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The Federal Reserve in the “ New Economy”

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Is the Money Supply All That Matters?

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1965: A Sea-Change

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An economist would be hard put to find anything
really new about the “ new economics.” And
since no economic environment is ever exactly
like any that has gone before, it is, strictly
speaking, belaboring the obvious to say we have
a “ new economy.” Yet there is something— or a
combination of things— that seems to be enough
different about the current economy to justify
the word “ new,” and therefore has important

The Federal Reserve
in the
“ New Economy”

implications for all economic institutions, includ­
ing the Federal Reserve.
At the risk of gross over-simplification, the
following six points are suggested as basic ele­
ments in this economy:
1. A new emphasis on

sustaining economic

expansion.
2. Growing confidence that built-in devices pro­
tect against economic catastrophe.
3. Wider public

acceptance of compensatory

fiscal policy.
4. Development of new techniques of manage­
ment control in business.
5. An experimental approach to control of wages
and prices.
6. Intimate involvement in a rapidly changing
world economy.
From all these in combination arises an attitude
toward the economy. At its best this attitude is
characterized by confident pragmatism, at its
worst by complacency reminiscent of the “ new
era.”
For the Federal Reserve, these elements have
implications which can be seen only dimly now
(Continued on Page 19)

BUSINESS REVIEW is produced in the Department of Research. David P. Eastburn was primarily respon­
sible for the editorial “The Federal Reserve in the ‘New Economy,’ ” Clay J. Anderson for the article “ Is the Money Supply All
That Matters?” and Bertram W. Zumeta for “1965: A Sea-Change.” The authors will be glad to receive comments on their articles.
Requests for additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of Philadelphia,

Philadelphia,
Pennsylvania 19101.


The m oney supply is all that matters. The m oney supply matters. The m oney supply doesn’t matter
at all.1* These statements— a succinct summary of the current status of monetary theory— raise the
question for monetary policy . . .

IS THE MONEY SUPPLY
ALL THAT MATTERS?
There is widespread agreement on the general

3. Still others believe that the money supply

objectives of monetary policy: maintaining a

hardly matters at all. The general liquidity

reasonably full use of productive resources, price

of the economy— the ease with which spend­

stability, sustained economic growth, and pro­

ers may obtain additional funds by borrowing

tecting the external value of the dollar. But in

and selling some of their assets— is the pri­

formulating policy to achieve these objectives

mary determinant of total demand.

the central banker confronts widespread dis­

There are divergent views within each class,

agreement, even among specialists in the field,

but in this article the goal is a greatly simplified

on two basic problems: how monetary measures

analysis confined to the principal characteristics

influence the economy, and what guides to use

of the three general doctrines.

in formulating policy.
1. MONEY SUPPLY THEORIES

LINKAGES BETWEEN MONETARY
ACTIONS AND ECONOMIC ACTIVITY

The oldest and probably the most widely ac­

How monetary measures influence the level of

total supply of money is the major determinant

prices and the volume of business activity has

of changes in the price level and business ac­

long been a subject of controversy among mone­
tary theorists. Current thinking falls into three

tivity. A brief summary of the evolution of this

general classes:

theory in better perspective.

cepted over the years is the doctrine that the

doctrine enables one to view current quantity

1. Many contend that the money supply is the
primary cause of changes in the price level

Quantity of money and prices

and the volume of business activity.

According to some scholars, a crude form of

2. Others

disagree.

may

the quantity theory can be found at least as far

matter, but it isn’t all that matters; mone­

back as the writings of the Romans. In its early

tary measures alter the cost and availability

form, the theory was simple and mechanistic.

of credit, which in turn influence total de­

Money is a medium of exchange; its value to

mand

the holder is how much it will buy, and how

and

The

thereby

money

business

supply

activity

and

prices.

much it will buy depends on the total quantity
of money in relation to the supply of goods and

1 Paraphrase of statements by fames Tobin, “ The M one­
tary Interpretation of History,” The American Economic
Review. June, 1965.




services available for purchase. An increase in
the supply of money stimulates spending, bids up

3

business review

prices, and reduces the buying power of money;

Gradual recognition that it was unrealistic to

a decrease in the supply has the opposite effects.

assume that productive resources were fully em­

Economists recognized long ago that this sim­

ployed and that “ other things remain the same”

ple form of quantity theory was unrealistic. To

was another major step in the evolution of the

be sure, the quantity of money at the disposal

quantity theory. The Great Depression in the

of the public was important, but there were other

early thirties brought a marked shift in emphasis

factors that should not be overlooked. The ve­

from the effects of monetary actions on prices to

locity of circulation of money also influenced
total demand and spending. For example, in a

their effects on total demand and the volume of
business activity. The sharp decline in produc­

given period of time $5 spent twice would have

tion and rise in unemployment, followed by a

the same effect on total spending as $10 used

prolonged period of stagnation with output run­

only once. The total quantity of goods and serv­

ning far below capacity, dramatized the unreality

ices

of assuming that other things remain the same.

available

for

purchase

also

influenced

the price level and value of money. A 25 per

In recent years, money-supply theories have dealt

cent increase in the money supply would not

not only with the effects of the quantity of money

raise prices if accompanied by a 25 per cent

on prices but also on total spending, production,

increase in the physical quantity of goods and

and employment.3*

services available for people to buy.
Three factors came to be recognized as deter­
minants of the price level and purchasing power

Current money-supply theory
Despite vigorous criticism of the quantity theory

of money: the money supply, its velocity of cir­

over the years, this category still seems to be

culation, and the total physical quantity of goods

the most widely accepted among economists.

offered in exchange. In the United States these

Within the group, however, there are divergent

factors were put in equation form: MV =

views as to how the money supply affects total

PT;

the money supply times its velocity of circula­

demand and as to the prescription for monetary

tion is equal to the price times the quantity of

policy.

goods sold. Even though velocity and total out­
3
That an increase in the money supply would tend to
stimulate business activity was recognized long ago. In
1723, for example, Pennsylvania’s colonial legislature
ponents of this form of quantity theory believed
passed an act providing for the issue of 15,000 pounds
both were stable, except during short periods of
sterling of paper currency to remedy the “ extreme scar­
city of money” because of which the trade of “ this
transition, so that changes in the quantity of
Province is greatly lessened and obstructed.” In the early
money remained as the primary determinant of
part of this century, public works expenditures were
recognized as a method of injecting funds into the econ­
the price level. An increase in the money supply
omy and stimulating business activity. In 1911, A . L.
Bowley, a noted English statistician, stated with reference
meant higher prices; a decrease, lower prices.to the beneficial effects of public works the effect is “ like
throwing a stone into a pond, which makes the ripples
2
Another version of the quantity theory, especially spread all over it.” In 1916, William Hard, an American
prominent among English economists, was the cash-bal­
journalist, who thought public works expenditures could
ances approach. This approach stressed that people
be used to move a depressed economy off dead center,
wanted to hold a certain proportion of their real income
wrote: “ When the waters of business are stagnant, gentle­
in the form of money. If, for example, an increase in the
men, it becomes necessary, if I may say so, to prime the
money supply lifted balances above the amounts people
pump.” In 1930, an American economist, V. A . Mund,
wanted to hold, they would increase their spending to
developed the concept of the multiplier in connection with
bring money balances down to the desired level.
the effects of public works expenditures.

put were recognized as possible influences, pro­

4




business review

Some believe that an increase in the money

The implications for

monetary policy

are

supply puts additional purchasing power at the

clear— regulation of the money supply is the pri­

disposal of the public, and more money means

mary road to business and price stability. More­

more spending. Other money-supply theorists put

over, they proposed a constant rate of growth in

more emphasis on subjective factors such as the

the money supply; e.g., from 3 to 5 per cent an­

demand for money. The public’s demand for

nually, depending on how money is defined.5

money is directly related to the level of real in­

There are two main reasons for the proposal.

