposes to enhance aggregate demand seems a carefully planned masterpiece of obfuscation—designed, one suspects, to get around some of
the more obvious "prejudices" against perpetual bank-financed Federal
deficits that the author feels make the average citizen reluctant to
embrace the "new economics." The underlying reasoning is simple and
not unfamiliar.
First, the "gap" is accepted without critical examination.
It is simply stated as a fact that our GNP is running about $30
billion below "potential."
Second, it is assumed that an expansion in aggregate demand
sufficient to stimulate the economy to the assumed higher potential
of GNP would not be inflationary.
Third, it is concluded that the expansion of bank credit
is the easiest and quickest way to generate this additional demand.
Essentially, the remainder of the book is devoted to an
intriguing and rather complex specific proposal to assure that this
additional credit expansion shall take place, and that it shall initially be "invested" in four broad areas, which the author feels
have been skimped--to the disadvantage of healthy economic growth
in the United States.
In brief, the proposal is to capture the unused and wasted
resources which are represented by the presumed gap between the
actual and potential output of our economy for certain social purposes the author regards as highly desirable.
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Federal Reserve Bank of St. Louis
Chairman Martin
-2-
Cleverly, I think, Mr. Chase wastes very little time criticizing past policies or urging changes in the structure or policy
of existing institutions. He seems to regard the Federal Reserve as
beyond redemption and passes very quickly over the fact that the same
additional credit expansion he proposes to achieve by a new agency
could be accomplished within the existing institutional framework
simply by an easier monetary policy.
Again, briefly, the author proposes to establish an "Agency
for Economic Growth," which would be empowered to issue notes called
"Growth Certificates." These certificates would bear a low (1/2 of
1 per cent) rate of interest and would have no fixed maturity.
They
would be "allotted and placed" with commercial banks in exchange for
demand deposits, which would then be expended for the growth promoting social purposes listed. It is argued that, since this process
would be in addition to the lending and investing activity that the
banks would otherwise undertake, they can easily afford to accept
the low rate of return, which would more than cover their "bookkeeping
costs."
Relying on calculations made by the "Committee on Cash
Flows," Mr. Chase estimates that some $18 billion of additional bank
credit financed expenditure should be carried out in the first 18
months to "close the gap," and that it would take about $6 billion
per year thereafter to "hold GNP at potential." This latter figure
is, in effect, an estimate of the deflationary bias of the Federal
Reserve System. He might have said, "We can assume that because of
its old-fashioned hyperconservatism the Federal Reserve will permit
the generation of $6 billion per year less bank credit than the
economy needs to operate at capacity. Hence, we will simply let
them go along as they have in the past--hewing to their overcautious
line--but, through a new agency we will slip the economy an extra
$6 billion a year on the side." Unstated is the assumption that the
Federal Reserve is so stupid that it would go right ahead with its
policy as before, ignorant or oblivious of the extra stimulus provided by AEG generated bank credit.
The flaws in the specific proposal are so numerous and
obvious that it is hard to believe that the author really intends
that it be taken seriously. One is inclined to suspect that the
specifics are simply tacked on to attract fire away from the very
dubious initial assumptions.
This could lead an unwary reader to
conclude that, while the new agency and the growth certificates are
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Federal Reserve Bank of St. Louis
Chairman Martin
-3-
unnecessary and unworkable, we could achieve much higher growth rates
and fuller resource utilization simply by inflating demand through
higher rates of bank credit creation than have been permitted in the
past. All we really need to do is just get the Federal Reserve off
the dime.1
If Mr. Chase merely succeeded in leading a substantial
number of readers to this conclusion, I suspect he would be well
satisfied.
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Federal Reserve Bank of St. Louis
May 19
Mr. Martin
This is a transcript of your Advertising
Council panel.
It is a copy for our files here.
not giving out copies.
We are
We understand the
Council has in its permanent file a copy
which they will let anyone see who wants
to come in and read it.
They are not making
it available on request.
mnm
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Federal Reserve Bank of St. Louis
THE ADVERTISING COUNCIL
VuASHIisfGTOKf COHFERENCt;
j^^i^cuj^jLon oft^ th£ Economy
May...6,.. .1964
Moderator;
Honorable Frederick G. Button
Asaicfcant Secretary of. Sea to
Honorable C. Douglas .Dillon
The Secretary of the Treasury
Honorable Luther H. /lodgus
The Secretary of Commerce
Honorable William McChesnoy Martin
Chairman, Federal Reserve Uourd
Honorable? Walter w. Heller
Chairman, Council of Economic Advisors
aGnt ing t he Conference :
Mr. T. R. Bcrner, Chairman 6: President
Curtiss-Wright Corporation
Mr. Joseph A. Grassier, President
American Radiator &
Standard Sanitary Corporation
Mr. Gabriel Ilauge, I're.'.iidont
Manufacturers Hanover Truct Company
Mr. William A. Hewitt, Precidont
Doere «t Company
THE ADVERTISING COUNCIL
WASHINGTON CONFERENCE
Wednesday, May 6, 196)4
MU MftRTItt: When I had the privilege o£ visiting with
this group a year ago, the situation was definitely different
than it ia today. We were having a quiet run on our dollar/ not
perhaps a too oeriouo one, but its cumulative effect was giving
all of ua concern. VJo recognised that we had long had a tax
0 ituation which had been delayed in being corrected after the
war. And while there were disagreements as to whether it was
tax revision, tax reform or tas: reduction which was needed, there
waa very little disagreement that something had to be done about
our ta:i system if we were to get the maximum benefit from our
economy.
