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1960 FEDERAL RESER VE ANNUAL REPORT BANK OF R IC H M O N D FEDERAL RESERVE B A N K OF RICH M OND A N N U A L REPORT 1960 To the Member Banks: We are pleased to present the Annual Report of the Federal Reserve Bank of Richmond for the year 1960. This year's report features the entire Federal Reserve System—its objectives, its structure, its policy tools, and its monetary policy actions during the past year. We hope that this presentation will help clarify the Federal Reserve's role as the nation's central bank, and that it will contribute to a better understanding of what the exercise of the System's monetary and credit powers may reasonably be expected to accomplish. In ad dition, the report contains a summary of Fifth District operations, a current list of officers and directors, and comparative financial statements. On behalf of the directors and staff, we wish to express our appreciation for your cooperation and support throughout the year. Very truly yours, Chairman of the Board President C O N T E N T S The Federal Reserve at W o r k ................................. 4 System Policy O b je c t iv e s ................................. 4 Structure of the Federal Reserve System . . 5 Service F u n ctio n s..................................................7 System Influence on Economic Activity . . . 9 Impact of Monetary P o lic y ................................. 11 The Policy-Making P r o c e s s ................................. 15 Federal Reserve Policy in 1960 ...................... 17 Limitations and Advantages of Monetary P o l i c y ............................................ 22 Summary of Operations— 1 9 6 0 ..................... Comparative Statement of Condition . . . . 26 28 Comparative Statement of Earnings and E x p e n s e s ..........................................29 Directors and Officers— R ic h m o n d .................30 Directors and Officers— B a lt im o r e .................32 Directors and Officers— C h a r lo t t e .................32 THE FEDERAL RESERVE A T W O R K THE FEDERAL RESERVE A T W O R K “Federal Reserve Cuts Bank Rate To Spur Lending” “Fed Cuts Stock Margin Requirement to 70 PC” “ Vault Cash Added To Reserves” “Fed Security Purchases Boost Bank Free Funds” T h e s e c a p t io n s f r o m le a d in g New Y o rk 1 9 6 0 is s u e s o f n e w sp a p e rs c le a r ly s h o w th e F e d e ra l R e s e rv e o fte n m a d e b ig n e w s in 1 9 6 0 . n u m e rou s " W h a t is th e 'F e d '? " e s t a b lis h p o lic y ?" " W h a t d o e s it d o ? " "W h a t a re its a i m s ? " The "b ig q u e s t io n s " H o w d o its a c t io n s a ffe c t th e e c o n o m y ? " "H o w n e w s " b ro u g h t fro m th e "H o w e ffe c tiv e ly c a n it a c c o m p lis h its o b j e c t iv e s ? " p u b lic . does it A n sw e rs to th e se q u e s t io n s lie a t th e h e a r t o f o u r n a t io n 's f in a n c ia l m e c h a n is m . S Y S T E M POLICY O B JE C TIV E S T h e F e d e ra l R e s e rv e S y s t e m is th e n a t io n 's ce n tra l b a n k . L ike o t h e r ce n tra l b a n k s t h r o u g h o u t th e w o r ld , its c h ie f r e s p o n s ib ilit y is to r e g u la t e th e f lo w o f m o n e y a n d c re d it in o r d e r to p ro m o t e e c o n o m ic s t a b ilit y a n d g r o w t h . It a ls o p e r f o r m s m a n y s e rv ic e f u n c t io n s f o r c o m m e rc ia l b a n k s , th e T r e a s u r y , a n d th e p u b lic . Its p o lic y is a im e d a t p r o v i d i n g m o n e t a r y c o n d it io n s f a v o r a b l e to th e r e a liz a t io n o f th re e o b je c tive s: a h ig h le v e l o f e m p lo y m e n t , s t a b ilit y in th e o v e r - a ll p ric e le vel, a n d a n e n v ir o n m e n t g e a r e d to a g r o w in g e co n o m y. A ll Sy ste m p o lic y a c t io n s a r e c o n d u c te d w it h a ll th re e g o a l s in m in d e v e n t h o u g h b u s in e s s d e v e lo p m e n t s a t tim e s a lt e r th e re la t iv e u r g e n c y o f th e th re e. P o lic ie s o f re s t r a in t a n d e a s e a re b u t t w o p h a s e s o f S y s t e m e ffo rt s to a c h ie v e th e se th re e a im s . T h e th re e u lt im a te g o a l s e m p lo y m e n t a n n e ss p ra c tic e s econom y can becom e o f Sy ste m p o lic y a r e n e ith e r r e m a in w a s t e f u l; e c o n o m ic c o lla p s e m a y d e v e lo p . s p e c u la t io n in te rre la t e d p ro sp e ro u s re p la c e s and nor gro w . p r o d u c t iv e a c tiv ity ; p e rsis te n t and W it h o u t h ig h in fla t io n , b u s i e x ce sse s le a d in g to F in a lly , h ig h e m p lo y m e n t a n d a s t a b le p ric e le v e l p r o m o t e th e k in d o f s a v i n g s , in c e n tiv e s, a n d e n t e r p r is e n e e d e d f o r e c o n o m ic g r o w t h . 4 in te rd e p e n d e n t . W it h H e nce , S y s t e m p o lic ie s d e s ig n e d to m a in t a in h ig h e m p lo y m e n t a n d fo s te r p ric e s t a b ilit y a ls o p ro d u c e a m o n e ta ry e n v ir o n m e n t con d u c iv e to lo n g -t e r m g r o w t h . S T R U C T U R E OF TH E F E D E R A L R E S E R V E S Y S T E M T h e S y s t e m h a s s e v e r a l im p o r t a n t p a rts: m e m b e r b a n k s , th e F e d e ra l R e s e rv e B a n k s , th e B o a r d of G o v e r n o r s , th e F e d e ra l O p e n M a r k e t C o m m itte e , a n d th e F e d e ra l A d v i s o r y C o u n c il. MEMBER BANKS A t th e b a s e o f th e F e d e ra l R e s e rv e p y r a m id a r e th e S y s t e m 's 6 , 2 0 0 m e m b e r b a n k s . A l l n a t io n a l b a n k s m u s t b e m e m b e r s , a n d S ta te b a n k s m ay jo in if t h e y m e e t c e rt a in re q u ire m e n ts . M e m b e r b a n k s h o ld n e a r ly 8 5 p e r ce nt o f a ll c o m m e r c ia l b a n k a s s e t s a n d d e p o s it s a lt h o u g h le ss th a n h a lf th e n a t io n 's c o m m e r c ia l b a n k s b e lo n g to th e S y s te m . T h e re a r e th re e c la s s if ic a t io n s o f m e m b e r b a n k s . T h e la r g e r N e w Y o r k a n d C h ic a g o b a n k s a re c a lle d ce n tra l r e s e rv e city b a n k s , m o s t m e m b e r b a n k s in 4 9 o t h e r citie s a r e c la s s if ie d a s re s e rv e city b a n k s , a n d a ll o t h e r b a n k s a r e c a lle d c o u n t r y b a n k s . M e m b e rs h ip conveys m a n y p r iv ile g e s b u t a ls o in v o lv e s o b lig a t io n s . O b lig a t io n s in c lu d e : h o ld i n g s p e c if ie d r e s e rv e s a g a i n s t d e p o s its ; s u b s c r ib in g to c a p it a l sto c k o f th e d istrict F e d e ra l R e s e rv e B a n k ; c o m p ly in g w it h v a r io u s r e q u ir e m e n t s o f F e d e ra l b a n k i n g la w ; c o m p le t in g n e c e ssa ry Sy ste m re p o rts; a n d in th e c a s e o f S t a t e m e m b e r b a n k s , b e in g e x a m in e d a n d s u p e r v is e d b y th e F e d e ra l R e s e rv e B a n k s . A m o n g th e m o r e im p o r t a n t a d v a n t a g e s a b a n k re c e iv e s f r o m S y s t e m m e m b e r s h ip a r e th e p re st ig e o f b e in g a m e m b e r b a n k a n d th e p r iv ile g e s o f b o r r o w i n g u n d e r c e rt a in c o n d it io n s f r o m th e F e d e ra l R e s e r v e B a n k s , u s in g S y s t e m c h e c k c o lle c tio n a n d w ir e t r a n s f e r fa c ilitie s, o b t a in in g c u r r e n c y a n d co in fre e o f t r a n s p o r t a t io n co sts, r e c e iv in g a n a n n u a l c u m u la t iv e 6 p e r ce n t d iv id e n d o n its F e d e r a l R e s e rv e B a n k sto ck, v o t in g in th e e le c tio n o f s ix o f th e n in e d ir e c to rs o f th e d istric t F e d e ra l R e s e rv e B a n k , a n d re q u e s t in g in f o r m a t io n a n d r e c e iv in g a i d o n v a r io u s p r o b le m s f r o m th e F e d e r a l R e s e rv e sta ff. FEDERAL RESERVE BANKS F e d e ra l R e s e rv e B a n k . th e d istricts. T h e c o u n t r y is d iv id e d in to t w e lv e F e d e ra l R e s e rv e d istric ts— e a c h w it h a T h e re a r e a ls o 2 4 F e d e ra l R e s e rv e B a n k b r a n c h e s s e r v i n g p a r t ic u la r a r e a s w it h in C itie s w it h F e d e r a l R e s e rv e h e a d o f fic e s a re : B o sto n , N e w Y o r k , P h ila d e lp h ia , C le v e la n d , R ic h m o n d , A t la n t a , C h ic a g o , St. L o u is, M in n e a p o lis , K a n s a s C ity , D a lla s , a n d S a n F ra n c isc o . Th e se 3 6 R e s e r v e B a n k o ffic e s c o m p r is e th e s e c o n d le v e l o f th e p y r a m id . T h e c o r p o r a t e s tru c tu re o f F e d e ra l R e s e rv e B a n k s r e s e m b le s t h a t o f c o m m e r c ia l b a n k s . c a p it a l sto ck, h a v e b o a r d s o f d ire c to rs w h o elect th e ir o ffic e rs, h a v e d e p a rt m e n ts , a n d o b t a in t h e ir e a r n i n g s A l l iss u e m a n y s im ila r o f f ic ia l titles a n d la r g e ly f r o m in te re st o n lo a n s a n d in v e s tm e n t s . T h e re a r e th re e m a in d iffe re n c e s , h o w e v e r , s t e m m in g f r o m th e R e s e rv e B a n k s ' r e s p o n s ib ilit ie s to th e p u b lic . First, th e p o w e r s o f R e s e rv e B a n k d ir e c to rs d if f e r c o n s id e r a b l y f r o m b a n k d ire c to rs. Second, R e se rve B a n k s a re th o s e o f c o m m e rc ia l n o t p ro f it -m o t iv a t e d , a lt h o u g h t h e y d o e a r n la r g e p ro fits. E x p e n s e s a n d m e m b e r b a n k d iv i d e n d s a b s o r b s o m e e a r n in g s , b u t m o s t a r e t u r n e d o v e r to th e U. S. T r e a s u r y a s " in t e r e s t " o n F e d e ra l R e s e rv e note s. to th e T r e a s u r y r a n $ 8 9 7 , 0 0 0 , 0 0 0 . In 1 9 6 0 d iv i d e n d s to ta le d $ 2 4 , 0 0 0 , 0 0 0 , a n d p a y m e n t s T h ird , if th e R e s e rv e B a n k s s h o u ld e v e r b e liq u id a t e d , th e F e d e ra l G o v e r n m e n t w o u ld re c e iv e a n y a s s e t s r e m a in in g a f t e r th e sto c k w a s p a id o f f a t p a r . E a c h R e s e rv e B a n k h a s th re e C la s s A d ire c to rs, th re e C la s s B d ire c to rs, a n d th r e e C la s s C d ire c to rs. M e m b e r b a n k s elect b o t h C la s s A a n d C la s s B d ire c to rs b y re s e n t a t iv e s o f th e m e m b e r b a n k s t o c k h o ld e r s a n d u s u a l ly a r e b a llo t. m u s t b e a c t iv e ly e n g a g e d in a g r ic u lt u r e , in d u s t r y , o r c o m m e rc e a n d d ire c to rs, o r e m p lo y e e s . T h o se c o m m e rc ia l in C la s s A b a n k e rs. m ust be C la s s re p B d ire c to rs m a y n o t b e e ith e r b a n k o ffic e rs, C la s s C d ire c to rs — o n e o f w h o m is d e s ig n a t e d a s c h a ir m a n a n d o n e a s d e p u t y 5 c h a ir m a n o f th e b o a r d — a r e a p p o in t e d b y th e B o a r d o f G o v e r n o r s . A C la s s C d ir e c to r m a y b e n e ith e r a d ire c to r, o ffic e r, e m p lo y e e , n o r s t o c k h o ld e r o f a n y b a n k . In a d d it io n to th e ir r e g u l a r d u t ie s in o v e r s e e in g th e o p e r a t io n s o f th e R e s e rv e B a n k s , th e b o a r d s o f d ire c to rs a l s o h a v e c e rt a in d u tie s p o lic y . in th e fie ld of m o n e ta ry First, t h e y e s ta b lis h , su b je c t to th e a p p r o v a l o f th e B o a r d d is c o u n t ra t e s ch a rg e on b an ks. Second, o f G o v e r n o r s , th e F e d e ra l sh o rt-te rm th e y R e s e rv e lo a n s elect to Banks m em ber fo u r of th e p r e s id e n t s o f th e F e d e ra l R e s e rv e B a n k s to se rve M a rke t as m em b e rs of C o m m itte e . th e F e d e ra l T h ird , th e y Open p r o v id e th e R e s e rv e B a n k p re s id e n t s a n d th e B o a r d o f G o v e r n o r s w it h a n in v a lu a b le s o u rc e o f " g r a s s r o o t s " in f o r m a t io n o n d istric t b u s i n e s s c o n d it io n s. BOARD OF GOVERNORS A t th e p e a k o f th e p y r a m i d is th e B o a r d o f G o v e r n o r s in W a sh in g t o n . a p p o in t e d S t a t e s w it h th e a d v ic e a n d c o n s e n t o f th e S e n a te . B o a r d m e m b e r s a r e a p p o in t e d f o r f o u r t e e n - y e a r te rm s a n d a r e in e lig ib le f o r r e a p p o in t m e n t a ft e r h a v i n g m a y c o m e f r o m th e s a m e F e d e ra l R e s e rv e d istrict. It c o n sis ts o f s e v e n m e m b e r s b y th e P re sid e n t o f th e U n ite d s e r v e d a fu ll te rm . N o tw o B o a rd m em b e rs T h e C h a i r m a n a n d V ic e C h a i r m a n o f th e B o a r d a r e a p p o in t e d b y th e P re s id e n t o f th e U n ite d S t a t e s fr o m a m o n g th e B o a r d m e m b e r s f o r a f o u r - y e a r te rm a n d c a n b e r e a p p o in t e d . O n e o f th e B o a r d 's im p o r t a n t d u tie s is s u p e r v is io n . T h e B o a r d m u s t a p p r o v e th e s a la r i e s o f a ll R e s e rv e B a n k p e r s o n n e l, th e a p p o in t m e n t o f R e s e rv e B a n k p r e s id e n t s a n d fir st v ic e p re sid e n ts , a n d th e b u d g e t s o f R e s e rv e B a n k s . c o m p lia n c e w it h T h e B o a r d a ls o e x a m in e s R e s e rv e B a n k s a n d b r a n c h e s e a c h y e a r to e n s u r e r e g u la t io n s a n d e c o n o m ic r e s e a r c h a n d d ata p r o p e r c o n tro l o f e x p e n d it u r e s . c o lle c tio n a n d In a d d it io n , it c o o r d in a t e s S y s t e m r e v ie w s a ll S y s t e m p u b lic a t io n s . e s t a b lis h m e n t o f c e rta in m e m b e r b a n k b r a n c h e s , s o m e bank m e rg e rs, a n d It m u s t a ls o a p p r o v e th e c e rta in o t h e r c o m m e r c ia l b a n k a c tio n s. T h e B o a r d 's p r im e fu n c tio n , h o w e v e r , is th e f o r m u la t io n o f m o n e t a r y p o lic y . In a d d it io n to p a s s i n g u p o n p r o p o s e d c h a n g e s in th e d is c o u n t ra te , it h a s a u t h o r it y to c h a n g e m e m b e r b a n k r e s e r v e r e q u ir e m e n t s w it h in s p e c if ie d lim its, to se t m a r g i n r e q u ir e m e n t s f o r th e f i n a n c i n g n a t io n a l s e c u rity e x c h a n g e s , a n d to se t m a x im u m p o sits. Even o f s e c u ritie s t r a d e d on m e m b e r b a n k s 7 tim e d e p a r t ic ip a t e in th e f o r m u la t io n a n d a d m in is t r a t io n o f o p e n m a r k e t p o lic y . FEDERAL OPEN MARKET COMMITTEE ta n t p o lic y - m a k in g on m o re im p o r t a n t , m e m b e r s o f th e B o a r d o f G o v e r n o r s a r e a ls o m e m b e r s o f th e F e d e ra l O p e n M a r k e t C o m m itt e e a n d 6 in te re st ra t e s p a y a b l e b o d y — is c o m p o s e d T h e F e d e