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Federal Reserve Bank of St. Louis
List of Proposed Consultants
To Assist with Replies to Questionnaire of (Patman) Subcommittee
on General Credit Control
Stewart, Walter W. Pge 66. Retired, Former Director of Board's Division
of Research and Statistics; former Economic Adviser to Bank of England; former private investment banker; Professor at Institute for
Advanced Study, Princeton, N. J.; Chairman, Rockefeller Foundation;
Chairman, General Education Board,
Goldenweiser, E. A. Age 68. Retired. Former Director of Research snd
Statistics at the Board; Member, Institute for Advanced Study; former
President American Economic and American Statistical Associations,
Parry, C. E. Age 68. Retired, Former Director, Board's Division of Security Loans,
Viner, Jacob. Age 59. Professor of Economics, Princeton University and
Consultant, U. S. Department of State; former Professor of Economics, University of Chicago; former visiting Professor, London School
of Economics and University of Cambridge; former Consulting Expert,
U, S. Treasury Department; former President, /merican Economic Association; Member, Research Advisory Board, Committee for Economic
Development,
or
Ellis. Howard S, Age 53• Professor of Economics, University of California; former Assistant Director of Board's Division of Research and
Statistics; former Fellow of Social Science Research Council; former
President, American Economic Association.
Schultz, Theodore W. Age 50, Professor of Economics and Chairman of Department, University of Chicago, and Economic Consultant to Federal
agencies. Chairman, Committee on Agriculture; Social Science Research Council; Director, study personnel in rural social, American
Council of Education; former President, /merican Farm Economics Association.
or
Murray, William G. Age 49. Professor of Economics and Head of Department of Economics and Sociology, Iowa State College; former Economist,
Farm Credit Administration; former President, American Farm Economics
Association.
Calkins t Robert DeB. Age 49. Vice President, Director General Education
Board. Former Professor of Economics and Dean of Business School,
Columbia University; Director, New York Federal Reserve Bank; Consultant, National Resources Planning Board and other Federal
agencies; Member, Research Advisory Board of Committee for Economic
Development.
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Federal Reserve Bank of St. Louis
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or
Saulnier. Raymond J. Age 44. Professor of Economics, Columbia University; Director, Financial Research Program, National Bureau of Economic Research; Consultant to Board's Division of Selective Credit
Controls,
-5;- *- #- *• -x-
Wilmerdingt Lucius. Age 44. Research Specialist on the structure and
organization of Government. Background: 1931-35* Institute of
Public Affairs (formerly Bureau of Municipal Research), New York
City; 1935-41, Office of Administration Assistance and Bureau of
Accounts, U. S. Treasury Department; 1944-4B, Institute for Advanced Study. Publication: "The Spending Power" (1943)* dealing
historically with problem of relation between the Congress and the
Executive on expenditures since 17#9.
October 3, 1951
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Federal Reserve Bank of St. Louis
Draft
- CM:nk 8 / 2 0 / 6 2
Dear Mr. Patman:
A complete record of all policy actions
Open Market Committee is maintained
taken by the Federal
by the Board of Governors and
is set out in full each year in the Board's Annual Report to Congress,
in accordance with provisions of the Federal Reserve Act.
Included
in the report thus made public are: (1) a record, by name, of all
votes cast by each member of the Committee in connection with the
determination of open-market policies;
(2) summaries of the economic
and financial developments and conditions taken into account in arriving
at policy actions;
of the Committee;
(3) statements of the reasons underlying the actions
and (4) statements of the reasons underlying
dissents, when there are dissents.
In addition to this complete record of all policy XK actions,
the Board maintains unusually full, detailed, almost vertatim minutes
of the discussions and debates of the Committee in executive session
prior to final determinations of policy actions.
These discussions and
debates do not constitute actions and the minutes of them are not, and
never have been, made public by the Open Market Committee in
accordance with a principle long established and long recognized in
the public service -- by the Executive and the Judicial branches of
the Government, and by the Committees of Congress as well, including
your Committee, in respect to their own operations.
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Federal Reserve Bank of St. Louis
That principle has been stated many times by many eminent Americans
whose devotion to the public interest is beyond question.
By a great jurist who served on the United States Supreme Coutt.
Mr. Justice Benjamin Cardozo, in a defense of the privacy required in
jury room discussions preceding the recording of jury verdicts - - a
defense equally applicable in other areas -- said this: "Freedom of
debate might be stifled and independence of thought checked if jurors
were made to feel that their arguments and ballots were to be freely
published to the world. "
By a President of the United States.
President Eisenhower, in a
letter to then Secretary of Defense Charles E. Wilson on May 17, 1954,
in connection with questions raised during the so-called "Army-McCarthy"
hearings, said this:
". . . It is essential to efficient and effective
administration that employees (of the Executive Branch) be in a position
to be completely candid in advising with each other on official matters,
and . . it is not in the public interest that any of their conversations or
communications, or any documents or reproductions concerning such
advice, be disclosed. "
And, elaborating at a press conference on
July 6, 1955, President Eisenhower added this:
"If anybody in an official
position of this Government does anything which is an official act, and
submits it either in the form of recommendation or anything else, that
is properly a matter for investigation if Congress so chooses, provided
the national security is not involved.
But when it comes to the conversa-
tions that take place between any responsible officials and his advisers
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or exchange of little, mere little slips of this or that, expressing personal
opinions on the most confidential basis, those are not subject to investigation by anybody;
and if they are, will wreck the Government.
There is
no business that could be run if there would be exposed every single thought
that an adviser might have, because in the process of reaching an agreed
position, there are many, many conflicting opinions to be brought together.
And if any commander is going to get the free, unprejudiced opinions of
his subordinates, he had better protect tvhat they have to say to him on a
confidential basis. "
Many others, far too numerous for citation here, have held
similarly that, and in the absence of anything approaching criminal conduct
or malfeasance in office -- and no question as to either can possibly be
raised by the minutes of the Open Market Committee -- internal deliberations
(intra-organizational advisory opinions, recommendations, tentative plans
and proposals, minutes of committee meetings, oral advice, etc. ), as
distinct from official actions , must, in the public interest, be held
confidential for the purpose of encouraging candor on the part of officials
and employees in speaking their minds freely and uninhibitedly, and without
fear of intimadation by others, then or thereafter.
A wuestion involving the principle thus stated now arises from
•
these circumstances:
On June 14, 1961, by letter, you requested among other things -all of which were furnished to you --
"the verbatim record of the Open Market
Committee meetings, or the full minutes of the Committee meetings, or both,
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Federal Reserve Bank of St. Louis
if both verbatim records and minutes were made during the year I960. "
On July 21, 1961, the Federal Open Market Committee in good
faith furnished you the full minutes of tfx its meetings in I960, with a
covering letter from me that said in pertinent part:
"Verbatim records of the meetings of the Federal Open Market
Committee are not made.
The minutes, however, present a
faithful and comprehensive record of the Committee's proceedings.
The Open Market Committee is prepared to make these
minutes of its meetings held in I960 available to the Joint
Economic Committee on the understanding that they will be
treated as confidential. . . With regard to the request that the
minutes be handled as confidential, the Committee believes
that it would not be in the public interest to have such minutes
for I960 made public in whole or in part at this time, and the
reasons for this position are as follows:
"(a) There are references in the minutes to information
obtained on a confidential basis. This information, and its
sources, should be kept confidential, certainly for a substantial
time period.
"(b) From time to time there are references in the minutes
to long-term prospects and possible monetary policy actions
should these eventuate. To guard against a reduction in the effectiveness of Committee actions or potential actions, there should be some
considerable elapse of time before the minutes of any given meeting
are given public access.
a
"(c) The minutes con tain/full account of ^basgpc the proceedings at the meetings, including the participants' statements.
However, a person will frequently compress his remarks by omitting
matters of background perspective that are fully understood by others
present at the mefeting, but which might lead to misinterpretation on
the part of one merely reading the minutes without the advantage of
having been present.
"(d) The minutes contain statements by individual members
which are often made to raise points of discussion or to probe the
possibilities of different courses of actions in implementing System
policies.
These statements do not necessarily represent a firm
view of the individual member and, in fact, the member may raise
a particular matter merely to obtain discussion and clarification of
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the issues involved.
Needless to say, individual views expressed
early in a meeting may well be modified by subsequent discussions
during the meeting.
Therefore, the participants should feel free
to raise questions and express their views -- either tentative or
firm -- with the knowledge that their comments will not be released
within a short period of time after the meetings.
This freedom of
discussion and the exchange of viewpoints prior to the final
decision are essential features of the process of decision-making.
"It is largely for the foregoing reasons that the Open
Market Committee believes that the public interest would not be
served if the minutes for 1960 were to become public documents
at this time, either in whole or in part.
The Committee is
particularly of this view, in the light of the comprehensive record
of policy actions made available some months ago in the 47th
Annual Report of the Board of Governors of the Federal Reserve
System.
"The official records of the Federal Open Market Committee
are maintained in the Board's offices, where the original copy of
the minutes for I960 is available for examination by representatives
of your Committee.
However, with the thought that it would be more
convenient, the duplicate original signed copy of the I960 minutes is
being delivered herewith to the custody of your Committee for its
perusal. It will be appreciated if this duplicate original is returned
to us for safekeeping as soon as it has served its purpose. "
Now, under a covering letter dated August 14, 1962, you have
furnished us, for the first time, a copy of a 74-page document already
in printed page-proof form and inscribed "Joint Committee Print, " and
you quote a resolution adopted by your Committee to the effect that this
print be submitted to the Chairman of the Board of Governors of the
Federal Reserve System "with the request that he allow" your Committee
"to make it public. "
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Federal Reserve Bank of St. Louis
At this first opportunity, the meeting of the Open Market Committee
held today, I have placed this matter before the Committee, as I told
you I would in my letter of August 16 acknowledging the communication
and document received from you, so that you might have a reply as
promptly as it is possible to make it.
The time for attention to the document itself has been, as you are
aware, severely limited.
Even so, it seems clear merely from a
single reading that:
1.
Not a single action on monetary policy or on operating
policies or procedures is shown in your document that was not faithfully
recorded in the Annual Report of the Board of Governors for 1960, along
with the votes of members of the Open Market Committee thereon, in
the economic context of the time, with the underlying reasons for the
action stated.
2.
Nothing in the slightest way suggestive of criminal conduct
or malfeasance in office on the part of any member of the Committee's
staff is indicated in your document, as indeed it would have been impossible for that document to indicate in veracity.
3.
What is immediately apparent, on the other hand, is that
what your letter describes as "a condensed report" by the two economists
you assigned to this project describing "ismues...and conclusions" at
each Open Market Committee meeting "in their own words" does, in true
selected
fact, contain scores and scores of/direct quotations from the minutes, some
of them of considerable length, plus selective but extensive accounts of
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Federal Reserve Bank of St. Louis
-
7
-
conversations in literal or lightly paraphrased form, plus some observations, comments and conclusions of the authors themselves.
Thus your document constitutes a form of eavesdropping on internal
discussions prior to actions
long since made public by the Committee,
and what you now propose to do is to give that eavesdropping amplification by the broadcast of universal publication.
That your Committee has the power do so so is unquestioned by us.
The question is one you will have to judge for yourselves, according to
your own conscience and sense of propriety and of the public interest.
The Open Market Committee has neither the means nor the wish to
restrict your Committee, and it has never had 3eik either;
it cannot
"allow" or disallow ^ anything your Committee wishes to do.
Yet the Open Market Committee would like to make it clear that,
except in making available to your Committee the full minutes of its meetings
in 1960, it bears no responsibility for the document you have had prepared,
nor would it bear any responsibility for its further publication.
There is no question here of a denial of information to the Congress:
your request for opportunity to examine the minutes of the Open Market
Committee was granted more than a year ago, and you still have them.
What is in question is whether there shall be broadcast via publication
not the actions of a statutory body--which already have been made public,
and for which the members of that body now accept and always have accepted
total responsibility--but the discussions and debates preceding that action,
even though no charge of wrongdoing or of concealment of action, of votes
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thereon or reasons therefore has been charged/ or would be warranted.
The question has applications affecting the Executive and Judicial
branches of the Government, other governmental agencies, and the
Committees of Congress, including your Committee, for it is commonplace
in all of these to have executive meetings without opening to public gaze
the internal discussions, where no wrongdoing has been done or charged.
It seems to us that, to publicize to the world discussions and conversations in any of these meetings - - s o long as no wrongdoing is XKX involved—might well raise throughout the Government and the nation, over
private meetings and conversations far beyond the confines of the Federal
Reserve, a spectre from which American life has hitherto been free -apprehension that "Big Brother may be watching you" -- and thus do public
mischief rather than public good.
The Open Market Committee is absolute in its confidence that it has
no cause for shame for anything said at its meetings, and absolute in its
recognition that the question of whether your document's selected excerpts
therefrom
aire to be published is solely one for your Committee to judge.
Nevertheless, for the reasons given, the Open Market Committee
continues to feel the public interest would be injured rather than helped by
broadside publication of the internal discussions preceding its actions.
Therefore it repeats this request in its letter of July 21, 1961, transmitting
its minutes to your Committee,
that you hold their contents in
confidence.
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Federal Reserve Bank of St. Louis
Sincerely yours,
ext. 3548
FOR FLAT P.M. RELEASE
Thursday, June 10, 1965
(Speech will be delivered
on the Floor, Thursday
afternoon, verbatim)
+
CHAIRMAN PATMAN OF THE HOUSE BANKING AND CURRENCY COMMITTEE CALLS
UPON WILLIAM MCCHESNEY MARTIN, CHAIRMAN OF THE FEDERAL RESERVE
BOARD, TO EASE HIMSELF OUT OF HIS PRESENT POSITION SO THAT PRESIDENT LYNDON BAINES JOHNSON MAY APPOINT A NEW FEDERAL RESERVE
CHAIRMAN SYMPATHETIC TO HIS FISCAL, ECONOMIC AND MONETARY POLICIES;
THE TEXAS CONGRESSMAN ALSO ACCENTUATES ECONOMIC ACHIEVEMENTS UNDER
PRESIDENT JOHNSON AND CHARGES THAT MARTIN IS "A MAN WHO CAN'T STAND
PROSPERITY."
.
This is the story of a man who can't stand prosperity.
Let
me modify that statement -- this is the story of a man who can't
stand prosperity for the many — it's A-okay for the few. This
is the story of the Federal Reserve Board's Chairman, William
/
McChesney Martin, who believes that it's more important to restrict the money stock and credit of the nation, and increase
interest rates, than it is to keep America prosperous. This is
the story of a man who is defying the President of the United
States by singing a siren song of pending disaster unless we
take measures that run counter to the President's, which will
in fact insure the reality of that disaster.
An important part of this story has to do with the remarkable
advances of the economy under President Kennedy, and continued
under Lyndon Baines Johnson.
of uninterrupted prosperity.
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No apology is needed for 52 months
- 2-
Despite this 52-month record of unprecedented prosperity,
«
the longest peacetime period of well-being in the Nation's history, with 75 million, 100 thousand employed in this country,
with our gross national product for the first quarter of 1.965
running at an annual rate of $648 billion a year, compared to
$622 billion for all of 1964 -- with all of this magnificent
achievement rolling a^ong, from out of the woodwork comes the
»
Chairman of the Federal Reserve Board to "CRY HAVOC."
America's Incredible Economic Record Under President Johnson
In the first 50 months of our record-breaking prosperity,
our output of goods and services rose by more than $147 billion,
an increase of almost 30%.
Our growth in the last four years was
greater than that of the entire nine years previously.
Unemploy-
ment fell from 6.8% in the first three months of 1961 to 4.8% in
the first three months of
1965.
v
Last week. President Johnson
was £.bie to announce that it went down to 4.6% in May, the lowest
level since October of 1957.
But, William McChesney Martin of the Federal Reserve Board,
in his powerful*\- position, cries havoc -- he can't stand prosperity,
Let's look further at the economic state of affairs under
Lyndon Baines Johnson.
relation to sales.
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Federal Reserve Bank of St. Louis
Inventories remain remarkably low in
Price stability is as firm as a weight
- 3-
lifter's muscle. There are no signs of excessive demand or
inflationary prices. We are still using only about 89% of our
i
productive capacity and while wages have gone up slightly, unit
%
labor costs are lower today than a year ago, according to the
President's chief economic adviser, Gardner Ackley.
The tax cut of 1964 provided a major fiscal stimulus for
the economy, and in the offing is the excise tax cut which can
only help our economy. Thanks to President Johnson's strong
campaign to reduce waste in government, and the increased
revenues which continued business expansion has brought, the
Administration's budget deficit for this fiscal year will be
only about half of last year's deficit.
The deficit in our
national income budget for the first three months of this year
is only $100 million.
For Chairman Martin of the Federal Reserve Board, all this
has been too good. He's the man who can't stand prosperity.
Chairman Martin's Open Mouth Policy
In a speech delivered at Columbia University in New York
recently, where Chairman Martin noted some similarities between
the economic situation now and during the period preceding the
Great Depression, he may have unwittingly brought about the beginning of the end of his public career.
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Federal Reserve Bank of St. Louis
He frightened the day-
- 4-
lights out of not only the stock market community, but business
and some important financial circles around the country as well.
I'm inclined to go along with Leon Keyserling, who says that
in many respects, Mr. Martin is an "estimable man1* and "is not
wrong in all respects."
Then Mr. Keyserling calls attention to
an expansion in consumer debts, which is probably too rapid, that
Mr. Martin complains about. But Keyserling notes that Mr. Martin
does not tell how the consumer debt situation came about. Mr..
Martin carefully avoids mentioning that it is due toi a decade
under the impact of Federal Reserve Board policies approved by
Mr. Martin, which took a heavy toll in unconscionable interest
rate rises that are paid by homeowners, farmers, small businessmen, and American families generally.
While Martin noted a few points of vulnerability that need
correction in the American economy, he ignored, as economist
Leon Keyserling said, the "manifold points of strength that
tower above these* (points of vulnerability) like Pike's Peak
above the plains."
What Martin did was to give some sensation-generating comparisons between the economic situation now and during the late
1920*s. He likened some current conditions to those pertaining
to the late 1920's, and he played up the idea that now, as just
prior to the !29 crash, the clear dangers to our domestic well-
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being lie chiefly, though not altogether, in our balance of payments difficulties, the monetary policies of France, and our
long-standing deficit in international balance of payments.
»
This is the theory of those who look upon Herbert Hoover as
primarily a victim of wicked European forces that brought upon
him the Great Depression. This theory is totally discounted by
such eminent economic scholars as Senator Paul Douglas, who wrote
a study called "Controlling Depressions,11 and the fine John
Galbraith work, "The Great Crash." These economic realists saw
clearly that the crash was due primarily to domestic maladjustments, "which caused our productive powers to get more and more
out of line with distribution and consumption at home," and which,
as I will point out later, were accentuated by the Fed's tight
money policies in the late 20;s.
Speaking of maladjustments, during the Hoover depression,
A
/
things got so bad down in East Texas that the folks were forced I
to go out and catch cottontail rabbits, something we never ate /
before. They were called "Hoover hogs." If William McChesney I/
Martin keeps up his drive toward disaster, we may call them
"Martin hogs."
That the real danger to our economic progress lies in implementing policies that have been discredited because they have time
and again brought about man-made depressions and recessions never
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Federal Reserve Bank of St. Louis
-, 6 -
seems to enter William McChesney Martin's mind. That the very
monetary policies which he espouses and puts into practice are
what causes national economic distress is totally imperceptible
to the thinking mechanism of a man who is so completely Hoover
oriented, and who is a believer in the trickle-down money theory.
(A prominent Washington writer, who knows him well, told me that
he believes that Martin would buy a Hoover collar if the haberdasheries still stocked them.) The cogs in his head click one
way — tight, tight, tight money, high, high, high interest rates;
ignore increasing the money stock even when economic activity
demands it.
A further note on the Hoover trickle-down policy, which
funneled money to the top and mighty little of it to the bottom.
There were supposed to be two cars in every garage and two chickens in every pot, according to Hoover.
But what the policy really
trickled down to was that the car or cars were repossessed by the
finance company and there were no chickens, and not even a pot to
•*.
•
cook them in. But there were at least two mortgages on*all homes
that had not been foreclosed.
To return to the matter of money supply, so vital to the
economy of every country, let's see how Mr. Martin and the Fed
have blundered.
In mid-May, our money supply was $159.2 billion.
Believe it or not, last December it was a little higher, $159.4
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Federal Reserve Bank of St. Louis
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billion.
But in the same period, our gross national product in-
creased to where it is now almost $650 billion, and between the
%
fourth quarter of 1964 and the first quarter of 1965, it went up
almost $14 billion.