come; e.g., rising as income increases. If the

First, of course, is the belief that changes in

money supply rises above the amount people

the money supply are the primary determinant

want to hold at current income levels, they will

of cyclical and longer-run fluctuations in money

spend the excess and total expenditures will rise;

income, prices, and business activity. Conse­

if supply falls below the amount people want to

quently, maintaining a constant rate of growth

hold, they will attempt to build up their money

in the money supply would tend to smooth out

balances and spending will decline.

these fluctuations. A second reason is the prac­

Theoretical analysis as to the role of the

tical difficulty involved in implementing a flexi­

money supply has been supplemented by at­

ble monetary policy. A time lag of varying

tempts at statistical verification. The most note­

length between changes in the money supply and

worthy, perhaps, is the comprehensive study by

the final effects on the economy makes it ex­

Friedman and Schwartz, embracing the behavior

tremely difficult to time countercyclical actions

of money in the United States for almost a cen­

properly. Attempts to do so may intensify in­
stead of mitigate business fluctuations. Hence a

tury.4 Their study of the money supply, extend­
ing back to 1867, led them to the following con­
clusions. First, changes in the money supply

constant rate of growth, although not ideal, is
considered the most practical method of imple­

have been closely associated with changes in

menting monetary policy with our present knowl­

money income, economic activity, and prices.

edge and institutional structure.6

Second, the interrelation between the money sup­
ply and economic change has been highly stable.
Third, changes in the money supply have often
had an independent origin; they did not occur
simply in response to changes in economic ac­
tivity. The authors recognized that close associa­
tion between changes in the money supply and
changes in money income provides no evidence
of which is cause and which is effect. They con­
cluded, however, that the money supply is “ . . .
rather clearly the senior partner in longer-run
movements and in major cyclical movements. .. .”
1 A Monetary History of the United States, 1867—1960,
A Study by the National Bureau of Economic Research
( Princeton: Princeton University Press, 1963).




5 Definition of the money supply has varied over the
years. In the earlier formulations of the quantity theory,
money was usually defined as currency and coin. For an
extended period, commercial bank demand deposits were
not included as m oney; they were considered as affecting
the velocity of circulation of currency and coin. Now all
definitions of money include demand deposits, but opin­
ions differ as to whether commercial bank time deposits
and other near monies should be considered as a part of
the money supply or as influencing velocity.
GIn a sense, F. A . von Hayek’s theory of “ neutral
m on ey’ in the early thirties was a forerunner of current
proposals for a stable rate of growth in the money supply.
He contended that a constant “ effective' money supply”
(money supply times exchange velocity) was a pre­
requisite for economic stability; however, the money sup­
ply should be adjusted to compensate for a change in the
proportion of trade effected with money and, of course,
for changes in transactions velocity.
Carl Snyder, of the Federal Reserve Bank of New York,
suggested in the twenties that the stabilization of business
was largely a matter of maintaining a rate of credit growth
corresponding roughly to the physical growth of trade.

5

business review

Some who believe the money supply should be

ment. According to this view, the “ natural” rate

the central aim of monetary policy favor a

of interest is the rate at which saving and invest­

flexible instead of a constant rate of growth.

ment are in balance. If the market rate falls be­

They believe, despite the problem of timing

low the natural rate, the tendency is to stimulate

monetary actions properly, that a rate of mone­

overexpansion and an investment boom ; if it

tary expansion adapted to changing economic

rises above, borrowing for investment becomes

conditions will yield better results.

unprofitable and an excess of saving over invest­
ment tends to reduce total demand and business

2. SUPPLY, COST, AND AVAILABILITY
OF CREDIT

activity. The Keynesian school of economists
stressed that the relation of the long-term rate

Environmental change was a significant influence

to the “ marginal efficiency” (profitability) of in­

leading some economists to question the validity

vestment usually had an important influence on

not only of some of the assumptions of the

the volume of investment expenditures. Changes

money-supply doctrine but the validity of the

in the level of investment, in turn, were the

doctrine itself. In an economy in which currency

principal cause of fluctuations in income and

and coin are the principal means of payment,

the volume of business activity. They recognized,

the supply in the hands of the public is a major

however, that in depression, profit prospects

influence on spending. But in a modern economy

might well be so poor that a low, or even zero,

in which credit is widely used as a means of

rate of interest would not stimulate investment.

spending tomorrow’s income for today’s pur­

Since the Great Depression many economists

chases, the supply of money already in existence

have tended to downgrade the cost effect of in­

is a less significant determinant of total spend­

terest rates. Prolonged stagnation in the thirties

ing. Total net debt outstanding in the United

demonstrated that unusually low rates will not

States, public and private, is well above one tril­

stimulate borrowing when there is no prospect

lion dollars, and the yearly increase recently has

that the funds can be used profitably. In addi­

been about $75 billion. The view that the money
supply matters but that supply, cost, and avail­

tion, several surveys of business firms revealed
that interest cost was not a significant influence

ability of credit are additional influences has

in investment decisions except for a small per­

gained adherents as credit has come to play a

centage of firms. The rate is more likely to be

more pervasive role in the economy.

influential when interest cost is a substantial part
of total cost; for example, when borrowing is

Interest rates

for a long term, such as in housing and business

The interest cost of borrowing probably in­

fixed investment.

fluences the demand for credit just as price is

A currently popular view seems to be that

a factor influencing demand for a commodity.

interest cost has little influence on willingness

But the importance of the cost effects of interest

to borrow. Neither does the rate have much

rates has long been a controversial issue.

effect on willingness to save, although it may

For many years, interest rates were regarded

influence the form in which savings are held.

by some economists as the principal means of

Following World War II there was a pro­

maintaining balance between saving and invest­

nounced shift in emphasis from the cost effect

6




business review

of interest rates to the influence of rates on

Report a few years ago. The Report concluded

willingness to lend. Large holdings of Govern­

it is “ the liquidity

ment securities, a much broader Government

than the ‘supply of money’ that the authorities

securities market, and a widespread belief that

should seek to affect by their use of monetary

large fluctuations in interest rates were not suit­

measures.”

of the economy, rather

able to the postwar environment encouraged de­

According to the Committee Report, monetary

velopment of the availability theory. Moreover,

actions operate on total demand primarily by

with securities widely held, the impact of a rate

altering spenders’ access to more funds. To be

change is more pervasive so that small changes

sure, decisions to spend are influenced some by

in interest rates may be effective.

the amount of cash in the till and the size of the

Commercial banks, in response to pressure on

balance in the bank, but much more important

their reserve positions, sell Government securities

is the availability of additional money— the addi­

in order to obtain funds to meet loan demand.

tional amounts consumers and businessmen can

Bank sales reinforce the trend toward higher

get hold of by receipts, borrowing, and the dis­

market rates and falling securities prices. But as

posal of assets.

institutions

Interest rates exert an influence, but primarily

were presumed to become more reluctant to sell,

by altering the liquidity position of lenders and

especially if a loss is incurred, in order to make

spenders.

loans. As a result of greater reluctance to lend,

values, diminish liquidity and tend to discourage

some institutions may refuse loans to new bor­
rowers and marginal credit risks, and tighten

lending and the disposal of assets. The terms on
which additional funds may be obtained is the

the terms on which credit is extended. Thus
higher interest rates, by diminishing somewhat

crucial factor. The Report states, “ . . . if the
money for financing the project cannot be got

its availability, may reduce the flow of credit.

on any tolerable terms at all, that is the end of

But the fact that lending institutions do sell

the matter.”

securities

prices

decline,

lending

Higher

rates,

by

reducing

capital

Governments in periods of strong credit demand

A somewhat different version of the liquidity

in order to make loans has tended to discredit

thesis has developed in the United States in re­

this particular aspect of the availability thesis.

cent years. Here the emphasis has been on near
money or liquid assets created by the growth of

3. LIQUIDITY THE “CENTERPIECE”

financial intermediaries. Spendable funds sup­

Widespread use of credit and the large volume

plied by nonbank financial intermediaries, such

outstanding helped inspire the view that the

as savings banks, savings and loan associations,

money supply hardly matters at all, that the

and insurance companies, have grown rapidly.

