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Federal Reserve Bank of St. Louis
AHSWSR TO S1HAOT KERB'S QTESnOH
Beginning in January 1953 and thereafter,
(a) State the policy directives adopted fey federal Qpea
Market Cosaaittee. Indicate whether each marked a change
in previous monetary policy and the direction of the
change.
'Soe policy directives adopted by the Federal Qpan flarket
Coaoalttee and the reasons for their adoption are set forth la
Record of Policy Actions of th© federal Open Market Committee prepared annually by the Board of Governors of the Federal Ha serve
System, in accordance with the requirements of the federal Reserve
Act, and published in the Annual Reports of the Board of Governors.
Copies of these reports for the years 1953-1956 are submitted here*
with. The reeord for 1957 will aot be available until next year.
Hie records of Open Market Ooiaiaittee actions may be found
in the Annual Reports on the following pages t
1953
1951*
1955
1956
Annual
Annual
Annual
Annual
Report
Baport
Baport
Report
Pages
Pages
Pages
Pages
86~1Q5
92-98
89-111
1?«4*7
Attached are auaaaaries of the principal Jfederal Reserve
policy actions from the beginning of 1953 to the end of 1956, with
brief explanations of the purposes of such actions. These summaries
have been prepared by the Board of Governors of the federal Reserve
System and previously published by the Joint Economic Cocaaitte® of
Congress or by the Board of Governors.
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Federal Reserve Bank of St. Louis
USE OF FEDERAL RESERVE INSTRUMENTS
January 1953 - December 1956
Date
Action
Purpose
Intent with
respect to
Explanation
effect on
credit and
money
January 1953
Raised discount rates
Restrictive To bring discount rates
as well as buying rates
from 1-3/U to 2 per cent
on acceptances into
and buying rates on 90closer alinsment with
day bankers' acceptances from 1-7/8 to
open market money rates
and to provide an addi2-1/8 per cent.
tional deterrent to
member bank borrowing
from the Reserve Banks,
February 1953
Reduced margin requirements on loans for
purchasing or carrying
listed securities from
75 to 50 per cent of
market value of securities.
May-June 1953
Purchased in open market Relief of
about $900 million U.S. credit
Government securities.
market
tensions,
To provide banks with
reserves and to permit
a reduction of member
bank borrowing from the
Reserve Banks at a time
when such borrowing was
high, credit and capital markets were showing strain, and seasonal needs for funds were
imminent.
July 1953
Reduced reserve require- Expansive
ments on net demand deposits by 2 percentage
points at central Reserve city banks and
by 1 percentage point
at Reserve city and
country banks, thus
freeing an estimated
1.2 billion of reserves.
To free additional bank
reserves for meeting
expected seasonal and
growth credit demands,
including Treasuryfinancing needs, and to
further reduce the pressure on member bank
reserve positions.
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Federal Reserve Bank of St. Louis
None
To reduce margin requirements from the
high level imposed
early in 1951, in the
judgment that the lower
requirement would be
adequate to prevent excessive use of credit
for purchasing and
carrying stocks.
- 2USE OF FEDERAL RESERVE INSTRUMENTS
January 1953 - December 1956
Date
Action
Purpose of action
Intent with
respect to
Explanation
effect on
credit and
money
July-December 1953
Made net purchases in
open market of U, S,
Government securities
totaling $1.7 billion.
Expansive
To provide banks with
reserves to meet seasonal and growth needs
and to offset a continuing gold outflow
with little or no addi-r
tional recourse to
borrowing.
This action and the one
below were taken in
pursuance of a policy
of active ease adopted
in view of the business
downturn.
January-June 195U
Limited net sales to
about $900 million of
U. S. Government
securities in open
market.
Expansive
To absorb only part of
the reserves made
available by the seasonal deposit contraction and return
flow of currency thereby further easing bank
reserve positions.
February 195U
Expansive
Reduced discount rates
from 2 to 1-3/U per
cent and buying rates
on 93-day bankers1
acceptances from 2-1/8
to 1-3/u per cent.
Reduced discount rates
from 1-3/U to 1-1/2 per
cent and buying rates
on 90-day bankers1
acceptances from 1-3/U
to 1-1/2 per cent.
To bring discount rates
as well as buying rates
on bankers1 acceptances
into closer alinement
with market rates of
interest and to eliminate any undue deterrent to bank borrowing
from the Reserve banks
for making temporary
reserve adjustments.
Reduced reserve require- Expansive
ments en net demand deposits by 2 percentage
points at central ReServe city banks and by
1 percentage point at
Reserve city and
country banks, and
To supply the banking
system with reserves
to meet expected
growth and seasonal
demands for credit and
money, including
Treasury financing
needs.