I repeat, our money stock remained the same*
The man who can't stand prosperity has not been able to
grasp that money supply, credit, and interest rate policies right
here at home bring on depressions and recessions.
Every single
depression and recession that we've had, which put the country
through a wringer each time — three under Eisenhower — was
preceded by a curtailment of the money supply — a failure to
keep the money supply abreast of the expanding economy -- a
tightening of credit and an increase in interest rates.
This
is precisely Martin's policy today — it was the same yesterday,
and the day before, and the day before.
Martin's policy could bring us trouble, but not a depression
or a re-do of the horrible Hoover days, because of the great things
%
•
that have happened under Franklin Roosevelt, Harry Truman, John
Kennedy and Lyndon Johnson.
I shall only mention a few facts
that will show how dissimilar 1929 is from 1965.
To those who
still get nerve tremors thinking of the Hoover days, let them
take courage from the following.
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Federal Reserve Bank of St. Louis
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Some Reasons Why 1965 Is Not 1929
In 1929, the government old not have a budget of $100 billion
a year.
This in itself is a cushion against any major collapse
of the total American economy.
During the Hoover depression, the old folks had lost their
life savings and had nothing to fall back on. Today, we have
the Social Security System which provides some income to 19.9
million of our citizens.
During the Hoover depression, and for the five years preceding it, the farmer had been not a second-class citizen but
a fifth-class citizen economically.
His income had been shrink-
ing since the mid-20fs. Prices of things they had to buy were
going up, up, up.
Interest rates were also going up, up, up,
so that when he went to the bank to borrow money to produce crops
or to raise cattle and hogs — when he wanted to borrow money for
any of these things, he was looked upon as a very bad risk and
paid through the nose, if he could get any money at all out of
his banker.
Today, most farmers are protected by farm programs, and
while the farmer's income might not be as high as the farmer
would like, he can't conceivably be as bad off as he was when
he had nothing but Hoover's famous crack about "prosperity11
being "just around the corner" to lean upon.
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Federal Reserve Bank of St. Louis
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Mr. Martin, with his Hoover depression mentality, ignores
the fact that we have insurance for our unemployed workers.
Besides, we have programs that President Johnson is implementing
designed to curtail poverty and bring improvement to the worst
areas of distress in America, to aid the bottom layer of our
wage earners so that the whole economy will not have a continuing drain upon it.
President Johnson is trying to help people to help themselves. Herbert Hoover, best known for his Great Depression,
spurred people all along the road to misery*
Chairman Martin,
the man who can't stand prosperity, appears to want to pick up
where Herbert Hoover left off.
Martin Discredits Himself Wi~h The Business Community
The business community, the last to turn against Herbert
Hoover during his Great Depression — and what names businessmen
called him -- "was in sheer panic due to the Hoover Administration
mismanagement and lack of foresight in the years preceding the
depression and during it — actually up until Roosevelt's reminder that the only thing Americans "have to fear is fear itself.11
I have felt all along that Martin fears prosperity.
trying to frighten people because we're prosperous.
He is
The very
businessmen and financial leaders who have supported Martin in
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- 10 -
his debate with me through the years over the alleged independence of the Federal Reserve System are now beginning to scratch
their heads and wonder whether perhaps I haven*»t been right.
My telephone calls from all over America have been very
heavy lately, saying:
to do?11
"What is this 'blank, blank1 Martin trying
"Who's back of him?"
ruining our economy?"
"What can we do to stop-him from
"Why doesn't he let well enough alone?"
"Who's he trying to frighten, a few stock market manipulators or
the American people?"
"Is it right for an American official to
have the authority to make our economy plummet?"
•
Martin's Policies Must Stop
The really disquieting similarities between our present time
and the period immediately preceding the Great Depression is the
fact that for the past six months the Federal Reserve has been
carrying on a "squeeze it" policy, that is, they have tightened,
tightened, tightened credit.
That is what happened prior to the
*
Hoover depression.
Besides, interest rates have been going up as they were
before the big crash in '29. Bankers then and now were asking
big business, small business and consumers to pay more and more
for money. While rates today have been going up moderately,
except on short-term governments where they have been soaring,
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Federal Reserve Bank of St. Louis
- 11 if a businessman wants to borrow money for a legitimate project,
frequently he is asked to pay "points11 to some one in order to
«
obtain the loan. This is a subterfuge employed to collect more
than the advertised or announced rate of interest. "Points" are
even asked sometimes in order to obtain a home loan.
Another way to increase the interest rate works as follows:
The businessman goes to his bank and says he needs a hundred
thousand dollars.
The banker tells him, "We'll let you have it
provided your account never goes below $15 or $30 thousand."
This has a nice name — it is called a "compensating balance."
Through this practice, the bank collects interest on a hundred
thousand dollar loan, but actually loans the borrower anywhere
from $70 to $85 thousand.
Banks are getting bolder and bolder in carrying on this
kind of shenanigans.
William McChesney Martin is making it
easier for them to make these demands on businessmen, large and
m
small, and home owners, and farmers, and laborers, and other
consumers — he is encouraging this type of usury by tightening
credit and ever seeking higher interest rates.
Have you ever
heard of Chairman Martin or any Federal Reserve official protecting the people against injustices caused by extortionate
interest rates? The answer is a resounding "No."
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Probably the worst practice that's going on in banking is
when they find a businessman in distress, they move into his
business, in its direction and its ownership. They get their
%
pound of flesh. And the more William McChesney Martin tightens
credit and increases interest rates, the more distress there
will be in the business community and the more banks will muscle
into it, particularly business in distress.
The Fed Is The Root of All Financial Evil
Mr. Martin's Fed has caused every single depression and
recession in our time, and always by tightening credit and increasing interest rates, and cutting down on the money supply.
For the past six months, the money supply of the nation has
failed to increase.
It has remained constant. The one way to
assure economic trouble is to cut off an orderly increase in
money supply necessary for the needs of an expanding economy.
Despite everything that Martin has been doing to curtail
our economic progress and well-being, he cannot do away with
the mighty pillar of strength erected to avoid disaster to our
banking structure. The Federal Deposit Insurance Corporation
makes it possible for everyone who has money on deposit in
practically all of our commercial banks and savings and loan
institutions to know that their accounts are insured up to
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Federal Reserve Bank of St. Louis
- 13 -
$10,000. Last year, I attempted to make the insurance $20,000,
«
but the banking lobby defeated my proposal. William McChesney
Martin may do the country wrong economically, but he cannot hurt
the basic strength the FDIC represents.
I have enumerated several similarities between what went on
in Hoover's day and today, some of them worrisome, that stem from
the action of the head of America's central banking system.
Well, you will say, this is another one of Patman's diatribes against William McChesney Martin -- we've been hearing
the same for many years. My colleagues, I don't wish to rub
it in, but there are none so blind as those who will not see.
If you have not had evidence to back up what my contention has
been for a long, long time, namely that Martin's tight money
and higher interest rate policy, and his mouthings concerning
it, are detrimental to the forward movement of the American
economy, then Martin's supporters are absolutely right —
Patman is just carrying on a iieud without substance.
Businessmen Are Asking Questions
But the American businessmen, both large and small, who
'
i
call me on the phone today know differently.
can you do to shut this fellow up?11
They ask, "What .
"Wha£ can you do to. counter-
act the evil that he is doing?" "What can you do to make the
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Federal Reserve responsible t3 the President of the United States?"
"What can you do to mesh monetary policy with fiscal and economic
policy?"
"How can you have the Fed going one way and the govern-
ment the other and come out whole?"
"Must we have two governments
in Washington -- one elected and the other carefully selected by
a few bankers?"
If you seriously want to know the answers to these questions that have all been asked me in recent days, then I say to
you gentlemen, it is high time that we do what I have suggested
we do for a long, long time -- bring the money power back to the
highest elected officials of :he United States government and
the Congress.
No longer perm .t the spokesmen for great banking
vested interests to govern the direction the American finance
and economy should take.
Think hard, think long, my colleagues.
plea for a pet peeve of Wright Patman's.
I'm not making a
I'm talking about the
hard core of our economic life, our central banking system.
The
Federal Reserve is to the American economy what a generator is
to a lighting system.
If the generator functions properly,
light is with us; if it falters, we're in darkness.
The forebodings of depression-minded Martin are those of
an unhappy man, whose hand is at the switch of the generator.
Or perhaps there is a better analogy. The Chairman of the
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Federal Reserve is like the undertaker in the depression days
who hadn't had a funeral for six months. He had the longest
%
face in town. There had to be a cadaver somewhere or he would
continue in his misery, William McChesney Martin hopes to find
the cadaver — the American economy.
To sum up Mr. Martin's speech at Columbia University in
New York takes but a few words — he came not to praise the
economy, but to bury it,
Sir William Petty in 1682 Knew More Than Chairman Martin in 1965
I wish to discuss a bit more about money supply, which is
one of the keys to whether American businessmen and consumers
have adequate credit for their needs.
In 1682, Sir William Petty, one of the first great economic
geniuses to appear, wrote an essay called, "Questions and Answers
Concerning Money."
In answer to a question, "Is there any way to
know how much money is sufficient for any nation?", he answered
to the effect that the amount of money has to be in relationship
to the national income of a country.
What Petty knew in 1682, Martin hasn't learned to this day,
I might add that Sir Samuel Pepys said of this early economist,
William Petty: "He was the most rational man who I ever heard .
speak with a tongue,"
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Federal Reserve Bank of St. Louis
<
- 16 -
Another question in Sir WilliatD Petty1 s essay was, "What
remedy is there if we have too little money?11 The answer:
"We
must erect a bank, which well computed, doth almost double the
<
* *•
effect of our coined money: and we have in England materials for
a bank which shall furnish stock enough to drive the trade of
the whole commercial world."
"Mr. Martin as Historian"
In a memorable Washington Post editorial following the Fed
Chairman's speech, called "Mr. Martin as Historian," the writer
notes that, "Mr. Martin dilated on many of the 'factors that
converted a stock exchange crash into the worst depression in
our history.1
There are many references to collapse of the gold
exchange standards, to speculation, to the lopsided distribution
of income, and to loose banking practices. But nowhere in his
chronicle does the chairman mention the money supply, the central
element in any monetary history...What Mr. Martin failed to tell
•
his Columbia audience is that the stock of money declined by a .
third between 1929 and 1933, and that the Federal Reserve policy
was directly responsible for that devastating shrinkage.
This
point is relevant because the Fed has of late been pursuing a
policy of increasing monetary restraint.
Their stock of money
is now no larger than it was six months ago, and unless it is
permitted to grow, the economic expansion will grind to a halt."
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"If Mr. Martin's selective history has any moral, it was
stated by Santayana who wrote:
'Those who cannot« remember the
past are condemned to repeat it.1 Congress, which under the
Constitution is charged with the regulation of the Nation's
money supply, can avert a repetition of the baleful past by instructing the Federal Reserve authorities to follow a consistent
policy, one that will provide the stock of money required to
sustain economic growth,"
This editorial is, I believe, accurate in its summation
and I shall have it printed in its entirety following my remarks.
I wish to point out one fact that the editorial writer omitted,
namely, that from early 1928 on, the money stock not only did
not grow but actually declined slightly, which played a large
part in undermining the economy prior to the 1929 stock market
crash.
What the man who can't stand prosperity seems to be doing
is emulating the disastrous monetary policy that led to the
1929 crash. This is the most disquieting similarity that can
be documented. This is not a myth or a distoriton of maladjustments, 1929 to 1933, vis-a-vis 1965;
Mr. Martin's speech makes
it clear that he has learned little, that he is prepared to
repeat the mistakes of the late 1920's and early 1930*s, and of
the 1950's. This is truly a disquieting similarity.
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Senator John Randolph of Virginia Was a Wise Man
%
Mr. Martin has been called the king-emperor of America's
money system.
v
In other days, the title was bestowed upon such
men as Nicholas Biddle, Morgan the First, Morgan the Second, and,
of course, Andrew Mellon. Certainly, early in American history,
statements and debates over America1s money power were as commonplace as they are today.
In 1811, during the debate over the renewal of the charter
of the Bank of the United States, Senator John Randolph of Virginia
expressed his opposition to the charter.
The following statement
is attributed to Senator Randolph:
"Charter a bank with $35,000,000 of capital, let it be
established and learn its power, and then find, if you can, means
to bell the cat. It will be beyond your power, it will overawe
your Congress and laugh at your laws."
The particular cat of Randolph1s time, symbolizing the aggressive character of the monciy trust, is still very much alive.
I am sorry to say that, to this day, we have not belled the cat.
Today its name is the Fed cat. Its immediate parents are the
fat cats of the banking community that inhabit an-alley of Lower
Manhattan Island, known as Wall Street.
In 1818, a committee of the New York State Legislature
reported as follows:
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"Of all aristocracies, none more completely enslave a
people than that of money; no system was ever better devised
•
so perfectly to enslave a community as that of the present mode
of conducting bank establishments*
Like the siren that entices
to destroy.
"They hold the purse strings of society, and by monopolizing
the whole of the circulating medium of the country, they form a
precarious standard by which all the property o£ the country —
home, lands, debts and credits, personal and real estate of all
descriptions — are valued, thus rendering the whole community
dependent upon them; proscribing every man who dares to expose
their unlawful practices."
An Awesome Burden of Responsibility
Such is the power of money power, those who are in controlling
position have a responsibility so heavy and awesome that it is
almost too much for any man to assume.
One thing about this matter I do know — certainly t-he country cannot afford -- even as prosperous as it Is — a man at the
helm of our monetary system who is so afraid of prosperity that
he has to end it. Certainly, we cannot afford to have a monetary
course set one way and a fiscal and economic policy set another.
Assuredly, we can't have President Johnson responsible for the
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Federal Reserve Bank of St. Louis
- 20 -
well-being of the country and have Chairman Martin, who is not
responsible for its well-being, put the brakes on the President's
program for economic prosperity.
»
\
Eliot Janeway, the noted business economist, stated very
clearly the situation when he said, "Any test of Presidential
power is bound to be disturbing to business confidence which has
come to rest on teamwork between the President, Congress and the
executive agencies.M
And Mr. Janeway noted that the Fed's Chair-
man, "has created such a disturbance by challenging President
Johnson's policy of keeping the banking system supplied with
reserves adequate to meet loan demand in an expanding world
economy."
Mr. Janeway continues, "The present upset in the stock and
money markets recalls the trouble which the Martin administration
of the Federal Reserve Board caused during the Eisenhower and
Kennedy years. But Johnson is not likely to permit Chairman
Martin to involve him in any kind of stock market break or
business slump. The prognosis is not for a muddle-along market
in Johnson's name but under Martin's management..."
President Johnson Will Not Permit Mismanagement of Our Money System
Knowing President Lyndon Baines Johnson from the time he was
12 years old, having followed his brilliant career, I can assure
you that he will not permit the American economy to go to pot.
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He will not stand idly by and permit any arrogance on the part
of a Federal Reserve Board Chairman, nor will he permit any ineptness to continue for long.
Certainly, he will not have the
show under his name and somebody elsefs management.
I have pointed out that the Fed has gone one way and the
Administration another, insofar as fiscal, economic and monetary
matters are concerned.
This is a fact no matter how hard re-
actionary columnists, who support Martin and the Fed, are attempting to fool the public into believing otherwise.
Would Martin agree with Gardner Ackley, Chairman of the
President's Council of Economic Advisers, who said recently:
"We saw in the late 1950fs what...fiscal and monetary restrictions did to jobs, to profits, to investment and to productivity
... It is in the interest of all of us to avoid falling back into
that trap...If we do maintain reasonable stability of costs and
prices, we can continue the expansionary monetary and fiscal policies that have contributed so much to our present prosperity."
Or would Martin agree with Secretary of the Treasury Fowler,
who said:
"To raise interest rates...not only conflicts with
our need to maintain our domestic expansion...but would not solve
the (balance-of-payroents) problem...An interest rate increase
large enough to have a significant effect...would almost certainly bring a recession, A recession, in turn, would severely
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Federal Reserve Bank of St. Louis
- 22 -
damage the climate for foreign investment in the United States
and would also create a strong movement to reduce interest rates
immediately."
Mr. Martin would disagree with both of these — in fact, he
did when he said in his Columbia University speech:
"Our common
goals of maximum production, .employment and purchasing power can'
be realized only if we... prevent orderly expansion from turning
into disorderly boom... If an occasion arose when we could preserve the international role of the dollar only at the expense
of modifying our favored domestic policies, even then would we
need to pay attention to the international repercussions of our
actions."
As Frank Porter said, in an astute news analysis in the
'i
Washington Post, the Fed Chairman "directly questioned the view
of top Administration economists that 1929 is not 1965 and- that
the present 5 2 -month expansion demonstrates the Nation is capable
of sustained economic growth."
The very able Mr. Porter pointed
out that no matter what the intent, Martin's words have had a
"depressing effect." Most objective observers will agree.
Patman!s Solution
I believe I have the solution.
In view of the fact that
Chairman Martin has challenged our President; in view of the
fact that the stock market drooped fourteen points in two days
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Federal Reserve Bank of St. Louis
*
- 23 -
following his gratuitous speech; in view of the fact that many
business leaders are concerned lest his words cause the end of
«
our 52-month prosperity; in view of the fact that Martin is advocating tight money-high interest rate policies that will bring
about the disaster he seems eager to foster — I suggest that the
present Federal Reserve Board Chairman has outlived his usefulness as a public servant in charge of America1s central banking
/
system. I suggest that he ease himself out of his present occupation and permit President Johnson to name a Board Chairman of
his own choosing.
Many, many times on the Floor of this House, I have pointed
out that it is only every four years that a President has the
opportunity to nanje the Board Chairman of our Federal Reserve
System, and then he must choose him from the seven Board members
holding office. President Kennedy re-appointed Mr. Martin, who
had held the office for some time.
But ray colleagues, do you
remember that it was Chairman Martin, re-appointed by President
Kennedy, who announced that if he felt it necessary, he would
tighten money and raise interest rates if the tax cut suggested
by President Kennedy overheated our economic system by permitting
people to buy things with the money they didn't have to pay in
taxes.
He just couldn't stand prosperity for the ordinary Amer-
ican citizen.
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It is apparent that the Federal Reserve Board Chairman, no
matter who it is, under the existing law has too much power.
Last year, the majority of the Domestic Finance Subcommittee
of the Banking and Currency Committee, of which I am Chairman,
offered some recommendations which would alter the situation
that nearly arose when Martin indicated he would, if he felt
like it, challenge President Kennedy.
Today, the unfortunate
situation has actually arisen through the challenge to President
Johnson by Mr. Martin.
I not only call upon Mr. Martin to do the decent thing and
resign, but I ask that the Congress seriously consider H. R. 11,
which was put together after extensive hearings, the most exten••
sive in the 50-year history of the Federal Reserve System.
H. R. 11 embodies the recommendations of the Subcommittee and
would alter most of the defects that now exist in the Fed.
It
. would no longer permit a Federal Reserve Chairman and his Board
to operate monetary policy contrary to the economic and fiscal
policies of the President and Congress of the United States.
It
would make the Fed responsible to the President and Congress,-who
are elected by the people and who can be removed by the people
if their policies do not meet with the people's approval.
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Now, Martin and the Fed are responsible only to the banking
%
interests that have been clamoring for tight money and high
interest rates.
It is my notion that tha American people would prefer to
have as head of our central banking system some one who is responsible to them, rather than a man who has been so responsive
to the wishes of those who believe in the divine right of money
kings.
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Federal Reserve Bank of St. Louis
•
ext. 3548
FOR RELEASE UPON DELIVERY
(Rep. Wright Patman (D.jTex.)
will deliver speech on the
Floor early Tuesday afternoon, June 15, 1965)
CHAIRMAN WM. McC. MARTIN IS NOT PRESIDENT LYNDON BAINES JOHNSON
Mr* Speaker, throughout history, there have been men who
think of themselves as God. Under no circumstances do I want
you to think that I am referring to the Chairman of the Federal
Reserve Board, William McChesney Martin.
I know that he doesn't
think he is God.
Then there are other men like Genghis Khan and Adolph Hitler
-
who thought they were Caesar and set out to conquer the world. I
would not put the Chairman of the Federal Reserve Board in this
category either.
But there is a man abroad in the land in high position who
thinks he is Lyndon Baines Johnson, the President of the United
States.
He takes the authority that belongs under our Constitu-
tion to the President of the United States and delegates it to
himself.
The Constitution states explicitly that, "The execu-
tive power shall be vested in a president of the United States
of America," and that, "...he shall take care that the laws be
faithfully executed..," The Constitution is again explicit on
money power, for it states that, "The Congress shall have power
...to coin money, regulate the value thereof..."