ra l O p e n M a r k e t C o m m it t e e — th e S y s t e m 's m o s t i m p o r o f th e s e v e n m e m b e r s o f th e B o a r d p lu s th e p r e s id e n t o f th e N e w Y o r k F e d e ra l R e s e rv e B a n k a n d f o u r o t h e r R e s e rv e Bank p re sid e n ts . Its m a in r e s p o n s ib ilit y is to e s t a b lis h S y s t e m open m a r k e t p o lic y — th e e x te n t to w h ic h th e S y s te m b u y s a n d se lls G o v e r n m e n t a n d o th e r se c u ritie s. It o r d i n a r i l y m e e ts e v e r y th re e w e e k s b u t s o m e t im e s m o r e o fte n . T h e C o m m it t e e 's p u r c h a s e s a n d s a le s a r e c o n d u c te d b y th e " T r a d i n g D e s k " o f the N e w Y o r k R e s e rv e B a n k . G o v e rn m e n t se c u ritie s b o u g h t o u t r ig h t a r e t h e n p ro r a t e d a m o n g th e t w e lv e R e s e rv e B a n k s a c c o r d in g to a f o r m u la b a s e d o n B a n k size. OTHER COMMITTEES Se ve ral o th e r c o m m itte e s a ls o p l a y s ig n if ic a n t ro le s in S y s te m o p e r a t io n s . One is th e t w e lv e - m a n Fed e r a l A d v i s o r y C o u n c il c o m p o s e d o f b a n k e r s , o n e fr o m e a c h o f th e F e d e r a l R e s e rv e d is tricts. M e m b e r s a r e e le cte d b y th e b o a r d s o f d ire c to rs o f th e R e s e r v e B a n k s o f th e ir d istricts. T h e C o u n c il m e e ts in W a s h i n g to n tim e s fo u r a year and a d v is e s the B o a r d o n im p o r t a n t c u r re n t d e v e lo p m e n t s . T h e C o n f e r e n c e o f P re s id e n t s a n d the C o n fe r e n c e o f C h a ir m e n a ls o m e e t p e r io d ic a lly to d is c u s s Syste m c o m m itte e s c o n t in u o u s ly s t u d y S y s t e m Syste m p ro b le m s . In a d d it io n , se ve ra l o th e r o p e r a t io n s a n d p o lic y p ro b le m s . S Y S T E M S E R V IC E F U N C T IO N S L ike m o s t o t h e r c e n tra l b a n k s , th e F e d e ra l R e s e r v e p e r f o r m s m a n y s e rv ic e fu n c t io n s f o r the p u b lic, th e T r e a s u r y , a n d c o m m e r c ia l b a n k s . FISCAL A G EN CY FUNCTIONS a ge n ts. T h e t w e lv e F e d e ra l R e s e r v e B a n k s a ct a s th e G o v e r n m e n t 's p r in c ip a l fis c a l T h e y h o ld th e T r e a s u r y 's c h e c k in g a c c o u n ts , re c e iv e a p p lic a t io n s fr o m th e p u b lic f o r th e p u r c h a s e o f s e c u ritie s b e in g s o ld b y th e T r e a s u r y , a llo t s e c u ritie s a m o n g b id d e r s , d e liv e r se c u ritie s, collect fro m s e c u rity b u y e r s , r e d e e m se cu ritie s, w ir e - t r a n s f e r se c u ritie s to o t h e r cities, m a k e d e n o m in a t io n a l e x c h a n g e s o f se cu ritie s, p a y in te re st c o u p o n s , a n d a s s is t th e T r e a s u r y a n d o t h e r G o v e r n m e n t a g e n c ie s in m a n y other w a y s. T h e R e s e rv e B a n k s re c e iv e n o c o m p e n s a t io n f o r h a n d l in g th e T r e a s u r y 's c h e c k in g a c c o u n ts a n d r e d e e m in g its c o u p o n s , b u t t h e y a r e r e im b u r s e d f o r m o st o f th e o t h e r f is c a l a g e n c y w o r k t h e y p e r fo rm . D u r in g 1 9 6 0 th e S y s t e m h a n d l e d f o r th e T r e a s u r y a b o u t 1 9 8 m illio n G o v e r n m e n t s e c u ritie s v a l u e d a t $ 5 2 7 b illio n . COLLECTION OF CHECKS A N D N O N CA SH ITEMS q u a n t it ie s o f b a n k c h e c k s a n d a n d b o n d co u p o n s. D u r i n g 1 9 6 0 th e S y s t e m p r o c e s s e d o v e r 4 b illio n c h e c k s t o t a lin g m o r e th a n $ 1 .3 t rillio n a n d a lm o s t 3 8 m illio n n o n c a s h F e d e r a l R e s e rv e B a n k s a ls o co lle ct f o r th e p u b lic v a s t s u b s t a n t ia l a m o u n t s o f n o n c a s h ite m s su c h a s d ra ft s, p r o m is s o r y notes, ite m s v a l u e d a t c lo se to $ 1 1 b illio n . 7 WIRE TRANSFER OF FUNDS ta te s p aym e n ts by T h e S y s t e m a ls o f a c ili m a k in g a v a ila b le to m em ber b a n k s a w ir e s e r v ic e th a t c a n b e u s e d to t r a n s f e r f u n d s q u ic k ly f r o m othe r. o n e p a r t o f th e c o u n t r y to a n F o r e x a m p le , a R ic h m o n d b u y e r w is h i n g to pay a New Y o r k s e lle r th e s a m e d a y c a n h a v e a m e m b e r b a n k re q u e s t th e R ic h m o n d R e s e rv e B a n k to t r a n s f e r th e f u n d s to th e s e lle r 's b a n k . T h e R ic h m o n d F e d e ra l R e s e rv e B a n k d e d u c t s th e f u n d s f r o m its m e m b e r 's re s e rv e a c c o u n t, a n d th e New Y o rk F e d e ra l R e s e rv e B a n k c re d its th e re s e rv e a c c o u n t o f th e N e w Y o r k m e m b e r b a n k s o th a t it in tu r n c a n c re d it th e s e lle r 's d e p o sit. T h e t w o R e s e rv e B a n k s th e n settle b y w ir e a t the e n d o f th e d a y t h r o u g h th e Syste m c le a r in g a g e n c y — th e In te rd istric t Se ttle m e n t F u n d in W a s h in g t o n . D u r in g 1 9 6 0 th e S y s t e m m a d e a lm o s t 3 m illio n w ir e t r a n s f e r s to t a lin g a b o u t $ 2 . 4 trillio n . HANDLING OF CURRENCY A N D CO IN T h e F e d e ra l R e s e rv e B a n k s a r e th e c h a n n e ls t h r o u g h w h ic h p r a c tic a lly a ll c a s h m o v e s in to a n d o u t o f c irc u la tio n . W h e n th e p u b lic w it h d r a w s c a s h fr o m c o m m e rc ia l b a n k s , th e b a n k s r e p le n is h th e ir s u p p ly b y o b t a i n i n g s h ip m e n t s fr o m th e R e s e rv e B a n k s . A s th e p u b lic 's re tu rn need fo r ca sh s u r p lu s m o n e y a n d a c c o u n ts. c o u n te d D u r in g ta p e rs off, banks th e ir re c e iv e c re d its to th e ir r e s e rv e 1960 o v e r 1 4 m illio n th e Syste m b ills a n d re c e iv e d and c o in s v a l u e d at n e a r ly $ 3 3 b illio n . NOTE ISSUE A p p r o x im a t e l y n a t io n 's " p o c k e t 85 per m o n e y " is is s u e d by ce n t th e of th e F e d e ra l R e s e rv e B a n k s in th e f o r m o f F e d e ra l R e s e rv e n ote s. W h e n a F e d e ra l R e s e rv e B a n k n e e d s m o re c u r r e n c y to m e e t th e d e m a n d s o f its m e m b e r b a n k s , it c a n o b t a in F e d e ra l R e s e rv e n o te s b y p le d g i n g g o ld c e r tific a te s e q u a l to a t le a st 2 5 p e r cent o f th e v a l u e o f th e n o te s a n d th e b a la n c e in G o v e r n m e n t s e c u r i tie s o r " e l i g i b l e " p a p e r . C o n v e r s e ly , R e s e rv e B a n k s c a n re tire th e ir n o te s a n d r e c o v e r th e ir p le d g e d g o ld ce rtific a te s a n d s e c u ritie s b y r e t u r n in g th e n o te s f o r c a n c e lla t io n w h e n th e d e m a n d f o r c u r re n c y d e c lin e s. OTHER SERVICE FUNCTIONS T h e R e s e rv e B a n k s a n d th e B o a r d ty p e s 8 of o f G o v e r n o r s a ls o s e rv ic e fu n c t io n s p r o v id e su c h as m any o th e r a n s w e rin g re q u e sts; d is t r ib u t in g oth e r m o n t h ly p u b lic a t io n s ; b u s in e s s e x a m in in g r e v ie w s b an ks; s p e a k e r s f o r v a r io u s o c c a s io n s ; a n d and p r o v id in g upon re q u e st, a s s is t in g b a n k s in s o lv i n g p ro b le m s . H O W D O E S TH E S Y S T E M IN F LU E N C E E C O N O M IC A C T IV IT Y ? Syste m a ff e c t in g p o lic y o p e ra te s th e a v a i l a b i l i t y of p r im a r ily bank th ro u gh c re d it a n d th e m o n e y s u p p l y a n d t h e r e b y th e v o lu m e o f s p e n d in g . W h ile th e in itia l im p a c t is fe lt b y th e c o m m e rc ia l b a n k i n g sy st e m , e ffe cts o f m o n e t a r y p o lic y s p r e a d t h r o u g h o u t th e n a t io n 's e n tire f in a n c ia l m e c h a n is m b e c a u s e o f th e c e n tra l ro le p la y e d b y c o m m e rc ia l b a n k s in m a jo r lo a n a n d s e c u ritie s m a rk e ts. W HY COMMERCIAL BANKS ARE DIFFERENT Com m e r c ia l b a n k s p l a y a k e y ro le in m o n e t a r y p o lic y b ecau se th e y a lo n e am ong can "c re a te " n e w m oney. f in a n c ia l in stitu tio n s O t h e r f in a n c ia l in stitu tio n s m e r e ly t r a n s f e r e x is t in g m o n e y to b o r r o w e r s w h e n th e y m a k e lo a n s o r in v e s tm e n t s . T h e c o m m e rc ia l b a n k i n g s y ste m , h o w e v e r , c a n in c re a s e the m o n e y s u p p ly b y p a y i n g o u t c a s h o r s e ttin g u p n e w d e m a n d d e p o s it s w h e n it e x p a n d s its e a r n in g a sse ts. Dem and d e p o s it s a re by fa r th e m o re im p o r t a n t o f th e tw o , c o n st itu t in g 8 5 p e r ce n t o f the total a n d a c c o u n t in g f o r a b o u t 9 0 p e r ce n t o f a ll p a y m e n t s . Of c o u rse , not e v e ry in c r e a s e in c o m m e rc ia l b a n k e a r n i n g a s s e t s re su lts in a n e q u a l rise in th e p r iv a t e ly - h e ld m oney s u p p l y — th a t p o rt io n of m a n d d e p o s it s a n d c a s h h e ld b y th e p u b lic . de Som e tim e s o t h e r t y p e s o f d e p o s it s su c h a s tim e, G o v e r n m e n t, o r in t e r b a n k ris e in st e a d . G e n e r a lly , how e v e r, a n e x p a n s i o n in b a n k e a r n i n g a s s e t s in c re a s e s th e p r iv a t e ly - h e ld m o n e y s u p p ly . H e r e 's h o w th e p ro c e s s o f m o n e y c re a tio n w o r k s . A s s u m e t h a t th e F e d e ra l R e s e rv e b u y s G o v e r n m e n t s e c u ritie s f r o m a d e a le r , c r e d itin g th e re s e rv e a c c o u n t o f th e d e a le r 's b a n k in p a y m e n t . S in c e c o m m e r c ia l b a n k s a r e p ro f it-m o t iv a te d , th a t b a n k w ill th e n p r o b a b l y u s e its n e w re s e rv e f u n d s to e x p a n d e a r n i n g a sse ts. W h e t h e r it m a k e s lo a n s o r in v e s t- 9 m en ts, d e p o s its o r c a s h o u t s id e b a n k s w ill in c re a s e . If th e b a n k m a k e s lo a n s , it w ill p r o b a b l y cre a te th e n e w m o n e y b y c r e d it in g its b o r r o w e r s 7 d e m a n d d e p o sits. If it p u r c h a s e s se cu ritie s, d e p o s it s w ill rise w h e n th e s e c u rity d e a le r d e p o s it s th e f u n d s re c e iv e d fr o m the b a n k . If th e se n e w d e p o s it s a r e c h e c k e d o u t to o t h e r b a n k s , re s e rv e s o f th e se b a n k s w ill in c r e a s e a n d th o se o f th e d e a le r 's b a n k w ill d e c re a se . T h e b a n k s h o l d in g th e se n e w d e p o s it s m u s t th e n se t a s id e p a r t o f th e ir n e w re s e r v e s to m e e t r e s e rv e r e q u ir e m e n t s a g a i n s t th e ir a d d it io n a l d e p o s it s b u t w ill b e a b le to lo a n o r in v e s t a p p r o x i m a t e l y th e r e m a in in g a m o u n t . A s the y, too, e x p a n d e a r n i n g a sse ts, d e p o s it s a n d p o s s ib ly p u b lic c a s h h o l d in g s w ill rise still fu rth e r. A n o th e r p art of th e new re se rve s w ill be u s e d to m e e t r e s e r v e re q u ir e m e n t s a g a i n s t th e se a d d it io n a l d e p o sits, b u t s o m e e x c e s s re s e r v e s w ill still b e a v a i l a b l e f o r fu r t h e r lo a n o r in v e s tm e n t e x p a n s io n . rise to th e p o in t th a t b a n k s m u s t u s e a ll th e new E v e n tu a lly , the p ro c e s s e n d s w h e n r e s e rv e s in m e e t in g re se rve d e p o s its re q u ir e m e n ts . By th is tim e, h o w e v e r , d e p o s it s w ill h a v e in c r e a s e d b y s e v e r a l tim e s th e o r ig in a l a d d it io n to b a n k re se rv e s. THE KEY ROLE OF M O N EY f o r g o o d s a n d se rv ic e s . M o n e y is u n iq u e in th a t n o t h in g e lse is g e n e r a lly a c c e p t a b le in paym ent O t h e r a s s e t s s u c h a s s a v i n g s d e p o s its , s h o rt-te rm T r e a s u r y se cu ritie s, a n d s a v in g s a n d lo a n s h a r e s s o c lo s e ly r e s e m b le m o n e y t h a t t h e y o fte n p e r fo rm s o m e o f th e f u n c t io n s o f m o n e y . N e v e rt h e le s s , su c h a s s e t s c a n n o t b e s p e n t d ire c tly . T h e y m u st first b e c o n v e rt e d in to m o n e y if a h o ld e r is to b u y s o m e t h in g in p la c e o f th e m . R is in g e c o n o m ic a c t iv it y in v o lv e s in c r e a s in g e x p e n d it u r e s , a n d r is in g e x p e n d it u r e s re q u ir e e ith e r a d d it io n a l m o n e y o r a h ig h e r m o n e t a r y v e lo c it y — th e ra te a t w h ic h m o n e y is s p e n t o n g o o d s a n d s e r v ices. If e x p e n d it u r e s f in a n c e d w it h e ith e r n e w m o n e y o r r is in g v e lo c it y in c re a s e fa s t e r t h a n th e f lo w of good s a n d se rv ic e s , in f la t io n in s u ffic ie n t to p r e v e n t re c e ssio n . re su lts. If e x p e n d it u r e s d o n o t k e e p p a c e w it h th e flo w , d e m a n d is T h u s, a s o u n d e c o n o m y re q u ir e s th e " r i g h t " S in c e m o n e y p la y s s u c h a k e y ro le in th e s p e n d in g a m o u n t o f s p e n d in g . p ro c e ss, it is e s se n tia l th a t th e b a n k in g sy ste m cre a te n e ith e r to o m u c h n o r to o little n e w m o n e y . THE IMPORTANCE OF BANK RESERVES To a la r g e exte n t, c h a n g e s in th e v o lu m e o f b a n k d e t e rm in e th e a m o u n t o f m o n e y b a n k s c a n crea te. to a c q u ir e a d d it io n a l e a r n i n g a sse ts, w h ic h re s e rv e s W h e n r e s e rv e s in c re a se , b a n k s h a v e a n in c e n tiv e e x p a n d s d e p o s it s o r c a s h o u t s id e ban ks. C o n v e r s e ly , a re d u c tio n in r e s e r v e s u s u a l ly fo rc e s b a n k s to cu t b a c k lo a n s a n d / o r in v e s tm e n ts , t h e r e b y r e d u c in g d e p o sits a n d c a s h o u t s id e b a n k s . T h e e x te n t to w h ic h b a n k s c a n e x p a n d th e p r iv a t e ly - h e ld m o n e y s u p p l y o n th e b a s is o f n e w re s e r v e s v a r ie s a c c o r d in g to a n u m b e r o f fa c to rs. N o r m a lly , th e lo w e r th e re se rve la r g e r th e e x p a n s i o n s in c e le ss r e s e rv e s a r e r e q u ir e d f o r e a c h d o lla r o f d e p o s its . m o n e y " e x p a n d s , th e s m a lle r th e in c r e a s e s in c e b a n k s m u s t d r a w th e ir c u sto m e rs. dow n re q u ir e m e n ts , th e T h e m o re " p o c k e t r e s e rv e s to o b t a in c a s h f o r C h a n g e s in th e v o lu m e o f d e p o s it s th a t a r e n ot p a r t o f th e p r iv a t e m o n e y s u p p l y - in te rb a n k , G o v e r n m e n t , a n d tim e d e p o s it s — c a n a