To me, the most dramatic achievement of 1963 was the
change in the competitive position of American business. I am
generalising when I say that, but I think the profit margins did
begin to improve by the end of the year*
And whether they were
what people to like them'to be or not, there is no question that
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Federal Reserve Bank of St. Louis
26
our competitive position in the world improved. And it demonstrated once again that American business, when it gets a head
of steam on and sees the problem, can do what is necessary to
compete.
President Kennedy in his balance of payments message
in July of last year covered this problem adequately.
enough was there or not waa not the point.
Whether
j
The fact was that he
had covered all the avenues that would need to be followed if
we were to bring about equilibrium in our balance of payments.
And he indicated that in the event we were not successful in this
program, which included, as you know, an increase in the Federal
Reserve discount rate from 3 to 3-1/2 percent, and a recognition
that we could not be isolationists on interest rates any more
than we can be isolationists in politics today.
The flow of money
around the world is such that we have to be aware of interest
rate differentials, particularly with respect to short term
i
movements, if we ever hope to maintain our position as a leading trading power.
It also noowed to me that his message,indicated a
iGcognitioii of the fact that reducing unemployment and promoting
growth in bringing about equilibrium in our balance of payments,
bat regardless of the emphasis that was placed on one or the other
Belt 6
at the time waa one and the same problem. And it scorns to me that
the results since that time have indicated that we can move in
theao directions simultaneously and with a certain amount of
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Federal Reserve Bank of St. Louis
27
success.
SUGVJ, as T..jo approach the p:-:o£c?nt situation v;e aro not
uViCio;: the gun of a DC;jn;ibIo deflation a:s we wore G yoar ago.
I am tvoiiic; something that I try to hoop away from here when X
am indicating the future, because in the Federal Reserve we try
not to beibrecaoters, but try to analyse things, as tjiby are.
nevertheless, It don't believe in ray judgment that deflation is
the problem at the rcoiaent. I think that we all recognise that
wo have aore unemployment than we uoulcl like to have, and there
aro differing .viswa as to how v.'e aliould tackle thin unemployment
problem, and v;o should certainly bend every effort' that v;e have
to improve the unemploywent picture. But at the same time we
must recognise that we are now in an expanding economy. And
the majority, I think, of ccncansus today io that we arp not
immediately £ac*od with a posaibility of a decline in busineos.
'I'hG^efo-re, the threat o£ inflation rears its ugly head once again.
&nd we have had recurring threats o£ inflation rind recurring
inflation in the entire poatwar uorlcl. 'J?hiB iaeansf obvioualy,
tl^Jt the period that we aro new moving into requires prucionce
and caution. I think that the President has rightly stressed
the? renponG.ibility of business inon and of laboir to be prudent
and cautioua in the way thoy handle tlio prooperity that v;e are
presently enjoying.
But when 1 use this'word "prosperity/1 I am
not Baying that it's what it ought to bo or that it's necessarily
all that it ia going to be, but I lira saying tarat we are in a
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Federal Reserve Bank of St. Louis
28
situation now where we can accept a certain amount of prosperity.
And we should nc-vor be afraid
• o'f prosperity.
There are a certain' number of people who constantly say,
"Well, things are so goodl thoy jUKt can't go on this way."
don't believe that we should ever take flat view.
I
1 think that
prosperity io nothing to be afraid of. But how you manage
prosperity is in the long run the question of how you sustain
it. And this is whore the role of the central bank comes in/
and this is really the gist"of my commonts today.
It seens to me that what we have and what is required
in the central banking system is an understanding that, first,
the central banks should see that there io enough money for the
legitimate requirements of business. That"a a primary responsibility. But having done that, it is our responsibility to regulate the total supply of money in such a way, including its cost
and its availability, that the marginal requirements of business,
tha lou requirements of: business and the low priority requirements
of government,, do not wan to themselves in speculation and rising
prices in a timo of expanding business. So that, conversely you
can uca, to the ontent that it can be used in a period of decliniiitj bo.ciiic'fju monetary policy to stimulate some speculation and
corar? nuu idoau, and to parhaprj contribute to adjusting and keepiiKj the tk'aXiuo frora getting oat of hand*
In other words, to put it oiuiply, to level the peaks
until to fill in the valloys.
'i'hia io the basic role of a central
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Federal Reserve Bank of St. Louis
29
bank.
It rw\;ui:X':j jti?!'^uc»iit, it requires courage, it requires
• i^.kiir.j ihXKi tii^ to time a one judgments with resp.z-at to the
vuturo.
Xtl:j luoro flexible than othor instruments o£ policy
fce^aurjo it cn.s be adjusted more quickly.
You can uiovo in either
direction without, in my judgment, doing too much dar.iage,. and
it certainly ia nut the controlling facto/:
. alone in the economy.
Let me just eloco by!>oaying that I rate the forces in
the economy, QEJ raany of you have hoard rae rate them before, as
budgetary baiug number one, and in this connection, I think that
the pv;eoic'{ont»c emphaoia on reducing unnecessary expenditures
in governiuc-nt hac been helpful to all of us in the period that
we are presently in.
7!n the second place, v:e are using fiscal policy because
the tas: program ia new under uay. To v;hat extent it will stimulate busineco, v;o donst knov;. But we knov; that cumulatively
it io likely to encourage business further.
In tho area of debt managerasnt, the Federal Reserve
liaa v;orkcd very closely with the Treasury and tho Treasury has
boon laoGv. cooperative in seeing to it that v;e have icoues t'hat
make it possible >ior ua to finance tho deficit outside the banking oyctein.
Oi: courrje the Treasury IIDS a problem in thio because
v;e have 11 4-1/4 percent interest coiling. And i£ we reached a
point where we could not cleal with that, there ia a real
Vjroblei.i with the treasury and the podernl Reserve in that.