April-May 1951
June-August 195U
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Federal Reserve Bank of St. Louis
- 3USE OF FEDERAL RESERVE INSTRUMENTS
January 1953 - December 1956
Date
Action
_
June-August 195u
(continued)
Purpose of action
Intent with
respect to
Explanation
effect on
credit and
money
requirements on time deposits by 1 percentage
point at all member
banks, thus freeing
about $1.5 billion of
reserves in the period
June l6-Aug. 1.
Sold or redeemed U. S.
Cushioning
Government securities
totaling about $1
billion in July and
August.
Sept.-November 195U Made net purchases in
open market of
approximately $850
million.
Expansive
Reductions in reserve
requirements were offset in part by temporary sales of
securities in order to
prevent- excess reserves from increasing
unduly at the time, buj
security pur chases werresumed as "need for
funds developed.
To supply the banking
"system.with reserves
to meet expected
growth and seasonal
demands for credit
and money.
FEDERAL RESERVE POLICY ACTIONS DECEMBER 195U-DECEMBER 1956
Date
December 195U
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Federal Reserve Bank of St. Louis
Purpose of action
Action
To meet part of the temporary
Made net purchases of U. S.
Government securities in open end-of-year needs of banks f01
reserve funds, but in view of
market of less than $50
million, all under repurchase rising credit demands, to
permit these needs to be reagreements with dealers and
brokers. Member bank borrow- flected in part in slightly
less easy reserve positions.
ing increased to an average
of $250 million in December.
FEDERAL RESERVE POLICY ACTIONS DECEMBER 195U-DECEMBER 1956
Date
Action
Purpose of action
January-June
Sold in the open market or re- To offset effects of seasonal
factors affecting bank re<»
deemed U0 S. Government .
serve positions and, in view
securities totaling $1.3
of strong credit demands, to
billion. Member bank borrowbring
about somewhat greater
ing increased to an average
member
bank borrowing from
of more than $Ij.OO million in
Federal
Reserve Banks.
the second quarter.
January 1955
Raised margin requirements on
loans for purchasing or
carrying listed securities
from 50 to 60 per cent of
market value of securities.
To help prevent an excessive
use of credit for purchasing
or carrying securities in a
period of increasing use of
credit for carrying securities.
April 1955
Raised margin requirements on
loans for purchasing or
carrying listed securities
from 60 to 70 per cent of
market value of securities.
To help prevent an excessive
use of credit for purchasing
or carrying securities in a
period of increasing use of
credit for carrying securities,
April 1955
Raised discount rates from
1-1/2 to 1-3A per cent,
To bring discount rates into
closer alinement with open
market money rates and make
borrowing by individual banks
more expensive.
1
March-December 1955 Made net purchase of bankers
acceptances in open market
totaling $28 million.
To recognize increased use of
bankers1 acceptances by business as a means of financing
international trade.
July-December 1955
Made outright purchases of
Treasury bills in the open
market totaling $700 million
net and increased repurchase
agreements with dealers and
brokers by 300 million. Member bank borrowing increased
to an average of about $850
million in September and
more than $1.0 billion in
November but declined to
about $850 million in Dec.
To meet part of reserve needs
associated with seasonal
factors, thus requiring banking system to meet needs in
part by further increasing indebtedness. This action was
taken with a view to providing
for seasonal needs while
limiting undue expansion of
bank credit.
Kovenber-December
1955
Purchased when-issued
Treasury certificates of
indebtedness totalling
$167 million.
To facilitate Treasury refunding
in period of money market
stringency. Supply of reserve
was consistent with overall
open market policy at time.
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Federal Reserve Bank of St. Louis
FEDERAL RESERVE POLICY ACTIONS DECEMBER 195U-DECMBER
Action
Purpose of action
August-Sept.
Increased discount rates from
1-3/4 to 2-1/2 per cent. This
increase was made in two steps
at all reserve banks except
Cleveland.
November 1955>
Increased discount rates from
2-1/1; to 2-1/2 per cent.
To keep discount rates in an
appropriate relationship with
market rates of interest and
thus maintain a deterrent on
excessive borrowing by in»
dividual banks at the reserve
banks.
January 19^6
Reduced System holdings of
U* S, Government securities by over $1.1| billion
through sales in the market, redemption of maturing bills, and termination of repurchase agreements. Member bank
borrowings increased to
weekly averages of $900
million in late January.
To offset seasonal return flow
of currency and reduction in
reserve needs and restore degree of restraint prevailing
before December action to
moderate restraint temporarily
February and March
Bought small amounts of Gov?t
securities at times. Member
bank borrowings declined
somewhat in February but increased substantially in
March as result of sharp increase in required reserves.
To meet changing reserve needs
and avoid an increasing degree of credit restraint in
view of growing tone of uncertainty as to economic
prospects.