ls o r e le a s in g re se rv e s. have im p o r t a n t e ffe cts by e ith e r a b s o r b in g or In a d d it io n , s h ifts o f re s e r v e s a m o n g c la s s e s o f b a n k s a ffe c t c re d it c r e a t io n sin c e d if fe re n t g r o u p s o f m e m b e r b a n k s h o ld v a r y i n g p e r c e n t a g e s o f r e s e rv e s a g a i n s t d e p o s its . F in a lly , v a r i a t io n s in th e v o lu m e o f e x c e s s re s e r v e s t h a t b a n k s c h o o s e to m a in t a in c a n in c r e a s e o r d e c r e a s e e x p a n s io n lim its. D e s p ite a ll th e s e v a r ia t io n s a n in c r e a s e in th e v o lu m e o f r e s e rv e s g e n e r a lly re su lts in th e c r e a tio n o f a d d it io n a l m o n e y , a n d a d e c lin e in r e s e r v e s u s u a l ly le a d s to a re d u c tio n in th e m o n e y s u p p ly . C o n s e q u e n t ly , th e F e d e ra l R e s e rv e c a n a ffe c t in te re st ra te s a n d th e a v a i la b i li t y o f b a n k c re d it t h r o u g h its c o n tro l o v e r th e v o lu m e o f b a n k re s e rv e s . B e c a u s e th e b a n k i n g sy ste m p la y s s u c h a v it a l ro le in th e c re d it m e c h a n is m , su c h e ffe c ts g e n e r a lly s p r e a d t h r o u g h o u t a ll c re d it m a r k e t s. 10 TH E IM P A C T OF M O N E T A R Y POLICY M o n e t a r y p o lic y a ffe c ts e x p e n d it u r e s b y in f lu e n c in g th e b e h a v io r o f th re e d if fe re n t g r o u p s : le n d e rs, b o rro w e rs, a n d n o n b o r ro w in g sp e n d e rs. P r o b a b l y th e m o s t im p o r t a n t e ffe c t is its in flu e n c e o n th e a v a i la b i li t y o f le n d e r s ' fu n d s . s o m e p e r io d s , f o r in sta n c e , th e S y s t e m D u rin g m a y o b s e r v e in f la t io n a r y p r e s s u r e s d e v e lo p in g a s th e p u b lic 's d e m a n d f o r g o o d s a n d s e rv ic e s e x c e e d s th e a v a i l a b l e s u p p ly . S in c e p a r t o f th is d e m a n d is a l w a y s f in a n c e d b y cred it, th e S y s t e m a t th e s e tim e s a d o p t s a p o lic y o f re s tr a in t to tr y to p r e v e n t the v o lu m e o f lo a n a b le f u n d s f r o m in c r e a s in g a s f a s t a s th e d e m a n d s f o r c re d it rise. D u r i n g th e se p e r io d s , le n d e r s m a y t a k e t w o t y p e s o f a c t io n to b a la n c e c re d it d e m a n d s w it h th e ir a v a i l a b l e s u p p l y o f lo a n a b le fu n d s . First, t h e y m a y in c re a s e th e ir p ric e s— th e in te re st ra t e s th e y c h a r g e . In m a n y c a se s, h o w e v e r , in te re st ra t e s d o n o t rise e n o u g h to p r e v e n t b o r r o w e r s ' d e m a n d s fr o m o u t r u n n in g a v a ila b le fu n d s. m e a n s — r a i s in g p e n s a t in g T h u s, le n d e r s in a d d it io n o fte n "r a t io n " th e ir s t a n d a r d s o f c re d it w o r t h in e s s , r e q u ir in g b a la n c e s in o r d e r to lim it th e ir a v a i l a b l e r o w e r s c o n s e q u e n t ly c a n n o t e x p a n d fu n d s to c re d it a m o n g b o rro w e rs by v a r io u s la r g e r d o w n p a y m e n t s , o r la r g e r c o m th e b e st c re d it risk s. M a r g in a l b o r th e ir s p e n d in g sin c e t h e y a r e u n a b l e to o b t a in a s m u c h c re d it a s t h e y w a n t e v e n t h o u g h th e y a r e w il li n g to p a y e x is t in g in te re st ra tes. O n th e o t h e r h a n d , th e F e d a t tim e s m a y c o n s id e r it a p p r o p r ia t e c re d it to g i v e a b o o s t to to ta l e x p e n d it u r e s . to in c r e a s e th e a v a i la b i li t y o f T h is " e a s y m o n e y " p o lic y p r o v id e s le n d e r s w it h f u n d s to a c c o m m o d a t e m a r g i n a l b o r r o w e r s p r e v io u s ly p a r t o f th e " u n s a t is f ie d f r in g e o f b o r r o w e r s " a n d a ls o e n c o u r a g e s le n d e r s to re d u c e in te re st ra t e s to a ttra c t still m o re b o r r o w e r s . B o r r o w e r s ' c re d it d e m a n d s a r e a ffe c te d in s e v e r a l w a y s . n o b o d y k n o w s e x a c t ly h o w s o m e m a r g i n a l projects. W h e n m o n e y tig h te n s, s o m e d e m a n d s — m a n y — a r e u n d o u b t e d l y cut b a c k b e c a u s e h i g h e r in te re st ra t e s d is c o u r a g e T h e e x p e c te d d if fic u lt y o f o b t a in in g th e d e s ir e d c re d it a c c o m m o d a t io n a ls o m a y d e t e r b o r r o w e r s w h o h a v e d o u b t s a b o u t b e in g a b le to o b t a in s u ff ic ie n t f u n d s to c o m p le te th e ir p ro je cts e v e n t h o u g h in itia l f i n a n c i n g is a v a ila b l e . L e g a l in te re st ra te c e ilin g s o n G - l lo a n s a n d s o m e S t a t e a n d lo c a l b o n d is s u e s a ls o c u t b o r r o w e r s ' d e m a n d s b y r e m o v in g p o t e n t ia l h o m e b u y e r s a n d g o v e r n m e n t s f r o m th e m a r k e t w h e n p r e v a i li n g ra t e s e x c e e d th e a m o u n t s t h e y c a n le g a ll y p a y . lo sse s, s u c h a s d e c lin e s in b o n d p ric e s r e s u lt in g f r o m b o rro w e rs fro m u n d e r t a k in g p roje cts. h ig h e r ra te s, m a y P o rt fo lio lik e w is e d is c o u r a g e p o t e n t ia l C o n v e r s e ly , e a s y m o n e y c a n s t im u la t e b o r r o w e r s ' d e m a n d s b y lo w e r in g ra te s, b y f o s t e r in g e x p e c t a t io n s th a t f u n d s w ill b e m o r e r e a d il y a v a ila b l e , a n d b y c r e a t in g " p a p e r " p o r t fo lio p ro fits. T ig h t a n d e a s y m o n e y c a n a ls o in flu e n c e th e a tt itu d e s o f s p e n d e r s w h o n e ith e r b o r r o w An n o r le n d . e ffe c tiv e t ig h t m o n e y p o lic y m a y , f o r in sta n c e , d a m p e n in f la t io n p s y c h o lo g y a n d c a u s e th e p o s t p o n e m e n t o f s o m e o u t la y s th a t m ig h t o t h e r w is e h a v e b e e n m a d e to g e t a h e a d o f th e p ric e rise s. a d d it io n , it m a y c a u s e c e rta in s p e n d e r s to re d u c e e x p e n d it u r e s b y c a u s i n g c u r it y h o ld in g s . In p o r t fo lio lo ss e s in th e ir s e C o n v e r s e ly , e a s y m o n e y c a n s t im u la t e o u t la y s b y f o s t e r in g a "t h in g s - w ill- g e t - b e t t e r " a t m o s p h e r e a n d b y c r e a t in g p a p e r p r o f it s in s p e n d e r s ' p o rtfo lio s. THE TOOLS OF CREDIT POLICY T h e S y s t e m h a s t w o ty p e s o f to o ls w it h w h ic h it c a n a ffe c t the le v e l o f e c o n o m ic a c tiv ity : q u a n t it a t iv e o r g e n e r a l c re d it c o n t ro ls a n d q u a lit a t iv e o r se le c tiv e co n tro ls. Q u a n t i ta t iv e c o n tro ls in flu e n c e th e v o lu m e o f b a n k r e s e r v e s a n d , t h r o u g h th e m , in te re st ra t e s a n d th e a v a i l a b ilit y o f cred it. Q u a lit a t iv e c o n tro ls, h o w e v e r , a r e d ire c te d a t a p a r t ic u la r k in d o f credit. The S y s t e m 's q u a n t it a t iv e to o ls a re : c h a n g e s in th e d is c o u n t rate, c h a n g e s in r e s e r v e re q u ir e m e n ts , a n d o p e n m a r k e t o p e r a t io n s . A t p re se n t, th e F e d 's o n l y q u a lit a t iv e c o n tro ls a r e c h a n g e s in m a r g i n re q u ir e m e n t s o n s e c u ritie s liste d o n n a t io n a l s e c u ritie s e x c h a n g e s . 11 The Discount Rate P e r h a p s th e best k n o w n o f th e q u a n t it a t iv e to o ls is th e d is c o u n t ra te — th e in te re st ra te c h a r g e d m e m b e r b a n k s o n lo a n s f r o m F e d e ra l R e se rv e B a n ks. Mem ber banks tw o w a y s: b y g iv in g can b o rro w th e ir o w n in s e c u re d n o te s o r b y r e d is c o u n t in g d ra ft s, b ills o f e x c h a n g e , o r n o te s f r o m th e ir p o rtfo lio s. In p ra ctice , v ir t u a lly a ll b a n k s u se th e ir o w n n o te s s e c u re d b y G o v e r n m e n t o b li g a t io n s . Changes in th e d is c o u n t ra te m u st b e m a d e s e p a r a t e ly b y e a c h F e d e ra l R e s e r v e B a n k s in c e th e B a n k 's d ir e c to rs in iti a te th e c h a n g e . G e n e r a lly , a ll R e se rv e B a n k s a c t a t a b o u t th e s a m e tim e , h o w e v e r, s in c e a ll m a k e th e ir d e c is io n s o n th e b a s is o f th e s a m e s o r t o f e v id e n c e . D if f e r e n c e s in t im in g re su lt m a i n ly f r o m v a r i a tio n s in th e m e e t in g d a t e s o f th e tw e lv e b o a r d s o f d ire c to rs. T h e in itia l c h a n g e is th e im p o r t a n t o n e , h o w e v e r , s in c e b u y e r s a n d s e lle rs in th e m a r k e t g e n e r a lly e x p e c t th a t o th e r R e s e rv e B a n k s w ill s o o n ta k e s im ila r a c tio n s. C e r t a in v it a l e ffe c ts o f c h a n g e s in th e d is c o u n t ra te a r e p s y c h o lo g ic a l. S u c h e ffe c ts a r e p a r t ic u la r ly im p o r t a n t w h e n o b s e r v e r s fe e l th e d is c o u n t ra te is b e in g u s e d b y th e S y s t e m to s ig n a l a s h if t in th e d ire c tio n o f p o lic y . In s u c h c a se s, th e f in a n c ia l m a r k e t s re a c t im m e d ia t e ly — s o m e t im e s e v e n in a d v a n c e o f S y s t e m a c t io n s — w h e n th e m o v e is a n tic ip a t e d . If th e ra te is in c re a s e d , in te re st ra t e s — p a r t ic u la r ly th o se o n sh o rt-te rm s e c u ritie s — g e n e r a lly ris e a n d c re d it m a r k e t s tig h te n . C o n v e r s e ly , a cut in th e d is c o u n t ra te th a t c le a r ly s ig n a l s a n e a s in g o f p o lic y is by o r d i n a r i ly f o llo w e d e a s ie r c o n d it io n s in th e m o n e y a n d c a p it a l m a r k e t s. A t tim e s, h o w e v e r , th e S y s t e m n u d g e s cre d it m a r k e t s fir s t w it h its o p e n m a r ket o p e r a t io n s a n d c h a n g e s d is c o u n t ra t e s o n l y to b r in g th e m in to lin e w it h o t h e r m o n e y ra te s. changes have Such little im m e d ia t e e ffe ct o n th e m o n e y m a r k e t sin c e t h e y a r e d is c o u n t e d w e ll in a d v a n c e . C h a n g e s in th e d is c o u n t ra te a ls o h a v e s o m e d ire c t e ffe c ts o n sh o rt-te rm in te re st ra t e s b y m a k i n g b o r r o w i n g s fr o m th e C e n t r a l B a n k e ith e r m o r e o r le ss co stly. W h e n th e d is c o u n t ra te is in c re a s e d , b a n k s a r e m o re in c lin e d to a d j u s t t h e ir re s e rv e p o s it io n s b y s e llin g s h o rt-te rm G o v e r n m e n t se c u ritie s r a t h e r t h a n t h r o u g h e x p a n d i n g th e ir b o r r o w i n g s a t th e Fe d. c u rity p ric e s a n d r a is e t h e ir y ie ld s . Th e se T h e in c r e a s e d s a le o f se c u ritie s te n d s to lo w e r s e h i g h e r m a r k e t y ie ld s in tu r n te n d to p u s h u p lo n g e r-t e r m in te re st rates. O n th e o t h e r h a n d , if th e d is c o u n t ra te is lo w e r e d d u r i n g a n e a s y m o n e y p e r io d , b a n k s a r e lik e ly to m a in t a in b o r r o w i n g s a t th e F e d 's d is c o u n t w i n d o w a t a h ig h e r le ve l t h a n w o u l d o t h e r w is e b e th e ca se . T h is t e n d s to p u s h ra t e s lo w e r b y e n c o u r a g i n g b a n k s to h o ld la r g e r q u a n t it ie s o f G o v e r n m e n t se cu ritie s. 12 Open Market Operations O p e n m a r ket o p e r a t io n s a r e th e S y s t e m 's m o s t im p o r t a n t c re d it tool. O p e r a t io n s a r e c o n d u c te d p r im a r ily in G o v e r n m e n t se cu ritie s, b u t th e S y s t e m a ls o b u y s a n d s e lls b a n k e r s ' a c c e p ta n c e s . m ay be under th e B o th k in d s o f se c u ritie s p u rc h a se d re p u rch a se d e a le r s to e ith e r o u t r ig h t a gre e m e n ts buy back or r e q u ir in g th e se c u ritie s w it h in a f e w d a y s . S e c u r it y p u r c h a s e s a n d s a le s d ire c tly a ffe c t th e v o lu m e of m em ber b an k re s e r v e s a n d , c o n s e q u e n tly , th e o v e r -a ll cost and a v a i l a b i l i t y o f credit. Sy ste m c h a s e s in c re a s e r e s e rv e s a n d b a n k in g s y st e m m u ltip le am o u n t. to e x p a n d p u r e n a b le the c re d it b y C o n v e rse ly , a Syste m s a le s re d u c e re s e r v e s a n d fo rc e b a n k s to c o n tra c t credit. Open m a r k e t o p e r a t io n s a r e e ith e r d e f e n s iv e o r d y n a m ic . D e f e n s iv e o p e r a tio n s a r e th o s e t a k e n to o ffse t o t h e r f a c to rs th a t c h a n g e th e v o lu m e o f m e m b e r b a n k re s e rv e s . f l o w s o r in c r e a s e s in T r e a s u r y d e p o s it s a t th e Fed a r e t e n d in g to re d u ce If, f o r e x a m p le , g o ld o u t m em ber bank re se rv e s, th e S y s t e m m a y m a k e o ffs e tt in g G o v e r n m e n t s e c u rity p u r c h a s e s e v e n t h o u g h it is n o t t r y in g to e a s e cre d it p o lic y . re d u c e C o n v e r s e ly , d u r i n g re s e r v e s to o fa st. t ig h t m o n e y p e r io d s, it m a y b u y s e c u ritie s if o t h e r fa c t o r s a r e t e n d in g to T h u s , it is im p o s s ib le to tell fr o m a s a le o r a p u r c h a s e w h e t h e r th e S y s te m is t ig h t e n in g o r e a s i n g u n le s s o n e k n o w s h o w o t h e r fa c t o r s a r e a f f e c t in g re se rv e s. D y n a m ic o p e r a t io n s c o n sis t o f e ith e r c a u s in g o r p e r m it t in g c h a n g e s in b a n k s ' r e s e r v e p o s it io n s in o r d e r to s tim u la t e e c o n o m ic a c t iv it y o r p r e v e n t in fla t io n . o p e r a t io n s , it o fte n m ust ta k e d e f e n s iv e Even w hen th e Syste m c o n d u c ts d y n a m ic m e a s u r e s a s w e ll s o t h a t th e d y n a m ic p o lic y c a n p ro c e e d s m o o t h ly . Reserve Requirements T h e S y s t e m 's to o l w it h th e m o s t im m e d ia t e a n d w id e s p r e a d im p a c t is the B o a r d 's p o w e r to v a r y m e m b e r b a n k re s e r v e r e q u ir e m e n t s w it h in s p e c if ie d lim its. O n tim e d e p o s its , th e lim its a r e 3 p e r ce n t to 6 p e r ce n t f o r a ll m e m b e r b a n k s . O n d e m a n d d e p o s its , th e y a r e 1 0 p e r cent to 2 2 p e r ce n t f o r ce n tra l r e s e r v e a n d r e s e rv e c ity b a n k s a n d 7 p e r c e n t to 1 4 p e r ce nt f o r c o u n t r y b a n k s . C h a n g e s in r e s e r v e re q u ir e m e n t s a ffe c t m e m b e r bank a c t io n s in tw o w ays. First, th e y e ith e r d e s t r o y o r c re a te e x c e s s r e s e r v e s b y c h a n g i n g th e a m o u n t o f re s e r v e s re q u ir e d a g a i n s t e x is t in g d e p o sits. R e d u c tio n s in re s e rv e re q u ir e m e n t s r e le a s e re s e r v e s a n d p r iv a t e ly - h e ld m oney s u p p ly . In c r e a s e s in in re q u ir e m e n t s a lt e r th e a m o u n t o f d e p o s it s a g i v e n g e n e r a lly b r in g about an r e q u ir e m e n t s h a v e th e o p p o s it e effect. e x p a n s io n in th e Second, ch a n ge s v o lu m e o f r e s e r v e s c a n s u p p o r t. If r e s e rv e re 13 q u ir e m e n t s a r e d e p o s its . 