View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

July S9> 19^6

Dear Allan:
Your letter of July


is the nor* iapreseive

ai tatag * seashore product . To«r eo«B«sti are ttry

aueh to tit* point and certainly »e*» to ee to got at
tho heart of sose tetle probleas facing xsonetary policy
at the present.

la my view, «tet«vtr say have been vreai la
past dteiilost respecting tho structure aa& control of
taskiagi tho root of our protont problem ia the failure
of fiseal policy to w r r y it* share of tha load la
restraining inflationary pressures. With economic
activity aovlng ahead at a rapid pace* aay reasonable
Monetary policy would, X fear, even under the boat of
c ircuastances , bo up against a serious problesi is
attempting to provide the necessary degree of restraint
while at the saate tiae avoiding severe monetary dis­


tour ooMttonta on the undesirability of imposing
artificial restraints on interest rates are, of course,
veil taken* Z share your view that tho financial aysten
works aost effectively in the long m
if prices are
sot by aarket forces* and X believe that it is stoat
unfortunate that ve have bees usable to work more
effectively la achieving the long-run goal of a flexible
competitive financial systen.
The goal of free financial saarkets sight well
have to ba te»porarlly set aside under emergency conditions
however. Whatever the reasons Cor the predieaaent of the
savings and loan associations, *tany of the* do find
theaselves ia a potentially vulnerable position even
though fears concerning thes have so far proved exaggerated
One can, of course, question the extent to which the
Federal Reserve should feel itself responsible for these
associations, vhich, through usage and advertising, have
encouraged people to believe that they are holding deposits


immediate withdrawal. In any case, X must
reluctantly agree that there are situations Imaginable
ia which temporary interest rate limitations sight
prove the best of a number or poor alternatives -- such
as the ttnvsateft easing of monetary policy, for example.
At the sane tine, I hardly need tell yon that legislation
foreing the Federal Reserve to impose unreasonably low
Interest rate ceilings (in contrast to the power to
inpose limitations of its own choosing at its ova
discretion) would, in »y Judgment, be a aost unfortunate
development. As you have seen, the Treasury has had
second thoughts on this latter issue*
X have been concerned, as you have, that the
certificate of deposit, which has given commercial banks
a needed competitive instrument, has also allowed banks
to slip away from Federal Reserve tightening, at least
in the short run* To be sure, I believe that even with
lower reserve requirements on certificates of deposit
and other time deposits than on demand deposits, the
System still has control over the volume of reserves
and, therefore, the basic degree of ease or tightness
of the banking system. But there is no doubt ia ay
mind that the use of e / B ’ has magnified the problem
in the short run and that banks are able to mitigate
temporarily the tightening impact of monetary policy.
The suggested solution of requiring uniform reserve
requirements seems overly drastic to me, and not really
essential. Since, as you say, it is unlikely that we
will be able to impose reserve requirements on nonbank
savings institutions in the foreseeable future, imposing
reserve requirements on commercial banks* time deposits
at a rate equal to those on demand deposits would, I
feel, simply put the commercial banks at a substantial
competitive disadvantage. As you point out, there may,
however, be a ease for shifting the present dividing line
between high and low reserve requirements so as to Include
negotiable C/B*s along with demand deposits in the high
reserve requirement classification*
The problems faced by the System are difficult,
and everyone in the Federal Reserve, both at the Board
and the Banks, recognises that some of the things we are
doing currently represent no more than an attempt to
provide temporary solutions to perplexing immediate
As for the present role of the Treasury in
these monetary matters, there undoubtedly is some residue
resentment over what the Administration considered


lack of coordin*tion” U a t December* However, as
above, the 7r«asiiry fortunately aaaaa to
have backed avay froa the concept of a mandatory rata
ceiling for certain tiae certificates. Ia the fiecal
area, a y feel lag of frustration over tho absence of
a tax iacreaae ia aa acute aa ever*

To** touched briefly on the starling situation.
Aa 70a earn iaagine, thia has been keeping Charlie and
mm pretty busy over raeent ve«k« aad the performance
of tfca exchange aarkat haa gives «• aoae vorrieose
aoaaata* On the other hand, it seeaa to ae that
Hr* Wileon’ prograa ia really vary drastic f aad If
ha can pat it through, aa now aeewa probable, ve may
be o» the varga of a ooael&erable turn ia aarkat
•aatU«at» Bat t n»it confess that thia particular
cliff hanger has baas lasting a lot loagar than X
w a U choose •
With beat wishes,
Tours sincerely,

Alfred Bayaa

Hr* Allan Sproul
F# 0. Box 3 6 5
Kentfield, California

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102