April and May
1956
Discount rates raised from
2-1/2 per cent to 2-3/U per
cent at 10 Reserve Banks and
to 3 per cent at 2 Banks
around middle of April;
System holdings of U. S0
Gov!t securities reduced by
$35>0 million. Member bank
borrowings at Reserve Banks
rose to over $1 billion.
To increase restraint on credit
expansion, in view of sharp
increase in bank credit in
March and indications of broad
increase in spending, growing
demands for credit, and upward
pressures on prices and costs.
Late May-early
August 195>6
Increased System holdings of
To meet currency needs around
U.S.Gov't securities around
holidays, to cover added deend of May and end of June
mands for reserves around tax
and maintained holdings at
payment and midyear settlement
higher level than in previous periods, and to avoid increasperiod.
ing the degree of restraint in
view of uncertainties in
economic situation.
Date
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Federal Reserve Bank of St. Louis
- 6FEDERAL RESERVE POLICY ACTIONS DECEMBER 195U-DECEMBER
Date
Action
August-November 1956 Discount rates raised late in
August to 3 per cent at the 10
Reserve Banks with rates of
2-3 A per cent.! System holdings of U.S.Gov t securities
increased by nearly $1
billion; member bank borrowings at Reserve Banks rose
to average of $900 million
in August and averaged between $700 and $800 million
in other months.
December 1956
System holdings of U.S.Gov!t
securities and bankers!
acceptances increased by
over $550 million, including
substantial repurchase
agreements with dealers.
Member bank borrowings declined to weekly averages of
around $600 million, except
in last week of year, and
at times were less than excess reserves.
1956
Purpose of action
Discount rates increased in
conformity with rise in market rates resulting from
vigorous credit demands.
Policies designed to increase
and maintain restraint on undue credit expansion while
covering seasonal and other
temporary variations in re»
serve needs, including effects
of frequent Treasury financing
operations.
To supply reserve funds in
recognition of additional
pressures in money, credit,
and, capital markets resulting
from seasonal factors and
international conditions, at
a time when lower liquidity
ratios of banks were themselves exerting restraint on
bank lending.
Sources: Flanders Subcommittee Hearings on Monetary Policy, Decembero ana 7,
pp., Il|-l5» Joint Committee Hearings on the President^ Economic Report, JanuaryFebruary 1956, p, 258, Forty-third Annual Report of the Board of Governors of the
Federal Reserve System, p. 16.
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Federal Reserve Bank of St. Louis
July 26, 1957
AsswEa TD 3SS&TCR maMi QP^TIQN
X, (b)
Describe each areaia\iry financing aotion^ other than the
regular weekly t>i ii offerings, but including regular
weeiciy bill offerings where the treasury increased the
amount la order to raise additional ©ash "
' " • ""'"" ' '-' '
(2) Identify those treasury financing actions which in
your Judgment were supported by the federal Reserve
either through (1) open market operations, or,
(2) reductions la reserve requirements.
Hie basis principle governing Federal Reserve actions
during treasury financing operations Is set forth In the continuing
operating authorities or statements of operating policy adopted In
the annual meeting of the Federal Qpea iSarket Oosmittee ia March 1956s
"Operations for the System account la the open market,
other than repurchase agreements, shall be confined to
shQTt«*term securities (except in the correction of disorderly markets), ami during a period of treasury finaaeing there shall be no purchases of (1) waturing
issues for whlah an exchange is being offered, (2) whenissued securities, or (3) outstanding Issues of cots^arabla
maturities to those being offered for exchange! these
policies to be followed until such tiiae as they iaay be
superseded or modified by further action of the Federal
Open Maries t Oomaittee.*
fhe ifederal Eeserv© sgraten ia Its open market operations
generally has followed a policy of maintaining stable conditions in
the money market during periods of refunding and of taking into account additional needs for reserve funds when the Treasury coats to
the market for easfc.
3fe« only deviation from the above directions occurred on
Hovember 30, 105, when the federal open SSarleet Gosaaittee authorised
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Federal Reserve Bank of St. Louis
the purchase of up t© |1|DO Dillon of 2*5/1 per cent December 1,
1956, certificates of indebtedness on a when«*isst»d basis. 2Ms
action was taken in response to a request made fegr the Secretary of
the treasury for assistance directed toward preventing undue cash
redemption of the saturing issue and with cognisaaoe of the possibility of psyehologioal deterioration cf the ^biole securities smrfcet
if tht HNMM»ity offering cas« to be regarded as a failure,
total
pur biases made under tMs aufchcrit^ amounted to $167 i^.llion.
leserve recpiraments were redused in the suuraaers of 1953
and 1951i and in both eases the reductions were designed to supply
reserves for seasonal demands including treasury financing needs.
