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M
F or R elea se on D e liv e ry
THE PRICE OF STABILITY
A ddress by
W in fie ld W. R i e f l e r , A s s is ta n t t o th e Chairman
Board o f G overnors o f th e F e d e ra l R eserve System
b e fo re
The R o c h e ste r Chamber o f Commerce
R o c h e s te r, New York
Jan u a ry ll i , 1957
5 7
THE PRICE OF STABILITY
The F e d e ra l R eserve System i s -widely h e ld r e s p o n s ib le f o r s o - c a lle d
”t i g h t m oney,n i . e . , f o r th e r i s e i n i n t e r e s t r a t e s , f o r th e lo w er p r ic e s a t
w hich lo n g -te rm bonds s e l l i n th e s e c u r i t i e s m ark ets and f o r th e f a c t t h a t
p o t e n t i a l b o rro w e rs w ith c r e d it- w o r th y p r o p o s itio n s have t o shop f o r le n d e r s .
Now, i n a s e n s e , t h i s i s t r u e . B ut i t i s v e ry im p o rta n t to u n d e rs ta n d th e
s p e c i a l sen se i n w hich t h i s a f f ir m a ti o n i s made. I t i s t r u e i n somewhat th e
same sen se t h a t th e C o u rts can be s a id to be r e s p o n s ib le f o r th e in c r e a s e o f
in ju n c tio n s is s u e d . More fu n d a m e n ta lly , how ever, i t i s th e c la s h o f c o n f l i c t
in g i n t e r e s t s t h a t p o ses a problem w hich th e C o u rts m ust d e a l w ith i n th e
p u b lic i n t e r e s t , a problem w hich c an n o t be s o lv e d by lo o k in g th e o th e r way.
S im ila r ly , i n th e c a s e o f t i g h t money and h ig h e r i n t e r e s t r a t e s ,
th e F e d e ra l R eserve System c o u ld i n a te c h n i c a l sense lo o k th e o th e r way.
I t c o u ld d is r e g a r d th e e f f e c t s upon th e r e a l v a lu e o f th e d o l l a r , o f huge
demands f o r borrow ed funds i n e x c e ss o f c u r r e n t s a v in g s , im pinging on a
s i t u a t i o n i n w hich p r ic e s a re a lr e a d y r i s i n g and demand i s a lr e a d y p re s s in g
on i n d u s t r i a l c a p a c ity . I t i s w ith in th e R eserve System* s te c h n i c a l d i s c r e t i o n
t o make s u f f i c i e n t r e s e r v e s a v a il a b le to th e com m ercial ban k in g system to p e r
m it th e banks to make lo a n s i n much l a r g e r volum e. T h is would i n e f f e c t ,
how ever, c r e a te money to o f f s e t th e d e f ic ie n c y o f s a v in g s . I f th e F e d e ra l
R eserve System d id t h i s , i t would b e tr a y i t s b a s ic r e s p o n s i b i l i t y .
P r ic e Trends
In th e c o u rse o f th e l a s t 18 m onths, th e p r o s p e r ity , s t a b i l i t y and
growth w hich t h i s c o u n try had e n jo y ed began g ra d u a lly to tu r n i n t o a boom.
An e x u b e ra n t optim ism d e v elo p e d , s e r io u s s h o rta g e s a p p ea re d i n key com m odities,
such a s s t e e l , and p r i c e s r o s e o v er an in c r e a s in g ly w ide ra n g e o f com m odities.
I n th e atm osphere o f g e n e r a lly a c ti v e demand, o p p o r tu n i tie s f o r employment were
b r is k and w ere r e f l e c t e d i n in c r e a s e d w ages. As c o s ts o f b o th la b o r and
m a te r ia ls r o s e , th e y w ere in c r e a s in g ly p a sse d on i n t o h ig h e r p r ic e s f o r f i n a l
p ro d u p ts . R e g u la te d a g e n c ie s , su ch a s r a i l r o a d s , squeezed by h ig h e r c o s t s ,
re q u e s te d and were g ra n te d r a t e in c r e a s e s , th u s a d d in g f u r t h e r to th e c o s t
o f d o in g b u s in e s s . F o r a lo n g tim e th e s e e x p an siv e developm ents found o n ly
m oderate r e f l e c t i o n in th e g e n e r a l c o s t o f l i v i n g , p a r t l y because o u r a g r ic u l
t u r e was going th ro u g h a b a s ic re a d ju s tm e n t and food p r ic e s w ere low . More
r e c e n t l y , a s food p r ic e s f i r s t s t a b i l i z e d and th e n r o s e , th e v e ry g e n e ra l r i s e
i n c o s ts and p r ic e s w hich had been g a th e r in g headway has been more f u l l y
r e f l e c t e d i n th e in d e x o f consum er p r i c e s . As t h i s in d e x i s used b y many o f
o u r le a d in g i n d u s t r i e s t o d e te rm in e when wage a d ju stm e n ts s h a l l be made, we
a re now e x p e rie n c in g an a d d itio n a l s e r i e s o f c o s t in c r e a s e s w hich in d u s tr y
w i l l n a t u r a l l y w ish t o p a ss on i n p r i c i n g in te rm e d ia te and f i n a l p ro d u c ts .
These developm ents a re now s u f f i c i e n t l y w id esp read to f u r n is h
u n m ista k ab le e v id en c e t h a t th e mechanism o f th e s p i r a l o f i n f l a t i o n i s a t
w ork. The s p i r a l can be s a id to be s t i l l an i n f a n t i n t h a t th e t o t a l r i s e
i n th e c o s t o f l i v i n g i s s t i l l l e s s th a n 3 p e r c e n t. I t i s so u n m ista k ab ly
p r e s e n t, how ever, t h a t i t c a l l s f o r c o n s id e r a tio n o f th e d an g ers in v o lv e d in
such a s p i r a l and th e e x i s t i n g means o f c o p in g w ith i t .
-2-
Mechanics of Inflation
A n
fe e d
to
upon
save
in fla tio n a r y
it s e lf .
is
d im in is h e d
w o u ld
n o r m a lly
be
chase
goods
w h ic h
a re
o f
e n c o u ra g e d
in c r e a s e d
on
r e la tiv e ly
a
s p ir a l
w o rd s ,
th e
o f
in
c o u n ts .
a c c e le r a te d
The
and
a re
These
m ay
b ased
tre n d s
spend
p o s tp o n e
n o t
ir i
th e ir
im m e d ia te
g ro w th
is
in
m o u n tin g
th e
th e
to
in c e n tiv e
C o n s u m e rs
in s te a d ,
a n d ,
B u s in e s s m e n ,
is
T h u s,
a lr e a d y
th e y
p r ic e s ,
te n d e n c ie s
r is e ,
s a v in g
s p e n d in g
In s te a d ,
in
to
in c r e a s e d .
n e e d .
econom y
in c r e a s e s
r a p id ly
s tro n g
r e q u ir e m e n ts .
th e
p r o d u c tio n .
be
on
e x p e c te d
to
to
la t e r
o n .
B ra k e s
on
s p ir a l
o f
w ag es,
p u r c h a s in g
lik e w is e ,
s p e n d in g
is
o p e r a tin g
c a n n o t
w o rk
r e s u lt
c o s ts ,
pow er
o r
a t
in
th e m s e lv e s
and
who
p u r
o u t
in
r e a l
in
o th e r
v a lu e
o f
is
w ith o u t
in c r e a s in g
la t e r
m o re
be
e ffe c te d
u se
o f
m oney
m o u n tin g
I t
is
b y
th e
th e
s e t
one
in
u n d e r m in e
th e
e x p a n s io n
p la n s
tre n d s
th e
w hen
in
th e y
o f
s ta g e
n o t
fo r
on
and
p r o b le m s
o f
c o n c re te
s p e c ific
b a s ic
e n te re d
b ased
c a p a c it y
h a rd
fo u n d a tio n s
n e c e s s a r ily
dem and
b u y in g
c a p a c it y
fo r
v e ry
a re
r e f le c t
a n tic ip a to r y
p r o d u c tiv e
th e
a l l
tim e s
o f
th e
F e d e ra l
in
o f
(3 )
th e
to
s ta n d
(1 )
p ro d u c ts .
dem ands
in to
fa u lty
a s
th a t
a
s o rt
fo re c a s ts
in
th e
o f
r e a d ju s tm e n t
c r e d it
s tru c
d e te r io r a tio n
w hen
o f
w o r k in g
b u t
p r ic e s
w ith in
c a p ita l
th e re
d o lla r .
To
adam ant
c a n n o t
and
and
w ages
a re
lim its
We
a re
a p p r o p r ia te
fo r
a le r t
a g a in s t
to
th is
m o re
th e s e
can
th e
th e
is
is
a
fin a n c in g
e x p e d ie n ts .
go
v e ry
th e re fo re ,
it s
p r im a r y
as
p o lic ie s .
e x p lic it ly
p r e s e r v a tio n
o f
m o u n t,
in te n s iv e
n e v e r
m o n e ta ry
e ffe c t
in fla tio n
s e lf-
c o s ts
s a fe g u a rd e d ,
g o v e rn m e n t w h ic h
b e
to
in c ip ie n t
h o w e v e r,
o f
m a k in g
fe e d -b a c k ,
c o n c e rn
and
Som e
b y
th e
f i r s t
h ap p en ,
b y
m a in ta in s
o u r
s h o u ld
becom e
tr a n s a c tio n s .
s u p p ly .
w ith
us
and
s im p ly
a c c e le r a te d
S y s te m
b e fo re
o f
c h a rg e d ,
th e
o p e r a tio n s
r e s p o n s ib ilit y
S y s te m .
M oney
ra te s
h ig h - le v e l
r is in g
(5 )
o f
A s
fin a n c e
m oney
fu n c t io n s ,
in te r e s t
o f
and
a l l
th e
lie
headw ay
T h is
m oney.
to
dow n
R e s e rv e
T ig h t
W hen
c o n te x t
w o u ld
g a th e r
e x is te n c e ,
to
R e s e rv e
o f
o f
in fla tio n ,
it s
and
th a t
b e in g ,
n eed ed
in s titu tio n
o f
pow er
C ause
in
d r a w in g
F e d e ra l
n a tu re
c a p a c it y ,
is
a lr e a d y
a t
a
ra th e r
p ro s p e c t
now
a d d itio n s
th e
p u r c h a s in g
B a s ic
m a rk e t
E x p a n s io n
s u p p lie s
b y
s p ir a l
w ith o u t
as
o r
s e lf-a c c e le r a tin g .
m oney
can
lo n g
b u t
m ay
th e
in fla tio n ,
and
fa r
o f
im b a la n c e s
th a t
s p ir a l
m is le a d in g
in fla tio n .
fe e d in g
and
re c u r
a
G ro w th
In fla tio n
Such
m o re
q u ite
s e r io u s
im b a la n c e s
su ch
p r o je c tio n s
a g a in s t
le a d
o f
g ro w th .
becom e
tu r e ,
in
has
e x p e c te d
to
d e p r e c ia tio n
o p e r a tio n s
in d u s tr ia l
hedge
m ay
A
m o re
a re
to
fu r th e r
in
o p e r a tio n
in c e n tiv e
B u t b ecau se
c a p a c it y ,
an d
in
g e n e r a lly
e n c o u ra g e d
a re
a n tic ip a te
in c r e a s e s
m o re
an
th e
a re
th e y
once
p r ic e s
d o lla r .
b a la n c e d
o f
to
f u l l
and
s a v e rs
b o th
c o r r e s p o n d in g
s p ir a l
B ecause
o f
th e s e
c o s ts
b an k
an d
r is e ,
a s
th e y
h ave
r is e n
e m p lo y m e n t,
(2 )
p r ic e s ,
in c r e a s e d
liq u id ity
d e v e lo p m e n ts
(U )
an d
o c c u r
o u tp u t
c o rp o ra te
a t
a
tim e
d u r in g
v e lo c ity
w o r k in g
o f
th e
p r e s s in g
on
o f
lim
y e a r,
its
m oney,
c a p ita l
c o n tin u e d
p a s t
o f
and
r a tio s ,
s ta b ility
-3and
som e
fo r
in v e s tm e n t
a ls o ,
g ro w th
in
th is
re s to re d
o r
in v e s tm e n t
is
r e le a s e
m o re
in
m o re
h an d ,
th e
s p ir a l
to
to
an d
m o re
w o rk e d
th a t
a re
p o te n tia l
e n te r
b id s
to
th e
b o rro w e rs
a lr e a d y
o u t,
th e re .
The
w h a t
v o lu m e
th e
e x te n t
th e s e
th a t
been
F e d e ra l
d u r in g
o f
th e
re s e rv e s
in c r e a s e d
r e le a s e s ,
th e
S y s te m
th a t
h o w e v e r,
to
n e u tr a liz e
th e
in
in te r e s t
r is e
ban ks
to
have
te m p e r
P r ic e
o f
have
in
th e
d if f ic u lt y
be
s a v e .
w ith in
p a id
is
th e
p r ic e
w h ic h
o f
and
n o t
in
a
p a rt
in to
has
m em ber
w e re
w e re
p a s t
th e
y e a r,
o f
th e
a n d ,
fo r
a
th e
b y
th e
p r ic e
s u ffic ie n t
r e s u lt,
r e s tr a in t
th a t
o f
som e
to
fu n d a m e n ta l
as
r is e
p o s s ib le
in
had
e c o n o m ic
b a n k s ,
re s e rv e s
co n seq u en ce,
c ir c le
in c r e a s e d
m ade
s c a rc e
e q u ilib r iu m
r e s p o n s ib ility
th a t
a
m itig a te d
i t
m oney
and
in fla tio n a r y
th e
b a s ic
th e n
w ith
As
'W h e n
com e
fa c t,
it s
an
c o s ts .
s itu a
w o u ld
goods
s p a rk
th e
th a t
r e le a s e
th e
m oney
can
I t
be
and
v o ic e s
a re
r a is e d
th e
hom e
U-l/2
p e r
c e n t.
q u a lity
m o rtg a g e s
in te r e s t
5
s c h o o l
o u tla y s
c o m p a re d
th a t
th e
th e
h ig h e r
w ith
o r
M o re
who
in
th e
in
v o lu m e ,
cause
o f
c o m m e r c ia l
has
h e lp e d
a b le
b e tte r ,
y e t
d is m a y e d
in te r e s t
ra te s
b u t
in te r e s t
ra te s
a re
a ls o
M o st
a ffe c te d
o f
a c c ru e
b y
changes
r a te
to
in
w h ic h
th o s e
h ave
a t
w ho
w ho
m oney
m o rtg a g e s
on
in te r e s te d
p lig h t
th e
o f
w h ic h
m u n ic ip a l
e n la r g e
im p a c t
o f
h ig h e r
th e y
access
s a d ly
A lm o s t e q u a lly
a re
o n ly
o f
in
to
n o t
w id e r
o u r
on
o f
fu n d s
s tr a in e d .
th a t
c o u n te d
c e ilin g
n o t
th e
m is le a d in g
n e e d le s s ly
b u y e r
in te r e s t
b o rro w
a lr e a d y
c o r p o r a tio n s
s e e k .
to
c o m p la in
g ia n t
th e y
is
a re
a re
a n
o b v io u s ly
They
who
hom e
th e ir
le n d
m a rk e t
th a t
is
in te r e s t
th a t
to
a re
i t
th e
to
th e
fu n d s
and
th e
b u d g e ts
in
re w a rd s
to
b u s in e s s m e n
as
e s s e n tia lly
s u b je c t
d is tr e s s in g
com e
f a r
p ro te s t.
b u ild e r
m o rtg a g e s
le n d e r s ,
s c h o o l
s m a ll
h ig h e r
fin d
on
c e n t
le s s .
on
f a ir ly
p a y
o f
f a c ilit ie s .
a re
to
p e r
a u th o r itie s
a g g r ie v e d
as
th a t
M o rtg a g e
fo r
y ie ld in g
s c h o o l
d e fic ie n t
is
tr a n s a c tio n s
so
c o n s is ts
b o rro w e d ,
b o r r o w in g ,
to
s t a b ilit y
m a rk e ts ?
th a t
e q u a l
ta in
had
e n v ir o n m e n t
m any
to
th a t
boom .
fo r
L o u d es t
a b le
g e n e ra l
th e
s c a rc e
to
b ecau se
sen se
fo rc e s
N a tu r a lly
h is
w h ic h
a
o f
be
s p e n d in g
som e
n o t
T h ro u g h o u t
fin a n c ia l
w ith
fin a n c in g
and
e c o n o m ic
r a te s .
e x u b e ra n c e
"W hat t h e n
m ust
th e
in
d id
be
dem ands,
and
th e
b o rro w e rs ,
fo r
w ages
h a s ,
th e
a v a ila b le
I t
o r
m a n d a te
r e lie v e
tr a n s a c tio n s .
tig h t
in c r e a s e d
s h a re s
p la n s
fo llo w s ,
e q u ilib r iu m
s a v in g s ,
it s
n o t
These
b id s
w o u ld
p r ic e s ,
in
I t
S ta b ility
c o n d itio n s
th e
and
o c c u rre d .
o p e ra te d
th e
m ade
lo a n s
ad van ces
e ffe c t
S y s te m
y e a r
th a t
in v e s tm e n t
c o m m e r c ia l b a n k s
lo a n s .
th e ir
fin a n c e
R e s e rv e
p a s t
w o u ld
th e
s a v in g
in v e s tm e n t.