thing that really matters is the general liquidity

Commercial banks, even though they alone have

position of lenders and spenders. The central

the power to create money, are not considered

thesis of this liquidity doctrine is that spenders’

unique. They are only one of several institutions

decisions are influenced mainly by the ease of

supplying lendable funds. And it is the supply

obtaining additional funds instead of by the

of spendable funds instead of the money supply

amount of money already in hand. The doctrine

that is the primary determinant of total spending.

was cogently stated in the Radcliffe Committee

Nonbank financial intermediaries are not under




7

business review

the direct control of the Federal Reserve with the

“ other conditions remaining the same,” price

result, according to this view, that the effective­

determination under conditions of free competi­

ness of monetary policy has been reduced.

tion, long-run effects after all adjustments have
been completed, etc. Monetary policy, however,

POLICY FORMULATION AND
IMPLEMENTATION

must be formulated for an economy in which

The central banker continually confronts the

further complicated by the fact that the central

question of what action he should take, if any,
in order to achieve the objectives of monetary

bank operates in a complex institutional struc­
ture in which wage rates are substantially in­

policy.

constantly

fluenced by the relative bargaining power of

changing, diagnosis of the state of the economy

large corporations and large labor unions, in

is a prerequisite for policy formulation.

which some product prices are “ administered”

With

economic

conditions

conditions never remain the same. The task is

Federal Reserve officials, ever since the deci­

by a few major producers, and in which it is

sion was made in the early twenties to direct

difficult to determine when the economy is operat­

policy primarily toward domestic economic ob­

ing so close to capacity that continued expan­

jectives, have attempted to develop the kinds of

sion of credit will generate strong inflationary

information needed in making policy decisions.

pressures instead of more output. Instead of a

They now have comprehensive data and analyses

single interest rate there is a whole structure of

of financial and business developments. But there

rates— rates varying for different maturities as

are still significant information gaps that need

well as the kind of market in which they are

to be bridged.

determined. Monetary theories, to be useful to
the policymaker, must be translated to apply to

SHORTCOMINGS OF THEORY

economic conditions as they exist.

Policy formulation necessarily involves consider­

Theory falls short also in that it usually deals

ation of how monetary measures influence the

mainly with the long-run effects after adjust­

economy: are the effects transmitted primarily

ments have been completed. But the effects of

through the money supply, the cost and availa­

monetary actions in a given period of time are

bility of credit, the liquidity position of lenders

of the essence for policy formulation. Both the

and spenders, or a combination of channels? In

total magnitude and the distribution of effects

its present state, monetary theory falls short of

over time are needed in order that policy actions

providing the guidance needed.

may be timed most effectively. Policy formula­

Unfortunately, at present we do not have con­

tion would be much easier, for example, if it

clusive evidence as to which monetary theory is

were possible to estimate with reasonable ac­

correct or as to the relative effectiveness of each

curacy the total effect on final demand of an

as a means of achieving monetary objectives.

injection of SI billion of additional bank re­

The policymaker is thus compelled to make a

serves and the magnitude of the effects during

judgment on the basis of inadequate information.

a given period of time.

Another shortcoming of monetary theory for

One factor complicating the problem of esti­

policy formulation is that most theories are

mating the effects of monetary actions is inabil­

stated in terms of hypothetical conditions—

ity to distinguish monetary and nonmonetary

8




business review

forces. Changes initiated by nonmonetary fac­

as immediate or short-term guides.7 But there is

tors are transmitted through the money mecha­

also need for “ intermediate” guides to reflect

nism. Moreover, a central bank action is likely

what is happening further along toward the im­

to be only one of several changes— monetary

pact on final demand.

and nonmonetary— occurring at the same time.
The effects following a monetary action may re­

Money supply

flect the impact of that action, response of the

For those who believe stabilization and sustained

monetary mechanism to some nonmonetary fac­

growth are to be achieved primarily by regula­

tors, or a combination of both.

tion of the money supply, the quantity of money
is the principal guide for policy. A money-supply

PROBLEM OF GUIDES

advocate recently stated, for example, “ The im­

Monetary theory, as we have seen, emphasizes

mediate aim of monetary policy should be con­

certain channels through which the effects of

trol of the stock of money.” But achieving a

central bank actions are transmitted to the econ­

certain behavior of the money supply is not so

omy. Whatever the channel, there are several

simple as it may at first appear. The effect of

links in the chain of transmission, and leakages

a given injection of reserves on the money sup­

along the way may diminish the final impact.

ply may vary widely for several reasons.

For the money-supply theorist, the quantity of

First, volatile market factors over which the

money is the main channel of transmission. But

Federal Reserve has no direct control frequently

there are several links between central bank ac­
tion and the impact on total demand. The direct

have a large impact on bank reserve positions.
Currency inflows and outflows, Treasury opera­

impact is on bank reserves; a change in reserves

tions, and Federal Reserve float may add or ab­

alters the capacity of the commercial banking

sorb several hundred million dollars of reserves

system to extend credit and create deposits;

in a single day. Despite System efforts to counter­

newly created currency and deposits make pos­

act the impact of such market factors on re­

sible an increase in spending.

serves, daily fluctuations are sometimes large.

There are also a number of links in the cost

Second, the distribution of reserves among

and credit availability, and liquidity transmis­
sion chains. The initial impact on bank reserves

classes of banks with different reserve require­

tends to alter short-term market rates and spread

and deposits.

with some time lag to intermediate- and longerterm rates; interest-rate changes may affect will­
ingness to borrow and lend, which in turn may
alter consumer and businessmen’s decisions to
spend and invest.
Because of leakages and the time lag between
action and effects, the policymaker needs some
guides that will indicate response in different
stages of the transmission process. Indicators in
the initial or early stages are often referred to




ments affects the potential expansion of credit
Third, willingness to use reserves made avail­
7 For defensive actions to offset temporary strains and
stresses, the Manager of the System Open Market Account
needs short-term guides to indicate the availability of
funds in the money market. Factors influencing the re­
serve positions of banks in the leading financial centers—
currency flows, Treasury operations, purchases and sales
of federal funds, sensitive short-term money rates— are
types of information that are useful in determining when
defensive open market operations are desirable. In this
article, however, we are concerned primarily with the
more positive, longer-run policy needed to achieve the
general objectives of price and business stability, and
sustained growth.

9

business re v ie w

able may vary among banks as well as over

total demand, and are thus a useful immediate

time. Country banks typically have a stronger

guide in implementing policy based on almost

preference for excess reserves than city banks,

any theory.

and banks are likely to put reserves to use more

One of the more commonly used reserve indi­

promptly in periods of active credit demand

cators is net free or net borrowed reserves. Net

than in a recession.

free reserves, the excess of total reserves over

Fourth, public preference between demand and

required reserves plus borrowings from the Re­

time deposits and between deposits and currency
may change. A withdrawal of currency from the

serve Banks, indicates the cushion of excess
reserves member banks already have available

banking system reduces reserves by an equal

to support additional deposits. A net free re­

amount. One dollar of reserves would support
only a corresponding increase in currency. De­

serve figure reflects an easy reserve position.
Net borrowed reserves is the amount by which

mand deposits could expand several times the

total borrowings from the Reserve Banks is

increase in reserves. Time deposits, because of

greater than excess reserves. Such a net reserve

a lower reserve requirement, could expand sev­

figure indicates member banks are operating on

eral times more than demand deposits; however,

a margin of borrowed reserves— reserves which

many do not consider time deposits a part of

have to be repaid shortly. Net borrowed reserves

the money supply, Thus there are several slip­

reflects a tighter reserve position.

pages that influence the effect of reserve changes
on the quantity of money.