In each year these were large cash offerings of treasury securities
which required tea$xarary increases in coaraareiai bask deposits and
required reserves.
WTtlim
7/26/5?
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Federal Reserve Bank of St. Louis
B O A R D DP G O V E R N O R S
DF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
To
From
flhairman
MaT*fcln
Date jvoy 21,19*7
Subject:
Arthur ¥• Marget
At the Hearings of the Senate Finance Committee on July
the following exchange took place between Senator Malone, as
questioner, and Secretary Humphrey:
W
Q. How much capital, American capital, is invested in
foreign nations now? Do you have any way of
knowing?
"A. No, T do 11not know* There are large amounts, of
course*
One never knows, of course, what line the questioning
may take; and I have no thought that one should be prepared on
every conceivable matter of fact. Since, however, Senator Malone
did raise this particular factual question, I thought you might
be interested in the appended table, which was prepared by Mr.
Allan F. Rau, of our Division, under the direction of Mr. Purth.
Attachment
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Federal Reserve Bank of St. Louis
International Investment Position of the United States
in Selected Years, 191U-56
(Billions of dollars)
1919
1930
1939
19U6
1956e/
3.5
3.5
3.5
2.6
.9
n«a.
0
0
0
7.0
7.0
6.5
3.9
2.6
.5
17.2
17.2
15.2
11.1*
11.1;
10.8
18.7
13.5
1*9. li
32.9
30.0
21.8
Foreign investments in U. S. 7.2
Long-term
6.7
Direct
1.3
Portfolio
5.1
Short term assets2/
.5
191U
U. S. investments abroad
Private
Long-term
Direct
Portfolio
Short-term
U. S. Government!/
Long-terra
Short-term
U. S. net creditor position
(excluding U. S. Government
investment abroad)
-3.7
Net long-term
-3.2
Net short-term
-.5
12.3
7.2
0
0
0
8.0
7.2
2.0
0
0
0
7.0
3.8
.6
0
0
0
li.C
8.1
3.2
.9
2.3
.8
5.7
l.li
U.3
9.6
6.3
2.0
iu3
3.3
15.9
7.0
2.5
3.0
3.3
-.3
8.8
9.5
-.7
1.8
-2.1;
1.5
-2.7
5.3
2.7
5.1
1.3
5.2
5.0
.2
iu5
8.9
-7.6
8.2
2.9
16.5
15.3
1.2
32.0
13.7
U.7
9.0
18.3
.9
16.3
-15.U
Notes;
I/ Excludes Vforld War I loans.
£/ Includes U. S. Government obligations in 19U6 and 1956.
e/
Estimate
Data for 191U refer to June 30, for the other years to December 31.
Data for various years are not wholly comparable because of different sources
and methods. Because of rounding, figures do not always add to totals.
SOURCE; Data for 191l*-l*6 are from U. S. Department of Commerce, Survey of
Current Business* August 1956. Data for 1956 are estimated on the basis of
the balance-of-payments figures for 1956, Survey of Current Business, June
1957, except for the re-investment of foreign earnings, which are assumed to
have been unchanged from 1955> and adjustments for changes in security values
estimated by Federal Reserve.
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Federal Reserve Bank of St. Louis
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
July 29 j 1957
Subject! Underwriting Activities of
To_
From.
Date
Arthur* W» Marget
Foreign Central Banks
The appended memorandum, by Messrs* Katz and Wood, was
prepared in response to a suggestion, by Governor Balderston,
that question might be raised with respect to the responsibilities
of central banks as underwriters of Government debt operations.
We intend to keep this matter under study*
Attachment
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Federal Reserve Bank of St. Louis
DRAFT:sIK:RCSr:dcl
July 29, 1957
To*
Mr. Marget
Subject: Underwriting Activities
From: Samuel I. Katz and Ralph C. Wood
of Foreign Central Banks
In accordance with your inquiry, we hare surveyed the central
banking legislation and charters in 3_i countries to obtain information
on the underwriting activities of these central banks. The preliminary
results of this survey are consolidated in this memorandum. For the
purposes of this survey, underwriting is defined as the responsibility
or practice of the central bank to take over all or any residual part
of Treasury security offerings.