th e
fo r
i . e . ,
n o t
o f
d is r e g a r d
th is
m e t,
had
Now,
s h o u ld
add
in
to
and
m eet
a v a ila b ility
be
fo r
ra te s
r is e
tig h t
to
is
s a v in g s .
b o th .
w o u ld
r e q u ir e m e n ts
in te r e s t
th e
s t i l l
w ith
dem ands
b e
s e e k in g
to
needed
m oney
to
s u ffic ie n tly
b a n k s ,
m a rk e ts
th e
be
cease
o f
i t ,
e x p la n a tio n
c u rre n t
S y s te m
m em ber
a c c e n tu a te
a c c e le r a te
it s e lf
to
r e a l
o f
c a n n o t
dow n
o n ly
excess
in c r e a s e
R e s e rv e
th e
m o n e y w o u ld
th e
in
c o m b in a tio n
to
w o u ld
a re
m oney
s c a le d
a
F e d e ra l
i t
s u p p ly ,
s a v in g s
b y
re s e rv e s
w o u ld
s e r v ic e s
ev e n
p la n s
R a th e r,
m oney
a g g re g a te
e ith e r
a c h ie v e d
I f
le n d
th e
th e
c o n te x t
u n le s s
b a la n c e
tio n .
in
in
sq u eezed
m ay
to
be
m a rk e ts
a re
th e
v o ic e s
s w e llin g
th e
c o s ts
th a t
o f
un
b e tte r
in
m a in
g o v e rn m e n t
-Ub ecau se
th e y
d a y
w hen
fo r
o u r
a
a p p ly
to
o u r
w e ll-o r d e r e d
re v e rs a l
o f
th e s e
o f
c u rre n t
p o lic ie s
Now,
ro w e rs
in
as
th e ir
so
th e
a g a in s t
q u e s t
e x p a n s io n .
a v a ila b le
lo a n s
does
to
n o t
to
th e
pass
s p e c ific
g ro u p
c o m p e titiv e
o f
th e
to
to
d e a l
as
la b o r
th e y
w ith
th e
The
I t
th e
e a s y
c r e d it
th is
is
tru e
th e
b a n k in g
s y s te m
a t
a l l
th ro u g h
fin a n c ia l
F e d e ra l
R e s e rv e
S y s te m
A ugm ent
s a v in g s
R e s e rv e
has
a lo n e .
s y s te m
To
as
o f
g ro u p s
o f
b o r
a u th o r itie s
fu n d s
fo r
th a t
can
w h o le ,
e n te r
such
to
o n ly
to
p la n t
is
a ffe c ts
th e
m a rk e t
fro m
r e lie f
to
re s e rv e s
lo a n e d
in
u n d er
B u t w o u ld
i t
as
th e
o th e r
an y
a v a ila b le
th e
m a rk e t
p re s e n t
a ls o
fro m
such
o n ly
o f
o f
c h a n n e le d
b r in g
m ake
b e
re s e rv e s
in fla tio n .
b u t
in te r m e d ia r ie s
a c tu a lly
means
no
I t
a
in c r e a s e
th e
a s
th e
r a te
in
o f
o f
a c tiv ity
is
is
no
b e
as
be
to
an d
in to
tru e
econom y
c o n d itio n s
to o
to
u n d e r
c o n d itio n s
b r in g
r e lie f
to
th a t
c e r ta in
p o in t
m oney
in
th e
b e tte r
c o s ts
o f
th e
hom e
th a t
How
r a te s ,
The
can
in v e n to r y ,
p r ic in g
c o s ts
He
and
a b le
to
th e y
s m a ll
r u in
be
m any
w e re
i f
e m p lo y
how
f a ir ly
in c r e a s e d
b u ild e r s
m o v e m e n ts .
r is in g
b e e n
have
c o n s tr u c tio n
p r o b le m ?
p r ic e
h ave
th e y
fu rth e r?
in te r e s t
c o n c e rn
o u t,
th e
s u p p ly .
som e
th e
o f
p a s t
p r e v a ile d
im p o r ta n t
th is
in
in
n o t
fo r
th e
a
th a t
b u s in e s s
is
le s s
s p e c ia lis ts
e x p a n s io n
h is
o f
fu tu re
th e re
ill
n o t
s t if le
r e c e s s io n
is
r e a l
c a r e fu lly
o f
a
r e a l
la t e r
and
d a n g e r,
th a t
can
see
c le a r ly
b u ild in g
fo rw a rd
on?
th a t
o r ig in
c u r
w hen
e s s e n tia l
it s
hom e
dem ands
to
a c tiv ity
had
th e
huge
r e la te d
c o n c e r n in g
o v e r-e x u b e ra n c e
We
th e
e n tir e ly
d e c is io n
y e a rs
195b*
s e g m e n ts
w
p r o b le m
e v e ry
tw o
Is
ra te s
s ta g e
th a t
a c c o u n t
c o r r e c tly ,
a re
fin a n c in g
in te r e s t
s e t
b u t
w o u ld
in fla te
lo w e r
m a rk e ts
to
o f
th a t
in
on
w e ll
c o s ts
y e a rs
e x p e n d itu r e s .
p a r tly
q u e s tio n
p r o b a b ly
la r g e
c r itic s
le v e l
i f
n o t
tw o
lo n g
to
com pound
c o s ts
know s
b u t
How
u n p r e d ic ta b le
th e
th e
b u ild in g
p a s t
w e re
b u ilt
r is e ,
r is in g
in
ta k e n
A m e r ic a n
be
W o u ld
th a n
b u s in e s s m e n
m ust
fa c t,
to
th e
c o s ts
p r o s p e c tiv e
p re s e n t
m oney,
o v e r
liv in g .
r is e ?
s o p h is tic a te d
o u r
o f
th is
o f
o f
b u t
b u ild in g
v u ln e r a b le
im p a c t
tig h te r
c o s t
i f
c o u ld ,
th e
to
m o n th s ,
c u rre n t
te r iz e d
s a y ,
o r
m ay w e ll
p o lic y .
som e
s c h o o l
b u lk
th a t
w e ig h t
fa v o r
g re a t
in fla tio n
now
T h e re
tiv e
p u b lic
th e
m a te r ia l
o f
im p a c t
S in c e
b u d g e t-m a k e r
in d u s tr ia l
p la n n in g
to
fa v o r
e x p e n s e ,
dem and
th e
le n d .
fe w
ite m iz a tio n
and
pow er
to
th e
to
to
a r e s u m p tio n
w ith
a s k ,
no
a t
v ie w
s itu a tio n .
has
m oney
o f
e x c e p tio n
c o m m e r c ia l b a n k s
m a rk e ts
re c e n t
fin a n c in g
re n t
p a r tic u la r
e x a m p le ,
R e s e rv e
re s p o n s e
m uch
M o re
fo r
in
p a s t
cope
p re p a re d
p o in ts
som e
v o lu m e
in c r e a s e
s c h o o ls
p o lic ie s .
a
th e s e
o r
to ta l
ban ks
p a r tic u la r ly
to
a l l
g ro u p s ?
th e ir
s tim u la te d
a b le
th e
r e lie f
th e
b o rro w e rs
m ass
a d d itio n a l
is
ta x
a ffe c t
o f
th e
tim e s
d e v e lo p
m an
d e la y in g
to
c o n d itio n s .
o v e r
re s u m e
a re
is
F e d e ra l
P a r tly
th re e
th e y
lo n g -n e e d e d
do
th e
c o u rs e ,
a ffe c te d
s te a d y
th a t
can
th e
c o m m e r c ia l b a n k in g
th e
and
p e r m it
p o lic ie s
a ffe c t
R e s e rv e
d ir e c tly ,
w h ic h
w o u ld ,
ill
r e p r e s e n tin g
R e s e rv e
fo r
th ro u g h
am ount
th e
d e b t
b u d g e t w
th e y
F e d e ra l
c o m p a n ie s ,
Thus
as
b o rro w e d
th e
in s u r a n c e
by
f a r
F e d e ra l
b o rro w e rs
s o u rc e s .
v o ic e s
F e d e ra l
o th e rs ,
fo r
A ll
fu n d s
s a v e rs
n a tio n a l
c itiz e n s .
In c r e a s in g ly ,
a
huge
F e d e ra l
it s
r e la
m o n e ta ry
h as
in
c h a ra c
th e
now
v e ry
th a t
in d u s tr y .
-5Because of the existence of this problem, the Federal Reserve System
can never commit itself specifically with respect to its future course of
action. It must always be in a position to adjust its policies to the
requisites of stability. The balance between saving and spending is subject
to many shifts, and the Federal Reserve System must always be in a position
to respond flexibly to these shifts. It does this in a minor degree, in fact,
almost continuously. Those who care to read the record meticulously will find
that on more than one occasion during 1956 the Federal Reserve relaxed some
what the emphasis with which it applied policies of restraint. On each occa
sion, a subsequent quickening of inflationary pressures indicated a continued
need for restraint.
One generalization that emerges from these illustrations is that,
despite the possibility of differential impacts, interest rates high enough
to balance saving with investment are a cheap, not a dear, price to pay for
stability when the alternative is inflation. Inflation, long continued,
corrupts the foundations of society. It reaches into the bosom of the family,
erodes savings, and undermines provision for sickness, education and old age.
•What about wMild Inflation1*
Yet, there are other voices, urbane and persuasive, to suggest that
a little inflation, a controlled inflation amounting to, say, 2 per cent a
year, may not be too bad, particularly if the alternative be a deep depression.
They suggest (1) that it may be a necessary price for growth and prosperity
and insurance against the losses of deep depression, and (2) that workers'
real wages are now protected by suitable collective bargaining contracts
against the ravages of an annual 2 per cent increase in the cost of living.
This view overlooks many pitfalls.
F ir s t,
In te r e s t
m ent
do
c o s ts
n o t
s e t
th e
th a t
th e
c ite d
s ta g e
p re v e n t
im b a la n c e s
fro m
i t
b e
th e s e
w
w e re
i l l
b ecau se
a lte r n a tiv e
c o n tr ib u te
fo r
to
o f
deep
s t a b ilit y
e c o n o m ic
d e v e lo p in g
im b a la n c e s
in
b y
d e p r e s s io n
b a la n c in g
c o lla p s e .
th e
have
econom y.
a c tu a lly
To
th e
I f
a
is
c o m p le te ly
s a v in g
w ith
c o n tra ry ,
d e p r e s s io n
d e v e lo p e d ,
n o t
in v a lid .
in v e s t
th e y
h e lp
o c c u rs ,
b ecau se
th e y
a v o id e d .
Second, there is no such thing as a controlled inflation limited
to 2 per cent per year. If it were once known that our government consciously
embraced or tolerated such a goal, the incentive to save would be sadly dimin
ished and the incentive to spend sharply increased. This in itself would lead
to an acceleration of inflationary pressures. It would tend to make them self
feeding and would go far to eliminate any possibility that the pressures could
be controlled within narrow limits.
Third, escalator clauses cannot protect the whole economy from in
flation. At the best, they insulate a portion of the economy at the expense
of the rest. This is the road to internal disruption and social chaos.
Finally, continued inflation, even if it could be controlled to a
rate of 2 per cent per annum, would by no means be mild. It would be equal
to an erosion of the purchasing power of the dollar by about one half in the
-6c o u rse o f each g e n e r a tio n . 'F o r exam ple, a w orker r e t i r i n g a t age 65 on a
p e n sio n o f $100 p e r month would have th e e q u iv a le n t o f o n ly a b o u t $82 p e r
month a t age 75, and o f o n ly a b o u t $67 p e r month a t age 85. I f he liv e d to
be one hu n d red , h is p e n sio n th e n would b e th e e q u iv a le n t o f o n ly $50 in
c u rre n t p ric e s .
i
These c a lc u la tio n s i l l u s t r a t e th e trem endous s ta k e t h a t th e American
w orker has r e c e n t l y a c q u ire d i n s t a b i l i t y i n th e p u rc h a sin g power o f money.
Among th e o u ts ta n d in g g a in s a ch ie v e d by c o l l e c t i v e b a rg a in in g i n r e c e n t y e a rs
i s th e w id e sp rea d a d o p tio n o f i n d u s t r i a l p e n sio n and r e tir e m e n t p la n s b ased
on th e w o rk e r's e a rn in g s d u rin g h is a c ti v e w orking l i f e . I f we sh o u ld e x p e r i
ence m erely c re e p in g i n f l a t i o n , th o se p e n sio n s w i l l be s e r i o u s ly d e f i c i e n t
i n buying power a s compared w ith w hat th e w orker had th e r i g h t t o e x p e c t. I f
th e i n f l a t i o n sh o u ld be a n y th in g more th a n c re e p in g , th e lo s s would be d i s a s t r o u s .
Two o th e r im p o rta n t p ro v is io n s o f modern c o l l e c t i v e b a rg a in in g con
t r a c t s r e l a t e to a u to m a tic c o s t o f l i v i n g a d ju stm e n ts and a u to m a tic a d ju stm e n ts
f o r in c r e a s e s i n g e n e r a l p r o d u c tiv it y . Where i n e f f e c t th e f i r s t c l e a r l y p ro
t e c t s th e w ork er from i n f l a t i o n so f a r a s c u r r e n t e a rn in g s a re co n cern ed , i t
a ls o a u to m a tic a lly t r a n s l a t e s r i s i n g consumer p r ic e s i n t o r i s i n g c o s ts o f
p ro d u c tio n . The second d im in is h e s th e e x te n t to which growth i n p r o d u c t iv i ty
may a c t t o c u sh io n i n f l a t i o n a r y p r e s s u r e s .
Thus, sh o u ld o u r governm ent come to t o l e r a t e
i n f l a t i o n , th e s e new f e a t u r e s o f c o l l e c t i v e b a rg a in in g
a c t u a l l y t o speed th e i n t e r p l a y o f g e n e r a lly i n f l a t i n g
each o th e r a t th e same tim e t h a t th e r e a l v a lu e o f th e
b e in g d i s s i p a t e d .
a g o a l o f even m ild
agreem ents would te n d
c o s ts and p r i c e s upon
w o rk e r's p e n sio n was
No such c a la m ity i s i m p l i c i t i n th e s e a g re em e n ts, how ever, i f our
governm ent c o n tin u e s to s ta n d fir m f o r a s t a b l e d o l l a r . In an environm ent
where th e p u rc h a sin g power o f money i s s t a b l e , th e s e key p r o v is io n s t h a t now
c h a r a c te r iz e so many c o l l e c t i v e b a rg a in in g c o n tr a c ts a re n o t m u tu a lly i n c o n s i s t
e n t . R a th e r, th e y m u tu a lly r e in f o r c e each o th e r i n prom oting th e p ro s p e c ts o f
a w id e ly b ased and s t a b l e p r o s p e r i t y .
Community Response
The l a s t th in g I would w ant to im ply i s t h a t th e F e d e ra l R eserve can
produce o r g u a ra n tee s u s ta in a b le growth o r s t a b i l i t y o r a c o m p le te ly s ta b le
p u rc h a sin g power o f th e d o l l a r . T hat happy r e s u l t depends on m u tu a lly harm oni
ous and r e in f o r c in g i n t e r r e a c t i o n s betw een a l l p a r t s o f o u r s o c i e ty . The
F e d e ra l R eserve does p la y an in d is p e n s a b le r o l e , how ever, i n th e q u e s t f o r
s t a b i l i t y . I am c e r t a i n t h a t s t a b i l i t y would be im p o ssib le i f th e F e d e ra l
R eserve f a i l e d i n i t s d u ty to a d o p t a p p ro p ria te p o l i c i e s d ir e c te d tow ard s u s
ta in a b le economic grow th, h ig h l e v e l s o f a c t i v i t y and s t a b i l i t y i n th e p u rc h a s
in g power o f th e d o l l a r .
The a d o p tio n o f th e s e p o l i c i e s by th e F e d e ra l R ese rv e , however, by
no means in s u r e s t h e i r e f f e c t i v e n e s s . T hat depends on a c o n s tr u c tiv e r e a c tio n
by e v e ry elem en t i n th e community. To r e v e r t to th e e a r l i e r a n a lo g y , a com
m unity i n w hich th e c i t i z e n s were p re p o n d e ra n tly law a b id in g would s t i l l be
Reproduced from the Unclassified / Declassified Holdings of the National Archives
-7la w le s s sh o u ld th e C o u rts f a i l to a d m in is te r th e law . On th e o th e r hand, a
community t h a t was e s s e n t i a l l y la w le s s would rem ain so no m a tte r how con
s c i e n t i o u s l y th e C ourts a c te d on th e c a s e s t h a t came b e fo re them. E q u a lly ,
i n th e problem o f a c h ie v in g and m aintaining s t a b i l i t y , th e F e d e ra l R eserve
can r e f u s e to f u e l th e f i r e s from w hich th e i n f l a t i o n a r y s p i r a l s p r in g s .