Net free or borrowed reserves are a rough but
far from accurate indicator of monetary ease or

The money supply, in turn, has shortcomings

restraint. The volume of excess reserves tends

as a guide to the probable effect on total spend­

to be reasonably stable because most banks like

ing. In the first place, the demand for money

to keep nonearning assets at a minimum. Mem­

may change. If an increase in the money supply

ber bank borrowing is thus the principal deter­

merely satisfies a demand for larger money bal­

minant of changes in net reserve figures.

ances, there is no stimulating effect on total

In a period of recession, a very low level of

expenditures. The increase in the money supply

borrowing from the Reserve Banks is one indi­

tends to be offset by a reduction in velocity.

cator of an easy-money policy. With total bor­

A second difficulty is that a change in the

rowing at a minimum level, however, additional

money supply may be cause or effect. An in­

ease would be reflected in free reserves only to

crease may stimulate spending and an enlarged

the extent banks were willing to hold a larger

volume of business activity. On the other hand,

volume of excess reserves.

an increase in the money supply may reflect only

In periods of business expansion the volume

a response to a rising volume of business in

of member bank borrowing usually rises sub­

which case there is no stimulating effect.

stantially because the Federal Reserve does not
supply enough reserves through open market

Bank reserve measures

operations to support the growing level of de­

Federal Reserve actions impinge directly on bank

posits. But a rising volume of member bank

reserves. Reserves are the first link in the chain

borrowing from the Reserve Banks enlarges the

of effects between Federal Reserve action and

reserve base. Borrowing per se is not restrictive.

10




business review

It exerts restraint only to the extent banks are

Reserve guides need to be supplemented by other

reluctant to borrow. In that case, banks would

data such as bank loans, investments, and de­

tend to adopt more restrictive loan policies. The

posits to show whether and to what extent re­

degree of restraint associated with a given vol­

serves are being utilized.

ume of net borrowed reserves varies according
to the banks doing the borrowing, as well as over

Credit market conditions

time. Many of the larger, more aggressive banks

Reserve measures are also a useful immediate

do not seem to be very reluctant borrowers.

guide for those who believe the supply, cost, and

The degree of ease or tightness associated with

availability of credit are the principal channels

a given level of net free or borrowed reserves is

through which the effects of System actions are

also influenced by the distribution of excess re­

transmitted. But for these channels, additional

serves. Excess reserves are usually concentrated

guides are needed.

in the smaller country banks because the larger

Data on loans and investments of commercial

ones try to keep all available funds utilized. A

bank and nonbank lenders serve as an indicator

redistribution of excess reserves toward the fi­

of trends in the supply of credit being put at

nancial centers usually results in easier condi­

the disposal of borrowers and sellers of securi­

tions in the money market; a flow from the

ties. Interest rates are the best indicators of

financial centers tends to result in temporary

trends in the cost of credit. Market rates also

tightening.

have the advantage of reflecting the interrela­

A serious shortcoming of a net reserve meas­
ure is that it affords no evidence of whether

tionship between supply and demand. Scarcity
or plentifulness of credit is determined by sup­

easy or tight reserve positions are having any
effect on the volume of bank credit. A stable

credit alone.

ply in relation to demand— not by the supply of

level of free or borrowed reserves means only

Using interest rates as a guide to credit cost

that the System is supplying sufficient reserves to

is complicated not only by the fact that stated

offset changes resulting from market factors and

rates often differ from effective rates but also

changes in required reserves. For example, a
stable volume of free reserves could be accom­

highly developed money and capital markets

panied by either an expansion or contraction of

such as exist in the United States. Each rate

credit and deposits.

should be considered in relation to the market

Total reserves is a better indicator of whether

because there is a whole complex of rates in

in which it is established. The federal funds rate

bank capacity to expand credit is growing at an

reflects the availability of reserves among a few

appropriate rate. Because of the reluctance of

hundred of the larger banks active in the federal

member banks to borrow, some watch the trend

funds market. The Treasury bill rate is one in­

in total nonborrowed reserves. A rise in this

dicator of the money position of institutions

total is believed more likely to stimulate credit

such as commercial banks, corporations, and

expansion than a corresponding increase in total

others which hold bills as a liquid reserve that

reserves arising from an increase in borrowing

can readily be converted into cash. If on balance

from the Reserve Banks.

these institutions have temporary surplus funds

Total reserve measures are also inadequate.




seeking investment, a strong demand for bills

11

business review

tends to put the rate down; if most of them are

cally keep monetary policy on target. The inter­

selling bills to raise cash, the rate would tend

national gold standard was presumed by many

to rise. Long-term rates, such as on real-estate

to provide such a device. Price-level stability

mortgage loans and market yields on corporate

and international balance could be maintained

bonds, reflect largely the supply of savings seek­

by permitting money and credit to respond to

ing investment relative to the demand arising

changes in a country’s gold reserve. Advocates

from home buyers and from corporations seek­

of the real-bills doctrine thought confining credit

ing funds for capital expenditures.
The character of the market in which interest

to short-term productive uses would automati­
cally result in the appropriate quantity of credit.

rates are determined varies widely. The money

For a short time in 1920, four Reserve Banks

market is impersonal, brings together many buy­

established progressive discount rates as a sub­

ers and sellers, and rates are sensitive to changes

stitute for discretion in preventing excessive

in supply and demand. On the other hand, cus­

member bank borrowing. As we have seen, some

tomer loan rates charged by commercial banks

economists favor a fixed rate of growth in the

and other lending institutions are relatively in­

money supply instead of a flexible monetary

sensitive to short-run changes in supply-demand
relationships. For the most part, lending institu­

policy.
Such simple, automatic devices have never

tions use methods other than interest-rate changes

been a satisfactory substitute for informed judg­

to stimulate or retard their extensions of credit.

ment in the formulation and implementation of

Availability of credit embraces more than

monetary policy. They are especially ill-adapted

mere capacity to extend credit; it depends also

to a modern complex and ever-changing economy

on willingness of lenders to lend. Inasmuch as

in which the problems facing monetary authori­

customer loan rates charged by lending insti­

ties are never twice alike. Under these condi­

tutions are not a sensitive indicator of willing­

tions, wise policy formulation requires flexibility

ness to lend, additional information is needed to

and adaptation, not rigidity.

indicate changes in the availability of credit. In

Moreover, adoption of some simple rule or

periods of credit restraint, lenders may refuse

guide does not avoid discretionary action. In­

loans to new borrowers and marginal credit

stead, it substitutes a single discretionary action

risks. They may scale down the amounts some
borrowers request and may require borrowers

presumed to be appropriate for an unknown

to maintain larger compensating balances. In the

can be based on relevant information about the

case of amortized loans, larger down payments

particular condition existing at the time.

future for a series of discretionary actions which

and shorter maturities increase the size of monthly
payments and may be far more effective than a

SHORT-RUN VS. LONG-RUN STABILITY

higher interest rate in discouraging demand for

Thus far, central banks have concerned them­

this type of credit.

selves primarily with actions to smooth out cycli­
cal fluctuations, aside from actions to relieve

RULES VS. DISCRETION

seasonal and other short-term stringencies in the

Economists and central bankers have long sought

money market. In recent years, however, some

some single rule or guide that would automati­

economists have suggested that the focus of

12




business review

policy should be shifted from cyclical swings to

monetary theory by economists and the knowl­

long-run stability and growth. Two principal

edge acquired by policymakers in trying to im­

reasons have been advanced in support of the

plement theory. Central bankers still must grope

proposed shift in emphasis toward a goal of

with the age-old question of which theory or com­

longer-run stability.

bination of theories is likely to yield the best

First, it is difficult to implement an anticyclical

results in the current economic and financial en­

monetary policy, for reasons already mentioned.

vironment. The answer to this question largely de­

As a result, monetary policy may tend to aggra­

termines the types of guides needed in the formu­

vate instead of smooth out cyclical fluctuations.

lation and implementation of monetary policy.