1 0 p e r cent, $ 1 , 0 0 0 , 0 0 0 in a d d it io n a l re s e r v e s c a n s u p p o r t u p to $ 1 0 , 0 0 0 , 0 0 0 o f n e w If r e q u ir e m e n t s a r e 2 0 p e r cent, h o w e v e r , the a d d it io n a l r e s e rv e s c a n n o t s u p p o r t m o re t h a n $ 5 , 0 0 0 , 0 0 0 o f n e w d e p o s its . M argin Requirements T h e F e d e ra l R e s e rv e B o a r d a ls o h a s th e r ig h t to se t m a r g in r e q u ir e m e n t s — th e p e r c e n t a g e d o w n p a y m e n t r e q u ir e d liste d o n n a t io n a l e x c h a n g e s . w hen b o r r o w i n g to f in a n c e p u r c h a s e s o r h o l d i n g s o f se c u ritie s T h e re a r e t w o s e p a r a t e r e g u la t io n s — R e g u la t io n R e g u la t io n T c o v e rs b r o k e r s 7 o r d e a le r s ' lo a n s to c u sto m e rs. T and R e g u la t io n U. R e g u la t io n U re g u la t e s c o m m e r c ia l b a n k lo a n s to b r o k e rs , d e a le r s, o r o th e r c u sto m e rs. M a r g in chases a n d r e q u ir e m e n t s a r e h o ld in g s . d ire c te d a t o n l y o n e ty p e o f c re d it— th a t u s e d to f in a n c e s e c u rity p u r If e x p a n s i o n o f s e c u rity lo a n s s e c u rity p rice s, re q u ir e m e n t s c a n b e ra is e d . a p p e a rs to b e a fa c to r in undue in c r e a s e s in A t o t h e r tim e s, w h e n th e re s e e m s to b e little d a n g e r o f s p e c u la t io n , th e S y s t e m cu ts re q u ir e m e n t s sin c e it p r e fe r s n o t to in te rfe re w it h th e a llo c a t io n o f c re d it a m o n g d if fe re n t se c to rs o f th e e c o n o m y . C o o r d in a t io n Am ong C r e d it C o n t r o ls E x c e p t in th e c a s e o f d e f e n s iv e o p e n m a r k e t o p e r a t io n s , th e F e d e ra l R e s e r v e 's c re d it c o n tro l to o ls a r e s e ld o m tra ry , a ll a r e c o o r d in a t e d e m p lo y e d in d e p e n d e n t ly o f e a c h oth e r. t o w a r d th e s a m e e n d — th e S y s t e m 's c u r re n t p o lic y T o th e c o n o b je c tiv e s. T h u s, it is u s u a lly n o t m e a n in g f u l to s p e a k o f " o p e n m a r k e t p o lic y / ' o r " d i s c o u n t ra te p o lic y , " o r " r e s e r v e r e q u ir e m e n t p o lic y . " In st e a d , it is m o re c o rre ct to v ie w m o n e t a r y p o lic y a s a b r o a d p r o g r a m th re e q u a n t it a t iv e c o n tro ls a n d m a r g i n r e q u ir e m e n ts a s w e ll. e m b r a c in g th e A c t io n w it h re sp e c t to a n y s in g le c o n tro l is a l w a y s t a k e n in th e lig h t o f p r io r o r p la n n e d a c t io n c o n c e r n in g th e o th e rs. In s e le c tin g v a r io u s c o m b in a t io n s o f p o lic y a c t io n s, th e F e d e r a l R e s e rv e c o n s id e r s b o t h p s y c h o lo g ical a n d d ire c t e ffe cts o f its d e c is io n s . If it is fe lt t h a t a p s y c h o lo g ic a l e ffe ct is n e e d e d to re in fo rc e th e d ire c t e ffe cts, p o lic y m e a s u r e s m a y w e ll in c lu d e c h a n g e s in re s e r v e r e q u ir e m e n t s o r th e d is c o u n t ra te sin c e th e se a c t io n s a r e s p e c if ic a lly a n n o u n c e d w h e r e a s o p e n m a r k e t o p e r a t io n s a r e not. o f c o u rse , c a n n o t b e m a d e to o f r e q u e n t ly w it h o u t p r e j u d ic in g th e ir u s e fu ln e s s. Su c h ch a n ge s, T h is is e s p e c ia lly tru e o f c h a n g e s in re s e rv e re q u ir e m e n t s b e c a u s e o f th e ir la r g e d ire c t e ffe c ts o n b a n k re s e rv e p o s itio n s . lim it a tio n s o n th e u s e o f d is c o u n t ra te a n d T h e se r e s e r v e r e q u ir e m e n t c h a n g e s p la c e a g r e a t e r b u r d e n o n o p e n m a r k e t o p e r a t io n s a s a to o l f o r a t t a in in g p o lic y g o a ls . T h e r ig h t c o m b in a t io n o f p o lic y m o v e s n e c e s s a r y to a c h ie v e a g iv e n e n d d e p e n d s o n m a n y fa c to rs. P o lic y m a k e r s m u s t c o n s id e r n o t o n l y d o m e s t ic e c o n o m ic d e v e lo p m e n t s b u t a ls o th e d ir e c tio n a n d s tre n g th o f th e la st p o lic y a c tio n s, th e le n g t h o f tim e s in c e th e la s t m o v e s , th e d if fe r e n t ia l im p a c t o f a lt e r n a t iv e p o lic y m e a s u r e s o n th e stru c tu re o f in te re st ra tes, a n d th e r e la t io n s h ip s b e t w e e n d o m e s t ic a n d f o r e ig n in te re st ra te s. T h e s e fa c t o r s a r e c o n s t a n t ly c h a n g i n g a n d , c o n s e q u e n t ly , th e o p t im u m p o lic y c o m b i n a tio n f o r a c h ie v in g a g i v e n e n d v a r ie s f r o m o n e p e r io d to th e n e xt. T h u s, m o n e t a r y a u t h o r it ie s h a v e c o n s id e r a b le la t it u d e in th e e x te n t to w h ic h t h e y u s e th e v a r io u s to ols. a lt e r n a t iv e p a t h s to a g i v e n W h ile th e c h o ic e b e t w e e n p o lic y g o a l is s e c o n d a r y to th e p r o b le m o f se ttin g g o a ls , it is a n im p o r ta n t a s p e c t o f m o n e t a r y p o lic y b e c a u s e o f th e in t e r d e p e n d e n c e o f th e v a r io u s p o lic y to o ls. 14 m ust T H E P O L IC Y -M A K IN G P R O C E SS THE POLICY FORUM p o lic y fo ru m . T h e re T h e m e e t in g s o f th e F e d e ra l O p e n b o th v e lo p m e n t s a n d r e a c h a B o a rd and Bank M a rke t C o m m itt e e a re th e S y s t e m 's m a in r e p r e s e n t a t iv e s m e e t r e g u l a r ly to d is c u s s e c o n o m ic d e p o lic y d e c is io n f o r th e w e e k s im m e d ia t e ly a h e a d . In a d d it io n to m e m b e r s o f th e B o a r d a n d th e f iv e p r e s id e n t s c u r re n t ly s e r v in g o n th e C o m m itte e , th e r e m a in in g R e s e rv e B a n k p re sid e n ts , th e m a n a g e r o f th e o p e n m a r k e t a c c o u n t a n d o n e o f h is p r in c ip a l a s s is ta n ts , s e v e r a l s e n io r B o a r d s t a f f m e m b e r s, a n d th e s e n io r e c o n o m is t f r o m e a c h o f th e R e s e r v e B a n k s o r d i n a r i ly a tte n d . In th is m a n n e r , n o t o n l y C o m m itt e e m e m b e r s , b u t a l s o th o s e p r e s id e n t s w h o w ill s o o n s e r v e o n th e C o m m ittee, th e c h ie f a d v is e r s to th e B o a r d a n d th e p re sid e n ts , a n d th o s e w h o im p le m e n t th e C o m m it t e e 's d a y - t o - d a y o p e n m a r k e t p o lic ie s a r e a l w a y s w e ll in f o r m e d o n c u r re n t p o lic y a c tio n s. C u m b e rso m e a s th is m a y se e m , it n e v e rt h e le s s c o n stitu te s p r o b a b l y th e s m o o t h e s t a n d m o s t e ffic ie n t w a y o f u tiliz in g th e u n iq u e c o n t rib u t io n s o f d iv e r s e p a r t s o f th e S y s t e m to r e a c h th e b e s t -in f o r m e d p o lic y ju d g m e n t s. PREPARATION FOR THE MEETING P r io r to th e m e e t in g , e a c h p a r t ic ip a n t a r m s h im s e lf w it h th e b e st a v a i l a b l e d a t a o n b o th b u s in e s s c o n d it io n s a n d th e e ffe c ts o f c u r re n t F e d e ra l R e s e rv e p o lic y . m e m b e r s a n d th e p re s id e n t s re c e iv e a s t e a d y f l o w o f in f o r m a t io n and a n a ly s e s fr o m B o a rd th e r e s e a r c h de p a r t m e n t s o f th e B a n k s a n d B o a r d a n d th e ir p e r s o n a l c o n ta c ts w it h b u s in e s s , a c a d e m ic , G o v e r n m e n t , a n d o t h e r s o u rc e s. T y p ic a l o f th e in f o r m a t io n s ifte d a n d a n a l y z e d a r e sta tistics o n n e w o rd e rs , b u s in e s s in c o r p o r a tio n s, c o n stru c tio n c o n tra c t a w a r d s , re ta il s a le s, u n e m p lo y m e n t , p e r s o n a l in c o m e , b u s in e s s f a ilu r e s , th e in t e r n a t io n a l b a la n c e e m p lo y m e n t , o f p aym e n ts, in d u s t r ia l p ro d u c t io n , in te re st ra te s, th e m oney s u p p ly , p rice s, G o v e r n m e n t re c e ip ts a n d e x p e n d it u r e s , m e m b e r b a n k re se rv e s, in v e n to rie s , S t a t e a n d lo c a l g o v e r n m e n t b o r r o w in g s , b a n k lo a n s a n d in v e s tm e n t s , tio n s, th e t u r n o v e r o f d e m a n d d e p o s its , a n d n u m e r o u s b u s in e s s oth e r and in d ic a t o rs . c o n su m e r In sh o rt, s p e n d in g by th e in te n tim e th e C o m m itt e e m e e ts e v e r y p a r t ic ip a n t is w e ll p r e p a r e d to c o n trib u te to in te llig e n t p o lic y d e c is io n s . THE INTERCHANGE OF O PIN IO N re c e n t d e v e lo p m e n t s a n d C o m m itt e e th e f o r m u la t io n m e e t in g s g e n e r a l l y f a ll in to t w o p a r t s — a o f p o lic y f o r th e p e r io d a h e a d . d is c u s s io n o f T h e m a n a g e r o f th e o p e n m a r k e t a c c o u n t t y p ic a lly le a d s o ff, r e v ie w in g th e T r a d i n g D e s k 's e x p e r ie n c e in im p le m e n t in g o p e n m a r k e t p o lic y sin c e th e la st m e e t in g . S e n io r m e m b e r s o f th e B o a r d 's s t a ff th e n s u m m a r iz e im p o r t a n t b u s in e s s a n d f in a n c ia l d e v e lo p m e n t s , s t r e s s in g p a r t ic u la r ly a n y n e w d e v e lo p m e n t s th a t m ig h t n o t y e t h a v e c o m e to th e a tte n tio n o f C o m m itt e e m e m b e r s. N e x t , e a c h B o a r d m e m b e r a n d p r e s id e n t g i v e s h is in te rp re ta t io n o f b u s in e s s c o n d it io n s a n d m a k e s p o lic y r e c o m m e n d a t io n s f o r th e p e r io d ahead. P re s id e n t s a ls o c o n trib u te s u b s t a n t ia l a m o u n ts of " g r a s s r o o t s " in f o r m a t io n c o n c e r n in g r e g io n a l d e v e lo p m e n t s . D u r i n g th e c o u rs e o f th e d is c u s s io n , p a r t ic ip a n t s f r e q u e n t ly e x p r e s s th e ir v ie w s a s to h o w a ll p o lic y in s t r u m e n t s — n o t just o p e n m a r k e t o p e r a t io n s — s h o u ld b e u s e d . N o f in a l a c t io n s o n o t h e r in st ru m e n t s c a n b e t a k e n a t th e C o m m itt e e m e e t in g , o f c o u rse , s in c e C o m m itt e e a u t h o r it y c o v e r s o n l y o p e n m a r k e t 15 o p e r a t io n s . T h e fre e d is c u s s io n o f a ll to o ls is q u it e h e lp fu l, h o w e v e r , in s e ttin g o p e n m a r k e t p o lic y a n d p r o v id e s v a l u a b l e a s s is t a n c e f o r th o s e w h o t a k e p a r t in o t h e r k in d s o f p o lic y a c t io n s. A f t e r o t h e r p a r t ic ip a n t s h a v e s u m m a r iz e d t h e ir p o s itio n s , th e C h a i r m a n v ie w s a n d fo r m u la t e s w h a t h e b e lie v e s to b e th e c o n s e n s u s o f th e g r o u p . c u s s io n o c c u rs in w o r k i n g o u t a C o m m itt e e p o s itio n . p o lic y o b je c tiv e s in b r o a d te rm s. F ro m o f th e B o a r d sta te s h is F re q u e n t ly , a d d it io n a l d is F in a lly , a p o lic y d ir e c tiv e is a d o p t e d s t a t in g th e th e p r e c e d in g d is c u s s io n , th e m a n a g e r o f th e o p e n m arke t a c c o u n t re c e iv e s h is in st ru c t io n s a s to w h a t o p e n m a r k e t a c t io n s h e s h o u ld ta k e o n b e h a lf o f th e S y s te m . BETWEEN MEETINGS T r a d in g B e tw e e n m e e t in g s B o a r d D e s k a t th e N e w Y o rk Bank. m e m b e r s a n d p r e s id e n t s k e e p in d a i l y to u c h w it h th e O n e im p o r t a n t m e a n s is a d e t a ile d p h o n e c a ll a r o u n d 11 A . M . o n b u s in e s s d a y s b e t w e e n s e n io r m e m b e r s o f th e B e a r d 's s ta ff; s o m e t im e s th e G o v e r n o r s th e m a n a g e m e n t o f th e o p e n of th e C o m m itte e . th e m se lv e s ; m a r k e t a c c o u n t; a n d o n a r o t a t in g b a s is , o n e o f th e p r e s id e n t - m e m b e r s A m o n g th e fa c t o r s d is c u s s e d a r e d e v e lo p m e n t s in m arke ts fo r G o ve rnm e n t and o th e r se cu ritie s, th e to n e o f th e m o n e y m a rk e t, th e r e s e r v e p o s it io n s o f m e m b e r b a n k s , in v e n t o r ie s o f G o v e r n m e n t s e c u rity d e a le r s , a n d th e p r o b a b le c o u r s e o f a c t io n to b e ta k e n by th e T r a d i n g D e sk. S h o r t ly a ft e r th e c o n v e r s a t io n , a s e n io r m e m b e r o f th e B o a r d 's s t a ff s u m m a r iz e s th e c o n te n t o f th e c o n v e r s a t io n in a m e m o r a n d u m f o r B o a r d m e m b e r s a n d a t e le g r a m f o r p re sid e n ts . T h u s, a n y m e m b e r o f th e O p e n M a r k e t C o m m itt e e h a s a m p le o p p o r t u n it y to r a is e w it h th e m a n a g e r o f th e a c c o u n t a n d o t h e r C o m m itt e e m e m b e r s a n y q u e s t io n s h e m a y h a v e c o n c e r n in g th e c o n t e m p la t e d a c tio n . In a d d it io n , th e D e s k p r e p a r e s d a i l y w ir e s s u m m a r i z i n g c o n d it io n s a t th e o p e n in g a n d c lo s in g o f th e s e c u ritie s m a r k e t s a n d n u m e r o u s w ritte n m e m o r a n d a d e s c r ib in g the D e s k 's o p e r a t io n s . th e se w ritt e n re p o rts a r e d a ily , s o m e w e e k ly , a n d s o m e le ss fr e q u e n t. 16 Som e of F E D E R A L R E S E R V E POLICY IN 1960 How d o e s F e d e ra l R e s e rv e p o lic y w o r k g o o d e x a m p le s s in c e S y s t e m T he Sy ste m in p ra c tic e ? T h e y e a r 1 9 6 0 p r o v id e s s o m e p a r t ic u la r ly p o lic y sh ifte d c o n s id e r a b ly d u r in g th e c o u rs e o f th e y e a r . u s e d a ll its p o lic y to o ls in 1 9 6 0 to m o v e c re d it in o n e d ir e c tio n — t o w a r d m o re e a se . T h e to o ls e v e n in c lu d e d a s p e c ia l o n e a u t h o r iz e d b y C o n g r e s s in 1 9 5 9 a n d fir st u s e d in D e c e m b e r o f th a t y e a r — th e p o w e r to a llo w m e m b e r b a n k s to c o u n t s o m e o r a ll o f th e ir v a u lt c a s h a s le g a l re se rv e s. In 1 9 6 0 th e S y s t e m a l s