30
So far, however, we have had no problem in financing the deficit
outcide the -banking system. Arid there lias been complete cooperation and harmony between the "Treasury and the Federal Reserve.
You are all familiar with the v;ago price problem and
here wo have to watch ctevelopwonts and await developments.
Monetary policy is the fourth of these policies.
Monetary policy must be maintained alert, but it must also keep
in front o£ people the fact that when money is as available as
it haD been thero is a tendency :i!or a deterioration in the quality
of: credit to persist and continue.
In the building of hotels
mid motaln and raultt-fwnily dwelling units and in other real
estate ventures, and in particular, there has been a tendency
to frsstoad tOKMs and to engage in activities which may ultimately
cause ww trouble. I don't think that point haa been reached yet,
but I think wo would be unwise not to bo calling attention to it.
And let mo juot close by oayiug that "I think it "a good
£or all o£ uo, in it period such no the present, when we have an
opportunity to think about it, to be beginning to think about what
we do when wo have another recession, because we will have another
rocooaioii at uoiao time. And I hope no one will think .1 am forecaotinej a i;Q«Qaoion now.
But it is in periodu like thin that
wa have? got to think about it. It will be more difficult to
fjot .".i fcaat cut the no2:t time? if wa are trying to otintulate the
nconoiay, booauoe we- are no longer to the aaue cxtc?nt ats we
wore bo£oro undor the gun oi: the war time tax problem. It
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Federal Reserve Bank of St. Louis
31
x.'lll bo iao:i.4e di;«:£irjult £or ui.; to u^o oa/jy laonoy policy bescauac
wo have u.Mv.v'i :U:, very esihitxitively, and agyrc'caively during thie
recent poritxL
hncl it will be, thojxvJore, incumbent upon ua
to HOC' to:u: thnt we clo whirl; wo can by prucloncc? and diociplinQ
to atrotoh out tho current pe^iocl oi: p^o.^perit}.; cintl to use what
expenditures v;o can to •ir.ipy.'ove the oHiploymoni: p\ ature at pvory
op{>ortunity, so that we can continue to havo the growth and the
dovelopuiont and the IUOVG toward equilibrium in oar balance of
payments v/hioh is ruquirocl.
'j?hank you.
(Applauso.)
i-lR. DvJ'i'TOW:
tve will now open up the* four officials
to quoLrtiousi £rom the p:raic?l«
X would like to juat vory bi;ie^:ly introdticjo thorn,
a3.though I am ausco Taost oif you ]-;nov; thoiu all.
K'ircit, I-Ir. Gabriol Hnuge, Presidoiit o£ the Il^nufacturors
'Hanover Vruat Company.
Mr. j'ocoph GrassiGK,. Chaiywan of the American Hadiator
and 8tantla:ccl Sanitary Corporation.
Mr. T. u. Berner, Chairraan r.ncl Pruaidoni; of tho
rtiaa-Vfjright Corporation,
.?un:! j.ir. Uilliam Hav;itt r President of Doore ond Company.
vTuat fire av;ay.
tAI. HS\UGS3: Well, I don l t know .\vhothor I aw to start,
ause 'S, am up hore at this end, but I will opon o££, Mr.
32
Chairman, with a question that has been prompted by the remarks
of two or three of the speakers.
And I might do it in terras of an article I read in
the Hew York Journal of Commerce the other day, written by
Professor Henry ftallack of Yale University.
He recalled that
at the time the tax cut v/as proposed an important part of the
analytical baoi& for the* tax cut was that the burden of sustaining or developing the economy could be put on fiscal policy,
and the burden of fighting for stability on a price and balance
of payments fund could be uioro logically reserved to monetary
policy.
Itfow we have had the tax cut, ami we are out into the;
beginning part of the effective period of this tan cut. And
from the comments that have been made here today, it is fair to
conclude that we can expect to have oome more favorable effects
from thio tint cut.
The question posed by Professor Wallack, arid I think
would be of interest to many membera of the Conference, and this
goos back in a way to a statement in the President's economic
report of luot January that it would ba self-defeating to cancel
the stimulation of a ta;c cut by tightening credit, ia what is
the thinking today of the relation of monetary and fiscal policy
at this stage of the cycle, and with the prospect iror apparently
a good deal more pressure on the economy aa time goes on?
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Federal Reserve Bank of St. Louis
SECRETARY DJLLQH:
Well, I x*ould be glad to say at
33
leaot
a beginning uorcl on that.
X thinl: that probably applies to a number of KB here.
It covers a broacl area.
I do thinl: that the argument that fiscal policy had
to boar a greater proportion of the load in stimulating our .
economy hao baen jusrt what's happened becauoe fairly on,
right in the beginning, and oven in the spring of 1961, we
never allowed -- or in the winter of 19GO, v;e never allowed
monetary policy the freedom that it had in the preceding
recession,''; during the 50 *a, when tho price of ohort term money
wont down to roughly half of one percent.
This time, because
of balance payments reaoond and no other reason, it never went
below for a very nhort period maybe 2-1/8 percent, which is
quite a lot different. 2\nd then it kept, arj we a aw the needa
moving upuardis, tho short term rate, right along. And,
finally/ with the? discount .rate increaae laot aurainor and
stabilization an a result of that rate nhortly thereafter of
our ahort term rtito;j at about 3-1/2 percent, and fitting into
that relaxations, tv;o of thorn, of ;;c?gulD.tion 0 by tho Federal
Reserve Syrjtom, which allowod the payment of higher ratea on
t.ima doporjitn and wavingti dopooits, I don't think that there is
anything uiuch further that monutary policy could very usefully
clo in the balance payments field. And so then we <3icJ turn
parallel to all this during thio poriocl, to tax reduction as the
prime motor to allow thia improvement, economic improvement to
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Federal Reserve Bank of St. Louis
34
carry on. And X think that situation is still maintained .