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Federal Reserve Bank of St. Louis
* '•
- 2-
Mr* Martin and his Open Market Committee are determining
the interest rates of the country, whether we have adequate
credit to meet our needs, and whether our money supply should
grow with the economy or fail to do so, as it has in the last
six months.
Mr. Martin is not responsible to the people *- he is
responsible to the bankers who control the Federal Reserve
.
- System.
On the other hand, Lyndon Baines Johnson is responsible
to the people of the country, who elected him.
By our Consti^
tution, he is duty bound to execute the laws of the land, and
the Congress when it set up the Federal Reserve Board had no
intention to delegate all of its authority to the Chairman of
the Federal Raserve Board.
Mr. Martin ignores this fact. He takes unto himself
illegal authority and, as I said the other day, since his
policies run counter to that of the President of the United
•
States, who is responsible for the economic and fiscal policies of the country -- the very well-being of the country —
I say to you again, Mr. Martin should do the decent thing and
.
resign. He has no business playing President.
•.
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Federal Reserve Bank of St. Louis
. ••» .
- 3-
Mr. Martin and his policies run counter to the Employment
Act of 1946.
The President is responsible for implementing that
Act — "To coordinate and utilize all of the Government's plans,
functions and resources...to promote maximum employment, production, and purchasing power.11
If you do what the President is attempting to do, you will
have prosperity in the country.
If you do what Mr. Martin, who
thinks he is President, wants done, you will have economic and
financial trouble throughout the land.
Again I say, we have no room in this country for a man who
holds high office, other than the Presidency, to act as though
he were President.
Mr. Martin is obviously not a team man. Again and again
and again, I shall ask that he remove himself from high office.
'
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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
OF THE
FEDERAL R E S E R V E SYSTEM
WASHINGTON
JAMES LOUIS ROBERTSON
M E M B E R Or THE B O A R D
December 9, 1965
Dear Mr. Patman:
In response to your request that members of
the Board of Governors of the Federal Reserve System
appear before your Committee on Monday, December 13,
I regret to advise you that because of an out-of-town
engagement related to the President's Balance of Payments Program, I will be unable to appear on that date.
However, in order to assist as fully as possible in the achievement of your objective of disclosing the factors that entered into the Federal Reserve's
recent decision to raise the discount rate and the ceilings on interest rates payable on time deposits, I am
enclosing copies of two statements which set forth my
own reasons for opposing both actions. The one relating to the discount rate increase was presented to the
Board at the time that action was taken. The one opposing higher maximum interest rates was written subsequent
to the meeting and submitted for the Board's record.
These statements include the main points that I would
make orally if it were possible for me to be present
Monday.
In the event you wish to make these statements
available to members of your Committee, its staff, and
other interested people, I am submitting additional
copies herewith.
Enclosures
The Honorable Wright Patman
Chairman, Joint Economic C
Congress of the United States
Washington, D. C.
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Federal Reserve Bank of St. Louis
Statement of Governor Robertson's Reasons for Opposing an Increase in the Discount Rate, December 3. 1965
Changes in monetary policy should not be triggered
by fear of prosperity. A prosperous and growing economy
has been the goal of public policies, and substantial achievement in that direction in the 1960*8 should be a cause of
gratification rather than concern.
It is not inevitable
that inflation, boom, and bust must follow from the kind of
prosperous performance the United States economy has been
giving, and consequently there are no valid grounds for arguing that tightening now is needed to forestall inflationary
developments that are sure to come later.
This is not to deny the need for very careful scrutiny of the progress of economic events and a willingness
to act to further restrain credit if and as excessive demand
pressures actually emerge.
I conceive of the present as a
time of delicate balance in the economy.
Supply and demand
forces seem so tentatively poised that abrupt action to
change monetary conditions could tip the scales significantly - towards inflation if policy was actively eased, or
on the other hand, towards recession if credit availability
were sharply tightened.
Financial markets have only recently calmed somewhat
after being buffeted by rumors of an impending discount rate
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Federal Reserve Bank of St. Louis
- 2change.
Such a rate increase now would come as a distinct
surprise, with reactions aggravated by the impending seasonal
peak of money market pressures. Such action would insure
undoubtedly that the heavy volume of Treasury cash borrowing to be done in January would have to be undertaken at
substantially higher interest costs to the government.
If, for whatever reasons, a tightening action is to be
initiated, it would be far preferable to use a subtle rather
than a slam-bang method.
An appropriately mild and indirect
line of action might be to (1) dampen bank issuance of promissory notes by defining them as deposits; (2) hold Regulation
Q ceilings on time deposit interest rates at existing levels
for the time being; and (3) take no action on the discount
rate, expecting that banks would undoubtedly have to cover
some portion of their net December loss of CD's by substantial temporary resort to the discount window. This combination of steps should serve to moderate somewhat the rate of
advance in bank credit, while not triggering immediate expectations of higher interest rates in the, market and yet,
at the same time, placing banks in a position of dependence
on the discount window that could lead fairly naturally to
a more overt tightening of monetary policy should inflationary developments begin to appear.
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Federal Reserve Bank of St. Louis
- 3 Whether or not a breakout of inflationary pressures
will in fact occur cannot now be predicted.
Accordingly,
the best practical course is to adopt a policy of "watchful
waiting", meanwhile continuing to supply a reasonable flow
of reserves to finance much-needed economic growth.
Despite
large and sustained expansion since the last recession in
1961, a small but significant margin of human and real capital resources remains unutilized in this country.
Further
orderly expansion in aggregate demand can effectively employ
some of these resources. The accompanying growth in credit
and money during this period has been orderly, and has contributed to overall economic growth.
Continued orderly credit
expansion is needed if our economy is to move on up to the
goal of sustainable full employment of available resources.
The price pressures to date from this economic growth
have been small and selective, stemming mostly from worldwide shortages of particular nonferrous metals, temporary
scarcities of certain agricultural products, and markettesting mark-ups in a few administered-price industries.
These are not the types of price increases appropriately
dealt with by a dampening of aggregate domestic demand.
The temporary nature of some of the recent increases is
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Federal Reserve Bank of St. Louis
- 4indicated by the fact that the rate of rise in the wholesale price index has already slowed since mid-year from an
annual rate of 2 per cent to 1 per cent. Meanwhile, recent
successful Administration actions against aluminum and copper prices reduce the likelihood of other administered-price
increases.
The U. S. balance of payments performance does not
now supply reasonable grounds for further monetary tightening. The chief burden for further improvement in the balance
falls on other policies.
The allegedly interest-sensitive
components are already performing very well under the discipline of the Voluntary Foreign Credit Restraint program.
I
see no sign that this program is weakening in so far as its
influence on financial institutions is concerned.
Corporate
direct investment abroad, the category of capital flow that
has been least reduced to date, is notoriously insensitive
to changing general credit conditions in the United States.
U. S. interest rates are already high by historical
standards, and I believe they are generating all the credit
restraint that ought to be attempted in the current delicate situation. The federal fiscal position will be shifting to a somewhat less stimulative policy for a time after
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Federal Reserve Bank of St. Louis
- 5 the turn of the year, and we should be wary of imposing a
coincident restraining influence from additional monetary
tightening at this juncture. The appropriate monetary
policy for later in 1966 can be best judged after we have
the benefit of the official federal budget message in January and see the public reaction thereto.
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Federal Reserve Bank of St. Louis
Statement of Governor Robertson's Reasons for
Opposing an Increase of the Ceilings on Interest Rates Payable on Time Deposits from 4 and
4-1/2 per cent to 5-1/2 per cent, December 3, 1965
Governor Robertson dissented from this action generally for the same reasons given for his dissent from the
action to raise the discount rate. The latter action, he
assumed, was designed to tighten credit, in view of the
rapid expansion of bank credit; it surely was not designed
- simply to raise interest rates. However, in his view, the
raising of the ceilings on interest rates payable on time
deposits would - in virtually the same breath - enable
banks to acquire more funds to expand their lending but at
higher rates, and thus not serve to reduce bank credit expansion - if that were the aim.
In addition, he felt, the
larger banks would be able to attract funds away from
smaller financial institutions which did not actively engage in the issuance of time deposits but relied on inflows
of savings and demand deposits with which to meet loan demands, or, alternatively, to force those smaller banks to
also engage in the risky business of competitively bidding
for highly interest-sensitive short-term funds with which
to make long-term loans.
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Federal Reserve Bank of St. Louis
JOINT ECONOMIC COMMITTEE
OPENING STATEMENT BY
WRIGHT PAIMAN, CHAIRMAN
Monday, December 13, 19^5
HEARINGS ON THE FEDERAL RESERVE
This hearing is called under Section 5 of the Employment Act of
19^-6 which assigns to this Committee the responsibility of studying means
to coordinate programs to carry out the purposes of the Act.
We have witnessed a most serious lack of coordination that runs to
the very heart of that law. I refer to the recent action by the
Federal Reserve Board to raise discount rates from k% to k^jo and to
lift the ceiling on time deposits from h^ffa to 5i$«
The discount rise
is 12*ff>, and the time deposit rate has gone up 22.2$.
There is an old Navy saying that the quickest way to sink a ship is
to have two Captains.
I believe this applies even more pronouncedly
to our national economy. A cartoon from the Washington Post of December 8
showing the Administration and the Federal Reserve trying to pedal one
bicycle in opposite directions is a most expressive and accurate
description of what is going on.
The Employment Act specifically requires coordination when in
Section 2 it charges the Federal Government ". . .to coordinate and
utilize all its plans, functions and resources for the purpose <*f
creating and maintaining, in a manner calculated to foster and promote
free competitive enterprise and the general welfare, conditions under
which there will be afforded useful employment opportunities including
self-employment for those able, willing, and seeking to work, and t»
promote maximum employment, production, and purchasing power."
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Page 2
Further, Section 3 of the Act requires that the President of the
United States conduct "a review of the economic program of the Federal
Government and the review of economic conditions affecting employment in
the United States . . . and the effect upon employment, production, and
purchasing power" and to transmit his recommendations annually to the
Congress.
It also requires that he submit each year a program for carrying
out the policies of the Act.
The Employment Act is very clear and specific on the requirement that
economic policies must be coordinated and it charges the President, the
Congress, and all other officials with this duty. Although no agency was
exempted, time and time again the Federal Reserve has chosen to ignore
this public law and to go off on its own.
It chooses to conduct the
monetary policy machinery of this nation as a completely independent and
separate operation — separate from the President, the Congress, and even
the law.
Marriner Eccles, a former Board Chairman, had something to say
about the role of a Federal Reserve Chairman.
statement into the record at this time.
I would like to read his
It was made before the Joint
Economic Committee on August 15, 19&1:
"I think, as a practical matter, it is reasonable to allow the
President to remove a Governor when he sees fit. An Administration
is charged with the economic and social problems of the Nation.
It seems to me to be extremely difficult for an Administration to
deal with these problems, economic and social of the entire country,
without having these powers. There must be a liaison, a responsive
relationship between the Administration and the monetary system.
This does not mean political control in the undesirable sense which
it is often implied. I think that the Governor of the Federal
Reserve Board is the channel through which the relationship with
the Federal Reserve System should develop."
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Federal Reserve Bank of St. Louis
Page 3
A brief review of events of recent weeks provides the needed background for this inquiry into the breakdown of economic policy coordination
called for by the Employment Act.
On December 1st, the President assured
a group of business leaders in Washington that an outbreak of inflation
was not anticipated in 1966 and that it would be a record year. He
indicated that the 1.8$ rise in consumer prices over the past 12 months had
been due in large measure to rising food prices.
He indicated that this
situation had stabilized and was not expected to continue in 1966.
Shortly thereafter the Secretary of Labor told the AFL-CIO Convention
that the level of unemployment was still high and that this economy is
still not operating at a level necessary to make full use of available
manpower.
He said "the worst mistake today would be to put on some
brakes." The Secretary of the Treasury said recently in New Orleans that
the Administration was opposed to any interest rate rise or credit
tightening, and that such action would be premature and unwise.
Shortly after these very clear indications of Administration policy
the Federal Reserve Board met on December 3rd and decided to change
monetary policy without waiting for full development of the Administration's program.
The Board voted k to 3 to tighten money at once.
The facts are obvious. While the rest of the Executive branch of government were coordinating their activities and plans preparatory to submitting them to Congress in accord with the law, the Federal Reserve,
under the chairmanship and leadership of Mr. Martin, by their action
declared their independence of any coordinating effort.
No other conclusion can be drawn*
On December 7th, one day after the
Federal Reserve decision was announced, Vice President Humphrey found it
necessary to declare that the government policies, which had been
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Federal Reserve Bank of St. Louis
Page k
coordinated for 57 months, were no longer coordinated as a result of the
Federal Reserve increase in the discount rate. The Vice President
specifically mentioned that the Federal Reserve did not give full consideration to the Administration proposed budget in making its decision.
The Vice President went on to say that "part of the task will be to develop
an appropriate fiscal-monetary policy in light of the Federal Reserve action."
The Federal Reserve action poses several serious issues:
1. What is the meaning of these two changes? What do they indicate
concerning trends in monetary policy as executed in recent
months by the Federal Reserve and as they are likely to execute
it in the months ahead?
2. What is the legal basis for this action and is it within the
constitutional guidelines as to the authority of the Federal
Reserve?
3. Does the current and prospective economic situation justify a
shift in monetary and fiscal policies; particularly are there
present, or immediate prospective, dangers of inflation such
as call for a more restrictive set of government policies?
k. What is likely to be the effect of the Federal Reserve actions
on the economy?
5. Was there appropriate coordination with the President, his
Advisers, and the Congress concerning the mix of economic
policies as called for by Section 2 of the Employment Act of
19^6, and which this Committee is directed to study by Section
5(b)(2) of the same statute?
The legal issues are clearly matters for the legislative committees
of the House and Senate to consider. The economic questions cannot be
answered fully until the President completes his budget and economic
program and submits them to the Congress in January.
We can, however,
reasonably demand a full and frank answer now to the last and most
important question: was there proper coordination of economic policies,
and if not, why not.
We are glad to hear your response.
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B O A R D OF G O V E R N O R S
or THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Chairman Martin
yrrmi
J. H. Furth
Date jmy 25,
Subject:
Attached a preliminary draft for a speech on Limits of
Monetary Policy.
It is the revised version of a pre-preliminary
draft that has been (rather hastily) scrutinized (and mercifully
cut by 40 per cent) by Ralph Young and Bob Solomon.
Nobody else
has seen it.
If you think that the draft roughly reflects your ideas
on the subject and that its line of reasoning sounds convincing,
I shall submit the draft, as usual, for comments and suggestions
to Charlie Molony, Bob Garden, Bob Holland, Al Koch, and Art Hersey
(both Ralph Young and Bob Solomon will be away this week).
I shall
also have all factual statements and especially all figures carefully checked and brought up to date.
Unless you advise me to the contrary, I shall assume
that you will inform the Treasury or any other Government agency
only when the draft reaches a more advanced stage.
Unfortunately, the questions of price and cost developments, vital as they are, may well (at least for the moment) be
eclipsed by even more vital and more difficult problems of international finance—unless the disruptive trends of the last few
weeks are stopped. The apparent lack of U.S. leadership in this
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Federal Reserve Bank of St. Louis
To:
Chairman Martin
- 2 -
July 25, 1966
field, compounded by the weakness of the British Government and the
dogmatic prejudices and rigidities of the Continental European
authorities, has caused anguish even to those of us who so far have
managed to retain their optimism and their faith in the good sense
of the international financial community.
We all hope and wish for your speediest recovery--and
not for personal reasons alone.
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Federal Reserve Bank of St. Louis
Hf
DRAFTSJHF:dch
July 22, 1966
Limits of Monetary Policy
The past nine months have, for the first time since the
start of the present upswing 5-1/2 years ago, seen the emergence
of serious inflationary pressures in our economy.
Wholesale and
consumer prices have been rising at annual rates of about 3 per
cent; labor costs in manufacturing have begun to inch up; and our
foreign trade surplus--our brightest hope in our struggle to end
our persistent large payments deficit—has seriously declined.
These developments, while disappointing, have been
neither surprising nor inexplicable.
On the contrary, they are
the normal concomitants of the stage of the business cycle our
economy has reached.
Until about nine months ago, we had been able to meet
the requirements of a rapidly expanding economy by drawing on
unemployed manpower and under-utilized plant capacity.
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Federal Reserve Bank of St. Louis
Bringing
- 2 -
these idle resources into the production process made it possible
to follow stimulative monetary and fiscal policies without bringing
forth serious scarcities or bottlenecks of productive factors, which
would have strained the maintenance of reasonable price and cost
stability and would have impeded progress toward correction of our
payments deficit.
All this changed when our economy, in the last quarter
of 1965, reached what may be considered a reasonably full utiliza-
tion of its resources.
From then on, further expansion in the
aggregate demand for goods and services in excess of the rate of
additions to labor force and plant capacity or of a rise in produc-
tivity would either be satisfied by means of an increase in imports
or a diversion of exports to domestic consumption; or it would be
frustrated and result only in rising prices.
Clearly, the previous
rate of expansion of demand could not be expected to remain sustain-
able under these changed conditions.
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Federal Reserve Bank of St. Louis
Thus, an annual rate of increase
- 3 -
of about 6 per cent in the "real" gross national product would have
to be reduced to, say, 4 or 5 per cent, in any event; if our GNP as
measured in current dollars were to rise faster, it would only lead
to serious price and cost pressures and adverse effects on our inter-
national payments position.
In order to achieve the transition to a less rapid increase
in our national product without risking dislocations that might result
in recession or stagnation, it would be necessary for investors and
consumers--including, to the extent consistent with national interests,
the public authorities--to change their plans.
And in order to induce
consumers and businesses to do so, it would be necessary to slow down
the rate at which additional credit funds, especially bank credit
funds, could be made available to potential borrowers, as well as
the rate at which consumers and producers would receive further in-
creases in their monetary after-tax income.
But as long as the flow
of money income and credit is growing as rapidly as hitherto, we cannot
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Federal Reserve Bank of St. Louis
- 4expect either consumers to abstain from further increasing their
demand for goods and services at the accustomed rate, or producers
to abstain from further trying to expand their production facilities
at a rate at least sufficient to meet their expectations of future
demands for their products.
In fact, the unusually high rate of utilization of plant
capacity has induced producers to raise their sights for further
expansion over and above the level of previous investment plans,
which had been limited by the opportunities for better use of
existing underutilized facilities.
In consequence, business
investment has risen even faster than consumption;
between 1964
and the first quarter of 1966, the ratio of private consumption
to GNP declined fractionally but the ratio of nonresidential fixed
investment to GNP increased from 9-1/2 per cent
per cent.
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Federal Reserve Bank of St. Louis
to 10-1/2
- 5Hence, just as the previous state of our economy required
a stimulus from both the fiscal and the monetary policy side, the
state of our economy since the fall of 1965 has, in my judgment,
required restraint, again from both fiscal and monetary policies.
The Federal Reserve System has accepted the policy impli-
cations of that analysis.
As you know, the discount rate was raised
by 1/2 of 1 per cent last December, and the net reserve position of
member banks was gradually tightened until these banks had, as a
whole, net borrowed reserves averaging about $400 million.
Our
discount rate now is higher than at any time since 1929, and the
new borrowed reserves of member banks are now higher than at any
time since 1959.
And, as you also know, this tightening has not failed
to exert its influence on the financial markets.
The availability
of credit for many purposes has been restrained, in the face of
surplus demands for funds.
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Federal Reserve Bank of St. Louis
In consequence, interest rates have
- 6 -
risen sharply.
Between September 1965 and July 1966, yields of
Treasury bills and medium-term Government securities rose by about
3/4 of 1 per cent and the yield of long-term securities by about
1/2 of 1 per cent; the yields on shares and mortgages rose somewhat
less but some bank lending rates, as well as the rates paid by
banks on time deposits and especially on the so-called certificates
of deposit, rose even more.
In order to avert disruption in financial
markets from a massive outflow of time deposits from banks, the Board
raised last December the maximum rate payable on time deposits from
4 and 4-1/2 to 5-1/2 per cent, and city banks especially have felt
compelled to push their deposit rates up to the permitted maximum.
In order to stem the resulting shift of funds from other savings
institutions to commercial banks, the .Board recently raised reserve
requirements on time deposits from 4 to 5 per cent--the first
increase in reserve requirements since 1951--and also limited rates
payable on multiple maturity time deposits.
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Federal Reserve Bank of St. Louis
- 7 -
The rise in interest rates, and the reactions that rise
has produced in some quarters, might give the impression that our
measures have starved the economy of liquidity.
opposite is true:
Actually, the
the supply of money and credit has continued
what
to expand rapidly--some/ less rapidly than before, and far less
rapidly than it would have in the absence of our action, but
apparently still too rapidly for the preservation of price and
cost stability and for the improvement, or even for the avoidance
of renewed deterioration, of our payments balance.