A ls o , on a p p r o p r ia te o c c a s io n such a s th e p r e s e n t , when sa v in g i s v i t a l l y
n e c e s s a ry to p ro v id e th e in g r e d ie n ts f o r grow th, i t can so o p e ra te a s to
p e rm it m ark et f o r c e s t o in c r e a s e th e in c e n tiv e s f o r s a v in g . But s u s ta in a b le
grow th w i l l n o t be fo rth co m in g i f th e community d o es n o t resp o n d to th e s e
in c e n tiv e s and does n o t, i n f a c t , c u r t a i l i t s consum ption and in c r e a s e i t s
s a v in g s . In th e same v e in , th e F e d e r a l R ese rv e , when c r e d i t demands a re
expanding a t a tim e o f r i s i n g p r ic e s and e x c e s s iv e demands on o ur p ro d u c tiv e
f a c i l i t i e s , can p e rm it t h i s demand t o b e r e f l e c t e d i n th e a v a i l a b i l i t y o f
c r e d i t and a h ig h e r c o s t o f b o rro w in g . These a re s ig n a l s f o r a l l b o rro w ers
to s e e , t o h eed , and to cause a re e x a m in a tio n o f t h e i r p r o je c te d spending
p la n s . The s ig n a ls w i l l n o t r e s u l t i n th e m ost c o n s tr u c tiv e outcom e, how ever,
i f th e b o rrow in g elem en ts i n th e community do n o t, i n f a c t , re v ie w t h e i r p ro
grams and ta k e s te p s to po stp o n e o r o th e rw is e t o economize on l e s s e s s e n t i a l
o u tla y s .
S t a b i l i t y can o n ly be a c h ie v e d b y th e whole community a c tin g in
harm onious re sp o n se to th e f a c t s o f each in d iv id u a l s i t u a t i o n . The p o t e n t i a l
f u tu r e b e fo re t h i s economy i s u n b e lie v a b ly b r i g h t , b u t t h a t p o t e n t i a l w i l l n o t
be r e a l i z e d i f , a s a community, we d is r e g a r d th e p l a i n meaning o f f a c t s t h a t
a re th e r e f o r a l l to s e e . Today th e s i t u a t i o n c a l l s n o t f o r e x p e d ie n ts o r
p a l l i a t i v e s t o a l l e v i a t e th e im p acts o f h ig h e r i n t e r e s t r a t e s b u t f o r con
s t r u c t i v e re s p o n se to th o s e r a t e s , c o n s tr u c tiv e i n th e s e n se o f in c re a s e d
sav in g and s o b e r rev iew o f p r o je c te d e x p e n d itu re s . A lthough i t i s im p o ssib le
t o p u t a d o l l a r f ig u r e on p o t e n t i a l demand, th e gap to be b rid g e d betw een
sav in g and p r o je c te d in v e stm e n t e x p e n d itu re s i s p ro b a b ly n o t v e ry l a r g e . I t
m ust, how ever, be b rid g e d , n o t b y p a n ic c u r ta ilm e n t b u t b y ju d ic io u s re s c h e d u l
in g o f o u tla y s on th e p a r t o f a l l o f th e m ajor e lem en ts o f o u r community—
consum ers, in d u s tr y and governm ent.
The R o c h e ste r Chamber o f Commerce i s o u ts ta n d in g i n th e le a d e r s h ip
i t has e x e r te d i n t h i s community and i n i t s c iv ic -m in d e d n e s s . T his was tr u e
when I grew up i n t h i s community and b e n e f ite d im m easurably, b o th from th e
a c t i v i t i e s th e Chamber c a r r i e d on i t s e l f f o r th e y o u th o f th e c i t y and a ls o
from th o s e i t sp o n so red i n th e community. T hat t h i s has c o n tin u e d to be t r u e
i s d e m o n strated by th e q u a l i t y o f th e man who i s fo rm a lly ta k in g over th e
le a d e r s h ip o f th e Chamber to n i g h t , and b y th e s u b j e c t t h a t was chosen f o r
t h i s a d d r e s s . W hether we e n jo y s t a b i l i t y o r n o t w i l l depend i n v e ry g r e a t
p a r t on th e s o r t o f re sp o n se t h a t you and y o u r c o u n te r p a r ts th ro u g h o u t th e
la n d make t o th e c u r r e n t f a c t s o f th e m onetary p i c t u r e . I d e e p ly a p p r e c ia te
th e o p p o rtu n ity t o la y th e s e f a c t s and t h e i r i n t e r r e l a t i o n s h i p s b e fo re you.
Reproduced from the Unclassified I Declassified Holdings of the National Archives
F or R elease on D e liv e ry
THE PRICE OF STABILITY
A ddress by
W in fie ld W. R i e f l e r , A s s i s ta n t t o th e Chairman
Board o f G overnors o f th e F e d e ra l R eserve System
b e fo re
The R o c h e ste r Chamber o f Commerce
R o c h e s te r, New York
Ja n u a ry li t , 195 7
THE PRICE OF STABILITY
The F e d e ra l R eserve System i s w id e ly h e ld r e s p o n s ib le f o r s o - c a lle d
’• t i g h t money," i . e . , f o r th e r i s e i n i n t e r e s t r a t e s , f o r th e lovrer p r ic e s a t
w hich lo n g -te rm bonds s e l l i n th e s e c u r i t i e s m ark ets and f o r th e f a c t t h a t
p o t e n t i a l b o rro w e rs w ith c r e d it- w o r th y p r o p o s itio n s have t o shop f o r le n d e r s .
Now, i n a s e n s e , t h i s i s t r u e . B ut i t i s v e ry im p o rta n t to u n d e rsta n d th e
s p e c i a l sen se i n w hich t h i s a f f ir m a ti o n i s made. I t i s t r u e i n somewhat th e
same sen se t h a t th e C ourts can be s a id to be r e s p o n s ib le f o r th e in c r e a s e o f
in ju n c tio n s is s u e d . More fu n d a m e n ta lly , how ever, i t i s th e c la s h o f c o n f l i c t
in g i n t e r e s t s t h a t p o ses a problem w hich th e C o u rts m ust d e a l w ith i n th e
p u b lic i n t e r e s t , a problem w hich can n o t be s o lv e d by lo o k in g th e o th e r way.
S im ila r ly , i n th e c a se o f t i g h t money and h ig h e r i n t e r e s t r a t e s ,
th e F e d e ra l R eserve System c o u ld i n a t e c h n i c a l sen se lo o k th e o th e r way.
I t c o u ld d is r e g a r d th e e f f e c t s upon th e r e a l v a lu e o f th e d o l l a r , o f huge
demands f o r borrow ed funds i n e x c e ss o f c u r r e n t s a v in g s , im p in g in g on a
s i t u a t i o n i n w hich p r ic e s a r e a lr e a d y r i s i n g and demand i s a lr e a d y p r e s s in g
on i n d u s t r i a l c a p a c ity . I t i s w ith in th e R eserve System ’ s te c h n i c a l d i s c r e t i o n
t o make s u f f i c i e n t r e s e r v e s a v a il a b le to th e com m ercial ban k in g sy stem to p e r
m it th e banks to make lo a n s i n much l a r g e r volum e. T h is would i n e f f e c t ,
how ever, c r e a te money to o f f s e t th e d e f ic ie n c y o f s a v in g s . I f th e F e d e ra l
R eserve System d id t h i s , i t w ould b e tr a y i t s b a s ic r e s p o n s i b i l i t y .
P r ic e Trends
In th e c o u rse o f th e l a s t 18 m onths, th e p r o s p e r i ty , s t a b i l i t y and
growth w hich t h i s c o u n try had e n jo y ed began g r a d u a lly to tu r n i n t o a boom.
An e x u b e ra n t optim ism d e v elo p e d , s e r io u s s h o rta g e s ap p eared i n key co m m odities,
such a s s t e e l , and p r i c e s r o s e o v er an in c r e a s in g ly w ide ra n g e o f com m odities.
In th e atm osphere o f g e n e r a lly a c tiv e demand, o p p o r tu n i tie s f o r employment were
b r is k and w ere r e f l e c t e d i n in c r e a s e d w ages. As c o s ts o f b o th la b o r and
m a te r ia ls r o s e , th e y w ere in c r e a s in g l y p a sse d on i n t o h ig h e r p r ic e s f o r f i n a l
p ro d u p ts . R eg u la te d a g e n c ie s , su ch a s r a i l r o a d s , sq u eezed b y h ig h e r c o s ts ,
re q u e s te d and -were g ra n te d r a t e in c r e a s e s , th u s a d d in g f u r t h e r to t h e c o s t
o f d o in g b u s in e s s . F o r a lo n g tim e th e s e e x p an siv e developm ents found o n ly
m oderate r e f l e c t i o n in th e g e n e r a l c o s t o f l i v i n g , p a r t l y because o u r a g r ic u l
t u r e was go in g th ro u g h a b a s ic re a d ju s tm e n t and fo o d p r ic e s w ere low . More
r e c e n t l y , a s food p r i c e s f i r s t s t a b i l i z e d and th e n r o s e , th e v e ry g s n e ra l r i s e
i n c o s t s and p r ic e s -which had been g a th e r in g headway has been more f u l l y
r e f l e c t e d i n th e in d e x o f consum er p r i c e s . As t h i s in d e x i s u sed by many o f
o u r le a d in g i n d u s t r i e s t o d e term in e when wage a d ju stm e n ts s h a l l be made, we
a re now e x p e rie n c in g a n a d d itio n a l s e r i e s o f c o s t in c r e a s e s w hich in d u s tr y
w i l l n a t u r a l l y w ish to p a ss on i n p r ic in g in te rm e d ia te and f i n a l p ro d u c ts .
These developm ents a re now s u f f i c i e n t l y -widespread to f u r n i s h
u n m ista k ab le e v id en c e t h a t th e mechanism o f th e s p i r a l o f i n f l a t i o n i s a t
w ork. The s p i r a l can be s a id to be s t i l l an i n f a n t i n t h a t th e t o t a l r i s e
i n th e c o s t o f l i v i n g i s s t i l l l e s s th a n 3 p e r c e n t. I t i s so u n m ista k ab ly
p r e s e n t , how ever, t h a t i t c a l l s f o r c o n s id e r a tio n o f th e d an g ers in v o lv e d i n
such a s p i r a l and th e e x i s t i n g means o f c o p in g w ith i t .
-2-
Mechanics of Inflation
An i n f l a t i o n a r y s p i r a l once i n o p e ra tio n h as s tro n g te n d e n c ie s to
fe e d upon i t s e l f . Because p r ic e s g e n e r a lly a r e e x p e c te d to r i s e , th e in c e n tiv e
to sav e i s d im in ish e d and th e in c e n tiv e to spend i s in c r e a s e d . Consumers who
"would n o rm a lly be s a v e rs a r e encouraged t o p o stp o n e sa v in g a n d , i n s t e a d , p u r
chase goods o f w hich th e y a r e n o t ill im m ediate n eed . B usinessm en, lik e-w ise,
a re encouraged to a n t i c i p a t e t h e i r grow th re q u ire m e n ts . Thus, spending i s
in c re a s e d on b o th c o u n ts . B ut becau se th e economy i s a lr e a d y o p e r a tin g a t
r e l a t i v e l y f u l l c a p a c ity , f u r t h e r in c r e a s e s i n sp en d in g c a n n o t r e s u l t i n
c o rre sp o n d in g in c r e a s e s i n p ro d u c tio n . I n s te a d , th e y work th e m selv e s o u t in
a s p i r a l o f more and more r a p i d l y m ounting p r i c e s , w ages, and c o s t s , i n o th e r
w o rd s, i n an a c c e le r a te d d e p r e c ia tio n i n tiie p u rc h a sin g power o r r e a l v a lu e o f
th e d o l l a r .
The o p e ra tio n s o f such a s p i r a l underm ine th e v e ry fo u n d a tio n s o f
b a la n c e d i n d u s t r i a l grow th. Growth o r e x p an sio n p la n s a r e n e c e s s a r i l y c o n c re te
and a re b a se d on p r o je c tio n s o f m arket tre n d s i n th e demand f o r s p e c i f i c p ro d u c ts .
These t r e n d s become q u ite m is le a d in g -when th e y r e f l e c t n o t b a s ic demands t h a t
may be e x p e c te d to r e c u r b u t r a t h e r a n t i c i p a t o r y b u y in g e n te r e d i n t o a s a s o r t
o f hedge a g a in s t i n f l a t i o n . E xpansion o f c a p a c ity b a se d on f a u l t y f o r e c a s t s
may le a d t o s e r io u s im balances i n p ro d u c tiv e c a p a c ity and i n th e c r e d i t s t r u c
t u r e , im b alan ces t h a t may s e t th e s ta g e f o r h a rd problem s o f re a d ju s tm e n t
l a t e r on.
B rakes on I n f l a t i o n
Such i s th e p r o s p e c t t h a t would l i e b e fo re u s sh o u ld th e i n c i p i e n t
s p i r a l o f i n f l a t i o n , now i n b e in g , g a th e r headway and become f i r s t s e l f
fe e d in g and l a t e r s e l f - a c c e l e r a t i n g . T h is sim p ly c an n o t hap p en , however,
w ith o u t in c r e a s in g s u p p lie s o f money. As p r ic e s and wages and c o s ts m ount,
more and more money i s needed to fin a n c e t r a n s a c t i o n s . Some o f t h i s f in a n c in g
can be e f f e c t e d by draw ing down w orking c a p i t a l and by making more in te n s iv e
u se o f money a lr e a d y i n e x is te n c e , b u t th e re a r e l i m i t s t o th e s e e x p e d ie n ts .
A m ounting s p i r a l o f i n f l a t i o n , a c c e le r a te d by fe e d -b a c k , can n e v er go v e ry
f a r w ith o u t a d d itio n s to th e money s u p p ly . We a re s a fe g u a rd e d , th e r e f o r e , a s
lo n g a s th e F e d e ra l R eserve System m a in ta in s a p p r o p r ia te m o n etary p o l i c i e s .
I t i s th e one i n s t i t u t i o n w ith in our governm ent w hich i s e x p l i c i t l y c h a rg e d ,
by th e n a tu re o f i t s f u n c tio n s , w ith co n cern f o r th e p r e s e r v a tio n o f th e
p u rc h a sin g power o f th e d o l l a r . To b e a l e r t t o th e e f f e c t o f i t s o p e ra tio n s
a t a l l tim e s and to s ta n d adamant a g a in s t i n f l a t i o n i s a p rim a ry r e s p o n s i b i l i t y
o f th e F e d e ra l R eserve System .
B asic Cause o f T ig h t Money
■When i n t e r e s t r a t e s r i s e , a s th e y have r i s e n d u rin g th e p a s t y e a r ,
i n a c o n te x t o f ( 1) h i g h - le v e l employment, ( 2) o u tp u t p r e s s in g on l i m i t s o f
c a p a c ity , ( 3) r i s i n g c o s ts and p r i c e s , (U) in c re a s e d v e l o c i t y o f money, and
( 5) d e t e r i o r a t i o n o f bank l i q u i d i t y and c o rp o ra te w orking c a p i t a l r a t i o s ,
and when a l l o f th e s e developm ents o ccu r a t a tim e o f c o n tin u e d s t a b i l i t y
-3-
and some grow th i n th e money s u p p ly , th e o n ly r e a l e x p la n a tio n i s t h a t p la n s
f o r in v e stm e n t in th e a g g re g a te a r e i n e x c e ss o f c u r r e n t s a v in g s . I t fo llo w s ,
a l s o , i n t h i s c o n te x t t h a t money c a n n o t c ease to be t i g h t and e q u ilib r iu m be
r e s t o r e d u n le s s e i t h e r s a v in g s in c r e a s e s u f f i c i e n t l y to m eet in v e stm en t demands,
o r in v e stm e n t p la n s a re s c a le d down to th e a v a i l a b i l i t y o f s a v in g s , o r t h a t a
b a la n c e i s a c h ie v e d by a com bination o f b o th .
I f th e F e d e ra l R eserve System sh o u ld d is r e g a r d i t s mandate and
r e l e a s e more r e s e r v e s to th e member b an k s, t h i s would n o t r e l i e v e th e s i t u a
t i o n . R a th e r, i t would a c c e n tu a te i t , f o r th e com m ercial ban k s would th e n
le n d more t o p o t e n t i a l b o rro w ers se e k in g lo a n s . These b o rro w e rs , w ith money
i n hand, would e n te r th e m ark ets to add t h e i r b id s f o r s c a rc e goods and s c a rc e
s e r v ic e s to b id s a lr e a d y t h e r e . The e f f e c t w ould be to sp ark an i n f l a t i o n a r y
s p i r a l and t o a c c e le r a te th e r i s e i n p r i c e s , wages and c o s t s . As a consequence,
even more money w ould be needed to fin a n c e t r a n s a c t i o n s . Wien th e c i r c l e had
w orked i t s e l f o u t, money s t i l l w ould be t i g h t b e ca u se th e b a s ic economic
re q u ire m e n ts had n o t been m et, i . e . , s a v in g had n o t come i n t o e q u ilib r iu m
w ith demands f o r in v e stm e n t.
Now, th e F e d e ra l R eserve System h a s , i n f a c t , m itig a te d th e r i s e o f
i n t e r e s t r a t e s d u rin g th e p a s t y e a r i n th e se n se t h a t i t has in c re a s e d some
w hat th e volume o f r e s e r v e s made a v a il a b le t o i t s member b a n k s, an d , to th e
e x te n t t h a t in c re a s e d lo a n s and in c re a s e d sp en d in g were made p o s s ib le by
th e s e r e l e a s e s , th e System s h a r e s i n some p a r t r e s p o n s i b i l i t y f o r th e p r ic e
advances t h a t have o c c u rre d . I t d id n o t r e le a s e r e s e r v e s in s u f f i c i e n t volum e,
how ever, t o n e u t r a l i z e th e econom ic f o r c e s t h a t were th e fu n d am en tal cause o f
th e r i s e i n i n t e r e s t r a t e s . Throughout th e p a s t y e a r , a s a r e s u l t , com m ercial
banks have o p e ra te d w ith in a g e n e ra l environm ent o f r e s t r a i n t t h a t has h e lp e d
to tem per th e exuberance o f th e boom.