&3 Mr. Martin points oat, wo h;.ve come to oort of a
•
new situation whore it is far more difficult with convertible
currencies to use Monetary policy in tho event of a recession
the x-;ay it used to be used because x^e have o-ot to maintain short
term interest rates relatively parallel throughout the world,,
throughout the parts oi: the world whore money flows.
That can
be done by action on both a idea ancl is done that-way.
Some may snyr "Why don't we handle the whole long term
portfolio problem, also, by monetary policy?" And the argument
in that is that that juat icn*t possible. ,To do it would require
at least a full ono percent increase in the present levelo of
interest rates for mortgagest for all aorta of other *— for
municipal bonds, corporate bonds, borrowing generally.
We do
some $40 billion or $40 billion to $50 billion of that sort of
business in a year here.
That is the flows of savings in and
the flows of savings out, And to somehow to be able to force
that rate up one percent to cut down a $2 billion outflow, a
very small piece of that that's going abroad, is sort of an
extreme? example of the tail trying to wag the dog. And we just
UonU: think it could Ibe done, even if you set out to try and do
it.
iUsof if you look back historically over any long
period o£ time, the longer terra rates that are presently currently
in Europe are fijir higher than they v/ere in i\umy periods of the
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Federal Reserve Bank of St. Louis
35
past.
Taking the whole Nineteenth Century, for inistance. And
our rates are much nearer what would appear to be/ at least
past history, proper rates of an economy that is relatively
advanced. In underdeveloped countries, of course, they have
much higher rates.
So I don't think that anything that's happening now
is contrary to what — the question you arc posing certainly I
don't think
lyone in the government, and certainly not the
President, would feel that we should not use monetary policy.
The dollar got in trouble, he has said GO very clearly, and is
fully prepared to back up the Federal Reserve, whose primary
responsibility is to do that.
So I think that there really
isn't a great problem there.
MR. DUTTOH: Mr. Martin, do you have any comments?
MR. MftRTIW: Well, I would just comment that we have
been very aware of the problem. A year ago, to go back again,
we were talking about not financing whatever deficit that
developed through the banking system. And we have been successful in maintaining that position.
How, just to show you how you can be wrong on these
things, if you had asked ino at that time what would be the
effect on interest rates when the tax reduction—VOICE PROM THE FLOOR: Louder.
MR. waRTlH:
(Continuing) If you had asked me what
would have boon the effect on interest rates when the tax
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•
36
reduction went through, I would have said it would have caused
an increase in interest rates. . It actually has not, because
retained earnings and depreciation of corporations has been
adequate up to the present time to meet their requirements.
And on the projections that we use at the Board, those that I
personally use at the Board, the requirements of the community
for money have been far below anything that I anticipated.
Therefore, we have pur cued a neutral policy in the Federal
Reserve.
We are waiting for the market to determine what the
forces are.
And I believe that there ia no immediate prospect
./
of an increase in interest rates based on supply and demand
factors.
i
,
How, we have been dealing here with a lot of expectational forces that are always in markets.
There are a lot of
people in the market who immediately jump to the same conclusion
that I was jumping to, that when the- tax reduction program went
through the demand for credit would surge here.
Only they went
one stop further and ssaid, "And the Federal Reserve will lead the
move toward higher interest rates."
Well, the Federal Reserve
hasn't lead the move toward higher interest rates, and I don't
think the Doctoral Reserve should lead tho move toward higher
intercut ratoa.
I think we try to lean againat the wind but we
don't try to make the wind.
And two or three times the money
market has boon fooled by those oxpoctational forces here.
What
they will be.in the future, I am not forecasting, but I can assure
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37
you, aa I tried to in my general remarks, that the Federal Reserve
ia very aware and alert to this problem,, and that i,t is our intention to do what we can here to prevent a speculative boom developing, or an inflationary aurge which could come at any time, which
would mean chat the sustaining of this prosperous period would
be shortened. And if it were shortened, unless all of us are
alert and active on this, it will mean that we will have a
larger recession than we would otherwise have from the inevitable
corrections that always come in an economy.
£4R. BOTTOM: Walter, do you have a comment on this?
MH. IIF£l*EJU Wall, *just one quick comment, which I
think &afoc Hauge in well av/avo of, and that is that as compared
with about seven years ago, beHoi?® ous? persistent balance Qt payments deficit became a balance of payments problem, and before
we developed the pevalatent slack in the economy, many of us
were advocating just the opposite policy; namely, tighter budget
policies, Qurpluoeo at full employment and relatively easier
monetary policy to put more funds into investment. And I think
that there has boon a very substantial change.
Economists aue
capable of adapting to the situation and I think there ia a
general acceptance of the proposition that relatively speaking
there should new be a heavier reliance on fiscal policy for
expansion. And that this, obviously, in the course of time gives
grantor freedom to monetary policy to do the job on the international front.
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And I think that the ejcplanations given by both
Secretary Dillon and Chairman Martin indicate that the tool ie
there, bat that at the present time we are in the happy position,
both on expansion and on the balance of payments front of not
having to tighten on the monetary front.
GUL'STIOU:
Continuing the Game thought, all of us,
I am sure, applaud the courage and foresight of the Adminiotration and its action on taxes.
But I wonder if we aren't over-
estimating, or if v;c- haven't over-estimated from the top down
the rapidity with which the tax cut or the benefito of it can
be translated into those things which create jobs, and unemployment remains a very oerioua problem.