1* S08e ftwo countries are explicitly permitted under their
basic charters to engage in underwriting:
Australia
New Zealand
2. One country provides a limited amount of central bank
credit to a separate institution which underwrites new government issues:
Belgium
$ 'tK countries are specifically prohibited from
3. Some f4*e
underwriting in the governing legislation:
Ceylon
Philippines
Austria
France
Greece
Switzerland
U. The remaining / ! _ countries which have no specific
reference to underwriting activities in the basic charter or legislation
can be classified into the following sub-groups according to their
practice:
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Federal Reserve Bank of St. Louis
a*
dose which customarily take over entire Treasury offerings:
Indonesia
Taiwan
Korea
To: Mr. Marget
- 2-
b. Those -which customarily take over only residual amounts
of new offerings:
Sweden
Denmark
Norway
Italy
India
Pakistan
Japan
c. Those which customarily follow the practice of not taking
over new Treasury offerings but may on occasion make limited purchases:
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Federal Reserve Bank of St. Louis
United Kingdom
Canada
Netherlands
^X/WM-A^^
6
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
SPECIAL
V
BOARD OF G O V E R N O R S
OF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
1*0
Cfhffi,1iT*mfln Martin
Arthur W« Marget
Date July 31,195?
Subject;
Bank of Franx*e and Underwriting
of Ofreasury Operations
I note that, at the end of your memorandum of July 30,
on "Techniques of Debt Management,11 you refer to the French situation
in connection with this general propositions "Certainly the fact that
some foreign central banks underwrite their Treasuries is no reason
for us to copy them.11 In the Katz-Wood memorandum of July 29 entitled
"Underwriting Activities of Foreign Central Banks," on the other hand,
france is listed as one of six countries which "are specifically prohibited from underwriting in the governing legislation."
Clearly, any apparent conflict between the two must derive
from a difference in the definition of "underwriting*" In the KatzWood memorandum, "underwriting is defined as the responsibility or
practice of the central bank to take over all or any residual part of
Treasury security offerings." I have asked Mr. Wood to spell out the
French arrangements in more detail. His memorandum on this point is
attached hereto.
Attachment
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Federal Reserve Bank of St. Louis
BOARD OF G O V E R N O R S
OF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
To
isr. Mar get
From
E« C« Wood
Date **y 31,1937—
Subject:
Bank of
France Underwriting
of French Treasury Issues
This memorandum is in response to your request for an
elaboration of the reasons for classifying France as a country in
which the central bank is prohibited from underwriting new security
offerings by the French Treasury*
It may be useful to note at once that in the case of France
the distinction between the underwriting of the Treasury, on the one
hand, and of new Treasury issues, on the other, is of great importance
for the answer one gives as to whether an underwriting function is
performed "by the central bank. In the past the Bank of France has
supported Treasury operations in a great variety of ways, and still
does so in several. One method is that of special advances by the
Bank to the Treasury, under "conventions11 between the two; characteristically, in the past, the amounts involved under particular conventions have been initially set in relation to the size of the
Treasury's problem at the time, frequently being raised later as the
Treasury's problem intensified* However great the efforts the Treasury
may have made to minimize its residual deficits—and it is only fair
to point out that while the advances to the Treasury have often been
substantial, this facility has seldom, except in time of war, been
used as an open-end financing device—"conventions* of this kind
would appear to approximate an underwriting relationship, as contrasted
with a comparatively permanent Treasury facility at the central bank,
fixed well in advance of expected use, such as the one which the United
States Treasury has with the System.
Moreover, if the question were whether the Bank of France
has an obligation to underwrite the Treasury in the market, as late
as one month ago one would have had to say that while in practice
the Treasury never abused the possibility, as a matter of law the
Bank of France was required to discount any and all Treasury paper
with no more than three months to maturity offered by the market.
Now that-this requirement has been abolished, the Bank of France
nominally has full discretion as to the buying support it will give
the Treasury in the market.
It may also be relevant to note that the institutional
arrangements in France are such that the Treasury is strongly supported, if not actually underwritten, by the financial resources of
several large governmental and quasi-governmental institutions.
This fact presumably tends to moderate the pressure for underwriting
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Federal Reserve Bank of St. Louis
-*
' >
Toi Mr. Marget
-2-
by the central bank, at times when the Treasury would otherwise be
under extremely severe strain. In this respect, however, the difference between France and some other countries9 such as the United
States, is only one of degree.
On the specific question of central-bank underwriting of
new Treasury issues, the view that the Bank of France is prohibited
from such underwriting is based on the following facts and reasoning.
1. Article 106 of the codification of statutes of the Bank
of France, the law of December 31» 193&, specifies that the operations
of the bank which are "generative of note issue" are (1) gold operations, (2) discount operations, (3) advances on public bills and on
stock securities, and (!{.) permanent advances to the national government, i/ Article 107 specifies that the bank can in no case "and
under no pretext" perform or undertake operations other than those
permitted it by law and by its statutes*
2. A decree-law of June 17, 1938, reads in part as follows!
With a view to acting on the volume of credit and
normalizing the money market, the Bank of France
is authorized—in addition to the operations
enumerated in Article 106 of the codification
decree of December 31* 193^-~*° ^7* on the free
market, within limits and on conditions established by the General Council /of the Bank of
France/, negotiable short-term~public bills and
priva¥e bills eligible for discount, and to sell
such bills without endorsement. These operations
may in no case be carried out for"rthe benefit of
the public Treasury or other issuing public agency.
