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B/D 4/21/55
Don't want to try to second-guess what you did last week* Shared
your doubts about an increase now, in terms of the business situation,
but Treasury financing is also a part of the whole economic situation.
Think you had a

choice awid the lack of^business and market

repercussions indicates that you did the right thingjn farm J o f ih j wboff

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Demonstration of the fact that discount policy is "still subordinate
to open market policy, and that credit policy as a whole is still
^frequently the prisoner of the


peeds. 1

Open market policy brought about the change in the cost and
availability of credit which moved short term market rates of
interest up to and above the discount rate. To maintain consistency
in^the various means of credit administration, an increase in the
discount rate would soon have become necessary, in any case,
m nt

k u n h ti'*

o f m f h*&

unless there was a change in the •oomenMa situation-and < open


£ in

0 ft**/*** . i,
market pxdseylf b o t h ,
The t ming of the change was forced bv the Treasury’ needs. With
the economy again operating at a high level, and with the tax take also
high, the Treasury shou^ ^ ^ ^^aye^to^be coming to the market for new

But the requirements of the defense program and the peculiar time

incidence of tax payments during the fiscal year, will make the Treasury
a heavy borrower of new money during the next few months* Private
demands for funds are consuming private savings, and the Treasury will
have to rely, in considerable part, on the commercial banks for the
success of its financing* Market knowledge of this situation, and market
expectations that an increase in rate would soon be forced by the
combination of private and Treasury demands for credit, in the face
of the existing reserve position, made i almost essential to have the





increase out of the way before the Treasury prices its new money
borrowing at the end of t f fmonth.
The implications e f this situation are disturbing. Despite our break
for freedom, monetary policy has to recognize the continuing need for
coordination with Treasury financing, which at times such as this makes
sole ly
it dififcult to have a wholly • qaojptoat monetaiy policy^ If the Federal

finances are out of whack with the ^ o aenifr

we can*t ignore

either one.
It is also disturbing to have what seems to be random action by other
Federal Reserve Banks, or action at such banks prompted ty members of
the Board of Governors, forcing the hand of this bank which is situated
in the principal money market of the country.

If it were not for special

Treasury needs as in this instance, however, I think it would be possible
for this bank to preserve more independence, although consistency with
open market policy would still be neeessaiy. Our views would influence
the Board of Governors and other banks as indeed they did in this case
postponing an action which otherwise would have been taken earlier when
even less justified in terms of the business situation. And, at times,
■ n
and for a period of time, I think we could have a differallyeffective
rate, even though the emergence of a national market in Government
Jcurities, and the increased fluidity of funds, are powerful forces in
the direction of uniform rates at the various Federal Reserve Banks.
No change.

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