And since it does, can't
this result in rather serious political frustrations, and perhaps
some pump priming activities which may accentuate and aggravate
this monetary situation?
MR. DUTTON:
Walter?
E1R. HELLER:
Well, as I tried to say in my comments,
we have,I think, pretty consistently, both in the Treasury and
in the Council, in fact, throughout the &c3mini.Btration, tried to
say that the impact of the tax cut was not going to be on overnight impact, that we? weren't going to just jump from persistent
levels of 5~1/?. percent unemployment, lot's say, to 4 percent
unemployment, or persistent levels of 85 percent utilisation
capacity to a preferred average operating rate of 92 percent.
!tra interesting, by tho way, that in the British
39
tax cut about ii year ago, which wau almost exactly comparable
to oua:a in teru:i o£ the balance 03; pnymsiits —- sxcusu me/ in
terras oi; tho trariLj.lation o£ tho grooo national product, there
was a rather flat period of lull and not much response in retail
sales, and so forth, for a couple of months after the tax cut
came in and then a very much enhanced and increased response in
the later months. Of course, the British economy is much more
expoaed. They are in a tougher and tighter position to take the
kinti o.t" expcuiciou th-it v;o aro able to tate with our lesser foreign
exposure and wich our greater :clcv> oi; both labor and industrial
capacity available to moot the? impact of tho tax cut.
'I think it fair to eay that the employment record of
the past few months, whether it's the buoyancy of the* tax cut
or not, nan been outstanding. We have created over 900,000 new
jobs ~- that's not oven counting the April results — which I
think will add to that— over 900,000 new jobs since December,
And about 1,400/000 — this ia non-farm jobs, — about 1,400,000
eince.a year ago. And ou.v prediction, after all, is fairly
modeat; not that we will be jumping down to 4 percent by the end
of the year, but that wa will be getting down to about 5 percent
unemployment and then going below that as we wove on. The
full impact of the tax cut won't havf worked its way through
tho .econoray £or about two yoaro.
QUESTION:
r
j?he recent joint economic report proved
the elimination or reduction of the gold cover requirements of
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40
the Federal Rooerve credit. What oubatitute restrictions or
limitations on tho Federal Ueuerve in extending crddit to
the U. S. banking oyatem in issuing money are contemplated?
SECRETARY DILLON: Well, I think that again hits a lot
of as.
'iiie Joint Economic Committee did make this recommendation, and many bankers, otudenta o£ the problem, are in agreement
with thorn Suntlaiuon tally. 'X'he reason i:or this is that the United
States ia piroaoi'itly the only country that has ouch a connection
between gold ancl domestic currency and credit. Gold everywhere
else ia used oololy as the medium to settle international payments
and that's what it really is under the present gold exchange
standard. That9a what it ia under ouv: lawc, because under our
lav.*u you cannot tray mui:;?, over ainc*..' 1934, turn in currency or
obtain gold or otw gold yourself. So logic would indicate tftat
VJQ 0hould havo, a a v;e clo have, our whole gold supply available
to protect the dollar in international dealings. We do have it
because tho present lav; gives Federal Fese?£ve the flexibility to
waive t:hio requirement v?hen nocorjsnry.
And tho Chairman of the
Federal Rocorvo, lir. Martin, has repeatedly said that he would
exorcise that right if such a aituation arose*
Hoi-;, UK? second question is the question of timing.
Thiu in a highly emotional icaue in this country. There are a
lot o£ people who £eel that bocauae we? have? alwayn had this
connection, wo ohould continue it, although v;© have changed it
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41
from time to time.
It used to be 40 percent a few years ago,
now it's 25, that that should continue*. And certainly we have
iielt that it would bo iwwitfo to ask the Congress to make that
change and precipitate a major battle there, a major emotional
battle in the country, which v;ould bring in the question of the
stability of. our currency because those who attack it would say
that the* currency would no longer be any <jood at the time when
our balance oi: fxiyiu:>utij wan still in relatively large deficit.
Uo ii: anythiuy .warj to be done, it should be done at a later
dato when we have got our balance of payments in order oo people
wouldn't think we were doing it ao we could continue to run very
big deficits.
That is the way-we have looked at it in the Treasury.
Now, this can bo technically modified in many ways. It doesn't
havoto be done away with completely.
We have gone down from 40
to 25 at onco, and it applies to both currency and to deposits of
banks with the Federal Reserve System.
It could be left to apply
raaybu only to currency which would free up about half the ejold
that's tied up behind that.
that could be? done.
So thoxe are a number of things
I think, basically, our feeling is that
it is not much of a restraint on-the 'Federal Reserve and never
has been. The Federal Reserve could isaue literally billions
and billions, tone? of billions of do?.lare of extra credit, bank
credit evon with the loox.'ny thoy now have.
hann't ;-;hoi:n thwt it n^ecla thut
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Federal Reserve Bank of St. Louis
3ort
The Federal Reserve
oi a reatriction on them,
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42
and I would think that x-Jhen the timo came that the Federal
Reserve needed that sort of a restriction that we would be in
pretty bad shape ourselves.
I think we ought to rely on the
Federal Reserve as an institution rather than on this sort of
artificial means of trying to tell the Federal Reao.rve or control
their actions.
MR* DUTTOLJ: Mr. Martin.
MR, MARTIN: Ho embargo on gold has been our consistent
policy, and it1o only aa an international media of exchange, as
the Secretary has pointed out, that it io primarily important
today.