o a c te d u n d e r a s p e c ia l C o n g r e s s io n a l m a n d a t e to e q u a liz e r e s e r v e re q u ir e m e n t s o f c e n tra l r e s e r v e city b a n k s a n d re s e rv e city b a n k s b y J u l y 1 9 6 2 , b y tw ic e r e d u c in g r e q u ir e m e n t s o f c e n tra l r e s e r v e city b a n k s . B u s in e s s c o n d it io n s a t th e b e g in n in g o f th e y e a r lo o k e d s tro n g . E c o n o m ic a c t iv it y a n d e m p lo y m e n t w e r e a t n e w h i g h le v e ls, a n d in te re st ra t e s h a d rise n to the h ig h e s t le v e ls in 3 0 y e a r s . se ttle m e n t o f th e steel s trik e h a d r a is e d e x p e c t a t io n s fo r a re s u m p tio n o f th e 1 9 5 9 b o o m . fo re c a s t s f o r th e fir s t h a lf o f th e n e w y e a r w e r e g l o w i n g l y o p tim istic. d e m a n d s w e re stro n g . B o th c o n s u m e r a n d in v e s tm e n t W h o le s a le p ric e s w e r e sta b le , b u t c o n s u m e r p ric e s w e r e in c h in g u p , a n d f e a r s o f in fla t io n w e r e w id e s p r e a d . re stra in t. R e ce n t N e a r l y a ll F o r m o re t h a n a y e a r th e S y s te m had been M e m b e r b a n k b o r r o w i n g s a t th e F e d w e r e o v e r $ 9 0 0 m illio n , a n d (m e m b e r b a n k b o r r o w i n g s m in u s e x c e s s re s e rv e s ) w e r e n e a r ly $ 4 0 0 m illio n . f o l l o w in g a net b o rro w e d p o lic y of re se rve s M o n e y w a s " t ig h t / 7 TH E J A N U A R Y -M A Y PERIOD C o n d it io n s b e g a n to c h a n g e v e r y s h o r t ly a ft e r the tu rn o f the y e a r . m u c h s o o n e r t h a n h a d b e e n e x p e c te d . Ste e l in v e n t o r ie s w e r e re b u ilt Im p o r t e d a u t o m o b ile s w e r e t a k i n g a n in c r e a s in g s h a r e o f th e 17 m a rk e t. ture. S e v e r a l p e r io d s o f v e r y b a d w e a t h e r s lo w e d a c t iv ity a n d f u r t h e r c lo u d e d th e e c o n o m ic p ic S a le s a n d d e c lin e d . d e c lin e . new C a p a c ity o r d e rs o f m a n u f a c t u r e r s f a ile d to rise, in v e n t o r ie s m o u n t e d , a n d u n fille d o r d e r s b e c a m e m o re t h a n a m p le . S o o n p ro d u c t io n in m a n y h e a v y in d u s t r ie s s ta rt e d to E m p lo y m e n t r e m a in e d h ig h , e v e n ro se a little w it h th e c o m in g o f s p r in g , b u t w e e k ly h o u r s o f w o rk e a se d a n d a v e r a g e w e e k ly e a r n in g s o f w o r k e r s d e c lin e d . J a n u a r y a n d th e e n d o f A p r il. S t o c k p ric e s fe ll 15 p e r ce nt b e t w e e n T h e F e d e ra l G o v e r n m e n t , in s t e a d o f b o r r o w i n g a s in p r e v io u s y e a r s , b u ilt u p a s u b s t a n t ia l c a s h s u r p lu s w h ic h it u s e d to re tire d e b t. D e m a n d f o r in v e s t m e n t f u n d s f r o m s e v e r a l o t h e r s o u r c e s e a s e d a lso , a n d in te re st ra t e s b e g a n to d e c lin e s lo w ly . M o n e y w a s d e f in it e ly "e a s ie r." OPEN MARKET OPERATIONS T h e S y s te m f o llo w e d th e se d e v e lo p m e n t s c lo s e ly f r o m d a y to d a y . It s o o n d e c id e d th a t th e d a n g e r o f in fla t io n h a d p a s s e d , a t le a st f o r th e tim e b e in g , a n d th a t it c o u ld s a f e ly m o d e r a t e its p o lic y o f re strain t. o p e n m a r k e t o p e r a t io n s . to $ 2 5 . 8 b illio n S y s te m T h is it d id b y g r a d u a l l y s u p p l y i n g a d d it io n a l re s e r v e s t h r o u g h h o ld in g s o f U n ite d S ta te s se c u ritie s ro s e f r o m $ 2 5 . 3 b illio n in M a r c h in M a y ; m e m b e r b a n k b o r r o w i n g s d e c lin e d fr o m $ 9 0 5 m illio n in J a n u a r y to $ 5 0 2 m il lio n in M a y ; ne t b o r r o w e d re s e rv e s fe ll f r o m $ 3 6 1 m illio n to $ 3 3 m illio n in th e s a m e fiv e - m o n t h p e r io d . A s r e s e r v e s s u p p lie d t h r o u g h th e o p e n m a r k e t in c re a s e d , m e m b e r b a n k b o r r o w i n g s d e c lin e d . te rm s o f to ta l re s e rv e s , th e se a c t io n s te n d e d to c a n c e l each oth e r. N e v e r t h e le s s , th e re w as a In net e a s in g e ffe ct b e c a u s e m e m b e r b a n k s fe lt u n d e r le ss p r e s s u r e a s th e ir b o r r o w i n g s a t th e Fed d e c lin e d . THE EC O N O M Y M O V ES SIDEWAYS In th is p e r io d th e F e d a c te d e a r ly to m o d e r a t e its p o lic y o f re s tra in t — p e r h a p s e a r lie r t h a n in a n y o t h e r c o m p a r a b le p e r io d . o n l y s id e w a y s . T h e in d u s t r ia l p ro d u c t io n D e s p ite th is, th e e c o n o m y c o n tin u e d to m o v e in d e x s e e s a w e d T o ta l e m p lo y m e n t c o n tin u e d to in c re a se , b u t m a n u f a c t u r in g o r d e r s fe ll. P e r s o n a l in c o m e a n d back and fo rt h e m p lo y m e n t , re tail s a le s c o n t in u e d to rise. b etw een w o rk 109 w ee ks, and and 111. u n fille d T h e ra te o f in v e n t o r y a c c u m u la t io n s lo w e d d o w n . THE JU N E -SE P TE M B E R PERIOD B y J u n e th e e x p e c te d s p r in g p ic k u p h a d n o t m a t e r ia liz e d d o w n w a rd . E c o n o m ic a c t iv ity and e m p lo y m e n t w e re and h ig h , th e e c o n o m y w a s but th e re w ere no m o v in g s ig n s g r o w t h , a n d s e v e r a l a r e a s — su c h a s steel a n d re s id e n t ia l h o u s i n g — w e r e d e f in it e ly w e a k . j o in in g th e la b o r fo rc e a t a ra te o f n e a r ly o n e m illio n p e r y e a r , a n d th e m . U n e m p lo y m e n t e x c e e d e d 5 p e r cent o f th e la b o r fo rc e . v e r y s lo w ris e in th e c o n s u m e r p ric e in d e x . th e re w e r e of s lig h t ly n orm al W o rk e rs w ere n o t jo b s f o r a ll o f P rice s r e m a in e d s t a b le e x c e p t f o r a F e a r s o f in fla t io n w e r e b e in g r e p la c e d b y f e a r s o f re c e ssio n . M o s t e c o n o m ic in d ic a t o r s w e r e e ith e r p o in t in g d o w n w a r d o r w e r e in d e t e r m in a te . th a t th e tim e h a d c o m e f o r b r o a d e r a n d m o re v i g o r o u s c o rre c tiv e a c tio n . m o v e th e la st v e s t ig e s o f re s tra in t a n d a d o p t a p o lic y o f e a se . To th is It w a s end T h e S y s te m d e c id e d now r e a d y to re it m o b iliz e d so m e w h a t h e a v ie r a rt ille ry . DISCOUNT RATE T h e d is c o u n t ra te o f th e 1 2 B a n k s h a d b e e n 4 p e r ce n t s in c e S e p t e m b e r 1 9 5 9 . in J u n e a ll o f th e B a n k s re d u c e d it to 314 p e r cent. th is tim e to 3 p e r cent. E a r ly A f t e r a n o t h e r t w o m o n t h s t h e y re d u c e d it a g a i n , In e a c h c a s e o th e r s h o rt -te rm in te re st ra t e s h a d f a lle n to o r b e lo w th e n e w rate, a n d c h a n g e s w e r e m a d e to b r in g th e ra te in to lin e w it h o th e r ra t e s a n d to in d ic a t e th a t th e S y s tem w a s a d o p t i n g a p o lic y o f g r e a t e r e a se . p e r io d o f tim e . 18 In b o t h in st a n c e s a ll R e s e rv e B a n k s a c te d w it h in a s h o r t M A R G IN REQUIREMENTS In J u l y th e B o a r d o f G o v e r n o r s re d u c e d th e m a r g i n r e q u ir e m e n t o n s e c u rity p u r c h a s e s f r o m 9 0 p e r ce n t to 7 0 p e r cent. In v ie w o f th e s u b s t a n t ia l d e c lin e in s to c k p ric e s w h ic h h a d b e e n g o i n g o n ir r e g u l a r ly f o r s e v e n m o n th s , it w a s fe lt th a t m a r g i n re q u ir e m e n t s c o u ld b e s a f e ly cu t w it h o u t s t im u la t in g u n d e s ir a b le s p e c u la t io n . RESERVE REQUIREMENTS A c t in g u n d e r th e C o n g r e s s io n a l m a n d a t e to e q u a liz e r e s e r v e r e q u ir e m e n t s o f c e n tra l r e s e rv e a n d re s e rv e city b a n k s , th e B o a r d d u r in g A u g u s t cut r e s e r v e re q u ir e m e n t s o f c e n tra l re s e r v e city b a n k s f r o m 1 8 p e r ce nt to 1716 p e r cent o f d e m a n d d e p o s its , e ffe c tiv e S e p t e m b e r 1, 1 9 6 0 . T h e re q u ir e m e n t f o r r e s e r v e city b a n k s w a s th e n 1 6 !6 p e r c e n t . It w a s e s tim a t e d th a t th e cut in c e n tra l r e s e rv e city b a n k r e q u ir e m e n t s w o u ld fre e a b o u t $ 1 2 5 m illio n o f re s e r v e s f o r th e b a n k s a ffe c te d . VAULT CASH T h e le g is la t io n e n a c te d c o u n t v a u lt c a s h as le g a l in 1 9 5 9 a ls o a u t h o r iz e d the B o a r d to a l l o w m e m b e r b a n k s to r e s e r v e s — s o m e t h in g t h e y h a d n ot b e e n a llo w e d to d o sin c e 1 9 1 7 . T o th e e x te n t ih a t b a n k s c a n c o u n t su c h c a s h t o w a r d m e e t in g re s e rv e re q u ire m e n ts , t h e y c a n h o ld c o r r e s p o n d in g ly s m a lle r d e p o s it s a t th e Fe d, th u s r e d u c in g th e a m o u n t o f n o n e a r n in g a s s e t s tie d u p a s re se rv e s. C o n s e q u e n t ly , p e r m is s io n to c o u n t v a u lt c a s h a s le g a l re s e rv e s h a s th e s a m e e ffe c t a s a re d u c tio n o f re s e rv e re q u ir e m e n ts . S in c e D e c e m b e r 1 9 5 9 b a n k s h a d b e e n a llo w e d to c o u n t a s m a ll p a r t o f th e ir c a s h a s le g a l re s e rv e s. In A u g u s t 1 9 6 0 th e B o a r d is s u e d a n e w r e g u la t io n in c r e a s in g th e a m o u n t o f a llo w a b le c a s h still m o re . T h is a c t io n a n d th e re d u c tio n o f re s e rv e re q u ir e m e n ts w e r e e x p e c te d to re le a s e a to ta l o f m o re th a n $ 6 0 0 m illio n o f re se rv e s. OPEN MARKET OPERATIONS th rou gh open D u r in g th e s u m m e r m o n th s m a r k e t o p e r a t io n s . Syste m in M a y to $ 2 6 . 7 b illio n d u r i n g S e p te m b e r. th e S y s te m c o n t in u e d to s u p p ly h o ld in g s o f U n ite d S ta te s s e c u ritie s ro s e fr o m r e s e rv e s $ 2 5 . 8 b illio n A s b e fo re , th is c a u s e d m e m b e r b a n k s to re d u c e th e ir b o r- F E D E R A L R E SE R V E D IS C O U N T R A T E 1960 Par cent 4.0 L 3.5 - 3.0 ____ I_______ I_______ I_______ L ______I_______ I_______I_______ I_______ I_______ I_______ l_____ J F M A M J J A S O N D 19 r o w i n g s a t th e F e d — th is tim e fr o m $ 5 0 2 m illio n to $ 2 2 5 m illio n . Net b o rro w e d re s e r v e s d is a p p e a r e d a n d fr e e r e s e r v e s ro s e to $ 4 1 4 m illio n . A SLOW DECLINE T h e S y s t e m u s e d a w id e a s s o r t m e n t o f to o ls a n d th e c re d it s it u a tio n e a s e d o v e r th e s u m m e r m o n th s . Bond th e p r im e ra te c h a r g e d w a s d e f in it e ly e a sie r. y ie ld s d r o p p e d s ig n if ic a n t ly , T r e a s u r y bill ra te s fe ll b e lo w b y la r g e c o m m e rc ia l b a n k s w a s cut f r o m 5 p e r ce n t to B u t b u s in e s s a c tiv ity s lid fu rth e r. s o n a l in c r e a s e a f t e r L a b o r D a y w a s le ss th a n n o r m a l. 4Vi p e r cent, a n d p e r cent. E m p lo y m e n t r e m a in e d a b o u t th e sa m e , w e e k ly h o u r s o f w o r k c o n t in u e d to d e c lin e s lo w ly , a n d th e in d u s t r ia l p r o d u c t io n in d e x fe ll f r o m In a d d it io n , th e g o ld o u t flo w in c re a s e d C r e d it T h e re w a s n o s h a r p d e c lin e , b u t th e s e a 1 1 0 to 1 0 7 . s h a r p l y — in p a r t b e c a u s e o f th e e a s i n g a c tio n . TH E O C TO B E R -D E C E M B E R PERIOD D u r i n g th e la s t th re e m o n th s o f th e y e a r th e S y s t e m w a s t r y in g to s h a p e p o lic y to a c c o m p lis h t w o s e p a r a t e o b je c t iv e s w h ic h w e r e in la r g e p a r t c o n tra d ic to ry . It w a n t e d to p r o v id e c o n t in u in g e a s e in th is c o u n t r y a n d a t th e s a m e tim e a v o i d a g g r a v a t i n g th e g o ld o u t flo w . In sh o rt, th e S y s t e m h a d to f o llo w b o th a d y n a m i c a n d a d e f e n s iv e cre d it p o lic y . In W e s t e r n E u r o p e e c o n o m ic a c t iv ity w a s s tro n g , a n d in te re st ra t e s w e r e h ig h . T h e d e c lin e o f sh o rt-te rm in te re st ra t e s h e re led s o m e h o ld e rs o f sh o rt-te rm f u n d s to t r a n s f e r th e m to E u r o p e to t a k e a d v a n ta ge o f th e h i g h e r inte re st rates. T h is a g g r a v a t e d th e g o ld o u t f lo w w h ic h , in tu rn , t e n d e d to re d u c e b a n k re s e rv e s . In a d d it io n , th e Fed w a s fa c e d re s e r v e s to h o l id a y c re d it d e m a n d s . m eet p e a k w it h th e n e e d to s u p p l y la r g e q u a n t it ie s o f E v e n t h o u g h c h a n g e s in th e re s e r v e s o f c o m m e rc ia l b a n k s h a v e a m o r e im p o r t a n t e ffe ct u p o n m a r k e t ra t e s th a n S y s t e m t r a n s a c t io n s th e m se lv e s , th e F e d e ra l R e s e rv e s o u g h t to m in im iz e a n y d ire c t e ffe cts its o p e r a t io n s m ig h t h a v e to d e p r e s s b ill rates. tem th e r e f o r e m o d if ie d its u s u a l p o lic ie s in th re e m a in respects. 20 The S y s OPEN MARKET OPERATIONS D u r in g O c t o b e r a n d e a r ly N o v e m b e r th e S y s t e m c o n t in u e d to s u p p l y re s e r v e s t h r o u g h o p e n m a r k e t o p e r a t io n s b o th to o ffse t th e h e a v y o u t f lo w o f g o ld a n d to m e e t s e a s o n a l n e e d s. H o ld i n g s o f U n ite d S ta te s s e c u ritie s ro s e fr o m $ 2 6 . 5 b illio n a t th e e n d o f S e p t e m b e r to $ 2 8 .1 b illio n th e w e e k o f N o v e m b e r 16, a ft e r w h ic h t h e y d e c lin e d a s th e m e a s u r e s d e s c r ib e d b e lo w b e g a n to p r o v id e re s e rv e s . T o a v o i d d e p r e s s in g sh o rt-te rm in te re st ra te s u n d u l y b y h e a v y b ill p u r c h a s e s , th e S y s te m m a d e s o m e o f its p u r c h a s e s in th e f o r m o f ce rtifica te s a n d b o n d s w it h m a t u rit ie s o f le ss t h a n 15 m o n th s. VAULT CASH N e x t, th e B o a r d p r o v id e d that, e ffe c tiv e N o v e m b e r 2 4 , all m e m b e r b a n k s c o u ld c o u n t all v a u lt c a s h a s p a r t o f th e ir le g a l re s e rv e s . RESERVE REQUIREMENTS F in a lly , th e B o a rd m a d e t w o c h a n g e s in r e s e r v e r e q u ir e m e n ts . C e n t r a l re s e r v e city b a n k s 7 r e q u ir e m e n t s o n D e c e m b e r 1 w e r e cut to 16!