P r ic e o f S t a b i l i t y
■What th e n i s th e p r ic e o f s t a b i l i t y so f a r a s i t i s a f f e c t e d by
c o n d itio n s i n th e f i n a n c i a l m a rk e ts? I t c o n s i s t s e s s e n t i a l l y o f changes i n
th e d i f f i c u l t y w ith w hich money can be b o rro w ed , in th e i n t e r e s t r a t e -which
must be p a id f o r t h a t b o rro w in g , and in th e rew ards t h a t a c c ru e to th o s e who
s a v e . N a tu r a lly many v o ic e s a re r a i s e d i n p r o t e s t .
L oudest i s t h a t o f th e home b u i l d e r and home b u y e r who co u n ted on
f in a n c in g h is tr a n s a c tio n s on m ortgages s u b j e c t to an i n t e r e s t c e i l i n g of
l j - l / 2 p e r c e n t . Mortgage le n d e r s , a b le to le n d t h e i r money on m ortgages o f
e q u a l q u a l i t y f o r 5> p e r c e n t o r b e t t e r , a re o b v io u s ly n o t i n t e r e s t e d in
m ortgages y ie ld in g l e s s . More d i s t r e s s i n g y e t i s th e p l i g h t o f o u r m u n ic ip a l
and s c h o o l a u t h o r i t i e s who come t o th e m ark et to borrow fu n d s to e n la rg e s a d ly
d e f i c i e n t sc h o o l f a c i l i t i e s . They a re dism ayed a t th e im pact o f h ig h e r
i n t e r e s t o u tla y s on sc h o o l b u d g e ts t h a t a re a lr e a d y s t r a i n e d . A lm ost e q u a lly
a g g rie v e d a r e th e sm a ll businessm en who com plain t h a t th e y a re squeezed un
f a i r l y a s compared w ith th e g ia n t c o rp o ra tio n s which n o t o n ly may be b e t t e r
a b le t o pay h ig h e r i n t e r e s t r a t e s b u t a ls o have w id e r a c c e ss to m arkets in
w hich t o f i n d th e fu n d s th e y s e e k . Most m isle a d in g a re th e v o ic e s t h a t main
t a i n t h a t h ig h e r i n t e r e s t r a t e s a re n e e d le s s ly s w e llin g th e c o s ts o f governm ent
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im p a c t
tig h te r
c o s t
i f
c o u ld ,
th e
to
m o n th s ,
c u rre n t
te r iz e d
th e
o r
m ay w e ll
p o lic y .
s a y ,
o f
b u lk
th a t
w e ig h t
g ro u p s
a u th o r itie s
g re a t
in fla tio n
now
T h e re
tiv e
som e
s c h o o l
th e
m a te r ia l
o f
fa v o r
S in c e
b u d g e t-m a k e r
in d u s tr ia l
p la n n in g
to
p u b lic
e x p e n s e ,
im p a c t
le n d .
fe w
ite m iz a tio n
and
pow er
fa v o r
th e
dem and
th e
to
r e s u m p tio n
w ith
a s k ,
no
to
a t
to
c o m m e r c ia l b a n k s
m a rk e ts
re c e n t
fin a n c in g
re n t
has
R e s e rv e
v ie w
s itu a tio n .
e x a m p le ,
m oney
re s p o n s e
m uch
M o re
fo r
in
cope
p re p a re d
p a r tic u la r
o f
e x c e p tio n
v o lu m e
th e
p a s t
s c h o o ls
p o lic ie s .
p o in ts
som e
to ta l
in c r e a s e
p a r tic u la r ly
to
a
th e s e
o r
g ro u p s ?
th e ir
s tim u la te d
a l l
th e
F e d e ra l
m ass
a d d itio n a l
is
th e
r e lie f
a ffe c t
b o rro w e rs
th e
tim e s
d e v e lo p
m an
d e la y in g
ta x
to
c o n d itio n s .
o v e r
re s u m e
a re
is
o f
P a r tly
th re e
th e y
lo n g -n e e d e d
do
th e
c o u rs e ,
a ffe c te d
s te a d y
th a t
can
ban ks
c o m m e r c ia l b a n k in g
th e
and
p e r m it
p o lic ie s
a ffe c t
R e s e rv e
d ir e c tly ,
c o m p a n ie s ,
w o u ld ,
ill
r e p r e s e n tin g
R e s e rv e
fo r
th ro u g h
w h ic h
th e
d e b t
b u d g e t w
th e y
F e d e ra l
in s u r a n c e
s p e c ific
as
b o rro w e d
th e
am ount
s o u rc e s .
fa r
F e d e ra l
b o rro w e rs
b y
v o ic e s
F e d e ra l
o th e rs ,
fo r
A ll
fu n d s
s a v e rs
n a tio n a l
c itiz e n s .
In c r e a s in g ly ,
a
huge
F e d e ra l
it s
r e la
m o n e ta ry
has
in
c h a ra c
th e
now
v e ry
th a t
in d u s tr y .
Because o f th e e x is te n c e o f t h i s problem , th e F e d e ra l R eserve System
can n e v e r commit i t s e l f s p e c i f i c a l l y -n ith r e s p e c t t o i t s f u t u r e c o u rse o f
a c ti o n . I t m ust alw ays be in a p o s i t i o n to a d j u s t i t s p o l i c i e s t o th e
r e q u i s i t e s o f s t a b i l i t y . The b a la n c e betw een sa v in g and sp en d in g i s s u b je c t
to many s h i f t s , and th e F e d e ra l R eserve System m ust alw ays be i n a p o s iti o n
t o resp o n d f l e x i b l y t o th e s e s h i f t s . I t does t h i s i n a m inor d e g re e , i n f a c t ,
a lm o st c o n tin u o u s ly . Those who c a re to re a d th e re c o rd m e tic u lo u s ly w i l l f in d
t h a t on more th a n one o c c a s io n d u rin g 1 9 ^ 6 th e F e d e ra l R eserve r e la x e d some
w hat th e em phasis w ith w hich i t a p p lie d p o l i c i e s o f r e s t r a i n t . On each occa
s io n , a su b se q u e n t q u ic k en in g o f i n f l a t i o n a r y p r e s s u r e s in d ic a te d a c o n tin u e d
need f o r r e s t r a i n t .
One g e n e r a liz a tio n t h a t em erges from th e s e i l l u s t r a t i o n s i s t h a t ,
d e s p ite th e p o s s i b i l i t y o f d i f f e r e n t i a l im p a c ts, i n t e r e s t r a t e s h ig h enough
to b a la n c e s a v in g w ith in v e stm e n t a r e a c h ea p , n o t a d e a r , p r i c e to pay f o r
s t a b i l i t y when th e a l t e r n a t i v e i s i n f l a t i o n . I n f l a t i o n , lo n g c o n tin u e d ,
c o r r u p ts th e fo u n d a tio n s o f s o c i e t y . I t re a c h e s i n t o th e bosom o f th e fa m ily ,
e ro d e s s a v in g s , and underm ines p r o v is io n f o r s ic k n e s s , e d u c a tio n and o ld a g e .
•What a b o u t HM ild I n f l a t i o n 11
Y e t, th e r e a re o th e r v o ic e s , urbane and p e r s u a s iv e , to s u g g e s t t h a t
a l i t t l e i n f l a t i o n , a c o n tr o lle d i n f l a t i o n am ounting t o , s a y , 2 p e r c e n t a
y e a r , may n o t be to o b a d , p a r t i c u l a r l y i f th e a l t e r n a t i v e be a deep d e p re s s io n .
They s u g g e s t ( 1 ) t h a t i t may be a n e c e s s a ry p r ic e f o r grow th and p r o s p e r i ty
and in s u ra n c e a g a i n s t th e lo s s e s o f deep d e p re s s io n , and ( 2) t h a t w o rk e rs'
r e a l wages a re now p r o te c te d by s u i t a b l e c o l l e c t i v e b a rg a in in g c o n tr a c ts
a g a i n s t th e ra v a g e s o f an a n n u a l 2 p e r c e n t in c r e a s e i n th e c o s t o f l i v i n g .
T h is view o v e rlo o k s many p i t f a l l s .
F i r s t , th e c i t e d a l t e r n a t i v e of deep d e p re s s io n i s co m p le tely i n v a l i d .
I n t e r e s t c o s ts t h a t c o n tr ib u te t o s t a b i l i t y b y b a la n c in g s a v in g w ith in v e s t
ment do n o t s e t th e s ta g e f o r economic c o l la p s e . To th e c o n tr a r y , th e y h e lp
p re v e n t im balances from d e v e lo p in g i n th e economy. I f a d e p re s s io n o c c u rs ,
i t w i l l be b e ca u se th e s e im balances have a c t u a l l y d ev elo p ed , n o t b ecau se th e y
w ere a v o id e d .
Second, th e r e i s no such th in g a s a c o n tr o lle d i n f l a t i o n lim it e d
t o 2 p e r c e n t p e r y e a r . I f i t w ere once known t h a t o u r governm ent c o n s c io u s ly
em braced o r t o l e r a t e d such a g o a l, th e in c e n tiv e t o save would be s a d ly dim in
is h e d and th e in c e n tiv e to spend s h a r p ly in c r e a s e d . T h is i n i t s e l f would le a d
to an a c c e l e r a t i o n o f i n f l a t i o n a r y p r e s s u r e s . I t w ould te n d to make them s e l f
fe e d in g and would go f a r to e lim in a te any p o s s i b i l i t y t h a t th e p r e s s u r e s co u ld
be c o n tr o lle d w ith in narrow l i m i t s .
T h ird , e s c a l a t o r c la u s e s can n o t p r o te c t th e w hole economy from i n
f l a t i o n . At th e b e s t , th e y i n s u l a t e a p o r tio n o f th e economy a t th e expense
o f th e r e s t . T h is i s th e ro ad t o i n t e r n a l d i s r u p ti o n and s o c i a l c h a o s.
F i n a l l y , c o n tin u e d i n f l a t i o n , even i f i t c o u ld be c o n tr o ll e d to a
r a t e o f 2 p e r c e n t p e r annum, would b y no means be m ild . I t would be e q u a l
to an e r o s io n o f th e p u rc h a sin g power o f th e d o l l a r b y a b o u t one h a l f i n th e
-6c o u rse o f each g e n e r a tio n . P or exam ple, a w orker r e t i r i n g a t age 65 on a
p e n sio n o f $100 p e r month would have th e e q u iv a le n t o f o n ly a b o u t $82 p e r
month a t age 75, and o f o n ly a b o u t $67 p e r month a t age 85. I f he liv e d to
be one hu n d red , h is p e n sio n th e n would b e th e e q u iv a le n t o f o n ly $50 i n
c u rre n t p ric e s .
These c a lc u la tio n s i l l u s t r a t e th e trem endous s ta k e t h a t th e American
w orker has r e c e n t l y a c q u ire d in s t a b i l i t y i n th e p u rc h a sin g power o f money.
Among the o u ts ta n d in g g a in s a c h ie v e d by c o l l e c t i v e b a rg a in in g i n r e c e n t y e a rs
i s th e w id esp read a d o p tio n o f i n d u s t r i a l p e n sio n and r e tir e m e n t p la n s b ased
on th e w o rk e r’ s e a rn in g s d u rin g h is a c ti v e w orking l i f e . I f we sh o u ld e x p e r i
ence m erely c re e p in g i n f l a t i o n , th o se p e n sio n s w i l l b e s e r i o u s l y d e f i c i e n t
i n buying power a s compared w ith what th e w orker had th e r i g h t t o e x p e c t. I f
th e i n f l a t i o n sh o u ld be a n y th in g more th a n c re e p in g , th e l o s s would be d i s a s t r o u s .
Two o th e r im p o rta n t p ro v is io n s o f modern c o l l e c t i v e b a rg a in in g con
t r a c t s r e l a t e to a u to m a tic c o s t o f l i v i n g a d ju stm e n ts and a u to m a tic a d ju stm e n ts
f o r in c r e a s e s i n g e n e r a l p r o d u c tiv ity . Where i n e f f e c t th e f i r s t c l e a r l y p ro
t e c t s th e w orker from i n f l a t i o n so f a r a s c u r r e n t e a rn in g s a re co n cern ed , i t
a l s o a u to m a tic a lly t r a n s l a t e s r i s i n g consum er p r ic e s in t o r i s i n g c o s ts o f
p ro d u c tio n . The second d im in is h e s th e e x te n t to w hich growth i n p r o d u c tiv ity
may a c t t o c u sh io n i n f l a t i o n a r y p r e s s u r e s .
T hus, sh o u ld o u r governm ent come to t o l e r a t e
i n f l a t i o n , th e s e new f e a t u r e s o f c o l l e c t i v e b a rg a in in g
a c t u a l l y t o sp eed th e i n t e r p l a y o f g e n e r a lly i n f l a t i n g
each o th e r a t th e same tim e t h a t th e r e a l v a lu e o f th e
b e in g d i s s i p a t e d .
a g o a l o f even m ild
agreem ents would te n d
c o s ts and p r ic e s upon
w o rk e r's p e n sio n was
No such c a la m ity i s i m p l i c i t i n th e s e a g re e m e n ts, how ever, i f our
governm ent c o n tin u e s to s ta n d fir m f o r a s t a b l e d o l l a r . In an environm ent
where th e p u rc h a sin g power o f money i s s t a b l e , th e s e key p ro v is io n s t h a t now
c h a r a c te r iz e so many c o l l e c t i v e b a rg a in in g c o n tr a c ts a re n o t m u tu a lly i n c o n s i s t
e n t . R a th e r, th e y m u tu a lly r e in f o r c e e ac h o th e r i n prom oting th e p ro s p e c ts o f
a w id e ly b a se d and s t a b l e p r o s p e r i t y .
Community Response
The l a s t th in g I would want to im p ly i s t h a t th e F e d e ra l R eserve can
produce o r g u a ra n te e s u s ta in a b le growth o r s t a b i l i t y o r a c o m p le te ly s ta b le
p u rc h a sin g power o f th e d o l l a r . T hat happy r e s u l t depends on m u tu a lly harm oni
ous and r e in f o r c in g i n t e r r e a c t i o n s betw een a l l p a r t s o f o u r s o c ie t y . The
F e d e ra l R eserve does p la y an in d is p e n s a b le r o l e , how ever, i n th e q u e s t f o r
s t a b i l i t y . I am c e r t a i n t h a t s t a b i l i t y would be im p o ssib le i f th e F e d e ra l
R eserve f a i l e d i n i t s d u ty to a d o p t a p p ro p ria te p o l i c i e s d i r e c te d tow ard su s
ta in a b le economic grow th, h ig h l e v e l s o f a c t i v i t y and s t a b i l i t y i n the p u rc h a s
in g power o f th e d o l l a r .
The a d o p tio n o f th e s e p o l i c i e s b y th e F e d e ra l R ese rv e , however, by
no means in s u r e s t h e i r e f f e c t i v e n e s s . T hat depends on a c o n s tr u c tiv e r e a c tio n
by e v e ry elem en t i n th e community. To r e v e r t to th e e a r l i e r a n a lo g y , a com
m unity i n w hich th e c i t i z e n s were p re p o n d e ra n tly law a b id in g would s t i l l be
Reproduced from the Unclassified I Declassified Holdings of the National Archives
-7la w le s s
s h o u ld
c o m m u n ity
th a t
s c ie n tio u s ly
in
th e
can
on
to
to
m a rk e t
g ro w th
w
il l
in c e n tiv e s
In
e x p a n d in g
a t
f a c ilit ie s ,
an d
s e e ,
i f
g ra m s
th e
a
a
to
be
th e
to
o f
in
fro m
and
p r ic e s
to
a
it s
th e
s p ir a l
so
does
n o t
w hen
c r e d it
dem ands
r e fle c te d
in
a re
th e
o f
m ost
do
to
as
to
s u s ta in a b le
to
th e s e
in c r e a s e
dem ands
on
o u r
fo r
its
a re
p r o d u c tiv e
a l l
p r o je c te d
c o n s tr u c tiv e
in
v it a lly
a v a ila b ility
s ig n a ls
n o t,
o th e r w is e
th e
th e ir
s p r in g s .
is
re s p o n d
e x c e s s iv e
These
E q u a lly ,
B u t
and
fa c t,
e c o n o m iz e
o f
b o rro w e rs
s p e n d in g
o u tc o m e ,
r e v ie w
on
a
con
R e s e rv e
o p e ra te
s a v in g .
h a n d ,
how
th e m .
s a v in g
can
fo r
o th e r
F e d e ra l
b e
in
o r
b e fo re
w hen
i t
R e s e rv e ,
c o m m u n ity
p o s tp o n e
m a tte r
c o n s u m p t io n
r e e x a m in a tio n
th e
th e
and
to
r e s u lt
in
g ro w th ,
c o m m u n ity
F e d e ra l
On
no
in fla tio n a r y
in c e n tiv e s
b o r r o w in g .
n o t
cam e
p re s e n t,
c u r ta il
so
s t a b ilit y ,
th e
fo r
la w .
r e m a in
th a t
th e
th e
dem and
cause
i l l
i f
th e
o f
e le m e n ts
s te p s
as
th e
fa c t,
th is
to
w
c ases
w h ic h
such
r is in g
c o s t
s ig n a ls
th e
th e
w o u ld
m a in ta in in g
in c r e a s e
v e in ,
p e r m it
h ig h e r
ta k e
on
in g r e d ie n ts
n o t,
tim e
b o r r o w in g
and
fir e s
a d m in is te r
la w le s s
and
o c c a s io n
sam e
h e e d ,
a c te d
to
fo r th c o m in g
does
can
The
th e
th e
fo rc e s
n o t
s a v in g s .
to
fu e l
and
f a i l
a c h ie v in g
p r o v id e
p e r m it
p la n s .