Again, this result is neither surprising nor mysterious.
Once prices generally begin to rise, borrowers quite rightly tend
to discount nominal interest rates by the expected rate of the
increase in relevant prices.
Even though interest rates in money,
credit, and capital markets have, over the past nine months,
advanced considerably, the rise has been very small if discounted
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Federal Reserve Bank of St. Louis
- 8 -
by the increase in prices.
And it should occasion no astonishment
to find that the movement has therefore been insufficient to induce
consumers to increase their savings rate or to induce business to
reduce its investment plans as much and as rapidly as would have
been necessary to maintain equilibrium between investment demands
and flow of savings.
Under these circumstances, two interrelated questions
arise;
could a more drastic tightening of monetary policy in itself
be expected to produce the necessary adjustments unaided by fiscal
policy; and if not, does this failure indicate that monetary policy
is an inefficient tool with which to maintain or restore financial
stability?
Both questions should, in my judgment, be answered in
the negative.
Monetary policy is a useful tool to counteract
moderate deviations from equilibrium; and it is an indispensable
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Federal Reserve Bank of St. Louis
- 9tool to assist fiscal and other policies in efforts to remedy a
serious disequilibrium; but its use cannot suffice, at least in our
own economy, to correct a serious disequilibrium alone and unaided.
Once deflationary or inflationary processes have gathered
considerable momentum, quite substantial changes in borrowing plans
of producers and consumers are needed to restore equilibrium.
In
the case of a serious recession, the shortcomings of monetary
policy, if unaided by other policies, in trying to generate such
substantial changes are generally recognized.
But similar limita-
tions also apply to the case of serious inflation.
When everybody expects prices to rise, an increase in
interest rates, in order to have a sufficiently restrictive effect,
may well need to be greater than the expected price advance.
Hence,
if everybody expected prices to advance, say, by 3 per cent a year,
interest rates might well need to rise by more than 3 percentage
points.
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Federal Reserve Bank of St. Louis
- 10 -
But what would happen if the Federal Reserve pursued
policies that would rapidly raise interest rates by more than
3 per cent? Would not such a policy be effective?
In fact, it might well be; but it is more likely that
it would have unwanted side-effects which would either impair its
effectiveness or, even worse, render the action so effective that
the boom would turn into a recession.
Let me explain what I mean by this statement.
An action of the Federal Reserve to tighten monetary
policy in such a way that interest rates would rapidly rise by
more than 3 percent would certainly be considered as signaling
a severe financial crisis.
The shock effect of such a signal might be sobering--
in fact so sobering that a great many producers and consumers
would immediately reduce their borrowing plans.
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Federal Reserve Bank of St. Louis
This would mean
- 11 a very rapid change in the business situation;
the boom would be
followed, not be a flattening out of the expansion but by an abrupt
contraction.
Obviously, such a sequence of events must be avoided.
But this would not be the only risk.
In fact, the shock
effect might have exactly the opposite consequences.
Producers and
consumers might become convinced that the rate of inflation was in
danger of greatly accelerating if the Federal Reserve felt it necessary
to permit such a drastic increase in the bill rate.
Instead of
reducing their borrowing plans, they might, under these circumstances,
actually increase them, thus accelerating instead of slowing down the
pace of inflation.
There is no way of reliably predicting the effect of such
a psychological shock--not only on potential borrowers but also on
the political and institutional framework of our credit system, and
on international markets.
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Federal Reserve Bank of St. Louis
We must never forget that the international
- 12 -
implications of our monetary policy are incomparably more important
than those of the monetary policy of any other nation:
not only
because of our leading role in international trade and even more
so in international finance; but primarily because of the widespread
use of the dollar as an international currency and as part of the
monetary reserves of foreign countries.
This consideration alone
is a good reason for avoiding drastic experiments.
But let us assume, for argumentfs sake, that the action
of the Federal Reserve would have no untoward psychological, political,
institutional, or international consequences.
What about its probable
impact on our domestic economy?
Moderate changes in monetary policy are unlikely to have
serious effects on income distribution.
The time has past when only
the rich man was a lender and only the poor man a borrower.
But
potentially serious effects might well appear once the changes
ceased to be moderate.
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Federal Reserve Bank of St. Louis
- 13 -
A sharp rise in interest rates has a particularly strong
impact on certain sectors of the economy, including residential
construction, public utilities, and local authority spending for
such vital projects as schools, hospitals, and roads.
Manufacturing
industries, requiring large inventories, would be more deeply
affected than service industries without inventories.
The budget
of the Federal Government, the largest single debtor of them all,
may find its debt service increased by more than its additional
revenues.
And our balance of international payments would be
burdened by the increase in interest payments on nearly $26 billion
of fixed-interest dollar liabilities to foreigners.
Moreover, our savings institutions might find themselves
in difficulties.
Even at present rates, savings institutions feel,
in some cases, compelled to pay rates on their deposits that are
as high as the yield of previously granted long-term credits, such
as mortgages.
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Federal Reserve Bank of St. Louis
A further drastic rise in rates might compel them
- 14 to pay rates in excess of such receipts; or else risk withdrawals
of funds.
Both alternatives might well lead to disturbing, even
disruptive developments:
the liabilities of savings institutions
are relatively short-term—seldom in excess of one yearfs maturity--,
but their assets may have average maturities as long as 10 years.
Hence, their assets cannot easily be liquidated to meet sudden large
withdrawals of deposits, and their average credit rates change far
more slowly than their average debit rates.
Neither the Treasury
nor the Federal Reserve could idly stand by while savings institu-
tions go down merely as the consequence of a change in monetary
policy.
tions.
Hence, they would be forced to cooperate in rescue opera-
At best, this would mean the lending of substantial new
funds to those institutions and their depositors or shareholders.
Such operations would avert catastrophe but the injection of
newly created funds into the economy would be contrary to the
objectives of counterinflationary monetary policy.
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Federal Reserve Bank of St. Louis
- 15 -
Even among enterprises in the same economic sector,
serious inequities might arise.
Small business would probably
have greater difficulties in receiving credit accommodation than
large enterprises.
And newcomers would have greater difficulties
than their old-established competitors, even though the new firms
might be more inclined toward technological and managerial innova-
tions.
Such a consequence would be particularly serious for our
economy which can remain prosperous only as long as it retains its
leadership in technology and management.
Consumer credit, little affected by moderate changes in
interest rates, also would begin to feel the pinch.
Purchase of
houses, of cars, and of home appliances might become the privilege
of those consumers whose income is high enough to make them inde-
pendent of credit.
In the long run, a gradual reduction in the
rate of increase in consumer credit might not be bad for our
economy; but an abrupt contraction of consumer lending would be
serious for consumers and producers alike.
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Federal Reserve Bank of St. Louis
- 16 -
Sledgehammer action would have equally unfavorable
consequences for the Government securities market.
The Federal
Reserve must not go so far in facilitating effective debt manage-
ment as to override the interests of the economy as a whole, when-
ever these interests demand tighter credit conditions.
But neither
must the Federal Reserve make it impossible for the Treasury to
finance Government operations.
The Federal Reserve must not arrogate
for itself a veto power over expenditures authorized by the Congress
even though these expenditures may exceed Government receipts and
therefore require new borrowing.
Moreover, even when budget expenditures are fully covered
by receipts, the Treasury must have continual access to the credit
market in order to turn over its maturing debt.
Hence, monetary
policy must never imperil the success of Treasury financing operations
at the current market rate.
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Federal Reserve Bank of St. Louis
- 17 -
The words "at the current market rate" should be stressed:
the Federal Reserve must not peg the price or limit the yield of
Government securities.
Moderate fluctuations in prices and yields
of these securities are essential for the smooth working of our
financial markets.
But excessively large or violent fluctuations
would make the markets disorderly.
Under our system, monetary
policy is, as you know, primarily conducted by means of operations
in the open market, and therefore presupposes the existence of a
wide, broad, and resilient market for Government securities.
Dis-
orderly markets would make the flexible functioning of our monetary
policy itself impossible.
Finally, a drastic change in interest rate levels could
produce disturbing price changes throughout our capital-based
economy.
Interest rates determine the present capital value of
future income flows.
Hence, a rapid and large decline in interest
rates would mean a rapid and large decline in the present value of
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Federal Reserve Bank of St. Louis
- 18 -
capital, including not only securities but also plant equipment
and real estate.
Such a general decline in prices could exert a
sharp deflationary influence on the plans of consumers and pro-
ducers.
In this way, an excessive firming of monetary policy
would again threaten to bring about a serious downturn of the
economy rather than the desired transition from unsustailable
boom to sustainable growth rates.
All these considerations do not mean that monetary policy
is a tool for fair weather only.
While it is not a sufficient
means to stem a serious inflation, it is a necessary means to
supplement fiscal and other policies to that end.
Restrictive fiscal policies — let us say, an increase in
tax rates--would fail in their purpose of ending inflationary
pressures if the Federal Reserve were to supply the market freely
with the funds needed to pay the increased taxes.
The tax increase
still would exert some effect, since the taxpayers, while maintaining
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Federal Reserve Bank of St. Louis
- 19 -
their liquidity position, would be able to do so only at the price
of reducing their net assets.
But the tax increase becomes far
more effective, and especially its impact on investment decisions
much greater, when the increased tax payments press immediately--
either fully or at least in part—on the taxpayers' liquidity as
well as onthejr income, instead of being financed by additional
borrowing.
Moreover, monetary policy has, as you know, the great
advantage of flexibility.
Under our Cons titution, the power to
change tax rates is a jealously guarded prerogative of the Congress;
and while it might be desirable for Congress under special circum-
stances to grant the Executive branch some leeway, it is under-
standable that Congress has been reluctant to do so.
But monetary
policy can easily and efficiently be used to modify the severity
of the impact of fixed tax rates on the liquidity of the banking
system and of the economy in general in line with changes in
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Federal Reserve Bank of St. Louis
- 20 -
economic conditions, until these changes are large enough to warrant--
and necessitate—further Congressional action.
Finally, the limitations on the effectiveness of monetary
policy do not mean that the Federal Reserve would be justified in
refusing to take anti-inflationary action in the absence of firm-
ing fiscal action.
none:
Here as so often, half a loaf is better than
inflation certainly would have progressed much faster over
these past nine months if the Federal Reserve had not firmed its
policies.
And in view of the understandable tendency of my audi-
ence to see forecasts in anything I say, let me warn you that
nothing I say should be interpreted as indicating that the Federal
Reserve had reached the end of its rope or that any further firm-
ing of its monetary policy would be inadvisable or impossible.
But it is my conviction
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Federal Reserve Bank of St. Louis
that beyond a certain limit—which we
- 21 -
may or may not have reached--further firming of monetary policy
alone tends to become less effective than an appropriate combina-
tion of monetary and fiscal measures.
Until recently, the interplay of our fiscal and monetary
policies has been working remarkably well. We can all take pride
in the achievements of the past 5-1/2 years;
an unprecedented up-
swing, accompanied until recently by only minimal increases in
prices and virtually no increase in labor cost per unit, and by
a gradual improvement in our payments balance.
This improvement
was by no means as rapid and as complete as we should have wished;
nevertheless, since rapid economic progress often tends to raise
imports more than exports, it might be considered quite an achieve-
ment to have brought about a substantial reduction in our payments
deficit at all.
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Federal Reserve Bank of St. Louis
- 22 But today we are in grave danger of losing the gains we
have made.
Inflation is harmful everywhere and under all condi-
tions; but it is particularly harmful here and now.
If we lived
in a closed domestic economy, or if we were in a comfortable bal-
ance-of-payments position, we might for a time tolerate without
great harm an annual increase in prices at an annual rate, say,
of 3 per cent--most if not all our friends in Europe have
experienced greater price increases over the past few
years.
But we are living in an open economy, in which the United
States is called upon to play a leading role in international com-
merce and even more so in international finance, and our interna-
tional accounts have remained in substantial deficit for nearly
nine years.
The entire fabric of the international payments system,
on which the prosperity of all trading nations of the free world
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Federal Reserve Bank of St. Louis
- 23 -
depends, is based on the universal use and acceptability of the
dollar.
most
The stability of/other currencies is of importance mainly
to their countries of issue since their currencies circulate only
at home.
The stability of the dollar is of importance to the
entire free world since it is used and held virtually everywhere
by merchants, investors, bankers, and central banks.
Our interna-
tional payments system cannot be maintained without a stable dollar;
a stable dollar cannot be maintained unless we correct our payments
imbalance; and we cannot do so if we succumb to inflation, even to
a degree perhaps tolerable in countries that do not have the
responsibilities of an international reserve center, and whose
international accounts are in surplus.
And just as inflation in the United States would have
more serious effects on the world economy than inflation in any
other country, so an abrupt downturn in our economy would also
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Federal Reserve Bank of St. Louis
- 24 -
be more harmful to the entire world than a downturn in any other
country.
Our economy is distinguished from all others in that the
United States is the only country that makes a large contribution
to international trade and finance, but whose international trans-
actions, despite their absolute magnitude, are equal to a very
small fraction of its domestic sector.
Hence, a downturn in our economy would pose not only
great risks to prosperity abroad but would also be unlikely to be
effectively stopped by the continuation of prosperity in the rest
of the world.
For this reason, the United States must take even
greater care than other countries to avoid the use of anti-inflationary
measures in a way that would risk to overshoot their mark and to
bring about a recession.
It is no longer true that when the United
States sneezes the rest of the world catches pneumonia; but it still
'
is true that if our economy were to become seriously ill, the rest
of the world could hardly hope to escape contagion.
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Federal Reserve Bank of St. Louis
- 25 -
For our own sake as well as for the sake of the entire
free world, all our efforts need to be directed toward the twin
goals of preserving the dynamism of our economy while maintaining
financial equilibrium in our domestic and international transac-
tions.
Under present conditions, monetary restraint is an in-
dispensable part of these efforts.
But it is only a part and it
should not, and cannot, be made to bear the entire burden.
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Federal Reserve Bank of St. Louis
Attach to memo circulated 8/10/66 containing other
copies of original letters regarding discount window.
Chairman Martin
FOR INFORMATION
PRIOR TO CONSIDERATION AT A
MEETING OF THE BOARD.
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Federal Reserve Bank of St. Louis
I
FEDERAL RESERVE BANK OF CHICAGO
OFFICE OF THE P R E S I D E N T
August 15, 1966
Board of Governors of the
Federal Reserve System
Washington, D. C. 20551
Gentlemen:
This is in response to your letter dated July 19
wherein you indicated it would be helpful if the Presidents
and Discount Officers of all Federal Reserve Banks would
review carefully the administration of their discount windows.
v
With the waning of "reluctance to borrow" on the part
of member banks, the fuller investment of their funds, increased
.".edges of their investment securities to an ever enlarging
group of preferred public depositors and an intensified squeeze
on the net earnings of some banks, we believe Regulation A, in
its present form, is being put to a severe test. We do, however,
agree that this is not an appropriate time to change the provisions of the Regulation, either formally or informally.
T\Te have discounted notes for many "first-time" borrowers
during recent months, and have noted their approach to the discount window was not accompanied by fear or reluctance to borrow.
Their reasons for borrowing appeared appropriate, and their
unwillingness to seek higher costing federal funds or CD's
economically wise.
Many banks are encountering increasing difficulty
adjusting for sudden withdrawals of funds, especially when the
amounts are large. With banks being more fully invested, a
number have been forced to the window repeatedly for this
uncontrollable reason rather than by choice or design.
•
In numerous cattle feeding areas seasonal peak periods
of credit demand ^.re giving way to steady demands at higher
levels. This is a phenomenon not contemplated by the agriculturally slanted discount (nine months) provisions of the law and
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Federal Reserve Bank of St. Louis
' F E D E R A L RESERVE BANK OF CHICAGO
Board of Governors of the
Federal Reserve System
-2-
August 15, 1966
regulation. Also, today, the manufacturing lead time in many
industries greatly exceeds the 90-day discount provision.
4
In the past six months we have had to visit with a
number of banks concerning inappropriate us^ o£ OUX v_._^>_w. ____
window. This has included borrowing to purchase from brokers
and carry high yielding loans secured by convertible bond
collateral and selling high priced federal funds while indebted
to us.
Many bankers have been cautioned that they cannot avail
themselves of every attractive investment opportunity that comes
their way unless they already have available loanable funds. In
a few areas banks have attempted to improve their public images
by increasing their real estate mortgage lending as savings and
loan associations curtailed theirs , with the hope they could lay
off the loans acquired with big city correspondents and insurance
companies. Their expectations for relief proved unrealistic and
some troublesome and costly asset adjustments resulted.
By and large, we believe Seventh District member bankers
have a fairly good understanding of what constitutes appropriate
use G..
discount window and we have been surprised that we
have not had more borrowing requests.
Fall loan demands of member banks are expected to be
quite heavy, and with the present low discount rate structure
we expect to experience administrative difficulties in assuring
ourselves that all borrowings are appropriate.
I'"e have no further comments at this time other than
the belief that, as stated above, any policy changes in the
administration of the discount windows should await completion
of the Reappraisal of the Discount Mechanism.
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Federal Reserve Bank of St. Louis
Sincerely,
Cha#les J. Scanlon
Add to the copies of the original letters distributed
August 11, 19663 regarding the discount window.
Chairman Martin
FOR INFORMATION
PRIOR TO CONSIDERATION AT A
MEETING OF THE BOARD.
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Federal Reserve Bank of St. Louis
FEDERAL RESERVE BANK
OF ATLANTA
ATLANTA, GEORGIA 3O3O3
O F F I C E OF
PRESIDENT
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Federal Reserve Bank of St. Louis
August 9, 1966
. . _ . _ . - . l.^-i-ritt She
ian.
>ecret< ry
Board of Governors of the
Federal Reserve System
Washington, D. C, 20551
Dear Mr. Sherman:
I have reviewed with considerable interest your
letter of July 19 regarding reasonable uniformity of administration of the discount window consistent with currenobjective s of monetary policy.
While we have had some expansion in the number of
crowing banks, attributable specifically to country banks,
cur administrative policies are generally consistent with those
set forth in your letter. We have experienced the expansion of
credit and the shift of demand out of the larger financial areas
into smaller banks.
So far as we are able to determine, there have been
no instances of banks deliberately using Federal Reserve credit
to profit from the rate differential in the Funds market. However, there have been some few instances of banks seliin >• funds
^bted to us at the window occasioned by unexpected deposits late in the day, demands made by correspondent banks too
late to adjust and for other similar reasons. We have communicated with all banks in the District and advised that such practice
was not an appropriate use of Federal Reserve credit.
v_>
*
Sincerely yours,
Pre.sident
•
Mr. Martin
This was mailed to you in Maine on 8/19
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Federal Reserve Bank of St. Louis
mnm
To oe considered at the joint meeting of the Presidents,
August 23, 1966.
Chairman Martin
FOR INFORMATION
PRIOR TO CONSIDERATION AT A
MEETING OF THE BOARD.
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Federal Reserve Bank of St. Louis
STRICTLY
CONFIDENTIAL
BOARD DF GDVERNDRS
DP THE
FEDERAL RESERVE SYSTEM
WASHINGTON,
D.
C.
20551
ADDRESS OFFICIAL C O R R E S P O N D E N C E
TO T H E
BOARD
August 19, 1966.
STRICTLY CONFIDENTIAL
Dear Sir:
Enclosed is a staff draft of a proposed memorandum regarding
the coordination of discount window administration with other monetary
policy instruments. This preliminary draft of statement has been
prepared at the Board's direction and is being distributed for study
by the Board members and the Presidents prior to the joint discussion
of the subject on Tuesday, August 23.
While the draft of memorandum is strictly confidential,
you should feel free to discuss it with your discount officers or
other officials at your Bank. The Board is seeking the best thought
in the System looking toward even better coordination between discount administration and other instruments of monetary policy.
Very truly yours,
Merritt Sherman,
Secretary.
Enclosure
TO THE PRESIDENTS OF ALL FEDERAL RESERVE BANKS.
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Federal Reserve Bank of St. Louis
STRICTLY CONFIDENTIAL (FR)
August 19, 1966.
DRAFT MEMORANDUM ON
COORDINATION OF DISCOUNT ADMINISTRATION
WITH OTHER INSTRUMENTS OF MONETARY POLICY
A.
Policy Background and Objectives
1.
The current economic and financial situation is giving
rise to special pressures on Federal Reserve discount facilities, but
it is also creating special opportunities for discount administration
to contribute to effective monetary policy, provided that timely,
appropriately oriented, and reasonably uniform adaptation of discounting
procedures can be achieved.
This memorandum outlines the means by which
such an objective may be sought.