3. The basic law is therefore that the Bank of France can
buy short-term public bills only in the market. I have assumed that
if it appeared necessary to pass a special law specifying that (in
addition to the operations listed in (1) above) the Bank of France
might buy short-term public paper in the market, it should have
appeared equally or even more necessary to stipulate that the Bank
I/ The permanent advances are a fixed amount, now amounting to 50
biTlion francs, of consolidated advances going back in part to 1857*
The special advances referred to above have been made under the authority of specific conventions approved by law, and subsumed in the
1936 codification under a section listing "special or transitpry
provisions."
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Federal Reserve Bank of St. Louis
TOJ
Mr* MELT get
"3 ~
might buy long-term public paper, had it been the intention of
Parliament to empower the Bank to buy such paper; I have therefore
concluded that the Bank has formal power to buy public short-term
paper only, and only in the market. ("Short term" is not defined
in the relevant French statutes, but probably includes two-year
paper and possibly even longer maturities; some European countries
regard paper of up to five years1 maturity as short term*) The
legal position on long-term paper is not clear; but one of the
officials at the French Embassy states that whatever the legal position may be, the Bank of France does not in fact buy long-term
public paper*
\4m That the decree-law of 193$ is still in force is confirmed by the language of the convention of June 26, 1957* under
which the Bank of France will on August 15 buy, directly from the
Treasury, 50 billion francs1 worth of Treasury certificates maturing
November 15 next. This convention (which, as usual, has been approved by Parliament and by the President of the Republic, thus
giving it the force of law) specifically indicates that it is in
derogation of the decree-law of 1938• This language is standard
in these conventions*
5« The fact that there have been rather frequent derogations from the 1938 law does not appear to change the essential
character of the basic law, which is that direct purchases by the
Bank from t&e Treasury are prohibited* Any derogations from the
basic law require Parliamentary approval*
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BOARD OF GOVERNORS
OF THE
FEDERAL R E S E R V E SYSTEM
Office Correspondence
To
Chairman Martin
From
Arthur W* Mar get
Date Angmt 9,
Subject:
In the Hearings before the Senate Finance Committee on
August 6, 1957, there was the following exchange between Senator
Martin and Mr. Surgesss
$•
"Mr. Burgess, what are your reasons for not agreeing with the contention that higher interest
rates are a cause of inflation? ...
A.
n. , . I know something about the economic literature . . • and I may say that I have not been
able to find anywhere a support in one of the
economists for the belief that interest rates
in themselves are a cause of inflation."
It is always dangerous to say that one cannot find
support for a given proposition — no matter how foolish —
"in one of the economists." Actually, the proposition that
higher interest rates have
an inflationary rather than a
deflationary effect is more than 100 years old: the proposition was advanced particularly by Thomas Tooke in one of the
great monetary controversies of the 19th Century*
I cannot imagine that you would be interested in
pursuing this matter of what "the economic literature" has had
to say on this subject^ but if, by any chance, you would be
interested, you wiH find the matter discussed in my Theory of
Prices, Volume I, pages 2U7-238.
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BOARD OF G O V E R N O R S
OF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
To
Chairman Martin
From
Arthur W. Mareet
Date August 13,1957
Subject: Leith-Ross on Credit Control
The recent pamphlet by Sir Frederick ¥. Leith-Ross on
"Orthodox Credit Control in Post-¥ar Conditions" not only has
been the subject of comment in the press, but also was mentioned
in the following colloquy between Senator Kerr and Mr. Burgess on
July 31*
"Q. Would you say the widespread adoption of monetary
policies since 1950 has helped to achieve
greater economic stability in the countries
which adopted them?
W
A. I would say very emphatically, yes.
tt
Kerr then cited a report of the International Institute
of Banking Studies which said that flexible monetary
policies had been disappointing."
Obviously, these matters can hardly be settled by simple
reference to ttauthority.n But, as Mr. Furth shows in the appended
memorandum, it happens, in this particular case, that Senator Kerr,
and most of the press commentators,
have simply misrepresented the
substance of Leith-Rossf s remarks, as well as the substance of the
reports by members fof the International Institute of Banking Studies
on which Leith-Ross s own remarks are supposed to have been based.
This is clear from the excerpts appended to Mr. Furthfs memorandum.
Attachments
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BOARD DF GDVERNDRS
OF THE
FEDERAL RESERVE SYSTEM
August 13, 1957-
Office Correspondence
«po
Nfr,
From
J. H. Furth
ftforgftt
S^ihjftrt!