C o u rts
o f
a p p r o p r ia te
n e c e s s a ry
c r e d it
C o u rts
e s s e n tia lly
th e
p r o b le m
re fu s e
A ls o ,
th e
lir a s
h o w e v e r,
th e ir
le s s
p ro
e s s e n tia l
o u tla y s .
S ta b ility
h a r m o 'n io u s
fu tu re
be
b e fo re
r e a liz e d
a re
th e re
fo r
s tr u c tiv e
to
a
s a v in g
m u s t,
in g
a l l
to
d o lla r
th o s e
fig u r e
o f
on
th e
r a te s ,
th e
o f
p a r t
b r ig h t,
th e
dem and,
th e
th e
m a jo r
C ham ber
o f
C o m m e rc e
is
in
th is
c o m m u n ity
and
in
g re w
in
th is
c o m m u n ity
and
b e n e fite d
th e
i t
th o s e
C ham ber
le a d e r s h ip
o f
on
la n d
m ake
th e
to
b y
th e
a d d re s s .
p a r t
c a r r ie d
s p o n s o re d
d e m o n s tra te d
th e
in
th e
C ham ber
o p p o r tu n ity
o f
la y
on
o f
th e s e
it s e lf
th e
an d
m an
b y
s ta b ility
th a t
fa c ts
it s
c o m m u n ity .
to n ig h t,
e n jo y
re s p o n s e
c u rre n t
to
th e
q u a lity
W h e th e r w e
s o rt
fo r
w
i l l
fa c ts
e x p e d ie n ts
ra te s
b u t
fo r
o r
con
sen se
o f
in c r e a s e d
i t
is
be
p r o b a b ly
b r id g e d
n o t
n o t
th a t
A lth o u g h
to
c u r ta ilm e n t
p o te n tia l
o f
in
p o te n tia l
im p o s s ib le
b e tw e e n
v e ry
la r g e .
b u t
b y
ju d ic io u s
e le m e n ts
o f
o u r
I t
r e s c h e d u l
c o m m u n ity —
g o v e rn m e n t.
R o c h e s te r
fro m
gap
is
n o t
th e
e x p e n d itu r e s .
o f
th a t
in te r e s t
in
a c tin g
The
m e a n in g
c a lls
h ig h e r
e x e rte d
up
b u t
p la in
s itu a tio n
p a n ic
a l l
c o m m u n ity
s itu a tio n .
o f
e x p e n d itu r e s
b y
w h o le
c o n s tr u c tiv e
p o te n tia l
on
th e
in d iv id u a l
d is r e g a r d
p r o je c te d
in v e s tm e n t
and
b y
each
im p a c ts
o u tla y s
I
we
T oday
th e
n o t
a c tiv itie s
th e
to
r e v ie w
o f
u n b e lie v a b ly
b r id g e d ,
has
th is
is
s e e .
p r o je c te d
The
is
to
in d u s tr y
a c h ie v e d
c o m m u n ity ,
be
o f
w hen
a
be
fa c ts
h o w e v e r,
c o n s u m e rs ,
i t
o n ly
th e
a lle v ia te
s o b e r
an d
to
econom y
as
re s p o n s e
and
p u t
th is
i f ,
p a llia tiv e s
s a v in g
ca n
re s p o n s e
o f
fa c ts
fo r
in
im m e a s u r a b ly ,
th e
T h a t
who
th e
o r
o f
has
th e
and
m o n e ta ry
y o u r
ill
w as
c o u n te rp a rts
I
in
w as
fro m
c ity
ta k in g
depend
p ic tu r e .
b o th
th e
fo r m a lly
w
le a d e r s h ip
T h is
c o n tin u e d
s u b je c t t h a t
n o t
th e
th e ir
y o u th
th is
is
yo u
and
o u ts ta n d in g
c iv ic -m in d e d n e s s .
and
to
a ls o
be
o v e r
tru e
th e
chosen
fo r
v e ry
g re a t
th ro u g h o u t
d e e p ly
in te r r e la tio n s h ip s
tru e
th e
th e
a p p r e c ia te
b e fo re
y o u .
Reproduced from the Unclassified / Declassified Holdings of the National Archives
S d u e ttio n I n
j g r l i a a d T X in ^^
« tth
A S u g g e s tio n by
H a f l e l d W. S i e f l a r
» j u a l i t y o f o p p o r tu n ity f o r s e lf-ia p ro v e M e n t an d re w a rd o n t h *
b a s i s o f a e r i t ra n k h ig h i n t h * A a e rio a n a c a le o f s o c i a l v a l u e s .
As
a p p lie d t o o p p o r tu n itie s f o r e d u c a tio n , p a r t i c u l a r l y p o o t-g ra d u a te ed u ca
t i o n , g r o a t e q p b a s is h a s b e e n p la c e d o n t b s s c r e e n in g o f a p p l ic a n t * f o r
ad H L sslo n m
th e b a s i s o f a e r i t r a t h e r th a n c o n n e c tio n * , an d g r e a t e f f o r t
h a s b e e n a a d * t o s e e t h a t s c h o la r s h ip o r lo a n fu n d * a r e s u f f i c i e n t t o
f in a n c e tb s e d u c a tio n o f q u a l i f i e d s tu d e n ts who v o u ld o th e rw ia a b e f o r c e d
t o f o re g o e d u c a tio n a l o p p o r tu n itie s f a r la c k o f a e a n a .
IB t h s S c h o o l o f A dvanced I n te r n a t i o n a l S ta d ia * a t th e p r e s e n t
t i a i s , fu n d * a v a i la b l e f o r lo a n * o r g r a n t* t o d * * e r r l n g s tu d e n ts a r e e q u a l
t o a b o u t o n e - f i f t h o f th e t o t a l t u i t i o n c h a rg e .
I n a d d i tio n , th e r e a r e
s e v e r a l c o m p e titiv e * c f a o l* r s h lp * aw ard ed p u r e ly o a th e b a s is o f q u a l i f l e a t i o a w ith o u t r e g a r d t o a a a n a .
I n p r a c t i c e a t t h s p r e s e n t t i n s , a s tu d e n t
a t S *A «I«S * i s eoqpacrtad t o p a y $ 1 ,0 0 0 a y e a r a s t u i t i o n , o r $2,000 i n a l l
f o r tw o -y e a r a tte n d a n c e *
A c o n s id e r a b le n u a b e r o f s tu d e n t s , h o e e v e r,
bo r row n i l o r p a r t o f' t h e i r t u i t i o n fro ® th e
-and
fu a d a *
I b i s i s i n a d d itio n t o th o s e w in n in g s c h o la r s h ip g r a n ts , w h ich c a r r y
s tip e n d s t h a t a x c e e d t u i t i o n c o e t e .
I t th u s o an b e a a ld t h a t a t l e a s t
ffioa o u t J fo u r o f th s s tu d s n ts a t S .A .I .3 . a r e f u l l y e x e a p lif y in g th a
U a e ric a n i d e a l i n t h a t th e y a r e a c c e p te d on t h e b a s i s o f a o r i t a lo n a
an d * r e a b l e t o a c q u ir e t h s e d u c a tio n th e y w a n t w ith o u t r e g a r d to w h e th e r
Reproduced from the Unclassified / Declassified Holdings of the National Archives
- a o r a o t th e y o r t h e i r f a a i l l e s p o s iw u th e a e a n s t o f in a n c e th e t u i t i o n .
I n th e c a e e o f t h re e - f o u r th s o f th e s tu d e n t b o d y , h o w e v e r, t h i s q u e s tio n
o a n n o t b e an sw e re d s o d e a r l y .
I t i s w e ll w ith in th e ra n g e o f p o s s i b i l i t y
t h a t s o a e o f th e s tu d e n t* n o * g r a n te d a d a & s slo n w o u ld h av e b een tu r n e d
d o sn t o aafes w ay f o r o th e r s w ith e v e n m are p ro w is e i f s c h o la r s h ip fu n d s
w are a o r e a d e q u a te .
T he p r e s e n t t o t a l a n n u a l a a o u n t b u d g e te d f o r s c h o la r s h ip an d a i d
fu n d s e n o u n te t o $ 3 0 ,0 0 0 , f o r th e a o s t p a r t c o l le c t e d c u r r e n t ly i n th e f o r a
o f a n n u a l c o n tr ib u tio n s tram d o n o r s .
I f th e S .A .I .S . w ere a a endow ed i n s t i
t u t i o n w ith s p e c i a l e n d owmen t s t o p ro v id e f o r s c h o la r s h ip s , a s c h o la r s h ip
en d o w asn t fu n d o f a ro u n d t h r e e - qua r t e r s o f a B i l l i o n d o l l a r s w o u ld b e r e
q u ir e d t o p ro v id e a a e q u iv a le n t a n n u a l y i e l d o f $ 3 0 ,0 0 0 .
Of th s $ 3 0 ,0 0 0
a b o u t h a l f i s aw ard ed i n th e f o r a o f s tip e n d s w h ich in c lu d e s t u i t i o n ,
w h ile th e o th e r h a l f i a w ade a v a i la b l e t o a c c e p te d s tu d e n ts a a lo a n s o r
g r a n ts o a th e b a s i s o f n e e d ,
f h e l a t t e r s u a , ro u g h ly $ 1 5 ,0 0 0 , c o rre s p o n d s
t o t r u e s c h o la r s h ip fu n d s s o d i a e q u iv a le n t t o t b e y i e l d o n a n en d o w asn t
o f s o w $ 350,000 t o $ 2 *0 0 *0 0 0 ,
th e re I s l i t t l e
t b a t c a n b e done to la p ro v s o n o u r p r e s e n t s c h o la r *
s h ip p r a c t i c e s o lo n g a s S .A .I .S . c o n tin u e s to e x i s t e l a o s t w h o lly on th e
b a s i s o f a n n u a l c o n tr ib u tio n s f r o a d o n o rs .
I f , h o w ev er, a n o p p o r tu n ity
f o r s c h o la r s h ip en d o w asn t fu n d s i n th e a a o u n t o f $ 1 *0 0 ,0 0 0 s h o u ld p r e s e n t
i t s e l f , S J U Io S * c o u ld e l l a i n a t e c o m p le te ly th e c o s t o f t u i t i o n a s a
h a r r i e r t o a tte n d a n c e .
I f S .A .I .S . h ed $ 1 )0 0 ,0 0 0 t o f in a n c e th e e a r l y y e a r s , i t c o u ld
an n o u n ce i n i t a c a ta lo g u e t h a t h e n c e f o rth a l l p e y m n t o f t u i t i o n f o r
Reproduced from the Unclassified I Declassified Holdings of the National Archives
„ 3 .
s tu d e n ts a d a i t t e d to th e S ch o o l w ould b e o n * d e f e r r e d b a s i s , t o b e
p a id b y th e s tu d e n ts o a t o f t h e i r e a r n in g s a f t e r g r a d u a tio n ,
th i a
w ould a e a n t h a t n o t u i t i o n w o u ld b e c h a rg e d an y s tu d e n t w h ile h e o r
s h e w as i n a c t u a l a tte n d a n c e a t th e S c h o o l, b u t t h a t in s te a d th e t u i t i o n
c h a rg e w ould b e p s y a b le a t th e r a t e o f |1 0 0 a n n u a lly f o r e a c h y s a r o f
a tte n d a n c e d u rin g th e f i r s t tw e lv e y e a r s 1 m e d i a t e l y f o llo w in g g r a d u a tio n .
F o r th e t y p i c a l s tu d e n t , w ith tw o y e a r s * r e s id e n c e , t h i s w o u ld a e a n a
t u i t i o n p ay w en t o f $ 2 0 0 e a c h y e a r f o r th o tw e lv e y e a r s f o llo w in g h i s o r
h e r g r a d u a tio n ,
t h i s sumw ould b e w e ll w ith in th e t y p i c a l earning
c a p a c ity o f S *A .1 .S « g r a d u a te s d u r in g th o s e f i r s t tw e lv e y e a r s .
It
w o uld b e e q u a l to b o rro w in g the p r e s e n t $ 1 ,0 0 0 c h a rg e d f o r t u i t i o n a t
j+■
a n i n t e r e s t c o s t o f a b o u t 2 -3 /1 *$ f o r th e a c t u a l t i n e th e a o n e y w as
bor r o wed .
Of c o u r s e , s h o u ld a n y s tu d e n t w is h to p re p a y h i s t u i t i o n ,
th e tw e lv e a n s a e ! i n s t a l n e n t s d u e c o u ld b e c o n v e rte d to a s in g le c a s h
p ay w sn t o f $ 1 ,0 0 0 , i . e . , a n M o u n t e q u a l t o th e p r e s e n t t u i t i o n .
I s w o uld
n o t , howev er , b e e x p e c te d t o d o s o , a n d th e r e w o u ld b e no f l a v o r o f s u s p ic io n
o f f a v o r itis m w <-thin th e s tu d e n t b o d y d ir e c te d a g a i n s t th o s e m eab sre '‘w ho
w ere p a y in g on a d e f e r r e d b a s i s .
l e r e 1 2 0 0 ,0 0 0 t o b e e o a s a v a i l a b l e f o r su c h u s e , th e c u r r e n t b u d g e t
o f th e 3 .A .I .S . w o u ld b e r e li e v e d o f th e $ 1 5 ,0 0 0 a n n u a l a p p r o p r ia tio n now
wade, f o r a i d lo a n s an d g r a n ts *
H ow ever, i f th o s e c o n tr ib u tio n s w ere c o n -
tin n e d i n th e b u d g e t u n t i l th e d e f e r r e d t u i t i o n peyw w nts p la n w as f u l l y
i n o p e r a tio n , s o n s 1 3 y e a r s , th e a d d i t i o n a l endow m ent n e e d e d t o p u t th e
p ro p o s e d p la n i n o p e r a tio n w ould be re d u c e d t o a ro u n d $ 2 £ 0 ,0 0 0 .
T h ese
f ig u r e s a s a n a s n o d e f a u l t s o r d e lln q u io ie s o n d e f e r r e d t u i t i o n p a y w e n ts .
Reproduced from the Unclassified I Declassified Holdings of the National Archives
lfa e r* u n d o u b te d ly w ould b e i o n f a l l o f f o f r e c e i p t * d u e , b u t i t
p ro b a b ly w ou ld n o t b e l a r g e .
th e r e a r e M m xm 1 m g r* au«fe a p la n c o u ld be r e g a r d e d .
It
c o u ld b e th o u g h t o f a s a d d in g t o t h * e e i f - r e a p e « t o f p r o s p e c tiv e s tu d e n t s ,
i n t h a t th e y w o u ld b a p a y in g th e & a e lv e s fox* t h e i r p r o f e s s io n a l e d u c a tio n ,
a n e d u c a tio n w h ich i n a o o * d e g re e in c rw a a e s t h a i r e a r n in g c a p a c ity .
It
o o u ld a l s o b a th o u g h t o f a a a a o p p o r tu n ity f e r d o n o ra w ith r e l a t i v a l /
m o d est a e a n s t o rw aove i n s u b s t a n t i a l d a g re e th e b a r r i e r t h a t p o v e r ty
in p o s e s cm o p p o r tu n itie s f o r e d u c a tio n a t tb a S .A .I ..1®.
A g if t o f aa l i t t l e
a a $ 2 5 0 ,0 0 0 w o uld o p an th e f a e i l i t i a a o f S . t . I . S . to s u b s t a n t i a l l y a l l who
c o u ld q u a l if y o n a s r i t am i w o u ld go f a r t o a s s u r e t h a t o u r b e a t h u aan
re a o u ro e a w o u ld , i n f a c t , p r e p a r a th s a s e lv w e f o r i n t e r n a t i o n a l s e r v ic e .
S h o u ld s u c h a g i f t b e s o u g h t, i t w ould p ro b a b ly b a p r e f e r a b le
t h a t i t b a a a d a t o tb a F o re ig n S e r v ic e E d u c a tio n a l F o u n d a tio n r a t h e r th a n
th a O h iv a r a itjr .
I h i a w o uld a v o id a n y c o n f l i c t b etw een th e p ro p o e e d p la n
a n d th e s c h o la r s h ip p ro g ra a s o f o th e r g ra d u a te s c h o o ls o f th a U n iv e r s ity .
Reproduced from the Unclassified I Declassified Holdings of the National Archives
August 16, 1957*
D ear Tedj:
I a a dism ayed when I th in k o f a y d e f ic i e n c ie s
a s a c o rre s p o n d e n t« Ever s in c e I g o t back from Europe
l a s t w in te r I have had y o u r Meyer m a n u sc rip t d r a f t and
t h e e x p la n a tio n o f why you c o u ld n ’ t u se s om o f th e
a a t e r i a l I s u g g e s te d . I u n d e rsta n d p e r f e c t l y ana sh o u ld
have w r i t t e n you lo n g a g o , b u t I r e a l l y h a v en *t y e t c au g h t
Dtp w ith th e th in g s t h a t accu m u lated a t t h a t tim e . J u s t
now we a r e i n th e m id s t o f th e S e n a te h e a rin g s and I have
no p eace w h a te v e r.