2.
The current economic situation is generating extraordinary
demands for credit, rising interest rates, and substantial dislocations
in flows of funds, both among financial intermediaries
intermediaries and market instruments.
and between
The impacts of such credit
pressures have been uneven, with particular effects on housing and
potentially on state and local governments.
3.
In this environment, it is the current aim of monetary policy
to restrain the pace of credit expansion, particularly bank credit
expansion, while achieving a somewhat better balance of such restraint
among the various categories of final credit users. A secondary but
nonetheless important qualifying consideration is the desire to avoid
disruptions of financial processes.
4.
In implementing current monetary policy, the Federal Reserve
has relied on several measures of restraint, some conventional and
some novel:
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Federal Reserve Bank of St. Louis
- 2 - STRICTLY CONFIDENTIAL (FR)
(a) Through open market operations, reserve availability has
been progressively restrained relative to demand in a fashion
typical of most business expansions of the 1950's and 1960's.
(b) In addition, however, reserve requirements have been
raised twice, the first such unilateral action in 15 years.—
(c) Besides such action on the reserve supply front, the
System has also recently been taking some steps to inhibit bank
ability or willingness to seek funds from other sources. Ruling
that promissory notes were deposits and reducing the rate ceiling
on multiple-maturity deposits were two actions of this type.
In addition, the Board has maintained the Regulation Q ceiling on
single-maturity CD's. With market rates on competitive instruments
now higher in some cases than on such CD's, a good many larger
banks undoubtedly are facing substantially larger CD run-offs than
they might have anticipated even a few weeks ago.
(d) Given the above constraints on supply of reserve and
non-reserve funds, banks have been scrambling hard for remaining
nondeposit-types of funds, (e.g., borrowing outside the System)
at progressively higher rates. In addition, banks will undoubtedly
be led to increase their demand for accommodation at the discount
window. In this connection, bank attitudes toward borrowing may
have been affected by mention of this possible avenue of relief
in the Board's press statement concerning the increase in reserve
requirements on time deposits.
\J
An upward adjustment from 11 to 12 per cent in the reserve
requirement on demand deposits at country banks was introduced
in November 1960, coordinate with the action making all vault
cash reserve-eligible.
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Federal Reserve Bank of St. Louis
- 3 -
STRICTLY CONFJOENTIAL (FR)
(e) In the meantime, the discount rate on Federal Reserve
credit has been hold down, because, in the Board's judgment, there
has been more to be lost than gained from the announcement effect
of an increase.
Supporting reasons for maintaining the discount
rate unchanged at this juncture were cited in the Board's letter
of July 16 to the Reserve Bank Presidents.
5.
In view of these developments and the current environment, it
becomes essential to have a discount policy that, besides performing the
usual kind of "cushioning" function, will do four particular things:
(a) provide an extra degree of cushioning against
extraordinary pressures that might concentrate at certain points
in the banking system, particularly because of substantial run-offs
of CD's;
(b) counter, at least partly, the demonstrated tendency
for banks to respond to credit restraint by running down their
net liquidity and selling portfolio investments while postponing
effective restriction of lending policies, particularly with
respect to loans to good business customers;
(c) avoid releasing so much reserves in the cushioning process
as to erode the effectiveness of overall credit restraint; and
(d) accomplish all this with a minimum of disruption and
confusion and a maximum of uniformity in the treatment of
similar cases.
The discount window is uniquely suited to undertaking these tasks. No
other existing monetary policy instruments, singly or in combination,
are likely to be able to achieve them.
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Federal Reserve Bank of St. Louis
STRICTLY CONFIDENTIAL (FR)
- 4-
B.
Implementing Stated Discount Policy Objectives
It is conceived that the best approach to the above discount
policy objectives is to develop a set of general guidelines extending
the present interpretation of the meaning of Regulation A at those
points that will come under greatest stress in the current and
prospective situation. This should leave substantially intact the
intent and philosophy of the Regulation, the present administrative
apparatus for policing the discount window, and the traditional "rules
of the game" for dealing with the conventional kinds of member bank
needs for temporary, seasonal, or emergency credit assistance.
The
recommended supplementary guidelines are listed in succeeding paragraphs.
1.
Borrowing member banks shall be considered for greater than
usual accommodation at the discount window when the clear proximate
cause for their borrowing is one of the following:
(a) a sharp run-off of CD's or savings deposits which
the bank is unable to replace because of the Regulation Q rate
ceilings (it is not intended as a prerequisite for this type of
discount accommodation that the member bank should be required
to engage in maximum promotion of small consumer-type CD's at
ceiling rates in an endeavor to offset, insofar as it can, run-offs
of either large CD's or savings deposits).
(b) a sudden and substantial drying up of non-Federal Reserve
sources of borrowed funds (Federal funds, RPs with corporations,
loans from correspondents, transfers from foreign branches) on
which the bank had previously relied to finance its position;
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Federal Reserve Bank of St. Louis
- 5STRICTLY CONFIDENTIAL (FRl
(c) an increase in reserve requirements against deposits;
(d) temporary credit extensions to finance, directly or
indirectly (through loans to recognized dealers or underwriters),
minimum underwriting activities essential to the continued
functioning of securities markets.
2.
Repayments of any borrowing undertaken for reasons cited in
Item B. 1. above shall be expected on a reasonable and orderly basis,
but Federal Reserve Bank officials should encourage banks to obtain
funds for such repayment by adopting more restrictive lending practices
in preference to selling off investments, borrowing funds elsewhere, or
soliciting consumer time deposits more aggressively.
For this purpose,
Reserve Bank officials should contact each borrowing
bank as early as
practicable in its borrowing span to ascertain the cause of borrowing
and, if other than a purely temporary case, to raise the question of
adjustment of bank lending policies.
If, and only if, the borrowing
bank indicates that its need for borrowing arises from causes cited in
Item B.I, above and demonstrates that it is in fact tightening lending
policies significantly, it may be allowed to borrow for a more extended
period than would otherwise be allowable under the present interpretation
of Regulation A.
How much longer will have to be a matter for judgment
by the discount officer, but it should be contingent upon continuing
and substantial progress in curtailing new loan commitments (although
not ceasing them altogether),
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Federal Reserve Bank of St. Louis
- 6STRICTLY CONFIDENTIAL (PR)
3.
Encouragement of tightening of lending policies, as recommended
in Item B.2., should not extend to Reserve Bank specification of particular
borrowers or classes of borrowers to be curtailed. Varying bank-customer
relations and the long-run efficiency of private decisions in fibis area
need to be respected,, What can be done, however, is to urge banks not
to exempt any major category of customer (and especially not business
customers) from some degree of tightening, and urge them to encourage
their customers, of all types and sizes, to hold down their loan requests
as much as possible.
4.
Additionally, banks borrowing for any except very infrequent
and temporary needs should be encouraged to maintain their net liquidity
at a reasonable level. This point of view should be pressed strongly
with any bank borrowing under the terms of Items B.I. and B.2. above.
While such banks should not be led to borrow extra funds from the
Federal Reserve simply to buy liquid assets or reduce their borrowing
from others, they should be pressed to continue their tightening of
loan policies beyond the point that permits repayment of current Federal
Reserve indebtedness, whenever such extended tightening is needed in
order to permit some rebuilding of their liquidity positions to an
appropriate level over a reasonable period of months. An "appropriate"
level of liquidity cannot be defined with any assurance. As a rough
rule of thumb, however, a discount officer might use as a normative
value the liquidity position of the typical bank in the borrowing bank's
reserve class and size range. This would be in effect measuring the
banker against the demonstrated judgment of his peers.
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Federal Reserve Bank of St. Louis
- 7 -
5.
STRICTLY CONFIDENTIAL (FF.)
If a borrowing banker, rather than submit to a program of
tightening loan policies and rebuilding liquidity in order to gain
added discount accommodation, decides to effect his adjustment through
other means (e.g., selling investments, borrowing funds elsewhere), he
should be allowed no more discounting assistance than would accrue to
him under the present interpretation of Regulation A. The latter
standards should be strictly observed, as underlined in the Board's
letter of July 19, 1966, and the responses thereto by the Presidents.
6.
To support the indicated administrative activities, Reserve
Banks should feel free to call on borrowing banks for whatever reasonably
available data might help to illuminate the relevant circumstances.
For example, when the bank's regular reports of loans outstanding are
not indicative of tighter policies because of current take-downs of
previous commitments, separate and regular reports on new loan commitments
should be requested. Borrowing banks should be asked to report regularly
on their borrowings from non-Federal Reserve sources, in order to permit
a suitable up-to-date judgment of their liquid liabilities to offset
against their liquid assets.
If, in the judgment of the Reserve Bank,
the borrowing bank's liquid asset position is not sufficiently revealed
by other reports, a special supplemental report on such assets could
also be requested periodically.
7.
To help in coordinating open market operations and other aspects
of monetary and regulatory policy with these adaptations in discounting,
special supplemental reports to the Trading Desk and the Board would
be needed:
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Federal Reserve Bank of St. Louis
- 8STRICTLY CONFIDENTIAL (FR>
(a) Daily report on the total dollar amount of borrowing
and number of borrowing banks known to fall into categories shown
in Items B.I.(a), (b), (c) and (d) above, and thus eligible for the
extra adjustment credit described in Item B.2.
(b) Daily report on the total dollar amount of borrowing and
number of borrowing banks making use of the additional adjustment
assistance credit specified in Item B.2. above, in exchange for
commitments to their Reserve Banks to adjust their lending policies.
(c) Brief but regular comments on the extent of problems, or
lack thereof, arising at each Reserve Bank in administering discount
facilities in this fashion. These reports might need to be weekly
at first, but less frequent later on.
The Board recognizes that the program herein outlined places a
very heavy responsibility upon the discount function, and may well
involve heavy demands upon Reserve Bank resources. If a program of this
sort can be carried through, however, it will make a major contribution
to the effectiveness of System monetary policy, at a vital time--a time
when monetary policy is carrying a very heavy load in the struggle to
resist inflation.
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Federal Reserve Bank of St. Louis
Chairman Martin
FOR INFORMATION
PRIOR TO CONSIDERATION AT A
MEETING OF THE BOARD.
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Federal Reserve Bank of St. Louis
FEDERAL RESERVE BANK
OF ATLANTA
ATLANTA, GEORGIA 3O3O3
o r r i c i or
PRESIDENT
August 19, 1966
CONFIDENTIAL (F.R.)
Mr. Merritt Sherman, Secretary
Board of Governors of the
Federal Reserve System
Washington, D. C. 20551
Dear Mr. Sherman:
This is in response to the Board's letter dated
August 15, 1966 regarding the administration of the discount window as commented upon during the recent examination of this bank.
Subsequent to the examination, the policies and
procedures followed in the administration of the discount
window were discussed in detail with the Executive Committee of our Board of Directors, especially the criticisms
mentioned by the Chief Examiner. A discussion also was
held with our full Board in EKecutive Session at its meeting
the following morning. Each member of our Board had
been furnished with a copy of the Board's letter of July 19
with respect to the policies to be followed. I would like
to say that our Board is very sensitive to the appropriate
administration of the discount window in this District and
that it conforms to Regulation A and the objectives of current
monetary policy.
As our records will show, there is no loan made to
any bank in this District that is not reviewed by our Executive Committee. In regard to the insufficient documentation
in the files of the Discount Department, we are now placing
a memorandum in the files of all phone conversations with
borrowing banks that pertain in any manner to the bank's indebtedness with us.
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Federal Reserve Bank of St. Louis
\
Harold TT Patterson
President
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
CONFIDENTIAL If ,8.)
WASHINGTON, O. C. 20551
AUG 1 5 1S66
Mr. Harold T. Patterson, President,
Federal Reserve Bank of Atlanta,
Atlanta, Georgia 30303.
Dear Mr. Patterson:
The Board has just received an excerpt from the report
of the recently concluded examination of the Federal Reserve Bank of
Atlanta relevant to the administration of the discount window. From
this it appears that the pattern of borrowing in the Atlanta District
may not be consistent with Regulation A, and the present stance of
monetary policy.' The examination report notes that the documentation
in the files of the Discount Department is insufficient and that
borrowing banks may not have been dommunicated with in a timely fashion,
The Board has your letter of August 9, 1966, and understands
that the entire matter was to be reviewed by the Executive Committee
of your Board. It would be appreciated, therefore, if you would inform
the Board as promptly as possible regarding the Executive Committee's
discussion of the matters referred to with particular reference to the
conclusions reached and actions planned or taken.
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Federal Reserve Bank of St. Louis
Very truly yours,
(Signed) Merrltt
Merritt Sherman,
Secretary.
Chairman Martin
FOR INFORMATION
PRIOR TO CONSIDERATION AT A
MEETING OF THE BOARD.
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Federal Reserve Bank of St. Louis
August 26, 1966
'
Board of Governors
of the Federal Reserve System
Washington, D. C. 20551
Dear Sirs:
The discussions which took place at the joint meeting
of the Presidents with the Board last Tuesday morning revealed
a surprising degree of unanimity of view among the Presidents.
This was especially evident in the widespread feeling that insufficient time was being allowed for a careful review of the
proposition presented in the draft memorandum under discussion.
This reaction arose out of past experience, which underscores
the desirability of deliberately evaluating any significant change
under consideration, be it a policy or an operational matter.
Such full and frank exchanges of view are among the System's
greatest sources of strength, and they certainly should be preserved,
The discussions closed with the statement by Acting
Chairman Robertson that the views expressed would be considered
further by the Board in reaching its final position. If the Board
should decide to press ahead after considering these views, I urge
on behalf of all members of the Conference that it allow time both
for a careful review of the proposed policy by System discountr~~~
officers and for further discussions with members of the Conference.
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Federal Reserve Bank of St. Louis
Very truly yours,
Edw. A. Wayne
Chairman
FEDERAL RESERVE BANK OF SAN FRANCISCO'
SAN FRANCISCO, CALIFORNIA 9412O
/ / M •'•t-C
August 26, 1966
^
"
... i
Board of Governors of the
Federal Reserve System,
Washington, D. C. 20551
Dear Sirs:
This refers to the Board's letter dated August 19, 1966, and the
staff draft of a proposed memorandum enclosed therewith, regarding the
coordination of discount window administration with other monetary policy
instruments. Subsequent to the discussion at the Board on August 23, this
subject has been given further consideration and we do not favor adopting
the policy==in its fullest implications—set forth in the draft memorandum,
for the reasons stated below. If it is believed that the need to curtail
loans selectively has reached the proportions which might be implied in the
draft memorandum, we believe voluntary credit restraints imposed on all
financial institutions should be sought. In addition, legislation which
would give the Board authority to adopt selective credit controls presumably
would also be in order.
As we understand the proposed program, it is intended to facilitate
the flow of Reserve System credit through the discount window in greater
measure to those banks which experience unusual pressures in the current
economic environment—particularly those arising from a runoff of large CD's
—provided such banks "submit" to a program of significant tightening in
particular lending policies and a rebuilding of liquidity. The impact of
the proposed policy would fall on the borrowing banks only. If general
credit restraints need modification at this time to effect selective loan
curtailment, we would prefer voluntary guidelines applicable to all institutional lenders instead of restricting only those member banks which borrow
from the System, leaving unaffected other member banks and all nonmember banks
to say nothing of other financial institutions. We believe it not-only— desir^.
able but necessary that the System stand ready to advance funds through the
discount window to member banks experiencing the pressures mentioned above,
but we do not believe accommodation should be available only to those member
banks which are willing and able to curtail certain types of loan activities.
Certainly under Regulation A advances would be appropriate even though other
sorts of adjustments were undertaken by the borrowing banks.
. On the other hand, we would preclude neither the possibility of
extended borrowing nor indirect encouragement of loan curtailment. If, in
connection with the type of borrowing under consideration, it develops that
a member bank chooses to repay in an orderly manner through loan liquidation
—rather than, for example, by sale of investments—it should be recognized
that such borrowings probably would be outstanding for a more extended period
of time, and, indeed, this might be a factor in a bank's choice of this avenue
of adjustment. Despite the problems of defining an appropriate "more extended
period of time", we would have no objection to this and think such a policy
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Federal Reserve Bank of St. Louis
FEDERAL RESERVE BANK OF SAN FRANCISCO
Board of Governors of the
Federal Reserve System.
-2-
August 26, 1966
could be adopted within the present framework of Regulation A. This would
permit the borrowing bank to judge whether its interests are best served
through one type of internal adjustment as compared to another. We are not
implying that we avoid discussion of various means of adjustment with a
borrowing bank. However, we do not believe that we. should require a borrowing bank to curtail lending, liquidate investments, issue promissory notes,
or take some other particular action to repay its debt to its Reserve Bank.
To substitute our judgment for that of the member bank, we suggest^impries a
question regarding the competence of management of the member bank, or at
least doubt that the management will take the action we think it should.
Only when an individual bank is in a most adverse and serious situation
should our judgment on sources of repayment be imposed on a borrowing member
bank. The proposed mandate to borrowing banks to build up their liquidity
is a somewhat separate issue, but one subject to the same objections.
If one interprets the intent of the draft memorandum in a more
minimal sense, however, it seems to us to be not too far out of line with
our position that borrowing for longer periods be permitted banks which
choose loan liquidation. If the proposed policy should go no farther than
this, we do not believe any supplement or amendment to Regulation A is necessary or desirable. In our opinion, this has already been brought to the
attention of all member banks and the public in the last paragraph of the
Board's press statement dated August 17.
Apart from the general questions raised hereinabove and even though
we do not favor the draft memorandum, the comments which follow relating to
its specific provisions may be of interest.
Page 1
A.
Policy Background and Objectives
3.
". . . , while achieving a somewhat better balance of such
restraint among the various categories of final credit
users."
From this phrase, one must assume that (1) a "better balance" would
result automatically from demonstrated general loan restrictions at borrowing
member banks, or (2) some specific guidelines would be furnished borrowing
member banks to bring about the "better balance" sought. If one agrees a
"better balance" is necessary or desirable, it could not be said that loan
curtailment per se would bring about a "better balance." As guidelines are
not being suggested at this time (see B.3., page 6), we suggest that the phrase
quoted above from A.3. be deleted, for it seems to be in conflict with what
may be accomplished within the proposed framework.
Page 2
A.4.(c) Line 4. We suggest "short-term" be inserted between the
words "that" and "promissory."
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Federal Reserve Bank of St. Louis
FEDERAL RESERVE B A N K OF SAN FRANCISCO
Board of Governors of the
Federal Reserve System.
-3-
August 26, 1966
3. A.5.(b) It is provided herein that it is "essential to have a discount policy that also will counter, at least partly, the demonstrated
tendency for banks to respond to credit restraint by running down their net
liquidity and selling portfolio investments while postponing effective restriction of lending policies, particularly with respect to loans to good
business customers."
We are unable to rationalize this view with the General Principles
set forth in the Foreword to Regulation A. The question of maintaining an
appropriate level of liquidity rests primarily in the supervision of banks
by the proper authority, not, we submit, in the formulation or administration
of discount policy.
Page 4. B.I. (a) Greater than usual discount accommodation is to be considered
for banks requiring funds because of "a sharp runoff of CD's or savings deposits
which the bank is unable to replace because of the Regulation Q rate ceilings."
This implies that a bank must pay the ceiling rates prior to consideration for special accommodations at the discount window. Some well-managed
banks may not wish to engage in the rate war for time deposits and, therefore,
lose significant amounts of such funds. We believe such member banks should
not be treated less favorably than those members paying Regulation Q ceiling
rates but which have lost deposits.
B.l.(b) This paragraph provides for more than usual accommodation
for a member bank experiencing a loss of substantial non-Federal Reserve
sources of borrowed funds upon which the bank previously had relied to finance
its position. Although the System may find it necessary in the final analysis
to lend support to such member banks, we are not sympathetic toward the
management of a bank which, to take advantage of interest differentials,
operates in a constant deficit position requiring at all times short-term
borrowed funds for the maintenance of legal required reserves. Unless no
reasonable alternative existed, we would not consider it appropriate to provide discount accommodations for an extended period to such an institution.
Page 5 . B.l.(d). This provides for greater than usual discount relief to a
member bank requiring funds because of the temporary needs of recognized
dealers or underwriters to cover minimum underwriting activities essential to
the continued functioning of securities markets. We agree that the purposes
here are worthy, but we do not see the necessity of singling out for special
mention borrowings by member banks for such purposes, since we would view such
advances as being within the intent of the Foreword to Regulation A.
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Federal Reserve Bank of St. Louis
F E D E R A L R E S E R V E B A N K OF SAN FRANCISCO
Board of Governors of the
Federal Reserve System.