T^-it.h-Rnag nn fJiwH t. f!nnt.-rr>1
Sir Frederick W. Leith-Ross has just published a pamphlet
on "Orthodox Credit Control in Post-War Conditions" (international
Institute of Banking Studies, Rotterdam, 1957), which has received
some attention in the press.
The press reports gave the impression that Sir Frederick
had found monetary policy ineffective; however, these reports are
based on a misunderstanding of Sir Frederick's statements.
Sir Frederick deals primarily with credit control based
exclusively on variations in bank rate; apparently he believes that
all other tools of monetary policies are not "orthodox". On the
basis of his own observations and of reports by the members of the
International Institute of Banking Studies from other European
countries, Sir Frederick comes to the conclusion that variations in
bank rate have lost some of their previous effectiveness, primarily
because of three reasons: (l) the prevalence of exchange controls
prevents variations in the bank rate from influencing decisively the
international flow of capital; (2) the prevalence of self-financing
of industrial corporations makes industry less dependent upon bank
credit; (3) the increased volume of Government transactions, reflected
both in a high level of taxation and a high level of public expenditures, increases the importance of fiscal policy and debt
management in relation to variations in the bank rate.
In spite of these developments, Sir Frederick concedes
that variations in the bank rate still have proved effective in
the United Kingdom, partly for reasons of "psychology" but in part
also because the increase in bank rate diverted funds from bank
deposits into Treasury Bills and thereby reinforced the tight money
policy of the Bank of England. He also concedes, that reports from
Austria, Germany, and (surprisingly enough) Norway indicated the
effectiveness of variations in bank rate in these countries.
More important however, is Sir Frederick's statement that
most countries supplemented variations in bank rate by other tools
of monetary policy, and that monetary policy thus defined has proved
very effective. This was true particularly in Austria, Germany,
Italy, and Sweden and in part also in Belgium, Denmark, and the
Netherlands. This list virtually exhausts the number of European
countries in which monetary policies were used as an important part
of the stabilization efforts of the authorities.
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To: Mr. Marget
-2-
August 13, 1957
Sir Frederick reports that increases in "bank rates had
little effect on savings, except in Austria and Italy. On the other
hand he is able to report that there has been no conflict between a
well-understood policy of high employment and a policy of tight
money; on the contrary in the face of inflationary pressures tight
money policies have been necessary to keep the economies on a
high-employment level.
Sir Frederick points out that monetary policy should
always be accompanied by other appropriate policies, including in
particular tools of fiscal policy and debt management. His only
recommendation in the field of monetary policy aims at bringing
financial institutions other than commercial banks under the influence of the central bank.
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This book is protected by copyright and has been removed.
Author(s):
Leith-Ross, Sir Frederick W.
Title:
Orthodox Credit Control in Post-War Conditions
Date:
1957
Publisher:
Institut international d'etudes bancaires
Place of
Publication:
Rotterdam
Page Numbers:
13-15; 21; 24-26; 29; 39; 47-49;
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\'••:/ 1
• '
i
*_*»• /
Assumed question re purchasing power adequate to support consumption
to absorb product of our plants and maintain employment*
To gain perspective, one must remember that for many years
now, consumers have been demanding services (as distinct from gadgets)
in increasing amount. The slanting of demand toward services is reflected both in the spending stream and in the employment figures.
Now as applied to the immediate past, our firms have been
seeking to expand plant capacity faster than we save. Saving, of
course, represents what we do not spend for goods and services*
Consequently, total demand exceeds resources and prices rise. If new
money or new credit were pumped in, prices would rise still faster,
because real production to take care of new construction as well as
consumption would remain unchanged.
It is not the task, nor is it within the power, of the Federal
Reserve to supply new savings for investment in housing or in business
plant and equipment, or for the financing of the construction of schools
and roads. Savings for these purposes can only come out of current
income that is not spent for consumption, because only through such
saving are physical resources of men and materials released for investment.
Federal Reserve policies, even if properly attuned to the
cash holding desires of the public, cannot always assure continued
growth and stability. The maintenance of equilibrium requires the
delicate balancing of an intricate structure of consumption and
investment involving a great multitude of goods and services. No
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Federal Reserve Bank of St. Louis
i
- 2master mind can direct with assurance the smooth functioning of
this complex mechanism.
The forces of the market and the price
system must be relied upon to direct and attract the flows of
money and of goods and of services into appropriate channels and
to keep them moving.
There are bound to be obstructions and
hindrances and slowdowns from time to time.