Meanwhile a copy o f Banks and P o l i t i c s i n America
comes t o a y d e s k . I have g la n c e d th ro u g h th e f o r m a t'and
i t lo o k s w o n d e rfu l. I a a g o in g t o re a d e v e ry word s e v e r a l
tim e s , o f c o u rs e , b u t I w ant you t o know how g r a t e f u l I a a
t h a t you had a copy s e n t to me. A ls o , a y deep c o n g ra tu la
t i o n s on a b ig jo b u n d e rta k e n and g lo r i o u s ly co m p leted .
D oit)thy d o e sn ’ t know I am w r i t i n g t h i s b u t I
know she jo i n s ste i n se n d in g b o th h e r lo v e and mine t o
you and M e litta .
As e v e r ,
W in fie ld A. i i i e f l o r ,
A s s i s t a n t to th e C h a ira a n .
Mr. B ray Hammond,
I h e tf o r d C en ter,
Vermont.
Wirt {CIS
Reproduced from the Unclassified / Declassified Holdings of the National Archives
October Zht 1956.
Mr. Bray Hammond,
fbetfard Center,
V e rm o n t.
Dear Mr. Hammond:
In Mr. Riefler*a absence froa the office,
I vish to acknowledge on his behalf your letter of
October 22.
J ls y o u siay have heard, Mr. Riefler ia
visiting, with Chairman Martin, central banks in
England, Oennany, and France, and is expected to
return to the office around the middle of November,
lour letter will receive his attention at that
time.
Sincerely yours,
Catherine L. Schmidt,
Secretary to Mr. Riefler.
cle
Reproduced from the Unclassified / Declassified Holdings of the National Archives
Thetford Center,
Vermont.
22 October 1956.
Dear Win:
At last I have adapted myself sufficiently to the
beauties of New England that I can turn ray back on them and for a few
minutes at a time pay attention to iqy work instead of gazing out my Vermont
windows at the long and lovely horizon of New Hampshire mountains visible
from them. So here is my reply to your invaluable letter of 30 August,
and for your'convenience I enclose the 11* pages of my text (Seation 8, III)
which is the subject of our discourse and which I beg you will please re
turn to me.
The paragraph on page 2 that perplexed you condenses
a record occupying several pages of the Board's minutes that perplexed me.
I found Ogden Mills' request for open market purchases normal ani under
standable. Governor Meyer's objections surprised and puzzled me. But for
two things I should have consulted you about them: one was a fear that
irry surprise merely reflected ny ignorancej and the othsr was a guilty
feeling that I had burdened you too much already. So I put the issue down
baldly and succinctly just as I found it in the minutes (but much condensed),
thinking that you would see it later and would signal it if it looked funny.
TOiich is just what you did, so maybe I am not so dumb after all.
Your explanation of the dilemma is luminous, and the
only doubt is whether Governor Meyer understood his position as well as
you describe it. That, as you say, presents the problem of clarifying his
position without putting him out of character. For his intelligence is
that of a man of action, not a scholar, as I see more clearly after reading
your diagnosis and noting hovT much more primitively he explains his motives
than you do. (I intend no implication that you yourself are not also a
man of action.)
But in this instance I suspect that he was motivated
as much by the psychological effect of central bank action as by its me
chanical effect, or more. He was habitually thinking of the significance
that would be ascribed to his actions by his peers, especially his European
friends, "fihat would people think?"-— for as they thought so they would do.
Thus he commends the British omission to raise their discount rate in
August and September 1931, though that would be the prescribed method of
checking withdrawals, because in their position, known to be weak, raising
the rate would be interpreted as defensive and not a sign of strength; hence
it would spread fear not confidence and stimulate withdrawals instead of
Reproduced from the Unclassified / Declassified Holdings of the National Archives
retarding them. But the position of New York that autumn was strong and
raising the discount rate there would confirm belief in her streagth. It
would have an effect the opposite of that in London, spreading confidence
not fear and retarding withdrawals instead of stimulating them. "I made
up n$r mind," he says, "that psychologically the greatest confidence would
be produced by acting normally, " that is, by putting up the rate; and he
speaks sarcastically of George Harrison's slowness in raising New York
rates after London’s suspension 21 eptember. "I didn't think," he says
he told Harrison, "I had to teach you the fundamental elements of inter
national finance." He praised London for not raisng the rate in the face
of withdrawals, but for the same thing New York got blamed. He judged the
action not as a mechanical measure but according to the interpretation
that would be put on it.
So in January 1933 he quite consistently thought the
Fed should not ease the market further, because to do so would be inter
preted as a measure of desperation. Open market purchases, he said, would
not only be inconsistent with rising money rates— which he deemed necessary
to' check foreign withdrawals, as you explain— but "they would be considered
weak abroad." That is, they would be interpreted by the French, by Glass,
by Willis, and by too many others, as a sign of yielding to inflation, which
was still more generally feared by the conservatives than the current li
quidation was. If the fears of the conservatives, already aroused quite
enough, were further inflamed by what they would "interpret" as a surrender
to inflation, the withdrawals would become worse than ever. Moreover, if
it got out that the purchases desired by Ogden Mills were directly intended
to facilitate Treasury financing the anti-inflationists would have been sure
the world was coming to an end.
It is scarcely necessary to say that the Governor had
no general fear of open market operations. In July 1932, for example, he
told the Open Market Policy Conference that currency and gold withdrawals
might have had disastrous effects in the preceding months except for the
immense open market purchases the System had made. And it is significant of
the deference to the current fear of inflation that in the statement released
by the Open Market Policy Conference, 5 January 1933> the following appears:
"The first and immediate objective of the
open market policy was to contribute factors of safety
and stability in meeting the forces of inflation. The
larger objectives..., to assist and accelerate the forces
of economic recovery, are now assuming importance. With
this purpose in mind, the Conference has decided... to
maintain... substantial excess member bank reserves...
Adjustments in... holdings... will be in accordance with
this policy."
Reproduced from the Unclassified I Declassified Holdings of the National Archives
The tim id im a g in a tio n s t h a t made i t n e c e s s a ry to
speak s e r io u s ly o f "th e f o r c e s o f i n f l a t i o n '1 i n Jan u ary 1933 and c a u tio u s ly
o f economic re c o v e ry maty have c o n s tr a in e d G overnor Meyer s i x weeks l a t e r
when he opposed Ogden M i l l s 1 re q u e s t f o r e n la rg e d p u rc h a s e s , e s p e c ia ll y
s in c e such p u rc h a se s m ight have b een deemed t o be more th a n th e sta te m e n t
o f th e C onference im p lie d .
l h a t I say i s n o t i n c o n f l i c t w ith y o u r e x p la n a tio n
t h a t open m arket p u rc h a se s would seem o b je c tio n a b le b e ca u se th e y would
fin a n c e s p e c u la tio n . I t i s som ething a d d itio n a l; and from iry re a d in g o f
Governor M ey er's re c o rd s I s u s p e c t t h a t i t i s w hat he th o u g h t o f m ost. He
spoke o f s p e c u la to r s , t o be s u r e , b u t th e y would '• in te r p r e t" th e open
m arket p u rc h a se s j u s t a s th e o rth o d o x i n g e n e r a l w ould, b e s id e s d e r iv in g
from them th e funds w ith which t o fin a n c e t h e i r s p e c u la tio n s . And I th in k
he was alw ays a p t t o be more concerned w ith im p re s s io n s , w ith th e i n t e r
p r e t a t i o n s and p s y c h o lo g ic a l r e a c tio n s a r i s i n g from c e n t r a l bank a c tio n
th a n w ith th e l a t t e r ' s m ech an ical and o b je c tiv e e f f e c t s . T his seems t o me
e v id e n t i n w hat he r e p e a te d ly say s— n o t a s d e l i b e r a t e s ta te m e n ts o f p r in c ip le
b u t as u n c o n scio u s m a n if e s ta tio n s o f h i s way o f th in k in g . I t a ls o seems
t o me t y p i c a l o f a b u s in e s s man, e s p e c i a ll y a s u c c e s s f u l one, more accustom ed
t o d e a l w ith p e o p le th a n w ith f o r c e s .
I f I am r i g h t i n th e d i s t i n c t i o n I make, I have a t
l e a s t th e advantage o f a c c e ss t o more lan g u ag e o f th e G o v ern o r's own to
r e l y on th a n i f I t r y t o make him e x p la in h im s e lf i n y o u r more s c i e n t i f i c
f a s h io n . You u n d e rs ta n d , Win, t h a t i n say in g t h i s I am n o t i n th e l e a s t
d e p r e c ia tin g y o u r a n a ly s is , w hich c e r t a i n l y s e t me s t r a i g h t , b u t am tr y i n g
t o so lv e th e problem you m ention y o u r s e l f o f p ro d u c in g an e x p la n a tio n t h a t
i s Governor M oyer's own and e x p re sse d i n h is la n g u a g e . I n iry book, I can
go in to th e s u b je c t in d e p e n d e n tly and more d i s c u r s i v e l y , a f t e r y o u r exam ple.
I have two q u e s tio n s ! F i r s t , have you re a d th e B o a rd 's
m in u tes t o w hich I r e f e r ? U nless I have p re s e n te d c o r r e c t l y th e view s th e r e
e x p re ss e d , we m^r be w a stin g o u r tim e . So i f you have n o t, w i l l you p le a s e
ask M iss Jo n es f o r th e B o a rd 's m in u te s o f 27 F eb ru ary 1933 and re a d p ag es
2 5 7 -2 6 1 ?
Second, on th e m arg in o f my ms, b e s id e th e p a ra g rap h
i n q u e s tio n on page 2 , you have w r itt e n : " Is t h i s t r u e ? I c a n 't u n d e rs ta n d
th e a c t i o n ." S ince y o u r l e t t e r in d ic a t e s t h a t you do u n d e rs ta n d i t , I p re
sume th e l e t t e r comes a f t e r th e m a rg in a l comment and su p e rse d e s i t . In
betw een you have so lv e d th e p u z z le . I s iqy surm ise c o r r e c t and may I d is r e g a r d
th e q u e s tio n and comment on th e ms?
W ith th e s e m a tte r s o u t o f th e way, we can now g e t
down to b u s in e s s . You have n o t inform ed u s d e f i n i t e l y t h a t you and D orothy
a r e coming 9 November t o spend th e weekend w ith u s , b u t we a r e c o u n tin g on
i t . We have h e a rd , how ever, t h a t y ou a re going t o Europe f o r two w eeks, o r
Reproduced from the Unclassified / Declassified Holdings of the National Archives
have gone. T his i s n o t c r e d i b l e , b u t le a v e s th e q u e s tio n ■what two w eeks.
We hope t o h e a r .
Dean Upgren and h i s w ife have b een m ost h o s p ita b le .
At d in n e r w ith them we m et P r o fe s s o r H e rb e rt W est, Chairman o f Com parative
L i t e r a t u r e , who h a s f l a t t e r i n g l y i n v ite d me t o a d d re ss h i s u p p erclassm en
i n a c o u rse on American Thought. I ' l l speak on A lexander H am ilton. T his
i s y o u r d o in g .
T o u rs,
Bray Hammond
Mr W in fie ld W. R ie f le r
A s s is ta n t to th e Chairman,
F e d e ra l R eserve B oard,
20t h and C S t r e e t s , NW,
W ashington 2$, D. C.
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Seotion 8
XXI.
I take Saturday, 25 February 1933# as the beginning of the end.
No adequate solution had been found for the trouble in Detroit, and the
Michigan state moratorium had been continued. There were difficulties in
Cleveland. On the 24th the governor of Maryland had proclaimed a state
moratorium. The testimony of Charles E Mitchell before a congressional
committee respecting operations of the National City Bank and its securi
ties affiliate in preceding years had been shocking to the business world,
or at least its more conservative part. Whereas banks had had to endure
runs, and still did, an even worse punishment was the silent transfer of
deposit accounts as large depositors shifted their funds fron bank to bank
and center to center in search of safety. The large city banks were suffer
ing heavy withdrawals of currency by their country correspondents.
Foreign
exchange rates and money rates both at home and abroad were rising. Yet
difficulties were still spotty, and hope persisted that the local and
regional disturbances could be cheeked, and not become general. It was
necessary, if possible, that some one keep eool; and in this conviction we
wrote the President, Saturday the 25 th, that it was important to avoid doing
things that would make the situation worse. This was the letter in which,
according to him, we were "minimizing the situation.” (H H 210)
On Monday, 27 February 1933, we met with both Secretary Mills, who
was ex-offioio the Federal Reserve Board's chairman, and 16111am H Woodin,
designated to succeed him as secretary and as our chairman.
Trouble was now
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8~ixx
-a*
developing aaong banks in tha District of Columbia, which were under the
supervision of th# Co«ptroller of tho Treasury* A fiscal problea also
faoed tho Treasury.
It had a refunding operation duo tho niddle of March,
and the pressure that banks were undor s&ght very noil foroo the* to soil
governnent securities just
the tl*o tho treasury would haw a fresh
offering to aake* A good part of the trouble arose from the Treasury’s
having to supply an increased voluae of funds to the Reconstruction Finance
Corporation .in order that the latter sight have acre to lend to weak banks}
with the net result that strong banks that had to furnish the funds to be
lent to the weak banks* would be unable to do so without soiling securities.
Secretary mils therefore wanted the Federal Reserve Banks to eas^the situa~
pan&m.wwm.
«
•'Sit
_.,v
. . . . ju o .*
m
u
'~ w'
I*
But the Board
,
#^Niklng'■to
.fi.raer,..iu line with the “
tondenoy athoaeaswoll as abroad,.and opo^ «
wtth’
^ »-'tymos«^ I thought suoh a s»ve would be not only ineffeetive but
r \ disturbing! aiaeoj-t would look like an atteapt to help the l*easury aad
f
would therefor* refloat on Its credit u well >■ on the integrity of ttw
rodsnl S i u r n 3yst*a.
The other medany, agreed with ae. W* thoaghtthat
the tendeney toward higher n t M .should eertainly be allowed to wortt itself
oat before the pur*ha**s desired by Secretary Mill* w*r* undertaken. (FSB K /
258, 2 6 0 , 2 6 1 )
Th* next day, Thursday, 28 February 1933, X oooeulted the governors
of all the Federal Reserve Banks *xn*pt San Franoisoo and
m s
In gsn*ral th* situation if net hotter was at any rat* not
inforaad that
m ots*
.
I also
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8-1 II
-3-
t o l d G overnor H a rris o n , t h a t in view o f th e e v id e n t s p e c u la tio n i n fo re ig n
exchanges i n New York, I th o u g h t i t would be a good th in g i f th e c le a r in g
house banks were to announce t h a t th e y could su p p ly a l l le g iti m a te demand
a t re a s o n a b le r a t e s b u t would n o t f u r n is h exchange f o r s p e c u la tio n .
(FRB M
2 6 3 -6 4 )
T hat same e v e n in g , Thursday, 2 8 F e b ru a ry , th e r e was a m eeting in
my o f f i c e a t which th e is s u a n c e o f c l e a r in g house c e r t i f i c a t e s o r s c r i p wa®
d is c u s s e d .
I t was im p o rta n t becau se Henry K R obinson, th e Los A ngeles
ban k er who was P r e s id e n t Hoover’ s p e rs o n a l a d v is e r , th o u g h t th e is s u a n c e
o f s c r i p was n e c e s sa ry and had persu ad ed th e P re s id e n t i t w as.
So th e
P r e s id e n t had p re p a red a memorandum f o r Ogden K i l l s t o ta k e up w ith o th e r s
co n cern ed .
The m eeting was a tte n d e d by men from th e T re a s u ry , th e B oard,
th e C o m p tro lle r's O f f ic e , th e R e c o n s tru c tio n F in an ce C o rp o ra tio n , in c lu d in g
G overnor Black o f th e F e d e ra l R eserve Bank o f A tla n ta and Deputy G overnor
Rounds o f th e F e d e ra l R eserve Bank o f New Y ork, b e s id e s S e c re ta r y M i l s ,
Kr R obinson, and m y s e lf.
no agreem en t*
We d is c u s s e d th e m a tte r a lo n g tim e and came t o
But even Robinson seemed to doubt th e f e a s i b i l i t y o f s c r i p ,
and a s I r e c a l l most i f n o t a l l th e r e s t d id .
A C M ille r was p e rh a p s an
e x c e p tio n , though he may have been r e p r e s e n tin g h o o v e r, f o r th e argum ent
he had seemed to be t h a t we had to do som ething and so we sh o u ld have s c r i p .
I t was th e o ld id e a t h a t had b een p u t i n p r a c t i c e i n 19 0 7 and p re v io u s p a n ic s
b e fo re th e F e d e ra l R eserve Banks were e s t a b lis h e d .
C le a rin g houses would
p r i n t c e r t i f i c a t e s o r s c r i p and in d iv id u a l banks co u ld exchange some o f
t h e i r e a rn in g a s s e t s f o r th e s c r i p and pay i t o u t i n p la c e o f c u rre n c y .
T h is
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8-III
-4-
was sensible if the currency could not be obtained, as had been the ease
before we had the Federal Reserve Banks, but it was no longer sensible now
that we had not only the Reserve Banks but tho Reconstruction Finance
Corporation and any bank could get currency that had the assets to exchange
for it.
The idea was crazy# George Harrison and I had already opposed it
at the White House* But it nevertheless had a lot of support and we had
to waste a lot of time shutting it off, Ogden Kills was in the unhappy
position of having to present Hoover's point of view, though no one saw
the foolishness of the proposal better than he did*
(FRB K 265# 2?9, 282-
284; M & N 349; Tkoe 679, 687)
On Friday, 1 Karel), we had to take account of the large movement
of funds from New York to other parts of the country and abroad arid to &et
the Federal Keserve Bank of Chicago to relieve the pressure on New York by
taking over some of their securities holdings.
