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r ~\ (0 (0 0) > D C cd "0 Business Review cd _a 0 "0 The Federal Reserve in the “ New Economy” _cd Is the Money Supply All That Matters? Z CL 1965: A Sea-Change M— 0 a : c cd CO 0 > i_ 0 CO 0 IT ~cd L_ 0 "O 0 LL V____ J 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