Second, some have pointed out that recent

There is no conclusive evidence as yet, either

institutional changes have tended to limit the

in theory or practice, as to which monetary

effectiveness of monetary policy. Public expendi­

theory is more accurate. It seems most unlikely

tures, which have become a large proportion of

that the money supply is all that matters. More

Gross National Product, are not sensitive to

convincing evidence than a long-term statistical

monetary measures. Growth of financial inter­

association between changes in the money sup­

mediaries has increased the supply of lendable

ply and changes in the total volume of business

funds not under direct control of the central

activity and prices is required to uphold this

bank. Interest-rate changes according to this

doctrine. The crucial question is whether changes

group, apparently have little influence on either

in the money supply are the cause or the effect

the total volume of saving or the total supply of

of business fluctuations. The money supply is all
that matters only if it is the sole cause of changes

lendable funds. Pressures arising from such fac­
tors as excessive market power of business and

in total demand and output. To take this posi­

labor organizations, and shifts in the composi­

tion is tantamount to saying that inadequate

tion of aggregate demand, even though total

growth in the money supply is the only way to

demand is stable, cannot be constrained by gen­

bring on a recession; that an increase in the

eral monetary controls, except at the price of

money supply is the only way to stimulate re­

recession and unemployment.

covery; and consequently fiscal, debt manage­

Developments such as these which have tended

ment, and other governmental policies are useless

to reduce the effectiveness of monetary actions
is a major part of the reasoning behind the

indirectly contribute to desired changes in the

suggestion that discretionary monetary policy

money supply.

as stabilization measures except as they may

should be used for two main purposes: smooth­

It seems more logical that the money supply

ing out seasonal and other temporary disturb­

matters; but that the cost and availability of

ances, and achieving a rate of growth in the

credit also matter. Interest cost, although in

money supply

most cases not a substantial part of total costs,

appropriate for the estimated

growth rate in total real output.

surely has some marginal influence on the de­
mand for credit, especially in areas such as

CONCLUDING COMMENTS

housing and fixed investments. Interest rates,

Central banking continues to be very much an

through their effects on prices of securities and

art, despite many years of study devoted to

other assets, probably have a marginal influence




13

business re v ie w

on willingness to lend and willingness of spend­

ness activity— the channels through which the

ers to obtain additional funds by the disposal

effects are transmitted, the relative magnitude

of assets. In short, it seems reasonable that cost

of the total effects, and the effects during a cer­

and availability of credit have at least a mar­

tain time period. The Federal Reserve is pres­

ginal influence on decisions to spend— and a

ently engaged in a coordinated research program

small marginal influence is all that is necessary

designed to

in order that monetary policy may be effective.

knowledge.

At the other side of the spectrum is the doc­
trine that the general liquidity of the economy

One part of this research program is directed
toward the linkages between open market opera­

is all that matters— that the money supply is
of little significance. Liquidity in the sense of

tions, the money market, and reserve utilization
by the banking system. Another deals with the

the ease or difficulty of obtaining additional

relationships between bank reserves and other

fill some

of

the

gaps

in

our

funds surely influences spending decisions. But

financial factors such as the money supply. A

the fact that in every major war severe infla­
tions were fueled by money creation leaves little

third segment is devoted to studies of the link­
ages between monetary policy and the final tar­

doubt that the money supply does matter, even

gets the Fed tries to influence, such as prices,

though it is not all that matters.

costs, and capacity. A fourth group o f studies

There are good reasons to believe that the
effects

of

monetary

actions

are

is in the area of international financial trans­

transmitted

actions. Some academic economists have been

through several channels: the money supply,

enlisted to make studies in their special fields,

the cost and availability of credit, and per­

e.g., the influence of monetary policy on major

haps liquidity positions. This view, if accepted,

categories of expenditures, including business

has important implications as to guides that are

investment in plant and equipment. This is one

useful in policy formulation. Instead of relying

of the most intensive research efforts in the

on the money supply as the sole or even the

history of the System.

primary intermediate guide, policymakers should
watch a number of indicators which may reflect

This research program is a significant step
forward, but it would be too much to expect

responses to monetary actions, e.g., reserve posi­

that in a complex and changing economy the

tions, market rates, the money supply, bank

magnitude of the effects of monetary actions

loans and investments, nonbank lending, the

during a given period of time can be pinpointed

terms on which credit is being made available,

precisely. It is not too much to expect, however,

the volume of new securities flotations, and the

that studies such as those planned and under

general tone of the money and capital markets.

way will add to our knowledge and narrow the

Judgment based on all relevant information

range of uncertainties with which policymakers

available is still the best formula for policy

must grapple. Improved knowledge of the effects

formulation.

of monetary actions would materially contribute

A brief survey of significant problems encoun­

to the implementation of monetary policy, and

tered in policy formulation clearly reveals the

might make possible a better use of Federal

need for better information about how Federal

Reserve tools to achieve selective as well as

Reserve actions affect total demand and busi­

general effects.

14




1965: A SEA-CHANGE
As 1966 begins, employment, international pay­

help-wanted columns and in expanding military

ments, defense spending, the length of the cur­

calls. They are equally clear in people’s partici­

rent business expansion are matters of concern

pation in economic activity. Unemployment at

in the U. S. economy. This sounds like last year,

the year’s end was down approximately to the

when the same items were in question. But it is

long-sought interim goal of 4 per cent of the

not. Although the labels read similarly, they

labor force. A few groups of workers were,

identify quite different problems.

if

We began 1965 wondering about persistent
deficits in international payments and how long

anything,

over-employed.

There

were not

enough of them between jobs to ensure optimum
mobility and availability.

an unwontedly long period of domestic pros­

Groups in the work force having very low

perity could last, about sticky unemployment

unemployment— less than 2 per cent— in late

and sticky little wars. We ended the year still

1965 included managers, officials, professional

concerned

persistent interna­

and technical workers. Married men with fami­

tional deficits. But now skills are scarce, not

lies had unemployment of about 2 per cent. For

with naggingly

jobs. Industry seeks more capacity because ex­

all men 20 years of age'and over, unemployment

isting capacity is almost fully occupied. Mean­

was about 3 per cent, as it was among craftsmen,

while, we must support and pay for an enlarged
war. Demand for productive resources no longer

foremen, and all people having work experience
in durable goods manufacturing.
There are other evidences of pressure in in­

poses the major domestic problem.
various ways and over varying periods of time

dustries making durable goods. Factories are
on long working weeks, and consequently are

in the different sectors. The event that most

paying heavily for overtime. Recruiting of skilled

influenced the millions of private and public

and even semi-skilled workers is intense; help-

decisions that determine spending, jobs and
incomes in the U. S. undoubtedly was the Presi­

wanted advertising in the U. S. is at a record

The economy’s metamorphosis occurred in

peak.
Total needs, however, are not yet so pressing

dent’s dramatic announcement, in July, of a
large build-up of strength in Viet Nam. After

as to have penetrated fully to every group in

that, with a good-sized war to worry about, it

the labor force. Over 11 per cent of the teen­

gradually became clear that business activity

agers working or seeking work are without

might be in danger of overheating. Unemploy­

jobs. The unemployment rate for non-whites is

ment became

of matching

greater than 6 per cent. For laborers it is over

people to jobs than one of generating the jobs.

7 per cent (but this is 2 points under the lows

In Shakespeare’s words, we have undergone

of the mid and late ’ fifties). The really intense

more

a problem

“ . . . a sea-change

pressures are just beginning to spill over to

Into something rich and strange.”

affect the less skilled and educated workers.

Pressures on the nation’s labor force are evi­

The need for more, and more efficient, pro­

dent in disappearing day-labor lines, in long

ductive capacity led to constantly rising capital




15

business re v ie w

spending and increased plans for future spend­

market interest rates rose substantially during

ing as 1965 unfolded. The increased productiv­

the fall of 1965. The discount rates of the

ity and increased capacity thus generated have

Federal Reserve Banks, which had not changed

helped and will continue to help offset the

since the end of 1964, were below usually com ­

pressure of rising demand for goods and serv­

parable rates. Recognizing this, and recognizing

ices. But the offset occurs as new facilities

explicitly also the inflationary threat inherent

come into use. That takes time. Current spend­

in the economy’s approach near to full utiliza­

ing to build future facilities competes with other
demands for productive resources. It adds to

tion of capacity, the Federal Reserve System
in December increased the discount rate one-

present pressures although it eventually will

half point, to 4 y2 per cent, and simultaneously

serve to relieve pressure.

raised the ceiling on permissible payments by

Increased productivity has helped hold down

member banks for time deposits.

the cost of the labor required to make each unit

All this is not to say that every part of the

of product, even though productivity gains were

U. S. economy is pressed. There are people,

somewhat less in 1965 than in 1964. Labor costs

industries and regions that have not yet felt
the full impact of the extraordinarily long busi­

per unit of output were remarkably stable
throughout 1965. One of the large questions
now open is how long they can keep from rising
in the face of high overtime hours and pay­

ness expansion that now has taken up half of
the nineteen sixties.
Nevertheless,

last

year

economic

growth

ments, and other factors making for lowered

reached more people and regions than usual.

productivity and increased costs.