^ p e r cent o f d e m a n d d e p o s it s — th e s a m e a s t h o s e o f r e s e r v e city b a n k s . S e c o n d , re q u ir e m e n ts o f c o u n try b a n k s w e r e r a is e d f r o m 11 p e r ce nt to 12 p e r c e n t o f d e m a n d d e p o s its a s o f N o v e m b e r 2 4 to o ffse t p a r t o f th e e ffe c ts o f th e r e le a s e o f c o u n t r y b a n k v a u lt c a sh . It w a s e s tim a t e d th a t th e a c tio n s o n v a u lt c a s h a n d w o u ld r e le a s e a b o u t $ 1 .3 b illio n o f n e t a d d it io n a l re se rv e s, w h ic h w o u ld go re s e rv e fa r to w ard r e q u ir e m e n ts m e e t in g th e b a n k s 7 s e a s o n a l n e e d s. THE DECLINE CONTINUES The Sy ste m su c c e e d e d in s u p p ly in g re s e rv e s to o f fs e t th e g o ld o u t f lo w a n d to m a in t a in e a s y c o n d it io n s in th e m o n e y m a r k e t w it h o u t u n d u ly d e p r e s s in g sh o rt-te rm ra t e s to s tim u la t e fu r t h e r g o ld o u t flo w . D e s p ite a g o ld lo ss o f n e a r ly $ 8 0 0 m illio n in O c t o b e r a n d N o v e m b e r , fr e e re s e r v e s w e r e m a in t a in e d a b o v e $ 4 0 0 m illio n m o s t o f th e tim e a n d e x c e e d e d $1 b illio n in la te N o v e m b e r . M e m b e r b a n k b o r r o w i n g s r e m a in e d b e l o w $ 1 0 0 m illio n t h r o u g h o u t D e c e m b e r. fr o m $ 1 3 9 . 7 b illio n in A u g u s t to $ 1 4 0 . 5 b illio n in la te s h o w e d a n e n c o u r a g i n g rise. D e c e m b e r, a n d oth e r liq u id A t n o tim e , h o w e v e r , d id the bill ra te f a ll b e l o w 2 p e r cent. ra t e s o n lo n g -t e r m G o v e r n m e n t se c u ritie s, w h ic h d r o p p e d c o n s id e r a b ly f r o m n o t d e c lin e fu rth e r. T h e m o n e y s u p p l y ro se sh o rt-te rm a sse ts In te re st J a n u a r y to A u g u s t , d id In fact, th e y ro s e s lig h t ly in O c t o b e r a n d N o v e m b e r , a n d a t th e e n d o f th e y e a r w e r e a little h ig h e r t h a n t h e y h a d b e e n in A u g u s t . B u s in e s s a c t iv ity c o n tin u e d to d e c lin e . O ctob e r a n d N o ve m b e r. E m p lo y m e n t w a s to its c lo se th e re w e r e n o d e fin it e s ig n s o f a b u s in e s s r e la t iv e ly s lo w . dow n and u n e m p lo y m e n t w as up in M o s t b u s in e s s in d ic a t o r s c o n tin u e d to p o in t d o w n w a r d , a n d a s th e y e a r d r e w re c o v e ry . The ra te o f d e c lin e , h o w e ve r, w a s N o o n e k n o w s f o r s u r e w h a t w o u ld h a v e h a p p e n e d in th e a b s e n c e o f th o s e S y s t e m p o lic ie s, b u t it s e e m s q u it e lik e ly t h e y h e lp e d p re v e n t th e d e c lin e fr o m b e c o m in g m o re s e r io u s in 1 9 6 0 . 21 L IM IT A T IO N S A N D A D V A N T A G E S OF M O N E T A R Y POLICY E s t a b lis h in g s o u n d m o n e t a r y p o lic y is a t a s k o f h e r c u le a n p ro p o r t io n s . C e n tra l b a n k e rs cannot fe e d d a t a in to a c o m p u t e r a n d e x p e c t to g e t a m o n e t a r y p o lic y t a ilo r - m a d e to fit a p a r t ic u la r e c o n o m ic sit u a tio n . N o m a t te r h o w rich th e e x p e rie n c e a n d ju d g m e n t o f th e p o lic y m a k e r s , h u m a n p o s sib le . A n d m is t a k e s , o n c e m a d e , m u st b e t a k e n in to a c c o u n t in f u t u r e p o lic y a c tio n s. e a s y c re d it p o lic y c a n c a u s e in fla t io n w h e n e x p a n s i o n re su m e s . to o s t r o n g c a n b r i n g a p e r io d o f e x p a n s io n to a p r e m a t u r e e r r o r is still A n o v e r ly A n t i- in f la t io n a r y m e a s u r e s w h ic h a r e h a lt. T h u s, c e n t ra l b a n k e r s — lik e m en w a l k i n g t ig h t r o p e s in h ig h a n d s h if t in g w in d s — m u s t m a in t a in th e ir f o o t in g b y le a n in g fir s t o n e w a y a n d th e n a n o t h e r in to th e w in d b u t n e v e r to o f a r in e ith e r d ire c tio n . L IM IT A T IO N S OF M O N E T A R Y POLICY W h a t t h e n a r e th e lim it a tio n s o f m o n e t a r y p o li c y ? w o rk in g in o p p o s it e d ire c tio n s. P a rtly , t h e y a r e th e e ffe c ts o f p o w e r f u l fo rc e s T o s o m e e x te n t t h e y re su lt fr o m th e lim ite d in flu e n c e w h ic h m o n e t a r y p o lic y h a s o v e r f in a n c ia l m a rk e ts. In p a rt, t h e y a r e due to im p e rfe c t k n o w le d g e and to e rro rs of h u m a n ju d g m e n t . PRICE-COST INFLATION be. The m o re c o m p e titiv e th e e c o n o m y , th e m o re e ffe c tiv e m o n e t a r y p o lic y c a n T h is is p a r t ic u la r ly tru e w h e n b u s in e s s a c t iv it y is r u n n in g a t n e a r - c a p a c it y le v e ls, a n d th e S y s t e m is t r y in g to c o m b a t i n f la t io n a r y p re ssu re s. A t su c h tim e s, m o n o p o lis t ic p r ic in g p ra c tic e s o n th e p a r t o f la b o r o r b u s in e s s c a n p u s h p rice s u p fr o m th e s u p p l y ra t h e r t h a n fr o m th e dem and s id e . S u f fi c ie n tly s t r o n g m o n e t a r y p o lic y c a n u n d o u b t e d ly p r e v e n t s o m e in c r e a s e s o f th is k in d b y d a m p e n i n g in f la t io n p s y c h o lo g y , b u t it is d o u b tfu l if it c a n c o m p le t e ly c u re th e p r o b le m w it h stro n g m o n o p o lis t ic p re ss u re s . in a p r o s p e r o u s e c o n o m y C o n v e r s e ly , c o n t in u e d m o n o p o lis t ic in c r e a s e s in w a g e s a n d p ric e s d u r i n g re c e s s io n te n d to h in d e r th e a d ju s t m e n ts th a t le a d to b u s in e s s re c o v e ry . T o c o m b a t s u c h p r ic in g p r o b le m s e ffe c tiv e ly , th e re m u s t b e a d d it io n a l m e a s u r e s d e s ig n e d to e n c o u r a g e c o m p e titio n . DIFFERING FISCAL POLICY A IM S If th e a im s o f f is c a l p o lic y — th e m a n n e r in w h ic h th e F e d e ra l G o v e r n m e n t s p e n d s , ta x e s , a n d m a n a g e s its d e b t— r u n c o u n t e r to th o s e o f m o n e t a r y p o lic y , th e t w o c a n to s o m e e x te n t o ffs e t e a c h o th e r. T h is is a lm o s t in e v it a b le a t tim e s s in c e th e a im s o f m o n e t a r y p o lic y a r e p u r e ly e c o n o m ic , w h e r e a s th o s e o f fis c a l p o lic y a r e o fte n p o litic a l o r s o c ia l r a t h e r t h a n e c o n o m ic . In a d e m o c r a c y it c o u ld n o t b e o th e rw ise , b u t n e v e rt h e le ss th e n et re su lt m a y b e a n e x p a n s i o n a r y b u d g e t d e fic it w h e n m o n e t a r y p o lic y — r ig h t ly o r w r o n g l y — is m o v i n g in th e o p p o s it e d ire c tio n . a le n g t h e n in g o f T r e a s u r y d e b t w h e n th e F e d e ra l R e s e r v e is c o m b a t in g re c e ssio n . O r it m a y m e a n In su c h c a se s, m o n e t a r y a n d fis c a l p o lic y w ill p a r t ly o ffse t e a c h o th e r. SLIPPAGES IN THE FINANCIAL M ECHANISM E v e n u n d e r th e b e st c o n d it io n s, m o n e t a r y p o lic y m u s t c o n te n d w it h t w o t y p e s o f " s l i p p a g e s " in th e f in a n c ia l m e c h a n is m . m e d ia t e ly e x p a n d o r c o n tra c t e a r n in g a s se ts in r e s p o n s e First, c o m m e rc ia l b a n k s m a y n ot im to c h a n g e s in th e a v a i l a b i l i t y o f re se rv e s. S e c o n d , e v e n t h o u g h b a n k s a ct p ro m p tly , sh ifts in m o n e t a r y v e lo c it y m a y m o n e y s u p p ly . is o v e r r a t e d . 22 p a r t ly o ffs e t c h a n g e s in th e B o th k in d s o f " s l i p p a g e s " c o m p lic a te th e t a s k o f m o n e t a r y p o lic y , b u t th e ir im p o r t a n c e In c o m p le te u se o f a d d it io n a l b a n k r e s e r v e s c le a rly c a lls f o r la r g e r c h a n g e s in r e s e r v e s t h a n w o u ld o t h e r w is e b e n e c e s sa ry . T h is k in d o f s p e c ia l a c tio n is ta k e n q u ite f r e q u e n t ly . D u rin g I9 6 0 , fo r e x a m p le , th e S y s t e m h a d to s u p p ly m o re r e s e rv e s t h a n w o u ld h a v e b e e n n e e d e d h a d c o u n t r y b a n k s re s p o n d e d m o r e q u ic k ly to th e re le a s e o f v a u lt c a sh . O n l y if b a n k s d id n o t r e s p o n d a t a ll w o u ld e ffe c tiv e S y s t e m p o lic y b e im p o s s ib le . A m o r e c o m m o n d if fic u lt y is th e in c re a s e in m o n e t a r y v e lo c ity o r d i n a r i ly a c c o m p a n y in g a re stric tiv e m o n e t a r y p o lic y . P e r h a p s th e m o s t im p o r t a n t c a u s e G o v e r n m e n t se c u ritie s to m e e t r is in g lo a n d e m a n d s . s in c e th e b a n k s m e r e ly su b stitu te o n e fo r m is th e liq u id a t io n by banks o f sh o rt-te rm T h is le a v e s the m o n e y s u p p l y v ir t u a lly u n c h a n g e d o f e a r n in g a s se t s f o r a n o t h e r, b u t it d o e s te n d to in c r e a s e v e lo c it y b y t r a n s f e r r in g b a n k b a la n c e s f r o m th o s e w h o p r o b a b l y w o u ld n o t s p e n d th e m a s q u ic k ly — th e p u r c h a s e r s o f th e se c u ritie s— to th o s e w h o s p e n d th e m a lm o s t im m e d ia t e ly — th e n e w b o r r o w e r s . F in a n c ia l in t e r m e d ia r ie s , su c h a s s a v i n g s a n d lo a n a s s o c ia t io n s o r m u t u a l s a v i n g s b a n k s , a ls o c a n c o n trib u te to in c r e a s e s in v e lo c it y b y r a is in g in te re st o r d iv id e n d ra te s to a ttra ct n e w f u n d s f o r le n d in g th a t m ig h t o t h e r w is e n o t h a v e b e e n s p e n t a s q u ic k ly a n d b y le n d in g the p ro c e e d s o f G o v e r n m e n t s e c u rity s a le s to b o r r o w e r s w h o s p e n d th e m im m e d ia t e ly . F in a lly , v e lo c ity c a n b e in c r e a s e d t h r o u g h s e c u rity s a le s b y n o n f in a n c ia l in stitu tio n s a n d t h r o u g h th e a d o p t io n o f v a r io u s w a y s o f e c o n o m iz in g o n b u s in e s s a n d p e r s o n a l c a s h n e e d s. S u c h in c r e a s e s in v e lo c it y m e a n th a t m o n e t a r y p o lic y m u st p e r m it th e m o n e y s u p p l y to e x p a n d m o re s lo w ly , a n d a t tim e s to co ntra ct, in o r d e r to p re v e n t s p e n d in g fr o m r is in g a t a n i n f la t io n a r y clip. It is s o m e t im e s a r g u e d th a t th e m o n e y s u p p l y c a n n o t u n d e rgo su c h r e s t r a in t w it h o u t f e r in g w it h T r e a s u r y f i n a n c in g o p e r a t io n s o r u p se t tin g se c u ritie s m a r k e t s t h r o u g h u n d u ly sh arp in te r in c r e a s e s in in te re st ra te s. In p ra ctice , h o w e v e r , th e se f e a r s h a v e n o t y e t b e e n re a liz e d . a t tim e s b y T r e a s u r y f in a n c in g d ire c tio n a n d a c tio n s. o p e r a t io n s , in te n s it y o f p o lic y . b u t th e S y s te m has N o r h a v e se c u ritie s m a r k e t s S y s t e m a c t io n s h a v e b e e n d e la y e d not been had to d is r u p t e d a lt e r a p p re c ia b ly b y Syste m th e t ig h t e n in g In c r e a s e s in in te re st ra t e s h a v e a c t u a lly b e e n ra th e r m o d e r a t e — to n o s m a ll d e g r e e b ecau se p o lic y a ffe c ts th e a v a i la b i li t y a s w e ll a s the co st o f credit. In fa ct, in c r e a s e s in v e lo c it y in d u c e d b y a t ig h t e n in g p o lic y p e r fo r m se ve ra l u s e fu l fu n c tio n s . First, b y p r o v i d i n g a m e a n s f o r f i n a n c i n g o u t la y s t h e y act a s a s a fe t y v a l v e to p r e v e n t a n in a d v e r t e n t o v e r t ig h t e n in g o f th e m oney s u p p ly fr o m b e c o m in g se rio u s. S e c o n d , s e c u rity s a le s r e s u lt in g in i n c r e a s e d v e lo c it y h e lp tr a n s m it c h a n g e s in th e co st a n d a v a ila b ilit y o f c re d it q u ic k ly t h r o u g h o u t th e e n tire c re d it m e c h a n is m . F in a lly , s h ifts in v e lo c it y m a k e cre d it p o lic y m o r e e q u it a b le s p e n d e r s to m a in t a in th o s e e x p e n d it u r e s w it h th e h ig h e s t p rio ritie s b y t r a n s m it t in g b y e n a b li n g th e e ffe cts o f th e p o lic y to th e m o r e m a r g i n a l o u t la y s . THE FORECASTING PROBLEM M o n e t a r y p o lic y — lik e a n y d is c r e t io n a r y s t a b il iz in g p o lic y — n e c e s s a r ily i n v o lv e s j u d g m e n t s b a s e d u p o n in c o m p le te e v id e n c e . E rro rs c a n o c c u r f o r t w o re a s o n s . First, d e la y s in the a v a i l a b i l i t y o f im p o r t a n t b u s in e s s in d ic a t o r s m a k e it im p o s s ib le to k n o w e x a c t ly h o w th e e c o n o m y is b e h a v in g a t th e m o m e n t. S e c o n d , p o lic y m a k i n g in v o lv e s ju d g m e n t s a s to b o th th e c o u rs e o f b u s i n e ss a c t iv ity in th e a b s e n c e o f ce n tra l b a n k in te rv e n tio n c o m b in a t io n s . and the p ro b a b le e ffe cts of v a r io u s p o lic y E r ro r s o f ju d g m e n t c a n b e m in im iz e d th r o u g h e x p e r ie n c e a n d c a re fu l a n a ly s is , b u t t h e y c a n n e v e r b e e lim in a t e d c o m p le te ly . 