This need arose not from
any weakness of the New Vork banks but from, the fact, that being the financial
center and the depository of banks throughout the rest of the country and
abroad they were liable to demands which though they could be raet neverthe
less tightened tho woimy market and interfered with normal procedure.
(FRB K 280-81)
That night I was in New York and met with a group, including
Kills and V/oodin, to canvass means of meeting the acute situation.
Woodin
was not there to suggest anything, of course, for Roosevelt would not permit
that, but to listen and learn, for his responsibilities would begin in three
days.
Banking holidays or legislative restrictions on the withdrawal of
deposits were in effect in Michigan, New Jersey, Indiana, Maryland, Arkansas,
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8-III
-5-
Ohio, Alabama, Kentucky, Tennessee, and Kevada.
(Banking, Chronology, 5)
The next day, Thursday, 2 March, holidays were proclaimed in
Arizona, California, Louisiana, Mississippi, Oklahoma, and Oregon.
There
were local holidays in other states and everywhere the utmost uneasiness,
(Banking, Chronology, 5)
That afternoon Dr Miller, who, as it happened, was a personal
friend both of President Hoover and President-elect Roosevelt, called at
the White House and urged upon Hoover, in accordance with the views of all
the appointive members of the Board, that a national holiday be proclaimed.
Hoover, according to his own account, was unwilling to do so without the
support of his legal advisers and of Rooseveltj but since Killer apparently
wanted the Board to try io do something to get the approval of Roosevelt
or Congress, he says he gave Killer the letter of 2 Karch, which I have
quoted, to be delivered to the Board.
(Hoover 21?,) Kyers and Newton 363)
In that letter, however, Hoover said nothing about our trying to ret any
body’ s approval but simply asked for our "recommendation accompanied by a
form of proclamation,” and for our advice about a scheme for guaranteeing
bank deposits.
He also consulted Secretary Kills, I think, for late that
afternoon Kills arranged with Attorney General Kitchell for counsel of th©
Treasury and the Board to discuss with him the question of authority for the
President to proclaim a holiday under the terms of the Trading-vdth-thc~Ene;nyAct of 1917.
According to Secretary Kills and Vialter Vfyatt, the Board's
Counsel, the Attorney General said there was sufficient color of authority
in the act to warrant a proclamation if the President thought the emergency
great enough but that the matter was not free of doubt and he preferred not
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a -m
-6-
to advise issuing one unless Roosevelt concurred.
Newton, 364? Holey, 145f Hamlin, 2 March 1933)
1
(FRB M 3011 Kyers and
The Attorney General’s
f
opinion was an official one, of course, but not very definite, nor was it
the only opinion of legal experts.
It was our unanimous conclusion at th*
Board that a holiday should at once be declared, but we also thought that
it should be agreed, if possible, that Congress would be called together
to ratify the action promptly.
Secretary Mills called the Mayflower Hotel,
where Roosevelt and his party had arrived during the evening fro* Hew York,
and reported our action.
This was sometime after lit00 p.*.
About aid-
night, I believe, Dr Miller went to see Roosevelt at the hotel and tried
to get an agreement between him and Hoover, but nothing cans of it.
Roosevelt, however, seemadto have aade up his mind already to proclaim the
holiday himself, if Hoover would not.
get that from both Glass and Koloy.
But h© refused to eossdt himself,
1
(Glass 341; Holey, 146, 148j FRB M 302}
Hamlin, 2 March 1933)
the next day, Friday, 3 March 1933, the Board approved advances in
the discount rate by New York and Chicago,
Foreseeing advances over the week
end by other Reserve Banks and the want of a quorum to approve them since
Secretary Mills would cease to be a member of the Board the next day at noon
and Secretary-designate Woodin night not immediately become one, two of us
were authorised to approve for the Board any additional increases by other
Reserve Banks up to 4-1/2 per cent.
(FRB M 304)
Many states had passed laws authorising restrictions on the
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6- I I I
- 7-
w ith d raw al o f d e p o s its and a ls o th e s e g re g a tio n o f new d e p o s its from o ld .
I t was enco u rag in g to h e a r t h a t c u rre n c y d e p o s its were b e in g re c e iv e d by
many banks i n e x c e s s o f needs and p ro v is io n was made f o r such c u rre n c y t o
be r e - d e p o s ite d w ith th e F e d e ra l R eserve Banks in s p e c ia l a c c o u n ts in o rd e r
to f o s t e r th e developm ent, b u t on th e whole news was b a d .
That day , F rid a y ,
3 March, banking h o lid a y s were pro claim ed i n seven more s t a t e s :
Id a h o , New M exico, T exas, U tah, W ashington, and W isconsin.
G eo rg ia,
(FRB K 304-5}
B anking, C hronology, 5 )
By a fte rn o o n th e w ith d ra w a ls from th e R eserve Banks were th r e a te n in g
t o red u ce t h e i r r e s e r v e s below th e l e g a l minimum.
U n iv e rs a l c lo s in g ap p eared
i n e v i t a b l e j and a l i t t l e a f t e r fo u r o 'c lo c k I went to th e W hite House to
r e p o r t th e s i t u a t i o n to th e P r e s id e n t.
The l a t t e r ap p eared a g re e a b le to
p ro c la im in g a h o lid a y , b u t o n ly i f R o o se v e lt would a p p ro v e .
Note to Mr. Moyer: A ccording t o Koley and
a c c o rd in g to Myers and Newton, you and Ogden
M ills w ere w ith Hoover a t t h i s hour i n c o n fe re n c e
w ith R o o se v e lt and K oley.
K oley makes c o n s id e ra b le o f th e m eeting (page®
1 4 4 - 1 4 6 ). He sa y s t h a t R o o se v e lt went to th e W hite
House to pay th e custom ary fo rm al c a l l o f th e
P r e s i d e n t - e l e c t upon th e o u tg o in g P r e s id e n t, and
t h a t Hoover " s u rp r is e d " him by c a l l i n g i n you and
M ills and p u ttin g him u n d er p r e s s u r e to a c q u ie s c e
in p ro c la m a tio n o f a h o lid a y . R o o se v e lt th e n
" s u rp ris e d " Hoover by c a l l i n g i n K oley, th e l a t t e r
says.
A ccording to Myers and Newton (p ag e 3 6 5 )#
Hoover had "arran g ed " th e c o n fe ren c e and th e r e was
no t r i c k o r s u r p r i s e ab o u t i t .
A ccording t o "Ik e" Hoover, th e W hite House u s h e r ,
th o R o o se v e lts were having te a w ith th e H ooversj and
th e m eeting Moley d e s c rib e s was some o th e r tim e b u t
a p p a r e n tly w ith o u t you.
I n y our r e p o r t to th e B oard, a c c o rd in g to
th e B oard *8 m in u tes and a c c o rd in g to H am lin’ s d ia r y ,
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8- m
-s-
thorc was no uontion o f such a c o n fe re n c e a t a l l .
The ndnutea simply indicate that a little after
4 o’clock you left tho Board, meeting to go to
the White House and report the strain on the
Reserve Banka, Dn your return, according to the
minutes, you rejoined the meeting and reported
telling Hoover what the situation was— but with
no mention of laving been in a conference with
him and Roosevelt, (FEB K 319-20)
Do you recall the situation?
k
third meeting of the Board was held that night at 9*15 o’clock,
Friday, 3 March 1933* ^r James was ill at home but in touch with us by
telephone, as we were also with Secretary ilL lls down th e hall in id s office,
Mr Hamlin -das summoned from a concert.
Reports from th e country at large on
the banking situation ware discussed and consideration of the recommendation
and form of proclamation requested by the President was resumed.
It was our
unanimous opinion that a natlon-vddo banking holiday would have to be
proclaimed.
Tne Senate had adjourned, and could not be expected to get
together and a c t before th e inauguration the following noon.
Kills agreed w ith us.
Secretary
I te le p h o n ed tho White House, stressing the gravity
of the situation, and t o l d Hoover we thought it was imperative that action
be taken at once. He seemed loss inclined to do anything than he had been
a few hours before.
Dr Miller tried again to see Roosevelt at the Mayflower
Hotel about 10:00 p.m., but without success. Later he discussed the situa
tion with Roosevelt by telephone,
(Hamlin, 3 Karch 1933)
Meanwhile we g o t word from New York t h a t th e F e d e ra l R eserve Bank
d i r e c t o r s had ad o p ted a r e s o lu tio n t h a t i n view o f th e n a ti o n a l emergency
C re ate d by th e c o n tin u e d and in c r e a s in g w ith d raw al o f c u rre n cy and g o ld from
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8-1 I I
-9 -
the banks, the Board should urge tho President to declare a holiday. I tried
to get secretary Mills by telephones in his office, but he had gone to the
While House, where President Hoover answered.
versation,
So he and 1 had a second con
I again tried to convince him that a holiday was necessary, •with
or without Roosevelt, but with no success. Mills came back to join us,
however, and we sent for James too. He was sick, but so were the rest of us
by now.
lie also had word that in Chicago the Reserve Bank directors had
adopted a resolution like Mew York’s urging that a holiday be proclaimed at
once.
The Chicago Bank expected denar.ds the first thing Saturday morning
for practically all the gold it had.
Mils did not seem to disagree with the rest of us at all about
the action to be taken but only about the language to be used in answering
the President's letter. Our reply as prepared began with the words, "Re
ferring to your letter of March 2 , 1933# and subsequent conversations, the
Federal Reserve Board has been in session again this evening," and so on
as already quoted. Mils felt the responsibilities of his position and
wanted to protect Hoover all he could.
the Attorney General*s opinion,
He believed Hoover was inhibited by
1 felt that the question of legality was
mixed up too much with the question whether to act with or without the
concurrence of Roosevelt,
We finally settled the question by simply omitting
the opening phrase of our letter, referrin’’ to Hoover's request of the 2d
and subsequent conversations.
Of course that made the letter read as if we
were acting on our own initiative; and it enabled Hoover to slap us down
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8-111
- 10-
th e n e x t morning in h is l e t t e r o f th o
4t h ,
which a ls o I have q u o te d , f o r
b o th e rin g him a t *the l a s t m inute w ith an unwelcome recom m endation which
hs would n o t fo llo w ,
(FEB K 3 3 0 )
Whether we th o u g h t o f t h a t I d o u b t, b u t a t any r a t e , th « l e t t e r
b e in g unanim ously approved, I sig n ed i t and s e n t i t by fir. Fahy, ay
s e c r e ta r y , to th e W hite House.
tu rn e d ,
Some tim e a f t e r one o 'c lo c k K r. Fahy r e
He s a id t h a t when he g o t to th e W hite House, th e P r e s id e n t had
gone to bed and no ono was w illin g t o d i s t u r b him w ith o u t lir R ich ey ’ s
p e rm is s io n .
So R ichey was c a l l e d .
He a u th o riz e d Hoover’ s b e in g d is tu r b e d ,
and Hoover was g iv en th e l e t t e r which we had s p e n t so much tim e p re p a rin g
i n com pliance w ith h i s re q u e s t and which he was a t a lo s s t o u n d e rsta n d
why we had s e n t.
fu l o r so re .
A fte r a l l , I am no t s u r p r is e d t h a t he was e i t h e r f o r g e t
The p re s s u re was t e r r i b l e , no ono l i k e s to be awakened a t
l i 30 a .m ., and t h s su b sta n c e o f th e l e t t e r was d is a g r e e a b le .
lie d id n o t
want to p ro c la im a h o lid a y and he d i s l i k e d b e in g a d v ise d to do so .
What
he w anted was t o fo r c e R o o sev elt i n t o s commitment im p lic a tin g h im s e lf i n
Hoover’ s a c ti o n .
The id e a was c ra z y ,
I am n o t overcome w ith a d m ira tio n
f o r R o o se v e lt when I say t h i s .
A fte r g e ttin g o f f th e l e t t e r t o Hoover, th e Board c o n tin u e d i n
s e s s io n t i l l a b o u t 4 s 00 a.m .
There were s e v e r a l s t a t e s i n which banking
h o lid a y s were n o t in e f f e c t and i t was im p o rtan t t o g e t them i n l i n e i f
th e r e was to be no p ro c la m a tio n by th e P r e s id e n t,
I l l i n o i s and New Y ork,
The most c r i t i c a l were
S h o rtly a f t e r 3 o 'c lo c k , we g o t word f i r s t from
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8- I I I
-1 1 -
New York and. th e n from Chicago t h a t i n b o th s t a t e s h o lid a y s would be p ro
Th(3 s t a t e h o lid a y s would be o b serv ed by th e tw elv e F e d e ra l R eserve
c laim ed .
Banks and t h e i r b ra n c h e s a s by l o c a l b a rk in g i n s t i t u t i o n s .
That would ta k e
c a re o f th in g s th ro u g h S a tu rd a y m orning.
Of th e s e crowded and alm o st c o n tin u o u s e f f o r t s by th e F e d e ra l Re
s e rv e Board t o g e t a c tio n on th e c r i s i s , Hoover say s n o th in g i n h is Memoirs
a f t e r q u o tin g h is l e t t e r o f 2 March a s k in g f o r a recom m endation accom panied
by a form o f p ro c la m a tio n ,
11The
m a jo rity o f th e B oard," he s a y s , "a g a in
d e c lin e d t o have any p a r t i n th e proposed recom m endations to R o o se v e lt o r
th e C o n g ress,"
And he concluded t h a t th e Board ’’was in d e ed a weak re e d f o r
a n a tio n to le a n on i n tim e o f tr o u b l e ,"
The f a c t i s t h a t th e Board was
n o t d iv id e d b u t unanim ous, In c lu d in g th e P r e s i d e n t’ s own S e c r e ta r y o f th e
l^ e a s u r y , and i n re sp o n se to h i s re q u e s t i t gave him a recom m endation t h a t
was w e ll-c o n s id e re d , v ig o ro u s , and r e p e a te d .
Hoover m ight have e x p la in e d
th e grounds on which he r e je c te d o u r recom m endation—g rounds which were
s e a s o n a b le , though I happen to th in k th e y were n o t v e ry c o n v in cin g —b u t
in s te a d he chose t o make i t a p p e a r t h a t we d id n o th in g w h a te v e r.
to u s , S a tu rd a y m orning,
4 M arch,
H is l e t t e r
was among th e v ery l a s t o f h is o f f i c i a l
a c ts .
R esp e ctin g th e s e e v e n ts , X sh o u ld l i k e to q u o te from C h a rle s S
H am lin’ s d ia r y , now i n th e L ib ra ry o f C o n g ress.
Hamlin say s p le n ty o f h a rsh
th in g s a b o u t me in h i s d ia r y one tim e o r a n o th e r; b u t on t h i s o c c a s io n ,
sp eak in g o f o u r e f f o r t s w ith th e P r e s id e n t ho say s;
"D uring th e e a r l i e r
p a r t o f th e evening Hoover c a ll e d up G overnor Meyer, who t o l d him o f th e
Reproduced from the Unclassified I Declassified Holdings of the National Archives
8-IXX
-12-
unaniaous agreement of the Board and begged hia both ae advieer and personal
friend to issue the procla*ation.
Hoover wa# evidently irery angry with
Governor Meyer, but Governor Meyer was aost courteous and fir*.*
(Haalin,
Index-Digest ml. 22, page 28| FRB Filet 470,-in slightly different language)
Hamlin also mentions Hoover's final latter to th® Board, Saturday
morning, 4 torch, in which Hoover charged that when the Board eent hi» its
final letter urging hia to proclaim a holiday, it knew of Roosevelt1® state
ment that he did not wish a proclamation Issued and knew also of the
readiness of the governors of Illinois and llsw York to proclaia a holiday.
Haalin says that Adolph Berle told hi» Monday, 6 March, that Hoover1s
statement of Roosevelt1s wish was “absolutely false*"
Hamlin says further
that the Board did not know of the readiness of the Illinois and New Tork
governors to declare a holiday till sonetiue between three and four o'clock
in the morning— well after delivery of the letter— and that the statement
that it did know of their readiness was "absolutely false."
Note to Mr* Meyer: I doubt if you will
wish to use this quotation but include it for
your Information.
The Board held no fornal meeting Saturday, Sunday, or Monday, but
the Keabers were in their offices and we had frequent conferences, including
one on Sunday with Secretary Woodin and other treasury officials, regarding
developments in the banking situation and methods of coping with the*.
Sunday evening, President Roosevelt officially decided to proclaim a nation
wide holiday.
Apparently, he had wade up his mind the day before, if not
Reproduced from the Unclassified I Declassified Holdings of the National Archives
8 -1 I I
-1 3 -
e a r l i e r , to do s o .
I n su b sta n c e th e p ro c la m a tio n he is s u e d was i d e n t i c a l
w ith t h a t p re p a re d f o r Mr Hoover by th e B oard’ s G en eral C o u n sel, W alter
W yatt, and th e o c c a s io n a l v e rb a l changes i n i t were m erely m a tte rs o f s t y l e .
I t went, i n t o e f f e c t th e f i r s t th in g Monday m orning, u n ify in g th e problem a s
a n a tio n a l one in s te a d o f h aving r e s p o n s i b i l i t y f o r i t s c a t t e r e d among th e
fo r ty -e ig h t s ta t e s .
