The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
July S9> 19^6 cosmmut Dear Allan: Your letter of July 18 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 location. . | I \ 1 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 2 subject 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 s 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 problems. As for the present role of the Treasury in these monetary matters, there undoubtedly is some residue resentment over what the Administration considered 3 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 s 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 DK:R0L:PF:AH/MI AIR MAIL