-4-
August 26, 1966
Page 6. B.4. Banks are to "be encouraged to maintain their net liquidity
at a reasonable level." This, again, raises the question of the relationship of bank supervision to Lhe discount administration. (See our comments
under A.5.(b) above.)
Page 7. B.6. The problems of interpreting daca on loan commitments were
brought out during the August 23 discussion, and we simply wish to emphasize
them again.
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Federal Reserve Bank of St. Louis
Yours very truly,
Eliot'.J. Swan,
President.
Chairman Martin
FOR INFORMATION
PRIOR TO CONSIDERATION AT A
MEETING OF THE BOARD.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
MEMORANDUM
STRICTLY CONFIDENTIAL (FR)
TO:
Board of Governors
FROM: Robert C. Holland
August 26, 1966.
SUBJECT: Revision of
discount administration program
As directed by the Acting Chairman, the staff ia ^undertaking
revisions of the draft program for discount administration (memorandum
dated August 19, 1966) in the light of oral comments by the Reserve
f
Bank Presidents at the Joint meeting on August 23 and written comments
expected to be received by August 29. Fending distribution of the
minutes of the joint meeting, I have prepared the attached draft reference
list of issues raised orally by the Presidents.
Discount officers from three Reserve Banks (New York, Philadelphia,
Chicago) will be meeting with the staff on Monday to modify and reformulate
one or more versions of the program in ways that might be operationally
feasible, depending upon how the Board resolves the basic issues of
principle involved. Attached is a rough outline of one possible set of
implementing arrangements, assuming a particular set of Board decisions
as to the issues of principle cited. The staff would appreciate any
guidance that the Board members might be moved to give, individually
or collectively, concerning the use of this material as grist for the
staff revision effort Monday.
The staff drafting group will be meeting In Room 2019 beginning
at 9:30 a.m. Monday. Governor Mitchell will make some opening remarks
and the Group is invited to lunch with the available Governors at 1:00 p.m.
s •«• •
in the Blue Room.
Attachments (2)
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Federal Reserve Bank of St. Louis
STRICTLY CONFIDENTIAL (FR)
August 26. 1966.
REVISED DISCOU&T ADMINISTRATION PROGRAM
II. POSSIBLE CCHPROHISS PROGRAM
A. Issues of principle involved
(to be resolved by Board, after
consideration of comments by the Presidents):
1, Allocation of credit;
Some tightening of lending policies, end some corresponding
lightening of bank securities sales, but minimum of interference
with bank decisions as to what borrowers get credit*
2» Release of reserves;
Moderate net increment of reserves to be released.
3. Extent of publicity;
Only borrowing banks in need of adjustment contacted explicitly,
but general theme might be mentioned in speeches, etc.
B. Implementing procedures needed
(to be developed by staff):
1. Only banks to be explicitly contacted would be those who ordinarily
would be due for contact by discount officer in any event, because
of their borrowing record.
2. Discount officer to raise question of possible resort to curtailment
of new lending as one among several possible avenues of adjustment,
with the banker left free to pick which means of adjustment he
might prefer tin the circumstances.
3* Banker to be encouraged to consider loan curtailment, especially
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Federal Reserve Bank of St. Louis
business loan curtailment, as action in the public interest—a way
for him to contribute to the fight against inflation that is the
•2 key current objective of monetary policy. Emphasis that choice
of borrowers to be cut back is up to him.
4. If borrowing bank decides to undertake loan curtailment as a means
of sdjustsssnt, it should ba sllcvcu as much<*»but no mora*»tim* to
repay its borrowing as would have been allowed by discount officer
if the bank had csde such an adjustment choice without special
Federal B^serve encouragement. Hence* there is no need for definition
of any special added borrowing privileges. However, so long as
loan curtailment proceeds at reasonable pace, there would be no
Federal Reserve pressure to accelerate repayment of borrowing by
pressing for sale of any free investments.
5. Net additional reserves released under this program should be
fairly moderate. Presumably sons more borrowing banks would
choose to adjust by curtailing loans in preference to other means
(e.g.9 selling investments, borrowing elsewhere, pushing small.
CD issuance), and presumably such adjustment would take longer
than would adjustment by sale of securities. Hence, the average
amount of borrowed reserves outstanding would probably be larger
than otherwise, but not greatly so.
s
6. Banks would not be invited into the window (no
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Federal Reserve Bank of St. Louis
"circumstances
qualifying banks for special assistance," £& suggested in the
August 19 memo), but as occasions arise banks could be reminded
that if they found themselves under more pressure than they could
handle (e.g., from CD run-offsX the discount window was available
- 3as a lender of last resort» adding the comment that it would be
hoped that they would conduct their adjustment programs, including
borrowing, in a manner consonant with the public interest in
(a) orderly financial processes, and (b) fighting inflation*
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Federal Reserve Bank of St. Louis
STRICTLY COKFIP3STIAL 0?n)
August 26.
1966,
SUMMARY OF CaMZKTS BY FEB2PJU. RESERVE BANK PRESIDENTS
ON DRAFT MEMORANDUM ON CCO?J>IKATIGN 0? DISCOUNT ADMINISTRATION
WITH OTK2R IKSTRttSHTS CF KCI2TARY POLICY
AT JOINT BOATOfWESffiENTS MEETirS. AUGUST 23. 1966
1. Monetary policy should cot be used to influence allocation of credit
asaoas various users; at least, discount policy should not ba so used.
2. CD run-offs con ba handled adequately under existing Regulation A*
3* Extending credit beyond regular Regulation A limits would create
problems for open market operations, as follows:
a) would release too much reserves, easing credit restraint;
b) would require offsetting open market operations of a size
that could strain the securities market;
c) would require core carefully thought through integration with
open market operations*
4* Proposed program would creata bank and public relations problems:
a) disrupt existing member bank understanding of dis count mechanism;
b) would aid aggressive, illiquid banks the most;
c) raises questions as to how ouch publicity to give program
(Board's announcement has already stirred up questions);
d) any significant change should be made openly, not secretly;
e) would be difficult to communicate accurately to backs other than
borrowing banks, but inadequately effective if applied only to
banks after they come to discount window.
5. Numerous problems of practical definition and measurement:
a) amount of extra borrowings;
b) new loan corcaitments;
c*) needs for financing underwriting;
d) kind of mesiber bank coxsmitment to Reserve Bank to reduce
lending, and for how much and how long;
e) orderly adjustment;
f) liquid liabilities.
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Federal Reserve Bank of St. Louis
- 2-
•
6. Difficult to inaiot on banks* maintaining or rebuilding liquidity
vhen they are under pressure; that is precisely the kind of need
for which banks would expect to use their previously husbanded
liquid resources; to effect bettor bank liquidity, need supervisory
standards.
7. Proposed progrsa night involve extra borrowing by many banks, small
as well as large, in preference to borrowing elsewhere, with large
number of cases hard to handle,
8. Will be hard to achieve uniformity of administration of the
proposed progr&n; on the other hand, discount administration under
existing Regulation A procedure is regarded as sufficiently
uniform to cause no serious problea.
9. Not logical or necessary to link reserve adjustment of individual bank
to general isonatary policy.
10« Would result in rising borrowings that would soon require discount
rate increase to help control*
11, Proposed program is too specific or mechanical, out of keeping
with core generalised language of Regulation A.
>
12. A workable minissura program would simply be to have discount
officers increase their emphasis on loan tightening as compared
with investment liquidation in contacting borrowing banks
regarding adjustaent.
13* Uora study of proposal needed, and situation not so pressing but
that several weeks could profitably be spent on review and discussion
of idea* Proposal represents a basic change in discount administration;
perhaps should be reviewed by committees responsible for the longer*
range discount study*
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Federal Reserve Bank of St. Louis
FEDERAL RESERVE BANK OF CHICAGO
OFFICE OF THE P R E S I D E N T
August 26, 1966
Board of Governors of the
Federal Reserve System
Washington, D. C. 20551
Gentlemen:
This letter supplements my oral comments of August 23
on the staff draft of a proposed memorandum regarding the
coordination of discount window administration with other
monetary policy instruments, dated August 19.
It has been difficult to achieve uniform administration
of the discount windows under the 1955 interpretation of
Regulation A, as is demonstrated in Bernard Shull's recent
analysis. We believe that any change in policy which placed
greater reliance upon discretionary decisions of discount
officers would cause still greater problems in achieving
uniformity of administration, at least for some considerable
period of time. Furthermore, since it is reasonable to assume
that the extensive study of the discount function now under
way will lead to some modifications of discount policy, it
would be undesirable to suggest to member banks that standards
of appropriateness of borrowing are being changed now. We have
succeeded recently, we think, in obtaining relatively good
understanding on the part of our member banks of what constitutes appropriate use of the window. We are fearful that
frequent changes in administrative standards—real or apparent-would make it nearly impossible to maintain reasonably good
understanding of policy by the member banks and reasonable
uniformity of administration by the Reserve Banks.
The months ahead may present critical problems for a
number of commercial banks and certain segments of the
securities markets. However, we feel that such situations are
provided for under the existing ''principles,11 as described in
the introduction to Regulation A, which state that Federal
Reserve credit is available to meet "unusual situations11 and
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Federal Reserve Bank of St. Louis
FEDERAL RESERVE BANK OF CHICAGO
~~
2
Board of Governors of the
Federal Reserve System
August 26, 1966
"exceptional circumstances." The cases cited under Section
B.I of the memorandum would appear to be covered by these
provisions. We agree that these cases, unless accommodated,
could result in serious problems in the current environment
and should, therefore, be regarded as appropriate reasons
for borrowing. It it; our view th^t no special stops aro
needed to inform bankers of this posture. In the present
circumstances, applications for advances are very likely to
rise as a result of any of these developments without any
special encouragement by the System.
As Mr. Shull!s analysis strongly suggests, the appropriateness of purpose of borrowing is largely a matter of whether,
in fact, the borrowing turns out to be of short or long duration.
The real question, then, is how soon should the borrowing be
liquidated. It still seems appropriate to discourage individual
banks from making continuous use of the window. But if we
undertake to provide more of the reserve expansion in the
months ahead through the discount window, more and more banks,
especially the large ones, will come to the window. We can
then move somewhat less promptly and less vigorously in getting
them out if they are faced with any of the four problems the
memorandum poses as deserving of special consideration and are
exercising appropriate restraint in their loan policies. This
would follow without engaging in discussions which would cause
banks to surmise that basic discount policies had been changed.
Meanwhile, Federal Reserve officials could include in
speeches or other statements comments on the objectives of
monetary restraint and the desirability of spreading its impact
to all sectors of demand including commercial and industrial
loans. They could also stress the responsibility of managers
of private financial institutions to maintain reasonable liquidity
so as to assure a sound financial structure generally and viability of individual firms.
We feel that "deals" with individual^banks, as suggested in Item B.2 and again in Item B.7.(b) of the memorandum, would
be inappropriate and impossible to administer equitably.
Moreover, we would be at a loss to determine specifically the
appropriate length of a "more extended" period of borrowing.
This should be decided on the basis of the circumstances in
each case, with continuous exchange of information between
discount officers and between the Reserve Banks and the Board
serving to maintain reasonable uniformity of administration.
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Federal Reserve Bank of St. Louis
FEDERAL RESERVE BANK OF CHICAGO
-- 3
Board of Governors of the
Federal Reserve System
August 26, 1965
Ttfith respect to the suggested attempt to set
liquidity standards as a part of the discount operation,
we believe such a policy would not be workable. Indeed,
it could backfire; for if bankers believe the window has
been, opened wider, many bank^~~uot; necessarily borrowing
banks—may be tempted to further reduce alternative
sources of liquidity. In any case, we do not feel that
it is possible to develop specific criteria with respect
to either loan trends or liquidity positions of individual
banks that could provide a rational basis on which to
distribute credit among member banks. There is a danger
that efforts to develop and implement such criteria would
lead some banks to conclude that the System is unwilling or
unable to fulfill its role as an ultimate source of liquidity
for the banking system. This would be very unfortunate.
We believe, therefore, that anticipated problems can
be dealt with under existing interpretations of Regulation A
while substantially achieving the policy objectives stated
in the staff memorandum. While discount officers should
continue to require necessary information from banks on
which to base lending decisions, we do not believe that this
necessitates an expanded System-wide reporting program at
this time or that the Manager of the Open Market Account can
utilize effectively, or should attempt to utilize, information
on bank borrowings by purpose in conducting open market operations. Information on total borrowings is more relevant to
his responsibilities.
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Federal Reserve Bank of St. Louis
Sincerely,
— - 4--_
Charles'J. Scanlon
FOR INFORMATION
PRIOR TO CONSIDERATION AT A
MEETING OF THE BOARD.
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Federal Reserve Bank of St. Louis
STRICTLY CONFIDENTIAL (FR)
TO:
Board of Governors
FROM:
Robert C. Holland S /I////
Pursuant
August 29, '
SUBJECT:
STRICTLY
Development of revised
program for
discount administration.
\..j
to the direction of the Board, discount officers
from the Federal Reserve Banks of New York, Philadelphia, and Chicago
met today with members of the Board's staff in an endeavor to develop
a practical program for adapting discount administration insofar as
feasible to the restraint of business lending.
Attached are the
results of that meeting, in the form of two drafts:
(1) "Revised Program for Discount Administration in the
Current Economic Environment", and
(2) "Letter to Member Banks Concerning Need to Restrain
Business Lending".
While the discount officers had at their disposal the Board
staff memorandum of August 19, 1966, "Draft Memorandum on Coordination
of Discount Administration with Other Instruments of Monetary Policy",
and a summary of the oral comments and selected written comments of
that memorandum by the Federal Reserve Bank Presidents, they found it
most practicable to develop fresh language for the attached documents.
The program encompassed in these documents, they believe, represents
as far as the System can feasibly go in adapting discount administration
to the objectives which the Board has expressed, so long as the existing
institutional framework is to be maintained. The kinds of contacts
with member banks proposed in this program they regard as no more than
an extension of the kinds of representations concerning total loan
curtailment that have already been made by some discount officers to
their member banks.
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Federal Reserve Bank of St. Louis
- 2-
The discount officers caution*
that the effectiveness
of the program suggested below will be hard to measure, and will
probably be no more than modest at best.
Furthermore, they feel
this program may not remain viable if business needs for bank credit
to finance defense production should accelerate.
While all the caveats expressed by the discount officers may be
well taken, I think the program herein presented represents an effort
in the direction of rebalancing credit pressures that might usefully
be undertaken.
If the Board finds this program to be worthy of consideration,
copies of it might be forwarded to each Reserve Bank President with
a request for his further comment.
President Wayne, in his capacity
as Chairman of the Conference of Presidents, has written the Board
requesting that time be allowed "for a careful review of the proposed
policy by System discount officers and for further discussions with
members of the Conference."
At the moment, the next convenient
opportunity for a meeting of the Board and the Presidents would be
in conjunction with the Federal Open Market Committee meeting on
September 13; and the first practical opportunity for a round-table
discussion by System discount officers would be at their scheduled
conference, September 19-20.
Potential market developments in the
interim, however, may very well make it inadvisable to delay until
these dates System discussion and final adoption of the program in
question.
Attachments 2
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Federal Reserve Bank of St. Louis
DRAFT
FOR INTERNAL SYSTEM USE ONLY
STRICTLY CONFIDENTIAL
(FR)
August 29, 1966.
REVISED PROGRAM FOR DISCOUNT ADMINISTRATION
IN THE CURRENT ECOHOglIC__ENyiROMMENT
In the current business and financial situation, it is
contemplated that it will prove necessary and desirable within the
next few weeks and months to impel member banks to borrow substantially
greater amounts than at present from their respective Reserve Banks.
This would be accomplished by maintaining current Regulation Q ceilings
while conducting sufficiently restrictive open market operations so
as to give rise to a substantial run-off in CD's or declines in other
types of deposits, and perhaps also occasional drying up of sources of
inter-bank borrowing.
This operational strategy is deemed necessary in order to slow
down the rate of bank credit expansion.
From an economic stabilization
point of view, however, this strategy can only be effective if the
lending policies of the Reserve Banks tend to curtail bank lending
to those segments of the economy where the greatest recent expansion
has taken place.
At the same time, it is necessary that pressures on
the banking system do not result in a demoralization of other financial
markets, e,g., the municipal market, as the banks endeavor to adjust
their positions.
It is believed that Federal Reserve Bank discount administration can help to accomplish the desired objectives within the framework of the present Regulation A.
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Federal Reserve Bank of St. Louis
It is likely that in those situations
FOR INTERNAL SYSTEM USE ONLY
STRICTLY CONFIDENTIAL (FR)
- 2 -
where there is a sharp run-off of CD's or a drying up of inter-bank
sources of funds, it may be necessary, as the Regulation in fact has
I/
anticipated^ to lend to banks for somewhat longer than usual periods
of time.
Such longer periods of credit extension would permit the
borrowing bank to make some adjustment
in the area of business loans
rather than concentrating their adjustment
in the earning asset
categories of investments, real estate mortgages, and other loans.
While discount officers should refrain from making
decisions for member banks, they should nevertheless urge the desirability of undertaking adjustments in business loans.
In any case, it
I/
should be made clear—again in accordance with the present Regulation —
that expansion of business loans at current rates is not in the
public interest and will not be condoned while the member bank is in
a position of having to borrow from the Federal Reserve Bank.
Indicated needs for industrial credit during the next few
months are such that it is altogether likely that member banks will
have to forego loans to some well-established prime customers.
It
is not intended that System policy prevent member banks from meeting
legitimate and normal seasonal needs, especially where they have made
some preparation to take care of this themselves; it is intended,
I/ "... Federal Reserve credit is also available for longer periods
when necessary in order to assist member banks in meeting unusual
situations, such as may result from national, regional, or local
difficulties or from exceptional circumstances involving only
particular member banks. . . ." Regulation A, Section 201.0, par. (d)
2/ Regulation A, Section 201.0, par. (e), quoted on page 3.
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Federal Reserve Bank of St. Louis
FOR INTERNAL SYSTEM USE ONLY
STRICTLY CONFIDENTIAL (FR)
- 3-
however, that the seasonally adjusted rate of expansion of business
loans shall be reduced.
The emphasis on slowing down the rate of growth of a
particular category of loan is a departure from recent discounting
tradition and practice.
It is felt to be necessary because of the
Board's conclusion that the present rate of expansion of business
loans is supporting an unsustainable rate of growth of business
investment, with unsound consequences for economic and financial
conditions.
possibility.
The Foreword to Regulation A has anticipated this
It specifies that "each Federal Reserve Bank gives
due regard to the purpose of the credit and to its probable effects
upon the maintenance of sound credit conditions, both as to the
individual institution and the economy generally."
It is this concern
for "sound credit conditions," rooted in the Federal Reserve Act
itself, which makes it currently necessary to bring to bear those
aspects of discount administration which are designed to deal with
unusual circumstances.
While the standards of discount accommodation outlined
above can only affect directly those banks that are indebted to the
Federal Reserve Banks, the Federal Reserve Banks are encouraged to
continue to take the initiative in communicating with any other banks
whose general liquidity position and lending activity are such that
they might soon need to borrow from the Federal Reserve.
The System's
policy and the reasons for it should be explained to them in an effort
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Federal Reserve Bank of St. Louis
FOR INTERNAL SYSTEM USE ONLY
STRICTLY CONFIDENTIAL (FR)
. 4 .
to encourage them to anticipate their needs and to make adjustments
in their lending policies that would be appropriate to the situation.
In addition, the examination function will be asked to pay
particular attention to the liquidity position of all member banks.
Where appropriate, examination officials might be invited to participate
jointly with discount officials in contacts with member banks whose
liquidity position and lending activity are out of keeping with the
program herein enunciated.
The accompanying statement from the Board of Governors
addressed to all member banks supplies a public expression of the
Federal Reserve*s point of view on these matters that may be
usefully referred to in discussions with member banks.
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Federal Reserve Bank of St. Louis
STRICTLY CONFIDENTIAL (FR)
August 29, 1966.
DRAFT
FOR PUBLIC RELEASE
LETTER TO MEMBER BANKS
CONCERNING NEED TO
RESTRAIN BUSINESS LENDING
It is the view of the Federal Reserve System that currently
strong demands for credit need to be restrained in order to hold
credit-financed spending within the bounds that can be accommodated
by the Nation's physical resources. Business demands for bank credit
are particularly intense, and while such credit requests often seem
justifiable when looked at individually, the aggregate total of
business spending so financedis Beach ing unsustainable levels and
adding substantially to inflationary pressures. Furthermore, such
loan expansion is being financed by liquidation of other banking
assets in ways that can be prejudicial to other financial markets.
The System believes that it serves the national economic
interest to reduce the rate of expansion of bank loans to business,
within the context of a program of overall monetary restraint.