There are only two important currencies in che world that
have a statutory gold reserve covered today, that io the Belgian
franc and the?fcJv/issfranc. Our i:ui:io now rjtandfj at 30.3 per
cent,. 2B porcout is the requirouiont,
I would certainly hope that
we would get our balance of; payments situation under control
before we go down below that 25 percent.
MR. HEWITT: I would like to addreeo a question to
Secretary Hodges.
.t-lr. Secretary, in the last sentence of your presentation you referred to a subject that's of conaitSorable current
interest.
X have in mind the question of trade between the
>j
United Stai:^;,; tuid Russia and the 'Russian satellite countries
in eastern Europe.
The oales of goodn by weotorn countries to the Soviet
Bloc last year totalled $4.2 billions and these calee by weotorn
43
countries to the Soviets are increasing at the rate of about
10 percent a year.
The United State's share of this export1to
Ilusaia total led about 2 percent or $1CG mill.Ion.
How, it ic relatively difficult for Uiiiood States
companies to trade with Russia, Hungary, Czechoslovakia, Bulgaria
and Jfiaat Germany.
Ic'u relatively (X^ier to trade w < c U iiouiania
and Yugoslavia.
I ara wondering, Mr. Secretary, if you could tell us
whether you anticipate any relaxation in the government controls
of exports, by United States companies to the Soviet Bloc? And
i-£ you do anticipate that, I wonder if you could help clarify
the criteria which ohould controlr rather, which ohould determine
what strategic materials are and what non-strategic goods are,
This io sometimes a little confusing.
I believe that approval
is necessary by a number of different government agenciest any
one of which, any department can cancel a bona fide opportunity
to sell to the Soviet Bloc. These include, I believe, the state
Department,. Agriculture Department, Defense Department, the
Commerce Department and also, I believe, the CIA.
SECRETARY HODGE8:
Well, the last part of your statement
io not entirely correct, Mr. Hewitt, Unfortunately, we have the
responsibility in Commerce, so you can put the total responsibility
on us. BecQUGG under the designation of the President the Commerce
Dopairtwont ilocretary haa the responoibility'.or paoaing or not
panaing applications for license.
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44
Aa a practical matter, however, we naturally would
consult with those agencies you are talking about.
And if one
of them had a bona fide argument or case, we would sit down
and diLjauaa it. And, of course, it would go up to the very
highest level. But you do not have to go to all of these places,
nor does each one of them have a veto.
that clear.
J. just wanted to make
Or course, you have rained a oerioua, current
question, in the Mattel: o:c how we do in trade with the Soviet
and the Bloc. I aui using that now, if. you don1't mind, with two
premises; that'wo are separating. Reel China, Worth Korea and Cuba
from your quoution. We are only talking about dealings with the
Soviets, particularly in Europe, and we are only talking about
itonr; that are non-strategic.
. HCVJ, to try to answer your question about ntrategic.
Cernard Baruch one time cnid, "nothing ia nonQstrategic."
But,
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Federal Reserve Bank of St. Louis
actually, we go basically by the COCOH liot, the list.
that the allies avid ourselves have ngre..d on are strategic
items and should not bo shipped to the Soviet a et cetera, as
it would add to their military potential.
Tho truth of the matter is that-, we in this country —
I am making thin very short —« wo in thio country are very
sentimental about a thing like thin. We are not in a way as
strong in ou:: controlo and our negative point of view as the
Congress and much o;5: the public would like uo to be. WQ are
far more liberal today, in May 1964, than we were in May 1962.
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.• .
•
. .
45
till. DUTT01T:
I p.m sorry, I aw going to have to cut
•
it off hore new i:or the President to ccrao in.
Wo 'thank you r gentlGiacn f very much for cowing today.
(.ftpplauaG.)
BOARD OF GOVERNORS
or THE
FEDERAL RESERVE SYSTEM
Office Correspondence
^0
Chairman Martin
From
J. Herbert Furth
Date August M, 3.954.—
Subject! Revision of quarterly payments
figures for 1964.
The Commerce press release reveals that the divergence
between our original estimates and the official released figure
for the second-quarter payments deficit is due exclusively to
new estimates for "special receipts" and "seasonal adjustment."
"Special receipts" remained negative but the (favorable)
correction was reduced from an estimated $70 million to $40 million.
The seasonal adjustment factor was raised from an estimated $70
million to $119 million.
The official deficit figure is now $623 million before,
and $742 million after, seasonal adjustment; the latter figure
corresponds to a seasonally adjusted annual rate of $2,968 million.
The seasonal adjustment factor for the first quarter was
raised from $249 million to $282 million.
This revision raises the
seasonally adjusted deficit from $181 million to $214 rnillio} equal
to a seasonally adjusted annual rate of $856 million.
Incidentally, the increases in the seasonal factors for the
(seasonally favorable) first and second quarters mean that the seasonal
correction for the current (seasonally unfavorable) third quarter also
will be greater than expected.
Since the fourth quarter is seasonally
almost neutral, the correction for the current quarter should be nearly
as large (with reversed sign) as the sum of the adjustments for the
first two quarters, or nearly $400 million.
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Federal Reserve Bank of St. Louis
LO: Chairman Martin
=2-
In response to Mr. Balderston's question of this morning,
the seasonal adjustment for short-term capital movements is,
according to the Commerce Department, very small for the first
but about $90 million tor the (seasonally favorable) second quarter;
this means that the seasonally adjusted outflow would be about $90
million larger than the reported unadjusted figure.
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Federal Reserve Bank of St. Louis
BOARD DF G D V E R N D R 5
or THE
FEDERAL RESERVE SYSTEM
Office Correspondence
f 0_
Date
Chairman Martin (through Mr. Young)
Samuel I0 Katz_
August 5. 1964. _
Subject i Will Britain Need Foreign Credi t s
During Next Six Months?