The Third Federal Reserve District admirably

Another large question concerns, of course,

illustrates this fact.

the demand for both output and manpower, and
the effect on the Federal budget, of the war in

THE THIRD DISTRICT IN 1965

Viet Nam. It is clear already that these demands

Every metropolitan area in the Third Federal

will rise, that Federal expenditures therefore
will rise, and that this will press further on

Reserve District experienced an excellent year

resources.

tions than at any time since the Korean War

The U. S. balance-of-payments

in 1965. Some enjoyed better business condi­

deficit de­

period and before. One group of areas per­

creased a bit during 1965, but at year’s end it

formed exceptionally well. Employment in this

still was large and troublesome. Meanwhile,

group of regions rose as fast or faster than

near the end of the year prices inched up a

in the nation as a whole. The new jobs had to

little more than usual in recent years. Certain

be filled either by employing persons previously

price rises were deterred only after confronta­

unemployed or by inducing more people to

tions between the evident wishes of the Federal

offer their services on the labor market. Wil­

Government and the desires of the industries

mington, York, Lancaster and the Lehigh Val­

concerned.

ley

(Allentown-Bethlehem-Easton

Metropolitan

Burgeoning demands were reflected in finan­

Area) are in the first group. They staffed their

cial markets. Result: demands for funds outran

greater-than-national job gains by both means.

available supplies of funds sufficiently so that

In the Wilmington area, for example, unem-

16




business review

STAFFING A BUSINESS EXPANSION
How employment and unemployment changed in 1965.
Total Employment (Nonfarm Wage and Salary Workers) Percentage Change*

SI

Labor Force— Percentage Change*

-2
Total Unemployment (Scale Inverted) Percentage Change*
Figures in parentheses are November 1965 unemployment rates.

Reading

Johnstown

Philadelphia

Altoona

Wilkes-Barre

Scranton

* First 11 months 1965 vs. first 11 months 1964.

ployment is usually rather low. Mainly because
of this, migration into the area is substantial

tion gains made possible a larger expansion in
the labor force without quite so much drawing

and therefore its population is rapidly increas­

down of unemployment.

ing. Wilmington’s employment gains in 1965

In the second set of areas employment rose

were accompanied by the largest percentage

less rapidly than in the nation. But their labor

expansion of any labor force in the Third Dis­

forces expanded and unemployment declined.

trict, combined with one of the smallest per­

The group includes Harrisburg, Reading and

centage reductions in unemployment.

Johnstown. Both this group and the first in­

even less unemployment than Wilmington but

clude areas that enjoyed unusually strong ex­
pansions in business activity last year.

gains population at about the national average
rate rather than the much higher Wilmington

ment rose less rapidly than in the nation. Un­

rate. Lancaster’s employment gains this year

employment declined to levels extremely low

were accompanied by the largest percentage re­

compared with those prevailing during the past

duction in unemployment in the Third District

dozen years. But in none of them did the labor

and by a labor force increase about two-thirds

force expand. This is not too surprising in

as large as Wilmington’s.

Altoona, Wilkes-Barre and Scranton, where con­

Lancaster County, by contrast, normally has

Obviously, in the Lancaster area growing de­

In the third group, like the second, employ­

siderable out-migration and consequent shrink­

mand was met by pressing very hard upon a

age in labor forces have been the rule. It is

labor force that already was rather fully em­

more surprising in the case of the Philadelphia

ployed. In the Wilmington area, larger popula­

Metropolitan Area, where there is in-migration.




17

business re v ie w

The answer, of course, is that in 1965 in the

activity in 1965. In the first place, it was a good

United States very large cities such as Phila­

year. In all three sets of areas, employment

delphia contained concentrations of people who

gains were unusually large, and unemployment

had never entered or who had left the labor force

dropped to exceptionally low levels. Secondly,

because of lack of training and the frustrations

not all the economic slack was taken in. In

that accompany both lack of training and its

several regions unemployment rates, though un­

causes. During periods of extreme pressure on

usually low for those regions, were high by

resources these people can be brought into the
labor force. In 1965 many of them obviously

reasonable standards. And in the third group,
and particularly in Philadelphia, the lack of

were not.

expansion in labor forces indicates the presence

The experience in these three groups of re­

of resources that could be productively em­

gions illustrates two main points about economic

ployed if the economy were under forced draft.

18




business review

(Continued from Page 2)

creased and because dealing with it now will

and may take years to reveal themselves com­

enhance the possibility of sustaining the expan­

pletely. What follows is an attempt to sketch in

sion, not diminish it.

some of these implications roughly.
1.

2. Innovation entails risks. Some economies,

The objective of sustained economic expan­ like some people, can ill afford major reverses

sion, of course, is far from new to the Federal

and hence can take few risks. Others have a

Reserve. But it has appeared in various guises

larger cushion. Today there is greater recogni­

over the years: prevention of financial panics;

tion than before that the strength of the United

mitigation of swings from boom to recession;

States economy permits innovation, can afford

furtherance of “ maximum employment, produc­

some calculated risks to achieve lasting economic

tion, and purchasing power.” As it has evolved

expansion.

over the years, the Fed’s objective has broadened.

This confidence builds not only on the per­

What seems to have happened in the past few

formance of the economy in the past five years

years is a further step in this evolution. The

but, more basically, on reforms instituted in the

remarkable performance of the economy since

1930’s— deposit insurance, social security, un­

1961 has raised hopes everywhere that the econ­

employment compensation, built-in fiscal stabi­

omy in future years need not experience the

lizers, and the like. While no one can be ab­

kind of booms and recessions of the past. One

solutely sure of it, these devices offer promise

needn’t go so far as to conclude that the busi­

that the kind of devastating collapse of the

ness cycle is dead to accept the possibility that

1930’s will never recur. This does not justify
reckless experimentation, of course. It does sug­

intelligent private and public policy can give us
longer sustained expansions than we have ever
had before.
In short, emphasis has shifted from mitigating
the business cycle to eliminating it. Under the
first objective, there is always the idea that what

gest that the Federal Reserve and other agencies
of public policy can undertake calculated risks
inherent in innovation with greater assurance
that the economy can absorb some reverses if

goes up must come down, and policy is shaped

they occur.
3. The greatest innovation of recent years

accordingly. Under the second, there is the new

was the tax cut of 1964. The success of this

possibility that perhaps what goes up can keep

one experiment probably has opened more eyes

going up. Policy then is adapted to the develop­

to the potentialities of compensatory fiscal policy

ing situation rather than simply following past

than economists have been able to do in thirty

modes.

years. The “ new economics”

propounded by

This difference is clearly apparent in innova­

Keynes goes back that far, but never was really

tions in Federal Reserve policy over the past five

accepted by the general public. Whether it was

years. Monetary expansion has been more vigor­

because of the “ Puritan Ethic,” or analogies

ous and sustained than during any earlier peace­

with personal finance, or whatever, most non­

time period— in the face of risks of inflation

economists refused to buy the idea of using tax­

and deterioration of the balance of payments.

ing and spending as flexible devices to influence

The more restrictive action recently has been

the level of economic activity.
Now, wider acceptance of compensatory fiscal

taken because the first of these risks has in­




19

business re v ie w

policy promises more flexible use of monetary

the momentum will be increased if they can play

policy as well. It may be possible to vary the

the long game rather than the short-run business

mix of fiscal and monetary policies to produce

cycle game.

more effective results in terms of the domestic
economy and the balance of payments.