Accordingly, this objective will be kept in mind by the Federal
Reserve Banks in granting credit to those member banks that are led
to borrow at the discount window by reason of shrinkages in deposits
or other sources of funds. Borrowing banks will be expected to
cooperate in reducing the rate of business loan growth as part of the
orderly adjustment of their positions.
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Federal Reserve Bank of St. Louis
This is in conformity with
-. 2 -
Section 201.0, par. (e) of the Board's Regulation A governing lending
to member banks:
"In considering a request for credit accommodation,
each Federal Reserve Bank gives due regard to the purpose of
the credit and to its probable effects upon the maintenance
of sound credit conditions, both as to the individual
institution and the economy generally. ..."
Federal Reserve credit assistance to member banks to meet
temporary, emergency, or normal seasonal demands from their
customers will continue to be available in accordance with the
standards set forth in Regulation A.
The curtailment of the recent extraordinary rate
of business loan expansion is in the interest of the entire banking
system. The Board expects all banks to be aware of this consideration,
whether or not they need to borrow. Management of bank resources in
accordance with the principles outlined above can make a constructive
contribution to sustainable economic prosperity.
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Federal Reserve Bank of St. Louis
In connection with Item #7, Agenda, September 1, 1966.
Additional material will be distributed shortly.
Chairman Martin
FOR INFORMATION
PRIOR TO CONSIDERATION AT A
MEETING OF THE BOARD.
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Federal Reserve Bank of St. Louis
STRICTLY CbMFIOBNTJAL
tfltj
August 3l, 1966.
LETTER TO MEMBER BANKS
CONCERNING NEED TO
RESTRAIN BUSINESS LENDING
It is the view of the Federal Reserve System that continued
orderly bank credit expansion is appropriate in today's economy,
though that expansion needs to be moderate enough to keep creditfinanced spending within the bounds that can be accommodated by
the nation's growing physical resources.
An excessive increase of bank credits, it must be stressed,
would add to the inflationary pressures that are already visible.
To put the matter in perspective, total bank credit has grown at
an annual rate of over 8 per cent during the first eight months
of this year, total bank loans at a rate of over 12 per cent, and
bank lending to business at a rate of close to 20 per cent. While
the growth of total bank credit and total bank lending has moderated
somewhat as compared with last year, the rise in business loans has
continued strong.this year.
The 1966 rates of growth in all three measures hate exceeded
the rise that occurred in 1961-1964, with the excess in the case of
total loans and business loans being very substantial. During that
earlier period, prices were relatively steady and unemployed resources
relatively large. 0n the other hand, the current situation, marked by
inflationary pressures and relatively full use of resources, is not
one in which credit and loan growth can appropriately continue at
this year's pace.
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Federal Reserve Bank of St. Louis
STRICTLY CONFIDENTIAL (FR)
- 2-
Business demands for bank credit have been particularly
intense.
While such credit requests often appear justifiable when
looked at individually, the aggregate total of credit-financed
business spending has tended to reach unsustainable levels and to add
appreciably to current inflationary pressures.
Furthermore, such
exceedingly rapid business loan expansion is being financed in part by
liquidation of other banking assets and by curtailment of other lending
in ways that could contribute to disorderly conditions in other credit
markets.
The System believes that the national economic interest
would be better served by a slower rate of expansion of bank loans
to business within the context of moderate overall money and credit
growth. Accordingly, this objective will be kept in mind by the Federal
Reserve Banks in granting credit to those member banks that are led
to borrow at the discount window by reason of shrinkages in deposits
or other sources of funds. -As--any-aubgfrattt-ia-fc--ad'JTtgtifleirt--tiiWLtgfar
bar»l*r -H^ju-irckrtrtett' -of- TmHMre-tp-art -s&cvfl?i$r±&sr -ov -otrhe*- -tnvgytamriTtrs" -wcirtd*
ad-d- -f-mffefre-r -fro- -pygggurge-3- -orr -f-rrtarrc-iBfl- -ma-rkertrs-,- -the -gy^rtenr •foghfevgg'
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e-§ -wec&e-sa-fetGR- -i» -the- -Fa-fee- -o°£ -eft^atts*©** -©£ -t»aa-s- -and- -ps^fckHrfra-Ply'
b«.s-iRe-s-s--toans-j. Borrowing banks therefore will be expected to
cooperate in reducing the rate of business loan growth beyond normal
seasonal requirements as part of the orderly adjustment of their
positions. This is in conformity with Section 201.0, par. (e) of
the Boardfs Regulation A governing lending to member banks:
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Federal Reserve Bank of St. Louis
STRICTLY CONFIDENTIAL (FR)
- 3-
"In considering a request for credit accommodation,
each Federal Reserve Bank gives due regard to the purpose of
the credit and to its probable effects upon the maintenance
of sound credit conditions, both as to the individual
institution and the economy generally. ..."
Federal Reserve credit assistance to member banks to meet
temporary, emergency, or normal seasonal demands from their customers
will continue to be available in accordance with the standards set
forth in Regulation A.
The curtailment of the extraordinary rate of business loan
expansion is in the interest of the entire banking system and of the
economy as a wh le. The Board expects all banks to be aware of this
consideration, whether or not they need to borrow. Management of bank
resources in accordance with the principles outlined above can make a
constructive contribution to sustained economic prosperity.
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Federal Reserve Bank of St. Louis
Chairman Martin
FOR INFORMATION
PRIOR TO CONSIDERATION AT A
MEETING OF THE BOARD.
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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
Office Correspondence
Xo_
Board of Governors
From_
Robert C. Holland
s^
C}A/l/fJ
I/y f^
Date Auust-, n 1966.
Subject! Amplification of Public State
ment on Discount Administration
Suggested by President Hayes.
President Hayes of the New York Reserve Bank spoke to
Governor Shepardson and me yesterday urging the amplification of
the proposed public statement on discount administration (cf. my
memorandum of August 29, 1966) in the manner attached. He said he
had two aims in mind:
(1) He wished to counter what he felt would otherwise be an
adverse market impact from the original draft of the
proposed letter to member banks,,
(2) More important, he felt that the extremely unsettled state
of financial markets, abetted by expectations of still
tighter monetary policy, needed to be tranquilized by a
moderate public statement from the Federal Reserve System,
speaking with one voice.
My own judgment is that the first lines of the Hayes draft
go a bit too far in recognizing rumors and explicitly denying any intent
to tighten credit further; but that with some modifications of such
expressions, a blend of his draft and the discount staff draft of
August 29 would prove helpful in quieting reactions to the documents
inside and outside the System without altering the basic substance
of the program. For similar reasons, I believe some moderation of
tone in the early pages of the proposed internal System memorandum
would also be a good idea. Some suggestions in this same vein have
also been received from individual Governors and staff members. If
the Board will indicate the general tenor of the revisions which it
wishes to have incorporated in these documents, the staff will
endeavor to polish up the specific language, clear it as appropriate,
and wire the revised text to all Presidents this afternoon for
comment promptly.
Attachment
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Federal Reserve Bank of St. Louis
August 30, 1966.
Strains in financial markets have recently been aggravated
by reports suggesting that the monetary authorities intend to prevent
any further growth in bank credit.
In order to prevent any misunder-
standing, the Federal Reserve System feels called upon to deny such
reports.
The growing economy clearly requires a continued growth of
both bank credit and bank lending, and the Federal Reserve System is
__^x
prepared to provide the reserves necessary for such growth.
On the other hand, it must be stressed that growth of credit
and lending at an excessive pace would add to the inflationary pressures
that are already visible.
To put the matter in perspective, total
bank credit grew at an annual rate of 8-1/2 per cent during the first
seven months of this year, total bank loans at a 14-1/2 per cent rate,
and bank lending to business at a 22 per cent rate.
While the growth
of total bank credit and total bank lending has moderated somewhat as
compared with last year, the rise in business loans has actually
accelerated.
The recent growth of all three measures exceeded the rise that
occurred in 1961-1964, with the excess in the case of total loans
and business loans being very substantial.
That was of course a period
when prices were relatively steady and unemployed resources relatively
large.
By the same token, the current situation, marked by inflationary
pressures and relatively full use of resources, is not one in which
credit and loan growth can appropriately continue at the recent pace.
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Federal Reserve Bank of St. Louis
- 2 -
August 30, 1966.
It is the Federal Reserve System's present intention to
moderate the growth of bank credit and loans and particularly to
discourage excess growth of bank lending to business, while at the
same time providing the reserves for a growth of credit appropriate
uo the present situation.
In implementing this policy, both open market operations
and the discount windows at the twelve Federal Reserve Banks
have a role to play.
will
In particular the System is aware that a policy
of moderating the growth of bank credit and lending,
along
with the
/
probability of deposit losses at individual banks, is likely to result
in an increase in member bank borrowing at^the discount window.
The .
System will be prepared to meet any such legitimate needs, but will
expect banks which have experienced unusually rapid growth in business
lending to make the necessary adjustment by cutting back on the rate
of expansion in this sector.
Bearing in mind that any substantial
adjustment through the liquidation of bank investments would threaten
a further increase in the strains already present in financial markets,
the System believes that much of the brunt of member bank adjustments
must take the form of moderation in the rate of expansion of loans
and particularly business loans.
The curtailment of the recent pace of bank credit and
lending to business is in the public interest and in the interest'of
the entire banking system.
In the present inflationary
environment,
the Federal Reserve System expects all banks to be aware of this
whether or not they seek recourse to the discount window.
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Federal Reserve Bank of St. Louis
CHAIRMAN MARTIN
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Federal Reserve Bank of St. Louis
For Information Only
•
FEDERAL RESERVE BANK OF PHILADELPHIA
PHILADELPHIA, PENNSYLVANIA 19101
August 29, 1966
OFFICE OF THE
PRESIDENT
Dear Merritt:
In response to Governor Robertson's request,
we are enclosing our views on the Board's draft
memorandum of August 19 concerning the coordination
of discount administration with other instruments
of monetary policy.
Sincerely,
President
Mr. Merritt Sherman, Secretary
Board of Governors of the
Federal Reserve System
Washington, D. C. 20551
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Federal Reserve Bank of St. Louis
FEDERAL RESERVE BANK OF PHILADELPHIA
Comments on the Board's Draft Memorandum of August 19, 1966,
concerning the Coordination of Discount Administration
with other Instruments of Monetary Policy
As we understand the Board's memorandum of August 19, the very
broad objectives of the proposed change in the thrust of discount policy
are two-fold:
First, to exert a countervailing influence on the tend-
ency for monetary policy to have an uneven impact on the various enduses of credit (thus (a) tempering inflationary pressures in particular
sectors of the economy, such as inventory and plant and equipment spending, and (b) reducing the inequities of monetary restraint and stemming
criticism of those inequities); and second, to assure that individual
banks and the banking system will not be adversely affected by mounting
liquidity pressures.
To secure these objectives, the memorandum sets
forth "a set of general guidelines extending the present interpretation
of the meaning of Regulation A at those points that will come under
greatest stress in the current and prospective situation."
(Page 4,
paragraph 1)
As a corollary to these two broader objectives, the Board's
memorandum may be viewed by some as a tactical tour de force.
By in-
fluencing banks to restrict lending instead of liquidating investments
in the coming period of credit stringency, upward pressures might be
diverted from market rates, thereby (a) helping to avoid criticism of
high and rising interest rates on securities and (b) reducing pressures
to raise the Q ceiling.
We should like to comment briefly on each of these goals and
then discuss some of the technical problems involved in a program of
the scope set forth in the memorandum.
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Federal Reserve Bank of St. Louis
f\
The Incidence of Monetary Restraint
Though we share the concern expressed in the memorandum over
the uneven impact of monetary restraint, we feel it would be a mistake
to attempt to influence the end-use of credit through adminis tration
of the discount window.
There are several reasons for this:
(1) The discount officer would be placed in the position of
advising a large number of banks on questions of overall
asset allocation and perhaps even of advising on individual
loans.
The result would be a substitution (to a greater or
less degree) of the discount officers1 judgments for those
of individual bankers in their own communities throughout
the nation.
In our opinion, the System's discount offi-
cers do not now have and could not readily acquire the
background and information needed to make intelligent judgments on the multitude of cases and questions which would
come to them for decision.
(2) Implementation of the Board's memorandum would create
inequities among individual banks within the banking
system.
Some banks, anticipating credit stringencies and
liquidity pressures, have been restricting credit rather
drastically for months.
Others have done very little to
restrain credit so far.
Since a program based on the
Board's memorandum presumably would take effect on a
given date, the banks which already have taken restrictive action would be penalized relative to the more
liberal banks.
In addition, the program would penalize banks which have
built up liquid assets in order to meet liquidity pressures
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Federal Reserve Bank of St. Louis
- 3from their own resources, relative to other less liquid
banks allowed to use Federal Reserve credit to provide
for their liquidity needs.
Also, the Fed might find it
more difficult to sell the liquidity philosophy in the
future if it now favors banks which do not pursue such a
philosophy.
;
(3) An attempt to influence the incidence of monetary policy
through discount administration -- even if successful in
reducing the volume of bank loans relative to other
credit -- could actually aggravate the problem of monetary
policy's uneven impact in other areas.
For instance, since
banks are the primary lenders to small business
and since
pressures to reduce loans would probably fall most on
smaller business borrowers, such pressures would tend to
tilt the flow of credit to larger firms and away from
smaller ones.
(4) There are other ways to influence the allocation of credit,
including the direct funneling of capital to particular
sectors of the economy through the intermediation of
governmental agencies.
In view of the problems associated
with use of the discount window in policing the end-use of
credit, these other channels might prove more suitable if
it were decided that a more balanced incidence of credit
restraint were an
overriding goal of public policy.
(5) Such a fundamental departure from traditional discount
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Federal Reserve Bank of St. Louis
policy as that suggested in the Board's memorandum raises
many questions and deserves long and careful study.
For
instance, what are the implications of such a posture for
- 4the System's "independence" in the longer run, for membership in the System, for the System's other policy^tools and
guides to policy?
Should such a program apply just to in-
flationary periods or to all phases of the business cycle?
These are but a few of the questions deserving careful con6i3ejXNaelan,
Sineo tha Syofcom now is uvulayfcaUins » funda-
mental review of the discount function, a ready opportunity
is provided to explore in more depth the issues raised in
the memorandum.
(6) The Federal Reserve represents the ultimate source of
liquidity to the banking system, a fact which is well-known
to bankers.
Moreover, the discount window has long been
associated with the function of "lender of last resort."
To maintain an unquestioned role as the ultimate source of
liquidity, the System should avoid attaching strings to the
discount window, especially before a period of potential
financial crisis.
(7) We sharp the concern expressed by others in the System over
regulatory agencies which change their public policies without changing their public regulations.
Given the prevail-
ing sensitivity of markets and the possibility of marked
liquidity pressures in the near-term, we would be hesitant
to announce publicly the substance of the Board's memorai}dum; hence we would be reluctant to undertake a program of
the scope outlined in the memorandum on grounds of equitable
regulatory practice.
(8) By encouraging banks to restrict lending and avoid liqui-
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Federal Reserve Bank of St. Louis
dating investments, could the 'Fed reduce upward pressures
- 5-
on interest rates (thereby relieving the beleaguered Q
X
ceiling and stilling Congressional and other criticism of
rising interest rates)?
Whether such a program would indeed relieve upward pressures
on interest rates is highly problematical.
Larger borrowers,
deprived of bank credife, would tend to berrew in the eapifeal
markets.
To the extent that reduced bank liquidation of
securities were offset by an increase in new issues, little
downward pressure on rates could be expected.
Moreover, a
significant reduction in bank credit could have the initial
effect of hiking rates if expectations were engendered of
severe future credit stringency.
Near-term Liquidity Problems
The second broad objective of the Board's memorandum (as
noted previously) is to assure that the banking system will not be affected adversely by mounting liquidity pressures.
In our opinion, the particular problem areas pinpointed by
the Board can be dealt with sffectively under the present language of
Regulation A, particularly under Section 201 (d) which states that:
Federal Reserve credit is also available for longer
periods when necessary in order to assist member
banks in meeting unusual situations, such as may
result from national, regional, or local difficulties
or from exceptional circumstances involving only
particular member banks.
We would stress, however, that member banks even then should
make internal adjustments as quickly as possible.
Extended discount
accommodation to some banks (accompanied by open market operations to
prevent a spurt in growth of the reserve base) has the effect of
rewarding those banks which have aggressiVly expanded loans and
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Federal Reserve Bank of St. Louis
4
- 6liabilities while penalizing the institutions which have behaved more
conservatively.
Technical Problems Associated
with the Board's Memorandum
Among other things the memo proposes, in effect, a quid pro
quo administrative procedure —
that is, a borrowing bank "shall be con-
sidered for greater than usual accommodation" (p.4, para.2) under certain conditions "if, and only if, (it) demonstrates that it is in fact
tightening lending policies significantly." (p.5, para.l, italics
added)
The memo also proposes a daily reporting system by the Reserve
Bank on the "banks making use of the additional adjustment assistance
credit...in exchange for commitments to their Reserve Banks to adjust
their lending policies."
(p.8, para.2)
To carry out the specifics of the memo would involve problems
of timing, definition, and interpretation.
Timing.
Information on loans and investments presently re-
ceived by the Research Department, processed by the Data Processing
Department, and made available to the Discount Department is limited
and late.
Such information consists of totals only and does not classify
loans in any detail.
It is received as of two Wednesdays each month
and is submitted voluntarily by member banks.
Most reports are not
received by Research until Friday and Monday following the Wednesday
closing.
A compilation of this information is not available to Dis-
count until two weeks after the end of a given reserve period, although
current data on a given bank may be physically searched out somewhere
along the processing line.
Information on federal funds, although submitted daily, is
not received from any country bank until at least two business days
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Federal Reserve Bank of St. Louis
- 7have elapsed. The Discount Department reviews daily reports submitted
by the banks, but this is not until after four or five business days
have elapsed.
Full details for an entire reserve period are not avail-
able until one week after the close of the period. Again data on individual banks are available by search in processing.
D^fin-it-ion.
^Such terms as "net liquidity, at a reasonable
level," "liquid assets," "liquid liabilities," "liquid asset position,"
"typical bank," "demonstrated judgment of his peers," "tightening lending practices significantly," etc. raise questions of definition that
could lead to less rather than more uniformity in administration.
Com-
parative ratios can be developed on a current basis only if information
is available on a current basis.
The Chicago Reserve Bank prints out
in its July "Business Conditions" (p. 9) that "There is no statistic
that can adequately measure bank liquidity nor is it possible to develop
one."
Very rough rule-of-thumb ratios can, of course, be obtained, but
to apply them to individual bank situations, without much more detailed
information, could lead to misjudgment.
Interpretation.
We are not sure how one can determine for an
individual bank the amount of borrowing under the regular provisions of
Regulation A and the suggested provisions of the memorandum.
How does
one determine whether a bank has tightened lending practices "significantly"?
For example, a decline in loans could be seasonal, could re-
sult from, conditions in the region, etc.
sion reflect significant tightening?
Does a slower rate of expan-
Also, maybe
some banks have
tightened up several months ago so that it would be difficult for them
to tighten further.
The real "purposes" of borrowing often involve a
mix of factors, the banker interpreting the "purpose" one way, the
discount officer and others interpreting it another.
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Federal Reserve Bank of St. Louis
For example,
many bankers say the purpose of borrowing is to get reserves to meet
Federal Reserve requirements; only time-consuming analyses over time
sharpens his awareness of what is really happening
or has happened to
his funds.
Not only would it be difficult to get data on "commitments"
but the idea of "commitment" is extremely difficult to define.
word is as good as my bond," says the banker.
"Commitments" range from
will take care of you"
"My
Is this a commitment?
"All right, come in when you are ready; we
to a firm commitment with the borrower paying
a commitment fee.
In summary, while the technical problems involved in timing,
definition, and interpretation could undoubtedly"be worked out, the
memorandum proposes an apparatus of borrowing bank and Reserve Bank
reporting that may well tend to create inflexibilities in a function,
the nature of which calls as much for "feel" and judgment to accomplish
objectives as it calls for information.
Moreover, the proposal has two serious weaknesses.
It would
have no effect on the lending policies of the large number of banks -member and nonmember -- that do not borrow from the Reserve Banks.
It
would also discriminate against member banks that do borrow from the
Reserve Banks.
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Federal Reserve Bank of St. Louis
BOARD
DF
GOVERNORS
DF THE
FEDERAL
RESERVE
SYSTEM
Tuesday, Sept. 6
Mr. Martin
These two from Mr. Roosa came in after
I talked to you in Bedford Village last
Friday.
mnm
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Federal Reserve Bank of St. Louis
from
ROBERT V. ROOSA
BROWN BROTHERS
HARR1MAN & CO.