CONFIDENTIAL
United Kingdom officials expect they will have to draw
upon foreign credits this year.
During my stay in London last week,
senior British Bank and Treasury officials stated privately that the
United Kingdom would be indeed fortunate if it did not find it necessary
to draw upon international credits within the next six monthsc
The
election may make Britain's payments problem more substantial, but
the fundamental cause of their concern is the continuing large
deficit in Britain's current
and long-term capital accounts.
Any
pre-election speculative capital flows would merely add to the
underlying payments deficit; on the other side, an election outturn
considered by financial markets to be favorable is not expected to
provide sufficient capital inflow to preclude difficulties.
Weakness in underlying payments position.
both the current
Deficits in
and the long-term capital accounts are responsible
for the weakness in Britain's external payments position.
On the
trade side, the cyclical increases in imports are about in line with
the expectations of the authorities when they undertook their expansionary
program about 15 months ago; but there is concern that exports may
not expand fast enough in the second half of 1964 to finance the
economy's needs for imported materials.
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Federal Reserve Bank of St. Louis
_
To: Chairman Martin
(through Mr. Young)
-2-
On the long-term capital side, British oil companies are
making heavy investments abroad this year after two years of only
limited payments.
The Shell investment in Italy and capital spending
in the new field in the Middle East are among the projects underway.
Thus far, Britain's reserves have been more favorable than had
been expected because the outer sterling countries have been accumulating
sterling balances.
But the view was expressed that the underlying
deficit was bound to lead to reserve losses over the next six months:
one figure mentioned (as a rough measure of magnitude and not as an
estimate or official projection) was reserve losses of as much as
£200 million during the next two or three quarters.
Any pre-election
capital flight would merely add to the large current payments deficit
and to expected reserve losses.
Attempts to hold domestic interest rates.
The publication
of the adverse trade figures for June produced a significant shake-out
in British financial markets in mid-July.
The Treasury bill yield
rose about 2Q basis points, and the discount houses obtained very
heavy amounts of bills at the weekly tender because "outside" investors
withdrew from the market.
At the same time, bond yields also moved up,
even though the Government Broker bought £100 million of bonds in a
single week.
After about a week, financial markets regained an element
of stability, and the authorities were even able to sell some bonds.
However, both the bill and gilt-edged markets continue to be brittle
and poor trade returns or other unfavorable news could produce a further
shake-out in these markets.
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Federal Reserve Bank of St. Louis
To: Chairman Martin
(through Mr. Young)
-3-
Despite rumors in financial markets, the British authorities
are strenuously trying to avoid a rise in Bank rate at this time.
In present circumstances, they want to avoid a rise in Bank rate
from 5 to 6 per cent at this time so that it would be available
as a policy instrument should a run on the pound develop in August
I/
or September.
Because the election is still three months off, Bank officials
are toying to check the rise in Treasury bill rates.
Bank officials
at all levels are expressing this view in conversations with the
discount houses.
To keep yields steady, the monetary authorities
are prepared to see some expansion in short-term credit supplies.
For example, the weekly Treasury bill tender was increased from
£230 million to £250 million in late July because the Government
Broker had been forced to buy bonds in mid-July.
One suggestion
made was that the Bank could act to ease short credit conditions
for a temporary period to gain time, if such drastic action were
required.
Conditions in British financial markets are not good.
As a result, distinctly unfavorable news could threaten to force
the hand of the monetary authorities at any moment.
_!/ It is assumed that a 2 per cent rise in Bank rate would be required
under emergency conditions,, A 6 per cent Bank rate now would thus
mean an 8 per cent Bank rate: but the rate only reached 7 per cent
during the massive exchange crises in September 1957 and again in
July 1961. An 8 per cent Bank rate would be considered out of
proportion to the extent of weakness in Britain's underlying position;
it would also have obvious political implications at this time.
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Federal Reserve Bank of St. Louis
To: Chairman Martin
(through Mr0 Young)
-4-
How to finance reserve losses?
Because expected reserve
losses would be primarily a matter of an underlying payments deficit
(not merely reversible shifts of temporary short-term capital),
British officials are thinking in terms of medium-term financing-*
that is, a drawing from the Fund and not short-term central bank
swaps.
However, the Fund might have to actuate the General
Agreement to Borrow if the United Kingdom wanted large amounts of
European currenciesc
Certain European representatives (the French
and the Dutch) are known to wish to impose conditions on the United
Kingdom.
On their part, the United Kingdom officials are prepared
to resist conditions they consider unreasonable,,
They will maintain
that drawings against their stand-by for the gold and first credit
tranche should continue to
be favorably treated: an attempt by
European representatives to impose conditions for such drawings
would (in the British argument) amount to a change in long-standing
Fund policies and would, therefore, be entirely unacceptable,.
It was reported that British officials have already
confirmed with Mr. Schweitzer that the Fund is prepared to meet
its commitment.
One British official expressed the hope that
Mr. Schweitzer would do as much of the negotiating with the Group of
Ten as possible but he did recognize that there was bound to be
some consultation within the Group of Ten with active participation
by United Kingdom representativesc
To meet a British drawing, Mr, Schweitzer may finally
have to fall back, at least in part, upon the Fund's gold holdings.
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Federal Reserve Bank of St. Louis
Toj
Chairman Martin
(through Mr0 Young)
-5-
Use of central bank swapsc
Either of two contingencies
might lead the United Kingdom to make use of central bank credit
facilities, at least in the first instance, instead of the Fund
stand-bye
In the first place, the time needed to complete
arrangements under the Borrowing scheme might create a problem of
temporary finance; in addition, the terms laid down might be such
as to lead British officials to seek funds from other sources.