23 A D V A N T A G E S OP M O N E T A R Y POLICY D e s p ite its im p e rfe c tio n s , m o n e t a r y p o lic y h a s s e v e r a l a d v a n t a g e s o v e r th e a lt e r n a t iv e m e t h o d s o f s t a b iliz in g th e e c o n o m y — fis c a l p o lic y a n d MONETARY POLICY IS IMPERSONAL d ire c t c o n tro ls su c h a s r a t io n in g a n d p ric e co n tro l. In o u r m a r k e t e c o n o m y , m o s t p r o d u c t io n d e c is io n s a r e m a d e in d ir e c tly b y s p e n d e r s t h r o u g h th e ir d e m a n d f o r g o o d s a n d se rv ic e s. O n l y th o s e t h in g s th a t s p e n d e r s w a n t w ill c o n tin u e to b e p ro d u c e d , o n ly the c h e a p e s t m e t h o d s o f p r o d u c t io n w ill last, a n d o n l y e ff i c ie n t p r o d u c e r s c a n r e m a in in b u sin e s s. C o n s e q u e n t ly , e x c e p t f o r c e rta in in te rfe re n c e s, o u r lim ite d s u p p lie s o f la n d , la b o r , a n d c a p it a l g o o d s a r e u s e d to p r o d u c e m o s t e ffic ie n t ly th o s e t h in g s s p e n d e r s w a n t m ost. D ire ct c o n tro ls o b v io u s l y c h a n g e a ll this. not do. T h e y , in effect, d ic ta te w h a t c o n s u m e r s c a n a n d c a n T h e re fo re , p r o d u c t io n d e c is io n s a r e m a d e b y th e a u th o ritie s , n o t b y th e m a rk e t. F isc a l p o lic y is q u it e im p e r s o n a l c o m p a r e d w it h d ire c t c o n tro ls, b u t v a r ia t io n s in th e d ire c tio n a n d v o lu m e o f t a x a t io n a n d s p e n d in g a lte r th e c o m p o s it io n a s w e ll a s th e o v e r -a ll le v e l o f p ro d u c t io n . t h in g s th e G o v e r n m e n t b u y s w ill b e p ro d u c e d in la r g e r q u a n t it ie s t h a n th e c a se , a n d th o se goods and o t h e r w is e w o u ld T h o se have been s e rv ic e s t a x p a y e r s w o u ld h a v e b o u g h t w ill b e p r o d u c e d in s m a lle r q u a n t itie s. In tu re s. c o n tra st, g e n e r a l A m o n e t a r y c o n tro ls a r e n e v e r u s e d to in flu e n c e p a r t ic u la r t y p e s o f e x p e n d i in g to o fa st. It le a v e s it to th e m a r k e t to d e c id e w h ic h a r e g e n e r a lly t h o s e t h in g s w h ic h c o n su m e rs a n d o t h e r th e total s p e n d in g f r o m in c r e a s particular a c tiv itie s w ill b e c u rta ile d . T h e se p o lic y o f re stra in t, f o r e x a m p le , is d e s ig n e d m e r e ly to p r e v e n t t h in g s th e y w ant m ost. S im ila r ly , w h e n sp e n d ers w ant le a st. They c o n tin u e to buy e a s y m o n e y e n c o u r a g e s s p e n d in g , th e a d d it io n a l o u t la y s t a k e w h a t e v e r f o r m s s p e n d e r s p re fe r. MONETARY POLICY IS FLEXIBLE M o n e t a r y p o lic y is m o r e f le x ib le t h a n m o s t s t a b iliz e r s . T h e re a re , o f c o u rse , l a g s b e t w e e n p o lic y d e c is io n s a n d th e tim e th e a c t io n s b e c o m e e ffe ctive , just a s in th e c a s e o f a n y s t a b iliz in g p o lic y . T h e re a r e o th e r l a g s a f f e c t in g a ll t y p e s o f d is c r e t io n a r y sta b iliz e rs. p o lic y - m a k in g m a c h in e r y is a d m ir a b le . r e s u lt in g f r o m th e la c k o f c u rre n t in f o r m a t io n — la g s B u t w h e n it c o m e s to r e a c h in g a q u ic k d e c is io n , S y s te m E v e r y th re e w e e k s — a n d s o m e tim e s m o r e o fte n — th e O p e n M a r ket C o m m itt e e re a c h e s s o m e d e fin ite p o lic y d e c is io n a t its m e e tin g . m a y d e c id e to act; b u t in a n y e v e n t it d e c id e s a n d It m a y d e c id e to s t a n d p at; it in itia te s im m e d ia t e ly th e n e c e s s a r y im p le m e n t in g ste p s. D is c r e t io n a r y f is c a l p o lic y a c t io n s i n v o lv in g c h a n g e s in s p e n d in g a n d t a x a t io n d e p e n d to a la r g e d e g r e e u p o n C o n g r e s s i o n a l a ctio n . S u c h d e c is io n s in a d e m o c r a c y su c h a s o u r s d e s e r v e a n d re c e iv e w id e stu d y a n d s o -c a lle d d e b a te . P r o p e r c o n s id e ra t io n th u s r e q u ir e s fis c a l " a u t o m a t ic s t a b iliz e r s " — p r im a r ily tim e , a n d f le x ib ilit y in e v it a b ly su ffe rs. The F e d e ra l in c o m e t a x e s a n d u n e m p lo y m e n t c o m p e n s a tio n p a y m e n t s — th a t te n d to cre a te b u d g e t s u r p lu s e s d u r i n g b o o m a n d b u d g e t d e fic its d u r in g re c e ssio n d o , h o w e v e r , a c t m o r e q u ic k ly . T h e se c le a rly c o n stitu te a v a lu a b le , p ra c tic a l a d ju n c t to m o n e t a r y p olicy . MONETARY POLICY IS FREE FROM DAY-TO-DAY POLITICAL PRESSURES In e s t a b lis h in g th e F e d e ra l Re s e r v e S y s te m , C o n g r e s s w is e ly g a v e it su c h in d e p e n d e n c e a s to e n a b le it to a ct f r e e ly in th e b e st in te re sts o f th e e c o n o m y . It s p r e a d th e p o lic y - m a k in g ro le t h r o u g h o u t th e S y s te m to a v o i d u n d u e c o n c e n tr a tio n o f p o w e r ; it p r o v id e d f o r 1 4 - y e a r te rm s o f o ffic e 24 fo r a p p o in t e d B o a rd m e m b e r s, m ade th e m in e lig ib le f o r r e a p p o in t m e n t a ft e r a fu ll term , a n d s t a g g e r e d th e ir te rm s o f o ffic e ; a n d it p r o v id e d f o r th e e le ctio n o f R e s e rv e B a n k p r e s id e n t s b y th e ir o w n b o a r d s F e d e ra l R e s e rv e B o a rd . T h e ne t re s u lt is a o f d ire c to rs su b je c t to th e a p p r o v a l o f the u n iq u e in stitu tio n a b le to b a s e its d a y - t o - d a y p o lic y o n e c o n o m ic n o n p o lit ic a l g r o u n d s . T h e S y s te m , o f c o u rse , m u s t a n s w e r to C o n g r e s s a n d h a s o n ly su c h p o w e r s a s F e d e ra l la w s g i v e it. W it h in th e lim its o f its b r o a d p o w e r s , h o w e v e r , th e S y s te m is fre e to u s e a n d d o e s u s e o n l y e c o n o m ic c o n s id e r a t io n s a s g u id e s to p o lic y . co n tro ls, w h ic h a r e a l w a y s S u c h c a n n e v e r b e e n tire ly th e c a s e w it h p a r t ly in flu e n c e d by fis c a l p o lic y o r d ire c t p o litic s in o u r ty p e o f d e m o c ra c y . TH E N E T R ESU LT W hen a ll its a d v a n t a g e s a r e w e i g h e d a g a i n s t its lim ita tio n s, w h e r e d o e s m o n e t a r y p o lic y s t a n d ? W h a t c a n it d o, a n d w h a t is it u n a b le to d o ? P e r h a p s th e b est s u m m a r y is th e f o l l o w in g t e s t im o n y g i v e n b y C h a i r m a n M a r t i n o f th e B o a r d o f G o v e r n o r s b e fo re th e J o in t E c o n o m ic C o m m itt e e on Feb r u a r y 2, 1 9 6 0 : ". . . It ( m o n e t a r y p o lic y ) c a n n o t p re v e n t m o n o p o ly . It c a n n o t a s s u r e th a t th e f in a n c ia l n e e d s o f a ll s o c ia lly d e s ir a b le a c tiv itie s a r e m e t w it h o u t in t e rv e n t io n b y G o ve rn m e n t. It c a n n o t b e re lie d u p o n to c o v e r F e d e ra l d eficits. A lo n e , it c e rt a in ly c a n n o t a s s u r e e ith e r s ta b ilit y o r g r o w th . " W h a t a co rre ct m o n e t a r y p o lic y c a n d o is to fo ste r c o n fid e n c e in th e d o lla r , s o th a t o u r p e o p le c a n a n d w ill s a v e a n d in v e s t in th e fu t u re w it h r e a s o n a b le a s s u r a n c e th a t th e ir p la n s w ill n ot b e fru stra te d b y ir r e s p o n s ib le c h a n g e s in th e v a lu e o f m o n e y ." 25 SUM M ARY OF OPERATIONS N e a r l y a ll d e p a r t m e n t s a t th e R ic h m o n d R e s e rv e B a n k a n d its B a lt im o r e a n d C h a r lo t t e B r a n c h e s e x p e r ie n c e d in c r e a s e s in v o lu m e fr o m th e b u s in e s s a n d e c o n o m ic a c t iv it y o f th e Fifth D istrict d u r i n g 1 9 6 0 . In its f o r t y -s ix t h y e a r o f o p e r a t io n th e B a n k re a c h e d th e $ 1 0 0 b illio n m a r k in c h e c k s c le a r e d — a l m o s t $ 3 b illio n m o r e t h a n in th e p r e v io u s y e a r . N e a r l y $ 1 3 4 m illio n o f c o in s w e r e re c e iv e d a n d p a id o u t— a n in c r e a s e o f m o re t h a n $ 4 .5 m illio n fr o m 1 9 5 9 . C u r r e n c y h a n d l e d t o p p e d $ 5 b illio n in b ills, a n d t r a n s f e r s o f f u n d s re a c h e d a lm o s t $ 9 8 b illio n , a n in c re a s e , d u r i n g I 9 6 0 , o f a p p r o x im a t e l y $ 6 b illio n . N e t e a r n i n g s b e f o r e p a y m e n t s to th e U n ite d S t a t e s T r e a s u r y in c r e a s e d b y o v e r $ 7 m illio n , t o t a lin g $ 5 9 ,7 9 4 ,8 1 7 .4 1 . t r a n s f e r r in g M em ber $ 2 ,9 9 2 ,4 0 0 banks to re c e iv e d s u r p lu s s ta tu t o r y d iv i d e n d s o f $ 1 , 0 8 3 , 4 2 9 . 2 5 d u r in g th e y e a r . (s u rp lu s A fte r a c c o u n t is tw ic e p a id in c a p ita l), th e r e m a in in g n e t e a r n in g s o f $ 5 5 , 7 1 8 , 9 8 8 . 1 6 w e r e p a id to th e T r e a s u r y a s in te re st o n F e d e ra l R e s e rv e notes. O v e r $ 7 b illio n o f c re d it w a s e x te n d e d to m e m b e r b a n k s d u r i n g th e y e a r . in g t r a n s a c t io n s w it h In 1960 crease d 158 c a p it a l stock, w h ic h b y $ 1 ,4 9 6 ,2 0 0 . T h is f ig u r e , re p r e s e n t b a n k s , s h o w s a d e c lin e fr o m th e 1 9 5 9 to tal. reflects in c re a s e s in th e c a p it a l a n d s u r p lu s o f m e m b e r b a n k s , in T h is f ig u r e re p re s e n ts 2 3 3 sto c k t r a n s a c t io n s . In th e p a s t t w e lv e m o n t h s o u r B a n k d is t rib u t e d o v e r 1 8 2 , 0 0 0 p u b lic a t io n s m a d e a v a i l a b l e b y th e S y s te m . T h e m a jo r it y o f th is m a t e ria l w a s s e n t to c o lle g e s , u n iv e rs it ie s , a n d s e c o n d a r y s c h o o ls in th e District. F ilm s a v a i l a b l e f r o m th is B a n k w e r e s c h e d u le d f o r 6 3 9 s h o w i n g s , a n d th e a u d ie n c e s v i e w i n g th e se a r e e s tim a t e d a t n e a r ly 2 2 , 0 0 0 . m a ilin g list, a n d o t h e r in te re ste d EMERGENCY PLANNING D istrict. B a n k e rs , b u s in e s s m e n , te a c h e rs , a n d e c o n o m is t s o n o u r r e g u l a r in d iv id u a ls re c e iv e d o v e r 1 0 9 , 0 0 0 c o p ie s o f o u r Monthly Review. A c t io n s w e r e ta k e n to fu r t h e r th e e m e r g e n c y p r e p a r e d n e s s p r o g r a m C h e c k a g e n t c irc u la rs w e r e iss u e d to a ll b a n k s o u t lin in g th e p ro c e d u re d u r i n g a n e m e r g e n c y , a n d a re v is io n w a s m a d e in o u r s e c u rity file s p r o g r a m fo r check in th e c o lle ctio n c o n c e r n in g th e m a i n t e n a n c e o f d u p lic a t e v it a l re c o rd s a t th e B a n k 's a lt e r n a t e lo c a tio n center. MAGNETIC INK CHARACTER RECOGNITION n itio n p ro g ra m m a d e g e n e r a lly f a v o r a b le D u r in g its fir st fu ll y e a r th e M a g n e t i c In k C h a r a c t e r R e c o g p r o g r e s s in th e F ifth F e d e ra l R e s e rv e District. M em ber and n o n m e m b e r b a n k s c o o p e ra t e d w it h th e A m e r ic a n B a n k e r s A s s o c ia t io n a n d th e F e d e ra l R e s e rv e S y s t e m in m a k i n g h ig h - s p e e d e le ctro n ic p r o c e s s in g o f c h e c k s a re a lity . O f th e a p p r o x im a t e l y 1 , 6 0 0 b a n k i n g o ffic e s in th e D istrict, 2 7 p e r cent p a r tic ip a t e d b y h a v i n g th e ir c h e c k s r e d e s ig n e d a n d p r e p r in t e d w it h th e r o u t in g s y m b o l- t r a n s it n u m b e r in m a g n e t ic in k. NEW FUNCTION A s a n e x t e n s io n o f o u r p o lic y o f u t iliz in g new and im p r o v e d m e th o d s , m a c h in e s , a n d e q u ip m e n t in a c c o m p lis h in g o u r w o r k , c o u p le d w it h a n a w a r e n e s s o f th e g r o w i n g u s e in b u s in e s s a n d b a n k i n g o f e le c tro n ic e q u ip m e n t, a n e w d e p a rt m e n t, D a t a P r o c e s s in g , w a s e s t a b lis h e d . T h is d e p a rtm e n t , w h ic h e n c o m p a s s e s th e w o r k f o r m e r ly p e r f o r m e d b y th e T a b u l a t in g D e p a rt m e n t , is r e s p o n s i b le f o r c o o r d in a t in g D a t a P ro c e s s in g a c tiv itie s t h r o u g h o u t th e B a n k . NEW MEMBER BANKS T w o Fifth D istrict b a n k s w e r e w e lc o m e d in to th e S y s t e m d u r in g th e y e a r . On A p r i l 2, th e B a n k o f A n n a n d a le , A n n a n d a le , V i r g i n i a , f o r m e r ly a n o n m e m b e r b a n k , c o n v e rt e d to a n a t io n a l c h a r t e r u n d e r th e n a m e o f th e O l d D o m in io n N a t i o n a l B a n k . T h e n e w ly - f o r m e d S e c u r it y N a t io n a l B a n k , F a lls C h u rc h , V ir g i n i a , b e c a m e a m e m b e r o f th e S y s t e m o n J u l y 1. BRANCH AUDITORS D u r in g th e y e a r p e r m a n e n t a u d it o r s w e r e a s s i g n e d to th e B ra n c h e s . Sam uel I. I r b y b e c a m e b r a n c h a u d it o r in B a ltim o re o n J a n u a r y 1, 1 9 6 0 , a n d O . L o u is M a r t in , Jr., w a s n a m e d to th e s a m e p o s it io n a t th e C h a r lo tte B r a n c h o n M a y 1, 1 9 6 0 . 26 CHANGES IN OFFICIAL STAFF D u r i n g 1 9 6 0 th e re w e r e m a n y c h a n g e s in th e o f fic ia l s t a f f o f the B a n k . E a r ly in th e y e a r R o b e rt R. F e n tre ss, a s s is t a n t c a sh ie r, a s s u m e d new d u tie s a t th e C h a r lo t t e B ra n c h . B. U. R a tc h fo rd , f o r m e r p r o f e s s o r o f e c o n o m ic s a t D u k e U n iv e rsit y , b e c a m e v ic e p r e s id e n t in c h a r g e o f th e R e s e a r c h D e p a rt m e n t . Edm und F. M a c D o n a ld w a s elected v ic e p r e s id e n t a n d b e c a m e th e o f fic e r in c h a r g e o f th e C h a r lo t t e B r a n c h f o llo w in g th e r e s ig n a t io n o f T. I. Sto rrs. J. G o r d o n D ic k e rs o n , Jr., a n d J o h n L. N o s k e r , f o r m e r ly a s s is t a n t v ic e p re s id e n ts , w e r e ele cted v ic e p re s id e n t s in D e c e m b e r. R o b e rt P. B la c k , S t u a r t P. F is h b u r n e , W i lli a m a s s is t a n t v ic e p re sid e n ts . W i lli a m B. H a r r is o n , III, a n d J o s e p h F. V iv e r e t t e w e r e n a m e d H. G e n t ry , Jr., a n d R o b e rt L. M ille r b e c a m e a s s is t a n t c a s h ie r s, a n d G . N . C a m p b e ll a s s u m e d th e o f f ic ia l p o s it io n o f a s s is t a n t g e n e r a l a u d it o r. E. B. C o le m a n , a s s is t a n t c a s h ie r , a n d C h a r le s W . W illia m s , e c o n o m ic a d v is e r , re tire d f r o m th e F e d e r a l R e s e rv e e ffe c tiv e S e p t e m b e r 3 0 a n d CHANGES IN THE BOARDS OF DIRECTORS D e c e m b e r 3 1 , re sp e c tiv e ly . A l o n z o G . D e ck e r, Jr., p re s id e n t o f th e B la c k & D e c k e r M a n u f a c t u r in g C o m p a n y o f T o w s o n , M a r y l a n d , w a s r e d e s ig n a t e d b y th e B o a r d o f G o v e r n o r s a s C h a i r m a n o f th e B o a r d a n d F e d e ra l R e s e rv e A g e n t f o r 1 9 6 1 . In J u l y 1 9 6 0 , W illia m H. G r ie r , p r e s id e n t o f th e R o c k H ill P rin t in g & F in is h in g C o., R o c k H ill, S o u t h C a r o lin a , w a s a p p o in t e d b y th e B o a r d o f G o v e r n o r s a s C la s s C d ire c to r, r e p la c in g D . W . C o lv a r d , f o r m e r d e a n o f a g r ic u lt u r e o f N o r t h C a r o l in a S ta te C o lle g e , R a le ig h , N o r t h C a r o l in a , w h o r e s ig n e d to b e c o m e p re s id e n t o f M is s is s ip p i S t a t e U n iv e r s it y . E d w in H y d e , p re sid e n t, M i ll e r & R h o a d s , Inc., R ic h m o n d , V i r g i n i a , w a s d e s ig n a t e d to r e p la c e M r . C o l v a r d a s D e p u t y C h a i r m a n o f th e B o a r d , a p o s it io n to w h ic h h e w a s r e d e s ig n a t e d f o r 1 9 6 1 . M r . G r ie r w a s r e a p p o in t e d f o r a t h r e e -y e a r te rm b e g in n i n g J a n u a r y 1, 1 9 6 1 . In N o v e m b e r A d d i s