59 WALL, STREET
NEW YORK,
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Federal Reserve Bank of St. Louis
N. Y. 1OO05
I N T E R N A T I O N A L SERVICE \
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Federal Reserve Bank of St. Louis
>
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ROBJCJLTaOOSA
yoio*£a Tiuyimair ni®3sa «cajppAay.
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Federal Reserve Bank of St. Louis
August 31, 1966
Dear Joe,
As you know, I have been most concerned that the present appropriate degree of monetary restraint would be suddenly intensified by a confidence crisis. Such a crisis could be set off either
by fears that the Administration was content to allow the Federal
Reserve to do the whole job indefinitely, or by fears that the Federal
Reserve was being punitively brutal without making delicate provision
for the convergence of unusual strains on particular seasonal dates.
On Monday, both fears seemed to be getting out of hand. That had a
lot to do with the record level of Treasury bill rates and the drastic
decline in stock prices*
In this setting it was a real Gbdsend to have Joe Barr's
testimony yesterday. I felt so relieved and hopeful that I immediately dispatched a congratulatory wire to Barr and a supporting
wire to the President. I do not send wires very often. Since these
are really all in your bailiwick and since I never want to reach out
into Treasury affairs without keeping you fully informed, I am enclosing copies of both telegrams—in case you should have a second
to look at them.
I am still hoping that there might be some way of enforcing
a limit on the market activities of the various Federal credit agencies,
and on the volume of asset sales. If that could be done, and accompanied
by an announcement indicating that this was deliberately initiated by the
Treasury in order to help in the necessary reduction of demand pressures
in tile credit markets, you would be making a major contribution toward
getting us through this period when we need restraint without paralysis.
As I said in my wire to Barr, I do wanttfee be helpful if there is any way
that I can. It is in that spirit that these telegrams were sent.
All the best,
Sincerely,
ROBERT V. EC;
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Federal Reserve Bank of St. Louis
The Honorable Henry H. Fowler
P. 8.
2
August 31, 1966
It has just occurred to me that I ought to send copies of this
letter and the attachments to Bill Martin—just to make sure
that his in basket is really chock full when he returns.
The Honorable Henry H. Fowler
Secretary of the Treasury
Main Treasury Building
Washington 25, D. C.
Enclosures
ccs Ww, HeC Marti*
from
ROBERT V. ROOSA
BROWN BKOTHKRS HARK1MAN & CO.
59 WALL STREET
NEW YORK,
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Federal Reserve Bank of St. Louis
N. Y. 1OOO."
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Federal Reserve Bank of St. Louis
August 30, 1966
Dear Robbie,
Having just finished the enclosed letter to Ed Dale, in
response to his current canvass of "economists", I thought you might
possibly also have some interest in my reply. It seems to me terribly
important to get across to the markets now, as they flounder in anxiety, a realization that this present strain is a necessary concomitant
of getting monetary restraint to become effective all down the line.
But I think it is equally important that the Fed, somewhere soon, find
a way to make clear that this does not mean an absolute cutoff in the
supply of funds but that seasonal requirements will be met in amounts
that correspond reasonably with the seasonal patterns of other years.
But, the provision of reserves for seasonal requirements, when the
markets are already so over-stretched, requires differing techniques
than this to which the market has more often been accustomed. This
may to a large extent, for example, mean that reserves initially will
be edged out through the discount window, and only validated in part
later through open market operations. Meanwhile, the banks, having
been kept on a string through incurring larger and larger borrowings,
will have every motive to hold down the size of individual advances,
while also turning down others.
But I certainly do not need to tell you all about this. I
am just repeating what in a feeble way I find myself saying to so many
in the markets—that the Fed must hold to its present tightness, but
this does not mean a credit deadlock or an absolute abandonment in the
face of seasonal needs.
With good wishes and warm regards,
Sincerely,
ROBERT V. ROOSA
P. S. I am sending copies of this letter and my letter to Ed Dale to Bill
and Dewey, as well, in case they should be interested whenever they
return.
The Honorable J. L. Robertson
Board of Governors of the Federal
Reserve System
August 29, 1966
Dear Ed,
My reply to your questionnaire is enclosed but I cannot let it go
without a covering letter.
The problem you are struggling with in these various questions
is not susceptible to short answers. In the American economic experience
now, as I see it, we are really writing a new book—creating the analysis
and the methodology for the restraining side of the "new economics. "
During 1966 we have had to run the experiment without the most powerful
tool of the new economics, that is, an appropriately restrictive fiscal
policy. The result, because a suitable framework of interacting fiscal
and monetary policies has not been possible, has been a breakdown of
another essential tool—incomes policy.
Any appraisal of monetary policy, for that reason, has to be
conditioned by this sort of preface. It seems to me that our overriding
problem in the financial sphere is that the aggregate demand for funds
exceeds the aggregate supply of savings plus permissible bank credit. Even
though the gap between total demand and total supply may not be wide, all
financial markets feel an absolute shortage. They are having to begin to
learn to live with tight money. This means that banks and insurance companies and savings and loan associations and others have to learn to question
the size of loans as •wall as making the easier decision as to whether a loan
could safely be made.
Under these conditions, many financial institutions have been disturbingly slow in adjusting to the need for more selectivity in the uses of
their funds. They have, in the name of competition, gone on lending or investing for too long without seriously initiating arrangements for scaling
back or screening their commitments. As a result, their liquidity—and
this relates to all kinds of financial institutions, not merely banks—has been
depleted or dangerously reduced. It appears that an intense squeeze was
necessary in order eventually to force upon many of these institutions a
realization of the need to scale down their loans and investments*
By holding down the expansion of bank reserves, instead of feeding
all demands with more and more credit, the Federal Reserve has done two
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Federal Reserve Bank of St. Louis
Mr. Edwin Dale, Jr.
2
August 29, 1966
things: (1) prevented the present demand inflation from cumulating into a
monetary binge with rapidly spiraling prices; and (2) put a number of financial
institutions under the kind of intense pressure that we must have in order to
close the gap between the aggregate demand for funds and the aggregate supply of them. But there had to be a risk that a few might panic (and possibly
even fail in the process) as most take timely action to improve their liquidity
and tighten controls over their loans and investment positions.
In effect, unless the Fed allowed demand pressures to create conditions in which there would be a good deal of alarm, the necessary action
would not be taken by financial institutions. Without their action, the markets
could not edge toward the equilibrium that will provide an answer to the present
strain. If the Fed can both keep its nerve and also provide temporary relief
whenever the pinch gets dangerously tight, another important lesson will have
been learned by all of us. If we get a second chance to prove the capacity of the
"new economics" on the high side, particularly if fiscal policy then works in
better relationship with monetary policy, there can be a reasonable allocation
of .scarce funds through the market place without having to reach the extremes
of agonized complaints or of high interest rates that certainly characterize
the present experience.
You can see from ail of this that I do not feel able to give succinct
simple answers to your questions. The Treasury, for example, could do much
toward relieving the apprehension in the money and capital markets by establishing a tight control over the issuance of new securities by all of the Federal
agencies, including the various "asset sales," for the remainder of the autumn
period of peak seasonal demands for money. I have strongly urged all of my old
colleagues, as well as Charlie Schultz and the C. E. A.t to try to limit this
miscellaneous array of friction-creating issues to the amounts needed for refunding of their outstanding obligations. If this means a shortfall in Treasury
cash, that shortfall can be made up with much less burden on the market through
the issuance of additional Treasury Bills.
Even if there were no embargo on agency issues for new money, there
would be considerable gain in simply being able to tell the markets what to
expect, in terms of approximate magnitude and timing. The unknown overhangi
of perhaps billions of assorted agency issues is an important cause of the
present skittishness in the markets. I would hope that in any overall appraisal
you would find some place to mention the need for removing this kind of abrasive
influence which has certainly been an important cause of the present high interest
rates.
Having said all of that, and hopeful that you will have time to read
it, X can now give quick answers to your questions.
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Federal Reserve Bank of St. Louis
Mr. Edwin Dale, Jr.
3
August 29, 1966
With good wishes and warm regards,
Sincerely,
ROBERT V. ROOSA
Mr. Edwin Dale, Jr.
New York Times
1701 K Street, N. W.
Washington, D. C. 20006
Enclosure
.
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Federal Reserve Bank of St. Louis
1. Do you f ^ A any w e n a c of concern, or even alarm, that the current
m o n e t a r y situation ^^ay be heading toward a financial crisis of some kind—runs
on financial institutions, a liquidity crisis in the banks, etc. ? Include a stock
market crUia if you think it relevant.
y«'H. SI rong dejivinth for .ill kinds of credit and capital, in excess of available savings
.ind Kink crodit, ^ r c c r e a t i n g an over-taxed situation. In combination with new concern
over poHMibJr n n-away wage pressures and deteriorating confidence in the economic general' • h i p of the A d n . j i i i s I ra Lion, these factors are causinr&rnos t serious stock market collapse in
Mi'voml y<uirs.
"
2. A or that or other reasons, do you believe that the Fed should now
etart puraui i t g an easier policy, supplying more reserves to the banks?
'-;ho ,,1,1 n 0 ( adopt ,i generally easv policy; it should be prepared to provide temporary
ieJ o l I nrie-; when many pressures conve-Xo in unusual size
3. Alternatively, in light of monetary policy's failure until very
r e c e n t l y to cvirb expansion of bank credit and the money supply, and in light of
continuing inflationary pressure, do you think policy should continue tough or
oven tougher?
Uonk < T » M | I L ond
c o n t i n u e overall
••seasonally over
c l u d e excessive
I lie money supply have been limited to a b o u t the r i ^ h t degree. I would
p o l i c y jus I as i t is. Bank c r e d i t and the money supply will have to expand
I he weeks ahead, b u t the tightness is at lasL being sufficiently felt to pref u r t h e r expansion.
4. In light of the President's decision not to make significant use of
jfiacal rofltraint thua far, do you believe the Fed's policy this year has been:
Too restrictive? Not restrictive enough? (About rignTTN (Circle the one you
x
bolievo.)
"~~
-<*
5. Do you believe there has been over-reliance on monetary policy,
with not enough help from fiscal policy?
M o n e t a r y policy would not have been placed under so much strain, and interest rates would
not have risen no f a r , if there had been a moderate t£ix increase early in 1966. Even now,
a c a r e f u l h u s b a n d i n g of b o r r o w i n g operations by Treasury agencies, combined with indications
t h a t t h e A d m i n i s t r a t i o n w i l l ask for additional taxes early in 1967, would help greatly.
6. Do you believe that continuance of the present or a tougher degree of
^monetary restraint will, in and of itself, lead to a recession next year?
Alternatively, do you believe the Fed can shift policy when soft spots occur and
that a recession induced by the current monetary restraint is not inevitable?
S k i l l f u l l y exercised, monetary policy can still get the economy through, without leading to
reces'-iion next, year, provided further exacerbation of the strains is not caused by other,
a r m s of the Government. There will be no difficulty,for the Fed to shift policy if serious
^qo('t ^ p o t s occur in the economy.
Comments:
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5YMBOLS
unless its deferred character is indicated by the
proper symbol
JL
Day Letter
N L = Night Letter
W. P. M A R S H A L L
R. W. McFALL
CHAIRMAN OF THE BOARD
PRESIDENT
International
Telegram
LT ^ Letter
The filing time shown in the date line on domestic telegrams is LOCAL TIME at point of origin. Time of receipt is LOCAL TIME at point of destination
LLF293 (5)CTA6?2 B^ 2
CsT
M MWB62? PD MILWAUKEE WIs 6
WILLIAM MCCHESNEY MARTIN JR
2861WOODLAND OR NORTHWEST WAS HOC
THE REPUBLIC NEEPS MORE MEN WITH YOUR FOREslGHTEDNEjSS CONGRATULATIONS
DICK TILLEY
62).
WUSF1201(R2-65)
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Federal Reserve Bank of St. Louis
« ett \\ QA
^ctf-r, ftv V\A
u
Friday, September 30
Mr. Martin
Your schedule for the weekend.
First I should mention —if I haven't had a chance to do it earlier—that
John Ecklund of Yale called you this morning; his secretary
spoke to me ; she said that if you could not get back to Mr c Ecklund
by 4:15 today, he might try to reach you at home on Saturday.
I told her his letter had been received; she mentioned that they sent
a copy of it to your home also.
Friday evening
The dinner with the Mitchells (and the Daanes) is at 1 p.m.
at
the Cosmos Club—with all to meet in the Ladies Lounge (rather
than in the "special" room mentioned in earlier plans.
Informal.
Saturday, October 1
8 p . m . . Mr. and Mrs. Clifford Folger's black tie dinner at the 1925 F Street
Club--you and Mrs. Martin.
Sunday, October 2
10:15... You and Mrs. Martin are "due" at Mats Terminal for take-off at 10:30
in the Coast Guard plane for the luncheon in Tarrytown.
Mats is located in the north concourse of National A i r p o r t — i s the turnoff
for the North Terminal. Secretary and Mrs. Fowler and Mr. Schweitzer
will be goingo
The plane is scheduled to arrive at W e s t c h e s t e r Airport at 11:40, where
you will be met by a Coast Guard c a r — t o take you to Tarrytown by 12.
It is expected that the party will depart about 3:30 (and this time probably
means from Tarrytown ; arrival at Mats in Washington will be at about
5:15 p. m.
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mnrn
BOARD
OF
GOVERNORS
OF T H E
FEDERAL
RESERVE
SYSTEM
STRICTLY CONFIDENTIAL (FR) July 16, 1968.
TO:
Chairman Mart inv
Governor Robertson
Governor Daane
Mr. Holland
Messrs. Reynolds, Hersey, Wood,
Ghiardi and Bryant
Mr. Dale (IMF)
FROM:
Robert Solomon
This paper was prepared at the
request of Secretary Fowler. I have sent
it to Fred Deming, asking him to pass it on
to the Secretary.
Attachment.
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Jan.17, 1969
Mr. Martin
Here's some "refresher"
material on what you and the
Board have said hitherto
about the sort of propositions
set out in the President's
Economic Report,
Think I'll furnish to
Poard members as information
that may be helpful <>
Chas. Molony
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Federal Reserve Bank of St. Louis
January 16, 1969.
MEMORANDUM TO BOARD (For information only).
-v .
Here is some quick background material on the position of the
Board, where any has been taken, on the three Federal Reserve structural
"reforms" mentioned in the President's Economic Report, at page 13»
#l--"The term of Chairman. . .should be appropriately geared
to that of the President to provide further assurance of harmonious policy
coordination."
Replying on September 9, 1968, to questions from Mr. Patman,
the Board made the following comment that appears on page <+7 of the House
Banking Committee's "Compendium on Monetary Policy Guidelines and Federal
Reserve Structure," issued in December, 1968:
In a letter dated October 6, 1966, to Representative
Abraham J. Multer, chairman of the Subcommittee on Bank Supervision and Insurance of the House Banking and Currence Committee, Chairman Martin stated that the Board believed that
the terms of the Chairman and Vice Chairman of the Board should
be related to the President's term of office and that a new
President should be able to appoint .a Chairman of his own
choice and should not be limited in his selection to incumbent
Board members.
A change in the law enabling the President to appoint a
Chairman of his own choice shortly after his inauguration would
provide a practical basis for effective coordination of Federal
Reserve monetary policies with the fiscal and financial policies
of the executive branch of the Government without affecting the
exercise of independent judgment by the Board in the discharge
of the responsibilities imposed upon it by Congress. Such an
arrangement would in fact afford a means by which the Federal
Reserve, through the Chairman of the Board, would be better able
to participate, at the highest level of the executive branch, in
continuing efforts to promote the sound conduct of the Government's financial affairs.
In order to accomplish the objectives of such a change
in the law, any amendment for this purpose should provide for
an adjustment in the terms of members of the Board so that the
term of one member would expire in each odd year instead of an
even year, thereby causing a vacancy to occur in the membership
of the Board in the year of a President's inauguration. Any
such amendment should also provide for a reasonable time lag,
perhaps as much as 6 months, between the time a newly elected
President takes office and the expiration of the terms of the
incumbent Chairman and Vice Chairman (underscoring supplied).
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Federal Reserve Bank of St. Louis
-2-
#2--The President's Economic Report, page 13: "The rigid
requirement that no more than a single member of the Federal Reserve Board
may be appointed from any one Federal Reserve District should be removed
so that the President, with the advice and consent of the Senate, may
choose the very best talent for the Board."
At the House Banking Committee's hearings on "The Federal
Reserve System After Fifty Years," on January 22, 1964, p. 40, Congressman
Bolton questioned Chairman Martin about a part of his statement favoring
the dropping from the Federal Reserve Act of "any reference to representation of particular segments of our society." Mr. Bolton continued: "And
you indicated there at least to me, that you would also favor dropping the
geographical representation of the Board. Would you feel--would you not
feel that this would hold the possibility of getting a concentration of
members from one particular area of the country only?"
Mr. Martin replied as follows (p. 41 of the hearing record):
"Yes; I think it does raise that possibility, Mr. Bolton. But in making that
suggestion, having thought about it a gre^at deal; I would assume that any
President who was making appointments to the Federal Reserve Board would be
very certain in his own mind if he had two men from the same district, that
the men were so outstanding that it would overcome that geographic disadvantage. . . .1 would think that any President facing up practically to
this problem would recognize that he would Tike to have on the Federal Reserve
Board the west coast, the center of the United States, and the East. . . .
Sometimes it just happens that on the Pacific coast, which is a very large
area, there may be someone in Los Angeles who would be ideal, and there may be
someone equally ideal in Seattle. Yet by law now there is no chance of getting
those two men, even though their circumstances may be such that they would be
available under these conditions, and it would not unduly imbalance the Board
to do that.
"I think it is very important that we try to get the highest
grade, most capable men we-can get. And that is what we are after. ..."
#3--Economic Report, p. 13: "The Congress should review procedures .for selecting the presidents of the 12 Reserve Banks to determine
whether these positions should be subject to the same appointive process that
applies to other posts with similarly important responsibilities for national
policy."
This (as we are telling press inquirers) is a new proposal, and
therefore the Board has had no occasion to take a formal position on it.
There have been a number of occasions, of course, when questions
have arisen about presidents of the Banks serving on the Open Market Committee.
And in connection with that, questions have been asked by Mr. Patman and others
about the status of the Reserve Bank presidents. For example, at the January 22,
1964, hearing on "The Federal Reserve System After Fifty Years," Mr. Reuss
posed the question (p. 38 of hearings):
"Is it not a fact that the presidents
of these banks, t the men who sit on the Open Market Committee, are in fact the
creatures of private power rather than public power?"
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Federal Reserve Bank of St. Louis
- 3-
Mr. Martin replied: "The initiative on the appointment comes
from the board of directors of the individual Reserve banks. But the Congress
has given the Federal Reserve Board the authority on the president and first
vice president.- We can disapprove them. We have complete authority on the
president and the first vice president of the banks. So, to that extent, they
are public officials.
"Mr. Reuss.
What do you mean, complete authority over them?
"Mr. Martin. Well, I am talking about the approval or disapproval of them. When the name comes up to the Board—the seven members of
the Federal Reserve Board—there is no participation by the board of the
individual bank.
"Mr. Reuss. Yes. But you cannot appoint a president who is not
appointed by the majority of private bankers on the board of the particular
Reserve bank, can you?
•
"Mr. Martin. We certainly have a good bit of influence. If the
chairman and deputy chairman are in disagreement with the other six board
members, you have a situation that is not likely to be tolerated.
"The point I am trying to make, Mr. Reuss, is that this is a
very ingenious blending of public and private activity. ..."
Subsequently, in an interchange with former Governor Balderston,
Mr. Reuss denied that the implication of the questions he asked is that the
presidents of the 12 Reserve banks are captives of the banking industry. The
interchange continued as follows (p. 39-40):
"Mr. Reuss. 1 am simply saying that they are not the appointed
servants of the people of -the United States of America, because they are not
appointed by the public appointing authority, as you members of the Board are.
"Mr. Balderston. But I would like to point out that when they
come to.the Open Market Committee, the five who are serving for that particular
year take an oath of office, which makes them public servants for that period
of time.
"Mr. Reuss. They are public servants in whose selection the
President of the United' States and other U. S. authorities played no part,
except the very remote, indirect role that Chairman Martin has described.
"Mr. Balderston. Which is a very direct role. Seven members
of the Board play a very significant part and very direct role in the
selection of those presidents. And as to whether they represent themselves
and vote in accordance with their own consciences, or at the behest of private
bankers, I .would like to suggest that you ask the bankers in any one of the
districts whether the president of their Federal Reserve bank obeys their
suggestions and intimations as to what they would like. It would be an
interesting survey."
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Charles Molony
@FedFRASER