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Federal Reserve Bank of St. Louis
Confirming the growing demand for services are certain data in the
1957 Economic Report to the President:
1946
p. 114
Per cent enrolled in school or college
p. 114
Bachelor!s and first professional
degrQis conferred
PC 109
Number of weeks of vacations (millions)
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Federal Reserve Bank of St. Louis
42.3
1956
52.3
136,174
325,000
34*4
70.0
w
August
19, 1937
There are four lines of inquiry pursued by Senator Long in
his questioning on which I would like to comment:
Assertion I--The American economy today is not characterized
by a shortage of manpower.
Assertion II--Ihe American economy today is not confronted
with a shortage of physical capacity to produce.
Assertion III--Consumer disposable income, at its present
purchasing power, has not grown during the past year.
Assertion IV—More production is the best cure for inflation.
I would like to take up these four questions separately and point
to the pitfalls.
1. It is true that the percentage of unemployment today is higher
than in 1951, 1952, and 1953, but this does not mean that the current rate
of employment is not pressing on our manpower resources. As I said
in my statement, "Despite the existence in some lines of reduced employment and slack demand, many employers have rising costs when they seek
to expand activity by adding appreciably to the number employed. Often
the manpower required has to be bid away from other employers." In
other words, under current conditions of very high employment, further
efforts to stimulate output on the scale suggested would soon spark a further
rise in costs which would accelerate the inflation spiral. I am appending
a technical appraisal of the unemployment figures cited in the tarings.
It throws considerable light on the problem.
II. My statement pointed out that specific bottlenecks in capacity
that impeded growth in production a year ago have been largely relieved
and that individual bottlenecks are no longer the cause of bidding up of
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Federal Reserve Bank of St. Louis
-aprices of individual commodities because of limited availability. This does
not mean* however, that materially higher utilization of current plant
capacity would not entail rising costs.
The extent of the upward pressure
would vary from one line to another depending upon the technical efficiency
of the reserve capacity, as well as many other considerations. The direction
would be toward higher costs and higher prices everywhere.
III. The assertion that consumer disposable income has not
increased during the past year disregards the inflation which is our problem,
by stating it in terms of ex-inflation dollars. Consumer personal income
available for spending has grown appreciably both in absolute amount and
on a per capita basis during the past year. It is the largest single component,
\
by far, of the total spending stream that has sustained the continued rise
in
both in wholesale prices an4/thc cost of living. If consumers had saved
a larger proportion of this income, it would have been available for the
financing of schools, highways, and capital plant without contributing further
to inflation and the reduction in the value of their spending dollars. As it is,
the inflation that has actually occurred has offset in large part the buying
power of the increase in consumer disposable income.
This sort of development is not exceptional during a period of inflation,
For example, practically all of the gains in real weekly earnings in manufacturing industries since World War I have come in periods of price stability.
From mid-1946 to mid-1948, a period of sharp inflation, both consumer
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Federal Reserve Bank of St. Louis
-3.
prices and average weekly earnings rose by close to 25% and there was
little gain in real wages. From mid-1948 to mid-1950, however, there
was little change in prices, but a gain in the purchasing power of weekly
earnings of about 10%. From mid-1950 to the spring of 1952 sharply rising
prices again offset rising weekly earnings.
During the ensuing long period
of stability in the cost of living, lasting until early 1956, the rise in money
earnings was reflected in comparably large gains in real wages. Since that
time further large wage increases have been largely nullified by the
inflation.
Thus during the whole period since the war, the appearance of
inflation has coincided with a leveling off of real wages.
IV. Increased production per se does not cure inflation. Money
income is generated in the process of production and becomes part of the
spending stream. As was pointed out on Tuesday, one man's expense is
another man's income. Consequently, increases in production in them*
selves add to the flow of spending as well as to the flow of goods.
Increased
output to the full extent permitted by our capabilities is good, provided,
of course, that it is the right production and is financed in such a way as
to promote continued prosperity. However, if there is excess money demand
present in the economy at a time when resources are actively employed that
excess will cause a rise in prices. Increased production under these circumstances will add to the spending stream as well as to the stream of goods
and services. It will not, therefore, eliminate the excessive money demand
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Federal Reserve Bank of St. Louis
that is the cause of rising prices. For inflation to be curbed, exce&s money
demand must be absorbed from the spending stream. This may come about
by the development of a budget surplus, by increased planned savings, by
curtailed borrowing from banks or by a slowing down in the growth of the
money supply or in its turnover, it does not result automatically from
increased production.
Ho one would maintain that a cessation of production*-the reverse
of this proposition--would stop a deflation.
Likewise, an increase in
production does not in and of itself stop an inflation. The unhappy condition
of France today is a standing example of this fact. It sharply increased
its production as well as its productivity but it failed to take measures
adequate to reduce the excess money demand that was necessary to avert
a crisis.
Attachment--"Factors Accounting for Differences in Unemployment! 1951- mid-53
and 1957" (prepared by Murray Wernick)
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@FedFRASER