5. To the extent business— and labor— take
the long view, cost-price pressures should be

But all the evidence on fiscal policy is not yet

reduced. This will help assure the success of the

in. The tax cut of 1964 converted many to the

current experimental approach of influencing

idea that deliberately running a deficit may stim­
ulate the economy. Whether as many are equally

wages and prices through guideposts.
In turn, success of this approach would sim­

persuaded of the efficacy of flexible fiscal policy

plify monetary policy. One of the problems con­

to restrain the economy remains to be seen.

fronting the Federal Reserve in the 1950’s was

4.

Public authorities have no monopoly on dealing with cost-push inflation by restraining

innovation. One of the most significant aspects

demand. The guideposts offer one possible solu­

of the “ new economy” is the new business eco­

tion to this problem.

nomics. Private enterprise is developing sophis­

But it is unlikely that the guidepost approach

ticated techniques of control, enabling it to

can succeed if demand gets out of hand. As

achieve its own objectives more effectively.

liquidity piled up during World War II, price

All the implications of this development are

controls merely suppressed inflation, which then

not clear, but it does seem, in some respects at

spilled over into black markets. If monetary

least, that the objectives of Federal Reserve

policy permitted excessive liquidity today, price

policy will be furthered rather than hindered.

and wage guideposts would collapse. The Fed­

Control of inventories by computer, for exam­

eral Reserve’s recent action of restraint on the

ple, apparently has reduced the extent to which

demand side should improve chances that the

inventory fluctuations aggravate the business

guideposts will continue effective on the cost-

cycle.

price side.

Even more important than new techniques at

6. Rapid and exciting as developments in the

their disposal will be the attitude of business

“ new” domestic economy may be, they are sur­

managers. In the past, the business cycle has so

passed by developments in the “ new” interna­

dominated the economy that businessmen neces­

tional economy. Relationships between domestic

sarily have thought in terms of cyclical swings.

and international aspects of the U. S. economy

During booms their interests apparently were

as well as among economies of the world have

served best by raising prices; during recessions

become much closer and interactions more com­

by laying off workers. Businessmen are not in

plex. This poses new problems for policymakers,

business out of altruism and, if only in self

including those in the Federal Reserve. Monetary

protection, must adjust to ups and downs of the

policy designed to affect the domestic economy

business cycle.

has implications for the balance of payments and

But if the expansion can be kept going month

vice versa. Policy measures taken here have an

after month, businessmen may see more clearly

increasingly direct effect on the economies of

their own great self-interest in sustaining the

other nations, and what they do has a greater

momentum. And, in turn, chances of sustaining

effect on us.

20




business review

These new relationships will require more

it does seem likely that something will have been

understanding in a number of respects: under­

gained. We have had a taste of what could be.

standing of the relationships themselves; under­

This has broken down old patterns of thought

standing of the trade-offs sometimes necessary

and imparted a sense of experiment and adven­

between domestic and international objectives;

ture that should not wear off easily. Perhaps the

and understanding of the needs and aspirations

most lasting characteristic of the new economy

of other nations. International cooperation will

will be the attitude that what we now have is

be essential, but cooperation may mean that

not good enough. No matter how well the econ­

sometimes everything cannot go just the way

omy performs, our aims are still higher.
In doing its part to meet these eter-rising

we might like.

goals, the Federal Reserve may continue to de­
*

*

*

Out of all this emerges a hazy picture of the

part from past patterns, developing new tech­
niques and approaches to new situations. In

“ new economy” — a picture that offers much

some respects, the Fed’s job may be easier in

promise for the future, but in which there are

the new economy. Hopefully, monetary policy

still many unanswered questions. Will business­

will get help from fiscal policy and the wage-

men act with restraint in inventory policy if

price guideposts. In many respects, as in the

prices keep rising and if shortages appear? Will

relationship between domestic and international

labor and business take the long view in setting

aspects, the Fed’s job will be more difficult. The

wages and prices? Will fiscal policy be used if
restraint is necessary? Will nations cooperate

various public and private policies that enter
into the new economy will require careful

to make the international financial mechanism

coordination if they are to achieve maximum

work better? Whether the new economy turns
out to be really new will depend on how these

effectiveness. But at the same time, the promise
of the future will not be fulfilled unless these

and other important questions are answered.

policies

But even assuming some unfavorable answers,




can be

pursued

imaginatively, with

maximum freedom of thought and initiative.

21

D IR E C T O R S A N D O F F IC E R S

At the election held in the fall of 1965, Mr. Ralph K. Gottshall, Chairman of the Board
and President, Atlas Chemical Industries, Inc., Wilmington, Delaware, was reelected
by member banks in Electoral Group 2 as a Class B Director for a three-year term
beginning January 1, 1966. Mr. Howard C. Petersen, President, Fidelity-Philadelphia
Trust Company, Philadelphia, Pennsylvania, was elected for a like term by member
banks in Electoral Group 1 as a Class A Director. He succeeds Mr. Benjamin F. Sawin.
The Board of Governors of the Federal Reserve System redesignated Mr. Walter E.
Hoadley as Chairman of the Board of Directors of this Bank and Federal Reserve Agent
for the year 1966. Dr. Willis J. Winn was reappointed as Deputy Chairman of the Board
of Directors for 1966. Mr. D. Robert Yarnall, Jr., President, Yarway Corporation, Phila­
delphia, Pennsylvania, was reappointed as a Class C Director for an additional term
of three years beginning January 1, 1966.
The Board of Directors of this Bank appointed Mr. William L. Day, Chairman, The
First Pennsylvania Banking and Trust Company, Philadelphia, Pennsylvania, to serve
as the member of the Federal Advisory Council to represent the Third Federal Reserve
District during 1966. Mr. Day has served in this capacity since January 1964.
Four changes in the officer staff occurred during the past year. Effective February 1,
1965, Mr. Murdoch K. Goodwin, Vice President, General Counsel and Assistant
Secretary, resigned his position with this Bank to resume private practice of law.
Effective that same date, Mr. James V. Vergari (Vice President and Cashier) became
Vice President and General Counsel. In addition to his former duties, Mr. Vergari now
directs the Bank’s legal affairs. Also on February 1, 1965, Mr. Walter J. Brobyn (Bank
Examiner-Trust) was appointed to the official position of Assistant Counsel.
Mr. G. William Metz, formerly General Auditor, was promoted to the position of
Vice President and General Auditor, effective January 1, 1966.

22




D IR E C T O R S A S O F J A N U A R Y 1, 1 9 6 6
Group

1

Term expires
December 31
CLASS A
HOWARD C. PETERSEN
President, Fidelity-Philadelphia Trust Co.
Philadelphia, Pennsylvania

1968

2

CHARLES R. SHARBAUGH
Senior Vice President
United States National Bank in Johnstown
Ebensburg, Pennsylvania

1966

3

LLOYD W. KUHN
President, The Bendersville National Bank
Bendersville, Pennsylvania

1967

1

2

CLASS B
BAYARD L. ENGLAND
Chairman, Atlantic City Electric Company
Atlantic City, New Jersey
RALPH K. GOTTSHALL
Chairman of Board and President
Atlas Chemical Industries, Inc.