Secondly, as the election approaches, the United Kingdom
might experience speculative capital outflows thought to be
reversible.
Central bank swaps are ideal for this purpose.
It is my impression that the Bank of England has no
specific advance understandings with European central banks for
this contingency and will wait to see the volume and destination
of any outflows before deciding on tacticsc
in using such credits in the past.
They do have experience
However, Bank officials seem
to be uncertain whether their European counterparts would try to
impose conditions on such swaps at this time.
They seem to think
that the credits would not be bilateral, as in the past, but that
there would be some joint discussion by the central banks of the
Common Market countries.
In fact, the bankers from these countries
have begun to meet regularly as a group on Monday afternoon after
the regular monthly meeting in Basle,
One British official thought
that despite the position taken by Common Market representatives
in other forums, the central bankers would make swaps available
with only minimum conditions*
Because of these uncertainties, however, it is evident
that the British authorities find the facilities available under
the Federal
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Federal Reserve Bank of St. Louis
Reserve swap particularly attractive at this timec
To: Chairman Martin
(through Mr. Young)
-6-
Major changes in British economic policy in prospect?
It
became clear (in discussions with Bank and Treasury officials, with
Sir Robert Shone of Neddy and with Christopher Saunders of the
National Institute for Economic Research) that a good deal of
ssrious thinking about British economic policy is already underway.
Some of the studies deal with the steps to be taken should payments
difficulties arise before the election.
But the fact that the
payments weakness is not temporary in character has provoked
inquiry into what went wrong this time*
There is general disappointment that, once again, domestic
expansion may have to be cut off by balance-of-payments difficultiesc
Proponents of two lines of policy have been particularly disappointed
those who thought that enough demand in the economy would lead to
sustained economic growth (through advances in productivity) and
those who thought that the key to steady growth was through the
Neddy-type of economic "planning,, "
The headline in the Financial Times (July 30) that
"Economic Problems Will Dominate The Next Five Years" (of the
new Parliament) confirms my own impression that significant changes
in economic policy may well be in the making.
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Federal Reserve Bank of St. Louis
BOARD OF G O V E R N O R S
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Chairman Martin
Date August u, 1964.
Subject! Weekly payments indicators_
J. Herbert Furth
CONFIDENTIAL
(FR)
Tentative data for the week ending August 12 suggest
a payments deficit of $147 million; the deficit for the preceding
week was revised downward to $73 million.
While the average of
these two weeks suggest a monthly deficit much lower than the
(revised) $612 million figure for July, the decline in the
deficit has so far been much smaller than in the corresponding
months of this year's first and second quarters.
Incidentally, I have not yet received the Commerce
press release announcing the payments data for the second
quarter.
Press reports indicate, however, that the announced
deficit is somewhat higher than had been expected (seasonally
adjusted annual rate of $2.9 billion rather than of $2.7 billion),
and that the figure for the first quarter also has been revised
upward (to a seasonally adjusted rate of $800 million, from
$720 million).
Mr. Dahl intends to discuss the figures in MondayTs
Board briefing, and I shall include an analysis in Tuesday^
FOMC presentation.
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Federal Reserve Bank of St. Louis
y
August 7, 196)4.
(\ CONFIDENTIAL—
(4 F. J
-
—
^——
J
Changes in Foreigners' Liquid Assets in the U.S. and in U.3, Monetary Reserves
(in millions of dollars]
W
E
K
L
Y
S
Changes in principal
liquid assets held "by foreigners
Official
"Street"
Total
Private
FRBNY
Period
.
E
Ending:
. July
8
July 15
July 22
July 29
Aug,
5
•
+
+
+
+
3
69
ij-9
59
10
•
- kk
+123
- J+l
+192
E
- 18
- 36r
+ 23r
+ 23p
+ 33p2.y + 79p-..
I
E
- 16
- 1
- 23
+ 10
r
~*
2
2
1
- 12
+21
- 27
- 22
- 3
- 23
+
-
+ 2
+ 2k
- 26
+ 1
- 30
/
.-;•
i
S
Changes in United States
monetary reserves (signs reversed)
IMF
.
Foreign
position
Total
Gold?/
currencies
+1.TA
+llj-7
+225
+ Ir
+31
R
^t.—.
O
Foreigners
net gains (
or losses(-
73
+ 6l
+360
+180
+ 2r
+-89p-*
/ '/ "7
(Six Week Totals)
Covering:
May
June
June
June
June
+108
28-July
8
k- July 15
11-July 22
l8-July 29
25 -Aug.
5
+257
+163
0
"> - ^ . - - f
3~ /sr
OX"
M
Official
on
;
•03 '
38
1-31
1-30
May
June
.
0
'
c
a/
b/
+503p V- ^ 6
'
I nt er nat i onal
and Regional ]y Private
+223
+200
- ^5
- 30
in - ^ .
71 • A •
-183
-287
' ' *-
H
L
Y
+208
+56^
+677
+572r
+63lp 6
-*•***" ^> •&>
S
E
R
I
E
S
Total
- 5
-117
+ 3k
+70
/
+11
+71
- 2
+123
/
+ ^-3
+26^
— . ^ -y
+ 38
+Ikj
L i• •
Treasury gold stock plus gold in Exchange Stabilization Fund.
These claims are included in official holdings in the Weekly Series.
p - preliminary
•Y*
O
+ll6r
+128p
;* '
N
T
+292
+286
+117
+ 76
—
-192
+ 21
+397
+380r
-•
r'OTr'i aorl
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Balance of Payments Divisior
Federal Reserve Bank of New
@FedFRASER