o n H. R e e se, p re sid e n t, N o r t h C a r o l in a N a t io n a l B a n k , C h a r lo tte , N o r t h C a r o lin a , w a s e le cte d C la s s A d ir e c to r to s u c c e e d D e n v e r L. M o r g a n , e x e c u tiv e v ic e p re sid e n t. T h e C h a r le s to n N a t io n a l B a n k , C h a r le s t o n , W e s t V i r g i n i a ; a n d R o b e rt E. L. J o h n s o n , c h a ir m a n o f th e b o a r d a n d c h ie f e x e c u tiv e o ffice r, W o o d w a r d & L o th ro p , Inc., W a s h in g t o n , D. C., w a s e le cte d C la s s B d ire c to r to s u c c e e d R o b e rt O . H u f f m a n , p re sid e n t, D r e x e l F u rn itu re C o m p a n y , D re x e l, N o r t h C a r o lin a . T h e ir te rm s b e g a n J a n u a r y 1, 1 9 6 1 . A t the B a lt im o r e B r a n c h th e B o a r d o f G o v e r n o r s a p p o in t e d H a r r y B. C u m m in g s , v ic e p re s id e n t a n d ge n e ra l m a n a g e r, M e ta l P ro d u c t s D iv is io n , K o p p e r s C o m p a n y , Inc., B a ltim o re , M a r y l a n d , to a th re e - y e a r te rm b e g in n i n g J a n u a r y R a ilw a y C om pany, B a ltim o re , 1, 1 9 6 1 , r e p la c in g C la r e n c e R. Z a r fo s s , v ic e p re sid e n t, W e s t e r n M a r y l a n d M a r y la n d . The B o a r d o f D ire c to rs o f th is B a n k r e a p p o in t e d J o s e p h N . S h u m a t e , p re sid e n t, T h e F a r m e r s N a t io n a l B a n k o f A n n a p o lis , A n n a p o l is , M a r y l a n d , d ire c to r f o r a th re e y e a r te rm b e g in n i n g J a n u a r y 1, 1 9 6 1 . G e o rge H. A u ll, a g r ic u lt u r a l e c o n o m ist, C le m s o n C o lle g e , C le m s o n , S o u t h C a r o l in a , a n d a t th e C h a r lo tte B ra n c h , w a s r e a p p o in t e d b y th e B o a r d o f G o v e r n o r s f o r a t h r e e - y e a r te rm J a n u a r y 1, 1 9 6 1 . W . W . M c E a c h e r n , p re sid e n t, T h e S o u t h C a r o lin a d ire c to r e ffe c tiv e N a t io n a l B a n k , G r e e n v ille , S o u t h C a r o lin a , w a s a p p o in t e d a C h a r lo t t e B r a n c h d ire c to r b y th e R ic h m o n d B o a r d f o r a t h r e e - y e a r term , re p la c in g E rn e st P atto n , c h a ir m a n o f th e b o a r d , T h e P e o p le s N a t io n a l B a n k o f G r e e n v ille , G r e e n v ille , S o u t h C a r o lin a , w h o s e te rm e x p ir e d D e c e m b e r 3 1 , 1 9 6 0 . FEDERAL ADVISORY COUNCIL MEMBER R o b e rt B. H o b b s, c h a ir m a n o f th e b o a r d , F irst N a t i o n a l B a n k o f B a ltim o re , B a ltim o re , M a r y l a n d , w a s a p p o in t e d b y th e B o a r d o f D ire c to rs to a o n e - y e a r te rm a s Fifth F e d e ra l R e s e rv e D istrict re p r e s e n t a t iv e to th e F e d e ra l A d v i s o r y C o u n c il, s u c c e e d in g J o h n S. A lf r ie n d , c h a ir m a n o f th e b o a r d , N a t i o n a l B a n k o f C o m m e r c e o f N o r fo lk , N o r fo lk , V i r g i n i a . 27 C O M P A R A T IV E S T A T E M E N T OF C O N D IT IO N ASSETS: Decem ber 31, 1960 D ecem ber 31,1959 Gold certificate account-------------------------------Redemption fund for Federal Reserve notes $1,035,163,268.08 81,220,045.00 $1,067,069,499.70 79,239,995.00 TOTAL GOLD CERTIFICATE RESERVES — 1,116,383,313.08 1,146,309,494.70 Federal Reserve notes of other banks---------Other c a s h ----------------------------------------------------Discounts and advances-------- 42,922,520.00 21,478,712.60 510,000.00 69,408,050.00 25,493,580.05 5,300,000.00 183,566,000.00 573,437,000.00 790,004,000.00 160,963,000.00 166,997,000.00 673,373,000.00 705,628,000.00 159,180,000.00 TOTAL U. S. GOVERNMENT SECURITIES 1,707,970,000.00 1,705,178,000.00 TOTAL LOANS AND SECURITIES-------------- 1,708,480,000.00 1,710,478,000.00 640.11 482,195,599.14 6,113,204.43 13,171,171.10 719.69 502,789,096.60 6,650,914.13 16,638,938.98 $3,390,745,160.46 $3,477,768,794.15 $2,185,035,255.00 $2,131,599,915.00 726,682,213.22 24,626,957.46 9,630,000.00 6,137,511.26 789,451,309.56 56,936,761.42 17,400,000.00 28,317,225.98 TOTAL DEPOSITS---------------- 767,076,681.94 892,105,296.96 Deferred availability cash items Other liabilities--------------------------- 380,482,167.80 1,813,305.72 399,443,648.83 1,592,432.04 3,334,407,410.46 3,424,741,292.83 18,779,250.00 37,558,500.00 17,283,050.00 34,566,100.00 1,178,351.32 $3,390,745,160.46 $3,477,768,794.15 $ $ U. S. Government securities: B i l l s -----------------------------------Certificates N o te s -------B onds-------- Due from foreign ban ks----------------Cash items in process of collection Bank prem ises-------------------------------Other a sse ts-----------------------------------T O T A L A SSE T S LIAB ILITIES: Federal Reserve n o te s--------------------Deposits: Member bank— reserve accounts _ U . S. Treasurer— general account F o r e ig n -----------------------------------------Other ---------------------------------------------- T O T A L LIA BILITIES CA P IT A L A C C O U N T S : Capital paid in Surplus -----------------------Other capital accounts TO T A L L IA B ILITIE S A N D C APITAL ACCOUNTS Contingent liability on acceptances purchased for foreign correspondents . 28 10,449,000.00 4,115,000.00 C O M P A R A T IV E S T A T E M E N T OF E A R N IN G S A N D E X P E N S E S E A R N IN G S : 1960 . __ Discounts and advances.................. ........................................ Interest on U. S. Government securities_______________ _______________________ Other earnings ............................. ..... ........... TOTAL CURRENT EA R N IN G S...... ...... .....................— .... ....................................... . $ 819,821.16 68,654,176.43 31,695.62 . 1959 $ 1,559,501.81 54,981,403.12 18,329.15 69,505,693.21 56,559,234.08 Operating expenses (including depreciation on bank premises) after deduct ing reimbursements received for certain Fiscal Agency and other expenses 10,175,679.84 Assessments for expenses of Board of Governors______ _______________ 292,800.00 Cost of Federal Reserve currency ......................................................................................... 570,909.90 9,821,945.58 321,400.00 500,821.04 11,039,389.74 10,644,166.62 ................................................ ... 58,466,303.47 45,915,067.46 Profit on sales of U. S. Government securities (net) .................. .......................... Transferred from Reserves for contingencies (net) ............................... ............... All other ................... ....... — - ......... — -------------------------------- - 153,386.87 1,178,351.32 277.66 11,746.06 6,500,111.52 265.56 ________ _____ _________ - 1,332,015.85 6,512,123.14 DED U CTIO N S FROM C U RREN T N E T E A R N IN G S ________ ____ ____________ 3,501.91 1,385.24 1,328,513.94 6,510,737.90 EXPENSES: NET EXPENSES ............................ ... ................ CURRENT NET EARNINGS ...................... . . ................................ - ......... ............................ ,.. A D D IT IO N S TO CU R R E N T N E T E A R N IN G S : t o t a l a d d i t i o n s ______ _______________ _______ Net Additions - _____ _..............- __ __ __ - - _____ ________- N E T E A R N IN G S BEFORE P A Y M E N T S TO U. S. T R E A SU R Y Dividends paid . __. . . ___ .. __ _________ . . ____ __________ __ _ . Paid U. S. Treasury (interest on Federal Reserve n o te s )_____________________ Transferred to su rp lu s------. . . . . . . . . . .............. .. . T O T AT. __ $59,794,817.41 $ 52,425,805.36 $ 1,083,429.25 55,718,988.16 2,992,400.00 $ 1,016,949 98 61,688,734.93 -10,279,879.55 $59,794,817.41 $ 52,425,805.36 $34,566,100.00 $ 44,845,979.55 -10,279,879.55 SURPLUS A C C O U N T Balance at close of previous y e a r ------------------------------------------- -------------------------Paid U. S. Treasury (interest on Federal Reserve notes) _____________ _______ Addition account of profits for y e a r ----------------------------------------------------------------------B A L A N C E A T CLOSE OF CU RREN T Y E A R .... ................ . . 34,566,100.00 2,992,400.00 34,566,100.00 $37,558,500.00 $ 34,566,100.00 $17,283,050.00 1,654,750.00 $ 16,438,600.00 979,450.00 C A P IT A L ST O C K A C C O U N T (Representing amount paid in, which is 50% of amount subscribed) Balance at close of previous y e a r -------------------------------------------------------------- ----Issued during the year — ------------------------. . . _ ~ --------Cancelled during the y e a r ------------------------------------------- . . .. ------ _ ------ _ B A L A N C E A T CLOSE OF CURRENT Y E A R ____________________ 18,937,800.00 158,550.00 $18,779,250.00 17,418,050.00 135,000.00 $ 17,283,050.00 29 FEDERAL RESERVE B A N K OF RICH M ON D DIR ECTO R S A l o n z o G . D e c k e r, Jr. Chairman of the Board and Federal Reserve Agent E d w in H y d e Deputy Chairman of the Board CLASS A H. H. C o o le y President, The Round Hill National Bank Round Hill, Virginia (Term expires December 31, 1962) D e n v e r L. M o r g a n Executive Vice President, The Charleston National Bank Charleston, West Virginia (Term expires December 31, 1960) Su ccee d e d by: A d d is o n H. R e e se President, North Carolina National Bank Charlotte, North Carolina (Term expires December 31, 1963) A . S c o tt O f f u t t Chairman of the Board and President, The First National Bank of Washington Washington, D. C. (Term expires December 31, 1961) CLASS B L. V in t o n H e r s h e y President, Hagerstown Shoe Company Hagerstown, Maryland (Term expires December 31, 1961) R o b e rt O . H u f f m a n President, Drexel Furniture Company Drexel, North Carolina (Term expires December 31, 1960) Su ccee d e d by: R o b e rt E. L. J o h n s o n Chairman of the Board, W oodward & Lothrop, Inc. Washington, D. C. (Term expires December 31, 1963) R a y m o n d E. S a lv a t i President, Island Creek Coal Company Huntington, West Virginia (Term expires December 31, 1962) CLASS C A l o n z o G . D e c k e r, Jr. President, The Black & Decker Manufacturing Company Towson, Maryland (Term expires December 31, 1962) W illia m H. G r ie r President, Rock Hill Printing & Finishing Co. Rock Hill, South Carolina (Term expires December 31, 1963) E d w in H y d e President, Miller & Rhoads, Inc. Richmond, Virginia (Term expires December 31, 1961) M EM B ER FEDERAL A D V IS O R Y CO U N CIL J o h n S. A l f r i e n d Chairman of the Board, National Bank of Commerce of Norfolk Norfolk, Virginia (Term expires December 31, 1960) Su ccee d e d by: R o b e rt B. H o b b s Chairman of the Board, First National Bank of Baltimore Baltimore, Maryland (Term expires December 31, 1961) 30 FEDERAL RESERVE B A N K OF RICH M OND OFFICERS Hugh Leach President N . L. A r m is t e a d Vice President S t u a r t P. F is h b u r n e Assistant Vice President J. G o r d o n D ic k e rs o n , Jr. Vice President H. E rn e st F o rd Assistant Vice President D o n a ld F. H a g n e r Vice President W illia m B. H a r r is o n , Hi Assistant Vice President A u b r e y N . H e flin Vice President and General Counsel V ic to r E. P re g e a n t, III Assistant General Counsel E d m u n d F. M a c D o n a ld Vice President R a y m o n d E. S a n d e r s , Jr. Assistant Vice President J o s e p h F. V iv e re t te Assistant Vice President C liff o r d B. B e a v e r s Assistant Cashier J o h n E. F rie n d Assistant Cashier W illia m H. G e n t ry , Jr. Assistant Cashier J o h n C. H o r i g a n Chief Examiner R o b e rt L. M ill e r Assistant Cashier W y t h e B. W a k e h a m Assistant Cashier U p to n S. M a r t i n J o h n L. N o s k e r Jo se p h M . N o w la n First Vice President Vice President Vice President Vice President and Cashier B. U. R a t c h fo rd Vice President Ja m e s M . S la y Vice President R o b e rt P. B la c k Assistant Vice President J o h n G . D e itric k Assistant Vice President W e lf o r d S. F a r m e r Secretary, and Assistant Counsel Edward A. Wayne G . H a r o ld S n e a d General Auditor G . N . C a m p b e ll Assistant General Auditor BALTIM ORE B R A N C H DIR ECTO R S OFFICERS G o r d o n M . C a ir n s Dean of Agriculture, University of Maryland College Park, Maryland (Term expires December 31, 1962) D o n a ld F. H a g n e r Vice President H a r v e y E. E m m a r t Senior Vice President and Cashier, Baltimore National Bank Baltimore, Maryland (Term expires December 31, 1961) A . A . S t e w a rt , Jr. Cashier J a m e s W . M c E lr o y President, First National Bank of Baltimore Baltimore, Maryland (Term expires December 31, 1962) B. F. A r m s t r o n g Assistant Cashier E. R i g g s J o n e s, Jr. Assistant Cashier A . C . W ie n e r t Assistant Cashier J o h n T. M e n z ie s , Jr. President, The Crosse & Blackwell Company Baltimore, Maryland (Term expires December 31, 1961) J. N . S h u m a t e President, The Farmers National Bank of Annapolis Annapolis, Maryland (Term expires December 31, 1963) J o h n W . Stou t President, The Parkersburg National Bank Parkersburg, West Virginia (Term expires December 31, 1961) C la r e n c e R. Z a r f o s s Vice President, Western Maryland Railway Company Baltimore, Maryland (Term expires December 31, 1960) S u c c e e d e d b y: H a r r y B. C u m m in g s Vice President and General Manager, Metal Products Division Koppers Company, Inc. Baltimore, Maryland (Term expires December 31, 1963) CHARLOTTE B R A N C H OFFICERS D IRECTORS G e o r g e H. A u l l Agricultural Economist, Clemson College Clemson, South Carolina (Term expires December 31, 1963) E d m u n d F. M a c D o n a ld Vice President J. C . C o w a n , Jr. Vice Chairman of the Board, Burlington Industries, Inc. Greensboro, North Carolina (Term expires December 31, 1962) S t a n h o p e A . L ig o n Cashier C h a r le s D. P a r k e r Asheville, North Carolina (Term expires December 31, 1962) R o b e rt R. F e n tre ss Assistant Cashier E rn e st P a tto n Chairman of the Board, The Peoples National Bank of Greenville F re d C . K r u e g e r , Jr. Greenville, South Carolina (Term expires December 31, 1960) Su ccee d e d by: W . W . M c E a c h e rn President, The South Carolina National Bank Greenville, South Carolina (Term expires December 31, 1963) I. W . S t e w a r t Honorary Chairman of the Board, North Carolina National Bank Charlotte, North Carolina (Term expires December 31, 1961) C la r e n c e P. S tre e t Secretary and General Manager, McDevitt & Street Co. Charlotte, North Carolina (Term expires December 31, 1961) G . G . W a ttS President, The Merchants and Planters National Bank of Gaffney Gaffney, South Carolina (Term expires December 31, 1961) 32 E. C lin t o n M o n d y Assistant Cashier Assistant Cashier