1967

1968

W ilm ington, Delaware

3

LEONARD P. POOL
President, Air Products and Chemicals, Inc.
Allentown, Pennsylvania
CLASS C
WALTER E. HOADLEY, Chairman
Vice President and Treasurer
Armstrong Cork Company
Lancaster, Pennsylvania

1966

1966

WILLIS J. WINN, Deputy Chairman
Dean, Wharton School of Finance and Commerce
University of Pennsylvania
Philadelphia, Pennsylvania

1967

D. ROBERT YARNALL,
JR.
President, Yarway Corporation
Philadelphia, Pennsylvania

1968




23

O F F IC E R S A S O F J A N U A R Y 1, 1 9 6 6

KARL R. BOPP
President
ROBERT N. HILKERT
First Vice President

WILLIAM A. JAMES
Assistant Vice President

HUGH BARRIE
Vice President

WARREN R. MOLL
Assistant Vice President

JOSEPH R. CAMPBELL
Vice President

LAWRENCE C. MURDOCH, JR,
Assistant Vice President
and Assistant Secretary

NORMAN G. DASH
Vice President

HENRY J. NELSON
Assistant Vice President

DAVID P. EASTBURN
Vice President

KENNETH M. SNADER
Assistant Vice President

DAVID C. MELNICOFF
Vice President

RUSSELL P. SUDDERS
Assistant Vice President

G. WILLIAM METZ
Vice President and
General Auditor

J. C. ROTHWELL, JR.
Economist

HARRY W. ROEDER
Vice President

BERTRAM W. ZUMETA
Economist

JAMES V. VERGARI
Vice President and
General Counsel

WALTER J. BROBYN
Assistant Counsel

RICHARD G. WILGUS
Vice President and Secretary
EVAN B. ALDERFER
Economic Adviser

JAMES P. GIACOBELLO
Chief Examining Officer
THOMAS K. DESCH
Examining Officer
WILLIAM L. ENSOR
Examining Officer

CLAY J. ANDERSON
Economic Adviser
EDWARD A. AFF
Assistant Vice President
JACK P. BESSE
Assistant Vice President
JOSEPH M. CASE
Assistant Vice President
RALPH E. HAAS
Assistant Vice President

JACK H. JAMES
Examining Officer
LEONARD E. MARKFORD
Examining Officer
JAMES A. AGNEW, JR.
Assistant Cashier
FRED A. MURRAY
Director of Plant

A. LAMONT MAGEE
Assistant General Auditor

24




S T A T E M E N T O F C O N D IT IO N
Federal R eserve B ank o f Philadelphia
End of year
1965

1964

ASSETS
Gold certificate reserves:
Gold certificate a cco u n t.........................................................
Redemption fund— Federal Reserve n o te s ........................
Total gold certificate rese rve s........................................

$ 787,149
93,751
$ 880,900

$ 759,801
85,890
$ 845,691

Federal Reserve notes of other Federal Reserve Banks . . .
Other c a s h .....................................................................................

65,516
6,473

51,395
4,523

Loans and securities:
Discounts and advances.........................................................
United States Government securities.................................
Total loans and se c u ritie s ...............................................

3,826
2,114,399
$2,118,225

2,135
2,002,859
$2,004,994

Uncollected cash ite m s .............................................................
Bank prem ises..............................................................................
All other a s s e ts ............................................................................
Total assets .........................................................................

483,808
2,587
51,052
$3,608,561

492,199
2,741
30,267
$3,431,810

LIABILITIES
Federal Reserve n o te s ................................................................

$2,241,279

$2,077,102

Deposits:
Member bank reserve acco unts...........................................
United States Governm ent....................................................
Foreign .....................................................................................
Other d e p o sits.........................................................................
Total d e p o s its .....................................................................

858,408
38,326
8,400
6,307
$ 911,441

783,819
74,653
12,320
6,586
$ 877,378

Deferred availability cash ite m s ...............................................
Ail other lia b ilitie s .......................................................................
Total lia b ilitie s ....................................................................

387,172
9,577
$3,549,469

384,021
35,081
$3,373,582

CAPITAL ACCOUNTS
Capital paid i n ................ ........................................................
Surplus .....................................................................................
Total liabilities and capital acco u n ts............................

$ 29,546
29,546
$3,608,561

$

(000’s omitted in dollar figures)

Ratio of gold certificate reserves to Federal Reserve note
liability .....................................................................................




39.3%

29,114
29,114
$3,431,810
40.7%

25

E A R N IN G S A N D E X P E N S E S
Federal R eserve B ank o f Philadelphia
1965

1964

Earnings from:
United States Government s e c u ritie s ..........................................
Other s o u rc e s .....................................................................................
Total current earnings ................................................................

$79,596
1,318
$80,914

$71,095
600
$71,695

Net expenses:
Operating expenses* .......................................................................
Cost of Federal Reserve c u rre n c y .................................................
Assessment for expenses of Board of G overnors........................
Total net expenses .......................................................................

8,571
1,348
473
$10,392

8,577
891
483
$ 9,951

Current net e a rn in g s ..............................................................................

70,522

61,744

(000’s omitted)

Additions to current net earnings:
Profit on sales of U.S. Government securities ( n e t ) ...................
All other ...............................................................................................
Total additions ..............................................................................
Deductions from current net earnings:
Loss on sales of U.S. Government securities (n e t).....................
Miscellaneous non-operating expe nses........................................
Total d ed u ction s............................................................................

$

59
59

$

—

(a)
5
$

5

33
32
65

1
$

1

Net additions ..........................................................................................

54

64

Net earnings before payments to U.S. T re a s u ry ............................

$70,576

$61,808

Dividends paid ........................................................................................
Paid to U.S. Treasury (interest on Federal Reserve n o te s ).........

$ 1,753
68,392

$ 1,716
86,224

Transferred to or deducted from (— ) S u rp lu s................

$

* After deducting reimbursable or recoverable expenses,
(a)Less than $1 thousand, rounded.

26

—




431

$-26,132

V O L U M E O F O P E R A T IO N S
Federal R eserve B ank o f Philadelphia
Number of pieces (000’s omitted)
Collections:
Ordinary ch e c k s * ...........................................................
Government checks (paper and c a r d ) .....................
Postal money orders ( c a r d ) ........................................
Non-cash items .............................................................
Food stamp c o u p o n s ....................................................
Clearing operations in connection with direct sendings
and wire and group clearing plans** ........................
Transfers of f u n d s .............................................................
Currency co u n te d ................................................................
Coins counted .....................................................................
Discounts and advances to member b a n k s...................
Depositary receipts for withheld ta x e s ..........................
Postal receipts (remittances) ........................................
Fiscal agency activities:
Marketable securities delivered or redeemed . . . .
Savings bond transactions—
(Federal Reserve Bank and agents)
Issues (including re issue s)......................................
Redemptions .............................................................
Coupons redeemed (Government and agencies) . . . .
Dollar amounts (000,000’s omitted)
Collections:
Ordinary c h e c k s .............................................................
Government checks (paper and c a r d ) ........................
Postal money orders (card) ........................................
Non-cash items .............................................................
Food stamp c o u p o n s ....................................................
Clearing operations in connection with direct sendings
and wire and group clearing plans** .....................
Transfers of fu n d s .............................................................
Currency counted .............................................................
Coins counted ............................... .................................
Discounts and advances to member b a n k s ................
D e p o s ita ry re c e ip ts fo r w ith h e ld t a x e s ...............................

Postal receipts (rem ittances)..........................................
Fiscal agency activities:
Marketable securities delivered or redeemed . . . .
Savings bond transactions—
(Federal Reserve Bank and agents)
Issues (including reissues) ...................................
Redemptions .............................................................
Coupons redeemed (Government and agencies) . . . .

1965

1964

1963

262,900
29,500
17,800
836
3,685

244,500
28,700
17,200
863
3,572

215,700
28,800
15,200
835
3,699

679
208
268,400
159,400
1
609
286

702
193
269,600
136,800
606
309

704
178
274,100
346,700
1
586
308

538

539

421

8,867
6,745
1,074

8,759
6,334
1,141

8,436
6,311
1,163

$ 79,445
6,004
246
563
5

$ 72,735
6,097
247
239
5

$ 68,600
6,259
261
185
5

47,649
167,181
2,003

44,770
134,480
1,987

41,031
123,253
1,935

1

12

21

44

2,086
2,593
891

863
2,522
931

1,192
2,605

13,845

14,486

13,745

431
362
225

444

444

346
146

344
175

888

‘ Checks handled in sealed packages counted as units.
** Debit and credit items.




27

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