Note to Mr Meyer: The m a te r ia l i n th e two p re c ed in g
s u b s e c tio n s , I I and I I I , p r e s e n ts q u e s tio n s X am u n a b le
to answ er. The d i f f i c u l t y i s t h a t to o much o f i t in v o lv e s
l i t e r a r y r i g h t s , r e s t r i c t i o n s , c o p y rig h t, c o u rte s y , and
so f o r t h .
A ll o f th e l e t t e r s i n th e in te rc h a n g e betw een th e
Board and th e P r e s id e n t a t th e end o f H oover's a d m in is tra
t i o n , e x c e p t th e l a s t tw o , a r e p u b lish e d by l-iyers and
Newton i n t h e i r "documented n a r r a t i v e , ” o r i n H o o v er's
m em oirs, o r in b o th , 'iheae l a s t two I found in th e
B o a rd 's f i l e s and m in u te s . The s t a t u s o f t h i s m a te r ia l
in v o lv e s b o th l e g a l i t y and c o u rte s y . The F y e rs and Newton
book was c o p y rig h te d i n 19 3 6 by S c r ib n e r s , tb e memoirs by
Hoover h im s e lf i n 1 9 5 2 .
These q u e s tio n s o c cu r to me*
Does S c r ib n e r 's c o p y rig h t ex ten d to th e l e t t e r s ?
Docs th e p ro b a b le f a c t t h a t th e B oard ' 3 p erm is
s io n to qu o te i t s l e t t e r s was n o t o b ta in e d by Hoover
o r by layers and Mewton a f f e c t th e c o p y rig h t?
In o rd e r t o p u b lis h th e B o a rd 's l e t t e r o f 4 March
to Hoover, sig n ed by y ou, must you a sk th e B o a rd 's
p e rm issio n ?
I f you do ask i t , w i l l th e Board g r a n t p e rm issio n ?
I n o rd e r to p u b lis h H o o v er's l e t t e r o f 4 March to
th e B oard, roust you a sk H o o v er's p e rm issio n ?
I f you do a sk i t , w i l l Hoover g r a n t th e p e rm issio n ?
Assuming th a t a l l th e m a te r ia l quoted i s o r has
been r i g h t f u l l y i n y o u r p o s s e s s io n , I wonder what
Reproduced from the Unclassified I Declassified Holdings of the National Archives
8-III
-14liability you might incur by publishing it without
permission.
With respect to the Haalin diary, I have
obtained permission to consult it, but you would
be under a noral obligation to obtain Mrs. Hamlin*a
permission to quote it. Assuaing you wish to quote
It, are you reluctant to request that pern&seion?
Aside froa the quoted letters and diary excerpts, the
story itself is a compound of Information drawn from the
following sources and not readily identifiable, I beliefs,
with any one source:
Your records and files
the Federal Reserve Board's files and ainutes
Federal Reserve Bulletins and Annual Reports
The Press
%ers and Newton, The Hoover Adalnistratlon
Hoover, Memoirs
I have also drawn on the followingt
Holey, After Sevan Tears
Jesse Jones, Fifty Billion Dollars
Lawrence Sullivan, Prelude to Panic
Arthur Ballantine, When All the Banks Closed
Saith and Beasley, Carter Glass
Uphaa and Laake, Closed and Distressed Banka
Harris, Twenty Tears of Federal Reserve Policy
Janes, Growth of Chicago Banks
Reproduced from the Unclassified I Declassified Holdings of the National Archives
A ugust 3 0 , 1 9 5 6 .
Dear B ra/:
E n clo sed a r e a y comments on th e m a n u sc rip t. I found i t
f a s c i n a t i n g a n d , w ith one e x c e p tio n , have made o n ly a few m a rg in a l
n o te s f o r y our c o n s id e r a tio n . The e x c e p tio n r e f e r s to th e second
p a ra g ra p h on page 2 , S e c tio n 8 I I I , and i n f a c t to th e whole s e c t i o n .
When I f i r s t r e a d th e p a ra g ra p h , I f e l t t h a t th e p o lic y move sounded
q u e e r and needed a m p lif ic a tio n . I s t a r t e d to a m p lify i t b e fo re re a d
in g th® re m a in d er o f th e c h a p te r . Now t h a t I have re a d th e whole
c h a p te r ,. I am co n v in ced t h a t w hat you need h e re i s n o t s o much m o d ifi
c a tio n s o f th e p a ra g ra p h a lo n g th e l i n e s I have i n d ic a te d i n th e
m argin b u t r a t t e r th e i n s e r t i o n o f a w h o lly new s e c t i o n o r p a ra g rap h
w hich would d e a l w ith th e g e n e r a l p o lic y problem f a c in g th e F e d e ra l
R eserve System a t t h a t tim e .
I t was th e s o r t o f problem t h a t t y p i c a l l y a r i s e s j u s t b e fo re
a f i n a n c i a l p a n ic . I n view o f w id e sp rea d f e a r s a r i s i n g o u t o f lo s s e s
on d e p o s its and th e bank h o lid a y s , th e p u b lic was r a p i d ly lo s in g i t s
c o n fid e n c e i n a l l f i n a n c i a l i n s t i t u t i o n s , and se e k in g t o m inim ize i t s
l o s s e s . T h is to o k th r e e fo rm s, ( 1 ) w ith d raw als o f d e p o s it s i n th e
form o f c u rre n c y , ( 2) w ith d ra w a ls o f d e p o s its f o r g o ld , and ( 3) th e
u se o f d e p o s its t o p u rc h a se f o r e i g n ex ch an g e. I f one t r i e s to a s c r ib e
r a t i o n a l b a se s to th e s e r e a c tio n s on th e p a r t o f th e p u b lic , one would
say t h a t th e in d iv id u a l d e p o s it o r , who d id n o t f e a r f o r th e d o l l a r and
d id n o t e x p e c t d e v a lu a tio n b u t o n ly f e a r e d f o r th e s a f e t y o r l i q u i d i t y
o f th e banking sy stem , w ithdrew h i s d e p o s its i n th e form o f c u rre n c y .
On th e o th e r hand, th e in d iv id u a l who f e a r e d f o r t h e d o l l a r a l s o and
had no f a i t h i n f o r e ig n c u r r e n c ie s w ithdrew h i s d e p o s its i n th e form
o f g o ld . F i n a l l y , th e in d iv id u a l who f e a r e d f o r th e g o ld s ta n d a rd
o r e x p e c te d d e v a lu a tio n e i t h e r w ithdrew h i s d e p o s its i n g o ld o r , i f
he w ished to p u t h im s e lf i n a p o s itio n to p r o f i t from th e s i t u a t i o n ,
bought f o r e ig n c u r r e n c i e s . Such p u rc h a se s o f f o r e ig n c u r r e n c ie s w ould,
o f c o u r s e , in c r e a s e th e d r a in o f g o ld a l s o , s in c e f o r e ig n c e n t r a l banks
m ig h t w e ll ta k e th e d o l l a r s coming i n to t h e i r p o s s e s s io n i n th e form
o f g o ld w ith d ra w a ls from th e F e d e ra l R e se rv e .
These c o n c u r re n t developm ents, w hich w ere c u m u latin g r a p id ly
d u rin g th e -reeks p re c e d in g th e banking c r i s i s , posed a s e r io u s dilemma
f o r c e n t r a l bank p o lic y . Both th e w ith d ra w a ls o f c u rre n c y and g o ld ,
u n le s s o f f s e t by open m arket o p e r a tio n s , ten d ed to t i g h t e n th e money
m ark et, a developm ent w hich th e m onetary a u t h o r i t i e s would o r d i n a r i l y
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Mr, Bray Hammond
-2-
deplore during a depression and therefore seek to offset. On the
other hand, in tho immediate context of the crisis, the monetary
authorities could not ignore the fact that easy xaomj and the
ready availability of credit to a certain class of wealthy individ
uals slight accentuate the drain, should these individuals pledge
their credit to obtain a larger volume of currency, gold, or
foreign currencies. Ths fact that very remunerative profits
might accrue to specula tors holding foreign exchange if the
country should subsequently go off gold or devalue could not be
Ignored* Such speculation had turned out very successfully then
the pound was devalued in 1931, and there were plenty of individ
uals of good credit standing aware of the fact. In fact, the
instability of exchange rates that arose as an aftermath of World
War I had produced a group of skilled operators in foreign exchanges
who specialised in situations such as this.
The real danger in the situation arose from the fact that
' such speculators were not at all limited to the deposits they had
in hand. If their credit s tandlng was good, which it was in all too
many cases, they were free to borrow from the banks to the full extent
of their credit line, and to take large positions, say, in Swiss francs
or sterling. Their ability to multiply their speculative resourses in
this fashion would depend, of course, on the willingness of banks to
lend* 4s reserve positions were tightened by the withdrawals of
currency and gold, the willingness of banks to lend for these pur
poses, as well as others, would tend to diminish. On the other hand,
if the withdrawals of currency and gold were offset by open market
purchases on the part of Reserve Banks, the monetary authorities
would, in effect, be financing indirectly a speculative move which
threatened the gold Reserve base of its own existence.
The traditional central bank procedure in a financial
crisis of this nature, i.e., a crisis that is dominated by lack
of confidence and speculation in foreign currencies, was not only
to let withdrawals of this nature tighten the market but, in addi
tion, to add further tightness by raising discount rates* At the
same time, central banks traditionally were supposed to see to it
that money was available to necessitous borrowers though at a high
penalty rate. The theory was that tight money would cause banks to
call in credits, that such calls would be particularly hard on specu
lative borrowsrs as compared to traditional business customers, and
that the professional speculators would be forced to liquidate their
positions and thus set the stage for a return of gold and confidence.
At the same time, to minimise business repercussions from the credit
stringency which was supposed not only to be sharp but also of short
duration, the central bank was supposed to see to it that money
would always be available on some terms to nee^r.pit-ms bu-rowers.
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Hr, Bray Hammond
«3~
The above summarises, 1 think, the rationale of this
traditional position. It was no longer accepted blindly in the
world that developed after World War I, due to greater awareness
of the importance of monetary policy to economic activity in gen
eral. In the general climate of opinion after World War I, the
preponderance was that the central bank should keep money rates
1am throughout a depression, offsetting whatever aarket factors
there were that night tend to tighten the money position. This
opinion, however, assumed that the possibility of financial panics
had disappeared. It did not take into account in its premises the
possibility of the actual financial situation which faced the 0. S.
in the opening months of 1933.
The conflict in indicated patha of action as represented
by these two positions arose in most acute fora in the week? immediately
preceding the bank closing. What was urgently needed was some decisive
event or move capable of clearing up the situation and restoring con
fidence in the currency and in the dollar so that noraal economic
prooesses could be resuaed and provide an environment in which abun
dant, cheep and easy credit would provide a constructive force. What
was conspicuously lacking was that environment. The efforts of the
Reconstruction Finance Corporation to accomplish this result had failed
because they were restricted to loans and to making those loans only
on the security of sound collateral. Ths idea of preventing the crisis
by having the R. f . C. buy preferred stock in banks had been turned
down. As a result, the natural forces of the market were acting to
produce a panic and thus create a situation in which the impasse would
have to be resolved (as it later was).
During the development of the crisis, the extreme positions
between which the Board had to decide were whether it would offset the
currency going into hoarding and the gold going abroad and thus facili
tate in some degree the financing of even more speculation against the
dollar, or whether it would risk advancing the crisis in time by rais
ing discount rates to higher levels* It pursued a middle course between
these extremes. It refrained, on the one hand, from easing the market
by offsetting the panic withdrawals. This permitted the market to
tighten somewhat* Discount rates were raised ultimately but not until
the last moment when the gold reserves of the Federal Reserve Banks
were seriously threatened. This latter action was hardly a policy
action. It was rather sort of a ritual action taken in conformity
with central bank tradition that the central bank must raise discount
rates when its gold reserves are drained toward the legal limits.
Under prevailing conditions, it had no effect, positive or negative,
except possibly to maintain some degree of confidence in the integrity
of the System on the part of some of the ware conservative elements
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Mr. B ray Hammond
of tbo financial community. Tba truth was that fay late February
1933 the crisis had gone far beyond the point wtiere it was affected
by open market actions or discount rate moves. The stage had
broadened to the point where only a reorganisation of the finan
cial aystea would restore sufficient order to permit money to
function constructively in the econony.
I don’t know what kind of a section you can concoct to
bring in something of the above and keep it in line with what
Governor Meyer would say and that would be true to his own thoughts
on the situation. I give it to you as background in order to permit
a richer interpretation of his remarks on page 2, where he says the
Board wanted somewhat higher rates, his remarks on page 3, where he
talks about liadting foreign exchange to speculators, and his renarks
later on in the chapter where he notes the rise In the discount rate.
Without some sort of general preparation* the reader, who is versed
only in the modern school that whatever happens, willy-nilly, money
must remain easy during a depression, would utterly fail to under
stand why Governor Meyer took some of these positions or allowed
soms of these things to happen.
Sincerely,
Winfield W. Riefler,
Assistant to the Chairman.
Mr. Bray Hammond,
Thetford Center,
Vermont.
mmtela
J c LAj^ t :
Reproduced from the Unclassified / Declassified Holdings of the National Archives
C E N T E R F O R A D V A N C E D S T U D Y IN T H E B E H A V IO R A L S C IE N C E S
202 Ju n !p »ro S w ra Boulmvard • S ta n fo rd , C a lifo rn ia
O A ve n p o rt 5-0026
October 1, 1957
Mr. Winfield W. Riefler
Assistant to the Chairman
Board of Governors of the
Federal Reserve System
Washington, D.C.
Dear Win:
As the Governor of North Carolina
said to the Governor of South Carolina,11fcheg-e^-s
-a long time between letters..
Your*. letter of
' August 16 has only just r*achea me'~here after
being forwarded from Chicago. It was nice to
hear from you.
,
I write now mostly to let you know
we are out here in Stanford at the Center
ff for the coming year. If, by any chance, you
* get out this way to the San Francisco Bank
or for any other reason, I certainly hope
you will let us know so that we will have a
chance to get together.
I i that
I hope in the meantime you have had
a chance to talk to Dave Fand and that It was
mutually profitable.
Best personal regards from Rose and
me.
Sincerely yours,
MF: bb
Milton .Friedman
JX*
s
Reproduced from the Unclassified I Declassified Holdings of the National Archives
August 16, 195?.
Hr* Milton Friedman,
Department of Soonosdcs,
The University of Chicago,
Chicago 37, Illinois.
Miltorn
Ihis is ft poor tins to be answering your
good latter of last Mgr which arrived while 1 was
abroad.
I have heard about David Fand in very favor
able terms and would like to see hia. I have been
Meaning to cell M s up and get hia over but have been
so caaplstely bogged down getting ready for and par
ticipating in the current hearings, in addition to
all the other things that see* to happen around here,
that X just haven't had the tias. X do m m to go
ahead with it.
Meanwhile ay best personal regards to Bose
and you.
Sincerely,
Winfield W. Riefler,
Assistant to the Chaiman.
WfcHrcla
Reproduced from the Unclassified I Declassified Holdings of the National Archives
ifcy 29, 19$7*
Mr. Miltoo Frladaaa,
D a p a rta a n t o f SconondcB j
Tbo U n l w a i t y o f C h ic a g o ,
Chicago 37# Illinoia.
D ear H r* F rladM am
I n M r. B i e f l a r ’a a b s e n c e from th e
o f f i c e , I mitk t o ack n o w led g e o n h ia b e h a lf
y o u r l a t t e r o f ttsy 2 7 , r e f e r r i n g to D avid
F and.
H r. H ia f le r i a a n ro u t® t o B a a le ,
S w itz e rla n d , t o a t te n d tb a A n n u al G e n e ra l
M a e tia g o f th a Bank f o r I n t e r n a t i o n a l S e t t l e
m e n t*. T o u r l a t t e r « H 1 r e c e iv e h ia a t t e n t i o n
u p o a h i a r e t u r n to th a o f f l e a on Ju n e 1 7 .
S in c e r e ly y o u r a ,
C a th a rin e L . S c h a id t,
S a c r a ta r y t o M r. R i e f l e r .
c l*
Reproduced from the Unclassified I Declassified Holdings of the National Archives
THE
UNIVERSITY
OF C H I C A G O
C H I C A G O 37 • I L L I N O I S
DEPARTMENT
OF E C O N O M I C S
Economics Research Center
27 May 1957
Mr. Winfield Eiefler
Board of Governors, Federal Reserve System
Washington, D. C.
Dear Win:
I have been meaning to write you for a long time to regg»t
explicitly how right you were last year, and how wrong I was.
In retrospect it is certainly clear that tight money was called
for over this period.
But though confession is good for the soul, the immediate
occasion for this letter is different. A couple of weeks ago,
one of our former students, David Fand, who is now working for
the Committee for Economic Development, was in town. In the course
of conversation, it turned out that he would he interested in ex
perience which would enable him to observe the making of monetary
policy from close up. It occurred to me that you might some time
have need for an assistant somewhat more sophisticated, than the
usual run, and that if so, Fand would be an ideal person for you.
Fand is a rather unusual person and has very great possibili
ties. fhough his innate interest is largely on the problems of
the formation of policy and the role of economic analysis in policy
formation, he did a thesis here which involved detailed grubbing
into facts and figures. His subject was the size of non-national
bank deposits and vault cash for the period before the Board's
estimates begin. He produced estimates for the period from 18751896 that are a decided improvement on anything previously avail
able, and in the course of which he acquired an extraordinary de
tailed knowledge of the banking structure and system of the time.
I hope you will pardon this random shot in the dark.
Best personal regards and wishes.
Sincerely yours
Milton Friedman
@FedFRASER